Contents Introduction Chapter 1: Logistics and the Supply Chain...............................................................................................1 ...................................................................................................................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... ...................................................................................................................................................................... ......................................................................................................................................................................

Chapter 2: The Supply Chain Management Concept..............................................................................23 Chapter 3: Logistics and Information Technology.................................................................................43 Chapter 4: Demand Management, Order Management and Customer Service......................................62 Chapter 5: Protective Packaging and Materials Handling......................................................................81 Chapter 6: Transportation ..................98 Chapter 7: Transportation Management................................................................................................115 Chapter 8: Distribution Center, Warehouse, and Plant Location..........................................................135 Chapter 9: Inventory Management........................................................................................................157 Chapter 10: Warehousing Management.................................................................................................182 Chapter 11: Procurement......................................................................................................................201 Chapter 12: International Logistics.......................................................................................................221 Chapter 13: Logistics Systems Controls...............................................................................................240 Chapter 14: Organizing and Analyzing Logistics Systems...................................................................260

PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 1: LOGISTICS AND THE SUPPLY CHAIN 1. Did it surprise you that logistics can be such an important component in a countrys economic system? Why or why not? 10% GDP The answer to this question likely depends on a students prior exposure to logistics. A typical student in an undergraduate basic logistics course likely has had limited exposure to and knowledge about logistics and thus would likely be unaware as to logistics impact on a countrys economic system. As such, she/he might be pleasantly surprised to learn that logistics often accounts for at least 10% of a countrys GDP and also is important for economic growth and development. 2. Distinguish between possession, form, time, and place utility. Possession utility refers to the value or usefulness that comes from a customer being able to take possession of a product and can be influenced by the relevant payment terms. Form utility refers to a products being in a form that (1) can be used by the customer and (2) is of value to the customer. Time utility refers to having products available when they are needed by customers while place utility refers to having products available where they are needed by customers. 3. How does logistics contribute to time and place utility? Logistics contributes to time utility by recognizing that different products have different sensitivities to time. For example, a three-day late delivery of bananas likely has more serious consequences than a three-day late delivery of a box of pencils. As for place utility, logistics facilitates products being moved from points of lesser value to points of greater value. 4. How can a particular logistics system be effective but not efficient? Effectiveness can be thought of as how well a company does what they say theyre going to do; efficiency focuses on how well (or poorly) company resources are used to achieve what a company promises they can do. There are a multitude of examples that would illustrate an effective, but not efficient, logistics system. For example, some companies routinely use premium and/or expedited transportationwhich increase transportation coststo meet customer delivery requirements. As such, the company could be considered effective (meeting delivery deadlines) but perhaps not efficient (increased transportation costs).

5. Explain the significance of the fact that the purpose of logistics is to meet customer requirements. One reason for this significance is that meeting customer requirements means that companies must knowrather than assumecustomer needs and wants. This knowledge is facilitated by communication between companies and their customers. Even today some companies are hesitant to communicate with customers. In addition, meeting customer requirements means that a one size fits all approach to logistics will result in some customers being overserved and others being underserved. As a result, companies should consider a tailored logistics approach, where groups of customers with similar logistical needs and wants are provided with the appropriate logistical services. 6. Explain how an understanding of logistics management could be relevant to your favorite charitable organization. 911 There are any number of examples that can be used. Consider the Asian tsunami of late 2004. In a relatively short time, a variety of humanitarian organizations, with the help of private sector companies, were able to get relief supplies as well as food and medicine into the region and distribute them to the affected population. 7. Discuss three reasons for why logistics has become more important since 1980. One reason for the increased importance of logistics involves a reduction in economic regulation. This allowed individual carriers flexibility in terms of pricing and service and provided them with an opportunity to break away from a one size fits all approach. Second, changes in consumer behavior, such as an increasing number of market segments, necessitate flexible rather than rigid logistics systems. Third, technological advances have allowed logisticians to make faster, more informed, and more accurate decisions. The chapter also discusses the growing power of retailers and globalization of trade as reasons for the increased importance of logistics.

8. Which reason for the increased importance of logistics do you believe is most important? Why? There is no single answer here. Students can offer compelling support for any one of the five reasonsa reduction in economic regulation; changes in consumer behavior; technological advances; growing power of retailers; globalization of tradepresented in the chapter. For example, a reduction in economic regulation has allowed carriers to offer different pricingservice options to different customers, which is important because different customers are trying to achieve different objectives with their logistical systems. 9. What are some practical implications of the idea that one logistics system does not fit all companies? The idea that one logistics system does not fit all companies is derived from the fact that logistical goals and objectives should be compatible with the overall goals and objectives of a particular company. One basic implication is that different companies should have different logistical strategies and tacticsand these strategies and tactics should reflect a companys goals and objectives. As such, a company focusing on cost containment should have different logistics strategies and tactics than a company focusing on superior customer service. For instance, a company concerned with cost containment might purchase an extremely large quantity in order to receive cost savings. This decision impacts warehousing and transportation in the sense that the company will likely need a great deal of storage space and will likely utilize volume-oriented transportation providers. Additional implications can be offered. 10. Distinguish between inbound logistics, materials management, and physical distribution. Inbound logistics refers to the movement and storage of materials into a firm; materials management refers to the movement and storage of materials and components within a firm; physical distribution refers to the storage of finished product and movement to the customer. 11. What is the systems approach to problem solving? How is this concept applicable to logistics management? The systems approach to problem solving suggests that a companys objectives can be realized by recognizing the mutual interdependence of the major functional areas such as marketing, production, finance, and logistics. As such, decisions made by one functional area can have important implications for the other functional areas. With respect to logistics, the systems approach suggests that one should recognize the mutual interdependence of the various activities that constitute the logistics function. Thus, a transportation decision may impact inventory, warehousing, and packaging, among others. 12. Explain what is meant by the total cost approach to logistics. The total cost approach to logistics is built on the premise that all relevant activities in moving and storing products should be considered as a whole (i.e., their total cost) and not individually. Use of the total cost approach requires an understanding of cost tradeoffs. In other words, changes to one logistics activity cause some costs to increase and others to decrease. The key to the total cost approach is that all relevant cost items are considered simultaneously when

making a decision. The objective is to find the approach with the lowest total cost that supports the organizations customer service requirements. 13. Define what is meant by a cost trade-off. Do you believe that this concept is workable? Why or why not? A cost trade-off acknowledges that changing patterns or activities of distribution will result in some costs increasing and other costs decreasing. The net effect, however, should be an overall cost decrease for providing a given level of customer service. The remainder of the question asks the student for her/his opinion about the workability of this concept. Although nearly any answer is acceptable, those students who believe that cost tradeoffs are unworkable might have difficulty with many of the concepts presented throughout the text. 14. What are several areas in which finance and logistics might interface? The finance department is often in charge of capital budgeting decisions that would affect logistics, such as materials handling and packaging equipment. Another potential area of finance/logistics interface is with respect to inventory. Key issues include inventory valuation, inventory float, and the fact that finance tends to view inventory from a dollar perspective while logistics tends to be more concerned with the number of units of inventory. 15. Briefly discuss each of the four basic aspects of the marketing mix and how each interfaces with the logistics function. In your opinion, which component of the marketing mix represents the most important interface with logistics? Why? 4P 3R The four basic aspects of the marketing mix are place, price, product, and promotion. With respect to place, a key concern is to provide a certain product at the right time, in the right quantities, and in an undamaged condition. A key component of the pricing decision involves transportation cost factors. Although marketers tend to prefer delivered pricing systems, such systems create logistical challenges in the sense that the seller becomes responsible for product distribution. Product decisions have been complicated in recent years by a marked increase in product offerings. Although these increased offerings allow for greater customer choice, they create logistical challenges in terms of identification, storage, and tracking. Finally, promotion requires close coordination between marketing and logistics particularly when specials are utilized. Failure to have sufficient product availability to support these specials can be especially detrimental to customer goodwill. The remainder of the question asks for students to choose, and support, the most important interface with logistics. Any of the four components is acceptable. 16. Why do marketers tend to prefer FOB destination pricing rather than FOB origin pricing? There are several reasons why marketers like FOB destination pricing. First, it enables a company to expand the geographic area to which its product is sold because distant customers

in a region do not pay the full costs of transportation. Second, because each buyer has the same landed cost, it is easier for a company to apply a uniform retail price on a regional or national basis. Third, because the seller controls the logistics network, it can function in a manner that is most beneficial to the sellers overall objectives. 17. What are several ways in which logistics and production might interface? One important interface involves the length of production runs. Production often favors longer production runs in order to achieve lower production costs per unit. However, this generates large amounts of inventorygenerally the responsibility of logistics. Another interface might occur with respect to the postponement concept in the sense that some value-added activities that were traditionally performed at the production plant are now performed in warehousing facilities. These facilities will need new types of equipment and may need to be configured differently in order to allow the value-added activities to take place. 18. Briefly discuss the ownership, negotiations, financing, promotion, and logistics channel. The ownership channel covers movement of the title to the goods; the goods themselves might not be physically present or even exist. The negotiations channel is the one in which buy and sell agreements are reached and can include telephone, email, and electronic data interchange, among others. The financing channel handles payment for goods and the companys credit, while the promotions channel is concerned with promoting a new or an existing product. Finally, the logistics channel handles the physical flow of the product. 19. Discuss five activities that might be part of a companys logistics department. The chapter presents, and describes, 14 separate activities that might be part of a companys logistics department. Any five of the 14 are acceptable to be discussed by the students. 20. Logistics managers must be both generalists and specialists. Why is this true? Does this help to explain why there tends to be an imbalance in the supply of, and demand for, logistics managers? Logisticians need to be generalists in order to understand the relationship between logistics and other corporate functions, both within and outside the firm. Logisticians also need to be specialists to understand the relationships between various logistics activities, as well as having some technical knowledge of the various activities. This combination of generalist and specialist likely provides a partial explanation for the imbalance in the supply of, and demand for, logisticians in the sense that not everyone is capable of balancing generalist and specialist requirements.

PART III EXAMINATION QUESTIONS CHAPTER 1: LOGISTICS AND THE SUPPLY CHAIN Multiple Choice Questions 1. Logistics as a percentage of U.S. Gross Domestic Product is approximately (within 2%): a. 5% b. 10% c. 15% d. 20% e. none of the above (b; p. 3) 2. Logistics clearly contributes to ___________ and ___________ utility. a. time; place b. form; time c. place; form d. possession; time e. none of the above (a; p. 4) 3. ___________ utility refers to the value or usefulness that comes from a customer being able to take possession of a product. a. Time b. Place c. Form d. Possession (d; p. 4) 4. ___________ utility refers to having products available where they are needed by customers. a. Possession b. Time c. Place d. Form (c; p. 5)

5. All of the following terms have been used to refer to business logistics except: a. business logistics b. industrial distribution c. logistics management d. physical distribution e. all of the above are correct (e; p. 5) 6. How well a company does what it says its going to do represents ___ ________. a. efficiency b. productivity c. leading edge logistics d. effectiveness (d; p. 6) 7. Every customer getting the same type and levels of logistics service refers to ___________. a. tailored logistics b. mass logistics c. effectiveness d. efficiency (b; p. 7) 8. Which of the following is not a reason for the increased importance of logistics? a. growing power of manufacturers b. reduction in economic regulation c. globalization of trade d. technological advances e. all of the above are reasons (a; pp. 710) 9. The ___________ concept suggests that there are an ever-increasing number of market segments with distinct preferences. a. rhochrematics b. relationship marketing c. market demassification d. niche marketing (c; p. 8)

10. ___________ are characterized by large market share and low prices.

a. Category killers b. Mass merchandisers c. Power retailers d. Do-it-yourself (DIY) retailers (c; p. 10) 11. The ___________ approach indicates that a companys objectives can be realized by recognizing the mutual interdependence of major functional areas. a. supply chain b. systems c. interfunctionality d. total cost (b; p. 10) 12. The movement and storage of materials into a firm refers to: a. physical distribution b. materials management c. materials handling d. inbound logistics (d; p. 11) 13. The movement and storage of materials within a firm refers to: a. physical distribution b. inbound logistics c. materials management d. procurement (c; p. 13) 14. Logistics managers use the ___________ approach to coordinate inbound logistics, materials management, and physical distribution in a cost efficient manner. a. total cost b. supply chain c. mass logistics d. interfunctional (a; p. 13)

15. A cost trade-off is a situation where: a. b. c. d. all costs react according to their individual degrees of inflation in the economy all costs are reflected as a percentage variation from standard costs some costs increase, some decrease, and the net effect is that total costs decrease some costs are eliminated by efficient management controls

(c; p. 13) 16. The cash flow associated with holding inventory is known as inventory ___________. a. turnover b. valuation c. stock d. float (d; p. 14) 17. The four basic components of the marketing mix include all of the following except: a. Price b. production c. product d. place (b; p. 14) 4P pricepromotionproductplace

18. __________ refers to one location where customers can purchase products from two or more brandname retailers. a. Intensive distribution b. Co-branding c. Co-generation d. Selective distribution (b; p. 15) 19. Landed costs refer to: a. a product that is shipped via surface transport b. a product that is quoted cash on delivery (COD) c. a prepaid shipment d. a price that includes both the cost of the product plus transportation to the buyer (d; p. 15)

20. Phantom freight refers to: a. paying more for transportation than the actual cost b. late shipments c. shipments accepted by non-certified carriers d. freight that disappears in transit (a; p. 16) 21. Freight absorption refers to: a. a special rate to cover increasing fuel costs

b. rates that are higher than other carriers charge c. the ability of cardboard to absorb moisture d. transportation payments lower than the actual costs incurred to ship the product (d; p. 16) 22. In FOB origin pricing, all of the following are true except: a. prices quoted do no include transportation to the consignee b. marketers can adopt uniform prices on a regional or national basis c. consignees must arrange for the transportation of the purchased product d. the seller always receives the same net from each sale (b; pp. 15-16) 23. ___________ refers to a situation where the applicable charges are paid at the time a shipment is tendered to a carrier. a. Freight prepaid b. Freight absorption c. Phantom freight d. FOB origin (a; p. 16) 24. __________ refers to charges being paid at the time of shipment delivery. a. Freight absorption b. Freight yield c. Freight collect d. FOB destination (c; p. 16)

25. The most common interface between production and logistics generally involves: a. the use of plastic versus wood pallets b. the mode of transportation c. shipment pricing d. the length of production runs (d; p. 18) 26. ___________ refers to the delay of value-added activities such as assembly, production, and packaging to the latest possible time. a. Building blocks b. Deferral c. Demurrage

d. Postponement (d; p. 19) 27. Which of the following is not part of the marketing channel? a. the logistics channel b. the negotiations channel c. the promotion channel d. the finance channel e. all are part of the marketing channel (e; p. 19) 28. The ownership channel consists of all parties except: a. customers b. manufacturers c. wholesalers d. retailers (a; p. 19) 29. The ____________ channel handles the physical flow of product. a. ownership b. negotiations c. logistics d. promotions (c; p. 19)

30. Which channel covers the movement of title to the goods? a. promotions b. logistics c. finance d. ownership (d; p. 20) 31. ____________ is bringing together similar stocks from different sources. a. Accumulating b. Assorting c. Auditing d. Allocating (a; p. 21) 32. ____________ refers to breaking a homogenous supply into smaller lots.

a. Sorting out b. Allocating c. Accumulating d. Assorting (b; p. 21) 33. Channel intermediaries: a. assume temporary ownership of the goods b. fill niches c. disappear as the market becomes organized d. tend to lack focus (b; p. 21) 34. The most common logistical intermediary is a: a. cargo surveyor b. freight forwarder c. freight broker d. bank (finance company) (b; p. 22)

35. The most costly logistics activity in many firms is ____________. a. industrial packaging b. warehousing management c. order management d. transportation management (d; p. 24)

True-False Questions 1. Absolute and relative logistics costs in relation to Gross Domestic Product vary from country to country. (True; p. 3) 2. Logistics clearly contributes to time and form utility. (False; p. 4) 3. The current definition of logistics, as promulgated by the Council of Supply Chain Management Professionals, suggests that logistics is part of the supply chain process. (True; p. 6)

4. Logistics is only concerned with forward flows, that is, those directed towards the point of consumption. (False; p. 6) 5. The purpose of logistics is to maximize customer service. (False; p. 7) 6. In mass logistics, groups of customers with similar logistical needs and wants are provided with logistics services appropriate to those wants and needs. (False; p. 7) 7. Logistical principles apply only to for-profit organizations. (False; p. 7) 8. Market demassification suggests that an ever-increasing number of market segments has distinct preferences. (True; p. 8) 9. The Internet has done little to improve logistical effectiveness and efficiency. (False; p. 9) 10. Superior logistics is an essential component of corporate strategies for many power retailers. (True; p.10) 11. Inbound logistics refers to the movement and storage of materials into a firm. (True; p. 11) 12. Physical distribution is synonymous with materials management. (False; p. 13) 13. Interfunctional logistics attempts to coordinate inbound logistics, materials management, and physical distribution in a cost efficient manner that supports an organizations customer service objectives. (False; p. 13) 14. The key to the total cost approach is that all relevant cost items are considered simultaneously when making a decision. (True; p. 13) 15. The key aspect of the total cost approach is to maximize customer satisfaction. (False; p. 13 ) 16. The finance department tends to measure inventory in terms of units while logistics tends to measure inventory in terms of its cost / value. (False; p. 14 ) 17. Logistics offers many companies an important route for creating marketing superiority. (True; p.14) 18. Co-branding is a retailing strategy that is associated with place decisions. (True; p. 15) 19. Landed costs refer to the price of a product at the source. (False; p. 15) 20. As a general rule, marketers prefer FOB origin pricing rather than FOB destination pricing. (False; p. 16) 21. Phantom freight and freight absorption are associated with FOB origin pricing. (False; p. 16) 22. Stockouts refer to a situation where a company is out of an item at the same time that there is demand for that item. (True; p. 18)

23. Long production runs sometimes result in excessive inventory of products with limited demand for them. (True; p. 18) 24. Postponement is the delay of value-added activities such as assembly, production, and packaging to the latest possible time. (True; p. 19) 25. Most decisions made within channels are for repeat purchases. (True; p. 20) 26. The negotiations channel is the one where buy and sell agreements are reached. (True; p. 20) 27. The financing channel handles a companys credit and payment for goods. (True; p.20 ) 28. There is no linkage between the promotions and logistics channel. (False; p. 21) 29. The most significant contribution that the logistics channel makes to the overall channel process is the sorting function. (True; p. 21) 30. The sorting function has four steps. (True; p. 21) 31. The sorting function takes place between retailers and the consumer. (False; p. 21) 32. The retailer is the most important channel intermediary in the ownership channel. (False; p. 21) 33. Intermediaries assume ownership of goods while theyre in the marketing channel. (False; p. 21) 34. A broker is a type of intermediary often associated with the negotiations channel. (True; p. 24) 35. Advertising agencies are a channel intermediary that might be found in the promotions channel. (True; p. 22) 36. Export management companies are the most common intermediary in the logistics channel. (False; p. 22) 37. Inventory management represents the most costly logistics activity in many organizations. (False; p. 27) 38. Returned products represent one type of activity in the logistical channel. (True; p. 24) 39. It is better for a logistics manager to be a generalist rather than a specialist. (False; p. 25) 40. There are relatively few opportunities for employment in the logistics sector. (False; p. 25)

PART IV CASE SOLUTIONS Cases are included at the end of each chapter. They vary in length, difficulty, and type of problem addressed, and some students may find them to be difficult. All of these cases have been pre-tested in one or more classes. The answers given here are based on what were considered to be complete (although not exhaustively thorough) student responses. Instructors should develop their own techniques for using the cases. Many can serve as the basis for detailed and lengthy classroom discussions. Many of the cases can be used for examination purposes, although many of the questions have more than one single correct answer. Previous adopters of our text have wondered about an ideal length for written answers to the various case questions. We hesitate to offer such guidance in part because the ideal length depends on a variety of factors. For example, if the written answers are a type of extra credit that can be earned, then shorter answers are likely preferable to longer ones. Alternatively, if the cases are used for examination purposes, then longer answers might be preferable to shorter ones. Several of the cases can be analyzed using commonly-used software packages such as Excel and we suggest that instructors familiarize themselves with the software and its application to the relevant case PRIOR to assigning the case. Such instructor preparation is important and necessary because todays college student is far more computer literate than in the past. Cases must be carefully read because key facts may be hidden. Instructors should clearly indicate how much additional data, not in the text of the original case, could be incorporated into each case analysis and its answers. For instance, a student who has worked in a warehouse may attempt to reference her or his own experiences in related situations. Answers for each question are included in this section of the manual. It is indicated here alternative answers are acceptable. Finally, a few discussion points the instructor might raise are included for some cases.

CASE 1-1 SUDSY SOAP, INC. Question 1: Assume that you are Frank Johnsons assistant, and he asks you to look into various scheduling problems that might occur. List and discuss them. First, extra time will be needed to put the dishes in the packages. How will this affect production schedules? How must production and delivery be altered to ensure that all geographic markets, including Hawaii (if it is to be included in the TV campaign), receive the same dish items in the same week? In addition, will packages have special printing that tell what type of dish they contain? If so, there will be problems coordinating the same dishes with the same packages. Question 2: What packaging problems, if any, might there be? Will one package hold all five dishes, or will some require a unique package size (which will rule out the proposal)? What external changes in printing on the package will be needed? Will the packages safely transport the dishes? Will the changed weight of packages have an impact on handling, or on transportation costs? Question 3: Many firms selling consumer goods are concerned with problems of product liability. Does the dish offer present any such problems? If so, what are they? Can they be accommodated? First, breakage. Who reimburses the customer, who pays for soap, and who discovers broken glassware inside? If there are delivery snags or supply problems, what responsibility is there to provide consumers with dishes they could not obtain during the promotion? Does the firms product liability insurance cover problems that may occur from the dinnerware promotion? Question 4: Should the exterior of the Sudsy Soap package be altered to show what dish it contains? If so, who should pay for the extra costs? The package should be altered externally to remind the customer of the promotion and indicate that there is a free item inside. Because the dish-maker gets free advertising from the soap packages, they should pay part of the costs. The splitting of these costs is subject to negotiation and would depend upon the overall agreement between the two firms.

Question 5: Assume that you are another one of Johnsons assistants and your principal responsibility is managing the inventories of all the firms inputs, finished products, and outbound inventories. What additional work will the dish proposal cause for you? There might be a rise in sales, an increased need for all inputs into production, as well as need for higher capacity and inventories. There would need to be an estimate of the possible sales increase, demands imposed by new delivery requirements, and the change in package size and weight. In addition, incoming dishes would need to be monitored, as would specially-printed

packages and outgoing packaged soap (classified by the type of dish inside). After the promotion, by how much, and for how long, will soap sales decline? Question 6: You are Mr. Beever. Your staff has given many objections to the dish tie-in proposal, but you believe that much of the problem is your staffs reluctance to try anything innovative. Draft a letter to the company thatalthough not accepting their proposalattempts to clarify points that may be subject to misinterpretation and also takes into account some of your staffs legitimate concerns. Some of the points the letter would cover include: a) If we cannot fulfill delivery on schedule to all markets, to have the dishes in the right place when your TV campaign breaks, are we liable to you? To the customer? b) What if the dishes break in route from you to us? c) What quality assurance of your dinnerware product can you provide? d) If, for some reason, a customer cannot find pieces for an entire place setting, will you supply them missing pieces? At what cost? We dont want any backlash against our company and soap product. e) Who pays the freight and insurance charges to get the dishes to our factory? f) Who pays for our increased packaging and handling costs? g) Who pays for the increased costs caused by complications added to our scheduling of outbound shipments? h) What is the content of the TV campaign? What shows will it appear on? How much mention will be made of our product? How, if at all, will our soap packages be shown on TV? i) Who will pay for the redesign of our packages? j) Will there be import duties on the dinnerware? Will we be reimbursed for paying them? k) Will you assume any liability in case we are sued because of something resulting from this promotion?

DISCUSSION Several instructors use this case early in the course, and then as part of the final examination.

CASE 1-2 KIDDIELAND AND THE SUPER GYM Question 1: List and discuss the advantages and disadvantages of purchasing a two-wheeled trailer for each store to use for delivering Super Gyms. Because the stores are in a number of states, one would have to check the motor vehicle and insurance requirements of each state. An advantage is that deliveries would be under the control of each store. A disadvantage may be labor costs, especially if two workers are needed to make the delivery. Also, once at the site, the stores employees might be asked to assist in the assembly of the gym. 70 Question 2: List and discuss the advantages and disadvantages of having local trucking companies deliver the Super Gym from the retail stores to the customers. There are probably no disadvantages to using a local trucking company to make the delivery. A decision would have to be made how to handle the trucking firms charges. Question 3: List and discuss the advantages and disadvantages of stocking Super Gyms at the distribution centers and then having the truck that make deliveries from the distribution center to the retail stores and also make deliveries of Super Gyms to individual customers. The problem here focuses on the size of equipment; the large tractor-trailer combinations are not suited to making home deliveries. The actual costs to KiddieLand of using trucks this way might be very high. There might be some savings in inventory costs by stocking the gyms at the distribution center rather than at each retail store. Question 4: List and discuss the advantages and disadvantages of charging the customer for home delivery if they are unable to carry the Super Gym home. Perhaps the one advantage to charging for home delivery is that KiddieLand recoups the associated costs. However, because charged home delivery will add to the customers total purchase price, there could be a reduction in demand or this could generate customer dissatisfaction. Kiddieland Kiddieland Question 5: Which alternative would you prefer? Why?

The student can choose any alternative. However, the text of the case seems to prefer the use of a local trucking company and charging the customer for home delivery. Question 6: Draft a brief statement (catalog copy) to be inserted in the firms spring/summer brochure that clearly explains to the potential customers the policy that is recommended in question 5. The brochure is intended for use in all stores, so whatever copy is prepared must be widely applicable. A sentence might read: The Super Gym comes unassembled and is packed in three boxes: one weighing ____ pounds, is ____ inches by ____ inches by ____ inches; the second weighs ____ pounds, is ____ inches by ____ inches by ____ inches; and the third weighs ____ pounds, and is ____ inches by ____ inches by ____ inches. Assembly requires the following tools: ____; ____; ____; and ____. XX kg XX cm XX XX kg XX cm XX XX kg XX cm XX XX XX Question 7: In the first meeting Toth asked about SUVs but there was no further mention of them. How would you follow up on his query? Anyone in the group could answer that sport utility vehicles have more carrying capacity than autos and many also have trailer-hitches. SUVs are sufficiently popularparticularly in the United Statesthat almost every buyer of the Super Gym equipment would either have a SUV, or be able to borrow one. SUV sport utility vehicles SUV PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 2: THE SUPPLY CHAIN MANAGEMENT CONCEPT 1. Discuss the differences between supply chain and supply chain management. A supply chain refers to the activities associated with the flow and transformation of goods from the raw material stage, through to the end user, as well as the associated information flows. Supply chains are not a new concept in the sense that through the years organizations have been dependent on suppliers and organizations have served customers. Although any

organization can be part of a supply chain, supply chain management requires overt management efforts by the organizations in the supply chain. Moreover, supply chain management cannot be successful unless the participating companies adopt an enterprise-toenterprise perspective. 2. Discuss the SCOR and GSCF models of supply chain management. The SCOR model identifies five key processesplan, source, make, deliver, and return associated with supply chain management. Each of the five processes indicates the important role of logistics in supply chain management. There are eight relevant processes in the GSCF modelcustomer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, supplier relationship management, product development management, and returns management. Logistics also plays an important role in the supply chain processes in the GSCF model. 3. What are four key attributes of supply chain management? The chapter discussed six key attributes of supply chain management: customer power; a longterm orientation; leveraging technology; enhanced communication across organizations; inventory control; interorganizational coordination. 4. Why do contemporary supply chains need to be fast and agile? First, fast encompasses a time/speed component, while agile focuses on an organizations ability to respond to changes in demand with respect to volume and variety. Fast and agile are important attributes of contemporary supply chains in part because customer needs and wants change relatively quickly. Failure to be fast and agile can result in decreased market share, reduced profitability, lower stock price, and/or dissatisfied customers for supply chain participants.

5. What is the difference between relational and transactional exchanges? Which is more relevant for supply chain management? Why? Relational exchanges tend to emphasize a long-term orientation, while transactional exchanges have a short-term orientation. Unlike transactional exchanges, relational exchanges are characterized by attributes such as trust, commitment, and dependence, among others. Supply chain management suggests that supply chains exist to improve the long-term performance of the individual companies and the supply chain as a whole. Relational exchanges also have a long-term orientation. As a result, relational exchanges are more relevant than transactional exchanges to supply chain management. 6. This chapter suggests that technology has been at the center of changes taking place that affect the supply chain. Do you agree or disagree? Why? Although students can support either side of the argument, the text does argue that technology has been at the center of changes taking place that affect the supply chain. In particular, increases in computing power and the Internet have been behind much of this change.

7. Discuss the impact of the Internet on supply chain management. The Internet can facilitate supply chain effectiveness and efficiency by providing opportunities to simultaneously improve customer service and reduce logistics costs. The Internet allows one supply chain party to have virtually instantaneous visibility to the same data as do other supply chain participants. This can ultimately result in lower inventories and improved profitability throughout the supply chain. 8. Discuss some of the ways that inventory can be reduced in the supply chain. Ways to reduce inventory in the supply chain include, but are not limited to, smaller, more frequent orders; the use of premium transportation; demand-pull (think of Dell Computers), as opposed to supply-push, replenishment; the elimination or consolidation of slower-moving products. 9. Do you agree that supply chain collaboration can be classified as transactional, tactical information sharing, or strategic in nature? Why? Students could argue that supply chain collaboration is not transactional, tactical information sharing or strategic in nature, but the text argues for this classification scheme.

10. How might regulatory and political conditions act as barriers to supply chain management? With respect to regulatory conditions, a number of todays supply chain arrangements were illegal until the early 1980s. At a minimum, companies should be aware of regulatory considerations before pursuing supply chain arrangements. Political conditions such as war and governmental stability can also act as barriers to supply chain management. War, for example, could easily disrupt well-established supply chains. Government policies that either discourage interorganizational coordination or discourage doing business with certain countries which would have a negative impact on supply chain efficiency. 11. Why is top management commitment necessary for successful supply chain management? Top management has the ability to allocate the necessary resources for supply chain endeavors and top management has the power to structure, or restructure, corporate incentive policies to focus on achieving organizational or interorganizational (as opposed to functional) objectives. 12. Some companies are hesitant to use frequent shopper cards because the data provided could violate the customers privacy. Do you agree or disagree? Why? Although either answer is acceptable, the question of data usage versus customer privacy has generated impassioned discussions by students. On the one hand, the frequent shopper cards can provide a plethora of data about the shopping habits of particular consumers, potentially allowing stores to achieve customized marketing for individual customers. At the same time, frequent shopper cards could violate customer privacy in the sense that certain customers might

be uncomfortable that stores have access to such detailed data about them, particularly if the data includes frequent purchases of potentially embarrassing products (e.g., laxatives). 13. Discuss the best of breed and single integrator approaches. In a single integrator approach, all relevant software applications (e.g., inventory management, transportation management, warehouse management, etc.) are provided by a single vendor. One advantage of this approach is that there should be coordination across the various applications. Alternatively, a best of breed approach chooses the best application for a particular function and this approach often requires additional software packages to coordinate the different applications.

14. Do you think corporate cultures are relevant for supply chain management? Why or why not? Again, either answer is adequate. However, the text indicates that incompatible corporate cultures could present potential obstacles to effective and efficient supply chain management. In addition, manifestations of corporate cultures, such as company rituals, company brochures, and the like, can provide important clues about the ability of potential supply chain parties to work together. 15. Why is supply chain integration so difficult in global supply chains? Integration challenges in global supply chains include cultural, economic, technological, political, spatial, and logistical differences. Global supply chains translate into both longer, and more unpredictable, lead times for shipments, which increases the chances that customer demand might not be fulfilled due to a potential out-of-stock situation. 16. Discuss the three primary methods that organizations can use to integrate their supply chains. One method is vertical integration, in which one organization owns multiple participants in the supply chain. Sherwin-Williams, for example, is a paint manufacturer and also owns retail paint stores. A second method involves formal contracts among various participants, such as occurs with franchising. The third method focuses on informal agreements among various organizations to pursue common goals and objectives. This option provides a great deal of flexibilitywhich can have both positive and negative aspects. 17. Discuss the factors that distinguish contemporary third-party logistics from earlier types of thirdparty logistics. For one, there tend to be formal contracts (generally 35 years) between providers and users. Contemporary third-party logistics also tends to be characterized by a relational focus, an emphasis on mutual benefits, and the availability of customized (as opposed to standardized) offerings. In short, contemporary third-party logistics has a decidedly long-term outlook, as opposed to shopping around for the best deal at the present time. 18. What are some reasons for using third-party logistics services? What are some reasons that thirdparty logistics arrangements arent always successful?

The decision to use third-party logistics services can be driven by strategic considerations in the sense that an organization believes that one or more aspects of its supply chain needs to be transformed. Alternatively, the decision to use 3PL services could be more tactical in nature; an organization might have an inefficient distribution network as well as an inability to control costs, among other reasons. Reasons for unsuccessful 3PL arrangements include unreasonable and unrealistic expectations and a lack of flexibility. 19. Do you agree or disagree with the sentiment that fourth-party logistics companies (lead logistics providers) merely add unnecessary cost and few service improvements to supply chains? Why? Either answer is acceptable. Because fourth-party logistics is a relatively new concept, it may be too early to have a good idea as to the ultimate role(s) that these intermediaries will play in effective and efficient supply chains. Their usefulness could be limited if they continue to be best suited to large companies with global supply chains. 20. Discuss the various types of supply chain software. Some software packages focus on specific functional areas such as reverse logistics, transportation, warehousing, or inventory management. Other software packages focus on specific supply chain processes such as customer relationship management or collaborative planning, forecasting, and replenishment. Still other packages attempt to simultaneously optimize supply chain processes across organizations.

PART III EXAMINATION QUESTIONS CHAPTER 2: THE SUPPLY CHAIN MANAGEMENT CONCEPT Multiple Choice Questions 1. According to Professor Mentzer and colleagues, the supply chain concept originated in what discipline? a. marketing b. operations c. logistics d. production (c; p. 33) 2. The supply chain management philosophy emerged in which decade? a. 1960s b. 1970s c. 1980s d. 1990s (d; p. 33) 3. A ____________ encompasses all activities associated with the flow and transformation of goods from the raw material stage, through to the end user, as well as the associated information flows. a. production line b. supply chain c. marketing channel d. warehouse (b; p. 34) 4. Although nearly any organization can be part of a supply chain, supply chain management requires: a. the involvement of third-party logistics companies b. overt management efforts by the organizations in a supply chain c. the participation of world-class organizations d. at least one organization to be a multinational company (b; p. 35)

5. Two of the most prominent supply chain management frameworks are the Supply-Chain Operations Reference (SCOR) model and the ____ model. a. Council of Supply Chain Management Professionals (CSCMP) b. Supply Chain Efficiency (SCE)

c. Global Supply Chain Forum (GSCF) d. Penn State University (PSU) (c; p. 35) 6. Which of the following is not one of the processes in the SCOR model? a. sell b. plan c. make d. return (a; p. 35) 7. The current Global Supply Chain Forum (GSCF) model identifies ____________ key processes associated with supply chain management. a. five b. six c. seven d. eight (d; p. 35) 8. Which of the following are not key attributes of supply chain management? a. inventory control b. leveraging technology c. customer power d. a long-term orientation e. all are key attributes (e; p. 36) 9. Contemporary supply chains should be fast and ____________. a. lean b. agile c. interactive d. relevant (b; p. 37)

10. Contemporary supply chains should be agile and ____________. a. fast b. lean c. interactive d. relevant (a; p. 37)

11. An organizations ability to respond to changes in demand with respect to volume and variety refers to ____. a. responsiveness b. leanness c. agility d. relevancy (c; p. 37) 12. What is a perfect order? a. simultaneous achievement of relevant customer metrics b. an order that arrives on time c. an order that arrives undamaged d. an order that is easy for the receiver to fill (a; p. 38) 13. Which of the following is not associated with relational exchanges? a. independence b. trust c. commitment d. shared benefits (a; p. 38) 14. Positive, long-term relationships between supply chain participants refer to: a. co-opetition b. tailored logistics c. partnerships d. supply chain management (c; p. 38)

15. According to the text, ____________ has been at the center of the changes taking place that affect the supply chain. a. logistics b. warehousing c. technology d. customer power (c; p. 38) 16. The two key factors that have sparked much of the technological change affecting supply chains are ____________ and ____________.

a. EDI; ERP b. Computing power; ERP c. EDI; Internet d. Computing power; Internet (d; p. 38) 17. The bullwhip effect: a. is an ineffective way to motivate warehouse employees b. applies to rodeos and has nothing to do with supply chain management c. refers to the swaying motion associated with triple trailers d. refers to variability in demand orders among supply chain participants (d; p. 39) 18. The variability in demand orders among supply chain participants: a. cannot be controlled b. refers to the bullwhip effect c. can be controlled with electronic order placement d. is more pronounced in relational exchanges (b; p. 39) 19. Which of the following is not a way to reduce inventory levels? a. supply-push replenishment b. smaller, more frequent orders c. use of premium transportation d. elimination of slower moving products (a; p. 39)

20. Cooperative supply chain relationships developed to enhance the overall business performance of both parties is a definition of: a. third-party logistics b. supply chain collaboration c. dovetailing d. relationship marketing (b; p. 41) 21. Supply chain collaboration can be classified as transactional, strategic, or ____ in nature. a. operational b. superorganizational c. managerial d. tactical information sharing (d; p. 41)

22. ____ collaborations offer the best opportunity for improving supply chain performance. a. Transactional b. Strategic c. Tactical information sharing d. Operational (b; p. 41) 23. Which of the following is false? a. top management commitment is essential if supply chain efforts are to have any chance of success b. some companies are uncomfortable with the concept of customer power in supply chains c. senior management commitment to supply chain management occurs in one of every two organizations d. some companies are hesitant to enter into long-term relationships because such relationships might be perceived as limiting a companys operational flexibility e. all are true statements (c; p. 42)

24. Which of the following is not a barrier to supply chain management? a. regulatory and political considerations b. lack of top management commitment c. reluctance to share, or use, relevant data d. incompatible corporate cultures e. all are barriers (e; pp. 4244) 25. Data mining: a. is illegal in the United States b. is synonymous with marginal analysis c. looks for patterns and relationships in relevant data d. can only be done by grocery stores (c; p. 43) 26. Looking for patterns and relationships in relevant data refers to: a. b. c. d. data warehousing marginal analysis correlation analysis data mining

(d; p. 43) 27. In a(n) ____ approach, all relevant software applications are provided by a single vendor. a. single integrator b. captive customer c. information outsourcing d. customer centric (a; p. 43) 28. ____ refers to how we do things around here and reflects an organization's vision, values, and strategic plans. a. Supply chain management b. Organizational behavior c. A mission statement d. Corporate culture (d; p. 43)

29. Which of the following is not a routine occurrence in global supply chains? a. documentation errors b. incomplete shipments c. packaging errors d. failure to follow order guidelines e. all of the above are routine occurrences (e; p. 44) 30. Supply chains can be integrated by having various parties enter into and carry out long-term mutually beneficial agreements. These agreements are known by several names. Which of the following is not one of these names? a. partnerships b. strategic alliances c. third-party arrangements d. contract logistics e. all of the above are correct (e; p. 44) 31. There are three primary methods that organizations can pursue when attempting to integrate their supply chains. Which of the following is not one of them? a. b. c. d. vertical integration intensive distribution formal contracts informal agreements

(b; p. 45) 32. All of the following are factors that distinguish contemporary third-party logistics from earlier efforts except: a. there tends to be a formal contract in contemporary 3PL b. contemporary 3PL focuses on customized offerings c. contemporary 3PL has a transactional focus d. contemporary 3PL focuses on mutual benefits (c; p. 46) 33. Which of the following statements is true? a. 3PL services are not used outside of Western Europe and North America b. The decision to use third-party logistics can only be strategic in nature c. Contemporary 3PL began to emerge in the 1970s d. A common cause of 3PL failure is unreasonable and unrealistic expectations e. None of the above are true (d; pp. 46-47) 34. What is a fourth-party logistics provider? a. a third-party logistics provider that has been in existence for at least 25 years b. a third-party logistics provider that has achieved ISO 9000 certification c. a logistics intermediary that specializes in one logistics activity (e.g., transportation, warehousing) d. a general contractor that coordinates the activities of third-party logistics providers (d; p. 47) 35. Which of the following statements about supply chain software is false? a. many supply chain software packages are developed for specific, rather than general, applications b. supply chain software packages can focus on specific functional activities such as transportation and warehousing c. supply chain software packages can focus on specific supply chain processes such as customer relationship management d. supply chain software packages can attempt to simultaneously optimize supply chain processes across organizations e. all are true (a; p. 48) True-False Questions 1. The supply chain concept originated in the logistics literature. (True; p. 33) 2. Customers are not included as part of supply chains. (False; p. 34)

3. Supply chain management requires overt management efforts by the organizations within the supply chain. (True; p.35) 4. Two of the more prominent supply chain management frameworks are the Supply-Chain Operations Reference (SCOR) and Global Supply Chain Forum (GSCF) models. (True; p. 35) 5. The SCOR model identifies four key processes associated with supply chain management. (False; p. 35) 6. Because customer needs and wants change relatively quickly, supply chains should be fast and lean. (False; p. 37) 7. With respect to supply chains, relevancy focuses on an organizations ability to respond to changes in demand with respect to volume and variety. (False; p. 37) 8. A perfect order simultaneously achieves relevant customer metrics. (True; p. 38) 9. Supply chains should employ a long-term orientation with various participants. (True; p. 38) 10. Relational exchanges cannot be successful without information sharing among various participants. (True; p. 38) 11. Power retailers have been at the center of changes taking place that affect the supply chain. (False; p. 38) 12. The Internet has been referred to as the greatest force of commodization known to man, for both goods and services. (True; p. 39) 13. Enhanced communications across organizations in a supply chain is only dependent on the technological capabilities of the organizations. (False; p. 39) 14. Variability in demand orders among supply chain participants is known as the bubble effect. (False; p. 39) 15. Inventory control in supply chain management is attempting to move from stops and starts to continuous flow. (True; p. 39) 16. Supply chain disruptions (e.g., terrorist attacks, natural disasters) have caused some supply chains to reassess their emphasis on inventory reduction. (True; p. 40) 17. As a general rule, supply chain collaboration is widely and successfully applied. (False; p. 41) 18. Tactical information sharing offers the best opportunity for improving supply chain performance. (False; p. 41) 19. Regulatory considerations present a bigger obstacle than political considerations to supply chain management. (False; p. 42)

20. The overall global climate for business has shifted toward allowing more cooperation among firms which should help supply chain management. (True; p. 42) 21. Top management is sometimes hesitant to fully commit to supply chain management. (True; p. 42) 22. Actual senior management commitment to supply chain management occurs in one of every two organizations. (False; p. 42) 23. One cause of the bullwhip effect is asymmetrical information among supply chain participants. (True; p. 43) 24. Data warehousing is a technique that looks for patterns and relationships in the relevant data. (False; p. 43) 25. Although customer loyalty programs (e.g., frequent shopper cards) can provide highly detailed data to companies, there are some who believe that these programs potentially violate a customers right to privacy. (True; p. 43) 26. Today, computer hardware is a larger barrier than computer software to interorganizational collaboration. (False; p. 43) 27. A best-of-breed approach chooses the best software application for a particular function. (True; p. 43) 28. Corporate cultures should not be considered when designing a supply chain. (False; p. 43) 29. Supply chain integration tends to be more challenging in global, as opposed to domestic, supply chains. (True; p. 44) 30. An individual firm can only be involved in one supply chain at a time. (False; p. 44) 31. Vertical integration is one of the methods that organizations can pursue when attempting to integrate their supply chains. (True; p. 46) 32. Contemporary third-party logistics has existed since about 1975. (False; p. 46) 33. Contemporary third-party logistics tends to be characterized by standardized, as opposed to customized, offerings. (False; p. 46) 34. Indications are that third-party logistics will become increasingly important in parts of the world such as Eastern Europe and Asia. (True; p. 46) 35. Shipment routing and reverse logistics are common activities demanded by third-party logistics customers. (False; p. 46) 36. The decision to use third-party logistics companies can be driven by strategic or tactical considerations. (True; pp. 46-47)

37. A fourth-party logistics provider should be viewed as a company whose primary purpose is to insure that third-party logistics providers are working toward relevant supply chain goals. (True; p. 47) 38. The fourth-party logistics concept appears to be best suited to small companies that need logistical assistance in only one or two functional areas. (False; p. 47) 39. As a general rule, supply chain software packages look to coordinate and integrate functions, processes, and/or systems across multiple supply chain participants. (True; p. 47) 40. The supply chain software market has been characterized by a great deal of consolidation in recent years. (True; p. 48)

PART IV CASE SOLUTIONS CASE 2-1 JOHNSON TOY COMPANY Question 1: From the standpoint of an individual concerned with accounting controls, discuss and evaluate Johnson Toy Companys present policies for handling returned items. The controls are poor from the standpoint of accuracy of financial records, because they provide poor information to management. Question 2: Answer question 1, but from the standpoint of an individual interested in marketing. Marketing people tend to favor less stringent controls in the sense that they provide more flexibility when bargaining with retailers. Question 3: Propose a policy for handling returns that should be adopted by the Johnson Toy Company. Be certain to list circumstances under which exceptions would be allowed. Should it apply to the Jungle Jim dolls? One students answer is reproduced here. I. HIGH VOLUME CUSTOMERS (defined as purchasing $75,000 of merchandise from Johnsons per year) A. Functionally damaged goods may be returned to Johnsons plant at Johnsons expense with a full refund. B. High volume customers will receive a straight 2% deduction off of the wholesale selling price to cover defectiveswhether defectives are classified as cosmetically damaged or slow moving items, except when unable to sell due to special circumstances (see Section III). II. LOW VOLUME CUSTOMERS A. Functionally damaged goods may be returned to Johnsons plant via Johnsons salesperson with a full refund. B. Low volume customers will NOT receive an automatic deduction for defectives. Instead, the damage or defect must be defined: 1. Cosmetically damaged goods (classified as functionable and sellable): a 25% discount granted upon inspection by Johnsons salesperson. 2. Slow moving items: NO RETURNS 3. Non-moving items (for reasons other than physical damage): see special circumstances, Section III)

III.

