INTRODUCTION TO SUPPLY & MATERIALS MANAGEMENT

Welcome to the ‘bonus’ features of your Profex Study Text! This material is intended to support, extend and focus your study and revision for your Introduction to Supply & Materials Management exam.

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CONTENTS

Upgrade Updated March 2006 Answer finder Updated March 2006 Use the news Updated March 2006 Mark maximisers Updated March 2006 Can you test me on this?

UPGRADE

At Profex, we’re committed to updating our Study Texts annually, so our material is (we hope) getting better and better – as well being always up-to-date. More or less.

We hate it when we send a new edition to print and a month later, something happens to make it look about as current as Betamax video… This is our chance to put those things right – and give you a free Text Upgrade!

Amendments and errata are where we put right our occasional bloopers. Updates are for examinable events that came to our attention after we’d gone to press.Additions are topics that came up in the latest exam but weren’t (yet) covered in the Study Text – and won’t hold on until the next edition!Integrated learning is where we give handy ‘checklists’ for topics (usually in the ‘How to…’ style) which draw on material across the syllabus.

Please contact us if you spot any errors, or facts that are past their use-by date, in your Profex Study Text. We’ll gratefully ‘patch’ the problem here – and incorporate the amendments in the next editions of the Texts.

AMENDMENTS & ERRATA

None identified at this time.

UPDATES

Watch this space.

ADDITIONS

Add to page 21, paragraph 2.9 (the cost of stockouts)

The cost of stockouts may include:

Costs of lost production eg through unavailability of material or components

Costs of inability to despatch: including non-delivery penalties, the expiry of letters of credit, and – as stated above – loss of credibility and goodwill, leading to potential loss of business or future contracts.

Add to page 25, after paragraph 4.7 (Routine and critical items)

Transactional and strategic purchasing

4.8 The terms transactional purchasing and strategic purchasing can be used to make this distinction between routine and critical items – and the way in which they are handled. (As we discussed in Chapter 1, purchasing may be undertaken at different levels.)

Transactional purchasing often involves non-critical items, such as those which are bought on a routine basis, to support the day-to-day resource needs of the organisation: stationery and other consumables, for example. These items are typically low-cost, and the annual value of purchases therefore low – despite a high purchase volume. This is supported by competition between a comparatively high number of potential suppliers, since items tend to be standardised.

Transactional purchasing approaches usually focus on process cost reduction. Purchase authorisations and price negotiations may not be required, as the order price is based on market rate, established by enquiry, catalogue comparison or competitive bidding. Blanket or standing orders (see Chapter 8) may be used to minimise transaction costs.

Strategic purchasing involves items which may have a critical influence on the organisation’s strategic objectives (eg market position or share) and require capital expenditure. Examples include investment in technology, capital plant and equipment – or even acquisition of another company. Strategic items are far fewer in number, higher in value – and higher in risk and differentiation.

Strategic purchasing approaches require detailed, flexible supplier selection and contract management, in order to manage the costs and supply-side risks: this involves complex negotiations, specifications and controls, and a partnership approach is often developed. Decisions involve an on-going cycle of strategic planning and control at a senior level: make-or-buy evaluations, auditing and review, investment appraisal, financial analysis and so on.

Add to end of page 25

Product packaging

5.6 Effective product packaging is also essential to reduce damaged stock by protecting the contents from damage or deterioration due to breakage, leakage, moisture, heat, contamination, vibration, impact and effects.

Other benefits of effective packaging, in a stores environment, include:

Reduction of handling of goods, or increased ease of handling (eg where packaging facilitates use of machinery, or bundles together a number of smaller items)

More efficient storage of goods (eg where bundled together to maximise use of cubic space, suitable for pallet/shelf storage and so on)

Reduction of pilferage risk (eg where securely sealed, or difficult to remove units).

Add to end of page 69 (value analysis)

Areas covered by a Value Analysis (VA) exercise

4.21 The examiner suggests a simple mnemonic: STOPS WASTE.

Standardisation (or variation reduction) Transportation classification Over-engineering Packaging

Substitute goods/components

Weight Any unnecessary processing Supplier’s input To make (rather than buy) Eliminate (waste, obsolescence, redundancy)

Conditions in which VA will yield most benefit

4.22 Like any technique, a value analysis exercise may not always be appropriate or cost-effective. In order for it to offer significant benefits:

There must be potential to change material costs (while retaining features and functions that add value)

Large quantities (or high value) of material must be used It must be possible to change the design or configuration without altering the

performance of related components (as discussed in paragraph 4.4) There must be cultural and managerial openness to change and innovation:

seeing processes and operations in new ways.

Add to end of page 99 (purchasing cycle)

In addition, note that the entire cycle may not need to be followed for every purchase, because some of the decisions may already have been made.

