L4M8 PROCUREMENT AND SUPPLY IN PRACTICE

QUESTIONS

Q1: Procurement Cycle

Identify and explain FIVE stages of the procurement cycle.

(25 marks)

Q2: Innovative Clothing

Innovative Clothing Limited are a manufacturer of personal protective equipment (PPE) and
workwear for organisations working in hazardous environments.

Bruce is a Category Manager responsible for the sourcing of workwear. Innovative Clothing mainly
source from Far Eastern and Indian countries, due to the expertise in clothing manufacture and cost
benefits. Recently, a strategic supplier had a major non-conformance related to working conditions
which has resulted in negative publicity and a loss of sales for Innovative Clothing.

The decision has been made by senior management that another clothing manufacturer is required,
to eventually become strategic partner, who is well qualified and in line with the expectations of
Innovative Clothing.

Describe the elements that Bruce should include in his evaluation criteria when sourcing a new
strategic supplier.

(25 marks)
Q3: Chilly Limited

Chilly Limited are a UK-based organisation which undertakes the service, repair and maintenance of
refrigerators and freezers for major food retailers. Chilly Limited adhere to strict service level
agreements for their customers, and callouts can be requested 24 hours a day, 7 days a week.

The organisation has recently won a significant retail contract worth £1.3m per annum covering the
whole of the UK. This will require additional vans and refrigeration technicians to support the new
and existing client base, resulting in the strategic decision to reinvest into the company fleet.

Jane, the Purchasing Manager at Chilly Limited has been tasked with reviewing the appropriate
options and delivering a plan for the acquisition of a new fleet whilst still maintaining service levels
to Chilly’s client base.

Discuss the factors Jane would need to consider as part of a whole life asset management process.

(25 marks)
Q4: Little Gems

Little Gems specialise in the sourcing and manufacture of bespoke pieces of jewelry for high-end
clients. Little Gems has always prided itself on buying from sustainable sources and using conflict
free diamonds in its jewelry. (Note. Conflict diamonds are defined as uncut diamonds mined in an
area of armed conflict and traded illicitly to finance the fighting.)

The company was initially started by a family, and due to rapid growth and international recognition
through the media, its stores have increased from 1 to 20 design and jewel stores throughout
Europe in prominent cities.

Owing to their growth and the increasing concerns around ethical procurement, Little Gems have
decided to recruit a Purchasing Manager to assist them with supplier sourcing and management.
Holly, the new Purchasing Manager, has found out the following information.

 Little Gems do not have an ethical sourcing policy to which suppliers are requested to sign
up.
 Suppliers have not been audited for at least three years.
 There have been concerns flagged in the media on two of Little Gems suppliers regarding
potential child labour and use of conflict minerals.

Identify and describe FIVE factors that can be included in Little Gems ethical sourcing policy.

(25 marks)
SOLUTIONS AND FEEDBACK

Solution 1: Procurement Cycle

Marks will be awarded using the following instruction: 1 mark for identification of a stage of the
procurement cycle, with up to 4 marks for explanation of that stage with examples.

The procurement cycle has been developed as a series of steps in the process of acquiring goods
and/or services. Candidates should select five steps for further explanation.

1. Understand the need and develop specification

At this stage, the need will have been generated either by procurement or an end user department.
The need must be communicated clearly to procurement to ensure there is no misunderstanding
between the requestor and procurement. A need can come from a variety of sources such as new
business/customers or product development.

After a need has been identified, the development of a specification should be a joint process with
the relevant stakeholders to ensure all factors have been captured accurately. For example, in the
development of a specification of a cleaning service, procurement would be required to know the
level of access required, areas to be cleaned and avoided, types of products which can/cannot be
used, hazardous areas etc. This would not be known without the involvement of relevant personnel.

Specifications being developed can be performance specifications, which state what the product or
service must do, or conformance specifications, which detail exactly what is required. Examples of
conformance specifications include technical drawings and chemical formulations.

2. Market/commodity options

At this stage, the buyer should firstly understand the budget that is available for this particular
requirement (this may or may not be pre-determined). With the budget and specification, market
research can commence to ascertain the number of suppliers available.

Porter’s Five Forces Model can be utilised here to understand the market forces which are operating
within this particular field.

