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Exam 8 June 2015 Questions and Answers PDF

This document contains 19 multiple choice questions about supply chain management concepts. The questions cover topics like push vs pull supply chains, centralized vs decentralized inventory systems, reducing the bullwhip effect, appropriate supply chain strategies for different product types, reducing safety stock levels through cross-docking operations, and types of supplier-retailer partnerships like vendor-managed inventory. The document also includes questions about issues like information sharing in supply chains and implementation drawbacks of different supply contract types.

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0% found this document useful (0 votes)
299 views17 pages

Exam 8 June 2015 Questions and Answers PDF

This document contains 19 multiple choice questions about supply chain management concepts. The questions cover topics like push vs pull supply chains, centralized vs decentralized inventory systems, reducing the bullwhip effect, appropriate supply chain strategies for different product types, reducing safety stock levels through cross-docking operations, and types of supplier-retailer partnerships like vendor-managed inventory. The document also includes questions about issues like information sharing in supply chains and implementation drawbacks of different supply contract types.

Uploaded by

Fazal Raheem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Exam 8 June 2015, questions and answers

Supply Chain Management (Erasmus Universiteit Rotterdam)

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Multiple choice questions


1. In many organizations there are two interacting chains: the supply chain and the
development chain. What type of decisions are characteristic for the development chain
and not for the supply chain?

A. Make/buy decisions.
B. Inventory decisions.
C. Transportation decisions.
D. Network design decisions.

2. Consider a centralized and a decentralized distribution system that have the same total
safety stock. Which statement is correct?

A. The service level provided by the centralized system is higher; and the higher the
coefficient of variation in the demand, the higher the difference in service level.
B. The service level provided by the centralized system is lower; and the higher the
coefficient of variation in the demand, the higher the difference in service level.
C. The service level provided by the centralized system is higher; and the higher the
coefficient of variation in the demand, the lower the difference in service level.
D. The service level provided by the centralized system is lower; and the higher the
coefficient of variation in the demand, the lower the difference in service level.

3. What is the advantage of a decentralized inventory system as compared to a centralized


inventory system?

A. The total level of safety stock decreases, while providing the same cycle service
level.
B. The overhead costs decrease.
C. The lead time shortens.
D. The total transportation costs decrease.

4. Out of the following activities, which one is the most effective approach to reduce the
bullwhip effect?

A. Use inventory replenishment policies with periodic reviews.


B. Take advantage of economies of scale.
C. Use an ‘everyday low pricing’ strategy.
D. Reduce the number of strategic alliances.

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5. The push portion of a supply chain has different characteristics than the pull portion of a
supply chain. What characterizes the push portion of a supply chain?

A. A simple supply chain structure, short lead times and low demand uncertainty.
B. Economies of scale, a complex supply chain structure and high demand uncertainty.
C. A focus on cost minimization, long lead times and low demand uncertainty.
D. A focus on order fulfillment, economies of scale and high demand uncertainty.

6. Consider the following two statements on supply chain strategies:


I. There is less safety stock after the push-pull boundary than before this point.
II. A pull-based supply chain has a greater risk of inventory obsolescence than a
push-based supply chain.
Which statements are true or false?

A. Statement I is true, statement II is true.


B. Statement I is true, statement II is false.
C. Statement I is false, statement II is true.
D. Statement I is false, statement II is false.

7. Which of the following statements is true?

A. The appropriate supply chain strategy for functional products is a push strategy,
where the focus is on efficiency and maximizing order fulfillment.
B. The appropriate supply chain strategy for functional products is a pull strategy,
where the focus is on responsiveness and the demand is predictable.
C. The appropriate supply chain strategy for innovative products is a push strategy,
where the focus is on efficiency and cost reductions.
D. The appropriate supply chain strategy for innovative products is a pull strategy
where the focus is on responsiveness and the demand is unpredictable.

8. Which supply chain strategy would be best when the demand uncertainty is high and the
production order lead times are long?

