CIPS L4M2 EXAM 2024
Re-buy
It is not necessary to specify a new specification or to source the market. Call-off or framework
agreement. A preferred supplier is in place
Modified Buy
Review of existing contract requirements and making any necessary amendments such as to build
additional benefits, streamline the business or to establish new KPIs/SLAs. Where some of the
specification or requirements have changed.
New Buy
A new purchase outlines requirements that have not been specified before. There is a higher risk
involved in procuring a new purchase, demand/supplier/market analysis should be conducted, and new
specific KPIs should be included in the specification.
Business Needs
The mission of the organisation determines its requirements and therefore what procurement needs to
source.
R - regulatory (any legal requirements)
A - availability (supply of goods/services when required, risk, financial and capacity)
Q - quality (consistency, repeatability, and fit for purpose)
S - service requirements (flexibility, support, availability)
C - cost (target costs, total cost of ownership, continuous improvement)
I - innovation (improving customer experience)
A model that can be used to identify business needs.
Kraljic Matrix
A matrix that allows procurement to prioritise spend in line with business needs.
Leverage - Kraljic Matrix
Business needs met by using purchasing department buying power to gain the best price and terms e.g.
competitive tendering.
Example of Leverage item (Kraljic Matrix)
Company cars or mobile phones.
Strategic - Kraljic Matrix
Business needs met by developing long term relationships such as partnerships to ensure security of
supply.
,Example of Strategic item (Kraljic Matrix)
Capital assets such as premises
Routine - Kraljic Matrix
Business needs met by trying to buy these more efficiently through blanket ordering, e-procurement and
vendor managed inventory leadership in procurement and supply.
Example of Routine item (Kraljic Matrix)
Stationary
Bottleneck - Kraljic Matrix
Business needs met by developing appropriate contracts (such as call off contracts, framework
agreements) in which the buyer can ensure that stock levels and maintained and speed of re-ordering.
Example of Bottleneck item (Kraljic Matrix)
Spare parts or oil for machines
Cost and risk - Kraljic Matric
Low cost / high risk - Bottleneck
High cost / high risk - Strategic
High cost / low risk - Leverage
Low cost / low risk - Routine
Total cost of ownership
Is how much it costs to own the product over its lifetime until disposal.
Whole life costing
Is a technique used to arrive at the total cost of ownership
Planning, preparation and implementation
Three stages of WLC
WLC - planning
Determines the budget for the asset being purchased, helps improve the specification to reduce cost,
and simulation or decision support models can be used to assist.
WLC - preparation
Testing the various models for calculating WLC and is necessary to choose the best model.
WLC - implementation
Implements the model to get the results. A review and intervals for regular recalculation.
Acquisition, operation and disposal
, There is a vital difference between purchase price and total cost of ownership. This includes 3 categories.
Cost based pricing
Allows the supplier to cover its costs and make a profit.
Limits to cost based pricing
Ignores competition and other influences on pricing and are quite inflexible. They also don't give a
supplier an incentive to reduce or manage costs.
Cost behaviour
The way in which costs of outputs are affected by fluctuations in the level of activity.
Open book costing
The supplier provides the buyer with information about their costs to be scrutinised e.g. reassures there
is VFM, facilitates cost based pricing.
Costing methods
Marginal, absorption, activity based
Marginal costing method
Is widely used by managers and is useful in the distinction between variable costs and fixed costs.
Variable costs are always the relevant costs in terms of decision making.
Absorption costing method
The challenge is to attribute a 'fair' amount of fixed costs to each unit of production output. Traditionally
this has been done by determining the amount of some measurable resource consumed in a production
period and the overheads of that resource.
Activity based costing method
This is based on the identification of cost drivers and cost pools. There is a difference between purchase
price and total cost of ownership. Best value = the lowest whole life cost.
Profit
The difference between the selling price of a product and the cost of producing the product.
Cash flow forecast
Is designed to identify the sources and amounts of cash inflows, and the destinations and amount of
cash outflows, over a given budgetary period.
Cash flow projection
Designed to project the future cash position of the firm or project.
