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Chapter 9  Supply Chain DesignChapter 9 Designing Effective Supply Chains TRUE/FALSE 1. The purpose of supply chain management is to synchronize a firm’s processes with those of its suppliers and customers. Answer: True Reference: Supply Chains for Services and Manufacturing Difficulty: Easy Keywords: supply chain management 2. Supply chain management tries to match the flow of materials, services and information with demand. Answer: True Reference: Supply Chains for Services and Manufacturing Difficulty: Easy Keywords: supply chain management 3. The purpose of supply chain design is to shape a firm’s supply chain to meet the competitive priorities of its operations strategies. Answer: True Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: supply chain design 4. Supply chain design for a service provider is driven primarily by the need to control the materials it consumes as it delivers its various services. Answer: False Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: supply chain design 5. The fundamental purpose of supply chain design for a manufacturer is to control inventories by managing the flow of materials. Answer: True Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: supply chain design 6. While it is important to manufacturing firms, little can be done to improve supply chain strategy in most service organizations. Answer: False Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: supply chain strategy 166 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 7. The finished goods of one firm may actually be the raw materials for another firm. Answer: True Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: finished good, raw material 8. The primary reason for keeping inventories low is that inventory represents a temporary monetary investment in goods on which a firm must pay interest. Answer: True Reference: Inventory and Supply Chains Difficulty: Easy Keywords: inventory, investment 9. One component of the holding cost of inventory is interest. Answer: True Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: holding cost, inventory, interest 10. One component of the ordering cost of inventory is shrinkage. Answer: False Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: ordering cost, shrinkage 11. A stockout occurs when an item that is typically stocked is not available to satisfy a demand the moment it occurs. Answer: True Reference: Inventory and Supply Chains Difficulty: Moderate Keyword: stockout 12. A backorder occurs when a customer order cannot be filled when it is placed, but is instead filled later. Answer: True Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: backorder, fill 13. Setup cost is independent of order size. Answer: True Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: setup cost 14. Reducing setup costs will increase the pressure to keep larger inventories. Answer: False Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: setup cost 167 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 15. Increasing inventory levels can sometimes help a firm reduce both its inbound and outbound transportation costs. Answer: True Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: pressure for large inventories 16. A quantity discount is attractive because there is a drop in the price per unit when the order is sufficiently large. Answer: True Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: quantity discount 17. Repeatability is an undesirable feature of some orders because they must be repeated until the order is filled correctly. Answer: False Reference: Inventory and Supply Chains Difficulty: Moderate Keyword: repeatability 18. The primary lever to reduce anticipation inventory is to place orders closer to the time when they must be received. Answer: False Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: anticipation inventory, safety stock 19. Forward placement is a reduction in inventory and safety stock because of the merging of variable demands from customers. Answer: False Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: forward placement, inventory 20. Inventory turnover is obtained by dividing the average aggregate inventory value by sales per week at cost. Answer: False Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: inventory, turnover 21. Increasing the percentage of on-time deliveries to customers actually reduces the total revenue of a firm. Answer: False Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: on-time delivery, revenue 168 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 22. Channel assembly is the process of using members of the distribution channel as if they were assembly stations in the factory. Answer: True Reference: Mass Customization Difficulty: Moderate Keywords: channel assembly, distribution, mass customization 23. Responsive supply chains work best when frequent product introduction exists. Answer: True Reference: Strategic Implications Difficulty: Moderate Keywords: responsive supply chains, product introduction 24. Efficient supply chains work best when contribution margins are high. Answer: False Reference: Strategic Implications Difficulty: Moderate Keywords: efficient supply chains, contribution margin 25. Efficient supply chains use low capacity cushions. Answer: True Reference: Strategic Implications Difficulty: Moderate Keywords: efficient supply chains, capacity cushion 26. Responsive supply chains