CIPS L4M2 EXAM 2024

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 Ensuring that we time incoming and outgoing cash flows. Business case Is the justification for undertaking an action and its purpose is to seek approval and finance for the recommended action. Companies will use a substitute product/service if the economics of doing so are favourable. This depends on 3 things: The relationship between the value the org gets from the product and it's price, how costly the change would be, and the inclination of the buyer to make a change. Line of best fit The line that goes approx. through the middle of the data points with an equal number of data points above and below it. Open-ended problems When something is stopping the achievement of an objective or blocking progress e.g. agreement from senior management is required before progressing. Closed problems These appear when something happens that should not have happened e.g. price of raw materials suddenly increase. Primary market data Is collected for a specific purpose, direct from relevant sources e.g. customers. This data is tailor made and is considered direct and a reliable source. However it is timely, costly and possibly considered biased. Requests for information If further detail/analysis is required to establish a full list of requirements. This can be requested from suppliers. Secondary data Data that has already been gathered and assembled for other purposes e.g trade publications. This data is readily available and is certified as a recognised source. This is also considered 'desk research'. Further examples, markets reports, official statistics, internet. Direct costs Costs directly associated with the production of a service or good. Indirect costs General running costs that cannot easily be attributed to specific products (also known as overheads). Expenditure on labour, materials and other items. Fixed costs Costs that do not vary irrespective of the volume of activity in a business e.g. salaries of permanent staff. Variable costs A cost that varies with the level of output of an organisation. Semi-variable costs A cost made up of both fixed and variable costs. Budgets Budgets plan quantified in monetary terms and are important for time phased income and expenditure management, to understand incoming and outgoing cash flow over a specified period. Fixed budget These are budgets that's are fixed and have to be operated within. Flexible budget These are budgets which move with business needs and change in line as the volume output changes. Variance to budget reasons Costs of materials changing Fluctuation in exchange rates Increase or decline in sales versus forecast Economies of scale Break-even analysis Calculates the point in a business where revenue equals total costs. There is a point where the sales line and total cost line cross over. Understanding this point can be useful in negotiations. Purchase cost analysis (PCA) A tool used to analyse the costs of things bought so that strategies can be developed for reducing costs and at the same time improve supplier relationships. The analysis of the cost of individual materials, components and activities that make up a purchases item. Benchmarking A strategic analysis process of continuously measuring an organisations products, services and practices against a recognised leader in the studied area. A result of benchmarking Enables pegs to learn from success and failures of other business and allow you to build competitive advantage and understanding of the bigger picture with their business or industry. Benchmarking process