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CPSM practice questions

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Question 1Supply Management Core

Which statement best describes strategic sourcing as practiced in supply management?

  1. A clerical activity limited to converting approved requisitions into purchase orders
  2. A one-time bidding event conducted only when an existing contract expires
  3. A finance function responsible for setting the organization's selling prices
  4. A structured process that analyzes spend and supply markets to select the best source of supply Correct answer.

Explanation

Strategic sourcing is a cross-functional, continuous process that examines spend patterns, supply market conditions, and supplier capabilities before selecting sources. It is broader than order placement or a single bidding exercise and is not a pricing function.

Question 2Supply Management Core

A manufacturer evaluates making a component in-house versus buying it. Which factor most strongly favors the buy alternative?

  1. In-house capacity is idle and the fixed overhead is unavoidable
  2. The process is a core competency protected by proprietary know-how
  3. The supplier has specialized equipment and higher volumes that lower unit cost Correct answer.
  4. Confidentiality requirements for the design are extremely strict

Explanation

Make-or-buy decisions weigh strategic factors alongside quantitative ones. A supplier's specialized capability and scale economies reduce total cost and favor buying, whereas core competency, idle capacity, and confidentiality concerns favor making.

Question 3Supply Management Core

A request for information (RFI) is primarily used to accomplish which objective?

  1. Gather data on supplier capabilities and market options before a formal solicitation Correct answer.
  2. Establish legally binding prices with a single supplier
  3. Document internal approval of a purchase requisition
  4. Award a contract to the lowest responsive bidder

Explanation

An RFI is a market research tool used to learn about available suppliers, technologies, and commercial options. It carries no award commitment and typically precedes an RFP or RFQ that does solicit formal offers.

Question 4Supply Management Core

A negotiator's BATNA is best described as which of the following?

  1. The course of action a party will take if no agreement is reached Correct answer.
  2. The price level the negotiator hopes to achieve in the agreement
  3. The maximum concession the negotiator is authorized to grant
  4. The set of issues both parties can trade against one another

Explanation

BATNA is the best alternative to a negotiated agreement, meaning the value of what a party will do if talks fail. It sets the walk-away point and determines relative bargaining strength.

Question 5Supply Management Core

Under a firm-fixed-price contract, which party bears the risk of unexpected cost increases during performance?

  1. Both parties equally, through a shared cost pool defined in the contract
  2. Neither party, because the price is renegotiated at each quarterly review
  3. The seller, because the price does not change with costs actually incurred Correct answer.
  4. The buyer, because incurred costs are reimbursed as they arise

Explanation

A firm-fixed-price contract places cost risk on the seller, who must deliver at the agreed price regardless of cost overruns and who benefits from any cost savings. Buyers typically pay a premium for this certainty when requirements are well defined.

Question 6Supply Management Core

Total cost of ownership differs from purchase price because TCO does which of the following?

  1. Adds acquisition, operation, maintenance, and disposal costs over the asset's life Correct answer.
  2. Applies exclusively to capital equipment above a stated dollar threshold
  3. Includes only the invoice price plus applicable inbound freight
  4. Represents the lowest price obtainable from any qualified supplier

Explanation

TCO captures all costs a buying organization incurs across the life cycle of a purchase, including acquisition, use, maintenance, downtime, and disposal. Comparing suppliers on TCO often reverses a decision that lowest unit price alone would produce.

Question 7Supply Management Core

In a typical purchase-to-pay process, a purchase order is issued at which point?

  1. After an approved requisition, conveying the buyer's offer to the supplier Correct answer.
  2. Simultaneously with payment, so the transaction can be closed
  3. Before a requisition is created and before budget approval is obtained
  4. Only after the supplier's invoice has been received and matched

Explanation

The purchase order is the buyer's offer and is issued after internal demand has been authorized through an approved requisition. The supplier's acknowledgement forms the acceptance, and invoicing follows delivery.

Question 8Supply Management Core

Liquidated damages in a supply contract are intended to do which of the following?

