The position of a product in its life cycle can affect the price that suppliers set. Is this statement correct?
- A . No, in market economy, the state decides the price of all goods and services
- B . Yes, each stage in product life cycle requires different levels of investment in promotion and distribution
- C . No, customer’s perception of value is the ultimate determinant of the suppliers’ price
- D . Yes, it is always the only factor determining the price
B
Explanation:
A firm also has to look at a myriad of other factors before setting its prices. Those factors include the offering’s costs, the demand, the customers whose needs it is designed to meet, the external environment―such as the competition, the economy, and government regulations―and other aspects of the marketing mix, such as the nature of the offering, the current stage of its product life cycle, and its promotion and distribution. If a company plans to sell its products or services in international markets, research on the factors for each market must be analyzed before setting prices. Organizations must understand buyers, competitors, the economic conditions, and political regulations in other markets before they can compete successfully. […]
The costs of the product―its inputs―including the amount spent on product development, testing, and packaging required have to be taken into account when a pricing decision is made. So do the costs related to promotion and distribution. For example, when a new offering is launched, its promotion costs can be very high because people need to be made aware that it exists. Thus, the offering’s stage in the product life cycle can affect its price.
Reference: – CIPS study guide page 90-91
– 15.2 Factors That Affect Pricing Decisions C Principles of Marketing (umn.edu) LO 2, AC 2.2
A CPO is making a business case for acquiring a new computer system. He has set out objective, generated options, cost and benefit of each option and implementation plan.
Which of the following elements should be included in the business case?
- A . Risk assessment
- B . Operation management
- C . Invitation to tender
- D . Contract management
A
Explanation:
Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
A CPO is making a business case for acquiring a new computer system. He has set out objective, generated options, cost and benefit of each option and implementation plan.
Which of the following elements should be included in the business case?
- A . Risk assessment
- B . Operation management
- C . Invitation to tender
- D . Contract management
A
Explanation:
Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
A CPO is making a business case for acquiring a new computer system. He has set out objective, generated options, cost and benefit of each option and implementation plan.
Which of the following elements should be included in the business case?
- A . Risk assessment
- B . Operation management
- C . Invitation to tender
- D . Contract management
A
Explanation:
Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
A CPO is making a business case for acquiring a new computer system. He has set out objective, generated options, cost and benefit of each option and implementation plan.
Which of the following elements should be included in the business case?
- A . Risk assessment
- B . Operation management
- C . Invitation to tender
- D . Contract management
A
Explanation:
Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
A CPO is making a business case for acquiring a new computer system. He has set out objective, generated options, cost and benefit of each option and implementation plan.
Which of the following elements should be included in the business case?
- A . Risk assessment
- B . Operation management
- C . Invitation to tender
- D . Contract management
A
Explanation:
Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
A CPO is making a business case for acquiring a new computer system. He has set out objective, generated options, cost and benefit of each option and implementation plan.
Which of the following elements should be included in the business case?
- A . Risk assessment
- B . Operation management
- C . Invitation to tender
- D . Contract management
A
Explanation:
Before a project commences (either capital purchase or switching to a new supplier), a business case should be developed. The business case outlines the why, what, how, and who necessary to decide if it is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
What is the document that defines the activities, deliverables and timelines a supplier must carry out during contract performance?
- A . Statement of work
- B . Project initial document
- C . Framework agreement
- D . Work instruction
A
Explanation:
Statement of Work (SoW) is the document that captures and defines all aspects of your project. You’ll note the activities, deliverables and the timetable for the project. It’s an extremely detailed document as it will lay the groundwork for the project plan.
Project Initial Document is an important document and should precede any specification writing project. It sets out the scope of the project and it is the team’s mandate from senior management Work instructions are also called work guides, Standard Operating Procedures (SOPs), job aids or user manuals, depending on the situation. In any case, the purpose of work instructions is to clearly explain how a particular work task is performed.
Framework agreements are arrangements between one or more buyers and one or more suppliers that provide the terms governing contracts to be established for a certain period of time, in particular with regard to price and, where necessary, the quantity envisaged.
Reference: CIPS study guide page 124
LO 3, AC 3.1
A procurement manager is writing a conformance specification for a non-core component. She thinks that if the requirements in specification are higher than ISO standards, her company can achieve greater cost-savings.
Is the procurement manager’s opinion correct?
- A . No, because higher specification may incur additional costs for the buyer
- B . No, because higher requirements in specification, the greater bargaining power of buying organisation
- C . Yes, because optimising the specification is the only method to achieve value for money
- D . Yes, because higher requirements will help buying organisation find the best supplier
A
Explanation:
The specification that is produced too detailed will incur unnecessary cost because it does not allow suppliers to use their expertise in finding the most efficient way to produce it.
‘No, because higher requirements in specification, the greater bargaining power of buying organi-sation’: more detailed specifications could tighten the supplier base and potentially leave buying organisation with fewer potential supplier. This may reduce buyer’s bargaining power in negotiation. ‘Yes, because higher requirements will help buying organisation find the best supplier’: in some circumstances, higher requirements will lead to smaller supplier base. In the worst scenario, there is no supplier who has capability to carry out those requirements
‘Yes, because optimising the specification is the only method to achieve value for money’: There are other methods to achieve cost saving and value for money, inter alia, volume concentration, relationship restructuring, etc.
Reference: CIPS study guide page 118-119
LO 3, AC 3.1
British Steel needs to source a set of instruments that will improve quality of steel. Without these instruments British Steel will loss control of the temperature. The bucket may freeze up, or if it is too hot it leaks out of the casting process, damaging the machine. There is limited supply on the market and quality varies greatly.
Which of the following will be the most appropriate managing approach to procure these items?
- A . Bundle these instruments into larger contract
- B . Leverage market competition to drive down cost
- C . Seek continuity of supply
- D . Form partnership with supplier
D
Explanation:
The instrument plays a crucial role in steel manufacturing because it presents in the majority of products, in which case lacking this instrument would have significant impact on the organisation’s output (production lines stop or damaging other machine). Otherwise, the risk of supply is high because there is limitation in supply. Therefore, it is considered as a strategic item in term of Kraljic’s portfolio matrix. Procurement manager should form partnership with suppliers to maximise the value.
The following graph illustrates Kraljic’s portfolio matrix:
Reference: CIPS Study guide page 84.
LO 2, AC 2.1
Thani Ltd is a fast growing logistics company with a fleet of 20 tractors. To meet Net Zero objective, 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 departments. 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
Thani Ltd is a fast growing logistics company with a fleet of 20 tractors. To meet Net Zero objective, 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 departments. 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
Thani Ltd is a fast growing logistics company with a fleet of 20 tractors. To meet Net Zero objective, 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 departments. 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
Thani Ltd is a fast growing logistics company with a fleet of 20 tractors. To meet Net Zero objective, 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 departments. 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
Thani Ltd is a fast growing logistics company with a fleet of 20 tractors. To meet Net Zero objective, 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 departments. 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
The purchase is made in emergency
- A . 2 and 4 only
- B . 1 and 4 only
- C . 1 and 3 only
- D . 2 and 3 only
A
Explanation:
The difference between the standard cost of direct materials specified for production and the actual cost of direct materials used in production is known as Direct Material Cost Variance. Material Cost Variance gives an idea of how much more or less cost has been incurred when compared with the standard cost. Thus, Variance Analysis is an important tool to keep a tab on the deviations from the standard set by a company.
Material Cost Variance can be due to less purchase price being paid than the standard or because of change in the quantity of material used. Thus, Material Cost Variance is made up of two components namely; Material Price Variance and Material Usage Variance. Among the 4 options:
– ‘The buyer updates purchase-to-pay system to track payment and delivery’: The use of e-procurement system can increase the productivity and create labour cost variance, not material cost variance.
– ‘An unprocessed goods received note is missing’: If a goods received note is missing, the buyer won’t pay for that batch, which create quantity variance.
– ‘The employees must work overtime to catch up with the customers’ orders’: Overtime salary can cause labour variance, not material cost variance.
– ‘The purchase is made in emergency’: Normally, the price in emergency situation is higher than usual. This can cause price variance.
Reference: – CIPS study guide page 57-59
– Material Variance | Cost, Price, Usage Variance Formula, Example – eFM (efinancemanage-ment.com)
LO 1, AC 1.4
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
Which of the following standards specifies requirements for a quality management system?
- A . ISO 27001
- B . ISO 9001:2015
- C . ISO 22000:2018
- D . ISO 14001:2015
B
Explanation:
ISO 9001:2015 specifies requirements for a quality management system.
ISO 14001:2015 specifies the requirements for an environmental management system that an organization can use to enhance its environmental performance. ISO 14001:2015 is intended for use by an organization seeking to manage its environmental responsibilities in a systematic manner that contributes to the environmental pillar of sustainability.
ISO 22000:2018 specifies food safety management systems ― Requirements for any organization in the food chain
ISO 27001 provides requirements for an information security management system.
LO 3, AC 3.1
Housing Ltd is inviting a number of contractors to a tender for the construction of a commercial building. In the attachment to the invitation to tender, there is a document which describes the re-quired materials and installation methods. This document is known as…?
- A . Functional specification
- B . Prescriptive specification
- C . Drawings
- D . Performance specification
B
Explanation:
This question mentions about specification in construction. In this sector, specifications are written documents that describe the materials and workmanship required for a development. They do not include cost, quantity or drawn information and need to be read alongside other contract documentation such as quantities, schedules and drawings.
Specifications vary considerably depending on the stage to which the design has been developed, ranging from performance (open) specifications that require further development by a contractor or supplier, to prescriptive (closed) specifications for which the design is already complete when the project is tendered.
Prescriptive specifications typically contain detailed descriptions of the following components:
– General requirements relating to regulations and standards.
– The type of products and materials required.
– The execution and installation methods required.
Prescriptive specifications give the client much more certainty about the end product when making investment decisions (such as when they appoint the contractor), and place a greater burden on the designer to ensure proper installation rather than the contractor.
Reference: – CIPS study guide page 116-120
– Prescriptive specification – Designing Buildings Wiki LO 3, AC 3.1
A purchaser is looking for alternative supplies if there is a major disruption to their supply chain, including logistics, manufacturing and all support services.
Which of the following method is that purchaser applying?
- A . Treat the risk
- B . Terminate the risk
- C . Tolerate the risk
- D . Transfer the risk
A
Explanation:
Risk control is the process by which an organization reduces the likelihood of a risk event occurring or mitigates the effects that risk should it occur. CIPS preferred way to determine your risk control strategy is to use the four T’s Process:
Transferring Risk can be achieved through the use of various forms of insurance, or the payment to third parties who are prepared to take the risk on behalf of the organization
Tolerating Risk is where no action is taken to mitigate or reduce a risk. This may be because the cost of instituting risk reduction or mitigation activity is not cost-effective or the risks of impact are at so low that they are deemed acceptable to the business. Even when these risks are tolerated they should be monitored because future changes may make it no longer tolerable.
Treating Risk is a method of controlling risk through actions that reduce the likelihood of the risk occurring or minimize its impact prior to its occurrence. Also, there are contingent measures that can be developed to reduce the impact of an event once it has occurred. Finding an alternative sup-plier is an example of treating the risk.
Terminating Risk is the simplest and most often ignored method of dealing with risk. It is the ap-proach that should be most favored where possible and simply involves risk elimination. This can be done by altering an inherently risky process or practice to remove the risk. The same can be used when reviewing practices and processes in all areas of the business.
If an item presents a risk and can be changed or removed without it materially affecting the busi-ness, then removing the risk should be the first option considered; rather than attempting the treat, tolerate or transfer it.
Reference: CIPS study guide page 144
LO 3, AC 3.3
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
Which of the following is the structured approach for defining customer requirements and translating them into technical specification?
- A . Kano model
- B . Thomas-Kilmann model
- C . Quality function deployment
- D . Mendelow’s matrix
C
Explanation:
Quality function deployment (QFD) is a method to transform qualitative user demands into quantitative parameters, to deploy the functions forming quality, and to deploy methods for achieving the design quality into subsystems and component parts, and ultimately to specific elements of the manufacturing process.
Kano model of excitement and basic quality (Kano et al, 1984; Berger et al, 1993; Matzler et al, 1996) brings a different perspective for the analysis of improvement opportunities in products and services because it takes in consideration the asymmetrical and non-linear relationship between performance and satisfaction. The Kano model classifies customers requirements in five categories: basic requirements, performance requirements, attractive requirements, indifferent requirements and reverse requirements.
Mendelow’s Matrix is a tool that may be used by an organisation to consider the attitude of their stakeholders at the start of a project or when they are setting out strategic objectives.
The Thomas Kilmann model identifies two dimensions when choosing a course of action in a conflict situation, these are assertiveness and cooperativeness. Assertiveness is the degree to which you try to satisfy your own needs. Cooperativeness is the degree to which you try to satisfy the other person’s concerns.
Reference: CIPS study guide page 32
LO 1, AC 1.2
Which of the following factors might prompt an organisation to procure an alternative product?
Select THREE that apply:
- A . Brand loyalty
- B . Relative value to money between options
- C . Buying organisation’s propensities to change
- D . Easy access to distribution channel
- E . Threat of retaliation
- F . Switching cost
B, C, F
Explanation:
According to Michael Porter, the threat of substitution, 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.)
Reference: CIPS study guide page 92-97
LO 2, AC 2.2
Which of the following factors might prompt an organisation to procure an alternative product?
Select THREE that apply:
- A . Brand loyalty
- B . Relative value to money between options
- C . Buying organisation’s propensities to change
- D . Easy access to distribution channel
- E . Threat of retaliation
- F . Switching cost
B, C, F
Explanation:
According to Michael Porter, the threat of substitution, 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.)
Reference: CIPS study guide page 92-97
LO 2, AC 2.2
Which of the following factors might prompt an organisation to procure an alternative product?
Select THREE that apply:
- A . Brand loyalty
- B . Relative value to money between options
- C . Buying organisation’s propensities to change
- D . Easy access to distribution channel
- E . Threat of retaliation
- F . Switching cost
B, C, F
Explanation:
According to Michael Porter, the threat of substitution, 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.)
