CHAPTER FOUR

Discussion Questions
1. What differences in the retail environment may justify the fact that the fastmoving consumer goods supply chain in India has far more distributors than in
the United States?
India is a land of shopkeepers selling to over a billion consumers. India is
becomingly increasingly Westernized, but it will be quite a while (if not forever)
before shopkeepers are supplanted by large retailers. The sheer volume of small
store owners requires a large number of distributors to service them. The younger
generation in India, particularly the IT rich areas of Bangalore and Chennai, have
far higher disposable income than the older generation and the rest of the country.
These young workers have very different retail habits and are causing changes in
Indias shopping and supply chain needs. Poor infrastructure, although not
entirely a retail concern, is another reason why India may need far more
distributors than in the U.S.
2. A specialty chemical company is considering expanding its operations into Brazil,
where five companies dominate the consumption of specialty chemicals. What
sort of distribution network should this company utilize?
If the expansion into Brazil is merely a sales operation, then distributor storage
with last mile delivery is the best network design. If the expanded operations
include manufacturing capabilities, then manufacturer storage with direct
shipping is a strong possibility. Given the nature of the product, package carrier
delivery is not an option and retail storage with customer pickup is out of the
question since this is a B2B scenario. In-transit merge would be an option only if
the manufacturer established a network of plants in Brazil, perhaps focused
factories relatively close to each customer.
The chemical company has only five customers to serve; it would not require too
large an investment in logistical infrastructure to effectively serve all five without
intervention by a distributor. Their short supply chain would be easier to
coordinate due to the stable demands and information sharing that is possible in a
B2B scenario.
3. 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 two supply network designs that the distributor can propose to counter the
manufacturers proposal are the distributor storage with package carrier delivery
and the distributor storage with last mile delivery. Both of these counter-proposals
offer higher order visibility for the customer while having simpler information

infrastructure than with manufacturer storage. The response time for both is
excellent, and the customer experience is also superior to the direct model. If the
manufacturer is trying to provide excellent customer service, the increased costs
in transportation and potentially higher levels of inventory may be acceptable
tradeoffs.
4. What types of distribution networks are typically best suited for commodity
items?
Commodity items are available from many sources and customers expect them to
be delivered quickly; if a supply chain cant be responsive, the customers will
move on to the next source. A distribution network designed for retail storage with
customer pickup achieves quick response for high demand, low variety products.
Other commodity products can be effectively distributed using distributor storage
with last-mile delivery, which is also suited for high demand, quick response
products.
5. What type of networks are best suited to highly differentiated products?
The networks that are best suited to highly differentiated products are the
manufacturer storage with direct shipping and the manufacturer storage with intransit merge. Both approaches have the ability to aggregate inventories and
postpone product customization, which would help support a wider variety of
products.
6. In the future, do you see the value added by distributors decreasing, increasing, or
staying about the same?
It is doubtful that value added by distributors will decrease over time; the nature
of competition in all areas would suggest that distributors that add less value
would be winnowed out. It is more likely that distributors will be asked to do
more or may volunteer to do so as a means of differentiating themselves from the
competition.
7. Why has e-business been more successful in the PC industry compared to the
grocery industry? In the future, how valuable is e-business likely to be in the PC
industry?
The PC industry is selling a highly customized product that is purchased on a perhousehold basis, less routinely than the commodity products that make up
groceries. A company like Dell can leverage the Internet as a marketing and
distribution tool to advertise new capabilities and options before bricks and
mortar retailers can. Dell also removes whatever intimidation (or frustration)
factor might be experienced by conversing with in-store sales representatives.
Computers have a very high value to shipping cost ratio, so the increased shipping
costs when compared to a traditional store are negligible. Groceries have a much

