L4M8 Exam Dumps - CIPS Level 4 Diploma in Procurement and Supply Questions and Answers

3. Explain the elements that Lucie should include in her analysis based on whole-life asset management. (25 marks)

Whole-life asset management means evaluating the total cost and value of an asset over its full life , not just the initial purchase price. CIPS explains this as whole-life costing / total cost of ownership , covering acquisition, usage and end-of-life costs. ISO 55000 also states that asset management should consider assets over their life cycles to realise value for the organisation.

In Water Works’ case, Lucie should include the following elements in her analysis of purchasing the 200 vehicles.

1. Initial acquisition costs

Lucie should first calculate the purchase price of the vehicles. This includes not only the price of each vehicle, but also delivery charges, registration, taxes, any fit-out requirements, signage, tracking systems and initial insurance. This is important because the capital cost will be high for a fleet of 200 vehicles, so the business case must show the full upfront investment rather than just the list price. CIPS notes that whole-life costing includes purchase price and acquisition cost .

2. Operating and running costs

A major element is the cost of operating the vehicles during their working life. Lucie should estimate fuel or energy costs, servicing, maintenance, repairs, tyres, road tax and insurance. This is especially relevant because the case states that some current vehicles are several years old and running costs are increasing . Therefore, Lucie should compare the likely running costs of new vehicles with the current hired fleet to show whether ownership offers better long-term value. CIPS identifies usage cost as a core part of total cost of ownership.

3. Reliability and performance

Lucie should assess how reliable the vehicles are expected to be over time. The case already mentions several breakdowns causing operational issues on Water Works sites. Therefore, her analysis should include the likely cost of breakdowns, lost productivity, missed site visits, delays to operations and possible emergency replacement vehicles. This is important because a cheaper vehicle may not represent best value if it is unreliable and disrupts service delivery. Whole-life asset management is about the value delivered over the asset life, not only cost. ISO guidance emphasises value, risk and outcomes across the lifecycle.

4. Maintenance strategy and support arrangements

Lucie should include how the vehicles will be maintained once purchased. For example, she should assess whether servicing will be outsourced, managed through manufacturer warranties, or supported by local garages across the ten regional offices. She should also consider the availability of spare parts and support response times. This matters because purchasing the fleet transfers more responsibility for asset upkeep to Water Works compared with hiring.

5. Asset life and replacement cycle

Another important element is the expected useful life of the vehicles. Lucie should estimate how long the vehicles will remain economically and operationally effective before replacement is needed. This should include mileage, intensity of use, operating conditions and likely deterioration. Since Water Works operates across ten regional offices, some vehicles may experience heavier use than others. A whole-life analysis should therefore include assumptions on replacement timing and fleet renewal planning.

6. Residual value and disposal value

Lucie should include the likely residual value of the vehicles at the end of their useful life. If Water Works owns the vehicles, they may be sold, traded in or auctioned. This means the organisation may recover some value at the end of the asset life. She should also include any disposal costs, such as decommissioning, collection, administration or environmentally compliant disposal. CIPS notes that whole-life costing includes end-of-life cost .

7. Financing and cost of capital

Although capital funds are available, Lucie should still consider the financial impact of tying up funds in vehicle ownership. The analysis should show whether using capital for vehicles represents best value compared with other strategic uses of funds. She may also include depreciation and the effect on budgets over time. This is important because purchasing assets creates a different financial commitment from hiring them.

8. Specification and fitness for purpose

Lucie should review whether the chosen vehicles meet operational needs. This includes vehicle size, load capacity, durability, fuel efficiency, suitability for site conditions and any specialist requirements for water service operations. A whole-life approach requires the asset to be fit for purpose, because a poor specification can increase maintenance costs and reduce operational value later in the lifecycle.

9. Risk analysis

Lucie should include risks associated with ownership. These may include unexpected repair costs, changes in fuel prices, asset obsolescence, poor resale values, non-availability of parts and the risk that operational needs change during the asset life. She should compare these ownership risks with the risks under hiring arrangements. ISO 55000 highlights that asset management should consider risks and opportunities throughout the lifecycle .

10. Sustainability and regulatory factors

As a regulated public authority, Water Works should also consider environmental and regulatory issues. Lucie’s analysis should include emissions, fuel efficiency, possible transition to lower-emission vehicles, compliance requirements and disposal obligations. This is relevant because public sector organisations are expected to consider long-term environmental impact as well as cost.

11. Whole-life comparison against hiring

Finally, Lucie should compare the total whole-life cost of buying against the alternatives of extending the current hire contract or re-tendering for hired vehicles . This comparison should include all acquisition, usage, maintenance and end-of-life costs, as well as service reliability and operational value. CIPS describes whole-life costing as an end-to-end cost estimate to support procurement decisions.

