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Chapter 15 - Supply Chain Management
15-9
Education.
f. Procurement: Purchasing is responsible for obtaining materials, parts, supplies, and services
needed to produce a product or provide a service. Purchasing is very important to a firm
because for a manufacturing firm, 60% of the cost of finished goods sold come from
2. If a business decided to vertically integrate, this would involve becoming well versed in many
different operations. Vertical integration could reduce communication time and lead time.
3. Some of the environmental issues involved with outsourcing operations to a foreign country
include dealing with that country’s environmental regulations, the ethical dilemma if
4. Examples of unethical behavior on p. 670 and which principles (other than the Rights Principle)
that they violate (any three are sufficient):
a. Bribing government or company officials: This action violates the Virtue Principle.
b. Exporting smokestacks: This action violates the Common Good Principle.
c. Claiming a green supply chain when in reality the level of green is minimal: This action
violates the Virtue Principle.
d. Ignoring health, safety, and environmental standards: This action violates the Utilitarian
Principle, the Common Good principle, and the Virtue Principle.
e. Paying substandard wages: This action violates the Fairness Principle.
f. Mislabeling country of origin: This action violates the Virtue Principle.
g. Selling goods abroad that are banned at home: This action violates the Utilitarian Principle,
the Common Good principle, and the Virtue Principle.
Chapter 15 - Supply Chain Management
15-10
Education.
Solutions
1. Given:
Holding cost = $10 per item per year
Options are two-day freight and five-day freight--five-day freight saves $135
Amount shipped = 2,000 items
Step 1:
Determine incremental holding cost:
H = Annual earning potential of shipped items = $10 * 2,000 = $20,000 per year
d = 5 – 2 = 3 days
Incremental holding cost =
2. Given:
Price per unit = $200 and holding cost = 30% of price
Options are overnight (cost = $300), two-day freight (cost = $260), and six-day freight (cost =
$180)
Amount shipped = 80 boxes
Step 1:
Compare overnight (one-day shipping) to six-day shipping:
Incremental holding cost =
Chapter 15 - Supply Chain Management
15-11
Education.
Step 2
Compare two-day shipping to six-day shipping:
d = 6 – 2 = 4 days
Incremental holding cost =
Overall conclusion: Six-day shipping is preferred over both overnight and two-day shipping due
to the savings generated by six-day shipping over both alternatives.
Alternative method of solving this problem:
Holding Cost per Unit per Year = .30 * $200 = $60
Total Cost Calculation for each Alternative:
Overnight:
Six-Day:
Chapter 15 - Supply Chain Management
15-12
3. Given:
Annual holding cost = 35% of unit price ($140)
Amount shipped = 300 boxes
Shipping alternatives:
Shipper
Days
Transportation
Cost
A
2
$500
A
3
$460
A
9
$400
B
2
$525
B
4
$450
B
7
$410
Holding Cost =
Total Cost Calculation for each Alternative:
Shipper A 2 days:
Shipper A 3 days:
$120.82 + $460 = $580.82
Shipper A 9 days:
Chapter 15 - Supply Chain Management
15-13
Shipper B 2 days:
$80.55 + $525 = $605.55
Shipper B 4 days:
Shipper
Days
Transportation
Cost
Holding
Cost
Total
Cost
A
2
$500
$80.55
$580.55
A
3
$460
$120.82
$580.82
A
9
$400
$362.47
$762.47
B
2
$525
$80.55
$605.55
B
4
$450
$161.10
$611.10
B
7
$410
$281.92
$691.92
Conclusion: Use Shipper A and 2-day shipping because this option offers lowest total cost.
Chapter 15 - Supply Chain Management
15-14
Education.
Case: MasterTag
1. The key benefit relates to customer satisfaction by more closely matching supply with demand,
2. Pros:
When MasterTag considers implementing their supply chain management plan, the potential
benefits they hope to gain are most likely to be greater customer satisfaction, advantages over the
Cons:
The most significant downside MasterTag should consider before implementing supply chain
management includes possible trust issues with partners. Successful supply chain management
requires integration of all aspects of the supply chain. This requires trust and a willingness to
cooperate to achieve common goals. Coordination and information sharing are critical to the
Case: B&L Inc.
There is a solid opportunity here for Brian Wilson, assuming that the numbers from Mike Carr and Mayes
are accurate. However, this does not mean that B&L should outsource the bracket, at least not right away.
After checking the numbers with Mike Carr and Mayes, Brian might want to dig into process
improvement opportunities before committing to outsourcing. For example, the case indicates that B&L is
not getting full benefit from the eight station burn table machine. The threat of moving production out to a
supplier might create some interest in the plant to changing the process to reduce costs. Either way, Brian
might want to satisfy manufacturing that he gave them a fair chance to look at the process and its costs
before pulling the business.
This case requires some quantitative analysis if the students are going to develop a meaningful analysis.
First, we will take a look at the cost data for the outrigger bracket. The case indicates that B&L produces
40 trailers per year, which suggests that it needs 800 brackets annually, assuming 20 brackets per trailer.
B&L estimated its bracket costs at $150.10 each, for a total annual cost of $120,080. It is certainly
worthwhile for Brian Wilson and Alison Beals to spend some time on this project.
Exhibit 1 in the case provides the data from the controller, Mike Carr, and the detail from the quote from
Mayes. Note the inconsistencies between the prices from Mayes and B&L’s costs, which raise the issue of
the accuracy of the prices/costs. It suggests that either B&L does not have a good handle on its costs or
Mayes has made some mistakes in their bid. It would be worthwhile to follow-up on this issue with the
controller, Mike Carr, and with Mayes. Students should be prepared to show how they intend to reconcile
the inconsistencies. It would be useful to get more information, such as material and direct labor costs.
Annual Manufacturing Cost:
Annual Demand = 40 trailers. Total usage per part = 40 trailers * 20 units/part = 800.
800 sets of five parts per year *$150.10 = $120,080
Chapter 15 - Supply Chain Management
Total Purchasing-Related Costs:
We will assume that Brian Wilson will order in EOQ amounts and will place a joint order with Mayes for
all five parts. Note: Using the EOQ will most likely over-estimate annual purchasing related costs because
demand is not level throughout the year.
D = 800 sets of the five parts per year
Calculate the EOQ:
Determine total cost when placing orders of Q = 75 sets of the five parts:
Total Cost = Annual Holding Cost + Annual Ordering Cost + Annual Purchase Cost
Annual savings from purchasing Q = 75 sets of five parts = $120,080 – $88,171.50 = $31,908.50.
Alternatively, Brian Wilson, materials manager at B&L, may want to place orders in multiples of 20
given that each trailer requires 20 sets of the five parts.
Determine total cost when placing orders of Q = 80 sets of the five parts:
