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RSM311 SUPPLY CHAIN MANAGEMENT

SAMPLE FINAL EXAM


Be concise and to the point. There is no need to write lots of prose. YOU HAVE A TOTAL OF TWO HOURS FOR THE EXAM.

NAME:_______________________________

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[1]

Give a quantitative rationale as to why aggregate demand across a category of products tends to have a lower Coefficient of Variation (CV) than the demand for each product in the category. In what situation does aggregation reduce the CV the most?

If aggregate demand X = xi , we have


var( X ) = var( xi ) + 2 cov( xi , x j ) where cov( xi , x j ) = i j for -1 1. When demand across different products is perfectly positively correlated, = 1. When demand across the periods is perfectly negatively correlated, = -1. With perfect correlation, the standard deviation of aggregate demand is the sum of the standard deviations of individual demand. In this case there is no benefit of aggregation in terms of CV. If demand is not positively (perfectly) correlated, the standard deviation of aggregate demand is less than the sum of the standard deviations. In this case the CV reduces on aggregation. The reduction is the greatest when there is perfect negative correlation. [2] List factors and tradeoffs that a firm must consider before it decides on the timing of a trade promotion or short term price discount.

Factors to be considered include: Impact of trade promotion on forward buy: High forward buy favors promoting during off peak Impact of trade promotion on true demand increase (as a fraction of current sales in period): High demand increase may favor promotion during peak period Demand pattern without promotion: Extent of current seasonality Cost of holding inventory: Higher holding cost favors promoting during off-peak Cost of capacity: regular time, over time, and subcontract: High capacity cost favors promotion during off peak Product margin: High product margin may favor promotion during peak [3] How does the bullwhip effect impact the following Performance measures in the supply chain? Explain why in each case.

Manufacturing cost will increase because the bullwhip effect increases demand variability raising peaks and lowering troughs. This results in the need for higher capacity than if demand were level. Inventories will increase because the bullwhip effect increases demand variability raising peaks and lowering troughs. This results in the need for higher inventory than if demand were level. Transport cost will increase because the bullwhip effect increases demand variability raising peaks and lowering troughs. Customer service level will decline because the bullwhip effect increases demand variability raising peaks and lowering troughs. [4] In Vendor Managed Inventories (VMI), inventories at the retailer are managed (all replenishment decisions) by the manufacturer. This practice is likely to i) ii) Improve the bullwhip effect Worsen the bullwhip effect

iii)

Have no impact on the bullwhip effect

Explain why? Bullwhip effect improves because VMI results in point of sales information (true customer demand) becoming available to the manufacturer. This shortens the manufacturers response time and also eliminates the increase in variability as each stage passes along orders to the next. [5] The manufacturer of Gurby, the most popular toy for Christmas 99, is facing a severe supply shortage. The manufacturer has decided to ration the available supplies proportional to the size of the order placed by each retailer. If the total orders equal 20,000 units and the available supply is 10,000 units, each retailer will get 50% of their order. What, if any, impact is this policy likely to have?

This rationing policy will increase the bullwhip effect because it encourages retailers to inflate the size of their order (in the hope of getting more delivery). The manufacturer interprets the increase in orders as a true increase in demand and tries to respond by building excess capacity. Once supply is available the fictitious demand disappears. [6] Wal-Mart has a strategy of locating several stores in an area supported by a distribution center. Seven Eleven Japan does the same with its convenience stores. Explain how this strategy helps facilitate frequent replenishment in small lots.

The dominance location strategy allows Wal-Mart and Seven Eleven to achieve economies of scale on transportation. Because many stores are located nearby it is easier to fill up a truck with daily (in the case of seven eleven) requirements at a few stores. The outbound delivery trucks are thus able to achieve good utilization. Economies of scale are achieved at the DC that sorts incoming product from suppliers and cross docks it to the outbound trucks. [7] Sun Chemical is a manufacturer of chemicals and supplies customers nationwide. They have a plant located north of Chicago that supplies customers in Indiana. All deliveries are on consignment, i.e., all inventories at the customer are owned by SunChem. There are 20 customers located in Indiana. All shipments use LTL carriers. The carrier charges $100 per load (independent of quantity) to Indiana along with a $50 charge for each location to which a delivery is made. SunChem currently sends a truckload to each customer for replenishment incurring a transportation cost of $150. SunChem recently has realized that it carries very large inventories on consignment. What tradeoffs should SunChem consider when revising their policy? How do you recommend they structure their delivery strategy?

