solutions to additional questions -...

Solutions to Additional Questions Syllabus Section 1: Legal aspects

Q1 11/03

Describe the difference between a condition and a warranty.

A condition is a vital term of the contract, breach of which entitles the injured party to terminate the contract and/or claim damages. A warranty is a less important term, breach of which does not entitle the injured party to terminate the contract (though he may still be entitled to damages).

Q10 5/04

In contracts, describe the difference between a ‘condition’ and a ‘warranty’.

This is the same question as the one above.

Q4 11/03

Identify four essential elements that must be present for a contract to be legally valid.

Any four of the following will suffice.

• Agreement (ie offer and acceptance)

• Consideration

• Intention to create legal relations

• Contractual capacity

• Correct form

Q6 11/03

State two binding methods of contractual dispute resolution.

Arbitration; litigation. (Mediation is not binding.)

Q8 11/03

What is a Romalpa clause and which party to a contract is likely to rely on it?

Otherwise known as a ‘retention of title clause’, this entitles the supplier to retain ownership of the goods supplied until the customer pays up. It is therefore the supplier who is likely to rely on it.

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Developing Contracts in Purchasing and Supply

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Q3 5/04

What method do most suppliers use to ensure that their terms and conditions govern any contracts entered into when offering goods for sale online through the internet?

To answer this question you should think about your own experience of ordering goods online. Usually, you will have been asked to click ‘I accept’, or similar, before the system will allow you to proceed with your order. This is the usual safeguard adopted by suppliers.

Q4 5/04

Distinguish between common law remedies and equitable remedies.

The main common law remedy available for breach of contract is damages. Equity provides a wider range of remedies, including specific performance, injunction. The examiner likes to say that common law remedies are against property, while equitable remedies are against the person.

Q5 5/04

What are the implications of the principle of ‘privity of contract’ to buyers?

This principle means that only the parties to the contract may assert rights under the contract, or be sued under the contract. In practice, the main implication is that if a supplier subcontracts work, and the subcontractor’s work is faulty, the buyer’s remedy is only against the supplier, not directly against the subcontractor. There are ways around this rule in some circumstances.

Q1 11/04

Explain the principle of ‘privity of contract’, using an example.

This is essentially the same question as the previous one. The ‘example’ is the case of the subcontractor.

Q6 5/04

Explain two vitiating factors (circumstances) which can make a contract void or voidable.

Three vitiating factors are explained in detail in the Profex text (Chapter 3). These are misrepresentation, mistake and duress/undue influence.

Q9 5/04

What are the legal reasons that explain why an agreement to meet a friend for lunch cannot be viewed as a contract?

To form a valid contract there must be intention to create legal relations. This is not normally present in a social arrangement. Moreover, there is nothing in this arrangement that could be regarded as valid consideration, which is another essential element in a binding contract.

Solutions to Additional Questions

Q2 11/04

Distinguish between an offer and an invitation to treat.

An offer is a clear and definite statement of a proposed contract, by which the offeror intends to be legally bound. An invitation to treat is not an offer in itself, but is an invitation to others to make an offer.

Q3 11/04

Distinguish between a void and a voidable contract.

A void contract has no legal effect on either party – it is just as though no contract exists at all. A voidable contract exists unless and until it is brought to an end (avoided) at the option of one of the parties.

Q6 11/04

Briefly explain the concept of ‘judicial precedent’.

The doctrine of judicial precedent states that where a decision has been made in the courts, the principle of the decision must be followed, where possible, in later cases.

Q7 11/04

Identify two potential advantages of arbitration over litigation in dispute resolution.

A number of these advantages are listed in Chapter 1 of the Profex text (repeated below for convenience). Select any two of these for an answer.

• Proceedings are private.

• Parties can choose the arbitrator.

• Arbitration is less confrontational.

• Arbitration is intended as a single ‘one-stop’ process, avoiding endless appeals.

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Syllabus Section 2: Analysing the need

Q2 11/03

What is the difference between a performance and a conformance specification?

With a performance specification the buyer aims to describe what he expects the part or material to be able to achieve. It is then up to the supplier to furnish a product that fits the bill.

With a conformance specification the buyer details exactly what the required item must consist of. The supplier must then conform to the letter of the description provided by the buyer.

Q8 5/04

Distinguish between a conformance and a performance specification.

This is the same question as the one above.

Q3 11/03

What are the four costs of quality?

The question presumably means ‘what four categories of quality-related cost are conventionally recognised?’ In Question 16 of the May 2004 exam the examiner refers to the three costs of quality.

The answer apparently intended here is prevention costs, appraisal costs, internal failure costs and external failure costs. In the May 2004 paper the examiner lumps internal failure costs and external costs together.

Q7 11/03

Give two reasons why procurement staff need to provide good internal customer service.

Many reasons might be suggested.

• To improve organisational efficiency

• To improve purchasing’s image in the eyes of other departments

• To protect the status of purchasing as an internal activity (at the extreme, to avoid purchasing being outsourced)

• To encourage other departments to cooperate with purchasing initiatives

• To improve the organisation’s end-offering to outside customers

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Q16 11/03

(a) Examine the role of the purchasing function in preparing and developing specifications.

(b) Briefly outline the problems and risks that may result if specifications are developed by users alone.

(a) This is a fairly standard ‘bookwork’ question. A solution can easily be prepared by drawing on material from Chapter 7 of the Profex text.

With a performance specification the buyer aims to describe what he expects the part or material to be able to achieve in terms of the functions it will perform and the level of performance expected. It is then up to the supplier to furnish a product that will satisfy these requirements.

With a conformance specification the buyer details exactly what the required product, part or material must consist of. The supplier may not know in detail, or even at all, what function the product will play in the buyer’s manufacturing. It is his task simply to conform to the letter of the description provided by the buyer.

In neither case is the buyer working alone. There must clearly be input to the process from user departments. Indeed, the process of preparing a specification is unlikely to be uniform in every case. This is true even within a single organisation, and even more so if one organisation is compared with another.

In most cases, the lead role is taken by users, often designers or engineers. But this may not be the case, for example if the quality required is easy to define in terms of products widely available on the market. In such cases it would be normal to leave the ‘specification’ to the purchasing department. Another similar case is where the purchasing department is buying for internal use, rather than for incorporation into manufacturing processes or for resale (eg buying factory seating and overalls).

In more complicated cases, it is users who take the lead role. In this case the process is a difficult management task, not least because of the sensitivities of the different departments that may need to contribute. To reconcile differences, eg between a marketing department and an engineering department, requires skilled management. The buyer must be ready to discuss the real needs of the user and to question the desired performance levels or tolerances. In the end, it is the purchasing department that must formally sign off the acquisition.

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(b) If this whole process is left to user departments, without involvement from purchasing, there are a number of problems and risks that may arise. Here are some examples.

