Chapter 16 Transaction costs and loss of customer goodwill

Document Type
Test Prep
Book Title
Effective Management 6th Edition
Authors
Chuck Williams
58. According to the textbook, what should a business owner do with excess inventory?
a.
cut prices on the product to increase its sales
b.
donate the products and get a tax write-off
c.
throw the excess away
d.
throw a party
e.
raise prices and sell the product as a premium product
59. ____ is the number of times per year that a company sells or replaces its average inventory.
a.
Stock rollover
b.
Average aggregate inventory
c.
The average inventory replacement cycle
d.
Inventory turnover
e.
The ratio of inputs to outputs
60. Mass distributors lowered prices substantially to sell increased volumes of hardware products, and
hardware stores managed the ____ costs of maintaining larger than needed inventories by including
them as overhead.
a.
containment
b.
stockout
c.
holding
d.
amortization
e.
setup
61. Which of the following is NOT a kind of cost associated with maintaining an inventory?
a.
ordering
b.
stockout
c.
holding
d.
amortization
e.
setup
62. Downtime and lost efficiency are both examples of ____.
a.
ordering costs
b.
setup costs
c.
holding costs
d.
stockout costs
e.
depreciation costs
63. Transaction costs and loss of customer goodwill are both examples of ____.
a.
ordering costs
b.
setup costs
c.
holding costs
d.
depreciation costs
e.
stockout costs
64. Companies relying on a trucking company providing just-in-time (JIT) transportation would _____?
a.
expect the chemical and dry bulk products to be delivered as they are needed by the
production line
b.
cannot continue operations if a stockout occurs
c.
have high inventory turnover rates
d.
uses a master production schedule to control service recovery costs
e.
spend more on holding costs than on any other form of inventory costs
65. A company that embroiders t-shirts, uses 15,000 plain t-shirts annually. The optimal order quantity is
500 shirts. The company embroiders approximately 150 shirts daily. Using the ____ calculations, the
company knows it should place an order approximately every 3 days.
a.
materials requirement planning
b.
just-in-time inventory management
c.
break-even
d.
economic order quantity
e.
independent demand
66. Which of the following is NOT a well-known technique for managing inventory?
a.
progressive inventory management (PIM)
b.
just-in-time inventory (JIT)
c.
materials requirement planning (MRP)
d.
economic order quantity (EOQ)
e.
kanban
67. Materials requirement planning (MRP) is ____.
a.
a method for inventory mining
b.
used with dependent demand systems
c.
used with tickets that indicate when to reorder various inventory items
d.
used with independent demand systems
e.
not concerned with finished product inventories
68. The three key parts of material requirement planning (MRP) are ____.
a.
aggregate inventory, suppliers’ invoices, and bills of laden
b.
inventory records, trend analyses, and production schedules
c.
the master production schedule, the bill of materials, and inventory records
d.
suppliers’ invoices, distribution schedules, and inventory records
e.
inventory turnovers, master production schedules, and storage space
69. ____ is a ticket-based system that indicates when to reorder inventory.
a.
An MRP system
b.
A just-in-time system
c.
Kanban
d.
An independent demand system
e.
A dependent demand system
70. In inventory management situations involving independent demand systems, ____ should be used,
whereas with dependent demand systems, ____ should be used.
a.
JIT; MRP and/or EOQ
b.
EOQ; JIT and/or MRP
c.
MRP; JIT and/or EOQ
d.
MRP; JIT or EOQ
e.
EOQ; JIT or MBO
RIP
In recent years, Japanese companies such as Mitsubishi, NEC, Fujitsu, and Sony began turning to
Americans to manufacture Japanese products. While Sony, Panasonic, and other Japanese giants still
excel at cranking out high-quality consumer electronics products such as camcorders and TVs by the
millions, it's a different story in industries with short product cycles, which require factories that must
build what customers order instead of churning out products in anticipation of demand. Japan's great
strength, repetitive manufacturing, is becoming its greatest weakness. This production-on-demand
form of management cannot depend on JIT. Instead the American companies rely on raw-in-process
inventory, or RIP. RIP calls for keeping a reasonable quantity of varied raw materials or components
on hand to meet changing customer demand.
