Supply Chain Management and Purchasing Principles — 2022

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

July 2022

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

Supply chain managers are expected to make certain strategic decisions when performing their duties in an organisation. Explain five such decisions.

Model answer

  1. Location decisions: choose suitable sites for factories, stores and distribution centres, balancing proximity to customers and suppliers against land, transport and operating costs.
  2. Production decisions: decide what to produce, the capacity required and whether to make or buy inputs so that supply can meet expected demand economically.
  3. Inventory decisions: determine stock policies, safety stocks and replenishment systems to balance the cost of holding goods against the risk of shortages.
  4. Transportation decisions: choose transport modes, routes and whether to operate or outsource fleets to meet delivery requirements at an acceptable cost.
  5. Information decisions: select systems for sharing demand, order and stock information so that suppliers, production and distribution can coordinate their plans.

Question 1(b) — 10 marks

Explain five challenges which the Kenya Bureau of Standards (KEBS) may experience when ensuring that quality of goods and services in the country meet the desired standards.

Model answer

  1. Limited inspection resources: inadequate funding, staff or vehicles can restrict the number of factories, shops and consignments that can be inspected.
  2. Limited testing capacity: specialised laboratories, equipment and qualified technicians may be insufficient for testing the wide variety of products supplied.
  3. A dispersed market: numerous small and informal traders make it difficult to trace products and monitor every point at which substandard goods are sold.
  4. Evasion by suppliers: counterfeit marks, false documents and concealed production activities can make non-compliant goods difficult to identify and remove.
  5. Changing products and technology: new materials and production processes require updated standards, testing methods and staff training, which may take time and money.

Question 2(a) — 10 marks

The Simple Average is one of the methods used to determine quantity of goods to be ordered in an organisation. Explain five disadvantages to an organisation of using this method.

Model answer

  1. It gives equal weight to every observation: old consumption figures influence the forecast as much as recent figures, even when current conditions have changed.
  2. It ignores a rising or falling trend: averaging past demand can underestimate a growing requirement or overestimate a declining one.
  3. It does not explicitly allow for seasonality: high-demand and low-demand months are averaged together, so the resulting order quantity may be unsuitable for a particular season.
  4. Unusual observations distort the average: an exceptional large order or a temporary shutdown may produce a forecast that does not represent normal consumption.
  5. It depends on relevant historical data: new items or products affected by major market changes may have no useful history, making the calculated quantity unreliable.

Question 2(b) — 10 marks

Outline five supplier-related factors which may influence the prices of goods in the market.

Model answer

  1. Production and procurement costs incurred by the supplier.
  2. The supplier’s desired profit margin and pricing objectives.
  3. Production capacity, efficiency and economies of scale.
  4. The quality, brand reputation and differentiation of the supplier’s goods.
  5. Credit, warranty, delivery and other services included in the supplier’s offer.

Question 3(a) — 10 marks

Milele Limited has decided to centralise its purchasing and supply operations. Explain five advantages to the company of making such a decision.

Model answer

  1. Stronger bargaining power: combining requirements from different departments creates larger orders, enabling the company to negotiate quantity discounts and favourable terms.
  2. Greater purchasing expertise: specialist buyers can concentrate on market research, negotiation and supplier evaluation instead of duplicating these tasks in every department.
  3. Standardisation: one purchasing office can apply consistent specifications and reduce the number of similar items bought, simplifying stores and maintenance.
  4. Lower administrative duplication: central records, enquiries and ordering procedures reduce repeated paperwork and the cost of maintaining separate purchasing teams.
  5. Better control: management can monitor expenditure and supplier performance in one place, reducing unauthorised purchases and improving coordination of deliveries.

Question 3(b) — 10 marks

Explain five factors which may influence lead-time in the purchasing and supply operations of an organisation.

Model answer

  1. Internal processing time: preparing specifications, obtaining approvals and issuing an order add time before the supplier can begin fulfilling the requirement.
  2. Supplier stock and capacity: items available from stock arrive sooner than items that must wait for a production slot or additional capacity.
  3. Availability of inputs: shortages of raw materials or components at the supplier may delay completion of the order.
  4. Transport and clearance time: distance, transport mode, congestion and any required border or port clearance affect the time taken to deliver goods.
  5. Receiving and inspection time: unloading, checking quality and recording receipt can delay the point at which delivered materials become available for use.

Question 4(a) — 10 marks

Organisations are encouraged to maintain an approved list of suppliers. Outline five advantages to an organisation of maintaining such a list.

Model answer

  1. It provides readily available contacts, reducing the time spent identifying suppliers.
  2. It limits routine sourcing to suppliers whose capability has already been assessed.
  3. It supports consistent invitations for quotations or tenders from suitable suppliers.
  4. It provides a basis for recording and reviewing supplier performance.
  5. It reduces repeated supplier investigation and helps maintain continuity of supply.