A. Pure pull-based strategy.


B. Pure push-based strategy.
C. Continuous replenishments.
D. Inventory positioning.

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9. In the article “Value of Information in Capacitated Supply Chains” by Gavirneni et al.


(1999), the authors study different circumstances when it is better to share information.
Under which circumstances is it more beneficial to share information?

A. When the end-item demand variance is high.


B. When the batch size (S-s) is moderate (that is, not very high and not very low).
C. When the supplier’s capacity is low.
D. When the ratio of penalty to holding cost is close to zero or very large.

10. Certain supply contracts are designed to be applied in either a make-to-order


environment or a make-to-stock environment. Which of the following supply contracts
are to be used in a make-to-order environment?

A. Buy-back contracts and cost-sharing contracts.


B. Quantity-flexibility contracts and pay-back contracts.
C. Revenue-sharing contracts and sales rebate contracts.
D. Quantity-flexibility contracts and cost-sharing contracts.

11. To which of the following concepts are lateral shipments closely related?

A. Distributor integration.
B. Collaborative forecasting & planning.
C. Delayed differentiation.
D. Design for logistics.

12. Consider a supply chain consisting of a single manufacturing facility, a cross-dock and
multiple retail outlets. Items are shipped from the manufacturing facility to the cross-
dock facility and from there to the retail outlets. What would be the best strategy to
reduce safety stock levels at the retail outlets?

A. Use pre-distribution operations for the cross-dock facility and locate the cross-dock
facility closer to the factory.
B. Use pre-distribution operations for the cross-dock facility and locate the cross-dock
facility closer to the retail outlets.
C. Use Pick-to-Zero operations for the cross-dock facility and locate the cross-dock
facility closer to the factory.
D. Use Pick-to-Zero operations for the cross-dock facility and locate the cross-dock
facility closer to the retail outlets.

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13. For which type of item is pre-sorted cross-docking the most logical distribution method:

A. High value density high packaging density products.


B. Low value density high packaging density products.
C. High value density low packaging density products.
D. Low value density low packaging density products.

14. Consider the following two statements on cross-docking:


I. Pre-sorted cross-docking operations can make more use of risk pooling than pick-
to-zero operations.
II. Pre-sorted cross-docking will always result in lower total safety stock levels than
direct shipments as long as the same cycle service level is provided.
Which statements are true or false?

A. Statement I is true, statement II is true.


B. Statement I is true, statement II is false.
C. Statement I is false, statement II is true.
D. Statement I is false, statement II is false.

15. In the article ‘Purchasing Must Become Supply Management’ by Kraljic (1983), the
author argues that a firm’s supply strategy should depend on profit impact and supply
risk. For which type of items is the appropriate procurement strategy to force competition
between suppliers, when there are many suppliers to choose from for these items?

A. Bottleneck items.
B. Leverage items.
C. Strategic items.
D. Noncritical items.

16. Which of the following is not an advantage for a company when a third party logistics
provider is used?

A. The company can focus on its core competencies.


B. Meet technological requirements in a quick and cost-effective way.
C. Provide flexibility in resource and workforce size.
D. Provide a more tight control and coordination of the supply chain.

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17. There are different types of retailer-supplier partnerships. In which type of relationship is
the supplier fully responsible for the inventory levels of the products at the retailers?

A. Quick response.
B. Continuous replenishment.
C. Advanced continuous replenishment.
D. Vendor-managed inventory.

18. Which of the following issues is an implementation drawback of a buy-back contract


between a supplier and a buyer?

A. The supplier needs to monitor the buyer’s revenue which increases administrative
cost.
B. The supplier needs to share its production cost information with the buyer.
C. The supplier needs to have an effective reverse logistics system.
D. It is not possible to coordinate the supply chain such that the global optimal order
quantities are achieved.

19. Consider the following two statements on supply contracts:


I. A buy-back contract between a buyer and supplier reduces the supplier’s risk.
II. A cost-sharing contract between a manufacturer and distributor gives the
manufacturer an incentive to produce more units when the manufacturer
implements a make-to-stock supply chain strategy.
Which statements are true or false?