A new buy (where an organisation is buying a product or service for the first time) will require a high level of purchasing involvement and activity: need identification, specification, supplier selection and so on.

A straight re-buy (the routine ‘topping up’ of stocks without changing supplier or product specification) will require little purchasing involvement or activity. This may be done on an automatic re-ordering system by the requisitioning department (or the supplier): authorised items, prices and suppliers will all be preset by the system, requiring only post-purchase review by the purchasing department.

A modified re-buy (where the organisation wants to change specifications, prices, terms or suppliers for a product it buys regularly or has bought before) may require the revisiting of some stages of the purchasing decision.

Add to page 112, after paragraph 1.5 (stock valuation)

How is stock valuation data used?

1.6 Stock valuations may be used:

For preparation of financial and management accounts, the Profit and Loss account and balance sheets

To calculate the insurable value of stock To measure or benchmark stockholdings, as part of the monitoring, control and

reduction of inventory To present a business case for materials management strategies (inventory

reduction, risk management and so on)

Add to page 138, paragraph 2.2 (a combination of modes of transport)

The term ‘intermodal’ (between modes) is given to a transport strategy which uses more than one mode of transport in a single movement from origin to destination (not including local pick-up and delivery by truck).

Lysons & Farrington (Purchasing & Supply Chain Management) outline the benefits as:

Lower overall transportation costs (allowing each mode to be used for the portion of the trip to which it is best suited)

Reduced congestion and burden on infrastructure Reduced energy consumption and environmental impacts

Intermodal transport has led to the increasing attempt to integrate transport modes, and to ensure that handling and storage methods are compatible, so that goods can ‘cross’ from one mode to another with minimal handling, minimal potential for damage, minimal space inefficiency – and associated costs. Examples include the design of road or rail containers or trailers that can also be carried by air or barge/ship. Container standardisation is a key to effective intermodal transport.

Add to page 159, after paragraph 3.19

Health and safety issues in stores handling

3.20 Stores handling has a number of health and safety implications, many of which are covered by specific regulations (under the UK Health and Safety at Work Act) for relevant workplaces and industries. In general, employers have a duty to provide a safe and healthy place of work, to undertake regular risk assessments, and to communicate with employee representatives on matters of health and safety.

Manual handling operations include lifting and carrying. Back injuries, related to such operations, account for more than a quarter of all accidents reported each year in the UK! Employers should take reasonable steps to avoid the need for heavy lifting, and should reduce risks by providing properly maintained equipment (eg conveyer belts) and procedures, and training in their use.

Hazardous substances include a range of chemicals and other materials which may cause burning, blinding, respiratory dysfunction, poisoning – and also work-related diseases (such as asbestos poisoning and asthma). Procedures will need to be in place for: warning signs and labels identifying toxic or hazardous chemicals and other substances (the standard HAZCHEM categories are listed below); training of staff in handling and storing substances; first aid and reporting procedures in the event of accident or exposure; secure storage of substances in such a way as to minimise risk; protective clothing (masks, gloves) and equipment for handling substances and so on.

Hazardous machinery and equipment. As with any equipment in the workplace, stores handling equipment must be properly maintained and repaired, employees trained in its safe use – and appropriate safety guards and devices used.

Training and communication. Adequate instruction in safety rules and measures must be included in the training of new and transferred workers, or where working methods (or speeds of operation) have been altered. There should be effective consultation between management, employees and employee representatives (eg trade unions) on health and safety management.

Reporting of work-related accidents and ill-health. There are strict requirements for the reporting of serious accidents and notifiable diseases to the Health and Safety Executive. This includes any injury which results in a person

being admitted to hospital for more than 24 hours and any ‘dangerous occurrence’ (near miss) that might have caused such an injury: the collapse of a load-bearing part of a lift, electrical short circuit causing fire – and so on.

HAZCHEM Categories

Radioactive material Danger of electric shockCorrosive material Biological hazardInflammable material Explosive materialPoison Sensitive electronic device

Add to page 159, after paragraph 3.19 (Material handling equipment)

3.20 A live storage system is defined as one which allows the movement of items held within it. The method used may be: conveyors; rollers; or chutes. Angled (gravity) rollers and chutes are most often used, because they rely simply on gravity, which is an energy- and cost-efficient ‘power source’!

The benefits cited for live storage are that it:

Makes efficient use of available floor space in the storage facility, because only two aisles are required: a loading face and a picking face.

Supports a First in First Out (FIFO) system – see p 53 – by delivering items in the same sequence in which they are input.

