1. CIPS On-line Tutoring Webinar
July 2015

2. Agenda
• Introduction
• Overview of D2 – Business Needs in P & S
• Study Tips and Exams
• Past D2 Exam Paper & Assessor Report
•Review of past exam questions
• Q&A

3. Business Needs in
Procurement and Supply
Diploma in Procurement and Supply
Learning outcomes:
1. Understand how to devise a business case for requirements to be sourced from
external suppliers
2. Understand the fundamentals of specifications and key performance indicators
that are included in contractual arrangements made with suppliers
3. Understand the main clauses that are included in contracts
4. Understand the main implications of outsourced work or outsourced services for
procurement

4. What are business needs?
• An organisation needs certain inputs in order to perform its
activities and pursue its objectives
• The planners of business activities, and the users of inputs, typically
notify the procurement function of these requirements, in various
ways
• The task of procurement is to fulfil the input requirements, by
achieving what are often called the five rights of procurement
Operational objectives of procurement are to provide right inputs to
meet operational needs on an organisation
But may also have strategic and commercial objectives - profit,
competitive advantage, cost leadership, differentiation, learning

5. Type of purchase (1.1) – page 7
• Straight re-buy of items already sourced from a supplier
• Modified re-buy, where some of the requirement has
changed
• New buy, where the requirement has not previously been
specified or sourced
Has implications for the extent to which systematic business
case justification is required.
Must understand how business needs may influence
procurement decisions for each of these types of purchase

6. The business case process – objectives of a
formal business case process (1.1)
• Fostering strategic, business-focused thinking
• Improving the efficiency and quality of decision-making
• Enabling management to evaluate proposals for feasibility,
suitability and acceptability
• Enabling management to compare alternatives and options
• Establishing measurable yardsticks by which the subsequent
performance, deliverables or outcomes of projects can be evaluated
• Is the project or asset achieving the business case benefits
anticipated?
• Are the assumptions made in the business case turning out to be
accurate?
• Is the business case justification for the project still valid?

7. Informal business case structure
(low value & low risk)
Introduction/
background
• Overview of the business need
• Priority of the need or issue (eg using Kraljic analysis)
• The current situation
Options • Options considered (if any), with reasons for rejecting or carrying forward each
option
Business benefits • Expected outcomes of the proposed solution, and their associated business
benefits
• Alignment of the proposed solution with business objectives, strategies, policies
and values
Costs and risks • Estimated costs of the proposed solution
• Anticipated risks of the proposed solution
• Anticipated impacts on activities and relationships
• Anticipated risks and costs of not pursuing the proposed solution (or doing
nothing)
Recommendation • Net (on-balance) cost/benefit assessment
• Return on investment or payback period (if data is available)
KPIs (if data is
available)
• Target costs and results which will be used to evaluate performance

8. Business benefits – that can be included in
business case (1.3)
• Fulfilment of a specific business objective
• Increased revenues
• Reduced costs
• Enhanced profitability
• Enhanced value for money
• Enhanced shareholder value
• Competitive advantage
• Leverage of key resources
• Increased capacity, capability or flexibility
• Improved brand or reputational equity

9. BUSINESS OBJECTIVES PURCHASING OBJECTIVES
Maintain or increase market share Provide supplies to match customer needs; assure
quality; reduce delivery lead time; reduce cost
Improve profits, cashflow, and return on capital Reduce stocks; improve reliability; more frequent
deliveries
Shorten time to market Early supplier involvement
Eliminate non-core activities Develop effective make-or-buy policy; integrate
purchasing and capacity planning
Introduce continuous improvement Reduce supplier base; partnership approaches;
reduce product complexity; increase accuracy and
reliability
Become world class supplier Work with suppliers to establish world class
standards; improve flexibility of response to market
conditions; liaison with technological sources
Links between corporate and
purchasing objectives (1.3)

10. • Communication with suppliers
• The buyer’s database of market data
• The marketing communications of suppliers
• Online market exchanges, auction sites and forums
• Advisory and information services
• Trade fairs, exhibitions and conferences
• Informal networking and information exchange
Primary sources of market data on
costs and prices (1.2)

