July 2013

Q3 Evaluate the key long term sources of finance that may be available to a large public
limited
company (plc). (25 marks)

Q4 Appraise benchmarking as a concept to improve an organisation’s supply chain processes. (25

marks)

November 2013

Question 3 – Learning Outcome

3.3

(a) Define the term “commodities” and distinguish between hard and
soft
commodities (15 marks) (b) Explain the use of future contracts when
buying commodities (10 marks)
(25mark
s) Overall this was the best answered question on the paper.

Part (a) The learning objective assessed by this

question was 3.3

Candidates needed to look at the three parts of the question. First the definition, a commodity
is a product, which is of uniform quality and traded across various markets. They are
unbranded and undifferentiated products and services that are considered to be the same in
nature no matter the source and supplier. They tend to be primitive products such as raw
materials in their basic state as the more refined the less undifferentiated they become. These
commodities are traded across markets situated in different corners of the world through
commodity exchanges such as the New York Mercantile Exchange, the London Metal
Exchange, etc. This attracted up to five marks.

In the second and third part of the question, candidates could have provided an examination
along the lines of there are generally two types of commodities, ‘hard commodities’ and ‘soft
commodities’.
Hard commodities include crude oil, iron ore, gold, and silver and have a long shelf
life.

Agricultural products such as soybean, rice or wheat, are considered ‘soft commodities’ since
they have a limited shelf life. These commodities have to be similar and interchangeable or
‘fungible’. For example, soybean from one country or market should be of the same quality
wise as soybean from another, or gold in one country should be of the same purity as gold
from another. Most candidates referred to the key differences in these two categories (hard
and soft) is the sensitivity of soft commodities to spoilage, which changes the way the
commodities prices behave for this area, and marks were awarded accordingly on the basis of
five for hard and five for soft making a total of 15 for part (a).

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Part (a) was well answered with a definition resembling the above definition together with a
clear examination of hard and soft commodities.

Part (b) The learning objective assessed by this

question was 3.3

A slightly more technical question, where at Level 6 some responses were disappointing in
length (some 1 or 2 lines) and quality. There was also an element of incorrect explanation e.g.
some candidates misunderstood the essence of a futures contract by saying that the price is
not agreed; therefore this report goes into some detail for future revision purposes. Candidates
could have started part (b) with an overview that commodity buying is price volatile, which
encourages the use of “futures contracts” to mitigate the impact of price fluctuations in the
future. A futures contract is a standardised contract between two parties to buy or sell a
specified asset of standardised quantity and quality for a price agreed upon today (the futures
price or strike price) with delivery and payment occurring at a specified future date, the delivery
date. The contracts are negotiated at a futures exchange, which acts as an intermediary
between the two parties. The party agreeing to buy the underlying asset in the future, the
"buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future,
the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the
parties—the buyer hopes or expects that the asset price is going to increase, while the seller
hopes or expects that it will decrease in near future. “Call” and “Put” options are also terms
used for the above rights to buy or sell. While the futures contract specifies a trade taking place
in the future, the purpose of the futures exchange institution is to act as intermediary and
minimize the risk of default by either party. Thus the exchange requires both parties to put up
an initial amount of cash, the margin. Additionally, since the futures price will generally change
daily, the difference in the prior agreed-upon price and the daily futures price is settled daily
also (variation margin). Both parties of a futures contract must fulfil the contract on the delivery
date. The seller delivers the underlying asset (commodity) to the buyer, or, if it is a cash-settled
futures contract, then cash is transferred from the futures trader who sustained a loss to the one
who made a profit. Hedging, commodity options and a contract for difference and derivatives
were also discussed in the explanation of futures contracts.

This is a broad summary and the marks available were 10, and although candidates did not
need to hit every point they did need to look at some of the above together with related areas
such as

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compatibility with lean supply chain practices. This was a technical question and candidates
linking the broad aspects of futures with commodity buying scored well. Stronger candidates
who give a detailed explanation scored very well-at times the maximum 10.

Question 4 – Learning Outcome

4.1

(a) Explain why cash flow analysis is important when reviewing a

potential
supplier’s financial performance. (12 Marks) (b) Evaluate the
use of cost-based metrics in assessing organisational
performance (13 marks)
(25mark
s) The learning objective assessed by this question was 4.1

Overall the standard was good with the majority of candidates scoring a pass mark. Most
candidates demonstrated an understanding of cash flow analysis and the benefits of
undertaking the analysis. Although the question specifically referred to cash flow analysis, a
broad approach was taken by the marking team which reflected credit where candidates
considered areas such as liquidity, the importance of cash and cash flow forecasts or cash flow
statements. Many candidates were able to observe that in performing a cash flow analysis a
cash flow statement normally needs to be reviewed. A cash flow statement is an integral part of
the statutory or final accounts of an organisation. It is vitally important as it focuses on the cash
movements which have occurred and summarises for the past year both how cash has been
generated and on what cash has been spent or in what it has been tied up. By doing this it
allows a potential buyer to look beyond the resource element of the income statement and
balance sheet and clearly observe how well (or not) a potential supplier organisation manages
its cash. This could be vitally important to a public sector buyer as they are generally unable to
pay in advance and the supplier may need to “fund” at least the early part of the contract. Even
in the private sector, when placing a contract supplier organisations often need to “fund” the
early work so cash will be key as even a profitable organisation can run out of cash if it over
commits itself.

Candidates could link the cash flow statement to the analysis of an organisation’s normal
trading activities where cash is generated by increasing shareholder investment, increased
long term borrowing by loans or debentures, more effective working capital management – i.e.
reducing stock levels, reducing debtors and debtor terms, increasing creditors or creditor
terms.

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The cash flow statement will clearly show how cash is utilised in the purchase of fixed assets,
payment of tax and interest, repayment of long term debts, increasing working capital
requirements. Therefore, candidates should stress that it is important for a potential buyer to
see how cash is being treated. Mark allocation was on the broad basis of an explanation of the
importance of cash flow statement, forecasts, liquidity ratios and candidates covering three or
four areas from above together with a well-rounded examination of the importance of cash,
when appraising suppliers, scored well.

A number of candidates seemed not to read the detail of the question, and based their answer
on ‘financial performance’, and went into other detail, suitable for a more general question on
financial performance rather that the specific requirements of this question, i.e. cash flow
analysis.

Part (b) The learning objective assessed by this

question was 4.1
Candidates could have started this question with an overview of performance and metrics
including the use of “cost based metrics”. Lalonde and Pohlen identified four groups of costs
• Information costs
• Inventory carrying costs
• Physical flow costs
• Transaction costs Approaches to
analysing cost include:
• Direct product profitability(DPP)
• Activity base costing (ABC)
• Total cost of ownership (TCO)

Absorption costing breakdown The above list is not exclusive and the marking
team adopted a wide view of analysing costs giving reward where they could. It is generally
believed that a well-crafted system of cost-based metrics can increase the chances for success
by (along with process-based metrics) aligning processes across the organisation, targeting the
most profitable market segments, and obtaining a competitive advantage through differentiated
services and lower costs. The lack of proper metrics for an organisation will result in failure to
meet consumer/end user expectations. An evaluation was required so answers benefitted from
a look at the negative aspects of cost based metrics such as off the shelf information such as
indices and commodity prices etc. has only limited

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use; therefore each organisation needs to develop its own approach including the approach to
cost- based metrics and this can be time consuming and costly. Finally as this was an
evaluation, an acceptance that costs ultimately relate to prices they can be misleading as
prices move for reasons nothing to do with performance such as inflation, currency fluctuations
and so on. Candidates at times managed to balance the evaluation with some of these
negative aspects of cost based metrics.

A broad evaluation of these sorts of areas was rewarded when linked to the importance of
getting the metrics right and how the use of cost-based metrics can be used by an
organisation wishing to assess its performance. Scoring varied considerably. Most candidates
described positive elements of cost metrics but ignored the risk of not considering other forms
of metrics when measuring performance. Very few candidates made reference to the models
or any academic work. This seemed to be a difficult question for a number of candidates, who
were a little too general in their comments, though as always the better candidates did apply
their answers to the question requirements. Several candidates simply described the various
costs that comprise an organisations cost profile so either did not answer the question or only
did so in an indirect way.

Question 3 – Learning Outcome

3.2

Analyse FIVE factors which could cause exchange rates to

change.
(25mark
s) Overall this was the best answered question on the paper.

At this level a context is normally rewarded and learners could have started this question by
summarising that an exchange rate is a price of a currency. They could even mention that there will be
two exchange rates between pairs of currencies; a selling rate and a buying rate. The price is
determined by the forces of demand and supply in the currency markets. Just like the commodity
markets for wheat, oil and coffee, the price of a currency will reflect the amount of the currency that
consumers and businesses want to buy (demand) and sell (supply).As a guide in any question looking
at prices (including exchange rates) demand and supply will normally attract marks.

Most learners observed that there were many major factors behind exchange rate change and
movements. These can be broadly summarised as demand and supply in foreign exchange markets,
the balance of payments perspective, purchasing power parity, monetary perspective and the portfolio
balance perspective.

Candidates could break down some of these to assess five of these broad factors and the following
headings are given as a guide

1. Differentials in Inflation As a general rule, a country with a consistently lower inflation rate
exhibits a rising currency value, as its purchasing power increases relative to other currencies.
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2. Differentials in Interest Rates Interest rates, inflation and exchange rates are all highly correlated. By
manipulating interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an
economy a higher return relative to other countries. Therefore, higher interest rates attract foreign
capital and cause the exchange rate to rise.

3. Current-Account Deficits / Balance of Payments The current account is the balance of trade
between a country and its trading partners, reflecting all payments between countries for goods,
services, interest and dividends. A deficit in the current account shows the country is spending more
on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the
deficit.

4. Public Debt Countries will engage in large-scale deficit financing to pay for public sector projects and
governmental funding. While such activity stimulates the domestic economy, nations with large public
deficits and debts are less attractive to foreign investors.

5. Purchasing Power Parity The exchange rate moves until parity is achieved. E.g. considering two
different fictitious countries, where 100 dollars from one country buys an item and 50 pounds from a
different country buys the same item, then purchasing parity is achieved when the exchange rates of the
dollar to pound rate is 2:1.

6. Terms of Trade A ratio comparing export prices to import prices, the terms of trade is related to
current accounts and the balance of payments. If the price of a country's exports rises by a greater
rate than that of its imports, its terms of trade have favourably improved. Increasing terms of trade
shows greater demand for the country's exports.

7. Political Stability and Economic Performance Foreign investors inevitably seek out stable countries
with strong economic performance in which to invest their capital. A country with such positive
attributes will draw investment funds away from other countries perceived to have more political and
economic risk. Political turmoil, for example, can cause a loss of confidence in a currency and a
movement of capital to the currencies of more stable countries leading to exchange rate volatility.

Some learners, to good effect, explained the Fisher effect, and even produced some key examples such
as the situation with Zimbabwe’s currency. Many learners also gave a broad purchasers view taking in
areas such as the purchase cost may be beneficial if the currency moves in the right direction but equally
if an adverse move takes place it could leave them in a vulnerable position. However the question was
aimed squarely at the factors which could cause exchange rates to change but the purchasing angle will
normally attract additional marks.
As a guide to marking there could be other factors to consider from those given above, as this is a vast
subject with often little agreement between experts, marks were allowed for a balanced response looking
in depth at five forces in some detail for broadly five marks each although latitude was allowed for
context.

