CIPS Exam Report for Learner Community:

Qualification: Diploma in Procurement and Supply

Unit: Unit D2: Business Needs in Procurement and Supply
Exam series: November 2014

Question 1 – Learning Outcome 1

Q1(a) Explain the difference between the terms 'cost' and 'price' (5 marks).

This straightforward part of this question sought an explanation of the difference between
the terms 'cost' and 'price'. Answers should have broadly stated that ‘cost’ is the money paid
out by an organisation to acquire the goods or services that it requires, including materials,
labour, and overheads; whereas ‘price’ is what the organisation charges its customers, and so
will normally include an element of profit. Therefore, the price charged by an organisation will
normally be higher that its costs, unless it is selling its product or service as a ‘loss-leader’ or
at a price which deliberately is set to only cover costs. Essentially, therefore, cost is an input,
and price is an output. Or, in the old cliché, ‘a cost is a fact; a price is an opinion’. Up to five
marks were available for this part of this question; but generally, this relatively
straightforward and introductory part of this question was not answered very well. Many
responses did not explain the difference clearly, and/or included various inaccuracies and
irrelevant content, such as ‘whole life costing’.

Q1(b) Describe FIVE sources of data that a buyer might consult to obtain information about
the market prices of inputs (20 marks).

This part of this question sought a description of any five sources of data that a buyer might
consult to obtain information about the market prices of inputs. Responses should have given
a description of any five such sources; and there were very many to choose from. Markers
accepted all feasible answers. Examples of correct answers included: direct communication
with suppliers; price enquiries; Requests for Quotations; trade exhibitions; conferences; meet
the Buyer events; online supplier/buyer forums; the buyer's own database of market data,
including past records of prices charged by suppliers, market price changes, price trends
analyses, and spend analyses; marketing communications sent out by suppliers; advertising
literature; brochures; catalogues; visits from suppliers' sales representatives; suppliers’
websites; price lists; online market exchanges; auction sites; advisory and information

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services; CIPS and its publications; informal networking with colleagues and with other
purchasing professionals; events such as CIPS branch meetings and training courses; the
financial or trade Press; published indices; published statistical surveys; price lists; and price
comparison websites. Generally, this part of this question was answered quite well; often
much better than was part (a) of this question.

Question 2 – Learning Outcome 2

Q2 (a) Explain THREE advantages of using Key Performance Indicators (KPIs) in a contract.
(15 marks)

This part of this question sought an explanation of any three advantages of using Key
Performance Indicators (KPIs) in a contract. There were many to choose from; and Markers
accepted all feasible answers. Examples of correct answers included, but were not limited to:
helps to ensure that contract performance is linked to the organisation’s overall objectives;
brings a quantitative and therefore measurable tool to contract management; suppliers are
motivated to achieve performance; clarifies and focuses on key results areas in the contract;
allows comparison of performance over time; highlights trends of improvement or
deterioration; can support collaborative relationships between buyer and supplier; may help
to identify the best and worst performing suppliers; can provide feedback, for use in
continuous improvement. All of these advantages, and all other feasible and relevant
advantages, were accepted, and were awarded marks. Up to five marks were awarded for
each relevant advantage explained; with higher marks being awarded for more
comprehensive explanations of those advantages. This part of this question was generally
answered quite well, with many candidates giving good responses. Some responses gave too
much unnecessary detail about the theory around KPIs, rather than explaining the advantages
of using them; and some responses struggled to identify three clearly separate ‘advantages’,
so that there was duplication and overlap within the response.

Q2(b) Explain TWO potential information security risks that should be addressed in the
specification for a new computer system (10 marks).

This part of this question sought an explanation of any two potential information security
risks that should be addressed in the specification for a new computer system. This part of
this question was also generally answered quite well, with many candidates giving good
responses. There were many to choose from; and Markers accepted all feasible answers.
Examples of correct answers included, but were not limited to: unauthorised hacking; lack of
adequate firewalls; viruses; poor access control for internal users; theft of confidential data;

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theft of Intellectual Property; degradation of data; poor password security; poor backup
arrangements; and poor arrangements for transfer of data. These and all other relevant
information security risks were given credit by Markers; but risks that were not 'information
security' risks were not relevant to this part of this question and so could not attract marks.
Candidates were not expected to be able to demonstrate any detailed technical knowledge of
IT systems; nor were they expected to develop the detail of the specification itself. Up to five
marks were awarded for each relevant risk explained, with higher marks being awarded for
the more detailed explanations. Some answers were far too short for a ‘ten-mark’ part of a
question. And a surprising number of candidates gave more than the two risks sought. This
doesn’t lose any marks - Markers stopped marking after the second one - but it cannot gain
any marks, and it does waste valuable exam time.

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.

