PRINCIPLES OF SUPPLY CHAIN MANAGEMENT A BALANCED APPROACH 6TH EDITION BY JOEL WISNER, KEAH_CHOON TAN by QuentinAxel

PRINCIPLES OF SUPPLY CHAIN MANAGEMENT A BALANCED APPROACH 6TH EDITION BY JOEL WISNER, KEAH_CHOON TAN, G. KEONG LEONG SOLUTIONS MANUAL

Table of Contents

Discussion Questions .......................................................................................................... 1 Cases ................................................................................................................................ 7 Learning Objectives ................................................................................................................................... 7 Answers to Questions ................................................................................................................................ 7 Appendix 1.1 The Beer Game .............................................................................................. 8 Questions and Exercises ............................................................................................................................ 8

Discussion Questions 1. Define the term supply chain management in your own words and list its most important activities. Answers: The Supply-Chain Council’s definition of supply chain management is ―managing supply and

demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer. These are also the most important activities; however, integration of key supply chain processes might also be included in there. 2. Can a small business like a local sandwich or bicycle shop benefit from practicing supply chain management? What would they most likely concentrate on? Answers: Yes, any organization can implement at least some of the important concepts. A good place to start is the rationalization or reduction of the supply base. Small businesses might also want to concentrate on customers as a starting point. 3. Describe and draw a supply chain for a bicycle repair shop and list the important supply chain members. Answers:

This will vary from student to student, but should include, for instance, parts suppliers, bicycle suppliers, and other suppliers (i.e., helmet suppliers) and services (i.e., repair services) as firsttier suppliers and bicycle owners as first-tier customers. 4. Can a bicycle repair shop have more than one supply chain? Explain. Answers: Yes. Every repair item the firm stocks has potentially a different supply chain associated with it. 5. What is a cold chain? Why did it become so important in 2020? Answers: A cold chain is an alliance of companies that can monitor and protect the temperature of perishable products to maintain quality and safety from the point of origin through distribution to the final consumer. Cold chains became a popular news item in 2020 as COVID-19 vaccines began to be distributed globally by Pfizer and Moderna. The two vaccines must be stored and transported at sub-zero temperatures. 6. How has the recent global pandemic impacted supply chain management? Answers: In general, it made things more difficult, particularly for global supply chains—companies have gone bankrupt, retailers have stopped buying regularly, ports have shut down unexpectedly, and many purchases have gone online as people stayed home. Companies have had to react quickly to the changes. 7. What roles do ―collaboration‖ and ―trust‖ play in the practice of supply chain management? Answers: This is essential for process integration. Sharing information and determining joint strategies is part of the process of integration and collaboration, and to do this, trust must be present between the customer, focal firm, and supplier. 8. Why don’t firms just become more vertically integrated (for example buy out suppliers and customers), instead of trying to manage their supply chains? Answers: This could cause a loss of focus and keep managers and employees from doing their core competencies, resulting in loss of performance. 9. What types of organizations would benefit the most from practicing supply chain management? What sorts of improvements could be expected? Answers: Firms with many suppliers, many complex products, large inventories, and many customers (in other words, firms with many supply chains). Gains would be lower purchasing costs, lower carrying costs, better product quality, and better customer service. 10. What are the benefits of supply chain management? Answers: Reduction of the bullwhip effect, better buyer/supplier relationships, better quality, lower costs, better customer service, higher demand, and more profits.

11. Can nonprofit, educational, or government organizations benefit from supply chain management? How? Answers: Yes. All services and organizations can benefit in terms of at least better customer service, better inventory management, and cheaper purchase prices. 12. What does the term, ―third-tier supplier‖ mean? What about ―third-tier customer‖? What about the ―focal firm‖? Provide examples. Answers: First-tier suppliers are the focal firm’s direct suppliers. Second-tier suppliers are the focal firm’s suppliers’ direct suppliers. Third-tier suppliers are the focal firm’s suppliers’ suppliers’ suppliers. Company A sells wood to Company B. Company B sells furniture to Company C. Company C sells the furniture to Wal-Mart. Company A is Wal-Mart’s third-tier supplier. Similarly, the focal firm’s customers’ customers’ customers are their third-tier customers. The focal firm just refers to the firm in question, or in the topic of discussion. 13. What is the bullwhip effect and what causes it? How would you try to reduce the bullwhip effect? Answers: The magnification of safety stock and erratic buying behavior as customers along the supply chain forecast demand and add safety stock to their forecasts and production schedules causes the bullwhip effect. As we move further back up the supply chain then, more and more of the output is in the form of safety stocks. Reducing the need to forecast (by agreeing on a future purchase quantity or using CPFR) is one way to reduce the bullwhip effect. 14. When did the idea and term, supply chain management, first begin to be thought about and discussed? Which two operations management practices became the origin of supply chain management? Answers: The general idea of supply chain management had been discussed for many years prior to the chain of events shown in Figure 1.1. Back in 1915, Arch W. Shaw of the Harvard Business School wrote the textbook, Some Problems in Market Distribution, considered by many to be the first on the topic of what we now refer to as supply chain management. The text included discussions of how best to purchase raw materials, transport products, locate facilities, and analyze productivity and waste. According to C. John Langley, Jr., professor of supply chain management at the Georgia Institute of Technology, ―The idea that companies ought to work together, and coordinate activities has always been around, but ask people today what one of the biggest problems with supply chains are today, and they say companies don’t work very well together.‖ The 1980s were the breakout years for supply chain management. One of the first widely recorded uses of the term supply chain management came about in a paper published in 1982. Intense global competition beginning in the 1980s (and continuing today) provided an incentive for U.S. manufacturers to offer lower-cost, higher-quality products along with higher levels of customer service. Manufacturers utilized just-in-time (JIT) and total quality management (TQM) strategies to improve quality, manufacturing efficiency, and delivery times. In a JIT manufacturing environment with little inventory to cushion scheduling, production problems, or both firms began to realize the potential benefits and importance of strategic and cooperative supplier-buyer-customer relationships. The concept of these partnerships or alliances emerged as manufacturers experimented with JIT and TQM. These were the origins of SCM. 15. Do you think supply chain management is simply the latest trend in management thinking and will die out in a few years? Why or why not? Answers:

This answer will vary because it was not specifically discussed. However, considering that the ideas of SCM have been around for many, many years makes one think that the practice is here to stay. 16. How has technology impacted supply chain management? Answers: SCM software and e-commerce has aided supply chain integration and aided in the evolution and adoption of supply chain management. Sharing information with supply chain partners through the internet has enabled firms to integrate stocking, logistics, materials acquisition, shipping, and other functions to create a more proactive and effective style of business management and customer responsiveness 17. What are the four foundation elements of supply chain management? Describe some activities within each element. Answers: The four elements are supply (supply base reduction, supplier alliances, SRM, global sourcing, ethical and sustainable sourcing), operations (demand management, CPFR, inventory management, MRP, ERP, lean systems, Six Sigma quality), logistics (logistics management, CRM, network design, RFID, global supply chains, sustainability, service response logistics), and integration (barriers to integration, risk and security management, performance measurement, green supply chains). 18. Is the use of a large number of suppliers a good idea? Why? Answers: This somewhat depends. Certainly, SCM suggests fewer suppliers and longer-term relationships; however, there can always be exceptions to this rule. Purchasing a widely available common product like soap or tissue paper might be better done with many suppliers competing for this business. But this works against ever creating trusting and lasting supply chain partnerships. In most cases though, use of a few key suppliers for an item is considered a good idea, since it means larger supply quantities, leading to lower prices and better service. 19. Do you think the proper way to choose a supplier is to always find the one that will give you the lowest price? When might this not be a good idea? Answers: Absolutely not. Low price is sometimes fine, if quality or service is not an issue, as in buying some MRO (maintenance, repair, and operations) items. But when quality and service matter, price should only be one of the purchase criteria. 20. What is supplier management? What are some of the activities of supplier management? Answers: Simply put, it means encouraging or helping the firm’s suppliers to perform in some desired fashion, and there are a few ways to do this. This involves assessing suppliers’ current capabilities and then deciding if and how they need to improve them. Thus, one of the key activities in supplier management is supplier evaluation or determining the current capabilities of suppliers. 21. What is the difference between supply chain management and logistics? Answers: Logistics involves only the transportation and distribution functions. SCM includes logistics as well as production, supply management, and integration of processes. 22. What is demand management and why is this an important part of supply chain management? Answers:

Demand management is when management tries to match demand to available capacity, either by improving production scheduling, curtailing demand, using a back-order system, or increasing capacity. In a recent survey of supply chain managers, stockouts were considered the most pressing issue in the use of demand management activities, followed closely by excess inventories and long lead times. 23. What is the difference between and MRP system and an ERP system? Answers: Material requirements planning (MRP) systems are the older materials management system software applications and are used for essentially basic assembly and purchase decisions. ERP systems came about several years later and tied all of a company’s geographically distant units together by having one central database to track system inventories. 24. What role do information systems play in supply chain management? Give some examples. Answers: Information systems play very important roles in most supply chains. They give supply chain members information visibility, tracking capabilities, and quick communication capabilities. 25. Briefly describe the terms, lean production, and Six Sigma systems. Answers: Lean refers to low waste and inventories and used to be referred to as JIT. Six Sigma originated at Motorola and refers to a quality management philosophy. 26. What are 3PLs and what role do they play in SCM? Answers: Third-party logistics service providers. These allow firms to concentrate more on their capabilities while allowing 3PLs to perform logistics activities like delivery and storage. 27. What is logistics? What is the objective of logistics? Answers: Logistics is the movement and storage of raw materials, work-in-process, and finished goods. The objective is to deliver products to customers at the right time, quality, and volume, which requires a high level of planning and cooperation between the firm, its customers, and the various logistics elements or services employed (such as transportation, warehousing, and breakbulk or repackaging services). In contrast, services are produced and delivered to the customer simultaneously in most cases, so services are extremely dependent upon server capacity and successful service delivery to meet customer requirements. 28. What is the triple bottom line and how would you describe it for Walmart? Answers: The term sustainability as applied to supply chains is a broad term that includes protecting the environment, some aspects of social responsibility, as well as financial performance (hence the linking of sustainability to what is termed the triple bottom line, or people, planet, and profits). For Walmart, it is its employees and customers, how its products impact the environment, and the money it makes. 29. What tradeoffs must be considered in designing a distribution system? Answers: Logistics decisions typically involve a trade-off between cost and delivery timing or customer service. Motor carriers (trucks), for example, are more expensive to use than rail carriers, but offer more flexibility and speed, particularly for short routes. Air carriers are even more expensive but much faster than any other transportation mode. Water carriers are the slowest but also the least expensive. Finally, pipeline transportation is used to transport oil, water, natural gas, and

coal slurry. Many transportation services offer various modal combinations, as well as warehousing and customs-clearing services. 30. What are the advantages and risks involved with global supply chains? Answers: Some of the advantages include a larger market for products, economies of scale in purchasing and production, lower labor costs, a supply base of potentially cheaper, higher-quality suppliers, and the generation of new product ideas from foreign suppliers and employees. Some of the risks include fluctuating exchange rates affecting production, warehousing, and purchasing and selling prices; government intervention or political instabilities causing supply disruptions; security concerns; and potential changes in subsidies, tariffs, and taxes. 31. What does process integration mean? Can supply chain management succeed without it? Why or why not? Answers: This refers to collaborations which occur between suppliers and buyers in a supply chain. Working together is what allows supply chains to be effective. Processes in a supply chain are said to be integrated when members of the supply chain work together to make purchasing, inventory, production, quality, logistics, and other decisions that impact the overall profits of the supply chain. If one key process activity fails or is performed poorly, then the flow of goods moving along the supply chain is disrupted, jeopardizing the effectiveness of the entire supply chain. Successful supply chain process integration occurs when the participants realize that effective supply chain management must become part of each member’s strategic planning process, where objectives and policies are jointly determined based on the end consumers’ needs and what the supply chain can do for them. 32. Should companies require their suppliers to get certified if they are performing well? Answers: Yes. This could help identify weaknesses in areas covered by the certification instrument. 33. At what point should a supplier be considered to have a strategic partnership with a firm? Answers: Suppliers see significant benefits from the creation of closer working relationships with customers in terms of long-term, higher-volume sales. These trading partner relationships have come to be termed strategic partnerships. 34. Why are performance measurement systems important when trying to manage supply chains? Answers: Performance measurements must be utilized along supply chains to help firms keep track of their supply chain management efforts. It is crucial for firms to know whether certain strategies are working as expected—or not—before they become financial drains on the organizations. Firms work together to develop long-term supply chain management strategies and then devise tactics to implement these strategies. Performance measurements help firms decide the value of these tactics and should be developed to highlight performance within the areas of purchasing, operations, logistics, and integration. 35. Does a global supply chain have more risk than a domestic supply chain? Why? Answers: Yes—distances are longer, which means more things can go wrong; also dealing with other cultures/governments can prove problematic. 36. What are big data and data analytics? How might they be used in supply chains? Answers:

Huge volumes of data generated refer to the term big data in business organizations. There is also the rising awareness among executives regarding the benefits of analytics solutions. Analytics can be used along the supply chain, for example, to schedule production according to expected supplier deliveries, to route delivery trucks through a distribution network, or to determine when a customer is most likely to be home to accept a delivery. 37. What are some things supply chain members could do to improve sustainability? Answers: By improving environmental, social, and governance performance throughout the supply chain, companies can enhance processes, reduce costs, increase productivity, uncover product innovation, achieve market differentiation, and improve societal outcomes. 38. Describe supply chain visibility and why supply chain managers like it. Answers: Supply chain visibility can be defined as the ability of suppliers, manufacturers, business partners, and customers to know exactly where products are, at any point in the supply chain. This inventory visibility is obviously made easier by technology and can prove very advantageous when dealing with disruptive events like hurricanes or other unexpected events.

Cases 1.

Supply Chain Management: The Big Picture Case Note

Learning Objectives:   

Describe a supply chain and define supply chain management. Describe the objectives and elements of supply chain management. Describe local, regional, and global supply chain management activities.

This case highlights how critical supply chain management is at different levels of expansion, that is local, regional, and global. The case discusses the four foundation elements of supply chain management, supply, operations, logistics, and integration. The case illustrates that although a company is engaged in global commerce, it may be necessary to look at supply chain management from the perspective of the specific marketplace, for example, Europe, South America, and so on. Depending on the industry, each marketplace may have different regulatory requirements. Finally, the case emphasizes the importance of supply chain management process integration. Although each of the first three foundation elements are designed well, unless every supply chain partner includes the planning in their strategic planning process, the entire system could fail.

Answers to Questions 1. For the supply chain management element supply, important issues to address are supply base reductions, supplier alliances, supplier relationship management, global sourcing, ethical sourcing, and sustainable sourcing. These will be covered in chapters 2, 3, and 4. 2. For the supply chain management element operations, important issues to address are demand management, inventory, management, lean systems, Six Sigma quality, etc. These will be covered in chapters 5, 6, 7, and 8. 3. For the supply chain management element logistics, important issue to address is logistics management, network design, global supply chains, sustainability, and service response logistics. These will be covered in chapters 9, 10, 11, and 12.

4. The issues any company must overcome are cultural norms, adversarial relationships, silos, conflict, and barriers within and between companies. These types of issues or obstacles must be broken down, reduced, or eliminated for true process integration to be achieved. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Appendix 1.1 The Beer Game Questions and Exercises 1. All players but the retailer should answer this question. What do you think the retailer’s customer demand pattern looked like? How did your customer orders vary throughout the game? Answers: Varies. Hopefully, their guesses will be nothing like the relatively constant demand pattern experienced by the retailer. 2. What happened to the current inventory levels as we move backward, up the supply chain from retailer to manufacturer? Why? Answers: The inventory levels should magnify or explode as we go back up the supply chain, as members try to fill ever-increasing orders from customers. This is due to the bullwhip effect. 3. How could the supply chain members reduce total inventory and back-order costs in the future? Answers: Through closer, more timely and accurate communications. 4. Go to https://beergame.masystem.se and try playing the Internet version of the game. Report on your experiences playing the game. Answers: If possible, try playing it first prior to assigning this question to the class.

Chapter 02: Answers to Questions/Problems Table of Contents Discussion Questions ................................................................................................................................. 9 Spreadsheet Problems ............................................................................................................................. 14 Cases 22 Learning Objectives ................................................................................................................................. 22 Questions and Answers ........................................................................................................................... 23 Learning Objectives ................................................................................................................................. 23 Questions and Answers ........................................................................................................................... 24 Learning Objectives ................................................................................................................................. 24 Questions and Answers ........................................................................................................................... 25 Part 2 Continuing Case

Answers to Questions .............................................................................................................................. 26

Discussion Questions 5. Describe the steps in a traditional manual purchasing system. Answer: Figure 2.1 describes a typical manual purchasing system. The user initiates the purchase by issuing a purchase requisition. If the item is not available in the storeroom, a buyer issues a purchase order to a qualified supplier. 6. Describe the e-procurement system and its advantages over the manual system. Are there any disadvantages to the electronic system? Do you think the e-procurement system will ultimately replace the manual system? Why or why not? Answer: Figure 2.4 describes an e-procurement system. e-procurement system eliminates duplicate data entry and thus improves accuracy. Other advantages include very fast execution time and the ability to handle mass communication effectively. Its disadvantages include additional capital investment to buy the hardware and software, training, and that it is a rapidly growing technology. Thus, new equipment and technology may become obsolete very quickly. Many savvy businesses are switching over to an e-procurement system because its advantages far outweigh the disadvantages. 7. How can purchasing help to improve the competitive edge of an organization? Answer:

Solution and Answer Guide:

In addition to ensuring uninterrupted flows of raw materials at the lowest total cost, purchasing can help to improve an organization’s competitive edge by actively seeking better materials and reliable suppliers, working closely with and exploiting the expertise of strategic suppliers to improve the quality of raw materials, and involving strategic suppliers and purchasing personnel in new product design and development efforts. 8. What is the profit-leverage effect of purchasing? What is the return-on-assets effect of purchasing? Answer: The profit-leverage effect of purchasing measures the impact of a change in purchase spend on a firm’s profit before taxes, assuming gross sales and other expenses remain unchanged. It is widely used to show that decreases in purchase spend directly increase profits before taxes by the same amount. The Return on Assets (ROA) effect of purchasing measures the impact of a change in purchase spend on a firm’s ROA. Table 2.2 is an example of the profit-leverage effect. 9. What does inventory turnover measure? Is a higher or lower turnover preferred in general? Answer: Inventory turnover measures the number of times a firm’s inventory is utilized and replaced over an accounting period, such as a month or a year. A high inventory turnover ratio is preferred because it indicates that the firm is more efficient in utilizing its inventory to support production and generate revenues. For example, an annual inventory turnover ratio of ten times shows that the firm turnovers its inventory ten times per year. 10. How does a merchant differ from an industrial buyer? Answer: A merchant (e.g., wholesaler and retailer) primarily purchases for resale purposes, whereas an industrial buyer purchases raw materials and/or component parts for conversion purposes. 11. Describe the purpose of a material requisition, a purchase order, a request for quotation and a request for proposal. Does the material requisition serve the same purpose as the purchase order? Answer:

Material requisition—an internal document used to request materials from the warehouse or purchasing department. Purchase order—a document used to buy materials from suppliers. It usually contains the terms and conditions of the sale and delivery. It is legally binding on the buyer and seller when the seller accepts the terms of the sale. Request for quotation—a document used to request the prices of goods and/or services from suppliers. Request for proposal—a document used to solicit ideas and/or solutions for a specific good and/or service from suppliers. It is usually used when the exact specifications of the good/service are not known. No, a material requisition is used to request goods whereas a purchase order is used to buy goods/services from supplier. 12. Why are small value purchase orders problematic? How can purchasing more effectively deal with this problem? Answer: It means that the ordering cost is more than the cost of the goods/services purchased. Many firms consider a total value of less than $500 to be small value purchase. There are many ways to deal with this problem, including the use of corporate purchasing cards (commonly known as p-cards), blank check purchase orders, blanket purchase orders, and Petty Cash. 13. Should unit price be used as the sole criterion for selecting suppliers? Why?

Solution and Answer Guide:

Answer: No. A firm should always consider the total costs of acquisition, which include purchase price, transportation cost, storage cost and quality cost, among others. 14. Explain backward vertical integration. What are the advantages of outsourcing compared to backward vertical integration? Answer: Backward vertical integration refers to acquiring a supplier’s operations. An example would be an automobile manufacturer buying a supplier who is supplying car seats or other component parts. Outsourcing enables the buying firm to focus on core competencies and to acquire better quality components and materials from qualified suppliers who can produce the components at a lower price due to higher volume and technology. For example, a car seat supplier will be able to invest more money in R&D and produces at a higher volume if it sells car seats to two or more automobile manufacturers than what each manufacturer can invest individually. 15. When should a firm outsource instead of making the items in-house? Answer: If cost is the only criterion, a breakeven analysis can be used to analyze the breakeven quantity. Generally, if the volume is too small, the equipment is very expensive or it lacks the expertise to produce the items, a firm should outsource. Strategically, a firm should outsource its non-core activities to focus on core competencies. 16. What factors should be considered while choosing suppliers? Answer: A firm should consider a supplier’s technology, financial stability, quality, delivery performance, flexibility, service, willingness to share technology and participate in new product development, and others. 17. What is supplier diversity, and how does a supplier prove their diversity status? Answer: Supplier diversity is a strategic sourcing initiative to ensure a diverse supplier base that includes businesses owned by diverse individuals, such as minority-owned, women-owned, veteranowned, disability-owned, and small-business enterprises. A supplier can prove their diversity status by seeking third-party certification from the relevant certification organizations, such as the National Minority Supplier Development Council, Women’s Business Enterprise National Council, National Veterans Business Development Council, National Veteran Owned Business Association, Department of Veterans Affairs’ Office of Small & Disadvantaged Business Utilization, and Disability:IN. 18. Describe the difference between sole source and single source. Answer: Sole source refers to a situation when there is no option but only one supplier is capable of supplying or producing the product needed. With single source, the buying firm chooses among multiple suppliers to select a single supplier that best meets its need.

Solution and Answer Guide:

19. What are the reasons to use a single supplier? Is this the most efficient way to purchase materials in general? Answer: Reasons to use a single source include more consistent quality level, higher volume, and to build buyer-supplier trust and mutually beneficial relationships. In general, this is true for many savvy corporations. 20. Describe centralized and decentralized purchasing and their advantages. Answer: Centralized purchasing uses a centralized purchasing department or division to handle all purchases for the corporation, whereas decentralized purchasing allows an individual division or branch to handle its own purchasing activity. Advantages of centralized system include quantity purchases, which lead to better bargaining power, and a consistent system for the entire corporation. Advantages of a decentralized system include flexibility, easier to source locally, faster delivery, and less bureaucracy. 21. Describe how the hybrid purchasing organization works. Answer: Hybrid purchasing organizations exist in one of two forms: (1) decentralized purchasing at the corporate level, but centralized procurement function at the business unit level, and (2) centralized purchasing structure to negotiate national contracts at the corporate level, but decentralized buying at the business unit level. The hybrid purchasing organization allows the firm to exploit the advantages of both the centralized and decentralized systems. 22. Describe how blanket orders and blanket order releases can be used to manage the procurement system of a business that owns a dozen large restaurants in a city. Answer: An organization can use the hybrid purchasing structure to negotiate blanket orders or contracts at the corporate level where prices and other delivery terms are agreed upon. Then, the firm can use blanket order releases to release orders at the firm level. 23. What are the two categories of Incoterms 2020? How many rules are in each category? Answer: The two categories of Incoterms 2020 are separated based on the method of delivery. These two categories are (1) the rules for any mode or modes of transport, and (2) the rules for sea and inland waterway transport. There are seven rules in the first category and four rules in the second category. 24. How does public procurement differ from corporate purchasing? Answer: Public procurement is subjected to political pressure and public scrutiny. Moreover, public procurement is subjected to special rules and regulations that are established by the federal, state, and local governments. Consequently, the procedures for public procurement differ from the public sector—in addition to ensuring that purchases for goods and services are in strict compliance with statute and policies, public procurement procedures are generally designed to maximize competition. 25. Describe the different types of bid bonds. Answer: Bid or surety bonds guarantee the successful bidder will accept the contract; performance bonds guarantee the work of the successful bidder meets specifications and in the time specified; and payment bonds protect the buyer against any third-party liens not fulfill by the bidder.

Solution and Answer Guide:

26. What are micro-purchases? How can they be used to improve public procurement? Answer: Micro-purchases are government purchases of $2,500 and below. Micro-purchases can be made without obtaining competitive quotes, and thus it improves the public buying process for small dollar value purchases. 27. What is the current simplified acquisition threshold? How does simplified acquisition help to improve public procurement? Answer: The simplified acquisition threshold was initially set at $100,000 but was raised to $250,000 in 2018. Simplified acquisition removes many restrictions and simplifies the procedures in government purchases. Instead of using full and open competitive bidding, government agencies can now use simplified procedures that require fewer administrative details, lower approval levels, and less documentation for soliciting and evaluating bids up to $250,000. Micro-purchases are government purchases that are less than $10,000, which can be made without obtaining competitive quotes. 28. Why do firms purchase from foreign suppliers? What are the risks involved in global sourcing? Answer: Reasons include cheaper and better materials, to meet requirements imposed by a foreign country to invest locally, and to take advantage of growth potential. Risks include political instability, currency fluctuation, and cultural differences. 29. What is countertrade? Describe the various types of countertrade. Answer: Countertrade is where goods and/or services are exchanged for goods and/or services of equal value or in combination with currency. There are various forms of countertrade, including barter, offset, and counterpurchase. Barter is the complete exchange of goods and/or services of equal value without the exchange of currency. Offset is an exchange agreement for industrial goods and/or services as a condition of military-related export. Offset can be divided into direct and indirect offsets. Direct offset usually involves co-production or a joint venture, and exchange of related goods and/or services, whereas indirect offset involves exchange of goods and/or services unrelated to the aerospace or defense sector. Counterpurchase is an arrangement whereby the original exporter either buys or finds a buyer to purchase a specified amount of unrelated goods and/or services from the original importer.

30. Describe how a typical government bidding process is conducted. Answer: In a typical government bidding process, an invitation for bid (IFB) is used to solicit sealed bids. The specifications for the proposed purchase, instructions for preparation of bids, and the conditions of purchase, delivery and payment schedule are usually included with the IFB. The IFB also designates the date and time of bid opening. Sealed bids are opened in public at the purchasing office at the time designated in the invitation, and facts about each bid are read aloud and recorded. A contract is then awarded to the lowest responsible and responsive bidder. 31. How can global sourcing enhance a firm’s competitiveness? Answer: Global sourcing may allow a firm to acquire better quality raw materials and components at a lower price due to better process or product technologies. Also, an overseas supplier may hold the patent of a product that limit the availability of the component locally.

Solution and Answer Guide:

32. Describe the disadvantages of global sourcing and how it can adversely affect a firm’s competitiveness. Answer: The costs and delivery lead time of global sourcing can be prohibitive. Global sourcing also imposes more complex shipping terms and complicated logistics issues than domestic suppliers. Also, the quality levels of global suppliers may not be acceptable. 33. Describe Tier-1, Tier-2, and Tier-3 suppliers. Answer: A tiered supply chain model is widely used in the aerospace, automotive, and computer industries where the finished goods consists of many complex sub-assemblies that must comply with stringent quality standard and complex manufacturing process. Original equipment manufacturers (OEM) are the companies that make the final products. Tier-1 suppliers provide parts or services directly to the OEM; Tier-2 suppliers provide their outputs to Tier-1 suppliers, but not directly to the OEM; and Tier-3 suppliers sell their outputs to Tier-2 suppliers.

Spreadsheet Problems 34. If a firm’s net income (profits before taxes) is $120,000 and it has total assets of $1.5 million, what is its return on assets? Answer: ROA = $120,000/$1,500,000 = 8% 35. If a firm’s total assets is $1.2 million and its net income is $100,000, what is its return on assets? Answer: ROA = $100,000/$1,200,000 = 8.33% 36. If a firm’s total assets is $2.5 million and its return on assets is 12 percent, what is its net income? Answer: Net Income = $2,5000,000 x 0.12 = $300,000 37. If a firm’s net income is $100,000 and its return on assets is 10 percent, what is its total assets? Answer: Total Assets = $100,000 / 0.10 = $1,000,000 38. If a firm can sustain the same level of operations in terms of sales and administrative expenses but reduces its materials cost by $50,000 through smarter purchases, what is the profit-leverage effect on gross profits? What is the profit-leverage effect on profits before taxes? Answer: (a) Gross profits increase by $50,000; (b) Profits before taxes increase by $50,000. 39. If a firm’s cost of goods sold is $2.5 million and its average inventory is $500,000, what is the inventory turnover? Answer: Inventory Turnover = $2,500,000/$500,000 = 5 times 40. If a firm’s cost of goods sold for the year is $2 million, and beginning and ending inventories for the year are $280,000 and $120,000 respectively, what is the annual inventory turnover? Answer:

Solution and Answer Guide:

Annual Inventory Turnover =

$2,000,000 = 10 times  $280,000  $120,000    2  

41. If a firm’s cost of goods sold is $5 million and its inventory turnover is 10 times, what is the average inventory? Answer: Average Inventory = $5,000,000/10 = $500,000 42. If a firm’s inventory turnover is eight times and its average inventory is $160,000, what is the cost of goods sold? Answer: COGS = $160,000 x 8 = $1,280,000 43. A retailer in Las Vegas has an ending inventory of $250,000 as of December 31, 2019, and the following accounting information.

Month

Ending Inventory

Cost of Goods Sold

January 2020

$225,000

$1,200,000

February 2020

$325,000

$1,250,000

March 2020

$240,000

$1,350,000

April 2020

$325,000

$1,500,000

May 2020

$460,000

$950,000

June 2020

$220,000

$850,000

July 2020

$85,000

$1,650,000

August 2020

$156,000

$1,325,000

September 2020

$220,000

$1,750,000

October 2020

$265,000

$850,000

November 2020

$100,000

$2,200,000

December 2020

$350,000

$3,500,000

a. Compute the monthly inventory turnover ratio for each of the twelve months. b. What are the annual cost of goods sold and the average inventory for the year? c. Compute the annual inventory turnover ratio. How is the retailer’s performance compares to the industry standard, assuming its business is similar to Wal-Mart’s?

Answer:

Solution and Answer Guide:

Ending Inv @ 12/31/2019 Fiscal Year 2020 Ending Inventory Cost of Goods Sold

$250,000 January February March April $225,000 $325,000 $240,000 $325,000 $1,200,000 $1,250,000 $1,350,000 $1,500,000

Average Inventory (a) Monthly Inventory Turnover (c) Annual Inventory Turnover (b) Annual Cost of Goods Sold = (b) Average Inventory for the Year = (c) Annual Inventory Turnover Ratio =

$237,500 5.05 75.49

$275,000 4.55

$282,500 4.78

$282,500 5.31

May $460,000 $950,000

June $220,000 $850,000

$392,500 2.42

$340,000 2.50

$18,375,000 $243,417 75.49

July August September $85,000 $156,000 $220,000 $1,650,000 $1,325,000 $1,750,000 $152,500 10.82

$120,500 11.00

$188,000 9.31

October November December $265,000 $100,000 $350,000 $850,000 $2,200,000 $3,500,000 $242,500 3.51

$182,500 12.05

$225,000 15.56

Note: To evaluate the retailer’s performance against the industry standard, we can compare its annual inventory turnover ratio against the industry standard or to the leading firms in the industry such as WalMart or Target. 44. A small firm has a beginning inventory of $52,000 as of January 1, 2020, and the following accounting information. Month

Ending Inventory

Cost of Goods Sold

January 2020

$75,000

$225,000

February 2020

$56,000

$325,000

March 2020

$25,000

$240,000

April 2020

$85,000

$325,000

May 2020

$125,000

$460,000

June 2020

$95,000

$220,000

July 2020

$72,000

$85,000

August 2020

$45,000

$156,000

September 2020

$52,500

$220,000

October 2020

$120,000

$265,000

November 2020

$162,500

$100,000

December 2020

$255,000

$350,000

a. Compute the monthly inventory turnover ratio for each of the twelve months. b. What are the annual cost of goods sold and the average inventory for the year? c. Compute the annual inventory turnover ratio. What can the purchasing department do to improve the firm’s performance?

Solution and Answer Guide:

Answer: Beginning Inv @ 01/01/2020 Fiscal Year 2020 Ending Inventory Cost of Goods Sold

$52,000 January $75,000 $225,000

Average Inventory (a) Monthly Inventory Turnover (c) Annual Inventory Turnover

$63,500 3.54 33.43

(b) Annual Cost of Goods Sold = (b) Average Inventory for the Year = (c) Annual Inventory Turnover Ratio =

February $56,000 $325,000

March $25,000 $240,000

April $85,000 $325,000

May $125,000 $460,000

June $95,000 $220,000

$65,500 4.96

$40,500 5.93

$55,000 5.91

$105,000 4.38

$110,000 2.00

July $72,000 $85,000

August $45,000 $156,000

September $52,500 $220,000

October $120,000 $265,000

November $162,500 $100,000

December $255,000 $350,000

$83,500 1.02

$58,500 2.67

$48,750 4.51

$86,250 3.07

$141,250 0.71

$208,750 1.68

$2,971,000 $88,875 33.43

The purchasing department can reduce order quantity and work with suppliers to deliver purchased items more frequently. This should lower total inventory. 45. You are given the following information: Costs

Make Option

Buy Option

Fixed Cost Variable Cost

$125,000 $15

$5,000 $17

a. Find the break-even quantity and the total cost at the break-even point. Answer: Breakeven quantity, Q = 60,000 units; cost at breakeven point = $1,025,000

b. If the requirement is 150,000 units, is it more cost-effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option?

Answer: Make option is cheaper; cost saving = $2,555,000 - $2,375,000 = $180,000 BreakevenAnalysis Fixed Cost Variable Cost

Make Option Buy Option $125,000.00 $5,000.00 $15.00 $17.00

(a) Breakeven Quantity (a) Breakeven Cost

60,000 units $1,025,000.00

(b)Quantity Needed Cost - Make Option Cost - Buy Option Cost - Difference

150,000 units $2,375,000.00 $2,555,000.00 ($180,000.00)

Solution and Answer Guide:

46. You are given the following information: Costs

Make Option

Buy Option

Fixed Cost

$25,000

$3,000

Variable Cost

$12

a. Find the break-even quantity and the total cost at the break-even point. b. If the requirement is 4,500 units, is it more cost-effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option?

c. If the requirement is 6,000 units, is it more cost-effective for the firm to buy or make the components? What is the cost savings for choosing the cheaper option?

Answer: (a) 5,500 units, $69,000

(b) buy, $4,000

BreakevenAnalysis Fixed Cost Variable Cost

Make Option Buy Option $25,000.00 $3,000.00 $8.00 $12.00

(a) Breakeven Quantity (a) Breakeven Cost

5,500 units $69,000.00

(b)Quantity Needed Cost - Make Option Cost - Buy Option Cost - Difference

4,500 units $61,000.00 $57,000.00 $4,000.00

6,000.00 units $73,000.00 $75,000.00 ($2,000.00)

47. Ms. Jane Kim, Purchasing Manager of Kuantan ATV, Inc., is negotiating a contract to buy 20,000 units of a common component part from a supplier. Ms. Kim has done a preliminary cost analysis on manufacturing the part in-house and concluded that she would need to invest $50,000 in capital equipment and incur a variable cost of $25 per unit to manufacture the part in-house. Assuming the total fixed cost to draft a contract with her supplier is $1,000, what is the maximum purchase price that she should negotiate with her supplier? What other factors should she negotiate with the suppliers? Answer: $27.45; delivery, quality and volume flexibility, among others. Let P = maximum purchase price from supplier $1,000 + 20,000P = $50,000 + $25 × 20,000  20,000P = $50,000 + $500,000 - $1,000 = $549,000  P = $549,000 / 20,000 = $27.45 48. A Las Vegas, Nevada, manufacturer has the option to make or buy one of its component parts. The annual requirement is 20,000 units. A supplier is able to supply the parts for $10 each. The firm estimates that it costs $600 to prepare the contract with the supplier. To make the parts inhouse, the firm must invest $50,000 in capital equipment and estimates that the parts cost $8 each.

Solution and Answer Guide:

a. Assuming that cost is the only criterion, use break-even analysis to determine whether the

firm should make or buy the item. What is the break-even quantity and what is the total cost at the break-even point?

Answer: Breakeven quantity = 24,700 units, if the requirement is 20,000, the firm should buy the item; cost at breakeven point = $247,600

b. Calculate the total costs for both options at 20,000 units. What is the cost savings for choosing the cheaper option?

Answer: Make = $210,000; Buy = $200,600; Cost saving = $9,400 BreakevenAnalysis Fixed Cost Variable Cost

Make Option $50,000.00 $8.00

Buy Option $600.00 $10.00

Breakeven Quantity Breakeven Cost

24,700 units $247,600.00

Quantity Needed Cost - Make Option Cost - Buy Option Cost - Difference

20,000.00 units $210,000.00 $200,600.00 $9,400.00

49. Given the following information, use total cost analysis to determine which supplier is more costeffective. Late delivery of raw material results in 60 percent lost sales and 40 percent back orders of finished goods. Order lot size Requirements (annual forecast) Weight per engine Order processing cost Inventory carrying rate Cost of working capital Profit margin Price of finished goods Back-order cost

1,000 120,000 units 22 pounds $125/order 20% per year 10% per year 15% $4,500 $15 per unit

Solution and Answer Guide:

Unit Price

Supplier 1

Supplier 2

1 to 999 units/order 1000 to 2,999 units/order 3,000+ units/order

$50.00 $49.00 $48.00

$49.50 $48.50 $48.00

Tooling cost Terms Distance Supplier Quality Rating Supplier Delivery Rating

$12,000 2/10, net 30 125 miles 2% 1%

$10,000 1/10, net 30 100 miles 2% 2%

Truckload (TL ≥ 40,000 lbs): $0.85 per ton-mile Less-than-truckload (LTL): $1.10 per ton-mile Note: per ton-mile = 2,000 lbs per mile; number of days per year = 365 Answer: Supplier 1 is more cost effective. Description 1. Total Engine Cost

Supplier 1 120,000 units x $49

Supplier 2 $ 5,880,000.00 120,000 units x $48.50

$ 5,820,000.00

2. Cash Discount n/30

$5,880,000 x 10% x 30/365

47,835.62

1/10

N/A

48,328.77

$5,820,000(10% x10/365+1%) $

74,145.21

2/10

$5,880,000(10% x10/365+2%) $ 133,709.59

N/A

Largest discount 3. Tooling Cost

$5,820,000 x 10% x 30/365

(133,709.59)

(74,145.21)

12,000.00

10,000.00

4. Transportation Cost 125miles x 120,000units x 22lbs x $1.10/2000

181,500.00 100miles x 120,000units x 22lbs x $1.10/2000

145,200.00

5. Ordering Cost

(22,000 lb LTL)

120,000 / 1,000 x $125

15,000.00 120,000 / 1,000 x $125

15,000.00

6. Carying Cost

1,000 / 2 x $49 x 20%

4,900.00 1,000 / 2 x $48.50 x 20%

4,850.00

7. Quality Cost

$5,880,000 x 2%

116,400.00

117,600.00 $5,820,000 x 2%

8. Delivery Rating Backorder (40%)

120,000 x 1% x 40% x $15

Lost Sales (60%)

120,000 x 1% x 60% x $4,500 x 15%

TOTAL COST

7,200.00 120,000 x 2% x 40% x $15 486,000.00 120,000 x 2% x 60% x $4,500 x 15%

$ 6,570,490.41

14,400.00

972,000.00

$ 7,023,704.79

50. A buyer received bids from three suppliers for a vital component part for its latest product. Given the following information, use total cost analysis to determine which supplier should be chosen. Late delivery of the component results in 70 percent lost sales and 30 percent back orders of finished goods. Order lot size 2,000 Requirements (annual forec ast) 240,000 units Weight per engine 40 pounds Order processing cost $200/order Inventory carrying rate 20% per year 10% per year Cost of working capital 15% Profit margin Price of finished goods $10,500 Back-order cost $120 per unit Unit Price

Supplier 1

Supplier 2

Supplier 3

1 to 999 units/order 1,000 to 2,999 units/order

$200.00 $195.00

$205.00 $190.00

$198.00 $192.00

Solution and Answer Guide:

3,000 + units/order

$190.00

$185.00

$190.00

Tooling Cost Terms

$12,000 2/10, net 30

$10,000 1/15, net 30

$15,000 1/10, net 20

Distance

120 miles

100 miles

150 miles

Supplier Quality Rating Supplier Delivery Rating

2% 1%

1% 1%

2% 2%

Truckload (TL ≥ 40,000 lbs): $0.95 per ton-mile Less-than-truckload (LTL): $1.20 per ton-mile Note: per ton-mile = 2,000 lbs per mile; number of days per year = 365 Answer: Supplier 2 is more cost effective. Description 1. Total Engine Cost

Supplier 1 240,000 units x $195

Supplier 2 $ 46,800,000.00 240,000 units x $190

$ 45,600,000.00

2. Cash Discount n/30

$46,800,000 x 10% x 30/365

$ 384,657.53

$45,600,000 x 10% x 30/365

$ 374,794.52

n/20 1/10

N/A

1/15

N/A

$45,600,000(10% x15/365+1%) $ 643,397.26

2/10

$46,800,000(10% x10/365+2%) $ 1,064,219.18

Largest discount 3. Tooling Cost

N/A $ (1,064,219.18)

(643,397.26)

12,000.00

10,000.00

4. Transportation Cost 120miles x 240,000units x 40lbs x $0.95/2000

547,200.00 100miles x 240,000units x 40lbs x $0.95/2000

456,000.00

5. Ordering Cost

(80,000 lb TL)

240,000 / 2,000 x $200

24,000.00 240,000 / 2,000 x $200

24,000.00

6. Carying Cost

2,000 / 2 x $195 x 20%

39,000.00 2,000 / 2 x $190 x 20%

38,000.00

7. Quality Cost

$46,800,000 x 2%

936,000.00 $45,600,000 x 1%

456,000.00

86,400.00 240,000 x 1% x 30% x $120

86,400.00

8. Delivery Rating Backorder (30%)

240,000 x 1% x 30% x $120

Lost Sales (70%)

240,000 x 1% x 70% x $10,500 x 15%

$ 2,646,000.00 240,000 x 1% x 70% x $10,500 x 15%

$ 2,646,000.00

$ 50,026,380.82

$ 48,673,002.74

TOTAL COST

Solution and Answer Guide:

Description

Supplier 3

1. Total Engine Cost

240,000 units x $192

$46,080,000.00

2. Cash Discount n/30

N/A

n/20

$46,080,000 x 10% x 20/365

252,493.15

1/10

$46,080,000(10% x10/365+1% $

587,046.58

1/15 2/10

N/A

Largest discount 3. Tooling Cost

(587,046.58)

15,000.00

4. Transportation Cost 150miles x 240,000units x 40lbs x $0.95/2000

684,000.00

5. Ordering Cost

(80,000 lb TL)

240,000 / 2,000 x $200

24,000.00

6. Carying Cost

2,000 / 2 x $192 x 20%

38,400.00

7. Quality Cost

$46,080,000 x 2%

921,600.00

Backorder (30%)

240,000 x 2% x 30% x $120

172,800.00

Lost Sales (70%)

240,000 x 2% x 70% x $10,500 x 15%

$ 5,292,000.00

8. Delivery Rating

TOTAL COST

$52,640,753.42

Cases 1.

3 Bees Buttermilk Corporation – Supplier Selection* Case Note

Learning Objectives:  

Understand sourcing decisions and the factors impacting supplier selection. Understand and be able to compute total cost of ownership.



Describe the opportunities and challenges of global sourcing.

The primary emphasis of this case is on supplier selection. The 3 Bees Buttermilk Corporation is an international company and sources its supplies globally. They understand how critical supplier selection is to their bottom line. The owners, Basil, Bernie, and Buford discuss with Buck, intern with the 3 Bees, some of the factors they consider when selecting suppliers. Every factor is important; however, each owner has specific factors they focus on such as process and product technologies, the supplier’s willingness to share technologies and information, and communication capability. In addition to the supplier selection criteria, Bernie, Chief Financial Officer, is big on the cost factor. He explained to Buck that you had to determine the total cost of ownership. This went beyond the price. Total cost of ownership also included payment terms, cash discount, ordering cost, carrying cost, and much more.

Solution and Answer Guide:

Questions and Answers: 51. Name and explain two factors of the supplier selection process that were not mentioned in the case. Answer: Students’ answers may vary, but here are two factors not mentioned in the case.

a. Capacity—3 Bees Buttermilk Corporation must consider whether suppliers have the capacity to fill not only the current orders, but larger orders if necessary.

b. Location—3 Bees Buttermilk Corporation must consider how the supplier’s location will affect delivery lead time, transportation costs, etc.

52. What are the advantages of ESI, early supplier involvement? Answer: Early supplier involvement (ESI) brings the supplier’s expertise to the design table. ESI can ensure cost effective design choices, provide alternative conceptual solutions, and aid in design assessment. 53. Identify qualitative and quantitative factors that are taken into consideration when looking at the total cost of ownership. Answer: Some qualitative and quantitative factors are freight and inventory costs, tooling, tariffs and duties, currency exchange rates, and nonperformance costs. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Frank’s Driving Appurtenances – A Make-or-Buy Decision* Case Note

Learning Objectives: 

Understand sourcing decisions and the factors impacting the make-or-buy decision.

This case highlights the importance of deciding whether to make the product one plans to sell or to buy it from a supplier. While this is a crucial decision for all businesses, it could truly be a make or break decision for a new company. Although Frank has the skill to design and manufacture the unique car accessories he plans to sell, he must determine if making them is the correct financial decision. Using the make-or-buy breakeven analysis, Frank can easily determine which is the best approach for him at this time.

Solution and Answer Guide:

Questions and Answers: 54. What is the purpose for using the breakeven analysis? Answer: One purpose for using the breakeven analysis is to calculate the cost effectiveness of sourcing decisions. It is an essential tool when cost is the most important criterion. 55. What are the two types of cost Frank must consider when doing the breakeven analysis? Answer: The two types of cost are fixed costs and variable costs. 56. Generally speaking, which type of cost is higher for the make option and which type of cost is higher for the buy option? Why? Answer: The fixed cost is higher for the make decision because of initial capital investment for equipment, facilities, etc. However, the variable costs are higher for the buy decision because the supplier includes its profit margin as part of the price of the product. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Middleton Fine Furniture – Supply Chain Savings Opportunities* Case Notes

Learning Objectives: 

Understand the role of purchasing and its strategic impact on an organization’s competitive advantage.

 

Understand sourcing decisions and the factors impacting supplier selection. Understand the pros and cons of single sourcing versus multiple sourcing.

This case addresses how to leverage supply chain management to improve the bottom line. Middleton Fine Furniture is experiencing financial difficulties as a result of a downturn in the economy. CEO Sally Sherman has tasked her CFO and vice president of supply chain management to develop a long term solution. Sally wants more than immediate relief for the current financial predicament; she wants plans put in place that will enable Middleton to weather any financial storm. Kenisha Yost, CFO, and Ellie Gomez, vice president of supply chain management, outline three major initiatives they are pursuing, inventory turnover analysis, single versus multiple sourcing for specific parts, and an evaluation of whether to change from make or buy where applicable. They believe that these initiatives will reduce costs in the near term and ensure costs are managed more effectively over the long term.

Solution and Answer Guide:

Questions and Answers: 57. Explain the reasoning of determining the inventory turnover ratio. What value does this action have for Middleton? Answer: As Kenisha stated, inventory was money on the shelf. The higher the inventory turnover ratio, the more frequently the inventory was being sold. Consequently, if Middleton Fine Furniture could increase its inventory turnover ratio, the money tied up in inventory would be converted into revenue. 58. What are the two main ways single sourcing can help reduce expenses? What is the risk? Answer: One way single sourcing can help reduce expenses is by lowing the cost of the inventory. Generally, if a company single sources, it purchases a larger volume from the supplier. This usually results in a lower cost per until for the company. A second way single sourcing can help reduce expenses is by lowering transportation costs. For example, since Middleton is purchasing large volumes they may be able to take advantage of full truckload shipment rates, rather than having to pay less-than-full truckload rates, which are more expensive. 59. What are the two types of cost that Kenisha and Ellie must consider when reevaluating the company’s make-or-buy decisions? Answer: The two types of cost are fixed costs and variable costs. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Part 2 Continuing Case Vanlandingham Robotics—Purchasing Management*

Answers to Questions: 60. Compute the monthly inventory turnover ratio for each of the twelve months. Answer: 275,000 January February 230,000 300,000 1,200,000 1,250,000 252,500 4.75 75.42

265,000 4.72

March 240,000 1,350,000

April 330,000 1,500,000

May 450,000 950,000

June 250,000 850,000

July 95,000 1,650,000

August September 136,000 220,000 1,325,000 1,750,000

Octob 255, 850,

270,000 5.00

285,000 5.26

390,000 2.44

350,000 2.43

172,500 9.57

115,500 11.47

237,5 3.58

178,000 9.83

61. What is the annual cost of goods sold? See above. 62. What is the average inventory for the year? See above. 63. Compute the annual inventory turnover ratio. See above. 64. What is the breakeven point? Answer: $10,000 + $4Q = $700 + $8Q $10,000 - $700 = $8Q - $4Q $9,300 = $4Q; 2325 = Q (breakeven point) a. Which option is less expensive, making or buying? Answer: Since 20,000 units > breakeven quantity, the decision would be to make. As a check: Total CostMake = $10,000 + ($4 X 20,000) = $10,000 + $80,000 = $90,000 Total CostBuy = $700 + ($8 X 20,000) = $700 + $160,000 = $160,700 * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Chapter 03: Answers to Questions/Problems Table of Contents Discussion Questions ......................................................................................................... 27 Problems .......................................................................................................................... 33 Cases ............................................................................................................................... 35 Learning Objectives ................................................................................................................................. 35 Answers to Questions .............................................................................................................................. 36 Learning Objectives ................................................................................................................................. 37

Solution and Answer Guide:

Questions and Answers ........................................................................................................................... 37 Learning Objectives ................................................................................................................................. 39 Part 2 Continuing Case ...................................................................................................... 40 Learning Objectives ........................................................................................................ 40 Questions and Answers .................................................................................................. 41

Discussion Questions 65. Explain the importance of supplier relationship to the performance of an organization. Answer: Increasingly, companies are requiring their suppliers to not only deliver innovative and quality products in Just-In-Time fashion, but also at a competitive price. The Japanese have shown that good supplier relations can provide many benefits such as flexibility in terms of delivery, better quality, better information, and better material flows between buyers and suppliers. These benefits will help improve organizational performance. The COVID-19 pandemic also showed that companies with good supplier relationships are better able to overcome the challenges of supply shortages and disruptions. 66. Compare and contrast the arm’s-length/adversarial and partnership approaches to the customersupplier relationships. Answer: Arms-length/adversarial

Partnership

Short-term relationship

Long-term relationship

Many suppliers Low bidder

Few suppliers

No supplier certification No supplier development program

Supplier certification Supplier development program Extensive information sharing

Little or no information sharing

Greater emphasis on quality and delivery

67. Explain how an organization can manage its suppliers more effectively. Answer: An organization can use a supplier evaluation and certification process to identify their best and most reliable suppliers. 68. The COVID-19 pandemic has wreaked havoc on supply chains in general. How was procurement affected by the pandemic? Answer: Procurement must work overtime securing much needed supplies which are in short supply due to heavy demand and transportation challenges. The advice here is to keep channels of communication open and to ensure there is open and transparent information sharing. Keep your suppliers in the loop regarding changes in operations and customer orders that might affect your suppliers. There might be situations where your suppliers might be able to help with your firm’s dilemma. Likewise keeping in touch with suppliers to see how they are doing and to offer any assistance if needed.

Solution and Answer Guide:

69. The healthcare industry appears to be more severely affected by the COVID-19 pandemic. Go online and investigate how hospitals are managing the high demand for healthcare services due to the pandemic. Answer: In general, hospitals are hard pressed to keep up with the demand for ventilators, personal protective equipment (PPE). China produced half the world’s supply of face masks so relationships with Chinese suppliers are critical. One of the problems is with the global supply chain. Many healthcare providers were using social media in pleas for PPEs. The Defense Production Act (DPA) allows the President to direct private companies to produce equipment needed for a national emergency. The federal government also can approach other governments for help with needed supplies. Transportation networks were also impacted. Some hospitals have converted other equipment, such as anesthesia machines, for use as ventilators. 70. What are the essentials for having strong supplier relationships during the COVID-19 pandemic? Answer: Several essential elements for establishing strong supplier relationships during COVID-19 are: 1. Mutual Respect. Very few relationships can have long lasting success without a feeling of respect going both ways. In addition, without integrity it would be difficult to keep the respect from diminishing in the relationship. 2. Shared vision. Companies and their suppliers must have a shared vision for collaboration to work. Only if there is collective vision would each party derive the most out of their relationship. As such it is important to have shared goals, ideas, and costs and benefits. 3. Communication. Open and consistent communication is central to any healthy relationship. Be proactive as frequent contacts mean fewer miscommunications, better expectations and, in the end, there will be less back pedaling and damage control. Transparency means that any problems, changes, and issues that were discovered whether in-house or elsewhere in the supply chain must be fully disclosed as quickly as possible. Transparency is important because it shows respect, trust, and good faith. 4. Positive conduct. To promote strong and effective relationships, employees must exhibit a good balance of empathy, patience, and urgency especially during the trying pandemic. Always keep bridges open and unburned even when relationships come to an end. 5. Supporting suppliers. Many suppliers face cash flow problems during the pandemic which could affect staffing and long-term viability. Supply chain finance became popular following the 2008 financial crisis, with companies providing support for their suppliers, and as a result avoided disruption to their own business. Supply chain finance (or SCF) is a form of supplier finance in which suppliers can receive early payment on their invoices. Supply chain finance reduces the risk of supply chain disruption and enables both buyers and suppliers to optimize their working capital. It's also known as reverse factoring. In a competitive industry, exceptional service is the major differentiator. Suppliers are more willing to work with companies that go above and beyond the norm with respect to communications, support, and attention to details. 71. What are the key factors that contribute to a lasting buyer–supplier partnership? Answer: The key factors are:

   

Building Trust Shared Vision and Objectives Personal Relationships Mutual Benefits and Needs

Solution and Answer Guide:

     

Commitment and Top Management Support Change Management Information Sharing and Lines of Communication Capabilities Performance Metrics Continuous Improvement

72. Explain how manufacturers can leverage their suppliers to gain a competitive advantage. Answer: Each manufacturer will have to identify what factors provide the manufacturer with a competitive advantage and work with the suppliers to develop that advantage. For example, Raytheon realized that in the highly competitive US defense industry, great technology alone is not sufficient to win orders. Factors such as purchase price and lifetime maintenance costs were becoming more critical. As such, Raytheon must revamp how it collaborates with its suppliers. The real benefit is for Raytheon to reduce cost at the design stage, develop innovative technologies that are not only affordable but also has low lifetime maintenance cost. Raytheon realized that communications is key to maintaining supplier relations during this disruptive environment 73. Describe the key performance indicators used to objectively measure the performance of supplier relationships. Answer: Five key performance indicators that objectively measure supply chain relationship performance are as follows:



Creativity—promoting quality, innovation, and a long-term approach by encouraging high performance.

   

Stability—investment, synchronization of objectives, and confidence building. Communication—frequent, open dialogue and information sharing. Reliability—concentrating on service and product delivery, lowering joint costs. Value—creating a win–win relationship in which each side is delighted to be a part.

In addition, we also have several intrinsic characteristics of relationship performance as follows:



Long-term Orientation—encouraging stability, continuity, predictability, and longterm, joint gains.

 

Interdependence—loss in autonomy is compensated through the expected gains.



Trust—richer interaction between parties to create goodwill and the incentive to go the extra mile.



Commitment—the relationship is so important that it warrants maximum effort to maintain it.



Adaption—willingness to adapt products, procedures, inventory, management, attitudes, values, and goals to the needs of the relationship.



Personal Relationships—generating trust and openness through personal interaction.

C3 Behavior—Collaboration, Co-operation, Coordination, jointly resourcing to achieve effective operations.

74. Explain why the majority of strategic alliances fail.

Solution and Answer Guide:

Answer: The top reasons for failure of alliances: they were overly optimistic and characterized by poor communications, there was a lack of shared benefits, slow payback results, lack of financial commitment, misunderstood operating principles, and there were cultural mismatches along with a lack of alliance experience. 75. What are the criteria used in evaluating a supplier? Answer: The criteria are: 1) no incoming product lot rejections (e.g. less than 0.5 percent defective) for a specified time period; 2) no incoming non-product rejections (e.g., late delivery) for a specified time period; 3) no significant supplier production-related negative incidents for a specified time period; 4) ISO 9000/Q9000 certified or successfully passing a recent, on-site quality system evaluation; 5) mutually agreed set of clearly specified quality performance measures; and 6) fully documented process and quality system with cost controls and continuous improvement capabilities. 76. Discuss how an organization develops a supplier evaluation and certification program. Answer: One approach of evaluating and certifying suppliers is to use the weighted criteria evaluation system described below: 77. Select the key dimensions of performance mutually acceptable to both customer and supplier. 78. Monitor and collect performance data. 79. Assign weights to each of the dimensions of performance based on their relative importance to the company’s objectives. The weights for all dimensions must sum to 1. 80. Evaluate each of the performance measures on a rating between zero (fails to meet any intended purpose or performance) and 100 (exceptional in meeting intended purpose or performance). 81. Multiply the dimension rating by the importance weight and sum to get an overall score. 82. Classify vendors based on their overall score:

 

Unacceptable (less than 50)—supplier dropped from further business

 

Certified (between 70 and 90)—supplier meets intended purpose or performance

Conditional (between 50 and 70)—supplier needs development work to improve performance but may be dropped if performance continues to lag Preferred (greater than 90)—supplier will be considered for involvement in new product development and opportunities for more business

83. Audit and on-going certification review. 13. What are the benefits and challenges of investing in supplier development program? Answer: As companies outsource more parts it becomes increasingly difficult to achieve further cost savings internally. One way to solve this problem is for companies to work with suppliers to lower the total cost of purchased materials, thus providing the company with a competitive advantage. Supplier development requires financial and human resource investments by both partners and includes a wide range of activities such as training of the supplier's personnel, investing in the supplier's operations, and ongoing performance assessment. 14. Describe the steps needed to develop a successful supplier development program. Answer:

Solution and Answer Guide:

A seven-step approach to supplier development is outlined below:

1. Identify critical goods and services. Assess the relative importance of the goods and services from a strategic perspective. Goods and services that are purchased in high volume, do not have good substitutes, or have limited sources of supply are considered strategic supplies. 2. Identify critical suppliers not meeting performance requirements. Suppliers of strategic supplies not currently meeting minimum performance in quality, on-time delivery, cost, technology, or cycle time are targets for supplier development initiatives. 3. Form a cross-functional supplier development team. Next, the buyer must develop an internal cross-functional team and arrive at a clear agreement for the supplier development initiatives. 4. Meet with the top management of suppliers. The buyer’s cross-functional team meets with the suppliers’ top management to discuss details of strategic alignment, supplier performance expectations and measurement, a time frame for improvement, and ongoing professionalism. 5. Rank supplier development projects. After the supplier development opportunities have been identified, they are evaluated in terms of feasibility, resource, and time requirements, supply base alternatives, and expected return on investment. The most promising development projects are selected. 6. Define the details of the buyer–supplier agreement. After consensus has been reached on the development project rankings, the buyer and supplier representatives jointly decide on the performance metrics to be monitored such as percent improvement in quality, delivery, and cycle time. 7. Monitor project status and modify strategies. To ensure continued success, management must actively monitor progress, promote exchange of information, and revise the development strategies as conditions warrant. 15. What are the benefits of ISO 9000 certification? Answer: The European Union in 1992 adopted a plan that recognized ISO 9000 as a third-party certification; the result is that many European companies prefer suppliers with ISO 9000 certification. Thus, U.S. companies wanting to sell in the global marketplace are required to seek ISO 9000 certification. ISO 9000 is a natural extension of an organization’s internal supplier evaluation and certification program. Obtaining the ISO 9000 certification provides further evidence that the supplier has an established quality management system. Companies that are ISO 9000 certified are more likely to experience a reduction in production cost due to an improvement in quality made. 16. Are sustainability issues influencing purchasing decisions? What are the benefits of ISO 14000 certification? Answer: Yes, sustainability issues are influencing purchasing decisions. Organizations are more conscious of the effect of pollution on the environment and society. ―Green purchasing includes the acquisition of recycled content products, environmentally preferable products and services, biobased products, energy- and water-efficient products, alternate fuel vehicles, and products using renewable energy.‖ Sustainability has influenced many companies purchasing strategy. One such example is Ford, which started the Partnership for a Cleaner Environment (PACE) program at the G7 Alliance Forum on Resource Efficiency workshop in Washington, DC in 2016. Ford uses the

Solution and Answer Guide:

PACE program to educate its suppliers about the energy, water, and carbon dioxide emissions savings initiatives that Ford has implemented in its manufacturing and office operations. The objective is to motivate Ford suppliers to execute several of the initiatives in their own facilities. Good supplier relationships and collaborations are necessary for developing end-to-end, integrated, and sustainable supply chains. Ford plans to be carbon neutral by 2050. The benefits are better public image, reduced risk of litigation, systematic approach to minimize pollution and impact on the environment, regulatory compliance, and competitive advantage. As more organizations are certified in ISO 14000, they are likely to pass this requirement on to their suppliers in the future. Ford currently requires its suppliers to have at least one manufacturing site to be ISO 14001 certified. 17. Research ISO’s Web site (http://www.iso.ch) and discuss the growth of ISO 9000 and 14000 certifications by regions of the world such as Africa/West Asia, Central and South America, North America, Europe, Far East, and Australia/New Zealand. Answer: Analysis of the growth of ISO 9000 and 14000 certifications is carried out every year by the International Organization for Standardization. Please research the ISO’s Web site to get the latest information. 18. Explain the key capabilities of supplier relationship management software. Answer: The key capabilities of supplier relationship management software are: 

Automation of transactional processes between an organization and its suppliers.



