L4M2 Questions and Answers

Explanation

The Performance Specifications define what the system being designed must do, and not how it must do it. In this step a list of needs and wants should be created. The needs are customer requirements, while the wants are engineering desires. If a buyer adopts performance specification, the supplier will be free to choose how to make and deliver the product.

A technical specification document outlines how you’re going to address a technical problem by designing and building a solution for it.

A design specification is a detailed document providing a list of points regarding a product or pro-cess. For example, the design specification could include required dimensions, environmental fac-tors, ergonomic factors, aesthetic factors, maintenance that will be needed, etc. It may also give specific examples of how the design should be executed, helping others work properly (a guideline for what the person should do).

With conformance specification the buyer says what they want and how they want it and the supplier has to meet this

Detailed Explanation:An output specification defines the desired outcome or result of the procurement rather than specifying how the result should be achieved. A requirements brief outlines the goals, leaving flexibility for the supplier to propose solutions. Reference: CIPS Level 4, Output Specifications in Procurement.

Explanation

Start-up costs are generally low in service industries, and the main requirement is a level of knowledge and skill in that particular service.

LO 2, AC 2.1

Explanation

There are two major types of specification: conformance and performance specifications. They have the following characteristics:

Table Description automatically generated

Since performance specification is often a list of outputs or outcomes, it usually takes less time to develop than conformance specification.

Explanation

The difference between the actual spend and budgeted spend is known as variance. The formula for variance is:

Variance = Actual spend - Budgeted spend

Variances can be adverse/unfavourable or favourable ie they can be positive or negative.

Be very careful with these terms. A positive or a negative variance may be favourable or it may be adverse/ unfavourable.

Adverse variances

Adverse variances are those variances that are unfavourable to the firm. Examples would be sales below plan; costs above budget, cash receipts lower than expected, and overtime payment more than forecast.

Favourable variances

Favourable variances are those variances that are beneficial to the business. Examples would be sales ahead of plan, costs below budget, and wages below forecast.

Positive variance

A positive variance occurs where 'actual' exceeds 'planned' or 'budgeted' value. Examples might be actual sales are ahead of the budget.

Negative variance

A negative variance occurs where 'actual' is less than 'planned' or 'budgeted' value. Examples would be when the raw materials cost less than expected, sales were less than predicted, and labour costs were below the budgeted figure.

When the operators create saving, it means that the Actual spend is less than Budgeted spend. Therefore the variance is negative.

Explanation

An Outcome Based Specification (OBS) focuses on the desired outcome of a service in business terms, rather than a detailed technical specification of how the service is to be provided; this allows providers scope to propose innovative solutions that might not have occurred to the procurement team. Outcome should be distinguished from output, which is the measurable results of a set of inputs. The example of difference between outcome and output is written at the bottom of page 123 in the study guide.

Outcomes should be the starting point in making new specification. However, using outcome-based specification has some setbacks:

- First, it is not easy to measure the outcomes. Usually, outcome of a project is a statement like 'increase customer satisfaction', 'maintain ambient temperature' or 'provide a convenient way to do something'. They are not easy to measure as output.

- Second, sometimes the desired outcomes require time to be materialised

- Third, outcomes can be ambiguous

Explanation

One product substitutes for another if it offers buyers an inducement to switch that exceeds the cost or overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always some cost of switching to a substitute because of the disruption and potential reconfiguration of buyer activities that must result, however. The threat of a substitute will vary depending on the size of the inducement relative to the required switching costs.

In addition to relative value to price and switching cost, the pattern of substitution is influenced by what I term the buyer’s propensity to switch. Faced with equivalent economic inducements for substitution, different buyers will often evaluate substitution differently. The threat of substitution, then, is a function of three factors:

• The relative value/ price of a substitute compared to an industry’s product

• The cost of switching to the substitute

• The buyer’s propensity to switch

Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278). Free Press. Kindle Edition.

The price-to-book ratio compares a company's market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.

LO 2, AC 2.2

Explanation

Open-ended problem is something stopping the achievement of an objective or blocking progress. To solve this type of problems, procurement professional should find a way to unblock the block-age. In the above question, high logistics cost is an obstacle to cost cutting objective while suppli-er’s incompliance prevents the company to achieve its sustainable objective.

