MARKS:100 COURSE:MRSM

SUB:SUPPLYCHAINMANAGEMENT

N.B.:

1) 2)

Allquestionscarriesequalmarks. Allquestionsarecompulsory

MARKS : 80 COURSE :MRSM

SUB : SUPPLY CHAIN MANAGEMENT

N.B.: 1) Attempt any Four cases 2) All cases carries equal marks. CASE 1 1. MANAGING GROWTH AT SPORTSTUFF.COM In December 2000, Sanjay Gupta and his management team were busy evaluating the performance at SportStuff.com over the last year. Demand had grown by 80 percent over the year. This growth, however, was a mixed blessing. The venture capitalists supporting the company were very pleased with the growth in sales and the resulting increase in revenue. Sanjay and his team, however, could clearly see that costs would grow faster than revenues if demand continued to grow and the supply chain network was not redesigned. They decided to analyze the performance of the current network to see how it could be redesigned to best cope with the rapid growth anticipated over the next three years.

SPORTSTUFF.COM Sanjay Gupta founded SportStuff.com in 1996 with a mission of supplying parents with more affordable sports equipment for their children. Parents complained about having to discard expensive skates, skis, jackets, and shoes because children outgrew them rapidly. Sanjays initial plan was for the company to purchase used equipment and jackets from families and any surplus equipment from manufacturers and retailers and sell these over the Internet. The idea was very well received in the marketplace, demand grew rapidly, and by the end of 1996 the company had sales of $0.8 million. By this time a variety of new and used products were sold and the company received significant venture capital support. In June 1996, Sanjay leased part of a warehouse in the outskirts of St. Louis to manage the large amount of product being sold. Suppliers sent their products to the warehouse. Customer orders were packed and shipped by UPS from there. As demand grew, sportStuff.com leased more space within the warehouse. By 1999, SportStuff.com leased the entire warehouse and orders were shipped to customers all over the United States. Management divided the United States into six customer zones for planning purposes. Demand from each customer zone in 1999 was as shown in Table. Sanjay estimated that the next three years would see a growth rate of about 80 percent per year, after which demand would level off. THE NETWORK OPTIONS Sanjay and his management team could see that they needed more warehouse space to cope with the anticipated growth. One option was to lease more warehouse space in St. Louis itself. Other options included leasing warehouses all over the country. Leasing a warehouse involved fixed costs based on the sized of the warehouse and variable costs the varied with the quantity shipped through the warehouse. Four potential locations for warehouse were identified in Denver, Seattle, Atlanta, and Philadelphia. Warehouses leased could be either small warehouses could handle a flow of up to 2 million units per year whereas large warehouses could handle a flow of up to 4 million units per year. The current warehouse in St. Louis was small. The fixed and variable costs of small and large warehouses in different locations are shown in Table (b).

TABLE a) Regional Demand at SportStuff.com for 1999 Zone Demand in 1999 Northwest 220,000 Southwest 350,000 Upper Midwest 320,000 200,000 160,000 Lower Midwest Northeast Southeast 175,000 Demand in 1999 Zone

TABLE b) Fixed and Variable Costs of Potential Warehouses Small Warehouse Fixed Cost Variable Cost Location ($/year) ($/unit flow) Seattle 0.2 Denver 0.2 St. Louis 0.2. Atlanta 0.2 Philadelphia 0.2 TABLE c) 300,000 250,000 220,000 220,000 240,000 Variable Cost ($/unit flow) 0.20 0.20 0.20 0.20 0.20 Large Warehouse Fixed Cost ($ / year) 500,000 420,000 375,000 375,000 400,000

UPS Charges per Shipment (Four Units) Upper Midwest $3.50 $2.50 $2.50 $3.00 Lower Midwest $4.00 $3.00 $2.50 $2.50

