Deck 13: Determining the Optimal Level of Product Availability

Question 1

The cost of overselling is denoted by C? and is the loss incurred by a firm for each unsold unit at the end of the selling season.

Answer 1

FALSE

Question 2

A managerial lever to increase profitability is to decrease the salvage value of each unit.

Answer 2

FALSE

Question 3

An increase in forecast accuracy increases both the overstocked and understocked quantity and decreases a firm's profits.

Answer 3

FALSE

Question 4

Quick response results in the manufacturer making a lower profit in the short term if all else is unchanged.

Question 5

A supply chain can use a high level of product availability to improve its responsiveness and attract customers.

Question 6

A high level of product availability requires less inventory, which will keep costs down for the supply chain.

Question 7

Whether the optimal level of availability is high or low depends on where a particular company believes they can maximize profits.

Question 8

Tailored sourcing may be volume-based or product-based depending on the source of uncertainty.

Question 9

Postponement is valuable for a firm that sells a large variety of products with demand that is independent and comparable in size.

Question 10

A supply chain needs to achieve a balance between the level of availability and the cost of inventory that maximizes supply chain revenues.

Question 11

A supply chain can use a high level of product availability to improve its responsiveness and attract customers, thus increasing revenue for the supply chain.

Question 12

Tailored postponement allows a firm to increase its profitability by only postponing the uncertain part of the demand and producing the predictable part at a lower cost without postponement.

Question 13

In volume-based tailored sourcing, the predictable part of a product's demand is produced at a flexible facility, whereas the uncertain portion is produced at an efficient facility.

Question 14

As the ratio of the cost of overstocking to the cost of understocking gets smaller, the optimal level of product availability decreases.

Question 15

The cost of understocking is denoted by C? and is the margin lost by a firm for each lost sale because there is no inventory on hand.

Question 16

The costs of overstocking and understocking have a direct impact on both the optimal cycle service level and profitability.

Question 17

With reduced demand uncertainty, a supply chain manager can better match supply and demand by reducing both overstocking and understocking.

Question 18

If quick response allows multiple orders in the season, profits increase and the overstock quantity increases.

Question 19

In product-based tailored sourcing, low-volume products with uncertain demand are obtained from a flexible source, while high-volume products with less demand uncertainty are obtained from an efficient source.

Question 20

The cost of underselling is a key factor that influences the optimal level of product availability.

Question 21

Scenario 13.1 - Nefarious
The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20.
The professor's suitcase has room for 50 boxes of souvenirs. How many boxes does he expect to have left once his friends have bought what they want?

A) 0
B) 1
C) 2
D) 3

Question 22

A high level of product availability requires ________, which raises supply chain costs.

A) large inventories
B) increased revenues
C) reduced costs
D) understocking the product

Question 23

Scenario 13.1 - Nefarious
The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20.
Naturally, the professor will purchase the optimal number of boxes. (He's had a course or two in supply chain management and knows this model well.) What is the expected number of boxes that he doesn't sell?

A) 5
B) 18
C) 13
D) 7

Question 24

The margin lost by a firm for each lost sale because there is no inventory on hand is

A) 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.

Question 25

The level of product availability, also referred to as the ________, is one of the primary measures of a supply chain's responsiveness.

A) no stock out level
B) reliability level
C) customer service level
D) logistics measure

Question 26

Which of the following would be a strategy to decrease the margin lost in a stockout?

A) Arranging for backup sourcing
B) Discarding the unused material
C) Selling unsold product to an outlet store
D) Reducing the level of cycle inventory

Question 27

Scenario 13.1 - Nefarious
The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20.
What is the optimal quantity of boxes for the professor to bring back home to sell to his friends?

A) 88
B) 74
C) 96
D) 82

Question 28

The level of product availability

A) 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) Only A and B are true.

Question 29

A high level of product availability requires ________, which raises supply chain costs.

A) large inventories
B) increased revenues
C) reduced costs
D) understocking the product

Question 30

Scenario 13.1 - Nefarious
The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20.
Naturally, the professor will purchase the optimal number of boxes. (He's had a course or two in supply chain management and knows this model well.) If each of his friends purchases only one box, how many friends will he turn away because he runs out of boxes of souvenirs?

A) 5
B) 3
C) 2
D) 1

Question 31

The level of product availability, also referred to as the ________, is one of the primary measures of a supply chain's responsiveness.

A) no stock out level
B) reliability level
C) customer service level
D) logistics measure

Question 32

The loss incurred by a firm for each unsold unit at the end of the selling season is

A) 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.

Question 33

Scenario 13.1 - Nefarious
The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20.
The professor's suitcase has room for 50 boxes of souvenirs. What is his expected profit?

A) $10,241
B) $11,975
C) $9,863
D) $8,127

Question 34

A supply chain needs to achieve a balance between the level of availability and the cost of inventory that

A) maximizes supply chain revenues.
B) minimizes supply chain costs.
C) maximizes supply chain profitability.
D) maximizes supply chain availability.

Question 35

A high level of product availability requires

A) 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.

