Solutions for Principles Of Supply Chain Management 5th Us Edition by Wisner by 6alsm

pPRINCIPLESOFSUPPLYCHAINMANAGEMENT:A BALANCEDAPPROACH,5th Ed.

AnswerstoQuestions/Problems

ChapterOne

DiscussionQuestions

1. Definethetermsupplychainmanagementin yourownwords,andlistitsmostimportant activities.

Ans.:TheSupply-ChainCouncil’sdefinitionofsupplychainmanagementis “[m]anaging supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.

Thesearealsothemostimportantactivities,howeverintegrationofkeysupplychain processesmightalsobeincludedinthere.

2. Canasmallbusinesslikealocalsandwichorbicycleshopbenefitfrompracticingsupply chainmanagement?Whatwouldtheymostlikelyconcentrateon?

Ans.:Yes,anyorganizationcanimplementatleastsomeoftheimportantconcepts.Agood placetostartistherationalizationorreductionofthesupplybase.Smallbusinessesmightalso wanttoconcentrateoncustomersasastartingpoint.

3. Describeanddrawasupplychainforabicyclerepairshopandlisttheimportantsupply chainmembers

Ans.:Thiswillvaryfromstudenttostudent,butshouldincludeforinstancepartssuppliers, bicyclesuppliersandothersuppliers(ie,helmetsuppliers)andservices(ie,repairservices)as 1st-tiersuppliersandbicycleownersas1st-tiercustomers.

4. Canabicyclerepairshophavemorethanonesupplychain? Explain.

Ans.:Yes.Everyrepairitemthefirmstockshaspotentiallyadifferentsupplychain associatedwithit.

5. Whatrolesdo“collaboration”and“trust”playinthepracticeofsupplychainmanagement?

Ans.:Thisisessentialforprocessintegration.Sharinginformationanddeterminingjoint strategiesispartoftheintegration/collaborationprocess,andtodothis,trustmustbepresent betweenthecustomer/focalfirm/supplier.

6. Whydon’tfirmsjustbecomemoreverticallyintegrated(eg.buyoutsuppliersand

customers),insteadoftryingtomanagetheirsupplychains?

Ans.:Thiscouldcausealossoffocusandkeepmanagers/employeesfrom doingtheircore competencies,resultinginlossofperformance.

7. Whattypesoforganizationswouldbenefitthemostfrompracticingsupplychain management? Whatsortsofimprovementscouldbeexpected?

Ans.:Firmswithmanysuppliers,manycomplexproducts,largeinventoriesandmany customers(inotherwords,firmswithmanysupplychains).Gainswouldbelowerpurchasing costs,lowercarryingcosts,betterproductquality,andbettercustomerservice.

8. Whatarethebenefitsofsupplychainmanagement?

Ans.:Reductionofthebullwhipeffect,betterbuyer/supplierrelationships,betterquality, lowercosts,bettercustomerservice,higherdemand,moreprofits.

9. Cannonprofit,educational,orgovernmentorganizationsbenefitfromsupplychain management? How?

Ans.:Yes.Allservicesandorganizationscanbenefitintermsofatleastbettercustomer service,betterinventorymanagement,andcheaperpurchaseprices.

10.Whatdoestheterm,“third-tiersupplier”mean? Whatabout“third-tiercustomer”? What aboutthe“focalfirm”? Provideexamples.

Ans.:First-tiersuppliersarethefocalfirm’sdirectsuppliers.2nd-tiersuppliersarethefocal firm’ssuppliers’directsuppliers.3rd-tiersuppliersarethefocalfirm’ssuppliers’suppliers’ suppliers.CompanyAsellswoodtoCompanyB.CompanyBsellsfurnituretoCompanyC. CompanyCsellsthefurnituretoWal-Mart.CompanyAisWal-Mart’s3rd-tiersupplier. Similarly,thefocalfirm’scustomers’customers’ customersaretheir3rd-tiercustomers.The focalfirmjustreferstothefirminquestion,orinthetopicofdiscussion.

11.Whatisthebullwhipeffectandwhatcausesit? Howwouldyoutrytoreducethebullwhip effect?

Ans.:Themagnificationofsafetystockanderraticbuyingbehaviorascustomersalongthe supplychainforecastdemandandaddsafetystocktotheirforecastsandproductionschedules causesthebullwhipeffect.Aswemovefurtherbackupthesupplychainthen,moreandmoreof theoutputisintheformofsafetystocks.Reducingtheneedtoforecast(byagreeingonafuture purchasequantityorusingCPFR)isonewaytoreducethebullwhipeffect.

12.Whendidtheideaandterm,supplychainmanagement,firstbegintobethoughtaboutand discussed?Whichtwooperationsmanagementpracticesbecametheoriginofsupplychain management?

Ans.:Thegeneralideaofsupplychainmanagementhadbeendiscussedformanyyearsprior tothechainofeventsshowninFigure1.1.Backin1915,ArchW.ShawoftheHarvardBusiness Schoolwrotethetextbook, Some Problems in Market Distribution,consideredbymanytobethe firstonthetopicofwhatwenowrefertoassupplychainmanagement.Thetextincluded discussionsofhowbesttopurchaserawmaterials, transportproducts,locatefacilities,and analyzeproductivityandwaste.AccordingtoC.JohnLangley,Jr.,professorofsupplychain managementattheGeorgiaInstituteofTechnology,“Theideathatcompaniesoughttowork togetherandcoordinateactivitieshasalwaysbeenaround,butaskpeopletodaywhatoneofthe biggestproblemswithsupplychainsaretoday,andtheysaycompaniesdon’tworkverywell together.”

The1980swerethebreakoutyearsforsupplychainmanagement.Oneofthefirstwidely recordedusesoftheterm supply chain management cameaboutinapaperpublishedin1982. Intenseglobalcompetitionbeginninginthe1980s(andcontinuingtoday)providedanincentive forU.S.manufacturerstoofferlower-cost,higher-qualityproductsalongwithhigherlevelsof customerservice.Manufacturersutilizedjust-in-time(JIT)andtotalqualitymanagement(TQM) strategiestoimprovequality,manufacturingefficiency,anddeliverytimes. InaJIT manufacturingenvironmentwithlittleinventorytocushionschedulingand/orproduction problems,firmsbegantorealizethepotentialbenefitsandimportanceofstrategicand cooperativesupplier-buyer-customerrelationships.Theconceptofthesepartnershipsoralliances emergedasmanufacturersexperimentedwithJITandTQM.TheseweretheoriginsofSCM.

13.Doyouthinksupplychainmanagementissimplythelatesttrendinmanagementthinking andwilldieoutinafew years? Whyorwhynot?

Ans.:Thisanswerwillvarybecauseitwasnotspecificallydiscussed,however,considering thattheideasofSCMhavebeenaroundformany,manyyearsmakesonethinkthatthepractice isheretostay.

14.Howhastechnologyimpactedsupplychainmanagement?