• Design departments are naturally inclined to over-specify, eg by insisting on tight tolerances, in order to ensure that the item purchased can perform adequately. Purchasing staff are able to balance this tendency by emphasising the cost consequences of over-specifying.

• Unless purchasing has a coordinating role, there is a risk that various user departments will duplicate specifications.

• User departments may have little idea of what alternatives are actually available to them in the market. To the extent that they do have such knowledge, it may be limited to well known brand names, which by their nature will be expensive, perhaps unnecessarily so.

• Purchasing staff have the expertise to identify and evaluate suppliers, to negotiate terms, and to conclude watertight contracts.

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Q1 5/04

Suggest two ways in which the purchasing function can add value for internal customers beyond merely placing and processing orders.

There are many possible answers. Select two from the following list (which is not comprehensive).

• Finding the best suppliers.

• Negotiating the best possible terms.

• Auditing and improving supplier performance.

• Managing contractual issues.

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Q16 5/04

(a) Identify and briefly discuss the application of some of the online (post-production) and offline (pre-production) quality tools that can be used to improve and maintain quality standards from suppliers.

(b) Provide two examples of each of the three costs associated with quality, in the areas of prevention, inspection/appraisal and failure.

(a) As the question indicates, offline quality tools are those that can be employed before production begins, while online tools are those that are used during production or after production is complete.

Offline tools include the following.

• Supplier quality assurance. This is the process of ensuring that materials, parts etc received from suppliers are of the required quality. If they are not, the impact on the buyer’s production process could be critical.

• Quality through design. Most quality problems begin at the design stage. Effective design can ensure that failures are ironed out at the earliest possible stage.

• Failure mode and effects analysis (FMEA). This is a technique for determining the different ways (modes) in which a product can fail, and assessing the seriousness of the effects in each case. This helps to focus attention on the critical areas.

Online quality tools include the following.

• Statistical process control (SPC). SPC is designed to impose control over processes (usually manufacturing processes) by means of statistical methods. While production is in process an operator continually samples the output and records results for comparison with predetermined expectations. If the output is in line with expectations, the process is in control; if not, the process is halted to permit remedial action.

• Quality circles. This refers to groups of workers, representative of different operational functions, who meet on a regular basis to highlight problems and brainstorm possible solutions.

• Fishbone diagrams (Ishikawa diagrams). In a manufacturing context these follow a ‘5M’ pattern, with branches comprising machinery, method, material, manpower and maintenance. The diagram is meant to illustrate the relationship between possible causes and effects, with a view to uncovering the source of quality problems.

(b) The three costs associated with quality are prevention costs, appraisal costs and failure costs.

• Prevention costs include the costs of quality management systems, staff training, supplier quality assurance etc.

• Appraisal costs include the costs of inspection and testing, supervision, ascertaining conformance etc.

• Failure costs include the costs of rejection, rework, complaints handling, loss of customer goodwill etc.

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Q8 11/04

Describe the difference between offline and online quality control.

See previous question, from the May 2004 exam.

Q10 11/04

Identify two different perspectives or definitions of quality.

Various perspectives/definitions are given in Section 5 of Chapter 8 of the Profex text. Choose two from the following.

• Quality is conformance to buyer specifications.

• Quality is functional excellence.

• Quality is the degree to which customer requirements are met.

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Q15 11/04

It is often said that the greatest opportunity for reducing costs is at the specification stage. Discuss the role of the procurement function at the specification stage and identify methods that can be used to ensure value for money is achieved and/or costs reduced.

This question goes over the same ground as Q16 of November 2003 (see above – a section of the solution to that question is repeated here for convenience). However, the final part of the question (on value for money and cost reduction) requires a little additional thought.

With a performance specification the buyer aims to describe what he expects the part or material to be able to achieve in terms of the functions it will perform and the level of performance expected. It is then up to the supplier to furnish a product that will satisfy these requirements.

With a conformance specification the buyer details exactly what the required product, part or material must consist of. The supplier may not know in detail, or even at all, what function the product will play in the buyer’s manufacturing. It is his task simply to conform to the letter of the description provided by the buyer.

In neither case is the buyer working alone. There must clearly be input to the process from user departments. Indeed, the process of preparing a specification is unlikely to be uniform in every case. This is true even within a single organisation, and even more so if one organisation is compared with another.

In most cases, the lead role is taken by users, often designers or engineers. But this may not be the case, for example if the quality required is easy to define in terms of products widely available on the market. In such cases it would be normal to leave the ‘specification’ to the purchasing department. Another similar case is where the purchasing department is buying for internal use, rather than for incorporation into manufacturing processes or for resale (eg buying factory seating and overalls).

In more complicated cases, it is users who take the lead role. In this case the process is a difficult management task, not least because of the sensitivities of the different departments that may need to contribute. To reconcile differences, eg between a marketing department and an engineering department, requires skilled management. The buyer must be ready to discuss the real needs of the user and to question the desired performance levels or tolerances. In the end, it is the purchasing department that must formally sign off the acquisition.

With regard to value for money and cost reduction, a number of the points above will contribute to these objectives. For example, the fact that purchasing staff are coordinating the inputs of various different departments, not to mention liaising with suppliers, reduces the danger of poor communication. Similarly, the fact that purchasing staff are questioning the desired performance levels or tolerances minimises the dangers of over- or under-specifying. And finally, if purchasing staff use performance specifications they can tap into innovative ideas from suppliers, which can be a source of value and cost savings.

In addition to these points, there are more general ways in which purchasing can assist. For example, even before specification it is advantageous to have a programme of standardisation, variety control and variety reduction in place within the organisation. From this base, a more effective specification procedure will be possible.

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Purchasing staff are also well placed to assist in value analysis and value engineering exercises. (See Chapter 9 of the Profex text for more detail.) The examiner for this paper is also fond of referring to the process of ‘late customisation’ (more detail at the end of Chapter 8 in the Profex text); this too can contribute to value for money and cost savings.

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Syllabus Section 3: Costing the need

Q5 11/03

Suggest two benefits of e-sourcing prior to award of contract.

There are various possibilities.

• Some services are only available online, so there is no alternative.

• Faster communication with potential suppliers is possible.

• New suppliers can be attracted by electronic tendering.

Any two of these would suffice.

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Q17 11/03

(a) Explain the concept of lifecycle costing.

(b) Briefly outline the types of information regarding a potential new supplier of capital equipment that should be obtained by a buyer prior to the negotiation for the purchase of this equipment.

(c) Give five variables or ‘tradables’ that a buyer could use in a negotiation with a supplier for the purchase of a major item of capital equipment.

(a) Lifecycle costing refers to the calculation of all costs arising over the lifetime of a capital asset. Apart from the original purchase price, there may be costs of maintenance and repair; costs associated with any inefficiency or actual failure of the machine; costs of delivery, installation and commissioning; costs of routine maintenance and periodic overhauls; costs of energy and labour involved in running the asset; costs of time lost during breakdowns, etc. There is also the ‘negative cost’ represented by the asset’s residual value when it is eventually disposed of.

