Procurement & Sourcing Flashcards

Which contract type places the greatest financial risk on the buyer?

Answer: Cost Plus Fixed Fee (CPFF)

Under a Cost Plus Fixed Fee contract, the buyer reimburses all allowable costs and pays a fixed fee, so cost overruns fall entirely on the buyer.

What is 'reverse auctioning' in procurement?

Answer: Suppliers competitively bid prices downward in real time

In a reverse auction, suppliers compete by lowering their prices in real time, which is the opposite of a traditional buyer-side auction.

A 'make-or-buy' analysis should primarily consider:

Answer: Core competency alignment, total cost, and strategic risk

Make-or-buy decisions require evaluating whether the activity aligns with core competencies, comparing total costs, and assessing risks of each option.

Which document formally authorizes a purchase and creates a legal obligation between buyer and supplier?

Answer: Purchase Order

A Purchase Order (PO) is a legally binding document issued by the buyer that, when accepted by the supplier, forms a contract.

Early Supplier Involvement (ESI) in new product development primarily benefits the buyer by:

Answer: Leveraging supplier expertise to improve design and reduce costs

ESI brings supplier knowledge of materials, processes, and costs into the design phase, enabling better designs and lower total costs.

What is the 'bullwhip effect' in supply chain management?

Answer: Amplified demand variability as orders move upstream in the supply chain

The bullwhip effect describes how small demand fluctuations at the retail level get magnified into large order swings further up the supply chain.

When a supplier's invoice price exceeds the agreed purchase order price, the buyer should first:

Answer: Issue a formal debit memo and notify the supplier

A debit memo formally documents the discrepancy and requests a supplier credit, initiating the dispute resolution process per contract terms.