L4M6 SUPPLIER RELATIONSHIPS

Questions: Chapter 1

1 Which one of the following is an implied feature of a commercial relationship between an

organisation and a key supplier?

A Competition

B Longevity

C Distance

D Networking

2 A close external relationship with a supplier is most appropriate when:

A it is profitable

B there is no internal relationship

C there is a long supply chain

D the items supplied have a high value.

3 Which one of the following distinguishes internal commercial relationships from external
commercial relationships?

A No option to switch suppliers

B Greater supply risk

C Authority to agree transactions

D Lower level of service

4 A commercial arrangement between an organisation and a regular supplier, where each
purchase aims at securing the optimum price and quality from the supplier, is best described
as:

A single source

B arm’s length

C transactional

D adversarial.

5 At which stage of a commercial relationship lifecycle does an organisation identify a supplier

who will be included on a list of suppliers invited to bid for business?

A Pre-relationship stage

B Exploratory stage

C Stable stage

D Development stage

Questions: Chapter 2

6 The main objective of a long-term commercial relationship should be to:

A reduce costs

B improve communications

C add value

D build trust.

7 The Kraljic matrix categorises commercial relationships according to:

A risk probability and risk impact

B supplier risk and supply risk

C financial risk and communication risk

D supply risk and financial risk.

8 According to the Kraljic matrix, when there are many suppliers in the market for a key item
of material, the most appropriate commercial relationship for the buyer is:

A a long-term strategic relationship

B a transactional relationship with competitive bidding

C purchasing via e-procurement

D supplier preferencing.

9 Which of the following are features of a partnership approach to dealing with a supplier?
SELECT TWO that apply.

A Mutual commitment

B Focus on compliance

C Arm’s length dealing

D Collaborative processes

E Short timescale

10 A company has used a supplier for a number of years, but in the past year or so there have
been problems with the quality of supplies, and the company is now buying much less of the
product than previously. Which one of the following action plans is likely to be the most
appropriate for managing the relationship with this supplier?

A Improve the relationship with the supplier on a long-term basis

B Continue dealing with the supplier without making changes

C Consider the option to phase out the relationship

D Establish a committee to deal with future disputes

Questions: Chapter 3

11 The procurement section in a company is finding that many of its suppliers are now
employing much younger staff in their customer relations and sales teams, and these
individuals prefer to communicate electronically (digitally) rather than by telephone or face-
to-face meetings. Which aspects of the company’s external environment are affected by
these changes? SELECT TWO that apply.

A Environmental

B Socio-cultural

C Ethical

D Economic

E Technical

12 In response to growing pressure from its investors and its customers, a company has decided
to cease manufacturing a product that is made from non-recyclable materials. Which
aspects of the company’s external environment are likely to have driven this change? SELECT
TWO that apply.

A Ethical

B Legal

C Environmental

D Economic

E Technological

13 Which of the following factors can help to determine the strength of barriers to entry to a
supply market? SELECT TWO that apply.

A High capital investment for new entrants

B Buyer power in the market

C The existence of substitute products

D Economies of scale for companies in the market

E A lack of product differentiation

14 Which one of the following conditions in a market is likely to result in higher prices?

A Economies of scale for producers

B Low barriers to entry

C Strong buyer power

D Limited competition between companies in the market

15 According to Porter, in which ways might a company gain a competitive advantage over its
rivals?

A Quality and price

B High market share or high price

C Lower costs or product differentiation

D Supplier relationships and innovation

Questions: Chapter 4

16 In which of the following ways might value be added through supply chain relationships?
Select TWO that apply.

A Increasing inventory

B Open book costing

C Quality assurance methods

D Reducing transportation risks

E Longer lead times

17 Which one of the following should be an expected consequence of supply chain

management?

A Higher costs throughout the supply chain

B An increase in outsourcing

C Slow response to innovative opportunities

D Collaborative relationships across the supply chain

18 The procurement manager in a company argues that better quality adds value for the
business. Is this view correct?

A Yes, because customers get a better deal

B Yes, because better quality enables a company to charge a higher price

C No, because quality control and quality assurance measures are expensive

D No, because it is not possible to control quality effectively throughout a supply chain

19 Value is added through supply chain management by:

A removing inefficiencies from links in the supply chain

B increasing investment in supplier selection

C increasing production output

D delegating research and development responsibilities to suppliers.