Reference: CIPS study guide page 92-97
LO 2, AC 2.2
Which of the following factors might prompt an organisation to procure an alternative product?
Select THREE that apply:
- A . Brand loyalty
- B . Relative value to money between options
- C . Buying organisation’s propensities to change
- D . Easy access to distribution channel
- E . Threat of retaliation
- F . Switching cost
B, C, F
Explanation:
According to Michael Porter, the threat of substitution, 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.)
Reference: CIPS study guide page 92-97
LO 2, AC 2.2
Which of the following factors might prompt an organisation to procure an alternative product?
Select THREE that apply:
- A . Brand loyalty
- B . Relative value to money between options
- C . Buying organisation’s propensities to change
- D . Easy access to distribution channel
- E . Threat of retaliation
- F . Switching cost
B, C, F
Explanation:
According to Michael Porter, the threat of substitution, 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.)
Reference: CIPS study guide page 92-97
LO 2, AC 2.2
Standardisation
- A . 2 and 3 only
- B . 1 and 3 only
- C . 3 and 4 only
- D . 1 and 4 only
D
Explanation:
Value analysis is often defined as a systematic process for improving the value of a product, service or project.
It is typically used in the following ways:
– To determine the value of each component used
– To find cost reduction opportunities by optimising the components used
Segment analysis helps procurement and supply to shape and manage the supply markets.
There is no concept known as Variety reduction.
Standardisation is the process which is used to reduce varieties of products or parts.
In this scenario, the company’s objective is cost reduction, then value analysis or value engineering is more likely to be applied. Also the company aims at reducing variety, standardisation can be combined with value analysis to produce the best results. LO 3, AC 3.4
Which of the following sources of information are considered as primary data? Select TWO that apply.
- A . The information about specific market sectors from trade associations
- B . Commercial publishers of market reports
- C . The collection of data from surveying customers
- D . RFI
- E . Reports in business magazines
C, D
Explanation:
The aim of this question is to check students’ understanding of different types of data. There are 2 types of data:
– Primary data is the collection of original or raw data which are generated from field research. In this case, only RFI and surveys from customers are considered as primary data.
– On the other hand, secondary data is public information that has been collected by others. It is typically free or inexpensive to obtain and can act as a strong foundation to any research project ― provided you know where to find it and how to judge its worth and relevance. Examples of secondary data are government statistics, industry associations, trade publications, published market reports, etc.
Reference: CIPS study guide page 22-24 LO 1, AC 1.2
At which stage of through-life contract management, procurement team needs to identify sources of risk and the ways to mitigate them?
- A . Specification stage
- B . Supplier relationship stage
- C . Tendering stage
- D . Contracting stage
B
Explanation:
Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.
There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:
– Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.
– Clearly identify any testing and quality assurance procedures and who will perform them.
– Document every important aspect of the specification including a project plan
– Include a reasonable limitation of liability clause in the contract and reference it in the specification
– Identify any guarantees that are needed
– Be clear on what insurance will and will not cover
– Make sure there is clear audit trail of any changes to the specification together with approvals
LO 3, AC 3.2
At which stage of through-life contract management, procurement team needs to identify sources of risk and the ways to mitigate them?
- A . Specification stage
- B . Supplier relationship stage
- C . Tendering stage
- D . Contracting stage
B
Explanation:
Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.
There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:
– Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.
– Clearly identify any testing and quality assurance procedures and who will perform them.
– Document every important aspect of the specification including a project plan
– Include a reasonable limitation of liability clause in the contract and reference it in the specification
– Identify any guarantees that are needed
– Be clear on what insurance will and will not cover
– Make sure there is clear audit trail of any changes to the specification together with approvals
LO 3, AC 3.2
At which stage of through-life contract management, procurement team needs to identify sources of risk and the ways to mitigate them?
- A . Specification stage
- B . Supplier relationship stage
- C . Tendering stage
- D . Contracting stage
B
Explanation:
Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.
There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:
– Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.
– Clearly identify any testing and quality assurance procedures and who will perform them.
– Document every important aspect of the specification including a project plan
– Include a reasonable limitation of liability clause in the contract and reference it in the specification
– Identify any guarantees that are needed
– Be clear on what insurance will and will not cover
– Make sure there is clear audit trail of any changes to the specification together with approvals
LO 3, AC 3.2
At which stage of through-life contract management, procurement team needs to identify sources of risk and the ways to mitigate them?
- A . Specification stage
- B . Supplier relationship stage
- C . Tendering stage
- D . Contracting stage
B
Explanation:
Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.
There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:
– Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.
– Clearly identify any testing and quality assurance procedures and who will perform them.
– Document every important aspect of the specification including a project plan
– Include a reasonable limitation of liability clause in the contract and reference it in the specification
– Identify any guarantees that are needed
– Be clear on what insurance will and will not cover
– Make sure there is clear audit trail of any changes to the specification together with approvals
LO 3, AC 3.2
At which stage of through-life contract management, procurement team needs to identify sources of risk and the ways to mitigate them?
- A . Specification stage
- B . Supplier relationship stage
- C . Tendering stage
- D . Contracting stage
B
Explanation:
Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.
There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:
– Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.
– Clearly identify any testing and quality assurance procedures and who will perform them.
– Document every important aspect of the specification including a project plan
– Include a reasonable limitation of liability clause in the contract and reference it in the specification
– Identify any guarantees that are needed
– Be clear on what insurance will and will not cover
– Make sure there is clear audit trail of any changes to the specification together with approvals
LO 3, AC 3.2
At which stage of through-life contract management, procurement team needs to identify sources of risk and the ways to mitigate them?
- A . Specification stage
- B . Supplier relationship stage
- C . Tendering stage
- D . Contracting stage
B
Explanation:
Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.
There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:
– Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.
– Clearly identify any testing and quality assurance procedures and who will perform them.
– Document every important aspect of the specification including a project plan
– Include a reasonable limitation of liability clause in the contract and reference it in the specification
– Identify any guarantees that are needed
– Be clear on what insurance will and will not cover
– Make sure there is clear audit trail of any changes to the specification together with approvals
LO 3, AC 3.2
Acquiring competitors
- A . 3 and 4 only
- B . 3 and 5 only
- C . 1 and 2 only
- D . 2 and 5 only
A
Explanation:
"A firm’s relative position within its industry determines whether a firm’s profitability is above or below the industry average. The fundamental basis of above average profitability in the long run is sustainable competitive advantage. There are two basic types of competitive advantage a firm can possess: low cost or differentiation. The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus." (Reference: Porter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York.)
Creating stand-out products and brands is considered as Differentiation. An organisation that is not clear about which of these three strategies to use is described as ‘stuck in the middle’ LO 2, AC 2.1
Robert is a senior buyer at MMC Construction Ltd. His company is doing multiple development projects in the country, which increases procurement workload significantly. Meanwhile, most of the tasks are handled manually, which causes bottlenecks in the workflows. The procurement team is overwhelmed by the workload and complains from other departments. From previous experience, Robert knows that electronic system may help his procurement team. He writes a business case to submit to the senior management, in which he insists on the possible productivity improvement by adopting e-system in procurement.
Is Robert’s action reasonable?
- A . No, there’s no need to make a business case for new purchase
- B . Yes, productivity improvement is a mandatory element in every business case
- C . No, adopting e-system may make procurement department jobless
- D . Yes, his reason may appeal the senior management
D
Explanation:
Composing a compelling business case requires the proposer to write in the language of the approvers. Generally, approvers are business executives or important shareholders whose major interest is the profitability of the firm. Business case proposer may embed the following contents:
– Return on investment: according to Investopedia, Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. A business case would seem more attractive if the proposal is expected to have high ROI.
– Time to market: Time-to-market (TTM) refers to the time from which a company initially conceives a product or service idea to the point when the actual product or service is accessible to buyers in the market (Afonso et al., 2008). The speed at which companies can introduce products into the market is critical for sustaining competitive advantage, and the reduction of product development cycle time has become a strategic objective for many technology-driven firms.
– Customer satisfaction: Keeping existing customer to stay in the business can affect greatly on the profit margin of a firm. A new proposal that finds the way to innovate while keeping the current customers satisfied may gain the interest of senior management.
– Improving productivity: Productivity is the measure of how efficient and effective a firm is. Im-proving the productivity means that with the same or lesser input, better output is generated. In-creasing productivity also improves the profitability of a company.
– Risk management: Any business activity contains inherent risks. For example, for a mining company to be truly responsible, it must keep all of its workers safe, healthy and motivated, meet the expectations of the local community and government for the region in which it is operating, ensure it impacts on the environment positively if at all, as well as achieve the financial objectives set by its investors for both the short and long term. Managing risks well improves the production throughput and maintains customer satisfaction.
In the scenario, Robert is trying to convince the senior management to adopt e-procurement system by insisting on potential productivity improvement. This is the right approach. A business plan should engage and please senior management and directors. An appealing business case tells them how important things to the business (such as productivity, return on investment, customer satisfaction or costs) are affected by the plan.
Reference: CIPS study guide page 19-21 LO 1, AC 1.1
Which of the following are typically included in a conformance specification? Select TWO that apply.
- A . Product functions
- B . Product dimensions
- C . Brand name
- D . List of outcome
- E . Packaging requirements
B, E
Explanation:
A conformance specification is a specification that defines the technical and physical characteristics and/or measurements of a product, such as physical aspects (e.g. dimensions, colour, and surface finish), design details, material properties, energy requirements, processes, maintenance requirements and operational requirements.
On the other hand, performance specification typically includes list of output or outcome or functional requirements. Brand name can be a part of performance specification because brand is a re-minder of quality that customers remember. For example, when talking about Roll Royce, people will think about an elegant car.
Reference: CIPS study guide page 118-124
LO 3, AC 3.1
Which of the following indicates types of waste that procurement department concentrates on when adopting Lean methods?
- A . DOWNTIME
- B . VA/VE
- C . OWN-IT
- D . SCAMPER
A
Explanation:
Copious amounts of waste can occur in the workplace, particularly in a manufacturing process, but do you know what the eight most commons wastes are and how they impact your organization? Taiichi Ohno, considered the father of Toyota Production System, created a lean manufacturing framework, which was based on the idea of preserving (or increasing) value with less work. Any-thing that doesn’t increase value in the eye of the customer must be considered waste, or "Muda", and every effort should be made to eliminate that waste. The following 8 lean manufacturing wastes, mostly derived from the TPS, have a universal application to businesses today. The acronym for the eight wastes is DOWNTIME. Downtime stands for:
– Defects
– Overproduction
– Waiting
– Not utilizing talent
– Transportation
– Inventory excess
– Motion waste
– Excess processing
OWN-IT is the acronym for the process of collecting and analysing the data and information needed in any field
SCAMPER is acronym for options addressing the underlying issues and achieving target
VA/VE is value analysis and value engineering
LO 3, AC 3.4
A procurement manager includes provision on recovery from natural disaster into a through-life specification. Some suppliers suppose that provision is unnecessary. Is procurement manager’s action justified?
- A . No, because with current technology, natural disaster can’t disrupt supply chain.
- B . Yes, because natural disaster may cause risks in organisation’s supply chain
- C . Yes, because the regulations require contract to have recovery provision
- D . No, because this provision will incur unnecessary cost to supplier
B
Explanation:
Risks like natural disasters – fire, flood, or weather-related event, and cyber-attacks can disrupt the supply chain seriously. Threats and disruptions mean a loss of revenue and higher costs, which leads to a drop in profitability. And businesses can’t rely on insurance alone because it doesn’t cover all the costs and the customers who move to the competition. Risks must be identified early and supplier should have a plan that ensures continuous operations during disasters.
There are several steps many companies must follow to develop a solid business continuity plan.
They include:
– Business Impact Analysis: Here, the business will identify functions and related resources that are time-sensitive. (More on this below.)
– Recovery: In this portion, the business must identify and implement steps to recover critical business functions.
– Organization: A continuity team must be created. This team will devise a plan to manage the disruption.
– Training: The continuity team must be trained and tested. Members of the team should also complete exercises that go over the plan and strategies.
Reference: CIPS study guide page 138. LO 3, AC 3.2
Which of the following is the new technology that has impact on manufacturing sector?
- A . Social Media
- B . E-commerce
- C . Robotics
- D . Blockchain
C
Explanation:
Robots in manufacturing help to create jobs by reshoring more manufacturing work. Robots protect workers from repetitive, mundane and dangerous tasks, while also creating more desirable jobs, such as engineering, programming, management and equipment maintenance. LO 2, AC 2.1
Sealines Inc is developing its fleet of cargo ships. The company is planning to build a new ship powered by natural gas. Brian, the procurement manager at Sealines, suggests the project team to develop a through-life specification before engaging with the supplier.
Is this a correct approach?
- A . Yes, decommissioning and disposal costs will not be accounted in this approach
- B . Yes, this approach will lower the total cost of ownership
- C . No, a ship is used only once, through-life management is unnecessary
- D . No, the company just needs to select the lowest bidder
B
Explanation:
Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
According to CIPS study guide, through-life management comprises of 6 parts:
Sealines Inc is developing its fleet of cargo ships. The company is planning to build a new ship powered by natural gas. Brian, the procurement manager at Sealines, suggests the project team to develop a through-life specification before engaging with the supplier.
Is this a correct approach?
- A . Yes, decommissioning and disposal costs will not be accounted in this approach
- B . Yes, this approach will lower the total cost of ownership
- C . No, a ship is used only once, through-life management is unnecessary
- D . No, the company just needs to select the lowest bidder
B
Explanation:
Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
According to CIPS study guide, through-life management comprises of 6 parts:
Sealines Inc is developing its fleet of cargo ships. The company is planning to build a new ship powered by natural gas. Brian, the procurement manager at Sealines, suggests the project team to develop a through-life specification before engaging with the supplier.
Is this a correct approach?
