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CPSM Exam 1 practice questions

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Question 1Sourcing Strategies and Supply Base Management

A company is deciding whether to machine a housing in its own plant or buy it from an external supplier. This decision is known as:

  1. Supplier certification
  2. Make-or-buy Correct answer.
  3. Reverse auctioning
  4. Spend analysis

Explanation

Make-or-buy analysis compares the fully loaded cost and strategic implications of internal production against purchasing from the market. It is the formal step used to choose between vertical integration and external supply. The other terms describe sourcing tools that do not address internal-versus-external production.

Question 2Sourcing Strategies and Supply Base Management

Sole sourcing differs from single sourcing in that sole sourcing involves:

  1. Only one supplier being capable of meeting the requirement Correct answer.
  2. Splitting volume between two equally qualified suppliers
  3. Producing the item internally rather than purchasing it
  4. Awarding all volume to one of several qualified suppliers

Explanation

Sole sourcing exists when the supply market itself offers only one viable source, for example because of patents, unique capability, or regulation. Single sourcing is a deliberate buyer choice to concentrate volume with one supplier even though alternatives exist. The distinction matters because sole-source situations cannot be cured by resourcing alone.

Question 3Sourcing Strategies and Supply Base Management

In the Kraljic portfolio matrix, items that represent a high share of spend but carry low supply risk belong in which quadrant?

  1. Non-critical
  2. Strategic
  3. Bottleneck
  4. Leverage Correct answer.

Explanation

The leverage quadrant combines high profit impact with low supply risk, so buyers exploit competition and volume to obtain favorable prices. Strategic items carry both high impact and high risk, bottleneck items carry high risk but low impact, and non-critical items carry low values on both axes. Each quadrant calls for a different sourcing approach.

Question 4Sourcing Strategies and Supply Base Management

Which statement best defines total cost of ownership for a sourcing decision?

  1. The invoice price plus inbound transportation charges
  2. All costs of acquiring and using an item over its life Correct answer.
  3. The annual spend committed to a single supplier
  4. The lowest quoted unit price among all technically qualified bidders

Explanation

Total cost of ownership aggregates acquisition, use, maintenance, quality, and disposal costs across the item's life cycle. Purchase price is only one element and can mislead when lifecycle costs differ among suppliers. Decisions based on price alone therefore often fail to minimize real cost.

Question 5Sourcing Strategies and Supply Base Management

The primary purpose of a spend analysis is to:

  1. Classify what the organization buys and from whom Correct answer.
  2. Assess the creditworthiness of each supplier
  3. Determine the selling price of finished goods
  4. Measure supplier delivery performance against contract

Explanation

Spend analysis consolidates and categorizes purchasing data by category, supplier, business unit, and volume to reveal consolidation and leverage opportunities. It is the analytical foundation for category strategy and sourcing priorities. Credit assessment, pricing to customers, and delivery measurement are separate activities.

Question 6Sourcing Strategies and Supply Base Management

When a buyer certifies a supplier, the buyer has:

  1. Verified that the supplier meets specified quality system requirements Correct answer.
  2. Reviewed the supplier's audited financial statements
  3. Committed to a minimum annual purchase volume
  4. Signed a multi-year sole-source agreement

Explanation

Certification confirms through audit or assessment that a supplier's processes and quality system satisfy the buyer's defined requirements. Certified status typically allows reduced incoming inspection and faster acceptance. Volume commitments, financial review, and exclusive agreements are separate commercial matters.

Question 7Sourcing Strategies and Supply Base Management

A reverse auction is most suitable for an item that is:

  1. A well-specified commodity with several qualified suppliers Correct answer.
  2. A patented component available from a single source
  3. A low-value item with no competitive supply market
  4. A customized design produced by one specialist firm

Explanation

Reverse auctions work when specifications are clear, the market has enough qualified bidders, and price is the dominant differentiator. These conditions let suppliers bid downward in real time and produce credible savings. Customized, patented, or non-competitive items lack the necessary specifiability or bidder depth.

