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11:
SUPPLY CHAIN MANAGEMENT
Teaching Notes
Supply chain management (SCM) is a popular topic and students have heard about it elsewhere.
However, there is general misunderstanding as to what it is. Perhaps one of the OM in Actions, e.g.,
Grower Direct, Kodak’s Service Parts, Quick Response of Sears Canada, Nygard, OfficeMax Grand &
Toy, or Cargill Value-added Meats- Canada can be used to illustrate SCM.
Purchasing has become more important as more outsourcing is taking place. Topics include choosing a
supplier and supplier partnership.
Logistics is a major part of supply chains. Modes of transportation include air, truck, rail, ship, and
pipeline, each having a different cost and delivery speed (both decreasing in the order given). Choosing a
mode of transportation in order to minimize total transportation and in-transit/safety inventory holding
cost shows the tradeoff between transportation and inventory costs.
Answers to Discussion and Review Questions
1. A supply chain is a sequence of organizations, their facilities and activities, that are involved in
producing and delivering a product. The chain begins with suppliers of raw materials and extends
all the way to the final customer.
2. Supply chain management is collaboration supply-chain companies and coordination of their
activities so that market demand is met as efficiently and effectively as possible.
3. The factors that have made it desirable to manage supply chains include increasing:
a. competition
b. level of outsourcing
c. globalization
d. E-commerce
e. need to manage orders and inventories across the supply chain
Benefits of effective management of a supply chain include lower logistics and inventory costs
(and avoidance of bull whip effect), higher fill rate and faster deliveries.
4. Bullwhip effect is the increase in order variability upstream in a supply chain (towards the
supplier of raw materials). It causes excess inventory and production costs, and reduced order fill
rate.
The reasons for bullwhip effect include
• slow and/or erratic reaction to demand/order changes upstream, due to lack of end-
customer demand visibility
• long lead times
• inexperience and lack of understanding of impact of one’s decisions on supplier
• manufacturer price discounts
• hoarding by retailers in tight supply markets
Solutions to bullwhip effect address the above causes, and include:

• sharing end-customer demand information upstream, and ordering regularly and
evenly
• reducing lead times
• collaboration in ordering and forecasting (CPFR)
• using every-day-low-pricing instead of price discounts
• basing allocations (in tight supply markets) on end-customer demand
5. If inventory holding cost (cost of storage and money tied up in inventory) is significant (e.g., if
inventory consists of expensive items), then reducing this cost is a good reason for redesigning
the supply chain. E.g., the repairable parts held by field engineers of Kodak and Majors
appliances sold by Sears Canada,
6. Supply chain design means determining the number, location, capacity, and product/process types of
the facilities in the supply chain.
7. The advantage of pushing inventory downstream closer to end-customer is that it can reach the
customer faster. The disadvantage is that the nature of inventory becomes more specific (thus it loses
its flexibility of use) and inventory holding cost goes up as the item’s cost/value increases.
8. Risk pooling is holding safety stocks in one central location rather than in multiple closer-to-
market locations.
Delayed differentiation/postponement is waiting until late in the process to add differentiating
features to standard components and products.
9. Quick response (QR) is a just in-time replenishment system used in retailing where orders are
based on actual sales, not periodic orders by retailers.
Efficient consumer response (ECR) is an expanded version of quick response, used in the grocery
industry, which includes further collaboration on forecasting, planning of store assortments,
promotions, and product introductions.
Vendor-managed inventory is an agreement in which the supplier has access to the customer’s
inventory and is responsible for maintaining the inventory level required by the customer.
10. Cross-docking is loading goods arriving at a warehouse from a supplier directly onto outbound
trucks, thereby avoiding warehouse storage.
11. Global SCM is more challenging bec.
• Distance and lead time
• Different languages and cultures, currencies
• Additional modes of transportation (resulting in additional shipment changing hands)
• Intermediaries such as freight forwarders and customs brokers
• Risk of damage, disruption, and terrorism
12. Data and information are used in supply chains for transaction processing (execution), including
visibility (tracking of shipments), making planning/design decisions, and collaboration. Supply
chain planning software can be classified into Strategic (e.g., network design optimization),