20 An agile supply network is one that:

A focuses on quality improvements

B responds quickly to exploit new opportunities that arise

C eliminates waste, such as excess stockholding

D uses cross-functional teamworking.

Questions: Chapter 5

21 In order to establish whether a supplier might be suitable for including in a list of pre-
qualified suppliers who will be invited to bid for supply contracts for a product item, which
one of the following actions might be taken by a procurement function?

A Issue a request for proposal to the supplier

B Visit the supplier’s website

C Prepare a budget for future purchases of the product item

D Carry out value analysis of the supplier

22 Which of the following are unethical procurement practices? Select TWO that apply.

A Inviting a bid when the buyer has already decided to award the contract to another
supplier

B Inviting a bid from a supplier who has caused a problem in the past

C Inviting a bid without first carrying out due diligence checks on the supplier

D Inviting a bid when there is no intention to buy

E Inviting a bid from a supplier who may not have sufficient capacity

23 For which of the following purposes is a pre-qualification questionnaire used? Select TWO
that apply.

A To apply a scoring system to supplier bids for a contract

B To record information about the supplier

C To obtain information from a supplier

D To obtain additional information after a supplier has submitted a bid for a contract

E To eliminate suppliers from a tendering process before inviting tenders

24 What is the purpose of post-tender negotiations?

A To reopen the bidding process to other suppliers

B To clarify the meaning of the buyer’s specifications

C To give feedback to the unsuccessful bidders

D To establish whether the preferred supplier’s bid could be improved

25 A feature of competitive tendering by public sector organisations that is not found in

competitive bidding by private sector companies is:

A the right of unsuccessful bidders to challenge an award decision

B a much shorter time for the bidding and award process

C the use of sealed bids

D the award of contracts exclusively on the basis of price.

Questions: Chapter 6

26 What should be done by management to maintain a positive relationship with employees

who have little power within their company but a high level of interest in what the company
does?

A Keep them satisfied

B Treat them as key players

C Keep them informed

D There is no need to do anything

27 A company is proposing to introduce automation into procurement procedures.

Procurement staff are resisting the change, arguing that effective procurement depends on
maintaining excellent relationships with key suppliers, and this cannot be automated. Senior
management say that automation will be applied only to routine tasks, leaving procurement
staff to spend more time on high-value activities. In the view of senior management, what is
the reason for the resistance among procurement staff to the planned changes?

A Fear of disruption

B Misapprehension

C Self-interest

D Disagreement about objectives

28 A company is in the process of developing e-procurement procedures, which it intends to

introduce into operational practice for all its suppliers in the near future. Some suppliers
have resisted the change and say that they want to continue with existing procedures.
Negotiations with these suppliers have been unsuccessful in getting them to change their
view. The company has therefore announced that the new e-procurement procedures will
be implemented and suppliers wishing to do business must adopt them. What approach has
the company taken to overcome resistance?

A Manipulation

B Negotiation

C Facilitation

D Coercion
29 How might setting up a cross-functional team to accomplish a task help to reduce resistance
within the organisation to the changes that will occur when the task is implemented, and
overcome mistrust about the motives of people in other functions? Select TWO that apply.

A It enables compromises to be achieved.

B Participation by different interest groups reduces the tendency to resist change.

C It overcomes the frustration, anger and depression among those resisting change.

D It brings conflicts into the open.

E Cross-functional working enables participants to understand the views of people in

the other functions.

30 What is a key lesson to be learned from theories of team development?

A It takes time for a new team to function at its full potential.

B One person cannot do everything.

C Team development strengthens forces in favour of change.

D To achieve its objectives, a team must be cross-functional.

Questions: Chapter 7

31 In which one of the following ways might a manufacturing company change fixed costs into
variable costs in its cost structure?