Question 8Sourcing Strategies and Supply Base Management

Early supplier involvement means that the buyer:

  1. Audits suppliers only after production has started
  2. Involves suppliers in design before specifications are finalized Correct answer.
  3. Invites suppliers to bid after drawings and specifications are frozen
  4. Requires suppliers to hold safety stock on the buyer's behalf

Explanation

Early supplier involvement brings selected suppliers into product or process design while requirements are still flexible. Suppliers can then contribute manufacturing knowledge that lowers cost, improves quality, and shortens development time. Involvement after specifications are frozen captures little of this value.

Question 9Sourcing Strategies and Supply Base Management

A manufacturer cuts its supply base from 400 suppliers to 90 for a family of purchased parts. Which outcome is the most likely intended benefit?

  1. Guaranteed reduction in total cost of ownership
  2. Elimination of every form of supply risk
  3. Higher volume per supplier and greater buying leverage Correct answer.
  4. Faster development cycles for all purchased items

Explanation

Consolidating spend increases the volume each remaining supplier receives, which strengthens the buyer's negotiating position and justifies closer supplier management. Rationalization also reduces administrative complexity. It does not by itself guarantee lower total cost or eliminate risk, and it can actually increase concentration risk.

Question 10Sourcing Strategies and Supply Base Management

A buyer awards 70 percent of a part's volume to one supplier and 30 percent to a second qualified supplier. The main purpose of this arrangement is to:

  1. Satisfy reverse auction participation rules
  2. Reduce supply disruption risk while preserving competition Correct answer.
  3. Minimize administrative and transaction costs
  4. Remove the need for supplier performance measurement

Explanation

Dual sourcing with a deliberate volume split keeps a second qualified source active so the buyer can shift volume if the primary supplier fails. The ongoing split also preserves price and performance competition between the two suppliers. It increases rather than decreases administrative effort.

Question 11Sourcing Strategies and Supply Base Management

A should-cost model is used to:

  1. Set the resale price of the buyer's finished product
  2. Compare the quoted prices submitted by competing suppliers
  3. Record the actual price the supplier charged in the prior year
  4. Estimate a product's cost from its design, materials, and processes Correct answer.

Explanation

A should-cost model builds up an independent estimate of cost from material content, labor, overhead, and process requirements. Comparing that estimate with supplier quotes exposes margin and inefficiency and supports fact-based negotiation. It is a cost build-up, not a record of prices paid or quoted.

Question 12Sourcing Strategies and Supply Base Management

Which situation is a legitimate justification for sole sourcing?

  1. The buyer wants to simplify invoice processing
  2. The supplier offers the lowest quoted price in the market
  3. The incumbent has supplied the item for more than ten years
  4. Only one supplier owns the patented technology required Correct answer.

Explanation

Sole sourcing is justified only when the supply market genuinely offers one viable source, such as an exclusive patent, unique capability, or regulatory restriction. Longevity, low price, or administrative convenience describe buyer preferences and do not eliminate available alternatives. Those situations are single sourcing at most.

Question 13Sourcing Strategies and Supply Base Management

In supplier segmentation, a strategic supplier relationship is best characterized by:

  1. Annual competitive bidding on standard purchased parts
  2. Long-term collaboration and joint planning on critical items Correct answer.
  3. Catalog-based transactional ordering
  4. Price-only negotiation with frequent resourcing

Explanation

Strategic suppliers provide items or capabilities that materially affect the buyer's competitiveness, so the relationship is managed with joint planning, shared information, and long horizons. Transactional and competitive approaches fit routine or low-impact categories instead. Applying price-only tactics to strategic suppliers erodes the collaboration the buyer depends on.

Question 14Sourcing Strategies and Supply Base Management

A firm is evaluating a low-cost-country supplier for a precision machined part. The decision should be based primarily on:

  1. Total landed cost, quality capability, and continuity risk Correct answer.
  2. The supplier's country tariff rate only
  3. The quoted unit price difference alone
  4. The length of the supplier's payment terms

Explanation

Global sourcing decisions require comparison of total landed cost, which includes freight, duties, inventory, quality, and coordination costs, together with capability and continuity risk. A favorable unit price can be erased by logistics cost, quality failures, or disruption. Single factors such as tariff rate or payment terms are inputs, not the basis for the decision.

