Instructions n.net



InstructionsIn each unit, students may choose to complete Learning Activities. Prior to working on the Learning Activities, they should read through the chapters and the unit lesson. If a student feels he or she understands the concepts in the reading, he or she may not need to complete all of the Learning Activities. However, working on the Learning Activities will increase confidence with the concepts. Students should be encouraged to complete all of the practice activities.Upon the professor's review of each practice activity, students will receive constructive feedback. They should clearly identify their work with their names, the date, the unit number, and the practice activity page number or name. Students should make sure to e-mail their professor whenever they upload work (activities or assessments) to the Dropbox.Upon submission, the professor should review of each practice activity and provide constructive feedback. Students may submit as many of the Learning Activities from the six available as they want. If all goes well, a student will e-mail the professor whenever he or she has uploaded work (activities or assessments) to the Dropbox. You should e-mail the student after the assignment has been reviewed. Activity 1: CO 3, Competencies C, D, and EChapter 13 (pp. 453–455): Review and Discussion Questions 1–6 and Problems 1–4Review and Discussion Questions 1–6What recent changes have caused supply chain management to gain importance?Answers Changes include the petitive pressures from foreign firmsElevation of product quality to a very high level of importanceInternational marketing and international purchasingTrends towards choosing sole-source suppliers and long-term relationshipsProduct varieties and ranges that are rapidly changing, with speed of delivery to market essentialProduct life cycles shortening, necessitating knowledge and control of inventories in the various pipelinesAdoption of JIT production changing supplier relationships and increasing the focus on reducing inventoriesTrends in the legal system holding manufacturers liable for product failures, even though causes of failure may lie outside of the production system itselfUse of EDI in purchasingThe growth of supplier developmentWith so much productive capacity and room for expansion in the United States, why would a company based in the United States choose to purchase items from a foreign firm? Discuss the pros and cons.AnswerThe use of foreign firms can provide a U.S. firm more alternatives in selecting a supplier. The pros are more choices; potentially reduced costs in the areas of materials, transportation, production, and distribution; and potentially moving closer to a foreign market. The cons are: the distance is generally increased; communications problems are increased due to distance, culture, and technology; and there may be problems with customs, government regulations, political stability, and so on.Describe the differences between functional and innovative products.AnswerFunctional products are staples that people buy in a wide range of retail outlets. Typically, they do not change much over time and they have low profit margins, stable and predictable demand, and long life cycles. Innovative products, on the other hand, give customers additional reasons to buy. Fashionable clothes and personal computers are examples of innovative products. Innovative products have short life cycles, high profit margins, and volatile demand.What are characteristics of efficient, responsive, risk-hedging, and agile supply chains? Can a supply chain be both efficient and responsive? Risk hedging and agile? Why or why not?AnswerEfficient supply chains are designed to minimize costs, which requires high utilization, minimizing inventory, selecting vendors based primarily on cost and quality, and designing products that are produced at minimum cost. Market-responsive supply chains are designed to minimize lead time to respond to unpredictable demand, thus minimizing stockout costs and obsolete inventory costs. Risk-sharing supply chains are those that share resources so that risks in the supply chain can be shared. Agile supply chains are those that are flexible while still sharing risks of shortages across the supply chain. Generally, these supply chains carry excess capacity and higher buffer stocks. Vendors in responsive supply chains would be selected for speed, flexibility, and quality. It is possible to be both efficient and responsive, and both risk-hedging and agile, but Exhibit 13.4 helps illustrate why supply chains are generally not both.As a supplier, which factors would you consider about a buyer (your potential customer) to be important in setting up a long-term relationship?AnswerThe financial stability and credit worthiness of the company is of primary importance. The reputation of the company vis-à-vis its supplier