CPSM Exam 2 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Total cost of ownership

Sum of purchase price, acquisition, usage and end-of-life costs, minus residual value. Used instead of unit price when bids differ in quality, logistics or lifecycle cost.

Cost of quality

Prevention plus appraisal plus internal failure plus external failure costs. External failures are usually largest and least visible, so sourcing decisions should weigh them explicitly.

Cash-to-cash cycle

Days inventory outstanding plus days sales outstanding minus days payable outstanding. Extending payment terms raises DPO and frees cash, but only if supplier health is not endangered.

Make-or-buy analysis

Comparison of fully loaded internal cost, including overhead allocation and tied-up capital, against supplier landed cost plus transition, quality and supply-risk costs.

Early supplier involvement

Bringing suppliers into design before specifications are frozen. Roughly 70 to 80 percent of product cost is locked in at design, so late procurement involvement limits savings.

Quality function deployment

Method linking customer requirements to engineering characteristics and target values. Procurement contributes supplier-capability data so specifications remain achievable at target cost.

Kraljic portfolio matrix

Two-axis model using profit impact and supply risk to place categories in non-critical, leverage, bottleneck or strategic quadrants, each with a distinct sourcing strategy.

Seven-step strategic sourcing

Profile spend, assess market, develop strategy, screen suppliers, negotiate and contract, implement transition, then measure and improve. Each step has defined deliverables and gates.

Should-cost model

Bottom-up estimate of material, labor, overhead, margin and logistics. It gives the buyer an independent price benchmark when supplier cost data is opaque.

Reverse auction fit

Best for leverage categories with clear, comparable specifications and several qualified bidders. Poor fit for strategic or bottleneck items where capability and risk outweigh price.

Weighted bid scorecard

Evaluation method scoring price, quality capability, capacity, financial stability, lead time and sustainability against weights agreed before bids are opened, preventing post-hoc rationalization.

Fixed-price versus cost-plus

Under fixed-price the supplier bears cost-overrun risk; under cost-plus the buyer does. Time-and-materials suits uncertain scope, and index clauses allocate commodity price risk.

Spend analysis normalization

Cleaning supplier names, units of measure and commodity codes before aggregating spend. Unnormalized invoice data understates category leverage and hides maverick buying.

Risk exposure scoring

Probability of occurrence multiplied by impact. Mitigation budget should be ranked against the highest exposure items rather than the most familiar or vocal ones.

Force majeure clause

Excuses performance for defined events beyond reasonable control. It typically does not excuse payment obligations and usually requires prompt notice and mitigation efforts.

Incoterms risk transfer

Incoterms 2020 define where cost, risk and customs duty pass between buyer and seller. Risk transfer point is distinct from the point where cost transfers.

Conflict minerals 3TG

Tin, tantalum, tungsten and gold. Dodd-Frank Section 1502 requires country-of-origin inquiry and, where needed, OECD-aligned due diligence across the supply chain.

FCPA third-party risk

The FCPA prohibits bribery of foreign officials and requires accurate books. Agents and intermediaries are the highest-risk channel and need due diligence and contractual representations.

Denied-party screening

Checking suppliers and shipments against sanctions, entity and export-control lists before onboarding or shipping. It is a legal control, not a procurement preference.

Supplier distress signals

Late payments to sub-tier suppliers, rising leverage, going-concern language, key departures, and sudden requests for prepayment or shortened terms all warrant financial review.

Safety stock formula

Z times demand standard deviation times square root of lead time. When lead-time variability is material, combine variances rather than adding standard deviations.

Economic order quantity

Square root of two times annual demand times order cost, divided by annual holding cost per unit. It minimizes the combined ordering and holding cost.

Reorder point

Average demand during lead time plus safety stock. Under continuous review it triggers an order of EOQ size; periodic review instead orders up to a target level.

Bullwhip effect causes

Order batching, promotions, shortage gaming, long lead times and forecasting on local rather than end-customer demand. Sharing point-of-sale data and cutting batch size dampen it.

Forecast bias versus accuracy

Bias is the mean of forecast minus actual, revealing systematic over- or under-forecasting. MAPE and MAD measure error magnitude but can hide consistent directional bias.

ABC inventory classification

Ranking SKUs by annual dollar usage. A items are few but high value and need tight control; C items justify simplified policies and lighter counting.

Total landed cost logistics

Unit price plus freight, duties, insurance, handling, in-transit carrying cost and currency conversion. Modal choice should be made on this total, not freight rate alone.

OTIF delivery metric

Orders delivered complete and on time divided by total orders. It is stricter than on-time delivery because partial shipments count as failures.

DPMO and Six Sigma

Defects divided by units times opportunities per unit, multiplied by one million. Six Sigma performance corresponds to 3.4 defects per million opportunities.

DMAIC improvement cycle

Define, Measure, Analyze, Improve, Control. It is the Six Sigma project cycle, while PDCA is the broader continuous improvement loop used in supplier development.

Supplier segmentation for SRM

Grouping suppliers as strategic, collaborative, transactional or at-risk. Relationship investment, review cadence and contract length should follow the assigned segment.

Gainsharing contract

Buyer and supplier split verified cost reductions. The agreement must fix the baseline, verification method and measurement window before the project starts.