Detailed Explanation:ISO standards are internationally recognised benchmarks that ensure quality and safety, making them applicable across various industries, including spare parts procurement. This approach improves reliability and supplier compliance. Reference: CIPS Level 4, Standardisation in Procurement.

Detailed Explanation:Given that the provision for 'risk for additional resource' exists and this is the first occurrence, James should reject the price increase as the supplier should account for these risks in their pricing. Reference: CIPS Level 4, Contract Management and Cost Control.

Explanation

Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.

Diagram, table Description automatically generated

Source: Andrew Graves

The installation stage occurs in In-Service Operations. At this stage, the machinery is shipped and installed on the buyer's premises and check to ensure that it is working to the standards set out in the design specification.

Explanation

RAQSCI stands for Regulatory, Availability, Quality, Service, Cost, Innovation.

LO 1, AC 1.1

Explanation

The instrument plays a crucial role in steel manufacturing because it presents in the majority of products, in which case lacking this instrument would have significant impact on the organisation's output (production lines stop or damaging other machine). Otherwise, the risk of supply is high because there is limitation in supply. Therefore, it is considered as a strategic item in term of Kraljic's portfolio matrix. Procurement manager should form partnership with suppliers to maximise the value.

The following graph illustrates Kraljic's portfolio matrix:

Explanation

Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.

There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:

- Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.

- Clearly identify any testing and quality assurance procedures and who will perform them.

- Document every important aspect of the specification including a project plan

- Include a reasonable limitation of liability clause in the contract and reference it in the specifica-tion

- Identify any guarantees that are needed

- Be clear on what insurance will and will not cover

- Make sure there is clear audit trail of any changes to the specification together with approvals

LO 3, AC 3.2

Explanation

Specification is the most important document in procurement because it sets out the quality which supplier must provide. If there is no spec or the spec lacks clarity and details, supplier's perfor-mance may vary and possibly lower than actual requirements. This puts the buyer at risks. On the other hand, if the spec is clear and detailed, the supplier is liable to provide 'fit for purpose' products or perform the service at required level of quality. This will ensure that the buyer achieve 'Right Quality'.

Detailed Explanation:Dual or multiple sourcing introduces competition, reducing the sole supplier's bargaining power and leading to cost reductions. Framework agreements (A) or economies of scale (D) may not address the immediate need to reduce rates. Reference: CIPS Level 4, Sourcing Strategies.

Explanation

In this question, you have to calculate price variance and quantity variance.

Last month, 1 tonne of steel costed $216. This month, the price decreases to $181.1. Price variance = (P1 - P2)*Q2 = ($216-$181.1)*11 = $383.9

Quantity variance = (Q1-Q2)*P1 = -$216

Price variance is greater than quantity variance, therefore, price variance is the main cost driver.

LO 1, AC 1.4

Explanation

Products used in agriculture can be subject to shortage due to natural disasters.

Explanation

Every sector among the options requires intensive capital investment. However, only manufacturing and retails bury much of their working capital in form of inventory. Raw materials and WIP only present in manufacturing sector.

The manufacturing industry is undergoing massive change, rivaling the Industrial Revolution that began in England and continued on Detroit's assembly lines. But today’s revolution is “smart,” thanks to factories using artificial intelligence and robots.

A new trend is the “cobot” — a collaborative robot designed to work with humans. One company called Moduform uses them to make furniture in the U.S. The company credits using cobots for reducing their staffing turnover, since the robots do mundane repetitive tasks that bore humans, while people can now do cognitive tasks requiring judgment and diversified responsibilities. Other innovations include 3D printing, Artificial Intelligence and automation.

Today’s artificial intelligence manufacturing revolution improves performance in two key areas of manufacturing: productivity and quality control.

Explanation

Printing and office supplies are often considered as low risk, low value items. Consolidation low value, low risk items into a broader range will dramatically increases the value of the contract and leverage of buying organisation in the negotiation.

Explanation

There are 4 steps to risk managing process:

Step 1: Identify hazards

Step 2: Assess the risk

Once a risk has been identified, a risk assessment should be conducted.

