Assignment -5

A1) A flexible workforce possesses the ability to learn new tasks or switch tasks without
significantly disrupting production, to expand (or contract) capacity via over or idle time,
hiring and firing of seasonal workers, or subcontracting, and to work different schedules.
A number of factors influence a producers ability to realize a flexible workforce: restrictive
labor agreements and work rules, a tight labor market, the education level, culture, or
organizational culture of the work force, the complexity of the tasks, the proprietary nature of
the production process, and restrictions imposed by other members of the supply chain.
A flexible workforce opens the supply chain up to a wider range of alternatives when trying
to match supply with demand. If subcontracting or temporary workers can be deployed, then
a firm can function at a steady base rate and use the subs to buffer periods of high demand
A2) The subcontractor can offer services more cheaply for a number of reasons.
In many cases, the subcontractor is a specialist in the area and is more flexible, hence
cheaper. If a subcontractor is performing similar work for a number of clients, they can take
advantage of the zero-sum nature of business competition. By aggregating orders from a
number of clients, the subcontractor is able to satisfy peaks in demand from some of their
clients because other standard clients will be experiencing valleys in demand. If
subcontracting occurs because a firm is at capacity, the subcontractor (that is not
overcapacity) can handle the production more cheaply simply because is expensive to operate
a system at excess capacity
A3) Any industry where a lucrative product requires both unique labor skills and production
facilities is a prime candidate for a dual facility operation. The healthcare industry is one
example of a dual facility type; many large hospital chains have focused operations for
trauma, heart, ob/gyn, and other specialties. Other industries with dual facility types include
the legal profession, hospitality,construction, and many others. Industries where dual facility
types are rare include tobacco products, alcoholic beverages, sawmills, and chemicals.The
dividing point among these industries is the continuous flow nature of the non-dual
producers. If processing requirements dictate that the product stream must visit the same
steps of a process in the same sequence, then the higher volume and low process flexibility

combination results in dedicated production facilities that simply cant have a broad product
range.
A4) Collaboration mechanisms in a supply chain should begin with the initial partnering
process as the supply chain is being established. All parties in the chain must be aligned and
dedicated to the success of the entire chain. Trust and open communication are of primary
importance; there should be a myriad of formal and informal communication channels open
among all parties. If constancy of purpose is ever in question, each firm might devote some
resources towards equitable chain incentives such that behaviors that benefit the entire
supply chain are recognized and rewarded. The incentives, communication, and trust should
be established at all levels of every chain member. Company leadership should provide for
highly visible evidence of these activities on their level and among cross-business supply
chain teams.
A5) There are many producers, both manufacturing and service, that use common parts
across many products. Some of these product lines include the food industry, construction,
furniture, soap, plastics, perfumes, computer and office equipment, automotive, motorcycles,
bicycles, airframe, and most back-office operations in the service industries.
The use of common parts (and services) lowers costs and enables producers to meet
variability in demand. Part commonality absorbs variability in disaggregated demand from
period to period since the aggregated demand is inherently less variable. The common parts
may be produced or acquired at a more constant rate and stocked at a lower inventory level
while maintaining a higher customer service level
A6) Marketing and operations often find themselves at cross purposes; as the authors note,
marketing often has incentives based on revenue, whereas operations has incentives based on
cost. The cachet of new products, service guarantees, co-promotions, and other marketing
vehicles is quite often lost on members of the organization that must fulfill promises made by
their friends in marketing. As with all collaborations, open communication is a must on a
near-constant basis. Regular planning meetings must include full cross-functional
participation and critical information must be shared as sales and operations occur. Having
common performance measures is another way to get these two groups to work together for
the common good of the company. Holding both groups responsible for Customer service,
accuracy, on time delivery and quality and rewarding them jointly for achieving these goals
will greatly increase their willingness to work together.

A7) A change in price, one of marketings Four Ps, will change demand assuming that there
is some elasticity in demand. A firm can shift demand from a popular product or time to a
less-popular product or what is traditionally an off-peak demand period by lowering prices. A
firm can collect data on the impact of price changes on demand and use the correlation as an
input into supply chain aggregate planning. In the absence of such coordination, it is virtually
guaranteed that supply chain partners will face demand levels they had not anticipated and
will be unable to satisfy. The increase in demand results from a combination of a) market
growth, b) stealing share, and c) forward buying. The first two increase demand for the
product and the third robs sales from the future.
A8) If we assume that a pricing promotion serves to increase demand, then there are a couple
of reasons a firm may offer pricing promotions during peak demand periods. Even at peak
demand, the firm may have excess capacity and could meet this demand. The nature of the
product and supply chain may be such that a promotion today results in an order that both the
supply chain and customer recognize will be filled in the future, perhaps during an
anticipated low demand period. If a firm produces a product that is at the end of its life cycle,
there may be incentive to exhaust accumulated materials and labor skills that are dedicated to
its production. Finally, a firm may be practicing a form of predatory pricing if it senses that a
competitor, teetering on the brink of extinction, is starved for sales.

A9) Pricing promotions during low-demand periods should serve to increase demand and
sales. The increase in demand results from a combination of the following three factors:

Market growth sales may be realized from customers that were not considering this

product at the higher price.

Stealing share sales may be realized from customers that were considering a

competitors product.
Forward buying sales may be stolen from the future by customers that feel that price
may rise in the future.

