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Chapter 9

Sales and Operations Planning: Planning Supply and Demand in a Supply Chain

True/False 1. Predictable variability is change in demand that cannot be forecasted. Ans er: !alse Difficulty: "asy !aced ith predictable variability of demand$ a company%s goal is to respond in a manner that ma&imi'es profitability. Ans er: (rue Difficulty: "asy (he advantage of carrying enough manufacturing capacity to meet demand in any period is very lo inventory costs$ because no inventory needs to be carried from period to period. Ans er: (rue Difficulty: "asy (he disadvantage of carrying enough manufacturing capacity to meet demand in any period is that much of the e&pensive capacity ould go unused during most months hen demand as lo er. Ans er: (rue Difficulty: "asy (he advantage of building up inventory during the off season to ,eep production stable year round lies in the fact that a firm could get by ith a smaller$ more e&pensive factory. Ans er: !alse Difficulty: -oderate (he disadvantage of building up inventory during the off season to ,eep production stable year round is the e&pensive capacity that ould go unused during most months hen demand as lo er. Ans er: !alse Difficulty: "asy An approach here a firm or,s ith their retail partners in the supply chain to offer a price promotion during periods of lo demand ould shift some of the demand into a slo period$ thereby spreading demand more evenly throughout the year and reducing the seasonal surge. Ans er: (rue Difficulty: -oderate 1ith supply and demand management decisions being made independently$ it is easier to coordinate the supply chain$ thereby increasing profit.

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Ans er: !alse Difficulty: -oderate 9. A firm can vary supply of product by controlling production capacity and inventory. Ans er: (rue Difficulty: "asy A firm that uses fle&ible or, hours from the or,force to manage capacity to better meet demand is using a seasonal or,force. Ans er: !alse Difficulty: -oderate Scheduling the or,force so that the available capacity better matches demand is using time fle&ibility from the or,force. Ans er: (rue Difficulty: -oderate (he use of a part3time or,force to increase the capacity fle&ibility by enabling the firm to have more people at or, during pea, periods is designing product fle&ibility into the production processes. Ans er: !alse Difficulty: -oderate A firm that uses a temporary or,force during the pea, season to increase capacity to match demand is using a seasonal or,force. Ans er: (rue Difficulty: "asy (he use of dual facilities to manage capacity may be hard to sustain if the labor mar,et is tight. Ans er: !alse Difficulty: 4ard A firm that purchases pea, production capability from other companies so that internal production remains level and can be done cheaply is using subcontracting. Ans er: (rue Difficulty: "asy A firm that builds dedicated facilities to produce a relatively stable output of products over time in a very efficient manner and purchases pea, production capability from other companies is using subcontracting. Ans er: !alse Difficulty: 4ard A firm that has production lines hose production rate can easily be varied to match demand has designed product fle&ibility into the production processes. Ans er: (rue Difficulty: "asy

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(he use of a seasonal or,force re5uires that the or,force be multi3s,illed and easily adapt to being moved from line to line. Ans er: (rue Difficulty: -oderate (he use of common components across multiple products$ ith each product having predictably variable demand$ ill result in the demand for the components being relatively constant. Ans er: (rue Difficulty: -oderate 1hen most of the products a firm produces have the same pea, demand season$ the use of common components to create relatively constant overall demand in the components is feasible. Ans er: !alse Difficulty: -oderate 1hen most of the products a firm produces have the same pea, demand season$ it is necessary to build products during the off season that have more predictable demand. Ans er: (rue Difficulty: "asy Operations usually ma,e the promotion and pricing decisions. Ans er: !alse Difficulty: "asy -a&imi'ing revenue is typically the ob6ective hen mar,eting and sales ma,e the promotion and pricing decisions. Ans er: (rue Difficulty: "asy Pricing decisions based only on revenue considerations often result in an increase in overall profitability. Ans er: !alse Difficulty: -oderate (he combination of pricing and aggregate planning 7both demand and supply management8 can be used to ma&imi'e supply chain profitability. Ans er: (rue Difficulty: -oderate 1hen performing aggregate planning$ the goal of all firms in the supply chain should be to ma&imi'e individual firm profits. Ans er: !alse Difficulty: -oderate Determining ho profits ill be allocated to different members of the supply chain is a ,ey to successful collaboration. Ans er: (rue Difficulty: -oderate

