CIPS L4M4 Ethical and Responsible Sourcing Exam Practice Test

Explanation

So you can immediately discount the options starting with yes.

Quoting in GBP / £ rather than the supplier's currency reduces the risk to the buyer. It will not re-duce the cost of the import, and will probably increase it as the supplier is then taking on the risk of currency fluctuations.

A current ratio below 1 suggests that the supplier may not have sufficient current assets to cover short-term liabilities, which could pose a risk to the buyer. Assessing financial stability aligns with responsible sourcing practices, as it ensures suppliers can fulfill contracts without disruption.

Requesting suppliers to quote in GBP Sterling removes exchange rate risk by fixing the cost in the buyer’s local currency. This strategy aligns with responsible sourcing practices by providing cost stability and protecting the procurement budget from currency fluctuations.

A full competitive tendering process ensures fairness by treating all suppliers equally, allowing them to compete on a level playing field. This aligns with ethical sourcing principles, especially in the public sector, where transparency and equal opportunity are paramount.

The acid test, also known as the quick ratio, measures a company's ability to cover its current liabilities with its most liquid assets, excluding inventory. It is a stringent indicator of short-term financial health. By requesting this ratio, the company can assess whether a potential supplier has sufficient liquidity to meet its obligations, which is crucial when procuring strategic items.

Multi-sourcing allows organisations to diversify their supply base, providing flexibility, and reducing risk by having multiple suppliers. It is an effective strategy to prevent over-dependence on a single source and allows for competition among suppliers, promoting quality and ethical standards in the supply chain.

Intra-company trading aims to optimize internal resources by enhancing production capacity utilization and offsetting fixed costs. By supplying goods or services internally, organizations can achieve economies of scale and better allocate resources. However, compensating for less effective technology or ensuring superior internal technology over external suppliers are not primary objectives of intra-company trading.

Explanation

gross profit = total revenue - cost of sales.

Learn all you can about financial ratios and financial statements for the exam- it's a very common topic

Explanation

A supplier who follows the CIPS Code of Conduct is more likely to meet the buyer's needs is the correct answer.

The other options are wrong:

1) Compliance with Codes of Conduct from professional bodies is optional. E.g. CIPS - no organi-sation is forced to comply with CIPS.

2) Unethical behaviour is not impossible to detect, it may be difficult but with correct due diligence and things like audits it's completely possible

3) ISO 14001 is quality management so is irelevent.

Defining corrective actions and running supplier development programs are effective remedial actions following an audit. These approaches support continuous improvement, aligning with responsible sourcing by helping suppliers meet ethical and performance standards.

Explanation

a balance sheet shows 'equity, assets and liabilities'. The other financial statements you need to know for this exam are cash flow statements and and income statements.

If you're not familiar with these three I strongly recommend you do some further reading on this before the exam if you can. This is helpful: How the 3 Financial Statements are Linked Together - Step by Step (corporatefinanceinstitute.com)

Explanation

So you can immediately discount the options starting with yes.

Quoting in GBP / £ rather than the supplier's currency reduces the risk to the buyer. It will not re-duce the cost of the import, and will probably increase it as the supplier is then taking on the risk of currency fluctuations.

Explanation

Robert should look at the supplier's ESG policy. This stands for Environmental Social Governance. So covers both his requirements for community (social) and environmental factors.

ISO 9001 is about Quality Management and ISO27000 about Information Security so these are in-correct answers. An Anti-Slavery Policy would not discuss the environment.

Explanation

Items of 'Non-Preferential Origin' are subject to tariff quotas and other customs commercial regulations. 'Preferential Origin' goods have no duties or tariffs.

The good news is CIPS have significantly simplified section 3.2 of the syllabus. The new study-guide is much lighter on names of documents and protocols for importing and quotas etc. The focus of this Learning Outcome has shifted more to Inco Terms so I would focus on that for revision, but do make sure you have a basic understanding of documents, law and jurisdiction.

Explanation

The best way to deal with potential Conflicts of Interest is to openly declare these. Just because you have a relationship with someone doesn't mean this is going to be an issue or lead to fraud, but it is a good idea to keep a written record of these.

It wouldn't be a risk register, because how can you rate someone's risk of doing something dodgy? Risk registers are for objective risks such as Health and Safety.

The balance sheet provides a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and equity. Short-term liabilities, such as unpaid taxes and bank overdrafts, are obligations the company must settle within a year and are critical indicators of the company's liquidity and financial health.

Exact Extract from Study Guide:

"The balance sheet includes details of current liabilities, such as unpaid taxes and bank overdrafts, which are essential for assessing a supplier's short-term financial obligations and overall stability."