Question 4(b) — 10 marks

An inspection team at Togo Limited has noticed a discrepancy between the good delivered by a supplier and those ordered by the company. Explain five possible causes of this discrepancy.

Model answer

The source uses the singular word “good”; its wording is preserved here.

  1. An unclear purchase order: incomplete specifications or ambiguous units may cause the supplier to interpret the requirement differently from the buyer.
  2. Picking or packing errors: supplier staff may select the wrong item, quantity or batch when preparing the consignment.
  3. Failure in production quality control: goods may be manufactured outside the required dimensions, material composition or performance standard.
  4. Damage or loss in transit: poor handling, theft or inadequate packaging may change the quantity or condition of goods before delivery.
  5. Unauthorised substitution: the supplier may replace an unavailable item with a different model or grade without obtaining the buyer’s consent.

Question 5(a) — 10 marks

Explain five disadvantages to an organisation of purchasing good on credit from suppliers.

Model answer

The source uses the singular word “good”; its wording is preserved here.

  1. Higher financing cost: suppliers may include a credit charge or a higher price to cover the cost and risk of waiting for payment.
  2. Loss of cash discounts: buying on credit may prevent the organisation from obtaining discounts offered for immediate settlement.
  3. Increased indebtedness: easy access to credit can encourage excessive purchases, creating liabilities that strain future cash flows.
  4. Restrictions on supply: suppliers may impose credit limits or withhold further deliveries when outstanding balances become too large.
  5. Consequences of late payment: failure to settle on time can lead to agreed interest or penalties, damaged reputation and deterioration of supplier relationships.

Question 5(b) — 10 marks

Outline five factors which may have contributed to the limited use of pipeline as a mode of transport in Kenya.

Model answer

  1. Pipelines are suited mainly to liquids, gases and suitable slurries rather than a wide range of general cargo.
  2. Construction requires a large initial investment in pipes, pumping stations and related facilities.
  3. Fixed routes give limited flexibility when the origin or destination of demand changes.
  4. Difficult terrain and the need to secure a continuous right of way can complicate construction.
  5. Leakage, vandalism and maintenance requirements can increase costs and interrupt operations.

Question 6(a) — 10 marks

Outline five ways in which the warehousing function may support the distribution operations of an organisation.

Model answer

  1. Receiving and checking incoming goods before they enter distribution stock.
  2. Protecting goods against damage, theft and deterioration while awaiting dispatch.
  3. Breaking bulk consignments into smaller quantities required by customers.
  4. Picking, assembling, packing and dispatching orders accurately.
  5. Holding buffer stock near markets to improve availability and delivery speed.

Question 6(b) — 10 marks

Explain five advantages to an organisation of using the Internet as a source of information about potential suppliers.

Model answer

Online information should be checked against reliable documents and references before a supplier is approved.

  1. Wider choice: online directories and supplier websites allow buyers to identify potential suppliers beyond their immediate geographical area.
  2. Faster access: a buyer can obtain contact details, product descriptions and catalogues without waiting for postal replies or visits.
  3. Lower search costs: initial research can be undertaken without extensive travel or printing and distribution of enquiries.
  4. Easier comparison: specifications, advertised prices and delivery capabilities from several suppliers can be reviewed before making enquiries.
  5. Convenient communication: online contact facilities allow buyers to request clarifications and quotations promptly, helping them assess responsiveness.

Question 7(a) — 10 marks

Outline five reasons that may make it necessary to adjust the price of an ongoing purchase contract.

Model answer

An adjustment must follow the contract terms and authorised variation procedure; a cost change alone does not create an automatic right to raise the price.

  1. Changes in the cost of raw materials or labour covered by an agreed price-adjustment mechanism.
  2. Exchange-rate movements affecting imported inputs or payments in a foreign currency.
  3. An approved change in the quantity, quality or scope of supplies.
  4. Changes in applicable taxes, duties or other agreed statutory cost components.
  5. An agreed extension or alteration of the delivery period that changes allowable costs.

Question 7(b) — 10 marks

Outline five advantages to an organisation of following procedures when purchasing goods.

Model answer

  1. Purchases receive the necessary authorisation before expenditure is committed.
  2. Consistent supplier-selection steps support fair and objective decisions.
  3. Budget checks and competitive comparisons help obtain value for money.
  4. Documents provide an audit trail showing who requested, approved and received goods.
  5. Standard steps reduce ordering errors, missed checks and disputes about responsibilities.

November 2022

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

One of the major decision areas in supply chain management is production. Outline five operational aspects that may be considered when making production decisions in an organization.

