Supply Chain Chain Management, Management, 6e (Chopra/Meindl) 6e (Chopra/Meindl) Chapter 13 Determining the Optimal Level of Product Product Availabilit
13.1 True/False Questions 1) A supply chain can use a high level of product availability to improve its responsiveness and attract customers. Answer T!"# $iff % Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Application of ,nowledge -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level. %) A high level of product availability reuires less inventory0 which will ,eep costs down for the supply chain. Answer FA'*# $iff % Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level. 3) A supply chain needs to achieve a balance between the level of availability and the cost of inventory that maimi2es supply chain revenues. Answer FA'*# $iff 3 Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Application of ,nowledge -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level. ) 4hether the optimal level of availability is high or low dep ends on where a particular company believes they can maimi2e profits. Answer T!"# $iff % Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Application of ,nowledge -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level.
1 ost Accounting A 5anagerial #mphasis
6) The cost of overselling is denoted by C o and is the loss incurred by a firm for each unsold unit at the end of the selling season. Answer FA'*# $iff 1 Topic 13.% Factors Affecting Affecting -ptimal 'evel of (roduct Availability Availability AA*+ Application of ,nowledge -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level. 7) The cost of understoc,ing is denoted by C u and is the margin lost by a firm for each lost sale because there is no inventory on hand. Answer T!"# $iff % Topic 13.% Factors Affecting Affecting -ptimal 'evel of (roduct Availability Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level. 8) The cost of underselling is a ,ey factor that influences the optimal level of product availability. Answer FA'*# $iff % Topic 13.% Factors Affecting Affecting -ptimal 'evel of (roduct Availability Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level. 9) The costs of overstoc,ing and understoc,ing have a direct impact on both the optimal cycle service level and profitability. Answer T!"# $iff 1 Topic 13.% Factors Affecting Affecting -ptimal 'evel of (roduct Availability Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level. :) As the ratio of the cost of overstoc,ing to the cost of understoc,ing g ets smaller0 smaller0 the optimal level of product availability decreases. Answer FA'*# $iff 3 Topic 13.% Factors Affecting Affecting -ptimal 'evel of (roduct Availability Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability availability and evaluate the optimal cycle service level.
% ost Accounting A 5anagerial #mphasis
1;) 4ith reduced demand uncertainty0 a supply chain manager can better match supply and demand by reducing both overstoc,ing and understoc,ing. Answer T!"# $iff % Topic 13.% Factors Affecting -ptimal 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level. 11) An increase in forecast accuracy increases both the overstoc,ed and understoc,ed uantity and decreases a firm
3 ost Accounting A 5anagerial #mphasis
16) Tailored postponement allows a firm to increase its profitability by only postponing the uncertain part of the demand and producing the predictable part at a lower cost without postponement. Answer T!"# $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Analytical thin,ing -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 17) Tailored sourcing may be volume=based or product=based depending on the source of uncertainty. Answer T!"# $iff 1 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.% "se managerial levers that improve supply chain profitability. 18) &n volume=based tailored sourcing0 the predictable part of a product
ost Accounting A 5anagerial #mphasis
%;) A managerial lever to increase profitability is to decrease the salvage value of each unit. Answer FA'*# $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Analytical thin,ing -bective '- 13.% "se managerial levers that improve supply chain profitability. 13.% 5ultiple hoice Questions 1) The level of product availability A) is also referred to as the customer service level. +) is an important component of any supply chain>>>>>>>0 which raises supply chain costs. A) large inventories +) increased revenues ) reduced costs $) understoc,ing the product Answer A $iff % Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level.
