Instructor's Manual

Instructor Manual
Matching Supply with Demand: An Introduction to Operations Management
4th Edition
by Gerard Cachon and Christian Terwiesch
Instructor Manual
This document describes our pedagogical strategy, summarizes the materials provided along with the text
to aid instructors (i.e., instructor materials), details our copyright policy regarding the instructor materials,
and provides a brief description of how we use the text in our own teaching (e.g., cases, preparation
questions, etc.)
Pedagogical strategy:
Our guiding philosophy with the design of this text is “real operations – real solutions”: we provide real
company cases and real solutions to their operational challenges while presenting the material in a manner
that non-engineering student can understand. In fact, we also like the expression “rigor with relevance”:
we do not shy away from rigorous mathematical analysis but our analysis is always focused on relevant
operational problems.
Our primary target audience is students in MBA degree programs (daytime, weekend or executive). Even
though the models we present are quite rich (e.g., they allow for different objective functions and different
performance measure evaluations) we find that MBA students are capable of mastering this material and
they appreciate that the course has not been “dumbed down”. In fact, we find that both “quant jocks” and
“poets” enjoy the course. Because the text emphasizes models and the qualitative insights from those
models, we find that junior professors are successful in the MBA classroom even with their limited
experience. Finally, we suspect that the text will work quite well with business or engineer undergraduate
students.
The following is a list of our design features that make this text a useful teaching tool:
1. Multiple levels of detail. Each chapter walks students through a case analysis in great detail. But
we find that students sometimes want a quick “how do I do X” solution, so we provide exhibits
within the chapter that explain to students the steps need to do a particular calculation.
Furthermore, at the end of each chapter and at the end of the text there are lists of key equations
for when students remember the process to do the calculation but can’t remember the particular
equation details.
2. Little mathematical notation. Students do not have the time or the desire to remember the
meaning of many different mathematical symbols or variables. So in many cases we write out
variable names so that there is no confusion, e.g., it is clear what “Expected Sales” means.
3. Plenty of practice problems. Students learn by repetition. So we provide enough practice
problems to satisfy even the most eager student.
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Instructor Manual
4. Presentation slides linked to the text. We find that the less quantitatively oriented students
appreciate our in class lectures that cover examples from the text, because then they can read the
text latter for additional explanations and reinforcement. Some of the quantitatively strong
students would prefer less redundancy, but when we consider the needs of all students, the
redundancy is a net winner.
5. Excel spreadsheets. We give students spreadsheets that perform the analysis of many of the
models. Students that are able to absorb this material quickly and need to minimize their time on
the course appreciate these tools.
6. Statistics Tutorial. Students do not always receive the statistics they need from their statistics
course. (For example, at our school the Poisson distribution is never mentioned in the statistics
core class.) So we provide a statistics tutorial in the appendix that gives the students exactly the
statistics they need for this text.
7. Advanced materials. Some students, the “quant jocks”, often want to know how equations are
derived. To satisfy their curiosity, we provide that supplemental information in the Appendix.
Summary of Instructor Materials:

1. Lecture slides. (Power Point files). These are slides that we use in our course. Many contain
references to cases and problems in the text, but there is additional content as well.
2. Solutions to all end-of-chapter problems in the text. (Word files).
3. Text figures. (Power Point). These files contain the figures that are used in the text (and may not
be contained in the lecture slides).
4. Case materials. We use a number of cases along with the text in our course and have prepared
materials associated with the cases, e.g., data students can use to answer preparation questions,
case analysis slides, etc.
5. Model solvers. We have developed several Excel spreadsheets that help students solve several of
the model discussed in the text.
6. Supplementary questions. We provide questions beyond those at the end of each chapter, including
both quantitative and qualitative questions. We have used these questions in final exams and
homework assignments. All of our homework and final exams are multiple choice with no partial
credit. We have had a very positive experience using this testing format: students find the format
to be fair, grading errors are minimized (in particular, there is no need to train graders on how to
offer partial credit), grading ambiguities are minimized (students with short answer questions can
be strategic in how they answer even if they do not know the answer), grading time is very quick
and question development does not require much more time than typical qualitative or quantitative
questions.
7. Sample syllabi. These syllabi are from our courses that use the text and include course policy,
timetables, case preparation questions, etc.
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Instructor Manual
Copyright policy:
All instructor materials that are not included in the actual text are copyrighted by the authors,
Gerard Cachon and Christian Terwiesch. Instructors that adopt the text as a requirement for their
course are free to use these materials and to modify them as they see fit. All others are required to
obtain explicit written permission from the authors.
Suggested course outline:
In our own teaching we use the text in 24 sessions (divided between two courses, each with 12
sessions) and each session is 80 minutes of class time. The following are the cases we use and the
chapters that contain materials associated with those cases:
Chapter Case Topic

