Supply Chain Management and Purchasing Principles — 2023

KNEC Diploma in Supply Chain Management, Module I. Original examination questions with explained model answers for revision.

March/April 2023

Paper codes: 2903/101, 2907/302
Time: 3 hours
Instructions: Answer any FIVE questions. All questions carry equal marks. Answer the questions in English.

Question 1(a) — 10 marks

Outline five operational roles which a supply chain manager may play when organizing distribution of goods to the customers.

Model answer

  1. Plan delivery routes, schedules and suitable transport arrangements.
  2. Coordinate order picking, packing and dispatch of customer consignments.
  3. Allocate available stock to customer orders and monitor inventory availability.
  4. Coordinate carriers, warehouses and customer receiving arrangements.
  5. Track deliveries and resolve shortages, damage, returns and other delivery problems.

Question 1(b) — 10 marks

Explain five advantages of using contract adjustment pricing method in an organization.

Model answer

  1. Responds to cost changes: An agreed adjustment formula allows relevant price changes to be reflected during performance.
  2. Shares price risk: Neither party has to bear all the effects of specified cost movements.
  3. Supports continuity of supply: A supplier is less likely to abandon performance because permitted input costs have risen sharply.
  4. Can reduce initial risk allowances: Suppliers need not include as large a contingency for uncertain costs in their initial bids.
  5. Provides a transparent basis for revision: Agreed indices and conditions reduce arbitrary price demands and disputes.

Question 2(a) — 10 marks

Outline five costs that may be associated with in-house making of an organization’s materials requirements.

Model answer

  1. Raw materials and component costs.
  2. Direct production labour costs.
  3. Plant and equipment costs, including relevant maintenance and depreciation.
  4. Production overheads, such as energy and factory supervision.
  5. Quality-control, inspection, scrap and rework costs.

Question 2(b) — 10 marks

Some organizations have adopted minimum ordering quantity as a policy when dealing with their suppliers. Explain five reasons for adopting this policy.

Model answer

  1. Reduce ordering cost per unit: A larger minimum quantity spreads the fixed cost of processing an order.
  2. Obtain economical transport loads: Adequate shipment quantities can lower delivery cost per unit.
  3. Meet supplier production requirements: Suppliers may need a minimum batch to make manufacturing economical.
  4. Obtain better commercial terms: A minimum volume may qualify the buyer for an agreed lower unit price.
  5. Ensure useful replenishment quantities: Orders can cover expected demand between deliveries and avoid frequent very small purchases.

Question 3(a) — 10 marks

A storekeeper of Mario Limited has not involved the Inspection and Acceptance Committee in the inspection of a certain consignment. Explain five adverse consequences of such action.

Model answer

  1. Unsuitable goods may be accepted: The storekeeper may lack the combined technical expertise of the committee.
  2. Quantity and quality discrepancies may be missed: Independent checks help detect shortages, defects and incorrect specifications.
  3. Internal controls are weakened: One person's unreviewed acceptance increases the opportunity for error or improper dealing.
  4. Payment disputes may arise: Finance or the supplier may question receipt where the required acceptance evidence is incomplete.
  5. Accountability may be compromised: Missing committee records can lead to audit objections and difficulty establishing who approved the consignment.

Question 3(b) — 10 marks

A certain public organization has decided to issue a commitment letter to a supplier. Explain five reasons that may have influenced such a decision.

Model answer

  1. Provide written assurance: The letter records the organisation's authorised commitment concerning the transaction.
  2. Clarify the intended obligation: It can state the order, amount, conditions and expected timing to reduce uncertainty.
  3. Support supplier planning: The supplier can use the confirmed commitment to reserve stock or arrange production.
  4. Support financing arrangements: Subject to a lender's requirements, the supplier may present the letter as supporting evidence when seeking working capital.
  5. Maintain the business relationship: Clear communication reassures the supplier and supports continuity while the agreed transaction is processed.

Question 4(a) — 10 marks

An organization dealing with fast moving consumer goods (FMCG) has adopted transhipment as its distribution method. Explain five benefits that the organization may derive from adopting such a strategy.

