TÀI LIỆU ÔN THI QUẢN TRỊ CHUỖI CUNG ỨNG TOÀN CẦU (SUPPLY CHAIN MANAGEMENT)

Home Work Chapter 1 to 12
Book Reference: Simchi-Levi, D., Kaminsky, P., and Simchi-Levi, E., & (2008). Designing
and managing the supply chain: Concepts, strategies, and cases (3rd edition). United-States:
McGraw-Hill.
Excel sheet:

Student Name: Shaheen Sardar
Department: Industrial and Management Engineering, Hanyang University, South Korea.

Home Work 1
Chapter 1: Introduction to Supply Chain Management
Problem 1:
Consider the supply chain for a domestic automobile.
1.
What are the components of the supply chain for the automobile?
2.
What are the different firms involved in the supply chain?
3.
What are the objectives of these firms?
4.
Provide examples of conflicting objectives in this supply chain.
5.
What are the risks that rare or unexpected events pose to this supply chain?
Answer:
1. The supply chain for a car typically includes the following components::
1. Suppliers for raw materials
2. Suppliers for parts and subsystems
3. Automobile manufacturer (Ford, in the example). Within a company, there are also different
departments, which constitute the internal supply chain:
1.
Purchasing and material handling

2.
Manufacturing
3.
Marketing, etc.
4. Transportation providers
5. Automobile dealers
2. Many firms are involved in the supply chain.
1. Raw material suppliers. For instance, suppliers for steel, rubber, plastics, etc.
2. Parts suppliers. For instance, suppliers for engines, steering wheels, seats, and electronic components,
etc.
3. Automobile manufacturer. For instance, Ford.
4. Transportation providers. For instance, shippers, trucking companies, railroads, etc.
5. Automobile dealers. For instance, Hayward Ford.
3. All companies involved in the supply chain want to maximize their respective profits by increasing revenue
and decreasing cost. However, companies may employ different strategies in order to achieve this goal.

‹#›


Some of them focus on customer satisfaction and quick delivery, while others may be more concerned
about minimizing inventory holding costs.
4. In general, different parts of the supply chain have objectives that are not aligned with each other.
1.
Purchasing: Stable order quantities, flexible delivery lead times and little variation in mix.
2.
Manufacturing: Long production runs, high quality, high productivity and low production costs.
3.
Warehousing: Low inventory, reduced transportation costs and quick replenishment capability.
4.
Customers: Short order lead times, a large variety of products and low prices.

1.

Typically, the automobile dealer would like to offer a variety of car colors and configurations to
accommodate different customer preferences, and meanwhile have a short delivery lead time from
the manufacturer. However, in order to maximize the length of production runs, and utilize
resources more efficiently, the manufacturer would like to aggregate orders from different dealers
and offer less variety in car configurations. This is a clear example of conflicting marketing and
manufacturing goals.

Problem 2: Consider a consumer mortgage offered by a bank.
a. What are the components of the supply chain for the mortgage?
Answer:
1.
Marketing companies that handle solicitation to potential customers.
2.
Credit reporting agencies that evaluate potential customers.
3.
The bank that extends the mortgage loans.
4.
Mortgage brokers through which the loans are distributed.
b. Is there more than one firm involved in the supply chain? What are the objectives of the firm or
firms?
Answer: The marketing companies strive to increase the response rate from homebuyers in order to
maximize their returns. Banks aim at a customer portfolio with a relatively low risk, healthy flow of
payments and low average loan maturity date. The brokers would like to maximize their sales commissions.
c. What are the similarities between product and service supply chains? What are the differences?
Answer: Similar to product supply chains, the objective of a service supply chain is to provide what is
needed (in this case, a particular type of service, rather than a physical product) at the right location, at the
right time, and in a form that conforms to customer requirements while minimizing system wide costs.
However, there are a number of differences between the two types of supply chains. For instance:

1.
In a product supply chain, there is both a flow of information and physical products. In a service
supply chain, it is primarily information.
2.
Contrary to a service supply chain, transportation and inventory are major cost components in a
product supply chain.
3.
Services typically cannot be held in inventory, so matching capacity with demand is frequently
more important in a service supply chain.
4.
In a service supply chain, the (explicit) cost of information is higher than in a product supply chain.
Note that in the mortgage example above, the bank has to compensate the credit reporting agency
for each credit report it obtains.
Problem 3: What is an example of a supply chain that has evolved over time?
Answer: Many supply chains evolve over time. For example, consider a memory chip supply chain.
Production strategies may change during different stages of the product life cycle. When a new memory
chip is introduced, price is high, yield is low, and production capacity is tight, and the availability of the
product is important. Consequently, production is usually done at plants close to markets, and the
management focuses on increasing yield, reducing the number of production disruptions, and fully utilizing
capacity. When the product matures, however, its price drops and demand is stabilized for a period of time,
so minimizing production cost moves to center stage. To reduce costs, production may be outsourced to
overseas foundries, where labor and materials are much cheaper.
Problem 4: A vertically integrated company is a company that owns, manages, and operates all its
business functions. A horizontally integrated company is a corporation consisting of a number of

‹#›


companies, each of which is acting independently. The corporation provides branding, direction, and
general strategy. Compare and contrast the supply chain strategies of the two types of companies.

Answer: A vertically integrated company aims at tighter interaction among various business components,
and frequently manages them centrally. Such a structure helps to achieve system wide goals more easily by
removing conflicts among different parts of the supply chain through central decision making. In a
horizontally integrated company, there is frequently no benefit in coordinating the supply chains of each
business within the company. Indeed, if every business specializes in its core function, and operates
optimally, an overall global optimum may be approached.
Problem 5: If a firm is completely vertically integrated, is effective supply chain management
still important?
Answer: Effective supply chain management is also important for vertically integrated companies. In such
an organizational structure, various business functions are handled by different departments of the company
that usually have different internal objectives, and these objectives are not necessarily aligned with each
other. This may be due to lack of communication among departments or the incentives provided by the
upper management. For instance, if the sales department is evaluated based on revenue only, and the
manufacturing department is evaluated based on revenue only, and the manufacturing department is
evaluated based on cost only, the company’s profit may not be maximized globally. Effective supply chain
management is still necessary to achieve globally optimal operations.

1.
2.
3.
4.

Problem 6: Consider the supply chain for canned peaches sold by a major food processing company.
What are the sources of uncertainty in this supply chain?
Answer: The sources of uncertainty in this example include:
Factors such as weather conditions, diseases, and natural disasters cause uncertainty in availability of raw
materials, i.e., peach crop.
Uncertain lead times during transportation of crop from the field to the processing facility may affect the
quality of peaches, e.g., they may get spoiled.
Processing times in the plant, as well as the subsequent warehousing and transportation times are subject to

uncertainty.
Demand is not known in advance.
Problem 7: Consider a firm redesigning its logistics network. What are the advantages to having a
small number of centrally located warehouses? What are the advantages to having a larger number of
warehouses closer to the end customers?
Answer: A small number of centrally located warehouses allow a firm to take advantage of risk pooling in
order to increase service levels and decrease inventory levels and costs. However, outbound transportation
cost is typically higher, and delivery lead times are longer. On the other hand, by building a larger number of
warehouses closer to the end customers, a firm can decrease outbound transportation costs and delivery lead
times. However, this type of system will have increased total inventory levels and costs, decreased
economies of scale, increases warehousing expenses, and potentially increased inbound transportation
expenses.

Problem 8: Consider a firm selecting a supplier of transportation services? What are the advantages
to using a truckload carrier? A package delivery firm such as UPS?
Answer: The choice of the particular transportation service depends largely on the types and sizes of
products the company wants to transport, the inventory and delivery strategies and the need for flexibility:
1. A truckload carrier is better if delivering bulky items or small items in large and stable quantities from
warehouses to demand points (stores). A good example is the delivery of groceries from warehouses to
supermarkets. Note that in this case we would like the demand to be in increments of full truck loads.
2. A package delivery firm is more appropriate if relatively small items are delivered from the
manufacturer/warehouse directly to the customers. Additionally, a package carrier company offers more
flexibility by different modes of transportation depending on the needs of the individual customers.
Problem 9: What are the advantages to a firm of high inventory levels? What are the disadvantages?
What are the advantages of low inventory levels? The disadvantages?

‹#›


Answer:

1. High inventory levels
1.
Advantages: High fill rate (service level) and quick order fulfillment.
2.
Disadvantages: High opportunity cost of capital tied in inventory, danger of price declines over time
and obsolescence, need for more warehouse space.
2. Low inventory levels
1.
Advantages: Low inventory holding and warehousing costs.
2.
Disadvantages: Higher risk of shortages and lower service levels.
Problem 10: What are some ways that redundancy can be built into a supply chain? What are the
advantages and disadvantages of building redundancy into the supply chain?
Answer: Building redundancy into the supply chain means that if one portion fails, the supply chain
can still satisfy demand. This is the biggest advantage of building redundancy in the supply chain.
Alternate sources of supply, provision for alternate transportation and distribution modes, alternate
warehouses are some of the ways by which redundancy can be built. A disadvantage of this policy is
that excess capacity is built into the system in order to hedge against emergencies that may disrupt the
supply – if these capacities are not used over time and if too much capacity is built as redundant
capacity, the costs to the supply chain increases. Other ways by which redundancy can be built is by
using information to better sense and respond to disruptive events, incorporating flexibility into
supply contracts to better match supply and demand and improving supply chain processes by
including risk assessment measures
Problem 11: Consider Figure 1-5. What are the reasons for the increase in transportation costs?
Inventory costs? Does one affect the other? How?
Answer: Inefficiencies in distributing products from the factories to the customers are primary reason
why both costs have increased. The two are related as the longer the time it takes to move products
from one point to the next in the supply chain; the higher will be the transportation costs – in addition,
the inventory costs will be higher as more products would be stocked in the pipeline between the
suppliers and the customers.

Case Discussion Questions (Case: Meditech Surgical):
Question 1: What are Meditech’s problems in introducing new products? In manufacturing ALL
products?
Answer: Meditech experiences poor service levels for new products, and inventory levels higher than
necessary for all products.
Question 2: What is driving these problems, both systemically and organizationally?
Answer: There are many causes for these problems:
1. Demand is not studied in detail.
2. Information systems that record and monitor demand and inventory are poorly designed.
3. Forecasting errors are not tracked.
4. There is a tendency to shift the blame to the customers, e.g., panic ordering.
5. There are built-in delays and monthly buckets in the planning system.
6. The planning system amplifies small variations in demand.
7. Poor communication with customers; Meditech doesn’t typically see end-customer demand.
Question 3: Why is the customer service manager the first person to recognize the major issues?

‹#›


Answer: The customer service manager is directly exposed to the complaints from the customers.
Hence, he is in a good position to gauge the scope of the problems. Other managers do not face the
customers, and they do not necessarily focus on their satisfaction.
Question 4: How would you fix these problems?
Answer:
1.
2.
3.
4.
5.

Recognize that demand is predictable, and establish better forecasting systems and
accountability for forecasts.
Institute better planning systems to eliminate planning delays; reduce the size of system time
buckets.
Alternatively, put assembly within the pull system and eliminate bulk inventory completely.
Develop and implement better information systems.
Improve communications with customers.

Home Work 2
Chapter 2: Inventory Management and Risk Pooling
Problem 2: How can firms cope with huge variability in customer demand?
Answer:
Companies can cope with uncertainty by
1. keeping safety stock,
2. shortening production and order lead times,
3. using risk pooling strategies,
4. delaying product differentiation in the supply chain as much as possible, i.e., aggregating demand
for parties upstream of the supply chain, and
5. by installing systems to achieve information sharing between suppliers and buyers, thus enabling
collaborative demand forecasting.
Problem 3: What is the relationship between service and inventory levels?
Answer:
In general, higher inventory levels make it easier to maintain higher service levels. However, modern
inventory management techniques may make it possible to increase service levels without increasing
inventory levels as much as in the past.
Problem 4: What is the impact of lead time, and lead time variability, on inventory levels?
Answer:
The variability in demand increases as the average and the variance of lead time increase. Therefore, for a
given service level, inventory levels increase with longer lead times and higher lead time variance.
Problem 5: What factors should management consider when determining a target service level?

Answer:

‹#›


The target service level depends on the mission-criticality of the product. For instance, consider a service
parts vendor for equipment for which every hour of down time is very expensive. In this case, we would
expect the management of the vendor company to specify a service level close to 100%. Market conditions
also play an important role in determining target service levels. For commodities, we would expect
relatively high service levels since customers can switch products easily if they do not find the particular
product they look for. However, a lower service level may be acceptable if the product has a clear value
differentiation compared to its competitors. For instance, customers of a high-end server that is clearly
deemed superior to the rest of the market may be willing to wait for 1-2 weeks if the manufacturer is out-ofstock.
Problem 6: Consider the (Q, R) policy analyzed in Section 2.2.6. Explain why the expected level of
inventory before receiving the order is

while the expected level of inventory immediately after receiving the order is

Answer:
The reorder level s = L * AVG + z * STD * has two components. The first component L * AVG covers the
expected demand during lead time, and the second component z * STD * is safety stock that protects
against deviations from the expected demand during lead time. Therefore, immediately before the order
arrives, we expect that the first component is depleted completely and the inventory level is z * STD * .
Then, when an order of Q units arrives, the expected level of inventory is Q + z * STD * .
Problem 7: Consider the base-stock policy analyzed in Section 2.2.8. Explain why the expected level of
inventory after receiving an order is equal to
while the expected level of inventory before an order arrives is

Answer:
In the base-stock policy, at the time the warehouse places an order, this order raises the inventory position

to the base-stock level (r + L) * AVG + z * STD * . Similar to the reorder level s in the continuous review
policy discussed in Question 5, this base-stock includes two components: the average demand ( r + L) *
AVG until the order arrives after r + L periods, and the safety stock z * STD * that protects against demand
uncertainty during lead time. Thus, just before an order arrives, the expected inventory on have is equal to
the safety stock z * STD * .
In order to determine the expected inventory level right after an order arrives at time t + L, note that when
inventory is reviewed at time t, the inventory position is raised to the base-stock level, and an order that
was placed at time t - r arrives at time t + L. (See Figure 3-12.) Therefore, when an order arrives, the
expected inventory level is L * AVG units less than the base-stock level, i.e., is equal to r * AVG + z * STD
*.
Problem 8: Imagine that you operate a department store. List five products you sell, and order them
from lowest target service level to highest target service level. Justify your ordering.
Answer:
Possible items for discussion are as follows:

‹#›


1.
2.
3.
4.
5.

Magazines – order quantity has to be the average demand for a magazine that the store expects to
sell. The service level is low and the store would not order a large quantity as unsold magazines
would be worthless
BestSellers – order quantity would be slightly higher than average demand as the store can expect
higher than average demand for such books
CDs – order quantity would be higher than average demand for the titles where the store expects a

higher demand. Otherwise the service level will be low for infrequently sold CDs.
Potato Chips – order quantity typically would cover expected demand over a number of days. Store
needs a high service level for such items and the longer shelf life of the products allows a larger
order quantity.
Milk – service level is high and hence order quantity would have to meet a high percentage of
expected demand; although milk is perishable, this is managed through frequent deliveries, which
allows the store to only match demand with available inventory over a few days.

Problem 9: Consider a supply chain consisting of a single manufacturing facility, a crossdock, and two
retail outlets. Items are shipped from the manufacturing facility to the cross-dock facility and from there to
the retail outlets. Let L1 be the lead time from the factory to the cross-dock facility and L2 be the lead time
from the crossdock facility to each retail outlet. Let L = L1 + L2. In the analysis below, we fix L and vary
L1 and L2.
a. Compare the amount of safety stock in two systems, one in which lead time from the cross-dock facility
to a retail outlet is zero (i.e., L1 = L and L2 = 0) and a second system in which the lead time from the
factory to the cross-dock facility is equal to zero (i.e., L1 = 0 and L2 = L).
b. To reduce safety stock, should the cross-dock facility be closer to the factory or the retail outlets? For this
purpose, analyze the impact of increasing L1, and therefore decreasing L2, on total safety stock.
Answer:
Observe that the longer L1, the more time the system has before allocation of inventory to the retailers need
to be made by the cross-dock facility. Thus, the longer L1 the more the system can take advantage of the
risk pooling concept. Hence, the total amount of inventory is smaller when the cross dock facility is closer
to the retail outlet.
Problem 10: Suppose you are selecting a supplier. Would you prefer a supplier with a short but highly
variable delivery lead time or a supplier with a longer but less variable lead time?
Answer:
The answer is not immediately clear because the required safety stock depends both on the average and on
the variance of the lead-time. The retailer would have to make a decision depending on the relative effects
of these two factors. In addition, your decision would ultimately depend on the requirements of the retailer’s
customers.

Problem 11: Although we typically model inventory-related costs as either fixed or variable, in the real
world the situation is more complex. Discuss some inventory-related costs that are fixed in the short term
but may be considered variable if a longer time horizon is considered.
Answer:
For a mature product, it is reasonable to expect that the price and demand are stable in the short term.
However, as the time horizon gets longer, and new products are introduced into the market, the demand and
price for this particular product decrease and excessive inventories may have to be written off. Thus,
inventory holding costs related to obsolescence may be regarded as fixed in the short term, but not in the
long term. Some storage costs are another example of inventory related costs fixed in the short term, but

‹#›


variable in the long term. For instance, due to large inventories as company may have to rent multiple
warehouses for a fixed lease term. However, if inventory policies are improved and turnover rates are
increased in this period of time, then it may be possible to rent fewer warehouses when renewing the lease
contracts. Clearly, similar arguments can be made for material handling equipment, storage racks, insurance,
personnel, etc.
Problem 12: When is a model such as the economic lot sizing model, which ignores randomness, useful?
Answer:
Such deterministic models can be used as proxies for the more realistic stochastic models if the planning
horizon is short, and the parameters of the problem are expected to be relatively stable over this time frame.
However, most importantly, simple models can illustrate the basic trade-offs in a given type of problem
which also translate into more realistic and complex situations. For instance, the optimal policy for the
economic lot sizing model balances ordering and inventory holding costs which is a general insight for
more sophisticated systems as well.
Problem 13: What are the penalties of facing highly variable demand? Are there any advantages?
Answer:
There are implicit and explicit penalties associated with a highly variable demand. For instance:
1. As discussed, the level of safety stock is proportional to the variability in demand, i.e., the higher the

variability in demand the higher the inventory holding costs.
2. From a manufacturer’s perspective, highly variable demand means that utilization of equipment will greatly
fluctuate, and equipment will sit idle when demand is low.
3. From a managerial perspective, high variability makes planning a very complex task that requires additional
resources, sophisticated models and tools.
On the other hand, if a company is successful at implementing strategies to cope with high variability in
demand, it may be possible to leverage on these to increase market share and/or revenue if the competitors
are not as successful.
Problem 14: Give a specific example of risk pooling (a) across locations, (b) across time, and (c)
across products.
Answer:
1. Risk pooling across locations: combining several warehouses into a single central warehouse.
2. Risk pooling across time: using quarterly demand forecasts instead of monthly forecasts to do capacity
planning.
3. Risk pooling across products: designing products with maximum commonality and delaying product
differentiation in the supply chain as much as possible.
Problem 15: When would you expect demand for a product in two stores to be positively correlated?
When would you expect it to be negatively correlated?
Answer:
If pricing strategies, service levels and quality of service in two stores are similar, then we would expect the
demand in these two stores to be positively correlated. However, assume that while the overall market
demand is relatively stable, one of the stores is running a promotion. In this case, we would expect that the
promotional campaign would steal sales from the other store, so that the demand in the two stores would be
negatively correlated.

‹#›


Problem 16: Consider the first Walkman™ model introduced by Sony. Discuss which forecasting
approach would be most useful at the start, in the middle, and toward the end of the product life cycle.

Now, consider a more recent Apple iPod model. How would your assessment of the appropriate
forecasting techniques change?
Answer:
In the absence of historical data, judgment and market research methods would be most useful at the
beginning of the life cycle of the first Sony Walkman TM. As more data becomes available during the product
adoption phase, time-series methods could be employed successfully. Then, as the product matures and the
manufacturer has a better understanding of the factors that affect demand, both time-series and causal
methods could prove effective.
When introducing a more recent Walkman model, we would expect Sony to rely much less on judgment and
market research methods compared to the very first model. Years of experience, knowledge and data can be
used to develop accurate quantitative time-series and causal models.
Problem 17: Technical question: KLF Electronics is an American manufacturer of electronic
equipment. The company has a single manufacturing facility in San Jose, California. KLF Electronics
distributes its products through five regional warehouses located in Atlanta, Boston, Chicago, Dallas,
and Los Angeles. In the current distribution system, the United States is partitioned into five major
markets, each of which is served by a single regional warehouse. Customers, typically retail outlets,
receive items directly from the regional warehouse in their market. That is, in the current distribution
system, each customer is assigned to a single market and receives deliveries from one regional
warehouse.
The warehouses receive items from the manufacturing facility. Typically, it takes about two weeks to
satisfy an order placed by any of the regional warehouses. Currently, KLF provides their customers
with a service level of about 90 percent. In recent years, KLF has seen a significant increase in
competition and huge pressure from their customers to improve the service level and reduce costs. To
improve the service level and reduce costs, KLF would like to consider an alternative distribution
strategy in which the five regional warehouses are replaced with a single, central warehouse that will
be in charge of all customer orders. This warehouse should be one of the existing warehouses. The
company CEO insists that whatever distribution strategy is used, KLF will design the strategy so that
service level is increased to about 97 percent.

Answer the following three questions:

Issue 1: a. A detailed analysis of customer demand in the five market areas reveals that the
demand in the five regions is very similar; that is, it is common that if weekly demand in one region is
above average, so is the weekly demand in the other regions. How does this observation affect the
attractiveness of the new system?
Issue 2: b. To perform a rigorous analysis, you have identified a typical product, Product A. Table
2-11 provides historical data and includes weekly demand for this product for the last 12 weeks in

‹#›


each of the market areas. An order (placed by a warehouse to the factory) costs $5,550 (per order),
and holding inventory costs $1.25 per unit per week. In the current distribution system, the cost of
transporting a product from the manufacturing facility to a warehouse is given in Table 2-12 (see the
column “Inbound”). Table 2-12 also provides information about transportation cost per unit from each
warehouse to the stores in its market area (see the column “Outbound”). Finally, Table 2-13 provides
information about transportation costs per unit product from each existing regional warehouse to all
other market areas, assuming this regional warehouse becomes the central warehouse.
Suppose you are to compare the two systems for Product A only; what is your recommendation? To
answer this question, you should compare costs and average inventory levels for the two strategies
assuming demands occur according to the historical data. Also, you should determine which regional
warehouse will be used as the centralized warehouse.
Issue 3: c. It is proposed that in the centralized distribution strategy, that is, the one with a single
warehouse, products will be distributed using UPS Ground Service, which guarantees that products
will arrive at the warehouse in three days (0.5 week). Of course, in this case, transportation cost for
shipping a unit product from a manufacturing facility to the warehouse increases. In fact, in this case,
transportation costs increase by 50%. Thus, for instance, shipping one unit from the manufacturing
facility to Atlanta will cost $18.Would you recommend using this strategy? Explain your answer.

Answer:
Issue No. 1

In this case, the demands from all warehouses are positively correlated. Therefore the benefits derived
from proposed system would not be considerable and new centralized system wouldn’t be attractive.
Issue No. 2 and Issue No. 3.
Please see the Excel sheet at start of this document (also PDF File uploaded separately on the
slideshare).

‹#›


Home Work 3
Chapter 3: Network Planning
Problem 1: Why is it important for a firm to periodically review its logistics network design? How do a
firm’s requirements for its logistics network change over time?
Answer:
The factors that affect the performance of the logistics network are not static, i.e., they change over time.
These factors include demand, product design, various costs in the logistics network, regulations, contracts,
etc. The effects of these dynamics need to be evaluated periodically in order to determine whether the
existing configuration is still satisfactory given the new operating environment.
For instance, service level requirements may change due to increased competition which typically means
that the lead time to fulfill customer orders needs to be shortened. This may require the firm to redesign its
logistic network and build new warehouses that are closer to the end customers.
----------------------------Problem 2: Within the organization, who is involved in a network design project (operations, sales,
marketing executives, etc.)? How?
Answer:
The design of the logistics network is a strategic decision that has long lasting effects and impacts all
functions within the company. For the success of such a project, many levels of the organization must be
involved:
1. Upper Management: The new design must be aligned with the vision and strategic goals of the company.
Additionally, such a project may be costly, so management buy-in is essential to ensure that sufficient
resources are devoted to the project.

2. Sales and Marketing: Demand forecasts and anticipated changes in product design and offerings affect the
network and need the involvement of sales and marketing teams.
3. Manufacturing and Operations: The logistics network design has obvious impact on day-to-day operation of
the firm. In order for the implementation to succeed, it is essential that the people involved with
operating the system on a daily basis are involved in its design.
-----------------------------------------------Problem 3: KLF Electronics is an American manufacturer of electronic equipment. The company has a
single manufacturing facility in San Jose, California. KLF Electronics distributes its products through five
regional warehouses located in Atlanta, Boston, Chicago, Dallas, and Los Angeles. In the current
distribution system, the United States is partitioned into five major markets, each of which is served by a
single regional warehouse. Customers, typically retail outlets, receive items directly from the regional
warehouse in their market area. That is, in the current distribution system, each customer is assigned to a
single market and receives deliveries from one regional warehouse. The warehouses receive items from the
manufacturing facility. Typically, it takes about two weeks to satisfy an order placed by any of the regional
warehouses. In recent years, KLF has seen a significant increase in competition and huge pressure from
their customers to improve service level and reduce costs. To improve service level and reduce costs, KLF
would like to consider an alternative distribution strategy in which the five regional warehouses are replaced
with a single, central warehouse that will be in charge of all customer orders.
Describe how you would design a new logistics network consisting of only a single warehouse. Provide an
outline of such an analysis: What are the main steps? Specifically, what data would you need? What are the
advantages and disadvantages of the newly suggested distribution strategy relative to the existing
distribution strategy?
Answer:
The decision that a single warehouse will be built has been made up-front. Therefore, we only need to focus
on the location and capacity of the warehouse, and determine how much space should be allocated to each
product in the warehouse. The main steps of the analysis are outlined below.
1. Data collection

‹#›

2.
3.
4.
5.

6.

1. Location of retail stores, existing warehouses (5 warehouses located in Atlanta, Boston, Chicago, Dallas
and Los Angeles), manufacturing facilities (a single manufacturing facility in San Jose), and
suppliers.
2. Candidate locations for the new warehouse.
3. Information about products, i.e., their sizes, shapes and volumes.
4. Annual demand (past actuals and future estimates) and service level requirements of the retail stores.
5. Transportation rates by available modes.
6. Transportation distances from candidate warehouse locations to retail stores.
7. Handling, storage and fixed costs associated with warehousing. Fixed costs should be expressed as a
function of warehouse capacity.
8. Fixed ordering costs, order frequencies and sizes by product or product family.
Data aggregation. Demand needs to be aggregated based on distribution patterns and/or product types.
Replace aggregated demand data points by a single customer.
Mathematical model building.
Model validation based on existing network structure.
Selection of a few low cost alternatives based on the mathematical model.
1. For the final decision, incorporate qualitative factors that were disregarded in the mathematical model,
e.g., specific regulations, environmental factors, etc.
2. Optionally, build a detailed simulation model to evaluate these low cost candidate solutions.
Decide where to locate the centralized warehouse.
With the centralized warehouse, service level will increase (less stock-out) and inventory holding costs will
decrease due to risk pooling. Also, fixed costs associated with warehousing will typically decrease, and
inbound transportation costs from the manufacturing facility to the warehouse should be less than the sum

of the previous inbound transportation costs. However, we will incur increased outbound transportation
costs from the central warehouse to the retailers. In summary, the essential design trade-off is between
transportation costs on one hand, and inventory holding costs and service level requirements on the other.
--------------------------------------------------Problem 4: In selecting potential warehouse sites, it is important to consider issues such as geographical
and infrastructure conditions, natural resources and labor availability, local industry and tax regulations, and
public interest. For each of the following industries, give specific examples of how the issues listed above
could affect the choice of potential warehouse sites:
1.
Automobile manufacturing
2.
Pharmaceuticals
3.
Books
4.
Aircraft manufacturing
5.
Book distribution
6.
Furniture manufacturing and distribution
7.
PC manufacturing
Answer:

1. In automobile manufacturing, cars are usually delivered over land, and demand is concentrated around
major cities. Therefore, we would expect warehouses in this industry to be located near large cities with
easy access to freeways and railroads. This would help to reduce the delivery lead time to dealerships in
the cities.
2. In the pharmaceutical industry, overnight delivery is common. Therefore, proximity to a major airport is a
factor that should be considered when choosing a warehouse location. Additionally, for raw material
warehouses it is important that these are close to natural resources.

3. In the book industry, supplier warehouse locations would be affected by the availability of nearby natural
resources.
4. In the aircraft manufacturing industry, sub-assemblies and parts are delivered by thousands of suppliers
scattered all over the globe to the manufacturing facilities. Therefore, for these supplier warehouses, by
far the most significant consideration is the ability to ship parts easily and on-time, i.e., the proximity to

‹#›


railroads, freeways, harbors, etc. In such a capital intensive industry, we would also expect that
regulations such as tax breaks have an impact on potential warehouse locations.
5. With a large customer base shopping for books on-line, short delivery lead times are crucial. Therefore, in
book distribution, we would expect to find large centralized warehouses on reasonably priced land and
where quick transportation modes are available.
6. Furniture manufacturing and distribution depends heavily on manual labor. Therefore, warehouses in this
industry should be located close to cities with sufficient labor supply.
7. In PC manufacturing, outsourcing from all around the world is common where labor is cheaper and
regulations favor the huge investments associated with high-tech manufacturing. These considerations
should be factored in when choosing candidate warehouse locations.
--------------------------------------Problem 5: Consider the pharmaceutical and the chemical industries. In the pharmaceutical industry,
products have high margins and overnight delivery typically is used. On the other hand, in the chemical
industry, products have low margins and outbound transportation cost is more expensive than inbound
transportation. What is the effect of these characteristics on the number of warehouses for firms in these
industries? Where do you expect to see more warehouses: in the chemical industry or the pharmaceutical
industry?
Answer:
In the pharmaceutical industry, we would expect more warehouses closer to the end customers for short
delivery lead times. On the other hand, in the chemical industry there would be fewer centralized
warehouses in order to consolidate orders and decrease outbound transportation costs.
--------------------------------------------------Problem 6: In Section 3.2.3, we observe that the TL transportation rate structure is asymmetric. Why?

Answer:
If we expect that the truck would travel empty on its return route, then TL rate would be higher.
Considering the example discussed in the chapter, the probability that the truck comes back empty from
Illinois (industrial heartland) to New York is lower than the corresponding probability from New York to
Illinois which explains the asymmetric cost structure between these two cities.
--------------------------------------------------Problem 7: Discuss some specific items that make up the handling costs, fixed costs, and storage costs
associated with a warehouse.
Answer:
1.
Handling Costs
1.
Labor cost of workers in material handling.
2.
Cost of conveyors, fork lifts, automated guided vehicles (AGVs), etc., used to carry the goods in the
warehouses. Note that these costs have two components: variable costs that are linearly proportional
to the distances the goods are transported over; and purchasing costs of equipment that are
proportional to the daily output required from the material handling system, but in a non-linear way
because equipment is purchased in discrete quantities.
2.
Fixed Costs
1. Purchasing or rental cost of land.
2.
Cost of maintaining and operating the warehouse building which includes annual depreciation and
utility costs.
3. Cost of racks that depend on the capacity of the warehouse.
4. The cost of insurance for the facility.
3.
Storage Costs
1.
Opportunity cost of capital tied up in inventory.

2.
Cost of price declines while inventory is sitting in the warehouse. Note that this includes the risk of
obsolete inventory that needs to be salvaged.
-----------------------------------Problem 8: What is the difference between using an exact optimization technique and a heuristic to solve a
problem?

‹#›


Answer:
An exact optimization technique is guaranteed to provide an optimal solution (if one exists) even if it takes a
long time. On the other hand, a heuristic algorithm is a method that will find good solutions to the problem
in a reasonable amount of time where the terms “good” and “reasonable” depend on the heuristic and the
particular problem instance. The choice between an exact optimization technique and a heuristic algorithm
for a given problem frequently depends on the trade-off between solution quality and solution time. Note
that even if a heuristic algorithm (by chance) finds the optimal solution to a problem, it cannot confirm the
optimality of the solution. On the other hand, for many problems there are no known optimal algorithms, so
heuristics must be used.
-----------------------------------------------Problem 9: What is simulation, and how does it help solve difficult logistics problems?
Answer:
Simulation is a popular performance evaluation and modeling tool for complex stochastic systems that
cannot be evaluated analytically. A simulation model can closely reflect a real system and mimic its
behavior, but it has some drawbacks: simulation is a descriptive tool, i.e., it cannot provide optimal values
for system inputs. It generates, for a given set of inputs, sample outputs from the system that are used to
compute statistical estimates of the performance measures. Also, accurate simulation models of large
systems require extensive development effort, and typically take a long time to run. Thus, we advocate a
two-phase approach to solve difficult logistics problems:
1. Use a mathematical optimization model to generate a number of good candidate solutions, taking into
account the most important cost components.
2. Use a detailed simulation model to evaluate the candidate solutions generated in the first phase.

Home Work 4
Chapter 4: Supply Contracts

Problems Solutions: 1, 3, 4, 5, 8
PROBLEM 1
Problem 1: When is a buy-back contract appropriate? When is a payback appropriate? What about
an option contract? How are they related? Argue that buy-back and pay-back contracts are special
types of options contracts?
Answer:
1.

Buy-back contract is appropriate when the supplier wants to increase the order quantity
placed by the buyer, and hence decreases the likelihood of out of stock. Buy back contract is
appropriate in a sequential supply chain. This type of supply contract is generally
implemented in order to reduce the risk of the buyer, so that he will order higher quantities
from the suppliers. In the buy–back contract the supplier buys the unsold commodities from
the buyer at a price that is greater than the salvage value so that the buyer involves himself in
higher orders. This is generally implemented in the make-to- order type of contracts (Supply
Chain) where the buyer forecasts the customer demand and orders the raw materials from the
supplier and the supplier provides the exact quantities to the buyer. As it can be observed here
the supplier is at risk as he needs to stock raw materials in accordance with to the buyer
needs. In order to compensate the risk on the suppliers end, the supplier offers a price that is
greater than the salvage value for the unsold goods from the buyer so that the risk is
compensated (minimized) and the profit is optimized between the both parties and also the
buyer will involve in higher amounts of orders.

‹#›

2.

Pay-back contract is appropriate when wanting to give the manufacturer incentive to
manufacture more since the risk with associated with unused capacity is decreased. In payback contract the buyer agrees to pay some price to the unit that the manufacturer (Supplier)
produces. In this way the risk associated with the supplier is reduced, as his production
capacity and utilization will be increased and he can rely on his production capacity. Whereas
the risk associated with the buyer (Distributor) increases; but this reduces the inventory risks.
The pay-back contract is generally implemented in a Make-to-Stock type of supply chain
where the supplier stocks goods that he needs to supply to the distributor. The contract is
made in such a way that all the parties involved are profited.

3.

In Option/Flexibility contracts the buyer pays a prior amount to the supplier which is called as
reservation price or premium. The buyer has the choice of making order till the order price
does not exceed the reservation price. But if the buyer wants to order some more quantity then
he has to pay more to the supplier in order to get the material; this price is called as exercise
price or execution price. It should be noted here that the price of the single unit will not be as
cheap as in the case of a long term contract. The option contract is similar to the pay-back
contract as the risk is shifted to the supplier/manufacturer as he needs to face the uncertainty
in the customers demand. But option contracts are not similar to the buy-back contract as the
supplier does not buy the unsold components. But it is similar in a way that the risk is
compensated between the supplier and the buyer. An option-contract is appropriate when
wanting to reduce the inventory risks. All the given contracts are option contracts to some
extent, where the option is either buy-back or pay-back and in both the risk is distributed
among the parties and the party with the highest risk will have the highest revenue assuming
that the contract goes perfect.

PROBLEM 3
Problem 3: In example 4-5, we discuss the revenue sharing contract between Blockbuster Video and

the movie studios. In this case the benefit for Blockbuster is clear: purchase price is reduced
significantly from $65 to $8 per copy. What are the benefits for the studios?
Answer:
In the Revenue Sharing contract between the Block-Buster and the Movie studios the Blockbuster
has requested the Video supplier to reduce the cost of the Video CD from $ 65 to $8. From this
contract it is clearly evident that the profits of the Block-Buster has drastically improved because they
purchased whole lot of videos and also could rent the videos to the 20% customers that they were
missing. This is also advantages to the Movie studios since according to the contract, as the Movie
studios will be sharing 30 to 45 % of the profit for each rental. Hence the Movie Studios will benefit
from the increase in number of rentals. Thus this can be considered a win-win situation. But it should
also be noted that the movie studios should keep in track of the actual number of rentals that the
Block-Buster rental store is making as the book also mentions that the Walt-Disney studios has filed a
law-suit against the block-buster rental store as they have caused them a loss of $ 120 million in
revenue sharing for four years.

PROBLEM 4
Problem 4: Again, consider the revenue-sharing contract between Blockbuster Video and the movie
studios. This contract has been extremely profitable for both sides. Since economists have explored

‹#›


revenue-sharing contracts for many years, why do you think Blockbuster and the movie studios took
until 1998 to implement a revenue-sharing contract?
Answer:
In order to answer the above question we need to consider the following drawbacks that the
revenue sharing contracts have. These can be explained as follows:
1.
In revenue-sharing contracts the supplier should involve in tracking the buyer’s revenue; as a
result of which there is an increase in administrative cost. This also signifies the fact that

there is requirement of strong trust between the supplier and the buyer even though there
are reliable information systems.
2.
In revenue-sharing contract the buyer is always at risk since he needs to share his revenue
with the supplier; this particular supplier– buyer contract is manageable but the buyer needs
to work out other form of incentives with other suppliers from which he gets the material. As
a result it might have taken some time for the block-buster rental store to gain the trust from
the movie studios as well as working out the optimal contract that is suitable for them
consider all its suppliers.

PROBLEM 5
Problem 5: In this chapter, we discuss a variety of supply contracts for strategic components, both in
make-to-stock and make-to-order systems, which can be used to coordinate the supply chain.
1.

Why to Make-to-stock and make-to-order require different types of supply contracts?

2.

Consider contracts for make to stock systems. What are the advantages and the
disadvantages of each type of contract? Why would you select one over the others?

3.

Consider contracts for make-to-order systems. What are the advantages and disadvantages
of each type of contract? Why would you select one over the others?

Answer: 5 a).
The make to stock and make to order require different types of supply contracts depending on the
risks that are associated with the supplier and the buyer. In Make-To-Order supply contract the

supplier needs to produce only the quantity that is required by the buyer, i.e. the quantity that is
forecasted by the buyer. Here the buyer is at risk, because the supplier has a choice in selecting the
buyer. As a result the supplier involves in providing the buyer with incentives such as buy-back
contracts, Revenue sharing contracts etc. Whereas, in Make-to-stock supply contracts the supplier is
at risk and the buyer involves in providing mutual incentives to optimize the profits in a supply chain.
As a result the both the parties involves in Pay-Back contracts, Cost Sharing contracts and etc. Finally,
all these contracts are made to compensate the risk on either end and optimize the overall profit of
the system (i.e. to involve in a Global Optimization).
Answer: 5 b).
In the Make-To-Stock contracts, we have the following supply contracts:
1). Pay-Back Contracts: Here the supplier is provided with a certain price for each unit that he
produces that are not taken by the distributor. In this way the supplier’s risk is minimized. And at the
same time he can involve in full utilization of his capacities. Also, here the supply contract is made in

‹#›


such a way that the supplier produces goods; that more than compensates the distributor’s orders
such that both the parties have maximum profits. The disadvantage is that the distributor is at risk.
2). Cost Sharing Contract: The buyer gets the discounted rates on the products and at the same time
supplier will be shared some part of the production costs from the buyer. The disadvantages would
be: the buyer would be at risk if he is unable to sell the components that are purchased from the
supplier. And another disadvantage is that the supplier needs to share his manufacturing and other
internal costs with the buyer.
Answer: 5 c).
In the Make-To-Order contracts, we have the following supply contracts:
1). Buy-Back Contract:
The advantages in involving in Buy Back contract are: The buyer can reduce the risk involved in
unsold items and can get back some incentive from the supplier. At the same time the supplier can
get a higher order due to the incentive that he is providing to the buyer.

The Disadvantages in involving in Buy Back contract are: The supplier needs to spend money in the
reverse logistics that will result in higher costs for the supplier. This indicates suppliers are at risk in
depicting the uncertainty in customer demand. Secondly there is a risk from the buyer choosing the
best contract and not standing on the buy-back contract.
2). Revenue Sharing Contract:
The advantages in Revenue-Sharing Contract are: In revenue-sharing contract the buyer has the
advantage of getting the products at a cheaper rate. This increase in risk to the supplier is
compensated by sharing the revenue that the buyer makes on the services offered from the product.
Here, the supplier is trying to compensate the risk involved with the buyer and mutually benefiting
from the revenue percentage.
The disadvantages in Revenue sharing Contracts are: It requires a correct feedback of revenues from
the buyer. So, this requires huge trust from the buyer to the supplier. Secondly as there is
requirement of excellent information system on the revenues, this involves in higher administrative
costs. Also, it becomes very difficult for the buyer to manage his other suppliers with whom he is not
involved in a revenue-sharing supply contract.
3). Sales Rebate Contracts: This can increase the sales of the products; as a result it benefits the
retailer. But there is a risk at the supplier end in meeting the rebate costs.
4). Quantity-Flexibility Contracts: It benefits the buyer as the unsold items to an extent will be funded
totally by the supplier. But there is risk for the buyer after that certain extent.

PROBLEM 8
Problem 8: In a portfolio approach described in section 4.5, the supplier takes on all the risk when
the option level is high and the base commitment level is low. Why would suppliers agree to take on
that risk?
Answer:

‹#›


In the portfolio approach the buyer involves major percentage of his orders in base commitment (i.e.

long term contracts) and average percentage in option level and very low percentage form the spot
market. The suppliers are confident enough in taking the risk since when the demand is high the
base commitment level will answer the orders to a certain extent and the buyer comes back to the
option contracts to answer the remaining of his orders; here the supplier has the advantage in selling
the items at a profitable rate. Similarly, when the base commitment is low, the supplier is still ready
to go ahead in selling items to the buyer at the option contract and achieving a trade-off that is both
suitable to the supplier and buyer.

Without Solutions
Problem 2: Consider a single manufacturer and a single supplier. Six months before demand is
realized, the manufacturer has to sign a supply contract with the supplier. The sequence of events is
as follows. Procurement contracts are signed in February and demand is realized during a short
period of ten weeks that starts in August.
Components are delivered from the supplier to the manufacturer at the beginning of
August and the manufacturer produces items to customer orders. Thus, we can ignore any
inventory holding cost. We will assume that unsold items at the end of the ten week selling
period have zero value. The objective is to identify a procurement strategy so as to maximize
expected profit.
Specifically, consider a manufacturer that needs to find supply sources for electricity. The
manufacturer produces and sells products to end customers at a unit price, $15, and we assume
that the only contributor to the production cost is the cost of electricity. To simplify the example
we assume that a unit of electricity is required to produce a unit of finished good. The
manufacturer thus has information on the distribution of the demand for electricity. More
precisely, she knows that demand for electricity follows the probabilistic forecast described in
Table 4-4.

Two power companies are available for supply:
1.
Company 1 offers a fixed commitment contract with the following conditions: power is
bought in advance at a price $10 per unit.

2.
Company 2 offers an option contract with reservation price of $6 per unit paid in advance
and then $6 per unit paid for each unit delivered.
What is the procurement strategy that should be used by the manufacturer?
Table 4.4: Demand Forecast
Demand
Probability
800
11%
1000
11%
1200
28%
1400
22%
1600
18%
1800
10%
Answer:

Problem 9: Consider the following demand scenario:

‹#›


Consider the following demand scenario:
Quantity
2000
2100

2200
2300
2400
2500
2600
2700

Probability
3%
8%
15%
30%
17%
12%
10%
5%

Suppose the manufacturer produces at a cost of $20/unit. The distributor sells to end customers for
$50/unit during season and unsold units are sold for $10/unit after season.
a) What is the system optimal production quantity and expected profit under global optimization?

b) Suppose the manufacturer is make-to-order (i.e., the distributor must order before it receives
demand from end customers).
(i) Suppose the manufacturer sells to the distributor at $40/unit, how much should the distributor
order? What is the expected profit for the manufacturer? What is the expected profit for distributor?

(ii) Find an option contract such that both the manufacturer and distributor enjoy a higher expected
profit than (b)(i). What is the expected profit for the manufacturer and the distributor?

c) Suppose the manufacturer is make-to-stock. (i.e., the manufacturer must decide how much to

produce before the distributor sees the demand and places an order.)

(i) Using the same wholesale price contract as part (b)(i), calculate the production level of the
manufacturer. What are the expected profits for the manufacturer and for the distributor? Compare
your results with part (b)(i).

(ii) Find a cost sharing contract such that both the manufacturer and distributor enjoy a higher
expected profit than that in (c)(i), and calculate their expected profits.
Answer:
Problem 10: Using the data from problem 9, suppose the manufacturer has an inflated demand
forecast as follows:

‹#›


Quantity
2200
2300
2400
2500
2600
2700
2800
2900

Probability
5%
6%
10%
17%

30%
17%
12%
3%

a) Suppose the manufacturer is make-to-order. Using your proposed contract in Problem 9 (b)(ii), find
the order quantity and expected profit of the distributor, and the expected profit of the
manufacturer. Compare your answers with 9 (b) (ii).
b) Suppose the manufacturer is make-to-stock. Using your proposed contract in Problem 9(c)(ii), find
the production quantity and expected profit of the manufacturer, and the expected profit of the
distributor. Compare your answers with 9(c)(ii).
c) If you are the distributor and you have the choice of sharing the true demand forecast or the inflated
demand forecast with the manufacturer, what will you do in each case (make to order; make to stock)?
Explain.
Answer:

Home Work 5
Chapter 5: The Value of Information
Problem 1: Answer these questions about the Barilla case study?
a) Diagnose the underlying causes of the difficulties that the JITD program was created to solve?
What are the benefits and drawbacks of this program?
Answer (a): JITD was created to solve the problems of a) effects of fluctuating demand (Bullwhip
Effect) b) stockouts issue that strain Barilla’s manufacturing and logistics operations.

Benefits: Barilla can make better delivery decisions and improve its demand forecasts, be more
effectively meet end-consumer’s need and more evenly distribute the workload on its manufacturing
and logistics systems. The inventories of Distribution Centers (customers) could be reduced.

Drawbacks:
1.

Sale Persons lost their incentives, because the sale will be predictable or flat.

2.

It will be difficult to run trade promotions with JITD.

3.

Cost might increase due the needs to increase internal inventories

‹#›


4.

It might create stockouts problem instead of solving it.

5.

Customers need to improve their equipment (computer, bar-code scanner, etc) and share
their sales data that they are reluctant to do.

6.

The customers might work with other vendors for their extra space for inventories.

b) What internal conflicts or barriers does the JITD program create? What causes these conflicts?
How would you deal with this?
Answer (b): The implementation will take away some needs for sale and marketing that Barilla

depend so much for their success as documented in the case study. The sale will be flat that takes
away the bonus for the sale persons and since the trade promotions will be difficult to run with JITD,
the function of marketing will be reduced somewhat.
I am not Donald Trump, so I will provide opportunities for both sale and marketing personnel that
might be impacted by this program do cross training for other company’s functions and provide a
new way of doing sale or trade promotion using JITD as a tool. The incentive or bonus for sale
persons could be fixed and be more customer service oriented.
c) As one of Barilla’s customers, what would your response to JITD be? Why?

Answer (c): I will be gladly accepted the program. The reasons: The program if implemented can
smooth out the bullwhip effect and reduce the needs to monitor goods and replenish them that can
save the cost for inventories and warehouse space.
d) In the environment in which Barilla operated in 1990, do you believe JITD (or a similar kind of
program) would be feasible? Would it be effective? If so, which customers would you target next?
How would you convince them that the JITD program was worth trying? If not, what alternatives
would you suggest to combat some of the difficulties that Barilla's operating system faces?
Answer (d): The program can help them smooth out the bullwhip effect and the product delivered to
them won’t be charge until sold. Barilla will monitor goods and replenish needed inventories when
supplies are low. The inventories will reduce to needed level thus save them cost for inventories and
space.
Alternatives suggested:
1.

Reduce the varieties of products provided to the customers (consumers), the easiest way is
to drop the least value-added products. This will reduce the needs to have so many different
inventories and SKU for both Barilla and customers.

2.

The company is vertically integrated, instead of JITD approach, try JIT (lean production)

approach for its manufacturing that Barilla has control and can be done within the company.

The proposed system will be effective if it can be implemented correctly, and indeed, subsequent
results showed that JITD was very effective. In order to show value, it would be useful to

‹#›


demonstrate that JITD benefits the distributors (lowering inventory, improving their service levels,
and increasing their returns on assets) by running experiment at one or more of Barillas 18 depots. If
customers will not agree to JITD, they may at least agree to collaborative forecasting or increased
supply chain visibility.
e) Compare the JITD strategy proposed by Barilla to the celebrated JIT strategy developed by
Toyota and others
Answer (e):
Problem 2: Discuss how each of the following helps to alleviate bullwhip effect?
Answer:
a). E-Commerce and Internet: E-Commerce and Internet have come a long way since their inception.
Customers have the option of, making the orders online at any point in time. There are specific shop
timings to affect the sales of the product but this does not apply after the inception of E-Commerce.
Added to this; most of the internet applications today are so effective that they can actually be
integrated with the existing databases to provide sales and customer demand information at
different stages of the supply chain. This advancement in technology definitely helps in alleviating
the bullwhip effect since the upstream stages of the supply chain can plan and have an idea of the
changes in customer demand for a product. All the stages in the supply chain can make effective and
efficient decisions, to involve in similar inventory polices and planning activities so that the whole
supply chain can be optimized (Global Optimization) rather than any sequence (i.e. Sequential
Optimization). Thus E-Commerce and Internet definitely adds value in increasing the vital
information to control inventory, production, lead-times etc.
b). Express Delivery: Express delivery options basically help in reducing the lead-times associated in

each of the stages of the supply chain. As a matter of fact lead-time is one of the major causes to add
to the variability in the supply chain, as a result enhancing the bullwhip effect across the upstream
stages. Due to the availability of information and the express delivery options that are being offered
today; for example, by FedEx, UPS etc, the suppliers are able to ship the components at a faster rate
to the manufacturers and similarly the warehouses to the retailers. Thus Express Delivery options are
able to resolve the bullwhip effect to a great extent, which is providing an opportunity for the players
in the supply chain to plan well and effectively. Also, as discussed in this chapter the manufacturers
and distribution centres will have an option open to wait till the demand for different products reach
the full truck load limit so as to save in the transportation costs. As a result of all these advantages
the Express Delivery of Goods definitely helps in alleviating the bullwhip effect.
c). Collaborative Forecasts: As discussed earlier, the collaborative forecasts helps in attainment of
global optimization of the supply chain. This is assured only when all the players or stages in the
supply chain adhere to the fact that they are open to the information sharing. Whenever the concept
of information sharing exists then the availability of the customer demand, Sales and the stock on
hand information at each stage of the supply chain is made clear and the different players such as
the suppliers, manufacturers, warehouses and the retailers can involve or use the same inventory
policy to control their inventory. This helps in sharing the risk across the supply chain and will help in
proper planning, maintenance of inventory, reduction in lead-times and transportation and variability
and thereby reducing the bullwhip effect.

‹#›


d). Everyday Low Pricing: Everyday low pricing is excellent concept that will make the customers buy
products on a regular basis. As observed in the case of Wal-Mart, this concept helps in managing the
products in such a way that the price of the product offered to the customers can be reduced for the
periods henceforth. This is achieved by collaborating with the manufacturer to control the inventory
of the retailer. In order to achieve this, there is a requirement of information sharing from the retailer
to the manufacturer, so that the manufacturer estimates the demand in the retail store and makes
agreements to replenish the goods himself. This is successfully implemented in Wal-Mart and as

discussed above is one of the best ways to reduce the bullwhip effect across the supply chain.
e). Vendor - Managed Inventory: Vendor - Managed Inventory is the same situation where the
manufacturer gets to know the consumer demand from the retailer and manages and replenishes
the inventory at the retailer. In order to involve in the Vendor Managed Inventory the retailer should
be able to share the demand and sales information with the manufacturer or the distributor. The
advantage of this concept is that this can be applied across all the upstream stages of the supply
chain and can reduce the supply chain costs to a greater extent by reducing the risks involved across
all the stages and improving the management of inventory. Thus, due to the above explained
advantages the Vendor – Managed Inventory helps in alleviating the bullwhip effect.
f). Supply Contracts: Supply contracts go a long way in achieving Global optimization of the supply
chain. It helps the supply chain players in the long run in sharing their profits, costs and reducing the
risks on mutual agreements and by creating win-win situations. The supplier contracts are mainly
made to share the customer information across all the stages of supply chain. These are generally
made for a mutual benefit among the supply chain players. For example the retailer will share the
information of the customer demand and sales information with the distribution centre. The
distribution centre will involve in providing some incentives to the retailer in the form of making
money if the sales exceed a certain value or help in the retailers promotional and advertising
activities. Over the years the manufacturing and service industries have realized the importance of
supply contracts in reducing the risks, uncertainties and the corresponding variabilities that exist in
supply chain. Hence we can state that Supply Contracts came a long way in achieving Global
Optimization of the Supply Chain and thereby alleviating the bullwhip effect.
Problem 3: What are the advantages to retailers sharing inventory? For instance, you suppose to go
the car dealer, to find a blue model and he doesn’t have that model in stock. Typically he will obtain
the model from another local dealer. What are the disadvantages to the retailer?
Answer:
The advantages to the Retailer are:
a). He wins the confidence of the customer. And thereby increases his sales and service levels.
b). He will share the profit from another local retailer from whom he is obtaining the car.
c). Creates a Win - Win situation for him, the consumer and the local dealer.
d). Reduces the lead time and thereby involves in on-time delivery.

e). Reduces the bullwhip effect.
The Disadvantages of the Retailer are:
a). He loses the total sale value of the car since he is collaborating with the another local dealer.

‹#›


b). Risk of losing the customer. Since even though he assures the car to the customer, the
customer has always has the option of going to his competitor to go and buy the car.
c). Increased lead time.
d). Reduced Revenues.
e). Reduced Service Levels.
f). Should be in definite supply contract with the local dealer.
Problem 4: Discuss five ways that lead times in the supply chain can be reduced?
Answer:
The ways in which the lead times in the supply chain can be reduced are by:
1). Information Sharing: Information sharing can reduce the order processing times to a Greater
extent and thereby reducing the lead-times.
2). By accurately estimating safety stock and base-stock levels to help not to get out of stock. That is
involving in more accurate forecasting of demand in the upstream stages of the supply chain.
3). By the usage of EDI (Electronic Data Interchange) to reduce the information lead time and
therefore involving proper planning of inventories.
4). Reducing Ordering Lead Times By cross docking.
5). Involving in more accurate forecasts; due to decreased forecast horizon.
6). Involving in optimal distribution network designs.
7). Obtaining point of Scale Data from the retailer will help the supplier know the exact sales of the
retailer and thereby involving in maintaining right amount of stock at the right time in the right
proportion and at the right location (Distribution centre or Warehouse).
8). Involving in Vendor Managed Inventory.
9). Involving in Supplier contracts, that is in the situations where the retailer is out of stock, retailer

can ask the wholesaler or the warehouse to directly ship the components to the customer.
Problem 5: Consider the supply chain for breakfast cereal. Discuss the competing objectives of the
farmers who make the raw materials, the manufacturing division of the company that makes the
cereal, the marketing of the company that makes the cereal, the distribution arm of the grocery
chain that sells the cereal and the manager of an individual grocery store that sells the cereal.
Answer:
The competing objectives for the farmer would be producing the raw material i.e. harvest as much as
much as raw material possible and sell it to the manufacturer i.e. in large quantities. The
manufacturer might not want to take the risk in buying large amount of raw material from the
farmers, because of the fluctuations in demand from the distributors. The competing objective for

‹#›


the distributor arm of the grocery chain would be getting the required packets or quantities of
cereals according to the demand of the retailer. So the major objective for them is to manage the
uncertainty in demand from the retailer or the actual grocery store and get the right quantities from
the manufacturer. The competing objective of the grocery store is to understand and answer the
uncertainty in the customer demand and getting in required quantities of the cereal.

Problem 6: Consider Example 5-1 and discuss strategies that could help Newbury Comics and
SoundScan Inc. Solve the misalignment problem.
Answer:
Information sharing is an important element in reducing the variability in the supply chain and
thereby reducing the bullwhip effect. But if they ate not done on the basis of reliable contracts and
agreements then it will be a loss to one of the players involved in it. Here in the Newbury comics
case, the company got price incentives on the record labels provided by the SoundScan and in return
to that; Newbury Comics used to share the information with the Sound Scan, but the discrepancy
came when SoundScan started sharing the information from the competing retailers which did not
comply with the Newbury Comics supply terms because they did not receive the exact aggregated

demand for the products. So in order to avoid such a misalignment in the information sharing
SoundScan should come into terms like what sort of information they would want to share with
Newbury comics and to what levels. Since this causes loss to the Newbury Comics, if SoundScan
shares the Newbury information to other competing retailers. Thus both the parties should be
careful in sharing the information and making agreements as we can observe in this case it’s a great
loss for the Newbury Comics to stay in competition in the market.

Home Work 6
Chapter 6: Supply Chain Integration
Problem 1: Discuss the advantages of a push-based supply chain. What about a pull-based
supply chain?
Answer:
Advantages of a Push Based Supply Chain:

1.
2.

Products with low demand rate can be stocked.
Production and Distribution decisions based on long – term forecasts.

Advantages of Pull Based Supply Chain:
1.
Production and Distribution demand are coordinated with true customer demand
rather than forecasted demand.
2.
Firm does not hold any inventory and only responds to certain orders.
3.
Reduced lead times through the ability to better anticipate the incoming orders from
the retailers.
4.

Reduce inventory levels.
5.
Less variability in the system.
6.
Reduced inventory at the manufacturer to due to the reduction in variability.

‹#›