You should carry out a risk assessment for any manual tasks identified as being hazardous, unless the risk is well known and you know how to control it. A risk assessment can help you determine, which postures, movements and forces of the task pose a risk, where during the task they pose a risk, why they are occurring and what needs to be fixed.

Step 3: Control the risk

The ways of controlling risks are ranked from the highest level of protection and reliability to the lowest, which is known as the hierarchy of control. You must always aim to eliminate the hazard, which is the most effective control.

Step 4: Review risk control

Control measures that have been implemented must be reviewed, and, if necessary, revised to make sure they work as planned and to maintain a work environment that is without risks to health and safety.

Source: WorkCover Queensland

Explanation

Risk control is the process by which an organization reduces the likelihood of a risk event occurring or mitigates the effects that risk should it occur. CIPS preferred way to determine your risk control strategy is to use the four T’s Process:

Transferring Risk can be achieved through the use of various forms of insurance, or the payment to third parties who are prepared to take the risk on behalf of the organization

Tolerating Risk is where no action is taken to mitigate or reduce a risk. This may be because the cost of instituting risk reduction or mitigation activity is not cost-effective or the risks of impact are at so low that they are deemed acceptable to the business. Even when these risks are tolerated they should be monitored because future changes may make it no longer tolerable.

Treating Risk is a method of controlling risk through actions that reduce the likelihood of the risk occurring or minimize its impact prior to its occurrence. Also, there are contingent measures that can be developed to reduce the impact of an event once it has occurred. Finding an alternative sup-plier is an example of treating the risk.

Terminating Risk is the simplest and most often ignored method of dealing with risk. It is the ap-proach that should be most favored where possible and simply involves risk elimination. This can be done by altering an inherently risky process or practice to remove the risk. The same can be used when reviewing practices and processes in all areas of the business.

If an item presents a risk and can be changed or removed without it materially affecting the busi-ness, then removing the risk should be the first option considered; rather than attempting the treat, tolerate or transfer it.

Explanation

A monopoly is a market with a single seller (called the monopolist) but with many buyers. In this market, the bargaining power of supplier is higher than of buyer since the supplier is the only seller.

Explanation

Specifications for through-life contracts must be clear. They should use precise technical language and avoid any ambiguity as much as possible. In most cases, 'good quality' is ambiguous. The con-tractor doesn't know exactly which product the buying organisation needs and how to supply that product.

Other notices for description of requirement are:

- Short and simply description

- Clear definitions at the beginning of the documents

- Clarify abbreviations (if any), but abbreviations should be avoided as much as possible

- Avoid any 'slang'

- Use imperative forms of language whenever possible.

LO 3, AC 3.2

Explanation

Value engineering is often applied to new products or services. Early supplier involvement (ESI) is the involvement of a supplier in the product development process from a very stage in order to use the supplier's experience and expertise. ESI can bring cost reduction opportunities, process improvements, supply chain improvements and reduce supply risk. Both processes focus on development of new product or service. They tend to work the best if they are used together.

LO 3, AC 3.1 & AC 3.4

Detailed Explanation:Acceptance testing verifies that the supplied product meets the buyer’s specification before it is formally accepted. This type of testing typically occurs during delivery or installation phases. Reference: CIPS Level 4, Quality Assurance in Procurement.

Detailed Explanation:Zero-based budgeting emphasizes starting from scratch and justifying all expenses.

3 (Budget flexibility): Ensures resources are allocated dynamically based on needs.

4 (Focus on operational issues): Encourages alignment with operational priorities rather than historical trends.Using prior figures (1) is contrary to zero-based budgeting principles. Reference: CIPS Level 4, Financial Planning and Budgeting.

Explanation

When using conformance specification, the buying organisation is responsible for the performance of the purchase. If the product fails due to poorly designed specification, the buyer is wholly responsible for it. It cannot blame the supplier for the failure because they still provided 'fit for purpose' product.

'Time to produce specification is shortened': Conformance specification requires details on dimen-sion, materials, design, etc. With such requirements, time to produce a complete conformance specification is often longer than producing performance specification.

'Buyer cannot control the inputs': Conformance specification is a list of inputs from buyer, so buyer has control over the inputs that will make the product. It also means that buyer is responsible for any product failure.