- A . Yes, decommissioning and disposal costs will not be accounted in this approach
- B . Yes, this approach will lower the total cost of ownership
- C . No, a ship is used only once, through-life management is unnecessary
- D . No, the company just needs to select the lowest bidder
B
Explanation:
Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
According to CIPS study guide, through-life management comprises of 6 parts:
Sealines Inc is developing its fleet of cargo ships. The company is planning to build a new ship powered by natural gas. Brian, the procurement manager at Sealines, suggests the project team to develop a through-life specification before engaging with the supplier.
Is this a correct approach?
- A . Yes, decommissioning and disposal costs will not be accounted in this approach
- B . Yes, this approach will lower the total cost of ownership
- C . No, a ship is used only once, through-life management is unnecessary
- D . No, the company just needs to select the lowest bidder
B
Explanation:
Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
According to CIPS study guide, through-life management comprises of 6 parts:
Sealines Inc is developing its fleet of cargo ships. The company is planning to build a new ship powered by natural gas. Brian, the procurement manager at Sealines, suggests the project team to develop a through-life specification before engaging with the supplier.
Is this a correct approach?
- A . Yes, decommissioning and disposal costs will not be accounted in this approach
- B . Yes, this approach will lower the total cost of ownership
- C . No, a ship is used only once, through-life management is unnecessary
- D . No, the company just needs to select the lowest bidder
B
Explanation:
Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
According to CIPS study guide, through-life management comprises of 6 parts:
Sealines Inc is developing its fleet of cargo ships. The company is planning to build a new ship powered by natural gas. Brian, the procurement manager at Sealines, suggests the project team to develop a through-life specification before engaging with the supplier.
Is this a correct approach?
- A . Yes, decommissioning and disposal costs will not be accounted in this approach
- B . Yes, this approach will lower the total cost of ownership
- C . No, a ship is used only once, through-life management is unnecessary
- D . No, the company just needs to select the lowest bidder
B
Explanation:
Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
According to CIPS study guide, through-life management comprises of 6 parts:
Sealines Inc is developing its fleet of cargo ships. The company is planning to build a new ship powered by natural gas. Brian, the procurement manager at Sealines, suggests the project team to develop a through-life specification before engaging with the supplier.
Is this a correct approach?
- A . Yes, decommissioning and disposal costs will not be accounted in this approach
- B . Yes, this approach will lower the total cost of ownership
- C . No, a ship is used only once, through-life management is unnecessary
- D . No, the company just needs to select the lowest bidder
B
Explanation:
Through-life management is a approach applied to capital asset. According to Ward and Graves, Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
According to CIPS study guide, through-life management comprises of 6 parts:
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
Which type of specification is less time-consuming to develop?
- A . Outcome-based specification
- B . Design specification
- C . Conformance specification
- D . Technical drawings
A
Explanation:
There are two major types of specification: conformance and performance specifications. They have the following characteristics:
Since performance specification is often a list of outputs or outcomes, it usually takes less time to
develop than conformance specification.
Reference: CIPS study guide page 116-124
Which type of specification is less time-consuming to develop?
- A . Outcome-based specification
- B . Design specification
- C . Conformance specification
- D . Technical drawings
A
Explanation:
There are two major types of specification: conformance and performance specifications. They have the following characteristics:
Since performance specification is often a list of outputs or outcomes, it usually takes less time to
develop than conformance specification.
Reference: CIPS study guide page 116-124
Which type of specification is less time-consuming to develop?
- A . Outcome-based specification
- B . Design specification
- C . Conformance specification
- D . Technical drawings
A
Explanation:
There are two major types of specification: conformance and performance specifications. They have the following characteristics:
Since performance specification is often a list of outputs or outcomes, it usually takes less time to
develop than conformance specification.
Reference: CIPS study guide page 116-124
Which type of specification is less time-consuming to develop?
- A . Outcome-based specification
- B . Design specification
- C . Conformance specification
- D . Technical drawings
A
Explanation:
There are two major types of specification: conformance and performance specifications. They have the following characteristics:
Since performance specification is often a list of outputs or outcomes, it usually takes less time to
develop than conformance specification.
Reference: CIPS study guide page 116-124
Which type of specification is less time-consuming to develop?
- A . Outcome-based specification
- B . Design specification
- C . Conformance specification
- D . Technical drawings
A
Explanation:
There are two major types of specification: conformance and performance specifications. They have the following characteristics:
Since performance specification is often a list of outputs or outcomes, it usually takes less time to
develop than conformance specification.
Reference: CIPS study guide page 116-124
Low switching costs
- A . 2 and 4 only
- B . 3 and 4 only
- C . 2 and 3 only
- D . 1 and 4 only
C
Explanation:
Barriers to entry is an economics and business term describing factors that can prevent or impede newcomers into a market or industry sector, and so limit competition. The most obvious barriers to entry are high start-up costs and regulatory hurdles which include the need for new companies to obtain licenses or regulatory clearance before operation. Also, industries heavily regulated by the government are usually the most difficult to penetrate. Other forms of barrier to entry that prevent new competitors from easily entering a business sector include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs.
In the scenario, the new factory for chipset manufacturing costs billions of dollars, which indicates
high set-up costs. Also, the incumbent manufacturers have reached economies of scale, allowing them to produce the components at optimal price.
The above descriptions are compiled from recent reports on current chip shortage (2021).
Reference: – Barriers to Entry Definition (investopedia.com)
– CIPS study guide page 96-97
LO 2, AC 2.2
A procurement manager consolidates the company expense on printing and office supplies into broader range of spend category. Other senior managers are concerned that it may increase company’s spend.
Is that concern justified?
- A . No, because the broader range of spend category can increase the value of the contract and the buyer may get volume discount
- B . Yes, because the consolidation may create a large contract that costs more than placing each purchase order
- C . No, because the consolidation will help the supplier to shorten deliver time.
- D . Yes, because the suppliers can’t provide a broader range of products and they will fail to deliver
A
Explanation:
Printing and office supplies are often considered as low risk, low value items. Consolidation low value, low risk items into a broader range will dramatically increases the value of the contract and leverage of buying organisation in the negotiation.
Reference: CIPS study guide page 8-9
LO 1, AC 1.1
This is the information on an organisation’s activities over the past year
• Sale were $5,000,000. The value of accounts receivable was $450,000 at the start of the year and $525,000 at the end of the year
• The value of direct costs was $2,500,000 and 75% of this was bought on credit
• Indirect costs were $3,000,000 and 25% of this was bought on credit
• During the year the organization spent $1,500,000 on new assets and sold $150,000 of old assets. $1,000,000 of the spend on assets was funded by a bank loan
• The organization declared a dividend of $200,000 at the end of the year but this was not paid for another two months
• Opening balance was $175,000
Which of the following is the bank balance of that organization at the end of the year?
- A . $1,675,000
- B . $1,875,000
- C . $1,700,000
- D . $2,025,000
B
Explanation:
In this question, you should understand the concept of cash flow and formula of cash flow. Cash flow calculates the physical money moving in and out a company’s bank balance.
The cash flow from sale activity is:
cash flow from sale = account receivable at beginning of the year + revenue – account receivable at the end of the year = $450,000 + $5,000,000 – $525,000 = $4,925,000
75% of direct costs was bought by credit, therefore, the company spent 25% on direct cost: – $2,500,000*25/100 = -$625,000
25% of indirect costs was bought on credit. Cash flow out on indirect costs is: -$3,000,000*75/100 = – $2,250,000
Company spent $1,500,000 on new assets funded by a loan of $1,000,000. Cash flow out from this activity is -$500,000
Company received $150,000 from selling old assets
Dividends have not been paid for another 2 months, thus, they are not accounted as cash flow out. The bank balance at the end of the year is: $175,000 + $4,925,000 – $625,000 – $2,250,000 – $500,000
+ $150,000 = $1,875,000 LO 1, AC 1.4
When procuring an IT equipment, at which stage the buyer’s expectations are translated into a technical specification?
- A . Installation
- B . Design
- C . In-service support
- D . Customer support
B
Explanation:
IT equipment is typically linked with through-life contracts. This type of contract not only deal with the specification and the price of a machinery, but also other stages such as design, manufacture, installation, in-service support, decommission and disposal. Among these stages, the design stage is when buyer’s requirements are translated into technically correct specification.
Reference: CIPS study guide page 131
LO 3, AC 3.2
Interserve is a construction contractor in UK. When receiving a huge and complex project, Inter-serve’s procurement manager assesses the risks by quantifying them and recommends other stake-holders to plan mitigating actions. Is the procurement manager’s action justified?
- A . No, because no risks can be quantified, therefore the procurement manager’s action is impossible.
- B . Yes, because procurement manager needs to assess the risks to prioritise and mitigate any potential risks
- C . Yes, because all the risks should be quantified and eliminated completely before they happen
- D . No, because embedding the risk into pricing will decrease the company’s competitiveness
B
Explanation:
Assessing the risks by quantifying them should be done. Even with qualitative risk assessment, quantifying is still important since risks need to be prioritised.
Risk assessment can be qualitative or quantitative. Perform qualitative and perform quantitative risk analysis are two processes within the project risk management knowledge area, in the planning process group. While qualitative risk analysis should generally be performed on all risks, for all projects, quantitative risk analysis has a more limited use, based on the type of project, the project risks, and the availability of data to use to conduct the quantitative analysis. Qualitative Risk Analysis
A qualitative risk analysis prioritises the identified project risks using a pre-defined rating scale. Risks will be scored based on their probability or likelihood of occurring and the impact on project objectives should they occur.
Probability/likelihood is commonly ranked on a zero to one scale (for example, .3 equating to a 30% probability of the risk event occurring).
The impact scale is organizationally defined (for example, a one to five scale, with five being the highest impact on project objectives – such as budget, schedule, or quality).
A qualitative risk analysis will also include the appropriate categorization of the risks, either source-
based or effect-based.
Quantitative Risk Analysis
A quantitative risk analysis is a further analysis of the highest priority risks during a which a numerical or quantitative rating is assigned in order to develop a probabilistic analysis of the project. A quantitative analysis:
– Quantifies the possible outcomes for the project and assesses the probability of achieving specific project objectives
– Provides a quantitative approach to making decisions when there is uncertainty
– Creates realistic and achievable cost, schedule or scope targets
In order to conduct a quantitative risk analysis, you will need high-quality data, a well-developed project model, and a prioritized lists of project risks (usually from performing a qualitative risk analysis).
Reference: CIPS study guide page 143-144
LO 3, AC 3.3
Which of the following are considered as direct costs in a construction company? Select TWO op-tions
- A . Raw materials
- B . An employee is hired to work on a project, either exclusively or for an assigned number of hours
- C . The materials and supplies needed for the company’s day-to-day operations.
- D . Advertising and marketing communication
- E . Clerical assistants who maintain the office
A, B
Explanation:
Direct costs are directly associated with the production of a good or service. In this question, ‘An employee is hired to work on a project, either exclusively or for an assigned number of hours’ and ‘Raw materials’ are directly related to producing the product.
Indirect costs are the general costs of the organisation – these costs cannot easily be attributed to specific products or services (also known as overheads). ‘The materials and supplies needed for the company’s day-to-day operations’ or ‘Clerical assistants who maintain the office’ or ‘Advertising and marketing communication’ is example of indirect cost.
Reference: CIPS study guide page 25-26
LO 1, AC 1.2
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 number 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
A charity is reviewing their spend and budget after an operation in flooded areas. They realise that the operators save money against the budgeting plan.
This saving is known as…?
- A . Negative budget
- B . Positive variance
- C . Negative variance
- D . Positive budget
C
Explanation:
The difference between the actual spend and budgeted spend is known as variance.
The formula for variance is:
Variance = Actual spend – Budgeted spend
Variances can be adverse/unfavourable or favourable ie they can be positive or negative.
Be very careful with these terms. A positive or a negative variance may be favourable or it may be adverse/ unfavourable.
Adverse variances
Adverse variances are those variances that are unfavourable to the firm. Examples would be sales below plan; costs above budget, cash receipts lower than expected, and overtime payment more than forecast.
Favourable variances
Favourable variances are those variances that are beneficial to the business. Examples would be sales ahead of plan, costs below budget, and wages below forecast. Positive variance A positive variance occurs where ‘actual’ exceeds ‘planned’ or ‘budgeted’ value. Examples might be actual sales are ahead of the budget.
Negative variance
A negative variance occurs where ‘actual’ is less than ‘planned’ or ‘budgeted’ value. Examples would be when the raw materials cost less than expected, sales were less than predicted, and labour costs were below the budgeted figure.
When the operators create saving, it means that the Actual spend is less than Budgeted spend.
Therefore the variance is negative.
Reference: – Variance analysis
– CIPS study guide page 57-59
LO 1, AC 1.4
Which of the following can directly affect labour variance? Select TWO that apply:
- A . Wage rate per hour
- B . Inflation
- C . Company’s budget
- D . Overhead expenditure
- E . Overtime
A, E
Explanation:
Labour variance refers to a situation in which actual costs of labor differ from projected or budgeted labor costs. This concept is most commonly applied in manufacturing environments.
Labour variance either results from efficiency or rate discrepancies. Efficiency variance results when actual time worked is more or less than budgeted time for a project. Rate variance means you paid more per hour worked than expected. This may occur with overtime pay or when you have higher paid employees on a project than projected. Labour variance is fairly typical, but modest variance is usually not a big factor in manufacturing, because materials and other production costs are often much higher.
LO 1, AC 1.4
Which of the following areas is specified by ISO/IEC 27001 family?
- A . The dimensions and associated tolerances for a series of housings for piston seals
- B . The requirements for an information security management system
- C . Evaluation and assessment of mutual agreed customer food safety requirements
- D . The requirements for an environmental management system
B
Explanation:
ISO/IEC 27001 is widely known, providing requirements for an information security management system (ISMS), though there are more than a dozen standards in the ISO/IEC 27000 family. Using them enables organizations of any kind to manage the security of assets such as financial infor-mation, intellectual property, employee details or information entrusted by third parties. LO 3, AC 3.1
Which of the following provides in-depth detail for both functional and non-functional require-ments and covers assumptions, constraints, performance, dimensions, weights and reliability of a product?