lower ratio; although in-store shoppers are incurring costs to pick up their
groceries, those costs are hidden in comparison to the delivery charge on an
itemized bill from Peapod.
E-business will continue to be a valuable tool in the PC industry; none of the
advantages currently being enjoyed by Dell and Gateway are likely to change
significantly.
8. Is e-business likely to be more beneficial in the early part or the mature part of a
products life cycle? Why?
E-business is more likely to be more beneficial in the early part of a products life
cycle. E-business strengths include flexible pricing, promotions, and product
portfolios and greater speed in disseminating product information. Later in the life
cycle, a product is likely to be a commodity, which doesnt play to the strengths of
this channel.
9. Consider the sale of home improvement products at Home Depot or a chain of
hardware stores such as True Value. Who can extract the greatest benefit from
going online? Why?
Both entities and other hardware companies like Ace are already on-line. An
article titled Home Depots Self-Improvement Company Business and
Marketing by Eric Young in The Industry Standard, September 11, 2000,
indicates that Home Depot is the last major player to go on-line, but brings the
deepest pockets. Those of us that have stood in line with the contractors realize
that many of Home Depots items are ill-suited to a web enterprise and the
clientele is equally ill-suited. Contractor sales are such a significant portion of
Home Depots sales in comparison with the mix at True-Value, that it is likely that
True-Value will ultimately benefit more from an e-commerce division.
The article goes on to say,
Each chain is employing a slightly different e-commerce strategy. Whereas
Home Depot wants its site to replicate its merchandise mix, True Value limits the
number of items it offers online. For example, at True Value, Net shoppers won't
find products most people need in a hurry, such as toilet-tank fix-it kits. "You're
not going to wait three days to have it shipped so you can stop the water from
dripping into your neighbor's apartment," says Neil Hastie, CIO at
TrueValue.com.
Ace Hardware, meanwhile, thinks bigger is better. Its site offers almost everything
in its stores, plus about 15,000 additional products. Ace's supplementary online
offerings are a windfall from its investment in OurHouse.com, a Web-based home
improvement site that handles Ace's online sales. The two companies split online
revenues. Ace joined forces with OurHouse to get a leg up in e-commerce. "We
didn't want to be left in the starting gate," says Ken Nichols, a retail operations
vice president for Ace.
Waiting in the wings is Lowe's, the nation's second-largest home improvement
chain. Like Home Depot, Lowe's wants to expand its online presence but is

approaching e-commerce slowly. Beginning in October, the retailer will offer a

wide selection in a limited number of categories, such as hand tools and
appliances. Lowe's will deliver Net orders directly to buyers or to the store closest
to the customer, again like Home Depot.
Meanwhile, Internet-only retailers are scrambling to win over customers, vowing
to compete against offline chains in price and selection. CornerHardware, for
example, says it currently has 125,000 products available -- three times the
number available at an average Home Depot store.
The pure Internet players acknowledge that they don't have the brand recognition
of Home Depot. But they hope to build their brands before Home Depot and the
other brick-and-mortar stores establish a strong online presence. Still, it's not clear
that any are benefiting from first-mover advantage. Already two Net pure-plays -Hardware.com and HomeWarehouse.com -- have gone under.
10. Amazon.com sells books, music, electronics, software, toys, and home
improvement products online. In which product category does e-business offer the
greatest advantage compared to a retail store chain? In which product category
does e-business offer the smallest advantage (or a potential cost disadvantage)
compared to a retail store chain? Why?
Amazons greatest e-business advantage comes from book sales; they are able to
list millions of book titles that a physical store cannot possibly carry on their
shelves. Cost advantages for Amazon are few and far between; the item price to
shipping cost ratio for books, music, and software is not as high as most
consumers would prefer. Amazon certainly has no cost advantage with music and
software. Both are readily sold over the Internet; it would behoove Amazon to
partner with another Seattle-area company to make this the norm. Electronics,
hardware, and even toys are products that most consumers would like to
experience before making a selection. Any cost advantage Amazon might have in
these sectors may be overshadowed by an inability to hold the item on-line.
11. Why should an e-business such as Amazon.com build more warehouses as its
sales volume grows?
Amazon initially tried to run their entire book business with no warehousing
facilities, instead relying on other distributors to carry their entire inventory. Next,
Amazon ran their business out of a single warehouse in Seattle and discovered it
wasnt feasible; the trade-off of responsiveness and cost was causing excessive
delays in getting products to customers. Now Amazon uses a hybrid of these two
systems, carrying items that it knows will sell in its own warehouses and letting
others carry items that have greater demand uncertainty. As Amazons business
grows, it should continue to establish warehouses to spread its facilities closer to
pockets of new customers, thus achieving better levels of responsiveness while
still maintaining its cost advantage.
CHAPTER 5