A Outsource administrative functions

B Make products in-house rather than buy externally

C Use less energy in operations

D Buy capital (fixed) assets rather than lease them

32 What is the main value to a procurement function of assembling data about suppliers’ cost
structures?

A To establish a pre-approved list of suppliers

B To establish a system of open book costing

C To assess whether suppliers’ profits seem too high

D To decide whether to switch to a different supplier

33 A manufacturing company purchases large quantities of a commodity whose market price is

liable to fluctuate frequently by significant amounts. The commodity is a key ingredient in
the company’s best-selling products. Which of the following measures would the company
be most likely to adopt to limit the impact on the company of the fluctuating commodity
price? Select TWO that apply.

A Buy from a large number of commodity suppliers

B Cut back production quantities

C Buy in bulk when the price seems low

D Switch to using a different commodity in products

E Buy the commodity forward in the commodity market

34 Which of the following are potential disadvantages for a manufacturing company of early
supplier involvement (ESI) for the joint development of new products? Select TWO that
apply.

A It locks the company into a fixed supplier relationship

B It reduces the buyer’s knowledge of technical product specifications

C It increases product development and manufacturing costs

D It risks information transfer to competitors

E It limits opportunities for product innovation

35 Which one of the following may be used as a quantitative metric to evaluate a buyer-
supplier relationship in order to drive improvement and change?

A Commitment

B Contract performance

C Risk sharing

D Cooperation

Questions: Chapter 8

36 A company has a long-term contractual relationship with a cleaning services supplier. Which
of the following developments might lead to the termination of their contractual
relationship? Select TWO that apply.

A A requirement by the customer for additional cleaning services

B A change in personnel in the cleaning company

C The contract reaching the end of its term

D A major breach of contract followed by notice to terminate

E A late payment by the customer

37 For a buyer, what might be the biggest adverse consequence of the termination of a long-
term supply contract for a widely available product as a result of a major disagreement
between the supplier and customer and a claim of a major breach of contract?

A A risk of legal action by the party making the claim

B A risk to their ongoing future relationship

C A threat to the continuity of supply

D Insufficient advance warning of the termination

38 Two companies are negotiating a commercial contract that will involve the exchange of data
between them. One of the companies is concerned that in the event of a termination of the
contract, the other company might take advantage of commercially sensitive information
that it will obtain from the business relationship. How can this risk be minimised?

A Online security measures

B Confidentiality clause in the contract

C Protection of the information by patent or copyright

D Return of documents by the other party on termination

39 A company has previously carried out security operations in-house, but has now decided to
outsource the work to an external security firm. All the company’s security staff will be
transferred to working for the security firm. Which of the following issues will be of
particular concern to the transferred employees? Select TWO that apply.

A Rights in the event of immediate dismissal by the new employer

B Loss of privacy of personal data

C The reasons why the security work has been outsourced

D Duration of the contract between the company and the security firm

E Terms of employment with the new employer

40 A company plans to terminate a commercial service contract at the end of its term and
switch to a different supplier. It has announced its intention to terminate the contract when
its term ends in six months’ time. Which of the following risks should it take into
consideration when formulating its exit strategy from the existing contract?

A The difference in contract terms between the old and new contracts

B The handover of relevant data from the old to the new supplier

C Loss of service quality during the six months’ notice period

D Its relationship with the new supplier

Questions: Chapter 9

41 A partnership agreement between a buyer and a supplier should be:

A proactive but short-term

B proactive and long-term

C reactive and short-term

D reactive and long-term

42 In which of the following circumstances is it difficult for a company to establish a partnership

agreement with a supplier? Select TWO that apply.

A When the traded item is not important to one or both of the parties

B When the parties have different technical capabilities

C When there is a restricted market for the supplier’s product

D When the parties are based in different countries

E When their IT systems are not integrated

43 In which of the following circumstances would a partnership arrangement between buyer

and supplier be more attractive than a ‘traditional’ transactional approach to procurement
and supply of a strategically important product?

A When the product price is stable

B When the supplier is a much bigger company than the buyer

C When there is a long supply chain

D When there is a restricted supply of the product

44 Which of the following are reasons why a buyer and a supplier may enter into a formal
partnership arrangement? Select TWO that apply.