SPECIAL CIRCUMSTANCES When product is not resellable for reasons other than being functionally damaged or just a slow mover in the off season, such as when the product receives bad press (as in the case of Jungle Jim and Jogger Dolls), Johnson will allow return of all such non-resellable items under the following conditions: A. Retailer must pay for the returned merchandise to reach Johnsons plant. B. Retailers account will be credited for the full amount of said purchase. C. Credit is to be used within 30 days of receipt of returned goods at Johnsons plant; credit will be void after 30 days.

No mention was made as to whether it should apply to the Jungle Jim dolls. The firm might try to enforce it but customers might complain that it should not be applied retroactively. Question 4: Should this policy, if adopted, be printed and distributed to all of the retailers who handle Johnson Toy Company products? Why or why not? If it should not be distributed to them, who should receive copies? Yes, retailers should know exactly what the returns policy will be. One element of a customer service policy is to let customers know in advance what the policy is. Question 5: Assume that it is decided to prepare a statement on returns to be distributed to all retailers and that it should be less than a single double-spaced page. Prepare such a statement. The answer provided for question 3 would suffice here as well. Question 6: On the basis of the policy in your answer to question 3, develop instructions for the Johnson Toy Company distribution and accounting departments with respect to their roles and procedures in the handling of returns. One could take the information as developed in answers 3 and 5, and draft a memo to be sent to both the distribution and accounting departments, telling them of the new policies, and their roles in carrying them out. The accounting department should be told to develop additional procedures that will protect against fraud. In addition, other departments in the firm should receive some information concerning the returns, because they may contain information that should interest marketing, quality control and production scheduling. Question 7: Assume that you are Cheryl Guridi, the firms logistics manager. Do you think that the returns policy favored by the logistics manager would differ from what would be best for the firm? Why or why not? Yes, the returns policy favored by the logistics manager will favor a tight return policy so that her department does not have to be responsible for keeping track of returned inventories, and for shipping damaged goods. The firm would probably prefer a looser return policy so that it could be used as a bargaining tool to increase sales. Question 8: Until the policy you recommend in your answer to question 3 takes effect, how would you handle the immediate problem of retailers wanting to return unsold Jungle Jim the Jogger dolls?

There are several approaches to this question. Some students have provided very specific policies. Others have said that because the policy was not in effect when the Jungle Jim dolls went out, it should not apply to their situation. This latter group favored a policy of almost anything that would keep retailers happy. They arguedwith support from the case material that there were a number of valued long-term relationships with retailers that should not be harmed.

CASE 2-2 WYOMO GROCERY BUYERS COOPERATIVE Question 1: Co-op members presently pay for goods on the basis of cost to the co-op plus 23% to cover warehousing and transportation from the warehouses to the members retail stores. Is this a fair way to cover warehousing costs? Can you think of a better way? If so, describe it. This system probably favors the stores that have smaller order sizes and higher transportation costs to reach. Better may or may not be the issue; it is only if one thinks that the rates should be cost-oriented. Question 2: Answer the problem posed in question 1 with respect to transportation costs. The previous answer is applicable here. If one wanted rates oriented toward transportation costs, they might devise a method that takes into account tonnages carried and distances traveled. Question 3: Toward the end of the case, Bright described how some manufacturers pay bribes to get shelf space in retail stores. Should retailers accept such bribes? Why or why not? The bribes are paid in two ways. One is a gift of additional merchandise to be sold, which merely lessens the stores cost of goods purchased. This is sometimes called a stocking allowance. The other way is cash paid to salaried employees, which they would probably pocket. The first method is a fairly common practice; the second method would be viewed by many as wrong and thus should be discouraged. Question 4: The case says, Stores were responsible for placing orders with the co-op, although a co-op representative would call on a weekly basis, and one of her/his functions was to help some store operators complete their order forms. Is this a function that the co-op should be performing? Why or why not? Its a way for the co-op to help some of its members and it also helps to keep certain stores loyal to the co-op. Unless the co-ops board adopts a policy against the practice, then theres nothing wrong with it. The practice can be viewed as a form of customer service. Question 5: The case mentions that some of the larger stores that belonged to the co-op sometimes threatened to form their own co-op. Assume that you are hired by some of them to study the feasibility of such a move. List the various topics that you would include in your study. One could look at all the elements in the distribution system needed to serve the larger co-ops: warehousing, transportation, inventories, order management, etc. Then one would determine the costs serving the larger co-ops and compare these costs to what is presently offered by Wyomo. This is an area where quantity discounts are important: can the new co-op earn large enough discounts on what it buys to have some major savings? Question 6: How would you vote on Hardys motion? Why? A student can vote either way, although freezing the number of SKUs may force the larger members to leave the co-op.

Question 7: Would it make a difference whether you represented a large or small store? Why? Small stores would probably favor the resolution, unless they realized that expansion was necessary for the survival of the co-op. If they lose their larger members, many costs per unit may increase. Question 8: Are there other strategies that the co-op might pursue to overcome this problem? If so, describe. They could get additional product space for some product lines, or arrange to have some large volume orders delivered directly to stores, bypassing the warehouse. PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 3: LOGISTICS AND INFORMATION TECHNOLOGY 1. In what ways can information be helpful in logistics and supply-chain management? There are a number of ways in which information can be helpful in logistics and supply-chain management. These include, but are not limited to, greater knowledge and visibility across the supply chain, which makes it possible to replace inventory with information; greater awareness of customer demand via point-of-sale data, which can help improve planning and reduce variability in the supply chain; better coordination of manufacturing, marketing, and distribution through enterprise resource planning tools; more streamlined order processing and reduced lead times enabled by coordinated logistics information systems. 2. Discuss how your favorite store substitutes information for inventory. There are a number of answers to this question. The book mentions that several U.S.-based grocery chains have studied Hispanic customers and learned that they place greater emphasis on fresh produce than do other ethnic groups. As a result, grocery stores located in heavily Hispanic areas often stock more fresh produce than to grocery stores located in other areas. 3. Name the six general types of information systems, and give one logistics application for each one that youve named. One type is office automation systems, and a logistics application could be spreadsheets that calculate optimal order quantities. A second is communication systems; one logistics example is voice-based order picking. Transaction processing systems are a third general type, with pointof-sale systems being a logistics application. Management and executive information systems are a fourth general type of information systems; a logistics application involves logistics information systems. A fifth general type of information system is decision support systems, with warehouse management systems being a logistics-related application. The sixth, and final, general type of information system is the enterprise system, represented by logistics modules of enterprise resource planning systems.

4. Do you view the spreadsheet as the most relevant general software package for logisticians? Why or why not? The text indicates that spreadsheets are indeed the most relevant general software package for logisticians. Todays spreadsheets allow managers to solve a variety of business problems relatively quickly and inexpensively. Key logistics problems that can now be analyzed by spreadsheets include transportation cost minimization and the optimal number of warehouse locations. 5. How did communication systems facilitate logistics management in the immediate aftermath of situations such as terrorist attacks and natural disasters? One example involves the substitution of information for inventory. The total shutdown of the U.S. aviation system following the terrorist attacks of September 11, 2001 caused many air shipments to be diverted to trucksthus adding to delivery times. Air-freight companies such as FedEx used their communication systems to inform customers that their shipments were being diverted and when the shipments would be arriving. 6. What advances in telecommunications technology do you view as being most beneficial to logistics management? Why? The answer to this question is likely to vary from student to student. Certainly cell phones, email, and wireless communications would be popular choices. 7. Discuss how wireless communications can improve logistical effectiveness and efficiency. Global positioning systems, for example, allow customers to have real-time visibility in terms of shipment locations and these systems also allow transportation companies to keep better track of their vehicles. Voice-based order picking is another wireless technology that offers the opportunity for increased worker productivity and higher pick accuracy. 8. Discuss the benefits and drawbacks of EDI. Potential benefits to EDI include reductions in: document preparation and processing time; inventory carrying costs; personnel costs; information float; shipping errors; returned goods; lead times; order cycle times; and ordering costs. In addition, EDI may lead to increases in: cash flow; billing accuracy; productivity; and customer satisfaction. Potential drawbacks include a lack of awareness of its benefits; high setup costs; lack of standard formats; and incompatibility of computer hardware and software. 9. Do you believe that EDI is a viable technology for contemporary logistics management? Support your answer. Although other technologies such as the Internet and XML offer great promise for logisticians, EDI is likely to continue as a viable technology in part because it reduces costs associated with inventory, order management, and transportation. Indeed, EDI has increased in popularity in the early years of the 21st century. Moreover, there are suggestions that the Internet will be a complement to, rather than a substitute for, EDI.

10. Discuss the relationship between automatic identification technologies and point-of-sale systems. The idea behind point-of-sales (POS) systems is to provide data and enhance managerial decision making, and automatic identification technologies can be very helpful in so doing. At the present time, POS systems involve scanning universal product codes (UPC), and these data are recorded into a database that supplies information such as the products price, applicable taxes, and so on. The specific price for each product, as well as a description, is flashed on a monitor screen near the check-out counter. When all products have been scanned, the customer receives verification that lists the products purchased, their respective prices, and the total bill. 11. Why are some companies hesitant to adopt RFID technology? One prominent drawback to RFID involves privacy concerns such as the inappropriate use of technology. Another drawback to the widespread adoption of RFID is the costs of installing RFID-related hardware and software, particularly the cost of RFID tags (chips). 12. Discuss the importance of timely and accurate information to a logistics information system. Timely information can involve several dimensions. For example, timely can refer to the upto-date status of information, which can be influenced by a companys collection and analyses procedures. Although such information should ideally involve internal and external sources, internal sources of logistics information are not always as plentiful as would be desired. Timely can also refer to how quickly a manager receives the requested information; this is influenced by a companys retrieval and dissemination procedures. Technological advances such as personal digital assistants have facilitated the dissemination of information. Accurate information may reflect the effectiveness and efficiency of a companys logistics information system. This means that a logistics information system needs to consider the nature and quality of the relevant data. For example, although the Internet can be a very cheap source of external information, some Internet information is of questionable validity. 13. The chapter listed 10 logistics simulation what not to dos. Which two do you think are most important? Why? Any two of the simulation what not to dos are appropriate answers. 14. What kind of uses does artificial intelligence have for logistics? Artificial intelligence has been used to manage certain parts inventories for the United States Air Force. A recent logistics-related application of artificial intelligence focused on select issues with highway traffic, including the prediction of urban traffic flows and managing traffic congestion. 15. What is data mining? How might it be used in logistics? Data mining can be defined as the application of mathematical tools to large bodies of data in order to extract correlations and rules; it uses sophisticated quantitative techniques to find hidden patterns in large volumes of data. Data mining has allowed Wal-Mart to discover that when hurricanes are projected to hit the state of Florida, there is a dramatic increase in demand

for beer and Kelloggs Pop Tarts. As a result, Wal-Mart makes sure that additional stocks of these products are available when hurricanes are projected to hit Florida. 16. Discuss advantages and disadvantages of enterprise resource planning systems. ERP systems are attractive because they offer the potential for lower costs and both increased productivity and customer satisfaction. In theory, ERP systems provide an opportunity for all functional areas within a firm to access and analyze a common database. This should allow for enterprise-wide coordination of relevant business processes. One of the most frequently mentioned shortcomings involves the costs of installation, and companies often fail to consider relevant costs such as upgraded hardware and employee training. Moreover, ERP implementation can be quite time consuming; actual implementation times may be 2 to 4 times longer than vendor estimates. Unfortunately, glitches in ERP installations often result in severe logistical problems. 17. How might unsuccessful ERP implementations lead to logistical shortcomings? The book provides an example of ERP implementation problems at a leading manufacturer of home medical products. This company missed shipment deadlines, could not respond to customer inquiries, and had limited information about order status. The order-related problems resulted in a higher-than-normal level of returns associated with incorrect orders and the missed shipments caused the company to spend more for expedited transportation. 18. Refer back to the logistical activities listed in Chapter 1; pick two that you are interested in and research how they have been influenced by the Internet. Are you surprised by your findings? Why or why not? Again, there is any number of acceptable answers for this question. 19. Discuss the advantages and disadvantages of on-demand software. Its pay-per-use formula allows customers to avoid high capital costs, and thus becomes a viable option for many companies that could not afford to purchase, install, and maintain applicationspecific software. Other advantages include faster and less costly installation, a smaller information technology staff, and regular upgrades and updates from the software provider. One drawback is that the regular upgrades and updates can be too frequent and numerous, and customers struggle to keep up with them. There are also limited opportunities for customization and because the Internet is the primary transaction medium, security issues such as data protection can be a concern. 20. From a logistical perspective, what are some differences between online and in-store retailing? Online orders tend to be more plentiful and in much smaller quantities than in-store retailing. Therefore, online retailing requires an order management system capable of handling high volumes of orders. In addition, online shopping is characterized by open-case picking, rather than full-case picking, and this necessitates packaging containers, such as bags and envelopes, which are well suited to holding small quantities of product. The smaller order quantities associated with online retailing tend to favor transport companies with extensive delivery

networks and expertise in parcel shipments. Moreover, return rates for online retailing are higher than in-store retailing and thus online retailers should attempt to make the return process as painless as possible.

PART III EXAMINATION QUESTIONS CHAPTER 3: LOGISTICS AND INFORMATION TECHNOLOGY Multiple Choice Questions 1. Which of the following is not a benefit to utilizing information in logistics? a. greater knowledge and visibility across the supply chain b. greater awareness of customer demand via point-of-sale data c. better coordination of manufacturing, merchandising, and distribution through ERP tools d. more streamlined order processing and reduced lead time e. all are benefits (e; p. 58) 2. How do data and information differ? a. data is a body of facts in a format suitable for decision making, while information is simply facts b. they are the same c. data is simply facts; information is a body of facts in a format suitable for decision making d. data is associated with decision support systems; information is associated with ERP systems (c; pp. 58-59) 3. ____ provide effective ways to process organizational business data, to perform calculations, and to create documents. a. Enterprise resource planning systems b. Transaction processing systems c. Decision support systems d. Office automation systems (d; p. 59) 4. Spreadsheets represent what general type of information management system? a. communication system b. transaction processing system c. decision support system d. office automation system (d; p. 59) 5. The most relevant general software package for logisticians is: a. word processing b. e-mail c. presentation packages

d. spreadsheets (d; p. 59) 6. Which of the following is not considered a general software package? a. spreadsheets b. word processing c. database management d. presentation packages e. all are general software packages (e; p. 59) 7. ____ help various stakeholdersemployers, suppliers, customerswork together by interacting and sharing information in many different forms. a. Office automation systems b. Communication systems c. Transaction processing systems d. Decision support systems (b; p. 60) 8. What has emerged as the measuring stock for logistics information technology in the 21st century? a. the Internet b. electronic data interchange c. wireless communication d. enterprise resource planning systems (c; p. 61) 9. ____ refers to a network of satellites that transmits signals that pinpoint the exact location of an object. a. Global positioning systems b. Geographic information systems c. Electronic data interchange d. Transportation management systems (a; p. 61) 10. All of the following are attributes of contemporary voice-based order picking systems except: a. more costly b. more powerful c. better voice quality d. less cumbersome for workers e. all are attributes (a; p. 61) 11. Electronic data interchange represents what general type of information management system?

a. communication system b. transaction processing system c. decision support system d. office automation system (b; p. 62) 12. ____________ refers to the computer-to-computer transmission of business data in a structured format. a. Data mining b. ERP c. EDI d. VMI (c; p. 62) 13. Which of the following statements about EDI is not true? a. EDI can have high setup costs b. EDI can result in increased inventory carrying costs c. EDI can lead to increased billing accuracy d. The Internet is likely a complement to, rather than substitute for, EDI (b; p. 62) 14. Automatic identification systems are an essential component in ____________. a. every warehouse b. point-of-sale systems c. a logistics information system d. dual distribution (b; p. 62)

15. The most popular automatic identification system currently in use is ___________. a. voice-data entry b. radio frequency identification c. magnetic strips d. bar code scanners (d; p. 63) 16. There has been a great deal of interest in radio-frequency identification (RFID) technology due in part to RFID compliance initiatives championed by Wal-Mart and ____. a. b. c. d. Starbucks The U.S. Department of Defense Procter and Gamble Tesco

(b; p. 63) 17. There are suggestions that widespread adoption of RFID will only occur when the price of readonly tags drops below ____ cents. a. 50 b. 25 c. 10 d. 5 (d; p. 63) 18. A logistics information system begins with: a. a logistics manager requesting information b. a good computer system c. lots of money d. a customer order (a; p. 63) 19. All of the following statements about logistics information systems are true, except: a. timely can refer to the up-to-date status of information b. internal sources of logistics information are relatively plentiful c. timely can refer to how quickly a manager receives requested information d. a LIS must be concerned with the nature and quality of data (b; pp. 63-64)

20. The primary advantage of ____________ is that it enables a firm to test the feasibility of proposed changes at relatively little expense. a. data mining b. expert systems c. simulation d. benchmarking (c; p. 65) 21. The initial focus of many logistics simulation programs is ____________. a. reducing transportation costs b. reducing inventory costs c. reducing warehousing costs d. improving customer service (d; p. 65) 22. ____________ refers to a branch of computer science that studies the computational requirements for tasks such as perception, reasoning, and learning, and develops systems to perform those tasks.

a. Psycho cybernetics b. Data mining c. Artificial intelligence d. Simulation (c; p. 65) 23. All of the following are examples of artificial intelligence, except: a. expert systems b. fuzzy logic c. neural networks d. artesian systems e. all are examples (d; p. 65) 24. Warehouse management systems represent an example of what general type of information management system? a. communication system b. transaction processing system c. decision support system d. office automation system (c; p. 66)

25. Which of the following is not a logistics-related decision support system? a. simulation b. application-specific software c. artificial intelligence d. electronic data interchange transaction processing systems TPS e. all are logistics-related decision support systems (d; pp. 65-66) 26. ____________ refers to the application of mathematical tools to large bodies of data in order to extract correlations and rules. a. Fuzzy logic b. Factor analysis c. Data mining d. Linear regression (c; p. 67) 27. ____ create and maintain consistent data processing methods and an integrated database across multiple business functions. a. Logistics information systems b. Enterprise systems c. Decision support systems d. Transaction processing systems (b; p. 67) 28. The origins of contemporary ERP systems can be traced back to logistics and ____________. a. manufacturing b. marketing c. finance d. accounting (a; p. 67) 29. Which of the following statements about ERP is false? a. ERPs origins can be traced back to finance and manufacturing b. ERP implementation costs can easily reach the tens of millions of dollars c. Top management support is essential for successful ERP implementation d. ERP glitches often have a logistical component to them (a; pp. 67-68)

30. All of the following are potential costs associated with ERP implementation, except: a. employee training b. upgraded computer hardware

c. data conversion d. system testing e. all are costs (e; p. 68) 31. A general rule of thumb is that the actual time to implement ERP systems may range from ____________ to ____________ times longer than the time period specified by the ERP vendor. a. 1 ; 2 b. 2; 3 c. 2; 4 d. 3; 4 (c; p. 68) 32. Research suggests ____________ and ____________ to be the logistics functions with the highest degree of Internet usage. a. transportation; order management b. order management; inventory management c. warehousing; inventory management d. transportation; warehousing (a; p. 69) 33. Perhaps the most popular application of on-demand software involves ____. a. warehouse management systems b. transportation management systems c. collaborative forecasting d. inventory optimization (b; p. 69) 34. Channel disintermediation refers to ____________. a. multiple functions being performed by one intermediary b. fewer ways of distributing a product c. removing intermediaries between producer and consumer d. the emergence of new types of intermediaries (c; p. 69)

35. Which of the following statements is false? a. orders associated with online retailing tend to be for smaller quantities than in-store retailing b. online retailers are challenged by last mile considerations c. online retailing and in-store retailing experience similar rates of product return d. online retailing is characterized by open-case, rather than full-case, picking e. all statements are true (c; p. 70)

True-False Questions 1. The effective and efficient use of information allows organizations to either reduce costs or improve customer satisfaction. (False; p. 58) 2. Data and information are synonymous terms. (False; pp. 58-59) 3. Office automation systems provide effective ways to process personal and organizational business data, to perform calculations, and to create documents. (True; p.59) 4. The most relevant general software package for the logistician is the spreadsheet. (True; p. 59) 5. A transaction processing system helps people work together by interacting and sharing information in many different forms. (False; p. 60) 6. The Internet has emerged as the measuring stick for logistics information technology during the first decade of the 21st century. (False; p. 61) 7. Global positioning systems can be helpful in locating lost or stolen transportation equipment. (True; p. 61) 8. Contemporary voice-based picking systems are less costly than earlier voice-based systems. (True; p. 61) 9. Global positioning systems often pay for themselves within six months. (False; p. 61) 10. In batch processing, data are collected and stored for processing at a later time. (True; p. 61) 11. EDI is an example of a logistics-related transaction processing system. (True; p. 62) 12. The Internet is a substitute for EDI. (False; p. 62) 13. EDI has increased in popularity during the early years of the 21st century. (True; p. 62) 14. The idea behind point-of-sale systems is to provide data to guide and enhance managerial decision making. (True; p. 62) 15. Radio-frequency identification is the most popular automatic identification system currently in use. (False; p. 63) 16. One prominent drawback to radio-frequency identification (RFID) involves privacy concerns. (True; p. 63) 17. It is suggested that widespread adoption of RFID will only occur when the price for read-only chips drops below 5 cents apiece. (True; p. 63)

18. A logistics information system begins with a logistics manager requesting information and ends with the manager receiving regular and customized reports. (True; p. 63) 19. Internal sources of logistics information are not always as plentiful as might be desired. (True; p. 64) 20. With respect to a logistics information system, external information is more important than internal information. (False; p. 64) 21. Timely information can refer to its nature and quality. (False; p. 64) 22. Simulation is an example of a logistics-related decision support systems technique. (True; p. 65) 23. The primary advantage of simulation is that it enables a firm to test the feasibility of proposed changes at relatively little expense. (True; p. 65) 24. Neural networks are a type of logistics information system. (False; p. 65) 25. Application-specific software is a type of decision support system. (True; p. 66) 26. Correlation analysis uses sophisticated quantitative techniques to find hidden patterns in large volumes of data. (False; p. 67) 27. Wal-Mart and its vendors make extensive use of data mining to improve supply chain efficiency and effectiveness. (True; p. 67) 28. The attractiveness of ERP systems comes from their potential for lower costs as well as increased productivity and customer satisfaction. (True; p. 67) 29. The origin of ERP systems can be traced back to finance and manufacturing. (False; p. 67) 30. There are suggestions that consultant fees for ERP implementations may be three times as costly as the software itself. (True; p. 68) 31. A general rule of thumb is that the actual time to implement an ERP system may range from 1 to 2 times longer than the time period specified by the ERP vendor. (False; p. 68) 32. Organizations with successful ERP implementations recognize that ERP requires major changes in the way they operate. (True; p. 68) 33. The Internet offers the potential for both cost reductions and service improvements across and within logistics functions. (True; p. 69) 34. The two logistics functions with highest degree of Internet usage are warehousing and transportation. (False; p. 69) 35. Warehouse management systems are perhaps the most popular logistics-related on-demand software. (False; p. 69)

36. Security issues such as data protection are a key concern with on-demand software. (True; p. 69) 37. Channel disintermediation refers to fewer ways of distributing a product. (False; p. 69) 38. There are few logistical similarities between online and in-store retailing. (False; p. 70) 39. The smaller order quantities occasioned by online retailing tend to favor transport companies with extensive delivery networks and expertise in parcel shipments. (True; p. 70) 40. The return rates associated with e-commerce are quite similar to those associated with other kinds of retailing. (False; p. 70)

PART IV CASE SOLUTIONS CASE 3-1 SPORTS CAR CARE Question 1: If Tayfun had a sixth car to repair/repaint could he fit it inside the 30 working days limit? If so, how long could the repairs and repaint take? Tayfun could not repair/repaint a sixth car within the 30-day limit. The Porsche repairs are finished on Day 28, and its painting occurs on Days 29 and 30. Question 2: Somewhat to his embarrassment, Tayfun suddenly learned that only cars built in the United States were to be shown at Pebble Beach. Luckily, he had some in his stable, though they also would need some repairs and painting/repainting. Following are the five U.S.built cars with their required times for repair and paint/repaint. Cars (Q) Qvale (F) Ford Shelby (O) Olds Toronado (C) Corvette (D) Dodge Viper Repair (days) 4 2 8 1 9 Paint (days) 3 7 6 7 5

Determine the order of the U.S. cars that are going to be taken into repair and repaint. The order is as follows: first is the Corvette, followed by the Shelby. This is followed by the Olds Toronado, and then comes the Dodge Viper. Finally comes the Qvale. Question 3: Draw a Gantt chart of the given work processes. Use Exhibit 3-A as a guide. Question 4: Calculate the total least amount of processing time for the work processes. The least total amount of processing time for the work is 29 days. Question 5: If Tayfun had a sixth U.S. car to repair/repaint, could he fit it inside the 30 days working limit? If so, how long could the repairs and paint/repaint take? Yes, one more car could be added. This car could take 5 days to repair and 1 day to paint/repaint.

CASE 3-2 JUST-IN-TIME IN KALAMAZOO Question 1: What is the total annual cost of maintaining the components inventory under the present system? Current system Average distance from vendor (in miles) 1,145 606 26 22 22 490 1,800 3 48 159 Number of units used each week 10 10 56 6 7 675 9 824 540 570 Average freight cost per unit $20 $18 $3 $20 $15 $2 $11 None $1 $1

Item Gas range Toilet Pump Refrigerator (large) Refrigerator (small) Foam cushion CB radio (type D) Dome lights Awning bracket Insect screen

Current lot size purchased 200 240 125 120 15 1,500 24 1,720 1,200 1,240

Unit cost $100 $80 $16 $110 $95 $8 $136 $2 $4 $7

Current system (continued) Average inventory 100 120 63 60 8 750 12 860 600 Total inventory 140 160 119 66 15 2,100 48 1,684 1,140 Inventory cost $62,400 $50,960 $55,328 $40,560 $40,040 $351,00 0 $68,796 $85,696 $140,40 Inventory carrying charges $3,360 $3,136 $450 $1,716 $319 $4,200 $1,411 $674 $1,140 Inventory maintenance cost $65,760 $54,096 $55,778 $42,276 $40,359 $355,200 $70,207 $86,370 $141,540

Item Gas range Toilet Pump Refrigerator (large) Refrigerator (small) Foam cushion CB radio (type D) Dome lights Awning

Safety stock 40 40 56 6 7 1,350 36 824 540

bracket Insect screen

1,140

620

1,760

0 $237,12 0

$2,816

$239,936

Total inventory maintenance cost per year = $1,151,522

Using JIT Average freight Inventory cost per unit maintenance (surface) cost $22 $66,040 $18 $61,360 $4 $55,328 $25 $43,056 $15 $3 $26 None $1 $2 $36,400 $351,000 $73,008 $171,392 $168,480 $266,760

Item Gas range Toilet Pump Refrigerator (large) Refrigerator (small) Foam cushion CB radio (type D) Dome lights Awning bracket Insect screen

JIT lot size 10 10 7 6 1 75 3 36 60 50

Unit cost $105 $100 $15 $113 $85 $7 $130 $4 $5 $7

Total inventory maintenance cost per year = $1,292,824.00 The table in this case is a 10% sample of the firms inventory and reflects the inputs needed for one weeks activities. We must calculate the average stock on hand for each item (safety stock + order lot size), and must calculate the cost per item (unit cost plus freight). For the first itemgas rangesa safety stock of 40 units is maintained, and the order lot size is 100 units, for a total inventory in stock of 140 units. Unit cost ($100) plus freight ($20) equals $120. Multiplying average inventory (140) times $120 equals $16,800. Doing all the items on table gives a total of $96,175. Because this is a 10% sample, the total parts inventory would be worth $961,750. Inventory carrying costs on this, at 20% per year, would be $192,350. Question 2: What would be the total annual cost of maintaining the components inventory under the JIT system (assuming no safety stocks)? One would look at the average number used per week, but apply the new, usually higher unit costs and freight charges. For one weeks activity shown on the table, the new cost would be $24,862 per week (compared with about $21,818 under the existing system). Hence the cost of the JIT system is higher. Question 3: Should Ballenger take into account any other costs or benefits from the JIT system? If so, what are they? Under a JIT system, Ballenger should exhibit less concern with various problems associated with maintaining a large inventory such as shrinkage and obsolescence. Question 4: If the JIT system is adopted, are there safety stocks of any item that should be maintained? If so, which ones, and how much?

Unfortunately, the case does not provide sufficient information to answer this question. Parts that are crucial to the process would need to be indicated by management, or perhaps work-flow process charts. Question 5: If the JIT system is adopted, what changes, if any, should occur in the relationships between Ballengers firm and his suppliers of components? Discuss. He would need better discipline in terms of prompt delivery and freedom from defects. Question 6: Assume that Ballenger has switched to the JIT system and that he receives a surprise phone call from a competitor who is going out of business. The competitor wants to sell Ballenger 7,000 dome lights of the type listed on Exhibit 3-C. Should Ballenger buy them? If so, at what price? Probably not because this would undermine the discipline envisioned by the JIT system. On the other hand, if the purchase price was very low, and there were no unique storage requirements, Ballenger might buy them. Question 7: Carrying costs are 20%. Is there a level of carrying costs at which both Ballengers present system and a JIT system have similar costs? If so, what is it? Using a basic spreadsheet package, we found that at the astronomical rate of 167%, the two systems were equal. DISCUSSION This is a difficult case although it can be approached in several ways. One must calculate the average costs of all the goods, as they are used each week, plus a figure for inventory carrying costs. PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 4: DEMAND MANAGEMENT, ORDER MANAGEMENT AND CUSTOMER SERVICE 1. What is the relationship between demand management, order management, and customer service? There is a key link between order management and demand forecasting, in that a firm does not simply wait for orders to arrive in order to learn what is happening. Forecasts are made of sales and of the inventories that must be stocked so that the firm can fill orders in a satisfactory manner. There is also a key link between order management and customer service because many organizations analyze customer service standards in terms of the four stages of the order cycle. 2. Discuss the three basic demand forecasting models. Judgmental forecasting involves using judgment or intuition and is preferred in situations where there is limited or no historical data, such as with a new product introduction. Judgmental forecasting techniques include surveys and the analog technique. An underlying assumption of time-series forecasting is that future demand is solely dependent on past demand. Time-series forecasting techniques include simple moving averages and weighted moving averages. Cause

and effect forecasting assumes that one or more factors are related to demand and that the relationship between cause and effect can be used to estimate future demand. Simple regression and multiple regression are examples of cause and effect forecasting. 3. List and discuss several demand forecasting issues. Demand forecasting issues include the situation at hand, forecasting costs in terms of time and money, and the accuracy of various forecasting techniques. With respect to the situation at hand, judgmental forecasting is appropriate when there is little or no historical data. As for time and money, survey research, for example, can cost a great deal of money and/or also take a great deal of time depending on the media. Forecasting accuracy refers to the relationship between actual and forecasted demand, and accurate forecasts have allowed some companies to reduce transportation costs because fewer shipments need to be expedited. 4. Is computer software the panacea for demand forecasting? Why or why not? The text suggests that there have been tremendous advancement in the breadth and computational power of computer software. Nonetheless, software-based forecasting continues to be plagued by inappropriate applications, cost issues and forecast error. Relatively simple software, such as Microsoft Excel, tends to generate relatively unsophisticated forecasts characterized by a great deal of error. Alternatively, highly evolved forecasting software may be too difficult to learn how to use. 5. Define and describe the order cycle. Why is it considered an important aspect of customer service? The order cycle is the elapsed time from when a customer places an order until the customer receives the order. It is an important aspect of customer service in part because the order cycle is frequently used to determine the parameters of customer service goals and objectives. The order cycle is also being used by some firms as a competitive weapon (generally the shorter the better), and technological advances now make it extremely easy (and fast) for customers to determine the exact status of their order(s). 6. What are some causes of order cycle variability? What are the consequences of order cycle variability? Order cycle variability can occur in each stage of the order cycle. For example, order transmittal by mail sometimes results in the mailed item never reaching its intended destination; variability, in the form of unreliable transit times, can occur during order delivery. One consequence of order cycle variability might be an increase in inventory levels to guard against stockouts. If inventory levels are not increased, then stockouts could occur because of order cycle variability, or a company might be forced to use expedited transportation to make sure orders arrive on time. 7. Define the perfect order concept. What is its relevance to the order cycle? The text defines a perfect order as simultaneously achieving relevant customer metrics. The order cycle offers plentiful opportunities for errors to occurand thus failure to achieve a perfect order.

8. List the various methods of order transmittal and discuss relevant characteristics of each one. In person => greatly reduces the potential for order errors, but it is not always convenient or practical in situations where the supplier is geographically distant. Mail => more convenient than ordering in person, but mail is relatively slow and there are occasions when the order never reaches the intended destination. Telephone => fast and convenient, but order errors may not be detected until the order is delivered. Fax => fast, convenient and provides hard copy documentation of an order, but there is the potential for junk (unwanted) faxes and the quality of transmission may be problematic. Electronic => fast, convenient, and potentially very accurate; major concern is the security of the data being transmitted. 9. Define order triage and explain how it can impact order processing. Order triage refers to classifying orders according to pre-established guidelines so that a company can prioritize how orders should be filled. Companies that choose to do order triage must decide the attribute(s) used to prioritize (e.g., first in, first served; customer longevity). Although there is no one right attribute to use for order prioritization, the chosen attributes are likely to delight one set of customers and disappoint other customers. 10. What is pick-to-light technology, and how can it improve order picking? In pick-to-light technology, orders to be picked are identified by lights placed on shelves or racks. An advantage to pick-to-light is that the worker simply follows the light from pick to pick, as opposed to the worker having to figure out an optimal picking path. Pick-to-light often results in higher pick rates and fewer picking errors, along with reduced training time and reduced levels of employee turnover. 11. Discuss the order delivery stage of the order cycle. Order delivery refers to the time from when a transportation carrier picks up a shipment until it is received by the carrier. Customers now have increasing power in terms of delivery options and companies such as UPS and FedEx offer prospective shippers a diverse menu of transit time options. In addition, shippers are emphasizing both elapsed transit time as well as transit time variability and some companies are utilizing delivery windows, or the time span within which an order must arrive. Another key delivery change is that the overnight range for truck service has been pushed from 500 miles to between 600 and 700 miles. 12. How can customer service act as a competitive weapon? Customer service is more difficult for competitors to imitate than other marketing mix variables such as price and promotion. The text cites an example of Nordstroms, a high-end retailer that has a long-standing reputation for excellent customer service. Their devotion to excellent customer service leads Nordstroms to do things that competitors cannot or will not match. 13. Distinguish between customer service and customer satisfaction.

Customer service strives to keep customers happy and creates in the customers mind the perception of an organization that is easy to do business with. Customer satisfaction compares a customers actual experience with the expected experience, and if the actual experience equals or exceeds the expected experience then the customer would be satisfied. Customer service can influence both the expected and actual experience and hence influence customer satisfaction. 14. Why are organizations and customers demanding a higher level of customer service? Macroenvironmental changes, such as globalization and advances in technology, are causing organizations and individuals to demand higher levels of customer service. Moreover, customer (and organizational) expectations continue to increase over time, and if the associated performance (service) levels fail to keep up, then customer dissatisfaction is a likely outcome. And, in an increasingly automated and computerized world, the relationships between customers and vendors can become dehumanized. A company that can offer a high level of customer service, especially on a personal basis, finds that it has a powerful sales advantage in the marketplace. 15. List and discuss the three elements of the dependability dimension of customer service. The three elements are consistent order cycles, safe delivery, and complete delivery. As pointed out earlier, inconsistent order cycles necessitate higher inventory requirements. Safe delivery brings loss and damage considerations into play; lost or damaged product can cause a variety of negative ramifications for a customer, such as an out of stock situation. One way of measuring the completeness of delivery involves the order fill rate or the percentage of orders that can be completely and immediately filled from existing stock; incomplete deliveries generally translate into unhappy customers. 16. What are some advantages and disadvantages to technological advances designed to facilitate buyer-seller communications? Cell phones, personal digital assistants, and the Internet have certainly helped buyer-seller communications. These technological advances allow for less costly and more frequent contact between the two parties. Having said this, technology such as text messaging and the Internet can depersonalize the communication process, which is why periodic telephone interaction and even face-to-face contact between seller and customer are recommended. 17. Distinguish between customer service goals and objectives. Goals tend to be broad, generalized statements regarding the overall results that the firm is attempting to achieve. Objectives, the means by which goads are to be achieved, have certain minimum requirements and are more specific than goals. Objectives should be specific, measurable, achievable, and cost effective.

18. How do characteristics such as substitutability and product life cycle stage influence the development of customer service goals and objectives?

If a firm has a near monopoly on an important product (i.e., few substitutes are available), a high level of customer service is not required because a customer that needs the product will buy it under any reasonable customer service standard. As for stage in the PLC, a product just being introduced needs a different kind of service support than one that is in a mature or declining market stage. When introducing a new product, companies want to make sure that there is sufficient supply of it to meet potential customer demand, and so companies might use expedited transportation to protect against out of stock situations. 19. Should organizations use a limited, or extensive, number of customer service measures? Support you position. The text suggests that while customer service must be measured if it is to be managed, organizations should resist the tendency to measure everything that moves. Rather, organizations should utilize a limited number of meaningful and relevant metrics. Excessive measurement can strain an organization because it requires the collection of tremendous amounts of data, and once collected the data must be analyzed. This can result in analysis paralysis, or the idea that so much time is required for analysis that there is little, if any, time left to make decisions based on the data. 20. What is meant by service recovery? How is it relevant to logistics? Service recovery refers to a process for returning a customer to a state of satisfaction after a service or product has failed to live up to expectations. Service recovery is particularly relevant to the order cycle; for example, late or erratic deliveries can play havoc with customer supply chains. One service recovery guideline, fair treatment for customers, is operationalized by some transportation companies in the form of service guarantees. If a shipment misses various delivery parameters (e.g., on time delivery), then customers can receive a full refund (or are not billed for the transportation).