tactical (e.g., production planning such as Sales & Operation Planning and distribution planning),
and operational (e.g., forecasting/demand management, production scheduling, transport
planning). Supply chain execution software include order-taking, purchasing/replenishment/order
fulfillment, Warehouse Management System, and Transport Management System (selecting
carriers, vehicle routing, dispatch, visibility/tracking, etc.). A more general type of software are
enterprise resource planning (ERP) or enterprise software.
13. Radio frequency identification (RFID) is a technology that uses radio waves to identify objects
such as goods in a supply chain. Advantages of RFID include the elimination of the need for
manual counting and bar-code scanning of goods at receiving docks, in warehouses, and on retail
shelves. This eliminates errors and greatly speeds up the process. The disadvantages of RFID
include the costs of setting up an RFID system: the tags, programming and fixing individual tags
to the objects, readers, and hardware and software to transmit and analyze the data generated.
Other than the costs, the downside of RFIDs is that the radio waves are affected by the nature of
some objects (e.g., liquid and metal objects interfere with the proper working of the RF waves).
14. EDI is Electronic Data Interchange—direct transmission of information and transactions (e.g.,
purchase order, POS or inventory data, advance shipping notice, invoice) between the computers
of two companies. Its advantages include:
• Reduction in clerical labour (no need for receiving, storing, and manipulating data manually)
• Reduction of paperwork
• Increased accuracy (avoids re-entry of data, thus reducing errors)
• Increased Speed
Its disadvantage is its cost.
15. Effective supply chain management requires forming close relationships, effective
communication and coordination of activities; supply chain visibility and information
sharing; event management capability; and performance metrics.
16. Common supply chain metrics include inventory turnover and item fill rate. Inventory turnover is
the rate at which inventory (material) goes through the supply chain. Item Fill rate is the
percentage of demand filled from stock on hand.
17. CPFR, collaborative planning, forecasting, and replenishment, is the process for communicating
and agreeing on forecasts and orders between the manufacturer and the customer (distributor).
An application given in the textbook is Whirlpool’s CPFR. Its advantages include reduction in
replenishment uncertainty, resulting in more even orders/shipments and reduction of safety
stocks. Its disadvantage includes the time of employees in both companies and cost of installing
EDI and other software.
18. Purchasing function is important because most of the cost of many finished goods are due to
purchased parts and materials, and all goods sold by retailers and wholesalers have to be
purchased first. Any dollar saved in cost of purchased items goes directly into profit. Purchasing
also is responsible for quality and timing of deliveries of products, both of which can have a
significant impact on operations and customer satisfaction. Also, Purchasing plays the central role
in forming partnerships.
19. A buyer (in an organization) assists in purchasing parts and raw materials, supplies, equipment,
and services. This includes receiving the requisition, identifying sources of supply and selecting a

