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INFORMATION TECNOLOGY & BUSINESS COLLEGE
DEPARTMENT OF MANAGEMENT AND BUSINESS ADMINSTRATION POST

GRAGUATE PROGRAM (MBA)
Supply Chain Management (SCM)
Assignment
Supply Chain Management (SCM)
Submitted by: NEGASI GIRMAY GEBRU
ID: MBA 4414/19

/19
Year: 1 Semester: 2 Section: M
Jul 2020
M
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CHAPTER ONE
Discussion Questions 1
1 Consider the purchase of a can of soda at a convenience store. Describe the various stages in the
supply chain and the different flows involved.
When a customer purchases a can of soda at a convenience store, his purchase represents the end of a
supply chain’s delivery of an item and the beginning of information regarding his purchase flowing in
the opposite direction.
The supply chain stages include customers, retailers, wholesalers/distributors, manufacturers, and
component/raw material suppliers. A customer’s purchase moves product towards the customer and
dollars and information towards the retailer.
The retailer places an order from the wholesaler/distributor to replenish stock, thereby moving
information back up the supply chain while moving product down the supply chain. As the order is
filled, the retailer will move dollars back up the supply chain.
The wholesaler/distributor transmits information and dollars to the manufacturer who produces
product and ships it down the supply chain to the wholesaler.
Finally (or initially, depending on your perspective) the manufacturer moves orders (information) and
dollars towards suppliers in exchange for material flow into their production processes.
2 Why should a firm like Dell take into account total supply chain profitability when making decisions?
Dell realizes that their ultimate success lies with the success of their supply chain and its ability to
generate supply chain surplus. If Dell was to view supply chain operations as a zero sum game, they
would lose their competitive edge as their suppliers’ businesses struggled. Dell’s profit gained at the
expense of their supply chain partners would be short lived. Just as a physical chain is only as strong
as its weakest link, the supply chain can be successful only if all members cooperate and focus on a
global optimum rather than many local optima.
3 What are some strategic planning and operational decisions that must be made by an apparel retailer
like The Gap?
As The Gap plans supply chain strategy it must first consider the marketing function’s pricing plans
in order to structure a supply chain consistent with these plans. Strategic considerations such as the
capacity of each supplier and assembly operations, sourcing decisions and how logistics are to be
handled are all part of the design. The supply chain must also settle on communication channels and
frequencies.
Supply chain planning takes the strategic decisions as a given and seeks to exploit efficiencies in the
chain to maximize supply chain surplus. The entire chain should collaborate in forecasting and
planning production to achieve a global optimum. The forecasts should take into account planned
promotions and known seasonal fluctuations in demand.
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The operational decision takes the plans as a given and makes day-to-day decisions to process
customer orders, allocate resources to certain customers, trigger orders from supply chain members,
and deliver product.
4 Consider the supply chain involved when a customer purchases a book at a bookstore. Identify cycles
in this supply chain and the location of the push/pull boundary.
All supply chain processes can be broken down into four process cycles that connect the five stages
of the supply chain; the customer order cycle, the replenishment cycle, the manufacturing cycle, and
the procurement cycle.
The customer order cycle connects the customer with the retailer; this connection is made as the
book, perhaps Supply Chain Management by Chopra and Meindl, is selected and paid for by the
customer. The replenishment cycle connects the retailer and the distributor and is triggered by the
retailer’s need to fill the empty shelf space with another copy of this tome. The manufacturing cycle
connects the distributor and the manufacturer. As demand for the book is realized and distributors
empty their warehouses, they signal the manufacturer to print another million copies to fill their
empty warehouses. Finally, the procurement cycle connects the manufacturer and the supplier. The
manufacturer requires raw material inputs of paper, ink, etc., to begin the assembly process for
another batch of Supply Chain Management.
The push/pull boundary exists where demand switches from reactive (pull) to speculative (push)
production. For most bookstore supply chains the push/pull boundary is between the customer order
cycle and the replenishment cycle. The customer order pulls the book from the book store shelf but
the initial production of the book was triggered by a build order that moved materials along the
supply chain to the retail outlet.
5 Consider the supply chain involved when a customer orders a book from Amazon. Identify the
push/pull boundary and two processes each in the push and pull phases.
In Amazon’s original operations design the push/pull boundary existed betwixt the retailer (Amazon)
and their distributor. Amazon ordered product from the distributor and the customer order arrived.
Today, Amazon has six warehouses where it stocks an inventory of items it is confident that will sell.
In this scenario, the push/pull boundary exists between the customer and the retailer.Processes in the
pull phase are the order fulfillment, shipping, customer returns, and customer billing. Processes in the
push phase are production, stock replenishments, shipping, and payment.
6 In what way do supply chain flows affect the success or failure of a firm like Amazon? List two
supply chain decisions that have a significant impact on supply chain profitability.
The success or failure of a company like Amazon is decided by the effective function of its supply chain.
The flow of products from publishers to distributors to customers must be rapid and reliable in order to
satisfy customers. The flow of information back through the supply chain allows all members to coordinate
efforts. The flow of money allows all supply chain members to maintain operations. Supply chain
profitability is influenced by sourcing, promotion, and fulfillment decisions
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CHAPTER 2
Discussion Questions
1. How would you characterize the competitive strategy of a high-end department store chain
such as Nordstrom? What are the key customer needs that Nordstrom aims to fill?
The Nordstrom web site states the following. Over the years, the Nordstrom family of employees
built a thriving business on the principles of quality, value, selection, and service. Today, Nordstrom
is one of the nation’s leading fashion retailers, offering a wide variety of high-quality apparel, shoes,
and accessories for men, women, and children at stores across the country. We remain committed to
the simple idea our company was founded on, earning our customers’ trust one at a time.
Nordstrom fills customer needs for high quality fashion merchandise and outstanding levels of
customer service. Price is no object for the typical Nordstrom shopper.
2. Where would you place the demand faced by Nordstrom on the implied demand uncertainty
spectrum? Why?
Implied demand uncertainty is demand uncertainty due to the portion of demand that the supply chain
is targeting, not the entire demand. A high-end department store chain such as Nordstrom falls on the
high end of the implied demand uncertainty scale. The fashion items that Nordstrom stocks have
extremely high product margin, high forecast errors and stockout rates, and once the season is over,
these items are sold at deep discounts at their Nordstrom Rack outlet stores.
3. What level of responsiveness would be most appropriate for Nordstrom’s supply chain? What
should the supply chain be able to do particularly well?
Supply chain responsiveness takes many forms, including the ability to respond to a wide range of
quantities, meet short lead times, handle a large variety of products, build innovative products, meet a
high service level, and handle supply uncertainty. The Nordstrom supply chain must be highly
responsive in the areas of handling highly innovative fashion products, customer response, and
service level; they are effective in supplying well-heeled customers with merchandise and their return
policy is legendary in the Pacific Northwest.
4. How can Nordstrom expand the scope of the strategic fit across the supply chain?
Scope of strategic fit refers to the functions within the firm and stages across the supply chain that
devise an integrated strategy with a shared objective. By adopting an intercompany interfunctional
scope strategy, Nordstrom will maximize supply chain surplus. Nordstrom can move in this direction
by working with their suppliers as if they are actually owned by Nordstrom. Rather than viewing the
supply chain as a zero-sum game of inventory cost minimization and profit maximization, Nordstrom
must recognize that spreading the wealth and occasionally taking on more inventory than is optimal
for them will result in improved customer service. The intercompany interfunctional scope of
strategic fit requires more effort than the other approaches presented in this section; Nordstrom must
evaluate all aspects of their supply web.
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5. Reconsider the previous four questions for other companies such as Amazon.com, a
supermarket chain, and auto manufacturer, and a discount retailer such as Wal-Mart.
Amazon.com focuses on cost and flexibility by providing books, music and a host of other household
products at low prices. Customers place orders online and expect to receive purchases in a number
of days. Customer orders are processed at central warehouses or are drop shipped from suppliers by
mail or common carrier. For the most part, the implied demand uncertainty for Amazon.com is low
as they cast such a wide net. Amazon.com’s supply chain must be responsive in terms of flexibility;
they handle an incredibly diverse range of products. Amazon.com’s supply chain should be able to
provide low prices wide variety and reasonable delivery schedules for its customers. In every link of
the supply chain, Amazon.com must function on the cost-responsiveness efficient frontier in order to
support its competitive strategy. A supermarket chain focuses on cost and quality, with some
specialty chains adding flexibility by carrying a broader range of products that may be targeted
towards customers interested in organic products or ethnic cuisine. Implied demand uncertainty for a
supermarket chain tends to be low; shoppers are typically repeat customers and have a constant
demand level. The supermarket supply chain must be responsive by receiving produce quickly to
ensure freshness and have a high service level. Supermarket supply chains tend to be well-
established and can improve strategic fit by emphasizing speed to maintain freshness, hence
perceived quality. Auto manufacturers have extremely complicated supply chains that are
increasingly focused on flexibility and lean operations. Implied demand uncertainty for auto
manufacturers varies considerably by target market and manufacturer. Automotive supply chains
among the big three in the United States have made great progress in the last decade and recognize
that they must be responsive from a time and flexibility standpoint. Wal-Mart’s supply chain is
obsessed with cost and is facilitated by a low implied demand uncertainty, their impressive logistics
system and their management information systems. Their supply chain is able to respond quickly to
fill a wide variety of products to keep merchandise on Wal-Mart’s shelves. Wal-Mart’s level of
coordination along the supply chain is excellent; it would be difficult to point out areas where true
intercompany interfunctional scope of strategic fit has not been achieved. The sole supply chain
criticism that surfaces is an occasional report that suppliers feel as if supply chain surplus is not
shared equitably.
6. Give arguments to support the statement that Wal-Mart has achieved very good strategic fit
between its competitive and supply chain strategies.
The best argument to support the statement that Wal-Mart has achieved very good strategic fit is their
success as a company. Competition today is supply chain versus supply chain, not company versus
company, so a company’s partners in the supply chain often determine the company’s success. Wal-
Mart’s strategic focus on cost is evident in their competitive, product development, supply chain, and
marketing strategy. Their marketing strategy of advertising every day low prices appeals to
consumers and does not disrupt the supply chain by causing surges in demand. Visiting one of their
big box stores reveals low-priced merchandise, both national and store brands, stacked from floor to
ceiling without elaborate displays or decoration. Wal-Mart’s logistics and information systems are
famous for coordinating their entire supply chain and allowing it to meet customer needs at minimal
cost.
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7. What are some factors that influence implied uncertainty? How does the implied uncertainty
differ between an integrated steel mill that measures lead times in months and requires large
orders and a steel service center that promises 24-hour lead times and sells orders of any size?
From a customer perspective, implied demand uncertainty increases when the customer’s range of
quantity required increases, lead times decrease, variety of product increases, rate of innovation
increases and required service levels increase. We also see high implied uncertainty attributed with
high product margins, forecast errors above 40%, stockout rates above 10% and forced season-end
markdowns. On the supply side we see increased supply uncertainty when the supply source has
frequent breakdowns, unpredictable and low yields, poor quality, limited supply capacity, and
evolving production processes. For the steel mill that requires large orders and has lead times
measured in months both the implied demand and supply uncertainty is less due to a better
predictable capability and a better defined schedule for production. Due to the increasing number of
sizes and the shorter response time associated with the steel service center, implied uncertainty is
high.
8. What is the difference in implied uncertainty faced by a convenience store chain such as 7-
Eleven, a supermarket chain, and a discount retailer such as Costco?
When customers go to a convenience store chain such as 7-Eleven, they go there for the convenience
of a nearby store and are not necessarily looking for the lowest price. Implied demand uncertainty
would be high as customers are looking for a variety of products and convenience versus cost and
demand levels are hard to predict. A supermarket chain focuses on cost and quality, with some
specialty chains adding flexibility by carrying a broader range of products that may be targeted
towards customers interested in organic products or ethnic cuisine. Implied demand uncertainty for a
supermarket chain tends to be low; shoppers are typically repeat customers and have a constant
demand level. The supermarket supply chain must be responsive by receiving produce quickly to
ensure freshness and have a high service level. Supermarket supply chains tend to be well-established
and can improve strategic fit by emphasizing speed to maintain freshness, hence perceived quality.
Low price is very important to customers of discount retailers such as Costco. This customer is
willing to tolerate less variety and even purchase very large package sizes as long as the price is low.
Customer demand can be more predictable and supply side needs are large and fairly stable.
9. What are some problems that can arise when each stage of a supply chain focuses solely on its
own profits when making decisions? Identify some actions that can help a retailer and a
manufacturer work together to expand the scope of strategic fit.
High inventories, poor quality, low customer service, increased returns are just a number of problems
that occur when each stage of a supply chain focuses solely on its own profits. The trucking
company requires full truck loads for delivery forcing the retailer to carry more inventory than
wanted or needed. The supplier offers discounts to their buyers to maximize production but forcing
the buyers to purchase in larger quantities than desired. This concept was very prevalent during the
1950s and 1960s as companies to minimize local costs and maximize their own profits.
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Today, retailers and manufacturers have the opportunity to plan promotions jointly such as Wal-Mart
and P&G. They can share sales information to determine customer trends. Joint product
development opportunities are being explored throughout the supply chain between retailers,
manufacturers and raw material suppliers.
Chapter 3
1. How could a grocery retailer use inventory to increase the responsiveness of the company’s supply
chain?
The logistical driver of inventory encompasses all raw mate The logistical driver of inventory encompasses
all raw materials, work in process, and finished goods within a supply chain. A grocery store can be more
responsive in the eyes of its customers if it offers a broader va riety of SKUs and/or maintains a greater
quantity of each S KU. A greater quantity of each S KU is problematic for highly perishable items like
produce, meat, fish, etc. For these items, a grocery store supply chain should be set up to permit frequent
orders so that freshness is ensured and a stock out situation won’t ex ist for a significant length o f time. A
grocery store supply chain should use historical demand patterns for seasonal items to relieve stress on all
members and provide customers with product d items to relieve stress on all members and provide customers
with product during peak demand periods.
2. How could an auto manufacturer use transportation to increase the efficiency of manufacturer use
transportation to increase the efficiency of its supply chain?
Transportation, a logistical driver, entails moving inventory from point to point Transportation, a logistical
driver, entails moving inventory from point to point inin the supply chain. The trade-off in transportation is
between the supply chain. The trade-off in transportation is between the cost of transportation and the speed
at which p roduct is transported. Slower modes of transportation reduce cost, but could be a reasonable
approach if suppliers are colocated with the assembly operations. If the supply chain located with the
assembly operations. If the supply chain is designed in such away, and assembly operations are located with
proximity to markets, then the supply chain can be run cheaply without holding too much inventory in transit.
3. How could a bicycle manufacturer increase responsiveness through its facilities?

