3/15/2016 Practice Problem 7: Uncertainty at Dog Co | Week 1 Practice Problems | CTL.

SC1x Courseware | edX

MITx: CTL.SC1x Supply Chain Fundamentals

Week 1: Overview of Supply Chain Management & Logistics > Week 1 Practice
 Problems > Practice Problem 7: Uncertainty at Dog Co
Bookmarks

   Bookmark
 Course
Overview & PRACTICE PROBLEM 7: UNCERTAINTY AT DOG CO
Logistics
You have joined the supply chain group at Dog Co - the leading dog
supplies and food store operating in the United States.  You discover that
 Entrance prior to your arrival all inventory and stocking decisions were being made
Survey on just the average weekly demand.  The distribution of the demand was
being tracked, but it was not being used at all in any of the inventory
 Week 1: calculations. 
Overview of
Supply Chain Your manager, Hank, however, does not think you need to consider the
Management
distribution of demand.  "The average has always been good enough for
& Logistics
me!" he proclaims often and loudly.   He prefers to use the average
demand and then add in 10% on top, "Just to be safe".  This is known as
Welcome to Week
1 "Hank's Rule" at Dog Co. 

Lesson 1: Supply
You do not want to get fired, but you would like to demonstrate to Hank
Chain Perspectives
that the distribution of demand does matter and perhaps "Hank's Rule"
Lesson 2: Core should be changed.
Concepts &
Approaches
Please enter all your numerical answers with at least 4 significant figures.
Week 1 Practice
Problems

Supplemental
Materials for
Part 1
MicroMasters

Week 1 Graded
You identified two SKUs that have common average weekly demand, but
Assignment
very different standard deviations.
Homework due Feb
24, 2016 at 15:00 UTC
SKU #87990_A (Wilson Chew Toys) cost $5.95 each and you sell them for
$9.99. The weekly demand is distributed normally with a mean of 625
 Week 2: units and a standard deviation of 225 units.
Forecasting I -
Introduction SKU #333_99_J_4 (Dexter Delight Dog Treats) cost $4.25 and you sell them
for $8.00. The weekly demand is distributed normally with a mean of 630
 Week 3: units and a standard deviation of 50 units.

https://courses.edx.org/courses/course-v1:MITx+CTL.SC1x_2+1T2016/courseware/eb6a807af0324d9caaaab908133f3e7c/63b1fbbfbc1b4438b2bd073bb398f635/ 1/6
3/15/2016 Practice Problem 7: Uncertainty at Dog Co | Week 1 Practice Problems | CTL.SC1x Courseware | edX

Forecasting II - If you stocked exactly the mean of the demand for any one of the items
Exponential (that is 625 of the Wilson Chew Toys or 630 of the Dexter Delights), what is
Smoothing the probability that your demand will exceed what you have in stock for
that item? Just enter a number from 0 to 1.00 for the probability.

 Week 4:
Forecasting III -  Answer: .50
Special Cases &
Extensions

 Week 5: EXPLANATION
Inventory
Management I Exactly 50% of the time! The Normal distribution is symmetric. If we
- Deterministic have the mean value, then 50% of the time we will have demand
Demand below the average and 50% of the time we will have demand above
the average.

You have used 3 of 3 submissions

Part 2

Using the same two SKUs, you want to see how Hank's Rule applies to
each of the products and how it impacts the probability of stocking out.

What is the probability that the weekly demand for the Wilson Chew Toys
(only one SKU not both) will exceed the level set by Hanks Rule, that is
setting the inventory level at 688 (= 625 + 62.5)? Just enter a number from
0 to 1.00 for the probability.

 Answer: 0.390

EXPLANATION

We need to transform this value into the unit normal function and use
the Unit Normal Tables or your spreadsheet NORMDIST functions. For
the Wilson Chew Toys this gives us the following, k=(x-mean)/(Std Dev)
= (688-625)/225 = 0.28. Using the tables, we get Probability of Demand
being less than 688 = 0.6103 so that the Probability of Stocking out
(demand exceeding this value) = 1 - 0.6103 = 0.3887 or 0.39.

https://courses.edx.org/courses/course-v1:MITx+CTL.SC1x_2+1T2016/courseware/eb6a807af0324d9caaaab908133f3e7c/63b1fbbfbc1b4438b2bd073bb398f635/ 2/6
3/15/2016 Practice Problem 7: Uncertainty at Dog Co | Week 1 Practice Problems | CTL.SC1x Courseware | edX

I also could have used the NORMDIST function, where stocking out = 1
- NORMDIST(688, 625, 225, 1) = 1- 0.6103 = 0.3897 = 0.39. Or, I could
use the NORMSDIST function once I had already transformed it to the
Unit Normal and found the k value. Stocking out = 1 -
NORMSDIST(0.28) = 0.3897 = 0.39. There are many ways to get to the
same answer.

You have used 3 of 3 submissions

Part 3

Using the same two SKUs, you want to see how Hank's Rule applies to
each of the products and how it impacts the probability of stocking out.

