CPP Cost Reduction & Value Analysis Strategies 3 — Questions and Answers
Question 1: In a make-or-buy decision, which factor most strongly favors the 'buy' option?
- The item is a core competency of the buying firm
- Supplier prices are below the company's internal production cost (Correct answer)
- The company has excess manufacturing capacity
- Strict quality control is required
Correct answer: Supplier prices are below the company's internal production cost
When an external supplier can produce the item at a lower cost than internal manufacturing, outsourcing is financially advantageous.
Question 2: Which of the following BEST represents an 'indirect cost' in a total cost of ownership (TCO) analysis?
- Invoice price paid to the supplier
- Cost of incoming inspection and quality testing (Correct answer)
- Freight charges listed on the purchase order
- Customs duties for imported goods
Correct answer: Cost of incoming inspection and quality testing
Incoming inspection costs are indirect costs not reflected in the purchase price but are a real cost of acquiring the good.
Question 3: A value analysis team determines that a purchased bracket is over-engineered with tolerances tighter than the application requires. The recommended action is to:
- Dual-source the bracket to reduce risk
- Relax the specifications to allow lower-cost manufacturing (Correct answer)
- Increase order quantities for volume discounts
- Switch to a domestic supplier to reduce lead time
Correct answer: Relax the specifications to allow lower-cost manufacturing
Relaxing unnecessarily tight tolerances reduces manufacturing complexity and cost without sacrificing functional performance.
Question 4: Price analysis is DIFFERENT from cost analysis in that price analysis:
- Evaluates the reasonableness of price without examining the supplier's cost structure (Correct answer)
- Requires a detailed breakdown of direct and indirect costs
- Is only applicable to competitive bid situations
- Always includes a review of the supplier's overhead rates
Correct answer: Evaluates the reasonableness of price without examining the supplier's cost structure
Price analysis compares offered prices to market benchmarks or historical prices without examining how the supplier built the price.
Question 5: The '80/20 rule' applied to spend analysis means that:
- 80% of suppliers account for 20% of spend
- 20% of suppliers or items typically represent 80% of total spend (Correct answer)
- 80% of cost savings come from 20% of negotiations
- 20% of quality defects cause 80% of rework costs
Correct answer: 20% of suppliers or items typically represent 80% of total spend
Pareto's principle in spend management identifies the vital few suppliers or categories that drive the majority of expenditure, focusing leverage efforts.
Question 6: Life-cycle costing (LCC) is most useful in procurement because it:
- Minimizes the initial purchase price of an item
- Evaluates all costs from acquisition through disposal to find lowest total cost (Correct answer)
- Ensures suppliers meet warranty obligations
- Predicts future commodity price fluctuations
Correct answer: Evaluates all costs from acquisition through disposal to find lowest total cost
LCC captures acquisition, operating, maintenance, and disposal costs, revealing that the cheapest purchase price may not yield the lowest total cost.
Question 7: Reverse auctions are used in purchasing primarily to:
- Identify sole-source suppliers for critical components
- Drive competitive price reduction through real-time bidding (Correct answer)
- Evaluate supplier quality and delivery performance
- Develop long-term strategic partnerships
Correct answer: Drive competitive price reduction through real-time bidding
In a reverse auction, suppliers bid against each other in real time, driving prices downward and creating savings for the buyer.
CPP Cost Reduction & Value Analysis Strategies 3
In a make-or-buy decision, which factor most strongly favors the 'buy' option?