Discussion QA 9to17

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CHAPTER NINE:

Sales and operations planning: Planning

supply and demand in a supply chain

1. What are some obstacles to creating a flexible workforce? What are the benefits? A flexible worktorce 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 producer's ability to realize a flexible workforce: restrictive labor agreements and work rules, a tight labor market, the education level, culture, or organizational culture ofthe work force, the complexity ofthe 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 [lfm 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. Ifprocessing 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 can't 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 ofthe 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 [lfm 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 ofthese 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 ofthese 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 dis aggregated 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 su pply and demand to maximize profitability.

l\1arketing and operations often [md 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 gnarantees, co-promotions, and other marketing vehicles is quite often lost on members of the organization that must fulfill promises made by their ti"iends in marketing. As with all collaborations, open communication is a must on a near-constant basis. Regnlar 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.

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7. How can a firm use pricing to change demand patterns?

A change in price, one of marketing's Four P's, 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 flfm 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 flfm 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 fo llowing three factors:

l\1arket growth - sales may be realized from customers that were not considering this product at the higher price.

Stealing share - sales may be realized ±rom 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 TEN:

Coordination in a supply chain

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 oflack 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 fmd 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 ±rame 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 point-of-sale (PaS) data so that all members are aware of the true customer demand for product. The beauty of data sharing requirements is that only aggregate pas data must be shared to mitigate the bullwhip effect; there is no need to share detailed pas 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 customer's natural tendency to wait for a milestone, either real or perceived, can also cause batching. Customers may wait until Friday, Monday, the last or flfst day of the month, etc., just because that's when they always have or because that event reminds them to order. Order batching also occurs because customers are aware of an impending price

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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 ifthe 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 party's 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 defmed as a business practice that combines the intelligence of multiple partners in the planning and fultillment 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 fmal merchandising decisions are made. The manufacturer benefits from this co llaboration by having more lead time to purchase raw materials and plan capacity.

CHAPTER

ELEVEN:

Managing economies of scale in the supply

chain: Cycle inventory

1. Consider a supermarket deciding on the size of its replenishment order from Proctor & Gamble. What costs should it take into account when making this decision?

The main cost categories for the supermarket's inventory policy are material costs, ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble for the goods themselves. Ordering costs, also called procurement costs, are incurred by requesting the goods from the supplier and are fixed in the sense that they do not vary with the size of the order. Examples of such fixed costs are the labor required to place the order, handle the resultant paperwork and the transportation fee to ship the order. The holding cost is the cost to carry one unit in inventory for a specified period of time, usually one year. This cost is variable and includes the cost of capital and all of the costs associated with physically storing inventory -shrinkage, spoilage or obsolescence, insurance, the cost of capital, the cost of the warehouse space, etc.

2. Discuss how various costs for the supermarket change as it decreases the lot size ordered from Proctor & Gamble.

As the lot size ordered from the supplier decreases, the holding cost (variable with respect to lot size) decreases. As the lot size decreases, the ordering cost remains the same, but the annual ordering cost will rise since the total number of orders each year must increase. As the lot size decreases, the cost of the materials will drop on a per-order basis but will stay the same on an annual basis since total annual demand hasn't changed.

The exception to this occurs if the supplier has a price hreak for an order size above a certain threshold; in this case the cost of the goods might increase if the reduced order size is not sufficient to trigger a substantial per unit discount.

3. As demand at the supermarket chain grows, how would you expect the cycle inventory measured in days of inventory to change? Explain.

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As the demand at the supermarket chain grows, we would expect the cycle inventory as measured in days of inventory to also increase, although the increase in cycle inventory is only 40% of the increase in demand. This is because the relationship between the optimal lot size Q' and the annual demand D is

Q'

=

~2DS

. Since D is under the radical, its doubling to 2D does

he

not translate to a jump from a Q' to a 2Q' order; it translates to a jump from a Q' to a 1.4Q' order.

4. The manager at the supermarket in Question 1 wants to decrease the lot size without increasing the costs he incurs. What actions can he take to achieve his objective? One action would be to simply decrease the lot size and let the robust nature of the EOQ model work its magic. The total cost curve on either side of the optimal order quantity, the Q', is relatively flat, so movements in either direction have little impact on total annual procurement and carrying costs.

If greater cuts in lot size are desired, the manager can aggregate multiple products in a single order. Recall that the EOQ model is based on a one-product-at-a-time assumption; if multiple products are aggregated, then the fIxed procurement cost is spread over all of the items and dramatic lot size reductions are possible. If the same products are being ordered by another supermarket in the same chain (or at least by stores that are willing to cooperate) the combined orders can be delivered by a single truck making multiple stops, thereby reducing transportation expense.

Other techniques that should be deployed when aggregating across product lines include advanced shipping notices and RFID tags that will make inventory tracking and warehouse management simpler.

