CPM CPM Risk Management and Mitigation 2 — Questions and Answers
Question 1: What is the purpose of a Business Continuity Plan (BCP) in the context of procurement?
- To standardize supplier payment terms
- To ensure critical procurement activities can continue during and after a major disruption (Correct answer)
- To document all supplier contracts in one location
- To automate purchase order generation
Correct answer: To ensure critical procurement activities can continue during and after a major disruption
A BCP outlines procedures and strategies to maintain or quickly resume essential procurement operations when faced with a disaster or significant disruption.
Question 2: What does 'supplier financial health assessment' involve in risk management?
- Reviewing a supplier's marketing materials and website
- Analyzing a supplier's financial statements to evaluate their stability and viability (Correct answer)
- Checking whether a supplier offers prompt payment discounts
- Reviewing the supplier's employee benefits programs
Correct answer: Analyzing a supplier's financial statements to evaluate their stability and viability
Assessing a supplier's financial health through analysis of credit ratings, balance sheets, and cash flow helps identify insolvency risk before it disrupts supply.
Question 3: Which risk transfer mechanism protects a buyer from losses caused by a supplier's failure to perform?
- Inventory buffer stock
- Performance bond or surety bond (Correct answer)
- Preferred supplier certification
- Long-term supply agreement
Correct answer: Performance bond or surety bond
A performance bond is a guarantee from a third party (surety) that the supplier will fulfill their contractual obligations or the buyer will be compensated.
Question 4: What is 'price risk' in purchasing management?
- The risk that a buyer will be overcharged on an invoice
- The risk that commodity or input prices will rise unexpectedly, increasing procurement costs (Correct answer)
- The chance that a supplier will lower prices after a contract is signed
- The risk of purchasing counterfeit goods at inflated prices
Correct answer: The risk that commodity or input prices will rise unexpectedly, increasing procurement costs
Price risk refers to the possibility that market prices for goods or materials will increase, causing actual procurement costs to exceed budgeted amounts.
Question 5: What is a 'hedge' in the context of managing commodity price risk?
- A legal clause limiting price escalation in a contract
- A financial strategy using futures or options contracts to lock in prices and offset potential cost increases (Correct answer)
- An inventory buffer maintained to cover price spikes
- A multi-supplier arrangement to create price competition
Correct answer: A financial strategy using futures or options contracts to lock in prices and offset potential cost increases
Hedging uses financial instruments like futures contracts to fix the purchase price of a commodity, protecting buyers from adverse price movements.
Question 6: In supply risk management, what does 'single source dependency' mean?
- Using one internal department to manage all purchasing
- Relying on only one supplier for a critical item, creating vulnerability if that supplier fails (Correct answer)
- Sourcing all products from one geographic region
- Using a single contract for all purchases from one vendor
Correct answer: Relying on only one supplier for a critical item, creating vulnerability if that supplier fails
Single source dependency means a buyer has only one qualified supplier for a critical item, leaving them exposed to complete supply disruption if that supplier has any issue.
CPM CPM Risk Management and Mitigation 2
What is the purpose of a Business Continuity Plan (BCP) in the context of procurement?