- A . Performance specification
- B . Tolerance
- C . Statement of work
- D . Design specification
D
Explanation:
Design specification is a detailed document providing a list of points regarding a product or pro-cess. For example, the design specification could include required dimensions, environmental fac-tors, ergonomic factors, aesthetic factors, maintenance that will be needed, etc. It may also give specific examples of how the design should be executed, helping others work properly (a guideline for what the person should do).
Performance specification is written requirement that describes the functional performance criteria required for a particular equipment, material, or product.
Tolerance is the permissable limit of a variable used to define a product
Statement of work is the document that captures and defines all aspects of a project, including the activities, deliverables and the timetable for the project.
Reference: CIPS study guide page 118
LO 3, AC 3.1
Which of the following is the technology that disrupts traditional retail?
- A . Self-Driving Cars
- B . Blockchain
- C . E-commerce
- D . Robotics
C
Explanation:
One of the biggest disruptors in retail has been e-commerce. According to a report by IDC, in the month of December 2018, which is also the holiday season in the west, the e-commerce sector globally, has grown by 20 percent.
LO 2, AC 2.2
A buying organisation may not have technical capability to produce a highly complex specification.
Which of the following are sources of information that can be used to create the specification? Select
TWO that apply
- A . Standard terms and conditions
- B . Name cards
- C . Industry standards
- D . Suppliers’ know-how
- E . Constitution
C, D
Explanation:
If an organisation doesn’t have capability to produce a technical specification, they can draft one
based on standards or consulting the suppliers.
Reference: CIPS study guide page 125-130
LO 3, AC 3.1
Which of the following is the best definition of target costing?
- A . The net present cost of the purchase or project and all future revenues flowing from it discounted back to the present time.
- B . The total of all costs in acquiring goods or services from the inception of the demand for them until their safe and satisfactory delivery at the point required.
- C . The cost of a product after analysing its components step by step
- D . A product cost estimate derived from a competitive market price.
D
Explanation:
Target costing is an activity aimed at reducing the life-cycle costs of new products, while ensuring quality, reliability, and other consumer requirements by examining all possible ideas for cost reduction at the product planning, research and development and prototyping phases of production. But it is not just a cost reduction technique; it is part of a comprehensive strategic profit management system.
Reference: CIPS study guide page 161
LO 3, AC 3.4
Which of the following might be the consequences of under-specification? Select TWO that apply:
- A . Few suppliers can supply the full range of features
- B . Additional cost to rework
- C . Unfit products or services
- D . Poor competition between suppliers
- E . Higher cost due to inessential features
B, C
Explanation:
Main risks involved in an under-specified requirement
• The product or service is not fit for use since it does not match the actual needs
• Higher cost due to corrections or reworks (proposal evaluations, scope or work monitoring, change in insulation materials or systems, reduced productivity, etc.).
• Higher operating cost on many fronts: process control, energy consumption, maintenance, etc.
• Other problems like corrosion under insulation, mold development, safety-related concerns, etc. LO 3, AC 3.3
Which of the following might be the consequences of under-specification? Select TWO that apply:
- A . Few suppliers can supply the full range of features
- B . Additional cost to rework
- C . Unfit products or services
- D . Poor competition between suppliers
- E . Higher cost due to inessential features
B, C
Explanation:
Main risks involved in an under-specified requirement
• The product or service is not fit for use since it does not match the actual needs
• Higher cost due to corrections or reworks (proposal evaluations, scope or work monitoring, change in insulation materials or systems, reduced productivity, etc.).
• Higher operating cost on many fronts: process control, energy consumption, maintenance, etc.
• Other problems like corrosion under insulation, mold development, safety-related concerns, etc. LO 3, AC 3.3
Which of the following might be the consequences of under-specification? Select TWO that apply:
- A . Few suppliers can supply the full range of features
- B . Additional cost to rework
- C . Unfit products or services
- D . Poor competition between suppliers
- E . Higher cost due to inessential features
B, C
Explanation:
Main risks involved in an under-specified requirement
• The product or service is not fit for use since it does not match the actual needs
• Higher cost due to corrections or reworks (proposal evaluations, scope or work monitoring, change in insulation materials or systems, reduced productivity, etc.).
• Higher operating cost on many fronts: process control, energy consumption, maintenance, etc.
• Other problems like corrosion under insulation, mold development, safety-related concerns, etc. LO 3, AC 3.3
Which of the following might be the consequences of under-specification? Select TWO that apply:
- A . Few suppliers can supply the full range of features
- B . Additional cost to rework
- C . Unfit products or services
- D . Poor competition between suppliers
- E . Higher cost due to inessential features
B, C
Explanation:
Main risks involved in an under-specified requirement
• The product or service is not fit for use since it does not match the actual needs
• Higher cost due to corrections or reworks (proposal evaluations, scope or work monitoring, change in insulation materials or systems, reduced productivity, etc.).
• Higher operating cost on many fronts: process control, energy consumption, maintenance, etc.
• Other problems like corrosion under insulation, mold development, safety-related concerns, etc. LO 3, AC 3.3
Competitors are increasingly deploying robotics and automation to boost productivity.
Which of the below business sectors does EV Inc belong to?
- A . Construction
- B . Manufacturing
- C . Financial services
- D . Retails
B
Explanation:
Every sector among the options requires intensive capital investment. However, only manufacturing and retails bury much of their working capital in form of inventory. Raw materials and WIP only present in manufacturing sector.
The manufacturing industry is undergoing massive change, rivaling the Industrial Revolution that began in England and continued on Detroit’s assembly lines. But today’s revolution is “smart,” thanks to factories using artificial intelligence and robots.
A new trend is the “cobot” ― a collaborative robot designed to work with humans. One company called Moduform uses them to make furniture in the U.S. The company credits using cobots for reducing their staffing turnover, since the robots do mundane repetitive tasks that bore humans, while people can now do cognitive tasks requiring judgment and diversified responsibilities. Other innovations include 3D printing, Artificial Intelligence and automation.
Today’s artificial intelligence manufacturing revolution improves performance in two key areas of manufacturing: productivity and quality control.
Reference: – The Key Characteristics of Manufacturing (bizfluent.com)
– CIPS study guide page 74-76
LO 2, AC 2.1
Lider Ltd is a leading bathroom furniture manufacturer in India. The company has more than 30 years experience in the market with extended knowledge of engineering and customers’ taste. Lider is planning to launch a new type of bath fitting next year which offers Bluetooth connectivity and thermostat display. The company gathers a team of multi-disciplines, including engineering, procurement, sales and marketing. At the first team meeting, the project leader tells the team to discuss which functions will be valued by the customers, and how to deliver those functions with the lowest costs possible.
Which of the following describes the process that the project team is undertaking?
- A . Cost analysis
- B . Standardisation
- C . Value engineering
- D . Just in time
C
Explanation:
From the scenario, you can see that the project team is developing a new product. They start with analysing the functions, and the costs of delivering those functions. This is a typical process of value engineering. You may read more on value engineering from the reference paper.
Reference: – CIPS study guide page 171-173
– Value Analysis – Norwood Whittle (cimaglobal.com)
– A CASE STUDY ANALYSIS THROUGH THE IMPLEMENTATION OF VALUE ENGI-NEERING (researchgate.net)
LO 3, AC 3.4
Dana is an automobile manufacturer. It has a new electrification strategy that aims at making eco-friendly electric pick-up trucks. To implement this strategy, the procurement department must source new categories of parts that make motors, sensors, solenoids and stators. He starts to analyse the market by identifying specific supply market segments for those parts and finding suppliers who have the best capabilities in those segment. He intends to segment the market based on specific features of the products.
Which variable is used by Dana procurement manager to shape and manage supply market?
- A . Buyer segments
- B . Channel segments
- C . Geographical segments
- D . Product segments
D
Explanation:
In sales and marketing, market segmentation is the process of trying to understand clusters of customers in terms of their buying behavior and their buying characteristics. There are some traditional segmentation approaches: geography, demography, types of industry and the benefits. Then there are newer segmentation approaches: behavioral, situational, and psychographic.
Procurement professionals can learn market segmentation from sales and marketing. Segmenting the market can help them to shape and manage the supply market effectively. According to Michael Porter, a market can be segment with array of products and buyers.
Source: Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 234). Free Press. Kindle Edition.
In the scenario, the products that Dana needs to source is distinct in their features. The best way is to
segment the market by product varieties.
Reference: CIPS study guide page 65
LO 2, AC 2.1
Which of the following is a risk to buying organization when using conformance specification?
- A . Buyer is responsible for product failure
- B . Buyer may face liquidity risks
- C . Buyer cannot control the inputs
- D . Time to produce specification is shortened
A
Explanation:
When using conformance specification, the buying organisation is responsible for the performance of the purchase. If the product fails due to poorly designed specification, the buyer is wholly responsible for it. It cannot blame the supplier for the failure because they still provided ‘fit for purpose’ product.
‘Time to produce specification is shortened’: Conformance specification requires details on dimen-sion, materials, design, etc. With such requirements, time to produce a complete conformance specification is often longer than producing performance specification.
‘Buyer cannot control the inputs’: Conformance specification is a list of inputs from buyer, so buyer has control over the inputs that will make the product. It also means that buyer is responsible for any product failure.
‘Buyer may face liquidity risks’: Liquidity means that how quick a business turns its assets into cash.
This is a financial term, it does not link directly with specification failure.
Reference: CIPS study guide page 118-119
LO 3, AC 3.1
After a project, the procurement team at CLK Ltd meets up and summarises on the performance. They see that they actually spent $5,000 less than planned budget. The team tries to identifies why there is such difference.
This activity is known as…?
- A . Cash flow analysis
- B . Variance analysis
- C . Rolling budget
- D . Cost modelling
B
Explanation:
The procurement team in the scenario is analysing the difference between the plan and actual spend. This activity is known as variance analysis. The sum of all variances gives a picture of the overall over-performance or under-performance for a particular reporting period. For each item, companies assess their favorability by comparing actual costs to standard costs in the industry.
For example, if the actual cost is lower than the standard cost for raw materials, assuming the same volume of materials, it would lead to a favorable price variance (i.e., cost savings). However, if the standard quantity was 10,000 pieces of material and 15,000 pieces were required in production, this would be an unfavorable quantity variance because more materials were used than anticipated.
Reference: – CIPS study guide page 57-58- Variance Analysis – Learn How to Calculate and Analyze Variances (corporatefinanceinsti-tute.com) LO 1, AC 1.4
Which of the following bodies provides standards for the products and services in the US?
- A . ISO
- B . ANSI
- C . AFNOR
- D . BSI
B
Explanation:
ANSI is the American National Standards Institute. It is responsible for providing technical standards in the US
LO 3, AC 3.1
Sabic is a petrochemical manufacturer. It wants to digitalise its operation and is looking for new IT system. The procurement manager approaches this matter with a through-life specification. He supposes that stating “good quality” in the specification will be enough for quality standard section. Is the procurement manager’s thought appropriate?
- A . Yes, because the specification should be concise.
- B . No, because “good quality” is an in-house jargon that suppliers are not familiar with
- C . Yes, because IT sector has its own standard of quality, therefore, suppliers may deliver good quality without any further explanation
- D . No, because “good quality” is very ambiguous for suppliers to identify Sabic’s re-quirement
D
Explanation:
Specifications for through-life contracts must be clear. They should use precise technical language and avoid any ambiguity as much as possible. In most cases, ‘good quality’ is ambiguous. The con-tractor doesn’t know exactly which product the buying organisation needs and how to supply that product.
Other notices for description of requirement are:
– Short and simply description
– Clear definitions at the beginning of the documents
– Clarify abbreviations (if any), but abbreviations should be avoided as much as possible
– Avoid any ‘slang’
– Use imperative forms of language whenever possible.
LO 3, AC 3.2
Which of the following factors are likely to be direct barriers to a new entrant in a supply market?
- A . Threat of forward integration
- B . Value to price
- C . Brand identity
- D . Availability of substitutes
- E . Cost advantages
C, E
Explanation:
There are many types of barriers to entry into a market. Some of these include:
– Economies of Scale: When manufacturing or selling at a large scale, companies are able to avail cost advantages because per unit costs of the product fall. So the more the company produces in quantity the more the benefit. When existing companies have this advantage, it can act as a barrier to entry because a new entrant will have to try to match the scale to achieve the same cost ad-vantage as the existing company. This may not be possible at the initial stage.
– A Differentiated Product: If the product being sold by the existing company or companies is highly differentiated or enjoys strong brand loyalty, then this can act as a strong barrier to entry. The new entrant will have to invest in creating a product with newer and unique features and bene-fits that surpass those offered by the old company. In addition, there will need to be strong efforts to break existing brand loyalties and shift them to a new untested company.
– High Capital Costs: If an industry requires huge capital investments at the onset, then this will act as a barrier to entry for many of the potential entrants. Only those will attempt to enter the competitive fray who have the resources to make this high initial investment.
– Other Cost Advantages: Apart from those cost benefits that come from economies of scale, there are other advantages that an existing firm may enjoy. These include access to the best suppliers, an understanding of existing materials and knowledge of their quality, possession of any necessary and important patents, and proprietary information and technological knowledge. There are also learning advantages, achieved over years of business and experience.
– Cost of Switching: The cost associated with a consumer’s move from one company or product or another is called the switching cost. If there are significant switching costs, then a new entrant may not be able to create means of removing these. Or, they may have to offer significant advantage to counter these switching costs at their own expense.
– Distribution Network: Often, distribution relationships are well established and may prove to be a strong barrier to entry for a new company. A new entrant will obviously need access to these distribution channels but will need to invest extra in order to engage distributors who have established relations with existing competitors.
– Suppliers: As with distributors, suppliers may be vital to the operations of a new business. Existing suppliers may have contracts or loyalties with existing companies and may prove to be difficult to form relationships with.
– Legal and Government Created Barriers: Government and regulatory requirements such as permits and licenses may be a strong barrier to entry. There may also be laws governing ways to conduct business that may conflict with a company’s practices in other countries.