A10) The main cost categories for the supermarkets inventory policy are material costs,
ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble for
the goods themselves. Ordering costs, also called procurement costs, are incurred by
requesting the goods from the supplier and are fixed in the sense that they do not vary with

the size of the order. Examples of such fixed costs are the labor required to place the order,
handle the resultant paperwork and the transportation fee to ship the order. The holding cost
is the cost to carry one unit in inventory for a specified period of time, usually one year. This
cost is variable and includes the cost of capital and all of the costs associated with physically
storing inventory shrinkage, spoilage or obsolescence, insurance, the cost of capital, the
cost of the warehouse space, etc.
A11) As the lot size ordered from the supplier decreases, the holding cost (variable with
respect to lot size) decreases. As the lot size decreases, the ordering cost remains the same,
but the annual ordering cost will rise since the total number of orders each year must
increase. As the lot size decreases, the cost of the materials will drop on a per-order basis but
will stay the same on an annual basis since total annual demand hasnt changed.
The exception to this occurs if the supplier has a price break for an order size above a certain
threshold; in this case the cost of the goods might increase if the reduced order size is not
sufficient to trigger a substantial per unit discount
A12) As the demand at the supermarket chain grows, we would expect the cycle inventory as
measured in days of inventory to also increase, although the increase in cycle inventory is
only 40% of the increase in demand. This is because the relationship between the optimal lot

Q*
size Q* and the annual demand D is

2DS
hC

. Since D is under the radical, its doubling to

2D does not translate to a jump from a Q* to a 2Q* order; it translates to a jump from a Q* to a
1.4Q* order
A13) One action would be to simply decrease the lot size and let the robust nature of the
EOQ model work its magic. The total cost curve on either side of the optimal order quantity,
the Q*, is relatively flat, so movements in either direction have little impact on total annual
procurement and carrying costs.
If greater cuts in lot size are desired, the manager can aggregate multiple products in a single
order. Recall that the EOQ model is based on a one-product-at-a-time assumption; if multiple
products are aggregated, then the fixed procurement cost is spread over all of the items and
dramatic lot size reductions are possible. If the same products are being ordered by another
supermarket in the same chain (or at least by stores that are willing to cooperate) the

combined orders can be delivered by a single truck making multiple stops, thereby reducing
transportation expense.
Other techniques that should be deployed when aggregating across product lines include
advanced shipping notices and RFID tags that will make inventory tracking and warehouse
management simpler
A14) Quantity discounts are justified in a supply chain as long as they are the fruits of a
coordinated supply chain and maximize total supply chain profits. For commodity products
for which price is set by the market, manufacturers with large fixed costs per lot can use lot
size-based quantity discounts to maximize total supply chain profits.
A15) Lot size discounts are based on the quantity purchased per lot, not the rate of purchase.
Lot size-based discounts tend to raise cycle inventory in the supply chain by encouraging
retailers to increase the size of each lot. Lot size-based discounts make sense only when the
manufacturer incurs a very high fixed cost per order. For commodity products for which price
is set by the market, manufacturers with large fixed costs per lot can use lot size-based
quantity discounts to maximize total supply chain profits.

Volume discounts are based on the rate of purchase or volume purchased per specified time
period. Volume-based discounts are compatible with small lots that reduce the cycle
inventory. If the manufacturer does not incur a very high fixed cost per order, it is better for
the supply chain to have volume-based discounts. For products for which a firm has market
power, volume-based discounts can be used to achieve coordination in the supply chain and
maximize supply chain profits
A16) Manufacturers use trade promotions to offer a discounted price and a time period over
which the discount is effective. The goal of manufacturers such as Kraft and Sara Lee is to
influence retailers to act in a way that helps the manufacturer achieve its objectives. These
objectives may include increased sales, a shifting of inventory from manufacturer to retailer,
and defence against the competition.
Trade promotions may cause a retailer to pass through some or all of the promotion to
customers to spur sales, which increases sales for the entire supply chain. What happens more
frequently in practice is that retailers may choose to pass through very little of the promotion

to customers, purchase in greater quantities, and hold this cheaper inventory in greater
quantities. This action increases both cycle inventory and flow times within the supply chain.
Trade promotions should be structured such that a retailers optimal response benefits the
entire supply chain, i.e., retailers limit their forward buying and pass along more of the
discount to end customers. If the manufacturer has accumulated excessive inventory, then a
trade promotion may provide sufficient incentive to the buyer to forward buy, thus drawing
inventories down to an appropriate level. The manufacturer may be able to smooth demand
by shifting it to a period of anticipated low demand with a trade promotion.
Research has shown that trade promotions by the manufacturer are effective for products with
high deal elasticity that ensures high pass-through (passing the discount on to the consumer)
and high holding costs that ensure low forward buying, paper goods being the poster child for
this combination. Trade promotions are also more effective with strong brands relative to
weak brands and may make sense as a competitive response
Assignment 6
A1) Safety inventory is inventory carried to satisfy demand that exceeds the amount
forecasted for a given period. As such, it tends to have a negative impact on supply chain cost
but a positive impact on supply chain responsiveness. Safety inventory is carried because
product demand and lead time are uncertain and a product shortage may result if actual
demand during lead time exceeds the forecast amount.
A2) A reduction in lead time reduces supply chain safety inventory according to equations
11.2 through 11.4. The reorder point is driven by the demand during lead time, the standard
deviation of demand during lead time, and the customer service level, the latter two
combining to form the safety stock. If lead time falls, the standard deviation of demand
during lead time also falls, resulting in less safety stock.
Taking an intuitive (and extreme) approach, if lead time approached zero there would be no
need for safety (or any) stock since customer orders could be filled instantaneously
A3) The common measures of product availability discussed in this chapter are product fill
rate, order fill rate, and cycle service level (CSL).

Product fill rate is the fraction of product demand that is satisfied from product in inventory
and should be measured over specified amounts of demand rather than time. Fill rate provides
an accurate picture of the number of customers that receive their single-product orders.
Order fill rate is the fraction of orders that are filled from available inventory and should be
measured over a specified number of orders rather than time. In the multiproduct case, poor
performance on one item can doom the order fill rate to an extremely low score while the
other products would have achieved very high fill rates.
Cycle service level is the fraction of replenishment cycles that end with all the customer
demand being met. Cycle service levels tend to be lower than the other two metrics; a firm
could maintain a cycle service level of 0% but have a 99% product fill rate
A4) The two types of ordering policies discussed in the text are continuous review and
periodic review. Continuous review requires that inventory levels be monitored constantly
with an order for a lot size of Q placed when the inventory level drops as low as the reorder
point. Since the level of inventory is known continuously, the level of safety inventory can be
low; an order will be placed the minute the reorder point is reached.
Periodic review requires less vigilance; the inventory level is measured at regular time
intervals and an order is placed to raise the inventory level to a specified threshold. Under
this system the level of inventory is known once a period and merely estimated until the next
count. More safety inventory must be carried under a periodic review system to guard against
a surge in demand
A5) From our knowledge of safety inventory we know that it is calculated by the
multiplication of standard normal variant of the probability distribution of demands and the
demand standard deviation, so the required safety inventory increases with an increase in the
standard deviation of demand. If one can determine the adequate supply then it would
minimize the need for safety inventory.
A6) A retailer with few large stores attracts customers from a wider area and what one part of
the customer base doesnt need this month, the other part does. The highs and lows tend to
cancel, thus stabilizing demand within each season. Whereas for a small stores operate in a
particular area, thus to retain its customer it needs to fulfil all the demands of that area.
A7) Amazon is able to provide a large variety of books and music with less safety inventory
by holding best-selling items in geographically spread warehouses. Amazon can hold less