Sunchem would be better off running milk runs across multiple customers in this case with lower lot sizes. The milk runs become feasible because all customers are located close to each other (within a state). The fact that the trucker charges for drop offs needs to be accounted for by setting up a tailored aggregation strategy across customers such that high demand customers are visited more frequently than low demand customers. [8] Explain why a trade promotion or short term discount offered by the manufacturer results in a large forward buy by the retailer. What tradeoffs does the retailer consider when making the purchasing decision?

The forward buy results because the retailer tries to minimize the sum of material, holding, and order cost. The material cost and order cost decline as quantity purchased during a trade promotion increases. Holding cost increases as quantity purchased during a trade promotion increases. The 2

retailer considers this tradeoff when making the lot sizing decision. The decrease in material cost results in the retailer ordering a quantity larger than the economic order quantity (EOQ) resulting in a forward buy. [9] Why does a periodic review policy require more safety inventory than a continuous review policy for the same cycle service level?

With a periodic review policy, uncertainty must be accounted for over the lead time as well as the reorder interval because the current order and the quantity on hand must suffice over this entire period. On the other hand, with a continuous review policy, the uncertainty exposure is only over the lead time. This results in lower uncertainty exposure and thus lower safety inventory with continuous review policies. [10] Mattel has traditionally allowed ToysRUs to place two orders to meet Christmas demand. The first order is placed by the 10th of November for delivery by Thanksgiving and the second order is placed by the 10th of December for delivery by December 17th. For 1999, Mattel has required all firms to place only a single order by November 10th for the entire season. Assume that ToysRUs targets a service level of 60%. (a) As a result of the change in Mattels policy, the total amount ordered by ToysRUs is expected to (i) (ii) (iii) Increase Decrease Remain unchanged

Explain why? The single order increases the uncertainty exposure for ToysRUs. As a result, for the same level of service it will have to increase its safety inventory (a 60% service level requires a positive safety inventory) and thus the quantity ordered. (b) As a result of the change in Mattels policy, the total profit at ToysRUs is expected to (iv) (v) (vi) Increase Decrease Remain unchanged

Explain why? Profits decline with an increase in uncertainty exposure because the expected quantity that will remain unsold increases. [11] Discuss a situation when the policy of postponement and component commonality may not be appropriate for the supply chain. Identify the tradeoffs that need to be considered when making this decision.

Postponement and component commonality is not advisable if a very large fraction of the demand comes from very few products. The inventory benefit from postponement and component commonality across the high volume products (most of the demand) is marginal because their demand is usually

predictable with a very low CV. On the other hand, postponement and component commonality often increase production cost and this will apply across all products (including the high volume ones). [12] Recall the Sport Obermeyer (SO) case and the fact that Hong Kong had a minimum order size of 600. Consider the following two situations. In situation I, SO places a single order for its entire seasons demand. In situation II, SO places two orders with the second order following the Las Vegas show. In which of the two situations will a reduction in minimum order size to 400 be more beneficial? Explain why. The reduction in lot size is more valuable when two orders are allowed. With a single order, the optimal order is large and more likely to exceed the minimum order size. With two orders, the size of each order shrinks making it less likely that the desired order will exceed the minimum order size. [13] Medtronics manufactures and sells a variety of equipment used by doctors to help patients with their heart problems. Medtronics has a manufacturing plant located in Minneapolis. Its sales agents serve doctors all over the country. Currently all inventory is maintained with the sales agents. Medtronics is thinking of storing inventory in state headquarters in each state with the inventory shipped to sales agents as needed by them. The shipping to sales agents will be done using a courier who guarantees delivery with 6 hours. As a result of this change, how will inventory and transportation costs be impacted? Explain.

Moving the inventory to state head quarters will aggregate it across the sales agents. This will reduce inventories with the inventory reduction being greater for low volume products and less for high volume products. Aggregation, however, will raise outbound transportation cost and response time for the sales reps. [14] Explain why the marginal transportation cost benefit of temporal consolidation decreases as we consolidate shipments over a longer time horizon.

