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Case Questions (30%)

1.What factors inuence the decision regarding the opening and closing of stores? Why does 7Eleven choose to have a preponderance of its stores in a particular location? The decision of opening or closing stores mainly depends on market environment in the region, such as number of competitors, transportation condition and incomes and population of residents. 7-Eleven applies a market-dominance strategy, which has the following advantages: boosts distribution eciency, improves brand awareness, increases system eciency, enhances the eciency of franchise support services, improves advertising eectiveness and prevents competitors entrance into the dominant area. 2.Why has 7-Eleven chosen o-site preparation of fresh foods and subsequent delivery to stores? 7-Eleven centralizes the food production in order to gain economic of scale, guarantee the quality of fresh foods and reduce transportation costs. Moreover, 7-Eleven can fully utilize the capacity, appropriately make production plan and aggregate demand for reducing uncertainty. Another reason is, 7-Eleven has a very eecient distribution system. It has the ability to distribute the products eeciently to the retailers. For example, every day, it can visit each of the retailer store several times. By doing this, the service level can be gauranteed while the eeciency can also be achieved. 3. Why does 7-Eleven discourage direct store delivery from vendors and make an eort to move all the products through combined DCs? 7-Eleven selects a cross-docking distribution mode. Since all the demands can be aggregated, therefore, by doing this, the inventory level can be reduced. Also note, in the DC, there is no inventory kept. The inventory cost is reduced. Since those stores are densely located near the combined DCs, 7-Eleven can gain the economy of scale for the outbound transportation too. From the case, we know they achieve a high ll rate with high exibility and eciency. This is directly connected to their location modelto have a preponderance of its stores in a particular location (this explans why its location choice model can boost distribution eciency). Because dierent stores may had dierent order sizes, 7-11 use inventory-pooling and combine all the orders together. Just imangine, without aggregation, if the vednor directly ship to the retailor store, what will happen? The vendor has to visit many stores. For each store, the order size usually is very small. This requires high handling and labor cost. By aggraging all the products from all the vendors, the xed labor and transporation cost can be shared among all the dierent products (the total handling cost and transporation cost with aggrergation can be higher than handling and transporating single product though). Since all the diernt products are combined in the same truck load, the good thing is, the order size for each of the product canbe reduced, this is why 7-Eleven can oer short

replenishment cycle time for quick response. 4. Why does 7-Eleven combine fresh food shipments by temperature? The main reason is, to reduce the order size and gain economy of scale in the transporation. This is one specic example for joint replenishemnt. The good thing is, the xed transporationcost and other related cost is reduced. For example, 7-Eleven reduce the number of vehicles required for daily delivery. The bad thing, there can be some extra handling cost. (Remeber the joint reprenishment model we present in the class?) Without joint replenishement, for each store, it may visit much less frequently, like one week per visit. With crossing docking and the joint replenishment, each store can be visit several times per day. This is the reason that 7-Eleven can make rapid deliver of a variety of fresh foods. 5. What point of sales data does 7-Eleven gather and what information is made available to store managers to assist then in their ordering and merchandizing decisions? How did the Information System at 7-Eleven enable them to become a market dierentiator ? POS data includes the information of the item, the time of sales and the age and sex of the customer. Information analysis of POS data: Sale analysis of product categories over time, SKU analysis, analysis of waste or disposal, ten-week sales trends by SKU, ten-day sales trends by SKU, sales trends for new products, sales analysis by day and time, list of slow moving items, sales analysis by product categories, analysis of sales and number of customers over time, contribution of product to sections in store display, sales growth by product categories and evaluation of merchandizing. The information system helps 7-Eleven stores to better match supply with demand, revise merchandize mix and develop appropriate new products. By analyzing those data, 7-Eleven can have a better picture of the demand. Therefore, it can reduce the operating cost such as invnetory ocst. By closely monitoring the fast move item and slow moving item, it can further explore how to use the retail space which is critical to the convinient store like 7-Eleven. For example, it can stop displaying and selling the very slow-moving product (s). At the same time, they can also match the demand with supply better and increases the customer satisction and customer loyalty to 7-Eelven. From the above discussion, we know that the role of information systems is critical within the supply chain. In the 7-Eleven case, management of the many Japan stores would be impossible without the information system. Humans could not physically collect, analyze and incorporate this data on an hourly basis as many of the programs 7-Eleven do. Immediate feedback of downstream supply chain data back to the beginning of the supply chain, the moment the transaction occurs is essential. The real-time feedback loop is the foundation to understanding the marketplace enabling immediate product consumption analysis and eective change management process. Without such an information system, a business would have no ecient means to streamline its customers pur-

