APP Purchasing Principles 3 — Questions and Answers
Question 1: Which type of contract places the greatest financial risk on the buyer?
- Firm fixed-price contract
- Cost-plus-fixed-fee contract (Correct answer)
- Fixed-price-with-incentive contract
- Time-and-materials contract
Correct answer: Cost-plus-fixed-fee contract
Cost-plus contracts reimburse all allowable costs plus a fee, giving the supplier little incentive to control costs, placing risk on the buyer.
Question 2: What is 'forward buying' in purchasing?
- Purchasing based on expected future price increases or supply shortages (Correct answer)
- Buying directly from the manufacturer instead of a distributor
- Issuing blanket purchase orders for future delivery
- Paying suppliers in advance to secure capacity
Correct answer: Purchasing based on expected future price increases or supply shortages
Forward buying involves purchasing larger quantities than immediately needed in anticipation of price increases or supply disruptions.
Question 3: Which document formally authorizes a supplier to begin work or ship goods after a contract is awarded?
- Purchase requisition
- Blanket purchase order
- Notice to proceed (purchase order) (Correct answer)
- Letter of intent
Correct answer: Notice to proceed (purchase order)
A purchase order (or notice to proceed) serves as the formal authorization for the supplier to deliver goods or begin services.
Question 4: An organization uses a 'weighted point evaluation' system for supplier selection. What is the PRIMARY advantage of this method?
- It eliminates subjectivity entirely
- It provides a structured, comparable score across multiple criteria (Correct answer)
- It focuses solely on the lowest price
- It simplifies the evaluation to a single metric
Correct answer: It provides a structured, comparable score across multiple criteria
Weighted point systems allow objective comparison of suppliers across multiple factors by assigning importance weights to each criterion.
Question 5: What is the key difference between a 'specification' and a 'standard' in purchasing?
- Specifications are internal documents; standards are external
- A specification describes requirements for a specific purchase; a standard is an established norm used industry-wide (Correct answer)
- Standards are legally binding; specifications are not
- Specifications apply to services; standards apply to goods only
Correct answer: A specification describes requirements for a specific purchase; a standard is an established norm used industry-wide
A specification defines what is needed for a particular procurement, while a standard is a pre-established benchmark recognized across an industry.
Question 6: Which metric measures how quickly a company pays its suppliers?
- Days Sales Outstanding (DSO)
- Days Payable Outstanding (DPO) (Correct answer)
- Inventory Turnover Ratio
- Cash Conversion Cycle
Correct answer: Days Payable Outstanding (DPO)
Days Payable Outstanding (DPO) measures the average number of days a company takes to pay its suppliers.
Question 7: In a competitive bidding process, what is 'bid shopping'?
- Searching for the best supplier price before issuing an RFQ
- Disclosing one bidder's price to competitors to solicit a lower bid (Correct answer)
- Evaluating bids based solely on price
- Requesting bids from international suppliers
Correct answer: Disclosing one bidder's price to competitors to solicit a lower bid
Bid shopping is an unethical practice where a buyer reveals a competitor's bid price to other bidders to drive prices lower.
APP Purchasing Principles 3
Which type of contract places the greatest financial risk on the buyer?