amount of inventory and still meets customer demand. On the other hand, many small retail
stores would each have their own safety inventory for their customer base.
A8) By keeping pigmentation in the retail paint stores, it can mix any colour into a solid
white base and produce accordingly the customer demands. This change has greatly reduced
the amount of safety inventory required as the paint store must now stock far fewer product
lines. The reduction in safety inventory has eventually reduced safety inventory storage costs
and increased responsiveness.
A9) If the retail book sellers have to carry stock after purchasing this machine, they should
carry items with a steady demand and bestsellers. The books that are rarely purchased would
best be left in the normal way. The books with low demand would be too expensive to stock;
they would need only one of each kind and would incur a very high inventory carrying cost.
A10) The product with the higher margin should be stocked at a higher level of availability
than the product with the lower margin. The product with the higher margin will have a
higher Cu, which is the cost of understocking. The cost of understocking is the sale price less
the cost and may be thought of by the supplier as profit foregone. A higher cost of
understocking results in a higher critical fractile, so the optimal cycle service level will be
higher, which will yield a higher availability.
A11) As the lot size ordered from the supplier decreases, the holding cost (cost of storing the
product) decreases. As the lot size decreases, the ordering cost remains the same, but the
annual ordering cost will rise since the total number of orders each year must increase. As the
lot size decreases, the cost of the materials also decreases on a per-order basis but will stay
the same on an annual basis since total annual demand remains unchanged.
A12) As the demand at the supermarket chain grows, we would expect the cycle inventory as
measured in days of inventory to also increase, although the increase in cycle inventory is
only 40% of the increase in demand. This is because D is under the radical, its doubling to 2D
does not translate to a jump from a Q* to a 2Q* order; it translates to a jump from a Q* to a
1.4Q* order.
A13) One action would be to simply decrease the lot size and use the EOQ model to
ascertain the optimal costs. The total cost curve on either side of the optimal order quantity,
the Q*, is relatively flat, so movements in either direction have little impact on total annual
procurement and carrying costs.

If greater cuts in lot size are desired, the manager can aggregate multiple products in a single
order. Recall that the EOQ model is based on a one-product-at-a-time assumption; if multiple
products are aggregated, then the fixed procurement cost is spread over all of the items and
dramatic lot size reductions are possible. Other techniques that should be deployed when
aggregating across product lines include advanced shipping notices and RFID tags that will
make inventory tracking and warehouse management simpler.
A14) Quantity discounts are justified in a supply chain as long as they provide the benefits of
a coordinated supply chain and maximize total supply chain profits. For commodity products
for which price is set by the market, manufacturers with large fixed costs per lot can use lot
size-based quantity discounts to maximize total supply chain profits.
A15). Lot size discounts are based on the quantity purchased per lot, not the rate of purchase.
Lot size-based discounts tend to raise cycle inventory in the supply chain by encouraging
retailers to increase the size of each lot. Lot size-based discounts make sense only when the
manufacturer incurs a very high fixed cost per order. For commodity products for which price
is set by the market, manufacturers with large fixed costs per lot can use lot size-based
quantity discounts to maximize total supply chain profits.
Volume discounts are based on the rate of purchase or volume purchased per specified time
period. Volume-based discounts are compatible with small lots that reduce the cycle
inventory. If the manufacturer does not incur a very high fixed cost per order, it is better for
the supply chain to have volume-based discounts. For products for which a firm has market
power, volume-based discounts can be used to achieve coordination in the supply chain and
maximize supply chain profits.
Assignment -7
A1) Rail and water transportation modes are best suited for large, low-value shipments. The
price structure of the business make rail and water the modes of choice if low-value, large,
heavy, or high-density items need to be transported. Air, package carriers, and trucks would
not have the infrastructure required to accommodate large items; roads and bridges would be
damaged and the storage capacity of the carriers is insufficient.

A2) Infrastructure often requires government ownership and is not something that can be
increased in capacity in the short term. If congestion is not factored in to the price structure

for infrastructure, then demand for the resources will exceed capacity and major delays will
occur. Pricing may be used to force users to internalize the marginal impact of their choices,
thus alleviating some of the demand during peak periods.

A3) A distribution center that supports several large retail stores can reduce supply chain
costs in four ways: 1) Inbound shipments to the DC achieve economies of scale because each
supplier sends a large shipment; 2) The outbound transportation costs for a DC can be low
because it serves retail locations nearby; and very large inbound shipments that match retail
demand can be cross-docked at the DC, which saves both 3) storage and 4) material-handling
costs.
A DC also can replenish retail inventories more frequently; the DC breaks bulk from
manufacturers on one side of the warehouse and sends it to retail locations on the outbound
side. Since retail demands are aggregated at the DC level, the amount of inventory actually
stored at the DC is very low and as Littles Law indicates, the time between replenishments is
low also.

