Chopra Scm7 Inppt 05 Working 4

Supply Chain Management: Strategy,
Planning, and Operation

Seventh Edition
Chapter 2
Achieving Strategic Fit in a
Supply Chain
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Competitive and Supply Chain Strategies
• Competitive strategy defines the set of customer needs a company seeks to
satisfy through its products and services
• Product development strategy specifies the portfolio of new products that
the company will try to develop
• Marketing and sales strategy specifies how the market will be segmented
and product positioned, priced, and promoted
• Supply chain strategy determines the nature of material procurement,
transportation of materials, manufacture of product or creation of service,
distribution of product, follow-up service, whether processes will be in-
house or outsourced
• All functional strategies must support one another and the competitive
strategy
The Value Chain
Figure 2-1 The Value Chain in a Company
Achieving Strategic Fit (1 of 2)
• Strategic fit – competitive and supply chain strategies have
aligned goals
• A company may fail because of a lack of strategic fit or
because its overall supply chain design, processes, and
resources do not provide the capabilities to support the desired
strategy
Achieving Strategic Fit (2 of 2)
1. The competitive strategy and all functional strategies must fit
together to form a coordinated overall strategy. Each
functional strategy must support other functional strategies
and help a firm reach its competitive strategy goal.
2. The different functions in a company must appropriately
structure their processes and resources to be able to execute
these strategies successfully.
3. The design of the overall supply chain and the role of each
stage must be aligned to support the supply chain strategy.
Summary of Learning Objective 1
Strategic fit requires that all functions within a firm and stages in
the supply chain target the same goal—one that is consistent with
customer needs. A lack of strategic fit between the competitive
and supply chain strategies can result in the supply chain taking
actions that are not consistent with customer needs, leading to a
reduction in supply chain surplus and a decrease in supply chain
profitability.
Supply Chain Linkages Showing
Work and Information Flows
Core Process
Core Processes & Support
Processes
Core process: A set of activities that delivers value to external customers .
– Supplier relationship process: A process that
selects the suppliers of services, materials,
and information and facilitates the timely and
efficient flow of these items into the firm.
– New service/product development process:

A process that designs and develops new
services or products from inputs received
from external customer specifications or from
the market in general through the customer
relationship process.
– Order fulfillment process : A process that
includes the activities required to produce
and deliver the service or product to the
external customer.
– Customer relationship process: A process

that identifies, attracts, and builds
relationships with external customers, and
facilitates the placement of orders by
customers, sometimes referred to as
customer relationship management.
– Eg (bank customer relationship officer)

Support process:
• A process that provides vital resources

and inputs to the core processes and
therefore is essential to the
management of the business.
• Examples include budgeting, recruiting,
and scheduling. Support processes
provide key resources, capabilities, or
other inputs that allow the core
processes to function
Step 2: Understanding Supply Chain
Capabilities (1 of 2)
• How does the firm best meet demand?
• Supply chain responsiveness is the ability to
– Respond to wide ranges of quantities demanded
– Meet short lead times
– Handle a large variety of products
– Build highly innovative products
– Meet a high service level
– Handle supply uncertainty
Step 2: Understanding Supply Chain
Capabilities (2 of 2)
• Responsiveness comes at a cost
• Supply chain efficiency is the inverse to the cost of making
and delivering the product to the customer
• The cost-responsiveness efficient frontier curve shows the
lowest possible cost for a given level of responsiveness
Cost-Responsiveness Efficient Frontier
Figure 2-3 Cost-Responsiveness Efficient Frontier

Responsiveness Spectrum
Figure 2-4 The Responsiveness Spectrum
Step 3: Achieving Strategic Fit
• Ensure that the degree of supply chain responsiveness is
consistent with the implied uncertainty
• Assign roles to different stages of the supply chain that ensure
the appropriate level of responsiveness
• Ensure that all functions maintain consistent strategies that
support the competitive strategy
Zone of Strategic Fit
Figure 2-5 Finding the Zone of Strategic Fit

Efficient and Responsive Supply Chains
Table 2-4 Comparison of Efficient and Responsive Supply Chains
Blank Efficient Supply Chains Responsive Supply Chains
Supply demand at the lowest