What is the probability that the weekly demand for the Dexter Delights
Dog Treats will exceed the level set by Hanks Rule, that is setting the
inventory level at 693 (= 630 + 63)? Just enter a number from 0 to 1.00 for
the probability. Note: the solution to this problem will not be posted until
after the deadline.

 Answer: 0.104

EXPLANATION

We need to transform this value into the unit normal function and use
the Unit Normal Tables or your spreadsheet NORMDIST functions. For
the Dexter Delights this gives us the following, k=(x-mean)/(Std Dev) =
(693-630)/50 = 1.26. Using the tables, we get Probability of Demand
being less than 693 = 0.8962 so that the Probability of Stocking out
(demand exceeding this value) = 1 - 0.8962 = 0.1038 or 0.104.

So, the Wilson Chew Toys will stock out almost 40% of the time while
the Dexter Delights will only stock out 10% of the time - with the same
amount of extra "Hank Rule" inventory of 10% of average! We will
learn more in later weeks about how to set inventory levels using
service levels such as this. But this simple analysis shows that the
shape of the distribution matters!

https://courses.edx.org/courses/course-v1:MITx+CTL.SC1x_2+1T2016/courseware/eb6a807af0324d9caaaab908133f3e7c/63b1fbbfbc1b4438b2bd073bb398f635/ 3/6
3/15/2016 Practice Problem 7: Uncertainty at Dog Co | Week 1 Practice Problems | CTL.SC1x Courseware | edX

You have used 3 of 3 submissions

Part 4

Hank kind of believes you, but he says that that only works on the fast
moving items. He applies a different rule to slow moving items called
"Hank's Slow Mover Rule." This rule says that if average weekly demand is
less than 10, then stock the average, plus 1 unit. You pick two slow moving
items for a test:

SKU #11_9 (Griffin's Dog Bed) cost $195.95 each and you sell them for
$275. The weekly demand is Poisson distributed with a mean of 3 units.

SKU #3765 (Cody Indestructible Chewables) cost $35.50 and you sell them
for $78.00. The weekly demand is Poisson distributed with a mean of 6
units.

What is the probability that your demand for Griffin Beds will exceed the
level set by Hank of 4 units (=3+1)? Just enter a number from 0 to 1.00 for
the probability.

 Answer: 0.18

EXPLANATION

Using the Poisson Distribution tables, looking at lambda = 3, we can

see the the probability that there are no more than 4 units of demand
is equal to 0.81526. So, the probability of having too little inventory
and stocking out = 1-0.81526 = 0.18474 = 0.18.

You have used 3 of 3 submissions

Part 5

What is the probability that your demand for Cody Indestructible

Chewables will exceed the level set by Hank of 7 units (=6+1)? Just enter a
number from 0 to 1.00 for the probability.

https://courses.edx.org/courses/course-v1:MITx+CTL.SC1x_2+1T2016/courseware/eb6a807af0324d9caaaab908133f3e7c/63b1fbbfbc1b4438b2bd073bb398f635/ 4/6
3/15/2016 Practice Problem 7: Uncertainty at Dog Co | Week 1 Practice Problems | CTL.SC1x Courseware | edX

 Answer: 0.26

EXPLANATION

Using the Poisson Distribution tables, looking at lambda = 6, we can

see the probability that there are no more than 7 units of demand is
equal to 0.74398. So, the probability of having too little inventory and
stocking out = 1-0.74398 = 0.25702 = 0.26

Alternatively, you could use the POISSON function in your

spreadsheet.

So, Hank's "add 1 unit" rule does not have the same effect. You can
see that it might over protect really slow movers and under protect
faster movers. We will learn later how to set these inventory levels.

You have used 3 of 3 submissions

Part 6

Even after presenting your analysis, Hank is hesitant to change his rules.

What should you do?

Quit Dog Co and get a job at Zaragoza Auto Supply or Boston Arts

Suggest that Hank take CTL.SC1x

Create a presentation that demonstrates how the lost sales and/or

extra inventory costs impact Hank's bonus

Create a presentation that demonstrates how the lost sales and/or

extra inventory costs impact Dog Co for Hank to use in a presentation
to his boss 

https://courses.edx.org/courses/course-v1:MITx+CTL.SC1x_2+1T2016/courseware/eb6a807af0324d9caaaab908133f3e7c/63b1fbbfbc1b4438b2bd073bb398f635/ 5/6
3/15/2016 Practice Problem 7: Uncertainty at Dog Co | Week 1 Practice Problems | CTL.SC1x Courseware | edX

EXPLANATION

We did not include points for this one - it is just for you to think about.
As we will learn later, sometimes the form of the message and how it
is delivered matters as much (if not more) than the actual message.
Perhaps Hank feels threatened by you and perhaps he does not know
how to translate the inventory savings into bottom line impacts to the
overall company.

You have used 3 of 3 submissions

© All Rights Reserved

© edX Inc. All rights reserved except where noted. EdX, Open edX and the edX and Open EdX logos are registered
trademarks or trademarks of edX Inc.

     

https://courses.edx.org/courses/course-v1:MITx+CTL.SC1x_2+1T2016/courseware/eb6a807af0324d9caaaab908133f3e7c/63b1fbbfbc1b4438b2bd073bb398f635/ 6/6