CIPS L4M2 DEFINING BUSINESS NEEDS

EXAM : 60 QUESTIONS

PASS MARK: 70%

TIME: 1 ½ HOURS

A designer has precise requirements for a new plastics components, but no-one within their
organisation possesses the required knowledge to design such a component in-house. The designer has
decided to create a performance specification and share it with some potential plastic-moulding
suppliers. Do you agree with this approach?

a) Yes, based on the performance specification a new supplier can design the component
b) Yes, new components can only be designed using a performance specification
c) NO, the designer should create an output-based specification instead
d) NO, the designer should create a conformance specification instead

1) Which of the following would be most likely to form part of the performance specification?
Select TWO that apply.

a) Technical drawings
b) Chemical formula
c) List of outputs
d) Operating conditions
e) Blueprints

2) The procurement team of a global supermarket has created a business case for a corporate
social responsibility (CSR) sourcing strategy to meet the corporate objective of sustainability.
This would require sourcing only from suppliers who meet ethical standards , a reduction in
plastic and using recycled material where possible. Which of the following business benefits
would be mentioned in the business case? Select TWO that apply.
a) Fulfilment of a business objective
b) Increased capacity
c) Leverage of technology
d) Improved brand equity
e) Reduced costs

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

4) Why is a ‘fixed budget’ an inadequate tool for budgetary control?

a) It focuses on fixed costs of the budget yet the variable costs are equally important
b) It is based on a fixed period of time yet the actual life span of the business is likely to exceed
c) It is based on a fixed level of activity which is likely to fluctuate during the budget period
d) It focuses on one-off capital expenditures which are connected to acquisition of fixed assets

5) Which of the following are typical examples of secondary sources of market data? Select TWO
that apply.
a) Communication with suppliers
b) Published market analysis
c) Trade fairs and exhibitions
d) Price comparison websites
e) Supplier marketing publications

6) Which of the following will help the bargaining strength of a buyer?

1. The buyer has the option to make the product in-house
2. There are 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

a) 1 and 2 only
b) 2 and 4 only
c) 1 and 4 only
d) 2 and 3 only

7) Procurement should work closely with colleagues in accounts when creating an annual budget.
This is because the budget will help the company……..
a) Process supplier invoices quicker
b) Plan its finances for the next year
c) Plan its functional strategy for the next year
d) Decide terms and conditions of contract

8) When performing a straight re-buy purchase, which of the following are typical impacts of
business needs that a buyer should be aware of? Select TWO that apply.
a) Optimise inventory replenishment methods
b) Engage in supplier and market research
 c) Secure additional benefits on the contract
d) Promote early supplier involvement
e) Undertake value engineering exercise

9) If established suppliers in a market start a price war. Is this a form of competitive rivalry?
a) Yes, economies of scale are a barrier to entry for new entrants
b) No, it makes the supplier more powerful, they force prices down in a price war
c) No, the volume purchased by the buyer or industry is not important
d) Yes, it is an aggressive strategy, one’s firm gain is another firm’s loss

10) Zodiac Manufacturing Group (ZMG) produces hybrid motorcycles and have a monopoly within
this market in the United Kingdom. The chief executive officer of ZMG believes that there are
other manufacturers planning to enter the UK hybrid motorcycle market. Which is the best
pricing strategy ZMG adopt to discourage new entrants to the market?
a) Introduce a customer loyalty programme
b) Reduced pricing of spare parts for existing ZMG motorcycle owners
c) Reduced retail pricing of new ZMG motorcycles
d) Increase the prices paid by ZMG to new suppliers

11) Which of these would speed up the cash inflows?

