Supply Chain Management: Strategy, Planning, and Operation, 7e (Chopra)
Chapter 9 Sales and Operations Planning: Planning Supply and Demand
in a Supply Chain
9.1 True/False Questions
1) Predictable variability is change in demand that cannot be forecasted.
Answer: FALSE
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
2) Faced with predictable variability of demand, a company's goal is to respond in a manner that
maximizes profitability.
Answer: TRUE
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
3) The advantage of carrying enough manufacturing capacity to meet demand in any period is
very low inventory costs, because no inventory needs to be carried from period to period.
Answer: TRUE
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
4) The disadvantage of building up inventory during the off season to keep production stable
year round is the expensive capacity that would go unused during most months when demand
was lower.
Answer: FALSE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
1
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5) A firm can vary supply of product by controlling production capacity and inventory.
Answer: TRUE
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
6) A firm that uses flexible work hours from the workforce to manage capacity to better meet
demand is using a seasonal workforce.
Answer: FALSE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
7) Scheduling the workforce so that the available capacity better matches demand is using time
flexibility from the workforce.
Answer: TRUE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
8) The use of a part-time workforce to increase the capacity flexibility by enabling the firm to
have more people at work during peak periods is designing product flexibility into the production
processes.
Answer: FALSE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
9) A firm that uses a temporary workforce during the peak season to increase capacity to match
demand is using a seasonal workforce.
Answer: TRUE
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
2
Copyright © 2019 Pearson Education, Inc.
10) The use of dual facilities to manage capacity may be hard to sustain if the labor market is
tight.
Answer: TRUE
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
11) A firm that purchases peak production capability from other companies is using
subcontracting.
Answer: TRUE
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
12) The use of a seasonal workforce is common in the tourism industry.
Answer: TRUE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
13) Pricing decisions based only on revenue considerations often result in an increase in overall
profitability.
Answer: FALSE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
14) When performing aggregate planning, the goal of all firms in the supply chain should be to
maximize individual firm profits.
Answer: FALSE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
3
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15) Determining how profits will be allocated to different members of the supply chain is a key
to successful collaboration.
Answer: TRUE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
16) In general, as the fraction of increased demand coming from forward buying grows, offering
the promotion during the peak demand period becomes more attractive.
Answer: FALSE
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
17) Offering a promotion during a peak period that has significant forward buying creates even
more variable demand than before the promotion.
Answer: TRUE
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
18) Promoting during a peak demand month may decrease overall profitability if a significant
fraction of the demand increase results from a forward buy.
Answer: TRUE
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Application of knowledge
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
19) As forward buying becomes a smaller fraction of the demand increase from a promotion, it is
less profitable to promote during the peak period.
Answer: FALSE
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
4
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20) When faced with seasonal demand, a firm should use a combination of pricing (to manage
demand) and production and inventory (to manage supply) to improve profitability.
Answer: TRUE
Diff: 2
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Application of knowledge
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
9.2 Multiple Choice Questions
1) Predictable variability is
A) change in demand that can be forecasted.
B) change in demand that cannot be forecasted.
C) change in demand that has been planned.
D) change in demand that has been scheduled.
Answer: A
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
2) A firm can handle predictable variability by managing
A) supply using capacity, inventory, trade promotions, and backlogs.
B) supply using capacity, inventory, subcontracting, and backlogs.
C) demand using short-term price discounts and trade promotions.
D) B and C only
Answer: D
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
3) Seasonal demand can be met by
A) maintaining enough manufacturing capacity to meet demand in any period.
B) building up inventory during the off season to meet demand during peak seasons.
C) offering a price promotion during periods of low demand to shift some of the demand into a
slow period.
D) all of the above
Answer: D
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
5
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4) The advantage of maintaining enough manufacturing capacity to meet demand in any period is
A) very low inventory costs because inventory needs to be carried from period to period.
B) very low inventory costs because no inventory needs to be carried from period to period.
C) very high inventory costs because no inventory needs to be carried from period to period.
D) very high inventory costs because expensive capacity would go unused during most months
when demand was lower.
Answer: B
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
5) The disadvantage of maintaining enough manufacturing capacity to meet demand in any
period is
A) much of the expensive capacity would go unused during most months when demand was
lower.
B) the expensive capacity would be used consistently throughout the year.