Ans.:SCMsoftwareand e-commercehasaidedsupplychainintegrationandaidedinthe evolutionandadoptionofsupplychainmanagement.Sharinginformationwithsupplychain partnersthroughtheinternethasenabledfirmstointegratestocking,logistics,materials acquisition,shipping,andotherfunctionstocreateamoreproactiveandeffectivestyleof businessmanagementandcustomerresponsiveness

15.Whatarethefourfoundationelementsofsupplychainmanagement? Describesome activitieswithineachelement.

Ans.:Thefourelementsaresupply(supplybasereduction,supplieralliances,SRM,global sourcing,ethicalandsustainablesourcing),operations(demandmanagement,CPFR,inventory management,MRP,ERP,leansystems,SixSigmaquality),logistics(logisticsmanagement, CRM,networkdesign,RFID,globalsupplychains,sustainability,serviceresponselogistics), andintegration(barrierstointegration,riskandsecuritymanagement, performance measurement,greensupplychains).

16.Istheuseofalargenumberofsuppliersa goodidea?Why?

Ans.:Thissomewhatdepends.CertainlySCMsuggestsfewersuppliersandlonger-term relationships,howevertherecanalwaysbeexceptionstothisrule.Purchasingawidelyavailable commonproductlikesoaportissuepapermightbebetterdonewithalargenumberofsuppliers competingforthisbusiness.Butthisworksagainstevercreatingtrustingandlastingsupply chainpartnerships.Inmostcasesthough,useofafewkeysuppliersforanitemisconsidereda goodidea,sinceitmeanslargersupplyquantities,leadingtolowerpricesandbetterservice.

17.Doyouthinktheproperwaytochooseasupplieristoalwaysfindtheonethatwillgiveyou thelowestprice?Whenmightthisnotbeagoodidea?

Ans.:Absolutelynot.Lowpriceissometimesfine,ifqualityorserviceisnotanissue,asin buyingsomeMROitems.Butwhenqualityandservicematter,priceshouldonlybeoneofthe purchasecriteria.

18.Whatissuppliermanagement? Whataresomeoftheactivitiesofsuppliermanagement?

Ans.:Simplyput,thismeansencouragingorhelpingthefirm’ssupplierstoperforminsome desiredfashion,andthereare anumberofwaystodothis.Thisinvolvesassessingsuppliers’ currentcapabilitiesandthendecidingifandhowtheyneedtoimprovethem.Thus,oneofthe keyactivitiesinsuppliermanagementissupplierevaluation,ordeterminingthecurrent capabilitiesofsuppliers.

19. Whatisthedifferencebetweensupplychainmanagementandlogistics?

Ans.:Logisticsinvolvesonlythetransportationanddistributionfunctions.SCMincludes logisticsaswellasproduction,supplymanagement,andintegrationofprocesses.

20.Whatisdemandmanagementandwhyisthisanimportantpartofsupplychainmanagement?

Ans.:Demandmanagementiswhenmanagementtriestomatchdemandtoavailable capacity,eitherbyimprovingproductionscheduling,curtailingdemand,usingaback-order system,orincreasingcapacity. Inarecentsurveyofsupplychainmanagers,stockoutswere consideredthemostpressingissueintheuseofdemandmanagementactivities,followedclosely byexcessinventoriesandlongleadtimes.

21.WhatisthedifferencebetweenandMRPsystemandanERPsystem?

Ans.:MRPsystemsaretheoldermaterialsmanagementsystemsoftwareapplications,and areusedforessentiallybasicassemblyandpurchasedecisions.ERPsystemscameabouta numberofyearslaterandtiedallofacompany’sgeographicallydistantunitstogetherbyhaving onecentraldatabasetotracksysteminventories.

22.Whatroledoinformationsystemsplayinsupplychainmanagement? Givesomeexamples.

Ans.:Informationsystemsplayveryimportantrolesinmostsupplychains.Theygivesupply chainmembersinformationvisibility,trackingcapabilities,andquickcommunication capabilities.

23.Brieflydescribetheterms lean and Six Sigma systems.

Ans.:LeanreferstolowwasteandinventoriesandusedtobereferredtoasJIT.Six Sigma originatedatMotorolaandreferstoaqualitymanagementphilosophy.

24.Whatare3PLsandwhatroledotheyplayinSCM?

Ans.:Third-partylogisticsserviceproviders;Theseallowfirmstoconcentratemoreontheir capabilitieswhileallowing3PLstoperformlogisticsactivitieslikedeliveryandstorage.

25.Whatislogistics?Whatistheobjectiveoflogistics?

Ans.:Logisticsisthemovementandstorageofrawmaterials,work-in-process,andfinished goods.Theobjectiveistodeliverproductstocustomersattherighttime,quality,andvolume whichrequiresahighlevelofplanningandcooperationbetweenthefirm,itscustomers,andthe variouslogisticselementsorservicesemployed(suchastransportation,warehousing,andbreakbulkorrepackagingservices).Incontrast,servicesareproducedanddeliveredtothecustomer simultaneouslyinmostcases,soservicesareextremelydependentuponservercapacityand successfulservicedeliverytomeetcustomerrequirements.

26.WhatisthetriplebottomlineandhowwouldyoudescribeitforWalmart?

Ans.:Thetermsustainabilityasappliedtosupplychainsisabroadtermthatincludes protectingtheenvironment,someaspectsofsocialresponsibility, aswellasfinancial performance(hencethelinkingofsustainabilitytowhatistermedthe triplebottomline,or people,planetandprofits).ForWalmart,itisitsemployees/customers,hoiwitsproductsimpact theenvironment,andthemoneyitmakes.

27.Whattradeoffsmustbeconsideredindesigningadistributionsystem?

Ans.:Logisticsdecisionstypicallyinvolveatrade-offbetweencostanddeliverytimingor customerservice.Motorcarriers(trucks)forexample,aremoreexpensivetousethanrail carriers,butoffermoreflexibilityandspeed,particularlyforshortroutes.Aircarriersareeven moreexpensivebutmuchfasterthananyothertransportationmode.Watercarriersarethe slowestbutarealsotheleastexpensive.Finally,pipelinetransportationisusedtotransportoil, water,naturalgas,andcoalslurry.Manytransportationservicesoffervariousmodal combinations,aswellaswarehousingandcustoms-clearingservices.

28.Whataretheadvantagesandrisksinvolvedwithglobalsupplychains?

Ans.:Someoftheadvantagesincludealargermarketforproducts,economiesofscalein

purchasingandproduction,lowerlaborcosts,asupplybase ofpotentiallycheaper,higherqualitysuppliers,andthegenerationofnewproductideasfromforeignsuppliersandemployees. Someoftherisksincludefluctuatingexchangeratesaffectingproduction,warehousing,and purchasingandsellingprices; governmentinterventionorpoliticalinstabilitiescausingsupply disruptions;securityconcerns;andpotentialchangesinsubsidies,tariffsandtaxes.

