Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 19 Supply Chain Management
1) The primary objective of the purchasing function is to:
A) ensure an adequate turnover of merchandise.
B) acquire enough stock to ensure uninterrupted sales or production.
C) determine the “best” possible price for both supplies and finished products.
D) maximize carrying and set-up costs for the firm.
2) The small company’s purchasing plan is closely linked to which of the other functional areas?
A) Marketing and sales
B) Finance and accounting
C) Production and engineering
D) All of the above
3) Managers have discovered that a quality approach to doing business:
A) is much more expensive than a nonquality focus, but worth it.
B) can lower employee turnover, increase market share, and decrease costs.
C) is easier to achieve than expected when TQM is implemented in an existing business.
D) works in manufacturing but is not applicable to the purchasing process.
4) Total Quality Management (TQM):
A) defines world-class quality as 95% defect-free products and services.
B) has been implemented by about 90% of all American manufacturers and is now moving into
the service industry.
C) relies on an army of quality inspectors to ensure that products and services meet quality
targets.
D) is a lifelong process of continuous improvement that focuses on doing the job right the first
time.
5) As a solution to a company’s quality problems, managers will find that TQM:
A) may be implemented without significant training of employees.
B) takes 3-4 years to bring about a significant change in quality.
C) techniques can be implemented piecemeal, one at a time.
D) creates little turmoil or change in the way a company does most of its business.
6) Research on the implementation of TQM programs shows that it takes ________ to
completely implement a TQM program.
A) three to four years
B) eight to ten years
C) six months to two years
D) one to three years
7) A small business owner needs to do which of the following well in order to successfully
implement a TQM program?
A) Focus on production and manufacturing
B) Set a “finishing line” for the quality effort
C) Move from a management-driven to team-driven company culture
D) Modify the rewards program to reward individual effort and innovation
8) Successful Total Quality Management (TQM) requires:
A) training employees in the use of the tools of statistical quality control.
B) directive management, providing clear quality direction.
C) thorough and complete quality inspections.
D) holding middle management responsible for the results.
9) Quality improvement efforts must ultimately focus on:
A) the product.
B) the customer.
C) the manufacturing process.
D) the purchasing process.
10) TQM:
A) instills the philosophy of 100% inspection of all products.
B) provides a “finish line” for the race for quality.
C) avoids placing blame and focuses on fixing mistakes.
D) makes middle managers responsible for product quality.
11) Critical to TQM is:
A) management competence.
B) understanding the product.
C) continual improvement.
D) knowing your competition.
12) Successful implementation of TQM involves:
A) modification in the operational culture.
B) work process.
C) Both A and B
D) Neither A nor B
13) Deming’s 14 Points include:
A) awarding business to suppliers on the basis of the best price.
B) correcting defects at the end of the production process.
C) establishing production quotas.
D) adopting a total quality philosophy.
14) The implementation of TQM cannot succeed unless:
A) the company is willing to undergo immediate radical transformation of all of its processes.
B) the company has extensive market research on its markets, competitors, and customers.
C) it is fully supported by upper management and has the involvement of the CEO.
D) the lowest level of employees is willing to implement the program from the very beginning.
15) A danger of an excessive investment in inventory for the small business is:
A) excessive inventory taxes by local and state government.
B) minimizing reordering costs.
C) creating too quick a turnover of inventory.
D) tying up an excessive amount of the firm’s capital.
16) Which of the following represents the cost of the units in the basic EOQ model?
A) Q/2 × H
B) D × C
C) D/Q × S
D) (L × U) + S
17) A small manufacturer of candles forecasts demand for upcoming year to be 20,000 which
costs the company $1.00 plus $0.10 for packaging and shipping per candle which the company
pays. The total annual cost of units is:
A) $20,000.00.
B) $20,000.10.
C) $2,000.00.
D) $22,000.00.
18) Holding or carrying costs include the costs of:
A) ordering materials and inventory.
B) receiving and inspecting items and all administrative costs.
C) insurance, taxes, depreciation, etc.
D) processing a purchase order.
19) The formula for calculating the cost of carrying inventory is:
A) Q/2 × H.
B) D × C.
C) D/Q × S.
D) Q/H × S.
20) ________ is (are) one of the elements of the total inventory costs.
A) Demand
B) Set-up costs
C) Standing costs
D) Safety stock
Use the information below to answer the following questions:
Albemarle Sprinkler Company purchases the sprinkler heads for its line of lawn sprinklers from
a supplier. Albemarle’s production manager wonders how many sprinkler heads she should order
for the next six months. The company’s marketing manager forecasts sales to be 29,400 units for
the upcoming six months. The purchasing manager has negotiated a price of $6.47 per head. The
production manager estimates that it costs $17.25 to place an order with the supplier and $2.97 to
store a sprinkler head in inventory for six months.
21) What is Albemarle’s Economic Order Quantity (EOQ) for the upcoming six months?
A) 292 heads
B) 358 heads
C) 396 heads
D) 584 heads
22) Approximately how many orders will Albemarle place over the next six months if it uses the
EOQ point?