11. Components of the cost base
• Raw materials (and/or components, subassemblies
and consumables)
• Labour
• Overheads

12. Benefits and limitations of WLC
Benefits
• Enabling the fair (like-with-like)
comparison of competing options
• Enabling realistic budgeting over
the life of the asset
• Highlighting, at an early stage, risks
associated with the purchase
• Promoting cross-functional
communication on cost and asset
management issues, and improving
awareness of total costs
• Supporting the optimisation of
value for money
Limitations
• It is not an exact science, and
future cost estimates are subjective
• Many costs are incurred through
the life of a product or asset, and
not all of these will be easy to
forecast
• A wide range of intervening factors
may affect costs over the lifecycle
of a product or asset
• A systematic WLC exercise can be
time-consuming, labour-intensive
and costly

13. Objectives of preparing a budget
(1.4)
• To express organisational objectives as operational targets
• To communicate plans and targets to stakeholders
• To motivate people to attain performance and cost targets
• To motivate managers to identify risks and problems
• To measure unit or project performance
• To help evaluate managerial performance
• To pre-authorise estimated levels of expenditure for
procurement activities
• To co-ordinate operations
• To control procurement activities and costs

14. The role of a specification (2.1)
• To define the requirement
• To communicate the requirement
• To provide a means of evaluating the quality or
conformance of the goods or services supplied

15. Types of specification (2.1)
Conformance specification
The buyer details exactly what the
required product, part or material
must consist of. This may take the
form of an engineering drawing or
blueprint, a chemical formula or
‘recipe’ of ingredients, or a sample of
the product to be duplicated, for
example. The supplier may not know
in detail, or even at all, what function
the product will play in the buyer’s
operations. The supplier’s task is
simply to conform to the description
provided by the buyer.
Performance specification
The buyer describes: what it expects a
part or material to be able to achieve,
in terms of the functions it will
perform and the level of performance
it should reach; or what outputs or
outcomes (results) it expects to be
delivered by a service. It is up to the
supplier to furnish a product or service
which will satisfy these requirements:
the buyer specifies the ‘ends’, and the
supplier has relative flexibility as to
‘means’ of achieving those ends.

16. Developing specifications - Content (2.2)
ITEM CONTENT
Identification Title, reference number, authority, designation, issue number and date
Circulation Distribution list of the specification
Contents List of parts, clauses, illustrations and annexes
Foreword Reasons for writing the specification
Introduction Summary of the business need and technical aspects of objectives
Scope Range of objectives and content
Definitions Terms used with special meanings in the text
Main body of the
specification
Requirements, guidance and methods
Annexes Additional detailed technical information and examples
Index Alphabetical index
Bibliography Details of internal and external standards and publications referred to in the
specification

17. Drafting specifications
Features of an effective specification:
• Clear and unambiguous as to what is required
• Concise
• Comprehensive
• Compliant with all relevant standards, and health, safety
and environmental laws and regulations
• Up-to-date
• Expressed in terms which can be understood by all key
stakeholders
• Value-analysed

18. Environmental criteria in specification
might include (2.2):
• Location in relation to the buyer and lower tiers of supply
• The use of less, and ‘greener’, materials and packaging
• ‘Green’ design and innovation capability; reverse logistics
and recycling capability; and so on
• The development and enforcement of strong
environmental policies
• Robust environmental management systems
• Compliance with environmental protection and emissions
law and regulation in the country of operation

19. • The development of robust CSR policies and ethical codes
• Location in relation to the buyer
• Evidence of responsible and ethical labour policies and practices
• Evidence of, and commitment to, conformance to relevant
legislation and regulations
• Compliance with International Labour Organisation standards
• Evidence of ethical trading policies and practices
• Compliance with Fair Trade standards, or membership of the Ethical
Trading Initiative
• Commitment to transparency and improvement, in collaboration
with the buyer
CSR and social sustainability
criteriafor specification may include (2.2)

20. Defining KPI’ -
What is performance measurement?
Supplier performance measurement is the assessment and
comparison of a supplier’s current performance against:
• Defined performance criteria
• Previous performance
• The performance of other comparable organisations (eg other
suppliers) or standard benchmarks

21. QUANTITATIVE MEASURES QUALITATIVE MEASURES
Easier to establish KPIs KPIs likely to be subjective
Easier to monitor over time Monitoring over time is subjective
Focus on efficiency Focus on effectiveness
Particularly suitable for purchase of
products
Particularly suitable for purchase of
services
Examples include prices, delivery
performance, financial performance,
reject rates
Examples include management
capability, staff issues, technological
development, willingness to
collaborate closely
Quantitative and qualitative
measures: characteristics (1.3)

