Coyle Supply Chain Management: A Logistics Perspective, 10th Edition

Chapter 3 Test Bank

CHAPTER 3 TEST QUESTIONS

True-False

1. The utility created through the basic marketing activities is known as place utility.
ANSWER: False, Page 56

2. Transportation is the physical movement or flow of goods.

ANSWER: True, Page 58

3. As a firm spends more on transportation service, cost of lost sales increases.

ANSWER: False, Page 70

4. A logistics channel is a supply chain of network organizations engaged in transfer, storage,

handling, communication, and other functions that contribute to the efficient flow of goods.
ANSWER: True, Page 86

5. As the dollar value of a product decreases, its inventory value decreases.

ANSWER: True, Page 71

6. In a logistics system, warehousing should be optimized at the expense of related logistics

activities, such as transportation and procurement.
ANSWER: False, Page 59

7. The mathematical calculation of the point of equality between systems under analysis is used for
short-run/static analysis.
ANSWER: False, Page 81

8. To hold down distribution cost, the lowest cost carrier should always be used.
ANSWER: False, Page 65

9. The inverse relationship that exists between the cost of lost sales and inventory costs is the
inventory effect.
ANSWER: True, Page 70

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Multiple Choice

10. As the dollar value of a product increases, packaging costs:

a. increase.
b. decrease.
c. stay the same.
d. can't be determined.
ANSWER: a, Page 71

11. As the weight density of a product decreases, transportation cost per pound:
a. increases.
b. decreases.
c. stays the same.
d. can't be determined.
ANSWER: a, Page 72

12. As a firm spends more on transportation service, cost of lost sales:

a. increase.
b. decrease.
c. stay the same.
d. can't be determined.
ANSWER: b, Page 70

13. The value that is added to goods through a manufacturing or assembly process is:
a. form utility.
b. place utility.
c. time utility.
d. possession utility.
ANSWER: a, Page 56

14. Which of the answers below is an example of the creation of form utility by a logistics
activity?

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a. When lumber is cut and made into a chair

b. When a firm's finance manager approves customer purchases on a credit basis
c. When Dell combines components with software to produce a computer to a
customer's specifications
d. When bulk products are broken and repackaged at a distribution center
ANSWER: d, Page 56

15. The utility that is created by moving goods from production points to market points where
demand exists is referred to as _____ utility.
a. form
b. place
c. time
d. possession
ANSWER: b, Page 56

16. Logistics creates which utility through production forecasting, production scheduling, and
inventory control?
a. Form utility
b. Quantity utility
c. Time utility
d. Possession utility
ANSWER: b, Page 57

17. Time utility depends on:

a. when the carrier picks up the shipment.
b. transportation companies delivering on time.
c. proper forecasting.
d. having the product available when the user wants it.
ANSWER: d, Page 56

18. What is often the largest component of logistics costs?

a. Inventory costs

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b. Transportation costs
c. Shipper-related costs
d. Administrative costs
ANSWER: b, Page 58

19. Materials handling is concerned with:

a. inventory levels.
b. breaking bulk.
c. scheduling trade-offs.
d. short-distance movement.
ANSWER: d, Page 59

20. Marketers have begun to recognize the strategic value of place in the marketing mix, as well as
the benefits resulting from high-quality logistical services. As a result, which has been recognized
as the interface activity between marketing and logistics?
a. Product
b. Promotion
c. Price
d. Customer service
ANSWER: d, Page 66

21. The most important trade-off in logistics is between:

a. warehousing and packaging.
b. inventory and packaging.
c. transportation and warehousing.
d. transportation and inventory.
ANSWER: d, Page 65

22. What activity is described as the movement of goods into a warehouse, the placement of goods
in a warehouse, and the movement of goods from storage to order picking areas and eventually to
dock areas for transportation out of the warehouse?
a. Materials handling
b. Physical distribution

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c. Business logistics
d. Order fulfillment
ANSWER: a, Page 59

23. A(n) _____ relationship exists between the cost of lost sales and inventory cost.
a. reverse
b. proportional
c. inverse
d. nonlinear
ANSWER: c, Page 70

