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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:
Excel sheet:

Q . 17 of
Chapter. 2; Inventory Management and Risk Pooling.xlsx

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.
a. What are the components of the supply chain for the automobile?
b. What are the different firms involved in the supply chain?
c. What are the objectives of these firms?
d. Provide examples of conflicting objectives in this supply chain.
e. What are the risks that rare or unexpected events pose to this supply chain?
a. 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:
i. Purchasing and material handling
ii. Manufacturing
iii. Marketing, etc.
4. Transportation providers
5. Automobile dealers
b. 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.
c. 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.
d. 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.
e. 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?
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
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 companys profit may not be maximized globally. Effective supply chain
management is still necessary to achieve globally optimal operations.
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:
1. Factors such as weather conditions, diseases, and natural disasters cause uncertainty in availability of
raw materials, i.e., peach crop.
2. 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.
3. Processing times in the plant, as well as the subsequent warehousing and transportation times are
subject to uncertainty.
4. 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
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?

1. High inventory levels
i. Advantages: High fill rate (service level) and quick order fulfillment.
ii. 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
i. Advantages: Low inventory holding and warehousing costs.
ii. 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 Meditechs problems in introducing new products? In manufacturing ALL
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 doesnt 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?
1. Recognize that demand is predictable, and establish better forecasting systems and accountability
for forecasts.
2. Institute better planning systems to eliminate planning delays; reduce the size of system time
3. Alternatively, put assembly within the pull system and eliminate bulk inventory completely.
4. Develop and implement better information systems.
5. 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?
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?
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?
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?

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

The reorder level s = L * AVG + z * STD * L has two components. The first component L * AVG
covers the expected demand during lead time, and the second component z * STD * L 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 *
L . Then, when an order of Q units arrives, the expected level of inventory is Q + z * STD * L .
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

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 * r L . 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 * r L 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 * r L .
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 *

r L.

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.

Possible items for discussion are as follows:

1. 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
2. BestSellers order quantity would be slightly higher than average demand as the store can expect
higher than average demand for such books
3. 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.
4. 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
5. 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.
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?
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 retailers
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.
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?
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?
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 manufacturers 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.
a. Risk pooling across locations: combining several warehouses into a single central warehouse.
b. Risk pooling across time: using quarterly demand forecasts instead of monthly forecasts to do capacity
c. 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?
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?
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 WalkmanTM. 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
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.

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 wouldnt 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

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
firms requirements for its logistics network change over time?
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?
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
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?
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

i. 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
ii. Candidate locations for the new warehouse.
iii. Information about products, i.e., their sizes, shapes and volumes.
iv. Annual demand (past actuals and future estimates) and service level requirements of the retail stores.
v. Transportation rates by available modes.
vi. Transportation distances from candidate warehouse locations to retail stores.
vii. Handling, storage and fixed costs associated with warehousing. Fixed costs should be expressed as
a function of warehouse capacity.
viii. Fixed ordering costs, order frequencies and sizes by product or product family.
2. Data aggregation. Demand needs to be aggregated based on distribution patterns and/or product types.
Replace aggregated demand data points by a single customer.
3. Mathematical model building.
4. Model validation based on existing network structure.
5. Selection of a few low cost alternatives based on the mathematical model.
i. For the final decision, incorporate qualitative factors that were disregarded in the mathematical
model, e.g., specific regulations, environmental factors, etc.
ii. Optionally, build a detailed simulation model to evaluate these low cost candidate solutions.
6. 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:
a. Automobile manufacturing
b. Pharmaceuticals
c. Books
d. Aircraft manufacturing
e. Book distribution
f. Furniture manufacturing and distribution
g. PC manufacturing
a. 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.
b. 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.
c. In the book industry, supplier warehouse locations would be affected by the availability of nearby
natural resources.
d. 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.
e. 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.
f. Furniture manufacturing and distribution depends heavily on manual labor. Therefore, warehouses in
this industry should be located close to cities with sufficient labor supply.
g. 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
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?
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.
1. Handling Costs
i. Labor cost of workers in material handling.
ii. 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
Purchasing or rental cost of land.
ii. Cost of maintaining and operating the warehouse building which includes annual depreciation and
utility costs.
Cost of racks that depend on the capacity of the warehouse.
The cost of insurance for the facility.
3. Storage Costs
i. Opportunity cost of capital tied up in inventory.
ii. 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

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?
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: 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?
a) 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 buyback 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 maketo- 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.
b) 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 pay-back 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.
c) 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 optioncontract 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: 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?
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: 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?
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 buyers 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: 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.
a. Why to Make-to-stock and make-to-order require different types of supply contracts?
b. 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?
c. 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 suppliers 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 distributors 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: 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
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
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:
Company 1 offers a fixed commitment contract with the following conditions: power is
bought in advance at a price $10 per unit.
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

Problem 9: Consider the following demand scenario:

Consider the following demand scenario:


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.
Problem 10: Using the data from problem 9, suppose the manufacturer has an inflated demand
forecast as follows:


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)?

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 Barillas manufacturing and logistics operations.

Benefits: Barilla can make better delivery decisions and improve its demand forecasts, be more
effectively meet end-consumers need and more evenly distribute the workload on its manufacturing
and logistics systems. The inventories of Distribution Centers (customers) could be reduced.
Sale Persons lost their incentives, because the sale will be predictable or flat.
It will be difficult to run trade promotions with JITD.
Cost might increase due the needs to increase internal inventories
It might create stockouts problem instead of solving it.
Customers need to improve their equipment (computer, bar-code scanner, etc) and share their
sales data that they are reluctant to do.
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 companys 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 Barillas 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
Answer (d): The program can help them smooth out the bullwhip effect and the product delivered to
them wont 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
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?
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 ECommerce 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 doesnt have that model in stock.
Typically he will obtain the model from another local dealer. What are the disadvantages to
the retailer?
The advantages to the Retailer are:
a). He wins the confidence of the customer. And thereby increases his sales and service
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
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?
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
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
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.

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.
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 its 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?
Advantages of a Push Based Supply Chain:
a) Products with low demand rate can be stocked.
b) Production and Distribution decisions based on long term forecasts.
Advantages of Pull Based Supply Chain:
a) Production and Distribution demand are coordinated with true customer demand rather
than forecasted demand.
b) Firm does not hold any inventory and only responds to certain orders.