is also very important. For example, is this a company that is fair with its suppliers and honors its payables in a timely fashion? Is the technological match between supplier and customer sufficient? Will delivery schedules and quantities be stable, facilitating smooth operations?Describe how outsourcing works. Why would a firm want to outsource?AnswerOutsourcing is the act of moving some of a firm's internal activities and decision responsibilities to outside providers. The terms of the agreement are established in a contract. Outsourcing goes beyond the more common purchasing and consulting contracts because not only are the activities transferred, but resources that make the activities occur are also transferred. Reasons for outsourcing are listed in Exhibit 13.6. Some of the major categories from this exhibit include organizational, improvement, financial, revenue, cost, and employee-driven reasons.Problems 1, 2, 3, and 4AnswerYear:0123Demand200,000300,000500,000Cost of Capital0.15Purchase OptionPurchase Cost Per Unit0.1$20,000.00 $30,000.00 $50,000.00 Shipping/Unit0.01$2,000.00 $3,000.00 $5,000.00 Inventory Charge/Unit0.005$1,000.00 $1,500.00 $2,500.00 Monthly Charge20$240.00 $240.00 $240.00 Total Purchase Cost$23,240.00 $34,740.00 $57,740.00 Make OptionDirect Material0.05$10,000.00 $15,000.00 $25,000.00 Direct Labor0.03$6,000.00 $9,000.00 $15,000.00 50% Surcharge0.015$3,000.00 $4,500.00 $7,500.00 Indirect Labor0.011$2,200.00 $3,300.00 $5,500.00 50% Surcharge0.0055$1,100.00 $1,650.00 $2,750.00 Overhead 100% DL0.03$6,000.00 $9,000.00 $15,000.00 Total Variable Manufacture Cost$28,300.00 $42,450.00 $70,750.00 Investment Engineer$30,000.00 Equipment$10,000.00 Cost Comparison AnalysisMake Cost – Buy Cost$40,000.00 $5,060.00 $7,710.00 $13,010.00 Discount Factor10.869570.756140.65752NPV (Make – Buy)$40,000.00 $4,400.00 $5,829.87 $8,554.29 Total NPV(Make – Buy)$58,784.15 Alternative: Option NPV CalculationsBuy$143,226.27 $40,000.00 $24,608.70 $32,098.30 $46,519.27 Make$84,442.11 $20,208.70 $26,268.43 $37,964.99 Difference$58,784.15Continuing to make in-house would cost us over $58,000 more in current dollars than buying from the supplier. We should accept the bid.AnswerRequirement (annual forecast)12,000.00unitsWeight22pounds per engineOrder Processing Cost$125.00per orderInventory Carry Cost20%of average inventoryLot Size (order quantity)1,000Units - given in the caseSupplier12Unit Price$510$505Annual Purchase Cost$6,120,000$6,060,000One-Time Tooling Cost$22,000$20,000Orders per Year1212Order Processing Cost$1,500$1,500Inventory Carry Cost$51,000$50,500Distance125100milesWeight per Load22,000Transportation (less than truckload)$1.20 per 2,000 lbs. per Mile$19,800$15,840Total Cost$6,214,300$6,147,840$66,460differenceWe would prefer supplier #2.Required lot size for truckload1,818Units (40,000 lbs. max. load / 22 lbs. per engine)Supplier12Unit Price$500$505Annual Purchase Cost$6,000,000$6,060,000One-Time Tooling Cost$22,000$20,000Orders per Year6.66.6Annual Order Processing Cost$825$825Annual Inventory Carry Cost$90,900$91,809Distance125100milesWeight per Load40,000Transportation (truckload)$0.80 per 2,000 lbs. per Mile$13,200$10,560Total Cost$6,126,925$6,183,194$56,269differenceYes, it would make sense to order in truckload lots because we can reduce total costs. Although carrying costs increase, purchase and transportation costs decrease by a greater amount. Note that if ordering in truckload lots, Supplier 1 becomes the lowest choice option.In future years, the cost would be reduced by the one-time tooling cost included here.AnswerThe problem tells us that we sell 4,000 quarter-pound burgers a week—meaning we sell 1,000 pounds a week—and each pound of hamburger costs $1.00. The problem also tells us that on average, the store has 350 pounds of inventory on hand. By dividing the Cost of Goods Sold by Average Aggregate Inventory Value, we can figure the inventory turns. This means that inventory turns 148.6 times a year. On average, the restaurant has about a third of a week’s supply on hand.AnswerQ1Q2Q3Q4Sales United States300350405375 Canada75607570 Europe30332015COGS (total)280295340350Inventory Raw Materials 50405560 WIP and FG 100105120150 DC Inventory United States25272330 Canada10111516 Europe5455Total Inventory190187218261Inventory Turnover1.51.61.61.3Using the end-of-quarter inventory numbers as a substitute for the average inventory level, we have the following quarterly and annual inventory turn values. Average inventory for the annual figure is based on the average of the four quarterly inventory numbers.Q1Q2Q3Q4Annual280 / 190 = 1.474295 / 187 = 1.578340 / 218 = 1.560350 / 261 = 1.3411,265 / 214 = 5.911If you were given the assignment to increase inventory turnover, what would you focus on? Why?To increase the inventory turns, a firm needs to reduce the amount of inventory, increase sales, or do both. To increase