CIPS
Level 5
SUGGESTED SOLUTIONS TO
PRACTICE QUESTIONS
Improving Supply Chain
Performance
Suggested Solutions to
Practice Questions
Collymore
Note that this question follows a common pattern of requiring general exposition of ideas in the first
part, with detailed application in the second part. In the examination you will do badly if either aspect
is skimped. Note also that, as is usual, you are required to analyse the implications of general ideas
for the purchasing function in particular.
(a)
Porter’s main theme in this area can be summarised by the idea that firms secure
competitive advantage by the effectiveness with which they perform value activities. A
firm creates value by carrying out activities better than its competitors, or by
combining activities so as to differentiate its products or services. Customers
consciously or unconsciously measure value by comparing the offerings of different
producers and purchasing the offerings that most closely meet their desires.
From the perspective of the purchasing function an important aspect of Porter’s ideas is
that value activities are not all performed within the firm’s own boundaries. A
manufacturer’s success depends largely on the quality of its products, but this in turn
will depend importantly on the parts and assemblies sourced from outside. In other
words, part of the value in the manufacturer’s products is added by external suppliers,
and this is very much the province of the purchasing specialist. Porter recognised the
importance of procurement in his diagrammatic representation of the value chain.
Porter’s analysis places emphasis on linkages between the different elements in the
value chain, which occur when one element in the chain affects the cost or
effectiveness of another. Clearly the purchasing function is an important source of such
linkages. This viewpoint is reflected not just in the work of Porter, but in other
researchers’ analysis of purchasing’s contribution to securing competitive advantage, for
example by developing superior supply options.
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Improving Supply Chain Performance
The views of Monczka are particularly relevant in this context. He places emphasis on
the ability of purchasing to add to customer satisfaction by involvement throughout the
product life cycle – from initial conception to eventual marketing. A key contribution to
securing competitive advantage is to drive out waste from the value chain right from
the beginning. The increasing strategic role of purchasing is also reflected in moves to
world class techniques such as just in time; an inevitable consequence is to broaden the
activities of the purchasing function so as to include development and management of
integrated supply chains.
(b)
Porter’s views imply that a firm’s efforts to obtain competitive advantage are not
restricted to activities within its own boundaries. Equally important is management of
links with suppliers (and of course customers, but that takes us somewhat away from
the role of purchasing). Once again, this is seen most clearly when world class
techniques are adopted; the need for examining a supplier’s value chain is much clearer
if a manufacturer is operating just in time purchasing and production.
In the case of Collymore, the character of the industry might at first sight suggest that
the role of value chain analysis would be slight. Collymore is one of a small number of
large firms exercising significant influence over the market as a whole. However, any
tendency to complacency should be resisted and it is still vital to maintain a competitive
edge. Value chain analysis can help in a number of ways.
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Firms pursuing a strategy of product differentiation can apply value chain analysis
to assess customers’ perceptions of value. This can help to identify where
additional value can be incorporated with least damage to product costs.
Firms pursuing a strategy of cost leadership can apply value chain analysis to
determine where their activities are efficient, and where they are not. This can
lead to important savings, and may also influence strategic ‘make or buy’
decisions.
Finally, value chain analysis can be used as one part of competitor analysis. This
assumes that data can be obtained on competitors’ value chains enabling fruitful
comparison.
Suggested Solutions to Practice Questions
Internal customers
It makes sense to tackle this question in two parts: firstly discussing the need, according to modern
thinking, to delight the customer, whoever that may be; and secondly discussing the area of
relationships with other functions when those functions can be regarded as ‘customers’ of purchasing
and supply.
Modern views of ‘quality’ in products and services have increasingly taken a customer-focused
approach. Instead of defining quality in terms of ‘conformance to specification’ or ‘fitness for
purpose’, the aim nowadays is to anticipate what will delight the customer and to provide that
element in the product or service supplied. The emphasis here is on ‘anticipating’: it is the job
of suppliers to enter into the minds of their customers and to provide features that the
customers themselves hardly realise they desire.
In the context of external customers the importance of this is evident, since the quality of
products or services defined in this way is an important source of advantage over
competitors. Since different customers may place different relative weights on different
product features (including price) it is important for suppliers to develop their understanding
of customers so as to meet expectations.
This whole analysis assumes that customers are capable of deciding which product features
are important to them, and of distinguishing between the offerings of alternative suppliers. In
practice this assumption has obvious limitations, but the principle remains true that customer
satisfaction is the most reliable criterion for long-term success.
In the case of internal customers the market discipline provided by competitive pressures may
be absent. Even so, it would be unwise to ignore the kind of analysis outlined above, for a
number of reasons.
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In some cases, even internal customers may have the option of ‘shopping around’. This
is becoming an increasing trend as more firms move to outsource specialist functions.
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Failure to take account of legitimate requirements of internal customers implies a
complacent approach to service provision which is likely to lead to inefficiency.
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Most importantly, the purchasing function, like any other, exists in an organisational
framework in which good relationships between members is a recipe for efficient and
effective teamwork.
This analysis implies that purchasing should be just as anxious to get inside the minds of other
functional areas as a marketing specialist should be to understand an external customer. In
particular, purchasing should expect to develop close relationships with such functions as
design and engineering, production, accounting and finance, and marketing.
The likely benefits from this approach include the following.
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Forging links with other departments assists the development of the purchasing
function as it moves from its historical ‘clerical’ role to a more strategic position in the
organisation.
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This approach is more consistent with top management’s objective of getting the most
from the organisation as a whole, rather than concentrating on any particular functional
area.
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Improving Supply Chain Performance
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The success of new products can be enhanced by the early involvement of purchasing
professionals, and this inevitably implies links with other departments that have an input
into product planning.
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World class strategies such as just in time production and total quality management
depend crucially on an integrated approach involving cooperation between different
functional specialisms.
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Suggested Solutions to Practice Questions
Centralisation and decentralisation
This is a straightforward bookwork question. Construct a solution by using the material in your
Reference Text.