A To win the support of senior management in both organisations

B To measure the additional value added by the arrangement

C To establish governance arrangements for the partnership

D To define standards that the parties will be expected to meet

E To formulate a detailed action plan for cooperation

45 For which of the following reasons might a partnership arrangement between a buyer and a
supplier fail? Select TWO that apply.

A Excessive commitment

B Insufficient time to develop

C Changes in the supply market or end product market

D Cost

E Failure to carry out partnership reviews or audits

Solutions and Feedback: Chapter 1

1 Answer B

A commercial relationship should be expected to last a reasonable length of time, because it is not
based on making individual one-off transactions. A relationship takes time to develop.

Reference Chapter 1 Section 1.1

2 Answer D

Close relationships with suppliers are most appropriate when the purchased item has a high value.
All dealings and transactions with suppliers should be profitable, but value does not depend solely
on price/cost.

Reference Chapter 1 Section 1.3

3 Answer A

With internal relationships between departments or functions in the same organisation, there is
usually no option to switch to a different supplier if the current relationship is unsatisfactory.

Reference Chapter 1 Section 2.5

4 Answer C

In the relationship spectrum, dealings between a buyer and supplier where the buyer makes regular
purchases from the supplier, but each purchase transaction is aimed at achieving a competitive price
and transaction efficiency, are best described as ‘transactional’ – closer than adversarial and arm’s
length, but not ‘closer tactical’.

Reference Chapter 1 Section 3.1

5 Answer A

The supplier selection process comes before any relationship has actually been started.

Reference Chapter 1 Sections 4.1–4.2

Solutions and Feedback: Chapter 2

6 Answer C

The main objective of a commercial relationship should be to add value. This may result in a
reduction in costs, or an improvement in non-cost factors such as quality. Building trust and better
communications should be features of a commercial relationship, but not its main objective.

Reference Chapter 2 Section 1.2

7 Answer D

The Kraljic matrix defines the optimal type of commercial relationship according to the economic
importance of the supplied item and the security (or lack of it) of supply.

Reference Chapter 2 Section 3.3

8 Answer B

Since there are many suppliers in the market, there is no risk to the security of supply. A buyer can
therefore seek to obtain the best terms for purchases through competitive bidding. The purchased
items are referred to as ‘leverage items’.

Reference Chapter 2 Section 3.3

9 Answer A and D

Mutual commitment and collaborative processes are features of a partnership approach to dealing
with a supplier. Arm’s length dealings, concern about compliance and a short-term focus are all
features of a transactional approach.

Reference Chapter 2 Section 1.2

10 Answer C

There have been problems with the relationship for some time, and the purchased item does not
appear to be as important for the company as it was in the past. An appropriate action plan would
be to consider how best to phase out the relationship.

Reference Chapter 2 Section 5.1

Solutions and Feedback: Chapter 3

11 Answer B and E

Employing much younger people is an aspect of social change (demographic change). Younger
people appear to favour electronic methods of communication, which means that the use of digital
technology is becoming more widespread.

Reference Chapter 3 Sections 2.1–2.3

12 Answer A and C

The decision has been driven by environmental concerns, and expectations that businesses should
behave ethically. (This could also be described as a socio-cultural change in the company’s
environment.)

Reference Chapter 3 Sections 2.1, 2.5, 2.8

13 Answer A and B

A supply market is a market for suppliers of a product. New entrants to the market may be deterred
by the high cost of capital investment required to set up business, and by the fact that buyers in the
market are powerful, and may therefore be able to impose harsh terms of trade on a new supplier.

Reference Chapter 3 Sections 4.1–4.2

14 Answer D

When there is limited competition (eg in a monopoly or oligopoly market), prices tend to be higher.
Economies of scale for producers, low barriers to entry and the strength of buyers are all likely to
keep prices low.

Reference Chapter 3 Sections 4.1–4.6

15 Answer C

Porter argued that in order to obtain a competitive advantage, companies can seek to be the least
cost (and lowest price) producer, or they should seek to differentiate their products and position
them in the market to appeal to a particular segment of customers.