  1. Pre-estimate the loss from a specified failure such as late delivery Correct answer.
  2. Cap the supplier's total liability for defective goods delivered
  3. Punish the supplier for any breach regardless of the loss actually suffered
  4. Allow the buyer to terminate the agreement at any time without cause

Explanation

Liquidated damages are a genuine pre-estimate of loss agreed in advance for a specified breach, most commonly late delivery, and they avoid the need to prove damages later. Courts generally enforce them only when they are a reasonable forecast rather than a penalty.

Question 9Supply Management Core

A team scores three suppliers on a 0-100 scale using weights of 40% for price, 35% for quality, and 25% for lead time. Supplier A scores 70 on price, 90 on quality, and 80 on lead time. What is Supplier A's weighted score?

  1. 83.5
  2. 80.0
  3. 76.5
  4. 79.5 Correct answer.

Explanation

Each criterion score is multiplied by its weight and the products are summed. The calculation is (0.40 x 70) + (0.35 x 90) + (0.25 x 80) = 28 + 31.5 + 20 = 79.5.

Question 10Supply Management Core

A buyer will pay no more than $50 per unit and the seller will accept no less than $46 per unit. Which statement about the bargaining zone is correct?

  1. A bargaining zone exists only at prices below $46
  2. A positive bargaining zone exists between $46 and $50 Correct answer.
  3. No zone exists because the two reservation points do not overlap
  4. The zone is determined by whichever opening offer is made first

Explanation

A zone of possible agreement exists wherever the buyer's maximum exceeds the seller's minimum. Here any price between $46 and $50 satisfies both reservation points, and the settlement within that range depends on leverage and tactics.

Question 11Supply Management Core

Price analysis differs from cost analysis in which respect?

  1. Price analysis compares offered prices with market benchmarks, prior prices, or competing quotes Correct answer.
  2. Price analysis is used only when the item is available from a single source
  3. Price analysis requires access to the supplier's internal accounting records
  4. Price analysis examines the individual elements of a supplier's cost buildup

Explanation

Price analysis evaluates the reasonableness of a quoted price by comparison, using catalog prices, historical data, index data, or competing offers. Cost analysis instead breaks down the supplier's actual cost elements and normally requires cost or pricing data.

Question 12Supply Management Core

A cost-reimbursable contract type is most appropriate under which circumstance?

  1. The supplier's production costs are stable and highly predictable
  2. The requirement is well defined and commercial off-the-shelf items are available
  3. The buyer requires maximum price certainty for a commodity purchase
  4. The scope is uncertain and costs cannot be estimated reliably in advance Correct answer.

Explanation

Cost-reimbursable arrangements are used when the work cannot be described precisely enough to price with confidence, so the buyer agrees to pay allowable costs. They reduce the risk of inflated seller contingencies but require strong cost monitoring and audit rights.

Question 13Supply Management Core

Involving a key supplier during the design phase of a new product is most likely to produce which outcome?

  1. Automatic transfer of all design liability to the supplier
  2. A guarantee that the final unit price will be the lowest available
  3. Fewer late design changes because supplier process knowledge is applied early Correct answer.
  4. The elimination of any need for a formal contract with that supplier

Explanation

Early supplier involvement brings manufacturing and process expertise into design decisions, which reduces costly changes after release. It does not remove commercial obligations, liability, or the need to test price competitiveness.

Question 14Supply Management Core

A buyer wants to measure on-time delivery as a supplier performance indicator. Which metric is most appropriate?

  1. The total spend committed to the supplier during the quarter
  2. The number of purchase orders issued to the supplier per month
  3. The percentage of order lines received on or before the promised date Correct answer.
  4. The count of approved requisitions recorded in the system

Explanation

An effective performance measure is specific, measurable, and within the supplier's control. On-time delivery is best expressed as the proportion of lines or orders received against the promised date, ideally with a defined tolerance window.

Question 15Supply Management Core

Competitive bidding is most likely to establish a fair market price under which condition?

  1. The buyer has no clear specification or statement of work
  2. Urgent delivery requires an immediate award to a known source
  3. Only one supplier is qualified and the tooling is proprietary to that supplier
  4. Several qualified suppliers can meet a well-defined requirement Correct answer.

Explanation

Competition works when the requirement is clear enough to bid on and enough qualified sources exist to create price tension. Ambiguous requirements or limited sources undermine comparability and invite disputes.

