Ch17 Risk-Pooling Strategies to Reduce and Hedge Test Bank

Matching Supply with Demand: An Introduction to Operations Management, 4e (Cachon)

Chapter 17 Risk-Pooling Strategies to Reduce and Hedge Uncertainty

1) The amount of milk produced by dairy cows depends on a number of factors, including average temperature and rainfall. A large dairy co‐op forecasts that production of milk next month in its northern region will be normally distributed with a mean of 100,000 gallons and a standard deviation of 40,000 gallons. Production next month in its southern region is forecasted to be normally distributed with a mean of 80,000 and a standard deviation of 30,000. The correlation between the two regions is 0.4. What is the coefficient of variation for total milk production across the two regions?

0.4 * 0.4 = 0.16

0.375 * 0.4 = 0.15

Total = 0.31

Difficulty: 3 Hard

Topic: Location Pooling

AACSB: Analytical Thinking

Blooms: Apply

2) The table below provides monthly demand data for two products along with the average monthly demand (2nd to the last column) and the standard deviation of monthly demand (last column). Which of the following best describes the relationship between the demands for these two products?

A) The products are negatively correlated.

B) The products are independent.

C) The products are positively correlated.

D) There is not enough evidence regarding the correlation between these products.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 3-4.]

Aquaguard manufactures three models of water purifiers in three separate plants in Taiwan. These plants serve the demand in Europe. All three models sell at a unit price of $100, and the holding cost is 5% of the selling price per month. The monthly demand for these models is normally distributed with the following parameters:

Model 1: Mean 1000, SD 300

Model 2: Mean 1000, SD 300

Model 3: Mean 1000, SD 300

The demand for Model 1 and Model 2 has a correlation coefficient of -0.35, while that for Model 3 is independent of the other two models.

3) Consider Aquaguard's distribution in Europe. They have a central DC that caters to the European market. The lead time from Taiwan to their DC is 2 months and orders are placed every month. Determine the expected end-of-month inventory for each product when a target in-stock probability is 98%.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Analytical Thinking

Blooms: Apply

4) Aquaguard has the option of redesigning its products. It can develop a "base" product B and ship it to the DC. The base product can then be customized into any one of the models and sold (delayed differentiation). The company chooses to redesign Models 1 and Models 2 while Model 3 remains untouched. The lead time, the in-stock target level, and the ordering policies remain the same. Determine the expected end-of-period inventory for product B.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Analytical Thinking

Blooms: Apply

5) Suppose that Supreme uses the same demand distribution for two of the 10 products, i.e., each has a mean of 25 units per week and a standard deviation of 20 per week. Supreme observes that the coefficient of variation of total demand for these 2 products is 0.70. Which of the following is true?

A) Demands for these products are positively correlated with each other.

B) Demands for these products are negatively correlated with each other.

C) Demands for these products are independent.

D) There is not enough information to answer this question.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Knowledge Application

Blooms: Apply

6) Montanso is a large bio firm that sells genetically modified seed to farmers. They currently have one warehouse in each of two different counties in Indiana, Grant, and Wabash. Over the last three years, demand (in kg) for their seed in these two counties has been

Montanso is considering consolidating their warehouses into a single one that would serve both counties. Therefore, they would like to understand the correlation in demand between these two counties. Given the data, which of the following do you think is most likely?

A) The demands are negatively correlated.

B) The demands are independent.

C) The demands are positively correlated.

D) There is not enough information to determine with confidence whether the demands are negatively correlated, independent, or positively correlated.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Analytical Thinking

Blooms: Analyze

7) Cross-training workers is most useful, from the perspective of matching supply with demand when

A) average demand exceeds capacity.

B) average demand is approximately equal to capacity.

C) average demand is significantly less than capacity.

D) cross-training of workers is equally useful (from the perspective of matching supply with demand) no matter the relationship between capacity and average demand.