c) Reduced lead times through the ability to better anticipate the incoming orders from
the retailers.
d) Reduce inventory levels.
e) Less variability in the system.
f) Reduced inventory at the manufacturer to due to the reduction in variability.
Problem 2. What is an example of a product with a primarily push-based supply chain? A
product with a primarily pull-based supply chain?
Push Supply Chain: Imagine a clothing manufacturer designs and produces a new type of
raincoat. If the manufacturer employs a push strategy to promote the raincoat, it would
contact wholesalers to generate interest in the product. If a wholesale company believes it can
convince retail stores within its network to stock the raincoats, it would buy some. The
manufacturer takes payment and leaves the promotional chain. The wholesaler then tries to
sell the coats to retailers at a slight markup.
Pull Supply Chain: A perfect example of an almost ideal pull supply chain is the Dell
business model. Michael Dell started manufacturing computers out of his dorm room while in
college. The difference between him and his competitors is that he did not own a storefront or
a manufacturing plant. He had to keep his inventory down to a minimum, if any at all, and
did not have room for parts storage, no matter how small the components may have been. To
counter these constraints, Dell created the ultimate business model: customers built their
computers specifications on the internet, and using those specifications, the computer was
built. Not a single spare part was left over, and Dell had no inventory, as each computer was
shipped out the door as soon as it was manufactured.
Problem 3. What are the advantages of moving the pushpull boundary earlier in a supply
chain? What about later?
Advantages of Push-Pull Boundary earlier:
a) Less inventory holding cost due to the system being pull at an earlier stage.
b) Postponement of product design can be made
Advantages of Push Pull Boundary Later:
a) Lead time can be reduced to the customers and retailers.
b) On time delivery of products.
c) Reduces Bull Whip effect due to the reduction in variability at the earlier stages.
Problem 4., Peapod, Dell, and many furniture manufacturers use pushpull
supply chain strategies. Describe how each of these companies takes advantage of the riskpooling concept.
a) switched from a pure pull to a push-pull supply chain strategy after its
sales reached a significant volume. It established regional warehouses in order to

aggregate demand across large geographical areas, and increase service levels. These
regional ware-houses form the boundary between the push and pull portions of the
supply chain.
b) Dell follows the push-pull strategy in their supply chain; i.e. Dell practices the push
strategy in the beginning i.e. producing all the individual parts required for a system.
Later it practices the pull strategy by assembling the parts for distribution and sales
according to the customers needs. Since the marketing is done by Pull strategy it
reduces the risk pooling. Computer components are standardized, and the demand for
these components is determined by the finished goods that consume them. Thus, Dell
achieves significant economies of scale and risk pooling by using a push-strategy in
its supply chain up until the assembly operation.
c) Peapod and Amazon who deal with online purchases give away eventual discounts
for purchases to be made online. By this way the risk pooling can be avoided. Similar
to, Peapod moved from a pure pull to a push-pull strategy by
establishing warehouses in order to aggregate demand over geographical areas, and
increase service levels.
d) Many furniture companies produce unique products and offer special services to
them. They focus on mass customization rather than mass production. And hence
production is not so high they can import parts from china and customize it according
to the needs of the customer. Furniture is a highly customized product, but its
handling and distribution are complex due to its bulkiness. Therefore, the production
phase is a pull system based on realized demand while transportation of furniture is
implemented based on fixed delivery schedules in order to achieve economies of scale
and risk pooling.
Push Strategies when the manufacturer uses its sales force and trade promotion money to
induce intermediaries to carry, promote, and sell the product to end users. Pull Strategies
when a manufacturer uses advertising and promotion to persuade consumers to ask
intermediaries for the product thus inducing the intermediaries to order it. The services and
products needed by the Customers (Pull) flow along the pipeline, they will be sent (Push) to
the Furniture Companies for Production., Dell and Peapod act as distributors
using the Push Pull strategy. Amazon: Amazon switched from pure pull to push and pull,
because the sale volume has grown large. The boundary is at their regional warehouses. This
change is because the large volume allows Amazon to aggregate demand across geographical
areas Peapod: Similar to Amazon, Peapod moved from pure pull to push and pull by
establishing warehouses which serve demand aggregated over an area larger than traditional
supermarkets. Delivery time constraint and service level are also reason cause Peapod
moving to push-pull mode. Dell: The push-pull boundary in Dell supply chain is at the
assembly. Computer components are standard; their demands are aggregated over all finished
products that require those components. They can be managed using push mode to take
advantage of risk pooling and economy of scale. Computers are customized according to the
configuration special by buyers, the assembly of computers should be managed in a pull
mode Furniture companies: The production is based on pull but delivery is push, because the
transportation cost for furniture is high and furniture companies need to aggregate demand
over some period to take advantage of risk-pooling and economy of scale.
Problem 5. Explain amazons strategy for slow moving, low-volume products and fastmoving, high-volume items.

High-volume, fast-moving products, whose demand can be accurately matched with supply
based on long-term forecasts, are stocked in stores Low-volume, slow-moving products are
stocked centrally for on-line purchasing The low-volume products have highly uncertain
demand levels, and therefore require high levels of safety stock Centralized stocking reduces
uncertainties by aggregating demand across geographical locations, and therefore reduce
inventory levels The Amazon retailer uses a push strategy for high volume, fast-moving
products and a push-pull strategy for low volume, slow-moving products. This little book and
CD sales turnover is low and is not kept in an Amazon distribution center. Low inventory
turnover means lower sales, operating efficiency is low and also much more expensive DC to
archive storage costs, such as inventory costs, problems arise. In other words, the order
arrived and customer demand occurs at book and CD product sales until customer demand
Yabe, rather than raising the cost of inventory piled up in warehouses because the classroom
Pull-Based strategy is advantageous. From Amazon so when Pull strategy. Consistently pay
profits, gradually increasing demand and, accordingly, was guilty of multiple
warehouses. Push way to accumulate as many books are to be kept in the warehouse. Yet Pull
manner while order will take. In other words, the high turnover rate produced by the
individual order book sales when demand is increased with longer lead time to meet the
bullwhip effect. To run the residual activity Pull approach based, the Internet
when using the Push-Pull strategy depending on the Amazon distribution center in order to
meet the demands of the many books sales, demand forecasting and inventory holding is cost
savings and effectiveness in terms of an appropriate strategy can be called.
A cross-docking strategy is appropriate for suppliers of fast moving nonperishable products,
such as beer, rice, and shampoo, with high overall sales volumes, but relatively low demands
at individual stores. In this case, cross-docking helps to coordinate shipments of fully loaded
On the other hand, perishable products for which lead times are critical, e.g., dairy products
like milk and yogurt, are best suited to a direct shipment strategy. Also, if individual stores
require full truckloads of certain products, then using a warehouse does not reduce
transportation costs, so the supplier can ship directly to the stores.
For slow moving products, such as household appliances, the discount store can benefit from
warehousing in order to reduce the total safety stock in the system, and to decrease
transportation costs.
Problem 6. Discuss some additional examples of each of the four categories in Figure 6-9.



Computer/ Laptops
Electronic equipment
Kitchen equipment

Door and window decorators

Music and Video

Ice creams
Aerated Drinks


of scale


Problem 7. Is it possible for the appropriate supply chain (push, pull, or pushpull) to change
during a products life cycle? If not, explain why? If it is possible, what are some specific
examples of products for which the appropriate supply chain changed?
It is possible for an appropriate supply chain to change in a products lifecycle
Some of the products that change in the supply chain are:
1). Software delivery process
2). Furniture manufacturers
3). Online Grocery Stores
4). Seasonal shopping stores
It is possible to change during a products life cycle during supply chain. Let discuss how can
one decide what will be the best point in the supply chain where the order-inventory interface
must be located? The order-inventory interface is the point in the supply chain where the
demand fulfillment process changes from fulfilling from inventory to fulfilling from orders.
While the article on considerations for push or pull provided a good view of attributes to be
considered, they do not necessarily help in deciding where in supply chain the nature of
demand fulfillment must change from inventory to orders. Let us establish some basic facts.
Supply chain for this discussion is represented as a chain of activities and nodes connecting
supply with demand. Keeping with the convention, we represent the supply end upstream of
the demand end. The Order-Inventory interface can then be located anywhere along the
length of the supply chain. It can be closer to the demand end or closer to supply end or midway between the two. Next, let us explore through logic what happens when the orderinventory (OI) interface point moves along the supply chain? We will explore the impact of
such movement from the point of what happens to demand as this point moves along the
chain. For example, if we move the order inventory (OI) interface closer to demand, it
follows logically that the demand fulfillment lead time will be lowest, while the flexibility to
customize products to the order will be lowest as all demand is fulfilled from available stock.

