Supply Chain Management exercise questions
Mike Johnson went back to work in his family business after graduating.
The family business, Johnson Bicycles, is a bike shop that specializes
in high quality bikes. They carried a full line of bikes, ranging from
touring bikes to mountain bikes and aimed to be the premiere, full
service bike shop.
Currently, Johnson Bicycles has three retail outlets that it stocks
individually (and hence manages inventory separately for each location).
Mike thinks that the operation is big enough to take advantage of scale
economies and wants to investigate the possibility of consolidating
inventory at a centralized distribution point. Mike thinks that
centralizing inventory should lead to a substantial reduction in
inventory costs.
The basic idea would be to stock the bikes centrally (excluding the
token display model) and expedite delivery to the stores on an as needed
basis. He figured if the principal of aggregation would work for the
series 200 bike, then it should provide costs savings for all styles of
bikes. Table 1, below, shows last year’s sales history for the model
200 series at each retail location.
Series 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Std Dev
Total
Outlet 1 9 5 15 10 12 5 3 12 23 12 8 5 5.5 119
Outlet 2 10 10 30 12 22 15 17 30 11 14 12 15 7.1 198
Outlet 3 12 22 5 15 14 23 10 4 9 15 3 5 6.7 137
Total Sales 31 37 50 37 48 43 30 46 43 41 23 25 8.9 454
As can be seen, monthly sales varied, but generally, sales remained
fairly constant from year to year. Mike estimated it cost $65 every
time the company placed an order for a given model at each location.
The supplier’s lead time is a hefty two months, but fortunately it has
been constant over time. Historically, they’ve stocked to a 98%
service level. Each bike model cost $75 per bike and Mike figures that
holding cost to be 25% of the purchase price on an annual basis. With
their high service level, there was naturally, a lot of extra safety
stock in inventory. Mike knew every additional unit of safety stock
(recall safety stock is any inventory held in excess of average demand)
added directly to the total cost of inventory in the form of added
holding cost. That is, total cost is equal to the cost of ordering plus
the cost of holding inventory, where the cost of holding inventory is
equal to the cost of holding average inventory plus safety stock.
Using the s, S model, what are the order quantities, reorder points,
and total annual inventory costs associated with inventory management of
the Series 200 line of bikes at each location?
What would be the order quantity, reorder point, and total annual
inventory cost for a consolidated plan where bikes are stored at a
central distribution center?
Would you recommend switching to centralized inventory management? What
other factors besides costs should Mike consider?
2. Breakfast Foods
John Morgan, CEO of Breakfast Foods Corporation (BF, makers of
"Wheatflakes" and other cereals) had just come back from lunch and
turned to a report on his desk from David Baker. This report concerned
John's desire to fire one of BF's three wheat price forecasters. Every
three months, for nearly ten years, BF had received from their
forecasters best guess forecasts of wheat prices three months hence as
part of BF's desire to reduce its purchase costs. BF relied exclusively
on these forecasts since the experts had already assimilated information
from such sources as futures prices, econometric models and so on.
However, their ten-year tenure had led the experts to be overly exacting
in their demands for retaining fees, and John felt that firing one of
them would not only cut costs directly by about a third, but indirectly
it would send the message to the remaining two that no one was
indispensable. He had asked David to evaluate which one should get the
axe.
David's memo read as follows: I dug out the forecasts made by our three
experts and compared them with the actual prices that resulted three
months later (Exhibit 1 on next page). Clearly what we want is to fire
the expert with the widest spread of errors. I'll give Harry the axe as
soon as you give the order.
Answer the following questions with supporting data.
If an expert is to be fired, would you fire Tom, Dick, or Harry? Why?
Suppose you decide to fire Tom. How would you combine future forecasts
from Dick and Harry into a single composite best guess forecast? For
example, suppose Dick predicts $3.20 and Harry says $3.50. What
composite forecast would you use? One method would be to simply take the
average ($3.20+ $3.50)/2 = $3.35. But that is completely arbitrary.
Propose and justify a method for combining forecasts into a composite
forecast. [Hint: consider measures of forecast error] How "good" is the
composite forecast? Show enough analysis to support your claims.
Now, given your answer to part b., would you change your answer to part
a. and fire someone else? Either way, you will need to support your
answer.
Exhibit 1*
Actual Price Forecast # Tom Smith Dick Wilson Harry Simpson
$3.51 1 $3.48 $3.48 $3.74
3.61 2 3.38 3.47 3.73
3.22 3 3.56 3.58 3.52
3.43 4 3.64 3.51 3.35
3.55 5 3.56 3.47 3.20
3.62 6 3.55 3.53 3.52
3.70 7 3.47 3.57 3.62
3.68 8 3.38 3.57 3.87
3.58 9 3.43 3.44 3.46
3.49 10 3.51 3.56 3.52
3.54 11 3.51 3.55 3.49
3.58 12 3.56 3.59 3.27
3.79 13 3.52 3.47 3.66
3.81 14 3.45 3.41 3.66
3.88 15 3.38 3.36 3.62
3.77 16 3.54 3.54 3.54
3.81 17 3.53 3.54 3.41
3.68 18 3.58 3.51 3.45
3.77 19 3.50 3.48 3.46
3.91 20 3.47 3.47 3.68
3.84 21 3.55 3.43 3.26
3.80 22 3.53 3.51 3.32
3.42 23 3.51 3.54 3.42
3.50 24 3.46 3.39 3.58
3.55 25 3.52 3.59 3.51
3.59 26 3.41 3.42 3.62
3.61 27 3.44 3.51 3.72
3.65 28 3.48 3.54 3.84
3.51 29 3.53 3.47 3.29
3.43 30 3.53 3.55 3.39
3.48 31 3.48 3.47 3.63
3.60 32 3.61 3.51 3.10
3.71 33 3.41 3.39 3.60
3.33 34 3.59 3.70 3.34
3.42 35 3.43 3.57 3.59
3.47 36 3.53 3.44 3.45
3.51 37 3.48 3.41 3.41
3.60 38 3.53 3.57 3.47
3.65 39 3.43 3.38 3.45
3.58 40 3.54 3.53 3.39
* Note that you can copy the table entirely into Excel to facilitate
your analysis
Carol Foriana (sometimes confused with another ex-CEO of a high tech
company) is the CEO of AichPee one of the largest innovative tech
companies in the world. Recently, she was called into a meeting by the
Board of Directors and taken to task for recent performance of the
company. While new product introductions have been up, along with
patent applications, market share has dropped, the company stock price
has plummeted to new lows, and the number of new products that have
failed in the market place is also way up. It seems the company is now
relying on price discounts and promotions to move excess inventory that
has not sold – in order to make room for new products. Moreover, the
company finds itself unable to meet the demand of the products that are
hot in the market.