work best when firms offer a low variety of services or products and demand predictability is high. Answer: False Reference: Strategic Implications Difficulty: Moderate Keywords: responsive supply chains, variety, predictability MULTIPLE CHOICE 27. Which one of the following is TRUE for supply chain management? a. Supply chain applies to both manufacturing and service organizations. b. Supply chain applies only to manufacturing because it deals with flow of materials. c. Supply chain is about suppliers and does not include distributors or customers. d. Supply chain includes any operation that deals with materials. Answer: a Reference: Supply Chain Design Across the Organization Difficulty: Easy Keywords: supply chain, service, manufacturing 169 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 28. Which of the following generates pressure to increase inventories? a. inventory holding costs b. ordering costs c. storage and handling costs d. taxes and insurance Answer: b Reference: Inventory and Supply Chains ( Difficulty: Easy Keywords: pressures for small / large inventories 29. Which of the following generates pressure to decrease inventories? a. inventory shrinkage costs b. backorders and stockouts c. transportation costs d. quantity discounts Answer: a Reference: Inventory and Supply Chains ( Difficulty: Easy Keywords: pressures for small / large inventories 30. Which of the following DOES NOT generate pressure to decrease inventories? a. taxes and insurance b. inventory holding costs c. storage and handling costs d. ordering costs Answer: d Reference: Inventory and Supply Chains ( Difficulty: Moderate Keywords: pressures for small / large inventories 31. Which of the following DOES NOT generate pressure to increase inventories? a. transportation costs b. backorders and stockouts c. inventory shrinkage costs d. quantity discounts Answer: a Reference: Inventory and Supply Chains ( Difficulty: Moderate Keywords: pressures for small / large inventories 32. Inventories needed for the production of services and goods (inputs to a firm’s transformation processes) are called: a. quarantined materials b. work-in-process c. raw materials d. finished goods Answer: c Reference: Inventory and Supply Chains ( Difficulty: Easy Keywords: types of inventories 170 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 33. Items, such as components or assemblies, needed to manufacture a final product are called: a. quarantined materials b. work-in-process c. raw materials d. finished goods Answer: b Reference: Inventory and Supply Chains ( Difficulty: Easy Keywords: types of inventories 34. Items sold to a firm’s customers are called: a. quarantined materials b. work-in-process c. raw materials d. finished goods Answer: d Reference: Inventory and Supply Chains ( Difficulty: Easy Keywords: types of inventories Use the following to answer questions 35 – 37: Shipments of Product A from a distribution center to a retailer are made in lots of 350. The retailer’s average demand for A is 75 units per week. Lead time from distributor to retailer is 3 weeks. The retailer pays for the shipments when they leave the distributor. The distributor has agreed to reduce the lead time to 2 weeks if the retailer will purchase quantities of 400 per shipment instead of 350. 35. With the change in purchased quantities, the average cycle inventory will: a. Decrease by 75 units. b. Increase by 50 units. c. Decrease by 25 units. d. Increase by 25 units. Answer: d Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 36. With the change in lead times, the pipeline inventory will: a. Decrease by 75 units. b. Increase by 50 units. c. Decrease by 25 units. d. Increase by 25 units. Answer: a Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 171 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 37. The net impact on the retailer will be: a. No net change in average cycle and pipeline inventories. b. A net average increase in cycle and pipeline inventories of 50 units. c. A net average decrease in cycle and pipeline inventories of 75 units. d. A net average decrease in cycle and pipeline inventories of 50 units. Answer: d Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory Use the following to answer questions 38 – 42: Shipments of Product X from a plant to a wholesaler are made in lots of 600. The wholesaler’s average demand for X is 100 units per week. Lead time from plant to wholesaler is 4 weeks. The wholesaler pays for the shipments when they leave the plant. 38. What is the total of the wholesaler’s current cycle plus pipeline inventories? a. 300 units b. 100 units c. 700 units d. 400 units Answer: c Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 39. If the plant reduces its lead time from 4 to 2 weeks and keeps its 600 unit lot size, what is the wholesaler’s new total cycle plus pipeline inventories? a. 300 units b. 500 units c. 700 units d. 200 units Answer: b Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 40. If the plant reduces its shipment lot size from 600 to 400 units and keeps its 4 week lead time, what is the wholesaler’s new total cycle plus pipeline inventories? a. 600 units b. 300 units c. 500 units d. 400 units Answer: a Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 172 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 41. Which of the following situations results in the wholesaler’s total cycle plus pipeline inventories amounting to 550 units? a. plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks b. plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks c. plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks d. plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks Answer: b Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 42. Which of the following situations results in the wholesaler’s total cycle plus pipeline inventories amounting to 400 units? a. plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks b. plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks c. plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks d. plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks Answer: d Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 43. Shipments of Product Q from a plant to a wholesaler are made in lots of 400. The wholesaler’s average demand for Q is 150 units per week. Lead time from plant to wholesaler is 5 weeks. The wholesaler pays for the shipments when they leave the plant. The plant has proposed several new lead time and lot size options to the wholesaler (see table below). If the wholesaler’s goal is to minimize total cycle plus pipeline inventories, which option should the wholesaler select? OPTION CURRENT 1 2 3 SHIPMENT LOT SIZE 400 500 800 1,000 PLANT-TOLEAD TIME 5 4 3 2 WHOLESALER a. option #1 b. option #2 c. option #3 d. remain with the current option Answer: c Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: types of inventories, cycle inventory, pipeline inventory 173 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 44. Which of the following is not a lever for reducing cycle inventories? a. place purchased item orders at fixed intervals b. reduce lot sizes for items moving in the supply chain c. streamline methods for placing orders and making machine set ups d. increase repeatability to eliminate the need for changeovers Answer: a Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory, types of inventories, inventory reduction, tactics 45. Which of the following does not increase repeatability? a. parts standardization b. customization c. group technology d. flexible automation Answer: b Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory, types of inventories, inventory reduction, tactics 46. One of the secondary levers for reducing pipeline inventory is to: a. offer seasonal pricing plans. b. increase capacity cushions. c. accept only large orders. d. select more responsive suppliers. Answer: d Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: pipeline inventory, lever 47. Which one of the following statements on inventory placement of finished goods is best? a. Forward placement might help reduce transportation cost. b. Forward placement is consistent with a competitive priority that calls for customization. c. Inventory pooling should be avoided when demand in various regions fluctuates month to month. d. Backward placement is consistent with a competitive priority that calls for fast delivery times. Answer: a Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory, forward placement 48. Which location shift would qualify as forward placement? a. From the manufacturer to a distribution center b. From the retailer to the wholesaler c. From the wholesaler to the manufacturer d. From the retailer to the manufacturer Answer: a Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory, forward placement 174 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 49. Padco averages $15 million worth of inventory in all of its worldwide locations. They operate 51 weeks a year and each week average $3 million in sales (at cost). Their inventory turnover is: a. 1.13 turns. b. 5 turns. c. 10.2 turns. d. 17 turns. Answer: c Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: inventory, turnover 50. Which one of the following statements about the relation between financial and supplychain performance measures is TRUE? a. Longer delivery times require higher levels of working capital. b. Shorter new product development time decreases revenue. c. Higher inventory turns call for higher working capital requirements. d. Lower aggregate inventory value means higher current assets. Answer: a Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: financial measures, supply chain, working capital 51. Henderson Corporation is a supplier of alloy ball bearings to auto manufacturers in Detroit. Because of the specialized manufacturing process employed, considerable workin-process and raw material inventories are created. The average inventory levels are $1,152,000 and $2,725,000, respectively. In addition, finished goods inventory is $3,225,000, and sales (at cost) for the current year are expected to be about $24 million. The inventory turnover that Henderson Corporation is currently expecting is: a. less than 2.0. b. greater than 2.0 but less than 2.5. c. greater than 2.5 but less than 3.0. d. greater than 3.0. Answer: d Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: inventory, turnover 175 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 52. Maple Leaf, Inc., a television manufacturer, would like to reduce its inventory. To this end, you are asked by the operations manager to assess its inventory level. You have the following information on average inventories from last year’s financial statement: Raw materials $2,500,000 Work-in-process $1,000,000 Finished goods $ 800,000 In addition, the cost of goods sold last year (50 weeks) was $15 million. What was the inventory turnover? a.Less