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PART II
ANSWERS TO END-OF-CHAPTER QUESTIONS

CHAPTER 2: LOGISTICS AND INFORMATION TECHNOLOGY

1. In what ways can information be helpful in logistics and supply-chain management?

There are a number of ways in which information can be helpful in logistics and
supply-chain management. These include, but are not limited to, greater
knowledge and visibility across the supply chain, which makes it possible to
replace inventory with information; greater awareness of customer demand via
point-of-sale data, which can help improve planning and reduce variability in the
supply chain; better coordination of manufacturing, marketing, and distribution
through enterprise resource planning tools; more streamlined order processing and
reduced lead times enabled by coordinated logistics information systems.

2. Name the six general types of information systems, and give one logistics application
for each one that you’ve named.

One type is office automation systems, and a logistics application could be

spreadsheets that calculate optimal order quantities. A second is communication
systems; one logistics example is voice-based order picking. Transaction
processing systems are a third general type, with point-of-sale systems being a
logistics application. Management and executive information systems are a fourth
general type of information systems; a logistics application involves logistics
information systems. A fifth general type of information system is decision
support systems, with warehouse management systems being a logistics-related
application. The sixth, and final, general type of information system is the
enterprise system, represented by logistics modules of enterprise resource
planning systems.

3. Do you view the spreadsheet as the most relevant general software package for
logisticians? Why or why not?

The text indicates that spreadsheets are indeed the most relevant general software
package for logisticians. Today’s spreadsheets allow managers to solve a variety
of business problems relatively quickly and inexpensively. One key logistics
problem that can be analyzed by spreadsheets is transportation cost minimization.

4. How did communication systems facilitate logistics management in the immediate

aftermath of situations such as terrorist attacks and natural disasters?

One example involves the substitution of information for inventory. The total
shutdown of the U.S. aviation system following the terrorist attacks of September
11, 2001 caused many air shipments to be diverted to trucks—thus adding to
delivery times. Air-freight companies such as FedEx used their communication

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systems to inform customers that their shipments were being diverted and when
the shipments would be arriving.

5. What advances in telecommunications technology do you view as being most

beneficial to logistics management? Why?

The answer to this question is likely to vary from student to student. Certainly cell
phones, e-mail, smart phones, and wireless communications would be popular
choices.

6. Discuss how global positioning systems have become quite valuable in transportation
management.

Global positioning systems (GPS) have become quite valuable in transportation

management because of high fuel costs and the relentless pressure to improve
efficiency and productivity. Indeed, transportation companies that have
implemented GPS have reported an increase in worker productivity, reduced
operating costs, and improved customer relations. One study found that GPS
implementation allows transportation companies to recapture nearly one hour per
day of their drivers’ time, which translates into labor savings of approximately
$5,500 per employee.

7. Discuss the benefits and drawbacks of EDI.

Potential benefits to EDI include reductions in: document preparation and

processing time; inventory carrying costs; personnel costs; information float;
shipping errors; returned goods; lead times; order cycle times; and ordering costs.
In addition, EDI may lead to increases in: cash flow; billing accuracy;
productivity; and customer satisfaction. Potential drawbacks include a lack of
awareness of its benefits; high setup costs; lack of standard formats; and
incompatibility of computer hardware and software.

8. Discuss the relationship between automatic identification technologies and point-of-

sale systems.

Automatic identification systems are an essential component in point-of-sale

(POS) systems; the idea behind POS systems is to provide data and enhance
managerial decision making, and automatic identification technologies can be
very helpful in so doing. Operationally, POS systems involve scanning Universal
Product Code (UPC) labels, either by passing the product over an optical scanner
or recording it with a handheld scanner.

9. Why are some companies hesitant to adopt RFID technology?

A major drawback to RFID adoption involves the costs of installing the related
hardware and software, which can range from $100,000 for smaller companies to

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$20 million for larger companies. Another drawback to RFID adoption involves
privacy concerns, such as the inappropriate use of the technology. Yet another
drawback is that data accuracy can be lower items with high moisture content,
such as fruits and vegetables.