Temporal consolidation helps in two ways 1. Allows aggregation to achieve economies of scale 2. Allows aggregation to reduce variability On the first count, once truck loads are achieved further consolidation is not very useful. On the second count, the marginal reduction in CV from aggregating 2 days of demand is more than the marginal reduction on aggregating 3 days of demand. As we aggregate across enough days one can argue that the CV reduction from further aggregation will be negligible. [15] When a customer orders a Dell PC along with a Sony monitor, the carrier (say Airborne) picks up the monitor from Sonys Mexico plant and the PC from Dells Texas plant and merges the two in transit. Under what conditions is this in transit merge model likely to be cheaper than Dell having a warehouse where Sony monitors are stocked? Under what conditions is this in transit merge model likely to be more expensive than Dell having a warehouse where Sony monitors are stocked?

The in-transit merge model reduces inventory and warehousing costs while increasing transportation cost. An in-transit merge model is likely to be cheaper for large high value products if there is sufficient volume picked up from both Dell and Sony that Airborne gets truckload economies on the inbound side to the sort center. The in-transit merge may not be very valuable for low value products if the volume on a daily basis does not allow truckload economies from the Dell and Sony factories. Observe that truckload economies on the inbound side to the DC only need to be achieved across all products picked up not individual products.

[16]

Toyota has traditionally had the policy of building a production facility for each regional market. A facility was typically only able to serve demand from its local market. Over the last two years, Toyota has made each plant more flexible giving it the capability of serving multiple markets if needed. Under what conditions would such an investment be justified?

Greater flexibility allows Toyota to react ex-post to fluctuations in demand and exchange rates across regions. It can reconfigure its global production network to increase profits. This would be effective even when financial hedges for exchange rates are in place. [17] Blockbuster is a large chain of video and DVD rental stores. NetFlix.com is a new firm that has set up to rent DVDs online. Discuss the pros and cons of the two business models from a supply chain perspective. Who do you think has the long term advantage? Why?

Blockbuster NetFlix Response time Faster Slower Ability to offer variety Lower from stores Higher Inventory Cost Higher Lower Transportation Cost Lower Higher Facilities cost Higher Lower Information Similar Similar One can argue that for a product like DVDs, the outbound transportation cost that NetFlix has to incur will be small relative to the value of the product and may be sufficiently low to let it exploit the reduced facility cost. If sufficient volumes result, NetFlix may be able to send full truckloads to the USPS or UPS sort reducing outbound transportation costs. However transportation cost is a variable cost that is incurred for each rental. Blockbuster does not incur a transportation cost on each rental. It only incurs the transportation cost on purchase. One can argue that Blockbuster could offer the same service added on to its current stores and allow customers the option of having the DVD shipped to their house or be picked up at the retail store. This allows Blockbuster to offer the same variety as NetFlix and lower its inventory cost for low volume DVDs. The blockbuster model will continue to have higher facility costs. NetFlix could be competitive if Blockbuster does not adjust its current model but a hybrid model will probably be best. [18] EthnicGrocer.com sells ethnic grocery as well as CDs and DVDs on the web. Their main competition is from local ethnic grocers as well as Audio/Video stores. Which of these product categories is better suited to the EthnicGrocer business model. Support your choice from a supply chain perspective.

The ethnic grocer model offers a transportation cost disadvantage and an inventory advantage relative to the local ethnic store. Given the distance of ethnic grocery stores it also offers convenience. The transportation cost disadvantage will be the lower for DVDs than for groceries. One can also argue that inventory reduction advantages on aggregation may be greater for DVDs and CDs (with high uncertainty) than for groceries (relatively low uncertainty). [19] From a supply chain perspective, do you think that the online channel is better suited to selling niche specialized products or more staple products? Use the grocery industry as an example to support your claim.

The online channel offers two distinctions from the brick-and-mortar channel a time lag between when the order is placed and shipped, and the ability to aggregate by centralizing. For high volume staple products the value of both is relatively small because demand tends to be high

and relatively stable with a low coefficient of variation. For low volume, highly uncertain demand (typical for niche products) postponement and aggregation offer great value.

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