2-4 Toshiba: OME works (HBS 9- Process analysis
696-059)
2-4 National Cranberry (HBS 9-688- Process analysis
122)
7 Executive Shirt (HBS 9-696-071) Process analysis (with batching)
8-9 Beau Ties (UVA-om-0836) Queuing
8-9 Manzana Insurance (HBS 9-692- Queuing, process design
015)
12 Le Club Francais (Wharton case) Newsvendor model
or LL Bean (HBS 983-003)
13 Timbuk2 (Wharton case) or Newsvendor model, reactive capacity
National Bicycle (Wharton case)
13 Sport Obermeyer (HBS 9-695- Reactive capacity
022)
14 Hewlett-Packard (Stanford) Order-up-to model, delayed
differentiation
15 Barnes and Noble vs Amazon.com Risk pooling
(HBS 9-798-063)
16 We do not use a case. Revenue management
17 Barilla (HBS 9-694-046) Supply chain coordination, bullwhip
effect
17 Video Vault (HBS 9-102-070) Supply chain contracting
The following outlines the sequence in which we present the material. The first set of 12 sessions
covers process analysis, quality, and lean manufacturing. The second set covers inventory and
supply chain management.
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Session # Process analysis, quality and lean manufacturing

1 Process Analysis and Little’s Law. Text: Chapters 1-3.
2 Process Flow Analysis. Case: Toshiba
3 Link between Finance and Operations: Chapter 6
4 Bottleneck Analysis. Case: National Cranberry
5 Process Design. Exercise: Work Methods. Text: Chapter 4
6 Lean Operations in Services: Chapter 11
7 Managing Variability & Waiting Time. Text: Chapter 8-9
8 Managing Variability & Waiting Time. Case: Beau Ties. Text: Chapter 8-9
9 Managing Variability: Customer Loss Problems. Text: Chapter 9
10 Toyota Production System. Text: Chapter 11
11 Process Improvement and Quality. Text: Chapter 10
12 Summary and Review
Session Inventory and supply chains

13 Introduction. Text: Chapter 12 Appendix A: Statistics Tutorial.
14 The Newsvendor Model. Case: Le Club Francais. Text: Chapter 12
15 Mass Customization and Make-to-Order. Case: Timbuk2. Text: Chapter 13
16 Quick Response with Reactive Capacity. Case: Sport Obermeyer. Text:
Chapter 13
17 The Order Up-to Model. Text: Chapter 14
18 Postponement. Case: Hewlett Packard
19 Managing Risk in Operations. Text: Chapter 15
20 Internet Distribution. Text: Chapter 15
21 Revenue Management. Text: Chapter 16
22 Supply Chain Coordination: Vendor Managed Inventory
Case: Barilla. Text: Chapter 17
23 Supply Chain Coordination: Contracts. Case: Video Vault. Chapter 17
24 Summary and Review
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Instructor Manual
The following is a detailed outline of course content:
Session 1 Introduction
Reading: Text, Chapters 1-2
Session 2 Process Flow Analysis: Assembly Line

The Toshiba case illustrates a classic assembly line operation. We use the case to reinforce several
of the key concepts and terms in process flow analysis.
Reading: Text, Chapter 3
Case: Toshiba: OME Works (HBS, 9-696-059)
Case Preparation Questions:
 What are the key elements of Toshiba’s business strategy in notebook computers? In what
way do OME’s operations support this strategy?
 What is Toshiba doing to achieve high performance on cost, quality and flexibility?
 Assuming the assembly line prototype is implemented as shown in Exhibit 1, calculate the
following quantities:
- Process Capacity
- The maximum number of computers that can be produced in a 7.5 hour shift.
- Direct Labor Content per notebook computer (i.e., the amount of time a worker
actually works on a computer while it is on the assembly line).
- Direct Labor Idle Time per notebook computer assembled (i.e., the amount of time
workers are idle per computer assembled).
- Inventory on the assembly line.
- Flow Time for a notebook computer.
Note that Station 9 is somewhat more complex than the others. Two facts are important: (1)
software loading does not require an operator (it’s like waiting for your computer to start up) and
(2) Station 9 occupies three “spaces” on the line. Because the conveyor belt moves continuously, a
given computer therefore spends three times as long in Station 9 as in the other stations. The
worker for Station 9 moves as needed among the three computers within Station 9 to perform the
tasks requiring an operator.
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Session 3 The Operations – Finance Link / Setup times