Northwest Southwest Northeast Southeast

Seattle $2.00 $2.50 $5.00 $5.50 Denver $2.50 $2.50 $4.00 $4.50 St. Louis $3.50 $3.50 $3.00 $3.50 Atlanta $4.00 $4.00 $3.00 $2.50

Philadelphia $2.50

$4.50 $4.00

$5.00

$3.00

$3.50

Sanjay estimated that the inventory holding costs at a warehouse (Excluding warehouse expense) was about $600 F where F is the number of units flowing through the warehouse per year. Thus, a warehouse handling 1,000,000 units per year incurred an inventory holding cost of $600,000 in the course of the year. following inventory costs: Range of F 0 2 million 2 4 million 4 6 million Over 6 million $475,000+0.1565F. SportSuff.com charged a flat fee of $3 per shipment sent to a customer. An average customer order contained four units. SportStuff.com in turn contracted with UPS charges were based on both the origin and the destination of the of the of the shipment and are shown in Table (c) Management estimated that inbound transportation costs for shipments from suppliers were likely to remain unchanged, no matter what the warehouse configuration selected. QUESTIONS :1. What is the cost SportStuff.com incurs if all warehouses recommend for SportStuff.com ? leased are in St. Louis ? What supply chain network configuration do you Inventory Cost $250,000 + 0.310F $530,000 + 0.170F $678,000 + 0.133F $798,000 + 0.113F If your version of Excel has problems solving the nonlinear objective function, use the

If student can handle only a single linear inventory cost they should use

CASE 2 Julie Williams had a lot on her mind when she left the conference room at Specialty Packaging Corporation (SPC). Her divisional manager had informed her that she would be assigned to a team consisting of SPSs marketing vice president and several staff members from their key customers. The goal of this team was to improve supply chain performance, as SPC had been unable to meet all the demand of their customers over the past several years. This often left SPCs customers scrambling to meet new client demands. Julie had little contact with SPCs customers and wondered how she would add value to this process. She was told by her division manager that the teams first task was to establish a collaborative forecast using data from both SPC and their customers. This forecast would serve as the basis for improving their With this in place, SPC would have a key tool to performance as they could use this more accurate forecast for their production planning. improve delivery performance. SPC

SPC turns polystyrene resin into recyclable /disposable containers for the food industry. Polystyrene is purchased as a commodity in the form of resin pellets. The resin is unloaded from bulk rail containers or overland trailers into storage silos. Making the food containers is a two step process. First, resin is conveyed to an extruder, which converts it into polystyrene sheet wound into rolls. The plastic comes in two formed clear and black. The rolls are either used immediately to make containers or are put into storage. Second, the rolls are loaded onto thermoforming presses, which from the sheet into containers and trim the containers from the sheet. The two manufacturing steps are shown in Figure. Over the past five years, the plastic packaging business has grown steadily. Demand for containers made from clear plastic comes from grocery stores, bakeries, and restaurants. Demand for black plastic trays comes from caterers and grocery stores, who use them as packaging and serving trays. Demand for clear plastic containers peaks in the summer months, whereas demand for black plastic containers peaks in the fall. Capacity on the extruders is not sufficient to cover demand for sheets during the peak seasons. As a result, the plant is forced to build inventory of each type of sheet in anticipation of future demand. Table(b) and Figure(c) display historical quarterly demand for each of the two types (clear and black) of containers. This demand data was modified from SPCs sales data by the team to take into account the lost sales when SPC was out of stock. Without the customers involved in this team, SPC would never have known this information as they did not keep track of lost orders. QUESTION :-

As a first step in the teams decision making, they want to forecast quarterly demand for each of the two types of containers for the years 2003 to 2005. Based on historical

trends, demand is expected to continue to grow until 2005, after which it is expected to plateau. Julie must select the appropriate forecasting method and estimate the likely forecast error. Which method should she choose ? FIGURE a) Manufacturing Process at SPC Step 1 Step 2 ThermoResin forming Storage Press Extruder Roll Storage

