Suggested Solutions to Practice Questions

CIPS Level 4

SUGGESTED SOLUTIONS TO PRACTICE QUESTIONS Measuring Purchasing Performance

Lowest cost of supply

This is a question on a basic theme in purchasing, one which you should expect to be examined fairly regularly.

The traditional, adversarial model of buyer-seller relationships emphasised the importance of securing a low price from the supplier. This was achieved by a mix of high-pressure tactics applied to each potential supplier, and the implicit threat of going elsewhere if the price was not right. In support of this approach firms adopted a deliberate policy of sourcing any particular item from more than one supplier.

While these tactics still have their supporters, many buyers now feel that an over- emphasis on short-term price issues has the paradoxical effect of increasing costs in the long term. On this analysis, too little attention has been paid to the non-price effects of the adversarial approach. For example, suppliers finding it necessary to cut their own costs might be tempted to skimp on quality or delivery, and this would eventually lead to increased costs for the buying firm.

Following this line of thought has led to a new focus on lowest cost of supply, as opposed to lowest price. The distinction is that the total cost of supply includes many costs not apparent from the beginning: the costs associated with poor quality, or with late delivery, for example. The modern approach is to adopt policies which recognise all the costs attributable to buying from one source rather than another, and to choose a supplier so as to minimise the ‘lifetime’ costs to the buying firm.

The effects of this new approach are to focus attention on the overall ‘offering’ of each supplier. This includes all of the following factors.

• Price. In other words, the basic price remains a vital element in the package, but is no longer seen as the only selection criterion. Indeed, an important argument supporting the ‘lowest cost of supply’ approach is that, if all goes well, the supplier offering the lowest cost of supply will also in the long term be the supplier with the lowest price. • Technical competence and quality standards. A supplier who is unable to deliver consistently to the standards specified will eventually cost the buying firm more in quality-related costs than any apparent price saving is worth. • After-sales performance. This includes technical support and back-up, but also refers to willingness to remedy mistakes promptly. • Common goals. An important part of a lean supply strategy is to pursue the common goal of eliminating waste throughout the supply chain. Suppliers who recognise goals in common with their customers are more likely to contribute effectively in this area. Equally, where problems arise a sense of common goals

1 Measuring Purchasing Performance can encourage a partnership approach to overcoming them, and this can mean that both firms benefit from the other’s expertise.

2 • Systems development. Buying firms must have an eye to their own future development. A supplier who already has good systems, combined with a proactive approach to improving them, is more likely to be a satisfactory partner in the long term. ‘Systems’ in this context refers to both manufacturing processes, and information systems such as readiness to adopt electronic data interchange.

The search for lowest cost of supply fits well with modern approaches to partnership relations with suppliers and holds out the best prospect for long-term reduction in costs and consequent competitive advantage.

3 Measuring Purchasing Performance

Specifications (CIPS November 2002)

The first part of the question is pure bookwork, which can be answered directly from the material in Chapter 3 of your Reference Text. You need to use a little imagination for the second part!

(a) There are various different types of specification. Two main categories are performance specifications (sometimes called functional specifications) and conformance specifications (sometimes called design specifications).

With a performance specification, the buyer aims to describe what he expects the part or material to be able to achieve in terms of the functions it will perform and the level of performance expected. It is then up to the supplier to furnish a product which will satisfy these requirements.

With a conformance specification, the buyer details exactly what the required product, part or material must consist of. The supplier may not know in detail, or even at all, what function the product will play in the buyer’s manufacturing. It is his task simply to conform to the letter of the description provided by the buyer.

Performance specifications are more common nowadays. Some of the main reasons for this are as follows.

• They are easier to draft. This is particularly important where the buyer has little technical knowledge of the product. • They place more responsibility on the shoulders of the buyer. If the part supplied does not perform its function the buyer is entitled to redress. • They widen the potential supplier base. If the task is to supply something – anything – that will perform a particular function, the ingenuity and expertise of different suppliers could potentially provide a wide range of possible solutions. Conformance specifications are becoming less common for reasons which are in effect the mirror image of those just listed.

• It can be very difficult to draft a comprehensive description of exactly what is wanted. • Suppliers who conform to the letter of the description are safeguarded in law even if the product supplied does not perform its intended function. The buyer bears the risk of poor specification. • They may well restrict the potential supplier base. It may be that once a specification is tightly defined, there is only one or a small number of suppliers who can cope. In effect, the skill of other potential suppliers will have been specified away. The position is even worse in the (now rare) situations where buyers specify the means of manufacturing the required item. In this case, the buyer assumes a very heavy responsibility (after all, the producer should have a better idea than the buyer of how best to manufacture the item), and closes himself off from manufacturing developments of which he may be unaware.

4 Suggested Solutions to Practice Questions

(b) A conformance specification may be preferable when it is important that the new product is compatible with existing products for manufacturing equipment. Another situation is where very sensitive items are being manufactured, involving very tight tolerances.

