[Mar 29, 2025] L4M2 Sample with Accurate & Updated Questions
L4M2 Exam Info and Free Practice Test | Exam4Tests
The Chartered Institute of Procurement and Supply (CIPS) is a globally recognized professional body that provides training and certification in the field of procurement and supply chain management. One of the certifications offered by CIPS is the Level 4 Managing Procurement and Supply qualification. Within this qualification, one of the modules that professionals can take is Defining Business Needs (L4M2).
NEW QUESTION # 12
Which of the following are most likely to negatively affect the suppliers' bargaining power in a specific market? Select TWO that apply:
- A. There are almost no threats of backward integration
- B. There are no differences among suppliers' products
- C. Substitute products are readily available in the market
- D. Buyers incur high cost when they change their suppliers
- E. Many suppliers are intent on integrating buyers into their business
Answer: B,C
Explanation:
The bargaining power of supplier is a major determinant of the structure of an industry and also how much profit is available to organisation operating in that industry. Supplier is weak if:
- Substitutes are available and easy to access
- Suppliers are small and fragmented
- The industry is important to the seller
- The sellers' product or service is not an important of the industry's value chain
- The sellers' product or service is undifferentiated
- There are no significant switching costs
- There is no threat of forward integration.
Suppliers may have more power:
- If they are in concentrated numbers compared to buyers.
- If there are high switching costs associated with a move to another supplier.
- If they are able to integrate forward or begin producing the product themselves.
- If they have specific expertise or technology needed to manufacture goods.
- If their product is highly differentiated.
- If there are many buyers and none make up significant portions of sales.
- If there are no substitutes available.
- If there are strong end users who can exert power over the organization in favor of a supplier (This can be the case in labor situations).
In all of these cases, the bargaining power of suppliers is high to demand premium prices and set their own timelines.
LO 2, AC 2.2
NEW QUESTION # 13
A company is planning the procurement of an IT system and wants to agree a through-life contract with the supplier to ensure ongoing system support. The first step in producing that specification should be to:
- A. Build a design
- B. Define the user requirements
- C. Prepare tendering documents
- D. Identify the IT system supplier
Answer: B
Explanation:
Writing a high-quality specification is very crucial in every purchase. In through-life management, it is even more important since the assets often have very high value. Defining user requirement is the first step to write a specification. Without doing this right, many problems may arise in later stages.
NEW QUESTION # 14
Andrew is responsible for procurement of capital assets at Lumber Ltd. He is devising new business case for the purchase of a new band saw. The purchase price of the saw is $50,000. Andrew estimates that the machine will generate $10,000 per year of net cash flow. What is the payback period of this band saw?
- A. 4 years
- B. 5 years
- C. 3 years
- D. 10 years
Answer: B
Explanation:
Payback period is the time in which the initial outlay of an investment is expected to be recovered through the cash inflows generated by the investment. It is one of the simplest investment apprais-al techniques.
Since cash flow estimates are quite accurate for periods in the near future and relatively inaccurate for periods in distant future due to economic and operational uncertainties, payback period is an indicator of risk inherent in a project because it takes initial inflows into account and ignores the cash flows after the point at which the initial investment is recovered.
The formula to calculate the payback period of an investment depends on whether the periodic cash inflows from the project are even or uneven.
If the cash inflows are even (such as for investments in annuities), the formula to calculate payback period is:
Payback Period = Initial Investment / Net Cash Flow per Period
When cash inflows are uneven, we need to calculate the cumulative net cash flow for each period and then use the following formula:
Payback Period =A + (B/C)
Where,
A is the last period number with a negative cumulative cash flow;
B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and C is the total cash inflow during the period following period A Cumulative net cash flow is the sum of inflows to date, minus the initial outflow.
Reference:
- Payback Period | Formulas, Calculation & Examples (xplaind.com)
- CIPS study guide page 44-47
LO 1, AC 1.3
NEW QUESTION # 15
Which of the following is an advantage of competitive benchmarking over other types of bench-marking?
- A. Similarity among processes
- B. Cost effectiveness
- C. Limited access to competitor's data
- D. Different corporate culture
Answer: A
Explanation:
Competitive benchmarking
Competitive benchmarking is a direct competitor-to-competitor comparison of a product, service, process, or method. This form of benchmarking provides an opportunity to know yourself and your competition better; combine forces against another common competitor. An example of competitive benchmarking within the Department of Defense, might include contrasting Army and Air Force supply systems for Joint initiatives.
Within the private sector, two or more American car companies might benchmark for mutual benefit against common international competitor; or, rival chemical companies benchmark for environmental compliance.
