Chapter 9 Quiz - Supply Management
Q: What is the relationship of acquisition cost to the total cost of ownership for most items? A) Acquisition cost is a very small portion of the total cost. B) Acquisition cost is about half of the total cost on average. C) Acquisition cost is not relevant. D) Acquisition cost is the major portion of the total cost.
A: A) Acquisition cost is a very small portion of the total cost. Rationale: The APICS Dictionary, 16th edition, defines the total cost of ownership (TCO) as follows: "In supply chain management, the total cost of ownership of the supply delivery system is the sum of all the costs associated with every activity of the supply stream. The main insight that TCO offers to the supply chain manager is the understanding that the acquisition cost is often a very small portion of the total cost of ownership." For more information, see Module 2, Section A, Chapter 9, Topic 1
Q: A midsize manufacturing firm works with a large retailer as its primary customer; the retailer is a dominant firm in the chain. The manufacturer has several sources of supply for each of its key materials and is trying to align its supply chain strategy with the retailer's corporate strategy. Which of the following must be the primary consideration when the manufacturer is setting corporate strategy? A) Alignment with the retailer's corporate strategy to holistically maintain a profitable relationship B) Aligning sales promotions and other strategic marketing activities C) Setting the firm's own strategic objectives to leverage a more profitable margin from their customers D) Alignment with the strategic objectives of their suppliers to generate long-term stability of supply
A: A) Alignment with the retailer's corporate strategy to holistically maintain a profitable relationship Rationale: Because the retailer in this situation appears to be the nucleus firm, alignment of the retailer's corporate strategy with the manufacturer's own corporate strategy must take precedence over other considerations. For more information, see Module 2, Section A, Chapter 9, Topic 4
Q: An organization buys in response to an immediate need, sharing technical purchasing requirements rather than strategies or plans. This exemplifies which of the following types of business relationships? A) Buy on the market B) Collaboration/strategic alliance C) Partnership D) Ongoing relationship
A: A) Buy on the market Rationale: "Buy on the market" is a traditional approach to purchasing, in which organizations buy in response to immediate needs, choosing freely from among all the suppliers who can meet those needs and sharing technical purchasing requirements rather than strategies or plans. For more information, see Module 2, Section A, Chapter 9, Topic 3
Q: What is an organization's next step in a make-versus-buy analysis after they have determined that they do not have texting-based customer service as a core competency? A) Determine if there is a need for texting in customer service. B) Determine the consequences of losing customer service expertise if it is outsourced. C) Outsource texting-based customer service. D) Develop texting-based customer service as a core competency.
A: A) Determine if there is a need for texting in customer service. Rationale: After determining whether a function or service is a core competency, the next step is to determine if there is a need for the function or service in the first place. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: A manufacturer creates a new supply plan that is aligned with the corporate strategy, mission, and culture. The manufacturer makes decisions on using centralized vs. autonomous sourcing and plans for future growth. However, soon after the plan is implemented, unforeseen issues begin causing stockouts of crucial supplies, disrupting the manufacturing process and causing massive losses. What is the likely cause of this failure? A) Failure to conduct a risk assessment B) Making the wrong decision on centralized vs. autonomous sourcing C) Overreliance on incorrect metrics during the decision-making process D) Failure to create opportunities for additional optimization
A: A) Failure to conduct a risk assessment Rationale: The unforeseen issues would likely have been identified and accounted for had the organization conducted a risk assessment. The risks of a supply plan must be spelled out for decision makers at a high level, including an assessment of the likelihood of each risk, its impact if it occurs, and possible means and costs involved in mitigating the risk. Process change risks should be called out. Contingency plans should be included. For more information, see Module 2, Section A, Chapter 9, Topic 4
Q: An organization is undertaking a total cost of ownership study of the supply chain, looking to reduce costs. When looking at landed costs, which cost may represent an area to generate cost savings? A) Monitoring and control costs B) Sales and marketing costs C) Financing and opportunity costs D) Reverse supply chain costs
A: A) Monitoring and control costs Rationale: Monitoring and control costs frequently differ between alternatives. These are generally higher when outsourcing is used and may represent an opportunity to reduce total costs to the supply chain. For more information, see Module 2, Section A, Chapter 9, Topic 1
Q: One of a tire producer's suppliers is a natural rubber producer whose products are becoming subject to more demand even as the product becomes more rare. Another of their suppliers is a tire recycler, who provides the tire producer with old tires. Which of the following collaborative intensities would be appropriate for these partners? A) Partnership or higher for the natural rubber producer; buy on the market for the tire recycler B) Collaboration and strategic alliance or higher for the natural rubber producer; partnership for the tire recycler C) Merger or acquisition for the natural rubber producer and the tire recycler D) Buy on the market for the natural rubber producer; partnership or higher for the tire recycler
A: A) Partnership or higher for the natural rubber producer; buy on the market for the tire recycler Rationale: Because the natural rubber is becoming more rare, the tire producer should consider some form of partnership or better for this partner. The tire recycler is not offering a unique value-added service but a commodity service, so these transactions should be kept at arm's length. For more information, see Module 2, Section A, Chapter 9, Topic 3
Q: Which of the following is true of the total cost of ownership (TCO)? A) TCO compares the differences between the incremental costs of alternatives. B) TCO is primarily a tactical measurement tool. C) TCO is used primarily to justify overseas outsourcing over local sourcing. D) TCO compares the costs that are the same between options.
