Krajewski Pom Tif 09

Chapter 9 Supply Chain Design
Chapter
Designing Effective Supply Chains
TRUE/FALSE
1.
The purpose of supply chain management is to synchronize a firms processes with those
of its suppliers and customers.
Answer: True
Reference: Supply Chains for Services and Manufacturing
Difficulty: Easy
Keywords: supply chain management
2.
Supply chain management tries to match the flow of materials, services and information
with demand.
Answer: True
Difficulty: Easy
Keywords: supply chain management
3.
The purpose of supply chain design is to shape a firms supply chain to meet the
competitive priorities of its operations strategies.
Answer: True
Difficulty: Moderate
Keywords: supply chain design
4.
Supply chain design for a service provider is driven primarily by the need to control the
materials it consumes as it delivers its various services.
Answer: False
5.
The fundamental purpose of supply chain design for a manufacturer is to control

inventories by managing the flow of materials.
Answer: True
6.
While it is important to manufacturing firms, little can be done to improve supply chain
strategy in most service organizations.
Answer: False
Keywords: supply chain strategy
166
Copyright 2010 Pearson Education
7.
The finished goods of one firm may actually be the raw materials for another firm.
Answer: True
Keywords: finished good, raw material
8.
The primary reason for keeping inventories low is that inventory represents a temporary
monetary investment in goods on which a firm must pay interest.
Answer: True
Reference: Inventory and Supply Chains
Difficulty: Easy
Keywords: inventory, investment
9.
One component of the holding cost of inventory is interest.

Answer: True
Keywords: holding cost, inventory, interest
10.
One component of the ordering cost of inventory is shrinkage.

Answer: False
Keywords: ordering cost, shrinkage
11.
A stockout occurs when an item that is typically stocked is not available to satisfy a
demand the moment it occurs.
Answer: True
Keyword: stockout
12.
A backorder occurs when a customer order cannot be filled when it is placed, but is
instead filled later.
Answer: True
Keywords: backorder, fill
13.
Setup cost is independent of order size.

Answer: True
Keywords: setup cost
14.
Reducing setup costs will increase the pressure to keep larger inventories.
Answer: False
Keywords: setup cost
167
15.
Increasing inventory levels can sometimes help a firm reduce both its inbound and
outbound transportation costs.
Answer: True
Keywords: pressure for large inventories
16.
A quantity discount is attractive because there is a drop in the price per unit when the
order is sufficiently large.
Answer: True
Keywords: quantity discount
17.
Repeatability is an undesirable feature of some orders because they must be repeated

until the order is filled correctly.
Answer: False
Keyword: repeatability
18.
The primary lever to reduce anticipation inventory is to place orders closer to the time
when they must be received.
Answer: False
Keywords: anticipation inventory, safety stock
19.
Forward placement is a reduction in inventory and safety stock because of the merging of
variable demands from customers.
Answer: False
Keywords: forward placement, inventory
20.
Inventory turnover is obtained by dividing the average aggregate inventory value by sales
per week at cost.
Answer: False
Reference: Measures of Supply Chain Performance
Keywords: inventory, turnover
21.
Increasing the percentage of on-time deliveries to customers actually reduces the total
revenue of a firm.
Answer: False
Keywords: on-time delivery, revenue
168
22.
Channel assembly is the process of using members of the distribution channel as if they
were assembly stations in the factory.
Answer: True
Reference: Mass Customization
Keywords: channel assembly, distribution, mass customization
23.
Responsive supply chains work best when frequent product introduction exists.
Answer: True
Reference: Strategic Implications
Keywords: responsive supply chains, product introduction
24.
Efficient supply chains work best when contribution margins are high.
Answer: False
Keywords: efficient supply chains, contribution margin
25.
Efficient supply chains use low capacity cushions.

Answer: True
Keywords: efficient supply chains, capacity cushion
26.
Responsive supply chains work best when firms offer a low variety of services or
products and demand predictability is high.
Answer: False
Keywords: responsive supply chains, variety, predictability
MULTIPLE CHOICE
27.
Which one of the following is TRUE for supply chain management?

a. Supply chain applies to both manufacturing and service organizations.
b. Supply chain applies only to manufacturing because it deals with flow of materials.
c. Supply chain is about suppliers and does not include distributors or customers.
d. Supply chain includes any operation that deals with materials.
Answer: a
Reference: Supply Chain Design Across the Organization
Difficulty: Easy
Keywords: supply chain, service, manufacturing
169
28.
Which of the following generates pressure to increase inventories?

