CIPS L4M2 Defining Business Needs Online Training
CIPS L4M2 Online Training
The questions for L4M2 were last updated at Nov 23,2024.
- Exam Code: L4M2
- Exam Name: Defining Business Needs
- Certification Provider: CIPS
- Latest update: Nov 23,2024
A company is analysing its existing product’s components and aims at reducing costs without damaging customer value proposition. They want to check which components are critical and which are unnecessary.
Which of the following should be adopted by the company?
- A . Under specification
- B . Value engineering
- C . Value analysis
- D . Variety reduction
C
Explanation:
In marketing, a customer value proposition (CVP) consists of the sum total of benefits which a vendor promises a customer will receive in return for the customer’s associated payment (or other value-transfer).
Value analysis is concerned with existing products. It involves a current product being analysed and evaluated by a team, to reduce costs, improve product function or both. Value Analysis exercises use a plan which step-by-step, methodically evaluates the product in a range of areas. These include costs, function, alternative components and design aspects such as ease of manufacture and assembly.
Value engineering is concerned with new products. It is applied during product development. The focus is on reducing costs, improving function or both, by way of teamwork-based product evalua-tion and analysis. This takes place before any capital is invested in tooling, plant or equipment.
In this scenario, the company’s objective is cost reduction, then value analysis or value
engineering is more likely to be applied. The products are existing, so value analysis is the
best option.
LO 3, AC 3.4
Thani Ltd is a fast growing logistics company with a fleet of 20 tractors. To meet Net Zero objec-tive, the company needs to electrify its fleet. Angelica is assigned to investigate the market price of electrifying services. After the investigation, she realises that the current market price is very expensive and unsustainable for her company. She decides to break down the costs before negotiating with the suppliers.
Which internal stakeholders may help Angelica estimate the breakdown of costs? Select TWO that apply.
- A . Sales and Marketing department
- B . Engineering department
- C . Finance department
- D . Commercial agency
- E . Suppliers
B,C
Explanation:
Despite of its importance, cost analysis is often a daunting task for procurement professionals. In order to analyse supplier’s costs effectively, procurement may need the input from other depart-ments. Normally, technical (or engineering) department may help them to identify the direct costs of the product/service (how much material is required to make the product, or how many people are needed to perform the job, etc), while finance (or accounting) department may have ideas on the overheads of the supplier.
In this scenario, engineering department may provide insights on the components needed and the tasks to perform. Similarly, finance may know how much supplier pays for the overheads.
On the other hand, while commercial agency and suppliers are external stakeholders,
Sales and marketing is unlikely to provide valuable information in this case.
Reference: CIPS study guide page 102
LO 2, AC 2.3
A procurement team is categorising their purchased items into four quadrants of Kraljic’s supply chain portfolio matrix. They realise that there are some low-value items which come from very few suppliers in the market. The organisation is critically dependent on these suppliers. The team plans to reduce the dependence by finding alternative sources.
Is this a right course of action?
- A . Yes, the organisation needs to reduce the supply risks
- B . No, the organisation should run competitive biddings to exploit the competition
- C . No, there is no way to escape this dependency
- D . Yes, this action will dramatically increase the supplier’s bargaining power
A
Explanation:
According to Kraljic portfolio matrix, the low-value items with high supply risk are bottleneck items.
The purchasing strategy that is commonly recommended for these products is primarily based on acceptance of the dependence and reduction of the negative effects of the unfavourable position. An alternative strategy suggested by purchasing practitioners is to find other suppliers and move towards the non-critical quadrant.
– Accept dependence, reduce negative consequences: The main focus of this strategy is to assure supply, if necessary even at additional cost. Examples of this strategy are keeping extra stocks of the materials concerned or developing consigned stock agreements with suppliers. By performing a risk analysis firms can identify the most important bottleneck products and consider the implications. A possible action for dealing with unexpected bad dependence positions for certain products is to employ contingency planning.
– Reduce dependence and risk, find other solutions: This strategy is geared towards
reducing the dependence on the supplier. The most common way to achieve this is to broaden the specifications of the product or to search for new suppliers.
The procurement team in the scenario has selected reducing dependency by finding
alternatives. This is a right strategy for bottleneck item.
Reference:
– CIPS study guide page 82-84
– Purchasing strategies in the Kraljic matrix―A power and dependence perspective, Marjolein C.J. Caniels, Cees J. Gelderman
LO 2, AC 2.1
Apple’s CPO is planning a budget for purchasing carbon-free aluminium next year. There are 27.4 tonnes of aluminum in stock, while Apple will need 200 tonnes for production next year and double inventory for production in the following year.
How much aluminum will Apple need to purchase in next year?
- A . 172.6 tonnes
- B . 117.8 tonnes
- C . 282.2 tonnes
- D . 227.4 tonnes
D
Explanation:
The quantity of aluminium Apple needs to buy is calculated as follows:
Quantity needed for production + the inventory needed at the end of the year – inventory at start of the year
That formula is quantified as: 200 + 54.8 – 27.4 = 227.4
Reference: CIPS study guide page 103
LO 2, AC 2.3
Which of the following is a challenge of making a business case for straight re-buys?