A: A) TCO compares the differences between the incremental costs of alternatives. Rationale: TCO compares the differences between the incremental (or marginal) costs of alternative supply chain solutions. An incremental cost is the cost associated with producing one additional unit of a product or service. Some costs remain relatively stable until they go above or below a certain level of capacity, at which point they step up or down in incremental cost. Measuring incremental costs considers the effects of system constraints on proposed solutions. For more information, see Module 2, Section A, Chapter 9, Topic 1
Q: Managers are enticed by the lower item cost of a product component when it is sourced overseas in a country with low labor costs. Which of the following can a supply chain manager use to show managers that item cost is only a minor part of the overall equation? A) Total cost of ownership B) Spend analysis C) Supplier relationship management D) Strategic sourcing
A: A) Total cost of ownership Rationale: Part of the APICS Dictionary, 15th edition, definition of total cost of ownership is that "the main insight that TCO offers to the supply chain manager is the understanding that the acquisition cost is often a very small portion of the total cost of ownership." For more information, see Module 2, Section A, Chapter 9, Topic 1
Q: Which of the following statements about outsourcing customer relationship management (CRM) is true? A) The only good reason for outsourcing CRM is cost savings. B) CRM vendors may provide seamless customer service. C) Separation of CRM vendors should be strictly enforced to protect the outsourcing business's autonomy. D) CRM should not be outsourced.
A: B) CRM vendors may provide seamless customer service. Rationale: If CRM vendors train their employees in the client's business and products and if they have adequate resources, they can convey the impression of seamless customer service. CRM may be outsourced for various reasons. Cost is not the only consideration; vendors may offer advanced capabilities, for example. Information gained by one vendor should be shared with all vendors to create a learning organization. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: A manufacturer has worked extensively with a single supplier over the past 15 years, building high levels of trust. They fully share goals, strategies, and tactics with each other and attempt to reflect the partner's plans in their own. Which type of relationship does this represent? A) Partnership B) Collaboration/strategic alliance C) Ongoing relationship D) Merger and aquisition
A: B) Collaboration/strategic alliance Rationale: A collaboration/strategic alliance is a long-term relationship, characterized by full sharing of goals, strategies, and tactics and the attempt to reflect the partner's plans in their own. For more information, see Module 2, Section A, Chapter 9, Topic 3
Q: Which of the following exemplifies a long-term arrangement in which suppliers are fully aware of the purchaser's goals and strategies and work with the purchaser to develop and implement tactics? A) Buy on the market B) Collaboration/strategic alliance C) Mergers and acquisitions D) Ongoing relationship
A: B) Collaboration/strategic alliance Rationale: Collaborations or strategic alliances are long-term arrangements ruled more by agreements than contracts. The suppliers are fully aware of the purchaser's goals and strategies and work with the purchaser to develop and implement tactics. Trust levels are high. For more information, see Module 2, Section A, Chapter 9, Topic 3
Q: What can an organization do if a need exists for a service for customers, the organization does not have it as a core competency, and it does not want to outsource the activity? A) Buy on the open market. B) Develop it as a competency. C) Avoid the service. D) Develop it as a non-core capacity.
A: B) Develop it as a competency. Rationale: If an organization identifies a need that is not currently a competency and does not wish to outsource the activity, it can develop the activity as a core competency. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: An organization has outdated equipment for a core competency, and it has cash flow issues delaying updates to the equipment. What action might free up some cash to help them make these investments right away? A) Keep costs low and lower prices to increase sales. B) Outsource a non-core competency activity where the vendor will incur capital expense. C) Research new technologies to develop a solution in-house. D) Outsource the activity to a supplier with the new equipment.
A: B) Outsource a non-core competency activity where the vendor will incur capital expense. Rationale: Organizations should not attempt to outsource the core competency, but should look to reinvest in improvments in problem areas that are considered a core competency. By outsourcing a non-core competency activity, it may be able to free up capital to reinvest back into the core competency area. Researching new technologies can be time consuming and expensive, and lowering prices to increase sales may not end up increasing cash availability. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: After a "buy" decision has been made, what is the next step in the process of offshoring some manufacturing to a country with low labor costs? A) Provide notice of layoffs and plant closings. B) Send out a request for proposal and select the lowest bidder. C) Do a detailed assessment of offshoring requirements. D) Acquire a local representative in a global sourcing hot spot.
