APP Investment Strategies 2 ā Questions and Answers
Question 1: Which investment strategy involves spreading procurement capital across multiple supplier relationships to reduce dependency risk?
- Sole sourcing
- Portfolio diversification (Correct answer)
- Vertical integration
- Spot buying
Correct answer: Portfolio diversification
Portfolio diversification in procurement means engaging multiple suppliers across categories to mitigate concentration risk.
Question 2: A purchasing manager is evaluating a long-term supply agreement with a preferred vendor. Which financial metric best measures the total value of the investment over the contract life?
- Gross margin
- Net present value (NPV) (Correct answer)
- Inventory turnover ratio
- Days payable outstanding
Correct answer: Net present value (NPV)
NPV discounts all future cash flows from the agreement to their present value, capturing total investment worth.
Question 3: When a company invests in supplier development programs, the PRIMARY expected return is:
- Lower raw material prices immediately
- Improved supplier capability and long-term quality (Correct answer)
- Elimination of safety stock requirements
- Faster payment terms for the buyer
Correct answer: Improved supplier capability and long-term quality
Supplier development investments target enhanced quality, delivery, and innovation capability over the long term.
Question 4: In a capital investment decision for procurement automation, the payback period is BEST defined as:
- The time until cumulative savings equal the initial investment cost (Correct answer)
- The discount rate that makes NPV equal to zero
- The ratio of net income to total assets
- The percentage reduction in procurement headcount
Correct answer: The time until cumulative savings equal the initial investment cost
Payback period measures how long it takes for cumulative cash savings to recover the upfront investment.
Question 5: Which sourcing investment strategy is MOST appropriate when a commodity's supply market is volatile and prices fluctuate significantly?
- Committing to annual fixed-price contracts
- Using forward contracts or hedging mechanisms (Correct answer)
- Always buying at spot market prices
- Reducing safety stock to zero
Correct answer: Using forward contracts or hedging mechanisms
Hedging through forward contracts locks in prices and protects against adverse commodity price movements.
Question 6: A buyer is comparing two suppliers: Supplier A requires $50,000 upfront tooling investment but offers lower unit costs; Supplier B has no tooling cost but higher unit prices. The preferred analysis method is:
- Simple payback only
- Total cost of ownership (TCO) analysis (Correct answer)
- Gross margin comparison
- Supplier scorecard rating
Correct answer: Total cost of ownership (TCO) analysis
TCO captures all costsāinitial investment, unit price, quality, and logisticsāto reveal the true cost over the sourcing relationship.
Question 7: Which factor MOST directly increases the risk of a procurement investment becoming a sunk cost?
- Using competitive bidding
- Supplier insolvency after contract signing (Correct answer)
- Maintaining dual sourcing
- Applying value analysis
Correct answer: Supplier insolvency after contract signing
If a supplier becomes insolvent after the buyer has invested in tooling or development, those funds cannot be recoveredāa classic sunk cost.
APP Investment Strategies 2
Which investment strategy involves spreading procurement capital across multiple supplier relationships to reduce dependency risk?