22. Four types of benchmarking: (1.3)
• Internal benchmarking
• Competitor benchmarking
• Functional benchmarking
• Generic benchmarking

23. The benchmarking process

24. PERFORMANCE
CRITERION
PERFORMANCE INDICATOR
Quality Management systems and processes are clear and
documented
Cost management Consumable purchasing rates are benchmarked for value
for money
Timeliness Service is delivered within the agreed periods of availability
Quantity Stocks are maintained to appropriate levels to ensure
continuity of service
Compliance Corporate policies and procedures are adhered to
Typical KPI’s - KPIs as statements of
performance

25. Benefits of effective SLAs (2.3)
• The clear identification of customers and providers, in relation to specific services
• The focusing of attention on what services actually involve and achieve
• Identification of the real service requirements of the customer, and potential for
costs to be reduced by cutting services or levels of service that (a) are
unnecessary and (b) do not add value
• Better customer awareness of what services they receive, what they are entitled
to expect, and what additional services or levels of service a provider can offer
• Better customer awareness of what a service or level of service costs, for realistic
cost-benefit evaluation
• Support for the ongoing monitoring and periodic review of services and service
levels
• Support for problem solving and improvement planning
• The fostering of better understanding and trust between providers and customers

26. What is a contract? (3.1)
A contract is basically a statement of:
• Exactly what two or more parties have agreed to do or
exchange
• Conditions and contingencies which may alter the
arrangement
• The rights of each party if the other fails to do what it has
agreed to do
• How responsibility or ‘liability’ will be apportioned in the
event of problems
• How any disputes will be resolved

27. General contract structure (3.1)
The agreement Names and signatures of the parties to the contract
Definitions Definition of names and terms, to avoid repetition of long sentences in the
body of the contract.
General terms • General agreements clause
• Changes, alterations and variations clause
• Notice clause: how and by what method any notice relating to the
contract is to be sent
Commercial
provisions
Rights and obligations of the supplier and of the purchaser. Standard terms
of purchase, for example, might include:
•Passing of title/ownership
•Time of performance
•Inspection/testing
•Delivery/packing
•Assignment
•Liability for damage or loss in transit
•Rejection
•Payment terms

28. General contract structure (cont.)
Secondary
commercial
provisions
• Confidentiality and intellectual property protection (where relevant)
• Indemnity
• Guarantee clause
• Termination
• Arbitration
Standard clauses These may include:
•Waiver
•Force majeure
•Law and jurisdiction

29. ADVANTAGES DISADVANTAGES
Helps reduce time and costs of
contract development
Terms may not be as advantageous to
a powerful buyer as if contract was
negotiated
Avoids ‘reinventing the wheel’ Terms may not include special clauses
Industry model forms are widely
accepted
Legal advice is still required if
significant amendments or variations
are to be made
Designed to be fair to both parties Costs of training buyers to use model
forms
Advantages and disadvantages of
model form contracts

30. Interpreting key terms (3.2)
• What type of clause they are and what they are
designed to achieve
• The legal and operational effects or implications of
the clause for the buyer and the supplier
• Whether the example clause, as given, expresses the
buyer’s requirements (and best interests) clearly

31. A breach of contract occurs:
• When a party fails to perform an obligation under the
contract: is in breach of a condition; improperly
repudiates (ends) the contract; or prevents completion of
the contract on his own side or by the other party, during
performance. These are examples of ‘actual breach’.
• When, before the time fixed to perform an obligation, a
party expressly or by implication repudiates the
obligations imposed on him by the contract: ie shows an
intention not to perform. This is called ‘anticipatory
breach’.

32. Insurances (3.2)
• Employer’s liability insurance
• Public liability insurance
• Professional indemnity insurance
• Product liability insurance

33. What is the ‘right price’? (3.3)
• A price which ‘the market will bear’
• A price which allows the seller to win business, in competition
with other suppliers
• A price which allows the seller at least to cover its costs, and
ideally to make a healthy profit
The ‘right price’ for the supplier or seller to charge
(the sales price) will be:

34. What is the ‘right price’?
• A price which the purchaser can afford
• A price which appears fair and reasonable, or represents value
for money, for the total package of benefits being purchased
• A price which gives the purchaser a cost or quality advantage
• A price which reflects sound purchasing practices
The ‘right price’ for the buyer to pay
(the purchasing price) will be:

35. Reasons for cost/price variations
• Under-estimation of costs at the forecasting stage
• Price inflation, escalating materials costs
• Wage inflation, escalating labour costs
• Commodity and energy price fluctuations
• Exchange rate fluctuations
• Overtime or incentive payments required to ‘crash’ the
schedule
• Failure costs incurred by unforeseen quality problems
• Changes in the scope of the contract
• Unforeseen contingencies

36. Cost-plus pricing
• A cost plus fixed fee (CPFF) contract includes
payment of allowed costs plus a pre-determined
fixed amount, as the fee for doing the work
• A cost plus incentive fee (CPIF) contract includes
payment of allowed costs plus a higher fee for
meeting or exceeding performance or cost targets or
KPIs
• A cost plus award fee (CPAF) contract includes
payment of allowed costs plus a fee (bonus) based on
the contractor’s performance

37. Payment methods/terms (3.3)
• Payment in advance (or payment with order)
• Payment on delivery
• Open account or credit

38. FACTORS SUPPORTING MAKING/DOING FACTORS SUPPORTING BUYING IN
Opportunity to extract value from otherwise
idle capacity and resources
Quantities required are too small for
economic production
Potential for lead time reduction Avoid costs of specialist machinery and
labour
Cost of work is known in advance Reduced inventory costs
Desire to exert direct control over
production and/or quality
Financial risk shared with supply chain
Protection of confidentiality and intellectual
property
Access to contractor’s specialist research,
expertise, technology, patents, designs and
so on
Less supply risk and supplier risk Augmented production capacity
Desire to maintain a stable workforce Desire to maintain a stable workforce
Factors in make/do or buy
decisions (4.1)

39. Drivers for outsourcing
• Quality drivers
• Cost drivers
• Business focus drivers
• Financial drivers
• Relationship drivers
• Human resource drivers

40. Why does it go wrong (risks)?
• The organisation fails to distinguish correctly between core and
non-core activities
• The organisation fails to identify and select a suitable supplier
• The organisation has unrealistic expectations of the outsource
provider
• The outsourcing contract contains inadequate or inappropriate
terms and conditions
• The contract does not contain well defined key performance
indicators or service levels
• The organisation lacks management skills to control supplier
performance and relationships
• The organisation gradually surrenders control of performance to the
contractor

41. Advantages of internal supply
• The transaction costs are low
• The relationship between ‘customer’ and ‘supplier’ is
likely to be long-term and stable
• There is (usually) no profit motive within the internal
supplier
• Customer and supplier are part of the same
organisation, meaning that they should share the
same culture and values

42. CIRCUMSTANCES WHAT ACTIVITIES TO OUTSOURCE
Procurement (or ‘purchasing’) is a peripheral
rather than a core activity (low or generalised
skill requirements, internally focused
responsibilities, well-defined or limited tasks,
jobs that are easily separated from other tasks)
• Purchase orders
• Locally and nationally procured needs
• Low-value acquisitions
• Brand name requirements
• Call-offs against framework agreements
• Administration and paperwork associated
with purchasing needs
The supply base is small and based on proven
cooperation, and there are no supply
restrictions
• Well-defined or limited tasks
• Jobs that are easily separated from other
tasks
• Jobs that have no supply restrictions
The supplier base is small, providing non-
strategic, non-critical, low-risk items
• Outsource purchasing to specialist purchasing
and supplier organisations, or to buying
consortia
When procurement should be
outsourced

43. The business case for outsourcing
(4.2)
• Costs and benefits
• Evaluation of options
• Alignment with organisational needs and timescales
The main criteria for making a business case for any
procurement proposal are:

44. • The outsourcer may be unable to keep up with the
pace of technological change in a particular activity
• The outsourcer may simply lack capability or capacity
to perform the activity competitively
• The outsourcer may be able to transfer the resources
used to make/do to another activity which will save
cost or increase revenue
Operational arguments for
outsourcing

45. The outsource procurement process
(4.3)

46. The outsource procurement process

47. Contract provisions - transfer of
assets
Contract terms should clearly establish:
• The value (or valuation) of assets transferred to the outsource
provider, and how depreciation or appreciation in value will be dealt
with
• Arrangements for the return to the outsourcer, or other disposal, of
assets transferred to the outsource provider, upon termination of
contract
• Arrangements for the return of files, data and proprietary
information to the outsourcer, upon termination of contract
• Ownership of assets developed or created in performance of the
contract
• Responsibilities for insurance, maintenance and management of the
assets

