D2 Cips Q4

Front 1

Explain the meaning of the term ‘make/do or buy decision’ for goods or services (5marks).

Back 1

an organisation might make the goods or develop the services that it needs in-house, procuring only the rawmaterials it needs for the products it is making, with the value of the final goods/servicesthereby being created almost entirely in-house.

Alternatively, the organisation might buy inthe goods or services that it needs from external suppliers or sub-contractors and then thevalue of the finished product will have been added by the external suppliers or subcontractors.

Front 2

Describe FIVE factors that an organisation may take into account when making a‘make/do or buy decision’ for goods or services. (20 marks).

Back 2

1. Whether the item required by the organisation is strategically important or 'core' to thebusiness.

2. The relative cost of making the product in-house, compared to the cost of buying it in.

3. The potential differences in quality or timescales.

4. The availability of in-house competencies and production capacity and how easily theycan be acquired or expanded and whether they will be available in the future.

5. The availability of external suppliers, who are able to fulfil the organisation's needs.

6. The assessed risks of sub-contracting work to the external supply chain, in terms of loss ofcontrol, loss of in-house knowledge and skills and the risk of passing on confidentialinformation and intellectual property.

7. Human resource impacts, in terms of a decision to buy in leading to redundancies or adecision to make/do resulting in additional recruitment and possible training costs.

8. Opportunity cost issues, such as using in-house production capacity to make the itemsneeded, when such capacity might be used to make potentially more profitable items.

9. Potential CSR issues of outsourcing to suppliers with poor labour records.

Front 3

A shoe retailer, that currently manufactures its own shoes, is now considering buying in theshoes from an external supplier.

4(a) Outline FOUR factors that the company should consider when deciding whether to buy inthe shoes or continue to manufacture them (16 marks)

Back 3

Responses included factors such as:

relative costs of the two approaches;

market demand;

competitors’ prices;

the availability of competent external suppliers;

quality issues;

in-housecapacity and competencies;

skills at managing commercial relationships; possibleredundancies,

HR consequences.

Front 4

A shoe retailer, that currently manufactures its own shoes, is now considering buying in the shoes from an external supplier.

4(b) Explain the role of the procurement function in the procurement process if the companydecides to outsource the supply of shoes (9 marks)

Back 4

A broad interpretation was taken by Markers of ‘the role ofthe procurement function’, so that answers could address both or either of the roles of theprocurement function that are ongoing after the outsourcing has been completed; the rolesthat would change after outsourcing; and/or the roles of procurement during and as part ofthe actual process of doing the outsourcing. The latter was the area addressed by mostcandidates; but all relevant ‘roles’ were awarded marks. The only ‘roles’ that were notawarded marks were any given by candidates that were clearly far beyond any normal scope ofa ‘procurement’ function. Typical ‘roles’ explained by candidates came from various parts ofthe procurement cycle, often including: giving help with specifications; identification appropriate suppliers; evaluating potential suppliers; negotiations; supplier performancemonitoring; and contract and relationship management.

Front 5

A university has decided to outsource two activities; catering, and facilities management.

4(a) Define the term ‘outsourcing’ (5 marks)

Back 5

The provision over the longer term of non-corebusiness processes by an external provider of suchprocesses to an organisation which heeds them butdoes not wish to do them any longer itself

Front 6

A university has decided to outsource two activities; catering, and facilities management.

4(b) Describe THREE benefits for the university of outsourcing these activities (12 marks)

Back 6

Popular ‘benefits’ included: cost savings; cost certainty; better quality of service; and increasedflexibility and responsiveness.

Front 7

A university has decided to outsource two activities; catering, and facilities management.

Q4(c) Describe two disadvantages for the university of outsourcing these activities (8 marks)

Back 7

Popular ‘disadvantages’ included: loss of control and/or loss of in-house expertise; employeerelations issues, such as TUPE; difficulties in ensuring and measuring service quality; and the‘permanence’ of the outsourcing decision.

