HW Answers

Chapter 01 - Operations and Supply Chain Management
1-1
Chapter 01
Operations and Supply Chain Management

Learning Objectives for Chapter 1

1. Understand why it is important to study operations and supply chain management.
2. Define efficient and effective operations.
3. Categorize operations and supply chain processes.
4. Contrast differences between services and goods producing processes.
5. Identify operations and supply chain management career opportunities.
6. Describe how the field has developed over time.

True / False Questions

1. Efficiency means doing the right things to create the most value for the company.
True False

2. Effectiveness means doing the right things to create the most value for the company.
True False

3. A doctor completes a surgical procedure on a patient without error. The patient dies
anyway. In operations management terms, we could refer to this doctor as being efficient but
not effective.
True False

1-2
4. A worker can be efficient without being effective.
True False

5. A process can be effective without being efficient.
True False

6. Operations and supply management is defined as the design, operation, and improvement
of the systems that create and deliver the firm's primary products and services.
True False

7. The term "value" refers to the relationship between quality and the price paid by the
consumer.
True False

1-3
8. Attempting to balance the desire to efficiently use resources while providing a highly
effective service may create conflict between the two goals.
True False

9. Central to the concept of operations strategy are the notions of operations focus and trade-
offs.
True False

10. Fashion retailers, in particular, need to have plenty of inventory on hand because demand
is so unpredictable.
True False

11. Today's leading retailers use operations and supply chain management techniques to
match supply and demand as closely and quickly as possible.
True False

12. "Concept-to-cash" refers to the idea of generating revenue from licensing of patent rights
or other intellectual property.
True False

13. OSM is concerned with management of the trickiest parts of the system that produces a
good or delivers a service.
True False

14. OSM is a functional field of business with clear line management responsibilities.
True False

1-4
15. The supply network as can be thought of as a pipeline through which cash, material and
information flows.
True False

16. Supply networks can not be constructed for every product or service.
True False

17. "Operations" refers to manufacturing and service processes used to transform resources
employed by a firm into products desired by customers.
True False

18. "Supply" refers to supply chain processes that move information and material to and from
the manufacturing and service processes of the firm.
True False

19. "Supply" includes inbound freight and inventory only.
True False

20. It is critical that a sustainable strategy meet the needs of shareholders and employees. It is
also highly desirable that it preserves the environment.
True False

21. Supply and demand planning is needed to coordinate the manufacturing, service, and
supply chain processes.
True False

1-5
22. Supply and demand planning involves forecasting demand, making intermediate term
plans for how demand will be met, controlling different types of inventory, but not the
detailed weekly scheduling of processes.
True False

23. All managers should understand the basic principles that guide the design of
transformation processes.
True False

24. OSM changes constantly because of the dynamic nature of competing in global business
and the constant evolution of information technology.
True False

25. Internet technology has made the sharing of reliable real-time information expensive.
True False

26. Use of systems like point-of-sale, radio-frequency identification tags, bar-code scanners,
and automatic recognition has made it more difficult to understand what all the information is
saying.
True False

27. Operations and supply processes can be conveniently categorized as planning, sourcing,
making, and delivering.
True False

28. A major aspect of planning involves developing a set of metrics to monitor the supply
chain.
True False

1-6
29. Returning involves processes for receiving worn-out, defective, and excess products back
from customers but does not involve support for customers who have problems with the
product.
True False

30. Delivering is not considered in supply chain analysis when outside carriers are contracted
to move products to customers.
True False

31. Services are intangible processes that cannot be weighed or measured.
True False

32. Service innovations can be patented.
True False

33. Services are homogeneous.
True False

34. Services are defined and evaluated as a package of features that affect the five senses.
True False

35. Automobiles and appliances are classified as "pure goods."
True False

36. Core service providers integrate tangible goods into their product.
True False

1-7
37. Servitization refers to a company building service activities into its product offerings for
current users.
True False

38. Servitization is a nonsense word invented to describe the disappearance of manufacturing
from the US economy.
True False

39. In contrast to careers in finance and marketing, careers in OSM involve hands-on
involvement with people and processes.
True False

40. A bank branch manager position is not an OSM-type of job.
True False

41. A supply chain manager is an OSM job while a purchasing manager is not.
True False

42. Just in time (JIT) production was a major breakthrough in manufacturing philosophy
pioneered by the Japanese.
True False

43. Lean manufacturing refers to just in time production coupled with total quality control.
True False

44. The Baldrige National Quality Award was started under the direction of the National
Institute of Standards and Technology.
True False

1-8

1-9
45. The approach that advocates making revolutionary changes as opposed to evolutionary
changes is called creation theory.
True False

changes is called "business process reengineering."
True False

47. Business process reengineering is contrasted to total quality management which
commonly advocates incremental change.
True False

48. The "triple bottom line" relates to the economic, employee, and environmental impact of a
firm's strategy.
True False

49. Sustainability is the ability to maintain profits in a system.
True False

50. Raising senior management awareness of operations as a competitive weapon is not an
issue on OSM.
True False

1-10

Multiple Choice Questions

51. A reason for studying operations management (OSM) is which of the following?
A. OSM is essential for understanding organizational behavior.
B. Most business graduates do OSM work regardless of their job title.
C. All managers should understand the basic principles that guide the design of
D. OSM is a required course in all business degree programs.
E. OSM is the most rigorous business discipline.

52. The Goods-Services Continuum consists of which set of the following categories?
A. No goods, some goods, even mix, some service, no service
B. Pure goods, core goods, core services, pure services
C. No service, some service, good service, excellent service
D. Self-service, help desk service, face-to-face service, service-with-a-smile
E. None of the above

53. Which of the following are defined as core goods?
A. Chemicals
B. Airlines
C. Data storage systems
D. Hotels

54. Current issues in OSM do not include:
A. Coordinating relationships between organizations.
B. Making senior management aware that OSM can be a competitive weapon.
C. The triple bottom line.
D. Managing customer touch points.
E. Increasing global servitization networks.

1-11
55. Which of the following are not listed in the text as jobs in OSM?
A. Department store manager
B. Project manager
C. Hospital administrator
D. Chief Information Officer
E. Call center manager

56. Which of the following is not a characteristic that distinguishes services from goods?
A. Service jobs are unskilled.
B. A service is intangible.
C. Services are perishable.
D. Services are heterogeneous.
E. None of the above.

57. Which of the following is not a way that operations and supply processes are categorized?
A. Planning
B. Return
C. Delivery
D. Selecting
E. Making

58. One of the package of features that make up a service are:
A. Appearance
B. Facilitating goods
C. Packaging
D. Cost
E. Implied use

Fill in the Blank Questions

59. The ability to maintain balance in a system is referred to as _______________.
________________________________________

1-12
60. Processes that are used to transform the resources into products are called
________________.
________________________________________

Essay Questions

61. What are the five categories of supply chain processes?
1. ___________________
2. ___________________
3. ___________________
4. ___________________
5. ___________________


62. Doing something at the lowest possible cost is called: ________________.
________________________________________

63. Value is the ratio of _______________________to _______________________
________________________________________

64. A pipeline through which material and information flows is a conception of a
_______________________.
________________________________________

1-13
65. List five OSM job titles.
1. ___________________
2. ___________________
3. ___________________
4. ___________________
5. ___________________
________________________________________

66. What are three current issues in operations and supply management?
1. ___________________
2. ___________________
3. ___________________
________________________________________

Essay Questions

67. Discuss the role of efficiency and effectiveness in the creation of value.

1-14
Chapter 01 Operations and Supply Chain Management Answer Key


1. Efficiency means doing the right things to create the most value for the company.
FALSE

AACSB: Analytic
Difficulty: Easy
Learning Objective: 2
Taxonomy: Knowledge
Topic: Differences Between Services and Goods

2. Effectiveness means doing the right things to create the most value for the company.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

3. A doctor completes a surgical procedure on a patient without error. The patient dies
anyway. In operations management terms, we could refer to this doctor as being efficient but
not effective.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-15
4. A worker can be efficient without being effective.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Comprehension

5. A process can be effective without being efficient.
TRUE

AACSB: Analytic
Difficulty: Medium

6. Operations and supply management is defined as the design, operation, and improvement
of the systems that create and deliver the firm's primary products and services.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: What is Operations and Supply Management?

7. The term "value" refers to the relationship between quality and the price paid by the
consumer.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-16
8. Attempting to balance the desire to efficiently use resources while providing a highly
effective service may create conflict between the two goals.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

9. Central to the concept of operations strategy are the notions of operations focus and trade-
offs.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. Fashion retailers, in particular, need to have plenty of inventory on hand because demand
is so unpredictable.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

11. Today's leading retailers use operations and supply chain management techniques to
match supply and demand as closely and quickly as possible.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-17
12. "Concept-to-cash" refers to the idea of generating revenue from licensing of patent rights
or other intellectual property.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. OSM is concerned with management of the trickiest parts of the system that produces a
good or delivers a service.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. OSM is a functional field of business with clear line management responsibilities.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

15. The supply network as can be thought of as a pipeline through which cash, material and
information flows.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Understanding

1-18
16. Supply networks can not be constructed for every product or service.
FALSE

AACSB: Analytic
Difficulty: Easy

17. "Operations" refers to manufacturing and service processes used to transform resources
employed by a firm into products desired by customers.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

18. "Supply" refers to supply chain processes that move information and material to and from
the manufacturing and service processes of the firm.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

19. "Supply" includes inbound freight and inventory only.
FALSE

AACSB: Analytic
Difficulty: Medium

1-19
20. It is critical that a sustainable strategy meet the needs of shareholders and employees. It is
also highly desirable that it preserves the environment.
FALSE

AACSB: Analytic
Difficulty: Medium

21. Supply and demand planning is needed to coordinate the manufacturing, service, and
supply chain processes.
TRUE

AACSB: Analytic
Difficulty: Easy

22. Supply and demand planning involves forecasting demand, making intermediate term
plans for how demand will be met, controlling different types of inventory, but not the
detailed weekly scheduling of processes.
FALSE

AACSB: Analytic
Difficulty: Easy

23. All managers should understand the basic principles that guide the design of
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-20
24. OSM changes constantly because of the dynamic nature of competing in global business
and the constant evolution of information technology.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Careers in Operations and Supply Management

25. Internet technology has made the sharing of reliable real-time information expensive.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

26. Use of systems like point-of-sale, radio-frequency identification tags, bar-code scanners,
and automatic recognition has made it more difficult to understand what all the information is
saying.
FALSE

AACSB: Analytic
Difficulty: Easy

27. Operations and supply processes can be conveniently categorized as planning, sourcing,
making, and delivering.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-21
28. A major aspect of planning involves developing a set of metrics to monitor the supply
chain.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. Returning involves processes for receiving worn-out, defective, and excess products back
from customers but does not involve support for customers who have problems with the
product.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

30. Delivering is not considered in supply chain analysis when outside carriers are contracted
to move products to customers.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

31. Services are intangible processes that cannot be weighed or measured.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-22
32. Service innovations can be patented.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

33. Services are homogeneous.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

34. Services are defined and evaluated as a package of features that affect the five senses.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

35. Automobiles and appliances are classified as "pure goods."
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-23
36. Core service providers integrate tangible goods into their product.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

37. Servitization refers to a company building service activities into its product offerings for
current users.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

38. Servitization is a nonsense word invented to describe the disappearance of manufacturing
from the US economy.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

39. In contrast to careers in finance and marketing, careers in OSM involve hands-on
involvement with people and processes.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-24
40. A bank branch manager position is not an OSM-type of job.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

41. A supply chain manager is an OSM job while a purchasing manager is not.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

42. Just in time (JIT) production was a major breakthrough in manufacturing philosophy
pioneered by the Japanese.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Historical Development of Operations and Supply Management

43. Lean manufacturing refers to just in time production coupled with total quality control.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-25
44. The Baldrige National Quality Award was started under the direction of the National
Institute of Standards and Technology.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

changes is called creation theory.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

changes is called "business process reengineering."
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

47. Business process reengineering is contrasted to total quality management which
commonly advocates incremental change.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-26
48. The "triple bottom line" relates to the economic, employee, and environmental impact of a
firm's strategy.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

49. Sustainability is the ability to maintain profits in a system.
FALSE

AACSB: Analytic
Difficulty: Easy

50. Raising senior management awareness of operations as a competitive weapon is not an
issue on OSM.
FALSE

AACSB: Analytic
Difficulty: Easy

1-27


51. A reason for studying operations management (OSM) is which of the following?
A. OSM is essential for understanding organizational behavior.
B. Most business graduates do OSM work regardless of their job title.
C. All managers should understand the basic principles that guide the design of
D. OSM is a required course in all business degree programs.
E. OSM is the most rigorous business discipline.

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

52. The Goods-Services Continuum consists of which set of the following categories?
A. No goods, some goods, even mix, some service, no service
B. Pure goods, core goods, core services, pure services
C. No service, some service, good service, excellent service
D. Self-service, help desk service, face-to-face service, service-with-a-smile

AACSB: Analytic
Difficulty: Medium
Taxonomy: Application

53. Which of the following are defined as core goods?
A. Chemicals
B. Airlines
C. Data storage systems
D. Hotels

AACSB: Analytic
Difficulty: Medium

1-28
54. Current issues in OSM do not include:
A. Coordinating relationships between organizations.
B. Making senior management aware that OSM can be a competitive weapon.
C. The triple bottom line.
D. Managing customer touch points.
E. Increasing global servitization networks.

AACSB: Analytic
Difficulty: Medium

55. Which of the following are not listed in the text as jobs in OSM?
A. Department store manager
B. Project manager
C. Hospital administrator
D. Chief Information Officer
E. Call center manager

AACSB: Analytic
Difficulty: Medium

56. Which of the following is not a characteristic that distinguishes services from goods?
A. Service jobs are unskilled.
B. A service is intangible.
C. Services are perishable.
D. Services are heterogeneous.
E. None of the above.

AACSB: Analytic
Difficulty: Medium

1-29
57. Which of the following is not a way that operations and supply processes are categorized?
A. Planning
B. Return
C. Delivery
D. Selecting
E. Making

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

58. One of the package of features that make up a service are:
A. Appearance
B. Facilitating goods
C. Packaging
D. Cost
E. Implied use

AACSB: Analytic
Difficulty: Medium


59. The ability to maintain balance in a system is referred to as _______________.
Sustainability

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-30
60. Processes that are used to transform the resources into products are called
________________.
Operations

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

Essay Questions

61. What are the five categories of supply chain processes?
1. ___________________
2. ___________________
3. ___________________
4. ___________________
5. ___________________
Planning, sourcing, making, delivering & returning.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge


62. Doing something at the lowest possible cost is called: ________________.
Efficiency

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-31
63. Value is the ratio of _______________________to _______________________
quality to price paid

AACSB: Analytic
Difficulty: Medium

64. A pipeline through which material and information flows is a conception of a
_______________________.
Supply network

AACSB: Analytic
Difficulty: Medium

65. List five OSM job titles.
1. ___________________
2. ___________________
3. ___________________
4. ___________________
5. ___________________
Any five from the list on page 14-15 of the text.

AACSB: Analytic
Difficulty: Medium

1-32
66. What are three current issues in operations and supply management?
1. ___________________
2. ___________________
3. ___________________
(any three): 1. Coordinating relationships between mutually supportive but separate
organizations; 2. Optimizing global supplier, production, and distribution networks; 3.
Managing customer touch points; 4. Raising senior management awareness of
operations as a significant competitive weapon; 5. Sustainability and the triple bottom
line.

AACSB: Analytic
Difficulty: Hard

Essay Questions

67. Discuss the role of efficiency and effectiveness in the creation of value.
A successful response to this question requires a definition of "value" (a relationship between
"quality" or "performance" of a product and its price) and discussion of the trade-off between
efficiency and effectiveness. Creating value means striking the most appropriate balance
between efficiency and effectiveness for the market need the product will satisfy. These
concepts are discussed in the text beginning on page 12.

AACSB: Analytic
Difficulty: Medium

1-33
Chapter 02
Strategy and Sustainability

Learning Objectives for Chapter 2:

1. Compare how operations and supply chain strategy relates to marketing and finance.
2. Understand the competitive dimensions of operations and supply chain strategy.
3. Identify order winners and order qualifiers.
4. Understand the concept of strategic fit.
5. Describe how productivity is measured and how it relates to operations and supply
chain processes.
6. Explain how the financial markets evaluate a firms operations and supply chain
performance.


1. An operations and supply strategy must be integrated with the organization's corporate
strategy.
True False

2. One of the competitive dimensions that form the competitive position of a company when
planning their strategies is cost.
True False

1-34
planning their strategies is delivery speed.
True False

planning their strategies is making the best trade-off.
True False

5. The process when a company seeks to match the benefits of a successful position while
maintaining its existing position by adding new features, services, and technologies into its
current portfolio is called flexibility.
True False

current portfolio it is called straddling
True False

1-35
7. By following a straddling strategy, firms can broaden their capabilities and effectively
compete with more focused firms in markets requiring low cost for success.
True False

8. An order winner is a set of criteria that differentiates the products or services of one firm
from another.
True False

9. An order winner is a set of screening criteria that permits a firm's products to be considered
as possible candidates for purchase.
True False

10. An order qualifier is a set of screening criteria that permits a firm's products to be
considered as possible candidates for purchase.
True False

11. Activity-system maps show how a company's strategy is delivered through a set of
tailored activities.
True False

12. Activity-system maps are useful in understanding how well a system of activities fits the
overall company's strategy.
True False

13. Activity-system maps depict the geographic reach of a company's business strategies.
True False

1-36
14. Operations and supply strategy are not important issues to investors who tend to focus on
growth, dividends and earnings per share.
True False

15. Investors pay close attention to efficiency and productivity measures like net income per
employee because they are interested in how well the firm manages its workforce relations.
True False

16. During a recession, efficient firms often have an opportunity to increase market share
while maintaining profitability.
True False

17. An operations strategy must resist change because of the long term nature of equipment
and personnel investments.
True False

18. Operations and supply strategy can be viewed as part of a planning process that
coordinates operational goals with those of the larger organization.
True False

19. Infrastructure decisions within operations strategy include the selection of the appropriate
technology, the role of inventory and the location of facilities.
True False

20. Infrastructure decisions within operations strategy include the selection of the logic
associated with the planning and control systems.
True False

1-37
21. Once an operations strategy is adopted and articulated, the primary emphasis becomes
perfecting the system of activities that make up the strategy through detailed refinements over
a long period of time.
True False

22. The job of operations strategy is to deliver the most feature-rich, highest quality product at
the lowest price within specified parameters of delivery time and customization.
True False

23. Wall Street analysts are not particularly concerned with how efficient companies are from
an operations and supply management view.
True False

24. Productivity is a relative measure.
True False

25. In a partial measure of productivity the denominator of the ratio would include all
resources used or all inputs.
True False

26. In a multifactor measure of productivity the numerator of the ratio would include all
True False

27. The operations and supply activities of the firm need to strategically support the
competitive priorities of the firm.
True False

1-38
28. The triple bottom line considers evaluating the firm against social, economic, and
environmental criteria.
True False

29. Sustainability means meeting a firm's current needs without excessively compromising the
ability of future generations to meet their own needs.
True False


30. Which of the following is not a major strategic operational competitive dimension that
forms a company's competitive position?
A. Cost or price
B. Delivery speed
C. Delivery reliability
D. Management acumen
E. Coping with changes in demand

31. A major competitive dimension that forms a company's strategic operational competitive
position in their strategic planning is which of the following?
A. Cost or price
B. Focus
C. Automation
D. Straddling
E. Activity-system mapping

32. When developing an operations and supply strategy, which of the following is an
important product-specific criterion to consider?
A. Technical liaison
B. Learning curve
C. Competitor's product performance
D. Production lot-size
E. Total quality management

1-39
33. In development of an operations and supply strategy, which of the following would be an
important product-specific criteria to consider?
A. Focus
B. Production lot-size
C. Supplier after-sale support
D. Learning curve

34. When a company seeks to match the benefits of a successful position while maintaining
its existing position in offering customers a variety of differing services, what is this process
called?
A. Operations capability analysis
B. Straddling
C. Order qualifying
D. Order winning
E. Inter-functional analysis

35. An activity-based map is which of the following?
A. A network guide to route airlines
B. A listing of activities that make up a project
C. A network that shows how a company's strategy is delivered to customers
D. A facility layout schematic noting what is done where
E. A timeline displaying major planned events

36. Which of the following is not a measure of operations and supply management efficiency
used by Wall Street?
A. Inventory turnover
B. Revenue per employee
C. Receivable turnover
D. Earnings per share
E. Asset turnover

1-40
37. Which of the following is a measure of operations and supply management efficiency
A. Dividend payout ratio
B. Current ratio
D. Earnings per share growth
E. Financial leverage

38. Which of the following is a partial measure of productivity?
A. Output/Materials
B. Output/(Labor + Capital + Energy)
C. Output/All resources used
D. Output/Inputs
E. All of the above

39. Which of the following is a multifactor measure of productivity?
A. Output/(Materials)
D. Output/Inputs
E. All of the above

40. Which of the following is a total measure of productivity?
A. Output/Materials
C. Output/Labor
D. Output/Inputs
E. All of the above

1-41
41. If all you knew about a production system was that total daily output was 400 units and
the total labor necessary to produce the 400 units was 350 hours, what kind of productivity
measure could you use to compute productivity?
A. Partial measure
B. Multifactor measure
C. Total measure
D. Global measure
E. All of the above

the total labor necessary to produce the 400 units was 350 hours, and the total materials used
were 425 units, what kind of productivity measure could you use to compute productivity?
A. Partial measure
C. Total measure
D. A and B above
E. B and C above

43. The total output from a production system in one day is 500 units and the total labor
necessary to produce the 500 units is 350 hours. Using the appropriate productivity measure,
which of the following numbers represents the resulting productivity ratio?
A. 1.000
B. 1.428
C. 0.700
D. 0.411

what is the resulting productivity ratio?
A. 1.000
B. 1.428
C. 0.700
D. 0.411

1-42
45. Larry's Auto Body Repair Shop had revenues that averaged $60,000 per week in April and
$50,000 per week in May. During both months, the shop employed six full-time (40
hours/week) workers. In April the firm also had four part-time workers working 25 hours per
week but in May there were only 2 part-time workers and they only worked 10 hours per
week. What is the percentage change in labor productivity from April to May for Larry's Auto
Body Repair?
A. 17.65
B. -15.84
C. 8.97
D. -1.76
E. 19.23

46. Various financial data for SunPath Manufacturing for 2010 & 2011 follow.

What is the percentage change in SunPath's total productivity measure between 2010 &
2011?
A. -9.22
B. 2.33
C. -0.53
D. 2.88
E. 10.39

1-43

What is the percentage change in the energy partial productivity measure for SunPath between
2010 & 2011?
A. -9.22
B. 2.33
C. -0.53
D. 2.88
E. 10.39


What is the percentage change in the labor partial productivity measure for SunPath between
2010 & 2011?
A. -9.22
B. 2.33
C. -0.53
D. 2.88
E. 10.39

1-44

What is the percentage change in the multifactor labor and raw materials productivity measure
for SunPath between 2010 & 2011?
A. -9.22
B. 2.33
C. -0.53
D. -2.88
E. 10.39


50. What is a criterion or product characteristic that differentiates a product from the products
of competitors in a way meaningful to the market called? ____________________
________________________________________

51. A diagram showing how a company's strategy is delivered through a set of tailored
activities is called what? _____________________
________________________________________

52. The triple-bottom-line evaluates the firm against what three criteria?
1. _____________________
2. _____________________
3. _____________________
________________________________________

1-45
53. People who provide capital to the firm through stock purchases and other financial
instruments are called: _____________________
________________________________________

54. Individuals or organizations that are influenced, either directly or indirectly, by the actions
of the firm are called: _____________________
________________________________________

55. Name five common measures of operations and supply management efficiency used by
Wall Street.
1. _____________________
2. _____________________
3. _____________________
4. _____________________
5. _____________________
________________________________________

Essay Questions

56. Describe a specific example of the trade-offs between any two of the competitive
dimensions.

1-46
57. Explain the role that "order qualifiers" and "order winners" play as the interface between
marketing and operations.

1-47
Chapter 02 Strategy and Sustainability Answer Key


1. An operations and supply strategy must be integrated with the organization's corporate
strategy.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: What is Operations and Supply Strategy?, Strategic Fit: Fitting Operational Activities to Strategy

planning their strategies is cost.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: What is Operations and Supply Strategy?

planning their strategies is delivery speed.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-48
planning their strategies is making the best trade-off.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

current portfolio is called flexibility.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

current portfolio it is called straddling
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Strategic Fit: Fitting Operational Activities to Strategy

1-49
7. By following a straddling strategy, firms can broaden their capabilities and effectively
compete with more focused firms in markets requiring low cost for success.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-50
8. An order winner is a set of criteria that differentiates the products or services of one firm
from another.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

9. An order winner is a set of screening criteria that permits a firm's products to be considered
as possible candidates for purchase.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. An order qualifier is a set of screening criteria that permits a firm's products to be
considered as possible candidates for purchase.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

11. Activity-system maps show how a company's strategy is delivered through a set of
tailored activities.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-51
12. Activity-system maps are useful in understanding how well a system of activities fits the
overall company's strategy.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. Activity-system maps depict the geographic reach of a company's business strategies.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. Operations and supply strategy are not important issues to investors who tend to focus on
growth, dividends and earnings per share.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: How Does Wall Street Evaluate Operations Performance?

15. Investors pay close attention to efficiency and productivity measures like net income per
employee because they are interested in how well the firm manages its workforce relations.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-52
16. During a recession, efficient firms often have an opportunity to increase market share
while maintaining profitability.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Productivity Measurement

17. An operations strategy must resist change because of the long term nature of equipment
and personnel investments.
FALSE

AACSB: Analytic
Difficulty: Easy

18. Operations and supply strategy can be viewed as part of a planning process that
coordinates operational goals with those of the larger organization.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

19. Infrastructure decisions within operations strategy include the selection of the appropriate
technology, the role of inventory and the location of facilities.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-53
20. Infrastructure decisions within operations strategy include the selection of the logic
associated with the planning and control systems.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

21. Once an operations strategy is adopted and articulated, the primary emphasis becomes
perfecting the system of activities that make up the strategy through detailed refinements over
a long period of time.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

22. The job of operations strategy is to deliver the most feature-rich, highest quality product at
the lowest price within specified parameters of delivery time and customization.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

23. Wall Street analysts are not particularly concerned with how efficient companies are from
an operations and supply management view.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-54
24. Productivity is a relative measure.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

25. In a partial measure of productivity the denominator of the ratio would include all
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

26. In a multifactor measure of productivity the numerator of the ratio would include all
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

27. The operations and supply activities of the firm need to strategically support the
competitive priorities of the firm.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-55
28. The triple bottom line considers evaluating the firm against social, economic, and
environmental criteria.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. Sustainability means meeting a firm's current needs without excessively compromising the
ability of future generations to meet their own needs.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge


30. Which of the following is not a major strategic operational competitive dimension that
forms a company's competitive position?
A. Cost or price
B. Delivery speed
C. Delivery reliability
D. Management acumen
E. Coping with changes in demand

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-56
31. A major competitive dimension that forms a company's strategic operational competitive
position in their strategic planning is which of the following?
A. Cost or price
B. Focus
C. Automation
D. Straddling
E. Activity-system mapping

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

32. When developing an operations and supply strategy, which of the following is an
important product-specific criterion to consider?
A. Technical liaison
B. Learning curve
C. Competitor's product performance
D. Production lot-size

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

33. In development of an operations and supply strategy, which of the following would be an
important product-specific criteria to consider?
A. Focus
B. Production lot-size
C. Supplier after-sale support
D. Learning curve

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-57
34. When a company seeks to match the benefits of a successful position while maintaining
its existing position in offering customers a variety of differing services, what is this process
called?
A. Operations capability analysis
B. Straddling
C. Order qualifying
D. Order winning
E. Inter-functional analysis

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

35. An activity-based map is which of the following?
A. A network guide to route airlines
B. A listing of activities that make up a project
C. A network that shows how a company's strategy is delivered to customers
D. A facility layout schematic noting what is done where
E. A timeline displaying major planned events

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

36. Which of the following is not a measure of operations and supply management efficiency
A. Inventory turnover
B. Revenue per employee
D. Earnings per share
E. Asset turnover

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-58
37. Which of the following is a measure of operations and supply management efficiency
A. Dividend payout ratio
B. Current ratio
D. Earnings per share growth
E. Financial leverage

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

38. Which of the following is a partial measure of productivity?
A. Output/Materials
D. Output/Inputs
E. All of the above

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

39. Which of the following is a multifactor measure of productivity?
A. Output/(Materials)
D. Output/Inputs
E. All of the above

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-59
40. Which of the following is a total measure of productivity?
A. Output/Materials
C. Output/Labor
D. Output/Inputs
E. All of the above

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

the total labor necessary to produce the 400 units was 350 hours, what kind of productivity
measure could you use to compute productivity?
A. Partial measure
C. Total measure
D. Global measure
E. All of the above

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

the total labor necessary to produce the 400 units was 350 hours, and the total materials used
were 425 units, what kind of productivity measure could you use to compute productivity?
A. Partial measure
C. Total measure
D. A and B above
E. B and C above

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-60
which of the following numbers represents the resulting productivity ratio?
A. 1.000
B. 1.428
C. 0.700
D. 0.411

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

what is the resulting productivity ratio?
A. 1.000
B. 1.428
C. 0.700
D. 0.411

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-61
45. Larry's Auto Body Repair Shop had revenues that averaged $60,000 per week in April and
$50,000 per week in May. During both months, the shop employed six full-time (40
hours/week) workers. In April the firm also had four part-time workers working 25 hours per
week but in May there were only 2 part-time workers and they only worked 10 hours per
week. What is the percentage change in labor productivity from April to May for Larry's Auto
Body Repair?
A. 17.65
B. -15.84
C. 8.97
D. -1.76
E. 19.23

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analytic


What is the percentage change in SunPath's total productivity measure between 2010 &
2011?
A. -9.22
B. 2.33
C. -0.53
D. 2.88
E. 10.39

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

1-62

What is the percentage change in the energy partial productivity measure for SunPath between
2010 & 2011?
A. -9.22
B. 2.33
C. -0.53
D. 2.88
E. 10.39

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analytic

1-63

What is the percentage change in the labor partial productivity measure for SunPath between
2010 & 2011?
A. -9.22
B. 2.33
C. -0.53
D. 2.88
E. 10.39

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analytic

1-64

What is the percentage change in the multifactor labor and raw materials productivity measure
for SunPath between 2010 & 2011?
A. -9.22
B. 2.33
C. -0.53
D. -2.88
E. 10.39

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analytic


50. What is a criterion or product characteristic that differentiates a product from the products
of competitors in a way meaningful to the market called? ____________________
Order winner

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-65
51. A diagram showing how a company's strategy is delivered through a set of tailored
activities is called what? _____________________
Activity-system map

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

52. The triple-bottom-line evaluates the firm against what three criteria?
1. _____________________
2. _____________________
3. _____________________
The text provides three alternatives: social, economic, and environmental; people,
planet, and profit; or folk, work, and place.

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

53. People who provide capital to the firm through stock purchases and other financial
instruments are called: _____________________
Shareholders

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-66
54. Individuals or organizations that are influenced, either directly or indirectly, by the actions
of the firm are called: _____________________
Stakeholders

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

55. Name five common measures of operations and supply management efficiency used by
Wall Street.
1. _____________________
2. _____________________
3. _____________________
4. _____________________
5. _____________________
Income per employee; Revenue per employee; Inventory turnover; Asset turnover;
Receivable turnover.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-67

Essay Questions

56. Describe a specific example of the trade-offs between any two of the competitive
dimensions.
This question requires that the student recall at least two of the seven competitive dimensions
described under the heading "Competitive Dimensions" on pages 27-29 of the text. In
evaluating the student's response the instructor should take care that the student's arguments
do, indeed illustrate a "trade-off" or a situation where an improvement in one dimension
comes at the cost of a lessening of a different dimension. A fairly common example is
between achieving low cost (or price) at the expense of quality. For this example it is
necessary for the student to specify that he is talking about reducing design quality to achieve
low cost (for example) instead of process quality where improvements typically result in
lowered cost.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

57. Explain the role that "order qualifiers" and "order winners" play as the interface between
marketing and operations.
The student's answer to this question should indicate the usefulness of articulating and
differentiating between order winners and order qualifiers. In essence, these factors should
indicate the essence of what is required to compete in the marketplace and the ways that the
product or service, itself, differentiates itself from competing products and services. This topic
is discussed in the text on pages 30 under the heading "Order Winners and Qualifiers: The
Marketing-Operations Link."

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

1-68
Chapter 03
Strategic Capacity Management


1. Recognize the concept of capacity and how important it is to manage capacity.
2. Explain the impact of economies of scale on the capacity of a firm.
3. Understand how to use decision trees to analyze alternatives when faced with the
problem of adding capacity.
4. Describe the differences in planning capacity between manufacturing firms and
service firms.


1. Capacity can be defined as the ability to hold, receive, store, or accommodate.
True False

2. When evaluating capacity, managers need to consider both resource inputs and product
outputs.
True False

1-69
3. Capacity can be defined as the amount of available resource inputs relative to requirements
for output over a particular period of time.
True False

4. The capacity utilization rate is found by dividing best operating level by capacity used.
True False

5. The objective of strategic capacity planning is to provide an approach for determining the
overall capacity level of labor-intensive resources.
True False

6. The objective of strategic capacity planning is to determine the overall capacity level of
capital intensive resources (including facilities, equipment, and overall labor force size) that
best supports the company's short-range competitive strategy.
True False

1-70
best supports the company's long-range competitive strategy.
True False

8. Best operating level is usually a multiple of the level of capacity for which a process was
designed.
True False

9. Best operating level is the volume of output at which average unit cost is minimized.
True False

10. At some point, the size of a growing plant can become too large and diseconomies of scale
become a capacity planning problem.
True False

11. Long-range capacity planning requires top management participation.
True False

12. Overtime and personnel transfers are solutions to capacity problems in the intermediate
term.
True False

13. Capacity planning is generally viewed in three time durations: Immediate, Intermediate
and Indeterminate.
True False

1-71
14. The basic notion of economies of scale is that as a plant gets larger and volume increases,
the average cost per unit of output drops.
True False

15. A piece of equipment with twice the capacity of another piece typically costs twice as
much to purchase and to operate.
True False

16. The problem of keeping demand sufficiently high to keep a large factory busy is a sales
issue and not a diseconomy of scale.
True False

17. A production facility works best when it focuses on a fairly limited set of production
objectives.
True False

18. A production facility develops virtuosity and works best when it focuses on a widely
varied set of production objectives.
True False

19. Making adjustments to eliminate the variance between planned and actual output is tied
into intermediate range capacity planning.
True False

20. The ultimate in plant flexibility is a one-hour-changeover time plant.
True False

1-72
21. Capacity flexibility means having the ability to rapidly increase or decrease production
levels, or to shift production capacity quickly from one product or service to another.
True False

22. Economies of scope exist when multiple products can be produced at a lower cost in
combination than they can separately.
True False

23. The frequency of additions to productive capacity should balance the costs of upgrading
too frequently and the costs of upgrading too infrequently.
True False

24. Subcontracting is a common source of external capacity.
True False

25. Sharing capacity is a common source of external capacity.
True False

26. A capacity cushion is the amount of capacity less than expected demand.
True False

27. A decision tree problem does not need probabilities or payoffs to generate a solution.
True False

28. In solving a decision tree problem, calculations start at the ends of the "branches" of the
tree and work backwards to the base "trunk" of the tree.
True False

1-73
29. The probability of each occurrence at a decision tree chance node is the reciprocal of the
number of possibilities at the chance node.
True False

30. In a decision tree, the only time probabilities are applied to a decision node is when the
decision is being made by someone else such as your customer or your competitor.
True False

31. Low rates of capacity utilization in service organizations are never appropriate.
True False

32. The smaller the capacity cushion the better.
True False

33. The larger the capacity cushion the better.
True False

34. The capacity cushion is the ratio of capacity used to the best capacity level.
True False

35. When a firm's design capacity is less than the capacity required to meet its demand, it is
said to have a negative capacity cushion.
True False

36. In decision tree analysis the time value of money is ignored because you are only
concerned with cash costs.
True False

1-74


37. The ability to rapidly and inexpensively switch production from one product to another
enables what are sometimes referred to as:
A. Economies of scale
B. Economies of size
C. Economies of shape
D. Economies of scope
E. Economies of shipping

38. Capacity planning involving hiring, layoffs, some new tooling, minor equipment
purchases, and subcontracting is considered as which one of the following planning
horizons?
A. Intermediate range
B. Long range
C. Short range
D. Current
E. Upcoming

39. Capacity planning involving acquisition or disposal of fixed assets such as buildings,
equipment or facilities is considered as which one of the following planning horizons?
A. Intermediate-range
B. Long-range
C. Short-range
D. Current
E. Upcoming

40. If the best operating level of a piece of equipment is at a rate of 400 units per hour and the
actual output during an hour is 300 units, which of the following is the capacity utilization
rate?
A. 0.75
B. 1.00
C. 1.33
D. 2.33
E. 300

1-75
41. If the actual output of a piece of equipment during an hour is 500 units and its best
operating level is at a rate of 400 units per hour, which of the following is the capacity
utilization rate?
A. 0.75
B. 1.00
C. 1.25
D. 1.33
E. 100

actual output during an hour is 300 units, which of the following is the capacity cushion?
A. 33 percent
B. 75 percent
C. 90 percent
D. 100 percent
E. 133 percent

43. The capacity focus concept can be put into practice through a mechanism called which of
the following?
A. Best operating level (BOL)
B. Plants within plants (PWP)
C. Total quality management (TQM)
D. Capacity utilization rate (CUR)
E. Zero-changeover-time (ZXT)

44. The way to build in greater flexibility in your workers is to do which of the following?
A. Pay higher wages to motivate a willingness to do a variety to tasks
B. Provide a broader range of training
C. Provide a wide variety of technology to augment workers skills
D. Institute a "pay for skills" program
E. Use part-time employees with specialized skills as needed

1-76
45. When deciding to add capacity to a factory which of the following need not be
considered?
A. Maintaining system balance
B. The frequency of capacity additions
C. Use of external capacity
D. Immediate product demand
E. Availability of raw materials

46. Which of the following is not a step used in determining production capacity
requirements?
A. Forecasting to predict product sales
B. Forecasting raw material usage
C. Projecting availability of labor
D. Calculating equipment and labor needs
E. Projecting equipment availability

47. Which of the following models uses a schematic model of the sequence of steps in a
problem and the conditions and consequences of each step?
A. Probability indexing
B. Johnson's sequencing rule
C. Decision trees
D. Activity System Maps
E. Decision mapping

48. Compared with a service operation, a manufacturing operation's capacity is which of the
following?
A. More dependent on time and location
B. Subject to more volatile demand fluctuations
C. Utilization more directly impacts quality
D. Demand can be smoothed by inventory policies
E. More capable of reacting to demand fluctuations

1-77
49. At a decision point in a decision tree, which machine would you select when trying to
maximize payoff when the anticipated benefit of selecting machine A is $45,000 with a
probability of 90%; the expected benefit of selecting machine B is $80,000 with a probability
of 50% and the expected benefit of selecting machine C is $60,000 with a probability of
75%?
A. Machine A
B. Machine B
C. Machine C
D. You would be indifferent between machines A and C
E. You would be indifferent between machines A and B

50. What is an important difference between capacity planning in services as contrasted to
capacity planning in manufacturing operations?
A. Time
B. Location
C. Demand volatility
D. Utilization impacts service
E. All of the above

51. Capacity planning involving consideration of production scheduling and inventory
position is characterized by which one of the following time durations?
B. Long-range
C. Short-range
D. Current
E. Upcoming


52. A chance node on a decision tree has four possible outcomes each worth $100,000. The
probabilities of the outcomes occurring are assessed as 10%, 27%, 43% and 20%. What is the
expected value of this chance node? ____________________
________________________________________

1-78
53. If demand for product "A" were forecast at 1,000,000 units for the coming year and your
factory has trained labor and equipment sufficient to produce 150,000 units per month, is the
capacity cushion positive or negative? ____________________
________________________________________

factory has one machine capable of producing 4,500 units per week, how many similar
machines might you plan to acquire? ___________________
________________________________________

factory has one machine capable of producing 75,000 units per month, how much of product
"A" might you plan to acquire through outsourcing? _______________
________________________________________

56. A chance node on a decision tree has four possible outcomes worth $10,000, $20,000,
$30,000 and minus $100,000 respectively. The probabilities of these outcomes occurring are
assessed as 10%, 25%, 50% and 15% correspondingly. What is the expected value of this
chance node? _________________________
________________________________________

actual output during an hour is 300 units, what is the capacity utilization rate?
____________________
________________________________________

actual output during an hour is 300 units, what is the capacity cushion?
__________________
________________________________________

1-79
Essay Questions

59. What is a capacity cushion and why would a firm have one?

60. Why does volatility of demand have a higher effect on a service delivery system than on a
manufacturing system?

61. Describe the relationship between capacity utilization and quality in a service operation.

1-80
Chapter 03 Strategic Capacity Management Answer Key


1. Capacity can be defined as the ability to hold, receive, store, or accommodate.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Capacity Management in Operations

2. When evaluating capacity, managers need to consider both resource inputs and product
outputs.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

3. Capacity can be defined as the amount of available resource inputs relative to requirements
for output over a particular period of time.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-81
4. The capacity utilization rate is found by dividing best operating level by capacity used.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

5. The objective of strategic capacity planning is to provide an approach for determining the
overall capacity level of labor-intensive resources.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

best supports the company's short-range competitive strategy.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-82

best supports the company's long-range competitive strategy.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

8. Best operating level is usually a multiple of the level of capacity for which a process was
designed.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-83
9. Best operating level is the volume of output at which average unit cost is minimized.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. At some point, the size of a growing plant can become too large and diseconomies of scale
become a capacity planning problem.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Capacity Planning Concepts

11. Long-range capacity planning requires top management participation.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

12. Overtime and personnel transfers are solutions to capacity problems in the intermediate
term.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-84
13. Capacity planning is generally viewed in three time durations: Immediate, Intermediate
and Indeterminate.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. The basic notion of economies of scale is that as a plant gets larger and volume increases,
the average cost per unit of output drops.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

15. A piece of equipment with twice the capacity of another piece typically costs twice as
much to purchase and to operate.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

