Inventory management under uncertainty

1. Weekly demand for loaves of Blunder Bread at a Kroger store is normally distributed with a mean of 500
and a standard deviation of 200. Blunder Bread takes two weeks to supply a Kroger order. Kroger is targeting 90%
of product availability (z=1.28) and monitors its inventory continuously. How much safety inventory of bread loaves
should Kroger carry? What should their ROP be?
<ROP=leadtime demand + safety stock>
Lead time demand = average daily sales * lead time
Safety stock = desired service level * average lead time * demand average
Safety stock: 1.28 * 14* 500=8960
ROP: 8960+7000= 15,960

2. Frank Ribs know that the demand during lead time for his ribs is described by a normal distribution with a
mean of 1000 pounds and a standard deviation of 100 pounds. Frank is willing to accept a stockout risk of
approximately 2 percent. (20%)
a) Determine the appropriate z level= 98% service level – 2.05
b) Calculate how much safety stock Frank should hold.

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A. In case a value you are looking up in the Standard Normal Distribution Function Table falls between
two entries, simply choose the entry which is closer. If a value falls exactly in the middle of two
entries, use average of entries.
B. If the answer you get has decimals, round the answer to the two decimal points.

Aggregate Inventory Management

1. CAU apparel has 10 items as below (30%)
Item Annual demand $ cost / unit
A02 4000 1.20 4,800
B38 2400 0.84 2,016
C27 2000 180.00 360,000
D19 200 17.00 3,400
E22 3100 34.00 105,400
F34 2000 25.00 50,000
G27 500 1.20 600
H25 1000 308.00 308,000
I36 1200 28.34 34,008
J39 700 85.72 60,004
651,028

1)Divide the items into ABC classification (10%)

A: C27 | E22 | H25
B: F34 | I36 | J39
C: A02 | B38 | D19 | G27

2)Explain why managers use these methods to classify inventory (10%)

The classification system allows managers to control and watch their A/B items more closely. More emphasize can
be placed in managing the inventory of items A and B. Managers are also able to save ordering cost on less
important C items by ordering only when A/B items are being from the same supplier.

3)Discuss how the classified items can be managed in terms of inventory control system (replenishment policy)
(10%) Class A items typically sell well and are profitable to the business, meaning that the replenishment of class A
items must tighter. The replenishment of class B, C items are also important as some items may be steady sellers.
For example, items “A02 and B38” are low class items however both have a high annual demand meaning that
replenishing them correctly is important.

Strategic fit and scope

Answer the questions below
a) Briefly explain ‘physical function’ and ‘market mediation function’ of a supply chain (5%)
The physical function of a supply chain refers to the movement of goods and materials from the point of origin to
the point of consumption. The goal of the physical function is to ensure that the right goods are available at the
right time and place to meet the demand of customers.

The market mediation function of a supply chain refers to the role that the supply chain plays in mediating between
different market participants, such as producers, wholesalers, retailers, and customers. The goal of the market
mediation function is to facilitate the exchange of goods and services between different market participants and to
ensure that the market functions efficiently.

b) Compare functional products and innovative products using the two functions of a supply chain (10%)
Functional products are products that are designed to perform a specific function or fulfill a specific need.
Examples of functional products include household items like hammers, tissue, or kitchen utensils. Innovative
products, on the other hand, are products that are designed to be innovative and unique, often incorporating new
technologies or features that are not found in existing products. Examples of innovative products might include
smartphones, laptops, or other high-tech consumer electronics.

The manufacturing amount for functional products can be easily forecasted as the demand is typically stable. As
functional products are rather un-innovative, manufacturing them is easy as it takes less skill and precision to the
final product. The manufacturing of innovative goods on the hand can be tricky as demand is elastic. Due to the
nature of innovative goods, the shelf life is short meaning that know when and how much to manufacture is the
key factor.

Another difference for functional and innovate goods are in their raw materials. Functional items require lots of
raw material while innovative items require less but more precious materials. For example, materials used in
chipsets and motherboards weight very little but hold a very high value once the product is complete. This means
that innovative goods require much more precious raw materials.

c) Discuss the appropriateness of products and supply chains using concepts of functional and innovative products
and ‘efficient’ and ‘responsive’ supply chains (10%).

2)
a) Discuss how customer need (e.g. range of quantity, lead-time, variety of products, etc.) and product life-cycle
influence implied uncertainty of demand.
Customer need, including factors such as the range of quantity, lead-time, and variety of products, can influence
the implied uncertainty of demand in several ways.

For example, if a customer has a wide range of quantity needs, it can be difficult for a company to accurately
forecast demand and plan production and inventory levels. This can lead to higher levels of uncertainty, as the
company may have to be prepared to rapidly ramp up or scale down production to meet fluctuating demand.
The product life-cycle can also influence implied uncertainty of demand. During the introduction and growth
phases of the product life-cycle, demand is often more uncertain as the product is being introduced to the market
and is not yet well established. As the product matures and reaches the maturity and decline phases of the life-
cycle, demand tends to become more stable and predictable.

b) Describe the abilities to determine responsiveness of a supply chain

There are several ways to determine the responsiveness of a supply chain, including:

Lead time: The length of time it takes to fulfill a customer order or request can be used to measure the
responsiveness of a supply chain. A shorter lead time indicates a more responsive supply chain, while a longer lead
time indicates a less responsive supply chain.

Inventory levels: The amount of inventory that a company holds can be used to measure the responsiveness of a
supply chain. A company that maintains low inventory levels may be more responsive, as it is able to quickly adjust
production or sourcing to meet changing demand. Conversely, a company that maintains high inventory levels may
be less responsive, as it may be slower to adjust to changing demand.

c) Discuss how strategic fit of a supply chain can be achieved?