a. inventory holding costs
b. ordering costs
c. storage and handling costs
d. taxes and insurance
Answer: b
( Difficulty: Easy
Keywords: pressures for small / large inventories
29.
Which of the following generates pressure to decrease inventories?

a. inventory shrinkage costs
b. backorders and stockouts
c. transportation costs
d. quantity discounts
Answer: a
( Difficulty: Easy
30.
Which of the following DOES NOT generate pressure to decrease inventories?

a. taxes and insurance
b. inventory holding costs
c. storage and handling costs
d. ordering costs
Answer: d
( Difficulty: Moderate
31.
Which of the following DOES NOT generate pressure to increase inventories?

a. transportation costs
b. backorders and stockouts
c. inventory shrinkage costs
d. quantity discounts
Answer: a
32.
Inventories needed for the production of services and goods (inputs to a firms
transformation processes) are called:
a. quarantined materials
b. work-in-process
c. raw materials
d. finished goods
Answer: c
( Difficulty: Easy
Keywords: types of inventories
170
33.
Items, such as components or assemblies, needed to manufacture a final product are

called:
b. work-in-process
c. raw materials
d. finished goods
Answer: b
( Difficulty: Easy
34.
Items sold to a firms customers are called:

b. work-in-process
c. raw materials
d. finished goods
Answer: d
( Difficulty: Easy
Use the following to answer questions 35 37:

Shipments of Product A from a distribution center to a retailer are made in lots of 350. The
retailers average demand for A is 75 units per week. Lead time from distributor to retailer is 3
weeks. The retailer pays for the shipments when they leave the distributor. The distributor has
agreed to reduce the lead time to 2 weeks if the retailer will purchase quantities of 400 per
shipment instead of 350.
35.
With the change in purchased quantities, the average cycle inventory will:
a. Decrease by 75 units.
b. Increase by 50 units.
c. Decrease by 25 units.
d. Increase by 25 units.
Answer: d
Keywords: types of inventories, cycle inventory, pipeline inventory
36.
With the change in lead times, the pipeline inventory will:

a. Decrease by 75 units.
b. Increase by 50 units.
c. Decrease by 25 units.
d. Increase by 25 units.
Answer: a
171
37.
The net impact on the retailer will be:

a. No net change in average cycle and pipeline inventories.
b. A net average increase in cycle and pipeline inventories of 50 units.
c. A net average decrease in cycle and pipeline inventories of 75 units.
d. A net average decrease in cycle and pipeline inventories of 50 units.
Answer: d
Use the following to answer questions 38 42:

Shipments of Product X from a plant to a wholesaler are made in lots of 600. The wholesalers
average demand for X is 100 units per week. Lead time from plant to wholesaler is 4 weeks. The
wholesaler pays for the shipments when they leave the plant.
38.
What is the total of the wholesalers current cycle plus pipeline inventories?
a. 300 units
b. 100 units
c. 700 units
d. 400 units
Answer: c
39.
If the plant reduces its lead time from 4 to 2 weeks and keeps its 600 unit lot size, what is
the wholesalers new total cycle plus pipeline inventories?
a. 300 units
b. 500 units
c. 700 units
d. 200 units
Answer: b
40.
If the plant reduces its shipment lot size from 600 to 400 units and keeps its 4 week lead
time, what is the wholesalers new total cycle plus pipeline inventories?
a. 600 units
b. 300 units
c. 500 units
d. 400 units
Answer: a
172
41.
Which of the following situations results in the wholesalers total cycle plus pipeline
inventories amounting to 550 units?
a. plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks
b. plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks
c. plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks
d. plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks
Answer: b
42.
Which of the following situations results in the wholesalers total cycle plus pipeline
inventories amounting to 400 units?
a. plant shipment lot size of 500 and plant-to-wholesaler lead time of 3 weeks
b. plant shipment lot size of 400 and plant-to-wholesaler lead time of 3 weeks
c. plant shipment lot size of 600 and plant-to-wholesaler lead time of 4 weeks
d. plant shipment lot size of 400 and plant-to-wholesaler lead time of 2 weeks
Answer: d
43.
Shipments of Product Q from a plant to a wholesaler are made in lots of 400. The
wholesalers average demand for Q is 150 units per week. Lead time from plant to
wholesaler is 5 weeks. The wholesaler pays for the shipments when they leave the plant.
The plant has proposed several new lead time and lot size options to the wholesaler (see
table below). If the wholesalers goal is to minimize total cycle plus pipeline inventories,
which option should the wholesaler select?
OPTION
CURRENT
1
2
3
SHIPMENT
LOT SIZE
400
500
800
1,000
PLANT-TOLEAD TIME
5
4
3
2
WHOLESALER
a. option #1
b. option #2
c. option #3
d. remain with the current option
Answer: c
173
44.
Which of the following is not a lever for reducing cycle inventories?