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Question 4 – Learning Outcome

4.2

(a) Explain the reasons for an organisation obtaining stakeholder feedback on

the
impact of its supply chain strategies. (10
marks)

(b) Discuss, using examples, a range of feedback mechanisms that may be used by an organisation
to obtain feedback on its supply chain strategies. (15 marks) (25marks)

Overall in part (a) the standard was good with the majority of candidates scoring a pass mark. Feedback
is vital on the impact of any strategy especially one such as supply chain strategy will can often affect
both organisations and individuals alike. Learners often began by giving an overview of the stakeholders
for whom there will be an impact from supply chain strategies. These stakeholders could have included
the following:
• Suppliers
• Customers
• Regulators e.g. OFGEM
• Internal stakeholders – managers and workforce
• Community
• Professional organisations and trade bodies

The main reasons that organisations needs to understand how their supply chain actions are perceived
relate to three major areas.

Prediction and Control – this feedback is needed to understand the link between cause and effect of
actions taken within the supply chain e.g. changing stockholding policy may have an impact on
availability for customers.

Mutual Understanding – this enables both the supplier and the stakeholder to better understand each
other’s point of view and main objectives.
Critical Reflection – this is where organisations receive feedback and having considered its content,
make an adjustment to the operation of its activities or supply chain.

There was a very wide range of other potential reasons that were accepted as valid content for this
section and as a guide for marking broadly it equated to 4 marks for some recognition of the range of
stakeholders, 6 marks for the reasons for organisations obtaining feedback.

Part (b) Part (b) provided good marks for the well prepared learner and there were a number of
papers with near maximum marks. There is a wide range of feedback mechanisms that
organisations can use to obtain feedback on their supply chain strategies.

Typical examples provided

were;

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Complaints processes and procedures – clearly these generally provide negative feedback, however
they may enable an organisation to adjust their supply chain to address issues raised by stakeholders.

Communication responses – this will include a wide range of email, letter, telephone communications
which, although not specifically designed to obtain feedback, may provide useful supporting data on the
perceptions of the organisation supply chain.

Service standard monitoring – organisations may collect market data to analyse the service status
achieved by their supply chain e.g. stock availability within warehouses.

Questionnaires and standard response forms – this mechanism enables organisations to directly target
specific groups to obtain feedback on the performance of the supply chain. Questionnaires can be
specifically designed to address particular aspects of supply chain performance.

Formal and informal feedback opportunities – organisations can use formal structures to gain feedback
from suppliers in supplier forums or customers in customer/user groups. There are benefits to both
formal and informal approaches which candidates may provide. Focus groups are an example of this
type of feedback mechanism.

As mentioned above, there was a wide range of feedback mechanisms that learners identified and in
their discussion some analysis of the benefits and problems of was included in the stronger
responses
As a guide to marking 10 marks approximately for the identification and discussion of feedback
mechanisms and 5 marks for the application of these mechanisms to the supply chain environment,
through the use of examples.

March 2014

Question 3 – Learning Outcome 3.2

(a) Outline the role played by the banking sector in international trade (7 marks)

(b) Describe THREE services provided by the banking sector to facilitate international
trade (18 marks)
(25 marks)

Overall this was a well answered question. (a) In Part (a) for seven marks most learners realised that for
a limited number of marks an in depth analysis was not required, hence the command word “outline”.
Some learners started with a context statement on the basis that banks facilitate international trade.
Some even mentioned that banks are vital facilitators of international trade; besides providing liquidity
they guarantee payment for around a fifth of world trade, in particular when the contract enforcement of
the importing country is weak. They can lend money through various types of loans, they can enable
payments internationally through electronic transfers etc, they can provide references on
creditworthiness, they can assist in market intelligence, and they can set up and be useful in
countertrade deals and assisting parties to reach agreed exchange values. A broad description of the
role played by banks in international trade was required generally based on one mark per role for seven
marks, with latitude given.

(b) Part (b) provided the bulk of the marks for Q3 and a more detailed description of three services was
required. There are many international services provided by banks, the main ones being; Documentary
letters of credit Documentary letters of credit are internationally recognised instruments that help ensure
the creditworthiness and payment of the overseas parties / organisation (or country) it is trading with. As
an exporter (seller), you can benefit from assurance that payment will be made to you by a bank and
retain control over your goods until payment is assured. As an importer (buyer), you can ensure that
payment by you to your supplier will only be made if your supplier complies with the terms set out in the
documentary letter of credit. As an exporter (seller), you can look at the option of raising finance against
the documentary letter of credit issued in your favour, as well as mitigate the payment risks associated
with selling to buyers overseas. They provide confidence when trading in new markets and/or with new
suppliers. A documentary letter of credit is subject to internationally agreed banking rules.

Bills of Exchange or Documentary Collections When trading internationally documentary collections can
help manage the trade transaction by retaining control of the goods and the timing of payment. If you are
importing, the bank will release documents to you upon your authority to pay or your acceptance of a bill
of exchange payable in the future. If you are exporting, the bank will control release of documentation to
the buyer against either payment by the buyer or their promise to pay where you have agreed this. If
importing, you will be able to examine the documents before payment is made, or examine the goods

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before payment is made where payment has been promised at a future date. If exporting, you will be
able to retain an element of control over the release of your goods against the buyer’s payment or
promise to pay. Use documentary collections to reflect a growing relationship of trust that may allow for
improved terms in your trading business, e.g. better prices or longer credit terms. Benefit from a more
controlled method of payment than dealing on an open account basis- the bank collects payment against
bills of exchange and/or documents after goods are shipped.

Guarantees Banks can provide a wide range of guarantees to support your international trading
activities. Generally this will offer your trading partner the comfort of the bank’s commitment to pay a
sum of money to them in specified situations. For sellers (exporters), guarantees can allow you to bid for
contracts that you might not have otherwise considered. For sellers (exporters), guarantees can help you
to manage your cash flow by enabling the release of cash from your buyers at an earlier stage in your
contract. For buyers (importers), guarantees can offer your suppliers security for payments to be made
to them. This may allow you to improve the terms of your contract with them.

Trade finance If a business is growing rapidly and becoming more international, its financing needs will
increase and they will face new risks. They may want to finance growth and manage these new risks.
Banks can provide a range of trade financing facilities to help finance growth when trading
internationally. Companies can gain access to finance tailored to their trade pattern. They can turn sales
into cash more effectively. As sales grow, finance needs will change. Improved cash flow may allow
companies to win further sales by offering more generous credit terms. Trade finance could allow an
organisation to tailor its finance to manage the risks faced when trading internationally.

All of these instruments have drawbacks such as arrangement time and costs. Also they may not be
available to small businesses and better learners considered this in their description.
These are the main areas but candidates could also refer to bank accounts, letters of credit or currency
exchange and trading and providing these services are considered in sufficient depth suitable marks
were allowed. In one or two scripts learners did not answer in terms of “international trade” therefore
marks were limited.

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Question 4 – Learning Outcome 4.1

(a)A purchasing director has obtained the following financial measures from the financial accounts of New W
new major supplier.

Return on sales 2013 2012 ROS 9.1% 13.8% Return on Capital Employed

ROCE 9.4% 12.51% Gross Profit Margin

GPM 23.9% 28.1% Return on Assets

ROA 7.0% 9.4% Stockturn 151 days 202 days Debtor days 131 days 148 days Creditor days 107 days 111
days Current ratio 2.0:1 2.22:1 Liquid/Acid ratio 1.07:1 1.12:1 Gearing 49% 58%

From the financial ratios given, assess New World Ltd.’s financial position as a potential supplier. (15 marks
Total Costs of Ownership (TCO) approach of cost analysis and control (10 marks)
(25marks)
(a) This question was presented in a novel way. Instead of giving a set of accounts and asking
for the ratios to be calculated, learners were required to assess a company’s potential as a
supplier from the ratios themselves. This was a well answered question with good
understanding of the significance of ratios demonstrated. Learners, in the main, gave a rounded
assessment of this potential suppliers financial position along the lines of:

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• Calculations of profit margin falling considerably over the period.

• Return on assets also falling.
• Debtor days are extremely high but have been reduced in last year – what are the
negotiated terms?
• Creditor days are also high – what are terms? What is reaction from suppliers – are
there any issues re non delivery?
• Current and liquid ratio slightly reduced but remain above what might be
considered acceptable levels.
• Stockturn is high but has been significantly reduced.
• Gearing is quite high but has been reduced in last year
• Any other valid deductions to be rewarded.

The question asked for consideration of New World Ltd as a potential supplier to the
purchasing director’s organisation. Therefore when assessing the company’s financial
position learners often commented on the risk aspects such as liquidity, the creditor day’s
situation and the gearing position. However all of the ratios could be of importance in one
way or another and provided a rounded assessment was given marks were awarded.

Marking wise, up to eight marks for understanding the implications of the detailed ratios given.
Up to seven marks for assessing the overall financial position of New World Ltd as a potential
supplier. However the split was not cast in stone and a well-rounded assessment as a
potential supplier scored well.

(b) Again a well answered question with learners giving a broad description of the TCO
approach. Traditionally cost has been associated with the purchase price alone or purchase
price plus support costs, or even total costs of acquisition (TCA). However the initial
procurement cost is typically only a relatively small percentage of the total cost of owning and
operating most products or services.

Total costs of Ownership can therefore be defined as an estimate of all direct and indirect
costs associated with an asset or acquisition over its entire life cycle.

Candidates should point out that total costs of ownership concept requires an organisation to
map their supply chain and uncover all the points at which cost is added, from what source
and why.

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Typically these can fall into six

categories;
• Management
• Delivery
• Service
• Communications
• Price
• Quality Once purchasers have done this they will have uncovered their
organisations true cost of supply. Learners could also have given examples of various TCO
mapping tools (such as Degeaeve and Roodhoofts) and where they did this was rewarded (but
even at this level was not essential for good marks).

JULY 2014
g Outcome 3.1

Define the term ‘working capital’ and evaluate a range of approaches that a procurement department
could use to assist in the effective financing of working capital. (25marks) Most candidates started their
answer, as required by the question, with their definition of working capital.

The definition required was along the lines of ‘working capital represents money being used to
run (or even start) the business on a short term basis’ or ‘working capital = current assets less
current liabilities’. Better candidates identified in some detail the items included in both current
assets and current liabilities. Some candidates even stressed that the element of most control
for procurement could be inventory. Some candidates noted that a company can have assets,
such as premises, cars etc but be short of liquidity if these assets cannot be converted into
cash quickly. Unfortunately, a number of candidates at PD level failed to correctly define
working capital, and as a result their answer did not reach the required standard. A number of
candidates confused working capital with operating profit.

Having correctly defined working capital candidates should then have moved on to evaluating
(going deeper than just describing) a range of approaches to assist in the effective financing of
working capital and the following are some of the approaches that could be used in effective
working capital management, in some (if not most) cases in conjunction with the finance
department.

The extension of creditor days and the reduction of debtor days would improve cash flow and
aid the running of the business on a short term basis. Procurement would be a prime mover in
dealing with suppliers and negotiating an increase in settlement terms. Stronger candidates did
discuss the alienation of suppliers in increasing settlement days, and also referred to possible
loss of profit with the loss of early settlement discount. Settlement of creditors before receipt of
debtors is not a formula for cash flow surplus.

Procurement could assist in the use of factoring and invoice discounting in aiding cash
flow and working capital, and could also assist in budgeting and forecasting by stringent
calculations and advice of any shortfall which would require use of short term overdrafts.

Procurement could also assist in management of working capital with the use of leasing
instead of outright purchase of fixed assets – thus preserving cash flow and aiding the working
capital position. Sale and leaseback of major assets would also assist in the effective financing
of working capital.

Effective use of stock control would also be a benefit to working capital with reduction of
stock/inventories held, and stronger candidates when discussing this point identified JIT
stock purchases and correctly identified the major problems in a failure of JIT stock
deliveries.
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The use of receiving bills of exchange, which could be discounted to improve cash flow and
working capital, in settlement of international debt was hardly mentioned even by the better
candidates.

