Which of the following should be considered when calculating ratios relating to a supplier’s liquidity?
- A . inventory
- B . reserves
- C . receivables
- D . profit
A buyer in the public sector has put an advert out asking for interested suppliers to express an interest in a potential tender activity to provide a facilities management contract to a hospital trust. The suppliers who have met that criteria are then sent a document detailing how they should submit their tender, how to price the opportunity, asks Questions relating to how they will deliver the service and gives a deadline for bids to be submitted.
Which document have the suppliers ben sent?
- A . Request for Quotation
- B . Invitation to Tender
- C . Invitation to Quote
- D . Request for Tender
B
Explanation:
This is an Invitation to Tender.
The only other real document listed in Request for Quotation. This is incorrect because the document asks questions relating to how they will deliver the service. This means price isn’t the only factor, which is the case for a RfQ.
Request for Tender and Invitation to Quote are not real things.
Which of the following would you expect to find in an Invitation to Tender? Select THREE
- A . awarding body
- B . deadline (Correct)
- C . pricing schedule
- D . qualifications required
- E . risk assessments
A, D
Explanation:
An ITT would include details on the awarding body (usually a brief overview of the buyer), the deadline (bids must be received by a certain date) and qualifications required (such as ISO requirements or competency certificates of staff members if it’s a service contract). You wouldn’t find pricing schedules in an ITT (this would be provided by the supplier in response to the ITT), nor would you find risk assessments (a supplier might be asked to provide one as part of the quality assessment of the tender though).
Invitation To Tender Simply Explained I Thornton & Lowe (thorntonandlowe.com)
Luke has sent out a Request for Information to test the waters of the supply market for a new product he is sourcing. He has received a high number of detailed documents back from suppliers.
Which of the following is Luke now likely to know about the marketplace? Select THREE
- A . acceptable lead times
- B . amount of product competition
- C . expected changes in the marketplace
- D . exact costs of the item he’s procuring
- E . samples of the product
A, B, C
Explanation:
The correct answers are; lead times, product competition and changes in the marketplace.
You wouldn’t expect to receive samples or costings from a Request for Information – rather, these should be expected as part of the Tender Competition
Achieving the ‘five rights of procurement’ is one of the key objectives of procurement managers.
Which of the following are not considered one of the 5 rights? Select TWO.
- A . time
- B . ethics
- C . environment
- D . quantity
- E . quality
B, C
Explanation:
ethics and environment are not a ‘right of procurement’.
The 5 rights are price, quality, quantity, time and place.
Tendering is a more formal and regimented process than sending out requests for quotations.
Which of the following are services that are often put out to tender? Select THREE.
- A . security
- B . consultancy
- C . provision of raw materials
- D . office supplies
- E . cleaning
B, C, E
Explanation:
security, consultancy and cleaning are services which are often tendered as they tend to be high value and complex opportunities.
Office supplies and raw materials have less variables so you could use a RFQ for these instead. A hint for this is also the word services. Security, consultancy and cleaning are services. Raw Materials and Office Supplies are goods.
In the Public Sector, what is the evaluation criteria most often used when evaluating bids from suppliers?
- A . Most Economically Advantageous Tender
- B . Best Value for Money
- C . Cheapest Overall Tender
- D . Best Business Fit
A
Explanation:
Most Economically Advantageous Tender (MEAT) is the Public Sector’s go to evaluation criteria. NOTE that this is changing from October 2023. Public Sector Procurement is currently based on legislation called PCR 2015 which itself is based on EU Procurement Directives. Now the UK has
officially Brexited, we’re making our own laws and the new Procurement Bill will be coming into effect in November 2024. One of the major changes is that MEAT is changing to MAT (most ad-vantageous tender – without the economical bit).
If you’re sitting this exam until July 2024- you’re fine- learn what the study guide says. If you’re taking the exam from November 2024 I’m not sure what students are expected to do. The entire section on public sector procurement is incorrect for you. My best guess is CIPS may remove questions this section as the study guide will be wrong, but I really don’t know how they plan to handle this. The new Procurement Bill – MEAT to MAT – Hempsons – Hempsons
Pierre is constructing a tender for a security contract. As well as cost, he would like to ask the security companies some questions about their health and safety processes and staff qualifications. He has created several questions and weighted these so that they add up to 25. is this the correct thing to do?