29.Whatdoes process integration mean?Cansupplychainmanagementsucceedwithoutit? Whyorwhynot?

Ans.:Thisrefersto collaborationswhichoccurbetweensuppliersandbuyersinasupply chain.Workingtogetheriswhatallowssupplychainstobeeffective.Processesinasupplychain aresaidtobeintegratedwhenmembersofthesupplychainworktogethertomakepurchasing, inventory,production,quality,logistics,andotherdecisionsthatimpacttheoverallprofitsofthe supplychain.Ifonekeyprocessactivityfailsorisperformedpoorly,thentheflowofgoods movingalongthesupplychainisdisrupted,jeopardizingtheeffectivenessoftheentiresupply chain.Successfulsupplychainprocessintegration occurswhentheparticipantsrealizethat effectivesupplychainmanagementmustbecomepartofeachmember’sstrategicplanning process,whereobjectivesandpoliciesarejointlydeterminedbasedontheendconsumers’needs andwhatthesupplychainasawholecandoforthem.

30. Shouldcompaniesrequiretheirsupplierstogetcertifiediftheyareperformingwell?

Ans.:Yes.Thiscouldindicateweaknessesinareascoveredbythecertificationinstrument.

31.Atwhatpointshouldasupplierbeconsideredtohavea strategic partnership withafirm?

Ans.:Suppliersseesignificantbenefitsfromthecreationofcloserworkingrelationshipswith customersintermsoflong-term,higher-volumesales.Thesetradingpartnerrelationshipshave cometobetermedstrategicpartnerships.

32.Whyareperformancemeasurementsystemsimportantwhentryingtomanagesupplychains?

Ans.:Performancemeasurementsmustbeutilizedalongsupplychainstohelpfirmskeep trackoftheirsupplychainmanagementefforts.Itiscrucialforfirmstoknowwhethercertain strategiesareworkingasexpected—ornot—beforetheybecomefinancialdrainsonthe organizations.Firmsworktogethertodeveloplong-termsupplychainmanagementstrategies andthendevisetacticstoimplementthesestrategies.Performancemeasurementshelpfirms decidethevalueofthesetacticsandshouldbedevelopedtohighlightperformancewithinthe areasofpurchasing,operations,logistics,andintegration.

33.Doesaglobalsupplychainhavemoreriskthanadomesticsupplychain?Why?

Ans.:Yes—distancesarelonger,whichmeansmorethingscangowrong;alsodealingwith othercultures/governmentscanproveproblematic.

34.Whatarebigdataanddataanalytics? Howmighttheybeusedinsupplychains?

Ans.:Hugevolumesofdatageneratedrefertotheterm bigdatainbusinessorganizations. Thereisalsotherisingawarenessamongexecutivesregardingthebenefitsofanalyticssolutions. Analyticscanbeusedalongthesupplychainforexample,toscheduleproductionaccordingto expectedsupplierdeliveries,toroutedeliverytrucksthroughadistributionnetwork,orto determinewhenacustomerismostlikelytobehometoacceptadelivery.

35.Whataresomethingssupplychainmemberscoulddotoimprovesustainability?

Ans.:byimprovingenvironmental,socialandgovernanceperformancethroughoutthe supplychain,companiescanenhanceprocesses,reducecosts,increaseproductivity,uncover productinnovation,achievemarketdifferentiation,andimprovesocietaloutcomes.

36.Describesupplychainvisibilityandwhysupplychainmanagerslikeit.

Ans.:Supplychainvisibilitycanbedefinedastheabilityofsuppliers,manufacturers, businesspartners,andcustomerstoknowexactlywhereproductsare,atanypointinthesupply chain.Thisinventoryvisibilityisobviouslymade easierbytechnology,andcanprovevery advantageouswhendealingwithdisruptiveeventslikehurricanesorotherunexpectedevents.

CASES

SupplyChainManagement–TheBigPicture

CaseNote

LearningObjectives:

 Describeasupplychainanddefinesupplychainmanagement.

 Describetheobjectivesandelementsofsupplychainmanagement.

 Describelocal,regional,andglobalsupplychainmanagementactivities.

Thiscasehighlightshowcriticalsupplychainmanagementisatdifferentlevelsof expansion,i.e.local,regional,andglobal. Thecasediscussesthefourfoundationelementsof supplychainmanagement,supply,operations,logistics,andintegration. Thecaseillustratesthat althoughacompanyisengagedin globalcommerce,itmaybenecessaryto lookatsupplychain managementfromtheperspectiveofthespecificmarketplace,e.g.Europe,SouthAmerica,etc. Dependingontheindustry, eachmarketplacemayhavedifferentregulatoryrequirements.

Finally,thecaseemphasizestheimportanceofsupplychainmanagementprocess integration. Althougheachofthefirstthreefoundationelementsaredesignedwell,unlessevery supplychainpartnerincludestheplanningintheirstrategicplanningprocess,theentiresystem couldfail.

AnswerstoQuestions

1. Forthesupplychainmanagementelementsupply,importantissuestoaddressaresupply basereductions,supplieralliances,supplierrelationshipmanagement,globalsourcing, ethicalsourcing,andsustainablesourcing.Thesewillbecoveredinchapters2,3,and4.

2. Forthesupplychainmanagementelementoperations,importantissuestoaddressare demandmanagement,inventory,management,leansystems,Six Sigmaquality,etc. Thesewillbecoveredin chapters5,6,7,and8.

3. Forthesupplychainmanagementelementlogistics,importantissuetoaddressare logisticsmanagement,networkdesign,globalsupplychains,sustainability,andservice responselogistics.Thesewillbecoveredin chapters9,10,11,and12.

4. Theissuesanycompanymustovercomeareculturalnorms,adversarialrelationships, silos,conflict,andbarrierswithinandbetweencompanies. Thesetypesofissuesor obstaclesmustbebrokendown,reduced,oreliminatedinorderfortrueprocess integrationtobeachieved.

*WrittenbyRickBonsall,D.Mgt.,McKendreeUniversity,Lebanon,IL.Thepeopleandinstitutionarefictional andanyresemblancetoanypersonoranyinstitutioniscoincidental.Thiscase waspreparedsolelytoprovide materialforclassdiscussion.Theauthordoesnotintendtoillustrateeithereffectiveorineffective handlingofa managerialsituation.

Appendix1.1TheBeerGame

QuestionsandExercises

1. Allplayersbuttheretailershouldanswerthisquestion.Whatdoyouthinktheretailer’s customerdemandpatternlookedlike?Howdid yourcustomerordersvarythroughoutthe game?

Ans.:Varies.Hopefully,theirguesseswillbenothingliketherelativelyconstantdemand patternactuallyexperiencedbytheretailer.

2. Whathappenedtothecurrentinventorylevelsaswemovebackward,upthesupplychain fromretailertomanufacturer? Why?

Ans.:Theinventorylevelsshouldmagnifyorexplodeaswegobackup thesupplychain,as memberstrytofillever-increasingordersfromcustomers.Thisisduetothebullwhipeffect.