6 ost Accounting A 5anagerial #mphasis
) A supply chain needs to achieve a balance between the level of availability and the cost of inventory that A) maimi2es supply chain revenues. +) minimi2es supply chain costs. ) maimi2es supply chain profitability. $) maimi2es supply chain availability. Answer $iff 3 Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level. 6) The level of product availability0 also referred to as the >>>>>>>>0 is one of the primary measures of a supply chain
7 ost Accounting A 5anagerial #mphasis
8) The level of product availability0 also referred to as the >>>>>>>>0 is one of the primary measures of a supply chain>>>>>>>0 which raises supply chain costs. A) large inventories +) increased revenues ) reduced costs $) understoc,ing the product Answer A $iff % Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level. :) The loss incurred by a firm for each unsold unit at the end of the selling season is A) the cost of overstoc,ing the product. +) the cost of stoc,ing the product. ) the cost of understoc,ing the product. $) the cost of overselling the product. Answer A $iff % Topic 13.% Factors Affecting -ptimal 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level.
8 ost Accounting A 5anagerial #mphasis
1;) The margin lost by a firm for each lost sale because there is no inventory on hand is A) the cost of overstoc,ing the product. +) the cost of stoc,ing the product. ) the cost of understoc,ing the product. $) the cost of overselling the product. Answer $iff % Topic 13.% Factors Affecting -ptimal 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level. 11) The margin lost from current as well as future sales if the customer does not return should be included in A) the cost of overstoc,ing the product. +) the cost of stoc,ing the product. ) the cost of understoc,ing the product. $) the cost of overselling the product. Answer $iff % Topic 13.% Factors Affecting -ptimal 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level.
9 ost Accounting A 5anagerial #mphasis
!cenario 13"1 # $efariou%
The tenured professor routinely led student groups on factory tours in eotic locales0 and one popular destination was an island south of 5iami. The students enoyed this happy little island and the professor li,ed it because he could supplement his income by bringing bac, a few boes souvenirs he could sell to his friends. The souvenirs cost the professor ?1%6 a bo and he sells them for ?%:; a bo. *ouvenirs that dry out due to age can be sold for ?9;. #perience has shown that the demand for boes of these souvenirs has a mean of 9; with a standard deviation of %;. 1%) The professor
16) Baturally0 the professor will purchase the optimal number of boes. C@e
1; ost Accounting A 5anagerial #mphasis
19) The costs of overstoc,ing and understoc,ing have a direct impact on A) the optimal cycle service level but not profitability. +) profitability but not the optimal cycle service level. ) both the optimal cycle service level and profitability. $) neither the optimal cycle service level nor profitability. Answer $iff % Topic 13.% Factors Affecting -ptimal 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level. 1:) 4hich of the following would be a strategy to decrease the margin lost in a stoc,out A) Arranging for bac,up sourcing +) $iscarding the unused material ) *elling unsold product to an outlet store $) !educing the level of cycle inventory Answer A $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Analytical thin,ing -bective '- 13.% "se managerial levers that improve supply chain profitability. %;) As the ratio of the cost of overstoc,ing to the cost of understoc,ing gets smaller0 A) the optimal level of product availability becomes irrelevant. +) the optimal level of product availability decreases. ) the optimal level of product availability remains stable. $) the optimal level of product availability increases. Answer $ $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Analytical thin,ing -bective '- 13.% "se managerial levers that improve supply chain profitability. %1) A company with multiple products that chooses to delay product differentiation until closer to the point of sale is using A) tailored sourcing. +) uic, response. ) postponement. $) improved forecasting. Answer $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 11 ost Accounting A 5anagerial #mphasis
%%) A company that uses a more epensive short lead time supplier as a bac,up for a low cost0 long lead time supplier is using A) tailored sourcing. +) uic, response. ) postponement. $) improved forecasting. Answer A $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.% "se managerial levers that improve supply chain profitability. %3) An increase in forecast accuracy A) decreases both the overstoc,ed and understoc,ed uantity and decreases a firm
1% ost Accounting A 5anagerial #mphasis
%7) As the total uantity for the season is bro,en up into multiple smaller orders0 the buyer is better able to A) match supply and demand and increase cost. +) match supply and demand and increase profitability. ) match supply and demand and decrease profitability. $) match supply and demand and decrease product availability. Answer + $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Analytical thin,ing -bective '- 13.% "se managerial levers that improve supply chain profitability. %8) &f uic, response allows multiple orders in the season0 A) profits decrease and the overstoc, uantity decreases. +) profits decrease and the overstoc, uantity increases. ) profits increase and the overstoc, uantity decreases. $) profits increase and the overstoc, uantity increases. Answer $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Analytical thin,ing -bective '- 13.% "se managerial levers that improve supply chain profitability. %9) Quic, response is clearly advantageous to A) a distributor in the supply chain. +) a retailer in the supply chain. ) a manufacturer in the supply chain. $) every step in the supply chain. Answer + $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.% "se managerial levers that improve supply chain profitability. %:) Quic, response results in A) the manufacturer ma,ing a lower profit in the long term if all else is unchanged. +) the manufacturer ma,ing a lower profit in the short term if all else is unchanged. ) the retailer ma,ing a lower profit in the short term if all else is unchanged. $) the distributor ma,ing a lower profit in the short term if all else is unc hanged. Answer + $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.% "se managerial levers that improve supply chain profitability.