Integration that provides a view of the supply chain that spans multiple departments, processes, and software applications for internal users and external partners. Visibility of information and process flows in and between organizations. Views are customized by role and aggregated via a single portal.

 

Collaboration through information sharing and suppliers’ ability to input information directly into an organization’s supply chain information system.



Optimization of processes and decision-making through enhanced analytical tools such as data warehouse and Online Analytical Processing (OLAP) tools with the migration towards more dynamic optimization tools in the future.

19. Why do organizations have supplier awards program? Answer: Organizations should not only evaluate their suppliers but also reward and celebrate the accomplishments of their top suppliers. Award winners exemplify true partnerships with respect to continuous improvement, organizational commitment, and excellence. Award winning suppliers also serve as role models for other suppliers. 20. What is supplier certification? Why do companies want to have a supplier certification program? Answer: A goal of evaluating suppliers is to determine if the supplier is performing according to the buyer’s requirements. An extension of supplier evaluation is supplier certification, defined by the Institute of Supply Management as ―an organization's process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections.‖ Implementing an effective supplier certification is critical to reducing the supplier base, building long-term relationships, reducing time spent on incoming inspections, improving delivery and responsiveness, recognizing excellence, developing a commitment to continuous improvement, and improving overall performance. Supplier certification allows organizations to identify suppliers who are most committed to creating and maintaining a partnership and who have the best capabilities.

Solution and Answer Guide:

21. How can supplier development and relationships help in avoiding scandals such as product fraud and recalls, which are damaging to an organization’s reputation and profitability? Answer: Product fraud is becoming increasingly damaging to the company because of the bad publicity associated with such scandals. In addition, there is the cost of recalls and the possibility of lawsuits. These problems can be avoided if companies have better two-way communications with their vendors, a quality assurance program in place, sound performance metrics and trust built into the relationship. Maintaining a long-term partnership will enhance the sharing of information and ensure that there is a shared vision on quality and accountability. 22. List the similarities and differences in capabilities of SRM software offered by JDA, Oracle, and SAP. Answer: Improvements to SRM software occur rapidly. Please research the company websites to get the latest information. 23. What are the advantages of using SRM solutions to manage suppliers? Answer: The advantages are: 

Better internal and external communications providing visibility into various cost components



Automated creation, negotiation, execution, and compliance leading to more strategic, longterm relationships



Common and consistent measurements that help focus resources, identify performance glitches, and develop strategies for supply chain improvements



The elimination of time-intensive, costly processes of performing paper-based business transactions

24. What are the differences between transactional and analytic SRM? Answer: Transactional SRM enables an organization to track supplier interactions such as order planning, order payment, returns, and so on. The volume of transactions involved may result in independent systems maintained by geographic region or business lines. Transactional SRM tends to focus on short-term reporting and are event driven such as: What did we buy yesterday? What supplier did we buy from? What is the cost of the purchase? On the other hand, analytic SRM allows the company to analyze the complete supplier base. The analysis provides answers to questions such as: Which suppliers should the company develop long-term relationships with? Which supplier would make the company more profitable? Analytic SRM attempts to answer more difficult and important questions about supplier relationships. Thus, we can see that transactional SRM addresses tactical issues such as size of order whereas analytic SRM focuses on long-term procurement strategy. With analytic SRM, an organization can assess where it was yesterday, where it stands today, and where it wants to go in the future to meet its strategic purchasing goals.

Problems 25. The Sun Devils Manufacturing Company is performing an annual evaluation of one of its suppliers, the Carson Company. Sony, who is the purchasing manager of the Sun Devils Manufacturing Company, has collected the following information on the company. Performance Criteria

Score

Weight

Continuous improvement

0.10

Solution and Answer Guide:

Cost

0.20

Delivery

0.15

Quality

0.25

Responsive

0.15

Sustainability

0.05

Technology

0.10

Total score

1.00

A score based on a scale of 0 (unsatisfactory) to 100 (excellent) has been assigned for each performance category considered critical in assessing the supplier. A weight is assigned to each of the performance criteria based on its relative importance. Vendors are classified based on their overall scores as follows:

 

Unacceptable (less than 50)—supplier dropped from further business

 

Certified (between 70 and 90)—supplier meets intended purpose or performance

How would you evaluate the Carson Company’s performance as a supplier? Answer: Compute the weighted score as shown below. Performance Criteria

Score

Weight

Weighted Score

Technology

0.10

9.00

Quality

0.20

17.00

Responsive

0.15

12.00

Delivery

0.25

23.75

Cost

0.15

13.50

Environment

0.05

4.00

Business

0.10

9.00

Total score

1.00

88.25

The weighted score is 88.25. Based on the weighted score, the supplier meets the intended purpose or performance and is classified as a Certified Vendor (score between 70 and 90). 26. The Kentucky Equipment Company is in the process of ranking its suppliers for one of its key components. To assist in the evaluation process, the information on the four suppliers is shown in the table below. Score Performance Criteria

Weight

Toros

Sun Devils

Gamecock s

Buckeyes

Price

0.10

Payment terms

0.20

Solution and Answer Guide:

Quality

0.10

Delivery

0.10

Suggestions for quality improvement

0.20

Reputation

0.10

Responsiveness

0.10

Sustainability

0.10

Total score

1.00

Each performance category is scored on a scale from 0 (unsatisfactory) to 100 (excellent) and assigned a weight based on its relative importance. Suppliers are considered ―preferred‖ if they score between 90 and 100. Preferred suppliers are those that Michelle Equipment will work with on new product development, approve for new business, and assist in maintaining a competitive position. An ―acceptable‖ supplier rating is between 70 and 89. In this category, the supplier is required to provide a plan to Michelle Equipment on how to achieve preferred status. A score of 0 to 69 means that the supplier has a ―developmental‖ supplier rating. How would you evaluate each of the suppliers? Which supplier would you pick? Answer: The weighted scores for the three suppliers are shown below. Weighted Scores Performance Criteria

Weight

Toros

Sun Devils

Gamecock s

Buckeyes

Price

0.10

8.5

9.5

9.0

Payment terms

0.20

18.0

16.0

19.0

17.0

Quality

0.10

9.5

8.0

8.5

9.0

Delivery

0.10

9.5

9.0

8.5

Suggestions for quality improvement

0.20

17.0

18.0

19.0

Reputation

0.10

8.5

9.0

8.5

Responsiveness

0.10

8.0

8.5

9.5

8.0

Sustainability

0.10

9.0

8.0

8.5

9.0

Total score

1.00

88.0

86.0

90.5

88.0

Based on the weighted scores, Toros, Sun Devils and Buckeyes are rated as acceptable suppliers. However, the Gamecocks is a preferred supplier with a score between 90 and 100.

Cases 1.

Donnell Truong Ventures* Case Note

Learning Objectives:   

Explain the importance of supplier relationships. Understand the key factors for developing successful partnerships. Develop a supplier evaluation and certification process.

Solution and Answer Guide:

This case goes beyond the traditional concept of supplier relationships and discusses the importance of all levels of supplier relationship. In this situation, Donnell Truong Ventures has both direct and indirect suppliers. The indirect suppliers to Donnell’s resort hotels and casinos are the complementary businesses that provide services which become part of the clientele’s total experience. These complementary businesses or suppliers are as critical to Donnell’s business as his direct suppliers. Mr. Truong’s hotels/casinos recommend the golf courses, spas, cruise ships, and so on, to their clientele. When the clientele rate Donnell Truong’s establishments, they are rating him based on the total experience. For his clientele, there is no true separation between his resort and those extracurricular activities his hotels/casinos recommend. Consequently, Donnell needs to ensure the quality of these complementary suppliers as well. His solution is to develop a supplier certification program for them too.

Answers to Questions: 27. Are the four intrinsic characteristics the best ones to base the relationship performance measures for Donnell Truong Ventures? If not, what characteristics would be more suitable? In either case, justify your answer with specific examples. Answer: Yes, the four intrinsic characteristics are the best ones because the complementary suppliers are essentially enabling Donnell Truong Ventures to enhance their relationship with their customers through these additional or supplementary services. For example, in the business metric category, a key metric is the reputation of the supplier and its leadership in the field. Since the complementary suppliers are also in the leisure, dining, or entertainment industries, their reputation within their specific industry would indicate trust, which is partly defined by ―the incentive to go the extra mile‖. Their leadership in the field strongly suggests commitment and ability to adapt. In the responsiveness metric category, a key metric is responsiveness to customers. Responsiveness to customers comes from building personal relationships. Building personal relationships results in generating trust. Finally, in the quality metric category, a key metric is continuous process improvement. This metric strongly suggests commitment as well as adaption. A related quality metric is a corrective action program. This is an indicator of trust, which is built on the interaction between parties to create goodwill. Furthermore, it indicates commitment to excellence. 28. Since Donnell Truong Ventures is developing a certification for ―complementary suppliers‖, should they use the same metrics they use for direct suppliers? Explain why or why not. Answer: No. The complementary suppliers cannot effectively be measured using similar metrics as those used with direct suppliers. Generally, direct suppliers provide goods, and can be evaluated on inventory cost, transportation cost, etc. Also, direct suppliers, if providing goods, can be evaluated on things such as warranty, zero defects, and fit for use, etc. In this scenario, complementary suppliers are basically doing the same thing as Donnell Truong Ventures, providing services to enhance the total experience. Consequently, reputation, continuous improvement, and responsiveness to customers and other metrics that convey trust, commitment, adaptation, and personal relationships are more aligned with what Donnell Truong Ventures needs from these types of suppliers. 29. List and defend any other metrics you think should be used for this certification. Answer: Students’ answers will vary. The other major metrics they may believe could be pertinent are cost/price, delivery, environment, technology, and total cost of ownership. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Solution and Answer Guide:

Jaeger Industrial Solutions* Case Notes

Learning Objectives:   

Explain the importance of supplier partnerships Understand the key factors for developing successful partnerships Develop a supplier evaluation and certification program

This case addresses the importance of having a robust evaluation system for your suppliers. Limiting yourself primarily to a single factor such as cost, detracts from the overall relationship. In some cases, as is the case with Jaeger Industrial Solutions, the number of suppliers can balloon to an unmanageable number. Nora Forrester, Director, Supply Chain Management, feels they may have gone too far in the direction of cost avoidance. Jaeger now has 1,000 suppliers. Nora believes that they must trim that considerably, to 100. Because the data they have on the suppliers is limited, Nora decided to focus on C3 Behavior as the primary criterion. C3 Behavior covers collaboration, cooperation, and coordination. Nora determined that for this task they would initially concentrate on cost, quality, responsiveness, and business metrics.

Questions and Answers: 30. Is Nora’s choice of C3 Behavior the best way to measure suppliers moving forward? If so, explain the benefits of using C3 Behavior. If not, then provide another option and justify your choice. Answer: Yes, the choice of C3 Behavior is a good choice. Under the cost category, the following metrics go beyond just setting a specific cost and suggest true C3 Behavior. For example, availability of cost breakdowns is a good indicator of collaboration and cooperation. By providing this information the supplier is essentially opening it books as a signal of wanting to develop a longterm relationship. In addition, product improvement and cost reduction programs are a good signal for coordination. They suggest the buyer and the supplier will work hand in hand on improving the product, while doing so in a manner that reduces cost. This also bodes well for collaboration and cooperation. Under the quality Category, the following metrics are applicable. These go beyond just setting quality targets but suggest true C 3 Behavior. Statistical process control is an indicator of potential coordination. These records can be shared with the buyer and enable both to track adherence to specifications. Also, continuous improvement suggests a willingness for all three of the C3 Behaviors. Continuous improvement would require collaboration, cooperation, and coordination. 31. Considering the C3 Behavior, identify two of the items listed under business metrics in Table 3.1, Examples of Supplier Performance Metrics, and explain why and how they fit this fundamental criterion. Answer: The following fit the C3 Behavior. While students may argue that other items listed under business metrics meet this criterion, the ones listed below are the strongest and most applicable. These go beyond just establishing the supplier’s financial wherewithal and suggest true proactive C3 Behavior.



Long term relationship is what Nora Forrester is seeking with her suppliers; therefore, any who have shown this appear to meet C3 Behavior.



Strong customer support group signals the desire to be collaborative and cooperative.

Solution and Answer Guide:



Quality of information sharing, assuming the quality is high, would be a good indication of collaboration, cooperation, and coordination.

32. Comment on Ms. Forrester’s strategy of trimming the number of suppliers—what would she hope to accomplish? Do you think it is a smart plan? Answer: Ms. Forrester hopes to do two things: 1) She wants to reduce costs by limiting the number of suppliers Jaeger Industrial Solutions has. Management and evaluation of so many suppliers add to the supply chain expenses.

Solution and Answer Guide:

2) She wants to improve the quality of the supply chain. By reducing the number of suppliers, this limits the potential variations in supplies received and enables Jaeger Industrial Solutions to develop a stronger relationship with the remaining suppliers; thus, enabling better alignment between Jaeger and its supply base. I do believe this is a smart plan because it is a win-win. The remaining suppliers will get more business from Jaeger. Jaeger will get more reliable suppliers who see Jaeger as a much more valuable customer then they may have when the numbers of suppliers was so large. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Cyber Logic Systems- Supplier Relationships* Case Note

Learning Objectives:    

Explain the importance of supplier relationships. Explain the importance of supplier development. Explain the importance of a supplier recognition program. Explain the benefits of using SRM software to manage suppliers.

This case features the various elements of a strong supplier relationship management system. Cyber Logic Systems is an international company that sources its needs on a global scale. Because of the sensitivity of its cyber security systems and the critically of these systems to its customers, Cyber Logic Systems relationships with its suppliers is vital to its success. Rhonda Mendoza, Vice President of Supply Chain Management, has developed a supplier relationship management program that operates at multiple levels. One level is supplier certification. This ensures that her suppliers understand and meet the strict regulatory requirements demanded by her industry. The second level is supplier development. Long term relationships are an advantage to both the supplier and Cyber Logic Systems. One avenue to guaranteeing the relationships last is for Cyber Logic Systems to develop their suppliers’ capabilities and performance. The final layer is supplier recognition. Suppliers are evaluated and rated based on their performance. Each year the suppliers who perform above specified standards are recognition at Cyber Logic Systems annual supplier recognition banquet.

Solution and Answer Guide:

Questions and Answers: Use this table to answer the questions. SUPPLIER RATINGS

SUPPLIER FINAL VALUE

Supplier A

Supplier B

Supplier C

Supplier D

Weigh t

Supplier A

Supplier B

Supplier C

Supplier D

Cost

0.10

8.00

8.50

7.00

7.80

Delivery

0.15

12.75

12.00

12.75

12.30

Environmental

0.10

7.50

8.50

6.50

8.80

0.20

19.00

18.60

17.80

Responsiveness

0.25

20.00

22.50

21.00

Technology

0.20

18.40

18.00

17.40

19.60

TOTAL SCORE 1.00 85.65 88.10 1. Based on the Supplier Scorecard, what classification does each supplier fit into?

82.45

87.30

Performance Measure

Quality

Answer: All four suppliers meet the certified classification standard. 2. Are there any suppliers Rhonda should be concerned about, i.e., replace, give additional business to, or place into her supplier development program? Why or why not? Answer: Although supplier C has a total score that places it in the certified classification, it is below that in two areas, cost and environmental. In both cases it is at the conditional level. Rhonda should place Supplier C in her supplier development program. 3. Assuming Cyber Logic Systems recognizes suppliers at the annual awards banquet if they meet the preferred classification standard for any of the specific performance measures, would any of the four suppliers qualify for an award? If so, who and for which performance measures? Answer: Supplier A would earn an award for quality and technology; Supplier B for quality, responsiveness, and technology; Supplier D for technology. Supplier C does not qualify for any award. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Part 2 Continuing Case Vanlandingham Robotics- Supplier Relationship Management Program*

Learning Objectives 

Explain the importance of supplier partnerships.



Develop a supplier evaluation and certification program.

Questions and Answers: 33. Based on the information provided in the case, metrics, weighting (option 1), and scores for each vendor, who are the top two vendors? Answer: The top 2 vendors are Gomez and Stafford. 34. Based on the information in the case, what performance category does each vendor fall under? Answer: Khan is in the conditional category. The remaining four suppliers are in the certified category. 35. If Vanlandingham Robotics decides to use option 2 weighting, do the vendor final values change? Answer: If weighting option 2 is used, the vendors’ final values do change.

c. If so, what is the difference?

All vendors would then be in the certified category.

d. Does the performance category for any vendor change? If so, how? All vendor final values have changed. By eliminating the TCO metric three of the five final values have dropped. Two of the final values have increased. Final Value

Bailey

Gomez

Khan

McKay

Stafford

Option 1

81.6

86.4

74.4

83.2

85.0

Option 2

77.1

82.6

75.8

85.2

81.6

36. Which weighting option would you recommend Vanlandingham Robotics use?

e. Explain why. Answer: Student answers will vary. Neither choice is wrong. Students must explain their choice. Option 1 might be preferable since TCO is a strong overall metric. It could be used as a differentiator if suppliers were equal in the other metrics.

Chapter 04: Answers to Questions/Problems Table of Contents

Discussion Questions ......................................................................................................... 42 Cases ............................................................................................................................... 48 Learning Objectives ................................................................................................................................. 48 Questions and Answers ........................................................................................................................... 48 Learning Objectives ................................................................................................................................. 49

Solution and Answer Guide:

Questions and Answers ........................................................................................................................... 49 Learning Objectives ................................................................................................................................. 50 Questions and Answers ........................................................................................................................... 50 Part 2 Continuing Case ...................................................................................................... 51 Learning Objectives ................................................................................................................................. 51 Questions and Answers ........................................................................................................................... 51

Discussion Questions 37. What is strategic sourcing? Answer: Managing the firm’s external resources in ways that support the long-term goals of the firm. This includes the development of ethical and sustainable sourcing initiatives, managing and improving supplier relationships and capabilities, identification and selection of environmentally and socially conscious suppliers, and monitoring and rewarding supplier performance. 38. What is the difference between purchasing and strategic sourcing? Answer: Sourcing refers to the many strategic activities beyond the mere purchase of services and materials undertaken by purchasing departments, supply management departments, or sourcing departments. Sourcing is thus defined here as all of the activities involved in managing the firm’s external resources. 39. What is ethical sourcing and why do firms do it? Answer: That which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior. Firms’ managers and customers want to do the right thing, the just and legal thing, to promote social responsibility. 40. What do business ethics, utilitarianism, and rights and duties have to do with ethical sourcing? Answer: Ethical sourcing utilizes two approaches to decide whether or not an action is ethical. The first approach is known as utilitarianism. This would mean that an ethical act creates the greatest good for the greatest number of people. The second approach is known as rights and duties and states that some actions are right in themselves without regard for the consequences. This approach maintains that ethical actions recognize the rights of others and the duties those rights impose on the ones performing the actions. 41. What are some common practices or activities of ethical sourcing?

Answer: Ethical sourcing practices include promoting diversity by intentionally buying from small firms, ethnic minority businesses and women-owned enterprises; discontinuing purchases from firms

Solution and Answer Guide:

that use child labor or other unacceptable labor practices; or sourcing from firms with good labor treatment or environmental protection credentials. 42. What are some of the risks of ethical sourcing? How about the potential advantages? Do you think ethical sourcing is a good practice? Why? Answer: Purchasing goods from suppliers in developing countries can be risky in that if human rights, animal rights, safety or environmental abuses become associated with the firm’s suppliers or foreign manufacturing facilities, this could lead to negative publicity for the buyer, along with product boycotts, a tarnished company image, brand degradation, lower employee morale, and ultimately lower sales, profits, and stock prices. 43. In what ways is corporate social responsibility different from business ethics? Answer: It is not different. This is just a new buzz word that is used in the industry. The practice of business ethics is also referred to as corporate social responsibility (CSR). Much of the discussion to date of corporate social responsibility assumes that a corporation can act ethically just as an individual can. Some businesses practicing CSR engage in local community assistance. 44. How could purchasing goods from suppliers in developing countries be risky? How should firms reduce this risk? Answer: It can be risky if human rights, animal rights, safety, or environmental abuses become associated with the firm’s suppliers or foreign manufacturing facilities, this could lead to negative publicity for the buyer, along with product boycotts, a tarnished company image, brand degradation, lower employee morale, and ultimately lower sales, profits, and stock prices. Firms can minimize this risk by making sure ethical sourcing policies include: Determining where all purchased goods come from and how they are made; Knowing if suppliers promote basic workplace principles; Use of ethical ratings for suppliers alongside the other standard performance criteria; Use of independent verification of supplier compliance; Reporting of supplier compliance performance to shareholders; and Providing detailed ethical sourcing expectations to suppliers. 45. What is a fair trade product? Could farmers in the United States make fair trade products? Answer: A fair trade product refers to one which is manufactured or grown by a disadvantaged producer in a developing country that receives a fair price for their goods. More likely than not, the term fair trade refers to farming products such as coffee, cocoa, sugar, tea, and cotton which are produced in developing countries and exported to large firms in developed countries. Since the United States is not a developing country, farmers there cannot make fair trade products. 46. What is sustainable sourcing and how does it differ from ethical sourcing? From green purchasing? Answer: The term sustainability as applied to supply chains is a broad term that includes green purchasing as well as some aspects of social responsibility as well as financial performance. It can be defined as: the ability to meet the needs of current supply chain members without

hindering the ability to meet the needs of future generations in terms of economic, environmental and social challenges.

47. What are the benefits of sustainable sourcing? Can firms actually make money from sustainable sourcing? Do you think it is a good practice? Why ? Answer:

Solution and Answer Guide:

Matt Kissler, vice president of package and product innovation at Wal-Mart’s membership warehouse affiliate Sam’s Club, may have gotten to the heart of the matter when he said, ―Sustainability is not just about the environment. No matter how good we do things for the environment, if they are not sustainable for our business, sustainability will not work. If what we are doing is not sustainable financially for our business entities, we should not be doing it.‖ 48. What are the three Ps? What do they have to do with sustainability? Answer: Some have begun referring to sustainability in terms of supporting the three Ps, which refers to people, planet, and profit. The objectives then are not only to sustain the world we live in, but to sustain employees and the balance sheet as well. 49. How could you apply sustainability to a supply chain? Answer: Companies must develop collaborative relationships with their key suppliers and customers to make sustainable sourcing a beneficial reality. 50. Describe some sustainable and ethical things your university is doing. Answer: varies. 51. How are ethical and sustainable sourcing policies designed in an organization? Answer: See Table 4.3. 52. How is the U.S. government getting involved in sustainability requirements? Answer: Local and national governments are now getting involved to set some clear targets for organizations to achieve. Today, sustainability is increasingly moving from voluntary to legally mandated initiatives, including sustainability reporting requirements. Almost three-quarters of U.S. companies on the S&P 500 issued some type of corporate sustainability report in 2014. 53. What are innovative and functional products? Can firms buy functional products in an ethical way? A sustainable way? What about innovative products? Answer: Functional products are maintenance, repair and operating (MRO) materials and other commonly purchased items and supplies. These items are characterized by low profit margins, relatively stable demands, and high levels of competition. Thus, companies purchasing functional products most likely concentrate on finding a dependable supplier selling at a low price. Factory maintenance and cleaning products for example, might fall into this category. Examples of innovative consumer goods are the Amazon Kindle and GM’s Volt; in factory settings, innovative products might be new types of control mechanisms, new software applications, or new robotics systems. Firms could buy these products from small or women-owned businesses for example, which are also practicing green operations. 54. What are the benefits of obtaining ethical and sustainable certifications? Why would a buyer want its suppliers to have these certifications? Answer: Firms, their supply chains, and government agencies alike are coming to realize that every purchase has a global environmental impact, and with careful sourcing, money can be saved. Certifications show customers and governments that the firm takes these issues seriously. 55. What advantages do company-designed supplier certification programs have over industry certifications like ISO 9000?

Solution and Answer Guide:

Answer: Company-designed certification programs can be better customized to suit specific requirements of the users. 56. What is supply base rationalization, and what are its advantages and disadvantages? Answer: Getting rid of poor or marginally-performing suppliers in order to give that business to the firm’s best suppliers. 57. What is outsourcing? How is it different from purchasing? Would a firm ever want to outsource a core product or process? Why or why not? Answer: Outsourcing means to purchase instead of making a product. A firm must already be making the product, then decide to buy some or all their needs. This is how it differs from purchasing. Outsourcing to highly capable and reliable suppliers can lead to improved quality in addition to lower prices, particularly when the outsourced product or service is a core product of the supplier. While it can be very risky to outsource a core product, if this can be justified based on cost, quality, or customer service grounds, it may make some sense. 58. When would firms want to insource a product or process?

Answer: Some firms do not adequately study the decision to outsource, and experience problems with product quality, late deliveries, or services not living up to expectations. In these cases, the outsourcing arrangement is unsuccessful and can result in insourcing, also referred to as backsourcing. 59. Do companies outsource for ethical or sustainable reasons? If so, provide some examples. Answer: Firms are also outsourcing to suppliers with outstanding ethical and sustainable credentials, due in part to brand enhancement and the lower potential costs of sustainability. 60. What is sourcing’s role in value engineering, and what benefits does this give to the firm? Answer: Value engineering occurs during the product design phase. Thus, buyers can be helpful in identifying suppliers that can work with the design team, they can identify available parts to substitute for custom-designed parts, and they can keep designers appraised of new products that are being developed by suppliers. 61. Why is early supplier involvement a good way to integrate the supply chain? Answer: Early supplier involvement is perhaps one of the most effective supply chain integrative techniques. Buyers and suppliers working together—sharing proprietary design and manufacturing information that their competitors would love to see—establishes a level of trust and cooperation that results in many future collaborative and potentially successful projects. 62. Why would suppliers want to be involved on a buyer’s new product development team? Answer: A supplier representative’s input can help the firm to reduce material cost, improve product quality and innovation, and reduce product development time. Getting suppliers involved in the

Solution and Answer Guide:

product design process has allowed them to reduce production lead times and time to market while reducing costs and thus producing better profit margins. 63. Describe the differences between vendor managed inventories (VMI) and co-managed inventories, and when it might be advisable to do either of them. Answer: VMI—allowing their supplier to track inventories and determine delivery schedules and order quantities. Co-managed inventories—the buyer and supplier reach an agreement regarding the buyer’s periodic demand forecasts, how information is shared, the order quantity, when an order is generated, and the delivery timing and location. This type of controlled VMI may be preferable for very high value, strategic item purchases, where the customer desires more input into the day-to-day supply activities, or perhaps as a precursor to a sole-source VMI where the buyer is still assessing the supplier’s ability to take full responsibility for the order fulfillment process. 64. What is the difference between supplier management and strategic alliance development? Answer: Supplier management is getting suppliers to do what you want them to do, whereas alliance development is increasing a key supplier’s capabilities. 65. If your firm had a large number of strategic supplier alliances, what would be the best way to manage them? Answer: To make strategic alliance programs successful, some firms create an alliance board to oversee alliances and coordinate alliance managers in various divisions within the organization or in different geographic regions of the world. 66. What makes supplier alliances fail? How can firms reduce the failure rate? Answer: Failures can be caused by lack of trust, different expectations, changes in products, lack of perceived benefits to one side, and changes in technology that cause changes in supplier requirements. Failure rates can be reduced by making joint decisions, committing to successful relationships, invest in communication tools, and providing educational programs. 67. Describe the differences between integrative and distributive negotiations, and when each should be used. Answer: Integrative negotiations—both sides work together to maximize the joint outcome, or to create a win-win result. The belief is that there is more to gain from collaborating, rather than trying to seek an outcome that favors primarily one side’s interests (referred to as distributive negotiations). For collaborative negotiations to succeed, members from both parties must trust each other, believe in the validity of each other’s perspective, and be committed to working together. 68. Why might second- and even third-tier suppliers be important to the focal firm? Answer: Second and third tier suppliers eventually impact the focal firm’s supply prices, quality, and service, which in turn impacts the products and services sold to customers. 69. What is a common method for developing second-tier suppliers? Answer:

Solution and Answer Guide:

As first-tier supplier alliances are created, these suppliers tend to develop supplier alliances of their own. 70. Discussion Problem: If your firm had 500 suppliers and they each had 100 suppliers, how many second-tier suppliers would your firm have? What if your firm reduced its supply base to twenty? Answer: 500 X 100 = 50,000 second-tier suppliers. Alternately, 20 X 100 = 2,000 second-tier suppliers. 71. What are some typical supplier rewards and punishments that a buyer could use? Answer: Many formal strategic supplier agreements allow suppliers to benefit in the following ways--a share of the cost reductions resulting from supplier improvements, a share of the cost savings resulting from a supplier’s suggestions made to the focal firm, more business and/or longer contracts for high performance, access to in-house training seminars and other resources, and company and public recognition in the form of awards. Punishment may take the form of a reduction or elimination of future business, a downgrade of the supplier’s status from key to marginal, or a billback penalty equal to the costs resulting from a late delivery or poor material quality. 72. If you work for a company, describe how it rewards and punishes its suppliers. Do you think appropriate methods are being used? Why or why not? Answer: Varies. 73. What is benchmarking? What are some different ways you could use benchmarking to improve your performance at school? Answer: Benchmarking is the practice of copying what other businesses do best, and is a very effective way to quickly improve sourcing practices and supply chain performance. Students can go ask top students how they study or do homework; ask the teacher for some good study tips. 74. Why would a firm want to monitor its purchasing performance? Answer: It may be preferable to periodically monitor the purchasing or sourcing function’s performance against set standards, goals, and/or industry benchmarks. Thus, as the firm strives to continuously improve its products and processes, purchasing can also gauge its success in improving its own value-enhancing contributions to the firm and its varied supply chains. 75. Describe several successful ethical sourcing practices. Answer: Reebok also tries to collaborate with its competitors in establishing common human rights guidelines, since they all may be buying merchandise from the same suppliers. U.K.-based Lush Fresh Handmade Cosmetics sources its raw materials globally, and suppliers must sign a pledge confirming no animal testing has been done. 76. How could a company use benchmarking and performance measurement to improve their ethical and sustainable purchasing practices? Answer: A firm could seek help from another firm which is performing well in terms of ethical and sustainable purchasing practices; go to conferences. It could design performance measures to track their progress in these areas.

Solution and Answer Guide:

Cases 1.

Maryann Franklin Industries* Case Note

Learning Objectives   

Understand how ethical and sustainable strategies are developed and implemented. Discuss the benefits of strategic supplier alliances. Describe how and why sourcing practices are benchmarked.

Questions and Answers 77. Johnathan Robert suggested that segmenting their suppliers would enable supply base optimization. Utilize the Internet to research ways to segment suppliers. Find at least three categories of segmentation and explain how these support supply base optimization. Answer: Students answer may vary. One possible website addressing supplier segmentation is http://www.supplychainquarterly.com/topics/Global/20121001-segment-your-suppliers-to-reducerisk/ a. Possible segmentation categories are – strategic suppliers, tactical suppliers, and transactional suppliers. b. Strategic suppliers are typically small in number; however, they are crucial to an organization’s wellbeing. Clearly, these suppliers would be the last on your list to end the relationship with. c.

Tactical suppliers are key suppliers, generally essential to day to day operations. However, in this case a risk assessment by the company would enable it to determine which suppliers could be terminated without any significantly adverse impact on the company.

d. Transactional suppliers are less important, in part because there are usually many choices for a company to pick from. This could be a key area in which suppliers are consolidated. Meaning, if multiple suppliers are delivering the same service or goods, reduce the number by increasing the requests from a few suppliers. 78. Although Mr. Butler agreed with Johnathan’s idea about renegotiating contracts with suppliers, he did have a major concern. Was Mr. Butler proposing they engage in collaborative or distributive negotiations? Explain what attributes of the specific type of negotiations you picked. Support your choice and how they relate to Mr. Butler’s concern. Answer: Mr. Butler is proposing they use collaborative negotiations. He knows that many of their supplier relationships are on solid ground. He wants to build on that status and in order to do so, believes they must maintain a high level of trust, i.e. collaborative negotiations. 79. Go to APICS, http://www.apics.org/docs/default-source/scc-nonresearch/apicsscc_scor_quick_reference_guide.pdf and download the Quick Reference Guide. In the section titled SCOR Metrics, select one metric from three of the five categories (reliability, responsiveness, agility, cost, and assessment management efficiency) and explain in your view how the metrics can lead to benchmark improvements and indicate best practices. Answer: Student answers will vary due to the large number of choices they have for metrics. Suggestions:

Solution and Answer Guide:

a. Reliability: delivery performance to customer commit date metric – this metric could be viewed as a best practice because meeting customer expectations such as on-time delivery is a measure that directly affects the customer’s business. b. Responsiveness: authorize supplier payment cycle time metric – this metric enhances the supplier relationship by monitoring the promptness of payment and building the sense that commitment is a two way street. c.

Cost: returns cost metric – this metric is an indicator of more than the cost of returns. It also suggests a deeper dive is required to understand what is driving these costs; thus, an enabler in identifying process errors, poor quality, etc.

* Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Fitz-Simmons Consultants* Case Note

Learning Objectives  

Understand how ethical and sustainable strategies are developed and implemented. Understand the use of environmental supplier certifications.

Fitz-Simmons Consultants is developing a process for its clientele to assess their suppliers’ ethical and sustainable credentials. It has used the United Nations Development Programme goals to establish criteria for a supplier certification program. However, although many of its clientele have very good supplier relationships, those suppliers may not currently meet these new supplier certification criteria. In a way, Fitz-Simmons has put the cart before the horse. They need to ensure there is a process that enables the supplier to buy-in to the new supplier certification program. Without this pre-step, their clientele will not endorse a process that may endanger their relationship with key suppliers.

Questions and Answers 80. Clearly, if Fitz-Simmons’ clientele have good supplier relationships, they have worked at supplier development. If they want to maintain those relationships with their suppliers, what are some critical first steps that must be taken to ensure suppliers buy-in to the new program? Answer: Refer to Table 4.2. This framework is the key to ensuring the suppliers buy-in to the certification process. Once the firm has determined the criteria, such as decreasing waste, they must effectively communicate it to the suppliers. In addition, they must develop a plan with a timeline for compliance that the suppliers can agree on. Once they do implement the system they must ensure they monitor the suppliers’ progress and provide them feedback in order to enable their success. 81. Once the new supplier certification program for ethical and sustainable sourcing is up and running, what would be the process to prune the number of suppliers? Recommend some criteria for enabling this step. Answer: As part of the ethical and sustainable certification process they should develop a range of certifications by which to rate the suppliers. For example, there could be four tiers – unacceptable, conditional, certified, and preferred. Any suppliers that fall into the unacceptable tier can be pruned from the list. In addition, those who fall into the conditional tier and do not progress out of it in a timely fashion can be terminated as well.

Solution and Answer Guide:

82. Outside of the obvious benefit of a company continuing to do business with its suppliers, how can a company add value to the suppliers adhering to the certification program? Provide specific examples of what the company can do. Answer: The company can add value to the supplier certification process by rewarding the supplier for good and excellent performance. If a supplier reduces waste, thus generating a cost savings for the buyer, the buyer can ensure the supplier shares in these savings. Other options would be to increase the business provided to the supplier and/or give longer contracts to those who reach the preferred tier. In addition, the company could develop a recognition program with an annual banquet where preferred tier suppliers are given public recognition for their performance. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Dean Vanwinkle Enterprises* Case Note

Learning Objectives   

Understand and appreciate the trends in ethical and sustainable sourcing. Understand how ethical and sustainable strategies are developed and implemented. Describe how and why sourcing practices are benchmarked.

Questions and Answers 83. Using Table 4.1, replace two of the four criteria Ms. Bentley and her staff decided on. Explain why your two choices are more suitable to use to evaluate the suppliers. Answer: Students’ answers may vary; however, this is one sequence of possible answers. a. My opinion of one that can be substituted is ―working conditions are safe and hygienic‖. Assuming the company has an agreement within the contract that allows it to do on-site inspections without any notice, and this can be easily verified. However, as part of the contract, what the safe and hygienic working conditions must be, should be stated since what this statement actually means could vary from country to country. Therefore, specific criteria must be documented. b. A second one could be ―employment is freely chosen‖. This should be able to be verified through non-governmental agencies such as the United Nations, Amnesty International, local human rights organizations, etc. c.

A third is ―regular employment is provided‖. As this is defined by the Ethical Trading Initiative, this should be variable through the local government since this would be required by law.

d. I do not believe that either ―no discrimination is practiced‖ or ―no harsh or inhumane treatment is allowed’ can be easily verified. Although there are agencies that do track this such as Amnesty International, the data is very dependent on someone reporting such actions. 84. Go to http://www.transparency.org/news/feature/corruption_perceptions_index_2016 and review the Corruption Perception Index 2016. Antonia asked you to review the following countries – Djibouti, Laos, Morocco, and Sierra Leone. What is your evaluation of these countries, meaning besides their overall ranking what concerns if any do you have? What recommendations would you give Ms. Bentley based on the data?

Solution and Answer Guide:

Answer: Recommendation to Ms. Bentley: a. Djibouti is in a declining state in the Corruption Perception Index. Since 2012 it has dropped six points, from 36 to 30. Any supplier whose home country is Djibouti should be at the top of the list for scrutiny. b. Laos is rising in the Corruption Perception Index. Although its overall rating is still very low, it has gone from a score of 21 in 2012 to 30 in 2016. While Ms. Bentley should still be concerned about the low overall rating of Laos, the improvement is encouraging. c.

Both Sierra Leone and Morocco appear relatively stable over the 2012-2016 period. Again, while neither is high in the overall rating, consistency bodes well for building a foundation for improvement.

85. Is the process developed by Ms. Bentley fair? Explain your viewpoint. Answer: Obviously, this can be argued either way. I say her process is fair. Antonia has selected a standardized criterion, the Corruption Perception Index. Furthermore, she has gone beyond just looking at the current year, and is assessing suppliers based on their country’s trend. Plus, she does not propose canceling any contracts based on her initial findings. She proposes Dean Vanwinkle Enterprises contact the suppliers, state their concerns, and give them an opportunity to rectify the situation. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Sources:

1. Transparency International, www.transparancy.org 2. Transparency International Corruption Perception Index, http://www.transparency.org/news/feature/corruption_perceptions_index_2016 3. Ethical Trading Initiative, www.ethicatrade.org

Part 2 Continuing Case Vanlandingham Robotics—Ethical and Sustainable Sourcing*

Learning Objectives   

Understand how ethical and sustainable strategies are developed and implemented. Describe how and why sourcing practices are benchmarked. Discuss why firms would want to assess their sourcing capabilities.

Questions and Answers 86. Based on the data provided on the performance scores, what vendors appear qualified to act as the benchmark company for specific metrics? Answer: If we focus on scores greater than 90, then the vendors are in the preferred category for the specific metric. Therefore, McKay could be the benchmark for price. McKay and Stafford could be the benchmarks for quality. Stafford could be the benchmark for technology

a. If any vendor is in an unacceptable or conditional category in any area, should they still be a benchmark for the area they excel in? Explain your reasoning. Answer: NOTE: student answers may vary. The answer should be no, however. The benchmark vendor ideally should be certified in all areas before becoming a benchmark company in any single area. Then, also ideally, a vendor should be selected as a benchmark company for a metric in which they are in the preferred category. 87. As important as ensuring ethical and sustainable sourcing is, the time to implement actions is often a scarce commodity. Review Table 4.3, Ethical and Sustainable Sourcing Strategy Framework, and select three of the six steps you believe are the most important to implement now. Explain your reasoning. Answer: NOTE: student answers may vary. However, steps 3, 4, and 5 should be selected, since Step 3 essentially gives the option to not do all at once if time is an issue. It states we should prioritize items based on ease of implementation. Step 4 is critical because we need a means by which to measure compliance. Step 5 builds on step 4 by ensuring we monitor progress and make improvements.

Chapter 05: Answers to Questions/Problems Table of Contents

Discussion Questions ......................................................................................................... 53 Problems .......................................................................................................................... 57 Cases ............................................................................................................................... 65 Learning Objectives ................................................................................................................................. 65 Questions and Answers ........................................................................................................................... 65 Learning Objectives ................................................................................................................................. 67 Questions and Answers ........................................................................................................................... 67 Learning Objectives ................................................................................................................................. 69 Questions and Answers ........................................................................................................................... 69 Part 3 Continuing Case ...................................................................................................... 70 Learning Objectives ................................................................................................................................. 70 Questions and Answers ........................................................................................................................... 70

Solution and Answer Guide:

Discussion Questions 88. Explain demand management. Answer: Demand management is a set of activities that range from determining or estimating the demand from customers through converting specific customer orders into promised delivery dates to help balance demand with supply. 89. What is demand forecasting? Why is demand forecasting important for effective supply chain management? Answer: Forecasting provides an estimate of future demand and the basis for planning and making sound business decisions. The impact of inaccurate forecasts resonates all along the supply chain and results in stock-outs, lost sales, high costs of inventory and obsolescence, material shortages, poor responsiveness to market dynamics, and poor profitability. The benefits of better forecasts are lower inventory levels, reduced stock-outs, smoother production plans, reduced costs, and improved customer service. 90. Explain the impact of a mismatch in supply and demand. What strategies can companies adopt to influence demand? Answer: When supply exceeds demand we have surplus inventory that will likely lead to markdowns to get rid of excess stock. Surplus inventory incurs high holding cost. When demand exceeds supply, we have a stock-out situation. Stock-outs result in loss of sales and goodwill. One approach to influence demand is the use of flexible pricing. During heavy demand periods, prices can be raised to reduce peak demand. Price discounts can then be used to increase sales during periods with excess inventory or slow demand. Another approach is use of appointments in the service industry. Appointments allow demand to be spread over the appropriate time period. For example, a doctor will only see so many patients in a day based on the appointment schedule. 91. What are qualitative forecasting techniques? When are these methods more suitable? Answer: Qualitative forecasting methods are approaches to forecasting based on human intuitive or judgmental evaluation. These methods are generally used when data are limited, unavailable, or not currently relevant and to develop long-range projections. 92. What are the main components of a time series? Explain the difference between a time series model and an associative model. Under what conditions would one model be preferred to the other. Answer: Trend, cyclical, seasonal, and random Time series models forecast by extrapolating the past data into the future. The associative models generally use regression analysis to estimate future demand. One or several external variables are identified that are related to demand, which are generally easier to determine than the forecast. When demand depends on variables other than time then the associative model would be appropriate to determine the forecast. 93. Explain the impact of the smoothing constant value on the simple exponential forecast. Answer:

Solution and Answer Guide:

With an  value closer to 1, there is a greater emphasis on recent data resulting in a major adjustment of the error in the last period’s forecast. Thus a high  value indicates that the model is more responsive to changes in recent demand. When the  value is low, more weight is placed on past demand (which is contained in the previous forecast), and the model responds slower to changes in demand. 94. Explain the impact of forecasting horizon on forecast accuracy. Answer: A longer forecasting horizon will have a major negative impact on forecasting accuracy. Forecasting further into the future is more difficult than predicting demand a few weeks out. As such having shorter delivery lead times means that organizations are required to forecast their demand over a short time horizon and with more reliability and accuracy. 95. Compare and contrast the jury of executive opinion and the Delphi techniques. Answer: In the jury of executive opinion approach, a group of senior management executives who are knowledgeable about the market, competitors, and business environment collectively develop the forecast. In the Delphi approach, a group of internal and external experts are surveyed during several rounds, in terms of future events and long term forecasts of demand. The Delphi group, unlike the jury of executive opinion approach, does not meet and as such the scenario where one or a few experts dominate a discussion is avoided. 96. What the key differences between the weighted moving average and the simple exponential smoothing forecasting methods? Answer: Exponential smoothing is a sophisticated weighted moving average forecasting technique in which the forecast for next period’s demand is the current period’s forecast adjusted by a fraction of the difference between the current period’s actual demand and forecast. The Weighted Moving Average technique has fixed weights assigned to past data. 97. Name three measures of forecasting accuracy. Answer: Mean Absolute Deviation, Mean Absolute Percentage Error, and Mean Square Error 98. How could the MAD be used to generate a better smoothing constant for an exponential smoothing forecast? Answer: MAD is a forecasting performance measure and used to track forecast accuracy. A lower MAD value is desirable because it indicates a more accurate forecast. The exponential forecasts are generated using different alpha (exponential smoothing constant) values for which historical demand data is available. MAD is calculated for each set of forecasts generated using a particular alpha value. For example, we could calculate MAD associated with alpha = 0.1, 0.2, 0.3, 0.4, 0.5, 0.6, 0.7, 0.8, and 0.9. We choose the best value of alpha that resulted in the lowest MAD. 99. What is a tracking signal? Explain how the tracking signal can help managers improve the quality of forecasts. Answer: Tracking signal is used to determine if a forecasting model is stable over time. If the tracking signal falls outside the pre-set control limits, there is a bias problem with the forecasting method and an evaluation of the way forecasts are generated is warranted. The tacking signal provides an indication of whether the forecasts are consistently over or under actual demand. A biased forecast will lead to excessive inventories or stock-outs.

Solution and Answer Guide:

100. Is the use of lag in forecasting performance a measure that companies will adopt in the future? Answer: Forecasting experts suggest that what is really important for decision makers is not the error at a specific time but the error over the lead time for the particular process. While lag and lead time are not the same, this does not prevent companies from using lead time as the lag. A 2019 E2open forecasting and inventory study found that organizations which have adopted this practice have experienced direct benefits and improvements in inventory management performance. It appears that use of forecast error over the exact lead-time as the measure for supply chain decisions is gaining traction. As many will agree, deep-rooted practices may be hard to change. 101. What is demand sensing? Are there any advantages for companies to use demand sensing? Answer: Demand sensing is a way of identifying short-term trends quickly so companies can better forecast what, when, and where consumers want goods. The 2019 E2open Forecasting and Inventory Benchmark study finds that ―within the first two weeks a product is on sale, demand sensing creates a step-change in performance that continues to deliver over the life of the product, cutting error by 30 percent. The study also shows that demand sensing improves forecast errors of the top movers by 34 percent and the slow-moving products by 36 percent. It is anticipated that long-term demand sensing will likely cut weekly and monthly forecast errors by greater than 10-20 percent for yearly time horizons. Demand sensing provides the building blocks for improving forecasting accuracy and creating a more agile supply chain. 102.

Why is widespread adoption of CPFR below expectations?

Answer: The top three challenges for successful CPFR implementation are difficulty of making internal changes, cost, and trust. In addition, widespread adoption is difficult because it requires a fundamental change in the way retailers and manufacturers work together. Many organizations are also hampered by legacy systems. For these reasons, widespread adoption of CPFR is below expectation. 103.

What are the advantages and challenges in using AI/ML in demand planning?

Answer: According to the Mackenzie & Company, reductions in forecasting errors of between 20 and 50 percent are feasible with AI. Other feasible improvements include reduction in lost sales due to out of stock products by up to 65 percent and inventory reductions of 20 to 50 percent. One advantage of AI is speed and the amount of data that can be analyzed quickly. Things that normally take two to three persons to do manually can be done in minutes using AI. Widespread application of AI has three challenges: access to ―right‖ data, talent scarcity, and trust in AI systems. The first challenge is having access to the right information and whether the data can be trusted. As such you would need domain experts working with data scientists on these data bases. According to Dean Abbott, cofounder and chief data scientist at SmarterHQ, ―Teaming data scientists with domain experts and data experts—who understand data sources and how they can be automated—should be a best practice in every analytics operation.‖ Many business leaders consider data to be an important asset, so organizations must commit resources to manage and get the most out of AI and advanced analytics. To get the most value out of advanced analytics and AI, the data collected must be trusted. 104. Discuss how companies manage demand planning during the COVID-19 pandemic and beyond

Solution and Answer Guide:

Answer: The following is a recommended plan of action, according to several supply chain management experts, for the pandemic and beyond:



Change forecasting models—Switch off from traditional models and manually override forecasts if needed. Implement machine-learning algorithms, which can incorporate the latest information and predict future demand.



Identify future demand drivers—Forecast structural shifts in demand due to changing customer requirements and distribution channels. Implement analytical predictive models using new demand drivers, virus information, and available lockdown information.



Understand supply chain dynamics—Must fully understand the dynamics of the industry. Predict end consumer demand and capacity in the supply chain and take into account the effect of lead times and inventories after considering the new environment.



Increase communication with customers—It is critical to have close direct contact with customers through frequent updates on order forecasts and downstream customer expectations. Hold joint planning meetings with major customers and challenge demand from customers to ensure there is no gaming involved. If possible, neutral independent parties can provide additional information to resolve extreme demand-supply mismatches.



Restructure S&OP (Sales & Operations Planning) processes—Form a cross-functional team of data analysts, demand planners, and sales to synchronize and update demand and supply changes right up to the S&OP meetings. Organize more regular S&OP meetings to focus on monitoring supply and transportation.



Plan product portfolio—Planning efforts should be focused on managing fast movers while reducing slow-moving products to better consolidate demand and minimize uncertainty.



Clean data for the future—Solicit agreement from all functions on a clean baseline data for forecasting and planning after the pandemic recovery. For example, the wild swings in demand for toilet paper in the winter/spring of 2020 would definitely not be relevant data for forecasting seasonal demand in 2021.

105. What is cloud-based forecasting, and why do companies use this in solving supply chain forecasting problems? Will cloud services replace the Microsoft desktop? Answer: Cloud-based forecasting can be described as using supplier-hosted or software-as-a-service (SaaS) advanced forecasting applications that are provided to companies on a subscription basis. Today, cloud-based forecasting is accomplished with state-of-the-art time series forecasting algorithms using seasonal and cyclical adjusting models. Some also utilize artificial intelligencebased expert systems to select the forecasting method best suited for a customer’s environment. With cloud-based forecasting, organizations can easily detour around outdated in-house applications, instantly increase data storage and data analysis capabilities as needed, and provide workers with new capabilities without devoting time and resources to software, hardware, and extensive training. Users need only a browser, and can be up and running in one day. Firms can reduce their IT costs significantly, improve employee productivity, and improve forecast accuracy, which also reduces stockout costs and inventory carrying costs. Many of these applications are provided as part of larger cloud-based enterprise management applications like transportation management, customer relationship management, and sales force management systems. In the

Solution and Answer Guide:

long run the expectation is that cloud computers will replace desktop computers. Users need only a browser and can be up and running quickly.

Problems 106. Ms. Winnie Lin’s company sells computers. Monthly sales for a six-month period are as follows:

Month

Sales

Jan

18,000

Feb

22,000

Mar Apr

16,000 18,000

May Jun

20,000 24,000

a. Plot the monthly data on a sheet of graph paper. b. Compute the sales forecast for July using the following approaches: (1) a three-month moving average; (2) a weighted three-month moving average using .50 for June, .30 for May, and .20 for April; (3) a linear trend equation; (4) exponential smoothing with α (smoothing constant) equal to .40, assuming a February forecast of 18,000. c.

Which method do you think is the least appropriate? Why?

d. Calculate the MAD for each of the four techniques in part b. Which is the best? Why? Answer: a. Use graph paper or Excel to plot the monthly data.

Solution and Answer Guide:

30,000 25,000 20,000 15,000 10,000 5,000 0 0

b. (1) FJuly = (18,000+20,000+24,000)/3 = 20,667 (2) FJuly = (0.2*18,000+0.3*20,000+0.5*24,000) = 21,600 (3) Linear regression forecast

Month

Month (x)

Demand (y)

January

18,000

18000

February

22,000

44000

March

16,000

48000

April

18,000

72000

May

20,000

100000

June

24,000

144000

Total

118,000

426000

b1 =

n(xy)   x y n x2  ( x)2

= [(6*426,000) – (21*118,000)]/[(6*91)-(21*21)] = 742.857

 yb x 1

b0 =

= (118,000 – 742.857*21)/6 = 17,066.667 July Forecast = 17,066.667 + 7*742.857 = 22,265.336 (4)

Exponential smoothing forecast Alpha = 0.4 F2 = 18,000 F3 = F2 + (A2 – F2) = 18,000+0.4(22,000-18,000) = 19600 F4 = F3 + (A3 – F3) = 19600+0.4(16,000-19600) = 18160 F5 = F4 + (A4 – F4) = 18160+0.4(18,000-18160) = 18095 F6 = F5 + (A5 – F5) = 18095+0.4(20,000- 18095) = 18858 F7 = F6 + (A6 – F6) = 18858+0.4(24,000-18858) = 20915

Solution and Answer Guide:

The demand data appears to have a trend component so forecasting techniques like moving average and exponential smoothing are less likely to perform well. Part d) below will confirm this.

Month Jan Feb Mar Apr May Jun

Demand 18,000 22,000 16,000 18,000 20,000 24,000

3-Month Moving Avg Forecast

Weighted 3-Month Moving Avg Forecast

3 Month MA Abs Error

18,667 18,667 18,000

18200 18200 18600 MAD

667 1333 6000 2667

Linear Regression Forecast 17810 18552 19295 20038 20781 21524

Exponential Smoothing Forecast

Linear Regression Abs Error 190 3448 3295 2038 781 2476 1765

19600 18160 18096 18858 MAD

Weighted 3-Month MA Abs Error

200 1800 5400 2467 Exponential Smoothing Abs Error

3600 160 1904 5142 2402

Looking only at April – June to be consistent with all techniques, the linear regression forecast has the lowest MAD and therefore is considered the best forecasting method. 2. The US monthly inflation rate for 2016 is shown below: Month January February March April May June

Inflation 1.4 1.0 0.9 1.1 1.0 1.0

Month July August September October November December

Inflation 0.8 1.1 1.5 1.6 1.7 2.1

a. Compute the inflation rate for January 2017 using the exponential smoothing forecast using  = 0.3 and 0.5. Assume that the forecast for February is 1.4. b. What is the MAD for the forecasts generated using exponential smoothing method? Answer: a. Alpha = 0.3 F2 = 1.4 F3 = F2 + (A2 – F2) = 1.4+0.3(1-1.4) = 1.28 F4 = F3 + (A3 – F3) = 1.28+0.3(0.9-1.28) = 1.166 F5 = F4 + (A4 – F4) = 1.166+0.3(1.1-1.166) = 1.146 F6 = F5 + (A5 – F5) = 1.146+0.3(1-1.146) = 1.102 F7 = F6 + (A6 – F6) = 1.102+0.3(1-1.102) = 1.072 F8 = F7 + (A7 – F7) = 1.072+0.3(0.8-1.072) = 0.990

Solution and Answer Guide:

F9 = F8 + (A8 – F8) = 0.990+0.3(1.1-0.990) = 1.023 F10 = F9 + (A9 – F9) = 1.023+0.3(1.5-1.023) = 1.166 F11 = F10 + (A10 – F10) = 1.166+0.3(1.6-1.166) = 1.296 F12 = F11 + (A11 – F11) = 1.296+0.3(1.7-1.296) = 1.417 F13 = F12 + (A12 – F12) = 1.417+0.3(2.1-1.417) = 1.622 = Jan 2017 forecast Alpha = 0.5 F2 = 1.4 F3 = F2 + (A2 – F2) = 1.4+0.5(1-1.4) = 1.2 F4 = F3 + (A3 – F3) = 1.28+0.5(0.9-1.28) = 1.050 F5 = F4 + (A4 – F4) = 1.050+0.5(1.1-1.050) = 1.075 F6 = F5 + (A5 – F5) = 1.075+0.5(1-1.075) = 1.038 F7 = F6 + (A6 – F6) = 1.038+0.5(1-1.038) = 1.019 F8 = F7 + (A7 – F7) = 1.019+0.5(0.8-1.019) = 0.909 F9 = F8 + (A8 – F8) = 0.909+0.5(1.1-0.909) = 1.005 F10 = F9 + (A9 – F9) = 1.005+0.5(1.5-1.005) = 1.252 F11 = F10 + (A10 – F10) = 1.252+0.5(1.6-1.252) = 1.426 F12 = F11 + (A11 – F11) = 1.426+0.5(1.7-1.426) = 1.563 F13 = F12 + (A12 – F12) = 1.563+0.5(2.1-1.563) = 1.832 = Jan 2017 forecast b. Month January February March April May June July August September October November December

Alpha Inflation 1.4 1 0.9 1.1 1 1 0.8 1.1 1.5 1.6 1.7 2.1

0.3 Exp Forecast

0.5 Exp Forecast

0.3 Abs. Error

0.5 Abs. Error

1.280 1.166 1.146 1.102 1.072 0.990 1.023 1.166 1.296 1.417

1.200 1.050 1.075 1.038 1.019 0.909 1.005 1.252 1.426 1.563 MAD

0.380 0.066 0.146 0.102 0.272 0.110 0.477 0.434 0.404 0.683 0.307

0.300 0.050 0.075 0.038 0.219 0.191 0.495 0.348 0.274 0.537 0.253

Forecast 1 MAD =0.307 Forecast 2 MAD = 0.253 Forecast 2 has a lower MAD than Forecast 1. 3. Myron Sheu, the owner of the Chocolate Outlet Store wants to forecast chocolate demand. Demand for the preceding four years is shown in the following table: Year 1 2 3 4

Demand (Pounds) 68,800 71,000 75,500 71,200

Forecast demand for Year 5 using the following approaches: (a) a three-year moving average; (b) a three-year weighted moving average using .40 for Year 4, .20 for Year 3, and .40 for Year

Solution and Answer Guide:

2; (c) exponential smoothing with α = .30, and assuming the forecast for Year 1 = 68,000. Answer: a. F5 = (71,000+75,500+71,200)/3 = 72,567 b. F5 = 0.4*71,000+0.2*75,500+0.4*71,200 = 71,980 c. F1 = 68,000 F2 = F1 + (A1 – F1) = 68,000+0.3(68,800-68,000) = 68,240 F3 = F2 + (A2 – F2) = 68,240+0.3(71,000-68,240) = 69,068 F4 = F2 + (A3 – F3) = 69,068+0.3(75,500-69,068) = 70,997.6 F5 = F2 + (A4 – F4) = 70,997.6+0.3(71,200-70,997.6) = 71,058.3 4. Monthly demand for Accugolf’s top rated golf balls in dozens for the last 12 months are shown below. Month January February March April May June

Demand 5,500 5,700 6,000 5,800 6,300 7,000

Month July August September October November December

Demand 7,500 7,200 6,800 6,300 6,000 5,800

a. Develop a simple regression model for sales of golf balls. c.