turns, the item most readily within our control is the amount of inventory that the firm has on hand. The raw materials, WIP, and FG inventories are the most obvious targets for reduction. The company reported that it used 500 M worth of raw material during the year. On average, how many weeks supply of the raw material are on hand at the factory?The 500 M does not come into play in this problem. Activity 2: CO 3, Competencies C, D, and EChapter 13 (pp. 455–457): Analytics Exercise: Global Sourcing Decisions—Granger: Reengineering the China-U.S. Supply ChainEvaluate the scenario and answer the following questions from the textbook in an APA-formatted paper of approximately three pages.Evaluate the current China-Taiwan logistics costs. Assume a current total volume of 190,000 CBM, with the 89% shipped direct from the supplier plants in containers. Use the data from the case and assume that the supplier-loaded containers are 85% full. Assume that consolidation centers are run at each of the four port locations. The consolidation centers only use 40’ containers and fill them to 96% capacity. Assume that it costs $480 to ship a 20’ container and $600 to ship a 40’ container. What is the total cost to get the containers to the United States? Do not include U.S. port costs in this part of the analysis.AnswerBasic DataTotal Current Volume (CBM)190,000Direct Ship Percentage0.89Direct Ship Volume (CBM)169,100Consolidation Center Volume20,900Shipping Cost CalculationsDirect Ship by Container Type20'40' Volume (%)21%79% Volume (CBM)35,511133,589 Container Capacity Used85%85%Consolidation Center by Container Type Volume (%)100% Volume (CBM)20,900 Container Capacity Used96%Container Capacity (CBM)3467Containers Shipped1,2292,671Shipping Cost per Container $ 480.00 $ 600.00 Shipping Costs by Container Size $ 589,920 $ 1,602,600 Total Shipping Cost $ 2,192,520 Consolidation Center Operating Cost CalculationsNumber of Centers4Annual Fixed Cost per Center $ 75,000 Total Annual Fixed Cost $ 300,000 Variable Cost per CBM $ 4.90 Total Annual Variable Cost $ 102,410 Total Annual Consolidation Center Costs $ 402,410 Total China-Taiwan Logistics Cost $ 2,594,930 Evaluate an alternative that involves consolidating all 20’ volume and using only a single consolidation center in Shanghai and Ningbo. Assume that all the existing 20’ volume and existing consolidation center volume is sent to this single consolidation center by suppliers. This new consolidation center volume would be packed into 40’ containers filled to 96% and shipped to the United States. The existing 40’ volume would still be shipped direct from the suppliers at 85% capacity utilization.AnswerBasic DataTotal Current Volume (CBM)190,000Direct Ship Percentage0.7031Direct Ship Volume (CBM)133,589Consolidation Center Volume56,411Shipping Cost CalculationsDirect Ship by Container Type20'40' Volume (%)0%100% Volume (CBM)0133,589 Container Capacity Used85%85%Consolidation Center by Container Type Volume (%)100% Volume (CBM)56,411 Container Capacity Used96%Container Capacity (CBM)3467Containers Shipped03223Shipping Cost per Container $ 480.00 $ 600.00 Shipping Costs by Container Size $ - $ 1,933,800 Total Shipping Cost $ 1,933,800 Consolidation Center Operating Cost CalculationsNumber of Centers1Annual Fixed Cost per Center $ 75,000 Total Annual Fixed Cost $ 75,000 Variable Cost per CBM $ 1.40 Total Annual Variable Cost $ 78,975 Total Annual Consolidation Center Costs $ 153,975 Total China-Taiwan Logistics Cost $ 2,087,775 Assuming the new consolidation center has the same fixed cost as before (which is questionable, given the increase in volume), the new approach saves $507,155 per year.What should be done based on your analytics analysis? What have you not considered that may make your analysis invalid or that may strategically limit success? What do you think Grainger management should do? AnswerConsolidating the 20’ volume and using a single consolidation center looks very attractive, based on this analysis. However, there are other issues to be considered. For one, we have not considered the increased cost to the suppliers that currently pack their own 20’ containers. These suppliers will need to bear the cost of shipping their goods to the Shanghai-Ningbo consolidation center. This cost will probably be pushed back to Grainger in the long run. There will also be some added cost for the suppliers that currently ship to consolidation centers directly. These will all need to use the Shanghai-Ningbo center now, which might not be as close as their current consolidation center. The cost calculations also assume that the Shanghai-Ningbo center can handle the increased workload and the fixed cost will remain the same. Neither of these assumptions is guaranteed (or even likely).We may want to seriously consider using two consolidation centers, with the other being in Yantian–Hong Kong. It may