(a)
The terms centralisation and decentralisation can be used to refer to:
(i)
(ii)
(b)
the extent to which decision-making authority is kept close to the centre (or
top) of the firm – ie the level of the hierarchy at which decisions are taken – and
the extent of delegation. Thus centralised purchasing decisions would be taken
by senior purchasing managers – while decentralised purchasing decisions would
be taken by purchasing staff at lower levels (eg unit buyers).
the extent to which related tasks and resources are gathered under a single
functional authority or location – ie whether there is a separate purchasing
function, or whether purchasing is carried out by relevant line departments.
Centralised purchasing involves all purchasing activity being conducted at a head
or central office, or on behalf of all units of the organisation. This is often the
case where items required by different units and plants are similar. Decentralised
purchasing involves buying activity carried out by line departments, plants or
worksites, usually defined as cost centres.
There are certain advantages in centralising any function, or retaining managerial
control and coordination:
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coordinated decisions (‘big picture’ thinking) and closer management control,
therefore less sub-optimising behaviour
conformity with overall objectives, rather than sub-unit goals and interests
standardisation of work processes and outputs, eg variety reduction and
rationalisation
balance between the competing interest of different functions or divisions
increased flexibility in use of resources, given ‘big picture’ thinking
economies of scale in the costs of management, finance, purchasing, production,
etc
better decisions (in theory) arising from the proven ability and experience
required to reach senior management positions
speedier decision-making, especially in a crisis – delegation can be timeconsuming
effective change management where quick action and strong leadership are
required.
In addition, there are particular advantages in centralising purchasing.
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The greater specialisation that is possible among purchasing staff. If purchasing
staff are scattered between divisions, each of them must have general
responsibility for a wide range of the division’s requirements, leading to the
development of generalist knowledge and skills. If purchasing staff are based at a
single centralised location, however, there is opportunity to divide tasks among
them on the basis of specialised skills. Each buyer can focus on a particular area
(particular skills, such as contract negotiation, or particular materials and
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Improving Supply Chain Performance
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markets, such as machinery or chemicals) and develop his knowledge to greater
depth.
A further advantage is that the requirements of different divisions can be
consolidated. This reduces the frequency of small orders for a particular material,
and enables buyers to obtain better prices (with economies of scale, bulk
discounts, etc) and higher levels of service (as potentially significant clients). The
number of suppliers is likely to be smaller, and order administration and
processing may be more streamlined. This advantage is particularly evident
where buying units are relatively small, because their individual requirements
might be uneconomical.
Greater coordination of purchasing activities may result from a centralised
structure. For example, uniform purchasing policies and procedures can be
introduced, facilitating standardisation. Staff training and development can be
undertaken more systematically.
Centralisation of purchasing can avoid price anomalies between purchasing
divisions. More importantly, it can avoid actual competition and conflict between
them, in times when supplies of a particular material, or purchasing resources,
are scarce.
Finally, the vital area of purchasing research is often neglected if individual
divisions are expected to carry it out. It is a specialised area, and the necessary
skills and contacts may not be available at divisional level. In addition, the need
for divisional purchasing staff to perform a wide range of functions often means
that purchasing research simply receives less attention than it deserves.
On the other hand, there are advantages in decentralising any function.
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Lower-level managers experience increased job satisfaction, which may promote
commitment and loyalty.
Senior management may not possess detailed knowledge of all the organisation’s
activities, or of operational demands (especially customer demands). Higherquality problem-solving and decision-making may be carried out by those with
more technical expertise and immediate experience.
Centralisation places stressful levels of responsibility onto senior management.
Subordinates experience enhanced opportunity for career development, which
may reduce difficulties in skill retention and management succession planning.
The referral of decisions upwards to senior management takes time and restricts
the responsiveness of the organisation to customer demands and environmental
changes.
Standardisation of processes and outputs may not capitalise on, or respond to,
local variations in conditions or customer demands.
There are particular advantages in decentralising purchasing, including:
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One reason for doing so is to maximise communication and coordination
between purchasing and operating departments. Buyers are close to users and
develop a close understanding of their needs and problems. Face-to-face
discussions are easy to organise and can help to diagnose problems and stimulate
solutions. (This problem can to some extent be countered in centralised
purchasing functions by the use of information and communications technology
Suggested Solutions to Practice Questions
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for regular contact and data-sharing, supplemented by regular site visits by
purchasing staff.)
Another benefit of decentralisation is that local buyers can respond more quickly
to user needs. Centralised purchasing can run into difficulties if things do not go
exactly according to plan. Reacting quickly to changes in schedules or unforeseen
problems is easier if buyers are close to the scene of operations. Relying on longdistance communication inevitably means that response times are longer.
Locally based buyers also have the advantage of knowing locally based suppliers.
There are advantages – of cost, delivery time etc – in sourcing from short
distances (although these should not be overstated, given the increasing
globalisation of business and the support of ICT – particularly for the sourcing of
services).
Finally, there is an important management principle that supports a policy of
decentralisation: a divisional manager can be held accountable for the
performance of his division only if he has genuine control over its operations.
This is not the case if the vitally important area of procurement is taken out of
his hands and given instead to a centralised purchasing function.
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Improving Supply Chain Performance
Purchasing and quality
We have formatted our answer in note form, since you were specifically invited to do so in the
question. You may have used a more elaborate approach, such as presentation slides, if you wished
to integrate some of your prior learning about presentation skills, say. Note that in general, when the
examiner asks for discussion or explanation, he does not want to see an answer in ‘note form’. You
may use bullet-pointed or numbered points, but each point must contain an appropriate level of
discussion or explanation required – not merely a ‘list’ of disconnected items.
Part (a)
Quality management is a control process.
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Setting clear standards and measures of quality.
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Establishing systems and procedures to ensure that quality standards are met.
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Continuously monitoring and reviewing quality and comparing it to standards.
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Taking control action to adjust systems and procedures if quality falls short.
Quality management is an attitude.
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Quality is a guiding system or ideology for the organisation culture.
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Quality is continuously monitored and objectively measured against defined standards.
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Employees are trained and rewarded for quality.
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Focus on constant, small incremental improvements – a never-ending journey.
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Quality involves the integration and involvement of the whole value chain.