What is the forecast for sales of golf balls in January of the following year?

Answer: Month January February March April May June July August September October November December Sum a. b1 =

Month (x) 1 2 3 4 5 6 7 8 9 10 11 12 78

Demand (y) 5,500 5,700 6,000 5,800 6,300 7,000 7,500 7,200 6,800 6,300 6,000 5,800 75,900

x2 1 4 9 16 25 36 49 64 81 100 121 144 650

Xy 5,500 11,400 18,000 23,200 31,500 42,000 52,500 57,600 61,200 63,000 66,000 69,600 501,500

n(xy)   x y n x2  ( x)2

= [(12*501,500) – (78*75,900)]/[(12*650)-(78*78)] = 56.993

b0 =

 y b x 1

n = (75,900 – 56.993*78)/12 = 5954.546

Jan forecast = 5954.546 + 13*56.993 = 6695.455

5. The forecasts generated by three forecasting methods and actual demand for the Torrance

Solution and Answer Guide:

Company are as follows: Month 1 2 3 4 5 6

Demand 269 289 294 278 268 269

Forecast 1 275 266 290 284 270 268

Forecast 2 268 287 292 298 274 270

Forecast 3 280 295 290 280 270 260

Fisher Ke, the forecasting manager, has been asked to compute the MSE and MAD for each forecasting method. Which forecasting method is the best? Would your decision on which forecasting method performs better depend on which forecasting accuracy measure (MAD or MSE) is selected? Answer: Month 1 2 3 4 5 6

Demand 269 289 294 278 268 269

1 275 266 290 284 270 268

Forecast 2 268 287 292 298 274 270

Month 1 2 3 4 5 6

Demand 269 289 294 278 268 269

1 275 266 290 284 270 268

Forecast 2 268 287 292 298 274 270

3 280 295 290 280 270 260 MAD

Forecast 1 Abs. Error 6 23 4 6 2 1 7

Forecast 2 Abs. Error 1 2 2 20 6 1 5.33

Forecast 3 Abs. Error 11 6 4 2 2 9 5.67

3 280 295 290 280 270 260 MSE

Forecast 1 Sq. Error 36 529 16 36 4 1 103.67

Forecast 2 Sq. Error 1 4 4 400 36 1 74.33

Forecast 3 Sq. Error 121 36 16 4 4 81 43.67

Forecast 2 has the lowest MAD. Forecast 3 has the lowest MSE. Depending on which forecasting accuracy measure is selected we will arrive at a different method which is best.

Solution and Answer Guide:

6. The Toro Cutlery Company has collected monthly sales information below: Month Sales Month Sales Month Sales January 20,000 May 92,000 September 30,000 February 16,000 June 30,000 October 90,000 March 42,000 July 90,000 November 80,000 April 100,000 August 50,000 December 90,000 The company is examining two forecasting methods, moving average and exponential smoothing for forecasting sales. a. What will the forecast be for January the following year using a 3-, 4-, and 5-month moving average? b. What will the forecast be for January the following year using exponential smoothing with  values of 0.5? Assume the forecast for February this year is 20,000. Answer: Assume the forecast for February this year is 20,000. a. 3-month MA, FJan = (90,000+80,000+90,000)/3 = 86,667 4-month MA, FJan = (30,000+90,000+80,000+90,000)/4 = 72,500 5-month MA, FJan = (50,000+30,000+90,000+80,000+90,000)/5 = 68,000 b. Assume forecast for February this year is 20,000. F2 = 20,000 F3 = F2 + (A2 – F2) = 20,000+0.5(16,000-20,000) = 18,000 F4 = F3 + (A3 – F3) = 18,000+0.5(42,000-18,000) = 30,000 F5 = F4 + (A4 – F4) = 30,000+0.5(100,000-30,000) = 65,000 F6 = F5 + (A5 – F5) = 65,000+0.5(92,000-65,000) = 78,500 F7 = F6 + (A6 – F6) = 78,500+0.5(30,000-78,500) = 54,250 F8 = F7 + (A7 – F7) = 54,250+0.5(90,000-54,250) = 72,125 F9 = F8 + (A8 – F8) = 72,125+0.5(50,000-72,125) = 61,062.5 F10 = F9 + (A9 – F9) = 61,062.5+0.5(30,000-61,062.5) = 45,531.25 F11 = F10 + (A10 – F10) = 45,531.25+0.5(30,000-45,531.25) = 67,765.625 F12 = F11 + (A11 – F11) = 67,765.625+0.5(30,000-67,765.625) = 73,882.8125 F13 = F12 + (A12 – F12) = 73,882.8125+0.5(30,000-73,882.8125) = 81,941.4063 7. The Sun Devils Corporation is deciding which of two forecasting models to use. The forecasts for the 2 models and actual demand are provided below: Month Sales 1 170 2 190 3 195 4 180 5 170 6 170 7 160 8 175 9 180 10 175

Model 1 Forecast 175 165 190 185 170 165 160 170 185 170

Model 2 Forecast 172 185 190 195 175 170 165 175 180 175

Compute the MAPE and RSFE for the two forecasting methods. Is RSFE a good forecasting accuracy measure? Answer: Month 1

Sales 170

Model 1 Forecast 175

Model 2 Forecast 172

Model 1 Error 1 -5

Model 2 Error 2 -2

Abs. % Error Model 1 Model 2 2.94 1.18

Solution and Answer Guide:

2 3 4 5 6 7 8 9 10

190 195 180 170 170 160 175 180 175

165 190 185 170 165 160 170 185 170

185 190 195 175 170 165 175 180 175 RSFE MAPE

25 5 -5 0 5 0 5 -5 5 30

5 5 -15 -5 0 -5 0 0 0 -17

13.16 2.56 2.78 0.00 2.94 0.00 2.86 2.78 2.86

2.63 2.56 8.33 2.94 0.00 3.13 0.00 0.00 0.00

3.29

2.08

RSFE for Model 1 = 30. Model 1 tends to under forecasts demand. RSFE for Model 2 = -17. Model 1 tends to over forecasts demand. MAPE for Model 1 = 3.29 MAPE for Model 2 = 2.08 A RSFE close to zero means that forecasts in the forecasting horizon are not consistently higher or lower than the actual demand. RSFE is a measure of bias in the forecasts. 8. The Dominguez Hills Company has the following forecasts generated by two forecasting methods. Actual sales for the same time periods are shown below: Year 1 2 3 4 5 6 7 8

Sales 880 895 890 880 860 870 860 875

Forecast 1 875 866 890 885 875 870 860 870

Forecast 2 850 890 895 890 875 880 860 875

Compute the tracking signal for each forecasting method. Why is tracking signal important in assessing the performance of a forecasting model?

Solution and Answer Guide:

Answer: Year 1 2 3 4 5 6 7 8

Sales 880 895 890 880 860 870 860 875

Forecast 1 875 866 890 885 875 870 860 870

Forecast 2 850 890 895 890 875 880 860 875 RSFE MAD

Forecast Error 1 2 5 30 29 5 0 -5 -5 -10 -15 -15 0 -10 0 0 5 0 19 -5

Abs. Error 1 5 29 0 5 15 0 0 5

2 30 5 5 10 15 10 0 0

7.375

9.375

Tracking signal1 = RSFE1/MAD1 = 19/7.375 = 2.576 Tracking signal2 = RSFE2/MAD2 = -5/9.375 = -0.533 Both the tracking signals for the first and second forecasting method are within the limits of +/4. It appears that the forecasts from the first model are biased on the low side, i.e. forecasts are lower than actual whereas the second model has forecasts biased on the high side.

Cases 1.

Quincy Snodgrass Enterprises—Forecasting* Case Note

Learning Objectives  

Explain the role of demand forecasting in a supply chain. Identify the components of a forecast.

This case addresses forecasting. Specifically, how does one forecast if there is no historical data available? Despite the fact that he has no historical data, Quincy has a method for developing initial data. He is able to determine the number of homes per town that are potential customers and estimates how many of those he can secure as his customers.

Questions and Answers 107. Since Quincy doesn’t have any historical data, (only an estimate of the number of customers he’ll serve each month), which specific type of qualitative method is he using? What would be the total number of customers based on his assumptions? Is this a realistic number to allow the business to survive? He estimates his average fee will be $25. Answer: Quincy is acting as his own marketing team; therefore, he is using essentially a sales force composite method. He knows the population of each town; therefore, he can calculate the number of homes. a. Smithburg: 700 x .25 = 175 b. Emeryville: 1800 x .25 = 450 c.

Golf Creek: 2500 x .25 = 625

The potential numbers of customers based on his ability to capture 10% of each market is as follows. a. Smithburg: 175 x .10 = 17.5 or round down to 17.

Solution and Answer Guide:

b. Emeryville: 450 x .10 = 45 c. Golf Creek: 625 x .10 = 62.5 or round down to 62 TOTAL = 124 homes. Quincy will earn $3,100 per month, if he has 124 homes and only services each home once per month. Assuming he services the lawns from April through October, the revenue would be $21,000. Additional revenue may be earned through snow removal in the winter months. However, assuming the lawns needs servicing every 3 weeks from April through October, that is a total of approximately 30 weeks, or 10 services per home. This would generate revenue of $31,000. This does not include any revenue he may earn based on snow removal in the winter months. The business is financially viable. 108. Because of the type of communities, overtime Smithburg will provide 20% of the homes as customers, Emeryville still 10%, and Golf Creek only 7%. Assuming he was charging $25 per home, what effect does this change in monthly forecast have on his monthly revenue? Should he change his price either up or down? Explain. Answer: The new monthly forecast would be as follows. a. Smithburg: 175 x .2 = 35 b. Emeryville: 450 x .10 = 45 c. Golf Creek: 625 x .05 = 31.25 or round down to 31. TOTAL = 121 Although his monthly revenue drops about $75, it would not be wise to raise the price until he determines if this is a long-term trend. 109. Quincy has been gathering data for over five years now. He has a record of how many customers he had each month. He also has information on the weather, e.g. which month has the most rain, etc. Quincy wants to use this data to improve his forecasting. He has a choice of cause-and effect models. Based on what data he has and what he wants to do, what would be the best method from the choices he has? Explain the elements of the forecasting equation.

Solution and Answer Guide:

Answer: Since Mr. Snodgrass has a single explanatory variable, weather, he should use simple linear regression forecast. a. Y = b0 + b1X Y = forecast or dependent variable X = explanatory or independent variable b0 = intercept of the vertical axis b1 = slope of the regression line * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Alvin Ortega’s Social Media Dream* Case Note

Learning Objectives 

Calculate and apply the quantitative forecasting techniques.



Assess the accuracy and interpret the results of forecasts.

Alvin Ortega is working on a social media platform similar to Twitter; however, his has some unique features that he believes will enable it to compete with Twitter. As he begins working on his business plan he decides he needs some real data to illustrate the potential of his creation. Unfortunately, since he hasn’t launched his company yet, he has no data of his own. He searches the Internet and discovers data on Statista,1 a website that provides statistical information on various industries. He searches for information on Twitter and finds data on the number of users per quarter from 2010 through 2016. He is elated! Mr. Ortega decides to use the data from 2010–2011 to illustrate the potential he believes his social media platform could have. Although the numbers are Twitter users, he plans to explain that he used their historical user data as a baseline for forecasting his potential user base. Alvin decides to test four different forecasting methods—2-quarter moving average, 3-quarter moving average, exponential smoothing with a smoothing constant of 0.2, and exponential smoothing with a smoothing constant of 0.9. Using the Twitter data as his baseline, Alvin wants to see which forecasting methods is the most accurate. Alvin creates the table shown below and prepares to calculate the forecasts using each of the four aforementioned methods.

Questions and Answers 1. Forecast demand using the 2-quarter moving average and the 3-quarter moving average. 2. Forecast demand using exponential smoothing, one with the smoothing constant of 0.2 and the other with a smoothing constant of 0.9. Note: Set the forecast for Q1/2010 equal to the demand level for Q1/2010.

3. Calculate the mean absolute deviation (MAD) of each forecasting method. Which forecasting method would you recommend Alvin use? Explain why. Answer: The tables shown below provide the answers for the three discussion questions. Quarter/ Actual Forecasted Absolute Year number of Demand – Forecast

Forecasted Demand –

Absolute Exponential Forecast smoothing

Absolute Forecast

Exponential Absolute smoothing Forecast

Solution and Answer Guide:

users in millions2 Q1/2010 Q2/2010 Q3/2010 Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011 Q1/2012

2-quarter moving average

30 40 49 35 54 44.5 68 51.5 85 61 101 76.5 117 93 109

Error

14 9.5 16.5 24 24.5 24

2-quarter moving average forecast error

5-Period SUM 5-Period MAD

14 9.5 16.5 24 24.5 24 98.5 19.70

3-quarter moving average

39.7 47.7 57 69 84.7 101

Error

14.3 20.3 28 32 32.3

3-quarter moving average forecast error

14.3 20.3 28 32 32.3 126.9 25.38

with smoothing constant of 0.2 30 30 32 35.4 39.1 44.9 52.9 62.5 73.4

Error

10 17 18.6 28.9 40.1 48.1 54.5

Exponential smoothing with smoothing constant of 0.2 forecast error 10 17 18.6 28.9 40.1 48.1 54.5 190.2 31.03

with smoothing constant of 0.9 30 30 39 48 53.4 81.1 84.5 99.4 115.2

Error

10 10 6 14.6 3.9 16.5 17.6

Exponential smoothing with smoothing constant of 0.9 forecast error 10 10 6 14.6 3.9 16.5 17.6 58.6 11.72

For question 3 the exponential smoothing method with the smoothing constant of 0.9 has the lowest MAD (using only the final 5 periods to compare the same number of periods for all methods), thus it’s the most accurate of the four methods tested. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Sources: 1. Statista, https://www.statista.com 2. Twitter, www.twitter.com and Statista, https://www.statista.com

Solution and Answer Guide:

Hammerstein University—Enrollment* Case Notes

Learning Objectives 

Calculate and apply the quantitative forecasting techniques.

Hammerstein University President Blake Sherman was worried about the survival of his university. The state of Illinois had been having financial troubles for years. For the past two years it was at an impasse in passing a budget. One consequence was that students were not getting the state tuition funds they had received in past years. This issue had multiple results. One, less students were enrolling because of the lack of state funds. Two, those students who did enroll were tentative about remaining in school and this generated a high dropout rate. Third, to support the students, Hammerstein University increased its own tuition assistance program. All three results were affecting Hammerstein University’s financial wellbeing. Blake had not yet been told the forecast for fall 2017. However, as he looked over the past enrollments he was not optimistic. Both spring 2017 and fall 2016 enrollments were below the breakeven point for no state tuition. Although he would have to wait for the figures from Admissions, he believed he need to begin looking at options if the state didn’t pass a budget that included tuition assistance.

Questions and Answers 110. Calculate the potential enrollment for Fall 2017 using a three-semester weighted moving average, with weights 0.1, 0.3, and 0.6, with .06 for the most recent semester. Start your forecast for the Spring 2016 semester and continue to Fall 2017. Answer: The enrollment for Fall 2017 using the 3-semester weighted moving average is 3218. (3,120 x .06) + (3,249 x 0.3) + (3,716 x 0.1) = 1,872 + 974.7 +371.6 = 3218.3 The remaining answers are shown in the table below. 111. Calculate the potential enrollment for Fall 2017 using exponential smoothing with a forecast for Fall 2014 of 3094 and a smoothing constant of 0.2. Which forecast do you think is the best? Why? Answer: Semester 2017 fall 2017 spring 2016 fall 2016 spring 2015 fall 2015 spring 2014 fall

Enrollment (actual demand) 3120 3249 3716 3520 3170 3094

Weighted Moving Avg. (.6, .3, .1) 3218 3416 3603 3372

Abs. error 296 354 344

Exponential Smoothing (.2) 3252 3286 3296 3191 3109 3094 3094

Abs. error 166 47 525

If we compare the absolute errors for the 3 common periods, the WMA forecast error is 994 and the ES error is 738. Given this, the exponential smoothing is more accurate than the 3-semester weighted moving average. 112. Which forecast or forecasts match or exceed the enrollment breakeven point if the state continues to not pay tuition assistance? Which match or exceed the enrollment breakeven point if the state pays tuition assistance? What is the next task President Sherman should have his staff do based on these forecasts? Answer:

Solution and Answer Guide:

Both the 3-semester weighted average and the exponential smoothing method exceed the enrollment breakeven point if state tuition is paid; however, neither is high enough if no state tuition is paid. President Sherman needs to have his staff determine which forecast is the most accurate so he has the most reliable numbers before making any decisions on cutting programs, etc. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Part 3 Continuing Case Mullenax Automobile Parts Inc., Operational Issues and Demand Forecasting*

Learning Objectives   

Calculate and apply the quantitative forecasting techniques. Assess the accuracy and interpret the results of forecasts. Identify the components of a forecast.

Questions and Answers 113. Calculate the demand forecast for April through December using a simple three-month moving average. Use the data from the table above. PROBLEM 1: Simple Three-Month Moving Average Historical Absolute Absolute CloudForecast Error Value of the Percentage Based Data error error (APE) (Demand) January 10,000 February 11,000 March 9,000 April 13,000 10,000 3,000 3,000 23.1 May 12,000 11,000 1,000 1,000 8.3 June 10,000 11,333 -1,333 1,333 13.3 July 10,000 11,667 -1,667 1,667 16.7 August 12,000 10,667 1,333 1,333 11.1 September 17,000 10,667 6,333 6,333 37.3 October 9,000 13,000 -4,000 4,000 44.4 November 11,000 12,667 -1,667 1,667 15.2 December 14,000 12,333 1,667 1,667 11.9 RFSE 4,667 MAD 2,444 MAPE 20.1 TRACKING SIGNAL 1.9

a) Calculate the demand forecast for March through December using a simple two-month moving average. Use the data from the table above.

Solution and Answer Guide:

PROBLEM 1a: Simple Two-Month Moving Average Historical Absolute Absolute CloudForecast Error Value of the Percentage Based error error (APE) Data (Demand) January 10,000 February 11,000 March 9,000 10,500 -1,500 1,500 16.7 April 13,000 10,000 3,000 3,000 23.1 May 12,000 11,000 1,000 1,000 8.3 June 10,000 12,500 -2,500 2,500 25.0 July 10,000 11,000 -1,000 1,000 10.0 August 12,000 10,000 2,000 2,000 16.7 September 17,000 11,000 6,000 6,000 35.3 October 9,000 14,500 -5,500 5,500 61.1 November 11,000 13,000 -2,000 2,000 18.2 December 14,000 10,000 4,000 4,000 28.6 RFSE 3,500 MAD 2,850 MAPE 24.3 TRACKING SIGNAL 1.2

114. Calculate the demand forecast for April through December using a three-month weighted moving average, with weights 0.1, 0.3, and 0.6, with 0.6 for the most recent month. Use the data from the table above. PROBLEM 2: Weighted Three-Month Moving Average Historical Absolute Absolute CloudValue of Percentage Forecast Error Based the error error (APE) Data (Demand) January 10,000 February 11,000 March 9,000 April 13,000 9,700 3,300 3,300 25.4 May 12,000 11,600 400 400 3.3 June 10,000 12,000 -2,000 2,000 20.0 July 10,000 10,900 -900 900 9.0 August 12,000 10,200 1,800 1,800 15.0 September 17,000 11,200 5,800 5,800 34.1 October 9,000 14,800 -5,800 5,800 64.4 November 11,000 11,700 -700 700 6.4 December 14,000 11,000 3,000 3,000 21.4 RFSE 4,900 MAD 3,178 MAPE 22.1 TRACKING SIGNAL 1.5

Weights: 0.1, 0.3, 0.6 0.6 = most recent month

a) Calculate the demand forecast for April through December using a three-month weighted moving average, with weights 0.7, 0.2, and 0.1, with 0.1 for the most recent month. Use the data from the table above.

Solution and Answer Guide:

PROBLEM 2a: Weighted Three-Month Moving Average Historical Absolute Absolute CloudValue of Percentage Forecast Error Based the error error (APE) Data (Demand) January 10,000 February 11,000 March 9,000 April 13,000 10,100 2,900 2,900 22.3 May 12,000 10,800 1,200 1,200 10.0 June 10,000 10,100 -100 100 1.0 July 10,000 12,500 -2,500 2,500 25.0 August 12,000 11,400 600 600 5.0 September 17,000 10,200 6,800 6,800 40.0 October 9,000 11,100 -2,100 2,100 23.3 November 11,000 12,700 -1,700 1,700 15.5 December 14,000 14,800 -800 800 5.7 RFSE 4,300 MAD 2,078 MAPE 16.4 TRACKING SIGNAL 2.1

Weights: 0.7, 0.2, 0.1 0.1 = most recent month

115. Calculate the demand forecast for February through December using exponential smoothing and a smoothing constant of 0.2. Use the data from the table above. Forecast Actual Error Absolute Value of the error

January February March 10,000 10,000 10,200 10,000 11,000

9,000

Absolute Percentage error (APE)

April 9,960

May 10,568

June July August Sept 10,854 10,684 ##### #####

13,000 3,040

12,000 1,432

10,000 10,000 ##### ##### -854 -684 1,453 6,163

3040

1432

854

684

1453

23.4

11.9

8.5

6.8

12.1

October November December 12,070 11,456 11,365 9,000 -3,070

11,000 -456

14,000 2,635

6163

3070

456

2635

36.3

34.1

4.1

18.8

TRACKIN MAPE G SIGNAL 4.4

RSFE MAD 9,659

2,199

17.3

a. Calculate the demand forecast for February through December using exponential smoothing and a smoothing constant of 0.9. Use the data from the table above. Forecast Actual Error Absolute Value of the error

January February March 10,000 10,000 10,200 10,000 11,000

Absolute Percentage error (APE)

116.

9,000

April 9,120

May 12,612

June July August Sept 12,061 10,206 ##### #####

13,000 3,880

12,000 -612

10,000 10,000 ##### ##### -2,061 -206 1,979 5,198

3880

612

2061

29.8

5.1

20.6

October November December 16,480 9,748 10,875 9,000 -7,480

11,000 1,252

14,000 3,125

206 1979 5198

7480

1252

3125

2.1

83.1

11.4

22.3

16.5

30.6

TRACKIN MAPE G SIGNAL 1.8

RSFE MAD 5,075

2,866

24.6

Compare the results of each forecasting method to the historical data provided.

a. Which forecast method do you think is the best as a backup to the cloud-based system? Why? Answer: Based on the MAD and MAPE, the weighted three-month moving average with the highest weight (0.7) placed on the oldest month is the most accurate.

117. See if you can come up with a forecast that results in a lower MAD and MAPE than the ones in questions 1, 2, and 3. Answer: Student Answers Will Vary. Have them discuss and explain what they did and why.

Chapter 06: Answers to Questions/Problems Table of Contents

Discussion Questions ......................................................................................................... 73 Spreadsheet Problems ............................................................................................................................. 78 Cases ............................................................................................................................... 87 Learning Objectives ................................................................................................................................. 87 Questions and Answers ........................................................................................................................... 88 Learning Objectives ................................................................................................................................. 89 Questions and Answers ........................................................................................................................... 89 Learning Objectives ................................................................................................................................. 91 Questions and Answers ........................................................................................................................... 91 Part 3 Continuing Case ...................................................................................................... 93 Questions and Answers ...................................................................................................... 93

Discussion Questions 118.

Why is it important to balance production capacity with market demand?

Answer: If capacity is not fully utilized, the firm incurs unnecessary capital expense and misses opportunities to fully utilize its potential. Conversely, if capacity is over utilized, quality level and delivery performance are likely to deteriorate. 119. Describe long-range, medium-range and short-range planning in the context of materials plan and capacity plan. How are they related? Answer: Long-range plans usually cover a year or more and tend to be more general and specify resources and outputs in terms of aggregate hours and units. Medium range plans normally span six to 18 months, whereas short-range plans usually cover a few days to a few weeks, depending on the sizes and types of the firms. Long-range plans involving major decisions in capacity are

Solution and Answer Guide:

established first, and then used to guide the medium-range plans involving minor changes, which are subsequently used to guide the short-range plans that specify the exact end-items and quantities to make daily. 120. Describe aggregate production planning, master production planning, material requirements planning and distribution requirements planning. How are these plans related? Answer: The aggregate production plan (APP) is a long-range materials plan. It sets the aggregate output rate, workforce size, utilization and inventory and/or backlog levels for an entire facility. The Master production schedule (MPS) is a medium-range plan and is more detailed than the aggregate production plan. It shows the quantity and timing of the end-items or services that will be produced. The material requirements plan (MRP) is short-range materials plan. It is the detailed planning process for components to support the master production schedule. MRP converts the end-items from the master production schedule into a set of time-phased component requirements. Distribution requirements planning (DRP) describes the time-phased net requirements from central supply warehouses and distribution centers. It links production with distribution planning by providing aggregate time-phased net requirements information to the master production schedule. 121.

Describe how MRP evolved into closed-loop MRP, MRP-II and eventually into ERP.

Answer: MRP is a short-range materials plan. It is also known as little mrp and MRP-I. MRP provides the detailed planning process for components by converting the end-items from the master production schedule into a set of time-phased component requirements. Closed-loop MRP is an MRP-based manufacturing planning and control system that incorporates the aggregate production plan, master production schedule, material requirements plan, and the capacity requirements plan. It is an extension of MRP. MRP-II (manufacturing resource planning) is an extension of the closed-loop MRP system. It incorporates the business and sales plans to the closed-loop MRP system and has simulation capabilities to answer ―what if‖ questions. A further extension of the MRP-II system is Enterprise Resource Planning (ERP). 122. Compare and contrast chase versus level production strategies. Which is more appropriate for an industry where highly skilled laborers are needed? Why? Answer: The chase production strategy adjusts capacity to match the demand pattern. Using this strategy, the firm hires and lays off workers to match its production rate to demand. The workforce fluctuates from month-to-month, but finished goods inventory remains constant. The level production strategy relies on a constant output rate and capacity, while varying inventory and backlog levels to handle the fluctuating demand pattern. Using this strategy, the firm will keep its workforce levels constant, and relies on fluctuating finished goods inventories and backlogs to match demand. Since the level production strategy keeps a constant output rate and capacity, it is more suited for firms that require highly skilled labor. The workforce can be expected to be more efficient, and morale is likely to be better due to job security. 123. Is a level production strategy suitable for a pure service industry, such as professional accounting and tax services or law firms? Can these firms inventory their outputs? Answer: No. Services usually are produced and consumed simultaneously. Pure service firms, such as professional accounting and tax services cannot inventory their outputs. Although these firms may not hire and fire their regular employees on a monthly basis, they usually rely on a chase strategy. Additional part time employees are usually hired during peak seasons. 124.

What is the purpose of low-level coding?

Solution and Answer Guide:

Answer: Low level coding assigns the lowest level on the bill of materials to all common components to avoid duplicate MRP computations. 125. What is the purpose of available-to-promise quantity, and how is it different from onhand inventory? Answer: The available-to-promise quantity is the uncommitted portion of the firm’s planned production (or scheduled MPS), whereas on-hand inventory is the current physical inventory. Available-topromise quality is the difference between confirmed customer orders and the quantity the firm planned to produce, based on the MPS. It provides a mechanism to allow the master scheduler or sales personnel to quickly negotiate new orders and delivery due dates with customers. 126.

What is system nervousness? Discuss how it can be minimized or avoided.

Answer: System nervousness is defined as a situation where a small change in the upper level production plan causes a major change in the lower level production plan. Many firms use a time fence system to separate the planning horizon into two segments – a firmed and a tentative segment. The firmed segment reaches from the current period to a couple of weeks into the future, and stipulates that the production plan or master production schedule cannot be altered, except with the authorization of senior management. The tentative segment is the planning time fence, and it typically stretches from the end of the firmed segment to several weeks into the future. It usually covers a longer period than the firmed segment, and the master scheduler can change production to meet changing conditions. Beyond the planning time fence, the computer can schedule the MPS quantities automatically, based on existing ordering and scheduling policies. Using small lot sizes can also be used to minimize the problem. 127.

List and describe the two segments of a time fence system.

Answer: The two segments are the firmed segment and tentative segment. A firmed segment is also known as a demand time fence, and it usually stretches from the current period to a period several weeks into the future. A firmed segment stipulates that the production plan or MPS cannot be altered except with the authorization of senior management. The tentative segment is also known as the planning time fence, and it typically stretches from the end of the firmed segment to several weeks farther into the future. It usually covers a longer period than the firmed segment, and the master scheduler can change production to meet changing conditions. 128. Available-to-promise quantity and on-hand inventory are used to fill orders. What is the difference between them? Answer: The available-to-promise quantity is the scheduled production units that are yet to be produced, whereas on-hand inventory is the current physical inventory. Please also refer to question # 8 above. 129.

What are the crucial inputs for material requirements planning?

Answer: The three crucial inputs of MRP are bill of materials, inventory status, and master production schedule. 130.

What is a BOM, and how is it different from the super BOM?

Answer: The bill of materials (BOM) is an engineering document that shows an inclusive listing of all component parts and items that make up the final product. It shows the parent-component

Solution and Answer Guide:

relationships, and the specific units of components (known as the planning factor) required for making a higher-level part. The super bill of materials uses a simplified product structure diagram to create a simplified BOM for an entire family of products that consists of different variations. Instead of stating the planning factor, the percentage of each option is used. The super bill of materials enables the firm to forecast the total demand of a family of products and then breakdown the forecast into different variations using the proper percent, instead of forecasting the demand of each option individually. 131.

What is the planning factor in MRP?

Answer: Planning factor is the quantity of a component that is needed to produce a unit of its parent item. 132.

Are manufacturing or purchasing lead times considered in the MPS and the MRP?

Answer: Both types of lead time information are used only in the MRP. 133.

What is the difference between scheduled receipts and planned order releases?

Answer: Scheduled receipts are committed orders waiting for deliveries, whereas planned order releases are orders that are yet to be released. 134. In MRP computation, do the gross requirements of level 3 items come from the gross requirements or planned order releases of the level 2 items? Explain how this works. Answer: The gross requirements of level 3 items come from the planned order releases of level 2 items. The product of planned order release of the level 2 item (parent) and the planning factor of the level 3 item is the gross requirement of the level 3 item (child). 135.

Where do the gross requirements of a level 0 item in the MRP come from?

Answer: Level 0 item is the finished goods. Its gross requirements come from the master production schedule. 136.

Where do the gross requirements of a level 5 item in the MRP come from?

Answer: The gross requirements of level 5 item come from the planned order releases of its level 4 parent item. The product of planned order release of the level 4 parent item and the planning factor of the level 5 item is the gross requirement of the level 5 child item. 137. Are the gross requirements of level 0 item in the MRP an independent or dependent demand? How about items below level 0 (i.e., level 1, 2, 3 and below)? Answer: Gross requirements of level 0 items are independent demand items, whereas level 1 and below are dependent demand items. Dependent demand items are computed using MRP. 138.

What is the difference between an MRP explosion and a DRP implosion?

Answer: In the DRP implosion process, demand information is gathered from several field distribution centers and aggregated in the central warehouse, and eventually passed onto the manufacturing facility. In the MRP explosion process, a Level 0 finished-good is broken into its component requirements.

Solution and Answer Guide:

139. Describe lead capacity strategy and lag capacity strategy. Which strategy is more widely used in the electronics manufacturing industry, especially in the semiconductor and integrated circuit sectors? Why? Answer: A lead capacity strategy is a proactive approach that adds or subtracts capacity in anticipation of future market conditions and demand, whereas a lag capacity strategy is a reactive approach that adjusts its capacity in response to demand. A lead capacity strategy is more widely used in the electronics manufacturing industry, especially in the semiconductor and integrated circuit sectors because of rapid technological innovation and short product life cycles in the sector. Also, capacity adjustment, particularly expansion in the sector generally takes a few years to accomplish. 140. Briefly describe resource requirements planning, rough-cut capacity planning and capacity requirements planning. How are these plans related? Answer: Resource requirements planning, a long-range capacity planning module, is used to check whether aggregate resources can satisfy the aggregate production plan. Once the aggregate production plan is determined to be feasible, the aggregate production information is disaggregated into a more detailed medium range production plan known as the master production schedule. The rough-cut capacity plan takes the master production schedule and converts it from production to capacity required, and then compares it to capacity available. Capacity requirements planning, a short-range capacity planning technique, is used to check the feasibility of the MRP. The time-phased material requirements plan is used to compute the detailed capacity requirements to manufacture the items specified in the MRP. 141. How are the various capacity plans (ERP, RCCP, CRP) related to the material plans (APP, MPS, MRP)? Answer: ERP is used to check the aggregate capacity of the APP, RCCP is used to check the capacity of the MPS, and CRP is used to check the detailed capacity of the MRP. 142.

Why are production planning and capacity planning important to SCM?

Answer: Without proper production planning and capacity planning at the individual firm level, the problems with excess inventory or idle capacity, missed deliveries and other production problems will adversely affect all members of the supply chain. 143.

Why have so many firms rushed to implement ERP systems over the past ten years?

Answer: At the turn-of-the-century, many firms were uncertain as to how the Year 2000 Millennium Bug (conversion of the year from 1999 to 2000) would affect their information systems. In addition, the rapid development of computer and information technology over the last two decades also contributed to the rapid growth of ERP. 144.

Describe the limitations of a legacy MRP system.

Answer: Legacy MRP systems were designed to perform a very specific operational function and were programmed as independent entities with little regard for meeting requirements or coordinating with other functional areas. Communication between systems is often limited and visibility across functional areas is severely restricted. Legacy systems were implemented to gather data for transactional purposes, and thus lacked analytical capabilities.

Solution and Answer Guide:

145. Why is it important to learn the fundamentals of the traditional MRP system, even if it is considered an outdated, legacy system? Answer: The modern ERP system utilizes the logic and fundamental of the traditional MRP system. 146.

What are the advantages of an ERP system over the legacy MRP system?

Answer: ERP uses a centralized, shared database system to tie the entire organization together, as opposed to the traditional legacy MRP system that uses multiple databases and interfaces that frequently result in duplicate and inconsistent information across different branches. 147. Explain best-of-breed and single integrator ERP implementations. What are the advantages and disadvantages of the best-of-breed implementation? Answer: The best-of-breed solution picks the best application or module for each individual function in the supply chain. It ends up with several different applications that must be integrated to work as a single coordinated system to achieve the global scope of the supply chain. Thus, a criticism of the best-of-breed solution is that multiple databases may have to be used to link the multiple applications from different suppliers. The single integrator solution picks all applications from a single supplier for the entire enterprise or supply chain. Therefore, an obvious advantage is that it should work well together. 148. Explain why many ERP implementations have failed to yield the expected benefits over the last ten years. Answer: The reasons for failed ERP implementations include lack of top management commitment, inadequate resources, improper training, poor communication, poor implementation schedule, and unfavorable system environment. 149. ERP?

Describe how a cloud-based ERP system works. When might a firm use a cloud-based

Answer: A cloud-based ERP system accesses application programs and/or stores data over the internet (i.e., on some other company’s server) instead of the user’s local hard drive. Cloud-based ERP system can be accessed anywhere and anytime as long as there is high-speed online connection. It is generally cheaper and easier to implement because the system vendor is responsible for implementation.

Spreadsheet Problems 150. The January beginning inventory and the desired ending inventory on June 30 are zero. Given the following demand information from January to June, what are the monthly chase and level production quantities? Month Jan Feb Mar Apr May Jun Demand

250

300

540

660

700

250

Chase Production Quantity Level Production Quantity

250 450

300 450

540 450

660 450

700 450

250 450

Level Production Quantity = (250 + 300 + 540 + 660 + 700 + 250)/6 = 450 units 151. Given the following production plan, use (a) a chase production strategy and (b) a level production strategy to compute the monthly production, ending inventory/(backlog) and

Solution and Answer Guide:

workforce levels. A worker can produce 100 units per month. Assume the beginning inventory as of January is zero, and the firm desires to have zero inventory at the end of June. Month

Jan

Feb

Mar

Apr

May

Jun

Demand

2000

3000

5000

6000

2000

Production Ending Inventory Workforce (a) Chase production strategy  production matches demand. Month

Jan

Feb

Mar

Apr

May

Jun

Demand

2000

3000

5000

6000

2000

Production

2000

3000

5000

6000

2000

0 20

0 30

0 50

0 60

0 20

Ending inventory Workforce

(b) Level production strategy  production = 24,000/6 = 4,000. Month

Jan

Feb

Mar

Apr

May

Jun

Demand

2000

3000

5000

6000

2000

Production

4000

Ending inventory Workforce

2000 40

3000 40

2000 40

0 40

-2000 40

0 40

Ending inventory of -2000 in May indicates a backlog of 2000 units 152. Given the following production plan, use (a) a chase production strategy and (b) a level production strategy to compute the monthly production, ending inventory/(backlog) and workforce levels. A worker can produce 50 units per month. Assume that the beginning inventory in January is 500 units, and the firm desires to have 200 units of inventory at the end of June. Month

Jan

Feb

Mar

Apr

May

Jun

Demand

2000

3000

5000

6000

2000

Production Ending Inventory Workforce (a) Chase production strategy  production matches demand. Month

Jan

Feb

Mar

Apr

May

Jun

Demand

2000

3000

5000

6000

2000

Production

1500

3000

5000

6000

2200

0 30

0 60

0 100

0 120

200*

Ending inventory [500] Workforce

* indicates desired ending inventory of 200 at the end of June

(b) Level production strategy  production = (24,000 – 500 + 200)/6 = 3,950. Month

Jan

Feb

Mar

Apr

May

Jun

Solution and Answer Guide:

Demand

2000

3000

5000

6000

2000

Production Ending inventory [500] Workforce

3950 2450 79

3950 3400 79

3950 2350 79

3950 300 79

3950 -1750 79

3950

200* 79

Ending inventory of -1750 in May indicates a backlog of 1750 units * indicates desired ending inventory of 200 at the end of June

153.

Given the following production schedule, compute the available-to-promise quantities. Week

Committed Customer Orders

ATP:D

MODEL A MPS

154.

BI = 60

Given the following production schedule, compute the available-to-promise quantities.

Week

Committed Customer Orders

ATP:D

MODEL B MPS

155.

BI = 20

Given the following production schedule, compute the available-to-promise quantities. Week

Committed Customer Orders

ATP:D

MODEL C MPS

156.

BI = 15

Given the following production schedule, compute the available-to-promise quantities. Week

Committed Customer Orders

ATP:D

MODEL A MPS

157.

BI = 10

Given the following production schedule, compute the available-to-promise quantities. Week

MODEL B MPS

BI = 8

Solution and Answer Guide:

Committed Customer Orders

ATP:D

158.

Given the following production schedule, compute the available-to-promise quantities. Week

Committed Customer Orders

ATP:D

MODEL C MPS

BI = 22

159. Given the following bill of materials for product A with the associated component parts and planning factors (in parenthesis), how many units of each of the dependent demand items are required to produce one unit of product A?

Answer: Component B: 3 units Component C: 2 units Component D: 1 unit Component E: 4 × 2 = 8 units Component F: 6 × 2 = 12 units 160. The bill of materials for product A with the associated component parts and planning factors (in parenthesis) are showed below. How many units of the following components are required to make one unit of the product A?

(A) (B)

Component B Component C

Answer 2 3 + 1x2 = 5

Solution and Answer Guide:

Component D Component E Component F Component G

1 + 1x2 + 1x3 = 6 2x3=6 1x1 = 1 2x2 = 2

161. Given the following information, complete the planned order releases and projected on- hand balances for component part X.

Part X

Gross Requirements

Scheduled Receipts

60 100

Projected On-Hand Balance

Week

120

100

Planned Order Releases

120

Q = 60, LT = 3 weeks, Safety Stock = 5 162. Given the following information, complete the planned order releases and projected on- hand balances for component part Y. Part Y

Gross Requirements

Scheduled Receipts

160 150

Projected On-Hand Balance

Week

120

200

Planned Order Releases

Q = 20, LT = 2 weeks, Safety Stock = 10 163. Given the following information, compute the planned order releases and projected onhand inventory for component part Z. Part Z

Gross Requirements

160

125

280

Scheduled Receipts

12 12

156

120

288

Projected On-Hand Inventory

week

Planned Order Releases Q = 12, LT = 1 week, Safety Stock = 6

164. Given the following information, compute the planned order releases and projected onhand inventory for component part Z. Part A

week

Gross Requirements Scheduled Receipts Projected On-Hand Inventory

Planned Order Releases

150

252

240

320

280

450

150

250

350

250

450

Q = 50, LT = 2 weeks, Safety Stock = 20

Solution and Answer Guide:

165. Given the MPS of an independent demand item, Model A ATV, compute the gross requirements, projected on-hand inventory and planned order releases of this level 0 item. Week MPS for Model A

1 30

2 40

3 80

4 15

5 75

6 85

7 95

8 158

Model A (Level 0 Item) Gross Requirements Scheduled Receipts Projected On-Hand Inventory Planned Order Releases Q = 50; LT = 1; SS = 12

1 30 50 30 50

2 40

3 80

4 15

5 75

6 85

7 95

8 158

40 100

45 50

20 100

35 100

40 150

166. The bills of materials for two finished products (D and E), inventory status, and other relevant information are given below. Compute the planned order releases and projected on- hand balances for parts D, E and F. D

3 required

2 required

3 required

F 2 required

Part D

Gross Requirements

Scheduled Receipts Projected On-Hand Inventory

Planned Order Releases

Q = 30; LT = 1; SS = 0 Part E

Gross Requirements

Scheduled Receipts Projected On-Hand Inventory

11 5

From D (1 each) From E (2 each)

30 28

Part F

Planned Order Releases

Q = LFL; LT = 2; SS = 3

30 5

Solution and Answer Guide:

Gross Requirements

Scheduled Receipts

Projected On-Hand Inventory

Planned Order Releases

Q = 60; LT = 1; SS = 0 167. The bill of materials for a finished product E, inventory status and other relevant information are given below. Compute the planned order releases and projected on-hand balances for parts E, F and M.

A 2 required

3 required

2 required

Part E

Gross Requirements

Scheduled Receipts Projected On-Hand Inventory

Planned Order Releases

Q = 50; LT = 2; SS = 0 Part F

Gross Requirements

100

Scheduled Receipts Projected On-Hand Inventory

50 120

120

Planned Order Releases

20 50

Q = 50; LT = 2; SS = 20 Part M

Gross Requirements

Scheduled Receipts Projected On-Hand Inventory Planned Order Releases

60 10

70 60

Q = 60; LT = 1; SS = 30 168. The bill of materials for a finished product A, inventory status, and other relevant information are given below. Compute the planned order releases and projected on-hand balances for the independent demand item A, and its dependent demand items C, E, and F.

Solution and Answer Guide:

Part A

Gross Requirements

168

Scheduled Receipts

60 12

180

60x2

180x2

Part C

Gross Requirements

120

360

Scheduled Receipts

120

360

120x4

360x4

Part E

Gross Requirements

480

1440

Scheduled Receipts

500 70

150

500

1500

120x6

360x6

Part F

Gross Requirements

720

2160

Scheduled Receipts

700 60

140

800

2100

Projected On-Hand Inventory

Planned Order Releases Q = 60; LT = 1; SS = 8

Projected On-Hand Inventory

Planned Order Releases Q = 30; LT = 2; SS = 10

Projected On-Hand Inventory

Planned Order Releases Q = 250; LT = 1; SS = 40

Projected On-Hand Inventory Planned Order Releases

Q = 100; LT = 1; SS = 50 169. Eat-More-Chicken Inc. replenishes its two distribution centers in Emeryville and Seattle from its St. Louis central supply warehouse. The distribution schedule for one of its products for

Solution and Answer Guide:

the next six weeks is shown below. Use proper distribution requirements planning logic to complete the replenishment schedules of its distribution centers and central warehouse. Emeryville Distribution Center

Gross Requirements

120

Scheduled Receipts

35 5

120

Seattle Distribution Center

Gross Requirements

120

230

180

286

145

268

Scheduled Receipts

150 45

200

300

100

300

65+200

85+300

120+100

90+300

St. Louis Central Warehouse

Gross Requirements

265

385

220

390

Scheduled Receipts

240

400

240

360

Projected On-Hand Inventory

Planned Order Releases Q = LFL; LT = 1; SS = 5

Projected On-Hand Inventory

Planned Order Releases Q = 50; LT = 1; SS = 2

Projected On-Hand Inventory

Planned Order Releases Q = 40; LT = 2; SS = 0

170. Crop-Quick Inc. replenishes its three distribution centers in Boston, Denver and Houston from its Las Vegas central supply warehouse. The distribution schedule for one of its products for the next six weeks is shown below. Use proper distribution requirements planning logic to complete the replenishment schedules of the three distribution centers and the central supply warehouse. Boston Distribution Center

Gross Requirements

Scheduled Receipts Projected On-Hand Inventory

Planned Order Releases

Q = 30; LT = 1; SS = 5 Denver Distribution Center

Gross Requirements

Scheduled Receipts Projected On-Hand Inventory Planned Order Releases

11 15

15 6

Solution and Answer Guide:

Q = LFL; LT = 2; SS = 2 Houston Distribution Center

Gross Requirements

Scheduled Receipts Projected On-Hand Inventory

Planned Order Releases

Q = 60; LT = 1; SS = 0 30+6

60+60

Las Vegas Central Warehouse

Gross Requirements

120

Scheduled Receipts Projected On-Hand Inventory Planned Order Releases

Q = 20; LT = 1; SS = 0

Cases 1.

Teen’s Scene* Case Note

Learning Objectives  

Understand the chase, level, and mixed aggregate production strategies. Know how to compute available-to-promote quantities, MRP explosion, and DRP implosion. Myrtle Mendez is an entrepreneur. She started a clothing manufacturing business and established a store a few years ago that focused on teens. Her brand and store are called Teen’s Scene. Initially, Myrtle worried about just getting the business running and keeping the financials above water. As her success grew, Myrtle realized that she needed to think more about the big picture. What was the direction she wanted her company to go? Did she want to stay as a single store? Did she want to get her brand sold in other clothing stores? Did she want to expand locally, i.e. just within the city of Chicago? Or, was there another avenue of growth she should pursue? Myrtle knows that each of her senior staff are experts in their areas; therefore, she decided the best course of action was to engage them in the planning of her company’s future. Myrtle listened to their views and realized that each one had valid points. Selecting the wrong strategy could result in her company failing financially in the long term. Furthermore, technically, her store was her manufacturing company’s customer, although the teens were the ultimate end users. If she added other intermediate suppliers in between her manufacturing company and the teens, i.e., other clothing stores, they would be her manufacturing company’s critical customers. Obviously, as her own customer she knew about any problems that would cause a disruption in supply; however, other stores wouldn’t care about the reasons. Consequently, a disruption in supply would be a major cause of customer dissatisfaction. Finally, she understood Essie’s point of view very clearly. A stable trained workforce was

Solution and Answer Guide:

essential to the quality of their product. A strategy that may seem more attractive from a financial perspective, i.e. keeping labor costs low, could affect their ability to maintain the level of quality their currently have.

Questions and Answers 171. If Ms. Mendez and her staff decided to expand the business by selling the Teen’s Scene brand to other clothing stores, which production strategy would be the best? Explain why your choice would be the best by addressing how the concerns of each director are resolved or at least minimized. Answer: I would recommend the mixed strategy. This would address Rolando’s concern about the financial effect of any specific strategy. The mixed strategy would allow Teen’s Scene to maintain a core staff, yet give them the flexibility to increase production when necessary by hiring temporary workers or using part-time workers. Furthermore, unlike the level strategy, which has the potential to create inventory overages, the mixed strategy would allow Teen’s Scene to ramp up when demand spiked. This would enable them to meet demand without having inventory overages, an unnecessary expense. The mixed strategy would provide the stable workforce Essie wanted, i.e., a core staff of well-trained employees. However, it would avoid the prospect of being overstaffed when demand wasn’t high; thus avoiding excess labor costs. This would please Rolando. As far as Andy’s concerns about ensuring sufficient inventory, the level strategy would jeopardize that. Both the chase and mixed strategies would ensure sufficient inventory. However, the chase strategy would not meet Essie’s needs since it requires a cycle of hiring and then laying off workers. This would disrupt the stability of her workforce. 172. One of the options that Myrtle is considering is the lead capacity strategy. Based on the case and the issues all three Directors voiced, do you agree that this is the best capacity strategy? Explain why or why not. What do you believe would be a better capacity strategy?

Solution and Answer Guide:

Answer: I disagree with Myrtle about using the lead strategy. The lead strategy would result in inventory overages and idle capacity at times. This would be contrary to what Rolando wanted. The lag capacity strategy would not satisfy Andy’s concern. Lag capacity strategy would create inventory shortages at times. The best strategy to employ is the mixed or tracking strategy. This one is essentially a middle of the road strategy, in-between lead and lag. While it could result in some of the issues the directors are concerned about, it is the best strategy under the circumstances. 173. Essie Floyd (DO) and Andy Allen (DS) have different concerns. What system or systems can Teen’s Scene procure and implement that would provide a resolution for both Directors? Identify the system or systems and explain why it or they would alleviate the specific concerns of each director. Be specific. Answer: Essie’s concern is production. Although both she and Andy want what is best for the company, their problems are different and in this case one solution does not fit all problems. For Essie they need an MRP system. An MRP system is designed to support production and will enable Essie to effectively manage dependent demand and timing requirements. Furthermore, by giving her the capability to more effectively manage production, it also enables Essie to create schedules that enhance her ability to ensure a stable workforce. Allen is worried about meeting customer demand; thus, he is more focused on distribution than production. DRP is driven by customer demand, not production. As Teen’s Scene expands by adding other retailers as customers, potentially it can be more capable of meeting the demand of the retail stores using the DRP system. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Fox’s Furniture Division* Case Note

Learning Objectives 

Describe an ERP system, and understand its advantages and disadvantages.

Beulah Burton is the Vice President of Fox’s Furniture Division. Fox is a corporation with businesses in many different industries. The furniture division has always been profitable; however, many years have passed since any overhaul of systems, equipment, or processes has been done. Jo Simon, Chief Executive Officer of Fox Industries, believed the time was right to give the furniture division a face lift. That was one reason she hired Beulah. Beulah has a reputation within the furniture industry of modernizing furniture companies. Beulah met with Jo and explained that Fox needed an Enterprise Resource Planning system. Once the ERP system was installed and operational the first reports began to flow. Ms. Burton realized that there was a lot of excess inventory. It was more than just too many of a certain part, e.g. wood spindles. It was a case of having inventory that was not used for any of their current product line. They had tens of thousands of dollars of obsolete inventory sitting in their warehouses.

Questions and Answers 174. You work for Beulah Burton. She directs you to determine what specific actions the furniture division needs to take in order to clean up the inventory system and to have the new system implemented effectively. What will you report? Answer:

Solution and Answer Guide:

As you reflect on the entire case, one action that should come to mind is reviewing all the bills of materials for the furniture. This will provide a list of all parts currently being used and can be reconciled against what is actually in inventory. Possibly, the final product’s design may have been modified and now new components are being used. For example, maybe the shape of the spindle used for the back of the chair has changed from straight to one with contours in it. Since the workers have been there a long time, such changes may not have been documented, just communicated to the workers. Consequently, the straight spindle may still be in inventory even though it isn’t being used any more. A second idea would be to develop an implementation and training plan. Again, you have a mature workforce who may believe they did fine without an ERP system. You need a plan to engage them in the process, as well as a plan to train them on the purpose and usage of the ERP system. A third idea is to ensure ongoing communication with the workforce. Make them aware of the value of the ERP system by sharing cost savings derived by selling off obsolete parts, etc. 175. You are part of a team tasked by Beulah to anticipate what problems may occur in the planning and implementation of an ERP system. Think about the scenario presented in the case. What specific problems may they encounter? What common problems, (i.e., ones which happened in many companies), may they encounter? What solutions or contingencies do you recommend? Answer: The problem with the highest potential of occurring is lack of buy in from the employees. They had been around a long time and they probably believe that they worked well under their current system and do not need an expensive computer system to manage the inventory, since so far they have managed without it. The key to solving this potential problem is good communications. As part of the communications plan, the employees must be engaged in developing the implementation plan and the specifications for the ERP system. Beulah needs to take a step back and realize that they do not have a crisis, just a problem to solve. Therefore, implementation should be done at a reasonable pace; a pace that ensures proper testing and training on the ERP system. Obviously, a full ERP system is going to be very, very costly. The danger is that because of the high cost, shortcuts may be taken if the full ERP system is being implemented. However, if Fox’s Furniture Division takes a more cautious approach, i.e. implement the ERP system in a modular fashion, that should ease some of the pressure from a cost perspective. 176. Do you agree with Beulah’s plan to jump all the way in, concerning the ERP system? Why? Shouldn’t Jo have slowed things down and said they would implement it more piecemeal? Explain your thoughts. Answer: No, I do not agree with Beulah to jump all the way in at once. Complete ERP systems are very complex and are designed to tie may company functions together; for example, suppliers, customers, operations, finance and accounting, engineering, human resources, to name a few. An implementation of ERP in all areas could lead to chaos. If there are multiple problems in several areas, then the perception of ERP benefits will quickly erode. Once this happens it is difficult to recover and gain everyone’s buy in again. Since inventory is the primary concern, it would be best to implement specific ERP modules. An MRP system, and possibly a logistics and warehouse module seems to be the most important ones to begin with. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Owen Poole CPA*

Solution and Answer Guide:

Case Note

Learning Objectives  

Understand the chase, level, and mixed aggregate production strategies. Describe the ERP system, and understand its advantages and disadvantages.

Today Mr. Poole is meeting with Van Ward. Mr. Ward’s business has been growing very rapidly. As Mr. Poole reviews Ward’s financial statements he notices that Mr. Ward’s profit has been decreasing slightly despite his company’s growth. Mr. Ward’s financial statements tell Owen a lot. He knows that there has not been much invested in resource planning systems. Consequently, as Van’s business has grown, so have the inefficiencies. Mr. Poole decided that will be the topic for today—to help Van understand the need for investment in this area.

Questions and Answers 177. Put yourself in Mr. Poole’s position. What questions would you ask Van Ward to better understand his needs concerning resource planning? Answer: Students’ answers will vary. Here is a list of questions that should be asked. The list in not exhaustive.  

How is your financial control? Explain to me what reports your current financial system generates on a daily, weekly, monthly, and annual basis.



What type of financial accountability is there for each department or function?

 

How do you communicate with customers? How do you know what their needs are or their purchasing history is?



Do you segment your customers? What factors is the segmentation based on?



Can you easily identify customers to target for special promotions?



Which of your suppliers is a top performer? How do you know?



Can you find where your goods are 24/7?

178. Enterprise Resource Planning software is expensive. As Mr. Poole, you know that Van Ward cannot afford to buy and implement a complete ERP system. In your opinion, what two common modules of an ERP system do you believe are the most crucial to any business? Provide a recommendation to Mr. Ward, justifying your choice of the two modules for his business. How does the investment potentially benefit him? Answer: The students’ answers may vary. Generally speaking, inventory would be the most important area to tackle. Inventory is just money sitting on a shelf. Van Ward needs a system that will enable him to reduce his inventory. A manufacturing module appears the most beneficial module for Van Ward. Depending on the capability of the software, a manufacturing module would at a minimum tie operations and logistics and warehousing together. This should enable Mr. Ward to minimize the amount of inventory within his warehouse, while ensuring he is maintaining sufficient inventory for his operations. If, after further evaluation, inventory doesn’t appear to be an urgent issue, but supplier relationships are, then a supplier relationship management module may be something to look at. The key to selecting a module is understanding where your company may have some sort of shortfall. 179. Currently, Mr. Ward is using a chase production strategy. Mr. Poole believes that this is an inefficient strategy. Do you agree with Mr. Poole? If so, what option would you recommend to Mr. Ward? If you disagree with Mr. Poole, explain why Mr. Ward is on the right track with his strategy.

Solution and Answer Guide:

Answer: Students’ answers will vary. Generally speaking, I agree with Mr. Poole. Although it depends on the type of workforce you require, meaning the skill set, a major disadvantage of the chase strategy is that you routinely are hiring and laying off workers. This can have a negative effect on morale and the quality of the work. If possible, I would encourage Van Ward to use a mixed production strategy. This strategy stabilizes your workforce by establishing a core group of fulltime workers. Then as production picks up you source additional workers, i.e. temporary or part-time workers. Part-time workers can already be part of your workforce, with a process to employ them for additional hours as needed. A temporary workforce can be sourced through temporary employment agencies. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Solution and Answer Guide:

Part 3 Continuing Case Mullenax Automobile Parts Inc., Operational Issues and Resource Planning Systems

Questions and Answers 180. Based on the information provided in the case, which production strategy would be best for the filtering devices? Answer: Level Production Strategy a. Why? What is the distinguishing element? Answer: For the filtering devices the output for production must be constant; therefore, the level production strategy is best. 181. Based on the information provided in the case, which production strategy would be best for the suspension parts? Answer: Chase Production Strategy

a. Why? What is the distinguishing element? Answer: Since the suspension parts will be required less frequently and their potential price is much higher than filtering devices the chase production strategy is best, i.e., adjust capacity to meet demand. 182. Using the information provided on labor cost per hour, number of hours worked per day per worker, number of days worked per month, and assembly time per unit in hours, use the student worksheet and determine the numbers for both the level and chase production strategies. In addition, answer the questions listed below. (See worksheet below for answers) a. What is the annual demand for the filtering devices? b. What is the total annual labor cost for the filtering device workforce? c. What is the average number of employees per month for the filtering device business unit? d. What is the annual demand for the suspension parts? e. What is the total annual labor cost for the suspension parts workforce? f.

What is the average number of employees per month for the suspension business unit?