PART III EXAMINATION QUESTIONS CHAPTER 4: DEMAND MANAGEMENT, ORDER MANAGEMENT AND CUSTOMER SERVICE Multiple Choice Questions

1. The creation across the supply chain and its markets of a coordinated flow of demand is the definition of: a. order cycle b. order management c. demand management d. supply chain management (c; p. 82) 2. Which of the following is not a basic type of demand forecasting model? a. exponential smoothing b. cause and effect c. judgmental d. time series e. all are basis types of forecasting models (a; p. 82) 3. Surveys and analog techniques are examples of ____ forecasting. a. cause and effect b. time series c. exponential smoothing d. judgmental (d; p. 82) 4. An underlying assumption of ____ forecasting is that future demand is dependent on past demand. a. trial and error b. time series c. judgmental d. cause and effect (b; p. 82)

5. Which forecasting techniques tends to be appropriate when there is little or no historical data? a. exponential smoothing b. judgmental c. time series d. cause and effect (b; p. 83) 6. Successful implementations of collaborative planning, forecasting and replenishment have resulted in 20 to 30% improvements in forecasting accuracy as well as ____ to ____ % reduction in order cycle times. a. 5; 10

b. 10; 15 c. 20; 30 d. 40; 50 (c; p. 84) 7. Which of the following is true? a. computer software for demand forecasting dates back about 25 years b. one challenge to collaborative planning, forecasting, and replenishment is getting supply chain partners to share data c. the Excel software package tends to generate forecasts that generate very little error d. SAP is the most widely used software package for demand forecasting e. All are true (b; p. 84) 8. ____ refers to the management of various activities associated with the order cycle. a. Logistics b. Order processing c. Demand management d. Order management (d; p. 84) 9. The order cycle is: a. the time that it takes for a check to clear b. the time that it takes from when a customer places an order until the selling firm receives the order c. also called the replenishment cycle d. also called the vendor cycle (c; p. 84) 10. The order cycle is composed of each of the following except: a. order picking and assembly b. order delivery c. order retrieval d. order transmittal (c; p. 84) 11. Which of the following is false? a. order cycle lengths continue to get shorter b. the order cycle should be analyzed in terms of total cycle time and cycle time variability c. order management has been profoundly impacted by advances in information systems d. order management and the order cycle are vitally important to the perfect order concept e. all are true (e; p. 85) 12. Order transmittal is:

a. the same thing as an order cycle b. the series of events that occur between the time a customer places an order and the time the seller receives the order c. the series of events that occur between the time the customer perceives the need for something and the time the seller receives the order d. the series of events between the time a customer places an order and the time the order cycle begins (b; p. 85) 13. In general, there are ____ possible ways to transmit orders. a. six b. five man/ mail / telephone/ fax/ electronic c. four d. three (b; p. 85) 14. Which of the following is not a possible method of order transmittal? a. b. c. d. e. in-person mail fax electronic all are methods of order transmittal

15. Ordering by ____ can be fast and convenient, but order errors are generally not detected until the order is delivered. a. telephone b. mail c. fax d. electronic (a; p. 85) 16. ____ refers to the time from when the seller receives an order until an appropriate location is authorized to fill the order. a. Order processing b. Order cycle c. Order management d. Order transmittal (a; p. 88) 17. Order processing typically involves each of the following activities except: a. credit check b. entering the order into the system c. determining inventory location

d. marketing department crediting the salesperson with the sale e. all are activities (e; p. 88) 18. Classifying orders according to pre-established guidelines so that a company can prioritize how orders are to be filled refers to ____. a. order management b. order processing c. order triage d. ABC analysis (c; p. 90) 19. Order picking and assembly is: a. the most important component of the order cycle b. the way a customer decides what he needs to purchase c. the component that follows order processing d. the most computerized part of the order cycle (c; p. 90) 20. The text suggests that ____ often represents the best opportunity to improve the effectiveness and efficiency of an order cycle. a. order transmittal b. order delivery c. order processing d. order picking and assembly (d; p. 90) 21. Travel time accounts for ____ to ____ % of total time when picking an order. a. 10; 20 b. 20; 30 c. 40; 55 d. 60; 80 (d; p. 90) 22. Which of the following is not a characteristic of advances in order pick technology? a. higher pick rates b. reduced employee turnover c. fewer employee accidents d. fewer picking errors e. all are characteristics (c; p. 90)

23. The document that indicates what items were picked, along with who picked the order, is called a(n) ____________. a. packing list b. order pick list c. order check list d. consular document (a; p. 91) 24. The final phase of the order cycle is called order ____________. a. picking and assembly b. delivery c. receiving d. replenishment (b; p. 91)

25. The time span within which an order must arrive refers to ____. a. transit time b. delivery window c. order delivery d. transit time reliability (b; p. 91) 26. A commonly used rule of thumb is that it costs approximately ____ times as much to get a new customer as it does to keep an existing customer. a. three b. four c. five d. six (c; p. 91) 27. Why might customer service be more effective than pricing as a competitive tool? a. price reductions can be done only once or twice before they become ineffective b. holding large inventory stocks is cheaper than price reductions c. superior customer service will be noticed more than a price reduction d. superior customer service is more difficult to imitate (d; p. 92) 28. ____ compares a customers actual experience with the expected experience. a. customer satisfaction b. customer service

c. customer loyalty d. order management (a; p. 92) 29. The ability of logistics management to satisfy users in terms of time, dependability, communication, and convenience is the definition of: a. customer satisfaction b. the order cycle c. perfect order d. customer service (d; p. 93)

30. Which of the following is not a dimension of customer service? a. time b. convenience c. dependability d. communication e. all of the above are dimensions (e; p. 93) 31. The percentage of orders that can be completely and immediately filled from existing stock is the ____ rate. a. order cycle b. perfect order c. order fill d. optimal inventory (c; p. 93) 32. What component of customer service focuses on the ease of doing business with a seller? a. convenience b. dependability c. time d. communication (a; p. 94) 33. Which of the following statements is false? a. goals tend to be broad, generalized statements regarding the overall results that the firm is trying to achieve b. objectives are more specific than goals c. a central element to the establishment of customer service goals and objectives is determining the customers viewpoint

d. benchmarking generally involves comparing an organization to competitors in the same industry e. all of the statements are true (d; pp. 94-95)

34. ____ is the process of taking corrective action when measurements indicate that the goals and objectives of customer service are not being achieved. a. Control b. Managing c. Leadership d. Benchmarking (a; p. 96) 35. Which of the following statements is false? a. service recovery refers to a process for returning a customer to a state of satisfaction after a service or product has failed to live up to expectations b. one service recovery guideline involves fair treatment for customers c. approximately 40% of customers who experience a problem with purchases of less than $5 will not do business with that company again d. good or excellent service recovery can actually result in increased customer loyalty e. all of the statements are true (c; pp. 98-99) True-False Questions 1. In make-to-order situations, finished goods are produced after receiving a customer order. (True; p. 82) 2. Simple moving averages and weighted moving averages are examples of judgmental forecasting. (False; p. 82) 3. Judgmental forecasting is appropriate when there is little or no historical data. (True; p. 83) 4. SAP is currently the most widely used software for business forecasting. (False; p. 84) 5. No software packageregardless of its sophistication and costis capable of totally eliminating forecast errors. (True; p. 84) 6. In general terms, order management refers to how a firm handles incoming orders. (True; p. 84)

7. The order cycle is usually the time from when a customer places an order to when the customer receives the order. (True; p. 84) 8. As a general rule, order cycle times have been increasing in recent years. (False; p. 84) 9. The shorter and more consistent the order cycle, the less inventory that is needed by ones customers. (True; p. 85) 10. Order processing refers to the time from when the customer places an order until the seller receives the order. (False; p. 85) 11. There are four possible ways to transmit orders. (False; p. 85) 12. One method of order transmittal relies on bar codes and scanners. (True; p.88) 13. Order information is checked for completeness and accuracy in the order processing component of the order cycle. (True; p. 88) 14. The order triage function refers to correcting mistakes that may occur with order picking. (False; p. 90) 15. A commonsense approach is to fill an order from the facility location that is closest to the customer, with the idea that this should generate lower transportation costs as well as a shorter order cycle time. (True; p. 90) 16. Order picking and assembly follows the order processing component of the order cycle. (True; p. 90) 17. Order processing often represents the best opportunity to improve the effectiveness and efficiency of the order cycle. (False; p. 90) 18. Travel time accounts for a majority of an order pickers total pick time. (True; p. 90) 19. Pick-to-light technology is an order picking technique that has grown in popularity in recent years. (True; p. 90) 20. A pick list indicates what items were picked as well as the person responsible for preparing the order for shipment. (False; p. 91) 21. Order retrieval is the final phase of the order cycle. (False; p. 91) 22. As a general rule, the narrowest delivery window, or time span within which an order must arrive, that carriers must meet is 30 minutes. (False; p. 91) 23. The current maximum range for overnight delivery by trucks is approximately 500 miles. (False; p. 91) 24. It costs approximately five times as much to get a new customer as it does to keep an existing customer. (True; p. 91)

25. Customer service and customer satisfaction are synonymous concepts. (False; p. 92) 26. Consumers are demanding about the same levels of service today as in years past. (False; p. 92) 27. One reason that customers are demanding higher levels of customer service is that reliable service allows a firm to maintain a lower level of inventory. (True; p. 92) 28. Customer service compares a customers actual experience with the expected experience. (False; p. 93) 29. Dependability consists of consistent order cycles, safe delivery, and consistent delivery. (True; p. 93) 30. Order fill rate is the percentage of orders that can be completely and immediately filled from existing stock. (True; p. 93) 31. Text messaging and the Internet have lessened the need for telephone interaction and face-to-face contact between seller and customer. (False; p. 94) 32. The convenience component of customer service focuses on the ease of doing business with a seller. (True; p. 94) 33. Goals are the means by which objectives are achieved. (False; p. 95) 34. Objectives should be as specific as possible, so it can be determined if the objectives have been met. (True; p. 95) 35. Benchmarking should only involve numerical comparisons of relevant metrics (e.g., fill rates). (False; p. 95) 36. The nature of the product can affect the level of customer service that should be offered. (True; p. 95) 37. Leadership is the process of taking corrective action when measurements indicate that the goals and objectives of customer service are not being achieved. (False; p. 96) 38. Organizations should utilize a limited number of meaningful and relevant metrics and should resist the tendency to measure everything that moves. (True; p. 98) 39. About 25% of customers who experience a problem with purchases of less than $5 will not do business with that company again. (False; p. 98) 40. Satisfactory service recovery tends to increase a customers willingness to recommend the offending organization; unsatisfactory service recovery magnifies the initial failure. (True; p. 99)

PART IV CASE SOLUTIONS CASE 4-1 CHEEZY WHEEZY Question 1: Assume that Cheezy Wheezy goes into the catalog order business. What policy should it adopt for handling stockoutsthat is, what should the company do when it receives mail orders that it cannot completely fill because one or more of the desired items are out of stock? They could have any one of a range of policies. They probably should find out what their competitors are doing. One suggestion would be to ask for customer phone numbers (or e-mail addresses) on the order form and then contact customers in case of a stockout and determine how customers want to handle the situation. Question 2: Some mail customers will complain that the items Cheezy Wheezy shipped never arrived. What policy should Cheezy Wheezy adopt to deal with this? Again, the firm has a variety of options. Firms might ship a duplicate order upon receipt of a complaint, and maintain a file of customer complaints to insure that certain customers do not abuse Cheezy Wheezys no questions asked policy. An alternative is to use parcel shipping that requires a signature upon receipt of a package. Question 3: Should the order form, which will be stapled into the center of the catalog and will be addressed to Cheezy Wheezy, be of the postage-paid type, which means that Cheezy Wheezy will pay the first-class postage rate plus a few cents on each envelope delivered to it, or should the customer be expected to add a first-class stamp to the order before he or she mails it? Discuss. The increasing cost of postage, combined with the customer having to put a stamp on an envelope, could be a sufficient enough hassle to convince some customers to shop elsewhere. Moreover, there could be delays if some potential customers need to obtain stamps. Postagepaid envelopes increase the convenience factor for the consumer, and allow the order to be mailed more quickly. Question 4: Cheezy Wheezys headquarters are in New Glarus, but the company also operates in southern Wisconsin and northern Illinois. Is New Glarus the best address to use for receiving mail orders for cheese? Might there be advantages, perhaps, in having the mail addressed to a more major citysay, Madison, Milwaukee, or Chicago? Discuss. An advantage of the larger city post offices is that the mail might be delivered earlier. The advantage of New Glarus is that the name is one that would be associated with the cheese industry. Question 5: From the facts that have been presented in the case, how would you handle the matter of charging for the packaging costs of each shipment? Why? Again, there can be a variety of answers. A quite common response among past students was to include packaging costs in the costs of the cheese, rather than developing complex tables that would cover all possible situations.

Question 6: How would you handle the matter of charging for the transportation costs of each shipment? Why? Past students have suggested including a simple table, with the weight of the shipment along one axis, and the distance from New Glarus along the other, as the basis for calculating transportation charges. Question 7: Taking into consideration your answers to questions 5 and 6, write out in either text or tabular form the explanation of shipping charges that your catalog customers will read. (Note: As used here, shipping includes both packaging and transportation.) A complete answer could say something like, Calculate shipping charges from the accompanying table; the figures include packaging, insurance, and delivery to your door. The table would have groups of two-digit zip codes (i.e., the first two digits of ones five digit zip code) across the top of the chart with the shipments weight along the side. Within the table would be numbers, expressed as dollars and cents, which are the shipping costs. Question 8: On a single 8 by 11-inch sheet of paper, design a catalog order form for use by Cheezy Wheezy. If this assignment is done outside of class the student will probably borrow heavily from realworld catalog order forms (especially during the latter part of the calendar year, when holiday catalogs abound). Question 9: Contemplate a simple website for Cheezy Wheezy to sell its products within the United States. How, if at all, would the order form used in its website differ from an order form printed and mailed as part of a catalog? Would any sales or shipping policies be changed? Discuss. The order form on the website would be designed so that customers would have to submit an accurate order, i.e., zip codes could be required and addition of charges would have to be correctly done. It would probably be easiest to have the same sales and shipping policies for both catalog and Web presentation. The website could recognize repeat customers in case it was believed that they deserve some sort of bonus or incentive.

CASE 4-2 HANDY ANDY, INC. Question 1: Is this a customer service problem? Why or why not? Customer service is sometimes defined as keeping existing customers happy and we have little evidence that there is a customer service problem. We do not know of customers who are inconvenienced by this system, nor do we know of lost sales. However, some customers are probably confused by the system. Question 2: Marketing channels are the arrangement of intermediaries (wholesalers, retailers, and the like) that the firm uses to achieve its marketing objectives. Is the problem discussed in Handy Andys marketing channels? Why or why not? This is a marketing channels problem because the arrangements between the home office, the factory distributors, the regular dealers and customers are not what was planned. The existing systems may be working better, but that is not the question. Question 3: Logistics channels handle the physical flow of goods or service. Is the problem discussed in Handy Andys logistics channel? Why or why not? There is probably not much of a problem in the physical flow of goods because the factory distributors were expected to be the main source of compactors, delivered and installed. Question 4: It appears that the factory distributors are exploiting the smaller dealers. Yet from what we can tell, Handy Andy in St. Louis has heard no complaints from the smaller dealers. Why would they not complain? They may be afraid or they may be receiving kick-backs from the factory distributor. Chances are that if the smaller dealers were losing money then they would likely complain to Handy Andy. Question 5: What should Handy Andys marketing Vice President do? Why? Probably study the situation further because there is little or no information so far that the existing arrangements, confusing as they may seem, are cutting into Handy Andys sales. The problem may be more complicated than the text indicates because the dealers and factory distributors also probably market other lines of appliances produced by other manufacturers. So the focus may be on the marketing arrangements for all types of appliances, not just Handy Andy compactors.

Question 6: Redesign the warranty postcard, staying within the same dimensions, and include questions or statements that will make it easier for Handy Andy headquarters to detect whether installation practices of the type discussed in this case occur. In the past, some students have designed cards similar to the one presented in the book, with a question or two added asking whether the model installed was the one originally ordered. To understand exactly what was happening, a number of specific questions had to be crafted. Other students believed, however, that such questions would undermine customer confidence in Handy Andy and its distributors. Question 7: In the case is the statement, The factory distributors in these few cities indicated that they, not Handy Andy, Inc., stood behind the 1-year warranty. Is this a problem for Handy Andy? Why or why not? This is a difficult question to answer because we are not certain whether the buyer perceives that both the factory distributor and Handy Andy are standing behind the product (i.e., doubling their protection) or that the factory distributor is filling a void created by Handy Andys unwillingness or inability. Question 8: Assume that the situation described in question 7 is a problem. How should the firm deal with it? One suggestion is to change the wording in the warranty, giving more emphasis to Handy Andys role. A statement could also be added to the return post card. PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 5: PROTECTIVE PACKAGING AND MATERIALS HANDLING 1. How do product characteristics influence packaging and materials handling considerations? One consideration is a products physical characteristics; substances exist in three formssolid, liquid, gasand each form has specific packaging requirements. For instance, metal cylinders are one method for the packaging of gases, while metal pails can be used for the packaging of liquids. Another physical characteristic is the products ability to withstand the elements; coal can be exposed to rain, whereas salt piles cannot. In a similar vein, some products can be exposed to freezing conditions, while others cannot. Product density (weight per volume) is yet another physical characteristic that can affect packaging conditions. 2. Discuss some of the packaging requirements associated with hazardous cargo. The specific requirements differ for each hazardous commodity, but all of them involve labeling, packaging and repackaging, placing warnings on shipping documents, and notifying carriers in advance. A common requirement for transferring flammable materials is that the vehicle and the receiving or discharging device both be electrically grounded. Packages, containers, trailers, and other vehicles carrying hazardous materials must carry distinct signs, or placards, identifying the hazard. 3. What is the building-blocks concept? How is it applied to the handling of packaged goods?

The building-block concept is a key factor in unit loads. Building blocks have certain dimensions that allow them to stack or load on a pallet or similar piece of equipment. The building-blocks hierarchy is important to remember because each of the different building blocks is inside another and their total effect must be to protect the product. They function in a complementary sense. 4. The chapter describes approximately 10 functions that a protective package should accomplish. Does every package have to accomplish every function? Explain. Packages are designed to perform a number of protective functions: protect the product from physical damage; be strong enough to support additional boxes as part of the building-block concept; provide uniform weight distribution within the package; and allow enough exterior space for shipping and identification labels to be attached. A thoughtful examination of the 10 functions would suggest that not every function is applicable to every package. For example, tampering tends to be more important with food and drugs than with, say, paper products. In addition, separation of the contents to prevent undesired contact is likely more important with fragile items such as glassware. 5. Discuss the relationship between the level of protective packaging used relative to the packaging requirement of common carriers. Carriers tariffs and classifications influence, if not control, the type of packaging and packing methods that must be used. In freight classification documents, the type of packaging is specified. The carriers established these different classifications for two main reasons. First, packaging specifications determined by product density encourage shippers to tender loads in densities that make best use of the equipments weight and volume capabilities. Second, specifications that deal with protective packaging reduce the likelihood of damage to products while they are being carried. 6. Discuss the role of labeling in logistics management. Once the material being packaged is placed into the appropriate container and sealed shut, it becomes necessary to label the container. Whether words or code numbers are used depends on the nature of the product and its vulnerability to pilferage. Retroflective labels that can be read by optical scanners may also be applied. Batch numbers are frequently assigned to food and drug products, so that they may be more easily traced in case of a product recall. Many regulations govern the labeling of packages, including the labeling of weight, specific contents, and instructions for use. Labeling can also be used to enable a container to pass through Customs and other inspections as it travels in international commerce. 7. Why is it important to recognize that labeling requirements may differ from country to country? Failure to comply with labeling requirements could subject the offending organization to surcharges, administrative fees, and/or penalty charges. As a general rule, labeling requirements and enforcement tend to be more stringent in economically developed countries than in economically developing countries.

8. Describe some of the devices that are used to monitor conditions during the journey that a shipment makes. Various packaging material manufacturers and trade organizations provide free package testing that attempts to duplicate shipping hazards such as vibration, dropping, compression, and rough handling, among others. Actual monitoring of the environment the package must pass through can be done by enclosing recording devices within cartons of the products that are shipped. More sophisticated devices record over time a series of variables, such as temperature, humidity, and acceleration force and duration. 9. What are some environmental disadvantages to plastic packaging? One of plastics most frequently cited shortcomings is the length of time that it takes to biodegrade, which can be up to several hundred years. Moreover, the production of plastic products is dependent on petroleum, which is a diminishing natural resource (and an extremely costly resource in recent years). A third environmental concern with plastic packaging is that sometimes plastic litter unintentionally ends up killing large numbers of marine animals. 10. What environmentally friendly packaging strategies might a firm adopt? One is to reduce the amount of packing materials used, such as the use of just one material. A second packaging strategy is to use environmentally friendly packaging materials, such as postconsumer recycled content. A third strategy is to use reusable containers, such as refillable glass beverage bottles. A fourth environmentally friendly strategy is to retain or support services that collect used packaging and recycle it. 11. What information is needed to design a protective package properly? Three important kinds of information are required: the severity of the distribution environment; the fragility of the product to be protected; and the performance characteristics of various cushion materials. 12. What are some potential advantages to the unit load? One advantage is additional protection to the cargo because the cartons are secured to the pallet by straps, shrink-wrapping, or some other bonding device. A second advantage is that pilferage is discouraged because it is difficult to remove a single package or its contents. The major advantage of the unit load is that it enables mechanical devices to be substituted for manual labor. 13. Discuss the disadvantages of the unit load. One disadvantage is that it represents a larger quantity of an item than a single box and may be of limited value to organizations that deal in small quantities. In addition, the mechanical devices, such as a forklift, that can be substituted for manual labor can be very expensive. Yet another drawback is a lack of standardization of pallet sizes, especially in the United States. This lack of standardization may necessitate repalletization of exports from the U.S.

14. What trade-offs exist between wood, plastic, and steel pallets? Wood pallets are relatively inexpensive compared with plastic and steel pallets. However, plastic and steel pallets have much greater longevity relative to wood. Steel pallets can last for over 20 yearsa wood pallet might last for one use! Unlike plastic and steel, wood pallets can break and splinter and thus pose safety dangers to workers as well as perhaps necessitating repair costs. Another disadvantage to wood pallets is that they are much heavier than plastic and steel. Wood and plastic pallets are much more flammable than steel. 15. Is the slip sheet currently a viable alternative to the pallet? Why or why not? A slip sheet, or flat sheet of either fiberboard material or plastic, is placed under the unit load and takes up less space than a pallet. The text suggests that advances in technology have created stronger plastics for slip sheets, which has led to a dramatic decrease in product damage. Improved damage rates and low cost ($.90 to $1.50 per slip sheet) suggest that slip sheets could account for 30% of product shipments by 2010. 16. What issues does the logistics manager face once unit loads have been placed onto a transportation vehicle? One consideration is how to load pallets, cartons, and the like into a transportation vehicle some cartons cannot be laid on their sides or cannot have other cartons placed on top of them. Bracing or inflatable dunnage bags are used to fill narrow empty spaces, but even when properly braced, various forces such as vibration, pitch, and roll can still cause damage. Some goods are so heavy that they utilize a vehicles weight capacity without filling its cubic capacity; these loads must be carefully braced and the weight must be distributed as evenly as possible. 17. Discuss the various handling characteristics associated with bulk cargoes. Bulk materials are loose rather than in packaged form and are handled by pumps, shovel devices, conveyor belts, or the mere force of gravity. One handling characteristic for bulk materials is density, and this can affect the amount of product that can be loaded onto a transport vehicle. A materials angle of repose is the size of angle that would be formed by the side of a conical stack of that material; the greater the angle, the higher the pile of material that can be placed on a specific land area. Bulk liquids have unique handling characteristics and their resistance to flow is measured as viscosity, which can be lowered by increasing the temperature of a liquid. Gases have unique handling properties, although most of them are handled within completely enclosed pipeline systems.

18. Describe two material handling principles. Which of the two do you believe is more important? Why? The text lists 10 materials handling principles developed by The College-Industry Council on Material Handling Education. Any two of these principles can be described, and the student can justify which one she / he believes to be more important.

19. Why is it important that materials handling be aligned with an organizations objectives, customers and products? The text indicates that this should be common sense but relates an anecdote about a consumer products company that redesigned one of its storage facilities with the primary purpose to be state of the art in terms of materials handling equipment. Less than a year later, the storage facility had to be redesigned because the state of the art materials handling equipment was inconsistent with the type of products sold by the company as well as with its customers ordering requirements. 20. Does your hometown have mandatory recycling requirements? If so, what kinds of products must be recycled? The answers to this question can provide a stimulating discussion assuming that the students come from different geographic areas (even with the same metropolitan area). It can be interesting to learn that side-by-side towns have vastly different recycling requirements as well as to explore the logistical implications of the various recycling requirements.

PART III EXAMINATION QUESTIONS CHAPTER 5: PROTECTIVE PACKAGING AND MATERIALS HANDLING Multiple Choice Questions 1. Which of the following statements is false? a. some products can be exposed to freezing weather; others cannot b. perishable products require special packaging as they move from source to customer c. a products chemical characteristics have little or no influence on the way they are handled

d. the various properties of goods must be made known to consumers to help them make the correct buying decision and properly care for the product e. all are true (c; pp. 107-108) 2. Which of the following statements regarding perishable products is false? a. they require special packaging b. they require special monitoring c. they require special loading d. they require special storage e. all are true (e; p. 108) 3. Legislation passed after the ____ requires petroleum carriers and tank farms to have in place extensive response plans for dealing with possible spills. a. Exxon Valdez Oil Spill b. terrorist attacks of September 11, 2001 c. Persian Gulf War of 1991 d. Vietnam War (a; p. 109) 4. What is a placard? a. a device used to monitor engine speed b. a distinct sign that identifies hazardous material c. protective wrap for shipments that might freeze while in transit d. a type of manually operated materials handling equipment (b; p. 109) 5. The building blocks concept is associated with which logistics function? a. warehousing b. packaging c. materials handling d. inventory management (b; p. 109) 6. ____ refers to materials used for the containment, protection, handling, delivery, and presentation of goods. a. Packaging b. A box c. Materials handling d. Procurement (a; p. 110)

7. Which of the following is not a general function of packaging? a. to promote b. to protect c. to facilitate product handling d. to identify (label) e. all are general functions (c; p. 110) 8. All of the following are protective functions of packaging except: a. enclosing the materials b. being tamper-proof c. providing uniform weight distribution d. cushioning the contents e. all are protective functions (e; pp. 110-111) 9. A box-makers certificate: a. b. c. d. refers to what box makers receive upon finishing their training is given in recognition of superior box making ability assures that boxes are free from any visible defects assures rails and truckers that boxes are sufficiently sturdy to meet their handling requirements (d; p. 113)

10. ____ regulates the packaging of international air shipments. a. An individual airline b. The United Nations c. A countrys federal government d. The International Air Transport Association (d; p. 114) 11. Which of the following is false? a. package labeling is usually done at the end of the assembly line b. code numbers are preferable to words for labeling a product c. some firms are moving from one dimensional to two dimensional bar codes d. batch numbers are frequently assigned to food and drug products (b; p. 114) 12. As a general rule, labeling requirements and enforcement tend to be more stringent in ____ countries than in ____ countries. a. larger; smaller

b. economically developing; economically developed c. economically developed; economically developing d. smaller; larger (c; p. 114) 13. Which of the following is not a type of information that is needed to develop a protective packaging system? a. severity of the distribution environment b. the budget for packaging c. fragility of the product to be protected d. performance characteristics of various cushioning materials e. all are types of information (b; p. 117) 14. Each of the following is a shipping hazard that a package may be exposed to except: a. Retraction b. vibration c. compression d. extreme temperature e. all are shipping hazards for a package (a; p. 117) 15. The ____ ordinance concerning recycling is indicative of the direction in which the world is moving. a. U.S. b. French c. British d. German (d; p. 119) 16. Which of the following is not a characteristic of plastic packaging? a. lack of versatility b. takes a long time to biodegrade c. plastic is dependent on petroleum d. plastic litter can kill marine animals e. all are characteristics of plastic packaging (a; p. 119) 17. The text suggests that firms can adopt ____ environmentally-friendly packaging strategies. a. b. c. d. two three four five

(c; p. 119) 18. Which of the following is not an environmentally-friendly packaging strategy that firms might adopt? a. reduce the amount of packing materials used b. use more environmentally-friendly packaging materials c. use reusable containers d. retain or support services that collect the used package and recycle it e. all are strategies (e; pp. 119-120) 19. ____ systems consider the reverse flow of products, their reuse, and the marketing and distribution of recovered products. a. Ecob. Open-loop c. Retro-movement d. Closed-loop (d; p. 120) 20. Libya, Myanmar, and ____ are the only three countries in the world that do not currently use the metric system of measurement. a. Sweden b. Argentina c. The United States d. Japan (c; p. 120) 21. The basic unit in unit loading is: a. a box b. a crate c. a pallet d. a container (c; p. 121) 22. A unit load involves: a. a convoy of rail cars carrying the same product b. loading an entire vehicle with shipments of three boxes or less c. the usage of a pallet rack system of storage d. securing one or more boxes to a pallet or skid in order to handle by mechanical means (d; p. 121) 23. The major advantage of the unit load is: a. its environmental friendliness

b. mechanical devices can be substituted for manual labor c. its value to companies that deal in small quantities d. that it simplifies transportation e. none of the above (b; p. 122) 24. Which of the following is false? a. the unit load is of limited value to shippers who deal in smaller quantities b. unit loads may discourage pilferage c. the unit load allows mechanical devices to be substituted for manual labor d. pallets suffer from a lack of standardized sizes e. all are true (e; p. 122)

25. A major drawback to steel and plastic pallets is their ____. a. weight b. incompatibility with existing forklifts c. price d. lifespan (c; p. 122) 26. ____ pounds is a significant weight in many logistics systems because it represents the approximate weight at which there is a noticeable increase in injuries. a. 40 b. 50 c. 60 d. 75 (b; p. 124) 27. Because of the height that a pallet takes up in a vehicle or warehouse, a method of achieving the advantages of a pallet without losing space is: a. slip sheets b. optimum cost reliability point c. mini-skid system d. low profile pallet system (a; p. 124) 28. Inflatable ____________ fill void space and function as both a cushion and a brace. a. b. c. d. tubes rafts mattresses dunnage bags

(d; p. 124) 29. The short distance movement of material between two or more points refers to: a. warehousing b. transportation c. materials handling d. materials management (c; p. 126)

30. A ____ is a uniform, sealed reusable metal box in which goods are shipped. a. container b. vessel c. trailer d. crate (a; p. 126) 31. A dry bulk materials ____ is important for determining the quantity that can be stored in a given location. a. market value b. angle of repose c. specific gravity d. viscosity (b; p. 128) 32. The greater a bulk materials angle of repose, the ____. a. higher the pile of materials that can be placed on a specific land area b. greater its resistance to flow c. higher its specific gravity d. harder it is to move (a; p. 128) 33. Each of the following is a question associated with materials handling, except: a. how will the product be handled? b. what kind of equipment is needed to handle or store the product? c. in what form will the product be? d. how much is the product worth? e. all of the above are questions (d; p. 128)

34. The ____ principle of materials handling reminds us that the shortest distance between two points is a straight line. a. ergonomic b. system c. standardization d. work (d; p. 129)

35. Which of the following is false? a. in a part-to-picker system, the pick location is brought to the picker b. forklifts can be dangerous c. automation refers to equipment that complements, rather than replaces, human contact d. racks and bins are examples of storage equipment e. all are true (c; p. 130) True-False Questions 1. The physical characteristics of some goods change while they are moving in the logistics channel. (True; p. 107) 2. Certain products should not, for health or safety reasons, be packaged together. (True; pp. 108) 3. Compressed gases are one category of hazardous materials. (True; p. 109) 4. Legislation passed during the 1970s requires petroleum carriers and tank farms to have in place extensive response plans for dealing with spills. (False; p. 109) 5. Placards are distinct signs that identify hazardous materials. (True; p. 109) 6. Procurement can be thought of in terms of the building-blocks concept. (False; p. 109) 7. One general function of packaging is to facilitate a products handling. (False; p. 110) 8. The promotional and protective functions of packaging sometimes conflict. (True; p. 110) 9. Protective packaging should be able to perform multiple functions. (True; pp. 110-111) 10. A box makers certificate assures that boxes are free from any visible defects. (False; p. 113) 11. Regardless of whether the shipper or carrier is responsible for damage in transit, the shipper specifies the level of packaging protection to be used. (False; pp. 113-114)

12. The packaging requirements for airlines and express delivery companies tend to be less detailed than those used by rail and motor carriers. (True; p. 114) 13. Most package labeling takes place at the end of the assembly line. (True; p. 114) 14. As a general rule, labeling requirements and enforcement tend to be more stringent in larger countries (based on population) than in smaller countries. (False; p. 114) 15. When new products or new packaging techniques are about to be introduced, it is somewhat advisable to have the packages pre-tested. (True; p. 117) 16. Under the German recycling ordinance, the final consumer has the ultimate responsibility for packaging disposal. (False; p. 119) 17. Plastic packaging tends to be cheaper, more versatile, and more consumer-friendly than paper packaging. (True; p. 119) 18. Polyvinyl chloride (PVC), commonly referred to as vinyl, is considered a friendly plastic because it has few, if any, potential side effects. (False; p. 120) 19. Reusable containers work best in a closed-loop system. (True; p. 120) 20. The United States is the only country in the world that does not currently use the metric system of measurement. (False; p. 120) 21. United States exporters are coming under increasing pressure to market their products overseas in metric units. (True; p. 120) 22. The basic unit in unit loading is the retail package. (False; p. 121) 23. When a unit load is secured to a pallet, it is more difficult for pilferage to take place. (True; p. 122) 24. The major advantage of the unit load is that it enables mechanical devices to be substituted for manual labor. (True; p. 122) 25. There are no disadvantages to the unit load. (False; p. 122) 26. Lift trucks are the common workhorse used around warehouses to move pallets. (True; p. 122) 27. Plastic pallets tend to be less expensive than wooden or steel pallets. (False; p. 122) 28. Steel pallets have longer lifespans than wooden or plastic pallets. (True; p. 124) 29. Advances in technology have created stronger plastics that can be used for slip sheets and this has resulted in a corresponding decrease in damage rates. (True; p. 124) 30. For surface cargo, the next-sized building block beyond the unit load is the pallet load. (False; p. 124)

31. Load-planning software can be used to suggest how to load a container with different sizes of cartons. (True; p. 124) 32. A weighed out container refers to one that has been weighed prior to its departure from a container yard. (False; p. 125) 33. Materials handling deals with the short distance movement of the material between two or more points. (True; p. 126) 34. Ocean carriers and railroads have both developed methods of handling two or more containers at one time. (True; p. 126) 35. A materials angle of repose refers to the size of angle that would be formed by the side of a conical stack of that material. (True; p. 128) 36. Viscosity refers to a bulk materials water content. (False; p. 128) 37. Ergonomics refers to the science that seeks to adapt work or working conditions to suit the abilities of the worker. (True; p. 129) 38. The planning principle of materials handling suggests that the material handling plan should be in line with the strategic objectives of the organization. (True; p. 129) 39. Automatic guided vehicles (AGVs) are an example of mechanized materials handling equipment. (False; p. 130) 40. As a general rule, picker-to-part systems are preferable to part-to-picker systems. (False; p. 130)

PART IV CASE SOLUTIONS CASE 5-1 LET THERE BE LIGHT LAMP SHADE COMPANY Question 1: How many style A shades can be loaded into an intermodal container? The intermodal container holds 2,720 cubic feet, however, the top six inches is of no use. It will hold 2,560 style A shades. Question 2: How many style B shades can be loaded into an intermodal container? Style B shades could be stacked two packages high with the square foot on the bottom. Each column would hold 12 shades. There would be 8 x 40, or 320 columns of 12, yielding 3,840 lamp shades, and would weigh less than 40,000 pounds. Question 3: How many style C shades can be loaded into an intermodal container? Style C shades could be stacked the same way as style B and a container would hold 320 columns of 20, yielding 6,400 lamp shades. However, this would exceed the 44,000 pound weight limit. Each shade weighs 10.1 pounds; dividing that into 44,000 pounds yields approximately 4,350 lamp shades. Question 4: What are the total costs of delivering the style A shades to the port of importation? Item Shade Packaging Intermodal containers (3) Container drayage to Port of Oakland Insurance Ocean freight rates (a) Ocean freight rates (b) Pick higher of (a) or (b) Total Cost parameters $4 x 5,400 $.60 x 5,400 $1,000 x 3 $27,800 x .02 $22 per 2,000 pounds $22 per 40 cubic feet Total cost $21,600 $3,240 $3,000 $556 $594 $2,970 $2,970 $31,366

Question 5: What are the total costs of delivering the style B shades to the port of importation? Item Shade Packaging Intermodal containers (2) Container drayage to Port of Oakland Insurance Ocean freight rates (a) Ocean freight rates (b) Pick higher of (a) or (b) Total Cost parameters $5 x 5,400 $2 x 900 $1,000 x 2 $30,800 x .02 $22 per 2,000 pounds $22 per 40 cubic feet Total cost $27,000 $1,800 $2,000 $616 $614 $1,960 $1,960 $33,376

Question 6: What are the total costs of delivering the style C shades to the port of importation? Item Shade Packaging Intermodal containers (2) Container drayage to Port of Oakland Insurance Ocean freight rates (a) Ocean freight rates (b) Pick higher of (a) or (b) Total Question 7: Which style would you recommend? Why? From the relevant data, style A is least expensive. PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 6: TRANSPORTATION 1. Why is transportation important to a firms supply chain operations? Transportation influences, or is influenced by, many logistics activities such as the fact that transportation costs are directly affected by the location of plants, warehouses, vendors, retail locations, and customers. Inventory requirements are influenced by the mode of transport used and the transport mode influences the packaging required as well as the materials handling equipment. Customer service goals influence the type and quality of carrier and carrier service selected by the seller. 2. Why is it important to know about the characteristics of a countrys transportation infrastructure? Cost parameters $6 x 5,400 $3 x 540 $1,000 x 2 $36,020 x .02 $22 per 2,000 pounds $22 per 40 cubic feet Total cost $32,400 $1,620 $2,000 $720 $600 $1,238 $1,238 $37,978

An individual countrys topology, economy, infrastructure and other macroenvironmental factors influence a countrys transportation system. Because an increasing number of shipments are being transported between multiple countries, knowledge of a countrys infrastructure can help avert potential transportation problems. For example, some countries may have few airports with 10,000 foot runways, which might reduce the feasibility of moving shipments via air. 3. List some products that frequently move by airfreight. Why do you think that airfreight was selected as the mode to use? As a general rule, products that move by airfreight tend to be high value and may be of a perishable nature or otherwise require urgent delivery. These products include cut flowers; electronic equipment and parts; fruits and vegetables among others. 4. How do truckload operations differ from less-than-truckload operations? Less-than-truckload (LTL) shipments range from about 150 10,000 pounds; truckload (TL) carriers focus on shipments of greater than 10,000 pounds although the exact weight depends on the product. LTL shipments are often too big to handle manually, do not fill a truck and LTL carriers transport shipments of many customers simultaneously. Whereas LTL shipments are routed through terminals, TL shipments tend to move directly from the shippers location to the consignees location.

5. How do speed limits and hours-of-service rules potentially affect motor carrier service? Speed limits and hours-of-service (HOS) rules have long been justified on the basis of safety concerns. However, speed limits influence the amount of territory that can be covered by a trucker during a particular time period (a lower speed limit means less mileage can be covered). Hours-of-service rules limit the number of hours that can be driven in a 24-hour period as well as the number of hours that can be driven in a one week period. 6. What are advantages and disadvantages to a pipelines lack of vehicles? There is no need for vehicle operators and little likelihood of work stoppages by operating employees. The lack of vehicles also means that transportation is one way and the lack of a backhaul reduces potential excess capacity issues. In addition, pipelines lack of vehicles means that it is the most reliable form of transportation because there are not vehicle-related disruptions and pipelines are virtually unaffected by adverse weather conditions. However, the lack of vehicles means that the relevant product must be forced through the pipeline and this means that pipelines tend to be the slowest form of transportation. 7. What are pipeline slurry systems? How do they function? Slurry systems allow bulk commodities to become liquefiable by grinding the solid material to a certain particle size, mixing it with a liquid to form a fluid muddy substance, pumping that substance through a pipeline, and then decanting the liquid and removing it, leaving the solid

material. While water is the most common liquid used in slurry systems, other liquids can be used. 8. Discuss the drawbacks of rail transportation. There is a level of market domination in railroading that creates limited service and pricing options for potential customers. US railroads have exhibited rather uneven reliability in recent years in part because of severe weather conditions that have destroyed and damaged many miles of track. Railroads present an interesting paradox in the sense that they are not the best or worst on any of the attributes such as capability, capacity, cost, and so on. 9. How do weather conditions influence the reliability of inland water carriers? Drought creates problems because when water levels drop below acceptable levels, barges are forced to reduce their loads or barge traffic might be halted altogether, situations that require alternate means of transportation. Icing closes bodies of water and prevents year-round operations. With flooding, there is too much water and while the disruptions from flooding tend to be shorter than those associated with drought, any disruption negatively impacts transportation reliability. 10. Discuss the positive attributes of inland water transportation. Inland water transportation is relatively inexpensive to users, particularly when compared to rail and truck transportation. Moreover, many different kinds of products can be carried and of the modes with vehicles, inland water transportation offers the greatest capacity (volume that can be carried at one time). 11. What is a land bridge service? How might it be applied? Rather than all water service between two ports, land bridge services involve the use of surface transportationusually railbetween the origin and destination port. The text presents an example of a shipment of pineapples from Hawaii to Europe. Rather than going by water from Hawaii through the Panama Canal and then onto Europe, under land bridge service the pineapples would move by ship from Hawaii to a US west coast water port. From this port the pineapples could be placed on railcars and shipped across the US to an east coast port where the pineapples would be loaded onto a vessel for movement to Europe. 12. What are freight forwarders? How do they function? What services do they perform? Freight forwarders operate as agents that act as consolidators of freight. They function by consolidating shipments from small shippers, buying transportation in volume rates, and then charging shippers a rate somewhere between the non-volume rate and the volume rate. The forwarder may offer pickup and delivery services, but not linehaul service. In addition, forwarders can specialize by handling domestic or international shipments; by handling surface or air shipments; by handling certain products (e.g., garments). 13. What is a shippers association?

Shippers associations perform basically the same functions as surface and air freight forwarders, except shippers associations do not operate as profit-making organizations. All profits achieved through their consolidation programs are returned to the associations members. 14. Why do truckload rates tend to be lower than less-than-truckload rates? Truckload rates are lower than less-than-truckload rates for three reasons: 1) the shipper loads the goods and the consignee unloads the trailer; 2) the load goes directly from shipper to consignee without passing through terminals; 3) paperwork, billing, and other administrative costs are little more for a 25,000 pound shipment than they would be for a 250 pound shipment. 15. Discuss the various options that are available to parcel shippers. Parcel shippers, who send packages weighing up to 150 pounds, have a variety of options such as Parcel Post, a service of the U.S. Postal Service that was specifically established to send packages through the mail system. Parcel Post has definite size and weight limitations (approximately 70 pounds). United Parcel Service (UPS) and FedEx are also options for parcel shippers; their rates, unlike the Parcel Post, include both pick up and delivery. The weight limitations for UPS and FedEx range from 70 to 150 pounds, depending on the type of service purchased. Package services are also available from Greyhound Lines, the primary intercity bus company in the U.S., and packages are limited to a maximum weight of 100 pounds. 16. List several environmental regulations and describe their impact on transportation. Noise standards promulgated by the U.S. Environmental Protection Agency (EPA) meant that commercial airlines had to equip their fleet with quieter engines. In terms of air pollution, the EPA has mandated that beginning in 2007 heavy-duty truck engines must meet stringent emission standards. The EPA is also quite concerned with resource conservation and improved fuel efficiency and reduced consumption of petroleum have become important issues for many transportation companies. 17. Pick three modes of transportation, name the federal agency responsible for safety regulation for each of the modes you picked, and provide a safety-related issue for each mode. Air: Federal Aviation Administration; weather-related accidents. Motor carriers: Federal Motor Carrier Safety Administration; large truck accidents are most often caused by driver behavior. Railroads: Federal Railroad Administration; signal and train control issues. Pipelines: Pipeline and Hazardous Materials Safety Administration; classifies accidents according to cause, damage, and fatalities or injuries. Inland water: U.S. Coast Guard; improve tugboat, towboat, and barge safety. 18. Define what is meant by economic regulation. Why is transportation economic deregulation important? Economic regulation in transportation refers to control over business practices and activities such as entry and exit, pricing, service, accounting and financial issues, mergers and acquisitions. Economic deregulation of transportation is important because it allowed transportation companies much greater freedom with respect to pricing and service options

two attributes that facilitate the tailored logistics concept. In addition, the economic deregulation that occurred in the U.S. has been the catalyst for economic deregulation in Canada and some European nations. 19. How does a common carrier differ from a contract carrier? A common carrier has agreed to serve the general public by assuming four specific obligations: to serve, to deliver, to charge reasonable rates, and to avoid discrimination in pricing and service. A contract carrier offers a specialized service to customers on a contractual basis and the contract specifies the compensation to be received, the services to be provided, the type of equipment to be used, among others. Unlike the common carrier, the contract carrier is under no obligation to render services to the general public and only has to serve customers with whom it has contracts. 20. Discuss advantages and disadvantages to private transportation. Operational control is a key advantage to private transportation. For example, shipments can move at a time convenient to the company, as opposed to a time that might be convenient for a carrier. Private transportation may also be a cost effective form of transportation, particularly in situations where the company can find backhaul traffic; revenue from the backhaul can be used to offset costs on both the fronthaul and backhaul. A key disadvantage is that private transportation can be quite costly, in part because of the capital expenditures that are necessary to own or lease the relevant vehicles. Moreover, managerial costs are often ignored or underestimated, which sometimes results in large, unanticipated outlays to procure a full-time private fleet manager.