Other areas highlighted included cross functional collaboration, market surveys, supplier
rationalisation, early procurement and supplier involvement, centralisation and standardisation,
effective supplier selection, cost beneficial contract terms and overall good communication
skills for procurement officers when dealing with external stakeholders.

Marking wise up to 5 marks for a good definition of working capital was allowed with up to 5
marks each for the approaches depending on depth.

Overall a well answered

question.

Question 4 – Learning Outcome

4.3

(a) Explain the concept of ‘gap analysis’ as an approach to benchmarking. (10 marks) (b)
Outline a typical performance measurement and improvement process which could lead to
performance improvement in a supply chain organisation, using examples where relevant.(15
marks) (25marks) Q4 – part a) = 10 marks Part a) required candidates to explain the concept
of gap analysis as an approach to benchmarking. Candidates could have started with a broad
overview of benchmarking and an explanation of gap analysis indicating it being the
comparison of actual performance with potential performance for a supply chain organisation –
making comment on and explaining the strategy gap and the operations gap. Gap analysis is
used by businesses to identify what steps need to be taken to move from its present position to
the potential and required position. Gap analysis consists of listing characteristic factors of the
current position, then listing the factors required to reach the required position, and then
highlighting the gaps that need to be filled. Gap analysis has the ability to be applied to a wide
variety of situations where improvement is required, but both time and costs are two of the
major disadvantages of conducting such analysis.

Marking wise, for the 10 marks candidates were required to give a broad explanation of the
concept and many did. Reward was also given for linking improvement in actual performance to
both the strategy and operations gap with many candidates demonstrating knowledge of the
gap analysis concept in a diagrammatical way comprising performance improvement needed to
the time required on a two axis diagram.

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Q4 – part b) = 15marks Part b) required the candidate to outline a typical performance

measurement and improvement process which could lead to performance improvement in
a supply chain organisation, using examples where relevant.

The answer required the candidate to demonstrate a performance improvement process –

many candidates in their answer however failed to identify the process, required in the
question.

The process example would include a start and a finish, and go through the following
steps (or something similar); 1. Determine which steps to measure 2. Establish
performance measures 3. Establish standards for comparison 4. Collect and monitor data
5. Evaluate performance data 6. Implement improvement actions

Not all candidates used these exact steps but provided a broad performance
measurement and improvement process was attempted, candidates usually scored well.

To establish current performance, candidates needed to identify an area that needs to be

measured. It is essential to be able to measure performance, and also essential to pick a
quantifiable metric. Having established the current performance, use the same metric to
measure the goal you need to achieve. To measure the gap, you need to calculate the
difference between the current performance level and the level you wish to achieve. With the
quantifiable gap measured, using the same metric, a plan then needs to be set up to reduce the
gap and the gap measured repeatedly to ensure the gap is closing, and not widening. All of this
should have been included in the process.

Candidates gave some good examples such as the balanced score card, the SCOR model,
SERVQUAL, dashboards etc. Some also gave examples of performance improvement
processes from their workplace and this was rewarded.
Marking wise, broadly speaking up to 10 marks for the process and 5 for examples although
markers allowed some latitude to this framework.
As question 3, question 4 was well answered in the Question 3 – Learninmain.

NOVEMBER 2014

Question 3 – Learning Outcome

3.1

(a) There is a range of ‘project finance’ options when funding investment in long- term
projects. Explain the term ‘project finance’. (5 marks) (b) Outline FIVE typical risks that may
be present when funding investment in long- term projects.(20 marks) (25marks)

Part (a)

An explanation of project finance was required that included the nature of projects e.g.
infrastructure, industrial projects or other examples of capital spend. These projects are based
upon projected cash flows they are expected to generate. The funding may be via a range of
methods – banks or other lending institutions, possibly in a syndicate, loans or debentures from
a principal lender or via raising equity finance from shareholders or existing company cash
holdings. In some responses the concept of sponsors was mentioned.

Most candidates were able to give an acceptable, if sometimes basic answer, to this part of
Q3 and generally a pass mark of 3 or above was awarded.

Marking wise – full 5 marks allowed for full explanation of the topic on the broad basis of a
mark per point made.

Part (b)

There was a wide choice of potential risks that could have been identified and outlined, with
each one worth a maximum of 4 marks. Risks included;-
• Credit risk – credit exposure and settlement risk
• Market risk – including currency volatility for foreign projects, interest rate rise risk,
equity risk, issues around demand for any new product from the project, issues around
continuation of supply of materials over the term of a project.
 • Portfolio concentration – excessive focus on specific market, sector or country.
• Liquidity risk – both client and contractor or suppler. It could arise from general market or
economic factors or relate specifically to individual organisation(s)
• Operational risk – relating to systems, people, operational management.
• Business risk – specific reference to any STEEPLE factors or issues around
disaster recovery, reputational damage or access to credit.

Other acceptable issues, well explained were also awarded

marks.

This part of the question was answered reasonably well by the majority of candidates who
correctly wrote about FIVE specific risk factors and related them to specific project risk, often
using examples from the media or their own organisation to support their answer.

A significant number of answers were somewhat brief and the risks identified were not
explained (even to an outline standard) to warrant full marks. Few candidates scored very
high marks on this part of the question but most scored at least a pass grade mark.

Marking wise – A maximum of 4 marks awarded for each of five risks clearly
outlined.

Question 4 – Learning Outcome

4.1

There are a number of financial measures that can be applied to measure

the performance of the supply chain. Assess how ratio analysis can assist
a purchaser to understand the financial performance of a potential
supplier.
(25marks)

Candidates could have started this question with a brief overview of ratio analysis; how the
approach covers a wide spectrum of the business, that it enables good trend analysis if done
over a period of years, it can provide good comparisons with previous performance and also
with other similar businesses enabling relevant comparisons across the sector or wider. It can
also allow non- financial people, with a minimum level of training, to understand summarised
performance of a supplier. Stronger candidates explained that ratio analysis is not the whole
financial landscape but a key tool in the understanding of a potential supplier’s financial
performance over several key areas.

An assessment (minimum benefits and limitations) of ratio analysis was required to

answer this question.

Benefits could include – the data covers a wide spectrum of financial data which can be
industry specific or general to the market, gives indication of trends over recent past history,
gives good comparison with similar suppliers and with overall industry sector average enabling
effective benchmarking, enables organisations to understand suppliers financial performance in
a simple understandable way. Ratio analysis can cover specific areas such as profitability,
liquidity, investment etc. therefore a buyer is able to see at a glance, and evaluate on, the most
important area to them.

As part of the answer candidates could have explained a number of ratios and indicated how
they enabled purchasers to assess the financial performance of the supplier. Knowledge
demonstrating how such ratios were calculated was rewarded depending on detail and depth
of knowledge demonstrated and how this was linked to assessing the supplier.

Limitations could include – large number of ratios can be produced and these need to be
understood in order for an accurate assessment of the supplier, training may be required to
assist this process, information produced by supplier is historical, it indicates trends but not the
reasons or causes of those trends, it may mask seasonal variations, the date is often a
snapshot of the business at the end of its financial year, internal financial data is not provided,
information from other suppliers or sector generic data is required for effective comparison and
benchmark. It can be argued that large supplier’s ratios cannot be directly compared to a small
supplier (especially on ROCE) and this takes away the general comparison scenario.
Emphasis could have been made that ratio analysis is just one tool to be used in evaluating
potential supplier.

Some learners related the ratios to their relevance to a potential supplier in areas such as long
term relationships with suppliers with an evaluation and explanation of relevant ratios, using
examples. There was a wide range of potential examples including ROCE, liquidity and acid
test, profitability and utilisation.

Generally this question produced very weak answers with many candidates failing to give
any real assessment of the value of the process; never mind the key point of how ratio
analysis can assist a purchaser to understand the financial performance of a potential
supplier, which was the fundamental requirement of the question.

Many ratios (where given) were incorrect and a number of candidates discussed financial
areas (e.g. corporate governance) which by any stretch of the imagination could not be
regarded as ratio analysis.

Answers to the question often comprised a brief explanation of a small number of ratios,
sometimes quoting the formula for the ratio, and then commenting on what the indication each
ratio result told a potential purchaser about the supplier. Marks were awarded where
candidates demonstrated good knowledge in these areas but such an answer was not
sufficient to score a pass mark, without an evaluation of the worth of the overall process itself.

The small minority of candidates, who, as part of their assessment, correctly focused on
explaining the benefits and limitations of how ratio analysis can assist a purchaser to
understand the financial performance of a potential supplier, did however score highly.

Marking wise – as general guide 5 marks were awarded for demonstration of understanding
of the process, with 10 marks each for benefits and limitations. Markers were able to exercise
some discretion in the balance of the marks awarded between these three areas.

Financial areas in the syllabus, such as ratio analysis, might never be the favourite topic of
revision for learners, however in an examination where all questions are compulsory, not to
revise them is a high risk strategy.

JANUARY 2015

Question 3 – Learning Outcome

3.3

(a) Define the term “commodities” and distinguish between hard and soft commodities (15
marks) (b) Explain the use of future contracts when buying commodities (10 marks) (25
marks)

Part (a)

Candidates needed to look at the three parts of the question. Firstly the definition, a commodity
is a product, which is of uniform quality and traded across various markets. They are
unbranded and undifferentiated products and services that are considered to be the same in
nature no matter the source and supplier. They tend to be primitive products such as raw
materials in their basic state as the more refined the less undifferentiated they become. These
commodities are traded across markets situated in different corners of the world through
commodity exchanges such as the New York Mercantile Exchange, the London Metal
Exchange, etc. This attracted up to five marks.

In the second and third part of the question, candidates could have provided an examination
along the lines of there are generally two types of commodities, ‘hard commodities’ and ‘soft
commodities’.

Hard commodities include crude oil, iron ore, gold, and silver and have a long shelf
life.

Agricultural products such as soybean, rice or wheat, are considered ‘soft commodities’ since
they have a limited shelf life. These commodities have to be similar and interchangeable or
‘fungible’. For example, soybean from one country or market should be of the same quality
wise as soybean from another, or gold in one country should be of the same purity as gold
from another. Most candidates referred to the key differences in these two categories (hard
and soft) is the sensitivity of soft commodities to spoilage, which changes the way the
commodities prices behave for this area, and marks were awarded accordingly on the basis of
5 marks for hard and 5 for soft making a total of 15 for part (a).

Part (b)

A slightly more technical question, where at PD 6 some responses were disappointing in length
(some 1 or 2 lines) and quality. There was also an element of incorrect explanation e.g. some
candidates misunderstood the essence of a futures contract by saying that the price is not
agreed. Candidates could have started part (b) with an overview that commodity buying is price
volatile, which encourages the use of “futures contracts” to mitigate the impact of price
fluctuations in the future. A futures contract is a standardised contract between two parties to
buy or sell a specified asset of standardised quantity and quality for a price agreed upon today
(the futures price or strike price) with delivery and payment occurring at a specified future date,
the delivery date. The contracts are negotiated at a futures exchange, which acts as an
intermediary between the two parties. The party agreeing to buy the underlying asset in the
future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in
the future, the "seller" of the contract, is said to be "short". The terminology reflects the
expectations of the parties—the buyer hopes or expects that the asset price is going to
increase, while the seller hopes or expects that it will decrease in near future. “Call” and “Put”
options are also terms used for the above rights to buy or sell. While the futures contract
specifies a trade taking place in the future, the purpose of the futures exchange institution is to
act as intermediary and minimize the risk of default by either party. Thus the exchange requires
both parties to put up an initial amount of cash, the margin. Additionally, since the futures price
will generally change daily, the difference in the prior agreed-upon price and the daily futures
price is settled daily also (variation margin). Both parties of a futures contract must fulfil the
contract on the delivery date. The seller delivers the underlying asset (commodity) to the buyer,
or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who
sustained a loss to the one who made a profit. Hedging, commodity options and a contract for
difference and derivatives were also discussed in the explanation of futures contracts.

