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Chapter 2 Test Questions
2.3.1 Wriston Manufacturing Corporation operates several plants with large differences in overhead rates. The Detroit plant has the highest overhead rate—more than twice the rate of the lowest overhead plant, Maysville. As a result, the corporation is considering closing down Detroit and transferring its production to a lower overhead facility such as Maysville.
What will be the effect of transferring the entire production of Detroit to Maysville and why? (Assume capacity is not an issue)
We know that overhead burden rates are driven (1) favorably by scale economies (i.e. volume) and (2) unfavorably by complexity (i.e. set-ups,..)
Transferring to Maysville will hardly impact volume but seriously impact complexity. As a consequence, overheads at Maysville will increase.
Because of Detroit’s focus on complexity and Maysville focus on volume, the deterioration of Maysville overhead will be worse than the gain at Detroit.
2.3.2 Sustaining competitive advantage requires strategic positioning and operational effectiveness. Define both concepts and graphically illustrate their difference using the competitive space graph.
Strategic positioning = from a firm’s current position, defining a relative ranking/importance of the competitive priorities (p, t, var, Q) that the company should focus on. This defines a direction for evolution (improvement) in the competitive space (dotted line)
Operational effectiveness = being excellent at what you do = have a current position on the current frontier.
Illustrate:
2.3.3 The Lancaster &York Distribution Company is a regional, full line, distributor of parts, tools and supplies used by maintenance personnel. The company maintains a catalogue of 75,000 odd active SKUs (items). Orders are taken over the phone and shipped by UPS out of the warehouse within a day. The company carries a full line of products—everything a maintenance operation may require. Its motto is: ”Everything you need for maintenance is only a phone call away—within a day.”
The company considers the individual maintenance supervisor, rather than the corporate purchasing department, as its customer. L & Y’s prices are relatively high—you can get almost anything they sell as much as 30% lower if you shopped around. They do not give any discounts from published list price. Their largest customer accounts for less than one tenth of one percent of their total business. L & Y has not been certified as a preferred supplier by any of its customers and it typically is not the primary supplier of a given item to a given company. The typical order is for two to six items, at a combined order value of $20 to $350. Many orders involve either an emergency situation where a particular item is needed right away, or a small $-value order where the major factor is the convenience of the maintenance supervisor who can get a complete order taken care of by just one telephone call.
The annual volume of an average item carried by L&Y is about 200 units, with some slow moving items selling as few as 10 units a year. The company enjoys a superior reputation for service, product quality and delivery (99% of all orders are sent complete within a day). The company has been consistently very profitable, but growth has been modest. The company is privately held.
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