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CPSM® Update

3 Questions, 3 Answers

July/August 2011, eSide Supply Management Vol. 4, No. 4

In every edition, eSide offers three sample questions — and answers — from the CPSM® Diagnostic Practice Exam to help you prepare to pursue your CPSM® certification. First, answer all three questions; then, scroll down to the "3 Answers" section to find out how you fared.
3 Questions

Question #1: Which of the following is LEAST appropriate as an objective for negotiations?

(A) Meeting the minimum essential needs of the organization
(B) Maintaining control over contract performance
(C) Determining the negotiation site
(D) Ensuring the correct ratio of contract administrators to workers

Question #2: Of the following, which is the BEST measure of the rate of inflation?

(A) Year-to-year change in the consumer price index
(B) Year-to-year variation in annual rate of return
(C) Period-to-period change in interest rates
(D) Period-to-period valuation of tangible assets

Question #3: A computer software development company offers to sell a set of programs for $199. Technical support and maintenance are priced at $399 per year. This type of pricing strategy is BEST known as

(A) buy-in
(B) cost plus
(C) market-demand
(D) skimming market share
3 Answers

Question #1: Option D is correct because the other three options are considered important elements in negotiation planning, whatever product or service is being negotiated. Meeting minimum essential needs of performance expectations (Option B) begins with negotiation planning, continues with actual negotiations, and is confirmed in the resulting contract. The negotiating team should consider advantages of various sites (Option C). Meetings conducted at the buying organization provide supply managers support via staff, data and familiar surroundings. In some situations, using the supplier's location may offer supply management the advantage of being able to walk away. Whatever the site, security must receive careful attention.

References: CPSM® Study Guide, 1st Edition (Book 1 — Foundation of Supply Management), pages 16-18; ISM Professional Series (Book 1 — Foundation of Supply Management), pages 151-153; The Supply Management Handbook (7th Edition), pages 498-499.

Question #2: Option A is correct. The Consumer Price Index (CPI) is the collective price for a group of items that typical people purchase and the change in that collective price over the time period measured. Since inflation is reflected by higher prices and a lower value of the dollar, it can BEST be measured by the rate of change in the prices of this collection of typically purchased items. Option B is not correct because the annual rate of return is a measure applied to investments, not to the value of the dollar. Option C is not correct. While interest rates may track with inflation, they may not, and are not the best measure. Option D is not correct because valuation of tangible assets is secondary to initial purchase prices, and not a good measure of inflation.

References: CPSM® Study Guide, 1st Edition (Book 2 — Effective Supply Management), page 14, 5; ISM Professional Series (Book 2 — Effective Supply Management Performance), pages 111-114.

Question #3: Option A is correct because "buy-in" pricing means the seller offers a low price on the initial purchase, with expectation of making a profit on subsequent work such as maintenance or upkeep. In cost plus pricing (Option B) the seller sets a price to cover variable production costs plus a contribution to fixed costs and a mark-up. Market-demand (or market-based) pricing (Option C) involves a seller basing price on demand, hoping to gain a certain portion of the market. Market-skimming (Option D) is another name for this technique.

References: CPSM® Study Guide, 1st Edition (Book 3 — Leadership in Supply Management), page 19; ISM Professional Series (Book 3 — Leadership in Supply Management), pages 179-180; The Supply Management Handbook (7th Edition), pages 448-449.

For more information on ISM's professional credentials, visit the Institute's website.

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