Discussion Questions
1. How do the location and size of warehouses affect the performance of a firm such
as Amazon.com? What factors should Amazon.com take into account when
making this decision?
The location and size of Amazons warehouses have a direct bearing on how
responsive and efficient they can be. At one time Amazon ran their on-line
bookstore out of one warehouse in Seattle; this warehouse was small by todays
standards and was unable to keep up with peak demand. Amazon has since added
other geographically distributed warehouses that hold the items with steadier
demand. The dispersion of warehouses allows Amazon to ship from closer to the
customers and the stocking of items with more even demand allows for a higher
service level at a reasonable cost.
Amazon should consider what regions are underserved by the current network of
warehouses and where it is most economical to locate the next warehouse,
effectively balancing their efficiency and responsiveness with their strategy.
2. How do import duties and exchange rates affect the location decision in a supply
chain?
Tariffs refer to any duties that must be paid when products are moved across
international, state, or city boundaries. If a tariff is excessive, it provides a strong
disincentive to do business across borders with entities in that area. The classic
workaround to a high tariff is adding a location inside the area. Some regions have
developed trade agreements that limit or eliminate the tariff on goods.
Exchange rates specify how much one currency is worth in terms of another. As
one currency gains against another, it may be beneficial to add shift production to
the area using the devalued currency. This makes the goods more affordable for
the population. Companies with flexible production capabilities can shift some
production from area to area depending on the buying power of local markets.
3. What are different roles played by production facilities within a global network?
The different strategic roles for facilities in a global network are as follows:
Offshore facility: low-cost facility for export production. This is strictly a
low-cost producer for an export market
Source facility: low-cost facility for global production. This facility is also
viewed as a low-cost provider, but provides output for the entire global
network.
Server facility: regional production facility This facility supplies the
market in the country where it is located
Contributor facility: regional production facility with development skills.
This facility serves the market where it is located but is also responsible
for customization that increases salability in that country.

Outpost facility: regional production facility built to gain local skills. This
facility plays the role of a server facility but more importantly, it obtains
access to knowledge or skills that exist in that region.
Lead facility: facility that leads in development and process technologies.
This facility creates new processes, technologies and products for the
entire network.

4. Amazon.com has built new warehouses as it has grown. How does this change
affect various cost and response times in the Amazon.com supply chain?
Logistics and facility costs incurred within a supply chain change as the number
of facilities, their location, and capacity allocation is changed. As Amazon has
added warehouses, their logistics, inventory and facility costs have changed. An
increased number of warehouses increases that fixed cost but can be exploited to
reduce transportation costs. These potentially fall if the warehouses are spread
throughout a distribution area, which increases responsiveness at a similar cost or
maintains responsiveness at a reduced cost. Inventory costs also change with an
increased number of warehouses; Amazon is holding more total inventory and can
take advantage of pooling to reduce quantities of some items.
5. McMaster-Carr sells maintenance, repair, and operations equipment from five
warehouses in the United States. WW Grainger sells products from more than 350
retail locations, supported by several warehouses. In both cases, customers place
orders using the Web or on the phone. Discuss the pros and cons of the two
strategies.
WW Grainger has the more responsive network; a customer with a critical repair
need can drive to a local retail location to pick up the necessary part. McMaster
Carrs network is less responsive; critical supplies would be scheduled for
overnight delivery in all likelihood. WW Grainger has the greater facility cost
since it has more locations, although the retail facilities provide a presence that
doubles as a marketing tool not enjoyed by McMaster Carr. McMaster Carrs
facility expense is much lower and their network model shifts the transportation
cost more fully to the customer. A WW Grainger customer travels the last mile to
pick up an order, but Grainger must ship from their warehouse to the retail
locations.
6. Consider a firm such as Dell, with very few production facilities worldwide. List
the pros and cons of this approach and why it may or may not be suitable for the
computer industry.
The advantage for Dells network design is lower facility costs; they can locate in
just enough countries to avoid tariffs and mitigate some of their exchange rate and
demand risk. The disadvantage for Dell is the lack of responsiveness this adds to
their system. A customer has no expectation of zero flow time, so they know as
they enter the transaction that they must wait for their PC. Shipping from one of

the production facilities adds to the delay, which is highly visible on Dells or the
package carriers web site. The shipping costs might also be a concern for some
customers, but the value to shipping cost ratio is so high that these costs seem like
small potatoes in comparison to the total invoice.
7. 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.
Automakers often use a multiplant strategy to create server facilities. These server
facilities provide product for the market where they are located, thereby taking
advantage of tax incentives, local content requirements, tariff barriers, and high
logistics costs. This can be a good strategy if market demand exists for your
product; when demand drops, the producer is left with expensive excess capacity.
If the facilities are flexible, production of popular models can continue to prepare
product for export. If facilities are inflexible or all sales are flat, then the producer
must bear the cost or shed assets.
CHAPTER SIX
Discussion Questions
1. Why is it important to consider uncertainty when evaluating supply chain design
decisions?
There is little in life that is certain, so it is important to consider the impact that
uncertainty has on the supply chain. Modeling techniques discussed in this text
require assumptions about future demand, price structures, paradigms, etc. It is
safe to say that most assumptions that we make in using these models are false;
we are permitted to apply these models because the assumptions occasionally are
not false enough to make a difference.
The supply chain decisions that must be made require considerable investments
that cannot be changed or rescinded in the short run without incurring losses. It is
important for the decision maker to weigh all alternatives and the uncertainties
attached to the events that the future holds in order to arrive at the best decision.
2. What are the major sources of uncertainty that can affect the value of supply chain
decisions?
The major sources of uncertainty are fluctuations in demand and price. These may
vary for a number of reasons; Porters five forces model suggests that the
presence or absence of substitute goods and services, the threat of existing
competitors, of new competitors and the bargaining power of customers will
affect a companys existing product. Prices may fluctuate according to supply and
demand, changes in tariffs and exchange rates, and inflation.