When adopting a lifecycle approach to costing we need to estimate all of these costs, despite the difficulties caused by the lengthy timescale over which they will arise. In major cases it will be appropriate to use discounted cashflow techniques (which may be familiar from the Business Analysis exam). However, there is also a need to be practical: many smaller organisations will not have the resources to perform this kind of analysis, and in any event may not have sufficient funding to enable a free choice between the different machines. This may mean in practice that they are forced to choose the asset which is cheapest in the short term.

(b) The choice of a supplier will depend partly on traditional purchasing criteria (cost, delivery schedule, etc) but partly on specific items of information peculiar to capital assets. These include the following.

• The supplier’s previous experience in producing the type of asset required. • Details of other satisfied customers to act as referees. • The quality of the supplier’s management, including approach to innovation,

approach to quality, design and manufacturing capacity. • The supplier’s position in the market as compared with that of competitors. • The financial standing of the supplier in terms of liquidity, cashflow, profitability

etc.

(c) This is a rather oddly worded question, but appears to refer to the number of variables that should form part of the eventual contract. The idea is that buyers can barter by trading a concession on one aspect in return for a concession on another.

The variables might include any of the following.

• The purchase price • Terms of payment, eg timing and amount of stage payments • Maintenance terms • Length of warranty period and comprehensiveness of warranty terms • Performance guarantees • Service levels

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Q7 5/04

Suggest two procedures that are appropriate for dealing with low-value orders.

Possibilities include the use of purchasing cards, petty cash, telephone or fax orders, or online ordering from electronic catalogues.

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Q17 5/04

(a) Many organisations see major potential benefits from the exploitation of internet technologies for purchasing and supply. However, these benefits are not guaranteed. Discuss the questions regarding supply markets that should be asked before a decision to use e-procurement tools is made.

(b) Explain how an online reverse auction works and identify the purchases for which it is most often used.

(a) This part of the question apparently requires regurgitation of a list of questions identified by the examiner. They are as follows.

• Is there liquidity in the supply market? In other words, is there a constant flow of suppliers who may have excess inventory or capacity that they would be willing to sell quickly?

• Is electronic technology widely adopted in the supply market? If there are only a few suppliers capable of making online bids then this may not be a good route to pursue. In particular, if the preferred suppliers are not capable of handling e-commerce then it is probably best to adopt alternative methods (unless they can be educated).

• Are there any legal risks in ordering this particular item via electronic channels? • Could the use of e-sourcing tools (such as reverse auctions) damage the supply

market or cause some suppliers not to bid for business? • What risks are involved? (Fraud, information security, computer viruses etc) • If a decision is taken to buy through a market exchange operated by a third

party, is there a risk of over-dependence on this provider? • Are there any ethical implications that need to be considered?

(b) An online reverse auction is prepared in advance by the buyer, who advertises contracts and solicits interest from possible suppliers. When the advertised time arrives the participants join each other online, effectively simulating the physical reality of an auction room. In line with this, each participant can see the offers made by others.

The buyer is hoping to attract as low a price as possible, which means that bidders (ie potential suppliers) must continually come down in price. (For this reason, such auctions are sometimes referred to as reverse auctions, because of course in a regular auction it is buyers who are competing upwards rather than suppliers competing downwards.)

According to the examiner this kind of process is used primarily to reduce prices for inputs such as cement, steel, component (??), tyres, packaging and other leverage items. To judge from articles in the professional press the process is much more widely adopted than this, and virtually any commodity appears to have a potential market online.

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Q18 5/04

Define lifecycle costing and explain how it can assist in making capital expenditure purchasing decisions.

Lifecycle costing refers to the calculation of all costs arising over the lifetime of a capital asset. Apart from the original purchase price, there may be costs of maintenance and repair; costs associated with any inefficiency or actual failure of the machine; costs of delivery, installation and commissioning; costs of routine maintenance and periodic overhauls; costs of energy and labour involved in running the asset; costs of time lost during breakdowns, etc. There is also the ‘negative cost’ represented by the asset’s residual value when it is eventually disposed of. The examiner likes you to classify these various costs under the three headings of acquisition costs, cost of operation, and disposal costs.

When adopting a lifecycle approach to costing we need to estimate all of these costs, despite the difficulties caused by the lengthy timescale over which they will arise. In major cases it will be appropriate to use discounted cashflow techniques (which may be familiar from the Business Analysis exam). However, there is also a need to be practical: many smaller organisations will not have the resources to perform this kind of analysis, and in any event may not have sufficient funding to enable a free choice between the different machines. This may mean in practice that they are forced to choose the asset which is cheapest in the short term.

The reason for taking all this trouble is that lifecycle costing is of major assistance in making capital expenditure decisions. The point is that it can be misleading to compare alternative assets solely on the basis of the ‘headline’ purchase price. An asset that appears very cheap in its initial price can become very expensive when running costs, maintenance costs etc are taken into account. Moreover, there is also an environmental consideration: one aspect of this is a possible preference for buying a used asset rather than a brand new one, and another aspect is the issue of disposing of the asset eventually in an environmentally friendly way.

Q4 11/04

Suggest two conditions for successful use of competitive tendering as a sourcing option.

Dobler and Burt identify these conditions (see Table 10.1 in the Profex text, part of which is reproduced in the list below). Any two of these will suffice.

• The monetary value of the purchase should be high enough to justify the expense of the method.

• The specifications must be clear and the vendors must have a clear idea of the production costs involved.

• There must be an adequate number of vendors in the market.

• The vendors must be both technically qualified and keen for the business.

• There must be sufficient time for the procedure to be accomplished.

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Q9 11/04

Who must abide by EU procurement directives, and when do they apply?

The directives apply to organisations in the public sector and to utilities organisations. They apply when the value of contracts exceed certain thresholds.

Q18 11/04

Preston Bank plc requires new air conditioning for each of its forty branches all located in the same region in the UK. The following are details of the requirement:

Required: Forty 80,000 BTU Output Automatic Air Conditioners installed within six months

Expected/average usage: 2,500 hours per year per AC unit

Expected life: 4 years before compulsory replacement for health and safety reasons

Following a request for quotations from pre-qualified suppliers three quotes have been received, the details of which are outlined in the table below.

Polar Cool Ltd Heat Systems Ltd Jones Electrical Ltd

Price £1,400 per unit including installation

£1,600 per unit including installation

£600 per unit. Installation cost £6,000 for all sites

Running cost: electrical usage

3kw per hour 2kw per hour 1kw per hour

Expected useful life 20,000 hours 10,000 hours 10,000 hours

Average interval between service/ breakdown

1,500 hours 1,000 hours 500 hours

Maintenance costs After warranty expires £300 per machine per year (parts & labour)

£100 for each service visit (parts & labour)

£100 for each service visit (parts & labour)

Warranty period 1st year all servicing/parts free

1st year all servicing/parts free

None. All service visits payable

Cost of 1kw electricity = 10p

(a) Calculate the estimated total life cost over four years of each quotation received and present your results in a clear table making clear which quotation is the ‘lowest’ and which is the ‘highest’.

