MEE2035

Logistics and Supply Chain Management DA 2

By: Siddharth S Nair

Reg No: 19BPI0015
Q1. There are several factors that lead Walmart to own its trucks, rather than outsourcing
transportation like many other retailers. These factors include:

1. Control over the supply chain: By owning its trucks, Walmart has greater control over the
entire supply chain. This allows the company to ensure that goods are transported
efficiently and on time, and that the products arrive in good condition.
2. Cost savings: While owning and operating a truck fleet can be expensive, it can also be
more cost-effective than outsourcing transportation. Walmart can save on transportation
costs by utilizing its own trucks and drivers, as well as by optimizing routes and reducing
empty miles.
3. Flexibility: Owning its trucks gives Walmart the flexibility to respond quickly to changes
in demand or supply chain disruptions. This can be particularly important in times of
crisis or during peak shopping seasons.
4. Sustainability: Walmart has made a commitment to sustainability, and owning its trucks
is one way the company can reduce its carbon footprint. By using more efficient trucks
and optimizing routes, Walmart can reduce emissions and improve environmental
performance.

Overall, owning its trucks gives Walmart greater control over its supply chain, cost savings,
flexibility, and sustainability benefits that may not be available through outsourcing
transportation.

Q2. There are some key differences between office supplies and subsystems such as seats, which
may require different sourcing strategies. Here are some recommendations:

1. Volume and frequency of purchase: Office supplies are typically purchased in small
quantities and on a regular basis, while subsystems like seats are purchased in larger
quantities but less frequently. Therefore, for office supplies, it may be more appropriate
to use a centralized purchasing approach where procurement is consolidated to negotiate
better pricing and streamline the procurement process, while subsystems may require a
more decentralized approach to engage multiple suppliers and obtain the best value.
2. Supplier relationships: For subsystems like seats, it may be more important to establish
long-term relationships with suppliers, as these subsystems require more technical
expertise and customization, while for office supplies, the focus may be on price and
availability rather than long-term supplier relationships.
3. Quality requirements: Subsystems like seats are critical components of the final product,
so quality is of paramount importance. Auto manufacturers should have stringent quality
control procedures in place to ensure that subsystems meet the required quality standards.
In contrast, for office supplies, quality may not be as important, and cost may be the
primary factor.
4. Risk management: Since subsystems are critical components of the final product, auto
manufacturers should have contingency plans in place in case of supplier disruptions or
quality issues. For office supplies, the risks are relatively low, and therefore, less
attention may be paid to risk management.
Overall, while the basic principles of sourcing may be similar for both office supplies and
subsystems like seats, the differences in volume, supplier relationships, quality requirements, and
risk management may require different sourcing strategies. Therefore, it is important for auto
manufacturers to tailor their sourcing strategies accordingly to achieve the best outcomes.

Q3. Revenue management involves optimizing pricing and capacity utilization to maximize
revenue and profitability. Here are some revenue management opportunities available to a
manufacturer, a trucking firm, and the owner of a warehouse, and how each one can take
advantage of them:

1. Manufacturer:

 Dynamic pricing: A manufacturer can use dynamic pricing to adjust prices based on
demand, seasonality, and other factors. This can help the manufacturer maximize revenue
while maintaining market competitiveness.
 Product bundling: By bundling products together, a manufacturer can increase revenue
by offering a higher perceived value to customers and encouraging them to purchase
more items.

2. Trucking firm:

 Capacity utilization: A trucking firm can optimize capacity utilization by maximizing the
number of loads transported and reducing empty miles. This can be achieved through
route optimization, load consolidation, and better coordination with customers.
 Surge pricing: During periods of high demand or tight capacity, a trucking firm can
implement surge pricing to increase rates and maximize revenue.

3. Warehouse owner:

 Space utilization: A warehouse owner can optimize space utilization by renting out
excess space or implementing a tiered pricing structure based on the amount of space
used. This can help the warehouse owner maximize revenue and reduce inefficiencies.
 Long-term contracts: By signing long-term contracts with tenants, a warehouse owner
can secure a steady stream of revenue and reduce the risk of vacancy.

