CIPS Exam Report for Learner Community:

Qualification: Diploma in Procurement and Supply

Unit: D3: Sourcing in Procurement and Supply
Exam series: March 2014

Question 1 – Learning Outcome 1

The London Organising Committee of the Olympic and Paralympic Games (LOCOG) spent
around £700 million on the goods and services that required sourcing for the event.
(a) Explain the term ‘sourcing’. (4 marks)
(b) Describe FOUR stages of the sourcing process that might be used by LOCOG.
(16 marks)
a) The question required candidates to explain the term ‘sourcing’. The aim of the question was test the
candidate’ ability to define and explain sourcing as a pre-contract activity within the procurement process.
Answers were expected to present such content as – the procurement process that is concerned with ‘how
and where the products or services are obtained’; the process of identifying, selecting and developing
suppliers; etc.

A maximum of two marks were allocated for a brief but correct explanation of the term ‘sourcing’ clearly as a
precontract process. Up to two additional marks would be awarded for further relevant explanation of the
process (Total: four marks). Some answers defined sourcing and provided a brief description of the sourcing
cycle. Others defined sourcing and proceeded to split it into strategic and tactical sourcing. Whatever
approach the candidates adopted, marks were awarded to reflect the relevance of the content to the
question. This was a well answered question as most candidates gained credit level or above marks. The
depth of answer content varied widely from a small paragraph to a full page or more– candidates were
expected to provide a relatively brief answer to this question considering the small number of marks allocated
to it.

b) This question required candidates to describe the FOUR stages of a sourcing process that might be used by
LOCOG. The aim of the question was to test the candidates’ knowledge of the stages covered in the sourcing
process. Answers were expected to briefly present four stages in the sourcing process, such as (or similar to)
the following: -
 Identification of the requirement or need – the specification, the quantities, whether a new
requirement or a rebuy/replenishment, etc.; the case study examples would include medals, sports
equipment, catering equipment, etc.

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  A sourcing plan – the buying team would refer to the existing sourcing policy or determine the
sourcing strategy or methodology to apply - e.g. single or multiple sourcing; whether to use
competitive tendering or direct negotiation; whether to source locally or internationally; establishing
the award criteria, contractual requirements and processes; etc
 Market analysis- this would involve analysing demand and market patterns; identifying new potential
suppliers; general risk assessment by evaluating the business environmental factors.
 The identification and/or pre-qualification of suppliers – using available sources of data on supply
sources (existing and potential suppliers); applying key criteria (technical, financial, commercial, etc)
to pre-screen and determine suitable suppliers who meet LOCOG’s standards; engage the identified
supplier using appropriate tools such as PQQ or RFI, RFQ or ITT, depending on the sourcing process or
methodology adopted. Some answers divided this stage into two – identification and pre-qualification
– and marks were earned appropriate to the depth of detail presented.
 Evaluating supply offers /options – depending on the methodology adapted, LOCOG would receive
(from pre-qualified suppliers) quotations or tenders/bids for evaluation against the established
criteria and /or enter into negotiations with one or more of the suppliers. The ‘winning’ supplier
would be the one offering the best value solution to the requirement – candidates with public sector
background seemed to favour the term ‘MEAT’ (Most Economically Advantageous Tender).
 Creating contractual relationship – this would be the final stage of the process when all clarifications
have been made a purchase order/contract/framework agreement or other method of legal
relationship is formulated and adopted by both parties.

A maximum of two marks were allocated for the identification and brief description of each of FOUR relevant
stages in a sourcing process. Up to two additional marks would be awarded for a more detailed description of
each sourcing stage, including reference to the case study (Total: 16 marks). This question was very well
answered with most candidates gaining credit level marks or above. Answers that failed to gain marks
included a negotiation stage which they incorrectly referred to as ‘post-contract negotiation’. Stronger
answers showed detail and reference to the case study.

Question 2 – Learning Outcome 2

Suggest FOUR selection criteria that LOCOG’s procurement function might have used
when identifying appropriate external suppliers in its sourcing plan.
(20 marks)
This question required candidates to identify and briefly describe FOUR selection criteria that LOCOG’s
procurement function might have used when identifying appropriate external suppliers. The aim of the
question was to test the candidates’ understanding of the various criteria applied in in the supplier selection
process. Answers were expected to present any four of the following (or similar):-
 Production capacity –whether the potential supplier has the resources and flexibility to meet the
volume of products or services needed by LOCOG in the short term and in the long term.
 Technical capability - whether the potential supplier has suitable plant/machinery and knowhow/skills
to meet LOCOG’s current requirement, and the ability or versatility to adapt to changes in customer
requirements.