Cash flow management
Re-buy
It is not necessary to specify a new specification or to source the market. Call-off or framework
agreement. A preferred supplier is in place
Modified Buy
Review of existing contract requirements and making any necessary amendments such as to build
additional benefits, streamline the business or to establish new KPIs/SLAs. Where some of the
specification or requirements have changed.
New Buy
A new purchase outlines requirements that have not been specified before. There is a higher risk
involved in procuring a new purchase, demand/supplier/market analysis should be conducted, and new
specific KPIs should be included in the specification.
Business Needs
The mission of the organisation determines its requirements and therefore what procurement needs to
source.
R - regulatory (any legal requirements)
A - availability (supply of goods/services when required, risk, financial and capacity)
Q - quality (consistency, repeatability, and fit for purpose)
S - service requirements (flexibility, support, availability)
C - cost (target costs, total cost of ownership, continuous improvement)
I - innovation (improving customer experience)
A model that can be used to identify business needs.
Kraljic Matrix
A matrix that allows procurement to prioritise spend in line with business needs.
Leverage - Kraljic Matrix
Business needs met by using purchasing department buying power to gain the best price and terms e.g.
competitive tendering.
Example of Leverage item (Kraljic Matrix)
Company cars or mobile phones.
Strategic - Kraljic Matrix
Business needs met by developing long term relationships such as partnerships to ensure security of
supply.
,Example of Strategic item (Kraljic Matrix)
Capital assets such as premises
Routine - Kraljic Matrix
Business needs met by trying to buy these more efficiently through blanket ordering, e-procurement and
vendor managed inventory leadership in procurement and supply.
Example of Routine item (Kraljic Matrix)
Stationary
Bottleneck - Kraljic Matrix
Business needs met by developing appropriate contracts (such as call off contracts, framework
agreements) in which the buyer can ensure that stock levels and maintained and speed of re-ordering.
Example of Bottleneck item (Kraljic Matrix)
Spare parts or oil for machines
Cost and risk - Kraljic Matric
Low cost / high risk - Bottleneck
High cost / high risk - Strategic
High cost / low risk - Leverage
Low cost / low risk - Routine
Total cost of ownership
Is how much it costs to own the product over its lifetime until disposal.
Whole life costing
Is a technique used to arrive at the total cost of ownership
Planning, preparation and implementation
Three stages of WLC
WLC - planning
Determines the budget for the asset being purchased, helps improve the specification to reduce cost,
and simulation or decision support models can be used to assist.
WLC - preparation
Testing the various models for calculating WLC and is necessary to choose the best model.
WLC - implementation
Implements the model to get the results. A review and intervals for regular recalculation.
Acquisition, operation and disposal
, There is a vital difference between purchase price and total cost of ownership. This includes 3 categories.
Cost based pricing
Allows the supplier to cover its costs and make a profit.
Limits to cost based pricing
Ignores competition and other influences on pricing and are quite inflexible. They also don't give a
supplier an incentive to reduce or manage costs.
Cost behaviour
The way in which costs of outputs are affected by fluctuations in the level of activity.
Open book costing
The supplier provides the buyer with information about their costs to be scrutinised e.g. reassures there
is VFM, facilitates cost based pricing.
Costing methods
Marginal, absorption, activity based
Marginal costing method
Is widely used by managers and is useful in the distinction between variable costs and fixed costs.
Variable costs are always the relevant costs in terms of decision making.
Absorption costing method
The challenge is to attribute a 'fair' amount of fixed costs to each unit of production output. Traditionally
this has been done by determining the amount of some measurable resource consumed in a production
period and the overheads of that resource.
Activity based costing method
This is based on the identification of cost drivers and cost pools. There is a difference between purchase
price and total cost of ownership. Best value = the lowest whole life cost.
Profit
The difference between the selling price of a product and the cost of producing the product.
Cash flow forecast
Is designed to identify the sources and amounts of cash inflows, and the destinations and amount of
cash outflows, over a given budgetary period.
Cash flow projection
Designed to project the future cash position of the firm or project.
Cash flow management