5. Discuss why supply chain profits may be hurt by a retailer making lot sizing decisions with the sole objective of minimizing its own costs. What advantage would result if the entire supply chain could coordinate this decision?

A supply chain is coordinated if the decisions the retailer and supplier make maximize total supply chain profIts. In reality, each stage of a supply chain is likely to make lot-sizing decisions with an objective of minimizing its own overall costs. The result of this independent decision making can be a lack of coordination in a supply chain because actions that maximize retailer profits may not maximize supply chain profits. This decision has an effect on overall supply chain costs including inventory holding costs, production costs, transportation costs, ordering costs, and warehousing costs.

6. When are quantity discounts justified in a supply chain?

Quantity discounts are justified in a supply chain as long as they are the fruits of a coordinated supply chain and maximize total supply chain profIts. For commodity products for which price is set by the market, manufacturers with large fIxed costs per lot can use lot size-based quantity discounts to maximize total supply chain profIts.

7. What is the difference between lot size-based and volume-based quantity discounts?

Lot size discounts are based on the quantity purchased per lot, not the rate of purchase. Lot size-based discounts tend to raise cycle inventory in the supply chain by encouraging retailers to increase the size of each lot. Lot size-based discounts make sense only when the manufacturer incurs a very high fIxed cost per order. For commodity products for which price is set by the market, manufacturers with large fixed costs per lot can use lot size-based quantity discounts to maximize total supply chain profits.

Volume discounts are based on the rate of purchase or volume purchased per specified time period. Volume-based discounts are compatible with small lots that reduce the cycle inventory. If the manufacturer does not incur a very high fIxed cost per order, it is better for the supply chain to have volume-based discounts. For products for which a firm has market power, volume-based discounts can be used to achieve coordination in the supply chain and maximize supply chain profIts.

8. Why do manufacturers such as Kraft and Sara Lee offer trade promotions? What impact do trade promotions have on the supply chain? How should trade promotions be structured to maximize their impact while minimizing the additional cost they impose on the supply chain?

l\1anufacturers use trade promotions to offer a discounted price and a time period over which the discount is effective. The goal of manufacturers such as Kraft and Sara Lee is to influence retailers to act in a way that helps the manufacturer achieve its objectives. These objectives may include increased sales, a shifting of inventory from manufacturer to retailer, and defense against the competition.

Trade promotions may cause a retailer to pass through some or all of the promotion to customers to spur sales, which increases sales for the entire supply chain. What happens more frequently in practice is that retailers may choose to pass through very little of the promotion to customers, purchase in greater quantities, and hold this cheaper inventory in greater quantities. This action increases both cycle inventory and flow times within the supply chain.

Trade promotions should be structured such that a retailer's optimal response benefits the entire supply chain, i.e., retailers limit their forward buying and pass along more of the discount to end customers. If the manufacturer has accumulated excessive inventory, then a trade promotion may provide sufficient incentive to the buyer to forward buy, thus drawing inventories down to an appropriate level. The manufacturer may be able to smooth demand by shiftmg It to a penod of anticipated low demand with a trade promotion.

Research has shown that trade promotions by the manufacturer are efiective for products with high deal elasticity that ensures high pass-through (passing the discount on to the consumer) and high holding costs that ensure low forward buying, paper goods being the poster child for this combination. Trade promotions are also more effective with strong brands relative to weak hrands and may make sense as a competitive response.

9. Why is it appropriate to include only the incremental cost when estimating the holding and order cost for a firm?

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The cycle inventory models discussed in the chapter are robust; thus incremental (variable) costs per lot size are more important than costs that are fIxed with respect to lot size. The labor component of procurement or setup costs may be salaried; therefore changes in lot size do not impact this component.

CHAPTER TWELVE:

Managing uncertainty in the supply chain:

Safety inventory

1. What is the role of safety inventory in the supply chain?

Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a given period. As such, it tends to have a negative impact on supply chain cost but a positive impact on supply chain responsiveness. Safety inventory is carried because product demand and lead time are uncertain and a product shortage may result if actual demand during lead time exceeds the forecast amount.

2. Explain how a reduction in lead time can help a supply chain reduce safety inventory without hurting product availability.

A reduction in lead time reduces supply chain safety inventory according to equations 11.2 through 11.4. The reorder point is driven by the demand during lead time, the standard deviation of demand during lead time, and the customer service level, the latter two combining to form the safety stock. If lead time falls, the standard deviation of demand during lead time also falls, resulting in less safety stock.

Taking an intuitive (and extreme) approach, if lead time approached zero there would be no need for safety (or any) stock since customer orders could be fIlled instantaneously. 3. What are the pros and cons of the various measures of product availability?

The common measures of product availability discussed in this chapter are product fIll rate, order fIll rate, and cycle service level (CSL).