Question 16Supply Management Core

A reverse auction is best suited to which type of purchase?

  1. A long-term strategic partnership involving joint development work
  2. A customized research service with a scope that cannot be defined
  3. A commodity item with clear specifications and many qualified bidders Correct answer.
  4. A single-source patented component with no available substitutes

Explanation

Reverse auctions work where specifications are standardized, price is the dominant differentiator, and enough qualified suppliers will compete in real time. Complex, sole-source, or collaborative requirements do not fit the format.

Question 17Supply Management Core

An indemnification clause in a supply contract is designed to accomplish which purpose?

  1. Set the delivery schedule and the applicable shipping terms
  2. Allocate responsibility for third-party claims and related losses between the parties Correct answer.
  3. Define the sampling plan used for incoming quality inspection
  4. Describe the procedure for resolving minor invoice discrepancies

Explanation

Indemnification shifts responsibility for specified third-party claims, such as those arising from defective products or infringement, to the party best able to control the risk. It is usually paired with insurance requirements and liability limits.

Question 18Supply Management Core

Under an 80 percent learning curve, if the first unit requires 100 labor hours, how many hours should the second unit require?

  1. 100 hours
  2. 80 hours Correct answer.
  3. 64 hours
  4. 60 hours

Explanation

With an 80 percent learning rate, each doubling of cumulative output reduces unit labor time to 80 percent of the prior unit's time. The second unit therefore takes 0.80 x 100 = 80 hours, and the fourth unit would take 64 hours.

Question 19Supply Management Core

A spend analysis shows that 15 percent of suppliers account for 80 percent of total spend. What is the most useful next step?

  1. Reduce the number of suppliers by the same percentage across all categories
  2. Allocate negotiation effort equally across the entire supplier base
  3. Move every high-spend item immediately to a single-source contract
  4. Prioritize the high-spend suppliers for strategic sourcing and relationship management Correct answer.

Explanation

Spend concentration follows a Pareto pattern, so effort should follow value. High-spend suppliers and categories offer the greatest savings and risk leverage and warrant deeper sourcing analysis and closer management.

Question 20Supply Management Core

Which approach best characterizes integrative (collaborative) negotiation?

  1. Identifying shared interests and trading issues of differing value to expand the joint outcome Correct answer.
  2. Treating every issue as a fixed pie to be divided between the parties
  3. Concealing all information so the other party cannot gain any advantage
  4. Making a single take-it-or-leave-it offer at the outset of discussions

Explanation

Integrative negotiation looks for joint gains by trading on differences in priorities, timing, and risk tolerance rather than dividing a single issue. It depends on sharing enough information to reveal where value can be created.

Question 21Supply Management Core

A supplier offers terms of 2/10, net 30. Using a 365-day year, what is the approximate annualized cost of forgoing the discount?

  1. About 37.2 percent Correct answer.
  2. About 2.0 percent
  3. About 36.5 percent
  4. About 24.8 percent

Explanation

The annualized cost of forgoing a trade discount equals the discount divided by the net-of-discount amount, multiplied by the number of extra credit days in a year. Here (0.02 / 0.98) x (365 / 20) = 0.3724, or roughly 37.2 percent.

Question 22Supply Management Core

A buyer's should-cost model estimates $42 per unit at a volume of 10,000 units, but the supplier quotes $47. What is the most appropriate next step?

  1. Reduce the specification until the quoted price matches the model
  2. Disqualify the supplier immediately as unreasonable
  3. Accept the quote because a should-cost model is only an internal estimate
  4. Use the gap analysis to identify which cost elements to challenge in negotiation Correct answer.

Explanation

A should-cost model is a diagnostic tool that reveals where the supplier's price and the buyer's estimate diverge, such as material, labor, overhead, or margin. The gap should drive targeted questions and negotiation rather than automatic acceptance or rejection.

Question 23Supply Management Core

In a Kraljic portfolio matrix, an item that combines high profit impact with high supply risk should be managed as which type of item?

  1. A strategic item managed through long-term partnership and joint planning Correct answer.
  2. A leverage item sourced through competitive bidding to exploit volume
  3. A bottleneck item managed through volume insurance and backup sources
  4. A noncritical item with simplified purchasing routines

Explanation

The Kraljic matrix positions items by profit impact and supply risk. High impact combined with high risk defines strategic items, which justify collaborative, long-term relationships, joint planning, and active risk management.

