Nov10 LEVEL 5 MARKING SCHEME. November 2010

Advanced Diploma in Purchasing and Supply RISK MANAGEMENT & SUPPLY CHAIN VULNERABILITY LEVEL 5 L5-02/Nov10 MARKING SCHEME November 2010 ‘Anchoring’...
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Advanced Diploma in Purchasing and Supply RISK MANAGEMENT & SUPPLY CHAIN VULNERABILITY



MARKING SCHEME November 2010 ‘Anchoring’

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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. ANCHORING AN EMERGING SUPPLY CHAIN Background The Government of Boldovia has announced its forward policy statement to develop and manage the country’s petroleum resources. A major challenge will be to attract the necessary network of organisations that supply oilfield related goods and services into the region (the supply chain) and to also keep that supply chain anchored (fixed) once it is there. Anchoring the supply chain in Boldovia will be a key challenge as other world regions are perceived to be more attractive to suppliers. The country's current economic performance is mixed. Perceptions amongst the suppliers considering working in Boldovia are mixed as to whether it will be a stable and attractive business environment. In particular, suppliers have expressed the following concerns regarding supply chain related risks and vulnerability should they decide to enter the region:

Political and Social Uncertainty There are frequent media reports of corruption across the business community and there is disagreement between political parties as to how the economy should progress. Additionally, social cohesion amongst the population and its communities could be better. Business Environment - Planning In terms of the business environment there appears to be no transparency around the Boldovia authorities forward project plans. This makes it difficult for suppliers to justify spending time and money preparing for entering a new country with no certainty over how much business there will be. Contracting Legal and contractual terms and conditions of contract for work in the Boldovia petroleum industry have not been developed to any great extent. Therefore there is great uncertainty around how onerous or easy the region will be in which to do business. Performing and Paying There are often disputes in the region between businesses as to the basis of contract performance, resulting in lengthy payment terms from the authorities to suppliers. Even when there are no disputes - the average payment term is in the region of 90 days which creates working capital and cashflow problems for suppliers, especially those further down the supply chain tiers.

Fortunately some key members of the Boldovia government recognise that new supplier will only commit to the Boldovia petroleum industry if they are encouraged to do so by the reassurance of an attractive future business environment. With this in mind they have established the Boldovia Industry Group (BIG) which is essentially a trade association that has been formed to represent the interests of prospective companies considering working in Boldovia’s emerging petroleum industry. The diverse companies considering entry into the region include: seismic contractors, drilling and well services companies, facilities providers, engineering and construction


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companies, subsea contractors, marine logistics and helicopter transport companies. These are typical of the organisations which will form the supply chain which needs to be anchored in the region, in order to secure the future of the Boldovia petroleum industry. Recognising the enormity of the challenge, BIG has appointed a strategic supply chain advisor to assist in developing the value proposition for the region’s future key contractors and suppliers. He has immediately recommended two supply chain concepts which he considers will help analyse the current position and also help position the region to ensure a more attractive offering to prospective suppliers. The recommendations are: (i)

Conduct a comprehensive analysis of the current position using a well known analytical tool (such as PESTLE)


Develop an industry ’Supply Chain Code of Practice‘ similar to those used effectively elsewhere. Fig 1 gives a high level overview of what the code achieves in making other regions more attractive. The code applies to 3 KEY STAGES with the Commercial process



Better transparency of forward project plans




Standard Contracts


Model Invitation to Tender documents


Seeking bidders / Prequalifying objectively


Use of Key Performance Indicators (KPIs)

30 day payment terms

Fig 1 Example of Supply Chain Code of Practice BIG is now reflecting on the supply chain advisor’s early recommendations and requires further information. 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.