13 ost Accounting A 5anagerial #mphasis
3;) There is a cost associated with postponement because the production cost using postponement is typically A) higher than the production cost without it. +) lower than the production cost without it. ) very stable. $) eual to the production cost without it. Answer A $iff 1 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 31) (ostponement is valuable for a firm that A) sells a large variety of products with demand that is depen dent and comparable in si2e. +) sells a large variety of products with demand that is independent and comparable in si2e. ) sells a small variety of products with demand that is dependent and comparable in si2e. $) sells a small variety of products with demand that is indepen dent and comparable in si2e. Answer + $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 3%) (ostponement is A) not very effective if a large fraction of demand comes from multiple products. +) not very effective if a small fraction of demand comes from a single product. ) only effective if a large fraction of demand comes from a single product. $) effective even if a large fraction of demand comes from a single product. Answer + $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain.
1 ost Accounting A 5anagerial #mphasis
33) 4hen a firm uses production with postponement to satisfy a part o f its demand with the rest being satisfied without postponement0 it is using A) adustable postponement. +) fleible postponement. ) managed postponement. $) tailored postponement. Answer $ $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 3) "nder tailored postponement0 a firm produces the amount that is very li,ely to sell using A) the lower cost production method with postponement and produces the portion of demand that is uncertain using postponement. +) the lower cost production method without postponement and produces the portion of demand that is uncertain using postponement. ) the higher cost production method with postponement and produces the portion of demand that is uncertain using postponement. $) the higher cost production method without postponement and produces the portion of demand that is uncertain using postponement. Answer + $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 36) &n tailored sourcing0 firms use a combination of two supply sources0 A) one focusing on cost but unable to handle uncertainty well0 and the other focusing on fleibility to handle uncertainty0 but at a higher cost. +) one focusing on cost and able to handle uncertainty well0 and the other focusing on fleibility to handle uncertainty0 but at a higher cost. ) one focusing on cost but unable to handle uncertainty well0 and the other focusing on fleibility to handle uncertainty at a lower cost. $) one focusing on cost and able to handle uncertainty well0 and the other focusing on fleibility to handle uncertainty at a lower cost. Answer A $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.% "se managerial levers that improve supply chain profitability.
16 ost Accounting A 5anagerial #mphasis
37) &n product=based tailored sourcing0 A) low=volume products with uncertain demand are obtained from a fleible source. +) high=volume products with less demand uncertainty are obtained from an efficient source. ) high=volume products with less demand uncertainty are obtained from a fleible source. $) A and + only Answer $ $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.% "se managerial levers that improve supply chain profitability. 38) >>>>>>>> allows a firm to increase profits and better match supply and demand if the firm produces a large variety of products whose demand is unpredictable0 not positively correlated0 and is of about the same si2e. A) *hortened forecasting window +) Quic, response ) (ostponement $) Tailored sourcing Answer $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 39) >>>>>>>> may reduce overall profits for a firm if a single product contributes the maority of the demand. A) *hortened forecasting window +) Quic, response ) (ostponement $) Tailored sourcing Answer $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain.