'Buyer may face liquidity risks': Liquidity means that how quick a business turns its assets into cash. This is a financial term, it does not link directly with specification failure.

Explanation

The term product life cycle refers to the length of time a product is introduced to consumers into the market until it's removed from the shelves. The life cycle of a product is broken into four stages—introduction, growth, maturity, and decline.

Chart, line chart Description automatically generated

Source: https://blueoceanoutsource.co.ke/the-product-life-cycle-concept/

At maturity stage, price competition sets in as more and more supply capacity has been added by new entrants, then the competition will be the most intense.

Explanation

Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer. According to CIPS study guide, through-life management comprises of 6 parts:

1. Design

2. Manufacture

3. Installation

4. In-service support

5. Decommission and disposal

6. Customer support

In this scenario, the company is planning to procure a ship, which is a capital asset. Through life management is a good approach. Sealines can start with developing through-life specification. This approach may have several benefits:

- It lowers the costs over the whole life of the asset

- It lowers the risks as there is a single company accountable for costs and service over the life of the asset

- A closer match between the asset delivered and the users' needs

- Development of capability over the life of the asset as the supplier continues to get experience of the users' needs and can adapt services to meet them.

Explanation

Acceptance testing, in the context of the engineering and software industries, is a functional trial performed on a product or prototype before it is put on the market or delivered, to decide whether the specifications or contract have been met. It also makes sure the quality and design of the product meet both contractual and regulatory obligations in terms of functionality, usability, durability, and safety.

If a product is found to be unacceptable at this stage, it can be sent back for modification, debug-ging, repair, or re-design before it can become a costly undertaking for the producer, as would be the case in a product recall.

Explanation

ISO 9001:2015 specifies requirements for a quality management system.

ISO 14001:2015 specifies the requirements for an environmental management system that an or-ganization can use to enhance its environmental performance. ISO 14001:2015 is intended for use by an organization seeking to manage its environmental responsibilities in a systematic manner that contributes to the environmental pillar of sustainability.

ISO 22000:2018 specifies food safety management systems — Requirements for any organization in the food chain

ISO 27001 provides requirements for an information security management system.

LO 3, AC 3.1

Explanation

Primary activities consist of inbound logistics, operations, outbound logistics, sales & marketing, service.

Second activities consist of firm infrastructure, human resource management, technology development and procurement

The following graph illustrate the value chain (Source: Smartsheet)

Graphical user interface, diagram Description automatically generated

Picking and delivery components is inbound logistics.

Maintenance is an example of operations activity.

Sourcing transportation services is an activity of procurement

Assembly design is an activity in research and development (Technology)

Recruiting is an activity of human resource management

Explanation

To answer this question, candidates are required to remember the cash flow cycle and cost entries as well as the impact of their timing on a business.

Diagram Description automatically generated

Source: https://cfoperspective.com/free-your-cash-trapped-in-the-cash-conversion-cycle/

Shorter payment term and more inventory are likely to have negative impact on the cash flow be-cause the buyer has to pay sooner and greater.

"Customers agree to pay immediately" will increase the organisation's bank account sooner.

Depreciation has no impact on cash flow as it is only listed in Profit and Loss statement.

Increasing revenue may have negative or positive impact on cash flow, depending on the real situation.

Explanation

The procurement team in the scenario is analysing the difference between the plan and actual spend. This activity is known as variance analysis. The sum of all variances gives a picture of the overall over-performance or under-performance for a particular reporting period. For each item, companies assess their favorability by comparing actual costs to standard costs in the industry.

For example, if the actual cost is lower than the standard cost for raw materials, assuming the same volume of materials, it would lead to a favorable price variance (i.e., cost savings). However, if the standard quantity was 10,000 pieces of material and 15,000 pieces were required in production, this would be an unfavorable quantity variance because more materials were used than anticipated.

Explanation

A responsibility assignment matrix[1] (RAM), also known as RACI matrix[2] (/ˈreɪsi/) or linear responsibility chart[3] (LRC), describes the participation by various roles in complet-ing tasks or deliverables for a project or business process. RACI is an acronym derived from the four key responsibilities most typically used: responsible, accountable, consulted, and informed.[4] It is used for clarifying and defining roles and responsibilities in cross-functional or departmental projects and processes.[5] There are a number of alternatives to the RACI model.

