CHARTERED INSTITUTE OF PROCUREMENT & SUPPLY

DIPLOMA IN PROCUREMENT AND SUPPLY

DEFINING BUSINESS NEEDS

(L4M2)

PRACTICE QUESTIONS

Time Allowed: 1 HOUR 30 MINUTES

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1. Which of the following are typical examples of a tender specification? Select TWO that apply
A. Requisition
B. Conformance
C. Performance
D. Purchase order
E. Selection questionnaire

2. The bargaining strength of suppliers is likely to be high in which of the following situations?
Select TWO that apply
A. There is a limited number of suppliers in relation to buyers
B. The buyer is large in size relative to suppliers
C. The buyer spend is a high proportion of suppliers revenue
D. The buyer requirement is urgent
E. The buyer is educated in supply markets

3. Which of the following are criteria that the ISO 14000 series covers
1. Life-cycle analysis
2. Continuous improvement
3. Financial information
4. Climate change
A. 1 and 4 only
B. 2 and 3 only
C. 3 and 4 only
D. 1 and 2 only

4. Which ONE of the following factors would increase a buyer’s bargaining power in a
negotiation with a supplier?
A. There are a number of alternative suppliers the buyer could use
B. There is a high level of demand from other buyers for the supplier’s product
C. The buyer’s specification is for a specific branded good
D. Pricing in the market is regulated by national government

5. Which of these are fixed cost? Select TWO that apply

A. Staff over time
B. Premises costs
C. Utilities costs
D. Materials costs
E. Sales commission

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6. When considering procuring a product that is a modified re-buy, a company should consider
A. Key performance indicators
B. The make or buy option
C. The supply market
D. Terms and conditions of the contract

7. An auto motive firm has just launched their first innovative self-driving vehicle. They have
chosen a market skimming pricing strategy. Is this the right decision?
A. Yes, because this enables them to recoup some of the costs of research
B. Yes, because this will give them a more attractive price in the market place
C. No. because this strategy ignores the impact of competition
D. No, because this is not tailored to different market segments

8. Head of procurement Maria would like to build up an overall picture of the manufacturing
operational costs for the production of a text book. Which of the following are classified as
direct costs?
A. Ink costs for the book
B. Royalties to author
C. Oil costs to lubricate print press
D. Salary for sales staff
E. Building insurance costs

9. A company has installed a new piece of capital equipment but needs to arrange a
maintenance contract for three years. The company wants to know as accurately as possible
what this price will be for the full contract. What would be an appropriate type of pricing
mechanism to use when asking suppliers to quote prices?
A. Fixed price
B. Fixed price with adjustment for inflation
C. Cost plus fixed fee
D. Cost plus percentage fee

10. Specifications will form the foundation of many contracts and allow suppliers to receive clear
insight into the project expectations. A local authority needs to create a hard surface bridge,
which is 2 meters wide to go over a local river. It needs a warranty of workmanship and
materials. Which specification would be the most appropriate? Was this not a statement of work?
A. Output specification

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 B. Input specification
C. Outcome specification
D. Combination specification

11. Which of the following content should a performance specification feature? Select TWO that
apply.
A. Exact details of the packaging
B. Outcomes to be achieved
C. Drawings of the required product
D. Required quality level
E. Approved / excluded materials requirements

12. A project manager is reviewing a make or buy analysis as part of a procurement strategy.
Which type of costs should the project manager consider for the analysis?
1. Direct costs
2. Indirect costs
3. Out-of-pocket costs
4. VAT costs
A. 1 and 3 only
B. 1 and 2 only
C. 3 and 4 only
D. 2 and 4 only

13. The buyer’s database is regarded as a primary data source. Which of the following is also a
source of primary data?
A. Price lists collected from suppliers’ representatives at trade fairs
B. Price listings on comparison websites and market exchanges
C. Published economic indices such as the retail price index
D. Financial and trade press including journals published by professional bodies