Question 36

Whether the optimal level of product availability is high or low depends on where a particular company believes they can

A) minimize cost.
B) maximize revenue.
C) maximize profits.
D) maximize product availability.

Question 37

Scenario 13.1 - Nefarious
The tenured professor routinely led student groups on factory tours in exotic locales, and one popular destination was an island south of Miami. The students enjoyed this happy little island and the professor liked it because he could supplement his income by bringing back a few boxes souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation of 20.
Naturally, the professor will purchase the optimal number of boxes. (He's had a course or two in supply chain management and knows this model well.) What is his expected profit from purchasing the optimal number of boxes?

A) $11,975
B) $11,455
C) $11,165
D) $10,835

Question 38

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.

Question 39

The costs of overstocking and understocking have a direct impact on

A) 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 nor profitability.

Question 40

The margin lost from current as well as future sales if the customer does not return should be included in

A) 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.

Question 41

A company that uses a more expensive short lead time supplier as a backup for a low cost, long lead time supplier is using

A) tailored sourcing.
B) quick response.
C) postponement.
D) improved forecasting.

Question 42

When a firm uses production with postponement to satisfy a part of its demand with the rest being satisfied without postponement, it is using

A) adjustable postponement.
B) flexible postponement.
C) managed postponement.
D) tailored postponement.

Question 43

In tailored sourcing, firms use a combination of two supply sources,

A) one focusing on cost but unable to handle uncertainty well, and the other focusing on flexibility to handle uncertainty, but at a higher cost.
B) one focusing on cost and able to handle uncertainty well, and the other focusing on flexibility to handle uncertainty, but at a higher cost.
C) one focusing on cost but unable to handle uncertainty well, and the other focusing on flexibility to handle uncertainty at a lower cost.
D) one focusing on cost and able to handle uncertainty well, and the other focusing on flexibility to handle uncertainty at a lower cost.

Question 44

Quick response results in

A) the manufacturer making a lower profit in the long term if all else is unchanged.
B) the manufacturer making a lower profit in the short term if all else is unchanged.
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 is unchanged.

Question 45

Postponement is valuable for a firm that

A) sells a large variety of products with demand that is dependent and comparable in size.
B) sells a large variety of products with demand that is independent and comparable in size.
C) sells a small variety of products with demand that is dependent and comparable in size.
D) sells a small variety of products with demand that is independent and comparable in size.

Question 46

________ allows a firm to increase profits and better match supply and demand if the firm produces a large variety of products whose demand is unpredictable, not positively correlated, and is of about the same size.

A) Shortened forecasting window
B) Quick response
C) Postponement
D) Tailored sourcing

Question 47

An increase in forecast accuracy

A) decreases both the overstocked and understocked quantity and decreases a firm's profits.
B) decreases both the overstocked and understocked quantity and increases a firm's profits.
C) increases both the overstocked and understocked quantity and decreases a firm's profits.
D) increases both the overstocked and understocked quantity and increases a firm's profits.

Question 48

Postponement is

A) not very effective if a large fraction of demand comes from multiple products.
B) not very effective if a small fraction of demand comes from a single product.
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.

Question 49

As the total quantity for the season is broken up into multiple smaller orders, the buyer is better able to

A) 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.

Question 50

________ allows a firm to increase profits and better match supply and demand if the firm produces a large variety of products whose demand is unpredictable, not positively correlated, and is of about the same size.

A) Shortened forecasting window
B) Quick response
C) Postponement
D) Tailored sourcing

Question 51

Quick response is clearly advantageous to

A) 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.

Question 52

________ may reduce overall profits for a firm if a single product contributes the majority of the demand.

A) Shortened forecasting window
B) Quick response
C) Postponement
D) Tailored sourcing

Question 53

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.

Question 54

In volume-based tailored sourcing,

A) the predictable part of a product's demand is produced at an efficient facility.
B) the uncertain portion is produced at an efficient facility.
C) the predictable part of a product's demand is produced at a flexible facility.
D) the predictable part of a product's demand is outsourced.

Question 55

Under tailored postponement, a firm produces the amount that is very likely to sell using

A) the lower cost production method with postponement and produces the portion of demand that is uncertain using postponement.
B) the lower cost production method without postponement and produces the portion of demand that is uncertain using postponement.
C) the higher cost production method with postponement and produces the portion of demand that is uncertain using postponement.
D) the higher cost production method without postponement and produces the portion of demand that is uncertain using postponement.

Question 56

In product-based tailored sourcing,

A) low-volume products with uncertain demand are obtained from a flexible source.
B) high-volume products with less demand uncertainty are obtained from an efficient source.
C) high-volume products with less demand uncertainty are obtained from a flexible source.
D) A and B only

Question 57

There is a cost associated with postponement because the production cost using postponement is typically

A) 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.

Question 58

As lead times decrease, supply chain managers are able to

A) better match supply with demand.
B) better match demand with supply.
C) increase supply chain cost.
D) decrease product availability.

Question 59

Supply chain managers are able to

A) 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.

Question 60

A company with multiple products that chooses to delay product differentiation until closer to the point of sale is using

A) tailored sourcing.
B) quick response.
C) postponement.
D) improved forecasting.