Facilities, another logistical driver, are the actual physical locations in the supply Facilities, another logistical
driver, are the actual physical locations in the supply chain network where product is stored, assembled, or
fabricated. A facility that is designed to be flexible can respond quickly to market demands by retooling to
designed to be flexible can respond quickly to market demands by retooling to produce different models or
products, whereas a dedicated facility cannot. produce different models or products, whereas a dedicated
facility cannot.
Locating a facility close to the market will increase responsiveness at the cost of decreased economies of
scale that might be achieved with a centralized location. Decreased economies of scale that might be
achieved with a centralized location.
A facility that is under capacity will be less responsive A facility that is under capacity will be less
responsive than a facility that is appropriately sized or has excess capacity.
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4. How could an industrial supplies distributor use information to increase its How could an industrial
supplies distributor use information to increase its responsiveness?
Information is a cross-functional driver and consists of data and analysis Information is a cross-functional
driver and consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and
customers concerning facilities, inventory, transportation, costs, prices, and customers throughout the supply
chain. Information serves as a connection among all members of the supply chain and operates within each
member to facilitate internal operations. Accurate information can improve responsiveness by helping
internal operations. Accurate information can improve responsiveness by helping an industrial supplier better
match supply and demand. Information that is an industrial supplier better match supply and demand.
Information that is gathered farther down the supply chain can be transmitted instantaneously and accurately
to the supplies distributor. Instead of waiting for a human accurately to the supplies distributor. Instead of
waiting for a human to call or FAX an order, the distributor can replenish inventory to the necessary levels or
provide what is needed to fill the order as it is realized. Provide what is needed to fill the order as it is
realized.
5. Motorola has gone from manufacturing all its cell phones in-house to almost completely
outsourcing the manufacturing. What are the pros and cons of the two approaches?
Sourcing is the set of business processes required to purchase Sourcing is the set of business processes
required to purchase foods and services. These decisions are crucial because the y affect the level of
efficiency and responsiveness that Motorola can achieve. The Motorola production system for their line of
pagers was hailed as a breakthrough in mass customization, so it was somewhat surprising when Motorola
outsourced cell phones. So somewhat surprising when Motorola outsourced cell phones. Sourcing decisions
should be made based on the total supply chain surplus; if a third party can help the chain achieve greater
surplus, then the function is a prime candidate for outsourcing. Motorola was willing to give up some control
and possibly some of its design talent and assembly expertise because it felt that the supplier could provide
product of an appropriate level of quality with the responsiveness provide product of an appropriate level of
quality with the responsiveness necessary. Products and services that are outsourced are rarely brought back
in- necessary. Products and services that are outsourced are rarely brought back in house and should never
be tied too closely to the out sourcing party’s core competency.
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6. How can a home delivery company like Peapod use pricing of its delivery How can a home delivery
company like Peapod use pricing of its delivery services to improve its profitability?
Pricing is the process by which a firm decides how much to charge customers for its goods and services.
Pricing affects the customer segments that choose its goods and services. Pricing affects the customer
segments that choose to buy the product as well as the customer’s expectations. Peapod can use everyday
low pricing of its products to ensure stability in the supply chain, but can influence demand by varying the
delivery charges. For example, by establishing a minimum demand by varying the delivery charges. For
example, by establishing a minimum order amount of $50 and charging $10 to deliver an order under $75,
Peapod order amount of $50 and charging $10 to deliver an order under $75, Peapod provides an incentive
for a customer to pile on additional items to save on per unit provides an incentive for a customer to pile on
additional items to save on per unit shipping. An order over $100 incurs a delivery fee of $7, which is the
lowest delivery charge for a residential customer. Peapod also varies delivery charges by time of day;
evening delivery times on Peapod also varies delivery charges by time of day; evening delivery times on
weekdays and morning deliveries on Sunday within narrow windows cost an extra weekdays and morning
deliveries on Sunday within narrow windows cost an extra dollar, wider delivery windows are $1 less. The
delivery latitude allows Peapod’s delivery drivers to schedule more efficiently thereby increasing
profitability.
7. How has globalization made strategic fit even more important to a company's success?
Supply chains today are more likely than ever to be global. Establishing a global supply chain
creates many benefits, such as the ability to source from a global base of suppliers who may offer
better or cheaper goods than were available in a company's home nation. Globalization, however,
also adds stress to the chain, because facilities within the chain are farther apart, making
coordination much more difficult.
Globalization has also increased competition, as once-protected national players must compete
with companies from around the world. In the past, with fewer companies satisfying customers'
needs, customers were willing to tolerate longer response times. However, in most industries
there are now many more firms aggressively pursuing their competitors' business. This
competitive situation makes supply chain performance a key to maintaining and growing sales
while also putting more strain on supply chains and thus forcing them to choose their trade-offs
even more precisely.
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8. What are some industries in which products have proliferated and life cycles have
shortened? How have the supply chains in these industries adapted?
The authors cite the example o f running shoes increasing from five styles in the early 70s to
almost 300 by the late 90s. Other products that have seen an explosion in variety include personal
electronics, beverages, snack and prepared explosion in variety include personal electronics,
beverages, snack and prepared foods, entertainment, tires, and personal services.
Supply chains have leveraged information systems, recognized the need to Supply chains have
leveraged information systems, recognized the need to collaborate on product and process
design, and supply chain execution. The collaborate on product and process design, and supply
chain execution. The supply chain stance has shifted towards a partnership orientation from a
supply chain stance has shifted towards a partnership orientation from a focus on price
negotiations.
9. How can the full set of logistical and cross-functional drivers be used to create strategic
fit for a PC manufacturer targeting both time-sensitive and price-conscious customers?
The logistical drivers, facilities, inventory, and transportation, and the cross- The logistical
drivers, facilities, inventory, and transportation, and the cross functional drivers, information,
sourcing, and pricing, must be used in functional drivers, information, sourcing, and pricing,
must be used in concert to achieve the appropriate balance o f efficiency and responsiveness for
the supply chain to be successful. A manufacturer that wan ts to deliver product both quickly and
efficiently can make cost and time trade-offs among these drivers to achieve their goals. These
trade offs across drivers afford more flexibility but require their goals. These trade offs across
drivers afford more flexibility but require constant vigilance as the trade-offs within each driver
chain constant vigilance as the trade-offs within each driver change. In addition, some drivers
may be altered more easily, e.g., order quantity and transportation media, than other drivers, e.g.,
location and sourcing.
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CHAPTER FOUR
1. What differences in the retail environment may justify the fact that the fast-moving
consumer goods supply chain in India has far more distributors than in the United States?
India is a land of shopkeepers selling to over a billion consumers. India is becomingly
increasingly Westernized, but it will be quite a while (if not forever) before shopkeepers
are supplanted by large retailers. The sheer volume of small store owners requires a large
number of distributors to service them. The younger generation in India, particularly the
IT rich areas of Bangalore and Chennai, have far higher disposable income than the older
generation and the rest of the country. These young workers have very different retail
habits and are causing changes in India’s shopping and supply chain needs. Poor
infrastructure, although not entirely a retail concern, is another reason why India may
need far more distributors than in the U.S.
2. A specialty chemical company is considering expanding its operations into Brazil, where
five companies dominate the consumption of specialty chemicals. What sort of
distribution network should this company utilize?
If the expansion into Brazil is merely a sales operation, then distributor storage with last
mile delivery is the best network design. If the expanded operations include
manufacturing capabilities, then manufacturer storage with direct shipping is a strong
possibility. Given the nature of the product, package carrier delivery is not an option and
retail storage with customer pickup is out of the question since this is a B2B scenario. In-
transit merge would be an option only if the manufacturer established a network of plants
in Brazil, perhaps focused factories relatively close to each customer. The chemical
company has only five customers to serve; it would not require too large an investment in
logistical infrastructure to effectively serve all five without intervention by a distributor.
Their short supply chain would be easier to coordinate due to the stable demands and
information sharing that is possible in a B2B scenario.
3. A distributor has heard that one of the major manufacturers from which it buys is
considering going direct to the consumer. What can the distributor do about this? What
advantages can it offer the manufacturer that the manufacturer is unlikely to be able to
reproduce? The two supply network designs that the distributor can propose to counter
the manufacturer’s proposal are the distributor storage with package carrier delivery and
the distributor storage with last mile delivery. Both of these counter-proposals offer
higher order visibility for the customer while having simpler information infrastructure
than with manufacturer storage. The response time for both is excellent, and the customer
experience is also superior to the direct model. If the manufacturer is trying to provide
excellent customer service, the increased costs in transportation and potentially higher
levels of inventory may be acceptable tradeoffs.
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4. What types of distribution networks are typically best suited for commodity items?
Commodity items are available from many sources and customers expect them to be
delivered quickly; if a supply chain can’t be responsive, the customers will move on to
the next source. A distribution network designed for retail storage with customer pickup
achieves quick response for high demand, low variety products. Other commodity
products can be effectively distributed using distributor storage with last-mile delivery,
which is also suited for high demand, quick response products.
5. What type of networks is best suited to highly differentiated products?