supplier, creating and negotiating contracts, monitoring orders and managing supplier relations,
receiving the items ordered, and paying the supplier.
20.
• Design engineering sends purchase requisition to Purchasing, giving the specification of
material/part/component required. Purchasing communicates market information about new
material/part/components to design engineering. Other users of purchasing services are
operations and maintenance.
• Receiving receives the item, directs it to the user, and notifies Accounting/Purchasing.
• Purchasing works with Accounts Payable to pay the invoice of supplier.
21. A company should outsource a part or a service when:
• it cannot produce the part or render the service at the same cost, quality, and delivery
speed as a supplier because
o of lack of knowledge/skills/machines/capacity/investment funds (E.g., Hi-bek
Springs of Ch. 6 outsourcing zinc electroplating)
o manufacturing process or the service is patented/copyrighted (e.g., Apple’s
patents: http://www.patentlyapple.com/patently-apple/2013/10/apples-
magnificent-new-round-of-manufacturing-process-patents.html)
• it will not produce the part or render the service because
o it is not its core competency (e.g., many companies use FedEx or UPS for their
logistics needs)
o demand is short term (e.g., many retailers employ temps for Christmas)
Disadvantages of outsourcing include reduction in control and expertise.
22. Published price list (for standard items bought infrequently, e.g., small electrical parts),
competitive bidding (for standard parts/products bought in large quantities, e.g., buying steel
frame bars by truck manufacturers), and negotiation (special custom purchases e.g., a special
equipment or part).
23. Value analysis involves analysis of the function(s) performed by a product in an attempt to reduce
its cost. Value analysis is used to provide the basic function of a part/product at minimum cost.
24. Centralized Purchasing: A single purchasing department handles all purchasing in an org.
Advantages of centralized purchasing include:
a. The ability to obtain quantity discounts due to large volume generated.
b. More attention/better service from suppliers due to high volume.
c. The ability to maintain a specialized staff with developed expertise in purchasing.
Decentralized Purchasing: Individual departments or separate locations are responsible for their
own purchasing requirements.
Advantages of decentralized purchasing include:
a. The ability to respond to “local” or “department specific” needs quickly.
b. Possible savings on transportation cost from local suppliers.

25. Spend analysis involves collecting, cleansing, classifying, and analyzing expenditure data with
the purpose of reducing procurement costs, improving efficiency, and monitoring compliance
with purchasing policies. Spend analysis is important because it determines total purchases from
a supplier, thus getting volume discounts.
26. E-commerce is the use of computers and Internet to conduct buying and selling. E-commerce has
promoted the use of supply chains for rapid order fulfillment to individual customers. Package
delivery companies such as FedEx and UPS have flourished.
27. Advantages of e-commerce to a buyer include convenient 24 hour ordering without having to
physically be in the location of the seller, fast transmission of order, and being able to see all the
relevant information (including for after-sale service). Advantages to a seller includes 24 hour
store front at low staffing cost, and not having to pay for a physical building. For other
advantages, see Table 11-1.
28. Order fulfillment involves order processing, scheduling, inventory management, warehousing,
packaging, billing, and delivery.
29. Supplier Analysis is studying various key characteristics of a potential supplier. The common
criteria (factors) used include price, quality, delivery, and service (also see Table 11-6).
30. Good supplier relations are important because the buyer may get:
• flexibility and cooperation regarding changes in the order
• assistance in value analysis (VA)
• supplier participation in Early Supplier Involvement (ESI)
31. Advantages of partnership to the buyer include:
• better service, VA, ESI, JIT deliveries, lower total cost of ownership
• assured supplies
Disadvantages of partnership to the buyer include:
• supplier may slip in terms of performance (if not monitored), e.g., increase the price
• other potentially good suppliers won’t have a chance to prove themselves
Advantages of partnership to the supplier include:
• assured sales—no need to compete for buyer’s business every year
• assured payments
• may get operational/financial assistance
Disadvantages of partnership to the supplier include:
• May become dependent on the buyer (and get pushed around to reduce costs, etc.)
32. Lambert’s partnership model provides a process for deciding if partnership between a buyer and a
supplier is desirable and, if so, to what extent. Each company’s managers first determine the key
reasons (drivers) they should get into partnership, and provide a metric and target for each reason,
and then share these with the other company’s managers. Next, if both sides agree that
partnership will likely meet their expectations, they proceed to identify the facilitators. These
include compatibility of cultures and management philosophy, and other factors that influence the
ease of coordination of activities required for partnership. Then, if coordination appears to be