24. As the dollar value of a product decreases, its transportation cost:

a. increases.
b. decreases.
c. stays the same.
d. can't be determined.
ANSWER: b, Page 71

25. The product's dollar value typically affects the cost of logistics activities. Which is not one of
these costs?
a. Warehousing costs
b. Transportation costs
c. Promotion costs
d. Packaging costs
ANSWER: c, Page 71

26. When a specific point in time, or level of production, is chosen and costs are developed for the
various logistics cost centers, it is called:
a. least cost analysis.
b. short-run analysis.
c. cost center analysis.
d. link node analysis.

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ANSWER: b, Page 81

27. A _____ analysis examines a logistics system over a long time period or range of output.
a. cost center
b. dynamic
c. link node
d. least cost
ANSWER: b, Page 82

28. What are fixed spatial points where goods stop for storage or processing?
a. Nodes
b. Links
c. Cost centers
d. Fulfillment centers
ANSWER: a, Page 85

29. An important sustainability issue that has received much more scrutiny in recent years is the:
a. focus on adequate inventory levels.
b. reduction in packaging waste by using alternate materials.
c. effort to move warehouse storage closer to consumers.
d. emphasis on materials handling and warehouse design.
ANSWER: b, Page 59

Essay

30. Explain the relationship between logistics and supply chain management?

ANSWER: The concepts of supply chain management and logistics must be compared or, more
appropriately, related to each other. Supply chain management is defined using a pipeline analogy
with the start of the pipeline representing the initial supplier and the end of the pipeline
representing the ultimate customer. In other words, it was an extended set of enterprises from the
supplier's supplier to the customer's customer.

Another perspective on supply chain management is to view it as a network of the logistics

systems and related activities of all the individual organizations that are a part of a particular

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supply chain. The individual logistics systems obviously play a role in the success of the overall
supply chain. The coordination or integration of the logistics systems in a supply chain is a
challenge; no logistics system operates in a vacuum. For example, the inbound part of a
manufacturer's logistics system interfaces with the outbound side of the supplier's logistics system.
The outbound portion of the manufacturer's logistics system interfaces with the inbound side of its
customer's logistics system. (Page 53)

31. The text mentions four subdivisions of logistics. Pick one, define, and discuss.

ANSWER:
• Business logistics: That part of the supply chain process that plans, implements, and controls
the efficient, effective flow and storage of goods, service, and related information from point of
origin to point of consumption in order to meet customer requirements.
• Military logistics: The design and integration of all aspects of support for the operational
capability of the military forces (deployed or in garrison) and their equipment to ensure readiness,
reliability, and efficiency.
• Event logistics: The network of activities, facilities, and personnel required to organize,
schedule, and deploy the resources for an event to take place and to efficiently withdraw after the
event.
• Service logistics: The acquisition, scheduling, and management of the facilities, assets,
personnel, and materials to support and sustain a service operation or business.
All four subdivisions have some common characteristics and requirements such as forecasting,
scheduling, and transportation, but they also have some differences in their primary purpose. All
four, however, can be viewed in a supply chain context; that is, upstream and downstream other
organizations play a role in their overall success and long-run viability. (Page 55)

32. Physical distribution has a special relationship to marketing. What is the nature of the
relationship between logistics and marketing? Is the relationship becoming more or less
important? Why?

ANSWER: Logistics is sometimes referred to as the other half of marketing. The rationale for this
definition is that the physical distribution or outbound side of an organization's logistics system is
responsible for the physical movement and storage of products for customers and thus plays an
important role in selling a product. In some instances, physical distribution and order fulfillment
might be the key variables in selling a product; that is, the ability to provide the product at the
right time to the right place in the right quantities might be the critical element in making a sale.
Today, logistics is related to all four Ps of marketing—price, product, promotion, and place.

