Use This Information for Question That Refer to the United

question 161

Multiple Choice

Use this information for question that refer to the United Tools case. Terry Harter is marketing manager for United Tools and Mike O'Reilly is the firm's logistics manager. They work together to make decisions about how to get United's hand and power tools to its customers-a mix of manufacturing plants and final consumers (who buy United tools at a hardware store) . United Tools does not own its own transport facilities and it works with wholesalers to reach its business customers.
Together, Harter and O'Reilly try to coordinate transporting, storing, and product handling activities to minimize cost while still achieving the customer service level their customers and intermediaries want. This usually requires that United keep an inventory of most of its products on hand, but demand for its products is fairly consistent over time so inventory is easy to manage.
Harter has identified four options for physical distribution systems she could use to reach two of her key wholesalers, Ralston Supply and Ricotta Tool Co. The total cost for each option-and the distribution service levels that can be achieved-are as follows: $\begin{array}{c}\begin{array}{lll}\mathbf { \text {Main feature of system:}}\\ \text {1. Airfreight}\\ \text {2. Inland waterways}\\ \text {3. Trucks}\\ \text {4. Rail and regional }\\\text {warehouses}\end{array}\begin{array}{r}\text { Total Cost } \\\$ 1,000,000 \\\$ 300,000 \\\$ 500,000 \\\$ 650,000\\\\\end{array}\begin{array}{c}\text { Distribution Service Level}\\\text { 95 percent }\\\text { 60 percent }\\\text { 70 percent }\\\text { 80 percent}\\\\\end{array}\end{array}$
Ralston Supply expects a very high level (90 percent) of distribution customer service. Ricotta Tool Co. is willing to settle for a 70 percent customer service level, even if that means some products will occasionally be out of stock, if it gets products at a lower price.
For its large retail hardware customers (like Home Depot) , United regularly ships smaller orders directly to individual stores or in some cases to the retail chain's warehouses. Cross-country shipments usually go by rail while regional shipments usually go by truck.
Which physical distribution system should Harter choose for Ricotta Tool Co.?

• A) Airfreight
• B) Inland waterways
• C) Truck
• D) Rail and warehouse
• E) Cannot be determined without more information

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Definitions:

Credit Sales

Sales made by a business where payment is delayed as agreed by both the seller and the buyer.

Spontaneous Financing

Financing that occurs automatically as a firm's operating activities increase, such as trade credit.

Trade Payables

Amounts owed by a company to its suppliers or vendors for goods and services received but not yet paid for.

Revolving Credit Agreement

A credit arrangement that allows a borrower to withdraw, repay, and re-borrow funds up to a specified limit over a set period.