In the first part of this session we talk about the link between operations management and finance.
Two topics will be emphasized. First, we will talk about inventory turns and other aspects of
working capital management. Second, we will outline the link between financial performance
metrics and operational decisions using the case of a small furniture company.
In the second part of the session, we discuss the impact of set-up times on capacity and inventory
levels.
Session 4 Bottleneck Analysis: Continuous Process

The National Cranberry case is a “classic” and has become a point of reference for nearly
everyone who has attended business school. A common pitfall in analyzing the case is to become
mired in too much detail, so be careful to maintain the big picture while addressing the questions.
For the purposes of your analysis, you may make the following assumptions:
 The Flow Time of the National Cranberry process (starting after the holding bins) is 1 hour
(i.e., it takes 1 hour for a cranberry to flow through the plant).
 During a high-volume period the dryer operator can start at whatever time you choose,
rather than 11 AM as shown in Figure E,
 The amount of inventory other than in the bins is negligible.
Case: National Cranberry Cooperative (HBS, 9-688-122)
 What are the problems facing receiving plant No. 1 (RP1)?
 Draw a Process Flow Diagram of the cranberry process beginning with Receiving and
ending with the Bailey Mills (i.e., ignore Sorting and Shipping at the end of the process).
 Compute the Capacity in barrels per hour of each process step.
 Consider a peak harvest day (18,000 barrels of berries unloaded with 70% of them wet
harvested). Assume that trucks arrive uniformly over a period of 12 hours. Identify the
Bottleneck of the process.
 When would processing be completed on a peak day?
 When would the last truck unload and how long would it have waited?
 If you were Hugh Schaeffer, what changes would you make to improve performance of the
process? Estimate the magnitude of the costs and benefits of these changes.
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Session 5 Process Design

Session 6 Lean Operations in Services

In this class, we apply the ideas and concepts derived in production settings to the service industry.
Case: Loan Processing at Capital One (Wharton)
Case Preparation:
 Read Chapter 11 to provide you with a good overview of Lean Operations.
 Try to put the two pieces (book chapter, case) together and address the question “What needs
to be done in the consumer loan processing organization to meet the new business needs?”
Session 7 Managing Variability: Waiting time problems

This lecture will introduce queuing formulas needed for the next several classes.
Session 8 Managing Variability and Waiting Times

The Beau Ties case will allow us to apply the tools of variability management for the analysis of a
call center. Check out http://www.beautiesltd.com/ for more details about the company’s product
line.
When answering the questions, please note the following: (a) use coefficients of variation equal to
1 for both arrival and service processes (b) The numbers in Exhibit 5 reflect call volumes for the
corresponding time slots cumulated over a period of two months. E.g. the 18 calls in the Monday
7-8 time slot come from eight different Mondays in March and April. Divide the numbers by 8 to
get daily volumes!
Case: Beau Ties Limited of Vermont (UVA-OM-0836)

 Assuming that Kenerson’s has a target of an average wait of less than 1 minute, develop a
telephone staffing plan for December 4, 1995 assuming that the distribution of phone calls
throughout the day follows the hourly distribution in Exhibit 5.
 How will your December 4, 1995 plan change if the target is an average wait of less than
30 seconds?
 Compare the variable costs of the staffing plans from questions 1 and 2 with the charges
from AIDC.
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Instructor Manual
 How should Kenerson evaluate the decision to bring the telephone order-entry system in-
house?
For the questions above, we strongly encourage you to build a spreadsheet model in Excel, rather
than doing the analysis “by hand”.
Session 9 Managing Variability: Loss Problems

Session 10 Toyota Production System

We use the Toyota to illustrate the Toyota Production System (TPS). We also discuss a specific
problem at the Georgetown, Kentucky plant. This session serves to link the material on process
analysis with the material on process improvement.
Reading Text: Chapter 11
Session 11 Statistical Process Control

This lecture will introduce the methodology of statistical process control as well as the concept of
six sigma.
Exercise: Analysis of flight delays (specific instructions will be distributed in session 10)
Session 12 Summary and Exam Prep Session