Level Production Strategy Is best for the filtering devices Business Unit. Last Year Ending Inventory Demand Production Ending Inventory Labor Cost Labor Hours Workforce -Round to the highest whole number

Labor Cost Per Unit Produced

Current Year January February March April May June July August September October November December 10,000 11,000 9,000 13,000 12,000 10,000 10,000 12,000 17,000 9,000 11,000 14,000 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 1,000 2,500 3,000 5,500 4,000 3,500 5,000 6,500 6,000 500 3,000 3,500 1,000 $181,125 $181,125 $181,125 $181,125 $181,125 $181,125 $181,125 $181,125 $181,125 $181,125 $181,125 $181,125 80,500 80,500 80,500 80,500 80,500 80,500 80,500 80,500 80,500 80,500 80,500 80,500 503

503

138,000 138,000 $2,173,500

503

$15.75

Workforce Hours 8 hours/day 20 Workforce Days days/month Total Hours per month per worker 160

Chase Production Strategy Is best for the Suspension Parts Business Unit Last Year Ending Inventory Demand Production Ending Inventory Labor Cost Labor Hours Workforce -Round to the highest whole number

Labor Cost Per Unit Produced

Current Year January February March April May June July August September October November December 9,000 9,000 13,000 10,000 10,000 17,000 8,000 7,000 12,000 8,500 7,000 10,000 9,000 9,000 13,000 10,000 10,000 17,000 8,000 7,000 12,000 8,500 7,000 10,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 $141,750 $141,750 $204,750 $157,500 $157,500 $267,750 $126,000 $110,250 $189,000 $133,875 $110,250 $157,500 63,000 63,000 91,000 70,000 70,000 119,000 56,000 49,000 84,000 59,500 49,000 70,000 394

394

569

438

744

350

306

525

372

306

438

$15.75

Workforce Hours 8 hours/day 20 Workforce Days days/month Total Hours per month per worker 160

Chapter 07: Answers to Questions/Problems Table of Contents

Discussion Questions ......................................................................................................... 95 Spreadsheet Problems ............................................................................................................................. 99

120,500 120,500 $1,897,875

439

Solution and Answer Guide:

Cases ............................................................................................................................. 114 Learning Objectives ............................................................................................................................... 115 Questions and Answers ......................................................................................................................... 115 Learning Objectives ............................................................................................................................... 116 Questions and Answers ......................................................................................................................... 116 Learning Objectives ............................................................................................................................... 117 Questions and Answers ......................................................................................................................... 118 Part 3 Continuing Case .................................................................................................... 119 Learning Objectives ............................................................................................................................... 119 Questions and Answers ......................................................................................................................... 119

Discussion Questions 183.

Describe and provide examples of dependent and independent demand.

Answer: Dependent demand is used to describe the internal demand for parts based on the demand of the final product in which they are used. Subassemblies, component parts, and raw materials are examples of dependent demand items. Independent Demand is the demand for final products and has a demand pattern that is usually relatively stable, although it may be affected by trends, seasonal patterns, and general market conditions. Final products and service parts are independent demand. 184.

Describe the four basic types of inventories.

Answer: (A) Raw materials are unprocessed, purchased inventory. (B) Work-in-process are partially processed inventory. (C) Finished goods are inventory or materials that have been completely processed or assembled, ready for sales or shipping to customers. (D) MRO supplies, such as lubrication, are used in the manufacturing process, but do not become parts of the finished goods. 185.

What is the ABC inventory system, and how is it used to manage inventory?

Answer: The ABC inventory system prioritizes inventory items into A, B and C groups. The A inventories are the highest priority, and C are the lowest priority items and most numerous. It is also known as 80/20 rule or Pareto’s rule. 186.

What is the ABC inventory matrix, and how is it used to manage inventory?

Answer: The ABC inventory matrix is used to assist in identifying obsolete stocks and to analyze whether a company is stocking the correct inventory by comparing two ABC analyses. First, an ABC analysis is done on current inventory based on the inventory value (quantity on-hand × price) to classify physical inventory into A, B, and C groups. Next, a second ABC analysis is done on inventory

Solution and Answer Guide:

usage (quantity used × price) to classify inventory usage into A, B, and C groups. The two ABC analyses are then combined to form an ABC inventory matrix as shown in Figure 1 in the text.

187.

Describe inventory turnover and how it can be used to manage inventory.

Answer: Inventory turnover shows how many times a company turns over its inventory in an accounting period. Faster turnovers are indicative of positive trend because it indicates the company can generate more revenue per dollar in inventory investment. 188.

Explain whether it is desirable to have a low or high inventory turnover ratio.

Answer: It is desirable to have a high inventory turnover because the ratio indicates the number of times a firm turns over its inventory in an accounting period. Higher turnovers show that the firm generates more revenue per dollar in inventory investment. Also, higher turnovers allow the firm to increase cash flow and reduce warehousing and carrying costs. 189.

Why is it important to conduct cycle counting?

Answer: It is used to count the physical inventory to ensure physical inventory matches against records. 190.

What is the electronic product code (EPC)?

Answer: EPC is one of the two major RFID standards. 191.

Briefly describe how RFID can be used to manage inventory.

Answer: RFID has been used as an eventual successor to the barcode for tracking individual unit of goods in the supply chain. Please refer to the ―Radio Frequency Identification‖ section for a detailed discussion of how RFID can be used to manage inventory. 192.

Explain why item-level tagging is more expensive than case-level tagging in RFID.

Answer: Item-level tagging requires a tag for each item and thus is more expensive. 193.

What is big data?

Answer: Big data broadly refers to collections of data sets that are too large and complex to be processed by traditional database management tools or data processing software applications. Instead, massive parallel software running on hundreds or even thousands of servers simultaneously is often required to store and process the data. 194.

How can firms use big data to make better decisions?

Answer: Big data technology allows organizations to process huge amount of data in real time to make better data-driven decisions. For example, Google uses big data technology to store and index all the information on the web. This technology allows Google to process about 12 billion searches each month. 195.

What is the purpose of the EOQ and the ROP? How can they be used together?

Solution and Answer Guide:

Answer: EOQ is used to find the optimal order quantity so that the annual inventory cost (i.e., holding and ordering cost) is minimized. ROP is the lowest inventory level at which a new order must be placed to avoid a stockout. ROP can be used to determine when to place an order, whereas EOQ can be used to determine the order size. 196. What are the assumptions of the EOQ model? Why do you think these assumptions are used for the EOQ model? Answer: Its assumptions include: the demand must be known and constant, delivery time is known and constant, instantaneous replenishment, no quantity discount, holding cost or rate is known and constant, ordering cost is known and constant, and stockouts are not allowed. The EOQ model is invalid if any of these assumptions is violated. However, if we relax the constant price or no quantity discount assumption, we derive at the Quantity Discount model, and if we relax the instantaneous replenishment assumption, we derive at the Economic Manufacturing Quantity model. 197. What are the two major costs considered in the EOQ model? Why is the total purchase price not a factor affecting the order quantity? Answer: Holding (or carrying) cost and ordering (or setup) cost. The total purchase price is not a factor because it is constant regardless of the order quantity. 198.

How is the quantity discount model related to the EOQ model?

Answer: It relaxes the no-quantity-discount assumption of the classic EOQ. 199.

How is the EMQ model related to the EOQ model?

Answer: EMQ relaxes the instantaneous replenishment assumption of the EOQ. 200. Discuss whether the EOQ model is still useful if a small error was made while estimating one of the cost parameters used in the EOQ computation. Answer: The lower portion of the annual total cost curve is rather flat, and thus insensitive to small variations in estimating the various parameters used in the EOQ model. The model is robust to small errors in estimating the parameters. 201. Assume that you used the EOQ model to compute the order quantity for an item, and the answer was twenty units. Unfortunately, the minimum lot size for the item is twenty-four units. Discuss how this is going to impact your annual holding cost, annual order cost and annual total inventory cost. Answer: Using an order quantity of 24 when the EOQ is 20 units results in a slightly higher annual holding cost, but a slightly lower annual ordering cost. The net effect is a slightly higher annual total inventory cost. The annual holding cost is slightly higher because the average inventory (Q/2 = 24/2 = 12 units) is higher compared to ordering at the EOQ quantity (Q/2 = 20/2 = 10 units). The annual ordering cost is slightly lower because fewer orders (annual demand / order quantity) are placed in a year due to the larger order quantity (i.e., 24 instead of 20). 202. Suppose in an EOM model, the optimum order quantity of an item 310 units. However, the item is only sold in a lot size of 300 units. Explain what the impacts are on the annual carrying cost, annual ordering cost, and annual total inventory cost.

Solution and Answer Guide:

Answer: Using an order quantity of 300 when the EOQ is 310 units results in a slightly lower annual holding cost, but a slightly higher annual ordering cost. The net effect is a slightly higher annual total inventory cost. The annual holding cost is slightly lower because the average inventory (Q/2 = 300/2 = 150 units) is lower compared to ordering at the EOQ quantity (Q/2 = 310/2 = 155 units). The annual ordering cost is slightly higher because more orders (annual demand / order quantity) are placed in a year due to the smaller order quantity (i.e., 300 instead of 310). 203. Explain whether the continuous review or periodic review inventory system is likely to result in higher safety stock. Which is likely to require more time and effort to administer? Why? Answer: The periodic review inventory system is likely to result in higher safety stock because on-hand inventory is reviewed less frequently. Thus, a higher level of safety stock is needed to cushion the uncertainty in demand over a longer period of time. A periodic system might be used when stockouts are cheap (C items) and when continuous counting is difficult (candy machines). However, continuous review system is likely to be more expensive to administer because onhand inventory must be reviewed frequently. A continuous review system might be used when stockouts are costly (A items) or when reviews are easy (computer system, scanner, barcodes on all products). 204. Use the inventory turnover ratios in Table 7.2 to comment on which firm is the most efficient in deploying its inventory to generate sales. Answer: Las Vegas Sands Corp. is the most efficient because it has the highest inventory turnover ratio. However, it is inappropriate to compare inventory turnover ratios across different industries. For example, it is inappropriate to compare the inventory turnover ratio of an automobile manufacturing firm to a retailer. 205. What is the order quantity when the annual order or setup cost equals the annual holding cost in the (a) EOQ model, (b) quantity discount model, and (c) EMQ model? Answer: (a) EOQ model: The order quantity is the optimum order quantity (EOQ). (b) Quantity discount model: The order quantity is the optimum order quantity if it occurs at one of the feasible EOQs. (c) EMQ model: The order quantity is the optimum order quantity (EMQ). 206.

Why is inventory management important to SCM?

Answer: Without proper inventory management at the individual firm level, the problems with lack of, or excess inventory, missed deliveries, stockouts, and other production problems will adversely affect all members of the supply chain. Excessive inventory contributes to the bull-whip effect. 207.

Describe the difference between annual physical inventory count and cycle counting.

Answer: Annual physical inventory count is physically counting a firm’s entire inventory, usually conducted at the end of the firm’s accounting period. Cycle counting is a perpetual inventory counting system where a subset of inventory in a specified location is counted on a stipulated day. In cycle counting, the process is repeated in such a way that all the items in inventory are counted at least once in an accounting period. The physical inventory count is a much more invasive process that can put the entire business operations on hold. Cycle counting reduces disruption in business operations, and is popular among organizations with large inventory, especially among firms that cannot closed for an extended period for annual physical inventory count.

Solution and Answer Guide:

208. Describe Near Field Communication (NFC), its relationship with RFID, and its applications. Answer: Near Field Communication (NFC) is a specialized subset of RFID technology that was designed as a secure form of data exchange between an NFC tag or Android-powered device with another Android-powered device. NFC has been used in Android-powered smartphones and smart locks. 209.

What is omnichannel and how does it affect inventory management?

Answer: Omnichannel is a recent multichannel retail concept that integrates the physical inventory in stores with digital channels to allow customers to shop in a physical store, or online via a mobile device, laptop, or personal computer. Customers can pick up the purchased items in a store or curbside, or have the items shipped directly from the company’s stores, distribution centers, or vendors. Omnichannel confounds the challenges of inventory management because retailers must maintain accurate and real time visibility of its inventory across their stores, distribution centers, warehouses, and vendors.

Spreadsheet Problems 210. The revenue for a firm is $2,500,000. It’s cost of revenue is $850,000, and its average inventory for the year is $62,000. What is their inventory turnover? Answer: Inventory turnover = $850,000/$62,000 = 13.7 times 211. The revenue for a firm that has incurred an operating loss of $800,000 is $1,350,000. It’s cost of revenue is $1,500,000, and its average inventory for the year is $150,000. What is the inventory turnover? Answer: Inventory turnover = $1,500,000/$150,000 = 10 times 212.

Given the following information, what is the annual inventory turnover ratio?

Revenue

$2,2000,000

Cost of Revenue

$1,250,000

Quarter 1 Ending Inventory

$85,000

Quarter 2 Ending Inventory

$98,000

Quarter 3 Ending Inventory

$125,000

Quarter 4 Ending Inventory

$68,000

Answer: Annual inventoryturnover 

 1,250,000

85,000  98,000  125,000  68,000/ 4

 13.3 times

213. Given the following information, compute the economic order quantity, annual holding cost, annual order cost, and annual total inventory cost. Annual requirements (R) = 50,000 units Order cost (S) = $150 per order Holding rate (k) = 15% Unit cost (C) = $100 per unit Answer:

Solution and Answer Guide:

EOQ 



 1,000 units

Annual holding cost = Q/2  k  C = $7,500 Annual ordering cost= R/Q  S = $7,500 Annual total cost = $7,500 + $7,500 = $15,000 214. The annual requirement of a part is 360,000 units. The order cost is $120 per order, the holding rate is 12 percent and the part cost is $2,500 per unit. What are the (a) EOQ, (b) annual holding cost, (c) annual order cost, and (d) annual total inventory cost? Answer: (a) EOQ 

2RS  kC

2  360,000 $120  536.66 units .12  $2,500

(b) Annual holding cost = Q/2  k  C = $80,498.45 (c) Annual ordering cost= R/Q  S = $80,498.45 (d) Annual total cost = $160,996.90 215. In Question 5 above, if the company decided to order at a lot size of 2,500 units instead of the EOQ quantity, what are the (a) annual holding cost, (b) annual order cost, and (c) annual total inventory cost? What can you conclude about these costs compared to ordering the EOQ quantity? Answer: (a) Annual holding cost = Q/2  k  C = 2,500/2  .12  $2,500 = $375,000 (b) Annual ordering cost = R/Q  S = 360,000/2,500  $120 = $17,280 (c) Annual total cost = $375,000 + $17,280 = $392,280 The order quantity of 2,500 is significantly larger than the EOQ quantity of 536.66 units. Indeed, it is about 4.66 times the EOQ quantity. As a result, the annual holding cost is significantly higher, annual ordering cost is significantly lower, and total cost is much higher compared to ordering at the EOQ quantity. 216. In Question 5 above, if the company decided to order at a lot size of 2,800 units instead of the EOQ quantity, what are the (a) annual holding cost, (b) annual order cost, and (c) annual total inventory cost? What can you conclude about these costs compared to ordering the EOQ quantity? Answer: (a) Annual holding cost = Q/2  k  C = 2,800/2  .12  $2,500 = $420,000 (b) Annual ordering cost = R/Q  S = 360,000/2,800  $120 = $15,428.57 (c) Annual total cost = $420,000 + $15,428.57 = $435,428.57 The order quantity of 2,800 is significantly larger than the EOQ quantity of 536.66 units. Indeed, it is about 5.22 times the EOQ quantity. As a result, the annual holding cost is significantly higher, annual ordering cost is significantly lower, and total cost is much higher compared to ordering at the EOQ quantity. 217. The weekly requirement of a part is 950 units. The order cost is $85 per order, the holding cost is $5 per unit per year, and the part cost is $250 per unit. The firm operates fiftytwo weeks per year. Compute the (a) EOQ, (b) annual holding cost, (c) annual order cost, and (d) annual total inventory cost. Answer:

100

Solution and Answer Guide:

Annual requirement = 950 x 52 weeks = 49,400 units Holding cost = $5  holding rate = $5/$250 = 2% (a) EOQ 



 1,295.99 units

(b) Annual holding cost = Q/2  k  C = $3,239.98 (c) Annual ordering cost= R/Q  S = $3,239.98 (d) Annual total cost = $6,479.96 218. In Question 8 above, if the company decided to order at a lot size of 1,000 units instead of the EOQ quantity, what are the (a) annual holding cost, (b) annual order cost, and (c) annual total inventory cost? What can you conclude about these costs compared to ordering the EOQ quantity? Answer: (a) Annual holding cost = Q/2  k  C = 1,000/2  .02  $250 = $2,500 (b) Annual ordering cost= R/Q  S = 49,400/1,000  $85 = $4,199 (c) Annual total cost = $2,500 + $4,199 = $6,699 The order quantity of 1,000 is slightly smaller than the EOQ quantity of 1,295.99 units. It is about 77.2% (1000/1295.99) of the EOQ quantity. As a result, the annual holding cost is smaller [($2,500 - $3,239.98)/$3,239.98 = -22.8%], annual ordering cost is higher [($4,199 $3,239.98)/$3,239.98 = 29.6%], and total cost is slightly higher [($6,699 - $6,479.96)/$6,479.96 = 3.38%] compared to ordering at the EOQ quantity. 219. In Question 8 above, if the company decided to order at a lot size of 1,400 units instead of the EOQ quantity, what are the (a) annual holding cost, (b) annual order cost, and (c) annual total inventory cost? What can you conclude about these costs compared to ordering the EOQ quantity? Answer: (a) Annual holding cost = Q/2  k  C = 1,400/2  .02  $250 = $3,500 (b) Annual ordering cost= R/Q  S = 49,400/1,400  $85 = $2,999.29 (c) Annual total cost = $3,500 + $2,999.29 = $6,499.29 The order quantity of 1,400 is slightly higher than the EOQ quantity of 1,295.99 units. It is about 108% (1400/1295.99) of the EOQ quantity. As a result, the annual holding cost is slightly higher [($3,500 - $3,239.98)/$3,239.98 = 8.03%], annual ordering cost is lower [($2,999.29 $3,239.98)/$3,239.98 = -7.43%], and total cost is slightly higher [($6,499.29 $6,479.96)/$6,479.96 = 0.30%] compared to ordering at the EOQ quantity. 220. The monthly demand for a part is 1,500 units. The order cost is $285 per order, the holding cost is $56 per unit per year, and the part cost is $850 per unit. The firm operates twelve months per year. Compute the (a) EOQ, (b) annual holding cost, (c) annual order cost, and (d) annual total inventory cost. Answer: Annual requirement = 1,500 x 12 months = 18,000 units Holding cost, kC = $56 (a) EOQ 

2RS  kC

2  18,000 $285  428.04 units $56

(b) Annual holding cost = Q/2  k  C = $11,984.99 (c) Annual ordering cost= R/Q  S = $11,984.99

101

Solution and Answer Guide:

(d) Annual total cost = $23,969.98 221. Icy Snowmobile, Inc., has an annual demand for 1,200 snowmobiles. Their purchase cost for each snowmobile is $2,500. It costs about $250 to place an order, and the holding rate is 35 percent of the unit cost. Compute the (a) EOQ, (b) annual holding cost, (c) annual order cost, and (d) total annual inventory cost. Answer: (a) EOQ 

2RS  kC

2  1,200 $250  26.18615 units .35  $2,500

(b) Annual holding cost = Q/2  k  C = 26.18615/2  .35  $2,500 = $11,456.44 (c) Annual ordering cost= R/Q  S = 1,200/26.18615  $250 = $11,456.44 (d) Total annual inventory cost = annual holding cost + annual order cost = $11,456.44 + $11,456.44 = $22,912.88 222. In Question 12 above, if the company decided to order at a lot size of 24 units instead of the EOQ quantity, what are the (a) annual holding cost, (b) annual order cost, and (c) annual total inventory cost? When compared to ordering the EOQ quantity, what is the percent difference of each cost? Answer: (a) Annual holding cost = Q/2  k  C = 24/2  .35  $2,500 = $10,500 (b) Annual ordering cost= R/Q  S = 1,200/24  $250 = $12,500 (c) Total annual inventory cost = annual holding cost + annual order cost = $10,500 + $12,500 = $23,000 Annual holding cost is 8.35% [($10,500 - $11,456.44)/$11,456.44 = -8.35%] lower, annual ordering cost is 9.11% [($12,500 - $11,456.44)/$11,456.44 = 9.11%] higher, and annual total cost is 0.38% [($23,000 - $22,912.88)/$22,912.88 = 0.38%] higher. 223. In Question 12 above, if the company decided to order at a lot size of 30 units instead of the EOQ quantity, what are the (a) annual holding cost, (b) annual order cost, and (c) annual total inventory cost? When compared to ordering the EOQ quantity, what is the percent difference of each cost? Answer: (a) Annual holding cost = Q/2  k  C = 30/2  .35  $2,500 = $13,125 (b) Annual ordering cost= R/Q  S = 1,200/30  $250 = $10,000 (c) Total annual inventory cost = annual holding cost + annual order cost = $13,125 + $10,000 = $23,125 Annual holding cost is14.56% [($13,125 - $11,456.44)/$11,456.44 = 14.56%] higher, annual ordering cost is 12.71% [($10,000 - $11,456.44)/$11,456.44 = -12.71%] lower, and annual total cost is 0.93% [($23,125 - $22,912.88)/$22,912.88 = 0.93%] higher. 224. Steamy Speedboats has an annual demand for 1,500 speedboats. Its supplier offers quantity discounts to promote larger order quantities. The cost to place an order is $300, and the holding rate is 32 percent of the purchase cost. The purchase cost for each speedboat is based on the price schedule given below. Compute the (a) optimal order quantity, (b) annual purchase cost, (c) annual holding cost, (d) annual order cost, and (e) total annual inventory cost. Order Quantity Price per Unit 150

$18,500

51100

$18,000

102

Solution and Answer Guide:

101150

$17,400

151 and above

$16,800

Answer: (a) 151 units, (b) $25,200,000, (c) $405,888, (d) $2,980.13, (e) $25,608,868.13 (Note: Optimal order quantity is at a price break point) Annual Req (R) = Setup Cost (S) = Holding Rate (k) =

1,500.00 $300.00 32.00%

Price BreakPoints 1 51 101 151

UnitPrice (C) $18,500.00 $18,000.00 $17,400.00 $16,800.00

Do not make any changes below this row Step 1 Unit Price EOQ EOQ @ Price = $16,800.00 12.94 EOQ @ Price = $17,400.00 12.71 EOQ @ Price = $18,000.00 12.50 EOQ @ Price = $18,500.00 12.33 Step 2: Compute Cost Feasible EOQ P = ? Feasible EOQ P = ? Feasible EOQ P = ? Feasible EOQ P = ? Price Break Point Price Break Point Price Break Point Price Break Point

Feasible? No, proceed to step 2 No No Yes

Unit Price Order Qty $16,800.00 $17,400.00 $18,000.00 $18,500.00 12.33 $18,500.00 1 $18,000.00 51 $17,400.00 101 $16,800.00 151

Annual Total Cost ($)

APC

AHC

AOC

$27,822,993.15 $28,202,960.00 $27,155,703.53 $26,385,639.45 $25,608,868.13

$27,750,000.00 $27,750,000.00 $27,000,000.00 $26,100,000.00 $25,200,000.00

$36,496.58 $2,960.00 $146,880.00 $281,184.00 $405,888.00

$36,496.58 $450,000.00 $8,823.53 $4,455.45 $2,980.13

Min ATC = EOQ = Annual Purchase Cost = Annual Holding Cost = Annual Order Costs =

$25,608,868.13 151 $25,200,000.00 $405,888.00 $2,980.13

225. Using the Steamy Speedboats problem above, assume that the order cost has dropped from $300 to $50. What are the (a) optimal order quantity, (b) annual purchase cost, (c) annual holding cost, (d) annual order cost, and (e) total annual inventory cost? Answer: (a) 151 units, (b) $25,200,000.00, (c) $405,888.00, (d) $496.69, (e) $25,606,384.69 (Note: Optimal order quantity is at a price break point)

103

Solution and Answer Guide:

Annual Req (R) = Setup Cost (S) = Holding Rate (k) =

1,500.00 $50.00 32.00%

Price BreakPoints 1 51 101 151

UnitPrice (C) $18,500.00 $18,000.00 $17,400.00 $16,800.00

Do not make any changes below this row Step 1 Unit Price EOQ EOQ @ Price = $16,800.00 5.28 EOQ @ Price = $17,400.00 5.19 EOQ @ Price = $18,000.00 5.10 EOQ @ Price = $18,500.00 5.03 Step 2: Compute Cost Feasible EOQ P = ? Feasible EOQ P = ? Feasible EOQ P = ? Feasible EOQ P = ? Price Break Point Price Break Point Price Break Point Price Break Point

Feasible? No, proceed to step 2 No No Yes

Unit Price Order Qty $16,800.00 $17,400.00 $18,000.00 $18,500.00 5.03 $18,500.00 1 $18,000.00 51 $17,400.00 101 $16,800.00 151

Annual Total Cost ($)

APC

AHC

AOC

$27,779,799.33 $27,827,960.00 $27,148,350.59 $26,381,926.57 $25,606,384.69

$27,750,000.00 $27,750,000.00 $27,000,000.00 $26,100,000.00 $25,200,000.00

$14,899.66 $2,960.00 $146,880.00 $281,184.00 $405,888.00

$14,899.66 $75,000.00 $1,470.59 $742.57 $496.69

Min ATC = EOQ = Annual Purchase Cost = Annual Holding Cost = Annual Order Costs =

$25,606,384.69 151 $25,200,000.00 $405,888.00 $496.69

226. Using the Steamy Speedboats problem above, assume that the holding rate has dropped from 32 percent to 15 percent. What are the (a) optimal order quantity, (b) annual purchase cost, (c) annual holding cost, (d) annual order cost, and (e) total annual inventory cost? Answer: (If setup cost is $300): (a) 151 units, (b) $25,200,000, (c) $190,260, (d) $2,980.13, (e) $25,393,240.13

104

Solution and Answer Guide:

(If setup cost is $50): (a) 151 units, (b) $25,200,000, (c) $190,260, (d) $496.69, (e) $25,390,756.69 (Note: Optimal order quantity is at a price break point) Annual Req (R) = Setup Cost (S) = Holding Rate (k) =

1,500.00 $300.00 15.00%

Price BreakPoints 1 51 101 151

UnitPrice (C) $18,500.00 $18,000.00 $17,400.00 $16,800.00

Do not make any changes below this row Step 1 Unit Price EOQ EOQ @ Price = $16,800.00 18.90 EOQ @ Price = $17,400.00 18.57 EOQ @ Price = $18,000.00 18.26 EOQ @ Price = $18,500.00 18.01 Step 2: Compute Cost Feasible EOQ P = ? Feasible EOQ P = ? Feasible EOQ P = ? Feasible EOQ P = ? Price Break Point Price Break Point Price Break Point Price Break Point

Feasible? No, proceed to step 2 No No Yes

Unit Price Order Qty $16,800.00 $17,400.00 $18,000.00 $18,500.00 18.01 $18,500.00 1 $18,000.00 51 $17,400.00 101 $16,800.00 151

Annual Total Cost ($)

APC

AHC

AOC

$27,799,974.99 $28,201,387.50 $27,077,673.53 $26,236,260.45 $25,393,240.13

$27,750,000.00 $27,750,000.00 $27,000,000.00 $26,100,000.00 $25,200,000.00

$24,987.50 $1,387.50 $68,850.00 $131,805.00 $190,260.00

$24,987.50 $450,000.00 $8,823.53 $4,455.45 $2,980.13

Min ATC = EOQ = Annual Purchase Cost = Annual Holding Cost = Annual Order Costs =

$25,393,240.13 151 $25,200,000.00 $190,260.00 $2,980.13

227. Frankfurt Electronics produces a component internally using a state-of-the-art technology. The operations manager wants to determine the optimal lot size to ensure that the total annual inventory cost is minimized. The daily production rate for the component is 500 units, annual demand is 36,000 units, setup cost is $150 per setup, and the annual holding rate is 30 percent. The manager estimates that the total cost of a finished component is $80. If we assume that the plant operates year-round, and there are 360 days per year, what are the (a) daily demand, (b) optimal lot size, (c) highest inventory, (d) annual product cost, (e) annual holding cost, (f) annual setup cost, (g) total annual inventory cost, (h) length of a production period, (i) length of each inventory cycle, (j) rate of inventory buildup during the production cycle, and (k) the number of inventory cycles per year? Plot the movement of the inventory during one production cycle using time on the horizontal axis and on-hand inventory on the vertical axis (see Figure 7.10).

105

Solution and Answer Guide:

Answer: (a) D = 36,000/360 = 100 units/day 

(b) EMQ  (c) Q  M







 



 750 units

D  100  Q1   750 1   600 units P 500   

(d) Annual Production Cost = R x C = (36,000) × ($80) = $2,880,000  QM   600  (e) Annual Holding Cost = k C   .30$80  $7,200     2 2      R  36,000  (f) Annual Setup Cost = S  $150    750    $7,200   Q     (g) Total Annual Inventory Cost = $2,880,000+$$7,200+$7,200=$2,894,400 EMQ 750 (h) T    1.5 days P P 500 EMQ 750 (i) T    7.5 days C D 100 (j) Rate of Inventory Buildup during Prod Cycle = (P – D) = (500 – 100) = 400 units/day (k) Number of Inventory Cycles = 360/7.5 = 48 times Inventory On-hand

TP = 1.5 days

TC = 7.5 days

Time

228. A manufacturing firm produces a product in its factory. The operations manager wants to determine the EMQ to ensure that the total annual inventory cost is minimized. The daily production rate for the product is 120 units, annual demand is 14,400 units, setup cost is $400 per setup, and the annual holding rate is 20 percent. The cost of the product is $95. If we assume that the plant operates year-round, and there are 360 days per year, what are the (a) daily demand, (b) EMQ, (c) highest inventory, (d) annual product cost, (e) annual holding cost, (f) annual setup cost, (g) total annual inventory cost, (h) length of a production period, (i) length of each inventory cycle, (j) rate of inventory buildup during the production cycle, and (k) the number of inventory cycles per year?

106

Solution and Answer Guide:

Answer: (a) D = 14,400/360 = 40 units/day 

(b) EMQ  (c) Q  M







 

 



 953.6633 units

D  40  Q1   953.66331   635.7755 units P 120   

(d) Annual Production Cost = R x C = (14,400) × ($95) = $1,368,000  QM   635.7755  (e) Annual Holding Cost = k C   .20$95  $6,039.87     2 2      R   (f) Annual Setup Cost = S  14,400 $400  $6,039.87      Q  953.6633  (g) Total Annual Inventory Cost = $1,368,000+$6,039.87+$6,039.87=$1,380,079.74 EMQ 953.6633 (h) T    7.9472 days P P 120 EMQ 953.6633 (i) T    23.8416 days C D 40 (j) Rate of Inventory Buildup during Prod Cycle = (P – D) = (120 – 40) = 80 units/day (k) Number of Inventory Cycles = 360/23.8416 = 15.0997 times 229. Paris Store stocks a part that has a normal distribution demand pattern during the reorder period. Its average demand during lead time is 650 units, and the standard deviation of demand during lead time is 60 units. What are the safety stock and statistical reorder point that result in a 97.5 percent service level? Answer:

Safety Stock   x     ZdLT  1.96 60  117.6 units

Statistical ROP  dLT  ZdLT  650  117.6 units  767.6 units 230. Lindner Congress Bookstore sells a unique calculator to college students. The demand for this calculator has a normal distribution with an average daily demand of fifteen units and a standard deviation of four units per day. The lead time for this calculator is very stable at five days. Compute the standard deviation of demand during lead time, and determine the safety stock and statistical reorder point that result in 5 percent stockouts. Answer: Std Dev of Demand During Lead Time  dLT  d Safety Stock  Zd

4

 8.94427 units

 1.6449  8.94427  14.7124 units

Statistical ROP  dLT  Zd

 15  5  14.7124  89.7124 units

231. The daily demand of a product is very stable at 250 units per day. However, its delivery lead time varies and can be specified by a normal distribution with a mean lead time of twelve days and standard deviation of three days. What are the safety stock and reorder point for a 97.5 percent service level? Answer:

Safety Stock  d ZLT  250 1.96  3  1470 units

107

Solution and Answer Guide:

Statistical ROP  d  LT  d ZLT  250  12  1470  4,470 units

232. The daily demand of a product can be specified by a normal distribution. Its average daily demand is 250 units with a standard deviation of 40 units. The delivery lead time of this product is also normally distributed with an average of ten days and a standard deviation of three days. What are the safety stock and reorder point for a 95 percent service level? Answer: 

Safety Stock  Z dLT  Z 



LT  1.6449

 1251.10 units

Statistical ROP  d  LT  ZdLT  250  10  1251.10  3,751.10 units

233.

Given the following inventory information, perform an ABC analysis.

Answer: Item Number

Unit Cost ($)

Annual Usage

Usage $

% of Total $

Class

T6334

70.00

500

35,000

24.68

J1252

5.25

6,500

34,125

24.06

Y3214

32.00

1,000

32,000

22.56

Y6339

4.00

3,500

14,000

9.87

X2215

1.50

8,000

12,000

8.46

M4554

5.50

2,000

11,000

7.76

L2425

1.00

1,500

1.06

K9667

0.25

4,000

1,000

0.71

B8867

6.00

100

600

0.42

W9856

0.75

800

600

0.42

Total

$141,825

100%

% of Class 71.30

26.09

2.61

234. Given the following inventory information, construct an (a) ABC analysis by annual dollar usage, (b) ABC analysis by current inventory value, and (c) an ABC inventory matrix. Is the firm stocking the correct inventories?

108

Solution and Answer Guide:

Answer: Item Number

Unit Cost

Annual Usage

Usage$

% of Total

Class

% of Total

Class

B8867

100

600

0.42

8,000

48,000

33.68

J1252

5.25

6,500

34,125

24.06

120

630

0.44

K9667

0.25

4,000

1,000

0.71

1,000

250

0.18

L2425

1,500

1.06

375

0.26

M4554

5.5

2,000

11,000

T6334

500

35,000

7.76

500

2,750

1.93

24.68

800

56,000

39.30

W9856

0.75

800

600

0.42

20,000

15,000

10.53

X2215

1.5

8,000

12,000

8.46

2,000

3,000

2.11

Y3214

1,000

32,000

22.56

500

16,000

11.23

Y6339

3,500

14,000

9.87

125

500

0.35

100%

$142,505

$141,825

Phy Inv Phy Inv $

100%

A Items

J1252

T6334

Y3214

B Items

M4554

C Items

ABC Analysis of Inventory Usage ($)

Convert the coordinates of the ten inventory items to 10-point scale. B8867: (33.7, 0.4)  (33.7/39.3  10, 0.4/24.7  10) = (8.6, 0.2) J1252: (0.4, 24.1)  (0.4/39.3  10, 24.1/24.7  10) = (0.1, 9.8) K9667: (0.2, 0.7) = (0.0, 0.3)  (0.2/39.3  10, 0.7/24.7  10) L2425: (0.3, 1.1)  (0.3/39.3  10, 1.1/24.7  10) = (0.1, 0.4) M4554: (1.9, 7.8)  (1.9/39.3  10, 7.8/24.7  10) = (0.5, 3.1) T6334: (39.3, 24.7)  (39.3/39.3  10, 24.7/24.7  10) = (10.0, 10.0) W9856: (10.5, 0.4)  (10.5/39.3  10, 0.4/24.7  10) = (2.7, 0.2) X2215: (2.1, 8.5)  (2.1/39.3  10, 8.5/24.7  10) = (0.5, 3.4) Y3214: (11.2, 22.6)  (11.2/39.3  10, 22.6/24.7  10) = (2.9, 9.1)  (0.4/39.3  10, 9.9/24.7  10) Y6339: (0.4, 9.9) = (0.1, 4.0)

X2215 Y6339

L2425 W9856 K9667

C Items

B8867

B Items

A Items

ABC Analysis of Physical Inventory ($) Comment: The firm has understocked J1252, M4554, Y3214, X2215, and Y6339. It has also overstocked W9856 and B8867. The firm should investigate whether B8867 and W9856 are obsolete stocks that need to be disposed.

109

Solution and Answer Guide:

235. Given the following inventory information, construct an (a) ABC analysis by annual dollar usage, (b) ABC analysis by current inventory value, and (c) an ABC inventory matrix. Is the firm stocking the correct inventories? Answer: Item #

Unit Cost

A967

32.00

B886

6.00

C314

5.25

D879

Annual Usage

Usage$

% of Total

Class

Phy Inv

Phy Inv $

% of Total

Class

0.02%

4,500

144,000

48.40%

100

600

0.42%

8,000

48,000

16.13%

168

0.12%

115

604

0.20%

12.50

675

0.47%

254

3,175

1.07%

E536

0.05

125

0.00%

120

0.00%

F876

0.07

423

0.02%

500

0.01%

G112

0.12

500

0.04%

1008

121

0.04%

H098

1.22

235

287

0.20%

750

915

0.31%

J125

5.25

6,500

34,125

23.74 %

120

630

0.21%

K966

0.25

4,000

1,000

0.70%

1,000

250

0.08%

L242

1.00

1,500

1.04%

375

0.13%

M455

5.50

2,000

11,000

7.65%

500

2,750

0.92%

N007

7.21

389

0.27%

525

3,785

1.27%

P231

5.25

168

0.12%

300

1,575

0.53%

Q954

3.25

0.06%

240

780

0.26%

T633

70.00

500

35,000

24.35 %

800

56,000

18.82%

W985

0.75

800

600

0.42%

20,000

15,000

5.04%

X221

1.50

8,000

12,000

8.35%

2,000

3,000

1.01%

Y321

32.00

1,000

32,000

22.27 %

500

16,000

5.38%

Z633

4.00

3,500

14,000

9.74%

125

500

0.17%

$143,721

100%

$297,501

100%

110

ABC Analysis of Inventory Usage ($) B Items C Items A Items

Solution and Answer Guide:

Z633 X221 M455

F876 Q954

C Items

B Items

A Items

ABC Analysis of Physical Inventory ($) Comment: The firm has understocked J125, Z633, M455, X221, and Y321. It has also overstocked A967, B886 and W985. The firm should investigate whether A967, B886 and W985 are obsolete stocks that need to be disposed. 236. Given the following information for an important purchased part, compute the (a) EOQ, (b) total purchase cost, (c) annual holding cost, (d) annual order cost, (e) annual total cost, (f) reorder point, (g) number of orders placed per year and (h) time between orders. Use Microsoft Excel to plot the cost curves (annual holding cost, annual order cost, and annual total cost) on the vertical axis, and the order quantity on the horizontal axis. Annual requirements (R) = 5,000 units Order cost (S) = $100 per order Holding rate (k) = 20% Unit cost (C) = $20 per unit Lead time (LT) = 6 days Number of days per year = 360 days Answer: a)

EOQ 

2RS  kC

2  5,000 units $100  500 units 0.20 $20

b) Total purchase cost = R  C = 5,000 units  $20 = $100,000 c)

Annual holding cost = Q/2  k  C = 500 units / 2  20%  $20 = $1,000

d) Annual ordering cost= R/Q  S = 5,000 units / 500 units  $100 = $1,000 e) Annual total cost = $1,000 + $1,000 = $2,000 f)

Reorder point (ROP) = 5,000 / 360  6 = 83.33 units

g) Number of orders placed per year = 5,000 / 500 = 10 orders h) Time between orders = 360 / 10 = 36 days i)

Cost Curves versus Order Quantity.

111

Solution and Answer Guide:

Costs ($) $3,000

Annual Total Cost

$2,000

Annual Holding Cost

$1,000

Annual Ordering Cost

Order Quantity (Q) EOQ = 500

237. Given the following information for a purchased part, compute the (a) EOQ, (b) total purchase cost, (c) annual holding cost, (d) annual order cost, (e) annual total cost, (f) reorder point, (g) number of orders placed per year and (h) time between orders. Use Microsoft Excel to plot the cost curves (annual holding cost, annual order cost, and annual total cost) on the vertical axis, and the order quantity on the horizontal axis. Monthly demand = 3,500 units Order cost (S) = $250 per order Holding cost (kC) = $8.65 per unit per year Unit cost (C) = $85 per unit Lead time (LT) = 12 days Number of days per year = 365 days Answer: (a) EOQ 

2RS  kC

2  3,500 units 12 $250  1,558.12 units $8.65

(b) Total purchase cost = R  C = 42,000 units  $85 = $3,570,000 (c) Annual holding cost = Q/2  k  C = $6,738.88 (d) Annual ordering cost= R/Q  S = $6,738.88 (e) Annual total cost = $6,738.88 + $6,738.88 = $13,477.76 (f) Reorder point (ROP) = (3,500*12) / 365  12 = 1,380.82 units (g) Number of orders placed per year = (3,500*12)/1,558.12 = 26.96 orders (h) Time between orders = 365/26.96 = 13.54 days (i) Cost Curves versus Order Quantity.

112

Solution and Answer Guide:

Costs ($) $25,000

$20,000

Annual Total Cost $15,000

Annual Holding Cost $10,000

Annual Ordering Cost $5,000

Order Quantity (Q) EOQ = 1,558.12

238. Kopi Luwak produces the world’s most expensive coffee by using coffee beans that have been digested by wild civet cat. The coffee beans, widely known as ―cat poop coffee‖ can be packaged in one pound bag at a daily production rate of 700 bags. The coffees are shipped to retailers at a constant rate of 120 bags every day of the year. Due to the scarcity of part-digested coffee beans from civet cat feces, the senior operations manager, Dr. Hadiyan Wijaya Ibrahim, uses economic manufacturing quantity (EMQ) to produce the coffee. The setup cost is $250 per setup, and the annual holding rate is 25 percent. The manager estimates that the total cost of a bag of coffee is $85. If we assume that there are 360 days per year, what are the (a) annual demand, (b) EMQ, (c) highest inventory, (d) annual product cost, (e) annual holding cost, (f) annual setup cost, (g) total annual inventory cost, (h) length of a production period, (i) length of each inventory cycle, (j) rate of inventory buildup during the production cycle, and (k) the number of inventory cycles per year? Plot the movement of the inventory during one production cycle using time on the horizontal axis and on-hand inventory on the vertical axis (see Figure 7.10). Answer:

(a) Annual Demand, D = 120 x 360 = 43,200 units/year (b) EMQ 





  

 



  1,011.0946 units 

D  43,200  Q1   1,011.0946 1   837.7641 units  P  252,000 

(d) Annual Production Cost = R x C = (36,000)*($85) = $3,060,000  QM  (e) Annual Holding Cost = k C   837.7641.25$85  $8,901.244     2 2    

113

Solution and Answer Guide: 

(f) Annual Setup Cost =

 R

S  

   Q

36,000



$250  $8,901.244

   1,011.0946 

(g) Total Annual Inventory Cost = $3,060,000+$8,901.244+$8,901.244=$3,077,802.49 EMQ 1,011.0946 (h) T    1.4444 days P P 700 EMQ 1,011.0946 (i) T    8.4258 days C D 120 (j) Rate of Inventory Buildup during Prod Cycle = (P – D) = (700 – 120) = 580 units/day (k) Number of Inventory Cycles = 360/8.4258 = 42.73 times

239. Given the following information for a part manufactured in-house, can you compute the economic manufacturing quantity? Provide a brief explanation to support your answer. Annual demand = 500,000 units Daily production rate = 1,000 units Setup cost = $250 per order Holding rate = 40 percent per year Value of finished part = $120 per unit Number of days per year = 360 days Answer: There is no economic manufacturing quantity for this problem because the annual demand of 500,000 units is larger than the annual production rate of 360,000 (1,000 x 360) units. The firm cannot produce 500,000 units to meet its annual demand. Mathematically, the EMQ formula calls for a negative square root, but square roots of negative numbers do not exist in the real numbers. EMQ 



  

 







Cases 1.

Sharp’s Sandwich Shop—Inventory Management* Case Note

114

Solution and Answer Guide:

Learning Objectives   

Understand ABC classification, the ABC inventory matrix, and cycle counting. Understand the EOQ model and its underlying assumptions. Understand the quantity discount and the EMQ models and their relationships with the basic EOQ model.

Dawn Sharp is the owner of Sharp’s Sandwich Shop. Her shop is open 24/7 and serves many different types of sandwiches, from classic breakfast sandwiches to more exotic burgers and other sandwiches usually consumed at lunch and dinner. As Dawn exams her financials she notices that her sandwich shop is going through certain inventory items faster than usual. From the ingredients listed, Dawn suspects that more of the high-end sandwiches are reaching her freshness quality time limit. Furthermore, as she compares the point-of-sale data to her inventory expense data, she concludes that there are spikes in the day where more sandwiches are reaching the charity bin. Dawn speculates on what could be the issue. She reflects back on her class in Supply Chain Management, specifically the inventory management chapter. She realizes that her primary focus had been on freshness, a key quality metric. She also recognized that timely service was another key quality metric that enabled her to get high customer satisfaction ratings. In hindsight, Dawn grasps that she had ignored basic inventory requirements while focusing on quality. Because of the freshness issue, more and more, her staff is making two sandwiches and only charging for one. Dawn firmly believes she cannot compromise on the quality; however, she needs to improve her inventory management in order to eliminate the growing waste.

Questions and Answers 240. Dawn understands her customers very well. She knows that they want two things – 1) speed in getting the sandwich, no matter what type, and 2) the sandwich must taste fresh. As Dawn works out how to improve her inventory management process, how can she utilize the ABC inventory classification system as part of the remedy for this situation?



Think outside the box. Consider which type of inventory she really needs to classify using the ABC classification system.

Answer: Dawn can use a modified version of the ABC classification system to manage the inventory in the premade bins. Since the ABC classification system looks at inventory based on its cost and usage, it may be a usable system under this circumstance. Some sandwiches are much more expensive and popular than others and could be classified as ―A‖ items. Those in the mid-price range with less usage could be ―B‖ items, and the cheapest ones could be ―C‖ items. Naturally, the annual dollar value would not be a sensible figure to use; however, a daily dollar amount, may be useable since Dawn is actually looking at the premade bin inventory. That specific inventory is turning over frequently throughout the day. If she classified her sandwiches in this manner, then she could use it to track how many were going in the charity bin and how many in general waste. This ultimately would be data that Dawn can use to adjust premade bin inventory levels to avoid waste of high-end sandwiches. 241. As we examine this case, we know that the basic issue is low inventory turnover. Consequently, the bins are overstocked during specific times and items must be discarded because they exceed the freshness quality time limit. As she considers this point, Dawn is debating if she needs to use the EOQ model or the EMQ model. Provide a recommendation to Dawn on which model would be the most effective for her situation. Explain why your choice is better than the one you did not select. Answer:

115

Solution and Answer Guide:

Sharp’s Sandwich Shop is a manufacturing environment. Consequently, even though we are talking about sandwiches, we are talking about producing finished goods from raw materials inventory. The sandwiches are manufactured and consumed simultaneously. Unlike with the EOQ model, inventory isn’t typically delivered all at once. The EOQ model implies that there are sandwiches sitting somewhere and will be delivered in bulk to the desired location, in this case the premade bins. Furthermore, the EOQ model assumes that demand is known and constant. While Dawn may have a general sense of demand over a specific shift, e.g., breakfast, the demand at any one time is unknown. Therefore, the EMQ model may be more effective in this type of situation. 242. Considering Sharp’s Sandwich Shop’s inventory issue, justify to Dawn what type of inventory review system she should establish. Go one step further, explain how this supports your previous answers to the above questions. Answer: Dawn’s inventory situation looks to be perfect for the continuous review method. Dawn wants to limit the number of sandwiches she has in the premade bins, so they stay fresh. Therefore, she always needs to be aware of the physical inventory. She doesn’t want a system that involves establishing any safety stock, i.e., extra sandwiches in the premade bins. This defeats the freshness principle. The continuous review system is said to work best when the quantity demanded is one unit at a time. This fits Dawn’s scenario. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Lamb’s Automotive Supplies* Case Note

Learning Objectives  

Understand ABC classification, the ABC inventory matrix, and cycle counting. Understand the EOQ model and its underlying assumptions.



Understand and be able to distinguish among the various statistical ROP models.

Molly Lamb has been a car aficionado since she was a teenager. This passion led her to open an automotive supply store. Her primary customers are small car repair shops. Many of these shops service a variety of makes and models. The other customer base is car buffs such as herself. These customers are car hobbyists, and they own ―classic‖ cars. They often buy an older clunker and rebuild it. They prefer to rebuild it as much as they can to the original specifications. Consequently, finding parts for these older makes/models is a challenge and building an inventory is even more difficult. Although Molly is aware of what inventory she has on hand, she has never actually used a specific inventory system. Now that her warehouse if reaching capacity, Molly realizes she must have a better inventory management process. Adding more warehouse space isn’t an option. She must use the space she has more efficiently. Molly begins to ponder how she can do this without creating a potential inventory shortage for either customer segment.

Questions and Answers 243. Since the parts for the ―classic‖ cars are difficult to obtain, Molly has decided that she must set aside a certain percentage of the warehouse for these parts. When she locates a specific part for this customer segment, Molly has to buy it and place it in her inventory because once the opportunity passes, it may never return. How does this affect the inventory management of the parts for newer cars? What systems or processes do you recommend to

116

Solution and Answer Guide:

Molly to ensure she does not develop shortages for the parts for the car repair shops? Explain how your recommendation helps Molly. Answer: Dedicating a significant portion of the warehouse to the ―classic‖ car parts obviously limits the space for newer car parts. Consequently, Molly will have to order those parts more frequently since the amount of storage space is limited. For the newer car parts Molly should use the EOQ inventory system. This will enable her to order parts on a repetitive basis and maintain the stock levels needed to ensure she has the parts for her primary customers, the car repair shops. 244. Considering Molly’s situation and her two distinct customer bases, do you think the ABC classification system would benefit her? If so, explain why? If not, explain why? Answer: The ABC classification system would benefit Molly primarily in managing the ―classic‖ car parts. Since these are not only expensive, but are also hard to obtain, Molly needs to employ a system that keeps these types of parts in the forefront. Essentially, one could assume that most of the ―classic‖ car parts will be an ―A‖ classification. 245. Explain whether the EOQ or statistical reorder point methods can enable Molly to better manage her ―classic‖ car parts inventory. Answer: I would say no, neither the EOQ nor the statistical reorder point methods would be effective for the ―classic‖ car parts. Unlike the newer car parts, which are readily available and can be ordered on a recurring basis, the ―classic‖ car parts cannot be ordered that way. Molly essentially needs to monitor the availability of ―classic‖ car parts on a daily basis and order them immediately when they are available. Again, the unique nature of the ―classic‖ car parts and the potentially erratic or infrequent demand would make the statistical report point method ineffective. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Crabtree Electronics* Case Note

Learning Objectives 

Understand ABC classification, the ABC inventory matrix, and cycle counting.



Understand the quantity discount and the EMQ models and their relationships with the basic EOQ model.



Understand the continuous review and periodic review systems.

Sylvester Bush owns Crabtree Electronics. His business has been going very well since he opened a few years ago. Most of his customers are other small businesses that need electronic parts such as circuit boards, transistors, resistors, capacitors, etc. A small percentage of his customers are hobbyists who enjoy building their own home sound systems and other items. Sylvester wants to do more than just save some money now during the lean times. He wants to establish an inventory system that enables him to capture continuous savings through effective inventory control. His inventory doesn’t contain many high-priced items. Most of the items his customers require are relatively low-cost items such as transistors, resisters, integrated circuit boards, wire, etc. If they need some item that is high priced, Sylvester orders it for them. Since he can get it within two days, often within one, this process works well for the expensive parts. Sometimes customers cannot wait even a day; in those cases, Sylvester directs them to another source. This seldom happens so neither Sylvester nor his customers have any concern about him not carrying those very expensive parts. Also, since the

117

Solution and Answer Guide:

requests for such parts are rare, Sylvester doesn’t want to have them sitting in his inventory gathering dust. Sylvester wants to ensure his inventory turns over frequently. Sylvester begins to consider all his options.

Questions and Answers 246. Sylvester Bush is a good businessman; however, he isn’t familiar with inventory control systems. Develop a chart for Mr. Bush with pros on one side and cons on the other. Help him make the choice between the ABC classification system and EOQ. Based on the inventory he carries and his general process, which approach is best for him? Or, should he employ both, why? Answer: EOQ would appear to be the best system for Mr. Bush. He has no high-priced items so the effort of sorting items into an ABC classification seems unnecessary. Furthermore, it appears that most of his inventory may move on a fairly routine basis. If that is the case, then EOQ would be an effective tool since he has repetitive ordering.

Pros

[ABC]

Cons

More efficient

Conflicts with other

Cycle counts.

cost systems

Pros

[EOQ]

Good for

Cons Does not take

repetitive

advantage of quantity

ordering Better control of

Requires substantial

High priority

resources

Inventory

discounts Assumptions may not be valid

Potential loss due to focus on only high cost/volume items Danger of over supply and under supply 247. Crabtree Electronics deals in relatively low-cost parts. However, they also deal in large volumes of those parts. Some of the businesses he supplies often get large contracts that require them to buy electronic parts in bulk. Is there a way for Mr. Bush to turn this into an advantage for his business? What would you recommend he do and why? How would your recommendation benefit him and his customers? Answer: Sylvester should use the quantity discount model for his customers who order large volumes. This appears to be a potential win-win scenario for Sylvester and those customers. His customers would experience savings and, in theory, would see this as a reason to continue doing business with Crabtree Electronics. Sylvester would be able to build a stronger, potentially longer lasting relationship with high volume purchasing customers; thus, have a stronger recurring revenue base.

118

Solution and Answer Guide:

248. Many electronic parts are physically small. Sylvester’s warehouse is brimming with rows upon rows of bins with hundreds and sometimes thousands of parts in them. Although some of the inventory models assume that the physical inventory levels are precise at any point in time, in reality they are not. Consider Sylvester’s situation. Sell Mr. Bush on a specific inventory review system. Explain why it is the best for his situation and what benefit he will receive by using the system you suggest. Answer: The periodic review system is recommended. This is less expensive to administer. Although it may cause Sylvester to have more safety stock on hand than if he used the continuous review system, since his inventory (electronic parts) is relatively inexpensive, this should not cause a problem. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Part 3 Continuing Case Mullenax Automobile Parts Inc., Inventory Management*

Learning Objectives 

Calculate specific metrics such as EOQ, Annual holding cost, Annual order cost, Annual total inventory cost, and Inventory Turnover Ratio.



Describe the Continuous Review and Periodic Review systems

Questions and Answers 249.

Calculate the following:

a. EOQ see answers below b. Annual holding cost c. Annual order cost d. Annual total inventory cost

119

DATA 2,000

Order Cost Holding Cost

$55 5

Part Cost

$350

NOTE: Number of weeks Firm operates per year.

EOQ Equation Elements R = annual requirement or demand S = order cost [sometimes called setup cost] k = holding cost [sometimes called carrying cost] C = unit cost

104,000 $55 20% $350

EOQ EQUATION Interna Square Root =(2RS/kC) =SQRT(F3) EOQ (also called Q) =

Annual Holding Cost: = (Q/2) x (k) x (C) Annual Ordering Cost: = (R/Q) x S Total Annual Inventory Cost: = (RxC) + (Q/2 x k x C) + (R/Q) x S

163,429

404.26

$14,149.20 $14,149.20

$36,428,298.41

EOQ Equation

250.

Calculate the inventory turnover ratio for Mullenax.

a. How does Mullenax’s inventory turnover compare to that of the automobile companies? Cost of Goods Sold (COGS)

525,750

Average Inventory

43,812

Inventory Turnover Ratio for the previous year Ford General Motors Toyota

15.23 10.53 16.95

Inventory Turnover Inventory Turnover Ratio Equation Ratio for Mullenax = COGS/Average Inventory 12.00

251. Select which type of review of inventory you believe would be most effective for Mullenax Automobile Parts—Continuous review or Periodic review. a. Justify your choice. Explain the benefits of the system you selected. Answer: Student answers will vary. Here are the possibilities: Continuous Review: this review process ensures that your inventory is always accurate. It requires that inventory levels must be updated in real time. The company must ensure that the physical inventory equals the stock record. The primary issue with this method is that it is expensive to implement. Periodic Review: this is a less expensive method. Physical inventory is reviewed at regular intervals. The primary issue with this review process is that you require more safety stock, because of the variation caused by longer review periods.

120

Solution and Answer Guide: Chapter 08: Answers to Questions/Problems

Chapter 08: Answers to Questions/Problems Table of Contents

Discussion Questions ....................................................................................................... 121 Problems................................................................................................................................................ 128 Cases ............................................................................................................................. 135 Learning Objectives ............................................................................................................................... 135 Questions and Answers ......................................................................................................................... 135 Questions and Answers ......................................................................................................................... 137 Learning Objective ................................................................................................................................. 139 Answers to Questions ............................................................................................................................ 139 Part 3 Continuing Case .................................................................................................... 140 Learning Objectives ............................................................................................................................... 140 Questions and Answers ......................................................................................................................... 140

Discussion Questions 252. Explain why lean production and Six Sigma are so important to successful supply chain management. Answer: Use of the term lean has begun to replace use of the term JIT, and is associated with the Toyota Production system. Lean is broader, although closely related to JIT, and describes a philosophy incorporating tools that seek to economically optimize time, human resources, assets, and productivity, while improving product and service quality. In the early 1980s, these practices started making their way to the Western world, first as JIT and then today, as lean production or lean manufacturing. Lean production has evolved into a way of doing business for many organizations. Quality assessment and improvement is a necessary element of lean production. First, as the process of waste elimination begins to shrink inventories, problems with human resource requirements, queues, lead times, quality and timing are typically uncovered both in production and with inbound and outbound materials. Eventually, these problems are remedied, resulting in higher levels of quality and customer service. Second, as the drive to continuously reduce throughput times continues, the need for a continuing emphasis on improving quality throughout the productive system results in the need for an overall quality improvement or Six Sigma program. Six Sigma stresses a commitment by the firm’s top management to enable the firm to identify customer expectations and excel in meeting and exceeding those expectations. Since environmental changes and changes in technology and competition cause customer expectations to change, firms must then commit to a program of continual reassessment and improvement; this, too, is an integral part of Six Sigma quality. Thus, to achieve the primary objectives of low cost, high quality, and reduced lead times, supply chain management requires the use of lean and Six Sigma thinking throughout the supply chain. 253.

Briefly explain the primary concerns and objectives of lean production.

121

Solution and Answer Guide:

Answer: Lean production emphasizes reduction of waste, continuous improvement, and the synchronization of material flows from within the organization and eventually including the organization’s immediate suppliers and customers. In many respects, then, supply chain management seeks to incorporate lean elements across the entire supply chain. 254.

How is lean production associated with JIT?

Answer: The term Just-In-Time was originally associated with Toyota managers like Mr. Taiichi Ohno along with his kanban system, encompassing continuous problem solving to eliminate waste. Use of the term lean has begun to replace use of the term JIT, and is associated with the Toyota Production system. Lean is broader, although closely related to JIT, and describes a philosophy incorporating tools that seek to economically optimize time, human resources, assets, and productivity, while improving product and service quality. In the early 1980s, these practices started making their way to the Western world, first as JIT and then today, as lean production or lean manufacturing. Lean production has evolved into a way of doing business for many organizations. 255.

What does the Toyota Production System have to do with JIT and lean production?

