2001022

Gayathri Mansingh

Institute of Public Enterprise

Answer in about 200 words. Use examples where ever possible.

1. A distributor has heard that one of the major manufacturers from which it buys is considering going
direct to the consumer. What can the distributor do about this? What advantages can it offer the
manufacturer that the manufacturer is unlikely to be able to reproduce?
The advantage of a distributor is that it can provide modest amounts and a wide choice of products at the same
time. A distributor can also provide a display room environment where customers can visit and experience
the product before purchasing it if the product is retail. This can only be replicated by the manufacturer if he
also acts as the distributor. As a result, the distributor and the manufacturer can agree that if the manufacturer
goes straight to a few consumers without compensating the distributor for supplying the products, the
distributor will cease to provide the foregoing services to all customers.

2. Consider a firm such as Ford, with more than 150 facilities worldwide. List the pros and cons of
having many facilities and why it may or may not be suitable for the automobile industry.
PROS CONS
• Having many sites reduces response • The transportation of parts must be
time, aids in the establishment of better done with extreme precision.
client relationships, and improves the Otherwise, the entire production
brand's positioning. When industry- process, which follows a rigid order,
specific factors are considered, the will suffer. Furthermore, controlling
importance of having close-by and coordinating all of the facilities is
facilities increases even more. That is difficult.
because, in most cases, automotive
manufacture follows a sequencing
paradigm with significant labor
division.

3. What are the major sources of uncertainty that can affect the value of supply chain decisions?
Inconsistent pricing and demand fluctuations are the primary cause of these supply chain issues. Due to the
inability to estimate exact volume or value of demand due to a dynamic consumer market, as well as uncertain
volatility in input costs and other factors changing due to external market forces, supply chain planning and
management have become uncertain. They can be of various forms and causes, as described by Porter's model,
which denotes the sources of fluctuations. Supply chain management is a large network with multiple distribution
choices that performs the functions of material procurement, raw material transformation, and completed goods
delivery.

4. How do static and adaptive forecasting methods differ?

Static techniques presume that the systematic component's estimates of level, trend, and seasonality do not
change as fresh demand is measured. There is no need to alter these parameters after they have been estimated;
they can be utilized for all future forecasts. The estimations of level, trend, and seasonality are revised after
each demand observation in adaptive forecasting, which means that data is included into the forecasting
process as it is collected. A forecaster can use adaptive algorithms to react (or overreact) to previous events.
If a disruptive technology has an impact on demand, the adaptive forecast will react quickly, although by
dragging multiple prior data points with it.
5. What types of industries or situations are best suited to the chase strategy? The flexibility strategy?
The level strategy?
When the cost of carrying inventory is high and the cost of changing machine and labour capacity is low, the
chasing approach should be adopted. Aircraft and other high-value products, as well as producers of perishable
goods, are examples of industries possessing these qualities. When inventory carrying costs are high, machine
capacity is cheap, and the work force cannot be modified on short notice, the flexibility technique should be
adopted. This method is effective in the automotive, durable goods, and consumer electronics industries.
When inventory carrying and backlog costs are modest, the level method works well.

6. Discuss how a company can get marketing and operations to work together with the common goal
of coordinating supply and demand to maximize profitability.
Marketing and operations are frequently at odds; as the authors point out, marketing often has revenue-based
incentives, whereas operations has cost-based incentives. Members of the organization who must meet
promises made by their marketing friends are frequently unaware of the cachet of new products, service
assurances, copromotions, and other marketing vehicles. Open communication is required on a near-constant
basis in all cooperation. Regular planning meetings with full cross-functional participation are required, as is
the sharing of vital information as sales and operations take place.

7. Why would a firm want to offer pricing promotions during its low-demand periods?
Pricing promotions during periods of low demand should help to boost demand and sales. A combination of
the following three variables has resulted in an increase in demand: Market expansion - sales from customers
who would not have considered this product at the higher price may be realized. Stealing market share —
sales from clients who were evaluating a competitor's goods may be realized. Forward buying — buyers who
believe the price will rise in the future may steal purchases from the future.

