1.

Risk Pooling Problems Case on Risk Pooling of the book, page 49 Compare the two systemsa) Without risk pooling b) With risk pooling with the following parameters: 99% service level Assume all other parameters are same as given in the case. Provide qualitative and quantitative solutions Qualitative solution With random demand, it is very likely that a higher-than-average demand at one retailer will offset by a lowerthan-average demand at another. As the number of retailers served by a warehouse goes up, the likelihood that the two will offset will also increase, which is inline with the forecasting principle that states aggregate forecasts are more accurate. This argument is in favor of the centralized system (single warehouse).

Product A week 1 2 3 4 3 Ms 3 45 37 38 4 NJ 6 35 41 40 7 Total 9 80 78 78 Product A: Massachusetts Total AVG = Pr o Total Weekly d u Deman ct 5 55 26 81 6 30 48 78 7 18 18 36 av. 8 Dd 58 55 11 3 39.25 38.62 5 77.87 5 SD 13.18 11.268 73 19.374 19 CoV S Stock 0.3357 30.709 96 4 0.2917 26.256 47 15 0.2487 45.141 86 87 New Jersey R Q 69.959 4 132 64.881 15 131 123.01 69 186

d/numb er of Weeks =39.25 38.625 77.875 Expecte d deman d during lead time = L * AVG = 1*39.25 1*38.62 5 1*77.87 5 = 39.25 38.625 77.875 SD = (weekl y ddAVG)2/ n-1 =

13.18 11.27 19.37 CoV = SD/AVG = 13.18/3 9.25 = 0.34 0.29 0.25 Safety Stock = Z *SD *L = 2.33 *13.18 *1 =30.71 26.27 45.14 Reorder Point = Expecte d dd during lead time + safety stock = 39.25

+30.71 =69.96 64.88 123 Order Quantit y (Q) = (2K*A VG)/h K =$60, h= $0.27 = (2*60*3 9.25)/.2 7 = 132 units 131 186 1 Week 0 Ms 2 NJ 2 Total 7 3 0 3 2 3 4 0 0 3 1 0 3 3 0 0 1 3 2 3 4 5 6 7 8 Av. STD CoV S Stock R Q DD 0 1.25 1.3919 1.1135 3.2432 4.4932 24 41 53 23 23 0 1.25 1.4790 1.1832 3.4461 4.6961 24 2 16 16 16 0 2.5 2.0615 0.8246 4.8034 7.3034 34 53 21 18 18

Product B: Massachusetts New Jersey Total AVG = Total Weekly Demand/number of Weeks =1.25 1.25 2.5 Expected demand during lead time = L * AVG = 1*1.25 1*1.25 1*2.5 = 1.25 1.25 2.5 SD = (weekly dd-AVG)2/n-1 = 1.39 1.47 2.06 CoV = SD/AVG = 1.39/1.25 = 1.11 1.48 0.82 Safety Stock = Z *SD *L = 2.33 *1.39 *1 =3.24 3.45 4.80 Reorder Point = Expected dd during lead time + safety stock = 1.25 +3.24 =4.49 4.7 24 Order Quantity (Q) = (2K*AVG)/h K =$60, h = $0.27 = (2*60*1.25)/.27 = 24 units 24 34 SD measures the absolute variability of customer demands, while the coefficient of variation measures variability relative to average demand Example: Product A has a much larger SD (13.18, 11.27 & 19.37) while Product B has a significant larger CoV (1.11, 1.48 & .82) The average demand Product A SD CoV Safety Stock R Q

M 39.25 13.18 .34 30.7 70 132 NJ 38.625 11.27 .29 26.26 65 131 Total 77.875 19.37 .25 45.14 124 186 Average dd faced by the centralized distribution system equals the sum of the two The variability faced by the centralized distribution is much smaller than the sum of the two both in terms of SD and CoV Average inventory for product A at the Massachusetts = SS + Q/2 = 30.7 + 66 =97 at the New Jersey = 26.26 + 65.5 =92 = 189 average inventory for Product A in the centralized system = 45.14 + 93 = 138 Thus, average inventory for product A is reduced by 37% (189-138)/138 if the centralized system is used Average inventory for Product B at the Massachusetts = 3.24 +12 = 15.24 Average inventory for Product B at the New Jersey = 3.45 + 12 = 15.45 =31 Average inventory for Product B at the centralized system is = 4.80 + 17 = 22 Thus, average inventory for Product B is reduced by 41% (31-22)/22 if the centralized system is used 2. Example 7-6, page 243 Given: Wholesale price $80 Selling price 125 Production cost 35 Salvage value 20 Profit in decentralized system Each dealer can order 12000 units Profit per retailer = $540,000 Manufacturers profit = $440000*2 = $880,000 Total supply chain Profit = $1,080,000 +$880,000 =$1,960,000 Profit in centeralized system Both Retailers can order 26,000 units altogether B. Supply Contract Problems Retail price $28

Wholesale price 20 Salvage value 50% of retail price = 14 The store estimates that demand during the season is normal with a mean of 1000 and a SD of 250 a). Quantit 250 500 750 1000 1250 1500 1750 y Average 2000 4000 6000 8000 6500 5000 3500 P Given the information, the optimal order Q for the store is 1000 units Whether the optimal quantity is less than or greater than the expected average demand or not requires to look at the marginal profit and marginal loss figures Marginal profit = retail price wholesale price = $28-20 = $8 Marginal loss = wholesale price salvage value = $20 -14 = 6 Thus, in general terms if MP <ML, then the optimal order quantity is less than the average demand; while if the ML>MP, then the optimal order quantity is greater than the average demand. This is only true if maximizing average profit is in fact the goal of the firm. b). With buy-back contract The publisher offers $17 price for unsold copies; and the store is required to ship back the unsold copies which results in a $1.00 cost per copy Q 250 500 750 1000 1250 1750 2000 Ave. P 2000 4000 6000 8000 7000 6000 5000 Given the information, the optimal order quantity Q for the store is still 1000 units 2. Example 4.3 of the text book, page 130 Two companies involved in the supply chain: a retailer and a manufacturer Given Retail Price Rs. 125 Wholesale price = Rs. 80 Salvage value = Rs. 20 For the manufacturer Fixed Production cost is Rs. 100,000

The variable production cost per unit equals Rs. 35 Determine the profit of the supply chain under two scenarios: a) No coordination (sequential supply chain)
8000 0.11 10000 0.11 12000 0.27 14000 0.23 16000 0.17 18000 0.1 price WS price SV VC FC 26000 0 Ex P 28600 36000 0 39600 35000 0 38500 45000 0 49500 44000 0 11880 0 54000 0 14580 0 50500 0 11615 0 60500 0 13915 0 54500 0 92650 64500 0 10965 0 58500 0 58500 68500 0 68500 125 80 20 35 10000 0

Manu

Ret Ex P

The optimal order quantity is 12,000 units Total supply chain profit Retailers profit + manufacturers profit = Rs. 540,000 + 440,000 = Rs. 980,000 b) Buy-back contract with a buy-back price of Rs. 50 With buy-back contract
8000 0.11 10000 0.11 12000 0.27 14000 0.23 16000 0.17 18000 0.1 price WS price SV VC FC 125 80 20 35 1000 00

BB 26000 0 28600 Retail er 36000 0 39600 35000 0 38500 45000 0 49500 44000 0 11880 0 54000 0 14580 0 51500 0 11845 0 63500 0 14605 0 57500 0 97750 73500 0 12495 0 63500 0 63500 83500 0 83500

50

Manu