than or equal to two b.Greater than two but less than three c.Greater than three but less than four d.Greater than four Answer: c Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: inventory, turnover 53. The average inventory at Hamilton Industries, comprising raw materials, work-inprocess, and finished goods, was found to be $17.2 million last year. If the cost of goods sold per week averaged $1.32 million, what was the inventory turnover experienced by Hamilton Industries? Assume the company had 50 working weeks per year. a. Less than or equal to 3.50 b. Greater than 3.50 but less than 3.75 c. Greater than 3.75 but less than 4.00 d. Greater than 4.00 Answer: c Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: inventory, turnover 54. A firm may choose to use members of the distribution channel as if they were assembly stations in the factory. Such an approach is known as: a. backward integration. b. postponement. c. channel assembly. d. deferred delay. Answer: c Reference: Mass Customization ( Difficulty: Easy Keywords: channel assembly 55. Which of the following is not identified in the text as a competitive advantage of a mass customization strategy? a. improvement of the quality of parts produced b. management of customer relationships c. elimination of finished goods inventory d. an increase in perceived value of services or products Answer: a Reference: Mass Customization Difficulty: Easy Keywords: mass customization, competitive advantages 176 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 56. __________ uses a firm’s flexible processes to generate a wide variety of personalized services or products at reasonably low costs. a. Mass customization. b. Channel assembly c. Postponement d. Forward integration Answer: a Reference: Mass Customization Difficulty: Moderate Keywords: mass customization 57. A somewhat successful computer manufacturer makes a generic computer in five exciting colors. Once orders are received, the computer guts are encased in the customer’s choice of colored case at the factory. This approach to production is known as: a. channel assembly. b. postponement. c. strategic sourcing. d. strategic production. Answer: b Reference: Mass Customization Difficulty: Moderate Keywords: postponement, delayed differentiation 58. A producer of medical devices makes a single model that can be customized to talk in and display any of 47 different languages. This customization is performed in one of their five regional distribution centers as firm orders are received, providing an elegant example of: a. backward integration. a. forward integration b. channel assembly. c. offshoring. Answer: c Reference: Mass Customization Difficulty: Moderate Keywords: channel assembly 59. The supply chain management department of a major manufacturer pondered a particularly weighty make or buy decision for weeks, ultimately deciding to make, rather than buy. This decision resulted in increased: a. outsourcing. b. offshoring. c. postponement. d. backward integration. Answer: d Reference: Outsourcing Processes Difficulty: Easy Keywords: make-or-buy decisions, integration 177 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design Use the following to answer questions 60 – 62. A company must decide if it will make or buy an item it needs. The company can make the item for $10 / unit, but must spend $15,000 per year in tooling to do so. An outside firm has quoted a total price of $12 / unit to supply the quantity required. 60. What is the break-even point in this situation? e. 6,500 units f.7,250 units g. 7,500 units h. 8,000 units ( Answer: c ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 60. Which alternative should be selected if annual requirements are 5,000 units? a. Make b. Buy c. Either Make or Buy; costs are the same for either option at 5,000 units d. Can’t be determined with information given ( Answer: b ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 61. What does the company save for the year by selecting this low-cost option (for annual requirements of 5,000 units)? a. $5,000 b. $15,000 c. $65,000 d. Can’t be determined with information given ( Answer: a ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 178 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design Use the following to answer questions 63 – 65. A company is considering making versus buying a part needed for manufacturing. Particulars are as follows: Make: Fixed Costs = $9,000 / year Variable Cost / Unit = $2 Buy: Fixed Costs = $3,000 / year Variable Cost / Unit = $5 62. What is the annual break-even quantity for choosing between making and buying in this situation? a. 1,000 units b. 2,000 units c. 6,000 units d. 3,000 units ( Answer: b ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 63. For an annual volume of 3,000 units, which supplier should be chosen? a. Make b. Buy c. Either Make or Buy; costs are the same for either option at 3,000 units d. Can’t be determined with information given ( Answer: a ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 64. What does the company save for the year by selecting this low-cost option (for annual requirements of 3,000 units)? a. $5,000 b. $1,000 c. $3,000 d. Can’t be determined with information given ( Answer: c ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 179 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design Use the following information to answer questions 66 – 71. You currently make a part on old equipment at