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Chapter 2 – Value Chains
Multiple Choice
1. In order to increase value, an organization must do all of the following EXCEPT:
a.
increase perceived benefits while holding price or cost constant.
b.
increase perceived benefits while reducing price or cost.
c.
keep the proportion of price or cost to perceived benefits constant.
d.
decrease price or cost while holding perceived benefits constant.
2. _____ is defined as the perception of the benefits associated with a good, service, or bundle
of goods and services in relation to what buyers are willing to pay for them.
a.
Proportionality
b.
Competitiveness
c.
Value
d.
Equity
3. A competitively dominant customer experience is often called a _____.
a.
perceived benefit
b.
preemptive strike
c.
moment of truth
d.
value proposition
4. Which of the following statements in the perspective of a value chain is TRUE?
a. Pre- and postproduction services complete the ownership cycle for a good or service.
b. Offshoring is the process of having suppliers provide goods and services that were previously
provided internally.
c. Value chain integration includes improving external processes for the client, and not the
internal processes.
d. A value chain is a narrower concept than a supply chain that focuses more on the physical
movement of goods, not services.
5. In the value chain model for a hospital, patients, drugs, and staff would be considered as
_____.
a.
suppliers
b.
inputs
c.
transformation processes
d.
outputs
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6. For a restaurant, order taking, bill payment, and home delivery would be considered as
_____.
a.
services
b.
inputs
c.
processes
d.
outputs
7. Which of the following is NOT a value chain process?
a.
Core processes
b.
Support processes
c.
General management processes
d.
Open-ended processes
8. In the value chain model for a hospital, pharmaceutical companies and organ donors would
be considered as _____.
a.
suppliers
b.
inputs
c.
processes
d.
outputs
9. In the context of the perspectives of a value chain, product and service guarantees, contract
negotiations and consulting services would be considered as _____.
a.
preproduction services
b.
production processes
c.
postproduction services
d.
after-sales services
10. In the context of the perspectives of a value chain, training and transportation delivery
services for customers would be considered as _____.
a.
preproduction services
b.
production processes
c.
postproduction services
d.
packaging services
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11. The operational structure of a value chain deals with the _____.
a.
management hierarchies
b.
customer services and returns
c.
configuration of resources
d.
order tracking reports
12. The control of Walmart’s value chain is _____, while the control of General Electric’s is
_____.
a.
postproduction focused; preproduction focused
b.
horizontal; vertical
c.
centralized; decentralized
d.
backward integrated; forward integrated
13. A company has two alternatives for meeting a customer requirement for 9,000 units of a
specialty molding. If done in-house, fixed cost would be $350,000, with variable cost at $30 per
unit. If outsourced, the cost is $80 per unit. Determine the break-even point and determine if
they should make the item in-house or outsource it.
a.
break-even point = 7,000 units; outsource it
b.
break-even point = 7,000 units; make it in-house
c.
break-even point = 11,667 units; outsource it
d.
break-even point = 11,667 units; make it in-house
14. A company has two alternatives for meeting a customer requirement for 6,000 units of a
specialty molding. If done in-house, fixed cost would be $350,000, with variable cost at $30 per
unit. If outsourced, the cost is $80 per unit. Determine the break-even point and determine if
they should make the item in-house or outsource it.
a.
break-even point = 7,000 units; outsource it
b.
break-even point = 7,000 units; make it in-house
c.
break-even point = 11,667 units; outsource it
d.
break-even point = 11,667 units; make it in-house
Problems #15 to #17
A manufacturing company needs to know whether to make in-house or buy a roller gear
assembly for its production of a new fax machine. The company expects to produce 9,000 units
per year. The following estimates have been made:
Make
Buy
Fixed cost per year
$8,000
$0
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Variable cost per part
$5.45
$6.93
15. The annual cost to make the roller gear assembly in-house is _____.
a. less than or equal to $30,000
b. more than $30,000 but less than or equal to $40,000
c. more than $40,000 but less than or equal to $50,000
d. more than $50,000 but less than or equal to $60,000
16. The annual cost to buy the roller gear assembly is _____.
a. more than $30,000 but less than or equal to $40,000
b. more than $40,000 but less than or equal to $50,000
c. more than $50,000 but less than or equal to $60,000
d. more than $60,000
17. The volume they are indifferent regarding the decision to make or buy is _____ units.
a. less than or equal to 2,000
b. more than 2,000 but less than or equal to 4,000
c. more than 4,000 but less than or equal to 6,000
d. more than 6,000 but less than or equal to 8,000
Problems #18 to #20
A U.S. motorcycle manufacturer has the option of either making the gas tank in their newly
designed motorcycle, or subcontracting it to a manufacturer from Sinagpore. The manufacturer
expects to produce 1,000 units per year. Costs for the two options are:
Source
Fixed Cost
Variable Cost
Make in-house
$15,000
$21.50
Buy from Singapore
$0
$29.00
18. The annual cost to make the gas tank in-house is _____.
a. less than or equal to $30,000
b. more than $30,000 but less than or equal to $40,000
c. more than $40,000 but less than or equal to $50,000
d. more than $50,000 but less than or equal to $60,000
19. The annual cost to outsource the manufacturing to Singapore is _____.
a. less than or equal to $30,000
b. more than $30,000 but less than or equal to $40,000
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c. more than $40,000 but less than or equal to $50,000
d. more than $50,000 but less than or equal to $60,000
20. The volume they are indifferent regarding the decision to make or buy is _____ units.
a. less than or equal to 2,000
b. more than 2,000 but less than or equal to 4,000
c. more than 4,000 but less than or equal to 6,000
d. more than 6,000 but less than or equal to 8,000
e. more than 8,000.
21. A large hotel and casino in Las Vegas is currently under construction. There will be an Italian
restaurant in the hotel that will serve pizza. Management is trying to decide whether to make
the pizza themselves or buy it frozen and simply heat it to customer order. One major source of
commercial-grade frozen pizza is Chun-Yee Corporation. If they make the pizza themselves a
substantial amount of preparation equipment will be required, along with skilled personnel.
Financial data is as shown below (variable costs are estimated based on an average pizza
purchase):
Source
Fixed Cost/year
Variable Cost
Make in-house
$7,870
$3.20
Chun-Yee
$2,460
$4.50
At what volume is the company indifferent to either Chun-Yee or make in-house?
a. Less than or equal to 2,000
b. More than 2,000 but less than or equal to 4,000
c. More than 4,000 but less than or equal to 6,000
d. More than 6,000 but less than or equal to 8,000
22. _____ is the process of managing information, physical goods, and services to ensure their
availability at the right place, at the right time, at the right cost, at the right quantity, and with
the highest attention to quality.
a.
Offshoring
b.
Value proposition
c.
Operational structure
d.
Value chain integration
23. _____ refers to acquiring capabilities in the value (supply) chain toward distributions or even
customers.
a. Backward integration
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b. Outsourcing
c. Offshoring
d. Forward integration
24. _____ refers to the process of acquiring and consolidating elements of a value chain to
achieve more control.
a.
Vertical integration
b.
Horizontal integration
c.
Outsourcing
d.
Offshoring
25. The first, second, and third waves of outsourcing experienced by the United States involve
_____ respectively.
a. goods-producing jobs, simple service work, and skilled knowledge work
b. simple service work, goods-producing jobs, and skilled knowledge work
c. simple service work, skilled knowledge work, and goods-producing jobs
d. skilled knowledge work, simple service work, and goods-producing jobs
26. _____ refers to acquiring capabilities toward suppliers.
a.
Advancing integration
b.
Horizontal integration
c.
Forward integration
d.
Backward integration
27. _____ is the process of having suppliers provide goods and services that were previously
provided internally.
a.
Outsourcing
b.
Horizontal integration
c.
Reshoring
d.
Vertical integration
28. The United States has experienced three waves of outsourcing. Which of the following is NOT
one of the waves?
a.
Skilled knowledge work
b.
Mass customization
c.
Simple service work
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d.
Goods-producing jobs
29. Which of the following costs is NOT considered a variable cost?
a.
Labor cost
b.
Transportation cost
c.
Administrative cost
d.