Question 61

Explain how tailored sourcing can be used to improve profitability.

Question 62

Scenario 13.2 - Fish or Chicken
The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos.
Suppose the taco stand manager could wake up a little earlier and borrow his buddy's full size pickup to transport tacos to campus. If time and capacity were not an issue, what would the expected profit be per day?

A) $29,443
B) $31,382
C) $35,000
D) $30,657

Question 63

________ may reduce overall profits for a firm if a single product contributes the majority of the demand.

A) Shortened forecasting window
B) Quick response
C) Postponement
D) Tailored sourcing

Question 64

Scenario 13.2 - Fish or Chicken
The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos.
Faced with a 3000 taco capacity constraint, what is the profit resulting from an optimal mix of fish and chicken tacos?

A) $22,577
B) $25,619
C) $24,667
D) $23,580

Question 65

Scenario 13.2 - Fish or Chicken
The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos.
Faced with a 3000 taco capacity constraint, what is the optimal number of fish tacos to prepare?

A) 2283
B) 1736
C) 1868
D) 2000

Question 66

When ordering a single product, it is optimal for the buyer to order the minimum of the available capacity and the optimal order quantity. When ordering multiple products,

A) the buyer should treat each product as a unique purchase and optimize each on an individual basis.
B) the buyer must consider trade-offs between ordering more of one product than another.
C) the buyer should average the cost, procurement, and holding parameters and create a basket product that consists of equal ratios of all items.
D) the buyer should construct a weighted average based on all individual item demands and optimize this quantity.

Question 67

A manufacturer of lawn care equipment has introduced a new product. The anticipated demand is normally distributed with a mean of ? = 100 and a standard deviation of ? = 50. Each unit costs $75 to manufacture and the introductory price is to be $125 to achieve this level of sales. Any unsold units at the end of the season are unlikely to be very valuable and will be disposed of in a fire sale for $25 each. It costs $10 to hold a unit in inventory for the entire season. What is the cost of overstocking? What is the cost of understocking? What is the optimal cycle service level? How many units should be manufactured for sale?

Question 68

Describe the approaches a manager can use to reduce demand uncertainty.

Question 69

When setting optimal levels of product availability in practice, it is important to

A) obtain a reasonable estimate of the cost of stocking out.
B) obtain a very precise estimate of the cost of stocking out.
C) focus on the most responsive production method, even if it is not low cost.
D) develop a preset target of product availability.

Question 70

In volume-based tailored sourcing,

A) the predictable part of a product's demand is produced at an efficient facility.
B) the uncertain portion is produced at an efficient facility.
C) the predictable part of a product's demand is produced at a flexible facility.
D) the predictable part of a product's demand is outsourced.

Question 71

Discuss the advantages and disadvantages of quick response.

Question 72

Explain how tailored postponement can improve profitability.

Question 73

Explain the relationship between product availability and supply chain profitability.

Question 74

Describe the two key factors that influence the optimal level of product availability within a supply chain.

Question 75

In the previous problem, the manufacturer performs additional market research. Based on this research, they determine that they can increase the price to $150 and are able to reduce the standard deviation of the forecast to ? = 30. At the same time, they have made an arrangement with an outlet store that will purchase unsold equipment for $60 each. How will these changes affect the cost of overstocking, cost of understocking, optimal cycle service level and optimal order size?

Question 76

Scenario 13.2 - Fish or Chicken
The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos.
Faced with a 3000 taco capacity constraint, what is the optimal number of chicken tacos to prepare?

A) 2758
B) 1736
C) 1264
D) 2500

Question 77

Scenario 13.2 - Fish or Chicken
The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos.
The taco stand manager decides to make exactly the same quantity of fish tacos as chicken tacos. If time and capacity are not an issue, and none of the other parameters in the scenario are changed, what would the retail price of chicken tacos need to be to make the optimal order quantities identical?

A) $6.00
B) $6.50
C) $7.00
D) $7.50

Question 78

Describe managerial levers to increase profitability within a supply chain.

Question 79

Scenario 13.2 - Fish or Chicken
The taco stand in the atrium of the new College of Business building carried two items, fish tacos and chicken tacos. The fish tacos sell for $15 and are made out of $5 of ingredients and the chicken tacos sell for $10 and are made out of $4 of ingredients. Some days the taco stand owner has only chicken at his disposal, so he makes nothing but chicken tacos, and some days the opposite is true and he makes only fish tacos. Thus, he is able to estimate demand for chicken tacos at 2500 per day with a standard deviation of 600 and the demand for fish tacos at 2000 per day with a standard deviation of 500. Any fish or chicken tacos that do not sell at the end of the day can be sold for $1 each as bait. On days when both proteins are available, the taco stand manager prefers to make a few of each kind. All tacos are made in his home kitchen and then transported to campus. Due to time constraints and the capacity of his pickup truck bed, he is limited to beginning each day with only 3000 tacos.
Suppose the taco stand manager could wake up a little earlier and borrow his buddy's full size pickup to transport tacos to campus. If time and capacity were not an issue, how many total tacos should he bring to campus each day?

A) 2500
B) 3000
C) 5041
D) 5500