Front 8

Q4 Discuss the stages of the procurement process when an organisation outsourcesan activity. Use examples to illustrate your discussion (25 marks)

Back 8

Most responses were wellstructured,and presented the stages of the procurement process when an organisation outsourcesan activity in a logical sequence, from early stages, such as identifying needs and preparing businesscases, right through to later stages, such as award, de-briefing, start-up, and contract management.Many candidates demonstrated good knowledge of aspects such as TUPE, and were able to provideconvincing and relevant examples from their studies and from their experience.

Front 9

Q4 Describe FIVE risks for an organisation of outsourcing a strategic function, such as InformationTechnology management (25 marks).

Back 9

Typical ‘risks’ described were:

1. Potentially higher costs than in-house provision

2. Difficulties in ensuring that performance standards are met

3. The costs of monitoring the contract

4. The loss of in-house expertise and knowledge, and technologies, any of which might beneeded in the future

5. The loss of control over key areas of performance, which might impact on the outsourcer’sreputation

6. The loss of control over confidential data and intellectual property, which might betransferred to the supplier to be able to undertake the contract

7. Ethical and employee relations issues on the transfer of the business

8. The potential of the outsource contract failing, resulting in additional costs if the service has tobe in-sourced in the future

9. Tricky TUPE/HR issues

Front 10

Explain the following express contract provisions, commonly used in outsourcing contracts:

(a) Confidentiality

(b) Indemnities

(c) Performance management

(d) Liquidated damages

(e) Dispute resolution(25 marks).

Back 10

Areas that were typically addressed in responses were:

(a) Confidentiality: an explanation that confidentiality provisions are designed to protect bothparties in situations where they need to give the other party access to information about theiroperations. Confidentiality provisions should define the nature of the confidential informationcovered and should make a provision that the other party will take all necessary steps to keepthat information confidential. Some responses included irrelevant content, e.g. about NonDisclosureAgreements.

(b) Indemnities: an explanation that an indemnity provision is designed to secure anundertaking from the outsource provider that it will accept liability for any loss arising from itsperformance of the contract. An indemnity provision might include costs, such as thereimbursement of any legal costs incurred by the outsourcer as a result of a breach ofcontract by the outsource provider, loss or damage to the outsourcer's property, or injuries tostaff or customers as a result of the outsource provider's negligence. Insurance aspects areusually covered in other, separate, clauses.

(c) Performance Management: an explanation that a performance management provision isdesigned to ensure that the outsource provider achieves specific Key Performance Indicators(KPIs) or critical success factors (CSFs) and explains how performance shall be monitored andmeasured.

(d) Liquidated Damages: responses typically and correctly gave an explanation that aliquidated damages clause provides for the payment of a fixed sum of money in consequenceof a breach of contract by the outsource provider. The sum of money must be a genuine preestimateof the losses.

(e) Responses should have explained that a dispute resolution provision is designed todetermine how any future disputes between the two parties will be settled. In the event of nodispute resolution provision, any dispute would be settled by litigation, which is costly,subject to significant time delays and in the public domain. To avoid this, it is likely that adispute resolution provision would stipulate that alternative dispute resolution ('ADR') oreffective dispute resolution ('EDR') techniques would be utilised - at least initially. Thesemight include, for example, negotiation, escalation, mediation, adjudication, or arbitration.

Front 11

Q4 Explain FIVE factors that a manufacturing company will take into account when decidingwhether to make a component itself or whether to buy it from a supplier (25 marks).

Back 11

Stronganswers fully described potential risks of outsourcing, such as loss of expertise and control, and poorperformance or reputational issues if the supplier fails. Responses often included good discussions ofmarket issues, and issues around availability of competent suppliers. Responses typically showed agood understanding of theory; but many responses also showed good understanding and applicationof the theory, with examples and evidence included from candidates’ own experiences. There weresome exceptionally good responses to this question, which fully debated the issues involved, andwhich included well-thought-out examples. All valid responses were awarded marks, with up to fivemarks awarded for each ‘factor’. Factors that were typically addressed in responses were: whetherthe component is strategically important to the business; how the costs of producing in-house stackup against buying from a supplier; the availability of competencies in-house and in the outsidemarketplace; the available capacity in-house and in the outside marketplace; the risks involved indevolving production activities to the external supply chain, such as risks to confidential informationand to intellectual property; and the effects on the workforce, such as the possibility of redundancies.These factors, and all other relevant factors and examples, received credit from markers.

