SolutionstoReviewQuestionsSession5

ProductProcessMatrix
Solution:
Thehautecouturedepartmentofahighfashioncompanyproduceshighlycustomizedproductsin
extremelylowvolumes.Inordertoachievesuchahighlevelofcustomizationtheproduction
processmustbestructuredasanextremelyflexible(andcostly)jobshop.
Massmerchantsrelyonprocessstandardizationandeconomiesofscaletoproducelargevolumesof
lowcost,highlystandardizedproducts.
M&Sprovideanintermediatelevelofcustomizationtotheircustomers(higherthanmassmerchants
butmuchlowerthanhighfashionfirms).Thiscustomizationcanonlybeachievedifproductionis
organizedinbatches.
Zaradeliversmediumtohighperceivedcustomization(largevarietyofmodelsproducedinsmall
quantities)usingthesametypeofbatchproductionprocessesasM&S.Furthermore,thecontinuous
arrivalofnewmodelsproducedinsmallbatchesenablesZaratominimizenewsboylossesandtosell
productsofacomparable(althoughslightlylower)qualitythanM&Satalowerprice.
CompaniesthatlikeZarapursuethisstrategyofdeliveringfashionatalowcostare
transformingtheapparelindustry.Asaresultoftheirprogressivemarketpenetration,theyerode
marketsharebothfromcompanieslikeM&S(whichareincreasinglyperceivedasoutoffashion)
andfromhighfashionfirms(whichareperceivedasoutofprice).

Product

High
Some
High

customisation standardisation
Processcustomisation
High fashion

Manual
shop

Batch
flow

Rigid Line
flow

(Dior, Chanel, )

ZARA

M&S
Mass
merchants

Apparelindustry

A) Answer: b) It is typically extremely difficult and costly to improve forecasts beyond a

given level of accuracy. A better way of dealing with newsboy losses would be to
reduce lead-time (which reduces uncertainty and implicitly makes forecasting easier
and more accurate) or to supply a continuously renewed set of small batches that never
saturate the market, as Zara does.
B) Marks & Spencer. Newsboy losses are a serious concern for companies that because

of their long lead time - need to forecast demand ahead of time. This is the case for
Marks & Spencer, which have on average much longer lead times than Zara.
Alternatively one could argue that Marks & Spencer operate in a much more stable
market than Zara (traditional UK customers as opposed to young urban shoppers).

Hence in theory it would be easier for them to predict demand and to hedge
against newsboy losses. This argument is less strong than the first one, though.

LaurenceandRalph
Answer(a):Intuitively,ifL&Rcanuseareactivesupplier,theoptionvalueoftheunitpurchased
fromtheChinesesupplierdecreasescomparedtothecasewhenthereactivesupplierisnot
available.Inotherwords,withoutthereactivesupplier,ifL&Rdidnotpurchaseenoughunitsfrom
theChinesesupplier(i.e.ifdemandislargerthantheorderplaced),L&Rincuracostproportionalto
theforgoneprofit(differencebetweenthesellingpriceandthecostoforderingfromtheChinese
supplier).Whenthereactivesupplierisavailable,ifdemandislargerthantheorderplacedwiththe
Chinesesupplier,L&Rcanstillusethereactivesupplierasabackupoptionandwillincuran
opportunitycostproportionaltothedifferencebetweenthecostoforderingfromthereactive
supplierandthecostoforderingfromtheChinesesupplier.Hence,L&Rshoulddecreasetheorder
fromtheChinesesupplierwhenthereactivesupplierbecomesavailable.

ChaseJacobsChapter17Problem1(incoursepackage)
Shortagecost:$6,Excesscost:$2.50
CriticalFractile=6/8.50=0.7059
z=0.54
Buy250+0.54*34=268.36=>269[boxesoflettuce]

RevenueManagement
Shortagecost=$400,Excesscost=$100
CriticalFractile=0.8
Protect10+(3010)*0.8=26seats[assuming11demand30]

ChaseJacobsChapter17Problem2(incoursepackage)
Shortagecost(morenoshowsthanadditionalseatssold)=$125;Excesscost(lessnoshowsthan
additionalseatssold)=$250125=$125;sincetheykeepyour$125!]
Criticalfractile=0.5
z=0
Overbook25+0*15=25seats

2productscenario
Shortagecost=9010=$80(lostmarginonproduct2marginmadeonproduct1);Excesscost
=10+10=$20(productioncost+opportunitycostofnotsellingproduct1)]
Criticalfractile=0.8
z=0.84
Productionquantity:15+0.84*5=19.2=>Produce20unitsofproduct2.

DualSourcing
If you buy too many units from the Chinese supplier, you lose: Co=200-90=$110 per unit
If you buy too few units from the Chinese supplier and have to turn to the Mexican one instead,
you lose revenues: Cu = margin from Chinese supplier margin now earned using Mexican
supplier = (1000-350-200) (1000-350 300) = $100 (Or alternatively: cost increase when
sourcing from Mexico: Cu=300-200=100).
SL=Cu/(Cu+Co)= 100/(100+110)=47.6%
Z= - 0.063
Order quantity from Chinese supplier: 600 0.063*250 = 584 or 585
Expected order quantity from Mexican supplier = expected shortages from Chinese supplier =
L(z)*Sigma = 0.431 * 250 = 107,75
Hence he should source from both suppliers, with the bulk still coming from China.