14. A company has purchased a component, but it has failed inspection. It has been purchased
regularly for use in a finished product but the company decided to use a new supplier and
issued a very short performance specification to the supplier. What could be the reason for
the failure?
A. Underspecified
B. Value analysis
C. Standardization
D. Wrong lists of inputs

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15. Which of the following are secondary sources of data for costs and prices?
1. Industry press
2. Published economic indices
3. Trade fairs
4. Buyer’s database on market data

A. 1 and 2 only
B. 2 and 3 only
C. 1 and 4 only
D. 2 and 4 only

16. When drafting a business case, Benjamin believes he has power over a supplier and will
consider this when detailing budget information. Is adopting a powerful approach with the
supplier a reasonable approach?
A. Yes, as long as there are other supply options
B. Yes particularly for highly critical items
C. No, collaborative approaches should always be adopted
D. No, power should never be used by a buyer on suppliers

17. Azram a procurement analyst has been tasked with analyzing whole life costing when
purchasing a piece of laboratory equipment. Was this the correct course of action?
A. Yes, as this focuses on the price of the equipment being purchased
B. Yes, because considers operational costs
C. No, because this considers the costs of quality
D. No because this covers various transactional costs.

18. Suppliers are powerful in which of the following situations?

1. There is potential for backward integration
2. Products and services are undifferentiated
3. The switching costs for buyers is high
4. There are few substitute products

A. 1 and 4 only
B. 3 and 4 only
C. 1 and 2 only
D. 1 and 3 only

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19. A company looks after public transport including maintaining bus and train stations which are
used extensively by the general public. What criteria should the procurement department
take into account in the specification for a cleaning contract that will have most impact on
the people using building?
A. The style of uniform the staff should wear when cleaning
B. Which references a cleaning contractor should with quotation
C. How often will the buildings will be cleaned
D. Contract penalty clauses for non-performance of the cleaning contract

20. Roger is responsible for capital equipment purchases within a local hospital. To assist in
developing a business case, Roger would like to calculate the pay-back period for the
purchase of a high powered microscope. If the high demand microscope costs $200 000 and
will generate annual revenue of $50 000, how long would the payback be?
A. 2 years
B. 3 years
C. 4 years
D. 8 years

21. XYZ Ltd operates in the plumbing and heating industry. The company has developed and
patented a new range of alternative products using a different material from a conventional
brass that offers substantial cost savings. XYZ Ltd plans to launch the full range of new
products. Will this change the impact of competitive forces in the market?
A. Yes, this development has created substitute products
B. Yes, this development created the threat of new entrants
C. No, this development does not impact on supplier bargaining power
D. No, this development does not impact on buyer bargaining power.

22. XYZ Ltd is the largest consumer for brass in the country. It consumes 48% of all brass
manufactured while the second largest consumes less than 10% of brass manufactured.
Which force of power does XYZ Ltd possess?
A. Market rivalry force
B. Threat of substitute force
C. Supplier bargaining power
D. Buyer bargaining power

23. Which competitive forces influence markets in our modern environment?

A. Manufacturing of goods and services
B. Bargaining strength of suppliers and buyers

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 C. Production companies and relationships
D. Increased cost in supply and deliveries

24. Aircraft Category Manager, Harpal Patel is purchasing several aircraft engines. He is seeking
to determine which category of specification will be most appropriate, he decides on using a
conformance based specification. A conformance based specification is most appropriate in
which of the following instances?
A. When technical dimensions are necessary for operational reasons
B. When technology is changing rapidly in the market sector
C. Where suppliers have greater relevant technical expertise than the buyer
D. Where there are clear objective criteria for evaluating solutions put forward by suppliers

25. Lucy a junior procurement analyst has been asked to assess the competitive forces in the
garden furniture market. XYZ Ltd is the largest producer of garden furniture in the country. It
produces 70% of all the garden furniture manufactured, while the second largest
manufacturer produces less than 5% of the garden furniture for the country. Which power
does XYZ Ltd possess?
A. Purchasing power
B. Substitute power
C. Supplier bargaining power
D. Buyer bargaining power