Model answer

  1. The quantity to produce and the capacity needed to meet demand.
  2. The production process, technology and plant layout to use.
  3. Production schedules and the sequence in which jobs will be completed.
  4. The allocation of labour, machinery and materials to production activities.
  5. Quality standards and process-control arrangements.

Question 1(b) — 10 marks

A certain company has been receiving complaints about the quality of its products despite being certified by the National Standard body. Explain the reasons that may be leading to this situation.

Model answer

  1. Standards may no longer be maintained: the company might have met the certification requirements initially but subsequently relaxed inspection or process controls.
  2. Inputs may vary: defective raw materials or unreliable component suppliers can cause poor output even where the production system was previously acceptable.
  3. Machinery or staff performance may deteriorate: worn equipment, incorrect settings or inadequate training can produce items outside specification.
  4. Products may deteriorate after manufacture: unsuitable packaging, storage or transport can damage goods that were satisfactory when they left the factory.
  5. Customer expectations may exceed the certification scope: conformity to a specified minimum standard does not necessarily guarantee every feature, durability level or service expected by buyers.

Question 2(a) — 10 marks

Explain five benefits that may accrue to an organization from using standard tender document in its procurement process.

Model answer

  1. Consistency: common instructions and contract conditions ensure that different tenders follow an established procurement approach.
  2. Comparable bids: suppliers respond to the same specification and pricing format, making objective evaluation easier.
  3. Completeness: a standard template prompts the organisation to include essential terms, qualification requirements and submission details.
  4. Time savings: staff adapt an existing document rather than drafting every clause from the beginning.
  5. Accountability: clearly recorded criteria and conditions provide a sound basis for explaining procurement decisions and resolving misunderstandings.

Question 2(b) — 10 marks

Outline five variables that a supply chain manager may use in vendor rating.

Model answer

  1. Quality and conformity of supplied goods to the required specification.
  2. Price and total cost of obtaining and using the supplies.
  3. Delivery performance, including punctuality and completeness.
  4. Capacity and reliability in meeting the required quantities.
  5. Responsiveness, after-sales support and handling of complaints.

Question 3(a) — 10 marks

Outline five purposes of a Request for Quotation document in the sourcing process.

Model answer

  1. Communicating the buyer’s required goods, quantities and specifications.
  2. Inviting suppliers to submit written prices for the requirement.
  3. Obtaining delivery, payment, warranty and validity terms.
  4. Providing a common basis for comparing suppliers’ offers.
  5. Creating a documented record for evaluation and subsequent purchasing decisions.

Question 3(b) — 10 marks

Explain the significance of a goods inspection report to an organization.

Model answer

  1. Acceptance decisions: it records whether delivered goods meet specification and supports a decision to accept, reject or accept subject to correction.
  2. Evidence of discrepancies: measured defects, shortages and damage provide a factual basis for requesting replacements or other remedies.
  3. Payment control: accounts staff can use the findings with the order and receipt records to avoid paying for unaccepted or defective goods.
  4. Supplier evaluation: repeated inspection results show a supplier’s quality performance and help determine future sourcing decisions.
  5. Traceability and accountability: the report identifies the goods, inspection date, checks and responsible inspector, supporting audits and investigation of later problems.

Question 4(a) — 10 marks

The government of Kenya recently enacted the prompt payment bill, 2020 for supply of goods and services. Explain five reasons which may have influenced such a decision.

Model answer

The question’s historical wording is reproduced as printed. These are reasons for a prompt-payment policy; the model answer does not establish whether a particular bill became law.

  1. Improving supplier cash flow: timely settlement gives suppliers funds to pay workers and buy inputs for subsequent orders.
  2. Protecting smaller businesses: firms with limited reserves are particularly vulnerable to financial distress when customers delay payment.
  3. Reducing financing costs: prompt payment reduces the need for suppliers to borrow expensively while waiting for amounts owed.
  4. Supporting continuity of supply: financially stable suppliers are better able to maintain production and honour future delivery commitments.
  5. Improving confidence and participation: predictable payment encourages capable suppliers to compete for contracts, supporting employment and economic activity.

Question 4(b) — 10 marks

Explain five measures that an organization may put in place in order to effectively use direct delivery as a distribution method.

Model answer

  1. Give accurate instructions: specify the customer’s address, contact person, ordered items and quantities so that the supplier sends the correct goods to the correct destination.
  2. Select capable suppliers and carriers: assess their coverage, vehicles, handling arrangements and reliability before entrusting them with customer deliveries.
  3. Coordinate delivery schedules: agree convenient delivery times with both supplier and customer to avoid failed deliveries and production delays.
  4. Establish packing and documentation requirements: suitable packaging and clear delivery notes protect the goods and enable customers to check the consignment.
  5. Monitor and confirm delivery: use tracking, exception reporting and signed proof of receipt to detect delays, shortages or damage and arrange prompt corrective action.