This is a broad summary and the marks available were 10, and although candidates did not
need to hit every point they did need to look at some of the above together with related areas
such as compatibility with lean supply chain practices. This was a technical question and
candidates linking the broad aspects of futures with commodity buying scored well. Stronger
candidates who give a detailed explanation scored very well-at times the maximum 10.

Question 4 – Learning Outcome

4.2

(a) Explain the reasons for an organisation obtaining stakeholder

feedback on the impact of its supply chain strategies. (10 marks)

(b) Discuss, using examples, a range of feedback mechanisms that may be used by an
organisation to obtain feedback on its supply chain strategies. (15 marks) (25 marks)

Part (a) Many candidates were able to set out that feedback is vital on the impact of any
strategy especially one such as supply chain strategy which can often affect both
organisations and individuals alike. Candidates often began by giving an overview of the
stakeholders for whom there will be an impact from supply chain strategies. These
stakeholders could have included the following:
• Suppliers
• Customers
• Regulators e.g. OFGEM
• Internal stakeholders – managers and workforce
• Community
• Professional organisations and trade bodies
The main reasons that organisations needs to understand how their supply chain
actions are perceived relate to three major areas.

Prediction and Control – this feedback is needed to understand the link between cause and
effect of actions taken within the supply chain e.g. changing stockholding policy may have an
impact on availability for customers.

Mutual Understanding – this enables both the supplier and the stakeholder to better
understand each other’s point of view and main objectives.

Critical Reflection – this is where organisations receive feedback and having considered its
content, make an adjustment to the operation of its activities or supply chain.

There was a very wide range of other potential reasons that were accepted as valid content for
this section and as a guide for marking broadly it equated to 4 marks for some recognition of the
range of stakeholders, 6 marks for the reasons for organisations obtaining feedback.

Part (b)

There was a wide range of feedback mechanisms that organisations can use to obtain
feedback on their supply chain strategies.

Typical examples provided were; Complaints processes and procedures – clearly these
generally provide negative feedback, however they may enable an organisation to adjust their
supply chain to address issues raised by stakeholders.

Communication responses – this will include a wide range of email, letter, telephone
communications which, although not specifically designed to obtain feedback, may provide
useful supporting data on the perceptions of the organisation supply chain.

Service standard monitoring – organisations may collect market data to analyse the service
status

achieved by their supply chain e.g. stock availability within

warehouses.

Questionnaires and standard response forms – this mechanism enables organisations to

directly target specific groups to obtain feedback on the performance of the supply chain.
Questionnaires can be specifically designed to address particular aspects of supply chain
performance.

Formal and informal feedback opportunities – organisations can use formal structures to gain
feedback from suppliers in supplier forums or customers in customer/user groups. There are
benefits to both formal and informal approaches which candidates may provide. Focus
groups are an example of this type of feedback mechanism.

As mentioned above, there was a wide range of feedback mechanisms that learners identified
and in their discussion some analysis of the benefits and problems of was included in stronger
responses

MAY 2015

Question 3 – Learning Outcome

3.1

Evaluate the key long term sources of finance that may be available to a large
PLC
(25marks)

This Question related specifically to long term finance and answers should have focused on
both equity and debt finance options. Aspects relating to debt finance should have considered
duration, fixed or floating interest rates, security required and possible covenants involved.
Specifically answers could have included explanation and evaluation of loans, debentures,
leasing, hire purchase, sale and leaseback arrangements, bonds and possibly grants. Equity
finance could include shares – ordinary and preference, rights issue, venture capital and
concept of future retained profits. A significant number of candidates saw “retained profits” as a
resource to be called upon, whereas in practice it is a historical figure. Stronger answers could
have also considered ownership of the plc, voting rights and control, interest

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costs, weighted cost of capital, gearing, risk of offering security for loans, limited availability of
grant finance for large plcs and so on.

Almost all candidates were able to provide at least a basic response to this question, but a few
mistakenly thought the question related to public sector finance and so failed to score any
significant marks. Many answers covered a range of relevant sources often giving a correct if
simplistic description of the sources chosen. Some candidates also included some short term
sources e.g. overdrafts which did not address the question and therefore did not score marks
for those sources. In general the aspect of evaluation was very limited although most
candidates did outline some benefits or disadvantages of the sources they covered in their
answer. There were also a small but significant number of very good answers correctly
describing a range of sources and clearly evaluating each one, making good comparison
between debt and equity finance. These candidates were rewarded with very high marks.

Marking wise, typically a good answer would have considered 4 or 5 key sources in depth or
more sources in less detail. However the question asked for an evaluation of the sources
and answers purely providing good descriptions would be limited to a bare pass grade of
about 13 marks only. Higher marks were awarded for a more detailed evaluation of each of
the sources explained.

Question 4 – Learning Outcome

4.1

(a) Explain why cash flow analysis is important when reviewing a

potential
supplier’s financial performance. (12 Marks) (b) Evaluate the
use of cost-based metrics in assessing organisational
performance (13 marks) (25marks)

Part (a) of the question required an explanation that this involves a review of a company`s
cashflow statement which, as part of its annual accounts, focuses upon its cash movements
over the preceding year. It summarises how cash has been generated and how it has been
spent or in what it is tied up.

This enables a potential buyer to see how well the supplier is managing their cash which is
important as the supplier will need to be able to finance the work involved in supplying the
product or service. It distinguishes between cash movements and profitability, which is
measured in the profit and loss statement. The cashflow statement shows how cash may be
used to purchase fixed assets hold more stock,
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increase or decrease working capital, pay tax, interest and dividends. It would also reveal
any extraordinary items such as new loans. Some reference to cashflow forecasts could
be made although this is often an internal planning document used by a supplier and may
not be made available to a prospective buyer in most circumstances.

There was a wide range in the quality of answers to this question. Almost all candidates
mentioned the need for suppliers to be able to fund their product and that cashflow analysis
helped to establish their ability to do so. Many candidates failed to explain the key aspects of
what a cashflow statement actually showed. Most candidates explained or mentioned the
difference between cash and profitability, but some did not understand this fundamental
difference and as a result did not score significant marks.

Marking wise, typically a good answer would cover 3 different aspects in some detail or a
larger range in less depth. Relevant reference to the source of information, the cashflow
statement, was important to score significant marks. A number of candidates seemed not to
read the detail of the question, and based their answer on ‘financial performance’, and went
into other detail, suitable for a more general question on financial performance rather that the
specific requirements of this question, i.e. cash flow analysis.

Part (b)

Candidates could have started this question with an overview of performance and metrics
including the use of “cost based metrics”. Lalonde and Pohlen identified four groups of costs
• Information costs
• Inventory carrying costs
• Physical flow costs
• Transaction costs Approaches to
analysing cost include:
• Direct product profitability(DPP)
• Activity base costing (ABC)
• Total cost of ownership (TCO)
• Marginal costing breakdown
 • Absorption costing breakdown The above list is not exclusive and the
marking team adopted a wide view of analysing costs giving reward where they could.

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Cost based metrics use approaches listed above such as Direct Product Profitability, Activity
Based Costing, Total Cost of Ownership, Efficient Consumer Response and a brief explanation
of some of these would have enabled the candidate to explain the advantages and drawbacks
of this overall approach. Reference to Lalonde and Pohlen who identified information, inventory
carrying, physical flow and transaction costs (above) could also have been included in the
answer. To evaluate the approach – advantages included improving organisations ability to
succeed by aligning processes, targeting most profitable areas, differentiating services and
generally lowering costs. Drawbacks include the need to develop specific system for each
organisation, prices of materials etc. fall outside the remit of this approach due to inflation,
currency movements and issues of supply and demand.

A wide range of responses to the question was observed. Good marks were achieved by those
candidates who correctly identified the key cost approaches outlined above and then briefly
evaluated the overall strengths and weaknesses of the generic approach. Reference to the
need to consider the use of other measurement tools such as process-based metrics also
scored marks for candidates. A large number of candidates however lacked knowledge of this
area (despite the question being a direct repeat of one previously asked) and many of these
gave answers relating to financial ratio analysis or merely a general approach stating the need
for organisations to measure their costs to try to remain profitable.

Marking wise, marks were split between the need to demonstrate a basic understanding of
cost- based metrics approach and then a brief evaluation covering both positive and negative
aspects. Several candidates simply described the various costs that comprise an
organisations cost profile so either did not answer the question or only did so in an indirect
way.

JULY 2015

Question 3.1 – Learning

Outcome
Describe the advantages and disadvantages of the following methods of investment appraisal,
illustrating your answer with examples: (i) Payback (8 marks) (ii) Discounted cashflow (DCF) (9
marks) (iii) Internal rate of return (IRR) (8 marks) (25marks) At PD level a context was
rewarded with the stronger candidates pointing out that appraisal methods fall into two main
types, those that do not discount cash flows such as payback and average rate of return (ARR)
and those that do such as discounted cash flow (DCF),net present value (NPV) and internal
rate of return (IRR). With this in mind the question was very direct; candidates should now have
described the

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advantages and disadvantages of all three

methods:

i) Payback. The answer required candidates to show that payback was a method of calculating
how rapidly a project returns the initial investment back to the company. The advantages
included that it was easy to calculate and also easy to understand, and allowed quick decisions
to be made on go, no-go rules. The main disadvantage was that payback did not incorporate
the time value of money, and therefore DCF (see ii below) should be the preferred way to
evaluate payback. Cash in the future is not worth as much as cash today. Stronger candidates
would have given examples such as; a company might decide that all projects need to have a
payback of less than five years. This is also referred to as the cut off period.

ii) Discounted cash flow (DCF). This method of investment appraisal takes into account that
the value of money today is more than the value of money received in the future – the time
value of money concept. NPV and DCF compare the value of a pound today to the value of that
same pound in the future, taking inflation and returns into account. If the NPV of a project is
positive, it should be accepted. However, if NPV is negative, the project should probably be
rejected because cash flows will also be negative. One of the disadvantages if that there is no
certainty in the calculations using the discount figure. With a project running for a number of
years, if the discount figure, which is a calculation, is incorrect, the discounted cash flow figures
will not be accurate, thus causing discrepancies in the calculation. Some stronger candidates
gave examples including “optimisation bias” on the timing of the inflows and DCF could be in a
long term Government project where the cost of money will be a key factor to the nature of the
duration.

Some advantages given by candidates included: Accounts for the fact that the value of a pound
today is more than the value of a pound received a year from now - that's the time value of
money concept. The other strength of this measure is that it recognises the risk associated with
future cash flows - even though they are not yet certain.

Some disadvantages given by candidates included: DCF does not give visibility into how long
a project will take to generate a positive NPV due to the calculations simplicity. The NPV rule
tells us to accept all investments where the NPV is greater than zero. However, the measure
doesn't tell when a positive NPV is achieved. Another limitation of the NPV approach is that
the model assumes that capital is abundant - that is there is no capital limit. If resources are
scarce, then the analyst has to look carefully at not just the NPV for each project they are
evaluating, but also the size of the investment itself. This could be countermanded by using a
form of internal rate of return (see next section).

iii) Internal Rate of Return (IRR). The internal rate of return is defines as the discount
rate

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where the NPV of cash flows are equal to zero. It is more desirable to undertake the project
the higher a project’s internal rate of return (when the NPV is zero). When used properly, IRR
provides excellent guidance on a project’s value and associated risk.

