Chapter 11
How does the pursuit of a response strategy impact the supply chain decisions of: (1) primary supplier selection criteria, (2) supply chain inventory, (3) distribution network, and (4) product design characteristics?
(1) Suppliers should be selected primarily based on capacity, speed, and flexibility. (2) The firm should use buffer stocks to ensure speedy supply. (3) The firm should use fast transportation, and it should provide premium customer service. (4) Products should have low setup times, and they should be poised for rapid production ramp-up.
Identify the ten opportunities in managing the integrated supply chain.
(1) accurate "pull" data; (2) lot size reduction; (3) single-stage control of replenishment; (4) vendor-managed inventory; (5) collaborative planning, forecasting, and replenishment (CPFR); (6) blanket orders; (7) standardization; (8) postponement; (9) electronic ordering and funds transfer; (10) drop shipping and special packaging
Supply chain managers outsource logistics to meet what three goals?
(1) drive down inventory investment; (2) lower delivery costs; (3) improve delivery reliability and speed
Identify three common occurrences that contribute to distortions of information about what is really occurring in the supply chain.
(1) local optimization; (2) incentives (sales incentives, quantity discounts, quotas, and promotions); (3) large lots
Identify three common features of contracts between buyers and suppliers.
(1) quantity discounts; (2) buybacks; (3) revenue sharing
Identify the four stages of supplier selection.
(1) supplier evaluation; (2) supplier development; (3) negotiations; (4) contracting
Identify the nine major categories of supply chain risk.
(1) supplier failure to deliver; (2) supplier quality failures; (3) logistics delays or damage; (4) distribution; (5) information loss or distortion; (6) political; (7) economic; (8) natural catastrophes; (9) theft, vandalism, and terrorism
Identify and describe briefly the six sourcing strategies.
1. With the many suppliers strategy, a supplier responds to the demands and specifications of a "request for quotation," with the order usually going to the low bidder. 2. The strategy of few suppliers develops long-term "partnering" relationships with a few dedicated suppliers who will work with the purchaser in satisfying the end customer. 3. Vertical integration is developing the ability to produce goods or services previously purchased or actually buying a supplier or a distributor. 4. Joint ventures represent a formal collaboration between firms, without implying any change of ownership. 5. Suppliers become part of a company coalition in the keiretsu strategy. 6. With the virtual companies strategy, firms rely on a variety of supplier relationships to provide services on demand.
Describe a reverse auction (also known as a Dutch auction).
A buyer initiates the process by submitting a description of the desired product or service. Potential suppliers then submit bids, which may include price and other delivery information. Thus, price competition occurs on the selling side of the transaction—bidding the price down.
What is a keiretsu?
A keiretsu is a network of suppliers who become part of a company coalition. It is part collaboration, part purchasing from a few suppliers, and part vertical integration. Usually the suppliers are partially owned or debtors to the purchasing organization. This structure is quite common in Japan.
With cross-sourcing, how many suppliers provide each component on a regular basis (i.e., excluding backup suppliers)?
A) 1
Consider a firm with an annual net income of $20 million, revenue of $60 million and cost of goods sold of $25 million. If the balance sheet amounts show $2 million of inventory and $500,000 of property, plant & equipment, what is the inventory turnover?
A) 12.50
What term describes a supply chain that is designed to optimize both forward and reverse flows?
A) closed-loop supply chain
What type of negotiating strategy requires the supplier to open its books to the purchasers?
A) cost-based price model
Local optimization is a supply-chain complication best described as:
A) optimizing one's local area without full knowledge of supply chain needs.
What is the practice of keeping a product generic as long as possible before customizing?
A) postponement
Which of the following is a primary supplier selection criterion for a firm pursuing a differentiation strategy?
A) product development skills
Warehouses sometimes perform certain other functions besides storing goods. Which of the following is NOT typically one of those functions?
A) purchasing
By which distribution system is more than 90 percent of U.S. coal shipped?
A) railroads
What are the four stages of supplier selection?
A) supplier evaluation, supplier development, negotiations, and contracting
Distribution management focuses on which of the following?
A) the outbound flow of products
A company is deciding where to assign its summer intern. The manager estimates that the intern can save the company $10,000 in supply chain costs. Given the table below, what increase in sales (revenue) by the intern is required to show an equal profit?
Additional sales would increase costs by (.35+.25) × Sales. Profit would therefore be X - .6X = .4X, where X is the increase in sales (revenue). Solve for when .4X = 10,000 or X = $25,000 required in increased sales to account for the same profit level.
Identify the advantages and disadvantages of using the "few suppliers" sourcing strategy.
