Procurement Management Flashcards

Question 1

What is the difference between procurement and purchasing?

Accepted Answer

Purchasing is the transactional act of buying goods or services, such as issuing a purchase order and paying an invoice. Procurement is broader and covers the entire process, including needs identification, supplier strategy, sourcing, contracting, supplier management, and closing out the relationship. Purchasing is therefore one step within procurement.

Question 2

What is a purchase requisition and why is it used?

Accepted Answer

A purchase requisition is an internal request from a department asking the procurement function to buy specific goods or services. It describes the item, quantity, required date, and budget code, and it needs approval from a manager. Requisitions create a documented trail, prevent unauthorized spending, and give procurement the information needed to start sourcing.

Question 3

What does the phrase total cost of ownership mean?

Accepted Answer

Total cost of ownership is the full cost of acquiring and using an item over its life, not just its purchase price. It includes acquisition, installation, training, maintenance, energy use, downtime, and disposal costs. Procurement uses it to compare offers, because a cheaper item can prove more expensive once all these costs are included.

Question 4

What is the purpose of a make-or-buy decision?

Accepted Answer

A make-or-buy decision determines whether an organization should produce a good or service internally or obtain it from an external supplier. The analysis weighs cost, capacity, quality control, core competencies, confidentiality, and supply reliability. Organizations usually outsource non-core activities and keep strategic or highly sensitive work in-house.

Question 5

What are the main stages of the procurement cycle?

Accepted Answer

The procurement cycle typically moves through identifying the need, defining requirements, sourcing and selecting suppliers, negotiating and awarding the contract, receiving and paying for goods or services, and then managing supplier performance through closeout. Stages may overlap, and the cycle repeats for each new purchase or renewal.

Question 6

Why do organizations establish a written procurement policy?

Accepted Answer

A written procurement policy sets the rules that everyone buying for the organization must follow. It defines approval limits, competitive bidding thresholds, conflict of interest rules, ethical standards, and documentation requirements. Consistent rules promote fairness, transparency, accountability, and value for money, and they make audits and decisions easier to defend.

Question 7

What is a purchase order and when is it issued?

Accepted Answer

A purchase order is a formal document from the buyer to the supplier that authorizes a purchase at stated prices, quantities, and terms. It is normally issued after a supplier is selected and before delivery begins. It then serves as the basis for receiving goods, matching invoices, and making payment.

Question 8

What is a three-way match in accounts payable?

Accepted Answer

A three-way match compares the purchase order, the goods receipt record, and the supplier invoice before payment is released. The quantities, prices, and item details should agree across all three documents. This control helps prevent paying for goods that were never received, billed at incorrect prices, or ordered without authorization.

Question 9

What is the difference between an RFI, an RFQ, and an RFP?

Accepted Answer

A request for information gathers general market information about capabilities without committing to a purchase. A request for quotation asks suppliers to price clearly defined, standard items. A request for proposal asks for a solution, approach, and price for a complex need where the buyer wants supplier input on how to meet requirements.

Question 10

Why do buyers prepare a statement of work or specification before sourcing?

Accepted Answer

A clear statement of work or specification describes what the buyer needs, including scope, performance standards, deliverables, timelines, and acceptance criteria. Suppliers can only bid accurately and comparably when they receive the same description. Vague requirements lead to inconsistent bids, scope disputes, and change orders that increase cost.

Question 11

What is market research in procurement and why is it performed?

Accepted Answer

Market research is the study of available suppliers, prices, technologies, and supply conditions before a sourcing event. It helps the buyer understand what is realistic to ask for, which suppliers can deliver, and whether the market is competitive or concentrated. Good research reduces surprises during negotiation and improves the quality of the buyer's requirements.

Question 12

What is a competitive bidding process and what are its advantages?

Accepted Answer

Competitive bidding invites several qualified suppliers to submit offers against the same requirements, and the buyer selects the best offer by stated criteria. It promotes price discipline, transparency, and fair access for suppliers. It also reduces the risk of favoritism, though it takes more time and administrative effort than a single-source award.

Question 13

What is supplier prequalification and what does it typically assess?

Accepted Answer

Supplier prequalification is an early screening step that confirms a supplier meets minimum requirements before it is invited to bid. Typical assessments include financial stability, technical capability, quality systems, certifications, safety record, references, and insurance coverage. Prequalification saves evaluation effort by removing unsuitable suppliers early.

Question 14

How does a weighted scoring model help evaluate supplier proposals?

Accepted Answer

A weighted scoring model assigns each evaluation criterion a weight that reflects its importance, then scores each proposal against every criterion. Multiplying scores by weights produces a total that can be compared across bidders. Defining weights before proposals arrive keeps the evaluation objective and reduces bias.