A4) The primary difference between these retailers is that Home Depot does not incur any
outbound transportation cost for residential customers while Amazon faces such charges.
Home Depot has substantial inbound transportation charges but is able to offload the
outbound transportation cost to the vast majority of their customers. Amazon must use high
cost package carriers for much of its product line although they are able to avoid inbound
transportation costs for items that are drop shipped. For items that are held in one of their
warehouses, Amazon must pay both inbound and outbound.
A5) Peapod faces the burden of expensive outbound transportation costs and must account
for congestion in the delivery area. Unlike traditional grocers who dont deliver their
products, Peapod must deliver items in their fleet of climate-controlled trucks. These trucks
must be scheduled with pricing incentives offered for peak and off-peak delivery times.

Customers are keenly aware of the transportation component of their purchases and Peapod
can use pricing incentives to spur their customers towards higher order amounts.
Both Peapod and traditional grocers must pay the inbound transportation costs of their wares;
there would appear to be no great advantage gained by either approach unless one vendor has
such substantial market share as to gain price concessions that they other cant negotiate
A6) Inventory aggregation is a good idea when inventory and facility costs form a large
fraction of a supply chains total costs. Inventory aggregation is useful for products with a
large value to weight ratio and for products with high demand uncertainty. Both factors allow
aggregation to work to Dells advantage, while Amazon reaps less of a reward.
Dell benefits from aggregation because personal computers have an extremely high value to
weight ratio; the demand for new items is uncertain, and Moores Law makes holding
excessive inventory an extremely unattractive proposition.
Amazon benefits from aggregation when inventory costs are examined, but is hurt by
increased transportation costs. Most items that Amazon sells have low value to weight ratios
and Amazon must ship them via package carrier, which is expensive. Amazon saves money
on storage costs since they choose to stock more popular titles and allow other entities to hold
items with more variable demand
A7) Tailored transportation is the term for use of different transportation networks and modes
based on customer and product characteristics. Tailoring transportation allows firms to
achieve cost and responsiveness targets that are appropriate for the supply chain. The key
drivers are density and distance, customer size, and product demand and value. These drivers
can be viewed as guide for ownership of Transportation options based on customer density
and distance are summarized in the table and present cost and responsiveness tradeoffs for the
supply chain.
Short distance

Medium distance

Long distance

Private fleet with

Cross-dock with

Cross-dock with

density

milk runs

milk runs

milk runs

Medium

Third-party milk

LTL carrier

LTL or package

density

runs

High

Low
density

carrier

Third-party milk

LTL or package

runs or LTL carrier

carrier

Package carrier

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

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

High Value

Type

Low Value

Disaggregate cycle inventory but

aggregate safety inventory. Use an

Disaggregate all inventories

High

inexpensive mode of transportation

and use inexpensive mode

demand

for replenishing cycle inventory and

of transportation for

a fast mode when replenishing safety

replenishment.

inventory.
Aggregate only safety
Low
demand

Aggregate all inventories. If needed,

inventory. Use inexpensive

use fast mode of transportation for

mode of transportation for

filling customer orders.

replenishing cycle
inventory.

A8) The bottom line is that good sourcing decisions improve profits for the firm and total
supply chain surplus. The authors list of benefits derived from effective sourcing decisions
includes:

Better economies of scale can be achieved if orders within a firm are

aggregated.

More efficient procurement transactions can significantly reduce the overall

cost of purchasing.

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

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

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

Firms can achieve a lower purchase price by increasing competition through the use of
auctions
A9) Wal-Mart is able to run its own fleet of trucks because it can ship TL throughout its
supply chain. Wal-Marts shipment sizes are large and the company achieves aggregation
across the many retail stores it owns. If Wal-Mart elected to go with a carrier, they might be
able to match Wal-Marts costs, but Wal-Mart would cede control to the carrier
A10) Lower price can be achieved by sacrificing product quality, product reliability, and
process control, which ultimately will cost the outsourcer more than the total variable cost
saved. The cost of coordination is often underestimated; the outsourcer offloads relatively
low-skilled labor but increases the burden on mid and upper management in controlling the
production. A firm may also lose customer/supplier contact that causes them to miss
opportunities that may have been recognized with a more direct relationship
A11) The retailer puts forth a lower sales effort because they are paid less on a per unit basis
to sell items under a revenue sharing contract than under a buyback or a classic retail
contract. The manufacturer and retailer agree to share a fraction of the retailers revenue after
agreeing on a low wholesale price. The low wholesale price triggers a larger order from the
retailer, and this can increase supply chain surplus if all product is sold. What happens in
practice is that the retailer has a smaller upside under the revenue sharing arrangement and
loses the incentive to push merchandise.

A12) A buy-back contract allows a retailer to return unsold inventory to the supplier; the
contract will stipulate the maximum amount returnable and the reimbursement amount the
retailer will receive. A buy-back contract provides an incentive for the retailer to place a
larger order and make product more available and can increase total supply chain surplus. A

downside of buy-back contracts is information distortion, i.e., the supply chain is aware of the
retailers orders and not the actual customer demand until the sales period has ended. This
problem is exacerbated by a situation involving multiple retailers each of which holds
inventory.
A quantity flexibility contract permits the retailer to change the quantity ordered after
observing demand; the contracts are similar to buy-back contracts except no returns are
required. With a quantity flexibility contract, retailers specify only the range within which
they will purchase, well before actual demand arises. The supplier can aggregate inventory
across all retailers and build a lower level of surplus inventory. Since retailers order closer to
the point of sale when demand is more visible and less uncertain; the uncertainty is
aggregated by a supplier that enjoys lower information distortion.
A13) When sales force are offered an incentive based contract they are incentivised to get
more sales but this can cause the manufacturer to be subject of the strategy by salesforce to
gain highest incentive each time. The salesforce may prepone or postpone the period of sale
which may not always translate into a manufacturers benefit. These problems can be avoided
by modifying the contracts with a rolling horizon. Rather than creating a high bonus period
over a fixed period of time, reduced bonuses can be offered continuously over a shorter time
period. The rolling periods have many last weeks built in and lead to a more constant level
of effort from the retail sites.
A14) For an auto manufacturer, seats are considered direct materials (components used to
make finished goods) while office supplies are indirect materials (goods used to support the
operation of a firm). The procurement process for direct materials should be designed to
ensure that components are available in the right place, in the right quantity, and at the right
time. The primary goal of the procurement process should be to make production plans and
current levels of component inventory at the manufacturer visible to the supplier and should
have alerts built into it if mismatches between supply and demand are detected The
procurement process for indirect materials should be on reducing the transaction cost of each
order. These items are not critical and can be purchased in bulk with an eye towards
aggregation and cost savings.
A15) Design collaboration with suppliers can help a firm reduce cost, improve quality, and
decrease time to market. Cost can be reduce by mass customization. If the products design
permits the use of standardized parts or modules, the manufacturer can save on inventory