A performance specification enables the buyer to take advantage of the supplier’s expertise and ingenuity, and should be chosen when that factor is important to the buyer. Equally, they may be used in cases where the buyer wishes to bring in additional potential suppliers (ie to broaden the supplier base).

Seaman

Memorandum

To: Managing director From: Purchasing manager Subject: Proposals for reducing the level of investment in stock Date:

Introduction

You have requested proposals for reducing the amount of investment in raw materials and finished goods stock. This memo sets out some suggestions.

Analysis of existing situation

A first step must be to examine the current stock levels being held. It may well be that a small number of stock lines account for a high proportion of the value of goods in stock, and management attention should then be focused on those areas in particular. We may have details of this on a perpetual inventory system, but this would be a good time to supplement the perpetual records by means of a physical stock count.

Apart from quantities in stock we should examine the rate of stock turnover for each stock item or each category of stock item. Items which show a very slow turnover are obvious candidates for remedial action: we are probably holding too large a stock of these items.

At the same time we should look out for evidence of damage, deterioration or obsolescence in stock items. Again, such findings would point to a need for action.

Proposals for system improvements

For the future we should implement a planned programme of stock control based on an ABC analysis. The meaning of this is that items should be classified as categories A, B or C depending on the extent to which they contribute to overall investment in stock, category A being the items of greatest value.

Once this has been done we can pay particular attention to category A items, with reduced controls for category B items and only minimal controls in respect of category C.

The measures to be taken could include any or all of the following.

• Consider opportunities for rationalisation and variety reduction – we may be holding small quantities of many different, but similar components, which could all be replaced with a single small quantity of a standardised component. • Consider opportunities for just in time production and purchasing – this will involve close liaison with a small number of suppliers, selected for their ability to meet very tight quality and delivery requirements. Even if full just in time principles are not achievable, we can at least encourage shorter lead times from suppliers, cutting down our need to hold safety stocks.

6 Suggested Solutions to Practice Questions • Consider opportunities for holding stock in suppliers’ premises, or for arranging delivery from suppliers direct to point of use or to our customers without passing through our stores. • Review control levels associated with each item of stock. This includes minimum and maximum stock levels, reorder levels and reorder quantities. Consider using the economic order quantity model for appropriate stock items.

Conclusion

By a systematic review of existing practices and systems, and adoption of the above recommendations, I believe that a significant reduction can be achieved in the amount of capital tied up in stock. I will be happy to discuss these recommendations in more detail if you wish to do so.

Holding costs and acquisition costs

This is a mainstream topic in this area of the syllabus. As you would expect, it is extensively covered in the literature. For further reading try either of the following.

• Purchasing and Supply Management, by Dobler and Burt (the chapter on inventory management) • The Management of Business Logistics, by Coyle, Bardi and Langley (the chapter on inventory in the logistics system).

(a) Stock holding costs include the following elements.

• The cost of capital tied up in the stock. The point is that if less stock is held, cash can be freed up and used in alternative (more productive) ways. The profits lost by reason that the cash is tied up are an opportunity cost of stockholding. • Storage costs. The more stock is held, the larger is the requirement for storage space, handling equipment, stores personnel etc. All of these factors involve expense. • Insurance costs. The higher the level of stock, the higher its value, and consequently the higher the premiums payable to insure it. • Obsolescence and deterioration. Stock in storage is subject to damage, pilferage etc. Moreover, if large quantities of a particular stock item are held it is that much more likely that some units will have become obsolete or will have deteriorated before the time comes to consume them. Stock acquisition costs include the following elements.

• The staff costs of personnel involved in buying stock. • The operating and supplies costs associated with reviewing suppliers, placing orders, expediting etc. • The cost of computer time, telephone calls etc involved in placing orders. (b) In general, the costs of acquisition suggest that orders should be kept to a minimum (implying large order quantities, and high buffer stocks), while stock holding costs suggest that only limited buffer stocks should be held (implying frequent orders of small quantities). A third type of cost – the cost of stockout, including intangible factors such as lost customer goodwill – suggests that buffer stocks are worth having.

It is not easy to reconcile these conflicting indications. Conventional stock holding policies concentrate on minimising the overall costs associated with stocks. A key element in achieving this is the concept of the economic order quantity – the order quantity (and hence frequency) which minimises the total of holding and acquisition costs.

8 Suggested Solutions to Practice Questions This is fine as far as it goes, but in recent years firms have become more ambitious. Rather than minimising the costs of stock, they seek to eliminate such costs completely. This is the basis of just in time purchasing and production.

In conventional terms, such a policy entails high risks. The problems of not holding buffer stocks of materials can be very serious if a production line halts because materials are not available. So can the costs of stockout if buffer stocks of finished goods are not held. However, with careful control of the entire supply chain many companies are finding it possible now to dispense entirely, or almost entirely, with buffer stocks, following the principle that ‘inventory is evil’.