be attractive to have consolidation centers in both Shanghai-Ningbo and Yantian–Hong Kong because these are the most heavily used ports. Assumptions regarding the consolidation center fixed costs would need to be tested as well.Activity 3: CO 4, Competencies A and BChapter 11 (pp. 386–393): Review and Discussion Questions 1–9 and Problems 1, 8, 17, 20, and 31Review and Discussion Questions 1–9Distinguish between dependent and independent demand in a McDonald’s, an integrated manufacturer of personal copiers, and a pharmaceutical supply house. Answer The key to the answer here is to consider what must be forecasted (independent demand), and, given the forecast, what demands are thereby created for items to meet the forecasts (dependent demand).In a McDonald’s, independent demand is the demand for various items offered for sale—Big Macs, fries, and so on. The demand for Egg McMuffins, for example, needs to be forecasted. Given the forecast, then, the demand for eggs, cheese, Canadian bacon, muffins, and containers can then be computed based on the amount needed for each Egg McMuffin.The manufacturer of copiers is integrated (i.e., the parts, components, etc. are produced internally). The demand for the number of copiers is independent (must be forecasted). Given the forecast, the bill of materials is exploded to determine the amounts of raw materials, components, parts, and so on that are needed (more on the BOM in Chapter 16).The pharmaceutical supply company is an extreme case where only end items are carried and nothing is produced internally. The bill of materials is the end item, and therefore, the independent demand (forecasted from customers) is the same as the dependent demand. One might attempt to consider that when the demand for items occurs together, this is similar to a bill of materials. But this is not a bill of materials, but rather a causal relationship making it easier to forecast.Distinguish among in-process inventory, safety stock inventory, and seasonal inventory.Answer In-process inventory consists of those items of material components and partially completed units that are currently in the production process.Safety-stock inventory is set so that inventory is maintained to satisfy some maximum level of demand. It could be stated that safety stock is that level of inventory between the minimum expected demand and the desired level of demand satisfaction.Seasonal inventory is that inventory accumulated to meet some periodic increase in demand.Discuss the nature of the costs that affect inventory size.Answer There are three main categories of costs: purchase cost, ordering costs, and holding costs. The purchase cost may affect inventory levels if quantity discounts are offered. Suppliers will offer a discount for placing larger orders, which might provide an incentive for carrying the resultant larger inventory levels. Ordering costs directly influence the optimum order quantity. As ordering costs increase, the effect is to order less often but in higher quantities, thus increasing inventory levels. Holding costs have an inverse effect on inventory levels. As holding costs increase, there is an incentive to reduce order quantities, resulting in lower average inventory levels.How does shrinkage (stolen stock) contribute to the cost of carrying inventory? How can this cost be reduced?Stock cannot be stolen unless it is on hand, and it is reasonable to assume that shrinkage will increase as on-hand inventory levels increase. Shrinkage costs can be reduced through increased security measures (security-related workforce, electronic tracking tags) and/or reducing the amount of inventory on hand at any one point in time.How does obsolescence contribute to the cost of carrying inventory? How can this cost be reduced?Obsolescence costs are relevant primarily in hi-tech industries. As inventory ages, market influences and advancements in technology drive the value of that inventory lower. The cost of making the item in inventory has likely decreased, and the latest and greatest innovation lowers the value of the older technology. Obsolescence costs can be reduced by producing in smaller quantities as the product matures. But that will increase total setup costs.Under what conditions would a plant manager elect to use a fixed–order quantity model as opposed to a fixed–time period model? What are the disadvantages of using a fixed time–period ordering system?Answer Fixed–order quantity models: when holding costs are high (usually expensive items or high deprecation rates) or when items are ordered from different sourcesFixed–time period models: when holding costs are low (i.e., associated with low-cost items, low-cost storage) or when several items are ordered from the same source (saves on order placement and delivery charges)The main disadvantage of a fixed–time period inventory system is that inventory levels must be