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Assuming the role of the strategic supply chain advisor to the Boldovia Industry’s Group (BIG), respond to the following two questions: Q1

Using the PESTLE tool, analyse the potential sources of risk to suppliers which are considering entry in the Boldovia petroleum industry. (25 marks)

Q1 MARK SCHEME Question aims: To examine candidates knowledge, understanding and application of the PESTLE analysis technique to indicate the key supply chain related risks in trading in a volatile unstable (Boldovia) Syllabus Reference(s): 1.3 Answer content might include: a discussion around the current volatility & unrest in the Boldovia region - grouping the discussion in the following categories

POLITICAL Government pressure to develop and implement new policies which can effect all manner of commercial enterprise from pricing, taxation regime and labour policies to the raising or lowering of trade barriers

ECONOMIC Changes in interest rates for example could completely change the financial equation for a company as costs will alter.

SOCIAL Demographic changes can for example affect customer buying habits and have knock on effects on product categories and stock holdings. Also population movements from areas of high unemployment to areas that are more prosperous.

TECHNICAL Impact of the internet on trading methods for example with purchasing online. Consider here the complexities, risk and related vulnerability e.g. breaches of copy right, intellectual property rights.

ENVIRONMENTAL This covers a whole raft of issues. One example might be to relate transportation to environmental barriers e.g. when trying to ship materials to certain ports it is worth knowing that certain such ports might not be accessible for certain times of the year!

LEGAL World Trade Organisation negotiations can lead to new legislation in all parts of the world e.g. reducing subsidies payable or relaxation on tariff barriers on produce from less developed countries Better answers: will explain how even when risks outside the organisation are severe – some form of control might still be managed. Up to 25 marks - are available for candidate’s that accurately define the six components of PESTLE (7marks) with up to an additional 3 marks being allocated to each example being given for each of six component parts (possible max of 18 marks).

Total 25 marks


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Explain how the introduction of an industry ‘Supply Chain Code of Practice’ would help suppliers to better manage risk and supply chain vulnerability in the Boldovia petroleum industry. (25 marks)

Q2 MARK SCHEME Question aims: To test candidate’s ability to recognise that industry initiatives like the introduction of a ‘Supply Chain Code of Practice’ can help companies better manage risk and supply chain vulnerability. Syllabus Reference(s): 1.7 Answer content might include: Recognition that the overall drive to change behaviour amongst relationships between purchasers and suppliers by improve performance, eliminating unnecessary costs and duplication and adding value and boosting competitiveness. The principles of the code try to encourage the creation of a more attractive sustainable business environment to keep key contractors anchored in the Boldovia region. Effectively meaning working in partnership with customers for a more sustainable, competitive and long term future for the region. Giving you the ability to determine who are your customers of choice Working with customers committed to ethical behaviours and fair principles

Better answers will bring out ‘What’s in it for suppliers?’ Code signature enables access to valuable information on purchasers forward work plans (PLANNING) Gain market intelligence. Save time & money when bidding for work by cutting repetitive pre-qualification and receiving industry standard ITT’s and contracts (CONTRACTING) Know which customers are committed to meeting the 30 day payment target (PAYMENT) Having greater certainty over customer performance expectations (through KPI - PERFORMING) (Up to 25 marks available) Total 25 marks


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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


Discuss why organisations need to raise risk awareness throughout the organisation and related supply chains. (10 marks)

Q3(a) MARK SCHEME Question aims: To test candidate ability to give a sound rationale as to why risk awareness is important both within organizations and cascaded into supply chains upon which those organisations rely. Syllabus Reference(s): 2.4 Answer content might include: A reasoned discussion around risk management being embodied within an organisation - making staff aware of risks can help to reduce them. Assigning ownership to monitor and control risks is important The discussion should also capture monitoring risks with suppliers putting in place obligations on them to be risk aware etc. (Up to 10 marks available) Total 10 marks Q3


Explain THREE ways in which companies can improve their risk awareness. (15 marks)

Q3(b) MARK SCHEME Question aims: To test candidates knowledge and understanding of different methods to raise risk awareness Syllabus Reference(s): 2.4 Answer content might include: Possible methods to consider building into a risk management process to raise risk awareness are:

• • • • • • • • •

Training from induction onwards Self assessment (CRSA) or health checks Audits - external / internal Cross functional review teams Quality circles Risk registers Broad network of contacts / forums Rewarding and publicising good practice risk identification Changes in responsibilities to dispel complacency Up to 5 marks will be available for a good description for each of any three methods Total 15 marks