Much depends on the state of a firm’s existing supply chain. Unless complete reliance can be placed on firms upstream it is likely that buffer stocks will continue to create costs. However, experience so far suggests that increasing use of modern techniques of supply chain management can eventually eliminate such costs.

New supplier (CIPS May 2002)

(a) There are a number of factors that a buyer must consider when evaluating a potential new supplier. Some of these are captured in the mnemonic FACE 2 FACE: fixed assets, financial stability, ability to deliver, ability to work cooperatively, cost, commitment to quality, efficiency, environmental considerations. This indicates that stability and performance are important factors, but not the only ones that should be considered.

In relation to stability, the buyer needs to know that the supplier will stay in business for the foreseeable future. Otherwise, the process of supplier selection will have to be undertaken all over again. The accounts of the supplier are an obvious source of information on this point. Apart from the profit and loss account and balance sheet, the accounts will also include a cashflow statement, which contains important information on how successful the supplier is at generating funds from operations. Another useful source of information on financial stability is a report from a credit reference agency such as Dun and Bradstreet.

In terms of performance, ability to deliver can be tested by seeking references from existing customers of the supplier. The buyer will also want to look at some of the output produced by the supplier to ensure that it meets quality standards. The supplier’s commitment to quality is also important, and will partly be evident from the control systems they have in place (eg statistical process control, total quality management systems). Do they have ISO 9000 certification? The buyer will also be concerned about the supplier’s efficiency. The supplier’s published accounts will contain information permitting calculation of efficiency ratios, eg speed of stock turnover, speed of collecting debtor balances etc

(b) The accounts of a supplier are an important source of financial information. The profit and loss account indicates the level of sales, the gross and net profit margins achieved, and the general cost structure of the business.

The balance sheet provides information on the short-term liquidity of the business (net current assets) and also on its long-term solvency (gearing ratio). The level of fixed assets may also indicate capacity to operate at a sufficiently high level of output.

Finally, the cashflow statement will show how effective the business is at generating funds from operations, and whether sufficient cash is available to finance the company’s plans.

Winterburn

This is an open-ended question, where you must select the ratios you think most appropriate. Structure your answer by dividing it into a few key areas: profitability, liquidity and efficiency.

You will find it helpful to begin by reconstructing the company’s profit and loss accounts for the two years, to the extent that this can be done from the information available.

Profitability

Profit and loss accounts have not been given but can be reconstructed in part.

20X4 20X3 £000 £000 Sales 1,600 1,150 Cost of goods sold 1,196 880 ______Gross profit 404 270 Expenses 194 ===== _____ Net profit 210 ===== Gross profit percentage is as follows.

Gross profit Sales × 100

20X4: 25.25%

20X3: 23.48%

Return on capital employed is as follows.

Gross profit/(Share capital + reserves) × 100

20X4: 404,000/888,000 × 100 = 45.50%

20X3: 270,000/628,000 × 100 = 42.99%

(Average capital employed should be used but year-end figures have been taken so that a figure for 20X3 can be computed. Also, we should use profit before tax rather than gross profit, but this figure is not available for 20X3; therefore, to ensure comparability we have used the gross profit figure in both years.)

The ROCE figures have been computed in a rough and ready fashion but they indicate a high level of return in both 20X3 and 20X4. The gross profit percentage shows a slight improvement. This is encouraging as the sales have grown considerably – an increase of 39 per cent over the 20X3 level.

Liquidity

The current ratio is as follows.

Current assets Current liabilities

984,000 650,000 20X4: = 1.5

580,000 350,000 20X3: = 1.7

The quick ratio is as follows.

Current assets - stock Current liabilities

444,000 650,000 20X4: = 0.7

440,000 350,000 20X3: = 1.3

Both ratios have shown a decline – particularly the quick ratio. Conventional opinion states that for many businesses an ideal current ratio is 2 and an ideal quick ratio is 1. However, the ideal ratio will depend on the type of business of a company. More important is the constancy of the ratio over time (assuming that the ratios reflect the efficient use of working capital).

The decline should not be viewed with alarm, particularly as the 20X3 figures include current assets which were surplus to the working capital requirements of the business at that time, ie the investments and cash. Both these items have been spent in purchasing new fixed assets. The quick ratio is, however, now low and should be watched carefully.

Efficiency

Stock turnover is

Cost of sales Year - end stocks

1,196,000 540,000 20X4: = 2.2 times

880,000 140,000 20X3: = 6.3 times

Year-end stock has been taken so that the 20X3 figure can be computed.

There is a very significant fall in stock turnover. This may indicate that the growth in sales has been made by offering many more types of shoes, some of which are not selling quickly. Or possibly it may indicate that further growth in sales is expected so that the company has stepped up production to anticipate this.

A closer look at this area would be required.