Question 15

Why is sole sourcing justified only in limited circumstances?

Accepted Answer

Sole sourcing awards a contract without competition, so it should be limited to cases such as a proprietary product, an emergency, a single qualified supplier in the market, or a legitimate need for continuity. Each sole source decision should be documented and justified in writing. Without justification, it invites favoritism and higher prices.

Question 16

What are the main ethical principles that guide supplier selection?

Accepted Answer

Common ethical principles include fairness, transparency, integrity, confidentiality, and avoiding conflicts of interest. Buyers should treat all qualified suppliers equitably, communicate evaluation criteria openly, protect proprietary bid information, and refuse gifts or favors that could influence a decision. Public and private organizations often codify these principles in a code of conduct.

Question 17

What is the main purpose of a procurement contract?

Accepted Answer

A procurement contract is a legally binding agreement that defines what the supplier will deliver, when, at what price, and under what conditions. It allocates risk and responsibility between buyer and supplier and gives both parties remedies if promises are not kept. A well-written contract turns negotiated expectations into enforceable obligations.

Question 18

What is the difference between a fixed-price contract and a cost-reimbursable contract?

Accepted Answer

A fixed-price contract sets a price for defined work, so the supplier carries most of the cost risk. A cost-reimbursable contract pays the supplier for allowable actual costs plus an agreed fee, so the buyer carries more cost risk. Fixed-price suits well-defined work, while cost-reimbursable suits uncertain or research-type work where scope is evolving.

Question 19

What key terms should a contract define to avoid disputes?

Accepted Answer

A contract should clearly define the scope of work, deliverables, delivery dates, pricing and payment terms, quality standards, and acceptance criteria. It should also state change control procedures, warranties, liability limits, termination rights, and the governing law. Precise definitions reduce ambiguity, which is a frequent cause of supplier disputes.

Question 20

What is a service level agreement and what should it include?

Accepted Answer

A service level agreement is a contract component that sets measurable performance targets for a service, such as response time, availability, or resolution time. It should define how each metric is measured, reporting frequency, the consequences of missing targets, and any service credits. Clear metrics let the buyer manage performance objectively.

Question 21

What are liquidated damages and when are they used?

Accepted Answer

Liquidated damages are a preset amount the supplier agrees to pay for specific breaches, such as late delivery, stated in the contract before any breach occurs. They provide a predictable remedy without proving actual loss. The amount should reasonably estimate expected harm, since courts may refuse to enforce a penalty.

Question 22

Why do contracts include termination for convenience clauses?

Accepted Answer

A termination for convenience clause lets the buyer end a contract without showing that the supplier breached it, usually with notice and sometimes a payment for work completed. It gives the buyer flexibility when needs change or funding is withdrawn. Suppliers may ask for compensation, so the clause should state how termination costs are calculated.

Question 23

What is an indemnity clause and why does it matter?

Accepted Answer

An indemnity clause requires one party to compensate the other for specified losses, such as third-party injury, intellectual property claims, or damage caused by its own negligence. It shifts financial exposure to the party best able to control the risk. Buyers should review this language, since broad wording can expose them to unintended losses.

Question 24

What is a change order and how should it be controlled?

Accepted Answer

A change order is a formal, written amendment to the original contract that alters scope, schedule, or price. Changes should be requested in writing, assessed for cost and schedule impact, approved by authorized signatories, and recorded before work begins. Informal verbal changes often create disputes over who pays and whether the work was ever agreed.

Question 25

What is the core purpose of supplier relationship management?

Accepted Answer

Supplier relationship management is a structured approach to working with key suppliers to create mutual value beyond the transaction. It classifies suppliers by importance and risk, then sets appropriate engagement levels, communication routines, and joint improvement goals. The aim is collaboration on innovation, cost, and reliability, not simply tighter control.

Question 26

How is supplier segmentation used to decide how much attention a supplier receives?

Accepted Answer

Segmentation groups suppliers according to spend, criticality, substitutability, and risk, often displayed on a matrix. Strategic suppliers with high spend and high impact receive partnership-level attention, while transactional suppliers with low risk are managed through simple, efficient processes. The segments guide how much time, governance, and monitoring each supplier deserves.

Question 27

What are key performance indicators used to monitor supplier performance?

Accepted Answer

Common supplier key performance indicators include on-time delivery, quality acceptance rate, order accuracy, invoice accuracy, responsiveness, and cost variance against the contract. Each indicator should have a defined formula, target, data source, and review frequency. Measuring only price or only delivery gives an incomplete picture of supplier value.

Question 28

What is a scorecard and how is it used in supplier reviews?