a. place purchased item orders at fixed intervals
b. reduce lot sizes for items moving in the supply chain
c. streamline methods for placing orders and making machine set ups
d. increase repeatability to eliminate the need for changeovers
Answer: a
Keywords: inventory, types of inventories, inventory reduction, tactics
45.
Which of the following does not increase repeatability?

a. parts standardization
b. customization
c. group technology
d. flexible automation
Answer: b
Keywords: inventory, types of inventories, inventory reduction, tactics
46.
One of the secondary levers for reducing pipeline inventory is to:

a. offer seasonal pricing plans.
b. increase capacity cushions.
c. accept only large orders.
d. select more responsive suppliers.
Answer: d
Keywords: pipeline inventory, lever
47.
Which one of the following statements on inventory placement of finished goods is best?
a. Forward placement might help reduce transportation cost.
b. Forward placement is consistent with a competitive priority that calls for
customization.
c. Inventory pooling should be avoided when demand in various regions fluctuates
month to month.
d. Backward placement is consistent with a competitive priority that calls for fast
delivery times.
Answer: a
Keywords: inventory, forward placement
48.
Which location shift would qualify as forward placement?

a. From the manufacturer to a distribution center
b. From the retailer to the wholesaler
c. From the wholesaler to the manufacturer
d. From the retailer to the manufacturer
Answer: a
Keywords: inventory, forward placement
174
49.
Padco averages $15 million worth of inventory in all of its worldwide locations. They
operate 51 weeks a year and each week average $3 million in sales (at cost). Their
inventory turnover is:
a. 1.13 turns.
b. 5 turns.
c. 10.2 turns.
d. 17 turns.
Answer: c
50.
Which one of the following statements about the relation between financial and supplychain performance measures is TRUE?
a. Longer delivery times require higher levels of working capital.
b. Shorter new product development time decreases revenue.
c. Higher inventory turns call for higher working capital requirements.
d. Lower aggregate inventory value means higher current assets.
Answer: a
Keywords: financial measures, supply chain, working capital
51.
Henderson Corporation is a supplier of alloy ball bearings to auto manufacturers in

Detroit. Because of the specialized manufacturing process employed, considerable workin-process and raw material inventories are created. The average inventory levels are
$1,152,000 and $2,725,000, respectively. In addition, finished goods inventory is
$3,225,000, and sales (at cost) for the current year are expected to be about $24 million.
The inventory turnover that Henderson Corporation is currently expecting is:
a. less than 2.0.
b. greater than 2.0 but less than 2.5.
c. greater than 2.5 but less than 3.0.
d. greater than 3.0.
Answer: d
175
52.
Maple Leaf, Inc., a television manufacturer, would like to reduce its inventory. To this
end, you are asked by the operations manager to assess its inventory level. You have the
following information on average inventories from last years financial statement:
Raw materials
$2,500,000
Work-in-process
$1,000,000
Finished goods
$ 800,000
In addition, the cost of goods sold last year (50 weeks) was $15 million. What was the
inventory turnover?
a.Less than or equal to two
b.Greater than two but less than three
c.Greater than three but less than four
d.Greater than four
Answer: c
53.
The average inventory at Hamilton Industries, comprising raw materials, work-inprocess, and finished goods, was found to be $17.2 million last year. If the cost of goods
sold per week averaged $1.32 million, what was the inventory turnover experienced by
Hamilton Industries? Assume the company had 50 working weeks per year.
a. Less than or equal to 3.50
b. Greater than 3.50 but less than 3.75
c. Greater than 3.75 but less than 4.00
d. Greater than 4.00
Answer: c
54.
A firm may choose to use members of the distribution channel as if they were assembly
stations in the factory. Such an approach is known as:
a. backward integration.
b. postponement.
c. channel assembly.
d. deferred delay.
Answer: c
( Difficulty: Easy
Keywords: channel assembly
55.
Which of the following is not identified in the text as a competitive advantage of a mass
customization strategy?
a. improvement of the quality of parts produced
b. management of customer relationships
c. elimination of finished goods inventory
d. an increase in perceived value of services or products
Answer: a
Difficulty: Easy
Keywords: mass customization, competitive advantages
176
56.
__________ uses a firms flexible processes to generate a wide variety of personalized