TABLE

b)

Quarterly Historical Demand for Clear and Black

Plastic Containers Black Plastic Demand Plastic Demand Year Ibs.) 1998 I II III IV I II Quarter 2,250 1,737 2,412 7,269 3,514 2,143 (000 Ibs.) 3,200 7,658 4,420 2,384 3,654 8,680 Clear (000

1999

2000

2001

2002

III IV I II III IV I II III IV I II III IV

3,459 7,056 4,120 2,766 2,556 8,253 5,491 4,382 4,315 12,035 5,648 3,696 4,843 13,097

5,695 1,953 4,742 13,673 6,640 2,737 3,486 13,186 5,448 3,485 7,728 16,591 8,236 3,316

FIGURE Plastic

c)

Plot of Quarterly Demand for Clear and Black Containers

CASE 3 MINTENDO GAME GIRL

It is late June, and Sandra, head of operations at Mintendo, and Bill, head of sales of We R Toys, are about to get together to discuss production and marketing plans for the next six months. Mintendo is the manufacture of the popular Game Girl handheld electronic game that is sold exclusively through We R Toys retail stores. The second half of the year is critical to Game Girls success because a majority of their sales occur during the holiday shopping period. Sandra is worried about the impact that the upcoming holiday surge in demand will have on her production line. Costs to subcontract assembly of the Game Girls are expected to increase and she has been trying to keep costs down given the her bonus depends on the level of production costs. Bill is worried about competing toy stores gaining share during the Christmas buying season. He has seen many companies lose their share by failing to keep prices in line with the performance of their products. He would like to maximize the Game Girl market share. Both Sandra and Bills teams produce a joint forecast of demand over the next six months, as shown in Table a. We R Toys sells Game Girls for $50 a piece. At the end of June, the company has an inventory of 50,000 Game Girls. Capacity of the production facility is set purely by the number of workers assembling the Game Girls. At the end of June, the company has a work force of 300 employees, each of whom work eight hours of non overtime at $15/hour for twenty days each month. Work rules require that no employee work more than forty hours of overtime a month. The various costs are shown in Table b. Sandra, concerned about controlling costs during the periods of surging demand over the holidays, proposes to Bill that the price be lowered by $5 for the month of September. This would likely increase Septembers demand by 50 percent due to new customers attracted to

Game Girl. Additionally, 30 percent of each of the following two months of demand would occur in September as forward buys. She strongly believes that this leveling of demand will help the company. Bill counters with the idea of offering the same promotion in November, during the heart of the buying reasons. customers attracted to Game Girl. Additionally, In this case, the 30 percent of Bill promotion increases Novembers demand by 50 percent due to new Decembers demand would occur in November as forward buying. a promotion during the peak season.

wants to increase revenue and sees no better way to do this than to offer

TABLE a) Demand for Game Girls Month July August September October November December Demand Forecast 100,000 110,000 130,000 180,000 250,000 300,000

TABLE b) Costs for Mintendo/We R Toys Item Material cost Inventory holding cost Marginal cost of a stockout Hiring and training costs Layoff cost Labour hours required Regular time cost Over time cost Cost of subcontracting QUESTION :Cost $12/unit $4/unit/month $10/unit/month $3000/worker $5000/worker .25/unit $15/unit $22.50/hour $18/unit

1.