- A . yes- point systems can be weighted any way a buyer choses so long as this is explained in the ITT
- B . yes- 25 is the correct weighting for quality question
- C . no- the weighting should total 10
- D . no- the weighting should total 100
D
Explanation:
weighted points systems for assessments should add up to 100. This is 100%.
An example is how this would work is
Price = 50%
Health and Safety questions= 30%
Qualifications = 20%
The procurement team at Grape Juice Limited often use a weighted point system when ap-praising potential suppliers.
What is a disadvantage of using a weighted point system?
- A . it allows transparency
- B . it is time-consuming to create
- C . it is easy to manipulate
- D . it is hard to be objective
A
Explanation:
Weighted points systems can be time consuming to create. They’re very transparent and allow for objective grading of supplier bids (so these answers are incorrect). They are not easy to manipulate and this is an advantage of using them.
The gross profit of a company can be calculated by using a simple formula.
What is this?
- A . total revenue – cost of sales
- B . assets – liabilities
- C . cost of sales – fixed assets
- D . debt owed – total sales
A
Explanation:
gross profit = total revenue – cost of sales.
Learn all you can about financial ratios and financial statements for the exam- it’s a very common topic
A balance sheet will show a company’s assets, liabilities and shareholder equity.
What is share-holder equity?
- A . the profit from sales once tax has been deducted
- B . the amount of money held in the company’s bank account
- C . the owners’ residual claim once all debt has been paid
- D . the amount of money from retained earnings
C
Explanation:
shareholder equity = the owner/s of the organisation’s residual claim once all debts have been paid.
What Is Shareholder Equity (SE) and How Is It Calculated? (investopedia.com)
If a company is described as ‘liquid’ what does this mean?
- A . the company is funded on equity rather than debt
- B . the company spends a lot of money
- C . the company is highly profitable
- D . the company has enough money to pay short-term liabilities
D
Explanation:
liquid = the ability to pay short and medium term debts. In simple terms do you have more in stuff (money, assets) than you owe in debt?
Understanding Liquidity and How to Measure It (investopedia.com)
This is a hot topic for the exam. Learn everything in this section.
Which of the following would be considered a strategic sourcing activity?
- A . an office ordering copier paper
- B . a bakery ordering eggs
- C . a factory ordering a new machine
- D . a restaurant ordering plastic cups
C
Explanation:
a factory ordering a new machine is the correct answer.
Strategic sourcing is for high value, high risk items. The other options given are tactical sourcing as they are low value (eggs, paper and plastic cups).
See p.3 for the differences between tactical and strategic sourcing
What type of relationship should a buyer seek when making strategic sourcing for their business?
- A . transactional
- B . collaborative
- C . arms-length
- D . partnership
B
Explanation:
The buyer should seek a ‘collaborative’ relationship. Transactional and arms-length relationships are more suited to tactical sourcing. Partnerships are reserved for joint-ventures.
Curly Cake Incorporated makes lots of different types of confectionary items. Although they are most famous for their cakes, they also have a smaller line of cereal bars and biscuits.
Which of the following would be the most appropriate items for Curly Cake Incorporated to outsource? Select TWO
- A . cakes
- B . cereal bars and biscuits
- C . cleaning
- D . facilities management
C, D
Explanation:
Cleaning and Facilities Management are the most appropriate items to outsource. They would not outsource the making of confectionary products as this is the ‘core’ business. See p.4 for "what is outsourcing?"
Which of the following would be a valid reason to make a product inhouse, rather than buy it from a supplier?
- A . improved quality control
- B . less inventory
- C . killset of supplier is higher
- D . threat of substitutions
A
Explanation:
One of the biggest advantages to making an item over buying it is ‘improved quality control’. When you make the product yourself, you can set the quality parameters you require and aren’t re-stricted to, or dependant on, what the supplier does. The other options are incorrect- making stuff inhouse would mean you hold more inventory. If the supplier has a higher skillset than you, you would outsource. Threat of substitutions wouldn’t impact this decision.
