Supply Chain Management and Purchasing Principles — 2020

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

July 2020

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

A certain organization has adopted a horizontal approach in organizing its purchasing function. Explain five disadvantages of adopting such an approach.

Model answer

  1. Unclear responsibility: where work is shared across functional teams, it may be difficult to identify who is accountable for a purchasing decision.
  2. Coordination costs: staff from several departments must meet and exchange information, consuming time and increasing administrative effort.
  3. Slower agreement: conflicting technical, financial and operational priorities may delay decisions when team members must reach consensus.
  4. Weaker specialist control: purchasing expertise may be diluted if staff without sufficient procurement experience influence important sourcing decisions.
  5. Resistance to change: managers and employees accustomed to departmental authority may oppose the shared roles and new working relationships.

Question 1(b) — 10 marks

Outline five mistakes that a supply chain manager may make while developing specifications for goods and services.

Model answer

  1. Using vague or incomplete descriptions that permit different interpretations.
  2. Specifying unnecessarily high quality, tolerances or features that increase cost.
  3. Restricting requirements to a particular brand without an appropriate justification.
  4. Omitting user input, operating conditions or compatibility requirements.
  5. Stating requirements that cannot be objectively measured or checked on delivery.

Question 2(a) — 10 marks

Outline five elements that constitute total cost of ownership as used in evaluating the bids for capital supplies.

Model answer

  1. Acquisition cost, including purchase price and applicable delivery charges or duties.
  2. Installation and commissioning costs needed to make the asset ready for use.
  3. Operating costs, such as energy, consumables and operator expenses.
  4. Maintenance and repair costs over the asset’s useful life.
  5. End-of-life removal and disposal costs, allowing for any expected residual value.

Question 2(b) — 10 marks

Explain five circumstances under which an organization may adopt counter-trade as a sourcing method for its materials requirement.

Model answer

Counter-trade links a purchase to a reciprocal supply or purchase of goods or services; it need not be a simple direct barter.

  1. A shortage of foreign currency: exchanging goods can enable an international purchase when the buyer lacks sufficient convertible currency.
  2. Difficulty arranging ordinary payment: counter-trade may offer an agreed alternative where banking or currency restrictions make cash settlement impractical.
  3. A seller’s market-access requirement: the supplier or its country may require reciprocal purchases as part of the supply arrangement.
  4. Availability of exchangeable output: the buyer may have commodities or products that the seller is willing to accept in full or partial payment.
  5. A need to develop export outlets: a reciprocal arrangement may help the buyer obtain supplies while securing a market for its own products.

Question 3(a) — 10 marks

ABC Limited has adopted standing orders as a technique of managing its materials requirement. Explain five benefits that the company may derive from such a technique.

Model answer

  1. Less paperwork: recurring requirements can be supplied under an existing arrangement rather than a fresh full order each time.
  2. Faster replenishment: agreed delivery intervals or call-off arrangements reduce repeated ordering and approval delays.
  3. Greater supply continuity: suppliers can plan regular deliveries, reducing interruptions to routine operations.
  4. More predictable expenditure: agreed prices and quantities improve budgeting for frequently used materials.
  5. Lower processing cost: repeated enquiries, negotiations and order preparation are reduced, freeing staff for more complex purchases.

Question 3(b) — 10 marks

Explain five reasons that may make an organization to undertake pre-shipment inspection for its materials requirement.

Model answer

  1. Confirm conformity: inspecting before dispatch establishes whether goods meet the agreed specification.
  2. Detect shortages: quantities and packing can be checked before the consignment leaves the supplier.
  3. Avoid unnecessary freight: rejecting unacceptable goods early prevents the cost of shipping and returning defective supplies.
  4. Allow timely correction: the supplier can replace or repair defects before dispatch, reducing disruption at the buyer’s premises.
  5. Provide documentary assurance: an inspection record supports agreed payment, quality and delivery controls for the consignment.

Question 4(a) — 10 marks

Outline five challenges that an organization may face when adopting electronic funds transfer as a payment method.

Model answer

  1. System outages or unreliable internet access may delay processing.
  2. Fraud, phishing and unauthorised access may cause loss of funds.
  3. Incorrect account details may result in misdirected payments.
  4. Bank charges, integration and training requirements may increase costs.
  5. Limited staff or supplier familiarity with the system may hinder effective use.