Advantages: long-term suppliers are more likely to understand the broad objectives of the procuring firm and the end customer; using few suppliers can create value by allowing suppliers to have economies of scale and a learning curve that yields both lower transaction costs and lower production costs; and the strategy also encourages those suppliers to provide design innovations and technological expertise. Disadvantages: concern about trade secrets and suppliers venturing out on their own; the high cost of changing partners; and risk of poor supplier performance.
Which of the following is NOT one of the five parts of the Supply Chain Operations Reference (SCOR) model?
B) Sell
Vertical integration appears particularly advantageous when the organization has:
B) a large market share.
A furniture maker has delivered a dining set directly to the end consumer rather than to the furniture store. The furniture maker is practicing which of the following?
B) drop shipping
A rice mill in south Louisiana purchases the trucking firm that transports packaged rice to distributors. This is an example of which of the following?
B) forward integration
E-procurement:
B) is the same thing as Internet purchasing.
Japanese manufacturers often pursue a strategy that is part collaboration, part purchasing from a few suppliers, and part vertical integration. What is this approach called?
B) keiretsu
Which sourcing strategy is particularly common when the products being sourced are commodities?
B) many suppliers
In most manufacturing industries, which of the following would likely represent the largest cost to the firm?
B) purchasing
Designing distribution networks to meet customer expectations suggests what three criteria?
B) rapid response, product choice, and service
A restaurant runs a special promotion on lobster and plans to sell twice as many lobsters as usual. When this large order is sent to the distributor, the distributor assumes the large size is a trend, not a one-time event. The distributor therefore places an even larger order with the lobsterman. This behavior is the result of which of the following?
B) the bullwhip effect
Which of the following is NOT an advantage of a virtual company?
B) total control over every aspect of the organization
In what type of auction does a buyer initiate the process by submitting a description of the desired product or service?
C) Dutch
Which of the following statements is true regarding the leverage of supply chain savings?
C) Supply chain savings exert more leverage as the firm's net profit margin decreases.
Which one of the following distribution systems offers speed and reliability when emergency supplies are needed overseas?
C) airfreight
A fried chicken fast-food chain that acquired feed mills and poultry farms has performed which of the following?
C) backward integration
Which of the following describes using one supplier for a component and a second supplier for another component, where each supplier acts as a backup for the other?
C) cross-sourcing
What three logistics-related costs are relevant when analyzing the choice of number of facilities in a distribution network?
C) inventory costs, transportation costs, and facility costs
When Daimler and BMW pooled resources to develop standardized auto components, the sourcing strategy could best be described by which of the following?
C) joint venture
The Japanese concept of a company coalition of suppliers is:
C) keiretsu.
Which of the following is NOT an advantage of the "few suppliers" sourcing strategy?
C) less vulnerable trade secrets
Drop shipping:
C) means the supplier will ship directly to the end consumer, rather than to the seller.
Which of the following best describes vertical integration?
C) produce goods or services previously purchased
The Institute for Supply Management:
C) publishes the principles and standards for ethical supply management conduct.
Among which of the following industries are purchasing costs the LOWEST percentage of sales?
C) restaurants
________ postpones final assembly of a product so the distribution channel can assemble it.
Channel assembly
Why is channel assembly popular in the personal computer industry?
Channel assembly is popular in the personal computer industry because of better market response with less investment. This is possible because the late-stage assembly and customization is a natural part of a rapidly changing industry. With this strategy, finished-goods inventory is reduced because units are built to a shorter, more accurate forecast.
________ describes using one supplier for a component and a second supplier for another component, where each supplier acts as a backup for the other.
Cross-sourcing
Outsourcing:
D) All of the above are true of outsourcing.
Which of the following is NOT true about reverse logistics as compared to forward logistics?
D) Speed is often very important.
As the number of facilities increases, total logistics costs tend to follow a curve that first declines, then rises. Why?
D) Transportation costs first decline steeply, then rise, while facility and inventory costs always rise.
What are the three classic types of negotiation strategies?
D) cost-based price model, market-based price model, and competitive bidding
A carpet manufacturer has delivered carpet directly to the end consumer rather than to the carpet dealer. The carpet manufacturer is practicing which of the following?
D) drop shipping
Which of the following is NOT an opportunity for effective management in the supply chain?
D) local optimization
The transfer of some of what are traditional internal activities and resources of a firm to outside vendors is:
D) outsourcing.
Hewlett-Packard withholds customization of its laser printers as long as possible. This is an example of which of the following?
D) postponement
Which of the following is NOT a typical benefit of centralized purchasing?
D) reduce lead times
Which of the following characteristics is NOT common to all four of Darden Restaurants' supply channels?