Question 15Sourcing Strategies and Supply Base Management

Outsourcing is generally most appropriate for activities that are:

  1. Non-core and available from capable external providers Correct answer.
  2. Protected by the firm's core patents
  3. Central to the firm's competitive differentiation
  4. Performed by the firm's most experienced engineers

Explanation

Outsourcing works best where the activity does not differentiate the firm and capable suppliers exist in a competitive market. This lets the firm concentrate resources on activities that create competitive advantage. Outsourcing differentiating or patented activities risks transferring core capability to a third party.

Question 16Sourcing Strategies and Supply Base Management

Supplier development refers to:

  1. Replacing underperforming suppliers with newly qualified sources
  2. Negotiating annual price reductions with incumbent suppliers
  3. Auditing suppliers' financial statements before award
  4. Buyer-led activities that raise a supplier's capability Correct answer.

Explanation

Supplier development is a deliberate program of training, technical assistance, process improvement, and performance feedback aimed at raising a supplier's capability. It is used when a supplier is strategically important but needs improvement rather than replacement. Replacing, price negotiation, and financial review are different interventions.

Question 17Sourcing Strategies and Supply Base Management

Tail spend in a procurement portfolio typically consists of:

  1. Many low-value transactions that are expensive to process Correct answer.
  2. Large strategic contracts with critical suppliers
  3. Capital equipment purchases approved by the board
  4. Spend placed with government or public agencies

Explanation

Tail spend is the long list of low-value, fragmented purchases that individually matter little but collectively incur disproportionate transaction cost. Because it is dispersed across many suppliers and buyers, it is usually addressed with catalogs, consolidated suppliers, or purchasing cards. Strategic contracts and capital purchases are typically high-value and closely managed.

Question 18Sourcing Strategies and Supply Base Management

Group purchasing organizations create value for their members mainly by:

  1. Aggregating demand to obtain volume-based pricing Correct answer.
  2. Guaranteeing supplier on-time delivery performance
  3. Transferring product liability to the suppliers
  4. Eliminating the need for supplier contracts

Explanation

A group purchasing organization combines members' requirements into larger volumes, giving the group more negotiating leverage than any member could achieve alone. Members still contract for supply, and delivery performance and liability remain governed by the terms each member negotiates. Aggregation of demand is the core mechanism.

Question 19Sourcing Strategies and Supply Base Management

Which indicator most directly signals emerging financial distress at a supplier?

  1. A rise in orders received from the buyer
  2. Lengthening payment days and late tax remittances Correct answer.
  3. Improving on-time delivery performance
  4. Successful renewal of ISO 9001 certification

Explanation

Stretching payments to its own suppliers and falling behind on tax obligations are classic liquidity warning signs that appear before formal insolvency. These indicators reflect cash constraints that can interrupt supply. Delivery improvements, order growth, and certification renewal are neutral or positive signals.

Question 20Sourcing Strategies and Supply Base Management

A firm shifts sourcing of a component from an offshore supplier to one in its own region. The most likely reason is to:

  1. Eliminate the need for incoming quality inspection
  2. Avoid the use of electronic procurement tools
  3. Shorten lead times and reduce logistics and disruption risk Correct answer.
  4. Raise the unit price to improve supplier margins

Explanation

Moving supply closer to the point of use shortens transit and replenishment lead times, lowers freight and inventory carrying cost, and reduces exposure to long-distance disruption. The trade-off is usually a higher unit price offset by lower total landed cost and better responsiveness. Quality inspection requirements and procurement systems remain.

Question 21Sourcing Strategies and Supply Base Management

For an item classified as strategic in the Kraljic matrix, the recommended sourcing approach is:

  1. Spot buying to capture short-term market price movements
  2. Long-term partnership with joint risk sharing and development Correct answer.
  3. Standardization and simplification to cut transaction cost
  4. Aggressive price competition among as many qualified suppliers as possible

Explanation

Strategic items combine high value impact with high supply risk, so the buyer manages them through close, long-term relationships that share risk and develop joint capability. Competitive price pressure and spot buying would sacrifice the security and collaboration such items require. Standardization is the usual remedy for non-critical items.