C) most of the expensive capacity would still be used during most months when demand was
lower.
D) very low inventory costs because no inventory needs to be carried from period to period.
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
6) The advantage of building up inventory during the off season to meet demand during peak
seasons and keep production stable year round is
A) very low inventory costs because no inventory needs to be carried from period to period.
B) much of the expensive capacity would go unused during most months when demand was
lower.
C) in the fact that a firm could get by with a smaller, less expensive factory.
D) in the fact that a firm could get by with a larger, more expensive factory.
Answer: C
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
6
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7) The disadvantage of building up inventory during the off season to meet demand during peak
seasons and keep production stable year round is
A) very low inventory costs because no inventory needs to be carried from period to period.
B) very high inventory costs because inventory needs to be carried from period to period.
C) in the fact that a firm could get by with a smaller, less expensive factory.
D) in the fact that a firm could get by with a larger, more expensive factory.
Answer: B
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
8) The advantage of offering a price promotion during periods of low demand to shift some of
the demand into a slow period is
A) a demand pattern that is less expensive to supply.
B) very high inventory costs because inventory needs to be carried from period to period.
C) in the fact that a firm could get by with a smaller, more expensive factory.
D) much of the expensive capacity would go unused during most months when demand was
lower.
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
9) Companies typically divide the task of supply and demand so that
A) Marketing manages demand and Operations manages supply.
B) Marketing manages supply and Operations manages demand.
C) Marketing manages demand and supply.
D) Operations manages demand and supply.
Answer: A
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
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10) With supply and demand management decisions being made independently,
A) it is increasingly difficult to coordinate the supply chain, thereby increasing profit.
B) it is increasingly difficult to coordinate the supply chain, thereby decreasing profit.
C) it is easier to coordinate the supply chain, thereby decreasing profit.
D) it is easier to coordinate the supply chain, thereby increasing profit.
Answer: B
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
11) ________ variability is change in demand that can be forecasted.
A) Capacity
B) Predictable
C) Inventory
D) Backlog
Answer: B
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
12) A firm can vary supply of product by controlling
A) inventory.
B) pricing.
C) demand.
D) revenue.
Answer: A
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
13) A firm can vary supply of product by controlling
A) revenue.
B) pricing.
C) demand.
D) capacity.
Answer: D
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
8
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14) In this approach to managing capacity, a firm uses flexible work hours by the workforce to
manage capacity to better meet demand.
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Use of dual facilities—specialized and flexible
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
15) In this approach to managing capacity, a firm uses a temporary workforce during the peak
season to increase capacity to match demand.
A) Time flexibility from workforce
B) Use of subcontracting
C) Use of dual facilities—specialized and flexible
D) Use of seasonal workforce
Answer: D
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
16) In this approach to managing capacity, a firm purchases peak production so that internal
production remains level and can be done cheaply.
A) Time flexibility from workforce
B) Use of subcontracting
C) Use of dual facilities—specialized and flexible
D) Use of seasonal workforce
Answer: B
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
9
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17) In this approach to managing capacity, a firm has flexible production lines whose production
rate can easily be varied.
A) Time flexibility from workforce
B) Use of subcontracting
C) Designing product flexibility into the production processes
D) Use of seasonal workforce
Answer: C
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
18) A firm can vary supply of product by controlling
A) production capacity and inventory.
B) production capacity and price promotions.
C) price promotions and inventory.
D) production capacity and inventory promotions.
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
19) The capacity management approach that uses flexible work hours from the workforce to
manage capacity to better meet demand is
A) time flexibility from workforce.
B) use of seasonal workforce.
C) use of subcontracting.
D) use of dual facilities—dedicated and flexible.
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
10
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20) The capacity management approach that uses a temporary workforce during the peak season
to increase capacity to match demand is
A) time flexibility from workforce.
B) the use of seasonal workforce.
C) the use of subcontracting.
D) the use of dual facilities—dedicated and flexible.
Answer: B
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
21) The capacity management approach where a firm purchases peak production from another
firm so that internal production remains level and can be done cheaply is
A) time flexibility from workforce.
B) the use of seasonal workforce.
C) the use of subcontracting.
D) the use of dual facilities—dedicated and flexible.
Answer: C
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
22) The capacity management approach where a firm builds facilities to produce a relatively
stable output of products over time in a very efficient manner and facilities to produce a widely
varying volume and variety of products, but at a higher unit cost is
A) time flexibility from workforce.