The networks that are best suited to highly differentiated products are the manufacturer
storage with direct shipping and the manufacturer storage with in-transit merge. Both
approaches have the ability to aggregate inventories and postpone product customization,
which would help support a wider variety of products.
6. In the future, do you see the value added by distributors decreasing, increasing, or staying
about the same?
It is doubtful that value added by distributors will decrease over time; the nature of
competition in all areas would suggest that distributors that add less value would be
winnowed out. It is more likely that distributors will be asked to do more or may
volunteer to do so as a means of differentiating themselves from the competition.
7. Why has e-business been more successful in the PC industry compared to the
grocery industry? In the future, how valuable is e-business likely to be in the PC
industry?
The PC industry is selling a highly customized product that is purchased on a per-
household basis, less routinely than the commodity products that make up groceries. A
company like Dell can leverage the Internet as a marketing and distribution tool to
advertise new capabilities and options before bricks and mortar retailers can. Dell also
removes whatever intimidation (or frustration) factor might be experienced by conversing
with in-store sales representatives. Computers have a very high value to shipping cost
ratio, so the increased shipping costs when compared to a traditional store are negligible.
Groceries have a much lower ratio; although in-store shoppers are incurring costs to pick
up their groceries, those costs are hidden in comparison to the delivery charge on an
itemized bill from Peapod. E-business will continue to be a valuable tool in the PC
industry; none of the advantages currently being enjoyed by Dell and Gateway are likely
to change significantly.
8. Is e-business likely to be more beneficial in the early part or the mature part of a
product’s life cycle? Why?
E-business is more likely to be more beneficial in the early part of a product’s life cycle.
E-business strengths include flexible pricing, promotions, and product portfolios and
greater speed in disseminating product information. Later in the life cycle, a product is
likely to be a commodity, which doesn’t play to the strengths of this channel.
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9. Consider the sale of home improvement products at Home Depot or a chain of
hardware stores such as True Value. Who can extract the greatest benefit from
going online? Why?
Both entities and other hardware companies like Ace are already on-line. An article titled
“Home Depot’s Self-Improvement – Company Business and Marketing” by Eric Young
in The Industry Standard, September 11, 2000, indicates that Home Depot is the last
major player to go on-line, but brings the deepest pockets. Those of us that have stood in
line with the contractors realize that many of Home Depot’s items are ill-suited to a web
enterprise and the clientele is equally ill-suited. Contractor sales are such a significant
portion of Home Depot’s sales in comparison with the mix at True-Value, that it is likely
that True-Value will ultimately benefit more from an e-commerce division.
The article goes on to say, “Each chain is employing a slightly different e-commerce
strategy. Whereas Home Depot wants its site to replicate its merchandise mix, True
Value limits the number of items it offers online. For example, at True Value, Net
shoppers won't find products most people need in a hurry, such as toilet-tank fix-it kits.
"You're not going to wait three days to have it shipped so you can stop the water from
dripping into your neighbor's apartment," says Neil Hastie, CIO at TrueValue.com. Ace
Hardware, meanwhile, thinks bigger is better. Its site offers almost everything in its
stores, plus about 15,000 additional products. Ace's supplementary online offerings are a
windfall from its investment in OurHouse.com, a Web-based home improvement site that
handles Ace's online sales. The two companies split online revenues. Ace joined forces
with OurHouse to get a leg up in e-commerce. "We didn't want to be left in the starting
gate," says Ken Nichols, a retail operations vice president for Ace. Waiting in the wings
is Lowe's, the nation's second-largest home improvement chain. Like Home Depot,
Lowe's wants to expand its online presence but is approaching e-commerce slowly.
Beginning in October, the retailer will offer a wide selection in a limited number of
categories, such as hand tools and appliances. Lowe's will deliver Net orders directly to
buyers or to the store closest to the customer, again like Home Depot. Meanwhile,
Internet-only retailers are scrambling to win over customers, vowing to compete against
offline chains in price and selection. CornerHardware, for example, says it currently has
125,000 products available -- three times the number available at an average Home Depot
store. The pure Internet players acknowledge that they don't have the brand recognition
of Home Depot. But they hope to build their brands before Home Depot and the other
brick-and-mortar stores establish a strong online presence. Still, it's not clear that any are
benefiting from first-mover advantage. Already two Net pure-plays -- Hardware.com and
HomeWarehouse.com -- have gone under.”
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10. Amazon.com sells books, music, electronics, software, toys, and home improvement
products online. In which product category does e-business offer the greatest
advantage compared to a retail store chain? In which product category does e-
business offer the smallest advantage (or a potential cost disadvantage) compared to
a retail store chain? Why?
Amazon’s greatest e-business advantage comes from book sales; they are able to list
millions of book titles that a physical store cannot possibly carry on their shelves. Cost
advantages for Amazon are few and far between; the item price to shipping cost ratio for
books, music, and software is not as high as most consumers would prefer. Amazon
certainly has no cost advantage with music and software. Both are readily sold over the
Internet; it would behoove Amazon to partner with another Seattle-area company to make
this the norm. Electronics, hardware, and even toys are products that most consumers
would like to experience before making a selection. Any cost advantage Amazon might
have in these sectors may be overshadowed by an inability to hold the item on-line.
11. Why should an e-business such as Amazon.com build more warehouses as its sales
volume grows?
Amazon initially tried to run their entire book business with no warehousing facilities,
instead relying on other distributors to carry their entire inventory. Next, Amazon ran
their business out of a single warehouse in Seattle and discovered it wasn’t feasible; the
trade-off of responsiveness and cost was causing excessive delays in getting products to
customers. Now Amazon uses a hybrid of these two systems, carrying items that it knows
will sell in its own warehouses and letting others carry items that have greater demand
uncertainty. As Amazon’s business grows, it should continue to establish warehouses to
spread its facilities closer to pockets of new customers, thus achieving better levels of
responsiveness while still maintaining its cost advantage.
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CHAPTER 5
1. How do the location and size of warehouses affect the performance of a firm such as
Amazon.com? What factors should Amazon.com take into account when making this
decision?
The location and size of Amazon’s warehouses have a direct bearing on how responsive
and efficient they can be. At one time Amazon ran their on-line bookstore out of one
warehouse in Seattle; this warehouse was small by today’s standards and was unable to
keep up with peak demand. Amazon has since added other geographically distributed
warehouses that hold the items with steadier demand. The dispersion of warehouses
allows Amazon to ship from closer to the customers and the stocking of items with more
even demand allows for a higher service level at a reasonable cost. Amazon should
consider what regions are underserved by the current network of warehouses and where it
is most economical to locate the next warehouse, effectively balancing their efficiency
and responsiveness with their strategy.
2. How do import duties and exchange rates affect the location decision in a supply chain?
Tariffs refer to any duties that must be paid when products are moved across
international, state, or city boundaries. If a tariff is excessive, it provides a strong
disincentive to do business across borders with entities in that area. The classic
workaround to a high tariff is adding a location inside the area. Some regions have
developed trade agreements that limit or eliminate the tariff on goods. Exchange rates
specify how much one currency is worth in terms of another. As one currency gains
against another, it may be beneficial to add shift production to the area using the devalued
currency. This makes the goods more affordable for the population. Companies with
flexible production capabilities can shift some production from area to area depending on
the buying power of local markets.
3. What are different roles played by production facilities within a global network?
The different strategic roles for facilities in a global network are as follows:
 Offshore facility: low-cost facility for export production. This is strictly a low-
cost producer for an export market
 Source facility: low-cost facility for global production. This facility is also viewed
as a low-cost provider, but provides output for the entire global network.
 Server facility: regional production facility This facility supplies the market in the
country where it is located
 Contributor facility: regional production facility with development skills. This
facility serves the market where it is located but is also responsible for
customization that increases salability in that country.
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 Outpost facility: regional production facility built to gain local skills. This facility
plays the role of a server facility but more importantly, it obtains access to
knowledge or skills that exist in that region.
 Lead facility: facility that leads in development and process technologies. This
facility creates new processes, technologies and products for the entire network.
4. Amazon.com has built new warehouses as it has grown. How does this change affect
various cost and response times in the Amazon.com supply chain?
Logistics and facility costs incurred within a supply chain change as the number of
facilities, their location, and capacity allocation is changed. As Amazon has added
warehouses, their logistics, inventory and facility costs have changed. An increased
number of warehouses increases that fixed cost but can be exploited to reduce
transportation costs. These potentially fall if the warehouses are spread throughout a
distribution area, which increases responsiveness at a similar cost or maintains
responsiveness at a reduced cost. Inventory costs also change with an increased number
of warehouses; Amazon is holding more total inventory and can take advantage of
pooling to reduce quantities of some items.
5. McMaster-Carr sells maintenance, repair, and operations equipment from five