For a list of pros and cons relating to the ‘make or buy’ decision see p.5. This is a hot topic for the exam.
Ramesh is a procurement manager who is looking at his supplier base. He is pursuing a sourcing
strategy with the aim of enabling logistical cost reductions. He has made the decision to scale-down
his supplier base and purchase from one supplier.
Which type of sourcing arrangement has Ramesh began?
- A . dual
- B . multiple
- C . single
- D . sole
Brooklyn Ltd is a manufacturer of windows and has a single sourcing relationship with their supplier of glass.
What relationship style would be best suited?
- A . collaborative
- B . transactional
- C . adversarial
- D . non-critical
A
Explanation:
When single sourcing, you should aim to have a collaborative relationship with the supplier. They’re the only ones who provide you with glass, which is a vital part of windows. So you need to make sure you have a good relationship with them and work with them to overcome any issues such as supply chain disruptions. If not- you’ve got no windows to sell!
In a negotiation, a supplier does not want to upset or offend the buyer, so concedes their own requirement in order to ensure harmony.
Which negotiation tactic is the supplier using?
- A . competitive
- B . collaborative
- C . compromising
- D . accommodating
D
Explanation:
This is accommodating: the supplier puts the buyer’s interest above his own.
This is from the Thomas Killman model of conflict resolution. There are 5 strategies; competitive, collaborative, avoiding, accommodating and compromising. In the study guide it doesn’t mention the name of the model but you do need to know the 5 strategies. The model comes up a lot in other modules so is a good one to learn. Particularly L5M1 which is about management theory.
Liquidity is a solvency measure which determines whether an organisation is able to pay its debt.
Which of the following would you use to assess a supplier’s liquidity? Select TWO.
- A . current assets
- B . current liabilities
- C . long-term debt
- D . shareholder’s equity
A, B
Explanation:
The correct answer is current assets and current liabilities. There are many Questions about financial ratios on the exam.
If you’re unsure on them I suggest doing further reading outside of the study guide as this will help. I like this youtube video (I’m not associated with the makers of this video but think it’s a great way to explain liquidity) Liquidity ratios (youtube.com)
You can be asked to work out liquidity in the exam. If you are asked this, the numbers will be very simple to the point you may be able to do the sums in your head. There is also a calculator on the test app you can use.
Greg is doing some research on a potential supplier and is concerned that the supplier’s funding is based on long-term debts and loans. Working with this supplier therefore might bring additional risks to Greg’s business.
What should Greg do about his concerns?
- A . use the Return on Investment Ratio
- B . do an Acid Test
- C . work out the supplier’s EBITDA
- D . work out the supplier’s gearing ratio
D
Explanation:
Greg needs to use a gearing ratio. Gearing is a measure of how the business is being funded and is based on the ratio of debt to equity Gearing comes up a lot in the exam. Also make sure you know what Return on Investment, Acid Test and EBITDA are.
Return on Investment (ROI): How to Calculate It and What It Means (investopedia.com)
EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com)
Acid-Test Ratio: Definition, Formula, and Example (investopedia.com)
Kiran is appraising some potential suppliers and has noticed that one of these suppliers has an extremely high gearing ratio.
What would this suggest?
- A . the supplier is extremely profitable
- B . the supplier has a lot of long-term debt
- C . the supplier has a high cost of sales
- D . the supplier has a strong return on investment
B
Explanation:
The correct answer is ‘the supplier has a lot of long-term debt’. Gearing is a measure of how the business is being funded and looks at the ratio of debt to equity. For example if they have taken out lots of loans and mortgages, this would equate to a lot of debt which means a poor gearing ratio. Gearing is a hot topic for the exam.
What would an EBITDA ratio show you?
- A . how profitable a business is
- B . how solvent a business is
- C . how much of a business’s funding is made up of long term debt
- D . how effectively a business uses its assets to generate sales
A
Explanation:
EBITDA stands for ‘earnings before interest, tax, depreciation and amortization’. This is a profitability ratio and would show how profitable a business is.
EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com)
A company has a low gearing of 20%. This shows that the company relies on equity capital and should therefore have less difficulty coping during tough economic times. Is this statement TRUE?