16. The problem of keeping demand sufficiently high to keep a large factory busy is a sales
issue and not a diseconomy of scale.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-85
17. A production facility works best when it focuses on a fairly limited set of production
objectives.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

18. A production facility develops virtuosity and works best when it focuses on a widely
varied set of production objectives.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

19. Making adjustments to eliminate the variance between planned and actual output is tied
into intermediate range capacity planning.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

20. The ultimate in plant flexibility is a one-hour-changeover time plant.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-86
21. Capacity flexibility means having the ability to rapidly increase or decrease production
levels, or to shift production capacity quickly from one product or service to another.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

22. Economies of scope exist when multiple products can be produced at a lower cost in
combination than they can separately.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

23. The frequency of additions to productive capacity should balance the costs of upgrading
too frequently and the costs of upgrading too infrequently.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

24. Subcontracting is a common source of external capacity.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-87
25. Sharing capacity is a common source of external capacity.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

26. A capacity cushion is the amount of capacity less than expected demand.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

27. A decision tree problem does not need probabilities or payoffs to generate a solution.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Capacity Planning

28. In solving a decision tree problem, calculations start at the ends of the "branches" of the
tree and work backwards to the base "trunk" of the tree.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-88
29. The probability of each occurrence at a decision tree chance node is the reciprocal of the
number of possibilities at the chance node.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

30. In a decision tree, the only time probabilities are applied to a decision node is when the
decision is being made by someone else such as your customer or your competitor.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

31. Low rates of capacity utilization in service organizations are never appropriate.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Planning Service Capacity

32. The smaller the capacity cushion the better.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-89
33. The larger the capacity cushion the better.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

34. The capacity cushion is the ratio of capacity used to the best capacity level.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

35. When a firm's design capacity is less than the capacity required to meet its demand, it is
said to have a negative capacity cushion.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

36. In decision tree analysis the time value of money is ignored because you are only
concerned with cash costs.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-90

37. The ability to rapidly and inexpensively switch production from one product to another
enables what are sometimes referred to as:
A. Economies of scale
B. Economies of size
C. Economies of shape
D. Economies of scope
E. Economies of shipping

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

38. Capacity planning involving hiring, layoffs, some new tooling, minor equipment
purchases, and subcontracting is considered as which one of the following planning
horizons?
A. Intermediate range
B. Long range
C. Short range
D. Current
E. Upcoming

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-91
39. Capacity planning involving acquisition or disposal of fixed assets such as buildings,
equipment or facilities is considered as which one of the following planning horizons?
B. Long-range
C. Short-range
D. Current
E. Upcoming

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-92
actual output during an hour is 300 units, which of the following is the capacity utilization
rate?
A. 0.75
B. 1.00
C. 1.33
D. 2.33
E. 300

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

41. If the actual output of a piece of equipment during an hour is 500 units and its best
operating level is at a rate of 400 units per hour, which of the following is the capacity
utilization rate?
A. 0.75
B. 1.00
C. 1.25
D. 1.33
E. 100

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-93
actual output during an hour is 300 units, which of the following is the capacity cushion?
A. 33 percent
B. 75 percent
C. 90 percent
D. 100 percent
E. 133 percent

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

43. The capacity focus concept can be put into practice through a mechanism called which of
the following?
A. Best operating level (BOL)
B. Plants within plants (PWP)
C. Total quality management (TQM)
D. Capacity utilization rate (CUR)
E. Zero-changeover-time (ZXT)

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

44. The way to build in greater flexibility in your workers is to do which of the following?
A. Pay higher wages to motivate a willingness to do a variety to tasks
B. Provide a broader range of training
C. Provide a wide variety of technology to augment workers skills
D. Institute a "pay for skills" program
E. Use part-time employees with specialized skills as needed

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-94
45. When deciding to add capacity to a factory which of the following need not be
considered?
A. Maintaining system balance
B. The frequency of capacity additions
C. Use of external capacity
D. Immediate product demand
E. Availability of raw materials

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

46. Which of the following is not a step used in determining production capacity
requirements?
A. Forecasting to predict product sales
B. Forecasting raw material usage
C. Projecting availability of labor
D. Calculating equipment and labor needs
E. Projecting equipment availability

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

47. Which of the following models uses a schematic model of the sequence of steps in a
problem and the conditions and consequences of each step?
A. Probability indexing
B. Johnson's sequencing rule
C. Decision trees
D. Activity System Maps
E. Decision mapping

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-95
48. Compared with a service operation, a manufacturing operation's capacity is which of the
following?
A. More dependent on time and location
B. Subject to more volatile demand fluctuations
C. Utilization more directly impacts quality
D. Demand can be smoothed by inventory policies
E. More capable of reacting to demand fluctuations

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

49. At a decision point in a decision tree, which machine would you select when trying to
maximize payoff when the anticipated benefit of selecting machine A is $45,000 with a
probability of 90%; the expected benefit of selecting machine B is $80,000 with a probability
of 50% and the expected benefit of selecting machine C is $60,000 with a probability of
75%?
A. Machine A
B. Machine B
C. Machine C
D. You would be indifferent between machines A and C
E. You would be indifferent between machines A and B

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-96
50. What is an important difference between capacity planning in services as contrasted to
capacity planning in manufacturing operations?
A. Time
B. Location
C. Demand volatility
D. Utilization impacts service
E. All of the above

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

51. Capacity planning involving consideration of production scheduling and inventory
position is characterized by which one of the following time durations?
B. Long-range
C. Short-range
D. Current
E. Upcoming

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


52. A chance node on a decision tree has four possible outcomes each worth $100,000. The
probabilities of the outcomes occurring are assessed as 10%, 27%, 43% and 20%. What is the
expected value of this chance node? ____________________
$100,000

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-97
factory has trained labor and equipment sufficient to produce 150,000 units per month, is the
capacity cushion positive or negative? ____________________
Positive

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

factory has one machine capable of producing 4,500 units per week, how many similar
machines might you plan to acquire? ___________________
5 (five)

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

factory has one machine capable of producing 75,000 units per month, how much of product
"A" might you plan to acquire through outsourcing? _______________
100,000 units

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-98
56. A chance node on a decision tree has four possible outcomes worth $10,000, $20,000,
$30,000 and minus $100,000 respectively. The probabilities of these outcomes occurring are
assessed as 10%, 25%, 50% and 15% correspondingly. What is the expected value of this
chance node? _________________________
$6,000

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

actual output during an hour is 300 units, what is the capacity utilization rate?
____________________
0.75 or 75%

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

actual output during an hour is 300 units, what is the capacity cushion?
__________________
0.33 or 33%

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-99
Essay Questions

59. What is a capacity cushion and why would a firm have one?
The capacity cushion is an amount of excess capacity over expected demand maintained by a
firm. Capacity cushion is discussed in the text beginning on page 49. A satisfactory response
to this question will indicate that firms typically hold capacity cushions when demand is more
rapidly variable than capacity adjustments can be. For example, in many service operations it
is not possible to inventory finished goods, they must be produced to demand. To be able to
meet peak demand, therefore, service operations must have a cushion of capacity over average
demand. Electric utilities, where demand varies considerably over a 24-hour period, are a
good example of this. Other reasons for a capacity cushion include expected rapid growth and
a desire to service expanded demand rapidly.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

60. Why does volatility of demand have a higher effect on a service delivery system than on a
manufacturing system?
The impact of demand volatility on services is discussed in the text on page 55. A successful
response to this question will mention the following three issues: (1) a service can not be
inventoried and thus must be produced as demanded; (2) that customers interact directly with
the service delivery system and each may have unique needs or will require different levels of
service; and (3) consumer behaviors can magnify volatility of demand very significantly in
service operations.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis

1-100
61. Describe the relationship between capacity utilization and quality in a service operation.
The relationship between capacity utilization and service quality is discussed in the text
beginning on page 55. A good response will note that higher levels of capacity utilization may
result in waiting lines and hurried or overwhelmed service personnel causing perceptions of
service quality to decline. An excellent response will include the observation that the optimal
utilization rates are context specific with the optimal rates depending on the degrees of
uncertainty (or variability in arrivals and service times). For example, a low rate of capacity
utilization is appropriate where the stakes are very high as in hospital emergency rooms or fire
departments.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis

1-101

Chapter 04
Production Processes


1. Understand the idea of production process mapping.
2. Define Littles law.
3. Demonstrate how production processes are organized.
4. Explain the trade-offs that need to be considered when designing a production processes.
5. Describe the product-process matrix.
6. Recognize how break-oven analysis is just as important in operations and supply chain
management as it is in other functional areas.
7. Understand how to design and analyze an assembly line.


1. Process selection refers to the strategic decision of choosing the volume of output to
produce in a manufacturing facility depending upon the way that facility produces.
True False

2. Process selection refers to the strategic decision of selecting which kind of production
processes to use to produce a product or provide a service.
True False

3. A continuous process indicates production of discrete parts moving from workstation to
workstation at a controlled rate.
True False

1-102
4. One difference between an assembly line process flow and a continuous process flow is
that on the assembly line the flow is discrete rather than continuous.
True False

5. One trade-off illustrated by the product-process matrix is between flexibility and cost.
True False

6. The choice of which process structure to select is generally a function of the volume
requirements for the product.
True False

1-103
7. One methodology used to evaluate equipment investment decisions where the investment
entails a large initial investment, fixed costs, and variable costs is break-even analysis.
True False

8. Break-even analysis can only be used in production equipment decision making when
dealing solely with fixed costs, no variable costs.
True False

9. A general purpose machine is less capable than a special purpose machine in certain tasks
but can perform a broader variety of tasks.
True False

10. Break-Even Analysis can be used to help decide whether to perform a task with a special
purpose machine or with a general purpose machine.
True False

11. The product-process matrix shows the relationship between process structures and product
volume and variety characteristics.
True False

12. The assembly-line balancing procedure determines the precedence relationships of
manufacturing tasks.
True False

13. Assembly lines are a special case of a project layout.
True False

1-104
14. In assembly-line balancing the theoretical minimum number of workstations is found by
the ratio of the sum of all task times divided by the cycle time.
True False

15. The efficiency of an assembly-line is found by the ratio of the sum of all task times
divided by the cycle time.
True False

16. For the purposes of assembly-line balancing, cycle time is found by dividing production
time per day by the required units of output per day.
True False

17. In balancing an assembly line workstation cycle time has to be less than the time between
successive units coming off the end of the line.
True False

18. If the sum of the task times required to produce a product is 45 minutes and the cycle time
for the same product is 10 minutes. Thus, the theoretical minimum number of workstations is
5 using the assembly-line balancing procedure.
True False

19. The first step in balancing an assembly line is to specify the precedence relationships
among tasks to be performed on the line.
True False

20. The term "assembly line" refers to progressive assembly linked by some material handling
device.
True False

1-105
for the same product is 15 minutes, the theoretical minimum number of workstations is 8
using the assembly-line balancing procedure.
True False

22. In designing a production layout a flexible line layout might have the shape of a "U".
True False

23. In designing an assembly line a mixed-model line layout is often used by JIT
manufacturers.
True False

24. The objective of a mixed-model line layout is to meet the demand for a variety of products
and avoid building high inventories.
True False

25. Workcenter layouts allocate dissimilar machines into cells to work on products that have
dissimilar processing requirements.
True False

26. A project layout is characterized by a relatively low number of production units in
comparison with process and product layout formats.
True False

27. A project layout is characterized by a high degree of task ordering.
True False

1-106
28. Assembly line balancing means assigning all necessary tasks to a series of workstations so
that each workstation has no more than can be done in the workstation cycle time and so that
idle time across all workstations is minimized.
True False

29. Inventory turn is the cost of goods sold divided by the average inventory value.
True False

30. Inventory turn is a better measure than the total value of inventory for comparative
purposes because it is a relative measure.
True False

31. Little's law says there is a long-term relationship between the inventory, throughput, and
flow time of a production system in steady state.
True False


32. Which of the following is not considered a major process flow structure?
A. Work Center
B. Project
C. Assembly line
D. Fabrication
E. Continuous Flow

1-107
33. A difference between project and continuous flow categories of process flow structures is
which two of the following?
A. The size of the product
B. Discrete parts moving from workstation to workstation
C. Degree of equipment specialization
D. Being a "Virtual Factory"
E. Both A & C

34. Assume a fixed cost for a process of $15,000. The variable cost to produce each unit of
product is $10 and the selling price for the finished product is $25. Which of the following is
the number of units that has to be produced and sold to break-even?
A. 500 units
B. 667 units
C. 790 units
D. 900 units
E. 1,000 units

product is $35, and the selling price for the finished product is $50. Which of the following is
A. 5,000 units
B. 6,000 units
C. 8,000 units
D. 11,000 units
E. 12,000 units

1-108
36. You are hired as a consultant to decide if your client should purchase a new, highly
specialized, piece of equipment. The product to be produced by this equipment is forecast to
have a total world wide demand of 15,000 units over the entire product life. The initial
investment to acquire and install the equipment is $256,000. The variable cost to produce
each unit will be $15 and the selling price for the finished product will be $30. Which of the
following best describes the situation the firm is facing?
A. The company will recover its initial investment
B. The company's total margin will be less than its investment
C. It's a good investment
D. The break-even is lower than the 15,000 units that are expected to sell
E. All of the above

37. In a workcenter machine A has a ten minute set-up time per batch and a two minute per
unit run time. Machine B performs the identical function but has a set-up time of thirty
minutes and a one minute run time per unit. The workcenter makes products in batches
ranging from one unit to one hundred units. Assuming capacity is not a limitation on either
machine, on which batches should machine B be used?
A. All batches should be run on machine B
B. Batches of more than 20 units should be run on machine B
C. Batches of fewer than 80 units should be run on machine B
D. Batches with up to 50 units should be run on machine B
E. No batches should be run on machine B

38. Which of the following is a basic type of process structure?
A. Process flow diagram
B. Product matrix
C. Process matrix
D. Workcenter
E. Manual assembly

39. Which of the following is not a basic type of process structure?
A. Product-process matrix
B. Workcenter
C. Manufacturing cell
D. Assembly line
E. Continuous process

1-109
40. Which of the following basic types of process structures is one which equipment or work
processes are arranged according to the progressive steps by which the product is made?
A. Project
B. Workcenter
D. Assembly line

41. Which of the following basic types of process structures is one which similar equipment
or functions are grouped together?
A. Project
B. Workcenter
D. Assembly line

42. The placement of which of the following is not determined by process structure
decisions?
A. Departments
B. Workgroups
C. Workstations
D. Machines
E. Emergency exits

43. Using the assembly-line balancing procedure, which of the following is the required cycle
time if the production time in minutes per day is 480 and the required output per day in units
is 50?
A. 0.104
B. 50
C. 9.6
D. 480
E. Cannot be determined from the information above

1-110
is 2000?
A. 0.72
B. 1.388
C. 250
D. 500

45. Using the assembly-line balancing procedure, which of the following is the theoretical
minimum number of workstations if the task times for the six tasks that make up the job are 4,
6, 7, 2, 6, and 5 minutes, and the cycle time is 10 minutes?
A. 3
B. 5
C. 6
D. 8

minimum number of workstations if the task times for the eight tasks that make up the job are
7, 4, 7, 8, 9, 4, 3 and 6 minutes, and the cycle time is 8 minutes?
A. 3
B. 5
C. 6
D. 8

47. You have just determined the actual number of workstations that will be used on an
assembly line to be 6 using the assembly-line balancing procedure. The cycle time of the line
is 5 minutes and the sum of all that tasks required on the line is 25 minutes. Which of the
following is the correct value for the resulting line's efficiency?
A. 0.500
B. 0.833
C. 0.973
D. 0.990

1-111
A. 0.500
B. 0.650
C. 0.750
D. 0.850

49. When balancing an assembly line, which of the following is not a way to reduce the
longest task time below the required workstation cycle time?
A. Upgrade the equipment
B. Assign a roaming helper to support the line
C. Split the task between two workstations
D. Speed up the assembly line transfer mechanism
E. Use a more skilled worker

50. The long-term relationship between the inventory, throughput, and flow time of a
production system in steady state is called which of the following?
A. Peterson's Rule
B. Murphy's Law
C. Little's Law
D. Robert's Rule


product is $10, and the selling price for the finished product is $50. Ignoring inventory, how
many units must the firm sell to break-even? ______________________
________________________________________

1-112
52. Using the assembly-line balancing procedure, what is the required cycle time if the
production time in minutes per day is 2,400 and the required output per day in units is 1,200?
______________________
________________________________________

4, 7, 5, 3 and 6 minutes, and the cycle time is 8 minutes?
______________________
________________________________________

is 30 seconds and the sum of all that tasks required on the line is 10 minutes. What is the line's
efficiency? ______________________
________________________________________

55. Give an example of a project layout. ______________________
________________________________________

56. The formula: (Inventory = Throughput rate x Flow time) is known as
______________________
________________________________________

1-113
Essay Questions

57. Describe the implications of the product-process matrix for process design in a
competitive situation.

58. Differentiate between a workcenter and a manufacturing cell.

59. Assume that you are offered a new piece of equipment for $10,000. The equipment will
produce 10,000 units per year with a margin of $6.00 per unit. Demand for the product being
produced has been 2,000 units per year. Your current equipment is fully depreciated and can
produce the 2,000 units per year at but at a margin of only $4.00 per unit. Should you
purchase the new equipment? Under what conditions?

1-114
60. A manufacturer has identified the options for acquiring a machined part. It can make the
part on a numerically controlled lathe for $150 per unit (including materials.) It can make the
part on a standard lathe for $250 per unit Document1Document1 It can make the part on a
machining center for $50 per unit (also including materials.) The manufacturer can acquire a
standard lathe for $10,000. It could acquire a numerically controlled lathe for $100,000. A
machining center would cost $350,000. It has also found that it can purchase the part for $350
per unit.

1-115
Chapter 04 Production Processes Answer Key


1. Process selection refers to the strategic decision of choosing the volume of output to
produce in a manufacturing facility depending upon the way that facility produces.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Designing a Production System

2. Process selection refers to the strategic decision of selecting which kind of production
processes to use to produce a product or provide a service.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-116
3. A continuous process indicates production of discrete parts moving from workstation to
workstation at a controlled rate.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: How Production Processes Are Organized

4. One difference between an assembly line process flow and a continuous process flow is
that on the assembly line the flow is discrete rather than continuous.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

5. One trade-off illustrated by the product-process matrix is between flexibility and cost.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

6. The choice of which process structure to select is generally a function of the volume
requirements for the product.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-117
7. One methodology used to evaluate equipment investment decisions where the investment
entails a large initial investment, fixed costs, and variable costs is break-even analysis.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Break-Even Analysis

8. Break-even analysis can only be used in production equipment decision making when
dealing solely with fixed costs, no variable costs.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

9. A general purpose machine is less capable than a special purpose machine in certain tasks
but can perform a broader variety of tasks.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. Break-Even Analysis can be used to help decide whether to perform a task with a special
purpose machine or with a general purpose machine.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-118
11. The product-process matrix shows the relationship between process structures and product
volume and variety characteristics.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

12. The assembly-line balancing procedure determines the precedence relationships of
manufacturing tasks.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Assembly-Line Design

13. Assembly lines are a special case of a project layout.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. In assembly-line balancing the theoretical minimum number of workstations is found by
the ratio of the sum of all task times divided by the cycle time.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-119
15. The efficiency of an assembly-line is found by the ratio of the sum of all task times
divided by the cycle time.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

16. For the purposes of assembly-line balancing, cycle time is found by dividing production
time per day by the required units of output per day.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

17. In balancing an assembly line workstation cycle time has to be less than the time between
successive units coming off the end of the line.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

for the same product is 10 minutes. Thus, the theoretical minimum number of workstations is
5 using the assembly-line balancing procedure.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-120
19. The first step in balancing an assembly line is to specify the precedence relationships
among tasks to be performed on the line.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

20. The term "assembly line" refers to progressive assembly linked by some material handling
device.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

for the same product is 15 minutes, the theoretical minimum number of workstations is 8
using the assembly-line balancing procedure.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

22. In designing a production layout a flexible line layout might have the shape of a "U".
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-121
23. In designing an assembly line a mixed-model line layout is often used by JIT
manufacturers.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

24. The objective of a mixed-model line layout is to meet the demand for a variety of products
and avoid building high inventories.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

25. Workcenter layouts allocate dissimilar machines into cells to work on products that have
dissimilar processing requirements.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

26. A project layout is characterized by a relatively low number of production units in
comparison with process and product layout formats.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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27. A project layout is characterized by a high degree of task ordering.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

28. Assembly line balancing means assigning all necessary tasks to a series of workstations so
that each workstation has no more than can be done in the workstation cycle time and so that
idle time across all workstations is minimized.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. Inventory turn is the cost of goods sold divided by the average inventory value.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Production Processes

30. Inventory turn is a better measure than the total value of inventory for comparative
purposes because it is a relative measure.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-123
31. Little's law says there is a long-term relationship between the inventory, throughput, and
flow time of a production system in steady state.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


32. Which of the following is not considered a major process flow structure?
A. Work Center
B. Project
C. Assembly line
D. Fabrication
E. Continuous Flow

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

33. A difference between project and continuous flow categories of process flow structures is
which two of the following?
A. The size of the product
B. Discrete parts moving from workstation to workstation
C. Degree of equipment specialization
D. Being a "Virtual Factory"
E. Both A & C

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-124
product is $10 and the selling price for the finished product is $25. Which of the following is
A. 500 units
B. 667 units
C. 790 units
D. 900 units
E. 1,000 units

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

product is $35, and the selling price for the finished product is $50. Which of the following is
A. 5,000 units
B. 6,000 units
C. 8,000 units
D. 11,000 units
E. 12,000 units

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-125
36. You are hired as a consultant to decide if your client should purchase a new, highly
specialized, piece of equipment. The product to be produced by this equipment is forecast to
have a total world wide demand of 15,000 units over the entire product life. The initial
investment to acquire and install the equipment is $256,000. The variable cost to produce
each unit will be $15 and the selling price for the finished product will be $30. Which of the
following best describes the situation the firm is facing?
A. The company will recover its initial investment
B. The company's total margin will be less than its investment
C. It's a good investment
D. The break-even is lower than the 15,000 units that are expected to sell
E. All of the above

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

37. In a workcenter machine A has a ten minute set-up time per batch and a two minute per
unit run time. Machine B performs the identical function but has a set-up time of thirty
minutes and a one minute run time per unit. The workcenter makes products in batches
ranging from one unit to one hundred units. Assuming capacity is not a limitation on either
machine, on which batches should machine B be used?
A. All batches should be run on machine B
B. Batches of more than 20 units should be run on machine B
C. Batches of fewer than 80 units should be run on machine B
D. Batches with up to 50 units should be run on machine B
E. No batches should be run on machine B

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-126
38. Which of the following is a basic type of process structure?
B. Product matrix
C. Process matrix
D. Workcenter
E. Manual assembly

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

39. Which of the following is not a basic type of process structure?
A. Product-process matrix
B. Workcenter
D. Assembly line

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

40. Which of the following basic types of process structures is one which equipment or work
processes are arranged according to the progressive steps by which the product is made?
A. Project
B. Workcenter
D. Assembly line

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-127
41. Which of the following basic types of process structures is one which similar equipment
or functions are grouped together?
A. Project
B. Workcenter
D. Assembly line

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

42. The placement of which of the following is not determined by process structure
decisions?
A. Departments
B. Workgroups
C. Workstations
D. Machines
E. Emergency exits

AACSB: Analytic
Difficulty: Easy
Taxonomy: Synthesis

is 50?
A. 0.104
B. 50
C. 9.6
D. 480

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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is 2000?
A. 0.72
B. 1.388
C. 250
D. 500

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

6, 7, 2, 6, and 5 minutes, and the cycle time is 10 minutes?
A. 3
B. 5
C. 6
D. 8

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-129
minimum number of workstations if the task times for the eight tasks that make up the job are
7, 4, 7, 8, 9, 4, 3 and 6 minutes, and the cycle time is 8 minutes?
A. 3
B. 5
C. 6
D. 8

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

A. 0.500
B. 0.833
C. 0.973
D. 0.990

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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A. 0.500
B. 0.650
C. 0.750
D. 0.850

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

49. When balancing an assembly line, which of the following is not a way to reduce the
longest task time below the required workstation cycle time?
A. Upgrade the equipment
B. Assign a roaming helper to support the line
C. Split the task between two workstations
D. Speed up the assembly line transfer mechanism
E. Use a more skilled worker

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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50. The long-term relationship between the inventory, throughput, and flow time of a
production system in steady state is called which of the following?
A. Peterson's Rule
B. Murphy's Law
C. Little's Law
D. Robert's Rule

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis


product is $10, and the selling price for the finished product is $50. Ignoring inventory, how
many units must the firm sell to break-even? ______________________
2,500 units

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

52. Using the assembly-line balancing procedure, what is the required cycle time if the
production time in minutes per day is 2,400 and the required output per day in units is 1,200?
______________________
2 minutes

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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4, 7, 5, 3 and 6 minutes, and the cycle time is 8 minutes?
______________________
4

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

is 30 seconds and the sum of all that tasks required on the line is 10 minutes. What is the line's
efficiency? ______________________
0.75

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

55. Give an example of a project layout. ______________________
A construction project like a building, a ship, a bridge or a highway

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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56. The formula: (Inventory = Throughput rate x Flow time) is known as
______________________
Little's Law

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

Essay Questions

57. Describe the implications of the product-process matrix for process design in a
competitive situation.
The product-process matrix on page 73 and is discussed on page 72 of the text. A successful
answer will focus on matching the process selected to characteristics of the product and will
discuss the trade-off between flexibility and low cost. For example in a commodity-type
marketing segment there is a strong imperative to push toward the lower right-hand corner of
the matrix, abandoning flexibility to achieve low cost. For products which are maturing, this
is a very strong imperative and the firm that reaches the low cost position first has substantial
competitive advantage through its ability to achieve low cost and high volume.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis

1-134
58. Differentiate between a workcenter and a manufacturing cell.
These layout types are discussed on page 82 of the text. A successful response should include
the notion that workcenters contain similar equipment while manufacturing cells are
organized around similarities in processing requirements of products and may contain a
collection of quite diverse equipment. In other words, a workcenter is organized around
technical aspects of the equipment while a manufacturing cell is organized around the
processing needs of the product.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

59. Assume that you are offered a new piece of equipment for $10,000. The equipment will
produce 10,000 units per year with a margin of $6.00 per unit. Demand for the product being
produced has been 2,000 units per year. Your current equipment is fully depreciated and can
produce the 2,000 units per year at but at a margin of only $4.00 per unit. Should you
purchase the new equipment? Under what conditions?
Yes. At 2,000 units per year the equipment will pay for itself through increased margin in two
and one-half years. If demand is expected to increase and the product life is expected to be
greater than two and one-half years, it is a good buy. Otherwise stick with the old equipment.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

1-135
60. A manufacturer has identified the options for acquiring a machined part. It can make the
part on a numerically controlled lathe for $150 per unit (including materials.) It can make the
part on a standard lathe for $250 per unit Document1Document1 It can make the part on a
machining center for $50 per unit (also including materials.) The manufacturer can acquire a
standard lathe for $10,000. It could acquire a numerically controlled lathe for $100,000. A
machining center would cost $350,000. It has also found that it can purchase the part for $350
per unit.
If the quantity required is less than 100, purchase the part for $350 per unit. If the quantity
needed is between 100 and 900, use the standard lathe. If the quantity needed is more than
900 but less than 2,500, use the numerically controlled lathe. If the quantity needed was
greater than 2,500, the machining center is best.
(Buy vs. Std: $350*D = $10,000 + 250*D; $100*D = $10,000; D = 100)
(Std vs. NC: $250*D + $10,000 = $150*D + $100,000; $100*D = $90,000; D = 900)
(NC vs. Machining Ctr: $150*D + $100,000 = $50*D + $350,000; $100*D = $250,000; D =
2,500)

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

1-136
Chapter 05
Service Processes


1. Describe the characteristics of service processes and how they differ from
manufacturing processes.
2. Classify service processes.
3. Explain service blueprinting.
4. Understand waiting line (queuing) analysis.
5. Model some common waiting line situation and estimate server utilization, the length
of a waiting line, and average customer wait time.


1. A service system with a high degree of customer contact is less difficult to control than a
low degree of customer contact service system.
True False

2. The service-system design matrix identifies seven different degrees of customer/service
contact.
True False

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3. An important aspect of service products is that they can not be inventoried.
True False

4. Customer contact refers to creation of the service.
True False

5. The work process involved in providing the service involves the physical presence of the
customer in the system.
True False

6. A central problem in many service settings is the management of waiting timethe trade-
off decision balancing the costs of additional service channels against the costs of waiting.
True False

7. Ideally in waiting line or queuing analysis we want to balance the cost of service capacity
with the cost of waiting.
True False

1-138
8. The customer arrivals in a queuing system come almost exclusively from finite
populations.
True False

9. The customer arrivals in a queuing system come almost exclusively from infinite
populations.
True False

10. A finite population in waiting line management refers to a population that is large enough
in relation to the service system so that the population size caused by subtraction or additions
to the population does not significantly affect the system probabilities.
True False

11. An infinite population in waiting line management refers to a population that is large
enough in relation to the service system so that the population size caused by subtraction or
additions to the population does not significantly affect the system probabilities.
True False

12. A variable arrival rate is more common in waiting line management than a constant arrival
rate.
True False

13. A constant arrival rate is more common in waiting line management than a variable arrival
rate.
True False

14. Arrival characteristics in a queuing problem include the length of the queue.
True False

1-139
15. The Poisson probability distribution is used in waiting line management when we are
interested in the number of arrivals to a queue during some fixed time period.
True False

16. The demand on a hospital's emergency medical services is considered a controllable
arrival pattern of the calling population.
True False

17. The demand on a hospital's emergency medical services is considered an uncontrollable
True False

18. Gas stations, loading docks, and parking lots have infinite potential length of lines for
their respective queuing systems.
True False

19. Highest-profit customer first is a queue discipline mentioned in the textbook.
True False

20. Longest waiting time in line is a queue discipline mentioned in the textbook.
True False

21. Best customer last is a queue discipline discussed in the textbook.
True False

22. A car wash is an example of a single channel, multiphase queuing system.
True False

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23. A tellers' window in a bank is an example of a single channel, multiphase queuing
system.
True False

24. The admissions system in a hospital for patients is an example of a single channel, single
phase queuing system.
True False

25. There are different queuing models to fit different queuing situations.
True False

26. In a practical sense, an infinite queue is one that includes every possible member of the
served population.
True False

27. In a waiting line situation, multiple lines occur only when there are multiple servers.
True False

28. The term "queue discipline" involves the art of controlling unruly customers who have
become irritated by waiting.
True False

29. In a practical sense, a finite line is one that is potentially very long in terms of the capacity
of the serving system.
True False

1-141
30. A department of 25 machines is kept running by three operators who respond to randomly
occurring equipment problems. An analyst who wanted to know how much production was
being lost by machines waiting for service could use queuing theory to find out.
True False

occurring equipment problems. When an operator is absent, the amount of production being
lost by machines waiting for service increases. The analyst can use queuing theory to
determine whether to pay overtime to an operator from a different shift or not.
True False

occurring equipment problems. An analyst wanting to know whether to add a fourth operator
or downsize to two operators would be helped by using queuing theory.
True False

33. An internet company that facilitates customers contact with each other is a kind of virtual
service.
True False

34. In a virtual service operations management is challenged to provide a policing function
through monitoring customer encounters.
True False

35. In a virtual service operations management's only challenge is to keep the technology
functioning and up to date.
True False

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36. The standard tool for process design, whether in services or manufacturing, is the flow
chart.
True False

37. In service blueprinting the line of visibility refers to things that the service process
designer did not foresee when conceiving the process.
True False

38. In service blueprinting poka-yokes are procedures that block mistakes from becoming
service defects.
True False

39. The line of visibility in service blueprinting distinguishes between those activities that the
customer sees presence and those the customer does not see.
True False


40. Which of the following refers to the physical presence of the customer in a service
system?
A. Creation of the service
B. Customer contact
C. Intermittent production
D. Continuous production

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41. Which of the following are alternative possible degrees of customer contact included in
the Service-System Design Matrix?
A. Mail
B. Warranty
C. Sales call
D. Field service

42. Which of the following is a degree of customer/server contact included in the service-
system design matrix?
A. Face-to-face distance
B. Internet
C. Questionnaire response
D. Automated teller (ATM)
E. Response card encounter

43. In the service-system design matrix, a face-to-face total customization service encounter is
expected to have which of the following?
A. Low sales opportunity
B. Low production efficiency
C. High production efficiency
D. Low degree of customer/server contact

44. In the service-system design matrix, a mail contact service encounter is expected to have
which of the following?
A. High sales opportunity
B. High degree of customer/server contact
C. Low production efficiency
D. Low sales opportunity

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45. In the service-system design matrix, a face-to-face loose specs service encounter is

46. In the service-system design matrix, an internet and on-site technology service encounter
is expected to have which of the following?
D. High production efficiency

47. Which of the following is a suggestion for managing queues that is mentioned in the
textbook?
A. Put up a serpentine lane to keep people from jumping ahead in line
B. Use humor to defuse a potentially irritating situation
C. Segment the customers
D. Assure customers that the wait is fair and inform them of the queue discipline
E. Tell people in the queue that each will be served as soon as possible

48. Which of the following is not a suggestion for managing queues presented in the
textbook?
A. Try to divert your customer's attention when waiting
B. Segment the customers
C. Encourage customers to come during the slack periods
D. Train your people to be friendly
E. Periodically close the service channel to temporarily disperse the line

1-145
textbook?
A. Train your servers to be friendly
B. Try to divert your customer's attention when waiting
C. Determine an acceptable waiting time for your customers
D. Inform your customers of what to expect
E. Encourage customers to come during slack periods

50. Which of the following is a suggestion for managing queues presented in the textbook?
B. Tell customers that the line should encourage them to come during slack periods
C. Give each customer a number
D. Periodically close the service channel to temporarily disperse the line
E. Use humor to defuse a potentially irritating situation

51. Which of the following are the two major components of a queuing system?
A. The source population and the queuing discipline
B. The number of servers and the waiting line
C. The source population and the condition of the customer exiting the system
D. The queue discipline and the waiting line
E. The service speed and the waiting line

52. Which of the following is an example of a finite population in a queuing system?
A. People waiting to purchase fuel at a service station
B. Machines which have randomly spaced service requirements
C. People waiting in line at a tellers' window in a bank
D. Patients seeking help from a doctor in a private practice
E. Taxpayers calling the IRS for assistance

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53. Which of the following is not a queue discipline mentioned in the textbook?
A. First come, first served
B. Last in, first out
C. Limited needs
D. Shortest processing time
E. Best customer first

54. Which of the following queue discipline is mentioned in the textbook?
A. First in, first out
B. Garner-Whitten formula
C. Soonest promise date
D. Patient customers last
E. Anxious customers first

55. Buying a ticket for a college football game where there are multiple windows to buy the
ticket at features which type of queuing system line structure?
A. Single channel, single phase
B. Single channel, multiphase
C. Multichannel, single phase
D. Multichannel, multiphase

56. Buying food at a large food store with multiple checkout counters features which type of
queuing system line structure?

1-147
57. Getting an autograph from a famous person might involve standing in which type of
queuing line structure?

58. In a college registration process, several department heads have to approve an individual
student's semester course load. What is the queuing system line structure?

59. Standing in line to buy a ticket for a movie where there is only one window to buy tickets
is which type of queuing system Line Structure?

60. A roller coaster ride in an amusement park employs which type of queuing system line
structure?

1-148
61. Machine breakdown and repair in a twelve machine factory having one repair mechanic
would develop which type of queuing system line structure concerning machine breakdowns?

62. Machine breakdown and repair in a twelve machine factory having three repair mechanics

63. Assume the service rate for a queue in a truck-loading operation is 2 trucks per hour.
Using the infinite queuing notion for the models presented in the textbook which of the
following is the average service time?
A. 2 hours
B. 1 hour
C. 0.5 hours
D. 0.25 hours

64. If the arrival rate for loading trucks is 5 trucks per hour, what is the mean time between
arrivals?
A. 28 minutes
B. 20 minutes
C. 12 minutes
D. 6 minutes

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65. A company is concerned about the number of customers that have to wait for service in
their customer service department. Assume the rate at which customers are serviced is 12 per
hour. Using the infinite queuing notion for the models presented in the textbook which of the
following is the mean time between arrivals?
A. 12 minutes
B. 6 minutes
C. 2 minutes
D. 1 minutes
E. Can not be determined

66. An example of a virtual service is which of the following?
A. A pizza delivery service
B. Purchasing a flower arrangement over the internet
C. An on-line dating service
D. Ordering a specially-configured computer on-line

67. A service blueprint is not which of the following?
A. A standard tool for service process design
B. A process flowchart
C. A diagram that distinguishes between different levels of customer contact
D. A service encounter that conforms to specifications
E. A tool that enumerates all the steps in a service process

68. Which of the following are not examples of poka-yokes described in the text?
A. Height bars at amusement parks
B. Chains to configure waiting lines
C. Take-a-number systems
D. Mirrors on telephones
E. Tear-out cards in magazines

1-150


69. In the service-system design matrix, what kind of production efficiency is expected from a
service encounter designed to be "face-to-face loose specs?" ______________________
________________________________________

70. When arrivals occur in a purely random fashion at a service facility, what kind of
distribution does a plot of inter-arrival times yield? __________________
________________________________________

71. When arrivals occur in a purely random fashion at a service facility, the distribution of the
number of arrivals per unit of time forms which kind of distribution? _____________
________________________________________

Short Answer Questions

72. In finite queuing theory, the average waiting time in line is denoted by what symbol?
_________________


73. In finite queuing theory, the average number in the waiting line divided by the average
arrival rate yields what measure of waiting line performance?
________________________________________

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74. Joining a line at an airport shoeshine stand where there are five people shining shoes puts
you in which type of queuing system line structure? ______________________
________________________________________

75. Buying items at a department store where there are a large number of checkout counters
features which type of queuing system line structure? _____________________
________________________________________

76. Getting a flu shot from the one campus nurse that is on duty might involve standing in
which type of queuing line structure? ___________________________________
________________________________________

77. In getting your first driver's license, several steps had to be taken. First, you took the
written test. Then you took the driving test. Then your photograph was taken and the license
made. What was the queuing system line structure in the Department of Motor Vehicles?
______________________________________
________________________________________

78. Standing in line to buy tickets for a basketball game where there are multiple windows to
buy tickets involves which type of queuing system Line Structure?
______________________________________
________________________________________

79. A single toll booth on a one-lane bridge is which type of queuing system line structure?
____________________________
________________________________________

80. A procedure that keeps a mistake from happening in a service operations is called what?
____________________________
________________________________________

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81. In a virtual service what kind of customer contact enables customers to interact with one
another in an open environment? ____________________________
________________________________________

82. How are poka-yokes used differently in services than in manufacturing?
____________________________
________________________________________

Essay Questions

83. How does the degree of customer contact relate to the kinds of skills needed by service
workers and the degree of training they require?

84. How are people waiting in queues in service operations similar to inventories in
manufacturing and in what ways are they different?