warehouses in the United States. WW Grainger sells products from more than 350
retail locations, supported by several warehouses. In both cases, customers place
orders using the Web or on the phone. Discuss the pros and cons of the two
strategies.
WW Grainger has the more responsive network; a customer with a critical repair need
can drive to a local retail location to pick up the necessary part. McMaster Carr’s network
is less responsive; critical supplies would be scheduled for overnight delivery in all
likelihood. WW Grainger has the greater facility cost since it has more locations,
although the retail facilities provide a presence that doubles as a marketing tool not
enjoyed by McMaster Carr. McMaster Carr’s facility expense is much lower and their
network model shifts the transportation cost more fully to the customer. A WW Grainger
customer travels the last mile to pick up an order, but Grainger must ship from their
warehouse to the retail locations.
6. Consider a firm such as Dell, with very few production facilities worldwide. List the
pros and cons of this approach and why it may or may not be suitable for the
computer industry.
The advantage for Dell’s network design is lower facility costs; they can locate in just
enough countries to avoid tariffs and mitigate some of their exchange rate and demand
risk. The disadvantage for Dell is the lack of responsiveness this adds to their system. A
customer has no expectation of zero flow time, so they know as they enter the transaction
that they must wait for their PC. Shipping from one of the production facilities adds to
the delay, which is highly visible on Dell’s or the package carrier’s web site. The
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shipping costs might also be a concern for some customers, but the value to shipping cost
ratio is so high that these costs seem like small potatoes in comparison to the total
invoice.
7. Consider a firm such as Ford, with more than 150 facilities worldwide. List the pros
and cons of having many facilities and why it may or may not be suitable for the
automobile industry.
Automakers often use a multiplant strategy to create server facilities. These server
facilities provide product for the market where they are located, thereby taking advantage
of tax incentives, local content requirements, tariff barriers, and high logistics costs. This
can be a good strategy if market demand exists for your product; when demand drops, the
producer is left with expensive excess capacity. If the facilities are flexible, production of
popular models can continue to prepare product for export. If facilities are inflexible or
all sales are flat, then the producer must bear the cost or shed assets.
CHAPTER SEVEN
1. What role does forecasting play in the supply chain of a build-to-order