- A . Yes- a low gearing ratio means the company’s finances are made up of equity rather than debt
- B . Yes- a low gearing ratio shows that the business is solvent and can deal with supply chain disruptions easily
- C . No- a low gearing suggests that the company is financed by long-term debt rather than equity
- D . No- a low gearing shows you that a company isn’t likely to be profitable
A
Explanation:
the correct answer is ‘Yes- a low gearing ratio means the company’s finances are made up of equity rather than debt’.
Remember low gearing = good (based on equity), high gearing = bad (based on debt). Anything over 50% is considered high.
The two no answers are therefore incorrect and you can discount these straight away. The other yes answer is one of those answers which COULD be true, but isn’t always true, and we’d need more information to know for sure. When you get options like this there will be one that is always right and one which is sometimes right – so always pick the always right one.
Dealing with supply chain disruptions is complex, and depending what the disruption is, how big it is, what the industry is etc determines whether a supplier can handle it or not. Because there’s more factors to consider than just gearing, this isn’t the right answer.
Which of the following is an example of intracompany trading? Select TWO
- A . a manufacturer in the UK buys raw copper from a supplier in Chile
- B . two companies owned by the same entity conduct business
- C . two companies join together to create a new product
- D . two departments within the same company collaborate on a project
- E . cleverness
B, D
Explanation:
Intracompany trading is when two departments in the same company do trading. AND when two companies owned by the same parent company do trading. INTRA means ‘within’ – so it’s doing business with yourself.
During which stage of the procurement cycle would you remove suppliers that do not add value, or could pose a risk to the buying organisation?
- A . develop strategy
- B . supplier selection
- C . contract award
- D . asset management
B
Explanation:
At supplier selection stage, unsuitable suppliers should be removed (those that do not add value or pose a risk). At develop strategy stage you’re not even looking at suppliers yet- you’re just deciding what you need. At contract award and asset management it’s too late. CIPS procurement cycle – Procurement Supply Cycle | CIPS
For complex and high value tenders, which document is the most appropriate to send to those suppliers who have already been appraised and deemed suitable?
- A . PQQ
- B . ITT
- C . RFQ
- D . RFT
B
Explanation:
The correct answer is Invitation to Tender. This is sent out to suitable suppliers inviting them to bid for the opportunity.
A PQQ – pre-qualification questions naire- is sent to suppliers to see if they are suitable. The QUESTION states these suppliers have already been deemed suitable, so they’ve already passed PQQ
A RFQ – request for quotation- would be used when the only variable is price, so is not suitable for complex tenders.
RFT isn’t a thing. I made the last one up.
Robert is appraising suppliers and is keen to evaluate suppliers’ contribution to the community and the environment.
Which of the following should Robert look at?
- A . ESG Policy
- B . Anti-Slavery Policy
- C . ISO9001
- D . ISO27000
A
Explanation:
Robert should look at the supplier’s ESG policy. This stands for Environmental Social Governance. So covers both his requirements for community (social) and environmental factors.
ISO 9001 is about Quality Management and ISO27000 about Information Security so these are in-correct answers. An Anti-Slavery Policy would not discuss the environment.
Which of the following would you use to determine the outcome of a competitive tender? Select TWO.
- A . location
- B . distribution
- C . reputation
- D . quality
- E . price
D, E
Explanation:
Price and Quality are the two considerations when marking a competitive tender.
Location, distribution and reputation may be considered for SOME tenders, but these would be sub-categories that fall under ‘quality questions.
Pre-qualification of suppliers is used to determine if the suppliers meet the basic requirements of the buying organisation.
Which of the following is assessed at the pre-qualification stage?
- A . capacity, capability and pricing structure
- B . pricing structure, ethics and financial stability
- C . financial stability, capacity and capability
- D . capability, culture and pricing schedules
C
Explanation:
The correct answer is financial stability (this is done by using all of those lovely ratios in chapter 1.3) and capacity and capability (which are part of Carter’s 10 Cs).
At PQQ stage you’re looking purely at whether the supplier is good or bad (to put it simply). You don’t give them details of your requirement yet, so they’re not providing a quote / pricing structure / price schedule at this point in time. That would be at the next stage, IF they pass PQQ, when you issue the tender competition.
