Q1.

Consider the following demand scenario:

Quantit Probability
y
9,000 15%
11,000 18%
13,000 21%
15,000 25%
17,000 11%
19,000 10%
Suppose the manufacturer produces at a fixed cost of $150,000 and a variable cost of
$63/unit. The manufacturer sells the products to the retailer at the wholesale price of
$77/unit. The retailer sells to end customers for $115/unit. Unsold products will be sold to the
discount store at the price of $22/unit after the season.
a. What is the supply chain’s marginal profit and marginal loss?
b. Given that the order quantity is 15,000 units, what is the expected profit under global
optimization?
(Note: Students are required to provide detailed calculation for the expected
profit of D = 11,000 and D = 17,000. Profits of the remaining demands can be
shown in a table.)
Suppose the manufacturer is make-to-order, the manufacturer and retailer have a supply
contract, in which the manufacturer agrees to decrease the wholesale price from $77 to $65,
and in return, the retailer provides 16 percent of the product revenue to the manufacturer.
c. What is this type of supply contract?
c. What is the retailer’s marginal profit and marginal loss? What is the manufacturer’s
marginal profit?
c. Given that the order quantity is 15,000 units, what are the expected profit for the
manufacturer and the retailer?
(Note: Students are required to provide detailed calculation for the expected
profit of D = 11,000 and D = 17,000. Profits of the remaining demands can be
shown in a table.)

Q2.
Marriott is a company that sells copiers. Marriott currently sells 15 variants of a copier, with
five distinct components: photoreceptor drum, corona cable, lamp, toner, and duplex. With
the disaggregate option, Marriott must design specific components for each copier variant.
Under the common-component option, Marriott designs variants such that three distinct
photoreceptor drums, three distinct corona cables, three distinct lamps, three distinct toners,
and three distinct duplexes can be combined to create 15 copier variants. Monthly demand
for each of the 15 copier variants is independent and normally distributed, with a mean of
1,000 and a standard deviation of 200. The replenishment lead time for each component is
two months. Marriott is targeting a customer service level of 95 percent for component
inventory. Given that F (0.95) = 1.645.
-1

a. What is the total safety inventory required under disaggregate option?

b. What is the total safety inventory required under common-component option?
c. Which option should Marriott choose in order to reduce the safety inventory,
disaggregate or common-component option? Why? If so, what is the percentage of
safety inventory that was reduced by using that option?

Q3.
Orion is one of the biggest truck firms in Vietnam. Orion has a current capacity of 350,000
cubic feet. A large manufacturer is willing to purchase the entire capacity at $0.20 per cubic
foot per day. The manager at Orion has observed that on the spot market, trucking capacity
sells for an average of $0.29 per cubic foot per day. Demand, however, is not guaranteed at
this price. The manager forecasts daily demand on the spot market to be exponentially
distributed, with a mean of 82,600 cubic feet.
a. What are the unit overstocking cost and the unit understocking cost?
b. What are the probability of overstocking and the probability of understocking?
c. How much trucking capacity should the manager save for the spot market to
maximize the expected revenue?
d. If the daily demand on the spot market is normally distributed, with a mean of 75,000
cubic feet and a standard deviation of 25,000, how much trucking capacity should the
manager save for the spot market to maximize the expected revenue?

Q4.
Helen Wu, vice president of supply chain at Michelle’s Hardware, was looking at the financial
results from the past quarter and thought that the company could significantly improve its
distribution costs.
Michelle’s had 32 stores in Indiana and sourced its products from eight suppliers located in
the Midwest. The company began in Indiana and its stores in the state enjoyed strong sales.
Each Indiana store sold, on average, 50,000 units a year of product from each supplier (for
annual sales of 400,000 units per store). Given the large sales at its Indiana stores,
Michelle’s followed a direct-ship model and shipped small truckloads (with a capacity of
10,000 units) from each supplier to each of its Indiana stores. Each small truck cost $450 per
delivery from a supplier to an Indiana store and could carry up to 10,000 units. Holding costs
for Michelle’s were $1 per unit per year.
Helen asked her staff to propose different distribution alternatives for Indiana. Helen’s staff
proposed two alternative distribution strategies for the stores in Indiana:
 Alternative 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 Indiana store.
Using larger trucks would lower transportation costs but increase inventories because
of the larger batch sizes.
 Alternative 2: Run milk runs from each supplier to multiple stores in Indiana 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. Given that the suppliers run milk runs to four stores on each
truck.
a. What is the annual distribution cost of the current distribution network? Include
transportation and inventory costs.
b. How should Helen structure distribution from suppliers to the stores in Indiana,
Alternative 1 or Alternative 2? What annual savings can she expect?
What changes in the distribution network (if any) would you suggest as the Indiana’s market
grows?