Model answer

  1. Economical bulk transport: Goods can move in consolidated loads on the main part of the journey before transfer to local delivery vehicles.
  2. Wider market coverage: Intermediate transfer points connect the main supply route to several destinations.
  3. Suitable vehicles on each route: Large long-distance vehicles can transfer goods to smaller vehicles suited to local access.
  4. Flexible transport arrangements: Different carriers or transport modes can be combined where direct movement is impractical.
  5. Efficient onward dispatch: Well-planned transfer schedules and sorting allow consignments to be redirected promptly to their final destinations.

Question 4(b) — 10 marks

Explain five factors that may influence the supplier’s pricing strategy.

Model answer

  1. Cost of supply: Material, labour, operating and delivery costs affect the price needed to recover expenditure.
  2. Market demand: Buyers' demand and willingness to pay influence the achievable price.
  3. Competition: Rival offers and the availability of substitutes limit the supplier's pricing freedom.
  4. Business objectives: Market entry, growth, cash generation or profit targets may call for different approaches.
  5. Product characteristics and perceived value: Quality, differentiation, scarcity and service support can justify different price levels.

Question 5(a) — 10 marks

One of the objectives of supply chain management is quality assuring of an organization’s material requirements. Explain five ways of achieving such an objective.

Model answer

  1. Define clear specifications: Measurable quality requirements tell suppliers and inspectors what must be achieved.
  2. Approve capable suppliers: Assess suppliers' facilities, processes and previous performance before placing orders.
  3. Agree quality controls: Contracts should identify required tests, certificates, acceptance criteria and corrective-action responsibilities.
  4. Inspect and test supplies: Check incoming goods and any necessary production stages against the agreed standards.
  5. Monitor and improve performance: Record defects, investigate their causes and follow up supplier corrective action to prevent recurrence.

Question 5(b) — 10 marks

Outline five types of discounts that an organization may include in its pricing strategy.

Model answer

  1. Quantity discount for purchases above an agreed volume.
  2. Cash or prompt-payment discount for paying within a specified short period.
  3. Trade or functional discount for intermediaries performing agreed distribution functions.
  4. Seasonal discount for purchases made during an off-peak period.
  5. Promotional discount offered for a specified campaign or introductory period.

Question 6(a) — 10 marks

Explain five measures that an organization may put in place to enhance efficiency of out sourced services.

Model answer

  1. Select a capable provider: Evaluate relevant experience, resources and performance before awarding the service contract.
  2. Specify service requirements clearly: Define deliverables, responsibilities, response times and measurable performance targets.
  3. Provide effective coordination: Appoint contact persons and share schedules and information needed for the work.
  4. Monitor performance regularly: Compare actual results with agreed targets through reports, reviews and appropriate checks.
  5. Act on performance problems: Agree corrective actions and apply relevant contractual incentives or remedies when justified.

Question 6(b) — 10 marks

Outline five aspects that may constitute reverse logistics during the process of distributing an organization’s products.

Model answer

  1. Collection and return of unwanted, defective or recalled products.
  2. Inspection and sorting of returned items to decide their appropriate treatment.
  3. Repair, refurbishment or remanufacture of recoverable products.
  4. Recovery and recycling of useful materials and reusable packaging.
  5. Safe disposal of products or materials that cannot be reused or recovered.

Question 7(a) — 10 marks

Some organizations have adopted e-distribution strategy in their operations. Explain five advantages of adopting such a strategy.

Model answer

  1. Wider reach: Electronic channels make products or ordering services accessible to customers in more locations.
  2. Continuous access: Customers can place orders or obtain eligible digital products outside normal office hours.
  3. Faster processing: Electronic order transmission and confirmation reduce manual delays.
  4. Lower transaction costs: Automation reduces repeated paperwork and routine processing work.
  5. Improved information visibility: Linked systems provide timely order, inventory and delivery information for customers and distribution staff.

Question 7(b) — 10 marks

Explain five factors that may hinder effective development of a material specification in an organization.

Model answer

  1. Unclear user requirements: Poorly defined needs make it difficult to state the correct material characteristics.
  2. Insufficient technical expertise: Staff may lack the knowledge needed to specify performance, dimensions and tolerances.
  3. Poor departmental coordination: Conflicting information from users, engineering and purchasing can produce inconsistent requirements.
  4. Inadequate market information: A specification may demand materials or features that capable suppliers cannot readily provide.
  5. Time and resource constraints: Limited research, testing facilities or preparation time can result in incomplete or inaccurate specifications.
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