Which of the following functions involves bringing similar stocks together into a larger quantity

Learning Outcomes

• Differentiate between supply chains and distribution channels

Figure 1. Supply Chain of Peanut Butter.

We have discussed the channel partners, the roles they fill, and the structures they create. Marketers have long recognized the importance of managing distribution channel partners. As channels have become more complex and the flow of business has become more global, organizations have recognized that they need to manage more than just the channel partners. They need to manage the full chain of organizations and transactions from raw materials through final delivery to the customer—in other words, the supply chain.

A supply chain is the system through which an organization acquires raw material, produces products, and delivers the products and services to its customers. Figure 1 illustrates a typical supply chain. Supply chain management helps increase the efficiency of logistics service by minimizing inventory and moving goods efficiently from producers to the ultimate users.

On their way from producers to end users and consumers, products pass through a series of marketing entities known as a distribution channel.

The Functions of Distribution Channels

Why do distribution channels exist? Why can’t every firm sell its products directly to the end user or consumer? Why are go-betweens needed? Channels serve a number of functions.

Channels Reduce the Number of Transactions

Channels make distribution simpler by reducing the number of transactions required to get a product from the manufacturer to the consumer. For example, if there are four students in a course and a professor requires five textbooks (each from a different publisher), a total of 20 transactions would be necessary to accomplish the sale of the books. If the bookstore serves as a go-between, the number of transactions is reduced to nine. Each publisher sells to one bookstore rather than to four students. Each student buys from one bookstore instead of from five publishers (see Figure 2).

Figure 2. How Distribution Channels Reduce the Number of Transactions (Attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license.)

Dealing with channel intermediaries frees producers from many of the details of distribution activity. Producers are traditionally not as efficient or as enthusiastic about selling products directly to end users as are channel members. First, producers may wish to focus on production. They may feel that they cannot both produce and distribute in a competitive way. On the other hand, manufacturers are eager to deal directly with giant retailers, such as Walmart, which offer huge sales opportunities to producers.

Channels Ease the Flow of Goods

Channels make distribution easier in several ways. The first is by sorting, which consists of the following:

• Sorting out: Breaking many different items into separate stocks that are similar. Eggs, for instance, are sorted by grade and size. Another example would be different lines of women’s dresses—designer, moderate, and economy lines.
• Accumulating: Bringing similar stocks together into a larger quantity. Twelve large Grade A eggs could be placed in some cartons and 12 medium Grade B eggs in other cartons. Another example would be to merge several lines of women’s dresses from different designers together.
• Allocating: Breaking similar products into smaller and smaller lots (allocating at the wholesale level is called breaking bulk.) For instance, a tank-car load of milk could be broken down into gallon jugs. The process of allocating generally is done when the goods are dispersed by region and as ownership of the goods changes.

Without the sorting, accumulating, and allocating processes, our modern consumer society would not exist. Instead, there would be home-based industries providing custom or semicustom products to local markets. In short, society would return to a much lower level of consumption.

A second way channels ease the flow of goods is by locating buyers for merchandise. A wholesaler must find the right retailers to sell a profitable volume of merchandise. A sporting-goods wholesaler, for instance, must find the retailers who are most likely to reach sporting-goods consumers. Retailers have to understand the buying habits of consumers and put stores where consumers want and expect to find the merchandise. Every member of a distribution channel must locate buyers for the products it is trying to sell.

Channel members also store merchandise so that goods are available when consumers want to buy them. The high cost of retail space often means many goods are stored by the wholesaler or manufacturer.

Supply Chain vs. Marketing Channels

The supply chain and marketing channels can be differentiated in the following ways:

1. The supply chain is broader than marketing channels. It begins with raw materials and delves deeply into production processes and inventory management. Marketing channels are focused on bringing together the partners who can most efficiently deliver the right marketing mix to the customer in order to maximize value. Marketing channels provide a more narrow focus within the supply chain.
2. Marketing channels are purely customer facing. Supply chain management seeks to optimize how products are supplied, which adds a number of financial and efficiency objectives that are more internally focused. Marketing channels emphasize a stronger market view of the customer expectations and competitive dynamics in the marketplace.
3. Marketing channels are part of the marketing mix. Supply chain professionals are specialists in the delivery of goods. Marketers view distribution as one element of the marketing mix, in conjunction with product, price, and promotion. Supply chain management is more likely to identify the most efficient delivery partner. A marketer is more likely to balance the merits of a channel partner against the value offered to the customer. For instance, it might make sense to keep a channel partner who is less efficient but provides important benefit in promotional strategy.

Successful organizations develop effective, respectful partnerships between the marketing and supply chain teams. When the supply chain team understands market dynamics and the points of flexibility in product and pricing, they are better able to optimize the distribution process. When marketing has the benefit of effective supply chain management—which is analyzing and optimizing distribution within and beyond the marketing channels—greater value is delivered to customers.

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PART II

END-OF-CHAPTER QUESTIONS

CHAPTER 10:  WAREHOUSING MANAGEMENT

1.      Distinguish between warehouses and distribution centers.

Warehouses emphasize the storage of products and their primary purpose is to maximize the use of storage space. In contrast, distribution centers emphasize the rapid movement of products through a facility and thus attempt to maximize throughput (the amount of product entering and leaving a facility in a given time period).

2.      Explain the four ways that warehousing facilitates the regrouping function.

Regrouping involves rearranging the quantities of products as they move through the supply chain and it takes four forms: accumulating (also referred to as bulk-making), allocating (also referred to as bulk-breaking), assorting, and sorting. Accumulating involves bringing together similar stocks from different sources, while allocating involves breaking larger quantities into smaller quantities. Assorting refers to building up a variety of different products for resale to particular customers, while sorting out refers to separating products into grades and qualities desired by different target markets.

3.      Discuss some of the value-added activities that can be performed by warehouses and distribution centers.

These value-added activities include assembly, custom labeling, light manufacturing, product testing, repackaging, and reverse logistics considerations, among others.

4.      What is cross-docking? How might it affect warehousing design?

Cross-docking can be defined as a process where a product is received in a facility, occasionally married with product going to the same destination, then shipped at the earliest opportunity, without going into long-term storage.  There is some disagreement with respect to the design of a cross-dock facility.  Some prefer a design that resembles a motor carrier terminal—rectangular, long, and as narrow as possible.  Others suggest that all cross-dock doors should be on one wall or placed at 90 degrees to one another.

5.      Distinguish between bonded storage and field warehousing.

There are several types of bonded storage and all refer to situations where goods are not released until applicable fees are paid. U.S. Customs-bonded warehouses hold goods until import duties are collected. Internal Revenue service-bonded warehouses hold goods until other federal taxes and fees are collected. A field warehouse is a facility temporarily established at the site of an inventory of goods, often the premises of the goods’ owner. The warehouser assumes custody of the goods and issues a receipt for them, which can then be used as collateral for a loan.