A) 28
B) 50
C) 74
D) 82
23) What is Albemarle’s total inventory cost using the EOQ point?
A) $191,954
B) $192,388
C) $192,166
D) $192,087
24) The Economic Order Quantity assumes:
A) a 30-day cycle in filling orders.
B) orders are filled instantaneously.
C) usage will impact delivery time.
D) None of these things
25) When shopping for a vendor, a small business owner should seek:
A) the best transfer of risk possible.
B) the lowest price.
C) the best price at acceptable quality.
D) to change vendors often in order to get the lowest price.
26) A key element to Deming’s 14 Points is:
A) ordering on the basis of price.
B) changing suppliers frequently.
C) conducting frequent quality inspections.
D) developing long-term relationships with vendors.
27) Trade discounts are offered on the basis of the:
A) size of the order.
B) position of the business in the distribution channel.
C) time of payment.
D) type of payment.
28) ________ discounts are normally set up on a graduated scale and are based on a firm’s
position in the channel of distribution and on the functions it performs in that channel.
A) Trade
B) Quantity
C) Cash
D) Cumulative
29) The table below is an example of a ________ discount.
Order Size Price
1–1,000 units List Price
1,001–5,000 units List Price–3%
5,001–10,000 units List Price–6%
10,001 & over List Price–10%
A) trade
B) quantity
C) cash
D) cumulative
30) ________ discounts give customers an incentive to pay for merchandise promptly.
A) Trade
B) Quantity
C) Cash
D) Cumulative
31) Small business people need to remember that:
A) there is an implicit cost of forgoing a cash discount.
B) they should avoid cash discounts.
C) by forgoing cash discounts they have more money for daily expenses.
D) cash discounts have hidden annual interest rates.
32) The reorder point model requires that the small business owner know:
A) the usage rate, the minimum level of stock, the lead time, and the EOQ.
B) who the supplier is, statistical process controls, and TQM.
C) the demand pattern for the product, reliability and proximity of the supplier, and who has title.
D) holding costs for the product, the usage rate, and the three “Cs” of the product.
33) The small business owner needs to know ________ in order to avoid stockouts and calculate
safety stock.
A) the EOQ
B) the lead time
C) the minimum level of stock allowable
D) the usage rate
34) A firm’s reorder point for an item takes into consideration its ________, which is the
difference between the time an order is placed and the time it is actually received.
A) minimum level of stock allowable
B) EOQ
C) usage rate
D) lead time
35) Many small businesses build a(n) ________, or cushion, into their inventories in case
demand runs ahead of the anticipated usage rate.
A) safety stock
B) lead time
C) EOQ
D) stockout point
36) The formula for calculating the reorder point of a product is:
A) Q/2 × H.
B) D × C.
C) D/Q × S.
D) (L × U) + S.
37) The basic reorder point model assumes that:
A) the firm’s inventory usage rate is constant.
B) the lead time varies.
C) safety stock is set at 5%.
D) the demand pattern is constant.
38) A company whose reorder point model includes a 95% desired service level will experience
stockouts ________% of the time.
A) 1
B) 5
C) 50
D) 95
39) The consequences for the small business owner of a vendor certification program include:
A) using one supplier for the majority of their inventory needs.
B) guaranteed quality and price for selected items.
C) that the vendor will not supply components to competitors.
D) less government scrutiny and regulation of their business.
40) The creation of a vender certification program requires:
A) a vendor rating scale developed by the company.
B) a firm price list from the vendor, good for three years.
C) membership in the SBA vendor certification program.
D) understanding the firm’s EOQ.
41) The first step in developing a vendor certification process is to:
A) develop a grading scale for vendors.
B) identify the most important criteria.
C) create a list of vendors to be evaluated.
D) weight the criteria used to evaluate the vendors.
42) The vendor certification process assumes:
A) all vendors are charging the same prices.
B) the use of a cross-functional team to conduct the evaluation.
C) the business owner has detailed knowledge of the vendors.
D) vendors are publicly owned so information can be gathered on each of them.
43) When seeking suppliers, a small business owner should use which of the following sources?
A) Competitors
B) The local telephone directory
C) The industry trade association
D) All of these
44) If a small business owner wanted an international vendor, he/she could use:
A) MacRae’s Blue Book.
B) Thomas.net.
C) Kelly’s Manufacturer and Merchant’s Directory.
D) Sources of State Information and State Industrial Directories.
45) The advantages resulting from concentrating purchases with a single supplier include:
A) protection from fraudulent vendors and excess inventory.
B) a longer lead time.
C) lower usage rates.
D) the ability to negotiate the best price package.
46) ________ is the right to ownership of property and, for a small business owner, determines
who has responsibility for ownership.
A) Identification
B) Risk of loss
C) Concept of title
D) F.O.B.
47) The first rule governing transfer of title and risk of loss states that:
A) title transfers to the buyer as soon as the goods are delivered.
B) the buyer has both title and risk of loss as soon as the goods are paid for, regardless of their
physical location.
C) the supplier and small business may agree to a shift of the risk of loss at any time during the
transaction between them.
D) title transfers to the buyer as soon as the goods are in the hands of the carrier.