Difficulty: 3 Hard

Topic: Capacity Pooling with Flexible Manufacturing

AACSB: Reflective Thinking

Blooms: Analyze

8) An insurance firm uses several types of agents to service different classes of insurance customers. Demand from each class of customers is uncertain. The firm decides to invest in the cross-training of agents so that an agent can serve multiple classes of customers. Investment in cross-training is likely to have a large incremental value

A) when total expected demand for services far exceeds total capacity.

B) when total expected demand for services is close to the total capacity.

C) when total expected demand for services is far less than the total capacity.

D) when there is minimal uncertainty in demand.

E) when cross-training is very expensive.

F) in none of the above cases.

Difficulty: 3 Hard

Topic: Capacity Pooling with Flexible Manufacturing

AACSB: Reflective Thinking

Blooms: Analyze

9) A firm sells two products, A and B. Both products have normally distributed demand. Both have the same mean and standard deviation. Consequently, they have the same coefficient of variation, which happens to be 0.50. If we were to measure the coefficient of variation (COV) of total demand (i.e., the sum of demands for products A and B) then we would find that the COV of the total demand

A) equals the sum of the individual COVs, i.e., it would be 1.0.

B) would be no greater than 1.0 and possibly less than 1.0.

C) would be 0.5.

D) would be no greater than 0.5 and possibly less than 0.5.

E) would be 0.35, i.e., 0.5 divided by the square root of 2.

F) would be 0.35 or lower.

Difficulty: 3 Hard

Topic: Product Pooling

AACSB: Reflective Thinking

Blooms: Analyze

10) Recall the proposal in the HP case to stock generic printers in the European DC and add to this generic printer an appropriate power supply and manual before shipping to a specific country. This process is often called delayed product differentiation; the generic printer is called the generic product, and the power supply and manuals the differentiating components. It is claimed that delayed product differentiation will not change the inventory of the differentiating components (holding the service level fixed). Is this claim correct? Choose the best response.

A) No, inventory of the differentiating components will decrease because of lead-time risk pooling.

B) No, inventory of the differentiating components will decrease because the target in-stock probability will decrease.

C) No, inventory of the differentiating components will increase because their replenishment lead-time will increase.

D) Yes, inventory of the differentiating components will remain the same because the characteristics of their demand distribution (e.g., mean and standard deviation) will not change.

E) Yes, inventory of the differentiating components will remain the same because their per unit holding cost and backorder cost will not change.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Reflective Thinking

Blooms: Analyze

11) It is also claimed that delayed differentiation will reduce the inventory of the generic product (holding the service level, such as the in-stock probability, constant) even if the different product offerings have positively correlated demand (but not perfectly positively correlated). Is this claim correct?

A) No, with positive correlation the coefficient of variability of the generic product will not be reduced.

B) No, with positive correlation the in-stock probability of the generic product will have to be increased.

C) No, with positive correlation the expected demand of the generic product will increase.

D) Yes, lead time risk pooling is most effective with positively correlated demand.

E) Yes, the standard deviation of total demand (i.e., the sum of the demands across the product offerings) will be reduced even with a positive correlation (assuming the correlation is less than one).

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Reflective Thinking

Blooms: Analyze

Aquaguard manufactures three models of water purifiers in three separate plants in Taiwan. These plants serve the demand in Europe. All three models sell at a unit price of $100 and the holding cost is 5% of the selling price per month. The monthly demand for these models is normally distributed with the following parameters:

Model 1: Mean 1000, SD 300

Model 2: Mean 1000, SD 300

Model 3: Mean 1000, SD 300

The demand for Model 1 and Model 2 has a correlation coefficient of -0.35, while that for Model 3 is independent of the other two models.

12) The company wishes to make two of the models in one plant by using flexible technology. Which two models should Aquaguard choose in order to minimize production variability in the new plant (as measured by the coefficient of variation)?

A) Models 1 and 2

B) Models 1 and 3

C) Models 2 and 3

D) All of the above.

