Foundation Diploma in Purchasing and Supply

Purchasing Contexts
LEVEL 4
DATE: Wednesday 27 January 2010

L4-05/Jan10

TIME: 14.00 to 17.00

DURATION: 3 hours

Instructions for Candidates:

This examination is in TWO sections. Section A Has TWO compulsory questions, worth 25 marks each. Section B Has FOUR questions; answer TWO. Each question is worth 25 marks. 1. Do not open this question paper until instructed by the invigilator. 2. All answers must be written in the answer booklet provided. 3. All rough work and notes should also be written in the answer booklet.

QP - 01

SECTION A You are strongly advised to read carefully and analyse the information in the case study before attempting to answer questions 1 and 2. ECO PRODUCTS LTD (EP) Eco Products (EP) specialises in the commercialisation of designs from inventors and design students who generate creative ideas with an environmentally friendly focus but who lack the finance and expertise to turn their ideas into a money-making reality. Currently EP is working on a range of wind-up (dynamo) torches and radios. These are designed to operate without the need for conventional batteries (or mains electricity) and as such dont produce hazardous waste in the form of used batteries. In addition, as the radios and torches do not need batteries, they can be used anywhere in the world. Feedback from market research has been very positive and EP is confident of high sales volumes. Consequently, a decision has been made to quickly move from small batch production to full-scale, high volume production. Manufacturing Details A key strength in the design of the torches and radios is that a range of standard components are used to generate and store electricity. These components are easily specified and can be purchased in volume from a wide number of suppliers. Due to a number of supply market dynamics the price of these components fluctuates. These components represent a small percentage of the cost of both products. The non-standard element is the outer case, in the shape of a torch or radio. The outer case is moulded from plastic and relies on specialist injection moulding tools which are very expensive to make, and are designed to be used on a particular type of injection moulding machine. This means that the tools cannot be used on another injection moulding machine without costly modification. Despite the high initial investment costs, however, once these have been recouped the cost per moulding is low. By comparison to the component costs, the assembly and subsequent packaging of the torches and radios is extremely labour intensive but relatively low-skilled. Intended Purchasing Strategy For the range of standard components used to generate and store electricity, EP has decided not at least at this stage to enter into any long-term supply arrangements. Spot-buying for this range of items has been suggested. To reduce the labour costs associated with assembly and packaging, EP intends to outsource these activities to a low labour-cost economy. A suitable country will have to be chosen, and appropriate terms and conditions including Incoterms agreed. Whilst direct labour and material costs are lower in developing countries, EP is aware of a number of significant risks, including the need to consider the implications of corporate social responsibility (CSR) and the possibility of incurring as yet unforeseen costs.

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The sourcing decision for the specialist injection moulding tools, however, is more complex. Skilled technical manufacturing costs tend to be high regardless of location, and savings made by sourcing from a low labour-cost economy are often negated by costs such as transport and insurance, administration and currency fluctuations.
The information in this case study is purely fictitious and has been prepared for assessment purposes only. Any resemblance to any organisation or person is purely coincidental.

QUESTIONS Questions 1 and 2 relate to the case study and should be answered in the context of the information provided. Q1 (a) Discuss the advantages and disadvantages of spot-buying for EP when purchasing the range of standard components. (10 marks) (b) Explain an appropriate method of purchasing the specialist injection moulding tools. (15 marks)

Q2 (a) Explain FIVE advantages for EP of using Incoterms when sourcing from another country. (10 marks) (b) Discuss FIVE key factors EP should consider when sourcing from another country. (15 marks)

PLEASE TURN OVER

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SECTION B Answer TWO questions from section B. You are strongly advised to read carefully all the questions in section B before selecting TWO questions to answer. Q3 (a) Discuss the UK governments position on competition. (10 marks)

(b) Discuss the purpose and role of the UKs Competition Commission. (15 marks)

Q4 Discuss FIVE impacts of public sector regulation on public sector purchasing. (25 marks)

Q5 A manufacturer of power tools for the construction industry consists of four separate business units. These business units produce respectively: drills, buffing and polishing machines, spraying equipment and compressors. Each of the four units undertakes its own purchasing activities. (a) Compare the arguments in favour of centralisation of procurement with the arguments in favour of decentralisation of procurement for the manufacturer. (10 marks) (b) Suggest an appropriate procurement structure for the manufacturer, explaining your reasons. (15 marks)

Q6 (a) Explain why a third sector organisation such as a charity needs regulating. (10 marks) (b) Explain how the regulation of a third sector organisation, such as a charity, might impact on its purchasing activities. (15 marks)

END OF QUESTION PAPER

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