(b) What would the effect of a decrease in the cost of electricity of 50% be to your analysis?

(c) What would the effect of an increase in the cost of electricity of 100% be to your analysis?

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(a) There are three cost elements that we have to aggregate: the basic purchase price, the running cost of electricity usage, and the maintenance costs. These should be tabulated and totalled. We can then adjust the totals in parts (b) and (c) to reflect the revised electricity costs. We begin with some notes to explain the calculations.

The basic purchase price is simple and requires no explanation.

With regard to electricity usage, each machine will be used for four years @ 2,500 hours per year, so 10,000 hours in total. Since there are 40 machines in total, that means we must pay for 400,000 hours. For Polar Cool, the cost per hour is 30p (= 3kw @ 10p); for Heat Systems the cost per hour is 20p; and for Jones Electrical the cost per hour is 10p.

With regard to maintenance, for Polar Cool we pay £300 per machine in each of Years 2, 3 and 4, so £900 per machine in total. (Year 1 is covered by warranty.) For Heat Systems, we have the first year (= 2,500 hours) covered by warranty. After that, each machine averages 7.5 service visits over the remainder of its life, at £100 per visit, so £750 per machine in total. For Jones Electrical we expect 20 service visits per machine (10,000 ÷ 500 = 20), at £100 per visit, so £2,000 per machine in total.

We can now tabulate our calculations.

Polar Cool Ltd Heat Systems Ltd Jones Electrical Ltd Purchase price 40 × £1,400 = 56,000 40 × £1,600 = 64,000 (40 × £600) + 6,000 =

30,000

Electricity cost 400,000 × 30p = 120,000 400,000 × 20p = 80,000

400,000 × 10p = 40,000

Maintenance cost 40 × £900 = 36,000 40 × £750 = 30,000 40 × £2,000 = 80,000

Total £212,000 HIGHEST

£174,000 £150,000 LOWEST

(b) In this scenario, electricity costs fall by half. This saves £60,000, £40,000 and £20,000 respectively. The new total costs are respectively £152,000, £134,000 and £130,000. The ranking remains the same: Polar is most costly, Jones is least costly.

(c) In this scenario, electricity costs double, adding £120,000, £80,000 and £40,000 respectively. The new total costs are respectively £332,000, £254,000 and £190,000. Again, the rankings are not affected.

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Syllabus Section 4: Providing the need

Q10 11/03

Give two reasons why ethical sourcing has become more important in recent years.

• Various reasons might be cited.

• Heightened awareness of ethical issues among consumers

• The wish to avoid being targeted by pressure groups

• Increasing globalisation means that standards from the developed West are in effect ‘exported’ to the third world

• Some companies have made a public virtue of their ethical standards in order to gain competitive advantage

Any two of these would suffice.

Q15 11/03

Explain how the nature of procurement processes and activities varies between primary, secondary and tertiary organisations.

This is a straightforward ‘bookwork’ question that can be answered from material in Chapter 11 of the Profex text. Refer to that chapter for more detail on any of the points below.

Primary industries are those concerned with extracting natural resources from the earth (eg mining). Characteristics of such organisations that affect procurement processes and activities include the following.

• The purchasing spend is very high, because large, specialised heavy-duty machinery is often necessary, and because expenditure on spares and tools is a significant element.

• Stock levels are typically, leading to an emphasis on stockholding costs.

• Most purchases are routed through a specialist purchasing department.

• Purchasing is typically represented at a high level in the organisation.

• The links between stages in a manufacturing environment are absent in a primary industry, which means that techniques such as JIT and MRP are less important.

• The value of special, non-recurring purchases is very high, which means that the supplier base can change frequently.

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Secondary industries (ie manufacturing industries) are often classified according to the nature of the manufacturing process.

• In a jobbing environment, all equipment and materials must be ready at all times, so that the jobbing worker can move onto a new stage of production whenever it is convenient. There is little standardisation of materials or processes. The system can cope with variations in incoming materials.

• In a flow environment, the exact time when a particular material and a particular item of equipment is needed is determined by the interaction of different production stages. JIT systems are in general more appropriate to flow systems than jobbing systems. Some measure of standardisation of products is essential. The system is less able to cope with variations in incoming materials.

• World class techniques (such as JIT, MRP, and TQM) have extensive use in manufacturing organisations, and have had the effect of raising the profile of purchasing.

• Purchasing’s key internal customer is the production function.

• The value of materials bought on a regular basis is proportionately high. This suggests a focus on a slim supplier base, with close relations between purchasing and suppliers.

• The role of purchasing extends right through from product development to delivery to customers.

Tertiary industries are service industries. Key characteristics include the following.

• The purchasing function is often relatively undeveloped, though this trend is changing as the importance of purchasing skills in all sectors is increasingly recognised.

• Purchasing activities are often dispersed throughout the organisation, with many user departments liaising directly with suppliers.

• The value of bought-in materials is typically a low proportion of total expenditure (salary and equipment costs being a much higher percentage of the total).

• Purchasing is often regarded as merely a support function, because there is no direct internal customer (such as the production function in a manufacturing firm).

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Q18 11/03

Discuss the purpose of supplier appraisal. Choose and justify four key areas against which you would appraise suppliers before approving them as potential suppliers to an organisation type of your choice.

Again, this is mostly ‘bookwork’ (see Chapter 12 of the Profex text).

In earlier days the purchasing function was perceived as a reactive support function, responding to requests form production and other user departments. Such requests were met on an ad hoc basis, and the main task of purchasing was to ensure that the clerical and administrative routines associated with order generation and expediting were conducted efficiently.

This approach is no longer regarded as adequate. Strategic involvement of purchasing staff is now considered essential. One aspect of this is the need for a systematic approach to supplier appraisal. The buyer’s aim in this is to ensure that suppliers or potential suppliers can perform the supply contract to the required standard.

The literature refers to many possible criteria that may be used in this process. Four possibilities are:

• Financial stability

• Quality systems

• Management competence

• Environmental credentials

As an example, suppose that you are sourcing a chemical to be used in large quantities by a manufacturing firm operating a flow production system.

• Clearly the potential supplier must be financially stable. If not, there is a danger that the supplier will run into financial difficulties, which as a minimum could lead them to ask for an increase in price, and in more extreme cases could endanger the supplier’s existence. Inspection of the supplier’s published accounts, and possibly a credit reference through a firm such as Dun & Bradstreet, would help in this area.

• The chemical will no doubt be of a precise specification, which means that the supplier will have to operate quality systems capable of producing to a consistent standard. A site visit, or reference to existing customers, would help in this area.