Question 22Sourcing Strategies and Supply Base Management

Before adding a second source for a critical component, a buyer should weigh the risk reduction against:

  1. The buyer's finished-goods inventory turnover
  2. The number of employees at the candidate supplier
  3. Added qualification, tooling, and administrative cost Correct answer.
  4. The candidate supplier's advertising spend

Explanation

Adding a second source creates duplication costs, including qualification trials, dedicated tooling, lower volume per supplier, and additional administrative and quality oversight. The business case holds only where the value of reduced disruption risk exceeds these costs. Supplier size and the buyer's inventory turnover do not capture these trade-offs.

Question 23Sourcing Strategies and Supply Base Management

Vertical integration into an activity currently performed by a supplier is most defensible when:

  1. The incumbent supplier consistently delivers on time
  2. The incumbent supplier's profit margins are unusually thin
  3. The activity is a small share of cost and widely available
  4. The firm holds proprietary know-how and the activity is strategically critical Correct answer.

Explanation

Integration adds fixed cost and management burden, so it is justified when the activity protects proprietary capability or is critical to competitive strategy and cannot be secured reliably in the market. Thin supplier margins or good service do not by themselves create value from owning the activity. Commodity activities are usually better bought.

Question 24Sourcing Strategies and Supply Base Management

A supply base is concentrated in one region exposed to hurricanes. The most effective structural mitigation is to:

  1. Add contractual penalties for late delivery
  2. Qualify alternate suppliers located in a different region Correct answer.
  3. Increase safety stock at the buyer's central warehouse
  4. Collect annual financial statements from suppliers

Explanation

Structural mitigation changes the design of the supply chain so that a single regional event cannot halt supply, which means qualifying sources in a different geographic area. Safety stock and penalties only buffer or allocate the consequence of disruption, and financial statements address a different risk. Geographic diversification removes the common-mode exposure.

Question 25Sourcing Strategies and Supply Base Management

A purchased item is supplied by one small firm that owns unique tooling, and the item is essential to production. The most appropriate action is to:

  1. Run an aggressive competitive bid to reduce the price
  2. Downgrade the item to non-critical and buy on the spot market
  3. Reduce inventory to free cash and rely on the supplier's lead time
  4. Secure supply with a long-term agreement while developing an alternative source Correct answer.

Explanation

This is a bottleneck situation: low value leverage but high supply risk, worsened by unique tooling that raises switching cost. The buyer should first assure supply through a long-term agreement and tooling ownership or access, then invest in developing an alternative source. Competitive bidding and inventory reduction would increase exposure without addressing the constraint.

Question 26Sourcing Strategies and Supply Base Management

A buyer needs suppliers to propose how they would deliver a complex, multi-year logistics service, including methodology, staffing, and management approach. Which document is most appropriate?

  1. A purchase order
  2. A request for proposal Correct answer.
  3. A request for quotation
  4. A request for information

Explanation

A request for proposal is used when the buyer needs suppliers to propose a solution, approach, or methodology rather than simply quote a price, which fits complex services whose requirements are not fully specified. Quotations assume a clearly defined requirement, and information requests do not seek a binding offer.

Question 27Sourcing Strategies and Supply Base Management

Adding freight, duties, inspection, and inventory carrying costs to a supplier's quoted price in order to compare offers is called:

  1. Total cost of ownership analysis Correct answer.
  2. A target-costing exercise on the part
  3. Price analysis of the quoted unit rate
  4. Value engineering of the specification

Explanation

Total cost of ownership adds all costs of acquiring, using, and owning an item so that competing offers are compared on an equivalent economic basis rather than on unit price alone. Price-only comparisons ignore cost drivers such as logistics, quality, and inventory.