manufacturer such as Dell?
Although Dell builds to order, they obtain PC components in anticipation of customer
orders and therefore they rely on forecasting. This forecast is used to predict future
demand, which determines the quantity of each component needed to assemble a PC and
the plant capacity required to perform the assembly.
2. How could Dell use collaborative forecasting with its suppliers to improve its supply
chain?
Collaborative forecasting requires all supply chain partners to share information
regarding parameters that might affect demand, such as the timing and magnitude of
promotions. Dell could share with their components suppliers all of the promotions, e.g.,
holiday, back-to-school, etc., they have planned. These suppliers could, in turn, notify
their suppliers of discrete components that a spike in demand is anticipated. These
demand forecasts for end items determine the demand for components and coupled with
knowledge of fabrication times, allows all members of the supply chain to provide the
right quantity at the right time to their customers.
3. What role does forecasting play in the supply chain of a mail order firm such as LL
Bean?
LL Bean has historically operated almost exclusively in a make-to-stock mode and with
very few exceptions, stocked products that did not go out of style as rapidly as many
other clothing and accessory lines. A pre-worldwide web existence would have relied on
communication with manufacturers about what products might be featured on the front of
their catalog. The lead times involved in printing and distributing the catalog and
20
producing the product line were such that elaborate planning and forecasting tools were
not required. A quick visit to the web site demonstrates that this is changing; the featured
products on the web site can be changed daily or programmed to rotate each time the web
page is refreshed. LL Bean and their supply chain, including the logistics component, are
well aware of the demand forecast and can all receive sales data as orders are placed. LL
Bean probably has an extranet to communicate sales data with suppliers and allows
customers to create accounts to manage purchases, wish lists, and track orders.
4. What systematic and random components would you expect in demand for
chocolates?
Systematic components are level, the current deseasonalized demand; trend, the rate of
growth or decline in demand for the next period; and seasonality, the predictable seasonal
fluctuations in demand. The demand for chocolates is probably highly seasonal, one
would expect demand to spike for certain holidays such as Valentine’s Day, Halloween,
and Christmas.
5. Why should a manager be suspicious if a forecaster claims to forecast historical

demand without any forecast error?
The primary difficulty with such a claim is that forecasts are always wrong, hence, an
estimate of error should be provided with the forecast. Given a set of data, it is possible to
create a forecasting model that is 100% accurate, but such a model would contain
ridiculous cubic, quartic, and possibly higher-order terms. The model would work only
on that data.
6. Give examples of products that display seasonality of demand.

