Procurement and Supply in Practice

1. PRACTICE MODULE
L4M8

2. Chapter 1 revision
Discuss the advantages and disadvantages for the
purchasing organisation of having a partnering
relationship with a supplier. (16)
 Partnership is a long term commitment between a buyer and supplier to
work together to develop world class capabilities.
Advantages
 Security of supply-the buying organisation may secure continuity of supply
and this may promote business continuity resulting in on shelf availability.
 The buying org can leverage on supplier expertise. This may cause the org to get
innovative solutions and enhance the competitiveness.
 Sharing of risks
 Access to supplier technology
 Synergy (2+2=5) “the whole is greater than the sum of its parts”

3. Disadvantages
 The relationship costs may be higher than the
benefits realised.
 Potential loss of confidential data and or intellectual
property. This may expose the org to competitors.
 Incompatibility problems-the BO can end up locked
into a long term relationship with an incompatibility.
The org may lose out.
 It is an uncompetitive strategy.
 Complacence

4. Draw the relationship spectrum and
indicate the position of outsourcing

5. Explain, using examples, the following
competitive forces in supply chains
(a) Potential substitute products
 These are alternative products that serve the same purpose. Usually they
are cheaper than the ideal products. They weaken the supplier’s
bargaining power. They widen product offering. Examples include
WhatsApp v postal letter.
(b) bargaining power of suppliers
 Suppliers are powerful relative to buyers when:
 They are few in number relative to the customers or a monopoly.
 When switching costs are high
 The buyer’s spend is very low
 The buyer’s need is very urgent and when the buyer lacks knowledge of
the product

6. (cont.)
(c) Bargaining power of buyers
 Buyers are powerful relative to suppliers when:
 Their spending power is high
 Their needs are not urgent
 The switching costs are very low
 They have adequate knowledge of the product
 There are many substitute products

7. (cont.)
(d) Threats of new entrants
 These are potential players who seek to enter into the
market. It is because the market is attractive enough.
 Their coming in widens product offering, thereby
weakening the current players’ bargaining power.
 The organisations have to establish barriers to entry to
deter new players from entering the market, such as:
i. Differentiate product offering
ii. Reduce the production cost and make it difficult for the
new players to enter the market……

8. (cont.)
(e) Competitive rivalry
 This considers the intensity of the competition.
 Competition is intense when:
i. Products are undifferentiated
ii. The rate of technological change is very slow
iii. Suppliers are fewer and of equal size, no one is too
dominant.

9. Suggest FOUR drivers of a collaborative
relationship in supply chains.
 Shorter product life cycles which mean closer supply
chain links
 Avoidance of costs from adversarial relationships
 Pressure towards customisation and the use of agile
supply chains
 Increased competition in the market pushing the
need for organisations to concentrate on core
activities
 Competitive pressures to become more lean

10. Suggest THREE ways buyers could increase the
“attractiveness” of their business to suppliers.
 Fair trade practices
 Investment in supplier improvement
 Making payments on time
 Sharing of risks
 Increase the value of the buyers brand and improve
reputation

11. Describe ONE relationship type that might be
appropriate for:
(a) a strategic procurement.
 Partnership- this is a commitment between a buyer
and seller to work together on a long term basis in
order to develop world class capabilities. Such a
relationship enables business continuity.
(b) a routine procurement.
 Adversarial- with this relationship, the buyer and
seller are opponents. One party maximises at the
expense of the other. It is a win-lose scenario.

12. One of the examples on the relationship
spectrum is ‘single sourcing’.
Explain TWO potential advantages and TWO potential
disadvantages associated with this approach.
An approach where there are many suppliers for the product
but the buyer chooses only one supplier
Advantages
 The buyer can aggregate its demand on a single supplier and enjoy
price discounts.
 A narrow supplier base can reduce the cost of relationship
management
Disadvantages
 Overdependence on a single supplier may be dangerous to the buyer
 It is uncompetitive, a factor that stifles innovation
 Incompatibility challenges-this has a tendency of robbing the org of
potential value offered elsewhere.