B) the use of seasonal workforce.
C) the use of subcontracting.
D) the use of dual facilities—dedicated and flexible.
Answer: D
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
11
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23) The capacity management approach where a firm has production lines whose production rate
can easily be varied to match demand is
A) time flexibility from workforce.
B) the use of seasonal workforce.
C) the use of subcontracting.
D) designing product flexibility into the production processes.
Answer: D
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
24) Which approach to capacity management may be hard to sustain if the labor market is tight?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Use of dual facilities—dedicated and flexible
Answer: B
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
25) Which approach to capacity management makes use of spare plant capacity that exists in the
form of hours when the plant is not operational?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Use of dual facilities—dedicated and flexible
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
12
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26) Which approach to capacity management makes use of overtime, which is varied to match
the variation in demand?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Use of dual facilities—dedicated and flexible
Answer: A
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
27) Which approach to capacity management would schedule the workforce so that the available
capacity better matches demand?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Use of dual facilities—dedicated and flexible
Answer: A
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
28) Which approach to capacity management would use a part-time workforce to increase
capacity flexibility by enabling the firm to have more people at work during peak periods?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Use of dual facilities—dedicated and flexible
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
13
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29) The key to which capacity management approach would involve having both volume
(fluctuating demand from a manufacturer) and variety flexibility (demand from several
manufacturers) to be sustainable?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Use of dual facilities—dedicated and flexible
Answer: C
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
30) Which approach to capacity management would require that the workforce be multi-skilled
and easily adapt to being moved from line to line?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of dual facilities—dedicated and flexible
D) Designing product flexibility into the production processes
Answer: D
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
31) Which approach to capacity management would use production machinery that can be
changed easily from producing one product to another?
A) Time flexibility from workforce
B) Use of subcontracting
C) Use of dual facilities—dedicated and flexible
D) Designing product flexibility into the production processes
Answer: D
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
14
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32) Which approach to capacity management would only be effective if the overall demand
across all the products is relatively stable?
A) Use of seasonal workforce
B) Use of subcontracting
C) Use of dual facilities—dedicated and flexible
D) Designing product flexibility into the production processes
Answer: D
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
33) Which of the following is an approach that firms can use when managing inventory to meet
predictable demand variability?
A) Time flexibility from workforce
B) Use of seasonal workforce
C) Use of subcontracting
D) Using common components across multiple products
Answer: D
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
34) When most of the products a firm produces have the same peak demand season, in order to
meet predictable variability with inventory, it must
A) use common components across multiple products.
B) use a seasonal workforce.
C) build inventory of high demand or predictable demand products.
D) use subcontracting.
Answer: C
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
15
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35) Supply chains can influence demand by using
A) production capacity and inventory.
B) pricing and other promotions.
C) price promotions and inventory.
D) production capacity and inventory promotions.
Answer: B
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
36) The pricing and promotion decisions are often made by
A) marketing and sales.
B) marketing and operations.
C) operations and sales.
D) marketing, operations, and sales.
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
37) The promotion and pricing decisions made by marketing and sales typically have the
objective of
A) maximizing profitability.
B) minimizing profitability.
C) minimizing revenue.
D) maximizing revenue.
Answer: D
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
16
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38) Pricing decisions based only on revenue considerations often result in
A) a decrease in overall profitability.
B) an increase in overall profitability.
C) a decrease in overall revenue.
D) a decrease in supply chain revenue.
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
39) When planning, the goal of all firms in the supply chain should be to maximize supply chain
profits because
A) this leaves them less profit to divide among themselves.
B) this leaves them more profit to divide among themselves.
C) this outcome leaves them more profit to pay tax on.
D) this outcome will increase their charitable giving.
Answer: B
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
40) One key to successful collaboration when the supply chain is performing aggregate planning
is
A) determining how losses will be allocated to different members of the supply chain.
B) determining how profits will be allocated to different members of the supply chain.
C) determining how labor will be allocated to different members of the supply chain.
D) determining how customers will be allocated to different members of the supply chain.
Answer: B
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
17
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41) An increase in consumption of the product either from new or existing customers is
A) market growth.
B) stealing share.
C) forward selling.
D) forward buying.