Product fill rate is the fraction of product demand that is satisfIed from product in inventory and should be measured over specified amounts of demand rather than time. Fill rate provides an accurate picture of the number of customers that receive their single-product orders. Order fill rate is the fraction of orders that are fIlled from available inventory and should be measured over a specifIed number of orders rather than time. In the multiproduct case, poor performance on one item can doom the order fIll rate to an extremely low score while the other products would have achieved very high fIll rates.

Cycle service level is the fraction of replenishment cycles that end with all the customer demand being met. Cycle service levels tend to be lower than the other two metrics; a fIrm could maintain a cycle service level of 0% but have a 99% product fIll rate.

4. Describe the two types of ordering policies and the im pact that each of them has on safety inventory.

The two types of ordering policies discussed in the text are continuous review and periodic review. Continuous review requires that inventory levels be monitored constantly with an order for a lot size ofQ placed when the inventory level drops as low as the reorder point. Since the level of inventory is known continuously, the level of safety inventory can be low; an order will be placed the minute the reorder point is reached.

Periodic review requires less vigilance; tlie inventory level is measured at regular time intervals and an order is placed to raise tlie inventory level to a specified thresliold. Under tliis system the level of inventory is known once a period and merely estimated until the next count. More safety inventory must be carried under a periodic review system to guard against a surge in demand.

5. What is the impact of supply uncertainty on safety inventory?

The required safety inventory increases with an increase in the standard deviation of periodic demand. The standard deviation of periodic demand is a function of the variance in the lead time and the variance in the demand. Anything that causes supply to be more deterministic will minimize the need for safety inventory.

6. Why can a Horne Depot with a few large stores provide a higher level of product availability with lower inventories than a hardware store chain such as Tru-Value, with many small stores?

Horne Depot benefIts from substitution and from aggregation. Many of the products Horne Depot carries are not aggressively branded in the eyes of the do-it-yourselfer. This class of customers wants to perform a simple horne repair or improvement and is less concerned about a specific manufacturer than about getting all the supplies in one trip (although I should note that in my experience there is no such thing as a single trip to Horne Depot for any project). Horne Depot also benefIts from aggregation; the large box store draws customers from a wider area and what one part of the customer base doesn't need this month, the other part does. The highs and lows tend to cancel, thus stabilizing demand within each season.

7. Why is Amazon able to provide a large variety of books and music with less safety inventory than a bookstore chain selling through retail stores?

Amazon is able to provide a large variety of books and music with less safety inventory through the power of aggregation. By holding best-selling items in geographically dispersed warehouses, Amazon can hold less inventory and still meet customer demand. Equations 11.12 through 11.16 illustrate the savings possible through aggregation versus a multiple location retail design.

Intuitively, many small retail stores would each have their own safety inventory for their customer base and most of this safety inventory would languish on the shelves. If one site experienced a surge in demand, a stockout would result. A large centralized supply would need less safety inventory as the demand variances might cancel each other, e.g., high demand from one region is offset by low demand from another. Only if many regions had unanticipated high demand would the central supply be exhausted.

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8. In the 1980s, paint was sold by color and size in paint retail stores. Today paint is mixed at the paint store according to the color desired. Discuss what, if any, impact this change has on safety inventories in the supply chain.

The practice of adding pigmentation in the retail store is a classic example of postponement; paint stores can mix any color into a solid white base and produce exactly what the customer wants. This change has greatly reduced the amount of safety inventory required as the paint store must now stock far fewer product lines. The reduction in safety inventory has simultaneously reduced safety inventory storage costs and increased responsiveness. 9. A new technology allows books to be printed in ten minutes. Barnes & Noble has decided

to purchase these machines for each store. They must decide which books to carry in stock and which books to print on demand using this technology. Do you recommend it for best-sellers or for other books? Why?

If Barnes & Noble must carry stock after purchasing this machine, they should carry items with a steady demand, bestsellers and the like. The fringe books that are rarely purchased would best be left to the 10 minute process which is effectively instantaneous production. The books with low demand would be too expensive to stock for sporadic demand; they would need only one of each, but the breadth of the product line would be overwhelming and prohibitively expensive to carry from month to month.

10. Consider a firm like Zara that has developed production capabilities with very short replenishment lead times. Do you think this capability is more valuable for its online operations or its store operations? Why?

It is more valuable for its store operations. Because Zara has developed a strategy that uses local flexible production, the trigger for replenishment is closer to the retail store than to it's online facilities. Thus this strategy benefits the store operations to a greater extent than the online operations.

11. As a firm gets better at postponement (can postpone at lower cost), should it increaselleave unchanged/decrease the variety that it offers? Why?

The typical response of most [lfms is to increase the variety that its offers, making the assumption that the more variety leads to greater demand. This is not always the case. As a firm increases variety, the number of component parts that need to be purchased and maintained increases thereby increasing the overall inventory holding costs. The better response is to maintain variety at the current levels, constantly monitoring the demand for each end item and adjusting the mix of products to reflect the overall demand. This means that as they add variety, they also may be taking away some items. Over the long haul this will lead to increased variety, but it is a managed and strategic move to increase variety instead of a direct response to postponement.