Payment history and financial stress scores provide insights into a supplier’s financial health and stability. This information is crucial for procurement professionals in assessing whether a supplier can fulfill long-term commitments, supporting responsible sourcing by mitigating financial risks.

Evaluating total life-cycle costs, including initial purchase price and long-term maintenance, aligns with ethical sourcing by promoting cost-effective and sustainable procurement. It ensures value for money and supports environmentally and financially responsible sourcing practices.

Explanation

You should investigate automatically low tenders by clarifying the bid with the supplier. It could be they have misunderstood the requirement. Or the bid could be genuine and they can really provide best value for money. But without enquiring, you just don't know.

Explanation

EBITDA stands for 'earnings before interest, tax, depreciation and amortization'. This is a profitability ratio and would show how profitable a business is.

EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com)

Explanation

This is a facilitation payment. It's when a sum of money is given for 'helping to facilitate' a contract. E.g. a procurement manager may accept a facilitation payment from a supplier for selecting him to be a new supplier for a big contract.

In the UK this is definitely considered a bribe. It's also against the CIPS Code of Conflict

Explanation

The correct answers are; suspiciously low labour costs, workers living on site and poor quality products (as this signals that the workforce may be unskilled).

A low score on the CPI is a good thing (high scores are more likely to signify slavery concerns) and just because someone speaks English as a second language doesn't mean you automatically need to be suspicious. That would be prejudice.

Unscheduled audits can provide an unbiased view of supplier practices and help identify compliance issues that might be hidden during scheduled audits. This approach supports responsible sourcing by ensuring accurate assessments of ethical and quality standards.

Explanation

The buyer should seek a 'collaborative' relationship. Transactional and arms-length relationships are more suited to tactical sourcing. Partnerships are reserved for joint-ventures.

Explanation

Ex-Works has the lowest risk to the supplier- in Exworks the buyer collects the items directly from the supplier - so they have all the issues and risks of transporting it back home.

There are many question on Incoterms CIPS can ask. But as there's such a huge bank of questions it's really hit or miss if you'll get one of those question. Two students sitting the exam at the same time in the same study centre can get different question sets. One person can get 3 Incoterm questions and the other gets 0.

I would learn the major ones- the ones at the ends of the table in particular because these are the ones question are likely to be about. Ex works / Free carrier and Delivered at Place Unloaded/ De-livered Duty Paid in particular.

I like this graph as I'm a visual person. I think it makes it easier to understand than the study guide:

Shipping Incoterms: the Complete Guide - Guided Imports

Unscheduled audits can provide an unbiased view of supplier practices and help identify compliance issues that might be hidden during scheduled audits. This approach supports responsible sourcing by ensuring accurate assessments of ethical and quality standards.

In the public sector, procurement activities exceeding certain financial thresholds are required to undergo competitive tendering processes. The anticipated expenditure of £950,000 surpasses the threshold that mandates a formal tendering procedure to ensure compliance with public procurement regulations, promote competition, and achieve value for money.

Exact Extract from Study Guide:

"Public sector procurement activities that exceed specified financial thresholds must follow formal competitive tendering procedures to ensure transparency and compliance with regulations."

Explanation

A credit rating generates a score which reflects 'the level of risk an organisation poses when dealing with other businesses'. It's saying how risky it is to loan them money or do business with them by looking at how good they are at paying people. So a high credit rating will say they're good at paying back their loans and paying their suppliers on time. A poor credit rating will say they often miss payments or pay late.

A credit rating will not tell you how much money they have, or details on their prices. Credit scores looks at purely financial data so wouldn't help you analyse whether their business practices are ethical or not.

Accepting an invitation under such circumstances would violate ethical standards, as it could create a conflict of interest. Ethical sourcing and procurement practices require impartiality, and any perceived favoritism or bias can harm the organisation's integrity.

Explanation

they are stock markets.

What is the FTSE 100 Index? Complete Beginner's Guide (moneycheck.com)

BSE SENSEX – Wikipedia

Profitability and asset levels indicate a supplier’s financial stability and ability to meet contract demands. Responsible sourcing practices include assessing financial capacity to reduce risk in the supply chain and ensure long-term supplier viability.

Explanation

Carry out due diligence is the correct answer. The other answers are incorrect:

- ensure all 46 suppliers publish an Anti Slavery Statement in line with the Modern Slavery Act is wrong because the question states that some suppliers are international. The legislation is UK, meaning international suppliers don't have to do the statement. It also only applies to companies with a turnover of £36m, and some of Zeb's suppliers may be smaller than this.

- work with less suppliers to reduce the risk of slavery entering the supply chain is a silly answer be-cause Zeb probably needs all of his suppliers. There's probably a reason he uses that many.

