Supply chain management strategy
Follow all the instructions and complete all the questions
Assignment : Quantitative Exercises
Instructions:
This assignment assesses your understanding of some quantitative techniques you learned from the course.
This assignment is worth 30 marks and contains two tasks (Task 1 and Task 2).
Task 1 carries 10 marks while Task 2 carries 20 marks.
For this assignment, you are required to prepare an Excel workbook and a Word file.
The Excel workbook should comprise multiple worksheets showing the models or the calculations you used to answer the questions in Task 1 and Task 2.
For Task 1, there should be four worksheets showing the following three demand forecasting methods that you are required to use to forecast the demand of Domino’s Pizza as well as a comparison of model performance using the KPIs mentioned in Question 2 of the task:
Moving average method;
Exponential smoothing method;
Holt’s model; and
Performance comparison of the three methods using the KPIs.
For Task 2, there should be three worksheets showing the following three sourcing decisions of Teens Forever that you are required to explore:
Onshoring;
Offshoring; and
Hybrid sourcing.
The Word file should report the process and the steps you have taken to obtain the findings. It also answers all the questions in Tasks 1 and 2.
There is no specific format for the models or report. You can use your own style to develop the models and write up the report with a proper report cover.
The marks received depends on the accuracy of the procedures and the results, as well as the clarity and comprehensiveness of the models and the report.
Task 1:
Demand Forecasting for Domino Pizza at Melbourne, Australia
Description:
Demand for supreme pizzas at Domino’s Pizza in a suburb of Melbourne in the last 12 days are as follows:
Day Demand
1 108
2 116
3 118
4 124
5 96
6 119
7 96
8 102
9 112
10 102
11 92
12 91
Questions:
Estimate demand for the next 4 days using a 4-day moving average as well as simple exponential smoothing with = 0.1. (4 marks)
Evaluate the MSE, MAD, MAPE, bias, and TS (i.e., the KPIs) in each case. Which of the two methods is better? Why? (3 marks)
Use Holt’s model to estimate the demand? Is it a better method? Why? (3 marks)
Task 2: Sourcing Decision for Teens Forever at New York, United States
Description:
Teens Forever is a retailer of trendy and low-cost apparel for young people. Located in New York City, the company divides the year into four sales seasons of about three months each and brings in new merchandise for each season.
The company has historically outsourced production to China, given the lower costs there. Sourcing from the Chinese supplier costs 55 Yuan/unit (inclusive of all delivery costs), which at the current exchange rate of 6.5 Yuan/$ (i.e., 1 USD = 6.5 Yuan) gives a variable cost of under $8.50/unit.
The Chinese supplier, however, has a long lead time, forcing Teens Forever to pick an order size well before the start of the season. This does not leave the company any flexibility if actual demand differs from the order size.
A local supplier has come to management with a proposal to supply product at a cost of $10/unit but to do so quickly enough that Teens Forever will be able to make supply in the season exactly match demand. Management is concerned about the higher variable cost but finds the flexibility of the onshore supplier very attractive. The challenge is to value the responsiveness provided by the local supplier.
Uncertainties Faced by Teens Forever
To better compare the two suppliers, management identifies demand and exchange rates as the two major uncertainties faced by the company.
Over each of the next two periods (assume them to be a year each), demand may go up by 10 percent, with a probability of 0.5, or down by 10 percent, with a probability of 0.5. Demand in the current period was 1,000 units.
Similarly, over each of the next two periods, the Yuan may strengthen by 5 precent, with a probability of 0.5, or weaken by 5 percent, with a probability of 0.5. The exchange rate in the current period was 6.5 Yuan/$.
Ordering Policies with the Two Suppliers
Given the long lead time of the offshore supplier, Teens Forever commits to an order before observing any demand signal. Given the demand uncertainty over the next two periods and the fact that the margin from each unit (about $11.50) is higher than the loss if the unit remains unsold at the end of the season (loss of about $8.50), management decides to commit to an order that is somewhat higher than expected demand.