Question 28Sourcing Strategies and Supply Base Management

Before building a sourcing strategy for a family of MRO items, the most useful first step is to:

  1. issue a request for quotation to the current suppliers
  2. analyze historical spend by supplier, plant, and item Correct answer.
  3. run a reverse auction for the top ten purchased items
  4. negotiate price cuts with the largest incumbent supplier

Explanation

Spend analysis establishes the size, concentration, and pattern of purchases and reveals where leverage and risk sit; without it a buyer cannot know which items or suppliers matter. Market analysis, strategy selection, and any sourcing event should follow from that picture.

Question 29Sourcing Strategies and Supply Base Management

A supplier code of conduct is best described as:

  1. a list of approved suppliers maintained by purchasing
  2. minimum ethical and labor standards suppliers must meet Correct answer.
  3. a scorecard used to rank suppliers on delivery and quality
  4. a negotiated contract clause that fixes unit prices for a year

Explanation

A code of conduct states the minimum ethical, labor, health and safety, and environmental expectations the buyer requires of suppliers, and is typically referenced in contracts and verified through audits or assessments. It defines required standards rather than commercial terms or performance ratings.

Question 30Sourcing Strategies and Supply Base Management

A preferred supplier list is best described as:

  1. a pre-qualified panel used for defined categories Correct answer.
  2. a ranking of suppliers by annual spend
  3. a record of every supplier that has ever invoiced the company
  4. a list of suppliers the buyer has rejected

Explanation

A preferred supplier list is a pre-qualified group of suppliers that have met capability, compliance, and commercial criteria for specific categories, allowing buyers to award or compete work within that group without repeating full qualification. It is a managed sourcing tool, not a historical or financial record.

Question 31Sourcing Strategies and Supply Base Management

Purchases made outside established contracts and preferred suppliers are called:

  1. Indirect spend
  2. Capital spend
  3. Maverick spend Correct answer.
  4. Tail spend

Explanation

Maverick spend is purchasing that bypasses negotiated agreements, preferred suppliers, or approved channels, and it erodes volume leverage and contract compliance. It is defined by the behavior of the buyer, not by the size or type of the purchase.

Question 32Sourcing Strategies and Supply Base Management

A specification that states the required output or function and leaves the design to the supplier is a:

  1. A brand-name specification
  2. A detailed design specification
  3. A material specification
  4. A performance specification Correct answer.

Explanation

A performance specification defines what the item must achieve, such as output, reliability, or interface requirements, and leaves the design solution to the supplier, which can encourage innovation. Design and material specifications prescribe how the item is made and constrain that freedom.

Question 33Sourcing Strategies and Supply Base Management

The main reason to place engineering, quality, and finance representatives on a sourcing team is to:

  1. transfer sourcing authority away from purchasing
  2. ensure stakeholder requirements shape the decision Correct answer.
  3. reduce the number of suppliers invited to bid
  4. shorten the time needed to issue a purchase order

Explanation

Sourcing decisions commit the organization to technical, quality, and financial outcomes, so the functions that own those requirements must help define criteria and evaluate suppliers. Cross-functional input improves decision quality and reduces costly changes after award.

Question 34Sourcing Strategies and Supply Base Management

In a weighted bid evaluation, the weight given to each criterion should reflect:

  1. the ease with which the criterion can be measured
  2. the number of suppliers that can meet the criterion
  3. how important the criterion is to the requirement Correct answer.
  4. the price offered by the lowest bidder on that criterion

Explanation

Weights express the relative importance of each criterion to the business requirement, and the scores are combined with those weights to produce a total that mirrors business priorities. Measurement ease and supplier counts affect data quality and competition, not importance.

Question 35Sourcing Strategies and Supply Base Management

Competitive bidding is most likely to produce a good outcome when:

  1. switching costs are high and the required lead time is short
  2. specifications are clear and several qualified suppliers bid Correct answer.
  3. the incumbent supplier holds proprietary technology and tooling
  4. the buyer has little leverage and annual volumes are small

Explanation

A competitive bid works when the requirement can be specified clearly, multiple qualified suppliers exist, and the buyer has enough volume and time to run a genuine contest. Weak competition, proprietary positions, or high switching costs remove the credible threat of moving the business.

