978-0134519258 Chapter 3 Solution Manual

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PART II

ANSWERS TO END-OF-CHAPTER QUESTIONS

CHAPTER 3: STRATEGIC AND FINANCIAL LOGISTICS

3-1. Discuss the differences between corporate level, business unit level, and functional level strategies.

Corporate-level strategy is focused on determining the goals for the company, the types of businesses

in which the company should compete, and the way the company will be managed. Strategy at a

business unit level is primarily focused on the products and services provided to customers and on

3-2. Discuss the cost leadership, differentiation advantage, and focus strategies.

A cost leadership strategy requires an organization to pursue activities that will enable it to become a

low-cost producer in an industry for a given level of quality. A differentiation strategy entails an

3-3. What are the two key components of an income statement?

Revenues and expenses are the two key components of an income statement. Revenues (sales) provide

a dollar value of all the products and services an organization provides to its customers during a given

3-4. What are the three key components of a balance sheet?

Assets, liabilities, and owners’ equity are the three key components of the balance sheet. Assets are

what a company owns and come in two temporal forms: current assets and long-term assets. Liabilities

3-5. What are the three key components of the statement of cash flows?

The statement of cash flows contains information from the income statement and balance sheet, but is

formatted to highlight the sources and uses of cash in an organization’s operations, and in investing and

3-6. What are the key components of the Strategic Profit Model? How can it be used to examine the

effect of logistics decisions?

Briefly, the Strategic Profit Model can be drilled down to Net Profit Margin x Asset Turnover = Return

on Assets. Return on assets indicates what percentage of every dollar invested in the business is

ultimately returned to the organization as profit. Net profit margin measures the proportion of each

3-7. Discuss how logistics decisions affect net profit margin in an organization.

The most relevant net profit margin considerations for logistics managers are sales, costs of goods sold,

and total expenses. A primary influence of logistics activities on sales would be through the

improvement of customer service. Logistics can impact costs of goods sold through procurement

3-8. Discuss how logistics decisions affect asset turnover in an organization.

Two examples involve inventory and accounts receivable. With respect to inventory, a retailer’s

decision to move to a system of vendor-managed inventory, where a supplier of a product maintains

3-9. Discuss some ways that inventory can be reduced on a firm’s balance sheet.

A decision by a retailer to move to a system of vendor-managed inventory where a supplier of a

product maintains control and ownership over an inventory item can result in a significant reduction of

3-10. How does logistics strategy connect to overall corporate strategy? Is it a one-way or two-way

connection?

While the corporate level strategy ultimately sets the goals for the logistics strategy, the functional

expertise that exists in the organization will necessarily influence the corporate strategy formulation.

The strategic issues at this level are related to business activities that support the achievement of the

Logistics strategy decisions involve issues such as the number and location of warehouses, the

selection of appropriate transportation modes, the deployment of inventory, and investments in

technology that support logistics activities. In addition to being influenced by the goals of the corporate

3-11 What are the three primary areas where the Sarbanes-Oxley Act (SOX) has implications for

logistics managers?

Three primary areas where SOX has implications for logistics managers are internal controls, off

balance sheet obligations, and timely reporting of material events. In terms of internal control, timely

3-12. Most managers believe that although it is possible to connect logistics decisions to costs, the

connection to revenue enhancement is difficult to impossible. Provide an example of how logistics

could improve sales.

A decision to provide overnight delivery of service to e-commerce customers might have a positive

influence on customer retention and sales.

3-13. What are some common logistics measures in transportation, warehousing, and inventory

management?

Transportation:

The major transportation measures focus on such things as labor, cost, equipment, energy, and transit

time. Measurements in this area include items such as return on investment (investments in

Warehousing:

The primary warehousing measures include such things as labor, cost, time, utilization, and

3-14. Do you think corporate cultures are relevant for designing a logistics measurement system? Why

or why not?

A recurring theme in the logistics research is that an organization’s logistics capabilities need to be

directly connected to objective firm performance measures. In addition, this research stream asserts that

logistics managers must continue to find ways to effectively communicate how these logistics

capabilities provide value and ultimately support corporate strategy and success in financial terms. The

3-15. How do you measure gross margin return on inventory (GMROI)?