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  Systems capabilities - whether the potential suppliers’ systems and procedures are compatible with
those of LOCOG, or whether the suppliers have the willingness to comply with LOCOG’s systems and
procedures.
 The quality systems – whether the potential suppliers’ quality management methods/procedures
meet the requirements of LOCOG’s specifications, e.g. quality control, quality assurance, total quality
management.
 Environmental, Sustainability and CSR policies – whether the suppliers’ policies are robust enough to
protect LOCOG’s reputation and brand/image –issues covered here include carbon footprint, greener
materials, recycling; labour and trading policies; local community initiatives; etc. (some answers
divided this point into two or three criteria and marks were awarded appropriate to the depth of
discussion).
 Financial capabilities - the potential suppliers’ financial stability issues such as profitability, liquidity,
investor attractiveness; costing and pricing methods (this could also be discussed as a separate point).
 Some candidates used other acceptable approaches- such as FACE2FACE and Carter’s 10Cs – to
provide effective answers to the question.

Up to two marks were allocated for the identification and brief description of each of four selection criteria
suggested. Up to three additional marks would be awarded to each suggested criterion for detail and use of
examples from the case study (Total: 20 marks). This question was generally well answered with the stronger
answers combining both depth of knowledge and application to the case study. The few weak answers tended
to misinterpret the question and present material- such as Porter’s 5 Forces- which provided little or no
relevance to the question requirement.

Question 3 – Learning Outcome 3

LOCOG had to assess several hundred suppliers that might be capable of delivering the
right products and services on time and to budget.

(a) Explain TWO liquid ratios that LOCOG’s procurement function might have used to (10 marks)
assess the viability of potential suppliers. (10 marks)
(b) Explain TWO profitability ratios that LOCOG’s procurement function might have
used to assess the viability of potential suppliers.

a) The question required candidates to explain two liquid ratios that LOCOG might have used to assess the
viability of potential suppliers. The aim of the question was to test the candidates’ knowledge of the liquidity
ratios applied to assess potential suppliers’ financial stability when making supplier selection decisions.
Answers were expected to identify and describe the following two liquidity ratios:-
 The current ratio: - calculated from current assets divided by current liabilities. Current assets would
typically consist of debtors, cash and stock, while current liabilities consist of trade creditors and short
term bank loans (including overdraft). A viable supplier would have a current ratio greater than 1:1
(ideally 2:1), which indicates sufficient current assets to pay off current liabilities on demand. A
current ratio less than 1:1 is indicates financial instability and therefore a risky supplier.

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  The acid test ratio (quick ratio or acid-test ratio):- calculated from current assets (excluding stock)
divided by current liabilities. Stock is removed from the formula, because it might be difficult to
quickly realise (turn into cash), or may not be realised at its full value. The acid test ratio should be
greater than 1:1, an indicator that the supplier can readily settle its current liabilities from its cash and
debtors.
 The ‘gearing ratio’ – is a long term liquidity ratio calculated by dividing long term debt/loans (fixed
return capital) by owners funding (ordinary shareholder capital plus reserves) and the result
multiplied by 100 to be expressed as a percentage. High gearing (high percentage/proportion) implies
a dependence on borrowed funds that demand regular long term fixed interest payments to the
lenders – a long term financial risk factor. A low-geared supplier would therefore generally be
considered less risky in the long term.

Up to two marks each were allocated for the identification and description of the formula for the two liquidity
ratios. Up to three additional marks each would be awarded for an explanation of the ratio in assessing the
viability of potential suppliers (Total: 10 marks). This question was well answered as many candidates gained
higher than pass grade marks. The few weaker answers were largely due to a knowledge gap in the subject, or
misinterpretation leading to presentation of wrong ratios. Cash Flow statement was also commonly
(incorrectly) presented among the wrong answers to this question. Stronger candidates explained current
assets and current liabilities, and then presented formulas, illustrations and application.

b) The question required candidates to explain two profitability ratios that LOCOG might have used to assess
the viability of potential suppliers. The aim of the question was to test the candidates’ knowledge of the
profitability ratios applied to assess potential suppliers’ financial stability when making supplier selection
decisions. It was expected that candidates would identify and describe any two profitability ratios from the
following: -
 Gross profit percentage:- calculated when a supplier’s gross profit is divided by its sales/turnover and
the result multiplied by 100 to give a percentage figure. Normally the higher the gross profit
percentage, the more viable the supplier is, but the percentage may vary from industry to industry,
and the profitability trends need to be reviewed/explained. A profitable supplier will provide a sense
of supply security and commercial flexibility e.g. concessions during negotiations.
 Operating (or Net) profit percentage:- calculated by dividing a supplier’s operating (or net) profit by its
sales/turnover and multiplying the result by 100 to give a percentage figure. Again, the higher the
operating (or net) profit percentage, the more viable the supplier is, but it may vary from industry to
industry, and trends need to be explained.
 Return on capital employed (ROCE):- calculated by dividing the supplier’s operating profit (before
interest and tax) by its average capital employed (shareholder funds plus long term loans) and
multiplying the result by 100 to express it as a percentage. Again, the higher this figure, the more
viable the supplier as it shows how efficiently the supplier is using its capital. The return a company
makes on each £ invested – to cover for interest, dividend and reserves.
 Return on assets:- calculated by dividing the supplier’s operating profit by total assets (fixed + current)
and multiplying the result by 100 to give a percentage figure. This indicates how well the assets of the
company are being used.