6.      What are the advantages and disadvantages of private warehousing?

One disadvantage to private warehousing is that they are characterized by high fixed costs—which necessitates high and steady demand volumes. In addition, a high fixed cost alternative becomes less attractive in times of high interest rates because it is more costly to secure the necessary financing. Private warehousing may also reduce an organization’s flexibility with respect to responding to changes in the external environment.

As for advantages, private warehousing offers users a great deal of control over their storage needs. More specifically, private warehouses can be constructed to meet user specifications and companies can also control product placement within a facility. In addition, private warehousing offers access to products when an organization needs or wants them.

7.      Discuss why contract warehousing is becoming a preferred alternative for many organizations.

Contract warehousing simultaneously mitigates the negative aspects and accentuates the positive aspects of public and private warehousing. For instance, contract warehousing allows a company to focus on its core competencies, with warehousing management provided by experts. Contract warehousing also tends to be more cost effective than private warehousing, with potentially the same degree of control because key specifications can be included in the relevant contract.

8.      Explain how common sense can be helpful in terms of warehousing design and operations.

One common sense piece of advice is that prior to designing a warehousing facility, the quantity and character of goods to be handled must be known. For example, online orders tend to be much smaller than those going to retail stores; as a consequence, picking and assembling one or two items is much different than picking and assembling a palletload of items.

Another common sense piece of advice is that it is important for an organization to know the purpose to be served by a particular facility because the relative emphasis placed on the storage and distribution functions affects space layout. For instance, a distribution-oriented facility attempts to maximize throughput rather than storage.

9.      In terms of warehousing design, give examples of trade-offs involving space, labor, and mechanization.

Spaciousness may not always be advantageous because the distances that an individual or machine must travel in the storing and retrieving functions are increased. On the other hand, cramped conditions can lead to inefficiencies such as the product damage that can be caused by forklift puncture and movement bottlenecks caused by inefficient aisle width.

10.  Distinguish between fixed and variable slot locations. How might they affect warehousing design?

A fixed slot location refers to a situation where each SKU has one or more permanent slots assigned to it, whereas a variable slot location involves empty slots being assigned to products based on space availability. Fixed slot systems may result in low space utilization and generally need to be larger than a variable slot facility.

11.  Discuss the trade-offs associated with order-picking versus stock-replenishing functions.

Organizations must decide whether workers who pick outgoing orders and those who are restocking storage facilities should work at the same time or in the same area. When order pickers and stock replenishers are allowed to work in the same area, fewer managerial personnel may be needed but it may also lead to congestion due to the number of workers in a relatively limited space. One suggestion is for the two sets of workers to use different aisles for their activities, but this requires a superior information system.

12.  Distinguish between a two-dock and a single-dock warehousing layout. Which one requires more space? Why?

A two-dock layout has receiving docks on one side of the facility and shipping docks on the other side with goods moving between them. In a one-dock system, each and every dock can be used for both shipping and receiving. This alternative reduces the space needed for storage docks, but it requires carriers to pick up and deliver at specific times.

13.  What are some potential advantages to paperless warehousing operations?

There are several important benefits to paperless warehousing, such as reduced clerical work, improved order picking efficiency, and a decrease in picking and shipping errors.  For example, most paper-based systems require picked orders to be manually entered into a computer system.  This information is often verified at the order staging area, a process that can delay shipping, add to processing costs, and does not catch all errors.

14.  Discuss how storage and handling equipment can influence warehousing operations.

Before installing storage equipment, companies should be familiar with the applicable regulations such as building codes in earthquake-prone areas often limit the height of storage shelves and racks. The use of racks may improve space utilization by allowing for narrower aisles. However, narrower aisles require specialized equipment with the capability of moving both vertically and horizontally at the same time.

15.  What is a warehouse management system (WMS)? How can it benefit warehousing operations?

Warehouse management systems are software packages that control the movement and storage of materials within an operation. Activities that can be controlled by WMS include inventory management, product receiving, and determination of storage locations, order selection processes, and order shipping.  Data entry errors can be dramatically reduced and the travel times for order picking can be reduced by nearly 50%.  Other benefits to WMS include reduced operating expenses, fewer stockouts, increased inventory accuracy, and improved service to customers.

16.  What is OSHA? What is OSHA’s role in warehousing safety?

OSHA is the Occupational Safety and Health Administration, an agency of the U.S. federal government that has responsibilities for industrial safety practices. In recent years, OSHA mandated that forklift drivers actually have to drive forklifts as part of the training process and that driver performance be evaluated every three years. OSHA inspectors make frequent visits to industrial workplaces.  In cases of non-compliance, citations can be issued and fines can be levied.

17.  What are the most common causes of warehousing fires? Which do you think is the easiest for managers to control? Justify your answer.

The most common cause of warehousing fires are arson, tobacco smoking, improper use of forklifts, electrical malfunctions, poor product disposal practices, and storage of incompatible materials. There are a variety of possible answers to the second part of the question; having said this, students should recognize that many fires can be prevented by common sense.

18.   How might the storage of hazardous materials affect the design of a warehousing facility?

Buildings that store hazardous materials often have specially constructed areas so that materials can be contained in the case of an accident.  Likewise, these facilities often have walls and doors that can withstand several hours of intense fire.  It is also important for a hazmat storage facility to have proper sprinkling systems as well as excellent ventilation.

19.  Discuss how warehousing security can be enhanced by focusing on people, facilities, and processes.

With respect to people, a starting point might be determining if a facility even has a formal hiring process. As for facilities, a number of different low-tech (e.g., fences) and high-tech (e.g., closed-circuit video cameras) devices can help to enhance warehousing security. Finally, with respect to processes, the more times a shipment is handled, the greater the opportunities for loss and/or damage.

20.  Why are cleanliness and sanitation issues relevant to warehousing operations?

Unclean and unsanitary warehousing facilities are not likely to attract many new customers and could cause existing customers to take their business elsewhere.  Moreover, clean and sanitary facilities have a positive impact on employee safety, morale, and productivity while also reducing employee turnover.