17 ost Accounting A 5anagerial #mphasis
3:) &n volume=based tailored sourcing0 A) the predictable part of a product>>>>>>> allows a firm to increase profits and better match supply and demand if the firm produces a large variety of products whose demand is unpredictable0 not positively correlated0 and is of about the same si2e. A) *hortened forecasting window +) Quic, response ) (ostponement $) Tailored sourcing Answer $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain. 1) >>>>>>>> may reduce overall profits for a firm if a single product contributes the maority of the demand. A) *hortened forecasting window +) Quic, response ) (ostponement $) Tailored sourcing Answer $iff 3 Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain.
18 ost Accounting A 5anagerial #mphasis
%) &n volume=based tailored sourcing0 A) the predictable part of a product
19 ost Accounting A 5anagerial #mphasis
!cenario 13"& # 'i%h or Chicen
The taco stand in the atrium of the new ollege of +usiness building carried two items0 fish tacos and chic,en tacos. The fish tacos sell for ?16 and are made out of ?6 of ingredients and the chic,en tacos sell for ?1; and are made out of ? of ingredients. *ome days the taco stand owner has only chic,en at his disposal0 so he ma,es nothing but chic,en tacos0 and some days the opposite is true and he ma,es only fish tacos. Thus0 he is able to estimate demand for chic,en tacos at %6;; per day with a standard deviation of 7;; and the demand for fish tacos at %;;; per day with a standard deviation of 6;;. Any fish or chic,en tacos that do not sell at the end of the day can be sold for ?1 each as bait. -n days when both proteins are available0 the taco stand manager prefers to ma,e a few of each ,ind. All tacos are made in his home ,itchen and then transported to campus. $ue to time constraints and the capacity of his pic,up truc, bed0 he is limited to beginning each day with only 3;;; tacos. ) *uppose the taco stand manager could wa,e up a little earlier and borrow his buddy
1: ost Accounting A 5anagerial #mphasis
7) The taco stand manager decides to ma,e eactly the same uantity of fish tacos as chic,en tacos. &f time and capacity are not an issue0 and none of the other parameters in the scenario are changed0 what would the retail price of chic,en tacos need to be to ma,e the optimal order uantities identical A) ?7.;; +) ?7.6; ) ?8.;; $) ?8.6; Answer A $iff 3 Topic 13. *etting (roduct Availability for 5ultiple (roducts "nder apacity onstraints AA*+ Analytical thin,ing -bective '- 13. Allocate limited supply capacity among multiple products to maimi2e epected profits. 8) Faced with a 3;;; taco capacity constraint0 what is the optimal number of fish tacos to prepare A) %%93 +) 1837 ) 1979 $) %;;; Answer + $iff 3 Topic 13. *etting (roduct Availability for 5ultiple (roducts "nder apacity onstraints AA*+ Application of ,nowledge -bective '- 13. Allocate limited supply capacity among multiple products to maimi2e epected profits. 9) Faced with a 3;;; taco capacity constraint0 what is the optimal number of chic,en tacos to prepare A) %869 +) 1837 ) 1%7 $) %6;; Answer $iff 3 Topic 13. *etting (roduct Availability for 5ultiple (roducts "nder apacity onstraints AA*+ Application of ,nowledge -bective '- 13. Allocate limited supply capacity among multiple products to maimi2e epected profits.