• Since the chemical is to be sourced in large quantities, there may well be a considerable effect on the operations of the supplier. Supplier management will need to be capable of handling any knock-on effects, eg on supplies to their other customers. Otherwise, there is a danger that they will let us down through taking on too much. Meeting with the management, site visits, and reference to existing customers would help in this area.

• Production of chemical products has obviously potential to harm the environment. Modern thinking suggests that purchasing staff must play their part in minimising this danger. This may involve asking for technical details of the production process, with statistical analysis of any adverse effects on the environment.

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Q2 5/04

Identify two areas where the purchasing function can contribute to the achievement of corporate social responsibility objectives.

There are numerous ways in which the purchasing function can contribute to CSR objectives. For example, they can draw up and enforce codes of ethical practice in sourcing, they can adhere to the rules laid down in the Ethical Trading Initiative, they can encourage (or even insist on) an environmental policy in their suppliers, they can adhere to rules concerning health and safety in the workplace, etc.

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Q15 5/04

It has been said that many negotiations are ‘won’ at the preparation stage. Write out a short set of notes with headings about what should be done in terms of preparation for a negotiation with a prospective supplier for a high-value contract.

There are various models prescribing what a buyer should do to at each stage of the negotiation process. In relation to the pre-negotiation phase, this examiner is fond of a seven-stage process, which is the basis of the notes below. (It is worth learning this by heart.)

1 Establish objectives for the negotiation

The range of objectives depends partly on the nature of the item being purchased. If it is a capital asset there may be many aspects to negotiate (price, installation and training, warranty provisions etc). In a simpler case there may be just one aspect to discuss (eg price). In either case, it is important to define an acceptable range of outcomes within which negotiation is possible and outside of which progress will not be possible.

2 Research the supplier and the supply market

The extent of competition within the market is obviously a vital factor in the negotiation. If there are few suppliers, the buyer’s position is relatively weak; if there are many, the buyer’s position is relatively strong. It will be important, therefore, to be aware of trends in the supply market. In relation to the supplier, the buyer will be interested in such factors as financial stability, cost structure (to the extent that he can find out about this), quality management, reliability, market share, and personnel (particularly the likely members of the negotiating team).

3 Establish the likely objectives of the supplier

Short of industrial espionage, it will be difficult to gain hard information on this topic. Nevertheless, it is worth questioning what the supplier is likely to think of the buyer’s organisation (its financial muscle, its likely importance as a customer in the long term etc). This will greatly influence the supplier in his objectives for the negotiation. If the debate is to centre on price, it is worth finding out as much as possible about the supplier’s cost structure so that estimates can be made of what price range is likely to be acceptable.

4 Identify the variables that can be traded in the negotiation

The examiner likes to refer to ‘tradeables’, by which he means the areas in which the buyer has scope for concessions in the negotiation. The more of these that can be identified, the more scope for flexibility in the negotiation. The most fruitful areas are where a buyer can concede something relatively inexpensive to himself, but with value to the supplier.

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5 Set upper and lower limits on the tradeables

Some authorities recommend the use of MIL limits. This means a range of outcomes from ‘Must have’ (ie the minimum acceptable) through ‘Intend to have’ (ie a realistic compromise) to ‘Like to have’ (ie an unexpectedly favourable result).

6 Determine a fallback position

Buyers need to prepare for the worst, namely the possibility that the negotiations may not lead to a successful outcome. In case this happens, the buyer must work out what the alternatives are. Having a strong fallback position improves the buyer’s bargaining position in the negotiations, because he will not feel compelled to accept an unfavourable outcome.

7 Develop scenarios around possible options

In other words, the buyer should try to imagine as realistically as possible the course that negotiations may take. He should prepare consciously for each possibility. He should examine his assumptions and test what the consequences would be if the supplier should act differently.

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Q5 11/04

Suggest two factors that should be considered at the specification stage, in order to reduce the harmful environmental impacts of bought-in products.

There are numerous possibilities:

• Use of energy in the production process

• Sources of materials

• Packaging materials

• Type of waste produced and methods of disposal of it

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Q16 11/04

Discuss the role that procurement can play in supporting corporate social responsibility (CSR) objectives for a large multinational corporation operating in the extractive sector.

This question is mostly bookwork, and part of the solution can be prepared from material in the Profex text (Chapter 14). However, the reference to a specific context (a large MNC in the extractive sector) calls for a little imagination in applying the general principles.

A modern approach to an organisation’s ethical obligations is sometimes referred to as corporate social responsibility or CSR. The examiner quotes a definition of CSR as follows:

CSR means the commitment to systematic consideration of the environmental, social and cultural aspects of an organisation’s operations. This includes the key issues of sustainability, human rights, labour and community relations, and supplier and customer relations beyond legal obligations. The objective [is] to create long-term business value and contribute to improving the social conditions of the people affected by our operations.

Any or all of the following considerations may be relevant in assessing an organisation’s CSR obligations.

• Responsibility to the environment (including issues of sustainability)

• Responsibility to the local and wider community

• Responsibility to uphold principles of good corporate governance

• Responsibility to uphold equal opportunities

• Responsibility to respect human rights (eg by not using suppliers who maltreat their workers, typically suppliers from third world countries)

• Responsibility to trade in accordance with ethical principles

There are numerous ways in which the purchasing function can contribute to CSR objectives. For example, they can draw up and enforce codes of ethical practice in sourcing, they can adhere to the rules laid down in the Ethical Trading Initiative, they can encourage (or even insist on) an environmental policy in their suppliers, they can adhere to rules concerning health and safety in the workplace, etc.

In the case of operations in the extractive sector, the risks of accidents, pollution and environmental degradation are particularly high, and the purchasing function should devote attention to the following issues among others.

• Renewal of natural resources

• Use of local suppliers where possible, including supplier development

• Adherence to the ETI base code

• Minimising environmental damage

• Funding local welfare programmes in third world countries (eg educational programmes)

• Anti-corruption policies

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Q17 11/04

Explain the concept of supplier positioning and the implications of the classifications ‘bottleneck’, ‘routine’, ‘leverage’ and ‘strategic’.

The classifications in this question are those of Kraljic, whose purchasing product portfolio attempts to classify products purchased according to two criteria:

• their supply risk (ie the danger that the product will be unavailable when needed)

• their importance financially (ie the relative amount expended by the organisation in purchasing each product).

By adopting this classification we can ‘position’ suppliers, ie we can decide the appropriate contractual relationship with each supplier.

Kraljic’s analysis is based on a two-by-two grid, and consequently gives rise to four classifications.

• Normal products (or routine products) are those low supply risk and low financial impact. There are probably many alternative suppliers, many near substitutes, and probably also a low overall value. A possible approach to sourcing such products is to streamline administration by means of systems contracting.