An internal rate of return offers a way to quantify the rate of return provided by the
investment. The internal rate of return is defined as the discount rate where the NPV of cash
flows are equal to zero.

The IRR can be calculated using trial and error (changing the discount rate until the NPV = 0).
Generally speaking, the higher a project's internal rate of return (when the NPV is zero), the
more desirable it is to undertake the project. The rule with respect to capital budgeting or when
evaluating a project is to accept all investments where the IRR is greater than the opportunity
cost of capital. Under most conditions, the opportunity cost of capital is equal to the company's
weighed average cost of capital (WACC).The internal rate of return is the highest discount rate
at which the project is viable, so it specifies the maximum cost of finance the project team
should accept. An example of IRR may be on a capital long term project where it is not known
at what rate the figures might come in to make it viable. IRR would set a guide.

Advantages cited by candidates: IRR is widely accepted in the project and financial community
as a quantified measure of return and it's also based on discounted cash flows - so accounts
for the time value of money. When used properly, the measure provides excellent guidance on
a project's value and associated risk.

Disadvantages cited by candidates: Multiple or no Rates of Return - if evaluating a project that

has more than one change in the cash flow stream, then the project may have multiple IRRs or
no IRR at all. Changes in Discount Rates - the IRR rule tells us to accept projects where the
IRR is greater than the opportunity cost of capital or WACC. But if this discount rate changes
each year then it's impossible to make this comparison. One of the strengths of the NPV
approach is that if you need to add one project to an existing project you can simply add the
NPVs together to evaluate the entire project. IRRs on the other hand cannot be added together
so projects must be combined or evaluated on an incremental basis.

Marking wise Payback-3 marks advs. 3 marks disadvs, 2 marks example. DCF-3 marks advs.
3 marks disadvs, 3 marks examples. IRR-as Payback.

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Question 4 – Learning Outcome

4.3

(a) Describe a process (or approach) for carrying out a benchmarking exercise in a supply
chain environment of your choice.(13 marks) (b) Outline FOUR advantages for a supply chain
organisation of carrying out an internal benchmarking process (12 marks) (25marks) Q4(a) For
13 marks this required the candidate to describe a process, or approach (this aspect was vital
for success), for carrying out a benchmarking exercise in a supply chain environment of their
choice. Good answers included what is to be benchmarked, who should you benchmark
against, how should the data be captured and how do you know what good looks like? The
question required a process, and this could have included planning, analysing data collected,
development of new standards, improvement in closing gaps and constant reviews.
Stronger candidates mentioned Oakland, who suggests a comprehensive quality managed
approach and/or Czarnecki, who recognised that benchmarking, is as much a future finding
activity as it is a more Oakland style quality management process.

Reward was given for knowledge of these approaches, but it was possible to score well
with a sensible benchmarking process which considered the following areas:
• Plan-including selection, team selection, data collection, the “What” question.
• Analyse stage-collate data, what is to be measured, against whom-the “Who” question.
• Development of new standards-draw up action plans, SMART plans.
• Improvement-closing the gaps, implement action plans-the “How” question.
• Review-constantly monitoring, analyse, review data for improvement, start the
cycle again? Candidates could also have brought in, as part of their process, visualising
results (possibly a circle diagram looking at management, technology, production, and
marketing for instance) using dashboards specifically related to the use of benchmarks in
supply chains. One or two candidates wrote all they knew on benchmarking which
unfortunately did not score well unless a clear process was described.

Q4 (b) Here it was very clear that, for 12marks, candidates needed to outline only FOUR
advantages for a supply chain organisation of carrying out an internal benchmarking
process.

Advantages such as spreading organisational knowledge, information is more compatible with

similar systems, less problems regarding confidentiality, less time and resources required and
results

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more readily accepted and less resistance to change. This summary is not exclusive and
candidates had other examples of advantages which if relevant were rewarded.

Question 4 was the opposite of Q3 in that in the main it was well answered. Part (a) was
well answered, mainly because candidates identified the specific requirements of the
question – describing a process and citing some of the points identified above, and part
b) followed suit, by giving reasons by outlining four advantages from those identified above
and maybe other areas linked to an internal benchmarking exercise.
Marking wise in part (a) Up to 3 marks for a supply chain environment setting and up to 10
marks for a description of a benchmarking approach or process (candidates were expected to
include a range of key and sequential stages), and in part (b) Up to 3 marks for each advantage
making 12 marks in total- as simple as that.

NOVEMBER 2015

Outcome 3.1

Question 3 – Lea(a) Explain the term “cost centre” and asses how using cost centres could
assist in managing and controlling the costs of an organisation (10 marks) (b) Describe the main
objectives of the following organisations;
A government department or ministry ( 7 marks) A public limited company (plc) ( 8
marks)
(25 marks)

Part (a)

This first part of the question was for 10 marks and required an explanation only.

Better candidates firstly explained how a cost centre can be a location, a function, a process
or any identifiable “centre” where costs are grouped and controlled.

Reference to production and service cost centres was also relevant and specific examples were
often included to assist the explanation. A Key point (and valid example) in the managing and
controlling element of the question was that cost centre manager has responsibility for the
centre, making ownership clear, and highlighting that control can be linked to budget variance
and future years budget process.

In summary, there are two main types of cost centre - production cost centres (direct costs)
and
 3

service cost centres (indirect costs/overheads) and candidates often gave a brief overview of
both.

At the professional level examples always illustrate explanations and examples of cost centres
included R and D departments, Marketing departments, Help desks and Customer
service/contact centres but there were many more given and rewarded. A link was sometimes
made to other activity centres such as profit centres and investment centres.

A cost centre typically adds to revenue indirectly or fulfils some other corporate mandate. A
key point (as above) is that a cost centre manager is responsible for costs under their
control. An advantage of using cost centres is that cost responsibility is clear and owned
but it can lead to inappropriate internal competition on costs.

Other valid content related to how cost centres assist in managing and controlling costs
were accepted.

The level of answers varied significantly with most candidates giving a fair explanation of the
term, but giving limited detail regarding the control process. A small minority demonstrated a
lack of knowledge of the topic and did not score too well.

Marking wise, although markers allowed latitude around 5 marks for explanation and 5
marks regarding cost control with relevance to valid examples.

Part (b)

(i) A Government Department

The response in (i) should have focused on how departmental financial objectives were linked
to overall objectives of government. The Key focus upon; value for money, economy,
efficiency and effectiveness were often well cited and explained but any other specific
examples relating to the main financial objectives of government were relevant. An overview
of the need for competition in public sector procurement was valid here.

Generally a fair level of knowledge demonstrated by majority of candidates with some

relevant examples given to help demonstrate understanding and so scoring good marks.

Also sustainability was given as a key in that a department is ongoing and will need to set
out its objectives accordingly, some candidates even mentioned the government financial
cycle and spending reviews. The department often has secondary financial targets which
included areas as diverse as surplus (or overspend) on PFI contracts, IPR income and so
on but the emphasis for candidates was that unlike the private sector, the financial
objectives are not profit based.

This was a wide topic and candidates made other points which were rewarded with
marking sympathetic to all types of government set ups across the world.

Some candidates however did not sufficiently address financial objectives and so received
lower

marks.

Marking wise, 7 marks for description of the main financial objectives with many candidates
scoring well.

ii) A public limited company (plc)

Many candidates started by defining a plc and comparing this to other commercial entities. This
was a good way to start the question. A public limited company (legally abbreviated to plc) is a
type of public company (publicly held company) under company law, It is a limited (liability)
company whose shares may be freely sold and traded to the public (although a plc may also be
privately held, often by another plc), with a minimum share capital of £50,000 and the letters
PLC after its name. Similar companies in other jurisdictions are called publicly traded
companies or other names and this was allowed for in marking.

The focus of the answer should then have been on profitability and enhancing shareholder
value although obtaining value for money was also relevant. Reference to both cost control
and growth were also valid issues as was increasing market share and better candidates made
the point that the emphasis is on profitability and shareholder wealth but still VFM was
important.

Better candidates emphasised that profit in itself does not necessarily create wealth for a
shareholder and that shareholders will only get paid (if at all) once costs, interest and tax are
met.

Many financial objectives therefore will be based on cost control which on a

procurement examination paper was perfectly relevant.

The growth in shareholder wealth could also be capital in the form of share value growth
and candidates referred to this.
Some candidates set out their response in terms of secondary financial objectives relating to
gearing, ROCE, turnover and more. Many other areas were relevant including revenue
maximisation, sustainability and more and candidates were rewarded for all relevant areas.

As in most answers candidates were rewarded for including examples to support their
answers.

There were some very good answers but a small minority of candidates mistakenly linked
these organisations to the public sector and accordingly scored few if any marks.

Marking wise up to 8 marks for describing the main financial objectives of what is normally a
very large organisation with complicated and varied objectives.

Question 4 – Learning Outcome 4.1

Discuss how a balanced scorecard methodology can be applied to the measurement of performanc
supply chains.
(25 marks)

An effective way to start an answer was to firstly explain the concept of a balanced scorecard (
BSC) combining both financial and non-financial measures, thus broadening the scope of
information available and increasing the likelihood of organisational objectives being met.

Each area (perspective) represents a different aspect of the business organization in order to
operate at optimal capacity.
• Financial Perspective - This consists of costs or measurement involved, in
terms of rate of return on capital (ROI) employed and operating income of the organisation.
• Customer Perspective - Measures the level of customer satisfaction, customer
retention and market share held by the organisation.
• Business Process Perspective - This consists of measures such as cost and
quality related to the business processes.
 • Learning and Growth Perspective - Consists of measures such as employee
satisfaction, employee retention and knowledge management.

It was key that candidates knew that the four perspectives were interrelated-this is the
strength of the model therefore, they do not function independently. In real-world situations
such as supply chain measurement, organisations may need one or more perspectives
combined together or new ones added to achieve its business objectives, and the better
papers made this point.

Following on from this, candidates should have turned to the supply chain measurement
aspects specifically.

An example of a relevant model that has been developed from the Kaplan and Norton
is the 'purchasing balanced scorecard' by Cousins et al. This addresses the following
questions:
• How do we look to stakeholders?
• What must we excel at internally?
• How do we manage suppliers?
• How do customers see us?
• How do we learn and innovate?

The main advantage of using this balanced view of measurement is that the supply partners
selected for this initiative may give up on one-sided targets but now they might be practicing
gain sharing and collaborative improvement up and down their supply chains using
measurement in all four sections of the card.

These targets should strive for balance in both the effort and benefit for all parties. Without
common multi-enterprise target values, the utility of a BSC is massively reduced. As an
example candidates could have suggested typical areas to be highlighted such as learning and
growth in tier 1 suppliers.

Reference to Kaplan and Norton’s (as mentioned above) model was helpful and rewarded and
often cited in the better scripts, and many candidates illustrated this source and included either
a diagram or noted the key elements of this model – marks were awarded accordingly
depending upon the level of detail included.

Reference and inter-connection between the financial perspective, customer perspective,

business process perspective and learning and growth – all linked to overall organisational
goals was a sound basis to discuss how performance measurement could take place in the
supply chain.

Other relevant models such as the SCOR model or dashboards was also incorporated in
better discussions, but the inclusion of these was by no means compulsory to score well.

Reference to the advantages and challenges of the approach was also relevant (the command
word was “discuss”) and this approach scored marks when correctly explained.

This question despite being clearly positioned in the Learning outcomes (LO 4.1) was often
answered quite poorly with candidates either failing to demonstrate knowledge of the
concept or providing a very limited degree of detail beyond the very basic aspects of the
format. Accordingly low marks were scored by a significant minority of candidates.