71. Refer to RIP. In terms of the characteristics of quality service, repetitive Japanese manufacturing
means many of the Japanese firms are weak in which of the following areas?
a.
reliability
b.
empathy
c.
responsiveness
d.
tangibles
e.
assistance
72. Refer to RIP. A company that builds what customers order rather than what it thinks customers should
buy has a strong ____.
a.
customer focus
b.
product orientation
c.
sales orientation
d.
organizational structure
e.
customer synergy
73. Refer to RIP. What type of manufacturing operation are Americans who manufacture NEC, Fujitsu,
and Sony products using?
a.
stock-to-make
b.
make-to-stock
c.
raw-to-stock
d.
make-to-order
e.
assemble-to-order
74. Refer to RIP. What kind of inventory are Americans who manufacture NEC, Fujitsu, and Sony
products maintaining?
a.
finished goods inventory
b.
component parts inventory
c.
raw materials inventory
d.
work-in-process inventory
e.
all of these
75. Refer to RIP. ____ would be one of the primary methods used to measure inventory in the
Japanese-based firms operating in the United States.
a.
Inventory turnover
b.
Inventory equity
c.
Stock liability
d.
Aggregated equity
e.
Stakeholders’ equity
76. Refer to RIP. The JIT system preferred by Japanese manufacturers ____.
a.
cannot be used with batch processing
b.
makes component parts available at the manufacturing plant just as they are needed
c.
determines the EOQ and maintains it
d.
creates independent demand systems
e.
eliminates problems with stockouts
77. Refer to RIP. Which of the following statements about the American companies who are taking over
Japanese operations is true?
a.
The American companies are able to make effective use of kanbans.
b.
Because American companies are more concerned about stockouts, they are less efficient.
c.
Both the Japanese and the American companies rely on independent demand systems to
determine inventory requirements.
d.
The American companies have higher holding costs.
e.
All of these statements about the American companies who are taking over Japanese
operations are true.
Hyundai
Because of the poor quality of its cars, Hyundai watched its U.S. sales drop from 264,000 cars to
90,000 cars in just two years. Hyundai cars ranked 26th out of 35 car brands in terms of initial car
quality as measured by the influential J. D. Power Initial Car Quality survey. With $6.6 billion in debt,
a $1 billion investment for a new manufacturing plant in Alabama, and the company’s first-ever loss,
Hyundai’s new chairman, Chung Mong Koo, declared that improving quality was the only way to fix
the company.
The challenge for Chung was to get his managers to put quality, not costs, first. So he sent a
visible, meaningful message that poor quality would no longer be tolerated. During one plant visit,
Chung demanded to see under the hood of a car on the production line. He was furious when he saw
loose wires, tangled hoses, bolts painted four different colorsa tremendous deviation from what the
engine compartment was supposed to look like. On the spot, he instructed the plant chief to paint all
bolts and screws black and ordered workers not to release any car unless all was orderly under the
hood. He then publicly declared that Hyundai would produce higher quality cars than Toyota, and that
its cars would lead the industry in quality.
Today, each workweek starts with a demanding three-hour meeting attended by managers,
engineers, designers, and suppliers. In his large boardroom, Chung displays Hyundai cars on rotating
turntables or mechanical lifts, whatever is required for those in attendance to see up close what
problems need to be fixed. Hyundai managers now measure everything. Hundreds of charts on the
walls of every Hyundai factory measure the number of times and the degree to which a process has
produced parts that differ meaningfully from the quality standards for those parts. The quality
department at Hyundai has grown from 100 to 1,000 people, all of whom now report directly to CEO
Chung.
All employees share their ideas about how to improve quality because Chung communicated to
workers that their ideas were important and welcomed. To prove it, he rewarded them with bonuses
averaging $150 per employee. At one Hyundai factory, workers have suggested 25,000 ideas for
improving quality, 30 percent of which have been implemented in the factory. For instance, a worker
noticed that the Hyundai Sonata and XG350 (now sold as the Azera) had identically sized spare tires
but different-sized spare tire covers. Though it sounds trivial, using the same spare tire cover for both
cars saves Hyundai $100,000 a year.
Hyundai addresses customer complaints as quickly as possible, and these quick responses have
had dramatic results. For example, Hyundai Santa Fe’s score in J.D. Power’s Initial Car Quality survey
dropped from 149 problems per 100 cars (PP100) to 93 PP100 in just one year.
Finally, if the greatly improved quality isn’t enough to convince you to buy a Hyundai, the
company believes that its 10-year/100,000 mile warranty may be enough. The longest, most
comprehensive warranty in the auto industry shows the confidence the company has in its cars. And
those extensive warranties probably won’t cost Hyundai much either, as the improved quality of its
cars has cut the cost of warranty repairs, which are paid for by headquarters, by 35 percent over the
last three years.
