Solution Manual for Business Logistics/Supply Chain Management, 5th Edition

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Business Logistics/Supply ChainManagementPlanning, Organizing, and Controlling the Supply ChainFifth EditionSolution ManualRonald H. BallouWeatherhead School of ManagementCase Western Reserve University

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iiCONTENTSPrefaceiiiChapter 1Business Logistics/Supply ChainA Vital Subject………12Logistics/Supply Chain Strategy andPlanning……………23The Logistics/Supply Chain Product...……………………44Logistics/Supply Chain Customer Service…..……………95Order Processing and Information Systems……………….136Transport Fundamentals…………………………………..147Transport Decisions……………………………………….Fowler Distributing Company…………………………..Metrohealth Medical Center…………………………….Orion Foods, Inc………………………………...............R & T Wholesalers……………………………………...17354148528Forecasting Supply Chain Requirements…………….……World Oil………………………………………………..Metro Hospital ………………………………………….6584889Inventory Policy Decisions………………………………..Complete Hardware Supply, Inc….……………………..American Lighting Products…………………………….American Red Cross: Blood Services…………………..9412112413110Purchasing and Supply Scheduling Decisions…………….Industrial Distributors, Inc………………………………13414411The Storage and Handling System………………………...14712Storage and Handling Decisions…………………………..14813Facility Location Decisions……………………………….Superior Medical EquipmentCompany………………....Ohio Auto & Driver’s License Bureau………………….Southern Brewery ………………………………………16218619019814The Logistics Planning Process…………………………...Usemore SoapCompany………………….……………..Essen USA………………….……………..20420821715Logistics/Supply Chain Organization…………………….22916Logistics/Supply ChainControl……………..…………….230

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1CHAPTER 1BUSINESS LOGISTICS/SUPPLY CHAINA VITAL SUBJECT12(a) This problem introduces the student to the evaluation of alternate channels ofproduction and distribution. To know whether domestic or foreign production is leastexpensive, the total of production and distribution costs must be computed from thesource point to the marketplace.Two alternatives are suggested, and they can becompared as follows.Production at Houston:Total cost = Production cost at Houston + Transportation and storage costs= $8/shirt100,000 shirts + $5/cwt.1,000 cwt.= $805,000/yearProduction at Taiwan:Total cost = Production cost in Taiwan+ Transportation and storage costs from Taiwan to Chicago+ Import duty + Raw material transportation cost from Houstonto Taiwan= $4/shirt100,000 shirts + $6/cwt.1,000 cwt. + $0.5/shirt100,000 shirts+ $2/cwt.1,000 cwt.= $458,000/yearProducing in Taiwan would appear to be the least expensive.(b) Other factors to consider before a final decision is made might be:(i)How reliable would international transportation be compared with domestictransportation?(ii)What is the business climate in Taiwan such that costs might change in favor ofHouston as a production point?(iii) How likely is it that the needed transportation and storage will be available?(iv) If the market were to expand, would there be adequate production capacityavailable to support the increased demand?

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2CHAPTER 2LOGISTICS/SUPPLY CHAIN STRATEGY AND PLANNING13The purpose of this exercise is to allow the student, in an elementary way, to examine thetradeoffsbetweentransportationandinventory-relatedcostswhenanincentivetransportation rate is offered. Whether the incentive rate should be implemented dependson the shipment size corresponding to the minimum of the sum of transportation, inven-tory, and order processing costs.These costs are determined for various shippingquantities that might be selected to cover the range of shipment sizes implied in theproblem. Table 2-1 gives a summary of the costs to Monarch for various shipment sizes.From Monarch's point of view, the incentive rate would be beneficial.Shipmentsizes should be approximately doubled so that the 40,000 lb. minimum is achieved. It isimportant to note that the individual cost elements are not necessarily at a minimum atlow shipment sizes, whereas order-processing costs are low at high shipment sizes. Theyare in cost conflict with each other. Transportation costs are low at high shipment sizes,but exact costs depend on the minimum volume for which the rate is quoted.In preparation for a broader planning perspective to be considered later in the text, thestudent might be asked what the place of the supplier is in this decision.How does heaffect the decision, and how is he affected by it?This will focus the student's attentionon the broader issues of the physical distribution channel.