The benefits of quality management:
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cost savings and efficiency; reduction in wastage of materials, components and defective
finished outputs.
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improved customer satisfaction (and possibly delight); customer retention and loyalty;
effective leveraging of key customer relationships.
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more focus on customer needs, wants and values; further opportunities for product
differentiation and competitive advantage.
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encouragement to reappraise business processes against customer demands and
market best practice; stimulation to innovation and competitive advantage.
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more communication and employee involvement around quality issues; enhances
employee commitment and job satisfaction; empowers employees in managing
customer/supplier relationships.
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clear criteria for evaluating organisational plans and performance, and employee
performance, potential and training and development needs.
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strong guiding values which aid integration/coordination – without strict programming
and controls; more satisfying to employees and encourages initiative, flexibility and
innovation.
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Suggested Solutions to Practice Questions
Part (b)
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‘It is the buyer’s responsibility to ensure that suppliers possess the ability, the
motivation, and adequate information to produce materials and components of the
specified quality in a cost-effective manner. In fulfilling this responsibility, a buyer can
exert positive control over the quality and attendant costs of incoming material.’
(Dobler et al)
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Materials specification. Involvement in creating complete, accurate, feasible and
appropriate specification of materials and components required, including relevant
quality measures, inspections and tests.
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Influence: the quality of the product design. Working with design and production
departments (quality circles, where used); keeping up to date with material
developments; recommending alternative materials where appropriate.
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Influence: the extent of the product’s conformance to design. Accurately
translating design requirements into materials specifications, and by determining
appropriate quality control, inspection and testing requirements
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Early involvement. Collaboration with suppliers and subcontractors, mediated by the
purchasing function, before specifications are finalised. Provides technical and
manufacturing input from the supplier’s perspective, useful in reducing costs or in
avoiding subsequent processing/quality problems.
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Supplier selection. Selecting suppliers with technical and production capabilities to
meet specific quality and cost requirements. Methods: product sampling or testing;
examination of proposals and bids (state explicitly how the supplier plans to achieve
consistent compliance with quality standards); and on-site investigation of the supplier’s
operations. Quote Deming: considerations such as quality and reliability should be at
least as important as price when choosing a supplier.
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Management of supply relationships.
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Developing a realistic mutual understanding of quality standards and procedures
(including drawing up of contract terms).
Motivating suppliers to perform accordingly (NB incentive of long-term
relationship).
Monitoring and controlling supplier performance (supplier certification and/or
monitoring).
Facilitating quality dispute resolution and improvement planning: clearly setting
out expectations and accountabilities; keeping detailed quality records.
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Improving Supply Chain Performance
Vendor appraisal
This is based on a past examination question.
The examiner’s analysis of the question highlights the following aspects which are developed in the
solution below.
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Vendor appraisal: inspection methods, housekeeping, management competence and attitude to
quality, plant.
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Maintaining performance standards: periodic visits, feedback on performance, vendor rating.
(a)
Although the terminology in this area is somewhat confused and inconsistent, the term
‘vendor appraisal’ is usually taken to refer to evaluation of potential suppliers, while
‘vendor rating’ refers to a continuous process of appraising existing suppliers. On this
interpretation, part (a) of the question refers to vendor appraisal, and part (b) to
vendor rating.
A systematic approach to vendor appraisal involves a use of checklists. These should
incorporate the main features on which a decision between suppliers is to be made;
traditionally these include price, quality, delivery times, service and financial stability.
However, these criteria are somewhat vague unless they are supported by more
detailed analysis. This is usually arrived at by means of some or all of the following
procedures.
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Preliminary surveys – to establish basic information about potential suppliers,
such as bank and credit references, latest financial accounts, site locations, size
etc. The purpose here is to eliminate suppliers who are unlikely to merit further
investigation.
Review of financial condition – again, the objective is to shorten the list of
suppliers who will make it to later stages of evaluation. Any evidence of poor
financial stability suggests a danger of weak management, and/or quality shortcuts.
Site visits – to acquire the detailed information that will enable a final decision to
be taken.
Conducting site visits is a time-consuming and expensive procedure, and this is the
reason why they should be kept to a minimum by suitable advance screening
procedures. However, once a supplier has reached a shortlist, a site visit is probably
essential. The following areas, amongst others, will be evaluated, again using a prepared
checklist to ensure completeness of coverage.
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Inspection methods. Obviously this is a key factor in ensuring the objective of
quality. It is important to check during the visit what controls are actually in
operation; this may differ significantly from what managers believe the system to
be.
Housekeeping. Dobler and Burt (in Purchasing and Supply Management) state
that ‘good housekeeping tends to be an indication of efficiency’ and suggest that
buyers ask questions such as ‘Is [the plant] clean and well organised?’, ‘Are the
machines clean’, ‘Are the tools, equipment and benches kept orderly and
accessible?’.
Suggested Solutions to Practice Questions
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(b)
Management competence and attitude to quality. This is particularly
important when the proposed purchase is of a high-value item made to the
buyer’s specification, rather than an off-the-shelf product.
Plant. Buyers will be impressed with plant that is modern and in good operating
condition. Output rates and consistency in holding tolerances are also important.
Just in time capability. It may be essential for the buyer that suppliers can
maintain just in time production and delivery, and this too is an area to be
evaluated during the site visit.
Once suppliers have been selected it is of course vital to ensure that their continuing
performance matches the original expectations. Three measures that can help in this
area are periodic visits, feedback on performance (particularly from production
management in the buying firm), and formal vendor rating.
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Periodic visits are an important method of fostering good buyer-supplier
relations, as well as a check by the buyer that quality standards and procedures
are being maintained.
Feedback on performance is of course available from within the buying firm.
Buyers must ensure that they have appropriate channels of internal
communication so that any problems are brought to their attention quickly.
A number of formal approaches to supplier evaluation (vendor rating schemes)
have been devised, in which quantitative measures are applied to both
quantitative and qualitative performance criteria. The objective is to arrive at a
measure of the supplier’s overall performance, and also to highlight areas where
improvements are possible.
