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Introduction to Supply Chain Management

Chapter 1—Introduction to Supply Chain Management

TRUE/FALSE

  1. According to the textbook, the keys to successful supply chain management include trust, cooperation, collaboration and honest, accurate communications between supply chain partners.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     1-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Supply chain management is concerned about how suppliers’ products are designed, produced, and transported.

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-1      Bloom’s: Knowledge           Difficulty: Easy

  1. One definition of supply chain management is "Coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers."

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-1      Bloom’s: Knowledge           Difficulty: Easy

  1. The universally accepted definition of supply chain management is "the management and integration of the parties involved in producing the end items coveted by consumers."

ANS:  F                               PTS:    1        

BUSPROG: Analytic           LO:     1-1      Bloom’s: Comprehension     Difficulty: Easy

  1. The assembly or production of finished products, producing the right amount of product, and ensuring that finished products meet specific quality, cost, and customer service requirements can all be considered elements of operations.

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Comprehension     Difficulty: Easy

  1. According to the textbook, supply chains include raw material suppliers, intermediate component manufacturers, end-product manufacturers, wholesale distributors, retailers and end-product consumers.

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Trucking companies, airfreight shipping companies, and information system providers can all be considered service providers to the supply chain.

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the textbook, a supply chain's end customers are the only true source of income for all supply chain organizations.

ANS:  T                               PTS:    1

BUSPROG: Analytic           LO:     1-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The foundation elements of supply chain management are Supply. Operations, Customer Service, Logistics.

ANS:  F                               PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Comprehension     Difficulty: Easy                   

  1. Supply chain management activity includes managing the various compensation and benefit programs within an organization.

ANS:  F                               PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Highly valued customers with large purchasing budgets who achieve moderate supply chain management success have been known to lower purchasing and inventory carrying costs, and create better quality products with higher levels of customer service.

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Many large firms are moving to in-house vertically integrated structures where they have more control over each business unit.

ANS:  F                               PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Supply chain analytics can be used along the supply chain to schedule production according to expected supplier deliveries

ANS:  T                               PTS:    1

BUSPROG: Analytic           LO:     1-4      Bloom’s: Analysis               Difficulty: Easy

  1. According to the textbook, in the 1950's and 1960's, mass production techniques focused on creating supplier partnerships, improving process design and flexibility, and improving product quality.

ANS:  F                               PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the textbook, third-party logistics providers (3LPs) do not offer assistance with helping products clear customs.

ANS:  F                               PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the textbook, environmental and social impacts are considered outside of supply chain management.

ANS:  F                               PTS:    1         REF:       

BUSPROG: Diversity          LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. Trends in supply chain management include expansion of the supply chain and decreasing supply chain visibility.

ANS:  F                               PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the text, supply chain management will involve cultural change among most or all of the participants.

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. The bullwhip effect causes an amplification of the variation in the demand pattern along the supply chain.

ANS:  T                               PTS:    1        

BUSPROG: Analytic           LO:     1-5      Bloom’s: Knowledge           Difficulty: Easy

  1. The bullwhip effect is the result of companies producing excessive defective products; defective items are whipped back from the end customer toward the manufacturer of the defect.

ANS:  F                               PTS:    1        

BUSPROG: Technology      LO:     1-5      Bloom’s: Analysis               Difficulty: Easy

MULTIPLE CHOICE

  1. When a particular item is in short supply accompanied by rising prices, a firm might find it beneficial to:

a.

Discontinue buying the product and focus more on cheaper products.

b.

Align itself with one of the suppliers to ensure a continued supply of the scarce item.

c.

Purchase the item from a manufacturer who cuts corners and provides a product below market price.

d.

All of these

ANS:  B                              PTS:    1        

BUSPROG: Analytic           LO:     1-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Supply chain management includes the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. It also includes:

a.

Human resources and job design

b.

Selling and marketing products

c.

Coordination and collaboration with channel partners

d.

Program evaluation and review techniques.

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Which company is experimenting with the management of the final mile of delivery in some markets, using small aerial drones to deliver shoebox-size packages from fulfillment centers?

a.

FedEx

b.

UPS

c.

Zappos

d.

Amazon

ANS:  D                              PTS:    1        

BUSPROG: Analytic           LO:     1-1      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the textbook, conditions which must be present for successful supply chain management include:

a.

Cooperation among firms

b.

Corporate contracts regarding performance expectations

c.

Short-term company focused performance

d.

Vertical Integration

ANS:  A                              PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the text, the FOUR important elements of the supply chain are:

a.

Purchasing, manufacturing, transportation, retail stores

b.

Supply, operations, logistics, integration

c.

Purchasing, manufacturing, logistics, transportation

d.

Supply, operations, manufacturing, distribution

ANS:  B                              PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Knowledge           Difficulty: Easy

          

  1. Encouraging or helping a firm's suppliers to perform in a desired fashion can be referred to as:

a.

Progressive procurement

b.

Supplier management

c.

Right-shoring

d.

Supply chain performance management

ANS:  B                              PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Knowledge           Difficulty: Easy

          

  1. Which of the following activities would fall under the foundational element of operation?

a.

Distribution network

b.

Supplier management

c.

Demand management

d.

Third-party logistics services

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-2      Bloom’s: Knowledge           Difficulty: Easy

  1. One operational method for managing inventory is the implementation of a software system which can be referred to as:

a.

Material requirements planning (MRP)

b.

Demand capacity tracking (DCT)

c.

Inventory sourcing (IS)

d.

Demand process reengineering (DPR)

ANS:  A                              PTS:    1        

BUSPROG: Technology      LO:     1-3      Bloom’s: Comprehension     Difficulty: Easy

          

  1. Which of the following activities allows buyers to assume the supplier will meet certain product quality and service requirements?

a.

Business process reengineering

b.

Right-shoring

c.

Supplier certification

d.

Distribution network

ANS:  C                              PTS:    1        

BUSPROG: Technology      LO:     1-3      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the textbook, the order of product & service flow is as follows:

a.

Raw material supplier, retailer, component manufacturer, wholesale distributor, end product manufacturer, end-product consumer

b.

Raw material supplier, component manufacturer, retailer, wholesale distributor, end product manufacturer, end-product consumer

c.

Component manufacturer, raw material supplier, retailer, wholesale distributor, end product manufacturer, end-product consumer

d.

Raw material supplier, component manufacturer, end product manufacturer, wholesale distributor, retailer, end-product consumer

ANS:  D                              PTS:    1

BUSPROG: Analytic           LO:     1-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is a reverse logistics activity:

a.

Delivering finished goods to your customer

b.

Recycling products and components

c.

Developing a collaborative relationship with your supplier

d.

Managing the quality of products

ANS:  B                              PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following would be considered a third party provider?

a.

A Raw materials supplier

b.

An intermediate component manufacturer

c.

A firm that leases storage warehousing

d.

An end product manufacturer

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following statements is TRUE?

a.

Supply chain management was invented by the auto manufacturing industry

b.

Strategic partnerships are seen as one of the foundations of supply chain management

c.

Purchasing is seen as the final and most difficult step in the supply chain

d.

Service response logistics is the digital distribution of services

ANS:  B                              PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following acronyms is NOT paired with its correct "translation?"

a.

TQM - Total Quality Management

b.

JIT - Just-in-Time

c.

TLS - Third-party Logistics Services

d.

ERP - Enterprise Resource Planning

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Lean production is typically associated with which of the following company's production systems?

a.

Proctor and Gamble

b.

Kraft

c.

Samsung

d.

Toyota

ANS:  D                              PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. Customer relationship management, distribution network, transportation management, and service response logistics are all important issues that are most closely related to:

a.

Purchasing

b.

Logistics

c.

Integration

d.

Manufacturing

ANS:  B                              PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Comprehension     Difficulty: Easy

  1. The following strategy is usually employed by lean organizations in an effort to ensure continued quality compliance among suppliers and with internal production facilities:

a.

Six Sigma

b.

MRP II

c.

3PL

d.

CAPS

ANS:  A                              PTS:    1        

BUSPROG: Analytic           LO:     1-3      Bloom’s: Knowledge           Difficulty: Easy

                    

  1. Which of the following 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”.

a.

Reverse logistics

b.

Enterprise resource planning

c.

Sustainability

d.

Strategic partnerships

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Comprehension     Difficulty: Easy

  1. According to the text, which of the following is considered a current trend in supply chain management?

a.

Using supply chain analytics

b.

Increasing supply chain visibility

c.

Both A and B

d.

None of these

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Developed in the 1990’s as a popular way of developing radically new business processes in an effort to reduce waste and increase performance is referred to as:

a.

Process integration

b.

Benchmarking

c.

Business process reengineering

d.

Vertical integration

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. The term Supply Chain Management and the field of study it represents today seems to have emerged in the:

a.

1960's

b.

1970's

c.

1980's

d.

1990's

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Knowledge           Difficulty: Easy

  1. An internal or external event that causes a disruption or failure of supply chain operations is an example of

a.

Bull-whip effect

b.

Back-shoring

c.

Supply chain risk

d.

Six Sigma quality management

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following can happen as a result of the bullwhip effect?

a.

Increase in defective products

b.

Excess costs for each firm in a supply chain

c.

Decreased levels of safety stock

d.

Quicker distribution to warehouses

ANS:  B                              PTS:    1        

BUSPROG: Analytic           LO:     1-5      Bloom’s: Comprehension     Difficulty: Easy

  1. The continuing cycle of erratic demand causing forecasts to include safety stock which in turn magnify supplier forecasts and cause production planning problems is known as:

a.

Supply chain management

b.

Process integration

c.

Back-shoring

d.

Bullwhip effect

ANS:  D                              PTS:    1        

BUSPROG: Analytic           LO:     1-5      Bloom’s: Comprehension     Difficulty: Easy

  1. The following is an example of the bullwhip effect:

a.

Barkley's produces a defective product and thus realizes an excessive increase in consumer returns

b.

Barkley's products are so successful that it adds a new retailer for distribution

c.

Barkley's incorrectly anticipates consumer demand resulting in stockouts at several popular retailers

d.

Barkley's is unhappy with the performance of a distributor which causes a chain-reaction of replacements to companies involved in its supply chain

ANS:  C                              PTS:    1        

BUSPROG: Analytic           LO:     1-5      Bloom’s: Application           Difficulty: Easy

 

SHORT ANSWER

  1. There are many definitions for supply chain management. a. Define supply chain management in your own words. b. What is the goal of supply chain management?

ANS: 

a.

Supply chain management is managing the activities involved in sourcing, production, and distribution of products. It is also involved in coordinating or integrating a number of goods- and services-related activities among supply chain participants.

b.

The goal of supply chain management typically involves improving operating efficiencies, increasing quality of products and strengthening customer service among the collaborating organizations.

PTS:   5

BUSPROG: Communication     LO:   1-1   Bloom’s: Comprehension     Difficulty: Moderate

  1. Explain the concept of 'value-enhancing benefits' by giving THREE examples of benefits that may be realized by a firm that successfully manages its supply chain.

ANS: 

Benefits from successfully managing the supply chain

a.

Lower purchasing and inventory carrying costs

b.

Better product quality

c.

Higher levels of customer service

d.

Increase in sales.

PTS:   5                              

BUSPROG: Communication     LO:   1-2   Bloom’s: Comprehension     Difficulty: Moderate

  1. Briefly explain how technology has impacted supply chain management? Give three examples.

ANS: 

How technology has impacted supply chain management

a.

Shipments can be tracked and monitored using technology and alerts sent to shippers about items that are in transit and delivered.

b.

Technology can be used to help a facility make more economic use of their utilities such as automated controls for lighting and air conditioning.

c.

RFID and automated storage and retrieval systems can be used to move product through a warehouse

d.

Inventory visibility is made easier by technology and the use of MRP and ERP systems.

PTS:   5                              

BUSPROG: Technology      LO:     1-4      Bloom’s: Knowledge           Difficulty: Moderate

  1. List three concepts used by supply chain managers in an attempt to make a firm more flexible and responsive to customers' changing needs:

ANS: 

a.

Agile manufacturing

b.

JIT

c.

Mass customization

d.

Lean manufacturing

e.

Quick response

PTS:   5                              

BUSPROG: Analytic           LO:     1-3      Bloom’s: Knowledge           Difficulty: Easy

ESSAY

  1. Discuss the differences between supply chain partnerships of the past and those that have developed today.

ANS: 

In the past, supply chain partnerships did not really exist.

·

Supply chains were seen as a series of independent organizations that were looked on, to perform their core competency for the sake of their downstream "partner."

·

Firms in the past did not seek to share information.

·

Buyers of supplies and services instead usually were reduced to bargain hunters. Low cost was valued over quality.

·

Traditional relationships were also characterized by a large number of partners and short-term contracts. This put an emphasis on low cost that would provide short-term profits versus sustainable profits that might come along with consistently high quality goods and services.

·

In some cases, conglomerates were formed by firms seeking more supply chain control.

Modern supply chain partnerships are much different.

·

Partnerships of today encourage sharing and collaboration from the design phase to the delivery phase.

·

Partners, nowadays, see each other as a chain of customers connected by their goal of pleasing the final end customer.

·

While cost is still an important aspect of creating value for the customer, today supply chains also focus on the importance of higher quality, more customization, and swift delivery service.

·

It is for this reason that modern partnerships focus on collaboration from the moment they begin to design a product until the product's lifecycle has run its course.

·

Modern partnerships often include a small number of partners who understand the value of long-term contracts that value quality, speed, and flexibility as much, if not more, than cost.

PTS:   10                            

BUSPROG: Communication LO:     1-4      Bloom’s: Application           Difficulty: Difficult

  1. List the four elements of supply chain management and provide a brief explanation of each of the four elements. What types of failures might each of those elements create within the supply chain? Why might those results be linked to errors in a particular element?

ANS: 

Note: While the descriptions of each of the four elements are relatively general and accurate, the types of failures each of the elements may be responsible for, are rather long lists. Therefore, in many cases it is important for the student to explain why one element may ultimately be responsible for a certain problem with a list.

a.

Supply Elements - Supply management professionals most often perform the purchasing function. Effective supply management has resulted in smaller supply bases and the development of more long-term supplier relationships to achieve the competitive benefits. Supply management is one of the foundations of supply chain management, since incoming material quality, delivery timing, purchase price, product safety, and purchasing’s impact on the environment are all affected by the buyer-supplier relationship and the capabilities of suppliers.

Some of the mistakes in purchasing can cause low-quality end-items, high inventories, stockouts, excessive cost of goods sold, interruptions in production, or excessive operational costs.

b.

Operations Elements - The operations elements of the supply chain take into account the assembly or processing of materials and components into finished products or services. Operations is also responsible for creating the right amount of product within an appropriate period of time that will meet the demand needs of the customer while still satisfying their specific needs in terms of quality, cost, customization, and timely delivery.

Mistakes in operations can cause shortages, stockouts, high inventories, low inventories, excessive operational costs, late deliveries, low-quality end-items, defects, or dangerous end-items.

c.

Logistics Elements - the distribution elements of the supply chain are focused on delivering products to customers at the right time, quality, and volume. The distribution elements include transportation, warehousing, break-bulking, packaging, containerization, and any services related to developing and keeping a distribution itinerary.

Mistakes in distribution can cause shortages, stockouts, excessive operational costs, damaged end-items, high pilferage rates, customer complaints, delivery errors (wrong item to the wrong destination), and lost inventory.

d.

Integration Elements - The integration elements involve the planning and coordination required to create a seamless supply chain. Supply chain integration requires management to inform all supply chain parties of how important it is for them to share information, articulate their needs, and develop relationships.

Poor supply chain integration will cause conflicts between supply chain partners, late deliveries, tardy production, overproduction, under production, poor forecasting, over purchasing, material shortages, long lead times, high operational costs, excessive waiting times, and excessive inventories.

PTS:   10                            

BUSPROG: Communication LO:     1-2      Bloom’s: Comprehension     Difficulty: Difficult

  1. Explain the bullwhip effect? What can be done to reduce the bullwhip effect? Give an example of how the bullwhip effect results in excess costs in the supply chain.

ANS:

a.

The bullwhip effect is a build-up of safety stocks due to poor forecasting and communication that cause order quantities to be increased throughout the supply chain. The increases become amplified as the product continues farther down the supply chain. This will likely cause overstock and excess costs for each firm in a supply chain.

b.

Better communication between each link in the supply chain and sharing of upcoming demand forecasts makes it easier for companies to feel confident about their order quantity. Trading partners feel more comfortable with manufacturers who consistently produce high quality products. Firms feel more confident and have better working relationships with manufactures that have better products and better services. Better working relationships lead to single source for supplies and this helps the manufacturer plan for demand.

c.

Example of the bullwhip effect – Company A sells widgets to customers. Actual demand from customers is 20 widgets. Company A orders 25 widgets from the distributor B; an extra 5 units are to ensure they don’t run out of floor stock. Distributor B wants to order in bulk to save costs so they order 30 widgets from supplier C. Supplier C always keeps safety 20% stock on hand so it orders 36 widgets from Manufacturer D. At Manufacturer D’s factory, they must produce in runs of 50. Now 50 units have been produced for a demand of only 20 units causing each firm in the supply chain excess costs.