services or products at reasonably low costs.
a. Mass customization.
b. Channel assembly
c. Postponement
d. Forward integration
Answer: a
Keywords: mass customization
57.
A somewhat successful computer manufacturer makes a generic computer in five exciting

colors. Once orders are received, the computer guts are encased in the customers choice
of colored case at the factory. This approach to production is known as:
a. channel assembly.
b. postponement.
c. strategic sourcing.
d. strategic production.
Answer: b
Keywords: postponement, delayed differentiation
58.
A producer of medical devices makes a single model that can be customized to talk in and
display any of 47 different languages. This customization is performed in one of their five
regional distribution centers as firm orders are received, providing an elegant example of:
a. backward integration.
a. forward integration
b. channel assembly.
c. offshoring.
Answer: c
59.
The supply chain management department of a major manufacturer pondered a

particularly weighty make or buy decision for weeks, ultimately deciding to make, rather
than buy. This decision resulted in increased:
a. outsourcing.
b. offshoring.
c. postponement.
d. backward integration.
Answer: d
Reference: Outsourcing Processes
Difficulty: Easy
Keywords: make-or-buy decisions, integration
177
Use the following to answer questions 60 62.

A company must decide if it will make or buy an item it needs. The company can make the item
for $10 / unit, but must spend $15,000 per year in tooling to do so. An outside firm has quoted a
total price of $12 / unit to supply the quantity required.
60.
What is the break-even point in this situation?

e. 6,500 units
f.7,250 units
g. 7,500 units
h. 8,000 units
( Answer: c
( Reference: Outsourcing processes
( Keywords: outsourcing, make-or-buy decisions
60.
Which alternative should be selected if annual requirements are 5,000 units?

a. Make
b. Buy
c. Either Make or Buy; costs are the same for either option at 5,000 units
d. Cant be determined with information given
( Answer: b
61.
What does the company save for the year by selecting this low-cost option (for annual
requirements of 5,000 units)?
a. $5,000
b. $15,000
c. $65,000
( Answer: a
178
Use the following to answer questions 63 65.

A company is considering making versus buying a part needed for manufacturing. Particulars are
as follows:
Make: Fixed Costs = $9,000 / year
Variable Cost / Unit = $2
Buy:
Fixed Costs = $3,000 / year
Variable Cost / Unit = $5
62.
What is the annual break-even quantity for choosing between making and buying in this
situation?
a. 1,000 units
b. 2,000 units
c. 6,000 units
d. 3,000 units
( Answer: b
63.
For an annual volume of 3,000 units, which supplier should be chosen?

a. Make
b. Buy
c. Either Make or Buy; costs are the same for either option at 3,000 units
( Answer: a
64.
What does the company save for the year by selecting this low-cost option (for annual
requirements of 3,000 units)?
a. $5,000
b. $1,000
c. $3,000
( Answer: c
179
Use the following information to answer questions 66 71.

You currently make a part on old equipment at a cost of $50,000 per year and a variable cost of
$20 / unit. You have found an outside supplier who will make the part for $15 / unit if you will
pay their annual fixed costs of $200,000 / year. The following table summarizes the details of this
make versus buy decision.
ALTERNATIVE
FIXED COST
VARIABLE COST
Buy
$200,000 per year
$15 per unit
Make
$50,000 per year
$20 per unit
65.
What is the break even quantity between buying and making?

a. 30,000 units per year
b. 40,000 units per year
c. 50,000 units per year
d. 60,000 units per year
( Answer: a
66.
What are total costs to buy an annual quantity of 40,000 units?

a. $400,000
b. $500,000
c. $800,000
d. $850,000
( Answer: c
( Difficulty: Easy
67.
What are total costs to make a quantity of 40,000 units per year?
a. $400,000
b. $450,000
c. $800,000
d. $850,000
( Answer: d
( Difficulty: Easy
180
69.
For what range of output would you prefer to buy?

a. 0 - 30,000 units per year
b. 30,000 or more units per year
c. 40,000 or more units per year
d. 0 40,000 units per year
( Answer: b
( Difficulty: Easy
70.
For what range of output would you prefer to make?