- ask all suppliers to get Fair Trade accredited is also a silly answer. Fair Trade only exists in some industries such as cocoa and bananas. Zig Zag Zips is in manufacturing so it's probably not going to be able to fairtrade accredit some of the stuff it buys.

Profitability and asset levels indicate a supplier’s financial stability and ability to meet contract demands. Responsible sourcing practices include assessing financial capacity to reduce risk in the supply chain and ensure long-term supplier viability.

Under the EXW (Ex Works) Incoterm, the buyer assumes responsibility for transportation and export clearance from the seller’s premises. This term aligns with cost-saving measures and the buyer’s internal capabilities for logistics, supporting efficient and responsible sourcing.

Explanation

Completing Due Diligence checks will help guard against concerns about unethical business practices.

Not all companies will have a published Anti-Slavery policy- this is only required for large companies.

Known suppliers might have issues that you don't know about so you should always do due-diligence checks on everyone you work with

Formal tenders won't sort out ethical issues unless specifically addressed within the tender and strong contract management is put in place afterwards.

Incoterms, short for International Commercial Terms, were introduced by the International Chamber of Commerce (ICC) in 1936. These standardized terms are used globally to define the responsibilities of buyers and sellers in international trade, helping to avoid misunderstandings by clarifying tasks, costs, and risks involved in the delivery of goods.

Employee working conditions, a code of ethics, and a carbon emissions policy are all indicative of a supplier's commitment to ESG standards. Assessing these factors aligns with responsible sourcing practices, which prioritize sustainability and ethical considerations.

Employee working conditions, a code of ethics, and a carbon emissions policy are all indicative of a supplier's commitment to ESG standards. Assessing these factors aligns with responsible sourcing practices, which prioritize sustainability and ethical considerations.

The Triple Bottom Line framework evaluates an organisation's impact on social, environmental, and economic factors. Financial and environmental performance are critical components, along with social metrics, aligning with responsible sourcing goals to promote sustainability and ethical practices.

The balance sheet and profit and loss account provide a comprehensive view of an organisation’s financial health, showing assets, liabilities, and profits. These statements are essential in evaluating a supplier’s financial capacity, aligning with responsible sourcing practices for financial stability.

Explanation

A Category spend is high value and strategic suppliers. C category is low value, high volume of spend aka tail spend. The bits in the middle are B category.

For example when you have a baby you have to buy lots of stuff for it. Your A spend is the big, important and expensive purchases like the pram, cot, carseat. You spend a lot of time in this category because they're important purchases you want to get right. The Tail Spend / C are all thelittle bits like nappies, baby shampoo, sippy cups. The B category are the bits in between - the purchases are kinda important but aren't as strategic or important as A category. Toys may fall into this category.

Explanation

Greg needs to use a gearing ratio. Gearing is a measure of how the business is being funded and is based on the ratio of debt to equity Gearing comes up a lot in the exam. Also make sure you know what Return on Investment, Acid Test and EBITDA are.

Return on Investment (ROI): How to Calculate It and What It Means (investopedia.com)

EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com)

Acid-Test Ratio: Definition, Formula, and Example (investopedia.com)

In public sector procurement, maintaining service levels within value and cost parameters is essential to ensure efficient use of public funds. Additionally, a competitive tendering process is encouraged to promote transparency, fairness, and value for money. While long-term supplier relationships can be beneficial, they are not always feasible or emphasized in the public sector due to regulations requiring periodic re-tendering. Confidentiality is important, but public sector procurement often requires a degree of transparency that precludes complete confidentiality in dealings.

Explanation

Intracompany trading is when two departments in the same company do trading. AND when two companies owned by the same parent company do trading.

INTRA means 'within' - so it's doing business with yourself.

Explanation

In a 'Credit Account' payment mechanism- the supplier receives payment after the goods are delivered, in line with agreed payment terms (which may be 30 days or something like that).

Evaluating total life-cycle costs, including initial purchase price and long-term maintenance, aligns with ethical sourcing by promoting cost-effective and sustainable procurement. It ensures value for money and supports environmentally and financially responsible sourcing practices.

Incoterms clarify responsibilities between buyers and sellers, reducing certain risks but not eliminating them entirely. Responsible sourcing requires recognising that Incoterms are only part of risk management in international trade, and other factors, such as supplier reliability and quality, must be considered.

Explanation

The correct answers are 'it is easy to drive down costs' (as you can pit the suppliers against each other) and 'low risk of failure to supply' (if one supplier can't provide what you need, the other supplier might be able to).

Economies of scale and supplier loyalty are advantages of single-sourcing.

There is a risk of failure to supply is a risk associated with single sourcing.