1) Reducing purchases
2) Promotional activity
3) Instalment payments
4) Bank loan

a) 2 and 4 only
b) 1 and 4 only
c) 2 and 3 only
d) 1 and 2 only

12) Which one of the following would allow an established company to develop a competitive
advantage over new entrants to its market?
a) Reduce advertising costs
b) Economies of scale
c) Internal management re-organisation
d) Selling only imported goods
13) When sourcing a new supplier to provide bespoke chemical compound would you use a….
a) Functional specification
b) Performance specification
c) Conformance specification
d) Brand specification

14) A large construction company has decide to restructure to a centralized procurement model.
What is a key benefit of centralized procurement?
a) Tighter budget control
b) Closer to the clients
c) Enhanced project focus
d) Closer to the supplier

15) Which of the following factors should be assessed to understand the competitiveness of a
supply market?
a) Presence of a minimum wage
b) Gross National Product of the country of manufacture
c) Number of suppliers within the market
d) Previous price paid for goods

16) It is only necessary to produce a new specification when there is a………….

a) Standard request used in the same industry
b) Non-standard request with the same supplier
c) Standard request in other industries
d) Non-standard request from other industries

17) Spend on delivery represents over 75% of total costs for a supplier of agricultural produce. The
procurement team has been tasked with reducing this to help decrease direct costs and in turn
free more capital for investment in the harvesting process. Which of the following would be the
best solution?
a) Reduce total deliveries
b) Reduce the fleet
c) Outsource the harvesting
d) Outsource the fleet

18) A business case allows a company to……….

a) Assess the costs and benefits of the options available to learn
b) Approve a sourcing strategy and potential suppliers
c) Approve final spend value for a capital project
d) Agree a preferred supplier list for a project
19) Which of the following is a potential driver of change in the manufacturing industry to help
reduce costs and increase efficiency?
a) E-commerce
b) Robotics
c) Omnichannel
d) Visualization

20) Procurement should include social and environmental criteria in all purchases that involve high
spend. Is this true or false?
a) False, the buyer should always pay the lowest possible price
b) False, it is the supplier’s responsibility to meet social and environmental criteria
c) True, criteria are critical for the welfare of customers
d) True, they are always important considerations to achieve value for money

21) CP Group places emphasis on the following business objectives:

1) Responsive production processes to react quickly to market changes
2) Collaboration and technological integration
3) New products launched and on sale very quickly

Which of the below business markets does CP group belong to?

a) Manufacturing
b) Retail
c) Agriculture
d) Construction

22) The procurement team of an IT hardware manufacturer has been set a target by senior
management to reduce the rates paid to the sole supplier of a new and innovative power-saving
battery. Which action should the procurement team first consider?
a) Offering a framework agreement
b) Agreeing rebate threshold
c) Dual or multiple sourcing
d) Offering economies of scale

23) 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

24) Which of the following is likely to be an outcome of over specification?

1) Ineffective Service Level Agreement (SLA)
2) Higher supplier costs
3) Increased Supplier Resource Management (SRM)
4) Reduced inventory costs

a) 1,3 and 4 only

b) 2,3 and 4 only
c) 1,2 and 3 only
d) 1,2 and 4 only

25) 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 contract

26) 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 conventional brass
that offers substantial cost savings. XYZ Ltd plans to launch the full range of new products. Will
this change the impact on 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

27) 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) 1and 4 only
b) 3 and 4 only
c) 1 and 2 only
d) 1 and 3 only

28) A company is considering buying a new computer system to handle large amounts of personal
data and expects the system to perform in a particular way. Which of the following should be
included in the performance specification? Select TWO that apply.
a) List of outputs
b) List of inputs
c) Brand name
d) Technical drawings
e) System operating conditions

29) A company is inviting tenders for a cleaning contract. The tenders will be evaluated on the most
advantageous tender (MEAT), with social and evaluation criteria having a higher weighting than
price. Which of the following criteria should have the greatest effect on social and
environmental considerations?
1) Functional characteristics
2) Type of materials
3) Minimising waste
4) Financial benefits

a) 1 and 2 only
b) 2 and 3 only
c) 3 and 4 only
d) 1 and 4 only

30) A ‘modified re-buy’ means ……..