a. 40,000 or more units per year
b. 0 40,000 units per year
c. 30,000 or more units per year
d. 0 30,000 units per year
( Answer: d
( Difficulty: Easy
71.
What does the company save for the year by selecting the low-cost option at an annual
requirement of 40,000 units?
a. $150,000
b. $300,000
c. $50,000
d. $40,000
( Answer: c
72.
Which of the following is not a benefit of outsourcing?

a. comparative labor costs
b. lower logistics costs
c. reduction of transaction costs through use of the Internet
d. technology transfer to another country or company
( Answer: d
73.
A U.S. company faced with spiraling costs in their customer care center recreated that
service in Luxembourg at a fraction of the cost. This is an example of:
a. offshoring.
b. forward integration.
c. backward integration.
d. postponement.
Answer: a
Difficulty: Easy
Keywords: offshoring, outsourcing
181
74.
An efficient supply chain should be preferred when:

a. product variety is high.
b. competitive priority is customization.
c. demand is highly predictable.
d. demand is unpredictable.
Answer: c
Keywords: efficient supply chain
75.
An efficient supply chain typically has:

a. a high capacity cushion.
b. high inventory turns.
c. supply chain partners that emphasize fast delivery time.
d. supply chain partners that emphasize volume flexibility.
Answer: b
Keywords: efficient supply chain
76.
A responsive supply chain typically has:

e. a low capacity cushion.
f.high inventory turns.
g. supply chain partners that emphasize low prices.
h. supply chain partners that emphasize volume flexibility.
Answer: d
Keywords: responsive supply chain
68.
Responsive supply chains should be preferred when:

a. product variety is low.
b. demand is predictable.
c. contribution margins are low.
d. product variety is high.
Answer: d
69.
The type of goods for which a responsive supply chain is appropriate are:
a. fashion goods.
b. products with a long shelf life.
c. expensive products.
d. those with infrequent design changes.
Answer: a
Difficulty: Hard
182
70.
It is desirable for a firm in a responsive supply chain to have:

a. low-capacity cushions.
b. delivery by railroad.
c. high-capacity utilization consistent with high-volume delivery.
d. inventory investments as needed to enable fast delivery times.
Answer: d
71.
The objective of a firm in a responsive supply chain is likely to be realized if it has a:

a. standardized product.
b. short lead time.
c. low-capacity cushion.
d. line-flow process.
Answer: b
FILL IN THE BLANK

81.
____________ is the synchronization of a firms process with those of its suppliers and
customers to match flow of materials, services and information with demand.
Answer: Supply chain management
Difficulty: Easy
Keywords: supply chain management, supply chain design
82.
____________ seeks to develop a firms supply chain to meet the competitive priorities
of the firms operations strategy.
Answer: Supply chain design
Difficulty: Easy
Keywords: supply chain management, supply chain design
72.
____________ are inventories needed for the production of goods and services; they are
considered the inputs to the transformation process.
Answer: Raw materials
Keywords: inventory types, raw materials
73.
____________ consists of items such as components or assemblies needed for a final

product in manufacturing.
Answer: Work-in-process (WIP)
Keywords: inventory types, WIP, work-in-process inventory
183
83.
A ____________ is an incentive to order larger quantities, where the price per unit is
decreased when the order is sufficiently large.
Answer: quantity discount
Keywords: inventory, pressure for large inventories, payments to suppliers
74.
____________ is the opportunity cost of investing in an asset relative to the expected

return on assets of similar risk.
Answer: Cost of capital
Keywords: cost of capital, opportunity, return on assets
75.
Inventory ____________ cost is the variable cost of keeping items on hand, including
interest, storage and handling, taxes, insurance, and shrinkage.
Answer: holding
Keywords: holding cost, interest, storage, handling, tax
76.
____________ occurs when inventory is stolen by employees and customers or when the
inventory cannot be sold at full value owing to model changes or low demand.
Answer: Shrinkage
Keywords: shrinkage, pilferage, obsolescence
77.
A(n) ____________ is an order that cannot be satisfied, resulting in the loss of a sale.
Answer: stockout
Keywords: inventory, pressure for large inventories, customer service
78.
A(n) ____________ occurs when a customer order cannot be filled as promised or

demanded but is filled later.
Answer: backorder
Keywords: backorder, order
79.
____________ is the cost of preparing a purchase order for a supplier or a production

order for the shop.
Answer: Ordering cost
Keywords: ordering cost
184
80.
____________ inventory is the portion of total inventory that varies directly with lot size.
Answer: Cycle
Keywords: cycle, lot size
81.
The ____________ determines the frequency and quantity to order.

