0134520319 ISM Ch03 - Answers to the questions at the end of the chapters; including the case studies. PDF

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Answers to the questions at the end of the chapters; including the case studies....

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PART II ANSWERS TO END-OF-CHAPTER QUESTIONS CHAPTER 3: STRATEGIC AND FINANCIAL LOGISTICS 3-1. Discuss the differences between corporate level, business unit level, and functional level strategies. Corporate-level strategy is focused on determining the goals for the company, the types of businesses in which the company should compete, and the way the company will be managed. Strategy at a business unit level is primarily focused on the products and services provided to customers and on finding ways to develop and maintain a sustainable competitive advantage with these customers. The functional level strategies are related to business activities that support the achievement of the higher-level goals set by the business unit and corporation. 3-2. Discuss the cost leadership, differentiation advantage, and focus strategies. A cost leadership strategy requires an organization to pursue activities that will enable it to become a low-cost producer in an industry for a given level of quality. A differentiation strategy entails an organization developing a product or service that offers unique attributes that customers value and perceive to be distinct from competitor offerings. A focus strategy concentrates an organization’s effort on a narrowly defined market to achieve either a cost leadership or differentiation strategy. 3-3. What are the two key components of an income statement? Revenues and expenses are the two key components of an income statement. Revenues (sales) provide a dollar value of all the products and services an organization provides to its customers during a given period of time. Expenses (costs) provide a dollar value for the costs incurred in generating services during a given period of time. 3-4. What are the three key components of a balance sheet? Assets, liabilities, and owners’ equity are the three key components of the balance sheet. Assets are what a company owns and come in two temporal forms: current assets and long-term assets. Liabilities are the financial obligations a company owes to another party. Liabilities also come in two temporal forms: current liabilities and long-term liabilities. Owners’ equity is the difference between what a company owns and what it owes at any particular time.

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3-5. What are the three key components of the statement of cash flows? The statement of cash flows contains information from the income statement and balance sheet, but is formatted to highlight the sources and uses of cash in an organization’s operations, and in investing and financing activities. Accounts payable, accounts receivable, revenue growth, gross margin, sales—general and administration, capital expenditures, and inventory are all areas that affect cash flows within an organization. 3-6. What are the key components of the Strategic Profit Model? How can it be used to examine the effect of logistics decisions? Briefly, the Strategic Profit Model can be drilled down to Net Profit Margin x Asset Turnover = Return on Assets. Return on assets indicates what percentage of every dollar invested in the business is ultimately returned to the organization as profit. Net profit margin measures the proportion of each sales dollar that is kept as profit, and asset turnover measures the efficiency of the capital employed to generate sales. The Strategic Profit Model has the advantage of assisting logistics managers in the evaluation of cash flows and asset utilization decisions. Suppose, for example, that a logistics manager is able to eliminate some unnecessary inventory. This would reduce the value of current assets as well as total asset value. As a result, sales divided by total assets—asset turnover —would be higher, as would the organization’s return on assets. 3-7. Discuss how logistics decisions affect net profit margin in an organization. The most relevant net profit margin considerations for logistics managers are sales, costs of goods sold, and total expenses. A primary influence of logistics activities on sales would be through the improvement of customer service. Logistics can impact costs of goods sold through procurement activities or through any logistics-related efficiency improvement that enables labor to be more productive. Expenses can include logisticsrelated activities such as transportation, warehousing, and inventory. A logistics decision to reduce the number of less-than-truckload shipments through a consolidation strategy would show up in the transportation costs category that is part of variable expenses. 3-8. Discuss how logistics decisions affect asset turnover in an organization. Two examples involve inventory and accounts receivable. With respect to inventory, a retailer’s decision to move to a system of vendor-managed inventory, where a supplier of a product maintains control and ownership of an inventory item, can result in a significant reduction of the amount of inventory on an organization’s balance sheet. As for accounts receivable, a decision to invest in an EDI system that would increase invoice accuracy should enable customer payments to be received in a more timely fashion.