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Discuss the main features of a basic risk register for a purchasing and supply function to help reduce risk and vulnerability. (25 marks)

Q4 MARK SCHEME Question aims: To test application of knowledge of the design ad features of risk assessment registers. Syllabus Reference(s): 2.6 Answer content might include: A description/definition of a risk register and its constituent components e.g.: item reference (external / internal… etc); answers are not expected to identify and define each item; however they should demonstrate an awareness that one should be included within the risk register • description • date identified • date last reviewed • owner • description of potential impact • likelihood of impact • classification of risk • potential mitigating actions • date of next review. In developing a risk register it is essential to involve the right people and get their input and buy-in on what should be included. The risk register assessment tool needs to be established in conjunction wit the team- involving a review of all aspects of the facility and likely areas of hazard/disruption /risk. Risk also registers need to be logged by a manager and regularly reviewed. Risk registers should also be kept as separate document, accessible by all members of the team. Each risk identified should be attributed to an ‘owner’ whose responsibility it is to monitor the risk and update the register accordingly. Regular reporting on the contents of the risk register is important as part of monitoring, review and escalation. Up to 20 marks to be awarded for appropriate risk register features being discussed; though it is expected that individual’s approaches to the answer may vary. Better answers will acknowledge the need to engage the right people in preparing the risk register to ensure a better chance of buy-in and ultimate risk reduction, changing behaviours etc. (Up to an additional 5 marks will be available for this)

Total 25 marks


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Discuss the importance of comprehensive supplier evaluation in order to minimise risk when selecting critical suppliers. (25 marks)

Q5 MARK SCHEME Question aims: To test candidate knowledge and understanding of supplier evaluation techniques at tender stage and being able to identify the benefits and value. Syllabus Reference(s): 3.1 Answer content might include: The supplier evaluation criteria might include some of the following factors : Tender price Financial stability Track record of previous similar work Method statement for undertaking the work Resource plan Available capacity, resources and technical expertise to undertake the work (including professional qualified staff) • Familiarity with the clients culture • Project management capability. • Security of performance • Sub-contract and supplier management capability • Health, safety and environmental and security capability and policy and procedures developed Each bidding company will have varying degrees of acceptability under each of these criteria. (Up to 20 marks will be available for this) Better answers will comment on the value & benefits that this type of criteria bring in terms of helping to reduce risk and vulnerability. This information is essential to be able to differentiate between the tenderers to arrive at a final decision. Some form of ‘weighting’ system will be needed to determine the relative importance of different criteria will be essential. (Up to an additional 5 marks ill be available for this)

• • • • • •

Total 25 marks


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Discuss why developing contingency plans can help an organisation overcome unexpected risk situations. (25 marks)

Q6 MARK SCHEME Question aims: To test candidate knowledge and understanding of why developing contingency plans can help organisations overcome unexpected risk situations. Syllabus Reference(s): 3.3 Answer content might include: A general discussion around having a fall back position ready in case something goes wrong. There are varying extremes – for example being prepared for the worst possible emergencies or unexpected risk situations that can be thought of and then trying to plan beyond that to situations that we think do not think will ever occur – similar to scenario planning (What if ?). At the other extreme, crises may emerge which require more than the normal management response to contain them but are not a full blown emergency. Disaster recovery and contingency planning covers these extremes and everything in between. (Up to 5 marks available for this element) Developing such plans help overcome unexpected risk situations by: Overcoming operational or organisational crises Avoiding loss of business continuity Maintaining service or product delivery Ensuring alternative personnel and / or resource is available Better answers will recognise that significant readiness to respond effectively to crises can be achieved through organisations:

• • • •

• • • • •

Identifying and evaluating or brainstorming possible risk scenarios Reviewing internal and external control to mitigate the risks Having response procedures in place – who does what, where and when ? Having in place operational control mechanisms Testing the plans & training personnel (Up to 20 marks will be available for this element) Total 25 marks



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