CIPS Exam Report for Learner Community:

Qualification: Diploma in Procurement and Supply

Unit: Unit D2: Business Needs in Procurement and Supply
Exam series: November 2015

Question 1 – Learning Outcome 1

Q1(a) Outline FIVE purposes of financial budgets (10 marks).

This was a straightforward part question requiring the candidate to identify and very briefly
outline the five purposes of a financial budget. Possible answers could have included, but
were not limited to:

• Express organisational objectives as operational targets.

• Communicate plans and targets to stakeholders throughout the organisation.
• Motivate employees to achieve performance and cost targets.
• Motivate managers to identify risks and problems, such as cash flow difficulties.
• Measure unit or project performance by comparing target results with actual results.
• Help evaluate managerial performance.
• Pre-authorise estimated levels of expenditure for procurement activities.
• Co-ordinate operations across functions.
• Control procurement activities and costs.

This part question was generally well answered, with a few candidates achieving maximum
marks. However some answers were often limited to a single sentence or even a list, whilst in
other cases, far too much detail was given, despite only ten marks being available. Such
answers often included irrelevant definitions or contrasts between incremental and zero-
based budgeting.

Q1(b) Using examples, describe THREE reasons why the actual price of bought-in materials
might be lower than the price shown in the purchasing budget.(15 marks).

The question required a description of three reasons why the actual cost of bought-in
materials might be lower than the budgeted figure, as well as a specific example to illustrate
the points being made. Possible answers could have included, but were not limited to:

• The skill of the buyer's negotiating team.

• The relative strength of the buyer's/supplier’s bargaining position.
• Fluctuations in commodity prices, as a result of changes in demand such as the recent fall

NOVEMBER 2015 D2 EXAM REPORT - LEARNER COMMUNITY 1/6

Leading global excellence in procurement and supply

 in the price of crude oil on world markets.
• If the bought-in materials are imported, changes in the exchange rate.
• Quantity discounts through buying larger quantities than anticipated at the time.
• Economies of scale for the supplier through production of larger quantities.
• Use of consortium buying.
• Opportunistic spot buying, especially for commodities.
• The purchase of cheaper, alternative or substitute products.
• The agreement of lower prices in return for more favourable payment terms for the
supplier.
• Increased competition in the market due to the entry of new suppliers.
• The implementation of a value analysis or value engineering exercise resulting in lower
costs.

Most answers given, quite correctly, tended to centre on changes in commodity prices,
exchange rates, bulk buying and buyer negotiating skills, but this part (b) tended to be less
well answered than part (a), mainly because of the failure of the candidates to give much in
the way of explanation or in many cases not giving any examples, despite the express
requirement in the question.

Question 2 – Learning Outcome 2

Q2 (a) Describe the role of a specification at THREE different stages within the procurement
cycle. (9 marks)

This question was aimed at testing understanding of the key roles of a specification and
deliberately included the words 'procurement cycle', to ensure that candidates elaborated, at
three different stages.

Possible answers could have included, but were not limited to:

 Defining the requirement in a manner that is clear, concise and unambiguous.

 Communicating with key internal stakeholders to ensure necessary contribution and buy-
in.
 Communicating with potential suppliers, so that they understand what is required and can
produce a credible bid.
 A benchmark against which competing bids are evaluated.
 Forming a legally binding part of the contract.
 A benchmark to measure whether the supplier is conforming against the agreed
specification and evidence for rejection if they are not.
 Evidence of what was agreed in the event of a dispute with the supplier.

This part question was generally well answered, with candidates clearly and correctly using
the procurement cycle as the basis for any answer. Occasionally answers were rather short or

NOVEMBER 2015 D2 EXAM REPORT - LEARNER COMMUNITY 2/6

Leading global excellence in procurement and supply

contained comparisons of conformance and performance specifications, when they were not
in any way related to the question.

Q2(b) Assess FOUR potential consequences of drafting a poor specification for a contract
(16 marks).

This question was intended to test candidates' understanding of the consequences of drafting
a poor specification for a contract. The command word was 'Assess', so candidates were
required to give a full account of the consequences. Possible answers could have included,
but were not limited to:

• Not achieving the overall objectives of the organisation, if the specification does not
reflect the actual business need.
• A specification which is incomplete may result in the need for instruction of additional
work, which will also lead to additional cost.
• If the specification is ambiguous, inaccurate or contradictory, this could lead to
rejections, downtime and expensive contractual and legal disputes.
• There may be conflict with internal stakeholders, such as end-users, whose needs may
have been misunderstood or ignored.
• Consequential quality defects may lead to costs of recall, rework, lost loyalty and
business and ultimately profit.
• If goods or services are over-specified, then the organisation may be paying a higher
price, with no business benefit.

This part of the question was also answered reasonably well, but sometimes with a lack of
explanation or examples to support the points being made, with a key failure being not
assessing the consequences, merely the causes.

Question 3 – Learning Outcome 3

Q3(a) Describe, with an example, the following price arrangements in commercial

agreements: (i) Fixed price arrangements (ii) Incentive price arrangements (iii) Cost-plus
arrangements.

Answers to this part of this question should have described each of the listed three types of
pricing arrangement and given an example of each one.

Areas that responses should have been covered were broadly as follows:

(i) Fixed price agreements are can be defined as absolutely fixed and firm and unchangeable
prices or fees, agreed in advance. An example might be for an off-the-shelf, well-specified
item, such as stationery, in times of low inflation.