The most significant trend is that marketers recognize the strategic value of place in the marketing
mix and the increased revenues and customer satisfaction that might result from excellent logistics

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service. As a result, many organizations have recognized customer service as the interface activity
between marketing and logistics and have aggressively and effectively promoted customer service
as a key element of the marketing mix. Organizations in such industries as food, chemicals,
pharmaceuticals, and technology have reported considerable success with this strategy to improve
efficiency and effectiveness. (Pages 66–67)

33. Logistics encompasses a relatively large number of managerial activities. Discuss five of these
activities and why they are important to logistics systems.

ANSWER: Transportation involves the physical movement or flow of raw materials or finished
goods and involves the transportation agencies that provide service to the firm.
Storage involves two closely related activities: inventory management and warehousing. A direct
relationship exists between transportation and the level of inventory and number of warehouses
required. It is important to examine the trade-offs related to the various alternatives in order to
optimize the overall logistics system.
Packaging involves the necessary packaging needed to move the product to the market. Logistics
managers must analyze the trade-offs between the type of transportation selected and its packaging
requirements.
Materials handling is important to efficient warehouse operation and concerns the mechanical
equipment for short-distance movement of goods through the warehouse.
Order fulfillment consists of the activities involved with completing customer orders. Order
fulfillment concerns the total lead time from when the order is placed to actual delivery in
satisfactory condition.
Forecasting involves the prediction of inventory requirement and materials and parts essential to
effective inventory control.
Production planning concerns the determination of the number of units necessary to provide
market coverage. The integration of production planning into logistics has become increasingly
popular in large companies to effectively forecast and control inventory.
Purchasing concerns the availability for production of needed parts, components, and materials in
the right quantity, at the right time, at the right place, and at the right cost. Purchasing is included
within the logistics area if it more effectively coordinates and lowers costs for the firm.
Customer service plays an important part in logistics by ensuring the customer gets the right
product at the right time and place. Logistics decisions about product availability and inventory
lead time are critical to customer service.
Site location is concerned with creating time and place relationships between plants and markets,
or between supply points and plants. Site location impacts transportation rates and service,
customer service, inventory requirements, and possible other areas. (Pages 58–61)

34. Why do companies analyze their logistics systems from the perspective of nodes and links?

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ANSWER: From a node-link perspective, the complexity of logistics systems can vary
enormously. A node system might use a simple link from suppliers to a combined plant and
warehouse and then to customers in a relatively small market area. At the other end of the
spectrum are large, multiple-product organizations with multiple plant and warehouse locations.
The complex transportation networks of the latter can include three or four different modes and
perhaps private as well as for-hire transportation.
The node-link perspective, in allowing analysis of a logistics system's two basic elements,
represents a convenient basis for seeking possible system improvements. As has been noted, the
complexity of a logistics system often relates directly to the various time and distance
relationships between the nodes and the links and to the regularity, predictability, and volume of
flow of goods entering, leaving, and moving within the system. (Pages 85–86)

35. What product characteristics affect logistics costs? Discuss the effects of these characteristics
on logistics costs.

ANSWER: A number of product-related factors affect the cost and importance of logistics. Among
the more significant of these are dollar value, density, susceptibility to damage, and the need for
special handling.

Dollar Value
The product's dollar value typically affects warehousing costs, inventory costs, transportation
costs, packaging costs, and even materials-handling costs. As the product's dollar value increases,
the cost in each identified area also increases.

Transportation prices reflect the risk associated with the movement of goods, and higher value
products are often more susceptible to damage and loss and/or require more care in the movement.
Transportation providers may also charge higher prices for higher-value products since these
customers may be willing to pay higher rates for transportation service.

Warehousing and inventory costs also increase as the dollar value of the product increases. Higher
value means more working capital invested in inventory, resulting in higher total capital costs. In
addition, the risk factor for storing higher-value products increases the costs of obsolescence and
depreciation. Also, since the physical facilities required to store higher-value products are more
sophisticated, warehousing costs increase with higher dollar value products.

Packaging costs also usually increase because the organization uses protective packaging to
minimize potential damage to the product. An organization spends more effort in packaging a
product to protect it from damage or loss if it has higher value. Finally, materials-handling
equipment used to meet the needs of higher-value products is very often more sophisticated.
Organizations are usually willing to use more capital-intensive and expensive equipment to speed
higher-value goods through the warehouse and to minimize the chance of damage.