PART III

EXAMINATION QUESTIONS

CHAPTER 10: WAREHOUSING MANAGEMENT

Multiple Choice Questions

1.      Warehouses emphasize ____ and their primary purpose is to maximize____.

a.       product storage; throughput

b.      product storage; usage of available storage space

c.       rapid movement of product; throughput

d.      rapid movement of product; usage of available storage space

(b; p. 242)

2.      Distribution centers emphasize ____ and their primary purpose is to maximize____.

a.       product storage; throughput

b.      product storage; usage of available storage space

c.       rapid movement of product; throughput

d.      rapid movement of product; usage of available storage space

(c; p. 242)

3.      Throughput refers to:

a.       storage capacity of a warehousing facility

b.      volume through a pipeline

c.       inventory turnover in a one-month period

d.      amount of product entering and leaving a facility in a given time period

(d; p. 242)

4.      The primary factor that distinguishes a distribution center from a warehouse is:

a.       distribution centers tend to be multi-story buildings

b.      distribution centers stress storage

c.       distribution centers stress rapid movement of products through the facility

d.      distribution centers tend to be smaller than warehouses

(c; p. 242)

5.  Warehousing and ____ are substitutes for each other.

a.        transportation

b.      materials handling

c.       packaging

d.      procurement

e.       none of the above

(a; p. 242)

6.       ____ and ____ refer to adjustments associated with the quantity of product.

a.       Accumulating; allocating

b.      Allocating; assorting

c.       Sorting; accumulating

d.      Sorting; assorting

(a; p. 3243)

7.      ____ involves bringing together similar stocks from similar sources.

a.       Bulk-breaking

b.      Assorting

c.       Accumulating

d.      Sorting

(c; p. 244)

8.      ____ refers to building up a variety of different products for resale to particular customers.

a.       Accumulating

b.      Allocating

c.       Sorting

d.      Assorting

(d; p. 244)

9.      ____ refers to a process where a product is received in a facility, occasionally married with product going to the same destination, and then shipped at the earliest time, without going into longer-term storage.

a.       Just-in-time

b.      Cross-docking

c.       Consolidation

d.      Turbologistics

(b; p. 244)

10.  ____ warehouses are similar to common carriers.

a.       Public

b.      Private

c.       Contract

d.      Cross-dock

(a; p. 245)

11.  Which of the following is not a characteristic of public warehousing?

a.       requires no capital investment from user

b.      user receives a regular bill for space used

c.       good for companies dealing with large volumes of inventory

d.      lack of control by user

e.       all are characteristics

(c; pp. 245-246)

12.  Bonded storage in a public warehouse refers to:

a.       products being stored in a public warehouse and no duties or taxes paid until the products leave the facility

b.      products that are insured by a general warranty bond

c.       products that are bonded as required in the order specifications

d.      products that are subjected to regular inspections

e.       none of the above

(a; p. 246)

13.  A field warehouse is:

a.       a facility that is often used as a field sales office along with the traditional storage function

b.      a facility established primarily to hold material serving as collateral for a loan

c.       a facility that is primarily used as a break-bulk point

d.      a facility located in a number of remote areas from the main production facility

(b; p. 246)

14.  ____ warehousing is owned or occupied on a long-term lease by the firm using them.

a.       Public

b.      Private

c.       Contract

d.      Multi-client

(b; p. 246)

15.  All are characteristics of private warehousing, except:

a.       owned or occupied on a long-term lease by the firm using them

b.      feasible when demand patterns are irregular

c.       users have a great deal of control

d.      may reduce an organization’s flexibility

e.       all are characteristics

(b; pp. 246-247)

16.  All are true concerning contract warehousing, except:

a.       can also be referred to as third-party warehousing

b.      3–5 year contracts appear to offer benefits to both user and provider

c.       more cost effective than private warehousing

d.      more flexible than public warehousing

e.       all are characteristics

(d; p. 248)

17.  Multi-client warehousing mixes attributes of ____ and ____ warehousing.

a.       public; contract

b.      public; common

c.       common; private

d.      private; contract

(a; pp. 248-249)

18.  One of the best pieces of advice with respect to the design of warehousing facilities is to:

a.       avoid consultants

b.      build up rather than out

c.       use common sense

d.      maximize space utilization

(c; p. 249)

19.  Tradeoffs must be among space, labor, and ____ with respect to warehousing design.

a.       cost

b.      construction materials

c.       speed

d.      mechanization

(d; p. 252)

20.  The primary advantage of variable slot locations in a warehouse is:

a.       increased space utilization

b.      better materials handling

c.       ease of record keeping

d.      more logical and simple product layout

(a; p. 253)

21.  The primary advantage of fixed slot locations in a warehouse is:

a.       increased space utilization

b.      better materials handling

c.       knowledge of where specific products are located

d.      improved employee morale

(c; p. 253)

22.  As one builds higher, building costs____, while warehousing equipment costs tend to ____.

a.       increase; decrease

b.      increase; increase

c.       decrease; decrease

d.      decrease; increase

(d; p. 253)

23.  Which of the following statements about a one-dock layout is false?

a.       each and every dock can be used for both shipping and receiving

b.      it requires carriers to pick up and deliver at specific times

c.       goods move in a straight configuration

d.      product may sometimes be reloaded in the vehicle that delivered it

e.       all of the statements are true

(c; p. 254 )

24.  Which of the following is not a tradeoff in warehousing design?

a.       two-dock versus single-dock layout

b.      build up versus build out

c.       order picking versus order taking functions

d.      space devoted to aisles versus space devoted to storage

e.       all are tradeoffs

(c; pp. 253-254 )

25.  Which of the following is not a benefit associated with paperless warehousing?

a.       low cost

b.      reduced clerical work

c.       decreased picking and shipping errors

d.      improved order picking efficiency

e.       all are benefits

(a; p. 254)

26.  It is possible for paperless warehousing facilities to have payback periods of approximately ____ months.

a.       6

b.      12

c.       18

d.      24

(c; p. 254)

27.  Recent estimates suggest that only approximately ____ of a facility’s cubic capacity is actually occupied by product.

a.       55%

b.      40%

c.       25%

d.      10%

(d; p. 255 )

28.  ____ tend to be the standard workhorse in many warehousing facilities.

a.       Forklifts

b.      Pallet jacks

c.       Dock carts

d.      Conveyor systems

(a; p. 256)

29.  Which of the following is false?

a.       warehouse work can be strenuous and physically demanding

b.      the use of racks may improve space utilization by allowing for narrower aisles

c.       goods can be moved by a combination of manual, mechanized, and automated methods

d.      warehouse workers tend to be easily motivated

e.       all are true

(d; pp. 255-256)

30.  Software packages that control the movement and storage of materials within an organization refer to ____ systems.

a.       enterprise resource planning

b.      materials requirement planning

c.       warehouse management

d.      inventory management

(c; p. 256)

31.  The most frequent injuries among warehousing personnel involve:

a.       feet

b.      the torso

c.       hands

d.      back and shoulder

e.       none of the above

(d; p. 258)

32.  ____ regulations deal with many aspects of warehousing safety.

a.       OSHA

b.      FDA

c.       FTC

d.      WSA

(a; p. 258)