When conducting a competitive tender, is it appropriate to use a supplier’s credit rating as a criteria for pre-section?
- A . yes- because a low rating would have a negative impact on the company’s reputation
- B . yes- because a low rating would indicate the supplier is financially unstable
- C . no- because a low rating would not affect the quality of the products supplied
- D . no- because a low credit rating would have a negative impact on the supply chain
B
Explanation:
The correct answer is ‘yes- because a low credit rating would indicate the supplier is financially un-stable’.
The two options beginning with no should automatically be discounted. The other option is incorrect because credit ratings are private and would therefore not affect reputation.
Which of the following financial ratios would indicate a supplier’s potential exposure risk to a steep rise in inflation?
- A . acid test
- B . current ratio
- C . gross profit margin
- D . gearing ratio
D
Explanation:
The correct answer is ‘gearing ratio’.
Gearing measures how much of a company’s funding is based on long-term debt or loans- this would be affected by a steep rise in inflation. If a company has a mortgage on their offices or facto-ry and they need to remortgage and inflation has gone up a lot- they’ll be paying a lot more on their mortgage. This will severely effect the gearing ratio as they’ll have more outgoings than incoming. Gross profit margin COULD be affected by inflation, for example if you’ve got hyper-inflation and the country goes into recession and people stop buying your product. However, this answer isn’t al-ways right and depends on many factors- the industry, the product, the company etc, so for the purpose of CIPS should be discounted. There are many industries which are immune to inflation.
Guillerme is a Category Manager within the procurement department of a Manufacturing company. In his Category there are 200 items he procures, and he has recently undertaken an ABC analysis of these.
Which of the following items would be C category items?
- A . high value items
- B . one-off purchases
- C . tail spent
- D . strategic sourcing
C
Explanation:
The C category is the ‘tail spend’ – it represents a large number of suppliers of small value items. I recommend giving this a read ABC Classification & ABC Method | CIPS
GDP is an economic index that a procurement professional can use to measure economic data.
What does GDP tell you?
- A . the value of public limited companies within a country
- B . the monatary value of the goods manufactured in a financial period
- C . the value of commodities such as steel, oil and wheat at a point in time
- D . average changes in price over a year
B
Explanation:
GDP = gross domestic product = "the monetary value of goods and services manufactured or sup-plied in a financial period". People use it to say whether a country’s economy is strong or weak. Stock markets look at the value of public limited companies within a country.
Commodity indices look at the value of commodities such as steel, oil and wheat at a point in time Average changes in price over a year can be measured by CPI or PPI
FTSE100 and Sensex are examples of what?
- A . stock markets
- B . commodity indices
- C . financial reports
- D . public sector organisations
A
Explanation:
they are stock markets.
What is the FTSE 100 Index? Complete Beginner’s Guide (moneycheck.com)
BSE SENSEX C Wikipedia
If a commodity index shows that the price of a commodity is continually rising, what does this indicate about the market?
- A . that there is little demand in the marketplace
- B . demand is exceeding supply
- C . there is a threat of substitution
- D . the marketplace is a monopoly
B
Explanation:
The correct answer is ‘demand is exceeding supply’- If everyone wants to buy something, the sup-pliers will likely increase the price.
If there was little demand or there were threats of substitutions, this would likely result in a price decrease.
Which of the following are primary sources of data? Select TWO.
- A . market reasearch commissioned by a rival company
- B . economic indices such as PPI or CPI
- C . published price lists
- D . trade fairs and exibits
- E . phone calls with current suppliers
D, E
Explanation:
Primary data includes trade fairs and exhibits, and phone calls to current suppliers. The others are examples of secondary data.
Remember primary= you do it yourself, Secondary = someone else did it.
Commodities are items which can be traded on the stock exchange. These are generally divided into four categories.
What are these four categories?
- A . metals, energy, elements and agriculture
- B . fruit, vegetables, meat and dairy
- C . energy, agriculture, metals, livestock
- D . chemicals, agriculture, metals and livestock
C
Explanation:
energy, agriculture, metals, livestock are the four trading categories on the stock exchange. Some-times there’s a 5th category added which is ‘environmental credits’. This is a fairly new thing and you don’t need to know anything about this for this exam.