Question 5(a) — 8 marks

Explain four factors that may be considered when determining an appropriate internal purchasing structure to adopt in an organization.

Model answer

  1. Size and complexity: a large organisation with many purchases may need specialist purchasing teams, while a small one may operate effectively with a simpler structure.
  2. Geographical spread: widely separated branches may require local buying authority to respond quickly, whereas a compact organisation can coordinate purchasing centrally.
  3. Nature of requirements: common standard items can be bought together centrally; specialised or urgent local requirements may justify decentralised responsibilities.
  4. Expertise and control needs: the structure should place decisions with competent staff while providing suitable approval, accountability and expenditure controls.

Question 5(b) — 12 marks

Describe the steps that a supply chain manager may follow when carrying out a value analysis exercise.

Model answer

  1. Select the item and define the objective: identify a product or process with significant cost or poor value, and establish the required performance and study scope.
  2. Gather information: collect drawings, specifications, quantities, purchase prices, manufacturing costs and user feedback to understand the current arrangement.
  3. Analyse functions: distinguish essential functions from secondary features and determine the cost attached to achieving each function.
  4. Generate alternatives: consider different materials, designs, processes, suppliers or standard components that could perform the required functions.
  5. Evaluate alternatives: compare total cost, quality, safety, reliability and practical feasibility, eliminating options that cannot meet essential requirements.
  6. Recommend, implement and review: obtain approval for the best option, introduce the change and monitor actual savings and performance against the original objectives.

Question 6(a) — 10 marks

A certain organization is in the process of evaluating a bid price offered by a supplier for a capital item. Explain five aspects that may constitute the bid.

Model answer

Compare bids on the same delivery and tax basis. Separately assess operating, maintenance and disposal costs when evaluating total ownership cost.

  1. Basic purchase price: the amount charged for the capital item in the specified configuration and capacity.
  2. Freight and insurance: charges for moving and protecting the item from the supplier to the agreed delivery point, where included in the offer.
  3. Taxes and duties: applicable taxes, import duties or other charges that the bid requires the buyer to bear.
  4. Installation and commissioning: costs of assembling, testing and bringing the equipment into working condition.
  5. Supporting items and services: prices for specified initial spares, accessories, operator training or maintenance support included in the bid.

Question 6(b) — 10 marks

Lota Limited has adopted the forward buying technique in its material acquisition process. Explain five challenges it may face in the application of this technique.

Model answer

  1. Adverse price movements: if market prices fall after the company commits to buy, it may pay more than a buyer purchasing later.
  2. Higher holding costs: acquiring goods earlier than needed increases storage, insurance and handling expenses.
  3. Working-capital pressure: money committed to advance purchases is unavailable for other operating needs.
  4. Forecasting errors: lower-than-expected demand may leave excess stock, while a wrong product mix may still cause shortages of needed items.
  5. Deterioration and obsolescence: goods held for long periods may expire, become damaged or be overtaken by changes in technology or specifications.

Question 7(a) — 10 marks

Outline five limitations of pre-shipment inspection of an organisation’s consignment.

Model answer

  1. It adds inspection, travel or third-party testing costs.
  2. Scheduling checks and correcting defects may delay shipment.
  3. Sampling may fail to identify defects in untested items.
  4. It cannot prevent loss or damage occurring after inspection during transit.
  5. Access, equipment or expertise at the inspection location may limit the checks that can be performed.

Question 7(b) — 10 marks

Some organizations have adopted loan supply technique in their sourcing process. Explain five advantages of adopting this technique.

Model answer

The source prints “loan supply technique”. Its intended technical meaning is unclear. The points above use a literal temporary-borrowing interpretation. If the intended term was “lean supply”, use the alternative explanation below; this is not a correction to the original wording.

  1. If “loan supply” means temporarily borrowing usable materials or equipment, it can provide immediate access to needed items while the organisation waits for its own supplies.
  2. Temporary borrowing can reduce the cash needed for an immediate purchase, preserving working capital for other operations.
  3. It can bridge a short-lived shortage, allowing production or service delivery to continue.
  4. Borrowing can avoid purchasing assets that are needed only for a brief assignment.
  5. A loan arrangement can allow equipment to be tried before a later purchase, helping assess its suitability.

Alternative interpretation: lean supply

  1. Lower inventory costs: smaller replenishments aligned to actual demand reduce storage and capital tied up in stock.
  2. Less waste: removing unnecessary movement, waiting and excess processing reduces avoidable supply-chain cost.
  3. Better quality: close supplier cooperation and feedback help prevent defects rather than carrying defective stock.
  4. Faster flow: coordinated schedules reduce delays between ordering, production and delivery.
  5. Greater responsiveness: shorter replenishment cycles allow supply to adjust more readily when customer needs change.
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