Front 12

Q4(a) Explain the meaning of the term ‘make/do or buy decision’ for goods or services (5marks).

Back 12

Correct responses stated that anorganisation might make the goods (or develop the services) that it needs in-house, procuringonly the raw materials it needs for the products it is making; with the value of the finalgoods/services thereby being created almost entirely in-house. Or, the organisation mightbuy in the goods/services that it needs from external suppliers or sub-contractors, and thenthe value of the finished product will have been added by the external suppliers or subcontractors

Front 13

Q4(b) Describe FIVE factors that an organisation may take into account when making a‘make/do or buy decision’ for goods or services. (20 marks).

Back 13

Strong answers fully describedpotential factors, such as the loss of expertise and internal control, and poor performance orreputational issues if the outsourced supplier then fails to deliver effectively. Responses oftenincluded good discussions of market issues, and issues around the availability of competentsuppliers.Other factors that were typically addressed in responses were:whether the goods or services are strategically important, or ‘core’, to the organisation; howthe costs of producing in-house stack up against buying from a supplier; the availability ofappropriate competencies in-house and in the outside marketplace; the available capacity inhouseand in the outside marketplace; the risks involved in devolving production activities tothe external supply chain, such as risks to confidential information and to intellectualproperty; and the effects on the workforce, such as the possibility of redundancies andindustrial disputes.

Front 14

Q4 An organisation has decided to outsource two activities catering and facilitiesmanagementQ4(a) Define the term ‘outsourcing’ (5 marks)

Back 14

The provision over the longer term of non-corebusiness processes by an external provider of suchprocesses to an organisation which heeds them butdoes not wish to do them any longer itself.

Front 15

An organisation has decided to outsource two activities catering and facilities management Q4(b) Describe THREE benefits for the organisation of outsourcing these activities (12 marks)

Back 15

Popular ‘benefits’ described by candidatesincluded: cost savings; cost certainty; better quality of service; and increased flexibility andresponsiveness.

Front 16

An organisation has decided to outsource two activities catering and facilities management

Q4 (c) Describe two disadvantages for the organisation of outsourcing these activities (8 marks)

Back 16

Popular ‘disadvantages’ described by candidates included: loss of control and/orloss of in-house expertise; employee relations issues, such as TUPE; difficulties in ensuring andmeasuring service quality; and the ‘permanence’ of the outsourcing decision.

Front 17

Q4(a) Describe FOUR factors that have contributed to the growth of outsourcing (16 marks).

Back 17

Amongst the more commonly chosen ‘factors’ were:improving quality standards and customer expectations; challenges to reduce costs;sharpening of business focus onto core competencies only; human resource flexibility inemerging nations; developments in enabling IT/telecoms; and the growth of globalisation.

Front 18

Q4(b) Explain THREE reasons why outsourcing projects may fail to achieve their expectedbenefits (9 marks).

Back 18

Popular ‘reasons’ explained bycandidates included: organisations sometimes fail to distinguish between core and non-coreactivities; it may be difficult for the organisation to ensure quality of service by the provider;there may be a potential loss of in-house expertise or knowledge; there may be a risk of loss ofcontrol over confidential data and intellectual property; organisations may fail to select anappropriate supplier, resulting in poor performance or supplier failure; organisations may haveunrealistic expectations of the benefits to be achieved from outsourcing; the outsourcingcontract may not contain well defined key performance indicators or service levels; theorganisation may fail to manage the outsourcing provider; or may even surrender control ofperformance to the supplier, who then takes advantage of the organisation's dependency

Front 19

Q4 Explain FIVE factors that a manufacturing company will take into account when decidingwhether to make a component itself or whether to buy it from a supplier (25 marks).