Primary goal Respond quickly to demand
cost
Product design Maximize performance at a Create modularity to allow
strategy minimum product cost postponement of product differentiation
Lower margins because price is a Higher margins because price is not a
Pricing strategy
prime customer driver prime customer driver
Lower costs through high Maintain capacity flexibility to buffer
Manufacturing strategy
utilization against demand/supply uncertainty
Maintain buffer inventory to deal with
Inventory strategy Minimize inventory to lower cost
demand/supply uncertainty
Reduce, but not at the expense Reduce aggressively, even if the costs
Lead-time strategy
of costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality
Challenges
• Increasing product variety and shrinking life cycles
– Greater product variety and shorter life cycles
increase uncertainty while reducing the window of
opportunity within which the supply chain can achieve
fit
• Globalization and increasing uncertainty
– Significant fluctuations in exchange rates, global
demand, trade deficit, inflation, and the price of crude
oil affecting supply chain performance
Challenges
• Fragmentation of supply chain ownership
– Firms are less vertically integrated
– Take advantage of supplier and customer
competencies they did not have
– New ownership structure makes aligning and
managing the supply chain more difficult
– Aligning all members of a supply chain has become
critical to achieving supply chain fit
Challenges
• Changing technology and business environment
– Changes in customer needs and technology may
force a firm to rethink their supply chain strategy to
maintain strategic fit
• The environment and sustainability
– Growing in relevance and must be accounted for
when designing supply chain strategy
– Opportunities may require coordination across
different members of the supply chain
SCOR Model
Plan
• Demand Planning
Demand planning is a multi-step operational supply chain management

(SCM) process used to create reliable forecasts. Effective demand
planning can guide users to improve the accuracy of revenue forecasts, align
inventory levels with peaks and troughs in demand, and enhance profitability
for a given channel or product.
• Supply Planning
Supply chain planning (SCP) is the component of supply chain management

(SCM) involved with determining how best to fulfill the requirements created
from the Demand Plan. Its objective is to balance supply and demand in a
manner that achieves the financial and service objectives of the enterprise.
Source
• Raw Material Procurement

• Packaging Material Procurement
• Non Production Item (NPI) Procurement
Make
• Production
• Engineering and Research
• MRO (Maintenance repair operation)
Deliver
• Warehousing
Operations of administrative and physical functions associated with

storage of goods and materials. These functions include receipt,
identification, inspection, verification, putting away, retrieval for issue, etc.
• Distribution
Distribution is the process of making a product or service available for the

consumer or business user that needs it. This can be done directly by the
producer or service provider, or using indirect channels with
intermediaries.
• Logistics
Ease and pace for the transition of goods from one point to another.
Return
• CRM
• Order returns
• Reverse Logistics
Copyright
Supply Chain Management: Strategy,
Planning, and Operation
Seventh Edition
Chapter 3
Supply Chain Drivers and
Metrics
Learning Objectives (1 of 3)
3.1 Describe key financial measures of firm performance.

3.2 Identify the major drivers of supply chain performance.
3.3 Define the key performance metrics for facilities and discuss
their role in creating strategic fit between the supply chain
strategy and the competitive strategy.
3.4 Define the key performance metrics for inventory and discuss
its role in creating strategic fit between the supply chain strategy
and the competitive strategy.
3.5 Define the key performance metrics for transportation and
discuss its role in creating strategic fit between the supply chain
3.6 Define the key performance metrics for information and

discuss its role in creating strategic fit between the supply chain
3.7 Define the key performance metrics for sourcing and discuss
3.8 Define the key performance metrics for pricing and discuss
Framework for Supply Chain Decisions (1 of
2)
Strategy of Imtiaz medical store and Time medicos are different one is focused on price and other is
Focused on responsiveness
Figure 3-1 Supply Chain Decision-Making Frame work
Framework for Supply Chain
Decisions (2 of 2)
• Logistical Drivers
– Facilities
– Inventory
– Transportation
• Cross-Functional Drivers
– Information
– Sourcing
– Pricing
• Interactions determine overall supply chain performance
The major drivers of supply chain performance are facilities,