3. Howcouldthesupplychainmembersreducetotalinventoryandbackordercostsinthe future?

Ans.:Throughcloser,moretimelyandaccuratecommunications.

4. Gotohttp://beergame.lim.ethz.ch/andtryplayingtheInternetversionofthegame.Report onyourexperiencesplayingthegame.

Ans.:Studentsmayhavedifficultydownloadingthesoftwarenecessarytoplaythegame.If possible,tryplayingitfirstpriortoassigningthisquestiontotheclass.

ChapterTwo

DiscussionQuestions

1. Describethestepsinatraditionalmanualpurchasingsystem.

Ans.:Figure2.1describesatypicalmanualpurchasingsystem. Theuserinitiatesthepurchase byissuingapurchaserequisition. Iftheitemisnotavailableinthestoreroom,abuyerissuesa purchaseorderto aqualifiedsupplier.

2. Describethee-procurementsystemanditsadvantagesoverthemanualsystem.Arethereany disadvantagestotheelectronicsystem? Doyouthinkthee-procurementsystemwill ultimatelyreplacethemanualsystem? Whyorwhynot?

Ans.:Figure2.4describesane-procurementsystem. e-procurementsystemeliminatesduplicate dataentryandthusimprovesaccuracy. Otheradvantagesincludeveryfastexecutiontimeand theabilitytohandlemass communicationeffectively. Itsdisadvantagesincludeadditional capitalinvestmenttobuythehardwareandsoftware,training,andthatitisarapidlygrowing technology. Thus,newequipmentandtechnologymaybecomeobsoleteveryquickly. Many savvybusinessesareswitchingovertoane-procurementsystembecauseitsadvantagesfar outweighthedisadvantages.

3. Howcanpurchasinghelp toimprovethecompetitiveedgeofanorganization?

Ans.:Inadditiontoensuringuninterruptedflowsofrawmaterialsatthelowesttotalcost, purchasingcanhelptoimproveanorganization’scompetitiveedgebyactivelyseekingbetter materialsandreliablesuppliers,workingcloselywithandexploitingtheexpertiseofstrategic supplierstoimprovethequalityofrawmaterials,andinvolvingstrategicsuppliersand purchasingpersonnelinnewproductdesignanddevelopmentefforts.

4. Whatistheprofit-leverageeffectofpurchasing?Whatisthereturn-on-assetseffectof purchasing?

Ans.:Theprofit-leverageeffectofpurchasingmeasurestheimpactofachangeinpurchase spendonafirm’sprofitbeforetaxes,assuminggrosssalesandotherexpensesremain unchanged. Itiswidelyusedtoshowthatdecreasesinpurchasespenddirectlyincreaseprofits beforetaxesbythesameamount.TheReturnonAssets(ROA)effectofpurchasingmeasuresthe impactofachangeinpurchasespendonafirm’sROA.Table2.2isanexampleoftheprofitleverageeffect.

5. Howdoesamerchantdifferfromanindustrialbuyer?

Ans.:Amerchant (e.g.wholesalerandretailer)primarilypurchasesforresalepurposes,whereas anindustrialbuyerpurchasesrawmaterialsand/orcomponentpartsforconversionpurposes.

6. Describethepurposeofamaterialrequisition,apurchaseorder,arequestforquotationanda requestforproposal.Doesthematerialrequisitionservethesamepurposeasthepurchase order?

Ans.: Material requisition –aninternaldocument usedtorequestmaterialsfromthewarehouse orpurchasingdepartment.

Purchase order –adocumentusedtobuymaterialsfromsuppliers. Itusuallycontainstheterms andconditionsofthesaleanddelivery.Itislegallybindingonthebuyerandsellerwhenthe selleracceptsthetermsofthesale.

Request for quotation –adocumentusedtorequestthepricesofgoodsand/orservicesfrom suppliers.

Request for proposal –adocumentusedtosolicitideasand/orsolutionsforaspecificgood and/orservicefromsuppliers. Itisusuallyusedwhentheexactspecificationsofthe good/servicearenotknown.

No,amaterialrequisitionisusedtorequestgoodswhereasapurchaseorderisusedtobuy goods/servicesfromsupplier.

7. Whyaresmallvaluepurchaseordersproblematic? Howcanpurchasingmoreeffectivelydeal withthisproblem?

Ans.:Itmeansthattheorderingcostismorethanthecostofthegoods/servicespurchased. Manyfirmsconsideratotalvalueoflessthan$500tobesmallvaluepurchase. Therearemany waystodealwiththisproblem,includingtheuseofcorporatepurchasingcards(commonly knownasp-cards),blankcheckpurchaseorders,blanketpurchaseorders,andPettyCash.

8. Shouldunitpricebeusedasthesolecriterionforselectingsuppliers?Why?

Ans.:No. Afirmshouldalwaysconsiderthetotalcostsofacquisition,whichincludepurchase price,transportationcost,storagecostandqualitycost,amongothers.

9. Explainbackwardverticalintegration.Whataretheadvantagesofoutsourcingcomparedto backwardverticalintegration?

Ans.:Backwardintegrationreferstoacquiringasupplier’soperations. Anexamplewouldbean automobilemanufacturerbuyingasupplierwhoissupplyingcarseatsorothercomponentparts. Outsourcingenablesthebuyingfirmtofocusoncorecompetenciesandtoacquirebetterquality componentsandmaterialsfromqualifiedsupplierswhocanproducethecomponentsatalower priceduetohighervolumeandtechnology.Forexample,acarseatsupplierwillbeabletoinvest moremoneyinR&Dandproducesatahighervolumeifitsellscarseatsto twoormore automobilemanufacturersthanwhateachmanufacturercaninvestindividually.

10.Whenshouldafirmoutsourceinsteadofmakingtheitemsin-house?

Ans.:Ifcostistheonlycriterion,abreakevenanalysiscanbeusedtoanalyzethebreakeven quantity. Generally,ifthevolumeistoosmall,theequipmentisveryexpensiveoritlacksthe

expertisetoproducetheitems,afirmshouldoutsource. Strategically,afirmshouldoutsourceits non-coreactivitiestofocusoncorecompetencies.

11.Whatfactorsshouldbeconsideredwhilechoosingsuppliers?

Ans.:Afirmshouldconsiderasupplier’stechnology,financialstability,quality,delivery performance,flexibility,service,willingnesstosharetechnologyandparticipateinnewproduct development,andothers.

12.Describethedifferencebetweensolesourceandsinglesource.

Ans.:Solesourcereferstoasituationwhenthereisnooptionbutonlyone supplieriscapableof supplyingorproducingtheproductneeded. Withsinglesource,thebuyingfirmchoosesamong multiplesupplierstoselectasinglesupplierthatbestmeetsitsneed.

13.Whatarethereasonstouseasinglesupplier?Isthisthemostefficientwaytopurchase materialsingeneral?