A: C) Do a detailed assessment of offshoring requirements. Rationale: Only when an organization has thoroughly assessed its needs for offshoring is there a sound basis for evaluating and selecting specific countries and suppliers. The organization is then ready to consider how potential global suppliers can support the organizational value proposition. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: Which types of components would be the most risky to outsource? A) Nonessential B) Modular C) Integral D) Commodity
A: C) Integral Rationale: When considering contracting for components of a product or service, the core question revolves around whether the component is integral to the device or if it is modular. An integral component is typically unique to a product, and if it fails the whole product fails. A modular component is interchangeable with other variants on the market, such as a computer component. Integral components are much more risky to outsource. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: An organization wants to pursue the lowest total cost of ownership (TCO) with its offshore supply chain partners. Which of the following problems cannot be overcome by hiring local experts in the foreign country? A) Foreign country bureaucracy issues that could potentially delay shipments B) Legal, tax, and regulatory differences in the foreign country C) Management incentives rewarding organizational cost reductions D) Less emphasis on total quality initiatives at the offshored organization
A: C) Management incentives rewarding organizational cost reductions Rationale: TCO can be difficult to implement at an organization, much less across a supply chain. Organizations have long-standing department-specific cost reduction policies, management incentives, and accounting practices in place that would penalize individuals for failing to minimize costs in their departments. In this case, the only option that cannot be directly addressed by hiring local experts in the foreign country is management incentives rewarding organizational cost reductions. For more information, see Module 2, Section A, Chapter 9, Topic 1
Q: An organization is expanding its purchasing efforts into a new region with different cultural dimensions and expectations that are difficult for outsiders to navigate. Which business practice would it benefit most from subcontracting? A) Customer relationship management (CRM) B) Information systems C) Supplier relationship management (SRM) D) Manufacturing
A: C) Supplier relationship management (SRM) Rationale: SRM organizations with experience in a particular region could assume responsibility for transactional purchasing or supplier sourcing, contract negotiation, two-way communications of expectations, and compliance management. Outsourced SRM can also provide strategic support for alliances such as spend analysis or facilitating design collaboration. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: Which is the most important criterion for making the decision to contract out a business function to a third party? A) The third party has low overhead from equipment and infrastructure. B) The third party can do the function for the lowest total cost of all options. C) The function is a core competency for the third party. D) The function is a core competency for the organization.
A: C) The function is a core competency for the third party. Rationale: Organizational leaders are increasingly focused on core competencies as the most reliable way to deliver shareholder value and capture market share. Because of this, cost is a reason for contracting out, but it is not the only reason. Contracting with companies whose core competencies are in the specified area means that the supplier may have substantial investments in related infrastructure, equipment, technology, and hiring/training. The result may or may not be lowest total cost. It could be better value or more reliable service than the organization could provide. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: A total cost of ownership (TCO) study can show that when pursuing offshore outsourcing to a country with low labor costs, the reduction in the total cost is usually partly offset by increases in which of the following? 1) Warehousing costs 2) Transportation costs 3) Raw materials costs 4) Monitoring and control costs A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 2 and 4
A: D) 2 and 4 Rationale: According to research by Kalakota and Robinson (source: Crandall), the total cost of ownership related to offshore outsourcing includes a typical reduction in the total cost of labor of 70%, an increase in total transportation costs of 20%, and an increase in the organization's monitoring and control costs of 20%, for a net reduction in costs of 30%. TCO analysis can thus sometimes help make the case for closer sourcing. For more information, see Module 2, Section A, Chapter 9, Topic 1
Q: How can contract sourcing be categorized? A) As an item cost B) As an ongoing cost C) As a landed cost D) As a process change cost
A: D) As a process change cost Rationale: Process change costs may include requirements identification and research, product development, and contract sourcing, among others. For more information, see Module 2, Section A, Chapter 9, Topic 1
Q: An organization finds itself overextended, attempting to create, market, and sell products well outside its areas of expertise, and is beginning to suffer financially as a result. How can subcontracting certain processes benefit the organization as it attempts to tackle the source of the problem? A) By creating faster development cycle times B) By generating economies of scale C) By increasing capital available for investment D) By allowing it to focus on core competencies
A: D) By allowing it to focus on core competencies Rationale: Given that the root cause of the issue is a lack of focus on core competencies, the main benefit the organization would seek to realize by subcontracting is the ability to focus on its core competencies. An enterprise contracts only for activities that are not core competencies (in most cases). It does so to increase its ability to focus on its core activities. For more information, see Module 2, Section A, Chapter 9, Topic 2
Q: What should supply plans do? A) Defer discussion of risks until later planning stages. B) Offer the lowest total cost solution and avoid allowing any changes that would raise costs. C) Prevent any level of autonomous local sourcing. D) Measure costs and benefits over a base period plus costs to grow capacity over a long horizon.
A: D) Measure costs and benefits over a base period plus costs to grow capacity over a long horizon. Rationale: A supply plan is a long-term plan, so it must incorporate the flexibility to grow to meet continuous improvement goals, additional demand, and/or new products and services. A benefit-cost analysis for each alternative supply plan should consider the plan over a base period plus the costs involved in growing these capabilities over an extended forecast horizon. For more information, see Module 2, Section A, Chapter 9, Topic 4