Difficulty: 3 Hard

Topic: Capacity Pooling with Flexible Manufacturing

AACSB: Reflective Thinking

Blooms: Analyze

13) Which of the following is NOT a benefit of pooling inventory across locations?

A) One can maintain the same on-hand inventory and increase the in-stock probability.

B) One can decrease pipeline inventory.

C) One can reduce on-hand inventory and increase the in-stock probability simultaneously.

D) One can maintain the same in-stock probability with less on-hand inventory.

E) One can maintain the same on-hand inventory and increase the in-stock probability and one can decrease pipeline inventory.

F) One can decrease pipeline inventory and one can reduce on-hand inventory and increase the in-stock probability simultaneously.

G) One can maintain the same on-hand inventory and increase the in-stock probability, one can decrease pipeline inventory and One can maintain the same in-stock probability with less on-hand inventory.

Difficulty: 3 Hard

Topic: Location Pooling

AACSB: Reflective Thinking

Blooms: Analyze

14) A company wants to standardize two of its products to take advantage of product pooling. Under which demand conditions will the standardization be most effective?

A) If the demand for the two products is somewhat positively correlated.

B) If the demand for the two products is perfectly positively correlated.

C) If the demand for the two products is uncorrelated.

D) If the demand for the two products is negatively correlated.

E) The benefits of pooling do not rely on the underlying correlation.

Difficulty: 3 Hard

Topic: Product Pooling

AACSB: Reflective Thinking

Blooms: Analyze

15) Which of the following is a reason to delay the differentiation of a product?

A) There is less uncertainty with respect to demand for individual versions of a product than there is for total demand.

B) Variety can be added late in the production process without a substantial cost increase.

C) The cost of a generic component is low, relative to the cost of the unique components.

D) Demand among end items is positively correlated.

E) a and b.

F) a and d.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Reflective Thinking

Blooms: Analyze

16) A company is planning to design a new digital camera. One option is to produce two different models: the "regular" model is suitable for taking pictures in dry conditions, and the "underwater" model is suitable for taking pictures both on land and underwater. A second option is the "Swiss army knife" approach: one model that is suitable for both above and below water conditions. Which of the following is most likely to be true?

A) Due to its higher functionality, the option-two camera is likely to be lighter than both the option-one cameras.

B) Assuming total demand is the same with either option, for a given amount of inventory investment (in units), the in-stock probability with option two is likely to be higher.

C) Manufacturing labor content per camera with option two is likely to be lower than with option one.

D) Due to its integrated features, option two is likely to appeal to more consumers; hence, total demand with option two is likely to be higher than with option one.

Difficulty: 3 Hard

Topic: Product Pooling

AACSB: Reflective Thinking

Blooms: Analyze

17) A manufacturing company is considering two options for adopting manufacturing flexibility. Option 1 allows Factory 1 to produce both Products 1 and 2 while Factory 2 can only produce Product 2. Option 2 allows Factory 2 to produce both Products 1 and 2 while Factory 1 can only produce Product 1.

Option 1 is preferable over Option 2 when

A) demand for Products 1 and 2 is positively correlated.

B) demand for Products 1 and 2 is independent.

C) demand for Products 1 and 2 is negatively correlated.

D) there is more uncertainty in demand for Product 1 than for Product 2.

E) there is equal uncertainty in demand for Products 1 and 2.

F) there is more uncertainty in demand for Product 2 than for Product 1.

Difficulty: 3 Hard

Topic: Capacity Pooling with Flexible Manufacturing

AACSB: Analytical Thinking

Blooms: Analyze

18) Establishing a regional warehouse for a retailer network can (choose one)

A) reduce the total inventory required due to risk pooling.

B) be costly because of an additional facility and additional handling costs.

C) be less beneficial if the demands of stores are positively correlated.

D) be more beneficial if the distance between the supplier and the market is long.

E) be less beneficial if the number of stores is small.