26. Which of the following would be an indirect cost of motor vehicle manufacturer?
A. Steel components
B. Manufacturing employees’ wages
C. Machine tooling
D. Director’s salary

27. An example of direct cost is ….

A. An overhead expense
B. Rent for premises
C. Office cleaning
D. Raw materials

28. When a stakeholder drafts a specification, the buyer should provide input to ensure that it …
A. Is grammatically correct and there are no spelling or formatting errors
B. Contains few details to allow as wide a market as possible to respond
C. Tells the supplier precisely how to deliver the contract in all aspects

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 D. Contains what is needed and will lead to the most effective solution

29. Which of the following does the ISO 9000 series cover? Select TWO that apply.
A. Life-cycle analysis
B. Financial information
C. Achieving objectives
D. Continuous improvement
E. Process approach

30. Would economies of scale be a barrier to entry for potential new entrants to a market
A. Yes, it allows established competitors to squeeze new entrants with a price war
B. No, it makes the buyer more powerful, they can force down prices in a war
C. No, the volume purchased by the buyer or industry is not important to the market
D. Yes, it is an aggressive competitive strategy, one firm’s gain is another firm’s loss

31. An example of a performance specification is a …

A. Brand name
B. List of outputs
C. List of inputs
D. Technical drawing

32. A buyer has a stronger negotiating position when the market place has …
A. Supplier monopolies
B. Limited substitutes
C. Supplier saturation
D. Limited competition

33. A plastics firm is creating a specification that needs to specify the exact type of chemical
makeup required. This would include a given set of tolerances for the chemicals to be used in
the manufacturing process of a new product. Which one of the following specifications should
they use?
A. Outcome
B. Technical
C. Brand name
D. Performance

34. Which of the following are cash outflows found in the cash budget?

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 1. Overdraft facilities
2. Staff salaries
3. Customer payments
4. VAT or sales tax
A. 1 and 2 only
B. 2 and 3 only
C. 2 and 4 only
D. 1 and 4 only

35. Which of the following is an accurate definition of budgetary control?

1. An estimation of what costs are likely to be
2. A comparison of estimates with actual cost
3. Securing fixed prices within the budget
4. Ensuring all of budget available is used
A. 1 and 2 only
B. 1 and 3 only
C. 3 and 4 only
D. 2 and 4 only

36. A procurement department has asked for a pricing structure that will allow the supplier to
cover their costs plus $10 000 to cover the supplier’s profit. What is this arrangement called?
A. Cost plus shared incentive
B. Cost plus a percentage fee
C. Cost plus an incentive
D. Cost plus a fixed fee

37. When making a business case the proposal has to consider financial costs, non-financial costs
and opportunity costs. What is an opportunity cost?
A. Opportunistic expenditure incurred in speculative activities such as auctions
B. Opportunity foregone by choosing to spend on one option instead of the other
C. The cost of lost opportunities because of operational disruption or reputational damage
D. The expenditure incurred by investing in costly and opportunistic ventures such as mergers

38. Alex has identified that he wishes to use a performance based specification for the purchase
of new HR staffing scheduling system. Was this the correct course of action?
A. No, because technology is changing rapidly
B. Yes, because specific blueprint is necessary for functional requirements
C. Yes, because suppliers have greater technical knowledge than the buying organization

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 D. No, because there are clear objective criteria for evaluating alternative solutions

39. Head of procurement Harpal would like to build up an overall picture of the manufacturing
costs of a text book. Which of the following are classified as indirect costs? Select TWO that
apply.
A. Utilities , electricity
B. Glue costs for books
C. Advertising costs
D. Machine operator salary
E. Royalties to author