This session concludes and reviews the course material. We will work through a mock-up exam to
help you get ready for the final.
Session 13 Introduction
This session will cover the course syllabus and introduce the newsvendor model.
Reading: Text, Chapter 12.0-12.4
Text: Appendix A contains a tutorial on the statistics needed for this course.
Session 14 The Newsvendor Model

This session explores the challenges of procurement for a fashion apparel catalog retailer.
Case: Le Club Francais du Vin (Wharton)
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Instructor Manual
Reading: Text, Chapter 12.5 - 12.7

For the following three questions, consider a 10 Euro (retail price) bottle.
 What are the costs of having one bottle too few in inventory (underage cost)? What are the
costs of having one bottle too many in inventory (overage cost)? List these costs
qualitatively and attempt to attach numbers to them.
 Assume the underage cost is 3 Euro and the overage cost is 1 Euro. How many bottles
would you order of a wine that is forecasted to sell 2000 bottles if your objective is to
maximize profits? How do these numbers change if you use the cost numbers from your
answer to Question 1?
 Assume you would like to achieve a fill rate of 98%. How would the answer to question 2
change?
 How much of each wine listed in Exhibit 2 would you order? Be prepared to explain and
justify your decisions. (An excel file is provided that contains the data in Exhibit 2.)
Session 15 Mass Customization and Make-to-order

Mass customization offers an infinite variety of goods that are customized to a consumer’s exact
specifications. This session explores the pros and cons of this strategy.
Case: Where in the world is Timbuk2 (Wharton case)
Reading: Text, Chapter 13.0-13.3
 What are some of the pros and cons of Timbuk2’s “Build your own” channel (i.e., its
ecommerce channel)?
 How should Timbuk2 go about deciding which options to offer customers in the ecommerce
channel? In other words, what general principles or analysis could be used to deepen their
understanding of the appropriate choices? You may want to consider several of the options
mentioned (an added handle, different color logos, different size panels, etc.)
 Estimate the cost of manufacturing a bag in San Francisco and the cost of producing a bag in
China.
 Should Timbuk2 pursue the option of manufacturing in China? If so, what challenges are they
likely to face and what changes will they need to make?
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Instructor Manual
Session 16 Quick Response with Reactive Capacity

This session studies how one fashion apparel supplier used early sales information to increase its
supply flexibility.
Case: Sport Obermeyer (HBS, 9-695-022)
 How much of each style described in Exhibit 10 should be produced if you only had one
production run? What is Sport Obermeyer’s expected profit?
 What do you think about Sport Obermeyer’s forecasting process? Contrast it with LL
Bean’s forecasting process.
 Suppose you now have the opportunity to make two production runs. The first must be
decided before the Las Vegas show, and the second is decided after the show. Let’s say the
production minimums are large (i.e., you essentially get to produce a style either in the first
production run or the second, but not both). Furthermore, suppose the first production run
must total at least 15,000 units across all styles, but then there is no capacity restriction on
the second production run. In addition, the production cost per unit of a style does not
depend on which production run it is ordered. How many units of each style in Exhibit 10
should Sport Obermeyer order in the first production run? How much is the mismatch tax
reduced by the second production run opportunity?
 How can Sport Obermeyer improve upon their system to better match supply to demand?
Session 17 The Order Up-To Model

This session studies service levels and lead times in a supply chain. Unlike with the newsvendor
model, we now consider a supply chain that has demand over a long time horizon, so multiple
replenishments are possible.
Session 18 Postponement
Postponement is a strategy to redesign a product and its supply chain to increase supply flexibility.
Case: Hewlett-Packard: DeskJet Printer Supply Chain A and B (Stanford case)
 What are the pros and cons of the following proposals mentioned in the A case: a European
factory, better forecasting, more inventory.
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Instructor Manual
 Assess quantitatively the air freight option relative to current operations. Just consider the
products for the European market. Do not forget to consider pipeline inventory (since HP
owns the pipeline inventory from Vancouver to Europe). Use the following assumptions:
- HP wants to minimize inventory while still achieving at least a 98% fill rate.
- The lead time from Vancouver to Europe is 5 weeks by the current method (ocean)
but 1 week by air.
- HP orders and received inventory on a weekly basis.
- There are 4.33 weeks per month and demand is independent across time.
- The product sells for $450 and marginal production cost is $300.
- Inventory carrying costs are 24% per year.
- Shipping via sea (the current operation) costs $10 per printer, whereas airfreight
costs $25 per printer.
 Evaluate quantitatively the proposal in the B case for the European market.
 Will the B case proposal be effective in the other major markets, North America and Asia?
 Would you support the B case proposal? If so, why? If not, why?
Session 19 Managing Risk in Operations