3. Describe the basic principle of DCFs and how it can be used to compare different
streams of cash flows.
Discounted cash flows operate on the principle that it is better to have money
available today than money available some time in the future. Money that is
available today may be invested in capital markets or some other instrument for a
return. Money that will be paid to you over time is worth less since you have
forfeited interest that might have accrued starting today. When comparing two or
more income streams, discounted cash flows (after tax) should be evaluated using
the net present value equation:
t
r
1
NPV CO
Ct
t 1 1 k
4. How does the binomial representation of uncertainty relate to the normal
distribution?
As the number of periods increases, the probability distribution among the end
states of the multiplicative binomial becomes smoother and begins to resemble
the normal distribution. In general, the normal distribution is a reasonable
approximation to the binomial distribution depending on the sample size and the
likelihood of the event in question. In the case of the multiplicative binomial, if
the probability p of moving up is close to 0.5 (and the probability of moving down
is therefore also close to 0.5) then 20 periods of up and down movement would
result in a distribution that is close to normal.
5. Summarize the basic steps in the decision tree analysis methodology.
The decision tree analysis methodology is summarized as follows:
Identify the duration of each period and the number of periods T over
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, determine
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.
6. What are the major financial uncertainties faced by an electronic components
manufacturer deciding whether to build a plant in Thailand or the United States?

The financial uncertainties posed by a global location decision can be quite

vexing. In the shorter term, the analyst must explore the cost structure for
establishing operations; acquiring land or an existing plant, fitting it with tooling,
and recruiting and training a staff. Taking the long view, the decision-maker must
assess the stability of each countrys currency; are exchange rates likely to remain
stable or will they move for or against the manufacturer? The analyst must also
weigh the likelihood that tariffs and taxes will rise and that costs for inputs and
labor will increase at an acceptable rate. Is inflation likely to be higher in one
country or the other?
7. What are some major nonfinancial uncertainties that a company should consider
when making decisions on where to source product?
Supply chain risks include the chance of disruptions and delays due to natural
disaster, war, terrorism, labor disputes, and poor supplier performance. The
chance of forecasting errors and information systems breakdown are also threats
to the supply chain. Risks associated with inventory include the rate of
obsolescence, shrinkage, and demand uncertainty as well as the number and
financial strength of customers. There is always the chance that your intellectual
property may be compromised by supply chain partners and that your productive
capacity loses flexibility.

CHAPTER SEVEN
Discussion Questions
1. What role does forecasting play in the supply chain of a build-to-order
manufacturer such as Dell?
Although Dell builds to order, they obtain PC components in anticipation of
customer orders and therefore they rely on forecasting. This forecast is used to
predict future demand, which determines the quantity of each component needed
to assemble a PC and the plant capacity required to perform the assembly.
2. How could Dell use collaborative forecasting with its suppliers to improve its
supply chain?
Collaborative forecasting requires all supply chain partners to share information
regarding parameters that might affect demand, such as the timing and magnitude
of promotions. Dell could share with their components suppliers all of the
promotions, e.g., holiday, back-to-school, etc., they have planned. These suppliers
could, in turn, notify their suppliers of discrete components that a spike in demand
is anticipated. These demand forecasts for end items determine the demand for
components and coupled with knowledge of fabrication times, allows all members
of the supply chain to provide the right quantity at the right time to their
customers.
3. What role does forecasting play in the supply chain of a mail order firm such as
LL Bean?
LL Bean has historically operated almost exclusively in a make-to-stock mode
and with very few exceptions, stocked products that did not go out of style as
rapidly as many other clothing and accessory lines. A pre-worldwide web
existence would have relied on communication with manufacturers about what
products might be featured on the front of their catalog. The lead times involved
in printing and distributing the catalog and producing the product line were such
that elaborate planning and forecasting tools were not required. A quick visit to
the web site demonstrates that this is changing; the featured products on the web
site can be changed daily or programmed to rotate each time the web page is
refreshed. LL Bean and their supply chain, including the logistics component, are
well aware of the demand forecast and can all receive sales data as orders are
placed. LL Bean probably has an extranet to communicate sales data with
suppliers and allows customers to create accounts to manage purchases, wish lists,
and track orders.