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9n general$ as the fraction of increased demand coming from for ard buying gro s$ offering the promotion during the pea, demand period becomes more attractive. Ans er: !alse Difficulty: -oderate Offering a promotion during a pea, period that has significant for ard buying creates even more variable demand than before the promotion. Ans er: (rue Difficulty: "asy Average inventory decreases if a promotion is run during the pea, period and increases if the promotion is run during the off3pea, period. Ans er: !alse Difficulty: "asy Promoting during a pea, demand month may decrease overall profitability if a significant fraction of the demand increase results from a for ard buy. Ans er: (rue Difficulty: 4ard As for ard buying becomes a smaller fraction of the demand increase from a promotion$ it is less profitable to promote during the pea, period. Ans er: !alse Difficulty: 4ard As the product margin declines$ promoting during the pea, demand period becomes less profitable. Ans er: (rue Difficulty: "asy 1hen faced ith seasonal demand$ a firm should use a combination of pricing 7to manage demand8 and production and inventory 7to manage supply8 to improve profitability. Ans er: (rue Difficulty: -oderate

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Multiple Choice 1. Predictable variability is a. change in demand that can be forecasted. b. change in demand that cannot be forecasted. c. change in demand that has been planned. d. change in demand that has been scheduled.

e. all of the above Ans er: a Difficulty: "asy #. 1hich of the follo ing is not a problem caused by products e&periencing predictable variability of demand: a. high levels of stoc,outs during pea, demand b. high levels of e&cess inventory during periods of lo demand c. increased responsiveness of the supply chain d. increased costs in the supply chain e. decreased responsiveness of the supply chain Ans er: c Difficulty: "asy A firm can handle predictable variability by managing a. supply using capacity$ inventory$ trade promotions$ and bac,logs. b. supply using capacity$ inventory$ subcontracting$ and bac,logs. c. demand using short3term price discounts and trade promotions. d. a and c only e. b and c only Ans er: e Difficulty: "asy Seasonal demand can be met by a. maintaining enough manufacturing capacity to meet demand in any period. b. building up inventory during the off season to meet demand during pea, seasons. c. offering a price promotion during periods of lo demand to shift some of the demand into a slo period. d. all of the above e. a and b only Ans er: d Difficulty: -oderate (he advantage of maintaining enough manufacturing capacity to meet demand in any period is a. very lo inventory costs because inventory needs to be carried from period to period. b. very lo inventory costs because no inventory needs to be carried from period to period. c. very high inventory costs because no inventory needs to be carried from period to period. d. very high inventory costs because e&pensive capacity ould go unused during most months hen demand as lo er. e. none of the above Ans er: b Difficulty: -oderate (he disadvantage of maintaining enough manufacturing capacity to meet demand in any period is

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a. much of the e&pensive capacity ould go unused during most months hen demand as lo er. b. the e&pensive capacity ould be used consistently throughout the year. c. most of the e&pensive capacity ould still be used during most months hen demand as lo er. d. very lo inventory costs because no inventory needs to be carried from period to period. e. ;one of the above are true. Ans er: a Difficulty: -oderate /. (he advantage of building up inventory during the off season to meet demand during pea, seasons and ,eep production stable year round is a. very lo inventory costs because no inventory needs to be carried from period to period. b. much of the e&pensive capacity ould go unused during most months hen demand as lo er. c. in the fact that a firm could get by ith a smaller$ less e&pensive factory. d. in the fact that a firm could get by ith a larger$ more e&pensive factory. e. ;one of the above are true. Ans er: c Difficulty: -oderate (he disadvantage of building up inventory during the off season to meet demand during pea, seasons and ,eep production stable year round is a. very lo inventory costs because no inventory needs to be carried from period to period. b. very high inventory costs because inventory needs to be carried from period to period. c. in the fact that a firm could get by ith a smaller$ less e&pensive factory. d. in the fact that a firm could get by ith a larger$ more e&pensive factory. e. ;one of the above are true. Ans er: b Difficulty: -oderate (he advantage of offering a price promotion during periods of lo demand to shift some of the demand into a slo period is a. a demand pattern that is less e&pensive to supply. b. very high inventory costs because inventory needs to be carried from period to period. c. in the fact that a firm could get by ith a smaller$ more e&pensive factory. d. much of the e&pensive capacity ould go unused during most months hen demand as lo er. e. all of the above Ans er: a Difficulty: -oderate Companies typically divide the tas, of supply and demand so that a. -ar,eting manages demand and Operations manages supply. b. -ar,eting manages supply and Operations manages demand. c. -ar,eting manages demand and supply.