PTS:   10                            

BUSPROG: Communication LO:     1-5      Bloom’s: Application           Difficulty: Difficult

TRUE/FALSE

  1. Purchasing can be broadly classified into two categories: merchants and industrial buyers.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Merchants primary task is to purchase raw materials for conversion purposes.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     2-1      Bloom’s: Knowledge           Difficulty: Easy

  1. A low ROA suggests that management is capable of generating large profits with relativiely small investments.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     2-1      Bloom’s: Comprehension     Difficulty: Easy

  1. The procedures for public procurement differ from the private sector.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Cost savings is an advantage of using an e-procurement system.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The goal of a good purchasing system is to ensure efficient information transitions between the materials users, the purchasing personnel, and the suppliers.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The purchase order is NOT a legally binding contract until it is accepted by the supplier.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. A material requisition and a purchase requisition are the same thing.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. A follow-up is considered a reactive approach to speed up an overdue shipment.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Procurement credit cards can be used for small purchases including meals, lodging, and travel expenses.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Blank check purchase orders, Corporate purchasing cards, Petty cash, and Open-end purchase orders are all possible alternatives to dealing with small value purchases such as those for office supplies.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Generally, firms outsource noncore activities while focusing on core competencies.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-4      Bloom’s: Comprehension     Difficulty: Easy

  1. If the break-even point in a typical make-buy scenario is 19,000 units and 10,000 units are required by the firm, then the firm should choose to make the units.

ANS:  F                               PTS:  1          

BUSPROG: Reflective Thinking     LO:     2-4           Bloom’s: Analysis                 Difficulty: Easy

  1. A reason for making items instead of buying them would include better quality control.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-4      Bloom’s: Comprehension     Difficulty: Easy

  1. The Total Cost of Ownership Concept does NOT include quantitative factors.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     2-5      Bloom’s: Analysis               Difficulty: Easy

  1. The total cost analysis demonstrates how other costs besides the unit cost can affect purchase decisions.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-5      Bloom’s: Knowledge           Difficulty: Easy

  1. The possibility of events like strikes, assembly line breakdowns, and natural disasters are all reasons a company should favor using a single supplier.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     2-6      Bloom’s: Knowledge           Difficulty: Easy

           

  1. Decentralized purchasing is the practice where individual, local purchasing departments throughout a single corporation make their own, individual purchasing decisions to fulfill their individual local needs.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     2-7      Bloom’s: Comprehension     Difficulty: Easy

  1. NAFTA and the WTO are trade organizations seeking to reduce tariff and non-tariff barriers among its member countries.

ANS:  T                               PTS:  1          

BUSPROG: Diversity          LO:     2-8      Bloom’s: Comprehension     Difficulty: Easy

  1. Foreign suppliers located farther away may be able to deliver goods faster than domestic suppliers due to more efficient transportation and logistical systems.

ANS:  T                               PTS:  1          

BUSPROG: Diversity          LO:     2-8      Bloom’s: Comprehension     Difficulty: Easy

MULTIPLE CHOICE

  1. The primary goals of purchasing include all EXCEPT:

a.

Secure materials at the lowest cost

b.

Maximize customer satisfaction

c.

Improve the quality of finished goods produced

d.

Ensure the highest quality raw materials are purchased

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     2-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following refers to the measurement of the impact of change in purchase spend on a firm’s profit before taxes, assuming gross sales and other expenses remain unchanged?

a.

Break-Even Analysis

b.

Profit-Leverage Effect

c.

Direct Offset

d.

Leveraging Purchase Volume

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     2-1      Bloom’s: Knowledge           Difficulty: Easy

  1. When calculating Return on Investment, current assets include:

a.

Cash, Accounts Receivable, and Inventory

b.

Cash, Accounts Receivable, and Equipment

c.

Accounts Receivable, Equipment, and Real Estate

d.

Equipment, Buildings, and Real Estate

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     2-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Inventory Turnover can be calculated by:

a.

Ratio of cost of goods sold over average inventory cost

b.

Ratio of average inventory cost over cost of goods sold

c.

Ratio of inventory days in stock over average inventory cost

d.

Ratio of average inventory cost over inventory days in stock

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     2-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Which type of requisition is used for materials and standard parts that are requested on a recurring basis?

a.

Open requisition

b.

Blanket requisition

c.

Traveling requisition

d.

Recyclable requisition (Cyc-Rec)

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. A form of purchasing that is placed directly to the supplier and suitable when firms use the same components to make standard goods over a relatively long period of time is referred to as:

a.

Material requisition

b.

Purchase requisition

c.

Planned order release

d.

Traveling requisition

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. When a product is purchased which is complicated or highly technical a ______________may be issued instead of a request for quotation.

a.

Request for proposal

b.

Purchase order

c.

Contract for sale

d.

Sales order

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Benefits derived from implementing e-procurement systems include all of the following EXCEPT:

a.

Allows buyers to submit bids and suppliers to respond to those bids in real time

b.

Increases the accuracy in communication between buyers and suppliers

c.

Creates numerous additional job opportunities in the purchasing department

d.

Tracking bids and transactions is easier and faster

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Comprehension     Difficulty: Easy

  1. While most public procurement is focused on goals like those of purchasing departments in the private sector, U.S. federal government purchases must comply with the:

a.

Services and Materials Acquisition Act

b.

Fair Standards and Equitable Purchases Act

c.

Federal Code of Conduct for Procurement

d.

Federal Acquisition Regulation

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     2-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Petty cash is being phased out in favor of:

a.

Hard cash

b.

A blank check

c.

P-card

d.

Score-carding

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Blanket or open-end purchase orders are suitable for buying

a.

Computers

b.

Heavy equipment

c.

Custom built components

d.

Office supplies

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     2-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is a reason small value purchases are handled differently?

a.

To give the buyer additional supplier choices

b.

To obtain a higher quality product

c.

To have better tracking of material usage

d.

To control unnecessary administrative costs

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     2-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following illustrates Forward Vertical Integration?

a.

Microsoft starting a new division that designs and manufactures clothing

b.

Ford automotive buying additional machines for production

c.

Subway sandwich company buying a bakery to make the bread for their sandwiches.

d.

Sony buying trucks to deliver their finished goods inventories to their customers' warehouses

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     2-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following would be a good reason to outsource (buy) versus making?

a.

To utilize existing capacity within a company's own firm

b.

A firm lacks the technology or expertise to produce an item

c.

To have more direct control over the design and production of an end item

d.

No competent supplier presently produces the needed item

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     2-4      Bloom’s: Knowledge           Difficulty: Easy

  1. Given the following make-buy information, what would be the break-even point?

Make Option

Buy Option

Fixed Costs

$5500

$1500

Variable Costs

$      4

$      9

a.

1200 units

b.

1708 units

c.

800 units

d.

460 units

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-4      Bloom’s: Application           Difficulty: Moderate

  1. Given the following make-buy information, what would be the break-even point?

Make Option

Buy Option

Fixed Costs

$16000

$1400

Variable Costs

$    6

$  10

a.

9170 units

b.

3650 units

c.

1040 units

d.

2750 units

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     2-4      Bloom’s: Application           Difficulty: Moderate

  1. As firms seek to improve the products they offer to the market, companies are seeking help from their suppliers in new product design and development through:

a.

Supplier certification programs

b.

Manufacturer certification programs

c.

Early supplier involvement

d.

Total Cost of Ownership initiatives

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-4      Bloom’s: Knowledge           Difficulty: Easy

  1. Firms can use total cost analysis to:

a.

See how efficiently management is using its total assets to generate profits

b.

Select the most cost-effective supplier

c.

Show how many times a firm’s inventory is utilized and replaced over an accounting period

d.

Brainstorm and isolate the causes of a problem

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     2-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Total Cost of Ownership does NOT consider which of the following factors?

a.

Purchase order costs

b.

Freight costs

c.

Payment terms

d.

Tooling costs

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     2-5      Bloom’s: Comprehension     Difficulty: Easy

  1. The total cost of ownership for Supplier A is $2,670,000. The total cost of ownership for Supplier B is $1,750,000. The total cost of ownership for Supplier C is $2,990,000. Using Total Cost Analysis, it will be more cost-effective to use

a.

Supplier A

b.

Supplier B

c.

Supplier C

d.

Cannot be determined

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     2-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is a reason for favoring single sourcing?

a.

Encourages competition among suppliers

b.

Spreads the risk of supply interruption

c.

Reduces variabilities in quality levels

d.

Reduces information about new processing technologies

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-6      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is a reason that single sourcing is considered risky/bad?

a.

There could be supplier interruptions due to political instability

b.

It could establish close relationships with the supplier

c.

Larger orders make quantity discounts more likely

d.

Decreases the item to item quality variability of items purchased

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     2-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is an advantage of a centralized purchasing department?

a.

Less bureaucracy

b.

More frequent shipments

c.

Specialization

d.

Closer contact between buyer and user

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-7      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following statements is FALSE?

a.

Centralized purchasing is where individual, local purchasing departments, such as at the plant level, make their own purchasing decisions. 

b.

Electronic procurement systems can aid a company in saving both time and money.

c.

More than 50% of each sales dollar typically goes towards covering supply chain costs.

d.

If a firm lacks the technology to make a required component they will need to consider buying/outsourcing.

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     2-7      Bloom’s: Bloom’s: Comprehension        Difficulty: Easy

  1. Which of the following is NOT a potential challenge for global sourcing?

a.

Long delivery lead times

b.

Costs involved in selecting foreign suppliers

c.

Relaxed trade barriers

d.

Labor and legal problems

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     2-8      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is NOT a form of countertrade?

a.

Barter

b.

Kaizen blitz

c.

Offset

d.

Counterpurchase

ANS:  B                              PTS:  1          

BUSPROG: Diversity          LO:     2-8      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following NOT a reason firms are expanding their supply bases to include foreign suppliers?

a.

Lower shipping rates due to lower tariffs

b.

Lower product cost

c.

Better product quality

d.

Overseas supplier holding the patent to the product

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     2-8      Bloom’s: Comprehension     Difficulty: Easy

SHORT ANSWER

  1. When using the Total Cost of Ownership concept, explain how a supplier with a higher unit price and higher tooling cost can end up being more cost effective than another supplier with a lower unit price and tooling cost.

ANS: 

When calculating the Total Cost of Ownership, unit price and tooling cost are not the only criterion used in supplier selection. Other qualitative and quantitative factors, including freight and inventory costs, tariffs and duties, currency exchange fees, payment terms, maintenance and nonperformance costs should be considered. After calculating these other factors, the Total Cost of Ownership may have been lower with the second supplier.

PTS:  5                               

BUSPROG: Communication LO:     2-5      Bloom’s: Application           Difficulty: Moderate

  1. Use what you understand about the outsourcing decision (Make vs. Buy) to answer this question. List and explain three reasons a restaurant might decide to buy pre-made desserts from a supplier rather than making the goods from scratch.

ANS: 

Reasons a person might buy a restaurant might decide to buy pre-made desserts from a supplier.

a.

Cost – Creating a high-quality dessert might require unusual, as well as, a large number of ingredients. They may not be able to take advantage of economies of scale, if they do not sell a lot of desserts. It also may be quite costly to hire a specialist to make the desserts.

b.

Insufficient Capacity - A restaurant may not have the capacity to make fresh desserts daily to fulfill the demand. They might not be able to offer a large selection of desserts.

c.

Lack of expertise - The restaurant personnel may not know how to make specialized desserts. Or perhaps it is difficult to hire a dessert specialist.

d.

Quality - While they may have the time, money, and skill to make desserts, they may not be able to make them as well as a place which specializes in desserts.

Similar answers with slightly different rationale may also be acceptable.

PTS:  5                               

BUSPROG: Communication LO:     2-4      Bloom’s: Application           Difficulty: Moderate

  1. Answer the questions that follow, based on the diagram provided below

a.

What are the fixed costs for the buy decision?

b.

What is the breakeven quantity for the two options illustrated?

c.

At Q = 300, would you choose the make or buy option? Why?

d.

At Q = 200, what will be the total cost associated with the best decision at this quantity?

ANS: 

a.

What are the fixed costs for the buy decision?

$500

b.

What is the breakeven quantity for the two options illustrated?

The Break-even quantity seems to be near 250 units. Using this chart, anything within 230 and 270 would probably deemed acceptable.

c.

At Q = 300, would you choose the make or buy option? Why?

The make option is better since the total costs for making are about $3900 versus about $4400 for buying.

d.

At Q = 200, what will be the total cost associated with the best decision at this quantity?

The best decision is to buy, and the total cost is slightly over $3000.

PTS:  5                               

BUSPROG: Analytic           LO:     2-4      Bloom’s: Analysis               Difficulty: Moderate

  1. Global sourcing has become commonplace. Many companies now consider expanding their supply base to include foreign suppliers. List three reasons why companies choose to source globally.

ANS: 

Lower price of materials (and services)

Overseas products may be of higher quality

Faster delivery times

Better array of services offered by the material supplier

Favorable exchange rates

Support local economies

Countertrade contracts

PTS:  5                               

BUSPROG: Diversity          LO:     2-4      Bloom’s: Comprehension     Difficulty: Moderate

ESSAY

  1. The BOEHM Cell Phone Company has developed a new series of phones that it plans to bring to the market in the next 18 months. Management is considering whether to produce the product in-house or to contract out the purchasing and manufacturing of their new cell phones.

Provide FOUR conditions that would favor outsourcing and FOUR conditions that would favor making the cell phones in-house.

ANS: 

Conditions that favor outsourcing:

a.

If other firms are offering cost advantages.

b.

If Boehm Cell Phone does not have sufficient capacity to meet the expected demand for the new line of cell phones.

c.

Perhaps Boehm is largely a design company that does not have expertise in purchasing and manufacturing. An outside firm might be better qualified to deliver a high quality product at a lower price.

d.

Outside companies may offer higher quality due to advantages in areas of skill, technology, and business processes.

Conditions that favor making the cell phones in-house:

a.

If the technology associated with the new lines of phones is proprietary, it may be easier to maintain secrecy in both manufacturing and in first-to-market marketing.

b.

Perhaps no one is capable of producing this product or a necessary component.

c.

If the firm feels that its quality programs are superior to any potential business partner, they may prefer to do it themselves to preserve the integrity of the brand.

d.

The company expects manufacturing capacity to be available once the product goes into production.

e.

If the company prefers to have more control over distribution related activities.

f.

If the company has the capability to produce the product at a lower cost if advantages in supply chain capabilities and/or economies of scale exist.

PTS:  10                             

BUSPROG: Communication LO:     2-4      Bloom’s: Application           Difficulty: Difficult

  1. Under which conditions would you most likely utilize a centralized purchasing system? List two advantages that would be gained by utilizing a centralized purchasing system.

Under which conditions would you most likely utilize a decentralized purchasing system? List two advantages that would be gained by utilizing a decentralized purchasing system.

ANS: 

Under which conditions would you most likely utilize a centralized purchasing system?

A centralized purchasing system would be favored by a company that is looking to reduce safety stocks, increase control in purchasing, centralize decision making, avoid duplicate purchases, centrally manage supplier relationships, and maximize available quantity discounts.

List two advantages that would be gained by utilizing a centralized purchasing system.

a.

Concentration of purchasing leading to lower purchase costs

b.

Avoiding duplication of job functions

c.

Buyer specialization

d.

Lower transportation costs

e.

Easier to negotiate contracts and manage relationships with a common supplier base

f.

No competition between units when purchasing the same material

Under which conditions would you most likely utilize a decentralized purchasing system?

A decentralized purchasing system would be favored by a company that is looking to make quicker decisions, maintain stocks that are closer to their customers, and identify and respond to changing customer needs at the local level.

List two advantages that would be gained by utilizing a decentralized purchasing system.

a.

Individual and decentralized buyers often have a greater knowledge of the exact needs for each individual unit utilized by organization.

b.

Decentralization is more conducive to local sourcing. Local sourcing offers an organization the opportunity to obtain faster delivery times, more frequent deliveries, while still maintaining very close supplier ties.

c.

Decentralization allows quicker response because the decentralized purchasing allows for faster decisions because of decreased bureaucracy.

PTS:  10                             

BUSPROG: Communication LO:     2-7      Bloom’s: Comprehension     Difficulty: Moderate

  1. The term Supply Management is used to describe responsibilities above and beyond those of traditional purchasing. What are three of these key activities and why are they considered important to Supply Management?

ANS: 

Other answers are possible.

a.

Supply Management is responsible for the uninterrupted flow of raw materials

b.

Supply Management is responsible for the acquisition of materials at lowest total cost

c.

Supply Management is responsible for improving the quality of finished goods through the purchase of high-quality components and/or raw materials.

d.

Modern supply chains require close partnerships with suppliers; Supply Management departments are very often responsible for maintaining those relationships

e.

Pushing suppliers to improve the quality of their raw materials and/or components

f.

Supply Management departments are often responsible for assisting in collapsing design-to-production cycle time

g.

Supply Management departments are often seen as a conduit between external suppliers and internal design and/or operations people.

PTS:  10                             

BUSPROG: Communication LO:     2-1      Bloom’s: Comprehension     Difficulty: Moderate

Use the following information to determine which supplier for steering wheels is more cost-effective using total cost analysis. Late delivery of the component results in 50% lost sales and 50% back orders of finished goods.

Table 1

Order lot size

400

Annual Requirements

4,800 units

Weight per steering wheel

20 pounds

Order processing cost

$125

Inventory carrying rate

20% per year

Cost of working capital

10% per year

Profit margin

20%

Price of finished golf cart

$5,000

Back order cost

$15 per unit

Table 2

Unit Price

Supplier A

Supplier B

1 to 999 units/order

$48

$47

1000 to 2,999 units/order

$47

$46

Tooling cost

$1000

$1000

Terms

2/10 net 30

1/10, net 30

Distance

120 miles

100 miles

Supplier Quality Rating (defects)

3%

2%

Supplier Delivery Rating (late)

1%

2%

Here is the freight rates for

Truckload (TL ≥ 40,000 lbs):    $0.90 per ton-mile

Truckload 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:

Total cost of ownership = Total steering wheel cost - Cash Discount + Tooling cost + Transportation cost + Ordering cost + Carrying Cost + Quality cost + Delivery rating (Back Order Cost and Lost Sales).