Benefits
- Comparing like processes
- Know your competition better
- Possible partnership
- Useful for planning and setting goals
- Similar regulatory issues
Challenges
- Difficult legal issues
- Relatively low performance improvement
- Threatening
- Limited by trade secrets
- May provide misleading information
- May not get best-in-class comparisons
- Competitors could capitalize on your weaknesses
Source: USN Benchmarking Handbook
NEW QUESTION # 16
Which of the following are considered as direct costs in a construction company? Select TWO op-tions
- A. Clerical assistants who maintain the office
- B. An employee is hired to work on a project, either exclusively or for an assigned number of hours
- C. Advertising and marketing communication
- D. The materials and supplies needed for the company's day-to-day operations.
- E. Raw materials
Answer: B,E
Explanation:
Direct costs are directly associated with the production of a good or service. In this question, 'An employee is hired to work on a project, either exclusively or for an assigned number of hours' and 'Raw materials' are directly related to producing the product.
Indirect costs are the general costs of the organisation - these costs cannot easily be attributed to specific products or services (also known as overheads). 'The materials and supplies needed for the company's day-to-day operations' or 'Clerical assistants who maintain the office' or 'Advertising and marketing communication' is example of indirect cost.
Reference:
LO 1, AC 1.2
NEW QUESTION # 17
Which of the following is a challenge of making a business case for straight re-buys?
- A. Effective inventory control
- B. Research of procurement process
- C. Terms and conditions
- D. Identifying suitable suppliers
Answer: A
Explanation:
For straight re-buy, the specifications for the products are known. Generally, there will be an existing contract with supplier in place. The business need is challenged annually, only on the annual demand. So effective inventory control will help procurement successfully manage straight re-buy.
NEW QUESTION # 18
Which of these causes variances in budgets?
* Quantity discounts
* Substitute goods
* Loan repayments
* Corporation tax
- A. 2 and 3 only
- B. 1 and 2 only
- C. 2 and 4 only
- D. 1 and 4 only
Answer: B
Explanation:
Detailed Explanation:
* Quantity discounts: Changes in order quantities can lead to cost savings, impacting budget forecasts.
* Substitute goods: Using alternative products can alter planned expenses, causing budget deviations.
Loan repayments and taxes are fixed financial obligations and do not directly impact procurement budgeting. Reference: CIPS Level 4, Cost Management.
NEW QUESTION # 19
What will be the result of retaliation between business rivals in an industry?
- A. More new entrants
- B. Lower profit
- C. Higher exit barrier
- D. Greater bargaining power of suppliers
Answer: B
Explanation:
Industry rivalry-or rivalry among existing firms-is one of Porter's five forces used to deter-mine the intensity of competition in an industry. Other factors in this competitive analysis are:
- Barriers to entry
- Bargaining power of buyers
- Bargaining power of suppliers
- Threat of substitutes
Industry rivalry usually takes the form of jockeying for position using various tactics (for example, price competition, advertising battles, product introductions). This rivalry tends to increase in intensity when companies either feel competitive pressure or see an opportunity to improve their position.
In most industries, one company's competitive moves will have a noticeable impact on the competition, who will then retaliate to counter those efforts. Companies are mutually dependent, so the pattern of action and reaction may harm all companies and the industry.
Some types of competition (for example, price competition) are very unstable and negatively influence industry profitability. Other tactics (for example, advertising battles) may positively influence the industry, as they increase demand or enhance product differentiation.
References
Porter, M. (1998). Competitive Strategy. New York: Free Press. pp. 17-23.
CIPS study guide page 86-87
LO 2, AC 2.2
NEW QUESTION # 20
Azram, a procurement analyst, has been tasked with applying whole life asset management when purchasing a piece of laboratory equipment. Was this the correct course of action?
- A. Yes, because this considers all associated costs
- B. No, because this covers various transactional costs
- C. Yes, because this focuses only on the price of the equipment
- D. No, because this considers the costs of quality
Answer: A
NEW QUESTION # 21
A charity is reviewing their spend and budget after an operation in flooded areas. They realise that the operators save money against the budgeting plan. This saving is known as...?
- A. Positive variance
- B. Positive budget
- C. Negative variance
- D. Negative budget
Answer: C
Explanation:
The difference between the actual spend and budgeted spend is known as variance. The formula for variance is:
Variance = Actual spend - Budgeted spend
Variances can be adverse/unfavourable or favourable ie they can be positive or negative.
Be very careful with these terms. A positive or a negative variance may be favourable or it may be adverse/ unfavourable.
Adverse variances
Adverse variances are those variances that are unfavourable to the firm. Examples would be sales below plan; costs above budget, cash receipts lower than expected, and overtime payment more than forecast.
Favourable variances
Favourable variances are those variances that are beneficial to the business. Examples would be sales ahead of plan, costs below budget, and wages below forecast.