10. Discuss the importance of timely and accurate information to a logistics information
system.

Timely information can involve several dimensions. For example, “timely” can
refer to the up-to-date status of information, which can be influenced by a
company’s collection and analyses procedures. Although such information should
ideally involve internal and external sources, internal sources of logistics
information are not always as plentiful as would be desired. “Timely” can also
refer to how quickly a manager receives the requested information; this is
influenced by a company’s retrieval and dissemination procedures. Faster and
more powerful technology has helped to reduce retrieval and dissemination times.

Accurate information may reflect the effectiveness and efficiency of a company’s

logistics information system. This means that a logistics information system needs
to consider the nature and quality of the relevant data. For example, although the
Internet can be a very cheap source of external information, some Internet
information is of questionable validity.

11. What benefits are associated with transportation and warehouse management
systems?

Organizations that have implemented transportation management systems have

reported decreased empty vehicle miles, reduced fuel consumption, and reduced
transportation expenditures. Potential benefits to warehouse management systems
include dramatic reductions in data entry errors as well as dramatic reductions in
the travel distances for order picking. Other benefits to warehouse management
systems include reduced operating expenses, fewer stockouts, increased inventory
accuracy, and improved service to customers.

12. What is data mining? How might it be used in logistics?

Data mining can be defined as the application of mathematical tools to large

bodies of data in order to extract correlations and rules; it uses sophisticated
quantitative techniques to find “hidden” patterns in large volumes of data. Data
mining has allowed Wal-Mart to discover that when hurricanes are projected to
hit the state of Florida, there is a dramatic increase in demand for beer and
Kellogg’s Pop Tarts®. As a result, Wal-Mart makes sure that additional stocks of
these products are available when hurricanes are projected to hit Florida.

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13. Discuss advantages and disadvantages of enterprise resource planning systems.

ERP systems are attractive because they offer the potential for lower costs and
both increased productivity and customer satisfaction. In theory, ERP systems
provide an opportunity for all functional areas within a firm to access and analyze
a common database. This should allow for enterprise-wide coordination of
relevant business processes. One of the most frequently mentioned shortcomings
involves the costs of installation, and companies often fail to consider relevant
costs such as upgraded hardware and employee training. Moreover, ERP
implementation can be quite time consuming; actual implementation times may
be 2 to 4 times longer than vendor estimates. A third shortcoming of ERP systems
is that they initially lacked strong application-specific logistical capabilities such
as transportation or warehouse management systems.

14. Refer back to the logistical activities listed in Chapter 1; pick two that you are
interested in and research how they have been influenced by the Internet. Are you
surprised by your findings? Why or why not?

There is any number of acceptable answers for this question.

15. From a logistical perspective, what are some of the differences between online and in-
store retailing?

For one, the orders associated with online shopping tend to be more plentiful and
in much smaller quantities that those associated with in-store retailing. As such,
online retailing requires an order management system capable of handling high
volumes of orders. Because of smaller order quantities, online shopping is
characterized by open-case, rather than full-case picking; open-case picking is
facilitated by materials handling equipment such as totes and push carts. In
addition, the smaller order quantities occasioned by online retailing tend to favor
transport companies with extensive delivery networks and expertise in parcel
shipments.

16. Why is a “one size fits all” logistics strategy not likely to facilitate effective or
efficient online shopping?

Rather than “one size fits all,” a variety of logistics strategies might need to be
applied to online shopping and it’s important to recognize the potential trade-offs
with these strategies. For example, one way of addressing the last-mile issue of
customer unavailability would be to install some type of receptacle for the product
at the customer’s residence. However, these receptacles might not be feasible for
large items (such as a refrigerator), perishable items (such as certain types of
food), or extremely valuable items (such as jewelry).

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17. Discuss the advantages and disadvantages of on-demand software.

Its pay-per-use formula allows customers to avoid high capital costs, and thus
becomes a viable option for many companies that could not afford to purchase,
install, and maintain application-specific software. Other advantages include
faster and less costly installation, a smaller information technology staff, and
regular upgrades and updates from the software provider. One drawback is that
the regular upgrades and updates can be too frequent and numerous, and
customers struggle to keep up with them. There are also limited opportunities for
customization and because the Internet is the primary transaction medium,
security issues such as data protection can be a concern.