 Are there any substitutes available (if sourcing a particular brand)?

 How easy is it for new suppliers to enter the market?
 Number of buyers and suppliers in the market, which can impact negotiation and bargaining
power

Researching the market can also help the buyer’s business case in whether to make or buy the
requirement. Here, the business should think about what its core competencies are.
3. Develop strategy/plan

A strategy or plan is required to communicate how the requirement is going to be purchased and
why.

Findings from market research conducted can be incorporated into the final recommendation.
Useful tools which can be used include STEEPLE (social, technological, economic, environmental,
political, legal and ethical) and SWOT analysis (strengths, weaknesses, opportunities and threats)
which assist the buyer in understanding the internal environment and external environment which
can impact the decision being made.

4. Market engagement

This stage is to review if it is the right time to purchase the requirement. If a need has been
identified for a particular piece of technology, research may find that this particular product is
nearing the end of its product lifecycle. This therefore may not be the right time to purchase and the
preference may be to wait until a newer model is released, or negotiate to reduce the purchase
price even lower.

Other areas a buyer can review as part of market engagement are legislation, exchange rate
fluctuations, and the level of supplier response to the requirement.

5. Documentation development

This stage is the development of all relevant documentation to be sent to suppliers. This can include
drawings, contract terms, delivery schedules and KPIs/SLAs which will be used to measure supplier
performance.

The level of documentation will depend on factors such as whether the organisation is in the public
or private sector and the urgency of the requirement. Establishing one set of documentation ensures
that all potential suppliers are receiving the same information, leading to reduced risk of disparity
between bids. The documentation can also be saved for future purchases or templates (such as
scoring/comparison documents).

6. Supplier selection

At this stage, suppliers who are going to receive the tender documentation must be selected.
Suppliers should be pre-evaluated against agreed criteria to assess their suitability for the required
work.

Areas a supplier can be evaluated on include financials, technical expertise and understanding,
ethical conduct and reputation. Models can be used to pre-evaluate suppliers including Carter’s
10Cs.

The benefit of supplier selection is that potential suppliers are verified initially, reducing the time,
cost and risk of suppliers submitting bids for review who may not be technically competent or have
the capacity to supply the item when required.
7. Issue invitation to tender or request for quotation

Once suppliers have been evaluated and selected, the documentation can be sent out. In the
interests of fairness and transparency, all suppliers should be sent the documentation at the same
time.

8. Tender/quotation evaluation

When all bids/quotes have been received the role of the buyer is to evaluate them with a view to
selecting the most appropriate.

It is simpler to evaluate bids which are submitted against a conformance specification, as

performance specification bids can vary greatly between their offerings. Often an agreed scoring
system can be established as a simpler way of scoring (for example, each section is to be scored out
of a pre-agreed amount). This provides a transparent and fair way of evaluating each submission.

The total cost should be considered prior to making a selection, as the lowest purchase price may
lead to costs further down the line with a longer lead time, training costs, consumables or simply a
poorer quality.

9. Contract award and implementation

Once quotations have been evaluated, the supplier who the Organisation wishes to contract with
can be selected; this is known as contract award.

Here, both parties will meet and finalise details within the terms and conditions, and seek
clarifications until both are in agreement across all areas and then sign the final contract and
commence the relationship.

10. Logistics and receipt

If the requirement initially requested is for goods (a tangible, physical item), then this will need to be
delivered to the agreed timescales, and receipted into the warehouse. Consideration must be given
to storage space, storage conditions and security.

Goods inwards personnel should be provided with the specification so that they can inspect and
check the product on delivery.

11. Contract performance review

For any contract to be managed effectively, the supplier should be measured against agreed key
performance indicators. Examples of KPIs include the following.

 % of deliveries on time and in full (OTIF) within the month

 % of rejected parts within the month
 Late deliveries – number of days difference between the requested delivery date and actual
delivery date

The KPIs should be recorded and discussed each month, with a view to implementing improvement
actions if the KPIs are not meeting the agreed targets. In addition to improvement actions,
increasingly buyers are implementing a continuous improvement KPI. This keeps the topic under
conversation during review meetings, and ensures both parties are working together to seek better
ways of doing things.