Overall, manufacturers, trucking firms, and warehouse owners can take advantage of revenue
management opportunities by optimizing pricing, capacity utilization, and customer
relationships. By implementing revenue management strategies, these businesses can maximize
revenue and profitability, while providing value to their customers.
Q4. When it comes to large, low-value shipments, there are several modes of transportation that
may be best suited. Here are three examples:

1. Maritime transportation: When it comes to shipping large quantities of low-value goods,

maritime transportation is often a good option. This is especially true for goods that are
bulky, heavy, or not time-sensitive. Shipping by sea allows for the transportation of large
volumes of goods at a relatively low cost per unit, due to economies of scale. The
disadvantage of maritime transportation is that it can be slow, as ships often take longer
to travel long distances compared to air or ground transportation.
2. Rail transportation: Rail transportation is another option for shipping large, low-value
shipments, especially over longer distances. Rail transportation offers economies of scale
and can handle large volumes of goods at a relatively low cost. It is also more fuel-
efficient than other modes of transportation, making it an environmentally-friendly
option. The disadvantage of rail transportation is that it may not be as flexible or fast as
other modes of transportation.
3. Trucking transportation: Trucking transportation is well-suited for large, low-value
shipments that need to be delivered within a specific timeframe. Trucks can provide
door-to-door delivery and can be more flexible than rail or maritime transportation.
However, trucking transportation can be more expensive compared to other modes of
transportation, especially over longer distances.

Overall, the best mode of transportation for large, low-value shipments will depend on several
factors, including distance, delivery timeframe, cost, and the nature of the goods being
transported. Maritime transportation, rail transportation, and trucking transportation are all viable
options, and the choice of mode will depend on the specific needs of the shipment.

Q5. Walmart's distribution network is designed to support several large retail stores, which
enables the company to reduce transportation costs while replenishing inventories more
frequently. Here's how:

1. Consolidation of shipments: By consolidating multiple shipments for multiple stores into

a single delivery from a distribution center (DC), Walmart can reduce transportation
costs. This is because fewer trucks are needed to transport goods to multiple stores,
reducing fuel costs and emissions.
2. Economies of scale: By using larger trucks to transport goods from the DC to the stores,
Walmart can take advantage of economies of scale. Larger trucks can carry more goods,
which reduces the cost per unit of transportation.
3. Reduced inventory costs: By replenishing store inventories more frequently, Walmart can
reduce the amount of inventory that needs to be stored in the stores. This reduces
inventory holding costs such as storage, handling, and insurance costs.
4. Improved coordination: By having a centralized DC, Walmart can better coordinate
transportation and inventory management across multiple stores. This can lead to
improved efficiency and reduced costs.
 5. Improved customer service: By replenishing store inventories more frequently, Walmart
can ensure that products are always in stock, which improves customer satisfaction and
helps to retain customers.

Overall, Walmart's distribution network is designed to reduce transportation costs while

improving inventory management and customer service. By consolidating shipments, taking
advantage of economies of scale, reducing inventory costs, improving coordination, and
improving customer service, Walmart can achieve a competitive advantage and improve its
bottom line.

Q6. The two types of ordering policies are continuous review (also known as a reorder point
policy) and periodic review. The impact that each of them has on safety inventory is as follows:

1. Continuous review policy: This ordering policy is based on maintaining a fixed inventory
level known as the reorder point (ROP). When the inventory level drops to the ROP, an
order is placed to replenish the inventory to a fixed level known as the order-up-to level
(OUT). The impact of this policy on safety inventory is that safety stock is typically
lower since the inventory level is monitored continuously, and inventory is replenished
more frequently. However, there is a risk of stockouts if demand fluctuates or the lead
time increases unexpectedly.
2. Periodic review policy: This ordering policy is based on reviewing inventory at fixed
intervals, such as weekly or monthly, and placing an order to replenish the inventory up
to a target level. The impact of this policy on safety inventory is that safety stock is
typically higher since the inventory level is not monitored continuously, and inventory is
replenished less frequently. However, there is less risk of stockouts since inventory levels
are reviewed periodically and orders are placed to replenish inventory as needed.

In summary, the continuous review policy can result in lower safety inventory levels but a higher
risk of stockouts, while the periodic review policy can result in higher safety inventory levels but
a lower risk of stockouts. The choice of ordering policy depends on several factors, including
demand variability, lead time, and cost considerations.

Q7. When a supermarket is deciding on the size of its replenishment order from Procter &
Gamble, there are several costs that it should take into account, including:

1. Ordering costs: These are the costs associated with placing an order, such as the cost of
labor, paperwork, and communication. The supermarket should consider how frequently
it will need to place orders and the associated costs.
2. Holding costs: These are the costs associated with holding inventory, such as storage,
handling, insurance, and capital costs. The supermarket should consider how much
inventory it needs to hold and for how long, and the associated holding costs.
 3. Stockout costs: These are the costs associated with running out of inventory, such as lost
sales, backorders, and customer dissatisfaction. The supermarket should consider the
potential impact of stockouts on its business and the associated costs.
4. Transportation costs: These are the costs associated with transporting the inventory from
Procter & Gamble to the supermarket, such as fuel, labor, and vehicle costs. The
supermarket should consider the transportation costs associated with different order sizes.
5. Quality costs: These are the costs associated with quality issues, such as product defects
or recalls. The supermarket should consider the potential impact of quality issues on its
business and the associated costs.