18. Discuss the benefits and drawbacks to electronic procurement.

Four types of benefits, transactional, compliance, management information, and

price, are associated with electronic procurement. As an example, transactional
benefits measure the transactional benefits, such as a reduced invoice-to-payment
time, that come from e-procurement. One concern with electronic procurement
involves the security of information that is being transmitted; there is a risk that
sensitive or proprietary information could end up in the wrong hands. Another
concern is that e-procurement can be impersonal in the sense that human
interaction is replaced by computer transactions.

19. What is an online reverse auction? Why do buyers like them?

In a reverse auction, a buyer (rather than seller) invites bids from multiple sellers,
and the seller with the lowest bid is generally awarded the business. Buyers tend
to like reverse auctions because they aim to generate low procurement prices and
the online nature of reverse auctions allows buyers to drill down to a seller’s low
price very quickly.

20. What are some of the macro-level information technology challenges that managers
face?

The text identifies three macro-level information technology challenges, the first
of which is that information technology is a tool that can help managers to address
organizational problems and not a panacea for them. Security is a second macro-
level concern, and it’s important that websites be as secure as possible from
computer viruses or computer hackers. A third information technology challenge
involves human resource issues, and employee resistance has been identified as a
major cause of information technology implementation failure.

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PART III
EXAMINATION QUESTIONS

CHAPTER 2: LOGISTICS AND INFORMATION TECHNOLOGY

Multiple Choice Questions

1. Which of the following is not a benefit to utilizing information in logistics?

a. greater knowledge and visibility across the supply chain

b. greater awareness of customer demand via point-of-sale data
c. better coordination of manufacturing, merchandising, and distribution through
ERP tools
d. more streamlined order processing and reduced lead time
e. all are benefits

2. How do data and information differ?

a. data are a body of facts in a format suitable for decision making, while
information is simply facts
b. they are the same
c. data are simply facts; information is a body of facts in a format suitable
for decision making
d. data are associated with decision support systems; information is associated
with ERP systems

3. ____ provide effective ways to process organizational business data, to perform

calculations, and to create documents.

a. Enterprise resource planning systems

b. Transaction processing systems
c. Decision support systems
d. Office automation systems

4. Spreadsheets represent what general type of information management system?

a. communication system
b. transaction processing system
c. decision support system
d. office automation system

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5. Which of the following is not considered a general software package?

a. spreadsheets
b. word processing
c. database management
d. presentation packages
e. all are general software packages

6. Electronic data interchange represents what general type of information management

system?

a. communication system
b. transaction processing system
c. decision support system
d. office automation system
(b; p. 28)

7. ____________ refers to the computer-to-computer transmission of business data in a

structured format.

a. Data mining
b. ERP
c. EDI
d. VMI
(c; p. 28)

8. Which of the following statements about EDI is not true?

a. EDI can have high setup costs

b. EDI can result in increased inventory carrying costs
c. EDI can lead to increased billing accuracy
d. The Internet is likely a complement to, rather than substitute for, EDI
(b; p. 29)

9. There are suggestions that widespread adoption of RFID will only occur when the
price of read-only tags drops below ____ cents.

a. 15
b. 10
c. 5
d. 2

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(d; p. 30)

10. A logistics information system begins with:

a. a logistics manager requesting information

b. a good computer system
c. lots of money
d. a customer order
(a; p. 30)

11. All of the following statements about logistics information systems are true, except:

a. “timely” can refer to the up-to-date status of information

b. internal sources of logistics information are relatively plentiful
c. “timely” can refer to how quickly a manager receives requested information
d. a LIS must be concerned with the nature and quality of data
e. all of the above are true
(b; pp. 30-31)

12. The primary advantage of ____________ is that it enables a firm to test the feasibility
of proposed changes at relatively little expense.

a. data mining
b. expert systems
c. simulation
d. benchmarking
(c; p. 31)

13. Which of the following is not a logistics-related decision support system?

a. simulation
b. application-specific software
c. transportation management systems
d. electronic data interchange
e. all are logistics-related decision support systems
(d; pp. 31-32)