Supplier A

Total steering wheel cost = 4800 x 48 = $230,400

- Cash Discount A = 230,400 x (10% x 30/365) = $1894

- Cash Discount B = 230,400 x (10% x 10/365 + 2%) = $5239 use this for biggest savings

+ Tooling cost = 1000

+ Transportation cost = (400 x 20) = 80000 so must use LTL shipment at $1.10 per ton-mile

120 x 4800 x 20 x 1.10/2000) = 6336

+ Ordering cost = (4800/400) x 125 = $1500

+ Carrying Cost = (400/2) x 48 x 20%= $1920

+ Quality cost = 230,400 x 3% = $6912

+ Delivery rating - Back order cost (50%) = 4800 x 1% x 50% x 15 = $360

           Lost Sales (50%) = 4800 x 1% x 50% x 5000 x 20% = $24,000

Total cost of ownership = 230,400 - 5239 + 1000 + 6336 +1500 + 1920 + 6912 + 360 + 24000 = $267,189

Supplier B

Total steering wheel cost = 4800 x 47 = $225,600

- Cash Discount A = 225,600 x (10% x 30/365) = $1854

- Cash Discount B = 225,600 x (10% x 10/365 + 2%) = $5130 use this for biggest savings

+ Tooling cost = 1000

+ Transportation cost = (400 x 20) = 80000 so must use LTL shipment at $1.10 per ton-mile

100 x 4800 x 20 x 1.10/2000) = 5280

+ Ordering cost = (4800/400) x 125 = $1500

+ Carrying Cost = (400/2) x 47 x 20%= $1880

+ Quality cost = 225,600 x 2% = $4512

+ Delivery rating - Back order cost (50%) = 4800 x 2% x 50% x 15 = $720

           Lost Sales (50%) = 4800 x 2% x 50% x 5000 x 20% = $48,000

Total cost of ownership = 225,600 - 5130 + 1000 + 5280 +1500 + 1880 + 4512 + 720 + 48000 = $283,362

The total cost analysis shows that Supplier A is more cost-effective, even though the unit price is higher than Supplier B. Supplier A has a better cash discount rate, and better delivery performance rating.

PTS:  10                             

BUSPROG: Communication LO:     2-5      Bloom’s: Application           Difficulty: Difficult

TRUE/FALSE

  1. If a company is effectively focusing on its core competencies, its level of outsourcing is likely to decrease.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-1      Bloom’s: Knowledge           Difficulty: Easy

  1. When developing successful partnerships, it is best to avoid inter-personal business relationships between buyers and suppliers.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-1      Bloom’s: Knowledge           Difficulty: Easy

  1. As companies outsource more and more parts, it becomes easier to achieve cost savings internally.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Building Trust, Shared Vision and Objectives, Personal Business Relationships, Mutual Benefits and Needs are key factors that contribute to a lasting supplier partnership.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-1      Bloom’s: Knowledge           Difficulty: Easy

  1. It is critical that buyers and suppliers develop stronger relationships and partnerships based on a tactical rather than a strategic perspective.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Successful supplier relationships involve equal decision-making control.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Comprehension     Difficulty: Easy

  1. The development of relationships with suppliers brings about changes that must be managed for a company to stay focused on their core businesses.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Comprehension     Difficulty: Easy

  1. A seven-step approach to supplier development might include identifying critical suppliers not meeting performance requirements.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Unless an organization has a firm grasp of the key issues surrounding supplier relationships, it cannot reap the benefits of such relationships.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Knowledge           Difficulty: Easy

  1. In a Total Cost of Ownership system, certification and training of suppliers would be considered post-transaction costs.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Knowledge           Difficulty: Easy

  1. In a weighted-criteria evaluation system the weights of all the performance dimensions must add up to  more than 1.00 and less than 100.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Knowledge           Difficulty: Easy

  1. ISO 14000 is a family of international standards for environmental management.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Knowledge           Difficulty: Easy

  1. China, which has the largest number of ISO 9001 certificates, issued over 292,000 as of 2017, representing 28.3 percent of the total certificates issued worldwide.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Knowledge           Difficulty: Easy

  1. It is illegal for corporations to provide their suppliers appreciation banquets to award performance.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Offering an awards program to suppliers both motivates the suppliers to commit to a program of continuous improvement as well as provides role models for other suppliers to follow.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-4      Bloom’s: Comprehension     Difficulty: Easy

  1. According to the text, only about half of companies recognize excellent performance with supplier awards and appreciation banquets.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Transactional SRM, allows the company to analyze the complete supplier base.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-5      Bloom’s: Comprehension     Difficulty: Easy

  1. A SRM strategy refers to a situation wherein a supplier’s employee is permanently housed in the purchasing department of the buyer’s organization.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     3-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Smoother processes, faster cycle times, reduced new product development, and improved time-to-market are possible benefits from the increased visibility that is offered by SRM software.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Automating procurement activities can lead to significant cost savings as buyers move toward managing processes by exception.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     3-6      Bloom’s: Comprehension     Difficulty: Easy

MULTIPLE CHOICE

  1. According to the SCM profile Honda ___________ based on a supplier relations index developed by Planning Perspectives.

a.

Ranked lower in 2015 than 2014

b.

Ranked near the bottom in 2015

c.

Ranked near the top in 2015

d.

Ranked fifth in 2015

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     3-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is important in developing successful relationships in a partnership?

a.

Commitment by top management

b.

Interpersonal business relationships between employees of the companies

c.

Mutual/compatible needs that result in a win-win situation for the partners

d.

All of these

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     3-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is NOT important in developing a successful strategic alliance?

a.

Developing performance metrics

b.

Developing cross-functional team capabilities externally and within the company

c.

Developing efficient processes that will remain unchanged for the duration of the partnership

d.

Open lines of communication that both promote sharing and secure confidentiality

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     3-1      Bloom’s: Comprehension     Difficulty: Easy

  1. According to the text, key ingredients for developing successful supply partnerships include all of the following EXCEPT:

a.

Personal relationships

b.

Performance metrics

c.

Mutual benefits and needs

d.

Individualized objectives

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the text, one of the most basic and successful approaches to protecting trade secrets is:

a.

Threat of litigation

b.

Working with law makers to increase fines and sentences for those that steal trade secrets

c.

Requiring employees and vendors to sign non-disclosure agreements

d.

Requiring employees and partners to get ISO 9000 certified

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Costs associated with investigating alternative suppliers and investigating alternative delivery options can be classified as:

a.

Pre-transaction costs

b.

Post-transaction costs

c.

Transaction costs

d.

All of these

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Knowledge           Difficulty: Easy

  1. What type of major cost category is considered in the cost associated with placing and receiving the order?

a.

Turnover Cost

b.

Supplier-Development Cost

c.

Transaction Cost

d.

Pre-transaction Cost

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Field failures, loss of goodwill, a decreased reputation, and warranty costs can all be classified as:

a.

Pre-transaction costs

b.

Post-transaction costs

c.

Transaction costs

d.

All of these

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is TRUE?

a.

Performance metrics and personal business relationships are both keys to building successful partnerships.

b.

ISO 75000 is the supplier award given to the highest rated supplier in Japan.

c.

The key to successful partnerships is developing performance measures with weights greater than 3.50.

d.

SRM software modules are very affordable (less than $50,000) and can be implemented with a week.

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     3-2      Bloom’s: Comprehension     Difficulty: Easy

  1. According to the text, the goal of a good performance evaluation system is to provide metrics that are:

a.

Understandable, easy to measure, focused on value-added results

b.

Understandable, quantitative, focused of cost-related results

c.

Understandable, qualitative, focused on short-term results

d.

Understandable, quantitative, focused on quality-related results

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Knowledge           Difficulty: Easy

  1. An organization's process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections can be referred to as:

a.

Quality Systems Certification

b.

Supply Management

c.

Supplier Inspection

d.

Supplier Certification

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Knowledge           Difficulty: Easy

  1. The benefits of implementing an effective supplier certification program include all of the following EXCEPT:

a.

Building long-term beneficial relationships

b.

Increasing supplier base

c.

Improving responsiveness

d.

Recognizing excellence

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Comprehension     Difficulty: Easy

  1. When using a Weighted Criteria Evaluation System to evaluate suppliers, all of the following are true EXCEPT:

a.

Select the key dimensions of performance based on what is important to the end consumer

b.

The weights for all dimensions must sum to 1 or 100%

c.

Evaluate each of the performance measures on a rating between zero and one-hundred

d.

Multiply the dimension ratings by their respective important weights and then sum to get an overall weighted score

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Comprehension     Difficulty: Easy

  1. A company using a weighted-criteria evaluation system has established these 3 categories and the appropriate weight in parentheses: Quality(0.30), Delivery(0.40), Cost(0.30).

The scores for each category are shown below. Which of the following companies has the highest total score?

a.

Company A: Quality(90), Delivery(80), Cost(60)

b.

Company C: Quality(70), Delivery(95), Cost(60)

c.

Company B: Quality(70), Delivery(80), Cost(80)

d.

All companies scored the same.

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Application           Difficulty: Easy

  1. A company using a weighted-criteria evaluation system has established these 5 categories and the appropriate weight in parentheses:

Quality (0.25)

Responsiveness (0.10)

Delivery (0.15)

Cost (0.15)

Technology (0.30)

Company X received the following ratings in each of the five categories: Quality(90), Responsiveness(90), Delivery(80), Cost(80), Technology(85). What is its total score?

a.

81.0

b.

82.5

c.

83.0

d.

84.5

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Application           Difficulty: Easy

  1. Direct benefits of ISO 14000 include:

a.

Reduced defect rates

b.

Improved on-time delivery rates

c.

Reduction of pollution emissions

d.

All of these

ANS:  C                              PTS:  1          

BUSPROG: Ethics               LO:     3-3      Bloom’s: Application           Difficulty: Easy

  1. In general, European companies prefer suppliers:

a.

Who employ the most people

b.

Whose headquarters are in a developing county

c.

Who are in the United States

d.

Who have ISO 9001 certifications        

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     3-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is NOT a reason for supplier recognition programs?

a.

To help suppliers’ reputation in the marketplace

b.

To select the best suppliers

c.

To encourage suppliers to be more innovative

d.

To reward suppliers for excellent performance

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     3-4      Bloom’s: Comprehension     Difficulty: Easy

  1. According to the textbook, Supplier Recognition Programs:

a.

Are generally not very effective

b.

Are used by 90% of companies

c.

Encourage suppliers to keep their performance high

d.

Are difficult to implement

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     3-4      Bloom’s: Knowledge           Difficulty: Easy

  1. The Hormel company awards their Hormel Food Corporation's No. 1 Award to their top supplier. How often do they give this award?

a.

Every year

b.

Every 6 months

c.

Every 5 years

d.

Every 10 years

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     3-4      Bloom’s: Knowledge           Difficulty: Easy

  1. Before supplier relationship management (SRM), buyers typically spent 40% of their time on expediting orders. After SRM implementation buyers spent about:

a.

10% of their time on expediting orders

b.

20% of their time on expediting orders

c.

30% of their time on expediting orders

d.

None of the these

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     3-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Streamlining the processes and communications between the buyer and supplier using software applications that enable these processes to be managed more efficiently and effectively can be referred to as:

a.

CRM

b.

SRM

c.

ISO 9000

d.

SCSS

ANS:  B                              PTS:  1          

BUSPROG: Technology      LO:     3-5      Bloom’s: Knowledge           Difficulty: Easy

  1. SRM software should be capable of:

a.

Automating transactional processes

b.

Making information flow between partners more visible

c.

Integration of the supply chain making it possible to monitor multiple departments and processes both internally and externally

d.

All of these

ANS:  D                              PTS:  1          

BUSPROG: Technology      LO:     3-5      Bloom’s: Knowledge           Difficulty: Easy

  1. Summers, Inc. needs to generate a list of good/services purchased per supplier. Which type software program can the manager consult to obtain this information?

a.

ISO 9000

b.

MRP

c.

SRM

d.

SCSS

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     3-6      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is NOT a key tenant of an SRM system?

a.

Automation

b.

Lean operations

c.

Visibility

d.

Integration

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     3-6      Bloom’s: Knowledge           Difficulty: Easy

  1. SRM software can automate procurement activities that lead to significant cost savings as purchasing professionals move toward:

a.

Collaborative planning

b.

Diversifying their hiring

c.

Improving capacity

d.

Expediting each order

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     3-6      Bloom’s: Knowledge           Difficulty: Easy

SHORT ANSWER

  1. Provide a list of four ways companies can motivate their suppliers to improve.

ANS: 

a.

Develop supplier recognition/awards programs

b.

Create supplier development programs

c.

Create an internal certification program

d.

Motivate suppliers to get a quality certification like ISO 9000

e.

Utilize Supplier Relationship Management software

f.

Utilize a performance metrics system

PTS:  5                               

BUSPROG: Reflective Thinking     LO:   3-2             Bloom’s: Analysis           Difficulty: Moderate

  1. What are the two external certification programs discussed in the text? What does each certification attempt to certify?

ANS: 

a.

ISO 9000 - ISO 9000 certifies an organization's management structure and practices and their quality output in the areas of design, development, production, installation, and service.

b.

ISO 14000 - ISO 14000 certifies an organization's environmental management. ISO 14000 maintains standards in energy consumption, resource consumption, environmental liability and risk, waste and pollution generation, and community goodwill.

PTS:  5                               

BUSPROG: Communication  LO:   3-3      Bloom’s: Comprehension     Difficulty: Moderate

  1. A company using a weighted-criteria evaluation system has established these 4 categories and the appropriate weight in parentheses: Technology(0.25), Quality(0.30), Environmental (0.20), Cost(0.25). Currently they use supplier ABC that presently has a supplier score of 85. Calculate supplier XYZ’s total score and decide (based on supplier score) if the company should change suppliers.    

The scores for supplier XYZ are shown below for each category.

Performance Measure

Score

Technology

80

Quality

75

Environmental

90

Cost

85

ANS: 

SCORE for Company XYZ: (0.25 x 80) + (0.30 x 75) + (0.20 x 90) + (0.25 x 85)

20 + 22.5 + 18 + 21.25 = 81.75

Based on supplier score they should continue to purchase supplies from Company ABC since they have a higher supplier score. It should be noted that quality performance is most important to this company and supplier XYZ scored lowest in that category.

PTS:  5                               

BUSPROG: Analytic           LO:     3-3      Bloom’s: Application           Difficulty: Moderate

  1. According to the textbook, SRM software varies based on capabilities offered. AMR research has identified 5 areas of distinction for an SRM system. Provide three of these key tenets of SRM and explain how it is used.

ANS:  The key tenents 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.

PTS:  5                               

BUSPROG: Communication     LO: 3-6      Bloom’s: Comprehension     Difficulty: Difficult

ESSAY

  1. Suppose your organization is attempting to set up a new strategic alliance with a supplier. You are considered the key manager from your organization to manage this alliance. What would be your goals for the planning stages of this proposed alliance? What would be your goals for the first few months of the alliance? What would be your long-term goals for the alliance?

ANS: 

What would be your goals for the planning stages of this proposed alliance?

One of the most important goals in developing this type of relationship is to ensure that the vision and objectives of the proposed alliance can be agreed upon by those parties involved. Also, it is important to create interpersonal business relationships in the buyer-supplier partnerships since it is the people who communicate and make things happen. Make sure that both organization's needs will be met and the benefits will be shared as this will keep the relationship productive and long-lasting. Be sure to get support and commitment from top management so you can dedicate your time, best people and resources to make the partnership succeed. It is also important that all parties communicate the constant need to share information and support programs of continuous improvement. While not all of these things will be accomplished during the planning stages it is vital that they are all discussed into certain degree agreed upon before the alliance gets off the ground.

What would be your goals for the first few months of the alliance?

The goals for the first few months of the alliance would center around the partnering organizations communicating to their employees their support for the alliance. In addition it would be important for management to communicate the objectives, the benefits, and the changes that are sought via the alliance. This would also include communicating the goal of continuous improvement to all the parties involved

Also during these first few months personal relationships and trust must continue to be nurtured. In terms of physical changes, the organizations would need to make the required changes to their rules and regulations, their information systems, and their processes that would facilitate the success of the alliance.

What would be your long-term goals for the alliance?

The long-term goals of the alliance would be to serve the customer by offering them high quality products in the most effective and efficient manner possible. This would be achieved by the organization’s long-term commitment to building trust, sharing information, teaching each other, measuring progress, reevaluating the vision and objectives of the alliance from time to time, and continuing the support of continuous improvement programs.

PTS:  10                             

BUSPROG: Communication     LO: 3-2      Bloom’s: Application           Difficulty: Difficult

  1. The TCO as defined in the textbook adds "all costs associated with the acquisition, use, and maintenance of a good or service."

The TCO is then broken up into three major cost categories. List the three cost categories, provide a definition of each, and then provide two examples of each of the three types of costs.

ANS: 

a.

Pre-transaction Costs - Costs incurred before the order and receipt of the purchased goods.

Examples: supplier certification, supplier training, investigating delivery options for new suppliers, cost associated with finding a new supplier, costs associated with comparing suppliers and their supplies...

b.

Transaction Costs - Costs of goods/services and cost associated with placing and receiving the order.

Examples: purchase price of the product, order preparation, delivery costs, insurance, packaging, costs associated with requesting the order...

c.

Post-Transaction Costs - Costs incurred after goods are in possession of the company.

Examples: Field failures, defective items delivered to the customer, damage to the company’s reputation, costs with maintaining broken items, warranty costs, legal costs, fines, and logistical costs associated with retrieving damaged or defective items in the field.