12. What capabilities can local suppliers in high-cost countries develop if they are to effectively compete against overseas suppliers in low-cost countries? Discuss how each capability impacts the level of inventory in the supply chain.

Local suppliers can begin to understand better the demand within the country and the drivers of that demand. By reducing the demand uncertainty the suppliers can better plan levels of safety inventory. Also by understanding replenishment lead times, lead time variability, and desired product availability, they can design a supply chain that can be more efficient with inventory levels and transportation costs that should offset the difference in production costs between themselves and competitors in low-cost countries.

CHAPTER THIRTEEN:

Determining the optimal level of product

availability

1. Consider two products with the same cost but different margins. Which product should have a higher level of product availability? Why?

The product with the higher margin should be stocked at a higher level of availability than the product with the lower margin. The product with the higher margin will have a higher Cu, which is the cost of understacking. The cost of understacking is the sale price less the cost and may be thought of by the supplier as profit foregone. A higher cost of understacking results in a higher critical fractile, so the optimal cycle service level will be higher, which will yield a higher availability.

2. Consider two products with the same margin carried by a retail store. Any leftover units of one product are worthless. Leftover units of the other product can be sold to outlet stores. Which product should have a higher level of availability? Why?

The product with the higher salvage value should be stocked at a higher level of availability than those with the lower salvage value. The product with the higher salvage value will have a lower Co, which is the cost of overstocking. The cost of overstocking is the sale price less the salvage value. A lower cost of overstocking results in a higher critical fractile, so the optimal cycle service level will be higher, which will yield a higher availability.

3. A firm improves its forecast accuracy using better marketing intelligence. What impact will this have on supply chain inventories and profitability? Why?

Improved forecast accuracy should result in a closer match between supply and demand, resulting in improved profitability. An improved match will result in lower levels of unplanned carryover inventory and shortages at the end of planning periods. The improved match will lower the expected costs of having too much or too little inventory.

4. How can postponement of product differentiation be used to improve supply chain profitability?

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Postponement refers to the delay of product differentiation until closer to the sale of the product. Postponement allows producers to leverage two features common to forecasts: forecasts with shorter time horizons tend to be more accurate than those with longer time horizons; and aggregate forecasts tend to be more accurate than forecasts for individual items/models. More accurate forecasts allow for a better match of supply and demand, thereby lowering mismatch costs and increasing profitability as discussed in the previous question.

5. What are some scenarios in which postponing product differentiation across all products may not be profitable? How can tailored postponement help in such situations? Postponement is valuable in a supply chain when a firm sells a large variety of products with highly unpredictable demand of about the same size that is not positively correlated. Postponement is not as valuable if a large traction of the demand comes trom a few products. In such a setting, tailored postponement is most effective whereby base loads are not postponed but the variation is postponed.

6. Zara has used local production in Europe to have short replenishment lead times. How does this capability of quick response help the company improve profits in a highly volatile trendy apparel marketplace?

In a trendy apparel market there exists a high probability for inventory obsolescence due to the nature of the industry. Therefore, by postponing the fmal configuration of the goods, Zara provides flexibility to its inventory to minimize this trend and better meet the ever changing demand.

7. When can tailored sourcing be used to improve supply chain profits? What are some challenges with implementing tailored sourcing?

In tailored sourcing, firms use a combination of two supply sources, one focusing on cost but unable to handle uncertainty, and the other focusing on flexibility to handle uncertainty but at a higher cost. For tailored sourcing to be efiective, having supply sources such that one serves as the backup to the other is not sufficient. The two sources must focus on different capabilities. The low-cost source must focus on being efficient and should be required to supply only the predictable portion of the demand. The flexible source should focus on being responsive and be required to supply the uncertain portion of the demand. As a result, tailored sourcing allows a firm to increase its profits and better match supply and demand.

8. Mattei has historically allowed toy retailers to place two orders for the holiday shopping season. Mattei is considering allowing retailers to place only one order. What impact will this have on retailer orders? What impact will this have on supply chain profits? Mattei needs to abandon this approach to supply chain management. Under the two-order system, retailers could place an order, assess market demand, and place a second order that takes advantage of the short time horizon and improved kuow ledge about market demand. The single-order system will require a less-educated guess about demand that will occur further in the future. The single-order system has a much higher risk of a gross mismatch between supply

and demand, resulting in excessive stock-out situations (lost sales) and fire sales at the end of the season. Supply chain profits will decline if the ordering system is changed to a single-order system.

9. Discuss how an expensive supplier with short lead times who is used as a backup for a low cost supplier with long lead times can result in higher profits than using only the low-cost supplier.