Minimises the costs and risks of manual handling operations

INTEGRATED LEARNING

HOW TO… REDUCE SAFETY STOCK LEVELS

Review to ensure levels meet current and forecast requirements

Review criticality of times: reduce or eliminate safety stock of non-critical items

Review supply lead times and supply risk: reduce or eliminate safety stock of readily/reliably sourced items

Improve accuracy of demand forecasting (eg by working more closely with Sales)

Undertake variety reduction/standardisation to support shorter supply lead times and substitution

Improve inventory control (eg by using MRP systems)

Conduct regular audits

HOW TO… ACHIEVE PRICE LEVERAGE

Bulk ordering (generally securing discounted prices)

Consortium or collaborative purchasing (to increase order quantity/value)

Standardisation and variety reduction, enabling consolidation of requirements (for bulk discounts)

HOW TO… REDUCE TOTAL ACQUISITION COSTS

Reduce transaction/administration costs through e-Procurement

Reduce costs of credit: cash purchase

Use of purchase cards: aggregrating small purchases, controlling ‘maverick’ spend

Negotiated blanket orders: minimising repeat placement costs and reducing small value orders

Rationalising supply base: approved suppliers (minimising further supplier selection costs and avoiding ‘maverick’ spend)

Standardisation: minimising small purchases

Buying generic spares rather than more expensive Original Equipment Manufacturer (OEM) versions

Inventory management and other measures (such as preventative maintenance) to ‘buy time’ to locate competitive suppliers and negotiate prices.

PURCHASE CRITERIA: MRO vs CAPITAL EQUIPMENT

MRO items Capital equipment Availability Cost Ability to use standard/generic

substitutes Ability to minimise stock holding Supplier service levels

Total costs over life of asset Asset utilisation: lifespan, flexibility Space/access requirements Training, health and safety requirements Cost/availability of spare parts through

the life of the equipment Post-contract maintenance service Options (buy, lease or hire)

ANSWER FINDER

Here we analyse the latest exams: what topics were set, where the key pitfalls and easy marks were, what the examiner said – and where you can find material for an answer, in your Profex Study Text.

The full text of past exams, marking schemes and Chief Examiners’ reports can be accessed by members at: http://www.cips.org

The 2005/6 edition of your Profex Study Text contains analysis of exams up to November 2004 – and the May 2003 paper as a Mock Exam, with full suggested solutions by Profex.

EXAM: MAY 2005

Rubric

The format of the exam was unchanged (as set out on pages xi and 193 of your Study Text) – but the recommended time allocations for each section were altered to include reading/checking time.

Section A: 30 minutesSection B: 80 minutesSection C: 70 minutes, or 35 minutes per question

The rubric also clarifies for Sections B and C that: ‘The tasks/questions in this section require full answers, and bullet points should be avoided wherever possible.’

Question topics

The right-hand columns refer to the 2005/6 edition of the Study Text.

Section A: compulsory short-answer questions

Marks Chapter Paragraph1 2 Benefits of effective packaging (for stores)*2 2 Stock control for dependent demand (MRP) 4 2.6ff3 2 Characteristics of good coding system 3 6.164 2 Costs used to calculate EOQ 3 8.85 2 HAZCHEM Codes*6 1 ABC analysis 3 4.1 – 4.27 3 Issues in in-bound stores management 2

1011

Table 2.11.8

8 2 Intermodal transport*9 3 Use of ‘cube’ to maximise storage space 11 3.5, 3.11,

3.1210 1 Benefit of live storage system*

* Yes, sorry, these areas are new! We’ve prepared some suggested Additions to your Study Text to answer these questions: see Upgrade section above.

Section B: case study on the stock management system of a supply consortium

Chapter Paragraph11 Single-storey v multi-storey store (10 marks) 11 2.14 – 2.1512 Optimising service levels while avoiding stock

holding costs (10 marks)3

Mock Exam1.11, 3.9Answer 12

13 Identify/describe periodic review system (5 marks)Suggest alternative, and its benefits (5 marks)

3 7.9ff, 4.1ff

14 Benefits of e-Procurement 8 6.2ff

Note that it was vital to apply the principles plausibly to the details given in the case study.

Section C: essay questions (20 marks each)

Chapter Paragraph15 ‘7 Wastes’ and how they can be reduced 6

Mock Exam6.5Answer 15

16 Need for, implications of, ethical codes 9Mock Exam

7.2ffAnswer 16

17 Transactional v strategic purchasing* 38

4.1ff

18 Costs of acquisition, holding, stock-outs* (6)

Plan for reducing holding costs (14)

3

368

Table 3.1, 1.3ff4.2, 5.1, 8.14.1ff, 5.5, 6.51.12

* We’ve prepared some additional detail to add to your Study Text: see Upgrade section above.

Note that it was vital to expand on the principles to provide a substantial, essay-form answer.

