L4M2 CIPS Defining Business Needs Free Practice Exam Questions (2025 Updated)

Explanation

Using Porter's value chain helps procurement professionals know what are direct and indirect costs of supplier. Information on direct and indirect costs will have been collected as part of the market analysis. Information sources that may help include the following:

- Company annual reports

- Market data

- Technical data

- Request for information

- Plan visits

- Discount lists

Market data is the information that is collected and analysed by specialist organisations like Mintel, Gartner, Forrester,...

Explanation

Labour variance refers to a situation in which actual costs of labor differ from projected or budgeted labor costs. This concept is most commonly applied in manufacturing environments.

Labour variance either results from efficiency or rate discrepancies. Efficiency variance results when actual time worked is more or less than budgeted time for a project. Rate variance means you paid more per hour worked than expected. This may occur with overtime pay or when you have higher paid employees on a project than projected. Labour variance is fairly typical, but modest variance is usually not a big factor in manufacturing, because materials and other production costs are often much higher.

LO 1, AC 1.4

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

Explanation

The scenario is very long with many distracting data. Students need to read carefully and use their experience to solve this problem.

The company is developing a new component which requires different type of material. But this component will not be available for mass production in 1.5 years. This means the company still needs to produce the current components with current materials until the development is finished. They must continue purchase the materials from current supplier through call-off orders. This situation is an example of straight re-buy.

Explanation

Closed problem is something happens that should not have happened. To solve this type of prob-lem, procurement professional should find a way to correct the situation or try to adapt to it. On the other hand, open ended problem is a obstacle to your short-term objective. You will need to overcome this obstacle.

Shortage of key medicines is a situation in which procurement must find a substitution or try to save the current stock.

In case of cyber attack, procurement should find a way to recover the IT system as soon as possible.

Otherwise, 'There are not enough data for procurement analytics' is an open-ended problem be-cause it prevents company to conduct procurement analytics (an objective).

'Logistics costs incur a large portion in wholesale prices': In this situation, logistics costs are hur-dles that prevent companies to reach lower wholesale.

'The suppliers don’t comply with the company’s policy on underage labour': In this situation, pro-curement should seek ways to help supplier comply with the company's labour policy.

LO 1, AC 1.1

Explanation

The writing of a complex specification should be treated as a project because it requires the brain power from different stakeholders. Many tools and processes of project management can be applied to complex specification development. Before engaging with the stakeholders and implementing the project, the project initial document should developed.

A Project Initiation Document (PID) is one of the most important components of project manage-ment, which forms the foundation for a company project. It is a reference point during the entire project, for the client as well as for the project team.

A PID bundles documentation into a logical reference work that collects all important information needed to start and run a project from a good foundation. After that, Project Initiation Document must be transferred to all stakeholders, including business sponsors.

This forms the basis for the project management. The documentation from which the PID is com-posed include the business case in which the project’s justification can be found, the communica-tion plan and the project plan.

The PID is composed out of collected information and includes, among others, the following com-ponents:

- Project goal(s); what do you want to achieve with the project?

- Project size; how large is the project, how long does it take and how many people are involved?

- Project organisation; who are involved in the project, what are their tasks, responsibilities and authority?

- Limits and risks; what can cause a project to stagnate and are there risks related to the project?

- Stakeholders; who has a stake in the success of the project?

- Project checks and frame reporting; by carefully taking into account evaluation moments, it is clear to everyone what sample tests can be carried out during the process.

In addition, it is important that the Project Initiation Document also contains the following infor-mation:

- The background and occasion of the project, which together provide information about the con-text.

- The project organisational structure, which describes who has which management responsibility in the project.

- The project quality plan, describing who controls the quality of the products to be delivered and how it will take place.

- The total project planning, including the duration of all activities.

- The exception process, which describes how exceptions are dealt with and the steps of the escalation procedure.

- The risk log, including the measures that will be taken when there are unforeseen risks.

- The documentation structure of the project, in which the encoding and storage of all documents and products to be provided by the project has been recorded in advance.

Explanation

Technical standards are often produced by a national or international body such as British Standard Institute (BSI)

LO 3, AC 3.1

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.

Comprehensive and Detailed Explanation (from CIPS L4M2: Supply Market Analysis)

Supplier power is high when:

Few suppliers exist relative to demand → less competition.

Urgent demand gives suppliers leverage over buyers.

A and D would reduce supplier power; C (educated buyer) also weakens it.

Relevant CIPS L4M2 Sections:

Porter’s Five Forces – supplier power

Market structure and urgency as power drivers