PART III EXAMINATION QUESTIONS CHAPTER 6: TRANSPORTATION Multiple Choice Questions 1. ___________ is the actual, physical movement of goods and people between two points. a. Logistics b. Transportation c. Materials handling d. Telecommunications (b; p. 135) 2. There are ____________ modes of transportation. a. three b. four c. five d. six (c; p. 136) 3. A 3,047 meter (10,000 foot) runway is significant because it ____. a. is the longest that can be used worldwide due to safety regulations b. represents the longest runway in the world c. is generally viewed as adequate for accommodating existing wide body aircraft d. is only found in economically developed countries (c; p. 136) 4. Rail gauge refers to ____. a. the distance between the inner sides of two parallel rail tracks b. the length of rail track c. the thickness of rail track d. the allowable speed on a segment of track e. none of the above (a; p. 137)

5. In the United States, ____ account for the largest share of ton-miles and ____ account for the majority of freight revenues. a. rails; rails b. trucks; trucks c. trucks; rails

d. rails; trucks (d; p. 137) 6. ____ is generally the fastest form of transportation for shipments exceeding 600 miles. a. Less-than-truckload carriers b. Air c. Parcel carriers d. Truckload carriers (b; p. 138) 7. Consignees are: a. preferred suppliers b. receivers of freight c. shippers of freight d. extremely large LTL carriers (b; p. 138) 8. Dimensional weight ____. a. is no longer used b. only applies to air transportation c. considers a shipments density d. is associated with commodity rates (c; p. 138) 9. Which of the following is not likely to move by air transportation? a. wearing apparel b. fruits and vegetables c. cut flowers d. auto parts e. all are likely to move by air (e; p. 139)

10. Less-than-truckload (LTL) carriers: a. serve only regional markets b. operate through a series of terminals c. are exempt from hours-of-service regulations d. carry the shipment directly from shipper to consignee (b; p. 139) 11. Truckload carriers focus on shipments of greater than ____ pounds.

a. 10,000 b. 15,000 c. 20,000 d. 25,000 (a; p. 139) 12. Each of the following statements are true, except: a. truckload movements go directly from shipper to consignee without passing through terminals b. truckload shipments cost less per pound than LTL shipments c. in truckload shipments, the shipper loads and the consignee unloads the trailer d. J.B. Hunt is an example of a truckload carrier e. all are true (e; pp. 139-140) 13. Hours-of-service (HOS) rules and speed limits have long been justified in the motor carrier industry on the basis of ____. a. cost efficiency b. operational efficiency c. safety concerns d. customer requirements (c; p. 140) 14. The primary advantage for motor carriers is ____. a. reliability b. speed c. capability d. flexibility (d; p. 140)

15. ____ trucking tends to have the highest cost per hundred weight. a. LTL b. TL c. Parcel d. Expedited (d; pp. 140-141)

16. ____ is the most reliable form of transportation. a. Rail

b. Motor carrier c. Pipeline d. Air e. Water (c; p. 141) 17. ____ allows bulk commodities to become liquefiable by grinding the solid material to a certain particle size, mixing it with liquid, transporting it and then decanting the liquid. a. Rhochrematics b. Slurry systems c. Conveyor systems d. Geothermic systems (b; p. 141) 18. ____ have a level of market concentration and dominance that is not found in the other modes. a. Pipelines b. Airlines c. Railroads d. Motor carriers (c; p. 142) 19. Which mode is not the best or worst on any of the six attributes (e.g., capability, flexibility, etc.) that were used to compare the modes? a. railroads b. water carriers c. pipelines d. motor carriers (a; p. 142) 20. Inland waterways should be dredged to a depth of ____ feet, which tends to be the minimum depth required for most barges. a. six b. nine c. twelve d. fifteen (b; p. 143) 21. A ____ raises or lowers barges so that they can meet the rivers level as they move upstream or downstream. a. towboat b. levee c. barge crane d. lock (d; p. 143)

22. Of the modes with vehicles, ____ offer the greatest capacity (volume that can be carried at one time). a. railroads b. water carriers c. motor carriers d. airlines (b; p. 144) 23. ____ transportation occurs when two or more modes work closely together in an attempt to utilize the advantages of each mode while at the same time minimizing their disadvantages. a. Multimodal b. Intramodal c. Intermodal d. Collaborative (c; p. 144) 24. What is regarded as the key development in intermodal transportation over the past 30 years? a. economic deregulation b. improved rail access c. the container d. the Internet (c; p. 144) 25. The primary advantage to land bridge service is ____. a. less loss and damage b. reduced transit time c. lower transportation cost d. improved reliability (b; p. 145) 26. Freight forwarders: a. are the same as shippers associations b. consolidate the shipments of several carriers c. represent the consignees interests d. consolidate the shipments of several shippers (d; p. p. 146) 27. Shippers associations: a. are the same as a freight forwarder b. function in a manner similar to freight forwarders c. specialize in truckload shipments d. are used only for agricultural products (b; p. 146)

28. A transportation broker: a. looks to match a shippers freight with a carrier to transport it b. deals only with agricultural products c. is the same as a freight forwarder d. tends to be spun off from carriers or management consulting firms (a; p. 147) 29. Firms that specialize in carrying packages that weigh up to 150 pounds are called: a. couriers b. accessorial carriers c. parcel carriers d. expedited carriers (c; p. 147)

30. What is the largest transportation company (by revenues) in the United States? a. FedEx b. Union Pacific Railroad c. American Airlines d. United Parcel Service (d; p. 147) 31. The U.S. ____ is the federal government body with primary responsibility for transportation safety regulation. a. Interstate Commerce Commission b. Department of Commerce c. Department of Homeland Security d. Department of Transportation (d; p. 148) 32. With respect to U.S. economic regulation, the ____ has primary responsibility for resolving railroad rate and service disputes, reviewing potential rail mergers and some jurisdiction over motor carriers, domestic water transportation, and pipelines. a. Surface Transportation Board b. Interstate Commerce Commission c. Federal Trade Commission d. Department of Commerce (a; p. 148)

33. Common carriers of transportation have ____ obligations. a. six b. five c. four d. three e. none of the above (c; p. 150) 34. Which of the following is not a legal classification of carriers? a. Exempt b. Common c. Contract d. Private e. all are legal classifications (e; p. 150) 35. Private transportation is most prevalent in the ____ industry. a. pipeline b. trucking c. railroad d. airline (b; p. 151) True-False Questions 1. Transportation is the actual, physical movement of goods and people between two points. (True; p. 135) 2. There are six different modes of transportation. (False; p. 136) 3. A 10,000 foot (3,047 meter) runway is viewed as adequate for accommodating the largest existing wide body aircraft. (True; p. 136) 4. Rail gauge refers to the thickness of rail track. (False; p. 137) 5. In the U.S., motor carriers have the largest share of ton-miles. (False; p. 137) 6. Air is generally the fastest mode of transportation for shipments exceeding 600 miles. (True; p. 138) 7. Accessorial service is always provided by trucks. (False; p. 138)

8. Products that are air freighted tend to be high in value and tend to require urgent delivery. (True; p. 138) 9. Less-than-truckload shipments range from about 150 to 10,000 pounds. (True; p. 139) 10. Truckload freight moves through a carriers terminal(s). (False; p. 139) 11. Hours-of-service rules and speed limits have generally been justified on the basis of operational efficiency. (False; p. 140) 12. The primary advantage for motor carriers is capability (the amount of different types of products that can be carried). (False; p. 140) 13. Pipelines are a unique mode of transportation because it is the only one without vehicles. (True; p. 141) 14. Railroads are considered the most reliable form of transportation. (False; p. 141) 15. Trunk lines carry crude oil to concentration points. (False; p. 141) 16. The U.S. railroad industry is dominated by four freight carriers. (True; p. 142) 17. U.S. freight railroads are not the best or worst on any of the six attributes that were used to compare modes. (True; p. 142) 18. Twelve feet of water is the minimum depth required for most barges. (False; p. 143) 19. Drought, icing, and flooding can impact the reliability of inland water transportation. (True; p. 143) 20. Barge transportation tends to be slow. (True; p. 143) 21. Of the modes with vehicles, railroads offer the greatest capacity, or volume, that can carried at one time. (False; p. 144) 22. The container is regarded as the key development in intermodal transportation over the past 30 years. (True; p. 144) 23. A commonly used metric for measuring container volumes is the TEU (twenty-foot equivalent unit). (True; p. 144) 24. Freight forwarders are the same thing as freight brokers. (False; pp. 146-147) 25. Freight forwarders sell freight at a higher rate per pound than they pay carriers to haul it. (True; p. 146) 26. Shipper cooperatives perform basically the same function as surface and air freight forwarders, except that cooperatives do not operate as profit-making organizations. (True; p. 146)

27. A transportation broker looks to match a shippers freight with a carrier to transport it. (True; p. 147) 28. Parcels refer to packages weighing up to 100 pounds. (False; p. 147) 29. The largest U.S. transportation company by revenues is FedEx. (False; p. 147) 30. The various types of transportation regulation cost money. (True; p.148) 31. The level and degree of transportation regulation is relatively uniform from country to country. (False; p. 148) 32. Environmental regulation of transportation is concerned with water, noise, and air pollution. (True; p. 148) 33. The U.S. Department of Homeland Security is the federal government body with primary responsibility for transportation safety regulation. (False; p. 148) 34. U.S. pipelines are so safe that there is no federal safety agency assigned to regulate them. (False; p. 149) 35. Economic regulation in transportation refers to control over business practices and activities such as entry and exit; pricing; service; accounting and financial issues; mergers and acquisitions. (True; p. 149) 36. Since deregulation, transportation carriers are no longer constrained with respect to the variety of services they can offer. (True; p. 150) 37. Private carriers do not have to comply with environmental and safety regulations. (False; p. 150 ) 38. Common carrier transportation companies have four specific obligations. (True; p. 150) 39. A contract carrier is under no obligation to render services to the general public. (True; p. 150) 40. Private transportation is most prevalent in the pipeline industry. (False; p. 151)

PART IV CASE SOLUTIONS CASE 6-1 BOONE SHOE COMPANY Question 1: Assume that there are no commodity or exception rates in effect for this shipment. Using Exhibits 6-B, 6-C, and 6-D, calculate the applicable charge. The LCL rating for arch support insoles (item number 13390) is 100 and a CL rating (20,000 pound minimum) is 70. The rate basis number is 579. The rate can then be found; it is $3.49 per hundredweight (CWT). The charge can be calculated with the class rate formula: Rate x $3.49 x weight in CWTs 170 = = charge $593.30

Question 2: Steve remembered that he had heard Larry speak of shipping wind. This involved paying the CL minimum weight in order to receive the CL rate, even if the shipment actually weighed less than the carload minimum weight. Should this technique be used for the shipment? Why or why not? Using the same formula as above: $2.44 x 200 = $488

By using the CL rating and shipping 3,000 pounds of wind, a saving of $105.30 ($593.30 minus $488) is possible. However, in order to qualify for the CL rate, the shipper would have to load the railcar and the consignee unload it. Question 3: The buyer will pay on receipt of the shipment, which is valued at $21,000 plus any transportation charges. Boone Shoe Company borrows money from the bank regularly on an open line of credit and is currently paying interest on its debt at the rate of 15% per year. If rail LCL service is used, delivery time to Green Bay will be about 10 days. If rail CL service is used, delivery time will be 6 days. What is the additional advantage to Boone Shoe Company if it chooses to use CL service? The shoe company should receive their payment 4 days earlier. The annual 15% interest rate works out to be .16% for 4 days. Multiplying $21,000 by .16 gives us $33.60 of savings in interest expense. Question 4: (This is a continuation of question 3.) Boone Shoe Company also owns several large trucks, although Steve is uncertain whether they are available for immediate use. He knows that they could make the delivery to Green Bay in 2 days. He checks the highway distance from St. Joseph to Green Bay and finds that it is 588 miles. Larry had once told Steve that it cost the company $.85 per mile to operate its highway trucks. Do you think that a truck should be used if it is available? Why? The one-way cost is 588 times $.85, or $499.80. Note, however, that this leaves the truck (and driver) in Green Bay. It must either be driven back empty, or a backhaul of some other commodity must be found.

Question 5: (This is a continuation of questions 2 and 3.) Another alternative is to make the shipment by rail from Boones St. Louis warehouse. Rail delivery time will be 4 days. What price should Tom Cook be told to quote to Lawsons? It still pays to ship wind. The rate basis number is 458 and the CL rate (using 460) is 215. Multiplying $2.15 times 200 yields $430. If Tom really wanted to be competitive, he could take into account that payment would be 6 days earlier. Question 6: Boone Shoe Company often sells large quantitiesfrom 10,000 up to 30,000 poundsof arch-support insoles on an FOB-delivered basis. After referring to Exhibit 6-B, do you think there is a minimum weight (in this 10,00030,000 pound range) that customers should be encouraged to order? If so, what is it? Obviously, orders over 20,000 pounds will move at lower (70) ratings. However, because of the shipping wind principle, there are some savings in the weight categories between 14,000 and 20,000 pounds.

PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 7: TRANSPORTATION MANAGEMENT 1. How is the transportation managers job different today than when the first edition of this book was published in the late 1970s? Two major reasons for this difference are globalization and changes in regulation. In the late 1970s, the Peoples Republic of China had just begun to emerge from the Cultural Revolution, a movement that severely restricted the countrys economic development. Today, by contrast, China has a booming economy and is a key source of manufactured products for many countries. The economic deregulation that began in the late 1970s has given the transportation manager greater pricing and service options. 2. Discuss how transportation managers could be involved with other operations of the firm. They assist marketing by quoting freight rates for salespeople, suggesting quantity discounts that can be based on transportation savings, and selecting carriers and routes for reliable delivery of products. Transportation managers can help manufacturing by advising on packaging and materials handling and making certain that an adequate supply of transportation is available when it is needed. In addition, transportation managers help purchasing by advising about methods to control the costs and quality of inbound deliveries and by tracing and expediting lost or delayed shipments of important inputs. 3. Briefly explain the class rate system. The class rate system simplifies rate determination in terms of three primary factorsproduct, weight, and distance. Four factors are used to determine a products classification. They are density, stowability, ease of handling, and liability to damage and theft. Distances are

simplified in terms of rate basis numbers; higher rate base numbers reflect greater distance between two points. Weight is divided into different groups, such as less than 500 pounds, 500999 pounds, and so on. 4. Discuss the four factors used in determining a products freight classification. Density, which refers to how heavy a product is in relation to its size, is viewed as the primary factor for setting a products classification. Low density products (low weight per cubic feet) are assigned a higher classification because these products tend to cube out before they weigh out. Stowability refers to how easy the commodity is to pack into a load, while ease or difficulty of handling refers to challenges to handling that might be presented by a commoditys size, weight, and so on. The liability for loss and damage considers, among others, a commoditys propensity to damage other freight, its perishability, and its value. 5. Explain the weight break concept. The fact that lower volume rates (e.g., LTL rates) tend to be higher than higher volume rates (e.g., TL rates) leads to the weight break concept, that is, the shipment size that equates transportation charges for different rates and weight groups. The weight break concept can be applied whenever rates differ by volume and there is a minimum weight specified for the higher volume classification. 6. Discuss how a transportation manager might take advantage of the trade-offs between price and service. The text provides two examples where monetary premiums were paid for meeting predetermined service standards and there can be monetary penalties for failure to achieve predetermined service standards. For example, two-day delivery of product should be cheaper than next day delivery of product. Price and service tradeoffs are limited only by the transportation managers creativity and ingenuity. 7. Why is the carrier selection process less straightforward than the modal selection process? There are several reasons why the carrier selection process is less straightforward than the modal selection process. First, while there are only five modes, there are many different types of carriers and a plethora of individual carriers within individual modes. Second, there is a lack of agreement as to the number of relevant factors that might be used in carrier selection; the number of carrier selection factors evaluated in academic research has ranged from less than 10 to over 150. 8. Define what is meant by an amodal shipper and discuss the factors that have contributed to its growth. An amodal shipper refers to a transportation manager who purchases a prespecified level of transportation service (e.g., two-day delivery for a particular price) and is indifferent to the mode(s) and / or carriers used to provide the actual transportation service. One reason for its growth is that non-asset based third-party logistics companies have the ability to develop multimodal solutions to a clients transportation problems. Amodalism is also aided by companies

such as UPS and FedEx that own companies that provide different types of transportation services (e.g., air, expedited, etc.). 9. The bill of lading is the single most important document in transportation. Discuss some of the basic functions it performs. The bill of lading is the basic operating document in the transportation industry. It functions as a delivery receipt when products are tendered to carriers. The signed original bill of lading is the shippers legal proof that the carrier received the freight. Furthermore, the bill of lading is a binding contract, specifying the duties and obligations of both the carrier and shipper. 10. Distinguish between the straight bill of lading and the order bill of lading. A straight bill of lading is printed on white paper. It states the name of the consignee in the appropriate place and the carrier is under a strict legal obligation to deliver the freight to the named consignee and to no one else. An order bill of lading is printed on yellow paper and the name of the consignee is not specified. Order bills of lading guarantee that the customer pays for the product prior to receipt. 11. What is a freight bill? Why should each freight bill be audited? A freight bill is an invoice that is submitted by the carrier requesting to be paid. Each freight bill should be audited to ensure that companies are not being charged too much (overcharges) for transportation services. 12. What is the basic rule of thumb regarding the determination of the full actual loss sustained by the shipper or consignee in a loss or damage claim situation? The owner should be made whole by receiving the proper money equivalent for what has actually been lost or to restore the owner to the position he (she) would have occupied had the carrier performed its contract. Products going into general inventory replacement stock mean that the shipper would recover wholesale costs while products destined for the final customer means that the shipper / consignee would receive the retail price. 13. Discuss the basic issues, conflicts, and problems involved in concealed loss and damage claims. Concealed loss and damage claims are more difficult to handle because the exterior package does not appear to be damaged or tampered with. At a later date, the consignee opens the package and finds that the product is damaged or missing. Carriers are reluctant to pay concealed loss and damage claims for two reasons. If the package came through the shipment with no exterior damage then there is a strong possibility that the product was improperly protected on the inside. If this is the case, then the carrier is exempted from liability because improper packaging is the fault of the shipper. Second, the possibility exists that the consignees employees broke or stole the products. 14. Explain why smaller shipments are challenging to transportation managers. The transportation manager faces the decision of whether and when to consolidate large numbers of small shipments into small numbers of large shipments because it costs less on a per-pound basis to ship larger quantities. However, it could take some time to accumulate the

units and this increased time could result in poorer service to the customer. A large number of small shipments also mean that there needs to be an information system capable of keeping track of each shipments status. Moreover, while larger shipments may yield transportation cost savings there are inventory cost considerations to holding units during consolidation. 15. Discuss the basic idea of demurrage and detention and how averaging agreements can be helpful in this area. Demurrage is a penalty payment made by the shipper or consignee to a railroad, inland water carrier, or pipeline for keeping particular equipment beyond the time when it should be released back to the carrier. Detention is the same concept applied to trucking companies. In averaging agreements, an accounting system of debits and credits is established. A credit is received every time the equipment is released early and a debit is recorded every time the equipment is released late. 16. Distinguish between diversion and reconsignment. Diversion occurs when a shipper notifies a carrier, prior to the shipments arrival in the destination city, of a change in the destination. Reconsignment is similar but it occurs after the shipment has arrived in the destination city. Both services are commonly used in conjunction with order bills of lading. 17. Explain how a routing guide might be used by a transportation manager. Routing can be defined as the process of determining how a shipment will be moved between consignor and consignee or between points of acceptance by the carrier and place of delivery to the consignee. A routing guide provides guidance in terms of a preferred list of carriers for shipments moving between two points. The text provides an example of a company that 1) specifies preferred carriers for each origin / destination combination and 2) specifies the ordering of the carriers (most preferred, 2nd most preferred, etc.). 18. What challenges might occur if rail movements of hazardous materials are banned from going through major cities? Railroads currently have a common carrier obligation to transport hazardous materials and if those shipments are prohibited from moving through major cities, they will be rerouted through other, less populated areasit is not likely that these areas will be happy. Moreover, rerouting will add to transit times and transport costs, and the railroads cost of hauling hazardous materials have increased dramatically in recent years because of higher insurance premiums associated with transporting hazardous materials. 19. Distinguish between tracing and expediting. Why are motor carriers being used to a greater extent in expediting? Tracing refers to determining a shipments location during the course of its move and the ability to trace a shipment directly affects expediting, which involves the need to rapidly move a shipment to its final destination. Motor carriers are being used to a greater extent in expediting because they are less expensive than air transportation and because expedited motor carriers can

often dedicate one truck to one shipment, expedited shipment by motor carriage can provide faster and more reliable service than expedited shipments involving air transportation. 20. What is a carrier performance scorecard? How might it be used by a transportation manager? Carrier performance scorecards contain a list of relevant attributes (perhaps the same attributes used to select carriers) and an evaluation of each carrier on every attribute. The performance scorecard could be used as a diagnostic tool; if an individual carriers performance is below a certain number, then the carrier might be put on probation for a certain time period. If performance does not show satisfactory improvement during the probationary period, then the carrier might be fired.

PART III EXAMINATION QUESTIONS CHAPTER 7: TRANSPORTATION MANAGEMENT Multiple Choice Questions 1. In general terms, ____ accounts for about 6% of U.S. Gross Domestic Product. a. warehousing b. logistics c. supply chain management d. transportation (d; p. 160) 2. Studies have indicated that transportation managers can spend up to one-third of their time dealing with ____ considerations. a. modal and carrier selection b. international transportation c. documentation d. rate (pricing) (d; p.161) 3. Which of the following is not one of the primary factors that transportation rates are based upon? a. product b. density c. weight d. distance (b; p. 161) 4. A(n) ____ rate refers to a specific rate for every possible combination of product, weight, and distance. a. exception b. class c. ad valorem d. commodity (d; p. 161)

5. A(n) ____ rate simplifies each of the three primary rate factorsproduct, weight, and distance. a. class b. ad valorem c. commodity

d. exception (a; p. 162) 6. How many factors are used to determine a products freight classification? a. three b. four c. five d. six (b; p. 162) 7. Which of the following is not a factor used to determine a products classification? a. density b. liability to damage and theft c. stowability d. ease of handling e. all are factors used to determine a products classification (e; p. 162) 8. ____ refers to how easy a commodity is to pack into a load. a. Ease of handling b. Recoupering c. Stowability d. Drayage (c; p. 162) 9. Suppose that there is a rate of $75 per hundredweight and you have a 600 pound shipment. What is the correct transportation charge for this shipment? a. $8 b. $450 c. $1,200 d. $45,000 e. cannot be determined (b; p. 162)

10. The shipment size that equates transportation charges for different weights and weight groups is the ____ concept. a. optimum cost reliability point b. satisficing c. weight break d. maximum-minimum (c; p. 166)

11. Suppose the LTL rate is $2.00 per hundredweight, the TL rate is $1.40 per hundredweight and the TL minimum is 18,000 pounds. What is the weight break? a. 5,294 pounds b. 10,588 pounds c. 12,600 pounds d. 30,0000 pounds e. cannot be determined (c; p. 166) 12. Which of the following tends to be the most important factor in carrier selection? a. pricing b. loss and damage performance c. transit time reliability d. financial stability e. none of the above (e; p. 168) 13. A(n) ____ refers to a transportation manager who purchases a prespecified level of transportation service and is indifferent to the mode and carrier used to provide the transportation service. a. industrial transportation manager b. certified logistics professional c. third-party logistics shipper d. amodal shipper (d; p. 168) 14. The most important single transportation document is the: a. bill of lading b. freight bill c. commercial invoice d. certificate of origin (a; p. 169) 15. Each of the following is true, except: a. the bill of lading is the most important transportation document b. the straight bill of lading contains the name of the consignee c. the order bill of lading does not contain the name of the consignee d. the bill of lading adds to the complexity of the transportation managers job e. all of the above are true (d; p. 169) 16. Each of the following is a type of bill of lading, except: a. long b. straight

c. short d. order e. all are a type of bill of lading (e; p. 169) 17. An order bill of lading is used: a. for overseas shipments b. when a shipment must be expedited c. when a shipment is started before the buyer is known d. to guard against disruptions in transit (c; p. 169) 18. An invoice submitted by the carrier requesting to be paid is ____. a. a bill of lading b. a freight bill c. a carnet d. dunnage (b; p.171) 19. The ____ was formed by shippers and carriers as a means for settling freight claims disputes. a. Transportation Arbitration Board b. Freight Claims Council c. Shipper-Carrier Mediation Board d. Traffic Management Claims Committee (a; p. 173)

20. If a product destroyed or damaged in transit is intended to be placed into general replacement inventory, then the retailer would likely receive: a. nothing but an apology from the carrier b. the wholesale price plus 20% c. the retail price minus 20% d. the wholesale price, plus freight if previously paid (d; p. 173) 21. Since deregulation, the volume of transportation claims activity has: a. stayed the same b. decreased c. slightly increased d. dramatically increased (b; p. 173) 22. Small shipments are defined as those that:

a. involve three or fewer cartons b. are moved primarily by parcel carriers c. weigh more than 150 pounds but less than 500 pounds d. weigh more than 10 pounds but less than 100 pounds (c; p. 174) 23. Which of the following statements is false? a. carriers may be reluctant to accept small shipments because they require a high degree of manual labor b. some carriers believe that they lose money on small shipments c. consolidating small shipments into larger ones could result in poorer service to the final customer d. consolidating small shipments into larger ones likely results in higher inventory carrying costs e. all statements are true (e; p. 174) 24. Demurrage charges are collected by which two modes of transportation? a. truck; rail b. pipeline; air c. rail; water d. truck; pipeline (c; p. 176) 25. Which of the following statements is false? a. demurrage is a penalty payment made by the shipper or consignee to a railroad for keeping equipment beyond the time it should be released b. detention is similar to demurrage, except that detention applies to the trucking industry c. averaging agreements can be used with demurrage d. carriers and shippers can negotiate demurrage / detention policies e. all statements are true (e; p. 176) 26. ____ occurs when a shipper notifies a carrier, prior to a shipments arrival in a destination city, of a change in destination. a. Diversion b. Dispatch c. Demurrage d. Detention (a; p. 176) 27. ____ occurs when a shipments destination is changed after it has arrived in the destination city.

a. Diversion b. Demurrage c. Reconsignment d. Re-routing (c; p. 176) 28. ____ can be defined as the process of determining how a shipment will be moved between consignor and consignee or between place of acceptance by the carrier and place of delivery to the consignee. a. Tracing b. Recoupering c. Transportation d. Routing e. None of the above (d; p. 177)

29. A ____ provides guidance in terms of a preferred list of carriers for shipments moving between two points. a. routing guide b. manifest c. bill of lading d. carnet (a; p. 177) 30. The U.S. federal government first began regulating the transportation of hazardous materials in the ____ century. a. 18th b. 19th c. 20th d. 21st (b; p. 177) 31. Which of the following is false? a. a number of large US metropolitan areas are seeking bans on railroad movement of hazardous materials through major cities b. hazardous materials are very common and include some everyday household items c. the US federal government first began regulating the transportation of hazardous materials in the 20th century 19 d. US regulations concerning the transportation of hazardous materials have been modified to more closely resemble those issued by the United Nations

(c; p. 177) 32. ____ is the attempt to locate lost or late shipments. a. Expediting b. Recoupering c. Reparation d. Tracing e. None of the above (d; p. 179) 33. ____ refers to rapidly moving a shipment through a carriers system. a. Expediting b. Recoupering c. Reparation d. Cross-docking (a; p. 179) 34. Tracing refers to: a. determining the least expensive route for a shipment b. locating the proper rate c. locating lost or delayed shipments d. finding the shortest distance between two points (c; p. 179) 35. The installation costs for transportation management systems range from: a. $500,000 - $1,000,000 b. $50,000 several million dollars c. $25,000 - $500,000 d. $100,000 - $2,000,000 (b; p. 179) True-False Questions 1. Todays transportation manager can play an active role in blending the appropriate pricing and service packages for his / her organization. (True; p. 160) 2. Freight transportation accounts for approximately 10% of U.S. Gross Domestic Product. (False; p. 160) 3. Studies have indicated that transportation managers can spend up to one-third of their time dealing with rate considerations. (True; p. 161) 4. A commodity rate is very good for dealing with demand-specific situations. (True; p. 161)

5. The class rate system simplifies with respect to three primary factorsdensity, product, and distance. (False; p. 162) 6. Weight is one of the four factors used to determine a products freight classification. (False; p. 162) 7. Stowability refers to how easy a commodity is to pack into a load. (True; p. 162) 8. A transportation charge (the cost of transportation) can be calculated by multiplying the weight times the rate. (True; p. 162) 9. With respect to a commoditys freight classification, shippers tend to prefer a higher classification number while carriers tend to prefer a lower classification number. (False; p. 164) 10. A weight break refers to the maximum weight of freight that can be loaded into a vehicle before another vehicle is needed. (False; p. 166) 11. Fewer than 500 motor carriers currently use the freight classification system. (False; p. 166) 12. The price and service tradeoffs available to todays transportation manager are limited only by her / his creativity and ingenuity. (True; p. 167) 13. The carrier selection procedure appears to be less straightforward than the procedure for modal selection. (True; p. 168) 14. Transit time reliability is the most important factor that shippers tend to use when selecting carriers. (False; p. 168) 15. An amodal shipper uses a logistics intermediary to make the relevant transportation decisions. (False; p. 168) 16. Transportation documentation serves both a practical function (e.g., what, where, and how much is being transported) as well as potentially providing legal recourse if something goes awry. (True; p. 169) 17. The most important single transportation document is the bill of lading. (True; p. 169) 18. An order bill of lading specifies the consignee. (False; p. 169) 19. The long-form bill of lading contains the entire contract between shipper and carrier. (True; p. 169) 20. The bill of lading is an invoice, submitted by the carrier, requesting to be paid. (False; p. 171) 21. Freight bill audits are designed to detect errors that result in overcharges and to correct these errors in the future. (True; p. 172) 22. The Transportation Arbitration Board (TAB) was formed by a group of disgruntled shippers as a method for settling claim disputes. (False; p. 173)

23. Suppose that a shipment of products destined for a particular retailer is lost or damaged. If these products were going into general inventory replacement stock, then the retailer is entitled to recover the wholesaler price plus freight costs (if they were paid). (True; p. 173) 24. Concealed loss and damage claims are some of the most difficult for shippers and carriers to handle. (True; p. 173) 25. Since deregulation, the volume of transportation claims activity has increased. (False; p. 173) 26. Small shipments refer to those that can be handled relatively expeditiously and inexpensively by either the postal system or UPS. (False; p. 174) 27. From a transportation managers perspective, small shipments are costly to transport and often receive poor service from transportation carriers. (True; p. 174) 28. Transportation specialists such as freight forwarders, shippers associations, and transportation brokers can be helpful in achieving consolidation across place for small shipments. (True; p. 174) 29. Demurrage is a payment penalty associated with railroads, while detention is a payment penalty associated with the trucking industry. (True; p. 176) 30. In demurrage-related averaging agreements, slow equipment returns can be offset by fast equipment returns. (True; p. 176) 31. Todays transportation carriers tend to have uniform demurrage and detention policies. (False; p. 176) 32. Diversion occurs after a shipment has arrived in its destination city. (False; p. 176) 33. Although the text presents diversion and reconsignment as two separate concepts, the two terms are sometimes used interchangeably. (True; p. 176) 34. A carnet provides guidance in terms of a preferred list of carriers for shipments moving between two points. (False; p. 177) 35. The U.S. federal government has been regulating the transportation of hazardous materials since the mid-1970s. (False; p. 177) 36. U.S. regulations regarding the transportation of hazardous materials have been modified to more closely resemble those devised by the United Nations. (True; p. 177) 37. Tracing refers to determining a shipments location during the course of its move. (True; p. 179) 38. Expedited shipment by motor carriage can sometimes provide faster and more reliable service than expedited shipping involving air transportation. (True; p. 179) 39. The installation costs for transportation management systems range from $500,000 to $1,500,000. (False; p. 179)

40. Some transportation managers have developed performance scorecards that contain a list of relevant attributes and an evaluation of each carrier on every attribute. (True; p. 180) PART IV CASE SOLUTIONS CASE 7-1 CHIPPY POTATO CHIP COMPANY Because motor freight classifications are not static, but change over time, it is suggested that students visit www.nmfta.org, a website that provides up-to-date information on the National Motor Freight Classification (NMFC). Question 1: If you worked for Chippy, what new classification would you ask for? Give your reasons. As of December 2006, the NMFC indicated that absent compelling information about other freight classification characteristics (e.g., stowability), density becomes the chief criteria guiding classification. The old style chips have a density of 4.67 pounds per cubic foot (carton weight of 14 pounds divided by carton size of 3 cubic feet, while the new style chips have a density of 10 pounds per cubic foot (carton weight of 10 pounds divided by carton size of 1 cubic feet). Again, as of mid-2003, a 10 lb/cubic foot density could qualify for a classification of 100. Moreover, the relatively low value per pound of the product qualifies for a classification of less than 100. Question 2: Classifications are based on both cost and value of service. From the carriers standpoint, how has cost of service changed? At a minimum, the cost of service is changed in the sense that the increased density per cubic foot means that carriers will be able to carry greater weight before cubing out of vehicle space. The cost of service might also change because the tubular containers may result in less product damage. Question 3: Given the existing LTL classification of 200, how has value of service to the customer changed? Because the tubular containers may result in less product damage, the value of service to the customer may change. On the other hand, the value of service appears to be negatively impacted in that they are paying $.59 for a five ounce container, versus $.59 for an eight ounce bagin other words, about a 40% decrease in product for the same price. Question 4: The new tubular containers are much sturdier. If you worked for Chippy, howif at all would you argue that this factor influences classification? As pointed out in questions 2 and 3, Chippy might argue that the sturdier container makes it less likely that the potato chips will be damaged and because of this, a lower classification should be assigned. Question 5: You work for the motor carrier classification bureau and notice that the relationship between the weight of potato chips and the weight of packaging has changed. How, it at all, should this influence changes in the products classification?

It appears as if the ratio of total product weight to total carton weight with the old chips is approximately 85.7%. (The carton weighs 14 pounds or 224 ounces; the product weight is 24 bags times 8 ounces per bag, or 192 ounces. 192 divided by 224 equals 85.7%.) As such, packaging appears to account for 14.3% of the total carton weight. By contrast, the product to carton weight for the new chips is 75% (120 ounces of product divided by 160 ounces of carton weight), meaning that packaging appears to be 25% of the total carton weight. The motor carrier classification bureau could argue several things with respect to classification: (1) That there is less packaging efficiency in the new system (in the sense that less of the carton contains actual product) and thus classification should be higher; (2) The increased proportion of packaging might be a surrogate for susceptibility to loss and damage, which again would argue for a higher classification. Question 6: One of Chippys own trucks, used for local deliveries, has two axles and an enclosed body measuring (inside) seven feet by eight feet by twenty feet and is limited by law to carrying a load of no more than 8,000 pounds. Because the truck is not supposed to be overloaded, what combinations, expressed in terms of cartons of each, of new- and old-style chips can it legally carry? (Hint: use a piece of graph paper.) As a starting point, one might calculate the number of cartons that it would take to weigh out as well as cube out. With respect to the old style, 8,000 pounds of capacity divided by 14 pounds per carton yields a capacity of 571 cartons. The capacity of the truck is 1,120 cubic feet (7 times 8 times 20); the 3 cubic foot carton for the old style yields a capacity of 373 cartons. In other words, the vehicle will cube out before it weighs out (373 cartons times 14 lbs/carton = 5,222 pounds). In terms of the new style, the 8,000 pound vehicle capacity divided by 10 pounds per carton yields 800 cartons. As for cubic usage the 1,120 cubic feet divided by the 1 cubic foot carton gives us 1,120 cartons; thus the vehicle will weigh out before it cubes out.

CASE 7-2 Nuernberg Augsburg Maschinenwerke (N.A.M.) Question 1: Assume that you are Weiss. How many viable alternatives do you have to consider regarding the initial shipment of 25 buses? The answer to this question can vary depending on how students define viable alternatives. If we take a broad perspective and just focus on the primary cities, Bremerhaven does not appear to be an option because there is no scheduled liner service in the desired time frame. That leaves us with Prague to Santos through Hamburg and Prague to Santos through Rotterdam. Several of the vessel departure dates for both alternatives are not feasible. For example, the 18 day transit time from Hamburg eliminates both the October 31st and November 3rd departures; likewise, the 17 day transit time from Rotterdam eliminates the November 2nd departure. And although the October 27th departure from Hamburg or the October 28th departure from Rotterdam should get the buses to Santos by November 15th, neither departure leaves much room for potential transit delays (e.g., a late season hurricane). As such, it appears that Weiss has but two viable alternatives; the October 24th departure from Hamburg and the October 23rd departure from Rotterdam. Question 2: Which of the routing alternatives would you recommend to meet the initial 90-day deadline for the 25-bus shipment? Train or waterway? To which port(s)? What would it cost? If one assumes that rail transport is used from Prague to either Hamburg or Rotterdam, then the total transportation costs of the two alternatives are virtually identical. Although rail costs to Rotterdam are 300 higher than to Hamburg, the shipping costs from Rotterdam are 300 lower than from Hamburg (based on 6000 times .95). Because the total transportation costs are essentially the same, the decision likely needs to be based on service considerations. The initial shipment is extremely important. It might be suggested that Prague to Hamburg by rail and Hamburg to Santos by ocean vessel is the preferred alternative. Our rationale is that the provided transit times with Hamburg are definitive, that is, 3 days by rail and 18 days by water. With Rotterdam, by contrast, the rail transit time is either 4 or 5 days, although water transportation is 17 days. Question 3: What additional information would be helpful for answering question 2? There is a variety of other information that would be helpful for answering question 2. For example, the case offers no insight about port congestion issues and how this congestion might impact the timeliness of shipment loadings. There also is no information about port performance in terms of loss and damage metrics. In addition, although the case indicates that rail transit time from Prague is either 4 or 5 days, it might be helpful to know what percentage of shipments is completed in 4 days. Students are likely to come up with more suggestions. Question 4: How important, in fact, are the transport costs for the initial shipment of 25 buses? Clearly, with ocean shipping costs of either 5700 or 6000 per bus, transportation costs cannot be ignored. Having said this, the initial shipment holds the key to the remainder of the order (another 199 buses) and appears to be instrumental in securing another order for 568 buses (for a total of 767 more buses). As such, N.A.M might be somewhat flexible with respect to transportation costs for the initial shipment. Suppose, for example, that N.A.M. can earn a profit of 5000 per bus (such profit on a 120000 bus is by no means exorbitant). A profit of

5000 times 767 buses yields a total profit of 3,835,000. Because of such a large upside with respect to additional orders, N.A.M. might focus on achieving the specified metrics for the initial shipment without being overly concerned with transportation costs. Question 5: What kinds of customer service support must be provided for this initial shipment of 25 buses? Who is responsible? Although a number of different constituencies are involved in the initial shipment (e.g., railroads, dock workers, ocean carrier, etc.), the particular customersthe public transit authoritiesare buying product from N.A.M. Because of this, N.A.M. should be the responsible party with respect to customer service support. There are myriad kinds of customer service support that might be provided. Real-time shipment tracking should be an option so that the customers can know, at any time, the location of the shipment. N.A.M. might also provide regular updates of shipment progress; perhaps N.A.M. could email or fax important progress points (e.g., the shipment has left Prague; the shipment has arrived in Hamburg, etc.) to the customers. Because successful performance on the initial shipment is crucial to securing future business, N.A.M. might have one of their managers actually accompany the shipment. Question 6: The Brazilian buyer wants the buses delivered at Santos. Weiss looks up the International Chamber of Commerces year 2000 Incoterms and finds two categories of delivered at a receiving port. They are: DES (Delivered Ex Ship). In this type of transaction, the seller must pay all the costs and bear all the risk of transport up to the foreign port of unloading, but not including the cost or risk of unloading the cargo from the ship. DEQ (Delivered Ex Quay). This is the same as DES except that the terms provide for the seller to pay the costs of unloading the cargo from the vessel and the cost of import clearance.

How should he choose? Why? Again, given the importance of the initial shipment, it would appear that the more control that N.A.M. has over the process, the better. Although the DEQ option is more costly, it also affords N.A.M. a bit more control later into the shipment process. Moreover, a willingness by N.A.M. to take on the additional costs associated with DEQ might be viewed in a positive fashion by the customers. Question 7: Would you make the same routing recommendation for the second, larger (199 buses) component of the order, after the initial 90-day deadline is met? Why or why not? Time pressures do not appear to be as critical for the larger component of the order, so this might argue for use of water transportation between Prague and Hamburg. The rationale would be that even though water transportation is slower, it saves money ( 48 per bus) over rail shipments. Alternatively, given that the selling price per bus is likely to be around 120000, trading off 3 days transit time in exchange for a savings of 48 might not be such a good idea. Question 8: How important, if at all, is it for N.A.M. to ship via water to show its support of the Green movements desires? On the one hand, N.A.M. could use rail transportation to Hamburg, Bremerhaven, or Rotterdam a significant point in that the case indicates that the Green movement appears to be more concerned with substituting water for truck movements than with substituting water for rail movements. Alternatively, the case also indicates that the Green movement has not hesitated to publicly embarrass shippers who use trucks instead of water. Have (will) the Greens also targeted shippers who use rail instead of water? What is the nature of the public embarrassment formulated by the Greens?

PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 8: DISTRIBUTION CENTER, WAREHOUSE, AND PLANT LOCATION 1. How can advances in technology and communication influence the facility location decision? The text cites an example of a manufacturer that used the Internet to gather the relevant data for choosing a new production facility to serve their customers east of the Rocky Mountains. Advances in technology and communication allow companies the ability to collect data inexpensively and relatively quickly. 2. Discuss the factors that influence the number of facilities that a firm chooses to operate. Rather than asking, Where should a new facility be located? organizations should be thinking about the optimal number of facilities in the system. The need for additional facilities often arises when an organizations service performance from existing facilities drops below

acceptable levels. The general trend in recent years has been for companies to reduce the number of facilities in their distribution networks. 3. Briefly describe the general factors influencing facility location. The cost and availability of natural resources may be a factor, particularly for manufacturing facilities. An areas population is also important; population serves as a market for goods as well as a source of labor. Taxes and subsidies are yet another general factor, as is the cost and availability of transportation. Over the past two decades, many organizations have identified proximity to key suppliers as an important determinant when locating a facility. Trade patterns, such as commodity flows, can be studied to determine changes occurring in the movement of raw materials and finished goods. An increasingly important locational factor can be broadly called quality-of-life considerations and can include access to commercial air travel, an areas cost of living, and its crime, among others. 4. How does a raw materials status as pure, weight-losing, or weight-gaining influence the facility location decision? A pure raw material is one that loses no weight in manufacturing and, because of this, the processing point can be anywhere near the raw material source and the market. Weight-losing products lose weight during processing; the processing point should be near their source in order to avoid payment of unnecessary transportation charges. Weight-gaining products gain weight during processing; the processing point should be close to the market. 5. Discuss how environmental considerations might influence the facility location decision. One set of environmental considerations involves various types of pollutionair, water, and noise. Another is the conservation of natural resourcessometimes with respect to those used in production and other times for various reasons. Developing nations often have lax environmental regulations, a situation that can foster economic growth and improve standards of living. These lax environmental regulations may have long-term consequences, such as depletion of key natural resourceswhich could render certain facilities meaningless. 6. Discuss how population can be viewed as both a market for goods and a source of labor. With respect to a market for goods, attributes of current and potential customers are important. Things such as changes in population size as well as changes in population characteristics are important. In terms of population size, for example, India and China are potentially attractive markets in part because these two countries account for approximately one-third of the worlds population. There are myriad concerns associated with population as a source of labor, to include the size of the workforce; the unemployment rate; the age profile; its skills and education; prevailing wage rates; and union status. 7. How might the factors considered important for locating manufacturing facilities differ from the factors considered important for locating a distribution facility?

There are a number of possible answers for this question. For example, the availability of natural resources is probably much more important for a manufacturing facility than a distribution facility. Population is likely to be an important factor regardless of whether one is looking at a manufacturing facility or a distribution facilitybut the relevant attributes may differ. Access to low cost labor might be a greater consideration for a manufacturing facility than for a distribution facility. The impact of taxes and subsidies is likely to be different as well. For instance, certain regions may develop subsidy/incentive plans to attract manufacturing facilities (e.g., foreign automakers locating in the Southern United States) while inventory taxes could be a concern with distribution facilities. 8. Discuss the advantages and disadvantages of locating manufacturing, assembly, or distribution facilities in countries with relatively low wages. Labor wage rates appear to be a key locational determinant as supply chains become more global in nature. Although absolute wage comparisons are important, relative comparisons can be quite insightful. For example, at prevailing wage rates, a company could have approximately similar compensation costs by hiring nine Mexican workers or one U.S. worker. Nine workers might generate more total output than one worker, so there could be productivity advantages as well. One possible disadvantage is that there are sometimes limits on the number of supervisory personnel that can be brought in from outside the country. There may also be regulations that specify that nationals be trained for and employed in supervisory posts. Countries with low labor costs may also have a number of sweatshops, which can be viewed as organizations that exploit workers and that do not comply with fiscal and legal obligations towards employees. 9. What are right-to-work laws? How do they influence locational decisions? Right-to-work laws refer to situations where an individual cannot be compelled to join a union as a condition of employment. Right-to-work laws tend to make particular locations more attractive to potential employers; in recent years several non-U.S. automakers have constructed production facilities in right-to-work states such as Alabama, Georgia, and Texas. 10. What are expatriate workers? What challenges do they face? Expatriate workers are those employees who are sent to other countries to work for extended periods of time. It appears that most expatriate turnover is caused not by technical factors (knowledge and skills) but, rather, by socialization issues. These socialization concerns can be magnified if the expatriates family comes along on the work assignment; its vital that the expatriate and his/her family are comfortable with the social and cultural factors of the country where they will be employed. 11. Do you think inventories should be taxed? Why or why not? Students can take either side in answering this question. An inventory tax may be a disincentive in the sense that it adds to the cost of doing business and may cause a certain location to be viewed as less business friendly. Moreover, as this manual is being prepared, there are suggestions that inventory taxes might be obsolete by 2010, in part because of lack of agreement of what is meant by inventory.

12. What are empowerment zones? What is their relevance to locational decisions? Empowerment zones were created by the U.S. Department of Housing and Urban Development to encourage business development, through tax credits, in economically depressed portions of individual cities. They represent one type of incentive for locating a facility in less-thandesirable areas. 13. What mode of transportation do you think is the most important to firms when evaluating new sites? Why? The answer to this question will depend on the type of facility that is being considered. A manufacturing plant might need both rail service (in order to bring in raw materials) and truck service (to carry the finished goods). A distribution center for repair parts might, by contrast, need highway and air service. 14. What are supplier parks? Give some examples. Supplier parks require key suppliers to locate on, or adjacent to, assembly plants which helps to reduce shipping costs as well as inventory carrying costs. They have been popular in Europe, have spread to other continents, and have often been associated with automakers and their suppliers. 15. Discuss how multicountry trade agreements have influenced the location of production or distribution facilities. The North American Free Trade Agreement (NAFTA) has seen Mexico become the third largest trading partner for the United States. NAFTA has resulted in increased north-south movement of product among the United States, Canada, and Mexico, and the Interstate 35 corridor has become a hotbed for distribution activity. The virtual elimination of trade barriers among members of the European Union (EU) has allowed many companies to reduce the number of relevant distribution facilities. When the EU consisted of 14 countries, the Benelux countries were a favored location for distribution facilities. However, since the EUs addition of 10 Central and Eastern European countries in 2004, the Czech Republic has become a favored production and distribution site because of its relatively central geographic location. 16. What quality of life considerations do you think are the most important for locational decisions? Why? There are a number of acceptable answers for this question, and the answer may vary from student to student. An unmarried student with no children, for example, might have a much different response from a married student with children. 17. Beyond the general factors discussed in this chapter, what additional considerations are important when a firm is thinking of locating a facility (facilities) in other countries?

The considerations include the relevant legal system; political stability; bureaucratic red tape; corruption; protectionism; nationalism; privatization; expropriation (confiscation); treaties and trade agreements. Social unrest and crime may also be important considerations, as are culture, customs, holidays, language, level of education, and religion. Currency fluctuations and devaluations can result in frequent cost changes for expatriate workers. The laws in the host country, and the ability to repatriate profits, limit ones ability to use profits that operations in the host country might generate. 18. What is a free trade zone? What functions might be performed in it? Free trade zones refer to highly specialized sites where a company can locate without being subjected to duties and quotas until the goods or their products enter the customs territory of the zone country. Functions that might be performed include storing, processing, exhibiting, and/or manufacturing. 19. Discuss advantages and disadvantages to grid systems such as the center-of-gravity and weighted center-of-gravity approaches. As a general rule, grid systems can be used for locating a single facility so that the distance to existing facilities is minimizedand by extension, transportation costs are minimized as well. In addition, grid systems are relatively simple to apply, and calculations can be done relatively quickly. Alternatively, the relative simplicity means that adjustments have to be made to take into account real-world considerations such as taxes, wage rates in particular locations, volume discounts, the cost and quality of transport services, and the fact that transport rates taper with increased distances. 20. Distinguish between facility relocation and facility closing. How should companies deal with their human resources (workers) in both situations? Facility relocation occurs when a firm decides that it can no longer continue operations in its present facility and must move operations to another facility in order to better serve suppliers and/or customers. Facility closing, by contrast, occurs when a company decides to discontinue operations at a current site because the operations may no longer be needed or can be absorbed by other facilities. Regardless of whether we are talking about relocation or closing, current employees should be kept informedby their employerabout relevant issues. Information from other sources could cause confusion, anger, and lower morale and could easily offset the productivity of the existing facility. Additional information is generally required for facility closings, in the sense that the Worker Adjustment and Retraining Notification Act mandates that employers give 60 days notice about closings and mass layoffs.