Problem 8. Is e-fulfillment a new concept? What is the difference between on-line and
catalog selling? Consider, for instance, Lands End, a company that has both channels.
Yes e-fulfilment is the process of delivering the products; right to the customers door step
rather than bulk transport of products to retailers. This ensures shorter lead time and good
customer satisfaction. Online selling is done by selling items online direct to the customer,
the customer browses for the item that he needs and can purchase it any time. Catalog selling
is done by distributors who sell their products to the retailers based on the catalog of items
that the particular retailer wants to sell based on demand forecast.
Problem 9. Explain how demand for a product like televisions can be shaped? How does this
compare to the ways in which demand for a product like canned soup can be shaped?
Televisions, in a very global and technology based environment, the Television had become a
commodity comparable to rice, best thing is television dont expire. Mass Media, Politics,
Health, Sports, Emergency Management and Education can now be done using the Television
almost all household, commercial and work place has one. Manufacturers are now fighting
for the most advanced technology available to produce the most economical and wide
platform. The television does not choose race, color or location it basically became a
requirement. The need of man for Entertainment and Information is what fuels the continuous
development of technology that satisfies the customer. Canned soup is a kind of food that is
used for eating. It is different from Television. It is a product for healthy. To get profit from
buying soup. They must find the way to make a best soup that the customers are really
needed to buy it and eat for their health.
Problem 10. Other than the examples listed in Section 6.5, what are some more examples of
failed Internet supply chain strategies? Successful Internet supply chain strategies?

Problem 11. Answer the questions at the end of the case study Dell Inc. Improving the
Flexibility of the Desktop PC Supply Chain.
Case Question 1: Why does L5 incur higher manufacturing and logistics costs than L6?
What are some of the costs that are incurred in L5 but not in L6? Are there any costs
that apply to only L6 but not L5?


Integrated offshore & outside a
Dell facility
Integrated motherboard-inside
chassis shipped on water
Labor savings
MB air-freighting costs are
Reduced motherboard
packaging costs


Integrated inside a Dell facility

Chassis shipped on water
Motherboards shipped by air
Increased motherboard air-freighting costs

3 -party integration cost in US

Separate logistical costs for chassis and

Root causes of increasing L5 manufacturing

Dells inability to provide motherboards in a timely fashion to CMs
a. Chipset Supplier decommit or supply issues
i. Creates a disruption in the desktop PC supply chain
ii. Accounted for more than 60% of L5 manufacturing
b. Quality/engineering issues
i. Leads to dysfunctional or problematic motherboards
ii. Create additional demand for motherboards
c. Dell forecast accuracy
i. Due to faulty forecast, Dell needs to source its extra chipsets or risk not
meeting the customer demand
ii. Long Lead Time in chipset makes things difficult for the supplier
d. New Pdt Introduction
i. Actual demand for new PC pdt is volatile, so need to air freight extra
Cost incurred in L5
Motherboard packaging cost
Motherboard air freight/expedite cost
Chassis and motherboard US transportation cost
Local/regional integration cost
Motherboard rework cost at DELL
Cost incurred in L6
China assemblers cost (Foxconn performing L6)
Case Question 2: Which of the six proposed manufacturing solutions should Dell
implement, based on the survey result? Why? What are the pros and cons of this
Option 3A: Integration at SLC/Hub
Less Complex for Worldwide Procurement
Supplier quality engineering management is reduced

Most Complex for Cost Accounting
Extra Production control & Inventory control headcounts are required.

Case Question 3: How easily sustainable is your recommendation for the previous
question if the chipset supply shortage further deteriorates?
Case Question 4: How good is the methodology employed by the BPI team to determine
the optimal manufacturing option for Dell? Are there more effective approaches?
Methodology of BPI team was GOOD
Process smoothness & sustainability
Cost per box
Pdt Quality
Capital Investment
Material Handling
Some other effective approaches can be
Push & Pull strategy
Geographical Location of suppliers
Case Question 5: How can Dell effectively address the root causes contributing to the
increase of L5 manufacturing?

By providing motherboards in a timely fashion to CMs

Ensuring that Chipset supplier dnt decommit or have other supply issues
Have Multiple Suppliers
Have some safety stock
Reduce Quality/engineering issues
Benchmark Standard Operating procedures
Forecast Accurately to avoid demand fluctuations
Plan demand in a better way for New Product introduction

Home Work 7
Chapter 7: Distribution Strategies
Problem 1: Consider a large discount store. Discuss some products and suppliers for which
the discount store should use a cross-docking strategy; some products and suppliers better
suited to a direct-shipment strategy; and, finally, some products and suppliers for which the
discount store should utilize a change to; "traditional warehousing strategy."

Cross Docking strategy is useful for the retail stores that deal with multiple products. Since
they need to maintain lowest level of inventories in their warehouses for all specific items
and must be able to ship them at the right time to their retail outlets. The best example of the
implementation of cross-docking strategy is Wal-Mart. Wal-Mart generally handles
thousands of products in their retail outlets. Hence requires cross docking strategy for
general day to day purpose products such as soaps, cosmetics, vegetables and other food
items such as bread, cereals, dairy etc. that have reasonable perishable times.
Direct shipping is generally suited for products such as electronic items, bikes, accessories
such as school bags, laptop bags that do not have high day to day demand. Here the
companies can use the retail outlets for the promotion and sales purpose; but should be able
to manage sales by directly shipping from their warehouses. For example electronic items
such as calculators, flash drives, air-conditioners etc. and watches. Generally items that
require installation and service could go for direct shipment.
Traditional warehousing should be utilized for products such as clothes, utensils, stationary,
books etc. These products have longer life periods and the demand can be managed easily by
the discount stores. And in case of high demand products, the company can purchase the
products in wholesale from the distributor. Also in case of traditional warehouses the
warehouses are spread across multiple locations that are logistically correct, the lead-time
should not be a concern for the discount stores.
Problem 2: Consider the following supply chains. For each one, list specific advantages of
centralized and decentralized management, and centralized and local facilities:
a. Milk and dairy products
b. Newspapers
c. MP3 players
d. Cars
e. Jeans
a). Milk and Dairy Products:
Advantages of Centralized Management:
1. Less inventory holding cost.
2. Lesser lead-Times. Faster Transportation.
3. Accurate Demand information.
4. Advantage due to centralized risk-pooling.
Advantages due to Decentralized Management:
1. Limited inventory carrying cost.
2. Faster shipment of products to the retail outlets.
3. Retailers demand specific warehouses. This implies functioning of warehouses with
regards to the retailers demand on one to one basis.
4. Local Optimization.
Advantages of Centralized and Local Facilities:
1. Higher service levels.
2. Higher sales. And could improve product promotion and brand value.