There's a useful table of advantages and disadvantages of single / multi sourcing on p.22. Types of sourcing is a key topic for the exam.

Explanation

Completing Due Diligence checks will help guard against concerns about unethical business practices.

Not all companies will have a published Anti-Slavery policy- this is only required for large companies.

Known suppliers might have issues that you don't know about so you should always do due-diligence checks on everyone you work with

Formal tenders won't sort out ethical issues unless specifically addressed within the tender and strong contract management is put in place afterwards.

Explanation

EXW- exworks is a suitable incoterm for transporting goods both by rail and boat. It can be used regardless of the mode of transport. The other three are for transport over water. P. 143 Shipping Incoterms: the Complete Guide - Guided Imports

Some students report a lot of questions on Incoterms in the exam, some say they only had 1. Best bet is to learn them if you possibly can.

Explanation

Items of 'Non-Preferential Origin' are subject to tariff quotas and other customs commercial regulations. 'Preferential Origin' goods have no duties or tariffs.

The good news is CIPS have significantly simplified section 3.2 of the syllabus. The new study-guide is much lighter on names of documents and protocols for importing and quotas etc. The focus of this Learning Outcome has shifted more to Inco Terms so I would focus on that for revision, but do make sure you have a basic understanding of documents, law and jurisdiction.

Total Quality Management (TQM) practices and ISO 9001 certification are indicators of a supplier’s commitment to quality. Responsible sourcing evaluates these factors to ensure suppliers meet high-quality standards and continuous improvement expectations.

Explanation

The C category is the 'tail spend' - it represents a large number of suppliers of small value items.

I recommend giving this a read ABC Classification & ABC Method | CIPS

Questions about equal opportunity and anti-bribery policies assess the supplier's commitment to social and ethical standards. These aspects are part of the ESC criteria, which align with responsible sourcing practices by ensuring suppliers maintain ethical workforce practices and governance.

Explanation

The correct answer is 'yes - these can be completed without warning which would give Ali an accurate picture of the supplier's operations'. The other options are incorrect:

1) you can do many types of audit- financial, ethical, Health and Safety etc

2) asking a supplier about their ethical practices isn't likely going to get you accurate information. They'll just tell you what they think you want to hear

3) audits are great- but they don't ALWAYS uncover issues. Always is the key word in that sentence which makes it incorrect.

Explanation

Weighted points systems can be time consuming to create. They're very transparent and allow for objective grading of supplier bids (so these answers are incorrect). They are not easy to manipulate and this is an advantage of using them.

The bill of lading serves as both a receipt of goods and a document of title, which means it confirms the contract of carriage and can transfer ownership. Responsible sourcing in international trade requires precise documentation, which is why the bill of lading is critical in verifying both carriage and title.

Multiple sourcing is particularly advantageous for ensuring quick delivery and preventing stock-outs, as it provides the flexibility to source from multiple suppliers. This approach aligns with responsible sourcing by ensuring continuity and reducing risks in the supply chain.

Explanation

At supplier selection stage, unsuitable suppliers should be removed (those that do not add value or pose a risk). At develop strategy stage you're not even looking at suppliers yet- you're just deciding what you need. At contract award and asset management it's too late.

CIPS procurement cycle - Procurement Supply Cycle | CIPS

Explanation

Social value is about benefitting the local community / society. Therefore of those options listed, use of local labour is the most appropriate to consider.

The acid test (quick ratio) is an effective measure of a supplier's ability to meet short-term liabilities, providing insights into financial stability. This aligns with responsible sourcing by ensuring the supplier is financially capable of fulfilling a strategic contract.

Explanation

The correct answer is 'gearing ratio'.

Gearing measures how much of a company's funding is based on long-term debt or loans- this would be affected by a steep rise in inflation. If a company has a mortgage on their offices or facto-ry and they need to remortgage and inflation has gone up a lot- they'll be paying a lot more on their mortgage. This will severely effect the gearing ratio as they'll have more outgoings than incoming.

Gross profit margin COULD be affected by inflation, for example if you've got hyper-inflation and the country goes into recession and people stop buying your product. However, this answer isn't al-ways right and depends on many factors- the industry, the product, the company etc, so for the purpose of CIPS should be discounted. There are many industries which are immune to inflation.

Competitive tendering is ideal for high-value contracts where technical expertise is essential. This method supports responsible sourcing by ensuring quality and aligning the supplier’s capabilities with the buyer’s needs, as required in more complex procurement scenarios.

Single sourcing can be appropriate when set-up costs are high, making it impractical to involve multiple suppliers. This aligns with responsible sourcing principles, particularly for high-value or specialised items, where relationship management and collaboration with one supplier can enhance quality and efficiency.