Material cost
30. When break-even analysis is applied to an outsourcing decision, the break-even quantity is
_____.
a. the ratio of fixed costs to the difference between variable outsourcing cost and variable in-
house production cost
b. the ratio of the difference between variable outsourcing cost and variable in-house
production cost to fixed costs
c. the product of the variable costs and the fixed costs
d. the product of the variable costs and the production quantity
31. According to the input-output perspective, a value chain begins with _____.
a.
feedback
b.
processes
c.
inputs
d.
suppliers
32. Outsourcing is _____.
a.
the same as offshoring
b.
the opposite of vertical integration
c.
the opposite of backward integration
d.
the same as diversifying
33. A hospital is evaluating whether to outsource or perform in-house a large set of blood and
urine laboratory tests. The fixed cost of the laboratory located in the hospital is $800,000, and
the weighted average variable cost per test if performed in-house is $28.75. A third-party lab
located one city block from the hospital will perform the same tests and distribute the results
electronically to the hospital at a price of $32.00. If the annual volume last year was 250,000
tests, the hospital should:
a. outsource these lab tests to this third-party lab.
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b. offshore these lab tests to this third-party lab.
c. perform these lab tests in-house at the hospital.
d. reduce fixed costs $200,000 and then outsource.
34. Pre-planning, response, and recovery from natural or anthropogenic disasters is called
_____.
a.
reshoring
b.
offshoring
c.
emergency management
d.
vertical integration
35. Which of the following constitutes a postproduction service in a value chain?
a. Customized and team-oriented product design
b. Recycling and remanufacturing initiatives
c. Product and service guarantees
d. Purchasing and supplier services
36. Which of the following terms is NOT used to describe sustainability?
a. Green operations
b. Green manufacturing
c. Green practices
d. Green integration
True/False Questions
1. A value chain describes the flow of customer information through a production system.
2. A supply chain is more inclusive than a value chain.
3. A value chain views an organization from an integrative perspective of goods and services,
while a supply chain focuses mainly on the physical movement of goods and materials.
4. While cultural differences are important in managing operations in different countries, they
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have little impact in designing the overall value chain.
5. Proportional increases or decreases in perceived benefits as well as price or cost result in no
net change in value.
6. One approach to increasing value is to maintain perceived benefits while increasing price or
cost.
7. The success of the entire value chain depends on how it is designed and managed.
8. The focus on value has forced many traditional goods-producing companies to reduce services
to their customer benefits packages.
9. Global purchasing can be a difficult process to manage when sources of supply, regional
economies, and even governments remain constant over time.
10. The decision to purchase a good or service or a customer benefit package is based on an
assessment by a customer of the perceived benefits in relation to its price.
11. A value chain can be considered a “cradle-to-grave” input-output model of the operations
function.
12. A value chain begins with the goods and services that are provided to customers.
13. Preproduction services might include warranty and claim services.
14. Postproduction services might include customer financing, customer benefit package design,
and promotion/advertising.
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15. The focus of preproduction services is on gaining a customer while that of postproduction
services is on keeping the customer.
16. Support processes are the ones that directly create and deliver goods and services.
17. A vertical integration strategy generally reduces the complexity of managing a value chain.
18. An organization that outsources still retains ownership of an outsourced process or function.
19. Vertical integration is a modern method of outsourcing.
20. Outsourcing is the opposite of vertical integration.
21. Decentralizing value chain activities lessens the control that a firm has over cost, quality, and
other important business metrics, and often leads to higher levels of risk.
22. Forward integration might include acquiring a customer.
23. Backward integration refers to acquiring capabilities toward distribution.
24. In break-even analysis, whenever the anticipated volume is greater than the break-even
quantity, the firm should not outsource.
25. Value chain integration for goods-producing firms requires consolidating information
systems among suppliers, factories, distributors, and customers; managing the supply chain and
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scheduling factories; and studying new ways to use technology.
26. Third-party “system integrators” are often used for vertical integration strategies.
27. Offshoring is the process of moving operations back to a company’s domestic location.
28. Offshoring is the same as outsourcing in terms of transferring ownership and control.
29. The decision to offshore or outsource involves a variety of economic and noneconomic
issues.
