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CIPS L4M7 Exam
Whole Life Asset Management (Page 3 )

Updated On: 30-Jan-2026
Page 3 of 28
PDF with 255 Questions

A supplier delivers large quantities of inventory to its customer's store, but only charges for the goods as and when they are used. This can be described as...?

  1. Consignment stock
  2. Components inventory
  3. Multi-stage inventory
  4. Multi-echelon stock

Answer(s): A

Explanation:

Consignment stock is stock legally owned by one party, but held by another, meaning that the risk and rewards regarding to the said stock remains with the first party while the second party is re- sponsible for distribution or retail operations. Ownership of consignment stock is passed only when the stock is used (issued or sold in the case of a shop). Unused stock in a warehouse may be returned to the supplier when it concerns standard manufactured products. With customer specific items, agreements concerning returning products, should be negotiated.


Reference:

CIPS study guide page 31
LO 1, AC 1.1



When purchasing a capital asset, an organisation should analyse the costs and benefits that the asset may bring.
Which of the following factors are considered in cost-benefit analysis? Select TWO that apply.

  1. The cost of the asset
  2. Current liabilities in the balance sheet
  3. Shareholders' equity
  4. The cumulative cash flows generated by the asset
  5. Dividends paid

Answer(s): A,D

Explanation:

A cost-benefit analysis is a process businesses use to analyze decisions (such as capital investment). The business or analyst sums the benefits of a situation or action and then subtracts the costs associated with taking that action.
A cost-benefit analysis (CBA) should begin with compiling a comprehensive list of all the costs and benefits associated with the project or decision.
The costs involved in a CBA might include the following:
- Direct costs would be direct labor involved in manufacturing, inventory, raw materials, manufacturing expenses.
- Indirect costs might include electricity, overhead costs from management, rent, utilities.
- Intangible costs of a decision, such as the impact on customers, employees, or delivery times.
- Opportunity costs such as alternative investments, or buying a plant versus building one.
- Cost of potential risks such as regulatory risks, competition, and environmental impacts.

Benefits might include the following:
- Revenue and sales increases from increased production or new product.
- Intangible benefits, such as improved employee safety and morale, as well as customer satisfaction due to enhanced product offerings or faster delivery.
- Competitive advantage or market share gained as a result of the decision. An analyst or project manager should apply a monetary measurement to all of the items on the cost- benefit list, taking special care not to underestimate costs or overestimate benefits. A conservative approach with a conscious effort to avoid any subjective tendencies when calculating estimates is best suited when assigning a value to both costs and benefits for a cost-benefit analysis. Finally, the results of the aggregate costs and benefits should be compared quantitatively to deter- mine if the benefits outweigh the costs. If so, then the rational decision is to go forward with the project. If not, the business should review the project to see if it can make adjustments to either increase benefits or decrease costs to make the project viable. Otherwise, the company should likely avoid the project.


Reference:

- Cost-Benefit Analysis (Investopedia)
- CIPS study guide page 175
LO 3, AC 3.2



XYZ Ltd is a large retailer who offers a range of products with different margins. The warehouse manager suggests that different product groups should have different level of safety stock. The appropriate level of safety stock is typically determined by...?

  1. Expected stockout cost multiplies with product margin
  2. Choosing the level of safety stock that assures a given service level
  3. Taking the square root of the economic order quantity
  4. Carrying sufficient safety stock so as to eliminate all stockouts

Answer(s): B

Explanation:

Safety stock is the stock held as a contingency or insurance against disruption or unexpected de- mand. Holding safety stock reduces the risks of stockouts, when an organisation is unable to meet an order or continue production due to lack of finished goods or input materials. For single items, an extra investment in inventory (higher levels of safety stock) will always in-crease customer service levels. Conversely, higher service levels imply larger quantities of safety stocks and an increased investment in inventory. (Procurement and Supply Chain Management - 9th Edition) However, high levels of safety stocks also increase the inventory cost. There must be a balance between inventory costs and customer service. Thus, calculating the should-be safety stock based on a determined service level has long been recommended by many professionals.


Reference:

CIPS study guide page 104-105
LO 2, AC 2.2



Which of the following statements is true of just-in-time (JIT) purchasing?

  1. In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales
  2. Only disadvantage of JIT purchasing is the higher level carrying and inspection costs
  3. JIT purchasing is guided solely by the EOQ model because that model emphasizes the tradeoff between relevant carrying and ordering costs
  4. In JIT purchasing, the optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and carrying costs

Answer(s): A

Explanation:

Just-in-time (JIT) purchasing is a systems approach for developing and operating the purchasing function. JIT purchasing along with the total quality management in many industries has been suc- cessful in reducing inventory and increasing the overall effectiveness of purchasing function and hence the productivity of manufacturing.
The just-in-time objectives of eliminating waste can be summarised in the 'five zeros: zero defects, zero set-up times, zero inventories, zero handling and zero lead times. The correct answer should be 'In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales' because it expresses that upstream activity (purchasing) only occurs as the downstream activity (production or sales) triggers.


Reference:

CIPS study guide page 122-127
LO 2, AC 2.3



Extra units that are held in inventory to reduce the risks of stock-out are called...?

  1. Just-in-time
  2. Reorder point
  3. Safety stock
  4. Demand variance

Answer(s): C

Explanation:

The safety stock (or buffer stock) is the stock level that limits stock shortages due to unforeseen events (forecasts not in line with demand, longer than expected supply time, etc...) Demand variance is the degree to which the demand in a fixed period deviates from the average demand of the same period.
A reorder point is the unit quantity on hand that triggers the purchase of a predetermined amount of replenishment inventory.
The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.


Reference:

CIPS study guide page 84-85
LO 2, AC 2.1



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