The two suppliers can be deployed so that the customer has the opportunity to place two (or more) orders during each demand cycle. The low-cost supplier with long lead times should receive the flfst order trom the customer. As demand is realized, the customer can refme their demand forecast. Ifthe forecast is overly optimistic, the excess inventory can be disposed for its salvage value. The salvage value should be the same regardless of supplier, but thanks to the lower purchase price, the cost of overstocking is much lower.

The second order can be placed at a later time and can be used to match demand as closely as the production situation permits. It may be possible to use the second order to fill only flfm customer demand that was not met by the order trom the slow, low-cost supplier. Even if this is not the case, the second order gives the customer the ability to match supply and demand while taking advantage of each supplier's strength.

CHAPTER

FOURTEEN:

Transportation

1. What modes of transportation are best suited for large, low-value shipments? Why? Rail and water transportation modes are best suited for large, low-value shipments. The price structure of the business make rail and water the modes of choice if low-value, large, heavy, or high-density items need to be transported. Air, package carriers, and trucks would not have the infrastructure required to accommodate large items; roads and bridges would be damaged and the storage capacity of the carriers is insufficient.

2. Why is it im port ant to account for congestion when pricing the use of transportation infrastructure?

Infrastructure often requires goverrnnent ownership and is not something that can be increased in capacity in the short term. If congestion is not factored in to the price structure for infrastructure, then demand for the resources will exceed capacity and major delays will occur. Pricing may be used to force users to internalize the marginal impact of their choices, thus alleviating some of the demand during peak periods.

3. Wal-Mart designs its networks so that a DC supports several large retail stores. Explain how the company can use such a network to reduce transportation costs while replenishing inventories more frequently.

A distribution center that supports several large retail stores can reduce supply chain costs in four ways: 1) Inbound shipments to the DC achieve economies of scale because each supplier

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sends a large shipment; 2) The outbound transportation costs for a DC can be low because it serves retail locations nearby; and very large inbound shipments that match retail demand can be cross-docked at the DC, which saves both 3) storage and 4) material-handling costs. A DC also can replenish retail inventories more frequently; the DC breaks bulk from manufacturers on one side of the warehouse and sends it to retail locations on the outbound side. Since retail demands are aggregated at the DC leve~ the amount of inventory actually stored at the DC is very low and as Little's Law indicates, the time between replenishments is low also.

4. Compare the transportation costs for an e-business such as Amazon.com and a retailer such as Home Depot when selling home-improvement materials.

The primary difference between these retailers is that Home Depot does not incur any outbound transportation cost for residential customers while Amazon faces such charges. Home Depot has substantial inbound transportation charges but is able to offload the outbound transportation cost to the vast rna jority of their customers. Amazon must use high cost package carriers for much of its product line although they are able to avoid inbound transportation costs for items that are drop shipped. For items that are held in one oftheir warehouses, Amazon must pay both inbound and outbound.

5. What transportation challenges does Peapod face? Compare transportation costs at online grocers and supermarket chains.

Peapod faces the burden of expensive outbound transportation costs and must account for congestion in the delivery area. Unlike traditional grocers who don't deliver their products, Peapod must deliver items in their fleet of climate-controlled trucks. These trucks must be scheduled with pricing incentives offered for peak and off-peak delivery times. Customers are keenly aware of the transportation component of their purchases and Peapod can use pricing incentives to spur their customers towards higher order amounts.

Both Peapod and traditional grocers must pay the inbound transportation costs oftheir wares; there would appear to be no great advantage gained by either approach unless one vendor has such substantial market share as to gain price concessions that they other can't negotiate. 6. Do you expect aggregation of inventory at one location to be more effective when a

company such as Dell sells computers or when a company such as Amazon.com sells books? Explain by considering transportation and inventory costs.

Inventory aggregation is a good idea when inventory and facility costs form a large fraction of a supply chain's total costs. Inventory aggregation is useful for products with a large value to weight ratio and for products with high demand uncertainty. Both factors allow aggregation to work to Dell's advantage, while Amazon reaps less of a reward.

Dell benefits trom aggregation because personal computers have an extremely high value to weight ratio; the demand for new items is uncertain, and Moore's Law makes holding excessive inventory an extremely unattractive proposition.

Amazon benefits from aggregation when inventory costs are examined, but is hurt by increased transportation costs. Most items that Amazon sells have low value to weight ratios and Amazon

must ship them via package carrier, which is expensive. Amazon saves money on storage costs since they choose to stock more popular titles and allow other entities to hold items with more variable demand.