PART III EXAMINATION QUESTIONS CHAPTER 8: DISTRIBUTION CENTER, WAREHOUSE, AND PLANT LOCATION Multiple Choice Questions 1. The major factors influencing locational decisions are ____ and____. a. markets; resource availability b. labor; transport services c. markets; labor d. transport services; resource availability e. none of the above (a; p. 188) 2. Each of the following is a dimension in facility location except: a. time b. cost c. value d. size (d; p. 189) 3. With respect to facility location decisions, firms are seeking the most ____ at the least ____ in the least elapsed amount of time. a. customers; cost b. value; effort c. value; cost d. sites; distance (c; p. 189) 4. The initial focus in facility location is on a____. a. city b. county c. state d. region (d; p. 189)

5. The general trend in recent years has been for companies to do what with their distribution networks? a. maintain the status quo b. reduce the number of facilities c. slightly increase the number of facilities d. relocate their facilities (b; p. 191) 6. Chicago Consulting is known for its annual list of The 10 Best Warehouse Networks for serving the U.S. population. For what country did Chicago Consulting debut a 10 Best Warehouse Networks during 2006? a. India b. China c. Brazil d. Russia (b; p. 191) 7. A pure material: a. is one that loses no weight in manufacturing b. cannot be mixed with other materials c. is soluble in water d. comes from the ocean e. none of the above (a; p. 193) 8. The processing point for a pure material: a. should be near its source b. should be near the final market c. can be anywhere in the world d. can be anywhere near the source and the market (d; p. 193) 9. The processing point for a weight-losing raw material: a. can be anywhere near the source and the market b. should be near its source c. should be near the final market d. should be equidistant between the source and the market (b; p. 193)

10. The processing point for a weight-gaining raw material: a. can be anywhere near the source and the market

b. should be near its source c. should be near the final market d. should be equidistant between the source and the market (c; p. 193) 11. Over the past quarter century, discussion of natural resources and facility location has increasingly factored in ____ considerations. a. cost b. supply chain c. ethical d. environmental (d; p. 193) 12. What two countries account for approximately one-third of the worlds population? a. Indonesia; China b. India; China c. United States; India d. Indonesia; United States (b; p. 194) 13. According to a recent update to the 2000 U.S. census, the population of the ____ is projected to grow approximately 14% between 2000 and 2010. a. Great Lakes b. Northeast c. West d. Southeast e. none of the above (c; p. 194) 14. Which of the following countries has the highest hourly worker compensation? a. Germany b. United States c. Japan d. Great Britain (a; p. 195) 15. ____ plants, which are located just south of the U.S.Mexican border, provide much needed jobs to Mexican workers and allow for low-cost, duty-free production so long as all the goods are exported from Mexico. a. b. c. d. Expatriate Trade zone Nationalization Maquiladora

(d; p. 195) 16. Right-to-work laws refer to a situation where: a. an individual cannot be compelled to join a union as a condition of employment b. each state provides employment to those people receiving public assistance c. every person who wants a job is guaranteed a job d. worker strikes are illegal (a; p. 195) 17. All of the following are true, except: a. countries with low labor costs often have a multitude of sweatshops b. a workforces union status may be a key locational determinant for some organizations c. expatriate work assignments can be costly d. there has been declining union membership in industrialized nations e. all are true (e; pp. 195-196) 18. An expatriate refers to a person: a. who holds dual citizenship b. who is sent to work in other countries for extended periods of time c. who is ISO 9000 certified d. who has renounced union membership e. none of the above (b; p. 196) 19. Logisticians and supply chain managers have a particular interest in ____ taxes. a. real estate b. corporate income c. inventory d. severance (c; p. 196) 20. A general rule of thumb is that the services being received in exchange for taxes represent about ____% of the taxes paid. a. 80 b. 70 c. 60 d. 50 (d; p. 197) 21. The purpose of ____ zones is to encourage business development in economically depressed portions of a particular city. a. commercial

b. free trade c. privatization d. empowerment (d; p. 197) 22. Which of the following is not a general factor influencing facility location? a. transportation considerations b. natural resources c. proximity to key suppliers d. trade patterns e. all are general factors (e; pp. 193-199) 23. It has been suggested that all things being equal, the best locations are generally those where the best ____ are located. a. skilled workers b. warehousing facilities c. transportation services d. natural resources (c; p. 197) 24. The existence of transportation competition, whether intermodal or intramodal, tends to: a. have cost, but not service, benefits to a user b. have service, but not cost, benefits to a user c. have both cost and service benefits to users d. have neither cost nor service benefits to users (c; p. 197) 25. Supplier parks are a concept that developed around ____ and their suppliers in Europe. a. supermarkets b. apparel makers c. computer makers d. automakers (d; p. 199) 26. With respect to commodity flows, logisticians are especially interested in ____ and ____. a. what is being produced; where it is being produced b. how much is being produced; where it is being shipped c. how much is being produced; where it is being produced d. what is being produced; where it is being shipped (b; p. 199)

27. Since the European Unions expansion into 10 Central and Eastern European countries in 2004, ____ has become a favored production and distribution site because of its relatively central location. a. Czech Republic b. Poland c. Estonia d. Austria (a; p. 200) 28. Which of the following is not a possible quality of life consideration? a. access to commercial air travel b. cost of living c. crime rate d. educational opportunities e. all are quality of life considerations (e; p. 200) 29. A brownfield is: a. a term for where crushed boxes are kept before recycling b. a term that refers to a potential facility site that has no trees needing to be cleared before construction c. a property for which use and redevelopment is complicated by past use d. an airport that lacks paved runways (c; p. 201) 30. A free trade zone refers to: a. an area that is home to businesses that are owned and operated by large concentrations of a particular ethnic group b. an area in which products can be stored, exhibited, or processed without being subjected to duties and quotas unless they enter the customs territory of the zone country c. an area in which the federal government disregards all import and export quotas for products coming from, or destined to, favored nations d. an area outside the legal jurisdiction of federal, state, and/or local governments e. none of the above (b; p. 202) 31. Each of the following statements about free trade zones are false, except: a. they must be located adjacent to ports or airports b. they cannot be used for processing or manufacturing c. they require duties to be paid prior to leaving the trade zone d. they have become less popular in recent years e. all are false (e; p. 202)

32. The center-of-gravity approach to location analysis minimizes: a. labor costs b. warehousing costs c. taxes d. distance to existing facilities (d; p. 204) 33. How does the weighted center-of-gravity approach to location analysis differ from the center-ofgravity approach to location analysis? a. the weighted approach considers taxes b. the weighted approach is less complicated c. the weighted approach considers shipment volume d. the weighted approach considers tapering rates (c; p. 204)

34. Location within another firms channel is feasible assuming that the products involved are ____. a. complementary b. supplemental c. very similar d. very different (a; p. 205) 35. Which of the following is not a possible reason for facility closings? a. eliminating redundant capacity in mergers and acquisitions b. poor planning c. improving supply chain efficiency d. insufficient volume of business e. all of the above are possible reasons (e; p. 206) True-False Questions 1. The major factors influencing locational decisions are markets and resource availability. (True; p. 188) 2. With respect to facility location decisions, firms are seeking the most value at the least cost in the least elapsed amount of time. (True; p. 189) 3. The initial focus in facility location is on the region. (True; p. 189)

4. The general trend in recent years has been for companies to increase the number of facilities in their distribution networks. (False; p. 191) 5. Chicago Consultings The 10 Best Chinese Warehouse Networks suggests that going from two to five warehouses allows a company to save nearly one day of lead time to the Chinese population. (True; p. 191) 6. A pure material is one that is totally water soluble. (False; p. 193) 7. The processing point for a pure material can be anywhere between the source and the market. (True; p. 193) 8. The processing point for a weight-losing raw material can be anywhere between the source and the market. (False; p. 193) 9. The processing point for a weight-gaining raw material should be close to the market. (True; p. 193) 10. Over the past quarter century, discussion of natural resources and facility location has increasingly factored in supply chain considerations. (False; p. 193) 11. Population can be viewed as both a market for goods and a potential source of labor. (True; p. 194) 12. Population size is an irrelevant consideration in the facility location decision. (False; p. 194) 13. Labor wage rates appear to be a key locational determinant as supply chains become more global in nature. (True; p. 195) 14. The United States has the highest hourly compensation rates in the world. (False; p. 195) 15. Maquiladora plants have experienced resurgence in recent years because of a focus on manufactured products that depend on fast time to market. (True; p. 195) 16. Sweatshops are organizations that exploit workers and that do not comply with fiscal and legal obligations. (True; p. 195) 17. Right-to-work laws mean that every person who wants a job is guaranteed a job. (False; p. 195) 18. An expatriate is a person who holds dual citizenship. (False; p. 196) 19. Turnover rates for expatriate workers currently range between 20% and 40%. (True; p. 196) 20. The inventory tax is based on the average amount of inventory during a six-month period. (False; p. 196) 21. There are suggestions that inventory taxes may be obsolete by 2010 in part because of lack of agreement as to what is meant by inventory. (True; p. 196)

22. The services received from business taxes represent only about 50% of the taxes that were paid. (True; p. 197) 23. The purpose of empowerment zones is to encourage business development in economically depressed portions of a city. (True; p. 197) 24. Transportation considerations, in the form of transportation availability and costs, tend to play a relatively minor role in facility location decisions. (False; p. 197) 25. Intermodal competition refers to the number of carriers within a particular mode of transportation. (False; p. 197) 26. Centralized facilities tend to minimize total transit distances, which likely results in minimum transportation cost. (True; p. 197) 27. Supplier parks refer to places where main component makers locate in specially created industrial complexes adjacent to assembly plants. (True; p. 199) 28. With respect to commodity flows, logisticians are especially interested in what is being produced and where it is being produced. (False; p. 199) 29. The development and implementation of multicountry trade agreements has had profound impacts on trade patterns. (True; p. 199) 30. Since the European Unions expansion into 10 Central and Eastern European countries in 2004, Poland has become a favored production and distribution site because of its relatively central geographic location. (False; p. 200) 31. Quality of life considerations play a limited role in locational decisions. (False; p. 200) 32. Government considerations such as the relevant legal system, political stability, and protectionism are important when companies are thinking of facility locations in non-domestic countries. (True; p. 200) 33. Zoning classifications can be changed in an effort to encourage or discourage business activity. (True; p. 201) 34. Brownfields refer to a place where flattened cartons are stored until they are recycled. (False; p. 201) 35. Free trade zones must be adjacent to a port or airport. (False; p. 202) 36. Grid systems are important to locational analysis because they allow one to analyze spatial relationships with relatively simple mathematical tools. (True; p. 202) 37. The idea behind a weighted center-of-gravity approach is that a prospective warehousing facility will be located closer to the existing sites with the greatest current demand. (True; p. 204) 38. Location within another firms channel is feasible assuming that the products involved are supplementary in nature. (False; p. 205)

39. Facility relocation is associated with business growth, while facility closing is associated with business contraction. (True; p. 205) 40. Communication with employees is more important for facility closings than for facility relocations. (False; p. 206)

PART IV CASE SOLUTIONS CASE 8-1 AERO MARINE LOGISTICS Question 1: What would the first-year costs be to AML if they purchased the 10 used 20-foot containers? How long would it take to recoup the investment, assuming that the mushroom traffic continued? Cost category Inbound transportation Outbound transportation Maintenance Energy Total Revenue category Mushroom sales Backhaulsa Total Monthly revenue ($U.S.) 30,000 Monthly cost ($U.S.) 20,000 10,000 Annual cost ($U.S.) 240,000 120,000 22,220 33,330 415,550 Annual revenue ($U.S.) 360,000 12,000 372,000

a: based on 120 container shipments per year; 10% of return loads, or 12 containers, would generate revenues equal to the associated costs According to the above data, the proposed service is a money loser and the relevant investment ($255,530 in U.S. currency) cannot be recouped. Investment costs are as follows: 10 containers @ 7 lakh = 70 lakh; re-equipping of 5 flatcars @ 9 lakh = 45 lakh, for a total investment of 115 lakh. Multiplying 115 lakh times $2,222 per lakh = $255,530. Question 2: What would the first-year costs be to AML if they purchased 5 new 40-foot containers? How long would it take to recoup the investment, assuming that the mushroom traffic continued? Cost category Inbound transportation Outbound transportation Maintenance Energy Total Revenue category Mushroom sales Backhaulsa Total Monthly revenue ($U.S.) 30,000 Monthly cost ($U.S.) 15,500 7,750 Annual cost ($U.S.) 186,000 93,000 0 33,330 312,330 Annual revenue ($U.S.) 360,000 9,300 369,300

a: based on 60 container shipments per year; 10% of return loads, or 6 containers, would generate revenues equal to the associated costs According to the above data, the proposed service would generate an annual profit of $56,970 ($369,300 minus $312,330). The investment in for 5 containers is as follows: 5 containers @ 15 lakh = 75 lakh, plus 5 re-equipped flatcars @ 9 lakh = 45 lakh, for a total of 130 lakh. 130 lakh = $288,860; this divided by $56,970 yields a payback time of approximately 5.1 years. Question 3: Is either of the alternatives covered in questions 1 and 2 riskier? Why? Given that the 10-container option yields an annual losswhich precludes recouping any part of the relevant investmentit appears to be the riskier of the two alternatives. Question 4: Mr. Singh has read about the supply-chain concept that attempts to identify and link all the participants from suppliers suppliers to customers customers. Who are all of the participants in the supply chain, a part of which has been discussed in the case? The participants could include, but are not limited to: mushroom suppliers, such as the farmers, mushroom pickers, and mushroom packers; Freshfoods; consolidators in Amsterdam; transportation carriers bringing the mushrooms to the consolidators; ocean carrier from Amsterdam to Mumbai; transportation provider(s) from Mumbai to Delhi; AML; the container leasing company; stores, open-air markets, hotels, and restaurants in Northern India. Question 5: Logistics partnerships involve sharing costs and risks. What are all the costs and risks that this venture entails? How might they be shared? Some of the costs include accessorial and linehaul transportation costs; the investment costs for the containers; energy costs to provide power for the refrigerated containers; reconfiguration costs for the flatcars; maintenance costs for the containers. Another cost, which appears not to have been mentioned, is the cost of capital. Some of the relevant risks include irregularities in product supply due to poor growing conditions for mushrooms; product spoilage due to refrigeration problems; lack of demand for the product; higher than expected maintenance for the containers (because of the high temperatures in India); theft, perhaps not so much for the mushrooms but because containers can serve as shelter; dramatic changes in the cost of capital, particularly if capital costs increase substantially. The sharing of the costs and risks depends on which parties are impacted by a particular cost or risk. For example, lack of demand for the mushrooms is a risk that might be shared by Freshfoods and AML. Alternatively, the risk of refrigeration inadequacies might be shared by AML, the container supplier, and perhaps the company installing the power equipment on flatcars (if different from AML). Question 6: With some help from your instructor, divide into groups representing most or all of the supply chain members identified in question 4, and negotiate an agreement or agreements that share the costs, risks, and possible profits and losses from the venture being considered. There is any number of acceptable responses.

CASE 8-2 ALBERTA HIGHWAY DEPARTMENT, REGION VI One student developed the following drawing to guide her analysis: 6000\ \ Mile 6 (700 tons) \ 5500 A \ \ Mile 5 (650 tons) \ 5000 B \ \ Mile 4 (580 tons) \ 4500 C\ \ Mile 3 (530 tons) \ 4000 D\ \ Mile 2 (480 tons) \ 3500 E\ \ Mile 1 (400 tons) \ 3000------------------------------|-----------------> Bear Valley 1 mile 40 miles Lake Louise Silo

Question 1: Should one portion of sand silos at the Lake Louise maintenance station be relocated to a point to the west, at a higher elevation? If yes, where should it be relocated, how much capacity should it have, and what are the projected annual savings in truck operating costs? Show your work. The answer is that a portion of the Lake Louise sand silos should be relocated to Point B. The capacity should be 2,460 tons (plus reservesactual amount unspecified). The following table shows the cost calculations for each alternative.

New silo at

Sectors served by new silo and by Lake Louise A-6,5,4,3

Average Inbound tonnage each costs from Bow Valley

2460

2460 x 46 x .03 = $3,395

LL-2,1

880

880 x 40 x . 03 = $1,056

Outbound Total costs costs to sectors beyond one mile from silo A to 4: 580 x 1 x .10 = $58 A to 3: 530 x 2 x .10 = $106 LL to 2: 480 x 2 x .10 = $96 LL to 1: 400 $4,751 x 1 x .10 = $40

B-6,5,4,3

2460

LL-2,1

880

2460 x 45 B to 6: 700 x x .03 = 1 x .10 = $3,321 $70 B to 3: 530 x 1 x .10 = $53 880 x 40 x . LL to 2: 480 03 = $1,056 x 2 x .10 = $96 LL to 1: 400 x 1 x .10 = $40 2940 x 44 C to 6: 700 x x .03 = 2 x .10 = $3,881 $140 C to 5: 650 x 1 x .10 = $65 C to 2: 480 x 1 x .10 = $48 400 x 40 x . LL to 1: 400 03 = $480 x 1 x .10 = $40 2940 x 43 D to 6: 700

$4,636

C-6,5,4,3,2

2940

LL-1

400

$4,654

D-6,5,4,3,2

2940

x .03 = $3,793

LL-1

400

400 x 40 x . 03 = $480

x 3 x .10 = $210 D to 5: 650 x 2 x .10 = $130 D to 4: 580 x 1 x .10 = $58 LL to 1: 400 x 1 x .10 = $40

$4,710

E-6,5,4,3,2,1

3340

3340 x 42 E to 6: 700 x x .03 = 4 x .10 = $4,208 $280 E to 5: 650 x 3 x .10 = $195 E to 4: 580 x 2 x .10 = $116 E to 3: 530 x 1 x .10 = $53 3340 x 40 x .03 = $4,008 LL to 6: 700 x 6 x .10 = $420 LL to 5: 650 x 5 x .10 = $325 LL to 4: 580 x 4 x .10 = $232 LL to 3: 530 x 3 x .10 = $159 LL to 2: 480 x 2 x .10 = $96 LL to 1: 400 x 1 x .10 = $40

$4,852

No new silo

LL6,5,4,3,2,1

3340

$5,280

Question 2: Assume that it is discovered that it would be impossible to split the silo into sections. However, it would be feasible to move the entire silo to a site farther up the slope. The section of highway from the Lake Louise maintenance station stretching west 1 mile to where it reaches the

3,000-foot elevation point must be sanded for 30 days per year. All points east of the Lake Louise maintenance station can be serviced from other points. Should the entire silo be moved to another point? If so, to where? What will the savings be? Show your work. This is handled the same way as question 1 except that we must also supply 300 tons of sand for the mile between the Lake Louise silo and the start of the hill. The combined hauling and spreading costs for each silo are: A, $5,641; B, $5,373; C, $5,228; D, $5,194 (the lowest cost); E, $5,260; and leaving the silo at Lake Louise, $5,640. The leaving the silo at Lake Louise cost is higher than given in question 1 because we now must include costs of sanding the mile just west of the silo. Question 3: Ignore all statements made in question 2 and assume, instead, that the silo can be divided into three sections: one remaining at Lake Louise and other two located somewhere along the 6-mile stretch. If two sections are to be located within the 6-mile section, where should they be placed? What will the savings be over the present system? Show your work. Because larger tonnages are used at the top, it would be the cheapest to place the split silos closer to the top: at site A which would serve miles 6 and 5, and at site C which would serve miles 4 and 3. Other sites would be served from Lake Louise. Question 4: This case was written some time ago, when fuel costs were very low. Assume now that the spreader dump truck costs $.35 per ton-mile to operate (compared to $.10) and that the trailer dump truck used to move sand from the quarry costs $.20 per ton-mile to operate (up from $.03). Answer question 1 again, but this time take into account the new truck operating costs. The problem is set up as in question 1, although the costs have changed. The new low cost silo site is D, with annual costs of $30,027, which should be compared with the annual costs of $31,185 to keep the site at Lake Louise. Question 5: Answer question 2 again but using the new trucking costs outlined in question 4. The new site is E, with annual costs of $32,947, compared with annual costs of $33,589 of keeping the silo at Lake Louise. With respect to both answers 4 and 5, note that the costs of the hauling trucks has increased more than the costs of spreading trucks; hence the most advantageous sites are lower on the hill. Question 6: Answer question 3 again, taking into account the new trucking costs outlined in question 4. The answer for question 3 applies here as well. PART II END-OF-CHAPTER QUESTIONS CHAPTER 9: INVENTORY MANAGEMENT 1. What is inventory turnover? How can a high inventory turnover ratio be detrimental to a firm?

Inventory turnover refers to the number of times that inventory is sold in a one year period. It can be calculated by dividing the cost of goods sold for a particular period by the average inventory for that period. High inventory turnover may signal a low level of inventories, which can increase the chance of product stockouts. 2. Distinguish among cycle, safety, pipeline, and speculative stock. Cycle (base) stock refers to inventory that is needed to satisfy normal demand during the course of an order cycle. Safety (buffer) stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time. Pipeline (in-transit) stock is inventory that is en route between various nodes in a logistics system, while speculative stock is inventory that is held for several reasons to include seasonal demand, projected price increases, and potential product shortages. 3. Define what is meant by inventory carrying costs. What are some of its main components? Inventory carrying costs refer to the costs associated with holding inventory. Inventory carrying costs consist of a number of different components, and their importance can vary from product to product. These components include obsolescence costs, shrinkage costs, storage costs, taxes, and interest costs. 4. Discuss the concept of stockout costs. How can a stockout cost be calculated? Stockouts refer to situations where customers demand items that are not immediately available and stockout costs refer to the costs associated with not having items available. Calculation of a stockout cost first requires a company to classify potential customer responses to a stockout (e.g., delays the purchase, lost sale, lost customer). Next, the company needs to assign probabilities to the various responses as well as to assign monetary losses to the various responses. The respective probabilities and losses are multiplied together and then all costs are summed to yield an average cost of stockout.

5. Distinguish between a fixed order quantity and fixed order interval system. Which one generally requires more safety stock? Why? In a fixed order quantity system, the order size stays constant (although the time interval between orders may vary); in a fixed order interval system, the time interval is constant (although the order size may vary). The infrequency of inventory monitoring makes a fixed order interval system more susceptible to stockouts and thus there is likely to be higher levels of safety stock in a fixed order interval system. 6. Explain the logic of the EOQ model. The logic of the EOQ model is as follows: determining an order quantity requires a company to balance two costs; the costs of carrying the inventory and the costs of ordering it. Inventory carrying costs are in direct proportion to order size; that is, the larger the order, the greater the inventory carrying costs. Ordering costs, by contrast, tend to decline with order size but not in a linear fashion. The EOQ attempts to find the point (quantity) at which ordering costs equals carrying costs. 7. How can inventory flow diagrams be useful to a logistics manager? They present a visual depiction of additions to, and subtractions from, inventory. This could be helpful in identifying any patterns that might be occurring. In addition, inventory flow examples illustrate how safety stock can offset an increased rate of demand as well as longer than normal replenishment cycles. 8. Discuss what is meant by ABC analysis of inventory. What are several measures that can be used to determine ABC status? ABC analysis is an approach that recognizes all inventories are not of equal value to a firm and, as a result, all inventory should not be managed in the same way. Measures that can be used to determine ABC status include sales volume in dollars, sales volume in units, the fastest selling items, item profitability, or item importance. 9. What are implications of the JIT approach for supply chain management? The consequences of JIT actually go far beyond inventory management and JIT has important implications for supply chain efficiency. One implication is that suppliers must deliver high quality materials to the production line, in part because of JITs emphasis on low (no) safety stock. Moreover, because customers in a JIT system tend to place smaller, more frequent orders, it is imperative that suppliers order systems are capable of handling an increased number of orders in an error-free fashion. Smaller, more frequent orders, coupled with close supplier location, tend to favor truck as a mode of transportation and this means that production and distribution facilities should be designed to support truck shipments. 10. How does vendor-managed inventory differ from traditional inventory management? In traditional inventory management, the size and timing of replenishment orders are the responsibility of the party using the inventory. Under vendor-managed inventory, by contrast, the size and timing of replenishment orders are the responsibility of the manufacturer. This

represents a huge philosophical shift for some organizations in the sense that they are allowing another party to have control over their inventories and this requires a great deal of trust among the various parties. 11. Do substitute items or complementary items present the greater managerial challenge? Support your answer. Either answer would be acceptable. Students should recognize that both substitute items and complementary items present managerial challenges, but the nature of these challenges is different. For instance, one challenge with substitute items might be the amount of product to hold; a challenge with complementary items might be product placement in a retail outlet. 12. Define what it meant by dead inventory. What are several ways to manage it? Dead inventory refers to product for which there is no demandat least under current marketing practices. Because dead inventory has often been associated with overproduction of items that customers do not want (or need), one suggestion would be make to order as opposed to make to stock. Having said this, an increasing source of dead stock in recent years involves special, highly customized orders that never end up with the customer. Suggestions for dealing with this situation include partial (or full) prepayment as well as a no-return policy. Another suggestion is for companies to more aggressively market their dead stock, and companies might also sell dead inventory via auctions. Another possibility is to donate the dead inventory to charitable causes. A last resort is to simply throw away the dead inventory in order to free up storage space. 13. Explain how an SKU might have different meanings, depending on ones position in the supply chain. A retailer, for example, might keep records in terms of individual items or case lots, while the warehouse that supplies the retailer may deal only with case lots or pallets loads of a product. In turn, the distributor that sells to warehouses may deal with only pallet loads or vehicle loads, and may only accept orders only for pallet loads or vehicle loadsand not case lots or individual items. 14. Why is it important for a manager to understand informal considerations with respect to inventory management? One reason is that the increasing quest for customer service and customer satisfaction is leading many companies to engage in informal considerations. Even though formal inventory analysis should not be ignored, they should not be applied without taking into account informal arrangements. The informal arrangements may not fit any formal inventory tenets, but many informal considerations tend to do an excellent job of satisfying customers. And, without customers, businesses are not going to be very successful. 15. Discuss some of the challenges that are associated with managing repair and replacement parts. One challenge is the difficulty in forecasting the demand for these productswhen will products break down or fail? As such, it becomes challenging with respect to which parts to

carry as well as the appropriate stocking levels for them. Another challenge involves the number of warehousing facilities to be used: Should the parts be more decentralized or more centralized? These and other challenges have caused some companies to outsource their repair/replacement parts business. 16. Which presents the greater reverse logistics challenge: (1) Returned items or (2) Refurbished and recycled products? Support your answer. As was the case with question 11, either answer is acceptable. Again, it is important to recognize that both present reverse logistics challengesbut the nature of the challenges is different. For example, there is unpredictability with respect to returned items, in terms of return rates and product content. Refurbishing and recycling, by contrast, are predicated on sufficient product volumes, which require adequate storage space. 17. What are substitute items and how might they affect safety stock policies? Substitute items refer to products that customers view as being able to fill the same need or want. With respect to safety stock policies, if a consumer has little hesitation in substituting another item for one that is out of stock, there would appear to be minimal penalties for a stockout. It is also important that companies understand substitution patterns in the sense that Product A may be a substitute for Product B, but the reverse may not be true. In such a situation, safety stock policies would need to reflect the appropriate relationships.

18. Which supply chain participant(s) should be responsible for managing inventory levels? Why? The key to this question is the word managing. Although various inventory approaches may require certain select participants to maintain the inventory, supply-chain effectiveness and efficiency would argue that all supply chain participants should be involved with managing inventory levels. Because the supply chain is a system, one companys inventory policies and practices can impact the other members of the supply chain. Failure to consider these other participants when setting inventory policies and practices could lead to dysfunctional consequences. 19. Should inventories be considered investments? Why? The text suggests that inventories should be considered investments. Carrying costs for inventories can be significant; the return on investment to a firm for its funds tied up in inventory should be as high as the return it can obtain from other, equally risky uses of the same funds. 20. Since the mid-1990s, many beer and soft-drink cans and bottles have contained a freshness date stamped on them to indicate the latest date that the product should be consumed. What problems might such a system cause for the people responsible for managing such inventories? Discuss. There are a variety of possible answers to this question. One consideration is that product needs to be in places where it can be bought prior to the expiration date. At a minimum, this means

that companies need to be able to identify individual products, locate the products, and move the products to the appropriate place(s). The oldest inventory should be turned before other inventory. Another consideration involves what to do with expired product, a situation that brings into play reverse logistics considerations.

PART III EXAMINATION QUESTIONS CHAPTER 9: INVENTORY MANAGEMENT Multiple Choice Questions 1. ____ refers to stocks of goods and materials that are maintained for many purposes, the most common being to satisfy normal demand patterns. a. Logistics b. Supply chain management c. Inventory d. Production (c; p. 216) 2. Inventory turnover can be calculated by: a. adding beginning and ending inventory; divide by two b. dividing the cost of goods sold by average inventory c. dividing average inventory by the cost of goods sold d. multiplying average inventory by 1.5 e. none of the above (b; p. 218) 3. All of the following are true, except: a. there is no one optimal inventory turnover ratio b. high inventory turnover may signal a low level of inventories c. low inventory turnover results in high inventory carrying costs d. inventory turnover is calculated by dividing the cost of goods sold by average inventory e. all are true (e; p. 218) 4. ____ stock is carried to stimulate demand. a. Base b. Speculative c. Attractive d. Psychic (d; p. 218)

5. ____ stock refers to inventory that is needed to satisfy normal demand during the course of an order cycle. a. Psychic b. Speculative c. Base d. Pipeline (c; p. 218) 6. ____ stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time. a. Buffer b. Base c. Pipeline d. Speculative (a; p. 218) 7. ____ stock refers to inventory that is en route between various nodes in a logistics system. a. Base b. Safety c. Pipeline d. Speculative (c; p. 218) 8. ____ stock refers to inventory that is held for several reasons, to include seasonal demand, projected price increases, and potential shortages of product. a. Base b. Safety c. Pipeline d. Speculative (d; p. 219)

9. A commonly used estimate for inventory carrying costs is ____. a. 35% b. 25% c. 20% d. 10% e. none of the above (b; p. 219) 10. All of the following statements are true, except: a. b. c. d. in general, inventory carrying costs are expressed in percentage terms in general, companies prefer to carry less inventory as carrying costs increase inventory carrying costs consist of a number of different factors or categories the importance of individual carrying costs factors (categories) is generally consistent from product to product e. all are true (d; p. 219) 11. Inventory shrinkage: a. is another name for inventory turnover b. refers to the fact that more items are recorded entering than leaving warehousing facilities c. refers to situations where the size and/or volume of inventory is decreased over time d. refers to a technique of stabilizing unit loads by using shrink wrap packaging (b; p. 219) 12. Each of the following is a component of inventory carrying cost except: a. storage cost b. accounting cost c. shrinkage cost d. interest cost e. all are components (b; pp. 219-220) 13. In the United States, ____ has traditionally provided a convenient starting point when estimating the interest charges associated with maintaining inventory. a. Gross Domestic Product growth b. Consumer Price Index c. The prime rate of interest d. The yield on US Treasury bills (c; p. 220) 14. Which of the following situations is likely the most damaging (costly) with respect to a stockout? a. the customer buys a substitute product that yields a higher profit for the seller b. the customer buys a substitute product that yields a lower profit for the seller c. the customer goes to a competitor for this purchase

d. the customer says Call me when its in (c; p. 220) 15. Which of the following statements is false? a. with respect to stockouts, a delayed sale is virtually costless because of the customers brand loyalty b. the higher the average cost of a stockout, the more inventory (safety stock) that should be held c. tradeoffs exist between carrying costs and stockout costs d. stockouts can be more costly than having too many items in stock e. all are true (e; pp. 220-221) 16. When marginal analysis is used with respect to safety stocks one is looking for: a. the point where the costs of holding additional safety stock are equal to the savings in stockout costs avoided b. the point where the costs of holding additional safety stock are equal to the carrying costs of the EOQ c. the point at which 95% of possible demand situations can be covered d. the point at which the marginal cost of one additional unit of safety stock is nearly zero (a; p. 221) 17. Under conditions of certainty, a reorder point is equal to: a. average daily demand in units times the length of the replenishment cycle b. safety stock plus an EOQ c. base stock plus safety stock d. base stock minus safety stock (a; p. 222)

18. The economic order quantity (EOQ) deals with calculating the proper order size with respect to ____ costs and ____ costs. a. order; stockout b. stockout; carrying c. carrying; order d. accounting; carrying (c; p. 223) 19. If there were no inventory carrying costs, then: a. firms would continually place orders and maintain virtually no inventory at all b. stockout costs would be infinite c. speculative stocks would decrease d. customers would hold immense inventory (d; p. 223) 20. The EOQ determines: a. the point at which a company should reorder b. the point at which carrying costs equal ordering costs c. the point at which the sum of carrying costs and ordering costs is maximized d. the relevant inventory flow for a particular time period e. none of the above (b; p. 224) 21. Concerning the EOQ model, if demand or annual usage increases by 10%, then the EOQ will: a. increase b. decrease c. stay unchanged d. it depends on the particular product (a; p. 224) 22. Concerning the EOQ model, if the ordering costs increase by 10% and the product value increases by 10%, then the EOQ will: a. increase b. decrease c. stay unchanged d. it depends on the particular product (c; p. 224)

23. Inventory flow diagrams illustrate that safety stock can prevent two problem areas, ____ and ____. a. increased rate of demand; longer-than-normal replenishment b. decreased rate of demand; shorter-than-normal replenishment

c. increased rate of demand; shorter-than-normal replenishment d. decreased rate of demand; longer-than-normal replenishment (a; p. 226) 24. ____ recognizes that all inventories are not of equal value to a firm and thus all inventories should not be managed in the same way. a. Vendor-managed inventory b. Suboptimization c. Marginal analysis d. ABC analysis (d; p. 227) 25. The JIT concept started in: a. Japan b. Germany c. England d. United States (d; p. 228) 26. Which of the following statements about JIT is false? a. the JIT concept started in Japan b. organizations should give careful consideration before adopting a JIT philosophy c. the JIT approach views inventory as waste d. trucking is an important mode of transportation in JIT systems e. all are true (a; p. 228) 27. Under ____, the size and timing of replenishment orders are the responsibility of the manufacturer. a. Quick Response b. Supply Chain Management c. Vendor-Managed Inventory d. Efficient Consumer Response (c; pp. 229-230) 28. Which of the following is not a potential benefit to vendor-managed inventory (VMI)? a. higher revenues b. improved demand forecasts c. reduced inventories d. fewer stockouts e. all are VMI benefits (e; p. 230) 29. ____ items refer to those that are used or distributed together.

a. Me-too b. Substitute c. Co-branded d. Complementary (d; p. 230) 30. All of the following are suggestions for dealing with dead stock (inventory), except: a. aggressive marketing b. donate to charities c. make to stock d. throwing it away e. all are suggestions (e; p. 231) 31. A(n) ____ refers to a specific individual item or product for which separate records must be maintained. a. economic order quantity b. stock-keeping unit c. project cargo d. throughput (b; p. 233) 32. What appears to be the driving force behind informal arrangements outside the distribution channel? a. decreasing costs b. the increasing complexity of formal inventory analysis c. increasing quest for customer satisfaction d. improved information systems e. none of the above (c; p. 233) 33. ____ can be essential to customer service and satisfaction, yet it can be extremely difficult to forecast demand for them. a. Repair/replacement parts b. Complementary products c. Substitute products d. Co-branded products (a; p. 233) 34. All of the following statements concerning reverse logistics are true except: a. return goods tend to be characterized by unpredictable product content b. product returns are characterized by a predictable product flow

c. refurbishing and recycling are predicated on sufficient product volumes d. return rates tend to vary across industry e. all are true (b; pp. 234-236) 35. ____ products refer to products that customers view as being able to fill the same need or want as another product. a. Copycat b. Cannibalized c. Substitute d. Complementary (c; p. 236) True-False Questions 1. Inventories are stocks of goods and materials that are maintained for many purposes. (True; p. 216) 2. Inventory carries its greatest costs after value has been added through manufacturing and processing. (True; p. 217) 3. The number of times that inventory is sold in a one year period is referred to as average inventory. (False; p. 218) 4. High inventory turnover indicates that a company is taking longer to sell its inventory. (False; p. 218) 5. Inventory turnover can be calculated by dividing cost of goods sold by average inventory. (False; p. 218) 6. Psychic stock is associated with retail stores. (True; p. 218) 7. Buffer stock can also be called cycle stock. (False; p. 218) 8. Safety stock refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand and/or lead time. (True; p. 218) 9. Pipeline stock refers to inventory that is en route between various nodes in a logistics system. (True; p. 218) 10. As a general rule, companies prefer to carry less inventory as the carrying cost percentage decreases. (False; p.219) 11. Inventory shrinkage refers to the fact that products lose value through time. (False; p. 219) 12. In the United States, the prime rate of interest has traditionally provided a convenient starting point when estimating the interest charges associated with maintaining inventory. (True; p. 220)

13. Not having enough items can be as bad as, and sometimes worse than, having too many items. (True; p. 220) 14. The higher the average cost of a stockout, the more likely a company is going to want to hold some amount of inventory (safety stock) to protect against stockouts. (True; p. 221) 15. With respect to marginal analysis as applied to stockouts, one is looking for the point at which 95% of possible demand situations can be covered. (False; p. 221) 16. In a fixed order quantity system, the order size stays constant although the time interval between orders may fluctuate. (True; p. 222) 17. A fixed order quantity system is more susceptible to stockouts than is a fixed order interval system. (False; p. 222) 18. A reorder point is equal to average daily demand divided by the length of the replenishment cycle. (False; p. 222) 19. One requirement of a fixed order interval system is that the inventory must be constantly monitored. (False; p. 223) 20. If there were no inventory carrying costs, then customers would continually place orders and maintain virtually no inventory at all, aside from safety stocks. (False; p. 223) 21. The EOQ is the point at which carrying costs equal ordering costs. (True; p. 224) 22. If demand or annual usage increases by 20%, then the relevant economic order quantity will decrease. (False; p. 224) 23. EOQs, once calculated, may not be the same as the lot sizes in which a product is commonly bought and sold. (True; p. 225) 24. Safety stock can prevent against two problem areas: An increased rate of demand and longerthan-normal replenishment. (True; p. 226) 25. ABC analysis recognizes that all inventories should not be managed in the same way. (True; p. 227) 26. In terms of ABC analysis of inventory, no more than 25% of items should be classified as As. (False; p. 227) 27. The JIT approach originated in Japan. (False; p. 228) 28. The JIT approach views inventory as waste. (True; p. 228) 29. Because of smaller, more frequent orders and closer supplier location, trucking tends to be an important mode of transportation in the JIT approach. (True; p. 228) 30. In vendor-managed inventory, the size and timing of replenishment orders are the responsibility of the manufacturer. (True; pp. 229-230)

31. One drawback of VMI is that retailers often experience lower inventory turnover. (False; p. 230) 32. Complementary products can be defined as inventories that can be used or distributed together, such as razor blades and razors. (True; p. 230) 33. One way of dealing with dead stock (inventory) is for companies to simply throw it away. (True; p. 231) 34. Inventory deals are occurring with greater frequency today than in the recent past. (False; p. 233) 35. The definition of a stock-keeping unit is the same, regardless of a partys position/role in the supply chain. (False; p. 233) 36. The increasing quest for customer service and customer satisfaction is leading many companies to engage in informal arrangements outside the distribution channel. (True; p. 233) 37. One challenge with repair/replacement parts involves difficulties in determining which parts to carry. (True; pp. 233-234) 38. Return items are characterized by unpredictability of product flow. (True; p. 236) 39. Refurbishing refers to dismantling an existing product in order to collect component parts. (False; p. 236) 40. Product placement is often a key issue with substitute items. (False; p. 236)

PART IV CASE SOLUTIONS CASE 9-1: LOW NAIL COMPANY Question 1: Using the EOQ methods outlined in chapter 9, how many kegs of nails should Low order at one time? The EOQ formula is: EOQ = 2 (annual use in units) (cost of placing an order) / annual carrying cost per item per year = 2 (2000) (60) / 2 = 120,000 = 345 kegs per order Note the 2 in the denominator. That is because, on average, the rented warehouse space is only half full, which, makes the average warehousing cost per keg be $2. Question 2: Assume all conditions in question 1 hold, except that Lows supplier now offers a quantity discount in the form of absorbing all or part of Lows order processing costs. For orders of 750 or more kegs of nails, the supplier will absorb all the order processing costs; for orders between 249 and 749 kegs, the supplier will absorb half. What is Lows new EOQ? (It might be useful to lay out all costs in tabular form for this and later questions.) Orders/year 1 2 3 4 5 6 7 8 9 Order size 2,000 1,000 667 500 400 334 286 250 223 Processing costs ($) Free Free 90 120 150 180 210 240 540 Warehousing costs ($) 2,000 1,000 667 500 400 334 286 250 223 Sum of processing and warehousing costs ($) 2,000 1,000 757 620 550 514 496 490 743

The new EOQ, based on the above information, is 250 kegs. Question 3: Temporarily, ignore your work on question 2. Assume that Lows warehouse offers to rent Low space on the basis of the average number of kegs Low will have in stock, rather than on the maximum number of kegs Low would need room for whenever a new shipment arrived. The storage

cost per keg remains the same. Does this change the answer to Question 1? If so, what is the new answer? The relevant table is as follows: Sum of processing and warehousing costs ($) 1,060 620 524 490 500

Orders/year 1 2 3 4 5

Order size 2,000 1,000 667 500 400

Processing costs ($) 60 120 180 240 300

Warehousing costs ($) 1,000 500 334 250 200

The new EOQ, based on the above information, is 500. Question 4: Take into account the answer to question 1 and the suppliers new policy outlined in question 2 and the warehouses new policy in question 3. Then determine Lows new EOQ. The relevant table is as follows: Orders/year 1 2 3 4 5 6 7 Order size 2,000 1,000 667 500 400 334 286 Processing costs ($) Free Free 90 120 150 180 210 Warehousing costs ($) 1,000 500 334 250 200 167 143 Sum of processing and warehousing costs ($) 1,000 500 424 370 350 347 353

The new EOQ, based on the above information, is 334. Question 5: Temporarily, ignore your work on questions 2, 3, and 4. Lows luck at the race track is over; he now must borrow money to finance his inventory of nails. Looking at the situation outlined in question 1, assume that the wholesale cost of nails is $40 per keg and that Low must pay interest at the rate of 1.5% per month on the unsold inventory. What is his new EOQ? This answer can be done in tabular form as well, with the interest on inventory appearing as a new column. If one order is placed a year, the average inventory is 1,000 kegs, worth $40,000, with annual interest charges (1.5 x 12 = 18%) of $7,200. Other interest costs are calculated in a similar fashion, adjusted for average inventory.

The relevant table is as follows: Sum of processing, Warehousing Interest costs warehousing, costs ($) ($) and interest costs ($) 2,000 7,200 9,260 1,000 3,600 4,720 667 2,405 3,252 500 1,800 2,540 400 1,440 2,140 334 1,203 1,897 286 1,030 1,736 250 900 1,630 223 807 1,570 200 720 1,520 182 656 1,498 167 605 1,492 154 555 1,489 143 519 1,502

Orders/year 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Order size 2,000 1,000 667 500 400 334 286 250 223 200 182 167 154 143

Processing costs ($) 60 120 180 240 300 360 420 480 540 600 660 720 780 840

The new EOQ, based on the above information, is 154 kegs. Question 6: Taking into account all the factors listed in questions 1, 2, 3, and 5, calculate Lows EOQ for kegs of nails. The relevant table is as follows: Sum of processing, Warehousing Interest costs warehousing, costs ($) ($) and interest costs ($) 1,000 7,200 8,200 500 3,600 4,100 334 2,405 2,829 250 1,800 2,170 200 1,440 1,790 167 1,203 1,550 143 1,030 1,383 125 900 1,265 112 807 1,459

Orders/year 1 2 3 4 5 6 7 8 9

Order size 2,000 1,000 667 500 400 334 286 250 223

Processing costs ($) Free Free 90 120 150 180 210 240 540

The new answer, based on the above information, is 250 kegs.