85. How are customer arrivals drawn from finite and infinite populations distinguished?

1-153

1-154
Chapter 05 Service Processes Answer Key


1. A service system with a high degree of customer contact is less difficult to control than a
low degree of customer contact service system.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: An Operational Classification of Services

2. The service-system design matrix identifies seven different degrees of customer/service
contact.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

3. An important aspect of service products is that they can not be inventoried.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-155
4. Customer contact refers to creation of the service.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

5. The work process involved in providing the service involves the physical presence of the
customer in the system.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

6. A central problem in many service settings is the management of waiting timethe trade-
off decision balancing the costs of additional service channels against the costs of waiting.
TRUE

AACSB: Analytic
Difficulty: Easy
Topic: The Queuing System

7. Ideally in waiting line or queuing analysis we want to balance the cost of service capacity
with the cost of waiting.
TRUE

AACSB: Analytic
Difficulty: Easy

1-156
8. The customer arrivals in a queuing system come almost exclusively from finite
populations.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

9. The customer arrivals in a queuing system come almost exclusively from infinite
populations.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. A finite population in waiting line management refers to a population that is large enough
in relation to the service system so that the population size caused by subtraction or additions
to the population does not significantly affect the system probabilities.
FALSE

AACSB: Analytic
Difficulty: Medium

11. An infinite population in waiting line management refers to a population that is large
enough in relation to the service system so that the population size caused by subtraction or
additions to the population does not significantly affect the system probabilities.
TRUE

AACSB: Analytic
Difficulty: Medium

1-157
12. A variable arrival rate is more common in waiting line management than a constant arrival
rate.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. A constant arrival rate is more common in waiting line management than a variable arrival
rate.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. Arrival characteristics in a queuing problem include the length of the queue.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

15. The Poisson probability distribution is used in waiting line management when we are
interested in the number of arrivals to a queue during some fixed time period.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-158
16. The demand on a hospital's emergency medical services is considered a controllable
FALSE

AACSB: Analytic
Difficulty: Easy

17. The demand on a hospital's emergency medical services is considered an uncontrollable
TRUE

AACSB: Analytic
Difficulty: Easy

18. Gas stations, loading docks, and parking lots have infinite potential length of lines for
their respective queuing systems.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

19. Highest-profit customer first is a queue discipline mentioned in the textbook.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-159
20. Longest waiting time in line is a queue discipline mentioned in the textbook.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

21. Best customer last is a queue discipline discussed in the textbook.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

22. A car wash is an example of a single channel, multiphase queuing system.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

23. A tellers' window in a bank is an example of a single channel, multiphase queuing
system.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-160
24. The admissions system in a hospital for patients is an example of a single channel, single
phase queuing system.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

25. There are different queuing models to fit different queuing situations.
TRUE

AACSB: Analytic
Difficulty: Easy

26. In a practical sense, an infinite queue is one that includes every possible member of the
served population.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Infinite queue

27. In a waiting line situation, multiple lines occur only when there are multiple servers.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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28. The term "queue discipline" involves the art of controlling unruly customers who have
become irritated by waiting.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

29. In a practical sense, a finite line is one that is potentially very long in terms of the capacity
of the serving system.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

occurring equipment problems. An analyst who wanted to know how much production was
being lost by machines waiting for service could use queuing theory to find out.
TRUE

AACSB: Analytic
Difficulty: Medium

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occurring equipment problems. When an operator is absent, the amount of production being
lost by machines waiting for service increases. The analyst can use queuing theory to
determine whether to pay overtime to an operator from a different shift or not.
TRUE

AACSB: Analytic
Difficulty: Hard

occurring equipment problems. An analyst wanting to know whether to add a fourth operator
or downsize to two operators would be helped by using queuing theory.
TRUE

AACSB: Analytic
Difficulty: Hard

33. An internet company that facilitates customers contact with each other is a kind of virtual
service.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

34. In a virtual service operations management is challenged to provide a policing function
through monitoring customer encounters.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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35. In a virtual service operations management's only challenge is to keep the technology
functioning and up to date.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

36. The standard tool for process design, whether in services or manufacturing, is the flow
chart.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: An Operational Classification of Services, Service Blueprinting and Fail-Saifing

37. In service blueprinting the line of visibility refers to things that the service process
designer did not foresee when conceiving the process.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

38. In service blueprinting poka-yokes are procedures that block mistakes from becoming
service defects.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Service Blue Printing and Fail-Safing

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39. The line of visibility in service blueprinting distinguishes between those activities that the
customer sees presence and those the customer does not see.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Service Blue Printing and Fail-Saifing


40. Which of the following refers to the physical presence of the customer in a service
system?
A. Creation of the service
B. Customer contact
C. Intermittent production
D. Continuous production

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

41. Which of the following are alternative possible degrees of customer contact included in
the Service-System Design Matrix?
A. Mail
B. Warranty
C. Sales call
D. Field service

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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42. Which of the following is a degree of customer/server contact included in the service-
system design matrix?
A. Face-to-face distance
B. Internet
C. Questionnaire response
D. Automated teller (ATM)
E. Response card encounter

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

43. In the service-system design matrix, a face-to-face total customization service encounter is

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

44. In the service-system design matrix, a mail contact service encounter is expected to have
D. Low sales opportunity

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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45. In the service-system design matrix, a face-to-face loose specs service encounter is

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

46. In the service-system design matrix, an internet and on-site technology service encounter
is expected to have which of the following?
D. High production efficiency

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

47. Which of the following is a suggestion for managing queues that is mentioned in the
textbook?
A. Put up a serpentine lane to keep people from jumping ahead in line
B. Use humor to defuse a potentially irritating situation
C. Segment the customers
D. Assure customers that the wait is fair and inform them of the queue discipline
E. Tell people in the queue that each will be served as soon as possible

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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textbook?
A. Try to divert your customer's attention when waiting
B. Segment the customers
C. Encourage customers to come during the slack periods
D. Train your people to be friendly
E. Periodically close the service channel to temporarily disperse the line

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

textbook?
B. Try to divert your customer's attention when waiting
C. Determine an acceptable waiting time for your customers
D. Inform your customers of what to expect
E. Encourage customers to come during slack periods

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

50. Which of the following is a suggestion for managing queues presented in the textbook?
B. Tell customers that the line should encourage them to come during slack periods
C. Give each customer a number
D. Periodically close the service channel to temporarily disperse the line
E. Use humor to defuse a potentially irritating situation

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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51. Which of the following are the two major components of a queuing system?
A. The source population and the queuing discipline
B. The number of servers and the waiting line
C. The source population and the condition of the customer exiting the system
D. The queue discipline and the waiting line
E. The service speed and the waiting line

AACSB: Analytic
Difficulty: Medium

52. Which of the following is an example of a finite population in a queuing system?
A. People waiting to purchase fuel at a service station
B. Machines which have randomly spaced service requirements
C. People waiting in line at a tellers' window in a bank
D. Patients seeking help from a doctor in a private practice
E. Taxpayers calling the IRS for assistance

AACSB: Analytic
Difficulty: Easy

53. Which of the following is not a queue discipline mentioned in the textbook?
A. First come, first served
B. Last in, first out
C. Limited needs
D. Shortest processing time
E. Best customer first

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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54. Which of the following queue discipline is mentioned in the textbook?
A. First in, first out
B. Garner-Whitten formula
C. Soonest promise date
D. Patient customers last
E. Anxious customers first

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

55. Buying a ticket for a college football game where there are multiple windows to buy the
ticket at features which type of queuing system line structure?

AACSB: Analytic
Difficulty: Medium

56. Buying food at a large food store with multiple checkout counters features which type of
queuing system line structure?

AACSB: Analytic
Difficulty: Medium

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57. Getting an autograph from a famous person might involve standing in which type of
queuing line structure?

AACSB: Analytic
Difficulty: Medium

58. In a college registration process, several department heads have to approve an individual
student's semester course load. What is the queuing system line structure?

AACSB: Analytic
Difficulty: Medium

59. Standing in line to buy a ticket for a movie where there is only one window to buy tickets
is which type of queuing system Line Structure?

AACSB: Analytic
Difficulty: EMPTY

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60. A roller coaster ride in an amusement park employs which type of queuing system line
structure?

AACSB: Analytic
Difficulty: Medium

61. Machine breakdown and repair in a twelve machine factory having one repair mechanic

AACSB: Analytic
Difficulty: Medium

62. Machine breakdown and repair in a twelve machine factory having three repair mechanics

AACSB: Analytic
Difficulty: Medium

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63. Assume the service rate for a queue in a truck-loading operation is 2 trucks per hour.
Using the infinite queuing notion for the models presented in the textbook which of the
following is the average service time?
A. 2 hours
B. 1 hour
C. 0.5 hours
D. 0.25 hours

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

64. If the arrival rate for loading trucks is 5 trucks per hour, what is the mean time between
arrivals?
A. 28 minutes
B. 20 minutes
C. 12 minutes
D. 6 minutes

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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65. A company is concerned about the number of customers that have to wait for service in
their customer service department. Assume the rate at which customers are serviced is 12 per
hour. Using the infinite queuing notion for the models presented in the textbook which of the
following is the mean time between arrivals?
A. 12 minutes
B. 6 minutes
C. 2 minutes
D. 1 minutes
E. Can not be determined

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

66. An example of a virtual service is which of the following?
A. A pizza delivery service
B. Purchasing a flower arrangement over the internet
C. An on-line dating service
D. Ordering a specially-configured computer on-line

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

67. A service blueprint is not which of the following?
A. A standard tool for service process design
B. A process flowchart
C. A diagram that distinguishes between different levels of customer contact
D. A service encounter that conforms to specifications
E. A tool that enumerates all the steps in a service process

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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68. Which of the following are not examples of poka-yokes described in the text?
A. Height bars at amusement parks
B. Chains to configure waiting lines
C. Take-a-number systems
D. Mirrors on telephones
E. Tear-out cards in magazines

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Service Blue Printing and Fail-Saifing


69. In the service-system design matrix, what kind of production efficiency is expected from a
service encounter designed to be "face-to-face loose specs?" ______________________
Low production efficiency

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

70. When arrivals occur in a purely random fashion at a service facility, what kind of
distribution does a plot of inter-arrival times yield? __________________
Exponential

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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71. When arrivals occur in a purely random fashion at a service facility, the distribution of the
number of arrivals per unit of time forms which kind of distribution? _____________
Poisson

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge


72. In finite queuing theory, the average waiting time in line is denoted by what symbol?
_________________
W
q

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge


73. In finite queuing theory, the average number in the waiting line divided by the average
arrival rate yields what measure of waiting line performance?
Average waiting time

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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74. Joining a line at an airport shoeshine stand where there are five people shining shoes puts
you in which type of queuing system line structure? ______________________
Multichannel, single phase

AACSB: Analytic
Difficulty: Medium

75. Buying items at a department store where there are a large number of checkout counters
features which type of queuing system line structure? _____________________

AACSB: Analytic
Difficulty: Medium

76. Getting a flu shot from the one campus nurse that is on duty might involve standing in
which type of queuing line structure? ___________________________________
Single channel, single phase

AACSB: Analytic
Difficulty: Medium

77. In getting your first driver's license, several steps had to be taken. First, you took the
written test. Then you took the driving test. Then your photograph was taken and the license
made. What was the queuing system line structure in the Department of Motor Vehicles?
______________________________________
Single channel, multiphase

AACSB: Analytic
Difficulty: Medium

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78. Standing in line to buy tickets for a basketball game where there are multiple windows to
buy tickets involves which type of queuing system Line Structure?
______________________________________

AACSB: Analytic
Difficulty: Medium

79. A single toll booth on a one-lane bridge is which type of queuing system line structure?
____________________________
Single channel, single phase

AACSB: Analytic
Difficulty: Medium

80. A procedure that keeps a mistake from happening in a service operations is called what?
____________________________
A poka-yoke

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

81. In a virtual service what kind of customer contact enables customers to interact with one
another in an open environment? ____________________________
Pure virtual customer contact

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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82. How are poka-yokes used differently in services than in manufacturing?
____________________________
They are applied to the actions of the customer

AACSB: Analytic
Difficulty: Easy
Topic: An Operational Classification of Services, Service Blueprinting and Fail-Safing

Essay Questions

83. How does the degree of customer contact relate to the kinds of skills needed by service
workers and the degree of training they require?
This question relates to the service-system design matrix discussion starting on page 101 and
particularly to exhibit 5.2 on page 103. A successful response to this question will indicate
that the kinds of skills required progress from technical (clerical) types of skills to relationship
types of skills as the degree of customer contact increases. The higher the degree of customer
contact, the more autonomous is the service worker and therefore training must include not
only the technical aspects of the job but also the entire array of strategic choices the company
has made regarding the way the customer is to be handled in a wide range of transactional
situations.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analytic

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84. How are people waiting in queues in service operations similar to inventories in
manufacturing and in what ways are they different?
People waiting in queues at various stages of a multiphase process are conceptually exactly
like the buffering inventories in that they tend to decouple different stages and reduce the
impacts of blocking, starving and bottlenecking on the efficiency of the system. The main
difference, of course, is that people as inventory need to be actively managed (as described in
the text starting on page 106) and, because they are customers, are more important and have a
vastly higher "cost of carrying" than inventories of materials.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis
Topic: An Operational Classification of Services, The Queuing System

85. How are customer arrivals drawn from finite and infinite populations distinguished?
The text on page 108-109 describes the difference between finite and infinite populations as
the size of the population relative to the service system. Analytically, different formulas and
methods are required for finite vs. infinite populations based upon the probability of the next
arrival either staying the same after an entry to service (infinite population assumption) or the
diminishing (finite assumption.)

AACSB: Analytic
Difficulty: Medium

1-180
Chapter 06
Quality Management and Six Sigma


1. Understand total quality management.
2. Discuss how quality is measured and be aware of the different dimensions of quality.
3. Explain the define, measure, analyze, improve, and control (DMAIC) quality
improvement process.
4. Show how to calculate the capability of a process.
5. Describe how processes are monitored with control charts.
6. Understand acceptance sampling concepts.


1. TQM was defined in the textbook as managing the entire organization so that it excels on
all dimensions of products and services that are important to the customer.
True False

2. One SPC tool used in total quality management is the run chart.
True False

3. An operational goal of total quality management is the careful design of the product or
service.
True False
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4. An operational goal of total quality management is ensuring that the organization's systems
can consistently produce the product or service as it is designed.
True False

5. Design quality refers to the inherent value of the product in the marketplace.
True False

6. One of the tools of a quality control department that is used in a TQM program is
acceptance sampling.
True False

leadership.
True False

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8. In 1997 the Malcolm Baldrige National Quality Improvement Act established the U.S.'s
annual award for total quality management.
True False

9. Conformance quality is a strategic decision for the firm.
True False

10. The Malcolm Baldrige National Quality Award represents the U. S. government's
endorsement of quality as an essential part of successful business strategy.
True False

11. While business organizations can seek to achieve the Baldrige National Quality Award,
educational institutions, like universities, can't.
True False

12. While small business organizations can seek to achieve the Baldrige National Quality
Award, health care organizations, like hospitals, can't.
True False

13. A quality guru named Philip Crosby defined quality as fitness for use.
True False

14. A quality guru named Philip Crosby defined quality as conformance to requirements.
True False

15. A quality guru named Joseph M. Juran defined quality as fitness for use.
True False

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16. A quality guru named Philip Crosby suggested a general approach to quality management
should involve prevention, not inspection.
True False

17. A quality guru named Philip Crosby is well known for his "14 points" of quality.
True False

18. Fundamental to any quality program is the determination of quality specifications and the
costs of achieving (or not achieving) those specifications.
True False

19. The term "conformance quality" refers to the relative level of performance of a product as
compared to competing products. For instance, certain luxury sedans are said to be of "higher
quality" than some low-priced sub-compact automobiles.
True False

20. "Quality at the source" refers to the degree to which product or service design
specifications are met.
True False

21. Design quality in products refers to the degree to which product design specifications are
met.
True False

22. One of the definitions for the cost of quality is that it represents the costs attributable to
the production of quality that is not 100 percent perfect.
True False

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23. Continuous improvement is a management philosophy that approaches the challenge of
product and process improvement as a never-ending process of achieving small wins.
True False

24. Six-sigma refers to the philosophy and methods that some leading companies use to
eliminate defects in their products and processes.
True False

25. A process that is in six-sigma control will produce no more than two defects out of every
million units.
True False

26. A DMPO is essentially the same thing as a DMAIC.
True False

27. An opportunity flow diagram is used to separate the value-added from the non-value-
added steps in a process.
True False

28. An opportunity flow diagram is a time sequenced chart showing plotted values measuring
the flow of end product or components.
True False

29. Variation in production systems that is caused by factors that can be clearly identified and
possibly even managed is called assignable variation.
True False

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30. An example of assignable variation in a production system may be that workers are not
identically trained.
True False

31. An example of assignable variation in a production system may be that a machine is not
adjusted properly.
True False

32. Variation that is inherent in a production process itself is called assignable variation.
True False

33. Variation that is inherent in a production process itself is called common variation.
True False

34. It is impossible to have zero variability in production processes.
True False

35. Genichi Taguchi's view of the cost of quality is that variance is a discontinuous function.
True False

36. The capability index is used to gauge economic changes in service systems.
True False

37. Process control is concerned with monitoring quality after the product or service has been
produced.
True False

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38. Statistical process control involves testing random samples of output from a process to
determine whether the process is producing items within a pre-selected range.
True False

39. Measurement by attributes means taking a sample, measuring the attribute in question and
determining the level of quality in the population from which the sample was drawn.
True False

40. Attributes are those quality characteristics that are classified as either conforming or not
conforming to specifications.
True False

41. A quality control chart has upper and lower control limits expressed as lines on a chart. As
long as the sample values fall between these two lines there is no need to investigate process
behavior.
True False

42. The "p" chart is only useful for sampling that deals with continuous variables.
True False

43. The value for "z" used in quality control charts is based on the degree of confidence you
want to have in the resulting UCL and LCL values.
True False

44. If the fraction defective is 0.12 based on a sample size of 16, the standard deviation used
in the "p" chart is about 0.08.
True False

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True False

46. To obtain a 99.7 percent confidence level in a "p" chart we would use a value of 3 for "z".
True False

47. Acceptance sampling is performed on goods that already exist to determine what
percentage of items conforms to specifications.
True False

48. In acceptance sampling, the number of units in the sample (n) is determined by the
interaction of the acceptable quality level (AQL), the lot tolerance percent defective (LTPD),
the probability of rejecting a high quality lot (alpha) and the probability of accepting a low
quality lot (beta).
True False

49. In acceptance sampling, the value for the acceptance number (c) is determined by the
quality lot (beta).
True False

50. AQL stands for accepting questionable lots in production quality management.
True False

51. LTPD in acceptance sampling stands for "lots of tolerance for parts defective."
True False

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52. The Greek letter alpha is associated with consumer's risk.
True False

53. The probability associated with rejecting a high quality lot is denoted in acceptance
sampling with the Greek letter alpha.
True False

54. The probability associated with accepting a low quality lot is denoted in acceptance
True False

55. The producer's risk associated with rejecting a high quality lot is denoted in acceptance
sampling with the Greek letter beta.
True False

56. Total, one-hundred percent, inspection can never be cost justified.
True False

57. One-hundred percent inspection is justified when the cost of inspection is not very much.
True False

58. Sampling plans are generally displayed graphically through the use of operating
characteristic (OC) curves.
True False

59. The capability index (C
pk
) calculates the percentage of items being produced within
specifications.
True False

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pk
) indicates the position of the mean and tails of a processes
variance relative to design specifications.
True False

61. Standard practice in statistical process control for variables is to set control limits so that
95 percent of the sample means will fall within the UCL and the LCL.
True False

62. In variables sampling the actual measurements of the variable observed are used
regardless of whether the unit is good or bad.
True False


63. The philosophical leaders of the quality movement, Philip Crosby, W. Edwards Deming,
and Joseph M. Juran had the same general message about what it took to achieve outstanding
quality. Which of the following was not part of that message?
A. Quality is free
B. Leadership from senior management
C. Customer focus
D. Total involvement of the workforce
E. Continuous improvement

quality. Which of the following was part of that message?
A. Fourteen steps for quality management
B. Quality is free
C. Customer focus
D. Zero defects
E. Six-sigma

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65. An analytical tool used in six-sigma quality improvement programs is which of the
following?
A. Leadership
B. Continuous improvement
C. Quick response
D. Partnership development
E. Checksheets

66. Which of the following is not an analytical tool used in six-sigma quality improvement
programs?
A. Run charts
B. Pass charts
C. Cause-and-effect diagrams
D. Flowcharts
E. Pareto charts

67. A flow chart as part of a six-sigma quality improvement process might be found in which
DMAIC category?
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

68. A fishbone diagram as part of a six-sigma quality improvement process might be found in
which DMAIC category?
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

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69. An opportunity flow diagram as part of a six-sigma quality improvement process might be
found in which DMAIC category?
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

70. A Pareto chart as part of a six-sigma quality improvement process might be found in
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

71. Which of the following is an analytical tool used in six-sigma quality improvement
programs?
A. Leadership
B. Pareto Charts
C. Management by fact
D. Continuous improvement
E. Kaizen

programs?
A. Flowcharts
B. Run charts
C. Control charts
D. Pareto analysis
E. Tendency analysis

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73. Failure mode and effect analysis is used in six-sigma projects. It involves which of the
following?
A. Closely examining each rejected part to determine the cause
B. A careful sampling plan
C. Calculating a risk priority number for each possible failure
D. Reporting the effect each failure has had on a customer
E. Multivariate testing

74. Design of experiments is a statistical methodology often used in six-sigma projects. It
aims to accomplish which of the following?
A. Keep careful track of the occurrences of each possible defect
B. Determine the cause and effect relationships between process variables and output
C. Report defects to management on a Pareto chart
D. Carefully change each individual process variable until the cause of a defect is found
E. Eliminate defects by finding out who or what is causing them

75. The Malcolm Baldrige award selection process helps improve quality and productivity by
which of the following means?
A. Stimulating foreign based suppliers of American companies to improve quality
B. Reporting quality levels among American firms
C. Identifying American firms with the most difficult quality problems
D. Providing feedback to applicants by the examiners
E. Helping Baldrige award winners increase their sales

76. Which of the following are eligible companies to be considered for the Baldrige award?
A. Auditing firms
B. Offshore suppliers to U. S. companies
C. Firms operating only outside the U. S.
D. State Government agencies

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77. Which of the following are not eligible to be considered for the Baldrige Award?
A. Small businesses
B. Health care organizations
C. Educational institutions
D. State highway patrol organizations
E. Nuclear power plants

78. The primary purpose of the Malcolm Baldrige National Quality Award is which of the
following?
A. To encourage the spread of statistical quality control
B. To improve human resource development and management in manufacturing
C. To improve competitiveness of American firms
D. To prove that American firms were competitive in quality
E. To emphasize the use of quantitative methods in process management

79. The Grading Criteria of the Baldrige Award for total quality management includes which
of the following?
A. Future plans
B. Information and analysis
C. Standardization
D. Control

80. The Malcolm Baldrige National Quality Award is given to organizations that have done
A. Instituted a six-sigma approach to total quality control
B. Demonstrated a high level of product quality
C. Demonstrated outstanding quality in their products and processes
D. Have a world-class quality control function
E. Most significantly improved their product quality levels

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81. Which of the following is not a category reported in applying for the Baldrige Award?
A. Corporate leadership
B. Use of statistical quality control tools
C. Business results
D. Consumer and market focus
E. Strategic planning

82. The dimension of design quality that concerns the sensory characteristics of the product is
A. Features
B. Serviceability
C. Perceived quality
D. Reputation
E. Aesthetics

83. The dimension of design quality that concerns the consistency of performance over time
or the probability of failing is which of the following?
A. Response
B. Serviceability
C. Reliability
D. Reputation
E. Perceived quality

84. The dimension of design quality that concerns secondary characteristics is which of the
following?
A. Features
B. Serviceability
C. Reliability
D. Reputation

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85. Which of the following is a dimension of design quality?
A. Price
B. Features
C. Color
D. Weight
E. Quality at the source

A. Aesthetics
B. Price
C. Quality at the source
D. Distribution
E. Leadership

87. Which of the following is a basic assumptions that justify an analysis of the costs of
quality?
A. Failures are caused
B. Prevention is more expensive
C. Performance can be learned
D. Rules of thumb don't always work
E. Appraisal costs are less than prevention costs

88. A cost of quality classification is which of the following?
A. Material costs
B. Prevention costs
C. Variable overhead
D. Direct labor
E. Inventory costs

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89. Which of the following is the cost of quality classification for costs such as scrap, rework,
or repair?
A. Appraisal costs
B. Prevention costs
C. External failure costs
D. Internal failure costs
E. Rework and wastage

90. Which of the following is the cost of quality classification for costs such as inspection,
testing, and other tasks to ensure that the product or process is acceptable?
A. Appraisal costs
B. Prevention costs
E. Checking costs

91. Which of the following is the cost of quality classification for costs such as defects that
pass through the system, such as customer warranty replacements, loss of customer or
goodwill, handling complaints, and product repair?
A. Appraisal costs
B. Prevention costs
D. Customer return cost
E. Workmanship costs

92. Which of the following tools uses a graphical representation of the production process to
suggest potential sources of process variation?
B. Check sheet
C. Pareto chart
D. Histogram
E. Run chart

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93. In monitoring process quality we might use which of the following statistics?
A. Absolute values
B. Percentage deviation from tolerance centers
C. "k" values for the sample mean
D. Logarithmic control intervals
E. Difference between the highest and lowest value in a sample

94. You have just used the capability index (C
pk
) formulas to compute the two values "min [2,
2.5]." Which of the following is the proper interpretation of these numbers?
A. The true capability index value is 2.5
B. The mean of the production process has shifted to the left of the design limits
C. The mean of the production process has shifted to the right of the design limits
D. The mean has not shifted at all
E. The true capability index value is between 2 and 2.5

pk
1]." Which of the following is the proper interpretation of these numbers?
A. The true capability index value is exactly 1

pk
) formulas to compute the two values "min
[1.5, 1]." Which of the following is the interpretation of these numbers?
A. The true capability index value is 1
E. The true capability index value is between 1.5 and 1

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97. Quality control charts usually have a central line and upper and lower control limit lines.
Which of the following is not a reason that the process being monitored with the chart should
be investigated?
A. A large number of plots are close to the upper or lower control lines
B. Erratic behavior of the plots
C. A single plot falls above or below the control limits
D. A change in raw materials or operators
E. A run of five above the central line

Which of the following is a reason that the process being monitored with the chart should be
investigated?
A. A single plot falls above or below the control limits
B. Normal behavior
C. A large number of plots are on or near the central line
D. No real trend in any direction
E. A change in raw materials or operators

99. If there are 120 total defects from 10 samples, each sample consisting of 10 individual
items in a production process, which of the following is the fraction defective that can be used
in a "p" chart for quality control purposes?
A. 120
B. 10
C. 8
D. 1.2
E. 0.8

A. 400
B. 160
C. 2.5
D. 1.0
E. 0.4

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101. You want to determine the upper control line for a "p" chart for quality control purposes.
You take several samples of a size of 100 items in your production process. From the samples
you determine the fraction defective is 0.05 and the standard deviation is 0.01. If the desired
confidence level is 99.7 percent, which of the following is the resulting UCL value for the
line?
A. 0.39
B. 0.08
C. 0.06
D. 0.05

102. You want to determine the lower control line for a "p" chart for quality control purposes.
you determine the fraction defective is 0.006 and the standard deviation is 0.001. If the
desired confidence level is 99.7 percent, which of the following is the resulting LCL value for
the line?
A. 0.0
B. 0.002
C. 0.003
D. 0.004

103. You want to determine the control lines for a "p" chart for quality control purposes. If the
desired confidence level is 99 percent, which of the following values for "z" would you use in
computing the UCL and LCL?
A. 0.99
B. 2
C. 2.58
D. 3

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total number of defects from all samples is 2,500, the number of samples is 100, and the
sample size is 50, which of the following would be the standard deviation used in developing
the control lines?
A. 0.4900
B. 0.2499
C. 0.1556
D. 0.0707
E. 0.02499

total number of defects from all samples is 560, the number of samples is 70, and the sample
size is 80, which of the following would be the standard deviation used in developing the
control lines?
A. 0.9000
B. 0.4556
C. 0.0335
D. 0.0011
E. 0.0112

106. For which of the following should we use a "p" chart to monitor process quality?
A. Defective electrical switches
B. Errors in the length of a pencil
C. Weight errors in cans of soup
D. Temperature of entrees in a restaurant
E. Letter grades on a final examination

A. The dimensions of brick entering a kiln
B. Lengths of boards cut in a mill
C. The weight of fluid in a container
D. Grades in a freshman "pass/fail" course
E. Temperatures in a classroom

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108. With which of the following should we use an "X-bar" chart based on sample means to
monitor process quality?
A. Grades in a freshman "pass/fail" course
B. Tire pressures in an auto assembly plant
C. Vehicles passing emissions inspection
D. Computer software errors
E. Number of units with missing operations

109. Which of the following should we use an "R" chart to monitor process quality?

A. Weighing trucks at a highway inspection station to determine if they are overloaded
B. Deciding whether an airliner has sufficient fuel for its trip
C. Student grades measured from 1 to 100
D. Determining whether vehicles from a motor pool will run
E. Determining the accuracy of a forecast of "snow"

111. You are developing an "X-bar" chart based on sample means. You know the standard
deviation of the sample means is 4, the desired confidence level is 99.7 percent, and the
average of the sample means is 24. Which of the following is your UCL?
A. 36
B. 24
C. 12
D. 4

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deviation of the sample means is 4, the desired confidence level is 99 percent, and the average
of the sample means is 20. Which of the following is your LCL?
A. 36
B. 24
C. 9.68
D. 16.79
E. 30.32

113. You want to develop a three-sigma "R" chart. You know the average range is 5 based on
several samples of size 10. Which of the following is the resulting UCL?
A. 20.9
B. 8.9
C. 7.02
D. 5
E. 3.1

114. You want to develop a three-sigma "R" chart. You know the average range is 12 based
on several samples of size 6. Which of the following is the resulting LCL?
A. 20.0
B. 18.3
C. 7.02
D. 5.6
E. 0.0

115. If you are going to develop an "X-bar" chart based on range statistics and you are using a
sample size of 12 for your charting purposes. Which of the following is the A2 factor for the
"X-bar" chart?
A. 0.37
B. 0.31
C. 0.27
D. 0.22
E. .18

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116. If you are going to develop an "R" chart based on range statistics and you are using a
sample size of 9 for your charting purposes. Which of the following is the lower control limit
D3 factor for the chart?
A. 0.08
B. 0.14
C. 0.18
D. 0.22
E. 0.29

sample size of 15 for your charting purposes. Which of the following is the upper control limit
A. 1.65
B. 1.70
C. 1.76
D. 1.87
E. 1.92


118. The National Quality Award in the United States is named ______________________.
________________________________________

119. The expenditures related to achieving product or service quality including the costs of
appraisal and prevention of defects are called ______________________.
________________________________________

120. ISO-9000 standards were developed to ______________________
________________________________________

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121. Six-sigma programs believe that each step in a process is an opportunity to produce
defects. These programs seek to reduce defects by working on processes to reduce
______________________.
________________________________________

122. If the fraction defective is 0.12 based on a sample size of 16, the standard deviation to be
used when constructing a "p" chart is ______________________.
________________________________________

in constructing the "p" chart is ______________________.
________________________________________

sample size is 50, the standard deviation used in developing the control lines would be
______________________.
________________________________________

size is 80, the standard deviation used in developing the control lines would be
______________________.
________________________________________

average of the sample means is 24. The UCL is ______________________.
________________________________________

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of the sample means is 20. The LCL is ______________________.
________________________________________

several samples of size 10. The resulting UCL is ______________________.
________________________________________

on several samples of size 6. The resulting LCL is ____________________.
________________________________________


130. The symbol designating the capability index is ______________________.


131. All else being equal, the magnitude of the effect of lot size on sample size is
______________________.
________________________________________

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132. You have 75 total defects from 100 different samples of 15. The value of "p" is
______________________.
________________________________________

133. Lots are defined as low quality when the percentage of defective units is greater than
______________________.
________________________________________

Essay Questions

134. What is the difference between the concepts of design quality and conformance quality?

135. What does it mean when we say that a process is capable?

136. Explain the difference between producer's risk and consumer's risk in acceptance
sampling.

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137. What is the difference between statistical quality control and statistical process control?

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Chapter 06 Quality Management and Six Sigma Answer Key


1. TQM was defined in the textbook as managing the entire organization so that it excels on
all dimensions of products and services that are important to the customer.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Total Quality Management

2. One SPC tool used in total quality management is the run chart.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Process Control Procedures

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3. An operational goal of total quality management is the careful design of the product or
service.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

4. An operational goal of total quality management is ensuring that the organization's systems
can consistently produce the product or service as it is designed.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

5. Design quality refers to the inherent value of the product in the marketplace.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Quality Specifications and Quality Costs

acceptance sampling.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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leadership.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

8. In 1997 the Malcolm Baldrige National Quality Improvement Act established the U.S.'s
annual award for total quality management.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

9. Conformance quality is a strategic decision for the firm.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

10. The Malcolm Baldrige National Quality Award represents the U. S. government's
endorsement of quality as an essential part of successful business strategy.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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11. While business organizations can seek to achieve the Baldrige National Quality Award,
educational institutions, like universities, can't.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

12. While small business organizations can seek to achieve the Baldrige National Quality
Award, health care organizations, like hospitals, can't.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. A quality guru named Philip Crosby defined quality as fitness for use.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

14. A quality guru named Philip Crosby defined quality as conformance to requirements.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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15. A quality guru named Joseph M. Juran defined quality as fitness for use.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

16. A quality guru named Philip Crosby suggested a general approach to quality management
should involve prevention, not inspection.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

17. A quality guru named Philip Crosby is well known for his "14 points" of quality.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

18. Fundamental to any quality program is the determination of quality specifications and the
costs of achieving (or not achieving) those specifications.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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19. The term "conformance quality" refers to the relative level of performance of a product as
compared to competing products. For instance, certain luxury sedans are said to be of "higher
quality" than some low-priced sub-compact automobiles.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

20. "Quality at the source" refers to the degree to which product or service design
specifications are met.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

21. Design quality in products refers to the degree to which product design specifications are
met.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

22. One of the definitions for the cost of quality is that it represents the costs attributable to
the production of quality that is not 100 percent perfect.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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23. Continuous improvement is a management philosophy that approaches the challenge of
product and process improvement as a never-ending process of achieving small wins.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

24. Six-sigma refers to the philosophy and methods that some leading companies use to
eliminate defects in their products and processes.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

25. A process that is in six-sigma control will produce no more than two defects out of every
million units.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

26. A DMPO is essentially the same thing as a DMAIC.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Six-Sigma Quality

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27. An opportunity flow diagram is used to separate the value-added from the non-value-
added steps in a process.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

28. An opportunity flow diagram is a time sequenced chart showing plotted values measuring
the flow of end product or components.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. Variation in production systems that is caused by factors that can be clearly identified and
possibly even managed is called assignable variation.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

30. An example of assignable variation in a production system may be that workers are not
identically trained.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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31. An example of assignable variation in a production system may be that a machine is not
adjusted properly.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

32. Variation that is inherent in a production process itself is called assignable variation.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

33. Variation that is inherent in a production process itself is called common variation.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

34. It is impossible to have zero variability in production processes.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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35. Genichi Taguchi's view of the cost of quality is that variance is a discontinuous function.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

36. The capability index is used to gauge economic changes in service systems.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Statistical Quality Control

37. Process control is concerned with monitoring quality after the product or service has been
produced.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

38. Statistical process control involves testing random samples of output from a process to
determine whether the process is producing items within a pre-selected range.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Acceptance Sampling

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39. Measurement by attributes means taking a sample, measuring the attribute in question and
determining the level of quality in the population from which the sample was drawn.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

40. Attributes are those quality characteristics that are classified as either conforming or not
conforming to specifications.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

41. A quality control chart has upper and lower control limits expressed as lines on a chart. As
long as the sample values fall between these two lines there is no need to investigate process
behavior.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

42. The "p" chart is only useful for sampling that deals with continuous variables.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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43. The value for "z" used in quality control charts is based on the degree of confidence you
want to have in the resulting UCL and LCL values.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

46. To obtain a 99.7 percent confidence level in a "p" chart we would use a value of 3 for "z".
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

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47. Acceptance sampling is performed on goods that already exist to determine what
percentage of items conforms to specifications.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

48. In acceptance sampling, the number of units in the sample (n) is determined by the
quality lot (beta).
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

49. In acceptance sampling, the value for the acceptance number (c) is determined by the
quality lot (beta).
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-221
50. AQL stands for accepting questionable lots in production quality management.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

51. LTPD in acceptance sampling stands for "lots of tolerance for parts defective."
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

52. The Greek letter alpha is associated with consumer's risk.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

53. The probability associated with rejecting a high quality lot is denoted in acceptance
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-222
54. The probability associated with accepting a low quality lot is denoted in acceptance
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

55. The producer's risk associated with rejecting a high quality lot is denoted in acceptance
sampling with the Greek letter beta.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

56. Total, one-hundred percent, inspection can never be cost justified.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

57. One-hundred percent inspection is justified when the cost of inspection is not very much.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-223
58. Sampling plans are generally displayed graphically through the use of operating
characteristic (OC) curves.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

pk
) calculates the percentage of items being produced within
specifications.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

pk
) indicates the position of the mean and tails of a processes
variance relative to design specifications.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

61. Standard practice in statistical process control for variables is to set control limits so that
95 percent of the sample means will fall within the UCL and the LCL.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-224
62. In variables sampling the actual measurements of the variable observed are used
regardless of whether the unit is good or bad.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


quality. Which of the following was not part of that message?
A. Quality is free
B. Leadership from senior management
C. Customer focus
D. Total involvement of the workforce
E. Continuous improvement

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

quality. Which of the following was part of that message?
A. Fourteen steps for quality management
B. Quality is free
C. Customer focus
D. Zero defects
E. Six-sigma

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-225
65. An analytical tool used in six-sigma quality improvement programs is which of the
following?
A. Leadership
B. Continuous improvement
C. Quick response
D. Partnership development
E. Checksheets

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

programs?
A. Run charts
B. Pass charts
C. Cause-and-effect diagrams
D. Flowcharts
E. Pareto charts

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

67. A flow chart as part of a six-sigma quality improvement process might be found in which
DMAIC category?
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-226
68. A fishbone diagram as part of a six-sigma quality improvement process might be found in
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

69. An opportunity flow diagram as part of a six-sigma quality improvement process might be
found in which DMAIC category?
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

70. A Pareto chart as part of a six-sigma quality improvement process might be found in
A. Define
B. Measure
C. Analyze
D. Improve
E. Control

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-227
71. Which of the following is an analytical tool used in six-sigma quality improvement
programs?
A. Leadership
B. Pareto Charts
C. Management by fact
D. Continuous improvement
E. Kaizen

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

programs?
A. Flowcharts
B. Run charts
C. Control charts
D. Pareto analysis
E. Tendency analysis

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

73. Failure mode and effect analysis is used in six-sigma projects. It involves which of the
following?
A. Closely examining each rejected part to determine the cause
B. A careful sampling plan
C. Calculating a risk priority number for each possible failure
D. Reporting the effect each failure has had on a customer
E. Multivariate testing

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-228
74. Design of experiments is a statistical methodology often used in six-sigma projects. It
aims to accomplish which of the following?
A. Keep careful track of the occurrences of each possible defect
B. Determine the cause and effect relationships between process variables and output
C. Report defects to management on a Pareto chart
D. Carefully change each individual process variable until the cause of a defect is found
E. Eliminate defects by finding out who or what is causing them

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

75. The Malcolm Baldrige award selection process helps improve quality and productivity by
which of the following means?
A. Stimulating foreign based suppliers of American companies to improve quality
B. Reporting quality levels among American firms
C. Identifying American firms with the most difficult quality problems
D. Providing feedback to applicants by the examiners
E. Helping Baldrige award winners increase their sales

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

76. Which of the following are eligible companies to be considered for the Baldrige award?
A. Auditing firms
B. Offshore suppliers to U. S. companies
C. Firms operating only outside the U. S.
D. State Government agencies

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-229
77. Which of the following are not eligible to be considered for the Baldrige Award?
A. Small businesses
B. Health care organizations
C. Educational institutions
D. State highway patrol organizations
E. Nuclear power plants

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

78. The primary purpose of the Malcolm Baldrige National Quality Award is which of the
following?
A. To encourage the spread of statistical quality control
B. To improve human resource development and management in manufacturing
C. To improve competitiveness of American firms
D. To prove that American firms were competitive in quality
E. To emphasize the use of quantitative methods in process management

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

79. The Grading Criteria of the Baldrige Award for total quality management includes which
of the following?
A. Future plans
B. Information and analysis
C. Standardization
D. Control

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-230
80. The Malcolm Baldrige National Quality Award is given to organizations that have done
A. Instituted a six-sigma approach to total quality control
B. Demonstrated a high level of product quality
C. Demonstrated outstanding quality in their products and processes
D. Have a world-class quality control function
E. Most significantly improved their product quality levels

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

81. Which of the following is not a category reported in applying for the Baldrige Award?
A. Corporate leadership
B. Use of statistical quality control tools
C. Business results
D. Consumer and market focus
E. Strategic planning

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

82. The dimension of design quality that concerns the sensory characteristics of the product is
A. Features
B. Serviceability
C. Perceived quality
D. Reputation
E. Aesthetics

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-231
83. The dimension of design quality that concerns the consistency of performance over time
or the probability of failing is which of the following?
A. Response
B. Serviceability
C. Reliability
D. Reputation

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

84. The dimension of design quality that concerns secondary characteristics is which of the
following?
A. Features
B. Serviceability
C. Reliability
D. Reputation

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

A. Price
B. Features
C. Color
D. Weight
E. Quality at the source

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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A. Aesthetics
B. Price
D. Distribution
E. Leadership

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

87. Which of the following is a basic assumptions that justify an analysis of the costs of
quality?
A. Failures are caused
B. Prevention is more expensive
C. Performance can be learned
D. Rules of thumb don't always work
E. Appraisal costs are less than prevention costs

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

88. A cost of quality classification is which of the following?
A. Material costs
B. Prevention costs
C. Variable overhead
D. Direct labor
E. Inventory costs

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-233
89. Which of the following is the cost of quality classification for costs such as scrap, rework,
or repair?
A. Appraisal costs
B. Prevention costs
E. Rework and wastage

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

90. Which of the following is the cost of quality classification for costs such as inspection,
testing, and other tasks to ensure that the product or process is acceptable?
A. Appraisal costs
B. Prevention costs
E. Checking costs

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

91. Which of the following is the cost of quality classification for costs such as defects that
pass through the system, such as customer warranty replacements, loss of customer or
goodwill, handling complaints, and product repair?
A. Appraisal costs
B. Prevention costs
D. Customer return cost
E. Workmanship costs

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-234
92. Which of the following tools uses a graphical representation of the production process to
suggest potential sources of process variation?
B. Check sheet
C. Pareto chart
D. Histogram
E. Run chart

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

93. In monitoring process quality we might use which of the following statistics?
A. Absolute values
B. Percentage deviation from tolerance centers
C. "k" values for the sample mean
D. Logarithmic control intervals
E. Difference between the highest and lowest value in a sample

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

pk
2.5]." Which of the following is the proper interpretation of these numbers?
A. The true capability index value is 2.5
E. The true capability index value is between 2 and 2.5

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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pk
1]." Which of the following is the proper interpretation of these numbers?
A. The true capability index value is exactly 1

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

pk
) formulas to compute the two values "min
[1.5, 1]." Which of the following is the interpretation of these numbers?
A. The true capability index value is 1
E. The true capability index value is between 1.5 and 1

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

Which of the following is not a reason that the process being monitored with the chart should
be investigated?
A. A large number of plots are close to the upper or lower control lines
B. Erratic behavior of the plots
C. A single plot falls above or below the control limits
D. A change in raw materials or operators
E. A run of five above the central line

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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Which of the following is a reason that the process being monitored with the chart should be
investigated?
A. A single plot falls above or below the control limits
B. Normal behavior
C. A large number of plots are on or near the central line
D. No real trend in any direction
E. A change in raw materials or operators

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. 120
B. 10
C. 8
D. 1.2
E. 0.8

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

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A. 400
B. 160
C. 2.5
D. 1.0
E. 0.4

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

101. You want to determine the upper control line for a "p" chart for quality control purposes.
you determine the fraction defective is 0.05 and the standard deviation is 0.01. If the desired
confidence level is 99.7 percent, which of the following is the resulting UCL value for the
line?
A. 0.39
B. 0.08
C. 0.06
D. 0.05

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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102. You want to determine the lower control line for a "p" chart for quality control purposes.
you determine the fraction defective is 0.006 and the standard deviation is 0.001. If the
desired confidence level is 99.7 percent, which of the following is the resulting LCL value for
the line?
A. 0.0
B. 0.002
C. 0.003
D. 0.004

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

desired confidence level is 99 percent, which of the following values for "z" would you use in
computing the UCL and LCL?
A. 0.99
B. 2
C. 2.58
D. 3

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

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sample size is 50, which of the following would be the standard deviation used in developing
the control lines?
A. 0.4900
B. 0.2499
C. 0.1556
D. 0.0707
E. 0.02499

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

size is 80, which of the following would be the standard deviation used in developing the
control lines?
A. 0.9000
B. 0.4556
C. 0.0335
D. 0.0011
E. 0.0112

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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A. Defective electrical switches
B. Errors in the length of a pencil
C. Weight errors in cans of soup
D. Temperature of entrees in a restaurant
E. Letter grades on a final examination

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. The dimensions of brick entering a kiln
B. Lengths of boards cut in a mill
C. The weight of fluid in a container
D. Grades in a freshman "pass/fail" course
E. Temperatures in a classroom

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

108. With which of the following should we use an "X-bar" chart based on sample means to
monitor process quality?

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-241

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. Weighing trucks at a highway inspection station to determine if they are overloaded
B. Deciding whether an airliner has sufficient fuel for its trip
C. Student grades measured from 1 to 100
D. Determining whether vehicles from a motor pool will run
E. Determining the accuracy of a forecast of "snow"

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

average of the sample means is 24. Which of the following is your UCL?
A. 36
B. 24
C. 12
D. 4

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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of the sample means is 20. Which of the following is your LCL?
A. 36
B. 24
C. 9.68
D. 16.79
E. 30.32

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

several samples of size 10. Which of the following is the resulting UCL?
A. 20.9
B. 8.9
C. 7.02
D. 5
E. 3.1

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

on several samples of size 6. Which of the following is the resulting LCL?
A. 20.0
B. 18.3
C. 7.02
D. 5.6
E. 0.0

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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115. If you are going to develop an "X-bar" chart based on range statistics and you are using a
sample size of 12 for your charting purposes. Which of the following is the A2 factor for the
"X-bar" chart?
A. 0.37
B. 0.31
C. 0.27
D. 0.22
E. .18

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

sample size of 9 for your charting purposes. Which of the following is the lower control limit
A. 0.08
B. 0.14
C. 0.18
D. 0.22
E. 0.29

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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sample size of 15 for your charting purposes. Which of the following is the upper control limit
A. 1.65
B. 1.70
C. 1.76
D. 1.87
E. 1.92

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis


118. The National Quality Award in the United States is named ______________________.
The Malcolm Baldrige National Quality Award

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

119. The expenditures related to achieving product or service quality including the costs of
appraisal and prevention of defects are called ______________________.
Cost of quality

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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120. ISO-9000 standards were developed to ______________________
help companies document that they are maintaining an efficient quality system. (Text,
page 140)

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

121. Six-sigma programs believe that each step in a process is an opportunity to produce
defects. These programs seek to reduce defects by working on processes to reduce
______________________.
Variance

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

122. If the fraction defective is 0.12 based on a sample size of 16, the standard deviation to be
used when constructing a "p" chart is ______________________.
0.081

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

in constructing the "p" chart is ______________________.
0.049

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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sample size is 50, the standard deviation used in developing the control lines would be
______________________.
0.0693

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

size is 80, the standard deviation used in developing the control lines would be
______________________.
0.335

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

average of the sample means is 24. The UCL is ______________________.
36

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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of the sample means is 20. The LCL is ______________________.
9.68

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

several samples of size 10. The resulting UCL is ______________________.
8.9

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

on several samples of size 6. The resulting LCL is ____________________.
Zero

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

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130. The symbol designating the capability index is ______________________.
C
pk

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


131. All else being equal, the magnitude of the effect of lot size on sample size is
______________________.
negligible (or very small)

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

132. You have 75 total defects from 100 different samples of 15. The value of "p" is
______________________.
0.05

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

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133. Lots are defined as low quality when the percentage of defective units is greater than
______________________.
Lot Tolerance Percent Defective (LTPD)

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

Essay Questions

134. What is the difference between the concepts of design quality and conformance quality?
Refer to the text, page 136-137. Design quality refers to the specifications that are drawn up at
the product design stage which define the inherent value of the product in the marketplace.
For example, are we designing a service package for a cheap roadside diner or for an
exclusive French restaurant? Are we designing a set of skis for the advanced professional or
for the fledgling beginner? Conformance quality relates to the degree to which the product or
service design specifications are met.