• Bottleneck products are similar to normal products, except that there may be expensive consequences if they happen to be unavailable. Bottleneck products and routine products between them probably account for a relatively small proportion of total purchasing spend. Buyers should be primarily concerned with ensuring continuity of supply.

• Strategic products account for a high monetary value and also suffer supply risk, perhaps because of the small number of potential suppliers. These products are natural targets for a negotiation approach leading to a long-term partnership, perhaps with a single supplier or just two suppliers.

• Leverage products are also valuable in monetary terms, but their supply risk is low, probably because there are many possible suppliers. This category is a natural target for a competitive bidding approach. The main deciding factor is likely to be purchase price.

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Scenario 1 (11/03)

Sinai Clinic

Sinai Clinic is a small private hospital located in London. The hospital specialises in the treatment of spinal injuries and has an excellent reputation in its field.

It is difficult to say exactly how many suppliers Sinai Clinic has, as no count has ever been conducted. However, it is estimated that there are more than 400. All purchasing is undertaken by individual clinicians and administrative staff under the direction of newly appointed clinical director, Dr King.

An audit shows that most of these suppliers – approximately 400 – provide low-value supplies and services such as disposables, linen, janitorial supplies, dressings, maintenance and specialist medical services and testing. The annual spend on these suppliers totals approximately £10m.

The remaining 20 or so suppliers provide supplies and medical services totalling over £50m. These high-spend suppliers include drug companies and medical suppliers, some of which supply specialist medicines and high-technology products, and some who supply standard equipment and generic, easily available drugs. Dr King has a number of concerns regarding legal and procurement processes and has hired you as a consultant to make recommendations. Your preliminary findings show the following.

• Almost all supply contracts are on suppliers’ terms and conditions.

• There are too many suppliers, particularly of low-value items, and keeping track of them takes up valuable time of clinical staff who have to chase up suppliers for deliveries.

• No formal supplier appraisal or performance measurement is carried out.

• Prices paid for supplies appear higher than other similar-sized hospitals.

• In a recent major contract for medical equipment agreed on standard terms and conditions, Sinai has agreed to pay a large additional amount of money to a supplier, Medquick Limited, due to a mistake the supplier said it made in its quotation. The supplier refused to install the equipment unless Sinai signed a new contract, which Sinai reluctantly did.

1 Contracting on suppliers’ terms and conditions means that Sinai Clinic is exposed to many potential legal and contractual risks.

(a) Identify three likely suppliers’ contractual terms/clauses that will need to be re-examined by Sinai and explain why the clauses you identify could work to the disadvantage of Sinai.

(b) Explain two contractual terms/clauses that, if incorporated, could protect and reduce risk for Sinai in their contracts with suppliers.

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(a) There are many possible clauses that a supplier could include in an effort to protect his own interests and, by the same token, potentially damage the interests of Sinai: exclusion clauses, force majeure clauses, price escalation clauses, Romalpa clauses etc. The first three of these are considered below.

An exclusion clause seeks to limit the supplier’s liability if anything goes wrong. There are limits to what the supplier can seek to achieve in this area; if the exclusion clause is drafted too broadly it may fall foul of the Unfair Contract Terms Act 1977. However, if the supplier avoids overreaching himself in this way, he can include a clause that may leave Sinai with little redress if the supplier falls short of his obligations.

A force majeure clause exempts the supplier from liability if his failure to meet contractual obligations arises from circumstances defined to be beyond his control. The potential problem lies in how widely this clause is drawn. While genuine catastrophes may be regarded as a legitimate excuse, the supplier might use such a term to apply to less dramatic circumstances.

A price escalation clause might entitle the supplier to increase his prices in certain circumstances, eg as a result of price increases in his own inputs. This might not be acceptable to Sinai, as effectively it places all the inflationary risk upon the Clinic, instead of on the supplier.

(b) Again, there are several types of clause that could help Sinai: time of the essence, liquidated damages, arbitration etc. The first two of these are considered below.

To specify that time is of the essence makes delivery time a condition of the contract. This means that if the supplier then fails to deliver on time, Sinai is entitled to terminate the contract, and/or claim damages.

A liquidated damages clause places a defined monetary value on the consequences of a breach of contract by either party. In the event that the supplier is guilty of the breach, it is possible for Sinai to gain a swift determination as to the amount of compensation due.

2 (a) Identify the risks and costs associated with having too many suppliers.

(b) Make recommendations as to how Sinai should establish and maintain appropriate commercial relationships with its different categories of suppliers.

(a) A modern trend in purchasing is towards a slimmer base of suppliers. Some of the reasons for this are listed below.

• It reduces the amount of time (and consequently cost) spent in evaluating suppliers.

• It reduces the risk of short-term, transactional relationships in which suppliers may not gain a full understanding of the buyer’s requirements.

• It reduces the administrative costs of maintaining a large purchase ledger. • It reduces difficulties in tracing quality problems back to source. • It reduces the difficulty of imposing standard specifications, terms and conditions.

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(b) The reference to ‘different categories of suppliers’ suggests the use of a tool such as Kraljic’s purchasing product portfolio (see Chapter 13 of the Profex text). Kraljic distinguishes between four categories of product: leverage products, routine products, bottleneck products, and strategic products.

• Leverage products are those with a high impact on the organisation’s financial results, and low supply risk. The normal recommendation for such products is to use competitive bidding and tendering. For Sinai, this could apply to easily available drugs.

• Routine products have low value and low supply risk. The normal recommendation is ‘systems contracting’. An alternative approach might be e-procurement. It is reasonable to keep a moderately high stock since overall value is low. For Sinai, this could apply to such items as disposables, medical dressings etc.

• Bottleneck products have low value, but high supply risk. The normal recommendation is to secure continuity of supply by becoming an attractive customer, securing tight contracts (possibly with supplier incentives) etc. For Sinai, this could apply to specialist medical services.

• Strategic products have high value and high supply risk. The normal recommendation is to adopt long-term supplier relationships, possibly based on partnership, with a view perhaps to information sharing and long-term quality improvement. For Sinai, this could apply to high technology products or specialist medicines.

3 If the Sinai Clinic were in the public sector, what key differences in its procurement processes would you expect to see?

If the Sinai Clinic were a public sector organisation, its contracts (or at least its larger contracts) would probably be governed by the EU procurement directives. Subject to certain exceptions, the directives require public bodies to use open tendering procedures. Buyers are generally required to award the contract on the basis of the lowest quoted price, or the economically most advantageous tender. The results of the tendering procedure must be made public.

The public environment also leads to other differences.

• Objectives would be to achieve defined service levels rather than to maximise profit.

• Confidentiality is limited because of the public interest in disclosure.

• Public sector bodies make greater use of information sharing.

• Public sector buyers are often constrained to follow established procedures.

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4 If Sinai refuses to pay Medquick Limited the additional monies due under the new agreement, what is the likelihood of success if Medquick make a claim against Sinai?