The debtor collection period is

Year - end trade debtors Sales × 365

444,000 1,600,000 20X4: × 365 = 100.4 days

170,000 1,150,000 20X3: × 365 = 54.0 days

Collecting debts in 54 days is not very impressive; 100 days is potentially disastrous. Immediate action is required to ensure prompter payment although the situation may not be as bad as it appears if it is the case that the growth in sales took place shortly before the year end rather than throughout the year. Debtors at the year end would then not be typical of the sales throughout the whole year.

Key areas (CIPS May 2002)

REPORT

To: Director of purchasing From: A Student Date: XX/XX/20XX Subject: Supplier appraisal

This report aims to define what is meant by supplier appraisal, and to describe three key areas to investigate when appraising suppliers.

Definition of supplier appraisal

Supplier appraisal is the process of vetting potential suppliers prior to awarding contracts, with a view to ensuring their suitability.

Key areas to investigate during supplier appraisal

A supplier appraisal should cover a large number of supplier attributes, but most of these can be gathered conveniently under the headings of financial stability, technical capability, and environmental/ethical standing.

Financial stability

If there are doubts about a supplier’s financial stability the supplier should be eliminated from consideration at an early stage. This is because we, as buyers, cannot afford the possible consequences of financial problems with the supplier (eg the possibility that the supplier will be unable to meet his obligations to us).

The most accessible source of information about a supplier is the published financial accounts. These should be supplemented if possible by internal management accounts prepared by the supplier, and also by comparison with the accounts of similar companies. It is also worthwhile to carry out a credit check on the supplier from one of the established credit agencies.

Technical capability

Clearly we need to ensure that the supplier is technically capable of meeting our needs.

We need to assess the quality of management within the supplier company to obtain assurance that adequate planning and resourcing will be applied to fulfilling our requirements. We need assurance also on the quality of the supplier’s operational systems; among other things, we will ask whether the supplier has been accredited under ISO 9000 or other appropriate standards. We will be concerned about the

15 Measuring Purchasing Performance supplier’s ability to implement modern best practice, eg in electronic data interchange, statistical process control etc.

Environmental standing

We will be concerned with the potential supplier’s environmental and ethical credentials, because any failing in this respect may reflect on the supplier’s business contacts, including ourselves. We are also concerned simply because we recognise an obligation to maintain and improve general environmental and ethical standards throughout industry.

We would request copies of any ethical and environmental policies published by the potential supplier, and would also inspect the published accounts to search for any stated commitment to ethical and environmental aims. We would ask whether the potential supplier adheres to the Ethical Trading Initiative.

Conclusion

In appraising potential suppliers we should consider financial stability, technical capability and environmental standing.

Proactive (CIPS November 2002)

The view of purchasing as a clerical and administrative function, responding to the requests of user departments as they arise, is now seen as inadequate. To improve organisational effectiveness and efficiency, and to maximise the profit earned by the business, purchasing departments must now pull their weight by acting in a planned and proactive way.

• The most obvious benefit of a proactive approach is a financial one. At the most basic level, if purchasing merely respond to a requisition when it arises there will inevitably be a measure of urgency about it. This immediately places buyers in a disadvantageous position: they may be forced to limit their search to suppliers who are able to react quickly and will have to accept the price they charge. Foreseeing the need, instead of merely reacting to it, removes this pressure. • A related benefit is concerned with researching the market. Buyers can improve their performance by taking full advantage of all information available on market and supply conditions. This enables them to select the suppliers and the modes of supply that best meet organisational objectives. This is unlikely to be possible without forward planning. • Early involvement in the design of new products is another area where purchasing staff are able to make a contribution. It is said that most of the eventual costs of a product, and most of its quality features, are in effect fixed at the design stage. To minimise costs and maximise quality it is vital to get the fullest input from all relevant functions, including purchasing, at this stage. And purchasing’s involvement with quality issues is ongoing: once products are in production, it is a responsibility of purchasing to ensure that outside manufacturing (ie the inputs from suppliers) is of the right quality. This they should achieve by a planned programme of supplier quality assurance. • Perhaps the most crucial contribution of purchasing is in the selection and management of suppliers. Modern thinking emphasises the importance of long- term relationships founded on trust and cooperation. The role of adversarial tactics based on a wide supplier base is nowadays regarded with suspicion. The new model suggests that a close link should be forged for the long term between buyer and supplier. The buyer should research potential suppliers thoroughly, usually including a site visit. Once a supplier has won approval, the objective should be to trade with that supplier over an extended period, working together to minimise waste and maximise profit throughout the supply chain. Quality issues and shorter lead times are as vital as basic price. • Finally, purchasing staff have a leading role to play in the continual task of reducing costs. Apart from basic disciplines in achieving the best possible prices from suppliers, purchasing should also take a part in formal programmes of value analysis and value engineering.

Ensuring supplier quality

Modern approaches to supplier relationships emphasise quality rather than short-term cost, not (obviously) because cost is unimportant, but because ignoring quality can itself lead to costs that outweigh any short-term savings.

As the question suggests, purchasing staff have a role to play particularly in the two areas of supplier selection and supplier management. However, you might also identify other areas, such as the preparation of specifications and new product development, where purchasing can contribute. These areas are discussed in part (b) of the solution below.