7. Discuss key drivers that may be used to tailor transportation. How does tailoring help? Tailored transportation is the term for use of different transportation networks and modes based on customer and product characteristics. Tailoring transportation allows fIrms to achieve cost and responsiveness targets that are appropriate for the supply chain. The key drivers are density and distance, customer size, and product demand and value. These drivers can be viewed as guide for ownership of

Transportation options based on customer density and distance are summarized in the table and p d · resent cost an responSIveness tra eo d ffi sort e supply c rn. ti h I ha·

Short distance Medium distance Lon!! distance High Private fleet with Cross-dock with Cross-dock with

density milk runs milk runs milk runs

Medium Third-party milk LTL carrier LTL or package

density runs carner

Low Third-party milk LTL or package Package carrier density runs or L TL carrier carrIer

Customer size and location dictate whether a supplier should use a TL or L TL carrier or milk runs. Very large customers can be supplied using a TL carrier, whereas smaller customers can use LTL carriers or milk runs. The authors discuss a customer-partitioning procedure for combining smaller customers' shipments with larger customers in order to achieve responsiveness and cost targets.

Product demand and value determine whether aggregation strategies will benefit the supply chain The best combinations are shown in the tabk

Product Type High demand Low demand High Value

Disaggregate cycle inventory but aggregate safety inventory. Use an inexpensive mode of transportation for replenishing cycle inventory and a fast mode when replenishing safety inventory.

Aggregate all inventories. If needed, use fast mode of transportation for filling customer orders.

Low Value

Disaggregate all inventories and use inexpensive mode of

transportation for

replenishment.

Aggregate only safety inventory. Use inexpensive mode of transportation for replenishing cycle inventory.

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CHAPTER FIFTEEN:

Sourcing

1. What are some ways that a firm such as Wal-Mart benefits from good sourcing decisions? The bottom line is that good sourcing decisions improve profits for the firm and total supply chain surplus. The authors' list of benefits derived from effective sourcing decisions includes:

Better economies of scale can be achieved if orders within a iirm are aggregated. More efficient procurement transactions can significantly reduce the overall cost of purchasing.

Design collaboration can result in products that are easier to manufacture and distribute, resulting in lower overall costs.

Good procurement processes can facilitate coordination with the supplier and improve forecasting and planning (lowering inventories and improving the match of supply and demand).

Appropriate supplier contracts can allow for the sharing of risk, resulting in higher profits for both the supplier and the buyer.

Firms can achieve a lower purchase price by increasing competition through the use of auctions.

2. What factors lead Wal-Mart to own its trucks although many retailers outsource all their transportation?

Wal-Mart is able to run its own fleet of trucks because it can ship TL throughout its supply chain. Wal-Mart's shipment sizes are large and the company achieves aggregation across the many retail stores it owns. IfWal-Mart elected to go with a carrier, they might be able to match Wal-Mart's costs, but Wal-Mart would cede control to the carrier.

3. How can a supplier with a lower price end up costing the buyer more than a supplier with a higher price?

Lower price can be achieved by sacriiicing product quality, product reliability, and process contro~ which ultimately will cost the outsourcer more than the total variable cost saved. The cost of coordination is often underestimated; the outsourcer offloads relatively low-skilled labor but increases the burden on mid and upper management in controlling the production. A firm may also lose customer/supplier contact that causes them to miss opportunities that may have been recognized with a more direct relationship.

4. Explain why, for the same inventory level, a revenue-sharing contract results in lower sales effort from the retailer than if the retailer has paid for the product and is responsible for all remaining inventory.

The retailer puts forth a lower sales effort because they are paid less on a per unit basis to sell items under a revenue sharing contract than under a buyback or a classic retail contract. The

manufacturer and retailer agree to share a fraction of the retailer's revenue after agreeing on a low wholesale price. The low wholesale price triggers a larger order from the retailer, and this can increase supply chain surplus if all product is sold. Wliat happens in practice is that the retailer has a smaller upside under the revenue sharing arrangement and loses the incentive to push merchandise.

5. For a manufacturer that sells to many retailers, why does a quantity flexibility contract result in less information distortion than a buy-back contract?

A buy-back contract allows a retailer to return unsold inventory to the supplier; the contract will stipulate the maximum amount returnable and the reimbursement amount the retailer will receive. A buy-back contract provides an incentive for the retailer to place a larger order and make product more available and can increase total supply chain surplus. A downside of buy-back contracts is information distortion, i.e., the supply chain is aware of the retailers' orders and not the actual customer demand until the sales period has ended. This problem is exacerbated by a situation involving multiple retailers each of which holds inventory. A quantity flexibility contract permits the retailer to change the quantity ordered after observing demand; the contracts are similar to buy-back contracts except no returns are required. With a quantity flexibility contract, retailers specify only the range within which they will purchase, well before actual demand arises. The supplier can aggregate inventory across all retailers and build a lower level of surplus inventory. Since retailers order closer to the point of sale when demand is more visible and less uncertain; the uncertainty is aggregated by a supplier that enjoys lower information distortion.

6. Most firms offer their sales force monetary incentives based on exceeding a specified target. What are some pros and cons of this approach? How would you modify these contracts to rectify some of the problems?