PTS:  10                             

BUSPROG: Communication     LO: 3-2      Bloom’s: Application           Difficulty: Difficult

  1. Blaize Manufacturing Company is using a weighted criteria evaluation system to certify suppliers.
  2. Determine the total weighted score for the supplier shown below.
  3. Based on the evaluation system and weights used by this firm, what is their purchasing objective?
  4. Give an example of a real company that might be using this type of strategy.
  5. If Blaize Mfg. classifies their vendors based on the following scores, how well is this supplier doing?

Unacceptable (less than 50)

Conditional (between 50 and 70)

Certified (between 70 and 90)

Preferred (greater than 90)

Performance Criteria

Weight

Score (0-100)

Technology

25%

85

Quality

20%

90

Environmental Responsibility

15%

84

Price

15%

77

On-time deliveries

10%

86

Flexibility

5%

84

Customer Service

10%

83

ANS:   

  1. Total weighted score = (.25) x 85 + (.20) x 90 + (.15) x 84 + (.15) x 77 + (.10) x 86 + (.05) x 84 + (.10) x 83 = 21.25 + 18 + 12.6 + 11.55 + 8.6 + 4.2 + 8.3 = 84.5
  1. Their purchasing objective seems to value Technology and Quality very high. Environmental responsibility is also relatively important to this company as well as product price.
  1. Answers will vary, but some examples might include tech companies like Honeywell, Intel and Apple.
  1. With a score of 84.5 this supplier meets the firms intended purpose. Blaize would certify this supplier since the score is between 70 and 90. They might not consider this supplier for new product development or opportunities for more business unless it can raise its score above 90.

PTS:  10                             

BUSPROG: Communication     LO: 3-3      Bloom’s: Application           Difficulty: Difficult

  1. For each of the following programs, processes, certifications, etc. explain how they can be useful in improving supplier relationships and motivating business partners to provide the best possible products and services.

a.

ISO 9000

b.

TCO

c.

Supplier development programs

d.

Supplier recognition programs

ANS: 

a.

ISO 9000 - ISO 9000 is a certification that proves an organization is committed to quality and has a quality management system in place that is dedicated to monitoring and improving quality. Companies that are ISO 9000 certified are more likely to experience a reduction in production cost due to an improvement in quality made.

b.

TCO - TCO is a performance metric system designed to isolate the total cost of purchases, which can include costs that are incurred before, during and after a transaction. This then allows companies to identify inefficiencies and key cost drivers.

c.

Supplier development programs - These programs allow buyers to share programs, ideas, and recommendations in an effort to not only improve the output purchased by the buyer, but it ultimately also helps the supplier improve in ways that will make it more competitive in the eyes of other potential buyers. This strengthens relationships and facilitates in fostering open communication lines between these companies.

d.

Supplier recognition programs - People like to be recognized and awarded for their accomplishments. Supplier recognition programs help communicate what buyers value and they also communicate whether or not a supplier's efforts are being appreciated. Winners know they should continue on their present path, those who do not win may be motivated to change in positive ways.

PTS:  10                             

BUSPROG: Communication     LO: 3-4      Bloom’s: Comprehension     Difficulty: Difficult

TRUE/FALSE

  1. Reverse logistics has become an important trend in ethical and sustainable sourcing.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     4-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Demands by customers for companies to become more ethically and environmentally focused have placed added pressures on firms to improve their performance in supply chain management.

ANS:  T                               PTS:  1          

BUSPROG: Ethics               LO:     4-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Sustainable sourcing takes into account the long-term impact on people, profits, and the planet.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-1      Bloom’s: Knowledge           Difficulty: Easy

  1. There are two approaches to deciding whether or not an action is ethical. The first approach is utilitarianism. The second approach is rights and duties.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-2      Bloom’s: Knowledge           Difficulty: Easy

  1. A practice aimed at ensuring that purchased products or materials meet environmental objectives of the organization is referred to as green purchasing.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-2      Bloom’s: Knowledge           Difficulty: Easy

  1. As described in the text, a “fair trade product” refers to selling and purchasing products without a cash transaction.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     4-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Ethical sourcing policies should NOT include determining where all purchased goods come from and how they are made.

ANS:  F                               PTS:  1          

BUSPROG: Ethics               LO:     4-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Sustainable sourcing practices include promoting diversity by intentionally buying from ethnic minority businesses.

ANS:  F                               PTS:  1          

BUSPROG: Ethics               LO:     4-3      Bloom’s: Comprehension     Difficulty: Easy

  1. It is considered unethical for a firm to intentionally buy from women-owned businesses.

ANS:  F                               PTS:  1          

BUSPROG: Ethics               LO:     4-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Companies outsource to help them reach their sustainability goals.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Functional products are characterized by low profit margins, relatively stable demands, and high levels of competition.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. It is important for firms to addresses the impact of ethical and sustainable sourcing on other facets of the organization and its trading partners.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Because internationally recognized certifications like ISO 9000 are becoming so common among suppliers, it is becoming more important that purchasing firms develop internal certification programs that are geared toward the specific needs of the purchasing organization.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Environmental supplier certifications can be used to identify rogue suppliers before they can cause problems.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-5      Bloom’s: Comprehension     Difficulty: Easy

  1. The use of ethical and environmental certifications for suppliers is decreasing.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     4-5      Bloom’s: Knowledge           Difficulty: Easy

  1. Creating strategic supplier alliances benefits firms by increasing the performance and value of suppliers as well as increasing brand awareness.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Developing a collaborative negotiation infrastructure includes four steps: build a preparation process, develop a negotiation database, design a negotiation launch process, and institute a feedback mechanism.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Rewarding suppliers for maintaining high levels of performance is an important step used in maintaining a successful strategic alliance program.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-7      Bloom’s: Knowledge           Difficulty: Easy

  1. Benchmarking is the practice of watching the mistakes other businesses do and trying to avoid the same mistakes.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     4-7      Bloom’s: Comprehension     Difficulty: Easy

  1. There are just a small number of resources available for firms seeking to learn about and implement successful sourcing practices.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     4-7      Bloom’s: Comprehension     Difficulty: Easy

  1. It is best for firms to learn through their own experiences the methods and tools that work the best, rather than benchmarking.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     4-7      Bloom’s: Comprehension     Difficulty: Easy

  1. Firms assess their sourcing capabilities because the sourcing function is one of the most value-enhancing functions in an organization.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-8      Bloom’s: Comprehension     Difficulty: Easy

  1. Criteria to evaluate a purchasing department’s performance should include both quantitative and qualitative assessments.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     4-8      Bloom’s: Knowledge           Difficulty: Easy

MULTIPLE CHOICE

  1. All of the following are reasons for the increasing use of ethical and sustainable sourcing practices EXCEPT:

a.

Global population growth

b.

Increasing environmental awareness

c.

Legislation requiring corporate ethical and sustainable sourcing

d.

Consumers’ desires for better corporate responsibility

ANS:  C                              PTS:  1          

BUSPROG: Ethics               LO:     4-1      Bloom’s: Comprehension     Difficulty: Easy

  1. ______________ considers the public consequences of organizational buying.

a.

The bullwhip effect

b.

Ethical sourcing

c.

Benchmarking

d.

Vendor managed inventory

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     4-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is a trend in ethical and sustainable sourcing?

a.

Using suppliers who are reducing their carbon footprint

b.

Discontinuing purchases from firms that use unacceptable labor practices

c.

Reducing the number of delivery miles traveled

d.

All of these

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     4-1      Bloom’s: Application           Difficulty: Easy

  1. Some businesses refer to sustainability in terms of supporting the three P’s. This stands for:

a.

People, place, price

b.

Place, price, promotion

c.

People, planet, profit

d.

Planet, people, price

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     4-2      Bloom’s: Comprehension     Difficulty: Easy

  1. A service where key customers ask suppliers to take on the job of store level replenishment planning is called:

a.

Vendor managed inventory

b.

Early supplier involvement scheduling

c.

Strategic inventory planning

d.

Purchase spend reduction forecasting

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     4-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following terms refers to an act that creates the greatest good for the greatest number of people:

a.

Rights and duties

b.

Corporate responsibility

c.

Social sustainability

d.

Utilitarianism

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     4-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The Ethical Trading Initiative (ETI) does NOT include which of the following:

a.

Workers receive a 30 minute break for an 8 hour shift

b.

Working hours are not excessive

c.

Regular employment is provided

d.

Freedom of association and the right to collective bargaining are respected

ANS:  A                              PTS:  1          

BUSPROG: Ethics               LO:     4-2      Bloom’s: Comprehension     Difficulty: Easy

  1. A fair trade product refers to one that is manufactured or grown by a disadvantaged producer in a developing country that receives for its goods.

a.

Bitcoin

b.

A fair price

c.

An imported product

d.

Freedom of association

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     4-2      Bloom’s: Comprehension     Difficulty: Easy

  1. The purchasing department at Big Horn Sheep Corporation decided to intentionally increase purchases from small, underdeveloped nations. This decision can be considered:

a.

Illegal

b.

Unethical

c.

Utilitarianism

d.

Ethical Sourcing

ANS:  D                              PTS:  1          

BUSPROG: Ethics               LO:     4-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Convincing your supplier to cutting back on packaging, fuel, or electricity is an example of:

a.

Ethical sourcing

b.

Sole sourcing

c.

Sustainable sourcing

d.

Global sourcing

ANS:  C                              PTS:  1          

BUSPROG: Ethics               LO:     4-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Promoting diversity by intentionally buying from small firms or ethnic minority businesses is an example of:

a.

Supply base rationalization

b.

Ethical sourcing

c.

Sustainable sourcing

d.

Supply base sourcing

ANS:  B                              PTS:  1          

BUSPROG: Ethics               LO:     4-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Sustainability reporting is ______________ for American companies:

a.

Required in the U.S.

b.

Mandated quarterly

c.

Required every 3 years

d.

Largely a voluntary effort

ANS:  D                              PTS:  1          

BUSPROG: Ethics               LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is NOT a step suggested in the Supply Chain Sourcing Strategy Framework?

a.

Establish corporate ethical and sustainable sourcing policies

b.

Certify suppliers as ISO 9001 compliant

c.

Develop a performance measurement system

d.

Prioritize items based on ethical and sustainability opportunities and ease of implementation.

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Sustainable sourcing policies should include which of the following?

a.

Use of minority workers

b.

Fair working conditions

c.

Use of renewable energy

d.

Use of child labor

ANS:  C                              PTS:  1          

BUSPROG: Ethics               LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. In designing an ethical and sustainable strategy a firm might make use of which of the following?

a.

Hire more supervisors to address problems quickly

b.

Use performance measures to identify weaknesses

c.

Create many short term relationships with suppliers

d.

All of these

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Leading companies practicing sustainable sourcing and seeking to reduce costs would NOT use which of the following strategies?

a.

Backward integration to purchase suppliers

b.

Increase resource efficiencies

c.

Avoid use of noncompliant suppliers

d.

Rethink transportation and distribution systems

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     4-4      Bloom’s: Comprehension     Difficulty: Easy

  1. The use of environmental supplier certification programs assists companies by which of the following?

a.

Identifying strategic alliance candidates

b.

Identifying companies who are the most popular with consumers

c.

Helping communities who are in jeopardy of plant closures

d.

All of the above

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     4-5      Bloom’s: Comprehension     Difficulty: Easy

  1. One standard which is measured in environmental supplier certification is:

a.

The number of trucks owned by the supplier

b.

Technology investment by the supplier

c.

The suppliers’ recycled content

d.

The number of on-time deliveries

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     4-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following could be an ethical and environmental certification requirement?

a.

Forest Stewardship Council (FSC) certification

b.

Energy Star certification

c.

Fair Trade certification

d.

All of these

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     4-5      Bloom’s: Knowledge           Difficulty: Easy

  1. ISO 14000 may play a role in a firm’s.

a.

Manufacturing flexibility program

b.

Supplier certification program

c.

Customer certification program

d.

Negotiated pricing program

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     4-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Successful strategic supplier alliances can result in which of the following?

a.

Better market penetration.

b.

Access to new technologies and knowledge

c.

Higher return on investment

d.

All of these

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     4-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following can be used as a punishment for suppliers that perform poorly?

a.

Elimination of future business with the focal firm

b.

Downgrade the supplier's status

c.

Billback penalty

d.

All of these

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     4-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is TRUE?

a.

VMI stands for Vertically Managed Inventory

b.

3PL stands for Third Party Leverage

c.

VMI stands for Vendor Managed Inventory

d.

3PL stands for Three Point Logistics

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     4-6      Bloom’s: Comprehension     Difficulty: Easy

  1. A negotiation where both sides work together to maximize the joint outcome or to create a joint optimal result is referred to as:

a.

Distributive negotiations

b.

Win-win negotiations

c.

Optimal review period

d.

DMAIC improvement cycle

ANS:  B                              PTS:  1          

BUSPROG: Ethics               LO:     4-6      Bloom’s: Comprehension     Difficulty: Easy

  1. For a large company with many strategic supplier alliances, what would be the best way to manage them?

a.

Create an alliance board to oversee alliances

b.

Reduce the number of supplier alliances to less than five

c.

Hire an outside firm to manage them

d.

All of the above

ANS:  A                              PTS:  1          

BUSPROG: Ethics               LO:     4-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is NOT a typical strategy for firms to obtain benchmarking data about other companies?

a.

Discussing sourcing strategies with colleagues at business association meetings

b.

Hiring former employees from other companies and assessing their knowledge

c.

Utilizing resources from the Center for Advanced Purchasing Studies

d.

Collecting published trade information on benchmarking studies

ANS:  B                              PTS:  1          

BUSPROG: Ethics               LO:     4-7      Bloom’s: Comprehension     Difficulty: Easy

  1. Benchmarking is:

a.

A system of performance metrics that seeks to motivate suppliers to perform better.

b.

A practice where companies attempt to learn and apply the best practices of other companies.

c.

A system of marking defective inbound inventory so it can quickly be identified for return to the supplier.

d.

A program where suppliers compete for contracts, but those companies who are outbid are provided advice for winning future contracts

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     4-7      Bloom’s: Comprehension     Difficulty: Easy

  1. The main benefit(s) from benchmarking sourcing practices is/are:

a.

Savings in energy consumption and materials, lower distribution costs, and improved corporate image among regulators, customers and community.

b.

Lower prices of goods and services, use of fewer buyers and lower administrative costs

c.

Larger market for products, economies of scale in purchasing and production, and lower labor costs.

d.

Allows firms to leapfrog the experience-gaining stage by trying things that have worked well for other companies.

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     4-7      Bloom’s: Comprehension     Difficulty: Easy

  1. Why do firms assess their sourcing capabilities?

a.

They are looking for ways to reduce their employee headcount

b.

They can easily spot suppliers who are not practicing sustainable sourcing practices

c.

They can gauge their success in improving their own value-enhancing contributions to the firm

d.

All of the above

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     4-8      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is true of today’s purchasing staff members?

a.

They are viewed as strategic internal suppliers of the organization

b.

They are expected to generate cost savings for the organization

c.

They are expected to generate service and quality enhancements for the organization

d.

All the above

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     4-8      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following should NOT be used as assessment criteria to evaluate the purchasing department’s performance?

a.

Improving time to market

b.

Lowering inventory turnover rates

c.

Participating in value engineering/value analysis efforts

d.

Creating supplier alliances

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     4-8      Bloom’s: Comprehension     Difficulty: Easy

SHORT ANSWER

Purchasing goods from suppliers in developing countries be risky. Why might this be risky? How can firms reduce this risk?

ANS:

Negative publicity could be connected to a firm if human rights, animal rights, safety, or environmental abuses become associated with the firm’s suppliers or foreign manufacturing facilities, this could lead to product boycotts, a tarnished company image, brand degradation, lower employee morale, and ultimately lower sales, profits, and stock prices.

Firms can minimize risk by making sure ethical sourcing policies include: Use of ethical ratings for suppliers as well as other standard performance criteria; Use of independent verification of supplier compliance; Reporting of supplier compliance performance to shareholders; Providing detailed ethical sourcing expectations to suppliers. Determining where their purchased goods come from and how they are made; and Knowing if suppliers promote basic workplace principles; Firms can minimize risk by making sure ethical sourcing policies include: Use of ethical ratings for suppliers as well as other standard performance criteria; Use of independent verification of supplier compliance; Reporting of supplier compliance performance to shareholders; Providing detailed ethical sourcing expectations to suppliers. Determining where their purchased goods come from and how they are made; and Knowing if suppliers promote basic workplace principles.

PTS:  5                               

BUSPROG: Communication  LO:   4-1      Bloom’s: Comprehension     Difficulty: Moderate

          

  1. Sustainable sourcing is a rather common practice among firms in many industries. What are THREE possible benefits companies practicing sustainable sourcing seek to achieve:

ANS: 

Increased revenues via new and differentiated products.

Cost reduction gained via resource efficiency, noncompliance fines, and other operation efficiencies Cost reduction gained via resource efficiency, noncompliance fines, and other operation efficiencies.

Managing risk by reducing damage to the brand, being compliant, and capturing socially responsible clientele.

Building intangible assets - Improving brand and reputation by being more socially and environmentally responsible.

PTS:  5                               

BUSPROG: Communication  LO:   4-3      Bloom’s: Comprehension     Difficulty: Moderate

  1. As relationships with suppliers become more trusted, reliable, and long-term in nature, early supplier involvement has become a popular strategy among firms. Explain THREE benefits gained from using this strategy.

ANS: 

Other answers are also possible.

Reduce Costs - Input from a supplier representative can help firms reduce material cost by suggesting use of less-expensive materials or more standardized parts. Reductions can be achieved in operational costs, costs associated with defects, costs associated with downtime, standard parts, fewer parts, and less expensive materials.

Improved Quality - The sharing of information allows the best parts and processes to be designed and used in the manufacturing of the end item. Getting suppliers involved in the product design process can help firms to design better quality products.

