Chapter 12Determining Optimal Level of Product AvailabilityTrue/False1. The level of product availability is also referred to as the customer service level.Answer: TrueDifficulty: Easy2. A supply chain can use a high level of product availability to improve itsresponsiveness and attract customers.Answer: TrueDifficulty: Moderate3. A high level of product availability requires less inventory, which will keep costsdown for the supply chain.Answer: FalseDifficulty: Moderate4. A supply chain needs to achieve a balance between the level of availability andthe cost of inventory that maximizes supply chain revenues.Answer: FalseDifficulty: Hard5. Whether the optimal level of availability is high or low depends on where aparticular company believes they can maximize profits.Answer: TrueDifficulty: Moderate6. The cost of overselling is denoted by C o and is the loss incurred by a firm foreach unsold unit at the end of the selling season.Answer: FalseDifficulty: Easy7. The cost of understocking is denoted by C u and is the margin lost by a firm foreach lost sale because there is no inventory on hand.Answer: TrueDifficulty: Moderate8. The cost of underselling is a key factor that influences the optimal level ofproduct availability.Answer: FalseDifficulty: Moderate9. The costs of overstocking and understocking have a direct impact on both theoptimal cycle service level and profitability.Answer: TrueDifficulty: Easy10. As the ratio of the cost of overstocking to the cost of understocking gets smaller,the optimal level of product availability decreases.Answer: FalseDifficulty: Hard11. With reduced demand uncertainty, a supply chain manager can better matchsupply and demand by reducing both overstocking and understocking.Answer: TrueDifficulty: Moderate12. An increase in forecast accuracy increases both the overstocked andunderstocked quantity and decreases a firm’s profits.Answer: FalseDifficulty: Easy13. Supply chain managers are able to increase their forecast accuracy as leadtimes decrease, which allows them to better match supply with demand andincrease supply chain profitability.Answer: TrueDifficulty: Easy14. If quick response allows multiple orders in the season, profits increase and theoverstock quantity increases.Answer: FalseDifficulty: Hard15. Quick response results in the manufacturer making a lower profit in the shortterm if all else is unchanged.Answer: TrueDifficulty: Hard16. There is a cost associated with postponement because the production cost usingpostponement is typically lower than the production cost without it.Answer: FalseDifficulty: Easy17. Postponement is valuable for a firm that sells a large variety of products withdemand that is independent and comparable in size.Answer: TrueDifficulty: Moderate18. Postponement may increase overall profits for a firm if a single productcontributes the majority of the demand because the increased manufacturingexpense due to postponement outweighs the small benefit that aggregationprovides in this case.Answer: FalseDifficulty: Hard19. Tailored postponement allows a firm to increase its profitability by onlypostponing the uncertain part of the demand and producing the predictable partat a lower cost without postponement.Answer: TrueDifficulty: Moderate20. In tailored sourcing,firms use a combination of two supply sources, one focusingon cost and able to handle uncertainty well, and the other focusing on flexibility to handle uncertainty, but at a higher cost.Answer: FalseDifficulty: Moderate21. Tailored sourcing may be volume-based or product-based depending on thesource of uncertainty.Answer: TrueDifficulty: Easy22. In volume-based tailored sourcing, the predictable part of a product’s demand isproduced at a flexible facility, whereas the uncertain portion is produced at anefficient facility.Answer: FalseDifficulty: Moderate23. In product-based tailored sourcing, low-volume products with uncertain demandare obtained from a flexible source, while high-volume products with lessdemand uncertainty are obtained from an efficient source.Answer: TrueDifficulty: Easy24. A contract may contain specifications regarding quantity, price, time, and quality.Answer: TrueDifficulty: Easy25. Double marginalization refers to the fact that the total supply chain is dividedbetween the manufacturer and the retailer.Answer: TrueDifficulty: Moderate26. Manufacturers can use buy-back contracts to increase their own profits as wellas total supply chain profits.Answer: TrueDifficulty: Moderate27. Buybacks encourage retailers to increase the level of product availability.Answer: TrueDifficulty: Easy28. Revenue sharing with a lower wholesale price allows retailers but notmanufacturers to increase their profit.Answer: FalseDifficulty: Moderate29. Revenue sharing encourages retailers to increase the level of product availability.Answer: TrueDifficulty: Easy30. Manufacturers can use contracts with quantity flexibility to increase their ownprofits at the expense of total supply chain profits.Answer: FalseDifficulty: Easy31. With vendor-managed inventory(VMI), the control of the replenishment decisionmoves to the manufacturer instead of the retailer.Answer: TrueDifficulty: Easy32. VMI can allow a manufacturer to increase their profits as well as profits for theentire supply chain by increasing some of the effects of double marginalization.Answer: FalseDifficulty: EasyMultiple Choice1. The level of product availabilitya. is also referred to as the customer service level.b. is an important component of