holding costs and training for assembly. Suppliers that are specialists in a required component
can bring to bear the design skills that will improve finished goods quality. Time to market
can be decreased by bringing suppliers into the design team from the early stages of product
design.
Assignment No: 8
A1) Nordstrom can take advantage of revenue management by using dynamic pricing
through their Nordstrom Rack stores. Dynamic pricing is the tactic of varying price over time
and is suitable for fashion and seasonal items. The Nordstrom Rack web site indicates that
there are currently 49 locations in 18 states and that the Nordstrom Rack stores are the offprice division of Nordstrom (positioned for the cost-conscious shopper). Merchandise that
does not sell at the Nordstrom stores is discounted 50-75% and moved to the Rack stores
where it is sold in a less attractive setting with a less generous return policy. Nordstrom Rack
is positioned such that it does not compete with Nordstrom stores, but allows the parent
company to reap the greatest return from all products stocked at Nordstrom.
A2) A manufacturers most profitable use of revenue management comes through the tactic of
overbooking, which is the overselling of an available asset that faces last-minute
cancellations of customer orders. The manufacturers valuable asset is production capacity,
which is finite and loses value after a certain date; in this case, capacity is worthless at the
end of the production period or past the date that the supply chain can fill customer orders.
The tradeoff is the cost of unused capacity with the cost of customer orders that cant be filled
and therefore must be subcontracted. The manufacturer can compute the marginal cost of
wasted capacity and the marginal cost of a capacity shortage, form the critical ratio, and apply
this to their knowledge of the customer order distribution, thereby increasing asset utilization.
A3) A trucking firm can use revenue management by offering a two-tiered pricing system;
charging smaller customers a higher price than larger customers that consume the majority of
the fleet. The rationale is that the larger customers offer the trucking firm steady demand and
the ease of dealing with only one or very few customers. These bulk purchases are made at a
discount while smaller customers must make spot purchases at higher prices to fill up
remaining capacity.
A4) A warehouse owner can lease capacity in bulk at a discount to a large company and fill
up the remaining warehouse capacity at full price to smaller customers. The large customer

offers more stable demand and more fully utilizes the warehouse owners space, albeit at a
discount. The smaller customer may never materialize, so holding space for them is a risky
proposition and merits a premium price.
A5) One way that the presence of outlet stores helps Saks is by recouping their purchase price
for items that do not sell in flagship stores. Items can be sold in the outlet stores at a lower
margin or even at a loss. Saks also benefits by freeing up more sales floor capacity in their
main stores, allowing them to stock with the current seasons high margin merchandise. The
full-price customers of Saks benefit because the inventory level of in-season items at Saks is
higher, therefore they are more likely to find what they want. Saks knows they can dump any
unsold merchandise at the end of the season in their outlet store; therefore, Saks initial order
will be higher than if they did not use revenue management.
A6) One way that the presence of outlet stores helps Saks is by recouping their purchase price
for items that do not sell in flagship stores. Items can be sold in the outlet stores at a lower
margin or even at a loss. Saks also benefits by freeing up more sales floor capacity in their
main stores, allowing them to stock with the current seasons high margin merchandise.
The full-price customers of Saks benefit because the inventory level of in-season items at
Saks is higher, therefore they are more likely to find what they want. Saks knows they can
dump any unsold merchandise at the end of the season in their outlet store; therefore Saks
initial order will be higher than if they did not use revenue management
A7) A hairdresser can use pricing and revenue management for seasonal demand; peaks on
the weekend and valleys on weekdays. The hairdresser can provide off-peak discounting in
order to shift demand from weekend to weekdays. The hairdresser should create a price
structure such that the discount given during the off-peak period is more than offset by the
decrease in cost because of a smaller peak and the increase in revenue during the off-peak
period. This tactic increases profits for the hairdresser, decreases the price paid by a fraction
of the customers, and also brings in potentially new customers during the off-peak discount
period and is, in a word, fabulous
A8) A golf course can use pricing and revenue management for seasonal demand, by
lowering the price for less popular times, a golf course manager can increase revenue by
increasing the total number of players and perhaps capturing new players. A golf course
manager can also engage in overbooking for peak times, overselling the course in the event

that some individual players will cancel at the last minute. Overbooking will use up more of
the golf courses capacity which might decrease the level of customer service but will
improve the courses financial performance.
A9) CRM processes focus on the downstream interactions between the enterprise and its
customers. The key processes under CRM are marketing, selling, and order management, and
of these three, the creative sub-processes of the marketing and selling processes are least
suited to IT enablement. The best suited processes for IT enablement are pricing and
profitability calculations, sales force automation, and order configuration and tracking.
Within order management, virtually all processes reap the benefits of information technology.
ISCM processes focus on internal operations within the enterprise and include strategic
planning, demand planning, supply planning, fulfilment, and field service. The use of IT to
facilitate ISCM sub-processes is presented in glowing terms in separate chapters in this text.
Huge gains in efficiency and responsiveness have been achieved via the application of IT to
all aspects of ISCM.
SRM processes focus on upstream interaction between the enterprise and its suppliers and
includes the sub-processes of design collaboration, sourcing, negotiating, buying, and supply
collaboration. The authors indicate in chapter 14 that sourcing-related IT has had the most
ups and downs of any supply chain software sector, with the primary problems being loss of
flexibility and the requirement of collaboration. Electronic marketplaces once flourished but
have since withered. This is not to say that IT does not play a role in SRM processes; in fact,
all areas are supported by IT software
A10) The competitive arena in CRM, ISCM, and SRM can be divided into ERP players, and
best-of-breed startups. Best of breed companies provide a valuable service to all sectors by
defining functionality and providing market leadership. For CRM there is Oracle and SAP.
The ISCM and SRM macro process sectors have had best of breed providers that have long
since yielded market leadership to ERP vendors.
A11) ERPs popularity in the 1990s drove the most successful companies to become the
largest enterprise software companies. Their size provides a wealth of resources and
collective experience that can be brought to bear on a clients issues.