12. Supplier relationship/contract management

Managing the contract and the relationships are two very different yet critical aspects to the
successful delivery of the contract.

Effective contract management ensures the contract is being performed as agreed, and that both
parties are meeting their obligations (for example on time delivery, prompt payment, quality
products)

The type of relationship management required will depend on the nature of the product or service.
For example, strategic products will require a close relationship, whereby both parties can share a
degree of transparency and keep open a regular channel of communication.

13. Asset management/end of life

There will be a point in the future where the contract will reach its end of life (for example, a one-off
service which is no longer required), or the product may reach the end of its useful life.

If the component specification remains the same, then the procurement cycle commences all over
again. However, if the need is no longer required, procurement will be tasked with managing the exit
(informing the supplier, reducing ordering to manage stock levels during the run down of stock,
disposal).
Solution 2: Innovative Clothing

Marks will be awarded using the following instruction: 1 mark for correct identification of an element
of evaluation criteria, with up to 4 marks for explanation of that stage relating to the scenario
provided.

For more detail, please refer to Chapter 3, Section 2 of your Profex Study Text.

Bruce should undertake evaluation prior to selection of a supplier, as it is critical that due diligence is
conducted given the issues which have been highlighted on a current supplier. Whilst there may be
urgency internally to establish a source of supply, it is important to perform the task thoroughly.

Ethical policy

Ethics will be a major consideration for Bruce, as this outlines potential supplier’s behavior,
processes and policies which it expects within its supply chain. For a robust ethical policy, Bruce
should ensure the supplier’s ethical policies deal with bribery, corruption, fraud, human rights,
modern slavery, working conditions and conflicts of interest with evidence of how they ensure this is
put into practice. Given the major non-conformance, if a potential supplier does not have an ethical
policy embedded in their organisation then it would be advisable for Bruce to exclude them from
future consideration.

Corporate social responsibility (CSR)

CSR aims to increase awareness for organisations of the impact their operations can have on the
environment. In relation to workwear manufacture, this can have a significant impact on the erosion
of the Earth’s resources. Here are some areas that Bruce can check are included within a supplier’s
CSR policy.

 Business ethics – here Bruce could use the CIPS Code of Conduct as a checklist
 Does the supplier take action to protect the environment and people? For example, is there
a focus on economic development in the countries where they are manufacturing and
harvesting cotton?
 Does the supplier respect the relevant laws and internal policies?

Environmental awareness

This is another key requirement within the industry Bruce is operating in, as there is a significant
environmental impact from manufacturing, such as the picking, transport, cleaning, processing and
transportation of cotton, to name just one of the materials. Impacts can include the loss of
biodiversity, erosion and contamination of soil, groundwater and surface water due to the chemicals
used during the manufacturing process and additional manufacturing processes along the supply
chain.
Bruce should review what targets the potential suppliers have in place to reduce their impact. For
example:

 Reduction in energy used

 Steps taken to protect the environment for wildlife and its other inhabitants
 Investment back into the area and community for the purpose of offsetting its
environmental impact

Reputation

The reputation of a new supplier will be critical for Innovative, firstly because of the negative
publicity and issues received due to the previous supplier’s non-conformance. Secondly, the media
and public may still be interested who Innovative form new relationships with, so existing reputation
will be a critical factor. Innovative may not be able to afford the loss of any more business,
particularly their key customers.

In the market of health and safety clothing, adherence to safety will be at the forefront of their
businesses, and a supplier who has an issue in their supply chain can also impact their customers by
association.

Bruce can use various channels such as the media or market talk regarding a supplier’s reputation.

Quality

It is important Bruce gets an overview of the supplier’s attitude and approach to quality. ISO are the
International Standards Organisation, which create globally recognised accreditations. The ISO for
quality is ISO 9001 and this would suggest to Bruce that quality is viewed seriously in the potential
supplier’s organisation.

Bruce should also check whether a supplier has a total quality management (TQM) system. This
would mean the supplier sees quality as a long-term, collaborative effort. It includes aspects such as
the commitment of all employees, continuous improvement and transparent and effective
communications.

