CPSM Procurement & Sourcing 4 — Questions and Answers
Question 1: Which contract type places the greatest financial risk on the buyer?
- Firm Fixed Price (FFP)
- Fixed Price with Economic Price Adjustment (FP-EPA)
- Cost Plus Fixed Fee (CPFF) (Correct answer)
- Time and Materials (T&M)
Correct 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.
Question 2: What is 'reverse auctioning' in procurement?
- A buyer selling surplus inventory to highest bidder
- Suppliers competitively bid prices downward in real time (Correct answer)
- A government process for disposing of excess property
- An auction where the last bidder wins the contract
Correct 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.
Question 3: A 'make-or-buy' analysis should primarily consider:
- Only the direct material cost comparison
- Core competency alignment, total cost, and strategic risk (Correct answer)
- Supplier lead times exclusively
- Current inventory levels of finished goods
Correct 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.
Question 4: Which document formally authorizes a purchase and creates a legal obligation between buyer and supplier?
- Purchase Requisition
- Request for Quotation
- Purchase Order (Correct answer)
- Bill of Lading
Correct 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.
Question 5: Early Supplier Involvement (ESI) in new product development primarily benefits the buyer by:
- Reducing the number of suppliers on the approved list
- Leveraging supplier expertise to improve design and reduce costs (Correct answer)
- Ensuring lowest unit price through competitive bidding
- Shifting all design liability to the supplier
Correct 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.
Question 6: What is the 'bullwhip effect' in supply chain management?
- Increasing price volatility caused by commodity speculation
- Amplified demand variability as orders move upstream in the supply chain (Correct answer)
- The impact of a single large customer on a supplier's capacity
- Demand smoothing achieved through vendor-managed inventory
Correct 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.
Question 7: When a supplier's invoice price exceeds the agreed purchase order price, the buyer should first:
- Pay the invoice to maintain supplier relations
- Issue a formal debit memo and notify the supplier (Correct answer)
- Cancel the PO and source from a different supplier
- Escalate to legal counsel immediately
Correct 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.
CPSM Procurement & Sourcing 4
Which contract type places the greatest financial risk on the buyer?