40. As the lead procurement manager you have been asked to compile a business case for a large
project. Which of the following should you include in the business case?
1. Costs and risks
2. List of large suppliers
3. Business benefits
4. Informal recommendation
A. 1 and 3 only
B. 2 and 4 only
C. 1 and 4 only
D. 2 and 3 only

41. A company is building a new two storey office block and will need to purchase new desks and
chairs. There will be no much space available. What should be included in the specification
for these desks and chairs?
A. Technical drawings
B. A brand name
C. A list of inputs
D. Key performance indicators

42. The main benefit of using standards in a specification is…

A. The British standards are aligned with other international standards
B. The standards provide a clear guide with no ambiguity and uncertainty
C. That standards allow the supplier to give the buyer a bespoke product
D. It will ensure the latest technology standards are kept up to date

43. A company’s finished product has 50 materials that have to be purchased. It wants to reduce
costs and believes the number of materials can be reduced to 30 by looking at each individual
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 material and removing those that do not add anything to the finished product. What is this
process called?
A. Value analysis
B. Standardization
C. Value engineering
D. Market testing

44. The volume purchased by the buyer or industry is important to a supplier in a competitive
market. Is this statement TRUE or FALSE?
A. True, it is an aggressive strategy , one firm’s gain is another firm’s loss
B. True, it makes the buyer more powerful as they can force down prices
C. False, the volume purchased by the buyer or industry is not important
D. False, it allows potential new entrants to enter the competitive market

45. Which of the following events would increase the number of suppliers in a particular market?
A. Introduction of minimum wage regulations
B. High and increasing levels of investment required to enter the market
C. Requirement for all companies to have 10 000 or more employees
D. De-regulation of previously government run industry

46. Is ISO 14 000 a series of environmental standards?

A. No, it’s a series of quality standards including continuous improvement
B. Yes, it’s a series of environmental standards including life cycle analysis
C. Yes, it’s a series of information security standards including financial information
D. No, it’s a series of risk management by standards including achieving objectives

47. Buyers can ascertain the prices by examining information provided by primary and secondary
sources of market data. Which of the following is a secondary source of market data?
A. Supplier prices provided on price comparison websites
B. Historical records of supplier prices on the buyer’s database
C. Price brochures provided by the supplier’s sales team
D. Suppliers prices provided on the buyer’s request for quotation

48. Which of the following costs can be classified as direct costs?

A. Cost of drilling machines to be used by the technicians on a car assembly line
B. Cost of the safety boots worn by the company workforce
C. Salary of the production manager in charge of both day and night shifts
D. Wages of technician responsible for installing engines into cars on an assembly line
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49. Samantha has recently joined Spann Farm Foods (SFF) as a procurement manager. She has
instructed her team to develop and distribute a standard specification template for business
stakeholders to use when requesting purchases. How would this benefit SFF?
A. Use of a standard template would prevent fraudulent purchases being made by
stakeholders
B. Use of a standard template would allow buyers to quickly identify any missing information
C. Use of a standard template would reduce the amount of negotiation required on the terms
and conditions of the contract.
D. Use of a standard template would mean suppliers will be more willing to negotiate on the
cost of the product

50. Gaskin Gaskets (GG) is a manufacturing company that wants to identify new suppliers for a
number of current parts. GG no longer has technical drawings for the parts and none of the
engineers currently working for them has enough knowledge of the parts to write a
specification.

What could GG do to get accurate pricing for these parts to compare to the existing parts?