b). Newspaper:
Advantages of Centralized Management:
1. Lesser inventory costs due to the accurate demand estimations. Since could involve in
correct estimation of demand due to available inventory models such as news-vendor.
Also, availability of historical data.
2. Wholesale discounts to the customers.
Advantages due to Decentralized Management:
1. Faster delivery time.
2. More sales. Because of higher safety stock at each retailer and distributor.
3. Can answer unexpected or variability in demand.
Advantages of Centralized and Local Facilities:
1. More customers.
2. Higher sales.
c). MP3 Players:
Advantages of Centralized Management:
1. Maximum utilization of information systems. Both in terms of shipments and ordering.
2. Lower inventory costs.
3. Lower inventory levels.
4. Reduction in over-all system costs due to Centralized risk pooling.
Advantages due to Decentralized Management:
1. Reduced shipment times.
2. Direct shipments.
3. High service levels.
4. Higher safety stocks.
Advantages of Centralized and Local Facilities:
1. Increase in sales due to availability of products near local areas.
2. Promotion.
d). Cars:
Advantages of Centralized Management:
1. Overall reduction in system costs due to risk pooling.
2. Lower safety stocks.
3. Higher sales to the dealer at a point in time.
4. Lesser warehouses.
5. Information sharing among dealers. Good for the parent company sales.
Advantages due to Decentralized Management:
1. Higher safety stocks.
2. Higher service levels.
3. Lower lead times.
4. Higher sales.

Advantages of Centralized and Local Facilities:

1. Higher service levels. As the customer can approach other dealer in case of
unavailability of a car.
2. Optimal solution for a car making company.
3. Increase in sales.
e). Jeans:
Advantages of Centralized Management:
1. Lower inventory.
2. Lower Inventory costs.
3. Accurate demand estimations using efficient information systems.
Advantages due to Decentralized Management:
1. Faster delivery.
2. Lead-Time Reduction.
3. Higher safety stock.
4. Wholesale discounts.
Advantages of Centralized and Local Facilities:
1. Promotion of products and leverage of brand value.
2. More sales due to more customers.
3. Availability of the product nearer to the customer.
Problem 3: What companies or supply chains can you think of that use an inventory pooling
Inventory pooling is the capability of the companies to serve several marketplaces each with
their own uncertain demand from a single stock of inventory (centralized warehouse,
common components, delayed differentiation, product/component substitution, e-tailing, etc.).
Companies that serve multiple products to multiple markets can use inventory pooling
strategy such as fashion apparel companies.
Problem 4: What companies or supply chains can you think of that use transshipment
Transshipment is the shipment of goods or containers to an intermediate destination, then to
yet another destination. Companies that require the cheapest route of bringing goods from
one location to another, use the transshipment. The transshipment strategy is
recommended for companies like IKEA (designs and sells ready-to-assemble furniture,
appliances, and home accessories) where the goods are easy to assemble or disassemble by
the customers themselves. It requires an export license to carry transshipped goods unless it
comes under certain exemptions. It usually takes place between two different countries. The
transshipped goods however do not undergo a customs check as it will deter it from being an
efficient means of transportation. This makes it more susceptible to illegal activities.

Problem 5: List two similarities between inventory pooling and transshipment strategies. List
two differences. Why might one or the other be appropriate for a particular supply chain?
The similarities between the inventory pooling and the transshipment strategies are:
1. Both the methodologies reduce the risk of the retailer, as the lost in sale can be
compensated either by ordering higher than required as in the case of inventory
pooling or by sharing the inventory from the other retailer as in the case of
2. Higher service levels.
3. Lesser lead times.
4. Sharing the risks.
The differences between the inventory pooling and the transshipment strategies are:
1. No need to share information with the other dealers in the case of inventory pooling
since if there is a lack of inventory then the dealer could directly get it from the
manufacturer. But in the case of transshipment the dealers need to share information.
2. Inventory pooling involves high holding cost but the transshipment involves lesser
holding cost.
Considering the customer search concept into consideration its better to opt for
transshipment with decentralized system through obtaining the Nash Equilibrium. Also
using the transshipment methodology will reduce the lead times and increase the profits of
the dealers.
Problem 6: Discuss how companies or dealers can encourage search.
Companies can encourage search by estimating the percentage of customers searching for
other dealers, from the dealer who has lost the sale. This information is important for the
company because the company can estimate the estimated loss in sales for the particular
dealer and could accommodate this percentage to the orders he has made.
Dealers can encourage search to gain customer good-will in providing the car to the customer
from the other dealer (Competitor) to compensate for the lost sale, reduce lead times and
optimize the profits between the dealers through sharing their inventory information.
Problem 7: Discuss how dealers might discourage search. Why might dealers want to
discourage search.
Dealers might discourage search, since they need to share the information with their
competitors. As it appears; due to the final sales from either of the dealers the manufacturer
benefits, but the lost in sale to one dealer is an advantage to its competitor. Moreover this is
more risky to the independent dealers or retailers when compared to the company owned
retail outlets.
Problem 8: Answer the following questions about amazon case at the start of the chapter.

a) What expansion options should Amazon Europe select? Expand into other countries?
Launch Marketplace activities?
Answer a):
b) What distribution network configuration should Amazon Europe adopt?
Answer b): In Europe, as seen from the given case, Amazon has 3 independent Distribution
Centers (DCs), in the UK, Germany & France. Here, we have seen the location of the
inventory to be geographically determined. However, we believe that Amazon could adopt
the concept of a European Distribution Network (EDN), where the location of the inventory
could be strategically determined.

Home Work 8
Chapter 8: Strategic Alliances
Problem 1: Consider a manager developing a logistics strategy. Discuss specific situations for which
the best approach would be to
a. Employ internal logistics expertise.
b. Acquire a company with this expertise.
c. Develop a strategy, and then employ specific suppliers to carry out well-defined portions of the
d. Develop the strategy with a third-party logistics provider.

Answer (a): Employ internal logistics Expertise: The internal logistic expertise may be
applied to a firm which has the core strength in the particular feature. If the manager thinks
that he has the core strengths in his firm then he can go for internal logistics expertise.
Consider a company for whom logistics is a core competency, and that has sufficient
resources to implement the strategy.