4. What systematic and random components would you expect in demand for
chocolates?
Systematic components are level, the current deseasonalized demand; trend, the
rate of growth or decline in demand for the next period; and seasonality, the
predictable seasonal fluctuations in demand. The demand for chocolates is
probably highly seasonal, one would expect demand to spike for certain holidays
such as Valentines Day, Halloween, and Christmas.
5. Why should a manager be suspicious if a forecaster claims to forecast historical
demand without any forecast error?
The primary difficulty with such a claim is that forecasts are always wrong,
hence, an estimate of error should be provided with the forecast. Given a set of
data, it is possible to create a forecasting model that is 100% accurate, but such a
model would contain ridiculous cubic, quartic, and possibly higher-order terms.
The model would work only on that data.
6. Give examples of products that display seasonality of demand.
Products that display seasonality include, heating oil, electricity, natural gas,
wrapping paper, school supplies, sporting goods (summer, winter, etc.), facial
tissues, beverages (coffee, beer, iced tea, etc.), ice cream, pizza delivery, and tax
preparation services. All products display some form of seasonality if you look at
them in a global perspective.
7. What is the problem if a manager uses last years sales data instead of last years
demand to forecast demand for the coming year?
Last years sales data is fine as long as there were no stock outs. If an item is not
on the shelf or is explicitly indicated as being sold out, the manager may be
blissfully unaware of customer demand that existed but was not expressed. Also,
if there were special promotions last year that are not planned for the following
year, the data must be adjusted to accommodate this factor.
8. How do static and adaptive forecasting methods differ?
Static methods assume that the estimates of level, trend, and seasonality within
the systematic component do not vary as new demand is observed. Once these
parameters are estimated, there is no need to adjust them and they can be used for
all future forecasts. In adaptive forecasting, the estimates of level, trend, and
seasonality are updated after each demand observation, that is, as data are
collected, they are incorporated into the forecasting process. Adaptive methods
allow a forecaster to react (or overreact) to recent developments. Should a

disruptive technology affect demand, the adaptive forecast will respond

immediately, albeit dragging several historical data points along for the ride. The
static approach would not take this new data into account and presumably the
forecasts would suffer. We would like to think that a forecaster using an invalid
static method would recognize its futility in light of a paradigm shift, but painful
personal experience suggests otherwise.
What information do the MSE, MAD, and MAPE provide to a manager? How can
the manager use this information?
Mean Squared Error(MSE) - squared deviation of forecast from demand.
Mean Absolute Deviation(MAD)- Absolute deviation of forecast from demand.
Mean Absolute Percentage Error (MAPE)- Absolute of forecast from demand
as percentage of the demand. Managers can use this information to forecast
accuracy and minimize error.

CHAPTER EIGHT
Discussion Questions
1. What are some industries in which aggregate planning would be particularly
important?
Aggregate planning is useful in many types of manufacturing and services.
Manufacturers include furniture, all durable goods, consumer electronics, textiles,
motor vehicles, and aircraft, Service industries might be restaurants and other
hospitality providers like hotels and motels.
2. What are the characteristics of these industries that make them good candidates
for aggregate planning?
Aggregate planning is most useful in industries characterized by relatively long
lead times and finite amounts of capacity. The end products or services provided
in these industries are composed of inputs that are often provided by other
businesses that must perform some fabrication.
3. What are the main differences between the aggregate planning strategies?
The three pure aggregate planning strategies are the chase strategy, time flexibility
from workforce or capacity strategy, and the level strategy. The primary
difference among the three strategies is the lever, that is, the parameter that is
manipulated to achieve equality of supply and demand over the aggregate
planning period.
The first chase strategy uses capacity, in the form of machine or personnel
capacity, as the lever. By chasing demand on a period-by-period basis, the level of
inventory is very low throughout the supply change and the work force is in a
constant state of flux, which can increase management costs.

The second chase strategy is time flexibility from workforce or capacity, using
utilization as the level. This strategy, like the chase plan before it, results in low
levels of inventory throughout the supply chain. It avoids the layoff problem of its
predecessor but still requires a flexible workforce and may also result in low
machine utilization.
The third strategy is to maintain a constant output rate throughout the aggregate
planning period, which stands in stark contract to the first two strategies. If
demand is highly variable, this plan will result in periods marked by backorders or
stock outs and other periods when the supply chain carries a high level of
inventory. There is no true synchronization of demand with supply in this strategy,
although over the entire aggregate planning period the planner will achieve a
match.
4. What types of industries or situations are best suited to the chase strategy? The
flexibility strategy? The level strategy?
The chase strategy should be used when the cost of carrying inventory is very
high and the costs to change levels of machine and labor capacity are low.
Industries with these characteristics include aircraft and other high dollar products
and producers of highly perishable products.
The flexibility strategy should be used when inventory carrying costs are
relatively high, machine capacity is relatively inexpensive, and the work force
cannot be adjusted on short notice. This strategy works in the automotive sector,
durable goods, and consumer electronics.
The level strategy works well when inventory carrying and backlog costs are
relatively low. The consumer goods industry has a cost structure that lends itself
well to the level strategy.
5. What are the major cost categories needed as inputs for aggregate planning?
The major cost categories needed as inputs for aggregate planning are production
costs and inventory costs. Production costs include labor costs of regular and
overtime, costs of subcontracting production, costs of changing capacity by hiring
or laying off workforce and increasing or reducing machine capacity. Inventory
costs include the cost of having too much (storage costs per period) and too little
(backorder or stockout costs).
6. How does the availability of subcontracting affect the aggregate planning
problem?
Subcontracting provides another variable that the aggregate planner may
manipulate to match supply with demand. A fortunate planner may be able to plan