13. Discuss the benefits for an organisation of
outsourcing a strategic function
 Business focus-the org can focus on core
competencies that add value while non ore are
performed by third parties.
 The buying org can leverage on the expertise of the
service provider. This may enhance innovation,
resulting in increased competitiveness.
 Cost savings
 Freeing up of resources
 Economies of scale

14. Outline FOUR factors that the company should consider
when deciding whether to buy in the shoes or continue to
manufacture them.
 Whether it is a core or non core. If a core, make in-
house. If a non core then buy.
 Cost-if it is cheaper to make in-house, make. If
cheaper to buy, buy.
 Availability of external service providers. If they are
available, a buy option may be ideal. If not available,
a make option would be ideal.
 Availability of in-house expertise. If there are any in-
house experts, a make option is appropriate. If not, a
buy option would be ideal.

15. Chapter 2 revision questions
Explain each of the following terms highlighting the differences between
them:
(i) Conditions
(ii) Warranties
(iii) Innominate terms.
 Condition-it is a vital term of the contract. Breach of such terms makes it
difficult for the contract to continue, therefore, the contract can be
terminated.
 Warranty-this is a non vital term of the contract. Breach of such terms
may not result in the contract being terminated. The injured party may
claim damages.
 Innominate-unclear whether it is a condition or warranty. Usually, the
courts will decide the position of the term

16. Explain FIVE essential elements of a legally
binding agreement.
Intention to create legal relations
 Parties to the contract to demonstrate a genuine
willingness to uphold the law. The agreement should
uphold the law.
Capacity to contact
 Parties to be above the legal age in order to contract.
 Parties to be mentally stable and free from drugs.
 They should have the authority to sign contracts for
their organisations.

17. (cont.)
Offer
 A statement that demonstrates willingness to be bound
in contract once accepted by the offeree.
 It must be clear and unambiguous
 It must result in an agreement once accepted
 It has to be open when the offeree accepts it
 It can be revoked at any time
Consideration
 It is something for something/exchange or barter.
 You give something in exchange for something
 It has to be valuable-monetary value
 It must be sufficient

18. (cont.)
Acceptance
 The offeree has to accept the offer freely and
unconditionally. He must not be forced into agreeing
to the terms of the other party.

19. Outline FIVE examples of contractual
terms that can be used by the supplier
 Payment-state when and how payment will be made
 Passing of title-outlines when ownership passes from the
seller to the buyer
 Liquidated damages-indicate how the injured party will
be compensated in the event of breach
 Time of performance-states when the parties to the
contract should have performed their contractual
obligations
 Subcontracting-states whether the supplier is allowed to
assign any part of his work to a third party.
 Force majeure- designed to release parties from
liabilities encountered due to circumstances beyond your
control.

20. Explain the difference between liquidated damages
clauses and ‘penalty clauses’ in contracts.
Liquidated damages
 They are a form of
compensation to the other
party in the event of
breach.
 They are enforceable by law
 They are meant to put the
injured party in the
position he would have
been had the contact
performed
 They motivate parties to
perform their contractual
obligations
Penalty clause
 They are designed to
punish the other party.
 They are not enforceable by
law as they do not seek to
compensate but to punish
the party in breach.
 They are a disincentive

21. Describe THREE factors that may lead to a
contract being invalid.
Misrepresentation
 A false statement of material fact made either before
or at the signing of the contract, meant to induce the
other party into the contract. The contract is
voidable.
Undue influence/duress
 It is a scenario where one powerful party takes
advantage of the weaker party. Such a situation is
voidable

22. (cont.)
Legality
 It is a situation where parties agree to do certain
things against the law. Such arrangements are void.
Mistake
 A situation where parties end up bound to do certain
things they did not intend to commit themselves to.

23. Outline five areas where the standard contract terms of a
buyer and a seller are likely to be different
 Price clause--price escalation clauses vs. requirement for
a fixed price
 Intellectual Property-does the supplier retain this right
vs. work done on behalf of the buyer passes to the buyer
 Passing of title such as retention of ownership until full
payment is received vs. on delivery
 Payment terms for example days required for payment,
advance payment or installments.
 Intellectual Property for example does the supplier retain
this right vs. work done on behalf of the buyer passes to
the buyer

24. Explain the following in relation to the
non-performance of a contract
(a) Substantial performance
 A situation where the supplier performs his part in the
contract but not to the required standard.
 The supplier would be entitled to be paid the agreed price less
an amount which reflected what was not complete.
(b) Acceptance of partial performance
 If the buyer accepts work partly performed, he has to pay for
the services rendered on a quantum meruit basis.
 It applies when a supplier is in breach of a contract and the
buyer is not obliged to accept what they have delivered.
 However, there is a situation where there is no option but to
accept the partial performance then payment would not be
required.