Answer: The term lean production essentially refers to the Toyota Production System in its entirety, which was created by several of Toyota’s key executives over a number of decades. JIT is an integral part of the TPS, using kanbans to manage the flow of materials. 256. What person or people at Toyota is (are) most responsible for the development of the JIT concept? Answer: Kiichiro Toyoda spent a year in Detroit studying Ford’s manufacturing system and others, and then returned to Japan, where he adapted what he learned to the production of small quantities of automobiles, using smaller, more frequently delivered batches of materials. This later was referred to as the Just-in-Time system within Toyoda. Mr. Eiji Toyoda, nephew of Sakichi, began working at Toyoda in 1936 and was named managing director of the renamed and reorganized Toyoda Automotive Works in 1950. Eiji too, traveled to Detroit to study Ford’s automobile manufacturing system and was particularly impressed with their quality improvement activities, most notably their employee suggestion system. Back in Japan, he implemented the concepts he had seen in the United States and this became the foundation of what was later referred to as the Toyota Production System. 257.

Why was Toyota’s first U.S. car such a failure? What did they learn from this experience?

Answer: Their first U.S. car was the Toyopet Crown. While popular in Japan, the car’s quality, speed, and styling problems resulted in sales of only 288 units in 14 months in the United States. Consequently, Toyota withdrew from the U.S. market, to better analyze U.S. consumers and their demands for reliability. ―No detail was unimportant, and they paid very close attention to customers,‖ says Dave Cole, chairman of Michigan-based Centre for Automotive Research. In 1965, the Corona was introduced in the United States and by 1972 U.S. sales had reached 1 million units. 258.

Who was responsible for first using the term ―lean‖ as it related to the auto industry?

Answer:

122

Solution and Answer Guide:

Actually, the term lean production did not originate at Toyota. It was first used in a benchmarking study conducted by the International Motor Vehicle Program (IMVP) at the Massachusetts Institute of Technology. The IMVP conducted a global automobile quality and productivity benchmarking study which culminated in the book, The Machine that Changed the World wherein the elements of lean production and the benchmarking results were presented. The word ―lean‖ was suggested because the Japanese facilities the benchmarking study when compared to their U.S. counterparts, used half the manufacturing labor, half the space, and half the engineering hours to produce a new automobile model in half the time. 259.

How is lean thinking associated with supply chain management?

Answer: Simply put, the objective of supply chain management is to balance the flow of materials with customer requirements throughout the supply chain, such that costs, quality, and customer service are at optimal levels. Lean production emphasizes reduction of waste, continuous improvement, and the synchronization of material flows from within the organization and eventually including the organization’s first-tier suppliers and customers. In many respects, then, supply chain management seeks to incorporate lean thinking across the entire supply chain. 260. Use an example to show how you could use lean thinking with a supplier and a customer. Answer: Reduce purchase lot sizes with a supplier and give them more business so they can afford to make more frequent deliveries. Negotiate with a customer to deliver your firm’s product more frequently to their location. 261.

What is yokoten, and what does it have to do with lean thinking?

Answer: Yokoten is a Japanese term meaning ―across everywhere‖. In lean terminology, it is used to mean the sharing of best practices. Lean firms are using yokoten to reach out to closely-linked suppliers and customers to make the supply chain leaner. 262.

Which do you think is the most important element of lean thinking?

Answer: Varies, but waste reduction will probably be mentioned the most. 263. What are the seven wastes, and can you discuss these in terms of a business you are familiar with? Answer: See Table 8.3. 264. What are the five-Ss? Apply the five-Ss to improve on how you should be completing your daily homework or study assignments. Answer: See Table 8.4. 265. lean?

What are the advantages of close supplier and customer relationships, when practicing

Answer: Quite commonly, firms must hold safety stocks of purchased products because their suppliers’ delivery times are inconsistent or the quality of the purchased goods do not always meet specifications. Internally, extra work-in-process (WIP) inventories are stored as a way to deal with temperamental processing equipment or other variabilities causing processing problems. On the distribution side, firms hold stocks of finished goods in warehouses prior to shipment to

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Solution and Answer Guide:

customers, in some cases for months at a time, to avoid stockouts and maintain high customer service levels. Holding high levels of these inbound, internal and outbound inventories costs the firm money while not adding much, if any value to the products or the firm; thus, they are considered wastes. When the focal firm, its suppliers, and its customers begin to work together to identify customer requirements, remove wastes and reduce costs, while improving quality and customer service, it marks the beginning of lean supply chain relationships. 266. What are the advantages and disadvantages of making small, frequent purchases from just a few suppliers? How do we overcome the disadvantages? Answer: Advantages—This serves to reduce average inventory levels. More frequent deliveries though, mean higher inbound transportation costs; to reduce these costs, suppliers are often required to distribute product from warehouses or production facilities located in close proximity to the buyer. By using just a few good suppliers though, they get lots of the firm’s business, which makes them willing to absorb dome of the higher transportation costs. 267.

Why should lean layouts be visual?

Answer: Lean layouts are very visual, meaning that lines of visibility are unobstructed, making it easy for operators at one processing center to monitor work occurring at other centers. In manufacturing facilities, all purchased and WIP inventories are located on the production floor at their point of use, and the good visibility makes it easy to spot inventory buildups as bottlenecks occur. When these and other production problems occur, they are spotted and rectified quickly. The relative closeness of the processing centers facilitates teamwork and joint problem solving and requires less floor space than conventional production layouts. 268.

What are manufacturing cells, and why are they important in lean production?

Answer: Manufacturing cells are designed to process similar parts or components, saving duplication of equipment and labor, as well as centralizing the area where units of the same purchased part are delivered. In many cases these manufacturing cells are U-shaped to facilitate easier operator and material movements within the cell. In assembly line facilities, manufacturing cells are positioned close to the line, feeding finished components directly to the line instead of delivering them to a stock area where they would be brought back out when needed. Manufacturing cells are themselves small assembly lines and are designed to be flexible, allowing machine configurations to change as processing requirements dictate. 269. Reducing lot sizes and increasing setups are common practices in most lean production settings. Why? Answer: To reduce inventory levels and hence also improve quality. 270.

What is the origin of the term kanbans and why are they used in lean systems?

Answer: Kanban is a Japanese word for card, and in lean facilities it has come to mean a signal. When manufacturing cells need parts or materials, they use a kanban to signal their need for these things from the upstream manufacturing cell, processing unit, or external supplier providing the needed material. Ideally, parts are placed in standardized containers, and kanbans exist for each container. 271.

Why are lean systems also known as pull systems?

Answer:

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Solution and Answer Guide:

In lean systems, nothing is provided until a downstream demand occurs. That is why a lean system is known as a pull system. 272. What is kaizen, and why is it so important for successful lean production? What is a kaizen blitz? Answer: To make the lean system work better, employees continuously seek ways to reduce supplier delivery and quality problems, and in the production area they improve movement problems, visibility problems, machine breakdown problems, machine setup problems, and internal quality problems. In Japanese manufacturing facilities, this is known as kaizen. A kaizen blitz is a rapid improvement event or workshop, aimed at finding big improvements. 273.

Discuss the linkage between lean systems and environmental sustainability.

Answer: Many organizations have realized the positive impact lean production can have on their environmental performance—adopting lean practices reduces the cost of environmental management and then leads to improved environmental performance. Further, lean production increases the possibility that firms will adopt more advanced environmental management systems, leading to yet further improvements in environmental performance. 274. Describe Six Sigma’s origins and the main parties involved. Why is the concept called ―Six Sigma‖? Answer: Six Sigma quality, many times simply referred to as Six Sigma, was pioneered by global communications leader Motorola in 1987, and is a statistics-based decision-making framework designed to make significant quality improvements in value-adding processes. Six Sigma (with capital S’s) is a registered trademark of Motorola. At the time, a senior staff engineer at Motorola named Mikel Harry formed a team of engineers to experiment with problem solving using statistical analyses, and this became the foundation for Six Sigma. Richard Schroeder, vice president of customer service at Motorola, heard about Harry’s work, and applied the methodology to his work at Motorola. Soon, both groups were announcing large reductions in errors and various costs. It is called Six Sigma to refer to the very small portion of the standard normal distribution that is beyond six standard deviations from the mean.

275.

How is Six Sigma different from TQM?

Answer: The Six Sigma concept though, is not just concerned with statistics. It is a broad improvement strategy that includes the concepts and tools of total quality management (TQM), a focus on the customer, performance measurement, and formal training in quality control methods. Six Sigma embodies an organizational culture wherein everyone from CEO, to production worker, to frontline service employee is involved in quality assessment and improvement. Six Sigma is proactive in nature and seeks to permanently fix the root causes of problems, instead of repeatedly spending time and money tinkering with and patching-up processes as problems occur in the business. In Six Sigma, sources of process variation are sought out and remedied prior to the time these variations can cause production and customer satisfaction problems. 276.

Describe the Lean Six Sigma approach.

Answer: The melding of lean production and Six Sigma quality practices. After the dot-com bust of 2001, many companies began considering implementing some form of lean, Six Sigma, or combination approach.

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277. Describe three ways by which your university could improve quality using elements of Six Sigma. Answer: varies. 278.

Describe Deming’s Theory of Management and how it can be used to improve quality.

Answer: Deming’s Theory of Management was the centerpiece of his teachings around the world (Deming died in 1993) and includes his Fourteen Points for Management. Deming’s Fourteen Points are all related to Six Sigma principles, covering qualitative as well as quantitative aspects of quality. He was convinced that quality was the outcome of an allencompassing philosophy geared toward personal and organizational growth. He argued that growth occurs through top management vision, support, and value placed on all employees and suppliers. Value is demonstrated through investments in training, equipment, continuing education, support for finding and fixing problems, and teamwork both within the firm and with suppliers. Use of statistical methods, elimination of inspected-in quality, and elimination of costbased decisions are also required to improve quality. 279.

Which of Deming’s 14 points might be the most important? Why?

Answer: Varies, but ―Drive out fear‖ should be listed in many cases, since some examples discuss this one first. 280.

Which do you like better—Deming’s, Crosby’s, or Juran’s approach to quality?

Answer: Varies. 281.

Why do you think the Baldrige Award is available only to U.S. companies?

Answer: The idea is to stimulate U.S. firms to improve quality and productivity (to catch up with foreign companies like Toyota), to recognize firms for their quality achievements, to establish criteria and guidelines so that organizations can independently evaluate their quality improvement efforts, and to provide examples and guidance to those companies wanting to learn how to manage and improve quality and productivity. 282. In viewing the Baldrige Award’s seven performance categories, how would your firm stack up in these areas (use the university or your most recent job if you are not currently employed). Answer: Varies. 283. What are the two most widely used ISO standards, and why are they so popular? If you are working, is your firm ISO certified? Is McDonald’s? Answer: Together, the ISO 9000 and 14000 families of certifications are the most widely used standards of ISO, with organizations in over 160 countries holding one or both types of certifications. The standards that have earned the ISO 9000 and ISO 14000 families a worldwide reputation is known as "generic management system standards", meaning that the same standards can be applied to any type of organization. Generic also means that no matter what the organization's scope of activity, if it wants to establish a quality management system or an environmental management system, then relevant standards of the ISO 9000 or ISO 14000 families provide the requirements.

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McDonald’s has received the ISO 14000 certification. 284.

What are critical-to-quality characteristics, and how are they used in Six Sigma?

Answer: Using the DMAIC improvement cycle allows the firm to continuously monitor and improve processes that are keys to customer satisfaction. By concentrating on these key processes and the CTQ characteristics (service or product requirements critical to achieving customer satisfaction), firms can make large and radical improvements in processes, products, and customer satisfaction. 285. What is the DMAIC improvement cycle, and how could you use it to improve your college study habits? Answer: The five-step DMAIC improvement cycle (define, measure, analyze, improve, control), is an important element of Six Sigma, and is the sequence of steps necessary to drive process improvement. The cycle can be applied to any process or project, both in services and manufacturing firms. The improvement cycle begins with customer requirements and then seeks to analyze and modify processes or projects so they meet those requirements 286. Construct a flow diagram of the ticket purchase/football game attendance process at your university. What areas would you investigate further, to identify problems? Answer: Varies. See Fig. 8.5. 287. Construct a cause-and-effect diagram for the following problem: The university course registration and payment process take too long. Brainstorm some potential causes. Answer: Varies. See Fig. 8.8. 288. What are the two types of process variation, and which one does statistical process control seek to eliminate? What can be done with the other one? Answer: Variations in process measurements can be either natural variations or assignable variations. All processes are affected by these variations, and environmental noise or natural variations are to be expected. When only natural variations are present, the process is in statistical control. Assignable variations are those that can be traced to a specific cause (such as the causes shown in Figure 8.8). These assignable variations are created by causes that can be identified and eliminated and thus become the objective of statistical process control efforts. Firms must accept most natural variations and trey to work around them. 289. Define ―variable data‖ and explain why two control charts are needed to assure that the process is under control. Answer: Variable data are continuous, such as weight, time, and length (as in the weight of a box of cereal, the time to serve a customer, or the length of a steel girder). Two charts are needed: the x -chart and the R-chart. The x -chart is used to track the central tendency of the sample means, while the R-chart is used to track sample ranges, or the variation of the measurements within each sample. A perfect process would have sample means equal to the desired measure and sample ranges equal to zero. It is necessary to view both of these charts in unison, since a sample mean might look fine, even though two of the five measures might be far from the desirable measure, making the sample range very high. It could also be the case that the sample

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Solution and Answer Guide:

range looks fine (all measures are quite close to one another), even though all five measures are far from the desirable measure, making the sample mean look bad. 290. Can a process exhibit sample measurements that are all within the control limits and still be considered out of control? Explain. Answer: Yes. If the measures do not fall randomly around the mean, and fairly close to the mean, then the process is considered out of control. 291. What are some variable data and attribute data that could be collected to track the quality of education at your university? Answer: Varies.

292.

How could P-charts be used in a manufacturing facility?

Answer: Could track the % of the sample passing various quality standards. 293.

Explain the difference between a C chart and a P chart.

Answer: Use C charts to control the number of defects per unit of output. C charts are useful when a number of mistakes or errors can occur per unit of output, but they occur infrequently. Examples can include a hotel stay, a newspaper, or a construction project. The control limits for C charts are based on the assumption of a Poisson probability distribution of the item of interest (commonly used when defects are infrequent). In this case, the distribution variance is equal to its mean. P charts, which monitor the percent defective in each sample, or C charts, which count the number of defects per unit of output, are used. This is the most commonly used attribute control chart. If large sample sizes are used when collecting data, they are assumed to be normally distributed, and the following formulas can be used to calculate the center line ( P ) and the upper and lower control limits for the P chart. 294. Can a process be considered in control but incapable of meeting design requirements? Explain. Answer: Yes. If the design standards are set narrowly, at say 1 standard deviation from the mean, then this could happen. 295. If a goal of a supplier partnership is to eliminate acceptance sampling, then when would it get done? Answer: The supplier typically would do it occasionally, to assure that the customer’s requirements are still being met.

Problems 296. Heavey Compressors uses a lean production assembly line to make its compressors. In one assembly area, the demand is 100 parts per eight-hour day. It uses a container that holds eight parts. It typically takes about six hours to round-trip a container from one work center to

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Solution and Answer Guide:

the next and back again. Heavey also desires to hold 15 percent safety stock of this part in the system. a) How many containers should Heavey Compressors be using? Answer: # of containers =

DT(1 S)

= [(100/8)(6)(1.15)]/8 ≈ 8 7/8 or 11 containers.

b) Calculate the maximum system inventory for this part. Answer: 11X8 = 88 parts c) If the safety stock percentage is reduced to zero, how would this impact the number of containers, all else being equal? Answer: # of containers =

DT(1 0)

= [(100/8)(6)]/8 = 9.4 or 10 containers

297. Using the information from problem 1, if Heavey desires to reduce their number of containers to eight, how does this impact the system? What has to change, if it assumed that demand, container size, and safety stock percentage don’t change, and what is that change? Answer: Time, T, has to change. Since # of containers =

DT(1 S)

64/(14.375) = 4.45 hrs or 4 hrs and 27 minutes.

, if 8=[(100/8)(T)(1.15)]/8, then T =

298. Eakins Enterprises makes model boats, and it is switching to a lean manufacturing process. At one assembly area, Eakins is using one part container that holds 250 parts, and it wants the output to be approximately 100 finished parts per hour; they also desire a 10 percent safety stock for this part. How fast will the container have to make it through the system to accomplish this? Answer: # of containers =

DT(1 S)

, or 1 = [(100)(T)(1.1)]/250, or T ≈ 3.

299. A lean system has 22 containers, each of which can hold 15 parts. The lead time required to round-trip one container through the system is four hours. The required safety stock is ten percent. a) What is the maximum demand rate this system can accommodate? b) The company wants to accommodate double the maximum demand rate found in a) What are all the ways the system could be changed to accomplish this? Answer:

a) # of containers =

DT(1 S)

; 22 = D(4)(1.1)/15; D = 75 parts/hr

b) Could double # containers, reduce T to 2 hrs., or increase C to 30. 300. Jim Corner, owner of Corner Bike Rentals, wants to start analyzing his company’s quality. For each bike rental, there are four types of customer complaints: bike not working properly, bike wrong size, bike uncomfortable, and bike broken during operation. During the past week, his company rented 280 bikes. He received 26 total complaints.

a. What is his company’s DPMO for the past week?

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Solution and Answer Guide:

Answer: DPMO =

number of defects (1,000,000) = [26/4(280)]1000000 = 23,214 per (OFD per unit )(number of units)

million rentals. b. What is their Six Sigma operating level?

Answer: slightly less than 3.5, from Table 8.5. c. If Jim wanted to operate at the 5-sigma level, what would his errors have needed to be over the past week? Answer: 233 = [X/4(280)]1000000; X = 0.26 errors. 301. Julie works at Gentry Flower Shoppe, which operates at the 4-sigma level, with about 6,000 DPMO, which was determined recently. At that time, Gentry was found to have 1500 total defects. They want to improve to the 5-sigma level, or about 500 DPMO. Assuming nothing else changes, what would their new total defect level have to be? Answer: DPMO =

number of defects (1,000,000); 6000 = (1500/X)(1MM), so X = 250,000; (OFD per unit )(number of units)

then 500 = (X/250,000)(1MM); X = 125 defects 302. The following sample information was obtained by taking four doughnuts per hour for 12 hours from the Fawcett Bakery’s doughnut process and weighing them: Hour

Weights (grams)

Hour

Weight (grams)

110, 105, 98, 100

89, 102, 101, 99

79, 102, 100, 104

100, 101, 98, 96

3 4

100, 102, 100, 96 94, 98, 99, 101

9 10

98, 95, 101, 100 99, 100, 97, 102

5 98, 104, 97, 100 6 104, 97, 99, 100 For the data shown above,

11 12

102, 97, 100, 101 98, 100, 100, 97

a. Find the x and R for each sample. Answer: hour

hour

103.3

97.8

96.3

98.8

99.5

98.5

98.0

99.5

99.8

100.0

98.8

b. Find the x and R for the 12 samples. Answer: x = 99.2 and R = 8.4 c.

Find the 3-sigma UCL and LCL for the mean and range charts.

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Solution and Answer Guide:

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Solution and Answer Guide:

Answer: For n = 4, A2=.729, D4=2.282, D3=0, then UCLx=99.2+.729(8.4) = 105.3, LCLx=99.2 - .729(8.4) = 93.1, UCLR=2.282(8.4) = 19.2, LCLR = 0 d. Does the process look to be in statistical control. Why? Answer: mean--OK; range--not OK 303. Through process measuring of a number of pizza delivery times, Mary Jane's Pizzeria finds the mean of all samples to be 27.4 minutes, with an average sample range of 5.2 minutes. They tracked four deliveries per hour for 18 hours to obtain their samples. a. Is this an example of variable or attribute sampling data? Answer: Variable data b. Find the UCL and LCL for both the x and R charts. Answer: UCLx = 27.4 + .729(5.2) = 31.2; LCLx = 27.4 - .729(5.2) = 23.6 UCLR = 2.282(5.2) = 11.9; LCLR = 0. 304. A company produces 8-pound bags of rice. As shown below, it gathered 5 samples with 6 bags in each sample for quality control purposes. The weights of each of the bags are listed below. Sample 1 2 3 4 5

1 7.98 8.33 7.89 8.24 7.87

2 8.34 8.22 7.77 8.18 8.13

Bags in each sample 3 4 8.02 7.94 8.08 8.51 7.91 8.04 7.83 8.05 7.92 7.99

5 8.44 8.41 8 7.9 8.1

6 7.68 8.28 7.89 8.16 7.81

a. Find the x and R for each of the five samples. Answer: x 1=8.07, R1=0.76; x 2=8.31, R2=0.43; x 3=7.92, R3=0.27; x 4=8.06, R4=0.41; x 5=7.97, R5=0.32 b. Find the x and R . Answer: x = (8.07+8.31+7.92+8.06+7.97)/5=8.07; R =(.76+.43+.27+.41+.32)/5=.44 c.

Find the 3-sigma UCL and LCL for the mean and range charts.

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Solution and Answer Guide:

Answer:

UCLx = x + A2 R =8.07+0.483(0.44)=8.28 (get A2 from Table 8.10) LCL x = x – A2 R =8.07 – .483(.44)=7.86; UCLR = D4 R =2.004(.44)=0.882; LCLR = D3 R = 0(.44) = 0. d. Does the process look to be in statistical control. Why/why not? Answer: no points above UCLx, no points below LCLx, nothing above UCLR. 4 of 5 pts. below R . Most points very close to x . With only 5 samples, it is very hard to talk about statis. control. 305. Ten customers per hour were asked by the cashier at Stanley’s Deli if they liked their meal, and the fraction that said ―no‖ are shown below, for a 12-hour period. Hour

Fraction Defective

Hour

Fraction Defective

1 2

0 .2

7 8

.1 0

4 5

.1 .1

10 11

.2 0

6 .2 12 For the data shown above, find

Answer: 1.4/12 = .1167 b. σP. Answer: SQRT[.1167(.8833)/10] = .1015 c. The 3-sigma UCL and LCL. Answer: UCL = .1167 + 3(.1015) = 0.42; LCL = .1167 – 3(.1015) = 0. d. Does customer satisfaction at Stanley’s appear to be in statistical control? How could we improve the analysis? Answer: Yes—4 samples above the mean, 6 below, none out of CLs. To improve, could go back to hour 3 records to see what happened; could go through statistical process control improvement efforts— check sheets, Pareto analysis, fishbone dia., improvement, back to checking again.

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306. A company collects 20 samples with 100 eggs in each sample. They want to construct a P chart to track the proportion of broken eggs in each sample. The table below shows the number of defective eggs per sample. Sample 1 2 3 4 5 6 7

Eggs 3 5 3 4 2 4 2

Sample 8 9 10 11 12 13 14

Eggs 6 4 9 2 6 5 1

Sample 15 16 17 18 19 20 TOTAL

Eggs 5 0 2 6 2 1 72

a. Determine P . Answer: 72/2000 = 0.036 or 3.6% b. Determine σP. Answer:

σP = c.

100

= 0.019

Determine the 3-sigma UCL and LCL.

Answer: UCL = .036 + 3(.019) = 0.093; LCL = .036 – 3(.019) = 0 d. Does the egg process appear to be in statistical control? Answer: 1 pt very close to UCL; half above and below P ; probably in control. 307. Roberto’s Steakhouse tracks customer complaints every day and then follows up with their customers to resolve problems. For the past 30 days, they received a total of 22 complaints from unhappy customers. Using this information, calculate a.

Answer: 22/30 = 0.733 b. The 3-sigma control limits. Answer: UCL = .733 + 3(SQRT.733) = 3.3; LCL = .733 – 3(SQRT.733) = 0

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Cases 1.

Sharp’s Sandwich Shop – Quality Control* Case Note

Learning Objectives  

Discuss and compare the major elements of lean and Six Sigma. Describe and use the various tools of Six Sigma.

Dawn Sharp is the owner of Sharp’s Sandwich Shop. Her shop is open 24/7 and serves many different types of sandwiches, from classic breakfast sandwiches to more exotic burgers and other sandwiches usually consumed at lunch and dinner. Recently, Dawn addressed inventory management as one of her major production issues. Dawn’s goal is to give her customers quick service and a quality product. As Dawn evaluated her inventory problem that was related to the premade sandwich system, she discovered a parallel issue—quality. As part of her revised inventory system, all sandwiches placed in the charity bin are recorded in a waste log. This process enables Dawn to reconcile the ―waste‖ sent to the charity bin to actual waste, that is, items that are thrown in the trash. Previously, Ms. Sharp had assumed that a significant quantity of her overall waste (95 percent) were items placed in the charity bin. However, as she compared her numbers, Dawn discovered that more was going into the trash than she thought.

Questions and Answers 308. Sharp’s Sandwich Shop has two conflicting quality issues – speed and freshness. The premade sandwich system enhances speed; however, it has the potential of affecting freshness. What type of system can Ms. Sharp implement that will enable her to keep the process of premade sandwiches, yet guarantee that freshness will be unaffected? Explain how the system would work and why it can effectively enable her to accomplish both goals without any concern that one or the other must suffer. Answer: Ms. Sharp could use Kanbans. While most Kanbans are not thought of in this manner, they would work very well in this situation. Think of each customer as a cell that will get the output of the Kanban. Within the premade bins a specific number of sandwiches are placed. Once the number of sandwiches decreases to a specified number a signal such as a flag is placed so that the sandwich preparers know they must make another one to place in the bin. Consequently, instead of just making a number of sandwiches and putting them in the premade bins for a specific timeframe, sandwiches are ―pulled‖ in as the customer is served one. This would enable sandwiches to be prepared before they are actually ordered; however, since they would be replacing one that was pulled from the premade bins the freshness of new sandwiches should be preserved.

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Solution and Answer Guide:

309. Currently, Ms. Sharp is evaluating the quality of the food by the waste, meaning as the cost of waste increases, she senses that the quality of the product is decreasing. Recommend to Ms. Sharp a better method to evaluate quality then just cost. Answer: Students may not realize it, but actually, Dawn is currently looking at the situation backwards. What is really happening is that poor quality is driving up cost. Dawn should look at quality from the perspective of a sigma level. She should calculate her current sigma level and then establish a target of where she wants the level to be in six months or a year. That would drive her to look at other issues beside cost. For example, she may discover that servers are not recording the orders correctly; thus, the food preparers make the wrong sandwich. Or, she may discover that the kitchen tasks are not organized properly; therefore, orders may be getting mixed up. By establishing a sigma level target, Dawn’s staff will be able to focus on specific solutions to increase the sigma level by decreasing errors (defects). 310. Ms. Sharp decides that she alone cannot implement a good quality program. Clearly, her staff must be involved. Although she has excellent employees, Dawn knows they do not understand the tools of quality. Furthermore, she understands that if things appear too complicated then she won’t get their buy-in. Dawn contacts you and requests that you explain to her staff some basic quality tools that will enable them to improve quality, yet are not complex, and will not demand a lot of their time. Answer: Check sheets are simple to use, will enable Sharp’s Sandwich Shop to track common errors, and will not take much time to complete. Since the common errors will be listed, and the time period could be set as the four times on the menu (breakfast, lunch, dinner, and after hours), all the servers or the food preparers need to do is place a tick mark in the appropriate cell. This would take seconds at the most. Ms. Sharp would probably use the check sheets to create a Pareto chart. How, you can demonstrate how effective a visual tool a Pareto is. At a glance one knows which error or defect is occurring more frequently. The chart could be displayed in several places within the kitchen as a visual reminder of potential errors; thus, can enable the employees to consciously reduce those errors. The fishbone or cause and effect diagram can be shown as a simple, yet elegant tool to identify root causes. You can explain to employees that for each error identified, a fishbone can be used to determine if it is a material issue (bread, burgers, etc.), an equipment issue (fryers, etc.), a process issue (how items are made), or an employee issue (not sufficient training, skill set, etc.). * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

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Solution and Answer Guide:

Downey College* Case Note

Learning Objectives 

Describe and use the various types of tools of Six Sigma

Tuition is the life blood of any four-year college and Downey College is no exception. Each year the Student Affairs Office initiates a campaign to get students to fill out their Free Application for Federal Student Aid (FAFSA) application. As with any tuition aid program, there is a timeframe when you must apply. If you miss the application deadline then you must wait until the following period. Last year Hannah had her staff develop a check sheet on common errors concerning FAFSA applications. There were five major areas and an ―other‖ area. She had them collect data by student status, i.e., freshman, sophomore, junior, and senior. The information is listed below. Error

Freshman

Sophomore

Junior

Senior

520 applications

500 applications

580 applications

530 applications

Total Errors

% of Total

Not filing by deadline

/////

////

//////

///

19.1%

Wrong FSA ID

////

9.6%

Wrong SSN

////

///

8.5%

Did not sign FAFSA

/////

///

16.0%

Under stating income

//////

////

/////

18.0%

Filing wrong year’s FAFSA

/////

///

12.8%

Other

/////

////

16%

Totals

30.8%

24.5%

21.3%

23.4%

100%

Questions and Answers 311. Hannah Hunt’s staff is very small; thus, she has limited resources available to tackle these issues. She can focus on either a specific error or on a specific class, for example, freshman. What do you recommend she do and why? Explain the benefit of your recommendation. Answer: Since Hannah has limited resources to apply to the problem, she should focus on a specific class rather than a specific error. As we see in the chart above, over 30 percent of the errors can be eliminated if the freshmen class fills out the FAFSA application correctly and files it on time. However, if Hannah only focuses on a specific error across all classes, the most she can reduce the problem by is 19.1% (not filing by deadline). Therefore, looking at this issue through the class perspective, she can utilize her staff more efficiently. 312. What is the sigma level of their FAFSA application program? Does the sigma level per class, for example, senior, change your recommendation on whether to focus on a specific error

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or a specific class? Is there any advantage in this perspective of the data? Explain your opinion to Hannah Hunt. Answer: The sigma level of Downey College’s FAFSA application program is about a 4 sigma level (6304 DPMO). If we calculate the sigma level for each class, we see that the freshmen class is at about a 4-sigma level (7967 DPMO), the sophomore class is close to a 4 sigma level (6571 DPMO), the junior class is between a 4 and 4.5 sigma level (4926 DPMO), as is the senior class (5929 DPMO). So, relatively speaking, all the classes are at about the same sigma level. Note: equation for freshmen class = # of defects * (1M) = 29 * (1M) OFD * # of units (7)*(520) If we chose to look at individual defects, we would calculate the sigma level for each as follows. In this case we would add the class sizes and get 2130; however, if we only looked at one defect, the OFD would be 1. Note: equation is for ―not filing by deadline‖ = # of defects * (1M) = 18 * (1M) OFD * # of units (1)*(2130) Further analysis tells us that if we eliminated all freshmen errors, then our sigma level would rise slightly (4,359 DPMO) and get closer to A 4.5 sigma level. However, if we addressed only the one error and eliminated all of it, our sigma level would be improved, but not as much (5,097 DPMO). Therefore, this perspective basically verifies our initial decision to tackle this issue by class, rather than by error, since our resources are limited. 313. Hannah Hunt believes that filling out and submitting the FAFSA application is a no brainer. She believes that a six-sigma level should be easy to obtain. Do you agree? Is this a realistic expectation? Explain your viewpoint. Answer: No, it isn’t a realistic expectation at this moment. Although the FAFSA application appears to be relatively simple, each year a new group of students is entering the mix; thus, are unfamiliar with the application. In addition, the timeframe between applications each period is sufficiently long enough for students to forget minor details. If the application is changed in any way year to year this adds to the potential for error. In addition, Hannah Hunt has limited resources to dedicate to fixing the problem; therefore, since they are at a 4 sigma now, progress toward 6 sigma will take time. Ultimately, with support, tutorials, etc. Downey College could be at a 6-sigma level and then would just have to work to maintain it. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

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Automotive Repair Shop War* Case Note

Learning Objective 

Describe and use various tools of Six Sigma.

Johnny was a good businessman and knew he needed to stem the flow of customer defections quickly. He went to the local community college and talked with the business professor about the situation. One thing Johnny understood what that he needed data so he could analyze the problem, develop solutions, and make effective decisions. Johnny had read about programs such as Six Sigma. Although he wasn’t familiar with it, he did realize that it is a means to identify a problem, collect data, analyze the data, and develop alternative solutions. Then, he could select what appeared the best solution, implement it, and then circle back around and see how effective it was.

Answers to Questions 314. Is Johnny Cruz approaching this situation sensibly? Is Six Sigma the best approach or is it overkill? Do you agree with Johnny? If so, explain how Six Sigma can help Johnny. If you don’t agree with Johnny, what alternative does he have? Answer: Students’ answers may vary. I believe Johnny’s approach is the correct way to go. Johnny has not experienced a lot of competition. Now he has a competitor who is going after his customer base. The customer base is relatively small, and having a lot of defections could be a devastating blow to Johnny’s business. Six Sigma allows Johnny to be very systemic in his approach for a viable and sustaining solution to this problem. Six Sigma will force Johnny to look at his business more through his customers’ eyes. Basically, because of the historic way business has been conducted historically, to some degree Johnny has had a monopoly. While there are other automotive repair shops at a greater distance, there are none relatively close. Consequently, Johnny may not have defined critical to quality characteristics as well as he should have. One could assume that although Johnny addressed any customer dissatisfaction, he probably didn’t keep records; thus, he may not have any historic data except for his memory. Six Sigma emphasizes the need for data collection and analysis. Since he has had no competition, or at least minimal competition, his processes may be out-of-date from the viewpoint of quality customer service. Therefore, Six Sigma gives him the opportunity to develop improvement and test them for their effectiveness. Finally, the control phase will enable Johnny to monitor his business and help ensure he is ready to make any necessary adjustments to compete with Rosie or any other competitor that seeks to take away his market share. 315. Six Sigma has a lot of tools Johnny can use. Be the community college professor in Oxbow, Texas and explain which tool or tools you would use and in what order. What would each tool enable Johnny to do? Answer: Students’ answers may vary. Obviously, Johnny needs to define his problem. The big problem appears to be customer defections. Johnny needs to collect data to understand why they are defecting. A customer survey to all customers, those who have defected and those who have not, is critical. Once Johnny has the survey responses, he can categorize the responses using a check sheet to see how many people cite specifics issues or concerns. Johnny can put this into a Pareto chart to determine which issues are the largest concerns of his customers. From here, Johnny could develop a cause-and-effect diagram for each major concern and use that tool to identify root causes. 316. Using the problem of defecting customers of Johnny Cruz, develop a fictional cause and effect diagram. Develop the four main categories and add the bones of possible causes or issues. Explain, based on your hypothetical scenario, what you see as Johnny’s possible major issues.

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Answer: Materials

Methods

Johnny-insufficient inventory

Johnny-long waits for basic services

Rosie-gets parts in 24 hours appointment

Johnny-no

Rosie-car rental option

Open 24/7

RosieCustomer Defections Rosie’s has other mechanics

Rosie’s has TV/Wi-Fi

John ny is a one-man shop Johnny has a good reputation Manpower

Johnny has tow truck Johnny is a known entity

Rosie can service all foreign brands

Machines

The primary overriding cause for customer defections appears to be a lack of modernizations of Johnny’s automotive repair shop. Each of the four major categories seems to have a root cause that suggests this. On the surface it appears that Rosie has a more up-to-date supply system, i.e., 24-hour fulfillment. Also, Rosie appears to have better customer service, e.g., open 24/7, car rental service, nicer waiting area (TV/Wi-Fi). Finally, Rosie appears to be able to service more brands and has additional mechanics; thus, enabling quicker service. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and company are fictional and any resemblance to any person or company is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Part 3 Continuing Case Mullenax Automobile Parts Inc., Process Management*

Learning Objectives 

Understand the importance of statistical process control for improving quality.

Questions and Answers 317. Based on the data provided in the case, calculate the DPMO. Using Table 8.4, what is the approximate Sigma level based on the DPMO? See the Excel Answer Worksheet below for these answers. 318. Using the data in the Variable Data Samples of AV1 chart above, calculate the following: a. b. c. d. e. f. g. h.

x R x R UCL of x LCL of x UCL of R LCL of R

Note: Use Table 8.10 when calculating the UCL and LCL for x and R See the Excel Answer Worksheet for these answers.

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319. Graph the x and R charts. Does the process look to be in control? Why? See the Excel Answer Worksheet for these answers.

x-double bar

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320. The Japanese Five Ss terms translate to organization, tidiness, purity, cleanliness, and discipline. These terms also have their English version of the Five Ss. What are they? Which do you think are the most important? Why? Answer: Organization = Sort Tidiness = Set in Order Purity = Sweep or Shine Cleanliness = Standardize Discipline = Self-Discipline or Sustain Students’ answers as to which are the most important will vary, and why. *

Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Chapter 09: Answers to Questions/Problems Table of Contents Problems................................................................................................................................................ 149 Cases ............................................................................................................................. 150 Learning Objectives ............................................................................................................................... 150 Questions and Answers ......................................................................................................................... 151 Learning Objectives ............................................................................................................................... 152 Answer to Questions.............................................................................................................................. 153 Learning Objectives ............................................................................................................................... 154 Questions and Answers ......................................................................................................................... 154 Part 4 Continuing Case .................................................................................................... 155 Questions and Answers ......................................................................................................................... 155

Discussion Questions 321.

What is logistics and how does it provide time and place utility?

Answer: The process of planning, implementing, and controlling procedures for the efficient and effective transportation and storage of goods including services, and related information from the point of

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origin to the point of consumption for the purpose of conforming to customer requirements. Time utility is created when customers get products delivered at precisely the right time, not earlier and not later. The logistics function creates time utility by determining how deliveries can be made in a timely manner and where items should be held prior to delivery. Place utility is created when customers get things delivered to their desired locations. 322.

Why are logistics issues important to business success?

Answer: Transportation, warehousing, and information systems play very significant roles in the logistics function. For supply chains in particular, logistics is what creates the efficient flow of goods between supply chain partners, allowing profits and competitive advantage to be maximized. 323.

What are the important activities or elements in logistics?

Answer: The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. 324.

What is the objective of transportation, for a business?

Answer: In the most general terms, transportation company objectives should then be to satisfy customer requirements while minimizing costs and making a reasonable profit. For logistics or perhaps supply chain managers, this also means deciding which forms of transportation, material handling, and storage, along with the most appropriate vehicle scheduling and routing, to use. 325. Why do you think that for-hire logistics expenditures have quadrupled over the past thirty years in the U.S.? Answer: Because of the level of competition, the likelihood of foreign markets, and the desire to concentrate the firm’s resources on internal competencies. 326. List the legal forms and modes of transportation. Which mode is the least expensive? Which mode carries the most freight? Which mode is growing the fastest? Shrinking the fastest? Answer: Transportation service companies are classified legally as either common, contract, exempt, or private carriers. There are five modes of transportation: motor, rail, air, water, and pipeline carriers. Water carriers are the least expensive. Motor carriers carry the most freight. Air carriers are growing the fastest. Rail carriers are growing smaller as an industry. 327.

What are some intermodal transportation alternatives?

Answer: The most common are truck trailer-on-flatcar (TOFC) and container-on-flatcar (COFC), also called piggyback service. The same containers can be placed on board containerships and airliners. Another example of intermodal transportation are RO-ROs or roll-on-roll-off containerships. These allow truck trailers and containers to be directly driven on and off the ship, without use of cranes. 328. What is the difference between TL and LTL shipments? Why are LTL shipping fees higher per cwt than TL shipping fees? Answer: TL stands for full truck load shipments, while LTL stands for less-than-truckload. The LTL carrier must consolidate many small shipments into one truckload, and then break the truckload back down into individual shipments at the destinations for individual deliveries. So, their costs are higher.

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329. What is a road train? If you had to classify them, would you say they are general freight carriers or specialized carriers? Answer: A truck with 3 or more attached trailers, commonly found in Australia. They could be either. Why do you think the fastest trains are found outside the U.S.? Where is the fastest train operating today? 330. Why do you think the fastest trains are found outside the United States? Where is the fastest train operating today? Answer: Foreign governments have committed funds to build these trains, while in the U.S. this has not been the case until just recently. Eventually, it may tend to be a problem as the U.S. transportation infrastructure deteriorates. Varies, but the fastest trains might be in China, Japan, or France. 331. When would you want to use value-of-service pricing instead of cost-of-service pricing? When would you like use negotiated pricing? Answer: In this case, carriers price their services at competitive levels the market will bear. Prices are thus based on the level of competition, and the current volume of demand for each service. This is a profit-maximizing pricing approach. Cost of service pricing is used when carriers desire to establish prices that vary based on their fixed and variable costs. To accomplish this, firms must be able to identify the relevant costs and then accurately allocate these to each shipment. Cost of service pricing varies based on volume and distance. As shipping volume increases, the portion of fixed costs that are allocated to each shipment goes down, allowing the carrier to reduce prices. Since the deregulation of transportation in the U.S., negotiating transportation prices has become much more common among business shippers and logistics providers. In addition, shippers today are inclined to develop alliances with logistics companies because of the key role they play in allowing firms and their supply chains to be more responsive to changing demand. This has also tended to increase the use of negotiated prices. 332.

What is FOB destination pricing and when would you want to use it?

Answer: The buyer pays for the goods upon delivery. Firms often use this when purchasing items they cannot transport, or do not want to risk incurring damage payments. 333. What does transportation security refer to, and which mode of transportation is most affected by security concerns? Answer: Transportation security refers to protection of transportation modes wrt unlawful acts such as terrorism. Particularly airline security has become a very important issue since September 11, 2001. 334.

What is PrePass and what are its advantages?

Answer: A type of security initiative is the PrePass, offered by the nonprofit organization HELP, which allows prequalified U.S. motor carriers to bypass state inspection and weigh stations at highway speeds, using automated vehicle identification technology, allowing inspection personnel to spend more of their time inspecting other vehicles. Additionally, PrePass saves drivers five to eight minutes and a half gallon of fuel per bypass. 335. Is government regulation of transportation good or bad? Why? Answer:

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This is debatable. Transportation deregulation has resulted in greater use of cost-of-service pricing, less service for small communities, rising freight rates for LTL shipments, and more safety problems as operators have tended to let fleets age and to reduce maintenance. 336.

Is transportation in the U.S. regulated today, or deregulated? Why?

Answer: Today, the U.S. transportation industry remains essentially deregulated, however a number of regulations still exist (primarily safety regulations) that carriers must adhere to. 337.

Describe three different types of warehouses and the advantages of each.

Answer: Consolidation warehouses collect large numbers of LTL shipments from nearby regional sources of supply, where these are then transported in TL or CL quantities to a manufacturing or userfacility located at some distance from the consolidation center. Private warehouses refer to warehouses that are owned by the firm storing the goods. For firms with large volumes of goods to store or transfer, private warehouses represent an opportunity to reduce the costs of warehousing. public warehouses are for-profit organizations that contract or lease various warehousing and distribution services to other companies. Public warehouses provide a number of specialized services that firms can use to create customized services for various shipments and goods. 338. If storing goods in a warehouse is bad, since it increases inventory carrying costs, why is the number and size of warehouses increasing in the U.S.? Answer: As disposable income in the U.S. increases, consumers buy more goods that must move through various distribution systems. Even though U.S. freight distribution systems move goods from manufacturers to end users in an increasingly efficient manner, the growth in demand for warehouse space has overcome this improved efficiency. 339.

What is the difference between a distribution center and a warehouse?

Answer: Warehouses are used to store things. DC’s receive bulk shipments, break them down, repackage various items into outgoing orders, and then distribute these orders to a manufacturing location or retail center. 340.

What are cold chains and what type of warehouse is used for these?

Answer: One of the latest demands for public warehousing involves the growing global market for pharmaceuticals. Pharmaceutical companies utilize so-called third party ―cold chains‖ to assure their product reaches buyers in good shape. Cold chains refer to temperature-controlled transportation, transfers, and warehousing. 341. Define risk pooling and the advantages and disadvantages of centralized warehousing. What assumption does risk pooling make? Answer: Risk pooling (also referred to as the square root rule and the portfolio effect) describes the relationship between the number of warehouses, inventory, and customer service, and it can be explained intuitively as follows: when market demand is random, it is very likely that higher-thanaverage demand from some customers will be offset by lower-than-average demand from other customers. As the number of customers served by a single warehouse increases, these demand variabilities will offset each other more often, thus reducing overall demand variance and the likelihood of stockouts and consequently, the amount of safety stock required to guard against stockouts. The more centralized a warehousing system is, the lower the safety stock required to

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Solution and Answer Guide:

achieve a given system-wide customer service level. However, centralized warehouses mean that transportation costs for delivering to customers will be higher. 342. For which situation (centralization or decentralization) does risk pooling result in less safety stock? Why? Answer: As the number of customers served by a single warehouse increases, these demand variabilities will tend to offset each other more often, thus reducing overall demand variance and the likelihood of stockouts. Consequently, the amount of safety stock in a warehouse system required to guard against stockouts decreases. Thus, the more centralized a warehousing system is, the

lower the safety stock. 343.

What type of warehouse location strategy do you think Amazon uses? Why?

Answer: Varies, but most will say centralized. 344.

What is a lean warehouse? When are they used?

Answer: Lean warehouses have items moving more quickly through inbound and outbound warehouses and distribution centers. This means reduced lot sizes and shipping quantities, greater emphasis on crossdocking, increased automation, and increased assembly operations. 345.

Why is logistics so important for successful supply chain management?

Answer: Logistics refers to the movement and storage of products from point-of-origin to point-ofconsumption within the firm and throughout the supply chain, and is thus responsible for creating time utility and place utility. In a managed supply chain setting, these logistics elements are extremely important in that products must be routinely delivered to each supply chain customer on-time, to the correct location, and at a reasonable cost. As mistakes occur in deliveries along the supply chain, more safety stocks must be held, impacting both customer service levels and costs. 346. What are 3PLs and why are they used? What types of companies use them? Why is their use growing so rapidly? Answer: In many cases, firms use outside agents or third-party logistics services (3PLs) to move items into foreign locations more effectively. International purchases are also similarly impacted by logistics considerations. When firms begin evaluating and using foreign suppliers, logistics costs and timing become critical factors in the sourcing decision. For small firms with no internal logistics expertise and large firms with many sizeable and varied logistics needs, outsourcing logistics requirements to 3PLs can help firms get the services they require at reasonable prices. Many firms outsource some or all of their logistics needs to allow more attention to be placed on core competencies. In tough economic times, firms used 3PLs to help reduce costs while maintaining customer service levels. 347.

Can 3PLs be effective supply chain partners? Why?

Answer: Studies performed by the Georgia Institute of Technology indicate a clear advantage gained by outsourcing logistics functions to 3PLs. One of their studies found that companies using 3PLs realized a 13 percent logistics cost savings. Supply chain management professor C. John Langley at the Georgia Institute of Technology argues that firms should increase the number of services outsourced to 3PLs. ―Shippers want to outsource activities that are more routine and repetitive

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rather than customer-focused. As long as this continues, shippers are not exploiting the full range of services they can benefit from,‖ he says. 348.

Are transportation intermediaries also a form of 3PL? Explain.

Answer: Many intermediaries have no real assets however many 3PLs also offer intermediary services such as freight forwarding. 349.

Describe several kinds of transportation intermediary.

Answer: Freight forwarders consolidate large numbers of small shipments to fill entire truck trailers or rail cars to achieve truckload or carload transportation rates. The logistics broker is legally authorized to act on either the shipper’s or carrier’s behalf, and typically these companies are hired because of their knowledge of the many transportation alternatives available or the many shippers needing transportation. Shippers’ associations are ―non-profit membership cooperatives which make domestic or international arrangements for the movement of members’ cargo. 350. What are the impacts of logistics on environmental sustainability? How can these be minimized? Answer: With regards to green logistics, California is attempting to limit rail idling for instance, Wal-Mart is demanding more environmentally sensitive packaging, and the U.S. government has passed tougher truck engine emissions standards. Becoming more ―green‖ also has some positive financial implications, as described in earlier chapters. A lot of energy is used in the supply chain, and shippers and 3PLs alike are finding quite a bit of low-hanging fruit in the areas of transportation and warehousing where energy costs can be reduced. 351.

What are empty miles and how can carriers reduce them?

Answer: In logistics, one of the big energy wastes comes from trucks returning from their deliveries empty (referred to as empty miles). LeanLogistics, a Michigan-based transportation management systems provider, introduced GreenLanes in 2009, a freight optimization system designed to reduce empty miles for carriers. Shippers and carriers both use the software-as-a-service system, and GreenLanes matches empty carriers with shipper needs to optimize hauling across 24 million loads per year across 21,000 U.S. locations. 352. What are the most common logistics management software applications and why are they beneficial to users? Answer: Some of the more popular logistics management applications include transportation management systems, warehouse management systems, and global trade management systems. Companies typically find significant benefits with these logistics execution systems. Until recently, purchases in this area were growing rapidly, but have slowed somewhat due to the global recession. Many shippers have been opting to use fee-based internet logistics management portals instead of outright purchases of logistics software to further manage 7cost outlays. Still, use of some form of logistics software remains quite high. According to an industry survey conducted early in 2010, 88 percent of the respondents were currently using logistics management software and 75 percent indicated they planned to buy additional logistics applications or upgrade during the year. Further, these respondents expected paybacks in one to two years. 353.

Could you have a TMS without and ERP system? Or without a WMS?

Answer:

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Yes. According to an industry survey conducted early in 2013, 34 percent of the respondents were currently using logistics management software (which is down from recent years due to the recession) and 21 percent indicated they planned to buy new logistics applications or upgrade during the year. For companies with ERP systems, about 79 percent said their systems included a warehouse management application, while 35 percent said their ERP systems included a transportation management application 354.

Describe what C-TPAT and FAST are. Which transportation modes use these?

Answer: In the past few years, the trucking industry has worked with U.S. Customs to develop the Customs-Trade Partnership Against Terrorism program (C-TPAT) and its security program called the Free and Secure Trade program (FAST). The overall goal is to ensure the security of global supply chains in general and international trucking in particular. To participate in FAST, motor carriers must become C-TPAT certified, and their commercial drivers must complete an application and undergo a background check. FAST participants receive expedited cargo clearance provided their customers are also C-TPAT certified and they receive access to a dedicated FAST lane at border crossings. 355.

What do you think the most pressing global logistics problem is today? Why?

Answer: Global freight security; While a number of logistics security topics have already been discussed, one issue needing further discussion is motor freight security at U.S. border crossings. In the past few years, the trucking industry has worked with U.S. Customs to develop the CustomsTrade Partnership Against Terrorism program (C-TPAT) and its security program called the Free and Secure Trade program (FAST). The overall goal is to ensure the security of global supply chains in general and international trucking in particular. 356. 3PLs?

Describe several international logistics intermediaries. Could they also be considered

Answer: Freight forwarders consolidate a large number of small shipments in order to fill entire truck trailers or rail cars that transport items at truckload or carload prices. Transportation brokers bring shippers and transportation companies (mainly truckers) together. Shippers’ associations are non-profit membership cooperatives which make domestic or international arrangements for the movement of members’ cargo. Yes, these are types of 3PLs. 357. What are foreign trade zones? How are they different from free trade zones? What benefits do they provide? Answer: Foreign-trade zones (FTZs) are secure sites within the U.S. under the supervision of the U.S. Customs Service. These sites are authorized by the Foreign-Trade Zones Board, chaired by the U.S. Secretary of Commerce, and are comparable to the so-called free trade zones that exist in many other countries today. FTZs are considered to be outside U.S. Customs territory, where foreign or domestic merchandise can enter without formal customs entry or payment of duties or excise taxes. Companies operating in FTZs bring goods and materials into the site and might use storage, assembly, testing, packaging, repairing, and export services. 358. Why was NAFTA replaced by the USMCA? How is the USMCA currently affecting trade among the United States, Canada, and Mexico? Do you think the USMCA is good for domestic U.S., Mexican, and Canadian producers? Why? Answer:

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Solution and Answer Guide:

The USMCA, is in many ways, a continuation of the original NAFTA. It seeks to promote and protect free trade between the three countries. Many of its provisions are simply updates to original rules that are over 25 years old. There are some major differences though, from NAFTA which include: • Building labor protections in Mexico—labor is cheaper in Mexico than it is in the United States. The USMCA adds additional protections for workers in Mexico such as any violations of labor laws are punishable by the cancellation of shipments, products of forced labor are barred from importation, and workers can organize and bargain collectively. • Under NAFTA, drug companies enjoyed protections for lucrative sub-divisions of the pharmaceutical industry. These protections have now been removed. • Technology and data companies now enjoy increased protections related to intellectual property and privacy concerns. • USMCA increases efforts to keep production in North America rather than in competing nations in Europe and Asia. Because of this, the United States backs the push for U.S. business owners to invest in industrial buildings in Mexico for their companies. 359.

What is reverse logistics? How does it impact supply chain management?

Answer: Reverse logistics refers to the backwards flow of goods from customers in the supply chain, occurring when goods are returned, either by the end product consumer or an organization within the supply chain. In other words, reverse logistics refers to the movement and storage of returned goods. Problems include the inability of information systems to handle returns or monitor reverse product flow, lack of worker training in reverse logistics procedures, little or no identification on returned packages, the need for adequate inspection and testing of returns, and the placing of potentially damaged returned products into sales stocks. A poor reverse logistics system can impact the entire supply chain financially, and can have a large impact on how a consumer views a product brand, potentially impacting future sales. 360. How can reverse logistics have a positive impact on the environment? On profits? On customer service? On repeat purchases? Answer: Through activities such as recycling, reusing materials and products, or refurbishing used products. Green reverse logistics programs include reducing the environmental impact of certain modes of transportation used for returns, reducing the amount of disposed packaging and product materials by redesigning products and processes, and making use of reusable totes and pallets. From a marketing perspective, an effective returns process can create goodwill and enhance customers’ perceptions of product quality and purchase risk. From a quality perspective, product failure and returns information can be used by quality personnel in root cause analyses and by design personnel to reduce future design errors (the number one reason for a product return is a defective or damaged item). From a logistics perspective, returned products can still create value as original products, refurbished products, or repair parts. This also tends to reduce disposal costs. Thus while 46 percent of companies report losing money on product returns about eight percent actually report making money.

Problems 361. A current warehouse system has six warehouses with 3,000 units at each warehouse. If the company desires to change the number of warehouses to become more centralized and keep the same customer service level, determine the average warehouse inventory levels, using the number of warehouses below and the square root rule. a) three warehouses b) one warehouse

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c) What is the percentage reduction in system inventory for the two systems above, compared to the original system? Answer: a) S2 = 12,728 units total for the 3 warehouses. b) S2 = 7,348 units total for one warehouse. c) (18000-12728)/18000 = 29.3% reduction from 6 to 3 (18000-7348)/18000 = 59.2% reduction from 6 to 1 362. A current warehouse system has six warehouses with 3,000 units at each warehouse. If the company desires to change the number of warehouses to become more decentralized and keep the same customer service level, determine the average warehouse inventory levels, using the number of warehouses below and the square root rule. a) nine warehouses b) twelve warehouses c) What is the percentage increase in system inventory for the two systems above, compared to the original system? Answer: a) S2 =

(S1) =

b. S2 =

(S1) =

(18000) = 22,045 units for 9 warehouses

6 12

(18000) = 25,456 units for 12 warehouses

(22045-18000)/18000 = 22.5% increase from 6 to 9 (25456-18000)/18000 = 41.4% increase from 6 to 12

Cases 1.

Whipple Logistics Company’s Transportation Challenge* Case Note

Learning Objectives 

Compare and contrast the various modes of transportation and their impacts on cost.

Ruby Shelton is part of the Executive Development Training Program. As part of her Executive Development Plan, Ruby has temporarily been assigned to the Transportation Division of Whipple Logistics Company. The objective is to expose her to different parts of the company as a method of grooming her for a senior position someday. Although Whipple Logistics Company provides shipping services to all industries, the new clients were primarily shipping large bulk items. For bulk shipments barges are the least expensive mode of transportations. However, waterways do not go everywhere; consequently, the critical factors are the shipment origin and its proximity to navigable waterways. Ms. Shelton began to investigate what besides cost could be a driving factor. She discovered that seldom were single barges alone used to haul cargo. Generally, barges are cabled together in what is called a 15-barge tow, giving it a capacity of 22,500 tons1. Ruby wondered how this compared to the capacity of rail and semi-trucks. She knew that rail cars are also connected together to increase capacity. The standard is a 100-car train whose hauling capacity is 11,200 tons1; however, it takes two 100-car trains to match a 15-barge tow. A third option is semi-trucks. A single semi-truck can haul 26 tons1. Unfortunately, the drawback of semi-trucks is they are a single shipping system, unlike barges or rail cars

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Solution and Answer Guide:

that are combined to create a larger shipping system. Approximately 870 semi-trucks1 would be required to equal the cargo capacity of either a 15-barge tow or two 100-car trains.

Questions and Answers 363. How should Ruby approach this briefing? Should she explain each mode of transportation or should she discuss only the concept of intermodal transportation? Explain your recommendation; why do you think one approach is better than another, i.e. what is the benefit to those being briefed?

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Solution and Answer Guide:

Answer: First, Ruby should explain each mode of transportation. This will enable the clients to see what mode or modes fit their transpiration needs. However, a thorough explanation of intermodal transportation should also be provided. Intermodal transportation uses standardized containers. Plus, usually, large intermodal transportation companies will charge a flat rate for a shipment and they will work on the best method or methods to get it to the destination on time. Therefore, briefing the clients in this manner gives them an understanding of the various types of shipping methods and then explains how companies such as Whipple Logistics Company utilizes them through the intermodal transportation concept to the client’s benefit. 364. In your opinion, which mode of transportation has the most potential for problems? Explain why you say that. Answer: This question could be answered by saying it depends. Currently, waterways seem to have the most potential for problems because of weather; thus, issues such as low water levels or excessive water flow (speed) and flooding. In addition, the lock systems on American waterways are old and need repair. Their condition often causes delays and traffic jams. 365. Identify the mode of transportation that is the most flexible and the one that is the least flexible. Explain why you consider them as the most and least flexible. Answer: Truck transportation is the most flexible, primarily because trucks can go almost anywhere. Barges and rail car are obviously limited by the waterways or rails. Consequently, barges and rail cars are essentially locked into specific routes, with no flexibility if they alone are used for a shipment. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Source: Iowa Department of Transportation (2014). http://www.envisionfreight.com/value/?id=illustration

Treadwell Distribution Centers* Case Note

Learning Objectives  

Describe the various reverse logistics activities. Explain how the various logistics software applications assist the firm in its supply chain management efforts.

Treadwell Distribution Centers is a full service fulfillment company. Its clients contract with Treadwell to warehouse and distribute their goods. Treadwell also processes any returned items for its clients. Recently, the challenges associated with reverse logistics are growing. The volume of returns has grown significantly. In order to enhance their competitive advantage, Treadwell’s clients are offering a free return policy. There is no charge for shipping items back to the warehouse. The companies provide their customers with a pre-paid shipping label. In addition, there is no restocking fee. This policy, used by most of Treadwell’s clients, has driven this increase in returned items. Up to this point, Treadwell had a computerized based management system, but not one that was specifically designed for warehouse management. Their system was sort of home grown and its capability was expanded as the business expanded. However, with the reverse logistics issues, the system was no longer viable.

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In addition, government regulations and pressure from local environmental groups are creating another issue for Treadwell Distribution Centers, environmental sustainability. The environmental sustainability issue has two components that are contributing to the sustainability concerns, transportation and reverse logistics. From a transportation perspective Treadwell’s trucks are racking up an increasing number of empty miles. More often than not, the trucks are returning empty. Reverse logistics is another matter. Treadwell is getting pressure from its clients to collect data on the returns. In the past all Treadwell did was accept the return, follow a predetermined process to see if the return was salvageable and either dispose of it or send it back to the original manufacturer. However, the data the clients want is much more detailed, e.g. can it be repaired, or refurbished, etc. Since Treadwell’s competitors are offering enhanced data collection, so must Treadwell.