There are several ways to achieve strategic fit in a supply chain:
 Develop partnerships and collaborations: Collaborating with other companies, suppliers, and logistics
providers can help to create a more flexible and responsive supply chain. This includes forming strategic
partnerships, outsourcing certain functions, and engaging in cross-functional collaboration within the
company.
 Invest in technology and infrastructure: Implementing advanced technologies and investing in infrastructure
can help to improve the efficiency and effectiveness of the supply chain. This includes investing in things like
transportation and logistics systems, inventory management systems, and supply chain planning and
forecasting tools.

Design for supply chain

1. Answer the questions below.
a) Describe push system, pull system and modular product
Push- Manufacturers produce goods based on their forecasting and hold onto inventory until they are needed.
Used in products with stable demand and long lead times.

Pull- Manufacturers produce goods only when they are needed, typically in response to a customer order. Used in
products with short lead time and high product variability.

Modular- Product that is made up of smaller, interchangeable components. Modular products are designed in a
way that allows for flexibility and customization. Useful in industries where demand is hard to predict, as it allows
production of goods on a more customized, as-needed basis.
Compare Box A, B and D in terms of supply chain strategies and manufacturing strategies.

-Box A: represents products that are characterized by predictable demand and low product introduction frequency.
-Box B: represents products with fast clock speed and highly unpredictable demand including high-tech products
and fashion items, etc. Focus is on responsiveness on pull strategy and modular product architecture. These
products require supply chain that values responsiveness over cost
-Box C: represents products with fast clock speed and low demand uncertainty. Not many products with an
example of cell phone engines. Different cellphones use the same engines in all their phones.
-Items from Box A have a low product introduction frequency meaning that the supply chain and manufacturing
can forecast and create the most efficient system. Factories can be optimized to create products in Box A thanks to
its predictable demand and low product introduction rate.
Items from Box B/C have a high production introduction rate meaning the manufacturers must adapt to new
technologies and learn to manufacture them quickly. This also means that items that were once sold will lose
demand quickly. Knowing this, the supply chain and manufacturers must collaborate and stay in close contact with
each other to keep updated on new product and make changes accordingly.

Answer the questions below.

a) Briefly present three elements of design for supply chain
1. Economic packaging and transportation – Make product packaging as efficient as possible by centralized
packaging, smaller packaging, fit for shelving.
2. Concurrent and parallel processing – Modify the manufacturing process so that steps that were previously
performed in a sequence can be completed at the same time. Decoupling and modularity. Products that can
be physically separated from final product is manufactured separately. EX) personal computer
3. Standardization – Standardize as much of the manufacturing process allowing for later decision making.
b) Discuss benefit of concurrent/parallel processing
1) Reduce manufacturing Leadtime, lower inventory cost through better forecasting, reduce safety stock
c) Discuss how customization can be achieved through standardization
1) Modular design / configurable processes. Having modular components in products allow for easy
customization. Standardized configurations allow customer to use different configurations according to
need.
d) A company purchases two types of mouse for two different PCs which are A and B. The company considers use a
common mouse for the two different PCs. Provide economic benefits in terms of safety stock level and average
inventory level (=average cycle inventory and safety inventory). Holding cost per week is KW 5,000, set-up cost is
KW 2,000,000, targe service level is 95% and lead time is 4 weeks.

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1)
Product 1 2 3 4 5 6 7 8 d std
A 1,078 3,546 781 221 2,415 1,226 223 2,510 1,500 1,200
B 1,475 1,195 585 5,718 356 3,607 1,854 1,210 2,000 1,800

e) Discuss qualitative benefit using the concept of postponement

Postponement in logistics refers to the practice of delaying certain activities in the supply chain until
later in the process, closer to the point of sale or consumption. This approach allows companies to be more
responsive to changes in demand and reduce waste by avoiding the production or procurement of
goods that may not ultimately be sold.
2) Increased flexibility – By delaying certain activities until later in the process, companies can be more
responsive to changes in demand and adjust their production accordingly. Helps with reducing the risk of
excess inventory or unsold goods.
Reduced lead time – Allows companies to wait unitl the last imnuitte to make certain decisions. Helps reduce the
need for a large safety stock and be more responsive to customer needs.

Distribution network

8. A company produces two types of products which are the standardized and the non-standardized.
(20%)
a) Suggest the type(s) of distribution network which are typically suited for the non-standardized products
and discuss why. Consider a case that the products are manufactured according to customer’s order.
-Selective Distribution network -> carefully screen and only few can sell
-Allow manufacturer to sell only to those who need the products. Due to the nature of non-standardized items the
demand for non-standardized items are very evident meaning distributing to only applicable retailers are beneficial.
Also can get data back from retailers. EX) Apple only has select retailers.

b) Suggest the type(s) of distribution network which are typically suited for the standardized products such
as snacks and stationery items and discuss why.
-Intensive distribution = Product is sold to as many customers as possible
-Major purchase decision is convenience therefore getting the product out to customers is most beneficial.

9. A company intends to design their distribution network which is able not only to realize inventory aggregation
but also to improve customer experiences. Among the six types of distribution network from the class, suggest the
type(s) of distribution network for this company. (15%)

The company is looking to aggregate their inventory while improving their customer service. I would suggest the
manufacturer storage with direct shipping network or with in-transit merge. This might change according to the
product of the company. According to this network the product is shipped directly to the customer. The retailer
would take orders then send that information to the manufacturer. Then the manufacturer will ship the items
directly to the customer. This will help solve both problems as the inventory is centralized at the manufacturer. The
customer experience is also much better as the customers receives the order directly. This network can also be
inter-used with the in-transit merge. Products like PCs can benefit from this network as the necessary items are
picked up by the carrier and the customer receives only one package.