The major advantage that ERP players have relative to best-of-breed providers is the inherent
ability to integrate across the three macro processes of CRM, ISCM, and SRM, often through
the transaction management foundation.
A12) Established firms that have strong CIO leadership and see the supply chain as
encompassing the entirety of the three macro processes would probably be more inclined to
select a large integrated solution. Well-respected CIO leadership would be essential in
promoting and managing such a project. A firm that is mature in this supply chain is fertile
ground for an integrated solution.
Firms that have recently merged or integrated vertically may have a more self-centered
perspective on the supply chain and might skew towards a best-of-breed approach. These
firms might start their IT enablement with a focus on ISCM and then seek to work either end
of the supply chain with an SRM or CRM best-of-breed implementation. Firms closer to
either end of the supply chain; e.g., an extractor of raw materials that sells to a few fabricators
or a turnkey service operation that spends most of their efforts dealing with customers might
choose a system tailored to their end of the supply chain.
A13) The high tech industry has been the leader in adopting supply chain IT systems because
of the mind-set of the decision-makers in this sector. The high tech workforce tends to be
early adopters of new technologies; they understand there is a risk associated with adoption
but are willing to assume the risk and proceed. High tech corporate cultures lend themselves
to such ventures; there is little resistance to change because survival in this sector depends on
it.
A14) From a supply chain perspective, manufacturers benefit more from IT enablement than
service organizations. The tangible, standard (or modular) nature of the output affords
manufacturing this advantage. Next on the spectrum are back office service processes which
can be completely automated using information technology. These back office processes can
be a component of either a manufacturing or service organization or could be stand-alone
organization, e.g., medical transcription, claims processing, payment centers, etc. This is not
to say that a pure service cannot reap the rewards of IT enablement; Pixar Studios and
Prudential Insurance are two such examples.
A15) The bullwhip effect refers to the fluctuation in orders along the length of the supply
chain as orders move from retailers to wholesalers to manufacturers to suppliers. The
bullwhip effect relates directly to the lack of coordination (demand information flows) within

the supply chain. Each supply chain member has a different idea of what demand is, and the
demand estimates are grossly distorted and exaggerated as the supply chain partner is
distanced from the customer
A16) The impact of lack of coordination is degradation of responsiveness and poor cost
performance for all supply chain members. As the bullwhip effect rears its ugly head, supply
chain partners find themselves with excessive inventory followed by stock outs and
backorders. The fluctuations in inventory result in increased holding costs and lost sales,
which in turn spike transportation and material handling costs. Ultimately, the struggle with
cost and responsiveness hurts the relationships among supply chain partners as they seek to
explain their lack of performance
A17) Incentive obstacles occur in situations when different participants in the supply chain
are motivated by self interest.
Incentives that focus only on the local impact of an action result in decisions being made that
achieve a local optimum but can avoid a global (supply chain) optimum. All supply chain
partners must agree on global performance measures and structure rewards such that
members are appropriately motivated.
Sales force incentives also are responsible for counterproductive supply chain behaviour.
Commissions that are based on a single short time frame can be gamed by the sales force to
maximize commission but these actions inadvertently increase demand variability and exert
pressure on the supply chain. Commissions should be structured to provide incentives to
consistently sell large volumes of product over a broad time frame to the sell-through point
A18) If each stage of a supply chain views its demand as the orders placed by their
downstream counterpart, the bullwhip effect is realized by the supply chain. Each member
develops a forecast that is based on something other than the true customer demand and
hilarity ensues. Supply chain members should share point-of-sale (POS) data so that all
members are aware of the true customer demand for product. The beauty of data sharing
requirements is that only aggregate POS data must be shared to mitigate the bullwhip effect;
there is no need to share detailed POS data
A19) Order batching is caused by a number of different factors. One mechanism is the price
structure of TL and LTL shipment quantities; there is incentive to wait a whie to make sure
that a TL shipment is achieved. A customers natural tendency to wait for a milestone, either

real or perceived, can also cause batching. Customers may wait until Friday, Monday, the last
or first day of the month, etc., just because thats when they always have or because that
event reminds them to order. Order batching also occurs because customers are aware of an
impending price reduction and want to take advantage of it. Batching adversely affects supply
chain coordination because the supply chain will be starved for flow, then overwhelmed with
demand.
A supply chain can reconfigure their transportation and distribution system to allow for
shipments to multiple customers on a single truck to achieve TL quantities. The chain can
also assign (or encourage) days for placing orders and move from lot-size based to volume
based quantity discounts (or abandon discounts and promotions altogether).
A20) Trade promotions and price fluctuations make supply chain coordination more difficult.
Customers want to purchase goods for less and engage in forward buying which increases
demand that may exceed the production capacity.
All parties will be benefited if the supply chain used everyday low pricing (EDLP) to
mitigate forward buying and allow procurement, production, and logistics to function at a
linear model.
A21): Cooperation and trust within the supply chain can help improve performance by the
following components:
When different stages trust each other, they are more likely to take the other partys
objectives into consideration when making decisions, thereby incurring a win-win situation.
An increase in supply chain productivity results, either by elimination of duplicated effort or
by allocating effort to the appropriate stage. When detailed sales and production information
is shared that allows the supply chain to coordinate production and distribution decisions.
A22) The issues that supply chain managers must consider when designing their respective
supply chains include assessing the value of the relationship, the operational roles and
decision rights for each, the execution of binding contracts, and establishment of conflict
resolution mechanisms.
The roles and decisions take into account the matrix formation between the parties, which in
result increase the value of the total supply chain network.