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Improving Supply Chain Performance
Ensuring supplier quality
Modern approaches to supplier relationships emphasise quality rather than short-term cost, not
(obviously) because cost is unimportant, but because ignoring quality can itself lead to costs that
outweigh any short-term savings.
As the question suggests, purchasing staff have a role to play particularly in the two areas of supplier
selection and supplier management. However, you might also identify other areas, such as the
preparation of specifications and new product development, where purchasing can contribute. These
areas are discussed in part (b) of the solution below.
(a)
Sourcing from the right suppliers is a key element in achieving quality objectives, and of
course is a task which falls within the province of the purchasing department.
Selection of suppliers
To begin with, appropriate selection of suppliers should be considered. The following
factors are relevant.
In most cases of major purchases, a number of suppliers will have been invited to make
supply proposals. A first step in which purchasing expertise can play a part is in the
analysis of the proposals. Certainly each proposal to be considered should indicate how
quality objectives are to be achieved; this requirement would have been made clear in
the invitation to submit proposals.
Purchasing staff should review what the proposals have to say under this head, with the
objective of screening out proposals which do not give satisfactory evidence of
capability. A less likely danger is of bidders over-specifying quality procedures, but this
too should be screened because of the unnecessary costs it will incur.
Another stage in which purchasing staff can contribute is in the analysis of product test
results. It is normal, before purchasing items, to test them – either internally, or by use
of a specialist outside firm. Indeed, this stage may well precede the invitation of bids
from selected suppliers. Clearly, the tests should be designed to ensure that the buyer’s
quality objectives are satisfied.
Finally in the area of supplier selection, a capability survey can be used to select from
the shortlist of suppliers whose proposals have survived the initial analysis. Clearly the
expense involved is justified only in the case of major purchases, but in such cases the
impact on quality may dictate that a capability survey is essential. Purchasing staff will
inevitably form part of the team conducting the survey.
Management of suppliers following selection
Selecting the right suppliers is of course only the beginning. Managing the relationship is
also essential to maintaining quality standards. Purchasing staff can contribute in the
following areas.
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First, buyers should monitor suppliers’ performance carefully, and ensure that
early discussion takes place if problems are identified. This depends crucially on
close liaison with production staff.
Suggested Solutions to Practice Questions
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(b)
Purchasing staff should bring about circumstances in which suppliers are
motivated to operate strict defect prevention systems, such as statistical process
control. This can be done partly by such strategic means as fostering long-term
partnership relationships, because this encourages suppliers to aspire to
continuing business from the buyer. It can also be helped by public marks of
recognition when high quality is achieved.
Other areas where purchasing staff can contribute to quality are in the preparation of
specifications and the development of new products.
Preparation of specifications
It is the task of purchasing staff to ensure that quality requirements are stated beyond
possibility of ambiguity in the specifications sent to suppliers. They should also conduct
whatever investigations are necessary to ensure that quality and cost considerations are
properly balanced. Finally, they should ensure that specifications are drafted in such a
way as to permit the widest possible competition among suppliers.
New product development
The broad approach to be recognised here is conveniently summarised in the phrase
EPI or early purchasing involvement. Purchasing specialists, provided they are
involved sufficiently early, have an important role in ensuring quality – and in keeping
costs down.
Particular contributions that purchasing can make are listed below.
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assisting in the development of objectives for the new product, including price,
performance and quality. All of these depend crucially on factors in the supply
market
review of designs so as to comment on the specification in terms of availability
and price of parts from suppliers
providing advice on the commercial implications of different design options
preparation of purchase description to enable potential suppliers to understand
exactly what is required.
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Improving Supply Chain Performance
Limpar
Note that the question specifically requests a report format for the solution.
CIPS have stated: ‘… frequently answers are required to be presented in a particular format, eg a
report or a memorandum. The ability to present the answer as required is essential to gain good
marks’.
REPORT
Value analysis in manufacturing activities
To:
Purchasing manager
From:
(Name or title)
Date: 19 September 20X6
Introduction
As you know, we are currently engaged in a project to introduce value analysis concepts
across the company’s range of manufacturing activities. The aim of this report is to set out
some of the ways in which our suppliers can contribute to this process.
Discussion
The potential for suppliers to contribute to value analysis is widely recognised. Their technical
knowledge and experience in manufacturing the materials we use gives them a good
perspective on the problems and opportunities we face in analysing our products. They have a
better idea than most as to the level of tolerances, finish and make up required in the parts
they supply.
There are various ways in which we can invite a contribution from suppliers.
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One common method is to display the items we are analysing and to invite selected
suppliers (or potential suppliers) to study the current make-up and costs. We
encourage them to suggest ways in which quality can be improved, or make-up
simplified, or costs reduced – or all three simultaneously! The incentive for suppliers is
obvious – they will be rewarded by the business they do with us as a result.
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Alternatively, we can design a checklist of questions for each item we are analysing and
circulate it to suppliers for completion. Suppliers will respond in relation to items
where their particular expertise can help us achieve our objectives, and once again
their reward is the additional business we can send them.
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More formally, we could conduct supplier workshops. Under this scheme, we host a
day-long presentation in which we explain the items we are interested in and show
suppliers around the production facilities. Both technical and managerial representatives
from supplier firms would be invited. The chance to see how we use their products,
combined with their knowledge of how other purchasers use them, may throw up
interesting suggestions for improvements.
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Suggested Solutions to Practice Questions
Potential problems
Not all suppliers welcome this approach. Particularly among existing suppliers there may be a
fear that the intention is to replace them with alternatives. This is a general problem in
supplier relationships, and we should in any case be examining ways of strengthening such
relationships and building confidence in partnership approaches. In the short term, we should
at least make it clear that tangible rewards are on offer for suppliers who can make a
contribution to our objectives.
Signature
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Improving Supply Chain Performance
Reducing the supplier base
You should note that this question is effectively in two parts: you should first explain why there has
been a trend to reductions in the supplier base, and then discuss the advantages and disadvantages
of the trend. Of course, the perceived advantages are important reasons why firms have gone along
this route, and so the two parts of your discussion will be interlinked.
Traditional purchasing practice has emphasised the value of multiple sourcing.