Overall, the supermarket should consider all of these costs when deciding on the size of its
replenishment order from Procter & Gamble. The goal is to balance the costs of holding
inventory with the costs of stockouts and ordering, while taking into account transportation and
quality costs.

Q8. As demand at the supermarket chain in Question 7 grows, I would expect the cycle
inventory measured in days of inventory to decrease. This is because cycle inventory is the
average amount of inventory held to satisfy demand during a replenishment cycle, and it is
calculated by dividing the average inventory by the average daily demand.

As demand grows, the average daily demand increases, which means that the supermarket will
need to order more frequently to meet the demand. This will lead to smaller order sizes, which in
turn will lead to a reduction in the average inventory held during a replenishment cycle. As a
result, the cycle inventory will decrease.

For example, if the supermarket chain currently orders from Procter & Gamble once a week and
holds an average of 100 units of inventory, and the average daily demand is 20 units, then the
cycle inventory is 5 days of inventory (100 units / 20 units per day). If the average daily demand
increases to 30 units per day, then the supermarket chain will need to order more frequently,
which may result in a smaller order size and a lower average inventory level. If the average
inventory decreases to 80 units, then the cycle inventory would be 2.67 days of inventory (80
units / 30 units per day), which is a decrease from the previous 5 days of inventory.

Q9. When a retailer makes lot-sizing decisions with the sole objective of minimizing its own
costs, it may hurt the profits of the entire supply chain. This is because lot-sizing decisions affect
the inventory levels of both the retailer and the supplier, which in turn affects the service levels,
lead times, and transportation costs of the entire supply chain.

If the retailer chooses to order in large quantities to minimize its own ordering costs and holding
costs, it may result in high inventory levels, longer lead times, and increased transportation costs
for the supplier. This may lead to stockouts, excess inventory, or longer cycle times, which can
ultimately lead to lost sales, lost profits, and reduced customer satisfaction. Moreover, the
supplier may have to incur additional costs to produce and store the excess inventory, which may
further reduce the profits of the entire supply chain.

On the other hand, if the entire supply chain could coordinate the lot-sizing decision, it could
result in several advantages. First, it could help to reduce inventory levels, lead times, and
transportation costs for both the retailer and the supplier, which can help to improve service
levels and reduce costs. Second, it could help to reduce the risk of stockouts or excess inventory,
which can help to improve customer satisfaction and reduce costs. Finally, it could help to align
the objectives of the retailer and the supplier, which can lead to improved collaboration, trust,
and profitability for the entire supply chain.

Q10. To determine the optimal order size and order frequency for each contract manufacturer:

For Foxconn (tablets and smartphones): Demand per month (D) = 10,000 units Unit cost (C) =
$100 Holding cost (H) = 25% of C = $25 Fixed cost per order (F) = $10,000

Using the Economic Order Quantity (EOQ) formula:

EOQ = √(2DF/H)

EOQ = √(2 * 10,000 * 10,000 / 25) = 2,828 units

Order frequency (f) = D/EOQ = 10,000/2,828 = 3.54 months

Therefore, the optimal order size for Foxconn is 2,828 units and the order frequency is 3.54
months.

For Flextronics (laptops): Demand per month (D) = 4,000 units Unit cost (C) = $400 Holding
cost (H) = 25% of C = $100 Fixed cost per order (F) = $10,000

Using the EOQ formula:

EOQ = √(2DF/H)

EOQ = √(2 * 4,000 * 10,000 / 100) = 632.45 units

Order frequency (f) = D/EOQ = 4,000/632.45 = 6.32 months

Therefore, the optimal order size for Flextronics is 632 units and the order frequency is 6.32
months.
If the company combines all assembly with one contract manufacturer, the optimal order size
and frequency can be calculated as follows:

Total demand per month (D) = 14,000 units Total cost of goods sold (TC) = (10,000 * $100) +
(4,000 * $400) = $1,600,000 Total holding cost (TH) = 25% of TC = $400,000 Fixed cost per
order (F) = $10,000

Using the EOQ formula:

EOQ = √(2DF/H)

EOQ = √(2 * 14,000 * 10,000 / 400,000) = 395.28 units

Order frequency (f) = D/EOQ = 14,000/395.28 = 35.41 months

Therefore, the optimal order size for combined orders is 395 units and the order frequency is
35.41 months.