production using a chase strategy from a macro view with production segmented
such that internal operations are run using a level strategy with a subcontractor
absorbing the variability in demand.
7. If a company currently employs the chase strategy and the cost of training
increases dramatically, how might this change the companys aggregate planning
strategy?
As training costs increase, it becomes more expensive to vary the level of
workforce, perhaps to the point of making a chase strategy cost-prohibitive. If a
chase strategy is taken off the table, then the aggregate planner should familiarize
himself with a level strategy, time flexibility strategy, or some happy combination
of the two.
8. How can aggregate planning be used in an environment of high demand
uncertainty?
High demand uncertainty creates difficulties for the forecasting input to aggregate
planning. Based on experience any aggregate planner knows that an aggregate
plan developed for an 18 month planning period will not be 100% accurate and
that the last few months in the plan may have gross errors in the demand forecast.
As those months roll towards the present, the planner must update the plan. In an
environment with high demand uncertainty, the planner must update plans
regularly, communicate more frequently with suppliers and all others providing
inputs to the plan, and recognize that plans several months into the future are little
more than toner on paper.

CHAPTER NINE
Discussion Questions
1. What are some obstacles to creating a flexible workforce? What are the benefits?
A flexible workforce possesses the ability to learn new tasks or switch tasks
without significantly disrupting production, to expand (or contract) capacity via
over or idle time, hiring and firing of seasonal workers, or subcontracting, and to
work different schedules.
A number of factors influence a producers ability to realize a flexible workforce:
restrictive labor agreements and work rules, a tight labor market, the education
level, culture, or organizational culture of the work force, the complexity of the
tasks, the proprietary nature of the production process, and restrictions imposed
by other members of the supply chain.
A flexible workforce opens the supply chain up to a wider range of alternatives
when trying to match supply with demand. If subcontracting or temporary
workers can be deployed, then a firm can function at a steady base rate and use
the subs to buffer periods of high demand.
2. Discuss why subcontractors can often offer products and services to a company
more cheaply than if the company produced them themselves?
The subcontractor can offer services more cheaply for a number of reasons.
In many cases, the subcontractor is a specialist in the area and is more flexible,
hence cheaper. If a subcontractor is performing similar work for a number of
clients, they can take advantage of the zero-sum nature of business competition.
By aggregating orders from a number of clients, the subcontractor is able to
satisfy peaks in demand from some of their clients because other standard clients
will be experiencing valleys in demand. If subcontracting occurs because a firm
is at capacity, the subcontractor (that is not overcapacity) can handle the
production more cheaply simply because is expensive to operate a system at
excess capacity.
3. In what industries would you tend to see dual facility types (some facilities
focusing on only one type of product and others able to produce a wide variety)?
In what industries would this be relatively rare? Why?
Any industry where a lucrative product requires both unique labor skills and
production facilities is a prime candidate for a dual facility operation. The
healthcare industry is one example of a dual facility type; many large hospital
chains have focused operations for trauma, heart, ob/gyn, and other specialties.
Other industries with dual facility types include the legal profession, hospitality,
construction, and many others. Industries where dual facility types are rare
include tobacco products, alcoholic beverages, sawmills, and chemicals.