a cost of $50,000 per year and a variable cost of $20 / unit. You have found an outside supplier who will make the part for $15 / unit if you will pay their annual fixed costs of $200,000 / year. The following table summarizes the details of this make versus buy decision. ALTERNATIVE FIXED COST VARIABLE COST Buy $200,000 per year $15 per unit Make $50,000 per year $20 per unit 65. What is the break even quantity between buying and making? a. 30,000 units per year b. 40,000 units per year c. 50,000 units per year d. 60,000 units per year ( Answer: a ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 66. What are total costs to buy an annual quantity of 40,000 units? a. $400,000 b. $500,000 c. $800,000 d. $850,000 ( Answer: c ( Reference: Outsourcing processes ( Difficulty: Easy ( Keywords: outsourcing, make-or-buy decisions 67. What are total costs to make a quantity of 40,000 units per year? a. $400,000 b. $450,000 c. $800,000 d. $850,000 ( Answer: d ( Reference: Outsourcing processes ( Difficulty: Easy ( Keywords: outsourcing, make-or-buy decisions 180 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 69. For what range of output would you prefer to buy? a. 0 - 30,000 units per year b. 30,000 or more units per year c. 40,000 or more units per year d. 0 – 40,000 units per year ( Answer: b ( Reference: Outsourcing processes ( Difficulty: Easy ( Keywords: outsourcing, make-or-buy decisions 70. For what range of output would you prefer to make? a. 40,000 or more units per year b. 0 – 40,000 units per year c. 30,000 or more units per year d. 0 – 30,000 units per year ( Answer: d ( Reference: Outsourcing processes ( Difficulty: Easy ( Keywords: outsourcing, make-or-buy decisions 71. What does the company save for the year by selecting the low-cost option at an annual requirement of 40,000 units? a. $150,000 b. $300,000 c. $50,000 d. $40,000 ( Answer: c ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 72. Which of the following is not a benefit of outsourcing? a. comparative labor costs b. lower logistics costs c. reduction of transaction costs through use of the Internet d. technology transfer to another country or company ( Answer: d ( Reference: Outsourcing processes ( Difficulty: Moderate ( Keywords: outsourcing, make-or-buy decisions 73. A U.S. company faced with spiraling costs in their customer care center recreated that service in Luxembourg at a fraction of the cost. This is an example of: a. offshoring. b. forward integration. c. backward integration. d. postponement. Answer: a Reference: Outsourcing Processes Difficulty: Easy Keywords: offshoring, outsourcing 181 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 74. An efficient supply chain should be preferred when: a. product variety is high. b. competitive priority is customization. c. demand is highly predictable. d. demand is unpredictable. Answer: c Reference: Strategic Implications ( Difficulty: Moderate Keywords: efficient supply chain 75. An efficient supply chain typically has: a. a high capacity cushion. b. high inventory turns. c. supply chain partners that emphasize fast delivery time. d. supply chain partners that emphasize volume flexibility. Answer: b Reference: Strategic Implications ( Difficulty: Moderate Keywords: efficient supply chain 76. A responsive supply chain typically has: e. a low capacity cushion. f.high inventory turns. g. supply chain partners that emphasize low prices. h. supply chain partners that emphasize volume flexibility. Answer: d Reference: Strategic Implications ( Difficulty: Moderate Keywords: responsive supply chain 68. Responsive supply chains should be preferred when: a. product variety is low. b. demand is predictable. c. contribution margins are low. d. product variety is high. Answer: d Reference: Strategic Implications Difficulty: Moderate Keywords: responsive supply chain 69. The type of goods for which a responsive supply chain is appropriate are: a. fashion goods. b. products with a long shelf life. c. expensive products. d. those with infrequent design changes. Answer: a Reference: Strategic Implications Difficulty: Hard Keywords: responsive supply chain 182 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 70. It is desirable for a firm in a responsive supply chain to have: a. low-capacity cushions. b. delivery by railroad. c. high-capacity utilization consistent with high-volume delivery. d. inventory investments as needed to enable fast delivery times. Answer: d Reference: Strategic Implications Difficulty: Moderate Keywords: responsive supply chain 71. The objective of a firm in a responsive supply chain is likely to be realized if it has a: a. standardized product. b. short lead time. c. low-capacity cushion. d. line-flow process. Answer: b Reference: Strategic Implications Difficulty: Moderate Keywords: responsive supply chain FILL IN THE BLANK 81. ____________ is the synchronization of a firm’s process with those of its suppliers and customers to match flow of materials, services and information with demand. Answer: Supply chain management Reference: Supply Chain Design Across the Organization Difficulty: Easy Keywords: supply chain management, supply chain design 82. ____________ seeks to develop a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy. Answer: Supply chain design Reference: Supply Chain Design Across the Organization Difficulty: Easy Keywords: supply chain management, supply chain design 72. ____________ are inventories needed for the