chasing behaviors timely enough to respond to changes in that behavior. Nor would it be able to predict or help optimize those behaviors to its benet. When designed eectively, and integrated with all aspects of the supply chain, information systems allow business to adapt quickly and eciently to the changing needs and behaviors of their customers. Having a sophisticated information system, 7-Eleven remains competitive and the leader of the market. 6. Does the 7-Eleven have the bullwhip eect? Give a general discussion of reducing the bullwhip eect for those companies who have the bullwhip eect? There is no bullwhip eect due to the sophiscated informationsystem. All teh demand inforamtion is available to the centralized system. Each store can palce order, however, the order doesnt give the false information to the distribution centor because the sales data is known to the distributor. We can reduce the bullwhip eect by following ways: good demand forecasting, reduce the order size, stabilize he price, eleminating the gaming in shortage situation etc.. For detailed discussion, please refer tothe lecture note.

Forecasting (30%)

For the forecasting, we need to know how to do forecast by various methods and how to evaluate a method and nally how to choose the best one. Demand: 8,000; 13,000; 23,000; 10,000; 18,000;24,000. Since the underlying model assumed for both moving average and exponential smoothing is stationary, the one-step-ahead and multiplestep-ahead forecasts for moving averages and exponential smoothing are the same. (1) : (7 points) Moving average forecast for the demand in period 7, 8 (N=3); Month Demand Ft 1 8000 2 13000 3 23000 4 10000 14666.67 5 18000 15333.33 6 24000 17000 7 17333.33 8 17333.33 (2) :(6 points) Exponential method to forecast the demand in period 7,8 ( = 0.1); F1 = 8000.

Month 1 2 3 4 5 6 7 8

Demand 8000 13000 23000 10000 18000 24000

Ft 8000 8000 8500 9950 9955 10759.5 12083.55 12083.55

(3) :(8 points) Winters method to forecast the demand in period 7,8 ( = = 0.1, = 0.05).Finding initial S0 and G0 by Moving average (N=3) plus linear regression Finding the Seasonal Factor by moving average (cN+1 , cN+2 , ..., c0 ). Update All the parameters until you get c1 ,...,c6 ,S1 ,...,S6 and G1 ,...,G6 . Using the above parameters to forecast the demand in period 7 and 8. Month 1 2 3 4 5 6 Demand 8000 13000 23000 10000 18000 24000 MA(3) 14666.67 15333.33 17000.00 17333.33 Ratio 0.89 1.50 0.59 1.04

Sxy = 19333.33, Sxx = 20, S0 = a = 12700, G0 = b = Sxy /Sxx = 966.67 c2 = 0.59, c1 = (0.89 + 1.04)/2 = 0.96, c0 = 1.50 Gt ct Month Demand St Ft 1 8000 13660.00 966.00 0.588 2 3 4 5 6 13000 23000 10000 18000 24000 14514.17 15455.42 16468.37 17561.81 18281.79 954.82 953.46 959.41 972.81 947.53 0.959 1.499 0.589 0.962 1.490

7 11327.26 8 19417.58 (4) :(5 points) Suppose demand satises the additive model, that is to say Dt = L+tG+Ct +Rt , 5

where Dt is the observed demand,Ct is seasonal factor,L + tG is linear trend and Rt is the random term. Please develop Winters method for this given additive model. Basically, for given , , , (a) how to get the initial data S0 , G0 , C0 , C1 , ..., CN +1 , where N is the number of periods before the seasonal factor repeats itself; (b) how to get St , Gt , ct and how to update them; (C) how to get Ft,t+i based on St , Gt , Ct . (a). We have to do the following steps. Step 1. Draw a picture and identify the number of periods before the season repeates itself; Step 2. Indentify the trend using moving average; Step 4. Group and average. St = (Dt ctN ) + (1 )(St1 + Gt1 ) (b). Gt = (St St1 ) + (1 )Gt1 ct = (Dt St ) + (1 )ctN (c). Ft,t+i = St + i Gi + Cti+N Step 3. Calculate {Di Ti };