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3-9. Discuss some ways that inventory can be reduced on a firm’s balance sheet. A decision by a retailer to move to a system of vendor-managed inventory where a supplier of a product maintains control and ownership over an inventory item can result in a significant reduction of the amount of inventory on an organization’s balance sheet. Similarly, the use of premium transportation may also enable a firm to reduce lead time and ultimately reduce pipeline inventory that would show up on the balance sheet. 3-10. How does logistics strategy connect to overall corporate strategy? Is it a one-way or two-way connection? While the corporate level strategy ultimately sets the goals for the logistics strategy, the functional expertise that exists in the organization will necessarily influence the corporate strategy formulation. The strategic issues at this level are related to business activities that support the achievement of the higher-level goals set by the business unit and corporation. This hierarch of strategy entails the functional units of an organization providing input into the other levels of strategy formulation. This input could take the form of information on the resources and capabilities available to the organization. After the corporate level and business unit strategies are developed, the functional units must translate these strategies into discrete action plans they must accomplish for the higherlevel strategies to succeed. Logistics strategy decisions involve issues such as the number and location of warehouses, the selection of appropriate transportation modes, the deployment of inventory, and investments in technology that support logistics activities. In addition to being influenced by the goals of the corporate and business unit strategies, logistics strategy is directly influenced by strategic decisions in the functional areas of marketing and manufacturing. The ability of the logistics function to ultimately influence the overall financial success of an organization is based on the ability of logistics managers to develop and implement strategies that are aligned with the overall corporate strategy. An appreciation for this interconnectedness and need for alignment of strategies is important for every logistics manager. 3-11 What are the three primary areas where the Sarbanes-Oxley Act (SOX) has implications for logistics managers? Three primary areas where SOX has implications for logistics managers are internal controls, off balance sheet obligations, and timely reporting of material events. In terms of internal control, timely and accurate accounting of inventory is expected. With respect to off balance sheet obligations, compliance with SOX can involve providing transparency to external relationships with suppliers to manage inventory and/or purchasing agreements. Finally, timely reporting of material events involves the need to provide visibility of late supplier deliveries and/or the inability of suppliers to provide the products or services that are expected to drive revenue for the organization.

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3-12. Most managers believe that although it is possible to connect logistics decisions to costs, the connection to revenue enhancement is difficult to impossible. Provide an example of how logistics could improve sales. A decision to provide overnight delivery of service to e-commerce customers might have a positive influence on customer retention and sales. 3-13. What are some common logistics measures in transportation, warehousing, and inventory management? Transportation: The major transportation measures focus on such things as labor, cost, equipment, energy, and transit time. Measurements in this area include items such as return on investment (investments in transportation equipment), outbound freight costs, transportation labor productivity, on-time deliveries, and in-transit damage frequency. Warehousing: The primary warehousing measures include such things as labor, cost, time, utilization, and administration. Some common measurements focused on warehouse activities include return on investment (investments in warehousing facilities or equipment), warehouse order processing costs, and warehouse labor productivity. Inventory Management: Inventory management measures tend to relate to the inventory service levels to customers as well as controlling inventory investment across an organization’s logistics system. Some common performance measures include obsolete inventory, inventory carrying cost, inventory turnover, and information availability. 3-14. Do you think corporate cultures are relevant for designing a logistics measurement system? Why or why not? A recurring theme in the logistics research is that an organization’s logistics capabilities need to be directly connected to objective firm performance measures. In addition, this research stream asserts that logistics managers must continue to find ways to effectively communicate how these logistics capabilities provide value and ultimately support corporate strategy and success in financial terms. The ability of the logistics function to ultimately influence the overall financial success of an organization is based on the ability of logistics managers to develop and implement strategies that are aligned with the overall corporate strategy. This entails working directly with other functional areas such as marketing and manufacturing. This working relationship is directly influenced by the corporate culture that exists with a firm and thus holds the potential to help or hinder these alignment efforts.