production of goods and services; they are considered the inputs to the transformation process. Answer: Raw materials Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: inventory types, raw materials 73. ____________ consists of items such as components or assemblies needed for a final product in manufacturing. Answer: Work-in-process (WIP) Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: inventory types, WIP, work-in-process inventory 183 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 83. A ____________ is an incentive to order larger quantities, where the price per unit is decreased when the order is sufficiently large. Answer: quantity discount Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory, pressure for large inventories, payments to suppliers 74. ____________ is the opportunity cost of investing in an asset relative to the expected return on assets of similar risk. Answer: Cost of capital Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: cost of capital, opportunity, return on assets 75. Inventory ____________ cost is the variable cost of keeping items on hand, including interest, storage and handling, taxes, insurance, and shrinkage. Answer: holding Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: holding cost, interest, storage, handling, tax 76. ____________ occurs when inventory is stolen by employees and customers or when the inventory cannot be sold at full value owing to model changes or low demand. Answer: Shrinkage Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: shrinkage, pilferage, obsolescence 77. A(n) ____________ is an order that cannot be satisfied, resulting in the loss of a sale. Answer: stockout Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory, pressure for large inventories, customer service 78. A(n) ____________ occurs when a customer order cannot be filled as promised or demanded but is filled later. Answer: backorder Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: backorder, order 79. ____________ is the cost of preparing a purchase order for a supplier or a production order for the shop. Answer: Ordering cost Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: ordering cost 184 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 80. ____________ inventory is the portion of total inventory that varies directly with lot size. Answer: Cycle Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: cycle, lot size 81. The ____________ determines the frequency and quantity to order. Answer: lot size Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: lot size 82. ____________ inventory is the surplus inventory that a company holds to protect against uncertainties in demand, lead-time, and supply. Answer: Safety stock Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: safety stock 83. As safety stock increases, the holding cost of that inventory item ____________. Answer: increases Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: safety stock, holding cost 84. ____________ inventory is the inventory moving from point to point in the materials flow system. Answer: Pipeline Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: pipeline, point flow 85. ____________ is the degree to which the same work can be done again and again. Answer: Repeatability Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: repeatability 86. ____________ are the basics tactics for reducing inventories in supply chains. Answer: Levers Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory reduction tactics 87. A ____________ lever is one that must be activated if inventory is to be reduced. Answer: primary Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory reduction tactics 185 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 88. Cornelius Controlfreak insisted that his manufacturing plant also be the sole location for all finished goods inventory. If any customer placed an order, they knew it would come from the only place on Earth that had a ready supply, Cornelius’ plant warehouse. ____________ was alive and well thanks to this approach. Answer: centralized placement Reference: Inventory and Supply Chains Difficulty: Easy Keywords: centralized placement 89. ____________ is a reduction in inventory and safety stock because of the merging of variable demands from customers. Answer: Inventory pooling Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: inventory pooling, merging 90. ____________ involves locating the stock closer to customers at a warehouse, distribution center, or retailer. Answer: Forward placement Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: forward placement 91. ____________ is an inventory measure obtained by dividing the average aggregate inventory value by sales per week at cost. Answer: Weeks of supply Reference: Measures of Supply Chain Performance ( Difficulty: Moderate Keywords: weeks of supply measure 92. ____________, the annual sales at cost divided by the average aggregate inventory value, is the number of times a year that a firm completely replenishes its inventory. Answer: Inventory turnover (turns) Reference: Measures of Supply Chain Performance ( Difficulty: Moderate Keywords: turnover, sales, inventory 93. ____________ is the money used to finance ongoing operations. Answer: Working capital Reference: Measures of Supply Chain Performance ( Difficulty: Moderate Keywords: working capital 94. The clever wine shop owner held a tasting, accepted customer orders and payments, and