8. The manager at the supermarket wants to decrease the lot size without increasing the costs he
incurs. What actions can he take to achieve his objective?
One option is to simply reduce the lot size and let the EOQ model's robustness work its magic. Because the
total cost curve on either side of the optimal order quantity, Q*, is very flat, changes in either direction have
little effect on total annual procurement and carrying costs. If the manager wants to make larger cutbacks in
lot size, he or she can combine many products into a single order. Remember that the EOQ model is based on
a one-product-at-a-time assumption; if many goods are aggregated, the fixed procurement cost is shared across
all items, allowing for dramatic lot size reductions. Advanced shipping notices and RFID tags are two further
approaches that should be used when aggregating across product lines to make inventory tracking and
warehouse management easier.

9. Why is Amazon.com able to provide a large variety of books and music with less safety inventory
than a bookstore chain selling through retail stores?
Through the power of aggregation, Amazon is able to supply a vast range of books and music with less safety
inventory. Amazon can store less inventory while still meeting customer demand by storing best-selling items
in geographically distributed warehouses. Many small retail establishments, intuitively, would have their own
safety inventory for their customer base, with the majority of this safety goods languishing on the shelves. A
stockout would occur if one of the sites saw a surge in demand.

10. Consider two products with the same cost but different margins. Which product should have a
higher level of product availability? Why?
The higher-margin product should be stocked at a higher level of availability than the lower-margin product.
The Cu, or cost of understocking, of the product with the higher margin will be higher. The cost of
understocking is the sale price minus the cost, which the supplier may consider a loss of profit. A greater
critical fractile derives from a larger cost of understocking, therefore the optimal cycle service level will be
higher, resulting in increased availability.
 11. Wal-Mart designs its networks so that a DC supports several large retail stores. Explain how the
company can use such a network to reduce transportation costs while replenishing inventories more
frequently.
A distribution facility that serves a number of large retail outlets can save money in four ways: 1) Because
each supplier sends a large shipment, inbound shipments to the DC achieve economies of scale; 2) Outbound
transportation costs for a DC can be low because it serves retail locations nearby; and very large inbound
shipments that match retail demand can be cross-docked at the DC, saving both 3) storage and 4) material-
handling costs. A DC can also refill retail inventories on a more regular basis. On one side of the warehouse,
the DC splits bulk from producers and transfers it to retail stores on the other. The amount of inventory actually
stored at the DC is quite low because retail requests are aggregated at the DC level, and the period between
replenishments is likewise very low, as Little's Law demonstrates.

12. Most firms offer their sales force monetary incentives based on exceeding a specified target. What
are some pros and cons of this approach? How would you modify these contracts to rectify some of
the problems?
The two-part tariff encourages sales agents to work harder by allowing retailers to buy products at cost and
the dealer's margin to be the supply chain margin. As total sales hit successively higher levels, threshold
contracts provide larger rewards for the retailer. These incentives can boost supply chain earnings, but they
can also be manipulated to favor retailers and agents at the expense of manufacturers. Slow-playing clients,
post-dating paperwork, and limiting efforts can all help to postpone purchases from one sales period to the
next.
Contracts with a rolling horizon can be modified to prevent these issues. Reduced benefits can be delivered
continually over a shorter time period rather than providing a large bonus period over a predetermined amount
of time. Many "last weeks" are included into the rolling periods, resulting in a more consistent level of effort
from the retail outlets.

13. What revenue management opportunities are available to the owner of a warehouse and how can it
take advantage of them?
Every owner of assets in a supply chain can benefit from revenue management. Revenue management can be
used by owners of any type of capacity (production, transportation, or storage) if there is seasonal demand or
if there are segments prepared to pay different prices for different lead times to use the capacity. If one sector
wants to use capacity at the last minute and is willing to pay a higher price for it, and another segment wants
a lower price and is willing to commit long in advance, revenue management can be beneficial. For owners
of perishable inventory, revenue management is critical. A warehouse owner can lease capacity in a bulk at a
discount to a large company and fill up the remaining warehouse capacity at full price to small customers.
The large customers offers more stable demand and more fully utilizes the warehouse owner’s space, albeit
at a discount.