AACSB: Analytic
Difficulty: Medium

135. What does it mean when we say that a process is capable?
From the text on page 150, "a process is capable when the mean and standard deviation of
the process are operating such that the upper and lower control limits are acceptable relative
to the upper and lower specification limits."

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-250
136. Explain the difference between producer's risk and consumer's risk in acceptance
sampling.
Producer's risk (alpha) is the probability of rejecting a high quality lot while consumer's risk
(beta) is the probability of accepting a low-quality lot. See text, page 164.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

137. What is the difference between statistical quality control and statistical process control?
Process control is concerned with monitoring quality while the product or service is being
produced. (text, p. 154). Statistical process control involves taking samples of output to
determine whether the process is producing product within the desired range. Statistical
quality control is designed to evaluate the product's conformance to specifications set during
the design of the products or services being produced. (text, p.146). Thus, SQC includes the
idea of SPC but also includes checking quality levels of products and services after
production is complete.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis

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Chapter 07
Projects


1. Explain what project management is and why it is important.
2. Identify the different ways projects can be structured.
3. Describe how projects are organized into major subprojects.
4. Understand what a project milestone is.
5. Determine the critical path for a project.
6. Demonstrate how to crash, or reduce the length, of a project.


1. Project management can be defined as planning, directing, and controlling resources to
meet the technical, cost, and time constraints of the project.
True False

2. A project may be defined as a series of related jobs directed toward some major output and
requiring a significant period of time to perform.
True False

3. The second step in managing a project is writing the Statement of Work.
True False

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4. An event unit package is a subdivision of a project.
True False

5. Complex projects are often subdivided into a series of tasks that are typically configured to
be not longer than several months in duration.
True False

6. A work breakdown structure is used in project management but it is not used when the
critical path method is involved.
True False

7. The fact that organizations are flattening is one of the reasons that project management is
important.
True False

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8. The Gantt chart is an example of a project control chart.
True False

9. Upper level management must decide between pure, functional, and matrix structures as
ways to organize projects.
True False

10. One of the disadvantages of a pure project organizational structure is that the project
manager has full authority over the project.
True False

11. One of the advantages of a functional project organizational structure is that a team
member can work on several projects.
True False

12. A matrix project attempts to blend properties of functional and pure project structures.
True False

13. A matrix project structure is often referred to as a "skunk works."
True False

14. A disadvantage of a matrix project organizational structure is that a project manager is
held responsible for successful completion of the project.
True False

15. The critical path of activities in a project is the sequence of activities that form the shortest
chain in a project network of activities.
True False

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16. CPM is an abbreviation for Critical Path Method.
True False

17. In CPM the late start time estimate is the latest time you can start an activity and still keep
the entire project on schedule.
True False

18. The critical path in a project is that sequence of activities that consume the longest amount
of time in a project network of activities.
True False

19. The critical path in a CPM analysis is always the shortest path through the network.
True False

20. Slack activity time is the difference between the early start and the late finish of a project
activity time.
True False

21. In a CPM analysis if you subtract the late finish from the early finish the result is the
activity's slack time.
True False

22. In a CPM analysis if you subtract the early finish from the late finish the result is the
True False

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23. The critical path in a CPM analysis is found by locating the activities times with zero
slack.
True False

24. Calculating the early start and early finish times for each activity in a CPM analysis does
not provide any useful information.
True False

25. The project indirect costs associated with a project include overhead, facilities, and
resource opportunity costs.
True False

26. The activity direct costs associated with a project might include giving workers overtime
to complete a project in less-than the expected time.
True False

27. You are managing a project and need to cut the cost of the project. You decide to transfer
workers to another job to cut the project's costs. Costs associated with transferring the
workers are an example of project indirect costs.
True False

28. Using the Time-Cost CPM model, the crash time is the shortest possible time allowed for
each activity in the project.
True False

29. In the Time-Cost CPM model, cost is a linear function of time.
True False

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30. When reducing the planned duration of a project using the Time-Cost CPM model we
select the activity to crash by determining the cost of each alternative and selecting the one
whose cost is the greatest.
True False

31. One of the assumptions made using CPM is that project activities can be identified with
clear beginning and ending points.
True False

32. One of the assumptions made using CPM is that project activity sequence relationships
can be specified and networked.
True False

33. One criticism of using CPM analysis in project management is that the zero slack path
through a network may not be the ultimate determinant of the project completion time.
True False

34. Project management software available today combines CPM and other scheduling aids,
like Gantt charting, to aid in tracking progress of project completion.
True False

35. One of the criticisms of CPM analysis is that the act of specifying the activities and
formalizing the network limits the flexibility required to handle changing situations as the
project progresses.
True False

36. A project milestone is a specific event to be reached by a particular point in time.
True False

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37. Breakthrough projects are those that provide fundamental improvements to existing
products.
True False

38. Derivative projects are those which address incremental changes to products or processes.
True False

39. Alliances and partnerships between organizations are focused on "breakthrough" projects.
True False

40. Earned Value Management (EVM) is a technique for measuring project progress in an
objective manner.
True False


41. A project can be subdivided into which of the following?
A. Job orders
B. Subjobs
C. Work Package
D. Sub-paths
E. Events and decisions

42. A project starts out as which of the following?
A. A Statement of Work
B. Critical Path Method (CPM)
C. A series of milestones
D. A Gantt chart
E. A latest-start-time estimate

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43. What is a work breakdown structure?
A. A list of the activities making up the higher levels of the project
B. A definition of the hierarchy of project tasks, subtasks, and work packages
C. A depiction of the activities making up a project
D. A Gantt chart
E. A structure that is incompatible with the Critical Path Method

44. Which of the following is a reason that project management is important?
A. Organizations do not allow hastily planned projects
B. Organizational hierarchies are becoming more robust
C. The firm's reputation is not a concern since projects are invisible to the outside world
D. Projects are a way to promote effective leadership
E. It is usually more important to complete a project on time than to complete it correctly

45. In a Gantt chart the horizontal axis is usually which of the following?
A. Activities
B. Cost
C. Profit
D. Time
E. Milestones

46. Which of the following is a graphic project report used in project management?
A. Project proposal
B. Approved project plan
C. Humphrey chart
D. Equipment and supplies chart
E. Cost and performance tracking schedule

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47. An advantage of a pure project where self-contained teams work full time on a project is
A. Team members can work on several projects
B. Functional area is a "home" after the project is completed
C. There are duplicated resources
D. Lines of communication are shortened
E. Overall organizational policies and goals can be ignored

48. Some of the advantages of a functional project where the project is housed in a functional
division include which of the following?
A. The project manager has full authority over the project
B. Team pride, motivation, and commitment are high
C. A team member can work on several projects
D. Needs of the client are secondary

49. A series of projects that are organized in such a way that each project utilizes people from
different functional areas is using which of the following organizational structures?
A. Matrix project
B. Integrated Task Force
C. Functional project
D. Pure project
E. Cross-functional flexible team

50. You are looking at a chart that has the terms BCWS, BCWP and AC indicating lines on
the chart. What kind of chart are you looking at?
A. Gantt Chart
B. PERT Chart
C. Bar/Milestone Chart
D. Total Program Cost Breakdown
E. EVM Chart

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51. PERT is an abbreviation for which of the following methodologies?
A. Product Evaluation Result and Treatment
B. Programming and Evaluation Realization Technology
C. Program Evaluation and Review Technique
D. Process Evaluation and Review Technology
E. It is a name, not an abbreviation for anything

52. You have just been assigned to oversee a series of projects. Functional areas will loan you
personnel for each project and separate project managers will be responsible for separate
projects. These project managers will report to you. Which project management structure is
being used?
A. Pure Project
B. Task force
C. Matrix Project
D. Functional Project
E. PERT

53. You have been placed in charge of a large project. Shortened communication lines are
required to insure quick resolution of problems as they arise. You recognize that the project is
going to take a lot of time and require a lot of team pride, motivation, and commitment by all
members. Which project management strucTURE should you use in this situation?
A. Pure Project
B. Task force
C. Matrix Project
E. PERT

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54. A simple project listing of five activities and their respective time estimates are presented
below:

Using CPM, which activities make up the critical path?
A. A, C, D, E
B. A, B, D, E
C. A, C, B, D, E
D. A, D, E

55. A simple project listing of five activities, their predecessors and their respective time
estimates are presented below:

Using CPM, what is the Latest Finish Time for the last activity in this project (i.e., the total
time to complete the project)?
A. 10 days
B. 7 days
C. 8 days
D. 12 days
E. 9 days

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Using the CPM, which activities have slack in this project?
A. A
B. B
C. C
D. D
E. C and E

57. A company must perform a maintenance project consisting of seven activities. The
activities, their predecessors, and their respective time estimates are presented below:

A. A, B, D, F, G
B. A, C, E, F, G
C. A, C, B, F, E
D. A, D, E

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A. 9 days
B. 10 days
C. 11 days
D. 12 days
E. 13 days

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Using CPM, which activities have slack in this project?
A. A, B, C
B. B, D
C. Only C
D. C, E
E. F, G

60. For an activity in a CPM analysis, the Early Finish time is 8 and the Late Finish time is
10. Which of the following statements is true?
A. The Late Finish is 12
B. The Early Finish is 10
C. The slack for this activity is 2
D. The duration of this activity is 2
E. The activity is on the critical path

61. For an activity in a CPM analysis the Early Finish time is 20 and the Late Finish time is
A. The activity's late start must happen before its early start
B. The activity is on the critical path
D. The duration of this task is zero
E. The duration of this task is 20

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62. A listing of immediate predecessor activities is important information in a CPM analysis
for which of the following reasons?
A. It specifies the relationships in the CPM network of activities
B. It provides useful timing information
C. It includes cost information
D. It is the probability information required in the final step of CPM

63. You have just performed a CPM analysis and have found that more than one path through
the project network has zero slack values. What can you conclude?
A. You have incorrectly performed the analysis
B. You have multiple critical paths
C. Only one path is optimal
D. More than one path is optimal
E. The project will not be completed by the desired time

64. You have the following time and cost information below for use in a Time-Cost CPM
Scheduling model.

What are the three costs per unit of time to expedite each activity?
A. A=$300, B=$200, C=$300
B. A=$100, B=$200, C=$400
C. A=$200, B=$200, C=$200
D. A=$100, B=$400, C=$300
E. A=$200, B=$300, C=$400

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65. Below are the data for a Time-Cost CPM Scheduling model analysis. The time is in days
and the costs include both direct and indirect costs.

What are the total time of this project and total normal cost?
A. Total time is 13 days, total cost is $1200
B. Total time is 12 days, total cost is $1700
C. Total time is 11 days, total cost is $1600
D. Total time is 10 days, total cost is $1750
E. Total time is 9 days, total cost is $1700


If you crash this project to reduce the total time by one day what is the total time of the
project and total cost?

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67. Below are the data for a Time-Cost CPM Scheduling analysis. The time is in days and the
costs include both direct and indirect costs.

If you crash this project to reduce the total time by four days, what is the total time of the

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68. You have collected the data for a Time-Cost CPM Scheduling model analysis. The time is
in days and the project "direct costs" are given below.

The indirect costs for the project are determined on a daily duration basis. If the project lasts
16 days the total indirect costs are $400, 15 days they will be $250, 14 days they will be $200,
and 13 days they will be $100. If you crash this project by one day what is the total (i.e.,
direct and indirect) project cost?
A. $2150
B. $2300
C. $2400
D. $2450
E. $2500

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and 13 days they will be $100. At what day do we achieve the lowest total project cost (i.e.,
direct plus indirect costs)?
A. 16 days
B. 15 days
C. 14 days
D. 13 days
E. 12 days

70. You know when you have arrived at the optimal solution in using the Time-Cost CPM
Scheduling model analysis when what happens?
A. You have found the critical path
B. You have run out of crash time
C. You no longer have a linear relationship with costs
D. You have reached the minimum total cost
E. You have run out of crash costs

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71. In CPM analysis it is generally expected that the relationship between activity direct costs
and project indirect costs will be which of the following?
A. Positively related
B. Optimally related
C. Negatively related
D. Not related
E. Fractionally related

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72. Which of the following is an assumption made in using CPM analysis?
A. Project activities flow together without distinct boundaries
B. Activities' sequential relationships can be specified and networked
C. Project management should focus on crashing activities
D. There is never a work stoppage in any activity until it is complete
E. There are no learning curve effects in setting activity time

73. Which of the following is a criticism made about CPM analysis?
A. Project activity sequencing relationships can be specified and networked
B. Project control should focus on the critical path
C. Projects can change over time and networks can be inaccurate
D. CPM does not foresee changes while the project is under way
E. The pessimistic time estimate is usually closest to the actual time

74. An assumption of CPM analysis is that project activities can be identified and have a clear
beginning and ending point. Which of the following is a valid criticism of this assumption?
A. Complex projects can change over time and networks become inaccurate
B. Project control cannot always focus on the critical path
C. The critical path through the network can change when activities are crashed
D. It is not necessarily true that the critical path is the longest path through the network


75. What is that sequence of activities that consume the longest amount of time in a project
network of activities called? _______________________________
________________________________________

76. What are "project milestones?" _________________________________________
________________________________________

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direct and indirect) project cost? ____________________
________________________________________


project and total cost? __________________
________________________________________

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Essay Questions

79. Describe how CPM handles the trade-offs between time and cost in the scheduling of a
project.

80. What is the criterion for determining whether a project activity is on the "critical path" or
not?

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Chapter 07 Projects Answer Key


1. Project management can be defined as planning, directing, and controlling resources to
meet the technical, cost, and time constraints of the project.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: What is Project Management

1-275
2. A project may be defined as a series of related jobs directed toward some major output and
requiring a significant period of time to perform.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

3. The second step in managing a project is writing the Statement of Work.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Structuring Projects

4. An event unit package is a subdivision of a project.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

5. Complex projects are often subdivided into a series of tasks that are typically configured to
be not longer than several months in duration.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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6. A work breakdown structure is used in project management but it is not used when the
critical path method is involved.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

7. The fact that organizations are flattening is one of the reasons that project management is
important.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

8. The Gantt chart is an example of a project control chart.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

9. Upper level management must decide between pure, functional, and matrix structures as
ways to organize projects.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-277
10. One of the disadvantages of a pure project organizational structure is that the project
manager has full authority over the project.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

11. One of the advantages of a functional project organizational structure is that a team
member can work on several projects.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

12. A matrix project attempts to blend properties of functional and pure project structures.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. A matrix project structure is often referred to as a "skunk works."
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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14. A disadvantage of a matrix project organizational structure is that a project manager is
held responsible for successful completion of the project.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

15. The critical path of activities in a project is the sequence of activities that form the shortest
chain in a project network of activities.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Networking-Planning Models

16. CPM is an abbreviation for Critical Path Method.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

17. In CPM the late start time estimate is the latest time you can start an activity and still keep
the entire project on schedule.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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18. The critical path in a project is that sequence of activities that consume the longest amount
of time in a project network of activities.
TRUE

AACSB: Analytic
Difficulty: Medium

19. The critical path in a CPM analysis is always the shortest path through the network.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

20. Slack activity time is the difference between the early start and the late finish of a project
activity time.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

21. In a CPM analysis if you subtract the late finish from the early finish the result is the
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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22. In a CPM analysis if you subtract the early finish from the late finish the result is the
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

23. The critical path in a CPM analysis is found by locating the activities times with zero
slack.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

24. Calculating the early start and early finish times for each activity in a CPM analysis does
not provide any useful information.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

25. The project indirect costs associated with a project include overhead, facilities, and
resource opportunity costs.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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26. The activity direct costs associated with a project might include giving workers overtime
to complete a project in less-than the expected time.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

27. You are managing a project and need to cut the cost of the project. You decide to transfer
workers to another job to cut the project's costs. Costs associated with transferring the
workers are an example of project indirect costs.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

28. Using the Time-Cost CPM model, the crash time is the shortest possible time allowed for
each activity in the project.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

29. In the Time-Cost CPM model, cost is a linear function of time.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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30. When reducing the planned duration of a project using the Time-Cost CPM model we
select the activity to crash by determining the cost of each alternative and selecting the one
whose cost is the greatest.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

31. One of the assumptions made using CPM is that project activities can be identified with
clear beginning and ending points.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

32. One of the assumptions made using CPM is that project activity sequence relationships
can be specified and networked.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analytic

33. One criticism of using CPM analysis in project management is that the zero slack path
through a network may not be the ultimate determinant of the project completion time.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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34. Project management software available today combines CPM and other scheduling aids,
like Gantt charting, to aid in tracking progress of project completion.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

35. One of the criticisms of CPM analysis is that the act of specifying the activities and
formalizing the network limits the flexibility required to handle changing situations as the
project progresses.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

36. A project milestone is a specific event to be reached by a particular point in time.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Work Breakdown Structure

37. Breakthrough projects are those that provide fundamental improvements to existing
products.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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38. Derivative projects are those which address incremental changes to products or processes.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

39. Alliances and partnerships between organizations are focused on "breakthrough" projects.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

40. Earned Value Management (EVM) is a technique for measuring project progress in an
objective manner.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-285

41. A project can be subdivided into which of the following?
A. Job orders
B. Subjobs
C. Work Package
D. Sub-paths
E. Events and decisions

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

42. A project starts out as which of the following?
A. A Statement of Work
B. Critical Path Method (CPM)
C. A series of milestones
D. A Gantt chart
E. A latest-start-time estimate

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

43. What is a work breakdown structure?
A. A list of the activities making up the higher levels of the project
B. A definition of the hierarchy of project tasks, subtasks, and work packages
C. A depiction of the activities making up a project
D. A Gantt chart
E. A structure that is incompatible with the Critical Path Method

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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44. Which of the following is a reason that project management is important?
A. Organizations do not allow hastily planned projects
B. Organizational hierarchies are becoming more robust
C. The firm's reputation is not a concern since projects are invisible to the outside world
D. Projects are a way to promote effective leadership
E. It is usually more important to complete a project on time than to complete it correctly

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

45. In a Gantt chart the horizontal axis is usually which of the following?
A. Activities
B. Cost
C. Profit
D. Time
E. Milestones

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

46. Which of the following is a graphic project report used in project management?
A. Project proposal
B. Approved project plan
C. Humphrey chart
D. Equipment and supplies chart
E. Cost and performance tracking schedule

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-287
47. An advantage of a pure project where self-contained teams work full time on a project is
A. Team members can work on several projects
B. Functional area is a "home" after the project is completed
C. There are duplicated resources
D. Lines of communication are shortened
E. Overall organizational policies and goals can be ignored

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

48. Some of the advantages of a functional project where the project is housed in a functional
division include which of the following?
A. The project manager has full authority over the project
B. Team pride, motivation, and commitment are high
C. A team member can work on several projects
D. Needs of the client are secondary

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

49. A series of projects that are organized in such a way that each project utilizes people from
different functional areas is using which of the following organizational structures?
A. Matrix project
B. Integrated Task Force
C. Functional project
D. Pure project
E. Cross-functional flexible team

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

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50. You are looking at a chart that has the terms BCWS, BCWP and AC indicating lines on
the chart. What kind of chart are you looking at?
A. Gantt Chart
B. PERT Chart
C. Bar/Milestone Chart
D. Total Program Cost Breakdown
E. EVM Chart

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

51. PERT is an abbreviation for which of the following methodologies?
A. Product Evaluation Result and Treatment
B. Programming and Evaluation Realization Technology
C. Program Evaluation and Review Technique
D. Process Evaluation and Review Technology
E. It is a name, not an abbreviation for anything

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

52. You have just been assigned to oversee a series of projects. Functional areas will loan you
personnel for each project and separate project managers will be responsible for separate
projects. These project managers will report to you. Which project management structure is
being used?
A. Pure Project
B. Task force
C. Matrix Project
E. PERT

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

1-289
53. You have been placed in charge of a large project. Shortened communication lines are
required to insure quick resolution of problems as they arise. You recognize that the project is
going to take a lot of time and require a lot of team pride, motivation, and commitment by all
members. Which project management strucTURE should you use in this situation?
A. Pure Project
B. Task force
C. Matrix Project
E. PERT

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

54. A simple project listing of five activities and their respective time estimates are presented
below:

A. A, C, D, E
B. A, B, D, E
C. A, C, B, D, E
D. A, D, E

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-290

A. 10 days
B. 7 days
C. 8 days
D. 12 days
E. 9 days

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-291

Using the CPM, which activities have slack in this project?
A. A
B. B
C. C
D. D
E. C and E

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-292

A. A, B, D, F, G
B. A, C, E, F, G
C. A, C, B, F, E
D. A, D, E

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

1-293

A. 9 days
B. 10 days
C. 11 days
D. 12 days
E. 13 days

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

1-294

Using CPM, which activities have slack in this project?
A. A, B, C
B. B, D
C. Only C
D. C, E
E. F, G

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

60. For an activity in a CPM analysis, the Early Finish time is 8 and the Late Finish time is
A. The Late Finish is 12
B. The Early Finish is 10
D. The duration of this activity is 2
E. The activity is on the critical path

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-295
61. For an activity in a CPM analysis the Early Finish time is 20 and the Late Finish time is
A. The activity's late start must happen before its early start
B. The activity is on the critical path
D. The duration of this task is zero
E. The duration of this task is 20

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

62. A listing of immediate predecessor activities is important information in a CPM analysis
for which of the following reasons?
A. It specifies the relationships in the CPM network of activities
B. It provides useful timing information
C. It includes cost information
D. It is the probability information required in the final step of CPM

AACSB: Analytic
Difficulty: Medium

63. You have just performed a CPM analysis and have found that more than one path through
the project network has zero slack values. What can you conclude?
A. You have incorrectly performed the analysis
B. You have multiple critical paths
C. Only one path is optimal
D. More than one path is optimal
E. The project will not be completed by the desired time

AACSB: Analytic
Difficulty: Medium
Taxonomy: Evaluation

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64. You have the following time and cost information below for use in a Time-Cost CPM
Scheduling model.

What are the three costs per unit of time to expedite each activity?
A. A=$300, B=$200, C=$300
B. A=$100, B=$200, C=$400
C. A=$200, B=$200, C=$200
D. A=$100, B=$400, C=$300
E. A=$200, B=$300, C=$400

AACSB: Analytic
Difficulty: Medium

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What are the total time of this project and total normal cost?

AACSB: Analytic
Difficulty: Medium

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If you crash this project to reduce the total time by one day what is the total time of the

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

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AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-300

direct and indirect) project cost?
A. $2150
B. $2300
C. $2400
D. $2450
E. $2500

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

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and 13 days they will be $100. At what day do we achieve the lowest total project cost (i.e.,
direct plus indirect costs)?
A. 16 days
B. 15 days
C. 14 days
D. 13 days
E. 12 days

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

70. You know when you have arrived at the optimal solution in using the Time-Cost CPM
Scheduling model analysis when what happens?
A. You have found the critical path
B. You have run out of crash time
C. You no longer have a linear relationship with costs
D. You have reached the minimum total cost
E. You have run out of crash costs

AACSB: Analytic
Difficulty: Easy

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71. In CPM analysis it is generally expected that the relationship between activity direct costs
and project indirect costs will be which of the following?
A. Positively related
B. Optimally related
C. Negatively related
D. Not related
E. Fractionally related

AACSB: Analytic
Difficulty: Medium

72. Which of the following is an assumption made in using CPM analysis?
A. Project activities flow together without distinct boundaries
B. Activities' sequential relationships can be specified and networked
C. Project management should focus on crashing activities
D. There is never a work stoppage in any activity until it is complete
E. There are no learning curve effects in setting activity time

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

73. Which of the following is a criticism made about CPM analysis?
A. Project activity sequencing relationships can be specified and networked
B. Project control should focus on the critical path
C. Projects can change over time and networks can be inaccurate
D. CPM does not foresee changes while the project is under way
E. The pessimistic time estimate is usually closest to the actual time

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-303
74. An assumption of CPM analysis is that project activities can be identified and have a clear
beginning and ending point. Which of the following is a valid criticism of this assumption?
A. Complex projects can change over time and networks become inaccurate
B. Project control cannot always focus on the critical path
C. The critical path through the network can change when activities are crashed
D. It is not necessarily true that the critical path is the longest path through the network

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


75. What is that sequence of activities that consume the longest amount of time in a project
network of activities called? _______________________________
The critical path

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

76. What are "project milestones?" _________________________________________
Specific events to be accomplished by specified points in time

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Work Breakdown Structure

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direct and indirect) project cost? ____________________
$2150

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

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project and total cost? __________________
Total time is 8 days, total cost is $2750

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

Essay Questions

79. Describe how CPM handles the trade-offs between time and cost in the scheduling of a
project.
This question can elicit a variety of responses. The "most correct" answers will deal with the
issues set forth on pages 199-203 under the heading "Minimum-Cost Scheduling" and should
include, as a minimum, the idea that each activity has a normal cost, normal time, crash cost
and crash time specified; that the critical path is computed, that only activities on the critical
path should be considered as candidates to "crash," that the critical path should be shortened
at the least cost and that the new solution should be checked to determine whether the critical
path has changed.

AACSB: Analytic
Difficulty: Medium

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80. What is the criterion for determining whether a project activity is on the "critical path" or
not?
This question is answered by the definition of the critical path on page 192 of the text: The
critical path of activities in a project is the sequence of activities that form the longest chain in
terms of their time to complete. The simplest correct answer is perhaps that a delay in
completing the activity will result in a delay in completing the entire project (unless, of
course, later activities can be "crashed.")

AACSB: Analytic
Difficulty: Easy

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Chapter 08
Global Sourcing and Procurement


1. Understand how important sourcing decisions go beyond simple material purchasing
decisions.
2. Demonstrate the bullwhip effect and how it is important to synchronize the flow of
material between supply chain partners.
3. Describe how characteristics of supply and demand have an impact on structuring
supply chains.
4. Know the reason for outsourcing capabilities.
5. Illustrate what green sourcing is.
6. Analyze the total cost of ownership.
7. Calculate inventory turnover and days of supply.


1. Strategic sourcing is the development and management of supplier relationships to acquire
goods and services in a way that aids in achieving the immediate needs of the business.
True False

2. Two common measures to evaluate supply-chain efficiency are the consumer price index
and the beta flow system.
True False

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3. Two common measures to evaluate supply-chain efficiency are the inventory turnover and
weeks-of-supply ratios.
True False

4. Inventory turn values that are considered good differ by industry and the type of products
being handled.
True False

5. Retailer behavior when stocking up during promotion periods (where the prices of goods
are reduced) is called backward buying.
True False

6. The phenomenon that magnifies the variability in order quantities for goods as orders move
through the supply-chain from the customer to the producer is called the bullwhip effect.
True False

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7. Functional products include staples that people buy in a wide range of retail outlets, such as
grocery stores and gas stations.
True False

8. The optimal strategy for functional products is to use an efficient supply-chain.
True False

9. The optimal strategy for functional products is to use a responsive supply-chain.
True False

10. The optimal strategy for innovative products is to use an efficient supply-chain.
True False

11. The best strategy for innovative products is to use either a responsive or an agile supply-
chain.
True False

12. Outsourcing is the act of moving some of a firm's internal activities and decision
responsibility to outside providers.
True False

13. Outsourcing allows a firm to achieve an improved focus on its core competencies.
True False

14. Logistics is a term indicating transportation choices for goods produced internationally but
consumed domestically.
True False

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15. Logistics is a term that refers to the management functions that support the complete cycle
of material flow, from the purchase and internal control of production materials; to the
planning and control of work-in-process; to the purchasing, shipping, and distribution of the
finished product.
True False

16. A financially-driven reason for outsourcing is that it can turn fixed costs into variable
costs.
True False

17. A financially-driven reason for outsourcing is that it can shorten cycle time.
True False

18. An organizationally-driven reason for outsourcing is that it can improve effectiveness by
focusing on what the firm does best.
True False

19. An organizationally-driven reason for outsourcing is that it can transform the
organization.
True False

20. A financially-driven reason for outsourcing is that it can reduce costs through a lower cost
structure.
True False

21. An improvement-driven reason for outsourcing is that it can increase product and service
value, customer satisfaction, and shareholder value.
True False

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22. A financially-driven reason for outsourcing is that it can help gain access to new markets,
especially in developing countries.
True False

23. A stable supply process is one where product volumes are high, demand is predictable and
there is a long product life.
True False

24. A stable supply process is one where the manufacturing process and the underlying
technology are mature and the supply base is well established.
True False

25. Firms producing functional products are forced to introduce a steady stream of
innovations in order to survive.
True False

26. Inventory turnover and weeks of supply are mathematically the inverse of one another.
True False

27. Green sourcing is only about finding new environmentally friendly technologies and
increasing the use of recyclable materials.
True False

28. An important opportunity in green sourcing is waste reduction opportunities.
True False

29. Green sourcing requires incorporating new criteria for evaluating alternatives.
True False

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30. The total cost of ownership (TCO) is an estimate of the cost of an item that includes all
the costs related to the procurement and use of an item, but does not include any of the costs
related to disposing of the item after it is no longer useful.
True False

31. The total cost of ownership (TCO) can be categorized into three areas: acquisition costs,
ownership costs, and post-ownership costs.
True False

32. In Total cost of ownership analysis overemphasis on purchase price frequently results in
failure to address other significant costs.
True False

33. In conducting a Total Cost of Ownership analysis, it is probably best to use a team
representing the key functional areas.
True False


34. The inventory turnover ratio used in measuring supply-chain efficiency is found by the
ratio of which of the following?
A. Cost of goods sold/Average aggregate inventory value
B. Fixed costs/Variable costs
C. Sales costs/Marketing costs
D. Cost of goods sold/Cost to sell goods
E. Operations flow costs/Suppliers flow costs

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35. The total value of all items held in inventory for the firm at cost is which of the
following?
A. Cost of goods to be sold
B. Average aggregate inventory value
C. Weeks supply of goods
D. Inventory turnover

36. If the average aggregate inventory value is $45,000 and the cost of goods sold is $10,000,
which of the following is weeks of supply?
A. 45,000
B. 234
C. 120
D. 23.4
E. 4.5

37. If the average aggregate inventory value is $1,200,000 and the cost of goods sold is
$600,000, which of the following is weeks of supply?
A. 1,040
B. 606
C. 104
D. 60.6
E. 2.0

$600,000, which of the following is inventory turnover?
A. 60
B. 10.4
C. 2
D. 0.5

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39. If the average aggregate inventory value is $100,000 and the cost of goods sold is
A. 19.23
B. 4.5
C. 0.8654
D. 0.2222

40. In Hau Lee's uncertainty framework to classify supply chains, a supply chain for
functional products with an evolving supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

functional products with a stable supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

innovative products with an evolving supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

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innovative products with a stable supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

44. The effect of the lack of synchronization among supply-chain members is referred to as
A. Forward buying
B. Continuous replenishment
C. Bullwhip effect
D. Metcalf's Law
E. Being out of step

45. In outsourcing which of the following internal activities and decision responsibilities can
not be transferred to outside contractors?
A. Activities involving people
B. Activities involving facilities
C. Activities involving equipment
D. Activities involving shareholders
E. Activities involving technology

46. Which of the following is an organizationally-driven reason for outsourcing?
A. Improve effectiveness by focusing on what the firm does best
B. Turn fixed costs into variable costs
C. Reduce costs through lowered cost structure and increased flexibility
D. Improve risk management
E. Improve credibility and image by associating with superior providers

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47. Which of the following is not an organizationally-driven reason for outsourcing?
B. Improve flexibility to meet changing demand for products and services
C. Increase product and service value by improving response to customer needs
D. Improve credibility and image by associating with superior providers
E. All of the above are organizationally-driven reasons for outsourcing

48. Which of the following is an improvement-driven reason for outsourcing?
A. Shorten cycle time
B. Improve effectiveness by focusing on what the firm does best
D. Turn fixed costs into variable costs
E. Reduce costs through a lower cost structure

49. Which of the following is not an improvement-driven reason for outsourcing?
A. Improve Quality and productivity
B. Enhance effectiveness by focusing on what you do best
C. Improve risk management
D. Obtain expertise, skills and technologies not otherwise available

50. When considering outsourcing, what should firms be sure to avoid?
A. Losing control of non-core activities which don't distinguish the firm
B. Allowing outsourcing to develop into a substitute for innovation
C. Giving the outsourcing partner opportunities to become a strong competitor
D. Allowing employees transferred to the outsourcing partner to rejoin the firm
E. Adverse corporate tax implications of asset transfers to the outsourcing partner

51. Which is the most challenging kind of supply chain to manage according to Hau Lee?
A. Agile supply chain
B. Efficient supply chain
C. Risk-hedging supply chain
D. Erratic supply chain
E. Responsive supply chain

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52. Which of the following of Fisher's product categories includes fashionable clothing,
personal computers and other products that typically have a very brief life cycle?
A. Functional products
B. Dysfunctional products
C. Innovative products
D. Bullwhip products
E. Value density products

53. Which of the following is not an improvement-driven reason to outsource?
A. Improve risk management
B. Increase commitment in a non-core area
C. Shorten cycle time
D. Improve quality and productivity
E. Obtain expertise, skills and technologies that are otherwise not available

54. Which of the following is one of the strategic characteristics to consider when deciding
how supplier relationships should be structured on the continuum between vertical integration
(do not outsource) to arm's length relationships (outsource)?
A. Cost
B. Location
C. Investment
D. Coordination
E. Transportation

55. The six-step process for green sourcing does not include which of the following?
A. Assess the opportunity.
B. Assess the supply base.
C. Confer with environmental groups.
D. Engage sourcing agents.
E. Institutionalize the sourcing strategy.

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56. The six-step process for green sourcing includes which of the following?
A. Provide a press release to local (and perhaps national) media.
B. Include members of environmental groups in the decision.
C. Notify the state and federal environmental agencies of your plans.
D. Perform an environmental impact study.
E. Develop the sourcing strategy.