higher to offer the same protection against stockout as a fixed–order quantity system. It also requires a periodic count and closer surveillance than a fixed–order quantity system. A fixed–order quantity system can operate with a perpetual count (keeping a running log of every time a unit is withdrawn or replaced) or through a simple two-bin or flag arrangement wherein a reorder is placed when the safety stock is reached. This latter method requires very little attention.What two basic questions must be answered by an inventory-control decision rule?Answer Any inventory-control model or rule must establish (1) when items should be ordered and (2) how many should be ordered.Discuss the assumptions that are inherent in production setup cost, ordering cost, and carrying cost. How valid are they?Answer Investigation of ordering and production setup cost will likely show that a single, unique cost does not exist for each product, nor is it linearly related to the number of orders (as implied in the equations or inventory models). In the purchasing department, for example, an employee is paid either a salary or an hourly rate for a normal work week. The cost for that employee is sometimes divided among the number of items or orders for which he or she has responsibility, resulting in an averaged or allocated cost for each order he or she places. However, when we consider an inventory ordering cost based on the number or orders per year (as is done in most inventory models), reducing the number of orders the individual places does not necessarily decrease the net cost to the firm because his or her weekly pay remains the same. What happens is really an increase in the ordering cost for each of the remaining items within his or her responsibility.Nonlinearity of costs also occurs in production setups. Consider the time for making a setup in preparation for a production run. Setup time is roughly based on an expected frequency of making this particular product run. However, as the frequency increases, familiarity with the setup allows some shaving of the setup time. Moreover, if the setup is repeated often, an investment in specialized equipment or the construction of jigs may become warranted, reducing the setup time even more.The terms carrying or holding costs for maintaining goods in inventory include a multitude of cost elements. To determine the nature and amounts of these costs can be a challenging feat. Fortunately, total inventory cost curves tend to be dish shaped and can, therefore, tolerate some error. The holding costs associated with insurance, obsolescence, and personnel who are handling materials are extremely difficult to ascertain on an item-by-item basis, yet each requires realistic analysis. Warehouse storage costs of an item, for example, may be based on a ratio of its required square footage and the entire available warehouse space, but this may not be an accurate representation because it is an allocation of cost rather than true cost. Take a warehouse that is too large or is used to stock products in an off season or depressed period. Allocation based on a share of total warehouse cost will result in a high cost for storage when excess storage space should actually create pressure for higher—not lower—order quantities.In the simple inventory model, holding costs are based on the average inventory on hand. “Average” inventory presumes that, as stock is depleted, other product lines will be moved in to occupy the space. It may be that costs should be based on maximum inventory, especially if these is an excess of space, or if the needs of an item are so specialized that no other products can use the space (for example, due to environmental requirements). Each remaining cost may be similarly challenged. Breakage, pilferage, deterioration, and insurance costs are not constant, but vary with inventory size. As the value of inventory increases, insurance rates decrease, more refined handling procedures can be installed to reduce breakage, some environmental control and maintenance can be used to reduce deterioration, and better security procedures can reduce theft.These challenges to determining true costs are not intended to discourage the use of inventory models. The intent, rather, is to prevent the use of any model without clear knowledge of its requirements and assumptions. Indeed, each application must consider the operating conditions and needs of the firm. An appropriate model can then be developed in a fashion similar to those covered in this chapter.