The majority of candidates did demonstrate a fair, if limited, understanding of the issue and
many used Kaplan and Norton’s model as the base of their answer. In many cases the degree
of detail was limited however and resulted in many candidates achieving marks at or around
the pass level. Those limited number of candidates who developed their answer in detail, listing
both advantages and challenges to the approach scored high marks.

Within the marking itself, the markers allowed latitude based on candidates describing a
broad performance methodology not just centring on one aspect, and this latitude saved a fair
number of papers.

Marking wise, 15 marks for overview of BSCs, 5 for relating concept to supply chain concept, 5
marks for challenges was considered.

JANUARY 2016

ning Outcome Question 3 –

Lear3

Analyse FIVE factors which could cause exchange rates to change (25marks)

At this level a context is normally rewarded and learners could have started this question by
summarising that an exchange rate is a price of a currency-some even made the link of “the
share price of a country”.

Candidates could have mentioned that there will be two exchange rates between currencies; a
selling rate and a buying rate. The price is determined by the forces of demand and supply in
the currency markets. Just like the commodity markets for wheat, oil and coffee, the price of a
currency will reflect the amount of the currency that consumers and businesses want to buy
(demand) and sell (supply).As a guide in any question looking at prices (including exchange
rates) demand and supply will normally attract marks.

Most candidates observed that there were many major factors behind exchange rate change
and movements. These can be broadly summarised as demand and supply in foreign
exchange markets, the balance of payments perspective, purchasing power parity, monetary
perspective and the portfolio balance perspective.

Candidates could have broken down some of these to assess five of these broad factors
and the following headings are given as a guide

1. Differentials in Inflation As a general rule, a country with a consistently lower inflation rate
exhibits a rising currency value, as its purchasing power increases relative to other currencies.

2. Differentials in Interest Rates Interest rates, inflation and exchange rates are all highly
correlated. By manipulating interest rates, central banks exert influence over both inflation and
exchange rates, and changing interest rates

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impact inflation and currency values. Higher interest rates offer lenders in an economy a
higher return relative to other countries. Therefore, higher interest rates attract foreign capital
and cause the exchange rate to rise.

3. Current-Account Deficits / Balance of Payments The current account is the balance of trade
between a country and its trading partners, reflecting all payments between countries for
goods, services, interest and dividends. A deficit in the current account shows the country is
spending more on foreign trade than it is earning, and that it is borrowing capital from foreign
sources to make up the deficit.

4. Public Debt Countries will engage in large-scale deficit financing to pay for public sector
projects and governmental funding. While such activity stimulates the domestic economy,
nations with large public deficits and debts are less attractive to foreign investors.

5. Purchasing Power Parity The exchange rate moves until parity is achieved. E.g. considering
two different fictitious countries, where 100 dollars from one country buys an item and 50
pounds from a different country buys the same item, then purchasing parity is achieved when
the exchange rates of the dollar to pound rate is 2:1.
6. Terms of Trade A ratio comparing export prices to import prices, the terms of trade is related
to current accounts and the balance of payments. If the price of a country's exports rises by a
greater rate than that of its imports, its terms of trade have favourably improved. Increasing
terms of trade shows greater demand for the country's exports.

7. Political Stability and Economic Performance Foreign investors inevitably seek out stable
countries with strong economic performance in which to invest their capital. A country with such
positive attributes will draw investment funds away from other countries perceived to have
more political and economic risk. Political turmoil, for example, can cause a loss of confidence
in a currency and a movement of capital to the currencies of more stable countries leading to
exchange rate volatility.

Some learners, to good effect, explained the Fisher effect, and even produced some key
examples such as the situation with Zimbabwe’s currency. Many learners also gave a broad
purchasers view taking in areas such as the purchase cost may be beneficial if the currency
moves in the right direction but equally if an adverse move takes place it could leave them in
a vulnerable position. However the question was aimed squarely at the factors which could
cause exchange rates to change but the purchasing angle will normally attract additional
marks.

As a guide to marking there could be other factors to consider from those given above, as this
is a vast subject with often little agreement between experts, marks were allowed for a
balanced response looking in depth at five forces in some detail for broadly five marks each
although latitude was allowed for context.

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Question 4 – Learning Outcome 4.1

There are a number of financial measures that can be applied to measure the performance of the su
Assess how ratio analysis can assist a purchaser to understand the financial performance of a pot
(25marks)
Candidates could have started this question with a brief overview of ratio analysis; how the
approach covers a wide spectrum of the business, that it enables good trend analysis if done
over a period of years, it can provide good comparisons with previous performance and also
with other similar businesses enabling relevant comparisons across the sector or wider. It can
also allow non- financial people, with a minimum level of training, to understand summarised
performance of a supplier. Better candidates explained that ratio analysis is not the whole
financial landscape but a key tool in the understanding of a potential supplier’s financial
performance over several key areas.

An assessment (minimum of benefits and limitations) of ratio analysis was required to

answer this question.

Benefits could include – the data covers a wide spectrum of financial data which can be
industry specific or general to the market, gives indication of trends over recent past history,
gives good comparison with similar suppliers and with overall industry sector average enabling
effective benchmarking, enables organisations to understand suppliers financial performance in
a simple understandable way. Ratio analysis can cover specific areas such as profitability,
liquidity, investment etc. therefore a buyer is able to see at a glance, and evaluate on, the most
important area to them.

As part of the answer candidates could have explained a number of ratios and indicated how
they enabled purchasers to assess the financial performance of the supplier. Knowledge
demonstrating how such ratios were calculated was rewarded depending on detail and depth
of knowledge demonstrated and how this was linked to assessing the supplier.

Limitations could include – large number of ratios can be produced and these need to be
understood in order for an accurate assessment of the supplier, training may be required to
assist this process, information produced by supplier is historical, it indicates trends but not the
reasons or causes of those trends, it may mask seasonal variations, the date is often a
snapshot of the business at the end of its financial year, internal financial data is not provided,
information from other suppliers or sector generic data is required for effective comparison and
benchmark. It can be argued that large supplier’s ratios cannot be directly compared to a small
supplier (especially on ROCE) and this takes away the general comparison scenario.
Emphasis could have been made that ratio analysis is just one tool to be used in evaluating
potential supplier.

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Some candidates related the ratios to their relevance to a potential supplier in areas such as
long term relationships with suppliers with an evaluation and explanation of relevant ratios,
using examples. There was a wide range of potential examples including ROCE, liquidity
and acid test, profitability and utilisation.

Generally this question produced some very weak answers with many candidates failing to give
any real assessment of the value of the process; never mind the key point of how ratio analysis
can assist a purchaser to understand the financial performance of a potential supplier, which
was the fundamental requirement of the question.

Many ratios (where given) were incorrect and a number of candidates discussed financial
areas (e.g. corporate governance) which by any stretch of the imagination could not be
regarded as ratio analysis.

The small minority of candidates, who, as part of their assessment, correctly focused on
explaining the benefits and limitations of how ratio analysis can assist a purchaser to
understand the financial performance of a potential supplier, did score highly.

Marking wise – as general guide 5 marks were awarded for demonstration of understanding
of the process, with 10 marks each for benefits and limitations. Markers were able to exercise
some discretion in the balance of the marks awarded between these three areas.

MARCH 2016

Question 3 – Learning Outcome

3.1

Describe the advantages and disadvantages of the following methods of investment appraisal, illus
your answer with examples: (i) Payback (8 marks) (ii) Discounted cashflow (DCF) (9 marks) (iii) Inte
return (IRR) (8 marks)
(25marks)

At Professional Diploma level a context was rewarded with the better candidates pointing out
that appraisal methods fall into two main types, those that do not discount cash flows such as
payback and average rate of return (ARR) and those that do such as discounted cash flow
(DCF),net present value (NPV) and internal rate of return (IRR).

The question was very direct; candidates should have described the advantages and
disadvantages of all three methods:

i) Payback. The answer required candidates to show that payback was a method of calculating
how rapidly a project returns the initial investment back to the company. The advantages
included that it was easy to calculate and also easy to understand, and allowed quick decisions
to be made on go, no-go rules. The main disadvantage was that payback did not incorporate
the time value of money, and therefore DCF (see ii below) could be the preferred way to
evaluate payback. Cash in the future is not worth as much as cash today. Also payback does
not give a rate of return so is difficult to compare, say, in a

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tender situation. Better candidates would have given examples such as; a company might
decide that all projects need to have a payback of less than five years. This is also referred to
as the cut off period.

ii) Discounted cash flow (DCF). This method of investment appraisal takes into account that the
value of money today is more than the value of money received in the future – the time value of
money concept. NPV and DCF compare the value of a pound today to the value of that same
pound in the future, taking inflation and returns into account. If the NPV of a project is positive, it
may be accepted. However, if NPV is negative, the project should probably be rejected because
cash flows will also be negative. There is a link here to IRR made by the better candidates. One
of the disadvantages if that there is no certainty in the calculations using the discount figure.
With a project running for a number of years, if the discount figure, which is a calculation, is
incorrect, the discounted cash flow figures will not be accurate, thus causing discrepancies in
the calculation. Some better candidates gave examples including “optimisation bias” on the
timing of the inflows and DCF could be in a long term Government project where the cost of
money will be a key factor to the nature of the duration.

Some advantages given by candidates included: Accounts for the fact that the value of a pound
today is more than the value of a pound received a year from now - that's the time value of
money concept. The other strength of this measure is that it recognises the risk associated with
future cash flows - even though they are not yet certain.
Some disadvantages given by candidates included: DCF does not give visibility into how long
a project will take to generate a positive NPV due to the calculations simplicity. The NPV rule
tells us to accept all investments where the NPV is greater than zero. However, the measure
doesn't tell when a positive NPV is achieved. Another limitation of the NPV approach is that
the model assumes that capital is abundant - that is there is no capital limit. If resources are
scarce, then the analyst has to look carefully at not just the NPV for each project they are
evaluating, but also the size of the investment itself. This could be countermanded by using a
form of internal rate of return (see next section).

iii) Internal Rate of Return (IRR). The internal rate of return is defines as the discount rate
where the NPV of cash flows are equal to zero. It is more desirable to undertake the project
the higher a project’s internal rate of return (when the NPV is zero). When used properly, IRR
provides excellent guidance on a project’s value and associated risk.

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An internal rate of return offers a way to quantify the rate of return provided by the
investment. The internal rate of return is defined as the discount rate where the NPV of cash
flows are equal to zero.

The IRR can be calculated using trial and error (changing the discount rate until the NPV = 0).
Generally speaking, the higher a project's internal rate of return (when the NPV is zero), the
more desirable it is to undertake the project. The rule with respect to capital budgeting or when
evaluating a project is to accept all investments where the IRR is greater than the opportunity
cost of capital. Under most conditions, the opportunity cost of capital is equal to the company's
weighed average cost of capital (WACC).The internal rate of return is the highest discount rate
at which the project is viable, so it specifies the maximum cost of finance the project team
should accept. An example of IRR may be on a capital long term project where it is not known
at what rate the figures might come in to make it viable. IRR would set a guide.

Advantages cited by candidates: IRR is widely accepted in the project and financial community
as a quantified measure of return and it's also based on discounted cash flows - so accounts
for the time value of money. When used properly, the measure provides excellent guidance on
a project's value and associated risk.
Disadvantages cited by candidates: Multiple or no Rates of Return - if evaluating a project that
has more than one change in the cash flow stream, then the project may have multiple IRRs
or no IRR at all. Changes in Discount Rates - the IRR rule tells us to accept projects where the
IRR is greater than the opportunity cost of capital or WACC. But if this discount rate changes
each year then it's impossible to make this comparison.

The markers here were not looking for an Accountant in depth analysis (especially in IRR),
more a basic review of advantages and disadvantages of each option. This three part
question, on a standard syllabus topic, was not well answered by candidates even though it
was simply split in 3 parts with only advantages and disadvantages wanted.

