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Supply Chain Network Design GMBA May 16 Intake

Individual Assignment
Brief Sample Answers
Question 1.
Your company operates a chain of speciality ice cream shops. As the
number of flavours increases, each shop is forced to carry more inventory,
and this is becoming a real problem in the small shops. Current practice is
to make 10 litre buckets of ice cream in each flavour on a regular
production schedule, in the factory. Shops then order the buckets on a
weekly cycle, with target inventories set to ensure that they have enough
stock for the following week.
Currently a typical shop carries 16 different flavours. Average demand for
each flavour is about 95 litres per week, with a standard deviation of 17
litres. How much stock of each flavour would they need at the start of
each week, so that they could maintain a 95% service level? What would
be the total inventory of all flavours?
You have just been offered a special mixer, designed to add flavour to the
ice cream in the shops. This would mean that the company would produce
only the unflavoured ice cream at the factory and ship it to the shops on a
weekly cycle. Each shop could then mix a ten litre bucket of each flavour,
as required during the following week.
How much total stock of all flavours would they need at the start of the
week with the proposed system?
Ans 1
For one flavour:
dw = 95 litres
= 17 litres
for 95% CSL, z = 1.65
For one week, to have 95% probability of meeting demand (95% service
level), required stock of one flavour
= average demand + safety stock
= Ld + z L
= 1*95 + 1.65*17*1
= 95 + 28.05
= 123 litres
Thus total inventory of all flavours = 16* 123 = 1968 litres
Alternatively, if you decide to work in units of 10 litre buckets, then the
required inventory of each flavour would be 13 buckets and the total for all
flavours would be 208 buckets.
If ice cream can have the flavour mixed in at the shop, then total demand
for all flavours
= 16* 95 = 1520 litres per week.
St dev = 17* 16 = 68 litres

Thus inventory at start of week = av demand + safety stock = Ld + z L


= 1520 + 1.65*68*1 = 1520 + 112 = 1632 litres or 164 buckets.

Question 2.
Your company serves snack foods at major sporting events. You have
estimated the sales of meat pies at this weeks football match at 2400
pies (mean estimate), with a standard deviation of 437 pies.
The pies are supplied in boxes of 24 pies at a cost of $29 per box. The
selling price is $5.50 per pie. Because there are no freezers available at
the football stadium, any pies left over after the match are given (at no
charge) to a charity, for immediate distribution at a shelter for homeless
people.
How many boxes of pies should you order to maximise your profit?
The manager of the charity has approached you and explained that she
now has funding to buy surplus pies at $10 a box. Does this change your
decision?
The manager of the charity has asked you if you are likely to have pies left
over, and if so, how many boxes. What would you tell her?
Ans 2.
Expected demand = 2400 pies
St dev of demand = 437 pies
Cost = $29/ 24 = $1.21
Selling price = $5.50
Cu = 5.5 1.21 = 4.29
Co = 1.21
Therefore CSL (critical fractile) = Cu/(Cu+Co) = 4.29/ (4.29+1.21) =
4.29/5.5 = 0.78
For CSL = 0.78, z = 0.77
Therefore recommended order = expected demand plus safety stock =
2400 + 0.77*437
= 2400 + 336 = 2736 pies or 114 boxes.
Note that if you work in boxes rather than in pies, you might get a small
rounding error compared to this answer.
Question 3.
An importer of building hardware (door handles, locks, handrails etc.) is
concerned about the costs of distribution within Australia. Most of the
stock is imported from China, with a small percentage imported from
Korea. The company serves the east coast of Australia from a warehouse
(DC) in the western suburbs of Sydney. The annual costs of operating the
DC are estimated at $13 million per annum. An additional $4.8 million is
spent on transport to smaller warehouses in Brisbane and Melbourne.
These small warehouses do not normally hold stock, but simply handle a
cross-docking operation, unloading the large trucks as soon as they arrive
from Sydney and loading the boxes of hardware into smaller vans for
delivery to customers. The Melbourne warehouse costs about $2.7 million
per annum to operate, and the Brisbane warehouse costs about $2.1
million. Local delivery costs from the Sydney warehouse to the local area

total $2.3 million, from Melbourne the cost is $2.1 million and from
Brisbane, the cost is $1.9 million.
The manager thinks it could be cheaper to import direct into warehouses
in Melbourne and Brisbane, rather than trans-ship via Sydney. You have
estimated the following changes in costs:
Sydney warehouse costs would be reduced to $6 million per annum
Brisbane costs would be increased to $3.9 million
Melbourne costs would be increased to $5.1 million
Transport costs Sydney to Brisbane and Sydney to Melbourne would be
eliminated.
Delivery costs within the local areas of Sydney, Melbourne and Brisbane
would be unchanged.
What would you recommend?
What other factors should the manager consider before deciding whether
or not to change his distribution system? Provide a simple list of the four
or five most important factors.
Ans 3.
Assumption: Costs of shipping from China to Syd, Mel and Bris are the
same, so sea transport costs will not change.
Compare costs:
Item
Sydney DC
Transport to Mel and
Bris
Melbourne Whse
Brisbane Whse
Syd Local delivery
Mel local delivery
Bris local delivery
Totals