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3TABLE 2-1Evaluation of Alternative Shipment Sizes for the Monarch Electric CompanyCurrentProposedType of cost57 motorsor10,000 lb.114 motorsor20,000 lb.171 motorsor30,000 lb.228 motorsor40,000 lb.285 motorsor50,000 lb.TransportationRD98,750= $78,75058,750= $43,75058,750= $43,75038,750=$26,250a38,750= $26,250Inventory carryingbICQ/20.2520057/2=$1,425a0.25200114/2= $2,8500.25200171/2= $4,2750.25200228/2= $5,7000.25200285/2= $7,125Order processingcDS/Q5,00015/57= $1,3165,00015/114= $6585,00015/171= $4395,00015/228= $3295,00015/285=$263aHandlingHD0.308,750= $2,6250.308,750= $2,6250.308,750= $2,6250.308,750= $2,6250.308,750= $2,625Total$84,116$49,883$51,089$34,904a$36,263aMinimum values.bStudents should be informed that average inventory can be approximated by one half the shipment size.cDemandDhas been converted to units per year.LEGENDR= transportation rate, $/cwt.D= annual demand, cwt.I= inventory carrying cost, %/year.C= cost of a motor, $/motor.Q= shipment size in motors, where Q/2 represents the average number of motors maintained in inventory.S= order processing costs, $/order.H= handling costs, $/cwt.

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4CHAPTER 3THE LOGISTICS/SUPPLY CHAIN PRODUCT3The 80-20 principle applies to sales and items where 80 percent of the dollar volume isgenerated from 20 percent of the product items.While this ratio rarely holds exactly inpractice, the concept does.We can apply it to these data by ranking the products bysales, and the percentage that the cumulative sales represent of the total.The followingtable shows the calculations.The 80-20 rule cannot be applied exactly, since the cumulative percent of items doesnot break at precisely 20 percent.However, we might decide that only products 08776and 12121 should be ordered directly from vendors.The important principle derivedfrom the 80-20 rule is that not every item is of equal importance to the firm, and that dif-ferent channels of distribution can be used to handle them.The 80-20 rule gives somerational basis for deciding which products should be shipped directly from vendors andwhich are more economically handled through a system of warehouses.6(a) Reading the ground transport rates for the appropriate zone as determined by zip codeand the weight of 27 lb. (rounding upward of 26.5 lb.) gives the following total costtable for the four shipments.ProductcodeDollarsalesCumulativesalesCumulativesales as% of totalCumulativeitems as% of total08776$71,000$ 71,00018.28.31212163,000134,00034.316.71073256,000190,00048.625.01169351,000241,00061.633.31061446,000287,00073.441.71207727,000314,00080.350.00707122,000336,00085.958.31054218,000336,00090.566.70669214,000354,00094.175.00972110,000368,00096.783.3142179,000378,00098.991.7110074,000391,000100.0100.0Total$391,000

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5(b) The transport rate structure is reasonably fair, since ground rates generally followdistance and size of shipment. These are the factors most directly affecting transportcosts. They are not fair in the sense that customers within a zone are all charged thesame rate, regardless of their distance from the shipment origin point.However, allcustomers may benefit from lower overall rates due to this simplified zone-ratestructure.10(a) This is a delivered pricing scheme where the seller includes the transport charges inthe product price. The seller makes the transport arrangements.(b) The seller prices the product at the origin, but prepays any freight charges; however,the buyer owns the goods in transit.(c) This is a delivered pricing scheme where the freight charges are included in theproduct price, however the freight charges are then deducted from the invoice, andthe seller owns the goods in transit.(d) The seller initially pays the freight charges, but they are then collected from the buyerby adding them to the invoice. The buyer owns the goods in transit, since the pricingis f.o.b. origin.(e) The price is f.o.b. origin.The buyer pays the freight charges and owns the goods intransit.Regardless of the price policy, the customer will ultimately pay all costs.If a firmdoes not consider outbound freight charges, the design of the distribution system will bedifferent than if it does.Since pricing policy is an arbitrary decision, it can be arguedthat transport charges should be considered in decision making, whether the supplyingfirm directly incurs them or not.11This shows how Pareto's law (80-20 principle) is useful in estimating inventory levelswhen a portion of the product line is to be held in inventory. An empirical function thatapproximates the 80-20 curve is used to estimate the level of sales for each product to beheld in inventory. According to Equation 3-2, the constant A is determined as follows.Tozip codeCatalogpriceUPSzoneTransportcostaTotalcost11107$99.952$ 7.37$107.324211799.95510.46110.417400199.95613.17113.125961599.95818.29118.24aUse 27 lb.