This session explores several operations strategies for reducing and hedging uncertainty.
Session 20 Internet Distribution

Internet retailing requires less inventory and retail space than brick-and-mortar retailing. But
Internet retailing introduces additional costs. We shall compare these two models from an
operations perspective.
Case: Online Book Retailing: Operational Strategies (Wharton case)
 What operational advantages and disadvantages does Amazon have relative to BN’s
superstores?
 Compare costs at BN with Amazon using data from the case. Does Amazon’s operational
advantage outweigh its operational disadvantage? Discuss the source of cost
advantage/disadvantage for every item of financial data in Figure 5.
 Consider the same analysis for BN.com versus Amazon. Did BN.com benefit from its
parent brick-and-mortar company?
 What do you think of Borders’ prospect going online?
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Instructor Manual
Session 21 Revenue Management

This session studies several revenue management tools to increase revenue in the presence of fixed
capacity and variable demand.
Session 22 Supply Chain Coordination: Vendor Managed Inventory

This session begins our discussion on coordination between different firms within a supply chain.
The particular coordination tool for this session is vendor managed inventory.
Case: arilla SpA (A) (HBS 9-694-046).
Reading: ext, Chapter 17.0-17.2
 Is there any evidence that Barilla faces the bullwhip effect? If so, what causes of the
bullwhip effect are present?
 Who resisted JITD and why? How would you respond to their concerns (i.e., how would
you modify the JITD proposal to make it more acceptable)?
 Would you adopt JITD?
Session 23 Supply Chain Coordination: Contracts
This session continues our discussion on supply chain coordination, with an emphasis on
contractual terms between different firms.
Case: upply Chain Close Up: The Video Vault (HBS 9-102-079)
Reading: ext, Chapter 17.3-17.6
 Video Vault needs to decide how many copies of new movie to purchase. Video Vault has
constructed the following forecast of rentals for this movie.
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Instructor Manual
Number of tapes Expected total

purchased number of rentals
1 60
2 100
3 120
4 132
5 137
6 139
For example, if they purchase 3 tapes, then they expect those three tapes to rent a total of
120 times. Clearly, the more tapes purchased, the greater the total number of rentals, but
each additional tape generates fewer incremental rentals over the previous one. Suppose
Video Vault can purchase each tape for $65 and Video Vault charges $3 per rental. How
many tapes should Video Vault purchase? What is the Video Vault’s supplier’s profit if
the supplier’s production, handling and distribution cost per tape is $8?
 Say you are Video Vault’s supplier and you are considering offering Video Vault a revenue
sharing contract, i.e., you will sell each tape to video vault for some wholesale price but
then you will also collect a certain fraction of Video Vault’s revenue. What terms would
you offer Video Vault, i.e., what wholesale price would you charge and what share of
revenue would you let Video Vault keep.
 Who are the winners and losers with revenue sharing?
 What are the potential concerns with the implementation of revenue sharing?
Session 24 Summary and Review

This session concludes and reviews the course material.
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Instructor Manual

Matching Supply with Demand: An Introduction to Operations Management

by Gerard Cachon and Christian Terwiesch

Summary of Instructor Materials:

Suggested course outline:

Chapter Case Topic

Session # Process analysis, quality and lean manufacturing

Session Inventory and supply chains

The following is a detailed outline of course content:

Session 2 Process Flow Analysis: Assembly Line

Session 3 The Operations – Finance Link / Setup times

Session 4 Bottleneck Analysis: Continuous Process

Session 5 Process Design

Session 6 Lean Operations in Services

Session 7 Managing Variability: Waiting time problems

Session 8 Managing Variability and Waiting Times

Case: Beau Ties Limited of Vermont (UVA-OM-0836)

Session 9 Managing Variability: Loss Problems

Session 10 Toyota Production System

Session 11 Statistical Process Control

Session 12 Summary and Exam Prep Session

Session 14 The Newsvendor Model

Reading: Text, Chapter 12.5 - 12.7

Session 15 Mass Customization and Make-to-order

Session 16 Quick Response with Reactive Capacity

Session 17 The Order Up-To Model

Session 19 Managing Risk in Operations

Session 20 Internet Distribution

Session 21 Revenue Management

Session 22 Supply Chain Coordination: Vendor Managed Inventory

Number of tapes Expected total

Session 24 Summary and Review

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