Current cost
(millions)
$13
$4.8

Cost of proposed
system (millions)
$6
$0

$2.7
$2.1
$2.3
$2.1
$1.9
$29

$5.1
$3.9
$2.3
$2.1
$1.9
$21

Based on these figures, it would be best to ship direct into all three cities,
Sydney, Melbourne and Brisbane and eliminate transport costs between
these cities.
Other

factors to consider:
Availability of suitable warehouse space in Melbourne and Brisbane
Availability of a smaller warehouse in Sydney
How easy is it to eliminate transport between Sydney, Mel and Bris?
Is this done by contractors (easy to discontinue) or in company
vehicles with employed drivers (cost of redundancies for drivers,
loss on sale of trucks etc)?
What are the implications for staff (redundancies in Sydney, new
staff needed in Melbourne and Brisbane)?

Question 4.
A manufacturing process involves four steps which must be done in the
correct order. Times for each step are:
Step

Time
taken per
item
(seconds)

Time taken per


batch of 10
items
(seconds)

Step 1

60

600

Step 2

72

720

Step 3

66

660

Step 4

60

600

a. What is the throughput time, for the first batch?


b. What is the cycle time?
c. What is the bottleneck process?
You have found that work in progress is building up in the system,
especially between steps 1 and 2. As a result, the throughput time is
increasing. To improve this, you have decided to move the process closer
together, eliminate batches and send items through the process one at a
time. The final change will be to implement a strict two bin kanban
system. What is the work in progress you would expect in such a system?
What is the new throughput time you would expect? What is the cycle
time?
Ans 4.
a. Throughput time for the first batch = 2580 seconds or 43 minutes
b. Cycle time = 720 seconds or 12 minutes (the time of the slowest
process).
c. The bottleneck process is Step 2 (the slowest process).
When the process settles down in the new arrangement, at step 1 and the
kanban between 1 and 2, there will be two items (one in the Kanban and
the other being processed in step 1 or in the kanban). Each item will spend
72*2 = 144 seconds in step 1 and the kanban.
At step 2, There will be one item being worked on at all times. This is the
bottleneck. Each item will spend 72 seconds here.
The kanban between 2 and 3 will be empty because the item will be taken
for step 3 as soon as it is placed there. The same applies to the kanban
between 3 and 4.
Items will spend 66 seconds in step 3 followed immediately by another 60
seconds in step 4. However items will only become available to work on,
every 72 seconds (fixed by the time in the bottleneck process).
Thus the throughput time = 144+72+66+60 = 342 seconds
Cycle time = 72 seconds
Average WIP = 342/72 = 4.75 items

Question 5.
In the EGAD case (discussed in class, and copied below), You have just
been told that the subcontractor has refused to accept any more orders.
Your marketing manager has heard that he is planning to enter the market
with his own brand. She has now revised her demand forecasts,
anticipating extra competition starting in April. With an alternative supplier
available locally, the customers are not going to wait for delivery, so you
cannot rely on backorders. Prepare a level production plan and an
intermediate plan. Which would you recommend?
The new demand forecast is:
Month

Jan

Feb

Mar

Apr

May

Jun

Total

Forecas
t

50

60

70

80

70

70

400

Case Study: Aggregate Planning - Eight Glasses A Day (EGAD)


The EGAD Bottling Company has recently expanded its bottled spring water operations to
include several new flavors. Marketing manager Georgianna Mercer is predicting an upturn
in demand based on the new offerings and the increased public awareness of the health
benefits of drinking more water. She has prepared an aggregate forecast for the next six
months, as shown in the following table. Note that the units are tank loads.
Month

Jan

Feb

Mar

Apr

May

Jun

Total

Forecast

50

60

70

90

80

70

420

Other information been provided by the production manager as follow:


Regular production cost

$10 per unit

Regular production capacity

60 units

Overtime production cost

$16 per unit

Subcontracting cost

$18 per unit

Holding cost

$2 per unit per month

Back-ordering cost

$50 per month per unit

Beginning inventory

0 units

Ans 5.
Not available