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d. Operations manages demand and supply. e. none of the above Ans er: a Difficulty: "asy 11. 1ith supply and demand management decisions being made independently$ a. it is increasingly difficult to coordinate the supply chain$ thereby increasing profit. b. it is increasingly difficult to coordinate the supply chain$ thereby decreasing profit. c. it is easier to coordinate the supply chain$ thereby decreasing profit. d. it is easier to coordinate the supply chain$ thereby increasing profit. e. none of the above Ans er: b Difficulty: -oderate A firm can vary supply of product by controlling a. production capacity and inventory. b. production capacity and price promotions. c. price promotions and inventory. d. production capacity and inventory promotions. e. none of the above Ans er: a Difficulty: -oderate 1hich of the follo ing is not an approach that firms can use hen managing capacity to meet predictable demand variability: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. using common components across multiple products Ans er: e Difficulty: "asy (he capacity management approach that uses fle&ible or, hours from the or,force to manage capacity to better meet demand is a. time fle&ibility from or,force. b. use of seasonal or,force. c. use of subcontracting. d. use of dual facilities<dedicated and fle&ible. e. designing product fle&ibility into the production processes. Ans er: a Difficulty: -oderate (he capacity management approach that uses a temporary or,force during the pea, season to increase capacity to match demand is a. time fle&ibility from or,force. b. the use of seasonal or,force. c. the use of subcontracting. d. the use of dual facilities<dedicated and fle&ible.

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e. designing product fle&ibility into the production processes. Ans er: b Difficulty: "asy 1.. (he capacity management approach here a firm purchases pea, production from another firm so that internal production remains level and can be done cheaply is a. time fle&ibility from or,force. b. the use of seasonal or,force. c. the use of subcontracting. d. the use of dual facilities<dedicated and fle&ible. e. designing product fle&ibility into the production processes. Ans er: c Difficulty: -oderate (he capacity management approach here a firm builds facilities to produce a relatively stable output of products over time in a very efficient manner and facilities to produce a idely varying volume and variety of products$ but at a higher unit cost is a. time fle&ibility from or,force. b. the use of seasonal or,force. c. the use of subcontracting. d. the use of dual facilities<dedicated and fle&ible. e. designing product fle&ibility into the production processes. Ans er: d Difficulty: "asy (he capacity management approach here a firm has production lines hose production rate can easily be varied to match demand is a. time fle&ibility from or,force. b. the use of seasonal or,force. c. the use of subcontracting. d. the use of dual facilities<dedicated and fle&ible. e. designing product fle&ibility into the production processes. Ans er: e Difficulty: -oderate 1hich approach to capacity management may be hard to sustain if the labor mar,et is tight: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: b Difficulty: -oderate 1hich approach to capacity management ma,es use of spare plant capacity that e&ists in the form of hours hen the plant is not operational: a. time fle&ibility from or,force b. use of seasonal or,force

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c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: a Difficulty: -oderate #1. 1hich approach to capacity management ma,es use of overtime$ hich is varied to match the variation in demand: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: a Difficulty: "asy 1hich approach to capacity management ould schedule the or,force so that the available capacity better matches demand: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: a Difficulty: "asy 1hich approach to capacity management ould use a part3time or,force to increase capacity fle&ibility by enabling the firm to have more people at or, during pea, periods: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: a Difficulty: -oderate (he ,ey to hich capacity management approach ould involve having both volume 7fluctuating demand from a manufacturer8 and variety fle&ibility 7demand from several manufacturers8 to be sustainable: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: c Difficulty: 4ard 1hich approach to capacity management ould re5uire that the or,force be multi3s,illed and easily adapt to being moved from line to line: a. time fle&ibility from or,force