a) The existing specifications should be reviewed but not the supply market as this type of
purchase is complex
b) The specification should not be considered for future treatment as a stock item because of
the modification
c) Both the specification and the market should be reviewed to manage the new
circumstances
d) The existing supplier should be the requirement because it is a modified re-buy of the same
item.
31) What issue is a buyer most likely to experience if the technical specification sent to suppliers as
part of a Request For Quotation (RFQ) is insufficient?
a) The buyer will receive quotes at different times from suppliers which will require greater co-
ordination with other members of the sourcing team
b) The buyer will receive costs from suppliers in different formats, which will male it difficult to
compare costs on a like-for-like basis.
c) The buyer will not be able to compare different suppliers’ costs directly as the suppliers will
have had to make assumptions on the specifications.
d) The buyer will need to work with their finance colleagues and business stakeholder to adjust
the budget available for the project

32) When drafting a business case, Benjamin believes he has power over a supplier and will
consider this when detailing information. Is adopting a powerful approach with the supplier aa
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

33) A manufacturing company is preparing a business case for the purchase of a new machine that
will be used in the assembly of its products. The company has identified an inexpensive, second-
hand machine, but it will need regular preventative services for at least the next five years. To
justify the business case, procurement should include costs that cover the whole life of the
machine. Which of the following will have the biggest impact over the five years? Select TWO
that apply.
a) Maintenance
b) Spares
c) Delivery
d) Purchase
e) Installation

34) 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?
a) Direct product costs tend to be variable costs for the organisation
b) Indirect product costs tend to be fixed costs for the organisation
c) Direct costs are also known as the overheads for the organisation
d) Indirect costs also known as the marginal costs for the organisation
35) Which of the following are primary sources of market data for costs and prices? Select TWO that
apply.
a) Published economic indices
b) Industry press
c) Supplier marketing communications
d) Price comparison website
e) Trade fairs
36) A company is building a new two-storey office block and will need to purchase new desks and
chairs. There will not be 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

37) Ranjit is purchasing a large piece of laboratory equipment which is brand new to market. Can
this be classified as a straight re-buy?
a) Yes, as the equipment is available from a supplier used in the past
b) Yes, as there is an existing specification
c) No, as a standing purchase agreement exists
d) No, as this has not been specified or sourced before

38) A procurement team has been tasked with undertaking a more strategic procurement strategy
in order to better control costs, by removing ad hoc cross-company purchases for similar goods
from various suppliers. What would be the best approach to achieve this?
a) Place all current suppliers into framework contracts
b) Request capped rates with all current suppliers
c) Agree minimum order values with current suppliers
d) Consolidate current suppliers into a framework agreement

39) 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

40) Robert is a buyer at Pickton’s Farm Products (PFP), a manufacturer of food products that are
sold to supermarkets. Robert will be sourcing from local farmers to supply PFP with raw
 materials for PFP’s products. What is a major supply chain risk that Robert needs to be aware of
which is specific to this market?
a) Extreme or unexpected weather conditions may affect supplier’s ability to supply to PFP in
line with quantity and timing requirements
b) Suppliers to PFP may also supply other customers which they prioritise over PFP, leading to
delays in PFP’s production process
c) The quantity of goods received by PFP may be of varying quantity and need to be returned
to the supplier for replacement
d) A supplier may deliver an incorrect quantity of materials to PFP, leading to PFP incurring
storage charges

41) Which of the following is a social factor that a buyer should take into account when reviewing
responses to a specification?
a) The age of the machinery being used by the supplier
b) The emissions produced by the supplier’s machinery
c) The available labour in the supplier’s geographic location
d) The logistical infrastructure available to the supplier

42) XTC Ltd manufactures high specifications steel components for the telecommunications
industry. It is presently developing a component which it estimates will be ready for full
production in around a year. XTC Ltd 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) Create a new specification for a new supplier
c) Issue a purchase order to a new supplier
d) Create a call-off contract from the existing supplier

43) 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 does XYZ Ltd possess?
a) Market rivalry force
b) Threat of substitute force
c) Supplier bargaining power
d) Buyer bargaining power

44) Which of the following are advantages of using standards of using standards within the
specification?
1) Removes ambiguity of requirement
2) Assist negotiation with supplier
 3) Assist accurate comparison of bids
4) Increase time to market
a) 1 and 4 only
b) 2 and 4 only
c) 1 and 3 only
d) 3 and 4 only