Back 19

Factors that were typically addressed inresponses were: whether the component is strategically important to the business; whether itis ‘core’ or ‘non-core’ activity; how the costs of producing in-house stack up against buyingfrom a supplier; the availability of competencies in-house and in the outside marketplace; theavailable capacity in-house and in the outside marketplace; the risks involved in devolvingproduction activities to the external supply chain, such as risks to confidential information andto intellectual property; and the effects on the workforce, such as the possibility ofredundancies, or ‘TUPE’ protection. Strong answers fully described factors such as thepotential risks of outsourcing, including loss of expertise and control, and poor performance orreputational issues if the supplier should fail. Responses often included good discussions ofmarket issues, and issues around availability of competent suppliers. Responses typicallyshowed a good understanding of theory; but many responses also showed good understandingand application of that theory, with examples and evidence included from candidates’ ownexperiences.

Front 20

Q4(a) Describe FOUR factors that have contributed to the growth of outsourcing (16 marks).

Back 20

Amongst the more commonly chosen ‘factors’ were:improvements in quality standards; raised customer expectations; challenges to reduce costs;sharpening of business focus onto core competencies only; human resource flexibility inemerging nations; developments in enabling IT and telecomms; and the growth ofglobalisation. Many candidates were able to add examples from their own experience,particularly of aspects of their own working environments that had been outsourced, such asIT, FM, and call-centres.

Front 21

Q4(b) Outline THREE risks to an organisation of outsourcing a non-core activity (9 marks).

Back 21

Popular ‘risks’outlined by candidates included: organisations failing to distinguish between core and noncoreactivities; loss of quality from the new provider; loss of in-house expertise or knowledge;risk of loss of control over confidential data and intellectual property; supplier failure; failure tomanage the outsourcing provider; and even surrender of control to the outsourcing provider,who can then exploit the organisation's dependency

Front 22

Q4(a) Explain the meaning of the term ‘make/do or buy decision’ for goods or services (5marks).

Back 22

an organisationmight make the goods or develop the services that it needs in-house, procuring only the rawmaterials it needs for the products it is making, with the value of the final goods/servicesthereby being created almost entirely in-house. Alternatively, the organisation might buy inthe goods or services that it needs from external suppliers or sub-contractors and then thevalue of the finished product will have been added by the external suppliers or subcontractors.

Front 23

Q4(b) Describe FIVE factors that an organisation may take into account when making a‘make/do or buy decision’ for goods or services. (20 marks).

Back 23

Correct answers could have included, but were notlimited to:

• Whether the item required by the organisation is strategically important or 'core' to thebusiness.

• The relative cost of making the product in-house, compared to the cost of buying it in.• The potential differences in quality or timescales.

• The availability of in-house competencies and production capacity and how easily theycan be acquired or expanded and whether they will be available in the future.• The availability of external suppliers, who are able to fulfil the organisation's needs.

• The assessed risks of sub-contracting work to the external supply chain, in terms of loss ofcontrol, loss of in-house knowledge and skills and the risk of passing on confidentialinformation and intellectual property.

• Human resource impacts, in terms of a decision to buy in leading to redundancies or adecision to make/do resulting in additional recruitment and possible training costs.

• Opportunity cost issues, such as using in-house production capacity to make the itemsneeded, when such capacity might be used to make potentially more profitable items.

• Potential CSR issues of outsourcing to suppliers with poor labour records.

Front 24

Q4(a) Describe FOUR benefits for an organisation of outsourcing its procurement functionto a third party (16 marks)

Back 24

Correct responses typically included: cost savings from using an outsourcing provider rather than expensivein-house provision; freeing up of procurement resources to be used for greater added value on morestrategic procurement tasks; the ability to draw on the procurement knowledge, experience, expertise, andcontacts of the outsource service provider; the ability to exploit specialist procurement technology notavailable in-house, such as e-auction software; the potential for the outsource service provider to aggregatedemand with their other clients, leading to economies of scale and lower costs and perhaps getting roundthe constraints of minimum order quantities; giving greater flexibility in adjusting to peaks and troughs ofdemand for procurement activities.