(a) Sourcing from the right suppliers is a key element in achieving quality objectives, and of course is a task which falls within the province of the purchasing department.

Selection of suppliers

To begin with, appropriate selection of suppliers should be considered. The following factors are relevant.

In most cases of major purchases, a number of suppliers will have been invited to make supply proposals. A first step in which purchasing expertise can play a part is in the analysis of the proposals. Certainly each proposal to be considered should indicate how quality objectives are to be achieved; this requirement would have been made clear in the invitation to submit proposals.

Purchasing staff should review what the proposals have to say under this head, with the objective of screening out proposals which do not give satisfactory evidence of capability. A less likely danger is of bidders over-specifying quality procedures, but this too should be screened because of the unnecessary costs it will incur.

Another stage in which purchasing staff can contribute is in the analysis of product test results. It is normal, before purchasing items, to test them – either internally, or by use of a specialist outside firm. Indeed, this stage may well precede the invitation of bids from selected suppliers. Clearly, the tests should be designed to ensure that the buyer’s quality objectives are satisfied.

Finally in the area of supplier selection, a capability survey can be used to select from the shortlist of suppliers whose proposals have survived the initial analysis. Clearly the expense involved is justified only in the case of major purchases, but in such cases the impact on quality may dictate that a capability survey is essential. Purchasing staff will inevitably form part of the team conducting the survey.

Management of suppliers following selection

Selecting the right suppliers is of course only the beginning. Managing the relationship is also essential to maintaining quality standards. Purchasing staff can contribute in the following areas.

19 Measuring Purchasing Performance • First, buyers should monitor suppliers’ performance carefully, and ensure that early discussion takes place if problems are identified. This depends crucially on close liaison with production staff.

20 Suggested Solutions to Practice Questions • Purchasing staff should bring about circumstances in which suppliers are motivated to operate strict defect prevention systems, such as statistical process control. This can be done partly by such strategic means as fostering long-term partnership relationships, because this encourages suppliers to aspire to continuing business from the buyer. It can also be helped by public marks of recognition when high quality is achieved. (b) Other areas where purchasing staff can contribute to quality are in the preparation of specifications and the development of new products.

Preparation of specifications

It is the task of purchasing staff to ensure that quality requirements are stated beyond possibility of ambiguity in the specifications sent to suppliers. They should also conduct whatever investigations are necessary to ensure that quality and cost considerations are properly balanced. Finally, they should ensure that specifications are drafted in such a way as to permit the widest possible competition among suppliers.

New product development

The broad approach to be recognised here is conveniently summarised in the phrase EPI or early purchasing involvement. Purchasing specialists, provided they are involved sufficiently early, have an important role in ensuring quality – and in keeping costs down.

Particular contributions that purchasing can make are listed below.

• assisting in the development of objectives for the new product, including price, performance and quality. All of these depend crucially on factors in the supply market • review of designs so as to comment on the specification in terms of availability and price of parts from suppliers • providing advice on the commercial implications of different design options • preparation of purchase description to enable potential suppliers to understand exactly what is required.

Vendor appraisal

This is based on a past examination question.

The examiner’s analysis of the question highlights the following aspects which are developed in the solution below.

• Vendor appraisal: inspection methods, housekeeping, management competence and attitude to quality, plant. • Maintaining performance standards: periodic visits, feedback on performance, vendor rating.

(a) Although the terminology in this area is somewhat confused and inconsistent, the term ‘vendor appraisal’ is usually taken to refer to evaluation of potential suppliers, while ‘vendor rating’ refers to a continuous process of appraising existing suppliers. On this interpretation, part (a) of the question refers to vendor appraisal, and part (b) to vendor rating.

A systematic approach to vendor appraisal involves a use of checklists. These should incorporate the main features on which a decision between suppliers is to be made; traditionally these include price, quality, delivery times, service and financial stability.

However, these criteria are somewhat vague unless they are supported by more detailed analysis. This is usually arrived at by means of some or all of the following procedures.

• Preliminary surveys – to establish basic information about potential suppliers, such as bank and credit references, latest financial accounts, site locations, size etc. The purpose here is to eliminate suppliers who are unlikely to merit further investigation. • Review of financial condition – again, the objective is to shorten the list of suppliers who will make it to later stages of evaluation. Any evidence of poor financial stability suggests a danger of weak management, and/or quality shortcuts. • Site visits – to acquire the detailed information that will enable a final decision to be taken. Conducting site visits is a time-consuming and expensive procedure, and this is the reason why they should be kept to a minimum by suitable advance screening procedures. However, once a supplier has reached a shortlist, a site visit is probably essential. The following areas, amongst others, will be evaluated, again using a prepared checklist to ensure completeness of coverage.