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b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: e Difficulty: -oderate #.. 1hich approach to capacity management ould use production machinery that can be changed easily from producing one product to another: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: e Difficulty: -oderate 1hich approach to capacity management ould only be effective if the overall demand across all the products is relatively constant: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. designing product fle&ibility into the production processes Ans er: e Difficulty: 4ard 1hich of the follo ing is an approach that firms can use hen managing inventory to meet predictable demand variability: a. time fle&ibility from or,force b. use of seasonal or,force c. use of subcontracting d. use of dual facilities<dedicated and fle&ible e. using common components across multiple products Ans er: e Difficulty: -oderate 1hen most of the products a firm produces have the same pea, demand season$ in order to meet predictable variability ith inventory$ it must a. use common components across multiple products. b. use a seasonal or,force. c. build inventory of high demand or predictable demand products. d. use subcontracting. e. use dual facilities<dedicated and fle&ible. Ans er: c Difficulty: -oderate Supply chains can influence demand by using a. production capacity and inventory. b. pricing and other promotions. c. price promotions and inventory.

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d. production capacity and inventory promotions. e. production capacity and other promotions. Ans er: b Difficulty: -oderate )1. (he pricing and promotion decisions are often made by a. mar,eting and sales. b. mar,eting and operations. c. operations and sales. d. mar,eting$ operations$ and sales. e. mar,eting and operations ithout sales. Ans er: a Difficulty: -oderate (he promotion and pricing decisions made by mar,eting and sales typically have the ob6ective of a. ma&imi'ing profitability. b. minimi'ing profitability. c. minimi'ing revenue. d. ma&imi'ing revenue. e. ma&imi'ing profitability across the supply chain. Ans er: d Difficulty: 4ard Pricing decisions based only on revenue considerations often result in a. a decrease in overall profitability. b. an increase in overall profitability. c. a decrease in overall revenue. d. a decrease in supply chain revenue. e. an increase in supply chain profitability. Ans er: a Difficulty: -oderate (he combination of pricing and aggregate planning 7both demand and supply management8 can be used to a. ma&imi'e customer orders. b. minimi'e customer orders. c. ma&imi'e supply chain profitability. d. minimi'e supply chain profitability. e. ;one of the above are accurate. Ans er: c Difficulty: "asy 1hen performing aggregate planning$ the goal of all firms should be to a. minimi'e company profits. b. ma&imi'e company profits. c. minimi'e supply chain profits. d. ma&imi'e supply chain profits. e. All of the above are accurate. Ans er: d Difficulty: -oderate

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1hen planning$ the goal of all firms in the supply chain should be to ma&imi'e supply chain profits because a. this leaves them less profit to divide among themselves. b. this leaves them more profit to divide among themselves. c. this outcome leaves them more profit to pay ta& on. d. this outcome ill increase their charitable giving. e. none of the above Ans er: b Difficulty: "asy One ,ey to successful collaboration hen the supply chain is performing aggregate planning is a. determining ho losses ill be allocated to different members of the supply chain. b. determining ho profits ill be allocated to different members of the supply chain. c. determining ho labor ill be allocated to different members of the supply chain. d. determining ho customers ill be allocated to different members of the supply chain. e. none of the above Ans er: b Difficulty: -oderate 1hich of the follo ing is not a ,ey factor influencing the timing of a trade promotion: a. impact of the promotion on demand b. product margins c. cost of holding inventory d. cost of changing capacity e. none of the above Ans er: e Difficulty: -oderate 1hich of the follo ing is not a factor that ould result in increased demand from a trade promotion: a. mar,et gro th b. stealing share c. for ard selling d. for ard buying e. All of the above are factors in increased demand. Ans er: c Difficulty: 4ard An increase in consumption of the product either from ne or e&isting customers is a. mar,et gro th. b. stealing share. c. for ard selling. d. for ard buying.