Question 24Supply Management Core

A performance specification is generally preferred over a design specification when which condition applies?

  1. The buyer wants to control precisely how the item is manufactured
  2. The buyer holds detailed drawings and proprietary process knowledge in-house
  3. The buyer wants suppliers to propose innovative ways to meet a defined outcome Correct answer.
  4. Safety regulations prescribe a specific method of manufacture

Explanation

A performance specification states the required outcome, such as function, reliability, and interface requirements, and leaves the method to the supplier. This invites innovation and broader competition, while design specifications prescribe materials and processes for the buyer to control.

Question 25Supply Management Core

A termination for convenience clause allows the buyer to take which action?

  1. Transfer the contract to a different supplier without any compensation
  2. Extend the contract term unilaterally at the existing prices
  3. End the contract without the supplier being in default, usually paying for work performed plus a reasonable profit Correct answer.
  4. Cancel the contract only after the supplier has breached a material term

Explanation

A termination for convenience clause lets the buyer end the agreement when its needs change, provided it pays for accepted work, settled commitments, and a reasonable profit on work done. Default-based cancellation is a separate termination for cause provision.

Question 26Supply Management Core

A firm is deciding whether to produce a component internally or purchase it from an external supplier. This decision is best described as which type of analysis?

  1. Spend cube segmentation
  2. Supplier tiering
  3. Make-or-buy analysis Correct answer.
  4. Value chain mapping

Explanation

Make-or-buy analysis compares the cost and capability of internal production with external supply. It is a strategic sourcing decision that weighs quantitative and qualitative factors.

Question 27Supply Management Core

Which statement best describes a blanket purchase order?

  1. It authorizes a single delivery against a fixed price.
  2. It is used only for capital equipment purchases.
  3. It replaces the need for a supplier contract.
  4. It sets terms for repeated purchases over a period. Correct answer.

Explanation

A blanket purchase order establishes agreed terms, prices, or quantities for recurring purchases over a defined period. Buyers then release orders against it as needs arise.

Question 28Supply Management Core

In a consignment inventory arrangement, when does the buyer typically take ownership of the goods?

  1. When the buyer issues a purchase order
  2. When the supplier invoices the buyer
  3. When the goods arrive at the buyer's site
  4. When the goods are consumed or sold Correct answer.

Explanation

Consignment inventory remains the supplier's property until the buyer uses or sells the goods. Payment is usually triggered by consumption rather than receipt.

Question 29Supply Management Core

In a vendor-managed inventory (VMI) program, which party is primarily responsible for monitoring stock levels and deciding replenishment quantities?

  1. The supplier Correct answer.
  2. The third-party logistics provider
  3. The buyer's marketing department
  4. The buyer's accounts payable team

Explanation

VMI transfers replenishment responsibility to the supplier, which uses shared demand and inventory data to decide when and how much to ship. The buyer typically provides visibility rather than making each replenishment decision.

Question 30Supply Management Core

What is a primary benefit of standardizing purchased items across an organization?

  1. It transfers quality responsibility to the supplier.
  2. It eliminates the need for supplier competition.
  3. It guarantees the lowest possible unit price.
  4. It reduces variety and inventory costs. Correct answer.

Explanation

Standardization reduces the number of unique items, which can simplify inventory, lower ordering costs, and increase purchase leverage. It does not by itself guarantee price or quality outcomes.

Question 31Supply Management Core

A supplier code of conduct is primarily intended to do which of the following?

  1. Determine the buyer's marketing strategy
  2. Replace all supplier contracts
  3. State required ethical standards to suppliers Correct answer.
  4. Set the buyer's internal travel expense limits

Explanation

A supplier code of conduct communicates the buyer's expectations for ethics, labor practices, health and safety, and environmental compliance. It is often incorporated into contracts and used in supplier monitoring.

Question 32Supply Management Core

A buyer accepts a valuable personal gift from a supplier whose contract is up for renewal. This situation most directly creates which problem?

