Chapter13 Exercises 1 & 7 and Chapter 14 Case Study

Supply Chain Management

SUPPLY CHAIN MANAGEMENT –Chopra Meindl Sixth Edition

Chapter 13: Determining the Optimal Level of Product Availability

Exercise 1 and Exercise 7

EXERCISE 1

Green Thumb, a manufacturer of lawn care equipment, has introduced a new product. Each unit costs $150 to manufacture, and the introductory price is $200. At this price, the anticipated demand is normally distributed, with a mean of u = 100 and a standard deviation of o = 40. Any unsold units at the end of the season are unlikely to be valuable and will be disposed of in a post-season sale for $50 each. It costs $20 to hold a unit in inventory for the entire season.

QUESTIONS TO ANSWER:

How many units should Green thumb manufacture for sale?

What is the expected profit from this policy?

On average, how many customers does Green Thumb expect to turn away because of stocking out?

EXERCISE 7

The manager at AnyLogo is considering the purchase of high-speed embroidery machines that will allow it to embroider on demand. In this case, the apparel will be made in Sri Lanka without any logo; the logo embroidery will be postponed and will be done in the United States on demand. This will raise the cost per unit to $18. However, AnyLogo will not have any holiday or company-specific apparel to be disposed of at the end of the season. The apparel without logos can be sold for $18 a unit to retailers. The cost of holding inventory and shipping adds $4 to the cost of any apparel left over after the holiday season. With all other information as in Exercise 6,

QUESTIONS TO ANSWER:

Do you recommend that the manager at AnyLogo implement postponement?

What will be the impact of postponement on profits and inventories?

TABLE 13-6 DEMAND DISTRIBUTION for AnyLogo

IBM

AT&T

HP

Cisco

Mean

5,000

7,000

4,000

4,000

SD

2,000

2,500

2,000

2,200

“EXERCISE 6 DATA ( if needed other than the TABLE) AnyLogo supplies firms with apparel containing their logo to be used for promotional purposes. AnyLogo has four major customers—IBM, AT&T, HP, and Cisco. During the holiday season, the logos are adorned with a Christmas motif. Demand from each firm for apparel with the Christmas motif is normally distributed, as shown in TABLE 13-6. AnyLogo currently produces all the apparel including the logo embroidery in Sri Lanka in advance of the holiday season. Each unit costs $15 and is sold by AnyLogo for $50. Any leftover inventory at the end of the holiday season is essentially worthless and cannot be repurposed for a different company. It is thus donated by AnyLogo to charity. Holding the apparel in inventory adds another $3 to the cost per unit donated to inventory. However, the donation allows AnyLogo to recover $6 per unit in tax savings.”

CHAPTER 14: Transportation in a Supply Chain

Case Study 1

Designing the Distribution Network for Michael’s Hardware

Ellen Lin, vice president of supply chain at Michael’s Hardware, was looking at the financial results from the past quarter and thought that the company could significantly improve its distribution costs, especially given the recent expansion into Arizona. Transportation costs had been very high, and Ellen believed that moving away from LTL shipping to Arizona would help lower transportation costs without significantly raising inventories.

Michael’s had 32 stores each in Illinois and Arizona and sourced its products from eight suppliers located in the Midwest. The company began in Illinois and its stores in the state enjoyed strong sales. Each Illinois store sold, on average, 50,000 units a year of product from each supplier (for annual sales of 400,000 units per store). The Arizona operation was started about five years ago and still had plenty of room to grow. Each Arizona store sold 10,000 units a year from each supplier (for annual sales of 80,000 units per store). Given the large sales at its Illinois stores, Michaels’s followed a direct-ship model and shipped small truckloads (with a capacity of 10,000 units) from each supplier to each of its Illinois stores. Each small truck cost $450 per delivery from a supplier to an Illinois store and could carry up to 10,000 units. In Arizona, however, the company wanted to keep inventories’ low and used LTL shipping that required a minimum shipment of only 500 units per store but cost $0.50 per unit. Holding costs for Michael’s were $1 per unit per year. Ellen asked her staff to propose different distribution alternatives for both Illinois and Arizona.

Distribution Alternatives for Illinois

Ellen’s staff proposed two alternative distribution strategies for the stores in Illinois:

1. Use direct shipping with even larger trucks that had a capacity of 40,000 units. These trucks charged only $1,150 per delivery to an Illinois store. Using larger trucks would lower transportation costs but increase inventories because of the larger batch sizes.

2. Run milk runs from each supplier to multiple stores in Illinois to lower inventory cost even if the cost of transportation increased. Large trucks (capacity of 40,000 units) would charge $1,000 per shipment and a charge of $150 per delivery. Small trucks (capacity of 10,000 units) would charge $400 per shipment and a charge of $50 per delivery.

Distribution Alternatives for Arizona

Ellen’s staff had three distribution alternatives for the stores in Arizona:

1. Use direct shipping with small trucks (capacity of 10,000 units) as was currently being done in Illinois. Each small truck charged $2,050 for a shipment of up to 10,000 units from a supplier to a store in Arizona. This was a significantly lower transportation cost than was currently being charged by the LTL carrier. This alternative, however, would increase inventory costs in Arizona given the larger batch sizes.

2. Run milk runs using small trucks (capacity of 10,000 units) from each supplier to multiple stores in Arizona. The small truck carrier charged $2,000 per shipment and $50 per delivery. Thus, a milk run from a supplier to four stores would cost $2,200. Milk runs would incur higher transportation costs than direct shipping but would keep inventory costs lower.

3. Use a third-party cross-docking facility in Arizona that charged $0.10 per unit for this cross-docking service. This would allow all suppliers to ship product (destined for all 32 Arizona stores) using a large truck to the cross-dock facility, where it would be cross-docked and sent to stores in smaller trucks (each smaller truck would now contain product from all eight suppliers). Large trucks (capacity of 40,000 units) charge $4,150 from each supplier to the cross-dock facility. Small trucks (capacity of 10,000 units) charge $250 from the cross-dock facility to each retail store in Arizona.

Ellen wondered how best to structure the distribution network and whether the savings would be worth the effort. If she used milk runs in either region, she also had to decide on how many stores to include in each milk run.

STUDY QUESTIONS TO ANSWER:

1. What is the annual distribution cost of the current distribution network? Include transportation and inventory costs.

2. How should Ellen structure distribution from suppliers to the stores in Illinois? AND What annual savings can she expect?

3. How should Ellen structure distribution from suppliers to the stores in Arizona? AND What annual savings can she expect?

4. What changes in the distribution network (IF ANY) would you suggest as both markets grow?