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e. none of the above Ans er: a Difficulty: "asy *1. Customers substituting the firm%s product for a competitor%s product is a. mar,et gro th. b. stealing share. c. for ard selling. d. for ard buying. e. none of the above Ans er: b Difficulty: "asy Customers moving up future purchases to the present is a. mar,et gro th. b. stealing share. c. for ard selling. d. for ard buying. e. none of the above Ans er: d Difficulty: "asy 9n general$ as the fraction of increased demand coming from for ard buying gro s$ offering the promotion during the pea, demand period becomes a. less attractive. b. more attractive. c. more profitable. d. less significant. e. none of the above Ans er: a Difficulty: -oderate Offering a promotion during a pea, period that has significant for ard buying a. creates a desirable demand pattern. b. creates a demand pattern less costly to serve. c. creates a demand pattern even more costly to serve. d. shifts demand from the pea, period to the slo period. e. shifts demand to a more desirable period. Ans er: c Difficulty: 4ard Average inventory a. increases if a promotion is run during the pea, period. b. increases if a promotion is run during the off3pea, period. c. decreases if a promotion is run during the pea, period. d. decreases if a promotion is run during the off3pea, period. e. both a and d Ans er: b Difficulty: -oderate

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Promoting during a pea, demand month may decrease overall profitability if a. a small fraction of the demand increase results from a for ard buy. b. any of the demand increase results from a for ard buy. c. a significant fraction of the demand increase results from a for ard buy. d. none of the above e. all of the above Ans er: c Difficulty: 4ard As the product margin declines$ promoting during the pea, demand period becomes a. less profitable. b. more profitable. c. less of a ris,. d. more desirable. e. none of the above Ans er: a Difficulty: 4ard

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Essay/Problems 1. Discuss ho a firm can respond to predictable variability of demand in the supply chain. Answer: !aced ith predictable variability$ a company%s goal is to respond in a manner that ma&imi'es profitability. A firm must choose ho to handle predictable variability by utili'ing techni5ues in t o broad categories: 1. -anage supply using capacity$ inventory$ subcontracting$ and bac,logs 2. -anage demand using short3term price discounts and trade promotions (he use of these tools enables the supply chain to greatly increase its profitability because it is able to match supply and demand in a much more coordinated fashion. One ay to meet seasonal demand re5uires carrying enough manufacturing capacity to meet demand in any period. (he advantage of this approach is very lo inventory costs$ because no inventory needs to be carried from period to period. (he disadvantage$ ho ever$ is that much of the e&pensive capacity ould go unused during most months hen demand as lo er. Another approach to meeting demand ould be to build up inventory during the off season to ,eep production stable year round. (he advantage of this approach lies in the fact that a firm could get by ith a smaller$ less e&pensive factory. 4igh inventory carrying costs$ ho ever$ ma,e this alternative e&pensive. A third approach ould be for a firm to or, ith their retail partners in the supply chain to offer a price promotion during periods of lo demand. (his promotion shifts some of the demand into a slo period$ thereby spreading demand more evenly throughout the year and reducing the seasonal surge. Such a demand pattern is

less e&pensive to supply. A company needs to decide hich alternative ma&imi'es their profitability. Often companies divide the tas, of supply and demand management bet een different functions. -ar,eting typically manages demand and Operations typically manages supply. At a higher level$ supply chains suffer from this phenomenon as ell$ ith retailers independently managing demand and manufacturers independently managing supply. 1ith supply and demand management decisions being made independently$ it is increasingly difficult to coordinate the supply chain$ thereby decreasing profit. (herefore$ ma&imi'ing profitability depends on these decisions being made in a coordinated fashion and re5uires supply chain partners to or, together across enterprises. Difficulty: 4ard #. Discuss the approaches that can be used to manage capacity to meet predictable variability of demand. Answer: 1hen managing capacity to meet predictable variability$ firms use a combination of the follo ing approaches: = Time flexibility from workforce: 9n this approach$ a firm uses fle&ible or, hours from the or,force to manage capacity to better meet demand. 9n many instances$ plants do not operate continually and are left idle during portions of the day or ee,. (herefore$ spare plant capacity e&ists in the form of hours hen the plant is not operational. -any plants do not run three shifts$ so the e&isting or,force could or, overtime during pea, periods to produce more to meet demand. 9f demand fluctuates by day of the ee, or ee, of the month and the or,force is illing to be fle&ible$ a firm may schedule the or,force so that the available capacity better matches demand. 9n such settings$ use of a part3time or,force may further increase the capacity fle&ibility by enabling the firm to have more people at or, during pea, periods. = Use of seasonal workforce: 9n this approach$ a firm uses a temporary or,force during the pea, season to increase capacity to match demand. (his approach may be hard to sustain if the labor mar,et is tight. = Use of subcontracting: 9n this approach$ a firm subcontracts pea, production so that internal production remains level and can be done cheaply. 1ith the subcontractor handling the pea,s$ the company is able to build a relatively infle&ible but lo 3cost facility here the production rates are ,ept relatively constant 7other than variations that arise from the use of overtime8. Pea,s are subcontracted out to facilities that are more fle&ible. A ,ey here is the availability of relatively fle&ible subcontractor capacity. (he subcontractor can often provide fle&ibility at a lo er cost by pooling the fluctuations in demand across different manufacturers. (hus the fle&ible subcontractor capacity must have both volume 7fluctuating demand from a manufacturer8 as ell as variety fle&ibility 7demand from several manufacturers8 to be sustainable. = Use of dual facilitiesdedicated and flexible: 9n this approach$ a firm builds both dedicated and fle&ible facilities. Dedicated facilities produce a relatively stable output of products over time in a very efficient manner. !le&ible facilities produce a idely varying volume and variety of products but at a higher unit cost. "ach dedicated facility could produce at a relatively steady rate$ ith fluctuations being absorbed by the fle&ible facility. = Designing product flexibility into the production processes: 9n this approach$ a firm has fle&ible production lines hose production rate can easily be varied.