Question no commodities will mainly centre around characteristics of commodities and factors that affect pricing.
Commodities are discussed much more in detail in L5M4. At level 4 you just need a basic overview.
When looking at credit scores, a supplier may be classified as a high risk for reasons that are not linked to poor credit.
Which of the following could these be? Select TWO
- A . The organisation is new
- B . The organisation has no loans or credit cards
- C . The organisation has lots of fixed assets
- D . The organisation does not employ many people
B, C
Explanation:
New organisations or those with no loans/ credit cards may have low credit scores. This is simply because they do not have enough financial history to make their scores good. That means banks au-tomatically class them as higher risk, because they simply don’t know that they’re trustworthy yet.
A company’s balance sheet will show you which of the following?
- A . revenue, profit and expenses
- B . equity, assets and liabilities
- C . cash coming in and out of the business
- D . profit, loss and assets
B
Explanation:
a balance sheet shows ‘equity, assets and liabilities’. The other financial statements you need to know for this exam are cash flow statements and and income statements.
If you’re not familiar with these three I strongly recommend you do some further reading on this before the exam if you can. This is helpful: How the 3 Financial Statements are Linked Together – Step by Step (corporatefinanceinstitute.com)
Which of the following areas of legislative and regulatory requirements prevent the deliberate limiting of supply and the formation of cartels?
- A . data protection
- B . product safety standards
- C . marketplace competition
- D . ethical practice
B
Explanation:
the correct answer is ‘marketplace competition’.
Ethical practice is about prohibiting corrupt and unfair practice, rather than issues of supply and demand. Although being in a cartel is ‘unethical behavior’ this option doesn’t fully answer the question which talks about limiting supply- this is related to marketplace competition.
Which of the following is considered as part of ESG?
- A . bribery, corruption and the environment
- B . market conditions and product lifecycle
- C . liquidity, gearing and profitability
- D . economic and social governance
B
Explanation:
The correct answer is bribery, corruption and the environment.
ESG stands for environmental and social governance. It’s the new buzzword for CIPS and is basically everything to do with ethical procurement- so areas such as bribery and corruption are included as well as the environment.
Option 4 is incorrect as economic doesn’t come into it.
The Freedom of Information Act is a piece of UK legislation which allows members of the public to request information on issues such as public sector sourcing. When a request is made, it is compulsory for the public sector to provide this information to the public.
Is this statement true?
- A . yes- the information must be provided within 28 days
- B . yes- the information must be posted publically online
- C . no- the public sector can choose not to publish information if it is not deamed to be in the public interest
- D . no- the public sector does not need to provide information on sourcing activities
C
Explanation:
the correct answer is ‘no- the public sector can choose not to publish information if it is not deemed to be in the public interest’.
They use something called the ‘public interest test’ to determine if the information should be re-leased or not. For example they may not respond to a request asking how many bullets the UK Army has in storage, as that would be detrimental to national security interests. Responses to requests are made within 21 days, not 28.
What is the best way to prevent potential issues of conflicts of interest?
- A . do not hire family members
- B . openly declare potential conflicts
- C . do not work with suppliers who have relationships with the procurement team
- D . create a risk register
B
Explanation:
The best way to deal with potential Conflicts of Interest is to openly declare these. Just because you have a relationship with someone doesn’t mean this is going to be an issue or lead to fraud, but it is a good idea to keep a written record of these.
It wouldn’t be a risk register, because how can you rate someone’s risk of doing something dodgy? Risk registers are for objective risks such as Health and Safety.
A procurement manager who works in the public sector has received 8 submissions to a tender op-port unity that was advertised on OJEU. The average price submission for the contract was £1m but one supplier has submitted a price of £200,000, which the procurement manager has identified as being ‘an abnormally low tender’.
What should be the procurement manager’s course of action?
- A . automatically dismiss the low bid
- B . award the contract to the low bid as this represents better value for money
- C . investigate the low bid
- D . award the bid a 0 for price
C
Explanation:
You should investigate automatically low tenders by clarifying the bid with the supplier. It could be they have misunderstood the requirement. Or the bid could be genuine and they can really provide best value for money. But without enquiring, you just don’t know.