A general rule of contract law is that a binding contract does not exist unless it is supported by valid consideration. In the present case, Medquick have agreed to supply and install equipment for an agreed price. They appear to have done so, and therefore the agreed price is payable by Sinai Clinic. However, the additional amount of money demanded is based on a new contract, and this is not supported by new consideration from Medquick, because they have done no more than fulfil a pre-existing obligation. Therefore the new contract for the additional money is unlikely to be upheld by a court. The case is similar to Atlas Express Ltd v Kafco (Importers) Ltd, where the court refused to uphold the demand for additional payment.

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Scenario 2 (5/04)

Department of Labour

A central government agency, the Department of Labour urgently needs to replace the air conditioning (AC) units in all its buildings in London. This will be a major piece of work involving the supply, installation and commissioning of more than 1,000 units in all areas of the building including the public areas. The old AC units will need to be removed and disposed of responsibly. Your experts estimate the cost of this work should be about £5m. This would include a modest but reasonable profit for the winning contractor. In response to your invitation to tender (ITT) advertised in a local London newspaper you received four bids from local suppliers which were received before the due date. Due to time constraints only the first three bids were considered. The details of these bids are outlined below.

Supplier XYZ Construction Volta Electric Flash Electrical

Commercial details General building and construction company

1,000 employees

Established 15 years

Busy at present time

Electrical contractor

100 employees

Established 5 years

Very busy at present

Electrical contractor

20 employees

Established 2 years

Not busy at present

Temporary staff used for projects

Price quoted £4.5m £6.5m £3.5m

Financial information Sales £50m

Profits £5m

Debts £1m

Sales £5m

Profits £1m

Debts £0.5m

Sales £20m

Profits £0.5m

Debts £2m

Health and safety record

1 worker injury every 500 working hours

1 worker injury every 2,000 working hours

No health and safety data supplied despite requests

Warranty 1 year for AC units, parts only

2 years, parts and labour 3 years, parts and labour

Delivery record 70% on-time completion of work

90% on-time completion of work

80% on-time completion of work

Buyer’s notes on terms and conditions

XYZ will not accept liquidated damages clauses

Compulsory arbitration by Royal Society of Electrical Engineers in event of dispute

Too many exclusion clauses

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1 There is quite a large difference between the suppliers’ bids for this work, considering that £5m is a realistic and objective estimate for the price of this work. Based on the information in the table:

(a) Suggest three reasons why XYZ has bid below your estimate.

(b) Suggest three reasons why Volta has bid well above your estimate.

(c) Suggest three reasons why Flash has bid below your estimate.

(a) There are many possible reasons why this has happened. For example, the large scale of the business may mean that it enjoys economies of scale (eg purchasing muscle, leading to low input prices for the new units); or it may be connected to the slightly less favourable offering from this firm (eg their warranty offer is less generous than the other firms); or XYZ may have simply got its pricing wrong (as a general builder the firm may not be sufficiently aware of the specialised nature of this contract, or they may have underestimated the costs of disposing of the existing units responsibly).

(b) Again, there are many possibilities. For example, they may not really want the work unless there is a high premium involved (because they are very busy at present); or they may be relying on a strong reputation to justify a premium price (eg their delivery record is very good, and their profit margin is a very high 20%); or they may have ‘padded’ their estimate to allow for eventualities (eg difficulties in decommissioning the existing units).

(c) Flash may have got their figures wrong (they are a comparatively new firm, with perhaps little relevant experience); or they may be desperate for the work (they have a relatively high level of debt and a poor profit margin); or they may be skimping on health and safety requirements (they have supplied no health and safety data, despite requests); or they may just see an opportunity to fill spare capacity without being much concerned about the profit that may ensue.

2 (a) Identify one procurement risk to consider if the contract is awarded to XYZ.

(b) Identify one procurement risk to consider if the contract is awarded to Volta

(c) Identify one procurement risk to consider if the contract is awarded to Flash.

(a) Possibilities: health and safety record is much poorer than Volta’s (so possibly below industry standards); possible overruns on schedule (only 70% on-time completion); poor warranty offering may cause problems post-installation or high costs to pay for insurance cover.

(b) Possibilities: high price is in excess of budget, unless it can be negotiated down; supplier is already very busy so may be over-stretching; the company is relatively small, with a danger that this large new contract may be too much for them to cope with.

(c) Possibilities: newly established with possibly little relevant experience; the firm has only a small core of permanent staff and relies heavily on temporary staff; the firm’s financial position may lead to serious liquidity problems; failure to provide health and safety data suggests a poor record in this respect; exclusion clauses may make it hard to obtain redress if performance is poor.

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3 (a) Explain, in brief, the purpose of the EU Public Procurement Directives and discuss whether they apply in this case.

(b) In brief, identify the key mistakes that were made in the tendering process that could lead to it being challenged in the courts or by suppliers.

(a) The EU procurement directives are a set of regulations designed to promote best value purchasing in the public sector and improve competition. They attempt to achieve this by requiring that contracts placed by public sector bodies (unless their value is small) must be advertised widely and subjected to competitive tendering. For a project of the type specified in this question, the relevant directive is the Public Works Directive. Since the Department of Labour is apparently a public body, and since the value of the contract (approximately £5m) exceeds the relevant threshold (approximately €5m), the Directive would probably apply in this case.

(b) There are two major breaches of commonly accepted principles relating to tendering.

• The contract was not advertised sufficiently widely. It is not enough to advertise in a local paper. Potential suppliers who were not aware of the contract would be entitled to challenge this.

• One of the four tenders was not considered, despite having complied with the time schedule. The tenderer is entitled to challenge this failure in the courts, and would be likely to succeed.

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4 Explain the implications of each of the three contractual risks identified in the buyer’s notes (last row of table) associated with each supplier’s bid.

Liquidated damages

As a proactive form of dispute resolution, the parties to a contract may agree a sum to be paid in the even of a breach. If this is a genuine pre-estimate of the loss that the breach will cause, the agreed sum is regarded as liquidated damages. If and when the contemplated breach occurs, there is no ambiguity as to the amount payable to the aggrieved party. This may avoid the need for an expensive and uncertain court action.

In the present case, XYZ’s refusal to accept such a clause makes its bid less attractive, in that the chances of unwelcome litigation are increased. One would also need to question why the firm should take such an attitude, which at first sight appears unnecessarily obstructive.

Compulsory arbitration

When a buyer faces a dispute over a contractual matter he has the option to pursue the supplier through the courts. However, this has disadvantages concerned with time, cost and publicity. To avoid this, it is common to agree that any disputes arising should be referred to arbitration by a suitable person or organisation. This may be someone with legal experience, or (more likely nowadays) someone with relevant technical knowledge. It is normal to state that arbitration proceedings will be binding on the parties.

In the present case, the contract may be subject to compulsory arbitration by an appropriate expert within the Royal Society of Electrical Engineers. The buyer should investigate the procedures followed by the Society in the event of such arbitration. Provided they appear to be fair and objective, this clause seems acceptable.