Production is then changed to match demand. (he production lines are designed such that changing the number of or,ers on a line can vary the production rate. As long as variation of demand across different product lines is complementary$ 7i.e.$ hen one goes up$ the other tends to go do n8$ the capacity on each line can be varied by moving the or,force from one line to the other. Of course$ this re5uires that the or,force be multi3s,illed and easily adapt to being moved from line to line. Production fle&ibility can also be achieved if the production machinery being used is fle&ible and can be changed easily from producing one product to another. (his approach can only be effective if the overall demand across all the products is relatively constant. Several firms producing products ith seasonal demand try and e&ploit this approach by carrying a portfolio of products that have pea, demand seasons distributed over the year. Difficulty: -oderate ). Discuss the approaches a firm can use to manage inventory to meet predictable variability of demand. Answer: 1hen managing inventory to meet predictable variability$ firms use a combination of the follo ing approaches: = Using common components across multiple products: 9n this approach$ a firm designs common components used in multiple products$ ith each product having predictably variable demand that results in relatively constant overall demand. >se of common components across these products ill result in the demand for the components being relatively constant. = Build inventory of high demand or predictable demand products: 1hen most of the products a firm produces have the same pea, demand season$ the previous approach is no longer feasible. A firm must then decide hich inventory to build during the off season. (he ans er is to build products during the off season that have more predictable demand$ because there is less to be learned about their demand by aiting. As more is ,no n about demand closer to the selling season$ production of more uncertain items should ta,e place. (his strategy helps the supply chain better synchroni'e supply and demand. Difficulty: -oderate *. Discuss the importance of collaboration ithin a supply chain hen performing aggregate planning. Answer: Supply chains can influence demand by using pricing and other forms of promotion. -ar,eting and sales often ma,e the promotion and pricing decisions$ and they typically ma,e them ith the ob6ective of ma&imi'ing revenue. 4o ever$ changing the demand pattern can change the cost the company incurs to meet that demand. (hus$ pricing decisions based only on revenue considerations often result in a decrease in overall profitability. (he same is true hen thin,ing of the supply chain. (he retailer sets the price and runs promotions to generate demand. (his is regularly done ithout ta,ing into account the impact on the rest of the supply chain. (herefore$ the combination of pricing and aggregate planning 7both demand and supply management8 can be used to ma&imi'e supply chain profitability. 1hen performing aggregate planning$ the goal of all firms in the supply chain should be to ma&imi'e supply chain profits because this outcome leaves them