CASE 9-2 JACKSONS WAREHOUSE (This case can best be assessed only by those familiar with STORM software, although other business analysis software programs might be used. The terminology and approach are not exactly the same as used here, especially the use of Sigma lead times, which are measured in units and can be explained as measuring the dipping into safety stocks. Also, some of the topics will be new to readers of this text.) Question 1: Perform an ABC analysis. Is it of much use if the firm maintains only 12 SKUs? Why or why not? Here is the ABC analysis printout from one software package, based on total annual usage of $3,212,560: Item rank 1 2 3 4 5 6 7 8 9 10 11 12 Item name Item 2 Item 11 Item 6 Item 5 Item 1 Item 3 Item 4 Item 7 Item 12 Item 9 Item 10 Item 8 Item ID 940 258 447 301 402 660 829 799 62 27 196 597 Annual usage ($) 748,900 546,000 474,240 455,000 312,000 312,000 101,400 83,200 74,880 43,680 36,400 24,960 % of cumulative items 8.33 16.67 25.00 33.33 41.67 50.00 58.33 66.67 75.00 83.33 91.67 100.00 % of $ usage 23.31 40.30 55.07 69.23 78.94 88.65 91.81 94.40 96.73 98.09 99.22 100.00 ABC classes A A B B B B C C C C C C

With only 12 SKUs, ABC analysis is probably not useful, unless it is very difficult to keep track of inventory. Nonetheless, one can see the advantages of establishing priorities for keeping track of inventory.

Question 2: Find the reorder point for each of the SKUs expressed as the point to which existing inventory must drop to trigger a replenishment order. The printout follows: Item name Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Item 9 Item 10 Item 11 Item 12 Item ID 402 940 660 829 301 447 799 597 27 196 258 62 Orders/setups 26.0 38.5 25.0 22.6 47.9 48.9 20.8 11.1 14.9 13.5 52.0 19.3 Order size 8 27 25 69 38 51 20 56 14 77 42 484 Reorder point 101 102 164 162 183 212 57 105 86 119 231 1331 Max orders outstanding 1 1 1 1 1 1 1 1 1 1 1 1

Question 3: How large a safety stock should be maintained for each SKU? The printout follows: Item name Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Item 9 Item 10 Item 11 Item 12 Item ID 402 940 660 829 301 447 799 597 27 196 258 62 Order cost ($) 1,950 2,889.89 1,872.00 678.26 1,436.84 1,468.24 624.00 334.29 445.71 405.19 1,560.00 580.17 Working stock cost ($) 1,800 2,916.00 1,875.00 672.75 1,425.00 1,453.50 600.00 336.00 441.00 404.25 1,575.00 580.80 Safety stock cost ($) 41,871.1 4 17,764.4 2 20,935.5 7 2,565.97 11,102.7 6 9,375.67 2,960.74 976.99 5,181.29 1,036.26 14,186.8 6 2,763.35 Total cost ($) 45,621.14 23,569.31 24,682.57 3,916.98 13,964.60 12,297.40 4,184.74 1,647.28 6,068.00 1,845.70 17,321.86 3,924.32

Question 4: How much money will Jackson have as its average investment in inventory? The printout follows: Jacksons Warehouse AGGREGATE INVENTORY VALUES Inventory carrying charge = 30% Service level = 95% Total number of items Average working stock investment Average safety stock investment Total inventory investment Cost of ordering EOQ items per year Average working stock carrying cost per year Average safety stock carrying cost per year Total inventory carrying cost per year Total cost per year Number of orders for EOQ items Expected stockouts 12 $46,931.00 $435,736.70 $482,667.70 $14,243.59 $14,079.30 $130,721.00 $144,800.30 $159,043.90 341 17

Question 5: Interest rates drop, and Jacksons now assumes that its carrying costs are 20%, rather than 30%. How will this change your answers to questions 2, 3, and 4, if at all? Explain.

The printout for question 2, as revised for 20% carrying costs: Max orders outstanding 1 1 1 1 1 1 1 1 1 1

Item name Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Item 9 Item 10

Item ID 402 940 660 829 301 447 799 597 27 196

Orders/setups 20.8 31.5 20.1 18.4 38.7 39.6 16.6 9.2 12.2 11.1

Order size 10 33 31 85 47 63 25 68 17 94

Reorder point 101 102 164 162 183 212 57 105 86 119

Item 11 Item 12

258 62

42.8 15.8

51 592

231 1331

1 1

The printout for question 3, as revised for 20 % carrying costs: Item name Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Item 9 Item 10 Item 11 Item 12 Item ID 402 940 660 829 301 447 799 597 27 196 258 62 Order cost ($) 1,560.00 2,363.64 1,509.68 550.59 1,161.70 1,188.57 499.20 275.29 367.06 331.91 1,284.71 474.32 Working stock cost ($) 1,500.00 2,376.00 1,550.00 552.50 1,175.00 1,197.00 500.00 272.00 357.00 329.00 1,275.00 473.60 Safety stock cost ($) 27,914.0 9 11,482.9 5 13,957.0 5 1,710.65 7,401.84 6,250.44 1,973.82 651.33 3,454.19 690.84 9,457.91 1,842.24 Total cost ($) 30,974.09 16,582.58 17,016.72 2,813.74 9,738.54 8,636.02 2,973.02 1,198.62 4,178.25 1,351.75 12,017.61 2,790.16

The printout for question 4, as revised for 20% carrying costs: Jacksons Warehouse AGGREGATE INVENTORY VALUES Inventory carrying charge = 20% Service level = 95% Total number of items Average working stock investment Average safety stock investment Total inventory investment Cost of ordering EOQ items per year Average working stock carrying cost per year Average safety stock carrying cost per year Total inventory carrying cost per year Total cost per year Number of orders for EOQ items Expected stockouts 12 $57,785.50 $435,736.70 $493,522.20 $11,566.67 $11,557.10 $87,147.35 $98,704.45 $110,271.10 277 14

Question 6: Disregard your answers to questions 4 and 5. Answer question 3 again, this time assuming that Jacksons wants to keep enough of each SKU to fill orders 90% of the time. The printout for question 3, assuming Jackson wants to fill orders 90% of the time: Item name Item 1 Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 8 Item 9 Item 10 Item 11 Item 12 Item ID 402 940 660 829 301 447 799 597 27 196 258 62 Order cost ($) 1,950.00 2888.89 1,872.00 678.26 1,436.84 1,468.24 624.00 334.29 445.71 405.19 1,560.00 580.17 Working stock cost ($) 1,800.00 2916.00 1,875.00 672.75 1,425.00 1,453.50 600.00 336.00 441.00 404.25 1,575.00 580.80 Safety stock cost ($) 32,622.9 8 13,840.7 6 16,311.4 9 1,999.22 8,650.47 7,304.84 2,306.79 761.20 4,036.89 807.38 11,053.3 8 2,153.01 Total cost ($) 36,372.98 19,645.65 20,058.49 3,350.23 11,512.32 10,226.58 3,530.79 1,431.49 4,923.60 1,616.82 14,188.38 3,313.97

The printout for question 4, assuming Jackson wants to fill orders 90% of the time: Jacksons Warehouse AGGREGATE INVENTORY VALUES Inventory carrying charge = 30% Service level = 90% Total number of items Average working stock investment Average safety stock investment Total inventory investment Cost of ordering EOQ items per year Average working stock carrying cost per year Average safety stock carrying cost per year Total inventory carrying cost per year Total cost per year Number of orders for EOQ items 12 $46,931.00 $339,494.70 $386,425.70 $14,243.59 $14,079.30 $101,848.40 $115,927.70 $130,171.30 341

Expected stockouts PART II END-OF-CHAPTER QUESTIONS CHAPTER 10: WAREHOUSING MANAGEMENT 1. Distinguish between warehouses and distribution centers.

34

Warehouses emphasize the storage of products and their primary purpose is to maximize the use of storage space. In contrast, distribution centers emphasize the rapid movement of products through a facility and thus attempt to maximize throughput (the amount of product entering and leaving a facility in a given time period). 2. Explain the four ways that warehousing facilitates the regrouping function. Regrouping involves rearranging the quantities of products as they move through the supply chain and it takes four forms: accumulating (also referred to as bulk-making), allocating (also referred to as bulk-breaking), assorting, and sorting. Accumulating involves bringing together similar stocks from different sources, while allocating involves breaking larger quantities into smaller quantities. Assorting refers to building up a variety of different products for resale to particular customers, while sorting out refers to separating products into grades and qualities desired by different target markets. 3. Discuss some of the value-added activities that can be performed by warehouses and distribution centers. These value-added activities include assembly, custom labeling, light manufacturing, product testing, repackaging, and reverse logistics considerations, among others. 4. What is cross-docking? How might it affect warehousing design? Cross-docking can be defined as a process where a product is received in a facility, occasionally married with product going to the same destination, then shipped at the earliest opportunity, without going into long-term storage. There is some disagreement with respect to the design of a cross-dock facility. Some prefer a design that resembles a motor carrier terminal rectangular, long, and as narrow as possible. Others suggest that all cross-dock doors should be on one wall or placed at 90 degrees to one another. 5. Distinguish between bonded storage and field warehousing. There are several types of bonded storage and all refer to situations where goods are not released until applicable fees are paid. U.S. Customs-bonded warehouses hold goods until import duties are collected. Internal Revenue service-bonded warehouses hold goods until other federal taxes and fees are collected. A field warehouse is a facility temporarily established at the site of an inventory of goods, often the premises of the goods owner. The warehouser assumes custody of the goods and issues a receipt for them, which can then be used as collateral for a loan.

6. What are the advantages and disadvantages of private warehousing? One disadvantage to private warehousing is that they are characterized by high fixed costs which necessitates high and steady demand volumes. In addition, a high fixed cost alternative becomes less attractive in times of high interest rates because it is more costly to secure the necessary financing. Private warehousing may also reduce an organizations flexibility with respect to responding to changes in the external environment. As for advantages, private warehousing offers users a great deal of control over their storage needs. More specifically, private warehouses can be constructed to meet user specifications and companies can also control product placement within a facility. In addition, private warehousing offers access to products when an organization needs or wants them. 7. Discuss why contract warehousing is becoming a preferred alternative for many organizations. Contract warehousing simultaneously mitigates the negative aspects and accentuates the positive aspects of public and private warehousing. For instance, contract warehousing allows a company to focus on its core competencies, with warehousing management provided by experts. Contract warehousing also tends to be more cost effective than private warehousing, with potentially the same degree of control because key specifications can be included in the relevant contract. 8. Explain how common sense can be helpful in terms of warehousing design and operations. One common sense piece of advice is that prior to designing a warehousing facility, the quantity and character of goods to be handled must be known. For example, online orders tend to be much smaller than those going to retail stores; as a consequence, picking and assembling one or two items is much different than picking and assembling a palletload of items. Another common sense piece of advice is that it is important for an organization to know the purpose to be served by a particular facility because the relative emphasis placed on the storage and distribution functions affects space layout. For instance, a distribution-oriented facility attempts to maximize throughput rather than storage. 9. In terms of warehousing design, give examples of trade-offs involving space, labor, and mechanization. Spaciousness may not always be advantageous because the distances that an individual or machine must travel in the storing and retrieving functions are increased. On the other hand, cramped conditions can lead to inefficiencies such as the product damage that can be caused by forklift puncture and movement bottlenecks caused by inefficient aisle width. 10. Distinguish between fixed and variable slot locations. How might they affect warehousing design? A fixed slot location refers to a situation where each SKU has one or more permanent slots assigned to it, whereas a variable slot location involves empty slots being assigned to products based on space availability. Fixed slot systems may result in low space utilization and generally need to be larger than a variable slot facility. 11. Discuss the trade-offs associated with order-picking versus stock-replenishing functions.

Organizations must decide whether workers who pick outgoing orders and those who are restocking storage facilities should work at the same time or in the same area. When order pickers and stock replenishers are allowed to work in the same area, fewer managerial personnel may be needed but it may also lead to congestion due to the number of workers in a relatively limited space. One suggestion is for the two sets of workers to use different aisles for their activities, but this requires a superior information system. 12. Distinguish between a two-dock and a single-dock warehousing layout. Which one requires more space? Why? A two-dock layout has receiving docks on one side of the facility and shipping docks on the other side with goods moving between them. In a one-dock system, each and every dock can be used for both shipping and receiving. This alternative reduces the space needed for storage docks, but it requires carriers to pick up and deliver at specific times. 13. What are some potential advantages to paperless warehousing operations? There are several important benefits to paperless warehousing, such as reduced clerical work, improved order picking efficiency, and a decrease in picking and shipping errors. For example, most paper-based systems require picked orders to be manually entered into a computer system. This information is often verified at the order staging area, a process that can delay shipping, add to processing costs, and does not catch all errors. 14. Discuss how storage and handling equipment can influence warehousing operations. Before installing storage equipment, companies should be familiar with the applicable regulations such as building codes in earthquake-prone areas often limit the height of storage shelves and racks. The use of racks may improve space utilization by allowing for narrower aisles. However, narrower aisles require specialized equipment with the capability of moving both vertically and horizontally at the same time. 15. What is a warehouse management system (WMS)? How can it benefit warehousing operations? Warehouse management systems are software packages that control the movement and storage of materials within an operation. Activities that can be controlled by WMS include inventory management, product receiving, and determination of storage locations, order selection processes, and order shipping. Data entry errors can be dramatically reduced and the travel times for order picking can be reduced by nearly 50%. Other benefits to WMS include reduced operating expenses, fewer stockouts, increased inventory accuracy, and improved service to customers. 16. What is OSHA? What is OSHAs role in warehousing safety? OSHA is the Occupational Safety and Health Administration, an agency of the U.S. federal government that has responsibilities for industrial safety practices. In recent years, OSHA mandated that forklift drivers actually have to drive forklifts as part of the training process and that driver performance be evaluated every three years. OSHA inspectors make frequent visits to industrial workplaces. In cases of non-compliance, citations can be issued and fines can be levied.

17. What are the most common causes of warehousing fires? Which do you think is the easiest for managers to control? Justify your answer. The most common cause of warehousing fires are arson, tobacco smoking, improper use of forklifts, electrical malfunctions, poor product disposal practices, and storage of incompatible materials. There are a variety of possible answers to the second part of the question; having said this, students should recognize that many fires can be prevented by common sense. 18. How might the storage of hazardous materials affect the design of a warehousing facility? Buildings that store hazardous materials often have specially constructed areas so that materials can be contained in the case of an accident. Likewise, these facilities often have walls and doors that can withstand several hours of intense fire. It is also important for a hazmat storage facility to have proper sprinkling systems as well as excellent ventilation. 19. Discuss how warehousing security can be enhanced by focusing on people, facilities, and processes. With respect to people, a starting point might be determining if a facility even has a formal hiring process. As for facilities, a number of different low-tech (e.g., fences) and high-tech (e.g., closed-circuit video cameras) devices can help to enhance warehousing security. Finally, with respect to processes, the more times a shipment is handled, the greater the opportunities for loss and/or damage. 20. Why are cleanliness and sanitation issues relevant to warehousing operations? Unclean and unsanitary warehousing facilities are not likely to attract many new customers and could cause existing customers to take their business elsewhere. Moreover, clean and sanitary facilities have a positive impact on employee safety, morale, and productivity while also reducing employee turnover.

PART III EXAMINATION QUESTIONS CHAPTER 10: WAREHOUSING MANAGEMENT Multiple Choice Questions 1. Warehouses emphasize ____ and their primary purpose is to maximize____. a. product storage; throughput b. product storage; usage of available storage space c. rapid movement of product; throughput d. rapid movement of product; usage of available storage space (b; p. 242) 2. Distribution centers emphasize ____ and their primary purpose is to maximize____. a. product storage; throughput b. product storage; usage of available storage space c. rapid movement of product; throughput d. rapid movement of product; usage of available storage space (c; p. 242) 3. Throughput refers to: a. storage capacity of a warehousing facility b. volume through a pipeline c. inventory turnover in a one-month period d. amount of product entering and leaving a facility in a given time period (d; p. 242) 4. The primary factor that distinguishes a distribution center from a warehouse is: a. distribution centers tend to be multi-story buildings b. distribution centers stress storage c. distribution centers stress rapid movement of products through the facility d. distribution centers tend to be smaller than warehouses (c; p. 242)

5. Warehousing and ____ are substitutes for each other. a. transportation b. materials handling c. packaging d. procurement e. none of the above (a; p. 242) 6. ____ and ____ refer to adjustments associated with the quantity of product. a. Accumulating; allocating b. Allocating; assorting c. Sorting; accumulating d. Sorting; assorting (a; p. 3243) 7. ____ involves bringing together similar stocks from similar sources. a. Bulk-breaking b. Assorting c. Accumulating d. Sorting (c; p. 244) 8. ____ refers to building up a variety of different products for resale to particular customers. a. Accumulating b. Allocating c. Sorting d. Assorting (d; p. 244) 9. ____ refers to a process where a product is received in a facility, occasionally married with product going to the same destination, and then shipped at the earliest time, without going into longer-term storage. a. Just-in-time b. Cross-docking c. Consolidation d. Turbologistics (b; p. 244)

10. ____ warehouses are similar to common carriers. a. Public b. Private

c. Contract d. Cross-dock (a; p. 245) 11. Which of the following is not a characteristic of public warehousing? a. requires no capital investment from user b. user receives a regular bill for space used c. good for companies dealing with large volumes of inventory d. lack of control by user e. all are characteristics (c; pp. 245-246) 12. Bonded storage in a public warehouse refers to: a. products being stored in a public warehouse and no duties or taxes paid until the products leave the facility b. products that are insured by a general warranty bond c. products that are bonded as required in the order specifications d. products that are subjected to regular inspections e. none of the above (a; p. 246) 13. A field warehouse is: a. a facility that is often used as a field sales office along with the traditional storage function b. a facility established primarily to hold material serving as collateral for a loan c. a facility that is primarily used as a break-bulk point d. a facility located in a number of remote areas from the main production facility (b; p. 246) 14. ____ warehousing is owned or occupied on a long-term lease by the firm using them. a. Public b. Private c. Contract d. Multi-client (b; p. 246) 15. All are characteristics of private warehousing, except: a. owned or occupied on a long-term lease by the firm using them b. feasible when demand patterns are irregular c. users have a great deal of control d. may reduce an organizations flexibility e. all are characteristics (b; pp. 246-247)

16. All are true concerning contract warehousing, except: a. can also be referred to as third-party warehousing b. 35 year contracts appear to offer benefits to both user and provider c. more cost effective than private warehousing d. more flexible than public warehousing e. all are characteristics (d; p. 248) 17. Multi-client warehousing mixes attributes of ____ and ____ warehousing. a. public; contract b. public; common c. common; private d. private; contract (a; pp. 248-249) 18. One of the best pieces of advice with respect to the design of warehousing facilities is to: a. avoid consultants b. build up rather than out c. use common sense d. maximize space utilization (c; p. 249) 19. Tradeoffs must be among space, labor, and ____ with respect to warehousing design. a. cost b. construction materials c. speed d. mechanization (d; p. 252)

20. The primary advantage of variable slot locations in a warehouse is: a. increased space utilization b. better materials handling c. ease of record keeping d. more logical and simple product layout (a; p. 253) 21. The primary advantage of fixed slot locations in a warehouse is: a. increased space utilization b. better materials handling c. knowledge of where specific products are located

d. improved employee morale (c; p. 253) 22. As one builds higher, building costs____, while warehousing equipment costs tend to ____. a. increase; decrease b. increase; increase c. decrease; decrease d. decrease; increase (d; p. 253) 23. Which of the following statements about a one-dock layout is false? a. each and every dock can be used for both shipping and receiving b. it requires carriers to pick up and deliver at specific times c. goods move in a straight configuration d. product may sometimes be reloaded in the vehicle that delivered it e. all of the statements are true (c; p. 254 ) 24. Which of the following is not a tradeoff in warehousing design? a. two-dock versus single-dock layout b. build up versus build out c. order picking versus order taking functions d. space devoted to aisles versus space devoted to storage e. all are tradeoffs (c; pp. 253-254 )

25. Which of the following is not a benefit associated with paperless warehousing? a. low cost b. reduced clerical work c. decreased picking and shipping errors d. improved order picking efficiency e. all are benefits (a; p. 254) 26. It is possible for paperless warehousing facilities to have payback periods of approximately ____ months. a. 6 b. 12 c. 18 d. 24 (c; p. 254)

27. Recent estimates suggest that only approximately ____ of a facilitys cubic capacity is actually occupied by product. a. 55% b. 40% c. 25% d. 10% (d; p. 255 ) 28. ____ tend to be the standard workhorse in many warehousing facilities. a. Forklifts b. Pallet jacks c. Dock carts d. Conveyor systems (a; p. 256) 29. Which of the following is false? a. warehouse work can be strenuous and physically demanding b. the use of racks may improve space utilization by allowing for narrower aisles c. goods can be moved by a combination of manual, mechanized, and automated methods d. warehouse workers tend to be easily motivated e. all are true (d; pp. 255-256) 30. Software packages that control the movement and storage of materials within an organization refer to ____ systems. a. enterprise resource planning b. materials requirement planning c. warehouse management d. inventory management (c; p. 256) 31. The most frequent injuries among warehousing personnel involve: a. feet b. the torso c. hands d. back and shoulder e. none of the above (d; p. 258) 32. ____ regulations deal with many aspects of warehousing safety. a. OSHA

b. FDA c. FTC d. WSA (a; p. 258) 33. What is dunnage? a. a type of packaging material that is placed inside of boxes b. a slang term for a particular type of ocean liner c. additional transportation fees that are charged to small shippers d. material that is used to block and brace products inside carrier equipment (d; p. 259) 34. Which of the following is not one of the four questions associated with effective management of hazardous materials storage? a. what material is being stored b. why is it being stored c. what is the materials source d. where is it being stored e. all are questions (c; p. 260) 35. It is estimated that the theft and pilferage of products stored in warehousing facilities causes losses in the range of ____ to ____ times the products value. a. five; six b. four; five c. three; four d. two; three (b; p. 260) True-False Questions 1. Warehouses emphasize the storage of products and their primary purpose is to maximize throughput. (False; p. 242) 2. Distribution centers emphasize the rapid movement of products through a facility and attempt to maximize throughput. (True; p. 242) 3. Throughput is the amount of product entering and leaving a warehousing facility in a given period of time. (True; p. 242) 4. Materials handling has been referred to as transportation at zero miles per hour. (False; p. 242) 5. Warehousing is needed because patterns of production and consumption may not coincide. (True; p. 243)

6. Assorting and sorting refer to adjustments associated with the quantity of product. (False; p. 243) 7. Accumulating involves bringing together similar stocks from different sources. (True; p. 244) 8. Assorting involves breaking larger quantities into smaller quantities. (False; p. 244) 9. A facility designed for cross docking should devote more space to product storage and less space to dock operations. (False; p. 244) 10. Because companies have different strategies, goals, and objectives, there is no correct mix of public, private, and contract warehousing. (True; p. 244) 11. With public warehousing the user rents space as needed, thus avoiding the costs of unneeded space. (True; p. 245) 12. Two notable private warehouse services involve bonded storage and field warehousing. (False; p. 246) 13. Perhaps the biggest drawback to public warehousing is the inability to provide specialized services. (False; p. 246) 14. Private warehousing tends to be feasible when demand patterns are relatively stable. (True; p. 246) 15. Private warehousing offers potential users a great deal of control over their storage needs. (True; p. 247) 16. The growth in contract warehousing appears to have come at the expense of public warehousing. (True; p. 248) 17. Contract warehousing tends to be more cost effective than public warehousing. (False; p. 248) 18. One to two year contracts appear to allow sufficient time for contract warehousers to learn their clients business while at the same time allowing clients some flexibility. (False; p. 248) 19. In essence, multi-client warehousing mixes attributes of private and contract warehousing. (False; pp. 248-249) 20. Common sense should not be ignored with respect to the design of warehousing facilities. (True; p. 249) 21. Tradeoffs must be made among space, labor, and mechanization with respect to warehousing design. (True; p. 252) 22. A fixed slot location warehousing system may result in low space utilization. (True; p. 253) 23. A general rule of thumb is that it is cheaper to build up than build out. (True; p. 253)

24. A one-dock warehouse layout (in contrast to a two-dock layout) increases the space needed for storage docks. (False; p. 254) 25. Narrower aisles can increase the space utilization of a facility. (True; p. 254) 26. Narrow aisle forklifts can operate in an aisle width of four feet, compared to the nine foot width that is needed by the standard forklift. (False; p. 254) 27. It is possible for paperless warehousing facilities to have payback periods of approximately 18 months. (True; p. 254) 28. Recent estimates suggest that only approximately 25% of a warehousing facilitys cubic capacity is actually occupied by product. (False; p. 255) 29. Motivation of warehouse employees can be difficult because of the somewhat repetitive nature of the operation. (True; p. 255) 30. Forklifts tend to be the standard workhorse in many warehousing facilities. (True; p. 256) 31. The majority (over 50%) of warehouse management system installations are completed within budget. (False; p. 256) 32. Warehouse management systems can result in reduced data entry errors as well as reduced travel distances for order picking. (True; p. 256) 33. Back and shoulder injuries are the most frequent injuries among warehouse personnel. (True; p. 258) 34. The Warehousing Safety Administration has primary responsibility for warehousing safety practices. (False; p. 258) 35. Dunnage refers to charges for accessorial transportation service. (False; p. 259) 36. Fires are a constant threat in warehousing. (True; p. 259) 37. Buildings that store hazardous materials often have walls and doors that can withstand several hours of intense fire. (True; p. 260) 38. It is estimated that the theft and pilferage of products stored in warehousing facilities causes losses in the range of two to three times the products value. (False; p. 260) 39. In general, warehousing security can be enhanced by focusing on people, facilities, and information. (False; p. 261) 40. Unsanitary warehousing facilities could cause existing customers to take their business elsewhere. (True; p. 261)

PART IV CASE SOLUTIONS CASE 10-1: SANDYS CANDY Question 1: Using those items of comparison for which costs can be calculated, determine the cost difference between the two delivery systems. The answer can best be given by calculating costs in approximately the same order as given in the text: Item Receipts from sales LESS: cost of goods sold plus discount Shrinkage @ w/s prices Spoilage Ordering costs Shelf-stocking Warehousing Delivery to store Checking goods Billing costs TOTAL Schoeneckers driver/salespeople $71.00 $50.70 $.99 -$1.50 ---$1.50 $1.00 $15.31 Mannix Markets $59.50 $31.00 $.62 $.31 $1.44 $1.38 * Negligible --$24.75 (excluding warehousing costs)

*: Less than $1 calculated on a per ton basis but $.96 on a line-item basis Question 2: List and compare those factors for which it is difficult to assign precise costs. Warehousing costs are the most difficult to calculate and allocate. Schoeneckers will probably offer a higher level of service than would occur if Mannix performs the function but this is difficult to quantify.

Question 3: Given the data that Sandy has, do you believe that Mannix Model Markets should get its Schoenecker candy through the buying cooperative or continue to rely on direct deliveries by Schoeneckers drivers-salespeople? Give your reasons. Mannix Markets own systems appear preferable given the data available to Ms. Nykerk. Question 4: If you were Sandy, what additional information would you like to have before being asked to make such a recommendation? See the answer to question 2. Whether the change is desirable depends almost entirely upon how one calculates the cost of moving the candy through the Mannix distribution system. Question 5: Candy sales increase during holiday seasons. Which of the two candy distribution systems do you think would do a better job of anticipating and supplying these seasonal increases? Why? Schoeneckers should do a better job because candy is their specialty. Question 6: Assume you are in charge of labor relations for Mannix Model Markets. Would you like to see continued reliance on drivers-salespeople to supply the markets candy needs? Why or why not? The advantage would be that we would have another firms labor costs and practices with which we could compare our own.

CASE 10-2 MINNETONKA WAREHOUSE Question 1: For each of the four work team sizes, calculate the expected number of trucks in the queue waiting to be unloaded. Size of team 2 3 4 5 Number of trucks in queue 3.2 .5 .27 .12

Question 2: For each of the four work team sizes, calculate the expected time in the queuethat is, the expected time a truck has to wait in line to be unloaded. Size of team 2 3 4 5 Expected time in queue .8 hours .125 hours .067 hours .030 hours

Question 3: For each of the four work team sizes, what is the probability that a truck cannot be unloaded immediately? Size of team 2 3 4 5 Probability that truck must wait upon arrival 80% 50% 40% 30%

Question 4: Which of the four work teams has the lowest cost to Wayne? Size of team 2 3 4 5 Total cost $268.00 $102.00 $96.00 $95.32

Question 5: Wayne is also considering rental of a forklift to use in truck unloading. A team of only two would be needed, but the hourly cost would be $38 per hour ($28 for the workers and $10 for the forklift). They could unload a truck in five minutes. Should Wayne rent the forklift? A two-person crew and a forklift will cost $38 per hour. Compare this with the answers in question 4; Wayne should adopt a two-man crew and use a forklift. Question 6: Disregard your answer to question 5. Labor negotiations are coming up and Wayne thinks he can get the union to give way on the work rule that prohibits warehouse workers on the unloading dock from being given other assignments when they are not unloading trucks. How much would

Wayne save in unloading dock costs if he could reassign warehouse workers to other tasks when they are not unloading trucks, assuming that he has picked a good team of workers and each worker works 8 hours a day? From the printouts, we must determine how much idle time there is with the present system. This depends in part upon the crew size. For a crew of four, for example, 24 minutes per hour is spent unloading trucks and the rest is idle time. Therefore, Wayne could get 36 minutes of work per hour of work elsewhere out of each worker. At $14 per hour, this is worth $8.40 ($14/hr times .6 hours). In theory, he could save up to $8.40 per worker per hour assuming he could assign them to other tasks where the pay rates were the same.

PART II END-OF-CHAPTER QUESTIONS CHAPTER 11: PROCUREMENT 1. What is procurement? What is its relevance to logistics? Procurement refers to the raw materials, component parts, and supplies bought from outside organizations to support a companys operations. It is closely related to logistics since acquired goods and services must be entered into the supply chain in the exact quantities and at the precise time they are needed. 2. Contrast procurements historical focus to its more strategic orientation today. Procurements historical focus in many organizations was to achieve the lowest possible cost from potential suppliers. Oftentimes these suppliers were pitted against each other in cutthroat competition involving three- or six-month length contracts awarded to the lowest bidder. Once this lowest bidder was chosen, the billing cycle would almost immediately start again and another low bidder would get the contract for the next several months. Today procurement has a much more strategic orientation in many organizations, and a contemporary procurement manager might have responsibility for reducing cycle times, playing an integral role in product development, or generating additional revenues by collaborating with the marketing department. 3. Discuss three potential procurement objectives. The text provides five potential procurement objectives that could be discussed. They are supporting organizational goals and objectives; managing the purchasing process effectively and efficiently; managing the supply base; developing strong relationships with other functional groups; supporting operational requirements. 4. Name and describe the steps in the supplier selection and evaluation process.

Identify the need for supply => can arise from the end of an existing supply agreement or the development of a new product. Situation analysis looks at both the internal and external environment within which the supply decision is to be made. Identify and evaluate potential suppliers delineates sources of potential information, establishes selection criteria, and assigns weights to selection criteria. Select supplier(s) is where an organization chooses one or more companies to supply the relevant products. Evaluate the decision involves comparison of expected supplier performance to actual supplier performance.

5. Discuss the factors that make supplier selection and evaluation difficult. Supplier selection and evaluation generally involve multiple criteria and these criteria can vary both in number and importance depending on the particular situation. Second, because some vendor selection may be contradictory, it is important to understand tradeoffs between them. Third, the evolution of business practices and philosophies, such as just-in-time and supply chain management, may require new selection criteria or the reprioritiztion of existing criteria. 6. Define supplier development and explain why it is becoming more prominent in some organizations. Supplier development (reverse marketing) refers to a degree of aggressive procurement not normally encountered in supplier selection and can include a purchaser initiating contact with a supplier, as well as a purchaser establishing prices, terms, and conditions. One reason for its growing prominence is the myriad inefficiencies associated with suppliers initiating marketing efforts towards purchasers. A second reason is that the purchaser may be aware of important events that are unknown to the supplier. Moreover, achieving competitive advantage in the supply chain is predicated on purchasers adopting a more aggressive approach so as to compel suppliers to meet the necessary requirements. 7. Why does the issue of quality in procurement represent a delicate balancing act for organizations? If an organization buys an input of inferior quality, it runs the risk of lowering the quality of the final product. If an organization buys an input of higher quality than ones final product, it may be paying for something that is not needed. 8. What is the role of ISO certification in quality management programs? ISO 9000 is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems. These standards are intended to help companies build quality into every core process in each department. Although ISO 9000 certification continues to become more commonplace throughout the world, it can still be a competitive advantage for some companies. 9. Describe significant benefits and drawbacks to Six Sigma programs.

The most significant benefits from Six Sigma have been reduced costs, reduced errors, and waste, and reduced cycle time, while the key drawbacks have involved overcoming business cultural barriers, investing the required resources (both human and money), and gaining top management commitment. 10. Discuss the Malcolm Baldrige National Quality Award. The Malcolm Baldrige National Quality Award was established in the 1980s to recognize U.S. organizations for their achievements in quality and performance. The Baldrige Quality Awards, which are restricted to organizations headquartered in the United States, require interested parties to submit a formal application that is evaluated by a committee largely made up of private sector experts in business and quality. Seven categories are evaluated: business results; customer and market focus; human resource focus; leadership; measurement, analysis, and knowledge management; process management; and strategic planning. 11. How do ISO 9000 and the Baldrige Quality Award differ? ISO 9000 essentially allows an organization to determine if it complies with its specific quality system. In contrast, the Baldrige Award is more heavily focused on the actual results from a quality system as well as on continuous improvement. The Baldrige Award also tends to be more externally focused in the sense that organizations benchmark themselves against organizations from outside their particular industry. 12. What are the components of the global sourcing development model presented in this chapter? Planning, specification, evaluation, relationship management, transportation and holding costs, implementation, and monitoring and improvements make up the components of the global sourcing development model presented in this chapter. 13. Pick and discuss two components of the global sourcing development model presented in this chapter. Any two components listed in the answer to Question 12 could be discussed. 14. Discuss the benefits and drawbacks to electronic procurement. Transaction benefits measure transaction benefits (e.g., reduced invoice-to-payment time), while compliance benefits focus on the savings that come from adherence to established procurement policies. Management information benefits encompass those that result from management information, customer satisfaction, and supplier satisfaction levels after implementation of electronic procurement. Price benefits are those that are given as a result of adopting e-procurement. One concern with electronic procurement involves the security of information that is being transmitted; there is a risk that sensitive or proprietary information could end up in the wrong hands. Another concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions. Moreover, despite substantial hype about the potential benefits of electronic procurement, a recent survey discovered that only about 25% of the responding organizations mandate its use.

15. What is an online reverse auction? Why do buyers like them? In an online reverse auction, a buyer invites bids from multiple sellers and the seller with the lowest bid is generally awarded the business. Buyers tend to like reverse auctions because they aim to generate low procurement prices and the online nature of reverse auctions allows buyers to drill down to a sellers low price very quickly. 16. Discuss the benefits of electronic procurement cards. Electronic procurement cards (p-cards) can benefit organizations in several ways, one of which is a reduction in the number of invoices. In addition, these cards allow employees to make purchases in a matter of minutes, as opposed to days, and procurement cards generally allow suppliers to be paid in a more timely fashion. 17. Distinguish between excess, obsolete, scrap, and waste materials. Excess (surplus) materials refer to stock that exceeds the reasonable requirements of an organization, perhaps because of an overly optimistic demand forecast. Obsolete materials, unlike excess materials, are not likely to ever be used by the organization that purchased them. Scrap materials refer to materials that are no longer serviceable, have been discarded, or are a by-product of the production process. Waste materials refer to those that have been spoiled, broken, or otherwise rendered unfit for reuse or reclamation. Unlike scrap materials, waste materials have no economic value. 18. Should investment recovery be the responsibility of the procurement manager? If yes, why? If not, which party (parties) should be responsible for investment recovery? The book indicates that investment recovery, which identifies opportunities to recover revenues or reduce costs associated with scrap, surplus, obsolete, and waste materials, is often the responsibility of the procurement manager. One could argue that procurement should be responsible for investment recovery because without procurement in the first place, there probably would be no scrap, surplus, obsolete, or waste material to manage. Alternatively, one could argue that since investment recovery focuses on revenues and costs, the finance department should have responsibility.

19. Name and give an example of the five dimensions of socially responsible purchasing. Diversity => includes procurement activities associated with minority or women-owned organizations. The environment => includes considerations such as waste reduction and the design of products for reuse or recycling. Human rights => includes child labor laws as well as sweatshop labor. Philanthropy => focuses on employee volunteer efforts and philanthropic contributions. Safety => concerned with the safe transportation of purchased products as well as the safe operation of relevant facilities.

20. Discuss some of the ethical issues that are associated with procurement. Areas of ethical concern in procurement include gift giving and receiving; bribes (money paid before an exchange) and kickbacks (money paid after an exchange); misuse of information; improper methods of knowledge acquisition; lying or misrepresentation of the truth; product quality (lack thereof); misuse of company assets, to include abuse of expense accounts; and conflicts of interest, or activity that creates a potential conflict between ones personal interest and her or his employers interests.

PART III EXAMINATION QUESTIONS CHAPTER 11: PROCUREMENT Multiple Choice Questions 1. ____ refers to the raw materials, component parts, and supplies bought from outside organizations to support a companys operations. a. Inbound logistics b. Procurement c. Materials management d. Supply management e. None of the above (b; p. 270) 2. Procurements historical focus in many organizations was to ____. a. incur minimal supply disruptions b. use a limited number of suppliers c. minimize loss and damage d. achieve the lowest possible cost (d; p. 270) 3. Procurement costs often range between ____ of an organizations revenues. a. 60-80% b. 50-70% c. 40-60% d. 30-50% (a; p. 270) 4. Procurement and ____ are viewed as synonymous terms. a. materials management b. supply management c. purchasing d. inbound logistics (c; p. 270)

5. Which of the following is not a potential procurement objective? a. supporting organizational goals and objectives

b. managing the supply base c. developing strong relationships with other functional groups d. supporting operational requirements e. all are potential procurement objectives (e; p. 271) 6. A focus on satisfying internal customers is associated with which procurement objective? a. managing the supply base b. supporting organizational goals and objectives c. managing the purchasing process effectively and efficiently d. supporting operational requirements (d; p. 271) 7. Buying the right products, at the right price, from the right source, at the right specifications, in the right quantity, for delivery at the right time to the right internal customer is associated with which procurement objective? a. managing the purchasing process effectively and efficiently b. supporting operational requirements c. supporting organizational goals and objectives d. managing the supply base (b; p. 271) 8. ____ looks at both the internal and external environment within which the supply decision is to be made. a. Identify the need for supply b. Identify suppliers c. Situation analysis d. Evaluate suppliers (c; p. 271) 9. ____ is the second step of the supplier selection and evaluation process. a. Identify need for supply b. Select suppliers c. Identify and evaluate possible suppliers d. Situation analysis (d; p. 271) 10. The text outlines a supplier selection and evaluation process that consists of ____ steps. a. 7 b. 6 c. 5 d. 4 (c; pp. 271-272)

11. What is the final step in the supplier selection and evaluation process? a. evaluate decision b. implement decision c. select suppliers d. provide feedback (a; p. 272) 12. Which of the following statements is false? a. Supplier selection and evaluation generally involve multiple criteria. b. The evolution of business practices and philosophies may require new supplier selection criteria. c. Selecting suppliers is the final step of the supplier selection and evaluation process. d. Some supplier selection criteria may be contradictory. e. All are true (c; p. 273) 13. A degree of aggressive procurement involvement not normally encountered in supplier selection refers to ____. a. supply management b. supplier development c. materials management d. physical supply (b; p. 273) 14. Supplier development is synonymous with ____. a. supplier selection and evaluation b. procurement c. materials management d. reverse marketing (d; p. 273) 15. Which of the following is not a reason for why purchasers are adopting a more proactive and aggressive role in the procurement process? a. there are myriad inefficiencies associated with suppliers initiating marketing efforts towards purchasers b. an excess number of suppliers currently exist c. achieving competitive advantage in the supply chain d. purchasers may be aware of important benefits that are not known to the supplier e. all are reasons (b; p. 273) 16. The ____ defines quality as a subjective term for which each person has his or her own definition.

a. U.S. Department of Commerce b. United Nations c. American Society of Quality d. International Standards Organization (c; p. 273) 17. ____ is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems. a. ISO 9000 b. ISO 14000 c. Six Sigma d. Quality Circle (a; p. 274) 18. Upon achieving ISO 9000 certification, organizations can be recertified every ____ years. a. 10 b. 7 c. 5 d. 3 (d; p. 274)

19. ____ suggests that there will be 3.4 defects, deficiencies, or errors per one million opportunities. a. ISO 9000 b. ISO 14000 c. Six Sigma d. Quality Assurance (c; p. 274) 20. Reduced costs, reduced errors and waste, and reduced cycle time are benefits that are associated with ____. a. the Malcolm Baldrige National Quality Award b. Six Sigma c. ISO 14000 d. ISO 9000 (b; p. 274) 21. ____ recognizes U.S. organizations for their achievements in quality and performance. a. Six Sigma

b. ISO 9000 c. The Malcolm Baldrige National Quality Award d. The U.S. Department of Commerce Commendation of Quality (c; p. 274) 22. Which of the following is not a Baldrige Quality Award category that is evaluated for achievement and improvement? a. customer and market focus b. strategic planning c. cost reduction d. process management e. all are relevant categories (c; p. 275) 23. ____ essentially allows an organization to determine if it complies with its specific quality system, while ____ is more heavily focused on the actual results from a quality system as well as on continuous improvement. a. ISO 9000; Six Sigma b. ISO 9000; Baldrige Award c. Baldrige Award; ISO 9000 d. Six Sigma; Baldrige Award (b; p. 275) 24. Which of the following is false? a. In the factor-input strategy, an organization is seeking low costs or high-quality sources of supply. b. Global procurement refers to buying components and inputs anywhere in the world. c. Planning is the first step in global procurement. d. Global procurement is driven by the factor-input and the market-access strategies. e. All are true (e; p. 275) 25. What is the first step in a global sourcing development model? a. specification b. situation analysis c. problem recognition d. planning (d; p. 275) 26. ____ is often a major shortcoming to many global procurement plans. a. Implementation b. Evaluation c. Specification d. Monitoring and improving (a; p. 276)

27. Which of the following is not a type of benefit that can come from electronic procurement? a. management information b. transaction c. price d. compliance e. all are benefits (e; p. 276) 28. ____ benefits focus on the savings that come from adherence to established procurement policies. a. Transactional b. Compliance c. Management information d. Price (b; p. 276) 29. ____ refers to employees who do not follow company guidelines about which suppliers to use in a particular situation. a. Irresponsible procurement b. Recalcitrant spending c. Maverick spending d. Unauthorized procurement (c; p. 276) 30. A recent survey indicated that about ____ of responding companies mandate the use of electronic procurement. a. 15% b. 25% c. 40% d. 50% (b; pp. 276-277) 31. Which of the following is false? a. Electronic procurement has facilitated online reverse auctions. b. Buyers like reverse auctions because they aim to generate low procurement prices. c. In reverse auctions a buyer invites bids from multiple sellers. d. The low(est) bid must be accepted in reverse auctions. e. All are true (d; p. 277) 32. ____ materials refer to stock that exceeds the reasonable requirements of an organization. a. Waste b. Obsolete c. Scrap

d. Excess (d; p. 278) 33. ____ materials are materials that are no longer serviceable, have been discarded, or are a byproduct of the production process. a. Excess b. Scrap c. Obsolete d. Waste (b; p. 278) 34. ____ materials have no economic value. a. Waste b. Scrap c. Obsolete d. Excess (a; p. 278) 35. Research suggests that socially responsible procurement consists of ____ dimensions. a. two b. three c. five d. seven (c; p. 279) True-False Questions 1. Procurement refers to the raw materials, component parts, and supplies bought from outside organizations to support a companys operations. (True; p. 270) 2. Procurements costs often range between 40-60% of an organizations revenues. (False; p. 270) 3. Procurements historical focus in many organizations was to minimize the total number of outside suppliers. (False; p. 270) 4. Procurement and purchasing are viewed as synonymous terms. (True; p. 270) 5. Supporting organizational goals and objectives means that procurements focus is on satisfying internal customers. (False; p. 271) 6. First and foremost, procurements objectives must manage the purchasing process effectively and efficiently. (False; p. 271) 7. The first step in supplier selection and evaluation is situation analysis. (False; p. 271)

8. Trade shows, trade publications, and the Internet can be used to identify possible suppliers. (True; pp. 271-272) 9. The final step of the supplier selection process is to evaluate the decision. (True; p. 272) 10. Supplier selection and evaluation generally involve multiple criteria. (True; p. 273 ) 11. Supply management refers to a degree of aggressive procurement not normally encountered in supplier selection. (False; p. 273) 12. Supplier development is synonymous with reverse marketing. (True; p. 273) 13. One reason for the growth of the supplier development concept is that achieving competitive advantage in the supply chain is predicated on purchasers adopting a more aggressive approach. (True; p. 273) 14. An excessive number of suppliers is one reason why purchasers are adopting a more proactive and aggressive role in the procurement process. (False; p. 273) 15. The International Standards Organization defines quality as a subjective term for which each person has his or her own definition. (False; p. 273) 16. ISO 9000 is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems. (True; p. 274) 17. After achieving ISO 9000 certification, organizations can be recertified every three years. (True; p. 274) 18. ISO 14000 suggests that there will be 3.4 defects, deficiencies, or errors per one million opportunities. (False; p. 274) 19. Reduced costs and reduced cycle times are two benefits associated with Six Sigma. (True; p. 274) 20. Any organization in the world can apply for the Malcolm Baldrige Quality Award. (False; p. 274) 21. The Baldrige Award allows an organization to determine if it complies with its specific quality system. (False; p. 275) 22. Global procurement refers to buying components and inputs anywhere in the world. (True; p. 275) 23. Problem recognition is the first step in global procurement. (False; p. 275) 24. Because global sourcing increases the distance that components and inputs must be moved, managers must consider the tradeoff between transportation and holding costs. (True; p. 276) 25. Implementation is often a major shortcoming to many global procurement plans. (True; p. 276) 26. One way of evaluating electronic procurement is by categorizing benefits as hard, soft, or intangible. (True; p. 276)

27. Unauthorized spending refers to employers who do not follow company guidelines about which suppliers to use in a particular situation. (False; p. 276) 28. One concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions. (True; p. 276) 29. About 50% of the companies in a recent survey mandate the use of electronic procurement. (False; pp. 276-277) 30. In a reverse auction, the buyer must accept the lowest bid. (False; p. 277) 31. Buyers are critical of reverse auctions because their primary emphasis is low price. (False; p. 277) 32. A reduction in the number of invoices is one benefit to procurement cards. (True; p. 277) 33. Investment recovery is often the responsibility of the finance manager. (False; p. 277) 34. Excess materials refer to stock that exceeds the reasonable requirements of an organization. (True; p. 278) 35. Scrap materials are no longer serviceable, have been discarded, or are a by-product of the production process. (True; p. 278) 36. Obsolete materials have no economic value. (False; p. 278) 37. The ways that organizations manage the investment recovery for excess, obsolete, scrap, and waste materials should be influenced by the materials classification. (True; p. 278) 38. Socially responsible procurement refers to procurement activities that meet the ethical and discretionary responsibilities expected by society. (True; p. 279) 39. Diversity and philanthropy are two dimensions of socially responsible procurement. (True; p. 279) 40. Bribes refer to money paid after an exchange. (False; p. 279)

PART IV CASE SOLUTIONS CASE 11-1: EASING IRAS IRE Question 1: Arrange the tasks shown in Exhibit 11-A in a network or PERT chart. A chart with three paths results. They, and their completion times, are:

ABCHIL ADEFKL ADGJL

6.50 days 6.45 days 8.00 days

The case does not indicate whether it is necessary to complete A before beginning B. This could be discussed in class. Question 2: Determine the critical path. What is the least amount of time it takes between receipt of an order and its delivery to a customer? The critical path is A D G J L and it takes 8 days. Question 3: Considering your answers to Questions 1 and 2, what areas of activity do you think Wood should look at first, assuming she wants to reduce order processing and delivery times? Why? She should, of course, look at the critical path because it takes the longest and is controlling. Items G and J seem like candidates. Question 4: Now that she is a Californian ready for the race down the information superhighway, Wood wants to be able to impress Pollack in terms of her knowledge of current technology. Recently a sales representative from a warehouse equipment company called, trying to interest her in installing a Star Wars-Robotic order picker for the warehouse. Controlled by lasers and powered by magnetic levitation, the device can pick orders (task H) in 15 minutes, rather than 6 hours (.75 days), the current time. How valuable would such a device be for Wood? Why? Although the Star Wars-Robotic order picker offers impressive time savings, it would appear to offer limited immediate advantages in the sense that overall completion time along the critical path would be unaffected.