A. Statement I is true, statement II is true.


B. Statement I is true, statement II is false.
C. Statement I is false, statement II is true.
D. Statement I is false, statement II is false.

20. Different strategies have been identified how a global supply chain can be employed to
address global risks. Which of the following statements is correct?

A. A hedging strategy is a risk taking strategy, whereas a speculative strategy is a risk


reduction strategy.
B. A flexible strategy is a risk taking strategy, whereas a hedging strategy is a risk
reduction strategy.
C. A speculative strategy is a risk taking strategy, whereas a hedging strategy is a risk
reduction strategy.
D. A flexible strategy is a risk taking strategy, whereas a speculative strategy is a risk
reduction strategy.

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21. What is one of the most appropriate strategies for managing known-unknown risks?
A. Invest in redundancy.
B. Increase velocity in sensing and responding.
C. Create an adaptive supply chain community.
D. Use historical data in order to characterize forecast errors, mean time between
machine failure, and lead time performance.

22. Which type of trade-off decision is underlying the concept of delayed differentiation?

A. To balance the lot size and inventory trade-off.


B. To balance the product variety and inventory trade-off.
C. To balance the inventory and transportation costs trade-off.
D. To balance the lead time and transportation costs trade-off.

23. There is the need for a better understanding of product architecture when outsourcing or
standardization is considered. Which statement on modular and integral products is
correct?

A. A modular product contains components that are manufactured dependently of each


other.
B. An integral product is made from off-the-shelf components.
C. Components of an integral product are interchangeable.
D. Components of an integral product perform multiple functions.

24. Volkswagen operates plants in the United States, Brazil, Mexico and Germany, all of
which are important markets for Volkswagen products. Depending on macroeconomic
conditions, certain plants may be more profitable at various times than others. What type
of global risk strategy does Volkswagen use?

A. Speculative strategy.
B. Hedge strategy.
C. Production shifting strategy.
D. Flexible strategy.

25. Suppose that a higher-functionality chip is sold as a lower-functionality chip when the
low-end chip is out of stock. Which type of standardization is used in this setting?

A. Part standardization.
B. Process standardization.
C. Product standardization.
D. Procurement standardization.

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26. Dynamic pricing could be used as a tool to better match demand and supply. Under
which condition does this strategy provide a larger profit benefit?

A. When the level of demand seasonality decreases.


B. When the coefficient of variation of the demand decreases.
C. When the production capacity is larger relative to the average demand.
D. When the planning horizon is shorter.

27. Which dimension of customer value is used for companies such as McDonald’s,
Starbucks and Walgreens, who find it important to be located in prime real estates such
that their customers can more easily have access to the products they sell?

A. Conformance to requirements.
B. Product selection.
C. Value-added services.
D. Relationships and experiences.

28. Which are the most important characteristics of a product, its production process, and the
network that enable mass customization?

A. Integral product, modular process, responsive (agile) network.


B. Modular product, modular process, responsive (agile) network.
C. Integral product, not - modular process, responsive (agile) network.
D. Modular product, not - modular process, efficient network.

29. Customer value is defined as the way the customer perceives the entire company’s
offerings, including products, services, and other intangibles. The customer perception
can be broken into several dimensions. Which dimension of customer value corresponds
to the accessibility of a product?

A. Value-added services.
B. Relationships and experiences.
C. Conformance to requirements.
D. Price and brand.

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30. Smart pricing can be used in different ways to determine the price of a product or
service. Which type of smart pricing mechanism is used when a company marks down
their products?

A. Product versioning.
B. Time-based differentiation.
C. Channel pricing.
D. Dynamic pricing.

Open questions on next page!