Answer (b): Acquire a company with this expertise: When the particular firm does not
have enough knowledge in a particular field then they can seek the help of another company
which has better expertise in the field. Consider a company whose products are perishable,
and for which environmental conditions must be tightly controlled during warehousing and
transportation. (For instance, a biotechnology or a pharmaceutical company.) In this case, the
company may not want to give up control of products during logistics operations in order to
ensure their quality, and it may choose to acquire a logistics company with appropriate

Answer (c): Develop a strategy and then employ specific suppliers to carry out well
defined portions of strategy: When a new firm is developed and the company wants to
excel in a particular field without seeking the help of other firms. Consider a company that

has internal logistics expertise, and that is trying to expand its operations into new markets. If
the company is already resource-constrained, it may make sense to develop the strategy inhouse, but delegate specific operations to third-party logistics providers.
Answer (d): Develop the strategy with a third party logistics provider: This strategy can be
followed for firms which invest a low value in certain fields and those fields can be improved or
organized by third party logistics provider. Consider a new company that established its
manufacturing operations recently, and is struggling to ramp-up its output. In this case, it may make
sense for this company to focus on design, manufacturing and sales operations of its products and
outsource all activities related to transportation and warehousing of raw materials, and distribution of
finished goods.
Problem 2: Why is the third-party logistics industry growing so rapidly?
The main reason for firms switching to third party logistic is to increase the core competency
of the particular firm
The firm can increase its technological flexibilities as technology change occurs in the logistic
The firm can expand geographically very easily
Logistics is a complex set of tasks that requires vast resources, analytical expertise, related software
and a significant amount of investment in information technology which goes out of date very rapidly.
Thus, unless logistics is a core competency of the company and it has resources to dedicate to it, it is
difficult to design and implement effective logistics operations. Therefore, companies are increasingly
willing to outsource logistics operations to third parties who have the analytical expertise, necessary
software and sufficient resources to keep their information systems up-to-date. In addition, since these
third party logistics providers have several (or many) customers, they have sufficient economies of
scale to make the necessary capital investments to operate an advanced logistics system
Problem 3: In this chapter, we discuss three types of retailer supplier partnerships: quick response,
continuous replenishment, and vendor-managed inventory (VMI). For each type, discuss situations
where that type would be preferred over the other two. For instance, compare quick response to
continuous replenishment: under what conditions is one preferred over the other?

Quick response strategy

Customer prepares the
purchase order

Continuous replenishment
Vendor manages the
inventory based on agreed
levels of inventory
It is aimed mainly at
Vendor managed inventory
reducing order response time, (VMI) arrangement in which
and achieving greater
either the vendor
accuracy in shipping the
continuously monitors a
correct goods in correct
customer's inventory or
quantities, by employing
customer supplies current
computerized equipment
inventory data, so that the
such as barcodes and EDI to vendor can make timely
speed up flow of information. shipments to maintain the
Its other objectives include
customer's inventory at
reduction in operating
agreed upon levels.

Vendor-managed inventory
Vendor manages the inventory
without customer involvement
in preparing purchase order
Inventory replenishment
arrangement whereby the
supplier either monitors the
customer's inventory with own
employees or receives stock
information from the customer.
The vendor then refills the stock
automatically, without the
customer initiating purchase

expenses, out-of-stock
situations, and forced markdowns (discounts).

Quick response: In a quick response system, the retailer determines the order quantities and
replenishment times, while suppliers analyze POS data to improve their forecasting and
production scheduling. This system could be preferred when the retailer-supplier relationship
is new, and trust between the two parties has not been fully developed yet. In this strategy,
the retailer has complete control on its inventory, but helps suppliers improve operations by
providing POS data. Additionally, this type of partnership could be preferred if financial and
personnel resources to develop a more integrated relationship are not available.
Continuous replenishment: In a continuous replenishment system, vendors receive POS
data and use these data to prepare shipments at previously agreed-upon intervals to maintain
specific levels of inventory. This type of partnership is a system between quick response and
VMI, because suppliers and buyers together agree on target inventory and service levels. It
involves less risk for retailers than VMI, and typically leads to a more stable and long-term
relationship between suppliers and retailers than quick response does.
In a vendor-managed inventory system, suppliers decide on the appropriate inventory level
for each product and the appropriate inventory policies to maintain these levels. The retailers
give the vendors full authority to manage inventory replenishment. This system is more
integrated than the previous two systems, and requires a high level of trust between the
supplier and the buyer. If implemented properly, VMI can lead to more overall system
savings than the other two types of partnerships. However, VMI requires more commitment,
and initially, significant investment in information infrastructure, time and personnel.
Problem 4: Consider the quick response partnership. Suppose the retailer places an order at the
beginning of each month but transfers POS data to the supplier every week. What is the impact of the
manufacturers weekly production capacity on the benefit from information sharing? That is, under
what situations is information sharing most beneficial: high weekly production capacity or low
capacity? How should the supplier use the weekly demand data received from the retailer?

Information sharing in this case is most beneficial if the production capacity of the supplier is
tight. The supplier can use the weekly POS data to forecast the order size that will arrive at the
beginning of next month, to adjust its production schedule accordingly given the tight capacity,
and to reduce the risk of not being able to meet the demand.

As production capacity increases, the optimal policy would postpone production as much as
possible and take advantage of all information available prior to the time of production start.
Similarly, if the production capacity is limited, then information is not very beneficial because the
production quantity is mainly determined by capacity, not realized demand. Percentage cost
savings due to information sharing increases as production capacity increases. This is true in both
finite and infinite time horizon models. Non-stationary demand may have a substantial impact on
both the benefits from information sharing and the optimal timing of information sharing. For
instance, if the demand rate is increasing, the benefit from information sharing is not as high as
that of decreasing demand rate (Simchi-Levi & Zhao, 2004).

Problem 5: Discuss the various possibilities for inventory ownership policies in a VMI arrangement.
What are the advantages and disadvantages of each of these policies?

Initial VMI schemes in which ownership of goods transferred to the retailer, goods delivered
benefited suppliers by giving them complete control of their system. Additionally, it also provided
an incentive to the suppliers to ship as much inventory to the retailer as permit ted under the
contract. This was an important disadvantage of these contracts because the overall system profit
was not necessarily maximized.
The more recently developed consignment schemes have clear inventory and managerial cost
reductions for the retailer since the supplier owns the goods until they are sold. However, this
strategy still allows the supplier to manage its operations more efficiently because it makes all the
production and distribution decisions. Note that inventory holding and personnel costs at the
supplier increase and these issues must be addressed in the supply contract by sharing cost
savings of the retailer with the supplier.
In general, both of these types of inventory ownership policies require significant information
sharing and large technology investments. Also, note that in these policies the retailer does not
have any control on its inventory any more, and trust issues must be resolved completely for this
type of partnership to work out.

Problem 6: Recall Example 8-13, the story of Spartan Stores failed VMI effort. Discuss how
Spartan might have done things differently in order to help the program succeed.
Some of the following steps could have been taken to prevent the failure of the program:
1. In a VMI system, trust issues should be resolved at the very beginning during contract
negotiations. Additionally, communication channels must be open at all times to discuss any
additional concerns that may arise. Clearly, these issues were not addressed in sufficient detail at
2. Spartan could have specified a test period for its suppliers, and after the test period the program
could have been discontinued with unsuccessful suppliers.
3. Spartan could have collaborated with its suppliers to determine agreed-upon forecasts and help
them resolve forecasting issues due to promotions.
4. The retailer-supplier partnership could have started with a continuous replenishment system
which is less risky than a vendor-managed inventory system. Then, the VMI system could have
been established based on this experience.
Simchi-Levi, David, & ZHAO, YAO (2004). The value of information sharing in a two-stage supply
chain with production capacity constraints. Probability in the Engineering and Informational Sciences,
18, 247-274.

