CIPS L4M2 - Defining Business Needs

Detailed Explanation:

A business case allows for the evaluation of alternatives and ensures alignment with strategic goals. It also assesses risks, benefits, and financial impact, providing a comprehensive basis for decision-making. Reference: CIPS Level 4, Capital Expenditure and Business Case Development.

Explanation

Price Analysis is the process of deciding if the asking price for a product or service is fair and rea-sonable, without examining the specific cost and profit calculations the vendor used in arriving at the price. It is basically a process of comparing the price with known indicators of reasonableness. When adequate price competition does not exist, some other form of analysis is required. Some reasons that could affect adequate price competition are: specifications are not definitive, tolerances are restrictive, or production capacity limits those eligible to bid.

Examples of other forms of price analysis information include:

• Analysis of previous prices paid

• Comparison of vendor’s price with the in-house estimate

• Comparison of quotations or published price lists from multiple vendors

• Comparisons with government agencies (such as GSA in the US) published prices

A strike price is the set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold. Strike price is also known as the exercise price.

A cost driver is the direct cause of a cost and its effect is on the total cost incurred. For example, if you are to determine the amount of electricity consumed in a particular period, the number of units consumed determines the total bill for electricity. In such a scenario, the number of units of electricity consumed is a cost driver.

Comprehensive and Detailed Explanation (paraphrased from CIPS L4M2 content)

CIPS L4M2 warns against over-specification – defining requirements in more detail, higher quality, or tighter tolerances than are actually needed. Key consequences include:

Increased costs – suppliers incur higher production and quality costs, which are passed on to the buyer.

Fewer potential suppliers – only a small number can meet the demanding specification.

More complex supplier relationships – closer collaboration and management may be needed to meet the demanding spec.

Assessing each statement:

Ineffective SLA – if the specification is unnecessarily detailed or unrealistic, SLAs can become difficult to meet, overly complex, or focused on the wrong priorities. Likely outcome.

Higher supplier costs – very clearly a result of over-specification (tight tolerances, special materials, complex processes).

Increased SRM – when the requirement is demanding and fewer suppliers can comply, buyers often need more intensive SRM to manage performance and risk.

Reduced inventory costs – this is not a typical outcome of over-specification; if anything, higher unit costs and longer lead times can increase inventory risks and carrying costs.

Thus 1, 2 and 3 are in line with CIPS treatment of over-specification; 4 is not, so:

Correct option: C (1, 2 and 3 only)

Relevant CIPS L4M2 areas:

Dangers of over-specification (cost, risk, supplier base)

Service Level Agreements and realistic performance measures

The role of SRM in managing complex or high-dependency suppliers

Comprehensive and Detailed Explanation (paraphrased from CIPS L4M2 content)

CIPS L4M2 explains that general inflation indices (like consumer or retail price indices) are based on a basket of goods and services for the whole economy, not tailored to a specific company’s imports or input mix.

For an engineering business importing from the USA, its price changes will depend on:

Specific industrial input price indices (e.g. metals, components, specialist goods),

Exchange rate movements GBP/USD,

Sector-specific factors (technology, capacity, freight, tariffs).

Therefore, simply “adding a published inflation index” to last year’s prices cannot precisely predict next year’s prices, particularly when:

The index may include irrelevant items like food, clothing, local services, etc.

It may not reflect the specific mix of industrial inputs or the effects of exchange rates.

Thus:

Option A correctly explains the limitation: the inflation index may include products and services that are not relevant to the company’s purchases.

Option B mentions price adjustment formulas (which can be more precise if designed well), but the question emphasises whether using a general index alone is precise – option A goes straight to the core reason.

Options C and D describe partial truths (indices can show general trends and give a quick check) but they do not support precise forecasting.

Relevant CIPS L4M2 areas:

Use and limitations of inflation indices in cost forecasting

Factors influencing prices in international procurement (currency, indices, market conditions)

Building realistic cost assumptions in a business case

Explanation

"Standards are often produced by professional bodies (maybe national or international bodies). Standards tend to be stable for a period of time, therefore, they are likely to be static and discourage innovation."

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