Products that display seasonality include, heating oil, electricity, natural gas, wrapping
paper, school supplies, sporting goods (summer, winter, etc.), facial tissues, beverages
(coffee, beer, iced tea, etc.), ice cream, pizza delivery, and tax preparation services. All
products display some form of seasonality if you look at them in a global perspective.
7. What is the problem if a manager uses last year’s sales data instead of last year’s
demand to forecast demand for the coming year?
Last year’s sales data is fine as long as there were no stock outs. If an item is not on the
shelf or is explicitly indicated as being sold out, the manager may be blissfully unaware
of customer demand that existed but was not expressed. Also, if there were special
promotions last year that are not planned for the following year, the data must be adjusted
to accommodate this factor.
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8. How do static and adaptive forecasting methods differ?
Static methods assume that the estimates of level, trend, and seasonality within the
systematic component do not vary as new demand is observed. Once these parameters are
estimated, there is no need to adjust them and they can be used for all future forecasts. In
adaptive forecasting, the estimates of level, trend, and seasonality are updated after each
demand observation, that is, as data are collected, they are incorporated into the
forecasting process. Adaptive methods allow a forecaster to react (or overreact) to recent
developments. Should a disruptive technology affect demand, the adaptive forecast will
respond immediately, albeit dragging several historical data points along for the ride. The
static approach would not take this new data into account and presumably the forecasts
would suffer. We would like to think that a forecaster using an invalid static method
would recognize its futility in light of a paradigm shift, but painful personal experience
suggests otherwise.
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CHAPTER NINE
1. What are some obstacles to creating a flexible workforce? What are the benefits?
A flexible workforce possesses the ability to learn new tasks or switch tasks without
significantly disrupting production, to expand (or contract) capacity via over or idle time,
hiring and firing of seasonal workers, or subcontracting, and to work different schedules.
A number of factors influence a producer’s ability to realize a flexible workforce:
restrictive labor agreements and work rules, a tight labor market, the education level,
culture, or organizational culture of the work force, the complexity of the tasks, the
proprietary nature of the production process, and restrictions imposed by other members
of the supply chain. A flexible workforce opens the supply chain up to a wider range of
alternatives when trying to match supply with demand. If subcontracting or temporary
workers can be deployed, then a firm can function at a steady base rate and use the subs
to buffer periods of high demand.
2. Discuss why subcontractors can often offer products and services to a company
more cheaply than if the company produced them themselves?
The subcontractor can offer services more cheaply for a number of reasons. In many
cases, the subcontractor is a specialist in the area and is more flexible, hence cheaper. If
a subcontractor is performing similar work for a number of clients, they can take
advantage of the zero-sum nature of business competition. By aggregating orders from a
number of clients, the subcontractor is able to satisfy peaks in demand from some of their
clients because other standard clients will be experiencing valleys in demand. If
subcontracting occurs because a firm is at capacity, the subcontractor (that is not
overcapacity) can handle the production more cheaply simply because is expensive to
operate a system at excess capacity.
3. In what industries would you tend to see dual facility types (some facilities focusing
on only one type of product and others able to produce a wide variety)? In what
industries would this be relatively rare? Why?
Any industry where a lucrative product requires both unique labor skills and production
facilities is a prime candidate for a dual facility operation. The healthcare industry is one
example of a dual facility type; many large hospital chains have focused operations for
trauma, heart, ob/gyn, and other specialties. Other industries with dual facility types
include the legal profession, hospitality, construction, and many others. Industries where
dual facility types are rare include tobacco products, alcoholic beverages, sawmills, and
chemicals. The dividing point among these industries is the continuous flow nature of the
non-dual producers. If processing requirements dictate that the product stream must visit
the same steps of a process in the same sequence, then the higher volume and low process
flexibility combination results in dedicated production facilities that simply can’t have a
broad product range.
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4. Discuss how you would set up a collaboration mechanism for the enterprises in a
supply chain.
Collaboration mechanisms in a supply chain should begin with the initial partnering
process as the supply chain is being established. All parties in the chain must be aligned
and dedicated to the success of the entire chain. Trust and open communication are of
primary importance; there should be a myriad of formal and informal communication
channels open among all parties. If constancy of purpose is ever in question, each firm
might devote some resources towards equitable “chain incentives” such that behaviors
that benefit the entire supply chain are recognized and rewarded. The incentives,
communication, and trust should be established at all levels of every chain member.
Company leadership should provide for highly visible evidence of these activities on their
level and among cross-business supply chain teams.
5. What are some product lines that use common parts across many products? What
are the advantages of doing this?
There are many producers, both manufacturing and service, that use common parts across
many products. Some of these product lines include the food industry, construction,
furniture, soap, plastics, perfumes, computer and office equipment, automotive,
motorcycles, bicycles, airframe, and most back-office operations in the service industries.
The use of common parts (and services) lowers costs and enables producers to meet
variability in demand. Part commonality absorbs variability in disaggregated demand
from period to period since the aggregated demand is inherently less variable. The
common parts may be produced or acquired at a more constant rate and stocked at a
lower inventory level while maintaining a higher customer service level.
6. Discuss how a company can get marketing and operations to work together with the
common goal of coordinating supply and demand to maximize profitability.
Marketing and operations often find themselves at cross purposes; as the authors note,
marketing often has incentives based on revenue, whereas operations has incentives
based on cost. The cachet of new products, service guarantees, 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.
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7. How can a firm use pricing to change demand patterns?
A change in price, one of marketing’s Four P’s, will change demand assuming that there
is some elasticity in demand. A firm can shift demand from a popular product or time to a
less-popular product or what is traditionally an off-peak demand period by lowering
prices. A firm can collect data on the impact of price changes on demand and use the
correlation as an input into supply chain aggregate planning. In the absence of such
coordination, it is virtually guaranteed that supply chain partners will face demand levels
they had not anticipated and will be unable to satisfy. The increase in demand results
from a combination of a) market growth, b) stealing share, and c) forward buying. The
first two increase demand for the product and the third robs sales from the future.
8. Why would a firm want to offer pricing promotions in its peak-demand periods?
If we assume that a pricing promotion serves to increase demand, then there are a couple
of reasons a firm may offer pricing promotions during peak demand periods. Even at
peak demand, the firm may have excess capacity and could meet this demand. The nature
of the product and supply chain may be such that a promotion today results in an order
that both the supply chain and customer recognize will be filled in the future, perhaps
during an anticipated low demand period. If a firm produces a product that is at the end of
its life cycle, there may be incentive to exhaust accumulated materials and labor skills
that are dedicated to its production. Finally, a firm may be practicing a form of predatory
pricing if it senses that a competitor, teetering on the brink of extinction, is starved for
sales.
9. Why would a firm want to offer pricing promotions during its low-demand periods?
Pricing promotions during low-demand periods should serve to increase demand and
sales. The increase in demand results from a combination of the following three factors:
Market growth – sales may be realized from customers that were not considering this
product at the higher price. Stealing share – sales may be realized from customers that
were considering a competitors product. Forward buying – sales may be stolen from the
future by customers that feel that price may rise in the future.
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CHAPTER TEN
1. Consider a supermarket deciding on the size of its replenishment order from

Proctor & Gamble. What costs should it take into account when making this
decision?
The main cost categories for the supermarket’s inventory policy are material costs,
ordering costs, and holding costs. Material cost is the money paid to Proctor and Gamble
for the goods themselves. Ordering costs, also called procurement costs, are incurred by
requesting the goods from the supplier and are fixed in the sense that they do not vary
with the size of the order. Examples of such fixed costs are the labor required to place the
order, handle the resultant paperwork and the transportation fee to ship the order. The
holding cost is the cost to carry one unit in inventory for a specified period of time,
usually one year. This cost is variable and includes the cost of capital and all of the costs
associated with physically storing inventory – shrinkage, spoilage or obsolescence,
insurance, the cost of capital, the cost of the warehouse space, etc.
2. Discuss how various costs for the supermarket change as it decreases the lot size
ordered from Proctor & Gamble.
As the lot size ordered from the supplier decreases, the holding cost (variable with
respect to lot size) decreases. As the lot size decreases, the ordering cost remains the
same, but the annual ordering cost will rise since the total number of orders each year
must increase. As the lot size decreases, the cost of the materials will drop on a per-order
basis but will stay the same on an annual basis since total annual demand hasn’t changed.
The exception to this occurs if the supplier has a price 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.
3. As demand at the supermarket chain grows, how would you expect the cycle
inventory measured in days of inventory to change? Explain.
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
2DS
lot size Q* and the annual demand D is Q*  . Since D is under the radical, its
hC
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.
26
4. The manager at the supermarket wants to decrease the lot size without increasing
the costs he incurs. What actions can he take to achieve his objective?
One action would be to simply decrease the lot size and let the robust nature of the EOQ
model work its magic. The total cost curve on either side of the optimal order quantity,
the Q*, is relatively flat, so movements in either direction have little impact on total
annual procurement and carrying costs. If greater cuts in lot size are desired, the manager
can aggregate multiple products in a single order. Recall that the EOQ model is based on
a one-product-at-a-time assumption; if multiple products are aggregated, then the fixed
procurement cost is spread over all of the items and dramatic lot size reductions are
possible. If the same products are being ordered by another supermarket in the same
chain (or at least by stores that are willing to cooperate) the combined orders can be
delivered by a single truck making multiple stops, thereby reducing transportation
expense. Other techniques that should be deployed when aggregating across product lines
include advanced shipping notices and RFID tags that will make inventory tracking and
warehouse management simpler.
5. When are quantity discounts justified in a supply chain?

