||Jai Sri Gurudev||

SJC Institute of Technology

Supply Chain Management
Module 4 Questions and answers
1 Explain supply chain Network optimization model
 During this phase, manager considers regional demand, tariffs, economies of scale, and aggregated
factor costs to decide the regions where facilities are to be located.
 During phase II, the manager must consider these quantifiable trade-offs along with nonquantifiable
factors such as the competitive environment and political risk
 Network optimization models are useful for managers considering regional configuration during phase
II.
 Allocation demand to production facilities
 Locating facilities and allocating capacity.
Key costs
Fixed facility costs
Transportation costs
Production costs
Inventory costs
Coordination costs

Demand allocation model

2 Explain impact of uncertainty on Network Design.
 Supply chain design decisions include investments in number and size of plants, number of
trucks, number of warehouses.
 These decisions cannot be easily changed in the short-term exchange rate and the competitive
market over the life time of supply chain network.
 Therefore, building flexibility into supply chain operations allows the supply chain to deal with
uncertainty in a manner that will maximize profits.
3 Explain Network Design decisions using Decision tree.
 A manager must make many different decisions when designing a supply chain network
 Many of them involve a choice between a long-term (or less flexible) option and a short-term(or
more flexible) option.
 If uncertainty is ignored, the long-term option will almost always be selected because it is
typically cheaper
 Such a decision can eventually hurt the firm, however, because actual fut ure prices or demand
may be different from what was forecasted at the time of the decision.
 A decision tree is a graphic device that can be used to evaluate decisions under uncertainty.

Decisions Tree Methodology:

 Identify the duration of each period (month, quarter, etc..) and the number of periods T
over the which the decision is to be evaluated.
 Identify factors such as demand, price, and exchange rate, whose fluctuation will be
considered over the next T periods.
 Identify representations of uncertainty for each factor, that is, what distribution to use to
model the uncertainty.
 Identify the periodic discount rate K for each period.
 Represent the decision tree with defined states in each period, as well as the transition
probabilities between states in successive periods.
 Starting at period T, work back to period 0, identifying the optimal decision and the
expected cash flows at each step. Expected cash flows at each state in a given period
should be discounted back when included in the previous period.
4 Explain multiple item multiple location inventory management.
Or
Explain the ABC and VED analysis
 Managing the inventory in a supply chain involves dealing with a large number of items, often
stocked at multiple stock points at various stages in the supply chain.
 So far we have only looked at the problem of managing inventory for a single item at a single
stock point.
 Complex supply chain is decomposed into multiple decision-making units managing individual
stock points, which in turn connect various production and transportation activities within a chain.
 For each stock point, one can identify relevant supply and demand.
 supply improvement involves working on structure, improving supply chain integration and
simultaneously optimizing performance of individual stock point.
 Supply chain manager cannot be expected to focus on all items with the same energy and time
because he or she has limited resources and the energy to spent all on the items do not result in
the same kind of benefits.

ABC Classification: Items are classified into three categories based on the value of the consumption. A-
category items contribute significantly to the value of inventory and consumption and are controlled
tightly and get more managerial attention

A: very important
B: moderate important
C: little Importance
FSN Classification: Items are classified based on volume of usage: fast moving (F), slow moving (S)
and non-moving (N). Fast-moving items are usually stocked in a decentralized fashion while slow-
moving items are stocked centrally. Non-moving items are candidates for disposal and the firm will like
to make sure that non-moving items do not take up significant share of inventory investment.

VED Classification: Items are based on criticality: vital (V) essential (E) and desirable (D). This
classification is quite popular in maintained management. Based on the VED Classification one can fix
different service levels for different items. A firm prefers to work with a very high service level for V
category.

5 Explain Pricing and revenue management

Pricing is an important lever to increase supply chain profits by better matching supply
and demand, especially when there are multiple customer types willing to pay different prices for an
asset. Revenue management is the use of pricing to increase the supply chain surplus and profit
generated from a limited availability of supply chain assets. Supply chain assets exist in two forms
capacity and inventory. Capacity assets in the supply chain exist for production, transportation, and
storage. Inventory assets exist throughout the supply chain and are carried to improve product
availability. In the presence of multiple customer types. Revenue management aims to grow profits by
selling the right asset to the right customer at the right price. Besides varying capacity and inventory,
revenue management suggests varying price to grow profits by better matching supply and demand.

Using revenue management, however, the firm could do much more as long as there are
customers whose willingness to pay varies with some dimension of the service such as response time.
One approach is to change a lower price to customers willing to commit their orders far
in advance and higher price to customers looking for transportation capacity at the last minute.
Another approach is to change a lower price to customers with long-term contracts and a
higher price to customers looking to purchase capacity at the last minute.
A third approach is to charge a higher price during periods of high demand and lower price during
periods of low demand.
revenue management may also be define as the use of differential pricing based on customer
segment, time of use, and product or capacity availability to increase supply chain surplus and profits.
The impact of revenue management on supply chain performance can be significant.
Revenue management adjusts the pricing and available supply of assets and has a significant
impact on supply chain profitability when one or more of the following four conditions exist.
1. The value of the product varies in different market segments.
2. The product is highly perishable or product wastage occurs.
3. Demand has seasonal and other peaks.
4. The product is sold both in bulk and on the spot market.