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Multiple choice questions – Answers

1. A. (see Section 1.2)


2. A. (see Section 2.3)
3. C (see Section 2.4)
4. C. (see Section 5.2.3)
5. C. (see Section 6.2 and 6.3, in particular Table 6-2 and Figure 6-10)
6. B. (see Chapter 6)
7. D. (see Section 9.4.1 and Section 6.2.5)
8. D. (see Section 6.3 and Figure 6-10 on page 195)
9. B. (see slides 34 – 36 of SCM lecture 4, or the article)
10. C. (see Section 4.2 and 4.3)
11. A. (see Section 7.4)
12. D. (see slide 30 and 33 from the slides of Chapter 7)
13. C. (see slide 58 from the slides of Chapter 7)
14. D. (statement I is wrong since products are assigned to customers earlier in pre-sorted cross-
docking, statement II is also wrong, see slide 50 of Chapter 7)
15. B. (see Section 9.4)
16. D. (see Section 8.3)
17. D. (see Section 8.4)
18. C. (see Section 8.4)
19. C. (statement I is wrong since the supplier’s risk increases, see Section 4.2, statement II is
correct, see Section 4.3)
20. C. (see Section 10.2.3)
21. D. (see Section 10.2.1 page 316)
22. B. (see Section 5.8.2, page 169)
23. D. (see Section 9.3) – A will also be considered correct
24. B. (see Section 10.2.3 on page 321-322)
25. C. (see Section 11.2.4 on page 348)
26. D. (see Section 13.6.2)
27. A. (see Section 12.2, page 371)
28. B. (see slide 63 of lecture 8)
29. C. (see Section 12.2 and in particular page 371)
30. D. (see Section 13.6.2)

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Open questions

See the supplement for the formula sheet and the look-up tables of a standard normal
distribution.

The following grading scheme will be used for the open questions and count for 35% of your
exam grade: each question is 3 points worth, one can earn a total of 21 points. The grade for
the open questions will be calculated as (total # of points earned/2.1)*0.35.

31. A convenience store sells caps for $5 per item. The monthly demand for this product has
a normal distribution with a mean of 100 and a standard deviation of 30. The store adopts
a continuous review (R,Q) policy. There is a fixed order cost of $20 per order, the lead
time for an order is one week, where each month contains exactly four weeks. Holding
cost is 20% per cap per week.
a. Determine the optimal order quantity Q, the reorder level R and the safety stock if the
store pursues a 99% service level. (See appendix for the look-up tables of a standard
normal distribution) Round the order quantity to the closest integer, and round the
reorder level and safety stock levels such that required service levels are met.
b. What is the fill rate for this product?
c. Assume the store decides to guarantee a fill rate of 95% by adjusting the reorder level.
What should be the minimal value of the reorder point?

302
𝐴𝐴𝐴𝐴𝐴𝐴 = 100 items⁄month = 25 items⁄week , STD = 30 items⁄month = � items�𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 =
4
15 items/week, L=1 week.

p = $5⁄item , K = $20⁄order , h = 0.2 ∗ $ 5⁄week = $1/week. (h=0.2 will also be accepted)


a. CSL = 99% from the look up table, z= 2.33
2∙𝐴𝐴𝐴𝐴𝐴𝐴∙𝐾𝐾 2∙25∙20
𝑄𝑄 = � ℎ
=� 1
= √1000 = 31.622 ≈ 32 items/order (with h=0.2, 𝑄𝑄 = 70.71 ≈ 71)

𝑅𝑅 = 𝐴𝐴𝐴𝐴𝐴𝐴 ∙ 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 + 𝑧𝑧 ∙ √𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 ∙ 𝑆𝑆𝑆𝑆𝑆𝑆2 + 𝐴𝐴𝐴𝐴𝐴𝐴 2 ∙ 𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴2 = 25 ∙ 1 + 2.33 ∙ 15 = 59.95 ≈ 60