reasonably easy, based on the level of expectation of benefits of partnership, the intended degree
(extent) of partnership can be determined. Finally, based on the degree of intended partnership,
both sides have to identify the extent of cooperation in planning, control, communication, and
risk/reward sharing, and implement activities to achieve these.
33. Logistics is the movement and warehousing of materials/products and information within and
outside a facility.
34. Transport planning involves:
• Deciding whether to outsource transportation management to a 3PL
• Selecting a mode of transportation
• Selecting a carrier
• Negotiating transport rate
35. A Third Party Logistics (3PL) provider is a logistics services management company. A 3PL can own
its own transport equipment (trucks, planes, ships) or it can just be a logistics management company. So, a
3PL can employ a transport company (the second party). Many transport companies also provide 3PL
services, even package delivery companies such as UPS (called UPS Supply Chain Services).
36. Transportation modes are the equipment used for delivery, include pipeline, ships, trains, trucks,
and airplanes.
37. Delivery time vs. delivery cost
38. Transport execution and control involves load planning & consolidation, load tendering,
appointment scheduling, checking carrier’s legal compliance (safety, etc.), having in-transit
visibility and tracking, freight payment, and measuring performance of carrier.
39. Reverse logistics is backward flow of goods returned by consumers or retailers.
Answers to Taking Stock Questions
1. Information shared with a supplier is mainly (a) POS/inventory levels/future orders and (b) future
plans/product design. Supplier can use (a) to better plan production, and (b) to make a better
component. In either case, there is a danger that sensitive information is divulged to a competitor
(another customer of the supplier). This risk should be balanced against the above benefits.
Information shared with a customer is mainly (a) capacities and inventory levels (b)
manufacturing costs (during design or value analysis). Customer can use (a) to better plan
purchases, and (b) to reduce the cost of the component. In case (b), the customer can use cost
information to ask for price reduction. Also, in either case, there is a danger that sensitive
information is divulged to a competitor of supplier (another supplier of the customer). These
risks should be balanced against the above benefits.
2. For strategic decisions, top management/executives should be involved. For tactical/operational
decisions, the managers/staff of logistics (transportation, inventory control), purchasing,
production, information systems, and marketing/sales may have to be involved.
3. Different ways that IS & technology has improved the ability to manage supply chains:
a. Communication software and systems (EDI, Internet, satellite communication, parcel
tracking), e.g., QLogitek, have enabled electronic communication.

b. CPFR software such as JDA Collaborate have enabled collaboration.
c. E-exchanges (see e.g., Table 11-2) have enabled electronic commerce.
d. Optimization software for network design and distribution, e.g., IBM® ILOG® LogicNet
Plus® XE produce minimum-cost networks.
e. Purchasing software such as Ariba and OfficeMax Grand & Toy’s OrderPoint have enabled
electronic purchasing.
f. Identification tools such as bar codes and RFID have made transaction processing faster and
more accurate.
g. WMS and TMS software have made managing a warehouse and transportation function
easier.
4. Accepting a kick back (bribe) for choosing a supplier/product is the most common ethical issue
(it is also illegal in North America). Salespersons are eager to make the sale and may resort to
providing incentives (“grease money”) to the buyer. If it is just a lunch, it is OK, but gifts of
more than $50 value should not be accepted. A buyer should act first (and only) in the interest of
his/her organization.
Answers to Critical Thinking Exercises
1. a. Recently credit cards have RFID embedded in them. Just tapping on a small box allows the
information in the credit card to be read.
b. New parking tags are RFIDs. The receiver reads the tag as a car approached the barrier. Similar
tags are used for automatic toll collection in the U.S. highways.
c. Some city bus passes have RFID embedded in them.
2. Answers vary.
Part (a) can be very challenging. For example, consider the purchase of the book: “Essentials of
Inventory Management”. This was purchased from Amazon.ca. It arrived by Canada Post. It is
published by American Management Association. The printer seems to be located in LaVergne,
Tennessee, but it is hard to identify it, let alone find out where the paper it is printed on came
from.
Part (b) is simpler. Common purchasing criteria are price, quality, delivery, and service. The
book was chosen because it had good ratings on Amazon.com, and scans of some of its pages
were available online. Amazon.ca was chosen because it had the lowest price (and free shipping).
Answers to Internet Exercises
1. Answers vary.
2. PepsiCo makes the concentrates and sells them to Pepsi franchise bottlers such as Pepsi America.
They add water and gas and bottle/can it and sell three types of retailers: Large format grocery
chains such as Kroger (48% of volume) and mass merchandisers such as Walmart (8% of
volume), small format retailers such as convenience stores, gas stations, and vending machines
(8% of volume each), and on-premise syrup channel such as restaurants (e.g., KFC) and schools
(21% of volume).
3. LogicNet can determine the minimum-cost supply chain network, i.e., the number and location of
facilities (plant and/or DCs) to satisfy customer demand in various locations, as well as which