Reduced New Product Development Time - When a supplier is involved in the buyer’s new product design process, the part and process changes can be timed to be in place and available when first needed by the buyer.

Establishes a Level of Trust and Cooperation - In this age of strategic alliances, establishing trust and cooperation early in the lifecycle product can pay dividends long into the future of the product's lifecycle. Firms can establish levels of trust and cooperation that may result in future collaborative projects.

PTS:  5                               

BUSPROG: Communication  LO:   4-4      Bloom’s: Comprehension     Difficulty: Moderate

  1. What is the purpose of supplier certification programs? Describe a certification program that would help companies who are looking for ethical and sustainable suppliers.

ANS:

Ethical and sustainable supplier certifications are one way to identify strategic alliance candidates or to further develop existing alliances. To become certified, a supplier must undergo a series of audits as well as on-site assessment. The certifications are beneficial when a firm is seeking to reduce purchases from marginal or poor-performing suppliers.

ISO 14000 is a family of international standards for environmental management. Becoming ISO 14000 certified enables an organization’s management, employees and external stakeholders to measure and improve environmental impact. Standards include reduced cost of waste management, savings in energy consumption and materials as well as lower distribution costs. 

PTS:  5                               

BUSPROG: Communication     LO:      4-5       Bloom’s: Comprehension          Difficulty: Moderate

  1. Describe THREE important steps in organizing and managing a successful strategic alliance program.

ANS: 

Determine how the program will be organized. For example, it can be based on business units, geographical areas, or product lines.

Create ways to disseminate information such as alliance strategies, goals and policies quickly and effectively through the organization. Make use of email, text, websites, etc.

Establish commitment to the program by assigning a director or vice-president to report to top management. Obtain acceptance by the line managers and their employees.

Continually evaluate alliance performances and make successes visible to the manager and employees. Since alliance goals change over time, they must be evaluated periodically.

Reward suppliers for improving or maintaining high levels of performance. Rewards typically include increased business, banquets and other nonmonetary awards.

PTS:  5                               

BUSPROG: Communication     LO:      4-6       Bloom’s: Comprehension          Difficulty: Moderate

ESSAY

  1. Service companies like beauty parlors, cleaning companies and delivery companies are also becoming aware of the trends in ethical and sustainable sourcing. Describe FOUR ways a service company can use ethical and sustainable sourcing. Provide an example of how this can happen.

ANS: 

A service company which uses ethical and sustainable sourcing practices can advertise this to the public. This will demonstrate their commitment to saving the environment as well as promoting their ethical standards. Example - Display this commitment on their web-site.

It is also important for a service company to make sure their working conditions are safe and hygienic and that working hours comply with national laws. Employees should have the right to join unions. Example. Company reviews the ETI Base Code and makes sure it is maintaining proper standards.

When a service company purchases supplies for the company, it should select environmentally and socially conscious suppliers. Ex. Company uses suppliers who have ethical and environmental certifications.

Management can encourage its employees to make conscious decisions in cutting back on electricity use. This will help to reduce a firms’ energy consumption. Example - Raising/lowering thermostats or turning off appliances when not in use.

Products used by the service company should be energy efficient. This can include low-water consumption products. Example – Product has automatic shut-off when not in use.

They should make sure there is no discrimination in their hiring, compensation, promotion, training, retiring or termination practices. Example - Service companies can make a concerted effort in their hiring practices to promote diversity.

Many others possible.

PTS:  10                             

BUSPROG: Ethics                 LO:   4-1      Bloom’s: Application           Difficulty: Difficult

  1. Home Depot is a retail leader in selling home improvement tools and materials. Home Depot wants to become more environmentally conscious.

Answer the following series of questions in an effort to develop a plan that will guide Home Depot executives into transforming Home Depot into a sustainable organization through green sourcing.

a.

Define sustainability.

b.

Outline a set of goals (FOUR) that would lead Home Depot down a sustainable path.

c.

How do these goals make sense from both a financial and environmental perspective?

d.

What are some ways supplier managers can aid in achieving these goals?

ANS: 

a.

According to the textbook: Sustainability is the ability to meet current needs without hindering the ability to meet the needs of future generations in terms of economic, environmental, and social changes.

b.

The following are some potential goals that would lead Home Depot down a sustainable path:

1.

Reduce waste

2.

Reduce packaging

3.

Reduce fuel and energy consumption

4.

Reducing material consumption

5.

Avoid using noncompliant suppliers

6.

Better route management

7.

Many others possible.

c.

All of the above goals directly translate into lower costs which can then easily translate in economic gains for the organization. Also, while they are all methods that translate into cost saving, they all reduce the burden on future generations by conserving resources and minimizing both toxic and non-toxic wastes.

Additionally, the reduction or elimination of dangerous wastes or non-environmental practices can reduce or eliminate government fines and penalties and also negative publicity.

d.

Supplier managers are required to

1.

Explore material/product options that are deemed environmentally friendly

2.

Purchase more efficient packaging options ¾ Explore re-usable packaging options

3.

Motivate suppliers to change their business practices

4.

Consider suppliers that are located closer to reduce emissions created during transportation

5.

Communicate corporate environmental policies to suppliers

6.

Communicate with operations and distribution so that integrated supply chain actions are aligned with corporate goals.

7.

Communicate with designers and manufacturers on methods and materials that lead to more sustainable business practices.

8.

Many others possible.

PTS:  10                             

BUSPROG: Communication     LO: 4-4      Bloom’s: Application           Difficulty: Difficult

  1. Explain why sourcing practices are benchmarked. Provide TWO examples of resources available for firms seeking to implement successful sourcing practices.

ANS: 

 Sourcing practices are benchmarked to allow firms to develop a standard against which to compare their performance. Benchmarking shortens the learning curve by allowing firms to make use of what works for other companies.

CAPS – Center for Advanced Purchasing Studies provides research studies, benchmarking reports, and best practices case studies They organize purchasing symposiums and roundtable discussions for purchasing professionals and academics.

The Supply-Chain Council helps practitioners reduce their supply chain costs and improve customer service by providing their Supply Chain Operations Reference (SCORE) model as a framework for supply chain improvement.

The Arizona-based Institute for Supply Management (ISM) provides resources such as a monthly publication featuring the latest supply management trends and information. They also publish the Journal of Supply Chain Management, organize several annual global supply management conferences, and support many seminars and web conferences for supply management professionals.

PTS:  10                             

BUSPROG: Communication  LO:   4-7      Bloom’s: Comprehension     Difficulty: Moderate

  1. Answer the following 3 questions:  

a.

Why would a firm want to assess their sourcing capabilities?

b.

List FIVE assessment criteria to evaluate the purchasing department’s performance.

c.

What kind of performance tool can be used to assess the criteria listed?

                                      

ANS: 

a.

Why would a firm want to assess their sourcing capabilities?

Firms assess their sourcing capabilities because it is one of the most value-enhancing functions in an organization. There can be tremendous cost savings for the firm and its customers when purchases are made with the objectives of the firm in mind. To verify whether the sourcing function is performing in a positive manner, they must be evaluated against some standards or benchmarks. Management should continuously audit their capabilities and successes in these areas.

b.

List FIVE assessment criteria to evaluate the purchasing department’s performance.

1.

participating in and leading multifunctional teams

2.

participating in value engineering/value analysis efforts

3.

finding and evaluating ethical and sustainable suppliers

4.

furthering the integration and development of existing key suppliers

5.

managing and developing local, regional, and global suppliers

6.

creating early supplier involvement initiatives

7.

creating strategic supplier alliances

8.

contributing to new product development efforts

9.

maintaining and improving internal cooperative relationships

c.

What kind of performance tool can be used to assess the criteria listed?

A weighted-factor rating method could be used since the criteria are both qualitative and quantitative.

PTS:  10                             

BUSPROG: Communication  LO:   4-8      Bloom’s: Comprehension     Difficulty: Moderate

TRUE/FALSE

  1. The goal of a good forecasting technique is to minimize the deviation between actual demand and the forecast.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Comprehension     Difficulty: Easy

  1. It is possible to expect 100 percent forecast accuracy most of the time.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Toymaker Spin Master, did not properly forecast demands for their new product, Hatchimals, in 2016. This caused stockouts for their distributors.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Minimizing the negative impacts of the bullwhip effect on supply chains is one of the goals of an effective CPFR system.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Random variations represent either increasing or decreasing movements over many years due to factors such as population growth, population shifts, cultural changes and income shifts.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     5-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Cyclical variations are longer than a year and are influenced by macroeconomic and political factors.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Trend variations are wavelike movements that are shorter than a year.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     5-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The Delphi forecasting approach is applicable for high-risk technology forecasting; large, expensive projects; or major new product introductions

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Quantitative forecasting methods are based on opinions and intuition, whereas qualitative forecasting methods use mathematical models and relevant historical data to generate forecasts.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Individual biases could negatively impact the effectiveness of the Sales Force Composite forecasting approach, due to the proximity of the sales personnel to the consumers.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

  1. If you felt that recent demand trends were more significant, and thus should be emphasized more in formulating a forecast, then in forecasting demand for the upcoming demand period, you would probably favor using a simple moving average over the conventional weighted moving average.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Regression analysis is commonly used in the cause-and-effect forecasting model.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Given the following information, the forecast for period two using exponential smoothing and a = 0.3 is 60.5.

Period

Demand

Forecast

1

64

59

2

70

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

  1. The calculated forecast for May is 46, using the actual demand shown in the table below, and a 3-month weighted moving average with weights 0.1, 0.4, 0.5 (the heaviest weight applied to the most recent period).

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

39

36

40

38

48

46

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

  1. The Naïve forecast, Mean Profit Leverage, and Mean Square Error are examples of forecasting accuracy measures.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Knowledge           Difficulty: Easy

  1. As tighter control limits are instituted for the tracking signal, there is a greater probability of finding exceptions that require no action, but it also means catching changes in demand earlier.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Forecast error is the actual quantity minus the forecast.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Knowledge           Difficulty: Easy

  1. The true value of CPFR comes from the sophisticated forecasting algorithms that provide companies with highly accurate forecasts, not from the exchange of forecasting information.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     5-6      Bloom’s: Comprehension     Difficulty: Easy

  1. One of the benefits of CPFR include integration of planning, forecasting, and logistics activities.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-6      Bloom’s: Knowledge           Difficulty: Easy

  1. Without supply chain trading partners collaborating and exchanging information, the supply chain will always be suboptimal and contain excess inventories, resulting in less-than-maximum supply chain profits.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-6      Bloom’s: Knowledge           Difficulty: Easy

  1. CPFR is more likely to succeed if companies educate their employees on the benefits of the process changes and the disadvantages of maintaining the status quo.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     5-6      Bloom’s: Comprehension     Difficulty: Easy

MULTIPLE CHOICE

  1. All of the following may influence demand and should be considered when developing a forecast EXCEPT

a.

New competition

b.

Supplier quality

c.

Ergonomic conditions

d.

Emerging markets

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Knowledge           Difficulty: Easy

  1. The impact of poor communication and inaccurate forecasts resonates along the supply chain and results in the:

a.

Bullwhip effect

b.

Delphi method

c.

CPFR effect

d.

Mean deviation

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Inaccurate forecasts can result in negative outcomes like:

a.

High inventory costs and increased profits

b.

Imbalances in supply and demand

c.

Material shortages and decreased costs of obsolescence

d.

Low inventory costs and stockouts

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Comprehension     Difficulty: Easy

  1. In 2016, Spin Master, did not properly forecast demand for their new product, Hatchimals, causing ___________ for their distributors.

a.

Excess stock

b.

The bullwhip effect

c.

Stockouts

d.

Price reductions

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-1      Bloom’s: Comprehension     Difficulty: Easy

  1. What component of a time series has variations in demand which show peaks and valleys that repeat over a consistent interval such as hours, days, weeks, months, or years?

a.

Trend Variations

b.

Cyclical Variations

c.

Random Variations

d.

Seasonal Variations

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     5-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Your company is conducting forecasting that revolves around population growth in large cities. This type of forecasting can be referred to as what component of a time series?

a.

Cyclical Variations

b.

Trend Variations

c.

Seasonal Variations

d.

Random Variations

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Cyclical variations are longer than a year and can be influenced by:

a.

Events such as natural disasters

b.

Imbalances in supply and demand

c.

Political factors

d.

Population growth

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Random variations in a Time Series component are due to:

a.

Population growth

b.

Unpredictable events

c.

Using a large value for the exponential smoothing constant

d.

Inaccurate responses of the expert participants

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-2      Bloom’s: Comprehension     Difficulty: Easy

  1. When there is not a lot of currently relevant data available it is generally best to use:

a.

Qualitative forecasting

b.

Time series forecasting

c.

Naive forecasting

d.

Simple moving average forecasting

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Which one of the following is NOT a type of qualitative forecasting?

a.

Sales force composite

b.

Consumer survey

c.

Jury of executive opinion

d.

Simple moving average

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Quantitative forecasts use mathematical techniques that are based on:

a.

Expert opinions

b.

Surveys

c.

Historical data

d.

Sales force knowledge of the market

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

  1. When linear trend forecasts are developed, demand would typically be:

a.

The independent variable

b.

The dependent variable

c.

The lead variable

d.

The passive variable

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

                                                                                                                  

  1. The following time-series approach to forecasting uses historical data to generate a forecast and works well when demand is fairly stable over time:

a.

Naïve Forecast

b.

Weighted Moving Average

c.

Simple Moving Average

d.

Exponential Smoothing

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-3      Bloom’s: Knowledge           Difficulty: Easy

                        

  1. Using the data set below, what would be the forecast for period 4 using a three period moving average: (Choose the closest answer.)

Period

Actual Demand

  1

10000

  2

12400

  3

13250

  4

15750

  5

20500

  6

18500

a.

11500

b.

11883

c.

12244

d.

14008

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

  1. Using the data set below, what would be the forecast for period 5 using a four period weighted moving average? The weights for each period are 0.05, 0.15, 0.30, and 0.50 from the oldest period to the most recent period, respectively. (Choose the closest answer.)

Period

Actual Demand

  1

10000

  2

12400

  3

13250

  4

14750

  5

15220

  6

18500

a.

12820

b.

13105

c.

13710

d.

14610

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

 

  1. Using the data set below, what would be the forecast for period 5 using the exponential smoothing method? Assume the forecast for period 4 is 14000. Use a smoothing constant of a = 0.4 (Choose the closest answer.)

Period

Actual Demand

  1

10000

  2

12400

  3

13250

  4

14750

  5

15220

  6

18500

a.

12660

b.

13190

c.

14030

d.

15220

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

  1. Using the actual demand shown in the table below, what is the forecast for May (accurate to 1 decimal) using a 3-month weighted moving average and the weights 0.20, 0.35, 0.45 (with the heaviest weight applied to the most recent period. Round to nearest whole number)?

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

39

36

40

38

48

58

a.

51

b.

56

c.

62

d.

68

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

  1. Given the following information, calculate the forecast (round to nearest whole number) for period three using exponential smoothing and a = 0.4.

Period

Demand

Forecast

1

64

59

2

70

a.

60

b.

65

c.

68

d.

71

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Difficult

  1. The smoothing constant for exponential smoothing must be?

a.

Positive

b.

Negative

c.

Between 0 and 1

d.

Greater than 1

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Knowledge           Difficulty: Moderate

  1. A positive error implies that a forecast was?

a.

Too low

b.

Too high

c.

Neither too high or too low

d.

The sign of an error gives no information as to the direction of the error

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Knowledge           Difficulty: Easy

  1. A forecast tracking signal is used to determine:

a.

If the product has shipped on time

b.

The location of the current shipment

c.

The price to charge for the product

d.

If the forecast bias is within the acceptable control limits

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

  1. The formula for the forecast error, is calculated by using the equation:

a.

Actual demand for period t minus the forecasted demand for period t

b.

Actual demand for period t divided by the forecasted demand for period t

c.

Actual demand for period t plus the forecasted demand for period t

d.

The average of Actual demand for period t and forecasted demand for period t

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Knowledge           Difficulty: Easy

  1. What is considered an acceptable range for a tracking signal?

a.

±1

b.

±2

c.

±3

d.

±10

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Comprehension     Difficulty: Easy

  1. A forecasting method has produced the following data over the past 5 months shown in the data set. What is the mean absolute deviation (accurate to 1 decimals)?

Month

Actual

Forecast

1

12

11

2

13

10

3

10

  8

4

11

  6

5

9

  8

a.

10.0

b.

-1.2

c.

2.0

d.

2.4

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Moderate

  1. Based on the information in the data set below, what is the mean squared error (accurate to 1 decimal)?

Month

Actual

Forecast

1

12

11

2

13

10

3

10

  8

4

11

  6

5

9

  8

a.

8.0

b.

10.0

c.

1.00

d.

0.8

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     5-4      Bloom’s: Application           Difficulty: Easy

  1. The real value of Collaborative Planning, Forecasting and Replenishment (CPFR) comes from:

a.

Sophisticated forecasting algorithms

b.

Exchange of forecasting information

c.

Both A and B

d.

None of the above

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-5      Bloom’s: Knowledge           Difficulty: Easy

  1. What does the acronym CPFR represent?

a.

Coordinated planning and forecasting relationships

b.

Collaborative planning, forecasting, and replenishment

c.

Centralized purchasing and forecasting relationships

d.

Collaborative purchasing, forecasting, and receivables

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     5-5      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the textbook, the top three challenges for CPFR implementation include all of the following EXCEPT:

a.

Making organizational and procedural changes

b.

Trust between supply chain partners

c.

Cost

d.

Supplier lead times

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     5-5      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is a benefit of CPFR?

a.