57. Ownership costs are incurred after the initial purchase and are associated with the ongoing
use of the product or material. Which of the following is not an ownership cost listed in the
text?
A. Financing costs
B. Energy costs
C. Taxes
D. Aesthetics
E. Worker fatigue

58. Acquisition costs include which of the following costs?
A. Quality costs
B. Maintenance and repair costs
C. Environmental costs
D. Supply chain costs
E. Customer dissatisfaction costs

59. Ownership costs include which of the following costs?
A. Environmental costs
B. Warranty costs
C. Supply chain costs
D. Quality costs
E. Taxes

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60. What is the effect of the lack of synchronization among supply-chain members called?
________________________
________________________________________

61. The acronym RFP stands for: ________________________
________________________________________

62. When a customer allows their supplier to manage an item or group of items for them it is
called ________________________
________________________________________

63. Name the four types of supply chain in Hau Lee's uncertainty framework for classifying
supply chains.
________________________
________________________
________________________
________________________
________________________________________

64. In Hau Lee's uncertainty framework to classify supply chains, a supply chain that
combines the strengths of a "risk-hedging" and a "responsive" supply chain is called what?
______________________________________
________________________________________

what are the weeks of supply? _______________________
________________________________________

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66. If the weeks of supply is 10 and the average aggregate inventory value is $1,000,000,
what is the cost of goods sold? _______________________
________________________________________

67. If inventory turnover is 20 and cost of goods sold is $100,000, what is the average
aggregate inventory value? _______________________.
________________________________________

68. Having a supply chain that is environmentally responsible is called:
_______________________.
________________________________________

69. The step in the Six-step Process for Green Sourcing where quantitative and qualitative
criteria to evaluate the sourcing process is developed is called: _______________________.
________________________________________

70. The step in the Six-step Process for Green Sourcing where a set of metrics against which
the supplier will be measured for the contract's duration is called:
_______________________.
________________________________________

71. An estimate of the cost of an item that includes all the costs related to the procurement and
use of an item, including any related costs in disposing of the item after it is no longer useful
is called what? _______________________.
________________________________________

72. Measures of sourcing efficiency are _______________________ and
_______________________.
________________________________________

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73. In Hau Lee's uncertainty framework to classify supply chains, an
_______________________ supply chain process should be used for functional products
________________________________________

74. In Hau Lee's uncertainty framework to classify supply chains, a
_______________________ supply chain process should be used for innovative products.
________________________________________

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Chapter 08 Global Sourcing and Procurement Answer Key


1. Strategic sourcing is the development and management of supplier relationships to acquire
goods and services in a way that aids in achieving the immediate needs of the business.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Strategic Sourcing

2. Two common measures to evaluate supply-chain efficiency are the consumer price index
and the beta flow system.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Measuring Sourcing Performance

3. Two common measures to evaluate supply-chain efficiency are the inventory turnover and
weeks-of-supply ratios.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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4. Inventory turn values that are considered good differ by industry and the type of products
being handled.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

5. Retailer behavior when stocking up during promotion periods (where the prices of goods
are reduced) is called backward buying.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

6. The phenomenon that magnifies the variability in order quantities for goods as orders move
through the supply-chain from the customer to the producer is called the bullwhip effect.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

7. Functional products include staples that people buy in a wide range of retail outlets, such as
grocery stores and gas stations.
TRUE

AACSB: Analytic
Difficulty: Medium

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8. The optimal strategy for functional products is to use an efficient supply-chain.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

9. The optimal strategy for functional products is to use a responsive supply-chain.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. The optimal strategy for innovative products is to use an efficient supply-chain.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

11. The best strategy for innovative products is to use either a responsive or an agile supply-
chain.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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12. Outsourcing is the act of moving some of a firm's internal activities and decision
responsibility to outside providers.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Outsourcing

13. Outsourcing allows a firm to achieve an improved focus on its core competencies.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Outsourcing

14. Logistics is a term indicating transportation choices for goods produced internationally but
consumed domestically.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

15. Logistics is a term that refers to the management functions that support the complete cycle
of material flow, from the purchase and internal control of production materials; to the
planning and control of work-in-process; to the purchasing, shipping, and distribution of the
finished product.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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16. A financially-driven reason for outsourcing is that it can turn fixed costs into variable
costs.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

17. A financially-driven reason for outsourcing is that it can shorten cycle time.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

18. An organizationally-driven reason for outsourcing is that it can improve effectiveness by
focusing on what the firm does best.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

19. An organizationally-driven reason for outsourcing is that it can transform the
organization.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

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20. A financially-driven reason for outsourcing is that it can reduce costs through a lower cost
structure.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Outsourcing

21. An improvement-driven reason for outsourcing is that it can increase product and service
value, customer satisfaction, and shareholder value.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

22. A financially-driven reason for outsourcing is that it can help gain access to new markets,
especially in developing countries.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

23. A stable supply process is one where product volumes are high, demand is predictable and
there is a long product life.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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24. A stable supply process is one where the manufacturing process and the underlying
technology are mature and the supply base is well established.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

25. Firms producing functional products are forced to introduce a steady stream of
innovations in order to survive.
FALSE

AACSB: Analytic
Difficulty: Easy

26. Inventory turnover and weeks of supply are mathematically the inverse of one another.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

27. Green sourcing is only about finding new environmentally friendly technologies and
increasing the use of recyclable materials.
FALSE

AACSB: Analytic
Difficulty: Easy
Topic: Green Sourcing

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28. An important opportunity in green sourcing is waste reduction opportunities.
TRUE

AACSB: Analytic
Difficulty: Easy

29. Green sourcing requires incorporating new criteria for evaluating alternatives.
TRUE

AACSB: Analytic
Difficulty: Easy

30. The total cost of ownership (TCO) is an estimate of the cost of an item that includes all
the costs related to the procurement and use of an item, but does not include any of the costs
related to disposing of the item after it is no longer useful.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Total Cost of Ownership

31. The total cost of ownership (TCO) can be categorized into three areas: acquisition costs,
ownership costs, and post-ownership costs.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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32. In Total cost of ownership analysis overemphasis on purchase price frequently results in
failure to address other significant costs.
TRUE

AACSB: Analytic
Difficulty: Easy

33. In conducting a Total Cost of Ownership analysis, it is probably best to use a team
representing the key functional areas.
TRUE

AACSB: Analytic
Difficulty: Easy


34. The inventory turnover ratio used in measuring supply-chain efficiency is found by the
ratio of which of the following?
A. Cost of goods sold/Average aggregate inventory value
B. Fixed costs/Variable costs
C. Sales costs/Marketing costs
D. Cost of goods sold/Cost to sell goods
E. Operations flow costs/Suppliers flow costs

AACSB: Analytic
Difficulty: Easy

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35. The total value of all items held in inventory for the firm at cost is which of the
following?
A. Cost of goods to be sold
B. Average aggregate inventory value
C. Weeks supply of goods
D. Inventory turnover

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

which of the following is weeks of supply?
A. 45,000
B. 234
C. 120
D. 23.4
E. 4.5

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

$600,000, which of the following is weeks of supply?
A. 1,040
B. 606
C. 104
D. 60.6
E. 2.0

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

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A. 60
B. 10.4
C. 2
D. 0.5

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

39. If the average aggregate inventory value is $100,000 and the cost of goods sold is
A. 19.23
B. 4.5
C. 0.8654
D. 0.2222

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

functional products with an evolving supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

AACSB: Analytic
Difficulty: Medium

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functional products with a stable supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

AACSB: Analytic
Difficulty: Medium

innovative products with an evolving supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

AACSB: Analytic
Difficulty: Medium

innovative products with a stable supply process is called which of the following?
A. Efficient
B. Forward looking
C. Agile
D. Risk hedging
E. Responsive

AACSB: Analytic
Difficulty: Medium

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44. The effect of the lack of synchronization among supply-chain members is referred to as
A. Forward buying
B. Continuous replenishment
C. Bullwhip effect
D. Metcalf's Law
E. Being out of step

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

45. In outsourcing which of the following internal activities and decision responsibilities can
not be transferred to outside contractors?
A. Activities involving people
B. Activities involving facilities
C. Activities involving equipment
D. Activities involving shareholders
E. Activities involving technology

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

46. Which of the following is an organizationally-driven reason for outsourcing?
B. Turn fixed costs into variable costs
C. Reduce costs through lowered cost structure and increased flexibility
D. Improve risk management

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Outsourcing

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47. Which of the following is not an organizationally-driven reason for outsourcing?
B. Improve flexibility to meet changing demand for products and services
D. Improve credibility and image by associating with superior providers
E. All of the above are organizationally-driven reasons for outsourcing

AACSB: Analytic
Difficulty: Medium
Topic: Outsourcing

48. Which of the following is an improvement-driven reason for outsourcing?
A. Shorten cycle time
B. Improve effectiveness by focusing on what the firm does best
D. Turn fixed costs into variable costs
E. Reduce costs through a lower cost structure

AACSB: Analytic
Difficulty: Medium
Topic: Outsourcing

49. Which of the following is not an improvement-driven reason for outsourcing?
A. Improve Quality and productivity
B. Enhance effectiveness by focusing on what you do best
C. Improve risk management
D. Obtain expertise, skills and technologies not otherwise available

AACSB: Analytic
Difficulty: Medium
Topic: Outsourcing

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50. When considering outsourcing, what should firms be sure to avoid?
A. Losing control of non-core activities which don't distinguish the firm
B. Allowing outsourcing to develop into a substitute for innovation
C. Giving the outsourcing partner opportunities to become a strong competitor
D. Allowing employees transferred to the outsourcing partner to rejoin the firm
E. Adverse corporate tax implications of asset transfers to the outsourcing partner

AACSB: Analytic
Difficulty: Medium
Topic: Outsourcing

51. Which is the most challenging kind of supply chain to manage according to Hau Lee?
A. Agile supply chain
B. Efficient supply chain
C. Risk-hedging supply chain
D. Erratic supply chain
E. Responsive supply chain

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

52. Which of the following of Fisher's product categories includes fashionable clothing,
personal computers and other products that typically have a very brief life cycle?
A. Functional products
B. Dysfunctional products
C. Innovative products
D. Bullwhip products
E. Value density products

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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53. Which of the following is not an improvement-driven reason to outsource?
A. Improve risk management
B. Increase commitment in a non-core area
C. Shorten cycle time
D. Improve quality and productivity
E. Obtain expertise, skills and technologies that are otherwise not available

AACSB: Analytic
Difficulty: Medium

54. Which of the following is one of the strategic characteristics to consider when deciding
how supplier relationships should be structured on the continuum between vertical integration
(do not outsource) to arm's length relationships (outsource)?
A. Cost
B. Location
C. Investment
D. Coordination
E. Transportation

AACSB: Analytic
Difficulty: Medium
Topic: Outsourcing

55. The six-step process for green sourcing does not include which of the following?
A. Assess the opportunity.
B. Assess the supply base.
C. Confer with environmental groups.
D. Engage sourcing agents.
E. Institutionalize the sourcing strategy.

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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56. The six-step process for green sourcing includes which of the following?
A. Provide a press release to local (and perhaps national) media.
B. Include members of environmental groups in the decision.
C. Notify the state and federal environmental agencies of your plans.
D. Perform an environmental impact study.
E. Develop the sourcing strategy.

AACSB: Analytic
Difficulty: Easy

57. Ownership costs are incurred after the initial purchase and are associated with the ongoing
use of the product or material. Which of the following is not an ownership cost listed in the
text?
A. Financing costs
B. Energy costs
C. Taxes
D. Aesthetics
E. Worker fatigue

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

58. Acquisition costs include which of the following costs?
A. Quality costs
B. Maintenance and repair costs
C. Environmental costs
D. Supply chain costs
E. Customer dissatisfaction costs

AACSB: Analytic
Difficulty: Medium

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59. Ownership costs include which of the following costs?
A. Environmental costs
B. Warranty costs
C. Supply chain costs
D. Quality costs
E. Taxes

AACSB: Analytic
Difficulty: Medium


60. What is the effect of the lack of synchronization among supply-chain members called?
________________________
The bullwhip effect

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

61. The acronym RFP stands for: ________________________
Request for proposal

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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62. When a customer allows their supplier to manage an item or group of items for them it is
called ________________________
Vendor managed inventory

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

63. Name the four types of supply chain in Hau Lee's uncertainty framework for classifying
supply chains.
________________________
________________________
________________________
________________________
1. Efficient; 2. Responsive; 3. Risk-hedging, 4. Agile

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

64. In Hau Lee's uncertainty framework to classify supply chains, a supply chain that
combines the strengths of a "risk-hedging" and a "responsive" supply chain is called what?
______________________________________
Agile

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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what are the weeks of supply? _______________________
2 weeks

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

66. If the weeks of supply is 10 and the average aggregate inventory value is $1,000,000,
what is the cost of goods sold? _______________________
$5,200,000

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

67. If inventory turnover is 20 and cost of goods sold is $100,000, what is the average
aggregate inventory value? _______________________.
$5,000

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

68. Having a supply chain that is environmentally responsible is called:
_______________________.
Green Sourcing

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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69. The step in the Six-step Process for Green Sourcing where quantitative and qualitative
criteria to evaluate the sourcing process is developed is called: _______________________.
Develop the sourcing strategy

AACSB: Knowledge
Difficulty: Medium
Taxonomy: Knowledge

70. The step in the Six-step Process for Green Sourcing where a set of metrics against which
the supplier will be measured for the contract's duration is called:
_______________________.
Institutionalize the sourcing strategy

AACSB: Knowledge
Difficulty: Medium
Taxonomy: Knowledge

71. An estimate of the cost of an item that includes all the costs related to the procurement and
use of an item, including any related costs in disposing of the item after it is no longer useful
is called what? _______________________.
Total cost of ownership

AACSB: Knowledge
Difficulty: Medium
Taxonomy: Knowledge

72. Measures of sourcing efficiency are _______________________ and
_______________________.
inventory turnover and weeks of supply

AACSB: Knowledge
Difficulty: Medium
Taxonomy: Knowledge

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73. In Hau Lee's uncertainty framework to classify supply chains, an
_______________________ supply chain process should be used for functional products
efficient

AACSB: Knowledge
Difficulty: Medium
Taxonomy: Knowledge

74. In Hau Lee's uncertainty framework to classify supply chains, a
_______________________ supply chain process should be used for innovative products.
responsive processes

AACSB: Knowledge
Difficulty: Medium
Taxonomy: Knowledge

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Chapter 09
Location, Logistics, and Distribution


1. Describe what a third-party logistics provider is.
2. Assess the major issues that need to be considered in locating a plant or warehouse
facility.
3. Set up the transportation model to analyze location problems and how to use Excel
Solver to find solutions to these models.
4. Understand the centroid method for locating entities such as cell phone
communication towers.
5. Know how a factor-rating system can be used to narrow potential location sites.


1. The local government's willingness to invest in upgrading infrastructure to the levels
required by a company is an important issue in a company's decision of where to locate a new
facility.
True False

2. Facility location analysis considers the competitive imperative to be close to customers as
to timeliness of deliveries.
True False

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3. Facility location analysis considers the competitive imperative of lowest total cost.
True False

4. Facility location analysis considers the competitive imperative of a favorable business
climate as indicated by the presence of other companies in the same industry.
True False

5. Facility location analysis considers the competitive imperative of locating near the
appropriate labor pool to take advantage of low wage costs and/or skill levels.
True False

appropriate labor pool to take advantage of high technical skills.
True False

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7. An example of a positive business climate that might influence a facility location decision
is increasing governmental costs and increasing property taxes.
True False

8. A favorable business climate in facility location decision-making might include
government legislation of tax abatements.
True False

9. A favorable business climate in facility location decision-making might include local
government intervention to facilitate businesses locating in an area via subsidies.
True False

government providing basic skill training for prospective members of the workforce.
True False

11. In facility location decision-making the educational and skill levels of the labor pool must
match the company's needs.
True False

12. In facility location decision-making matching the educational and skill levels of the labor
pool to a company's needs is even more important than the labor pool's willingness and ability
to learn.
True False

13. Because the world is becoming more highly interconnected, the proximity of an important
supplier's plants is not crucial in supporting lean production methods.
True False

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14. Issues of Document1Document1 and capacity are strongly interconnected to the facility
location decision.
True False

15. A free trade zone operates under different rules and laws than a foreign trade zone.
True False

16. A free trade zone is typically a closed facility into which foreign goods can be brought
without being subject to the usual customs requirements.
True False

17. The objective of facility location analysis is to select the site with the lowest total cost.
True False

18. Governmental barriers to enter and locate in many countries are increasing through
restrictive protectionist legislation.
True False

19. Quality of life in a host community is not a major factor in making the facility location
decision.
True False

20. In facility location decision-making the factor-rating system is one of the least used
general location techniques.
True False

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21. In facility location decision-making the factor-rating system is based on linear
programming.
True False

22. A major problem in a plant location decision based on the factor-rating system is that
simple point-rating schemes do not account for the wide variance of costs that may occur
within each factor used in the analysis.
True False

23. Services typically have multiple site locations to maintain close contact with customers.
True False

24. Facility location decisions are made using analytical techniques that are able to weigh a
large number of different variables equally.
True False

25. A third-party logistics company is a firm that manages all or part of another company's
product delivery operations.
True False

26. DHL and United Parcel Service are transportation companies which are prohibited from
functioning as a third-party logistics company the way Federal Express does.
True False

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27. Which of the following is not a criterion that influences manufacturing plant or warehouse
facility location decisions?
A. Proximity to customers
B. Historical cost
C. Infrastructure of a country
D. Quality of labor
E. Business climate

28. Which of the following is a not criterion that influences manufacturing plant or warehouse
A. Suppliers
B. Free trade zones
C. Political risk
D. Gross national product
E. Tariffs and customs duties

A. Government barriers
B. Trading blocs
C. Environmental regulation
D. Immigration rules
E. Local labor costs

30. Which of the following is a criterion that influences manufacturing plant or warehouse
B. Corporate policy
C. Competitor's locations
D. Competitive advantage
E. Host community politics

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31. An important issue in facility location analysis is business climate. An unfavorable
business climate could be indicated by which of the following?
A. Similar-sized businesses nearby
B. The willingness of local politicians to provide favorable treatment for a consideration
C. The presence of other foreign companies in the case of international locations
D. The local presence of companies in the same industry
E. An established educational institution nearby

32. One of the objectives of facility location analysis is to select a site with the lowest total
cost. Which of the following costs should be excluded from the analysis?
A. Historical costs
B. Inbound distribution costs
C. Land
D. Construction
E. Regional costs

cost. Which of the following costs should not be included in the analysis?
A. Outbound distribution costs
B. Incidental costs
C. Energy costs
D. Hidden costs
E. Costs we can pass along to our customer

cost. Which of the following are hidden costs that should be included in the analysis?
A. Becoming less responsive to the customer
B. Supplier costs
C. Taxes
D. Construction costs
E. Product life cycle costs

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35. One of the objectives in facility location analysis is to select a site with the lowest total
cost. Which of the following costs are hidden costs that should be included in the analysis?
A. Infrastructure costs
B. Movement of preproduction material between locations
C. Taxes
E. Bribery costs

36. Which of the following is not an infrastructure criteria used in facility location analysis?
A. Adequate school system
B. Adequate health care
C. Adequate transportation
D. Adequate low cost labor
E. Adequate public utility systems

37. How many free trade zones are there in the United States?
A. Less than 50
B. Less than 100
C. About 260
D. More than 412
E. About 310

38. An example of a trading bloc is which of the following?
A. North American Free Trade Agreement countries
B. Free trade zones
C. ISO-9000 companies
D. American Production and Inventory Control Society
E. Wal-Mart and its' suppliers

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39. Which of the following is a plant location methodology good for locating a single facility
within a set of existing facilities based in distances and volumes of goods shipped?
A. Factor-rating systems
B. Centroid method
C. Decision trees
D. Linear programming
E. Regression analysis

40. In which of the following situations should we not use the transportation method of linear
programming?
A. To find a new site location for a plant
B. To minimize costs of shipping "n" units to "m" destinations
C. To maximize profits of shipping "n" units to "m" destinations
D. To determine which corner of a street intersection to locate a retail service facility
E. To locate a finished goods distribution warehouse

41. The centroid method for plant location uses which of the following data?
A. Volume of goods to be shipped between existing points
B. Inbound transportation costs
C. Transport times between facilities
D. Correlation matrix of existing facilities
E. Probabilities and payoffs

42. Plant A is located at the (X, Y) coordinates of (100, 200) and has a volume of shipping of
500 units a day. Plant B is located at the (X, Y) coordinates of (150, 400) and has a volume of
shipping of 200 units a day. Using the centroid method, which of the following is the X
coordinate for the new plant location?
A. About 100
B. About 115
C. About 130
D. About 150
E. X coordinate cannot be computed from the data given

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A. About 227
B. About 243
C. About 389
D. X coordinate cannot be computed from the data given

44. A company wants to determine where they should locate a new warehouse. They have two
existing production plants (i.e., Plant A and Plant B) that will ship units of a product to this
warehouse. Plant A is located at the (X, Y) coordinates of (50, 100) and will have volume of
shipping of 250 units a day. Plant B is located at the (X, Y) coordinates of (150, 200) and will
have a volume of shipping of 150 units a day. Using the centroid method, which of the
following are the X and Y coordinates for the new plant location?
A. (81,117)
B. (88, 138)
C. (117,102)
D. (76,123)
E. X and Y coordinates cannot be computed from the data given

45. What transportation mode has very high initial investment costs but gives a very low cost
per mile for products that are highly specialized and require no packaging?
A. Highway
B. Rail
C. Water
D. Pipeline
E. Air

46. Very few products are moved without at least part of their journey being by which mode
of transportation?
A. Highway
B. Rail
C. Water
D. Pipeline
E. Air

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47. Name the five transportation modes discussed in the textbook.
1)____________________; 2)____________________;
3)____________________; 4)____________________;
5) ____________________
________________________________________

48. Name four methods of quantitative analysis that are useful in informing the facility
location decision. 1)____________________; 2)____________________;
3)____________________; 4)____________________
________________________________________

49. What is a closed area or compound into which foreign goods can be brought without being
subject to the normal customs requirements? ____________________
________________________________________

50. Three distribution centers, A, B, and C, are located at the following (X, Y) coordinates: A,
(20, 130); B, (180, 0); and C, (200, 200). A factory is to be constructed to distribute a new
product through these warehouses. The expected annual volumes expected to be shipped
through the three warehouses is forecast to be 20 million units through A, 100 million through
B and 50 million through C. Using the centroid method, approximately what should the
coordinates of the new factory be? _________________
________________________________________

51. What is the name for a group of countries that have agreed on a set of special
arrangements governing the buying and selling of goods between member countries?
________________________
________________________________________

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52. The text describes 14 "Issues in facility location." Name as many of these as you can.
1) ________________________ 2) ________________________
3) ________________________ 4) ________________________
5) ________________________ 6) ________________________
7) ________________________ 8) ________________________
9) ________________________ 10) ________________________
11) ________________________ 12) ________________________
13) ________________________ 14) ________________________
________________________________________

53. What are the two "hidden costs" that are often overlooked in determining the total cost of
a facility location decision?
__________________________________
__________________________________
________________________________________

Essay Questions

54. Compare and contrast the factor-rating system and the transportation method of linear
programming as used in facility location decisions.

55. As a facility location consultant, how would you advise a client wanting to locate a retail
service facility differently than a client wanting to locate an on-line stock trading operation?

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56. What weight should be given to environmental pollution control regulations that differ
from location to location or from country to country in making facility location decisions?

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Chapter 09 Location, Logistics, and Distribution Answer Key


1. The local government's willingness to invest in upgrading infrastructure to the levels
required by a company is an important issue in a company's decision of where to locate a new
facility.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Issues in Facility Location

2. Facility location analysis considers the competitive imperative to be close to customers as
to timeliness of deliveries.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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3. Facility location analysis considers the competitive imperative of lowest total cost.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

4. Facility location analysis considers the competitive imperative of a favorable business
climate as indicated by the presence of other companies in the same industry.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

appropriate labor pool to take advantage of low wage costs and/or skill levels.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

appropriate labor pool to take advantage of high technical skills.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-359
7. An example of a positive business climate that might influence a facility location decision
is increasing governmental costs and increasing property taxes.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

8. A favorable business climate in facility location decision-making might include
government legislation of tax abatements.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

government intervention to facilitate businesses locating in an area via subsidies.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

government providing basic skill training for prospective members of the workforce.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-360
11. In facility location decision-making the educational and skill levels of the labor pool must
match the company's needs.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

12. In facility location decision-making matching the educational and skill levels of the labor
pool to a company's needs is even more important than the labor pool's willingness and ability
to learn.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. Because the world is becoming more highly interconnected, the proximity of an important
supplier's plants is not crucial in supporting lean production methods.
FALSE

AACSB: Analytic
Difficulty: Easy

14. Issues of Document1Document1 and capacity are strongly interconnected to the facility
location decision.
TRUE

AACSB: Analytic
Difficulty: Easy

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15. A free trade zone operates under different rules and laws than a foreign trade zone.
FALSE

AACSB: Analytic
Difficulty: Easy

16. A free trade zone is typically a closed facility into which foreign goods can be brought
without being subject to the usual customs requirements.
TRUE

AACSB: Analytic
Difficulty: Easy

17. The objective of facility location analysis is to select the site with the lowest total cost.
TRUE

AACSB: Analytic
Difficulty: Easy

18. Governmental barriers to enter and locate in many countries are increasing through
restrictive protectionist legislation.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-362
19. Quality of life in a host community is not a major factor in making the facility location
decision.
FALSE

AACSB: Analytic
Difficulty: Easy

20. In facility location decision-making the factor-rating system is one of the least used
general location techniques.
FALSE

AACSB: Analytic
Difficulty: Easy
Topic: Plant Location Methods

21. In facility location decision-making the factor-rating system is based on linear
programming.
FALSE

AACSB: Analytic
Difficulty: Easy

22. A major problem in a plant location decision based on the factor-rating system is that
simple point-rating schemes do not account for the wide variance of costs that may occur
within each factor used in the analysis.
TRUE

AACSB: Analytic
Difficulty: Easy

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23. Services typically have multiple site locations to maintain close contact with customers.
TRUE

AACSB: Analytic
Difficulty: Easy

24. Facility location decisions are made using analytical techniques that are able to weigh a
large number of different variables equally.
FALSE

AACSB: Analytic
Difficulty: Easy

25. A third-party logistics company is a firm that manages all or part of another company's
product delivery operations.
TRUE

AACSB: Analytic
Difficulty: Easy
Topic: Logistics

26. DHL and United Parcel Service are transportation companies which are prohibited from
functioning as a third-party logistics company the way Federal Express does.
FALSE

AACSB: Analytic
Difficulty: Medium
Topic: Logistics

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B. Historical cost
C. Infrastructure of a country
D. Quality of labor
E. Business climate

AACSB: Analytic
Difficulty: Easy

28. Which of the following is a not criterion that influences manufacturing plant or warehouse
A. Suppliers
B. Free trade zones
C. Political risk
D. Gross national product
E. Tariffs and customs duties

AACSB: Analytic
Difficulty: Easy

A. Government barriers
B. Trading blocs
C. Environmental regulation
D. Immigration rules
E. Local labor costs

AACSB: Analytic
Difficulty: Easy

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30. Which of the following is a criterion that influences manufacturing plant or warehouse
B. Corporate policy
C. Competitor's locations
D. Competitive advantage
E. Host community politics

AACSB: Analytic
Difficulty: Easy

31. An important issue in facility location analysis is business climate. An unfavorable
business climate could be indicated by which of the following?
A. Similar-sized businesses nearby
B. The willingness of local politicians to provide favorable treatment for a consideration
C. The presence of other foreign companies in the case of international locations
D. The local presence of companies in the same industry
E. An established educational institution nearby

AACSB: Analytic
Difficulty: Easy

cost. Which of the following costs should be excluded from the analysis?
A. Historical costs
B. Inbound distribution costs
C. Land
D. Construction
E. Regional costs

AACSB: Analytic
Difficulty: Easy

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cost. Which of the following costs should not be included in the analysis?
A. Outbound distribution costs
B. Incidental costs
C. Energy costs
D. Hidden costs
E. Costs we can pass along to our customer

AACSB: Analytic
Difficulty: Easy

cost. Which of the following are hidden costs that should be included in the analysis?
A. Becoming less responsive to the customer
B. Supplier costs
C. Taxes
E. Product life cycle costs

AACSB: Analytic
Difficulty: Easy

35. One of the objectives in facility location analysis is to select a site with the lowest total
cost. Which of the following costs are hidden costs that should be included in the analysis?
A. Infrastructure costs
B. Movement of preproduction material between locations
C. Taxes
E. Bribery costs

AACSB: Analytic
Difficulty: Easy

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36. Which of the following is not an infrastructure criteria used in facility location analysis?
A. Adequate school system
B. Adequate health care
C. Adequate transportation
D. Adequate low cost labor
E. Adequate public utility systems

AACSB: Analytic
Difficulty: Easy

37. How many free trade zones are there in the United States?
A. Less than 50
B. Less than 100
C. About 260
D. More than 412
E. About 310

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

38. An example of a trading bloc is which of the following?
A. North American Free Trade Agreement countries
B. Free trade zones
C. ISO-9000 companies
D. American Production and Inventory Control Society
E. Wal-Mart and its' suppliers

AACSB: Analytic
Difficulty: Easy

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39. Which of the following is a plant location methodology good for locating a single facility
within a set of existing facilities based in distances and volumes of goods shipped?
A. Factor-rating systems
B. Centroid method
C. Decision trees
D. Linear programming
E. Regression analysis

AACSB: Analytic
Difficulty: Easy

40. In which of the following situations should we not use the transportation method of linear
programming?
A. To find a new site location for a plant
B. To minimize costs of shipping "n" units to "m" destinations
C. To maximize profits of shipping "n" units to "m" destinations
D. To determine which corner of a street intersection to locate a retail service facility
E. To locate a finished goods distribution warehouse

AACSB: Analytic
Difficulty: Easy

41. The centroid method for plant location uses which of the following data?
A. Volume of goods to be shipped between existing points
B. Inbound transportation costs
C. Transport times between facilities
D. Correlation matrix of existing facilities
E. Probabilities and payoffs

AACSB: Analytic
Difficulty: Easy

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A. About 100
B. About 115
C. About 130
D. About 150
E. X coordinate cannot be computed from the data given

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

A. About 227
B. About 243
C. About 389
D. X coordinate cannot be computed from the data given

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-370
44. A company wants to determine where they should locate a new warehouse. They have two
existing production plants (i.e., Plant A and Plant B) that will ship units of a product to this
warehouse. Plant A is located at the (X, Y) coordinates of (50, 100) and will have volume of
shipping of 250 units a day. Plant B is located at the (X, Y) coordinates of (150, 200) and will
have a volume of shipping of 150 units a day. Using the centroid method, which of the
following are the X and Y coordinates for the new plant location?
A. (81,117)
B. (88, 138)
C. (117,102)
D. (76,123)
E. X and Y coordinates cannot be computed from the data given

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

45. What transportation mode has very high initial investment costs but gives a very low cost
per mile for products that are highly specialized and require no packaging?
A. Highway
B. Rail
C. Water
D. Pipeline
E. Air

AACSB: Analytic
Difficulty: Easy

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46. Very few products are moved without at least part of their journey being by which mode
of transportation?
A. Highway
B. Rail
C. Water
D. Pipeline
E. Air

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


47. Name the five transportation modes discussed in the textbook.
1)____________________; 2)____________________;
3)____________________; 4)____________________;
5) ____________________
1) Highway; 2) Rail; 3) Water; 4) Air; 5) Pipeline

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

48. Name four methods of quantitative analysis that are useful in informing the facility
location decision. 1)____________________; 2)____________________;
3)____________________; 4)____________________
1) Centroid method; 2) Regression analysis; 3) Transportation method of linear
programming; 4) Factor rating system

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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49. What is a closed area or compound into which foreign goods can be brought without being
subject to the normal customs requirements? ____________________
A free trade zone (or foreign trade zone)

AACSB: Analytic
Difficulty: Easy

50. Three distribution centers, A, B, and C, are located at the following (X, Y) coordinates: A,
(20, 130); B, (180, 0); and C, (200, 200). A factory is to be constructed to distribute a new
product through these warehouses. The expected annual volumes expected to be shipped
through the three warehouses is forecast to be 20 million units through A, 100 million through
B and 50 million through C. Using the centroid method, approximately what should the
coordinates of the new factory be? _________________
X = 167, Y = 74

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

51. What is the name for a group of countries that have agreed on a set of special
arrangements governing the buying and selling of goods between member countries?
________________________
Trading bloc

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

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52. The text describes 14 "Issues in facility location." Name as many of these as you can.
1) ________________________ 2) ________________________
3) ________________________ 4) ________________________
5) ________________________ 6) ________________________
7) ________________________ 8) ________________________
9) ________________________ 10) ________________________
11) ________________________ 12) ________________________
13) ________________________ 14) ________________________
(1.) Proximity to customers; (2.) Business climate; (3.) Total cost; (4.) Infrastructure; (5.)
Quality of labor; (6.) Suppliers; (7.) Other facilities; (8.) Free trade zones; (9.) Political
risk; (10.) Government barriers; (11.) Trading blocs; (12.) Governmental regulation;
(13.) Host community; (14.) Competitive advantage

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

53. What are the two "hidden costs" that are often overlooked in determining the total cost of
a facility location decision?
__________________________________
__________________________________
(1.) Excessive moving of pre-production materials between locations prior to final
delivery to the customers. (2.) Loss of customer responsiveness arising from locating
away from the main customer base.

AACSB: Analytic
Difficulty: Medium

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Essay Questions

54. Compare and contrast the factor-rating system and the transportation method of linear
programming as used in facility location decisions.
These two methods are discussed in the text starting on page 255. A successful response to the
question will identify that the transportation method of linear programming employs
substantially more mathematical rigor but also imposes some fairly rigid assumptions (like
linearity & certainty) and is limited in the kinds of information that is considered in making
the decision. The factor-rating system makes fewer assumptions to facilitate analytical
tractability and gives broad latitude in terms of the kinds of information used. On the other
hand, to use the factor-rating system to sort out a facility decision from a large number of
candidate locations will require gathering and assessment of large amounts of data which is
measured differently and may not necessarily be compatible. Linear programming, on the
other hand, uses less data per alternative and that data is, by definition, analyzable. Stated
differently, the factor-rating method incorporates the decision-makers judgment more
explicitly than does the transportation method of linear programming.
A strong response to this question will convey the idea that blending these methods is
possible. The transportation method can be used to help sort through a large number of
candidate locations and eliminate most of them. The factor-rating system, then, working with
a relatively short list of possibilities, each of which is acceptable from the transportation linear
programming perspective, can look more closely and in more detail to assist in the final
decision.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

1-375
55. As a facility location consultant, how would you advise a client wanting to locate a retail
service facility differently than a client wanting to locate an on-line stock trading operation?
A retail service facility requires close physical proximity to customers. An analytical method
that relates possible locations to the locations of clientele (such as the centroid method or
regression analysis) is favored here. The on-line operation, on the other hand, is relatively
footloose relative to customers. Here, a factor-rating system that considered issues like quality
of labor, infrastructure, quality of life, host community amenities, etc. would be more
appropriate.

AACSB: Analytic
Difficulty: Hard

56. What weight should be given to environmental pollution control regulations that differ
from location to location or from country to country in making facility location decisions?
Environmental regulations are mentioned in passing on page 254 of the text. This question is
extremely value-laden and does not lend itself to a right-or-wrong answer. Instead it provides
your students with the opportunity to impose their own values on the issue. Hence, some
latitude must be taken in evaluating their responses. Some students will argue that, because of
the costs of being "green," the firm has a responsibility to shareholders to locate in the most
environmentally permissive location. Others will argue that the social responsibility of the
firm should dominate the decision and, wherever it locates, the firm should spare no expense
to be as "clean and green" as technology allows. Either case, argued well, should get some
credit. A slightly more thoughtful response will look not just at current regulations but toward
possible tighter regulations in the long-term future and even to the public image the firm
wishes to project. An excellent response will incorporate all of these perspectives and will add
the notion that, by being "clean and green" a firm may actually gain competitive advantage as
the environmental movement takes hold and sensitive customers become aware of the firm's
environmentally responsible stance. A second type of competitive advantage might arise. If
the "green" firm lobbies for the more strict pollution rules, competitors may be required to
conform to tougher regulations by adopting pollution controls at inflated future prices.

AACSB: Analytic
Difficulty: Hard

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Chapter 10
Lean and Sustainable Supply Chains


1. Describe how Green and Lean can complement each other.
2. Explain how a production pull system works.
3. Understand Toyota Production System concepts.
4. Summarize important attributes of a lean supply chain.
5. Analyze a supply chain process using value stream mapping.
6. Know the principles of supply chain design.


1. Lean production is an integrated set of activities designed to achieve high-volume
production using minimal inventories of raw materials, work in process, and finished goods.
True False

2. Henry Ford used JIT concepts as he streamlined his moving assembly lines to make
automobiles in the early 1900's.
True False

3. Lean production requires a "push & pull" system of inventory replenishment.
True False

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4. Lean production replaced JIT in the 1990s because JIT did not address the problem of
reducing waste.
True False

5. Lean production is a management philosophy and a pull system throughout the plant.
True False

6. Lean production makes implementing green strategies in manufacturing processes more
difficult.
True False

7. Green strategies that save energy and fight global warming have broad consumer appeal
and political support.
True False

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8. A recent report recommended that companies report that their emissions of Green House
Gases were generated by their supply chain.
True False

9. Group technology is a philosophy wherein similar parts are grouped together and the
processes required to make the parts are arranged as a work cell.
True False

10. Group technology cells help to eliminate movement and queue (waiting) time between
operations.
True False

11. Group technology includes the set of psychological tests and training exercises given to
group workers to insure a high level of teamwork.
True False

12. In the textbook the expression "quality at the source" means that we need to purchase the
best quality a supplier or vendor can provide.
True False

13. "Quality at the source" requires factory workers to become their own inspectors.
True False

14. JIT production means that we produce the product before it is required so the customer
does not wait for the product.
True False

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15. The goal of JIT production is to drive all inventory queues lower.
True False

16. JIT is typically applied to non-repetitive manufacturing.
True False

17. JIT manufacturing forces a firm to work with a lower water level despite safety hazards.
True False

18. A principle of value stream mapping is to concentrate on speeding up value-added
operations.
True False

19. Value stream mapping is a technique that aims to eliminate waste in a process.
True False

20. Uniform plant loading is where you schedule production with different amounts of the
same product each day of the week to permit variation to meet changing demand
requirements.
True False

21. Uniform plant loading is a process of smoothing the production activity flow to dampen
the reaction waves that normally occur in response to schedule variations.
True False

22. Value stream mapping is used to visualize product flows through various processing
steps.
True False

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23. A Kanban control system uses a signaling device to regulate JIT flows.
True False

24. Kanban means "symbol" or "box" in Japanese.
True False

25. Using the formula in the textbook the only parameters we need to determine the number
of Kanban card sets is the average number of units demanded over some time period, the
container size, and the safety stock.
True False

26. "Kanban Squares" is an educational game played in Kanban training sessions.
True False

27. Respect for people is a key to the Japanese improvement ideas in manufacturing.
True False

28. In Japanese manufacturing automation and robotics are used extensively to perform dull
or routine jobs so employees are free to focus on important improvement tasks.
True False

29. Subcontractor networks are not very important in Japanese manufacturing.
True False

30. Company unions in Japan exist to foster a cooperative relationship with management.
True False

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31. Firms in Japan tend to have short-term partnerships with their suppliers and customers.
True False

32. One of the many JIT techniques that have been successfully applied in service firms is the
upgrading of quality.
True False

upgrading of housekeeping.
True False

34. One of the many JIT techniques that have been successfully applied in service firms is
leveling facility load.
True False

eliminating of unnecessary activities.
True False

36. One of the few JIT techniques that do not work well in service firms is demand-pull
scheduling.
True False

37. The term "freeze window" refers to the practice of building quality into the process and
not identifying quality by inspection.
True False

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38. Preventive maintenance is emphasized in lean production to ensure that flows are not
interrupted by downtime or malfunctioning equipment.
True False

39. Value stream mapping is used to identify all of the value-adding as well as non-value-
adding processes that materials are subjected to within a plant.
True False

40. Value stream mapping involves materials, not information.
True False

41. A kaizen burst is a symbol on a value stream map.
True False

42. A kaizen burst is an overfilled kanban container.
True False


43. Which of the following are related to lean production?
A. A philosophy of waste elimination
B. Lean consumption
C. Never running out of inventory
D. The Waehi-Subaru method
E. Full use of capacity

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44. In the textbook Toyota's Fujio Cho identified which of the following types of waste to be
eliminated?
A. Excess quality
B. Overproduction
C. Underproduction
D. Environmental
E. Over-thinking

eliminated?
A. Underproduction
B. Excess quality
C. Preventive maintenance
D. Product defects
E. Kaizen

eliminated?
A. Excess quality
B. Motion
C. Excess capacity
D. Underproduction
E. Excess demand

47. Which of the following is a key inventory reduction target under lean production?
A. FIFO inventory
B. Hidden inventory
C. Safety stock
D. Lost inventory
E. Ladder inventory

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48. Which of the following addresses elimination of waste under lean production?
A. Info-matic warehouse networks
B. Outsourced housekeeping
D. Backflush
E. Bottom-round management

49. Which of the following is an element that addresses elimination of waste under lean
production?
A. Production ahead of demand
B. Group plant loading technology
C. Kanban production control system
D. Minimized run times
E. Full capacity utilization

50. Group technology (GT) is credited with which of the following benefits?
A. Reducing waiting time between process operations
B. Improving inventory discipline
C. Reducing required workforce skills
D. Improved labor relations
E. Improved small group functioning

51. Which of the following statements holds true for Kanban production control systems?
A. The authority to produce or supply additional parts comes from upstream operations
B. In a paperless control system, containers can be used instead of cards
C. The cards or containers make up the Kanban push system
D. They require substantial quantitative analysis prior to implementation
E. They have not been successful outside of Japan and the United States

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52. In setting up a Kanban control system you need to determine the number of Kanban card
sets needed. If the expected demand during lead time is 25 per hour, the safety stock is 20%
of the demand during lead time, the container size is 5, and the lead time to replenish an order
is 5 hours, what is the number of Kanban card sets needed?
A. 5
B. 20
C. 27
D. 30
E. 34

of the demand during lead time, the container size is 4. If the lead time to replenish an order is
8 hours, what number of Kanban card sets is needed?
A. 60
B. 80
C. 90
D. 120
E. 150

54. You have been called in as a consultant to set up a Kanban control system. The first thing
to do is to determine the number of Kanban card sets needed. Your research shows that the
expected demand during lead time for a particular component is 150 per hour. You estimate
the safety stock should be set at 25% of the demand during lead time. The tote trays used as
containers can hold 8 units of stock and the lead time it takes to replenish an order is 2 hours.
Which of the following is the number of Kanban card sets necessary to support this situation?
A. 42
B. 47
C. 68
D. 89
E. 94

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you do is to determine the number of Kanban card sets needed. Your research shows that the
expected demand during lead time for a particular component is 1,200 per hour. You estimate
containers can hold 2 units of stock and the lead time to replenish an order is 10 hours. Which
of the following is the number of Kanban card sets necessary to support this situation?
A. 5,000
B. 5,500
C. 6,300
D. 6,500
E. 7,000

56. In designing a lean production facility layout a designer should do which of the
following?
A. Design for work flow balance
B. Locate flexible workstations off line
C. Link operations through a push system
D. Balance capacity using job shop analysis
E. Always keep operations on a single floor of the factory

57. When implementing a lean production system a stabilized schedule is achieved using
A. Level scheduling
B. Demand pull
C. Freeze window
D. Reduced lot sizes

58. To implement a Kanban pull system a firm would do which of the following?
A. Reduce lot sizes
B. Force demand
C. Hire a consultant
D. Bottom-round management
E. Implement group technology

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59. In implementing a lean production system you should work with suppliers to do which of
the following?
A. Open facilities near your factory
B. Focus workstation capacities
C. Backflush
D. Provide quality at the source
E. Reduce lead times

the following?
A. Calculate lead times
B. Quality circles
C. Freeze windows
D. Make frequent deliveries
E. Achieve bottom-round management

61. To implement a flow process in developing a lean system a firm might do which of the
following?
A. Improve capacity utilization
B. Build product in anticipation of demand
C. Reduce setup/changeover time
D. Eliminate some fixed costs
E. Implement groupware

following?
A. Balance workstation capacities
B. Standardize product configurations
C. Process design with product design
D. Adopt a kaizen philosophy
E. Implement top-down management controls
F. Level: Medium

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63. Imagine comparing a manufacturing operation using regular lot-sizing and the same
operation with a Kanban/lean production approach. What would be your expectations of the
difference between the total cost (i.e., inventory holding costs + setup/ordering costs) of
each?
A. Inventory holding cost will increase non-linearly with inventory
B. Total costs will be lower for the regular lot-size operation
C. Total costs will be lower for the Kanban/lean production operation
D. The order quantity will be larger for the Kanban/lean production approach
E. As long as the total quantity is the same, total costs will be the same

64. In a lean production system we expect to see which of the following?
A. No extra inventory
B. Extra inventory of critical parts held "just-in-case"
C. More parts and fewer standardized product configurations
D. Managers being held responsible for quality of the work turned out
E. Closer management/labor relationships

65. Which of the following is a lean production technique that is not reported in the textbook
to have been successfully applied in service firms?
A. Organize problem-solving groups
B. Upgrade housekeeping
C. Upgrade quality
D. Freeze windows
E. Eliminate unnecessary activities

66. An activity where the parts that go into each unit of a product are periodically removed
from inventory and accounted for based on the number of units produced. is called which of
the following?
A. Frozen window
B. Backflush
C. Level schedule
D. Group Technology
E. Kanban

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67. Which of the following is a lean production technique that has been successfully applied
in service firms?
A. Decision trees
B. Leveling the facility load
C. Linear programming
D. Fully utilizing capacity
E. Backflushing


68. In setting up a kanban control system you need to determine the number of kanban card
sets needed. If the expected demand during lead time is 24 per hour, safety stock is 10% of
the demand during lead time, the container size is 5. If the lead time to replenish an order is 5
hours, what number of kanban card sets is needed? ___________________
________________________________________

69. In setting up a kanban control system and you need to determine the number of kanban
card sets needed. If the expected demand during lead time is 50 per hour, the safety stock is
20% of the demand during lead time, the container size is 4. If the lead time to replenish an
order is 2 hours, what number of kanban card sets is needed? ___________________
________________________________________

70. Name Fujio Cho's seven prominent types of waste to be eliminated.
1) ___________________
2) ___________________
3) ___________________
4) ___________________
5) ___________________
6) ___________________
7) ___________________
________________________________________

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71. Name seven elements that address elimination of waste.
1) ___________________
2) ___________________
3) ___________________
4) ___________________
5) ___________________
6) ___________________
7) ___________________
________________________________________

72. Name the four value stream principles.
1) ___________________
2) ___________________
3) ___________________
4) ___________________
________________________________________

73. What are the four rules of the Toyota Production System?
1) ___________________
2) ___________________
3) ___________________
4) ___________________
________________________________________

Essay Questions

74. As lean production methods reduce changeover and setup times and thus enable smaller
economic lot sizes and less work-in-process inventory, is the importance of quality increased
or decreased? Why?
Level: Hard

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75. Explain why lean manufacturing requires a stable demand environment.

