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| Section | Objectives |
|---|---|
| Topic 1: Understand how to develop a business case for requirements to be sourced from external suppliers | - Analyse how market factors affect procurement |
| Topic 2: Understand the use of specifications in procurement and supply | |
| Topic 3: Understand market management in procurement and supply | - Compare the competitive forces that influence markets
|
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NEW QUESTION # 34
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 # 35
Which of the following statements is true about product life cycle?
Answer: 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, increas-ing production and an increase in the competitive landscape. Availability of the product is under-standably 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.
NEW QUESTION # 36
Jasmine identified a possible new supplier that offers commercial improvements in her category of spend. She decided to put forward a business case to justify the necessity for a new supplier assessment and audit with the aim of adding the supplier to the approved list. Jasmine decided to carry out a cost-benefit analysis. Is this the right approach for Jasmine to use?
Answer: C
Explanation:
A cost-benefit analysis (CBA) is used in business cases to determine if the value or savings generated outweigh the costs incurred (in this case, supplier onboarding and auditing).
The CIPS L4M2 Study Guide, Chapter 4: Business Case Development, states:
"A cost-benefit analysis helps determine whether the proposed initiative is financially and operationally justifiable by comparing the expected benefits with the projected costs." Option analysis:
* A. Regulatory requirement - No. It's a best practice, not mandatory regulation.
* B. Only by accounts - Incorrect. CBA is a strategic tool used by procurement and project teams.
* C. Shows if benefits outweigh costs - Correct. This is the purpose of a CBA.
* D. Request supplier approval - Approval should be justified through analysis, not assumption.
Correct answer: C
CIPS Study Guide Reference:
* Module: L4M2 - Defining Business Needs
* Chapter 4: Financial Justification and Cost-Benefit Analysis
NEW QUESTION # 37
A UK engineering company imports more than 75% of its products from the USA. The finance manager is creating the budget for next year and has told the procurement manager that, to do this, finance simply add a published inflation index to prices paid last year. Is this a way for a business to precisely predict prices for next year?
Answer: A
Explanation:
Comprehensive and Detailed Explanation (paraphrased from CIPS L4M2 content) CIPS L4M2 explains that general inflation indices (like consumer or retail price indices) are based on a basket of goods and services for the whole economy, not tailored to a specific company's imports or input mix.
For an engineering business importing from the USA, its price changes will depend on:
Specific industrial input price indices (e.g. metals, components, specialist goods), Exchange rate movements GBP/USD, Sector-specific factors (technology, capacity, freight, tariffs).
Therefore, simply "adding a published inflation index" to last year's prices cannot precisely predict next year' s prices, particularly when:
The index may include irrelevant items like food, clothing, local services, etc.
It may not reflect the specific mix of industrial inputs or the effects of exchange rates.
Thus:
Option A correctly explains the limitation: the inflation index may include products and services that are not relevant to the company's purchases.
Option B mentions price adjustment formulas (which can be more precise if designed well), but the question emphasises whether using a general index alone is precise - option A goes straight to the core reason.
Options C and D describe partial truths (indices can show general trends and give a quick check) but they do not support precise forecasting.
Relevant CIPS L4M2 areas:
Use and limitations of inflation indices in cost forecasting
Factors influencing prices in international procurement (currency, indices, market conditions) Building realistic cost assumptions in a business case
NEW QUESTION # 38
Which of the following is the core of value analysis process?
Answer: A
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 manufac-ture 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.
2. Function Analysis
This step represents the meat and potatoes (core) of the value analysis. The team attempts to determine the functions the project serves. Functions come in two forms:
- Primary functions are those that represent the reason for the project's existence, for example, a building project might have adequate plumbing as a primary function.
- Secondary functions are those that the project serves without being core to the project. For example, a building project might have as a secondary function maintaining the view of the neighboring building.
The functions are described in verb/noun pairs, such as "supply water to all suites," or "Maintain view of adjacent park." For a project like this, the team should come up with 10 - 15 functions. You might be surprised how many secondary functions exist for most projects. Subject matter experts would be a great resource, but in their absence an appropriate level of brainstorming and analysis are necessary.
The team should also identify value-mismatched functions to focus the improvements on. For ex-ample, maybe a large obstruction is preventing the view of the adjacent park from too many suites resulting in a potential mismatch of the cost vs. functional benefit. This is investigated in the next step.
3. Creative
This phase represents the generation of improvement ideas. The team develops alternative ways that the project can perform the functions that have been identified. At this step, the functions are looked at individually and each one gets a list of alternative ways to perform the function. There is no judging between the importance of the various functions.
4. Evaluation
At this stage, a priority is given to each project improvement idea. The ideas are discussed and potential costs are determined. Once the risk-reward profile of each idea is itemized, the team has determined which ideas are worth implementing into the project or feature.
A few years ago, there was a pedestrian bridge built near my home which was originally designed for emergency vehicles. Although this type of design is standard practice for the bridges of this type, the value engineering team identified that emergency vehicle passage was not needed (verb/noun pair = 'maintain passage for emergency vehicles'). Also, a second major outcome of this value analysis was to change the design to an aesthetic, curved bridge because it was in a prominent location. The redesign of the bridge cost some money but this was more than made up by the cost of the bridge construction. Thus, the value analysis paid for itself about 10 times over in the reduced construction cost, and the bridge was significantly more aesthetic.
5. Development
Once the value improvement options have been whittled down to the ones that make sense, the value engineering team develop the options to the point of passing them back to the original project team. They must be clearly written and explained so that the project owner and stakeholders can understand how it benefits the project and act on it. Any potential negative factors are identified. Potential costs and cost savings are itemized.
6. Presentation
This last phase represents the presentation of the alternatives to the stakeholders. Often value engineering represents a change in the normal practices that people are used to, an "out of the box thinking." Thus the best salesperson on the team is often the best one to do the presentation.
Some typical products of a value engineering analysis are a briefing document, risk analy-sis, present worth analysis, advantages vs. disadvantages, etc.
Reference: CIPS study guide page 163-171
LO 3, AC 3.4
NEW QUESTION # 39
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