Provides an analysis of key performance metrics

b.

Integrates planning, forecasting and logistics activities

c.

Uses joint planning and promotions management

d.

All of the above

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     5-5      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is a major cultural issue and big hurdle for widespread implementation of CPFR?

a.

There is no software available to use

b.

Global economic changes

c.

Trust

d.

All of the above

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     5-6      Bloom’s: Knowledge           Difficulty: Easy

SHORT ANSWER

  1. List and Explain two types of qualitative forecasting methods.

ANS: 

a.

Jury of Executive Opinion: This type of qualitative forecasting is usually used for long-range forecasting. An experienced group of senior management executives knowledgeable about the market, competitors, and the business environment develop a forecast in the hopes that their experience will provide them with a competitive advantage.

b.

Delphi Method: Internal and external experts are surveyed about future events and long-term forecasts of demand. Following the survey, the answers are summarized, and this summary is sent back out to the experts. Experts are then able to modify their responses based on the summary. The process continues until a consensus is reached. Experts in this process never physically need to meet; they communicate only through their survey responses and their subsequent responses to the summaries.

c.

Sales Force Composite: This qualitative forecasting method utilizes the knowledge of the sales force. The sales force is seen to have recent and accurate information concerning the market and the needs of the customer. Based on this knowledge the sales force is asked to create a forecast to estimate the needs of the customer.

d.

Consumer Survey: Surveys are administered to customers via phone, mail, Internet, or personal interviews. Customers are surveyed about issues such as future buying habits, new product ideas, and opinions about existing products. Using statistical tools and managerial judgment, a forecast is devised.

PTS:   10                 

BUSPROG: Communication  LO:   5-3      Bloom’s: Comprehension    Difficulty: Moderate

  1. Given the following information, calculate the forecast (round to nearest whole number) for period four using exponential smoothing and a = 0.3. Use a tracking signal to determine if there is a bias problem with the forecasting method. (Assume the control limit for the tracking signal is ± 3.

Period

Demand

Forecast

1

1620

1590

2

1680

3

1720

4

1770

ANS:

Since you do not have the forecast for periods 2 and 3, you must calculate those first in order to use them in calculating the forecast for period four.

F2 = 1590 + .3(1620 – 1590) = 1599

F3 = 1599 + .3(1680 – 1599) = 1623

F4 = 1623 + .3(1720 – 1623) = 1652

RSFE = (1620 – 1590) + (1680 - 1599) + (1720 - 1623) + (1770 – 1652) = 326

MAD = 81.5

Tracking signal = 326/81.5 = 4

The results indicate a bias in the forecasts as the tracking signal is not within the control limits of ± 3.

PTS:  5                               

BUSPROG: Analytic    LO:      5-4       Bloom’s: Application   Difficulty: Moderate

  1. What is a tracking signal? How can managers use the information provided by the tracking signal to improve the quality of forecasts?

ANS: 

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. Adjustments to the forecasts can be made accordingly. Some inventory experts suggest using ±4 for high-volume items and ±8 for lower-volume items while others prefer a lower limit. For example, a company may start off with a control limit for their tracking signal of ±4. Over time, the quality of forecasts improved and the control limits were reduced to ±3. As tighter limits are instituted there is a greater probability of finding exceptions that require no action, but it also means catching changes in demand earlier.

PTS:   5                   

BUSPROG: Communication  LO:   5-4      Bloom’s: Application          Difficulty: Moderate

  1. Explain the key challenges of CPFR implementation.

ANS:

The key challenges are the difficulty of making internal changes, total implementation cost, and trust. Resistance to change should be addressed by top management. A project will be more likely to succeed if top management commits time and resources to the project. It is important that companies educate their employees on the benefits of the process changes. Companies need to budget for the cost of using this technique as demands for employee time and resources will be a factor. Trust is challenge because many retailers are reluctant to share the type of proprietary information required by CPFR.

PTS:   5                   

BUSPROG: Communication  LO:   5-5      Bloom’s: Comprehension    Difficulty: Moderate

           

  1. List FOUR benefits that can be achieved by implementing a successful CPFR program.

ANS: 

a.

Strengthens partner relationships

b.

Provides analyses of sales and order forecasts

c.

Uses point-of-sale data, seasonal activity, promotions, new product introductions and store openings or closings to improve forecast accuracy

d.

Manages the demand chain and proactively eliminates problems before they appear

e.

Allows collaboration on future requirements and plans

f.

Uses joint planning and promotions management

g.

Integrates planning, forecasting and logistics activities

h.

Provides efficient category management and understanding of consumer purchasing patterns

i.

Provides analysis of key performance metrics

PTS:   5                   

BUSPROG: Communication  LO:   5-5      Bloom’s: Comprehension    Difficulty: Moderate

ESSAY

  1. The four components of time series data are: trend variations, cyclical variations, seasonal variations, and random variations. Briefly describe each type of variation.

ANS: 

a.

Trend variations: Trend variations can either be increasing or decreasing demand movements over a number of years. These variations can be due to factors such as population growth, population shifts, cultural change, and income shifts.

b.

Cyclical variations: This type of variation is typified by wave-like movements where demand fluctuates up-and-down. These fluctuations must be sustained for leased one year. Variation is usually influenced by macroeconomic and/or political factors.

c.

Seasonal variations: variation is seasonal; demand becomes somewhat predictable on certain days, weeks, months, years, or seasons. In the United States the most common form of seasonal variation is seen in many retail industries during the Christmas season when demand usually spikes.

d.

Random variations: Unexpected or unpredictable events such as natural disasters, strikes, and wars will cause random variations in demand. The threat of hurricane will usually cause a tremendous spike in demand for items like batteries, bottled water, and wood products.

PTS:   10                 

BUSPROG: Communication     LO:      5-2       Bloom’s: Comprehension          Difficulty: Difficult

  1. Answer the following questions regarding quantitative and qualitative forecasting:

a.

Define quantitative forecasting.

b.

Explain the naïve forecasting method and give an example.

c.

What are the benefits of using the naïve forecasting method?

d.

Under which circumstances would one utilize a combination of both quantitative and qualitative forecasting?

ANS: 

a.

Define quantitative forecasting.

Quantitative forecasts use various mathematical models which use historical data and/or associative variables to forecast demand.          

   

b.

Explain the naïve forecasting method and give an example of this technique.

 

The naïve method uses the forecast for the next period to be the same as the actual demand in the last period. For example if actual demand for January was 150 units, then forecast the demand for February to be 150 units.

c.

What are the benefits of using the naïve forecasting method?

 

The naïve method is easy to understand, and is inexpensive to develop, store data and operate.

   

d.

Under which circumstances would one utilize a combination of both quantitative and qualitative forecasting?

When there is a long-time horizon, it is generally recommended to utilize a combination of both quantitative and qualitative techniques.

PTS:   10                 

BUSPROG: Communication  LO:   5-3      Bloom’s: Comprehension    Difficulty: Difficult

  1. Use the data set below to answer the questions that follow.

Period

Demand Sales Volume

1

1000

2

1200

3

1450

4

1650

5

1700

6

1850

a.

Find the four-period simple moving average forecasts for Periods 5 and 6.

b.

Find the four-period weighted moving average forecasts for Periods 5 and 6 using weights of 0.05, 0.25, 0.30, and 0.40 from the earliest period to the latest period, respectively.

c.

Which set of forecasts is more accurate, the simple moving average forecasts or the weighted moving average forecasts? Why is that set of forecasts more accurate in this particular case (using Data Set E4)?

d.

Will that type of forecast always be more accurate? Why or why not?

ANS: 

a.

Find the four period simple moving average forecasts for Periods 5 and 6.

Forecast for Period 5 = (1000 + 1200 + 1450 + 1650)/4 = 1350

Forecast for Period 6 = (1200 + 1450 + 1650 + 1700)/4 = 1500

b.

Find the four period weighted moving average forecasts for Periods 5 and 6 using weights of 0.05, 0.25, 0.30, and 0.40 from the earliest period to the latest period, respectively.

Forecast for Period 5 = .05(1000) + .25(1200) + .3(1450) + .4(1650) = 1445

Forecast for Period 6 = .05(1200) + .25(1450) + .3(1650) + .4(1700) = 1598

c.

Which set of forecasts is more accurate, the simple moving average forecasts or the weighted moving average forecasts?

In this case the weighted moving average forecasts are more accurate, using the

mean absolute deviation (MAD) to compare forecast accuracy. For the Simple moving average, the MAD for the 2 periods is 350. For the Weighted moving average forecast, the MAD is 254 for the 2 periods.

Why is that set of forecasts more accurate in this particular case?

Because demand is increasing in every period and the weighted moving average forecast, which weighs more heavily recent periods of demand in calculating the forecast versus early periods of demand, is more capable of reflecting recent changes in demand patterns.

d.

Will that type of forecast always be more accurate? Why or why not?

While the weighted moving average forecast works very well with this particular data set, it might not be as effective if demand were more stable from period to period. When there's a greater degree of stability in demand from period to period, a simple moving average forecast would likely be more effective. Nonetheless, if demand patterns were very random it is uncertain which forecasting model would be more accurate. It is for this reason the textbook describes a number of different forecasting methods that when used together can help an organization see a more complete picture of what the future may hold. Use of the MAD is necessary to compare forecast accuracy.

The student may also note that while the weighted moving average forecast was more accurate, neither forecasting model would have aptly prepared the organization for the increasing demands that were experienced during periods five and six. The student might even mention some of the other models from the textbook. The exponential smoothing forecasting model and trend adjusted exponential smoothing forecasting model may be more effective for this particular data set.

PTS:   10                 

BUSPROG: Communication  LO:   5-4      Bloom’s: Application          Difficulty: Difficult

TRUE/FALSE

  1. The chase production strategy works well when highly skilled workers are needed, especially in a tight labor market.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Knowledge           Difficulty: Easy

  1. The three basic production strategies for addressing the aggregate planning problem are the chase production strategy, the level production strategy, and the aggregate production strategy.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Knowledge           Difficulty: Easy

  1. A level production strategy works well for make-to-stock manufacturing firms, which typically emphasize immediate delivery of off-the-shelf, standard goods at relatively low prices.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Comprehension     Difficulty: Easy

  1. The mixed strategy uses overtime and subcontracting to cope with the high demand periods.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Knowledge           Difficulty: Easy

  1. MRP is the production planning system intended to develop long-range plans (more than a year away) concerning product families manufactured by the organization.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Comprehension     Difficulty: Easy

  1. A Master Production Schedule is an engineering document that shows an inclusive listing of all component parts and subassemblies making up the end item.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Knowledge           Difficulty: Easy

  1. System nervousness is when even small changes to upper-level production plans cause major changes in lower-level production plans.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Lead Capacity Strategy is a reactive approach that adjusts its capacity in response to demand.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Comprehension     Difficulty: Easy

  1. An MRP system has a subassembly with a lot size of 500 units. In terms of filling future requirements, this would mean that planned order releases for the subassembly would always have to be exactly 500 units.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Comprehension     Difficulty: Easy

  1. ERP Implosion is the process of converting a parent item's planned order releases into component gross requirements.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Distribution requirements plan (DRP) operates in a dependent demand situation.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Comprehension     Difficulty: Easy

  1. Legacy systems were designed to perform a very specific operational function.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     6-4      Bloom’s: Knowledge           Difficulty: Easy

  1. ERP systems were designed to coordinate the information requirements for purchasing, planning, scheduling and distribution of an organization operating in a complex multi-unit global environment.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     6-4      Bloom’s: Knowledge           Difficulty: Easy

  1. The legacy MRP system was programmed to coordinate with other functional areas in the firm.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Legacy MRP systems typically utilized multiple software packages and databases which caused the same information to be stored in multiple locations.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     6-4      Bloom’s: Comprehension     Difficulty: Easy

  1. An ERP system is generally a multi-module application software for managing an enterprise’s internal functional activities, as well as its suppliers and customers.

ANS:  T                               PTS:  1          

BUSPROG: Technology      LO:     6-5      Bloom’s: Knowledge           Difficulty: Easy

  1. Two reasons ERP implementations have been known to fail include: lack of top management commitment and lack of communication between the firm and its ERP software provider.

ANS:  T                               PTS:  1          

BUSPROG: Technology       LO:     6-5      Bloom’s: Comprehension     Difficulty: Easy

  1. ERP provides the mechanism for supply chain members to share information so that scarce resources can be fully utilized to meet demand, while minimizing the bullwhip effect and supply chain inventories.

ANS:  T                               PTS:  1          

BUSPROG: Technology      LO:     6-5      Bloom’s: Comprehension     Difficulty: Easy

  1. In general, single integrator ERP solutions are better suited to more intricate workplaces.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     6-6      Bloom’s: Comprehension     Difficulty: Easy

  1. When a single company that is implementing an ERP system chooses to use one company to provide an operations module, another to provide the sales and marketing application, and yet another company to provide the finance and accounting module, that single company has chosen to utilize the single integrator approach.

ANS:  F                               PTS:  1          

BUSPROG: Technology      LO:     6-6      Bloom’s: Knowledge           Difficulty: Easy

  1. The best-of-breed solution picks all the desired applications from a single vendor for the ERP system.

ANS:  F                               PTS:  1          

BUSPROG: Technology      LO:     6-6      Bloom’s: Knowledge           Difficulty: Easy

  1. Implementing a best-of-breed solution may cause firms to link databases from multiple software applications of different vendors.

ANS:  T                               PTS:  1          

BUSPROG: Technology      LO:     6-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Lack of communication between the implementing firm and its ERP software provider can become a major hindrance for a successful implementation.

ANS:  T                               PTS:  1          

BUSPROG: Technology      LO:     6-6      Bloom’s: Comprehension     Difficulty: Easy

MULTIPLE CHOICE

  1. Which of the following basic production strategies works best with make-to-order manufacturing firms?

a.

Capacity Production Strategy

b.

Mixed production Strategy

c.

Level Production Strategy

d.

Chase Production Strategy

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following results from using the chase production strategy?

a.

The workforce fluctuates in response to the demand pattern

b.

Finished goods inventories remain constant

c.

Both A & B

d.

None of these

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Which strategy allows finished goods inventories to accrue and relies on backlogs to handle the demand?

a.

The Level Production Strategy

b.

Mixed Production Strategy

c.

The Chase Production Strategy

d.

The Aggregate Production Strategy

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Knowledge           Difficulty: Easy

  1. Which strategy uses overtime and subcontracting to cope with the high demand periods ?

a.

The Level Production Strategy

b.

Mixed Production Strategy

c.

The Chase Production Strategy

d.

The Aggregate Production Strategy

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-1      Bloom’s: Knowledge           Difficulty: Easy

  1. The __________ specifies which end product is to be made, how many are required, and when they need to be completed.

a.

Aggregate production plan

b.

Master production schedule

c.

Bill of material

d.

Super bill of materials

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following seeks to develop short range plans seeking to effectively and efficiently manage components and/or subassemblies over time period of few days to a few weeks?

a.

Resource requirements plan

b.

Material requirements plan

c.

Rough-cut capacity plan

d.

Master production schedule

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The _______________ is used to check the feasibility of the Master Production Schedule.

a.

Distribution Requirement Plan

b.

Material Requirement Plan

c.

Capacity Requirement Plan

d.

Rough-Cut Capacity Plan

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Knowledge           Difficulty: Easy

                                

  1. Which of the following keeps the production plan’s capacity fixed during the planning horizon?

a.

Materials Requirements Plan

b.

Master Capacity Plan

c.

Aggregate Production Plan

d.

Capacity Requirements Plan

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The ___________ planning horizon is shorter than the aggregate production plan’s, but must be longer than a firm’s production lead time to ensure the end item can be completed within the planning horizon?

a.

Material requirements plan

b.

Master production schedule

c.

Demand time fence

d.

Capacity Requirements Plan

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-2      Bloom’s: Knowledge           Difficulty: Easy

  1. If an available-to-promise (ATP) for any period is negative, the deficit must be subtracted from the:

a.

Master Production Schedule

b.

Most recent positive ATP

c.

Beginning inventory

d.

Bill of materials

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Calculate the final discrete available-to-promise quantity for Week 1 using the following table.

Weeks

1

2

3

4

MPS

BI = 30

10

10

15

10

Committed Customer Orders

20

5

25

15

ATP:D

           

a.

ATP1 = 0

b.

ATP1 = 10

c.

ATP1 = 15

d.

ATP1 = 20

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Application           Difficulty: Easy

  1. Complete the following MRP record and provide the planned order releases for Week 1. Lead time is 2 weeks. Safety stock is 3. Use LFL lot sizes.

Part X

Week

1

2

3

4

Gross Requirements

32

16

34

40

Scheduled Receipts

10

Projected On-Hand inventory

46

Planned Order Releases

           

a.

34

b.

26

c.

29

d.

14

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Knowledge           Difficulty: Easy

  1. What is the most important output of the MRP?

a.

Bill of materials

b.

Distribution requirements plan

c.

Planned order releases

d.

Aggregate production plan

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Knowledge           Difficulty: Easy

  1. In a bill of materials, items at which level are independent demand items?

a.

Level 0

b.

Level 1

c.

Level 2

d.

Level 3

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is NOT one of the three basic methods used to calculate the available-to-promise quantities?

a.

Discrete available-to-promise

b.

Cumulative available-to-promise without looking ahead

c.

Indiscrete available-to-promise

d.

Cumulative available-to-promise with looking ahead

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following MRP terms represents a committed order awaiting delivery for a specific period?

a.

Projected on-hand inventory

b.

Time bucket

c.

Net requirement

d.

Scheduled receipt

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following MRP terms represents the parts demanded by a parent?

a.

Gross requirement

b.

Component

c.

Net requirement

d.

Scheduled receipt

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Legacy MRP systems had which of the following limitations?

a.