33.  What is dunnage?

a.       a type of packaging material that is placed inside of boxes

b.      a slang term for a particular type of ocean liner

c.       additional transportation fees that are charged to small shippers

d.      material that is used to block and brace products inside carrier equipment

(d; p. 259)

34.  Which of the following is not one of the four questions associated with effective management of hazardous materials storage?

a.       what material is being stored

b.      why is it being stored

c.       what is the material’s source

d.      where is it being stored

e.       all are questions

(c; p. 260)

35.  It is estimated that the theft and pilferage of products stored in warehousing facilities causes losses in the range of ____ to ____ times the products’ value.

a.       five; six

b.      four; five

c.       three; four

d.      two; three

(b; p. 260)

True-False Questions

1.  Warehouses emphasize the storage of products and their primary purpose is to maximize throughput. (False; p. 242)

2.      Distribution centers emphasize the rapid movement of products through a facility and attempt to maximize throughput. (True; p. 242)

3.      Throughput is the amount of product entering and leaving a warehousing facility in a given period of time. (True; p. 242)

4.      Materials handling has been referred to as transportation at zero miles per hour. (False; p. 242)

5.      Warehousing is needed because patterns of production and consumption may not coincide. (True; p. 243)

6.      Assorting and sorting refer to adjustments associated with the quantity of product. (False; p. 243)

7.      Accumulating involves bringing together similar stocks from different sources. (True; p. 244)

8.      Assorting involves breaking larger quantities into smaller quantities. (False; p. 244)

9.      A facility designed for cross docking should devote more space to product storage and less space to dock operations. (False; p. 244)

10.  Because companies have different strategies, goals, and objectives, there is no “correct” mix of public, private, and contract warehousing. (True; p. 244)

11.  With public warehousing the user rents space as needed, thus avoiding the costs of unneeded space. (True; p. 245)

12.  Two notable private warehouse services involve bonded storage and field warehousing. (False; p. 246)

13.  Perhaps the biggest drawback to public warehousing is the inability to provide specialized services. (False; p. 246)

14.  Private warehousing tends to be feasible when demand patterns are relatively stable. (True; p. 246)

15.  Private warehousing offers potential users a great deal of control over their storage needs. (True; p. 247)

16.  The growth in contract warehousing appears to have come at the expense of public warehousing. (True; p. 248)

17.  Contract warehousing tends to be more cost effective than public warehousing. (False; p. 248)

18.  One to two year contracts appear to allow sufficient time for contract warehousers to learn their client’s business while at the same time allowing clients some flexibility. (False; p. 248)

19.  In essence, multi-client warehousing mixes attributes of private and contract warehousing. (False; pp. 248-249)

20.  Common sense should not be ignored with respect to the design of warehousing facilities. (True; p. 249)

21.  Tradeoffs must be made among space, labor, and mechanization with respect to warehousing design. (True; p. 252)

22.  A fixed slot location warehousing system may result in low space utilization. (True; p. 253)

23.  A general rule of thumb is that it is cheaper to build up than build out. (True; p. 253)

24.  A one-dock warehouse layout (in contrast to a two-dock layout) increases the space needed for storage docks. (False; p. 254)

25.  Narrower aisles can increase the space utilization of a facility. (True; p. 254)

26.  Narrow aisle forklifts can operate in an aisle width of four feet, compared to the nine foot width that is needed by the standard forklift. (False; p. 254)

27.  It is possible for paperless warehousing facilities to have payback periods of approximately 18 months. (True; p. 254)

28.  Recent estimates suggest that only approximately 25% of a warehousing facility’s cubic capacity is actually occupied by product. (False; p. 255)

29.  Motivation of warehouse employees can be difficult because of the somewhat repetitive nature of the operation. (True; p. 255)

30.  Forklifts tend to be the standard workhorse in many warehousing facilities. (True; p. 256)

31.  The majority (over 50%) of warehouse management system installations are completed within budget. (False; p. 256)

32.  Warehouse management systems can result in reduced data entry errors as well as reduced travel distances for order picking. (True; p. 256)

33.  Back and shoulder injuries are the most frequent injuries among warehouse personnel. (True; p. 258)

34.  The Warehousing Safety Administration has primary responsibility for warehousing safety practices. (False; p. 258)

35.  Dunnage refers to charges for accessorial transportation service. (False; p. 259)

36.  Fires are a constant threat in warehousing. (True; p. 259)

37.  Buildings that store hazardous materials often have walls and doors that can withstand several hours of intense fire. (True; p. 260)

38.  It is estimated that the theft and pilferage of products stored in warehousing facilities causes losses in the range of two to three times the products’ value. (False; p. 260)

39.  In general, warehousing security can be enhanced by focusing on people, facilities, and information. (False; p. 261)

40.  Unsanitary warehousing facilities could cause existing customers to take their business elsewhere. (True; p. 261)

PART IV

CASE SOLUTIONS

CASE 10-1: SANDY’S CANDY

Question 1: Using those items of comparison for which costs can be calculated, determine the cost difference between the two delivery systems.

The answer can best be given by calculating costs in approximately the same order as given in the text:

*: Less than $1 calculated on a per ton basis but $.96 on a line-item basis

Question 2: List and compare those factors for which it is difficult to assign precise costs.

Warehousing costs are the most difficult to calculate and allocate. Schoenecker’s will probably offer a higher level of service than would occur if Mannix performs the function but this is difficult to quantify.

Question 3: Given the data that Sandy has, do you believe that Mannix Model Markets should get its Schoenecker candy through the buying cooperative or continue to rely on direct deliveries by Schoenecker’s drivers-salespeople? Give your reasons.

Mannix Markets’ own systems appear preferable given the data available to Ms. Nykerk.

Question 4: If you were Sandy, what additional information would you like to have before being asked to make such a recommendation?

See the answer to question 2. Whether the change is desirable depends almost entirely upon how one calculates the cost of moving the candy through the Mannix distribution system.

Question 5: Candy sales increase during holiday seasons. Which of the two candy distribution systems do you think would do a better job of anticipating and supplying these seasonal increases? Why?

Schoenecker’s should do a better job because candy is their specialty.

Question 6: Assume you are in charge of labor relations for Mannix Model Markets. Would you like to see continued reliance on drivers-salespeople to supply the markets’ candy needs? Why or why not?

The advantage would be that we would have another firm’s labor costs and practices with which we could compare our own.

CASE 10-2 MINNETONKA WAREHOUSE

Question 1: For each of the four work team sizes, calculate the expected number of trucks in the queue waiting to be unloaded.

Question 2: For each of the four work team sizes, calculate the expected time in the queue—that is, the expected time a truck has to wait in line to be unloaded.

Question 3: For each of the four work team sizes, what is the probability that a truck cannot be unloaded immediately?

Question 4: Which of the four work teams has the lowest cost to Wayne?