more to divide ith each other. !or profit ma&imi'ation to ta,e place$ companies need to devise a ay to collaborate and$ 6ust as important$ determine a ay to split the supply chain profits. Determining ho these profits ill be allocated to different members of the supply chain is a ,ey to successful collaboration. Difficulty: -oderate +. Discuss the impact of promotion on demand ithin a supply chain. Answer: Companies ant to e&plore if and hen to potentially offer a promotion. !our ,ey factors influence the timing of a trade promotion: = 9mpact of the promotion on demand = Product margins = Cost of holding inventory = Cost of changing capacity Companies should identify hether each factor favors offering a promotion during the high3 or lo 3demand periods. (hey start by considering the impact of promotion on demand. 1hen a promotion is offered during a period$ that period%s demand ill go up. (his increase in demand results from a combination of the follo ing three factors: 1. arket growth: An increase in consumption of the product$ either from ne or e&isting customers. #. !tealing share: Customers substituting the firm%s product for a competitor%s product. ). "orward buying: Customers move up future purchases to the present. (he first t o factors increase the overall demand$ hereas the third simply shifts future demand to the present. 9t is important to ,no the relative impact from the three factors as a result of a promotion before ma,ing the decision regarding the optimal timing of the promotion. 9n general$ as the fraction of increased demand coming from for ard buying gro s$ offering the promotion during the pea, demand period becomes less attractive. Offering a promotion during a pea, period that has significant for ard buying creates even more variable demand than before the promotion. Product that as once demanded in the slo period is no demanded in the pea, period$ ma,ing this demand pattern even more costly to serve. Average inventory increases if a promotion is run during the pea, period and decreases if the promotion is run during the off3pea, period. Promoting during a pea, demand month may decrease overall profitability if a significant fraction of the demand increase results from a for ard buy. As for ard buying becomes a smaller fraction of the demand increase from a promotion$ it is more profitable to promote during the pea, period. As the product margin declines$ promoting during the pea, demand period becomes less profitable. Other factors such as holding cost and the cost of changing capacity also affect the optimal timing of promotions. 1hen faced ith seasonal demand$ a firm should use a combination of pricing 7to manage demand8 and production and inventory 7to manage supply8 to improve profitability. (he precise use of each lever varies ith the situation. (his ma,es it crucial that enterprises in a supply chain coordinate both their forecasting and planning efforts. Only then are profits ma&imi'ed. Difficulty: -oderate

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Discuss ,ey issues hen managing predictable variability of demand ithin a supply chain. Answer: 1. #oordinate planning across enterprises in the supply chain$ !or a supply chain to successfully manage predictable variability$ the entire chain must or, to ard the one goal of ma&imi'ing profitability. "veryone in a supply chain may agree ith this in principle$ but in reality$ it is very difficult to get an entire supply chain to agree on ho to ma&imi'e profitability. 1ithin a company$ mar,eting often has incentives based on revenue$ hereas operations has incentives based on cost. 1ithin the supply chain$ different enterprises are 6udged by their o n profitability$ not necessarily by the overall supply chain%s profitability. 9t is clear that ithout or,ing to get companies to or, together$ the supply chain ill return suboptimal profits. (herefore$ firms in the supply chain need to collaborate through the formation of 6oint teams. 9ncentives of the members of the supply chain must be aligned. 4igh3level support ithin the organi'ation$ including support from the chief e&ecutive officer$ ill also be needed because this coordination often re5uires groups to act counter to their traditional operating procedures. Although this collaboration is difficult$ the payoffs are significant. #. Take predictable variability into account when making strategic decisions$ Predictable variability has a tremendous impact on the operations of a company. A firm must al ays ta,e this impact into account hen ma,ing strategic decisions. 4o ever$ predictable variability is not al ays ta,en into account hen strategic plans are made$ such as hat type of products to offer$ hether or not to build ne facilities$ and hat sort of pricing structure a company should have. (he level of profitability is greatly affected by predictable variability and$ therefore$ the success or failure of strategic decisions can be determined by it. ). %reempt& do not 'ust react to& predictable variability$ Companies often have a tendency to focus on ho they can effectively react to predictable variability. (his role often falls on operations$ hich tries to manage supply to best deal ith predictable variability. (he management of supply as ell as demand provides the best response to predictable variability. Actions li,e pricing and promotion that manage demand are preemptive and often in the domain of mar,eting. 9t is important for mar,eting and operations to coordinate their efforts and plan for predictable variability together ell before the pea, demand is observed. (his coordination allo s a firm to preempt predictable variability and come up ith a response that ma&imi'es profits.