Home Work 9
Chapter 9: Procurement and Outsourcing Strategies
Problem 1: Answer the following questions about the case at the beginning of this chapter:
a) Describe Zaras current sourcing strategy. How is it a competitive advantage for the firm?

b) What specific challenges are a result of Zaras rapid inventory turnover? What portions
of Zaras replenishment strategy make it easier to manage?
c) Will Zaras current sourcing strategy continue to be useful as it expands? How should this
strategy change? What are the risks associated with this new strategy?
Answer a): Most other retailers (like American chain GAP and Swedish retailer H&M)
completely outsource their production to factories around the world, most of them in low cost
Asian countries. The production which is not outsourced is owned or closely-controlled
facilities-tremendous amount of flexibility and control.
Answer b):
Short lead time = more fashionable clothes
Lower quantities = scarce supply
More styles = more choice, more chances of hitting it right
More designers = rapid implementation of ideas
Usually shorter routes
Store receives garments within 1-2 days several times a week.
Answer c): Concerning ZARAs impressive growth during the last years despite of their
differing strategy, it would not make sense to expand the new strategy. Of course for the
moment they profit by the higher margins (because of the lower production costs), but
ZARAs customers set value on premium quality and in-season fashion. ZARA does not
make brand advertising like other brands do so. Therefore the most important about ZARA is
their IMAGE.
Problem 2: Discuss the impact of the product life cycle on the buy/make framework
developed in Section 9.3
In order to assess the effect of product life cycles on the make/buy framework developed in
Section 9.3, we need to understand how product knowledge and capacity requirements evolve
over the life cycle of a product. A typical product life cycle has several stages:
1. The product is newly introduced, and bought initially by a relatively small number of
customers (early adopters). At this stage of the product life cycle, production level is low
and capacity is usually not an issue. Also, quite possibly, there are problems in the design
and manufacturing of the product such that yield is low, and changes in the production
processes are frequent. Under these conditions, the buy/make framework implies that a
new product should not be immediately outsourced.
2. In the rapid adoption phase, demand for the product increases at an increasing rate. If this
leads to tight production capacity, and the production processes are already stable, then
outsourcing should be considered. It may even be the only choice to keep up with the
increasing demand.
3. When the product reaches the maturity phase, i.e., when demand stabilizes over time, then
the outsourcing decision should be re-considered under the framework discussed in
Section 9.3. For instance, if earlier an integral product was outsourced due to capacity
constraints, then the firm should consider installing additional capacity to meet the
stabilized demand, and manufacturing the product in-house.
4. When the product is approaching its end-of-life, outsourcing is a good option for both
integral and modular products because the company should focus on new products.

Problem 3: Apply the hierarchical model discussed in section 9.3 to IBM decision in the
early 1980s to outsource the production of microprocessors for its PCs to Intel.

Problem 4: Consider a consumer product manufacturer such as Procter & Gamble. Analyze
whether the company should outsource the production of products such as shampoo. Is your
recommendation consistent with P&G's strategy? If not, explain the reason for the difference
between your strategy and what is done by P&G.
Problem 5: Discuss the appropriate sourcing strategy for a component with low customer
importance, fast clockspeed, and no competitive advantage.

Problem 6: Apply the Kraljic matrix model to the Cisco virtual manufacturing strategy.
Problem 7: Provide examples of three types of items identified in the Kraljic matrix model:
Problem 8: Analyze component procurement strategy as a function of the product life cycle.
Specifically, identify the appropriate strategy when a product is at a growth stage
(introduction), maturity (steady state), and end-of-life.
Problem 9: According to Bill Paulk, IBMs vice president of e-marketplaces, IBM has
saved about $1.7 billion since 1993 by being able to divulge sensitive price and inventory
information over a private exchange built for 25,000 suppliers and customers. As the host of
the exchange, the company helped defray the cost of connecting suppliers. The payoff: Ontime delivery to customers soared from about 50 percent to close to 90 percent, which
helped justify the cost, Paulk says. In 1999, IBM invested in E2open, a consortia-based emarketplace for the electronics industry. Why do you think IBM needs both a private
exchange and a consortia-based e-marketplace?
The private and consortia-based e-marketplaces play different roles in IBMs supply chain.
IBM benefits from both marketplaces in different ways.
1. In the private exchange, the focus is on better supply chain collaboration. Sensitive
information such as product design, customer orders, cost, production plans, etc., is

shared between IBM and its suppliers to improve operations, decrease costs and increase
2. The objective in the consortia-based e-marketplace is to increase purchasing power by
aggregating buyers, to need new and high quality suppliers, and to allow these suppliers
achieve cost efficiencies by dealing with standardized systems.

Home Work 10
Chapter 10: Global Logistics and Risk Management
Problem 1: Discuss situations in which each of these supply chains might be the appropriate choice
for a firm:
a. International distribution systems.
b. International suppliers.
c. Offshore manufacturing.
d. Fully integrated global supply chain.
Answer (a): Domestic production with international distribution is typical for small businesses that
attempt to expand to serve global markets. For instance, Mavi Jeans manufactures its products in two
facilities in Istanbul, Turkey, but sells them in more than 3,000 locations worldwide. (See Mavi Jeans
Answer (b): The product(s) may be so complex that the necessary expertise and resources to
manufacture different components are spread across the world. For instance, Boeing has more than
15,000 suppliers in 81 countries. (See The Boeing Company (2003).)
Answer (c): Typically, high labor cost in labor-intensive industries causes manufacturing operations
to shift offshore. For instance, consider Nike, which subcontracts its manufacturing to approximately
350 factories in the Asia-Pacific region employing nearly 400,000 workers. (See Nike (2003).)
Answer (d): A fully integrated supply chain is crucial for companies that implement flexible global
supply chain strategies in a highly variable environment, e.g., for companies that intend to shift
production from country to country in order to reduce costs or risk. The PC manufacturing industry is
a good example of this.
Problem 2: Discuss a recent example of an unknown-unknown risk that proved damaging to a supply
chain. Explain specifically how each of the following strategies might have mitigated this risk:
a. Invest in redundancy.
b. Increase velocity in sensing and responding.
c. Create an adaptive supply chain community.

Problem 3. You are the CEO of a small electronics manufacturing firm that is about to develop a
global strategy. Would you prefer a speculative strategy, a hedge strategy, or a flexible strategy?
Would your answer to this question change if you were the CEO of a large electronics firm?
Although the specific answer depends on the management style, resources and long-term strategies of
the firm, a hedge strategy seems more appropriate for a small firm. Following a speculative strategy
may be disastrous if the company does not have the size and financial strength to absorb potential
losses associated with a speculative strategy. On the other hand, following a flexible strategy may
require a significant amount of additional investment in infrastructure to ensure the necessary

coordination, and for the re-design of products and processes. The resources necessary to implement a
flexible strategy successfully may not be available to a small rm. Clearly, for a large firm, the
financial and resource 29 constraints may be much less relevant than for a small firm, and the global
strategy to be employed may be any of the three strategies mentioned above depending on the
specifics of the situation.