Planning (20%)

A company transforms the raw material AAA into intermediate product BBB by machine EEE. The machine FFF will transform intermediate product BBB into the nal product CCC. Machine EEE can produce 30 pounds pf product BBB, while machine FFF can produce 20 pounds of CCC (nished product) per hour. Each pound of product BBB needs one pound raw material. While each pound of nished product needs one pound of BBB. While one machine EEE needs 3 operators and one FFF needs 2 operators. Currently, the company has 14 EEE and 25 FFF. Within the planning horizon, no new machine will be bought. During any month, the machine EEE or FFF can be idle. If the machine is idle, the associated worker will be layo. If the machine is idle, the only savings is the salary of associated workers. However, layo each worker costs 500$ (for both operators of machine EEE and FFF). When any idle machine is brought online, the company needs to spend 400$ as set-up cost for machine EEE and 300$ set-up cost for machine FFF (set-up cost is the xed cost). At the same time, for each new hire people, the company needs to spend 500$ training cost. For each month, each worker can work 20 days and each day the worker can work 8 hours. Each worker can work at most 10 hours overtime per month. The salary for all the workers is same. The regular hour is 10$ per hour, while for the overtime, the salary is 15$ per hour. There is no subcontracting company available. The purchasing cost of product AAA is 100$ per 100 pound. There are enough product AAA in the market so that the company needs not to stock those products. The un-used product BBB will be stored in the companys warehouse. For holding BBB, for each month, the holding cost is 6

2$ per 100 pound per month and will be charged by the end of each month. For holding product CCC, the holding cost is 4$ per 100 pound per month. All the unsatised orders will be backlogged. The forecast demand for the next 6 months is as following: 30,000; 50,000; 90,000; 25,000; 60,000; 70,000. Initially the company has 52 operator for EEE and 50 operators for FFF. The initial inventory is 0 and the the ending inventory is also 0. We will dene the the related variables and then, you are required to get some of the cost objective functions and ll in some constraints or explain some constraints. First, lets dene the variables.

me = t mf t =

number of machines EEE working in month t;, number of machines FFF working in month t;

sb = back orders of product BBB at the end of month t; t sc = back orders for CCC at the end of month t; t
b It = inventory level of for BBB at the end of month t; c It = inventory level of CCC at the end of month t; c Dt = demand for CCC in month t;

pc = production quantity for CCC in month t; t pb = production quantity for BBB in month t; t Le = number of machines EEE that working in month t-1 t and will be idle in month t; Lf t = number of machines FFF that working in month t-1 and will be idle in month t Hte = number of machine EEE that in period t-1 is idle and will be working in month t; Htf = number of machine FFF that in period t-1 is idle and will be working in month t;
e Ot = overtime hours machine EEE in month t; f Ot

= overtime hours for machine FFF in month t;

2 points for each questions.

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Objective Function : Minimizing the total cost write to the following cost : (1) : regular labor cost (2) : layo cost (3) : or : (4) :
6 X t=1 6 X t=1

1600 (3 me + 2 mf ) t t

500 (3 Le + 2 Lf ) t t
6 X t=1 6 X e [400 Ht + 300 Htf + 500 (3 Hte + 2 Htf )]

new-hiring cost new-hiring cost overtime cost

t=1 6 X t=1

500 (3 Hte + 2 Htf )

f e 15 (3 Ot + 2 Ot )

Answer the following questions : Part one : write the constraints

(5) : me Le + Hte = me evolution of the working machines EEE t1 t t (the relationship between the number of working in month t-1 and month t)
f (6) : pc 20 20 8 mf + 20 Ot constrains on product quantity CCC t t

based on number of working machine FFF and overtime Part two : Explain and make decision Is this correct or not? Why?