A. GG’s engineers could estimate the specification and drawings that are sent to prospective
suppliers
B. GG could send samples of the parts to prospective suppliers as part of the request for
quotation
C. GG could communicate a cost to the suppliers that must be met regardless of the final
specification
D. GG could allow suppliers to develop and use their own specification as part of their cost
proposal

51. How can procurement support the finance department in developing an accurate forecast for
a project budget?
A. Procurement can interpret the business technical requirements for finance colleagues
B. Procurement can provide additional resource to work in the finance department during
budget setting periods
C. Procurement and finance can work together to amend supplier specifications in order to
reduce budgeted costs
D. Procurement can provide benchmark costs and identifying potential savings opportunities
ahead of the start of the project

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52. An engineering company that manufactures hydraulic tipping gear for fitting to vehicles is
redesigning the range of lifting equipment that it supplies to its customers. The most
expensive components are steel tubes for which the company is writing a conformance
specification which will allow procurement to invite tenders from potential suppliers these
tubes have been purchased from one supplier for the last three years. Which of the following
specifications should be included so that procurement can follow a successful tendering
procedure? Select TWO that apply.
A. Concise terms and conditions of contract of the steel tubes
B. The price the company expects to pay for the steel tubes
C. Technical drawings of the required tubes for the steel tubes
D. The current supplier’s technical standards for the steel tubes
E. The steel tubes working conditions for the steel tubes

53. Josh a junior procurement analyst was asked to analyse the cost breakdowns for some of the
major category products that he purchases for the engineering company he work for. He has
looked at various types of costs and has identified some correlations. Which of the following
are correct?

1. Direct product costs tend to be variable costs for the organization

2. Indirect product costs tend to be fixed costs for the organization
3. Direct costs are also known as overheads for the organization
4. Indirect costs are also known as the marginal costs for the organization

A. 1 and 2 only
B. 2 and 3 only
C. 2 and 4 only
D. 1 and 4 only

54. A company wishes to write a business case to justify the purchase of an expensive piece of
equipment that will be expected to be in use for at least five years. The equipment will cost
$100 000 but bring in $20 000 of income a year. The production manager wants to
recommend the equipment because its payback period exactly matches the minimum life. Is
this the right reason for justifying the expenditure?
A. Yes, payback is the only method to evaluate capital purchases
B. Yes, the only consideration is that the equipment will pay for itself
C. No, the company should consider only the equipment affordability
D. No, this method makes no allowance for the future value of money.

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55. If an item is regarded as being of low financial value and represents a low level risk to the
organization it would be handled as a….
A. Leverage item
B. Non critical item
C. Strategic item
D. Bottleneck item

56. Which of the following would be considered to be direct costs? Select TWO that apply
A. Production materials
B. Head office salaries
C. Company car depreciation
D. Manufacturing staff wages
E. Buildings insurance

57. A large sports organization requires some additional racing equipment to be built. It should
match exactly the predetermined technical specifications and requires exact compatibility.
Which of the following specifications would be most appropriate?
A. Conformance specification
B. Performance specification
C. Outcome specification
D. Product specification

58. XTC Ltd manufactures high specification steel components for the telecommunications
industry. It is presently developing a new component which it estimates will be ready for full
production in around a year. XTC holds sufficient stock of existing materials for the next three
months, with a lead time of two months it will need to purchase more stock. What should
XTC Ltd do to ensure continuity of supply for production?
A. Create a new specification for the existing supplier
B. Issue a purchase order to a new supplier
C. Create a new specification for a new supplier
D. Create a call off contract from the existing supplier

59. Which of the following will help the bargaining strength of a buyer?
1. The buyer has the option to make the product inhouse
2. There are a limited number of suppliers available to the buyer
3. The buyer’s switching costs are high
4. The buyer’s spend is a high proportion of the supplier’s revenue

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 A. 1 and 2 only
B. 2 and 4 only
C. 1 and 4 only
D. 2 and 3 only

60. The main purpose of benchmarking is __________. Choose one correct answer to complete
the sentence
A. To discover the best prices and services available
B. To force a supplier to reduce their prices
C. To disclose another suppliers information
D. To know what price suppliers has to beat

Bonus question

Rita was proud of the business plan that she had created in preparation for a meeting with her
procurement director. In the plan she had created a budget based on last year’s usage with the
sales departments predicted annual increases. What type of a budget has Rita created?

A. Zero based

B. Incremental budget

C. Activity based budget

D. Rolling Budget

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