• Inspection methods. Obviously this is a key factor in ensuring the objective of quality. It is important to check during the visit what controls are actually in operation; this may differ significantly from what managers believe the system to be. • Housekeeping. Dobler and Burt (in Purchasing and Supply Management) state that ‘good housekeeping tends to be an indication of 22 Suggested Solutions to Practice Questions efficiency’ and suggest that buyers ask questions such as ‘Is [the plant] clean and well organised?’, ‘Are the machines clean’, ‘Are the tools, equipment and benches kept orderly and accessible?’.

• Management competence and attitude to quality. This is particularly important when the proposed purchase is of a high-value item made to the buyer’s specification, rather than an off-the-shelf product. • Plant. Buyers will be impressed with plant that is modern and in good operating condition. Output rates and consistency in holding tolerances are also important. • Just in time capability. It may be essential for the buyer that suppliers can maintain just in time production and delivery, and this too is an area to be evaluated during the site visit. (b) Once suppliers have been selected it is of course vital to ensure that their continuing performance matches the original expectations. Three measures that can help in this area are periodic visits, feedback on performance (particularly from production management in the buying firm), and formal vendor rating.

• Periodic visits are an important method of fostering good buyer-supplier relations, as well as a check by the buyer that quality standards and procedures are being maintained. • Feedback on performance is of course available from within the buying firm. Buyers must ensure that they have appropriate channels of internal communication so that any problems are brought to their attention quickly. • A number of formal approaches to supplier evaluation (vendor rating schemes) have been devised, in which quantitative measures are applied to both quantitative and qualitative performance criteria. The objective is to arrive at a measure of the supplier’s overall performance, and also to highlight areas where improvements are possible.

Cashflow I (CIPS May 2002)

The supplier has regular cash outgoings of £1,470,000 per quarter, which are barely covered by regular receipts from debtors of £1,500,000. (It appears that all sales are on credit terms.)

This already precarious situation is worsened in the year ahead by two factors.

• In the first quarter, cash receivable from debtors is only £1m rather than £1.5m. • The supplier is planning to spend £0.75m in Quarter 2 to finance new capital purchases.

The effect of all this is that an opening cash position of £1m (favourable) is expected to turn into a cash deficit of £130,000 by the end of the year. This arises from deficits in Quarters 1 and 2 of £470,000 and £720,000 respectively, which are only partly made up by surpluses of £30,000 in each of Quarters 3 and 4. If the pattern of Quarters 3 and 4 continues indefinitely it will be about 15 months after the year end that the business eventually returns to a positive cash balance.

Castle (CIPS May 2001)

(a) The term ‘partnership sourcing’ has been defined as ‘a commitment by customers/suppliers, regardless of size, to a long-term relationship based on clear mutually agreed objectives to strive for world class capability and effectiveness’.

The relationship described in the case study between Castle Bookshops and London Press is not remotely of this kind.

• There is no ‘commitment to a long-term relationship’. Indeed, Castle’s letter, while indicating that there may be a long-term future based on exclusive rights to sell LP’s books, is calculated to do great damage to the relationship. Castle appear to have informed LP of the new terms and conditions without any of the ongoing discussions that would characterise a partnership relationship. • The relationship is not apparently ‘based on clear mutually agreed objectives’. In fact there is no indication in the case that they have discussed mutual objectives at all. The fact that their business dealings are frequent does not modify their essentially transactional nature. • There is no indication in the case that the two parties are determined ‘to strive for world class capability and effectiveness’. On the contrary, each party seems content to muddle along in a ‘warm and rather comfortable relationship’, which is the antithesis of the striving for continuous improvement characteristic of partnership relationships. If the relationship were genuinely of the partnership type we would expect to see some or all of the following features.

• Joint planning for the future. Both parties appear to have been taken aback by the effects of technological developments. Neither seems to have considered what form such developments might take and what implications they might have for business. • Greater transparency. It is inappropriate in a partnership relationship to take such unilateral action as Castle have done. Similarly, we are told that ‘LP … have spent the past couple of days planning their next move’, which suggests that instead of discussing the matter openly with Castle, they are regarding the situation as a kind of war game. • Greater discussion of mutual objectives. Castle and LP should be discussing the impact of internet-based trading and agreeing on how they should (jointly) react to it. • Greater efforts to eliminate wasteful activity along the supply chain. At present, there is evidence of sloppy trading practice. For example, Castle apparently think nothing of asking for single copies of texts, without any effort to aggregate orders. And similarly LP apparently have no aims to achieve the same-day despatch service that is routine with internet booksellers. (b) Castle’s despatch of the letter is likely to have a damaging, even destructive, effect on the relationship with LP. To salvage the relationship it will be important for LP to respond in a positive way, particularly by way of emphasising the ways

26 Suggested Solutions to Practice Questions in which both parties stand to gain by continuing the relationship. No doubt Castle are only one bookseller among many who stock LP books, and no doubt LP are only one publisher among many whose books Castle stock, but even so there are reasons for not wishing the relationship to be damaged.