Answer: A
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
42) Customers substituting the firm's product for a competitor's product is
A) market growth.
B) stealing share.
C) forward selling.
D) forward buying.
Answer: B
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
43) Customers moving up future purchases to the present is
A) market growth.
B) stealing share.
C) forward selling.
D) forward buying.
Answer: D
Diff: 1
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
18
Copyright © 2019 Pearson Education, Inc.
44) In general, as the fraction of increased demand coming from forward buying grows, offering
the promotion during the peak demand period becomes
A) less attractive.
B) more attractive.
C) more profitable.
D) less significant.
Answer: A
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
45) Offering a promotion during a peak period that has significant forward buying
A) creates a desirable demand pattern.
B) creates a demand pattern less costly to serve.
C) creates a demand pattern even more costly to serve.
D) shifts demand from the peak period to the slow period.
Answer: C
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
46) Average inventory
A) increases if a promotion is run during the peak period.
B) increases if a promotion is run during the off-peak period.
C) decreases if a promotion is run during the peak period.
D) decreases if a promotion is run during the off-peak period.
Answer: B
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
19
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47) Promoting during a peak demand month may decrease overall profitability if
A) a small fraction of the demand increase results from a forward buy.
B) any of the demand increase results from a forward buy.
C) a significant fraction of the demand increase results from a forward buy.
D) none of the above
Answer: C
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
48) As the product margin declines, promoting during the peak demand period becomes
A) less profitable.
B) more profitable.
C) less of a risk.
D) more desirable.
Answer: A
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
49) Which factor favors promotion during low-demand periods?
A) High forward buying
B) High ability to steal market share
C) High ability to increase overall market
D) High margin
Answer: A
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
50) Which factor favors promotion during low-demand periods?
A) High margin
B) High ability to steal market share
C) High ability to increase overall market
D) Low margin
Answer: D
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
20
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51) Which factor favors promotion during peak-demand periods?
A) Low margin
B) Low ability to steal market share
C) High ability to increase overall market
D) High margin
Answer: C
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
21
Copyright © 2019 Pearson Education, Inc.
The Okra Colada
An okra farm anticipates highly seasonal demand for their product, tender pods of okra that can
be made into the new drink sensation, the okra colada. Their estimate of the demand profile
appears below. This forecast is based on the demand profile of last year's drink, the tuna colada.
Once everyone in the test market had actually sampled the drink, demand fell to zero.
Month
January
February
March
April
May
June
Demand Forecast
1,200
2,400
3,600
4,800
2,200
200
The costs for the managerial levers appear in this table.
Item
Materials cost/unit
Inventory holding cost/unit/month
Marginal cost of stockout/unit/month
Hiring and training cost/worker
Layoff cost/worker
Labor hours required/unit
Regular time cost/hour
Over time cost/hour
Beginning inventory equals
Ending inventory greater than
Marginal subcontracting cost/unit
Cost
$10
$2
$5
$300
$500
4
$4
$6
1000
500
$30
The base price per okra colada is $40 per unit and there is no promotion, but management is
seriously considering different promotional plans. The beginning workforce level is 80 workers.
52) Use the Okra Colada scenario to answer this question. What should the objective function be
when using linear programming to solve this sales and operations planning problem?
A) Minimize total cost
B) Maximize total revenue
C) Minimize total price
D) Maximize total demand
Answer: A
Diff: 1
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
22
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53) Use the Okra Colada scenario to answer this question. What constraints are associated with
the level of inventory at the end of each period when using linear programming to solve this
sales and operations planning problem?
A) EIJAN-MAY = 0
B) EIJUNE ≥ 500, EIJAN-MAY = 0
C) EIJAN-MAY ≥ 0
D) EIJUNE ≥ 500, EIJAN-MAY ≤0
Answer: B
Diff: 2
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
54) Use the Okra Colada scenario to answer this question. What is the ideal workforce level
throughout January-June?
A) 84 workers
B) 80 workers
C) 57 workers
D) 53 workers
Answer: C
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
55) Use the Okra Colada scenario to answer this question. Which of the following statements is
true when using linear programming to solve this sales and operations planning problem?
A) No layoffs occur.
B) No stockouts occur.
C) No subcontracting is used.
D) No overtime is used.
Answer: D
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
23
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56) Use the Okra Colada scenario to answer this question. What is the minimum value for the
cost of a single stockout to ensure that there are no stockouts during the six-month planning
period?