Given that expected demand is 1,000 units over each of the next two periods, management decides to order 1,040 units from the Chinese supplier for each of the next two periods. If demand in a period turns out to be higher than 1,040 units, Teens Forever will sell 1,040 units.
However, if demand turns out to be lower than 1,040, the company will have leftover product for which it will not be able to recover any revenue. The short lead time of the local supplier allows Teens Forever to keep bringing product in a little bit at a time, based on actual sales.
Thus, if the local supplier is used, the company is able to meet all demand in each period without having any unsold inventory or lost sales. In other words, the final order from the local supplier will exactly equal the demand observed by Teens Forever.
A Potential Hybrid Strategy
The local supplier has also offered another proposal that would allow Teens Forever to use both suppliers, each playing a different role. The Chinese supplier would produce a base quantity for the season and the local supplier would cover any shortfalls that result.
The short lead time of the local supplier would ensure that no sales are lost. In other words, if Teens Forever committed to a base load of 900 units with the Chinese supplier in a given period and demand was 900 units or less, nothing would be ordered from the local supplier. If demand, however, was larger than 900 units (say, 1,100), the shortfall of 200 units would be supplied by the local supplier.
Under a hybrid strategy, the local supplier would end up supplying only a small fraction of the season’s demand. For this extra flexibility and reduced volumes, however, the local supplier proposes to charge $11/unit if it is used as part of a hybrid strategy.
Questions:
Draw a decision tree reflecting the uncertainty over the next two periods.
Identify each node in terms of demand and exchange rate and the transition probabilities. (8 marks)
If management at Teens Forever is to pick only one of the two suppliers, which one would you recommend? What is the NPV of the expected profit over the next two periods for each of the two choices? Assume a discount factor of k = 0.1 per period. (6 marks)
What do you think about the hybrid approach? Is it worth paying the local supplier extra to use it as part of a hybrid strategy?
For the hybrid approach, assume that management will order a base load of 900 units from the Chinese supplier for each of the two periods, making up any shortfall in each period at the local supplier.
Evaluate the NPV of the expected profits for the hybrid option assuming a discount factor of k= 0.1 per period. (6 marks)
Final instructions
Read the assignment document above and understand the requirements of the two tasks. Develop an Excel workbook to help answer the questions of each task. Write a Word report showing the procedures and steps you have followed to work out the solutions.
The following should be noted:
Task 1 carries 10 marks while Task 2 carries 20 marks.
The Excel workbook should comprise multiple worksheets showing the models or the calculations you used to answer the questions in Task 1 and
Task 2.
For Task 1, there should be four worksheets showing the following three demand forecasting methods that you are required to use to forecast the demand of Domino’s Pizza as well as a comparison of model performance using the KPIs mentioned in Question 2 of the task:
(a) Moving average method
(b) Exponential smoothing methods
(c) Holt’s model
(d) Performance comparison of the three methods using the KPIs
For Task 2, there should be three worksheets showing the following three sourcing decisions of Teens Forever that you are required to explore:
(a) Onshoring
(b) Outsourcing
(c) Hybrid sourcing
The Word file should report the process and the steps you have taken to obtain the findings. It also answers all the questions in Tasks 1 and 2.
The marks received depends on the accuracy of the procedures and the results, as well as the clarity and comprehensiveness of the models and the report.
Tips for Assignment 2
Task 1 is a simple demand forecasting exercise. All the necessary procedures, steps, formulas and examples are found in the course materials for Topic 8. So, it will be good to go through the topic materials first and
Task 2 is very similar to the Trip Logistics example discussed in the lecture notes of Topic 7.
Detailed step-by-step explanation on how the decision tree is constructed and the NPV of the total expected value is calculated are given. Therefore, again, it is good to go through the topic materials
NOTE: DO NOT use only one single spreadsheet in the Excel workbook for everything. Marks will be significantly deducted if the required models for the different questions are not provided separately.
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