D) refrigeration
Which of the following is NOT one of the risk mitigation tactics for the supply chain risk category of suppliers failing to deliver?
D) require overnight delivery
Which one of the following is NOT one of the six sourcing strategies?
D) short-term relationships with few suppliers
Which of the following is NOT a condition that favors the success of vertical integration?
D) small market share
While freight rates are often based on very complicated pricing systems, in general, the primary freight price factor is based on which of the following attributes?
D) speed of shipment
A disadvantage of the "few suppliers" sourcing strategy is:
D) the high cost of changing partners.
________ management focuses on the outbound flow of products.
Distribution
Consider a firm with an annual net income of $20 million, revenue of $60 million and cost of goods sold of $25 million. If the balance sheet amounts show $2 million of inventory and $500,000 of property, plant & equipment, how many weeks of supply does the firm hold?
E) 4.16
In supply chain management, ethical issues:
E) All of the above are true.
The bullwhip effect:
E) All of the above are true.
Which of the following would NOT be subject to negotiation between a buyer and supplier?
E) All of the above could be negotiated.
Which of the following devices represents an opportunity for technology to improve security of container shipments?
E) all of the above
Which of the following would NOT typically be considered as part of a manufacturing firm's supply chain?
E) landscaping contractors
All EXCEPT which of the following are "opportunities" in managing the integrated supply chain?
E) line balancing
For which corporate strategy(ies) should supply chain inventory be minimized?
E) low cost and differentiation
Which of the following is an advantage of the postponement technique?
E) reduction in inventory investment
Which of the following statements does NOT accurately explain what occurs when the number of facilities in a distribution network increases?
E) response time first decreases, then increases
TAL Apparel's management of its supply chain for Stafford shirts sold in JCPenney in an example of which of the following?
E) single-stage control of replenishment
What term is used to describe the outsourcing of logistics?
E) third-party logistics (3PL)
Which of the following best describes Vizio's sourcing strategy?
E) virtual company
________ is the term describing purchasing facilitated through the Internet.
E-Procurement
Define EDI.
Electronic data interchange is a standardized data-transmittal format for computerized communications between organizations.
Describe vendor-managed inventory (VMI). How is it related to outsourcing? Cite an example from your experiences as a shopper.
In vendor-managed inventory, the supplier maintains material for the buyer, often delivering directly to the buyer's using department. It is a form of outsourcing, because the buying firm has transferred the shipping, stocking, and receiving tasks to an external vendor. There are many instances of VMI in today's retail model, e.g., shelves of snack foods and soft drinks are routinely managed by the distributor, not the retailer.
The ________ is an organization that has developed principles and standards for ethical supply management conduct.
Institute for Supply Management
________ is a Japanese term that describes suppliers who become part of a company coalition.
Keiretsu
________ is an approach that seeks efficiency of operations through the integration of all material acquisition, movement, and storage activities.
Logistics management
A manufacturing plant averaged $740 of raw materials, $230 of work-in-process inventory, and $1030 of finished goods inventory during the month. If the cost of goods sold this month amounted to $10,000, what is the inventory turnover for the month?
Monthly cost of goods sold / Inventory Investment = $10,000 / ($740 + $230 + $1030) = 5
How are outsourcing and vertical integration related? Can a single firm successfully do both?
Outsourcing transfers what were traditional internal activities to outside vendors. It is a way of increasing specialization which allows the firm to focus on its core strengths, and not try to do all possible tasks. Vertical integration is much the opposite, decreasing a firm's specialization so that it can perform additional functions along its supply chain. Vertical integration has become increasingly difficult in the face of increasing specialization. It seems unlikely that firms that make significant use of outsourcing would do much vertical integration, but it is possible that a firm's set of competitive advantages would support outsourcing in some functions and vertical integration in others.
Identify three specific measures that indicate how well assets are utilized. What are the formulas for each measure?
Percent invested in inventory = (Total inventory investment/Total assets) × 100 Inventory turnover = Cost of goods sold/Inventory investment Weeks of supply = Inventory investment/(Annual cost of goods sold/52 weeks)
_______ involves delaying any modifications or customization to the product as long as possible in the production process.
Postponement
What is e-procurement?
Purchasing facilitated through the Internet.
________ is the process of sending returned products back up the supply chain for value recovery or disposal.
Reverse logistics
________ involves reducing the number of variations in materials and components as an aid to cost management.
Standardization
The ________ is a set of processes, metrics, and best practices developed by the Supply Chain Council.