%; ost Accounting A 5anagerial #mphasis
:) Faced with a 3;;; taco capacity constraint0 what is the profit resulting from an optimal mi of fish and chic,en tacos A) ?%%0688 +) ?%6071: ) ?%0778 $) ?%3069; Answer $ $iff 3 Topic 13. *etting (roduct Availability for 5ultiple (roducts "nder apacity onstraints AA*+ Application of ,nowledge -bective '- 13. Allocate limited supply capacity among multiple products to maimi2e epected profits. 6;) 4hen setting optimal levels of product availability in practice0 it is important to A) obtain a reasonable estimate of the cost of stoc,ing out. +) obtain a very precise estimate of the cost of stoc,ing out. ) focus on the most responsive production method0 even if it is not low cost. $) develop a preset target of product availability. Answer A $iff % Topic 13.6 *etting -ptimal 'evels of (roduct Availability in (ractice AA*+ Application of ,nowledge -bective '- 13. Allocate limited supply capacity among multiple products to maimi2e epected profits. 13.3 #ssay Questions 1) #plain the relationship between product availability and supply chain profitability. Answer The level of product availability is measured using the cycle service level or the fill rate0 which are metrics for the amount of customer demand satisfied from available inventory. The level of product availability is also referred to as the customer service level. The level of product availability is an important component of any supply chain
%1 ost Accounting A 5anagerial #mphasis
%) $escribe the two ,ey factors that influence the optimal level of product availability within a supply chain. Answer The two ,ey factors that influence the optimal level of product availability are D ost of overstoc,ing the product D ost of understoc,ing the product The cost of overstoc,ing is denoted by C o and is the loss incurred by a firm for each unsold unit at the end of the selling season. The cost of understoc,ing is denoted by C u and is the margin lost by a firm for each lost sale because there is no inventory on hand. The cost of understoc,ing should include the margin lost from current as well as future sales if the customer does not return. The costs of overstoc,ing and understoc,ing have a direct impact on both the optimal cycle service level and profitability. $iff 1 Topic 13.1 The &mportance of the 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level. 3) A manufacturer of lawn care euipment has introduced a new product. The anticipated demand is normally distributed with a mean of E 1;; and a standard deviation of G 6;. #ach unit costs ?86 to manufacture and the introductory price is to be ?1%6 to achieve this level of sales. Any unsold units at the end of the season are unli,ely to be very valuable and will be disposed of in a fire sale for ?%6 each. &t costs ?1; to hold a unit in inventory for the entire season. 4hat is the cost of overstoc,ing 4hat is the cost of understoc,ing 4hat is the op timal cycle service level @ow many units should be manufactured for sale Answer C o c = s
C u
?86 = ?16 ?7; p=c
?1%6 = ?86 ?6; *'H C u/CC u I C o) 6;/C6; I 7;) .66 J .6 -H B-!5&BKC*'H0 E0 G) B-!5&BKC;.60 1;;0 6;) :3.817:3 J : $iff % Topic 13.% Factors Affecting -ptimal 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level.
%% ost Accounting A 5anagerial #mphasis
) &n the previous problem0 the manufacturer performs additional mar,et research. +ased on this research0 they determine that they can increase the price to ?16; and are able to reduce the standard deviation of the forecast to G 3;. At the same time0 they have made an arrangement with an outlet store that will purchase unsold euipment for ?7; each. @ow will these changes affect the cost of overstoc,ing0 cost of understoc,ing0 optimal cycle service level and optimal order si2e Answer C o c = s
C u
?86 = ?6; ?%6 p=c
?16; = ?86 ?86 *'H C u/CC u I C o)
-H
86/C86 I %6) .86 B-!5&BKC*'H0 E0 G) B-!5&BKC;.860 1;;0 3;) 1%;.%38 J 1%;
The change in price increases the cost of understoc,ing. The increase in the salvage value reduces the cost of overstoc,ing. +oth of these changes will ma,e it more profitable to increase product availability0 which is seen in the increase in the optimal cycle service level. The reduction in standard deviation is the result of a more accurate forecast0 which means that less ecess inventory is needed to maintain the optimal cycle service level. $iff 3 Topic 13.% Factors Affecting -ptimal 'evel of (roduct Availability AA*+ Analytical thin,ing -bective '- 13.1 &dentify factors affecting the optimal level of product availability and evaluate the optimal cycle service level.