30. General Electric would be considered a multinational enterprise because it sources, markets,
and produces its goods in several countries.
31. Global value chains face higher levels of risk and uncertainty, requiring more inventory and
day-to-day monitoring to prevent product shortages.
32. Sustainable practices can lead to increased revenues.
Case Study Questions (To reward students who attend class, listen and learn, and take good
class notes on the case discussion and/or student team presentation.)
1. Which one of the following statements regarding the Bookmaster case study is TRUE?
a.
Advantages of the bricks-and-mortar value chain include more customization, more
product variety, and using more customer labor (self-service).
b.
Operations play no role in the Internet-based value chain.
c.
The nature of the service encounter did not change between the bricks-and-mortar
versus Internet-based value chain.
d.
The case is an example of where physical assets are replaced by information.
2. Which one of the following statements is TRUE regarding the Bookmaster case study?
a.
One advantage of the virtual (web-based) value chain is mass customization using
self-service (i.e., customer labor).
b.
One advantage of the bricks-and-mortar value chain is more customer convenience and scope of
greater product selection.
c.
One advantage of the virtual (web-based) value chain is more management control.
d.
One advantage of the bricks-and-mortar value chain is less of a carbon footprint.
3. Which of the following lessons from the Bookmaster case study is FALSE?
a.
Total customer processing time increases in the traditional bricks-and-mortar book value
chain compared to an e-book value chain.
b.
An advantage of the internet-based e-book value chain is convenience.
c.
The nature of service encounters changed from the traditional bricks-and-mortar book
value chain to an e-book value chain.
d.
The carbon footprint for the total traditional bricks and mortar book value chain is less
than for an e-book value chain.
Problems for Manual Grading, Take-Home Exams and Partial Credit (Also, review the OM
Instructor’s Manual for end–of-chapter questions/problems)
1. Define value and discuss three ways for organizations to increase value.
1.
increase perceived benefits while holding price or cost constant;
2.
increase perceived benefits while reducing price or cost; or
3.
decrease price or cost while holding perceived benefits constant.
2. Explain a value proposition. Relate this to a customer benefits package of goods and services.
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3. Differentiate a supply chain from a value chain.
4. Explain the input-output perspective of a value chain.
5. What are the major decisions organizations must address in designing and configuring their
value chains?
6. Contrast outsourcing with vertical integration. Also, contrast backward integration with
forward integration.
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7. Explain the notion of value chain integration.
8. A company has two alternatives for meeting a customer requirement for 5,000 units of a
specialty molding. If done in-house, fixed cost would be $350,000 and variable cost is $20 per
unit. Alternative two is to outsource for a total cost of $40 per unit. Determine the break-even
quantity and determine if they should make the item in-house or outsource it.
9. Two alternatives are being considered for a customer’s order whose anticipated volume is not
yet known. If the firm produces in-house, the fixed cost is $340,000 and variable cost is $2.90
per unit. If the firm chooses to outsource, it will incur a fixed cost of $275,000 and variable cost
of $3.50 per unit. Determine the break-even quantity and a decision rule of when to outsource.
a.
Make:
TC = $15,000 + $21.50(3000) = $79,500
Buy:
TC = $0 + $29.00(3000) = $87,000
$7,500.
b.
Make:
TC = $15,000 + $21.50(5000) = $122,500
10. A manufacturing company needs to know whether to make in-house or buy an injection
molding machine for its new fax machine production. The company expects to produce 9,000
units per year. The following estimates have been made:
Make
Buy
Fixed cost per year
$9,000
$0
Variable cost per part
$6.45
$7.20
a.
What is the annual cost to make an injection molding machine?
b.
What is the annual cost to buy an injection molding machine?
c.
At what volume are they indifferent regarding the decision to make or buy?
a.
Cost to make: $9,000 + $6.45(9,000) = $67,050
b.
Cost to buy: $7.20(9,000) = $64,800
Buy an injection molding machine since it has lower cost.
c.
$9000 + $6.45X = $7.20X => X = 12,000 units
11. A U.S. motorcycle manufacturer has the option of either making the tires in their newly
designed motorcycle, or subcontracting it out to a manufacturer from Singapore. Costs for the
two options are:
Source
Fixed Cost
Variable Cost
Make in-house
$15,000
$21.50
Buy from Singapore
$0
$29.00
a.