any supply chain’s responsiveness.c. increases revenues for the supply chain by increasing sales.d. All of the above are true.e. Only a and b are true.Answer: eDifficulty: Hard2. A supply chain can use a high level of product availability toa. improve its responsiveness and attract customers.b. reduce costs for the supply chain by reducing inventories.c. increase revenues for the supply chain by increasing sales.d. All of the above are true.e. Only a and c are true.Answer: eDifficulty: Easy3. A high level of product availability requiresa. large inventories and tends to raise costs for the supply chain.b. large inventories and tends to reduce costs for the supply chain.c. small inventories and tends to raise costs for the supply chain.d. small inventories and tends to reduce costs for the supply chain.e. none of the aboveAnswer: aDifficulty: Easy4. A supply chain needs to achieve a balance between the level of availability andthe cost of inventory thata. maximizes supply chain revenues.b. minimizes supply chain costs.c. maximizes supply chain profitability.d. maximizes supply chain availability.e. all of the aboveAnswer: cDifficulty: Moderate5. Whether the optimal level of product availability is high or low depends on wherea particular company believes they cana. minimize cost.b. maximize revenue.c. maximize profits.d. maximize product availability.e. all of the aboveAnswer: cDifficulty: Moderate6. The key factors that influence the optimal level of product availability do notincludea. the cost of overstocking the product.b. the cost of stocking the product.c. the cost of understocking the product.d. All of the above are key factors.e. None of the above are key factors.Answer: bDifficulty: Moderate7. The loss incurred by a firm for each unsold unit at the end of the selling season isa. the cost of overstocking the product.b. the cost of stocking the product.c. the cost of understocking the product.d. the cost of overselling the product.e. the cost of underselling the product.Answer: aDifficulty: Moderate8. The margin lost by a firm for each lost sale because there is no inventory onhand isa. the cost of overstocking the product.b. the cost of stocking the product.c. the cost of understocking the product.d. the cost of overselling the product.e. the cost of underselling the product.Answer: cDifficulty: Moderate9. The margin lost from current as well as future sales if the customer does notreturn should be included ina. the cost of overstocking the product.b. the cost of stocking the product.c. the cost of understocking the product.d. the cost of overselling the product.e. the cost of underselling the product.Answer: cDifficulty: Moderate10. Which of the following is not a situation involving the trade-off between the costof overstocking and the cost of understocking?a. seasonal products where all leftover items must be disposed of at the endof the seasonb. continuously stocked items where demand during stockout is backloggedc. continuously stocked items where demand during stockout is lostd. continuously stocked items where demand during stockout is redirectede. none of the aboveAnswer: dDifficulty: Moderate11. The costs of overstocking and understocking have a direct impact ona. the optimal cycle service level but not profitability.b. profitability but not the optimal cycle service level.c. both the optimal cycle service level and profitability.d. neither the optimal cycle service level or profitability.e. the optimal cycle service level and an indirect impact on profitability.Answer: cDifficulty: Moderate12. Which of the following is not a managerial lever to increase profitability?a. increasing the salvage value of each unitb. decreasing the margin lost from a stockoutc. reducing demand uncertaintyd. reducing the level of product availability below optimale. increasing forecast accuracyAnswer: dDifficulty: Moderate13. Which of the following would be a strategy to increase the salvage value of anunsold product?a. discarding the unused materialb. selling unsold product to an outlet storec. keeping the product in inventory until it sellsd. reduce the level of cycle inventorye. none of the aboveAnswer: bDifficulty: Easy14. Which of the following would be a strategy to decrease the margin lost in astockout?a. arranging for backup sourcingb. discarding the unused materialc. selling unsold product to an outlet stored. reduce the level of cycle inventorye. none of the aboveAnswer: aDifficulty: Moderate15. As the ratio of the cost of overstocking to the cost of understocking gets smaller,a. the optimal level of product availability becomes irrelevant.b. the optimal level of product availability decreases.c. the optimal level of product availability remains stable.d. the optimal level of product availability increases.e. none of the aboveAnswer: dDifficulty: Hard16. Which of the following is not an approach to reduce the uncertainty of demand?a. tailored sourcingb. quick responsec. postponementd. improved forecastinge. decreased marginAnswer: eDifficulty: Moderate17. With reduced demand uncertainty, a supply chain manager cana. increase both overstocking and understocking.b. increase overstocking and reduce understocking.c. reduce overstocking and increase understocking.d. reduce both overstocking and understocking.e. none of the aboveAnswer: dDifficulty: Easy18. A company that uses better market intelligence and collaboration to reducedemand uncertainty is making use ofa. tailored sourcing.b. quick response.c. postponement.d. improved