A) $15
B) $20
C) $10
D) $25
Answer: A
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
57) Use the Okra Colada scenario to answer this question. Which of the following statements is
true when using linear programming to solve this sales and operations planning problem?
A) More workers are hired than laid off.
B) More units are built using subcontracting than using overtime.
C) The number of stockouts exceeds the number of units in ending inventory from January-May.
D) The number of units subcontracted exceeds the number of stockouts that occur.
Answer: B
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
58) Use the Okra Colada scenario to answer this question. What is the optimal total cost when
using linear programming to solve this sales and operations planning problem?
A) $424,140
B) $414,240
C) $400,340
D) $434,040
Answer: C
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
24
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59) Use the Okra Colada scenario to answer this question. What is the optimal profit when using
linear programming to solve this sales and operations planning problem?
A) $159,330
B) $183,440
C) $167,550
D) $175,660
Answer: D
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
25
Copyright © 2019 Pearson Education, Inc.
The Tuna Colada
A fishing consortium anticipates highly seasonal demand for their product, yellowtail tuna steaks
that can be made into the new drink sensation, the tuna colada. Their estimate of the demand
profile appears below. This forecast is based on the demand profile of last year's drink, the okra
colada with one key difference. The tuna colada is being positioned as a healthier alternative to
eggnog, so demand is expected to climb throughout the planning period with a peak in
December.
Month
July
August
September
October
November
December
Demand Forecast
1,560
2,200
2,850
3,440
4,020
5,280
The costs for the managerial levers appear in this table.
Item
Cost
Materials cost/unit
$10
Inventory holding cost/unit/month
$4
Marginal cost of stockout/unit/month
$12
Hiring and training cost/worker
$200
Layoff cost/worker
$800
Labor hours required/unit
3
Regular time cost/hour
$16
Over time cost/hour
$24
Period beginning inventory equals
0
Period ending inventory equals
0
Marginal subcontracting cost/unit
$80
The base price per tuna colada is $75 and there is currently no promotion, hence, no forward
buying, but management is seriously considering different promotional plans. The beginning
workforce level is 80 employees.
60) Use the Tuna Colada scenario to answer this question. If this problem is to be solved using
linear programming, how should the objective function read?
A) Minimize total cost
B) Maximize total revenue
C) Minimize total price
D) Maximize total demand
Answer: A
Diff: 1
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
26
Copyright © 2019 Pearson Education, Inc.
61) Use the Tuna Colada scenario to answer this question. If this problem is solved using linear
programming, which of these parameters equals 0 in an optimal solution?
A) Layoff cost per worker
B) Number of units made using overtime
C) Number of workers laid off
D) Number of units made using subcontracting
Answer: B
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
62) Use the Tuna Colada scenario to answer this question. If this problem is solved using linear
programming, what is the maximum possible profit?
A) $61,370
B) $34,260
C) -$21,070
D) -$34,260
Answer: C
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
63) Use the Tuna Colada scenario to answer this question. If this problem is solved using linear
programming, which of these statements is best?
A) The workforce rises and then falls as the period moves from July to December.
B) There are more units made using overtime than there are instances of stocking out.
C) Inventory is at its peak during the month of September.
D) There are more units made by subcontracting than there are workers laid off throughout the
planning period.
Answer: D
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
27
Copyright © 2019 Pearson Education, Inc.
64) Use the Tuna Colada scenario to answer this question. If this problem is solved using linear
programming, what is the minimum possible cost that still permits the planners to meet demand?
A) $1,472,320
B) $1,451,250
C) $1,443,680
D) $1,430,120
Answer: A
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
65) Use the Tuna Colada scenario to answer this question. What is the minimum value the cost
of subcontracting must have to ensure that it is not used during the planning period?
A) $110 per unit
B) $107 per unit
C) $104 per unit
D) $101 per unit
Answer: B
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
66) Use the Tuna Colada scenario to answer this question. Suppose a promotion in month 1
results in 10% consumption and a 20% forward buy. What is the maximum profit possible
throughout the planning period?
A) -$11,588
B) $15,974
C) -$17,548
D) $23,462
Answer: C
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
28
Copyright © 2019 Pearson Education, Inc.