inventory, transportation, information, sourcing, and pricing.
Each driver affects the balance between responsiveness and
efficiency and the resulting strategic fit. Thus, it is important for
supply chain designers to structure the six drivers appropriately
to achieve strategic fit.
Drivers of Supply Chain Performance (1 of 2)
1. Facilities
– The physical locations in the supply chain network where
product is stored, assembled, or fabricated
2. Inventory
– All raw materials, work in process, and finished goods
within a supply chain
3. Transportation
– Moving inventory from point to point in the supply chain
Drivers of Supply Chain Performance (2 of 2)
4. Information
– Data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers throughout the
supply chain
5. Sourcing
– Who will perform a particular supply chain activity
6. Pricing
– How much a firm will charge for the goods and services
that it makes available in the supply chain
Facilities (1 of 6)
• Role in the supply chain
– Production sites and storage sites
– Increase responsiveness by increasing the number of
facilities, making them more flexible, or increasing
capacity
Facilities (2 of 6)
– Tradeoffs between facility, inventory, and transportation
costs
 Increasing number of facilities increases facility and
inventory costs, decreases transportation costs and
reduces response time
 Increasing the flexibility or capacity of a facility
increases facility costs but decreases inventory costs
and response time
Facilities (3 of 6)
• Components of facilities decisions
– Capability
 Flexible, dedicated, or a combination of the two
 Product focus or a functional focus
– Location
 Where a company will locate its facilities
 Centralize for economies of scale, decentralize for
responsiveness
 Consider macroeconomic factors, quality of workers, cost of
workers and facility, availability of infrastructure, proximity
to customers, location of other facilities, tax effects
Facilities (4 of 6)
– Capacity
 A facility’s capacity to perform its intended function or
functions
 Excess capacity – responsive, costly
 Little excess capacity – more efficient, less responsive
– Demand Allocation
 Markets each facility will serve
 Revisited as conditions change
Facilities (5 of 6)
– Facility-Related Metrics
 Capacity
 Utilization
 Processing/setup/down/idle time
 Quality losses
 Production cost per unit
 Theoretical flow/cycle time of production
 Actual average flow/cycle time
Facilities (6 of 6)
 Product variety
 Volume contribution of top 20 percent SKU's and
customers
 Average production batch size
 Production service level
The major facility related decisions include identifying the

number of facilities, the extent of flexibility, the level of capacity,
and the markets served by each facility. Increasing the number of
facilities, their flexibility, or their excess capacity increases
responsiveness but hurts efficiency. Key facility-related metrics
are capacity, utilization, processing/setup/down/idle time, quality,
theoretical flow/cycle time of production, actual flow/cycle time,
product variety, volume contribution of top 20 percent SKU
s/customers, average production batch size, and service level.
Inventory (1 of 3)
• Role in the Supply Chain
– Mismatch between supply and demand
– Exploit economies of scale
– Reduce costs
– Improve product availability
– Affects assets, costs, responsiveness, material flow time
Inventory (2 of 3)
• Overall Trade-Off
– Increasing inventory generally makes the supply chain
more responsive
– A higher level of inventory facilitates a reduction in
production and transportation costs because of improved
economies of scale
– Inventory holding costs increase
Inventory (3 of 3)
– Material flow time, the time that elapses between the
point at which material enters the supply chain to the point
at which it exits
– Throughput, the rate at which sales occur
Components of Inventory Decisions (1 of 4)
• Cycle Inventory
– Average amount of inventory used to satisfy demand
between supplier shipments
– Function of lot size decisions
• Safety Inventory
– Inventory held in case demand exceeds expectations
– Costs of carrying too much inventory versus cost of losing
sales
• Seasonal Inventory
– Inventory built up to counter predictable variability in
demand
– Cost of carrying additional inventory versus cost of flexible
production
• Level of Product Availability
– The fraction of demand that is served on time from product
held in inventory
– Trade off between customer service and cost
– Average safety inventory
– Seasonal inventory
– Fill rate
– Fraction of time out of stock
– Obsolete inventory
The major inventory related decisions include identifying the

batch size, the safety inventory, the seasonal inventory, and the
level of product availability. Increasing the safety inventory and
level of product availability increases responsiveness but hurts
efficiency. Increasing the batch size and seasonal inventory
increases holding costs but may decrease production,
transportation, and purchasing costs. Key inventory-related
metrics are average inventory, turns, products with more than a
specified number of days of inventory, average replenishment
batch size, average safety inventory, seasonal inventory, fill rate,
and fraction of time out of stock.
Transportation (1 of 5)
– Moves inventory between stages in the supply chain
– Affects responsiveness and efficiency
– Faster transportation allows greater responsiveness but
lower efficiency
– Also affects inventory and facilities
– Allows a firm to adjust the location of its facilities and
inventory to find the right balance between responsiveness
and efficiency
• Components of Transportation Decisions
– Design of transportation network
 Modes, locations, and routes
 Direct or with intermediate consolidation points
 One or multiple supply or demand points in a single run
– Choice of transportation mode
 Air, truck, rail, sea, and pipeline
 Information goods via the Internet
 Different speed, size of shipments, cost of shipping, and
flexibility
– Transportation-Related Metrics
 Average inbound transportation cost
 Average income shipment size
 Average inbound transportation cost per shipment
 Average outbound transportation cost
 Average outbound shipment size
 Average outbound transportation cost per shipment
 Fraction transported by mode
• Overall Trade-off: Responsiveness Versus Efficiency
– The cost of transporting a given product (efficiency) and
the speed with which that product is transported
(responsiveness)
– Using fast modes of transport raises responsiveness and
transportation cost but lowers the inventory holding cost
The major transportation related decisions include designing the