Question 5: Wayne is also considering rental of a forklift to use in truck unloading. A team of only two would be needed, but the hourly cost would be $38 per hour ($28 for the workers and $10 for the forklift). They could unload a truck in five minutes. Should Wayne rent the forklift?

A two-person crew and a forklift will cost $38 per hour. Compare this with the answers in question 4; Wayne should adopt a two-man crew and use a forklift.

Question 6: Disregard your answer to question 5. Labor negotiations are coming up and Wayne thinks he can get the union to give way on the work rule that prohibits warehouse workers on the unloading dock from being given other assignments when they are not unloading trucks. How much would Wayne save in unloading dock costs if he could reassign warehouse workers to other tasks when they are not unloading trucks, assuming that he has picked a good team of workers and each worker works 8 hours a day?

From the printouts, we must determine how much “idle time” there is with the present system. This depends in part upon the crew size. For a crew of four, for example, 24 minutes per hour is spent unloading trucks and the rest is idle time. Therefore, Wayne could get 36 minutes of work per hour of work elsewhere out of each worker. At $14 per hour, this is worth $8.40 ($14/hr times .6 hours). In theory, he could save up to $8.40 per worker per hour assuming he could assign them to other tasks where the pay rates were the same.

Page 2

PART II

END-OF-CHAPTER QUESTIONS

CHAPTER 11: PROCUREMENT

1.      What is procurement?  What is its relevance to logistics?

Procurement refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations.  It is closely related to logistics since acquired goods and services must be entered into the supply chain in the exact quantities and at the precise time they are needed.

2.      Contrast procurement’s historical focus to its more strategic orientation today.

Procurement’s historical focus in many organizations was to achieve the lowest possible cost from potential suppliers. Oftentimes these suppliers were pitted against each other in “cutthroat” competition involving three- or six-month length contracts awarded to the lowest bidder.  Once this lowest bidder was chosen, the billing cycle would almost immediately start again and another low bidder would get the contract for the next several months.  Today procurement has a much more strategic orientation in many organizations, and a contemporary procurement manager might have responsibility for reducing cycle times, playing an integral role in product development, or generating additional revenues by collaborating with the marketing department.

3.      Discuss three potential procurement objectives.

The text provides five potential procurement objectives that could be discussed. They are supporting organizational goals and objectives; managing the purchasing process effectively and efficiently; managing the supply base; developing strong relationships with other functional groups; supporting operational requirements.

4.      Name and describe the steps in the supplier selection and evaluation process.

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

5.      Discuss the factors that make supplier selection and evaluation difficult.

Supplier selection and evaluation generally involve multiple criteria and these criteria can vary both in number and importance depending on the particular situation.  Second, because some vendor selection may be contradictory, it is important to understand tradeoffs between them.  Third, the evolution of business practices and philosophies, such as just-in-time and supply chain management, may require new selection criteria or the reprioritiztion of existing criteria.

6.      Define supplier development and explain why it is becoming more prominent in some organizations.

Supplier development (reverse marketing) refers to a degree of aggressive procurement not normally encountered in supplier selection and can include a purchaser initiating contact with a supplier, as well as a purchaser establishing prices, terms, and conditions.  One reason for its growing prominence is the myriad inefficiencies associated with suppliers initiating marketing efforts towards purchasers.  A second reason is that the purchaser may be aware of important events that are unknown to the supplier.  Moreover, achieving competitive advantage in the supply chain is predicated on purchasers adopting a more aggressive approach so as to compel suppliers to meet the necessary requirements.

7.      Why does the issue of quality in procurement represent a delicate balancing act for organizations?

If an organization buys an input of inferior quality, it runs the risk of lowering the quality of the final product.  If an organization buys an input of higher quality than one’s final product, it may be paying for something that is not needed.

8.      What is the role of ISO certification in quality management programs?

ISO 9000 is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems.  These standards are intended to help companies build quality into every core process in each department.  Although ISO 9000 certification continues to become more commonplace throughout the world, it can still be a competitive advantage for some companies.

9.      Describe significant benefits and drawbacks to Six Sigma programs.

The most significant benefits from Six Sigma have been reduced costs, reduced errors, and waste, and reduced cycle time, while the key drawbacks have involved overcoming business cultural barriers, investing the required resources (both human and money), and gaining top management commitment.

10.  Discuss the Malcolm Baldrige National Quality Award.

The Malcolm Baldrige National Quality Award was established in the 1980s to recognize U.S. organizations for their achievements in quality and performance.  The Baldrige Quality Awards, which are restricted to organizations headquartered in the United States, require interested parties to submit a formal application that is evaluated by a committee largely made up of private sector experts in business and quality.  Seven categories are evaluated:  business results; customer and market focus; human resource focus; leadership; measurement, analysis, and knowledge management; process management; and strategic planning.

11.  How do ISO 9000 and the Baldrige Quality Award differ?

ISO 9000 essentially allows an organization to determine if it complies with its specific quality system.  In contrast, the Baldrige Award is more heavily focused on the actual results from a quality system as well as on continuous improvement.  The Baldrige Award also tends to be more externally focused in the sense that organizations benchmark themselves against organizations from outside their particular industry.

12.  What are the components of the global sourcing development model presented in this chapter?

Planning, specification, evaluation, relationship management, transportation and holding costs, implementation, and monitoring and improvements make up the components of the global sourcing development model presented in this chapter.

13.  Pick and discuss two components of the global sourcing development model presented in this chapter.

Any two components listed in the answer to Question 12 could be discussed.

14.  Discuss the benefits and drawbacks to electronic procurement.

Transaction benefits measure transaction benefits (e.g., reduced invoice-to-payment time), while compliance benefits focus on the savings that come from adherence to established procurement policies.  Management information benefits encompass those that result from management information, customer satisfaction, and supplier satisfaction levels after implementation of electronic procurement.  Price benefits are those that are given as a result of adopting e-procurement.

One concern with electronic procurement involves the security of information that is being transmitted; there is a risk that sensitive or proprietary information could end up in the wrong hands.  Another concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions.  Moreover, despite substantial hype about the potential benefits of electronic procurement, a recent survey discovered that only about 25% of the responding organizations mandate its use.

15.  What is an online reverse auction?  Why do buyers like them?

In an online reverse auction, a buyer invites bids from multiple sellers and the seller with the lowest bid is generally awarded the business.  Buyers tend to like reverse auctions because they aim to generate low procurement prices and the online nature of reverse auctions allows buyers to drill down to a seller’s low price very quickly.

16.  Discuss the benefits of electronic procurement cards.

Electronic procurement cards (p-cards) can benefit organizations in several ways, one of which is a reduction in the number of invoices.  In addition, these cards allow employees to make purchases in a matter of minutes, as opposed to days, and procurement cards generally allow suppliers to be paid in a more timely fashion.