Question 36Sourcing Strategies and Supply Base Management

The purpose of a supplier pre-qualification questionnaire is to:

  1. rank shortlisted suppliers using weighted scores
  2. collect detailed cost breakdowns from each bidder
  3. filter out suppliers lacking capability or compliance Correct answer.
  4. establish the final contract price before any negotiation

Explanation

A pre-qualification questionnaire screens the market on financial stability, certifications, capacity, and compliance so the buyer invests detailed evaluation effort only in a credible group. It is a screening step, not a pricing or scoring event.

Question 37Sourcing Strategies and Supply Base Management

Which set of measures best evaluates an established production supplier's ongoing performance?

  1. Number of employees, plant size, and years in business
  2. Defect rate, on-time delivery, and responsiveness Correct answer.
  3. Bid response time, brochure quality, and sales visits
  4. Stock price, credit rating, and annual revenue growth

Explanation

Ongoing performance is judged by outcomes the supplier controls and the buyer experiences, such as quality defects, delivery reliability, and responsiveness to problems, which can drive corrective action and future volume decisions. Financial and capability indicators describe the supplier but not its current delivery of the contract.

Question 38Sourcing Strategies and Supply Base Management

A buyer maps the suppliers of its supplier for a critical component mainly to:

  1. negotiate lower prices at the second tier
  2. uncover hidden risk deeper in the supply chain Correct answer.
  3. comply with internal purchase order procedures
  4. reduce the number of first-tier suppliers

Explanation

Sub-tier mapping exposes single points of failure, shared upstream sources, and capacity or financial exposure that are invisible at the first tier, enabling contingency planning with the first-tier supplier. It is a risk-visibility exercise, not a commercial or administrative one.

Question 39Sourcing Strategies and Supply Base Management

When replacing an incumbent supplier of a production part, the buyer should plan first for:

  1. immediate termination of the incumbent's contract
  2. a public announcement of the new award
  3. continuous supply, including tooling transfer Correct answer.
  4. renegotiation of the incumbent's price as a benchmark

Explanation

A supplier change on a production part carries the risk of line stoppage, so tooling, drawings, knowledge, and buffer stock must be secured before the switch. The transition plan exists precisely to prevent the gap that abrupt termination would create.

Question 40Sourcing Strategies and Supply Base Management

Category management differs from transactional purchasing mainly because it:

  1. focuses only on the lowest purchase price per order
  2. requires a competitive bid for every purchase
  3. manages related spend for long-term value Correct answer.
  4. applies only to direct materials

Explanation

Category management treats a group of related spend as a business unit, using cross-functional teams, market analysis, and multi-year strategies to deliver total value rather than order-by-order savings. It applies to indirect and service categories as well as direct materials.

Question 41Sourcing Strategies and Supply Base Management

A buyer who wants suppliers to bring forward innovation should:

  1. keep technical requirements confidential until the contract is signed
  2. share roadmaps and requirements early and reward useful ideas Correct answer.
  3. limit supplier contact to the purchasing department
  4. award business strictly on lowest price

Explanation

Suppliers invest in innovation when they understand the buyer's long-term needs and can see a route to reward, so early sharing of roadmaps and requirements combined with recognition or shared benefits encourages proposals. Secrecy and price-only awards remove any return on that investment.

Question 42Sourcing Strategies and Supply Base Management

A fixed-price contract is most appropriate when:

  1. the scope is likely to change frequently during the work
  2. requirements are well defined and cost is predictable Correct answer.
  3. the work is urgent and the design is still incomplete
  4. the buyer wants the supplier to absorb all unknown risk

Explanation

A fixed price places cost risk on the supplier, which is workable only when the requirement is well defined and the supplier can estimate its cost with confidence. Unstable scope or incomplete design makes such an arrangement unfair and invites claims or heavy contingency pricing.

Question 43Sourcing Strategies and Supply Base Management

Consolidating a part's volume from five plants to a single supplier usually:

  1. reduces the buyer's dependence on any single supplier
  2. raises total spend across the category
  3. increases leverage for better pricing and service Correct answer.
  4. increases administrative workload for the buying team

Explanation

Consolidation increases the share of business each supplier can win, which strengthens the buyer's negotiating position on price, service, and priority, and usually reduces the number of transactions and suppliers to manage. It also concentrates dependence on the chosen supplier.

