Certified Supply Chain Professional (CSCP) Practice Exam

What is included in the three elements of an incentive agreement?

1. Target profit, maximum price, and payment terms

2. Target cost, target profit, and sharing agreement

3. Fixed price, quality assurance, and delivery timeliness

4. Performance standards, order requirements, and penalties

The correct answer is: Target cost, target profit, and sharing agreement

The three elements of an incentive agreement are target cost, target profit, and the sharing agreement. This structure is designed to align the interests of both the buyer and the seller in a contractual arrangement. The target cost is the cost that the seller aims to achieve while delivering the product or service. By establishing a target cost, both parties can agree on a baseline from which performance can be measured. The target profit is the predetermined profit margin that the seller expects to achieve, ensuring that they can cover costs while still making a profit. Lastly, the sharing agreement outlines how any cost savings, or potentially losses, will be distributed between the buyer and the seller, typically incentivizing the seller to reduce costs while maintaining quality, as they would benefit from the savings. This framework fosters collaboration, as both parties work towards the same goals—efficiency and profitability—while also managing risk in a way that is fair and transparent. The other options do not encapsulate the core elements of an incentive agreement, focusing instead on unrelated contractual aspects that do not emphasize the collaborative goal-setting process inherent in successful incentive structures.