Summary In part i) Payback, some candidates identified it was the amount and or time taken
to repay loans. Even so, part i) was the best answered of the three parts, averaging over
50% of marks available.

Part ii) DCF was poorly answered, with some candidates saying discounting was discounts to
invoice settlement and anything else where “discount” seemed appropriate.

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Part iii) was a challenging part of this question. There were a fair number of exceptional
attempts scoring full marks.

Question 4 – Learning Outcome

4.1

(a) “Total cost of ownership (TCO) is an important financial concept that can be
used to assess the performance of the supply chain. Evaluate the main elements of TCO. (15 ma

(b) Outline 5 areas of a suppliers Profit and Loss Account (Income statement) which may be of inte
when conducting a selection exercise. (10 marks)
(25marks)
Candidates could have started their response with an overview. Total cost of ownership is
an important financial concept that can be used to assess the performance of the supply
chain from inception to disposal.

Total Cost of Ownership (TCO) allows organisations to look at both the short and long term
costs of any particular solution.

Although full life costs are often calculated for business cases this is seldom the same thing
as TCO. Also it is seen by many in the supply chain as being a better guide for supply chain
decision making than total costs of acquisition (TCA) as it has a wider context.

Traditionally cost has been associated with the purchase price alone or purchase price plus
support costs, however the initial procurement cost is typically only a relatively small
percentage of the total cost of owning and operating most products.

Better candidates often acknowledged that TCO looks at the complete cost from purchase to
disposal and is a way of thinking about cost when attempting to fairly assess the merits of
make or buy, for instance.

In a supply chain context it is often difficult to predict accurately what the lifetime costs of a
solution will be, particularly in relation to change so carrying out a Total Cost of Ownership
(TCO) assessment provides an opportunity to identify, explore and challenge any assumptions
and biases. Calculating Total Cost of Ownership (TCO) is necessary to quantify and compare
costs of all options, and applies equally across the sourcing landscape.

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Main elements to consider which go to make up an assessment of TCO

include,
• Acquisition and procurement
• Selection upfront evaluation purchase price licenses, hardware integration
• Operation and Management
• Carbon footprint and green issues
• End of Life Management
• Final disposal
Additional indirect costs may also include costs incurred with another party to ensure the
ability to meet Service Level Agreement targets for business critical solutions, Unplanned
costs, for example the possibility of unanticipated expenditure through compliance auditing
and so on.

TCO often educates and raises awareness of full costs of the project. TCO establishes a
standardised way to compare (and possibly track) costs over time, evaluating all costs both
direct and indirect costs incurred throughout the lifecycle an asset, product or system.

Again as part of the evaluation, an assessment of TCO which looks at much more than just
the cost of acquisition is a critical component when ensuring value is obtained from any
proposed supply solution. However, whilst TCO should form an important part of assessing
proposed solutions it is important to remember that TCO is only concerned with the financial
cost of any solution independent of any other benefits again this could be a weakness.

Exceptional candidates referred to the Degraeve and Roodhooft mapping matrix for
cost identification and this was rewarded

To obtain a pass mark candidates were required to evaluate at least three or four key areas of
the TCO concept with marks for identification of TCO elements, marks for their discussion /
evaluation. There was some latitude allowed in the marking for different styles.

Part (b) was an outline question a detailed explanation was not required. Profit and Loss
account (P and L) and Income Statement (IS) were be treated as exactly the same thing,
however many candidates chose to give the elements contained in a balance sheet such as
current assets and current liabilities and therefore attracted few marks.

Candidates needed to outline five P and L areas of interest to a purchaser when

considering a potential supplier in a selection exercise. The main areas outlined were;

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Revenue/Sales/Turnover The first entry on a Profit and Loss statement. The revenues (sales)
during the period are recorded here. Sometimes referred to as the “top line” – revenue shows
the total value of sales made to customers.
Cost of sales The direct costs of generating the recorded revenues go into “cost of sales”.
This would include the cost of raw materials, components, goods bought for resale and the
direct labour costs of production.

Gross profit The difference between revenue and cost of sales. A simple but very useful
measure of how much profit is generated from every £1 of revenue before overheads and
other expenses are taken into account. Is used to calculate the gross profit margin (%).

Distribution & administration expenses Operating costs and expenses that are not directly
related to producing the goods or services are recorded here. These would include distribution
costs (e.g. marketing, transport) and the wide range of administrative expenses or overheads
that a business incurs such as R and D.

Operating profit A key measure of profit. Operating profit records how much profit has been
made in total from the trading activities of the business before any account is taken of how the
business is financed. When linked to capital it can form the basis of the Prime Return on
Capital Employed (ROCE %)

Finance expenses Interest paid on bank and other borrowings, less interest income
received on cash balances, is shown here. A useful figure for shareholders to assess how
much profit is being used up by the funding structure of the business.

Profit before tax Calculated as operating profit

less finance expenses

Tax An estimate of the amount of corporation tax that is likely to be payable on the recorded
profit before tax. It’s only an estimate at this stage. This could be of interest regarding
exclusion for none payment-but unlikely.

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Profit attributable to shareholders The amount of profit that is left after the tax has been
accounted for. The shareholders then decide how much of this is paid out to them in dividends
and how much is left in the business (“retained earnings” in the equity section of the balance
sheet).
Dividends to be paid This would give an indication of how much money the directors have
decided that the owners of the company are going to be paid

Any of the above 5 or international variants was

acceptable.

All formats of a P and L were rewarded. No great detail was required in line with the command
word, however the question was not well answered and there was a fair amount of confusion
with entries in the balance sheet (stock and inventory, assets, liabilities, debt, creditors and
debtors and so on). Also a fair number of candidates thought you could monitor cash flow
through a P and L which is incorrect.

JULY 2016

b) Learning outcome addressed 2.3 Command word explanation:

Assess – evaluate or judge the importance of something

Examples of good content/good approaches in answers: Candidates could have started this
question with an overview of a stock exchange's primary aim is to provide

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issuers, intermediaries and investors with attractive, efficient and well-regulated markets in which to
raise capital and fulfil investment and trading requirements.

Stock exchanges (or stock markets) refer to the market in which publically listed shares are issued and
traded. It is one of the most vital areas of a market economy because it gives company’s access to
capital and investors (often small share buyers) a proportion of ownership in a company with the
potential to realise gains based on its future performance.
Many candidates expanded that this market can be split into two main sectors: the primary and
secondary market. The primary market is the part of the capital market that deals with issuing of new
securities. Companies, governments or public sector institutions can obtain funds through the sale of
a new stock or bond issues through this primary market. This is typically done through an investment
bank or finance syndicate of securities dealers. The secondary market, also called aftermarket, is the
financial market in which previously issued financial instruments such as stock, bonds, options, and
futures are bought and sold. Another frequent usage of "secondary market" is to refer to loans which
are sold by a mortgage bank to investors such as other banks and pension fund holders.

Marks were awarded for the identification and assessment of the primary and secondary roles of
stock exchanges although other styles of answering, not built around primary and secondary roles,
scored well if relevant.

Examples of content for merit/distinction grade answers: Stronger candidates made mention
of preference shares, becoming a listed company, The London stock exchange workings (although
other city exchanges were rewarded), regulation and market indices.

Examples of poorer content/ poorer approaches in answers: Very few candidates demonstrated
any in depth knowledge of the roles of organisations such as the Financial Conduct Authority (FCA),
UKLA, the “rules” of the London Stock exchange, MIFID or any other type of regulator/regulation. It
should be pointed out that a number of scripts concentrated on commodity and/or foreign exchange
markets and few marks were allowed for this.

Concluding comment: As in part (a) of this question, part (b) was not answered well with some
candidates not even attempting or giving a very weak response.

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Question 3 – Learning Outcome 3.1 Mark

a) Using examples to illustrate your answer, explain the meaning of an

organisation’s:
i. Direct costs ii. Indirect costs.
 b) Production overheads have to be allocated or apportioned and
absorbed. In the treatment of overhead costs, explain the meaning and process of:
i. Allocation ii. Apportionment iii. Absorption.
10 Marks

15 marks

(a) Learning outcome addressed 3.1 Command word explanation: Explain – give reasons for or acco
something

Examples of good content/good approaches in answers: Many candidates started this part with
an overview of the importance of categorising costs in some way. In this case costs are categorised
according to how strongly they can be attributed to specific products or services as follows:

Direct Costs Direct costs can be defined as costs which can be specifically and accurately be traced
to a product or service with little effort. Cost areas may be a product, a department, a project, etc.
Direct costs typically benefit a single cost object therefore the classification of any cost either as direct
or indirect is done by taking the cost object into perspective.

Indirect Costs There are costs which cannot be easily or accurately attributed to specific product or
service. These typically benefit multiple cost objects and it is impracticable to accurately trace them to
individual products, activities or departments etc. The costs can be spread over a number of
identifiable units or aspects and some candidates pointed out that indirect costs are typically conflated
with overhead costs.

The question asked for examples; such as raw materials, production wages for direct and head
office managers salaries, insurance etc. for indirect.

Examples of content for merit/distinction grade answers: Some candidates noted that most
direct costs are variable but this may not always be the case, but they always are linked to a
specific unit or aspect of the organisation, such as a person, product, service, department or
location. For example, the salary of a supervisor for a month who has only supervised the
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construction of a single building is a direct fixed cost incurred on the building. Some candidates said that
particular cost may be direct cost for one cost object but indirect cost for another cost object, and this
type of advanced content was rewarded.

Examples of poorer content/ poorer approaches in answers: Although a similar concept, direct
and indirect costs were sometimes confused with fixed and variable costs which are more related to
cost behaviours. In one or two papers no examples were given which limited the marks available

Concluding comment: This part of the question was

well answered in the main.

(b) Learning outcome addressed 3.1 Command word explanation:

Explain – give reasons for or account for something

Examples of good content/good approaches in answers: The question related to the treatment of
overhead costs. What follows is a guide to an effective answer, however where candidates gave a
different process or understanding, providing this was in broad relevance to the accepted meaning
and process, marks were awarded. Put simply the definitions of the 3 terms are;

(i) Allocation – this is the process where overhead costs are assigned to a particular cost unit,
cost
centre, account or time period.

(ii) Apportionment – this is the process where an overhead cost is assigned to more than one
cost
centre etc. (iii) Absorption – this is the method by which costs are allocated to specific
products and services.
The basis of absorption will depend on the nature of the overhead. Direct labour hours and
prime cost are both valid approaches that could be used to absorb overheads within the final
product.

The above explanation provides a basis for candidates, many of whom used their own examples or
wording to explain the meaning of the terms to good effect. The whole question of accounting for
overhead costs can even vary even within a single organisation therefore a broad approach to marking
was used.
Examples of content for merit/distinction grade answers: Better candidates illustrated their answers
with examples such as Allocation- An example of this may be where the whole cost of a company car for
a manager is charged to their department. This approach is simple and requires no further calculations.
Apportionment- An example of this approach could be the rent and rates for a factory building which
houses a number of different departments. The overhead cost in terms of rent and rates will need to be
apportioned on some fair basis. In this case floor area would be an appropriate method to use for the
apportionment. In

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some cases whole departments may need to have their costs apportioned e.g. a procurement
department, which produces no direct output for sale to consumers, will need to recover its costs from
the other departments of the organisation so that their costs can be built into the final product price.
Similarly, the apportionment of an IT department costs may be across a range of approaches but one
example could be the number of IT licences held by the production departments.

This sort of demonstration of understanding is always rewarded in this

module.

Examples of poorer content/ poorer approaches in answers: This part of the question proved
difficult for a number of candidates. Some candidates confused this overhead process with areas such
as break even, the value chain, and other unlinked areas.