𝑠𝑠𝑠𝑠 = 𝑧𝑧 ∙ √𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 ∙ 𝑆𝑆𝑆𝑆𝑆𝑆2 + 𝐴𝐴𝐴𝐴𝐴𝐴 2 ∙ 𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴2 = 2.33 ∙ 15 = 34.95 ≈ 35

b. 𝐹𝐹𝑅𝑅 = 1 − 𝐸𝐸𝑆𝑆𝐸𝐸/𝑄𝑄 where 𝐸𝐸𝑆𝑆𝐸𝐸 = 𝐴𝐴(𝑧𝑧)√𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 ∙ 𝑆𝑆𝑆𝑆𝑆𝑆2 + 𝐴𝐴𝐴𝐴𝐴𝐴 2 ∙ 𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴2 = 0.0034 ∙ 15 = 0.051
𝐹𝐹𝑅𝑅 = 1 − 0.051⁄𝑄𝑄 = 0.998 = 99.8% (FR= 99.9% with a Q of 71)

c. If 𝐹𝐹𝑅𝑅 = 95% = 0.95 then 𝐸𝐸𝑆𝑆𝐸𝐸 = 32 − 30.4 = 1.6 (or 3.55 with Q=71) that is
1.6
𝐴𝐴(𝑧𝑧) ∙ 𝑆𝑆𝑆𝑆𝑆𝑆 ∙ √𝐴𝐴 = 1.6 that is, L(z) = 15 = 0.1066 (or 0.2366)
From the look-up table 𝑧𝑧 = 0.87 and computing R anew 𝑅𝑅 = 25 + 0.87 ∙ 15 = 38.05 ≈ 39
(or z=0.39 and R= 30.85)

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32. A store sells sofa’s and assorted supplies. The best-selling sofa has a normally distributed
demand. The mean demand per day is 1 unit, and the standard deviation is 0.3 units. The
store manager can order once a month (equal to 30 days). The lead time for every order is
stochastic with an average of 7 days and a standard deviation of 2 days. Since the
manager is able to share fixed ordering costs with other retailers, these costs are
negligible per product.
a. What type of replenishment policy should be used by the store?
b. What should be the minimal value of the base-stock level when the store wants to
guarantee a cycle service level of 90%? (see appendix for the look-up table for a
standard normal distribution)
c. What should be the minimal value of the base-stock level when the store wants to
guarantee a fill rate of 97%?

𝐴𝐴𝐴𝐴𝐴𝐴 = 1 items⁄day, STD = 0.3 items⁄day, r=30 days, AVGL=7 days, STDL = 2 days.

a, Since there are no fixed order costs using an (S-1,S) policy is the most logical choice. Considering
that orders can only placed once a month, a periodic review (S-1,S) policy, with r=30 days will be
used.
b, 𝐸𝐸𝑆𝑆𝐴𝐴 = 90% the look up table gives 𝑧𝑧 = 1.29
𝑆𝑆 = 𝐴𝐴𝐴𝐴𝐴𝐴(𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 + 𝑟𝑟) + 𝑧𝑧 ∙ �(𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 + 𝑟𝑟)𝑆𝑆𝑆𝑆𝑆𝑆2 + 𝐴𝐴𝐴𝐴𝐴𝐴 2 𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴2 = 37 + 1.29 ∙ 2.7 = 40.49(
≈ 41 not asked)
c. If FR = 97% = 0.97 and ESC = 𝐴𝐴(𝑧𝑧)�(𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 + 𝑟𝑟) ∙ 𝑆𝑆𝑆𝑆𝑆𝑆2 + 𝐴𝐴𝐴𝐴𝐴𝐴 2 ∙ 𝑆𝑆𝑆𝑆𝑆𝑆𝐴𝐴2 = 𝐴𝐴(𝑧𝑧)2.707 then
30 − 29.1
𝐴𝐴(𝑧𝑧) = = 0.3324
2.707
From the look-up table z=0.15 and computing S anew 𝑆𝑆 = 37 + 0.15 ∙ 2.7 = 37.405

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33. A supply chain manager has narrowed the search for a new facility location to four
communities. The annual fixed costs (land, property taxes, insurance, equipment, and
buildings) and the variable costs (labor, materials, transportation, and variable overhead)
are shown in the following table:

Community Fixed costs per year Variable costs per barrel


A $150,000 $62.00
B $300,000 $38.00
C $500,000 $34.00
D $600,000 $30.00

a. Which community is selected based on an economic analysis when the expected


annual volume to produce is 20,000 units?
b. What would be the range in volume when B is chosen based on the break-even
analysis?

a. V= 20,000 units
A: TC= 150,000 + 20,000*62 = $1,390,00
B: TC= 300,000 + 20,000*38 = $1,060,00
C: TC= 500,000 + 20,000*34 = $1,180,000
D: TC= 600,000 + 20,000*30 = $1,200,000
Based on an economic analysis location B is chosen for a volume V= 20,000 units.
b. Break even analysis. Consider:
A and B:
150,000 + 62 ∗ V ≤ 300,000 + 38 ∗ V, that is, 150,000 ≤ 24V or 6,250 ≤ V
This means that B is selected instead of A when the volume is in the range [6,250, +∞)
C and B:
500,000 + 34 ∗ V ≤ 300,000 + 38 ∗ V, that is, 4V ≤ 200,000 or V ≤ 50,000
This means that B is selected instead of C when the volume is in the range [0; 50,000]
D and B:
600,000 + 30 ∗ V ≤ 300,000 + 38 ∗ V, that is, 8V ≤ 300,000 or V ≤ 37,500
This means that B is selected instead of D when the volume is in the range [0; 37,500]

Summarizing the three cases, B is chosen among all locations for any volume in the range
of [6,250; 37,500].

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34. An electronics manufacturer must expand by building a second facility. The search has
been narrowed to seven locations. A thorough investigation of each location with respect
to nine important factors generated the raw scores and weights as indicated below:

Location Factors
Critical Objective Subjective
Suppl Tax Revenue Facilit Mate- Commu Union Ship- Prox. to
y of incen- y cost rial nity regu- ping supplier
labor tives cost attitude lation modes s
s
0.3 0.35 0.2 0.15
A 1 1 295 90 65 0.80 0.65 0.90 0.72
B 1 1 260 60 90 1.00 0.91 0.75 0.65
C 1 1 270 45 60 0.60 0.95 0.72 0.87
D 1 0 250 90 70 0.75 0.80 0.80 0.78
E 1 1 300 80 85 0.65 0.90 0.95 0.54
F 0 1 280 65 75 0.85 0.92 0.65 0.93
G 1 1 270 95 60 0.50 0.65 0.90 0.69

What is the best location to build the new plant based on a hybrid analysis? Assume that
the weight for the objective factors is 0.6 relative to the subjective factors (𝛼𝛼 = 0.6).

When we apply the formulas:

location CFMi � OFij OFMi SFMi


j=1
A 1×1=1 295-90-65=140 (140-90)/(165-90)=0.667 0.755
B 1×1=1 260-60-90=110 (110-90)/(165-90)=0.267 0.866
C 1×1=1 270-45-60=165 (165-90)/(165-90)=1.0 0.787
D 1×0=0 250-90-70=90 (90-90)/(165-90)=0.0 0.782
E 1×1=1 300-80-85=135 (135-90)/(165-90)=0.6 0.781
F 0×1=0 280-65-75=140 (140-90)/(165-90)=0.667 0.8465
G 1×1=1 270-95-60=115 (115-90)/(165-90)=0.333 0.661

Since the weight of the objective factors is 0.6 compared to the subjective factors, we get:
location LMi
A 1×(0.6×0.667+0.4×0.755) = 0.7022
B 1×(0.6×0.267+0.4×0.866) = 0.5064
C 1×(0.6×1.0+0.4×0.787) = 0.9148
D 0×(0.6×0.0+0.4×0.782) = 0.0
E 1×(0.6×0.6+0.4×0.781) = 0.6724
F 0×(0.6×0.667+0.4×0.8465) = 0.7386
G 1×(0.6×0.333+0.4×0.661) = 0.4644

As a result, location C is selected.