Which Option delivers the maximum profit for the supply chain:Sandras plan, Bills plan, or no promotion plan at if a discount of $10 must be discount increasing the decision fears this about

all ? How does the answer change received ? Suppose Sandras

given to reach the same level of impact that the $5

outsourcing costs come to fruition and the cost rises to $22/unit for subcontracting. Does when the discount is $5 ? change

CASE 4 MANAGING INVENTORIES AT ALKO INC. ALKO started in 1943 in a garage workshop set up by John Williams at his Cleveland home. John had always enjoyed tinkering and in February 1948, he obtained a patent for one of his designs for lighting fixtures. He decided to produce it in his workshop and tried marketing it in the Cleveland area. The product sold well and by 1957 ALKO had grown to a $3 million company. Its lighting fixtures were well known for their outstanding quality. By then, it sold a total of five products. In 1963 John took the company public. Since then ALKO has been very successful and the company has started distributing its products nationwide. As competition intensified in the 1980s, ALKO started introducing many new lighting fixture designs. The companys profitability, however, started to worsen despite the fact that ALKO had taken great care to ensure that product quality did not suffer. The problem was that margins started to shrink as competition in the market intensified. As this point the board decided that a complete

reorganization was needed, starting at the top. hired to reorganize and restructure the company.

Gary Fisher was then

When Fisher arrived in 1999, he found a company teetering on the edge. He spent the first few months trying to understand the company business and the way it was structured. Fisher realized that the key was in the operating performance. Although the company had always been outstanding at developing and producing new products, they had historically ignored their distribution system. itself. The feeling within the company was that once you make a good product, the rest takes care of Fisher set up a task force to review the companys current distribution system and come up with recommendations. THE CURRENT DISTRIBUTION SYSTEM The task force noted that ALKO had 100 products in its 1999 line. All production occurred at three facilities located in the Cleveland area. For sales purposes, the continental United Sates was divided into five regions, as shown in Figure (a) A DC owned by ALKO operated in each of these regions. Customers placed orders with the DCs, which tried to supply As inventory for any product them from product in inventory.

diminished, the DC in turn ordered from the plants. The plants scheduled production based on DC orders. Orders were transported from plants to the DCs in TL quantities because order sizes tended to be large. On the other hand, shipments from the DC to the customer were LTL. ALKO used a third party trucking company for both transportation legs. In 1999 TL costs from the plants to DCs averaged $0.09 per unit. LTL shipping costs from a DC to a customer averaged $0.10 per unit. On average, five days were necessary between the time a DC placed an order with a plant and the time the order was delivered from the plant. The policy in 1999 was to stock each item in every DC. A detailed study of the product line had shown that there were three basic

categories of products in terms of the volume of sales. categorized as types High, Medium, and Low.

They were

Demand data for a

representative product in each category is shown in Table (b). Products 1,3 and 7 are representative of High, Medium, and Low products, respectively. Of the 100 products that ALKO sold, 10 were of type High, 20 of type Medium, and 70 of type Low. The task force identified that Each of their demands was capacities allowed any identical to those of the representative products 1,3 and 7, respectively. plant reasonable order to be produced in one day. Thus, a plant shipped out an order one day after receiving it. After another four days in transit, the order reached the DC. The DCs ordered using a periodic review policy with a reorder interval of six days. The holding cost incurred was $0.15 per unit per day whether the unit was in transit or in storage. All DCs carried safety inventories to ensure a CSL of 95 percent.

FIGURE a) Sales Regions for ALKO

ALTERNATIVE DISTRICUTION SYSTEMS The task force recommended that ALKO build a national distribution center (NDC) outside Chicago. The task force recommended that ALKO close its five DCs and move all inventory to the NDC. Warehouse capacity was measured in terms of the total number of units handled per year (i.e. the warehouse capacity was given in terms of the demand supplied from the warehouse). The cost of constructing a warehouse is shown in Figure

. However, Alko expected to recover $50,000for each warehouse that it closed. The CSL out of the NDC would continue to be 95 percent. Given that Chicago is close to Cleveland, the inbound transportation cost from the plants to the NDC would reduce to $0.05 per unit. Given the increased average distance, however, the outbound transportation cost to customers from the NDC would increase to $0.24 per unit. Other possibilities the task force considered include building a national distribution center while keeping the regional DCs open. In this case, some products would be stocked at the regional DCs while others would be stocked at the NDC. FIGURE c) Construction Costs for NDC

QUESTION:1. What is the annual inventory and distribution cost of the following the task pair force recommendation and current distribution system ? What are the savings that would result from setting up an NDC ? Evaluate the savings as the correlation of regions varies from 0

coefficient of demand in any

to 0.5 to 1.0. Do you recommend setting Suggest other options that Fisher

up

NDC

should

consider.