45) A car manufacturer requires a specification for a key component, which allows future
adaptability for the addition of new market innovations? Which specification type should they
use?
a) Prescriptive
b) performance
c) Design
d) Conformance

46) ‘Straight re-buy’, ‘modified re-buy’ and ‘new buy’ are each referred to as a type of purchase.
When purchasing a ‘new buy’ the buyer……….
a) Is expected to have an existing contract from which to make a ‘call-off’
b) Is likely to re-specify and re-negotiate the existing contract
c) Will immediately request the supplier to deliver so that the existing stock is kept at the
optimum level
d) Is likely to engage in the development of specifications and in researching the market

47) A company assembles its finished products from a wide selection of components. It is analysing
these components to see which features are needed and whether any features can be removed
to save costs. Which of the following could result from this process?
1) Variety reduction
2) Value engineering
3) Value analysis
4) Standardization
a) 1 and 2 only
b) 2 and 3 only
c) 3 and 4 only
d) 1 and 4 only

48) 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 suppler. What could be the reason for the failure?
a) Under specified
b) Value analysis
 c) Standardization
d) Wrong list of inputs

49) 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 for the country. Which power does XYZ
Ltd possess?
a) Purchasing power
b) Substitute power
c) Supplier bargaining power
d) Buyer bargaining power

50) Which of these are variety reduction initiatives? Select the THREE that apply.
a) Drawing up performance or conformance specifications
b) Looking at how frequently each item in a range is used
c) Identifying items which can be substituted for each other
d) Identifying where items have similar characteristics
e) Making multiple small regular orders of variant items
f) Giving similar items various specifications/descriptions

51) Raheem is the head of procurement at a care home. He decides to use a performance
specification for the purchase of a new intelligent patent record system. Is this a correct
approach?
a) Yes, as it helps to drive innovation
b) Yes, as it tells the supplier the exact requirements
c) No, this approach is difficult to manage
d) No, as it will take too long to acquire the IT systems

52) Which of these are variable costs?

1) Staff overtime
2) Premises costs
3) Insurance costs
4) Material costs

a) 1 and 2 only
b) 1 and 4 only
c) 2 and 3 only
 d) 2 and 4 only

53) 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

54) A budget is a plan quantified in monetary terms. Which of the following budgets consolidates
services, suppliers in raw materials and is analysed to show when goods/services are received
and when they are paid for?
a) Personnel budget
b) Stocks budget
c) Production overhead budgets
d) Purchasing budget

56)a conformance specification with designs should contain more detail than a performance
specification with outputs. Is this statement TRUE or FALSE?

a) True, the supplier will need to know exactly what is required

b) false, the outputs are usually easier to describe than designs

c) false, the outputs should include detailed drawings of the requirement

d) True, the supplier will need to allow for innovation

57) A global manufacturer has been impacted by competitor investment in advanced robotics and is
struggling to compete with production times and cost. This would prove the biggest barrier to
entry in which of the following market places?
a) Hospitality
b) Finance
c) Aerospace
d) Insurance

58) Which of the following are advantages of zero-based financial budgeting?

1) Use of previous year figures
2) Emphasis on short term planning
3) Budget treatment as flexible
4) Focus on operational issues
 a) 1 and 4 only
b) 3 and 4 only
c) 2 and 3 only
d) 1 and 2 only

59) A UK engineering company imports more than 75% of its products from the USA. The finance
manager is creating the budget for next year and has told the procurement manager that to do
this, finance simply add a published inflation index to prices paid last year. Is this a good way for
a business to predict prices for next year?
a) No, an inflation index may include retail products and services which are not relevant
b) No, an inflation index is less accurate than a price adjustment formula
c) Yes, an inflation index is a realistic way to see if industrial prices are increasing
d) Yes, an inflation index is a quick way to check how prices are increasing

60) 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) Requirements of all companies to have 10000 or more employees
d) De-regulation of a previously government-run industry