• In the UK, most booksellers and publishers are linked by common technology. For example, booksellers use online publishers’ catalogues to assist customers with their queries and to place orders. With this infrastructure already in place it will be a waste if Castle do not continue to deal with LP. • There is goodwill and common understanding between the two parties built up over many years. This can lead to greater openness in future dealings, but will be wasted if the relationship ceases. • At present, we are told that Castle ‘are a major route to market for many publishing companies’, including LP. Both parties have been ‘making a satisfactory profit from their mutual interest in meeting the need for academic texts’. These advantages will be lost if the relationship ceases. • Both firms have good market and product information, which they can share for mutual benefit if the relationship is preserved (and especially if it is enhanced in the direction of true partnership).

Appraisal

Make sure you distinguish appraisal clearly from other HR terms (such as job evaluation, job analysis and performance management): this may sound obvious, but it is a cornerstone of exam technique to ensure that you are answering the question actually set. We have discussed some key trends in part (b). If you are stuck, think about what aspects the person is being appraised on and who is doing the appraising: this accounts for most of the recent trends.

(a) Appraisals may be regarded as a waste of time primarily because they fail to achieve meaningful purposes.

• The objectives of the system may be unclear or conflicting. A system used purely to justify pay and promotion decisions will focus on past performance and be judgemental in nature: a system aimed at problem- solving and future improvement will be quite different. A single system is unlikely to achieve both objectives. • Appraisers may be reluctant to perform their responsibilities conscientiously because interviewers have difficulty handling the interpersonal aspects of negative feedback. ‘Managers are uncomfortable when they are put in the position of playing God’ (McGregor). The appraiser’s own experience, and the culture of the organisation, may suggest that appraisal is time-consuming, difficult and fruitless. • Appraisees may be defensive and suspicious of the objectives of the appraisal, especially if they perceive it to be a purely judgemental exercise. • Criteria for assessment may vary from appraiser to appraiser. Unfairness or lack of consistency will be perceived by appraisees, and there will be uncertainty in the minds of assessors as to what they are supposed to be assessing. • Feedback on performance is an on-going process: formal appraisal may be perceived as superfluous ‘window-dressing’. • There may be no post-appraisal action (in terms of training and so on), so a low opinion of its usefulness will be perpetuated. (b) In most new methods, appraisal techniques are regarded as proactive tools for performance improvement and problem-solving, rather than retrospective judgements. Personnel are assessed on value-adding outputs rather than inputs or processes. Many of these methods also emphasise that there should be collaboration with the person being appraised.

Performance management is a process of continuous collaborative planning and control, in which managers and individuals or teams jointly set key accountabilities, objectives, measures and priorities for performance and performance improvement, and review and adjust performance on an on-going basis.

• The emphasis of traditional appraisal was primarily retrospective: performance management focuses on the following review period, and on progress towards continuous improvement goals, and is therefore more proactive, forward-looking and stimulating in its orientation.

28 Suggested Solutions to Practice Questions • Appraisals have traditionally been held annually, especially where they are tied in to pay awards. Performance management is an on-going control system, with in-built feedback and review timescales.

29 Measuring Purchasing Performance • Appraisal, at its most positive and solution-focused, can concentrate on the (personal) development and reward aspirations of the employee, at the expense of the need to add value to the business. Performance measurement is more thoroughly focused on performance, through the integration of employee improvement/reward goals with strategic objectives. Job-related criteria are replacing personality-based appraisal systems. Job- related, or results-based, systems take as their criteria for assessment factors defined as being important for successful job performance. Depending on the approach used, these may be based on critical incidents, key results or competencies, as derived from job analysis, competency definitions or the plans, targets and standards set for the individual or unit.

• Job-related criteria can be more accurately defined and measured, enhancing both the perception that appraisal is fair and relevant and its effectiveness in addressing genuine performance issues. • Job-related criteria are more objective, and are therefore more readily justified and subject to discussion between the appraiser and appraisee. • Job-related criteria are more directly related to accountabilities, and the process is therefore likely to be taken more seriously by managers. Multi-source feedback systems are replacing downward appraisal. Upward appraisal (where managers are appraised by the people who work under them), customer appraisal (where individuals are appraised by the internal and external customers they serve) and self-appraisal (where the individual is encouraged to develop self-insight) are increasingly used. They are particularly valuable where criteria such as leadership and customer service are concerned, as they give the end-user’s viewpoint. 360-degree feedback encourages feedback from a range of these sources: since results are aggregated by a facilitator, feedback is anonymous and therefore less subject to suspicion and pressure than upward or peer appraisal. Multi-source feedback also has the benefit of encouraging multi- directional communication about performance issues, which may have knock on benefits for innovation, culture and flexibility.

Job description and person specification

Resist the temptation to write everything you know too early: you would run out of fresh points to make in part (b). Make sure the two documents are distinct in your mind.