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3-15. How do you measure gross margin return on inventory (GMROI)? Gross margin return on inventory is a common metric that is used by retailers and distributors to examine inventory performance based on margin and inventory turn. GMROI can be measured as (Gross Profit in Dollars/Sales in Dollars) x (Sales in Dollars/Average Inventory at Cost). 3-16. Describe how logistics decisions might affect an organization’s cost of goods sold. Cost of goods sold includes all the costs of materials and labor directly involved in producing a product or delivering a service. A significant part of this expense category is the cost of materials that are used to make a product. As such, logistics can influence these costs through procurement activities (e.g., purchasing at volume discounts, reverse auctions) or through any logistics-related efficiency improvements that enable labor to be more productive (e.g., enhanced materials handling processes on a production line). 3-17. Discuss the common types of information included in traditional logistics measurement systems. Logistics measurement systems have been traditionally designed to include information on five types of performance: asset management, cost, customer service, productivity, and logistics quality. Several measures are designed and implemented in each of these categories to manage logistics activities such as transportation, warehousing, and inventory management. Research suggests that leading-edge organizations are highly focused on performance measurement across these five areas and this serves as a platform on which competitive position, value-adding capabilities, and supply chain integration can grow. 3-18. What are the major parts of a balanced scorecard? Why are these parts needed? The Balanced Scorecard (BSC) is made up of performance measures that address particular goals or capabilities in the areas of customers, internal business processes, learning and growth, and financial. This holistic approach is needed in order to force management to look beyond the traditional financial measures when conducting a strategic analysis. 3-19. What are the steps for developing an effective logistics scorecard? To develop an effective logistics scorecard, management first defines the organization’s vision and goals. Next, logistics strategies are designed to ensure achievement of this vision and goals. These strategies are then translated into specific tactical performanceenhancing activities, and, finally, appropriate measures are established for each activity.

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3-20. Identify some of the key considerations for a logistics manager who is designing and implementing a logistics measurement system in his or her organization. Some of the key things to consider when applying performance measures to logistics activities include: 1. Determination of the key measures should be tailored to the individual organization and level of decision making. 2. Data collection and analysis are a major part of a performance measurement system in logistics. This complexity is increased in global settings. 3. Behavioral issues should be considered when establishing and implementing a system of logistics measures. Top management support can help tremendously in this area. 4. Frequent communication and constant updating of the measures is a necessary condition for ensuring they are supporting the stated goals of the organization.

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PART III CASE SOLUTIONS CASE 3-1 BRANT FREEZER COMPANY Question 1: When comparing performance during the first five months of 2017 with performance in 2016, 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 2016 was $9.97 and for the first five months of 2017, it fell to $9.07. Question 2: When comparing performance during the first five months of 2017 with performance in 2016, which warehouse shows the poorest change in performance? The worst change is the company’s 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 2017 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 2017. 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 2016 should be the same proportion in 2017.

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Warehouse Location Atlanta Boston Chicago Denver Fargo Los Angeles Portland St. Louis

(1)

(2)

(3)

(4)

% 2016 Costs Occurring in First Five Months 22.88 44.00 53.43 35.00 54.00 72.20 49.30 44.80

Actual Costs for First Five Months of 2017 ($) 40,228 29,416 141,222 14,900 9,605 93,280 42,616 19,191

Projected Total Costs in 2017 ($) 175,822 66,885 264,312 42,571 17,787 129,197 86,442 42,837

Projected Costs in Last Six Months of 2017 ($) 116,204 32,085 105,556 23,714 7,012 30,781 37,559 20,265

The projected costs in 2017 (column 3) are calculated by dividing the actual costs for the first five months of 2017 (column 2) by the percent of 2016 costs that occurred in the first five months (column 1). For example, Atlanta’s actual 2017 costs of $40,228 divided by 2016’s 22.88% yields projected 2017 costs of approximately $175,822. The projected costs in the last six months of 2017 (column 4) are calculated by subtracting the actual costs for the first five months of 2017 (column 2) from 2017’s projected total costs (column 3). This gives us the projected costs for the last seven months of 2017. However, we are only interested in the last six months of 2017, so this number is multiplied by 6/7, or .857. Continuing with Atlanta, 2017’s 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 the 2016 figures with the 2017 figures shown in the table, the amount budgeted for each warehouse in 2017 was greater than actual 2016 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 = 2016 unit costs x (2017 units shipped – 2016 units shipped) Inflation difference = 2017 units shipped x (2017 unit costs – 2016 unit costs) For example, Atlanta’s 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

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Question 7: Use the 2016 Income Statement and Balance Sheet to complete a Strategic Profit Model for J. Q.

Question 8: Holding all other information constant, what would be the effect on ROA for 2016 if warehousing costs declined 10% from 2016 levels? Given that warehousing costs were $735,982 for 2016, a 10% reduction would be approximately $73,598. Thus, total expenses would decrease to $2,412,569 ($2,486,167 – $73,598), with the following SPM:

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