%3 ost Accounting A 5anagerial #mphasis
6) $escribe managerial levers to increase profitability within a supply chain. Answer Three managerial levers to increase profitability are 1. &ncreasing the salvage value of each unit increases profitability Cas well as the optimal cycle service level). %. $ecreasing the margin lost from a stoc,out increases profitability. 3. !educing demand uncertainty. -ne strategy to increase the salvage value of an unsold product would be selling unsold product to an outlet store. *trategies to decrease the margin lost in a stoc,out include arranging for bac,up sourcing Cthat may be more epensive) so customers are not lost forever and purchasing product from a competitor on the open mar,et. As the ratio of the cost of overstoc,ing to the cost of understoc,ing gets smaller0 the optimal level of product availability increases. This fact eplains the difference in the level o f product availability between a high=end store and a discount store. The high=end store has higher margins and thus a higher cost of understoc,ing. &t should thus provide a higher level of product availability than a discount store with lower margins0 and as a result0 a lower cost of stoc,ing out. The reduction of demand uncertainty is a significant managerial lever to improve supply chain profitability. 4ith reduced demand uncertainty0 a supply chain manager can better match supply and demand by reducing both overstoc,ing and understoc,ing. A manager can reduce demand uncertainty via the following means 1. &mproved forecasting "se better mar,et intelligence and collaboration to reduce demand uncertainty. %. Quic, response !educe replenishment lead time so that multiple orders may be placed in the selling season. 3. (ostponement &n a multiproduct setting0 postpone product differentiation until closer to the point of sale. . Tailored sourcing "se a more epensive short lead time supplier as a bac,up for a low cost0 long lead time supplier. $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.% "se managerial levers that improve supply chain profitability.
% ost Accounting A 5anagerial #mphasis
7) $escribe the approaches a manager can use to reduce demand uncertainty. Answer An increa%e in foreca%t accurac decreases both the overstoc,ed and understoc,ed uantity and increases a firm
&n tailored %ourcing 0 firms use a combination of two supply sources0 one focusing on cost but unable to handle uncertainty well0 and the other focusing on fleibility to handle uncertainty0 but at a higher cost. For tailored sourcing to be effective0 having supply sources where one serves as the bac,up to the other is not sufficient. $iff % Topic 13.3 5anagerial 'evers to &mprove *upply hain (rofitability AA*+ Application of ,nowledge -bective '- 13.3 "nderstand conditions under which postponement is valuable in a supply chain.
%6 ost Accounting A 5anagerial #mphasis
8) $iscuss the advantages and disadvantages of uic, response. Answer There are three important conseuences of being able to place a second order in the season. 1. The epected total uantity ordered during the season with two orders is less than that with a single order for the same cycle service level. &n other words0 it is possible to provide the same level of product availability to the customer with less inventory if a second follow=up order is allowed in the sales season. %. The average overstoc, to be disposed of at the end of the sales season is less if two orders are allowed. 3. The profits are higher when a second order is allowed during the sales season. &n other words0 as the total uantity for the season is bro,en up into multiple smaller orders0 the buyer is better able to match supply and demand and increase profitability. &f uic, response allows multiple orders in the season0 profits increase and the overstoc, uantity decreases. Quic, response is clearly advantageous to a retailer in the supply chain0 Lwith one caveat. As the manufacturer reduces replenishment lead times0 allowing for a second order0 we have seen that the retailer
:) #plain how tailored sourcing can be used to improve profitability. Answer &n tailored sourcing0 firms use a combination of two supply sources0 one focusing on cost but unable to handle uncertainty well0 and the other focusing on fleibility to handle uncertainty0 but at a higher cost. For tailored sourcing to be effective0 having supply sources where one serves as the bac,up to the other is not sufficient. The two sources must focus on different capabilities. The low=cost source must focus on being efficient and should only be reuired to supply the predictable portion of the demand. The fleible source should focus on being responsive and be reuired to supply the uncertain portion of the demand. As a result0 tailored sourcing allows a firm to increase its profits and better match supply and demand. The value of tailored sourcing depends on the reduction in cost that can be achieved as a result of one source facing no variability. &f this benefit is small0 tailored sourcing may not be ideal because of the added compleity of implementation. Tailored sourcing may be volume=based or product= based depending on the source of uncertainty. &n volume=based tailored sourcing0 the predictable part of a product
%8 ost Accounting A 5anagerial #mphasis