Quantity discounts are justified in a supply chain as long as they are the fruits of a
coordinated supply chain and maximize total supply chain profits. For commodity
products for which price is set by the market, manufacturers with large fixed costs per lot
can use lot size-based quantity discounts to maximize total supply chain profits.
6. What is the difference between lot size-based and volume-based quantity discounts?
Lot size discounts are based on the quantity purchased per lot, not the rate of purchase.
Lot size-based discounts tend to raise cycle inventory in the supply chain by encouraging
retailers to increase the size of each lot. Lot size-based discounts make sense only when
the manufacturer incurs a very high fixed cost per order. For commodity products for
which price is set by the market, manufacturers with large fixed costs per lot can use lot
size-based quantity discounts to maximize total supply chain profits. Volume discounts
are based on the rate of purchase or volume purchased per specified time period.
Volume-based discounts are compatible with small lots that reduce the cycle inventory. If
the manufacturer does not incur a very high fixed cost per order, it is better for the supply
chain to have volume-based discounts. For products for which a firm has market power,
volume-based discounts can be used to achieve coordination in the supply chain and
maximize supply chain profits.
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7. Why do manufacturers such as Kraft and Sara Lee offer trade promotions? What
impact do trade promotions have on the supply chain? How should trade
promotions be structured to maximize their impact while minimizing the additional
cost they impose on the supply chain?
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 defense against the competition. Trade promotions may cause a retailer to
pass through some or all of the promotion to customers to spur sales, which increases
sales for the entire supply chain. What happens more frequently in practice is that
retailers may choose to pass through very little of the promotion to customers, purchase
in greater quantities, and hold this cheaper inventory in greater quantities. This action
increases both cycle inventory and flow times within the supply chain. Trade promotions
should be structured such that a retailer’s optimal response benefits the entire supply
chain, i.e., retailers limit their forward buying and pass along more of the discount to end
customers. If the manufacturer has accumulated excessive inventory, then a trade
promotion may provide sufficient incentive to the buyer to forward buy, thus drawing
inventories down to an appropriate level. The manufacturer may be able to smooth
demand by 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.
8. Why is it appropriate to include only the incremental cost when estimating the
holding and order cost for a firm?
The cycle inventory models discussed in the chapter are robust; thus incremental
(variable) costs per lot size are more important than costs that are fixed with respect to lot
size. The labor component of procurement or setup costs may be salaried; therefore
changes in lot size do not impact this component.
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CHAPTER ELEVEN
1. What is the role of safety inventory in the supply chain?

Safety inventory is inventory carried to satisfy demand that exceeds the amount
forecasted for a given period. As such, it tends to have a negative impact on supply chain
cost but a positive impact on supply chain responsiveness. Safety inventory is carried
because product demand and lead time are uncertain and a product shortage may result if
actual demand during lead time exceeds the forecast amount.
2. Explain how a reduction in lead time can help a supply chain reduce safety
inventory without hurting product availability.
A reduction in lead time reduces supply chain safety inventory according to equations
11.2 through 11.4. The reorder point is driven by the demand during lead time, the
standard deviation of demand during lead time, and the customer service level, the latter
two combining to form the safety stock. If lead time falls, the standard deviation of
demand during lead time also falls, resulting in less safety stock. Taking an intuitive (and
extreme) approach, if lead time approached zero there would be no need for safety (or
any) stock since customer orders could be filled instantaneously.
3. What are the pros and cons of the various measures of product availability?
The common measures of product availability discussed in this chapter are product fill
rate, order fill rate, and cycle service level (CSL). Product fill rate is the fraction of
product demand that is satisfied from product in inventory and should be measured over
specified amounts of demand rather than time. Fill rate provides an accurate picture of
the number of customers that receive their single-product orders. Order fill rate is the
fraction of orders that are filled from available inventory and should be measured over a
specified number of orders rather than time. In the multiproduct case, poor performance
on one item can doom the order fill rate to an extremely low score while the other
products would have achieved very high fill rates. Cycle service level is the fraction of
replenishment cycles that end with all the customer demand being met. Cycle service
levels tend to be lower than the other two metrics; a firm could maintain a cycle service
level of 0% but have a 99% product fill rate.
4. Describe the two types of ordering policies and the impact that each of them has on
safety inventory.
The two types of ordering policies discussed in the text are continuous review and
periodic review. Continuous review requires that inventory levels be monitored
constantly with an order for a lot size 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.
29
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.
5. What is the impact of supply uncertainty on safety inventory?

The required safety inventory increases with an increase in the standard deviation of
periodic demand. The standard deviation of periodic demand is a function of the variance
in the lead time and the variance in the demand. Anything that causes supply to be more
deterministic will minimize the need for safety inventory.
6. Why can a Home Depot with a few large stores provide a higher level of product
availability with lower inventories than a hardware store chain such as Tru-Value,
with many small stores?
Home Depot benefits from substitution and from aggregation. Many of the products
Home Depot carries are not aggressively branded in the eyes of the do-it-yourselfer. This
class of customers wants to perform a simple home repair or improvement and is less
concerned about a specific manufacturer than about getting all the supplies in one trip
(although I should note that in my experience there is no such thing as a single trip to
Home Depot for any project). Home Depot also benefits from aggregation; the large box
store draws customers from a wider area and what one part of the customer base doesn’t
need this month, the other part does. The highs and lows tend to cancel, thus stabilizing
demand within each season.
7. Why is Amazon.com able to provide a large variety of books and music with less
safety inventory than a bookstore chain selling through retail stores?
Amazon is able to provide a large variety of books and music with less safety inventory
through the power of aggregation. By holding best-selling items in geographically
dispersed warehouses, Amazon can hold less inventory and still meet customer demand.
Equations 11.12 through 11.16 illustrate the savings possible through aggregation versus
a multiple location retail design. Intuitively, many small retail stores would each have
their own safety inventory for their customer base and most of this safety inventory
would languish on the shelves. If one site experienced a surge in demand, a stockout
would result. A large centralized supply would need less safety inventory as the demand
variances might cancel each other, e.g., high demand from one region is offset by low
demand from another. Only if many regions had unanticipated high demand would the
central supply be exhausted.
30
8. In the 1980s, paint was sold by color and size in paint retail stores. Today paint is
mixed at the paint store according to the color desired. Discuss what, if any, impact
this change has on safety inventories in the supply chain.
The practice of adding pigmentation in the retail store is a classic example of
postponement; paint stores can mix any color into a solid white base and produce exactly
what the customer wants. This change has greatly reduced the amount of safety inventory
required as the paint store must now stock far fewer product lines. The reduction in safety
inventory has simultaneously reduced safety inventory storage costs and increased
responsiveness.
9. A new technology allows books to be printed in ten minutes. Borders has decided to
purchase these machines for each store. They must decide which books to carry in
stock and which books to print on demand using this technology. Do you
recommend it for best-sellers or for other books? Why?
If Borders must carry stock after purchasing this machine, they should carry items with a
steady demand, bestsellers and the like. The fringe books that are rarely purchased would
best be left to the 10 minute process which is effectively instantaneous production. The
books with low demand would be too expensive to stock for sporadic demand; they
would need only one of each, but the breadth of the product line would be overwhelming
and prohibitively expensive to carry from month to month.
CHAPTER TWELVE
1. Consider two products with the same cost but different margins. Which product
should have a higher level of product availability? Why?
The product with the higher margin should be stocked at a higher level of availability
than the product with the lower margin. The product with the higher margin will have a
higher Cu, which is the cost of 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.
2. Consider two products with the same margin carried by a retail store. Any leftover
units of one product are worthless. Leftover units of the other product can be sold to
outlet stores. Which product should have a higher level of availability? Why?
The product with the higher salvage value should be stocked at a higher level of
availability than those with the lower salvage value. The product with the higher salvage
value will have a lower Co, which is the cost of overstocking. The cost of overstocking is
the sale price less the salvage value. A lower cost of overstocking results in a higher
critical fractile, so the optimal cycle service level will be higher, which will yield a higher
availability.
31
3. A firm improves its forecast accuracy using better marketing intelligence. What
impact will this have on supply chain inventories and profitability? Why?
Improved forecast accuracy should result in a closer match between supply and demand,
resulting in improved profitability. An improved match will result in lower levels of
unplanned carryover inventory and shortages at the end of planning periods. The
improved match will lower the expected costs of having too much or too little inventory.
4. How can postponement of product differentiation be used to improve supply chain