17.  Distinguish between excess, obsolete, scrap, and waste materials.

Excess (surplus) materials refer to stock that exceeds the reasonable requirements of an organization, perhaps because of an overly optimistic demand forecast.  Obsolete materials, unlike excess materials, are not likely to ever be used by the organization that purchased them.  Scrap materials refer to materials that are no longer serviceable, have been discarded, or are a by-product of the production process.  Waste materials refer to those that have been spoiled, broken, or otherwise rendered unfit for reuse or reclamation.  Unlike scrap materials, waste materials have no economic value.

18.  Should investment recovery be the responsibility of the procurement manager?  If yes, why?  If not, which party (parties) should be responsible for investment recovery?

The book indicates that investment recovery, which identifies opportunities to recover revenues or reduce costs associated with scrap, surplus, obsolete, and waste materials, is often the responsibility of the procurement manager.  One could argue that procurement should be responsible for investment recovery because without procurement in the first place, there probably would be no scrap, surplus, obsolete, or waste material to manage.  Alternatively, one could argue that since investment recovery focuses on revenues and costs, the finance department should have responsibility.

19.  Name and give an example of the five dimensions of socially responsible purchasing.

Diversity => includes procurement activities associated with minority or women-owned organizations.

The environment => includes considerations such as waste reduction and the design of products for reuse or recycling.

Human rights => includes child labor laws as well as sweatshop labor.

Philanthropy => focuses on employee volunteer efforts and philanthropic contributions.

Safety => concerned with the safe transportation of purchased products as well as the safe operation of relevant facilities.

20.  Discuss some of the ethical issues that are associated with procurement.

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

PART III

EXAMINATION QUESTIONS

CHAPTER 11: PROCUREMENT

Multiple Choice Questions

1.      ____ refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations.

a.       Inbound logistics

b.      Procurement

c.       Materials management

d.      Supply management

e.       None of the above

(b; p. 270)

2.      Procurement’s historical focus in many organizations was to ____.

a.       incur minimal supply disruptions

b.      use a limited number of suppliers

c.       minimize loss and damage

d.      achieve the lowest possible cost

(d; p. 270)

3.      Procurement costs often range between ____ of an organization’s revenues.

a.       60-80%

b.      50-70%

c.       40-60%

d.      30-50%

(a; p. 270)

4.      Procurement and ____ are viewed as synonymous terms.

a.       materials management

b.      supply management

c.       purchasing

d.      inbound logistics

(c; p. 270)

5.      Which of the following is not a potential procurement objective?

a.       supporting organizational goals and objectives

b.      managing the supply base

c.       developing strong relationships with other functional groups

d.      supporting operational requirements

e.       all are potential procurement objectives

(e; p. 271)

6.      A focus on satisfying internal customers is associated with which procurement objective?

a.       managing the supply base

b.      supporting organizational goals and objectives

c.       managing the purchasing process effectively and efficiently

d.      supporting operational requirements

(d; p. 271)

7.      Buying the right products, at the right price, from the right source, at the right specifications, in the right quantity, for delivery at the right time to the right internal customer is associated with which procurement objective?

a.       managing the purchasing process effectively and efficiently

b.      supporting operational requirements

c.       supporting organizational goals and objectives

d.      managing the supply base

(b; p. 271)

8.      ____ looks at both the internal and external environment within which the supply decision is to be made.

a.       Identify the need for supply

b.      Identify suppliers

c.       Situation analysis

d.      Evaluate suppliers

(c; p. 271)

9.      ____ is the second step of the supplier selection and evaluation process.

a.       Identify need for supply

b.      Select suppliers

c.       Identify and evaluate possible suppliers

d.      Situation analysis

(d; p. 271)

10.  The  text outlines a supplier selection and evaluation process that consists of ____ steps.

a.       7

b.      6

c.       5

d.      4

(c; pp. 271-272)

11.  What is the final step in the supplier selection and evaluation process?

a.       evaluate decision

b.      implement decision

c.       select suppliers

d.      provide feedback

(a; p. 272)

12.  Which of the following statements is false?

a.       Supplier selection and evaluation generally involve multiple criteria.

b.      The evolution of business practices and philosophies may require new supplier selection criteria.

c.       Selecting suppliers is the final step of the supplier selection and evaluation process.

d.      Some supplier selection criteria may be contradictory.

e.       All are true

(c; p. 273)

13.  A degree of aggressive procurement involvement not normally encountered in supplier selection refers to ____.

a.       supply management

b.      supplier development

c.       materials management

d.      physical supply

(b; p. 273)

14.  Supplier development is synonymous with ____.

a.       supplier selection and evaluation

b.      procurement

c.       materials management

d.      reverse marketing

(d; p. 273)

15.  Which of the following is not a reason for why purchasers are adopting a more proactive and aggressive role in the procurement process?

a.       there are myriad inefficiencies associated with suppliers initiating marketing efforts towards purchasers

b.      an excess number of suppliers currently exist

c.       achieving competitive advantage in the supply chain

d.      purchasers may be aware of important benefits that are not known to the supplier

e.       all are reasons

(b; p. 273)

16.  The ____ defines quality as “a subjective term for which each person has his or her own definition.”

a.       U.S. Department of Commerce

b.      United Nations

c.       American Society of Quality

d.      International Standards Organization

(c; p. 273)

17.  ____ is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems.

a.       ISO 9000

b.      ISO 14000

c.       Six Sigma

d.      Quality Circle

(a; p. 274)

18.  Upon achieving ISO 9000 certification, organizations can be recertified every ____ years.

a.       10

b.      7

c.       5

d.      3

(d; p. 274)

19.  ____ suggests that there will be 3.4 defects, deficiencies, or errors per one million opportunities.

a.       ISO 9000

b.      ISO 14000

c.       Six Sigma

d.      Quality Assurance

(c; p. 274)

20.  Reduced costs, reduced errors and waste, and reduced cycle time are benefits that are associated with ____.

a.       the Malcolm Baldrige National Quality Award

b.      Six Sigma

c.       ISO 14000

d.      ISO 9000

(b; p. 274)

21.  ____ recognizes U.S. organizations for their achievements in quality and performance.

a.       Six Sigma

b.      ISO 9000

c.       The Malcolm Baldrige National Quality Award

d.      The U.S. Department of Commerce Commendation of Quality

(c; p. 274)

22.  Which of the following is not a Baldrige Quality Award category that is evaluated for achievement and improvement?

a.       customer and market focus

b.      strategic planning

c.       cost reduction

d.      process management

e.       all are relevant categories

(c; p. 275)