then placed an order with the vineyard. Since he paid the vineyard after he received the shipment (and well after he charged his customers), his ____________ time was negative. Answer: cash-to-cash Reference: Measures of Supply Chain Performance ( Difficulty: Moderate Keywords: cash-to-cash, cash flow 186 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 95. ____________ is a concept whereby some of the final activities in the provision of a service or product are delayed until the orders are received. Answer: Postponement Reference: Mass Customization Difficulty: Moderate Keywords: postponement 96. One way to gain control over suppliers in a chain is to buy a controlling interest in them, known as ____________. Answer: backward integration Reference: Outsourcing Processes Difficulty: Moderate Keywords: backward integration 97. When a company uses ____________ , it does not perform some processes itself, but instead pays suppliers or distributors to perform those processes and provide needed services and materials. Answer: outsourcing Reference: Outsourcing Processes Difficulty: Easy Keywords: outsourcing 98. When a company uses ____________ , it is moving upstream in the supply chain toward the source of raw materials. Answer: backward integration Reference: Outsourcing Processes Difficulty: Easy Keywords: vertical integration, backward integration 99. When a company acquires more channels of distribution, such as its own distribution centers and retail stores, it is using ____________ . Answer: forward integration Reference: Outsourcing Processes Difficulty: Easy Keywords: vertical integration, forward integration 100. ____________ is the process of using members of the distribution channel as if they were assembly stations in the factory. Answer: Channel assembly Reference: Strategic Implications Difficulty: Moderate Keywords: channel assembly 187 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design SHORT ANSWERS 101. Discuss the major differences between supply chains for services and manufacturing. Which supply chain is easier to coordinate effectively? Answer: Supply chain design for a service provider is driven by the need to provide support for the essential elements of the various service packages it delivers. Manufacturers try to control inventory by managing the flow of materials. Since a good is very rarely a pure service or a pure manufactured product, most companies will experience both issues. Ease of coordination answers will vary but may depend on the dynamic nature of the item, of the market, and other factors outside the control of the operations manager. Reference: Supply Chains for Services and Manufacturing Difficulty: Moderate Keywords: manufacturing, service, inventory, service package, supply chain 102. Discuss the trade-offs with locating the inventory at the factory versus locating it closer to the customer at a warehouse, distribution center, wholesaler, or retailers. Answer: Locating inventory at a company’s factory or warehouse constitutes centralized placement, thereby allowing a firm to take advantage of inventory pooling. Inventory pooling permits the producer to reduce the total inventory in the system, yet retain high service levels since one customer’s high demand may be offset by another customer’s low demand. The disadvantage of holding inventory in one location is the additional expense and time required to get product in the hands of the customer. Another approach to inventory location is forward placement. Forward placement reduces delivery times and puts the inventory closer to the customer so that in some cases (when it is located at a retailer), it can be seen and might trigger a purchase. The disadvantages of forward placement run counter to the advantages of pooling. Reference: Inventory and Supply Chains Difficulty: Moderate Keywords: centralized placement, inventory pooling, service levels, forward placement 103. What are the components of holding cost? ( Answer: The components of holding cost include cost of capital, storage and handling cost, taxes, insurance, and shrinkage. ( Reference: Inventory and Supply Chains ( Difficulty: Moderate ( Keywords: holding cost 104. What are the secondary levers for cycle inventory? ( Answer: The secondary levers for cycle inventory are streamlining methods for placing orders and making setups, and increasing repeatability to eliminate the need for changeovers. ( Reference: Inventory and Supply Chains ( Difficulty: Moderate ( Keywords: cycle inventory, lever 188 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 105. What are the secondary levers for safety stock inventory? ( Answer: The secondary levers for safety stock inventory are improved demand forecasts, cutting lead-time of purchased or produced items, reducing supply uncertainties, and relying more on equipment and labor buffers. ( Reference: Inventory and Supply Chains ( Difficulty: Moderate ( Keywords: safety stock inventory, lever 106. What are the secondary levers for pipeline inventory? ( Answer: The secondary levers for pipeline inventory are finding more responsive suppliers and introducing new computer systems to overcome information delays and decreasing Q where lead-time depends on lot size. ( Reference: Inventory and Supply Chains ( Difficulty: Moderate ( Keywords: pipeline inventory, lever 107. Compare and contrast efficient versus responsive supply chains. Answer: The purpose of efficient supply chains is to