Evaluate each option and recommend a distribution system for ALKO that would be most profitable. How dependent is coefficient of your recommendation on the correlation demand across different regions ?

CASE 5 DELIVERY STRATEGY AT MOONCHEM John Kresge was very concerned as he left the meeting at MoonChem, a manufacturer of specialty chemicals. The year-end meeting had evaluated financial performance and discussed the fact that the firm was achieving only two inventory turns a year. A more careful look revealed that over half the inventory MoonChem owned was consignment inventory with its customers. This was very surprising given that only 20 percent of its customers carried consignment inventory. John Kresge was Vice President of Supply Chain and thus responsible for inventory as well as transportation. He decided to take a careful look at how consignment inventory was managed and come up with an appropriate plan. MOONCHEM OPERATIONS MoonChem is a manufacturer of specialty chemicals used in a variety of industrial applications. MoonChem has eight manufacturing plants and

forty distribution centers.

The plants manufacture the base chemicals In the specialty chemicals

and the distribution centers mix them to produce hundreds of end products that fit customer specifications. market, MoonChem has decided to differentiate itself in the Midwest

region by providing consignment inventory to its customers. MoonChem would like to take this strategy national if it proves effective. MoonChem keeps the chemicals required by each customer in the Midwest region on consignment at the customers sites. Customers use the chemicals as needed and MoonChem ensures replenishment to ensure that the customers do not run out of inventory. In most instances, consumption of chemicals by customers is very stable. MoonChem. MoonChem is paid for the chemicals as they are used. Thus, all consignment inventories belong to

DISTRIBUTION AT MOONCHEM MoonChem currently uses Golden trucking, a full truckload carrier for all its shipments. Each truck has a capacity of 40,000 pounds and Golden charges a fixed rate given the origin and destination, irrespective of the quantity shipped on the truck. Currently MoonChem sends full truckloads to each customer to replenish their consignment inventory. THE ILLINOIS PILOT STUDY John decided to take a careful look at his distribution operations. Chicago distribution center. He decided to focus on the state of Illionois, which was supplied from the He broke up the state of Illinois into a collection of zip codes that were contiguous, as shown in Figure 10.10. He decided to restrict attention within the Peoria region, which was classified as zip code 615.A careful study of the Peoria region revealed two large customers, six medium-sized customers, and twelve small customers.

The annual consumption at each type of customer is as shown in Table (a).Golden currently charges $400 for each shipment from Chicago to Peoria and MoonChems policy is to send a full truckload to each customer when replenishment of consignment inventory is needed. John checked with Golden to find out what it would take to include shipments for multiply customers on a single load. Golden informed him that they would continue to charge $350 per truck and would then add $50 for each drop-off that Golden was responsible for. Thus, if Golden carried a truck that had to make one delivery, the total charge would be $400.However,if a truck had to make four deliveries, the total charge would be $550. Each pound of chemical in consignment cost MoonChem $1 and MoonChem had a holding cost of 25 percent. on the optimal distribution available in the Peoria region to decide on the optimal distribution policy. The detailed study of the Peoria region would provide the blueprint for the distribution strategy that MoonChem planned to roll out nationally. FIGURE b) Illionois Zip Code Map John wanted to analyze different options for distribution available in the Peoria region to decide

QUESTIONS 1. What is the current annual cost of MoonChems strategy of consignment inventory ? Consider different sending full truckloads to each customer in the Peoria region to replenish delivery options and evaluate the cost of each. What delivery MoonChem ? How does your inventory for MoonChem

option do you recommend for ?

recommendation impact consignment