Pitfalls

Exam verbs. ‘Describe’ is often used by this examiner (even for a 1-mark question!) Avoid bald statements, lists and acronyms… (See FAQs: What are exam verbs? in the free access area of this site.) Also, look out for the precise requirements: eg ‘…give an example for each…’ (Q 15) or ‘Produce a plan…’ (Q 18(b)).

Numerical selections. Even in essay questions, you may be asked specifically for ‘FIVE areas…’ or ‘ONE area…’: you won’t get extra marks for covering extra ones!

Points of detail. This examiner asks detailed questions – eg about HAZCHEM codes – which you might not have revised, in aiming for a broad understanding.

Terminology and buzz words. This examiner uses terminology in very precise ways, and is interested in checking that you know what terms mean. Eg ‘The cube’ (Q 9) doesn’t refer to pack shape, but to the use of cubic footage of storage space. Similarly ‘inter-modal transport’ (Q8) is about compatibility ‘between modes’. Don’t panic: you could have worked these out with careful use of common sense.

Topic overlaps. There were clear overlaps between topics in Section B and C: if this happens, try not to repeat the same material (let alone whole answers!) twice.

Technical error. Some candidates wrongly identified the stock control method (Q 13) as EOQ, JIT or vendor managed inventory – and got no marks! The correct answer was periodic analysis. (The examiner noted: EOQ is a lot size rule for independent demand items that seeks to optimise the cost of holding stock with the cost of acquisition: it is not a stock control system.)

Easy marks

Focus on basic issues of inventory management eg ABC/Pareto analysis, reduction of stock-holding costs (opportunity to discuss JIT)

A classic question on e-Procurement (if you remembered to refer to the whole purchasing cycle)

Overlap with past exam questions: questions 4, 6, 15, 16 and 17, for example, were taken straight from the May 2003 exam (reproduced as the Mock Exam in the Study Text). So it pays to use our practice questions!!!

What the examiner said

The examiner complained mainly about:

Rushed, difficult to read and often incomplete answers to Section A: you lose marks through poor time management!

Poor case study answers. ‘Examiners were looking for answers within the context of the case; clear thinking; attention to key command words; a structured answer that considered information provided and made realistic/practical suggestions from within the syllabus that could be reasonably applied to overcome a problem.’

Over-reliance on a handful of standard concepts. Candidates need to move away from the idea that VMI, JIT and MRP are the answer to all stock management problems and can be applied in all instances – and the same goes for ABC and EOQ! (Pay careful attention to the comments in your Study Text on the drawbacks and limitations of such techniques: eg Chapter 4, paragraph 1.31…)

EXAM: NOVEMBER 2005

Rubric

As May 2005.

Question topics

The right-hand columns refer to the 2005/6 edition of the Study Text.

Section A: compulsory short-answer questions

Marks Chapter Paragraph1 2 ‘Seven wastes’ of lean supply 6 6.52 3 Concept/benefits of ‘materials management’ 2 1.4, 3.13 2 Examples of importance of ethical codes 9 7.2-7.64 3 Departments than could put pressure on

stock/inventory managers2 1.8 – 1.10

5 2 Two uses of stock valuation data*6 2 Reducing safety stock levels**7 2 Two benefits of palletisation 11 3.8 – 3.98 2 ‘New buy’ v ‘re-buy’*9 1 ‘Blanket order’ 8 3.110 1 Eg of how price leverage can be achieved*

* Yes, sorry, these areas are not covered explicitly in the text. We’ve prepared some suggested Additions to your Study Text to answer these questions: see Upgrade section above.

** This is an integrative question: rather than send you all over the text for an answer, we’ve summarised the main points as an Integrated Learning point: see Upgrade section above.

Section B: case study on MRO purchasing and storage by a waste management company

Chapter Paragraph11 Methods to reduce total acquisition costs of MRO

items (10 marks)*8 Table 8.1,

1.10 – 1.12, 6.1 – 6.2

12 Appropriate stock control system for MRO items (10 marks)

3

7

7.7, 7.9ff, 7.18ff1.5 – 1.10

13 Criteria for selecting capital equipment vs. MRO items (10 marks)*

7 2.4, 2.27, 2.29

14 How to reduce supply base; how this could improve supplier relations. (10 marks)

9 4.14 – 4.16

* These are integrative questions: we have provided helpful checklists in the Integrative Learning section of Upgrade, above.

Note that it was vital to apply the principles plausibly to the details given in the case study. So for example, you had to recognise the particular nature of MRO items (low value, irregular usage) – which rules out solutions such as JIT or vendor managed inventory, for example. You might also have made reference to specific inefficiencies and challenges mentioned in the scenario.