“The nice thing about inventory models is that you can pull one off the shelf and apply it so long as your cost estimates are accurate.” Comment on this.Answer Unfortunately, there is no model or set of models universally applicable to all inventory situations. As stated in the chapter several times, each situation is different and requires a model to suit those conditions. Students frequently try to memorize specific models rather than the process of building any inventory model. See also the answers to Question 8 below.Which type of inventory system would you use in the following situations?Answer Supplying your kitchen with fresh foodObtaining a daily newspaperBuying gas for your carTo which of these items do you impute the highest stockout cost?Supplying kitchen with food: This is both a periodic model and order quantity. Generally, a household will shop once weekly for the majority of items (periodic), then pick up items such as bread and milk as the supply runs low (fixed quantity with reorder point).Obtaining a daily newspaper: A daily newspaper is obviously a periodic model. One does not usually wait until he has finished one daily paper before buying the next day’s paper.Buying gas for your car: Generally, this is a hybrid-type model wherein a reorder point is signaled when the gas indicator is low, and then the tank is filled. Many people, however, have a fixed quantity purchase when the reorder point is reached, such as “put in 10 gallons or $10.00 worth.” Still others (drawing upon their own experience) use a periodic ordering system on their spouse’s car, such as taking it out and filling it every Sunday after church (or in Chase’s case, after the football game).The highest stockout cost for most well-fed, well-read individuals would be running out of gas in your car. The cost could range from practically zero (if one runs out in front of a gas station) to being late for an appointment or causing an accident on the highway.What is the purpose of classifying items into groups, as the ABC classification does?Answer Using a classification scheme such as this one allows a greater portion of time to be spent in controlling specific groups, classes, or items. For the ABC grouping, greater control is afforded those items that comprise the greatest dollar volume in usage. The result of this classification is a reduction in the overall inventory size, leading to decreased costs for the same level of satisfying inventory demands.Problems 1, 8, 17, 20, and 31AnswersCu = $10 - $4 = $6Co = $4 - $1.50 = $2.50, NORMSINV(.7059) = 0.541446Should purchase 250 + .541446(34) = 268.4 or 268 boxes of lettuce. = 22.36 2217.a. = 89.44 89b. Ordering cost = = $224.72c. Holding cost = = $222.5020. a. = 408.25 408 bottlesb. = 52 units95% S.L. from standard normal distribution, z = 1.64= 100(3) + (1.64)52 = 300.00 + 85.28 = 385.28 385 bottles31. Item NumberAverage Monthly DemandPrice per UnitMonthly UsageClass54,0002184,000A32,0001224,000A or B41,1002022,000B73,00026,000B9500105,000B170064,200B or C82,50012,500C101,00022,000C6100101,000C22004800CActivity 4: CO 4, Competency CChapter 11 (pp. 395–398): Analytics Exercise: Inventory Management at Big10 You are curious about how much Rhonda and Steve made with their business last year. You do not have all the data, but you know that most of their expenses relate to buying the sweaters and having them monogrammed. You know they paid themselves $50,000 each and you know the rent, utilities, insurance, and benefit package for the business were about $20,000. About how much do you think they made before taxes last year? If they must make their payment to the venture capital firm, and then pay 50% in taxes, what was their increase in cash last year? AnswerLast Year’s Pretax ProfitUnitUnitSalesSale PriceCostRevenueCostMarginOhio2,300$12073.88$276,000$169,924$106,076Michigan1,468$12073.88$176,160$108,456$67,704Purdue890$12073.88$106,800$65,753$41,047eBay342$5060.88$17,100$20,821($3,721)Totals5,000$576,060$364,954$211,106Overhead:$120,000Net Profit:$91,106If they pay 25% to the venture capital firm, this is $22,776.50, and their profit before taxes is $68,329.50. They then pay $34,164.75 in taxes, leaving them with an increase in cash of about $34,165. The major point here is to show how relevant these decisions are to the success of the firm.What was your reasoning behind using the aggregate demand forecast when determining the size of your order rather than the individual school forecasts? Should you rethink this or is there a sound basis for doing it this way? AnswerHere we argue that the aggregate forecast should be more accurate than the individual person’s forecast. You can easily calculate the coefficient of variation (CV) in the individual forecasts and compare that to the aggregate forecast to prove this (the CV for the individual forecasts is between 10% and 14%, and the CV for the aggregate forecast is less than 6%). A big assumption here is that the forecasts at each school are independent and that they are not biased. If this is true, the errors will tend to cancel each other out. If there is major bias in the forecasts (for example, they are all high or low), then we have a problem and it might be better to use the individual forecasts. In our