Responses to this part of this question should both have described each of the listed three
types of pricing arrangement, and given an example of each one. Areas that responses should
have covered were broadly as follows: (i) Fixed price agreements are where absolutely fixed
and firm and unchangeable prices or fees are agreed in advance; or possibly where prices are
fixed to some specified index; (ii) Incentivise price arrangements are where bonus payments
are agreed in advance, based on the supplier’s achievement of specific performance
indicators, perhaps especially 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’; (iii) Cost-plus
arrangements are where the buyer reimburse the supplier with all of its allocable 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; but
there is no incentive on the supplier to reduce their costs with this arrangement, which may
make it less attractive to the buyer. Both parties may then share the cost savings. This pricing
arrangement may be used particularly where there is plenty of scope for cost reductions and
performance improvements by the supplier. Good responses to this part of this question fully
explained each of the listed three types of pricing arrangement, and gave an example of each
one: all possible relevant examples received credit from Markers. There were up to two

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marks available for each description; and a further one mark available for each example, up to
a total of nine marks. But there were very few wholly satisfactory responses. The large
majority of responses did not clearly describe the three pricing arrangements: most gave only
very basic descriptions of the three types, often with many errors and inaccuracies. And only
a few responses included a relevant example of each of the three types. Plenty of scope was
given by Markers for differences in the wording used in responses, because the terminology
of pricing arrangements is not consistent across the world, or even across different sectors in
the UK; but still a significant number of answers were way off the track of the question,
and/or were of insufficient length and depth to gain high marks.

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

Generally, this part of this question was answered quite well; and was generally better than
part (a) of this question. Most candidates were able to explain two convincing advantages of
‘fixed price’ purchase arrangements, albeit often at a fairly basic level. Candidates often failed
to give much detail, and therefore did not gain all potential marks. All relevant examples of
advantages of fixed price purchase arrangements for a purchasing organisation were given
credit by Markers. Correct answers included: reduced financial risk, because cost
commitments are known in advance; the supplier bears the risk of any price fluctuations;
cashflow management is clarified; may motivate the supplier to perform, as there is a strong
incentive to achieve cost savings because savings are kept by the supplier; administratively
simple, as there is no need to monitor or audit cost performance; budgetary certainty.

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. In contrast to the other parts of this
Question, this part of this question was quite often answered quite well. There was a vast
array of possible ‘elements’ to from which to choose, and Markers accepted all feasible
answers. Examples of correct answers included, but were not limited to: underestimated
costs; underestimated budgets; wage increases; inflation; commodity price increases; over-
runs; exchange-rate fluctuations; and changes to the specification. These and all other
relevant reasons for price fluctuations/increases were given credit.

Overall, Question 3 was often the lowest-scoring question on exam papers from this exam
session; although this was often compensated for, in many instances, by much higher marks
gained for the other questions on the paper, especially for Questions 1 and 4.

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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 small part of this question was answered well by the great majority of candidates, and
maximum scores of all five marks were quite common. Correct responses 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. Or, the organisation might
buy in the goods/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. All appropriate variations and additions to this explanation were also accepted
by Markers.

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).

Most responses to this part of this Question were well structured, and clearly set out five
different factors that an organisation may take into account when deciding whether to make
goods/services itself, or whether to buy them in from a supplier. Most of the responses
demonstrated good knowledge of these factors, identifying them well, and giving good,
relevant descriptions, of appropriate length to get high marks. Strong answers fully described
potential factors, such as the loss of expertise and internal control, and poor performance or
reputational issues if the outsourced supplier then fails to deliver effectively. Responses often
included good discussions of market issues, and issues around the availability of competent
suppliers. Responses typically showed a good understanding of theory; but many responses
also showed good understanding and application of the theory, with examples and evidence
included from candidates’ own experiences. There were some exceptionally good responses
to this question. All valid responses were awarded marks, with up to four marks awarded for
each ‘factor’ described. Other factors that were typically addressed in responses were:
whether the goods or services are strategically important, or ‘core’, to the organisation; how
the costs of producing in-house stack up against buying from a supplier; the availability of
appropriate competencies in-house and in the outside marketplace; the available capacity in-
house and in the outside marketplace; the risks involved in devolving production activities to
the external supply chain, such as risks to confidential information and to intellectual
property; and the effects on the workforce, such as the possibility of redundancies and
industrial disputes. These factors, and all other relevant factors and examples, received credit

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from Markers. Up to four marks were awarded for each of the factors described, with higher
marks being awarded for more accurate and more detailed descriptions. Oddly, a few
responses gave fewer than five factors, thereby limiting their potential maximum score; and
also a few responses 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.

Overall, Question 4 was answered very well by the majority of candidates, and good total
marks here often compensated for lower marks elsewhere - particularly for Question Three.
Scores for Question 4 also often brought the total score for the paper as a whole up to a
‘pass’ or ‘merit’ level.

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