Conclusion

In conclusion, Lucie’s whole-life asset management analysis should not focus only on the purchase price of the vehicles. It should include acquisition costs, operating costs, maintenance, reliability, useful life, replacement cycle, residual value, disposal costs, finance implications, specification, risk and sustainability considerations . By analysing all these elements, Lucie can show whether purchasing the fleet gives Water Works better long-term value than continuing to hire vehicles. This is the main purpose of whole-life asset management.

Disposal of an asset is the final stage in the decommissioning process of a fixed asset.

When a fixed asset reaches the end of its useful or cost effective life time within an organization, the decision is made as to whether it should be removed from the premises or disposed off.

If the asset is truly at the end of its life, no longer fit for purpose, not cost effective to repair and is not able to be exchanged, then disposal is the only option; there are two options for disposal;

1) Take the asset to land fill site

2) Taking the asset to a recycling plant.

By using STEEPLE and SWOT analysis, the organization can reach out to the following strategic decision in how it will engage with its external environment, and utilize it strength to cover up for its weakness and achieve its strategic goals;

1) STEEPLE can aid an organization to come up with informed decision by understanding when is the right time to procure goods or services?

2) STEEPLE and SWOT analysis can uncover the quantity that could be most economical to ac-quire at the point in time.

3) When an organization want to decide on the currency that could be most favorable for the buy, it will analyze the countries involved and the strength of their currency and make its decisions on which currency that the supplier should be paid that will not make the organization to lose unnecessary money to exchange.

4) Should the product or services be made or bought?

5) Should the product or services be resourced?

6) Should the product or services be placed?

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A business case is a document containing the justification and the commercial benefits achievable for a potential project or an identified need, for example, the purchase of a capital equipment, con-struction of an additional warehouse or procuring more innovative software to replace the current on in use.

The essence of the business case is to obtain support and get buy-in from senior management.

In order to gain authority to apply whole life asset management a business case will need to be created and presented. A developed business case will cover the following element.

1) Introduction: Outline of what the business case is all about

2) Objective: Explanation of what the business case desired outcome is.

3) Approach that will be undertaken

4) List of resources required

5) Benefits of achieving the objective

Assets are things that an organization owns regarded as having value and available to meet debt and generate revenue. The following are list of assets owned by Fullpower project, a shoe manufacturing firm;

1) Machinery,

2) a factory,

3) an innovative software,

4) skills of its personnel,

5) land,

6) Distribution network.

7) Its long time relationship with experienced suppliers of raw materials and Distributors of finished shoes.

A contract is written or verbal agreement, made between two or more parties that is legally enforceable. For a contract to be legally binding it must include intention of parties entering into the contracts. All parties must have the capacity to contract or be contracted. They must be of a sound mind, there should be a promise (offer) for per-formance from the other party and an exchange (consideration) of one thing for another within an agreement for contract to be binding, and there must be an acceptance of the offeror’s offer by the offeree.

Damages are ‘sum of money that the supplier pays if it fails to carry out its contractual obligation.

When creating terms for damages in the contract, it should be considered that Damages are categorized into two types (liquidated and un-liquidated). And which or if both are applicable to the contract in hand.

Liquidate Damages are fixed amount of money agreed between the parties that is payable if a contract is breached. For example, knowing that supplier not being able to install a device properly in a power transformer may destroy the device and going ahead to include a fee in the contract if the device was destroyed.

Un-liquidated damages are unfixed amount of money. It is used when the amount of money that will compensate the injured party cannot be known in advance. A court decides the amount when the damages occur. For example, knowing that supplier not being able to install a device properly in a power transformer may destroy the device, other appliances and equipment unknown, cause the buyer delay in the process and reputational damage as in customer dissatisfaction. Yet, unquantifiable as both parties are unable to fix a fee in advance on the damages and leaving it to the court to decide the damage if it may occur.

Organizations which display good behavior create a positive social impact. The com-munity in which they are based and to which they supply will benefit from the following.

1. High employment

2. Fair wages

3. low pollution

4. sustainable resources

5. Engagement and movement with local organization

Data can be primary or secondary

Primary data are derived from original work or research through experience. Primary data can be gathered from the following sources; 1) Interview (2) survey (3) meetings (4) case studies.

Secondary data is derived from a previous source, i.e. somebody else has gathered the data. Sec-ondary data can be gained from; (1) Books (2) Websites, Trade magazines, etc

After all the due diligence is carried out, before awarding contract to the best supplier, sometimes procurement professionals find themselves in some problem solving situation; this might have been emanated from supplier facing a financial challenge or problems from external environment. Responding to this might require an amendment or an addendum, depending on the case in hand.

An amendment is for a physical change in the existing contract for example; if a contract contains a negotiated and agreed fixed price for the period of the contract but unexpected market forces such as an economic down turn or force majeure occur, the supplier may have to request an amendment order to continue to make a profit.

An addendum is when an additional document is added to the existing contract for example, If a contract have a schedule of rates and the market forces prices up, an addendum can be added to an existing contract with a revised schedule. Once accepted, the addendum becomes part of the con-tract. Addendum are physically used when the forecasted cost of a project rises and approval is needed to increase the contract spend.

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