  1. A warranty obligation
  2. A force majeure event
  3. Conflict of interest Correct answer.
  4. A constructive change

Explanation

Accepting a valuable gift can improperly influence the buyer's judgment, creating a conflict between personal benefit and organizational duty. Most codes require disclosure or refusal of such gifts.

Question 33Supply Management Core

Under the Incoterms rule EXW (Ex Works), what is the seller's main obligation?

  1. Deliver goods to the buyer's named destination
  2. Arrange and pay for export clearance
  3. Make goods available at the seller's premises Correct answer.
  4. Load goods onto the buyer's carrier

Explanation

Under EXW, the seller makes the goods available at its own premises, and the buyer generally bears the main costs and risks of loading, export clearance, and transport. It represents the minimum obligation for the seller.

Question 34Supply Management Core

A new product has a market price of $120. The company requires a 25% margin on selling price. What is the target cost per unit?

  1. $30
  2. $90 Correct answer.
  3. $95
  4. $100

Explanation

A 25% margin on the $120 selling price is $30, so the allowable target cost is $120 minus $30, or $90. Target costing starts from the market price and works backward to an allowable cost.

Question 35Supply Management Core

Compared with traditional overhead allocation, activity-based costing (ABC) improves supply cost analysis by doing which of the following?

  1. Setting prices solely from competitor bids
  2. Using only direct labor hours as the allocation base
  3. Tracing costs to activities and cost drivers Correct answer.
  4. Ignoring overhead costs entirely

Explanation

ABC assigns overhead to activities and then to products or services based on the activities they consume. This generally gives a more accurate cost picture when products or services use overhead differently.

Question 36Supply Management Core

A buyer can make a part internally with fixed costs of $50,000 and variable cost of $10 per unit, or buy it for $20 per unit. At what annual volume do total make and buy costs break even?

  1. 2,500 units
  2. 10,000 units
  3. 5,000 units Correct answer.
  4. 4,000 units

Explanation

Set make cost equal to buy cost: $50,000 + $10x = $20x. Solving gives $50,000 = $10x, so x = 5,000 units.

Question 37Supply Management Core

In the economic order quantity (EOQ) model, what happens to the EOQ when ordering cost per order increases, all else equal?

  1. It stays unchanged
  2. It becomes zero
  3. It decreases
  4. It increases Correct answer.

Explanation

EOQ is the square root of (2DS/H), where S is ordering cost. A higher ordering cost makes larger, less frequent orders economical, so EOQ increases.

Question 38Supply Management Core

Safety stock is held primarily to protect against which of the following?

  1. Obsolescence of finished goods
  2. Loss of supplier discounts
  3. Increases in storage rent
  4. Demand variability Correct answer.

Explanation

Safety stock buffers against uncertainty in demand and, in practice, lead time. It helps maintain service levels when actual demand or replenishment timing differs from forecast.

Question 39Supply Management Core

In ABC inventory classification, which group typically receives the tightest management control?

  1. Items with the shortest shelf life
  2. Items with high annual dollar usage Correct answer.
  3. Items with the lowest annual dollar usage
  4. Items with the most suppliers

Explanation

ABC classification prioritizes items by annual dollar usage or value. A items, which account for the highest dollar usage, receive the tightest control because they have the greatest financial impact.

Question 40Supply Management Core

Supplier development efforts are most appropriate when a strategic supplier has which profile?

  1. Is being phased out within one month
  2. Consistently meets all requirements and has excess capacity
  3. Has capability but needs help improving performance Correct answer.
  4. Supplies only low-value, off-the-shelf items

Explanation

Supplier development targets suppliers that are strategically important and have the potential to improve, often through training, process support, or joint projects. It is not usually applied to suppliers that are already excellent, trivial, or exiting.

Question 41Supply Management Core

A company reduces its supply base from 200 to 40 suppliers. Which risk should the buyer monitor most closely after this change?

  1. Higher number of purchase orders
  2. Increased dependency on fewer suppliers Correct answer.
  3. Greater variation in supplier codes of conduct
  4. Reduced need for supplier performance metrics

Explanation

Consolidating suppliers can improve leverage and relationship depth, but it also increases concentration risk. The buyer should monitor continuity, capacity, and financial health of the remaining suppliers.