48. Performance management clauses
• A rights of inspection clause
• A schedule performance clause
• Penalties for specific non-performance, and
incentives for performance or improvements

49. Risks of contractor switching
The new supplier may fail to perform
Process incompatibility
Cultural or inter-personal incompatibility
Loss of knowledge
Learning curve: time for the new provider to achieve peak performance,
teething problems
Exposure of intellectual property, confidential data
Problems of adversarial hand-over from the old provider to the new
De-stabilisation of the workforce, through multiple transfers of service
provision

50. Study Tips &
Exam
Preparation

51. Study Tips
Time management
Support
Resources
Attitude
Balance
Assignments/ learning outcomes
Exam success

52. Types of Questions
• Essay style
•Unseen case studies
•Pre-released case studies

53. Command Words
•Analyse
•Appraise
•Argue
•Assess
•Comment on
•Compare
•Contrast
•Criticise
•Define
•Describe
• Discuss
• Enumerate
• Evaluate
• Explain
• Identify
• Illustrate
• Interpret
• Justify
• List
• Outline
• Propose
• Reconcile
• Relate
• Review
• Show
• State
• Suggest
• Summarise
KEY - D: AD: PD

54. Exam Paper Revision – D2
Business Needs in Procurement
and Supply
Focus on command word, instruction, mark allocation
and assessor comments.

55. July 2014 – D2
Q1 (a) When operating financial budgets explain the difference between an incremental
budget and a zero-based budget. (6 marks)
The major difference between the two methods is the incremental budget method adjusts
the previous period with known changes to arrive at a budget whereas a zero based
budget ignores the previous period and starts completely from scratch.
Incremental budget example – add a percentage to last period’s costs to reflect average
cost rises or pricing trends.
Zero based budget example – estimate costs and prices for procurements planned in new
period.

56. Q1(a) When operating financial budgets explain the difference
between an incremental budget and a zero-based budget. (6
marks)
•Required an explanation of the difference between an incremental budget and
a zero-based budget.
• A few responses did not clearly explain the difference, and/or included
various inaccurate guesses;
•Vast majority of answers were of a very high standard for this part of this
question.
D2 July 2014 - Assessor Report

57. July 2014 – D2
Q1 (b) Describe THREE cash outflows that might be entered in a procurement function’s
cash budget. (9 marks)
1. Payments to external suppliers for inputs required to produce the organisations goods
or services. Example – payment for raw materials
2. Payments to creditors for the purchase of plant and other productive assets required to
produce stock for sales. Example – payment for production machinery
3. Payments of salaries, wages and benefits for staff as reward for working in the
business. Example – payment to direct and indirect staff including benefits.

58. Q1(b) Describe THREE cash outflows that might be entered in a procurement function’s cash budget.
(9 marks )
•Answers should have given a brief identification and a description of any three cash
outflows
•Markers accepted answers that regarded the purchasing procurement budget as
applying to the whole organisation, and also those that regarded the purchasing
procurement budget as applying solely to the purchasing function itself.
•Generally, this part of this question was also answered well.
•Most responses gained between four and seven marks.
•Despite the very broad range of ‘cash outflows’ that was accepted by markers, some
responses still struggled to give sufficiently clear and comprehensive information to fully
address this part of the question.
D2 July 2014 - Assessor Report

59. July 2014 – D2
Q1 (c) The procurement function of a shirt manufacturing company forecasted that the cost of
the imported material needed would be $4-00 per shirt. After the first three months of
production it was established that the actual cost was $3-50 per shirt.
Suggest FIVE possible reasons for the variance where the actual material cost is lower than the
forecasted cost. (10 marks)
1. The skill of the buyer’s negotiating team to negotiate lower prices by using negotiating
techniques such as conditioning, threat of competition or cost analysis
2. The strength of the buyer’s bargaining position to leverage the supplier to offer a better
than market price because they represent a large portion of the suppliers business.
3. Changes in supply and demand conditions resulting in excess supply and suppliers offering
lower prices to move stock or gain market share.
4. Exchange rate fluctuations where the $ strengthened against the foreign currency of the
supplier country.
5. Quantity discounts negotiated due to an increase in quantity purchased and supplier is
prepared to reduce price as fixed costs are already recovered on standard quantity.