Section C: essay questions (20 marks each)

Chapter Paragraph15 ‘Value analysis’ vs ‘value engineering’ (4 marks)

Ten areas for VA exercise (10 marks)Conditions for effective VA (6 marks)

6 4.1-4.3*

16 ‘Stock for inventory’ vs ‘stock to order’ vs ‘stock to forecast’ and when appropriate (12 marks)Problems of ‘stock for inventory’ (8 marks)

3 1.19

17 How supply chain relationship can reduce organisational vulnerability

2

9

5.1, 5.10, Table 2.23.1ff, 5.6ff

18 Construction/use of ‘significant coding system’ (10 marks)Benefits of such a system (10 marks)

3 6.17 – 6.22

* We’ve prepared some additional detail to add to your Study Text: see Upgrade section above.

Note that it was vital to expand on the principles to provide a substantial, essay-form answer.

Pitfalls

Exam verbs. ‘Explain’ is often used by this examiner (even for a 2-mark question.) Avoid bald statements, lists and acronyms… (See FAQs: What are exam verbs? in the free access area of this site.) Also, look out for the precise requirements: eg ‘…paying particular attention to…’ (Q 8). Watch out in particular for multiple question requirements, such as ‘Recommend and justify…’ (Q 12).

Numerical selections. Even in essay questions, you may be asked specifically for ‘FIVE areas…’ or ‘ONE area…’: you won’t get extra marks for covering extra ones!

Points of detail. This examiner asks detailed questions – eg about palletisation, which you might not have revised if you were aiming for a broad understanding. Pay careful attention to terms, too: candidates that ignored the word ‘safety’ in ‘safety stocks’ (Q 6) were at a disadvantage.

Easy marks

Focus on some mainstream areas of the syllabus, such as the seven wastes, ethical codes, reducing acquisition costs, stock control, value analysis and supply base reduction.

What the examiner said

The examiner complained mainly about:

Failure to answer Section B questions in sufficient depth of detail: relying on vague references to concepts without explaining how or why they might work.

Over-reliance on a handful of standard concepts. Candidates need to move away from the idea that VMI, JIT and EOQ are the answer to all stock management problems and can be applied in all instances – particularly if they are offered as solutions to the same problems, despite the obvious contradictions! (Pay careful attention to the comments in your Study Text on the drawbacks and limitations of such techniques: eg Chapter 4, paragraph 1.31…)

Lack of in-depth understanding as to how and why techniques developed, and practical benefits and drawbacks to their use. ‘Simply put, it is not acceptable so say “Company X could solve their MRO problems by outsourcing” as many in section B did.’

USE THE NEWS

Here we pick up on some of the Hot Topics covered in the ‘In the News’ feature (in the free access area of this site). We consider how they might come up in exam questions – and how you can use the examples and illustrations in your answers.

Chapter 8: e-Procurement

This topic is very likely to feature somewhere in the exams. The ‘In the News’ articles illustrate some of the areas of interest within the topic:

The article on eProcurement Scotland is a good illustration of the benefits of e-procurement in reducing transaction costs and improving efficiency, and of the features outlined in paragraph 6.15. With the ePS platform:

Suppliers need enter their product information only once, which can be overlaid with pricing and contract information. The product or service information is then made available to all buyers on the ePS system.

Buyers can access the entire catalogue, but they can also limit their choice to selected ranges. They can also see prices relevant to their organisation, and the contracts that they have negotiated.

Reverse auctions are also being hotly debated at the moment. As our comments in paragraphs 6.11 – 6.12 suggest, there are drawbacks. The possibilities of e-sourcing beyond competitive bidding is outlined in a great article called ‘The Tender Connection’, Simon Vail (Supply Management, 21 July 2005, page 21), which includes:

A summary of the various types of e-sourcing software on the market The use of e-procurement by private and public sector organisations The popularity of e-auctions and competitive bidding techniques – and why

they are not the main source of savings. The use of e-sourcing systems to evaluate proposals and tenders (including a

great mini-case-study on the British Library’s adoption of e-tendering).

Chapter 9: Single or multiple sourcing?

In paragraphs 4.14 ff, we discuss the pros and cons of single sources, as opposed to multiple sourcing.

The case of the Chinese clothing import quotas (see ‘In the News’ in the free access area of the site) is a good illustration of the risks of limited sourcing.

Tesco said some of its garments from China had been blocked, but its diverse global supply base meant the impact would be minimal, while Asda said customers would not notice any difference because it had a number of low-cost sources.

Anusha Bradley, Supply Management 25 August 2005

At the same time, supplier rationalisation (that is, reducing the supply base) is argued to have many benefits – not least as a pre-condition for the effective use of e-procurement. The advice column in Supply Management (15 December, 2005) suggests:

Rationalising the supply base will reduce the number of suppliers that end-users buy from and allows you to focus effort on to a smaller number of preferred suppliers. This will improve the procurement process by only providing access to approved suppliers….