A23) The following issues must be considered when a manager is trying to improve the
chances of developing cooperation and trust:
The presence of flexibility, trust, and commitment between the seller and the buyer and
interdepartmental coordination help a supply chain to succeed in cooperation and trust.
Good organizational arrangements, especially for information sharing and conflict resolution,
improve chances for success, like a matrix enclosure of a company.
A24) Collaborative planning, forecasting, and replenishment (CPFR) is defined as a business
practice that combines the intelligence of multiple partners in the planning and fulfilment of
customer demand. In order to be successful, the two parties must have synchronized their
data and established standards for exchanging the information.
The four scenarios that sellers and buyers can collaborate along include:
Retail event collaboration the identification of specific SKUs that will be involved
in sales promotions and sharing of information regarding the timing, duration, pricing,
advertising, and display tactics to be deployed. The benefit of retail event
collaborations is a reduction in stock outs, excess inventory and unplanned logistics
costs.
DC replenishment collaboration the forecasting of DC withdrawals or demand from
the DC to the manufacturer is converted to a stream of orders that are locked in over a
specified time horizon. A successful DC replenishment collaboration reduces
production costs at the manufacturer and inventory and stock outs at the retailer.
Store replenishment collaboration the forecasting of store-level orders that are
committed over a specific time horizon. Such a collaboration results in greater
visibility of sales for the manufacturer, improved replenishment accuracy and product
availability, and reduced inventories.
Collaborative assortment planning the forecasting (collaborative interpretation) of
industry trends, macroeconomic factors, and customer tastes for seasonal goods. This
forecast is converted into a planned purchase order at the style/color/size level that is
used to produce sample products for a fashion event before final merchandising
decisions are made. The manufacturer benefits from this collaboration by having more
lead time to purchase raw materials and plan capacity.

Assignment 9:

A1) A flexible workforce possesses the ability to learn new tasks or switch tasks without
significantly disrupting production, to expand (or contract) capacity via over or idle time,
hiring and firing of seasonal workers, or subcontracting, and to work different schedules.
A number of factors influence a producers ability to realize a flexible workforce: restrictive
labor agreements and work rules, a tight labor market, the education level, culture, or
organizational culture of the work force, the complexity of the tasks, the proprietary nature of
the production process, and restrictions imposed by other members of the supply chain.
A flexible workforce opens the supply chain up to a wider range of alternatives when trying
to match supply with demand. If subcontracting or temporary workers can be deployed, then
a firm can function at a steady base rate and use the subs to buffer periods of high demand.
A2) The subcontractor can offer services more cheaply for a number of reasons.
In many cases, the subcontractor is a specialist in the area and is more flexible, hence
cheaper. If a subcontractor is performing similar work for a number of clients, they can take
advantage of the zero-sum nature of business competition. By aggregating orders from a
number of clients, the subcontractor is able to satisfy peaks in demand from some of their
clients because other standard clients will be experiencing valleys in demand. If
subcontracting occurs because a firm is at capacity, the subcontractor (that is not
overcapacity) can handle the production more cheaply simply because is expensive to operate
a system at excess capacity.
A3) Any industry where a lucrative product requires both unique labor skills and production
facilities is a prime candidate for a dual facility operation. The healthcare industry is one
example of a dual facility type; many large hospital chains have focused operations for
trauma, heart and other specialties. Other industries with dual facility types include the legal
profession, hospitality,
construction, and many others. Industries where dual facility types are rare include tobacco
products, alcoholic beverages, sawmills, and chemicals.
The dividing point among these industries is the continuous flow nature of the non-dual
producers. If processing requirements dictate that the product stream must visit the same
steps of a process in the same sequence, then the higher volume and low process flexibility
combination results in dedicated production facilities that simply cant have a broad product
range.

A4) Collaboration mechanisms in a supply chain should begin with the initial partnering
process as the supply chain is being established. All parties in the chain must be aligned and
dedicated to the success of the entire chain. Trust and open communication are of primary
importance; there should be a myriad of formal and informal communication channels open
among all parties. If constancy of purpose is ever in question, each firm might devote some
resources towards equitable chain incentives such that behaviors that benefit the entire
supply chain are recognized and rewarded. The incentives, communication, and trust should
be established at all levels of every chain member. Company leadership should provide for
highly visible evidence of these activities on their level and among cross-business supply
chain teams.
A5) There are many producers, both manufacturing and service, that use common parts
across many products. Some of these product lines include the food industry, construction,
furniture, soap, plastics, perfumes, computer and office equipment, automotive, motorcycles,
bicycles, airframe, and most back-office operations in the service industries.
The use of common parts (and services) lowers costs and enables producers to meet
variability in demand. Part commonality absorbs variability in disaggregated demand from
period to period since the aggregated demand is inherently less variable. The common parts
may be produced or acquired at a more constant rate and stocked at a lower inventory level
while maintaining a higher customer service level.
A6)

Marketing and operations often find themselves at crossroads. Marketing often has

incentives based on revenue, whereas operations has incentives based on cost. As with all
collaborations, open communication is a must on a near-constant basis. Regular planning,
meetings must include full cross-functional participation and critical information must be
shared as sales and operations occur. Having common performance measures is another way
to get these two groups to work together for the common good of the company. Holding both
groups responsible for Customer service, accuracy, on time delivery and quality and
rewarding them jointly for achieving these goals will greatly increase their willingness to
work together.

A7)

A change in price can change demand assuming that there is some elasticity in

demand. A firm can shift demand from a popular product or time to a less-popular product or
what is traditionally an off-peak demand period by lowering prices. A firm can collect data on

the impact of price changes on demand and use the correlation as an input into supply chain
aggregate planning. In the absence of such coordination, it is virtually guaranteed that supply
chain partners will face demand levels they had not anticipated and will be unable to satisfy.
The increase in demand results from a combination of-market growth, stealing share, and
forward buying. The first two increase demand for the product and the third robs sales from
the future.