plant ships to which DC and which DC ships to which customer. It also has graphical (GIS)
display of plants/DCs/customer locations and the transportation lanes. It shows the optimal
solution for a given number of DCs and allows cost-comparison of close-by numbers of DCs
(sensitivity analysis). It can display the breakdown of DC costs, customer distance (from the DC
supplying it), and total landed cost. It also allows multi-objective optimization, e.g., no. of DCs
vs. customer distance.
4. The following photos and captions describe how RFID is being used by Montreal Transit
Authority (MTA):

5. Answers vary.
6. Answers vary.
7. Summary of video “Keeping the Global Supply Chain Moving”:
Global supply chain is a massive machine that gets things where they're going across the entire
planet. It's a sensitive machine, affected by dozens of factors, including weather, congestion, fuel
prices, labor costs, and network conditions. Not in months or years, but in days, or hours. Let’s
consider a small shoe store in St. Louis that gets its shoes worldwide. The store doesn’t have
much storage space, so it needs the shoes on time or will lose sales. For the athletic shoes store
sells, rubber, leather, cotton, plastic, and other materials are shipped from all over the world to a
factory in China (see left image below). Finished shoes travel by truck to Shanghai then cross the
Pacific in shipping containers. The shipping containers are unloaded and a crate of athletic shoes
starts a journey by truck to St. Louis where they're delivered to a distributor's warehouse. When
the store owner orders more shoes, the distributor sends a dozen boxes across town on a delivery
truck. The store also sells high-end orthopedic shoes, designed in Denmark and assembled in
Latvia, along with boots made by hand in Montana. Their paths are quite different - but each
encounters multiple transportation systems (see right image below).
Today we have just-in-time delivery. If the delivery system breaks down, consequences are quick
and severe. For example within 6 to 12 hours assembly lines will come to a stop; within 24 hours
many hospitals will run out of essential supplies; within 48 hours many gas stations will run out
of fuel; within 72 hours grocery stores will run out of perishables.

8. Summary of the Lambert video:
Supply Chain Management is the integration of key business processes from end user through
original suppliers that provides products, services, and information that add value for customers
and other stakeholders.
Key business processes are:
The Customer Relationship Management and Supplier Relationship Management are most
important because they coordinate the efforts of the other processes.
9.
NYK is basically a shipping company and has several (480) bulk-good, (110) car-transport, and
(140) container ships. Bulk dry goods transported include iron ore, coal, grain, and lumber. NYK
also transports large steel products. It also has several off-shore tankers and drill ships, as well as
LNG tanker ships. NYK also runs several (32) port terminals around the world. NYK also owns a
cruise-ship company in Japan and Crystal Cruises in North America. Its logistics division is called
Yusen Logistics which has several trucks, warehouses, freight forwarding service, and also
provides contract logistics. Its air cargo division is called Nippon Cargo Airlines which has
several large (Boeing 747) planes.