– Barriers to Exit: Interestingly, barriers to exit may act as a deterrent to entry by new companies. If a company is unable to easily leave a competitive environment in case business does not work out, then it will have to stay and compete even if that is a detrimental business practice. In this case, the company may choose to not enter the market in the first place.
Reference: CIPS study guide page 96 LO 2, AC 2.2
Due to increasing demand, a local restaurant is requesting its fish vendor to supply larger quantity.
The restaurant manager also asks the vendor whether it is possible to reduce the total price by 5%.
This is known as…?
- A . Straight rebuy
- B . Capital purchase
- C . Modified rebuy
- D . New purchase
C
Explanation:
There are three major types of buying situations, which are new purchase, modified rebuy and straight rebuy. Three factors make the buying situations be different from the others, customers may face different problems in these situations.
A new purchase is a situation requiring the purchase of a product for the very first time.
A straight rebuy is when a company places a second order with a supplier that is identical to the first purchase it made.
A modified rebuy is when a company orders again from a supplier, but wants to change some aspect of the order, such as the quantity, packaging, product features, or delivery times. The scenario above is an example of modified rebuy.
Reference: – What is a straight rebuy example?
– CIPS study guide page 3-4
Which of the following are the fair and reasonable comparators in price analysis? Select TWO that apply:
- A . Pricing formula
- B . Price indices
- C . Strike price
- D . Cost driver
- E . Competitive bidding
A, B
Explanation:
Price Analysis is the process of deciding if the asking price for a product or service is fair and rea-sonable, without examining the specific cost and profit calculations the vendor used in arriving at the price. It is basically a process of comparing the price with known indicators of reasonableness. When adequate price competition does not exist, some other form of analysis is required. Some reasons that could affect adequate price competition are: specifications are not definitive, tolerances are restrictive, or production capacity limits those eligible to bid. Examples of other forms of price analysis information include:
• Analysis of previous prices paid
• Comparison of vendor’s price with the in-house estimate
• Comparison of quotations or published price lists from multiple vendors
• Comparisons with government agencies (such as GSA in the US) published prices
A strike price is the set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold. Strike price is also known as the exercise price.
A cost driver is the direct cause of a cost and its effect is on the total cost incurred. For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity. In such a scenario, the number of units of electricity consumed is a cost driver.
Reference: CIPS study guide page 35
LO 1, AC 1.2
Facing fiercer competition at home and abroad, IKEA, the leading furniture retailer, needs to im-prove its competitiveness. In order to do this, IKEA must decrease operating costs and improve quality of current and new retail stores. The company establishes a project team. The job of the team is to collect data on performance from multiple stores in several countries, then select the best performing one. The team will work closely with best performing store and study its processes. After the research, the team will recommend best practices to other retail stores. IKEA management can also apply these practices to new stores in the future.
Which of the following correctly describe the process undertaken by IKEA project team?
- A . Internal benchmarking
- B . Competitive benchmarking
- C . Internal audit
- D . Site visit
A
Explanation:
Basically, IKEA project team is undertaking the following process:
This is a typical benchmarking process. Benchmarking is defined as the process of measuring products, services, and processes against those of organizations known to be leaders in one or more aspects of their operations. Benchmarking provides necessary insights to help you understand how your organization compares with similar organizations, even if they are in a different business or have a different group of customers.
In the scenario, benchmarking process is undertaken within subsidiaries of IKEA, thus it is internal.
Reference: – CIPS study guide page 49-51
– What is Benchmarking? Technical & Competitive Benchmarking Process | ASQ
– Internal Benchmarking at IKEA
LO 1, AC 1.3
Which of the following activities are considered as primary activities of an organization according to Porter’s value chain? Select TWO that apply:
- A . Maintenance
- B . Picking and delivery components
- C . Sourcing transportation services
- D . Trainees recruitment
- E . Assembly design
A, B
Explanation:
Primary activities consist of inbound logistics, operations, outbound logistics, sales & marketing, service.
Second activities consist of firm infrastructure, human resource management, technology development and procurement
The following graph illustrate the value chain (Source: Smartsheet)
Picking and delivery components is inbound logistics.
Maintenance is an example of operations activity.
Sourcing transportation services is an activity of procurement
Assembly design is an activity in research and development (Technology)
Recruiting is an activity of human resource management
Reference: CIPS study guide page 71
LO 2, AC 2.1
Builder Inc is a rapidly expanding business in construction sector. Due to an increase in projects, it cannot manage the flow of materials by Excel spreadsheets but by more dedicated software.
Who would be a key internal stakeholder in defining software compatibility with company’s current system?
- A . Procurement team
- B . IT team
- C . Executive team
- D . Finance team
B
Explanation:
Internal stakeholders may contribute to defining needs and drafting the specification by using their technical expertise. In this scenario, IT team may consult procurement team on the technical specification of the software, including compatibility with company’s current IT system.
Reference: CIPS study guide page 173-174
LO 3, AC 3.4
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 the core of value analysis process?
- A . Be creative
- B . Develop
- C . Evaluate
- D . Gather information
- E . Carry out functional analysis
E
Explanation:
Value Analysis (VA) is concerned with existing products. It involves a current product being ana-lysed 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.
According to the Value Methodology standard, there are 6 phases to a Value Analysis:
– Information
– Function Analysis
– Creative
– Evaluation
– Development
– Presentation 1. Information
In this first phase, the team attempts to understand why the project exists and who or what it is to produce. They obtain project data, present the original design or product concepts, and understand the project scope. Schedule, costs, budget, risk, and other non-monetary issues are studied until the team is comfortable with the concept of the project, what it is to produce, and who its end users are. This step also includes things like site visits and meetings with the project team, if required. Project documents like plans, drawings, specifications, and reports are obtained and the value engineering team becomes familiar with them.
Which of the following is the core of value analysis process?
- A . Be creative
- B . Develop
- C . Evaluate
- D . Gather information
- E . Carry out functional analysis
E
Explanation:
Value Analysis (VA) is concerned with existing products. It involves a current product being ana-lysed 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.
According to the Value Methodology standard, there are 6 phases to a Value Analysis:
– Information
– Function Analysis
– Creative
– Evaluation
– Development
– Presentation 1. Information
In this first phase, the team attempts to understand why the project exists and who or what it is to produce. They obtain project data, present the original design or product concepts, and understand the project scope. Schedule, costs, budget, risk, and other non-monetary issues are studied until the team is comfortable with the concept of the project, what it is to produce, and who its end users are. This step also includes things like site visits and meetings with the project team, if required. Project documents like plans, drawings, specifications, and reports are obtained and the value engineering team becomes familiar with them.
Which of the following is the core of value analysis process?
- A . Be creative
- B . Develop
- C . Evaluate
- D . Gather information
- E . Carry out functional analysis
E
Explanation:
Value Analysis (VA) is concerned with existing products. It involves a current product being ana-lysed 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.
According to the Value Methodology standard, there are 6 phases to a Value Analysis:
– Information
– Function Analysis
– Creative
– Evaluation
– Development
– Presentation 1. Information
In this first phase, the team attempts to understand why the project exists and who or what it is to produce. They obtain project data, present the original design or product concepts, and understand the project scope. Schedule, costs, budget, risk, and other non-monetary issues are studied until the team is comfortable with the concept of the project, what it is to produce, and who its end users are. This step also includes things like site visits and meetings with the project team, if required. Project documents like plans, drawings, specifications, and reports are obtained and the value engineering team becomes familiar with them.
Which of the following is the core of value analysis process?
- A . Be creative
- B . Develop
- C . Evaluate
- D . Gather information
- E . Carry out functional analysis
E
Explanation:
Value Analysis (VA) is concerned with existing products. It involves a current product being ana-lysed 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.
According to the Value Methodology standard, there are 6 phases to a Value Analysis:
– Information
– Function Analysis
– Creative
– Evaluation
– Development
– Presentation 1. Information
In this first phase, the team attempts to understand why the project exists and who or what it is to produce. They obtain project data, present the original design or product concepts, and understand the project scope. Schedule, costs, budget, risk, and other non-monetary issues are studied until the team is comfortable with the concept of the project, what it is to produce, and who its end users are. This step also includes things like site visits and meetings with the project team, if required. Project documents like plans, drawings, specifications, and reports are obtained and the value engineering team becomes familiar with them.
Which of the following is the core of value analysis process?
- A . Be creative
- B . Develop
- C . Evaluate
- D . Gather information
- E . Carry out functional analysis
E
Explanation:
Value Analysis (VA) is concerned with existing products. It involves a current product being ana-lysed 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.
According to the Value Methodology standard, there are 6 phases to a Value Analysis:
– Information
– Function Analysis
– Creative
– Evaluation
– Development
– Presentation 1. Information
In this first phase, the team attempts to understand why the project exists and who or what it is to produce. They obtain project data, present the original design or product concepts, and understand the project scope. Schedule, costs, budget, risk, and other non-monetary issues are studied until the team is comfortable with the concept of the project, what it is to produce, and who its end users are. This step also includes things like site visits and meetings with the project team, if required. Project documents like plans, drawings, specifications, and reports are obtained and the value engineering team becomes familiar with them.
Which of the following is the core of value analysis process?
- A . Be creative
- B . Develop
- C . Evaluate
- D . Gather information
- E . Carry out functional analysis
E
Explanation:
Value Analysis (VA) is concerned with existing products. It involves a current product being ana-lysed 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.
According to the Value Methodology standard, there are 6 phases to a Value Analysis:
– Information
– Function Analysis
– Creative
– Evaluation
– Development
– Presentation 1. Information
In this first phase, the team attempts to understand why the project exists and who or what it is to produce. They obtain project data, present the original design or product concepts, and understand the project scope. Schedule, costs, budget, risk, and other non-monetary issues are studied until the team is comfortable with the concept of the project, what it is to produce, and who its end users are. This step also includes things like site visits and meetings with the project team, if required. Project documents like plans, drawings, specifications, and reports are obtained and the value engineering team becomes familiar with them.
Warwickshire Ambulance Service (WAS) is an NHS Trust. It operates throughout Warwickshire and the neighbouring areas. It has three core areas of activity, namely the provision of Emergency Ambulance Services, routine Patient Transport Services, and Logistic Medical Services. The agency is working towards higher service level through benchmarking.
Which of the following is the benefit of benchmarking to WAS?
- A . Benchmarking is a panacea for all WAS’s problems
- B . It will help WAS create performance standards derived from an analysis of the best in business
- C . It helps WAS identify better ways to deliver service through a cookbook process
- D . It will help WAS analyse the competitors in the industry
B
Explanation:
Benchmarking is ‘the pursuit by organisations of enhanced performance by learning from the suc-cessful practices of others. Benchmarking is a continuous activity; key internal processes are adjusted, performance is monitored, new comparisons are made with the current best performers and further changes are explored. Where information about these key processes is obtained through a co-operative partnership with specific organisations (rather than via a third party such as an independently-maintained database), there is an expectation of mutual benefit over a period of time.
Reference: – The Department of Navy Benchmarking Handbook: A system view – CIPS study guide page 49-51
LO 1, AC 1.3
Which of the following specific markets engage in creation, liquidation and change of ownership of stock?
- A . Financial
- B . Manufacturing
- C . Construction
- D . Agriculture
- E . Retail
A
Explanation:
According to Investopedia, the financial services sector provides financial services to people and corporations. This segment of the economy is made up of a variety of financial firms including banks, investment houses, lenders, finance companies, real estate brokers, and insurance companies. As noted above, the financial services industry is probably the most important sector of the economy, leading the world in terms of earnings and equity market capitalization. Large conglomerates dominate this sector, but it also includes a diverse range of smaller companies. According to the finance and development department of the International Monetary Fund (IMF), financial services are the processes by which consumers or businesses acquire financial goods. For example, a payment system provider offers a financial service when it accepts and transfers funds between payers and recipients. This includes accounts settled through credit and debit cards, checks, and electronic funds transfers.
Companies in the financial services industry manage money. For instance, a financial advisor manages assets and offers advice on behalf of a client. The advisor does not directly provide investments or any other product, rather, they facilitate the movement of funds between savers and the issuers of securities and other instruments. This service is a temporary task rather than a tangible asset.
Financial goods, on the other hand, are not tasks. They are things. A mortgage loan may seem like a service, but it’s actually a product that lasts beyond the initial provision. Stocks, bonds, loans, commodity assets, real estate, and insurance policies are examples of financial goods.
Reference: CIPS study guide page 79-80
LO 2, AC 2.1
XYZ Ltd is a large supermarket chain which operates mainly in the UK and Europe. Their customers are increasingly concerned about sustainability. Therefore, procurement manager is required to source the products from suppliers who have good environmental performance.
Which of the following can be an assurance that the supplier has procedures and policies to enhance its environmental performance?
- A . ISO 14001:2015 certificate
- B . ISO 13485:2016 certificate
- C . ISO 22716:2007 certificate
- D . ISO 9001:2015 certificate
A
Explanation:
ISO 9001:2015 specifies requirements for a quality management system.
ISO 14001:2015 specifies the requirements for an environmental management system that an organization can use to enhance its environmental performance. ISO 14001:2015 is intended for use by an organization seeking to manage its environmental responsibilities in a systematic manner that contributes to the environmental pillar of sustainability.
ISO 22716:2007 gives guidelines for the production, control, storage and shipment of cosmetic products. These guidelines cover the quality aspects of the product, but as a whole do not cover safety aspects for the personnel engaged in the plant, nor do they cover aspects of protection of the environment.
ISO 13485:2016 specifies requirements for a quality management system where an organization needs to demonstrate its ability to provide medical devices and related services that consistently meet customer and applicable regulatory requirements.