14. Warehouse management systems represent an example of what general type of

information management system?

a. Communication system
b. Transaction processing system
c. Decision support system
d. Office automation system

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(c; p. 32)

15. Which of the following is not a potential benefit of transportation management

systems?

a. Fewer stockouts
b. Reduced fuel consumption
c. Decreased empty vehicle miles
d. Reduced transportation expenditures
e. All of the above are benefits
(a; p. 33)

16. ____________ refers to the application of mathematical tools to large bodies of data
in order to extract correlations and rules.

a. Fuzzy logic
b. Factor analysis
c. Data mining
d. Linear regression
(c; p. 35)

17. ____ create and maintain consistent data processing methods and an integrated
database across multiple business functions.

a. Logistics information systems

b. Enterprise systems
c. Decision support systems
d. Transaction processing systems
(b; p. 35)

18. Efficient data mining is dependent upon ____________.

a. Good forecasting tools

b. Top management commitment
c. High-speed technology
d. Data warehouses
(d; p. 35)

19. The origins of contemporary ERP systems can be traced back to logistics and
____________.

a. manufacturing
b. marketing
c. finance
d. accounting
(a; p. 35)

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20. Which of the following statements about ERP is false?

a. ERP’s origins can be traced back to finance and manufacturing

b. ERP implementation costs can easily reach the tens of millions of dollars
c. In recent years, ERP vendors have begun to provide high-quality application-
specific logistics capabilities
d. ERP glitches often have a logistical component to them
(a; pp. 35-36)

21. All of the following are potential costs associated with ERP implementation, except:

a. employee training
b. upgraded computer hardware
c. data conversion
d. system testing
e. all are costs
(e; pp. 35-36)

22. A general rule of thumb is that the actual time to implement ERP systems may range
from ____________ to ____________ times longer than the time period specified by
the ERP vendor.

a. 1 ½ ; 2
b. 2; 3
c. 2; 4
d. 3; 4
(c; p. 36)

23. Approximately ____________ percent of the world’s population currently uses the
Internet.

a. 15
b. 25
c. 35
d. 45
(b; p. 36)

24. Which of the following statements is false?

a. orders associated with online retailing tend to be for smaller quantities than in-
store retailing
b. online retailers are challenged by last mile considerations
c. online retailing and in-store retailing experience similar rates of product
return
d. online retailing is characterized by open-case, rather than full-case, picking

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e. all statements are true
(c; pp. 36-37)

25. What has emerged as the most popular application of on-demand software (software-
as-a-service)?

a. Transportation management systems

b. Warehouse management systems
c. Inventory optimization
d. Collaborative forecasting
(a; p. 38)

26. Which of the following is not a type of benefits that comes from electronic
procurement?

a. Transactional benefits
b. Management information benefits
c. Compliance benefits
d. Production benefits
e. All of the above are benefits
(d; p. 38)

27. In a reverse auction, ____________.

a. Multiple sellers invite bids from one buyer

b. One buyer invites bids from multiple sellers
c. One buyer invites bids from one seller
d. Multiple sellers invite bids from multiple buyers
(b; p. 38)

28. ____________ has been identified as the biggest information technology that
companies face today.

a. Software viruses
b. The cost of technology
c. Information security
d. Employee resistance
(c; p. 39)

True-False Questions

1. The effective and efficient use of information allows organizations to either reduce
costs or improve customer satisfaction. (False)

2. “Data” and “information” are synonymous terms. (False)

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3. Office automation systems provide effective ways to process personal and

organizational business data, to perform calculations, and to create documents.
(True)

4. The most relevant general software package for the logistician is the spreadsheet.
(True)

5. A transaction processing system helps people work together by interacting and

sharing information in many different forms. (False)

6. The Internet has emerged as the measuring stick for logistics information technology
during the first decade of the 21st century. (False)

7. Transportation companies that have implemented global positioning systems have

reported increased worker productivity, reduced operating costs, and improved
customer relations. (True)

