Test Bank Chapter 15 Assemble-to-Order, Make-to-Order, and

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

Chapter 15 Assemble-to-Order, Make-to-Order, and

Quick Response with Reactive Capacity

1) BASF sells customized petrochemical catalysts that are produced in a plant in Germany. Many of their customers are in North America and transportation is done via ocean carrier. They can purchase container capacity in advance at the price of $2500 per container. However, if they advance purchase containers, they bear the risk of not knowing their exact needs for containers. In particular, here is a forecast of their needs for June (i.e., a density and distribution function):

If they purchase a container in advance and don't actually need it, then they will fill it with some excess "filler" product and store it in North America until it can be sold. The expected extra storage cost is $325 per container. For example, if their needs are for 2 containers but they advanced purchased 3 containers, then they ship all three containers and incur an extra $325 charge for the 1 container filled with "filler" product. Containers purchased on the spot market (after they learn their needs) are expected to cost $3000 per container. For example, they may advance purchase 1 container but discover that they need 3 containers, in which case they would purchase an additional 2 containers at $3000 each. How many containers should they advance purchase to minimize their costs?

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Knowledge Application

Blooms: Apply

2) PECO has an idea to reduce the consumption of electricity by residential users. It normally charges customers $0.11 per kWh. With a new plan, the customer pays $0.10 per kWh for the first 800 kWhs of the month, $0.15 per kWh for the next 200 kWhs (i.e., kWhs 800 through 1000) and $0.35 per kWh for all additional kWhs (i.e., all kWhs above 1000). If a household's monthly usage is normally distributed with a mean of 900 and a standard deviation of 400, what would be the household's average monthly bill under this new plan?

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 3-5.]

A small retailer is considering various monthly plans for purchasing electricity. With one plan they are charged 5 cents per kWh no matter what their consumption is. With a second plan, they can pre-purchase kWhs at the cost of 4.5 cents per kWh. If they don't use all of the kWhs they purchase, then there is no refund for the unused electricity. If they need more kWhs than they purchase, the extra kWhs are purchased at the rate of 6 cents per kWh. Their forecast for kWh usage per month is normally distributed with a mean of 6,000 and a standard deviation of 2,500.

3) Suppose they choose the first plan, the flat rate of 5 cents per kWh. What will be their expected monthly bill?

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Knowledge Application

Blooms: Apply

4) Suppose they choose the second plan, 4.5 cents per pre-purchased kWh which is non-refundable and 6 cents per additional kWh. How many kWs should they pre-purchase?

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Analytical Thinking

Blooms: Analyze

5) Suppose they choose the second plan, 4.5 cents per pre-purchased kWh which is non-refundable and 6 cents per additional kWh. If they were to pre-purchase 6000 kWhs, then what would be their expected monthly bill?

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Analytical Thinking

Blooms: Analyze

[The following information applies to questions 6-7]

Purchasing road salt for towns in the Northeast is a challenging task. The town of Homer, New York, has calculated a forecast of their annual salt needs using historical data. The forecast is summarized in the table below (Q is the quantity needed):

6) For example, there is a 60.6% chance they will need 50,000 tons or fewer, there is a 3.3% chance they will need exactly 100,000 tons, and there is a very small chance they will need more than 200,000 tons. Suppose Homer wanted to minimize the amount of inventory it purchases while at the same time having no more than a 6% chance of running out of salt (which would force it to purchase salt on the spot market for a premium). At the start of the season, how much salt (in tons) should Homer have available in its storage sheds? Assume salt must be purchased in increments of 10,000 tons.

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Knowledge Application

Blooms: Apply

7) Now suppose Homer has been offered the following deal from American Salt Mine (ASM). ASM will sell Homer salt options for $30 per option with an exercise price of $40 for each option Homer purchases in advance of the season. Homer can "exercise" it during the season to receive one ton of salt during the season. For example, if Homer purchases 100,000 options before the season starts, then it pays ASM $30 * 100,000 = $3,000,000 for those options. As Homer needs salt during the season, ASM will deliver, up to the number of purchased options, for a price of $40 per ton. Options are good only for this season—any unexercised options at the end of the season have no value. Finally, if Homer exercises all of its options and still needs more salt, then it will have to purchase salt in the spot market, for an estimated $80 per ton. Given this deal, how many options should Homer purchase from ASM? Assume options must be purchased in increments of 10,000 tons.