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Chapter 10 Lean and Sustainable Supply Chains Answer Key


1. Lean production is an integrated set of activities designed to achieve high-volume
production using minimal inventories of raw materials, work in process, and finished goods.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Supply Chains

2. Henry Ford used JIT concepts as he streamlined his moving assembly lines to make
automobiles in the early 1900's.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

3. Lean production requires a "push & pull" system of inventory replenishment.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-393
4. Lean production replaced JIT in the 1990s because JIT did not address the problem of
reducing waste.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

5. Lean production is a management philosophy and a pull system throughout the plant.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

6. Lean production makes implementing green strategies in manufacturing processes more
difficult.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Production

7. Green strategies that save energy and fight global warming have broad consumer appeal
and political support.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-394
8. A recent report recommended that companies report that their emissions of Green House
Gases were generated by their supply chain.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

9. Group technology is a philosophy wherein similar parts are grouped together and the
processes required to make the parts are arranged as a work cell.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. Group technology cells help to eliminate movement and queue (waiting) time between
operations.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

11. Group technology includes the set of psychological tests and training exercises given to
group workers to insure a high level of teamwork.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-395
12. In the textbook the expression "quality at the source" means that we need to purchase the
best quality a supplier or vendor can provide.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Logic, Lean Supply Chains

13. "Quality at the source" requires factory workers to become their own inspectors.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. JIT production means that we produce the product before it is required so the customer
does not wait for the product.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: The Toyota Production System, Lean Supply Chains

15. The goal of JIT production is to drive all inventory queues lower.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-396
16. JIT is typically applied to non-repetitive manufacturing.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

17. JIT manufacturing forces a firm to work with a lower water level despite safety hazards.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: The Toyota Production System

18. A principle of value stream mapping is to concentrate on speeding up value-added
operations.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Value Stream Mapping

19. Value stream mapping is a technique that aims to eliminate waste in a process.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-397
20. Uniform plant loading is where you schedule production with different amounts of the
same product each day of the week to permit variation to meet changing demand
requirements.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

21. Uniform plant loading is a process of smoothing the production activity flow to dampen
the reaction waves that normally occur in response to schedule variations.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

22. Value stream mapping is used to visualize product flows through various processing
steps.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

23. A Kanban control system uses a signaling device to regulate JIT flows.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-398
24. Kanban means "symbol" or "box" in Japanese.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

25. Using the formula in the textbook the only parameters we need to determine the number
of Kanban card sets is the average number of units demanded over some time period, the
container size, and the safety stock.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

26. "Kanban Squares" is an educational game played in Kanban training sessions.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

27. Respect for people is a key to the Japanese improvement ideas in manufacturing.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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28. In Japanese manufacturing automation and robotics are used extensively to perform dull
or routine jobs so employees are free to focus on important improvement tasks.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. Subcontractor networks are not very important in Japanese manufacturing.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

30. Company unions in Japan exist to foster a cooperative relationship with management.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

31. Firms in Japan tend to have short-term partnerships with their suppliers and customers.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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upgrading of quality.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Supply Chains, Lean Supply Chain Design Principles

upgrading of housekeeping.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

34. One of the many JIT techniques that have been successfully applied in service firms is
leveling facility load.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

eliminating of unnecessary activities.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

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36. One of the few JIT techniques that do not work well in service firms is demand-pull
scheduling.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

37. The term "freeze window" refers to the practice of building quality into the process and
not identifying quality by inspection.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Supply Chains, Value Stream Mapping

38. Preventive maintenance is emphasized in lean production to ensure that flows are not
interrupted by downtime or malfunctioning equipment.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Logic, The Toyota Production System, Lean Supply Chains

39. Value stream mapping is used to identify all of the value-adding as well as non-value-
adding processes that materials are subjected to within a plant.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-402
40. Value stream mapping involves materials, not information.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

41. A kaizen burst is a symbol on a value stream map.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

42. A kaizen burst is an overfilled kanban container.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-403


43. Which of the following are related to lean production?
A. A philosophy of waste elimination
B. Lean consumption
C. Never running out of inventory
D. The Waehi-Subaru method
E. Full use of capacity

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

eliminated?
A. Excess quality
B. Overproduction
C. Underproduction
D. Environmental
E. Over-thinking

AACSB: Analytic
Difficulty: Medium

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eliminated?
A. Underproduction
B. Excess quality
C. Preventive maintenance
D. Product defects
E. Kaizen

AACSB: Analytic
Difficulty: Medium

eliminated?
A. Excess quality
B. Motion
C. Excess capacity
D. Underproduction
E. Excess demand

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

47. Which of the following is a key inventory reduction target under lean production?
A. FIFO inventory
B. Hidden inventory
C. Safety stock
D. Lost inventory
E. Ladder inventory

AACSB: Analytic
Difficulty: Easy

1-405
48. Which of the following addresses elimination of waste under lean production?
A. Info-matic warehouse networks
B. Outsourced housekeeping
D. Backflush

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

49. Which of the following is an element that addresses elimination of waste under lean
production?
A. Production ahead of demand
B. Group plant loading technology
C. Kanban production control system
D. Minimized run times
E. Full capacity utilization

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

50. Group technology (GT) is credited with which of the following benefits?
A. Reducing waiting time between process operations
B. Improving inventory discipline
C. Reducing required workforce skills
D. Improved labor relations
E. Improved small group functioning

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Supply chain Design Principles

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51. Which of the following statements holds true for Kanban production control systems?
A. The authority to produce or supply additional parts comes from upstream operations
B. In a paperless control system, containers can be used instead of cards
C. The cards or containers make up the Kanban push system
D. They require substantial quantitative analysis prior to implementation
E. They have not been successful outside of Japan and the United States

AACSB: Analytic
Difficulty: Easy
Topic: Lean Logic

of the demand during lead time, the container size is 5, and the lead time to replenish an order
is 5 hours, what is the number of Kanban card sets needed?
A. 5
B. 20
C. 27
D. 30
E. 34

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis
Topic: Lean Logic

1-407
of the demand during lead time, the container size is 4. If the lead time to replenish an order is
8 hours, what number of Kanban card sets is needed?
A. 60
B. 80
C. 90
D. 120
E. 150

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis
Topic: Lean Logic

to do is to determine the number of Kanban card sets needed. Your research shows that the
expected demand during lead time for a particular component is 150 per hour. You estimate
containers can hold 8 units of stock and the lead time it takes to replenish an order is 2 hours.
Which of the following is the number of Kanban card sets necessary to support this situation?
A. 42
B. 47
C. 68
D. 89
E. 94

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis
Topic: Lean Logic

1-408
you do is to determine the number of Kanban card sets needed. Your research shows that the
expected demand during lead time for a particular component is 1,200 per hour. You estimate
containers can hold 2 units of stock and the lead time to replenish an order is 10 hours. Which
of the following is the number of Kanban card sets necessary to support this situation?
A. 5,000
B. 5,500
C. 6,300
D. 6,500
E. 7,000

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis
Topic: Lean Logic

56. In designing a lean production facility layout a designer should do which of the
following?
A. Design for work flow balance
B. Locate flexible workstations off line
C. Link operations through a push system
D. Balance capacity using job shop analysis
E. Always keep operations on a single floor of the factory

AACSB: Analytic
Difficulty: Medium
Topic: Lean Logic

1-409
57. When implementing a lean production system a stabilized schedule is achieved using
A. Level scheduling
B. Demand pull
C. Freeze window
D. Reduced lot sizes

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Lean Logic, The Toyota Production System

58. To implement a Kanban pull system a firm would do which of the following?
A. Reduce lot sizes
B. Force demand
C. Hire a consultant
D. Bottom-round management
E. Implement group technology

AACSB: Analytic
Difficulty: Medium
Topic: Lean Logic

1-410
the following?
A. Open facilities near your factory
B. Focus workstation capacities
C. Backflush
D. Provide quality at the source
E. Reduce lead times

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge
Topic: Lean Logic

the following?
A. Calculate lead times
B. Quality circles
C. Freeze windows
D. Make frequent deliveries
E. Achieve bottom-round management

AACSB: Analytic
Difficulty: Medium
Topic: Lean Logic

following?
A. Improve capacity utilization
B. Build product in anticipation of demand
C. Reduce setup/changeover time
D. Eliminate some fixed costs
E. Implement groupware

AACSB: Analytic
Difficulty: Medium

1-411
following?
A. Balance workstation capacities
B. Standardize product configurations
C. Process design with product design
D. Adopt a kaizen philosophy
E. Implement top-down management controls
F. Level: Medium

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Value Stream

63. Imagine comparing a manufacturing operation using regular lot-sizing and the same
operation with a Kanban/lean production approach. What would be your expectations of the
difference between the total cost (i.e., inventory holding costs + setup/ordering costs) of
each?
A. Inventory holding cost will increase non-linearly with inventory
B. Total costs will be lower for the regular lot-size operation
C. Total costs will be lower for the Kanban/lean production operation
D. The order quantity will be larger for the Kanban/lean production approach
E. As long as the total quantity is the same, total costs will be the same

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Logic

1-412
64. In a lean production system we expect to see which of the following?
A. No extra inventory
B. Extra inventory of critical parts held "just-in-case"
C. More parts and fewer standardized product configurations
D. Managers being held responsible for quality of the work turned out
E. Closer management/labor relationships

AACSB: Analytic
Difficulty: Easy
Topic: Lean Logic

65. Which of the following is a lean production technique that is not reported in the textbook
to have been successfully applied in service firms?
A. Organize problem-solving groups
B. Upgrade housekeeping
C. Upgrade quality
D. Freeze windows
E. Eliminate unnecessary activities

AACSB: Analytic
Difficulty: Easy
Topic: Lean Logic

66. An activity where the parts that go into each unit of a product are periodically removed
from inventory and accounted for based on the number of units produced. is called which of
the following?
A. Frozen window
B. Backflush
C. Level schedule
D. Group Technology
E. Kanban

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Logic

1-413
67. Which of the following is a lean production technique that has been successfully applied
in service firms?
A. Decision trees
B. Leveling the facility load
C. Linear programming
D. Fully utilizing capacity
E. Backflushing

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lean Logic


68. In setting up a kanban control system you need to determine the number of kanban card
sets needed. If the expected demand during lead time is 24 per hour, safety stock is 10% of
the demand during lead time, the container size is 5. If the lead time to replenish an order is 5
hours, what number of kanban card sets is needed? ___________________
27 (26.4)

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

69. In setting up a kanban control system and you need to determine the number of kanban
card sets needed. If the expected demand during lead time is 50 per hour, the safety stock is
20% of the demand during lead time, the container size is 4. If the lead time to replenish an
order is 2 hours, what number of kanban card sets is needed? ___________________
30

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-414
70. Name Fujio Cho's seven prominent types of waste to be eliminated.
1) ___________________
2) ___________________
3) ___________________
4) ___________________
5) ___________________
6) ___________________
7) ___________________
(1.) Waste from overproduction; (2.) Waste of waiting time; (3.) Transportation waste;
(4.) Inventory waste; (5.) Processing waste; (6.) Waste of motion; (7.) Waste from
product defects.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

71. Name seven elements that address elimination of waste.
1) ___________________
2) ___________________
3) ___________________
4) ___________________
5) ___________________
6) ___________________
7) ___________________
(1.) Focused factory networks; (2.) Group technology; (3.) Quality at the source; (4.) JIT
Production; (5.) Uniform plant loading; (6.) Kanban production control system; (7.)
Minimized set-up times.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge
Topic: Lean Logic, The Toyota Production System

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72. Name the four value stream principles.
1) ___________________
2) ___________________
3) ___________________
4) ___________________
(1.) Keep the value stream moving at maximum velocity; (2.) Eliminate waste that stops,
slows down or diverts the value stream; (3.) Concentrate on removing waste rather than
speeding up value-added operations; (4.) Look for waste in the factory, office, physical,
technical and procedural operations.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

73. What are the four rules of the Toyota Production System?
1) ___________________
2) ___________________
3) ___________________
4) ___________________
(1.) All work shall be highly specified as to content, sequence, timing and outcome; (2.)
Every customer-supplier connection must be direct and there must be an unambiguous
yes-or-no way to send requests and receive responses; (3.) The pathway for every
product and service must be simple and direct; (4.) Any improvement must be made in
accordance with the scientific method under the guidance of a teacher at the lowest
possible level of the organization.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

1-416

Essay Questions

74. As lean production methods reduce changeover and setup times and thus enable smaller
economic lot sizes and less work-in-process inventory, is the importance of quality increased
or decreased? Why?
Level: Hard
Increased. The reason for this is simply that as lean production takes hold, there is a lower
margin for error. A defective component can totally shut down a production line where, with
plenty of inventory, the defect can be discarded with minimal affect on other processes. An
incorrect answer can be logically construed. An answer of "decreased" can be defended by the
notion that with very brief set-up times it doesn't take too long to set up to replace the
defective component. However brief that time is, however, it is time that several other
processes are being starved for components.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis
Topic: Lean Logic

75. Explain why lean manufacturing requires a stable demand environment.
The text refers to "uniform plant loading" on page 284. Changes in demand result in a "ripple
effect" that is echoes throughout the manufacturing system. This is similar to the "bullwhip
effect" discussed in Chapter 8, "Global Sourcing And Procurement." To avoid this,
adjustments to the schedule are made very gradually.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

1-417
Chapter 11
Demand Management and Forecasting


1. Understand the role of forecasting as a basis for supply chain planning.
2. Compare the differences between independent and dependent demand.
3. Identify the basic components of independent demand: average, trend, seasonal, and
random variation.
4. Describe the common qualitative forecasting techniques such as the Delphi method
and Collaborative Forecasting.
5. Show how to make a time series forecast using regression, moving averages, and
exponential smoothing.
6. Use decomposition to forecast when trend and seasonality is present.


1. Continual review and updating in light of new data is a forecasting technique called
second-guessing.
True False

2. Independent demand is the demand for a product or service caused by the demand for other
products or services.
True False

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3. There is not much that a firm can do to influence independent demand.
True False

4. Cyclical influences on demand are often expressed graphically as a linear function that is
either upward or downward sloping.
True False

5. Cyclical influences on demand may come from occurrences such as political elections, war
or economic conditions.
True False

6. Trend lines are usually the last things considered when developing a forecast.
True False

7. Time series forecasting models make predictions about the future based on analysis of past
data.
True False

1-419

8. In the weighted moving average forecasting model the weights must add up to one times
the number of data points.
True False

9. In a forecasting model using simple exponential smoothing the data pattern should remain
stationary.
True False

10. In a forecasting model using simple moving average the shorter the time span used for
calculating the moving average, the closer the average follows volatile trends.
True False

11. In the simple exponential smoothing forecasting model you need at least 100 observations
to set the weight.
True False

12. Experience and trial and error are the simplest ways to choose weights for the weighted
moving average forecasting model.
True False

13. The weighted moving average forecasting model uses a weighting scheme to modify the
effects of individual data points. This is its major advantage over the simple moving average
model.
True False

14. A central premise of exponential smoothing is that more recent data is less indicative of
the future than data from the distant past.
True False

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15. The equation for exponential smoothing states that the new forecast is equal to the old
forecast plus the error of the old forecast.
True False

16. Exponential smoothing is always the most accurate of all forecasting models.
True False

17. In exponential smoothing, it is desirable to use a higher smoothing constant when
forecasting demand for a product experiencing high growth.
True False

18. The exponential smoothing model permits non-linear forecast values.
True False

19. The weighted moving average model does not work with non-linear forecast values.
True False

20. The simple moving average model permits non-linear forecast values.
True False

21. The simple moving average model requires linear forecast values.
True False

22. The value of the smoothing constant alpha in an exponential smoothing model is between
0 and 1.
True False

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23. Simple exponential smoothing lags changes in demand.
True False

24. Exponential smoothing forecasts always lag behind the actual occurrence but can be
corrected somewhat with a trend adjustment.
True False

25. Because the factors governing demand for products are very complex, all forecasts of
demand contain some error.
True False

26. Random errors can be defined as those that cannot be explained by the forecast model
being used.
True False

27. Random errors in forecasting occur when an undetected secular trend is not included in a
forecasting model.
True False

28. When forecast errors occur in a normally distributed pattern, the ratio of the mean
absolute deviation to the standard deviation is 2 to 1, or 2 MAD = 1 standard deviation.
True False

29. MAD statistics can be used to generate tracking signals.
True False

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30. RSFE in forecasting stands for "reliable safety function error."
True False

31. RSFE in forecasting stands for "running sum of forecast errors."
True False

32. A tracking signal (TS) can be calculated using the arithmetic sum of forecast deviations
divided by the MAD.
True False

33. A major limitation of linear regression as a model for forecasting is that past data and
future projections are assumed to fall on or near a straight line.
True False

34. Regression is a functional relationship between two or more correlated variables, where
one variable is used to predict another.
True False

35. Linear regression is not useful for aggregate planning.
True False

36. The standard error of the estimate of a linear regression is not useful for judging the fit
between the data and the regression line when doing forecasts.
True False

37. Multiple regression analysis uses several regression models to generate a forecast.
True False

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38. For every forecasting problem there is one best forecasting technique.
True False

39. A good forecaster is one who develops special skills and experience at one forecasting
technique and is capable of applying it to widely diverse situations.
True False

40. In causal relationship forecasting leading indicators are used to forecast occurrences.
True False

41. Qualitative forecasting techniques generally take advantage of the knowledge of experts
and therefore do not require much judgment.
True False

42. Market research is a quantitative method of forecasting.
True False

43. Decomposition of a time series means identifying and separating the time series data into
its components.
True False

44. A time series is defined in the text as chronologically ordered data that may contain one or
more components of demand variation: trend, seasonal, cyclical, autocorrelation, and
random.
True False

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45. It is difficult to identify the trend in time series data.
True False

46. In decomposition of time series data it is relatively easy identify cycles and
autocorrelation components.
True False

47. We usually associate the word "seasonal" with recurrent periods of repetitive activity that
happen on other than an annual cycle.
True False


48. In time series data depicting demand which of the following is not considered a
component of demand variation?
A. Trend
B. Seasonal
C. Cyclical
D. Variance
E. Autocorrelation

49. Which of the following is not one of the basic types of forecasting?
A. Qualitative
B. Time series analysis
C. Causal relationships
D. Simulation
E. Force field analysis

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50. In most cases, demand for products or services can be broken into several components.
Which of the following is not considered a component of demand?
A. Average demand for a period
B. A trend
C. Seasonal elements
D. Past demand
E. Autocorrelation

Which of the following is considered a component of demand?
A. Cyclical elements
B. Future demand
C. Past demand
D. Inconsistent demand
E. Level demand

A. Forecast error
B. Autocorrelation
C. Previous demand
D. Consistent demand
E. Repeat demand

53. Which of the following forecasting methodologies is considered a qualitative forecasting
technique?
A. Simple moving average
B. Market research
C. Linear regression
D. Exponential smoothing
E. Multiple regression

1-426
technique?
A. Market research
B. Causal relationship forecasting
C. Regression analysis
E. Simple moving average

55. Which of the following forecasting methodologies is considered a time series forecasting
technique?
B. Market research
C. Leading indicators
D. Historical analogy
E. Simulation

technique?
A. Delphi method
B. Exponential averaging
C. Simple movement smoothing
D. Weighted moving average
E. Simulation

57. Which of the following forecasting methodologies is considered a causal forecasting
technique?
A. Exponential smoothing
B. Weighted moving average
E. Market research

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58. Which of the following forecasting methods uses executive judgment as its primary
component for forecasting?
A. Historical analogy
C. Panel consensus
D. Market research
E. Linear regression

59. Which of the following forecasting methods is very dependent on selection of the right
individuals who will judgmentally be used to actually generate the forecast?
A. Time series analysis
B. Simple moving average
C. Weighted moving average
D. Delphi method
E. Panel consensus

60. In business forecasting, what is usually considered a short-term time period?
A. Four weeks or less
B. More than three months
C. Six months or more
D. Less than three months
E. One year

61. In business forecasting, what is usually considered a medium-term time period?
A. Six weeks to one year
B. Three months to two years
C. One to five years
D. One to six months
E. Six months to six years

1-428
62. In business forecasting, what is usually considered a long-term time period?
A. Three months or longer
B. Six months or longer
C. One year or longer
D. Two years or longer
E. Ten years or longer

63. In general, which forecasting time frame compensates most effectively for random
variation and short term changes?
A. Short-term forecasts
B. Quick-time forecasts
C. Long range forecasts
D. Medium term forecasts
E. Rapid change forecasts

64. In general, which forecasting time frame best identifies seasonal effects?

65. In general, which forecasting time frame is best to detect general trends?

1-429
66. Which of the following forecasting methods can be used for short-term forecasting?
A. Simple exponential smoothing
B. Delphi technique
C. Market research
D. Hoskins-Hamilton smoothing
E. Serial regression

67. Which of the following considerations is not usually a factor in deciding which
forecasting model a firm should choose?
A. Time horizon to forecast
B. Product
C. Accuracy required
D. Data availability
E. Analyst sophistication

68. A company wants to forecast demand using the simple moving average. If the company
uses four prior yearly sales values (i.e., year 2007 = 100, year 2008 = 120, year 2009 = 140,
and year 2010 = 210), which of the following is the simple moving average forecast for year
2011?
A. 100.5
B. 140.0
C. 142.5
D. 145.5
E. 155.0

uses three prior yearly sales values (i.e., year 2008 = 130, year 2009 = 110, and year 2010
=160), which of the following is the simple moving average forecast for year 2011?
A. 100.5
B. 122.5
C. 133.3
D. 135.6
E. 139.3

1-430
70. A company wants to forecast demand using the weighted moving average. If the company
uses two prior yearly sales values (i.e., year 2009 = 110 and year 2010 = 130), and we want to
weight year 2009 at 10% and year 2010 at 90%, which of the following is the weighted
moving average forecast for year 2011?
A. 120
B. 128
C. 133
D. 138
E. 142

uses three prior yearly sales values (i.e., year 2008 = 160, year 2009 = 140 and year 2010 =
170), and we want to weight year 2008 at 30%, year 2009 at 30% and year 2010 at 40%,
which of the following is the weighted moving average forecast for year 2011?
A. 170
B. 168
C. 158
D. 152
E. 146

72. Which of the following is the major reason that exponential smoothing has become well
accepted as a forecasting technique?
A. Accuracy
B. Sophistication of analysis
C. Predicts turning points
D. Ease of use
E. Ability to Forecast lagging data trends

73. The exponential smoothing method requires which of the following data to forecast the
future?
A. The most recent forecast
B. Precise actual demand for the past several years
C. The value of the smoothing constant delta
D. Overall industry demand data
E. Tracking values

1-431
74. Given a prior forecast demand value of 230, a related actual demand value of 250, and a
smoothing constant alpha of 0.1, what is the exponential smoothing forecast value for the
following period?
A. 230
B. 232
C. 238
D. 248
E. 250

75. If a firm produced a standard item with relatively stable demand, the smoothing constant
alpha used in an exponential smoothing forecasting model would tend to be in which of the
following ranges?
A. 5 % to 10 %
B. 20 % to 50 %
C. 20 % to 80 %
D. 60 % to 120 %
E. 90 % to 100 %

76. If a firm produced a product that is experiencing growth in demand, the smoothing
constant alpha used in an exponential smoothing forecasting model would tend to be which of
the following?
A. Close to zero
B. A very low percentage, less than 10%
C. The more rapid the growth, the higher the percentage
D. The more rapid the growth, the lower the percentage
E. 50 % or more

77. Given a prior forecast demand value of 1,100, a related actual demand value of 1,000, and
a smoothing constant alpha of 0.3, what is the exponential smoothing forecast value?
A. 1,000
B. 1,030
C. 1,070
D. 1,130
E. 970

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78. A company wants to generate a forecast for unit demand for year 2011 using exponential
smoothing. The actual demand in year 2010 was 120. The forecast demand in year 2010 was
110. Using this data and a smoothing constant alpha of 0.1, which of the following is the
resulting year 2011 forecast value?
A. 100
B. 110
C. 111
D. 114
E. 120

79. As a consultant you have been asked to generate a unit demand forecast for a product for
year 2011 using exponential smoothing. The actual demand in year 2010 was 750. The
forecast demand in year 2010 was 960. Using this data and a smoothing constant alpha of 0.3,
which of the following is the resulting year 2008 forecast value?
A. 766
B. 813
C. 897
D. 1,023
E. 1,120

80. Which of the following is a possible source of bias error in forecasting?
A. Failing to include the right variables
B. Using the wrong forecasting method
C. Employing less sophisticated analysts than necessary
D. Using incorrect data
E. Using standard deviation rather than MAD

81. Which of the following is used to describe the degree of error?
A. Weighted moving average
B. Regression
C. Moving average
D. Forecast as a percent of actual
E. Mean absolute deviation

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82. A company has actual unit demand for three consecutive years of 124, 126, and 135. The
respective forecasts for the same three years are 120, 120, and 130. Which of the following is
the resulting MAD value that can be computed from this data?
A. 1
B. 3
C. 5
D. 15
E. 123

83. A company has actual unit demand for four consecutive years of 100, 105, 135, and 150.
The respective forecasts were 120 for all four years. Which of the following is the resulting
MAD value that can be computed from this data?
A. 2.5
B. 10
C. 20
D. 22.5
E. 30

84. If you were selecting a forecasting model based on MAD, which of the following MAD
values reflects the most accurate model?
A. 0.2
B. 0.8
C. 1.0
D. 10.0
E. 100.0

85. A company has calculated its running sum of forecast errors to be 500 and its mean
absolute deviation is exactly 35. Which of the following is the company's tracking signal?
A. Cannot be calculated based on this information
B. About 14.3
C. More than 35
D. Exactly 35
E. About 0.07

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86. A company has a MAD of 10. It wants to have a 99.7 percent control limits on its
forecasting system. Its most recent tracking signal value is 31. What can the company
conclude from this information?
A. The forecasting model is operating acceptably
B. The forecasting model is out of control and needs to be corrected
C. The MAD value is incorrect
D. The upper control value is less than 20
E. It is using an inappropriate forecasting methodology

87. You are hired as a consultant to advise a small firm on forecasting methodology. Based on
your research you find the company has a MAD of 3. It wants to have a 99.7 percent control
limits on its forecasting system. Its most recent tracking signal value is 15. What should be
your report to the company?
E. The company is using an inappropriate forecasting methodology

88. Which of the following is the portion of observations you would expect to see lying within
a plus or minus 3 MAD range?
A. 57.048 percent
B. 88.946 percent
C. 98.334 percent
D. 99.856 percent
E. 100 percent

A. 57.048
B. 88.946
C. 98.334
D. 99.856
E. 100

1-435
90. If the intercept value of a linear regression model is 40, the slope value is 40, and the
value of X is 40, which of the following is the resulting forecast value using this model?
A. 120
B. 1,600
C. 1,640
D. 2,200
E. 64,000

91. A company hires you to develop a linear regression forecasting model. Based on the
company's historical sales information, you determine the intercept value of the model to be
1,200. You also find the slope value is -50. If after developing the model you are given a
value of X = 10, which of the following is the resulting forecast value using this model?
A. -3,800
B. 700
C. 1,700
D. 1,040
E. 12,000

92. Heavy sales of umbrellas during a rain storm is an example of which of the following?
A. A trend
B. A causal relationship
C. A statistical correlation
D. A coincidence
E. A fad

93. You are using an exponential smoothing model for forecasting. The running sum of the
forecast error statistics (RSFE) are calculated each time a forecast is generated. You find the
last RSFE to be 34. Originally the forecasting model used was selected because it's relatively
low MAD of 0.4. To determine when it is time to re-evaluate the usefulness of the exponential
smoothing model you compute tracking signals. Which of the following is the resulting
tracking system?
A. 85
B. 60
C. 13.6
D. 12.9
E. 8

1-436


94. Name the four basic types of forecasting.
1. _____________________;
2. _____________________;
3. _____________________;
4. _____________________.
________________________________________

absolute deviation is exactly 25. What is the company's tracking signal?
_____________________.
________________________________________

96. A company has calculated its running sum of forecast errors to be 1,000 and its tracking
signal is 50. What is the company's mean absolute deviation? ___________
________________________________________

=230), what is the simple moving average forecast for year 2011? ____________
________________________________________

uses two prior yearly sales values (i.e., year 2009 = 11,000 and year 2010 = 13,000), and we
want to weight year 2009 at 35% and year 2010 at 65%, what is the weighted moving average
forecast for Year 2011?
________________________________________

1-437
Year 2011 using exponential smoothing. Actual demand in year 2010 was 950 but the forecast
for that year 1,060. Using this data and a smoothing constant alpha of 0.5, which of the
following is the resulting year 2011 forecast value? __________
________________________________________

100. A company has had actual unit demand for four consecutive years of 100, 110, 125, and
150. The respective forecasts using exponential smoothing were 120 for each of those four
years. What value of alpha, the smoothing constant, was the firm using? ___________
________________________________________

101. What are the five steps of CPFR (collaborative planning, forecasting and
replenishment?)
1. _____________________;
2. _____________________;
3. _____________________;
4. _____________________;
5. _____________________.
________________________________________

102. When analyzing time series data, if demand data contains both seasonal and trend effects
at the same time, what are the two ways that they relate to each other discussed in the text?
1) ___________________________
2) ___________________________
________________________________________

1-438
Essay Questions

103. What does the text mean when it states that rather than to search for the perfect forecast
one should learn to live with inaccurate forecasts?

104. Distinguish between "dependent" and "independent" demand.

105. Distinguish between errors in statistics and errors in forecasting.

106. Describe the collaborative planning, forecasting and replenishment (CPFR) technique.

1-439
Chapter 11 Demand Management and Forecasting Answer Key


1. Continual review and updating in light of new data is a forecasting technique called
second-guessing.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Wal-Mart's Data Warehouse

2. Independent demand is the demand for a product or service caused by the demand for other
products or services.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Demand Management

3. There is not much that a firm can do to influence independent demand.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-440
4. Cyclical influences on demand are often expressed graphically as a linear function that is
either upward or downward sloping.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

5. Cyclical influences on demand may come from occurrences such as political elections, war
or economic conditions.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

6. Trend lines are usually the last things considered when developing a forecast.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Time Series Analysis

7. Time series forecasting models make predictions about the future based on analysis of past
data.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-441
8. In the weighted moving average forecasting model the weights must add up to one times
the number of data points.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

9. In a forecasting model using simple exponential smoothing the data pattern should remain
stationary.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. In a forecasting model using simple moving average the shorter the time span used for
calculating the moving average, the closer the average follows volatile trends.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

11. In the simple exponential smoothing forecasting model you need at least 100 observations
to set the weight.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-442
12. Experience and trial and error are the simplest ways to choose weights for the weighted
moving average forecasting model.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. The weighted moving average forecasting model uses a weighting scheme to modify the
effects of individual data points. This is its major advantage over the simple moving average
model.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. A central premise of exponential smoothing is that more recent data is less indicative of
the future than data from the distant past.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

15. The equation for exponential smoothing states that the new forecast is equal to the old
forecast plus the error of the old forecast.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-443
16. Exponential smoothing is always the most accurate of all forecasting models.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

17. In exponential smoothing, it is desirable to use a higher smoothing constant when
forecasting demand for a product experiencing high growth.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

18. The exponential smoothing model permits non-linear forecast values.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

19. The weighted moving average model does not work with non-linear forecast values.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-444
20. The simple moving average model permits non-linear forecast values.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

21. The simple moving average model requires linear forecast values.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

22. The value of the smoothing constant alpha in an exponential smoothing model is between
0 and 1.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

23. Simple exponential smoothing lags changes in demand.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-445
24. Exponential smoothing forecasts always lag behind the actual occurrence but can be
corrected somewhat with a trend adjustment.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

25. Because the factors governing demand for products are very complex, all forecasts of
demand contain some error.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

26. Random errors can be defined as those that cannot be explained by the forecast model
being used.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

27. Random errors in forecasting occur when an undetected secular trend is not included in a
forecasting model.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-446
28. When forecast errors occur in a normally distributed pattern, the ratio of the mean
absolute deviation to the standard deviation is 2 to 1, or 2 MAD = 1 standard deviation.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. MAD statistics can be used to generate tracking signals.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

30. RSFE in forecasting stands for "reliable safety function error."
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

31. RSFE in forecasting stands for "running sum of forecast errors."
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-447
32. A tracking signal (TS) can be calculated using the arithmetic sum of forecast deviations
divided by the MAD.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

33. A major limitation of linear regression as a model for forecasting is that past data and
future projections are assumed to fall on or near a straight line.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

34. Regression is a functional relationship between two or more correlated variables, where
one variable is used to predict another.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

35. Linear regression is not useful for aggregate planning.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-448
36. The standard error of the estimate of a linear regression is not useful for judging the fit
between the data and the regression line when doing forecasts.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

37. Multiple regression analysis uses several regression models to generate a forecast.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

38. For every forecasting problem there is one best forecasting technique.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

39. A good forecaster is one who develops special skills and experience at one forecasting
technique and is capable of applying it to widely diverse situations.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-449
40. In causal relationship forecasting leading indicators are used to forecast occurrences.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

41. Qualitative forecasting techniques generally take advantage of the knowledge of experts
and therefore do not require much judgment.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

42. Market research is a quantitative method of forecasting.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

43. Decomposition of a time series means identifying and separating the time series data into
its components.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-450
44. A time series is defined in the text as chronologically ordered data that may contain one or
more components of demand variation: trend, seasonal, cyclical, autocorrelation, and
random.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

45. It is difficult to identify the trend in time series data.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

46. In decomposition of time series data it is relatively easy identify cycles and
autocorrelation components.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

47. We usually associate the word "seasonal" with recurrent periods of repetitive activity that
happen on other than an annual cycle.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-451


48. In time series data depicting demand which of the following is not considered a
component of demand variation?
A. Trend
B. Seasonal
C. Cyclical
D. Variance
E. Autocorrelation

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

49. Which of the following is not one of the basic types of forecasting?
A. Qualitative
C. Causal relationships
D. Simulation
E. Force field analysis

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

Which of the following is not considered a component of demand?
A. Average demand for a period
B. A trend
C. Seasonal elements
D. Past demand
E. Autocorrelation

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-452

1-453
A. Cyclical elements
B. Future demand
C. Past demand
D. Inconsistent demand
E. Level demand

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. Forecast error
B. Autocorrelation
C. Previous demand
D. Consistent demand
E. Repeat demand

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

technique?
B. Market research
E. Multiple regression

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Qualitative Techniques in Forecasting

1-454
technique?
A. Market research
B. Causal relationship forecasting
C. Regression analysis
E. Simple moving average

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

technique?
B. Market research
C. Leading indicators
E. Simulation

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

technique?
A. Delphi method
B. Exponential averaging
C. Simple movement smoothing
D. Weighted moving average
E. Simulation

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-455
57. Which of the following forecasting methodologies is considered a causal forecasting
technique?
A. Exponential smoothing
B. Weighted moving average
E. Market research

AACSB: Analytic
Difficulty: Easy
Topic: Qualitative Techniques in Forecasting, Time Series Analysis

58. Which of the following forecasting methods uses executive judgment as its primary
component for forecasting?
A. Historical analogy
C. Panel consensus
D. Market research
E. Linear regression

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

59. Which of the following forecasting methods is very dependent on selection of the right
individuals who will judgmentally be used to actually generate the forecast?
A. Time series analysis
B. Simple moving average
C. Weighted moving average
D. Delphi method
E. Panel consensus

AACSB: Analytic
Difficulty: Medium

1-456
60. In business forecasting, what is usually considered a short-term time period?
A. Four weeks or less
B. More than three months
C. Six months or more
D. Less than three months
E. One year

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

61. In business forecasting, what is usually considered a medium-term time period?
A. Six weeks to one year
B. Three months to two years
C. One to five years
D. One to six months
E. Six months to six years

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

62. In business forecasting, what is usually considered a long-term time period?
A. Three months or longer
B. Six months or longer
C. One year or longer
D. Two years or longer
E. Ten years or longer

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-457
63. In general, which forecasting time frame compensates most effectively for random
variation and short term changes?

AACSB: Analytic
Difficulty: Medium

64. In general, which forecasting time frame best identifies seasonal effects?

AACSB: Analytic
Difficulty: Medium

65. In general, which forecasting time frame is best to detect general trends?

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-458
66. Which of the following forecasting methods can be used for short-term forecasting?
A. Simple exponential smoothing
B. Delphi technique
C. Market research
D. Hoskins-Hamilton smoothing
E. Serial regression

AACSB: Analytic
Difficulty: Medium

67. Which of the following considerations is not usually a factor in deciding which
forecasting model a firm should choose?
A. Time horizon to forecast
B. Product
C. Accuracy required
D. Data availability
E. Analyst sophistication

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-459
uses four prior yearly sales values (i.e., year 2007 = 100, year 2008 = 120, year 2009 = 140,
and year 2010 = 210), which of the following is the simple moving average forecast for year
2011?
A. 100.5
B. 140.0
C. 142.5
D. 145.5
E. 155.0

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

=160), which of the following is the simple moving average forecast for year 2011?
A. 100.5
B. 122.5
C. 133.3
D. 135.6
E. 139.3

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-460
uses two prior yearly sales values (i.e., year 2009 = 110 and year 2010 = 130), and we want to
weight year 2009 at 10% and year 2010 at 90%, which of the following is the weighted
moving average forecast for year 2011?
A. 120
B. 128
C. 133
D. 138
E. 142

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

uses three prior yearly sales values (i.e., year 2008 = 160, year 2009 = 140 and year 2010 =
170), and we want to weight year 2008 at 30%, year 2009 at 30% and year 2010 at 40%,
which of the following is the weighted moving average forecast for year 2011?
A. 170
B. 168
C. 158
D. 152
E. 146

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-461
72. Which of the following is the major reason that exponential smoothing has become well
accepted as a forecasting technique?
A. Accuracy
B. Sophistication of analysis
C. Predicts turning points
D. Ease of use
E. Ability to Forecast lagging data trends

AACSB: Analytic
Difficulty: Medium

73. The exponential smoothing method requires which of the following data to forecast the
future?
A. The most recent forecast
B. Precise actual demand for the past several years
C. The value of the smoothing constant delta
D. Overall industry demand data
E. Tracking values

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-462
74. Given a prior forecast demand value of 230, a related actual demand value of 250, and a
smoothing constant alpha of 0.1, what is the exponential smoothing forecast value for the
following period?
A. 230
B. 232
C. 238
D. 248
E. 250

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

75. If a firm produced a standard item with relatively stable demand, the smoothing constant
alpha used in an exponential smoothing forecasting model would tend to be in which of the
following ranges?
A. 5 % to 10 %
B. 20 % to 50 %
C. 20 % to 80 %
D. 60 % to 120 %
E. 90 % to 100 %

AACSB: Analytic
Difficulty: Medium

1-463
76. If a firm produced a product that is experiencing growth in demand, the smoothing
constant alpha used in an exponential smoothing forecasting model would tend to be which of
the following?
A. Close to zero
B. A very low percentage, less than 10%
C. The more rapid the growth, the higher the percentage
D. The more rapid the growth, the lower the percentage
E. 50 % or more

AACSB: Analytic
Difficulty: Easy

77. Given a prior forecast demand value of 1,100, a related actual demand value of 1,000, and
a smoothing constant alpha of 0.3, what is the exponential smoothing forecast value?
A. 1,000
B. 1,030
C. 1,070
D. 1,130
E. 970

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-464
78. A company wants to generate a forecast for unit demand for year 2011 using exponential
smoothing. The actual demand in year 2010 was 120. The forecast demand in year 2010 was
110. Using this data and a smoothing constant alpha of 0.1, which of the following is the
resulting year 2011 forecast value?
A. 100
B. 110
C. 111
D. 114
E. 120

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

year 2011 using exponential smoothing. The actual demand in year 2010 was 750. The
forecast demand in year 2010 was 960. Using this data and a smoothing constant alpha of 0.3,
which of the following is the resulting year 2008 forecast value?
A. 766
B. 813
C. 897
D. 1,023
E. 1,120

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-465
80. Which of the following is a possible source of bias error in forecasting?
A. Failing to include the right variables
B. Using the wrong forecasting method
C. Employing less sophisticated analysts than necessary
D. Using incorrect data
E. Using standard deviation rather than MAD

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

81. Which of the following is used to describe the degree of error?
A. Weighted moving average
B. Regression
C. Moving average
D. Forecast as a percent of actual
E. Mean absolute deviation

AACSB: Analytic
Difficulty: Medium

82. A company has actual unit demand for three consecutive years of 124, 126, and 135. The
respective forecasts for the same three years are 120, 120, and 130. Which of the following is
the resulting MAD value that can be computed from this data?
A. 1
B. 3
C. 5
D. 15
E. 123

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-466
83. A company has actual unit demand for four consecutive years of 100, 105, 135, and 150.
The respective forecasts were 120 for all four years. Which of the following is the resulting
MAD value that can be computed from this data?
A. 2.5
B. 10
C. 20
D. 22.5
E. 30

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

84. If you were selecting a forecasting model based on MAD, which of the following MAD
values reflects the most accurate model?
A. 0.2
B. 0.8
C. 1.0
D. 10.0
E. 100.0

AACSB: Analytic
Difficulty: Easy

1-467
absolute deviation is exactly 35. Which of the following is the company's tracking signal?
A. Cannot be calculated based on this information
B. About 14.3
C. More than 35
D. Exactly 35
E. About 0.07

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

86. A company has a MAD of 10. It wants to have a 99.7 percent control limits on its
forecasting system. Its most recent tracking signal value is 31. What can the company
conclude from this information?
E. It is using an inappropriate forecasting methodology

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

1-468
87. You are hired as a consultant to advise a small firm on forecasting methodology. Based on
your research you find the company has a MAD of 3. It wants to have a 99.7 percent control
limits on its forecasting system. Its most recent tracking signal value is 15. What should be
your report to the company?
E. The company is using an inappropriate forecasting methodology

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

A. 57.048 percent
B. 88.946 percent
C. 98.334 percent
D. 99.856 percent
E. 100 percent

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-469
A. 57.048
B. 88.946
C. 98.334
D. 99.856
E. 100

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

90. If the intercept value of a linear regression model is 40, the slope value is 40, and the
value of X is 40, which of the following is the resulting forecast value using this model?
A. 120
B. 1,600
C. 1,640
D. 2,200
E. 64,000

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-470
91. A company hires you to develop a linear regression forecasting model. Based on the
company's historical sales information, you determine the intercept value of the model to be
1,200. You also find the slope value is -50. If after developing the model you are given a
value of X = 10, which of the following is the resulting forecast value using this model?
A. -3,800
B. 700
C. 1,700
D. 1,040
E. 12,000

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

92. Heavy sales of umbrellas during a rain storm is an example of which of the following?
A. A trend
B. A causal relationship
C. A statistical correlation
D. A coincidence
E. A fad

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-471
93. You are using an exponential smoothing model for forecasting. The running sum of the
forecast error statistics (RSFE) are calculated each time a forecast is generated. You find the
last RSFE to be 34. Originally the forecasting model used was selected because it's relatively
low MAD of 0.4. To determine when it is time to re-evaluate the usefulness of the exponential
smoothing model you compute tracking signals. Which of the following is the resulting
tracking system?
A. 85
B. 60
C. 13.6
D. 12.9
E. 8

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis


94. Name the four basic types of forecasting.
1. _____________________;
2. _____________________;
3. _____________________;
4. _____________________.
(1.) Qualitative; (2.) Time series analysis; (3.) Causal; (4.) Simulation.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-472
absolute deviation is exactly 25. What is the company's tracking signal?
_____________________.
16

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

96. A company has calculated its running sum of forecast errors to be 1,000 and its tracking
signal is 50. What is the company's mean absolute deviation? ___________
20

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

=230), what is the simple moving average forecast for year 2011? ____________
210

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-473
uses two prior yearly sales values (i.e., year 2009 = 11,000 and year 2010 = 13,000), and we
want to weight year 2009 at 35% and year 2010 at 65%, what is the weighted moving average
forecast for Year 2011?
12,300

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

Year 2011 using exponential smoothing. Actual demand in year 2010 was 950 but the forecast
for that year 1,060. Using this data and a smoothing constant alpha of 0.5, which of the
following is the resulting year 2011 forecast value? __________
1,005

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

100. A company has had actual unit demand for four consecutive years of 100, 110, 125, and
150. The respective forecasts using exponential smoothing were 120 for each of those four
years. What value of alpha, the smoothing constant, was the firm using? ___________
0 (zero)

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-474
101. What are the five steps of CPFR (collaborative planning, forecasting and
replenishment?)
1. _____________________;
2. _____________________;
3. _____________________;
4. _____________________;
5. _____________________.
(1.) Create a front-end partnership agreement; (2.) Joint business planning; (3.)
Development of demand forecasts; (4.) Sharing forecasts; (5.) Inventory replenishment.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

102. When analyzing time series data, if demand data contains both seasonal and trend effects
at the same time, what are the two ways that they relate to each other discussed in the text?
1) ___________________________
2) ___________________________
1) Additive and 2) Multiplicative.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-475
Essay Questions

103. What does the text mean when it states that rather than to search for the perfect forecast
one should learn to live with inaccurate forecasts?
The text makes this statement on page 337 in the context of "perfect forecasts are virtually
impossible." And, further, analysts should not go to unreasonable lengths to improve the
precision of a forecast. Rather, the analyst should look at several methodologies for
forecasting the same phenomena and try to cull out the "commonsense" view from them. It is
far more important to continually review forecasts and learn to live with inaccurate forecasts
than it is to try to pin down a forecast with too much precision.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

104. Distinguish between "dependent" and "independent" demand.
Starting on page 307 the text distinguishes between demand that is "dependent" upon (or can
be derived from) demand of some other product (as in demand for an end-product's
component) and demand that is "independent" or that which is the result of incoming orders
from customers, etc.

