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CIPS
L4M2
Defining Business Needs

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 Latest Version: 6.0
Question: 1
The position of a product in its life cycle can affect the price that suppliers set. Is this statement correct?

A. No, in market economy, the state decides the price of all goods and services
B. Yes, each stage in product life cycle requires different levels of investment in promotion and
distribution
C. No, customer's perception of value is the ultimate determinant of the suppliers' price
D. Yes, it is always the only factor determining the price

Answer: B
Explanation:
A firm also has to look at a myriad of other factors before setting its prices. Those factors include the
offering’s costs, the demand, the customers whose needs it is designed to meet, the external
environment—such as the competition, the economy, and government regulations—and other aspects
of the marketing mix, such as the nature of the offering, the current stage of its product life cycle, and
its promotion and distribution. If a company plans to sell its products or services in international
markets, research on the factors for each market must be analyzed before setting prices. Organizations
must understand buyers, competitors, the economic conditions, and political regulations in other
markets before they can compete successfully.
[...]
The costs of the product—its inputs—including the amount spent on product development, testing, and
packaging required have to be taken into account when a pricing decision is made. So do the costs
related to promotion and distribution. For example, when a new offering is launched, its promotion
costs can be very high because people need to be made aware that it exists. Thus, the offering’s stage in
the product life cycle can affect its price.
Reference:
- CIPS study guide page 90-91
- 15.2 Factors That Affect Pricing Decisions – Principles of Marketing (umn.edu)
LO 2, AC 2.2

Question: 2
A CPO is making a business case for acquiring a new computer system. He has set out objective,
generated options, cost and benefit of each option and implementation plan. Which of the following
elements should be included in the business case?

A. Risk assessment
B. Operation management
C. Invitation to tender

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D. Contract management

Answer: A
Explanation:
Before a project commences (either capital purchase or switching to a new supplier), a business case
should be developed. The business case outlines the why, what, how, and who necessary to decide if it
is worthwhile continuing a project.
Basically, the following criteria can be applied to the assessment of a business case:
1. Objectives
This part describes why you are doing the project. The business objective answers the following
questions:
- What is your goal?
- What is needed to overcome the problem?
- How will the project support the business strategy?
2. Option identification and selection
Identify the potential solutions to the problem and describe them in enough detail for the reader to
understand.
For instance, if the business case and proposed solution makes use of technology, make sure to explain
how the technology is used and define the terms used in a glossary. Since most problems have multiple
solutions an option appraisal is often needed. This will explore the potential solutions and recommend
the best option.
When writing the initial business case the option appraisal is likely to contain a long list of options and
will cover many possibilities. As the project continues a number of options will be rejected. The final
business case may contain three to five options ― the short list ― that includes a do nothing or
benchmark option.
3. Benefits and limitations
The benefits and limitations section describes the financial and non-financial benefits in turn. The
purpose is to explain why you need a project.
For instance, to:
- Improve quality
- Save costs through efficiencies
- Reduce working capital
- Generate revenue
- Remain competitive
- Improve customer service
- Align to corporate strategy
The business case should also include any limitations since these present potential risk to the pro-ject.
4. Risk management
The risk assessment summarizes the significant project risks and opportunities and how they are
managed. The risks included should cover those that could arise from your project or the organiza-tion’s
ability to deliver change.
This section answers the following questions:
- What risks are involved?
- What are the consequences of a risk happening?
- What opportunities may emerge?
- What plans are in place to deal with the risks?

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- Every project should include a risk log.
When writing a business case, make sure this is included as it explains how risk and opportunity are
managed.
5. Implementation plan
The outline plan provides a summary of the main activities and overall timescale ― project schedule ―
for the project.
Ideally, the project should be divided into stages with key decisions preceding each stage. Use this
section to answer the following questions:
- What is required?
- How is it done?
- Who does what?
- When will things happen?
This outline plan lists the major deliverables and includes a brief project description plus accountabilities
for each activity.
In the scenario, the CPO has set out objective, generated options, cost and benefit of each option and
implementation plan. In order to make the business case more compelling, he should reinforce it with
risk management.
Reference: CIPS study guide page 41-48
LO 1, AC 1.3

Question: 3
What is the document that defines the activities, deliverables and timelines a supplier must carry out
during contract performance?

A. Statement of work
B. Project initial document
C. Framework agreement
D. Work instruction

Answer: A
Explanation:
Statement of Work (SoW) is the document that captures and defines all aspects of your project. You’ll
note the activities, deliverables and the timetable for the project. It’s an extremely detailed document
as it will lay the groundwork for the project plan.
Project Initial Document is an important document and should precede any specification writing project.
It sets out the scope of the project and it is the team's mandate from senior management
Work instructions are also called work guides, Standard Operating Procedures (SOPs), job aids or user
manuals, depending on the situation. In any case, the purpose of work instructions is to clearly explain
how a particular work task is performed.
Framework agreements are arrangements between one or more buyers and one or more suppliers that
provide the terms governing contracts to be established for a certain period of time, in particular with
regard to price and, where necessary, the quantity envisaged.
Reference: CIPS study guide page 124
LO 3, AC 3.1

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 Question: 4
A procurement manager is writing a conformance specification for a non-core component. She thinks
that if the requirements in specification are higher than ISO standards, her company can achieve greater
cost-savings. Is the procurement manager’s opinion correct?

A. No, because higher specification may incur additional costs for the buyer
B. No, because higher requirements in specification, the greater bargaining power of buying
organisation
C. Yes, because optimising the specification is the only method to achieve value for money
D. Yes, because higher requirements will help buying organisation find the best supplier

Answer: A
Explanation:
The specification that is produced too detailed will incur unnecessary cost because it does not allow
suppliers to use their expertise in finding the most efficient way to produce it.
'No, because higher requirements in specification, the greater bargaining power of buying organi-
sation':
more detailed specifications could tighten the supplier base and potentially leave buying organisation
with fewer potential supplier. This may reduce buyer's bargaining power in negotia-tion.
'Yes, because higher requirements will help buying organisation find the best supplier': in some
circumstances, higher requirements will lead to smaller supplier base. In the worst scenario, there is no
supplier who has capability to carry out those requirements
'Yes, because optimising the specification is the only method to achieve value for money': There are
other methods to achieve cost saving and value for money, inter alia, volume concentration,
relationship restructuring, etc.
Reference: CIPS study guide page 118-119
LO 3, AC 3.1

Question: 5
British Steel needs to source a set of instruments that will improve quality of steel. Without these
instruments British Steel will loss control of the temperature. The bucket may freeze up, or if it is too hot
it leaks out of the casting process, damaging the machine. There is limited supply on the market and
quality varies greatly. Which of the following will be the most appropriate managing approach to
procure these items?

A. Bundle these instruments into larger contract

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 Answer: D
Explanation:
The instrument plays a crucial role in steel manufacturing because it presents in the majority of
products, in which case lacking this instrument would have significant impact on the organisation's
output (production lines stop or damaging other machine). Otherwise, the risk of supply is high because
there is limitation in supply. Therefore, it is considered as a strategic item in term of Kraljic's portfolio
matrix. Procurement manager should form partnership with suppliers to maximise the value.
The following graph illustrates Kraljic's portfolio matrix:

Reference: CIPS Study guide page 84.

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