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Knowledge Application

Blooms: Apply

8) Dan's Independent Book Store is trying to decide on how many copies of a book to purchase at the start of the upcoming selling season. The book retails at $28.00. The publisher sells the book to Dan at $20.00. Dan will dispose of all of the unsold copies of the book at 50% off the retail price, at the end of the season. Dan estimates that demand for this book during the season is normal with a mean of 1,000 and a standard deviation of 250. Suppose Dan orders 1,415 copies of the book. What would be his expected mismatch cost?

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Analytical Thinking

Blooms: Analyze

9) SEC, a Semiconductor (fabrication) Equipment Company, has a central spare parts warehouse to support its chip fabrication plant customers located around the world. As new generations of fab equipment are introduced, the installed base of older models declines and ultimately disappears. As a consequence, SEC must at some point retire support for the older model. Once a model has been scheduled for retirement, SEC makes a "final buy" for service parts that are required to maintain support of the equipment until the retirement date. If the inventory of a part runs out before retirement, then an emergency order is placed with the part vendor. Inventory remaining in the warehouse at the retirement date is scrapped for salvage materials.

Consider one model that has 50 machines installed throughout the world and SEC has just announced the model will be retired in one year. Focus on part A in this machine. Part A's current cost to purchase is $10,000. The expected cost for an emergency order of part A after the final buy is $25,000. Part A's estimated salvage value is $2,000 and its total annual demand (across the 50 machines) is estimated to be Poisson with mean 3.5. Suppose there are currently 2 of these parts in inventory.

How many part A's should SEC order in the final buy to minimize its expected cost? (Recall, there are currently two parts in inventory.)

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Analytical Thinking

Blooms: Analyze

10) A construction company has signed a contract to build an office tower. The contract stipulates that the project will be completed in 1,500 days from today and also includes a penalty on the construction company of $30,000 per day the project is late. In addition, the construction company estimates that its internal cost is $60,000 for each day the project is late. However, completing the project early is costly to the firm as well: each day the project is early costs the firm $45,000. (This includes the opportunity cost of capital and idle capacity.) The firm estimates the project will take 1,200 days to complete with a standard deviation of 500 days. How many days should the firm wait to begin construction?

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Analytical Thinking

Blooms: Analyze

11) Montgomery County, PA (MC) predicts that its total road salt needs during the next winter will be normally distributed with a mean of 3,400 tons and a standard deviation of 1,800 tons. MC currently has no road salt in inventory. MC and the supplier American Salt Inc. (ASI) have signed the following contract. MC will receive salt on an as needed basis during the winter season (in other words, MC will buy in sufficiently small quantities, and ASI will deliver with a sufficiently small lead time that MC's total purchase for the season will be essentially equal to its total road salt needs). MC will pay $62 per ton for the first 3,600 tons purchased and $75 per additional ton above 3,600.

For example, if MC purchases 2,500 tons, then their total payment to ASI is 2,500 * $62 = $155,000, and if MC purchases 4,000 tons, then its total payment to ASI is 3,600 * $62 + 400 * $75 = $253,200. How much can MC expect to pay ASI?

Difficulty: 3 Hard

Topic: When is Mismatch Cost High?

AACSB: Analytical Thinking

Blooms: Analyze

12) WebFlix is an Internet DVD rental service. Customers mail back DVDs to the company after watching them and then receive new ones in the mail based on their preference lists that they maintain via the web. For next year, WebFlix projects that demand at its processing facility is normally distributed with mean 3,600 DVDs per day and standard deviation of 60. WebFlix needs to set a capacity for this facility, which is measured in DVDs per day. If the capacity is Q, then the cost per day incurred for this capacity is $0.1Q, no matter whether the capacity is fully utilized or not. If demand on a day exceeds the chosen capacity, then WebFlix processes the entire excess using overtime. In that case, each DVD handled with overtime costs $0.15 to process. What is the optimal processing capacity that WebFlix will need?