Placing all one’s eggs in one basket has been regarded as dangerous: the buyer is too much at
the mercy of the supplier. This means that the supplier can take advantage of the position by
charging unreasonable prices, and by skimping on quality. To avoid all this, buyers have sought
to spread the risks and improve supplier motivation by a policy of multiple sourcing.
This approach still has its supporters, but shortcomings have also become apparent. In
particular, it is now widely thought that multiple sourcing is not after all the best way to
achieve quality and cost objectives. The reasons for this change in emphasis include the
following.
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There has been a gradual recognition that members of a supply chain are to some
extent partners, who should cooperate to maximise common benefits. The older idea
that buyer and supplier firms were opponents, aiming to extort advantages and
concessions from each other, is now perceived as shortsighted.
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Competitive pressures have led to closer examination of quality and cost issues. Firms
seeking competitive advantage have deliberately looked for new approaches to
achieving it, and this has led to re-evaluation of previous views.
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This trend has been reinforced by the observed success enjoyed by some companies,
particularly Japanese companies, whose approach to supplier relations has differed
markedly from the traditional Western model. Success leads to imitation and the effort
to replicate Japanese triumphs has stimulated attention to these issues in the West.
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With attention now firmly focused on supply chain issues, it was not long before people
started to notice the waste and duplication created by the accepted practices of buyersupplier relations. This has led to the evolution of a lean supply concept which
concentrates on eliminating such waste.
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Finally, technological developments have opened up opportunities which would not
have been available in the past even if the general climate had been more receptive to
them. For example, modern ideas of supply chain management emphasise
communication of information along the chain using techniques such as electronic data
interchange (EDI) and the internet, which of course were hardly feasible even 10 years
ago.
It is fair to say that the trend towards reducing the supplier base has indeed brought many of
the advantages that were hoped for. These include the following.
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Greater control over quality, using the concept of partnership with suppliers to gain
access to their input on quality issues
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Reduction of waste in the supply chain, with techniques such as just in time purchasing
and production permitting much reduced levels of stock
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Suggested Solutions to Practice Questions
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Although partnership relationships with suppliers involve greater effort to establish
initially, once they are in place there is dramatic reduction in the amount of supplier
management and administration that is needed
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Savings throughout the supply chain translate into reduced costs and tighter cost
control.
Despite all this, there remain critics of the modern approach. Partly this is a matter of
ingrained habits and patterns of thought among both buying and supplier personnel.
Another problem is an argument often advanced, namely that reliance on a single supplier is
risky. Using a large number of suppliers, so the argument runs, minimises the risks.
This opinion is often sincerely held, and in an imperfect world there will certainly be
circumstances where it is valid. However, it is shortsighted in that it sees only one way of
reducing risk. Supporters of partnership relations are well aware that an element of
dependency can arise, but they aim to obviate this by careful selection of partners over a long
course of dealing.
A further difficulty is that many suppliers are suspicious of buyers’ motives in adopting this
approach. These suspicions are fuelled by cases in which buyers have sought to achieve the
benefits of partnership relations, while not offering full reciprocation.
The conclusion is that in some cases reducing the supplier base will not be feasible, but
strategic considerations suggest that buying firms should continue to adopt this as a target.
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Improving Supply Chain Performance
Bottleneck
The reference to bottleneck products suggests that the examiner has Kraljic’s matrix in mind.
Such products are those for which the financial value is low, but where supply risk is high.
(The opposite situation – where supply risk is low but financial value is high – refers to
leverage products.)
For bottleneck products buyers should focus primarily on continuity of supply, if necessary
even at additional cost. In such a situation it is clear that the supplier has a dominant position.
This supports the assertion in the question that relationship management is important in the
case of bottleneck products. The buyer is anxious to ensure continuity of supply and will
therefore take care to be on good terms with his suppliers. To do so he may adopt any or all
of the following measures.
•
Working closely with the supplier to ensure he understands the supplier’s preferences
and requirements
•
Ensuring prompt payment of supplier invoices
•
Attempting to aggregate his orders to minimise order processing costs for the supplier
•
Offering a long-term commitment
Of course, the buyer must also recognise that things may still go wrong. He may seek to
minimise dependency on any one supplier (though this may run counter to the idea of a longterm commitment). Or he may prepare contingency plans (eg investigating substitute
products).
The remainder of the assertion in the question is that relationship management is less
important in other contexts, say in the case of leverage items. Professional buyers will not
neglect relationship management considerations in any situation, but it is true that with
leverage products the power lies mainly with the buyer. There are many different suppliers of
such products, and probably many different substitutes. The priority will be to obtain the
minimum price consistent with satisfactory quality. Competitive bidding is likely to be used.
Transactional relationships are likely to be in place, which does indeed imply a lesser concern
with relationship management.
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Suggested Solutions to Practice Questions
Manufacturing strategy
This question touches on issues of conflict and balance between different functional priorities: in this
case, between manufacturing on the one hand and purchasing and supply on the other.
A useful general consideration to be borne in mind when facing questions such as this is that modern
research emphasises the benefits of cooperation and integration. This suggests a route into a solution:
by all means stress the importance of each ‘conflicting’ function, but look out too for ways in which
they complement each other.
For many decades the general approach to ensuring quality in manufactured products was to
check all or a sample of output once complete, or possibly at predetermined points in the
production cycle. Items which failed the quality test were reworked or rejected.
The costs involved in conducting the inspection and test procedures, in reworking, and in
scrap, were high, but this was considered an acceptable price for achieving the objective. And
leaving aside the issue of quality, the basic cost of the product was already determined beyond
possibility of change before the product entered manufacture.
More modern approaches pioneered by such figures as W Edwards Deming, and adopted
with great success by Japanese firms in particular, have made these earlier procedures
outdated. The emphasis now is on ensuring that the issue of scrap or rework simply does not
arise: slogans such as ‘zero defects’ and ‘right first time’ encapsulate the new philosophy.
A key requirement in translating these ideals into practice is a focus on the earliest stages of
product development, notably the design stage. As a result, manufacturers now stress that
quality should be designed into a product, not inspected into it. The same can be said about
costs; once decisions about the design of a product have been taken it is much more difficult
to alter the basic cost profile.