60. Q1 (c) The procurement function of a shirt manufacturing company
forecasted that the cost of the imported material needed would be $4-00 per
shirt. After the first three months of production it was established that the
actual cost was $3-50 per shirt. Suggest FIVE possible reasons for the variance
where the actual material cost is lower than the forecasted cost. (10 marks)
•All feasible and relevant responses were accepted by markers.
•Up to two marks were awarded for each relevant ‘reason’ suggested, with one
mark for identification and the second mark for its description.
•A few responses went into unnecessary introductory and unrelated detail;
•Few responses gave more than five ‘reasons’, which was not wrong but which
could not gain any marks, as markers do not assess ‘extra’ content of this kind.
D2 July 2014 - Assessor Report

61. July 2014 – D2
Q2 (a) Explain the reasons for using standards within specifications. (9 marks)
1. They are clear and there is no uncertainty or ambiguity as to the requirement meaning
less potential for error or disputes with supplier
2. Save time and cost in preparing company specifications as standard are available off
the shelf
3. Reduces design time so can go to market quicker
4. Increases the range of potential suppliers as standard is generic and not confined to 1
specific product or brand
5. Allows accurate comparison of quotations as all suppliers will quote on same
specification

62. Q2 (a) Explain the reasons for using standards within specifications. (9
marks)
•All feasible and relevant reasons, were accepted, and were awarded marks;
•Higher marks being awarded for more reasons and/or for more detailed
descriptions of those reasons.
•Some responses gave too much unnecessary detail about ‘conformance’
specifications and ‘performance’ specifications; or only gave generic
information about specifications, without addressing ‘standards’.
D2 July 2014 - Assessor Report

63. July 2014 – D2
Q2 (b) Describe FOUR typical key performance indicators (KPIs) and outline how
they might be used to measure performance in a contract. (16 marks)
KPIs described were delivery, lead times, quality, prices, risk management, flexibility,
responsiveness, technical support, compliance, environmental impacts, and accuracy and
timeliness of invoicing and other administrative and financial procedures. All of these, and
all other feasible KPIs, were accepted, and were awarded marks. Up to four marks were
awarded for each KPI described

64. Q2(b) Describe FOUR typical key performance indicators (KPIs) and outline
how they might be used to measure performance in a contract. (16 marks)
•Up to four marks were awarded for each KPI described, with higher marks
being awarded for the more detailed descriptions.
•There were a few weaker answers, that were too short, or that lacked detailed
description.
•Good responses fully described four relevant KPIs; sometimes supplemented
with examples from candidates’ own knowledge and experience.
D2 July 2014 - Assessor Report

65. July 2014 – D2
Q3 (a) Explain the following types of pricing arrangement and their use:
(i) Cost plus fixed fee. (5 marks)
(ii) Cost plus incentive fee. (5 marks)
(iii) Cost plus award fee. (5 marks)
(i) Cost plus fixed fee: costs are covered in full; and the extra fixed fee is based on a pre-determined fixed amount on
successful completion of the contract. The costs are unknown, although they can be capped; but the fixed fee
remains constant. This pricing arrangement may be used in particular where the supplier's costs cannot easily be
estimated e.g. for some Research and Development contracts; but there is no incentive on the supplier to reduce
their costs with this arrangement, which may make it less attractive to the buyer.
(ii) Cost plus incentive fee: costs are covered as for ‘fixed fee’; but then an additional incentive fee is offered if the
supplier should meet or exceed predetermined KPIs, perhaps especially those aimed at making cost reductions or
achieving high measurable performance levels. Both parties may then share the cost savings. This pricing
arrangement may be used particularly where there is plenty of scope for cost reductions and performance
improvements by the supplier.
(iii) Cost plus award fee: costs are covered as for ‘fixed fee’; but then an additional incentive award fee is offered if
the supplier should meet, or exceed, some predetermined aspects of contractual performance that are not easy to
measure quantitatively. The award fee may be paid to the supplier in recognition of qualitative assessment of the
supplier's application of effort to meet the buyer’s needs, probably on a subjective evaluation. This pricing
arrangement may be used particularly for service contracts, such as cleaning, catering, software development, etc.;
where the contractor’s performance in qualitatively satisfying the demands of internal customers may be the driver
for the amount of the award fee.