Difficulty: 3 Hard

Topic: Quick Response with Reactive Capacity

AACSB: Knowledge Application

Blooms: Apply

13) Zazz, a maker of a hot new MP3 player, is concerned about the availability of flash memory chips, a key component in the Zazz3 player. It is the start of April and Zazz must commit to a flash memory chip quantity for delivery in July. Each chip ordered now will cost Zazz $40. Zazz expects that demand for chips in July is normally distributed with a mean of 250,000 and a standard deviation of 200,000. If Zazz's demand in July exceeds its regular order (the amount ordered in April), then Zazz can obtain additional units on the spot market. The spot market price for these chips in July is estimated to be $50. Chips not used in July will certainly be used in August. However, chips ordered in May for August delivery are expected to cost $36. Furthermore, there is a $1 cost to hold each chip from one month to the next (due to the opportunity cost of capital and physical storage costs). How many chips should Zazz order in April?

Difficulty: 3 Hard

Topic: Quick Response with Reactive Capacity

AACSB: Knowledge Application

Blooms: Apply

[The following information applies to questions 14-16.]

You operate a small tee-shirt silk screening company. Your local professional football team has just made it to the NFC Championship game, which will be played in one week. You are considering selling tee-shirts with "NFC Champions" blazed across the top of the shirt along with the local team's name and mascot. If the team indeed wins, these shirts will sell extremely well, but if they lose, then there will be no demand for these shirts. Unfortunately, you must print the shirts before the game because otherwise there will not be enough time to take advantage of the hype. You estimate that there is only a 40% chance the local team will win, but if they win, you figure your demand will be normally distributed with mean 15,000 and standard deviation 6,000. It costs $5.50 to buy and silkscreen each shirt, you will sell these shirts for $12.50 each, and any leftover shirts (whether the team wins or loses) can be sold to a liquidator for $0.50 each.

14) Suppose you print 18,000 shirts and suppose you get lucky and the team wins. What is your expected profit?

Difficulty: 3 Hard

Topic: When is the Mismatch Cost High?

AACSB: Analytical Thinking

Blooms: Analyze

15) Suppose you print 15,000 shirts, and again, you are lucky, and the team wins. Given that the team wins, what is the probability you lose money on this venture?

Difficulty: 3 Hard

Topic: When is the Mismatch Cost High?

AACSB: Analytical Thinking

Blooms: Analyze

16) How many shirts should you print to maximize your expected profit? (Unlike in the previous two parts, do not assume the team necessarily wins.)

Difficulty: 3 Hard

Topic: Quick Response with Reactive Capacity

AACSB: Analytical Thinking

Blooms: Analyze

17) Patagonia sells outdoor wear. The margin, the loss due to salvaging, and the coefficient of variation of the demand distribution for each of several products are provided below. Among the following products, which product is likely to have the lowest demand-supply mismatch cost per unit?

A) Snow

B) Ice

C) Freeze

D) Blizzard

E) Powder

F) Chill

Difficulty: 3 Hard

Topic: When is Mismatch Cost High?

AACSB: Analytical Thinking

Blooms: Analyze

18) Which of the following normal demand distributions would result in the highest expected profit for the news vendor model (keeping cost/revenue parameters the same)? Choose the best answer.

A) Mean 20, standard deviation 0

B) Mean 20, standard deviation 10

C) Mean 20, standard deviation 20

D) Mean 10, standard deviation 0

E) Mean 10, standard deviation 10

F) Mean 10, standard deviation 20

G) It is not possible to determine which of the above has the highest expected profit because it would depend on the particular cost and revenue parameters.

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Reflective Thinking

Blooms: Analyze

19) Why does Sport Obermeyer place two production orders with their suppliers, each comprising 50% of their total season needs? Choose the best single answer.

A) This lowers their carbon footprint.

B) This increases their odds of not suffering from quota restrictions.

C) This allows them to take advantage of the positive correlation between early orders from retailers and total demand.

D) This allows them to defer production of their lowest value and easiest to forecast items until after the Las Vegas trade show.

E) This gives them more time to refine their product designs.

F) They would be better off ordering just once because then they would face a news vendor problem for which the optimal solution is known.