The systems needed continuous modifications

b.

The systems were not user-friendly

c.

The systems were designed to perform a very specific operational function

d.

All of these

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     6-4      Bloom’s: Knowledge           Difficulty: Easy

  1. Why are firms migrating to ERP systems?

a.

ERP systems are easy to implement, particularly in large organizations

b.

ERP systems tie together a variety of specialized systems

c.

ERP systems are successful with two-dimensional processes

d.

ERP systems are inexpensive to implement

ANS:  B                              PTS:  1          

BUSPROG: Technology      LO:     6-4      Bloom’s: Comprehension     Difficulty: Easy

  1. While ERP is a relatively new technology, it has grown rapidly since the early 1990s. Which of the following is the reason that has contributed to its rapid growth?

a.

The increased use of email during the 1990's

b.

The trend for companies to eliminate their supply chain partners

c.

The year 2000 millennium bug

d.

All of the above

ANS:  C                              PTS:  1          

BUSPROG: Technology      LO:     6-4      Bloom’s: Knowledge           Difficulty: Easy

  1. Legacy MRP systems typically utilized multiple software packages and databases which caused:

a.

The system to crash often

b.

The same information to be stored in multiple locations

c.

Data integrity

d.

Planned order releases

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-4      Bloom’s: Knowledge           Difficulty: Easy

  1. The acronym ERP is short for:

a.

Enterprise Resource Planning

b.

Electronic Resource Provider

c.

Executive Resource Plan

d.

Electronic Requirements Provider

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     6-5      Bloom’s: Knowledge           Difficulty: Easy

  1. An advantage/benefit of utilizing an ERP system includes which of the following?

a.

ERP systems are designed to take advantage of Internet technology

b.

ERP systems enable the firm to automate some of the steps of a manufacturing process

c.

Both A & B

d.

None of the above

ANS:  C                              PTS:  1          

BUSPROG: Technology      LO:     6-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is considered an advantage/benefit of utilizing an ERP system?

a.

Fairly inexpensive to purchase and implement

b.

Enables the company to utilize a single centralized database system, thus eliminating duplicate data entries

c.

Flexible enough that it allows different companies with different business models to mold the new ERP system to fit the company's business model

d.

All of the above

ANS:  B                              PTS:  1          

BUSPROG: Technology      LO:     6-5      Bloom’s: Comprehension     Difficulty: Easy

  1. Not all ERP software is designed to provide the exact same tools, nonetheless, some of the common modules usually included in ERP software packages include:

a.

Customer relationship management and Human resource management

b.

Computer assisted drawing and Photo enhancing

c.

Operating systems and Internet browsing

d.

All of the above

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     6-5      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is NOT a common module of ERP systems?

a.

Human Resources Management

b.

Customer Relationship Management

c.

Marketing Resources Management

d.

Supply Chain Management

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     6-5      Bloom’s: Knowledge           Difficulty: Easy

  1. Which of the following is considered a disadvantage of utilizing an ERP system?

a.

ERP systems reduce the bullwhip effect

b.

ERP systems are very complex and have proven difficult to implement

c.

ERP systems use a single database and common infrastructure

d.

Once ERP information is entered it is made available to all users

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     6-5      Bloom’s: Comprehension     Difficulty: Easy

  1. The ___________ solution picks all the desired applications from a single vendor for the ERP system.

a.

Best-of-breed

b.

Elite integrator

c.

Single integrator

d.

Premier application

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     6-6      Bloom’s: Knowledge           Difficulty: Easy

  1. Using the ________________ multiple software infrastructures and databases may have to be used to link the multiple applications obtained from different vendors.

a.

Best-of-breed solution

b.

Elite integrator solution

c.

Multi-modular solution

d.

Premier application solution

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     6-6      Bloom’s: Knowledge           Difficulty: Easy

  1. According to the textbook, which of the following is considered a reason that ERP implementations fail?

a.

Top management becomes overcommitted to the point where they constantly encourage the employees during implementation

b.

Lack of communication within an organization

c.

Organizations tend to spend too much time and money training their employees on the new system

d.

All of the above

ANS:  B                              PTS:  1          

BUSPROG: Technology      LO:     6-6      Bloom’s: Knowledge           Difficulty: Easy

 

SHORT ANSWER

  1. Explain the three basic production strategies used to complete the aggregate plan.

ANS: 

Chase strategy - Adjusts capacity to match demand patterns. Firms must hire and lay off workers to match its production rate to demand. Hiring, training, and termination costs are significant cost components in the chase production strategy.

Level strategy - Relies on a constant output rate and capacity while varying inventory and backlog levels to handle the fluctuating demand patterns. Firms keep their workforce levels constant and rely on fluctuating finished goods inventories and backlogs to meet demand. This strategy it is more suited for firms that require highly skilled labor.

Mixed strategy - Strives to maintain a stable workforce while using short-term means to manage short-term high demand. This strategy uses overtime and subcontracting to cope with the high demand periods. Some firms will schedule preventive maintenance or produce complementary products that require similar resources but different demand cycles during the off-peak demand periods.

PTS:  5                               

BUSPROG: Communication LO:     6-1      Bloom’s: Knowledge           Difficulty: Moderate

                                                                                                                             

  1. Complete the Projected on Hand Inventory and Planned Order Release rows.

Item – Speed Boat A

1

2

3

4

Gross Requirements

25

35

40

35

Schedule Receipts

10

40

Projected on Hand Inventory

30

Planned Order Releases

Q = LFL; LT = 2; SS = 10

           

ANS: 

Item – Speed Boat A

1

2

3

4

Gross Requirements

25

35

40

35

Schedule Receipts

10

40

Projected on Hand Inventory

30

15

20

10

10

Planned Order Releases

30

35

Q = LFL; LT = 2; SS = 10

           

PTS:  5                               

BUSPROG: Analytic           LO:     6-3      Bloom’s: Application           Difficulty: Moderate

  1. Describe the limitations of a legacy MRP system.?

ANS: 

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.

PTS:  5                               

BUSPROG: Communication  LO:   6-4      Bloom’s: Comprehension     Difficulty: Moderate

  1. What is ERP? Why was it developed?

ANS: 

ERP stands for Enterprise Resource Planning systems. ERP systems are manufacturing information systems that are intended to connect all functional areas and operations of an organization, as well as its suppliers and customers, in some cases, via a common software infrastructure and database. The systems utilize a centralized and shared database that allows the organization to easily share information and communicate quickly with all of its internal functional members as well as any participating supply-chain partners.

PTS:  5                               

BUSPROG: Communication  LO:   6-5      Bloom’s: Comprehension     Difficulty: Moderate

  1. What does it mean if your organization has chosen to adopt a best-of-breed solution?

ANS: 

ERP systems utilize numerous applications or modules that are integrated during implementation in hopes of creating a single coordinated system. These applications or modules are developed, sold, and integrated by a number of different providers. Some modules or applications are considered to be better than others. The textbook outlines two solutions in developing a coordinate ERP system. One is a best-of-breed solution and the other is the single integrator solution.

The best-of-breed solution takes the best application or module for each individual function and supply chain.

The single integrator approach, on the other hand, would utilize all the desired applications from a single vendor.

PTS:  5                               

BUSPROG: Communication LO:     6-6      Bloom’s: Application           Difficulty: Moderate

ESSAY

  1. This chapter discussed both materials planning and capacity planning. Consider those concepts in answering the following questions:

a.

Which is more appropriate for a conventional service organization? Why?

b.

Which is more appropriate for a conventional manufacturing organization? Why?

c.

What are the three hierarchical components of materials planning? Provide a brief description of each.

d.

What are the three hierarchical components of capacity planning? Provide a brief description of each.

ANS: 

a.

Which is more appropriate for a conventional service organization? Why?

Because services are unable to inventory their services, capacity planning is considered more important to service industries than materials planning.

b.

Which is more appropriate for a conventional manufacturing organization? Why?

Because manufacturers are typically able to build inventories of their products, materials planning is considered more important to manufacturing industries than capacity planning.

The answers to the first two questions should not imply that both capacity planning and materials planning cannot be important in both service and manufacturing industries, but due to nature of what each provides for their customer, services are more often concerned with meeting demand with available capacity while many manufacturers can meet demand with built up inventories. Nonetheless, many modern manufacturers are moving to pull type systems so they too will be concerned with capacity.

c.

What are the three hierarchical components of materials planning? Provide a brief description of each.

1.

Aggregate Production Plan - APP - long-range materials plan/more than 1 year. This plan is likely to deal with product groups/families. This plan sets the aggregate output rate, workforce size, utilization and inventory, and/or backlog levels for an entire facility.

2.

Master Production Schedule - MPS - a medium range materials plan/6 to 18 months. The master production schedule deals with end items. It shows the quantity and timing of the end items or services that will be produced.

3.

Materials Requirement Planning - MRP - a short-range materials plan/days or weeks. MRP deals with components/subassemblies. A detailed planning process for components in parts that supports the Master production schedule. The end item requirements from the Master production schedule are converted into a set of time phased components in part requirements

d.

What are the three hierarchical components of capacity planning? Provide a brief description of each.

1.

Resource Requirement Planning - RRP - This is a long-range capacity planning module. The RRP is used to check whether aggregate resources are capable of satisfying the aggregate production plan. The RRP typically considers labor hours and machine offers. Additional considerations include new facilities and/or additional capital equipment.

2.

Rough Cut Capacity Planning - RCCP - the medium-range capacity planning. This plan checks the feasibility of the Master production schedule. The RCCP takes a master production schedule and converts it for production to capacity require. Then it compares the capacity available during each production period.

3.

Capacity Requirement Planning - CRP - this is short-range capacity planning. This plan is used to check the feasibility of the MRP. This plan computes the capacity requirements at each workstation during specific periods to see whether or not they will be capable of manufacturing the items specified by the MRP.

PTS:   10

BUSPROG: Communication LO:     6-2      Bloom’s: Comprehension     Difficulty: Difficult

  1. Calculate the final discrete available-to-promise quantity row using the following table below and explain how the numbers are generated.

Weeks

1

2

3

4

MPS

BI = 20

10

15

10

20

Committed Customer Orders

20

5

20

15

ATP:D

           

ANS: 

Weeks

1

2

3

4

MPS

BI = 20

10

15

10

20

Committed Customer Orders

20

5

20

15

ATP:D

10

0

0

5

           

ATP1 = 20 +10 – 20 = 10 Then ATP2 = 15 - 5 = 10. Next ATP3 = 10 - 20 = -10. Negative not allowed, so use uncommitted inventory from week 2. Revised ATP2 = 10 - 10 = 0. Revised ATP3 = 0. ATP4 = 20 - 15 = 5.

PTS:  10                             

BUSPROG: Analysis             LO:   6-3      Bloom’s: Application           Difficulty: Difficult

  1. Given the following information, complete the MRP records below and explain how the numbers are generated. Note the bill of materials. Also note the lot sizes and lead times. There are no scheduled receipts and no safety stock is required.

PART 1

(Lot size=lot-for-lot)                             WEEK

(Lead time=2 weeks)                1          2          3           4_

Gross Requirements                                       75        120                   

Sched. Receipts                                   ________________________

On-Hand Inventory    65        ________________________               Bill of Materials         

Pl. Order Releases                  ________________________

PART 2

(Lot size=lot-for-lot)                             WEEK

(Lead time=1 week)                  1          2          3           4_

Gross Requirements              

Sched. Receipts                                   ________________________

On-Hand Inventory    20        ________________________  

Pl. Order Releases                  ________________________

         

ANS: 

PART 1

(Lot size=lot-for-lot)                             WEEK

(Lead time=2 weeks)                1          2          3           4_

Gross Requirements                                       75        120                   

Sched. Receipts                                   ________________________

On-Hand Inventory    65        ______________0______0__              

Pl. Order Releases                  10____120_______________

PART 2

(Lot size=lot-for-lot)                             WEEK

(Lead time=1 week)                  1          2          3           4_

Gross Requirements               20        240

Sched. Receipts                                   ________________________

On-Hand Inventory    20        _0______0_______________  

Pl. Order Releases                  240_____________________  

Part 1: Since on-hand inventory is not enough to satisfy the gross requirements in week 3, we must add 10 planned order releases in week 1. To satisfy the gross requirements in week 4 of 120, we must add 120 planned order releases in week 2 (since there is a 2 week lead time for the part).

Part 2: To generate the gross requirements for part 2, we must multiply the planned order releases of part 1 by 2 since the bill-of-materials states that 2 of part 2 are required for each part 1. The on-hand inventory of 20 satisfies the gross requirements for week 1. In order to satisfy the gross requirements of 240 in week 2, we must have planned order releases of 240 in week 1 (since there is a 1 week lead time for the part).

PTS:   10

BUSPROG: Communication  LO:   6-3      Bloom’s: Comprehension       Difficulty: Difficult

  1. Your firm is considering modernizing its organizational information systems.

Your boss asks you, "Do you think our company needs an ERP system?" Obviously, without knowing the details of this company or the industry in which it operates, it would be difficult to provide a detailed answer to this question.

Your new project may take days, weeks, or even months to answer accurately, but before you begin your research you should develop a short but detailed outline for a paper that will inform the boss about the basics of ERP, the advantages of ERP, as well as the disadvantages of ERP.

Answer some of these questions within your outline/answer:

·

What is ERP?

·

Why should the organization get an ERP system?

·

Why might the organization not want to get ERP?

·

If we did get an ERP system what would be required for successful implementation?

ANS: 

·

What is ERP?

An ERP System is an organizational information system that runs on a single database. Some of the key objectives of an ERP system include coordinating the information requirements for many or all of the functional departments of an organization and making data readily available to everyone associated with the supply chain and via a user-friendly system.

·

Why should the organization get an ERP system?

Some of the benefits to getting in ERP system include utilization of a single database, which requires a fairly simple computer infrastructure, easy access to data and information for all employees of the organization, the potential for improved data analysis because of the easy access to data, greater coordination with supply-chain partners, the potential to hand off important decisions to supply-chain partners who may be more qualified to respond to market changes.

·

Why might we not want to get ERP?

Investing in an ERP system can be extremely costly. An organization, in addition to paying for the ERP system, will incur high costs to implement the system, train its employees, alter its processes, and convert data from Legacy systems for use on the new ERP system. Also, organizations need to prepare for a drop in productivity due to the learning curve associated with the implementation of the ERP system.

·

If we did get an ERP system what would be required for successful implementation?

Successful implementation of an ERP system requires the commitment and backing of top management, adequate investment resources, appropriate system training, excellent organizational communication, and an ERP system that's capabilities match the requirements of the organization/processes it will be serving.

PTS:   10

BUSPROG: Communication     LO:      6-5       Bloom’s: Comprehension          Difficulty: Difficult

TRUE/FALSE

  1. Steering wheels purchased by Ford are an example of dependent demand.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-1      Bloom’s: Application           Difficulty: Easy

  1. Dependent demand must be forecasted to be accurate.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-1      Bloom’s: Knowledge           Difficulty: Easy

  1. The four categories of inventory are raw materials, intermediate assemblies, work-in-progress and finished goods.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-2      Bloom’s: Knowledge           Difficulty: Easy

  1. MRO supplies are a type of work-in-progress.

ANS:  F                               PTS:  1

BUSPROG: Analytic           LO:     7-2      Bloom’s: Knowledge           Difficulty: Easy

  1. The inventory turnover ratio shows how efficiently a firm is using its inventory to generate revenue.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-3      Bloom’s: Comprehension     Difficulty: Easy

  1. MRO supplies are a type of indirect costs.

ANS:  T                               PTS:  1

BUSPROG: Analytic           LO:     7-3      Bloom’s: Knowledge           Difficulty: Easy

  1. Cycle counting means to physically count inventory on a periodic basis.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-4      Bloom’s: Knowledge           Difficulty: Easy

  1. The ABC inventory control prioritizes dependent demand inventory items into three groups, A, B, and C. A items receive the smallest amount of safety stock, while C items typically have the most safety stock.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Pareto Analysis means that 20 percent of the items get about 80 percent of the safety stock.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-4      Bloom’s: Comprehension     Difficulty: Easy

  1. The ABC inventory matrix combines two ABC analyses—one is based on current inventory valuation and the other is based on annual inventory dollar usage..

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Radio Frequency Identification (RFID) is beginning to replace bar code inventory tracking, however a weakness is that it requires a direct line of sight for RFID tags to be read.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-5      Bloom’s: Knowledge           Difficulty: Easy

  1. The economic order quantity model (EOQ) is the optimal independent demand order quantity that minimizes total annual inventory costs.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Knowledge           Difficulty: Easy

  1. One of the assumptions of the economic order quantity model (EOQ) is that purchase price must remain constant.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Knowledge           Difficulty: Easy

  1. The EOQ equation is derived by setting the annual purchase cost equal to the annual holding cost.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Knowledge           Difficulty: Easy

  1. The optimal order quantity for the quantity discount model is always at one of the price breakpoints.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-7      Bloom’s: Knowledge           Difficulty: Easy

  1. In the economic manufacturing quantity model (EMQ), the annual consumption rate must be less than the annual production rate.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-7      Bloom’s: Comprehension     Difficulty: Easy

  1. When demand and lead time are constant, the reorder point (ROP) is less than the demand during lead time.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-8      Bloom’s: Knowledge           Difficulty: Easy

  1. When both the demand and lead time of a product are variable, firms must keep a higher safety stock level compared to variations in just demand, to offer the same service level.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-8      Bloom’s: Knowledge           Difficulty: Easy

  1. The statistical reorder point is calculated as the average demand during the delivery lead time plus the desired safety stock.