The dividing point among these industries is the continuous flow nature of the
non-dual producers. If processing requirements dictate that the product stream
must visit the same steps of a process in the same sequence, then the higher
volume and low process flexibility combination results in dedicated production
facilities that simply cant have a broad product range.
4. Discuss how you would set up a collaboration mechanism for the enterprises in a
supply chain.
Collaboration mechanisms in a supply chain should begin with the initial
partnering process as the supply chain is being established. All parties in the chain
must be aligned and dedicated to the success of the entire chain. Trust and open
communication are of primary importance; there should be a myriad of formal
and informal communication channels open among all parties. If constancy of
purpose is ever in question, each firm might devote some resources towards
equitable chain incentives such that behaviors that benefit the entire supply
chain are recognized and rewarded. The incentives, communication, and trust
should be established at all levels of every chain member. Company leadership
should provide for highly visible evidence of these activities on their level and
among cross-business supply chain teams.
5. What are some product lines that use common parts across many products? What
are the advantages of doing this?
There are many producers, both manufacturing and service, that use common
parts across many products. Some of these product lines include the food industry,
construction, furniture, soap, plastics, perfumes, computer and office equipment,
automotive, motorcycles, bicycles, airframe, and most back-office operations in
the service industries.
The use of common parts (and services) lowers costs and enables producers to
meet variability in demand. Part commonality absorbs variability in disaggregated
demand from period to period since the aggregated demand is inherently less
variable. The common parts may be produced or acquired at a more constant rate
and stocked at a lower inventory level while maintaining a higher customer
service level.
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 often find themselves at cross purposes; as the authors
note, marketing often has incentives based on revenue, whereas operations has
incentives based on cost. The cachet of new products, service guarantees, copromotions, and other marketing vehicles is quite often lost on members of the
organization that must fulfill promises made by their friends in marketing. As
with all collaborations, open communication is a must on a near-constant basis.

Regular planning meetings must include full cross-functional participation and

critical information must be shared as sales and operations occur. Having
common performance measures is another way to get these two groups to work
together for the common good of the company. Holding both groups responsible
for Customer service, accuracy, on time delivery and quality and rewarding them
jointly for achieving these goals will greatly increase their willingness to work
together.
7. How can a firm use pricing to change demand patterns?
A change in price, one of marketings Four Ps, will change demand assuming that
there is some elasticity in demand. A firm can shift demand from a popular
product or time to a less-popular product or what is traditionally an off-peak
demand period by lowering prices. A firm can collect data on the impact of price
changes on demand and use the correlation as an input into supply chain
aggregate planning. In the absence of such coordination, it is virtually guaranteed
that supply chain partners will face demand levels they had not anticipated and
will be unable to satisfy. The increase in demand results from a combination of a)
market growth, b) stealing share, and c) forward buying. The first two increase
demand for the product and the third robs sales from the future.
8. Why would a firm want to offer pricing promotions in its peak-demand periods?
If we assume that a pricing promotion serves to increase demand, then there are a
couple of reasons a firm may offer pricing promotions during peak demand
periods. Even at peak demand, the firm may have excess capacity and could meet
this demand. The nature of the product and supply chain may be such that a
promotion today results in an order that both the supply chain and customer
recognize will be filled in the future, perhaps during an anticipated low demand
period. If a firm produces a product that is at the end of its life cycle, there may be
incentive to exhaust accumulated materials and labor skills that are dedicated to
its production. Finally, a firm may be practicing a form of predatory pricing if it
senses that a competitor, teetering on the brink of extinction, is starved for sales.
9. Why would a firm want to offer pricing promotions during its low-demand
periods?
Pricing promotions during low-demand periods should serve to increase demand
and sales. The increase in demand results from a combination of the following
three factors:
Market growth sales may be realized from customers that were not considering
this product at the higher price.
Stealing share sales may be realized from customers that were considering a
competitors product.
Forward buying sales may be stolen from the future by customers that feel that
price may rise in the future.

CHAPTER tenth
Discussion Questions

1. What is the bullwhip effect and how does it relate to lack of coordination in a
supply chain?
The bullwhip effect refers to the fluctuation in orders along the length of the
supply chain as orders move from retailers to wholesalers to manufacturers to
suppliers. The bullwhip effect relates directly to the lack of coordination (demand
information flows) within the supply chain. Each supply chain member has a
different idea of what demand is, and the demand estimates are grossly distorted
and exaggerated as the supply chain partner is distanced from the customer.
2. What is the impact of lack of coordination on the performance of a supply chain?
The impact of lack of coordination is degradation of responsiveness and poor cost
performance for all supply chain members. As the bullwhip effect rears its ugly
head, supply chain partners find themselves with excessive inventory followed by
stockouts and backorders. The fluctuations in inventory result in increased
holding costs and lost sales, which in turn spike transportation and material
handling costs. Ultimately, the struggle with cost and responsiveness hurts the
relationships among supply chain partners as they seek to explain their lack of
performance.
3. In what way can improper incentives lead to a lack of coordination in a supply
chain? What countermeasures can be used to offset this effect?
Incentive obstacles occur in situations when different participants in the supply
chain are motivated by self interest.
Incentives that focus only on the local impact of an action result in decisions
being made that achieve a local optimum but can avoid a global (supply chain)
optimum. All supply chain partners must agree on global performance measures
and structure rewards such that members are appropriately motivated.
Sales force incentives also are responsible for counterproductive supply chain
behavior. Commissions that are based on a single short time frame can be gamed
by the sales force to maximize commission but these actions inadvertently
increase demand variability and exert pressure on the supply chain. Commissions
should be structured to provide incentives to consistently sell large volumes of
product over a broad time frame to the sell-through point.