78. Refer to Hyundai. When Chung Mong Koo, Hyundai’s new chairman and CEO visited a Hyundai
plant he strode onto the factory floor and demanded a peek under the hood of a Sonata sedan. He didn't
like it when he saw loose wires, tangled hoses, and bolts painted four different colors. The fact that this
car was not being built the way it was designed and the fact that its manufacturing flaws resulted in it
not working as it was supposed to indicated that Hyundai had a problem with ____.
a.
responsiveness
b.
assurance
c.
tangibles
d.
reliability
e.
serviceability
79. Refer to Hyundai. In every Hyundai factory, hundreds of wall charts track the number of times and the
degree to which a process has produced parts that differ meaningfully from the quality standards for
those parts. The company is maintaining quality by measuring ____.
a.
variation
b.
synergy
c.
entropy
d.
process autonomy
e.
manufacturing empowerment
80. Refer to Hyundai. Hyundai’s generous warranty means that the company will assume responsibility
for the cost of all repairs for 10 years or until the car has been driven an astounding 100,000 miles,
generally longer than a single driver will own the car. The warranty demonstrates Hyundai’s
commitment to ____, a quality-related service characteristic.
a.
assurance
b.
durability
c.
service recovery
d.
serviceability
e.
tangibles
81. Refer to Hyundai. By addressing customer complaints as quickly as possible, even in the middle of a
model year, Hyundai is demonstrating ____.
a.
assurance
b.
empathy
c.
responsiveness
d.
serviceability
e.
tangibles
82. Refer to Hyundai. A worker noticed that the Hyundai Sonata and XG 350 sedans had identically sized
spare tires but different sized spare tire covers. Using the same spare tire cover for both cars saves
Hyundai $100,000 a year and increased the company’s productivity by ____.
a.
decreasing confusion
b.
getting the same output for fewer inputs
c.
increasing inventory of only one item
d.
getting more inputs for more outputs
e.
decreasing variation
WWYD Louis Vuitton
A multinational company based in France, Louis Vuitton Moët Hennessy (LVMH) is the world’s
leading luxury goods company. Louis Vuitton started his company in 1854 and revolutionized travel
by selling trunks and luggage designed for easier stowage on board trains and steamships. Today the
company is comprised of the highest-end luxury brands in fashion, jewelry, perfume, cosmetics, shoes,
and wine and spirits.
Over the last decade, the worldwide luxury market has doubled to $220 billion a year, with
much of that growth coming from China, where “1.4 billion people … suddenly want to treat
themselves, and it will continue.” Growth like that creates a number of challenges for companies like
Louis Vuitton.
First, it can’t run out of the most popular products, but it must have the flexibility to produce
small batches (limited editions) of a large number of different luxury goods. Second, because workers
complete just one task, it generally takes 30 craftsmen eight days to produce just one Louis Vuitton
bag. Production bottlenecks are common. The company wants and needs to restructure its production
process to add more capacity without building any more factories.
Louis Vuitton generally releases one new bag a season, or four per year. Because its factories
were working on long-term production schedules for its most popular products, they lacked the ability
to scale up production if a bag suddenly became popular. In other words, they weren’t flexible. This
also meant that they were hitting production ceilings where, under their old system, their 17 factories
weren’t capable of producing more goods without building more factories. As a result, Louis Vuitton
experienced frequent stockouts where it could not stock its store shelves.
One improvement came from using robots to move unfinished inventory throughout the
factory and thereby get rid of waiting time and production bottlenecks. For example, in its Italian shoe
factory, LV uses robots to retrieve the foot molds around which workers make shoes. Now, instead of
having craftspeople retrieve a shoe mold every time they’re ready to begin a new job, the robots bring
the molds to the workers. CEO Yves Carcelle says the robots have yielded “considerable” time
savings. As a result, instead of shipping a new bag every three months, it is now every six weeks.
Patrick-Louis Vuitton, in charge of special orders, says, “It's about finding the best ratio between
quality and speed.”
Another improvement involved switching to teams of 6 to 12 workers and who learned to
complete multiple production steps. So instead of having three workers separately handle gluing,
stitching, and finishing the edges of a flap, one worker would do all three steps. And, by placing those
teams in u-shaped clusters, Louis Vuitton was able to free up 10 percent more space in its existing
factories. Because of that, says CEO Ives Carcelle, “We were able to hire 300 new people without
adding a factory.” The U-shaped workstations also positioned sewing machines and assembly tables so
that team members could pass bags back and forth without waiting. That, combined with having
workers perform multiple production steps, eliminated production bottlenecks.