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6AXYYX().(.)...10 25 1750 750 250125The 80-20 type curve according to Equation 3-1 is:YAAXXX()(.).1101250125This formula can be used to estimate the cumulative sales from the cumulative itemproportion. For example, item 1 is 0.05 of the total number of items (20) so that:Y(.)( .)...101250 0501250 050 321Ofthe$2,600,000intotalannualwarehousesales,item1shouldaccountfor0.3212,600,000 = $835,714.By applying this formula to all items, the following inventory investment table can bedeveloped which shows sales by item.The average inventory investment by item isfound by dividing the turnover ratio into the item sales.The sum of the averageinventory value for each item gives a total projected inventory of $380,000.Inventory Investment TablePro-ductCumulativeitem pro-portion, XCumulativesales, YProjecteditem salesTurnoverratioAverageinventoryvalue10.05$ 835,714$ 835,7148$104,46420.101,300,000464,286858,03630.151,595,454295,454836,93240.201,800,000204,546825,56850.251,950,000150,000625,00060.302,064,705114,706619,1187B0.352,155,26390,558615,09380.402,228,57173,308612,21890.452,289,13060,559610,093100.502,340,00050,87068,478110.552,383,33343,333410,833120.602,420,68937,35649,339130.652,453,22632,53748,134140.702,481,81828,59247,14815C0.752,507,14225,32446,331160.802,529,71922,58745,647170.852,550,00020,27145,068180.902,568,29318,29344,473190.952,584,88416,59144,148201.002,600,00015,11643,779Total$380,000A

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712This problem involves the application of Equations 3-1 and 3-2. We can develop an 80-20 curve based on 30 percent of the items accounting for 70 percent of sales. That is,AXYYX().(.)...10 30 10 700 700 300 225Therefore, the sales estimating equation is:YXX(.).10 2250 225By applying this estimating curve, we can find the sales ofAandBitems.Forexample, 20 percent of the items, or 0.220 = 4 items, will beAitems with a cumulativeproportion of sales of:YA(.)( .)...10 2250 200 2250 200 5765and 3,000,0000.5765 = 1,729,412.TheA+Bitem proportion will be:YAB(.)( .)...10 2250 500 2250 500 8448and 3,000,0000.8448 = 2,534,400.The product groupBsales willA+Bsales lessAsales, or 2,534,4001,729,412 = $804,988.The product groupCwill be the remaining sales, but these are not of particularinterest in this problem.The average inventories forAandBproducts are found by dividing the estimatedsales by the turnover ratio. That is,A:1,729,412/9= 192,157B:804,988/5= 160,988Total inventory353,155 casesThe total cubic footage required for this inventory would be 353,1551.5 = 529,732cu. ft.The total square footage for productsAandBis divided by the stacking height.That is, 529,731/16 = 33,108 sq. ft.

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813This problem is an application of Equations 3-1 and 3-2. We first determine the constantA. That is,AXYYX().(.)...10 20 10 650 650 200156and0 75101560156.(.).XXSolving algebraically forX, we have:XAxYAYx10156 0 75101560 750 288.....That is, about 29% of the items (0.2885,000 = 1,440 items) produce 75% of the sales.14The price would be the sum of all costs plus an increment for profit to place theautomotivecomponentinthehandsofthecustomer.Thiswouldbe25+10+5+8+5+transportation cost, or 53+T.Based on the varying transportation cost,the following price schedule can be developed.QuantityPrice per unitDiscount1 to 1,000 units53+5=$5801,001 to 2,000 units53+4.00=571.7%a>2,000 units53+3.00=563.5%a[(58 - 57)/58][100]=1.7%