Global accreditations

If a company is accredited to a globally recognised standard, it means they are taking that particular
area seriously. For example, it is commonly known how much preparation work is required for a
successful outcome for an ISO audit. Other relevant global accreditations can include:

 International Labour Organisation

 ISO 14001 – Environmental Management
Financial standing

Bruce should seek to financially assess potential suppliers in order to ensure that they are
sustainable and there for the long term. Bruce should be aware that a supplier with poor financial
reports and ratios could be forced to make cutbacks on areas which may compromise health and
safety or product quality.

Ways Bruce could research the financial performance of a supplier include the following.

 Credit ratings – usually through sites such as Experian or Dun and Bradstreet
 Reviewing the organisation’s balance sheet and calculating ratios to understand the
organisation’s liquidity and profitability
 Requesting financial references from other current customers.

Technical expertise

Technical qualifications are important for Innovative to ensure that a new strategic supplier knows
the manufacturing process, market and products well. This can lead to collaboration for innovative
projects in the future, as the market of workwear is continually being developed for the newest
material and increased sustainable content.

Innovative require a supplier who can support them strategically in the development and
manufacture of workwear garments. In addition, a supplier who is extremely competent technically
reduces the risk in this area of adverse events occurring.

Culture

Culture plays a pivotal role in how employees are treated and according to Charles Handy ‘the way
things are done around here’. Whilst is can be difficult to gauge a supplier’s culture without visiting
(which should be done later), Bruce can initially ask questions such as: employee turnover, social
events which the organisation arranges, charitable donations, investment in training (for example,
the global accreditation of Investors in People)
Solution 3: Chilly Limited

For questions which do not stipulate a number of points required, it is advisable for candidates to
provide enough factors (ideally five) which allows for an in-depth answer to be formulated.

Marks will be awarded using the following instruction: up to 10 marks for correct identification of
whole life asset management elements with up to 15 marks for relevant depth and linking to the
scenario.

Refer to Chapter 4 of your Profex Study Text Sections 1–4.

Whole life asset management is the process of evaluating the total price and all other associated
costs, to enable procurement to make the best decision which reflects overall value for money. It is
worth Jane understanding what Chilly’s notion of value is: it is based on adding value, reducing costs,
or something else?

Identification of needs/specification

The need has already been identified and decided by senior management: owing to the winning of a
significant tender a new fleet of vehicles is required. However, it is worth asking the question
whether they are happy with the specification of vans currently within their fleet. The current fleet
may be based on an older model, and this could be an opportunity to gain feedback from the
technicians and drivers as to any additional requirements which could be considered essential to the
performance of their work, or to improve efficiencies. For example, can they access the parts
required quickly on the vans they currently have?

Consideration will also need to be given to ensuring clients continue to be serviced as required
during the process, and to the compatibility of the new fleet with the current fleet.

Procurement

This stage will be for Jane to undertake the sourcing and supply of the fleet. It is important that Jane
is aware of all the costs. This will involve the following activities.

 Researching the market to understand current suppliers

 Pre-evaluation of suppliers
 Development of documentation and issuing of tender
 Tender evaluation
 Contract award and order placement
Construction

Vans are usually manufactured to a standard specification. However, this may present an
opportunity to add bespoke characteristics to the fleet, if it can be established that new features will
add value to Chilly. For example, it may be required to have the vehicles in a certain colour scheme,
or branded with the company logo and contact details.

Additional features will result in an increased cost and potentially longer lead times. Jane and the
senior management team need to ensure they can mobilise the current fleet to satisfy their current
supply base and that the new vehicles will be delivered prior to the new contract going live (to
ensure time for driving and testing the vehicles).

Installation and commissioning

Commissioning of the vehicles will mean bringing the vans into working condition. The delivery of
the fleet will need to be organized, ensuring there is enough room for safe storage and inspection.

Jane should also be aware of the costs involved.

 Training on new features and new model

 Insurance on the new fleet (premiums may be higher due to new models)
 Testing and how the vehicles perform operationally (are they more fuel efficient?)

Maintenance costs

The fleet is a capital investment, and therefore will need to be maintained and serviced accordingly
in order to maintain longevity. It is a key asset in the delivery of the organisation’s services.

Jane needs to consider the costs included in maintenance such as the availability of spare parts, how
service will be maintained should a van break down, frequency of service requirements (this is
usually stipulated per x amount of miles and therefore should be able to be planned to ensure all
vehicles don’t require servicing at the same time).