8. Global positioning systems often pay for themselves within six months. (False)

9. In batch processing, data are collected and stored for processing at a later time.
(True)

10. EDI is an example of a logistics-related transaction processing system. (True)

11. EDI is no longer an important logistics technology in the 21st century. (False)

12. The idea behind point-of-sale systems is to provide data to guide and enhance
managerial decision making. (True)

13. Radio-frequency identification is the most popular automatic identification system

currently in use. (False)

14. It is suggested that widespread adoption of RFID will only occur when the price for
read-only chips drops to 2 cents. (True)

15. One prominent drawback to radio-frequency identification (RFID) involves privacy

concerns. (True)

16. A logistics information system begins with a logistics manager requesting

information and ends with the manager receiving regular and customized reports.
(True)

17. Internal sources of logistics information are not always as plentiful as might be
desired. (True)

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18. “Timely” information can refer to its nature and quality. (False)

19. The primary advantage of simulation is that it enables a firm to test the feasibility of
proposed changes at relatively little expense. (True)

20. Application-specific software is a type of decision support system. (True)

21. One benefit to transportation management systems is fewer stockouts. (False)

22. Activities that can be controlled by a warehouse management system include

inventory management, determination of storage locations, and order shipping.(True)

23. Correlation analysis uses sophisticated quantitative techniques to find “hidden”

patterns in large volumes of data. (False)

24. Wal-Mart and its vendors make extensive use of data mining to improve supply chain
efficiency and effectiveness. (True)

25. The attractiveness of ERP systems comes from their potential for lower costs as well
as increased productivity and customer satisfaction. (True)

26. The origin of ERP systems can be traced back to finance and manufacturing. (False)

27. There are suggestions that consultant fees for ERP implementations may be three
times as costly as the software itself. (True)

28. A general rule of thumb is that the actual time to implement an ERP system may
range from 1 ½ to 2 times longer than the time period specified by the ERP vendor.
(False; p. 36)

29. In recent years, ERP vendors have begun to provide high-quality application-specific
logistical capabilities. (True; p. 36)

30. About 35 percent of the world’s population currently uses the Internet. (False; p. 36)

31. There are few logistical similarities between online and in-store retailing. (False; p.
36)

32. The smaller order quantities occasioned by online retailing tend to favor transport
companies with extensive delivery networks and expertise in parcel shipments.
(True; p. 37)

33. The return rates associated with e-commerce are quite similar to those associated with
other kinds of retailing. (False; p. 37)

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34. The two logistics functions with highest degree of Internet usage are warehousing and
transportation. (False; p. 69)

35. One reason for the popularity of on-demand software is that is pay-per use formula
allows customers to avoid high capital investment costs. (True; p. 38)

36. Electronic procurement uses the Internet to make it easier, faster, and less expensive
for an organization to purchase goods and services. (True; p. 38)

37. In a reverse auction, one seller invites bids from multiple buyers. (False; p. 38)

38. Information technology should be regarded as a tool to help managers address

organizational problems. (True; p. 39)

39. Software viruses are viewed as the most important information technology issue that
companies face today. (False; p. 39)

40. People-related factors such as employee resistance have been identified as a major
cause of information technology implementation failure. (True; p. 39)

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PART IV
CASE SOLUTIONS

CASE 3-1 JUST-IN-TIME IN KALAMAZOO

Question 1: What is the total annual cost of maintaining the components inventory under
the present system?

Current system

Average
distance from Number of Average freight
vendor (in units used each Current lot cost
Item miles) week size purchased Unit cost per unit
Gas range 1,145 10 200 $100 $20
Toilet 606 10 240 $80 $18
Pump 26 56 125 $16 $3
Refrigerator 22 6 120 $110 $20
(large)
Refrigerator 22 7 15 $95 $15
(small)
Foam cushion 490 675 1,500 $8 $2
CB radio 1,800 9 24 $136 $11
(type D)
Dome lights 3 824 1,720 $2 None
Awning 48 540 1,200 $4 $1
bracket
Insect screen 159 570 1,240 $7 $1

Current system (continued)

