Homework #1 Solution

Question 3

Many supply chains evolve over time. For example, consider a memory chip supply chain. Production strategies may change during different stages of the product life cycle. When a new memory chip is introduced, price is high, yield is low, and production capacity is tight, and the availability of the product is important. Consequently, production is usually done at plants close to markets, and the management focuses on increasing yield, reducing the number of production disruptions, and fully utilizing capacity. When the product matures, however, its price drops and demand is stabilized for a period of time, so minimizing production cost moves to center stage. To reduce costs, production may be outsourced to overseas foundries, where labor and materials are much cheaper.

Question 7

A small number of centrally located warehouses allows a firm to take advantage of risk pooling in order to increase service levels and decrease inventory levels and costs. However, outbound transportation cost is typically higher, and delivery lead times are longer. On the other hand, by building a larger number of warehouses closer to the end customers, a firm can decrease outbound transportation costs and delivery lead times. However, this type of system will have increased total inventory levels and costs, decreased economies of scale, increases warehousing expenses, and potentially increased inbound transportation expenses.

Question 9

1. High inventory levels

i. Advantages: High fill rate (service level) and quick order fulfillment.

ii. Disadvantages: High opportunity cost of capital tied in inventory, danger of price declines over time and obsolescence, need for more warehouse space.

2. Low inventory levels

i. Advantages: Low inventory holding and warehousing costs.

ii. Disadvantages: Higher risk of shortages and lower service levels.

Question 10

Building redundancy into the supply chain means that if one portion fails, the supply chain can still satisfy demand. This is the biggest advantage of building redundancy in the supply chain. Alternate sources of supply, provision for alternate transportation and distribution modes, alternate warehouses are some of the ways by which redundancy can be built. A disadvantage of this policy is that excess capacity is built into the system in order to hedge against emergencies that may disrupt the supply – if these capacities are not used over time and if too much capacity is built as redundant capacity, the costs to the supply chain increases.

Other ways by which redundancy can be built is by using information to better sense and respond to disruptive events, incorporating flexibility into supply contracts to better match supply and demand and improving supply chain processes by including risk assessment measures