Question 5: Another alternative is to use faster transportation. How should Wood choose between paying more for faster transportation and paying more for other improvements? Assume that her only goal is speed. See the answer to question 3. Wood should look at all costs along the critical path. Any improvement would have to be an item on the path; and the cost of each improvement would have to be compared with the time savings it provides. Question 6: To offset some of the costs of speeding up the system, does the PERT chart indicate where there might be some potential savings from assigning fewer people to some tasks, thereby increasing the amount of time needed to complete these tasks? If so, which tasks are likely candidates? Why? Wood should explore transferring workers from tasks not on the critical path, such as B, C, E, F, H, I, or K, and these workers should be transferred to tasks on the critical path. She could do this so long as the function from which the workers were transferred does not become part of a new critical path.

CASE 11-2: TEMPO LTD. Question 1: Should Terim let somebody else complete the transaction because he knows that if he does not sell to the North Koreans somebody else will? This question may stimulate a great deal of discussion among students. On the one hand, Terim is contemplating a transaction involving commodities (chemicals and lumber) as well as with a country (North Korea) with which he is not all that familiar. These aspects might argue against completing the transaction. Moreover, in light of certain events involving North Korea specifically, admitting that they possess nuclear capabilitiesTerim might pull back from the proposed transaction because of uncertainty as to exactly how the chemicals will be used by the North Koreans (e.g., might the chemicals actually be used to make weapons?). On the other hand, even though the case indicates that the Turkish have imposed trade sanctions against North Korea, trade involving banned partners is periodically achieved by routing the products through other countries. Question 2: What are the total costs given in the case for the option of moving via Romania? Activity Ocean transportation to Constantza Suez Canal charges Truck Handling False documents Total Cost (U.S. dollars) 42,000 3,000 15,000 6,250 10,211 76,461

Question 3: What are the total costs given in the case for the option of moving via Syria? Activity Ocean transportation to Latakia Suez Canal charges Truck Handling Rusvet Total Cost (U.S. dollars) 33,000 3,000 12,000 6,250 50,000 104,250

Question 4: Which option should Terim recommend? Why? Either option can be supported. For example, the Romanian option is nearly $30,000 cheaper than the Syrian option, thus solely from the perspective of cost, the Romanian option might be preferred. However, the Romanian option takes three weeks longer to complete than does the Syrian option. Moreover, the Romanian option appears to be riskier than the Syrian one in the sense that things might go awry in the redocumentation process. Question 5: What other costs and risks are involved in these proposed transactions, including some not mentioned in the case? The entertainment of the North Korean officials can be viewed as both a cost and a risk. At a minimum, luxurious hotel accommodations as well as business-related dinners and receptions will not come cheaply. From a risk perspective, there is a chance that the entertainment could get out of hand and generate embarrassing publicity. There is also a chance that some of the rusvet fees might unexpectedly increase, particularly those associated with generating the false documents. If providers of the documentation understand the captive nature of the lumber shipment from Romania to Turkey, then it is possible that these providers could leverage their position to increase their income. A more general risk for these proposed transactions is the volatile political situation in the Middle East. One manifestation of this volatility is through disruptions in transportation routes; traffic through the Suez Canal has periodically been influenced by the regions political volatilityan important consideration given that the proposed lumber shipments will need to move through the Suez Canal. Students are likely to generate other costs and risks. Question 6: Regarding the supply chain, howif, at allshould bribes be included? What functions do they serve? From a broad perspective, the purpose of bribes should be to facilitate the completion of international transactions. At least two perspectives must be considered when analyzing the first part of the question. One is the legal perspective; quite simply, in some countries (such as the United States), bribes are theoretically illegalregardless of the circumstances. Under this scenario, bribes would not be included in the supply chain. A second perspective, practicality, understands that bribes are essential for the completion of international transactions. Under this scenario, supply chains would need the flexibility to accommodate situations that require a bribe. One manifestation of this flexibility could be the name assigned to a bribe. For example, one of the authors was not allowed to board an airplane flight to Katmandu, Nepal until all four members of his traveling party (each a U.S. resident) paid what was called a weight penalty. This weight penalty appears to have been bribe-like in the sense that none of the other passengers, several of whom clearly had weight problems, were assessed weight penalties. Question 7: If Terim puts together this transaction, is he acting ethically? Discuss.

The answer to this question could depend on ones definition of ethical actions. One definition, for example, focuses on a personal code of conduct to guide ones actions. Another definition suggests that anything that is not illegal is ethical. Having said this, the Romanian routing appears questionable because of the document alterations associated with it. These document alterations are probably illegal, regardless of the country in question. Alternatively, because the Syrian routing does not appear to include any overtly illegal activities, some might view it as ethical. Even though it includes rusvets, Terim merely would be following accepted protocol for many international transactions. Moreover, the use of Syria is smart in the sense that Terim is avoiding a Turkish port where the chances of getting caught, and the associated penalties, are much higher. Alternatively, the case suggests that Terim is struggling with the decision to do business with the North Koreans in part because of concerns about their communist regime and support of terrorist policies. Because this may indicate that Terim has a conscience, any transaction involving the North Koreans could be viewed as unethical in the sense that Terim is violating his personal code of conduct. Question 8: What do you suggest should be done to bring moral values into the situation so that the developing countries are somewhat in accordance with Western standards? Keep in mind that the risks involved in such environments are much higher than the risks of conducting business in Western markets. Also, note that some cultures see bribery as a way to better distribute wealth among their citizens. Because this case involves organizations located in two non-Western countries, it might be culturally insensitive to bring in moral values that are more in accordance with Western standards. PART II END-OF-CHAPTER QUESTIONS CHAPTER 12: INTERNATIONAL LOGISTICS 1. Explain how developing nations ensure that an increasing proportion of supply chain activities are conducted within their borders. Because the role of these governments in their economies is substantial, they are able to exert considerable influence over outside firms desiring to do business within their borders. The governments are becoming more insistent that much of their foreign trade be carried on vessels or planes owned by their companies and headquartered within their boundaries. The governments also want their local firms to have at least their fair share of revenues from the sale of freight forwarding services, marine insurance, and other distribution functions. 2. Discuss some of the challenges associated with international logistics. Economic changes, such as changes in the relative value of currencies, have a profound affect on international trade patterns. When one countrys currency is weak relative to other

countries, it becomes costly to import products but exports often surge; when one countrys currency is strong relative to other currencies, the opposite occurs. Differences in regulations, laws, and legal systems also add to the challenges of international logistics and the degree of enforcement of existing regulations and laws is not uniform from country to country. Cultural considerations, such as differences in language, also contribute to international logistics challenges. Moreover, for goods moving in cross-border trade, it is not safe to assume that cargo handlers can read English and it would not be unusual for some cargo handlers to be illiterate. 3. What are some key political restrictions on cross-border trade? Many nations ban certain types of shipments that might jeopardize their national security. Likewise, individual nations may band together to pressure another country from being an active supplier of materials that could be used to build nuclear weapons. Some nations restrict the outflow of currency because a nations economy will suffer if it imports more than it exports over a long term. A relatively common political restriction on trade involves tariffs or taxes that governments place on the importation of certain items. Another group of political restrictions can be classified as nontariff barriers, which refer to restrictions other than tariffs that are placed upon imported products. Another political restriction involves embargoes, or the prohibition of trade between particular countries. 4. Discuss the roles that a particular countrys government might play in international transport. Governments may exert strong control over ocean and air traffic because they operate as extensions of a nations economy and most of the revenue flows into that nations economy. In some cases, import licenses may restrict movement to a vessel or plane owned or operated by the importing country. Although federal governments have often owned ocean carriers and international airlines, some are moving toward the private sector. In addition, some nations provide subsidies to develop and/or maintain their ocean and air carriers. Governments also support their own carriers through cargo preference rules, which require a certain percentage of traffic to move on a nations flag vessels. 5. What is a certificate of origin, a commercial invoice, and a shippers export declaration? A certificate of origin specifies the country (ies) in which a product is manufactured and can be required by governments for control purposes or by an exporter to verify the location of manufacture. A commercial invoice is similar in nature to a domestic bill of lading in the sense that a commercial invoice summarizes the entire transaction and contains (should contain) key information to include a description of the goods, the terms of sale and payment, the shipment quantity, the method of shipment, and so on. A shippers export declaration contains relevant export transaction data such as the transportation mode(s), transaction participants, and description of what is being exported. 6. What is determined by the terms of sale? The terms of sale determines when and where to transfer the following between buyer and seller:

The physical goods (the logistics channel) Payment for the goods, freight charges, and insurance for the in-transit goods (the financing channel) Legal title to the goods (the ownership channel) Required documentation (the documentation channel) Responsibility for controlling or caring for the goods in transit, say, in the case of livestock (the logistics channel).

7. Pick, and describe, one C Incoterm, one D Incoterm, one E Incoterm, and one F Incoterm. Any of the respective C, D, E, and F Incoterms can be described.

8. Discuss the role of the letter of credit with respect to international shipments. The letter of credit is a very popular payment alternative that spreads risk across buyers and sellers. A letter of credit is issued by a bank and guarantees payment to a seller provided that the seller has complied with the applicable terms and conditions of the particular transaction. 9. Discuss four possible functions that might be performed by international freight forwarders. The text describes eight such functions, so discussion of any four would be appropriate. 10. What is an NVOCC? An NVOCC (non-vessel operating common carrier) is often confused with international freight forwarders. Although both NVOCCs and international freight forwarders must be licensed by the Federal Maritime Commission, NVOCCs are common carriers and thus have common carrier obligations to serve and deliver, among others. NVOCCs consolidate freight from different shippers and leverage this volume to negotiate favorable transportation rates from ocean carriers. From the shippers perspective, an NVOCC is a carrier; from an ocean carriers perspective, an NVOCC is a shipper. 11. What services do export management companies perform? An export management company is a firm that specializes in handling overseas transactions. They represent manufacturers and help them find overseas firms that can be licensed to manufacture their products in other countries. The export management company also handles sales correspondence in foreign languages, ensures that labeling requirements are met, and performs other specialized functions. 12. What are the two primary purposes of export packing? One function is to allow goods to move easily through customs. For a country assessing duties on the weight of both the item and its container, this means selecting lightweight packing materials. The second purpose of export packing is to protect products in what almost always is

a more difficult journey than they would experience if they were destined for domestic consignees. 13. What are RO-RO vessels? Roll on-roll off (RO-RO) vessels have large doors on their sterns or on their sides. Ramps are stretched to the shore and cargo is moved off RO-RO vessels in trailers. The required port facilities are relatively inexpensive; only a ramp for driving trailers on or off is needed. 14. What is a parcel tanker? Parcel tankers have over 50 different tanks of varying capacities. Each tank can carry a different liquid and is loaded and unloaded through a separate piping system. The tanks have different types of coating and some are temperature controlled. 15. Explain the load center concept. How might load centers affect the dynamics of international transportation? Load centers are major ports where thousands of containers arrive and depart each week. As vessel sizes increase, it becomes more costly to stop at multiple ports in a geographic area, and as a result, operators of larger container ships prefer to call at only one port in a geographic area. Load centers might impact the dynamics of international trade in the sense that some ports will be relegated to providing feeder service to the load centers. 16. Discuss service contracts as applied to international water transportation. A service contract consists of a commitment by a shipper to a shipping conference or individual carrier for a minimum volume of cargo, with rate levels indicated as intermodal, point-to-point or port-to-port. The carrier or conference must guarantee regular service and there are clauses for damages in case the shipper does not live up to its commitment (such as loss of overseas sales). 17. Discuss the role of alliances in the container trades. Carriers retain their individual identities but cooperate in the area of operations. These alliances provide two primary benefits to participating members, namely, the sharing of vessel space and the ability to offer shippers a broader service network. Whereas an individual carrier might only be able to provide weekly service on a particular route, an alliance might be able to offer daily service. The size of the alliance allows them to exercise considerable clout in their dealings with shippers, port terminal operators, and connecting land carriers. 18. How do the rates established by the International Air Transport Association influence international airfreight? To obtain lower rates from the IATA carriers, the shipper must tender the freight loaded to airline specifications; at the other end of the journey, the entire load must be destined to one consignee. The result has been to increase the average size of shipments handled by the airlines and this has reduced the number of individual packages each airline terminal must handle. 19. Discuss some of the challenges to surface transport in other countries.

Few nations have as wide a range of modes to choose from because the United States has traditionally encouraged the development across all modes of transport. In addition, the degree of nationalization of transportation is often higher in many countries than in the United States. The widespread use of seaborne containers has brought about hopes for standardizing land vehicles for carrying containers on the landward legs of their journeys. However, there is opposition to truck transportation in some countries. Rail equipment sizes, as well as bridge and tunnel clearances, vary throughout the world and most nations use equipment that is much smaller than that used in the U.S. Containers that can be loaded two to a railcar in the United States are frequently carried on individual railcars elsewhere. Different rail gauge can complicate the exchange of traffic between nations. 20. What are some of the challenges associated with inventory management in cross-border trade? Because of greater uncertainties, misunderstandings and transport delays, safety stocks must be larger. Inventory policies should be modified to accommodate the relevant marketing area and tailoring products for individual markets can be problematic. Return items are extremely difficult, if not impossible, to accommodate in international distributionparticularly for products that must cross multiple borders. Furthermore, inventory valuation on an international scale is difficult because of fluctuations in the various currencies. When a nations (or the worlds) currency is unstable, investments in inventories rise because they are believed to be less risky than holding cash or securities. Inefficient warehousing practices can impact inventory carrying cost through increased storage, handling, obsolescence, or shrinkage costs.

PART III EXAMINATION QUESTIONS CHAPTER 12: INTERNATIONAL LOGISTICS 1. What brought an end to the colonial system of international trade? a. computerization b. advances in telecommunications c. World War II d. the end of the Cold War e. none of the above (c; p. 291) 2. During 2006, the U.S. trade deficit with China was approximately $ ____ billion. a. 75 b. 135 c. 190 d. 230 (d; p. 291) 3. A ____ is used in areas in which dockworkers cannot read but need a method to keep documents and shipments together. a. RFID tag b. Shippers mark c. Bar code d. Shipment coordinator (b; p. 293) 4. What is a consular office? a. b. c. d. a place where tariffs are filed sources of information regarding a nations import and currency exchange regulations another name for a police department a location where imported goods must be inspected to ensure that they are free from plant and animal diseases (b; p. 294)

5. ____ are taxes that governments place on the importation of certain items. a. Tariffs b. Embargoes

c. Surcharges d. Reciprocities (a; p. 295) 6. Which of the following is not a political restriction on international trade? a. embargoes b. tariffs c. barring certain types of shipments d. nontariff barriers e. all are political restrictions (e; p. 295) 7. Cargo preference rules ____. a. are synonymous with embargoes b. indicate how each shipment should be loaded into / onto a transport vehicle c. indicate preferred shippers d. require a certain percentage of traffic to move on a nations flag vessels (d; p. 296) 8. A ____ is similar in nature to a domestic bill of lading and summarizes the entire transaction. a. shippers letter of instruction b. shippers export declaration c. commercial invoice d. certificate of origin (c; p. 296) 9. A ____ often serves as the basis for a companys official export statistics. a. certificate of origin b. commercial invoice c. shippers export declaration d. shippers letter of instruction e. none of the above (c; p. 296)

10. Incoterms refer to: a. terms of sale for international shipments b. a specific method of payment for international shipments c. standardization of international trade terminology d. standardized procedures for handling international shipments (a; p. 297)

11. From a sellers perspective, the most basic Incoterms transaction is: a. free on board b. ex-works c. cost and freight d. delivered ex ship (b; p. 297) 12. A letter of credit ____. a. is only used for domestic shipments b. allows a consignee with poor credit to pay by credit c. is provided when a transportation vehicle is loaded or unloaded prior to its allotted free time d. is a popular payment alternative for international transactions (d; p. 299) 13. International freight forwarders can provide a number of functions. Which is not one of them? a. booking space on carriers b. obtaining consular documents c. preparing an export declaration d. arranging for insurance e. all are possible functions (e; p. 300) 14. Which is not a source of export forwarders income? a. buying space wholesale and selling it retail b. commissions on shipping revenues generated for carriers c. fees for document preparation and performing research d. payment for freight pick up and delivery e. all are sources of income (d; p. 303)

15. A(n) ____ oversees the efficient movement of an importers goods (and accompanying paperwork) through customs and other inspection points. a. customshouse broker b. international freight forwarder c. import management company d. shippers association (a; p. 303) 16. A main difference between international freight forwarders and customshouse brokers is: a. there are no differences b. forwarders take title to goods although customshouse brokers do not

c. forwarders tend to handle exports while customshouse brokers tend to handle imports d. customshouse brokers are typically government agents (c; p. 303) 17. Which international logistics service provider is often confused with the international freight forwarder? a. customshouse broker b. export management company c. non-vessel operating common carrier d. export trading company (c; p. 304) 18. ____ represent manufacturers and help them find overseas firms that can be licensed to manufacture their products. a. International freight forwarders b. Shippers associations c. Export management companies d. Export trading companies (c; p. 304) 19. ____ and international freight forwarders are closely related because together they can offer a complete overseas sales and distribution service to the domestic manufacturer that wants to export but does not know how. a. Export management companies b. Export trading companies c. Non-vessel operating common carriers d. Customshouse brokers (a; p. 304) 20. An ____ custom packs shipments when the exporter lacks the equipment or the expertise to do so itself. a. export management company b. export packer c. export trading company d. international freight forwarder (b; p. 304) 21. Because the distances associated with international shipments are often much greater than those associated with domestic shipments, the buyer and seller must often choose between ____ and ____ transportation. a. Air; water b. Rail; air c. Water; rail d. Water; truck (a; p. 305)

22. Approximately ____ of cross-border shipments move by water transportation. a. 40% b. 50% c. 60% d. 70% (c; p. 305) 23. Much of the worlds ocean shipping tonnage is used to carry: a. containers b. petroleum c. grain d. coal (b; p. 305) 24. A ____ has over 50 different tanks, and each tank can carry a different liquid. a. bulk tanker b. storage tanker c. tramp ship d. parcel tanker (d; p. 306)

25. ____ refer to major ports where thousands of containers arrive and depart each week. a. Hubs b. Consolidation points c. Ship parks d. Load centers (d; p. 307) 26. ____ is when vessel lines bump waste paper cargo for loads of higher-paying cargo. a. Rolling b. Bumping c. Detention d. Stowability (a; p. 308) 27. Users of ocean shipping companies view ____ as the most important contract provision. a. predictable, stable rates b. guaranteed space availability c. all-inclusive rates

d. door-to-door service (a; p. 308) 28. Shipping conferences refer to ____. a. annual meetings of large international shippers b. the same thing as shippers associations c. cartels of ocean vessel operators operating between certain trade areas d. water ports that are located in the same geographic area (c; p. 308) 29. Ocean carrier alliances provide two primary benefits to participating members, namely, the sharing of vessel space and ____. a. anti-trust immunity b. the ability to offer shippers a broader service network c. lower rates d. faster transit times (b; p. 308)

30. Which of the following is not a type of international air freight operations? a. chartered aircraft b. scheduled air carriers c. integrated air carriers d. tramp air carriers (d; p. 309) 31. The freight rates for international air carriers are established by: a. individual carriers b. government negotiations c. the International Air Transport Association d. shippers associations (c; p. 309) 32. Integrated carriers: a. are those that own several modes of transportation b. utilize the services of scheduled airlines c. own all their vehicles as well as pick up and delivery facilities d. perform transportation in tightly linked supply chains (c; p. 311) 33. ____ refers to ocean shipping along a regions coast, rather than across oceans.

a. Drayage b. Intramodal c. Land bridge d. Short sea (d; p. 311) 34. Short sea shipping is unlikely to become a more common transportation option in the United States until highway driving speeds decrease to about ____ miles per hour. a. 40 b. 30 c. 20 d. 10 (c; p. 311)

35. Which of the following statements about international inventory management is false? a. return items are quite difficult to accommodate b. inventory valuation is difficult because of continually changing exchange rates c. inefficient warehousing practices can impact inventory carrying cost d. an inventory in one nation generally serves the needs of markets in nearby nations e. all are true statements (d; pp. 313-314) True-False Questions 1. World War I brought an end to the colonial system of international trade. (False; p. 291) 2. Developing nations insist that an increasing proportion of assembling and manufacturing be conducted within their own borders. (True; p. 291) 3. International logistics is both more costly and challenging than domestic logistics. (True; p. 291) 4. When one countrys currency is weak relative to other currencies, it is more costly to import products into that country. (True; p. 291) 5. A shippers mark is used in areas in which dockworkers cannot read but need a method to keep documents and shipments together. (True; p. 293) 6. Consular offices are current sources of information regarding their nations import and currency exchange regulations. (True; p. 294)

7. Reciprocities refer to taxes that governments place on the importation of certain items. (False; p. 295) 8. The primary purpose of a non-tariff barrier is to encourage exports. (False; p. 295) 9. Embargoes are physical limits on the amount that may be imported from any one country during a period of time. (False; p. 295) 10. Some nations with weak balance-of-payment positions issue an import license on the condition that the goods move on an aircraft or vessel flying that nations flag. (True; p. 295) 11. Cargo preference rules indicate how each shipment should be loaded into / onto a transport vehicle. (False; p. 296) 12. The documentation requirements for international shipments can act as a nontariff barrier to trade. (True; p. 296) 13. A certificate of origin specifies the country (ies) in which a product is manufactured. (True; p. 296) 14. A shippers letter of instruction contains relevant export transaction data such as the transportation mode(s), transaction participants, and description of what is being exported. (False; p. 296) 15. Some free trade agreements have actually resulted in an increased in documentation requirements. (True; p. 297) 16. The use of Incoterms is mandatory for international shipments. (False; p. 297) 17. An Ex-Works (EXW) transaction is considered the most basic transaction in the Incoterms framework. (True; p. 297) 18. A commercial invoice is a very popular payment alternative that spreads risk across buyers and sellers in international transactions. (False; p. 299) 19. International freight forwarders can handle either vessel shipments or air shipments. (True; p. 299) 20. Consular documents involve obtaining permission from the importing country for goods to enter. (True; p. 301) 21. Customshouse brokers are another name for international freight forwarders. (False; p. 303) 22. From the shippers perspective, a non-vessel operating common carrier (NVOCC) is a carrier; from an ocean carriers perspective, an NVOCC is a shipper. (True; p. 304) 23. Non-vessel operating common carriers are not allowed to enter into contract arrangements with individual shippers. (False; p. 304)

24. Export trading companies represent U.S. manufacturers and help them find overseas firms that can be licensed to manufacture their products. (False; p. 304) 25. Export packers custom pack shipments when the exporter lacks the equipment or expertise to do so itself. (True; p. 304) 26. International transportation cannot be effective or efficient without fairly identical handling equipment being in place at each end of the trip. (True; p. 305) 27. Much of the worlds shipping tonnage is used for carrying agricultural products. (False; p. 305) 28. Load centers refer to major ports where thousands of containers arrive and depart each week. (True; p. 307) 29. In terms of necessary contract provisions, ocean shippers view guaranteed ship space as the most important factor. (False; p. 308) 30. Shipping conferences refer to annual meetings of large international shippers. (False; p. 308) 31. Some water carriers are engaged in a new type of alliance in which carriers retain their individual identities but cooperate in some areas of operations. (True; p. 308) 32. Ocean carrier alliances provide two primary benefits to participating members, namely, the sharing of vessel space and lower rates. (False; p. 308) 33. The three types of international airfreight operations are chartered aircraft, scheduled air carriers, and integrated carriers. (True; p. 309) 34. The schedules and routes of international air carriers are established by the International Air Transport Association. (False; p. 309) 35. UPS and FedEx are examples of integrated air carriers. (True; p. 311) 36. Drayage refers to ocean shipping, often along a regions coast, rather than across oceans. (False; p. 311) 37. Short sea shipping is unlikely to become a more common transportation option in the U.S. until highway driving speeds decrease to about 35 miles per hour. (False; p. 311) 38. An inventory held in one nation may not necessarily serve the needs of markets in neighboring nations. (True; pp. 313-314) 39. Return items are virtually impossible to accommodate in an international distribution system. (True; p. 314) 40. Inventory valuation on an international scale is difficult because the value of various currencies continually change. (True; p. 314)

PART IV CASE SOLUTIONS CASE 12-1: HDT TRUCK COMPANY Question 1: Assume you are Vanderpool. Draft the comparison Pon just requested. Many students will calculate transportation costs. For the movement via Chicago, they will choose to use rail. Heres the comparison: Via Chicago Vessel charter Load and block ($20/trk) Rail rate at $90/trk Wharfage Loading and stowing ($80/trk) Seaway tolls ($27/trk) Unloading Insurance ($105/trk) Total Via Baltimore Load and block ($30/trk) Rail rate at $448/trk Handling @ Baltimore ($100/trk) Ocean freight ($720/trk) Insurance ($75/trk) Total Costs ($) 72,000 2,000 9,000 1,070 8,000 2,700 4,200 10,500 109,470 Costs ($) 3,000 44,800 10,000 72,000 7,500 137,300

Question 2: Which of the two routing alternatives would you recommend? Why? In terms of transportation costs only, the chartered vessel is cheaper. However, when we take into account cash flows and the value of money, the Baltimore route becomes advantageous. Assume we use the charter vessel. It should arrive on May 30th and HDT will be paid. However, if trucks are sent two at a time via Baltimore, the middle pair (#25 and #26) should be finished on about April 16th and arrive at Doha about May 8th, when they will be paidin other words, 22 days earlier than if they arrived on May 30th on the chartered vessel. HDT pays 8% per year for its money so here is how to calculate the savings for truck #25 or #26: ($172,000 times .08 times 22) divided by 365 = $829.37 Multiplying $829.37 times 50 yields $41,468.50. When added to the costs of using Chicago ($109,470), the total cost now becomes $150,938.50which is more expensive than using Baltimore.

Question 3: Assume that the buyer in Saudi Arabia has made other large purchases in the United States and is considering consolidating all of its purchases and loading them onto one large ship, which the buyer will charter. The buyer contacts HDT and, although acknowledging its commitment to buy FAS Doha, asks how much HDT would subtract from the $172,000 per truck price if the selling terms were changed to FOB HDTs Crown Point plant. How much of a cost reduction do you think HDT should offer the buyer? Under what terms and conditions? All the transportation costs, calculated above, could be subtracted. The revised terms of sale should also specify dates when cargo would be picked up and paid for, and the price should include HDTs daily costs in investment in finished inventory. Question 4: Answer question 3 with regard to changing the terms of sale to delivery at port in Baltimore. The buyer would unload the trucks from the railcars. The answer for question 3 holds here as well. Note that HDT still has responsibility for getting the trucks to Baltimore on railroad flatcars, although the buyer would be responsible for unloading the railcars. Question 5: Is there an interest rate that would make HDT change from one routing to another? If so, what is it? Let i equal the rate of interest. Refer to answers to questions 1 and 2. The relevant equation is: $109,470 + (8,600,000 times 22/365i) = $137,500 Solving for i yields an approximate value of .053 Substituting .053 into the left side of the relevant equation (i.e., shipping via Chicago) above yields a value of $109,470 + $27,473, which comes to slightly less than $137,000thus less than the costs via Baltimore. Question 6: Assume that it is the year 2005 and the cost to HDT of borrowing money is 12% per year. Because the buyer will pay for trucks as they are delivered, would it be advantageous for HDT to pay overtime to speed up production, ship the trucks as they were finished via the Port of Baltimore, and collect their payment earlier? Why or why not? The selling price of each truck is still $172,000. Each day that HDT must wait for payment costs [(.12 times $172,000) divided by 365], or $56.55 per day. They should pay overtime only if it costs less than this amount.

CASE 12-2: BELLE TZELL CELL COMPANY Questions 1-5: Questions 14 ask for the total inventory carrying costs of alternatives 1 through 4, respectively; question 5 asks for which alternative Kupferman should recommend and why. These questions can be approached in the same manner although a few simplifying assumptions are needed. We will set up annual costs. We will ignore the problem of Pancho Villa. We will also assume that the additional inventories can be produced without undue strain on the firms ability to fill current orders. a. Each days production at Nogales represents a cost of $10,000. b. Each days production at Tucson represents a cost of $14,000 (the cost at Nogales plus costs of transporting plates to Tucson plus costs at Tucson). c. Annual costs of maintaining inventory are 12% of the costs. d. Assume that trailers and truck-tractors have 3-year lives. Alternatives Interest cost on inventory (annual) ($) Annual costs of trailers @ $1,000 per trailer ($) Annual costs of truck-tractor @ $1,667 per truck-tractor Total ($) 1 6,000 5,000 1,667 12,667 2 6,480 4,000 3,333 13,813 3 5,760 4,000 3,333 13,093 4 5,040 3,000 1,667 9,707

Offhand, alternative 4 is the least costly. Also, it has the advantage of larger inventories in Tucson, where there should be fewer worries about timely delivery. Therefore, this appears to be the best alternative. Question 6: Tzell wanted enough inventory in reserve that the Tzell Cell Company could fill 99% of all orders on time. This is, as you may recall, a customer service standard. How reasonable is a 99% level? Why not, say, a 95% level? How would Nell and Kupferman determine the relative advantages and disadvantages of the 95% and the 99% service levels? What kind of cost calculations would they have to make? This depends on the costs of not maintaining a 97% service level. What is the percent of delayed shipments, with penalty clauses the firm must confront, and what losses can be incurred? To decide between a 95% and 97% service standard, the company would have to figure out the expected costs from penalties and the loss of customers and reputation that would result from a drop to the 95% service level. Is the firm losing more through penalty clauses than it would from increased storage charges? Question 7: Jedson Electronic Tools invoked a penalty clause on a purchase order that Tzell Cell Company had accepted and the Tzell Cell Company had to forfeit $3,000. Draft, for Nell Tzells signature, a memo indicating when and under what conditions the Belle Tzell Cell Company should accept penalty clauses in purchase orders covering missed delivery times or windows.

The memo should only commit Tzell to a penalty clause where the company believes there is little chance for delay. There is no information in the case to determine which delivery requests are riskier. It might be a good idea to limit the amount of penalty payment to the amount that the customer will lose because of the delay. Question 8: In your opinion, is it ethical for a U.S.based firm to relocate some of its operations in Mexico so as to avoid the stricter U.S. pollution and worker-safety laws? Why or why not? Although not illegal, such behavior is not ethical. Having said this, ones competitors may be relocating to Mexico for these same reasons and thus would have significantly lower costs for the products that they sell. Question 9: Should the firm be willing to pay bribes at the Mexican border to get their shipments cleared more promptly? Why or why not? The obvious answer is no, if for no other reason than bribes are prohibited by the Foreign Corrupt Practices Act. Having said this, the behavior of various Mexican border agents is resulting in extended delivery times for certain shipments. These extended delivery times are contributing to poorer customer service, and in some cases, Tzell is paying penalty fees that range into the thousands of dollars. Students can be encouraged to think about alternatives that accomplish the same purpose as bribes, but would not be considered bribes from a legal perspective. PART II END-OF-CHAPTER QUESTIONS CHAPTER 13: LOGISTICS SYSTEMS CONTROLS 1. Discuss how accountants and logisticians differ in terms of their approach to accounting controls. Accountants measure inventory in terms of its dollar value, whereas logisticians measure inventory in terms of the number of stock-keeping units (SKUs). These different measurements can result in managerial disconnects; for example, if one has inventory of grain, its monetary value fluctuates based on the appropriate commodity exchange rates, even though the actual quantity and quality remain unchanged. In addition, in times of inflation, identical items added to inventory at different times means that each unit has a different cost, and even though inventory levels are not affected, it makes a difference whether an organization uses historic cost or current value as an indicator of the inventorys total value. 2. What is activity-based costing (ABC)? What are the five steps of the ABC process? Activity-based costing (ABC) attempts to trace an expense category to a particular cost object. With ABC, cost objects consume activities and activities consume resources. ABC consists of five steps: Identify activities Determine cost for each activity Determine cost drivers Collect activity data Calculate product cost

3. Define what is meant by productivity. Discuss how productivity can be improved. At a basic level, productivity can be defined as the amount of output divided by the amount of input. An understanding of this relationship leads to the recognition that there are but three ways to improve productivity: 1) reduce the amount of input while holding output constant; 2) increase the amount of output while holding input constant; or 3) increase output while at the same time decreasing input. 4. What is short-interval scheduling? Short-interval scheduling involves looking at each workers activity in small time segments. An amount of time is assigned to each unit of work, and then the individuals work is scheduled in a manner that utilizes as much of each workers time as possible and maximizes output for each worker.

5. In what ways can unionized workforces be a challenge to improving productivity? Union work rules are often very specific in the sense that job descriptions spell out in exacting detail the responsibilities associated with a particular job. Although detailed specifications help create additional jobs, the relative lack of worker flexibility can potentially hinder productivity by increasing inputs (e.g., additional workers, hence additional labor costs) while also decreasing output. 6. Why does driver supervision tend to be more difficult than supervision of warehouse workers? For one, drivers are generally removed from immediate supervision by the nature of their jobs. Truck drivers can fall behind schedule or be delayed for a variety of reasons such as traffic conditions, a bottleneck at a loading dock, or perhaps too much time socializing with fellow drivers a particular truck stop. Initially, all a supervisor can do is accept the drivers explanation of schedule glitches. 7. Discuss how driver productivity can be improved with global positioning systems and geographic information systems. Global positioning systems (GPS) use satellites that allow companies to compute vehicle position, velocity, and time, whereas graphical information systems (GIS) allow companies to produce digital maps that can drill down to site-specific qualities such as bridge heights and customer locations. GPS and GIS are evolving towards a situation in which instant updates can be provided to GIS databasesdata that can be leveraged to provide real-time route planning that can direct drivers away from accidents and other traffic bottlenecks. 8. Describe some ways in which transportation companies might reduce their fuel consumption. Transportation companies are more closely examining their current operations in an effort to reduce fuel consumption, hence, fuel prices. These include reducing vehicle idling times, joining fuel purchasing networks, implementing route optimization systems, and implementing fuel purchase optimization systems. 9. Describe the three critical factors in managing returned goods. One factor is why products are returned. Products are returned for a variety of reasons, such as the customer making an error in ordering, the shipper making an error in filling an order, and customers not being able to get what they bought to work. The second factor involves how to optimize returned goods management and one basic decision concerns the design of reverse goodsreverse logistics systems. The third factor in managing returned goods is whether they should be managed internally or outsourced to a third party. There are tradeoffs between internal management and outsourcing returned goods management. 10. What U.S. federal agencies are involved in product recalls and what are their respective jurisdictions? The Food and Drug Administration is concerned with food, drugs, and cosmetics, while the Consumer Product Safety Commission focuses on banning the sale of products deemed hazardous, such as flammable fabrics. The National Highway Traffic Safety Administration is concerned with vehicles and their accessory parts; it does not actually engage in recalls but is

responsible for causing the manufacturer to notify purchasers that a defect has been discovered. The Food Safety and Inspection Service of the U.S. Department of Agriculture inspects meat, poultry, and eggs and relies on voluntary recalls. 11. Discuss practice recalls (fire drills). Well-managed firms have practice recalls to determine the speed, degree of coverage, and effectiveness they can effect. All actions that firms take to prepare for a hypothetical recall are important for two reasons. First, they allow for better performance when a real emergency arises. Second, in case the recall is not completely successful and lawsuits result, a portion of the firms defense might be the precautionary actions it had undertaken. 12. What are the reasons for why logisticians might be concerned with theft? Even though insurance will reimburse an organization for the market value of the stolen items, the time and costs (e.g., documentation) associated with theft tend not to be covered by insurance. A second logistical concern is that theft results in the planned flow of goods being interrupted and can lead to stockouts in the distribution channel. Theft can also factor into the facility location decision in the sense that many organizations will avoid locating their facilities in areas characterized by high crime rates. It is also possible for the stolen products to reappear in the market at a lower price to compete with products that have moved through traditional channels. 13. Explain how logistics managers can attempt to control pilferage. Control begins with the hiring process and one of the best ways to manage pilferage is to avoid hiring people who are predisposed to steal, such as people with credit, alcohol, or drug problems. Some organizations utilize psychological tests as part of the hiring process in an effort to identify prospective employees who might pilfer. Organizations can better control pilferage if they have clearly articulated and enforced pilferage-related policies. Experts recommend that the best pilferage policy should be based on zero tolerance because problems inevitably arise for those companies that tolerate a small amount of pilferage. 14. In what ways are goods moving in international commerce more vulnerable to theft than goods moving in domestic commerce? Entire shiploads of cargo can disappear. Some vanish, only to appear under a new name and a new flag. Some are diverted to a different port, where the cargo is sold to the highest bidder. Piracy is also a threat, particularly in certain regions of the worldand todays pirates use speedboats, cell phones, and automatic weapons. 15. Discuss three electronic devices that can be used to provide building-related security functions. Closed-circuit television cameras can be used to view different areas of a particular facility. Unfortunately, organizations sometimes fail to activate or monitor their closed-circuit cameras, which defeats their purpose. A second type of electronic device is used to control access to

particular facilities. An example is a magnetically encoded tag that each employee must insert into a sensing device that records the event and determines whether the door or gate should be unlocked. A third category of electronic devices is invisible photo-electronic beams and many types of listening devices that can record unauthorized movements. 16. How is vehicle security in the early twenty-first century a mixture of relatively low- and hightechnology alternatives? With respect to low-technology alternatives, numbers are painted on the top of truck trailers to make them easier to spot from the air if they are stolen. Some truck-leasing companies attempt to thwart truck theft by etching a vehicle identification number in up to 40 different locations on each vehicle. A somewhat more high-technology approach involves cameras and video screens. Some companies have equipped their tractors and trailers with multiple cameras that can provide nearly 360 degrees of coverage and real-time data to drivers. Radio frequency identification (RFID) is emerging as a valuable technology for managing vehicle security; transponders (a small device that responds to radio signals from an outside source) can be placed on vehicles, and global positioning systems can be used to monitor the location of the transponder.

17. Describe the two issues that managers face with respect to computer and data security. One issue involves developing business practices that reduce the likelihood of employees losing critical data files (e.g., what a company can do to decrease the chance of a laptop being lost or stolen), whereas the second seeks to protect the data files that are stored on, or can be accessed through the laptop (e.g., the use of firewalls and data encryption). 18. What are two examples of how the terrorist attacks of September 11, 2001 have affected the management of logistics systems? The storage and transport of hazardous materials in todays world is managed with an eye to potential terrorist considerations. Petroleum tank trucks and ocean tankers have the potential to be mobile bombs. Inbound containers are receiving much greater scrutiny than prior to September 11th and the result has been a series of legislative proposals in recent years focused on increasing the inspection of inbound containers. 19. What are some ways in which the Transportation Security Administration is attempting to improve the security of the U.S. transportation system? The Transportation Security Administration (TSA) is the agency that conducts passenger screenings at U.S. commercial airports. The TSA also plays a number of roles with respect to freight security, such as using dogs to screen airfreight. In addition, the TSA is in the process of developing a Transportation Worker Identification Credential (TWIC) that is meant to be a common credential to identify workers across all modes of transportation.

20. Discuss the Customs Trade Partnership Against Terrorism (C-TPAT). In C-TPAT, U.S. Customs and Border Protection (CBP) and private organizations (e.g., retailers and manufacturers) work together to prevent terrorism against the U.S. through imports and transportation. Private organizations apply to CBP for C-TPAT certification, and the process involves demonstrating that organizations have improved the physical security of their containerized shipments as well as the ability to track people who have access to the containerized shipments. Although the government-provided benefits to C-TPAT certification include fewer security inspections of inbound containers along with faster processing through customs, many companies have discovered that the C-TPAT process has also led to a reduction in cargo theft.

