Sample Quiz

SAMPLE QUIZ SOLUTIONS

[1]

Consider a manufacturer selling 2 brands of soaps with very similar prices.

Customers are generally willing to buy either brand of soap depending on product
availability. If you just consider this market, encouraging substitutability helps
the manufacturer.
True / False.
Justify your answer briefly.
True. Helps reduce safety stock costs through aggregation while maintaining the
customer base (i.e., not losing them because they are willing to substitute).

[2]

Reduction in supply uncertainty has no effect on safety inventory.

True / False.
Justify your answer briefly.
False. Higher the uncertainty (variance) higher the safety stock required to
maintain the same CSL.

[3]

Fill rate is always less than CSL.

True / False.
Justify your answer
False. Fill rate measures the probability that there will be stockout during the
replenishment cycle while the CSL measures the probability of stockout during
leadtime.

LSCMSample Quiz

[4]

The safety stock with a periodic review policy is smaller than the safety stock with
a continuous review policy.
True / False.
Justify your answer briefly.
while for a continuous review
False. For the periodic review model
model
The safety stock is proportional to the standard deviation
and hence is higher for a periodic review policy (assuming the same CSL level has
to be maintained). Essentially, safety stock with a periodic review policy must
account
for
the
length
of
time
between
orders,
not
just the inventory level dropping below a certain level.

[5]

Two firms, A and B, each have a global network of production facilities for disk
drives that sell to OEMs around the world. The two firms are investigating the
value of a merger. Each firm has some excess capacity. Is it possible for the firms
to gain any synergies without shutting down any facility? Explain.
Yes. Consolidating and reallocating how customers are supplied in the new
network may lead to additional saving, i.e., the transportation, production, and
inventory holding costs can be reduced. Furthermore, excess capacity in the
network may improve the ability of the combined firm to deal with uncertainty
especially in a global distribution network. Capacity and flexibility can be treated
as operational options available to the combined firm and must be valued
accordingly.

[6]

As forward buying increases

(a) Offering a promotion during the peak demand period becomes more attractive
(b) Offering a promotion during the low demand period becomes more attractive
(c) The amount of forward buying has no impact on when a promotion should be
offered.
Explain your answer.
(b). Allows the firm to smoothen demand.

[7]

Many industries experience the hockey stick phenomenon where sales people
bring in majority of their orders towards the end of an incentive period. For
example, if sales people get quarterly incentives, sales in the last 2-3 weeks of
the quarter form a large fraction of total sales. Why is the hockey stick

LSCMSample Quiz

phenomenon observed? What can a firm do to dampen the hockey stick

phenomenon?
Essentially, the salesforce waits until most of the uncertainty is resolved (which
happens towards the end of the incentive horizon) and then make additional effort
to reach the threshold/target sales set by the firm that offers the incentive. These
incentives are typically called sales quotas or threshold-based incentives, where,
the firm offers an additional bonus on reach a target sales value.
One way to deal with this is to offer an incentive over a rolling horizon (i.e., not
just a fixed time horizon with no overlap with the next incentive period). This
helps to smoothen out the spike in the sales effort and last period sales.
[8]

makes aluminum trays used for baking. manufactures over 500 different
SKUs. Demand is highly seasonal with 50% of the annual demand in the months
of November and December. produces half the expected demand during the
peak season in advance and half during the peak season. Which production
strategy do you recommend for and why:
a. Produce low uncertainty products in advance and high uncertainty products
during the peak season.
b. Produce high uncertainty products in advance and low uncertainty products
during the peak season.
c. Produce 50% of forecast demand for each SKU in advance and produce the
rest during the peak season.
Explain.
(a). should produce low uncertainty products in advance and high uncertainty
products during the peak season. This controls the probability of overstocking
(which is the primary risk for producing during the speculative production phase)
and
allows

to
reserve
reactive
capacity
for
high
uncertainty whose demand can be better estimated closer to the selling season.

[9]

What kind of quantity discounts offered in the industry? Which one is preferred in
terms of overall supply chain cost and give two reasons why?
(1)
(2)

Lot size based discounts all unit and marginal

Volume based discounts

While both coordinate the supply chain, lot size based discounts tend to increase
the cycle inventory in the supply chain. On the other hand volume based
discounts are based on the sell-through (rate of sale) volume and do not
unnecessarily increase cycle inventory. Lot-size based discounts are not optimal
in the presence of high inventory costs volume-based discounts perform better
in this case. Another benefit is that volume based discounts may actually benefit
the end-consumer rather than the intermediary in the supply chain.

LSCMSample Quiz

[10]

Krantz Co., Inc. is a small retail widget company operating at a desired CSL of
50%. The company purchases seasonal widgets from its suppliers at a cost of
$65 and is able to sell them in its retail stores for $115. At the end of each sales
season, Krantz Co., Inc. is able to sell any leftover merchandise to discount
retailers for a net salvage value of $50. Recently, the company has been thinking
of improving its CSL to a new level of 75%.
If Krantz Co., Inc. does decide to operate at the new CSL of 75%, the implied
shadow price of capacity would
a) Increase by _____ %
b) Decrease by 92.9 %
c) Remain Unchanged
Applicable formulas & variables:
r = Retail sales price
c = purchase cost
s = salvage cost
Cu = r c = Cost of under-stocking
Co = c s = Cost of over-stocking
p = (Probability of NOT stocking out)
p = (Cu v) / (Cu + Co) = CSL
v = Shadow price of capacity
v = Cu (Cu + Co)p
Given:
r = $115
c = $65
s = $50
CSLold = pold = 50%
CSLnew = pnew = 75%
Calculations:
Cu = $115 - $65 = $50
Co = $65 - $50 = $15
Cu + Co = $50 + $15 = $65
vold =$50 ($65)(50%) = $17.50
vnew =$50 ($65)(75%) = $1.25
Therefore:
($1.25 - $17.50) / $17.50 = -92.9% change in shadow price of capacity as CSL
increases from 50% to 75%.