10. Answers vary.
11. Summary of Genco’s video “New Trends in Reverse Logistics”:
Manufacturers and retailers are getting more value out of returns by dealing with them sooner in
the supply chain. Most (~70%) of returns are just buyer remorse and consumer abuse of lax return
policy (e.g., large screen TVs after Super Ball), and don’t need to be shipped back to the DC.
Another example is unsold leather coats at the end of season that are remarketed by Genco in
South America (bec. of reverse season).
12.
From To
Greenock (via Ireland & Southampton) Shanghai (via Suez Canal & Singapore)
Shanghai (via Tokyo and LA then by rail) NY
NY Santos, Brazil
Santos Tokyo (via Hong Kong)
Tokyo (via Bangkok & Singapore) Southampton
Solutions to Problems
1. H = $10 per unit per year (2,000 item) = $20,000 per year
Two-day:
Transport cost = $X
Holding cost = $20,000(2/365) = 109.59
$X + $109.59
Five-day:
Transport cost = $X - $135
Holding cost = $20,000(5/365) = 273.97
$X + $138.97
$109.59 < $138.97, therefore use 2-day freight.

2. a. H = 0.30(80 boxes)($200 per box) = $4,800
Overnight: (overnight takes one day)
Transport cost = $300.00
Holding cost = $4,800(1/365) = 13.15
$313.15
Two-day:
Holding cost = $4,800(2/365) = 26.30
$286.30
Six-day:
Holding cost = $4,800(6/365) = 78.90
$258.90
Six-day alternative is cheapest.
b. Let X = cost per box. Then H = 24X, and total costs will be:
Overnight: 300 + (24/365)X
Two-day: 260 + (48/365)X
Six-day: 180 + (144/365)X
Overnight will be cheapest
if 300 + (24/365)X < 260 + (48/365)X → 24X > 40(365) → X > $608.33
and
if 300 + (24/365)X < 180 + (144/365)X → 120X > 120(365) → X > $365.00
Two-day will be cheapest
if 260 + (48/365)X < 300 + (24/365)X → 24X < 40(365) → X < $608.33
and
if 260 + (48/365)X < 180 + (144/365)X → 96X > 80(365) → X > $304.17
Six-day will be cheapest
if 180 + (144/365)X < 300 + (24/365)X → 120X <120365) → X < $365
and
if 180 + (144/365)X < 260 + (48/365)X → 96X < 80(365) → X < $304.17
Therefore, Overnight is cheapest if unit cost > $608.33,
Two-day delivery is cheapest if $304.17 < unit cost < $608.33,
and Six-day delivery is cheapest if unit cost < $304.17.

3. H = 0.35 (300 boxes) ($140 per box) = $14,700
Carrier A
Two-day:
Holding cost = $14,700(2/365) = 80.55
$580.55
Three-day:
Holding cost = $14,700(3/365) = 120.82
$580.82
Nine-day:
Holding cost = $14,700(9/365) = 362.47
$762.47
Two-day alternative is cheapest if Carrier A is used.
Carrier B
Two-day:
Holding cost = $14,700(2/365) = 80.55
$605.55
Four-day:
Holding cost = $14,700(4/365) = 161.10
$611.10
Seven-day:
Holding cost = $14,700(7/365) = 281.92
$691.92
Two-day alternative is cheapest if Carrier B is used.
Because $580.55 < $605.55, choose 2-day service of Carrier A.

4. Mode Annual freight
Truck 120,000($4) = $480,000
Train 120,000($2) = $240,000
Mode Annual in-transit holding cost
Truck 120,000($120)(0.25)(3/365) = $29,589.04
Train 120,000($120)(0.25)(7/365) = $69,041.10
Mode Annual Safety-Stock holding cost
Truck 1,000($120 + $4)(0.25) = $31,000
Train 3,000($120 + $2)(0.25) = $91,500
Mode Annual Total cost
Truck $540,589.04
Train $400,541.10  cheaper
5. Mode Duration (days) Cost ($) per part
Air 6 90 + 15 = 105
Ocean + truck 15 + 6 = 21 30 + 20 = 50
Ocean + train 15 + 14 = 29 30 + 15 + 10 =55
Mode Annual freight & delivery costs
Air 2,900($105) = $304,500
Ocean + truck 2,900($50) = $145,000
Ocean + train 2,900($55) = $159,500
Mode Annual in-transit holding cost
Air 2,900($1,000)(0.12)(6/365) = $5,720.55
Ocean + truck 2,900($1,000)(0.12)(21/365) = $20,021.92
Ocean + train 2,900($1,000)(0.12)(29/365) = $27,649.32
Mode Annual Safety Stock holding cost
Air 60($1,000 + $105)(0.12) = $7,956
Ocean + truck 210($1,000 + $50)(0.12) = $26,460
Ocean + train 290($1,000 + $55)(0.12) = $36,714
Mode Annual Total cost
Air $304,500 + $5,720.55 + $7,956 = $318,176.55
Ocean + truck $191,481.92  cheapest
Ocean + train $223,863.32