Two incentive oriented contracts discussed in the chapter are the two-part tariff and the threshold contract. The two-part taritt" increases sales agent efiort by allowing the retailer to acquire product at cost and letting the dealer's margin be the supply chain margin. Threshold contracts establish greater rewards for the retailer as total sales reach successively higher hrackets. These incentives can increase supply chain profits but can also be gamed to maximize retailer/agent bonuses without benefiting the manufacturer. Sales can be postponed from one sales period to the next by slow-playing customers, post-dating paperwork, and minimizing efiorts. The sales that would have occurred in period 1 are delayed to period 2, during which sales efiorts are maximized; ior the same level of sales, the agent has an increased commission, but the manufacturer realizes a lower profit. This gamesmanship also causes information distortion at the producer.

These problems can be avoided by modifying the contracts with a rolling horizon. Rather than creating a high bonus period over a fixed period of time, reduced bonuses can be offered continuously over a shorter time period. The rolling periods have many "last weeks" built in and lead to a more constant level of efiort from the retail sites.

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7. An auto manufacturer sources both office supplies and subsystems such as seats. What, if any, difference in sourcing strategy would you recommend for the two types of products? For an auto manufacturer, seats are considered direct materials (components used to make finished goods) while ofiice supplies are indirect materials (goods used to support the operation of a firm). The procurement process for direct materials should be designed to ensure that components are available in the right place, in the right quantity, and at the right time. Sources should be carefully selected to ensure that quality and responsiveness are acceptable and that a long-term relationship is possible. The primary goal of the procurement process should be to make production plans and current levels of component inventory at the manufacturer visible to the supplier and should have alerts built into it if mismatches between supply and demand are detected.

The procurement process for indirect materials should be on reducing the transaction cost of each order. These items are not critical and can be purchased in bulk with an eye towards aggregation and cost savings. Stockout costs are low in comparison with direct materials so sourcing decisions are not as critical.

8. Why do you think assembly in the consumer electronics industry is performed by third parties, whereas assembly in the auto industry is almost never outsourced?

In the consumer electronics industry, the third parties aggregate the demand across multiple flfms when performing assemblies thereby gaining production economies of scale that no single firm in this industry can. The auto industry on the other hand, maintains volume levels for its models that each individual manufacturer can reap the benefits oftheir own assembly. 9. How can design collaboration with suppliers help a PC manufacturer improve

performance?

Design collaboration with suppliers can help a firm reduce cost, improve quality, and decrease time to market. These performance metrics are increasingly influenced by suppliers since between 50 and 70 percent of the spending at a manufacturer is through procurement. Costs can be reduced by designing the product for postponement and mass customization. If the product's design permits the use of standardized parts or modules, the manufacturer can save on inventory ho Iding costs and training for assembly and repair labor. Costs are also reduced by increasing attention to design for manufacturability.

Quality is increased by applying robust design techniques, certifying suppliers, and conducting failure modes and effects analysis. Suppliers that are specialists in a required component can bring to bear the design skills that will improve fmished goods quality.

Time to market can be decreased by bringing suppliers into the design team from the early stages of product design. An engineering drawing reference database can eliminate the necessity for designing new parts which reduces overall design time.

10. For products such as home appliances, toys, garments, and consumer electronics, what factors would influence selecting an onshore, near-shore, or offshore supplier? The decision to outsource is based on the growth in supply chain surplus provided by the third party and the increase in risk incurred by using a third party. This growth in surplus needs to be looked at understanding the following:

Capacity aggregation Inventory aggregation

Transportation aggregation by transportation intermediaries Transportation aggregation by storage intermediaries Warehousing aggregation

Procurement aggregation Information aggregation Receivables aggregation Relationship aggregation and Lower costs and higher quality.

CHAPTER SIXTEEN:

Pricing and revenue management in a supply

chain

1. In what ways can a retailer such as Nordstrom take advantage of revenue management opportunities?

Nordstrom can take advantage of revenue management by using dynamic pricing through their Nordstrom Rack stores. Dynamic pricing is the tactic of varying price over time and is suitable for fashion and seasonal items. The Nordstrom Rack web site indicates that there are currently 49 locations in 18 states and that the Nordstrom Rack stores are the off-price division of Nordstrom (positioned for the cost-conscious shopper). Merchandise that does not sell at the Nordstrom stores is discounted 50-75% and moved to the Rack stores where it is sold in a less attractive setting with a less generous return policy. Nordstrom Rack is positioned such that it does not compete with Nordstrom stores, but allows the parent company to reap the greatest return from all products stocked at Nordstrom.

2. What revenue management opportunities are available to a manufacturer? How can it take advantage of these opportunities?

A manufacturer's most profitable use of revenue management comes through the tactic of overbooking, which is the overselling of an available asset that faces last-minute cancellations of customer orders. The manufacturer's valuable asset is production capacity, which is fmite and loses value after a certain date; in this case, capacity is worthless at the end of the production period or past the date that the supply chain can fill customer orders. The tradeoff is the cost of unused capacity with the cost of customer orders that can't be filled and therefore must be subcontracted. The manufacturer can compute the marginal cost of wasted capacity and the

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marginal cost of a capacity shortage, form the critical ratio, and apply this to their knowledge of the customer order distribution, thereby increasing asset utilization.