67) Use the Tuna Colada scenario to answer this question. Suppose a promotion in month 1
results in 10% consumption and a 20% forward buy. What is the peak level of inventory during
the six-month planning period?
A) 1,220 units in August
B) 1,020 units in September
C) 940 units in August
D) 1,380 units in September
Answer: D
Diff: 3
Topic: 9.2: Sales and Operations Planning at Red Tomato
AACSB: Analytical thinking
Objective: LO 9.2: Use sales and operations planning to maximize profitability when faced with
predictable variability in a supply chain.
29
Copyright © 2019 Pearson Education, Inc.
9.3 Essay Questions
1) Discuss how a firm can respond to predictable variability of demand in the supply chain.
Answer: Faced with predictable variability, a company's goal is to respond in a manner that
maximizes profitability. A firm must choose how to handle predictable variability by utilizing
techniques in two broad categories:
Manage supply using capacity, inventory, subcontracting, and backlogs.
Manage demand using short-term price discounts and trade promotions.
The use of these tools enables the supply chain to greatly increase its profitability because it is
able to match supply and demand in a much more coordinated fashion. One way to meet
seasonal demand requires carrying enough manufacturing capacity to meet demand in any
period. The advantage of this approach is very low inventory costs, because no inventory needs
to be carried from period to period. The disadvantage, however, is that much of the expensive
capacity would go unused during most months when demand was lower.
Another approach to meeting demand would be to build up inventory during the off season to
keep production stable year round. The advantage of this approach lies in the fact that a firm
could get by with a smaller, less expensive factory. High inventory carrying costs, however,
make this alternative expensive. A third approach would be for a firm to work with their retail
partners in the supply chain to offer a price promotion during periods of low demand. This
promotion shifts some of the demand into a slow period, thereby spreading demand more evenly
throughout the year and reducing the seasonal surge. Such a demand pattern is less expensive to
supply. A company needs to decide which alternative maximizes their profitability.
Often companies divide the task of supply and demand management between different functions.
Marketing typically manages demand and Operations typically manages supply. At a higher
level, supply chains suffer from this phenomenon as well, with retailers independently managing
demand and manufacturers independently managing supply. With supply and demand
management decisions being made independently, it is increasingly difficult to coordinate the
supply chain, thereby decreasing profit. Therefore, maximizing profitability depends on these
decisions being made in a coordinated fashion and requires supply chain partners to work
together across enterprises.
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
30
Copyright © 2019 Pearson Education, Inc.
2) Discuss the approaches that can be used to manage capacity to meet predictable variability of
demand.
Answer: When managing capacity to meet predictable variability, firms use a combination of
the following approaches:
Time flexibility from workforce: In this approach, a firm uses flexible work hours from the
workforce to manage capacity to better meet demand. In many instances, plants do not operate
continually and are left idle during portions of the day or week. Therefore, spare plant capacity
exists in the form of hours when the plant is not operational. Many plants do not run three shifts,
so the existing workforce could work overtime during peak periods to produce more to meet
demand. If demand fluctuates by day of the week or week of the month and the workforce is
willing to be flexible, a firm may schedule the workforce so that the available capacity better
matches demand. In such settings, use of a part-time workforce may further increase the capacity
flexibility by enabling the firm to have more people at work during peak periods.
Use of seasonal workforce: In this approach, a firm uses a temporary workforce during the peak
season to increase capacity to match demand. This approach may be hard to sustain if the labor
market is tight.
Use of subcontracting: In this approach, a firm subcontracts peak production so that internal
production remains level and can be done cheaply. With the subcontractor handling the peaks,
the company is able to build a relatively inflexible but low-cost facility where the production
rates are kept relatively constant (other than variations that arise from the use of overtime). Peaks
are subcontracted out to facilities that are more flexible. A key here is the availability of
relatively flexible subcontractor capacity. The subcontractor can often provide flexibility at a
lower cost by pooling the fluctuations in demand across different manufacturers. Thus the
flexible subcontractor capacity must have both volume (fluctuating demand from a
manufacturer) as well as variety flexibility (demand from several manufacturers) to be
sustainable.
Use of dual facilities—dedicated and flexible: In this approach, a firm builds both dedicated and
flexible facilities. Dedicated facilities produce a relatively stable output of products over time in
a very efficient manner. Flexible facilities produce a widely varying volume and variety of
products but at a higher unit cost. Each dedicated facility could produce at a relatively steady
rate, with fluctuations being absorbed by the flexible facility.
Designing product flexibility into the production processes: In this approach, a firm has flexible
production lines whose production rate can easily be varied. Production is then changed to match
demand. The production lines are designed such that changing the number of workers on a line
can vary the production rate. As long as variation of demand across different product lines is
complementary, (i.e., when one goes up, the other tends to go down), the capacity on each line
can be varied by moving the workforce from one line to the other. Of course, this requires that
the workforce be multi-skilled and easily adapt to being moved from line to line. Production
flexibility can also be achieved if the production machinery being used is flexible and can be
changed easily from producing one product to another. This approach can only be effective if the
overall demand across all the products is relatively constant. Several firms producing products
with seasonal demand try and exploit this approach by carrying a portfolio of products that have
peak demand seasons distributed over the year.
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
31
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the face of predictable variability.
3) Discuss the approaches a firm can use to manage inventory to meet predictable variability of
demand.
Answer: When managing inventory to meet predictable variability, firms use a combination of
the following approaches:
Using common components across multiple products: In this approach, a firm designs common
components used in multiple products, with each product having predictably variable demand
that results in relatively constant overall demand. Use of common components across these
products will result in the demand for the components being relatively constant.
Build inventory of high demand or predictable demand products: When most of the products a
firm produces have the same peak demand season, the previous approach is no longer feasible. A
firm must then decide which inventory to build during the off season. The answer is to build
products during the off season that have more predictable demand, because there is less to be
learned about their demand by waiting. As more is known about demand closer to the selling
season, production of more uncertain items should take place. This strategy helps the supply
chain better synchronize supply and demand.
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
4) Discuss the importance of collaboration within a supply chain when performing aggregate
planning.
Answer: Supply chains can influence demand by using pricing and other forms of promotion.
Marketing and sales often make the promotion and pricing decisions, and they typically make
them with the objective of maximizing revenue. However, changing the demand pattern can
change the cost the company incurs to meet that demand. Thus, pricing decisions based only on
revenue considerations often result in a decrease in overall profitability. The same is true when
thinking of the supply chain. The retailer sets the price and runs promotions to generate demand.
This is regularly done without taking into account the impact on the rest of the supply chain.
Therefore, the combination of pricing and aggregate planning (both demand and supply
management) can be used to maximize supply chain profitability.
When performing aggregate planning, the goal of all firms in the supply chain should be to
maximize supply chain profits because this outcome leaves them more to divide with each other.
For profit maximization to take place, companies need to devise a way to collaborate and, just as
important, determine a way to split the supply chain profits. Determining how these profits will
be allocated to different members of the supply chain is a key to successful collaboration.
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
32
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5) Discuss the impact of promotion on demand within a supply chain.
Answer: Companies want to explore if and when to potentially offer a promotion. Four key
factors influence the timing of a trade promotion:
Impact of the promotion on demand
Product margins
Cost of holding inventory
Cost of changing capacity
Companies should identify whether each factor favors offering a promotion during the high- or
low-demand periods. They start by considering the impact of promotion on demand. When a
promotion is offered during a period, that period's demand will go up. This increase in demand
results from a combination of the following three factors:
Market growth: An increase in consumption of the product, either from new or existing
customers.
Stealing share: Customers substituting the firm's product for a competitor's product.
Forward buying: Customers move up future purchases to the present.
The first two factors increase the overall demand, whereas the third simply shifts future demand
to the present. It is important to know the relative impact from the three factors as a result of a
promotion before making the decision regarding the optimal timing of the promotion. In general,
as the fraction of increased demand coming from forward buying grows, offering the promotion
during the peak demand period becomes less attractive. Offering a promotion during a peak
period that has significant forward buying creates even more variable demand than before the
promotion. Product that was once demanded in the slow period is now demanded in the peak
period, making this demand pattern even more costly to serve.
Average inventory increases if a promotion is run during the peak period and decreases if the
promotion is run during the off-peak period. Promoting during a peak demand month may
decrease overall profitability if a significant fraction of the demand increase results from a
forward buy. As forward buying becomes a smaller fraction of the demand increase from a
promotion, it is more profitable to promote during the peak period. As the product margin
declines, promoting during the peak demand period becomes less profitable.