transportation network and selecting the transportation mode.
Faster modes of transport are more expensive but can improve
responsiveness while helping decrease inventory and facility
costs. Key transportation-related metrics are average inbound
transportation cost, average incoming shipment size, average
inbound transportation cost per shipment, average outbound
transportation cost, average outbound shipment size, average
outbound transportation cost per shipment, and fraction
transported by mode.
Information (1 of 2)
– Improve the utilization of supply chain assets and the
coordination of supply chain flows to increase
responsiveness and reduce cost
– Information is a key driver that can be used to provide
higher responsiveness while simultaneously improving
efficiency
Information (2 of 2)
• Role in the Competitive Strategy
– Improves visibility of transactions and coordination of
decisions across the supply chain
– Right information can help a supply chain better meet
customer needs at lower cost
– More information increases complexity and cost of both
infrastructure and analysis exponentially while marginal
value diminishes
– Share the minimum amount of information required to
achieve coordination
Components of Information Decisions (1 of 3)
• Demand Planning
– Best estimate of future demand
– Include estimation of forecast error
• Coordination and Information Sharing
– Supply chain coordination, all stages of a supply chain
work toward the objective of maximizing total supply
chain profitability based on shared information
– Critical for success
• Sales and Operations Planning (S&OP)
– The process of creating an overall supply plan (production
and inventories) to meet the anticipated level of demand
(sales)
– Can be used to plan supply chain needs and project
revenues and profits
• Information-Related Metrics
– Forecast horizon
– Frequency of update
– Forecast error
– Variance from plan
– Ratio of demand variability to order variability
The major information related decisions include coming up with

a demand plan as well as a sales & operations plan that optimally
matches supply and demand. It is important that information is
shared across the supply chain to ensure that plans at different
stages are coordinated. Key information-related metrics are
forecast horizon, forecast error, variance from plan, and ratio of
demand variability to order variability.
Sourcing (1 of 2)
– Set of business processes required to purchase goods and
services
– Will tasks be performed by a source internal to the
company or a third party
– Should increase the size of the total surplus to be shared
across the supply chain
Sourcing (2 of 2)
• Role in the Competitive Strategy
– Sourcing decisions are crucial because they affect the level
of efficiency and responsiveness in a supply chain
– Outsource to responsive third parties if it is too expensive
to develop their own
– Keep responsive process in-house to maintain control
Components of Sourcing Decisions (1 of 3)
• In-House or Outsource
– Perform a task in-house or outsource it to a third party
– Outsource if it raises the supply chain surplus more than
the firm can on its own
– Keep function in-house if the third party cannot increase
the supply chain surplus or if the outsourcing risk is
significant
• Supplier Selection
– Number of suppliers, criteria for evaluation and selection
• Procurement
– Obtain goods and service within a supply chain
– Goal is to decrease total cost of ownership and increase
supply chain surplus
• Sourcing-Related Metrics
– Days payable outstanding
– Average purchase price
– Range of purchase price
– Average purchase quantity
– Supply quality
– Supply lead time
– Percentage of on-time deliveries
– Supplier reliability
The major sourcing related decisions include deciding whether an

activity will be insourced or outsourced, identifying key factors
in supplier selection, and selecting the supplier portfolio. Key
sourcing-related metrics are days payable outstanding, average
purchase price, range of purchase price, average purchase
quantity, percentage on-time deliveries, supply quality, and
supply lead time.
Pricing
– Pricing determines the amount to charge customers for
goods and services
– Affects the supply chain level of responsiveness required
and the demand profile the supply chain attempts to serve
– Pricing strategies can be used to match demand and supply
– Objective should be to increase firm profit
Components of Pricing Decisions (1 of 3)
• Pricing and Economies of Scale
– The provider of the activity must decide how to price it
appropriately to reflect economies of scale
• Everyday Low Pricing Versus High-Low Pricing
– Different pricing strategies lead to different demand
profiles that the supply chain must serve
• Fixed Price Versus Menu Pricing
– If marginal supply chain costs or the value to the customer
vary significantly along some attribute, it is often effective
to have a pricing menu
– Can lead to customer behavior that has a negative impact
on profits
• Pricing-Related Metrics
– Profit margin
– Days sales outstanding
– Incremental fixed cost per order
– Incremental variable cost per unit
– Average sale price
– Average order size
– Range of sale price
– Range of periodic sales
The major pricing related decisions include deciding whether the