Role distinction[edit]

There is a distinction between a role and individually identified people: a role is a descriptor of an associated set of tasks; may be performed by many people; and one person can perform many roles. For example, an organization may have ten people who can perform the role of project manager, although traditionally each project only has one project manager at any one time; and a person who is able to perform the role of project manager may also be able to perform the role of business analyst and tester.

R = Responsible (also recommender)Those who do the work to complete the task.[6] There is at least one role with a participation type of responsible, although others can be delegated to assist in the work required (see also RASCI below for separately identifying those who participate in a sup-porting role).

A = Accountable (also approver or final approving authority)The one ultimately answerable for the correct and thorough completion of the deliverable or task, the one who ensures the prerequi-sites of the task are met and who delegates the work to those responsible.[6] In other words, an accountable must sign off (approve) work that responsible provides. There must be only one accountable specified for each task or deliverable.[7]

C = Consulted (sometimes consultant or counsel)Those whose opinions are sought, typical-ly subject-matter experts; and with whom there is two-way communication.[6]

I = Informed (also informee)Those who are kept up-to-date on progress, often only on completion of the task or deliverable; and with whom there is just one-way communication.[6]

Very often the role that is accountable for a task or deliverable may also be responsible for com-pleting it (indicated on the matrix by the task or deliverable having a role accountable for it, but no role responsible for its completion, i.e. it is implied). Outside of this exception, it is generally recommended that each role in the project or process for each task receive, at most, just one of the participation types. Where more than one participation type is shown, this generally implies that participation has not yet been fully resolved, which can impede the value of this technique in clarifying the participation of each role on each task.

Explanation

This International Standard (ISO 27001:2013) has been prepared to provide requirements for establishing, implementing, maintaining and continually improving an information security management system. The adoption of an information security management system is a strategic decision for an organization. The establishment and implementation of an organization’s information security management system is influenced by the organization’s needs and objectives, security requirements, the organizational processes used and the size and structure of the organization. All of these influencing factors are expected to change over time.

The information security management system preserves the confidentiality, integrity and availability of information by applying a risk management process and gives confidence to interested parties that risks are adequately managed.

It is important that the information security management system is part of and integrated with the organization’s processes and overall management structure and that information security is considered in the design of processes, information systems, and controls. It is expected that an information security management system implementation will be scaled in accordance with the needs of the organization.

This International Standard can be used by internal and external parties to assess the organization's ability to meet the organization’s own information security requirements.

The order in which requirements are presented in this International Standard does not reflect their importance or imply the order in which they are to be implemented. The list items are enumerated for reference purpose only.

ISO/IEC 27000 describes the overview and the vocabulary of information security management systems, referencing the information security management system family of standards (includ-ing ISO/IEC 27003[2], ISO/IEC 27004[3] and ISO/IEC 27005[4]), with related terms and defini-tions.

Explanation

In construction, specifications are written documents that describe the materials and workmanship required for a development. They do not include cost, quantity or drawn information but need to be read alongside other contract documentation such as quantities, schedules and drawings.

Specifications vary considerably depending on the stage to which the design has been developed, ranging from performance (open) specifications that require further design by a contractor or sup-plier, to prescriptive (closed) specifications where the design is already complete when the project is tendered.

Prescriptive specifications give the client more certainty about the end product when they make their final investment decision (i.e. when they appoint the contractor), whereas a performance specification gives the contractor and suppliers more scope to innovate and adopt cost effective methods of work, potentially offering better value for money.

Typically, performance specifications are written on projects that are straight-forward, standard building types, whereas prescriptive specifications are written for more complex buildings, or buildings where the client has requirements that might not be familiar to contractors and where certainty regarding the exact nature of the completed development is more important to the client.

Performance specification has some disadvantages:

- Well-defined performance metrics are needed to ensure that the specified performance will achieve the desired outcome

- Require reliable, practical, economical tests of performance

- Evaluations are subjective and require additional time and effort to complete

Therefore, if a performance specification is used, the buying organisation will have to ensure that they are able to define and conduct tests on whether supplier's solution can deliver the desired out-come.