Gross margin return on inventory is a common metric that is used by retailers and distributors to

3-16. Describe how logistics decisions might affect an organization’s cost of goods sold.

Cost of goods sold includes all the costs of materials and labor directly involved in producing a product

or delivering a service. A significant part of this expense category is the cost of materials that are used

3-17. Discuss the common types of information included in traditional logistics measurement systems.

Logistics measurement systems have been traditionally designed to include information on five types

of performance: asset management, cost, customer service, productivity, and logistics quality. Several

measures are designed and implemented in each of these categories to manage logistics activities such

grow.

3-18. What are the major parts of a balanced scorecard? Why are these parts needed?

The Balanced Scorecard (BSC) is made up of performance measures that address particular goals or

capabilities in the areas of customers, internal business processes, learning and growth, and financial.

3-19. What are the steps for developing an effective logistics scorecard?

To develop an effective logistics scorecard, management first defines the organization’s vision and

goals. Next, logistics strategies are designed to ensure achievement of this vision and goals. These

3-20. Identify some of the key considerations for a logistics manager who is designing and

implementing a logistics measurement system in his or her organization.

Some of the key things to consider when applying performance measures to logistics activities include:

1. Determination of the key measures should be tailored to the individual organization and

level of decision making.

PART III

CASE SOLUTIONS

CASE 3-1 BRANT FREEZER COMPANY

Question 1: When comparing performance during the first five months of 2017 with performance in

2016, which warehouse shows the most improvement?

St. Louis is the only one showing any improvement, using cost per unit shipped as the performance

Question 2: When comparing performance during the first five months of 2017 with performance in

2016, which warehouse shows the poorest change in performance?

The worst change is the company’s own warehouse (located in Fargo), where costs per unit shipped

Question 3: When comparisons are made among all eight warehouses, which one do you think does

the best job for the Brant Company? What criteria did you use? Why?

Using the cost per unit handled criterion, St. Louis does the best job, closely followed by Chicago.

Question 4: J. Q. is aggressive and is going to recommend that his father cancel the contract with one

of the warehouses and give that business to a competing warehouse in the same city. J. Q. feels that

when word of this gets around, the other warehouses they use will “shape up.” Which of the seven

should J. Q. recommend be dropped? Why?

Denver has the lowest volume and highest unit costs among all the public warehouses used. In addition,

it had been closed by a strike which must have inconvenienced the Brant Company. It may be that the

Question 5: The year 2017 is nearly half over. J. Q. is told to determine how much the firm is likely to

spend for warehousing at each of the eight warehouses for the last six months of 2017. Do his work for

him.

There is not enough information to do a very precise forecast. J. Q. assumes that the proportion of costs

occurring during the first five months of 2016 should be the same proportion in 2017.

(1) (2) (3) (4)

Warehouse

Location

% 2016 Costs

Occurring in First

Five Months

Actual Costs for

First Five Months

of 2017 ($)

Projected Total

Costs in 2017

($)

Projected Costs in

Last Six Months of

2017 ($)

Atlanta 22.88 40,228 175,822 116,204

Boston 44.00 29,416 66,885 32,085

Chicago 53.43 141,222 264,312 105,556

Denver 35.00 14,900 42,571 23,714

The projected costs in 2017 (column 3) are calculated by dividing the actual costs for the first five

months of 2017 (column 2) by the percent of 2016 costs that occurred in the first five months (column

The projected costs in the last six months of 2017 (column 4) are calculated by subtracting the actual

costs for the first five months of 2017 (column 2) from 2017’s projected total costs (column 3). This

Question 6: When comparing the 2016 figures with the 2017 figures shown in the table, the amount

budgeted for each warehouse in 2017 was greater than actual 2016 costs. How much of the increase is

caused by increased volume of business (units shipped) and how much by inflation?

There are several ways to approach this question. One involves calculating the volume difference and

inflation difference for each warehouse, as follows:

Volume difference = 2016 unit costs x (2017 units shipped – 2016 units shipped)

Question 7: Use the 2016 Income Statement and Balance Sheet to complete a Strategic Profit Model

for J. Q.

Question 8: Holding all other information constant, what would be the effect on ROA for 2016 if

warehousing costs declined 10% from 2016 levels?

Given that warehousing costs were $735,982 for 2016, a 10% reduction would be approximately

following SPM: