MgtOp 452
Supply Chain Management
HW1 SOLUTIONS:
Chapter 1
Discussion Questions
Question 1
Pick any car model manufactured by a domestic auto maker. For example, consider the
2002 Ford Thunderbird.
a. The supply chain for a car typically includes the following components:
1. Suppliers for raw materials
2. Suppliers for parts and subsystems
3. Automobile manufacturer (Ford, in this example). Within a company, there are also
different departments, which constitute the internal supply chain:
i. Purchasing and material handing
ii. Manufacturing
iii. Marketing, etc.
4. Transportation providers
5. Automobile dealers
b. Many firms are involved in the supply chain.
1. Raw material suppliers. For instance, suppliers for steel, rubber, plastics, etc.
2. Parts suppliers. For instance, suppliers for engines, steering wheels, seats, and
electronic components, etc.
3. Automobile manufacturer. For instance, Ford.
4. Transportation providers. For instance, shippers, trucking companies, railroads, etc.
5. Automobile dealers. For example, Hayward Ford.
c. All companies involved in the supply chain want to maximize their respective profits
by increasing revenue, decreasing cost and meeting customers’ demand. However,
companies may employ different strategies in order to achieve this goal. Some of them
focus on customer satisfaction and quick delivery, while others may be more concerned
about minimizing inventory holding costs. Different firms in the supply chain have
different, conflicting objectives.
d. In general, different parts of the supply chain have objectives that are not aligned with
each other.
1. Suppliers Purchasing: Stable and large order quantities, flexible delivery lead times
and little variation in mix.
2. Manufacturing: Long production runs, high quality, high productivity and low
production costs.
3. Warehousing: Low inventory, reduced transportation costs and quick replenishment
capability.
4. Customers: Short order lead times, enough stock, a large variety of products and low
prices.
Typically, the automobile dealer would like to offer a variety of car colors and
configurations to accommodate different customer preferences, and meanwhile have a
short delivery lead time from the manufacturer. However, in order to maximize the length
of production runs, and utilize resources more efficiently, the manufacturer would like to
aggregate orders from different dealers and offer less variety in car configurations. This is
a clear example of conflicting marketing and manufacturing goals.
Question 6
The sources of uncertainty in this example include:
1. Factors such as weather conditions, diseases, natural disasters cause uncertainty in
availability of raw materials, i.e., peach crop.
2. Uncertain lead times during transportation of crop from the field to the processing
facility may affect the quality of peaches, e.g., they may get spoiled.
3. Processing times in the plant, as well as the subsequent warehousing and transportation
times are subject to uncertainty.
4. Demand is not known in advance.
Chapter 2
Discussion Questions
Question 3
The advantages of using more warehouses includes:
1. Improve service level due to less delivery time to customers;
2. Reduce outbound transportation costs;
The advantages of using less warehouses includes:
1. Decrease inventory costs and warehouse setup costs;
2. Reduce inbound transportation costs due to economy of TL;
The decision that a single warehouse will be built has been made up-front. Therefore, we
only need to focus on the location and capacity of the warehouse, and determine how
much space should be allocated to each product in the warehouse. The main steps of the
analysis are outline below.
1. Data collection
i. Location of retail stores, existing warehouses (5 warehouses located in Atlanta,
Boston, Chicago, Dallas and Los Angeles), manufacturing facilities (a single
manufacturing facility in San Jose), and suppliers.
ii. Candidate locations for the new warehouse.
iii. Information about products, i.e., their sizes, shapes and volumes.
iv. Annual demand (past actuals and future estimates) and service level requirements
of the retail stores.
v. Transportation rates by available modes.
vi. Transportation distances from candidate warehouse locations to retail stores.
vii. Handling, storage and fixed costs associated with warehousing. Fixed costs should
be expressed as a function of warehouse capacity.
viii. Fixed ordering costs, order frequencies and sizes by product or product family.
2. Data aggregation: Customer and product aggregation. Customers need to be grouped
by proximity in space (often zip code). Replace aggregated demand data points by a
single customer. Products needs to be aggregated based on distribution patterns and/or
product types.
3. Mathematical model building.
4. Model validation based on existing network structure.
5. Selection of a few low cost alternatives based on the mathematical model.
i. For the final decision, incorporate qualitative factors that were disregarded in the
mathematical model, e.g., specific regulations, environmental factors, etc.
ii. Optionally, build a detailed simulation model to evaluate these low cost candidate
solutions.
6. Decide where to locate the centralized warehouse.
With the centralized warehouse, inventory service level will increase (less stock-outs)
and inventory holding costs will decrease due to risk pooling. Also, fixed costs associated
with warehousing will typically decrease, and inbound transportation costs from the
manufacturing facility to the warehouse should be less than the sum of the previous
inbound transportation costs. However, we will incur increased outbound transportation
costs from the central warehouse to the retailers. In addition, the delivery time will
increase. In summary, the essential design trade-off is between transportation costs on
one hand, and inventory holding costs, fixed cost and service level requirements on the
other.
Question 5
In the pharmaceutical industry, we would expect fewer warehouses closer to the end
customers because inventory is expensive relative to transportation cost. On the other
hand, in the chemical industry there would be more decentralized warehouses close to
end customers in order to consolidate orders and decrease outbound transportation costs.
Prob4
See hw1.xls: sheet “PROB4”
The conclusion of the example is: aggregating customers can reduce the variability in
demand, and therefore ensure more accurate forecast of demand at product levels.
Prob5
See hw1.xls: sheet “PROB5”
The conclusion of the example is: Recommend to build the assembly line location in the
location with Longitude 81.08 and Latitude 38.76 degrees.
.
Prob6
Heuristic Method1:
First only focus on the minimum outbound transportation costs. So Market 1 and 3 are
served by Warehouse 3, and Market2 are served by Warehouse 2. There will be 100,000
units flowing through Warehouse 3 and another 100,000 products through Warehouse2.
The total outbound cost =$ 1x 50,000+$1x 50,000+$1x100,000 =$200,000.
Then assign each plant for production based on cost. Plant 2 should produce 60,000
(reaching its capacity) for Warehouse 2 and the left 40,000 in Warehouse2 will be
produced in Plant 1. Also Plant1 will produce 100,000 for Warehouse 3. Altogether Plant
1 will produce 100,000+40,000=140,000, which is less than its capacity.
Total inbound cost=$2x60,000+$5x40,000+$3x100,000= $620,000.
So total cost =$200,000+$620,000=$820,000
Heuristic Method2:
Assign each market based on total landed cost:
Markets P1—W1 P1—W2 P1—W3 P2—W1
Market1
$3
$7
$4
$7
Market2
$4
$6
$5
$8
Market3
$5
$7
$4
$9
P2—W2
$4
$3
$4
P2—W3
$5
$6
$5
Considering the capacity restriction in each plant, the total cost =
$0x50,000+$3x50,000+$2x60,000+$5x40,000+$1x100,000+$3x50,000+$1x50,000=
$770,000.
Optimal approach result is $690,000 by EXCEL: See hw1.xls:
sheet “PROB6”.