Front 25

Q4(b) Outline THREE risks for an organisation of outsourcing its procurement function to a third party (9marks)

Back 25

Popular ‘risks’ outlined by candidates included: the organisationloses commercial skills and knowledge; the organisation may lose control over important data andintellectual property; an additional management layer is required, to manage the outsource serviceprovider; domination by the outsource service provider; planned cost savings and benefits of outsourcingprocurement may not actually materialise; reputation/relationships with suppliers are damaged.

Front 26

Explain the following express contract provisions, commonly used inoutsourcing contracts:a) Confidentialityb) Indemnitiesc) Performance managementd) Liquidated damagese) Dispute resolution

Back 26

Correct content typically found in responses included:(a) Confidentiality: an explanation that confidentiality provisions are designed to protect both parties insituations where they need to give the other party access to information about their operations, especially inan outsourced environment. Confidentiality provisions should define the nature of the confidentialinformation covered, and should make a provision that the other party will take all necessary steps to keep Leading global excellence in procurement and supplyMarch 16 D2 Exam Report Learner Community FV 5/5that information confidential, such as Non-Disclosure Agreements.(b) Indemnities: an explanation that an indemnity provision is designed to secure an undertaking from theoutsource provider that it will accept liability for any loss arising from its performance of the contract. Anindemnity provision might include costs, such as the reimbursement of any legal costs incurred by theoutsourcer as a result of a breach of contract by the outsource provider, loss or damage to the outsourcer'sproperty, or injuries to staff or customers as a result of the outsource provider's negligence.(c) Performance Management: an explanation that a performance management provision is designed toensure that the outsource provider achieves specific Key Performance Indicators (KPIs) or critical successfactors (CSFs); and explains how performance shall be monitored and measured.(d) Liquidated Damages: an explanation that a liquidated damages clause provides for the payment of a fixedsum of money in consequence of a breach of contract by the outsource provider. The sum of money must bea genuine pre-estimate of the losses.(e) Dispute Resolution: an explanation that a dispute resolution provision is designed to determine how anyfuture disputes between the two parties will be settled. In the event of no dispute resolution provision, anydispute would be settled by litigation, which is costly, subject to significant time delays and in the publicdomain. To avoid this, it is likely that a dispute resolution provision would stipulate that alternative disputeresolution ('ADR') or effective dispute resolution ('EDR') techniques would be utilised - at least initially. Thesetechniques might include, for example: negotiation, escalation, mediation, adjudication, and/or arbitration.

Front 27

Q4 Alternative sourcing options must first be evaluated before making a businesscase to outsource processes or services. The considerations of these alternativesourcing options may be included as part of the business case.

Q4(a) Describe THREE such alternative sourcing options that could be evaluatedwhen making an outsourcing decision. (15 Marks)

Back 27

Correct answers included:producing the services in-house; licensing or franchising the technology or designs to external supplier(s);establishing a joint development project with another organisation; acquiring the supplier outright;purchasing from a qualified external supplier under a normal customer/supplier relationship; entering into along term development or supply relationship; ‘partial outsourcing’ (i.e. giving some elements to anoutsourced service provider, but retaining some elements in-house); and using a Shared Services Unit todeliver the required services. Credit was also given for responses based on the ‘relationship spectrum’, suchas the formation of ‘strategic alliances’ or ‘partnerships’ with suppliers, but these needed to then be relatedto the question and presented clearly as alternative options to outsourcing. Credit was also given for genericbusiness case options, such as 'do nothing', i.e. maintain the status quo, unchanged.

Front 28

Q4(b) Discuss TWO options for a purchaser if a contract for outsourced servicesbreaks down. (10 Marks)

Back 28

Correct content typically found in responses included: establish clearly the underlyingproblems with the current provider/customer, and implement an action plan for immediate/urgent correctionand recovery; award the contract instead to another supplier, perhaps the ‘second choice’ provider from theprevious sourcing exercise; re-tender the contract if too much time has elapsed since the original contract wasawarded; or bring the work back in-house.