(7) : Hte 14 me t1

Yes. The number of new working machine in Month t can not be l arg er than the number of idle machine in Month t 1.
c c c c (8) : It1 + pc = Dt + St1 + Itc St , Is this correct? Why? t

Yes. The left side represnts the total supply available in Month t while the right side represents the total demand in Month t. Namely, the supply should be balanced with the demand.
b (9) : pc It1 + pb t t

Is this correct? Why?

Yes. Since each pound of CCC needs one pound of BBB, the production amount of CCC in Month t can not exceed the amount of BBB available 8

in Month t. Initial Condition :

c b (10) : me = 14, mf = 25, I0 = I0 = sb = sc = 0 Is this correct,why? o 0 0 0

Yes. There are 14 EEE and 25 FFF and no initial inventory and backorder. All decision variables are non-negative.

Inventory Control (20%)

(1) (5 points) Estimating Cycle Service Level (Continuous Review Policy): D = 3,500/week(expected demand); D = 500 (standard deviation of the one week demand), L = 3 weeks (ordering leadtime); Q = 10,000 (order quantity each time); ROP = 11,866 (re-order point). Solution: RL = 3 3500 = 10500 L = 500 3 = 866.025 ROP = 11, 866 RL CSL = Fs ( ROP L ) = 0.943 (2) (5 points) Evaluating Safety Inventory Given CSL(Continuous Review Policy) :D = 3,500/week; D = 500, L = 3 weeks; Q = 10,000; CSL = 0.90. Solution: RL = 3 3500 = 10500 L = 500 3 = 866.025 CSL = 0.90 1 ss = Fs (CSL) L = 1.28 866.025 = 1109.857 (3) (4 points) (Newsvendor Model) The manager at Sportmart, a sport store, has to decide on the number of skis to purchase for the winter season. Considering the past demand and weather forecast, suppose the demand is normally distributed with mean 350 and a standard deviation of = 100. Each item costs c = 100$ and the retail price is p=250,. Any unsold item can be disposed at the end of the season for 85$. Assume it costs 5$ to hold a pair of skis in inventory for the season. Evaluate the number of skis that the manager should order to minimize the cost. Solution: = 350, = 100 Cu = 250 100 = 150 Co = 100 + 5 85 = 20 Cu Cu +Co = 0.88235 1 Q = + Fs ( CuCu o ) = 350 + 1.1868 100 = 468.68 +C (4) (6 points) (EOQ for multiple product) Suppose Best Buy sells three models of computers, the Litepor, Medpor and Heavypor. Annual demands for three products are DL =12,000 for Litepro, DM =2000 for Medpor and DH =500 for Heavypro. Assume that each model costs best Buy 1000$. A xed transportation cost 4000$ is incurred each time an order is delivered. For each model

ordered and delivered on the same truck, an additional xed cost 1000$ is incurred for receiving and storage. Best Buy incurs a holding cost of 20% per year. Evaluate the lot sizes the Best Buy should order by considering the following three options: (a) All the products are ordered and delivered independent. (b) Aggregate all products each time they place an order. (c) Order jointly, but to be selective about which models they include in each order. Solution: (a) Since all the products are ordered and delivered independent, we can just apply EOQ model to obtain the solution.l For Litepor, Q = L For
2DL SL = 2120005000 = 774.597 ' 775 q h q 10000.2 2DM SM = Medpor, QM = 220005000 = 316.228 ' 316 q h q 10000.2 Heavypor, Q = 2DH SH = 25005000 = 158.114 ' 158 H h 10000.2

n = 2Dh = 14500200 = 14.392 S 27000 = DL = 12000 = 833.77 ' 834 QL n 14.392 2000 Q = DM = 14.392 = 138.96 ' 139 M n DH 500 Q = n = 14.392 = 34.74 ' 35 H (c) Order jointly, but to be selective about which models they include in each order. Step 1. Finding the most frequently ordered product. q q L nL = hDL = 20012000 = 15.49 2S 25000 nM =

For (b) Aggregate all products each time they place an order. The aggregated annual demand D = DL + DM + DH = 14500 The set-up cost per order S = 4000 + 3 1000 = 7000 The holding cost per unit per unit time h = 1000 0.2 = 200 q q