4. What problems result if each stage of a supply chain views its demand as the
orders placed by the downstream stage? How should firms within a supply chain
communicate to facilitate coordination?
If each stage of a supply chain views its demand as the orders placed by their
downstream counterpart, the bullwhip effect is realized by the supply chain. Each
member develops a forecast that is based on something other than the true
customer demand and hilarity ensues. Supply chain members should share pointof-sale (POS) data so that all members are aware of the true customer demand for
product. The beauty of data sharing requirements is that only aggregate POS data
must be shared to mitigate the bullwhip effect; there is no need to share detailed
POS data.
5. What factors lead to a batching of orders within a supply chain? How does this
affect coordination? What actions can minimize large batches and improve
coordination?
Order batching is caused by a number of different factors. One mechanism is the
price structure of TL and LTL shipment quantities; there is incentive to wait a
while to make sure that a TL shipment is achieved. A customers natural tendency
to wait for a milestone, either real or perceived, can also cause batching.
Customers may wait until Friday, Monday, the last or first day of the month, etc.,
just because thats when they always have or because that event reminds them to
order. Order batching also occurs because customers are aware of an impending
price reduction and want to take advantage of it. Batching adversely affects
supply chain coordination because the supply chain will be starved for flow, then
overwhelmed with demand.
A supply chain can reconfigure their transportation and distribution system to
allow for shipments to multiple customers on a single truck to achieve TL
quantities. The chain can also assign (or encourage) days for placing orders and
move from lot-size based to volume based quantity discounts (or abandon
discounts and promotions altogether).
6. How do trade promotions and price fluctuations affect coordination in a supply
chain? What pricing and promotion policies can facilitate coordination?
Trade promotions and price fluctuations make supply chain coordination more
difficult. Customers seek to purchase goods for less and engage in forward buying
which creates spikes in demand that may exceed capacity. All parties would
benefit if the supply chain used every day low pricing (EDLP) to mitigate forward
buying and allow procurement, production, and logistics to function at a steadier
pace. If price incentives must be offered, the chain is better served by
implementing a volume-based quantity discount plan instead of a lot size based
quantity discount, i.e., providing incentives to purchase large quantities over a
long period of time, perhaps a year.

7. How is the building of strategic partnerships and trust valuable within a supply
chain?
Cooperation and trust within the supply chain help improve performance for the
following reasons:
When stages trust each other, they are more likely to take the other partys
objectives into consideration when making decisions, thereby facilitating win-win
situations.
Action-oriented managerial levers to achieve coordination become easier to
implement and the supply chain becomes more agile.
An increase in supply chain productivity results, either by elimination of
duplicated effort or by allocating effort to the appropriate stage.
Detailed sales and production information is shared; this allows the supply chain
to coordinate production and distribution decisions.
8. What are the different CPFR scenarios and how do they benefit supply chain
partners?
Collaborative planning, forecasting, and replenishment (CPFR) is defined as a
business practice that combines the intelligence of multiple partners in the
planning and fulfillment of customer demand. In order to be successful, the two
parties must have synchronized their data and established standards for
exchanging the information.
The four scenarios that sellers and buyers can collaborate along include:
Retail event collaboration the identification of specific SKUs that will be
involved in sales promotions and sharing of information regarding the
timing, duration, pricing, advertising, and display tactics to be deployed.
The benefit of retail event collaborations is a reduction in stockouts,
excess inventory and unplanned logistics costs.
DC replenishment collaboration the forecasting of DC withdrawals or
demand from the DC to the manufacturer is converted to a stream of
orders that are locked in over a specified time horizon. A successful DC
replenishment collaboration reduces production costs at the manufacturer
and inventory and stockouts at the retailer.
Store replenishment collaboration the forecasting of store-level orders
that are committed over a specific time horizon. Such a collaboration
results in greater visibility of sales for the manufacturer, improved
replenishment accuracy and product availability, and reduced inventories.
Collaborative assortment planning the forecasting (collaborative
interpretation) of industry trends, macroeconomic factors, and customer
tastes for seasonal goods. This forecast is converted into a planned
purchase order at the style/color/size level that is used to produce sample
products for a fashion event before final merchandising decisions are
made. The manufacturer benefits from this collaboration by having more
lead time to purchase raw materials and plan capacity.