AACSB: Analytic
Difficulty: Easy

1-476
105. Distinguish between errors in statistics and errors in forecasting.
In statistics, the term for errors is "residuals" which means the deviation of observations from
a standard such as a regression line. These residuals are used to measure the "goodness of fit"
of a model to the data it represents. In forecasting, the term "error" is used to denote the
deviation that an actual value had from a forecast. These can be either "bias errors" (a
systematic mistake such as using the wrong relationship between variables) or "random
errors," deviations that simply can not be explained by the model being used.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

106. Describe the collaborative planning, forecasting and replenishment (CPFR) technique.
CPFR is described on pages 335-36 of the text. It is a sharing of information between trading
partners across multiple levels in a supply chain which allows the entire supply chain to
operate with lower levels of inventory and increased responsiveness.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-477
Chapter 12
Aggregate Operations Planning


1. Understand what sales and operations planning is and how it coordinates
manufacturing, logistics, service, and marketing plans.
2. Construct aggregate plans that employ different strategies for meeting demand.
3. Describe what yield management is and why it is an important strategy for leveling
demand.


1. The aggregate operations plan translates annual and quarterly business plans into broad
labor and output plans for the intermediate term of 3 to 18 months.
True False

2. The objective of the aggregate operations plan is to insure that the marketing and sales
plans are realistic.
True False

3. The aggregate operations plan differs in virtually every aspect in service organizations as
contrasted with manufacturing organizations.
True False
1-478

4. The sales and marketing plans are typically developed separately from the aggregate
operations plan as a way of cross-checking results to insure the integrity of assumptions about
the future.
True False

5. Aggregate sales and operations planning occurs in a company about every 3 to 18 months.
True False

6. Aggregation in sales and operations planning is by groups of customers on the supply side
and by product families on the demand side of the firm's supply chain.
True False

1-479
7. Accurate medium-range planning increases the likelihood of operating within the limits of
a budget.
True False

8. The main purpose of the aggregate production plan is to specify the optimal combination of
workforce level and inventory on hand.
True False

9. The International Aggregate Planning Society (IAPS) has developed aggregate operations
planning guidelines which are followed by a majority of manufacturing firms.
True False

10. The sales and operations planning process consists of a series of meetings.
True False

11. The sales and operations planning process is made up of a variety of analytical techniques
which interact to produce short and intermediate term goals.
True False

12. Subcontracting is viewed as a risky strategy because the firm may loose control of product
design and pricing.
True False

13. The aggregate operations plan should not be updated but should be followed precisely
until the planning horizon has passed.
True False

1-480
14. Fixed and variable costs incurred in producing a given product type in a given time period
are relevant aggregate operations planning costs.
True False

15. Backordering costs incurred in producing a given product type in a given time period are
relevant aggregate operations planning costs.
True False

16. Foregone profit margins are considered as relevant aggregate operations planning costs.
True False

17. Costs incurred in hiring, training and laying off personnel are considered relevant
aggregate operations planning costs.
True False

18. The aggregate operations plan is developed from the master schedule and the strategic
capacity plan.
True False

19. The widespread adoption of computing technology has led to the virtual abandonment of
simple cut-and-try charting and graphical methods to develop aggregate operations plans.
True False

20. The increasing complexity of modern operations management has made simple cut-and-
try charting and graphical methods formerly used to develop aggregate operations plans
impractical and obsolete.
True False

1-481
21. In a services organization strategic capacity planning follows process planning.
True False

22. In a logistics organization vehicle dispatching immediately precedes vehicle loading.
True False

23. Yield management is the process of allocating the right type of capacity to the right type
of customer at the right prices at the right time to maximize revenue or yield.
True False

24. Order scheduling is the step in the aggregate operations planning process that immediately
follows material requirements planning.
True False

25. The master production schedule is a crucial input into the aggregate operations plan.
True False

26. In services, once the aggregate staffing level is determined, the focus is on short-term
workforce and customer scheduling.
True False

27. The aggregate operations planning variable "production rate" refers to the number of units
completed per unit of time.
True False

28. The aggregate operations planning variable "workforce level" refers to the number of
workers needed to accomplish the planned production.
True False

1-482
29. The aggregate operations planning variable "inventory on hand" refers to the balance of
unused inventory carried over from the previous time period.
True False

30. Because a level production strategy does not require adjustment in the short-to-medium
term, aggregate sales and operations planning is not required.
True False

31. The essence of yield management is the ability to manage supply.
True False

32. One of the conditions that make yield management effective is when inventory is easily
stored and held for a time when demand is stronger.
True False

33. Yield management is an important tool that can be used to shape demand patterns.
True False

34. Firms facing cyclical demand fluctuations would be wise to introduce complementary
products whose cycles are the same as their current products.
True False

35. Firms that match the production rate to the order rate by hiring and laying off employees
as the order rate varies are following what is known as the chase strategy.
True False

1-483


36. In an overview of the major operations planning activities in a typical organization, which
of the following activities precedes aggregate sales and operations planning?
A. Process planning
B. Workforce scheduling
C. Master production scheduling
D. Materials requirements planning
E. Order scheduling

37. In an overview of the major operations planning activities in a typical logistics
organization, which of the following activities follows aggregate sales and operations
planning?
A. Process planning
C. Vehicle loading
E. Order scheduling

38. In an overview of the major operations planning activities in a typical service
planning?
A. Process planning
C. Master scheduling
E. Order scheduling

organization, which of the following activities immediately follows aggregate sales and
operations planning?
A. Process planning
B. Strategic capacity planning
C. Vehicle dispatching
D. Vehicle capacity planning
E. Warehouse receipt planning

1-484
40. The main purpose of aggregate operations planning is to specify the optimal combination
of which of the following?
A. Workforce levels and inventory on hand
B. Inventory on hand and financing costs for that inventory
C. The strategic plan and the products available for sale
D. The workforce level and the degree of automation
E. Operational costs and the cash flow to support operations

41. In conducting aggregate operations planning there are a number of required inputs. Which
of the following are inputs considered external to the firm?
A. Inventory levels and market demand
B. Raw material availability and competitor's behavior
C. Current workforce and economic conditions
D. Current physical capacity and market demand
E. Subcontractor capacity and inventory levels

A. Competitors' behavior and economic conditions
B. Market demand and inventory levels
C. Subcontractor capacity and current workforce
D. Economic conditions and current physical capacity
E. Raw material availability and inventory levels

of the following are considered inputs internal to the firm?
A. Inventory levels and economic conditions
B. Market demand and subcontractor capacity
C. Current physical capacity and current workforce
D. Competitor behavior and current workforce
E. Current physical capacity and raw material availability

1-485
44. Which of the following is a production planning strategy presented in the textbook?
A. Level
B. Strategic
C. Balanced
D. Synchronous
E. Optimal

45. Which of the following is considered a "pure" production planning strategy?
A. Variable workforce, stable work hours
B. Lag demand
C. Level playing field
D. Stable workforce, variable work hours
E. Product warehouse

46. Matching the production rate to the order rate by hiring and laying off employees as the
order rate varies is which of the following pure production planning strategies?
A. Stable workforce, variable work hours
B. Chase
C. Level
D. Meeting demand
E. Minimizing inventory

47. Maintaining a stable workforce working at a constant output rate while shortages and
surpluses are absorbed by fluctuating inventory levels, order backlogs and allowing lost sales
is which of the following production planning strategies?
B. Chase
C. Level
D. Full employment
E. Skill maintenance

1-486
48. Which of the following costs are relevant to aggregate operations planning?
A. Sunk costs
B. Transaction costs
C. Backordering costs
D. Legal costs
E. Fixed costs

49. Using the cut-and-try method for aggregate operations planning we can determine the
production requirement in units of product. If the beginning inventory is 100 units, the
demand forecast is 1,200, and the necessary safety stock is 20% of the demand forecast,
which of the following is the production requirement?
A. 1,200
B. 1,300
C. 1,340
D. 1,500
E. 1,540

A. 1,000
B. 600
C. 550
D. 450
E. 100

51. An advantage of the level strategy for aggregate operations planning is which of the
following?
A. Total costs through the entire system are minimized.
B. There is a smooth flow throughout the production system
C. There is variety for the workers through the mixing of models produced
D. The risk of backorders is minimized
E. Customer service is improved

1-487
following?
A. Purchased items from vendors can be delivered when and where needed
B. High level of scheduling allows for workers to have lots of overtime
C. System can better accommodate unexpected large orders
D. Financial requirements are minimized through lower finished goods inventory
E. It is easier to apply linear programming or simulation

53. Which of the following methods requires generating several alternative aggregate plans?
A. Trial and error
B. Production smoothing
C. Graphing and charting
D. Aggregate plan simulation
E. Cut and try

54. From an operational perspective yield management is most effective under which of the
following circumstances?
A. Demand cannot be segmented by customer
B. Inventory is perishable
C. Fixed costs are low and variable costs are high
D. The customer is a "captive" of the system
E. The firm doing yield management is very profitable

55. From an operational perspective yield management is least effective under which of the
A. Demand can be segmented by customer
B. The product can be sold in advance
C. Demand is highly variable
D. Fixed costs are high and variable costs are low
E. Demand is stable and close to capacity

1-488
C. The product can be kept to be sold when demand is stronger
E. Demand is highly variable


57. What are the four main categories of cost relevant to aggregate operations planning?
1. ____________________________
2. ____________________________
3. ____________________________
4. ____________________________
________________________________________

demand forecast is 900 units, and the required safety stock is 10% of the demand forecast,
what is the production requirement? ___________
________________________________________

production requirement in units of product. If beginning inventory is 4,000 units, the demand
forecast is 2,900 units, and the required safety stock is 10% of the demand forecast, what is
the production requirement? ____________
________________________________________

1-489
60. What are the five conditions named in the text that support yield management from an
operational perspective?
1. ____________________________
2. ____________________________
3. ____________________________
4. ____________________________
5. ____________________________
________________________________________

61. What are four advantages of level production that make it the backbone of JIT
production?
1. ____________________________
2. ____________________________
3. ____________________________
4. ____________________________
________________________________________

Essay Questions

62. What are the three basic production planning strategies?
1. ____________________________
2. ____________________________
3. ____________________________

1-490
63. Explain how yield management works and why some companies are able to use it to
manage demand patterns?

64. Describe the aggregate sales and operations planning process.

1-491
Chapter 12 Aggregate Operations Planning Answer Key


1. The aggregate operations plan translates annual and quarterly business plans into broad
labor and output plans for the intermediate term of 3 to 18 months.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: What Is Sales and Operations Planning?

2. The objective of the aggregate operations plan is to insure that the marketing and sales
plans are realistic.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

3. The aggregate operations plan differs in virtually every aspect in service organizations as
contrasted with manufacturing organizations.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: The Aggregate Operations Plan

1-492
4. The sales and marketing plans are typically developed separately from the aggregate
operations plan as a way of cross-checking results to insure the integrity of assumptions about
the future.
FALSE

AACSB: Analytic
Difficulty: Easy

5. Aggregate sales and operations planning occurs in a company about every 3 to 18 months.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

6. Aggregation in sales and operations planning is by groups of customers on the supply side
and by product families on the demand side of the firm's supply chain.
FALSE

AACSB: Analytic
Difficulty: Medium

7. Accurate medium-range planning increases the likelihood of operating within the limits of
a budget.
TRUE

AACSB: Analytic
Difficulty: Easy

1-493
8. The main purpose of the aggregate production plan is to specify the optimal combination of
workforce level and inventory on hand.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

9. The International Aggregate Planning Society (IAPS) has developed aggregate operations
planning guidelines which are followed by a majority of manufacturing firms.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

10. The sales and operations planning process consists of a series of meetings.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

11. The sales and operations planning process is made up of a variety of analytical techniques
which interact to produce short and intermediate term goals.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-494
12. Subcontracting is viewed as a risky strategy because the firm may loose control of product
design and pricing.
FALSE

AACSB: Analytic
Difficulty: Easy

13. The aggregate operations plan should not be updated but should be followed precisely
until the planning horizon has passed.
FALSE

AACSB: Analytic
Difficulty: Easy

14. Fixed and variable costs incurred in producing a given product type in a given time period
are relevant aggregate operations planning costs.
TRUE

AACSB: Analytic
Difficulty: Easy

15. Backordering costs incurred in producing a given product type in a given time period are
relevant aggregate operations planning costs.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-495
16. Foregone profit margins are considered as relevant aggregate operations planning costs.
FALSE

AACSB: Analytic
Difficulty: Medium

17. Costs incurred in hiring, training and laying off personnel are considered relevant
aggregate operations planning costs.
TRUE

AACSB: Analytic
Difficulty: Medium

18. The aggregate operations plan is developed from the master schedule and the strategic
capacity plan.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

19. The widespread adoption of computing technology has led to the virtual abandonment of
simple cut-and-try charting and graphical methods to develop aggregate operations plans.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-496
20. The increasing complexity of modern operations management has made simple cut-and-
try charting and graphical methods formerly used to develop aggregate operations plans
impractical and obsolete.
FALSE

AACSB: Analytic
Difficulty: Easy

21. In a services organization strategic capacity planning follows process planning.
TRUE

AACSB: Analytic
Difficulty: Easy

22. In a logistics organization vehicle dispatching immediately precedes vehicle loading.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

23. Yield management is the process of allocating the right type of capacity to the right type
of customer at the right prices at the right time to maximize revenue or yield.
TRUE

AACSB: Analytic
Difficulty: Easy
Topic: Yield Management

1-497
24. Order scheduling is the step in the aggregate operations planning process that immediately
follows material requirements planning.
TRUE

AACSB: Analytic
Difficulty: Easy

25. The master production schedule is a crucial input into the aggregate operations plan.
FALSE

AACSB: Analytic
Difficulty: Easy

26. In services, once the aggregate staffing level is determined, the focus is on short-term
workforce and customer scheduling.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

27. The aggregate operations planning variable "production rate" refers to the number of units
completed per unit of time.
TRUE

AACSB: Analytic
Difficulty: Easy

1-498
28. The aggregate operations planning variable "workforce level" refers to the number of
workers needed to accomplish the planned production.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. The aggregate operations planning variable "inventory on hand" refers to the balance of
unused inventory carried over from the previous time period.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

30. Because a level production strategy does not require adjustment in the short-to-medium
term, aggregate sales and operations planning is not required.
FALSE

AACSB: Analytic
Difficulty: Medium

31. The essence of yield management is the ability to manage supply.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-499
32. One of the conditions that make yield management effective is when inventory is easily
stored and held for a time when demand is stronger.
FALSE

AACSB: Analytic
Difficulty: Medium

33. Yield management is an important tool that can be used to shape demand patterns.
TRUE

AACSB: Analytic
Difficulty: Easy

34. Firms facing cyclical demand fluctuations would be wise to introduce complementary
products whose cycles are the same as their current products.
FALSE

AACSB: Analytic
Difficulty: Easy

35. Firms that match the production rate to the order rate by hiring and laying off employees
as the order rate varies are following what is known as the chase strategy.
TRUE

AACSB: Analytic
Difficulty: Easy

1-500


36. In an overview of the major operations planning activities in a typical organization, which
of the following activities precedes aggregate sales and operations planning?
A. Process planning
C. Master production scheduling
E. Order scheduling

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

planning?
A. Process planning
C. Vehicle loading
E. Order scheduling

AACSB: Analytic
Difficulty: Easy

1-501
38. In an overview of the major operations planning activities in a typical service
planning?
A. Process planning
C. Master scheduling
E. Order scheduling

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

organization, which of the following activities immediately follows aggregate sales and
operations planning?
A. Process planning
B. Strategic capacity planning
C. Vehicle dispatching
D. Vehicle capacity planning
E. Warehouse receipt planning

AACSB: Analytic
Difficulty: Easy

1-502
40. The main purpose of aggregate operations planning is to specify the optimal combination
of which of the following?
A. Workforce levels and inventory on hand
B. Inventory on hand and financing costs for that inventory
C. The strategic plan and the products available for sale
D. The workforce level and the degree of automation
E. Operational costs and the cash flow to support operations

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. Inventory levels and market demand
B. Raw material availability and competitor's behavior
C. Current workforce and economic conditions
D. Current physical capacity and market demand
E. Subcontractor capacity and inventory levels

AACSB: Analytic
Difficulty: Medium

A. Competitors' behavior and economic conditions
B. Market demand and inventory levels
C. Subcontractor capacity and current workforce
D. Economic conditions and current physical capacity
E. Raw material availability and inventory levels

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-503
of the following are considered inputs internal to the firm?
A. Inventory levels and economic conditions
B. Market demand and subcontractor capacity
C. Current physical capacity and current workforce
D. Competitor behavior and current workforce
E. Current physical capacity and raw material availability

AACSB: Analytic
Difficulty: Easy

44. Which of the following is a production planning strategy presented in the textbook?
A. Level
B. Strategic
C. Balanced
D. Synchronous
E. Optimal

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

45. Which of the following is considered a "pure" production planning strategy?
A. Variable workforce, stable work hours
B. Lag demand
C. Level playing field
D. Stable workforce, variable work hours
E. Product warehouse

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-504
46. Matching the production rate to the order rate by hiring and laying off employees as the
order rate varies is which of the following pure production planning strategies?
B. Chase
C. Level
D. Meeting demand
E. Minimizing inventory

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

47. Maintaining a stable workforce working at a constant output rate while shortages and
surpluses are absorbed by fluctuating inventory levels, order backlogs and allowing lost sales
is which of the following production planning strategies?
B. Chase
C. Level
D. Full employment
E. Skill maintenance

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

48. Which of the following costs are relevant to aggregate operations planning?
A. Sunk costs
B. Transaction costs
C. Backordering costs
D. Legal costs
E. Fixed costs

AACSB: Analytic
Difficulty: Easy

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A. 1,200
B. 1,300
C. 1,340
D. 1,500
E. 1,540

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

A. 1,000
B. 600
C. 550
D. 450
E. 100

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-506
following?
A. Total costs through the entire system are minimized.
B. There is a smooth flow throughout the production system
C. There is variety for the workers through the mixing of models produced
D. The risk of backorders is minimized
E. Customer service is improved

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

following?
A. Purchased items from vendors can be delivered when and where needed
B. High level of scheduling allows for workers to have lots of overtime
C. System can better accommodate unexpected large orders
D. Financial requirements are minimized through lower finished goods inventory
E. It is easier to apply linear programming or simulation

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

53. Which of the following methods requires generating several alternative aggregate plans?
A. Trial and error
B. Production smoothing
C. Graphing and charting
D. Aggregate plan simulation
E. Cut and try

AACSB: Analytic
Difficulty: Medium

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54. From an operational perspective yield management is most effective under which of the
A. Demand cannot be segmented by customer
B. Inventory is perishable
C. Fixed costs are low and variable costs are high
D. The customer is a "captive" of the system
E. The firm doing yield management is very profitable

AACSB: Analytic
Difficulty: Medium

C. Demand is highly variable
E. Demand is stable and close to capacity

AACSB: Analytic
Difficulty: Medium

C. The product can be kept to be sold when demand is stronger
E. Demand is highly variable

AACSB: Analytic
Difficulty: Medium

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57. What are the four main categories of cost relevant to aggregate operations planning?
1. ____________________________
2. ____________________________
3. ____________________________
4. ____________________________
(1.) Basic production costs; (2.) Costs associated with changes in the production rate; (3.)
Inventory holding costs; (4.) Backordering costs.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

demand forecast is 900 units, and the required safety stock is 10% of the demand forecast,
what is the production requirement? ___________
590

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

production requirement in units of product. If beginning inventory is 4,000 units, the demand
forecast is 2,900 units, and the required safety stock is 10% of the demand forecast, what is
the production requirement? ____________
0 (zero)

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-509
60. What are the five conditions named in the text that support yield management from an
operational perspective?
1. ____________________________
2. ____________________________
3. ____________________________
4. ____________________________
5. ____________________________
(1.) Demand can be segmented by customer; (2.) Fixed costs are high and variable costs
are low; (3.) Inventory is perishable; (4.) Product can be sold in advance; (5.) Demand is
highly variable.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

61. What are four advantages of level production that make it the backbone of JIT
production?
1. ____________________________
2. ____________________________
3. ____________________________
4. ____________________________
(1.) The entire system can be planned to minimize inventory and work-in-process; (2.)
Product modifications are up-to-date because of the low level of work-in-process; (3.)
There is a smooth flow throughout the production system; (4.) Purchased items can be
delivered by vendors when needed.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-510

Essay Questions

62. What are the three basic production planning strategies?
1. ____________________________
2. ____________________________
3. ____________________________
(1.) Chase; (2.) Stable workforcevariable work hours; (3.) Level.

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

63. Explain how yield management works and why some companies are able to use it to
manage demand patterns?
Yield management is discussed in the text on pages 372-374. It is, in essence, a method used
by service firms (typically) that have limited and inflexible capacity to match short-term
demand to that capacity. The technique capitalizes on short-term supply/demand relationships
involving price with the service firm manipulating price either upwards or downwards to just
fill their available capacity. Lower matinee movie prices, discount air-fares, lowered weekend
hotel rates and higher weekend golf course green fees are examples of yield management. A
successful answer to this question will also indicate that firms that are successful at using
yield management have excellent forecasting skills and a well trained staff who are skilled at
dealing with customers who may be disappointed to find an activity which they have booked
turns out to have no room for them.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis

1-511
64. Describe the aggregate sales and operations planning process.
In the text, this is addressed on page 356. The aggregate sales and operations planning process
is essentially a series of meetings designed to insure that all facets of the business are "on the
same page." Although sophisticated analysis both precedes and flows from the process, it is
the open and honest communications that takes place in these meetings that truly adds value
to the process. The process synchronizes the needs of sales and operations over a three to
eighteen month horizon, seeking to develop a collaborative relationship. In addition to sales
and operations executives, senior management is intimately involved in the process.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-512
Chapter 13
Inventory Control


1. Explain the different purposes for keeping inventory.
2. Understand that the type of inventory system logic that is appropriate for an item
depends on the type of demand for that item.
3. Calculate the appropriate order size when a one-time purchase must be made
4. Describe what the economic order quantity is and how to calculate it.
5. Summarize fixedorder quantity and fixedtime period models, including ways to
determine safety stock when there is variability in demand.
6. Discuss why inventory turn is directly related to order quantity and safety stock.


1. Inventory is defined as the stock of any item or resource used in an organization.
True False

2. An inventory system is a set of policies and controls that monitors levels of inventory and
determines what levels should be maintained, when stock should be replenished, and how
large orders should be.
True False
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3. One of the basic purposes of inventory analysis in manufacturing and stockkeeping services
is to specify when items should be ordered.
True False

is to determine the level of quality to specify.
True False

is to determine how large the orders to vendors should be.
True False

6. In inventory models, high holding costs tend to favor high inventory levels.
True False

7. In inventory models, high holding costs tend to favor low inventory levels and frequent
replenishment.
True False

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8. If the cost to change from one product to another were zero the lot size would be very
small.
True False

9. Shortage costs are precise and easy to measure.
True False

10. Dependent demand inventory levels are usually managed by calculations using calculus-
driven, cost-minimizing models.
True False

11. The fixed-time period inventory system has a smaller average inventory than the fixed-
order quantity system because it must also protect against stockouts during the review period
when inventory is checked.
True False

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12. The fixed-order quantity inventory model favors less expensive items because average
inventory is lower.
True False

13. The fixed-order quantity inventory model is more appropriate for important items such as
critical repair parts because there is closer monitoring and therefore quicker response to a
potential stockout.
True False

14. The fixed-order quantity inventory model requires more time to maintain because every
addition or withdrawal is logged.
True False

15. Fixed-order quantity inventory models are "event triggered."
True False

16. Fixed-order quantity inventory models are "time triggered."
True False

17. Fixed-time period inventory models are "event triggered."
True False

18. Fixed-time period inventory models are "time triggered."
True False

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19. Fixed-order quantity inventory systems determine the order point, R and the order
quantity, Q values.
True False

20. The computation of a firm's inventory position is found by taking the inventory on hand
and adding it to the on-order inventory, and then subtracting back-ordered inventory.
True False

21. Using the probability approach we assume that the demand for inventory over a period of
time is normally distributed.
True False

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22. Safety stock can be defined as the amount of inventory carried in addition to the expected
demand.
True False

23. If demand for an item is normally distributed we plan for demand to be twice the average
demand and carry 2 standard deviations worth of safety stock inventory.
True False

24. Safety stock can be computed when using the fixed-order quantity inventory model by
multiplying a "z" value representing the number of standard deviations to achieve a service
level or probability by the standard deviation of daily demand.
True False

level or probability by the standard deviation of lead time.
True False

26. The key difference between a fixed-order quantity inventory model, where demand is
known and one where demand is uncertain is in computing the reorder point.
True False

27. Fixed-time period inventory models generate order quantities that vary from time period
to time period, depending on the usage rate.
True False

28. Fixed-order quantity systems assume a random depletion of inventory, with less than an
immediate order when a reorder point is reached.
True False

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29. The standard fixed-time period model assumes that inventory is never counted but
determined by EOQ measures.
True False

30. Safety stock is not necessary in any fixed-time period system.
True False

31. In the fixed-time period model it is necessary to determine the inventory currently on hand
to calculate the size of the order to place with a vendor.
True False

32. Some inventory situations involve placing orders to cover only one demand period or to
cover short-lived items at frequent intervals.
True False

33. The optimal stocking decision in inventory management, when using marginal analysis,
occurs at the point where the benefits derived from carrying the next unit are more than the
costs for that unit.
True False

34. When stocked items are sold, the optimal inventory decision using marginal analysis is to
stock that quantity where profit from the sale or use of the last unit is equal to or greater than
the losses if the last unit remains unsold.
True False

35. Cycle counting is a physical inventory-taking technique in which inventory is counted on
a frequent basis rather than once or twice a year.
True False

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36. The "sawtooth effect," named after turn-around artist Al "chainsaw" Dunlap, is the severe
reduction of inventory and service levels that occurs when a firm has gone through a hostile
takeover.
True False

37. The "sawtooth effect," is named after the jagged shape of the graph of inventory levels
over time.
True False

38. Price-break models deal with the fact that the selling price of an item varies with the order
size.
True False

39. Price-break models deal with the fact that the selling price of an item generally increases
as the order size increases.
True False

40. Price-break models deal with discrete or step changes in price as order size changes rather
than a per-unit change.
True False

41. In a price break model of lot sizing, to find the lowest-cost order quantity, it is necessary
to calculate the economic order quantity for each possible price.
True False

to calculate the economic order quantity for each possible price and to check to see whether
the lowest cost quantity is feasible.
True False

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43. In a price break model of lot sizing the lowest cost quantity is always feasible.
True False


44. Which of the following is not one of the categories of manufacturing inventory?
A. Raw materials
B. Finished products
C. Component parts
D. Just-in-time
E. Supplies

45. Which of the following is one of the categories of manufacturing inventory?
A. Economic Order Inventory
B. Work-in-process
C. Quality units
D. JIT Inventory
E. Re-order point

46. Firms keep supplies of inventory for which of the following reasons?
A. To maintain dependence of operations
B. To provide a feeling of security for the workforce
C. To meet variation in product demand
D. To hedge against wage increases
E. In case the supplier changes the design

47. Which of the following is not a reason to carry inventory?
A. To provide a safeguard for variation in raw material delivery time
B. To take advantage of economic purchase-order size
C. To maintain independence of operations
D. To meet variation in product demand
E. To keep the stock out of the hands of competitors

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48. When developing inventory cost models, which of the following is not included as costs to
place an order?
A. Phone calls
B. Taxes
C. Clerical
D. Calculating quantity to order
E. Postage

49. When material is ordered from a vendor, which of the following is not a reason for delays
in the order arriving on time?
A. Normal variation in shipping time
B. A shortage of material at the vendor's plant causing backlogs
C. An unexpected strike at the vendor's plant
D. A lost order
E. Redundant ordering systems

50. Which of the following is not included as an inventory holding cost?
A. Annualized cost of materials
B. Handling
C. Insurance
D. Pilferage
E. Storage facilities

51. Which of the following is usually included as an inventory holding cost?
A. Order placing
B. Breakage
C. Typing up an order
D. Quantity discounts
E. Annualized cost of materials

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52. In making any decision that affects inventory size, which of the following costs do not
need to be considered?
A. Holding costs
B. Setup costs
C. Ordering costs
D. Fixed costs
E. Shortage costs

53. Which of the following are fixed-order quantity inventory models?
A. Economic order quantity model
B. The ABC model
C. Periodic replenishment model
D. Cycle counting model
E. P model

54. Which of the following are fixed-time period inventory models?
A. The EOQ model
B. The least cost method
C. The Q model
D. Periodic system model
E. Just-in-time model

55. Which of the following is a perpetual system for inventory management?
A. Fixed-time period
B. Fixed-order quantity
C. P model
D. First-in-first-out
E. The wheel of inventory

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56. Which of the following is an assumption of the basic fixed-order quantity inventory
model?
A. Lead times are averaged
B. Ordering costs are variable
C. Price per unit of product is constant
D. Back orders are allowed
E. Stock-out costs are high

57. Which of the following is not an assumption of the basic fixed-order quantity inventory
model?
A. Ordering or setup costs are constant
B. Inventory holding cost is based on average inventory
C. Diminishing returns to scale of holding inventory
D. Lead time is constant
E. Demand for the product is uniform throughout the period

58. Which of the following is the symbol used in the textbook for the cost of placing an order
in the fixed-order quantity inventory model?
A. C
B. TC
C. H
D. Q
E. S

59. Which of the following is the set of all cost components that make up the fixed-order
quantity total annual cost (TC) function?
A. Annual purchasing cost, annual ordering cost, fixed cost
B. Annual holding cost, annual ordering cost, unit cost
C. Annual holding cost, annual ordering cost, annual purchasing cost
D. Annual lead time cost, annual holding cost, annual purchasing cost
E. Annual unit cost, annual set up cost, annual purchasing cost

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60. Assuming no safety stock, what is the re-order point (R) given an average daily demand of
50 units, a lead time of 10 days and 625 units on hand?
A. 550
B. 500
C. 715
D. 450
E. 475

78 units and a lead time of 3 days?
A. 421
B. 234
C. 78
D. 26
E. 312

62. If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is
$2.50 per unit per year, which of the following is the optimal order quantity using the fixed-
order quantity model?
A. 576
B. 240
C. 120.4
D. 60.56
E. 56.03

$5 per unit per year, which of the following is the optimal order quantity using the fixed-order
quantity model?
A. 909
B. 707
C. 634
D. 500
E. 141

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A. 5,060
B. 2,320
C. 2,133
D. 2,004
E. 1,866

65. Using the fixed-order quantity model, which of the following is the total ordering cost of
inventory given an annual demand of 36,000 units, a cost per order of $80 and a holding cost
per unit per year of $4?
A. $849
B. $1,200
C. $1,889
D. $2,267
E. $2,400

66. A company is planning for its financing needs and uses the basic fixed-order quantity
inventory model. Which of the following is the total cost (TC) of the inventory given an
annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an EOQ of
400 units, and a cost per unit of inventory of $150?
A. $1,501,800
B. $1,498,200
C. $500,687
D. $499,313

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67. A company has recorded the last five days of daily demand on their only product. Those
values are 120, 125, 124, 128, and 133. The time from when an order is placed to when it
arrives at the company from its vendor is 5 days. Assuming the basic fixed-order quantity
inventory model fits this situation and no safety stock is needed, which of the following is the
reorder point (R)?
A. 120
B. 126
C. 630
D. 950
E. 1,200

68. A company has recorded the last six days of daily demand on a single product they sell.
Those values are 37, 115, 93, 112, 73, and 110. The time from when an order is placed to
when it arrives at the company from its vendor is 3 days. Assuming the basic fixed-order
quantity inventory model fits this situation and no safety stock is needed, which of the
following is the reorder point (R)?
A. 540
B. 270
C. 115
D. 90
E. 60

69. Using the probability approach to determine an inventory safety stock and wanting to be
95 percent sure of covering inventory demand, which of the following is the number of
standard deviations necessary to have the 95 percent service probability assured?
A. 1.28
B. 1.64
C. 1.96
D. 2.00
E. 2.18

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70. To take into consideration demand uncertainty in reorder point (R) calculations, what do
we add to the product of the average daily demand and lead time in days when calculating the
value of R?
A. The product of average daily demand times a standard deviation of lead time
B. A "z" value times the lead time in days
C. The standard deviation of vendor lead time times the standard deviation of demand
D. The product of lead time in days times the standard deviation of lead time
E. The product of the standard deviation of demand variability and a "z" score relating to a
specific service probability

71. In order to determine the standard deviation of usage during lead time in the reorder point
formula for a fixed-order quantity inventory model which of the following must be computed
first?
A. Standard deviation of daily demand
B. Number of standard deviations for a specific service probability
C. Stockout cost
D. Economic order quantity
E. Safety stock level

72. If it takes a supplier four days to deliver an order once it has been placed and the standard
deviation of daily demand is 10, which of the following is the standard deviation of usage
during lead time?
A. 10
B. 20
C. 40
D. 100
E. 400

73. If it takes a supplier 25 days to deliver an order once it has been placed and the standard
during lead time?
A. 50
B. 100
C. 400
D. 1,000
E. 1,600

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74. If it takes a supplier two days to deliver an order once it has been placed and the daily
demand for three days has been 120, 124, and 125, which of the following is the standard
deviation of usage during lead time?
A. About 2.16
B. About 3.05
C. About 4.66
D. About 5.34
E. About 9.30

75. A company wants to determine its reorder point (R). Demand is variable and they want to
build a safety stock into R. If the average daily demand is 12, the lead time is 5 days, the
desired "z" value is 1.96, and the standard deviation of usage during lead time is 3, which of
the following is the desired value of R?
A. About 6
B. About 16
C. About 61
D. About 66
E. About 79

build a safety stock into R. The company wants to have a service probability coverage of 95
percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage
during lead time is 2, which of the following is the desired value of R?
A. About 17.9
B. About 19.7
C. About 24.0
D. About 27.3
E. About 31.2

77. Which of the following is not necessary to compute the order quantity using the fixed-
time period model with safety stock?
A. Forecast average daily demand
B. Safety stock
C. Inventory currently on hand
D. Ordering cost
E. Lead time in days

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78. Using the fixed-time period inventory model, and given an average daily demand of 200
units, 4 days between inventory reviews, 5 days for lead time, 120 units of inventory on hand,
a "z" of 1.96, and a standard deviation of demand over the review and lead time of 3 units,
which of the following is the order quantity?
A. About 1,086
B. About 1,686
C. About 1,806
D. About 2,206
E. About 2,686

a service probability of 95 percent, and a standard deviation of demand over the review and
lead time of 8 units, which of the following is the order quantity?
A. 863
B. 948
C. 1,044
D. 1,178
E. 4,510

units, 3 days between inventory reviews, 1 day for lead time, 30 units of inventory on hand, a
service probability of 98 percent, and a standard deviation of daily demand is 3 units, which
of the following is the order quantity?
A. About 30.4
B. About 42.3
C. About 53.7
D. About 56.8
E. About 59.8

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81. You would like to use the fixed-time period inventory model to compute the desired order
quantity for a company. You know that vendor lead time is 5 days and the number of days
between reviews is 7. Which of the following is the standard deviation of demand over the
review and lead time if the standard deviation of daily demand is 8?
A. About 27.7
B. About 32.8
C. About 35.8
D. About 39.9
E. About 45.0

review and lead time period if the standard deviation of daily demand is 10?
A. 25
B. 40
C. 50
D. 73
E. 100

83. If a vendor has correctly used marginal analysis to select their stock levels for the day (as
in the newsperson problem), and the profit resulting from the last unit being sold (MP) is
$0.90 and the loss resulting from that unit if it is not sold (ML) is $0.50, which of the
following is the probability of the last unit being sold?
A. Greater than 0.357
B. Greater than 0.400
C. Greater than 0.556
D. Greater than 0.678

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in the newsperson problem), and the profit resulting from the last unit being sold (MP) is $120
and the loss resulting from that unit if it is not sold (ML) is $360, which of the following is
the probability of the last unit being sold?

