Warren presented three different alternatives for dealing with supply chain uncertainties. They are: to utilize vertical integration, carry more inventory, and form better relationships with suppliers. To which alternative does each of the following risks and benefits apply?
Let's see how well you answered the questions.
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Large capital risk. |
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Your Answer:
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Correct Answer: Vertical integration |
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Buying a book wholesaler would involve a considerable capital investment which would carry a great deal of risk if, for example, authors start selling directly to customers. |
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Possibility of obsolete or unsellable inventory. |
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Your Answer:
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Correct Answer: Carry more inventory |
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Even in the book industry where publishers will buy back much of the unused inventory, there are still items they will not buy back. There are also additional shipping costs. Further, there is increased risk of loss or theft. |
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3. |
Reduced cash flow from inventory investments. |
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Your Answer:
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Correct Answer: Carry more inventory |
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Money invested in inventory is cash that is tied up and not generating a return. This reduces cash flow and may put the company in jeopardy. |
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4. |
Risk of a partner's business failure. |
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Your Answer:
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Correct Answer: Closer relationships with suppliers |
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There are certain risks associated with forging closer relationships with a reduced number of suppliers. There is the possibility that a key supplier might experience a labor strike (as has happened in the auto industry), suffer financial difficulties, or even go out of business. With an exclusive deal, CanGo's fate would be closely tied to that of its wholesaler. |
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5. |
Possible antitrust scrutiny from the government. |
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Your Answer:
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Correct Answer: Vertical integration |
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Anti-trust considerations are what doomed the Barnes & Noble buyout of Ingram, a book wholesaler. Although CanGo is much smaller than Barnes & Noble, the purchase of a wholesaler could still bring unwanted scrutiny. |
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6. |
Potential for a partner to become a competitor. |
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Your Answer:
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Correct Answer: Closer relationships with suppliers |
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Sometimes suppliers that work closely with a company can gain enough knowledge about the company's business to become a potential competitor. In the Introductory Video, Warren mentioned the possibility of wholesalers starting their own retail Web sites. |
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© 2002 by Prentice-Hall, Inc.