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lOMoARcPSD|4100961

35. Consider a 4-echelon supply chain consisting of a supplier of raw materials, a


manufacturer, a distribution center and a retailer who is selling the final products to
customers. The lead time between the DC and the retailer is 1 week, between the
manufacturer and the DC it is 3 weeks, and between the raw material supplier and the
manufacturer it is 5 weeks. Assume that all parties in this supply chain apply a base-stock
policy to control the inventory levels. The average and standard deviation of the weekly
demand is forecasted based on exponential smoothing with a smoothing factor of 0.25,
whereas the demand itself follows a normal distribution. The retailer has observed the
following demand in the previous 8 periods:

period 1 2 3 4 5 6 7 8
observed demand 425 396 441 408 372 388 413 429

Based on these numbers, the forecasted average demand equals 409, whereas the variance
is 459.5.
a. Consider the scenario where the separate parties do not share their demand
information or forecasts. Give the lower bound on the bullwhip effect caused by the
retailer (and observed at the supplier).
b. Consider the scenario where the separate parties share all demand information or
forecasts. Give the lower bound on the bullwhip effect caused by the retailer (and
observed at the supplier).

a. Since information is not shared, this is a decentralized system where the lower bound on the
bullwhip effect is given by
k
2 × Li 2 × α2
� �1+2 × Li × α + �
2-α
i=1
In this exercise α = 0.25, L1 = 1, L2 = 3, and L3 = 5. We are interested in the bullwhip effect caused
by the retailer. Hence, the lower bound is given by
2×L1 2 ×α2 2×L2 2 ×α2 2×L3 2 ×α2
�1+2×L1 ×α + � × �1+2×L2 ×α + � × �1+2×L3 ×α + �
2-α 2-α 2-α
2×1×0.252 2×32 ×0.252 2×52 ×0.252
= �1+2×1×0.25 + � × �1+2×3×0.25 + � × �1+2×5×0.25 + �
2-0.25 2-0.25 2-0.25
= 26.105
b. When the information is shared, and the system becomes centralized then the lower bound on the
bullwhip effect becomes
2×(L1 +L2 +L3 )2 ×α2
�1+2×(L1 +L2 +L3 )×α + �
2-α

2×(1+3+5)2 ×0.252
= �1+2×(1+3+5)×0.25 + � = 11.2857
2-0.25

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lOMoARcPSD|4100961

36. A company produces sunblock cream whereas a retailer sells the products to customers.
Since there is a long delivery lead time, the retailer should make the order placement
before the season starts and there is no option to place a second order during the sales
season. Therefore, the demand is forecasted as
demand 8,000 10,000 12,000 14,000 16,000 18,000
probability 0.11 0.11 0.28 0.22 0.18 0.10
The retailer has to pay $8 for each bottle purchased from the manufacturer, and they are
sold for $12.5 per unit in the shop. Any inventory not sold at the end of the season is
marked down to $2.0 per bottle such that no inventory remains unsold after the sales
period. There is no loss-of-goodwill cost associated with a lost sale.
When the manufacturer receives the order from the retailer, he starts production. The
fixed production cost is $10,000 independent of the amount produced, whereas the
variable production cost equals $3.5 per unit.
a. What is the profit function corresponding to the retailer?
b. What is the marginal profit and loss for the retailer? What can you conclude about the
order size of the retailer based on your findings?
c. What is the optimal order size for the retailer when he wants to maximize his own
profit?

𝑝𝑝 = $12.5⁄unit , w = $8/unit, v = $2/unit, K = $10,000/unit, c = $3.5⁄unit.