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9CHAPTER 4LOGISTICS/SUPPLY CHAIN CUSTOMER SERVICE6(a) This company is fortunate to be able to estimate the sales level that can be achieved atvarious levels of distribution service.Because of this, the company should seek tomaximize the difference between sales and costs.These differences are summarizedas follows.Percent of orders deliveredwithin 1 dayContribution to506070809095100profit-1.8 2.0 3.5 4.0 3.4 2.8-2.0The company should strive to make deliveries within 1 day 80 percent of the time fora maximum contribution to profit.(b) If a competing company sets its delivery time so that more than 80 percent of theorders are delivered in 1 day and all other factors that attract customers are the same,the company will lose customers to its competitor, as the sales curve will have shifteddownward. Cleanco should adjust its service level once again to the point where theprofit contribution is maximized.Of course, there is no guarantee that the previouslevel of profits can be achieved unless the costs of supplying the service cancorrespondingly be reduced.7(a) This problem solution requires some understanding of experimental design andstatistical inference, which are not specifically discussed in the text.Alert thestudents to this.The first task is to determine the increase in sales that can be attributed to thechange in the service policy.To determine if there is a significant change in thecontrol group, we set up the following hypothesis test.zXXsNsN212221212222418561102791023936 486118394...Now, referring to a normal distribution table in Appendix A of the text, there is asignificant difference at the 0.01 level in the sales associated with the control group.That is, some factors other than the service policy alone are causing sales to increase.Next, we analyze the test group in the same manner.

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10z2 2951 34257656335569535 9242 00410 722,,,,.This change is also significant at the 0.01 level.The average increase in sales for the control group is 224/185 = 1.21, or 21%.The average sales increase in the test group is 2295/1342 = 1.71, or 71%.If webelieve that 21% of the 71% increase in the test group is due to factors other thanservice policy, then 7121 = 50% was the true service effect.Therefore, for eachsales unit, an incremental increase in profit of (0.4095)(0.50) = $19 can be realized.Since the cost of the service improvement is $2, the benefit exceeds the cost.Theservice improvement should be continued.Note: If the students are not well versed in statistical methodology, you may wishto instruct them to consider the before and after differences in the mean values ofboth groups as significant. The solution will be the same.(b) The use of the before-after-with-control-group experimental design is a methodologythat has been used for some time, especially in marketing research studies.Theoutstanding feature of the design is that the use of the control group helps to isolatethe effect of the single service variable.On the other hand, there are a number ofpotential problems with the methodology:The sales distributions may not be normal.The time that it takes for diffusing the information that a service change has takenplace may distort the results.The products in the control group may not be mutually exclusive from those in thetest group.The method only shows the effect of a single step change in service and does notdevelop a sales-service relationship.Itmaynotalwaysbepracticaltointroduceservicechangesintoon-goingoperations to test the effect.8(a) The optimum service level is set at that point where the change in gross profit equalsthe change in cost.The change in gross profit:P= Trading marginSales response rateAnnual sales= 1.000.0015100,000= $150 per year per 1% change in the service levelThe change in cost:C= Annual carrying costStandard product costz

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11Demand standard deviation for order cycle= 0.3010.00400zNow, setP=Cand solve forz.150 = 1200zz= 0.125From the tabulated changes in service level with those changes inz, the service levelshould be set between 96-97%.(b) The weakest link in this analysis is estimating the effect that a change in service willhave on revenue. This implies that a sales-service relationship is known.9The methodology is essentially the same as that in question 7, except that we are asked tofindXinstead ofY. That is,P= 0.750.001580,000= 90andC= 0.251,000500z= 1250zThen,P=C90 = 1250zz = 0.072From the normal distribution (see Appendix A), thezfor an area under the curve of93% is 1.48, and for 92%,zis 1.41.Since the difference of 1.481.41 = 0.07, we canconclude that the in-stock probability should be set at 92-93%. Of course, the change inzis found by taking the difference inzvalues for 1% differences in the area values underthe normal distribution curve for a wide range of area percentages.10Apply Taguchi’s concept of the loss function.First, estimate the loss per item if thetarget level of service is not met. We know the profit per item as follows.

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12Sales price$5.95Cost of item-4.25Other costs-0.30Profit per item$1.40Since one-half of the sales are lost, the opportunity loss per item would be/item70.0$880(1/2)(880)$1.40lossyOpportunitNext, findkin the loss function.Lk ymkkk().().().220 701050 70250 03Finally, the point where the marginal supply cost equals the marginal sales loss is%67.1)03.0(210.02)5(kBy%67.6567.1yThe retailer should not allow the out-of-stock percentage to deviate more than 1.67%,and should not allow the out-of-stock level to fall below 1.67 + 5 = 6.67%.Profit per itemSales lostCurrent salesTarget %out-of-stock % at point where ½ sales are lost

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13CHAPTER 5ORDER PROCESSING ANDINFORMATION SYSTEMSAll questions in this chapter require individual judgment and response.No answers areoffered.

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