85. The Pareto principle is best applied to which of the following inventory systems?
A. EOQ
B. Fixed-time period
C. ABC classification
D. Fixed-order quantity
E. Single-period ordering system

86. Which of the following is the recommended percentage groupings of the ABC
classifications of the dollar volume of products?
A. A items get 15%, B items get 35%, and C items get 50%
B. A items get 15%, B items get 45%, and C items get 40%
C. A items get 25%, B items get 35%, and C items get 40%
D. A items get 25%, B items get 15%, and C items get 60%
E. A items get 20%, B items get 30%, and C items get 50%

87. Using the ABC classification system for inventory, which of the following is a true
statement?
A. The "C" items are of moderate dollar value
B. You should allocate about 15 % of the dollar volume to "B" items
C. The "A" items are of low dollar value
D. The "A" items are of high dollar value
E. Inexpensive and low usage items are classified as "C" no matter how critical

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88. Which of the following values for "z" should we use in as safety stock calculation if we
want a Service Probability of 98%?
A. 1.64
B. 1.96
C. 2.05
D. 2.30

89. Computer inventory systems are often programmed to produce a cycle count notice in
which of the following case?
A. When the record shows a near maximum balance on hand
B. When the record shows positive balance but a backorder was written
C. When quality problems have been discovered with the item
D. When the item has become obsolete
E. When the item has been misplaced in the stockroom


90. What is the term for there being no relationship between demands for various items?
________________
________________________________________

100 units and a lead time of 5 days? ________________
________________________________________

$12.50 per unit per year, what is the optimal order quantity using the fixed-order quantity
inventory model? ________________
________________________________________

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units, 4 days between inventory reviews, 5 days for lead time, 1,200 units of inventory on
hand, a "z" of 1.96, and a standard deviation of demand over the review and lead time of 12
units, what quantity should be ordered? ________________
________________________________________

94. Using the fixed-order quantity model, what is the total ordering cost of inventory given an
annual demand of 36,000 units, a cost per order of $40 and a holding cost per unit per year of
$45? ________________
________________________________________

deviation of daily demand is 14, what is the standard deviation of usage during lead time?
________________
________________________________________

96. What are the five purposes of inventory?
1. ________________
2. ________________
3. ________________
4. ________________
5. ________________
________________________________________

97. In making any decision that affects the size of inventory, what are the four categories of
cost that must be considered?
1. ________________
2. ________________
3. ________________
4. ________________
________________________________________

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98. What is the name of a physical inventory-taking technique that focuses only on certain
items and counts more often than once or twice a year? ________________
________________________________________

Essay Questions

99. Distinguish between dependent and independent demand. How are these demands treated
differently?

100. What is "inventory accuracy," why is it important and how does inaccuracy occur?

101. Explain the difference between inventory control for finished goods in manufacturing
and in services.

1-535

Chapter 13 Inventory Control Answer Key


1. Inventory is defined as the stock of any item or resource used in an organization.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Purpose of Inventory

2. An inventory system is a set of policies and controls that monitors levels of inventory and
determines what levels should be maintained, when stock should be replenished, and how
large orders should be.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

is to specify when items should be ordered.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-536
is to determine the level of quality to specify.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

is to determine how large the orders to vendors should be.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

6. In inventory models, high holding costs tend to favor high inventory levels.
FALSE

AACSB: Analytic
Difficulty: Easy
Topic: Fixed-Order Quantity Models

7. In inventory models, high holding costs tend to favor low inventory levels and frequent
replenishment.
TRUE

AACSB: Analytic
Difficulty: Easy

1-537
8. If the cost to change from one product to another were zero the lot size would be very
small.
TRUE

AACSB: Analytic
Difficulty: Easy

9. Shortage costs are precise and easy to measure.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Independent versus Dependent Demand

10. Dependent demand inventory levels are usually managed by calculations using calculus-
driven, cost-minimizing models.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

11. The fixed-time period inventory system has a smaller average inventory than the fixed-
order quantity system because it must also protect against stockouts during the review period
when inventory is checked.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-538
12. The fixed-order quantity inventory model favors less expensive items because average
inventory is lower.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. The fixed-order quantity inventory model is more appropriate for important items such as
critical repair parts because there is closer monitoring and therefore quicker response to a
potential stockout.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. The fixed-order quantity inventory model requires more time to maintain because every
addition or withdrawal is logged.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

15. Fixed-order quantity inventory models are "event triggered."
TRUE

AACSB: Analytic
Difficulty: Easy

1-539
16. Fixed-order quantity inventory models are "time triggered."
FALSE

AACSB: Analytic
Difficulty: Easy

17. Fixed-time period inventory models are "event triggered."
FALSE

AACSB: Analytic
Difficulty: Easy

18. Fixed-time period inventory models are "time triggered."
TRUE

AACSB: Analytic
Difficulty: Easy

19. Fixed-order quantity inventory systems determine the order point, R and the order
quantity, Q values.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-540
20. The computation of a firm's inventory position is found by taking the inventory on hand
and adding it to the on-order inventory, and then subtracting back-ordered inventory.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Inventory Control and Supply Chain Management

21. Using the probability approach we assume that the demand for inventory over a period of
time is normally distributed.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

22. Safety stock can be defined as the amount of inventory carried in addition to the expected
demand.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

23. If demand for an item is normally distributed we plan for demand to be twice the average
demand and carry 2 standard deviations worth of safety stock inventory.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-541
level or probability by the standard deviation of daily demand.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

level or probability by the standard deviation of lead time.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

26. The key difference between a fixed-order quantity inventory model, where demand is
known and one where demand is uncertain is in computing the reorder point.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

27. Fixed-time period inventory models generate order quantities that vary from time period
to time period, depending on the usage rate.
TRUE

AACSB: Analytic
Difficulty: Easy

1-542
28. Fixed-order quantity systems assume a random depletion of inventory, with less than an
immediate order when a reorder point is reached.
FALSE

AACSB: Analytic
Difficulty: Easy

29. The standard fixed-time period model assumes that inventory is never counted but
determined by EOQ measures.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

30. Safety stock is not necessary in any fixed-time period system.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

31. In the fixed-time period model it is necessary to determine the inventory currently on hand
to calculate the size of the order to place with a vendor.
TRUE

AACSB: Analytic
Difficulty: Easy

1-543
32. Some inventory situations involve placing orders to cover only one demand period or to
cover short-lived items at frequent intervals.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

33. The optimal stocking decision in inventory management, when using marginal analysis,
occurs at the point where the benefits derived from carrying the next unit are more than the
costs for that unit.
FALSE

AACSB: Analytic
Difficulty: Easy

34. When stocked items are sold, the optimal inventory decision using marginal analysis is to
stock that quantity where profit from the sale or use of the last unit is equal to or greater than
the losses if the last unit remains unsold.
TRUE

AACSB: Analytic
Difficulty: Easy

35. Cycle counting is a physical inventory-taking technique in which inventory is counted on
a frequent basis rather than once or twice a year.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-544
36. The "sawtooth effect," named after turn-around artist Al "chainsaw" Dunlap, is the severe
reduction of inventory and service levels that occurs when a firm has gone through a hostile
takeover.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

37. The "sawtooth effect," is named after the jagged shape of the graph of inventory levels
over time.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

38. Price-break models deal with the fact that the selling price of an item varies with the order
size.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

39. Price-break models deal with the fact that the selling price of an item generally increases
as the order size increases.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-545
40. Price-break models deal with discrete or step changes in price as order size changes rather
than a per-unit change.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

to calculate the economic order quantity for each possible price.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

to calculate the economic order quantity for each possible price and to check to see whether
the lowest cost quantity is feasible.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

43. In a price break model of lot sizing the lowest cost quantity is always feasible.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-546


44. Which of the following is not one of the categories of manufacturing inventory?
A. Raw materials
B. Finished products
C. Component parts
D. Just-in-time
E. Supplies

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

45. Which of the following is one of the categories of manufacturing inventory?
A. Economic Order Inventory
B. Work-in-process
C. Quality units
D. JIT Inventory
E. Re-order point

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

46. Firms keep supplies of inventory for which of the following reasons?
A. To maintain dependence of operations
B. To provide a feeling of security for the workforce
C. To meet variation in product demand
D. To hedge against wage increases
E. In case the supplier changes the design

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-547
47. Which of the following is not a reason to carry inventory?
A. To provide a safeguard for variation in raw material delivery time
B. To take advantage of economic purchase-order size
C. To maintain independence of operations
D. To meet variation in product demand
E. To keep the stock out of the hands of competitors

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

48. When developing inventory cost models, which of the following is not included as costs to
place an order?
A. Phone calls
B. Taxes
C. Clerical
D. Calculating quantity to order
E. Postage

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

49. When material is ordered from a vendor, which of the following is not a reason for delays
in the order arriving on time?
A. Normal variation in shipping time
B. A shortage of material at the vendor's plant causing backlogs
C. An unexpected strike at the vendor's plant
D. A lost order
E. Redundant ordering systems

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-548
50. Which of the following is not included as an inventory holding cost?
A. Annualized cost of materials
B. Handling
C. Insurance
D. Pilferage
E. Storage facilities

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

51. Which of the following is usually included as an inventory holding cost?
A. Order placing
B. Breakage
C. Typing up an order
D. Quantity discounts
E. Annualized cost of materials

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

52. In making any decision that affects inventory size, which of the following costs do not
need to be considered?
A. Holding costs
B. Setup costs
C. Ordering costs
D. Fixed costs
E. Shortage costs

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-549
53. Which of the following are fixed-order quantity inventory models?
A. Economic order quantity model
B. The ABC model
C. Periodic replenishment model
D. Cycle counting model
E. P model

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

54. Which of the following are fixed-time period inventory models?
A. The EOQ model
B. The least cost method
C. The Q model
D. Periodic system model
E. Just-in-time model

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

55. Which of the following is a perpetual system for inventory management?
A. Fixed-time period
B. Fixed-order quantity
C. P model
D. First-in-first-out
E. The wheel of inventory

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-550
56. Which of the following is an assumption of the basic fixed-order quantity inventory
model?
A. Lead times are averaged
B. Ordering costs are variable
C. Price per unit of product is constant
D. Back orders are allowed
E. Stock-out costs are high

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

57. Which of the following is not an assumption of the basic fixed-order quantity inventory
model?
A. Ordering or setup costs are constant
B. Inventory holding cost is based on average inventory
C. Diminishing returns to scale of holding inventory
D. Lead time is constant
E. Demand for the product is uniform throughout the period

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

58. Which of the following is the symbol used in the textbook for the cost of placing an order
in the fixed-order quantity inventory model?
A. C
B. TC
C. H
D. Q
E. S

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-551
59. Which of the following is the set of all cost components that make up the fixed-order
quantity total annual cost (TC) function?
A. Annual purchasing cost, annual ordering cost, fixed cost
B. Annual holding cost, annual ordering cost, unit cost
C. Annual holding cost, annual ordering cost, annual purchasing cost
D. Annual lead time cost, annual holding cost, annual purchasing cost
E. Annual unit cost, annual set up cost, annual purchasing cost

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

50 units, a lead time of 10 days and 625 units on hand?
A. 550
B. 500
C. 715
D. 450
E. 475

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

78 units and a lead time of 3 days?
A. 421
B. 234
C. 78
D. 26
E. 312

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-552
A. 576
B. 240
C. 120.4
D. 60.56
E. 56.03

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

$5 per unit per year, which of the following is the optimal order quantity using the fixed-order
quantity model?
A. 909
B. 707
C. 634
D. 500
E. 141

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-553
A. 5,060
B. 2,320
C. 2,133
D. 2,004
E. 1,866

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

65. Using the fixed-order quantity model, which of the following is the total ordering cost of
inventory given an annual demand of 36,000 units, a cost per order of $80 and a holding cost
per unit per year of $4?
A. $849
B. $1,200
C. $1,889
D. $2,267
E. $2,400

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

1-554
66. A company is planning for its financing needs and uses the basic fixed-order quantity
inventory model. Which of the following is the total cost (TC) of the inventory given an
annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an EOQ of
400 units, and a cost per unit of inventory of $150?
A. $1,501,800
B. $1,498,200
C. $500,687
D. $499,313

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

67. A company has recorded the last five days of daily demand on their only product. Those
values are 120, 125, 124, 128, and 133. The time from when an order is placed to when it
arrives at the company from its vendor is 5 days. Assuming the basic fixed-order quantity
inventory model fits this situation and no safety stock is needed, which of the following is the
reorder point (R)?
A. 120
B. 126
C. 630
D. 950
E. 1,200

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-555
68. A company has recorded the last six days of daily demand on a single product they sell.
Those values are 37, 115, 93, 112, 73, and 110. The time from when an order is placed to
when it arrives at the company from its vendor is 3 days. Assuming the basic fixed-order
quantity inventory model fits this situation and no safety stock is needed, which of the
following is the reorder point (R)?
A. 540
B. 270
C. 115
D. 90
E. 60

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

69. Using the probability approach to determine an inventory safety stock and wanting to be
95 percent sure of covering inventory demand, which of the following is the number of
standard deviations necessary to have the 95 percent service probability assured?
A. 1.28
B. 1.64
C. 1.96
D. 2.00
E. 2.18

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-556
70. To take into consideration demand uncertainty in reorder point (R) calculations, what do
we add to the product of the average daily demand and lead time in days when calculating the
value of R?
A. The product of average daily demand times a standard deviation of lead time
B. A "z" value times the lead time in days
C. The standard deviation of vendor lead time times the standard deviation of demand
D. The product of lead time in days times the standard deviation of lead time
E. The product of the standard deviation of demand variability and a "z" score relating to a
specific service probability

AACSB: Analytic
Difficulty: Medium

71. In order to determine the standard deviation of usage during lead time in the reorder point
formula for a fixed-order quantity inventory model which of the following must be computed
first?
A. Standard deviation of daily demand
B. Number of standard deviations for a specific service probability
C. Stockout cost
D. Economic order quantity
E. Safety stock level

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-557
72. If it takes a supplier four days to deliver an order once it has been placed and the standard
during lead time?
A. 10
B. 20
C. 40
D. 100
E. 400

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

during lead time?
A. 50
B. 100
C. 400
D. 1,000
E. 1,600

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-558
74. If it takes a supplier two days to deliver an order once it has been placed and the daily
demand for three days has been 120, 124, and 125, which of the following is the standard
deviation of usage during lead time?
A. About 2.16
B. About 3.05
C. About 4.66
D. About 5.34
E. About 9.30

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

build a safety stock into R. If the average daily demand is 12, the lead time is 5 days, the
desired "z" value is 1.96, and the standard deviation of usage during lead time is 3, which of
the following is the desired value of R?
A. About 6
B. About 16
C. About 61
D. About 66
E. About 79

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-559
build a safety stock into R. The company wants to have a service probability coverage of 95
percent. If average daily demand is 8, lead time is 3 days, and the standard deviation of usage
during lead time is 2, which of the following is the desired value of R?
A. About 17.9
B. About 19.7
C. About 24.0
D. About 27.3
E. About 31.2

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

77. Which of the following is not necessary to compute the order quantity using the fixed-
time period model with safety stock?
A. Forecast average daily demand
B. Safety stock
C. Inventory currently on hand
D. Ordering cost
E. Lead time in days

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-560
a "z" of 1.96, and a standard deviation of demand over the review and lead time of 3 units,
which of the following is the order quantity?
A. About 1,086
B. About 1,686
C. About 1,806
D. About 2,206
E. About 2,686

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

a service probability of 95 percent, and a standard deviation of demand over the review and
lead time of 8 units, which of the following is the order quantity?
A. 863
B. 948
C. 1,044
D. 1,178
E. 4,510

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-561
units, 3 days between inventory reviews, 1 day for lead time, 30 units of inventory on hand, a
service probability of 98 percent, and a standard deviation of daily demand is 3 units, which
of the following is the order quantity?
A. About 30.4
B. About 42.3
C. About 53.7
D. About 56.8
E. About 59.8

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

review and lead time if the standard deviation of daily demand is 8?
A. About 27.7
B. About 32.8
C. About 35.8
D. About 39.9
E. About 45.0

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-562
review and lead time period if the standard deviation of daily demand is 10?
A. 25
B. 40
C. 50
D. 73
E. 100

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

in the newsperson problem), and the profit resulting from the last unit being sold (MP) is
$0.90 and the loss resulting from that unit if it is not sold (ML) is $0.50, which of the
following is the probability of the last unit being sold?

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-563
in the newsperson problem), and the profit resulting from the last unit being sold (MP) is $120
and the loss resulting from that unit if it is not sold (ML) is $360, which of the following is
the probability of the last unit being sold?

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

85. The Pareto principle is best applied to which of the following inventory systems?
A. EOQ
B. Fixed-time period
C. ABC classification
D. Fixed-order quantity
E. Single-period ordering system

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-564
86. Which of the following is the recommended percentage groupings of the ABC
classifications of the dollar volume of products?
A. A items get 15%, B items get 35%, and C items get 50%
B. A items get 15%, B items get 45%, and C items get 40%
C. A items get 25%, B items get 35%, and C items get 40%
D. A items get 25%, B items get 15%, and C items get 60%
E. A items get 20%, B items get 30%, and C items get 50%

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

87. Using the ABC classification system for inventory, which of the following is a true
statement?
A. The "C" items are of moderate dollar value
B. You should allocate about 15 % of the dollar volume to "B" items
C. The "A" items are of low dollar value
D. The "A" items are of high dollar value
E. Inexpensive and low usage items are classified as "C" no matter how critical

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

88. Which of the following values for "z" should we use in as safety stock calculation if we
want a Service Probability of 98%?
A. 1.64
B. 1.96
C. 2.05
D. 2.30

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-565
89. Computer inventory systems are often programmed to produce a cycle count notice in
which of the following case?
A. When the record shows a near maximum balance on hand
B. When the record shows positive balance but a backorder was written
C. When quality problems have been discovered with the item
D. When the item has become obsolete
E. When the item has been misplaced in the stockroom

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


90. What is the term for there being no relationship between demands for various items?
________________
Independent demand

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

100 units and a lead time of 5 days? ________________
500

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-566
$12.50 per unit per year, what is the optimal order quantity using the fixed-order quantity
inventory model? ________________
160

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

units, 4 days between inventory reviews, 5 days for lead time, 1,200 units of inventory on
hand, a "z" of 1.96, and a standard deviation of demand over the review and lead time of 12
units, what quantity should be ordered? ________________
1,571

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

94. Using the fixed-order quantity model, what is the total ordering cost of inventory given an
annual demand of 36,000 units, a cost per order of $40 and a holding cost per unit per year of
$45? ________________
$5,692

AACSB: Analytic
Difficulty: Hard
Taxonomy: Analysis

1-567
deviation of daily demand is 14, what is the standard deviation of usage during lead time?
________________
44.27

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

96. What are the five purposes of inventory?
1. ________________
2. ________________
3. ________________
4. ________________
5. ________________
(1.) To maintain independence of operations; (2.) To meet variation in product demand;
(3.) To allow flexibility in production scheduling; (4.) To provide a safeguard for
variation in raw material delivery time; (5.) To take advantage of economic purchase
order size

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-568
97. In making any decision that affects the size of inventory, what are the four categories of
cost that must be considered?
1. ________________
2. ________________
3. ________________
4. ________________
(1.) Holding (or carrying) cost; (2.) Setup (or production change) cost; (3.) Ordering
costs; (4.) Shortage cost

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

98. What is the name of a physical inventory-taking technique that focuses only on certain
items and counts more often than once or twice a year? ________________
Cycle counting

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

Essay Questions

99. Distinguish between dependent and independent demand. How are these demands treated
differently?
The text distinguishes between dependent and independent demands on pages 391-92.
Dependent demand means that the need for an item is directly related to the need for some
other item. Independent demand is uncertain and is not related to the need for any other item.
Typically, independent demand is the demand for an end item offered in the marketplace.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-569
100. What is "inventory accuracy," why is it important and how does inaccuracy occur?
Inventory accuracy is discussed on pages 412-14 of the text. It has to do with discrepancies
between the amount of an item on hand and the amount that the inventory records indicate are
on hand. There are two ways to measure inventory accuracy: one is by the percentage of the
total number of items where records do not match physical reality. The other way of
measuring inventory accuracy is the percentage difference between recorded and on-hand
inventory. Inventory accuracy is important because inventory records interact with planning
activities like MRP or ERP. When the physical amount on hand is less than the recorded
amount interruptions in production are likely. If there is more on hand than is recorded it is
likely that orders will be generated, obsolescence can be more likely and cost data will be
inaccurate. There are two main causes of inventory inaccuracy: improper record-keeping and
unauthorized usage. Physical restraints (e.g., a locked supply room), disciplined record-
keeping and frequent physical inventory-taking (for example, as in cycle-counting) are the
main weapons against inventory inaccuracy.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Knowledge

1-570
101. Explain the difference between inventory control for finished goods in manufacturing
and in services.
This question requires the student to integrate some themes that have been sounded
throughout the text. The topic of this chapter is inventory control and almost exclusively deals
with manufactured goods. By convention, manufacturing inventory generally refers to items
that contribute to or become part of a firm's product output. Manufacturing inventory is
typically classified into raw materials, finished products, component parts, supplies, and
work-in-process. In services, inventory generally refers to the tangible goods to be sold and
the supplies necessary to administer the service. Since finished services are highly perishable
and hard to inventory companies usually hold them in the form of capacity to create the
service to meet peak demand. Thus, services that are not capital intensive often have very
substantial capital equipment capacity cushions (See Chapter 3, Strategic Capacity
Management, page 49, and also Chapter 5, Service Processes) when measuring average
demand against capacity. Where capacity is very costly (e.g., the industry is capital intensive)
attempts are made to manage demand through yield management (see Chapter 12, page 372.)
A successful response to this question will note the underlying differences between
manufacturing and services and comment to the effect that inventory of finished goods is
possible in most manufacturing operations but, in most services, the operating system either
has the flexibility to operate at a variety of levels with little penalty or else demand is able to
be managed through appropriate pricing strategies.

AACSB: Analytic
Difficulty: Hard
Taxonomy: Synthesis
Topic: Purpose of Inventory, Independent versus Dependent Demand

1-571
Chapter 14
Material Requirements Planning


1. Describe what MRP is and where it is best applied.
2. Understand the source of the information used by the system.
3. Demonstrate how to do an MRP explosion.
4. Explain how order quantities are calculated in MRP systems.


1. MRP stands for Manufacturing Requirements Planning.
True False

2. MRP stands for Material Requirements Planning.
True False

3. All firms maintain bill of materials (BOM) files, which are simply a sequencing of
everything that goes into a final product.
True False

1-572
4. MRP is based on dependent demand.
True False

5. MRP is most valuable in industries where a number of products are made in batches using
the same productive equipment.
True False

6. The master production schedule a master production schedule, which states the number of
items to be produced during specific time periods.
True False

7. MRP is least valuable in industries where a number of products are made in batches using
True False

1-573
8. MRP is a logical, easily understandable approach to the problem of determining the number
of parts, components, and materials needed to produce each end item.
True False

9. MRP provides the schedule specifying when each part and component of an end item
should be ordered or produced.
True False

10. The deeper one looks into the product creation sequence, the more the requirements of
dependent demand items tend to become more "lumpy."
True False

dependent demand items tend to smooth out and become even over time.
True False

12. A master production schedule is an essential input to a material requirements planning
(MRP) system.
True False

13. A necessary input to the material requirements planning (MRP) system is an exception
report.
True False

14. A necessary input to the material requirements planning (MRP) system is an inventory
records file.
True False

1-574
15. An output of MRP is a bill of materials (BOM) file.
True False

16. A BOM file is often called a product structure file or product tree because it enumerates
all of the component parts of the end item product.
True False

17. Computing the quantity of each component that goes into a finished product requires
expanding (or exploding) each item in a product structure file and summing at all levels.
True False

18. A modular bill of materials includes items with fractional options.
True False

19. A modular bill of materials is the term for an item that can be produced and stocked as a
subassembly.
True False

20. The MRP program performs its analysis from the bottom up of the product structure trees,
imploding requirements level by level.
True False

21. Net change MRP systems are "activity" driven.
True False

22. In a net change MRP system requirements and schedules are updated whenever a
transaction is processed that has an impact on the item.
True False

1-575
23. In a net change MRP system requirements and schedules are considered rigid and never
updated.
True False

24. Net change MRP reflects the exact status of each item managed by the system in "real
time."
True False

25. Low level coding in MRP indicates the exact status of each item managed by the system
in "real time."
True False

26. In a net change MRP program, a change in one item will result in a completely new
inventory plan and schedule for every item in the master production schedule.
True False

27. Since MRP systems focus on batch or lot-sized orders and JIT is focused on individual
item production, the two systems are incompatible and cannot work together.
True False

28. Generally, determining lot sizes in MRP systems is simple.
True False

29. A lot-for-lot (L4L) lot sizing technique does not take into account setup costs or capacity
limitations.
True False

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30. The lot-for-lot (L4L) lot sizing technique minimizes carrying cost by taking into account
setup costs and capacity limitations.
True False

31. Lot-for-lot (L4L) is the most common lot sizing technique.
True False

32. The economic order quantity (EOQ) lot sizing technique produces or acquires exactly the
amount of product that is needed each time period with none carried over into future periods.
True False

33. The economic order quantity (EOQ) lot sizing technique uses the "square root formula" to
balance set-up cost, carrying cost and cost of stock-outs.
True False

balance set-up cost and carrying cost.
True False

35. The least total cost method (LTC) lot-sizing technique calculates the order quantity by
comparing the carrying cost and the setup (or ordering) costs for various lot sizes and then
selects the lot in which these are most nearly equal.
True False

36. The least unit cost method (LUC) lot-sizing technique calculates the order quantity by
True False

1-577
37. The least unit cost method of lot-sizing technique adds ordering and inventory carrying
cost for each trial lot size and divides by the number of units in each lot size, picking the lot
size with the lowest unit cost.
True False

38. The least unit cost method of lot-sizing technique adds ordering, stock-out and inventory
carrying cost for each trial lot size and divides by the number of units in each lot size, picking
the lot size with the lowest unit cost.
True False

39. "Projected available balance" is a term referring to unsold finished goods inventory.
True False

40. Projected available balance is the amount of inventory that is expected as of the beginning
of a period.
True False

41. The three main inputs to an MRP system are the bill of materials, the master schedule and
the inventory records file.
True False

42. Enterprise Resource Planning (ERP) evolved from Materials Requirements Planning
(MRP).
True False

43. Enterprise resource planning (ERP) is a computer system that integrates application
programs in accounting, sales, manufacturing, and the other functions in a firm.
True False

1-578
44. When implemented correctly, MRP links all areas of the business.
True False

45. ERP vendors have set new standards in information integration that can cause significant
cost to a company.
True False

46. ERP vendors have set new standards in information integration that can significantly
benefit a company.
True False

47. Materials Requirements Planning (MRP) evolved from Enterprise Resource Planning
(ERP).
True False


48. A BOM file is called which of the following?
A. Product structure tree
B. Stocking plan
C. Inventory usage record
D. Production parts plan
E. Time bucket schedule

49. Which of the following industry types has high expected benefits from the application of
MRP?
A. Fabricate-to-stock
B. Fabricate-to-order
C. Assemble-to-stock
D. Continuous process
E. Service and repair parts

1-579
MRP?
A. Fabricate-to-order
B. Hospitals
C. Assemble-to-order
D. Aircraft manufacturers
E. Oil refineries

51. Which of the following industry types will not benefit greatly from the application of
MRP?
B. Assemble-to-stock
D. Manufacture-to-order

52. A product structure tree can do which of the following?
A. Help to compute component usage
B. Reduce product scrap
C. Reduce labor overtime
D. Reduce regular time labor
E. Locate raw material supplies

53. Which of the following is an input to the master production schedule (MPS)?
A. Inventory records file
B. The aggregate plan
C. The bill of materials
D. The exception report
E. Planned order schedules

1-580
54. Which of the following is one of the main purposes of a MRP system?
A. Educate personnel in basic work rules.
B. To determine the amount of materials needed to produce each end item.
C. Stimulate the work force.
D. Decrease labor requirements.
E. Increase inventory accuracy.

55. One of the main purposes of a MRP system is which of the following?
A. Track inventory levels.
B. Create productive capacity.
C. Decrease layers of management.
D. Develop schedules specifying when each component should be ordered or produced.
E. Upgrade manufacturing's professionalism.

56. Which of the following is most closely related to the reason a firm might implement
MRP?
A. So they can order the right parts
B. So they can order parts sufficient for immediate use
C. So they can insure that parts to arrive prior to when they are needed
D. To assure appropriate quality levels
E. To keep process costs between the LCL and the UCL

57. MRP systems seek to achieve which of the following?
A. Minimize lot sizes
B. Determine the number of dependent demand items needed
C. Relieve capacity bottlenecks
D. Provide a yardstick for future improvements
E. Improve on JIT methods

1-581
58. Which of the following is an input to the master production schedule?
A. Prototype products from product development
B. Aggregate component schedule
C. Peg reports
D. Exception reports
E. Forecasts of demand from random customers

A. Bill of materials (BOM) file
B. Inventory records file
C. Exception reports
D. Planned-order schedules

60. Which of the following is an input file necessary to run an MRP system?
B. Quality management report
E. Purchasing contracts

A. Exception report
B. Computer-aided-design files
C. Inventory records file
D. Personnel files
E. Planned order schedule

62. Which of the following is not a production activity report generated by MRP?
A. Exception report
B. Planning report
C. Performance control report
E. Bill of materials report

1-582
63. In an MRP program, the program accesses the status of any file in specific periods called
A. Cubed time units
B. Time buckets
C. BOM units
D. Time modules
E. Time lines

64. Which of the following files allows us to retrace a material requirement upward in the
product structure through each level, identifying each parent item that created the demand?
A. Planning bill of materials file
B. Modular bill of materials file
C. Super bill of materials file
D. Exception report file
E. Peg record file

65. We would expect to see which of the following in an MRP system's inventory transactions
file?
A. End items produced
B. Late/early delivery records
C. Scrap parts
D. Labor efficiency
E. Computer errors

66. In a typical inventory status record which of the following would you not expect to see?
A. Scrap allowance
B. Order quantity
C. Gross requirements
D. Planned-order releases
E. Lost items

1-583
67. Which of the following is considered a primary report in an MRP system?
A. Planning reports
B. Performance reports
D. Planned order schedules
E. Cycle counting reports

68. Which of the following is considered a secondary report in an MRP system?
A. Planned order schedule
C. Inventory record
D. Firm orders from known customers
E. Engineering change reports

B. Peg report
C. Planning report
D. Inventory accuracy report
E. Aggregate production plan report

70. Which of the following is the net requirement using an MRP program if the gross
requirement is 1,250 and the inventory on hand is 50?
A. 1,200
B. 1,300
C. 1,150
D. 2,450

1-584
A. 1,000
B. 950
C. 500
D. 400
E. 350

72. Which of the following is the planned-order release using an MRP program if the gross
requirement is 5,000 and the inventory on hand is 1,200?
A. 5,000
B. 4,500
C. 3,800
D. 1,200

requirement is 670 and the inventory on hand is 600?
A. 670
B. 600
C. 530
D. 70

74. Which of the following can be used for lot sizing in an MRP system?
A. Low-level coding
B. Time bucket size
C. Least unit cost
D. Inventory record file
E. Peg inventory

1-585
75. Which of the following is not a lot sizing technique used in MRP systems?
A. Lot-for-lot (L4L)
B. Economic order quantity (EOQ)
C. Least total cost (LTC)
D. Least unit cost (LUC)
E. Warehouse loading factor (WLF)

76. Under the lot-for-lot (L4L) lot sizing technique as used in MRP, we would expect which
of the following?
A. A consistent lag of supply behind demand
B. Minimized carrying costs
C. Minimized set-up costs
D. A just in time management philosophy
E. Minimized quality problems

77. If annual demand is 6,125 units, annual holding cost is $5 per unit, and setup cost per
order is $50, which of the following is the EOQ lot size?
A. 350
B. 247
C. 230
D. 185
E. 78

A. 2,000
B. 1,200
C. 1,000
D. 300
E. 200

1-586
79. Which of the following is a dynamic lot-sizing technique that calculates the order quantity
by comparing the carrying cost and the setup (or ordering) costs for various lot sizes and then
selects the lot in which these are most nearly equal?
A. Economic Order Quantity
B. Lot for lot
C. Least total cost
D. Least unit cost
E. ABC analysis

selects the lot size in which these are most nearly equal?
A. Kanban
B. Just-in-time system
C. MRP
D. Least unit cost
E. Least total cost

81. Which of the following is a dynamic lot-sizing technique that adds ordering and inventory
the lot size with the lowest unit cost?
A. Economic order quantity
B. Lot-for-lot
C. Least total cost
D. Least unit cost
E. Inventory item averaging


82. What is the name for demand caused by the demand for a higher level item?
____________________
________________________________________

1-587
83. What is the name for a bill of materials that includes items with fractional options?
______________________
________________________________________

84. In MRP, how is demand information for a level 0 (zero) item derived?
_________________________
________________________________________

85. What is the name given to the manufacturing software that combines MRP and JIT logic?
____________________
________________________________________

86. What does it mean when a super bill of materials specifies half of a component part in an
assembly? ___________________________________________________
________________________________________

87. What is the planned-order release using an MRP program if the gross requirement is 1,600
and the inventory on hand is 600? ______
________________________________________

88. If annual demand is 1,000 units, annual holding cost is $0.50 per unit, and the cost per
order is $10, what is the EOQ? ____________
________________________________________

89. What are the three main inputs to an MRP program?
1. _______________
2. _______________
3. _______________
________________________________________

1-588
90. Demand in for an item located in level 3 of a product structure tree depends on demand
for an item in the next higher level. What is that level called? ______________
________________________________________

91. Name three major ERP software vendors.
1. _______________
2. _______________
3. _______________
________________________________________

Essay Questions

92. Discuss the importance of inventory record accuracy to an MRP system.

1-589
Chapter 14 Material Requirements Planning Answer Key


1. MRP stands for Manufacturing Requirements Planning.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: From Push to Pull and Where MRP Can Be Used

2. MRP stands for Material Requirements Planning.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

3. All firms maintain bill of materials (BOM) files, which are simply a sequencing of
everything that goes into a final product.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Material Requirements Planning System Structure and An Example Using MRP

1-590
4. MRP is based on dependent demand.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

5. MRP is most valuable in industries where a number of products are made in batches using
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

6. The master production schedule a master production schedule, which states the number of
items to be produced during specific time periods.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

7. MRP is least valuable in industries where a number of products are made in batches using
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-591
8. MRP is a logical, easily understandable approach to the problem of determining the number
of parts, components, and materials needed to produce each end item.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

9. MRP provides the schedule specifying when each part and component of an end item
should be ordered or produced.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

dependent demand items tend to become more "lumpy."
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

dependent demand items tend to smooth out and become even over time.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-592
12. A master production schedule is an essential input to a material requirements planning
(MRP) system.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

13. A necessary input to the material requirements planning (MRP) system is an exception
report.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

14. A necessary input to the material requirements planning (MRP) system is an inventory
records file.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

15. An output of MRP is a bill of materials (BOM) file.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-593
16. A BOM file is often called a product structure file or product tree because it enumerates
all of the component parts of the end item product.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

17. Computing the quantity of each component that goes into a finished product requires
expanding (or exploding) each item in a product structure file and summing at all levels.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: An Example Using MRP

18. A modular bill of materials includes items with fractional options.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

19. A modular bill of materials is the term for an item that can be produced and stocked as a
subassembly.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-594
20. The MRP program performs its analysis from the bottom up of the product structure trees,
imploding requirements level by level.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

21. Net change MRP systems are "activity" driven.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-595
22. In a net change MRP system requirements and schedules are updated whenever a
transaction is processed that has an impact on the item.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

23. In a net change MRP system requirements and schedules are considered rigid and never
updated.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

24. Net change MRP reflects the exact status of each item managed by the system in "real
time."
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

25. Low level coding in MRP indicates the exact status of each item managed by the system
in "real time."
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-596
26. In a net change MRP program, a change in one item will result in a completely new
inventory plan and schedule for every item in the master production schedule.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

27. Since MRP systems focus on batch or lot-sized orders and JIT is focused on individual
item production, the two systems are incompatible and cannot work together.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge
Topic: Lot Sizing in MRP Systems

28. Generally, determining lot sizes in MRP systems is simple.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

29. A lot-for-lot (L4L) lot sizing technique does not take into account setup costs or capacity
limitations.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-597
30. The lot-for-lot (L4L) lot sizing technique minimizes carrying cost by taking into account
setup costs and capacity limitations.
FALSE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

31. Lot-for-lot (L4L) is the most common lot sizing technique.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

32. The economic order quantity (EOQ) lot sizing technique produces or acquires exactly the
amount of product that is needed each time period with none carried over into future periods.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

balance set-up cost, carrying cost and cost of stock-outs.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-598
balance set-up cost and carrying cost.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

35. The least total cost method (LTC) lot-sizing technique calculates the order quantity by
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

36. The least unit cost method (LUC) lot-sizing technique calculates the order quantity by
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-599
37. The least unit cost method of lot-sizing technique adds ordering and inventory carrying
cost for each trial lot size and divides by the number of units in each lot size, picking the lot
size with the lowest unit cost.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

38. The least unit cost method of lot-sizing technique adds ordering, stock-out and inventory
the lot size with the lowest unit cost.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

39. "Projected available balance" is a term referring to unsold finished goods inventory.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

40. Projected available balance is the amount of inventory that is expected as of the beginning
of a period.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-600
41. The three main inputs to an MRP system are the bill of materials, the master schedule and
the inventory records file.
TRUE

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

42. Enterprise Resource Planning (ERP) evolved from Materials Requirements Planning
(MRP).
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

43. Enterprise resource planning (ERP) is a computer system that integrates application
programs in accounting, sales, manufacturing, and the other functions in a firm.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

44. When implemented correctly, MRP links all areas of the business.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-601
45. ERP vendors have set new standards in information integration that can cause significant
cost to a company.
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

46. ERP vendors have set new standards in information integration that can significantly
benefit a company.
TRUE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

47. Materials Requirements Planning (MRP) evolved from Enterprise Resource Planning
(ERP).
FALSE

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-602

48. A BOM file is called which of the following?
A. Product structure tree
B. Stocking plan
C. Inventory usage record
D. Production parts plan
E. Time bucket schedule

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

MRP?
A. Fabricate-to-stock
B. Fabricate-to-order
C. Assemble-to-stock
D. Continuous process
E. Service and repair parts

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

MRP?
B. Hospitals
D. Aircraft manufacturers
E. Oil refineries

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-603
51. Which of the following industry types will not benefit greatly from the application of
MRP?
B. Assemble-to-stock
D. Manufacture-to-order

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

52. A product structure tree can do which of the following?
A. Help to compute component usage
B. Reduce product scrap
C. Reduce labor overtime
D. Reduce regular time labor
E. Locate raw material supplies

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

53. Which of the following is an input to the master production schedule (MPS)?
A. Inventory records file
B. The aggregate plan
C. The bill of materials
D. The exception report
E. Planned order schedules

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-604
54. Which of the following is one of the main purposes of a MRP system?
A. Educate personnel in basic work rules.
B. To determine the amount of materials needed to produce each end item.
C. Stimulate the work force.
D. Decrease labor requirements.
E. Increase inventory accuracy.

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

55. One of the main purposes of a MRP system is which of the following?
A. Track inventory levels.
B. Create productive capacity.
C. Decrease layers of management.
D. Develop schedules specifying when each component should be ordered or produced.
E. Upgrade manufacturing's professionalism.

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

56. Which of the following is most closely related to the reason a firm might implement
MRP?
A. So they can order the right parts
B. So they can order parts sufficient for immediate use
C. So they can insure that parts to arrive prior to when they are needed
D. To assure appropriate quality levels
E. To keep process costs between the LCL and the UCL

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-605
57. MRP systems seek to achieve which of the following?
A. Minimize lot sizes
B. Determine the number of dependent demand items needed
C. Relieve capacity bottlenecks
D. Provide a yardstick for future improvements
E. Improve on JIT methods

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. Prototype products from product development
B. Aggregate component schedule
C. Peg reports
D. Exception reports
E. Forecasts of demand from random customers

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

B. Inventory records file

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-606
B. Quality management report
E. Purchasing contracts

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. Exception report
B. Computer-aided-design files
C. Inventory records file
D. Personnel files
E. Planned order schedule

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

62. Which of the following is not a production activity report generated by MRP?
A. Exception report
B. Planning report
C. Performance control report
E. Bill of materials report

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-607
63. In an MRP program, the program accesses the status of any file in specific periods called
A. Cubed time units
B. Time buckets
C. BOM units
D. Time modules
E. Time lines

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

64. Which of the following files allows us to retrace a material requirement upward in the
product structure through each level, identifying each parent item that created the demand?
A. Planning bill of materials file
B. Modular bill of materials file
C. Super bill of materials file
D. Exception report file
E. Peg record file

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

65. We would expect to see which of the following in an MRP system's inventory transactions
file?
A. End items produced
B. Late/early delivery records
C. Scrap parts
D. Labor efficiency
E. Computer errors

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-608
66. In a typical inventory status record which of the following would you not expect to see?
A. Scrap allowance
B. Order quantity
C. Gross requirements
D. Planned-order releases
E. Lost items

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

A. Planning reports
D. Planned order schedules
E. Cycle counting reports

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

68. Which of the following is considered a secondary report in an MRP system?
C. Inventory record
D. Firm orders from known customers
E. Engineering change reports

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-609
B. Peg report
C. Planning report
D. Inventory accuracy report
E. Aggregate production plan report

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. 1,200
B. 1,300
C. 1,150
D. 2,450

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

A. 1,000
B. 950
C. 500
D. 400
E. 350

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-610
requirement is 5,000 and the inventory on hand is 1,200?
A. 5,000
B. 4,500
C. 3,800
D. 1,200

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

requirement is 670 and the inventory on hand is 600?
A. 670
B. 600
C. 530
D. 70

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

74. Which of the following can be used for lot sizing in an MRP system?
A. Low-level coding
B. Time bucket size
C. Least unit cost
D. Inventory record file
E. Peg inventory

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

1-611
75. Which of the following is not a lot sizing technique used in MRP systems?
A. Lot-for-lot (L4L)
B. Economic order quantity (EOQ)
C. Least total cost (LTC)
D. Least unit cost (LUC)
E. Warehouse loading factor (WLF)

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

76. Under the lot-for-lot (L4L) lot sizing technique as used in MRP, we would expect which
of the following?
A. A consistent lag of supply behind demand
B. Minimized carrying costs
C. Minimized set-up costs
D. A just in time management philosophy
E. Minimized quality problems

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

A. 350
B. 247
C. 230
D. 185
E. 78

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

1-612
A. 2,000
B. 1,200
C. 1,000
D. 300
E. 200

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

selects the lot in which these are most nearly equal?
A. Economic Order Quantity
B. Lot for lot
C. Least total cost
D. Least unit cost
E. ABC analysis

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-613
selects the lot size in which these are most nearly equal?
A. Kanban
B. Just-in-time system
C. MRP
D. Least unit cost
E. Least total cost

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

81. Which of the following is a dynamic lot-sizing technique that adds ordering and inventory
the lot size with the lowest unit cost?
A. Economic order quantity
B. Lot-for-lot
C. Least total cost
D. Least unit cost
E. Inventory item averaging

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge


82. What is the name for demand caused by the demand for a higher level item?
____________________
Dependent demand

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-614
83. What is the name for a bill of materials that includes items with fractional options?
______________________
Super bill of materials

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

84. In MRP, how is demand information for a level 0 (zero) item derived?
_________________________
From the master production scheduling process

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

85. What is the name given to the manufacturing software that combines MRP and JIT logic?
____________________
Flow management

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

86. What does it mean when a super bill of materials specifies half of a component part in an
assembly? ___________________________________________________
It means that 50% of the units assembled will include that component and 50% will not.

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

1-615
87. What is the planned-order release using an MRP program if the gross requirement is 1,600
and the inventory on hand is 600? ______
1,000

AACSB: Analytic
Difficulty: Easy
Taxonomy: Analysis

88. If annual demand is 1,000 units, annual holding cost is $0.50 per unit, and the cost per
order is $10, what is the EOQ? ____________
200

AACSB: Analytic
Difficulty: Medium
Taxonomy: Analysis

89. What are the three main inputs to an MRP program?
1. _______________
2. _______________
3. _______________
1. Bill of materials 2. Master schedule 3. Inventory records file

AACSB: Analytic
Difficulty: Medium
Taxonomy: Knowledge

90. Demand in for an item located in level 3 of a product structure tree depends on demand
for an item in the next higher level. What is that level called? ______________
Level 2

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

1-616
91. Name three major ERP software vendors.
1. _______________
2. _______________
3. _______________
1. Oracle 2. SAP 3. i2 Technologies

AACSB: Analytic
Difficulty: Easy
Taxonomy: Knowledge

Essay Questions

92. Discuss the importance of inventory record accuracy to an MRP system.
A satisfactory answer to this question will require the student to extrapolate from Chapter 13,
page 412-14 into the MRP context. The discussion in Chapter 13 essentially assumes the
perfection of inventory (and bill of material) records. However, the discussion in Chapter 13
indicates that perfect agreement between the computer files and actual storeroom content may
be rare instead of common. Inaccurate inventory records may cause, for example, orders of
excess inventory or for assembly to be scheduled even though there is an inadequate supply of
components to support that assembly. Either occurrence can cause significant waste of
resources, time and money. No MRP system can deliver positive results when the basic input
data is faulty. A good way to summarize this is the old adage "garbage-in, garbage-out."

AACSB: Analytic
Difficulty: Medium
Taxonomy: Synthesis

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Chapter 01 - Operations and Supply Chain Management

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