25. Discuss the purpose of the following TWO
contract terms.
(a) Applicable Law
 A term that provides clarity as to which legal jurisdiction
will preside over dispute resolution. It applies to
international contracts.
 It may be of particular importance should a dispute
occur.
(b) A Force Majeure clause-French for
"major/superior force")
 It is a term design to release parties from liabilities
arising due to circumstances beyond their control.
 It allows a party to suspend or terminate the
performance of its obligations when certain
circumstances beyond their control arise

26. Explain THREE legal remedies available to a
purchaser when a breach of contract occurs.
 Specific performance- the court orders the party
in breach to honour its contractual obligations. It is
only available if the goods are of a unique character.
It applies if damages are not an adequate remedy.
 Termination of the contract
 Damages-the injured party can claim damages as
compensation for the loses suffered.

27. Outline the main drawbacks of litigation as a
means of resolving contractual disputes.
 It is adversarial in nature-a win lose scenario
 Details are aired to the public
 It is an expensive mechanism
 Complex in international contracts
 Decisions may take longer to be made
 It is confrontational

28. Dispute resolution mechanisms
 Negotiation
 Mediation
 Conciliation
 Arbitration
 Adjudication
 Litigation

29. Outline THREE resources that could
contribute to effective contract management.
 Skilled personnel
 Finances
 Information
 ICT systems

30. Supplier evaluation/appraisal
Financial stability
 Check financial statements
 Invite the supplier’s finance director to present the
company position
 Use credit rating agencies such as Dun & Bradstreet
Quality
 Accreditations such as ISO 9001
 Site visits

31. (cont.)
Compliance
 Tax clearance
 Health & safety
 Labour practices
Capacity
 Ability to produce work in a given time
 Check machine size
 Number of employees

32. Suggest FOUR award criteria that might be used to
decide which suppliers should be awarded contracts
 Price
 Conformance to specifications
 Whole life costing
 Quality

33. Explain THREE benefits of the use of positive
relationship management in supply chains.
 Greater profitability can be achieved through
reduced sourcing and input costs.
 Greater potential for synergy (2+2=5)
 Improved business efficiency through integration of
management information systems
 Creation and maintenance of competitive advantage.

34. Elements of total cost of ownership
 Pre acquisition
 Purchase price
 Installation/tooling
 Operating costs
 Maintenance costs
 Training of users
 End of life costs
 It guides buyers to make informed decisions.

35. Globalisation
Benefits
 Access to cheaper & abundant resources
 Better quality
 Access to new markets
 Relaxed policies on investment
 Access to new technology
 Cheap & skilled labour

36. Globalisation
Limitations
 Exchange rate fluctuations
 Logistical challenges-longer lead times
 Social & cultural problems-reputational problems
 Compliance challenges
 Payment challenges
 Import tariffs
 Differences in time zones

37. Explain the advantages of leasing
 No initial capital tied in the asset
 Commitments known in advance-planning purpose
 Hedges against risk of obsolescence
 Fewer challenges with taxman and calculations of
depreciation

38. Challenges of leasing an asset
 No total control of the asset
 Payment commitments may outweigh the outright
purchase price
 Ownership does not transfer

39. Contribution of senior management
 Approve decisions
 Cooperation/buy-in
 Provision of adequate resources

40. Team working
A team is a small group of people with complementary
skills who are committed to common or similar objectives.
Benefits of team working
 Team working facilitates interactive communication-
better & or informed decisions can be made.
 Simplifies tasks that are complex (2+2=5)
 Motivates their member to devote themselves so that
they discharge their obligations effectively.
 Enhances worker morale, a factor that improves
productivity levels
 Reduces conflicts in the org

41. Stages of team development
Forming
 team identity
 communication of goals and objectives, roles and
responsibilities.
 Leadership stated
Storming
 Members begin to test out their roles
 Open conflict
 Generation of ideas-brainstorming
Norming
 Conflicts would have been resolved
 Settling down stage
 Members ready to perform

42. (cont.)
Performing
 Members execute their tasks
 Achievement of goals and objectives
Adjourning
 Team would have achieved its objectives
 Complacence builds
 Team is disbanded

43. Ethical code of practice
 Fraud-deliberate deception with an intention of
gaining something
 Confidentiality
 Conflict of interest
 Human rights
 Environmental purchasing
 Transparency
 Bribery & corruption