3. What revenue management opportunities are available to a trucking firm? How can it take advantage of these opportunities?

A trucking iirm can use revenue management by oifering a two-tiered pricing system; charging smaller customers a higher price than larger customers that consume the majority of the fleet. The rationale is that the larger customers offer the trucking flfm steady demand and the ease of dealing with only one or very few customers. These bulk purchases are made at a discount while smaller customers must make spot purchases at higher prices to fill up remaining capacity. 4. What revenue management opportunities are available to the owner of a warehouse and

how can it take advantage of them?

A warehouse owner can lease capacity in bulk at a discount to a large company and fill up the remaining warehouse capacity at full price to smaller customers. The large customer offers more stable demand and more fully utilizes the warehouse owner's space, albeit at a discount. The smaller customer may never materialize, so holding space for them is a risky proposition and merits a premium price.

5. Explain the use of outlet stores such as Saks Fifth Avenue in the context of revenue management. How does the presence of outlet stores help Saks? How does it help its more valuable customer, who is willing to pay full price?

One way that the presence of outlet stores helps Saks is by recouping their purchase price for items that do not sell in flagship stores. Items can be sold in the outlet stores at a lower margin or even at a loss. Saks also benefits by freeing up more sales floor capacity in their main stores, allowing them to stock with the current season's high margin merchandise.

The full-price customers of Saks beneiit because the inventory level of in-season items at Saks is higher, thereiore they are more likely to iind what they want. Saks knows they can dump any unsold merchandise at the end of the season in their outlet store; therefore Saks initial order will be higher than if they did not use revenue management.

6. Demand for hairdresser is much higher over the weekend, when people are not at work. What revenue management techniques can be used by such a business?

A hairdresser can use pricing and revenue management for seasonal demand; peaks on the weekend and valleys on weekdays. The hairdresser can provide off-peak discounting in order to shift demand from weekend to weekdays. The hairdresser should create a price structure such that the discount given during the off-peak period is more than offset by the decrease in cost because of a smaller peak and the increase in revenue during the ofi~peak period. This tactic increases proiits ior the hairdresser, decreases the price paid by a fraction of the customers, and also brings in potentially new customers during the off-peak discount period and is, in a word, fabulous.

7. How can a golf course use revenue management to improve financial performance? A golf course can use pricing and revenue management for seasonal demand much in the way the hairdresser in the previous scenario can. By lowering the price for less popular tee times, a golf course manager can increase revenue by increasing the total number of players and perhaps capturing new players. A golf course manager can also engage in overbooking ior tee times, overselling the course in the event that a ioursome or individual players will cancel at the last minute. Overbooking will use up more of the golf course's capacity which might decrease the level of customer service but will improve the course's fmancial performance.

CHAPTER

SEVENTEEN:

Information technology in a supply chain

1. What processes within each macro process are best suited to being enabled by IT? What processes are least suited?

The macro processes in a supply chain are customer relationship management (CJTh,1), internal supply chain management (ISCM), and supplier relationship management (SRM). Taken collectively, these macro processes span the entire supply chain.

CRM processes focus on the downstream interactions between the enterprise and its customers. The key processes under CRM are marketing, selling, and order management, and of these three, the creative sub-processes ofthe marketing and selling processes are least suited to IT enablement. The best suited processes for IT enablement are pricing and profitability calculations, sales force automation, and order configuration and tracking. Within order management, virtually all processes reap the benefits of information technology.

ISCM processes focus on internal operations within the enterprise and include strategic planning, demand planning, supply planning, fulfilhnent, and iield service. The use of IT to facilitate ISCM sub-processes is presented in glowing terms in separate chapters in this text. Huge gains in efficiency and responsiveness have been achieved via the application ofIT to all aspects ofISCM.

SRM processes focus on upstream interaction between the enterprise and its suppliers and includes the sub-processes of design collaboration, sourcing, negotiating, buying, and supply collaboration. The authors indicate in chapter 14 that sourcing-related IT has had the most ups and downs of any supply chain software sector, with the primary problems being loss of flexibility and the requirement of collaboration. Electronic marketplaces once flourished but have since withered. This is not to say that IT does not playa role in SRM processes; in fact, all areas are supported by IT software.

2. What are some advantages of the software as a service (SaaS) model? Why has it been successful in the CRM space?

The Software as a Service (SaaS) model implies the use of various applications in rent. Its so-called Cloud Computing. The essence of the model is that the customer does not buy the software, but pays for the service which it provides. The customer does not install software on the servers, but uses capacities of the developer, needing only to pay for the service, cloud server maintenance and consultation services. As a result the with SaaS customer gets access to the