Rationalisation of suppliers is about identifying those who are preferred and approved and closing routes to the rest. This increases spend aggregation, improves leverage in negotiations and avoids duplication of suppliers and services. It also minimises business risk, reduces administration and delivers improved value from the procurement of both direct and indirect goods and services.

Critical success factors for supplier rationalisation, according to the article, include:

Involving all relevant stakeholders (buyers, commodity experts, budget holders, finance department, requisitioners) for maximum buy-in (and avoidance of ‘off-system’ spend)

Inform the affected parties: non-preferred suppliers, buyers and accounts payable (since orders from non-preferred suppliers should be rejected).

Chapter 9: Ethics

Ethics in purchasing is another key issue: see In the News for some of the most hotly talked-about examples, including the Marks & Spencers ‘Look behind the Label’ campaign.

For this syllabus, questions on ethics are most likely to address internal matters of ethics within an organisation or profession: ethical codes and their operational implications – as in the May 2003 and 2005 exams. (See, for example, the In the News feature on business gifts.) Bear this in mind: you won’t get marks for discussing developing-world economic issues if you have been asked how purchasing departments can avoid unethical dealings with suppliers!

An interesting feature in The Times (‘Be aware of the tricks and slights of hand of the fraudster’s trade’, 20/9/05) suggests that:

While high-profile cases such as Parmalat, Worldcom and Enron grab the headlines, the reality of fraud is that it is often low-tech, small-scale and all too achievable, particularly within small businesses… That doesn’t make it any less threatening to the health of business, however. A recent Home Office report put the annual cost of fraud to the UK economy at £14 billion…

It is essential to check companies and the individuals behind them. Among the modern business trends that help bogus individuals and companies appear above board are serviced offices and the trend towards meeting new contacts in hotel lobbies….

Trading frauds are not the only point of vulnerability… Employees – whether disaffected or crooked – can be the prime movers behind some of the more complex and large-scale frauds… Many companies have to put up with missing stationery, personal telephone calls and even the theft of mobile phones or computers. Larger scale fraud is often carried out by employees working in collusion with suppliers. Such frauds can be as simple as accepting

kickbacks or they can be more complex affairs where an employee deliberately rejects goods already paid for as defective, returning them to the supplier who then resells them as new.

Chapter 10: Outsourcing

Section 4 of Chapter 10 refers specifically to outsourcing of transport functions, but keep in mind the benefits – and pitfalls – of outsourcing in general, as highlighted by the ‘In the News’ articles. Outsourcing frequently comes up in exams in one form or another, and these examples make it more likely that you’ll get a ‘critically evaluate’ or ‘describe the advantages/disadvantages’ type question than a ‘What is meant by outsourcing?’ question…

In the exam, you might be asked about the benefits of outsourcing, or the drawbacks. If a question asks you to ‘evaluate’ or ‘discuss’ outsourcing, you need to present both viewpoints – in which case the BA example will be a useful balance to examples of successful outsourcing.

The BA story could also be used specifically to illustrate the need for:

Multi-sourcing, rather than putting all strategic eggs in one basket! Careful supplier appraisal, including criteria related to human resource

management and ethical standards Ongoing monitoring of outsourced activities and standards, and management

of the relationship with the service provider.

If you get a case study based on the incident, you might bear the following comments in mind.

The dispute between BA and Gate Gourmet should act as a warning to the profession, purchasing experts have claimed.

They say the high-profile case illustrates why purchasing staff drawing up contracts for outsourced work must carry out risk assessment, monitor supplier performance and implement contingency plans in case contractual terms are not met.

Kevin Barrow, outsourcing and staffing partner at law firm Tarlo Lyons, said: “Procurement loves consolidation, but there is a downside if you have all your eggs in one basket. Perhaps what BA needs is a lot of suppliers and a bigger procurement department so it’s not totally exposed if one has a problem.”

And while Martyn Hart, chairman of the National Outsourcing Association, does not believe outsourcing is the root cause of this particular row, he said any core service that is outsourced must be supported by a back-up plan…. ‘Step-in’ clauses, which allow firms with outsourced contracts to reassume responsibility for the work if something goes wrong, were becoming increasingly popular.

Rebecca Ellinor, Supply Management, 25 August 2005

As a counter-example of successful outsourcing and its benefits, you might want to refer to the article ‘It’s good to outsource’ (Supply Management, 4 August 2005), which describes the BT group’s 20-year record of successful sourcing from low-cost countries on a large scale: a strategy of ‘ensuring value for money and getting the rights skills and the right economies’. The article describes BT’s approach to:

Corporate social responsibility and ethical sourcing from low-cost economies Risk management: physical audits of suppliers and their supply chains, to

ensure that environmental, human and financial aspects conform to BT’s standards

Managing cultural differences: cultural sensitivity training for BT managers for example. (‘Purchasers risk failure if they do not understand both the culture and expectations they are buying into. In India, people don’t like to say ‘no’: ‘This can leave a company unaware of problems at, for example, an outsourced call centre.’)