F) all of the above.

G) none of the above.

Difficulty: 3 Hard

Topic: Location Pooling

AACSB: Reflective Thinking

Blooms: Analyze

19) Amazon started with one warehouse but now has seven warehouses. Amazon's decision to increase the number of warehouses it operates resulted in

A) higher overhead costs and lower technology costs.

B) higher technology costs and lower inventory costs.

C) higher service level and lower inventory costs.

D) higher inventory costs and lower shipping costs.

E) higher labor costs and lower overhead costs.

F) none of the above.

Difficulty: 3 Hard

Topic: Location Pooling

AACSB: Reflective Thinking

Blooms: Analyze

20) Capacity pooling in the form of flexible capacity is most valuable when

A) capacity is significantly greater than the expected demand.

B) capacity is significantly smaller than the expected demand.

C) capacity is approximately equal to expected demand.

D) the capacity size relative to demand does not matter.

Difficulty: 3 Hard

Topic: Capacity Pooling with Flexible Manufacturing

AACSB: Reflective Thinking

Blooms: Analyze

21) A firm currently operates a distribution center (DC) with weekly replenishments. They are considering switching to daily replenishment. To evaluate this decision, demand data was collected for one product. They found the following:

Mean Standard deviation

Demand over five days 100 40

Demand over one day 20 11

Demand for this product over time (i.e., across periods) is

A) positively correlated.

B) independent.

C) negatively correlated.

D) This data is not sufficient to determine the correlation.

Difficulty: 3 Hard

Topic: Product Pooling

AACSB: Reflective Thinking

Blooms: Analyze

22) Consider two books sold by Amazon.com, A and B. Book A is shipped to customers from the Delaware warehouse, and book B is shipped from the Seattle warehouse. Inventories for these books are managed using an order-up-to policy with a target in-stock probability. Currently, the demand correlation between these two books is zero. Suppose the demand correlation between these two books were to increase, but the means and standard deviations of demand for the books remain the same. Assume any necessary adjustments are made to the base stock levels to maintain the same target in-stock probability. What would happen to each book's average inventory?

A) Both A and B's inventory would increase.

B) Both A and B's inventory would decrease.

C) They would not change.

D) A's inventory would decrease, and B's inventory would increase.

E) A's inventory would increase, and B's inventory would decrease.

F) It is impossible to tell from the information provided.

Difficulty: 3 Hard

Topic: Location Pooling

AACSB: Reflective Thinking

Blooms: Analyze

23) A computer firm sells two versions of a computer, a "slow" and a "fast" version, at two different prices. Because these are sophisticated pieces of equipment, no matter the version purchased, a technician is required to install the computer at the customer's location. The firm decides to manufacture only the fast version of the computer. When a customer requests the slow version, a fast version is delivered to the customer, and during the installation process, the technician damages several circuit boards to convert the fast computer into a slow computer. This strategy is best described as

A) consolidated distribution.

B) location pooling.

C) universal design.

D) delayed differentiation.

E) capacity pooling.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Reflective Thinking

Blooms: Analyze

24) Which of the following is the least important part of the contract manufacturing industry's value proposition?

A) Contract manufacturers can quickly establish production capacity for a firm.

B) Contract manufacturers take advantage of scale to procure components cheaply.

C) Contract manufacturers provide lower assembly cost because they can pool capacity among multiple customers.

D) Contract manufacturers provide legal services because they have significant experience with multiple suppliers and customers.

Difficulty: 3 Hard

Topic: Capacity Pooling with Flexible Manufacturing

AACSB: Reflective Thinking

Blooms: Analyze

25) Suppose two versions of a product are made with a delayed differentiation strategy, i.e., a generic version of the product is stocked and then converted into one of the two final products as demand is realized. This strategy becomes more effective as the correlation between the two products decreases because

A) the sum of the products' demands increases.

B) the mean demand for each product increases.

C) the standard deviation of the combined demand of the two products decreases.