Exclusion clauses

Suppliers will typically seek to exclude themselves from liability in the event of dispute by including exclusion clauses in their contracts. To be effective, such clauses must be incorporated in the contract (which is what Flash appears to contemplate), and must be clear and precise. Flash will no doubt have taken legal advice to ensure there is no vagueness in the clauses which might tell against the firm.

In the present case, the buyer should be suspicious of too many exclusion clauses. They suggest that Flash is less concerned with ensuring a good job than in protecting themselves against their own inefficiencies. If the buyer accepts this the effect will be to transfer too high a proportion of the contractual risk away from the supplier and towards the Department of Labour.

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Scenario 3 (11/04)

Rica Coffee Ltd

Rica Coffee Ltd (Rica) is a successful UK chain of cafés, with outlets in most UK cities and large towns. The company has Italian roots and started out in 1975 with one café in Central London and now numbers over 200 outlets. Although a wide range of snacks and beverages are provided, over 50% of revenues are still based on coffee sales.

The expensive high specification coffee machines used to make the beverages are sourced from three manufacturers in Italy and, if maintained well, are extremely reliable and durable. Recently it has become apparent that the present maintenance service provider, Automation Ltd, is becoming less responsive to call outs and there is evidence that routine maintenance is not being carried out to the manufacturer’s recommended maintenance schedule (MRMS). This has led to increasing rates of machine breakdown and consequential loss of sales in the cafés.

The initial annual contract for maintenance, agreed three years ago, was on Rica’s terms and conditions and required Automation Ltd to fully abide by the MRMS. Over the years, Automation Ltd has made amendments to the contract, which were never officially agreed by Rica. These amendments included the following new clauses, which are printed on the latest versions of the contracts kept on file by Rica.

1 Automation Ltd will determine the most appropriate maintenance schedule and procedures for all coffee machines regardless of any MRMS.

2 Automation Ltd cannot be held liable for any claims that arise from coffee machine malfunction for any reason during the period of contract.

You have been hired by Rica to advise it on a number of areas related to this contract as it is up for renewal or re-negotiation shortly.

1 Based on the information in the case study, advise Rica on whether Automation Ltd’s amendments to the contract are valid and enforceable in a court of law.

2 How can Rica ensure that all contracts are let on its own terms and conditions, and that any changes are agreed explicitly before incorporation?

3 (a) In preparation for negotiations with a potential new maintenance supplier, outline specific information headings that would be helpful to Rica in negotiations for an improved offer.

(b) Draft a short list of potential negotiation tradeables Rica could use in this negotiation.

4 Explain what a service level agreement (SLA) is and suggest what features should be included in a SLA between Rica and any new maintenance provider so as to ensure improved customer service.

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1 The first question to be asked here is whether the terms inserted by Automation Limited have become a part of the contract (ie whether they have been ‘incorporated’ into the contract). An essential element of a binding contract is that the proposed terms have been accepted, and in the present case it appears that Rica has not expressly accepted the new terms. However, Rica’s case is not a strong one, despite this. The courts have held that a term can be accepted by the conduct of the contracting parties. In the present case, the situation is very similar to that of Brogden vs Metropolitan Railway (for details, look up the case in the Case Index of your Profex text). Essentially, this means that Rica may be deemed to have accepted Automation’s terms simply by continuing to use their services without querying the new provisions. Moreover, Rica has placed a copy of the most recent version of the contract on its files, while continuing to do business with Automation. This too suggests that Rica has accepted the contract on Automation’s terms. The conclusion is not watertight, because we do not know the full terms of the original contract. For example, if that contract contained a provision that new clauses were not to be inserted unless by express approval of the parties, Rica’s case would be strengthened.

These considerations apply to both of the new clauses and in each case the conclusions are discouraging from Rica’s point of view. However, the second clause is an exclusion clause, and this means it is subject to additional criteria before it can be regarded as a valid part of the contract. Apart from having been incorporated into the contract, the term must correctly cover the loss or damage suffered by the other party (in this case Rica), and must satisfy a reasonableness test.

With regard to the construction of the clause, Rica’s position is weak, in that the clause appears to be widely drawn and probably covers any possible claim that might be brought by Rica. However, on the point of reasonableness, Rica’s position is stronger. Any attempt to exclude liability for death or personal injury arising from negligence is automatically void, which means that the scope of Automation’s exclusion clause is at once restricted. Even if death and personal injury are not in question, the wide scope of the clause can hardly be regarded as reasonable: it effectively exempts Automation from taking any care whatsoever.

2 This question is essentially in two parts.

• To ensure that all contracts are on Rica’s own terms and conditions, the company should draw up a detailed specification of what is required from the supplier (in the present case, this would include compliance with the MRMS). This should then be specifically incorporated into the contract. Such a procedure is a common feature of tendering processes, and Rica might well adopt competitive tender in the case of this contract, but can also be part of a contract concluded without tender.

• To ensure that all contract variations are explicitly agreed, Rica need only insert a clause to that effect in the original contract before signing. This is common practice to avoid the kind of ‘creeping’ contract changes that have occurred in the case of Automation.

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3 (a) In this part of the question there are a large number of points that we might wish to take up with a potential new supplier.

• Supplier’s ability to perform the contract, perhaps including references from other customers

• Supplier’s capacity to perform the contract, ie how busy he already is with other contracts

• Supplier’s position in the market, including his current market share • Supplier’s motivation, ie how importantly he rates the contract • Supplier’s cost structure and profit expectations

(b) Areas on which Rica may be prepared to negotiate include any or all of the following.

• Basic contract price • Any variations to basic contract price, eg in terms of incentive bonuses • Payment terms, eg credit periods, intervals between billing • Service levels and key performance indicators • The term of the agreement • Exclusivity of the agreement, or perhaps dividing the contract among

several suppliers on a geographical basis

4 Although your answer must be tailored to the particular circumstances of Rica, much of this is basic bookwork and can be answered from the material on service level agreements in Chapter 7 of the Profex text.

A service level agreement, as the name suggests, specifies the level of service to be provided by the supplier. The SLA is used to determine how well the supplier is performing and helps the buyer to monitor whether the supplier is fulfilling his contractual obligations.

In the case of Rica, an SLA might cover any or all of the following points.

• How often is the service to be provided? How can the service be scheduled so as to encompass all the Rica outlets on a regular cycle?

• During what hours will the service be carried out, and in particular will there be any disruption to trading activities?

• How many staff (and, if relevant, what grades of staff) will be involved in providing the service?

• Does the service include special tasks caused by fault of the buyer’s own staff? • What qualifications are needed by staff members providing the service? • What speed of response is expected from the supplier in the event of non-

routine maintenance work (eg if a machine malfunctions)? • What dispute procedures will be required? • What level of helpdesk support will be provided? • What level and frequency of reporting will be provided?

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