Density

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This refers to the weight/space ratio of the product. An item that is lightweight compared to the
space it occupies has low density. Density affects transportation and warehousing costs. As density
increases for an item, its transporting and warehousing costs decrease.

When establishing their prices, transportation providers consider how much weight they can fit
into their vehicles, since they quote their prices in dollars and cents per hundred pounds.
Therefore, on high-density items, providers can charge a lower price per hundred pounds because
they can fit more weight into their vehicle.

Susceptibility to Damage
The third product factor affecting logistics cost is susceptibility to damage. The greater the risk of
damage to a product, the higher the transportation and warehousing cost. Because of a higher
degree of risk and liability associated with more fragile goods, higher are the prices charged by
both transportation and warehousing providers. These providers might also charge higher prices
because of measures they must take to prevent product damage.

Special Handling Requirements

A fourth factor is special handling requirements for products. Some products might require
specifically designed equipment, e.g., refrigeration, heating, or strapping. These special
requirements will usually increase warehousing, transportation, and packaging costs. (Pages 71–
73)

36. How does logistics add value in the economy? How does logistics add value for firms? What,
if any are the differences?

ANSWER: Five principle types of economic utility add value to a product or service. Included are
form, time, place, quantity, and possession. Generally, production activities are credited with
providing form utility; logistics activities with time, place, and quantity utilities; and marketing
activities with possession utility.

Form or Transformation Utility refers to the value added to the goods through a manufacturing
or assembly process. For example, such utility results when raw materials or components are
combined in some predetermined manner to produce a finished product. This is the case, for
example, when Dell combines components along with software to assemble a computer to a
customer's specifications. The process of combining these different components represents a
change in the product form that adds value to the finished product.

Place Utility
Logistics provides place utility by moving goods from production points to markets where demand
exits. Logistics extends the physical boundaries of the market area, thus adding economic value to
the goods. Logistics creates place utility primarily through transportation. For example, moving
Huggies diapers from a Kimberly-Clark manufacturing facility in Wisconsin by motor carrier to
markets where consumers need these diapers creates place utility. The market boundary extension,
added by place utility, increases competition, which often leads to lower prices and increased

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profit opportunities through economies of scale.

Time Utility
Not only must goods and services be available where customers need them but also at the time
when customers need them. Time utility is the economic value added to a good or service by
having it at a demand point at a specific time when it is needed. Logistics creates time utility
through proper inventory maintenance, the strategic location of goods and services, and
transportation. For example, having heavily advertised products and sale merchandise available in
retail stores at the time promised in the advertisement or being able to supply products when there
is an emergency are good examples of time utility. Time utility is much more important today
because of the emphasis on reducing lead time and minimizing inventory levels through logistics-
related strategies to improve cash flow.

Quantity Utility
Today's global competition requires that products not only be delivered on time to the correct
destination but also be delivered in the correct quantities to minimize inventory cost and prevent
stock-outs. The utilities of when and where must be accompanied by how much. Delivering the
proper quantities of an item to where it is demanded provides quantity utility. For example, assume
that General Motors will be assembling 1,000 automobiles on a given day and is using a JIT
inventory strategy. This will require that 5,000 tires be delivered to support the automobile
production schedule. Assume that tire supplier only delivers 3,500 tires on time at the correct
location. Even though the when and where utilities are created, the how much utility is not. Thus,
GM will not be able to assemble the 1,000 cars as planned. Logistics must deliver products at the
right time, to the right place, and in the right quantities to add utility and economic value to a
product. All three are obviously interrelated.

Possession Utility is primarily created through the basic marketing activities related to the
promotion and sales of products and services. Promotion can be defined as the effort, through
direct and indirect contact with the customer, to increase the desire to possess a good or benefit
from a service. The role of logistics in the economy is related to and supports possession utility;
time, place, and quantity utilities make sense only if demand for the product of service exists.
Marketing also depends on logistics, since possession utility cannot be accomplished unless time,
place, and quantity utilities are provided. (Pages 55–58)

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