Explanation

ISO/IEC 27001 is widely known, providing requirements for an information security management system (ISMS), though there are more than a dozen standards in the ISO/IEC 27000 family. Using them enables organizations of any kind to manage the security of assets such as financial infor-mation, intellectual property, employee details or information entrusted by third parties.

LO 3, AC 3.1

Explanation

According to Investopedia, the financial services sector provides financial services to people and corporations. This segment of the economy is made up of a variety of financial firms includ-ing banks, investment houses, lenders, finance companies, real estate brokers, and insurance com-panies. As noted above, the financial services industry is probably the most important sector of the economy, leading the world in terms of earnings and equity market capitalization. Large conglomerates dominate this sector, but it also includes a diverse range of smaller companies.

According to the finance and development department of the International Monetary Fund (IMF), financial services are the processes by which consumers or businesses acquire financial goods. For example, a payment system provider offers a financial service when it accepts and transfers funds between payers and recipients. This includes accounts settled through credit and debit cards, checks, and electronic funds transfers.

Companies in the financial services industry manage money. For instance, a financial advi-sor manages assets and offers advice on behalf of a client. The advisor does not directly provide investments or any other product, rather, they facilitate the movement of funds between savers and the issuers of securities and other instruments. This service is a temporary task rather than a tangible asset.

Financial goods, on the other hand, are not tasks. They are things. A mortgage loan may seem like a service, but it's actually a product that lasts beyond the initial provision. Stocks, bonds, loans, commodity assets, real estate, and insurance policies are examples of financial goods.

Explanation

As you can see from the scenario, ABC Group is developing the new product. It might be using value engineering. The latter sentences confirm this: the cross-functional team in ABC is mapping the functions and surveying the customers. Their method is known as Kano model.

Explanation

The following are typical social criteria in procurement:

• Reducing unemployment

• Preventing the use of child labour

• Preventing discrimination on the grounds of race, religion, disability, sex or sexual orientation

• Encouraging good employment practice

• Reducing local unemployment

• Reducing social exclusion

• Promoting training opportunities for the young or disadvantaged

• Encouraging access to work for people with disabilities

Explanation

One of the biggest disruptors in retail has been e-commerce. According to a report by IDC, in the month of December 2018, which is also the holiday season in the west, the e-commerce sector globally, has grown by 20 percent.

LO 2, AC 2.2

Explanation

Value Analysis (VA) is concerned with existing products. It involves a current product being ana-lysed and evaluated by a team, to reduce costs, improve product function or both. Value Analysis exercises use a plan which step-by-step, methodically evaluates the product in a range of areas. These include costs, function, alternative components and design aspects such as ease of manufac-ture and assembly.

According to the Value Methodology standard, there are 6 phases to a Value Analysis:

- Information

- Function Analysis

- Creative

- Evaluation

- Development

- Presentation

1. Information

In this first phase, the team attempts to understand why the project exists and who or what it is to produce. They obtain project data, present the original design or product concepts, and understand the project scope. Schedule, costs, budget, risk, and other non-monetary issues are studied until the team is comfortable with the concept of the project, what it is to produce, and who its end users are.

This step also includes things like site visits and meetings with the project team, if required. Project documents like plans, drawings, specifications, and reports are obtained and the value engineering team becomes familiar with them.

2. Function Analysis

This step represents the meat and potatoes (core) of the value analysis. The team attempts to determine the functions the project serves. Functions come in two forms:

- Primary functions are those that represent the reason for the project’s existence, for example, a building project might have adequate plumbing as a primary function.

- Secondary functions are those that the project serves without being core to the project. For example, a building project might have as a secondary function maintaining the view of the neighboring building.

The functions are described in verb/noun pairs, such as “supply water to all suites,” or “Maintain view of adjacent park.” For a project like this, the team should come up with 10 – 15 functions. You might be surprised how many secondary functions exist for most projects. Subject matter experts would be a great resource, but in their absence an appropriate level of brainstorming and analysis are necessary.