Positive variance
A positive variance occurs where 'actual' exceeds 'planned' or 'budgeted' value. Examples might be actual sales are ahead of the budget.
Negative variance
A negative variance occurs where 'actual' is less than 'planned' or 'budgeted' value. Examples would be when the raw materials cost less than expected, sales were less than predicted, and labour costs were below the budgeted figure.
When the operators create saving, it means that the Actual spend is less than Budgeted spend. Therefore the variance is negative.
NEW QUESTION # 22
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. Define terms and conditions of the contract
- C. Plan its functional strategy for the next year
- D. Plan its finances for the next year
Answer: D
NEW QUESTION # 23
Which of the following problems may be identified as closed problems? Select TWO that apply:
- A. There are not enough data for procurement analytics
- B. Shortage of key medicines in healthcare industry
- C. A cyber attack takes down whole company's IT system
- D. Logistics costs incur a large portion in wholesale prices
- E. The suppliers don't comply with the company's policy on underage labour.
Answer: B,C
NEW QUESTION # 24
An example of a performance specification is a ...
- A. Technical drawing
- B. List of inputs
- C. List of outputs
- D. Brand name
Answer: C
NEW QUESTION # 25
Honda of America Manufacturing is a well established automobile manufacturer. It purchases tens of thousands of materials and parts from suppliers, however, only few of them are strategic. To these suppliers, Honda's procurement manager requires them to send details of labour, materials, overhead cost and profit. However, the suppliers are reluctant to submit such confidential infor-mation. Is the procurement manager's action appropriate?
- A. No, because no suppliers are willing to show sensitive information on their costs and profit.
- B. Yes, because the procurement manager can get a good insight from the market
- C. No, because procurement manager should conduct life-cycle analysis
- D. Yes, because strategies can be introduced for reducing cost and improving the supplier relationships.
Answer: D
Explanation:
With strategic suppliers, the aim should be to work co-operatively with them to find ways of reducing costs to achieve a target cost. It is necessary to work with the suppliers in carrying out open book costing by having first persuaded them of the need to do it. Open book can be used to establish a Target Cost, a Compensation Event value and can eventually be used to ensure the payment of actual costs to an organization. A number of forms of contract cater for this functionality of which only the NEC goes to into any great depth of methodology.
If the suppliers worry about leak of confidential information, procurement team can suggest them to sign a non-disclosure agreement. The buying organisation should also comply with data protection regulations. The Employer / individual responsible for a project's costs should ultimately take a pragmatic and sensible approach with regard to commercially or personally sensitive data provided by the contractor. The primary goal of all open book cost management is to provide Employer comfort and security in the accuracy of commercial data; this effectively means striking a balance between undertaking full audits and blind faith.
Reference:
LO 1, AC 1.2
NEW QUESTION # 26
Due to increasing demand, a local restaurant is requesting its fish vendor to supply larger quantity. The restaurant manager also asks the vendor whether it is possible to reduce the total price by 5%. This is known as...?
- A. New purchase
- B. Capital purchase
- C. Straight rebuy
- D. Modified rebuy
Answer: D
Explanation:
There are three major types of buying situations, which are new purchase, modified rebuy and straight rebuy.
Three factors make the buying situations be different from the others, customers may face different problems in these situations.
A new purchase is a situation requiring the purchase of a product for the very first time.
A straight rebuy is when a company places a second order with a supplier that is identical to the first purchase it made.
A modified rebuy is when a company orders again from a supplier, but wants to change some as-pect of the order, such as the quantity, packaging, product features, or delivery times. The scenario above is an example of modified rebuy.
NEW QUESTION # 27
Which of the following sources of information are considered as primary data? Select TWO that apply.
- A. The information about specific market sectors from trade associations
- B. RFI
- C. Commercial publishers of market reports
- D. The collection of data from surveying customers
- E. Reports in business magazines
Answer: B,D
Explanation:
The aim of this question is to check students' understanding of different types of data. There are 2 types of data:
- Primary data is the collection of original or raw data which are generated from field research. In this case, only RFI and surveys from customers are considered as primary data.
- On the other hand, secondary data is public information that has been collected by others. It is typically free or inexpensive to obtain and can act as a strong foundation to any research project - provided you know where to find it and how to judge its worth and relevance. Examples of secondary data are government statistics, industry associations, trade publications, published market reports, etc.
NEW QUESTION # 28
An automotive manufacturer is sourcing rubber components from Company A. The specification given to the supplier state that the component should be 1 meter long, without mentioning the tolerance. Enthusiast with the opportunity, engineers at Company A work hard to cut the components with tolerance at only +/- 1mm.
The head and tail of the component is then joined together to form a circular band. After that it is stretched over another component. To fit this purpose, the rubber component can be at any length from 80cm to 110cm.
