CPSM Exam 1 cheat sheet

Make-or-buy analysis compares total relevant cost of internal production with the delivered cost of purchase; allocated fixed overhead is relevant only if it is avoidable by outsourcing.

Kraljic matrix plots profit impact against supply risk: non-critical (simplify, catalogues), leverage (competitive bidding, volume consolidation), bottleneck (secure supply, long-term agreements, dual source), strategic (partnership, joint development).

Sole source means only one supplier is capable (patent, proprietary spec); single source means one supplier was deliberately chosen from several qualified candidates.

Spend (Pareto) analysis typically shows roughly 80% of spend concentrated in about 20% of suppliers or categories; sourcing effort and leverage strategies follow that concentration.

Design decisions commit an estimated 70-80% of total product cost, while production-stage changes influence far less; this is the economic rationale for early supplier involvement.

Incoterms 2020 allocate cost and risk transfer only: EXW is the seller's minimum obligation, DDP the maximum; Incoterms do not govern title, payment terms, or governing law.

Reverse auctions fit buys that are well specified, commodity-like, and contested by several qualified suppliers; they fit poorly when design collaboration, capacity constraints, or total cost dominate.

Supplier rationalization lowers transaction cost and raises volume leverage but increases concentration risk; critical items need contingency plans, dual sourcing, or buffer arrangements.

Taper integration (partial in-house capability plus external supply) preserves market intelligence and competitive benchmarking while retaining internal capacity for surge or confidentiality.

A valid contract requires offer, acceptance, consideration, capacity, and legality; a writing is additionally required where the Statute of Frauds applies.

UCC Article 2 governs contracts for the sale of goods; common law governs service contracts; UCC 2-207 resolves conflicting standard forms in the battle of the forms.

UCC 2-201 requires a writing for sale-of-goods contracts of $500 or more, with exceptions such as specially manufactured goods and admitted contracts.

Cost risk allocation by contract type: firm-fixed-price (seller bears), cost-reimbursable (buyer bears), incentive or fixed-price-incentive-fee (shared by a negotiated share ratio above target cost).

Liquidated damages must be a reasonable pre-estimate of anticipated loss at contract formation; if they operate as a penalty, courts refuse to enforce them.

Requisition-to-pay cycle: need identification, requisition, RFx or quotation, bid evaluation, award and PO or contract, receipt and inspection, invoice, three-way match, payment.

Termination for default requires documented cause, notice, and an opportunity to cure; termination for convenience requires notice and payment for work performed plus a reasonable settlement.

Sealed competitive bidding suits clear specifications with price as the deciding factor; negotiated procurement suits complex or undefined requirements needing supplier dialogue.

Change control is a contract clause, not an informal practice: scope, price, and schedule changes must be documented in writing before work proceeds to preserve enforceability.

TCO = acquisition price + acquisition costs (freight, duty, inspection) + ownership costs (energy, maintenance, training, downtime, inventory) + end-of-life costs, minus residual value.

Learning curve: unit hours fall by a fixed percentage each time cumulative output doubles; on an 80% curve, the second lot of equal size takes 80% of the first lot's hours per unit.

Should-cost modeling builds cost bottom-up from material, direct labor, overhead, SG&A, and profit, then compares the total to the quoted price to locate the gap.

Price analysis compares a price with other prices (competitive bids, catalogues, historical, indices) and requires no supplier cost data; cost analysis examines the individual cost elements.

Break-even quantity = fixed costs / (unit price - variable cost per unit); the same relationship tests whether a volume discount or a new supplier is economically justified.

Annualized cost of forgoing a cash discount = [d / (100 - d)] x [365 / (N - D)]; for 2/10 net 30 the result is approximately 37% per year.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; demand is elastic when the absolute value exceeds 1.0.

Escalation clauses should reference a published, verifiable index (PPI, commodity index, labor index), specify the base period, and include caps, floors, or a collar to limit exposure.

Price is determined by market structure and competition: perfect competition makes the buyer a price taker, oligopoly invites negotiated and index-linked pricing, monopoly invites cost analysis and regulation.

Cost of quality has four categories: prevention, appraisal, internal failure, and external failure; external failure is the most expensive because it includes warranty, recall, and lost goodwill.

The 1-10-100 rule: a defect costs about 1 unit to prevent at design, 10 units to correct in process, and 100 units to remedy after it reaches the customer.

ISO 9001 specifies requirements for a quality management system and is third-party certified; ISO 14001 covers environmental management; ISO 45001 covers occupational health and safety.

Cpk = min[(USL - mean), (mean - LSL)] / (3 sigma); 1.33 is a common minimum acceptance level and 1.67 is often required for critical characteristics.

SPC signals special-cause variation when a point falls beyond a 3-sigma control limit or when a run of about seven points trends in one direction; only special causes justify process intervention.

Acceptance sampling uses the acceptable quality level with ANSI/ASQ Z1.4 tables to fix sample size and acceptance number; it controls the risk of accepting bad lots, not the process capability.

Supplier scorecards typically combine quality (PPM defects, reject rate), delivery (OTIF), cost performance, responsiveness, and compliance or sustainability indicators.

The US Foreign Corrupt Practices Act prohibits bribing foreign government officials to obtain or retain business and requires accurate books and internal accounting controls; the UK Bribery Act also covers commercial bribery.

Price fixing, bid rigging, and market allocation among competitors are per se illegal under antitrust law, and buyers must avoid sharing competitively sensitive pricing information with suppliers or competitors.