Inventory Inventory
Average Total Inventory carrying maintenance
Item Safety stock inventory inventory cost charges cost
Gas range 40 100 140 $62,400 $3,360 $65,760
Toilet 40 120 160 $50,960 $3,136 $54,096
Pump 56 63 119 $55,328 $450 $55,778
Refrigerator 6 60 66 $40,560 $1,716 $42,276
(large)
Refrigerator 7 8 15 $40,040 $319 $40,359
(small)
Foam 1,350 750 2,100 $351,000 $4,200 $355,200
cushion
CB radio 36 12 48 $68,796 $1,411 $70,207
(type D)
Dome lights 824 860 1,684 $85,696 $674 $86,370
Awning 540 600 1,140 $140,400 $1,140 $141,540
bracket
Insect screen 1,140 620 1,760 $237,120 $2,816 $239,936

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Total inventory maintenance cost per year = $1,151,522

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Using JIT

Average freight Inventory

cost per unit maintenance
Item JIT lot size Unit cost (surface) cost
Gas range 10 $105 $22 $66,040
Toilet 10 $100 $18 $61,360
Pump 7 $15 $4 $55,328
Refrigerator 6 $113 $25 $43,056
(large)
Refrigerator 1 $85 $15 $36,400
(small)
Foam cushion 75 $7 $3 $351,000
CB radio (type D) 3 $130 $26 $73,008
Dome lights 36 $4 None $171,392
Awning bracket 60 $5 $1 $168,480
Insect screen 50 $7 $2 $266,760

Total inventory maintenance cost per year = $1,292,824.00

The table in this case is a 10% sample of the firm’s inventory and reflects the
inputs needed for one week’s activities. We must calculate the average stock on
hand for each item (safety stock + ½ order lot size), and must calculate the cost
per item (unit cost plus freight). For the first item—gas ranges—a safety stock of
40 units is maintained, and ½ the order lot size is 100 units, for a total inventory
in stock of 140 units. Unit cost ($100) plus freight ($20) equals $120. Multiplying
average inventory (140) times $120 equals $16,800. Doing all the items on table
gives a total of $96,175. Because this is a 10% sample, the total parts inventory
would be worth $961,750. Inventory carrying costs on this, at 20% per year,
would be $192,350.

Question 2: What would be the total annual cost of maintaining the components
inventory under the JIT system (assuming no safety stocks)?

One would look at the average number used per week, but apply the new, usually
higher unit costs and freight charges. For one week’s activity shown on the table,
the new cost would be $24,862 per week (compared with about $21,818 under the
existing system). Hence the cost of the JIT system is higher.

Question 3: Should Ballenger take into account any other costs or benefits from the JIT
system? If so, what are they?

Under a JIT system, Ballenger should exhibit less concern with various problems
associated with maintaining a large inventory such as shrinkage and obsolescence.

Question 4: If the JIT system is adopted, are there safety stocks of any item that should
be maintained? If so, which ones, and how much?

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Unfortunately, the case does not provide sufficient information to answer this
question. Parts that are crucial to the process would need to be indicated by
management, or perhaps work-flow process charts.

Question 5: If the JIT system is adopted, what changes, if any, should occur in the
relationships between Ballenger’s firm and his suppliers of components? Discuss.

He would need better discipline in terms of prompt delivery and freedom from
defects.

Question 6: Assume that Ballenger has switched to the JIT system and that he receives a
surprise phone call from a competitor who is going out of business. The competitor wants
to sell Ballenger 7,000 dome lights of the type listed on Exhibit 3-C. Should Ballenger
buy them? If so, at what price?

Probably not because this would undermine the discipline envisioned by the JIT
system. On the other hand, if the purchase price was very low, and there were no
unique storage requirements, Ballenger might buy them.

Question 7: Carrying costs are 20%. Is there a level of carrying costs at which both
Ballenger’s present system and a JIT system have similar costs? If so, what is it?

Using a basic spreadsheet package, we found that at the astronomical rate of

167%, the two systems were equal.

DISCUSSION

This is a difficult case although it can be approached in several ways. One must calculate
the average costs of all the goods, as they are used each week, plus a figure for inventory
carrying costs.

©2011 Pearson Education, Inc. publishing as Prentice Hall 18