The team should also identify value-mismatched functions to focus the improvements on. For ex-ample, maybe a large obstruction is preventing the view of the adjacent park from too many suites resulting in a potential mismatch of the cost vs. functional benefit. This is investigated in the next step.

3. Creative

This phase represents the generation of improvement ideas. The team develops alternative ways that the project can perform the functions that have been identified. At this step, the functions are looked at individually and each one gets a list of alternative ways to perform the function. There is no judging between the importance of the various functions.

4. Evaluation

At this stage, a priority is given to each project improvement idea. The ideas are discussed and potential costs are determined. Once the risk-reward profile of each idea is itemized, the team has determined which ideas are worth implementing into the project or feature.

A few years ago, there was a pedestrian bridge built near my home which was originally designed for emergency vehicles. Although this type of design is standard practice for the bridges of this type, the value engineering team identified that emergency vehicle passage was not needed (verb/noun pair = ‘maintain passage for emergency vehicles‘). Also, a second major outcome of this value analysis was to change the design to an aesthetic, curved bridge because it was in a prominent location. The redesign of the bridge cost some money but this was more than made up by the cost of the bridge construction. Thus, the value analysis paid for itself about 10 times over in the reduced construction cost, and the bridge was significantly more aesthetic.

5. Development

Once the value improvement options have been whittled down to the ones that make sense, the value engineering team develop the options to the point of passing them back to the original project team. They must be clearly written and explained so that the project owner and stakeholders can understand how it benefits the project and act on it. Any potential negative factors are identified. Potential costs and cost savings are itemized.

6. Presentation

This last phase represents the presentation of the alternatives to the stakeholders. Often value engineering represents a change in the normal practices that people are used to, an “out of the box thinking.” Thus the best salesperson on the team is often the best one to do the presentation.

Some typical products of a value engineering analysis are a briefing document, risk analy-sis, present worth analysis, advantages vs. disadvantages, etc.

Detailed Explanation:

A (Early supplier involvement): Engaging suppliers early fosters innovation by leveraging their expertise in developing solutions.

D (Outcome-based specification): Focusing on outcomes rather than rigid inputs encourages creative and flexible proposals.Conformance specifications (C) restrict innovation, and standards (E) limit supplier flexibility. Reference: CIPS Level 4, Innovation in Procurement Specifications.

Detailed Explanation:De-regulation removes barriers to entry, encouraging new suppliers to enter the market. Other factors, like high investment or stringent requirements, limit supplier participation. Reference: CIPS Level 4, Market Entry and Supply Chain Factors.

Explanation

In the scenario, ABC Ltd has the following characteristics:

- Large investment in facilities and machinery

- Access to skilled workforce

- Mass production.

This company is a manufacturer. Manufacturing is an industry that makes products from raw ma-terials by the use of manual labour or machinery and that is usually carried out systematically with a division of labour.

Manufacturing requires investment in machinery and access to a suitably skilled workforce as well as materials and components.

Explanation

A rolling budget is continually updated to add a new budget period as the most recent budget period is completed. Thus, the rolling budget involves the incremental extension of the existing budget model. By doing so, a business always has a budget that extends one year into the future.

Think of continuous (rolling) budgets as waves rolling ashore on the beach. A new wave comes in each time, replacing the one that was there before. From a financial perspective, the wave is your budget, and the time between waves is longer! These reporting time frames can be monthly, quar-terly, yearly, etc.

An incremental budget is a budget prepared using a previous period's budget or actual performance as a basis with incremental amounts added for the new budget period.

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

Activity-based budgeting (ABB) is a system that records, researches, and analyzes activities that lead to costs for a company. Every activity in an organization that incurs a cost is scrutinized for potential ways to create efficiencies. Budgets are then developed based on these results.

Explanation

Direct costs are directly associated with the production of a good or service. In this question, 'An employee is hired to work on a project, either exclusively or for an assigned number of hours' and 'Raw materials' are directly related to producing the product.

Indirect costs are the general costs of the organisation - these costs cannot easily be attributed to specific products or services (also known as overheads). 'The materials and supplies needed for the company’s day-to-day operations' or 'Clerical assistants who maintain the office' or 'Advertising and marketing communication' is example of indirect cost.