Supply Chain Operations Reference model or SCOR model
________ describes the coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer.
Supply chain management
A grocery chain is interested in exploring the impact effective supply chain management would have. Suppose that for every $1 of sales, 4% is profit, 50% is spent in the supply chain, and the remaining 46% is evenly divided between fixed and production costs. If the chain can save $1 in the supply chain it would take how many dollars of increased sales to have the same increase in profit? Assume that fixed costs are fixed so that the portion of increased sales allocated to fixed costs is instead profit (27% profit margin combined now).
Suppose initially the firm sells $100 of merchandise. $50 is spent in the supply chain, $23 in fixed costs, $23 in variable costs, and $4 is profit. An increase in sales of $X would increase revenue by X but increase costs by X ∗ (.5 + .23). Therefore profit would be increased by revenue - costs = X - (.73X). Therefore .27X(profit % ∗ sales) = 1(profit req) and solving gives X = $3.70 of increased sales yields an additional $1 of profit.
What are several advantages of shipping by truck?
The advantages of shipping by truck include flexibility, on-time behavior, no damage, paperwork in order, and low cost.
A company is deciding where to assign its summer intern. The manager estimates that the intern can save $10,000 in the supply chain or increase sales (revenue) by $25,000. If sales (revenue) is divided into the three categories shown in the table, where should the manager assign the intern to maximize profits?
The intern would save $10,000 in the supply chain, or show a profit of $10k. Profit from the increase in sales would be equal to revenue - costs. If revenue is X, then costs would be (.35+.25)X. Thus profit would be X - .6X or simply .4X. $25,000(.4) = $10,000 so the manager is neutral on where to assign the intern.
As the corporate and operations management strategies vary from low cost to response to differentiation, how does this impact the criteria used for selecting suppliers?
The supply chain must support the operations management strategy. For a firm using the low-cost strategy, supplier selection should be based primarily on cost. When using the response strategy, the selection criteria are capacity, speed, and flexibility. For the differentiation strategy, the supplier is selected based on product development skills, the degree to which it is willing to share information, and the degree to which it can jointly and rapidly develop new products.
Of all areas of the organization, why is the supply chain especially vulnerable to ethical lapses?
The supply chain offers more opportunities for ethical issues than some other functions in the organization. Some of these opportunities arise from the large sums of money involved. Perhaps these opportunities arise because of the close and long-term personal contact between buyer and seller. Globalization adds even more complexity to the decisions made in the supply chain.
What are the three classic negotiation strategies? Briefly describe each of them.
The three classic strategies for negotiating with suppliers are the cost-based model, the market-based price model, and competitive bidding. In the cost-based model, contract price is a function of supplier costs, such as those for time and materials. In the market-based price model, price is set by some form of published, auction, or index price. Competitive bidding may be used when vendors are not open to the cost-based model, or where information is not perfect enough for market-based pricing. Bidding policies usually require that the purchasing agent has several potential suppliers and quotations from each.
Identify some technological advances that can serve to improve logistics management and also improve shipping security.
They include devices that can detect a broken seal on a shipping container; devices that can detect whether a container is in motion; devices that sense and transmit temperature and radioactivity; and devices that can transmit truck or container location, content, and condition.
Explain why once revenue and total logistics costs are considered together, the optimal number of facilities in a distribution network may well increase compared to the optimal number of facilities based on total logistics costs only. Include details about the behavior of relevant cost and revenue elements.
Total logistics costs are comprised of inventory, transportation, and facility costs. While inventory and facility costs always increase in the number of facilities, transportation costs first decline steeply, then rise. This causes the total logistics cost curve to first decline, then rise, suggesting a certain optimal number of facilities. However, on the revenue side, increasing the number of facilities always decreases response time, which should increase revenue (better customer service). Therefore, when these revenue implications are considered, the total profit (revenue - cost) may suggest more facilities than a cost analysis alone would imply.
What is the trucking industry doing to improve efficiency?
Trucking firms are using computers to monitor weather, find the most effective route, reduce fuel cost, and analyze the most efficient way to unload. To improve logistics efficiency, the industry is establishing Web sites such as Schneider National's connection (www.schneider.com), which lets shippers and truckers find each other.
________ is developing the ability to produce goods or services previously purchased or actually buying a supplier or a distributor.
Vertical integration
________ rely on a variety of supplier relationships to provide services on demand.
Virtual companies
Local optimization, incentives, and large lots all contribute to ________ about what is really occurring in the supply chain.
distortions of information
Virtual companies are also known as ________ .
hollow corporations or network companies
The ________ decision involves choosing between producing a component or a service internally and purchasing it externally.
make-or-buy
Transferring to external vendors a firm's activities that have traditionally been internal is known as ________.
outsourcing
Of the four stages of supplier selection, the stage at which the factor weighting approach would be used is ________.
supplier evaluation
Suppliers are also known as ________.
vendors