23.  ____ essentially allows an organization to determine if it complies with its specific quality system, while ____ is more heavily focused on the actual results from a quality system as well as on continuous improvement.

a.       ISO 9000; Six Sigma

b.      ISO 9000; Baldrige Award

c.       Baldrige Award; ISO 9000

d.      Six Sigma; Baldrige Award

(b; p. 275)

24.  Which of the following is false?

a.       In the factor-input strategy, an organization is seeking low costs or high-quality sources of supply.

b.      Global procurement refers to buying components and inputs anywhere in the world.

c.       Planning is the first step in global procurement.

d.      Global procurement is driven by the factor-input and the market-access strategies.

e.       All are true

(e; p. 275)

25.  What is the first step in a global sourcing development model?

a.       specification

b.      situation analysis

c.       problem recognition

d.      planning

(d; p. 275)

26.  ____ is often a major shortcoming to many global procurement plans.

a.       Implementation

b.      Evaluation

c.       Specification

d.      Monitoring and improving

(a; p. 276)

27.  Which of the following is not a type of benefit that can come from electronic procurement?

a.       management information

b.      transaction

c.       price

d.      compliance

e.       all are benefits

(e; p. 276)

28.  ____ benefits focus on the savings that come from adherence to established procurement policies.

a.       Transactional

b.      Compliance

c.       Management information

d.      Price

(b; p. 276)

29.  ____ refers to employees who do not follow company guidelines about which suppliers to use in a particular situation.

a.       Irresponsible procurement

b.      Recalcitrant spending

c.       Maverick spending

d.      Unauthorized procurement

(c; p. 276)

30.  A recent survey indicated that about ____ of responding companies mandate the use of electronic procurement.

a.       15%

b.      25%

c.       40%

d.      50%

(b; pp. 276-277)

31.  Which of the following is false?

a.       Electronic procurement has facilitated online reverse auctions.

b.      Buyers like reverse auctions because they aim to generate low procurement prices.   

c.       In reverse auctions a buyer invites bids from multiple sellers.

d.      The low(est) bid must be accepted in reverse auctions.

e.       All are true

(d; p. 277)

32.  ____ materials refer to stock that exceeds the reasonable requirements of an organization.

a.       Waste

b.      Obsolete

c.       Scrap

d.      Excess

(d; p. 278)

33.  ____ materials are materials that are no longer serviceable, have been discarded, or are a by-product of the production process.

a.       Excess

b.      Scrap

c.       Obsolete

d.      Waste

(b; p. 278)

34.  ____ materials have no economic value.

a.       Waste

b.      Scrap

c.       Obsolete

d.      Excess

(a; p. 278)

35.  Research suggests that socially responsible procurement consists of ____ dimensions.

a.       two

b.      three

c.       five

d.      seven

(c; p. 279)

True-False Questions

1.      Procurement refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations. (True; p. 270)

2.      Procurement’s costs often range between 40-60% of an organization’s revenues. (False; p. 270)

3.      Procurement’s historical focus in many organizations was to minimize the total number of outside suppliers. (False; p. 270)

4.      Procurement and purchasing are viewed as synonymous terms. (True; p. 270)

5.      Supporting organizational goals and objectives means that procurement’s focus is on satisfying internal customers. (False; p. 271)

6.      First and foremost, procurement’s objectives must manage the purchasing process effectively and efficiently. (False; p. 271)

7.      The first step in supplier selection and evaluation is situation analysis. (False; p. 271)

8.      Trade shows, trade publications, and the Internet can be used to identify possible suppliers. (True; pp. 271-272)

9.      The final step of the supplier selection process is to evaluate the decision. (True; p. 272)

10.  Supplier selection and evaluation generally involve multiple criteria. (True; p. 273 )

11.  Supply management refers to a degree of aggressive procurement not normally encountered in supplier selection. (False; p. 273)

12.  Supplier development is synonymous with reverse marketing. (True; p. 273)

13.  One reason for the growth of the supplier development concept is that achieving competitive advantage in the supply chain is predicated on purchasers adopting a more aggressive approach. (True; p. 273)

14.  An excessive number of suppliers is one reason why purchasers are adopting a more proactive and aggressive role in the procurement process. (False; p. 273)

15.  The International Standards Organization defines quality as a subjective term for which each person has his or her own definition. (False; p. 273)

16.  ISO 9000 is a set of generic standards used to document, implement, and demonstrate quality management and assurance systems. (True; p. 274)

17.  After achieving ISO 9000 certification, organizations can be recertified every three years. (True; p. 274)

18.  ISO 14000 suggests that there will be 3.4 defects, deficiencies, or errors per one million opportunities. (False; p. 274)

19.  Reduced costs and reduced cycle times are two benefits associated with Six Sigma. (True; p. 274)

20.  Any organization in the world can apply for the Malcolm Baldrige Quality Award. (False; p. 274)

21.  The Baldrige Award allows an organization to determine if it complies with its specific quality system. (False; p. 275)

22.  Global procurement refers to buying components and inputs anywhere in the world. (True; p. 275)

23.  Problem recognition is the first step in global procurement. (False; p. 275)

24.  Because global sourcing increases the distance that components and inputs must be moved, managers must consider the tradeoff between transportation and holding costs. (True; p. 276)

25.  Implementation is often a major shortcoming to many global procurement plans. (True; p. 276)

26.  One way of evaluating electronic procurement is by categorizing benefits as hard, soft, or intangible. (True; p. 276)

27.  Unauthorized spending refers to employers who do not follow company guidelines about which suppliers to use in a particular situation. (False; p. 276)

28.  One concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions. (True; p. 276)

29.  About 50% of the companies in a recent survey mandate the use of electronic procurement. (False; pp. 276-277)

30.  In a reverse auction, the buyer must accept the lowest bid. (False; p. 277)

31.  Buyers are critical of reverse auctions because their primary emphasis is low price. (False; p. 277)

32.  A reduction in the number of invoices is one benefit to procurement cards. (True; p. 277)

33.  Investment recovery is often the responsibility of the finance manager. (False; p. 277)

34.  Excess materials refer to stock that exceeds the reasonable requirements of an organization. (True; p. 278)

35.  Scrap materials are no longer serviceable, have been discarded, or are a by-product of the production process. (True; p. 278)

36.  Obsolete materials have no economic value. (False; p. 278)

37.  The ways that organizations manage the investment recovery for excess, obsolete, scrap, and waste materials should be influenced by the materials’ classification. (True; p. 278)

38.  Socially responsible procurement refers to procurement activities that meet the ethical and discretionary responsibilities expected by society. (True; p. 279)

39.  Diversity and philanthropy are two dimensions of socially responsible procurement. (True; p. 279)

40.  Bribes refer to money paid after an exchange. (False; p. 279)

PART IV

CASE SOLUTIONS

CASE 11-1: EASING IRA’S IRE

Question 1: Arrange the tasks shown in Exhibit 11-A in a network or PERT chart.