= 200500 = 3.16 25000 n = 15.49 Step 2. Identify the ratio of the orders for the other products to the most frequently ordered nH = product. nM =
hDM = 2002000 = 14.14 q2sM q 21000 hDH nH = 2sH = 200500 = 7.07 21000 mM = n/nM = 15.49 = 1.095, mM = 2 14.14 mH = n/nH = 15.49 = 2.19, mH = 3 7.07

hDM q 2SM hDH 2SH

2002000 = 6.32 q 25000

Step 3. Compute the number of orders placed per year for the most frequently ordered product. n =
r
200(DL mL +DM mM +DH mH ) 2[4000+1000(m1 +m1 +m1 )] L M H

Step 4. Compute the number of orders for all the product. nL = n /mL = 17.32 nM = n /mM = 8.66 nH = n /mH = 5.77 Step 5. Get the order quantity of each product per order.

20017500 2(4000+10001.833)

= 17.32

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L Q = DL = 692.82 ' 693 L n DM Q = nM = 230.94 ' 231 M H Q = DH = 86.60 ' 87 H n

4.1

Optional Question (Bonus 10%)

(EOQ for multiple product) Considering two products A and B. Suppose the annual demand for A is D1 and annual demand for B is D2 . The cost for A is c1 $ and the cost for B is c2 $. if any order is placed, a xed cost S incurs. If product A is ordered, Sa will also incur, if B is ordered, Sb will incur (that is to say, if A and B is order, the total ordering cost will be S+Sa +Sb , if only A is order, the ordering cost is S+Sa , if only B is ordered, the ordering cost is S+Sb ). Suppose the holding cost for holding one year is h$. Suppos if A and B are ordered independently, A will be ordered more frequently. Considering the following policy, every time when an order is placed, A will be always ordered, while for product B, every k orders for A, B will be ordered once. That is to say, suppose na is the order frequency for product A and nb is the order frequency for product B. Then k=na /nb . Now determine the best k to minimize the total ordering and holding cost. Solution: Given k, the total cost is bD T C = 1 c1 hQa + (S+Sa )D1 + 1 c2 hQb + SQb 2 2 Qa 2 D1 na = Qa = k D2 = nb Qb D Qb = kQa D2 1 D T C = 1 c1 hQa + (S+Sa )D1 + 1 c2 hkQa D2 + Sb D1 2 Qa 2 kQa 1
dT C dQa

= 1 h(c1+ c2 k D2 ) 2 D1 Q = a Q b
p

k D2 D1

(S+Sa )D1 Q2 a

T C(k) = 2h(c1 D1 + c2 kD2 )(S + Sa + Sb /k) H(k) = (c1 D1 + c2 kD2 )(S + Sa + Sb /k) dH(k) c1 D1 Sb dk = c2 D2 (S + Sa ) k2 2 H(k) d D = 2c1k31 Sb > 0 dk2 Clearly, T C is convex in k. k is determined by
q
c1 D1 Sb c2 D2 (S+Sa ) dT C dk

2D1 (S+Sa +Sb /k) h(c1 +c2 kD2 /D1 )

Sb D1 kQ2 a

2D1 (S+Sa +Sb /k) h(c1 +c2 kD2 /D1 )

= 0.

k = k1 = d
c1 D1 Sb c2 D2 (S+Sa ) e q c d c2 D1 D1 Sb a ) e 2 (S+S

If k 1, since k must be an integer, we have two choice. k2 =

q

k = arg min{T C(k1 ), T C(k2 )}; If k < 1, since k must be an integer, we have two choice.

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k1 = d k2 = d

q q

k = arg min{T C(k1 ), T C(k2 )}.

c2 D2 (S+Sa ) c1 D1 Sb e c2 D2 (S+Sa ) c1 D1 Sb e

Appendix
Step 1. ni = hCi Di 2 (S + si ) n = max {ni }
s

Step 2.

For the other products, we calculate the order frequency

s

ni = mi

hCi Di 2si = n/ni

mi = dmi e(for the most frequent one, the ratio is one) Step 3. n
vP u m (Di mi Ci h) u = t i=1 P

2 S+

m si i=1 mi

Step 4.ni = n /mi Di Step 5.Qi = ni

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