Purchasing Management — Undated papers

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

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Question 1(a) — 10 marks

A certain organization has decided to outsource its procurement function. Explain the benefits that the organization may derive from this decision.

Model answer

  1. Specialist expertise: an experienced provider may offer stronger market intelligence, sourcing skills and systems.
  2. Lower operating cost: the organisation may reduce duplicated staff and process overheads.
  3. Focus on core activities: managers can devote more attention to the organisation’s principal products and services.
  4. Purchasing economies: a provider handling aggregated demand may secure improved commercial terms.
  5. Flexible capacity: external resources can be adjusted to changing workload without maintaining all capabilities internally.

Question 1(b) — 10 marks

Outline the importance of applying the lifecycle costing technique in the purchasing operations of an organization.

Model answer

  1. Compares alternatives using acquisition, operation, maintenance and disposal costs.
  2. Prevents a low purchase price from concealing high future expenditure.
  3. Improves long-term budgeting and cash-flow planning.
  4. Supports selection of durable, efficient and maintainable equipment.
  5. Makes residual value, disposal obligations and other end-of-life consequences visible in the purchasing decision.

Question 2(a) — 10 marks

Many buying organizations prefer to enter into long term contractual relationships with their suppliers. Outline the benefits that may accrue to organizations from such relationships.

Model answer

  1. Greater continuity and security of supply.
  2. Lower repeated tendering and negotiation costs.
  3. Improved prices and service through predictable demand commitments.
  4. More scope for joint quality improvement and innovation.
  5. Better planning, communication and investment in dedicated supplier capacity.

Question 2(b) — 10 marks

Explain the factors that may influence an organization to adopt the cross-functional team-work approach in its procurement operations.

Model answer

  1. Complex requirements: technical, financial and user expertise must be combined.
  2. High purchase risk or value: major decisions benefit from wider scrutiny.
  3. Need for coordination: shared decisions prevent conflicting specifications and schedules.
  4. Innovation objectives: different perspectives help identify alternatives and improve value.
  5. Implementation commitment: departments are more likely to support an agreement they helped develop.

Question 3(a) — 10 marks

Successful negotiators exhibit certain characteristics during contract negotiation process. Outline such characteristics.

Model answer

  1. Clear communication: explain requirements and proposals accurately and check that the other party understands.
  2. Active listening: identify the supplier’s concerns and interests before proposing concessions.
  3. Persuasion: support proposals with evidence of cost, quality and mutual benefit.
  4. Emotional control: remain patient and professional when discussions become difficult.
  5. Relationship building: show respect and reliability so agreement can be reached without destroying future cooperation.

Question 3(b) — 10 marks

Outline the circumstances under which it would be appropriate to adopt the decentralised purchasing structure in an organization.

Model answer

  1. Branches operate far apart and need timely local decisions.
  2. Units purchase substantially different or specialised materials.
  3. Local suppliers offer suitable availability or lower delivery costs.
  4. Competent staff and adequate local controls exist.
  5. Rapid response to local customer or operational requirements is more valuable than central aggregation.

Question 4(a) — 10 marks

Kambii Limited intends to implement a quality assurance system in its procurement operations. Explain the ways in which the objectives of this system may be achieved.

Model answer

  1. Use clear specifications: agree measurable performance and acceptance requirements with user departments before sourcing.
  2. Qualify suppliers: assess technical capability, quality systems and previous performance before award.
  3. Build quality into contracts: state inspection, testing, traceability, warranty and corrective-action responsibilities.
  4. Verify performance: inspect risk-sensitive deliveries and review defects, complaints and supplier process evidence.
  5. Improve continuously: investigate root causes with suppliers, implement corrective actions and monitor whether defects recur.

Question 4(b) — 10 marks

Explain the factors that may motivate the procurement staff to be involved in unethical behaviour while carrying out their duties in an organization.

Model answer

  1. Weak internal controls: an officer able to request, award and approve payment without review has greater opportunity for abuse.
  2. Personal financial pressure or greed: private gain may be placed ahead of professional responsibilities.
  3. Improper influence: pressure from managers, political actors or suppliers can bias specifications and awards.
  4. Low accountability: poor monitoring and inconsistent sanctions make misconduct appear unlikely to have consequences.
  5. Unethical workplace culture: tolerated gifts, favouritism and collusion can normalise behaviour that violates professional standards.

Question 5(a) — 10 marks

You have been assigned the task of evaluating the performance of suppliers in your organization. Outline the factors you would consider when carrying out this task.

Model answer

  1. On-time delivery rate: percentage of deliveries received by the agreed date.
  2. Defect or rejection rate: proportion of supplied units failing the specification.
  3. Order fulfilment rate: proportion of orders delivered complete and in the correct quantity.
  4. Cost performance: actual total cost compared with agreed prices and cost-reduction targets.
  5. Responsiveness: time taken to acknowledge orders, solve problems and provide technical support.

Question 5(b) — 10 marks

Outline five types of costs that are associated with the management of quality in an organization.

Model answer

  1. Prevention costs: expenditure on planning and training to stop defects occurring.
  2. Appraisal costs: inspection, testing and quality audits used to check conformity.
  3. Internal failure costs: scrap, rework and downtime caused by defects found before delivery.
  4. External failure costs: returns, warranty work and complaint handling after delivery.
  5. Intangible or opportunity costs of poor quality: lost customers, damaged reputation and foregone sales.

Question 6(a) — 10 marks

Explain the disadvantages of buying materials from an oligopolistic supplier.

Model answer

  1. Weak price competition: a few suppliers may maintain high prices or follow one another’s increases.
  2. Limited alternatives: the buyer has less freedom to switch when service deteriorates.
  3. Collusion risk: suppliers may coordinate prices, territories or bidding behaviour.
  4. Strong supplier bargaining power: payment, delivery and other terms may favour the sellers.
  5. Supply concentration risk: disruption at one major producer can affect a large share of available materials.

Question 6(b) — 10 marks

Explain the factors that an organization should consider when choosing an investment appraisal method to use for its projects.

Model answer

  1. Time value of money: long-lived projects require methods that properly recognise when cash flows occur.
  2. Risk and uncertainty: the method should support realistic sensitivity analysis of uncertain cash flows and required returns.
  3. Decision objective: value-maximising organisations normally emphasise discounted measures such as net present value, while liquidity concerns may also require payback.
  4. Information and expertise: available forecasts, cost-of-capital estimates and staff capability affect what can be applied reliably.
  5. Project characteristics and resources: size, duration, mutually exclusive alternatives and capital limits influence the comparisons needed.

Question 7(a) — 10 marks

Outline the importance of the contract document in purchasing and supply operations of an organization.

Model answer

  1. Records the parties’ agreed rights and obligations.
  2. Defines specifications, quantities and quality standards against which performance is measured.
  3. Sets the price, payment arrangements and delivery responsibilities.
  4. Provides evidence for resolving disputes and enforcing valid contractual remedies.
  5. Supports planning, approvals, accountability and audit of the purchasing transaction.

Question 7(b) — 10 marks

Explain five situations in which a buyer may be considered to be in a strong position as compared to the supplier with regard to bargaining power analysis.

Model answer

  1. Many capable alternatives exist: the buyer can credibly switch suppliers.
  2. Large purchase volume: losing the buyer would materially affect the supplier’s sales.
  3. Low switching costs: changing source does not require major redesign, retraining or investment.
  4. Strong market information: the buyer understands prevailing costs, prices and supplier capacity.
  5. Ability to make or substitute: credible internal production or alternative materials reduce dependence on the supplier.
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