Reference: CIPS study guide page 125
LO 3, AC 3.1
Which of the following might be consequences of over-specification? Select TWO that apply:
- A . Reducing motion waste
- B . Higher cost due to inessential features
- C . Limiting competition in supply market
- D . Lack of essential features
- E . Better contract management
B, D
Explanation:
Over-specification can cause problems to buying organisation, include the following:
– Higher expense due to unnecessary features embedded into the product
– Stifle competition because higher requirements will lead to fewer suppliers in the market are able to supply
– Harder to evaluate the trade-offs between different features and attributes in the specification
Reference: CIPS study guide page 141-142
LO 3, AC 3.3
Total cost of ownership of a solar panel is $5,000 and it is expected that the panel will make a sav-ing of $1,000 each year. So it would take 5 years for the benefits to repay the investment. Therefore, the firm plans to keep the solar panel for at least 5 years. Is payback period calculation right for making the business decision?
- A . Yes, because it takes everything into account
- B . No, because payback period can be only used to calculate the depreciation of a fixed asset
- C . No, because payback period doesn’t take into account price fluctuations
- D . Yes, because payback period shows how long the firm recovers the investment
D
Explanation:
There are many factors that need to be considered when making a business decision. Costs and benefits are among those factor. To estimate the length of time in which an investment reaches a break-even point, businesses often use the payback period. The payback period refers to the amount of time it takes to recover the cost of an investment.
‘Yes, because it takes everything into account’: It ignores the time value of money (TVM), unlike other methods of capital budgeting such as net present value (NPV), internal rate of return (IRR), and discounted cash flow.
‘No, because payback period doesn’t take into account price fluctuations’: Though it doesn’t take into account price fluctuation, payback period is still useful in financial and capital budgeting.
‘No, because payback period can be only used to calculate the depreciation of a fixed asset’: Payback period only calculates the length of time in which the benefits of a charge repay its costs. LO 1, AC 1.3
Which of the following can cause overhead variance? Select TWO that apply:
- A . Rising production worker’s wage rate per hour
- B . Decrease in production volume
- C . Spike in material price
- D . Decreasing packaging costs
- E . Spike in monthly leasing fee
B, E
Explanation:
Overhead variances arise when the actual overhead costs incurred differ from the expected amounts. Managers want to understand the reasons for these differences, and so should consider computing one or more of the overhead variances described below. Each of these variances applies to a different aspect of overhead expenditures. It is not necessary to calculate these variances when a manager cannot influence their outcome.
Fixed Overhead Spending Variance
The fixed overhead spending variance is the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense. An unfavorable variance means that actual fixed overhead expenses were greater than anticipated. The formula for this variance is: Actual fixed overhead – Budgeted fixed overhead = Fixed overhead spending variance
The amount of expense related to fixed overhead should (as the name implies) be relatively fixed, and so the fixed overhead spending variance should not theoretically vary much from the budget. Fixed Overhead Volume Variance
The fixed overhead volume variance is the difference between the amount of fixed overhead actually applied to produced goods based on production volume, and the amount that was budgeted to be applied to produced goods. For example, a company budgets for the allocation of $25,000 of fixed overhead costs to produced goods at the rate of $50 per unit produced, with the expectation that 500 units will be produced. However, the actual number of units produced is 600, so a total of $30,000 of fixed overhead costs are allocated. This creates a fixed overhead volume variance of $5,000.
Variable Overhead Efficiency Variance
The variable overhead efficiency variance is the difference between the actual and budgeted hours worked, which are then applied to the standard variable overhead rate per hour. The formula is: Standard overhead rate x (Actual hours – Standard hours) = Variable overhead efficiency variance
A favorable variance means that the actual hours worked were less than the budgeted hours, resulting in the application of the standard overhead rate across fewer hours, resulting in less expense being incurred. However, a favorable variance does not necessarily mean that a company has incurred less actual overhead, it simply means that there was an improvement in the allocation base what was used to apply overhead.
Variable Overhead Spending Variance
The variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. The variance is used to focus attention on those overhead costs that vary from expectations. The formula is:
Actual hours worked x (Actual overhead rate – standard overhead rate)
= Variable overhead spending variance
A favorable variance means that the actual variable overhead expenses incurred per labor hour were less than expected.
In the study guide, CIPS splits overhead variance into volume and expenditure variance. They can be understood as variable and fixed overhead variance respectively.
Reference: – CIPS study guide page 59
– What are overhead variances? ― AccountingTools LO 1, AC 1.4
Which of the following may allow suppliers free to choose the materials, manufacturing process or delivery process?
- A . Performance specification
- B . Design specification
- C . Technical specifications
- D . Conformance specification
A
Explanation:
The Performance Specifications define what the system being designed must do, and not how it must do it. In this step a list of needs and wants should be created. The needs are customer requirements, while the wants are engineering desires. If a buyer adopts performance specification, the supplier will be free to choose how to make and deliver the product.
A technical specification document outlines how you’re going to address a technical problem by designing and building a solution for it.
A design specification is a detailed document providing a list of points regarding a product or process. For example, the design specification could include required dimensions, environmental fac-tors, ergonomic factors, aesthetic factors, maintenance that will be needed, etc. It may also give
specific examples of how the design should be executed, helping others work properly (a guideline for what the person should do).
With conformance specification the buyer says what they want and how they want it and the supplier has to meet this
Reference: CIPS study guide page 119-124
LO3, AC 3.1
Which of the following problems may be identified as closed problems? Select TWO that apply:
- A . A cyber attack takes down whole company’s IT system
- B . Shortage of key medicines in healthcare industry
- C . There are not enough data for procurement analytics
- D . Logistics costs incur a large portion in wholesale prices
- E . The suppliers don’t comply with the company’s policy on underage labour.
A, B
Explanation:
Closed problem is something happens that should not have happened. To solve this type of problem, procurement professional should find a way to correct the situation or try to adapt to it. On the other hand, open ended problem is a obstacle to your short-term objective. You will need to overcome this obstacle.
Shortage of key medicines is a situation in which procurement must find a substitution or try to save the current stock.
In case of cyber attack, procurement should find a way to recover the IT system as soon as possible. Otherwise, ‘There are not enough data for procurement analytics’ is an open-ended problem because it prevents company to conduct procurement analytics (an objective).
‘Logistics costs incur a large portion in wholesale prices’: In this situation, logistics costs are hurdles that prevent companies to reach lower wholesale.
‘The suppliers don’t comply with the company’s policy on underage labour’: In this situation, procurement should seek ways to help supplier comply with the company’s labour policy. LO 1, AC 1.1
To strengthen its market presence, ABC Group decided to develop a new product. A cross-functional team was formed to discuss the scope and the functions of the product. They will also survey the potential customers to see what they like, what they love, and what they dislike.
What is this process called?
- A . Value analysis
- B . Cash flow analysis
- C . Product standardisation
- D . Value engineering
D
Explanation:
As you can see from the scenario, ABC Group is developing the new product. It might be using value engineering. The latter sentences confirm this: the cross-functional team in ABC is mapping the functions and surveying the customers. Their method is known as Kano model.
Reference: CIPS study guide page 171-172
LO 3, AC 3.4
When a procurement manager considers a substitution, the number and nature of additional functions 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
Why should the buying organization require the supplier to carry out acceptance testing?
- A . To get the approval from the senior management
- B . To check whether the product matches the specification
- C . To compare between the account payables and account receivables
- D . To see whether the supplier engages in unethical business practice
B
Explanation:
Acceptance testing, in the context of the engineering and software industries, is a functional trial performed on a product or prototype before it is put on the market or delivered, to decide whether the specifications or contract have been met. It also makes sure the quality and design of the product meet both contractual and regulatory obligations in terms of functionality, usability, durability, and safety.
If a product is found to be unacceptable at this stage, it can be sent back for modification, debugging, repair, or re-design before it can become a costly undertaking for the producer, as would be the case in a product recall.
Reference: – CIPS study guide page 134-135
– Acceptance Testing (investopedia.com) LO 3, AC 3.2
OMK is a Russian steel firm that is expanding market abroad. It plans to build a steel plant in a foreign country. Due to intricate technical requirements, the plant design will be very complex. Procurement department or technical department alone cannot draft the specification. OMK senior management decides that this task must be treated as a project.
Which of the following should be done before writing the specification for new steel plant?
- A . Develop the performance framework for the supplier
- B . Draft the terms and conditions for plant construction contract
- C . Invite suppliers to the tendering process
- D . Develop project initial document
D
Explanation:
The writing of a complex specification should be treated as a project because it requires the brain power from different stakeholders. Many tools and processes of project management can be applied to complex specification development. Before engaging with the stakeholders and implementing the project, the project initial document should developed.
A Project Initiation Document (PID) is one of the most important components of project management, which forms the foundation for a company project. It is a reference point during the entire project, for the client as well as for the project team.
A PID bundles documentation into a logical reference work that collects all important information needed to start and run a project from a good foundation. After that, Project Initiation Document must be transferred to all stakeholders, including business sponsors.
This forms the basis for the project management. The documentation from which the PID is com-posed include the business case in which the project’s justification can be found, the communication plan and the project plan.
The PID is composed out of collected information and includes, among others, the following com-ponents:
– Project goal(s); what do you want to achieve with the project?
– Project size; how large is the project, how long does it take and how many people are involved?
– Project organisation; who are involved in the project, what are their tasks, responsibilities and authority?
– Limits and risks; what can cause a project to stagnate and are there risks related to the project?
– Stakeholders; who has a stake in the success of the project?
– Project checks and frame reporting; by carefully taking into account evaluation moments, it is clear to everyone what sample tests can be carried out during the process.
In addition, it is important that the Project Initiation Document also contains the following infor-mation:
– The background and occasion of the project, which together provide information about the con-text.
– The project organisational structure, which describes who has which management responsibility in the project.
– The project quality plan, describing who controls the quality of the products to be delivered and how it will take place.
– The total project planning, including the duration of all activities.
– The exception process, which describes how exceptions are dealt with and the steps of the escalation procedure.
– The risk log, including the measures that will be taken when there are unforeseen risks.
– The documentation structure of the project, in which the encoding and storage of all documents and products to be provided by the project has been recorded in advance.
Reference: – CIPS study guide page 148
– Project Initiation Document (PID), a project management tool | ToolsHero
LO 3, AC 3.3
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
When procuring a machinery, at which stage buyer must check whether it is working to the standards set out in the design specification?
- A . Installation
- B . Maintenance and repair activities
- C . Customer support
- D . Manufacture
A
Explanation:
Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
Source: Andrew Graves
The installation stage occurs in In-Service Operations. At this stage, the machinery is shipped and installed on the buyer’s premises and check to ensure that it is working to the standards set out in the design specification.
Reference: CIPS study guide page 130
LO 3, AC 3.2
Halfords is a major bicycle and car parts retailer with long history in the market. Its suppliers are plentiful and there is no threat of forward integration. Some other smaller retailers are applying 3D-printing technology to make personalized bicycle parts but their market share is relatively low. 3D-printing technology is an example of which competitive force?
- A . Bargaining power of buyer
- B . Threat of substitute
- C . Rivalry within the industry
- D . New entrants may enter the market
B
Explanation:
3D-printed parts can replace traditional metal parts. They are also more easily customised to fit customer’s needs. This technology is an example of threat of substitute in Porter’s Five Forces model. Substitute goods or services that can be used in place of a company’s products or services pose a threat. Companies that produce goods or services for which there are no close substitutes will have more power to increase prices and lock in favorable terms. When close substitutes are available, customers will have the option to forgo buying a company’s product, and a company’s power can be weakened.
Reference: – CIPS study guide page 85-96
– Porter’s 5 Forces Definition: Analyzing Businesses (investopedia.com) LO 2, AC 2.2
Ymira is asked to develop the specification for water purifier which will be used at the company headquarter. She believes that the specification can be drafted based on the information available on the Internet, such as blog posts, comparison websites, how-to websites, life hacks, etc.
Which of the following traits will make the information more useful?
- A . Trustworthy sources
- B . Objectivity
- C . Subjectivity
- D . Written by inexperienced author
- E . Promotional information
A, B
Explanation:
Internet is a great source of information, however, information from the Internet needs to be tested for accuracy and reliability.
To check the information from the Internet, a buyer can use the criteria with acronym SAMOA:
Source (of the information)
Audience (intended as the recipient of the information)
Methodology (used to collect and analyse the data)
Objectivity (of the information – there should be no bias)
Accuracy
Reference: CIPS study guide page 125-126
LO 3, AC 3.1
Why is the specification considered as the most important document in procurement?
- A . It provides a mean to appraise the performance of supplier
- B . It helps the buyer to gain at supplier’s loss
- C . It eliminates all possible supply risks
- D . It always shifts the balance of bargaining power in favour of the buyer
A
Explanation:
Specification is the most important document in procurement because it sets out the quality which supplier must provide. If there is no spec or the spec lacks clarity and details, supplier’s performance may vary and possibly lower than actual requirements. This puts the buyer at risks. On the other hand, if the spec is clear and detailed, the supplier is liable to provide ‘fit for purpose’ products or perform the service at required level of quality. This will ensure that the buyer achieve ‘Right Quality’.
Reference: – CIPS study guide page 116-130
– How fitness for purpose works – Evocurement LO 3, AC 3.1
At which stage of product life cycle, price competition between sellers will be the most intense?
- A . Growth stage
- B . Introductory stage
- C . Maturity stage
- D . Decline stage
D
Explanation:
The term product life cycle refers to the length of time a product is introduced to consumers into the market until it’s removed from the shelves. The life cycle of a product is broken into four stages― introduction, growth, maturity, and decline.
Source: https://blueoceanoutsource.co.ke/the-product-life-cycle-concept/
At maturity stage, price competition sets in as more and more supply capacity has been added by new entrants, then the competition will be the most intense.
Reference: CIPS study guide page 90-91
LO 2, AC 2.2
When preparing through-life specification, which of the following requirements should procurement team define besides the physical asset? Select TWO that apply.
- A . Customer service
- B . Objectives
- C . Market analysis
- D . Logistics and installation
- E . Available substitute
A, D
Explanation:
Through-life Management involves the life-cycle management of the products, services and activities required to deliver a fully integrated capability to the customer, while reducing the cost of ownership for the customer.
Source: Andrew Graves
With through-life management, buyer not only cares about the physical asset but also other factors like customer services and maintenance.
Reference: CIPS study guide page 130
LO 3, AC 3.2
Which of the following specific markets is most likely to have product shortage by nature?
- A . Retail
- B . Financial
- C . Construction
- D . Services
- E . Agriculture
E
Explanation:
Products used in agriculture can be subject to shortage due to natural disasters.
Reference: CIPS study guide page 81
LO 2, AC 2.1
Daytona Ltd is developing a new product which is more environmental friendly. Though the objectives are set, the project team has no idea on which functions will be customers’ favourites.
Which of the following will help them decide the ‘should-have’ functions of the new product?
- A . Kano model
- B . Taguchi method
- C . Thomas-Kilmann model
- D . Six Sigma
A
Explanation:
The Kano model is useful in gaining a thorough understanding of a customer’s needs. You can translate and transform the resulting verbatims using the voice of the customer table that, subsequently, becomes an excellent input as the whatsin a quality function deployment (QFD) House of Quality.
The model involves two dimensions:
Achievement (the horizontal axis), which goes from the supplier didn’t do it at all to the supplier did it very well.
Satisfaction (the vertical axis), which goes from total dissatisfaction with the product or service to total satisfaction with the product or service.
Dr. Noriaki Kano isolated and identified three levels of customer expectations: that is, what it takes to positively impact customer satisfaction. The figure below portrays the three levels of need: expected, normal, and exciting.
The ThomasCKilmann Conflict Mode Instrument (TKI) is a conflict style inventory, which is a tool developed to measure an individual’s response to conflict situations.
Genichi Taguchi, a Japanese engineer, proposed several approaches to experimental designs that are sometimes called "Taguchi Methods." These methods utilize two-, three-, and mixed-level fractional factorial designs. Large screening designs seem to be particularly favored by Taguchi adherents.
Six Sigma is a method that provides organizations tools to improve the capability of their business processes. This increase in performance and decrease in process variation helps lead to defect re-duction and improvement in profits, employee morale, and quality of products or services.
Source:
– CIPS study guide page 171-172- WHAT IS THE KANO MODEL? LO 3, AC 3.4
Which of the following problems may be identified as open-ended problems? Select TWO that apply:
- A . Shortage of key medicines in healthcare industry
- B . A cyber attack takes down whole company’s IT system
- C . Engine failures cause flight cancellations.
- D . Logistics costs incur a large portion in wholesale prices
- E . The suppliers don’t comply with the company’s policy on underage labour.
D, E
Explanation:
Open-ended problem is something stopping the achievement of an objective or blocking progress. To solve this type of problems, procurement professional should find a way to unblock the block-age. In the above question, high logistics cost is an obstacle to cost cutting objective while supplier’s incompliance prevents the company to achieve its sustainable objective.
Reference: CIPS study guide page 11
LO 1, AC 1.1
Which of the following problems may be identified as open-ended problems? Select TWO that apply:
- A . Shortage of key medicines in healthcare industry
- B . A cyber attack takes down whole company’s IT system
- C . Engine failures cause flight cancellations.
- D . Logistics costs incur a large portion in wholesale prices
- E . The suppliers don’t comply with the company’s policy on underage labour.
D, E
Explanation:
Open-ended problem is something stopping the achievement of an objective or blocking progress. To solve this type of problems, procurement professional should find a way to unblock the block-age. In the above question, high logistics cost is an obstacle to cost cutting objective while supplier’s incompliance prevents the company to achieve its sustainable objective.
Reference: CIPS study guide page 11
LO 1, AC 1.1
Which of the following problems may be identified as open-ended problems? Select TWO that apply:
- A . Shortage of key medicines in healthcare industry
- B . A cyber attack takes down whole company’s IT system
- C . Engine failures cause flight cancellations.
- D . Logistics costs incur a large portion in wholesale prices
- E . The suppliers don’t comply with the company’s policy on underage labour.
D, E
Explanation:
Open-ended problem is something stopping the achievement of an objective or blocking progress. To solve this type of problems, procurement professional should find a way to unblock the block-age. In the above question, high logistics cost is an obstacle to cost cutting objective while supplier’s incompliance prevents the company to achieve its sustainable objective.
Reference: CIPS study guide page 11
LO 1, AC 1.1
Which of the following problems may be identified as open-ended problems? Select TWO that apply:
- A . Shortage of key medicines in healthcare industry
- B . A cyber attack takes down whole company’s IT system
- C . Engine failures cause flight cancellations.
- D . Logistics costs incur a large portion in wholesale prices
- E . The suppliers don’t comply with the company’s policy on underage labour.
D, E
Explanation:
Open-ended problem is something stopping the achievement of an objective or blocking progress. To solve this type of problems, procurement professional should find a way to unblock the block-age. In the above question, high logistics cost is an obstacle to cost cutting objective while supplier’s incompliance prevents the company to achieve its sustainable objective.
Reference: CIPS study guide page 11
LO 1, AC 1.1
Information security
2 and 4 only
B. 1 and 2 only
C. 2 and 3 only
D. 3 and 4 only
Explanation:
ISO 14001:2015 specifies the requirements for an environmental management system that an organization can use to enhance its environmental performance. ISO 14001:2015 is intended for use by an organization seeking to manage its environmental responsibilities in a systematic manner that contributes to the environmental pillar of sustainability.
ISO 14001:2015 helps an organization achieve the intended outcomes of its environmental management system, which provide value for the environment, the organization itself and interested parties. Consistent with the organization’s environmental policy, the intended outcomes of an environmental management system include:
• enhancement of environmental performance;
• fulfilment of compliance obligations;
• achievement of environmental objectives.
ISO 14001:2015 is applicable to any organization, regardless of size, type and nature, and applies to the environmental aspects of its activities, products and services that the organization determines it can either control or influence considering a life cycle perspective. ISO 14001:2015 does not state specific environmental performance criteria.
ISO 14001:2015 can be used in whole or in part to systematically improve environmental management. Claims of conformity to ISO 14001:2015, however, are not acceptable unless all its requirements are incorporated into an organization’s environmental management system and fulfilled without exclusion.
In conclusion, ISO 14001:2015 focuses on: management system (including roles, leadership and processes) and the life cycle of product or service. Life cycle is defined as "consecutive and inter-linked stages of a product (or service) system, from raw material acquisition or generation from natural resources to final disposal. […] The life cycle stages include acquisition of raw materials, design, production, transportation/ delivery, use, end-of-life treatment and final disposal." The answer is process and life cycle.
Reference: – ISO 14001:2015 Environmental management systems ― Requirements with guidance for use LO 3, AC 3.1
An automotive manufacturer is sourcing rubber components from Company A. The specification given to the supplier state that the component should be 1 meter long, without mentioning the tolerance. Enthusiast with the opportunity, engineers at Company A work hard to cut the components with tolerance at only +/- 1mm. The head and tail of the component is then joined together to form a circular band. After that it is stretched over another component. To fit this purpose, the rubber component can be at any length from 80cm to 110cm.
This is an example of…?
- A . Defects
- B . Waiting
- C . Unnecessary motion
- D . Over processing
D
Explanation:
This questions is intended to ask students about types of waste in Lean principles.
Lean was born out of manufacturing practices but in recent time has transformed the world of knowledge work and management. It encourages the practice of continuous improvement and is based on the fundamental idea of respect for people. Womack and Jones defined the five principles of Lean manufacturing in their book “The Machine That Changed the World”.
The five principles are considered a recipe for improving workplace efficiency and include: 1) defining value, 2) mapping the value stream, 3) creating flow, 4) using a pull system, and 5) pursuing perfection.
Lean principles aim to eliminate waste in processes.
The eight wastes of Lean principles are:
– Defects
– Over-production
– Waiting
– Not using talent
– Transport and handling
– Inventory
– Motion waste
– Excess processing
In the scenario, the component is processed more than necessary. The engineers try to make them as accurate as possible with very little tolerance. In fact, the component does not need to be that precise. This excesses buyer’s requirements and incurs costs for both buyer and supplier. The scenario is an example of over processing (or excess processing).
Overprocessing is one of the seven wastes of lean manufacturing (or 7 mudas); Overprocessing is adding more value to a product than the customer actually requires such as painting areas that will never be seen or be exposed to corrosion.
Overprocessing as one of the seven wastes is caused by having unclear standards and specifications, many operators will try to do the best job possible and will not always be aware of what truly adds value to the product or even the end use. They will therefore often expend time polishing and finishing components that do not require it.
Reference: – CIPS study guide page 153-156
– Waste of Overprocessing; causes, costs, examples solutions, symptoms (leanmanufactur-ingtools.org)
LO 3, AC 3.4
What is the purpose of sending value engineering analysis to external suppliers?
- A . To improve early supplier involvement
- B . To improve the existing products
- C . To analyse the supply market
- D . To standardise production processed
A
Explanation:
Value engineering is often applied to new products or services. Early supplier involvement (ESI) is the involvement of a supplier in the product development process from a very stage in order to use the supplier’s experience and expertise. ESI can bring cost reduction opportunities, process improvements, supply chain improvements and reduce supply risk. Both processes focus on development of new product or service. They tend to work the best if they are used together. LO 3, AC 3.1 & AC 3.4
Which of the following is the purpose of benchmarking?
- A . To identify and adapt the best practices to improve organisation’s performance
- B . To copy other organisation’s intellectual properties, processes and practices
- C . To coerce all suppliers to sacrifice their profit
- D . To resist continuous improvement
A
Explanation:
According to US Department of the Navy, Benchmarking is a strategic and analytic process of continuously measuring an organisation’s products, services, and practices against a recognised leader in the studied area.
Successful benchmarking will help you:
– Find who does the process best and close the gap
– Recognise the leading organisations in a process or activity
– Create performance standards derived from an analysis of the best in business
– Ensure that comparisons are relevant
– Measure your performance, your processes, and your strategies against best in business
– Measure business processes
– Assess performance over time
– Accelerate continuous process improvement (CPI)
– Establish more credible goals for CPI
– Establish actionable objectives
– Discover and clarify new goals
– Establish customer expectations of business standards set by the best suppliers in industry
– Help your organisation achieve breakthrough improvements
– Create a sense of urgency for change
– Increase customer satisfaction
– Become direction setting
– Provide a positive, proactive structured process
Benchmarking does not:
– Copy the other’s processes
– Steal other business confidentiality
– Stop. Benchmarking is a continuous process.
Reference: – CIPS study guide page 49-51
– The Department of the Navy Benchmarking Handbook LO 1, AC 1.3
A CPO is analyzing whole life cycle costing of a machinery. He realises that cost elements are not specific but come from a range of values.
Which whole-life costing model should the CPO use to get the most accurate total cost of ownership?
- A . Simulation models
- B . Optimisation models
- C . Decision support models
- D . Kraljic’s preferencing model
A
Explanation:
There are three basic groups of WLC (whole life-cycle costing) models:
– Decision support models
– Simulation models: Life cycle cost is an essential approach to decide on alternative rehabilitation strategies for infrastructure systems. Monte Carlo simulation approach is used to develop a stochastic life cycle cost (SLCC) model and methodology in order to compare different rehabilitation scenarios/alternatives for infrastructures, such as water mains. This method assumes that some inputs are randomly variable in a range of values.
– Optimisation models
Reference: CIPS study guide page 38-39
LO 1, AC 1.2
Which of the following statements is true about product life cycle?
- A . The price remains static throughout the product life cycle
- B . The price competition will be the fiercest at the declining stage because the inventories are plentiful
- C . If price skimming is adopted, the supplier will gradually lower the price when it attracts enough buyers
- D . Sale volume will be the highest at the introductory stage
C
Explanation:
A product’s life cycle portrays the length of time a product is in the market; from the beginning of its introduction to consumers until it is removed from shelves and phased out. This cycle is often divided into four phases: introduction, growth, maturity, and decline. Depending on the relevant stage, companies will set an according strategy to achieve their desired targets. Pricing and promotions play a pivotal role in the design of these product life cycle strategies. Therefore, product life cycle management, the process of strategizing ways to continuously support and maintain a product, is seen more and more at pricing mature players and could bring real value to your company. Introduction phase: during the introduction phase, the new product is introduced to consumers and a substantial amount of money is invested in advertising and marketing campaigns to bring awareness of the product to the customer. In this phase competition is low, but units sold will also correspondingly be quite low as well still. Consumers need to be convinced of the benefits of the product. Lots of articles never make it beyond this phase: e.g. 3D televisions.
Profits in the introduction stage tend to be low or there may even be a loss. This is because the cost of marketing to establish product awareness plus distribution costs can be far higher than the revenue received from sales. This can be offset to a degree by ‘skimming’ price in the very early stages. Skimming a price is where a business charges the highest price that it thinks the market will bear initially until product recognition brings in other buyers and then the price drop.
Growth phase: when it’s shown there is proven demand for the product and consumers are buying it, the next stage will be its growth phase. This phase is punctuated by increasing demand, increasing production and an increase in the competitive landscape. Availability of the product is understandably paramount during this phase, going out of stock is unthinkable during the growth period. The electric car is an example of a product that is currently in the midst of the growth phase. Maturity phase: normally the maturity phase is the phase that is characterized by declining production and marketing costs due to synergies and economies of scale. During this phase the first signs of market saturation occur and most consumers or households already own the product. Sales numbers still grow, but at a slower pace. In the maturity phase, price competition becomes intense, a broader range of distribution channels are deployed and competition is more focused on competitive pricing, marginal product differences or the difference in services or promotions. This period in the PLC is often said to be the ‘cash-cow period’.
That being said, the idea of ‘Maturity from the start’ also exists. This occurs when a brand decides to launch a product extension and directly follows up the maturity phase of an earlier version of the product. For example, the iPhoneX followed up from the ‘normal’ iPhone-series and therefore the iPhoneX never had to undergo the introduction or growth phase, but immediately started in its maturity phase.