ANS:  T                               PTS:  1          

BUSPROG: Analytic           LO:     7-8      Bloom’s: Knowledge           Difficulty: Easy

  1. The (s, S) continuous review policy is to order the same quantity, Q, when physical inventory reaches the reorder point.

ANS:  F                               PTS:  1          

BUSPROG: Analytic           LO:     7-9      Bloom’s: Knowledge           Difficulty: Easy

MULTIPLE CHOICE

  1. Independent demand is the:

a.

Internal demand for all end-item parts and materials.

b.

Demand for a firm’s end products.

c.

d.

Forecasted demand for purchased items.

Absolute demand for all items.

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     7-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following would be considered a dependent demand item?

a.

Bicycle tires used to assemble a bicycle

b.

Televisions

c.

Furniture

d.

Retail customers

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     7-1      Bloom’s: Comprehension     Difficulty: Easy

  1. Lubricants for production equipment which are not parts of the final products are called:

a.

Raw materials

b.

Work-in-process

c.

Maintenance, repair and operating supplies

d.

Finished goods

e.

Cycle stock

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     7-2      Bloom’s: Knowledge           Difficulty: Easy

  1. Which one of the following is NOT a reason for firms to carry inventory?

a.

To meet variations in product demand

b.

To increase production change/setup costs

c.

To allow for production scheduling flexibility

d.

To take advantage of quantity discounts

e.

To maintain independence of operations

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     7-2      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is a disadvantage of carrying too much inventory?

a.

it creates an unnecessary waste of scarce resources.

b.

it leads to higher annual inventory ordering costs.

c.

it leads to lower average finished goods inventories.

d.

it increases the need to purchase items.

e.

it reduces the need to conduct cycle counts.

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     7-3      Bloom’s: Comprehension     Difficulty: Easy

  1. If at the end of the year, the cost of revenue = $2,500, total revenue = $12,000 and inventory value = $2,000, the inventory turnover ratio would be:

a.

0.208

b.

0.375

c.

2.667

d.

0.800

e.

1.250

ANS:  E                               PTS:  1          

BUSPROG: Analytic           LO:     7-3      Bloom’s: Comprehension     Difficulty: Moderate

  1. In the ABC Inventory Matrix shown, inventory in area Y suggests:

a.

under-stocked A and B items.

b.

under-stocked B and C items.

c.

overstocked A and B items.

d.

over-stocked B and C items.

e.

inventory that matches sales.

ANS:  E                               PTS:  1          

BUSPROG: Analytic           LO:     7-4      Bloom’s: Analysis               Difficulty: Easy

  1. Classify the following inventory items as either A, B, or C items using the ABC inventory control system:

Item #                       

Annual Sales

Unit Cost

  1                                          

130 units

$ 4.00

  2                                           

400 units

15.30

  3                                 

25 units

17.00

  4                                          

1320 units

1.25

  5                                        

90 units

2.10

           

a.

item 1 (C), item 2 (A), item 3 (C), item 4 (B), item 5 (C)

b.

item 1 (B), item 2 (A), item 3 (A), item 4 (C), item 5 (C)

c.

item 1 (C), item 2 (B), item 3 (C), item 4 (A), item 5 (C)

d.

item 1 (A), item 2 (B), item 3 (C), item 4 (A), item 5 (B)

e.

item 1 (B), item 2 (C), item 3 (B), item 4 (C), item 5 (A)

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     7-4      Bloom’s: Application           Difficulty: Moderate

  1. Which of the following would refer to the 80/20 rule when applied to the ABC inventory control system?

a.

80 percent of the items account for 20 percent of the groups.

b.

20 percent of the items account for 80 percent of the tasks.

c.

80 percent of the unit cost accounts for 20 percent of the items.

d.

80 percent of the total annual $ usage is accounted for, by 20 percent of the items.

e.

None of these.

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     7-4      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following describes a global RFID challenge?

a.

Foreign firms will not use global RFID since the field communication standards tend to vary from country to country.

b.

Globally, the RFID industry does not have its own UHF spectrum allocation.

c.

RFID tags are passive in undeveloped countries.

d.

RFID can track outbound shipments only.

e.

All of the above.

ANS:  B                              PTS:  1          

BUSPROG: Diversity          LO:     7-5      Bloom’s: Comprehension     Difficulty: Easy

  1. The primary purpose of the basic economic order quantity (EOQ) model is to:

a.

Calculate the reorder point, so that replenishments take place at the proper time

b.

Minimize the sum of purchase cost and holding cost

c.

Maximize the customer service level

d.

Calculate the optimum safety stock level

e.

None of the above

ANS:  E                               PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Comprehension     Difficulty: Easy

 

 

 

 

 

  1. Which of the following is TRUE regarding the EOQ figure below?

a.

Curve J represents the annual ordering cost, and curve L represents the annual holding cost.

b.

A lot size of G has an annual total cost of about C.

c.

At lot size H both holding costs and ordering costs exceed the annual total cost.

d.

The EOQ is at lot size G, and curve K is the annual holding cost curve.

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Application           Difficulty: Easy

  1. If an item is ordered using its economic order quantity, the annual carrying cost should be:

a.

slightly less than the annual ordering cost.

b.

equal to the annual ordering cost.

c.

twice the annual purchase price.

d.

the square root of the annual ordering cost.

e.

none of the above.

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Comprehension     Difficulty: Easy

  1. What inventory factor may be omitted from the basic EOQ derivation because it is a constant?

a.

Annual order-processing cost

b.

Annual purchase cost of goods

c.

Annual capital cost

d.

Annual setup costs

e.

Annual total costs

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Which of the following is NOT an assumption of the economic order quantity (EOQ) model?

a.

Demand is known, constant, and independent.

b.

Lead time is known and constant.

c.

Quantity discounts are not possible.

d.

Production and use occur simultaneously.

e.

The only variable costs are setup cost and holding cost.

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Comprehension     Difficulty: Easy

  1. The cost of a product is $5, and the carrying cost rate is 20%; the cost of processing an order is $45 and the annual demand is 1000. What is the economic order quantity (EOQ)?

a.

5

b.

20

c.

25

d.

200

e.

300

ANS:  E                               PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Application           Difficulty: Easy

  1. Which one of the following statements regarding the economic order quantity (EOQ) is true?

a.

The EOQ model combines several different item orders to the same supplier.

b.

If an order quantity is larger than the EOQ, then the annual holding cost will exceed the annual ordering cost.

c.

The EOQ model assumes a variable demand pattern.

d.

When the holding cost rate drops, both the annual holding cost and the EOQ decrease.

e.

The EOQ is frequently used to determine the optimum shipping quantity.

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Comprehension     Difficulty: Easy

  1. Use the information below to calculate the number of orders per year when using the EOQ:

Annual demand for an item is 43,000 units

The cost to place an order is $200

The per unit cost of the item is $50.00

The annual holding rate is 35%

Choose the closest answer.

a.

49

b.

81

c.

123

d.

202

ANS:    A         PTS:  1

BUSPROG: Analytic    LO:      7-6       Bloom’s: Application   Difficulty: Moderate

  1. If your company had an annual purchase cost of items equal to $2,000,000, an annual holding cost of $150,000 and an annual ordering cost of $50,000 this scenario would reveal that:

a.

Your order size was lower than the EOQ

b.

Your order lot size was equal to the EOQ

c.

Your order lot size was higher than the EOQ

d.

Nothing because there is insufficient information to discern where the EOQ would be.

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     7-6      Bloom’s: Application           Difficulty: Easy

  1. The EOQ model with quantity discounts attempts to determine:

a.

the lowest purchasing price.

b.

whether to use a fixed-quantity or fixed-period order policy.

c.

how many units should be ordered.

d.

the shortest lead time to use.

e.

the lowest amount of inventory necessary to satisfy a certain service level.

ANS:  C                              PTS:  1          

BUSPROG: Analytic           LO:     7-7      Bloom’s: Comprehension     Difficulty: Easy

  1. When demand and delivery lead time are known and constant, daily demand = 8, purchase lead time = 5 days, and the purchase price = $20/unit, then the reorder point is:

a.

2

b.

13

c.

32.

d.

40.

e.

56.

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     7-8      Bloom’s: Application           Difficulty: Easy

  1. When demand and delivery lead time are known and constant, the reorder point is the ____.

a.

demand during the delivery lead time

b.

safety stock

c.

demand during lead time + safety stock

d.

economic order quantity

e.

average inventory

ANS:  A                              PTS:  1          

BUSPROG: Analytic           LO:     7-8      Bloom’s: Comprehension     Difficulty: Easy

  1. The College Bookstore sells a unique calculator to college students. The demand for this calculator has a normal distribution with an average daily demand of 20 units and a standard deviation of 4 units per day. The lead time for this calculator is 9 days. Compute the statistical reorder point that results in a 95 percent in-stock probability. Choose the closest answer.

a.

20 units

b.

80 units

c.

180 units

d.

200 units

e.

420 units

ANS:  D                              PTS:  1          

BUSPROG: Analytic           LO:     7-8      Bloom’s: Application           Difficulty: Moderate

  1. The College Bookstore sells a unique calculator to college students. The demand for this calculator is constant at 20 units per day. The lead time for this calculator is variable at an average of 9 days with a standard deviation of 2 days. Compute the statistical reorder point that results in a 95 percent in-stock probability. Choose the closest answer.

a.

26 units

b.

46 units

c.

182 units

d.

226 units

e.

246 units

ANS:  E                               PTS:  1          

BUSPROG: Analytic           LO:     7-8      Bloom’s: Application           Difficulty: Moderate

  1. Which of the following is true under the Periodic Review System?

a.

a lower level of safety stock is needed to buffer against uncertainty in demand over a longer planning horizon, compared to the EOQ system

b.

a higher level of safety stock is needed to buffer against uncertainty in demand over a longer planning horizon, compared to the EOQ system

c.

it is more expensive to administer compared to the Continuous Review System

d.

the only uncertainty is the magnitude of demand during the delivery lead time

e.

there are no discrepancies between physical inventory and the stock record

ANS:  B                              PTS:  1          

BUSPROG: Analytic           LO:     7-9      Bloom’s: Comprehension     Difficulty: Easy

SHORT ANSWER

  1. Briefly describe the differences between dependent and independent demand. Provide examples of dependent and independent demand items for each of the following industries: automotive, personal computer, bicycle

ANS: 

a.

Dependent demand items are those parts whose demand is based on the demand of the final product in which the parts are used. Independent demand items are the demand for end items, and whose demand is affected by trends, seasonal patterns, and general market conditions.

b.

Automotive Industry:

1.

Independent demand item - car/truck and service parts purchased by customers.

2.

Dependent demand item - tires, axles, steering wheel, and battery used to assemble the automobiles.

c.

Personal Computer Industry:

1.

Independent demand item - computer/laptop computer and hardware sold directly to consumers.

2.

Dependent demand item - monitor, CPU, and keyboard used to assemble the PC.

d.

Bicycle Industry:

1.

Independent demand item - bicycle and service oparts

2.

Dependent demand item - tires, handlebars, chain, and seats used to assemble the bicycles.

PTS:   5

BUSPROG: Communication   LO:  7-1      Bloom’s: Application           Difficulty: Moderate

          

  1. Name and briefly explain the four basic types of inventory.

ANS: 

a.

Raw materials - unprocessed, purchased inventories.

b.

Work-in-process - partially processed inventories.

c.

Finished goods - inventory or materials that have been completely processed or assembled, ready for sales or shipping to customers.

d.

Maintenance, repair and operating (MRO) supplies - (e.g., lubrication) goods used to maintain, repair, or operate the manufacturing equipment, but do not become part of the finished goods.

PTS:   5

BUSPROG: Communication   LO:  7-2      Bloom’s: Comprehension     Difficulty: Moderate

  1. List five of the assumptions of the EOQ model.

ANS: 

a.

Demand must be known and constant

b.

Delivery time must be known and constant

c.

Replenishment is instantaneous

d.

Price is constant/quantity discounts are not allowed

e.

Holding cost is known and constant

f.

Ordering cost is known and constant

g.

Stockouts are not allowed

PTS:   5

BUSPROG: Communication   LO:  7-6      Bloom’s: Knowledge           Difficulty: Moderate

  1. The manager at Robert’s Cigars wants to determine the lowest cost order policy given the following purchase discounts offered: cigar costs are $4 each for orders less than 500; $3.50 each for orders of 500 – 1000; and $3.25 each for orders greater than 1000. The order cost = $75, annual demand forecast = 5500 cigars, inventory carrying cost = 30% per year.

ANS: 

Step 1

Determine the 3 EOQ’s—

For $4 cigars, EOQ =  = 829 (infeasible, since EOQ > 500.

For $3.50 cigars, EOQ =  = 886 (feasible range, since EOQ > 500 but < 1000.

For $3.25 cigars, EOQ =  = 920 (infeasible, since EOQ < 1000, so must order 1001 to get the discount.

Step 2

Calculate the total annual inventory costs for the $3.50 and the $3.25 cigars:

      TIC3.50 = O+I+P =  (75) +  (.3)(3.50) + 5500(3.50) = $465.58 + $465.15 + $19,250 = $20,180.73

      TIC3.25 = O+I+P =  (75) +  (.3)(3.25) + 5500(3.25) = $412.09 + $487.99 + $17,875 = $18,775.08

So, the lowest cost order policy is to order 1001 cigars at a time, pay $3.25 per cigar, for a total inventory cost of $18,775.08

PTS:   5

BUSPROG: Communication     LO:      7-7       Bloom’s: Analysis        Difficulty: Difficult

ESSAY

  1. Describe the ABC inventory matrix, and how is it used to manage inventory.

ANS: 

An ABC inventory matrix is used to assist in identifying obsolete stocks and to analyze whether a company is stocking the correct inventories by comparing two ABC analyses. The vertical axis of the ABC inventory matrix shows the firm's inventory classification based on inventory usage whereas the horizontal axis shows the firm's inventory classification based on physical inventory.

Items appearing along the diagonal of the matrix suggest inventory matches sales. Items in the top left triangle indicate under-stocked A and B items, whereas items in the lower right triangle suggest overstocked B and C items, or obsolete stocks.

PTS:   10

BUSPROG: Communication   LO:  7-4      Bloom’s: Application           Difficulty: Difficult

  1. What is Radio Frequency Identification (RFID)? Provide four examples or scenarios of how RFID can be used to aid in supply chain management.

ANS: 

RFID aids in inventory management by making it easier to track inventories in the supply chains. It can synchronize information and physical flow of goods along supply chains from manufacturers to retail outlets and to the consumers. Moreover, it is also very useful for tracking returned goods through supply chains and to prevent counterfeits. For example,

a.

Materials management: As a supply vehicle enters the warehouse, the fixed-portal RFID reader positioned at the entrance reads the tags on the pallets or individual items to provide handling, routing, and storage information of the incoming goods, and inventory status can be updated automatically.

b.

Manufacturing: An RFID tag can be placed on the unit being produced so that specific customer configurations can be incorporated automatically during the production process. This is invaluable in a make-to-order environment.

c.

Distribution center: As the logistics vehicle arrives at the loading dock, the fixed-portal RFID reader communicates with the tag on the vehicle to confirm that it is approved to pick up goods. When the loaded vehicle leaves the dock and crosses the portal, the reader picks up the signals from the tags to alert the RFID software and ERP system to update the inventory automatically and initiate an advanced shipping notice (ASN), proof of pickup, and invoices.

d.

Retail store: As a delivery vehicle enters the unloading dock, the fixed-portal reader picks up the signals from the tags, and the RFID software application processes the signals to provide specific handling instructions and initiates automatic routing of the goods. An RFID reader can also be placed on the store shelf to trigger automatic replenishments when an item reaches its reorder point. Moreover, inventory status can be updated automatically in real time at any stage of the supply chain, and handheld readers can be used to assist in cycle counting.

PTS:   10

BUSPROG: Communication   LO:  7-5      Bloom’s: Application           Difficulty: Difficult

  1. Use the graph below to answer the questions that follow.

a.

Identify the Annual Holding Cost curve. Provide a brief description of what the Annual Holding Cost curve represents.

b.

Identify the Annual Ordering Cost curve. Provide a brief description of what the Annual Ordering Cost curve represents.

c.

Identify the Annual Total Cost Curve. Provide a brief description of what the Annual Total Cost curve represents.

d.

Identify the Economic Order Quantity. Provide a brief description of what the Economic Order Quantity represents.

ANS: 

a.

Identify the Annual Holding Cost curve. Provide a brief description of what the Annual Holding Cost curve represents.

Curve K. Curve K represents the cost to a firm for holding inventory for an entire year. The larger the order size, the more inventory a firm holds, thus the higher the annual cost of holding inventory.

b.

Identify the Annual Ordering Cost curve. Provide a brief description of what the Annual Ordering Cost curve represents.

Curve L. Curve L represents the cost to a firm for ordering inventory for an entire year. The larger the order size, the fewer the orders required to accumulate a year's worth of inventory, thus the lower the annual cost of ordering, and the higher the annual holding cost.

c.

Identaify the Annual Total Cost Curve. Provide a brief description of what the Annual Total Cost curve represents.

Curve J. Curve J is the sum of Curve K and Curve L. It begins very high as ordering costs are very high when order quantities are small, but as curve L and curve K near an intersection, the annual costs decrease. The intersection of K and L represents the lowest annual total cost, and thus reveals the EOQ. After K and L intersect, the annual total cost again begins to increase as order quantities increase causing holding costs to increase.

d.

Identify the Economic Order Quantity. Provide a brief description of what the Economic Order Quantity represents.

The EOQ is the order size at which annual holding cost and annual ordering cost are equal, and where annual total cost is at its minimum. On this chart the EOQ is point G.

PTS:   10

BUSPROG: Communication   LO:  7-6      Bloom’s: Analysis               Difficulty: Difficult

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