Ans.:Reasonstouseasinglesourceincludemoreconsistentqualitylevel,highervolume,andto buildbuyer-suppliertrustandmutuallybeneficialrelationships. Ingeneral, thisistrueformany savvycorporations.

14.Describecentralizedanddecentralizedpurchasingandtheiradvantages.

Ans.:Centralizedpurchasingusesacentralizedpurchasingdepartmentordivisiontohandleall purchasesforthecorporation,whereasdecentralizedpurchasingallowsanindividualdivisionor branchtohandleitsownpurchasingactivity. Advantagesofcentralizedsystemincludequantity purchases,whichleadto betterbargainingpower,andaconsistentsystemfortheentire corporation. Advantagesofadecentralizedsystemincludeflexibility,easiertosourcelocally, fasterdelivery,andlessbureaucracy.

15.Describehowthehybridpurchasingorganizationworks.

Ans.:Hybridpurchasingorganizationsexistinoneoftwoforms:(1)decentralizedpurchasingat thecorporatelevel,butcentralizedprocurementfunctionatthebusinessunitlevel,and(2) centralizedpurchasingstructuretonegotiatenationalcontracts atthecorporatelevel,but decentralizedbuyingatthebusinessunitlevel.Thehybridpurchasingorganizationallowsthe firmtoexploittheadvantagesofboththecentralizedanddecentralizedsystems.

16.Describehowblanketordersandblanketorderreleasescanbeusedtomanagethe procurementsystemofabusinessthatownsadozenlargerestaurantsinacity.

Ans.:Anorganizationcanusethehybridpurchasingstructuretonegotiateblanketordersor contractsatthecorporatelevelwherepricesandotherdeliverytermsareagreedupon.Then,the firmcanuseblanketorderreleasestoreleaseordersatthefirmlevel.

17.Howdoespublicprocurementdifferfromcorporatepurchasing?

Ans.:Publicprocurementissubjectedtopoliticalpressureandpublicscrutiny.Moreover,public procurementissubjectedtospecialrulesandregulationsthatareestablishedbythefederal,state, andlocalgovernments.Consequently,theproceduresforpublicprocurementdifferfromthe publicsector–inadditiontoensuringthatpurchasesforgoodsandservicesareinstrict compliancewithstatuteandpolicies,publicprocurementproceduresaregenerallydesignedto maximizecompetition.

18.Describethedifferenttypesofbidbonds.

Ans.:Bidorsuretybondsguaranteethesuccessfulbidderwillacceptthecontract;performance bondsguaranteetheworkofthesuccessfulbiddermeetsspecificationsandinthetimespecified; andpaymentbondsprotectthebuyeragainstanythird-partyliensnotfulfillbythebidder.

19.Whataremicro-purchases? Howcantheybeusedtoimprovepublicprocurement?

Ans.:Micro-purchasesaregovernmentpurchasesof$2,500andbelow.Micro-purchasescanbe madewithoutobtainingcompetitivequotes,andthusitimprovesthepublicbuyingprocessfor smalldollarvaluepurchases.

20.Whydofirmspurchasefromforeignsuppliers?Whataretherisksinvolvedinglobal sourcing?

Ans.:Reasonsincludecheaperandbettermaterials,tomeetrequirementsimposedbyaforeign countrytoinvestlocally,andtotakeadvantageofgrowthpotential. Risksincludepolitical instability,currencyfluctuation,andculturaldifferences.

21.Whatiscountertrade?Describethevarioustypesofcountertrade.

Ans.:Countertradeiswheregoodsand/orservicesareexchangedforgoodsand/orservicesof equalvalueorincombinationwithcurrency. Therearevariousformsofcountertrade,including barter,offset,andcounterpurchase.Barteristhecompleteexchangeofgoodsand/orservicesof equalvaluewithouttheexchangeofcurrency.Offsetisanexchangeagreementforindustrial goodsand/orservicesasaconditionofmilitary-relatedexport.Offsetcanbedividedintodirect andindirectoffsets.Directoffsetusuallyinvolvesco-productionorajointventure,andexchange ofrelatedgoodsand/orservices,whereasindirect offsetinvolvesexchange ofgoodsand/or servicesunrelatedtotheaerospaceordefensesector.Counterpurchaseisanarrangement wherebytheoriginalexportereitherbuysorfindsabuyertopurchaseaspecifiedamountof unrelatedgoodsand/orservicesfromtheoriginalimporter.

22.Describehowatypicalgovernmentbiddingprocessisconducted.

Ans.:Inatypicalgovernmentbiddingprocess,aninvitationforbid(IFB)isusedtosolicitsealed bids.Thespecificationsfortheproposedpurchase,instructionsforpreparationofbids,andthe conditionsofpurchase,deliveryandpaymentscheduleareusuallyincludedwiththeIFB.The

IFBalsodesignatesthedateandtimeofbidopening.Sealedbidsareopenedinpublicatthe purchasingofficeatthetimedesignatedintheinvitation,andfactsabouteachbidareread aloud andrecorded.Acontractisthenawardedtothelowestresponsibleandresponsivebidder.

23.Howcanglobalsourcingenhanceafirm’scompetitiveness?

Ans.:Globalsourcingmayallowafirmtoacquirebetterqualityrawmaterialsandcomponents atalowerpriceduetobetterprocessorproducttechnologies. Also,anoverseassuppliermay holdthepatentofaproductthatlimittheavailabilityofthecomponentlocally.

24.Describethedisadvantagesofglobalsourcingandhowitcanadverselyaffectafirm’s competitiveness.

Ans.:Thecostsanddeliveryleadtimeofglobalsourcingcanbeprohibitive.Globalsourcing alsoimposesmorecomplexshippingtermsandcomplicatedlogisticsissuesthandomestic suppliers.Also,thequalitylevelsofglobalsuppliersmaynotbeacceptable.

25.DescribeTier-1,Tier-2,andTier-3suppliers.

Ans.:Atieredsupplychainmodeliswidelyusedintheaerospace,automotive,andcomputer industrieswherethefinishedgoodsconsistsofmanycomplexsub-assembliesthatmustcomply withstringentqualitystandardandcomplexmanufacturingprocess.Originalequipment manufacturers(OEM)arethecompaniesthatmakethefinalproducts.Tier-1suppliersprovide partsorservicesdirectlytotheOEM;Tier-2suppliersprovidetheiroutputs toTier-1suppliers, butnotdirectlytotheOEM;andTier-3suppliersselltheiroutputstoTier-2suppliers.

SPREADSHEET PROBLEMS

1. Ifafirm’snetincome(profitsbeforetaxes)is$120,000andithastotalassetsof$1.5million, whatisitsreturnonassets?

Ans.:ROA=$120,000/$1,500,000=8%

2. Ifafirm’stotalassetsis$2.5millionanditsreturnonassetsis12percent,whatisitsnet income?

Ans.:NetIncome=$2,5000,000x0.12=$300,000

3. Ifafirmisabletosustainthesamelevelofoperationsintermsofsalesandadministrative expensesbutreducesitsmaterialscostby$50,000throughsmarterpurchases,whatisthe profit-leverageeffectongrossprofits?Whatistheprofit-leverageeffectonprofitsbefore taxes?