66. Q3(a) Explain the following types of pricing arrangement and their use:
(i) Cost plus fixed fee. (5 marks)
(ii) Cost plus incentive fee. (5 marks)
(iii) Cost plus award fee. (5 marks)
•Good responses fully explained each of the listed three types of pricing arrangement, and the use of each
one
•Very few satisfactory responses, and the large majority of responses did not clearly explain the three
pricing arrangements. Most gave only very basic descriptions of the three types, often with many errors
and inaccuracies
•Only a very few responses really explained the arrangements, or gave clear explanations and examples of
their use.
•Many responses were little more than a sentence or so in length, frequently just repeating the question.
Several responses made mention of NASA as a user of ‘cost plus award fee’ arrangements, but often
without any further explanation or justification. This fee in particular was rarely explained correctly. A
wide allowance was made here by markers for differences in terminology used in responses, because the
terminology of pricing arrangements is not consistent across the world, or even across different sectors in
the UK. Nonetheless, a significant number of answers were off the track of the question, and/or were of
insufficient length and depth to gain high marks.
D2 July 2014 - Assessor Report

67. July 2014 – D2
Q3 (b) Explain what is meant by an indemnity clause and provide an example of how such a
clause may be used. (10 marks)
An indemnity clause is designed to secure an undertaking from the other party that it will
accept liability for any loss arising from events in performance of the contract, and will
make good the loss to the injured party or parties
General indemnity clauses, can cover a variety of situations, such as indemnity against all
loss of, or damage to, any of the buyer’s property arising from acts of the supplier or its
sub-contractors; or clauses which give indemnity to any claims a buyer might face from its
employees or its customers as a result of the supplier’s actions.

68. Q3(b) Explain what is meant by an indemnity clause and provide an example of how
such a clause may be used. (10 marks)
•The command word in the question is, very clearly, ‘explain’; and the topic to be
explained is, very clearly, an indemnity clause
•Candidates are also required to provide an example of how an indemnity clause may
be used
•Most responses seemed to miss the point of the question entirely, and explained
other, unrelated, types of contractual clause, such as Liquidated Damages clauses, Force
Majeure clauses, or Insurance clauses
•All relevant examples of indemnity were given credit by markers; but scores for this
part of this question were frequently very low
•This appeared to be the lowest-scoring question from this exam session
D2 July 2014 - Assessor Report

69. July 2014 – D2
Q4 Explain FIVE factors that a manufacturing company will take into account when deciding
whether to make a component itself or whether to buy it from a supplier. (25 marks)
1. Whether the component is strategically important or core to the business. If the component
is core or strategic to due risk and potential profit impact then there may be risks to
outsourcing due to loss of IP, and loss of control over quality and reliability of supply. If
component is of poor quality or supplied late, then market share will be lost. If not core or
strategic, then outsourcing may be viable as it will allow the business to focus on more
important components.
2. The costs of producing in-house are higher than buying from a supplier. If costs from a
supplier are lower, then it could make sense to outsource as the supplier is most probably
more efficient. Lower prices will allow the company to put more into marketing or reduce
prices to gain market share. If the company continues to manufacture a uncompetitive
component they could loose market share.
3. The availability of competencies in-house and in the outside marketplace etc...
4. The available capacity in-house and in the outside marketplace etc...
5. The risks involved in devolving production activities to the external supply chain, such as
risks to confidential information and to intellectual property; and the effects on the
workforce, such as the possibility of redundancies etc...

70. Q4 Explain FIVE factors that a manufacturing company will take into account
when deciding whether to make a component itself or whether to buy it from
a supplier (25 marks).
•This question was answered very well by the great majority of candidates
•Responses often included good discussions of market issues, and issues
around availability of competent suppliers
•There were some exceptionally good responses to this question, which fully
debated the issues involved, and which included well-thought-out examples
•All valid responses were awarded marks, with up to five marks awarded for
each ‘factor’
•A few responses gave fewer than five factors, and a few gave more than five
factors
D2 July 2014 - Assessor Report