profitability?
Postponement refers to the delay of product differentiation until closer to the sale of the
product. Postponement allows producers to leverage two features common to forecasts:
forecasts with shorter time horizons tend to be more accurate than those with longer time
horizons; and aggregate forecasts tend to be more accurate than forecasts for individual
items/models. More accurate forecasts allow for a better match of supply and demand,
thereby lowering mismatch costs and increasing profitability as discussed in the previous
question.
5. Mattel has historically allowed toy retailers to place two orders for the holiday
shopping season. Mattel is considering allowing retailers to place only one order.
What impact will this have on retailer orders? What impact will this have on supply
chain profits?
Mattel needs to abandon this approach to supply chain management. Under the two-order
system, retailers could place an order, assess market demand, and place a second order
that takes advantage of the short time horizon and improved knowledge about market
demand. The single-order system will require a less-educated guess about demand that
will occur further in the future. The single-order system has a much higher risk of a gross
mismatch between supply and demand, resulting in excessive stock-out situations (lost
sales) and fire sales at the end of the season. Supply chain profits will decline if the
ordering system is changed to a single-order system.
6. Discuss how an expensive supplier with short lead times who is used as a backup for
a low cost supplier with long lead times can result in higher profits than using only
the low-cost supplier.
The two suppliers can be deployed so that the customer has the opportunity to place two
(or more) orders during each demand cycle. The low-cost supplier with long lead times
should receive the first order from the customer. As demand is realized, the customer can
refine their demand forecast. If the forecast is overly optimistic, the excess inventory can
be disposed for its salvage value. The salvage value should be the same regardless of
supplier, but thanks to the lower purchase price, the cost of overstocking is much lower.
The second order can be placed at a later time and can be used to match demand as
closely as the production situation permits. It may be possible to use the second order to
fill only firm customer demand that was not met by the order from the slow, low-cost
32
supplier. Even if this is not the case, the second order gives the customer the ability to
match supply and demand while taking advantage of each supplier’s strength.
CHAPTER THREETEN
1. What modes of transportation are best suited for large, low-value shipments? Why?
Rail and water transportation modes are best suited for large, low-value shipments. The
price structure of the business make rail and water the modes of choice if low-value,
large, heavy, or high-density items need to be transported. Air, package carriers, and
trucks would not have the infrastructure required to accommodate large items; roads and
bridges would be damaged and the storage capacity of the carriers is insufficient.
2. Why is it important to account for congestion when pricing the use of transportation
infrastructure?
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.
3. Wal-Mart designs its networks so that a DC supports several large retail stores.
Explain how the company can use such a network to reduce transportation costs
while replenishing inventories more frequently.
A distribution center that supports several large retail stores can reduce supply chain
costs in four ways: 1) Inbound shipments to the DC achieve economies of scale because
each supplier 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 Little’s Law indicates,
the time between replenishments is low also.
33
4. Compare the transportation costs for an e-business such as Amazon.com and a
retailer such as Home Depot when selling home-improvement materials.
The primary difference between these retailers is that Home Depot does not incur any outbound
transportation cost for residential customers while Amazon faces such charges. Home Depot has
substantial inbound transportation charges but is able to offload the outbound transportation cost
to the vast 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.
5. What transportation challenges does Peapod face? Compare transportation costs at

online grocers and supermarket chains.
Peapod faces the burden of expensive outbound transportation costs and must account for
congestion in the delivery area. Unlike traditional grocers who don’t deliver their products,
Peapod must deliver items in their fleet of climate-controlled trucks. These trucks must be
scheduled with pricing incentives offered for peak and off-peak delivery times. Customers
are keenly aware of the transportation component of their purchases and Peapod can use
pricing incentives to spur their customers towards higher order amounts. Both Peapod and
traditional grocers must pay the inbound transportation costs 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 can’t negotiate.
6. Do you expect aggregation of inventory at one location to be more effective when a

company such as Dell sells computers or when a company such as Amazon.com sells
books? Explain by considering transportation and inventory costs.
Inventory aggregation is a good idea when inventory and facility costs form a large fraction
of a supply chain’s total costs. Inventory aggregation is useful for products with a large value
to weight ratio and for products with high demand uncertainty. Both factors allow
aggregation to work to Dell’s advantage, while Amazon reaps less of a reward. Dell benefits
from aggregation because personal computers have an extremely high value to weight ratio;
the demand for new items is uncertain, and Moore’s Law makes holding excessive inventory
an extremely unattractive proposition. Amazon benefits from aggregation when inventory
costs are examined, but is hurt by increased transportation costs. Most items that Amazon
sells have low value to weight ratios and Amazon must ship them via package carrier, which
is expensive. Amazon saves money on storage costs since they choose to stock more popular
titles and allow other entities to hold items with more variable demand.
34
7. Discuss key drivers that may be used to tailor transportation. How does tailoring
help?
Tailored transportation is the term for use of different transportation networks and modes
based on customer and product characteristics. Tailoring transportation allows firms to
achieve cost and responsiveness targets that are appropriate for the supply chain. The key
drivers are density and distance, customer size, and product demand and value. These drivers
can be viewed as guide for ownership of 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.
35

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INFORMATION TECNOLOGY & BUSINESS COLLEGE

DEPARTMENT OF MANAGEMENT AND BUSINESS ADMINSTRATION POST

Supply Chain Management (SCM)

Supply Chain Management (SCM)

Submitted by: NEGASI GIRMAY GEBRU

ID: MBA 4414/19

Year: 1 Semester: 2 Section: M

3. How could a bicycle manufacturer increase responsiveness through its facilities?

5. What type of networks is best suited to highly differentiated products?

5. McMaster-Carr sells maintenance, repair, and operations equipment from five

1. What role does forecasting play in the supply chain of a build-to-order

5. Why should a manager be suspicious if a forecaster claims to forecast historical

6. Give examples of products that display seasonality of demand.

1. Consider a supermarket deciding on the size of its replenishment order from

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

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

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

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

5. What transportation challenges does Peapod face? Compare transportation costs at

6. Do you expect aggregation of inventory at one location to be more effective when a

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