While these problems are not entirely new, they have certainly been
exacerbated in the past six months. Carol wonders if the problem might
be related to the Global Director of Supply Chain Management she hired
away from Wal-Mart six months ago. Carol is confused. While there is
clearly a coincidence in timing, the new Director demonstrated
remarkable performance in supply chain efficiency in his prior position.
Is it coincidence? Maybe the new director has not had enough time to
implement his program of efficiency. Based on course concepts, what
should Carol do? She must do something or start looking for a new job.
In fact, it may already be too late.
The Friendly Embalming and Mortuary Company (FEMC), experiences
significant seasonal fluctuations in – I suppose you could call it
demand. At the same time, business has been good and increasing. Don,
who heads FEMC recalls that trend adjusted exponential smoothing can
produce very accurate forecasts for just this type of situation. Don
has provided past annual “demand” for the prior 4 years:
Year Demand
2001 855
2002 1022
2003 1333
2004 1546
, provide a forecast for 2005.
Using the same information provided in part a), provide an annual
forecast for 2007.
The annual forecast provided in part a) is helpful, but does not enable
the company to plan its resources by quarter. The following table
provides quarterly “demand” for each of the past four years. Using
this information and the seasonal factor method, provide forecasts for
each quarter of 2005.
Year Quarter Demand Year Quarter Demand
2001 1 171 2003 1 260
2 235
2 373
3 209
3 340
4 239
4 360
2002 1 210 2004 1 325
2 268
2 437
3 243
3 402
4 301
4 383
Short answers for the following:
How can firms cope with huge variability in customer demand?
What is the relationship between service and inventory levels?
What factors should management consider when determining target service
levels?
Business Homework Solutions
#37964
Supply Chain Management Exercise Question
Supply Chain Management exercise questions
1. Mike Johnson went back to work in his family business after graduating. The family business, Johnson Bicycles, is a bike shop that specializes in high quality bikes. They carried a full line of bikes, ranging from touring bikes to mountain bikes and aimed to be the premiere, full service bike shop.
Currently, Johnson Bicycles has three retail outlets that it stocks individually (and hence manages inventory separately for each location). Mike thinks that the operation is big enough to take advantage of scale economies and wants to investigate the possibility of consolidating inventory at a centralized distribution point. Mike thinks that centralizing inventory should lead to a substantial reduction in inventory costs.
The basic idea would be to stock the bikes centrally (excluding the token display model) and expedite delivery to the stores on an as needed basis. He figured if the principal of aggregation would work for the series 200 bike, then it should provide costs savings for all styles of bikes. Table 1, below, shows last year's sales history for the model 200 series at each retail location.
Series 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Std Dev Total
Outlet 1 9 5 15 10 12 5 3 12 23 12 8 5 5.5 119
Outlet 2 10 10 30 12 22 15 17 30 11 14 12 15 7.1 198
Outlet 3 12 22 5 15 14 23 10 4 9 15 3 5 6.7 137
Total Sales 31 37 50 37 48 43 30 46 43 41 23 25 8.9 454
As can be seen, monthly sales varied, but generally, sales remained fairly constant from year to year. Mike estimated it cost $65 every time the company placed an order for a given model at each location. The supplier's lead time is a hefty two months, but fortunately it has been constant over time. Historically, they've stocked to a 98% service level. Each bike model cost $75 per bike and Mike figures that holding cost to be 25% of the purchase price on an annual basis. With their high service level, there was naturally, a lot of extra safety stock in inventory. Mike knew every additional unit of safety stock (recall safety stock is any inventory held in excess of average demand) added directly to the total cost of inventory in the form of added holding cost. That is, total cost is equal to the cost of ordering plus the cost of holding inventory, where the cost of holding inventory is equal to the cost of holding average inventory plus safety stock.
a. Using the s, S model, what are the order quantities, reorder points, and total annual inventory costs associated with inventory management of the Series 200 line of bikes at each location?
b. What would be the order quantity, reorder point, and total annual inventory cost for a consolidated plan where bikes are stored at a central distribution center?
c. Would you recommend switching to centralized inventory management? What other factors besides costs should Mike consider?
Please see attached for full question.
This is a discussion of Supply Chain & Inventory Management for a fictitious company called Johnson Bicycles.
What is this?
By OTA - Overall OTA Rating
Rohtas Kumar, MBA - 4.9/5
Purchase Cost Now
$2.19 CAD (was ~$99.75)
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