analysis here, we assume the forecasts are independent and not biased but we also calculate the orders by individual school.How many sweaters should you order next year? Break down your order by individual school. Document your calculations in your spreadsheet. Calculate this based on the aggregate forecast and also the forecast by individual school. AnswerHere the single-period model is applicable. The cost of underestimating demand is the lost profit. In this case, a sweater would be sold for $120 and it would cost $73.88 (supplier plus subcontractor cost), so the return is $46.12 per sweater. The cost of overestimating demand is the difference between the supplier cost of $60.88 and the eBay price of $50, which is $10.88. The critical probability then is Cu / (Co + Cu) = 46.12 / (10.88 + 46.12) = .809123. Using the aggregate demand forecast, which has a mean of 7,400 and standard deviation of 430 units, you should order NORMINV(.809123,7400,420) = 7,776 units. Based on the forecast data, Ohio State gets 33.78% or 2,627 units, Michigan get 23.87% or 1,856 units, Purdue get 13.51% or 1,051 units, Michigan State gets 21.85% or 1,699 units, and Indiana gets 6.98% or 543 units. If we base this on the individual forecasts, we would order the following. Ohio State = NORMINV(.809123,2500,300) = 2,762 Michigan = NORMINV(.809123,1767,252) = 1,987 Purdue = NORMINV(.809123,1000,100) = 1,087Michigan State = NORMINV(.809123,1617,126) = 1,727 Indiana = NORMINV(.809123,517,76) = 583 The total order size would be 8,146. There is a difference of 8,146 - 7,767 = 379 sweaters.What do you think they could make this year? They are paying you $40,000 and you expect your benefit package addition would be about $1,000 per year. Assume that they order based on the aggregate forecast.AnswerWe base this on the expected average sales from our forecast and an aggregate order size of 7,767 sweaters. Assuming sales are as forecast, the safety stock would be sold on eBay. We also need to adjust overhead to account for the $41,000 increase due to the new employee.This Year’s Expected Pretax ProfitUnitUnitSalesSale PriceCostRevenueCostMarginOhio2,500$12073.88$300,000$184,700$115,300Michigan1,767$12073.88$212,040$130,546$81,494Purdue1000$12073.88$120,000$73,880$46,120Michigan State1617$12073.88$194,040$119,464$74,576Indiana517$12073.88$62,040$38,196$23,844eBay366$5060.88$18,300$22,282($3,982)Totals7,767$906,420$569,068$337,352Overhead: $161,000Net Profit: $176,352Using the same logic as before, the venture capital people get $44,088, leaving us with $132,264 to pay taxes on. Taxes would be $66,132. This creates an increase in our cash of about $66,132.How should the business be developed in the future? Be specific and consider changes related to your supplier, the monogramming subcontractor, target customers, and products.AnswerThis is open ended, so you may get many different ideas. Here you can begin the discussion by talking about the core competencies of this firm. Actually, this firm does not have much that could not be quickly duplicated. It has its website, a marketing channel through the game programs, and the unique design of its monogram. So in developing the business, it should think about ways it could make better use of these capabilities and assets. Here are some thoughts.Supplier: Here it would be good to try to reduce cost, reduce the minimum order quantity, and reduce the lead time associated with the order. Any of these would be desirable. If it were possible to reduce the minimum order quantity and the lead time, then multiple orders could be placed during the season instead of a single order. For example, one order could cover the initial half of the season and a second could cover the rest. This should allow for more accurate forecasts and less product sold through eBay. They might consider using a domestic (U.S.) supplier or possibly even consider subcontracting the sweater making to locals. A quick web search shows that automated machines at fairly low cost are now available. Monogramming subcontractor: They might consider doing this in-house. They have a pretty good deal right now, though, because the subcontractor is providing space for inventory and shipping the product to the customer. Target customers: They could expand this to the rest of the Big Ten teams. Other sports, particularly international venues, such as soccer could be developed. Products: Many similar products that would be personalized could be developed, such as sweatshirts, jackets, blankets, and blazers. These would possibly use the same or similar suppliers, and have the same requirements related to monogramming. Getting into totally different kinds of products, such as coolers, might be another idea. It’s probably important to try to exploit the idea of high-end products that are attractive as gifts. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download