Question 44Sourcing Strategies and Supply Base Management

Reducing the number of distinct part numbers in a product family typically:

  1. lowers the value of each contract awarded
  2. raises volume per part and buyer leverage Correct answer.
  3. requires more suppliers to be qualified
  4. raises inventory levels across the plant

Explanation

Fewer part numbers raise the quantity of each remaining part, which strengthens volume leverage and simplifies inventory, changeovers, and administration. Standardization is a demand-side lever that improves the buyer's supply-side position.

Question 45Sourcing Strategies and Supply Base Management

Including environmental and social criteria in supplier selection is most effective when the criteria are:

  1. applied only to suppliers in developing countries
  2. considered only after the contract has been awarded
  3. left to the supplier to self-report without verification
  4. in the solicitation and scored like other requirements Correct answer.

Explanation

Sustainability criteria change supplier behavior only when they are stated up front in the solicitation, weighted in the evaluation, and subject to verification. Unverified claims and post-award conditions cannot influence the sourcing decision and invite greenwashing.

Question 46Sourcing Strategies and Supply Base Management

A supplier's plant runs at 85 percent utilization and the buyer's new award would add 20 percent. The most prudent action is to:

  1. cancel the sourcing project until demand falls
  2. award the full volume and rely on the supplier to expand
  3. verify capacity plans and phase or split the award Correct answer.
  4. award and ask the supplier to subcontract any overflow

Explanation

An award that pushes a supplier beyond practical capacity threatens delivery for this part and for the supplier's other customers, so the buyer should confirm the capacity plan and phase or split the volume. Assuming expansion or allowing uncontrolled subcontracting shifts the risk back onto the buyer.

Question 47Sourcing Strategies and Supply Base Management

A buyer has quoted prices but no cost breakdown from a sole supplier. Which approach still provides a reasonableness check on the price?

  1. Cost analysis of labor, material, and overhead rates
  2. An open-book review of the supplier's records
  3. Comparison with prior prices and market indices Correct answer.
  4. A line-by-line review of the supplier's cost data

Explanation

When cost detail is unavailable, price analysis still tests reasonableness by comparing the quote with prior prices, market indices, or similar items. Cost analysis, should-cost build-ups from supplier data, and open-book reviews all require access to the supplier's cost structure.

Question 48Sourcing Strategies and Supply Base Management

An offshore quote is 18 percent lower on unit price but adds 45 days of pipeline inventory and a higher inspection failure rate. The award decision should rest on:

  1. total cost of ownership over the contract life Correct answer.
  2. the lead time quoted by each supplier only
  3. the quoted unit price, since it is the only hard number
  4. the supplier's country risk rating alone

Explanation

Offshore savings on unit price are real only after freight, duty, pipeline inventory carrying cost, quality failures, and lead-time risk are netted out, which is what total cost of ownership over the contract life captures. A single factor such as unit price, lead time, or country rating cannot capture the trade-off.

Question 49Sourcing Strategies and Supply Base Management

Exit criteria for a strategic supplier relationship are best defined:

  1. at the outset, in the contract terms Correct answer.
  2. after the relationship has ended
  3. when a replacement supplier is identified
  4. when performance problems first appear

Explanation

How and when the relationship can end, including notice periods, transition assistance, and return of tooling and data, should be agreed while both parties still have an incentive to reach agreement. Once problems appear, the buyer's leverage to negotiate exit terms is at its lowest.

Question 50Sourcing Strategies and Supply Base Management

A decentralized company wants to stop business units from awarding conflicting contracts to the same supplier. The most effective structural mechanism is:

  1. more frequent supplier scorecards shared between units
  2. a policy memo requesting that units cooperate voluntarily
  3. a central council with authority over key categories Correct answer.
  4. a larger purchasing staff in each business unit

Explanation

Conflicting awards across business units are a governance problem, and only a body with decision rights over key categories can align supplier choices, contract terms, and volume. Information tools and added local staff do not create the authority to coordinate.