Question 42Supply Management Core

Which characteristic is most important for a service level agreement (SLA) metric?

  1. It is reviewed only at contract expiration
  2. It is based on supplier subjective opinion
  3. It is kept confidential from both parties
  4. It is measurable and outcome-based Correct answer.

Explanation

An SLA metric must be objective enough to measure performance against a defined service level. It should also be relevant and verifiable so both parties can track compliance.

Question 43Supply Management Core

A performance-based statement of work for services should focus primarily on which of the following?

  1. The supplier's internal reporting format
  2. The daily work schedule of supplier staff
  3. The exact tools the supplier must use
  4. Outcomes the supplier must achieve Correct answer.

Explanation

A performance-based SOW defines measurable results, standards, and acceptance criteria while leaving the supplier flexibility in how to achieve them. This encourages innovation and clarifies accountability.

Question 44Supply Management Core

Which control is most appropriate for a purchasing card (p-card) program?

  1. Using the card for personal purchases with reimbursement
  2. Eliminating all receipt requirements
  3. Transaction limits by merchant category and user Correct answer.
  4. Allowing unlimited spending by senior buyers

Explanation

P-card programs rely on controls such as individual transaction limits, merchant category restrictions, and reconciliation of receipts. These controls balance convenience with fraud prevention and policy compliance.

Question 45Supply Management Core

A U.S. buyer has a euro-denominated payable due in six months. Which action is a direct financial hedge of the currency exposure?

  1. Increasing safety stock
  2. Buying a euro forward contract Correct answer.
  3. Extending payment terms
  4. Requesting a supplier price discount

Explanation

A forward contract locks in an exchange rate for a future payment, directly offsetting the risk that the euro will rise against the dollar. Other commercial terms may shift risk but do not lock the rate.

Question 46Supply Management Core

A cost-plus-incentive-fee contract has a target cost of $200,000, target fee of $20,000, a 70/30 buyer/seller share ratio, and a ceiling price of $260,000. Actual cost is $230,000. What is the seller's total reimbursement before considering the ceiling?

  1. $241,000 Correct answer.
  2. $239,000
  3. $230,000
  4. $250,000

Explanation

The cost overrun is $30,000. The seller bears 30% of the overrun, or $9,000, so the fee becomes $20,000 minus $9,000 = $11,000. Total reimbursement is actual cost plus fee: $230,000 + $11,000 = $241,000, which is below the ceiling.

Question 47Supply Management Core

Which set of early-warning indicators most likely signals that a supplier may be in financial distress?

  1. Falling cash flow and rising days payable Correct answer.
  2. Increasing on-time delivery and lower debt
  3. Rising inventory turnover and stable margins
  4. Growing order backlog and new financing

Explanation

Deteriorating operating cash flow and stretched payables can indicate liquidity strain and difficulty meeting obligations. Buyers should combine these signals with financial statements, credit data, and supplier communication.

Question 48Supply Management Core

A supplier offers a 2% discount for payment in 10 days instead of 60 days. Using a 365-day year, what is the approximate annualized return on the early payment?

  1. 2.0%
  2. 14.9% Correct answer.
  3. 7.3%
  4. 24.3%

Explanation

The approximate annualized cost of forgoing the discount is (0.02 / 0.98) × (365 / 50). That equals about 0.0204 × 7.3, or 14.9%.

Question 49Supply Management Core

Under common law, a buyer's response to a supplier's offer that changes a material term is generally treated as which of the following?

  1. A counteroffer Correct answer.
  2. A void contract
  3. A firm offer
  4. A valid acceptance

Explanation

Common law traditionally follows the mirror image rule: acceptance must match the offer. A response that materially changes terms operates as a counteroffer and does not form a contract by acceptance alone.

Question 50Supply Management Core

A firm is deciding whether to outsource an activity. Which factor most strongly argues against outsourcing it?

  1. The activity uses widely available technology
  2. The activity has high variable cost
  3. The activity has low customer visibility
  4. It is a core competitive advantage Correct answer.

Explanation

Activities that underpin a firm's distinctive advantage are usually kept in-house to protect know-how and strategic control. High cost alone, widely available technology, or low visibility do not necessarily make an activity core.