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Up to two marks were allocated for the identification and description of the formula for each of two
profitability ratios. Up to three additional marks each would be awarded for an explanation of each ratio in
assessing the viability of potential suppliers (Total 10 marks). The performance in this question was lower than
in part (a). Weaker answers displayed signs of a knowledge gap in the subject and some question
misinterpretation leading to presentation of wrong ratios or the cash flow statement. Stronger candidates
showed depth of discussion, presented formulas, illustrations and application. This was a relatively unpopular
question.

Question 4 – Learning Outcome 4

At the core of LOCOG’s sourcing process was the ‘CompeteFor’ web-based buying portal.

Describe FIVE benefits to LOCOG of using an e-sourcing tool, such as the ‘CompeteFor’ (20 marks)
web-based portal, in the sourcing process.

The question required candidates to identify and describe any FIVE advantages of using an e-sourcing tool.
The aim of the question was to test the candidates’ knowledge of the electronic systems applied in the
sourcing process, and their significance. The answers were expected to contain the following (or similar): -
 Cost savings through increased process efficiencies in contract management and less paperwork and
less staff time spent on routines.
 The development of best practice reflected in better communication - consistent and transparent
systems enabling uncompromisable devolution of the sourcing process to non-procurement staff.
 Enhanced quality and capability, because the sourcing process is transparent- providing clear criteria
to facilitate decision making.
 Reduced cycle times in the sourcing process, because by using an e-sourcing tool, the inherent
automation enables faster response times.
 Wider supplier base -due to the power of internet and greater capacity for data management, new
and potentially innovative suppliers are identified for LOCOG.

Up to two marks were allocated for the identification and brief description of each of five benefits of using an
e-sourcing tool, such as LOCOG’s ‘CompeteFor’. Up to two additional marks each would be awarded for
detailed description and linkage to the case study (Total: 20 marks). This was the most popular question
where most candidates gained credit or distinction level marks. The weaker answers tended to be theoretical
and/or to be narrow in approach (e.g. focusing on the process of e-tendering or e-auctions) with little attempt
to refer to the case study.

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Question 5 – Learning Outcome 5 (if applicable)

Discuss the advantages and disadvantages of competitive tendering in enabling LOCOG to

achieve the best value for money. (20 marks)

This question required candidates to discuss the advantages and disadvantages of competitive tendering that
would enable LOCOG to achieve value for money. The aim of the question was to test the candidates’
understanding of the benefits and drawbacks of competitive tendering to sourcing - commonly applied in the
public sector as a matter of regulatory/compliance requirements.
The answers were expected to present content relating (but not necessarily limited) to the concept of best
‘value for money’. This concept broadly focuses on the combination of whole life costs and quality, or
balancing efficiency with economy in order to achieve an optimal result. This was particularly vital for LOCOG
which had a fixed budget of around £700 million.
Alternatively answers could discuss the importance of competitive tendering process in establishing criteria
that ensured supplier selection was fair, transparent, and auditable - providing potential suppliers with equal
opportunity. Most candidates adopted this approach. Many of LOCOG's requirements were likely to be of high
value and thus competitive tendering would be the best possible option to achieve value for money.

On the other hand, the disadvantages of competitive tendering could be explained with such content as:- it
discourages closer working relationships with suppliers; limits innovative approaches that could have helped
LOCOG in this a one off event; it can create a risk avoidance culture for suppliers; it is not appropriate where
suppliers are few or the timescales are short; SMEs may be discouraged due to the complexity of the
tendering process; it demands much time, cost and bureaucracy; etc.

Up to 10 marks were allocated for an explanation of how competitive tendering may result in best value for
money being achieved. Also up to 10 additional marks would be awarded for a discussion on the
disadvantages of competitive tendering (Total: 20 marks). This was a fairly broad question as there was no
prescribed number of advantages or disadvantages. Most answers presented advantages and disadvantages
separately. However some candidates concurrently presented the advantages and disadvantages, e.g. a
tendering advantage as explained and then critiqued in the same paragraph. As expected the performance in
this question was quite varied in terms of approach, content depth and even the balance between advantages
and disadvantages. It was a relatively unpopular question. Weak answers strayed into discussing the process
of tendering or e-auctions without attempting to relate to the question expectations.

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