coordinate the flow of materials and services to minimize inventories and maximize the efficiency of the manufacturers and service providers in the chain. Responsive supply chains are designed to react quickly to market demands by positioning inventory and capacities to hedge against uncertainties in demand. Efficient supply chains work best where demand is predictable with low forecast errors; competitive priorities are low cost, consistent quality, and delivered on time; new-product introduction is low; and profit margins are low. Responsive supply chains work best when demand is unpredictable with high forecast errors. Competitive priorities are development speed, fast delivery times, customization, high-performance design quality; new product-introduction is frequent; contribution margins are high; and product variety is high. Efficient supply chains should use a make-to-stock or standardized services operations strategy, lowcapacity cushion, and low inventory investment. They should shorten lead time without increasing costs and emphasize fast delivery time, customization, volume flexibility, and high-performance design quality. Responsive supply chains should use assemble-to-order, make-to-order, or customized services emphasizing product or service variety; high-capacity cushions; and inventory levels set to enable fast delivery time. They should aggressively shorten lead time and emphasize fast delivery time, customization, volume flexibility, and high-performance design quality. Reference: Strategic Implications Difficulty: Hard Keywords: efficient supply chain, responsive supply chain 189 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design PROBLEMS 108. Last year, RJT Enterprises had average inventories (raw materials, work-in-process, and finished goods) of $7.5 million. During this same year the cost of goods sold was $30 million. The company operates 50 weeks per year. a. What is their total inventory (measured as weeks of supply)? b. What is their inventory turnover? Answer: Weeks of supply = average aggregate inventory value/weekly sales at cost = 7.5 million/(30 million/50) = 12.5 weeks Inventory turnover = annual sales (at cost)/average aggregate inventory value = 30 million/7.5 million = 4 Reference: Measures of Supply Chain Performance Difficulty: Moderate ( Keywords: turnover, weeks of supply, inventory value 121. Rome Corporation is a supplier of ball bearings. Because of the specialized manufacturing process employed, considerable work-in-process and raw material inventories are created. The current inventory levels are $1,500,000 and $3,775,000, respectively. In addition, finished goods inventory is $3,500,000, and sales (at cost) for the current year are expected to be about $28 million. Assume they operate 50 weeks per year. a. What is their total inventory (measured as weeks of supply)? b. What is their inventory turnover? Answer: a. Weeks of supply = average aggregate inventory value/weekly sales at cost = (1,500,000 + 3,775,000 + 3,500,000)/(28,000,000/50) = 15.7 weeks b. Inventory turnover = annual sales (at cost)/average aggregate inventory value = 28 million/8.775 million = 3.19 Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: turnover, weeks of supply, inventory value 122. A television manufacturer would like to reduce its inventory. To this end, you are asked by the operations manager to assess its inventory level. You have the following information on average inventories from last year’s financial statement: Raw materials $1,500,000 Work-in-process $1,200,000 Finished goods $ 800,000 In addition, the cost of goods sold last year (50 weeks) was $20 million. a. What is its total inventory (measured as weeks of supply)? b. What is its inventory turnover? Answer: Weeks of supply = average aggregate inventory value/weekly sales at cost = (1,500,000 + 1,200,000 + 800,000)/(20,000,000/50) = 8.75 weeks Inventory turnover = annual sales (at cost)/average aggregate inventory value = 20 million/3.5 million = 5.71 Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: turnover, weeks of supply, aggregate inventory value 190 Copyright ©2010 Pearson Education Chapter 9  Supply Chain Design 123. Champion Cooling Company remanufactures window air conditioners during the offseason months for sales during the scorching months of June, July, and August in the Oklahoma City area. Their average inventory of air conditioners is shown in the following table. The company operates 50 weeks a year and has average weekly sales of $3,750 and expects to sell $135,000 worth of product in a year. Unit Type Avg. Inventory Value of Each (at cost) 110 Volts 65 $250 18,000 BTU or smaller 220 Volts 90 $350 Larger than 18,000 BTU 50 $500 a. What is their average aggregate inventory value? b. What is their total inventory (measured as weeks of supply)? c. What is their inventory turnover? Answer: (#Units on Hand )(Value of Each Item) a. Avg Aggregate Inventory Value   Avg Aggregate Inventory Value  65  $250  90  $350  50  $500  $72, 750 Avg Aggregate Inventory Value b. Weeks of Supply  Weekly Sales Weekly Sales (at cost) Weeks of Supply  $72, 750  20 weeks 19.4 weeks $3, 750 / week Annual Sales (at cost) Annual Sales Avg Aggregate Inventory Value $135, 000 Inventory Turnover   1.86 $72, 750 c. Inventory Turnover  Reference: Measures of Supply Chain Performance Difficulty: Moderate Keywords: turnover, weeks of supply, aggregate inventory value 191 Copyright ©2010 Pearson Education