PROBLEMS:

1. Weekly demand at a retail store for a particular item is normally distributed and has a mean of
300 and a variance of 400. If the store owner stocks 340 pieces at the beginning of the month,
what percentage of customers are expected to be serviced satisfactorily? If the store owner does
not want more than 1% of his customers to go empty handed how much should he plan to stock?
Mean = 300 units
Variance = 400
Standard dev = √variance = √400 = 20
Total items = Mean + 2 σ
Case 1: Total items = 340
340 = 300 + z*20
Z=2
P = 0.9772
 So, 97.72% customer service satisfaction.

Case 2: For service level = 99%

Z = 2.32
Total items = 300 + 2.32 * 20
= 300 + 46.4
= 346.4

2. Odyssey buys books from one publisher at Rs 120. The marginal production cost for the
publisher is Rs 10 per book. Odyssey sells this book at Rs 240 per piece and expects demand
over the next two months to be normally distributed with a mean of 20000 and a standard
deviation of 5000. Odyssey places order for the two months at the beginning in one lot. Any
unsold book at the end of two months can be sold at Rs 60. How many books should Odyssey
order? The Publisher wants Odyssey to order 25000 nos for the two month period and offers a
buyback policy. How much he will have to buy the books for?

Cost = Rs. 120

Marginal production cost = 10
Price = Rs. 240
Demand normally distributed, mean = 20000
Standard deviation = 5000 order placed for 2 months
Salvage price = 60
Underage cost Cu = 240 – 120 = Overage Cost
Co = 120 – 60 = 60
Critical ratio = Cu/(Co+Cu) = 120/(60+120) = 0.66
Corresponding value of Z from Normal Distribution Table = 0.44
Q = µ + z*σ = 20000 + 0.44*5000 = 22200
Number of books to order (every two months) = 22200
Publisher wants Odyssey to order 25000 books Q = µ + z*σ or 25000 = 20000 + z*5000
Or 5000z = 25000 – 20000 = 5000 Or z = 5000 / 5000 = 1
Corresponding value from Normal Distribution table = 0.84134
Critical ratio = Cu/(Co + Cu) = 120/(Co+120) = 0.84134
Or 120/0.84134 = Co + 120 Or Co = 142.63 – 120 = 22.63
Salvage (buyback price) = 120 – 22.63 = 97.37
The publisher needs to buy books for Rs. 97.37

3. Raaj Logistics has plenty of warehouse space to offer. They have identified two segments of
customers, one willing to pay@20/sft while the other, requiring more protection, willing to pay
40/sft. The latter customer’s requirement is probabilistic and the demand follows a normal
distribution with a mean of 30000sft with a standard deviation of 6000 sft. How many sft should
Raaj hold for the high paying customer?
For want of more certainty, this high end customer is now willing to pay 50/sft. How much more
space can he be assured of now? ( sft MEANS SQUARE FOOT )
Price of lower segment (A) = Pa = Rs. 20/sqft
Price for high segment (B) = Pb = Rs. 40/sqft
The mean of segment B = Db = 30000 sqft
Standard deviation of segment B = σb = 6000 sqft

a. Capacity allocation of high paying segment (B) = NORMINV (1- Pa/Pb, Db, σb)
Cb = Norminv(1-2/4, 30000, 6000)
Cb = Norminv(0.5, 30000, 6000)
Solving in excel,
Cb = 30000
So, 30000 sft should Raaj hold for the high paying customer

b. Price of lower segment (A) = Pa = Rs. 20/sqft

Price for high segment (C) = Pc = Rs. 50/sqft
The mean of segment C = 30000 sqft
Standard deviation of segment C = σc = 6000 sqft
Cc = Norminv(1-20/50, 30000, 6000)
Cc = 31,520.08
If high paying customer price is charged to Rs. 50/ sqft. Then capacity allocated to this segment should
be 31,520.