Question 4(b) — 10 marks

An organization has decided to use the standard gauge railway to transport its consignment from the port of Mombasa. Explain five factors that may have influenced this decision.

Model answer

These are possible decision factors, not a statement about current fares, schedules or comparative service performance.

  1. Capacity: rail can carry large or heavy consignments that would require several road vehicles.
  2. Cost for the required journey: the organisation may find the total rail and terminal costs economical for its shipment size and destination.
  3. Service reliability: a scheduled service may provide a predictable delivery period for planning receipt and distribution.
  4. Cargo security and handling: suitable wagons, containers and controlled terminals can help protect the consignment.
  5. Route suitability: access to an appropriate rail terminal near the destination may make onward delivery practical.

Question 5(a) — 10 marks

Explain five circumstances under which progress payment method may be appropriate for use in purchasing operations.

Model answer

Payments should relate to verified contractual milestones and include suitable safeguards against paying for incomplete work.

  1. Long-duration contracts: payments at agreed stages reduce the need to wait until a project is fully completed.
  2. High-value purchases: staged settlement spreads the buyer’s cash outflow instead of requiring one large final payment.
  3. Significant work before delivery: custom equipment or construction may require the supplier to incur substantial material and labour costs in advance.
  4. Measurable milestones: completed stages can be inspected or certified, giving a clear basis for each payment.
  5. Supplier financing needs: verified progress payments can support continuing production where the supplier cannot finance the entire contract independently.

Question 5(b) — 10 marks

One of the objectives of the purchasing function is to obtain materials at a competitive market price. Explain five ways in which a procurement officer may achieve this objective.

Model answer

  1. Research the market: current quotations and cost information provide a benchmark for judging whether an offer is reasonable.
  2. Encourage competition: inviting suitable suppliers to quote or tender creates pressure to offer competitive prices.
  3. Negotiate the offer: discuss price, discounts, delivery and payment terms using knowledge of the requirement and market alternatives.
  4. Combine suitable requirements: larger planned purchases may attract quantity discounts and reduce ordering or transport costs.
  5. Use clear, economical specifications: avoiding unnecessary features and allowing suitable alternatives prevents paying for requirements that add no useful value.

Question 6(a) — 10 marks

An organization has adopted a periodic review system as a technique of controlling the amount of stock. Outline five disadvantages of the system.

Model answer

  1. A shortage may develop between reviews without being detected promptly.
  2. Larger safety stock may be needed to cover both the review period and replenishment lead time.
  3. Order quantities vary, complicating supplier and delivery planning.
  4. Fixed review dates may not suit rapidly changing demand or urgent items.
  5. Reviewing many items together may create a heavy periodic counting and ordering workload.

Question 6(b) — 10 marks

Explain five ways in which a purchasing officer may minimize price variation in purchasing contracts.

Model answer

  1. Specify requirements accurately: a clear scope reduces later changes that would alter the price.
  2. Agree an appropriate fixed price: where costs and scope are sufficiently predictable, fix the price for a defined period.
  3. Plan purchases and delivery dates: realistic schedules reduce urgent changes and avoidable extension costs.
  4. Define any adjustment mechanism: agreed indices, limits, evidence and approval requirements control allowable changes.
  5. Manage currency exposure where appropriate: agreeing the payment currency or using authorised hedging arrangements can reduce unexpected exchange-related cost changes.

Question 7(a) — 10 marks

Outline five aspects of a firm’s experience that may be incorporated in the tender document to be used as an evaluation criteria.

Model answer

  1. Experience supplying goods or completing work similar to the requirement.
  2. The size and complexity of comparable contracts successfully completed.
  3. The number of years of relevant operating experience.
  4. Past performance on quality, delivery and contractual obligations.
  5. Relevant experience and qualifications of key personnel proposed for the contract.

Question 7(b) — 10 marks

Outline five methods that an organization may use to expedite orders placed with suppliers.

Model answer

  1. Contact suppliers regularly to confirm progress against promised delivery dates.
  2. Visit the supplier’s premises to check production and resolve delays.
  3. Agree priority scheduling or authorised overtime for urgent requirements.
  4. Arrange partial deliveries of completed items when useful.
  5. Use an appropriate faster transport or collection arrangement for ready goods.
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