71. Past Exam Questions
May 2015 Mar 2015 Nov 2014 July 2014
Q1 (a) Using an
example to
illustrate, explain
the term ‘budget’. (5
marks)
(b) Describe TWO
approaches to
budgeting used to
establish
procurement
targets. (8 marks)
(c) Explain THREE
purposes of
preparing a budget
for a procurement
function. (12 marks)
Q1 (a) Define the
term ‘total
lifecycle costing’.
(5 marks)
(b) Describe FIVE
costs that should
be considered
when calculating
the lifecycle cost
of an item, apart
from the
purchase price
of the item. (20
marks)
Q1 (a) Explain the
difference between
the terms ‘cost’
and ‘price’. (5
marks)
(b) Describe FIVE
sources of data
that a buyer might
consult to obtain
information about
the market prices
of inputs. (20
marks)
Q1 (a) When operating financial
budgets explain the difference between
an incremental budget and a zero-
based budget. (6 marks)
(b) Describe THREE cash outflows that
might be entered in a procurement
function’s cash budget. (9 marks)
(c) The procurement function of a shirt
manufacturing company forecasted that
the cost of the imported material
needed would be $4-00 per shirt. After
the first three months of production it
was established that the actual cost
was $3-50 per shirt.
Suggest FIVE possible reasons for the
variance where the actual material cost
is lower than the forecasted cost. (10
marks)

72. Past Exam Questions
May 2015 Mar 2015 Nov 2014 July 2014
Q2 (a) Outline FIVE
social or
environmental
criteria which could
be included in a
specification. (10
marks)
(b) Describe FIVE
typical sections,
other than social or
environmental, that
should be included in
a specification. (15
marks
Q2 (a) Outline FIVE
characteristics of an
effective
specification. (10
marks)
(b) Explain THREE
reasons in favour of
the purchasing
function becoming
involved in the
drafting of a
specification. (15
marks)
Q2 (a) Explain THREE
advantages of using
Key Performance
Indicators (KPIs) in a
contract. (15 marks)
(b) Explain TWO
potential information
security risks that
should be addressed
in the specification
for a new computer
system. (10 marks)
Q2 (a) Explain the
reasons for using
standards within
specifications. (9
marks)
(b) Describe FOUR
typical key
performance
indicators (KPIs) and
outline how they
might be used to
measure
performance in a
contract. (16 marks)

73. Past Exam Questions
May 2015 Mar 2015 Nov 2014 July 2014
Q3 (a) Explain TWO
reasons why a ‘fixed
price’ contractual
arrangement might not
be acceptable to a
supplier. (10 marks)
(b) Explain THREE
advantages of using
bespoke (contract
specific) terms in a
contract, rather than
using standard terms
and conditions or
model form contracts.
(15 marks)
Q3 Explain the
purposes of the
following clauses in
contracts:
(a) Indemnities. (5
marks)
(b) Sub-contracting.
(5 marks)
(c) Insurances. (5
marks)
(d) Guarantees. (5
marks)
(e) Liquidated
Damages. (5 marks
Q3 (a) Describe, with an
example, the following price
arrangements in commercial
agreements:
(i) Fixed price arrangements
(ii) Incentive price
arrangements
(iii) Cost-plus arrangements. (9
marks)
(b) Explain TWO advantages of
fixed price purchase
arrangements for a purchasing
organisation. (8 marks)
(c) Explain TWO elements that
may cause price fluctuations in
a cost plus purchase
arrangement. (8 marks)
Q3 (a) Explain the
following types of
pricing arrangement and
their use:
(i) Cost plus fixed fee. (5
marks)
(ii) Cost plus incentive
fee. (5 marks)
(iii) Cost plus award fee.
(5 marks)
(b) Explain what is
meant by an indemnity
clause and provide an
example of how such a
clause may be used. (10
marks)

74. Past Exam Questions
May 2015 Mar 2015 Nov 2014 July 2014
Q4 Explain FIVE
factors that a
manufacturing
company will take
into account when
deciding whether to
make a component
itself or whether to
buy it from a
supplier. (25 marks)
Q4 (a) Describe FOUR
factors that have
contributed to the
growth of
outsourcing. (16
marks)
(b) Explain THREE
reasons why
outsourcing projects
may fail to achieve
their expected
benefits. (9 marks)
Q4 (a) Explain the
meaning of the term
‘make/do or buy
decision’ for goods or
services. (5 marks)
(b) Describe FIVE
factors that an
organisation may
take into account
when making a
‘make/do or buy
decision’ for goods or
services. (20 marks)
Explain FIVE factors
that a manufacturing
company will take
into account when
deciding whether to
make a component
itself or whether to
buy it from a
supplier. (25 marks)

75. Questions