Reference Chapter 3 Section 6.2

Solutions and Feedback: Chapter 4

16 Answer C and D

Improvements in quality (eg reducing the frequency of faults and defective items) and reducing
transportation risks (which are likely to add to costs) will add value within a supply chain. Longer
lead times and larger stocks of inventory are aspects of ‘waste’ that cause loss of value.

Reference Chapter 4 Sections 2.3–2.5

17 Answer D

The objective of supply chain management should be to create or improve collaborative

relationships across the supply chain. This should result in lower costs and faster response to new
opportunities that arise.

Reference Chapter 4 Section 4.6

18 Answer B

Better quality should add value, either by creating a product or service that customers will pay a
higher price for, or because better quality should reduce costs of waste. Better quality therefore
creates economic value for a business.

Reference Chapter 4 Section 2.4

19 Answer A

Value can be added by eliminating non-value adding activities. These often occur in the links
between supplier and buyer in a supply chain. Increasing output does not add value unless there is
customer demand for the end product. Companies may involve suppliers in their product
development activities, but they should not delegate R&D responsibilities to suppliers. Increasing
investment in supplier selection does not itself add value: value is added only if the outcome is the
selection of suppliers who improve the supply chain.

Reference Chapter 4 Sections 4.6–4.7

20 Answer B

Agility means speed of response and ‘nimbleness’. A supply chain that eliminates waste is ‘lean’
rather than ‘agile’.

Reference Chapter 4 Section 4.8

Solutions and Feedback: Chapter 5

21 Answer B

If a buyer wants to obtain information about a supplier before deciding whether the supplier should
be included in a pre-qualified list, it may use several sources. One of these is likely to be the
supplier’s website.

Reference Chapter 5 Section 2.1

22 Answer A and D

In these two circumstances, there is no intention to award a contract to the supplier who is invited
to bid. The supplier will therefore waste time (and some cost) for no purpose. This would be
unethical practice by the buyer.

Reference Chapter 5 Section 2.3

23 Answer C and E

Suppliers may be invited to answer questions on a PQQ. Buyers can then use these answers to
eliminate unsuitable suppliers from the tendering process before invitations to tender are issued.
This saves time and effort for the buyer (since there will be fewer bids), and also for suppliers who
will not succeed in winning the contract (since they do not prepare and submit a bid).

Reference Chapter 5 Section 2.5

24 Answer D

The preferred bid may be unsatisfactory in some respects, and post-tender negotiations with the
supplier may be undertaken to see whether some of the terms of the bid can be improved.

Reference Chapter 5 Section 3.3

25 Answer A

Rules about competitive bidding in the public sector vary between countries, but unsuccessful
bidders may have the right to appeal against the award decision. This is not something that will
happen in the private sector, where there is no appeal to an arbiter or other authority about a
commercial decision that has been taken.

Reference Chapter 5 Section 4.6

Solutions and Feedback: Chapter 6

26 Answer C

This question is based on the Mendelow power/interest matrix. If employees have a high level of
interest but little power, a positive relationship can be achieved and maintained by keeping them
informed about what the company is doing.

Reference Chapter 6 Section 1.1

27 Answer B

In this situation, senior management believe that procurement staff are resisting automation
because they misunderstand the purpose of the change, and how they might even benefit from it.

Reference Chapter 6 Section 2.2

28 Answer D

The company has ended negotiation and is resorting to imposing its own wishes. This is coercion –
forcing suppliers to do what the company wants in order to get any business from the company.

Reference Chapter 6 Section 2.4

29 Answer B and E

Cross-functional working reduces barriers between functions. Participation in a change process

reduces resistance to change and strengthens acceptance of change.

Reference Chapter 6 Section 4

30 Answer A

The need for time for a team to develop is evident in Belbin’s four stages of team development.

Reference Chapter 6 Section 5.1

Solutions and Feedback: Chapter 7

31 Answer A

By outsourcing administrative functions and paying for services when they are delivered, it is
possible to reduce fixed (administration) costs and replace them, to some extent at least, with
variable costs.