Q5.

relationship between demand, D, and price, p, by the linear function D=2000-0.6p. The
Consider a retailer selling a single item. Based on past experience, management estimates the

retailer is considering differential pricing strategies for different market segments.

a. At what price is revenue maximized? What is the total revenue if this price is applied?

(p1=$1,000 and p =$1,600), what is the total revenue?

b. If the retailer employs the two-tier pricing strategy, in which he introduces two prices

c. If the retailer employs the three-tier pricing strategy (p =$1,000, p =$1,600 and
2

p =$1,800), what is the total revenue?

1 2

d. Which strategy will include the highest total revenue? How much higher in $ and % of
this strategy comparing with the other two policies?
(Requirement: Show step-by-step manual calculation for this problem)

Q6.
The Park Hyatt Philadelphia has 118 King/Queen rooms. Full fare is $225 targeting business
travelers. Also, Hyatt offers a discount fare of $159 for a mid‐week stay targeting leisure
travelers. Demand for low fare rooms is abundant. Most of the high fare demand occurs
within a few days of the actual stay and follows an exponential distribution with mean 27.3.
a. What are the unit overstocking cost and the unit understocking cost?
b. What are the probability of overstocking and the probability of understocking?
c. How many rooms should be protected for full fares to minimize expected cost
(maximize expected total revenue)? Hint: Use inverse-transformation of exponential
cumulative distribution.
(Requirement: Show step-by-step manual calculation for this problem)

Q7.
Icie is a chain of retail stores that sells 32 flavors of slushy – a partially frozen drink made
with crushed ice and fruit-flavored syrup. The weekly demand for each flavor of slushy is
independent and is normally distributed with N(100,121). The replenishment lead time from
the factory is three weeks and Icie aims for a customer service level of 95%.
a. How much safety stock will Icie have to hold if the slushies are mixed at the factory
and held in inventory at the retail store as individual flavors?
b. How does the safety stock requirement change if Icie holds the crushed ice and adds
the fruit-flavored syrup on demand?
c. Based on the results of part a and b, which strategy should Icie use to optimize the
amount of safety stock? Why?
(Requirement: Show step-by-step manual calculation for this problem)

Q8.
a. What are the benefits and drawbacks of postponement?
b. A new technology allows books to be printed in 10 minutes. Fahasa has decided to
purchase these machines for each store. It must decide which books to carry in stock
and which books to print on demand using this technology. Do you recommend it for
best sellers or for other books? Why?

Q9.
Apple manufactures 20 laptops with four distinct components: processor, memory, hard drive
and motherboard. Under the disaggregate option, Apple designs specific components for each
laptop, resulting in 20x4=80 distinct components. Under the common-component option,
Apple designs laptops such that two distinct processors, two distinct memory units, two
distinct hard drives and two distinct motherboards can be combined to create 20 laptops.
Monthly demand for each of the 20 laptops is independent and normally distributed, with a
mean of 10,000 and a standard deviation of 2,000. The replenishment lead time for each
component is one month. Apple is targeting a CSL of 95 percent for component inventory.
 a. Evaluate the safety inventory requirements with and without the use of component
commonality.
b. Calculate the percentage of safety inventory that was reduced by using component
commonality.
(Requirement: Show step-by-step manual calculation for this problem)

Q10.
a. Give an example of modular and nonmodular products and processes.
b. How do standardization strategies help managers deal with demand variability and the
difficulty of making accurate forecasts?
c. What are the advantages and disadvantages of integrating suppliers into the product
development process?