Ans.:(a)Grossprofitsincreaseby$50,000;(b)Profitsbeforetaxesincreaseby$50,000.

4. Ifafirm’scostofgoodssoldis$2.5millionanditsaverageinventoryis$500,000,whatis theinventoryturnover?

Ans.:InventoryTurnover=$2,500,000/$500,000=5times

5. Ifafirm’scostofgoodssoldis$5millionanditsinventoryturnoveris10times,whatisthe averageinventory?

Ans.:AverageInventory=$5,000,000/10=$500,000

6. Ifafirm’sinventoryturnoveris8timesanditsaverageinventoryis$160,000,whatisthe costofgoodssold?

Ans.:COGS=$160,000x8=$1,280,000

7. AretailerinLasVegashasanendinginventoryof$250,000asatDecember31,2012and thefollowingaccountinginformation.

Month EndingInventory CostofGoodsSold

January

February

March

April

May

June

July

August

September

October

November

December

$225,000

$325,000

$240,000

$325,000

$460,000

$220,000

$85,000

$156,000

$220,000

$265,000

$100,000

$350,000

$1,200,000

$1,250,000

$1,350,000

$1,500,000

$950,000

$850,000

$1,650,000

$1,325,000

$1,750,000

$850,000

$2,200,000

$3,500,000

a. Computethemonthlyinventoryturnoverratioforeachofthetwelvemonths.

b. Whataretheannualcostofgoodssoldandtheaverageinventoryfortheyear?

c. Computetheannualinventoryturnoverratio. Howistheretailer’sperformancecompare totheindustrystandard,assumingitsbusinessissimilartoWal-Mart’s?

Ans.:(seeExcelWorksheetbelow)

EndingInv@12/31/2012$250,000

FiscalYear2013JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember

EndingInventory$225,000$325,000$240,000$325,000$460,000$220,000$85,000$156,000$220,000$265,000$100,000$350,000

CostofGoodsSold$1,200,000$1,250,000$1,350,000$1,500,000$950,000$850,000$1,650,000$1,325,000$1,750,000$850,000$2,200,000$3,500,000

AverageInventory$237,500$275,000$282,500$282,500$392,500$340,000$152,500$120,500$188,000$242,500$182,500$225,000 (a)MonthlyInventoryTurnover5.054.554.785.312.422.5010.8211.009.313.5112.0515.56 (c)AnnualInventoryTurnover75.49

$18,375,000(b)TotalorAnnualCostofGoodsSold

$243,417(b)AverageInventoryfortheYear 75.49(c)AnnualInventoryTurnoverRatio

Note:Toevaluatetheretailer’sperformanceagainsttheindustrystandard,compareitsannual inventoryturnoverratioagainsttheindustrystandardortotheleadingfirmsintheindustrysuch asWal-MartorTarget.

8. Asmallfirmhasanendinginventoryof$52,000asatDecember31,2012andthefollowing accountinginformation.

Month EndingInventory CostofGoodsSold

January

February

March

April

May

June

July

August

September

October

November

December

$75,000

$56,000

$25,000

$85,000

$125,000

$95,000

$72,000

$45,000

$52,500

$120,000

$162,500

$255,000

$225,000

$325,000

$240,000

$325,000

$460,000

$220,000

$85,000

$156,000

$220,000

$265,000

$100,000

$350,000

a. Computethemonthlyinventoryturnoverratioforeachofthetwelvemonths.

b. Whataretheannualcostofgoodssoldandtheaverageinventoryfortheyear?

c. Computetheannualinventoryturnoverratio.Whatcanthepurchasingdepartmentdoto improvethefirm’sperformance?

Ans.:(seeExcelWorksheetbelow)

EndingInv@12/31/2012$52,000

FiscalYear2013JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember

EndingInventory$75,000$56,000$25,000$85,000$125,000$95,000$72,000$45,000$52,500$120,000$162,500$255,000 CostofGoodsSold$225,000$325,000$240,000$325,000$460,000$220,000$85,000$156,000$220,000$265,000$100,000$350,000

AverageInventory$63,500$65,500$40,500$55,000$105,000$110,000$83,500$58,500$48,750$86,250$141,250$208,750 (a)MonthlyInventoryTurnover3.544.965.935.914.382.001.022.674.513.070.711.68 (c)AnnualInventoryTurnover33.43

$2,971,000(b)TotalorAnnualCostofGoodsSold

$88,875(b)AverageInventoryfortheYear

33.43(c)AnnualInventoryTurnoverRatio

Thepurchasingdepartmentcanreduceorderquantityandworkwithsupplierstodeliver purchaseditemsmorefrequently. Thisshouldlowertotalinventory.

EndingInv@12/31/2012$125,000

FiscalYear2013JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember EndingInventory$52,000$88,000$85,000$55,000$75,000$85,000$156,000$215,000$65,000$100,000$165,000$105,000 CostofGoodsSold$85,000$1,250,000$950,000$750,000$950,000$850,000$555,000$1,325,000$985,000$850,000$1,250,000$1,050,000

AverageInventory$88,500$70,000$86,500$70,000$65,000$80,000$120,500$185,500$140,000$82,500$132,500$135,000 MonthlyInventoryTurnover0.9617.8610.9810.7114.6210.634.617.147.0410.309.437.78 AnnualInventoryTurnover103.66

$10,850,000(b)TotalorAnnualCostofGoodsSold $104,667AverageInventoryfortheYear 103.66AnnualInventoryTurnoverRatio

EndingInv@12/31/2012$250,000

FiscalYear2013JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember EndingInventory$225,000$325,000$240,000$325,000$460,000$220,000$85,000$156,000$220,000$265,000$100,000$350,000 CostofGoodsSold$1,200,000$1,250,000$1,350,000$1,500,000$950,000$850,000$1,650,000$1,325,000$1,750,000$850,000$2,200,000$3,500,000

$18,375,000(b)TotalorAnnualCostofGoodsSold

$243,417(b)AverageInventoryfortheYear 75.49(c)AnnualInventoryTurnoverRatio

EndingInv@12/31/2012$52,000

FiscalYear2013JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember EndingInventory$75,000$56,000$25,000$85,000$125,000$95,000$72,000$45,000$52,500$120,000$162,500$255,000 CostofGoodsSold$225,000$325,000$240,000$325,000$460,000$220,000$85,000$156,000$220,000$265,000$100,000$350,000

$2,971,000(b)TotalorAnnualCostofGoodsSold

$88,875(b)AverageInventoryfortheYear 33.43(c)AnnualInventoryTurnoverRatio

9. Youare giventhefollowinginformation:

a. Findthebreak-evenquantityandthetotalcostatthebreak-evenpoint.