Airline seats are good example of a product whose value varies by market segment. A
business traveler is willing to pay a higher fare for a flight that matches his or her schedule. In contrast a
leisure traveler will often alter his or her schedule to get a lower fare. An airline that can extract a higher
price from the business traveler compared to the leisure traveler will always do better than airline that
charges the same price for all traveler.

Fashion and seasonal apparel are examples of highly perishable products because they lose value
over time. Customers typically value high-fashion apparel more at the start of the season because they
want to be the first people seen wearing it. By the end of the season, customers are willing to buy the
product only if it is deeply discounted. Similarly, production, storage, and transportation capacity loses
all value if it is not used at a given time because the lost capacity cannot be recovered. All capacity is a
highly perishable asset. the goal of Revenue management in a such a setting is to adjust the price over
time to maximize the profit obtained from the available inventory or capacity.

Demand for hotel rooms in many tourist destinations shows a highly seasonal pattern. For
example resorts in phuket, Thailand, charge a significant lower rate during the off-season summer
months compared to the peak winter months. Such a pricing pattern allows them to attract customers with
some time flexibility during the lower-cost summer months, leaving the winter capacity for customers
 who are willing to pay more to enjoy phuket in the winter. It is important to keep in mind that differential
pricing for peak and off-peak periods increases profits in a manner that is consistent with customer
priorities. In the obscene of peak pricing, peak periods, being the most desirable, would have excess
demand, whereas off peak periods would have significant idle capacity. With differential pricing,
customers who really value the peak period would pay the higher price. Whereas those that were not time
constrained would shift to the off-peak period take advantage of lower prices.

Every product and every unit of capacity can be sold both in bulk and in the spot market.
For example, the owner of a warehouse must decide whether to lease the entire warehouse to customer
willing to sign long-term contracts or to save apportion of the warehouse for use in the spot market. The
long term contract is more secure but typically fetches a lower average price then the unpredictable spot
market. Revenue management increases profits by finding the right portfolio of long-term and spot-
market customers.

Revenue management can be a power full tool for every owner of assets in a supply chain.
Owners of any form of capacity can use revenue management if there is seasonal demand or if there are
segments that are willing to pay different prices for different lead times to use the capacity. revenue
management can be effective if a segment wants to use capacity at the last minute and is willing to pay a
higher price for this privilege, and another segment wants a lower price and is willing to commit far in
advance. Revenue management is essential for owners of any perishable inventory. Most successful
examples of the use of revenue management are from the travel and hospitality industry and include
airlines.

6 Explain Pricing and revenue management tactics used for perishable assets.

Any assets that lose value over time is perishable. Fruits, vegetables and pharmaceuticals are
perishable. This list also includes products such as computers and cell phones that lose value as new
models are introduced. High-fashion apparel is perishable it cannot be sold at full price once the season is
past. Perishable assets also include all forms of production, Transportation and storage capacity that is
wasted if not fully utilized. Unused capacity from the past has no value.

The two revenue management tactics used for perishable assets are
1 vary price dynamically over time to maximize expected revenue.
2 Overbook sales of the assets to account for cancellation.

Dynamic pricing:
The tactic of varying price over time, is suitable for assets such as fashion apparel that have a clear
date beyond which they lose a lot of their value. Apparel designed for the winter does not have much
value by April. A retailer that has purchased 100 ski jackets in October has many options with regard to
its pricing strategy. It can charge a high price initially. This strategy will result in fewer sales early in the
season (through at a higher price), leaving more jackets to be sold latter during the season, when they
have lower value to customers. Another option is to charge a lower price initially. Selling more jackets in
the season and laving fewer jackets to be sold at a discount. This trade-off determines the profit for the
retailer. To vary price effectively over time for a perishable asset. The asset owner must be able to
estimate the value of the asset over time and forecast the impact of price on customer demand effectively.
Effective deferential pricing over time generally increases the level of product availability for the
consumer willing to pay full price and also increases total profits for the retailers.

Overbooking:
The tactics of overbooking or overselling of the available assets is suitable in any situation in which
customers are able to cancel orders and the value of the asset drops significantly after a deadline.
Examples include airline seats, items designed specially for Christmas, and production capacity in each
case. A limited amount of the asset is available; customers are allowed to cancel orders. And the asset
loses value beyond a certain date. If the cancelation or the return rate can be predicted accurately, the
overbooking level is easy to determine. In practice, however, the cancelation or return rate is uncertain.
The basic trade-off to consider during overbooking is between having wasted capacity because of
excessive cancellations or having a shortage of capacity because of few cancelations, in which case an
expensive backup needs to be arranged. The cost of wasted capacity is the margin that would have been
generated if the capacity had been used for production. The cost of the capacity shortage is the loss per
unit that results from having to go to a backup source. the goal when making the overbooking decision is
to maximize supply chain profits by minimizing the cost of wasted capacity and the cost of capacity
shortage.