Deterioration

Deterioration should be factored in as the assets, in particular the older vehicles, will eventually get
to the stage where they reach the end of their useful life. This will be the same in the future for the
new fleet of vehicles.

In addition, the value of the vans will depreciate over time – what it is worth now will slowly reduce
over time. Due to depreciation, the vehicles will reach a point where it will no longer be
economically viable to keep them running and paying for spares and servicing.
Decommissioning

When a vehicle reaches the end of its lifecycle, it will need to be decommissioned. This can include:

 Removal of the asset from service – this will include transport costs, labour and potential
downtime for removal of asset
 Re-selling – the asset could be sold (no doubt at a considerably lower cost than originally
purchased for) to try and recover some costs
 Disposal – there may be salvageable parts from the vehicles, while the rest may need to be
scrapped and disposed of in the right way, following relevant regulations.

Renewal and replacement

Jane should have a plan in place and should retain documentation of the entire process. There will
be a point in time where a new fleet is required again. This could be due to vehicles beyond repair or
additional growth from winning new business.
Solution 4: Little Gems

Marks will be awarded using the following instruction: 1 mark for correct identification of an element
of evaluation criteria, with up to 4 marks for explanation relating to the scenario provided.

Refer to Chapters 6 and 7 of your Profex Study Text.

It is envisaged that there is top-level commitment because Little Gems recruited someone mainly for
the supplier sourcing and management.

Bribery

Bribery can be defined as the act of giving something of value to persuade another party to do
something which benefits you. Bribery isn’t illegal in all countries and still occurs today, which is why
it is important for Little Gems to include this in their policy. They are working in an industry where
this type of behavior can be commonplace and it is important to state their stance on it. Starting in
the UK, Little Gems will be governed by the UK Bribery Act 2010. As purchasing manager, Holly
should also be aware that bribery is not tolerated under the CIPS Code of Conduct.

Holly can also use sites such as Transparency International which shows the level of bribery taking
place across different countries.

Holly should stipulate in the policy not only what is expected of their suppliers, but also what Little
Gems are practising also. This includes ongoing training, monitoring of the supply chain and ongoing
risk assessment of the likelihood and impact of bribery.

Corruption

Corruption is an unethical activity and includes abuse of power, embezzlement, bribery and
deception (to deceive someone). Abuse of power in the supply chain can occur, a major example
being an unjustified preference for one supplier over another. Holly needs to clarify that corruption
of any kind is not tolerated throughout the supply chain, particularly due to the issues surrounding
conflict materials which has been highlighted in the case of Little Gems.

Fraud

Fraud can be defined as deliberate deception intended to result in financial or personal gain. There
are many types of fraud which Holly and Little Gems should be aware of and make clear will be in
breach of policy.

 Kickbacks
 Collusion
 Invoicing fraud
 Bid rigging
 Corrupt influence

In their ethical policy, Little Gems should stipulate that any supplier involved in any fraudulent
activities will have their contracts cancelled and will be reported using the appropriate channels.
Human rights

Human rights is a critical factor in an ethical policy, especially for Little Gems. There have been
reports of suppliers within their supply chain using child labour which not only deserves zero
tolerance, but will result in significant adverse publicity.

In accordance with the Universal Declaration of Human Rights, there are five basic rights which Holly
could refer to within an ethical policy.

 The right to equality

 Freedom from discrimination
 Right to life, liberty and personal security
 Freedom from slavery
 Freedom from torture and degrading treatment

In the industry of mining, the abuse of human rights can be commonplace with hazardous working
conditions and the use of child or forced labour.

Modern slavery

Modern slavery is a final key requirement of an ethical policy for Little Gems. Modern slavery
includes human trafficking (recruiting and exploiting people against their will), bonded labour, forced
labour and child labour.

It is important to note that due to the importance of the areas above, combined with the fact that
the scenario states that suppliers have not been visited for a number of years, due diligence will
need to be conducted with a degree of physical presence to see suppliers – which also should be a
regular occurrence. As a now profitable company in a multi million pound industry, Little Gems
should be seen to be doing more than simply paying lip service to their newly implemented ethical
policy.