forecasting.e. decreased margin.Answer: dDifficulty: Moderate19. A company that reduces replenishment lead time so that multiple orders may beplaced in the selling season is making use ofa. tailored sourcing.b. quick response.c. postponement.d. improved forecasting.e. decreased margin.Answer: bDifficulty: Moderate20. A company with multiple products, that chooses to delay product differentiationuntil closer to the point of sale, is usinga. tailored sourcing.b. quick response.c. postponement.d. improved forecasting.e. decreased margin.Answer: cDifficulty: Moderate21. A company that uses a more expensive short lead time supplier as a backup fora low cost, long lead time supplier is usinga. tailored sourcing.b. quick response.c. postponement.d. improved forecasting.e. decreased margin.Answer: aDifficulty: Moderate22. An increase in forecast accuracya. decreases both the overstocked and understocked quantity anddecreases a firm’s profits.b. decreases both the overstocked and understocked quantity and increasesa firm’s profits.c. increases both the overstocked and understocked quantity and decreasesa firm’s profits.d. increases both the overstocked and understocked quantity and increasesa firm’s profits.e. none of the aboveAnswer: bDifficulty: Moderate23. Supply chain managers are able toa. increase their forecast accuracy as lead times increase.b. increase their forecast accuracy as lead times decrease.c. decrease their forecast accuracy as lead times decrease.d. decrease their forecast accuracy as lead times increase.e. a product is received into stock at a store.Answer: bDifficulty: Moderate24. As lead times decrease, supply chain managers are able toa. better match supply with demand.b. better match demand with supply.c. increase supply chain cost.d. decrease product availability.e. none of the aboveAnswer: aDifficulty: Moderate25. Which of the following is not a consequence of being able to place a secondorder during the season for a seasonal product?a. The expected total quantity ordered during the season with two orders isless.b. The average overstock to be disposed of at the end of the sales season isless.c. The profits are higher.d. The average inventory level is higher.e. none of the aboveAnswer: dDifficulty: Moderate26. As the total quantity for the season is broken up into multiple smaller orders, thebuyer is better able toa. match supply and demand and increase cost.b. match supply and demand and increase profitability.c. match supply and demand and decrease profitability.d. match supply and demand and decrease product availability.e. none of the aboveAnswer: bDifficulty: Moderate27. If quick response allows multiple orders in the season,a. profits decrease and the overstock quantity decreases.b. profits decrease and the overstock quantity increases.c. profits increase and the overstock quantity decreases.d. profits increase and the overstock quantity increases.e. none of the aboveAnswer: cDifficulty: Moderate28. Quick response is clearly advantageous toa. a distributor in the supply chain.b. a retailer in the supply chain.c. a manufacturer in the supply chain.d. every step in the supply chain.e. none of the aboveAnswer: bDifficulty: Hard29. Quick response results ina. the manufacturer making a lower profit in the long term if all else isunchanged.b. the manufacturer making a lower profit in the short term if all else isunchanged.c. the retailer making a lower profit in the short term if all else is unchanged.d. the distributor making a lower profit in the short term if all else isunchanged.e. none of the aboveAnswer: bDifficulty: Moderate30. There is a cost associated with postponement because the production cost usingpostponement is typicallya. higher than the production cost without it.b. lower than the production cost without it.c. very stable.d. equal to the production cost without it.e. none of the aboveAnswer: aDifficulty: Easy31. Postponement is valuable for a firm thata. sells a large variety of products with demand that is dependent andcomparable in size.b. sells a large variety of products with demand that is independent andcomparable in size.c. sells a small variety of products with demand that is dependent andcomparable in size.d. sells a small variety of products with demand that is independent andcomparable in size.e. focuses on processes that are internal to the firm.Answer: bDifficulty: Hard32. Postponement isa. not very effective if a large fraction of demand comes from multipleproducts.b. not very effective if a small fraction of demand comes from a singleproduct.c. only effective if a large fraction of demand comes from a single product.d. effective even if a large fraction of demand comes from a single product.e. none of the aboveAnswer: bDifficulty: Hard33. When a firm uses production with postponement to satisfy a part of its demandwith the rest being satisfied without postponement, it is usinga. adjustable postponement.b. flexible postponement.c. managed postponement.d. tailored postponement.e. none of the aboveAnswer: dDifficulty: Moderate34. Under tailored postponement, a firm produces the amount that is very likely tosell usinga. the lower cost production method with postponement and produces theportion of demand that is uncertain using postponement.b. the lower cost production method without postponement and producesthe portion of demand that is uncertain using postponement.c. the higher cost production method with postponement and produces theportion of demand that is