Ans.:(seeExcelWorksheet)

Breakevenquantity,Q=60,000units;costatbreakevenpoint=$1,025,000

b. Iftherequirementis150,000units,isitmorecost-effectiveforthefirmtobuyormake thecomponents?Whatisthecostsavingsforchoosingthecheaperoption?

Ans.:(seeExcelWorksheet)

Makeoptionischeaper;costsaving=$2,555,000-$2,375,000=$180,000

10.Youare giventhefollowinginformation:

a. Findthebreak-evenquantityandthetotalcostatthebreak-evenpoint.

b. Iftherequirementis4,500units,isitmorecost-effectiveforthefirmtobuyormakethe components?Whatisthecostsavingsforchoosingthecheaperoption?

c. Iftherequirementis6,000units,isitmorecost-effectiveforthefirmtobuyormakethe components?Whatisthecostsavingsforchoosingthecheaperoption?

Ans.:(a)5,500units,$69,000 (b)buy,$4,000 (c)make,$2,000 (useworksheetabove)

11.Ms.JaneKim,PurchasingManagerofKuantanATV,Inc.,isnegotiatingacontracttobuy 20,000unitsofacommoncomponentpartfromasupplier.Ms.Kimhasdoneapreliminary costanalysisonmanufacturingthepartin-houseandconcludedthatshewouldneedtoinvest $50,000incapitalequipmentandincuravariablecostof$25perunittomanufacturethepart in-house.Assumingthetotalfixedcosttodraftacontractwithhersupplieris$1,000,whatis

themaximumpurchasepricethatsheshouldnegotiatewithhersupplier?Whatotherfactors shouldshenegotiatewiththesuppliers?

Ans.:$27.45,delivery,qualityandvolumeflexibility,amongothers. (useworksheetabove)

12.ALasVegas,Nevada,manufacturerhastheoptiontomakeorbuyoneofitscomponent parts.Theannualrequirementis20,000units.Asupplierisabletosupplythepartsfor$10 each.Thefirmestimatesthatitcosts$600topreparethecontractwiththesupplier.Tomake thepartsin-house,thefirmmustinvest$50,000incapitalequipmentandestimatesthatthe partscost$8each.

a. Assumingthatcostistheonlycriterion,usebreak-evenanalysistodeterminewhetherthe firmshouldmakeorbuytheitem.Whatisthebreak-evenquantityandwhatisthetotal costatthebreak-evenpoint?

Ans.:Breakevenquantity=24,700units,iftherequirementis20,000,thefirmshould buytheitem;costatbreakevenpoint=$247,600

b. Calculatethetotalcostsforbothoptionsat20,000units.Whatisthecostsavingsfor choosingthecheaperoption?

Ans.:Make=$210,000;Buy=$200,600;Costsaving=$9,400 (useworksheetabove)

13.Giventhefollowinginformation,usetotalcostanalysistodeterminewhichsupplierismore cost-effective.Latedeliveryofrawmaterialresultsin60percentlostsalesand40percent backordersoffinishedgoods.

Orderlotsize

1,000

Requirements(annualforecast) 120,000units

Weightperengine 22pounds

Orderprocessingcost

$125/order

Inventorycarryingrate 20%peryear

Costofworkingcapital 10%peryear

Profitmargin 15%

Priceoffinishedgoods

Back-ordercost

$4,500

$15perunit

Truckload(TL≥40,000lbs):$0.85perton-mile

Less-than-truckload(LTL): $1.10perton-mile

Note:perton-mile=2,000lbspermile;numberofdaysperyear=365

Ans.:(seeattachedExcelWorksheet) Supplier1ismorecosteffective.

Description

Supplier1Supplier2

1.TotalEngineCost120,000unitsx$495,880,000.00$120,000unitsx$48.505,820,000.00 $

2.CashDiscount n/30$5,880,000x10%x30/36548,328.77$$5,820,000x10%x30/36547,835.62 $ 1/10N/A$5,820,000(10%x10/365+1%)74,145.21 $ 2/10$5,880,000(10%x10/365+2%)133,709.59$N/A Largestdiscount(133,709.59) $ $(74,145.21)

3.ToolingCost12,000.00 $ $10,000.00

4.TransportationCost (22,000lbLTL)125milesx120,000unitsx22lbsx$1.10/2000181,500.00$100milesx120,000unitsx22lbsx$1.10/2000145,200.00 $

5.OrderingCost120,000/1,000x$12515,000.00$120,000/1,000x$12515,000.00 $

6.CaryingCost1,000/2x$49x20%4,900.00$1,000/2x$48.50x20%4,850.00 $

7.QualityCost$5,880,000x2%117,600.00$$5,820,000x2%116,400.00 $

8.DeliveryRating

Backorder(40%)120,000x1%x40%x$157,200.00$120,000x2%x40%x$1514,400.00 $

LostSales(60%)120,000x1%x60%x$4,500x15%486,000.00$120,000x2%x60%x$4,500x15%972,000.00 $ TOTALCOST6,570,490.41 $ $7,023,704.79

14.Abuyerreceivedbidsfromthreesuppliersforavitalcomponentpartforitslatestproduct. Giventhefollowinginformation,usetotalcostanalysistodeterminewhichsuppliershould bechosen.Latedeliveryofthecomponentresultsin70percentlostsalesand30percent backordersoffinishedgoods.

Orderlotsize

2,000

Requirements(annualforecast) 240,000units

Weightperengine 40pounds

Orderprocessingcost

$200/order

Inventorycarryingrate 20%peryear

Costofworkingcapital 10%peryear

Profitmargin 15%

Priceoffinishedgoods

Back-ordercost

Truckload(TL≥40,000lbs):$0.95perton-mile

$10,500

$120perunit

Less-than-truckload(LTL): $1.20perton-mile

Note:perton-mile=2,000lbspermile;numberofdaysperyear=365

Ans.:(seeattachedExcelWorksheet) Supplier2ismorecosteffective.