Decline phase: the final phase of the PLC is entered once the product loses market share to other, newer products and the competitive landscape becomes too hard to survive. During this stage, de-mand declines, companies are left with overstock with prices and margins getting depressed.
Therefore retailers and brands normally start stunting with promotions during the decline of the PLC to sell their final stock.
A well-known example of a product that has been through the decline phase were the Nokia phones; sales results dramatically decreased after the introduction of the iPhone.
Reference: – CIPS study guide page 90
– Adjusting your Pricing Strategy to the Product Life Cycle Stage (omniaretail.com)
– Price Skimming Definition (investopedia.com)
LO 2, AC 2.2
A hospital extensively spends on medical and implantable devices, medical, surgical and pharmaceutical supplies, costs of supplies related to buildings and maintenance operations. Hospital’s procurement manager suggests that the hospital has an opportunity to reduce operational costs by reducing variation of medical devices and pharmaceutical supplies.
Which of the following best describe the procurement manager’s suggestion?
- A . Process standardisation
- B . Product standardisation
- C . Value engineering
- D . Process re-engineering
B
Explanation:
The hospital is buying too many product variants. This may cause bottleneck in its operation and increase operational expense. So procurement manager suggests to standardise products. This is an example of the benefits of product standardisation:
Saint Thomas Health, a system of 5 hospitals, needed to find a way to reduce costs. They were purchasing different SKUs for products that were very similar, in this case, labels. They bought label rolls for $3 and a very similar product for $1. This oversight in product purchases impacted the overall costs of the system. After partnering with a sole source vendor it was able to save $200,000 over a four year span. They accomplished this simply by standardizing label products. These savings, however, only account for the immediate savings from standardizing products. The saving that are not factored into that number are the savings from soft or hidden costs.
On a national scale, hospitals lose millions of dollars per year in hidden expenses due to missed opportunities for cost containment and incorporation.
Some of the hidden elements that increase overall costs for a healthcare provider include the following:
– Redundant purchasing
– Freight
– Excessive purchase orders
– Multiple vendor relations
– Low efficiency
– Joint commission fines
– HAI
By implementing product standardization, hospitals and health systems reduce vendors, are able to reduce SKUs, purchase orders, inefficiency, freight costs, fines, and off-contract spending. All of this adds up to large savings for the organization as a whole.
96% of the respondents in the survey agree that consolidating suppliers and standardizing product purchases across organization would reduce hidden costs.
Reference: – CIPS study guide page 157-159
– 3 Ways Product Standardization Can Help You Get a Bonus C ConnectID (pdchealthcare.com) LO 3, AC 3.4
A procurement manager is discussing with other stakeholders about the scope and the implementation of the upcoming construction project. A stakeholder argues that the construction projects are often risky as the overall scope of the work can’t be accurately estimated from the beginning. Furthermore, the project spans over a long period, the costs of materials can fluctuate widely. The procurement manager suggests that the pricing structure should be able to cover the supplier’s costs plus 10% markup on total costs.
This arrangement is known as…?
- A . Cost-plus fixed-fee
- B . Cost-plus award fee
- C . Cost-plus incentive fee contracts
- D . Cost-plus Fixed percentage
D
Explanation:
As you can see from the scenario, the procurement manager is suggesting to use cost plus pricing arrangement.
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific amount of profit, usually stated as a percentage of the contract’s full price. These type of contracts are primarily used in construction where the buyer assumes some of the risk but also provides a degree of flexibility to the contractor.
Cost-plus contracts can be separated into four categories. They each allow for the reimbursement of costs as well as an additional amount for profit:
A procurement manager is discussing with other stakeholders about the scope and the implementation of the upcoming construction project. A stakeholder argues that the construction projects are often risky as the overall scope of the work can’t be accurately estimated from the beginning. Furthermore, the project spans over a long period, the costs of materials can fluctuate widely. The procurement manager suggests that the pricing structure should be able to cover the supplier’s costs plus 10% markup on total costs.
This arrangement is known as…?
- A . Cost-plus fixed-fee
- B . Cost-plus award fee
- C . Cost-plus incentive fee contracts
- D . Cost-plus Fixed percentage
D
Explanation:
As you can see from the scenario, the procurement manager is suggesting to use cost plus pricing arrangement.
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific amount of profit, usually stated as a percentage of the contract’s full price. These type of contracts are primarily used in construction where the buyer assumes some of the risk but also provides a degree of flexibility to the contractor.
Cost-plus contracts can be separated into four categories. They each allow for the reimbursement of costs as well as an additional amount for profit:
A procurement manager is discussing with other stakeholders about the scope and the implementation of the upcoming construction project. A stakeholder argues that the construction projects are often risky as the overall scope of the work can’t be accurately estimated from the beginning. Furthermore, the project spans over a long period, the costs of materials can fluctuate widely. The procurement manager suggests that the pricing structure should be able to cover the supplier’s costs plus 10% markup on total costs.
This arrangement is known as…?
- A . Cost-plus fixed-fee
- B . Cost-plus award fee
- C . Cost-plus incentive fee contracts
- D . Cost-plus Fixed percentage
D
Explanation:
As you can see from the scenario, the procurement manager is suggesting to use cost plus pricing arrangement.
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific amount of profit, usually stated as a percentage of the contract’s full price. These type of contracts are primarily used in construction where the buyer assumes some of the risk but also provides a degree of flexibility to the contractor.
Cost-plus contracts can be separated into four categories. They each allow for the reimbursement of costs as well as an additional amount for profit:
A procurement manager is discussing with other stakeholders about the scope and the implementation of the upcoming construction project. A stakeholder argues that the construction projects are often risky as the overall scope of the work can’t be accurately estimated from the beginning. Furthermore, the project spans over a long period, the costs of materials can fluctuate widely. The procurement manager suggests that the pricing structure should be able to cover the supplier’s costs plus 10% markup on total costs.
This arrangement is known as…?
- A . Cost-plus fixed-fee
- B . Cost-plus award fee
- C . Cost-plus incentive fee contracts
- D . Cost-plus Fixed percentage
D
Explanation:
As you can see from the scenario, the procurement manager is suggesting to use cost plus pricing arrangement.
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific amount of profit, usually stated as a percentage of the contract’s full price. These type of contracts are primarily used in construction where the buyer assumes some of the risk but also provides a degree of flexibility to the contractor.
Cost-plus contracts can be separated into four categories. They each allow for the reimbursement of costs as well as an additional amount for profit:
A procurement manager is discussing with other stakeholders about the scope and the implementation of the upcoming construction project. A stakeholder argues that the construction projects are often risky as the overall scope of the work can’t be accurately estimated from the beginning. Furthermore, the project spans over a long period, the costs of materials can fluctuate widely. The procurement manager suggests that the pricing structure should be able to cover the supplier’s costs plus 10% markup on total costs.
This arrangement is known as…?
- A . Cost-plus fixed-fee
- B . Cost-plus award fee
- C . Cost-plus incentive fee contracts
- D . Cost-plus Fixed percentage
D
Explanation:
As you can see from the scenario, the procurement manager is suggesting to use cost plus pricing arrangement.
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific amount of profit, usually stated as a percentage of the contract’s full price. These type of contracts are primarily used in construction where the buyer assumes some of the risk but also provides a degree of flexibility to the contractor.
Cost-plus contracts can be separated into four categories. They each allow for the reimbursement of costs as well as an additional amount for profit:
Which of the following is an useful tool for value engineering?
- A . SAMOA
- B . Kraljic Portfolio Matrix
- C . Star-burst method
- D . Kano model
D
Explanation:
Value Engineering (VE) 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 evaluation and analysis. This takes place before any capital is invested in tooling, plant or equipment. This is very significant, because according to many reports, up to 80% of a product’s costs (throughout the rest of its life-cycle), are locked in at the design development stage. This is understandable when you consider the design of any product determines many factors, such as tooling, plant and equipment, labour and skills, training costs, materials, shipping, installation, maintenance, as well as decommissioning and recycle costs.
The Kano model is a theory for product development and customer satisfaction developed in the 1980s by Professor Noriaki Kano, which classifies customer preferences into five categories. Both Kano model and Value Engineering aims at optimising new product, so they can be combined together. CIPS L4M2 study guide consider Kano model is a tool of Value Engineering
Example of Kano model (source: Wikipedia)
Reference: CIPS study guide page 171-172
LO 3, AC 3.4
Company A sells a product for $100. The total unit variable costs are $60. Fixed costs as in its ac-count are $20,000.
How many products does the company have to sell to achieve break-even point?
- A . 600
- B . 550
- C . 400
- D . 500
D
Explanation:
Break even point = Fixed costs/(Price-variable cost). In this case, break even point = 20,000/(100-60) = 500
Reference: CIPS study guide page 28-29
LO 1, AC 1.2
Company A sells a product for $100. The total unit variable costs are $60. Fixed costs as in its ac-count are $20,000.
How many products does the company have to sell to achieve break-even point?
- A . 600
- B . 550
- C . 400
- D . 500
D
Explanation:
Break even point = Fixed costs/(Price-variable cost). In this case, break even point = 20,000/(100-60) = 500
Reference: CIPS study guide page 28-29
LO 1, AC 1.2
Company A sells a product for $100. The total unit variable costs are $60. Fixed costs as in its ac-count are $20,000.
How many products does the company have to sell to achieve break-even point?
- A . 600
- B . 550
- C . 400
- D . 500
D
Explanation:
Break even point = Fixed costs/(Price-variable cost). In this case, break even point = 20,000/(100-60) = 500
Reference: CIPS study guide page 28-29
LO 1, AC 1.2
Company A sells a product for $100. The total unit variable costs are $60. Fixed costs as in its ac-count are $20,000.
How many products does the company have to sell to achieve break-even point?
- A . 600
- B . 550
- C . 400
- D . 500
D
Explanation:
Break even point = Fixed costs/(Price-variable cost). In this case, break even point = 20,000/(100-60) = 500
Reference: CIPS study guide page 28-29
LO 1, AC 1.2
Company A sells a product for $100. The total unit variable costs are $60. Fixed costs as in its ac-count are $20,000.
How many products does the company have to sell to achieve break-even point?
- A . 600
- B . 550
- C . 400
- D . 500
D
Explanation:
Break even point = Fixed costs/(Price-variable cost). In this case, break even point = 20,000/(100-60) = 500
Reference: CIPS study guide page 28-29
LO 1, AC 1.2
The substitute fits organization’s strategy
- A . 1 and 4 only
- B . 3 and 4 only
- C . 1 and 2 only
- D . 2 and 4 only
D
Explanation:
The threat of substitution 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
Buyers with different circumstances and in different industries do not all have equal propensities to substitute when faced with a comparable economic motivation. Differences in their circumstances lead buyers to respond to a given relative value to price (RVP) and switching cost differently. While such differences might be treated as factors that modify RVP or switching costs, it is more helpful in practice to isolate them.
Resources. Substitution often involves up-front investments of capital and other resources. Access to such resources will differ from one buyer to another.
Risk Profile. Buyers often have very different risk profiles, the result of such things as their past history, age and income, ownership structure, background and orientation of management, and nature of competition in their industry. Buyers prone to risk taking are more likely to substitute than buyers that are risk-averse.
Technological Orientation. Buyers experienced with technological change may be less concerned with some kinds of substitution risks, while extremely aware of others that a less technologically sophisticated buyer would be oblivious to.
Previous Substitutions. The second substitution may be easier for a buyer than the first, unless the
first substitution has been a failure. The buyer’s uncertainties over undertaking a substitution may have diminished if a past substitution has been successful, or risen if a past substitution has led to difficulties. In the soft drink industry, this seems to have worked to the benefit of aspartame.
Intensity of Rivalry. Buyers under intense competitive pressure and searching for competitive ad-vantage will tend to substitute more quickly to gain a given advantage than those that are not. Generic Strategy. The RVP of a substitute will have different significance depending on the competitive advantage that industrial, commercial, or institutional buyers are seeking or the value of time and particular performance needs of the household buyer. A substitute that offers a cost saving will tend to be of more interest to a cost leader than a differentiator, for example.
Many of these factors that shape the buyer’s propensity to substitute will be a function of the particular decision maker who is involved in the purchase decision.
Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278-
289). Free Press. Kindle Edition.
Reference: CIPS study guide page 95-96
LO 2, AC 2.2
GSC Ltd is a manufacturer of car parts. To accommodate growing demands of electric cars, the company is developing a new component which requires different type of steel. The project team estimates that the component will be ready for production in 1.5 years. Until then, they need to keep the production busy.
After checking the inventory records, the production team sees that the company has 3 months of stock. The lead time for each batch is two months.
Which of the following should be a priority action of the company?
- A . Create new specification to new supplier
- B . Standardise the specification
- C . Create new specification to current supplier
- D . Make a call-off order to current supplier
D
Explanation:
The scenario is very long with many distracting data. Students need to read carefully and use their experience to solve this problem.
The company is developing a new component which requires different type of material. But this component will not be available for mass production in 1.5 years. This means the company still needs to produce the current components with current materials until the development is finished. They must continue purchase the materials from current supplier through call-off orders. This situation is an example of straight re-buy.
Reference: CIPS study guide page 3
LO 1, AC 1.1
GSC Ltd is a manufacturer of car parts. To accommodate growing demands of electric cars, the company is developing a new component which requires different type of steel. The project team estimates that the component will be ready for production in 1.5 years. Until then, they need to keep the production busy.
After checking the inventory records, the production team sees that the company has 3 months of stock. The lead time for each batch is two months.
Which of the following should be a priority action of the company?
- A . Create new specification to new supplier
- B . Standardise the specification
- C . Create new specification to current supplier
- D . Make a call-off order to current supplier
D
Explanation:
The scenario is very long with many distracting data. Students need to read carefully and use their experience to solve this problem.
The company is developing a new component which requires different type of material. But this component will not be available for mass production in 1.5 years. This means the company still needs to produce the current components with current materials until the development is finished. They must continue purchase the materials from current supplier through call-off orders. This situation is an example of straight re-buy.
Reference: CIPS study guide page 3
LO 1, AC 1.1