NOVEMBER 2015 D2 EXAM REPORT - LEARNER COMMUNITY 3/6

Leading global excellence in procurement and supply

(ii) Incentive price arrangements are where bonus payments are agreed in advance, based on
the supplier’s achievement of specific performance indicators, perhaps those aimed at
making cost reductions or achieving high, measurable performance levels or where the
commercial agreement includes a formula to share gains between buyer and supplier -
sometimes called ‘gainshare’. This arrangement might be used where the buyer can benefit
from early completion of a building, thus incentivising the supplier to finish the works before
the agreed completion date.

(iii) Cost-plus arrangements are where the buyer reimburses the supplier with all of its
allowable costs incurred whilst performing the contract, with an addition always of an agreed
percentage for the supplier’s ‘profit’; and/or where the full costs are supplemented by a
supplier’s ‘management fee’. This pricing arrangement may be used in particular where the
supplier's costs cannot easily be estimated e.g. for some Research and Development
contracts. There is however no incentive on the supplier to reduce its costs with this
arrangement, which may make it less attractive to the buyer.

The quality of answers to this part of the question were fairly mixed, with some candidates
showing an excellent understanding and others not knowing or mixing up the definitions of
the three different types of pricing arrangement. A major failure of many candidates was to
overlook the requirement to give an example and thus being unable to gain maximum marks.

Q3(b) Explain TWO advantages of fixed price purchase arrangements for a purchasing
organisation (8 marks).

This question clearly requires the candidate to explain the benefits of fixed prices for the
buyer. Possible answers could include, but are not limited to:

• Reduced financial risk of a cost commitment which is known in advance and the supplier
bears the risk of price fluctuations.
• Cash flow management, if the timing of payments is planned agreed in advance.
• It motivates the supplier to perform as there is a strong incentive to complete work on
time, with any cost savings being kept by the supplier.
• It is administratively simple as there is no need to monitor or audit cost performance.

Generally, this part of this question was answered quite well. Most candidates were able to
explain two convincing advantages of ‘fixed price’ purchase arrangements, though often at a
fairly basic level, lacking any explanation.

Q3(c) Explain TWO elements that may cause price fluctuations in a cost plus purchase
arrangement (8 marks).

This part of this question sought an explanation of any two elements that may cause price
fluctuations in a cost plus purchase arrangement. There was a large of possible elements to
from which to choose. Correct answers could have included, but were not limited to:

NOVEMBER 2015 D2 EXAM REPORT - LEARNER COMMUNITY 4/6

Leading global excellence in procurement and supply

• underestimated costs;
• underestimated budgets;
• wage increases;
• inflation;
• commodity price increases;
• cost over-runs;
• schedule over-runs;
• exchange-rate fluctuations;
• changes to the specification.

Candidates generally gave an adequate response, but these were often poorly supported by
explanations or examples. An example here was exchange rate movements. This was often
correctly identified by candidates, but with no explanation as to how this affected, say the
price of imported materials.

Question 4 – Learning Outcome 4

Q4(a) Explain the meaning of the term ‘make/do or buy decision’ for goods or services (5
marks).

This was a simple definition type question and correct answers stated that an organisation
might make the goods or develop the services that it needs in-house, procuring only the raw
materials it needs for the products it is making, with the value of the final goods/services
thereby being created almost entirely in-house. Alternatively, the organisation might buy in
the goods or services that it needs from external suppliers or sub-contractors and then the
value of the finished product will have been added by the external suppliers or sub-
contractors.

This is a relatively straightforward part question, with the direction of the answer clearly
indicated within the wording of the question and was therefore answered very well by the
great majority of candidates

Q4(b) Describe FIVE factors that an organisation may take into account when making a
‘make/do or buy decision’ for goods or services. (20 marks).

This was a straightforward question requiring a good understanding of theory, but ideally
backed up with examples and evidence. Correct answers could have included, but were not
limited to:

• Whether the item required by the organisation is strategically important or 'core' to the
business.
• The relative cost of making the product in-house, compared to the cost of buying it in.
• The potential differences in quality or timescales.

NOVEMBER 2015 D2 EXAM REPORT - LEARNER COMMUNITY 5/6

Leading global excellence in procurement and supply

• The availability of in-house competencies and production capacity and how easily they
can be acquired or expanded and whether they will be available in the future.
• The availability of external suppliers, who are able to fulfil the organisation's needs.
• The assessed risks of sub-contracting work to the external supply chain, in terms of loss of
control, loss of in-house knowledge and skills and the risk of passing on confidential
information and intellectual property.
• Human resource impacts, in terms of a decision to buy in leading to redundancies or a
decision to make/do resulting in additional recruitment and possible training costs.
• Opportunity cost issues, such as using in-house production capacity to make the items
needed, when such capacity might be used to make potentially more profitable items.
• Potential CSR issues of outsourcing to suppliers with poor labour records.

This part question was generally well answered. Most candidates achieved high marks, often
compensating for relatively poor answers to the first three questions and thereby achieving a
pass. However, some responses gave fewer than five factors, thereby limiting their potential
maximum score and others gave more than five factors, in which case markers only assessed
the first five factors described. Both of these are clear examples of poor exam technique;
candidates should describe and clearly delineate the number of the points asked for in the
question; no more and no less.

NOVEMBER 2015 D2 EXAM REPORT - LEARNER COMMUNITY 6/6

Leading global excellence in procurement and supply