Reference Chapter 7 Section 1.1

32 Answer C

An understanding of suppliers’ costs, and comparing these with suppliers’ prices, can help a
procurement function to assess whether suppliers are enjoying profits that seem too high. Where
this appears to be the case, the procurement function can try to negotiate a reduction in price.
Decisions about switching to a different supplier should be based on factors such as price or value
added (or other non-price factors), not on suppliers’ cost structures.

Reference Chapter 7 Section 1.4

33 Answer C and E

Buying in bulk when prices seem low, or fixing prices in advance through the commodities (futures)
markets, are ways of trying to reduce the effect of price fluctuations. Switching to a different
cheaper commodity for best-selling products would be unwise. Buying from a large number of
different suppliers would not provide protection against fluctuations in the commodity’s market
price.

Reference Chapter 7 Section 2.4

34 Answer A and D

Joint development of new products in an ESI arrangement locks a company into a long-term
relationship with a supplier, which can be a disadvantage when other suppliers are more innovative.
In spite of a confidentiality agreement or non-disclosure agreement, there is also a greater risk that
information about new products will ‘leak out’ to competitors, giving competitors a potential
commercial advantage.

Reference Chapter 7 Section 3.2

35 Answer B

Contract performance can be measured in quantitative terms through KPIs (eg on-time in full
deliveries). The other aspects of a buyer-supplier relationship are qualitative issues that can be
assessed but not measured statistically.

Reference Chapter 7 Sections 5.2–5.3

Solutions and Feedback: Chapter 8

36 Answer C and D

A contract may terminate simply because it reaches the end of its term. A contract may also be
terminated by a major breach of contract by one party and then the other party giving notice of
termination. A late payment is a breach of contract, but one late payment will not be sufficient to
give the supplier the right to cancel the contract.

Reference Chapter 8 Sections 1.1–1.3

37 Answer A

Since the product is widely available, the buyer should be able to switch quickly and without
difficulty to an alternative supplier. The only threat of significance might be a legal claim by the
supplier for compensation for a breach of contract by the buyer.

Reference Chapter 8 Sections 2.3 and 4

38 Answer B

If the other party uses commercially sensitive information, legal action can be taken for breach of
the confidentiality clause.

Reference Chapter 8 Sections 4.5–4.7

39 Answer A and E

The employees may be interested in other issues, but the matters concerning them most will be how
the transfer of their employment will affect their jobs.

Reference Chapter 8 Section 4.8

40 Answer C

A major risk with a change in service provider when notice is given of the change is that the existing
supplier will not maintain the same quality of service during the notice period.

Reference Chapter 8 Section 5

Solutions and Feedback: Chapter 9

41 Answer B

A partnership agreement should be long-term, between a buyer and a major supplier. Both parties
should be proactive in their approach to developing the partnership.

Reference Chapter 9 Section 1.1

42 Answer A and D

A partnership agreement will not be worthwhile unless it is important to at least one of the parties,
the supplier or the buyer. If the buyer and supplier are based in different countries, a partnership
arrangement may also be difficult because of the practical difficulties with collaboration caused by
physical distance. Integrated IT systems are desirable, but integration can be developed over time as
the partnership develops.

Reference Chapter 9 Section 1.2

43 Answer D

A partnership arrangement helps to secure supply of the product for the buyer. If the product is
strategically important but supply is restricted, the buyer is likely to seek to develop a close business
relationship with its supplier.

Reference Chapter 9 Sections 1.2 and 1.4

44 Answer C and D

A formal partnership agreement should set out how the arrangement should be governed (for
example, who is responsible for what decision-making) and should also set out the standards or
objectives that the parties should meet. Senior management agreement should come before a
formal agreement and detailed planning comes after the agreement has been made.

Reference Chapter 9 Section 2.6

45 Answer C and E

A partnership arrangement may fail because changes in the supply market or end-product market
may mean that the supplied item is no longer strategically important. A partnership arrangement
must also be monitored regularly to assess progress, and unless there are regular reviews or audits,
monitoring is unlikely to be sufficient to sustain the partnership.

Reference Chapter 9 Section 3.1