Problem 4: Discuss some examples of regional products and of true global products. What is it about
the products that makes them better suited to being regional or global products?
Some of the factors that affect whether a product can be sold globally without modification are
discussed below:
1. Brand recognition. Some brands have developed a global image of quality and desirability that
they do not have to be customized to regional and national tastes. This is especially true for luxury
brands, such as Ferrari that sells the same cars globally.
2. Cultural differences. Some products reflect long-term traditions and/or a certain regional taste
developed over time, and fit into the regional category. A lot of food products fall here, and it is much
harder for these products to get accepted globally. For instance, it is hard to think of kabobs that are
very popular in the Middle East to be sold in global chain restaurants. An exception in this category is
pizza, for instance.
3. Standardization. In consumer electronics and computer manufacturing there are plenty of
examples of global products. The complexity of such products requires standardization throughout the
world, and makes them global products. However, note that exceptions exist. For instance, TV
systems in the US and Europe are different, and the same TV set cannot be sold in both markets.
Medical products also fit into this category as long as they satisfy differences in health regulations in
different countries.
Problem 5:
You are the manager of a regional bakery. Contrast the issues you would face if your firm is located
in each of the following countries:
a. Belgium
b. Russia
c. Singapore
d. Canada
e. Argentina
f. Nigeria
In Belgium and Canada, the most important issue would be keeping the costs down. Bakery
production is labor-intensive and requires relatively unskilled labor. However, unskilled labor costs in
the First World countries are typically very high compared to the rest of the world. In the emerging
nations, such as Russia, Singapore and Argentina, logistics issues would be most important since the
necessary infrastructure may not be in place. On-time delivery of bakery products is crucial because
they are perishable items, and there is a time window they need to reach the bakeries in order to be
sold. For instance, if the fresh products arrive at noon, instead of early in the morning, most of these
items may be left on the shelves at the end of the day. In a Third World country, such as Nigeria, in
addition to the logistics problems mentioned above for the emerging nations, environmental
conditions may not be sufficient to ensure a healthy production of bakery products. For instance,
water may not be clean, etc.
Problem 6:
Answer these questions about the article at the beginning of this chapter:

(a) Other than a need to expand, what other reasons would Wal-Mart have for opening stores globally?
(b) Why would it be beneficial for Wal-Mart to have suppliers in different countries?
(c) Why would Wal-Mart want strong centralized control of its stores? Why would Wal-Mart want
strong local control of stores?
(d) What pitfalls and opportunities, other than those mentioned in this article, will Wal-Mart face over
the next few years?
Answer (a): Possible reasons for Wal-Mart to start international operations include:
1. Domestic revenues do not increase at a pace Wal-Mart wants them to. Therefore, Wal-Mart intends
to achieve a high growth rate in foreign countries to hedge against the slow business in the domestic
2. A rival European chain, Carrefour SA, has already a strong presence in the South American market.
Wal-Mart could lose the market totally if it did not respond quickly.
3. Foreign operations would also help Wal-Mart identify potential new low-cost suppliers for
domestic operations.
Answer (b): Having many suppliers in different countries would enhance Wal-Marts everyday low
pricing formula by allowing it to hedge against cost increases due to economic and/or political
conditions in a given country.
Answer (c): Strong centralized control is helpful for aligning local operations with the overall
corporate objectives. Additionally, Wal-Marts years of domestic expertise in retail operations, e.g.,
distribution systems, can best be leveraged to improve distribution in South America if strong
centralized control is implemented. On the other hand, it may be impossible to analyze customer
preferences and understand cultural differences unless local managers control certain aspects of the
Answer (d): In general, political instability is a major concern in South American countries. For
instance, due to the recent downfall of the Argentine economy, Wal-Mart may experience difficulties
if the Argentine government starts to employ policies that favor domestic producers rather than
foreign companies. Also, if the dollar continues to gain in value against major South American
currencies such as the Argentine Peso and Brazilian Real, American exports into these countries will
be expensive compared to their local competitors, which will negatively impact Wal-Marts margins.

Home Work 11
Chapter 11: Coordinated Product and Supply Chain Design
Problem 1: List two low clock speed products, two medium clock speed products, and two
fast clock speed products.
Low clock speed products would include diamond mining and electricity.
Medium clock speed products would include automobiles and computer operating systems.
High clock speed products would include and cosmetics and games and toys.
Problem 2: How does a low clock speed impact the product design strategy? How about a
fast clock speed?
Low clock speed affects the product design strategy in that the focus is less on speeding up
product development or postponing differentiation and modularity as it is not that important
for more functional products.

High clock speed affects product design in that the focus is on modular product architecture
since it allows independent development of product subcomponents. There is also greater
weight placed on postponement of product differentiation, sometimes until demand is
Problem 3: Give an example of a product appropriate for each of the boxes in Figure 11.3.
Box A-Rice
Box B- Infotainment
Box C-Semi-conductors
Box D- Jewellery
Problem 4: Discuss some examples of products that are designed to lower shipping and
storage costs.
Some of the items that are designed to reduce shipping and transportation costs are products
that can be packed compactly and can be packed in great quantities without the transportation
mode reaching weight carrying capacity. These would include fashion items, such as clothes,
shoes and bags. Also included would be products that can be boxed or placed in containers
such as consumer goods such as canned food or other such groceries. Also included would
plastic products that can be easily packaged such as Tupperware.

IKEA Furniture
Floor lamps
Tupperware made by Rubbermaid
Collapsible chairs
Fedex package box

Problem 5: How does the proliferation of products, models, and options make the supply
chain more difficult to manage?
The proliferation of products, models and options make the supply chain more difficult to
manage in that the great variety of products as they are produced in sequence cause longer
lead times. This means that concurrent and parallel processing is necessary. This then means
that the manufacturing process itself has to be modified to be conducive to such processing
and manufacture. Another difficulty may arise in that for each product or module, different
levels of inventory may be necessary and these have to be integrated into the manufacturing
process for each product or model.
Offering more products, models, and options requires more customization and more
complicated production scheduling.
Product proliferation makes it difficult for manufacturers to take advantage of economy
of scale, because products are processed in small batches.
Offering more products adds difficulty to inventory tracing.
Non-aggregate demand usually has higher variability than aggregate demand.

Great demand variability makes forecast inaccurate.

When demand variability is high, a firm needs to prepare more stock to maintain the same
service level than when demand variability is little.

Problem 6: What are the advantages of downward substitution? What are the disadvantages?
Some of the advantages for downward substitution include being able to make use of
aggregate forecast for products, which means the forecasts would be more accurate as they
would be aggregated over a larger number of products that would then be differentiated
further downstream, or those products which are already of slight difference. Another
advantage would be that components can be made ready for the consumer when demand
arises but no stock is kept for a specific end product, which means the available components
can be used thus capitalizing on downward substitution, and thus loss due to obsolescence is
less likely to occur.
Disadvantages of downward substitution include that fact that certain products may require
modules that are not of the same quality as the standard modules provide. This can lead to
lower quality products because one of the components was not of the correct quality. Another
disadvantage is that if the components had an error at manufacturing all the products cannot
be assembled thus resulting in a loss of customer satisfaction.
Problem 7: What are some products or industries that have been damaged by excessive part
One of these industries is the personal computer industry. Standardization must be a positive
force to eliminate the cost and inconvenience caused by the possible incompatibility between
products offered by different vendors, and still allows competition and innovation. Excessive
standardization could reduce design options and affects the development of a product or
industry. Microsoft windows is an example of excessive standardization. The large
population of MS windows users and the wide acceptance of this operating system among
various software vendors make many MS window technologies industrial standards.
Microsoft takes advantage of this to block competition and manipulate market rather than
improve the performance of its products.
Problem 8: Discuss some examples of modular and non-modular products and processes.
A modular product would be a cell phone, a television or a watch.
Non-modular products include remote controls or rice products.
A modular process would include the assembly of an automobile
Anon-modular process would include the making of chocolate or ice cream.
Problem 9: How do standardization strategies help managers deal with demand variability
and the difficulty of making accurate forecasts?