uncertain using postponement.d. the higher cost production method without postponement and producesthe portion of demand that is uncertain using postponement.e. All of the above are accurate.Answer: bDifficulty: Moderate35. In tailored sourcing,firms use a combination of two supply sources,a. one focusing on cost but unable to handle uncertainty well, and the otherfocusing on flexibility to handle uncertainty, but at a higher cost.b. one focusing on cost and able to handle uncertainty well, and the otherfocusing on flexibility to handle uncertainty, but at a higher cost.c. one focusing on cost but unable to handle uncertainty well, and the otherfocusing on flexibility to handle uncertainty at a lower cost.d. one focusing on cost and able to handle uncertainty well, and the otherfocusing on flexibility to handle uncertainty at a lower cost.e. None of the above are accurate.Answer: aDifficulty: Hard36. In volume-based tailored sourcinga. the predictable part of a product’s demand is produced at an efficientfacility.b. the uncertain portion is produced at a flexible facility.c. the predictable part of a product’s demand is produced at a flexible facility.d. all of the abovee. a and b onlyAnswer: eDifficulty: Moderate37. In product-based tailored sourcinga. low-volume products with uncertain demand are obtained from a flexiblesource.b. high-volume products with less demand uncertainty are obtained from anefficient source.c. high-volume products with less demand uncertainty are obtained from aflexible source.d. all of the abovee. a and b onlyAnswer: eDifficulty: Moderate38. A contracta. specifies the parameters within which a buyer places orders and asupplier fulfills them.b. may contain specifications regarding quantity, price, time, and quality.c. may require the buyer to specify the precise quantity required, with a verylong lead time.d. all of the abovee. a and c onlyAnswer: dDifficulty: Moderate39. Double marginalization refers to the fact that the total supply chain margin isdivided betweena. the customer and the retailer.b. the distributor and the retailer.c. the manufacturer and the retailer.d. the manufacturer and the customer.e. none of the aboveAnswer: cDifficulty: Moderate40. Each member of the supply chain makes decisions consideringa. only a portion of the total supply chain margin.b. the total supply chain margin.c. other members of the supply chain.d. customers of the supply chain.e. none of the aboveAnswer: aDifficulty: Moderate41. Buy-backs encourage retailers toa. decrease the level of product availability.b. increase the level of product availability.c. decrease the level of profitability.d. increase the level of cost.e. none of the aboveAnswer: bDifficulty: Hard42. The impact of holding cost subsidies on manufacturer and supply chain profits isa. the opposite of buy-back contracts.b. negligible.c. very much like buy-back contracts.d. a decrease the level of profitability.e. none of the aboveAnswer: cDifficulty: Moderate43. When the manufacturer charges the retailer a low wholesale price and shares afraction of the revenue generated by the retailer, it is referred to asa. double marginalization.b. buy-backs.c. holding cost subsidies.d. revenue-sharing.e. none of the aboveAnswer: dDifficulty: Easy44. Revenue sharing with a lower wholesale price allowsa. only manufacturers to increase their profit.b. only retailers to increase their profit.c. both retailers and manufacturers to increase their profit.d. neither retailers or manufacturers to increase their profit.e. none of the aboveAnswer: cDifficulty: Moderate45. With vendor-managed inventory(VMI),a. the customer is responsible for all decisions regarding product inventoriesat the retailer.b. the retailer is responsible for all decisions regarding product inventories atthe manufacturer.c. the manufacturer or supplier is responsible for all decisions regardingproduct inventories at the retailer.d. the customer is responsible for all decisions regarding product inventoriesat the manufacturer.e. none of the aboveAnswer: cDifficulty: ModerateEssay/Problems1. Explain the relationship between product availability and supply chain profitability.Answer: The level of product availability is measured using the cycle service level or the fill rate, which are metrics for the amount of customer demand satisfiedfrom available inventory. The level of product availability is also referred to as the customer service level. The level of product availability is an importantcomponent of any supply chain’s responsiveness. A supply chain can use a highlevel of product availability to improve its responsiveness and attract customers.This increases revenues for the supply chain by increasing sales through highproduct availability when customers come to make a purchase. However, a highlevel of product availability requires large inventories, and large inventories tendto raise costs for the supply chain. Therefore, a supply chain needs to achieve abalance between the level of availability and the cost of inventory. This optimallevel of product availability is one that maximizes supply chain profitability.Whether the optimal level of availability is high or low depends on where aparticular company believes they can maximize profits.Difficulty: Moderate2. Describe the two key factors that influence the optimal level of product availabilitywithin a supply chain.Answer: The two key factors that influence the optimal level of product availability are:• Cost of overstocking the product• Cost