Difficulty: 3 Hard

Topic: Reducing Mismatch Costs with Make-to-Order

AACSB: Reflective Thinking

Blooms: Analyze

20) Which kind of product is likely to have the highest mismatch cost as a % of its maximum profit:

A) High demand variability, large gross margin, high salvage value

B) High demand variability, large gross margin, low salvage value

C) High demand variability, low gross margin, high salvage value

D) High demand variability, low gross margin, low salvage value

E) Low demand variability, large gross margin, high salvage value

F) Low demand variability, large gross margin, low salvage value

G) Low demand variability, low gross margin, high salvage value

H) Low demand variability, low gross margin, low salvage value

Difficulty: 3 Hard

Topic: When is the Mismatch Cost High?

AACSB: Reflective Thinking

Blooms: Analyze

21) You are deciding which demand forecasting system to use for a line of products: A/F approach (see LLBean) or a panel of experts (see Sport Obermeyer). Which of the following considerations will support the panel of experts' approach?

A) Demand has to be forecasted for a large number of items.

B) All items in the product line have approximately the same coefficient of variation.

C) news vendor model will be used to make stocking decisions.

D) Items in the product line differ significantly in the coefficient of variation.

E) Reactive capacity is available to make the second ordering decision.

Difficulty: 3 Hard

Topic: When is the Mismatch Cost High?

AACSB: Reflective Thinking

Blooms: Analyze

22) National Bike's mass customization model is a good business model because (choose the best one)

A) it did not make money in its bike business in the past.

B) it can bypass the retailers.

C) it can completely avoid holding component and finished goods inventory.

D) it needs to reduce the manufacturing cost.

E) the mismatch cost is high for high-end bikes.

F) all the above.

G) none of the above.

Difficulty: 3 Hard

Topic: Summary

AACSB: Reflective Thinking

Blooms: Analyze

23) In order to make reactive capacity useful,

A) the unit cost of the second order must not be higher than that of the first order.

B) the critical ratios of different products must be different.

C) the coefficient of variation (COV) of different products must be different.

D) the mismatch costs of different products must be different.

E) the lead time of the second order is not too long.

F) all the above are needed.

G) none of the above is needed.

Difficulty: 3 Hard

Topic: Quick Response with Reactive Capacity

AACSB: Reflective Thinking

Blooms: Analyze

24) Suppose the news vendor model is appropriate for each of the following products. Which one of them is most likely to have the largest difference between its maximum profit and its expected profit? Assume all products have the same mean forecasts and underage/overage costs.

Coefficient of variation Stock-out probability

a) 0.4 0.25

b) 0.4 0.05

c) 0.8 0.15

d) 1.2 0.25

e) 1.2 0.05

A) a

B) b

C) c

D) d

E) e

Difficulty: 3 Hard

Topic: Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost

AACSB: Reflective Thinking

Blooms: Analyze

25) The process of using a committee to forecast, as in the Sport Obermeyer case, becomes more useful if:

I) The committee begins to generate a single consensus forecast rather than individual forecasts.

II) The number of items to be forecasted increases.

III) The firm has more reactive capacity.

A) I only

B) II only

C) III only

D) I and II only

E) I and III only

F) II and III only

G) I, II, and III

H) None of the above

Difficulty: 3 Hard

Topic: Quick Response with Reactive Capacity

AACSB: Reflective Thinking

Blooms: Analyze

26) Taboo! Inc makes shirts for women at its plant in Costa Rica, and sells to wholesalers and distributors in the U.S. Due to long lead times; it makes its production commitments for each season using the news vendor model. Unsold shirts are salvaged at the end of the season at a heavy loss.

Now the firm is considering opening a second factory in Fall River, Massachusetts, where production costs are much higher, but production lead times shrink. Taboo! Inc plans to produce a baseline number of shirts in Costa Rica, and then respond to demand during the season by producing in the Fall River plant at a higher cost. Which of the following statements must be true under the new strategy (choose the best answer)?

i. Expected sales will go up.

ii. The total expected production of shirts for the season will go up.

iii. Expected leftover inventory of shirts at the end of the season will decline.

A) i only.

B) ii only.

C) iii only.

D) i and ii.

E) i and iii.

F) ii and iii.

G) i, ii, and iii.

Difficulty: 3 Hard

Topic: Quick Response with Reactive Capacity

AACSB: Reflective Thinking

Blooms: Analyze