This is an example of...?
- A. Unnecessary motion
- B. Defects
- C. Waiting
- D. Over processing
Answer: D
Explanation:
This questions is intended to ask students about types of waste in Lean principles.
Lean was born out of manufacturing practices but in recent time has transformed the world of knowledge work and management. It encourages the practice of continuous improvement and is based on the fundamental idea of respect for people. Womack and Jones defined the five principles of Lean manufacturing in their book "The Machine That Changed the World". The five principles are considered a recipe for improving workplace efficiency and include: 1) defining value, 2) mapping the value stream, 3) creating flow,
4) using a pull system, and 5) pursuing perfection.
Lean principles aim to eliminate waste in processes. The eight wastes of Lean principles are:
- Defects
- Over-production
- Waiting
- Not using talent
- Transport and handling
- Inventory
- Motion waste
- Excess processing
In the scenario, the component is processed more than necessary. The engineers try to make them as accurate as possible with very little tolerance. In fact, the component does not need to be that precise. This excesses buyer's requirements and incurs costs for both buyer and supplier. The scenario is an example of over processing (or excess processing).
Overprocessing is one of the seven wastes of lean manufacturing (or 7 mudas); Overprocessing is adding more value to a product than the customer actually requires such as painting areas that will never be seen or be exposed to corrosion.
Overprocessing as one of the seven wastes is caused by having unclear standards and specifications, many operators will try to do the best job possible and will not always be aware of what truly adds value to the product or even the end use. They will therefore often expend time polishing and finishing components that do not require it.
NEW QUESTION # 29
Which of these are advantages of using a conformance specification? Select TWO that apply.
- A. It enables supplier flexibility and product innovation
- B. It provides evidence of requirements if there is a dispute
- C. It forces consideration of actual product needs
- D. It enables value-for-money solutions
- E. There is a smaller supplier base to select from
Answer: B,C
NEW QUESTION # 30
At which stage of through-life contract management, procurement team needs to identify sources of risk and the ways to mitigate them?
- A. Supplier relationship stage
- B. Specification stage
- C. Contracting stage
- D. Tendering stage
Answer: A
Explanation:
Risk management has become incredibly complex, especially for capital purchase which requires through-life contract. Any source of risks should be identified and closely managed from the specification stage.
There should be sufficient information in the specification to minimise risks later in the through-life contract. Here is something to consider:
- Make sure the parties to the contract are clearly identified. This is particularly important if a prime contractor is being used. Allow them to subcontract elements of the specification.
- Clearly identify any testing and quality assurance procedures and who will perform them.
- Document every important aspect of the specification including a project plan
- Include a reasonable limitation of liability clause in the contract and reference it in the specifica-tion
- Identify any guarantees that are needed
- Be clear on what insurance will and will not cover
- Make sure there is clear audit trail of any changes to the specification together with approvals LO 3, AC 3.2
NEW QUESTION # 31
Which of the following are major factors when determining the bargaining power of buyers? Select THREE that apply.
- A. Dependence of a buyer's purchase on a particular supplier
- B. Interest costs
- C. Number of buyers relative to suppliers
- D. Switching costs
- E. Life cycle costs
- F. Cash flow
Answer: A,C,D
NEW QUESTION # 32
Which of the following is an advantage of competitive benchmarking over other types of bench-marking?
- A. Similarity among processes
- B. Cost effectiveness
- C. Limited access to competitor's data
- D. Different corporate culture
Answer: A
Explanation:
Competitive benchmarking
Competitive benchmarking is a direct competitor-to-competitor comparison of a product, service, process, or method. This form of benchmarking provides an opportunity to know yourself and your competition better; combine forces against another common competitor. An example of competitive benchmarking within the Department of Defense, might include contrasting Army and Air Force supply systems for Joint initiatives. Within the private sector, two or more American car companies might benchmark for mutual benefit against common international competitor; or, rival chemical companies benchmark for environmental compliance.
Benefits
- Comparing like processes
- Know your competition better
- Possible partnership
- Useful for planning and setting goals
- Similar regulatory issues
Challenges
- Difficult legal issues
- Relatively low performance improvement
- Threatening
- Limited by trade secrets
- May provide misleading information
- May not get best-in-class comparisons
- Competitors could capitalize on your weaknesses
Source: USN Benchmarking Handbook
Reference:
LO 1, AC 1.3
NEW QUESTION # 33
Which of the following are characteristics of effective financial markets?
* Market stability is maintained
* Market volatility is encouraged
* Investment is encouraged
* The level of regulation is reduced
- A. 2 and 4 only
- B. 1 and 3 only
- C. 3 and 4 only
- D. 1 and 2 only
Answer: B
NEW QUESTION # 34
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