(a) (i) A job description is ‘a written statement of those facts which are important regarding the duties, responsibilities [of a job] and their organisational and operational interrelationships.’ (Livy)

The purposes of a job description vary according to the context in which it is used. In the context of recruitment, a job description is used as follows.

• To decide what skills and qualifications are required of the job holder. When formulating recruitment advertisements and interviewing an applicant for the job, the interviewer can use the job description to match the candidate against the requirements of the job. • To inform the candidate of the requirements of the job, in order to aid self-selection and (if the candidate is successful) induction planning. • To match the job to the candidate: ensuring that the job content provides sufficient activity and challenge to satisfy and fully utilise the proposed job holder. • To determine a rate of pay which is fair for the job, if this has not already been decided by some other means. Job descriptions can also be used in other areas of HR management: for job evaluation, induction and training planning, performance appraisal, work study and organisational analysis.

(ii) A person specification (also known as a personnel specification) is a profile of the kind of person the organisation should recruit or develop for a given job. It sets out the education, qualifications, training, experience, personal attributes and competences a job holder requires to perform a job satisfactorily from the organisation’s point of view. A person specification modelled on Professor Rodger’s ‘Seven Point Plan’ (for example) would include detailed specification in the areas of physical attributes, attainments, general intelligence, special aptitudes, interests, disposition and circumstances.

The purpose of the person specification in recruitment is thus to identify the characteristics which are ‘essential’, ‘desirable’ and ‘contra-indicated’ for satisfactory performance of the job, for the purposes of selection screening, interviewing, testing and so on. It enables the candidate to be matched to a set of requirements stated in the same ‘person-centred’ terms as are used in the application form, CV, interview and so on.

(b) Job descriptions and person specifications are both commonly used in the process of recruitment and selection. There is a clear distinction between their nature and functions: a job description focuses on the requirements of a position or job, while the person specification focuses on the qualities of the person

31 Measuring Purchasing Performance required to fulfil those requirements. In addition, the person specification involves the organisation’s aspirations for an ‘ideal’ or ‘desirable’ level of performance in the job, while the job description simply describes tasks and responsibilities.

It has been suggested that job descriptions have been used to define the boundaries of the job in a way that is becoming dysfunctional in flexible work environments. Person specifications may be seen as a less restrictive way of describing what a job involves.

However, the two documents are interdependent within the recruitment and selection process: two perspectives on the same requirements. Job advertising, for example, is likely to state the tasks, responsibilities and conditions of the job (drawn from the job description) and the type of person sought by the organisation (drawn from the person specification). The same information would be required in selection interviewing, and in the formulation of relevant tests.

The person specification is often developed from the job description, redefining its job centred requirements in terms of the ideal job holder. As Professor Rodger suggested: ‘If matching is to be done satisfactorily, the requirements of an occupation (or job) must be described in the same terms as the aptitudes of the people who are being considered for it.’

Training

(a) The disadvantages of the current methods are as follows:

(i) New employees are trained by experienced workers on the job. This means that they are taught the bad habits as well as the standard procedures which those workers employ. Existing workers may resent spending time training inexperienced staff. (ii) An experienced worker will not be an experienced trainer, and many people find difficulty in explaining a familiar routine to someone with little knowledge. (iii) The training for normal work and coaching in new duties takes place during normal operations. It will be subject to interruptions and lack of preparation. (iv) Learning on the job tends to be slower than classroom input followed by a structured experience programme. Therefore the disruption to normal work operations can be extensive and output will suffer. (v) In the purchasing section, managers are available for counselling if problems arise. The onus is placed on the staff to seek advice. This will not succeed where staff feel ‘at risk’ or inadequate in performance. The very people who need counselling are likely to be those who avoid it. (vi) Training ought to be structured, continuous and based on the individual’s capabilities and current level of knowledge. It is unlikely that learning from an experienced worker or supervisor would start with this analysis. (b) Other alternatives are possible, though each will have its own disadvantages.

(i) An alternative could be to designate one or two sections as training sections, selected because the experienced staff are viewed as effective trainers. A possible disadvantage is that specialist work may not be covered by these few sections. Further, these training sections will be able to achieve little production and this may cause resentment among other section heads who have full quotas to satisfy. (ii) Training could be completed by specialist trainers away from the workplace. This would provide a consistent training method based on best practice. However, it will be expensive and it may be difficult to justify specialist facilities and trainers for an intermittent workload. A further disadvantage could be the lack of practical knowledge as the trainers become more involved in training and less in day-to-day production. (iii) The qualified staff in the purchasing section could be developed through a series of specific techniques and personal development courses which could be run in-company. Inevitably there would be disruptions of normal work and the danger of irrelevant topics being explored. (iv) The training programme could be carefully analysed so that basic techniques could be explained and practised away from the workplace, perhaps organised by an industry training service. This would be supplemented by a short period of practical experience in the workplace. The disadvantage of this approach would be the disruption to production and also the phasing problem of getting groups together for each training

33 Measuring Purchasing Performance stage without involving staff in long delays waiting for the next training course.