QUESTION: 65

To strengthen its market presence, ABC Group decided to develop a new product. A cross-functional team was formed to discuss the scope and the functions of the product. They will also survey the potential customers to see what they like, what they love, and what they dislike.
What is this process called?

Value analysis
Cash flow analysis
Product standardisation
Value engineering

Answer(s): D

Explanation:

As you can see from the scenario, ABC Group is developing the new product. It might be using value engineering. The latter sentences confirm this: the cross-functional team in ABC is mapping the functions and surveying the customers. Their method is known as Kano model.

Reference:

CIPS study guide page 171-172
LO 3, AC 3.4

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QUESTION: 66

When a procurement manager considers a substitution, the number and nature of additional func- tions that substitute provides should be taken into account carefully.
Which of the following ratio could help the procurement manager to make the right decision?

Value to price ratio
Price to Earnings ratio
Reserve requirement ratio
Price to book value ratio

Answer(s): A

Explanation:

One product substitutes for another if it offers buyers an inducement to switch that exceeds the cost or overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always some cost of switching to a substitute because of the disruption and potential reconfiguration of buyer activities that must result, however. The threat of a substitute will vary depending on the size of the inducement relative to the required switching costs. In addition to relative value to price and switching cost, the pattern of substitution is influenced by what I term the buyer's propensity to switch. Faced with equivalent economic inducements for substitution, different buyers will often evaluate substitution differently. The threat of substitution, then, is a function of three factors:
- The relative value/ price of a substitute compared to an industry's product
- The cost of switching to the substitute
- The buyer's propensity to switch
Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278).
Free Press. Kindle Edition.
The price-to-book ratio compares a company's market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company.
The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.
LO 2, AC 2.2

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QUESTION: 67

Why should the buying organisation require the supplier to carry out acceptance testing?

To get the approval from the senior management
To check whether the product matches the specification
To compare between the account payables and account receivables
To see whether the supplier engages in unethical business practice

Answer(s): B

Explanation:

Acceptance testing, in the context of the engineering and software industries, is a functional trial performed on a product or prototype before it is put on the market or delivered, to decide whether the specifications or contract have been met. It also makes sure the quality and design of the product meet both contractual and regulatory obligations in terms of functionality, usability, durability, and safety.
If a product is found to be unacceptable at this stage, it can be sent back for modification, debug- ging, repair, or re-design before it can become a costly undertaking for the producer, as would be the case in a product recall.

Reference:

- CIPS study guide page 134-135
- Acceptance Testing (investopedia.com)
LO 3, AC 3.2

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QUESTION: 68

OMK is a Russian steel firm that is expanding market abroad. It plans to build a steel plant in a foreign country. Due to intricate technical requirements, the plant design will be very complex. Procurement department or technical department alone cannot draft the specification. OMK senior management decides that this task must be treated as a project.
Which of the following should be done before writing the specification for new steel plant?

Develop the performance framework for the supplier
Draft the terms and conditions for plant construction contract
Invite suppliers to the tendering process
Develop project initial document

Answer(s): D

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.

Reference:

- CIPS study guide page 148
- Project Initiation Document (PID), a project management tool | ToolsHero LO 3, AC 3.3

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QUESTION: 68

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