All of this analysis supports the implication in the question that manufacturing strategy,
particularly at the design stage, is a vital priority. However, the further implication that this
consideration should override strategic development of the supply chain is misconceived. The
point is that the two issues are interlinked: effective manufacturing strategy depends crucially
on effective supply chain management.
This relationship can be seen at work in a number of areas.
•
Increasingly, there is a recognition of the importance of value added by suppliers. The
value added internally is only one element of the total value sought by customers and
to ignore other elements would be short-sighted.
•
This is particularly true in those industries – the majority – where bought-in materials
have formed an ever increasing proportion of total manufacturing costs.
•
Managers engaged on supply chain activities have an important contribution to make to
product development and design. This is recognised in the increasing importance
accorded to early purchasing involvement or EPI.
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Improving Supply Chain Performance
In summary, the importance of an effective link between manufacturing and supply chain
strategies is well expressed in Strategic Purchasing and Supply Chain Management by Saunders:
‘Many so-called manufacturing firms have become “purchasing intensive” and harnessing the
value creating capabilities of other stages of the supply chain can have a greater effect on
competitive advantage than giving attention to only internal manufacturing activities’.
20
Suggested Solutions to Practice Questions
New products
In line with modern thinking on the role of purchasing, the examiner adopts a broad approach to the
responsibilities of the function. In particular, it is clear that purchasing has a role to play in new
product development.
It would be a mistake to see that role as beginning only when the new product is actually in
production, and this question is designed to illustrate how purchasing specialists can and should
become involved right from inception.
The broad approach to be recognised here is conveniently summarised in the phrase EPI or
early purchasing involvement. This approach recognises that most of the eventual costs
of a product become committed early in the product’s development – at the design stage.
Purchasing specialists, provided they are involved sufficiently early, have an important role in
keeping costs down and ensuring quality.
The investigation phase
The role of purchasing includes:
•
•
•
•
acquiring and communicating information about new developments in supply markets,
by means of contacts with existing suppliers, trade fairs and professional journals
assisting in the development of objectives for the new product, including price,
performance and quality. All of these depend crucially on factors in the supply market
developing and evaluating alternatives by advising on the economy and availability of the
materials required for each option
establishing supply plans for sourcing the necessary materials.
The development phase
The role of purchasing includes:
•
•
•
•
review of designs so as to comment on the specification in terms of availability and
price of parts from suppliers
providing advice on the commercial implications of different design options
preparation of purchase description to enable potential suppliers to understand exactly
what is required
participation in value engineering to ensure that unnecessary costs are eliminated as
early as possible.
The production phase
The role of purchasing includes:
•
•
•
finalisation of the procurement plan, possibly in the form of a bill of materials
assistance in ‘make or buy’ analysis – purchasing is in an ideal position to advise on the
cost and quality issues associated with each alternative
implementation of the procurement plan.
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Improving Supply Chain Performance
Logistics management
The distinction between materials management and logistics management is a fine one, and is
blurred by a common tendency to use either or both of these terms imprecisely. Even where
precision is attempted, the wide range of different definitions makes progress difficult.
It is clear that both logistics management and materials management are broader than the
functions traditionally carried out by purchasing departments. Both terms attempt to
encapsulate a wide range of activities which for strategic purposes it is desirable to
coordinate. This is brought out in the CIPS definition quoted in the question, with its
reference to logistics as a source of competitive advantage.
The clearest approach is that taken in textbooks such as Purchasing and Supply Management
by C K Lysons and The Gower Handbook of Logistics and Distribution Management, ed J L
Gattorna. A similar approach is implicit in the CIPS definition quoted. Essentially, these
authorities distinguish between activities which can be classed as materials management, and
activities which relate to physical distribution management.
The dividing line, in terms of the production cycle, is when materials and work in progress are
converted into finished goods. Everything before this, including most traditional purchasing
tasks, is materials management; everything from here on is physical distribution management.
A bridge between the two is the management of inventory.
In more detail, we can draw up the following scheme.
Activity
Effect on strategic performance
Materials management
Procurement and acquisition
Greater efficiency
Competitive advantage through strategic management of
the supply chain
Reduced costs and improved profitability
Transport and storage of materials
Enabling world class techniques such as just in time
Reducing investment in stocks and hence improving
profitability
Production
Streamlining production processes
Avoiding bottlenecks
Avoiding breaks in production
Physical distribution management
Storage and transport of finished goods
As for transport and storage of materials
Consumption of finished goods
Delighting the customer
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Suggested Solutions to Practice Questions
Teamworking
This is a typically brief-seeming essay question. We included it deliberately to ensure that you have
grasped the meaning of the instruction word ‘evaluate’, in answer to which the examiner expects to
see advantages/disadvantages, costs/benefits – or whatever form a balanced critical appraisal might
take. Our answer thus discusses the benefits and drawbacks of teamworking: note that only the
organisation’s point of view was specified, don’t waste marks discussing the importance of teams to
individuals.
Organisations are increasingly using teamworking to make work units more responsive.
Teams offer a number of advantages to an organisation.
(a)
They facilitate the performance of tasks which require the collective skills, experience
or knowledge of more than one person or function (eg in multidisciplinary or multiskilled groups). Because of this ‘pooling’ of resources and viewpoints, groups have been
shown to produce better evaluated (though fewer) decisions than individuals working
alone.
(b)
Teams facilitate the co-ordination of the work of different individuals or groups,
because they bring them into direct contact across organisational boundaries (eg
disciplines or departments) with shared goals and structured communication. Peters
(Thriving on Chaos) called this ‘horizontal structure’ and suggested that it was able to
deliver more effective customer service than ‘vertical’ (functionally divided) structures.
(c)
Teams facilitate interactive communication and interpersonal relationships, and are thus
well adapted for key organisational functions such as:
(i)
(ii)
(iii)
(iv)
(d)
Testing and ratifying decisions, because they offer multi-source feedback and may
make the decision more acceptable (by taking account of a cross-section of
stakeholder views).