Accepted Answer

A supplier scorecard summarizes a supplier's results against agreed indicators over a period, often with ratings or color bands. It gives both parties a shared, factual basis for periodic business reviews. Scorecards support decisions about volume allocation, corrective action, improvement plans, and contract renewal.

Question 29

What steps should a buyer take when a supplier misses its performance targets?

Accepted Answer

First, the buyer should confirm the facts and document the shortfall with data. Next, it should notify the supplier in writing, request a root cause analysis, and agree on a corrective action plan with dates. If performance does not recover, the buyer can apply contractual remedies, including service credits or escalation under the dispute clause.

Question 30

What is supplier development and when is it worth investing in?

Accepted Answer

Supplier development is a set of activities a buyer undertakes to improve a supplier's capability, such as training or process improvement. It is worth the investment when the supplier is critical, switching costs are high, and the supplier has real potential to improve. For commodity items with many alternatives, development costs more than it returns.

Question 31

Why is continuous improvement important in long-term supplier relationships?

Accepted Answer

Long-term supplier relationships can drive gains that a one-time negotiation cannot, such as lower total cost, shorter lead times, better quality, and joint innovation. Regular reviews of processes and results let both parties find waste and reduce risk over time. Continuous improvement works best when it is shared, measured, and tied to agreed goals.

Question 32

How should a buyer handle a supplier dispute to protect the relationship?

Accepted Answer

Start with a factual discussion between operational teams to clarify what happened and what the contract requires. If that fails, escalate in steps to senior managers, using any mediation or dispute resolution process the contract defines. Keep communication respectful and documented, and avoid public blame, since relationships often outlast a single disagreement.

Question 33

What is a procurement plan and what should it contain?

Accepted Answer

A procurement plan documents how a project or organization will acquire the goods, services, and works it needs. It typically lists what will be bought, why, the sourcing approach, estimated costs, schedule, roles and approval authorities, contract types, and key risks. The plan gives stakeholders a shared roadmap and makes later decisions traceable.

Question 34

What is a should-cost estimate and how is it used?

Accepted Answer

A should-cost estimate is an independent, bottom-up calculation of what an item ought to cost, based on materials, labor, overhead, and reasonable margin. Buyers use it as a benchmark during negotiation to test whether supplier prices are justified. It also reveals which cost drivers matter most, so negotiation effort can focus there.

Question 35

What is spend analysis and why do procurement teams perform it?

Accepted Answer

Spend analysis is the systematic review of what an organization buys, from whom, at what price, and through which channels. It reveals fragmentation, off-contract buying, duplicate suppliers, and savings opportunities. Teams use the findings to consolidate volume, set category strategies, and prioritize sourcing events where the potential benefit is largest.

Question 36

What is supplier risk and how do buyers assess it?

Accepted Answer

Supplier risk is the chance that a supplier will fail to deliver, perform, or remain viable, causing harm to the buyer. Buyers assess it by reviewing financial health, geographic and political exposure, dependence on a single source, cybersecurity practices, compliance history, and continuity planning. Risk ratings guide how much oversight each supplier needs.

Question 37

What is a supply chain disruption contingency plan?

Accepted Answer

A contingency plan prepares an organization for supply interruptions by identifying critical items, alternative suppliers, safety stock levels, and transport or production fallback options. It names decision owners and triggers, so response is quick when a disruption occurs. Testing the plan periodically reveals gaps before a real crisis exposes them.

Question 38

How do buyers use early supplier involvement during product design?

Accepted Answer

Early supplier involvement brings suppliers into design discussions before specifications are finalized. Their manufacturing knowledge can reduce complexity, improve manufacturability, shorten development time, and identify lower-cost materials. Buyers must still protect intellectual property and fair competition, so information sharing should follow clear confidentiality agreements.

Question 39

What is a procurement budget and how does it relate to the approved spend plan?

Accepted Answer

A procurement budget is the amount approved for buying goods, services, or works within a period or project. The spend plan breaks that budget into planned purchases by category, department, and timing, which lets finance and procurement track commitments against available funds. Committing spend beyond the approved plan requires a formal budget revision and approval.

Question 40

How do procurement professionals address ethical risk and compliance in global sourcing?

Accepted Answer

Procurement professionals address these risks by performing due diligence on suppliers, including sanctions, bribery, and forced labor screening. They include anti-corruption, labor, and data protection terms in contracts, require audits where risk is high, and provide training to buyers. Documenting these steps protects the organization and demonstrates responsible sourcing to stakeholders.

Procurement Management Flashcards

1Procurement fundamentals

2Sourcing and supplier selection

3Contracts and contract terms

4Supplier relationship and performance

5Planning, cost, and risk

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