of understocking the productThe cost of overstocking is denoted by C o and is the loss incurred by a firm foreach unsold unit at the end of the selling season. The cost of understocking isdenoted by C u and is the margin lost by a firm for each lost sale because there is no inventory on hand. The cost of understocking should include the margin lostfrom current as well as future sales if the customer does not return. The costs of overstocking and understocking have a direct impact on both the optimal cycleservice level and profitability.Difficulty: Easy3. Decribe managerial levers to increase profitability within a supply chain.Answer: Three managerial levers to increase profitability are:1. Increasing the salvage value of each unit increases profitability (as wellas the optimal cycle service level).2. Decreasing the margin lost from a stockout increases profitability.3. Reducing demand uncertainty.One strategy to increase the salvage value of an unsold product would be selling unsold product to an outlet store.Strategies to decrease the margin lost in a stockout include arranging for backup sourcing (that may be more expensive) so customers are not lost forever andpurchasing product from a competitor on the open market.As the ratio of the cost of overstocking to the cost of understocking gets smaller, the optimal level of product availability increases. This fact explains thedifference in the level of product availability between a high-end store and adiscount store. The high-end store has higher margins and thus a higher cost ofunderstocking. It should thus provide a higher level of product availability than adiscount store with lower margins, and as a result, a lower cost of stocking out.The reduction of demand uncertainty is a significant managerial lever to improve supply chain profitability. With reduced demand uncertainty, a supply chainmanager can better match supply and demand by reducing both overstockingand understocking. A manager can reduce demand uncertainty via the following means:1. Improved forecasting:Use better market intelligence and collaborationto reduce demand uncertainty.2. Quick response: Reduce replenishment lead time so that multipleorders may be placed in the selling season.3. Postponement:In a multiproduct setting, postpone productdifferentiation until closer to the point of sale.4. Tailored sourcing:Use a more expensive short lead time supplier as abackup for a low cost, long lead time supplier.Difficulty: Moderate4. Describe the approaches a manager can use to reduce demand uncertainty.Answer: An increase in forecast accuracy decreases both the overstocked and understocked quantity and increases a firm’s profits.Quick response is the set of actions a supply chain takes that lead to areduction in the replenishment lead time. Supply chain managers are able toincrease their forecast accuracy as lead times decrease, which allows them tobetter match supply with demand and increase supply chain profitability. If quick response allows multiple orders in the season, profits increase and the overstock quantity decreases.Postponement allows a firm to increase profits and better match supply anddemand if the firm produces a large variety of products whose demand is notpositively correlated and is of about the same size. There is a cost associatedwith postponement because the production cost using postponement is typically higher than the production cost without it.In tailored sourcing,firms use a combination of two supply sources, onefocusing on cost but unable to handle uncertainty well, and the other focusing on flexibility to handle uncertainty, but at a higher cost. For tailored sourcing to beeffective, having supply sources where one serves as the backup to the other is not sufficient.Difficulty: Moderate5. Discuss the advantages and disadvantages of quick response.Answer: There are three important consequences of being able to place asecond order in the season.1. The expected total quantity ordered during the season with two ordersis less than that with a single order for the same cycle service level. Inother words, it is possible to provide the same level of product availabilityto the customer with less inventory if a second follow-up order is allowedin the sales season.2. The average overstock to be disposed of at the end of the salesseason is less if two orders are allowed.3. The profits are higher when a second order is allowed during the salesseason.In other words, as the total quantity for the season is broken up into multiplesmaller orders, the buyer is better able to match supply and demand andincrease profitability. If quick response allows multiple orders in the season,profits increase and the overstock quantity decreases.Quick response is clearly advantageous to a retailer in the supply chain, withone caveat. As the manufacturer reduces replenishment lead times, allowing fora second order, we have seen that the retailer’s order size drops. In effect, themanufacturer sells less to the retailer. Thus, quick response results in themanufacturer making a lower profit in the short term if all else is unchanged. This is an important point to consider, because decreasing replenishment lead timesrequires tremendous effort from the manufacturer, yet seems to benefit theretailer at the expense of the manufacturer. The benefits resulting from quickresponse should be shared appropriately across the supply chain.Difficulty: Hard6. Explain how tailored postponement can improve profitability.。