Consulting, negotiating and conflict resolution, because they allow an interactive
exchange of views and influence.
Generating new ideas, because of their potential for ‘bouncing’ ideas off each
other and gaining multiple input (eg in brainstorming groups).
Collecting and disseminating information, because of the multiple networks in
which the members are involved.
Teams can motivate individuals to devote more energy and effort to achieving the
organisation’s gaols, since:.
(i)
(ii)
They offer intrinsic rewards, in the form of satisfying relationships and networks.
Group influences may reinforce performance, because of shared accountability.
However, teams also have drawbacks – even where they are performing effectively.
(a)
Group decision making takes longer, especially if the group seeks to reach consensus by
working through disagreements (as is the preferred style in Japanese management
techniques).
(b)
Group working inevitably requires a certain amount of attention and energy to be
devoted to group dynamics and group maintenance processes, which may detract from
task performance. This may be particularly prevalent in the early stages of group
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Improving Supply Chain Performance
development (which Tuckman called ‘forming, storming and norming’) prior to the
‘performing’ stage, and in a subsequent stage of complacency (‘dorming’).
(c)
Group decisions may be based partly on group norms and interests – the group’s own
agenda – rather than the needs of the task or organisation. Roethlisberger and
Dickson’s follow-up to the Hawthorne experiments found that work groups restrict
output and manipulate supervision, for their own interests.
(d)
Team decisions have been shown to be riskier than individual decisions. Shared
accountability blurs the individuals’ sense of responsibility for outcomes. Ultra-cohesive
groups, in particular, tend to protect consensus by ignoring outside information and
feedback: they become blinkered and over-confident.
(e)
Cohesive groups tend to foster inter-group competition, which can result in disintegration, loss of communication and conflict between groups.
It should be remembered that there are effective and ineffective teams: the advantages of
team working may be lost if teams are poorly selected and managed.
24
Suggested Solutions to Practice Questions
Managing conflict
(a)
There are various perspectives on conflict. According to the unitary perspective,
organisations are co-operative structures in which there are no systemic conflicts of
interest: conflict is therefore unnatural and undesirable. According to the pluralist
perspective, organisations are natural arenas for conflict, as members compete for
limited resources, status and rewards: conflict is therefore destructive, and controlling
it is a mutual survival strategy. According to the evolutionary view, however, conflict is
a positive means of bringing about healthy change, by maintaining the status quo
(through balancing competing interests) while keeping the organisation sensitive to the
need for change.
John Hunt suggests that conflict is constructive when its effect is to:
•
•
•
•
•
highlight problems and introduce new solutions, through airing differences.
define power relationships more clearly, through competition and challenge.
encourage creativity and the testing of ideas, through argument.
focus attention on individual contributions, by spotlighting non-conforming
individuals.
bring emotions out into the open and ‘clear the air’, particularly releasing
hostilities that might otherwise harden into long-term resentments.
However, conflict can also be destructive, negative and damaging to social systems if it:
•
•
•
•
•
distracts attention from the task, absorbing people’s energies in political gameplaying and subverting task objectives in favour of secondary goals.
polarises views and ‘dislocates’ teams.
encourages defensive, aggressive or ‘spoiling’ behaviour which damages
relationships and may sabotage tasks and team processes.
results in the disintegration of teams, through hostility and withdrawal of
communication.
stimulates emotional, win-lose conflicts, adversarial negotiation and outright
hostility.
Charles Handy suggested that ‘difference’ is healthy, and that ‘argument’ and
‘competition’ are healthy ways of resolving difference: it is only if argument and
competition are not managed that they can degenerate into destructive ‘conflict’.
(b)
There are many different models of conflict resolution, some of which focus primarily
on interpersonal approaches to conflict (such as the two-dimensional models of conflict
styles). Robbins provides a broader classification of possible strategies.
•
•
•
Problem-solving: the parties are brought together to find a solution to the
particular issue.
Superordinate goals: the parties are encouraged to see the bigger picture and
identify shared goals that override their differences.
Expansion of resources: resources are mobilised to meet both parties’ needs,
eliminating the need for competition.
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Improving Supply Chain Performance
•
•
•
•
•
•
26
Avoidance: one or both parties withdraws from the conflict or denies/conceals
the incompatibility.
Smoothing: one or both parties plays down the differences, or ‘papers over the
cracks’.
Compromise: bargaining, negotiating and conciliating, so that each party makes
some concessions in order to obtain some gains.
Authoritative command: an arbitrator with authority over both parties makes a
decisive judgement.
Altering the human variable: effort is made to change the attitudes, beliefs and
perceptions underlying the conflict.
Altering the structural variable: effort is made to re-organise work relationships
in order to minimise the potential for conflict.
Suggested Solutions to Practice Questions
Phases of negotiation
Kennedy’s four stage analysis (prepare; debate; propose; bargain) is another model that could be
used here, but the solution below uses a three stage analysis more accessible in the standard
purchasing literature.
•
Pre-negotiation
•
Negotiation (which can be subdivided into a number of further categories)
•
Post-negotiation
The process of negotiation can be broken down into the following three stages: prenegotiation, negotiation, and post-negotiation.
Pre-negotiation
During the preparatory stage, the buyer must determine objectives, plan strategy and tactics
and assemble information.
Objectives are often defined in terms of the MIL model: ie those we Must achieve, those we
Intend to achieve, and those we would Like to achieve. In terms of price, the area of
manoeuvre will centre about a range within which both buyer and seller are ready to
compromise on their ideal requirement.
Strategic and tactical considerations include such issues as the personnel to take part (eg
individual approach or team approach), the venue, the order in which separate issues are to
be tackled (including whether some issues should be linked together), the concessions that
can be made (and those that must not be made), and so on.
Assembly of information is also vital. This should cover areas such as:
•
price/cost analysis.
•
relative bargaining strength of the parties
•
any information to be presented at the meeting (such as graphs, charts etc).
Throughout this phase the buyer’s aim is to strengthen his own position while looking for
weaknesses in the seller’s position.
