1

Khang Huynh
Professor Harold Fraser
MGMT 539
09/15/2015
Chapter 2 Homework
Question 17:
a. Risk pooling is the measure that would reduce the demand variability if the demand is
aggregated across locations. Thus, as the study specified that the demand in the five
regions are very similar, the new system which is a centralized system that takes
advantage of risk pooling is no longer attractive due to the fact that there are no
significant discrepancy in demand across those locations.
b. Based on the calculations, the total cost of the decentralized system is about $9,256 per
week while in the centralized system, the total cost ranges from highest at $7,790 per
week for Atlanta to the most optimal at $6,537 for Los Angeles. Thus, at the lowest cost,
Los Angeles should be chosen to be the centralized warehouse. (See Appendix)
c. The strategy of reducing lead time by using UPS should not be recommended due to the
fact that while the inventory holding cost is decreased, the transportation cost increased
aggressively. The results show that while Los Angeles is still the lowest cost location for
the centralized system, the cost is now $8,803 per week, which jumps more than 30%
from the original strategy.
Question 6:
According to the textbook, the function for the reorder level is:
R = L * AVG + z * STD * L
Since the first component of this function, "L x AVG" is determined to be the average inventory
during lead time, which means that this inventory will be used before the new order arrived, and
leave the expected level of inventory before receiving the order to be:
z * STD * L

Thus, right after the amount of the new order Q is specified, it will be added into the previous
level of inventory and become:
Q + z * STD * L
Question 16:
With a new and innovative product such as the first Walkman by Sony, the initial forecasting
technique would have to be market research in order to gauge the interests of the consumers; an
appropriate market research method for the Walkman could be group focus since the participants
can experience the product first hand. Next, the judgment method can follow with a panel of
experts to draw conclusions from the market research study.
Toward the middle of the Walkman's product life cycle, the managers can now employ timeseries methods as more data become available. Ultimately, as the Walkman moves into its mature
phase, time-series methods can still be relied upon along with the casual methods, which bring
other factors such as economic trends into play.
Now, with a more recent Apple iPod model, Apple could take a similar approach by first starting
with the market research methods as the iPod is a more superior product and new to the market.
However, with the historical data sales of the Walkman products and the like, Apple can also
forecast its sales with time-series and causal methods. In addition, the judgment methods could
also be beneficial with inputs from experienced experts in the industry.

Appendix
Question 17-b

Question 17-c