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| Section | Objectives |
|---|---|
| Understand the use of specifications in procurement and supply | |
| Understand market management in procurement and supply | - Contrast direct costs and indirect costs
|
| Understand how to develop a business case for requirements to be sourced from external suppliers | - Analyse how market factors affect procurement |
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NEW QUESTION # 16
Which of the following are most likely to increase the buyer's bargaining power?
1. Buyers are price sensitive
2. High set-up cost for new entrants
3. Threat of forward integration is high
4. Threat of backward integration is significant
Answer: D
Explanation:
Price sensitivity is the degree to which the price of a product affects consumers' purchasing behaviours. Buyer power will be stronger if buying organisation are price sensitive and vice versa.
Backward integration is a form of vertical integration in which a buying organisation expands its role to fulfil tasks formerly completed by businesses up the supply chain. Buyer power is strong if threat of backward integration is high.
Set-up cost is a determinant of threat of new entry. Some industries require very expensive assets in order to make products. The financial risk of entering the industry and not succeeding can deter many potential new entrants. The fewer new entrants, the fewer available substitutes, then the bar-gaining power of buyer can be negatively affected.
Forward integration is a business strategy that involves a form of vertical integration whereby business activities are expanded to include control of the direct distribution or supply of a compa-ny's products. Threat of forward integration is a determinant of supplier's bargaining power.
Reference: CIPS study guide page 88-91
LO 2, AC 2.2
NEW QUESTION # 17
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...?
Answer: C
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.
NEW QUESTION # 18
A consulting firm in London had previously had static budgets. They were set once and locked in for the year.
This resulted in departments meeting their budgets early and doing virtually nothing the rest of the accounting period. To address this imbalance, the company tossed out the static budget and developed a new one for each department of the next 18 months. And each month, real sales figures are analyzed against the plan and the budget is adjusted accordingly. Then the company adds another month into the budgeting plan. What type of budget this company is using?
Answer: B
Explanation:
A rolling budget is continually updated to add a new budget period as the most recent budget period is completed. Thus, the rolling budget involves the incremental extension of the existing budget model. By doing so, a business always has a budget that extends one year into the future.
Think of continuous (rolling) budgets as waves rolling ashore on the beach. A new wave comes in each time, replacing the one that was there before. From a financial perspective, the wave is your budget, and the time between waves is longer! These reporting time frames can be monthly, quar-terly, yearly, etc.
An incremental budget is a budget prepared using a previous period's budget or actual performance as a basis with incremental amounts added for the new budget period.
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.
Activity-based budgeting (ABB) is a system that records, researches, and analyzes activities that lead to costs for a company. Every activity in an organization that incurs a cost is scrutinized for potential ways to create efficiencies. Budgets are then developed based on these results.
NEW QUESTION # 19
As the lead procurement manager you have been asked to compile a business case for a large project. Which of the following should you include in the business case?
* Costs and risks
* List of large suppliers
* Business benefits
* Informal recommendation
Answer: D
Explanation:
Comprehensive and Detailed Explanation (from CIPS L4M2 - Business Case Development) A robust business case must:
* Quantify costs and risks (financial, operational, environmental).
* Identify and justify business benefits (savings, value, compliance, performance).
Supplier lists or informal notes are not appropriate inclusions.
Thus, Option A (1 and 3 only) is correct.
Relevant L4M2 references:
* "Structure and content of a business case"
* "Cost, risk, and benefit evaluation in justification"
NEW QUESTION # 20
A buyer may consider switching from one product or service to another, or from one supplier to another.
Which of the following options are a type of switching cost?
* Inflation cost
* Historical cost
* Retraining cost
* Modification cost
Answer: C
Explanation:
When developing a business case, procurement professionals must consider the costs associated with changing suppliers, known as switching costs.
The CIPS L4M2 Study Guide, Chapter 4 (Developing the business case), explains:
"Switching costs arise when an organisation changes from one supplier, product or service to another. These costs may include retraining staff, modifying systems or processes, and integration costs." Assessment of each item:
* Inflation cost relates to general economic price increases and is not caused by switching suppliers.
* Historical cost refers to past expenditure and does not affect the decision to switch.
* Retraining cost is incurred when staff must learn new systems, processes or products due to a change in supplier.
* Modification cost arises when equipment, processes or systems need to be altered to accommodate a new supplier or product.
The correct combination of switching costs is 3 and 4, making Option C correct.
CIPS Reference:
CIPS L4M2 Defining Business Needs
Chapter 4: Developing the business case and evaluating sourcing options
NEW QUESTION # 21
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