Answer to Questions 366. What is your recommendation to Treadwell concerning their issues of sustainability and reverse logistics? What actions can they take to remedy their management of these concerns? Explain the benefits of taking such actions. Answer: Although Treadwell’s home grown computerized management system worked for them early on, they must update their systems. Based on their issues of sustainability and reverse logistics they need two systems, the transportation management system (TMS) and the warehouse management system (WMS). TMS will enable Treadwell to plan more effectively; therefore, enabling them to potentially schedule loads for trucks that dropped off a load. This would enhance sustainability by reducing, if not eliminating, empty miles. Also, it will potentially reduce costs since they would not have to send out another truck to pick up that load. The WMS at a minimum would improve the tracking of goods, whether outbound or inbound (reverse logistics). The impression we get from the case is that Treadwell is currently overwhelmed by the volume. They must get a better system to trach the volume, and what they will do with it. 367. Treadwell Distribution Centers is in a very competitive industry. Are there any options concerning reverse logistics that can enable Treadwell to turn it from a liability to an asset? Explain why you believe yes, or believe no. Answer: Treadwell needs to think big picture. True, the task has been significantly expand; however, there are options to consider. For one, green reverse logistics programs would enhance sustainability. They should work closer with their clients and address the three R’s, recycling, reusing, and refurbishing used products. This may turn what is currently classified as a product to dispose of into one that can reenter the supply chain. This approach becomes a win-win for both their clients and themselves, both financially and with their reputation. 368. Is there anyone Treadwell can turn to who can help them with the empty miles issue? If so, explain how. If not, explain why not. Answer: Treadwell should consider hiring a logistics broker. A logistics broker can connect Treadwell to shippers who may need the use of Treadwell’s trucks. Often trucking companies can find a backhaul job once their delivery is completed. Partnering with a logistics broker could be very beneficial for Treadwell. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Honeycutt Warehouse and Shipping Corporation* Case Note

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Solution and Answer Guide:

Learning Objectives 

Understand the strategic importance of the logistics elements and describe how they affect supply chain management.



Discuss global aspects of logistics.

Honeycutt Warehouse and Shipping Corporation is global company that specializes in shipping and warehousing of goods. Honeycutt Warehouse and Shipping Corporation owns and operates its own transportation fleet consisting of barges, rail cars, and semi-trucks. Ms. Minnie Harmon, Chief Operating Officer, is looking to expand operations into several emerging markets. Minnie is looking at either acquiring other companies or building from scratch. Minnie is concerned about Honeycutt’s carbon footprint. She is a strong believe in protecting the environment; thus, wants to improve their sustainability results. Since their warehouse and shipping facilities will be at the selected locations for many years, Ms. Harmon believes that warehouse location selection is one of the most critical decisions to be made. Therefore, she called her senior staff together to develop a proposal on how to address location selection and sustainability. Ms. Harmon’s staff realized that expanded warehouse location selection factors would enable them to minimize these sustainability concerns. Instead of focusing on either proximity to markets or suppliers, a more balance assessment could significantly reduce energy consumption and pollution. Thinking long term and analyzing the transportation needs from that viewpoint, they could ascertain a more efficient use of the transportation options. The Council of Logistics defines logistics as ―the process of planning…the efficient, effective flow of goods…from point of origin to point of consumption‖. Consequently, Minnie and her staff knew they must utilize all the tools of logistics management to address not only the best cost per shipment, but all the concerns associated with freight transportation, such as energy consumption and pollution. Therefore, although it had not be an element of their warehouse location selection process in the past, it must now include sustainability as a major factor.

Questions and Answers 369. Instead of focusing only on one modal alternative for their shipping, companies can use a combination of modes. Explain that approach and would this be an option for Honeycutt Warehouse and Shipping Corporation? Why? Answer: Honeycutt Warehouse and Shipping Corporation can use intermodal transportation. Intermodal transportation is the use of combinations of transportation modes. Critical to ensuring intermodal transportation is effective in cutting shipping costs is to use approaches such as truck trailer-onflatcar (TOFC) or container-on-flatcar (COFC). These approaches essentially guarantee transportation mode compatibility, thus decreasing cost by reducing time needed to transfer freight from one mode to another. In addition, this method can reduce labor costs associated with the transfer of freight between modes because no unpacking and repacking is necessary. Finally, the enhanced efficiency can aid in improving sustainability. 370. What are some examples of tools, programs, or partnerships that Honeycutt Warehouse and Shipping Corporation can use to improve logistics sustainability? Explain how they can help. Answer: Supply chain environmental challenges are pollution (high carbon emissions) and the excessive use of nature resources (fuel consumption). One key tool is the Environmental Protection Agency (EPA) program called SmartWay. Not only is SmartWay a tool for improving environmental sustainability, but it is a partnership with the EPA. Another tool is better route planning and coordination of shipments. This can eliminate energy waste cause by empty miles. Use of the latest technology is key. GreenLanes is a freight optimization system that enables carriers to reduce empty miles. Also, the Supply Chain Carbon Dashboard by AP Moller-Maersk Group is a carbon footprint tracker. It enables you to identify carbon hotspots in your supply chain.

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371. What are some issues with barge, rail, and truck transportation systems that affect sustainability? Answer: Barge transportation is limited by the presence of waterways; consequently, the benefits of cost related to huge bulk shipments is limited as well. Another issue is the state of waterways. Locks, ice, and sunk barges impede river traffic. While the barges are in a waterway roadblock, precious fuel is burned and more carbon emissions are produced. Rail transportation has problems similar to barges; they are slow and inflexible and derailment can create dangerous spills. While trucks are a more flexible mode of transportation, they still suffer from traffic and weather issues. In addition, their fuel consumption is high in relation to the tons of cargo shipped per mile. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Part 4 Continuing Case Interactive Health, Inc.*

Questions and Answers

1. The SCM consultant, working with IH, has determined that the new I-Tread has returns from corporate and homeowner customers at higher than industry average levels. Their report also noted returns just above industry averages across other product lines. In addition, IH’s supplier audit reported a higher-than-average return rate of treadmill parts to one supplier. If you were on the consultant team, how would you explain reverse logistics to the IH executive team and what recommendations would you offer to address the high parts return rate problem? What about IH customer returns? Answer:  Student responses should include the definition of Reverse Logistics (RL). ―RL is the backward flow of goods from customers in the supply chain, occurring when goods are returned, either by the end-product consumer or by a business customer within the supply chain. In other words, reverse logistics refers to the movement, storage, and processing of returned goods.‖  Student responses should respond with a list and explanations, including the following: o Hidden-profit view of returns. ―Reverse logistics enables the extension of the life of a product, so that its return is not a 100 percent loss.‖ o From a marketing perspective, an effective returns process can create goodwill and enhance customers’ perceptions of product quality and purchase risk. o From a quality perspective, product failure and returns information can be used by quality personnel in root cause analyses and by design personnel to reduce future design errors (the number one reason for a product return is a defective or damaged item). o From a logistics perspective, returned goods can still create value as original goods, refurbished goods, or repair parts. This also tends to reduce disposal costs. o Reverse logistics can have a positive impact on the environment through activities such as recycling, reusing materials and goods, or refurbishing used goods. Green reverse logistics programs include reducing the environmental impact of certain modes of transportation used for returns, reducing the amount of disposed packaging and product materials by redesigning goods and processes, and making use of reusable totes and pallets. 2. With the shift in supply chain management and logistics from shipping only to retailers (Dick’s Sporting Goods) to delivering the IH I-Tread to individual homeowners, IH is concerned that their inexperience in last mile logistics will be costly and impact customer satisfaction. The consulting team

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recommended that IH should partner with a 3PL for outbound equipment delivering to individual homeowners and university and professional track teams. Develop a mini presentation on 3PL advantages for using 3PL services. Include a comparison of other logistics alternatives such as freight forwarders and logistics brokers.

Answer:  Students should present a short analysis of pros/cons for a 3PL in PowerPoint. The presentation should include added value services for domestic residential customers. Students can be encouraged to construct tables for added value. a. 3PL refers to the outsourcing of logistics processes to a third-party logistics business. b. It makes sense for small companies that do not have fully developed logistics capabilities, and even for large firms entering a new foreign market for example. c. Some 3PLs provide complete end-to-end supply chain management services, including network optimization, light manufacturing, and other value-added services. d. Many firms outsource some or all of their logistics needs to allow more attention to be placed on their core competencies. e. 3PLs contribute to improved customer service. f. Using fewer 3PLs enables the firm to select and use only the best-performing 3PLs as well as to give these 3PLs a bigger share of the firm’s logistics needs. This, in turn, results in better levels of service and potentially lower prices. The larger share of business given to each 3PL can be used as leverage when negotiating prices, shipping schedules, and associated services. g. Important selection factors were found to be transit-time reliability, transportation rates, total transit time, willingness to negotiate rates and services, damage-free delivery frequency, financial stability, use of electronic data interchange, and willingness to expedite deliveries.  Alternatives that might be included in student responses: a. Freight forwarders - consolidate large numbers of small shipments to fill entire truck trailers or rail cars to achieve discounted truckload or carload transportation rates. These companies pass some of the savings on to the small shippers and then keep the rest as fees. Thus, freight forwarders provide valuable services to both the shipper (lower shipping costs) and the carrier (extra business and higher equipment utilization). b. Logistics brokers—legally authorized to act on either the shipper’s or carrier’s behalf, and typically these companies are hired because of their knowledge of the many transportation alternatives available or the many shippers needing transportation. Besides helping goods move efficiently, brokers also handle cargo claims, obtain specialized equipment, use dependable carriers, and track deliveries in real time. Unfortunately, bad logistics brokers can expose shippers and carriers to significant liability, reduce on-time delivery rates, and harm reputations. 3. Provide a brief description of TMS (transportation management systems) and 3PL interface and then comment on whether IH would benefit from that interface. Answer:  Students should describe these logistics execution systems. Many shippers have been opting to use fee-based Internet logistics management portals instead of outright purchases of logistics software to further manage cost outlays. a. To help reduce these costs while optimizing service levels, TMS applications allow firms to find carriers, select the best mix of transportation services and pricing to determine the best use of containers or truck trailers, better manage transportation contracts, rank transportation options, clear customs, track fuel usage and product movements, and track carrier performance. Additionally, regulatory bodies, shippers, and customers want to know

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the locations of goods in-transit; thus, real-time information about a shipment’s location while it is being transported to a final destination is required. Consequently, information may need to be provided by the manufacturer, 3PLs, agents, freight forwarders, and others as goods move through global supply chains. Technologies employed to provide this visibility include barcode scanners, RFID tags, the Internet, and GPS devices. Assisting in the management of all this transportation-related information is the job of a TMS. 4. Excel Exercise—The projected growth of home training for university and professional athletes as well as physical therapists and individuals who train for community events and general health is an attractive segment for IH’s new I-Tread. In addition to the industry projections for growth in this segment, the pandemic has increased demand for working out at home, increasing the demand for at home workout equipment. The IH executive team is concerned that the increased demand for the ITread and the delivery requirements to residential customers moving to the suburbs can’t be effectively served shipping from the manufacturing plant. Cutty and Brooks have asked the consulting team to help them evaluate a warehouse and distribution strategy. Your charge is to prepare a decision matrix using an Excel spreadsheet for a presentation to the IH executive team. Your analysis should include comparisons of different warehouse options on the vertical axis of your spreadsheet (private warehouses, public warehouses, consolidation warehouse, cross docking, risk pooling, warehouse location, decentralized vs centralized, and combinations, i.e., centralized risk pooling). The criteria to evaluate each option, on the horizontal axis of your spreadsheet, will be used to weigh, rate, and rank each option. You will need a key for your weighting rationale as well as your rating system (point allocation). Include graphs that display your findings.  Students should set up the decision matrix with alternatives on the vertical axis and the criteria to assess each alternative on the horizontal axis. Provide assumptions and rationale for your ratings and weights and then make a recommendation to IH that include an alignment to IH’s KPIs.  Criteria should include: enabling firms to store purchases, work-in-progress, and finished goods; perform breakbulk, repackage and assembly activities; warehouses allow faster and more frequent deliveries of finished goods to customers, which in turn can result in better customer service; cost reduction; income potential; short and long term storage options; material handling equipment maintenance; inventory control; quality control; site security; location; and risk pooling options  Alternatives should include: consolidation warehouse; private warehouse; public warehouse; and centralized/decentralized warehouse. Answer:  Students should provide assumptions and rationale for ratings and weights that are consistent with benefits and challenges of each alternative and criteria. Students should state the KPI and then provide evidence as to how the location recommendation would add value to the KPI. SEE EXCEL SHEET.

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Storage Capabilitiy (Score 1100) Weight (Sum to 1) Consolidation Warehouse Private Warehouse Public Warehouse Centralized Decentralized

Criteria

0.2 40 60 20 60 10

Weight (Sum to 1)

Breakbulk Income Specialty Capability Reduced Cost Potential Services (Score 1-100) (Score 1-100) (Score 1-100) (Score 1-100) 0.15 70 10 90 20 60

0.25 30 20 80 40 30

0.3 90 60 40 80 70

0.1 10 40 20 10 30

Alternatives

Rationale

Storage Capability

Weighted Totals 54

Consolidation Warehouse

Private Warehouse Public Warehouse Centralized Decentralized

Private Warehouse

40.5

Public Warehouse

51.5

Centralized

Decentralized

42.5

Weighted Totals 60

54 51.5

42.5 40.5

0 Consolidation Warehouse

Private Warehouse

Public Warehouse

Centralized

Decentralized

* Written by Brian Hoyt, DBA, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Chapter 10: Answers to Questions/Problems

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Table of Contents

Discussion Questions ....................................................................................................... 159 Problems................................................................................................................................................ 165 Cases ............................................................................................................................. 165 Learning Objectives ............................................................................................................................... 166 Learning Objectives ............................................................................................................................... 167 Questions and Answers ......................................................................................................................... 167 Learning Objectives ............................................................................................................................... 168 Questions and Answers ......................................................................................................................... 169 Part 4 Continuing Case .................................................................................................... 171 Questions and Answers ......................................................................................................................... 171

Discussion Questions 372. Define the term Customer Relationship Management and what has impacted the way companies view CRM over the past 15 or 20 years. Answer: I like this one the best: ―…managing the relationships among people within an organization and between customers and the company’s customer service representatives in order to improve the bottom line.‖ The idea should be to treat customers right and try to do things that will maximize their lifetime value to the firm. The increase in competition is forcing firms to try harder to treat customers right, to keep them from leaving. 373.

How does the actual practice of CRM differ from the use of CRM software?

Answer: Touching products and talking face-to-face with company representatives remain integral parts of the supplier/customer interface. Thus, CRM must still include talking to customers, understanding their behavior and their requirements, and then building a system to satisfy those requirements. 374.

Why have so many CRM efforts failed? Can you site a personal example of a CRM effort?

Answer: No efforts are put forth to engender a customer’s trust and loyalty—to build customer relationships. If building and maintaining relationships were truly what companies were seeking, they would for instance, return phone messages, make it easy to return or service products, and make it easy for customers to get accurate information and to contact the right people inside the organization. Instead, companies buy CRM software and expect that to solve their customer problems. 375. Describe why CRM is so important in managing supply chains. What do firms with good CRM programs do? Can you cite an example aside from the ones mentioned in this chapter?

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Answer: In an integrated supply chain setting, the need to be a good supplier, to adequately meet the needs of supply chain customers, is paramount to the success of supply chains. As products make their way along the supply chain to the end-user, close, trusting, and high-performance relationships must be created among all the key supplier-customer pairs along the way. Thus, just as firms must create methods for finding and developing good suppliers, they must also create methods for becoming and staying good suppliers themselves. Because customers are not all the same, firms must identify and segment their customers, then provide different sets of desired products and services to each segment. As noted, CRM consultant Barton Goldenberg has been telling clients for years—a successful CRM initiative is 50 percent people, 30 percent process, and 20 percent technology. Thus, a successful CRM program is both simple and complex—it is simple in that it involves training users and treating customers right, to make them feel valued. It is complex in that it also means finding affordable ways to identify (potentially millions of) customers and their needs, and then designing customer contact strategies geared toward creating customer satisfaction and loyalty. Examples will vary. 376. What is ―segmenting customers‖ and why is it perhaps the most important activity in CRM? What do firms typically do with the segments of customers? Answer: Companies group customers in varieties of ways so that specialized communications about their products can be directed to specific customer groups. Customer segmentation can occur based on sales territory or region, preferred sales channel, profitability, products purchased, sales history, demographic information, desired product features, and service preferences, just to name a few. Analyzing this type of customer information can tell companies something about customer preferences and the likelihood they will respond to various types of target marketing efforts. By targeting specific customer segments, firms can save labor and postage costs with respect to these efforts, as well as avoid becoming a nuisance to some customers. 377.

Define these terms: permission marketing, cross-selling, and churn reduction.

Answer: Permission marketing—letting customers choose when to be marketed to or communicated with. Cross-selling—when customers are sold additional products after an initial purchase. Churn reduction—reducing customer defections to competitors. How would an analysis of customer defections help the firm become more competitive? Answer: Knowing which customers have quit purchasing and why, can be very valuable information for organizations. Not only can these customers be approached to encourage additional purchases, but the knowledge gained can be used to reduce future defections. 378.

How would an analysis of customer defections help the firm become more competitive?

Answer: According to Harvard Business School research, a 5 percent improvement in customer retention can result in a 75 percent increase in profits. Knowing which customers have quit purchasing and why, can be very valuable information for organizations. Not only can these customers be approached to encourage a return to the business, but the customer churn knowledge gained can be used to reduce future defections. 379.

Why is the determination of customer lifetime value important?

Answer: It is necessary to determine customer lifetime value or profitability such that appropriate benefits, communications, services, or policies can be directed towards (or withheld from) customers or customer segments.

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380. Pick a specific company near your residence and describe how they could personalize their communications with you, the customer. Answer: varies. 381. Describe several ways that CRM applications can increase the effectiveness and productivity of a firm’s sales force. Answer: Through use of sales force automation (SFA) modules within CRM applications. 382.

How does your definition of customer service compare to the Seven R’s Rule?

Answer: Will vary by student. The seven R's stand for having the right product, in the right quantity, in the right condition, at the right place, at the right time, for the right customer, at the right cost. 383. Describe some businesses in your area providing good customer service, then list some providing poor customer service. Answer: varies. 384. Describe the types of customer service that come before, during and after the sale. Why are they important to CRM? Answer:



Pretransition elements—these customer service elements precede the actual product or service, and examples are customer service policies, the mission statement, organizational structure, and system flexibility.



Transaction elements—these elements occur during the sale of the product or service and include the order lead time, the order processing capabilities, and the distribution system accuracy.



Post transaction elements—these elements refer to the after-sale services and include warranty repair capabilities, complaint resolution, product returns, and operating information.

Thus, to provide high levels of service and value to customers, firms seek to continually satisfy the seven R's and develop adequate customer service capabilities before, during, and after the sale of products and services. 385. Are call centers good or bad for the firm? What has been your experience with call centers? Answer: Yes, they are good, if handled well. Call center systems can now categorize all calls, determine average resolution time, and forecast future call volume. These automated systems can reduce call center labor costs and training time, and improve the overall productivity of the staff, while increasing customer satisfaction levels. Lately, call centers have implemented virtual queuing systems as well, as callers see this as a very convenient call center characteristic. Automated tools allow callers to request a callback from an agent without losing their place in the phone queue, which frees up callers’ time and also reduces call center toll charges for keeping callers on hold. A consumer who is satisfied with an automated experience is 2.5 times as likely to conduct business with the firm in the future. 386.

Do you think call center outsourcing negatively affects customer service? Explain.

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Answer: Most call center work today is done in-house. In the U.K., fully 80 percent of all call centers are housed within the firm. Much of the emphasis in call center management is on product training and information software usage. ―There’s nothing worse than phoning your service provider and finding you know more than the person on the other end of the line,‖ says Neil Armstrong, marketing director at U.K. broadband service provider PlusNet. But low labor costs still make call center outsourcing an attractive option for some companies. In the U.S., nearshore locations such as the Dominican Republic, Jamaica, and Nicaragua offer lower labor cost, good English and Spanish speaking capabilities, and proximity such that management has better control over training and tools used by offshore call centers. 387.

Could self-service websites be used in place of call centers? Explain.

Answer: In some cases, well-designed website self-service capabilities can further reduce the need for call center staffers, while adequately handling most customer queries. It is estimated that answering a customer query on a phone costs about $7, while dealing with a customer using an automated online system costs about $0.10. California-based Blue Coat, an application delivery network provider, gives customers a knowledgebase for finding answers on their website. Additionally, the website guides customers in updating the knowledgebase as well as provides customer feedback to in-house new product developers. 388. How should customer satisfaction be measured at a bank? A restaurant? A manufacturing firm? A retailer? Answer: By using customer satisfaction surveys. They can be personalized to fit specific customer segments, and responses can be matched to the respondent’s profile to provide the company direction on how to improve its communication and service capabilities for various groups of customers. Talking with and listening to customers, and then taking action based on what customers are saying lets customers know the firm is completely engaged. 389.

Do you think CRM applications unnecessarily invade customers’ privacy? Explain.

Answer: Varies. 390.

Describe the steps necessary for designing and implementing a successful CRM program.

Answer: Involves asking what the CRM program is meant to do, then involving employees, then looking at piecemeal programs that have already been started at the firm and integrating these into one enterprise-wide program, finding the right provider, and designing an appropriate performance measurement system. 391. What is the most common mistake made, when designing and implementing a CRM program? Answer: Poor planning is typically the cause for most unsuccessful CRM initiatives, because of the temptation to start working on a solution or to hire a CRM application provider before understanding the problem. The firm must first answer this question: What are the problems a CRM program is going to solve? This must involve employees from all functional groupings across the firm, as well as input from the firm’s key customers. 392. How do you think CRM performance should be measured? Suggest several performance measures for a specific company. Answer:

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At the organizational level, performance measures should concentrate on areas deemed strategically important, such as CRM productivity, new customers added, or sales generated from the CRM program. Some examples of these measures are listed in Table 10.1. Note that the performance measures are spread between the customers, the CRM system itself and the users. Additionally, all of the metrics should be transparent and easy to measure. At the user level, other more tactical performance measures should be developed and tracked, supporting the firmwide strategic measures. Linking performance measures in this way will give the firm the best chance of a successful program implementation and continued revision and use of the program into the future. 393.

What sort of problems can occur with a firm’s existing or legacy CRM applications?

Answer: In most firms, CRM systems are not one single product, but rather a suite of various applications that have been implemented over time. One of the biggest mistakes made is that departments across the firm implement various CRM applications without communicating these actions to other departments. Eventually, these systems will interfere with each other, as they communicate with the same customer, sending confusing and irritating signals that can chase customers away quickly. er to? Answer: As the number of customers grows however, their transactions and the desire to analyze all of this information is referred to as big data analytics. In some companies, the volume of customer data is monumental—in four hours on ―black Friday‖ 2012, Walmart handled 10 million cash register transactions, or 5000 items per second; UPS receives over 39 million tracking requests per day from customers; and VISA processes more than 172 million card transactions each day. Some experts argue that trying to make sense of some big data like social media interactions can cause poor decision-making, as managers ignore the more routine ―little‖ data, such as financial, customer, and product quality information. 394.

What do big data and big data analytics refer to?

Answer: Big data simply refers to large amounts of data. While analyzing large amounts of data has been around a long time (in the 1950s people analyzed data by hand from spreadsheets), today the process is extremely fast and can analyze much more data for quick decisions. The ability to analyze data today and make quick decisions is amazing—retailer Macy's adjusts pricing in nearreal time for 73 million items, based on demand and inventory. 395. Why is CRM program user training so important? How could the training requirement be minimized? Answer: Training can also help convince key users such as sales, call center, and marketing personnel of the benefits and uses of CRM applications. Training is one area crucial to CRM program success. Unfortunately, in a recent survey conducted by Customer Relationship Management magazine, 43 percent of the respondents said their user training ―needed improvement.‖ Unless the users are shown the personal gains, they’ll receive for taking time to learn the software and its capabilities, the CRM applications will most likely go unused or underused. Karen Ainley, product manager at U.K.-based CRM software developer Sage emphasizes that shortcuts in training can ultimately prove costly. Training managers and users in the key customer contact areas can also help the firm decide what customizations to the CRM applications are required before the system is put into use. 396. data?

How can firms help to assure the privacy and security of their customers’ information and

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Answer: Some of the independent measures firms can take to improve information security are to develop a privacy policy and post it on the company website as well as on other information-gathering forms; allow customers to opt-in and out of mailing lists and promotional campaigns; allow customers to access their accounts on-line so they can view the information collected about them; require customers to state their privacy preferences, build this into their profiles, and use these preferences when developing one-to-one promotions; make someone in the firm responsible for enforcing privacy policies and communicating these to employees and customers; and continuously monitor employee desktop applications, website activity, e-mails, instant messages and phone calls. 397. How do various social media impact an organization’s CRM methods? Should firms use social media for attracting new customers? Answer: Firms can use social media sites to create user forums where technical support and other customer questions are answered by other customers. In many cases, companies are finding this to be an improvement over answers given by the firms’ own help desks. Companies like Intel and Linksys have found that the investment to create these social communities can be recouped in less than a year, given the zero-labor cost of the social media sites. 398.

What do you think the true value of social CRM is?

Answer: Varies, but according to noted CRM author and customer strategy consultant Paul Greenberg, social CRM is ―designed to engage the customer in a collaborative conversation in order to provide mutually beneficial value in a trusted and transparent business environment.‖ This type of engagement leads to customer satisfaction and loyalty. Firms can use social media sites to create user forums where technical support and other customer questions are answered by other customers. In many cases, companies are finding this to be an improvement over answers given by the firms’ own help desks. 399.

What is cloud computing and what are its advantages for CRM?

Answer: Today, there are many application service providers or ASPs providing on-demand applications (not just for CRM), also referred to as the software-as-a-service model, or SaaS model. These days, the SaaS model is more often referred to as cloud computing since users are able to access business applications online with only a browser. The software and user data are stored on the ASP’s computer (as in ―somewhere up in the cloud‖). Similarly, Facebook users are in the cloud when they store pictures and other information on the ASP’s computers. 400.

How is AI impacting CRM?

Answer: One of the biggest benefits of AI is its capacity to take over tedious, time-consuming manual tasks. The goal is to use robotic automation to enhance CRM user productivity. AI enhances service agents’ abilities to help customers. It does this by analyzing customer data such as past calls and buying patterns to generate a profile that gives agents a better understanding of the customer. This lets the agents deliver a more personalized customer interaction. 401.

What is mobile CRM and why is it important today?

Answer: The COVID-19 pandemic emphasized the need to utilize mobility. As workforces became distributed and remote almost overnight, many companies struggled to get people access to the basic systems they needed to effectively work. This wake-up call is going to be a huge driver of

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CRM systems. Businesses will be looking towards CRM to fill the gaps that were uncovered in 2020. This means accessibility from anywhere, anyplace, and anytime is going to be very important.

Problems 402.

For the information given, rank the customers in terms of customer lifetime value. Avg. Annual Sales Avg. Profit Margin Expected Lifetime

Customer A:

$2,500

17 %

8 years

Customer B: Customer C:

$4,000 $1,200

12 % 30 %

6 years 12 years

Use a discount rate of 6 percent and treat the average sales figures as annuities. Should any of these customers be fired? Answer:

1 i n  1  1 .068  1  = $2,500(.17)   = $425(6.21) = $2,639 NPVA = a   i 1 i n  .06 1 .068       1 i n  1  1 .066  1   = $4,000(.12)   NPVB = a  n .06 1 .066  = $480(4.92) = $2,362 i 1 i        1 i n  1  1 .0612  1    = $1,200(.3)  NPVC = a  n .06 1 .0612  = $360(8.38) = $3,018 i 1 i   







The rankings from best to worst are C, A, B. None should be fired. 403. A tree provider to plant nurseries is trying to use customer lifetime value to determine the value of its customers. Two customers are shown below. Use customer lifetime value to determine the importance of each customer. Use an 8 percent discount rate. What do you recommend? Customer A: Customer B:

Avg. Annual Sales $21,500 $14,000

Avg. Profit Margin 20 %

Expected Lifetime 10 years

10 %

6 years

Answer:

1 i n  1  1 .0810  1  = $21,500(.20)   NPVA = a  n .08 1 .0810  = $4300(6.71) = $28,853 i 1 i       n 6      = $1400(4.62) = $6,468 NPVB = a  1 i  n 1 = $14,000(.10)  1 .08  1 6 i 1 i  .08 1 .08      Customer A is more important

Cases 1.

Polly’s Sweet Treats and Drinks* Case Note

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Learning Objectives  

Discuss the strategic importance of CRM. Describe how social media and cloud computing have impacted CRM.

Iris Rice has managed Polly’s Sweet Treats and Drinks for 10 years. The owner, Mamie Hammond, essentially gave Iris full control about seven years ago. Mamie had established Polly’s almost 30 years ago and has been in semi-retirement for about the last five years. Mamie is considering selling the store and is giving Iris first choice. Iris is extremely excited about the prospect of owning her own business. However, Iris wants to expand the offerings and ultimately increase the number of locations. Currently, the menu consisted of dessert like food such as cakes, pies, tarts, muffins, doughnuts, and other pastries. The drinks were a variety of sodas that included diet and caffeine free drinks. Polly’s also served a variety of hot and cold teas, hot and cold coffees, as well as milk, hot chocolate, milk shakes, frozen drinks, etc. Iris thinks that she will have to expand the menu to include things beyond sweet treats and drinks. She talked it over with Mamie. Mamie’s concern was that since such a variety of customers visited Polly’s it would be a challenge to fulfill all their likes. Plus, many people liked the store as it was. They had visited it as children and now brought their kids there. Would they lose customers or gain them if changes were made? After much discussion Mamie and Iris agreed that they needed more information about what their customers liked and didn’t like.

Questions and Answers 404. Iris Rice is planning to take a huge step toward changing Polly’s Sweet Treats and Drinks’ business strategy. What does she need to do to collect the type of data she’ll require to make an effective decision? Explain what you would do if you were her. What would be your plan? Be specific. Answer: Students’ answers may vary. First, Iris needs to begin segmenting her customer base. At the moment, based on the case, it appears she has three segments associated with the time element, i.e. 11 a.m. segment, 3 p.m. segment, and the 6 p.m. segment. However, she could also segment them by group, i.e. mothers and senior citizens, teenagers, and families. Whichever way she decides to segment her customers she can then work on target marketing. She can survey each group and list some proposed changes such as sandwiches or the blue plate special. Iris can then find out if each segment is receptive to those ideas. Furthermore, she should ask them what they would like added to the menu. Some may want breakfast to be added; thus, Iris would need to consider if extending the time they are open is viable. As she collects data from her customers, she needs to see what changes would enhance their satisfaction as well as what she determines are feasible changes. 405. Assume Ms. Rice moves forward with her plan to change the menu. This could alter the current customer base. Advise her on actions she should take to address customer defections. Explain how the actions will benefit her and potentially prevent customer defections. Answer: Students’ answers may vary. One tool Iris could use is social media. She could have an account where customers could explain why they stopped coming. Although risky since other customers may see the comments, it would enable her to address any problems rapidly. By being aware of the issues, Iris can work on actions to remedy them in the future. For example, maybe someone was dissatisfied with the service. Iris could ensure she addresses this with the specific server as well as all servers. Furthermore, if the person left dissatisfied, Iris could possibly reach out through social media and offer the person a free drink. Instead of leaving, the person might give Polly’s Sweet Treats and Drinks a second chance.

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406. The case suggests that many of Polly’s Sweet Treats and Drinks’ customers are from the same community. Parents came there as children and are now bringing their children there. Would you recommend that Iris use social CRM? Why or why not? Answer: Students’ answers may vary. Yes, I would recommend Iris use social CRM. Everyone, from young children to grandma seems to be engaged in social media. Popular social media such as Facebook and Twitter provide an easy and far-reaching way to connect with all your customers. In addition, through social media you often can connect to the friends and acquaintances of your customer. This potentially drives new customers your way. In a community such as where Polly’s Sweet Treats and Drinks appears to be located, people may want to join a Polly’s Sweet Treats and Drinks devotee page. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Perfection Call Center* Case Note

Learning Objectives  

Discuss the strategic importance of CRM Describe how information is used to create customer satisfaction and greater profits for the firm.

Perfection Call Center performs customer service activities for several different companies, large and small. Although the current clients are very satisfied, new business has been hard to obtain. Therefore, the Board of Directors recently hired Tim Roy as the new Director of Perfection Call Center. His primary responsibility is to grow the business. To Tim’s tremendous surprise, he discovered that Perfection Call Center did not collect very much performance data. In addition, he found out that most of the current clients had started with Perfection in its early days of operation; consequently, the relationship between them and Perfection had gradually grown very strong over the years. The result was a customer base that trusted Perfection to naturally do an outstanding job for them. Unfortunately, potential new clients were not as trusting. They wanted to see proof that Perfection Call Center was as good as they claimed. What historical data did they have that illustrated past customer satisfaction? More importantly, what type of reports would they provide new customers to demonstrate they were meeting their expectations? Tim Roy now saw the problem. Perfection Call Center was extremely good at what it did; however, beside testimonials from current clients, they could not prove it.

Questions and Answers 407. Does Tim’s conclusion make sense to you, i.e., do you agree with it? What specific information could Perfection Call Center provide moving forward that would demonstrate to new clients that Perfection was meeting expectations? Answer: Students’ answers may vary. Yes, I believe that Tim’s conclusion is right on target. From the case we can assume that everything they do comes out well. They just need data to enable them to generate reports to prove it. By collecting data, they could quantify customer satisfaction and customer loyalty. An example of a customer satisfaction metric is percent of first call resolution. Customer Loyalty can be demonstrated by tracking the number of customer praises. They could

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also quantify CRM productivity with information about average call time and number of complaints solved. 408. Tim also discovered that Perfection Call center had an outdated call center system. He decided to request a major update from the Board of Directors. The issue is that Tim was brought in to raise revenues through new clients, not to increase expenses with new systems. Develop an argument for Tim that highlights the benefits of upgrading the call system. Explain how it can drive customer satisfaction, which potentially drives new business. Answer: Generally, a call center’s biggest problem is having customers waiting on the line for what seems forever in the customer’s eyes. This obviously generates dissatisfaction even before the customer gets to talk with anyone. Even if their issue is resolved, the sour taste from having to wait so long will linger. A virtual queuing system could relieve this frustration. A virtual queuing system enables the customer to receive a callback instead of waiting on the line. Plus, with an updated automated system you can collect data on all customer problems and later analyze them to see if which ones are recurring problems. With an updated automated system, the operators will be able to see the customers’ history; thus, know what the customer has gone through. 409. Besides providing the usual customer problem resolution services, Tim believes there are other services that his call center could provide that would enhance his clients’ revenue streams; thus, through its contract enable Perfection to trigger bonuses based on those increased revenues. What type of additional services could Perfection provide that addresses this point? Explain how those services would potentially enhance Perfection’s clients’ revenue, thus their own. Answer: A key service that Perfection Call Center agents can provide is cross-selling or up-selling. Once the problem is resolved, the agents could review the customer’s history and sell them a related product or one that fits preferences identified in the system. This type of additional service would enable the agents to build a stronger relationship with the clients’ customers. This enhanced relationship may increase the customer lifetime value. Overall, this would potentially increase the clients’ revenue. Perfection could have a stipulation in their contract that stated once a certain monthly or annual dollar amount was reached from up-selling or cross-selling, the client would pay a bonus to Perfection. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Burley’s Biscuits, Beef, and Veggies* Case Notes

Learning Objectives  

Discuss the components of a CRM initiative. Discuss the implementation procedures for CRM programs.

Bob Burley and his brother Buford ran the best restaurant in Dallas, Texas. Many out of towners would visit Dallas and go to Burley’s Biscuits, Beef, and Veggies for a good wholesome meal. One thing that Bob and Buford had going for them in a town as active as Dallas was that their restaurant was open 24/7. This was especially important for all the big game days. No matter what the professional sport was,

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Solution and Answer Guide:

thousands flocked to the city to watch their favorite team. However, in-between major sports events and other activities such as concerts, etc. the restaurant wasn’t always filled to capacity. A full restaurant with people wanting and waiting to get in was what Bob and Buford desired. Jose Sanchez was a close friend of the Burley brothers. Jose interrupted and started asking them about their CRM program. Bob and Buford told Jose they didn’t have a CRM program. They weren’t clear on what exactly a CRM program was. Jose explained that it simply means building and maintaining profitable long-term customer relationships. Joes asked how many customers were return customers. Although they had a lot of people, they saw repeatedly in the restaurant, neither Bob nor Buford knew the specific number. Jose then stated the obvious, the Burley brothers had to develop and implement a CRM program if they wanted to achieve their dream of non-stop business 24/7.

Questions and Answers 410. We know from the case that Bob and Buford have customers from many different segments. They could segment them by sports, businesspeople, regulars, breakfast, lunch, or dinner crowd. How should Jose and explain to the Burleys the advantages of segmenting customers? What types of customer relationship management activities should they implement, that would drive business to the restaurant? Explain how those CRM activities would help. Answer: Once they segment their customers the Burley brothers could utilize target marketing. They could specifically use event-based marketing when the big games come to town. For those who aren’t into sports, other events such as birthday specials would work. In addition, events such as concerts, conventions, etc. could be part of the event driven marketing and they could target past customers who had indicated any of those preferences. This would be an effective method to increase customer flow at any time. 411. Bob is excited about implementing social CRM. Buford is against using social CRM. Who do you agree with and why? Answer: Students’ answers may vary. I agree with Bob. Social CRM is a ―now‖ CRM activity. It seems that just about everyone wants to connect with others through social media. Furthermore, people like to belong to some type of community group, e.g., Burley’s Biscuits, Beef, and Veggies food fanatics! Social CRM is an excellent way to collect additional data about people’s likes and dislikes. Also, it is an effective way to get the word out about your business to those who are unaware of it. 412. As part of their CRM initiative, Buford wants to utilize the ―Seven Rs Rule‖. Can this truly be part of their CRM program or is it just a nice sounding ―slogan‖? Explain whether or not it can help as part of the CRM program. Answer: Students’ answers may vary. I believe Buford is on the right track concerning the ―Seven Rs Rule‖. This would be an outstanding way to track customer satisfaction. On a survey they could state that they prided themselves in serving the perfect order, i.e., achieving a top rating on each of the ―Seven Rs‖. Whether they use a paper survey or an electronic survey they can ask seven simple, short questions. For example, did you get the right meal? Or did you get it at the right time? The responses could be collected in the CRM database and analyzed to determine if there are issues with any particular ―R‖. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

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Part 4 Continuing Case Interactive Health, Inc.*

Questions and Answers

1. a) What components should the consulting team recommend to IH to include in their CRM system? Answer: Students should respond with definition and explanation of CRM benefits, and features that a CRM system provides, and note specific benefits to IH based on the type of customer data they can collect (from end users, trained athletes, physical therapists). Customer relationship management refers to building and maintaining profitable long-term customer relationships Components to include are two of the most recent trends in CRM—use of social networks and cloud computing. Some applications allow a company for instance to extract information automatically about people from a social network like LinkedIn and load it directly into one of its CRM systems. Other applications include the use of a service provider’s eMarketing cloud to send email ―blasts‖ to thousands of customers (email’s consistently highly rated ROI of a $51 return on every $1 spent.) A number of elements are required for the development of effective CRM initiatives, and these include segmenting customers, predicting customer behaviors, determining customer value, personalizing customer communications, automating the sales force, and managing customer service capabilities. Touching goods and talking face-to-face with company representatives remain integral parts of the customer experience. Thus, CRM must still include talking to customers, understanding their behavior and their requirements, and then building a system to satisfy those requirements. Most importantly, CRM must be more than just software. b) What benefits, including ROI, should IH expect when the CRM system is operational? Answer: To ensure that IH maximizes the benefits from a CRM they should focus on avoiding/neutralizing the seven deadly sins of CRM failure. These are: viewing CRM primarily from a technology perspective, a lack of customer-centric vision, not understanding the concept of a customer's lifetime value, insufficient top management support, not re-engineering business processes, underestimating the challenges in integrating various sources of data, and underestimating the challenge in effecting change in CRM. Applications along with company websites that capture data in an effort to automate the customer relationship process, in some respects these have provided significant benefits to the companies and their customers. The benefits of a successful CRM program are both simple and complex—it is simple in that it involves training users and treating customers right, to make them feel valued. It is complex in that it also means finding affordable ways to identify (potentially millions of) customers and their needs, and then designing customer contact strategies geared toward creating customer satisfaction and loyalty. Doing these things right will produce bottom line results (ROI). 2. Excel exercise a) Calculate customer lifetime value. Considering the big data analysis and customer profiles, IH would like to narrow down the segments to target their next marketing effort. With the variety of IH’s customers and the potential for new customers as a result of the I-Tread, the IH marketing team has suggested they calculate CLVs comparing customer types by product purchase before they execute next year’s marketing campaign. The marketing team pulled together the following data on each customer type per primary product/product line purchases (first purchase). Use the

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Solution and Answer Guide:

data to calculate CLV and then comment on the most attractive customer type. (Note: IH currently pays 5% interest on its debt.)  I-Tread – average annual sales $4968 (equipment, subscription, stretching and recovery products, workout clothing, smart products); Average profit margin 11%; expected lifetime including customers who age- in and age- out is 20 years.  Home exercise equipment (weights, mats, foam, recovery products, workout clothing, workout subscription services) – average annual sales is $650; average profit margin is 35%; expected lifetime including customers who age-in and age-out is 30 years.  Exercise bikes or elliptical – average annual sales $1500; average profit margin is 7%; expected lifetime 10 years. Answer: See Excel worksheet below.

I-Tread Home Exercise Equipment Exercise Bikes or Elliptical

Average Annual Sales $4,968 $650 $1,500

Average Profit Margin 11% 35% 7%

Expected Lifetime (Years) 20 30 10

Annual Discount Rate 5%

Customer Life Time Value I-Tread $6,810.35 Home Exercise Equipment $3,497.23 Exercise Bikes or Elliptical $810.78

b) Should customer satisfaction and return rate be included in the algorithm to determine CLV? Why or why not? What impact could that have on the CLV calculations? Answer: Upon completing the spreadsheet exercise, students should comment on factors that could impact the CLV algorithm, noting positive or negative impact on the most attractive selection. Students should consider type of customer, logistics to deliver product to customer, and factors that are most important (i.e., lead time or set up). Improved customer satisfaction positively impacts loyalty and is a factor in CLV. Return rate, higher has negative impact, also would impact customer loyalty and is a factor in accurately predicting CLV. 3. List and explain each of the implementation procedures for CRM programs. Answer:

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Students should respond with explanations of CRM plans, CRM benefits, and CRM implementations. To create a CRM plan, it should include the objectives of the CRM program, its fit with corporate strategy, new applications to be purchased, the integration with or replacement of existing methods or legacy CRM systems, the requirements for personnel, training, policies, upgrades and maintenance, and the costs and time frame for implementation. An important step is to involve CRM users from the outset, to develop a relationship between employee involvement and successful implementation of CRM. The plan should include selecting the correct application and provider which can be accomplished by visiting a CRM-oriented tradeshow, using a CRM consulting firm, searching CRM or business publications such as CRM Magazine, Call Centre Helper, and Inside Supply Management, using the knowledge of internal IT personnel who already know the market, and searching the many CRM supplier directories and websites. Next, work on the criteria to select the integration and connection requirements (the hardware, software, and networking capabilities), processing and performance requirements (the volume of data and number of users it can support), security requirements, reporting requirements (preformatted and customized reporting capabilities), usability requirements (ability for users to customize the software, display graphics and print information), function enabling features (workflow management, e-mail response engine, predictive modeling capabilities), and performance capabilities (response times for various queries). Lastly, integrate existing CRM applications and train the users. 4. Establish performance measures—using Table 10.1, construct a CRM program performance measures plan (a table) using the six performance measurement types for residential/single user customers and training centers (universities and physical therapy centers). Answer: Students should construct at table with six measurement types (customer loyalty, customer satisfaction, average sales revenue per customer, CRM productivity, CRM user satisfaction, and CRM user training. The second and third columns should be measures related residential users of I-Tread and training centers using the I-Tread. * Written by Brian Hoyt, DBA, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Chapter 11: Answers to Questions/Problems Table of Contents

Discussion Questions ....................................................................................................... 174 Problems................................................................................................................................................ 180

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Cases ............................................................................................................................. 185 Learning Objectives ............................................................................................................................... 185 Questions and Answers ......................................................................................................................... 186 Learning Objectives ............................................................................................................................... 188 Questions and Answers ......................................................................................................................... 188 Learning Objectives ............................................................................................................................... 189 Questions and Answers ......................................................................................................................... 190

Discussion Questions 413.

What is the impact of facility decisions on a supply chain?

Answers: A supply chain is a network of facilities and the location of production facilities, warehouses, distribution center, and suppliers determines the efficient flow of goods to and from these facilities. Once a decision on locating a facility is made, it is costly to move or shut down the facility. Thus, facility location has a long-term impact on a supply chain and must be an integral part of the firm’s supply chain strategy. 414.

Why is demand management important for effective supply chain management?

Answers: There must be demand before a supply can be provided. This is the central theme behind demand management, which causes the supply chain to function only when demand exists. Thus, demand management involves accurately determining how much product to produce to satisfy demand at each stage of the supply chain. Where to locate the production facilities is an important decision since it affects the amount of inventory in the supply chain, cost, and ability to meet customer requirements. 415. What are business clusters? Provide several examples of business clusters in a variety of countries. What are the advantages of clustering? Answers: According to Michael Porter, ―clusters are geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition.‖ Examples of business clusters: Silicon Valley and Hollywood in California; Bangalore, Hyderabad, and Mumbai (formerly Bombay) in India; Singapore; Tijuana, Mexicali, San Luis R.C., and Tecate in Mexico. One advantage of clustering is the close cooperation, coordination, and trust among companies in related industries. Companies are more productive in their operations because of easy access to the local supplier base, information, and technology. Companies can also recruit from the local pool of skilled and experienced workers, thus reducing the recruiting transaction costs. Due to the intensity of competition, peer pressure, and constant comparison among rivals, companies respond much quicker to customer needs and trends than companies located outside the cluster. Clusters thus provide the competitive environment that promotes an increasing pace of innovation, which will eventually lead to further productivity growth.

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416.

What are the critical factors influencing facility location?

Answers: Regional trade agreements, competitiveness of nations, government taxes and incentives, currency stability, access and proximity to markets/customers, environmental issues, labor issues, access to suppliers and cost, utility availability and cost, quality of life issues, land availability and costs. 417. Discuss the major regional trade agreements in Asia, Africa, Europe, Latin America, and North America. Answers: There are several important trade agreements listed below:



The European Union (EU): Set up after World War II, the European Union was officially launched on May 9, 1950, with France’s proposal to create a European federation consisting of six countries: Belgium, Germany, France, Italy, Luxembourg, and the Netherlands. A series of accessions in 1973 (Denmark, Ireland, and the U.K.), 1981 (Greece), 1986 (Spain and Portugal), 1995 (Austria, Finland, and Sweden), 2004 (Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, and Slovakia), 2007 (Bulgaria and Romania), and 2013 (Croatia) has resulted in a total of 27-member states. Currently, the EU has five candidate countries—Albania, Montenegro, North Macedonia, Serbia, and Turkey. Two highlights of the EU are the establishment of the single market in 1993 and the introduction of the euro notes and coins on January 1, 2002. The euro (€) is the official currency of 19 out of 27 EU countries. These countries are collectively known as the Eurozone. In 2015, Greece became the first country to default on an IMF loan payment. EU member countries then provided bailout aid to Greece to enable the country to service its debt obligations. In 2016, British citizens voted to exit the European Union. The UK has to invoke an agreement called Article 50 of the Lisbon Treaty to leave the EU, giving the two sides two years to agree on the terms of the split. The UK withdrew from the EU officially on January 31, 2020.  The 0United States-Mexico-Canada Agreement (USMCA), formerly the North American Free Trade Agreement (NAFTA): The original trade agreement among the United States, Canada, and Mexico was called NAFTA and was implemented on January 1, 1994. NAFTA created the world’s largest free trade area, currently with over 450 million people and GDP of more than US$20 trillion. Many tariffs were eliminated with an immediate effect, while others were phased out over periods ranging from five to fifteen years. According to the Office of the U.S. Trade Representative, ―U.S. exports to Canada and Mexico support more than 3 million American jobs and U.S. trade with NAFTA partners has unlocked opportunity for millions of Americans by supporting Made-in-America jobs and exports.‖ In addition, Canada and Mexico are two of the United States’ largest export markets and these countries buy more made-in-America goods and services than any other countries in the world. The United States renegotiated the North American Free Trade Agreement, replacing it with an updated and rebalanced agreement, which is now called the United StatesMexico-Canada Agreement (USMCA), and which came into force on July 1, 2020. For merchandise entered into commerce on or before June 30, 2020, NAFTA rules continue to apply.



The Southern Common Market (MERCOSUR): This economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela was formed in March 1991

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with the signing of the Treaty of Asuncion. The agreement was created with the goal of forming a common market/customs union between the participating countries for free movement of goods, services, and people, and was based on economic cooperation between Argentina and Brazil that had been in place since 1986. After Paraguay was suspended in 2012 for violating the Democratic Clause of Mercosur, Venezuela was added as a full member but was then suspended on December 1, 2016. Associate members include Bolivia, Chile, Colombia, Ecuador, Peru, and Suriname. The total population of the member states is more than 307 million.



418.

The Association of Southeast Asian Nations (ASEAN): This association was created in 1967 in Bangkok, Thailand and is comprised of the ten countries in the Southeast Asian region: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The primary objective of ASEAN is ―to accelerate the economic growth, social progress and cultural development in the region through joint endeavors in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian Nations. Common Market for Eastern and Southern Africa (COMESA): COMESA was established in 1994 to ―be a fully integrated, internationally competitive regional economic community with high standards of living for all its people ready to merge into an African Economic Community.‖ The mission of COMESA is to ―Endeavour to achieve sustainable economic and social progress in all Member States through increased co-operation and integration in all fields of development particularly in trade, customs and monetary affairs, transport, communication and information, technology, industry and energy, gender, agriculture, environment and natural resources.‖ COMESA has nineteen member states: Burundi, Comoros, D.R. Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe. Regional Comprehensive Economic Partnership (RCEP): 15 Asia-Pacific countries signed the RCEP on November 15, 2020 through a virtual signing ceremony hosted by Vietnam. The countries involved are Australia, Brunei, Cambodia, China, Philippines, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, Singapore, Thailand, and Vietnam. India, which was in the initial list of countries, withdrew from the agreement. This is the first trade agreement between Asia’s three largest economies of China, Japan, and Korea. The members account for 30 percent of global population and 30 percent of global GDP. The RCEP represents the world’s largest (somewhat) free trading area. The agreement is expected to eliminate 90 percent of the tariffs for imports between member countries within 20 years. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The trade agreement includes eleven countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, which came into force on December 30, 2018. This agreement evolved from the original TransPacific Partnership (TPP) after the US left the group in 2017. The UK is currently seeking membership. The total member economies represent 13.4 percent of global GDP. The CPTPP together with the USMCA, EU, and RCEP represent the world’s top four free trade areas. What is the World Trade Organization and what is its role in world trade?

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Solution and Answer Guide:

Answers: WTO is ―the only global international organization dealing with the rules of trade between nations.‖ The WTO was established on Jan 1, 1995, and has its headquarters in Geneva, Switzerland. Its functions include administering the WTO agreements, providing a forum for trade negotiations, handling trade disputes, monitoring national trade policies, providing technical assistance and training programs for developing countries, and cooperating with other international organizations. As of 2020, the WTO has 164 members and its goal is to help producers of goods and services, exporters, and importers conduct their business. There are 25 countries seeking to join the WTO, and these are called observer countries. Other functions of the WTO include administering the agreements, providing a forum for trade negotiations, handling trade disputes, monitoring national trade policies, providing technical assistance and training programs for developing countries, and cooperating with other international organizations. There are 349 regional trade agreements under the WTO currently. 419.

What are the critical factors in making community and site decisions?

Answers: Environmental issues, access and proximity to market, labor issues, access to supplies & cost, transportation issues, utility availability & cost, quality of life issues, state taxes & incentives, right to work state, local taxes & incentives, land availability and cost. 420.

Discuss Walmart’s location strategy.

Answers: Wal-Mart's early super-centers were located in predominantly rural markets to avoid direct competition with major discount stores in large metropolitan areas. More recently, Wal-Mart has changed its location strategy to include urban locations in the West and Northeast regions of the US. Wal-Mart has stores in 28 countries. 421.

Discuss Amazon’s global facilities network.

Answers: The early belief in electronic commerce was that millions of customers could be served without requiring the infrastructure of a Sears or Walmart. Today, online retailers are finding that without their own warehouses and shipping capabilities, customer service can suffer. The objective is to improve logistics and reduce shipping times to customers. The company currently has several facility types including Fulfilment Centers/Distribution Centers (DCs), Pantry/Fresh Food Fulfillment Centers, Sortation Centers, Delivery Stations, airport hubs, and Prime Now Hubs, totaling 838 in the United States. Other worldwide logistics facilities located in Europe are in Austria, Czech Republic, France, Germany, Italy, Netherlands, Poland, Republic of Ireland, Slovakia, Spain, Sweden, and the UK. In Asia, the fulfillment centers are found in Australia, China, India, Japan, and Singapore. Amazon also has logistics facilities in Canada, Mexico, and Brazil. Outside the United States, Amazon has 723 such facilities/centers/hubs. Amazon’s massive logistics network far exceeds that of any retailer in terms of scale and coverage. By strategically locating its logistics facilities and improving its operations, Amazon is able to provide faster customer service globally 422. Define quality of life. Why is quality of life an important factor in facility location? Is the set of quality-of-life factors used by the Chamber of Commerce in Jacksonville, Florida a good one? Please explain. Answers: Quality of life can be defined as ―a feeling of well-being, fulfillment or satisfaction resulting from factors in the external environments.‖ Quality of life is an important factor because if employees are not happy with the environment they live in, the company would be unable to recruit and retain skilled workers. A satisfied worker is a productive worker.

177

Solution and Answer Guide:

The set of quality-of-life factors used by the Chamber of Commerce in Jacksonville, Florida, is a good one because it covers a wide range of issues such as education, standard of living and community economic health, social environment, culture/recreation, medical and health care system, government/politics, public safety, and ease of transportation. 423. What is a right-to-work state? What are the advantages or disadvantages of doing business in a right-to-work state? Answers: In the United States today, there are 24 states with right-to-work laws: Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Louisiana, Mississippi, Nebraska, Nevada, North Carolina, Michigan, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wyoming. A right-to-work law ―secures the right of employees to decide for themselves whether or not to join or financially support a union.‖ In the last few decades, there has been a shift in the U.S. auto industry to the South, with assembly plants built in Tennessee, South Carolina and Alabama, all of which are right-to-work states. Dubbed the Southern Auto Corridor, this cluster represents a new era in U.S. auto manufacturing. The trend to locate in the sunny, incentive-friendly, nonunionized South will most likely continue to grow. Right-to-work states prohibit unions and employers from forcing employees to join a union or pay union dues as a condition of employment. Advocates of right-to-work laws suggest that the state is likely to benefit from lower unemployment and higher gross domestic product (GDP) growth. On the other hand, right-to-work laws could weaken collective bargaining, slow employee wage growth and allow for worker termination without just cause. 424.

Why is China an attractive location for many businesses?

Answers: China has the world’s largest population, a great potential market, cheap and plentiful supply of labor, and access to suppliers. China is now a member of the WTO. Opportunities for foreign investments are very good. Recent rapid increases in China’s per capita income has resulted in a huge domestic market for foreign branded goods. Thus, manufacturing in China also serves the expanding local Chinese market. China is now one of the largest economies in the world. 425.

What are the challenges of doing business in China?

Answers: China joined the WTO in 2001. Since then, the country has been opening to more and more foreign investors. Restrictions in terms of majority ownerships in many key sectors such as retailing and logistics are coming down. However, infrastructure development is still lagging although the Chinese government has allocated billions of dollars to improve roadways, airports, and ports. The country's inadequate transportation infrastructure, coupled with a fragmented distribution system, hinder the efficient distribution of domestic and imported products and have raised the cost of doing business in China. Protection of intellectual property has been an issue for the software and music industry and many technology companies. Environmental pollution is another issue that the Chinese government would have to address. Due to the tremendous economic growth and as more companies build manufacturing facilities in China, the country is experiencing an increasing shortage of skilled and management workers. More recently, politics is becoming a factor as the US is trying to reduce the trade deficit with China. 426.

Discuss the six strategic roles of a foreign facility.

Answers: An offshore factory manufactures products at low cost with minimum investment in technical and managerial resources. These products tend to be exported.

178

Solution and Answer Guide:

A source factory has a broader strategic role than an offshore factory with plant management heavily involved in supplier selection and production planning. The source factory’s location is dictated by low production cost, fairly developed infrastructure, and availability of skilled workers. A server factory is set up primarily to take advantage of government incentives, minimize exchange risk, avoid tariff barriers, and reduce taxes and logistics cost to supply the regional market where the factory is located. The contributor factory plays a greater strategic role than a server factory by getting involved in product development and engineering, production planning, making critical procurement decisions, and developing suppliers. The outpost factory is set up in a location with an abundance of advanced suppliers, competitors, research facilities, and knowledge centers to access the most current information on materials, technologies, and products. Since the facility normally produces something, its secondary role can be that of a server or an offshore factory. A lead factory is a source of product and process innovation and competitive advantage for the entire organization. It translates its knowledge of the market, competitors, and customers into new products. 427. What is sustainable development and why is this policy important to a country and the world at large? Answers: A development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It is critically important that governments invest in satisfying the needs of their citizens while maintaining the natural environment indefinitely. Sustainable development policies encompass more than environmental considerations; they also address economic and social issues. In the long run, environmental and social issues in one country will impact the rest of the world. 428.

What is the difference between green development and sustainable development?

Answers: The difference between green development and sustainable development is that green development focuses on environmental sustainability over economic and social considerations. Sustainable development policies encompass environmental, economic, and social issues. 429.

Explain why 3D printing may lead to a revival of manufacturing in the United States.

Answers: Production using a 3D printer involves laying down a very thin layer of stainless-steel or ceramic powder and using liquid binder to fuse the different layers to form the final product. The technology is applicable to wide range of industries such as defense, aerospace, automotive, medical, and metals manufacturing. Initially, 3D printing was used for rapid prototyping, but new developments make it possible for use in actual production. Benefits of additive manufacturing include shorter lead times, mass customization, reduced parts count, more complex shapes, parts on demand, efficient material use, and lower energy consumption. The affordability of 3D printers could keep businesses from going overseas for their manufacturing needs. 430. Provide examples of major US companies that are using 3D printing and explain why they are reshoring their manufacturing back to United States? Answers: An example of a major U.S. company investing in 3D printing is General Electric, the world’s largest manufacturer, is an early adopter of 3D printing. They have recently introduced the ―brilliant factory‖ concept, which is ―a sophisticated factory that combines lean manufacturing, advanced and additive manufacturing with advanced software analytics to enhance productivity.‖ Manufacturing has evolved from the Industrial Revolution where the assembly line was introduced. Today, with the emergence of 3D printing, we are seeing more and more innovations

179

Solution and Answer Guide:

in the manufacturing industry. According to Philippe Cochet, SVP & Chief Productivity Officer, General Electric, ―Additive manufacturing, or 3-D printing, is another piece that was in its infancy just 10 years ago, but represents an enormous area of opportunity for manufacturing. Additive technologies allow us to create parts with precision and efficiency to a degree previously unheard of, create new types of parts that were previously impossible to produce, and reduce waste during production by using only the raw materials needed. These advancements will swing the pendulum back to domestic sourcing in the U.S.‖ 431.