Answer: lot size
Keywords: lot size
82.
____________ inventory is the surplus inventory that a company holds to protect against
uncertainties in demand, lead-time, and supply.
Answer: Safety stock
Keywords: safety stock
83.
As safety stock increases, the holding cost of that inventory item ____________.
Answer: increases
Keywords: safety stock, holding cost
84.
____________ inventory is the inventory moving from point to point in the materials
flow system.
Answer: Pipeline
Keywords: pipeline, point flow
85.
____________ is the degree to which the same work can be done again and again.
Answer: Repeatability
Keywords: repeatability
86.
____________ are the basics tactics for reducing inventories in supply chains.
Answer: Levers
Keywords: inventory reduction tactics
87.
A ____________ lever is one that must be activated if inventory is to be reduced.

Answer: primary
Keywords: inventory reduction tactics
185
88.
Cornelius Controlfreak insisted that his manufacturing plant also be the sole location for
all finished goods inventory. If any customer placed an order, they knew it would come
from the only place on Earth that had a ready supply, Cornelius plant warehouse.
____________ was alive and well thanks to this approach.
Answer: centralized placement
Difficulty: Easy
Keywords: centralized placement
89.
____________ is a reduction in inventory and safety stock because of the merging of

variable demands from customers.
Answer: Inventory pooling
Keywords: inventory pooling, merging
90.
____________ involves locating the stock closer to customers at a warehouse,

distribution center, or retailer.
Answer: Forward placement
Keywords: forward placement
91.
____________ is an inventory measure obtained by dividing the average aggregate

inventory value by sales per week at cost.
Answer: Weeks of supply
Keywords: weeks of supply measure
92.
____________, the annual sales at cost divided by the average aggregate inventory value,
is the number of times a year that a firm completely replenishes its inventory.
Answer: Inventory turnover (turns)
Keywords: turnover, sales, inventory
93.
____________ is the money used to finance ongoing operations.

Answer: Working capital
Keywords: working capital
94.
The clever wine shop owner held a tasting, accepted customer orders and payments, and
then placed an order with the vineyard. Since he paid the vineyard after he received the
shipment (and well after he charged his customers), his ____________ time was
negative.
Answer: cash-to-cash
Keywords: cash-to-cash, cash flow
186
95.
____________ is a concept whereby some of the final activities in the provision of a

service or product are delayed until the orders are received.
Answer: Postponement
Keywords: postponement
96.
One way to gain control over suppliers in a chain is to buy a controlling interest in them,
known as ____________.
Answer: backward integration
Keywords: backward integration
97.
When a company uses ____________ , it does not perform some processes itself, but
instead pays suppliers or distributors to perform those processes and provide needed
services and materials.
Answer: outsourcing
Difficulty: Easy
Keywords: outsourcing
98.
When a company uses ____________ , it is moving upstream in the supply chain toward
the source of raw materials.
Answer: backward integration
Difficulty: Easy
Keywords: vertical integration, backward integration
99.
When a company acquires more channels of distribution, such as its own distribution
centers and retail stores, it is using ____________ .
Answer: forward integration
Difficulty: Easy
Keywords: vertical integration, forward integration
100.
____________ is the process of using members of the distribution channel as if they were
assembly stations in the factory.
Answer: Channel assembly
187
SHORT ANSWERS
101.
Discuss the major differences between supply chains for services and manufacturing.
Which supply chain is easier to coordinate effectively?
Answer: Supply chain design for a service provider is driven by the need to provide
support for the essential elements of the various service packages it delivers.
Manufacturers try to control inventory by managing the flow of materials. Since a
good is very rarely a pure service or a pure manufactured product, most companies
will experience both issues. Ease of coordination answers will vary but may depend
on the dynamic nature of the item, of the market, and other factors outside the control
of the operations manager.
Keywords: manufacturing, service, inventory, service package, supply chain
102.
Discuss the trade-offs with locating the inventory at the factory versus locating it closer
to the customer at a warehouse, distribution center, wholesaler, or retailers.
Answer: Locating inventory at a companys factory or warehouse constitutes centralized
placement, thereby allowing a firm to take advantage of inventory pooling. Inventory
pooling permits the producer to reduce the total inventory in the system, yet retain
high service levels since one customers high demand may be offset by another
customers low demand. The disadvantage of holding inventory in one location is the
additional expense and time required to get product in the hands of the customer.
Another approach to inventory location is forward placement. Forward placement
reduces delivery times and puts the inventory closer to the customer so that in some
cases (when it is located at a retailer), it can be seen and might trigger a purchase.
The disadvantages of forward placement run counter to the advantages of pooling.
Keywords: centralized placement, inventory pooling, service levels, forward placement
103.
What are the components of holding cost?