The cumulative distribution of the demand is given by:
demand 8,000 10,000 12,000 14,000 16,000 18,000
probability 0.11 0.22 0.50 0.72 0.90 1.00

𝑝𝑝𝑆𝑆 + 𝑣𝑣(𝑄𝑄 − 𝑆𝑆) − 𝑤𝑤𝑄𝑄, 𝑆𝑆 ≤ 𝑄𝑄


a. profit 𝑟𝑟 = � .
(𝑝𝑝 − 𝑤𝑤)𝑄𝑄, 𝑆𝑆 > 𝑄𝑄
b. marginal cost: w-v = $6
marginal profit: p-w = $ 4.5
Since the retailer’s marginal cost is greater than its marginal profit, the retailer has an incentive to
choose a small Q.
c. (𝑤𝑤 − 𝑣𝑣)𝐹𝐹(𝑄𝑄) = (𝑝𝑝 − 𝑤𝑤)�1 − 𝐹𝐹(𝑄𝑄)�, which yields (p − v)F(Q) = 𝑝𝑝 − 𝑤𝑤, that is,
𝑝𝑝 − 𝑤𝑤 4.5
𝐹𝐹(𝑄𝑄) = = = 0.4285
𝑝𝑝 − 𝑣𝑣 10.5
From the cumulative distribution table of the demand Q = 12,000.

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lOMoARcPSD|4100961

37. Consider the same setting as in Question 36, but now you are interested in the best
solution for the entire supply chain (that is, the global optimal solution).
a. What is the overall marginal profit and loss for the supply chain? What can you
conclude about the global optimal order size of the retailer based on your findings?
b. What is the global optimal order size for the retailer?
c. If the demand would have been a normal distribution with an average of 13,100 units
and a standard deviation of 2,890 units, how would this have influenced your result
for the optimal order size?

𝑝𝑝 = $12.5⁄unit , w = $8/unit, v = $2/unit, K = $10,000/unit, c = $3.5⁄unit.


The cumulative distribution of the demand is given by:
demand 8,000 10,000 12,000 14,000 16,000 18,000
probability 0.11 0.22 0.50 0.72 0.90 1.00

𝑝𝑝𝑆𝑆 + 𝑣𝑣(𝑄𝑄 − 𝑆𝑆) − 𝑤𝑤𝑄𝑄 − 𝐾𝐾 + (𝑤𝑤 − 𝑐𝑐)𝑄𝑄, 𝑆𝑆 ≤ 𝑄𝑄


a. profit 𝑆𝑆𝑆𝑆 = � , that is,
(𝑝𝑝 − 𝑤𝑤)𝑄𝑄 − 𝐾𝐾 + (𝑤𝑤 − 𝑐𝑐)𝑄𝑄, 𝑆𝑆 > 𝑄𝑄
𝑝𝑝𝑆𝑆 + 𝑣𝑣(𝑄𝑄 − 𝑆𝑆) − 𝐾𝐾 − 𝑐𝑐𝑄𝑄, 𝑆𝑆 ≤ 𝑄𝑄
profit 𝑆𝑆𝑆𝑆 = � .
(𝑝𝑝 − 𝑐𝑐)𝑄𝑄 − 𝐾𝐾, 𝑆𝑆 > 𝑄𝑄
b. marginal cost: c-v = $1.5
marginal profit: p-c = $9
Since the marginal cost is less than the marginal profit, the retailer has an incentive to choose a larger
Q.
(𝑐𝑐 − 𝑣𝑣)𝐹𝐹(𝑄𝑄) = (𝑝𝑝 − 𝑐𝑐)(1 − 𝐹𝐹(𝑄𝑄)), which yields (p − v)F(Q) = 𝑝𝑝 − 𝑐𝑐, that is,
𝑝𝑝 − 𝑐𝑐 9
𝐹𝐹(𝑄𝑄) = = = 0.8571
𝑝𝑝 − 𝑣𝑣 10.5
From the cumulative distribution table of the demand Q = 16,000.

c. AVG = 13,100, STD = 2,890, then from the look up table z= 1.07
𝑄𝑄 = 𝐴𝐴𝐴𝐴𝐴𝐴 + 𝑧𝑧𝑆𝑆𝑆𝑆𝑆𝑆 = 13,100 + 1.07 ∗ 2,800 = 16,192.3

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