41.

42.

43.

44.

45.

a. market growth b. stealing share c. forward selling d. forward buying e. All of the above are factors in increased demand. Answer: c

Difficulty: Hard

An increase in consumption of the product either from new or existing customers is

a. market growth. b. stealing share. c. forward selling. d. forward buying. e. none of the above Answer: a

Difficulty: Easy

Customers substituting the firm’s product for a competitor’s product is a. market growth. b. stealing share. c. forward selling. d. forward buying. e. none of the above Answer: b

Difficulty: Easy

Customers moving up future purchases to the present is a. market growth. b. stealing share. c. forward selling. d. forward buying. e. none of the above Answer: d

Difficulty: Easy

In general, as the fraction of increased demand coming from forward buying grows, offering the promotion during the peak demand period becomes a. less attractive. b. more attractive. c. more profitable. d. less significant. e. none of the above Answer: a

Difficulty: Moderate

Offering a promotion during a peak period that has significant forward buying a. creates a desirable demand pattern. b. creates a demand pattern less costly to serve. c. creates a demand pattern even more costly to serve. d. shifts demand from the peak period to the slow period.

e. shifts demand to a more desirable period. Answer: c

Difficulty: Hard

46.

Average inventory a. increases if a promotion is run during the peak period. b. increases if a promotion is run during the off-peak period. c. decreases if a promotion is run during the peak period. d. decreases if a promotion is run during the off-peak period. e. both a and d Answer: b

Difficulty: Moderate

Promoting during a peak demand month may decrease overall profitability if a. a small fraction of the demand increase results from a forward buy. b. any of the demand increase results from a forward buy. c. a significant fraction of the demand increase results from a forward buy. d. none of the above e. all of the above Answer: c

Difficulty: Hard

As the product margin declines, promoting during the peak demand period becomes a. less profitable. b. more profitable. c. less of a risk. d. more desirable. e. none of the above Answer: a

Difficulty: Hard

47.

48.

Essay/Problems 1. Discuss how a firm can respond to predictable variability of demand in the supply

chain.

Answer: Faced with predictable variability, a company’s goal is to respond in a manner that maximizes profitability. A firm must choose how to handle predictable variability by utilizing techniques in two broad categories:

1. Manage supply using capacity, inventory, subcontracting, and backlogs 2. Manage demand using short-term price discounts and trade promotions

The use of these tools enables the supply chain to greatly increase its profitability because it is able to match supply and demand in a much more coordinated fashion. One way to meet seasonal demand requires carrying enough

manufacturing capacity to meet demand in any period. The advantage of this approach is very low inventory costs, because no inventory needs to be carried from period to period. The disadvantage, however, is that much of the expensive capacity would go unused during most months when demand was lower.

Another approach to meeting demand would be to build up inventory during the off season to keep production stable year round. The advantage of this approach lies in the fact that a firm could get by with a smaller, less expensive factory. High inventory carrying costs, however, make this alternative expensive. A third

approach would be for a firm to work with their retail partners in the supply chain to offer a price promotion during periods of low demand. This promotion shifts some of the demand into a slow period, thereby spreading demand more evenly throughout the year and reducing the seasonal surge. Such a demand pattern is less expensive to supply. A company needs to decide which alternative maximizes their profitability.

Often companies divide the task of supply and demand management between different functions. Marketing typically manages demand and Operations typically manages supply. At a higher level, supply chains suffer from this phenomenon as well, with retailers independently managing demand and manufacturers independently managing supply. With supply and demand management

decisions being made independently, it is increasingly difficult to coordinate the supply chain, thereby decreasing profit. Therefore, maximizing profitability depends on these decisions being made in a coordinated fashion and requires supply chain partners to work together across enterprises. Difficulty: Hard

2.

Discuss the approaches that can be used to manage capacity to meet predictable variability of demand.

Answer: When managing capacity to meet predictable variability, firms use a combination of the following approaches:

? Time flexibility from workforce: In this approach, a firm uses flexible work hours from the workforce to manage capacity to better meet demand. In many

instances, plants do not operate continually and are left idle during portions of the day or week. Therefore, spare plant capacity exists in the form of hours when the plant is not operational. Many plants do not run three shifts, so the existing workforce could work overtime during peak periods to produce more to meet demand. If demand fluctuates by day of the week or week of the month and the workforce is willing to be flexible, a firm may schedule the workforce so that the available capacity better matches demand. In such settings, use of a part-time workforce may further increase the capacity flexibility by enabling the firm to have more people at work during peak periods.

? Use of seasonal workforce: In this approach, a firm uses a temporary workforce during the peak season to increase capacity to match demand. This approach may be hard to sustain if the labor market is tight.

? Use of subcontracting: In this approach, a firm subcontracts peak production so that internal production remains level and can be done cheaply. With the subcontractor handling the peaks, the company is able to build a relatively inflexible but low-cost facility where the production rates are kept relatively constant (other than variations that arise from the use of overtime). Peaks are subcontracted out to facilities that are more flexible. A key here is the availability of relatively flexible subcontractor capacity. The subcontractor can often provide

flexibility at a lower cost by pooling the fluctuations in demand across different manufacturers. Thus the flexible subcontractor capacity must have both volume (fluctuating demand from a manufacturer) as well as variety flexibility (demand from several manufacturers) to be sustainable.

? Use of dual facilities—dedicated and flexible: In this approach, a firm builds both dedicated and flexible facilities. Dedicated facilities produce a relatively stable output of products over time in a very efficient manner. Flexible facilities produce a widely varying volume and variety of products but at a higher unit cost. Each dedicated facility could produce at a relatively steady rate, with fluctuations being absorbed by the flexible facility.

? Designing product flexibility into the production processes: In this approach, a firm has flexible production lines whose production rate can easily be varied.

Production is then changed to match demand. The production lines are designed such that changing the number of workers on a line can vary the production rate. As long as variation of demand across different product lines is complementary, (i.e., when one goes up, the other tends to go down), the capacity on each line can be varied by moving the workforce from one line to the other. Of course, this requires that the workforce be multi-skilled and easily adapt to being moved from line to line. Production flexibility can also be achieved if the production machinery being used is flexible and can be changed easily from producing one product to another. This approach can only be effective if the overall demand across all the products is relatively constant. Several firms producing products with seasonal demand try and exploit this approach by carrying a portfolio of products that have peak demand seasons distributed over the year. Difficulty: Moderate

3.

Discuss the approaches a firm can use to manage inventory to meet predictable variability of demand.

Answer: When managing inventory to meet predictable variability, firms use a combination of the following approaches:

? Using common components across multiple products: In this approach, a firm designs common components used in multiple products, with each product having predictably variable demand that results in relatively constant overall demand. Use of common components across these products will result in the demand for the components being relatively constant.

? Build inventory of high demand or predictable demand products: When most of the products a firm produces have the same peak demand season, the previous approach is no longer feasible. A firm must then decide which inventory to build during the off season. The answer is to build products during the off season that have more predictable demand, because there is less to be learned about their demand by waiting. As more is known about demand closer to the selling season, production of more uncertain items should take place. This strategy helps the supply chain better synchronize supply and demand. Difficulty: Moderate

Discuss the importance of collaboration within a supply chain when performing aggregate planning.

4.