6. Annual costs:
Current (Rail)
Purchase (& transport) = 60($612.22) = $36,733.20
Safety stock holding = 6($612.22)(0.2) = 734.66
Avg. cycle holding = (Q/2)(price)(i) = (30/2)($612.22)(0.2) = 1,836.66
39,304.52
Merchant’s quote (Truck)
Purchase (& transport) = 60($567.78) = $34,066.80
Safety stock holding = 2($567.78)(0.2) = 227.11
Avg. cycle holding = (20/2)($567.78)(0.2) = 1,135.56
35,429.47
Direct from manufacturer (Truck)
Purchase = 60(US$386.89)(1.05) = $24,374.07
Transportation = $2,600(60/20) = 7,800.00
In-transit holding = 60(US$386.89)(1.05)(0.20)(7/365) = 93.49
Safety stock holding = 2(US$386.89×1.05 + $2,600/20)(0.2) = 214.49
Avg. cycle holding = (20/2)(US$386.89×1.05 + $2,600/20)(0.2) = 1,072.47
33,554.52  lowest
Direct-from-manufacturer has the lowest total annual cost.
7. Total Annual Cost = Fixed Cost + Variable Cost per Unit × Estimated Annual Quantity
Make: $20,000 + $8 × 15,000 = $140,000  lowest
Vendor A: $0 + $11 × 15,000 = $165,000
Vendor B: $5,000 + $10 × 15,000 = $155,000
Thus, Make has the lowest total annual cost.
Make using A: $40,000 + $50 × 10,000 = $540,000
Make using B: $36,000 + $52 × 10,000 = $556,000
Buy: $0 + ($51 + $2) 10,000 = $530,000  lowest
Thus, buying would have the lowest total annual cost.

Revised costs for Process B:
Fixed cost = .90 × $36,000 = $32,400. Add $8,000 to obtain $40,400.
Variable cost per unit = .90 × $52 = $46.80
Total Annual Costs = $40,400 + $46.80 × 10,000 = $508,400
Yes, this amount is less than buying (see #8’s solution), therefore make using process B.
10.
11. Many alternatives are possible, such as
a. See if Chiquita has terminals closer to Canada, e.g., Seattle or Vancouver
b. Assuming that the answer to a is negative, can the containers be put on a ship to Vancouver and
then on trains to various DCs?
c. Have the containers put on a train from Huemene etc. to Calgary and distribute them by truck
from Calgary

Answer to Crusty Cargo Mini-case:
Advantages of Louisville holding tanks
• Faster / reliable deliveries to customers
• Use of full truck-load to Louisville
Disadvantages of Louisville holding tanks
• Capital investment
• Cost of operating the holding tanks
Answers to Summerwood Mini-case:
FedEx (transportability) classification: http://shipfreight.van.fedex.com/ClassificationTool.aspx

Rate: https://www.fedex.com/ratefinder/standalone?method=goToFreight&from=Package

FXF rate is $825. Note that Summerwood can establish a contract with FXF and reduce these rates even
more.
Because $825 includes unloading, and current cost to customer is $750 freight + $200 unloading = $950,
FXF rate is lower. Also, using FXF saves the time of staff arranging for unloading labour and customer
acrimony if they neglected to ask for unloading ahead of the time.

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