D) the coefficient of variation of demand for each product decreases.

E) the standard deviation of demand for each product decreases.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Reflective Thinking

Blooms: Analyze

26) The following are the observed sales of free-range chicken eggs by the Wholesome Foods grocery chain in the regions of Lilliput and Blefuscu (all numbers in dozens).

Based on the above numbers only, which of the following options is definitely true?

A) Demands in these two regions are definitely negatively correlated.

B) Demands in these two regions are definitely positively correlated.

C) Total demand in Blefuscu over the three weeks was at least 380 dozen.

D) Demands in these two regions are definitely independent of each other.

E) The store in Blefuscu carried not more than 130 dozen eggs each week on their shelves.

F) The order quantity in the Lilliput region grocery store was at most 180 dozen in any given week.

Difficulty: 3 Hard

Topic: Location Pooling

AACSB: Reflective Thinking

Blooms: Analyze

27) In the HP case, what is the best reason, not to implement DC localization in the Asian market? (Choose the best answer.)

A) Total demand in Asia was not sufficiently large enough to justify the fixed expenses associated with implementing DC localization.

B) The Asian market did not have the problem of variety.

C) Demand across products in the Asian market was positively correlated.

D) The necessary components were procured in North America, which meant long lead times for replenishing those components in Asia.

E) Air shipments to Asia were more expensive than air shipments to Europe.

F) The cost of labor in Asia is lower than the cost of labor in Europe.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Reflective Thinking

Blooms: Analyze

28) Which of the following is the best reason why Amazon opened more than one warehouse?

A) Opening multiple warehouses allowed them to reduce their inventory investment.

B) Opening multiple warehouses reduced shipping costs.

C) Opening multiple warehouses allowed them to collect broader consumer data.

D) Opening multiple warehouses reduced the number of customers that would have to pay sales tax.

E) Opening multiple warehouses simplified their logistics management software.

F) Opening multiple warehouses allows Amazon to forward buy.

Difficulty: 3 Hard

Topic: Location Pooling

AACSB: Reflective Thinking

Blooms: Analyze

29) In the Hewlett-Packard case, if each of the following pieces of new information were true, then which one would make postponement a less attractive option for the European market?

A) Demand for printers in Europe will continue to grow.

B) Manufacturing one generic printer will become less expensive at the Vancouver factory.

C) Accurate demand forecasting for different countries in Europe will become harder.

D) Demand correlation among the different countries will increase in the future.

E) Labor expenses for local (European) product assembly will become insignificant.

F) The power supply units will become cheaper with time.

G) Shipping one generic printer to Europe will be cheaper than shipping several versions.

Difficulty: 3 Hard

Topic: Product Pooling

AACSB: Reflective Thinking

Blooms: Analyze

30) Suppose a firm is currently selling three similar products with identical demand distributions but different demand correlations among them. The firm is considering designing a universal product that would replace all three of them. The firm will achieve savings in inventory

A) only if at least two of the products have negatively correlated demand.

B) only if demands for all three products are positively correlated.

C) only if all demand correlations are different from zero.

D) only if all demand correlations are different from -1.

E) only if all demand correlations are different from 1.

F) none of the above applies.

Difficulty: 3 Hard

Topic: Product Pooling

AACSB: Reflective Thinking

Blooms: Analyze

31) Suppose a firm has several factories that it can use to satisfy the demand for several products. Furthermore, each factory is operating at close to 100% utilization. Which action is likely to be most effective to increase sales?

A) Increase the mean demand.

B) Decrease the mean demand.

C) Reconfigure the factories so that they can produce a broader set of products.

D) Focus the factories so that they each produce one product.

E) Reduce the number of products sold.

F) Increase capacity.

G) Decrease capacity.

Difficulty: 3 Hard

Topic: Lead Time Pooling: Consolidated Distribution and Delayed Differentiation

AACSB: Reflective Thinking

Blooms: Analyze