Description

1.TotalEngineCost240,000unitsx$19546,800,000.00$240,000unitsx$19045,600,000.00 $

2.CashDiscount

n/30$46,800,000x10%x30/365384,657.53$$45,600,000x10%x30/365374,794.52 $ n/20

1/10N/AN/A

1/15N/A $45,600,000(10%x15/365+1%)643,397.26 $ 2/10$46,800,000(10%x10/365+2%)1,064,219.18$N/A Largestdiscount(1,064,219.18) $ $(643,397.26)

3.ToolingCost12,000.00 $ $10,000.00

4.TransportationCost (80,000lbTL)120milesx240,000unitsx40lbsx$0.95/2000547,200.00$100milesx240,000unitsx40lbsx$0.95/2000456,000.00 $

5.OrderingCost240,000/2,000x$20024,000.00$240,000/2,000x$20024,000.00 $

6.CaryingCost2,000/2x$195x20%39,000.00$2,000/2x$190x20%38,000.00 $

7.QualityCost$46,800,000x2%936,000.00$$45,600,000x1%456,000.00 $

8.DeliveryRating

Backorder(30%)240,000x1%x30%x$12086,400.00$240,000x1%x30%x$12086,400.00 $

LostSales(70%)240,000x1%x70%x$10,500x15%2,646,000.00$240,000x1%x70%x$10,500x15%2,646,000.00 $

TOTALCOST50,026,380.82 $ $48,673,002.74

Description

Supplier3

1.TotalEngineCost240,000unitsx$19246,080,000.00 $

2.CashDiscount

n/30N/A

n/20$46,080,000x10%x20/365252,493.15 $

1/10$46,080,000(10%x10/365+1%)587,046.58 $

1/15

2/10N/A

Largestdiscount(587,046.58) $

3.ToolingCost15,000.00 $

4.TransportationCost

(80,000lbTL)150milesx240,000unitsx40lbsx$0.95/2000684,000.00 $

5.OrderingCost240,000/2,000x$20024,000.00 $

6.CaryingCost2,000/2x$192x20%38,400.00 $

7.QualityCost$46,080,000x2%921,600.00 $

8.DeliveryRating

Backorder(30%)240,000x2%x30%x$120172,800.00 $

LostSales(70%)240,000x2%x70%x$10,500x15%5,292,000.00 $

TOTALCOST52,640,753.42 $

CASES

1. 3BeesButtermilkCorporation–SupplierSelection* CaseNote

LearningObjectives:

 Understandsourcingdecisionsandthefactorsimpactingsupplierselection.

 Understandandbeabletocomputetotalcostofownership.

 Describetheopportunitiesandchallengesofglobalsourcing. Theprimaryemphasisofthiscaseisonsupplierselection. The3BeesButtermilk Corporationisaninternationalcompanyandsourcesitssuppliesglobally. Theyunderstandhow criticalsupplierselectionistotheirbottomline. Theowners, Basil,Bernie,andBuforddiscuss withBuck,internwiththe3Bees,someofthefactorstheyconsiderwhenselectingsuppliers. Everyfactorisimportant;however,eachownerhasspecificfactorstheyfocusonsuchas processandproducttechnologies,thesupplier’swillingnesstosharetechnologiesand information,andcommunicationcapability.

Inadditiontothesupplierselectioncriteria,Bernie,ChiefFinancialOfficer,isbigonthe costfactor. HeexplainedtoBuckthat youhadtodeterminethetotalcost ofownership. This wentbeyondtheprice. Totalcostofownershipalsoincludedpaymentterms,cashdiscount, orderingcost,carryingcost,andmuchmore.

AnswertoQuestions:

1. Students’answersmayvary,butherearetwofactorsnotmentionedinthecase.

a. Capacity–3BeesButtermilkCorporationmustconsiderwhethersuppliershave thecapacitytofillnotonlythecurrentorders,but largerordersifnecessary.

b. Location–3BeesButtermilkCorporationmustconsiderhowthesupplier’s locationwillaffectdeliveryleadtime,transportationcosts,etc.

2. Earlysupplierinvolvement(ESI)bringsthesupplier’sexpertisetothedesigntable. ESI canensurecosteffectivedesignchoices,providealternativeconceptualsolutions,andaid indesignassessment.

3. Somequalitativeandquantitativefactorsarefreightandinventorycosts,tooling,tariffs andduties,currencyexchangerates,andnonperformancecosts.

2. Frank’sDrivingAppurtenances–AMake-or-BuyDecision*

CaseNote

LearningObjectives:

 Understandsourcingdecisionsandthefactorsimpactingthemake-or-buydecision. Thiscasehighlightstheimportanceofdecidingwhethertomaketheproductoneplansto sellortobuyitfromasupplier. Whilethisisacrucialdecisionforallbusinesses,itcouldtruly beamakeorbreakdecisionforanewcompany. AlthoughFrankhastheskilltodesignand manufacturetheuniquecaraccessoriesheplanstosell,hemustdetermineifmakingthemisthe correctfinancialdecision. Usingthemake-or-buybreakevenanalysis,Frankcaneasily determinewhichisthebestapproachforhimatthistime.

AnswerstoQuestions:

1. Onepurpose forusingthebreakevenanalysisistocalculatethecosteffectivenessof sourcingdecisions. Itisanessentialtoolwhencostisthemostimportantcriterion.

2. Thetwotypesofcostarefixedcostsandvariablecosts.

3. Thefixedcostishigherforthemakedecisionbecauseofinitialcapitalinvestmentfor equipment,facilities,etc. However,thevariablecostsarehigherforthebuydecision becausethesupplierincludesitsprofitmargin aspartofthepriceoftheproduct.

3. MiddletonFineFurniture–SupplyChainSavingsOpportunities*

CaseNotes

LearningObjectives:

 Understandtheroleofpurchasinganditsstrategicimpactonanorganization’s competitiveadvantage.

 Understandsourcingdecisionsandthefactorsimpactingsupplierselection.

 Understandtheprosandconsofsinglesourcingversusmultiplesourcing. Thiscaseaddresseshowtoleveragesupplychainmanagementtoimprovethebottom line.MiddletonFineFurnitureisexperiencingfinancialdifficultiesasaresultofadownturnin theeconomy. CEOSallyShermanhastaskedherCFOandVicePresident ofSupplyChain Managementtodevelopalongtermsolution. Sallywantsmorethanimmediatereliefforthe currentfinancialpredicament;shewantsplansputinplacethatwillenableMiddletontoweather anyfinancialstorm.

Ms.Yost,CFO,andMs.Gomez,VicePresidentofSupplyChainManagement,outline threemajorinitiativestheyarepursuing,inventoryturnoveranalysis,singleversusmultiple sourcingforspecificparts,andanevaluationofwhethertochangefrommakeorbuywhere applicable. Theybelievethattheseinitiativeswillreducecostsintheneartermandensurecosts aremanagedmoreeffectivelyoverthelongterm.

AnswerstoQuestions:

1. AsKenishastated,inventorywasmoneyontheshelf. Thehighertheinventoryturnover ratio,themorefrequentlytheinventorywasbeingsold. Consequently,ifMiddletonFine Furniturecouldincrease itsinventoryturnoverratio,themoneytiedupininventory wouldbeconvertedintorevenue.

2. Onewaysinglesourcingcanhelpreduceexpensesisbylowingthecostoftheinventory. Generally,ifacompanysinglesources,itpurchasesalargervolumefromthesupplier. Thisusuallyresultsinalowercostperuntilforthecompany.Asecondwaysingle sourcingcanhelpreduceexpensesisbyloweringtransportationcosts. Forexample, sinceMiddletonispurchasinglargevolumestheymaybeabletotakeadvantageoffull truckloadshipmentrates,ratherthanhavingtopayless-than-fulltruckloadrates,which aremoreexpensive.

3. Thetwotypesofcostarefixedcostsandvariablecosts.