7/25/2019 Solutions Review Questions Session 5

1/2

Solutions

to

Review

Questions

Session

5

ProductProcessMatrix

Solution:

Thehautecouturedepartmentofahighfashioncompanyproduceshighlycustomizedproductsin

extremelylowvolumes.Inordertoachievesuchahighlevelofcustomizationtheproduction

processmust

be

structured

as

an

extremely

flexible

(and

costly)

job

shop.

Massmerchantsrelyonprocessstandardizationandeconomiesofscaletoproducelargevolumesof

lowcost,highlystandardizedproducts.

M&Sprovideanintermediatelevelofcustomizationtotheircustomers(higherthanmassmerchants

butmuchlowerthanhighfashionfirms).Thiscustomizationcanonlybeachievedifproductionis

organizedinbatches.

Zaradeliversmediumtohighperceivedcustomization(largevarietyofmodelsproducedinsmall

quantities)usingthesametypeofbatchproductionprocessesasM&S.Furthermore,thecontinuous

arrivalofnewmodelsproducedinsmallbatchesenablesZaratominimizenewsboylossesandtosell

productsofacomparable(althoughslightlylower)qualitythanM&Satalowerprice.

Companies

that

like

Zara

pursue

this

strategy

of

delivering

fashion

at

a

low

cost

are

transformingtheapparelindustry.Asaresultoftheirprogressivemarketpenetration,theyerode

marketsharebothfromcompanieslikeM&S(whichareincreasinglyperceivedasoutoffashion)

andfromhighfashionfirms(whichareperceivedasoutofprice).

Apparelindustry

A) Answer: b) It is typically extremely difficult and costly to improve forecasts beyond a

given level of accuracy. A better way of dealing with newsboy losses would be to

reduce lead-time (which reduces uncertainty and implicitly makes forecasting easier

and more accurate) or to supply a continuously renewed set of small batches that never

saturate the market, as Zara does.

B) Marks & Spencer. Newsboy losses are a serious concern for companies that because

of their long lead time - need to forecast demand ahead of time. This is the case for

Marks & Spencer, which have on average much longer lead times than Zara.

Alternatively one could argue that Marks & Spencer operate in a much more stable

market than Zara (traditional UK customers as opposed to young urban shoppers).

Process

Product

Mass

merchants

M&SZARA

High fashion

(Dior, Chanel, )

Mass

merchants

M&SZARA

High fashion

(Dior, Chanel, )

Rigid Line

flow

Manual

shop

Batch

flow

High

customisationSome

customisation

High

standardisation

7/25/2019 Solutions Review Questions Session 5

2/2

Hence in theory it would be easier for them to predict demand and to hedge

against newsboy losses. This argument is less strong than the first one, though.

LaurenceandRalph

Answer(a):Intuitively,ifL&Rcanuseareactivesupplier,theoptionvalueoftheunitpurchased

fromtheChinesesupplierdecreasescomparedtothecasewhenthereactivesupplierisnot

available.In

other

words,

without

the

reactive

supplier,

if

L&R

did

not

purchase

enough

units

from

theChinesesupplier(i.e.ifdemandislargerthantheorderplaced),L&Rincuracostproportionalto

theforgoneprofit(differencebetweenthesellingpriceandthecostoforderingfromtheChinese

supplier).Whenthereactivesupplierisavailable,ifdemandislargerthantheorderplacedwiththe

Chinesesupplier,L&Rcanstillusethereactivesupplierasabackupoptionandwillincuran

opportunitycostproportionaltothedifferencebetweenthecostoforderingfromthereactive

supplierandthecostoforderingfromtheChinesesupplier.Hence,L&Rshoulddecreasetheorder

fromtheChinesesupplierwhenthereactivesupplierbecomesavailable.

ChaseJacobsChapter17Problem1(incoursepackage)

Shortagecost:$6,Excesscost:$2.50

CriticalFractile=6/8.50=0.7059

z=0.54Buy250+0.54*34=268.36=>269[boxesoflettuce]

RevenueManagement

Shortagecost=$400,Excesscost=$100

CriticalFractile=0.8

Protect10+(3010)*0.8=26seats [assuming11demand 30]

ChaseJacobsChapter17Problem2(incoursepackage)

Shortagecost(morenoshowsthanadditionalseatssold)=$125;Excesscost(lessnoshowsthan

additionalseatssold)=$250125=$125;sincetheykeepyour$125!]

Criticalfractile=0.5

z=0

Overbook25+0*15=25seats

2productscenario

Shortagecost=9010=$80(lostmarginonproduct2marginmadeonproduct1);Excesscost

=10+10=$20(productioncost+opportunitycostofnotsellingproduct1)]

Criticalfractile=0.8

z=0.84

Productionquantity:15+0.84*5=19.2=>Produce20unitsofproduct2.

DualSourcing

If you buy too many units from the Chinese supplier, you lose: Co=200-90=$110 per unitIf you buy too few units from the Chinese supplier and have to turn to the Mexican one instead,you lose revenues: Cu = margin from Chinese supplier margin now earned using Mexicansupplier = (1000-350-200) (1000-350 300) = $100 (Or alternatively: cost increase whensourcing from Mexico: Cu=300-200=100).SL=Cu/(Cu+Co)= 100/(100+110)=47.6%Z= - 0.063Order quantity from Chinese supplier: 600 0.063*250 = 584 or 585Expected order quantity from Mexican supplier = expected shortages from Chinese supplier =L(z)*Sigma = 0.431 * 250 = 107,75Hence he should source from both suppliers, with the bulk still coming from China.