The negotiating meeting
In reality there may be more than one meeting, but the procedures to be accomplished are
ultimately the same. These are sometimes analysed in the following five stages:
•
Negotiating an agenda and rules of order
•
Identification of problems and issues and establishment of a settlement range
•
Range modification and problem solving
•
Hard bargaining
•
Closure and agreement
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Improving Supply Chain Performance
Throughout this phase the buyer must deploy techniques and types of behaviour designed to
maximise the likelihood of gaining the objectives he has set. This does not mean a strict and
confrontational insistence on his own point of view, but rather a concentrated effort to
achieve his requirements while allowing the seller to obtain as much of his objectives as can
be conceded. Win-win is preferred to win-lose.
Post-negotiation
Successful negotiation is only part of the story. The buyer’s task then is to ensure that what
was agreed is implemented. A common failing is to let gains slip by insufficient attention in this
final phase.
Most importantly, buyers should confirm in writing what they consider to have been the
outcome of the negotiations. The seller should be asked to confirm in return that this agrees
with his understanding of the position.
After this, the buyer should work to ensure that commitments agreed on are honoured. This
is part of a long-term view which recognises that future negotiations are likely to take place
with the same parties; if commitments are not honoured, it will be much more difficult to
secure cooperation in the future.
Finally, the negotiation performance should be evaluated so as to highlight areas of success
and failure. This will provide useful lessons for the future.
28
Suggested Solutions to Practice Questions
Competitive bidding
(a)
The term ‘competitive bidding’ refers to situations where, having identified suppliers
with the potential to meet contract requirements, the buyer invites bids from the ones
he considers best qualified. The intention (normally) is to choose the qualified supplier
offering the lowest price. The method is to be distinguished from alternatives such as
negotiation; and it should be recognised that it is a relatively expensive method,
particularly if the number of suppliers to be invited is large.
The situations where competitive bidding is suitable have been identified in the
literature.
•
•
•
•
•
(b)
Cases where it is compulsory. In many public sector contexts, a regime of
compulsory competitive tendering (CCT) prevails, as part of government aims to
ensure value for taxpayers’ money.
Cases of very high-value purchases. The comparatively high costs of this
approach make it unsuitable if the value of the overall contract is low. The value
must be high both in the view of the buyer and in the view of the seller.
There must be clear specifications, and the supplier must have a clear idea of the
costs to be incurred in making the supply.
There must be an adequate number of suppliers in the market who are both
technically qualified and positively keen on getting the business.
There must be adequate time available to complete the tender procedures,
which can be lengthy.
Dobler and Burt also identify situations which suggest that competitive bidding is
unsuitable.
•
•
•
•
Situations where it is not possible to estimate costs accurately
Situations where price is not the only important variable
Situations where the buyer expects to have to make changes in specification or
other aspects once the contract is underway; this can encourage unscrupulous
suppliers to place low bids initially, with the expectation of gaining lost ground
when the changes are negotiated
Situations where special tooling or set-up costs are major factors.
The above are specific situations where competitive tendering may not be the best
solution, but more general criticisms are also levelled at this method. It is argued that
the procedure leads to frequent switching of suppliers, and that suppliers who win a
contract have no incentive to improve performance while it remains in force. The time
and costs involved are also disadvantages.
Even more crucially, the use of competitive bidding, with its emphasis on price as the
key variable, may conflict with the attainment of other important objectives. In
particular, little emphasis is given under this procedure to more modern concerns with
lowest overall cost of supply.
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Improving Supply Chain Performance
Other possible conflicts arise in the area of quality. As already mentioned, there may be
a fall in supplier motivation once the deal is signed; indeed, if competitive tendering is
compulsory, and changes of supplier frequent, the existing supplier may allow
performance to tail off quite markedly as the contract nears expiry. One possible
remedy is very tight specifications, but this too has difficulties and costs associated with
it.
Finally, the use of competitive tendering can lead to a broadening of the supply base if
new suppliers are adopted each time a contract is signed. This conflicts with
progressive thinking on reducing the number of suppliers.
These disadvantages focus attention on alternatives to competitive bidding. The main
possibilities are negotiation, partnership approaches, or approaches combining elements
of some or all of these.
30
Suggested Solutions to Practice Questions
Technology
(a)
Technology has been defined as the knowledge or use of mechanical arts and applied
sciences. It is the application in practice of scientific principles to enhance products,
production processes and business methods.
The impact of technological developments on organisations in recent decades has been
pervasive. Three main strands can be identified.
•
•
•
(b)
Technology has broadened the range of products offered by manufacturers and
service providers. Products are bought and sold today for which no market
existed until recently, because the products themselves did not exist. Examples
are numerous: digital cameras, MP3 players, plasma televisions, electronic
personal organisers. In the field of services, the growth of internet service
providers and internet search engines has been a dramatic development.
Technology has drastically improved production methods. New methods of
production have cut down on defects, reduced manufacturing costs and
shortened the time to market for new products. An example often cited is the
‘manning’ of production lines by highly accurate robot operators.
Finally, technology has revolutionised the ways in which we do business. Using
online facilities we buy holidays, books and CDs; we can also do so using
television shopping. Also online, we manage our personal and business banking
without the need to visit a bank branch. Organisations use online methods not
only to sell, but also to improve awareness of their offerings, ie they do their
marketing online.
Purchasing departments have been as much affected by these developments as anyone
else.
•
•
•
The development of new products means that purchasing staff have constantly to
stay abreast of movements in supply markets. They need to be aware of new
requirements in their own firms’ products and the implications of this for dealing
with suppliers (eg in sourcing entirely new materials, parts and components used
in manufacturing the new products).
New production methods have led to an overhaul of manufacturing systems,
involving modern techniques such as MRPII, JIT purchasing and manufacture etc.
This has led to a new emphasis on close cooperation among members of the
supply chain in order to reduce waste, reduce stock levels, and reduce lead
times.
New ways of doing business have also been seized upon by purchasing
departments. Buyers routinely scan suppliers’ catalogues online. They may order
online, and effect payment by electronic funds transfer. They may enjoy ever
closer links with key suppliers by means of electronic data interchange. They may
conduct online auctions to solicit bids for contracts.
31