How has the pandemic affected location decisions?

Answers: The pandemic quickly changed everything as ports closed, planes were grounded, businesses were shuttered, workers were sent home, and many countries partially or fully closed their borders. The saying, ―business location as usual,‖ is no longer true. As a result of the pandemic, many companies are expected to increase the use of digital technologies and automation in the future. The digital transformation effort is expected to have an impact on the company’s global operating footprints. IBM’s report indicates a greater focus on availability of skills as a location criterion, implying that digital technologies and automation will likely alter skills requirements instead of replacing the requirement for talent. As a result of digital technologies and automation, workforces will be required to develop new skills. Two other issues that rise to the top are supply chain diversification and risk mitigation. New questions emerge regarding consolidation (few suppliers) versus diversification (many suppliers) (see Chapter 2 for more discussion on this issue). Now, with the pandemic to the forefront of corporate location risk considerations, companies will have to reevaluate the benefits and risks of a consolidated footprint. The conventional argument for consolidation is that having fewer locations makes it easier to manage, build culture, and reduce costs. However, geographic diversification also helps companies reduce the risk of disruptions to business operations.

Problems 432. The Soft Toys Company has collected information on fixed and variable costs for four potential plant locations. Location

Annual Fixed Cost

Unit Variable Cost ($)

$200,000

$300,000

C D

$400,000 $600,000

25 20

a. Plot the total cost curves for the four plant locations on a single graph. b. Find the break-even points and determine the range of demand for which each location has a cost advantage.

c. Which plant location is best if demand is 30,000 units? Answer:

a) Plot the 4 graphs as shown below. TCA = 200,000+50Q; TCB = 300,000+45Q; TCC = 400,000+25Q; TCD = 600,000+20Q

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Solution and Answer Guide:

$3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 0

5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 A

b) Breakeven point between Locations A and B. TCA = TCB 200,000 + 50Q = 300,000 + 45Q 5Q = 100,000 Q = 20,000 units This indicates that producing less than 20,000 units per year would be cheaper at location A, while producing more than 20,000 units per year would be cheaper at location B. Breakeven point between Locations A and C. TCA = TCC 200,000 + 50Q = 400,000 + 25Q 25Q = 200,000 Q = 8,000 units This indicates that producing less than 8,000 units per year would be cheaper at location A, while producing more than 8,000 units per year would be cheaper at location C. Breakeven point between Locations A and D. TCA = TCD 200,000 + 50Q = 600,000 + 20Q 30Q = 400,000 Q = 13,333 units This indicates that producing less than 13,333 units per year would be cheaper at location A, while producing more than 13,333 units per year would be cheaper at location D. Breakeven point between Locations B and C. TCB = TCC 300,000 + 45Q = 400,000 + 25Q 20Q = 100,000 Q = 5,000 units This indicates that producing less than 5,000 units per year would be cheaper at location B, while producing more than 5,000 units per year would be cheaper at location C. Breakeven point between Locations B and D. TCB = TCD 300,000 + 45Q = 600,000 + 20Q 25Q = 300,000 Q = 12,000 units

181

Solution and Answer Guide:

This indicates that producing less than 12,000 units per year would be cheaper at location B, while producing more than 12,000 units per year would be cheaper at location D. Breakeven point between Locations C and D. TCC = TCD 400,000 + 25Q = 600,000 + 20Q 5Q = 200,000 Q = 40,000 units This indicates that producing less than 40,000 units per year would be cheaper at location C, while producing more than 40,000 units per year would be cheaper at location D.

c) When demand is 30,000 units, the costs for the different locations are shown below. Location

Annual Fixed Cost Unit Variable Cost

Total Cost

$200,000

$50

$1,700,000

$300,000

$45

$1,650,000

C D

$400,000 $600,000

$25 $20

$1,150,000 $1,200,000

Location C has the lowest total cost and is best when demand is 30,000 units. 433. The Vienna Company has identified four locations to set up a new production facility. They have determined the fixed and variable costs associated with each location as follows: Location

Annual Fixed Cost ($)

Unit Variable Cost ($)

Philadelphia

10,000

Atlanta Miami Houston

30,000 60,000 70,000

5 4 7

 

a. Plot the total cost curves for the three plant locations on a single graph.



c. Which plant location is best if demand is i) 40,000 units, ii) 15,000?

b. Find the break-even points and determine the range of demand for which each location has a cost advantage. Which city has no cost advantage at all?

Answer: a.

Total cost curves for the 4 plant locations.

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Solution and Answer Guide:

From the graph above, we can see that Houston is always more expensive than the other cities, irrespective of the quantity produced. b. Notation : P = Philadelphia, A = Atlanta, M = Miami, H = Houston Breakeven point between Philadelphia and Atlanta TCP = TCA 10,000 + 6Q = 30,000 + 5Q Q = 20,000 units This indicates that producing less than 20,000 units per year would be cheaper at the Philadelphia Plant, while producing more than 20,000 units per year would be cheaper at the Atlanta Plant. Breakeven point between Philadelphia and Miami. TCP = TCM 10,000 + 6Q = 60,000 + 4Q 2Q = 50,000 Q = 25,000 units This indicates that producing less than 25,000 units per year would be cheaper at the Philadelphia Plant, while producing more than 25,000 units per year would be cheaper at the Miami Plant. Breakeven point between Atlanta and Miami TCA = TCM 30,000 + 5Q = 60,000 + 4Q Q = 30,000 units This indicates that producing less than 30,000 units per year would be cheaper at the Atlanta Plant, while producing more than 30,000 units per year would be cheaper at the Miami Plant. c.

If demand is 40,000 units, then it is cheaper to produce at the Miami Plant. Location

Annual Fixed Cost ($)

Unit Variable Cost ($)

Total Cost $

Philadelphia

10,000

250,000

Atlanta

30,000

230,000

Miami

60,000

220,000

Houston

70,000

350,000



ii) If demand is 15,000 units, then it is cheaper to produce at the Philadelphia Plant. Location

Annual Fixed Cost ($)

Unit Variable Cost ($)

Total Cost $

Philadelphia

10,000

100,000

Atlanta

30,000

105,000

Miami

60,000

120,000

Houston

70,000

175,000

434. Amazing is looking to open up a new fulfillment center as part of their expanding network to meet faster delivery needed for their Prime customers in California. To assist the company in deciding where to locate this new fulfillment center, three sites have been identified with the information shown below.

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Solution and Answer Guide:

Critical Location Factors

Factor Weight

City of Industry

Ontario

San Bernardino

(Sum to 1)

Scores (1–100)

Labor availability

0.10

Proximity to market

0.25

100

Supplier base

0.20

100

Taxes

0.20

Utilities Transportation

0.10 0.15

85 90

85 75

75 85

Which site would be ideal for the fulfillment center? Answer: Critical Location Factors

Factor Wt.

COI Scores

COI Wt. Scores

Ontario Scores

Ont. Wt. Scores

SB Scores

SB Wt. Scores

Labor availability

0.10

8.5

Proximity to market

0.25

100

Supplier base

0.20

100

Taxes

0.20

Utilities

0.10

8.5

7.5

Transportation

0.15

13.5

11.25

12.75

1.00

TOTAL

89.5

82.75

82.25

City of Industry has the highest total weighted score and is the best choice for the fulfilment center. 435. The Gamecock Brewery is planning to build another brewery for the expanding US market. The company has identified five critical location factors and their relative weights. The scores for each of the three potential sites are shown in the following table. Which site should be selected for the new brewery?

Critical Location Factors

Factor Weight

Columbus

Las Vegas

Carson

(Sum to 1)

Scores (1–

Scores

100)

(1–100)

Labor cost

0.10

Proximity to market Supplier base Quality of life

0.25 0.20 0.30

100 80 90

90 100 60

80 70 60

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Solution and Answer Guide:

Taxes

0.15

Answers: Critical Location Factors

Factor Weight

Columbus Scores

Weighted Score Columbus

LV Scores

Weighted Score LV

Carson Scores

Weighte d Score Spokane

Labor cost

0.10

7.0

9.0

Proximity to market

0.25

100

22.5

Supplier base

0.20

100

Quality of life

0.30

Taxes

0.15

13.5

1.0

TOTAL

84.0

81.5

70.5

The Columbus site has the highest total weighted score and is the selected site.

Cases 1.

Quigley Global Transportation* Case Note

Learning Objectives  

Explain the impact of global location decisions on the supply chain. Identify the factors influencing location decisions.



Use several location evaluation models. Queenie Quigley is a very successful entrepreneurial. Queenie grew up in an ocean port city and loved the sea. Her father was a commercial fisherman and often took her with him during the summer. Her love for the sea triggered an interest in international shipping. Queenie knew that this was a business that provided services that would always be needed. She had sought out contracts that she knew would lead to a foothold in a port. However, now that Quigley Global Transportation was on solid footing, Queenie wants to develop a selection criteria that is more robust. Queenie decided to utilize the weighted factor rating model as her selection tool for the next port. She is still convinced that TEU should be the number one criterion. However, although she has four other factors 2, 3, Ms. Quigley has not decided on their importance. Queenie thought if she looked at her current ports through those criteria it would help her decide on how to weight the criteria going forward.

Getting Credit2 by Country

Enforcing Contract2 by Country

123

GDP growth3 by Country2016 -3.3%

101

1.4%

1.7%

LA, USA

1.6%

NY, USA

1.6%

Country

Port Ranking by TEU1 (1=best)

Ease of doing business2 by Country

Brazil

Hong Kong, China Netherlands

185

Solution and Answer Guide:

Turkey

3.3%

Questions and Answers 436. Queenie has a very challenging task ahead of her. As stated, she didn’t use any selection system for the first six ports except that she secured a contract with a client and then built that into a foothold in that port. Queenie wants a more effective selection system moving forward. Her first criterion is still TEU and she plans to weight it at 30% on a scale of 0-100%. No two criterion can have the same weighting; Queenie wants some sort of distinction between each one. What is your recommendation for weighting the other criteria? Why did you weight each one as you did? Explain the logic of your weighting factors. Answer: Students’ answers may vary. Queenie has 70% left in her weighting system. I would weigh the remainder as follows: ease of doing business = 25%, GDP growth = 20%, enforcement of contracts = 15%, and getting credit = 10%. Ease of doing business seems the most logical second choice and should be rated high. In such a competitive industry as shipping, Queenie wants to eliminate as many barriers to doing business as possible. GDP is the next criterion because how well the country is doing economically is a reasonable indicator of potential business for Queenie. Depending on the terms of the contracts Quigley Global Transportation signs, there is the potential that a less than reputable client may not pay in full, etc. Thus, enforcement of the contract through the local courts may be an avenue they will need to pursue. Finally, Quigley Global Transportation is an international company. I would assume they have credit throughout the world and needing to obtain local credit may not be an issue; thus, can be weighted the lowest. 437. Ms. Quigley wants to expand her business into Africa. Based on her initial analysis there are no ports large enough in many African countries to make them viable by themselves. However, transporting goods from another port to African ports would be a sound business move. Ms. Quigley had her staff provide a list of five ports that could be used to serve Africa. Using the recommendation you provided Queenie for the weighting-factor model and the chart below select the best port for Quigley Global Transportation.

Country United Arab Emirates Sri Lanka Saudi Arabia Malta Spain

Port Ranking by TEU1 (1=best)

Ease of doing business2 by Country

GDP growth3 by Country2016

Getting Credit2 by Country

Enforcing Contract2 by Country

44 28 36 49 33

28 110 147 132 85

2.3% 5.0% 1.2% 4.1% 3.1%

101 118 82 139 62

25 116 105 58 29

Answer: Students’ answers may vary and will depend on their answers to question 1. The weighted scores for each port, using the weights described in #1, with a 100-point scale, and assuming the best score in each category gets 100 points, is as follows: UAE = (28/44)100(.3)+(28/28)100(.25)+(2.3/5)100(.2)+(25/25)100(.15)+(62/101)100(.1)=74.4 Sri Lanka=(28/28)100(.3)+(28/110)100(.25)+(5/5)100(.2)+(25/116)100(.15)+(62/118)100(.1)=83.2

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Solution and Answer Guide:

Sd. Arabia=(28/36)100(.3)+(28/147)100(.25)+(1.2/5)100(.2)+(25/105)100(.15)+(62/82)100(.1)=44.0 Malta=(28/49)100(.3)+(28/132)100(.25)+(4.1/5)100(.2)+(25/58)100(.15)+(62/139)100(.1)=49. 8 Spain=(28/33)100(.3)+(28/85)100(.25)+(3.1/5)100(.2)+(25/29)100(.15)+(62/62)100(.1)=69.0 So, Sri Lanka is the favored location. Obviously, a slight change in the weighting could have listed the UAE as number one. 438. Review the locations of the ports listed in question two (using the World Fact Book 3 can help). Keeping the TEU as criterion number 1, which of the other criteria would you change to enhance the selection process? Think in terms of the African question. What factors would be better criteria from a business and supply chain perspective? Explain your reasoning. Answer: Students’ answers may vary. Instead of getting credit and enforcing contracts, I would consider the stability of the government. Establishing a shipping office in a country and having ships docked there in order to be ready to capture an immediate contract is a financially risking venture if the country is in political unrest. This is potentially much more important a factor than getting credit locally since we can assume Quigley Global transportation has good credit worldwide. Furthermore, for a fourth factor I would consider is either the trading partners of the country or the type of commodities that are shipped form the country. The trading partners would be a helpful factor in that if the country with the prospective port traded with countries’ where Queenie currently had ports, then the potential for two-way business would be greater. The commodities may be a useful factor if Quigley Global Transportation specialized in shipping certain commodities. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

187

Solution and Answer Guide:

Sources: 1. http://www.worldshipping.org/about-the-industry/global-trade/top-50-world-container-ports 2. World Bank Doing Business – www.doingbusiness.org 3. World Fact Book – https://www.cia.gov/library/publications/the-world-factbook/index.html

Pittman’s Fireplaces* Case Note

Learning Objectives 

Identify the factors influencing location decision



Use several location evaluation models Percy Pittman recently took over the family business. Pittman’s Fireplaces has been in business since 1922. It was started by Percy’s grandfather and then passed on to Percy’s father. The business has thrived. They install fireplaces throughout the Unites States (U.S.). In addition to the fireplaces, Pittman’s Fireplaces sells all the accessories you can imagine you would need to make your fireplace the centerpiece of your room. Percy wants to take the business to the next level, and go international. The reputation of Pittman’s Fireplaces is excellent. They have installed many fireplaces in the homes of diplomats who are representing their countries in the U.S. Furthermore, many international businessmen who keep homes in New York, Los Angeles, Chicago, and other large U.S. cities, have purchased Pittman’s fireplaces and accessories. Percy decides he will investigate three countries, United Kingdom, Germany, and Finland. His initial criteria for his weighted factor model are labor costs, weather (cold winters), environmental laws, and trade agreements with the U.S. However, as Percy continues to ponder the best factors, he isn’t yet sure which are the best ones to use as location selection criteria. The wrong set of criteria could result in selecting the wrong country for his inaugural foreign expansion.

Questions and Answers 439. Percy is investigating several tools to help him make his decision as to which country he should expand into first. He thinks that these tools may also guide him in deciding which specific factors he should use to evaluate the three countries, United Kingdom, Germany, and Finland. Percy is reviewing both the 2016 Global Competitiveness Report and the 2016 World Competitiveness Yearbook. Clearly, in both documents the three countries are rated significantly different. Obviously, this is a critical decision for the future of Pittman’s Fireplace. As a businessperson what is your opinion regarding which of the two references Percy should use? Explain your answer. Answers: Students’ answer may vary. In some respects, this decision is a flip of the coin. However, in attempting to look at which report is best from an objective standpoint I argue that the 2016 World Competitiveness Yearbook is the better of the two reports. I base my opinion on the number of criteria they use in evaluating a country, 327 criteria. Furthermore, they group the criteria into four competitiveness categories. This, in my opinion, makes general analysis and reasoning easier. In the 2016 Global Competitiveness Report they use the ―12 Pillars of Competitiveness‖ as their evaluation criteria. Although an effective method, it doesn’t appear as robust. 440. Percy has decided that he will not have more than five factors as part of his weighted factor model. Currently, he is thinking of four factors – labor costs, weather, environmental laws and trade agreements with the U.S. However, when he was originally pondering the situation he thought along these lines – labor-skill set, labor-wages, material sourcing, and environmental

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Solution and Answer Guide:

laws. Based on the case, do you believe the final four are the absolute best four for Percy to select, or should he go with his original four, or some different ones? Explain why you agree or disagree with him. Justify your views either way. In addition, what should be the fifth factor? Answers: Students’ answers may vary. From the case my impression is that Pittman’s fireplaces are high end items. Percy is basing part of his expansion plan on the fact that diplomats and foreign businessmen are buying them for their homes in the U.S. For this reason, I think using material resourcing as one of the five criteria is essential. He needs to ensure that the quality he can provide in the U.S. will be the same in whichever country he selects; consequently, the materials are a key component. Again, primarily because of the quality factor, labor-skill set should be a major consideration. I do not believe weather is an important factor. I believe that those who purchase Pittman’s fireplaces do so more for the appearance it adds to a room than its functionality. Therefore, I would suggest to Percy that he use labor-skill set, labor-wages, material sourcing, environmental laws, and trade agreements with the U.S. as the five factors. 441. Assume that Percy has selected Finland as the best location to begin his international expansion. Now, Percy begins to put costs together. He forecasted 7,000 fireplaces per year. Calculate the breakeven points for the three countries. Should Percy still go with Finland, or should he select another country? If the forecast was 5,000 should Percy ignore the weighted factor model? Explain why or why not? Location

Annual Fixed cost ($)

Unit variable Cost ($)

Finland (A)

$550,000.00

$180.00

Germany (B)

$450,000.00

$200.00

United Kingdom (C)

$400,000.00

$220.00

Answers: Using the breakeven analysis equations Total CostA = Total CostB, Total CostA = Total CostC, and Total CostB = Total CostC the answer follows. For a forecast of 7,000 the lowest cost is Finland ($1.81 million). Even if the demand drops to 5,000, Finland is still a viable candidate ($1.45 million). However, if the demand drops to 5,000, then the total cost in Germany ($1.45 million) is the same as Finland. Even though the costs are equal for a forecast of 5,000, since the weighted factor rating model showed Finland as the number one choice, Percy should stay with Finland. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

O’Leary Management Solutions* Case Note

Learning Objectives  

Identify the factors influencing location selection. Use several location selection models. Mary O’Leary is an extremely successful management consultant. Mary worked for several large corporations in various roles before starting her consulting business. Mary’s forte is using long established management concepts and applying them in innovative ways. Consequently, Mary is a much sought-after consultant. As the years have passed, Mary has hired other very talented people and trained them in her approach.

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As Mary reviews her company’s current status and looks toward its future she wonders if it is time to open a second location. Although technology helps, Mary is a big believer in hands on consulting. Ms. O’Leary’s experience tells her that meeting people face to face, when trying to find a solution to their issues, is crucial. That is getting more and more difficult to do, particularly in states closer to the west coast. Ms. O’Leary decides that opening a second office is a must. Mary schedules a meeting with her staff for next Thursday and plans to explain why they are opening another office and share her thoughts about the selection criteria. Also, she plans to get their feedback on what would be the best selection criteria since some of them will have to move there.

Questions and Answers 442. The textbook lists 11 major community factors to use as selection criteria for choosing a location. Mary realizes that all factors are important; however, 11 are too many because it waters down the effect of each factor’s weight. Therefore, Mary wants no more than five major factors. Based on the information in the case, which factors should Mary and her staff choose? Explain why the specific factors you picked are pertinent to Mary’s company. Answers: Students’ answers may vary. The five community location factors I believe are most aligned with O’Leary Management Solutions are transportation issues, quality of life, state taxes and incentives, local taxes and incentives, and land availability and cost. Since O’Leary has customers in many states, transportation, particularly air transportation, is a significant need. Even within the city they are located, public transportation is an important consideration. Quality of life seems another critical factor based on the type of employees O’Leary has. These are well educated, highly successful people who would be interested in many of the specific sub-factors in the quality-of-life category. As a business owner, Mary would be looking for any incentives state and local governments will provide. In addition, taxes on her business and employees are one of the considerations she identified. Finally, land availability and cost are important because O’Leary must be located in what is perceived as the high rent district. Having said that, it doesn’t mean that Mary will not shop around and find the best buy for her money. For example, some office buildings may offer the exact type of location she wants and may also offer incentives for a longer lease. 443. Building on question one, weight the five factors you choose for O’Leary Management Solutions. Mary has expressed that she does not want any two factors with the same weight. Explain why you rated them as you did, i.e., why one criterion is more or less important than another. Answers: Students’ answers may vary. I would weight quality of life at 30 on a scale of 100. Mary’s employees are the most valuable asset in her business. Their comfort, safety, etc. are essential to both their performance and satisfaction. State taxes and incentives would be second with a weight of 25. O’Leary is a very successful business and one would assume Mary is going to stay at that second location for a long time. Financially, low taxes and good incentives are important considerations for the long haul. Local taxes and incentives are third with a weight of 20. Slightly lower than the state because generally speaking local taxes tend to be lower, and incentives are often not as strong. A good transportation system is a necessary thing to have; however, since Mary will probably move to another large city (currently in New York), transportation should not be a big worry, so I give it a weight of 15. Finally, land availability and cost are fifth with a weight of 10. Clearly an important financial and marketing factor, but not as important as the other four. 444. Mary is thinking that quality of life may be one of the factors they should pick. However, it is much too general a term to be a good indicator of the best location. Therefore, Mary believes it would be best to create a weighted factor rating matrix just for quality of life. Each location can

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be looked at through those specific criteria as well, and the score each receives can then put inputted into the broader location selection matrix. There are nine quality of life factors listed in the textbook. This time, Mary wants no more than four for this sub-weighted factor rating analysis. Which four would you recommend and why? How would you weight them and why? Answers: Students’ answers may vary. The quality-of-life factor is obviously related to the employees. Since they are highly educated people, one can assume they would want the same for their children. Since some currently have families and potentially the others will in time, achieving education excellent would be a necessary criterion. On a scale of 100, I would weight that at 35. I assume that family, i.e., children, would be most employees’ number one priority. The second sub-factor would be enjoying arts, culture, and recreation and I would give it a weight of 30. Mary mentioned that her employees enjoyed their time off and that it was a precious commodity; consequently, I believe this must be second. Third is moving around efficiently and safely. This would be weighted at 25. An essential facet of their business is traveling, whether locally or out of town. Accessibility to transportation and short commute times would be an asset to O’Leary Management Solutions. Promoting social welfare is fourth with a weight of 10. Again, I am making assumptions here; however, I think the type of people Mary’s is hiring would be community oriented both for themselves and also as a relationship builder for their company. Well educated people often want to give back to the community. From O’Leary’s perspective this is also a good marketing tool since it builds strong community relationships, and potentially future business. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Part 4 Continuing Case Interactive Health, Inc.*

Answers to Questions

IH is focusing on improving its supply chain network of facilities, including the location of production facilities, offices, distribution centers, and retail sites. They must determine the efficient flow of goods to and from these facilities. There is a difficulty and cost of moving or shutting down a facility, so the decision to relocate is a major decision and likely a costly one. 1. Identify the factors that should influence IH’s location decisions. Design a table with facility/location options in one column, the location criteria (i.e., cost) in another column, and then in a third column note whether the criteria for each location option would be generally positive (i.e., low cost) or negative. Answer: Students should list the options noted in the case updates and some of the criteria below. A firm competing on cost is more likely to select a location that provides a cost advantage. A firm that competes on speed of delivery, such as FedEx, uses the hub-and-spoke approach to location determination. Each of the hubs has been picked for its central location and easy access to customers. Criteria include:  What will be the reaction of shareholders, customers, competitors, and employees?  Where is the target market located?  Will the location provide a sustainable competitive advantage?  What will be the impact on product or service quality?

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Solution and Answer Guide:

      

Can the right people be hired? What will be the effect on supply chains? What is the projected cost? What will be the impact on delivery performance? How will the market react? Can green development be used? Is the transfer of people necessary, and, if so, are employees willing to move?

2. a) List several location evaluation models, describe each model, and note if there would be an advantage or disadvantage for IH to pursue each one of the models. Answer: Upon completing Question 1, students should be able to provide rationale and assumptions for ratings and weighting. They should also be able to recommend, based on their decision matrix, the best alternative including any challenges the selected alternatives would present to IH’s supply chain management. b) Construct an Excel spreadsheet in a decision matrix format to evaluate the options including offshore factory, source factory, server factory, contributor factory, outpost factory, and lead factory. The strategic criteria include environmental issues, access and proximity to markets, quality of life issues, right to work laws, green development, and competitive strength internationally or domestic. Operational criteria include labor issues, access to suppliers, logistics issues, utility availability and cost, land availability and cost, business cluster opportunities, green development, and sustainable development. Answers: Strategic Criteria Strategic Criteria (Score 1-100)

Weight (Sum to 1)

Offshore Factory

Source Factory

Server Factory

Environmental Issues Access & Proximity To Markets Quality-of-Life Issues Green Development International or Domestic Right-to-Work Laws

Contributor Factory

Output Factory

Lead Factory

Alternatives Offshore Factory Source Factory Server Factory Contributor Factory Output Factory Lead Factory Strategic Criteria Environmental Issues Access & Proximity To Markets Quality-of-Life Issues Green Development International or Domestic Right-to-Work Laws

Top 3 Factories

Operational Criteria (Score 1100) Access to Suppliers Labor Issues Logistics Issues Utility Availability & Cost Land Availability & Cost Green Development Business Cluster Opportunities Sustainability Development

Weighted Totals

Weight

Advantages/Disadvantages

Weight (Sum to 1) Operational Criteria Top 3 Alternatives

Opertional Criteria Access to Suppliers Labor Issues Logistics Issues Utility Availability & Cost Land Availability & Cost Green Development Business Cluster Opportunities Sustainability Development

Weighted Totals

Weight

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3. a) Describe Additive Manufacturing (AM). Answer: Additive manufacturing or 3D printing is a ―process of making a three-dimensional solid object of virtually any shape from a digital model.‖ Production using a 3D printer involves laying down a very thin layer of stainless steel or ceramic powder and using liquid binder to fuse the different layers to form the final product. AM materials include thermoplastics, metals, ceramics, and biochemicals. Initially, 3D printing was used for rapid prototyping, but new developments make it possible for use in actual production. Benefits of additive manufacturing include shorter lead times, mass customization, reduced parts count, more complex shapes, parts on demand, efficient material use, and lower energy consumption. b) What types of parts or components of the I-Tread could be used with AM? Answer: Students should list parts based on a materials list from case information. c) Would the use of suppliers who use AM have an impact on facility location? Answer: Students should describe the characteristics of AM including the affordability of 3D printers, which could keep businesses from going overseas for their manufacturing needs or it could bring manufacturing back to the US. Another aspect of 3D printing is speed. AM can create lighter, more complex designs that are too difficult or too expensive to build when using dies, molds and other machining. Rapid prototyping allows adjustments during a run and facilitates a design driven process. Lead times are reduced and, in many cases, AD can produce a single assembly-free part that once was multiple parts. The strength and lighter weight can be a significant advantage as both can be achieved with AM as compared to traditional manufactured parts where those variables are incompatible (strength of steel vs. weight of plastics). * Written by Brian Hoyt, DBA, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Chapter 12: Answers to Questions/Problems

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Solution and Answer Guide:

Table of Contents Discussion Questions ....................................................................................................... 194 Problems ........................................................................................................................ 201 Cases ............................................................................................................................. 205 Learning Objectives ............................................................................................................................... 205 Answers to Questions ............................................................................................................................ 205 Learning Objectives ............................................................................................................................... 207 Questions and Answers ......................................................................................................................... 208 Part 4 Continuing Case .................................................................................................... 209 Questions and Answers ......................................................................................................................... 209

Discussion Questions 445.

Is your university a pure service? Explain.

Answer: Yes—universities produce no tangible products. 446. Why is the service sector in the United States and other highly developed economies growing so much more rapidly than the manufacturing sector? Answer: As economies grow, disposable income grows, and the need for services also grows. The cost of labor also increases, which makes manufacturing, a labor-intensive industry, seek out lower labor cost climates, such as Mexico, India, China, and other relatively low labor-cost countries. 447.

Describe the primary differences between goods and service firms.

Answer: Service firms differ from manufacturers in a number of ways including the tangibility of the end product, the involvement of the customer in the production process, the assessment of product quality, the labor content contained in the end products, and the facility location. 448. Using the formula for productivity, describe all the ways that firms can increase productivity. Which of these ways might be considered risky? Answer: The general productivity formula is: outputs/inputs. To increase this ratio, one could increase the numerator, decrease the denominator, increase the numerator more than the denominator, or decrease the numerator less than the denominator. Decreasing labor cost for instance by laying off personnel, can be risky, since labor is responsible for creating the outputs. 449. Describe several single- and multiple-factor productivity measures that could be used at your university. Answer: varies.

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450. Define Baumol’s Disease and the Wal-Mart effect, and how they affect service-oriented economies like the United States. Answer: For most services, the labor content per unit of output can be quite high relative to manufactured goods. This can lead to a declining productivity growth rate as a nation’s economy becomes less manufacturing-oriented and more service-oriented This productivity growth problem has been termed Baumol’s disease. The Wal-Mart effect postulates that the booming growth in information-technology has allowed many big-box retailers like Wal-Mart to realize large productivity growth rates. This has tended to counteract Baumol’s disease, leading some economists to say that Baumol’s disease does not exist. So, it is unclear what the combination of these two things means for service-oriented economies. 451.

Discuss the primary issues in the management of global services.

Answer: Labor, facilities and infrastructure support—cultural differences, education, and expertise levels can prove to be problematic for firms unfamiliar with local human resources. Firms must also do a good job of locating existing support facilities, suppliers, transportation providers, communication systems, and housing. Legal and political issues—local laws may restrict foreign competitors, limit available resources, attach tariffs to prices, or otherwise impose barriers to global service expansion. Some foreign countries require the formation of joint ventures with local business partners. Domestic competitors and the economic climate—Managers must be aware of the local competitors, the services they offer, their pricing structures, and the current state of the local economy. Firms can devise competitive strategies by modifying their services to gain competitive advantage. Identifying global customers—perhaps most importantly, firms must find out where their potential global customers are, through use of the Internet, foreign government agencies, use of a trading partner, or a foreign trade intermediary. Once potential customers are identified, services can begin to decide how their service products can be modified to meet the needs of these customers. 452.

What sorts of problems must services overcome as they expand into foreign markets?

Answer:



Labor, facilities and infrastructure support. Cultural differences, education and expertise



Legal and political issues. Local laws may restrict foreign competitors, limit use of certain



453.

levels can prove to be problematic for firms unfamiliar with local human resources. Firms must also become adept at locating the most appropriate support facilities, suppliers, transportation providers, communication systems and housing.

resources, attach tariffs to prices or otherwise impose barriers to foreign services. Some countries require foreign companies to form joint ventures with domestic business partners. Domestic competitors and the economic climate. Company managers must be aware of their local competitors, the services they offer, their pricing structures and the current state of the local economy. Firms can devise competitive strategies by modifying their services to gain a local or regional competitive advantage. Identifying global customers. Perhaps most importantly, managers must find out where potential global customers are, through use of the Internet, foreign government agencies, trading partners or foreign trade intermediaries. Once potential customers are identified, managers can begin modifying their service products to meet the needs of these customers. What are the three generic strategies that services use to compete? Give examples.

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Solution and Answer Guide:

Answer: cost leadership (Wal-Mart, Southwest Air), differentiation (i.e., quality—Ritz-Carlton, Macy’s), and focus (clothing outlets for ―full-figured women‖, Fed-Ex). 454. When a service competes using a cost leadership strategy, does this mean the service is low quality? Explain. Answer: No. Using a cost leadership strategy often requires a large capital investment in automated production equipment and significant efforts in the areas of controlling and reducing costs, doing things right the first time, standardizing services and aiming marketing efforts at cost-conscious consumers. 455. When customers purchase a service, they are actually getting a bundle of service attributes. List and describe these attributes using a car rental agency, a convenience store and a radio station. Answer: The explicit service itself (reserving and use of an automobile) along with the supporting facility (the rental agency and website), facilitating goods (the rental forms, statements, and the extra services provided like insurance and fuel), and implicit services (the security provided, the atmosphere in the agency, the privacy, and the convenience). 456.

How would you characterize your university’s service delivery system?

Answer: varies. 457.

Provide some examples of front-of-the-house and back-of-the-house service operations.

Answer: Back of the house operations (administrative offices) tend to be managed as a manufacturing center, where the emphasis is on maximizing output and achieving economies of scale. Technical people are hired for specific well-defined tasks, and technology is employed to increase productivity. Front of the house operations (customer contact operations) are characterized by taking care of customers, hiring front-line service providers with good public relations skills, and giving employees the power and resources to solve customers’ problems quickly and effectively. 458.

What are some things service firms can do to monitor customer satisfaction?

Answer: Monitoring customer complaints, talking to and observing customers, and tracking customer feedback using customer comment cards and comment forms on the company's website are ways to continually monitor customer satisfaction. Walk-through service audits should also be performed by management, covering service system attributes from the time customers initially encounter the service, until they leave. 459.

Why are service locations so important?

Answer: Location decisions are extremely important for almost all services, because they have a significant impact on customer visits and consequently, the long-term profits of the company. Location decisions are viewed as long-term decisions because of the typical high cost of construction, remodeling, and relocation. Global market opportunities, global competitors, and technological and demographic changes contribute to the importance of using a good location strategy. 460. What strategy do you think was used in selecting the location of your university? Could there be a better location?

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Solution and Answer Guide:

Answer: varies. 461.

Discuss the principle design objectives for service layouts.

Answer: Service layouts can be designed to reduce the travel times of customers or service workers when moving from one area to another. An example of a layout where this might be a primary consideration would be a health clinic. Designing service layouts to place certain desirable pairs of departments closer to one another is another useful type of layout analysis tool, and is often used for retail or office layouts. Here, the importance is placed on the relationship between various departments. 462. How do supply chain management activities differ between services and manufacturing companies? In what ways are these activities alike? Answer: In many respects, service-producing organizations are like goods-producing organizations—both types make purchases and therefore deal with suppliers, they incur order costs and inventory carrying costs; and the purchased inventories must be transported, counted, assessed for quality, and stored somewhere. For some services, purchased items are part of the service provided and are extremely important sources of competitive advantage (such as at a retailer or restaurant), while for others, this may be a very minor concern (for instance law offices and barber shops). In many cases, service firms also purchase facilitating products such as computers, furniture, and office supplies that are not part of the services sold, but rather consumed inside the firm, and these materials must also be managed. On the other hand, service firms are unlike goodsproducing organizations, in that services typically deal with the end customer in their supply chains, while most goods-producing firms deal with wholesalers, distributors, other manufacturers, or retailers. In other words, service products are typically not passed on to customers further down a distribution channel. Thus, any goods that are delivered as part of the service are typically consumed or used by immediate customers. Service firms deal very closely with their customers, and the services performed in many cases contain higher labor content than manufactured products. 463.

What are the four concerns of service response logistics?

Answer: The four primary activities of concern in service response logistics are the management of service capacity, waiting times, distribution channels, and service quality. 464. text.

Define service capacity and provide three examples of service capacity not listed in the

Answer: Service capacity is most often defined as the number of customers per day the firm's service delivery systems are designed to serve, although it could also be some other period of time such as customers per hour or customers per shift. Capacity measures can be stated somewhat differently too, depending on the service—for instance, airline companies define capacity in terms of available seat miles per day. 465.

What is the capacity of your class’s classroom?

Answer: varies. 466. Define capacity utilization. What is an ideal utilization? Can utilization ever be greater than 100 percent? Explain.

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Solution and Answer Guide:

Answer: Capacity Utilization =

actual customers served per period . capacity

As utilization approaches (and sometimes even exceeds) 1.0, services become more congested, service times increase, wait times increase, and the perceived quality of service deteriorates. Thus, the ideal utilization might be somewhere around 80%. 467.

Describe how you would use a level and a chase demand capacity utilization strategy.

Answer: The two most basic strategies for managing capacity are to use a level demand strategy (when the firm utilizes a constant amount of capacity regardless of demand variations) or a chase demand strategy (when the amount of capacity varies with demand). When a level demand strategy is used, the firm is left to using demand management or queue management tactics to deal with excess customers. When a chase demand strategy is used, effective plans must be in place to utilize, transfer, or reduce service capacity when there is excess available, and to develop or borrow capacity quickly when demand exceeds capacity. 468. What are some alternatives to hiring and laying-off workers to vary service capacity as demand varies? Answer: a number of efficient methods can be employed to minimize the costs of hiring workers and then letting them go, and the cost of letting customers wait in line. These include cross-training and sharing employees, using part-time employees, using customers, using technology, using employee scheduling strategies and finally, using demand management techniques to smooth or shift demand. 469.

Can customers be used to provide extra service capacity? Explain.

Answer: Yes, provided it is seen by customers as value-enhancing. The benefits for self-service customers include faster service, more customized service, and lower prices. The benefits for the companies include lower labor costs and extra service capacity. In this sense, customers are "hidden" employees, allowing the firm to hire fewer workers and to vary capacity to some extent as needed. The tradeoff for customers is that they expect to pay less for the service, since they are doing some of the work. This might include pumping gas, filling soda cups, filing taxes, or filing legal forms. 470. Describe some demand management techniques that are used when demand exceeds capacity, and when capacity exceeds demand. Your university has periods of time when both of these situations exist. What do they do? Answer: When demand exceeds capacity--raising prices during busy periods to reduce demand and shift it to less busy periods, taking reservations or appointments to schedule demand for less busy periods, discouraging undesirable demand through use of screening procedures and marketing ads, and segmenting demand to facilitate better service (examples include use of first class and economy class seating, and use of express and regular checkout stations). When capacity exceeds demand--lowering prices during off-peak periods, as in early-bird dinner specials or mid-week hotel rates, and designing aggressive marketing campaigns for use during slow business periods. The answers to the final part will vary. 471.

How can firms make use of excess capacity?

Answer:

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Solution and Answer Guide:

One way to utilize excess capacity is to develop additional service products. Periodic lack of demand might be particularly troublesome for services with seasonal demand, such as hotels, airlines, and ski resorts. For these services, management may try to develop service products that the firm can provide during their characteristically slow periods. This might include airlines partnering with resorts to provide vacation packages during off-peak seasonal periods, hotels booking business conferences during slow periods, or ski resorts designing mountain bike trails or building cement luge runs for summer use. Firms can also make use of cross-training to shift or transfer employees to other areas needing more capacity. For instance, swimming pool builders might train and then use their construction workers to build pool enclosures during the winter months. 472. What are the two elements managers must pay attention to, when managing queues, to maximize customer satisfaction? Answer: to design adequate queuing systems and then couple this with the management of customers’ perceived waiting times to minimize the negative impact of waiting in line. 473.

What are the primary elements to consider when designing any queuing system?

Answer: the primary elements of all queuing systems are the input process, the queue characteristics, and the service characteristics. 474. What type of queuing system configuration is used at a restaurant? A car dealer? At Zappos? Answer: Restaurant—multiple channel, single phase; car dealer—single channel, multiple phase; Zappos— multiple channel, single phase. 475.

Define the terms ―balking‖ and ―reneging‖. How could a firm minimize them?

Answer: Balking (refusing to join the queue once they see how long it is) or reneging (leaving the line prior to completing the service). They could use more servers, faster technology, and better queue management techniques. 476.

What is a virtual queue? When might one be used?

Answer: Technology is impacting queuing systems such that virtual queues are becoming more commonplace. Customers’ places in the queue are tracked by a computerized system that allows them to roam the premises until their place is called. This reduces balking and reneging while allowing customers to make better use of their time. Restaurants use these frequently. 477.

What type of queuing system does a three-channel, four-phase system refer to?

Answer: This means there are three servers working in parallel (checking people in), with four different service processes and servers arranged in series (one after another) for customers. 478.

What are the advantages and disadvantages of increasing the number of channels?

Answer: The big advantages are reduced queue lengths and shorter waiting times. The disadvantage is higher server costs. 479. What queue discipline is used to register students at your university? What about seating patrons at a fancy nightclub?

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Solution and Answer Guide:

Answer: University—first-come-first-served; fancy nightclub—most-important-customer-first 480.

Explain and give examples of Maister’s 1st and 2nd Laws of Service.

Answer:

Rule #1: Satisfaction = perception – expectation When customers expect a certain level of service, and then perceive the service they actually receive to be higher, then they will be satisfied. Conversely, when customers' service expectations are higher than their perceptions once the service has been received, they are unsatisfied.

Rule #2: It is hard to play catch-up ball If customers start out happy when the service is first encountered, it is easy to keep them happy. If they start out disgruntled, it is almost impossible to turn things around. 481. If your firm has designed an effective queuing system, why is it still necessary to practice waiting time management on some occasions? Answer: Because of the variance of actual demand and the variance in service rates. There will be many occasions when actual demand will exceed forecasted or planned demand, for short time periods, and occasions when server capacity will vary or services demanded will vary. 482. What are the distribution channel alternatives for a weather service? A souvenir shop? A marriage counselor? How about your university? Answer: Weather service—TV, radio, newspapers, internet; souvenir shop—stand-alone store, store in a mall, internet store; marriage counselor—stand-alone office, radio, TV. 483.

What is a microfranchise? Would these be good for a developing country? For the U.S.?

Answer: The microfranchise is another type of franchising concept and is seen as a good way for economically disadvantaged people to make a living. It offers ready-made, low- risk starter jobs for people with little or no education and little available capital, while giving established companies additional distribution avenues. Drishtee, for example, is an India-based microfranchise. Their small kiosks can be seen in thousands of Indian villages selling basic healthcare products. Drishtee loans franchisees $150 for start-up fees, and the kiosks can earn the franchisees about $30 per month in profits. They might also be good for the U.S. particularly during tough economic times. 484.

What is edutainment? Does your university use it? How?

Answer: Museums, parks, radio shows, movies and a host of service providers are also getting into the act with edutainment or infotainment to attract more customers, create a learning experience, and increase revenues. Edutainment combines learning with entertainment to appeal to customers looking for education along with play. 485.

Describe the important issues in the international expansion of services.

Answer: Operating with partners who are familiar with the region’s markets, suppliers, infrastructure, government regulations, and customers; become involved in Chinese markets; exposure to foreign currency exchange rate fluctuations can also pose a problem for firms, requiring them to use financial hedging strategies to reduce exchange rate risk; language barriers, cultural problems and the varying needs of different regional cultures also must be addressed when expanding.

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Solution and Answer Guide:

486. Describe and give examples of a pure Internet distribution strategy and a mixed Internet distribution strategy. Find your examples on the Internet. Answer: Sell products exclusively over the Internet (a pure strategy), while others use it as a supplemental distribution channel (a mixed strategy). The pure Internet strategy can have several distinct advantages over traditional brick-and-mortar services. They can become more centralized reducing labor, capital, and inventory costs, while using the Internet to decentralize their marketing efforts to reach a vastly distributed audience of business or individual consumers. Amazon.com falls into this category. Today though, the mixed strategy of combining traditional retailing with Internet retailing seems to be emerging as the stronger business model. Firms such as JCPenney sell items in retail outlets and also sell items from Internet and store catalogs. 487.

How is service quality related to customer service and satisfaction?

Answer: For services, quality occurs during the service delivery process and typically involves an interaction between a customer and a service employee. Customer satisfaction with the service depends not only on the ability of the firm to deliver what customers want, but the customers' perceptions of the quality of the service received. When customer expectations are met or exceeded, the service is deemed to possess high quality and when expectations are not met, the perception of quality is poor. 488. Describe the five dimensions of service quality for a dentist’s office, how performance in these dimensions might be measured, and how recoveries might be handled for failures in each of the service quality dimensions. Answer:

Reliability: consistently performing the dental services correctly and dependably. Could track the number of customer problems or complaints regarding these issues; Responsiveness: providing

dental services promptly and in a timely manner (keeping appointments). Could measure the time lag between appointment times and actual customer start times. Assurance: using knowledgeable, competent, courteous employees who convey trust and confidence to customers. Could track complaints regarding employees, and how much training they receive. Empathy: providing caring and individual attention to customers. Tangibles: the physical characteristics of the service including the facilities, the servers, equipment, and other customers. 489.

Can recovery from a poor service quality incident be a good thing? Explain.

Answer: In most cases, quick recovery from these service failures can keep customers loyal and coming back, and may even serve as good word-of-mouth advertising for the firm, as customers pass on their stories of good service recoveries. Most importantly, when service failures do occur, firms must be able to recover quickly and forcefully to satisfy customers.

Problems 490. For the previous month, the Bichsel Lounge served 1,500 customers with very few complaints. Their labor cost was $3,000; material cost was $800; energy cost was $200; and building lease cost was $1,500. They were open 26 days during the month, and the lounge has 20 seats. They are open six hours per day, and the average customer stay is one hour.

a. Calculate the single-factor productivities and the overall multiple-factor productivity. How could they improve the productivity? b. Calculate the monthly capacity and the capacity utilization. Answer:

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Solution and Answer Guide:

a. Single factor productivities: labor—0.5 customers/labor$; material—1.875 customers/material$; energy—7.5 customers/energy$; building—1 customer/lease$. Multifactor productivity—0.272 customers/total$. They could improve productivity by improving capacity utilization, possibly increasing the number of hours they are open or adding seats. b. Capacity = 26(20)(6/1) = 3120 customers per month. Utilization = 1500/3120 = 0.48 or 48%. 491. The Iarussi Legal Aide office assisted 126 people in June, 2021, with a staff labor cost of $3240. In June, 2022 the office provided assistance to 145 people with a labor cost of $3960. What was their productivity growth over this one-year period? Answer: P2013 = (126/3240) = .0389; P2014 = (145/3960) = .0366. Growth = (P2014 – P2013)/P2013 = - 5.9% 492. The Valentine Ski Company makes top-of-the-line custom snow skis for high-end ski shops and employs fifteen people at $20 per hour. Chris, the owner, wants to track several productivity performance measures using the data shown below. Financial Information Net sales Cost of goods sold (purchased items) Net income after taxes Current assets Current liabilities Avg. inventory value Inputs and Outputs Skis produced Labor hours Lease payments

2021 Results $205,000 $32,000 $28,200 $68,000 $22,000 $4,500 1,000 10,800 $24,000

a. Calculate the labor productivity, lease productivity, and material productivity. b. Calculate the multiple-factor productivity. If the multiple factor productivity for 2020 was 0.004 skis/dollar, then what was the productivity growth from 2020 to 2021? Answer:

a. Labor = 1000/10800(20) = 0.005 skis/labor$; Lease = 1000/24000 = 0.042 skis/lease$; Material = 1000/32000 = 0.031 skis/material$ b. MFP = 1000/(10800(20)+24000+32000) = 0.0037 skis/$ Growth = (.0037-.004)/.004 = - 0.075 or – 7.5% growth,

493. For the office layout shown below and the accompanying trip and distance matrices, determine the total distance traveled per day. Find another layout that results in a lower total distance traveled per day. Answer: Multiply the trips and the distances together, for each element in the matrices. This results in a total distance traveled per day of 5545 m. Put Depts. 4 and 5 closer together, to reduce distance traveled the most. So, switch 5 and 8, which will also put 1 and 8 closer together, which is good. The new Distance matrix would look like: New Distances Between Departments (meters)

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Solution and Answer Guide:

Note: * designates new distances (simply swap distances from 5 and 8 to everything else). (2)

(3)

(4)

(5)

(6)

(7)

(8)

50*

10*

35*

20*

40*

10*

60*

50*

20*

10*

(1) (2) (3) (4) (5) (6) (7)

30*

And, the new total distance is: 3805 m/day. 494. For the office layout shown in problem 4, determine the closeness desirability rating using the rating table below. Treat the hallway as if it doesn’t exist (i.e., the Production and Accounting Departments touch each other). Can you find a more desirable layout? How could you use both the distance traveled and the closeness desirability in assessing the layout alternatives? Can you find a layout resulting in relatively high scores using both types of criteria? Answer: For every department that touches another department, record the corresponding score from the closeness desirability matrix. Do not count pairs twice (i.e., depart. pair (1,2) is worth 2 points, but do not also count the pair (2,1). There are 11 distinct pairs for a total of 13 points (1-2, 1-5, 1-6 = 3 pts.; 2-3, 2-6 = 3 pts.; 3-4, 3-7 = 2 pts.; 4-8 = 2 pts.; 5-6 = 2 pts.; 6-7 = 0 pts.; 7-8 = 1 pt.) To find a better layout, try switching depts. 5 and 8 (don’t move any walls). In this case, the new desirability score would be (1-2, 1-8, 1-6 = 6 pts.; 2-3, 2-6 = 3 pts.; 3-4, 3-7 = 2 pts.; 4-5 = 3 pts.; 8-6 = 2 pts.; 6-7 = 0 pts.; 7-5 = 2 pts.) or 18 points. There would certainly be others. To combine this method and the distance traveled method would be a good idea—you could look for layouts that scored high using both methods. 495. Corner’s Cat Care needs help in her grooming business as shown below for the 5-day workweek. Determine a full and part-time work schedule for the business using the fewest number of workers.

Workers

Monday

Tuesday

Wednesday

Thursday

Friday

Monday

Tuesday

Wednesday

Thursday

Friday

Answer: Workers Required Full time (2) Part time (1) Part time (1) Part time (1)

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Solution and Answer Guide:

2 full-time and 3 part-time workers to fill the requirements. 496. Given an average service rate of twelve customers per hour, what is the probability the business can handle all the customers when the average arrival rate is ten customers per hour? Use the Poisson distribution to calculate the probabilities for various customer arrivals. Answer: Similar to Example 12.4. No. of Arrivals, x 0 1 2 3 4 5 6 7 8 9 10 11 12

P(x for T=1hr) .000 .000 .002 .008 .019 .038 .063 .090 .113 .125 .125 .114 .095

Cum. Probability .000 .001 .003 .010 .029 .067 .130 .220 .333 .458 .583 .697 .792

Thus, the business can handle up to 12 customers per hour about 79% of the time, when the average arrival rate is 10 customers/hour. 497. With an average service rate of twelve customers per hour and an average customer arrival rate of ten customers per hour, calculate the probability that actual service time will be less than or equal to six minutes. Answer: This is similar to Example 12.5. Probability = 0.7 P = 1 – e-12(.1) =0.699. Note that 6 minutes = 0.1 hrs. 498. Breann can handle about 10 customers per hour at her one-person comic book store. The customer arrival rate averages about 6 customers per hour. Theresa is interested in knowing the operating characteristics of her single channel, single phase queuing system. Answer: This is similar to the example in the chapter: λ = 6/hr μ = 10/hr Ls = 1.5 customers Lq = 1.5 - .6 = 0.9 customers Ws = 1.5/6 = .25 hrs. = 15 min. Wq = .9/6 = .15 hrs. = 9 min.

ρ = 0.6

499. How would Breann’s queuing system operating characteristics change for the problem above, if she added another cashier and increased her service rate to twenty customers per hour? Answer: This is similar to the example in the chapter: ρ = 6/20 = 0.3 P0 = 1/(1 + .6 + .18(1.43)) = 0.538 Lq = .538((.36(.3) / (2(.72)) = .059 customers Ls = .059 + .6 = .659 customers Wq = 0.059/6 = 0.01 hrs. = 0.6 min. Ws = .01 + .1 = 0.11 hrs. = 6.6 min.

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Solution and Answer Guide:

Cases 1.

Daisy Perry* Case Note

Learning Objectives 

Describe the strategies of managing capacity, wait times, distribution, and quality in services.



Use various techniques for managing customers’ perceived waiting times.

Daisy Perry is the repair shop supervisor at one of the largest automotive dealerships in Phoenix, Arizona. Daisy has been working on cars since she was 12 years old, more than 25 years. She began by helping her father repair racecars; he raced cars as a hobby. After her graduation from high school, Daisy attended a technical school to earn her Automotive Service Excellence (ASE) certification. Early in her career Daisy move around from brand to brand to get as much experience as she could. Daisy has worked on all type of cars, from traditional family vans to sporty high-performance cars. Because of her experience at different dealerships, Daisy has an excellent reputation throughout Phoenix, so much so, that some customers actually switched brands when Daisy moved on to another dealership. Daisy is ready to go out on her own and open an all-purpose automotive repair shop. Opening her own business requires a lot of thought. Daisy has many things to consider; for example, layout, location, type of strategy, productivity, capacity, and customer waiting time, to name just a few. Daisy beings to jot down some of the things she believes are important to include in her business. As Daisy reviews her list, she feels that there are still many unanswered questions. However, Daisy feels reasonably confident since she effectively ran the repair shop at the dealership for the last five years. Daisy has many friends in the business and decides to share her list with several of them and get feedback.

Answers to Questions 500. Daisy decided that the main thing she should focus on is customer satisfaction. She believed that if you did that then you’d address all the other items since they drive customer satisfaction. Evaluate Daisy’s list of things she believed were necessary for her business. Explain which items support the five dimensions of service quality. Has Daisy missed any of the five service quality dimensions? If so, which one(s)? Answer: Daisy has addressed four of the five service quality dimensions. Reliability: Daisy will ensure billing accuracy through itemized invoices. In addition, Daisy will offer at a minimum a 30-day warranty on all work. Responsiveness: At this stage of planning, Daisy has not directly addressed any responsiveness criteria. Assurance: Daisy is highlighting her employees’ skill through their ASE certification. In addition, Daisy’ reputation is the firm’s reputation. Empathy: Daisy is implementing a customer recognition program with the free oil change after every fifth one. In addition, her waiting room has multiple amenities for the customers, e.g., WiFi, TV, etc. Tangibles: Daisy is ensuring her employees look professional by providing them overalls and ensuring they will have a clean pair to begin the workday. Daisy has state-of-the-art equipment and it is visual through the waiting room windows. Finally, the waiting room design enhances customers’ comfort. 501. Which service strategy is Daisy planning to implement? Provide specifics that support your selection. Do you believe this is the best strategy? Should she consider one of the other two?

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Solution and Answer Guide:

Answer: Of the three service strategies, cost leadership, differentiation, and focus, Daisy is clearly implementing the differentiation strategy. Only employing ASE certified mechanics is a differentiator. Her layout, with windows to the work bays is another differentiator. Proving a 30day warranty on all work could be a significant differentiator. The number of amenities in the waiting room appear to be differentiators. Since Daisy’s professional reputation is her major differentiator, it makes sense to build on that and use differentiation as a strategy. Also, since her expertise is on a wide range of vehicles, a focus strategy does not seem necessary or as appropriate as broad differentiation. 502. Daisy’s concern about scheduling during non-peak periods is a serious problem. She cannot risk alienating her ASE certified mechanics by cutting their hours because they can easily find other work. Assume the following: after the first year, Daisy determines the non-peak periods. There are very few times; however, she believes they will be consistent year after year, meaning the same general timeframe. Explain to Daisy what options or initiatives she can use to increase demand since cutting hours is not an option. Answer: Although Daisy’s customers are not in the standard queue such as those in banks or fast-food restaurants, they still are in a queue, thus waiting for the service to be completed. Essentially, Daisy is already employing basic initiatives to manage perceived waiting times. In her situation, Daisy is keeping the customer informed by using the waiting room windows as a visual of the stage of repair/service. In addition, Daisy is keeping them occupied by providing Wi-Fi, TV, etc. Finally, she has grouped the customers together in a single area; thus, they can talk to one another about what is on TV, in a magazine, etc. * Written by Rick Bonsall, D. Mgt., McKendree University, Lebanon, IL. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Designing a Call Center for an Express Logistics Service Provider*

Case Note Bangmod has to deliver two major values to their customers which are speed and convenience to ensure the supply chains are responsive as needed.

Questions and Answers 503. Do you think a call center would benefit Bangmod at this point? What benefits could it provide? Answer: Yes. The call center will provide better customer service for pre-transaction, transaction, and post-transaction customers. For pre-transaction, the call center will provide information regarding service options, fees, etc. For the transaction period, the call center will ensure customers that the shipment will reach customers at the right time and right place. For post-transaction, the call center will support shipment tracking and handle customer feedback. It will also be used to improve service in the future. 504. From the case, identify items of importance in terms of designing the call center and rank them in terms of importance. Answer: 1) Managing and improving service quality, 2) increasing sales, 3) managing service capacity, and 4) managing queue time.

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Solution and Answer Guide:

505. Discuss the important issues for managing the daily center operations including queuing management, facilitating products, and service quality for Bangmod. Answer: a.

Queuing Management DESIGN: process design, recruitment, and employee development are all important aspects in creating a successful call center. Poor process design, recruitment, and employee development can result in inefficient processes with long service processing rates that will result in unsatisfied customers, long waits, and unprofitable systems. DAILY OPERATIONS: The number of servers staffed is important in terms of managing the number of customers waiting in line, the amount of time each customer will wait, and the cost to operate the system.

Facilitating Products

Service Quality

Some of the facilitating products students may mention include: computers, furniture, office paper, light bulbs, headsets, monitors, printers, pens and pencils...

DESIGN: process designers will need to consider customer expectations when designing the service, choosing the facility, and recruitment. It will be important to consider whether the customer values reliability, responsiveness, assurance, or empathy, and how much. DAILY OPERATIONS: Managers and servers need to keep in mind the customer's expectations. It is important that servers not only seek to satisfy the customer based on the information provided by the managers, but they also seek to identify changes in customer's needs as time goes by. Managers and servers should work together to identify changes and/or problems that require immediate attention and order to maintain a high level of service quality. * Written by Watcharapoj (Jack) Sapsanguanboon, Graduate School of Management and Innovation, King Mongkut’s University of Technology, Thailand. The people and institution are fictional and any resemblance to any person or any institution is coincidental. This case was prepared solely to provide material for class

Benevolence Children Hospital* Case Note

Learning Objectives 

Describe the strategies of managing capacity, wait times, distribution, and quality in services.



Use various techniques for managing customers’ perceived waiting times.

Benevolence Children Hospital has grown steadily over the last decade. They have been fortunate to receive several large sums of charitable donations. This has enabled them to recently add a new surgical wing. This wing is actually a completely new service the hospital is providing. In the past children were sent to other area hospitals for surgery. Now, Benevolence Children Hospital can provide surgical services specializing in children’s needs.

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Solution and Answer Guide:

The new surgical wing has come at the perfect time because the population of Widow Creek has grown exponentially in the past three years. Unfortunately, the hospital wasn’t prepared for the volume of surgeries. Although they have the physical capacity, e.g., operating rooms, staff, recovery rooms, etc., they have fallen short on customer care. As Meredith examined the data and talked with the families of the patients, she began to understand the root cause of their complaints. Communication was poor. Parents didn’t feel that they were kept informed in a timely manner about their children’s surgery. Their perception was that a lot of time passed before any updates were provided. Also, if they had a complaint or a compliment, they didn’t know who specifically to name. Since they were extremely stressed because their child was having surgery, they didn’t always remember which staff member they interacted with. Meredith talked with her senior staff and they concluded that in many ways the problem was similar to managing queue times. Many of the same emotions and reactions people felt when in a queue were similar to what waiting families were experiencing.