Standardization strategies help managers deal with demand variability and accurate forecasts
in that by standardizing, the organization can reduce the uncertainty of forecasts by using
aggregate forecasting across all the products thereby getting a more accurate forecast.
Standardization helps managers deal with variability in demand in that the products can be
differentiated according to demand at the point of demand by the customer. In this way, the
products that are wanted by customers are the ones assembled using the component parts
which can be used for other products as well.
Problem 10: What are the advantages and disadvantages of integrating suppliers into the
product development process?
One of the advantages is that the organization may not have the expertise to develop those
new products and in involving suppliers who do, the organization can still continue with the
introduction of the new product but without going through the process of trial and error that
would incur costs. Another advantage is that the suppliers can gain experience with the new
product while the organization continues with its core competencies. The fact that costs and
risk could be separated between the organization and suppliers is also an advantage.
A disadvantage could be that the organization may lose out on being credited for the idea
alone but also faces the possibility of the innovation getting out too early. Another
disadvantage would be that the organization may not be learning everything about the
product and could thus lose out on further opportunities to innovate
Problem 11: You are the CEO of a medium-sized apparel manufacturer, and you are
considering a mass customization strategy for some of your products. How will you decide
which, if any, of your products are appropriate candidates for mass customization?

Home Work 12
Chapter 12: Customer Value
Problem 1: Discuss the trade-off between product quality and price in traditional and on-line
In traditional retailing, quality is frequently the primary determinant of price: the higher the
quality of the physical product, the higher is the price. However, in on-line retailing, firms are
able to leverage on value propositions other than product quality, and thus gain more
flexibility in pricing. For instance, the ability to browse and search an on-line catalog or the
availability of an order tracking system may attract the customer to a site which has higher
prices for the same product or to a site that offers lower quality products for the same price.
In other words, in on-line retailing the price versus quality trade-of curve is affected by other

Problem 2: Consider dynamic pricing strategies and their impact on profit. Explain why
dynamic pricing provides significant profit benefit over (the best) fixed-price strategy as
a. Available capacity decreases.
b. Demand uncertainty increases.
c. Seasonality in demand pattern increases.
a. As the available capacity decreases with respect to the average demand, it may be
impossible to satisfy the realized demand. Therefore, by changing prices to affect the demand
distribution, the firm would be able to increase revenues. For instance, increasing price may
decrease the overall demand, but if the realized demand for the company is still more than the
available capacity, the firm is better o by increasing price.
b. As the standard deviation of demand increases with respect to its mean, it becomes more
likely that the realized demand over time is not close to the demand estimate associated with
a fixed-price policy. Therefore, adjusting the prices over time, increases profits when demand
variability is high.
c. Demand is not only a function of price. Seasonality and macroeconomic conditions, e.g.,
changes in the size of the whole market, affect the demand distribution that an individual firm
faces. Clearly, as the demand distribution changes over time, the optimal price changes as
Problem 3: Discuss how supply chain management decisions impact the ability to excel in
certain dimensions. Specifically, consider
a. Conformance to requirements.
b. Product selection.
c. Price and brand.
d. Value-added services.
e. Relationships and experiences.
a. This dimension of customer value refers to the ability to match supply and demand. If the
supply chain is not designed by taking into account the specific characteristics of the market,
then the consequences can be severe. For instance, if the demand is highly variable, then the
focus of the supply chain should be on flexibility and reducing lead times such that the
product can be delivered to the market before the conditions change. Otherwise, customer
requirements cannot be satisfied, sales are lost, and obsolete inventories accumulate.
b. The decision where to draw the push-pull boundary in the supply chain has a strong impact
on what product portfolio can be offered. For instance, if finished products are made-to-stock
and kept in a central inventory until a customer order arrives, then it may not be possible to
meet the demand for all types of product configurations. On other hand, if the push-pull
boundary is at the assembly operation, as it is in the Dell case, it is possible to offer a greater
variety of products.
c. An important component of price is cost. Supply chain decisions determine production,
inventory and transportation costs, and affect the ability of a company to offer low prices.

Furthermore, supply chain decisions impact the brand recognition of a product. Note that it
would be very hard to build a prestigious brand name if the supply chain produces defective
products, does not meet delivery due dates, and does not provide support for its products after
the sale.
d. Consider, for example, service and maintenance support. Clearly, in order to perform these
activities, the supply chain must satisfy certain requirements. For instance, if on-site support
is provided, then it may be necessary to keep component inventories close to the major
customer locations in addition to the necessary personnel to perform these activities. Also, if
a piece of hardware needs to be sent back to the factory to be fixed, then reverse logistics
operations must be planned, e.g., pick-up from the customer site, transportation back to the
factory, etc.
e. In order to ensure that the learning process enhances customer value, it is critical to install
the necessary information loops in the supply chain. For instance, if databases are used to
track customer preferences, then this data must be fed back to the product design process, and
eventually a superior product must reach the customer. Clearly, this may require additional
investment in information technology infrastructure. Also, consider the Dell example, in
which Dell manages the entire purchasing process of large customers including special
custom features. In this case, the supply chain must have enough flexibility in production and
distribution to accommodate customer-specific demands.
Problem 4: What is the dominant customer value the following companies bring?
a. Starbucks
b. The Gap
a. Starbucks emphasizes customer access along with experience by creating a pleasant
ambiance in its stores.
b. The Gap creates customer value by offering affordable products along with a brand image
built around stylish designs.
c. brings customer value by offering a large selection of products, i.e.,
consolidating information about different travel rates from many companies for easier
shopping, and enabling one-stop shopping for flights, hotels and cars.
Problem 5: What additional experience opportunities does the Internet enable?
Examples of experiences enabled by the Internet include:
1. Newsletters sent regularly by e-mail.
2. On-line customer service.
3. On-line birthday cards sent based on birthday data collected from customers.
4. User groups created by companies that bring together people that share the same
enthusiasm and interest about the companys products.

Problem 6: What measures would you use in a business like to evaluate the
companys performance? The supply chain?
Possible performance measures for include:
The average interval between re-visits (of the same customer) to the site.
Average order size in dollars, average number of items in an order.
Growth rate of hits on the site.
Links to the site from other web sites.
Classical performance measures, such as sales, total revenue, costs and profits, earnings per
share, etc.
Possible performance measures for the supply chain include:
On-time delivery, lead time, fill rate.
Return rate.
Value added per employee.
Inventory turnover.