Other factors such as holding cost and the cost of changing capacity also affect the optimal
timing of promotions. When faced with seasonal demand, a firm should use a combination of
pricing (to manage demand) and production and inventory (to manage supply) to improve
profitability. The precise use of each lever varies with the situation. This makes it crucial that
enterprises in a supply chain coordinate both their forecasting and planning efforts. Only then are
profits maximized.
Diff: 2
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
33
Copyright © 2019 Pearson Education, Inc.
6) Discuss key issues when managing predictable variability of demand within a supply chain.
Answer: Coordinate planning across enterprises in the supply chain. For a supply chain to
successfully manage predictable variability, the entire chain must work toward the one goal of
maximizing profitability. Everyone in a supply chain may agree with this in principle, but in
reality, it is very difficult to get an entire supply chain to agree on how to maximize profitability.
Within a company, marketing often has incentives based on revenue, whereas operations has
incentives based on cost. Within the supply chain, different enterprises are judged by their own
profitability, not necessarily by the overall supply chain's profitability. It is clear that without
working to get companies to work together, the supply chain will return suboptimal profits.
Therefore, firms in the supply chain need to collaborate through the formation of joint teams.
Incentives of the members of the supply chain must be aligned. High-level support within the
organization, including support from the chief executive officer, will also be needed because this
coordination often requires groups to act counter to their traditional operating procedures.
Although this collaboration is difficult, the payoffs are significant.
Take predictable variability into account when making strategic decisions. Predictable variability
has a tremendous impact on the operations of a company. A firm must always take this impact
into account when making strategic decisions. However, predictable variability is not always
taken into account when strategic plans are made, such as what type of products to offer, whether
or not to build new facilities, and what sort of pricing structure a company should have. The
level of profitability is greatly affected by predictable variability and, therefore, the success or
failure of strategic decisions can be determined by it.
Preempt, do not just react to, predictable variability. Companies often have a tendency to focus
on how they can effectively react to predictable variability. This role often falls on operations,
which tries to manage supply to best deal with predictable variability. The management of
supply as well as demand provides the best response to predictable variability. Actions like
pricing and promotion that manage demand are preemptive and often in the domain of
marketing. It is important for marketing and operations to coordinate their efforts and plan for
predictable variability together well before the peak demand is observed. This coordination
allows a firm to preempt predictable variability and come up with a response that maximizes
profits.
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Application of knowledge
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
34
Copyright © 2019 Pearson Education, Inc.
7) An okra farm anticipates highly seasonal demand for their product, tender pods of okra that
can be made into the new drink sensation, the okra colada. Their estimate of the demand profile
appears below. This forecast is based on the demand profile of last year's drink, the tuna colada.
Once everyone in the test market had actually sampled the drink, demand fell to zero.
Month
January
February
March
April
May
June
Demand Forecast
1,200
2,400
3,600
4,800
2,200
200
The costs for the managerial levers appear in this table.
Item
Materials cost/unit
Inventory holding cost/unit/month
Marginal cost of stockout/unit/month
Hiring and training cost/worker
Layoff cost/worker
Labor hours required/unit
Regular time cost/hour
Over time cost/hour
Beginning inventory equals
Ending inventory greater than
Marginal subcontracting cost/unit
Cost
$10
$2
$5
$300
$500
4
$4
$6
1000
500
$30
With a base price of $40 per bushel of okra and no promotion, what is the optimal sales and
operations plan? Assume that the beginning workforce level is set at 80 workers.
35
Copyright © 2019 Pearson Education, Inc.
Answer:
Period Hired Laid off Workers O/T Inventory Stockout Sub Production
0
0
0
80
0
1,000
0
0
1
0
23
57
0
2,080
0
0
2,280
2
0
0
57
0
1,960
0
0
2,280
3
0
0
57
0
640
0
0
2,280
4
0
0
57
0
0
1,660 220
2,280
5
0
0
57
0
0
1,580
0
2,280
6
0
0
57
0
500
0
0
2,280
The total cost of this plan is $400,340. The revenue is $576,000 and the resulting profit is
$175,660.
Diff: 3
Topic: 9.1: Responding to Predictable Variability in the Supply Chain
AACSB: Analytical thinking
Objective: LO 9.1: Manage supply and demand to improve synchronization in a supply chain in
the face of predictable variability.
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