Planning the physical logistics of the supply chain and undertaking thorough cost-benefit analysis.

Chapter 10: tracking movement of goodsChapter 11: stores procedures

You are not expected to have detailed stores knowledge, but it may be worth getting to grips with the concept and proposed benefits of RFID – which is a Hot Topic in the use of ICT in materials management. See the In the News feature for details – and think of RFID as one potential solution to some of the challenges of storage (identifying the location of items), inventory management (tracking stock movements) and logistics (tracking orders).

MARK MAXIMISERS

Here we throw in a variety of quick tools to focus your revision and beef up your exam answers, including: key definitions and quotes, memory-boosters and case-study examples and illustrations.

Of course, there are similar features in your Profex Study Texts. Think of these on-line ones as a double bonus: they give you some extra options – and they help keep the Texts short!

EXAMPLES & ILLUSTRATIONS

Chapter 2: Logistics management

Spare a thought for the agencies responsible for supplying the armed forces in Iraq (Supply Management, 25/8/95). And if you think they’re ‘taking flak’ – what about the agencies responsible for the relief effort in the wake of Hurricane Katrina on the US Gulf Coast? ‘Ensuring the availability of the right product, in the right quantity and the right condition, at the right place at the right time’? Not according to news reports.

Chapter 3: Inventory

Woolworths Supermarkets, in Australia, is one example of a company that has recently reported the benefits of inventory reduction (Sydney Daily Telegraph: 23/8/05). Woolworths has created a ‘virtual retailer’, with over $31 billion of annual sales – and ‘not a penny of stock! At least, not in net terms. Woolies’ total group inventory of just under $2 billion is matched by some $2.3 billion of trade payables – what it owes its suppliers… This extraordinary combination of cost and inventory reduction turns solid sales growth into spectacular – and rising – returns on funds employed.’

Chapter 6: Supply management in different environments

Supply Management often supplies helpful case studies and examples in this area.

The purchasing of energy supplies (eg gas and electricity) is one ‘hot topic’ at the moment with rising prices and the threat of disruption to supply from Russia.

Another interesting example is purchasing’s role in IT purchases. The advice column in Supply Management (2 March 2006) suggests:

The IT sector, in many instances, works on the principle that if you are not an IT specialist you can be of no added value to their process. The situation is often exacerbated by suppliers making a beeline for the IT department, deliberately cutting out purchasing.

Purchasing’s key contributions may be in areas such as:

Search for suppliers (where intellectual property rights do not dictate the supplier)

Carrying out due diligence, supplier evaluation and risk analysis Negotiating price Negotiating contract terms (such as software upgrades, remedies for non-

performance)

Chapter 9: Internal customer relationships

Our table 9.1 on page 114 doesn’t consider the special case of the Human Capital or Human Resource department. The relationship between procurement and HR is not always straightforward. Which is the internal customer – and what do they offer each other?

The growing involvement of procurement professionals in buying HR services is, on the face of it, a good thing. In theory, the disciplined and rigorous approach they bring to the table should deliver better quality, better value services, while freeing up HR to concentrate on the more strategic aspects of its role.

But HR professionals don’t always see it that way… Typical comments made by HR professionals were that procurement put cost above quality, used over-legalistic and bureaucratic contract specifications, and paid scant regard to business relationships. Yet the criticisms cut both ways. For example, people in procurement judge their HR colleagues to be lacking in financial awareness, unable to define qualitative requirements or quantify desired outcomes, and hazy about what constitutes success or failure….

Some organisations, such as BT and HBOS, are… creating specialist HR procurement professionals with strong sector expertise.

Chris Mottershaw, procurement manager at Co-operative Financial Services (CFS), where procurement gets involved in all contracts worth more than £50,000 a year, says: ‘We are a consultancy service and see the business as our customer. We take a very qualitative partnership approach.’ She and her team provide advice, and technical and commercial support that is tailored to individual requirements.... The procurement function at CFS also carries out extensive due diligence, which gives HR good quality information on which to base decisions. The team gives HR a model, including guidelines and training, to manage the ongoing relationship with chosen suppliers…

Human Capital (HC) at PricewaterhouseCoopers, turns to procurement whenever it engages third-party suppliers… The four big areas of spend where procurement gets involved are recruitment, training and development, reward and company cars. But the department is as concerned with qualitative criteria – such as carbon neutrality in car schemes and the socially responsible credentials of potential suppliers – as it is about cost.