( Answer: The components of holding cost include cost of capital, storage and
handling cost, taxes, insurance, and shrinkage.
( Reference: Inventory and Supply Chains
( Keywords: holding cost
104.
What are the secondary levers for cycle inventory?

( Answer: The secondary levers for cycle inventory are streamlining methods for
placing orders and making setups, and increasing repeatability to eliminate the
need for changeovers.
( Keywords: cycle inventory, lever
188
105.
What are the secondary levers for safety stock inventory?

( Answer: The secondary levers for safety stock inventory are improved demand
forecasts, cutting lead-time of purchased or produced items, reducing supply
uncertainties, and relying more on equipment and labor buffers.
( Keywords: safety stock inventory, lever
106.
What are the secondary levers for pipeline inventory?

( Answer: The secondary levers for pipeline inventory are finding more
responsive suppliers and introducing new computer systems to overcome
information delays and decreasing Q where lead-time depends on lot size.
( Keywords: pipeline inventory, lever
107.
Compare and contrast efficient versus responsive supply chains.

Answer: The purpose of efficient supply chains is to coordinate the flow of materials and
services to minimize inventories and maximize the efficiency of the manufacturers
and service providers in the chain. Responsive supply chains are designed to react
quickly to market demands by positioning inventory and capacities to hedge against
uncertainties in demand. Efficient supply chains work best where demand is
predictable with low forecast errors; competitive priorities are low cost, consistent
quality, and delivered on time; new-product introduction is low; and profit margins
are low. Responsive supply chains work best when demand is unpredictable with
high forecast errors. Competitive priorities are development speed, fast delivery
times, customization, high-performance design quality; new product-introduction is
frequent; contribution margins are high; and product variety is high. Efficient supply
chains should use a make-to-stock or standardized services operations strategy, lowcapacity cushion, and low inventory investment. They should shorten lead time
without increasing costs and emphasize fast delivery time, customization, volume
flexibility, and high-performance design quality. Responsive supply chains should
use assemble-to-order, make-to-order, or customized services emphasizing product or
service variety; high-capacity cushions; and inventory levels set to enable fast
delivery time. They should aggressively shorten lead time and emphasize fast
delivery time, customization, volume flexibility, and high-performance design
quality.
Difficulty: Hard
Keywords: efficient supply chain, responsive supply chain
189
PROBLEMS
108.
Last year, RJT Enterprises had average inventories (raw materials, work-in-process, and
finished goods) of $7.5 million. During this same year the cost of goods sold was $30
million. The company operates 50 weeks per year.
a. What is their total inventory (measured as weeks of supply)?
b. What is their inventory turnover?
Answer:
Weeks of supply = average aggregate inventory value/weekly sales at cost =
7.5 million/(30 million/50) = 12.5 weeks
Inventory turnover = annual sales (at cost)/average aggregate inventory value =
30 million/7.5 million = 4
( Keywords: turnover, weeks of supply, inventory value
121.
Rome Corporation is a supplier of ball bearings. Because of the specialized

manufacturing process employed, considerable work-in-process and raw material
inventories are created. The current inventory levels are $1,500,000 and $3,775,000,
respectively. In addition, finished goods inventory is $3,500,000, and sales (at cost) for
the current year are expected to be about $28 million. Assume they operate 50 weeks per
year.
a. What is their total inventory (measured as weeks of supply)?
b. What is their inventory turnover?
Answer:
a. Weeks of supply = average aggregate inventory value/weekly sales at cost =
(1,500,000 + 3,775,000 + 3,500,000)/(28,000,000/50) = 15.7 weeks
b. Inventory turnover = annual sales (at cost)/average aggregate inventory value =
28 million/8.775 million = 3.19
Keywords: turnover,weeksofsupply,inventoryvalue
122.
A television manufacturer would like to reduce its inventory. To this end, you are asked
by the operations manager to assess its inventory level. You have the following
information on average inventories from last years financial statement:
Raw materials
$1,500,000
Work-in-process
$1,200,000
Finished goods
$ 800,000
In addition, the cost of goods sold last year (50 weeks) was $20 million.
a. What is its total inventory (measured as weeks of supply)?
b. What is its inventory turnover?
Answer:
Weeks of supply = average aggregate inventory value/weekly sales at cost =
(1,500,000 + 1,200,000 + 800,000)/(20,000,000/50) = 8.75 weeks
Inventory turnover = annual sales (at cost)/average aggregate inventory value =
20 million/3.5 million = 5.71
Keywords: turnover,weeksofsupply,aggregateinventoryvalue
190
123.
Champion Cooling Company remanufactures window air conditioners during the offseason months for sales during the scorching months of June, July, and August in the
Oklahoma City area. Their average inventory of air conditioners is shown in the
following table. The company operates 50 weeks a year and has average weekly sales of
$3,750 and expects to sell $135,000 worth of product in a year.
Unit Type
Avg. Inventory Value of Each
(at cost)
110 Volts
65
$250
18,000 BTU or smaller 220 Volts 90
$350
Larger than 18,000 BTU
50
$500
a. What is their average aggregate inventory value?
b. What is their total inventory (measured as weeks of supply)?
c. What is their inventory turnover?
Answer:
(#Units on Hand )(Value of Each Item)
a. Avg Aggregate Inventory Value
Avg Aggregate Inventory Value 65 $250 90 $350 50 $500 $72, 750