Which option would be preferred at an annual volume of 3,000 tires?
b.
Which option would be preferred at an annual volume of 5,000 tires?
c.
For what range of production volume would it be better to make the tires in-house?
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12. A large hotel and casino in Las Vegas is currently under construction. There will be an Italian
restaurant in the hotel that will serve pizza. Management is trying to decide whether to make
the pizza themselves or buy it frozen and simply heat it to customer order. There are two major
sources of commercial-grade frozen pizza: Ma Ma’s Products and the Chun-Yee Corporation. If
they make the pizza themselves, a substantial amount of preparation equipment will be
required, along with skilled personnel. Frozen pizza needs either a conventional oven (Ma Ma’s)
or a microwave (Chun-Yee). Financial data is as shown below (variable costs are estimated based
on an average pizza purchase):
Source
Fixed Cost/year
Variable Cost
Make in-house
$7,870
$3.20
Ma Ma’s
$ 860
$5.60
Chun-Yee
$2,460
$4.50
a.
At what volume is either Ma Ma’s or Chun-Yee acceptable?
b.
At what volume is the company indifferent to either Chun-Yee or make in-house?
a.
Ma Ma’s—Chun-Yee:
$860 + $5.60X = $2460 + $4.50X => 1.10X = 1600 => X = 1455 pizzas
b.
Chun-Yee—Make in-house:
$2460 + $4.50X = $7870 + $3.20X => 1.30X = 5410 => X = 4162 pizzas
13. John Morton, director of materials management for Computer Products Corporation (CPC) in
San Jose, is reviewing next year’s plans for the supply of a component that is purchased from
Osiega Ltd., a company in Japan. The component is the PS100 power supply assembly that is
used in many of CPC’s products.
CPC pays the supplier more than $7 million per year for these units, and John wonders if money
could be saved by developing another supplier for this component or if CPC should gear up to
manufacture the power supply assemblies in-house within one of CPC’s own production plants.
John’s purchasing-analysis staff has developed the following estimates:
Supply Source
Annual
Variable Cost
for PS100
Description of Cost
Fixed Cost
per Unit
Osiega Ltd.
Annual tooling
$50,000
Inspection and rework
$0.16
Shipping
$0.95
Making in-house is more economical by $22,500.
$29X = $15,000 + $21.50X => 7.50X = 15,000 => X = 2000 tires
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Purchase price
$11.88
Atlanta Spier
Annual tooling
$95,000
Inspection and rework
$1.05
Shipping
$0.15
Purchase price
$10.59
In-house
Annual tooling
$70,000
Inspection and rework
$0.55
Shipping
$0.25
Production costs
$ 5,000
$11.50
The purchasing-analysis group has learned that CPC will need about 550,000 of the PS100 units
next year.
a.
Which supply source provides the least cost for next year?
b.
How many PS100 units would have to be bought next year for each of the sources to be the
least-cost source?
14. Define multinational enterprises. What challenges do they pose to operations managers?
TC = FC + (VC)Q
= $7,194,500
= $6,579,500 (least cost)
= $6,840,000
Atlanta Spier is the least-cost choice for next year.
Determine the break-even points between the sources.
CPC vs. Osiega Ltd:
75,000 + 12.30(Q) = 50,000 + 12.99(Q)
0.69(Q) = 25,000
Q = 36,231.9 units
CPC vs. Atlanta Spier:
75,000 + 12.30(Q) = 95,000 + 11.79(Q)
Q = 39,215.7 units
If the annual volume is between 1 and 36,231.9 units, Osiega Ltd. would be preferred. If
annual volume is between 36,231.9 and 39,215.7 units, CPC (in-house) would be preferred.
If annual volume is more than 39,215.7 units, Atlanta Spier would be preferred. Obviously,
with an estimated annual demand of 550,000 units, Atlanta Spier is the preferred source.
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15. List the variety of economic and noneconomic issues to be considered when making offshore
decisions.
16. Discuss six issues that make global value chains more difficult to manage than small
domestic value chains.