(Extracts from: ‘Right to buy?’ People Management 1/9/05)

Chapter 10: Transport strategy

In paragraph 1.21, we discuss the attributes of an effective transport strategy. An interesting article posted by Harvard Business School (Risk & Reward in Supply Chain Management, by David Bovet, 29/8/05) highlights the need to manage risk.

‘Work with suppliers to create contingency plans. In the wake of 9/11, Continental Teves, a major automotive supplier, activated existing contingency relationships with transport firms such as Emery to supplement air shipments of parts from Europe. After making a same-day assessment of parts flows at risk, Continental Teves was able to rely on pre-arranged ocean shipping space and increased inventories, thus allowing its customers, including Toyota, to continue operations with little disruption over the following weeks.’

Link: http://workingknowledge.hbs.edu

QUOTABLE

Watch this space

MEMORY BOOSTERS

Value analysis

We like the examiner’s mnemonic so much, we’ll reproduce it here. This is a good one to use when thinking through not just value analysis, but any plan to improve efficiency and reduce costs.

Standardisation (or variation reduction) Transportation classification Over-engineering Packaging Substitute goods/components

Weight Any unnecessary processing Supplier’s input To make (rather than buy) Eliminate (waste, obsolescence, redundancy)

LINKS

If you want to follow up the health & safety aspects of stores management, try:

http://www.hse.gov.ukhttp://www.the-ncec.com/hazchem

For an interesting ‘hub’ for case studies, articles and discussions about logistics and supply management (among other) issues, try:

http://www.about.com/business (Just bear in mind that they are US sites…)http://www.businessballs.com

And of course, check Supply Management journal, if you haven’t read it lately…

http://www.supplymanagement.co.uk

CAN YOU TEST ME ON THIS?

The Foundation Stage exams all feature short-answer questions in Section A. The questions may be short and factual – but they are also quite challenging, because they require great breadth of syllabus knowledge (sometimes also at a detailed level).

Question practice is useful: (a) so you can test your coverage and recall of the syllabus and (b) so you can get used to tackling lots of short questions in the time allowed.

We’ll be adding fresh quizzes from time to time, to keep you on your toes.

Go on. Some people like doing quizzes and questionnaires. Try and think of this as fun…

Test your knowledge quiz 1

1. What two activities are integrated in the concept of ‘logistics’ management?

2. What is meant by a ‘stock to forecast’ inventory policy?

3. Give SIX examples of costs of acquiring stock.

4. According to Kraljic’s grid, what kind of purchasing approach is required for (a) bottleneck items and (b) leverage items?

5. Describe a periodic review system.

6. List FOUR key features of the Just In Time approach, and THREE operational implications for the purchasing department.

7. MRP is designed to tackle (1) demand items, not (2) demand items. The appropriate system for (2) demand items – such as (3) would be a (4) system.

8. Explain the concept of the net realisable value of stock.

9. Explain the operational implications of a policy of EPI (early purchasing involvement).

10. Describe one major advantage and one potential disadvantage of standardisation.

11. List Taichi Ohno’s ‘Seven Wastes’.

12. Outline the role of purchasing in the acquisition of capital equipment.

13. List the four distinguishing features of services, from a purchasing viewpoint.

14. List the stages in the purchasing cycle.

15. Describe the use of (a) purchasing cards and (b) on-line reverse auctions.

16. Differentiate between a ‘supplier’ and ‘supply partner’ relationship.

17. List FIVE advantages of single sourcing over multiple sourcing.

18. What responsibilities attach to a supplier under FOB and CIF terms?

19. Distinguish between ‘expediting’ and ‘tracing’ a shipment.

20. List FIVE principles of effective stores layout.

Answers

1. See Chapter 2, Figure 2.12. See Chapter 3, paragraph 1.193. See Chapter 3 Table 3.1: NB the question asked for costs of acquisition, not

holding costs.4. See Chapter 3, paragraph 4.65. See Chapter 3, paragraphs 7.96. See Chapter 4, paragraphs 1.15, 1.24, 1.26, 1.27, 1.297. See Chapter 4, paragraph 2.17; and Chapter 3, paragraph 7.78. See Chapter 5, paragraph 1.39. See Chapter 6, Table 6.110. See Chapter 6, paragraph 5.5, 5.1111. See Chapter 6, paragraph 6.512. See Chapter 7, Table 7.213. See Chapter 7, paragraphs 4.7 - 4.1014. See Chapter 8, Figure 8.215. See Chapter 8, paragraphs 6.19, 6.1316. See Chapter 9, Figure 9.217. See Chapter 9, paragraph 4.1618. See Chapter 10, paragraphs 3.8, 3.1019. See Chapter 10, paragraph 5.820. See Chapter 11, paragraph 4.6