Questions and Answers 506. Obviously, hospital personnel wear nametags to identify themselves. However, in the case the families are not remembering who they interact with because they are stressed. Recommend a solution that guarantees to eliminate this issue; thus, improving the families’ sense of connection to those caring for their children. Answer: Students’ answer may vary. The issue in many hospital situations is that a variety of people with different duties and skill sets are involved in taking care of each patient. Generally, staff are assigned to each patient prior to their treatment as part of the hospital’s scheduling system. Consequently, when a patient is admitted, who will do what is already determined. A 3X5 size card can be given to the patient’s family with the name of the registration person (administrative staff), the pre-procedure person (registered nurse [RN] who takes vitals, etc.), the procedural person (surgical RN), the recovery room person (RN), the anesthesiologist, and the surgeon. This would enable the family to provide positive or negative comments about the specific person. Also, it would go a long way to relieving anxiety knowing who specifically is accountable for each stage of the process. 507. What actions do you recommend the hospital take to increase the feeling of customized service; thus, enhancing empathy? Hint: think about what restaurants and/or airlines do to enable better communications. Answer: Students’ answers may vary. The key to customized service in this scenario is to ensure an effective communication process that is tailored to the individual family. To ensure the family is confident it will be located and notified, when necessary, they could be given a pager like what is given when waiting in line at a restaurant. This way they can be signaled directly without having to worry about missing an announcement over an audio system. In addition, they could be provided a 3X5 size card that has a number unique to the patient and explains what the various stages of treatment are. Within the waiting room there can be a screen with the patient’s number and a color code displayed next to it. For example, the color codes are in pre-op yellow, ready for OR orange, in OR light green, and so forth. This would keep the family informed and lessen their anxiety because they would have a sense of how things are progressing. 508. Besides the actions or initiatives taken to solve the specific problems mentioned in questions 1 and 2, what additional things can the hospital do to manage perceived waiting times and the issues they cause? Answer: Students’ answers may vary. Some initiatives to manage the family’s perception of waiting time are as follows.

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Solution and Answer Guide:

     

Provide TVs to view. Provide magazines. Prove free Wi-Fi. Provide snack and drink machines, and directions to the hospital cafeteria. Provide a small play area with toys/books for children. Design the waiting room to foster a sense of togetherness and to facilitate conversations.

Part 4 Continuing Case Interactive Health, Inc.*

Questions and Answers 1. Describe the requirements for IH’s service department and note how that differs from supply chain management service for IH’s manufacturing plants. Answer: Students should explain state utility, meaning that services do something to things that are owned by the customer (such as transport and store their supplies, or repair their machines). Students should note several aspects of providing services including comments on expectations such as service department’s need to adequately hire, train and schedule service representatives; to acquire technologies and equipment to aid in the provision of services; and to provide the right facility, network, and procedures to continually satisfy customers. Students should also discuss the problems or mistakes that occur during the delivery of services including an increase in service delivery time, a reduction in customer satisfaction, lower perceived service quality, and lost current and future sales. Students should list some and note IH’s application including those services that cannot be inventoried such as inventory equipment set up, services are often unique, services have high customer-server interactions, and services are decentralized. 2. Using Table 12.1 from the text, construct a table that describes the transportation and warehousing/inventory services, for a warehouse lease customer and ―at home‖ equipment customers. Answer: Students should construct a table with ―at home‖ equipment customers and warehouse lease customers on the vertical axis and transportation and warehouse/inventory on the horizontal axis. Each quadrant will have bulleted items distinct to customer requirements such as last mile delivery for at home customers and coordinating receiving and shipping for items to be stored. 3. Define service quality, and describe how to measure service quality for IH’s customer service call center and the private warehouse customers. Answer:

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Solution and Answer Guide:

Students should explain that service quality assessments vary based on both the tangible and intangible elements of the services supplied and the satisfaction of the customers receiving the services. Many call centers that fail to satisfy customers for example, provide opportunities for improvement in service quality. With respect to call centers, the ―gold standard‖ of service quality is their first call resolution score or the percent of callers whose problem is solved on their first call. Students should identify customer service quality measures for orders, service, complaints for both customer types (call center and warehouse) including first call resolution, wait time on hold, lead time on service (delivery and set up). Warehouse lease customers will assess quality based on products shipped to due date, bulk shipments break down and inventory management, and pick errors. 4. Using the information below in Excel, calculate productivity for the private warehouse comparing existing productivity and productivity if robots were leased. Single factor productivity assumptions:  # of workers = 100 (50 dedicated pickers, 25 material handlers, 25 crew leaders and utility associates)  Pay rate/hour = 50 at $15.00/hour and 50 at $25/ hour  # of picks/hour = avg. 100 picks per hour per picker Multiple factor productivity assumptions  # of workers = 100  Pay rate/hour = 50 at $15.00/ hour and 50 at $25/ hour  # of picks/hour = avg. 100 picks per hour per picker  Errors per hour charge back (return freight and reship cost) = 10% error rate per hour per shift and the charge back calculation is $10.00 per picked error. (Instructor note: 10 errors X $10 X 8 hours X 50 pickers = $60,000 per shift X 20 shifts per month = $800,000 per month  Damage and theft = $5000/month Single factor productivity assumptions with robots  # of workers = 50  Pay rate/hour = avg. $35.00  # of picks/hour = 350 picks per hour Multiple factor productivity assumptions with robots  # of workers = 50  Pay rate / hour = avg. $35.00  # of picks/ hour = 350 picks per hour  Errors per hour/ charge back = 0 errors  Lease per robot = $2500/month  # of robots = 30 Answer:

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Solution and Answer Guide:

Single Factor Productivity Without Robots Pickers Material Handlers Crew Leaders Total Workers

50 25 25 100

Pay Rate/hr (for 50 workers)

Avg picks/hr per picker

Average Pay per Worker Total Average Labor Cost Total Picks/hr

Labor Productivity Without Robots ($/Picks)

$ $

20 2,000 10,000

With Robots Workers Avg Pay Rate/hr $ Avg Picks/hr

50 35 350

0.20

Total AverageLab $

1,750

Total Picks/hr Labor Productivity With Robots ($/Picks)

17,500

100

Multiple Factor Productivty Without Robots Workers Pay Rate/hr (for 50 workers) $ Pay Rate/hr (for 50 workers) $ Avg picks/hr per picker Errors/hr / Charge Back Hours Shifts per Month Damage & Theft/month Total Other Costs Picks per Month

With Robots 100

Workers

Labor Productivity Without Robots ($/Picks)

0.70

100

$ $

10 / $10 8 20 5,000

Labor Productivity With Robots ($/Picks) $ 0.13

Avg Pay Rate/hr

50 $

Avg Picks/hr Errors/hr / Charge Back

35 350 0

Lease per Robot Total Robots

2,500 30

Total Other Costs Picks per Month

75,000 2,800,000

805,000 1,600,000

5. What other factors could be considered with the multiple factor productivity that would add to the validity of the comparison? Answer: Factors that could be calculated into the productivity algorithm include sick pay, vacation pay, injury/health care, theft/damage, training, labor shortages, turnover and cost to hire, or flexibility to add capacity with more robots. * Written by Brian Hoyt, DBA, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

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0.10

Chapter 13: Answers to Questions/Problems Table of Contents Discussion Questions 212 Cases 218 Questions and Answers ......................................................................................................................... 218 Learning Objectives ............................................................................................................................... 219 Questions and Answers ......................................................................................................................... 219 Questions and Answers ......................................................................................................................... 220

Discussion Questions 509.

What does process integration mean, and why is it difficult to achieve?

Answer: The term process integration means sharing information and coordinating resources to jointly manage a process. Process integration can be an extremely difficult task because it requires proper training and preparedness, willing and competent trading partners, trust, compatible information systems, and potentially a change in one or more organizational cultures. 510. What makes a supplier or customer a key or primary supply chain partner? Describe why it is important to begin supply chain management efforts with only these companies. Answer: it is important to identify the critical or key trading partners that will eventually enable the successful sale and delivery of end products to the final customers. At least initially, including a large number of supply chain businesses will be extremely difficult and cumbersome, particularly as the firm moves out to second- and third-tier suppliers and customers. Identifying only the primary trading partners allows the firm to concentrate its time and resources on managing important process links with these companies, enabling the supply chain to perform well. Including other non-essential or supporting businesses will prove counter-productive in terms of successful supply chain management. 511. Describe the linkage between supply chain strategies and internal functional strategies and policies. Answer: On an annual basis, management should identify the basic supply chain strategies associated with each of their trading partner’s goods and services. If an end product is competing based on quality, then supply chain members should also be using strategies consistent with delivering high quality products at competitive price and service levels. Product strategies should then translate into internal functional policies regarding the types of parts purchased and suppliers

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Solution and Answer Guide:

used, the manufacturing processes employed, the designs of goods and services, the warranty and return policies offered and potentially the amount of outsourcing employed. In each of these areas, policies should be geared toward supporting the overall strategy of the supply chain. 512.

How do functional silos prevent process integration?

Answer: Successful supply chain management requires process coordination and collaboration internally between the firm’s functional areas as well as externally between the firm and its trading partners. Achieving process integration within the firm requires a transition from the typical functional silos to one of teamwork and cooperation across business functions. 513. What are the eight key supply chain business processes, and why are they important when managing supply chains? Answer: See Table 13.1. 514. What is the difference between the customer service management process and the customer relationship management process? Answer: The customer relationship management process provides the firm with the structure for developing and managing customer relationships. The customer service management process is what imparts information to customers while also providing ongoing management of any product and service agreements between the firm and its customers. 515. Do you think customer service has improved over the years for retailers? Cite some examples. Answer: It varies, but because of competitive pressures, the answer should be yes. 516. What sort of demand management techniques would an exclusive restaurant use when demand exceeds their capacity? What about McDonalds? Answer: Taking reservations, sending people to a sister restaurant; for McDonald’s it would be a longer queue. 517. Is it necessary to have internal performance measures for each of the supply chain business processes? Why or why not? Answer: Yes. Performance measures need to drive a consistent emphasis on the overall supply chain strategy and corresponding process objectives. In order to assure that processes are supporting the supply chain strategy, performance should be continuously measured using a set of metrics designed for each process. 518.

Which should come first—internal integration or external integration? Why?

Answer: Before companies can measure performance among supply chain partners, they must first build good internal performance measurement capabilities across functions. When firms have achieved a reasonably good measure of internal process integration, they are ready to move on to externally integrating key supply chain processes with trading partners. 519.

Explain the differences between process integration, coordination, and collaboration.

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Solution and Answer Guide:

Answer: They all mean the same thing. 520. Why is an ERP system important for both internal and external process integration? What other IT considerations are there? Answer: Firms that are successfully integrating key business processes are using global ERP systems and data warehouses to make better, informed decisions. Data warehouses store information collected from ERP and legacy systems in one location, such that users can extract information as needed, analyze it, and use it to make decisions. A globally-linked ERP system allows the firm to use a common database from which to make product, customer, and supplier decisions. Information is captured once, reducing data input errors; information is available in real time, eliminating delays throughout the organization as information is shared; and finally, information is visible throughout the organization—all transactions taking place can be seen and accessed by everyone on the system. 521. Think of some supply chain (external) performance measures for several of the eight key supply chain business processes, assuming the overall strategy is superior customer service. What if the overall strategy is sustainability? Answer: Varies. 522.

What is an internal supply chain? Do some firms not have any?

Answer: These are the people or departments that feed materials and services to other people/departments within the firm. 523. What are knowledge management solutions, and how can they support a firm’s supply chain integration efforts? Give some examples. Answer: Today, connecting buyers and suppliers via the Internet is the way supply chains are becoming integrated. More generally termed knowledge-management solutions, Internet applications tied to desktop applications enable real-time collaboration and flow of information between supply chain partners, the ability to ―see‖ into suppliers’ and customers’ operations, faster decision-making, and the collection of supply chain performance metrics. 524.

How do organizations extend process integration to second-tier suppliers and customers?

Answer: Firms can develop relationships with their second-tier suppliers and then insist that their direct suppliers use these suppliers. They can also work closely with their key direct suppliers to solve second-tier supplier problems and help them, in turn, to better manage their direct suppliers. To stay on the competitive edge, firms today must use a combination of information system linkages and old-fashioned customer and supplier teamwork to identify and manage second-tier relationships along the supply chain. 525.

How can RFID tags help to enable external process integration?

Answer: RFID technology can add tremendous real-time information visibility capabilities to supply chains. 526.

What is the difference between active and passive RFID tags?

Answer:

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Solution and Answer Guide:

Passive RFID tags don’t contain a power source, require power from a tag reader, and cost from $0.05 to $1.00 each, depending on volume, packaging and how the tag is made. Active RFID tags draw power from an internal battery and are priced in the $20 to $70 range depending on volume required and battery type. 527. Why is lack of trust an obstacle to supply chain management? How can we overcome this obstacle? Answer: Successful process integration between trading partners requires trust, and as with the silo mentality and lack of information visibility, trust is seen as a major stumbling block in supply chain management. Trust develops over time between supply chain partners, as each participant follows through on promises made to the other businesses. Even though this sounds cliché, relationships employing trust result in win-win, or win-win-win for the participants. To overcome this, use the six ways of ―getting to yes‖. 528.

Why is visibility so important when integrating processes?

Answer: Lack of information visibility along the supply chain is also cited as a common supply chain process integration problem. In global supply chains, information visibility is particularly important. New product safety standards, trade agreements and security mandates are changing almost daily, making information visibility critical for importers and shippers. ―Visibility is not just about watching stuff happen,‖ says Melissa Irmen, vice president of products and strategy for North Carolina-based Integration Point, a provider of global trade and regulatory compliance solutions. ―Things are changing so fast, and to have connectivity to all partners is just critical.‖ 529. Define the bullwhip effect and describe how it impacts supply chain integration, or how integration impacts the bullwhip effect. Answer: Even though end item demand may be relatively constant, forecasts of end-item and trading partner demand and the corresponding orders from suppliers as we move up the supply chain can become amplified, causing what is termed the bullwhip effect. These variations in demand cause problems with capacity planning, inventory control, and workforce and production scheduling, and ultimately result in lower levels of customer service, greater levels of safety stock, and higher total supply chain costs. 530. What is cloud-based supply chain management and how might it impact process integration? Answer: Cloud-based supply chain management is also becoming a reality, as companies seek better ways to outsource manufacturing and services while maintaining necessary information visibility. With high-tech manufacturing, for example, managers want as much information visibility as they can get to reduce risk. Cloud-based supply chain solutions give these managers the ability to quickly scale and compete as the global economy recovers, as well as the ability to automate processes and manage exceptions more effectively. ―A typical cloud supply chain already has all of the infrastructure in place,‖ says Mark Woodward, CEO of California-based cloud supply chain provider E2open. 531. What is the difference between supply chain management and supply chain process integration? Answer: A number of factors can impede external process integration along the supply chain, causing information distortion, longer cycle times, stockouts, and the bullwhip effect, resulting in higher overall costs and reduced customer service capabilities. These are the silo mentality, lack

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of supply chain visibility, lack of trust, and lack of knowledge. There is no difference between supply chain process integration and supply chain management. 532. Define the term collaborative education and explain what this has to do with supply chain management. Answer: Training of supply chain partner employees is also known as collaborative education, and can result in more successful supply chains and higher partner returns. 533. Describe an incidence either personally or at work, where you have been involved in shortage gaming. Answer: When buyers figure out the relationship between their orders and what is supplied, they tend to inflate their orders to satisfy their real needs. This strategy is known as shortage gaming. Answers to this question will vary. 534. What is order batching and is this something that will reduce the bullwhip effect? Why or why not? Answer: Making large orders for goods from suppliers on an infrequent basis to reduce order and transportation costs. It tends to amplify demand variability which creates greater use of safety stock, causing more bullwhip effect. 535.

Why should reducing the length of the supply chain also reduce the bullwhip effect?

Answer: By reducing the number of occasions where forecasts are calculated and safety stocks are added. 536.

What is everyday low pricing, and how does it impact the bullwhip effect?

Answer: The obvious way to reduce the problems caused by fluctuating prices is to eliminate price discounting among the supply chain’s members. Manufacturers can reduce forward buying by offering uniform wholesale prices to its customers. Many retailers have adopted this notion of everyday lowing pricing (EDLP), while eliminating promotions that cause forward buying. Similarly, buyers can negotiate with their own suppliers to offer EDLP when curtailing promotions. 537. Have you ever experienced rationing and/or shortage gaming? Please describe an instance. Answer: varies. 538. What is the difference between supply chain risk management and supply chain security management? Which do you think is most important? Answer: As supply chains grow to include more foreign sources and markets, there is a corresponding increase in supply chain disruptions, caused by weather and traffic delays, infrastructural problems, and political problems—risk management deals with mitigating these disruptions; Security management deals with mitigating or protecting against unlawful or terrorist-related activities. Which is more important depends on where the firm is doing business. 539. What do most small businesses do, to reduce supply chain risk? Could they do something more effective? Answer: See Table 13.3. Most just carry more safety stock.

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540. In chapters three and four, it was explained how some firms were successfully single-or sole-sourcing. Doesn’t this increase supply chain risk? Answer: Yes, it does. So, firms should consider also doing some of Table 13.3. 541. What types of supply chains are most likely to be impacted by risk and security problems? Why? Answer: Lengthening supply chains (global supply chains) may have resulted in cheaper labor and material costs, and better product quality, but it has also resulted in higher security costs and greater levels of risk, potentially leading to deteriorating profit and customer service levels. 542.

Which is more important—risk management or security management?

Answer: Both are highly important; for small firms operating locally or domestically though, security might not pose such a large problem. 543.

List some steps firms can take to reduce supply chain risk and increase security.

Answer: Add the job function, Chief Risk Officer, to the global firm’s job structure; carry some level of safety stock to provide the desired product until a suitable substitute supply source can be found; identify suppliers, transportation and warehousing services, and other third party services to use in case the preferred supplier or service becomes unavailable; backup or emergency sourcing and multiple sourcing though, may be a sound strategy in specific cases; diversify purchases of product from other firms and countries; create a formal risk management plan encompassing the firm and its supply chain participants. 544.

What is C-TPAT and which companies would benefit most from using it?

Answer: C-TPAT, or Customs-Trade Partnership Against Terrorism, refers to a partnership among U.S. Customs, the International Cargo Security Council (a U.S. nonprofit association of companies and individuals involved in transportation) and Pinkerton (a global security advising company, headquartered in New Jersey), whereby companies agree to improve security in their supply chain in return for ―fast lane‖ border crossings at both the Canadian and Mexican borders. This includes conducting self-assessments of the firm’s and its partner facilities and updating security policies to meet C-TPAT security requirements, and then completing a C-TPAT application. Companies crossing the Canadian and Mexican borders would benefit the most. 545.

How did the pandemic impact risk and security?

Answer: Will vary. The pandemic made supply chain risk much, much worse. "There's just too much uncertainty, COVID-19 surges and variants, for anyone to accurately predict when this all returns to some level of normal," Gold, of the National Retail Federation, said. "Everyone is working through this but there is no risk mitigation strategy playbook for the pandemic.‖ The pandemic is believed to have contributed to an increase in cargo theft, which was up overall in 2020 from the previous year, according to the cargo security firm Sensitech. "COVID-19 created a perfect storm of cargo threat and vulnerability.‖ 546. Explain why supply chain process integration is so important to the success of supply chain trading partners. Answer: External process integration can be an extremely difficult task because it requires proper training and preparedness, willing and competent trading partners, trust, compatible information systems,

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potentially a change in one or more organizational cultures, and successful internal process integration. The benefits of collaboration and information sharing between trading partners can be significant: reduced supply chain costs, greater flexibility to respond to market changes, and fewer process problems, which means less supply chain safety stock, higher quality levels, reduced time to market, and better utilization of resources.

Cases 1. 3D Printing: Will Additive Manufacturing Solve the Bullwhip Effect? Case Note Faculty should recommend that students do a quick article search on 3D printing for background information on the process, products, and companies involved.

Questions and Answers 547. What are the challenges and benefits for Crane-Tech Manufacturing if they use Precision Parts 3D printing capability to improve predictions of equipment and aftermarket parts orders to its customers? Answer: Students should first briefly discuss the Bullwhip Effect, as suppliers’ performance impacts the supply chain downstream. Students should start with a brief definition of Demand Forecasting Updating and then discuss aspects of 3D Printing. On-demand production used by 3DP reduces the reliance on forecasting based on orders placed. The on-demand production will reduce safety stocks and corresponding purchase orders with Precision Parts’ own suppliers based on changing forecasts. The ―When Ready‖ contract that Precision Parts initiated will provide collaborative planning with Crane-Tech Manufacturing by providing actual demand data in real time and directly connected to 3DP production runs. The on-demand production used by 3DP will reduce lead time and smaller orders more closely matching actual demand patterns. The challenges for C-TM includes changing they approach to manipulating suppliers lead times as a risk aversion strategy. Students should provide a brief review of Shortage Gaming. 3DP make to order approach will alleviate Crane-Tech Manufacturing from placing orders that inflate demand predictions by Precision Parts. C-TM will not need to ―fool‖ PP and PP will not be responding to false demand forecasts. The on-demand production of Precision Parts’ 3DP will provide any fastener product to C-TM just in time for them to use on their OEM production, after market scheduled maintenance, and in emergency repair situations. Crane-Tech manufacturing will no longer feel pressure to calculate percentage on hand (Precision Parts inventory) as it relates to shifting demand for equipment or aftermarket parts. 548. How much warehouse space expansion should C-TM add to include the new 3D printed parts used for aftermarket sales? Answer: Students should respond with ―no additional warehouse space is needed‖. Students should discuss the relationship between order batching and warehouse space and associated costs. Precision Parts’ 3DP will alleviate the need to run large batch sizes for efficiencies and safety stock replacement. The on-demand production, while increasing the likelihood of LTL shipments, will reduce carrying costs, labor costs, handling and distribution costs. New transportation strategies can be used to deliver smaller shipments from PP to C-TM as PP’s sites are located closer to CT-M facilities. 549. Will the supply chain partnership with Precision Parts provide Crane-Tech Manufacturing improve sustainable competitive advantage in the construction equipment and aftermarket parts industries?

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Answer: Students should discuss sustainable competitive advantage and then examine how PP’s additive manufacturing could provide C-TM with cost and price advantages in the market. Students should provide a brief review of Price Fluctuations. The costs savings for Crane-Tech Manufacturing based on the 3DP cost reductions and the reduced inventory and related carrying costs will provide C-TM an opportunity to employ level pricing. C-TM can pass along cost savings with lower equipment prices or in replacement part costs and lessen the need for discounted prices to stimulate sales. Cost advantages should be used for increased rates of returns (i.e., internal investments in product development, equipment, etc.) and to pass along to customers as sustainable competitive advantage strategies. * Written by Brian Hoyt, PhD, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

2. Managing Supply Chain Security* Case Note

Learning Objectives a. Describe the advantages of, and obstacles to, process integration b. Describe the various processes requiring integration along the supply chain c. Discuss the various issues associated with supply chain risk and security

Questions and Answers 550. Identify the levels of security system response Global Electronics is trying to address by collaborating with Warehouse Security Professionals and with the integration of Secure Check. Explain how the use of Secure Check would meet level objectives. Answer: Students should identify and explain how Secure Check addresses basic initiatives and proactive initiatives. Basic Initiatives – WSP’s screened security personnel provide physical security for property, product, and employees. WSP security professionals have training in the use of monitoring and protection hardware and software making use of technologically advanced clearance procedures for product, employees, and vendors. Having security personnel on site with advanced theft protection skills and experience can facilitate significant cost reduction and reduced insurance claims. Proactive Initiatives – WSP’s Secure Check uses hiring risk modeling to assess new employees and reduce failed hire present costs and bad hire future costs. Using skilled security professionals from WSP’s screened pool of security professionals can shift security focus from monitoring to protection and prevention. 551. What challenges will Global Electronics incur in integrating the use of Secure Check throughout its supply chain? Answer: This problem approach for students can organize challenges from the strategic perspective and the operational perspective. Strategic challenges – The identifying security measures and performance levels for conformance, control and assessment, and full integration into the supply chain system is a major effort. The prioritizing of key supply chain processes, development of performance measures, and the assessment of those external processes is likely to drop the narrow application of Secure Check as a priority.

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Operational challenges – Secure Check is only one small component of the overall security management and only one component of the hiring of security professionals or employees with some security clearance required. The integrity of the other data streams is a major factor in the effectiveness of Secure Check to predict an effective hire. The effectiveness of Secure Check is also dependent on other selection practices (i.e., interviewing). While the integration of Secure Check for any organization may satisfy regulatory compliance to ―Ban the Box‖, ―fair chance‖, or fair credit reporting legislation it may not overcome the alienation of customers and employees or diminish the damage to public image. 552. What advice would you offer to Warehouse Security Professionals to advance their supply chain security portfolio of products and services? Answer: Students should first consider a portfolio that has a niche focus on providing security professionals and services or one that is more diverse and expands products and services across security management opportunities. Students can be prompted to solve this problem for WSP by using an Analysis Matrix with products/services on one axis and criteria on the other matrix (growth, development time, etc.) for niche and diverse portfolio analysis. Students could also construct a decision tree that would include both niche and diverse product services to calculate expected values for each product/service. Ideas for products and services for both niche and diverse portfolios can start with a review in basic, reactive, proactive, and advanced initiatives as well as considering the supply chain members and their unique security management needs. Niche portfolio that focuses on hiring, training, and development of security professionals. Building on Secure Check could include recruiting services of underrepresented populations such as veterans, minorities, and individuals with criminal backgrounds. Orientation and on boarding modules could be developed for new security guard hires. The on boarding curriculum would have standard practices as well as proprietary component templates for clients to add organizational culture elements to orientation. Training modules can be developed for personnel new to the security field, technology advances in software and hardware, new techniques in detection and prevention practices, and legal/regulatory changes both national and international. Diverse portfolio that focuses on a broader offering of products and services along supply chain could include security risk consulting, freight protection, software development, and legal/regulatory lobbying. Market development opportunities international may exist as global supply chains increase. All of these areas…and any area outside of Warehouse Security Professionals existing core competencies has significant risk and investment implications. * Written by Brian Hoyt, PhD, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

3. Supply Chain Integration of Third-Party Logistics Providers* Case Note

Questions and Answers 553. Identify and briefly explain the key items that Bobcat Logistical Solutions’ proposal should include to secure the 3PL contract with Midwest Food and Beverage Transportation’s supply chain integration efforts. Answer: Students should first identify any of the key supply chain business processes (Table 13.1) that Midwest Food and Beverage Transportation is attempting to strengthen with second-tier suppliers

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as they align those key process with supply chain strategies. BLS’s contract storage and delivery services to important spot markets could strengthen MFBT’s supply chain performance in 3 areas:

a. Customer Service Management—As the last step in the supply chain deliveries to end customers (grocery stores, independent restaurants, convenience stores, etc.) Bobcat Logistical Solutions can provide important information system linkages for monitoring and reporting customer service performance (delivery due dates, order status, damage reports) in real time data management. b. Demand Management—As an asset-based 3PL provider Bobcat Logistical Solutions can balance customer demand for product (mix and delivery service) with Midwest Food and Beverage Transportation’s capacity fluctuations. With BLS’s WMS inventory and truck movements can be accessed by MFBT in real time. Inventory management data will be used for forecasting and balancing spot market fluctuations such as harsh weather conditions that upset carrier routes across the region. c. Order Fulfillment—Bobcat Logistical Solutions provides needed capacity and proximity to spot markets that expands Midwest Food and Beverage Transportation’s distribution of product at required service levels. 554. What are the advantages for Bobcat Logistical Solutions to be part of this potential relationship? Answer: A primary benefit to BLS is the exposure and involvement in a corporation’s supply chain integration initiative. As a second-tier supply chain partner BLS will be required to assess and report on supply chain performance measures. This activity will strengthen their internal processes by setting competitive performance targets and directing work and improvements to meet those targets. Secondary benefits include providing BLS with an opportunity to demonstrate the capability as an asset-based to be considered as a Tier 1 supply chain partner. Opportunities to demonstrate excellent performance as a supply chain partner that can contribute to Midwest Food and Beverage Transportation’s performance goals in quality of delivery service, capacity balancing, and data analysis. This partnership as a contract provider will provide stability to Bobcat Logistical Solutions’ continued growth plans, increase investments and return on assets, and open up opportunities for adding capacity by acquiring other 3PLs in strategic spot markets. 555. What are the advantages for Midwest Food and Beverage Transportation to partner with Bobcat Logistical Solutions as an integrated second-tier supply chain member? Answer: Students should be able to review the basic purposes of supply chain integration and pull-out advantages for collaborating at the Tier 2 level.

556.



Reduce risk and increase security with shared information from spot market logistical providers.



Access to real time performance data at the point of customer level for CRM system.

   

Increase forecasting accuracy (inventory levels and lead time for deliveries) Hold costs stable through contacts with BLS into important spot markets Provide information to customer on product availability and delivery schedules More effective response to customer complaints, returns, and product damage What are the potential risks?

Answer:

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Students should identify the obstacles to process integration along the supply chain as they might apply to partnering with Bobcat Logistical Solutions.

a. The silo mentality—The risk includes Midwest Food and Beverage Transportation not fully integrating the Tier 2s (including BLS) into the supply chain management system. When MFBT makes decisions on product, customers, logistics, and so on, those decisions could impact suppliers’ capability to contribute to MFBT’s competitive advantage. Not fully committing to supplier inclusion could limit the supplier’s access to information (amount of information, type of information, and timing of information) and delay important responses by suppliers. This might be particularly a challenge when involving second-tier suppliers. b. Lack of supply chain visibility—suppliers are likely to have different levels of technology and data analysis competencies that contribute to the varying intensities of usable data for MFBT. There is risk that suppliers can’t provide information or have information and they won’t or don’t know how to provide important data on products, delivery performance, inventory levels, etc. c. Lack of trust—There is always some level of risk involved when partnering when supply partners are not exclusive. Sharing information in both directions can be altered because of competitor alliances, which can fuel mistrust. Certain levels of mistrust can result in less-than-optimal pricing/costing contracts. d. Lack of knowledge—Along with the silo mentality some companies don’t consider the value of suppliers’ business or supply chain management knowledge. Opportunities can be missed if MFBT does not consider how close BLS is to spot market customers or how well they have solved logistical problems that were not resolved when brokering freight into spot markets. * Written by Brian Hoyt, PhD, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Chapter 14: Answers to Questions/Problems Table of Contents Discussion Questions 223 Problems

229

Cases 230 Answers to Questions ............................................................................................................................ 230 Questions and Answers ......................................................................................................................... 231 Questions and Answers ......................................................................................................................... 233

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Discussion Questions 557. How did the pandemic change what performance measures companies were monitoring in 2020? Answer: Probably a greater emphasis on costs, profits, and product availability, although, the healthcare industry for example, has dealt with huge issues in terms of supply availability, so facilities have been able to be innovative in the ways they conserve, obtain and stock supplies. Hospitals look at ways to ensure they have a robust supply chain. They have learned ways in which they can use fewer products, reprocess products that have not traditionally been reprocessed, monitor use of products, and possibly move purchasing to more local manufacturers. 558. Walmart’s success is due to its low prices. Why would they need to monitor anything except price performance? Answer: Making decisions while relying on financial performance alone gives no indication of the underlying causes of financial performance. Designing standards and then monitoring the many activities or processes indirectly or directly impacting financial performance can provide much better information for decision-making purposes. 559. Do you think there is a relationship between performance measurement and a firm’s competitiveness and profitability? Explain. Answer: Yes. The Conference Board of Strategic Performance Management found that companies using performance measurement were more likely to achieve leadership positions in their industry and were almost twice as likely to handle a major change successfully. Also, you can’t improve what you aren’t measuring. 560.

Why would IKEA be interested in sustainability performance measures?

Answer: Successful supply chains are those that can continue to deliver the right combinations of cost, quality, sustainability and customer service, as customer needs change. Weaknesses in any of these areas can mean loss of competitiveness and profits for all supply chain members. Today, the best supply chain performers are more responsive to customer needs, quicker to anticipate changes in the markets and much better at controlling costs, resulting in greater supply chain profits. 561.

What do customers have to do with good performance measures?

Answer: Supply chain members can audit their capabilities and those of their supply chain partners to determine if what they do particularly well is consistent with the needs of the end-customers and other supply chain trading partners. Some companies may be well positioned to supply the desired levels of cost, quality, and customer service performance, while others may not be as well positioned. Matching or adjusting supply chain member capabilities with customer requirements can be a very difficult task, particularly if the communication and cooperation levels among companies are not excellent, or if companies are serving multiple supply chains and customer segments requiring a different set of capabilities. 562.

How should performance measures be viewed from a supply chain perspective?

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Answer: Matching supply chain capabilities to end-customer requirements means that firms and their supply chain partners must be continually reassessing their performance with respect to these changing end-customer requirements. This brings us back to the importance of performance measures and their ability to relay information regarding the performance of each member within the supply chain, along with the performance of the supply chain vis-à-vis their end-customers. 563.

In building supply chain competencies, what are the tradeoffs that must be considered?

Answer: Supply chain strategies must consider the potential tradeoffs existing between the cost, quality, quantity, and service requirements mentioned above. For instance, supply chain responsiveness (meeting due date, lead-time, and quantity requirements, providing high levels of customer service) can come at a cost. 564.

What do the best supply chains do, that is better than other supply chains?

Answer: Successful supply chains are those that can continue to deliver the right combinations of cost, quality, sustainability, and customer service, as customer needs change. They are also more sustainable and diverse. The most successful supply chains are more centralized, integrated, global, and focused on measuring performance. Also, these supply chains use big data, highly optimized inventory management, flexibility and speed with order fulfillment, customization with process implementation, energy sustainability, and compliance. 565. What risk do managers take when they view their firm’s performance solely in financial terms? Answer: Decisions that are made solely to maximize current stock prices don't necessarily mean the firm is performing well or will continue to perform well into the future. Business success depends on the firm’s ability to turn internal competencies into products and services that customers want, while providing desired availability, quality, and customer service levels at a reasonable price. Financial performance measures, while important, cannot adequately capture a firm’s ability to excel in these areas. 566. List some of the traditional performance measures and describe their value in today’s competitive climate. Answer: Several problems are associated with using costs, revenues, and profits to gauge a firm’s performance. Windfall profits that occur when prices rise due to demand increases and supply interruptions as has been the case in recent years in the oil industry, is one example. Another problem with the use of costs, revenues, or profits as performance measures is the difficulty in most cases, to attribute cost, revenue, or profit contributions to the various functional units or underlying processes of the organization. 567. Discuss the use of performance standards and performance variances. Do schools and universities use them? How can they be damaging to the organization? Answer: Establishing output standards like 1000 units/day or productivity standards like 10 units/labor hour establishes an ultimate goal that can drive employees and managers to do whatever it takes to reach their goals, even if it means producing shoddy work or "cooking" the books. Schools use these by using grades—A to F. 568.

How can performance standards create functional silos?

Answer:

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When applied at the functional level, standards can reinforce the idea of functional silos. Departments are then assessed on meeting their performance standards instead of optimizing firm or supply chain performance. 569. What is the difference between a total productivity measure and a single factor productivity measure? Provide an example. Answer: A total factor prod. measure is: measure is:

output costs of labor  capital  energy  material

and a single factor prod.

output

, for example. The total factor measure is good for a big picture cost of labor measure, but is not provide any information on specific inputs like labor. 570. List some single-factor and multiple-factor productivity measures for a restaurant; a quick-change oil garage; and an overnight delivery service. Answer: Varies. 571. Using the formula for productivity, (outputs/inputs), what are all the ways that productivity can be increased? Answer: Increase outputs while holding inputs constant; decrease inputs while holding outputs constant; increase outputs faster than inputs are increasing; reduce inputs faster than outputs are decreasing. 572. What is the productivity growth rate right now in the United Sates? Explain why it is as low as it is. Answer: Varies, but should contain a discussion of the aging workforce and low productivity in general of services. 573. What are the advantages and disadvantages of using labor utilization as a performance measure? Do these same arguments apply to machine utilization? Answer: These performance measures when used alone, can encourage the firm once again to reduce labor levels until everyone is overworked, causing queues of work or customers to develop, morale to suffer, and quality and customer service levels to erode. Additionally, using the measures discussed above, there is a tendency to continue producing and adding to inventory just to keep machines and people busy. Less time is spent doing preventive maintenance, training, and projects that can lead to greater performance and profits in the future. While it is obviously beneficial to meet demand and keep labor costs at optimal levels, maximizing utilization can prove to be very expensive for firms. 574.

How could you increase labor productivity without increasing labor utilization?

Answer: Since labor utilization can be expressed as: actual hours utilized , this ratio could remain constant, total hours available

for example, and labor productivity increase if a new technology was introduced to make laborers’ jobs more effective. 575.

Using the formulas provided for utilization, calculate the utilization of your classroom.

Answer:

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Solution and Answer Guide:

Varies, but if the room has 60 seats, then the seats utilized would be the total students registered in the room each day (maybe 300) and the total seats available would be the number of classes each day (maybe 6) times 60 (360). So, the utilization would then be the number of students per day actually in the classroom (possibly 200), divided by 360. So, utilization might be around 55%. 576.

What do you think a good labor utilization would be for a factory? A restaurant? Why?

Answer: Varies, but factory utilization probably would be higher, since demand variability is higher for the restaurant. 577. How do world-class performance measures differ from say, financial performance measures? Answer: World-class performance measures must be easy to implement, understand, and measure; they must be flexible and consistent with the firm’s objectives; and they must be implemented in areas that are viewed as critical to the success of the firm. Financial performance measures are too specific to one area, and would not fit the definition here. 578. Using the steps suggested for developing performance measures, create several worldclass performance measures for a hotel’s front-desk area, maintenance department and room service personnel. Answer: Varies. 579. How should a firm extend their performance measures to include other supply chain members? Answer: In successful supply chains, members jointly agree on a supply chain performance measurement system. The focus of the system should be on value creation for end-customers, since customer satisfaction drives sales for all of the supply chain’s members. An integrated business intelligence system can be used to provide internal users and supply chain members with visibility into the firm’s business performance, allowing users to view financial and other performance data and perform trend analyses, for example. Problems can be quickly identified and remedied to reduce costs and improve sales. 580. What are demand driven supply networks and what role do performance measures play in these networks? Answer: This is when consumer demand drives firms’ supply chains. Termed demand-driven supply networks, the idea is to design supply chains with enough flexibility to respond quickly to changes in the marketplace. One of the cornerstones of Best Buy’s supply chain transformation is performance measurement. 581.

How can you create performance measures for an entire supply chain?

Answer: Members jointly agree on appropriate supply chain performance measures. Then, the measures are averaged across the number of members submitting data. 582.

What is a sustainable supply chain?

Answer: Supply chain companies that will succeed far into the future, since these practices reduce costs and improve efficiency, in addition to preserving natural resources.

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583. Why should supply chains begin using green performance measures? Provide some examples of green supply chain performance measures. How would these differ from green performance measures for one firm? Answer: As consumers, governments, and business leaders begin to address the need for protecting the environment and reducing greenhouse gas emissions, the demand for products and services will change, along with regulations impacting how supply chains operate. As a result, supply chain performance must begin to include assessments of environmental performance. See the seven specific supply chain performance measures; also, the percentage of supply chain trading partners that have become ISO 14000 certified; the percentage of supply chain trading partners that have created a director of environmental sustainability; the average percentage of environmental goals met; the average number of policies adopted to reduce greenhouse gas emissions; and the average percentage of carbon footprints that have been offset by sound environmental practices. These are averaged across firms in a supply chain. While these performance indicators may certainly vary by supply chain and industry, the measures here will provide a good starting point for collaboration on supply chain environmental performance. 584. What is a carbon footprint and how can firms reduce theirs? How could you measure the carbon footprint for a supply chain? Answer: A firm’s total carbon emissions per period; recycle, reuse, and reduce energy use. For a supply chain, sum or average carbon emissions for all members. 585.

What is the triple bottom line? How is it measured/calculated for a company?

Answer: It is a framework incorporating social, environmental and financial dimensions. This differs from traditional performance frameworks since it includes environmental and social measures that can be difficult to assign numerical measurements. There is no universally accepted method for calculating the TBL. There is also no agreement on the measures that are included in each of the three TBL categories. This can be viewed as a strength because it allows users to vary the measures used based on the needs of supply chain entities, the specific project, or geographic location. The set of measures used will ultimately be determined by stakeholders and the ability to collect the data required. Economic variables should use data that deal with the bottom line, such as costs or profits; environmental measurements should incorporate natural resources and things influencing its viability, such as air and water quality or energy consumption; and social variables refer to social dimensions of the area under consideration, including measurements of education, equity, and access to social resources. 586.

What is perfect order fulfillment? Cash-to-cash cycle time?

Answer: Orders among supply chain members that arrive on-time, complete, and damage-free; number of days between paying for raw materials and getting paid for product, (calculated by inventory days of supply plus days of sales outstanding minus average payment period for material). 587. Describe the four perspectives of the Balanced Scorecard. How is this model different from a set of world-class performance measures? Answer: See Figure 14.1. Supply chain-oriented performance measures such as the ones in Figure 14.1 can be added to the more internally-focused measures traditionally used in a balanced scorecard, to help the firm as well as their supply chains meet their objectives. 588.

What are the steps in developing a balanced scorecard?

Answer:

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The process of developing a BSC begins with defining the firm's strategy. Once the firm's strategy is understood and agreed upon by senior managers, the next step is to translate the strategy's goals into a system of performance measures. Each of the four perspectives in the BSC require four to seven performance measures, resulting in a scorecard with about two dozen measures relating to one single strategy. The potential for failure does exist if firms are not clear about what they are hoping to achieve and are not focused on ensuring that the best scorecard with the right performance measures linked to firm strategy is used. 589.

What are some weaknesses of the BSC?

Answer: Most companies were having difficulty taking BSC from concept to reality. John McMahan, senior advisor at Hackett Group, said, ―Most companies get very little out of scorecards because they haven’t followed the basic rules that make them effective.‖ For example, in the United States, the average number of measures used is a very high and often confusing 132, while Kaplan and Norton suggest use of 20 to 30 measures. Additionally, consultants are used in many cases to help map the organization’s strategy and its effect on performance, and to assist in selecting performance measures. Further, information systems may have to be modified, sometimes at great expense, to supply the information necessary for the scorecards. Other weaknesses in the BSC include its inability to show what one’s competitors are doing; exclusion of employee, supplier and alliance partner contributions; and its reliance on top-down measures. 590.

How is a scorecard different from a dashboard?

Answer: Web-based balanced scorecard applications are also sometimes referred to as dashboards. These enable users to retrieve data easily from ERP databases and also enable wide access by users at many locations, while providing desired security features. Today, dashboards are being used to track ―big picture‖ corporate objectives as well as core process performance and more tactical, detailed data. 591. What are the six process categories of the SCOR model and which one do you think is most important? Answer: Plan, source, make, deliver, return, and enable. Most might say ―make‖, but all are important for firm success. 592.

In what ways is the BSC similar to the SCOR model? Different from the SCOR model?

Answer: The BSC is a way to align an organization’s performance measures with its strategic plans and goals. The SCOR model is designed to enable effective communication, performance measurement and integration of processes between supply chain members. So, the BSC is internally focused while the SCOR is more externally focused. 593. Which model do you think is best suited to measure supply chain performance--the Balanced Scorecard or the SCOR? Why? Answer: The SCOR model is designed specifically for supply chains, while the BSC is more firm-oriented. 594.

How is SCORmark beneficial for member organizations?

Answer: SCORmark allows member firms to benchmark performance against peer companies using a benchmarking portal at the APICS Supply Chain Council’s website. Benchmark data is supplied through an alliance with Performance Measurement Group, a wholly-owned subsidiary of

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Solution and Answer Guide:

PricewaterhouseCoopers. Supply Chain Council members have access to confidential benchmarking based on the SCOR model metrics.

Problems 595. Cindy Jo’s Hair Salon is concerned about their rising costs of supplies, energy, and labor, so they are considering investing in better equipment, which hopefully will reduce the time required to perform most hair styles as well as resulting in better perceived quality by their customers. They predict that the added investment will increase output levels as well as reduce energy costs, since some of the new equipment (hair dryers) use less electricity. Using the following information, determine the current and expected single factor and total productivity measures. What is the percentage change in productivity? What other items should be considered, before making this capital investment? Do you think the increase in output will overcome the capital costs? Inputs and Outputs

Current (this year)

Expected (next year)

Hairstyles per week

250

300

Labor costs per week

$960

$1010

Energy costs per week

$400

$350

Material costs per week

$300

$325

Capital investment

$12,000

Answer: Current total productivity = 250/$1660 = 0.151 haircuts/dollar Expected total productivity = 300/$1685 = 0.178 haircuts/dollar (an 18% increase) Labor produc. = 250/$960 = 0.26, then 300/1010 = 0.297 (a 14% incr.) Energy prod. = 250/400 = 0.625, then 300/350 = 0.857 (a 37% incr.) Material prod. = 250/300 = 0.833, then 300/325 = 0.923 (a 11% incr.) They might also need to consider training costs, maintenance costs, impact on customer preferences, and space required for the dryers. Sales are going up by about 20 percent along with the increases in productivity. It looks on the surface of things at least, like this is a good investment, provided their forecasts are correct. 596. For the four months shown, calculate the monthly labor productivities and the monthly productivity growths. March

April

May

June

Units produced

1260

1340

1293

1324

Labor hours

328

332

321

318

3.84

4.04(5.2%)

4.03(.2%)

4.16(3.2%)

Answer:

597. Calculate the single factor productivities and the total productivity given the information below. Output 325,000 units Sales price = $1249.00/unit

Inputs 6400 labor hours @ $15.00 per hour Material cost = $40,625,000 Utilities cost = $4400

Answer:

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Solution and Answer Guide:

Labor = $405.9MM/96,000 = 4228 $/labor$ Material = 9.992 $/mat’l$; Utility = 92256 $/utility$ Total = 9.967 $/input$

Cases 1.

Production Labor Sourcing for Supply Chain Management* Case Note

Answers to Questions 598. How could contracting with Bethel Consulting Services advance Stor-Pak’s position as a world-class supply chain partner for Brook Medical Supplies and other customers? Ans.: Answer: Effective labor management systems should provide labor performance across multiple effectiveness and efficiency measures. Managing labor should provide benefits in labor cost reduction, real time visibility of performance and productivity useful for forecasting, and have the capacity to monitor progress and integrate into a balanced scorecard framework. BCS’s advanced recruitment, selection, training, and performance monitoring system is based on a quantitative approach to improving semi-skilled labor performance. The approach begins with a workforce assessment of the warehouse operation that would provide clear performance measures in quality (i.e., accuracy and completeness), safety, and productivity. Those performance measures can be used as indexes for the ―best performer‖ selection criteria, training modules, and performance monitoring activities. The performance template can then be used to evaluate and report performance measures in real time. The performance template can also be used to focus improvement efforts on storage, retrieval, and packing areas that BCS sourced employees work. Stor-Pak and Brook Medical Supplies will have workforce performance data in the material handling and kitting areas useful in forecasting and will be able to use BCS to manage changes that require training (i.e., new kits) and expansion of labor (selection and performance monitoring). Overall, Stor-Pak and Brook Medical Supplies can integrate the BCS sourcing model into their world-class performance measures in quality, cost and customer service. 599. What cost advantage perspective should Stor-Pak use to determine the differences between using a traditional temp agency vs. a 3 rd party labor source provider such as Bethel Consulting Services? Answer: The evaluation can be viewed as a short-term vs. long-term assessment or more narrow productivity and utilization measures vs. world-class performance measures. Temp agencies contract to place temporary employees in warehouse facilities with primary advantages of labor payroll savings and managing capacity fluctuations. In addition to saving on benefits temp agencies incur the cost of recruiting and selecting a labor pool. Many distribution centers use temp agencies to increase short term capacity as an alternative to the time, cost, and long-term employment commitment (benefits, training, etc.). The cost savings at first appears to be firm variable in calculating labor performance. Distribution centers without labor management systems don’t have measures in key areas and underestimate the costs of training and supervising the high turnover temp placements as well as productivity, quality, and safety costs. Specialized 3rd party labor sourcing companies present a labor provider with proven programs, systems and methods to adjust to meeting productivity requirements with a reduction in risk (customer satisfaction, safety, labor cost increases). 3rd party labor sourcing companies

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Solution and Answer Guide:

like BCS have data based continuous improvement programs, demand driven workforce flexibility, performance-based compensation system, and often include gain sharing type incentives that can be shared with contract partners. They focus on specialized training that result in higher quality work (errors, safety) and productivity (including learning curve reduction). Supply chain members (i.e., Stor-Pak and BCS) need to demonstrate detailed performance measures that align with partner strategies (i.e., Brook Medical Supplies) and focus effective system improvement activities. Students can use the listed steps in chapter 14 for creating an effective performance measurement system to conclude the differences between utilizing a temp agency and a 3rd party labor sourcing company. That review could also include some examples of specific world-class performance measures in the 3 capability areas of quality, cost, and customer service. 600. If the reduced costs projected by Bethel Consulting Services are realized, will there still be any risks for Stor-Pak in bringing in a 3rd party labor source company such as BCS? Answer: The benefits of using BCS is to fully use their core competencies in reducing direct labor costs (i.e., salary, benefits) and indirect costs (recruiting, on boarding, training, performance monitoring, etc.). As core competencies, they represent sustainable competitive advantage when the competencies are represented in the process of reducing costs and continually improving performance (safety, productivity, quality of work) through innovative screening, hiring, and training systems. These competencies are controlled by BCS and in addition to losing some control of labor sources in general Stor-Pak ―loses‖ learning curve advantages in quality improvement, productivity improvements, and labor performance measurements and reporting for semi-skilled labor. Relying on outside source expertise is a significant risk when the outsourced ―technology‖ is integral to an organization’s success. Loss of control, expertise, improvement experience, and future learning (effectiveness and efficiencies) must be weighed against the short-term gains (i.e., cost reduction). All organizations must prioritize the core competencies they must develop for sustainable competitive advantage. Using BCS should allow Stor-Pak to focus on other core competencies with greater potential for differentiation in the storage, assembly/packing, and distribution sector. Efforts in Lean and Six-Sigma can be directed to work systems with greater potential for cost reduction, productivity gains, and competitive advantage opportunities. The risk is mitigated if the systems BCS uses becomes more standardized within the industry in managing semi-skilled labor. Standardization could occur as other 3pl labor sourcing companies enter the sector (i.e., temp agencies shift their models) and as 3pl contract with multiple competing distribution centers. If standardization occurs Stor-Pak could reclaim control of its’ semi-skilled labor force and not required proprietary expertise. * Written by Brian Hoyt, PhD, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

Warehouse and Distribution Center Robotics* Case Note

Questions and Answers 601. Defend Rack and Shelving Manufacturing’s (RSM) new product development strategy of tying new rack and shelving products to AST’s AGV/robotic innovation cycles. Answer:

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Solution and Answer Guide:

Students can discuss the strength of the new product development strategy from several perspectives. One perspective is related to the focus on efficiencies for warehouse and distribution. AGV’s target labor efficiencies, storage and retrieval accuracy and speed, reduced product and rack damage, improved safety, and more environmentally sustainable. The second perspective is related to finding a niche that they can become a stronger player in market share. Being first in a market as rack and storage equipment leader for AGV robotics will have competitive advantages. The specialty racks will be a small investment in the total cost of investing in AGV and AS/RS for warehouses and allow higher prices/profit margins than realized in their traditional pallet rack systems. A third perspective is based on collaborating with an industry disrupter in robotics. Robotics will be driving many changes in the pickup, carry, and drop-off applications for warehouse and distribution facilities. 602. How will product manufacturers and supply chain partners benefit in their efforts to adopt high performance supply chain measures by using RSM’s and AST’s AGV equipment and storage racks? Answer: Several supply chain performance measures can be positively impacted by investing in AGV and AS/RS technologies. AGV and AS/RS systems add value to warehouse operations with more dense racking capability. An increase in product storage capacity reduces the square footage costs contributing to total supply chain management costs. Robotic technologies in retrieval improves access to product, time to retrieve products, accuracy in picks, and reduced damage to products and shelving. Automated retrieval equipment is supported by software that can optimize routing and picking of product for order efficiencies. These efficiencies impact supply chain productivity, order fulfillment and delivery performance measures. 603. What risks does RSM and AST face that may alter (quicken or slow down) the pace of the adoption of warehouse robotics in the warehouse, storage, and logistics sectors? Answer: Several factors that students could discuss include the forecasted impact on environmental sustainability, the diffusion of new products throughout the supply chain, and advances in AGV technology. Positive environmental impact of electric AVG equipment could have a significant and measurable impact on environmental sustainability. As companies include analysis of carbon footprint measures along the supply chain AGV will be established as a performance indicator for green supply chain management. Diffusion of new robotic products in warehouse and distribution will be a significant hurdle for RSM and AST to overcome. Manufacturers, warehouses, and distribution centers will have to allocate new dollars to change over floor space to accommodate AGV and AS/AR systems. AGV and AS/AR are only one alternative that aligns with supply chain members’ emphasis on cost savings (square footage efficiencies) and performance improvements (speed, accuracy, completeness). Potential adopters of AGV and AS/AR systems will need to determine the extent to which these systems are superior to existing storage and retrieval systems. Adopters will need have measures in place that can be used to align benefits of robotics as compared to existing storage and retrieval systems. The complexity of integrating the new system, training, maintenance will all be factors in adopters’ decisions. The access to on the floor trials with using robotics on the storage floor will also be an important adopting factor. The advances in AGV technology are being ―driven‖ by the auto industry’s commitment to this technology. Uber’s investment and advances in driverless innovations has stimulated almost all the major auto manufacturers to allocate R&D dollars in this technology. The availability of shared technology, increased lab and personnel expertise, and government involvement will provide opportunities to advance AGV applications in warehouses.

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Solution and Answer Guide:

Note: For pallet rack descriptions see Rack Manufacturers Institute / Material Handling Institutes SIG’s (www.mhi.org). Students should also visit the ProMat tradeshow website at www.ProMatshow.com. General information on Robotics for warehousing can be found at www.dcvelocity.com * Written by Brian Hoyt, PhD, Professor of Management, Ohio University. This case was prepared solely to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

The Balanced Scorecard Approach*

Case Note Instructors may want to point students toward two websites for background information related to these questions. For information on BSC see www.balancedscorecard.org and for information on the Baldrige approach http://www.nist.gov/baldrige

Questions and Answers 604. Should the Learning & Growth team sever its relationship with Balanced Scorecard Systems before the new CEO presents the new BSC plan? Develop a Pro/Con response that the Learning & Growth team could present to the BSC steering committee. Answer: Students should discuss the benefits of keeping BSS including having access to BSC expertise and guidance including facilitating change management throughout the organization, training, and follow up. Efficiencies in execution are likely to be realized by avoiding the individual and organizational learning curve in implementing a new strategic initiative. Possible challenges to keeping BSC include perpetuating a silo approach (only one perspective is using the consultants) and it might be disruptive to the continuity of the new CEO/executive teams’ overall change management approach. Students could discuss decision approaches and tools that could be used to examine BSS as an alternative including matrix analysis or decision tree analysis with expected value calculations for each alternative. This analysis approach might provide an opportunity to discuss several alternatives (i.e., BSS consulting for all perspectives and driving the entire program) and involvement at this level might encourage commitment to the final decision. 605. What advice can you provide the new executive team for their next organizational meeting that addresses the staying power of BSC? Answer: Students should focus their responses in two areas. The first area is related to communicating strategic objectives and initiatives (BSC). The second area is related to possible causes for previous ―failed‖ program launches. Communication strategy should reflect goal setting, anticipate member reactions, and serve as a basis for action. Strategic ―conversations‖ about BSC certainly can address goal setting and basis for action. Anticipating reactions (i.e., new leadership and new initiatives vs. old systems and limited success) can be addressed by focusing on key fundamental issues that are understood and directly linked to organizational success. Communication format alternatives (meetings, e-mail, website, etc.) should be examined and selected based on legitimizing important issues, shaping new positive memories for the organization, clarify confusing or ambiguous content, and provide common themes to direct present and future decisions. Student responses for the second component (failed launches) should discuss any approach by new management that directs the conversation first toward consensus on success/failure. Perceptions that a program failed because it was phased out rather than ―didn’t work‖ may need discussion. Presenting information to confirm that efforts are still providing benefits (i.e., 6 sigma is still being used to reduce costs in a specific department) or that benefits (i.e., return on investment) have covered the costs of the programs should be shared. It might also be important for the BSC program to spend some time/effort assessing significant causes (not symptoms) of

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Solution and Answer Guide:

previous improvement effort ―failures‖. Assessing causes related to People (i.e., lack of training), Equipment (i.e., IT support), or Procedures (i.e., consistency in execution) might be revealing and provide insight into more effective execution of BSC efforts. Also, recognizing that other programs were not as effective as desired and replacing with another strategic improvement initiative can be viewed as effective change management: agile and committed to successful change. Commitment to any organizational improvement approach is important to the successful execution and results. Student responses could include using analysis tools such as Pareto Diagram and Cause and Effect analysis to determine causes of past program ―failures‖. 606. Is the Baldrige approach, that the manufacturing group is presenting, an alternative to the BSC or can it run parallel? Answer: Students should frame a compare and contrast analysis between Baldrige and BSC and then note conditions that direct a decision (i.e., Baldrige as better approach, an equal alternative, or run parallel). The Baldrige approach is similar to BSC in overall objectives to improve organizational performance by reviewing key performance areas, establishing measures for each performance area, setting improvement targets, and structuring plans/actions to achieve improvement targets. The Baldrige approach focuses on seven key performance areas (leadership, strategic planning, customer focus, measurement/analysis/knowledge management, workforce focus, operations focus, and results) instead of the four BSC performance areas (financial, customer, internal business processes, and learning and growth). The Baldrige approach focuses on processes and subsystems in each of the seven areas and has very structured guidelines to examine and score the effectiveness of each major performance area. While there are a growing number of BSC consultants and experts (i.e., the new CEO for PJEx) BSC does not have a common or standard implementation approach. A significant difference between Baldrige and the BSC is the formal award process where an organization can present its performance assessment and improvement efforts to experts in organizational change and improvement (Baldrige examiners). BSC participants are generally limited to self-assessment or perhaps industry benchmarking. Both approaches address the ―silo mentality‖ and facilitate the measurement and improvement of the whole organization. The alternatives (replace BSC with Baldrige, use BSC, or use both) should examine organizational factors that can be used as criteria to select an alternative. Factors could include training requirements (heavier for Baldrige), existing system measures/control (is there performance data on systems targeted as key performance indicators?), culture (attitudes toward team, project, change management), and change management skills (abilities, knowledge), and leadership capacity throughout the organization among other factors. Running parallel has its own set of challenges including diluting efforts and resources and increasing coordination (meetings, team building, communication, decision making) but it may be an effective long-term approach if implemented sequentially with Baldrige approach used to measure and improve systems and the BSC to maintain (including adjustments needed in the future). * Written by Brian Hoyt, PhD, Professor of Management, Ohio University. This case was prepared solely

to provide fictional material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation.

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