83. Refer to WWYD Louis Vuitton.When the operations manager said, “By cutting out one of our sewing
machines and getting it to where it was needed, we produced the same number of Kim-K purses as
before,” he was referring to an increase in:
a.
quality
b.
productivity
c.
responsiveness
d.
inputs
e.
inventory
84. Refer to WWYD Louis Vuitton. By setting up U-shaped workstations for its high-end handbags and
the like, Louis Vuitton reduced its:
a.
inputs
b.
productivity
c.
quality
d.
finished-goods inventory
e.
available factory space
85. Refer to WWYD Louis Vuitton. In terms of operational issues, by adding robots to its manufacturing
process, Louis Vuitton experienced:
a.
the democratization of fashion
b.
decreased quality due to lack of craftsmanship
c.
increased labor costs because robots are more expensive to operate
d.
increased stockouts due to increased demand for luxury items
e.
increased productivity due to decreased inputs
86. Refer to WWYD Louis Vuitton. As a production manager at Louis Vuitton, which method of
managing inventory would be inappropriate for the purse manufacturing operation?
a.
EOQ
b.
JIT
c.
kanban
d.
MRP
e.
EDI
87. Refer to WWYD Louis Vuitton. If LVMH were committed to quality-related programs, it could
pursue all of the following EXCEPT:
a.
Baldrige National Quality Award
b.
ISO 9000
c.
ISO 14000
d.
TQM
e.
LVMH could pursue all of the above programs.
88. Refer to WWYD Louis Vuitton. Because Louis Vuitton is interested in adding more capacity without
building additional factories, it is most likely the company is interested in increasing:
a.
partial productivity
b.
labor productivity
c.
multifactor productivity
d.
throughput
e.
inventory
89. Refer to WWYD Louis Vuitton. The frequent stockouts described in the passage are examples of
which kind of inventory?
a.
raw material
b.
component parts
c.
work in process
d.
finished goods
e.
average aggregate
90. Refer to WWYD Louis Vuitton. Partial productivity measures for making a batch of Louis Vuitton
handbags would consider all of the following inputs EXCEPT:
a.
leather
b.
electricity
c.
wages and benefits
d.
sewing machines
e.
the finished bags themselves
SHORT ANSWER
1. Define productivity. Provide an everyday example of a measure of productivity that consumers
sometimes use in deciding which car to purchase.
2. Define the two common measures of productivity used by managers. Specify the circumstances under
which each should be used.
3. There are two ways to define quality. Describe both of them.
4. Make a list of the characteristics that define quality for goods. Then make a second list of
characteristics that define quality for services. Why do these lists differ? Which characteristic appears
on both lists and why?
5. Briefly explain the difference between ISO 9000 certification and the Baldrige National Quality
Award.
6. What types of public recognition are given to companies that demonstrate the highest probability that
they are consistent producers of high quality goods or services?
7. Briefly describe total quality management (TQM).
ANS:
8. Manufacturing processes are classified according to the amount of processing or assembly that occurs
after receiving an order from customers. Briefly describe the three types of manufacturing processes.
9. List and describe the four kinds of inventory that a manufacturer stores.
10. List and briefly identify the three basic measures of inventory that managers use to keep inventory
costs from becoming too large.
11. Briefly identify the three different methods of inventory management. Specify the circumstances under
which each should be used.
ESSAY
1. Briefly explain how production and productivity relate to the financial success of companies as well as
the countries in which the companies are located. Given the nature of today's global economy,
comment on how these relationships might be particularly important in developing (as opposed to
industrialized) countries, where the industrial base and standard of living are low.
2. What is quality? List and define three characteristics of quality for goods and for services. Explain
why these characteristics are different for goods and services. Then identify the one dimension that is
common in both lists. Finally, specify a good or service that you were very dissatisfied with during the
past year, and explain which of these quality dimensions the good or service was deficient on.
ANS:
3. Describe the changes that many service organizations are making to enhance the process of service
recovery. Give an example of such a change that could enhance service recovery for dissatisfied
students at your college or university.
4. What is inventory? Explain the potential costs associated with it. Briefly describe the systems of
inventory management that are available to managers to control these costs, and specify which method
of inventory management is best.
5. Explain why operations management is potentially relevant to every employee in every organization in
the 21st century.
ANS:

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