PART III EXAMINATION QUESTIONS Multiple Choice Questions 1. ____ refers to measurement that ensures conformity with an organizations policies, procedures, or standards. a. Motivation b. Management c. Metrification d. Control e. None of the above (d; p. 329) 2. ____ view control mechanisms in terms of monetary costs or value, whereas ____ view control mechanisms from either a monetary or nonmonetary perspective. a. Accountants; financiers b. Financiers; logisticians c. Accountants; logisticians d. Financiers; accountants (c; p. 330) 3. ____ costs involve two steps: first, one must establish acceptable costs for each activity; and second, one must determine acceptable deviations from these costs. a. Relevant b. Controllable c. Indirect d. Standard e. None of the above (d; p. 331) 4. If the standard cost of handling one pallet is $2, and 5,000 pallets are handled in a given time period, then ____ should be budgeted for handling pallets. a. $10,000 b. $7,500 c. $5,000 d. $2,500 e. Cannot be determined (a; p. 331)

5. With ____, cost objects consume activities and activities consume resources. a. financial accounting

b. activity-based costing c. cost accounting d. standard costing (b; p. 331) 6. Which of the following is not a step associated with activity-based costing? a. collect activity data b. determine cost for each activity c. identify activities d. determine cost drivers e. all are steps associated with activity-based costing (e; p. 331) 7. What is the first step in the activity-based costing process? a. collect activity data b. identify activities c. determine cost for each activity d. determine cost drivers (b; p. 331) 8. ____ refers to the amount of output divided by the amount of input. a. Control b. Monitoring c. Productivity d. Input-output analysis (c; p. 332) 9. Which of the following is a way to improve to productivity? a. increase the amount of input while holding output constant b. decrease the amount of output while holding input constant c. increase input while at the same time decreasing output d. increase output while holding input constant (d; pp. 332-333)

10. The two most frequent uses of labor in logistics are ____ and ____. a. b. c. d. order management; warehousing transportation; customer service transportation; warehousing order management; customer service

(c; p. 333) 11. Productivity improvement efforts in logistics are often directed towards ____. a. reducing input while increasing output b. reducing input while holding output constant c. increasing output while holding input constant d. increasing output by a greater percentage than inputs are increased (c; p. 333) 12. Short-interval scheduling is a common technique used in logistics systems because it helps managers to: a. analyze a workers activity in small time segments b. make efficient use of scarce loading dock space c. eliminate unproductive union work rules d. minimize waste associated with shipping dunnage (a; p. 333) 13. What is the most important purpose of warehouse work rules? a. to control pilferage b. to keep employees from engaging in unproductive and potentially destructive activities c. to protect companies from union grievance procedures d. to give managers control over warehouse workers (b; p. 335)oo 14. Which of the following statements is false? a. union work rules are often very specific b. in warehousing, supervisors can be physically present to monitor work activities c. contracts that are negotiated with unionized warehouse workers increasingly contain performance-related standards d. to be effective, work rules must be enforced e. all of the above are true (e; p. 335) 15. A ____ is a device used to monitor and control the actions taken by a driver and his/her vehicle. a. tachometer b. tachograph c. speedometer d. regulator (b; p. 337) 16. The two areas in logistics systems where most energy costs occur are ____ and ____. a. customer service; warehousing

b. packaging; transportation c. materials handling; packaging d. warehousing; transportation (d; p. 339) 17. With respect to the design of warehouses, one suggestion for energy savings is to make sure that dock doors are not placed on the ____ side of a building. a. north b. south c. east d. west (a; p. 339) 18. Skylights and large windows that incorporate solar energy can reduce energy usage in a warehouse between ____ and ____%. a. 15; 25 b. 30; 40 c. 40; 60 d. 50; 65 e. None of the above (c; p. 339) 19. Transportation accounts for approximately ____ of all petroleum consumption in the United States. a. three-quarters b. two-thirds c. one-half d. one-third (b; p. 340) 20. Which of the following is not a fuel reduction option currently being pursued by motor carriers? a. reducing vehicle idling times b. implementing route optimization systems c. joining fuel purchasing networks d. removing paint from tractors and trailers e. all of the above are options (d; p. 340) 21. Which of the following is not one of the three critical factors associated with the process of managing returned goods? a. why products are returned b. how many products are returned c. whether returned goods should be managed internally or outsourced to a third party d. how to optimize returned goods management (b; p. 341)

22. With respect to product recalls, which agency does not engage in recalls? Instead, they are responsible only for causing the manufacturer to notify purchasers that a defect has been discovered? a. the Federal Trade Commission b. the Food and Drug Administration c. the Consumer Product Safety Commission d. the National Highway Traffic Safety Administration (d; p. 343) 23. Which U.S. federal government agency does not have authority over product recalls? a. Federal Trade Commission b. National Highway Traffic Safety Administration c. Consumer Product Safety Commission d. Food and Drug Administration e. All these agencies have product recall authority (a; p. 343)

24. All of the following are reasons why logisticians should be concerned about theft except: a. stolen products may reappear to compete with other products b. time and costs associated with theft arent always covered by insurance c. some organizations will avoid locating their facilities in areas characterized by high crime rates d. theft can lead to stockouts in the distribution channel e. all of the above are reasons (e; p. 345) 25. The materials stolen in ____ are usually for the employees own use. a. theft b. non-monetary compensation c. pilferage d. demurrage (c; p. 345) 26. What is the primary difference between pilferage and theft? a. there is no difference between the two b. theft refers to stolen merchandise worth more than $500 c. pilferage refers to stolen merchandise worth more than $500

d. pilferage involves a firms own employees, while theft involves efforts from outsiders e. none of the above (d; pp. 344-345) 27. ____ involves chartering an aged ship that is loaded with goods worth more than the ship. After setting sail, it makes an unscheduled stop, sells off the cargo to the highest bidder and exchanges the regular crew for a scuttling crew. a. Tramp shipping fraud b. Rust bucket fraud c. Despatch d. Lower order fraud (b; p. 345) 28. Which country experienced the most pirate attacks in 2005? a. Brazil b. China c. Indonesia d. India (c; p. 345) 29. What is viewed as a basic foundation for controlling theft? a. technology b. company policies c. sufficient organizational resources d. common sense (d; p. 347) 30. Which of the following statements is false? a. products at rest are particularly susceptible to theft b. security experts suggest that closed-circuit television and alarms are highly effective in controlling pilferage c. electronic devices can be used to provide building-related security functions d. there is virtually no limit to the sophistication or cost of security devices that can be used for building security e. all of the above are true (b; pp. 347-349) 31. Truck leasing companies, in an effort to thwart truck theft, now etch vehicle identification numbers in up to ____ different locations on each vehicle. a. 40 b. 30 c. 20 d. 10 (a; p. 349)

32. Transponders ____. a. allow for prepayment of custom duties b. permit electronic submittal of international documentation c. can be valuable for managing vehicle security d. plan the routes of forklift trucks (c; p. 349) 33. Two of the most important U.S. government agencies incorporated into the Department of Homeland Security were the Transportation Security Agency and ____. a. Department of Transportation b. Federal Maritime Commission c. Surface Transportation Board d. Customs and Border Protection (d; p. 351) 34. Which of the following is false? a. the Transportation Security Administration conducts passenger screening at U.S. commercial airports b. the Transportation Worker Identification Credential is to contain both personal and biometric data c. the Transportation Security Administration is involved in the Container Security Initiative d. the Transportation Worker Identification Credential is not yet fully operational e. all of the above are true (c; pp. 351-352) 35. All of the following are potential benefits to the Customs Trade Partnership Against Terrorism except: a. lower costs b. fewer security inspections c. reduction in cargo theft d. faster processing time through Customs e. all of the above are potential benefits (a; p. 352) True-False Questions 1. Control refers to measurement that ensures conformity with an organizations policies, procedures, or standards. (True, p. 329) 2. One difference between accounting and logistics is that accountants count inventory in dollars whereas the logistics staff counts inventory in terms of stock-keeping units. (True; p. 330) 3. Standard costs are synonymous with average costs. (False; p. 331)

4. If the standard cost of handling a pallet is $1.25 and 400 pallets are handled in a particular time period, then $500 should be budgeted for handling pallets. (True; p. 331) 5. Fully allocated costing has become popular in logistics in recent years. (False; p. 331) 6. With activity-based costing, cost objects consume activities, and activities consume resources. (True; p. 331) 7. Determining a cost for each activity is the first step in activity-based costing. (False; p. 331) 8. Productivity can be defined as the amount of output divided by the amount of input. (True; p. 332) 9. Productivity efforts in logistics are often directed at increasing the amount of output while holding input constant. (True; p. 333) 10. Short-interval scheduling is a technique that maximizes the use of available dock space. (False; p. 333) 11. In an effort to improve worker performance, many supervisors use a three-part approach consisting of peer review, feedback, and positive reinforcement. (False; p. 335) 12. The most important function of work rules is to protect management from worker grievances. (False; p. 335) 13. Union work rules are often very specific in the sense that job descriptions spell out the responsibilities associated with a particular job. (True; p. 335 ) 14. Contracts that are negotiated with unionized warehouse workers increasingly contain performancerelated standards. (True; p. 335) 15. As a general rule, the same types of supervision can be used for both warehouse workers and truck drivers. (False; . 335) 16. The tachograph is a recording instrument that produces a continuous, timed record of the truck, its speed, and its engine speed. (True; p. 337) 17. Wireless communications, global positioning systems, and graphical information systems offer tremendous opportunities to improve driver productivity. (True; p. 338) 18. Warehousing and packaging are the two areas in logistics systems where most energy costs occur. (False; p. 339) 19. With respect to energy controls, warehousing design suggests that dock doors should not be placed on the west side of a building. (False; p. 339) 20. Roof color is often overlooked as an area for warehousing energy control. (True; p. 339) 21. Transportation accounts for about one-half of all petroleum consumption in the United States. (False; p. 340)

22. A number of companies are likely to reconfigure their modal allocations given that $60 per barrel oil prices are projected to be the norm through 2012. (True; p. 340) 23. Many third-party logistics companies offer expertise in returned goods management. (False; p. 342) 24. Some types of product recalls are more serious than others. (True; p. 342) 25. The main objective of the Consumer Product Safety Commission is to ban the sale of products deemed hazardous. (True; p. 343) 26. It is a good idea for companies to have practice, or fire drill, recalls to determine their speed, degree of coverage, and effectiveness. (True; p. 344) 27. Product recalls may offer an excellent opportunity for service recovery. (True; p. 344) 28. As a general rule, logisticians should not be concerned about theft because many organizations carry insurance to compensate themselves in case of theft. (False; p. 345) 29. Pilferage refers to stolen goods valued at more than $1,000. (False; p. 345) 30. Experts recommend that the best pilferage policy should be based on zero tolerance. (True; p. 345) 31. Tramp shipping fraud involves chartering a ship with cargo worth more than the ship itself, diverting the cargo, and scuttling the ship. (False; p. 345) 32. Piracy is still a threat in some shipping lanes. (True; p. 345) 33. Goods at rest (e.g., sitting in warehouses) are more vulnerable to theft than goods in motion. (True; p. 346) 34. Security experts suggest that closed-circuit television and alarms are highly effective in controlling pilferage. (False; p. 348) 35. Vehicle security is a particularly acute issue in the trucking industry because theft involves 1) the vehicle itself and 2) the vehicles contents. (True; p.349 ) 36. Transponders can be used to improve building security. (False; p. 349) 37. Information security is the most important technology issue that companies face today. (True; p. 349) 38. From a logistics perspective, the Transportation Security Administration and the Department of Transportation are two of the most important government entities that were incorporated into the Department of Homeland Security. (False; p. 351) 39. Customs and Border Protection is responsible for securing U.S. borders to protect the American people and the U.S. economy. (True; p. 351)

40. Companies that participate in the Customs Trade Partnership Against Terrorism are exempt from all import tariffs and all import quotas. (False; p. 352)

PART IV CASE SOLUTIONS CASE 13-1: BRANT FREEZER COMPANY Question 1: When comparing performance during the first five months of 2004 with performance in 2003, which warehouse shows the most improvement? St. Louis is the only one showing any improvement, using cost per unit shipped as the performance criterion. The cost for the first five months of 2003 was $9.97 and for the first five months of 2004, it fell to $9.07. Question 2: When comparing performance during the first five months of 2004 with performance in 2003, which warehouse shows the poorest change in performance? The worst change is the companys own warehouse (located in Fargo), where costs per unit shipped increased 31%. Among the public warehouses used, Denver was the worst in terms of cost per unit handled. It is also the most expensive public warehouse that Brant uses. Question 3: When comparisons are made among all eight warehouses, which one do you think does the best job for the Brant Company? What criteria did you use? Why? Using the cost per unit handled criterion, St. Louis does the best job, closely followed by Chicago. Question 4: J.Q. is aggressive and is going to recommend that his father cancel the contract with one of the warehouses and give that business to a competing warehouse in the same city. J.Q. feels that when word of this gets around, the other warehouses they use will shape up. Which of the seven should J.Q. recommend be dropped? Why? Denver has the lowest volume and highest unit costs among all the public warehouses used. In addition, it had been closed by a strike which must have inconvenienced the Brant Company. It may be that the warehouse workers unions are strong in the Denver area. J.Q. should probably check out rates and productivity measures of other Denver warehouses before deciding to drop its current warehouse there. Question 5: The year 2004 is nearly half over. J.Q. is told to determine how much the firm is likely to spend for warehousing at each of the eight warehouses for the last six months of 2004. Do his work for him. There is not enough information to do a very precise forecast. J.Q. assumes that the proportion of costs occurring during the first five months of 2003 should be in the same proportion in 2004. (1) % 2003 costs occurring in first five months (2) Actual costs for first five months of 2004 ($) (3) Projected total costs in 2004 ($) (4) Projected costs in the last six months of 2004 ($)

Warehouse location

Atlanta Boston Chicago Denver Fargo Los Angeles Portland St. Louis

22.88 44.00 53.43 35.00 54.00 72.20 49.30 44.80

40,228 29,416 141,222 14,900 9,605 93,280 42,616 19,191

175,822 66,885 264,312 42,571 17,787 129,197 86,442 42,837

116,204 32,085 105,556 23,714 7,012 30,781 37,559 20,265

The projected costs in 2004 (column 3) are calculated by dividing the actual costs for the first five months of 2004 (column 2) by the percent of 2003 costs that occurred in the first five months (column 1). For example, Atlantas actual 2004 costs of $40,228 divided by 2003s 22.88% yields projected 2004 costs of approximately $175,822. The projected costs in the last six months of 2004 (column 4) are calculated by subtracting the actual costs for the first five months of 2004 (column 2) from 2004s projected total costs (column 3). This gives us the projected costs for the last seven months of 2004. However, we are only interested in the last six months of 2004, so this number is multiplied by 6/7, or .857. Continuing with Atlanta, 2004s projected total costs of $175,822 minus the first five months actual costs of $40,228 equals $135,394. Multiplying this by 6/7 yields projected six months costs of approximately $116,204. Question 6: When comparing 2003 figures with the 2004 figures shown in Exhibit 13-A, the amount budgeted for each warehouse in 2004 was greater than actual 2003 costs. How much of the increase is caused by increased volume of business (units shipped) and how much by inflation? There are several ways to approach this question. One involves calculating the volume difference and inflation difference for each warehouse, as follows: Volume difference = 2003 unit costs x (2004 units shipped 2003 units shipped) Inflation difference = 2004 units shipped x (2004 unit costs 2003 unit costs) For example, Atlantas volume and inflation differences are: Volume difference: $8.99 x (18,000 17,431) = $8.99 x 569 = $5,115 Inflation difference: 18,000 x ($9.97 - $8.99) = 18,000 x $.98 = $17,640 Question 7: Prepare the firms 2005 warehousing budget, showing for each warehouse the anticipated number of units to be shipped and the costs. Again, this can be done in several ways. One is to assume that the 2004 to 2005 increases will be exactly the same amount as the 2003 to 2004 increases (with units shipped rounded to the nearest hundred, and costs rounded to the nearest $500). This would yield the following results:

Differences in units shipped Warehouse b/w 2003 location and 2004 Atlanta 600 Boston 300 Chicago 1,900 Denver 100 Fargo 0 Los 500 Angeles Portland 700 St. Louis 2,100

Units shipped in 2004 18,000 7,200 30,000 3,100 2,000 17,000 9,000 8,000

Projected units shipped in 2005 18,600 7,500 31,900 3,200 2,000 17,500 9,700 10,100

Difference in warehouse Projected costs b/w Warehouse warehouse 2003 and costs in costs in 2004 ($) 2004 ($) 2005 ($) 21,000 178,000 199,000 9,500 73,000 82,500 38,500 285,000 323,500 3,000 31,000 34,000 500 17,000 17,500 24,000 176,000 200,000 12,000 4,000 85,000 56,000 97,000 60,000

Another method would use percentage changes. Question 8: While attending classes at the university, J.Q. had learned of logistics partnerships. Should Brant Freezer Company attempt to enter into a partnership relationship with these warehouses? If so, what approach should it use? Assuming that a partnership approach was to be used, Brant would have to think of some sort of sharing of potential risks and profits. Offhand, the case does not provide much information to go on, other than cost containment or reduction is an issue.

CASE 13-2: RED SPOT MARKETS COMPANY Question 1: How should Fosdick respond to the immediate situation? Fosdick is on the spot and must respond immediately. Probably the best thing for him to do is refuse the sandwich, indicate his surprise atand clear disapproval ofthe pilferage, and continue on his way to the restaurant. Question 2: What controls, of the types discussed in this chapter, might have been used by Red Spot Markets to reduce or eliminate the problems discussed in the case? Closer controls on worker productivity and on pilferage would have helped. Question 3: What longer-range steps should Fosdick take to control the operations of the Providence distribution center? He should implement a management style whereby he, rather than Bigelow, determines the pace of the warehouse work. However, this is much easier said than done, particularly because of Bigelows almost overpowering influence. Question 4: What longer-range steps should Fosdick take to improve the Providence distribution centers productivity? Fosdick should first consult with Easter to determine whether the company is going to keep or dump Bigelow. Bigelow appears to hold the key to the warehouse workforces productivity and few schemes to increase output will succeed without his blessings. Fosdick and Easter might also attempt to incorporate productivity measures into the distribution centers next labor contract. Question 5: What longer-range steps can Fosdick take to reduce the distribution centers high rate of shrinkage? Again, after consulting with Easter, a decision must be reached as to how quickly and how forcefully the company is going to end the free lunch program, because that appears to be a main cause of the shrinkage. Fosdick and Easter might also incorporate a shrinkage target into the next labor contract and perhaps link performance bonuses to this target. Question 6: Assume that Fosdick decides that the practice of free lunches from the open cases of goods must be stopped. Develop and present arguments he should give in a meeting with a union shop steward. He might say that the practice is a form of stealing and clearly unacceptable to the company. If there are behavior clauses in the union contract, Fosdick might invoke them. He could emphasize that the pilferage has made Providence a high cost warehouse and if these high costs are not improved within a certain time frame, then the facility could be shut down. Question 7: (This is a continuation of question 6.) Assume, instead, that you are the union shop steward. Develop and present your argument that the free lunches represent a long-standing employee

benefit enjoyed by the distribution centers employees, and that managements attempt to stop them is a breach of an unwritten contract and will be resisted. You might argue that management has known about the practice for a long time and, by not eliminating it, has tacitly accepted it. You could also argue that the practice is not much different from managements use of company phones and company cars for personal activities. Question 8: Much of the situation described in the case seems to revolve around the personality of T.D. Bigelow. How should he be treated? Why? This question may generate a wide variety of responses and the discussion can become quite intense. Some students may argue that Bigelow should be fired. Others may argue that he should seek assistance for his apparent substance abuse problem, possibly through an Employee Assistance Program (if Red Spot has such a program). Still others may argue for a divide and conquer approach in the sense that Bigelow, despite his inability to count and spotty attendance, should be made some type of supervisor because of his ability to get the warehouse employees to work. Such an approach could turn Bigelow into an enemy of the hourly workers, in that he would no longer be one of them. PART II END-OF-CHAPTER QUESTIONS CHAPTER 14: ORGANIZING AND ANALYZING LOGISTICS SYSTEMS 1. Discuss several issues that influence the organization of logistics activities within a firm. The organization of logistics activities within a firm depends on a number of factors, including the number and location of customers, as well as an organizations size. The number and location of customers might influence whether a firm adopts a centralized or decentralized logistics organization. An organizations size might influence the organizing of logistics activities in the sense that there are limitations in the degree of specialization of managerial talent in small firms. 2. Compare and contrast the fragmented and unified logistical organizational structures. In a fragmented logistics structure, logistics activities are managed in multiple departments throughout an organization. In such a structure, it is possible for the various logistics activities to be managed in two, three, four, or more departments. Because effective and efficient logistics is predicated on a high degree of coordination among logistics activities, such coordination can become difficult when the logistics activities are spread throughout an organization. In a unified logistics structure, multiple logistics activities are combined into, and managed as, a single department. The unified structure can be further classified based on the number and type of activities assigned to the department. Regardless of how many, or what type, of logistics activities are managed, the unified logistics structure should be better positioned than the fragmented structure to achieve coordination across the various activities. 3. What are the differences between a centralized and a decentralized logistics department?

A centralized logistics organization implies that the corporation maintains a single logistics department that administers the related activities for the entire company from the home office. A decentralized logistics organization means that logistics-related decisions are made separately at the divisional or product group level and often in different geographic regions. There are advantages to both approaches, with a primary advantage of centralization being its relative efficiency, whereas a primary advantage of decentralization is its customer responsiveness. Centralization allows an organization to take advantage of the cost savings that can arise from volume-creating opportunities. Many global firms need to decentralize operations because of geographic and time differences from the home office. 4. Discuss the process, market, and information logistics strategies. In a process strategy, traditional logistics activities are managed as a value-added system. Emphasis is on achieving maximum efficiency, the primary goal is to cut costs, and the focus is on rationalizing complex activities into an efficient value-added system. With a market strategy, a limited number of traditional logistics activities are managed across business units. Emphasis is on achieving synergy from coordinated physical distribution, the primary goal is to serve common customers from various business units, and the focus is on reducing the complexity faced by customers. In an information (channel) strategy, a diverse group of logistics activities, together with other activities, are managed as a channel system. Emphasis is on the coordination and control of dealer and distribution networks, and the focus is on achieving interorganizational coordination and collaboration through logistics and information management. 5. Describe the hierarchical and matrix organizational design. Hierarchical, or functional, organizational design has its foundations in the command-andcontrol military organization, where decision making and communication often follow a topdown flow. Each employee reports to one, and only one, supervisor. In a matrix design, one employee might have cross-functional responsibilities. For example, the manager of small appliances at one organization might report to logistics, marketing, and production executives, and the small appliance manager would have responsibility for the production, marketing, and logistics of small appliances. 6. From a logistics perspective, how is network organizational design manifested in terms of relevancy, responsiveness, and flexibility? Relevancy, which refers to satisfying current and emerging customer needs, can be facilitated by developing mutually beneficial relationships with key customers; at a minimum, these relationships should provide an understanding of customer needs and wants. Responsiveness reflects the degree to which an organization can accommodate unique or unplanned customer requests; responsiveness can be achieved when the appropriate decision makers are provided with both relevant information and the authority to address unique or unplanned requests. Flexibility, which can be defined as an organizations ability to address unexpected operational situations, is predicated on avoiding early commitment to an irreversible course of action. One example of logistics flexibility would be the postponement of assembly, labeling, and so on until exact customer requirements are known.

7. Define logistics systems analysis. Why is friction inherent when performing logistics systems analysis? Logistics systems analysis refers to the orderly and planned observation of one or more segments in the logistics network or supply chain to determine how well each segment and the entire system function. Friction is inherent when performing logistics system analysis, in part because of different viewpoints and perspectives. Top management might view systems analysis as an opportunity to identify policies and practices that could improve logistical effectiveness and efficiency. Operating personnel might view systems analysis as an excuse to modify existing work rules or to reduce the hours or numbers of workers needed. 8. What is industry systems analysis? What is its value? Industry systems analysis is performed by a trade association, professional organization, or other entity on an industrywide basis. The participating firms can use the findings to determine how their performance compares to the industry as a whole or to various other industry segments. 9. What is partial systems analysis? Why is it used? Partial systems analysis refers to analysis that is relatively narrow in scope, with the focus looking at a single aspect of logistics, such as a time-and-motion study of individuals who handle incoming freight at a receiving dock. Partial systems analysis is used because it contributes toward an understanding of how an entire system functions. In addition, it is difficult to measure the overall performance of a system without measuring and understanding the performance of individual components. 10. Discuss customer profitability analysis. Customer profitability analysis (CPA) refers to the allocation of revenues and costs to customer segments or individual customers to calculate the profitability of the segments or customers. CPA suggests that different customers (segments) consume differing amounts and types of resources and has been facilitated by activity-based costing. Customer profitability analysis explicitly recognizes that all customers are not the same and that some customers are more valuable than others to an organization. CPA can be used to identify different groups of customers from a profitability perspective and such a grouping can better help in allocating organizational resources. 11. Explain how warehousing productivity can be improved without significant investment in technology, or mechanized, or automated equipment. One suggestion for improving warehousing productivity involves a review of existing procedures and practices to identify the tasks that are creating the largest inefficiencies and then developing methods to reduce or eliminate the efficiencies without adding to or upgrading present technology or equipment. Organizations can also examine their facility layouts; long horizontal runs and frequent backtracking could be the symptoms of layout problems. Something as basic as adding cross aisles could reduce the length of horizontal runs as well as the length of backtracking.

12. How have advances in information technology facilitated transportation cost analysis? Some trucking companies can examine inbound or outbound deliveries for a representative period of time using data gathered from a customers paid freight bills. This can allow both the carrier and the customer to determine whether individual shipments or shipment patterns can be improved. It is also possible to conduct sensitivity analysis to determine the transportation costs for various levels of transportation service. 13. Explain the compounding nature of packaging inefficiency. What cost savings and service improvements can occur with better packaging efficiency? The building blocks concept is useful for analyzing packaging inefficiency in the sense that packaging inefficiency tends to be compounded as one moves from a very small unit to a smaller unit, to a small unit, and so on. The text provided an example of inefficient case and pallet utilization that resulted in less than 25% of available pallet space being occupied by actual product. The book also cited an example of a company where improved packaging efficiency has resulted in lower transportation and warehousing costs as well as a reduction in damaged product. 14. How might goals, objectives, and constraints facilitate decisions about how to conduct a comprehensive systems analysis? Systems goals must be realistic and systems objectives must be achievable within the context of a firms operational scope. Monetary constraints might mitigate against the use of outside consultants (because of the expense), whereas time constraints might argue for a small (in terms of the number of people) analysis team. 15. Discuss how the channels audit might identify the need for distribution or channel rearrangement. With respect to distribution rearrangement, the book discusses the recorded music industry, where customers historically bought physical products such as record albums, cassettes, or compact discs that were distributed through retail outlets such as music stores or mass merchandisers. Today, by contrast, technological advances allow for digital distribution of songs, meaning that there is less demand for prerecorded cassettes or compact discsand less need for the respective retailers. As for channel rearrangement, the Internet offers some organizations the option of a direct distribution channel (i.e., from producer to consumer with no intermediaries in between). The logistics associated with direct distribution are different from the logistics associated with indirect distribution (e.g., the orders are smaller and less predictable with direct distribution). 16. Why should the competition audit identify both current and potential competitors? Potential competitors may present more formidable challenges than do current competitors. The book cites Wal-Mart as an example because its superior logistical capability often causes tremendous upheaval when it expands into product lines that have been dominated by certain retailers. For instance, Wal-Mart is now the worlds largest toy retailer and this has led to bankruptcies and restructurings among long-standing toy retailers.

17. Explain why the facilities audit should consider the age and capacity of production plants and storage facilities. A facilitys age can be important to know because older facilities tend to reflect the prevailing engineering and technological wisdom at the time they were constructedand its safe to say that there are advances in engineering and technological knowledge through time. Moreover, older facilities may not be in compliance with contemporary health, safety, and environmental regulations. A facilitys capacity can be evaluated across dimensions such as its total capacity and percent of capacity being used. The percent of capacity being used provides insights into the efficiency or inefficiency of capacity utilization in the sense that excessive unused capacity can be quite costly to an organization. 18. How can the product audit be helpful in evaluating decisions about adding new products or new product lines? The book presents an example involving Procter and Gambles (P&G) acquisition of Gillette; this has allowed P&G to broaden its product mix by adding a number of personal care products that are largely targeted to males (P&Gs personal care products tend to be targeted towards females). There appears to be a great deal of synergy between the two companies because their products are distributed in the same channels, and the products have similar production, packaging, handling, transportation, and warehousing requirements.

19. Describe several dimensions of the social responsibility audit. The book presents six dimensions of the social responsibility auditthe environment, ethics, diversity, safety, philanthropy, and human rights. Any combination of these can be described. In terms of the environment, for example, organizations might focus on reusing and recycling products, reducing the amount of packaging, improving fuel efficiency, and reducing various types of pollution. 20. Name the seven types of comprehensive logistics systems audits that should be performed. Which do you view as the most important? The least important? Why? The seven types of comprehensive audits that should be performed are channels, competition, customer, facilities, product, social responsibility, and supplier audits. Any of the seven might be viewed as the most or least important.

PART III EXAMINATION QUESTIONS CHAPTER 14: ORGANIZING AND ANALYZING LOGISTICS SYSTEMS Multiple Choice Questions 1. ____ and ____ are the two basic organizational structures associated with logistics. a. Centralized; hierarchical b. Fragmented; centralized c. Fragmented; unified d. Unified; hierarchical (c; p. 362) 2. In a ____ logistics structure, logistics activities are managed in multiple departments throughout an organization. a. unified b. fragmented c. decentralized d. matrix (b; p. 362) 3. One problem with a ____ logistics structure is that because logistics activities are scattered throughout the firm, they likely remain subservient to the objectives of the department in which they are housed. a. fragmented b. matrix c. decentralized d. hierarchical (a; p. 362) 4. In a ____ logistics structure, multiple logistics activities are combined into, and managed as, a single department. a. hierarchical b. centralized c. matrix d. unified (d; p. 362) 5. A ____ logistics organization implies that the corporation maintains a single logistics department that administers the related activities for the entire company from the home office. a. hierarchical b. unified

c. centralized d. command-and-control (c; p. 363) 6. A ____ logistics organization means that logistics-related decisions are made separately at the divisional or product group level. a. fragmented b. decentralized c. flexible d. agile (b; p. 363) 7. A primary advantage of ____ logistics is its relative efficiency, whereas a primary advantage of ____ logistics is its customer responsiveness. a. unified; fragmented b. unified; decentralized c. fragmented; centralized d. centralized; decentralized (d; p. 363) 8. Which of the following is an advantage of a decentralized logistics organization? a. less expensive than a centralized organization b. good opportunities for freight consolidation c. can be responsive to customer service requirements d. better control over company data (c; p. 363) 9. Which of the following is an advantage of a centralized logistics organization? a. less expensive than a decentralized organization b. good opportunities for freight consolidation c. can be responsive to customer service requirements d. easier to manage than a decentralized organization (b; p. 363)

10. Which of the following is not one of the three strategic logistical orientations? a. centralized b. market c. information d. process (a; pp. 363-365) 11. In a ____ strategy, traditional logistics activities are managed as a value-added system.

a. process b. market c. value chain d. information (a; p. 363) 12. With a ____ strategy, a limited number of traditional logistics activities are managed across business units. a. process b. linking pin c. market d. information (c; p. 365) 13. In a(n) ____ strategy, a diverse group of logistics activities, together with other activities, are managed as a channel system. a. supply chain b. market c. process d. information (d; p.365 ) 14. ____ organizational design has its foundations in the command-and-control military operation, where decision-making and communication often follow a top-down flow. a. Centralized b. Unified c. Matrix d. Hierarchical (d; p. 365) 15. A ____ organizational design attempts to create an organization that is responsive to the parameters of the contemporary business environment. a. matrix b. network c. decentralized d. unified (b; p. 365) 16. A key attribute of network organizational design is a shift from ____ to ____. a. function; process b. centralization; decentralization c. process; function

d. decentralization; centralization (a; p. 366) 17. ____ refers to satisfying current and emerging customer needs. a. Responsiveness b. Flexibility c. Relevancy d. Accommodation (c; p. 366) 18. ____ can be defined as an organizations ability to address unexpected operational situations. a. Relevancy b. Flexibility c. Accommodation d. Responsiveness (b; p. 366) 19. The orderly and planned observation of one or more segments in the logistics network or supply chain in order to determine how well each segment and the entire system function refers to ____. a. trade-offs b. supply chain management c. systems analysis d. optimum cost reliability analysis (c; p. 366)

20. Systems analysis can best be thought of as: a. the usage of operations research and other sophisticated quantitative techniques to determine the optimum synergistic tendencies of logistics versus other functional areas such as marketing and production b. an orderly and planned observation of one or more segments in the logistics network to determine how well each segment and the entire system is functioning c. the use of outside consultants to determine the problem areas within a firm d. an analysis of how well the various functional areas such as marketing, production, and logistics work together toward achieving company goals (b; p. 366) 21. Outside consultants are sometimes employed in systems analysis because: a. b. c. d. they can be more objective they are more cost effective than company employees they are more knowledgeable about the firm being studied they are more knowledgeable about operations research and other sophisticated quantitative techniques

(a; p. 368) 22. ____ analysis is performed by a trade association, professional organization, or other organization on an industrywide basis. a. Macro industrial b. Peer supported c. Industry systems d. Sponsored (c; p. 368) 23. An advantage of partial systems analysis is that ____. a. it can be completed by current company employees, without the use of outside consultants b. it is often not possible to do a total system analysis, and thus the only feasible alternative is partial systems analysis c. it can often be completed without using sophisticated quantitative techniques d. it almost always significantly increases the effectiveness of the order management function (b; p. 368)

24. ____ refers to the allocation of revenues and costs to customer segments or individual customers to calculate the profitability of the segments or customers. a. Customer profitability analysis b. Tailored logistics c. Direct customer contribution margin d. Customer relationship management (a; p. 368) 25. Customer Profitability Analysis (CPA) has been facilitated by the acceptance of: a. Generally Accepted Accounting Principles b. Vendor-managed inventory c. Supply chain management d. Activity-based costing (d; p. 369) 26. Which of the following is not a potential measure of warehousing productivity? a. average warehouse capacity used b. pallets shipped per person c. forklift capacity used d. cases shipped per person e. all are measures of warehousing productivity (e; p. 369)

27. Recent warehousing industry statistics indicate a median of ____ cases (within five) shipped per hour. a. 150 b. 125 c. 100 d. 75 (c; p. 369) 28. ____ is pursuing a Remix distribution strategy that strongly encourages its vendors to work with logistics service providers to consolidate less-than-truckload shipments into truckload shipments. a. Hewlett-Packard b. Procter & Gamble c. Target d. Wal-Mart (d; p. 369) 29. What has been described as the last frontier of logistics savings opportunities? a. materials handling practices b. packaging inefficiencies c. inventory turnover d. warehousing productivity e. none of the above (b; p. 371) 30. All of the following are one type of comprehensive audit that should be performed in logistics systems analysis, except: a. competitor b. supplier c. channels d. product e. all are audits that should be performed (e; p. 373) 31. Disintermediation refers to: a. the removal of channel levels b. a lack of coordination among channel members c. a breakdown in labor negotiations d. a supply chain disruption (a; p. 373) 32. The information required for the ____ audit is generally not available within a companys own records.

a. product b. competition c. facilities d. channels (b; p. 374) 33. Which of the following statements about the facilities audit is false? a. facility age should be considered b. changing trade patterns necessitate periodic analysis of facility location c. a facilitys capacity can be evaluated across dimensions such as total capacity and percent of capacity being used d. facility layout is the most important configuration consideration e. all the statements are true (d; p. 375) 34. Which of the following is not relevant to a supplier audit? a. assessment of supplier quality b. supplier costs c. the number of suppliers d. the type(s) of suppliers e. all are relevant to a supplier audit (e; pp. 376-377 ) 35. After completing the various audits associated with comprehensive systems analysis, the next step is to: a. write a report and present it to top management b. examine and analyze the collected data c. redesign the logistics system d. conduct partial systems analysis (b; p. 377) True-False Questions 1. The organization of logistics activities within a firm depends on a number of factors, including the number and location of customers and an organizations size. (True; p. 361 ) 2. In a decentralized logistics structure, logistics activities are managed in multiple departments throughout an organization. (False; p. 362) 3. One problem with a fragmented logistics structure is that because logistics activities are scattered throughout the firm, they likely remain subservient to the objectives of the department in which they are housed. (True; p. 362)

4. In a unified logistics structure, multiple logistics activities are combined into, and managed as, a single department. (True; p. 362) 5. Leading edge organizations are more likely to use a unified, as opposed to fragmented, logistics structure. (True; p. 362) 6. A centralized logistics organization generally results in better customer responsiveness than a decentralized organization. (False; p. 363) 7. Most Fortune 500 companies employ a chief logistics officer (CLO). (False; p. 363) 8. The primary goal in a market strategy is to cut costs. (False; p. 363) 9. In an information strategy, a diverse group of logistics activities, together with other activities, are managed as a channel system. (True; p. 365) 10. The dominant contemporary emphasis in logistics involves maximizing efficiency, which is associated with a process strategy. (True; p. 365) 11. Societal changes are relatively easy to accommodate in a hierarchical, or functional, organizational design. (False; p. 365) 12. A matrix organizational design can be very responsive to customer requirements. (True; p. 365) 13. From a logistics perspective, a network organizational design in logistics is manifested in terms of relevancy, responsiveness, and flexibility. (True; p. 366) 14. Responsiveness refers to satisfying current and emerging customer needs. (False; p. 366) 15. The postponement of product assembly and labeling until exact customer requirements are known is an example of responsiveness. (False; p. 366) 16. Systems analysis refers to the orderly and planned observations of one or more segments in the logistics network or supply chain in order to determine how well each segment and the entire system function. (True; p. 366) 17. Friction is inherent in any attempt to analyze and redesign a supply chain. (True; p. 366) 18. Some firms prefer to use outside consultants to conduct logistics systems analysis, in part because consultants can be more objective than internal employees. (True; p. 368) 19. Peer-supported analysis is generally performed by a trade association. (False; p. 368) 20. Partial systems analysis can be used to improve an entire system. (False; p. 368) 21. Customer profitability analysis is one type of partial systems analysis. (True; p. 368) 22. Customer profitability analysis has been facilitated by the acceptance of vendor-managed inventory. (False; p. 369)

23. Customer profitability analysis recognizes that some customers are more valuable than others to an organization. (True; p. 369) 24. Increases in warehousing productivity generally are not possible without significant investment in technology, or mechanized or automated equipment. (False; p. 369) 25. Transportation cost analysis has tended to focus more on inbound, rather than outbound, freight costs. (False; p. 370) 26. Wal-Mart is pursuing a Remix distribution strategy that strongly encourages its vendors to work with logistics service providers to consolidate less-than-truckload shipments into truckload shipments. (True; p. 370) 27. Warehousing productivity has been described as the last frontier of logistics savings opportunities. (False; p. 371) 28. System constraints involve factors in the system that cannot be changed for various reasons. (True; p. 372) 29. Channel audits are used today to determine whether some channels can be shortened. (True; p. 373) 30. Disintermediation refers to a quality management technique that is used by world-class logistics firms. (False; p. 373) 31. The information for a competition audit is generally not available within a companys own database or records. (True; p. 374) 32. The competition audit should focus more heavily on current, rather than potential, competitors. (False; p. 374) 33. The customer audit provides a key input for systems analysis because, in the end, each system is designed to satisfy the needs and requirements of a firms customers. (True; p. 375) 34. A facilities audit would not include evaluations of work crews or performance ratings of managers or supervisors. (False; p. 375) 35. Changing trade patterns necessitate periodic analysis of the location of an organizations production plants and storage facilities. (True; p. 375) 36. The information required for a product audit is generally not available within a companys own records. (False; p. 376) 37. The relevant dimensions for a social responsibility audit are generally similar across the supply chains of different industries. (False; p. 376) 38. The supplier audit evaluates an organizations suppliers of raw materials, component parts, and professional services. (True; p. 376)

39. After completing the various audits associated with comprehensive systems analysis, the next step is to write a report and present it to top management. (False; p. 377) 40. Although comprehensive systems analysis is concerned with logistical effectiveness and efficiency, it is rare that a logistics system is completely redesigned at one time. (True; p. 377)

PART IV CASE SOLUTIONS CASE 14-1: COLUMBIA LUMBER PRODUCTS COMPANY Question 1: Draw a new organization for Columbia Lumber Products Company (CLPC) that you feel overcomes best the directors criticisms of CLPCs present (January 31, 1996) organization. Indicate the geographic location of all operations shown on the new chart. Explain why you established the organization chart the way you did. There is no single solution. Various answers can be compared. Question 2: Assume that the firm should be reorganized in a manner that emphasizes sales and marketing. This would include a physical distribution system, which would support the marketing effort. Draw an organization chart that you think would accomplish this aim. Indicate the geographic location of all operations on the new chart and explain why you drew the chart as you did. There would likely be a marketing department, headed by a vice president or senior vice president. Within it would be a physical distribution function that has direct linkages to marketing and distribution efforts throughout the country. Question 3: Assume that the firm wants to reorganize into a highly centralized form, closely managed from a single home office. Draw a new chart that takes this into account. Indicate the geographic location of all operations on the chart and explain why you organized it as you did. This would move mostor allfunctions now performed out in the field into the home office. Question 4: Assume, instead, that the firm wants to reorganize into a highly decentralized form, where many important decisions can be made out in the field. Draw up a new chart, including the geographic location of all activities. Explain why you drew it up as you did. The answer to this would be almost the exact opposite from the answer to question 3. A decentralized organization would have allor nearly allthe functions performed out in the field. Question 5: Young Irwin Buchanan III, the firms senior traffic manager, heard rumors that the number of vice presidents was to be reduced. He felt that this would reduce his chances of ever achieving vice presidentialor presidentialstatus. Luckily, he had access to some money in a family trust fund. He wondered whether he should propose to form a separate, third-party firm to contract with CLPC to perform CLPCs logistical operations. What functions should it offer to perform? He might consider offering to perform those functions that he believes that CLPCs top management has always had trouble controlling. He would have to convince CLPCs management that a third-party firm could perform better, and with fewer headaches to CLPC. CLPC has little to lose by listening to Buchanans proposals, although some of the problems listed in the case will not be solved by a third-party logistics firm.

Question 6: (This is a continuation of the situation described in question 5.) Assume that young Buchanan does decide to form an outside firm to handle CLPCs logistics operations. Draft his letter to CLPCs management containing such a proposal. Such a letter could address the advantages of forming an outside logistics firm and then contracting with it, such as the ability for CLPC to focus on their core competencies. The letter would also need to include information that would convince CLPCs management that young Buchanan is capable of leading and managing the new firm. In addition, the letter would need to be diplomatic with respect to discussing CLPCs present logistical inadequacies, in part because Buchanan had probably contributed to some of these inadequacies.

CASE 14-2: TRIGO EXPORT CO., LTD. The pricing of products for export sale is covered here, with logistics practices and costs having considerable influence. Question 1: Ziolas export packaging materials consisted of at least 40% recycled contents. Should this be mentioned in the quotation given to the potential Brazilian buyer? It would not hurt in case somebody reviewing the bid happened also to be interested in environmental protection. However, note that they are buying tractors to use in Brazil. Question 2: Each package in this shipment will be bar coded. Is this an example of supply-chain integration? Why or why not? It is an example of supply-chain integration, although one again is uncertain how useful this might be in the Brazilian market for tractors. Question 3: What price should be quoted for 40 tractors? Note that 24 tractors can be carried inside a 20-foot container. Here are the costs of shipping 40 tractors: Type of cost Tractors (40 x $700) Rail to Halifax (2 containers) Ocean freight Insurance on land (1% of $28,000) Insurance on sea (2% of $28,800) Documentation Subtotal Interest (.12 x [25/365] x 34,306) Subtotal 10% markup Total Cost ($) 28,000 800 4,400 280 576 250 34,306 282 34,588 3,459 38,047

$38,047 divided by 40 tractors equals $951.18 per tractor

Question 4: What price should be quoted for 100 tractors? Here are the costs of shipping 100 tractors: Type of cost Tractors (100 x $700) Rail to Halifax (5 containers) Ocean freight Insurance on land (1% of $70,000) Insurance on sea (2% of $72,000) Documentation Subtotal Interest (.12 x [25/365] x $85,390) Subtotal 10% markup Total $94,701 divided by 100 equals $947.01 per tractor Question 5: Is there another quantity between 40 and 100 where the costs per tractor are lower? If so, what is it? What are its costs per tractor? One area where a change might be possible is to sell in quantities that result in full containers. For example, if we choose to sell 96 tractors, only four containers would be needed. The relevant costs would be as follows: Type of cost Tractors (96 x $700) Rail to Halifax (4 containers) Ocean freight Insurance on land (1% of $67,200) Insurance on sea (2% of $68,800) Documentation Subtotal Interest (.12 x [25/365] x $79,898) Subtotal 10% markup Total $88,611 divided by 96 equals $923.03 per tractor Question 6: For how long into the future should the price quotes be made (i.e., Trigo agree to deliver at a certain price)? Why? Cost ($) 67,200 1,600 8,800 672 1,376 250 79,898 657 80,555 8056 88,611 Cost ($) 70,000 2,000 11,000 700 1,440 250 85,390 702 86,092 8,609 94,701

This would depend in which currency the quote was being made and that currencys anticipated stability. Before making the bid, the potential buyer might be asked the length of time the quote should be for, in case the process has to pass through several steps. Question 7: In what currency should Trigo ask to be paid? Why? The two options appear to be the Canadian and Brazilian currencies; Trigo probably should be paid in the more stable currency. Students could track values of the Canadian and Brazilian currencies over a certain time period, such as a year, in order to determine their relative stability. Question 8: After preparing the bid, Ziola calls Trigo and says that they are thinking of redesigning the tractor frame so that it can be disassembled, taking up half the space. A Ziola Speedwagon could fit into an export package measuring 1 meter by 1 meter by 0.5 meter. The weight of the packaged tractor would continue to be 220 kilos. By how much, if at all, would this new package size reduce the answers for Questions 3 and 4? Cubic dimensions (not weight) currently determine the shipments transportation costs. In general terms, packing the tractors so that they would be twice as dense would reduce the transportation costs per tractor by one-half. The assumptions in the previous paragraph are assuming that a 20-foot intermodal container that formerly carried 24 tractors could now carry 48 (tractors stacked four high instead of two high). However, if it is possible to stack the tractors five high (.5 meter height per package into a 2.5 meter height), then the container could hold 60 tractorsthus further reducing costs. This could be a point of discussion. R MBA www.eauc.hk