A8)

A firm should offer pricing promotions in its peak demand periods because at peak

demand, the firm may have excess capacity and could meet this growing demand. The nature
of the product and supply chain may be such that a pricing promotion will increase demand
that both the supply chain and customer recognize, perhaps during an anticipated low demand
period. If a firm produces a product that is at the end of its life cycle, there may be incentive
to exhaust accumulated materials and labour skills that are dedicated to its production. This
can be done through pricing promotions.
A9)

Pricing promotions during low-demand periods should serve to increase demand and

sales. The increase in demand results from a combination of the following three factors:

Market growth sales may be realized from customers that were not considering this

product at the higher price.

Stealing share sales may be realized from customers that were considering a

competitors product.
Forward buying sales may be stolen from the future by customers that feel that price
may rise in the future.

Assignment 10:
A1) The main cost categories for the supermarkets inventory policy are material costs,
ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble for
the goods themselves. Ordering costs, also called procurement costs, are incurred by
requesting the goods from the supplier and are fixed in the sense that they do not vary with
the size of the order. Examples of such fixed costs are the labor required to place the order,
handle the resultant paperwork and the transportation fee to ship the order. The holding cost
is the cost to carry one unit in inventory for a specified period of time, usually one year. This

cost is variable and includes the cost of capital and all of the costs associated with physically
storing inventory shrinkage, spoilage or obsolescence, insurance, the cost of capital, the
cost of the warehouse space, etc
A2) As the lot size ordered from the supplier decreases, the holding cost (variable with
respect to lot size) decreases. As the lot size decreases, the ordering cost remains the same,
but the annual ordering cost will rise since the total number of orders each year must
increase. As the lot size decreases, the cost of the materials will drop on a per-order basis but
will stay the same on an annual basis since total annual demand hasnt changed.
The exception to this occurs if the supplier has a price break for an order size above a certain
threshold; in this case the cost of the goods might increase if the reduced order size is not
sufficient to trigger a substantial per unit discount
A3) As the demand at the supermarket chain grows, we would expect the cycle inventory as
measured in days of inventory to also increase, although the increase in cycle inventory is
only 40% of the increase in demand. This is because the relationship between the optimal lot

Q*
size Q* and the annual demand D is

2DS
hC

. Since D is under the radical, its doubling to

2D does not translate to a jump from a Q* to a 2Q* order; it translates to a jump from a Q* to a
1.4Q* order.
A4) One action would be to simply decrease the lot size and let the robust nature of the EOQ
model work its magic. The total cost curve on either side of the optimal order quantity, the
Q*, is relatively flat, so movements in either direction have little impact on total annual
procurement and carrying costs.
If greater cuts in lot size are desired, the manager can aggregate multiple products in a single
order. Recall that the EOQ model is based on a one-product-at-a-time assumption; if multiple
products are aggregated, then the fixed procurement cost is spread over all of the items and
dramatic lot size reductions are possible. If the same products are being ordered by another
supermarket in the same chain (or at least by stores that are willing to cooperate) the
combined orders can be delivered by a single truck making multiple stops, thereby reducing
transportation expense.

Other techniques that should be deployed when aggregating across product lines include
advanced shipping notices and RFID tags that will make inventory tracking and warehouse
management simpler
A5) Quantity discounts are justified in a supply chain as long as they are the fruits of a
coordinated supply chain and maximize total supply chain profits. For commodity products
for which price is set by the market, manufacturers with large fixed costs per lot can use lot
size-based quantity discounts to maximize total supply chain profits
A6) Lot size discounts are based on the quantity purchased per lot, not the rate of purchase.
Lot size-based discounts tend to raise cycle inventory in the supply chain by encouraging
retailers to increase the size of each lot. Lot size-based discounts make sense only when the
manufacturer incurs a very high fixed cost per order. For commodity products for which price
is set by the market, manufacturers with large fixed costs per lot can use lot size-based
quantity discounts to maximize total supply chain profits.
Volume discounts are based on the rate of purchase or volume purchased per specified time
period. Volume-based discounts are compatible with small lots that reduce the cycle
inventory. If the manufacturer does not incur a very high fixed cost per order, it is better for
the supply chain to have volume-based discounts. For products for which a firm has market
power, volume-based discounts can be used to achieve coordination in the supply chain and
maximize supply chain profits.
A7) Manufacturers use trade promotions to offer a discounted price and a time period over
which the discount is effective. The goal of manufacturers such as Kraft and Sara Lee is to
influence retailers to act in a way that helps the manufacturer achieve its objectives. These
objectives may include increased sales, a shifting of inventory from manufacturer to retailer,
and defence against the competition.
Trade promotions may cause a retailer to pass through some or all of the promotion to
customers to spur sales, which increases sales for the entire supply chain. What happens more
frequently in practice is that retailers may choose to pass through very little of the promotion
to customers, purchase in greater quantities, and hold this cheaper inventory in greater
quantities. This action increases both cycle inventory and flow times within the supply chain.
Trade promotions should be structured such that a retailers optimal response benefits the
entire supply chain, i.e., retailers limit their forward buying and pass along more of the

discount to end customers. If the manufacturer has accumulated excessive inventory, then a
trade promotion may provide sufficient incentive to the buyer to forward buy, thus drawing
inventories down to an appropriate level. The manufacturer may be able to smooth demand
by shifting it to a period of anticipated low demand with a trade promotion.
Research has shown that trade promotions by the manufacturer are effective for products with
high deal elasticity that ensures high pass-through (passing the discount on to the consumer)
and high holding costs that ensure low forward buying, paper goods being the poster child for
this combination. Trade promotions are also more effective with strong brands relative to
weak brands and may make sense as a competitive response
A8)

Incremental (variable) costs per lot size are more important than costs that are fixed

with respect to lot size. The labour component of procurement or setup costs may be salaried;
therefore, changes in lot size do not impact this component. Also incremental costs depict the
real picture of the costs incurred by a firm.
Submitted By:
Abhishek Mukherjee
Atikur Rahman Khan
Anupama Singh
Anshu Srivastava
Abhilash C.S.
Nevin Francis