A chart with three paths results. They, and their completion times, are:

A B C H I L                 6.50 days

A D E F K L                6.45 days

A D G J L                           8.00 days

The case does not indicate whether it is necessary to complete A before beginning B. This could be discussed in class.

Question 2: Determine the critical path. What is the least amount of time it takes between receipt of an order and its delivery to a customer?

The critical path is A D G J L and it takes 8 days.

Question 3: Considering your answers to Questions 1 and 2, what areas of activity do you think Wood should look at first, assuming she wants to reduce order processing and delivery times? Why?

She should, of course, look at the critical path because it takes the longest and is controlling. Items G and J seem like candidates.

Question 4: Now that she is a Californian ready for the race down the information superhighway, Wood wants to be able to impress Pollack in terms of her knowledge of current technology. Recently a sales representative from a warehouse equipment company called, trying to interest her in installing a “Star Wars-Robotic” order picker for the warehouse. Controlled by lasers and powered by magnetic levitation, the device can pick orders (task H) in 15 minutes, rather than 6 hours (.75 days), the current time. How valuable would such a device be for Wood? Why?

Although the “Star Wars-Robotic” order picker offers impressive time savings, it would appear to offer limited immediate advantages in the sense that overall completion time along the critical path would be unaffected.

Question 5: Another alternative is to use faster transportation. How should Wood choose between paying more for faster transportation and paying more for other improvements? Assume that her only goal is speed.

See the answer to question 3. Wood should look at all costs along the critical path. Any improvement would have to be an item on the path; and the cost of each improvement would have to be compared with the time savings it provides.

Question 6: To offset some of the costs of speeding up the system, does the PERT chart indicate where there might be some potential savings from assigning fewer people to some tasks, thereby increasing the amount of time needed to complete these tasks? If so, which tasks are likely candidates? Why?

Wood should explore transferring workers from tasks not on the critical path, such as B, C, E, F, H, I, or K, and these workers should be transferred to tasks on the critical path. She could do this so long as the function from which the workers were transferred does not become part of a new critical path.

CASE 11-2: TEMPO LTD.

Question 1: Should Terim let somebody else complete the transaction because he knows that if he does not sell to the North Koreans somebody else will?

This question may stimulate a great deal of discussion among students. On the one hand, Terim is contemplating a transaction involving commodities (chemicals and lumber) as well as with a country (North Korea) with which he is not all that familiar. These aspects might argue against completing the transaction.  Moreover, in light of certain events involving North Korea—specifically, admitting that they possess nuclear capabilities—Terim might pull back from the proposed transaction because of uncertainty as to exactly how the chemicals will be used by the North Koreans (e.g., might the chemicals actually be used to make weapons?). On the other hand, even though the case indicates that the Turkish have imposed trade sanctions against North Korea, trade involving “banned” partners is periodically achieved by routing the products through other countries.

Question 2: What are the total costs given in the case for the option of moving via Romania?

Question 3: What are the total costs given in the case for the option of moving via Syria?

Question 4: Which option should Terim recommend? Why?

Either option can be supported. For example, the Romanian option is nearly $30,000 cheaper than the Syrian option, thus solely from the perspective of cost, the Romanian option might be preferred. However, the Romanian option takes three weeks longer to complete than does the Syrian option. Moreover, the Romanian option appears to be riskier than the Syrian one in the sense that things might go awry in the redocumentation process.

Question 5: What other costs and risks are involved in these proposed transactions, including some not mentioned in the case?

The entertainment of the North Korean officials can be viewed as both a cost and a risk. At a minimum, luxurious hotel accommodations as well as business-related dinners and receptions will not come cheaply. From a risk perspective, there is a chance that the entertainment could get out of hand and generate embarrassing publicity.

There is also a chance that some of the rusvet “fees” might unexpectedly increase, particularly those associated with generating the false documents. If providers of the documentation understand the “captive” nature of the lumber shipment from Romania to Turkey, then it is possible that these providers could leverage their position to increase their income.

A more general risk for these proposed transactions is the volatile political situation in the Middle East. One manifestation of this volatility is through disruptions in transportation routes; traffic through the Suez Canal has periodically been influenced by the region’s political volatility—an important consideration given that the proposed lumber shipments will need to move through the Suez Canal.

Students are likely to generate other costs and risks.

Question 6: Regarding the supply chain, how—if, at all—should bribes be included? What functions do they serve?

From a broad perspective, the purpose of bribes should be to facilitate the completion of international transactions. At least two perspectives must be considered when analyzing the first part of the question. One is the legal perspective; quite simply, in some countries (such as the United States), bribes are theoretically illegal—regardless of the circumstances. Under this scenario, bribes would not be included in the supply chain.

A second perspective, practicality, understands that bribes are essential for the completion of international transactions. Under this scenario, supply chains would need the flexibility to accommodate situations that require a bribe. One manifestation of this flexibility could be the name assigned to a “bribe.” For example, one of the authors was not allowed to board an airplane flight to Katmandu, Nepal until all four members of his traveling party (each a U.S. resident) paid what was called a “weight penalty.” This “weight penalty” appears to have been bribe-like in the sense that none of the other passengers, several of whom clearly had weight problems, were assessed “weight penalties.”

Question 7: If Terim puts together this transaction, is he acting ethically? Discuss.

The answer to this question could depend on one’s definition of ethical actions. One definition, for example, focuses on a personal code of conduct to guide one’s actions. Another definition suggests that anything that is not illegal is ethical. Having said this, the Romanian routing appears questionable because of the document alterations associated with it. These document alterations are probably illegal, regardless of the country in question.

Alternatively, because the Syrian routing does not appear to include any overtly illegal activities, some might view it as ethical. Even though it includes rusvets, Terim merely would be following accepted protocol for many international transactions. Moreover, the use of Syria is “smart” in the sense that Terim is avoiding a Turkish port where the chances of getting caught, and the associated penalties, are much higher.

Alternatively, the case suggests that Terim is struggling with the decision to do business with the North Koreans in part because of concerns about their communist regime and support of terrorist policies. Because this may indicate that Terim has a “conscience,” any transaction involving the North Koreans could be viewed as unethical in the sense that Terim is violating his personal code of conduct.

Question 8: What do you suggest should be done to bring moral values into the situation so that the developing countries are somewhat in accordance with Western standards? Keep in mind that the risks involved in such environments are much higher than the risks of conducting business in Western markets. Also, note that some cultures see bribery as a way to better distribute wealth among their citizens.

Because this case involves organizations located in two non-Western countries, it might be culturally insensitive to bring in moral values that are more in accordance with Western standards. 

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