Concluding comment: A number of candidates did not even attempt his part. However, a
number of candidates scored the maximum 15 marks.

Question 4 – Learning Outcome 4.3 Mark

a) Define the term ‘internal benchmarking’ and outline its advantages as

a method of measuring supply chain performance.

b) Your procurement director has just returned from a conference where

a specialist benchmarking consultancy gave a very positive presentation on the uses of benchmarkin
Advise the procurement director on a range of potential difficulties that may arise in a supply chain
benchmarking exercise.
12 marks
 13 marks

(a) Learning outcome addressed 4.3 Command word explanation: Define – explain
the exact meaning of a word or phrase Command word explanation: Outline – give the
main features, facts or the general idea of something

Examples of good content/good approaches in answers: This was in effect a two part question
looking at a definition and the advantages of internal benchmarking.

In the first part of part (a), many candidates gave a reasonable definition of internal benchmarking
along the lines of being where one part of an organisation compares its performance, in a structured
way, against another part of the same organisation. For example this may happen on a geographical,
business unit, divisional or departmental basis.

The second part of the question required

advantages; Advantages included:

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• spreading knowledge and learning

• better resource understanding
• lack of confidentiality or IPR issues (compared with external
benchmarking)
• reduced conflicts compared to external bench marking should be
rewarded
• improving internal communications
• improving cross functional working
• less resources and time required to administer
• common culture across the organisation making implementation of results
easier
• internal benchmarking such as the benefit of internal confidentiality where problems do not have to
shared externally. Many other examples were rewarded.

Examples of content for merit/distinction grade answers: A good definition

balanced against about five clear advantages would have scored well.

Examples of poorer content/ poorer approaches in answers: The question required two tasks and
some candidates did not always follow these instructions thus limiting marks

Concluding comment: A well answered question. Marking wise, only a brief definition was
required along with outlining the advantages of internal benchmarking, including illustrations and
any examples.

(b) Learning outcome addressed

4.3

Command word explanation: Advise - offer suggestions about the main features or facts of
something

Examples of good content/good approaches in answers: In an interestingly worded part (b),

candidates were required to advise the procurement director on a range of potential difficulties that
may arise in a supply chain benchmarking exercise. The “Advise” command word produced lists,
advice notes or traditional format responses and all were acceptable. Many and diverse
recommendations were produced with a range of potential difficulties. What follows is a summary of
the better points made;
• Even a positive benchmarking report can have consequences in that it may lead to
complacency. In addition the wrong conclusions can be drawn for many reasons including
the nature of the organisation, its scope and size and the differences in business conditions.
• The organisation may have difficulty in finding a benchmark comparator
organisation, particularly in the public sector
• The process is often described as backward looking therefore focus on the future needs
and challenges could be compromised.

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• The actual skills to translate the data may not be present in the organisation leading to
incorrect conclusions or over reliance on a third party advisor (such as the consultant in the
question).
 • Chasing best practice in every area might not be realistic and the organisation may
become overstretched and motivation/results could be damaged.
• It might lead the organisation to select an easy benchmark where it can easily improve
leaving the more difficult areas ignored i.e. the argument between can and need.
• The sum of all the benchmarking elements may not add up to the “big picture”
affecting performance in some key areas.
• Benchmarking is resource draining in both continuous time and the costs involved if
done effectively.
• It could be a fad of an influential member of staff (say following a presentation) as opposed
to a real business necessity.
• It may not be required; is this just the latest whim of the
director? The list is not exclusive and candidates gave other areas, giving
some examples.

Examples of content for merit/distinction grade answers: Well thought out advice to a director
producing a good range of advice points. Any examples to support the advice was marked well.

Examples of poorer content/ poorer approaches in answers: Some candidates gave more areas of
difficulty for fewer marks and this was acceptable, however only offering minimal difficulties didn’t really
provide the range, as required in the question.

Concluding comment: As in part (a) well answered, marking wise, typically candidates were
expected to give about three to four external benchmarking difficulties or issues.

NOVEMBER 2016

Question 3 – Learning Outcome 3 Mark When an organisation is considering the funding

of its working capital, outline the advantages and disadvantages of the following forms of
finance. i) Sale of Assets (5 marks) ii) Bank Overdraft (4 marks) iii) Line of Credit (4 marks) iv)
Sale and Leaseback (6 marks) v) Factoring and Invoice Discounting (6 marks)
25 Marks
Learning outcome addressed: 3.1
Command word explanation: Outline – give the main features, facts or the general idea of
something
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Examples of good content/good approaches in answers: For each of the five sources of working
capital candidates were required to outline both advantages and disadvantages so a balance of each
was required. A brief explanation of each source was often given by candidates at the start of the
answer, which was good exam technique and rewarded with a mark when the explanation was correct.
However it was not necessary for candidates to give a detailed explanation unless using this to
specifically outline advantages and disadvantages. Given the relatively small amount of marks
available for each of the sources only 2 or 3 advantages and disadvantages at most were required to
score full marks but these needed to be specific to each source. Specific examples could have
included;

Sale of Assets – a positive source if the asset is currently underused or no longer needed, but it does
reduce the overall value of the organisation and it may be a lengthy and complex process if the asset
is property.

Bank Overdraft – may be quick and easy to arrange and cheaper than a loan if only required for a short
period, but sometimes interest rates may be high and the facility may be withdrawn at short notice and
there will be a charge even if unused.

Line of Credit – a form of trade credit available either from a financial organisation or made available by
suppliers – either approach was acceptable. In the first approach it is a facility made available but where
interest is only payable if and when it is utilised so giving organisation an incentive to limit its use. A set-
up fee may be payable in advance.

Sale and Leaseback – using the sale of existing assets to inject cash into the organisation but
continuing to use them at a monthly or quarterly charge allowing the business to grow and expand. It
may be an expensive approach in the longer term and the business loses ownership and control of the
asset.

Factoring and Invoice Discounting – where a company can immediately receive up to say 90% of its
invoices from a factoring/invoice discounting company whilst still offering credit terms to its supplier.
The main advantage is the availability of cash to continue to expand the business but it can be a
costly approach as charges may be high. With factoring there is a danger of damaging relationship
with customer as factoring company may take a strict approach when collecting the outstanding debt.

Examples of content for merit/distinction grade answers: Most candidates demonstrated a sound
understanding of parts i), ii) and iv) of the question. Higher marks were generally scored by those
candidates who also correctly outlined and gave advantages and disadvantages for both Line of Credit
and also Factoring and Invoice Discounting. These were topics that some candidates did not understand
correctly or who did not answer those parts of the question.

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Examples of poorer content/ poorer approaches in answers: Apart from the lack of
knowledge of those sections mentioned above, other examples of poorer content included
vague and unspecific comments regarding interest rates being high or variable – sometimes
these comments were given as both an advantage and a disadvantage. In part v) some
candidates incorrectly discussed offering a discount to customers in return for early payment
which would generate early cashflow but is not strictly Invoice Discounting as a financial
service.
Concluding comment: Most candidates had at least a basic understanding of the sources of
finance and so marks were normally at a pass rate or above. The majority of answers did
correctly focus on advantages and disadvantages but some answers were very brief and parts
iii) and v) were sometimes answered weakly, incorrectly or omitted. Those candidates who
demonstrated good knowledge of all parts of the question were able to score very high marks.
Question 4 – Learning Outcome 4 Mark a) Explain the reasons for an organisation
obtaining stakeholder feedback on the impact of its supply chain strategies. b) Discuss, using
examples, a range of mechanisms that may be used by an organisation to obtain feedback on
its supply chain strategies.
10 marks
15 marks
Learning outcome addressed: 4.2
Command word explanation: Explain – give reasons for or account for something
Discuss- consider something by writing about it from different points of view
Examples of good content/good approaches in answers: Part a) A brief overview of the
range of stakeholders (suppliers, customers, regulators, internal stakeholders) likely to be
involved was a good introduction to the answer. The main reasons for obtaining feedback are
likely to include Prediction and Control, Mutual Understanding and Critical Reflection but other
potential reasons were quoted by candidates and where correctly explained these were
awarded marks appropriately. Marks were awarded for discussion of the stakeholders but most
were related to the reasoning.
Part b) Most candidates were able to suggest a suitable range of examples such as complaints
procedures, various communication responses, service standard monitoring, questionnaires and
response forms, and any other organisation formal or informal feedback opportunities such as
supplier forums or consumer groups. Each
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example needed a fairly brief example to demonstrate candidates understanding of the mechanism
and how it could be used to obtain relevant feedback.

Examples of content for merit/distinction grade answers: Part a) Better answers clearly linked the
reasoning given to the relevant stakeholder groups discussed and justified the benefits of obtaining
the stakeholder feedback. Examples such as linking the cause and effect of any actions taken within
the supply chain, recognising stakeholder perceptions and their points of view, and the possible need
to take corrective adjustments to any actions after reviewing their impact.
Part b) Better answers included some discussion regarding the strengths and any weaknesses of the
approaches adopted. For example the difficulty in persuading people to complete questionnaires, the
issue about whether suppliers would be prepared to give critical feedback in case that damaged their
prospects of future business and the issue of time spent in collecting, analysing and using the feedback
obtained.

Examples of poorer content/ poorer approaches in answers: Part a) Some candidates did
not make any reference to which stakeholder groups would be relevant to this topic thereby limiting
their explanation of the link between the feedback and its impact on the supply chain. A relatively
small number of answers were quite brief and lacking in any real detail leading to low scores.

Part b) A small number of answers were very brief in content and lacking in depth of detail. This may
have been due to a lack of time as this was the final question on the paper. Other weaker answers did
not discuss how the feedback mechanisms quoted were used in helping the supply chain strategies in
any meaningful way.

Concluding comment: Part a) Was generally answered well by the majority of the candidates with a
significant number of them achieving marks at a credit level demonstrating a clear appreciation of the
importance of obtaining relevant feedback.

Part b) Was generally answered to a good standard with most candidates quoting an
acceptable range of mechanisms and discussing how they would be used to obtain relevant
feedback. Marks overall were therefore generally in the pass/merit range.

JANUARY 2017

metrics (% of OTIF etc.) were rewarded as content or examples

5. Customer Satisfaction- based Metrics Satisfaction is a measure of the amount by which

perceptions exceed expectations. Satisfaction metrics are often very difficult to design and monitor.
Good answers reviewed the four metric groups on which satisfactory and unsatisfactory provisions
are often classified;
• Recovery - the extent to which an unsatisfactory service provision is
corrected
• Adaptability - flexibility of service delivery systems to meet the needs of different
customers
• Spontaneity -unprompted and unsolicited
improvements
• Coping - responses to queries and problems Complaint levels are also one of the
main ways to measure satisfaction and answers sometimes used examples such as complaints
per 10000 interactions etc. Other popular areas as examples were;
 • Completeness of service (OTIF,
etc.)
• Level of loyalty and returning customers
• Pre and post transaction returns
• Zero defects and returns analysis. Good candidates described the European Customer
Satisfaction Index (ECSI) which is a model linking satisfaction to its determinants (image, customer
loyalty, perceived value and so on) where each factor is measured through a set of variables, with
metrics being produced through questions to customers. There are many satisfaction-based metrics
which could have been described beyond the content above, and all relevant discussion or examples
were rewarded

Examples of content for merit/distinction grade

answers:

In such a wide question there is no need to repeat the above narrative except to say that what really
made the difference between pass and merit papers was the quality of examples.

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Examples of poorer content/ poorer approaches in

answers:

Just as quality of examples gave many answers a merit then the lack of examples, which was a key
to the question, meant that a number of attempts fell short.

Concluding
comment:

Q4 was a well answered question.