- A . Terms and conditions
- B . Research of procurement process
- C . Effective inventory control
- D . Identifying suitable suppliers
C
Explanation:
For straight re-buy, the specifications for the products are known. Generally, there will be an existing contract with supplier in place. The business need is challenged annually, only on the annual demand. So effective inventory control will help procurement successfully manage straight re-buy.
Reference: CIPS study guide page 7
LO 1, AC 1.1
When a procurement manager considers a substitution, the number and nature of additional func-tions that substitute provides should be taken into account carefully.
Which of the following ratio could help the procurement manager to make the right decision?
- A . Value to price ratio
- B . Price to Earnings ratio
- C . Reserve requirement ratio
- D . Price to book value ratio
A
Explanation:
One product substitutes for another if it offers buyers an inducement to switch that exceeds the cost or overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always some cost of switching to a substitute because of the disruption and potential reconfiguration of buyer activities that must result, however. The threat of a substitute will vary depending on the size of the inducement relative to the required switching costs.
In addition to relative value to price and switching cost, the pattern of substitution is influenced by what I term the buyer’s propensity to switch. Faced with equivalent economic inducements for substitution, different buyers will often evaluate substitution differently.
The threat of substitution, then, is a function of three factors:
• The relative value/ price of a substitute compared to an industry’s product
• The cost of switching to the substitute
• The buyer’s propensity to switch
Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278). Free Press. Kindle Edition.
The price-to-book ratio compares a company’s market value to its book value. The market
value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country’s central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.
LO 2, AC 2.2
Which kind of these following costs belong to fixed costs? Select TWO that apply.
- A . Energy consumption in manufacturing
- B . The annual income tax charged by local authorities
- C . The packaging and distribution costs
- D . The depreciation of capital inputs
- E . The costs of leasing or purchasing capital equipment
D,E
Explanation:
Based on variability, the costs has been classified into three categories, they are fixed, variable and semi variable. Fixed costs, as its name suggests, is fixed in total i.e. irrespective of the number of output produced. Variable costs vary with the number of output produced. Semi-variable is the type of costs, which have the characteristics of both fixed costs and variable costs (Source: Key Differences).
Among above costs, leasing and depreciation are relatively static and do not change if volume of business activities increase or reduce.
Packaging, utilities and annual business rate (tax) are variable costs.
Reference: CIPS study guide page 26
LO 1, AC 1.2
What does the acronym RAQSCI stand for?
- A . Relationship, Ability, Quality, Service, Cost, Innovation
- B . Regulatory, Availability, Quality, Service, Cost, Innovation
- C . Regulatory, Availability, Quantity, Sustainability, Inventory
- D . Regulatory, Ability, Quality, Service, Cost, Inventory
- E . Relationship, Availability, Quantity, Sustainability, Cost, Innovation
B
Explanation:
RAQSCI stands for Regulatory, Availability, Quality, Service, Cost, Innovation. LO 1, AC 1.1
A procurement manager is requested to source a major component. She needs information on sup-pliers’ direct and indirect cost, fixed and variable costs to prepare for negotiations. Therefore, she collects 17 annual reports from potential suppliers who are competing in the same industry.
In order to estimate an approximate value of fixed and variable costs in that industry, which of the following technique should be adopted by the procurement manager?
- A . Line of best fit
- B . Variance calculation
- C . Total cost of ownership
- D . Open-book costing
A
Explanation:
Public annual reports can be a source of information that helps the procurement professional to analyse an industry’s cost and revenue using the line of best fit. Line of best fit is one of the most important outputs of regression analysis. Regression refers to a quantitative measure of the relationship between one or more independent variables and a resulting dependent variable. Regression is of use to professionals in a wide range of fields from science and public service to financial analysis.
In this case, by collecting and analysing 17 annual reports, the procurement manager can find the line of best fit which goes approximately through the middle of the data points with an equal num-ber of data points above and below it.
The slope of the line of best fit is the approximate variable costs the industry. The easiest way to calculate it is to take a point at the right-hand end of the line of best fit and note its cost and output levels. Divide the cost by the output and this gives and approximate figure for the cost per unit of output or variable cost. This gives an approximate value for the industry fixed and variable costs.
Reference: CIPS study guide page 99-100
LO 2, AC 2.3
Which of the following are typically reasons why an organisation implements value analysis? Select TWO that apply:
- A . To determine the value of each component used
- B . To decide whether there will be sufficient surplus funds to reinvest in the business
- C . To shape and manage supply market
- D . To provide an outline business case for the specification
- E . To find cost reduction opportunities by optimising the components used
A
Explanation:
Value analysis is a systematic review of the production, purchasing and product design processes to reduce overall product costs.
This can be accomplished through a variety of activities, including the following:
– Designing products to use lower-tolerance parts that are less expensive
– Switching to lower-cost components
– Standardizing parts across product platforms in order to achieve volume discounts
– Altering production processes to minimize the amount of production cycle time, thereby reducing labor costs
– Introducing automation to strip labor costs out of the production process
– Altering product packaging to lower its cost while still protecting the product
The process is not a wholesale attack on costs. Costs are only reduced when the result will not im-pact the perceived level of quality experienced by customers, or the level of customer satisfaction.
Reference: CIPS study guide page 160-163
LO 3, AC 3.4
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