The reduction in cycle inventory as a result of combining orders and shipments can be calculated
as follows:

For Foxconn: Cycle inventory = EOQ/2 = 2,828/2 = 1,414 units

For Flextronics: Cycle inventory = EOQ/2 = 632/2 = 316 units

For combined orders: Cycle inventory = EOQ/2 = 395/2 = 197.5 units

Therefore, the reduction in cycle inventory as a result of combining orders and shipments is
1,414 + 316 - 197.5 = 1,532.5 units.

Q11. To calculate the safety inventory required by Epson in Europe if it targets a CSL of 95
percent, we can use the formula:

Safety stock = Z-score x Square root of lead time x Standard deviation of demand

where Z-score for 95% service level is 1.65.

For France: Safety stock = 1.65 x SQRT(8) x 2000 = 726 units

For Germany: Safety stock = 1.65 x SQRT(8) x 2200 = 799 units

For Spain: Safety stock = 1.65 x SQRT(8) x 1400 = 509 units

For Italy: Safety stock = 1.65 x SQRT(8) x 1600 = 582 units

For Portugal: Safety stock = 1.65 x SQRT(8) x 800 = 291 units

For UK: Safety stock = 1.65 x SQRT(8) x 2400 = 873 units

Therefore, the total safety inventory required by Epson in Europe would be:

Total safety inventory = 726 + 799 + 509 + 582 + 291 + 873 = 3,780 units.

Now, let's calculate the saving of safety inventory that Epson can expect as a result of building a
central DC in Europe:

Assuming that the central DC can receive base printers from Taiwan in eight weeks and
assemble power supplies and manuals within one week, the total lead time for delivering printers
to each country would be nine weeks. Thus, the safety inventory required would be:

Safety stock = Z-score x Square root of lead time x Standard deviation of demand

where Z-score for 95% service level is 1.65.

For France: Safety stock = 1.65 x SQRT(9) x 2000 = 784 units

For Germany: Safety stock = 1.65 x SQRT(9) x 2200 = 861 units

For Spain: Safety stock = 1.65 x SQRT(9) x 1400 = 620 units

For Italy: Safety stock = 1.65 x SQRT(9) x 1600 = 711 units

For Portugal: Safety stock = 1.65 x SQRT(9) x 800 = 354 units

For UK: Safety stock = 1.65 x SQRT(9) x 2400 = 1,056 units

Therefore, the total safety inventory required by Epson in Europe with the central DC would be:

Total safety inventory = 784 + 861 + 620 + 711 + 354 + 1,056 = 4,386 units.

Thus, Epson can expect to save 4,386 - 3,780 = 606 units of safety inventory by building a
central DC in Europe.

Q12. a. The cycle service level (CSL) for a continuous review policy is given by the probability
of not stocking out during the lead time plus the probability of not stocking out during the review
period. Since the lead time is two days, the CSL is given by the sum of the probability of not
stocking out for two days and the probability of not stocking out during the review period, which
is one day in this case. Using the normal distribution with a mean of 300 and a standard
deviation of 100, we can calculate the z-score for a demand of 750 units:
z = (750 - 300) / 100 = 4.5

The probability of not stocking out for two days is the probability that the demand during this
period is less than or equal to 1,500 units:

P(Z ≤ (1,500 - 300) / 100) = P(Z ≤ 12) ≈ 1

The probability of not stocking out during the review period is the probability that the demand
during this period is less than or equal to 300 units:

P(Z ≤ (300 - 300) / 100) = P(Z ≤ 0) = 0.5

Therefore, the CSL is approximately 1.5, or 150%.

b. The fill rate is the percentage of demand that is satisfied directly from inventory, without
backorders. In other words, it is the percentage of time that the inventory level is greater than or
equal to the demand. Using the normal distribution with a mean of 300 and a standard deviation
of 100, we can calculate the z-score for a demand of 1,500 units:

z = (1,500 - 300) / 100 = 12

The probability of stocking out is the probability that the demand during the lead time is greater
than 1,500 units:

P(Z > 12) ≈ 0

Therefore, the fill rate is approximately 100%.

c. If DoorRed increased its ROP from 750 to 800, the probability of stocking out during the
review period would decrease, because the safety stock would be higher. Using the normal
distribution with a mean of 300 and a standard deviation of 100, we can calculate the z-score for
a demand of 800 units:

z = (800 - 300) / 100 = 5

The probability of not stocking out during the review period is the probability that the demand
during this period is less than or equal to 800 units:

P(Z ≤ 5) ≈ 1

Therefore, the fill rate would increase to approximately 50%.