48) Newton orders 14 electric staplers for his office supply store from Home Office Suppliers.
The contract specifies shipping terms as “F.O.B. Home Office Suppliers.” Home Office
Suppliers delivers the goods to Zippy Shippers and invoices Newton. The electric staplers never
arrive, and Newton refuses to pay Home Office Suppliers. Home Office Suppliers sues Newton
for the contract price of the staplers. Who wins?
A) Newton, because it wasn’t his fault that the staplers never arrived.
B) Home Office Suppliers, because they were the last ones to touch the goods.
C) Newton, because in an F.O.B. contract, the risk of loss does not shift to the buyer until the
goods are actually delivered to the buyer.
D) Home Office Suppliers, because in an F.O.B. seller contract, risk of loss shifts to the buyer
when the seller delivers the goods to the carrier.
49) Buyer owns a retail shop in Baltimore. Seller is a manufacturer in San Diego. Buyer orders
from seller to be shipped “F.O.B. San Diego.” Risk of loss passes to the buyer when:
A) the seller delivers the goods to the carrier.
B) the goods are identified to the contract.
C) the contract is made.
D) the goods are delivered to the buyer’s retail shop.
50) “F.O.B. seller” means that:
A) title passes to the buyer when the seller delivers the goods to the buyer.
B) risk of loss transfers to the buyer when the seller delivers the goods to the carrier.
C) the seller pays all shipping and transportation costs.
D) the buyer has both title and risk of loss as soon as the goods are paid for, regardless of their
physical location.
51) “F.O.B. buyer” means that:
A) title passes to the buyer when the seller delivers the goods to the shipper.
B) risk of loss passes to the buyer when the seller delivers the goods to the buyer’s place of
business.
C) the buyer pays all shipping and transportation costs.
D) both title and risk of loss pass to the buyer immediately upon payment of the contract
regardless of location of the goods.
52) The responsibility for verifying the identity and condition of merchandise:
A) is the seller’s.
B) is the carrier’s.
C) depends on the nature of the contract between buyer and seller.
D) is the buyer’s.
53) The small business gains what advantage by selling on consignment?
A) Shorter lead time when reordering than with standard contracts
B) Better customer service
C) Not bearing the risk of loss for the consigned goods
D) Receiving absolute title to the goods prior to paying for them
54) The kaizen philosophy holds that:
A) once an improvement is implemented, no other improvements are necessary.
B) small improvements made continuously over time accumulate into a radically reshaped and
improved process.
C) major improvements made continuously over time accumulate into a radically reshaped and
improved process.
D) None of the above
55) TQM is not a ________ or ________ program that can magically push a company to world-
class status overnight.
A) quick-fix; short-term
B) quick-fix; long-term
C) long fix; long-term
D) None of the above
56) What are the two basic tenets of TQM?
A) employee involvement
B) teamwork
C) technology
D) Both A and B
57) One of the most important factors in making long-term, constant improvements in a
company’s processes is ________ the philosophy and the tools of TQM.
A) teaching customers
B) teaching workers
C) teaching vendors
D) teaching manufacturers
58) Pareto’s Law (also called the 80/20 Rule), states that:
A) 20 percent of a company’s quality problems comes from just 80 percent of all causes.
B) 80 percent of accounts receivable comes from 20 percent of customers.
C) 80 percent of a company’s quality problems arise from just 20 percent of all causes.
D) 20 percent of a company’s revenue comes from just 80 percent of all customers.
59) To implement TQM successfully, a small business owner must rely on 10 fundamental
principles. One principle states:
A) share information with everyone in the organization.
B) information needs to be handled by only the top management.
C) information needs to be handled by only the lower level workers who deal with the products
every day.
D) All of the above
60) Determining factors of setting up or ordering costs for products are:
A) the various expenses incurred in actually ordering materials.
B) the various expenses incurred in actually ordering inventory.
C) setting up the production line to manufacture.
D) All of the above
61) Setup or ordering costs are found by multiplying:
A) the number of orders made in a year by the cost of placing a single order.
B) the number of production runs in a year by the cost of setting up a single production run.
C) Both A and B
D) Neither A nor B
62) The EOQ formula simply balances the ordering cost and the carrying cost of the small
business owner’s inventory so that total costs are ________.
A) optimized
B) minimized
C) maximized
D) calculated
63) The small business owner who sells merchandise on a consignment basis realizes the
following advantages except:
A) the owner does not have to invest money in these inventory items, but the merchandise on
hand is available for sale.
B) the owner does not make payment to the consignor until the item is sold.
C) because the consignment relationship is founded on the law of agency, the consignor never
takes title to the merchandise and does not bear the risk of loss for the goods.
D) the supplier normally plans and sets up displays for the merchandise and is responsible for
maintaining it.
64) Improving quality:
A) lowers the associated cost with scrap.
B) reduces rework time.
C) increases worker productivity.
D) All of the above
65) Generally, quality control impacts:
A) revenues.
B) gross profit.
C) reduction in costs.
D) All of the above
66) Which of the following are the categories of quality?
A) Vendor based
B) Distribution based
C) User based
D) None of the above