Avg Aggregate Inventory Value
b. Weeks of Supply
Weekly Sales
Weekly Sales (at cost)
Weeks of Supply
$72, 750
20 weeks 19.4 weeks
$3, 750 / week
Annual Sales (at cost)
Annual Sales
Avg Aggregate Inventory Value
$135, 000
Inventory Turnover
1.86
$72, 750
c. Inventory Turnover

Keywords: turnover,weeksofsupply,aggregateinventoryvalue
191

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Chapter 9 Supply Chain Design

Designing Effective Supply Chains

The fundamental purpose of supply chain design for a manufacturer is to control

Chapter 9 Supply Chain Design

One component of the holding cost of inventory is interest.

One component of the ordering cost of inventory is shrinkage.

Setup cost is independent of order size.

Chapter 9 Supply Chain Design

Repeatability is an undesirable feature of some orders because they must be repeated

Chapter 9 Supply Chain Design

Efficient supply chains use low capacity cushions.

Which one of the following is TRUE for supply chain management?

Chapter 9 Supply Chain Design

Which of the following generates pressure to increase inventories?

Which of the following generates pressure to decrease inventories?

Which of the following DOES NOT generate pressure to decrease inventories?

Which of the following DOES NOT generate pressure to increase inventories?

Chapter 9 Supply Chain Design

Items, such as components or assemblies, needed to manufacture a final product are

Items sold to a firms customers are called:

Use the following to answer questions 35 37:

With the change in lead times, the pipeline inventory will:

Chapter 9 Supply Chain Design

The net impact on the retailer will be:

Use the following to answer questions 38 42:

Chapter 9 Supply Chain Design

Chapter 9 Supply Chain Design

Which of the following is not a lever for reducing cycle inventories?

Which of the following does not increase repeatability?

One of the secondary levers for reducing pipeline inventory is to:

Which location shift would qualify as forward placement?

Chapter 9 Supply Chain Design

Henderson Corporation is a supplier of alloy ball bearings to auto manufacturers in

Chapter 9 Supply Chain Design

Chapter 9 Supply Chain Design

__________ uses a firms flexible processes to generate a wide variety of personalized

A somewhat successful computer manufacturer makes a generic computer in five exciting

The supply chain management department of a major manufacturer pondered a

Chapter 9 Supply Chain Design

Use the following to answer questions 60 62.

What is the break-even point in this situation?

Which alternative should be selected if annual requirements are 5,000 units?

Chapter 9 Supply Chain Design

Use the following to answer questions 63 65.

For an annual volume of 3,000 units, which supplier should be chosen?

Chapter 9 Supply Chain Design

Use the following information to answer questions 66 71.

What is the break even quantity between buying and making?

What are total costs to buy an annual quantity of 40,000 units?

Chapter 9 Supply Chain Design

For what range of output would you prefer to buy?

For what range of output would you prefer to make?

Which of the following is not a benefit of outsourcing?

Chapter 9 Supply Chain Design

An efficient supply chain should be preferred when:

An efficient supply chain typically has:

A responsive supply chain typically has:

Responsive supply chains should be preferred when:

Chapter 9 Supply Chain Design

It is desirable for a firm in a responsive supply chain to have:

The objective of a firm in a responsive supply chain is likely to be realized if it has a:

FILL IN THE BLANK

____________ consists of items such as components or assemblies needed for a final