firm will offer quantity discounts, whether it will offer everyday
low pricing or prices that vary over time, and whether it will offer
a fixed price or a menu of prices that vary along some dimension
such as response time. Pricing-related metrics are profit margin,
days sales outstanding, incremental fixed cost per order,
incremental variable cost per unit, average sale price, average
order size, range of sale price, and range of periodic sales.
Copyright
Chapter 2
PURCHASING
MANAGEMENT
Supply Chain
Management:
Prepared by Mark A. Jacobs, PhD

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
LEARNING OBJECTIVES
You should be able to:

• Understand the role of supply management and its
strategic impact on an organization’s competitive advantage
• Have a basic knowledge of the manual purchasing
process, e-procurement, public procurement, and green
purchasing
• Understand and know how to handle small value purchase
orders
• Understand sourcing decisions and the factors impacting
supplier selection
©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
76
LEARNING OBJECTIVES (Continued)
You should be able to:

• Understand the pros and cons of single sourcing
versus multiple sourcing
• Understand the pros and cons of single versus
multiple sourcing
• Describe opportunities and challenges of global
sourcing and its impacts on supply management
• Understand and compute total cost of ownership
77
CHAPTER OUTLINE
• Introduction
• A Brief History of Purchasing Terms
• The Role of Supply Management in an Organization
• The Purchasing Process
• Sourcing Decisions – The Make or Buy Decision
• Roles of Supply Base
• Supplier Selection
• How Many Suppliers to Use
• Purchasing Organization
• International Purchasing/Global Sourcing
• Procurement for Government/Non-Profits Agencies
78
A Brief History of Purchasing
Terms
Purchasing – Obtaining merchandise, capital equipment;
raw materials, services, or maintenance, repair, and
operating (MRO) supplies in exchange for money or its
equivalent
Merchants – Wholesalers and retailers who purchase for
resale
Industrial Buyers – Purchase raw materials for
conversion, services, capital equipment, & MRO supplies
79
A Brief History of Purchasing
Terms (Continued)
Purchasing - key business function for acquiring

materials, services, & equipment
Contracting - term often used for the acquisition of
services
Supply Management - a newer term that encompasses
all acquisition activities
 Institute of Supply management defined supply
management as the “Identification, acquisition,
access, positioning, and management of resources
an organization needs or potentially needs in the
attainment of its strategic objectives.”
80
The Role of Supply Management
in an Organization
The primary goals of purchasing are:
 Ensure uninterrupted flows of raw materials at the lowest total
cost,
 Improve quality of the finished goods produced, and
 Optimize customer satisfaction.
Purchasing contributes to these objectives by:

 Actively seeking better materials and reliable suppliers,
 Work closely with and exploiting the expertise of strategic
suppliers to improve quality and materials
 Involving suppliers and purchasing personnel in new product
design and development efforts.
81
The Purchasing Process – Manual
Purchasing (older system)
Step 1- Material Requisition/Purchase Requisition –
Stating product, quantity, and delivery date. May originate as a
planned order release from the MRP system. Traveling
requisition used for recurring orders.
Step 2- The Request for Quotation (RFQ) –
Buyer identifies suppliers & issues a request for quotation
(RFQ) for routine items or a Request for Proposal (RFP) for
more demanding products. Supplier Development is used to
develop supplier capabilities.
Step 3- The Purchase Order (PO) –
Is the buyer’s offer & becomes a binding contract when
accepted by supplier. When initiated by the supplier on their
own terms, the document is a sales order.
82
Swim Lane Flowcharts
Purchase process.
The Purchasing Process – Manual
Purchasing (Continued)
Figure 2.2
84
The Purchasing Process –
Manual Purchasing (Continued)
Figure 2.3
85
e-Procurement
Step 1- Material user inputs a materials requisition –
Relevant information such as quantity and date needed.
Step 2- Materials requisition submitted to buyer –

At purchasing department (hardcopy or electronically).
Step 3- Buyer assigns qualified suppliers to bid –

Product description, closing date, & conditions are given.
Step 4- Buyer reviews closed bids & selects a supplier
86
e-Procurement
Figure 2.4
87
e-Procurement (Continued)
Advantages of the e-Procurement System

 Time savings
 Cost savings
 Accuracy
 Real time
 Mobility
 Trackability
 Management
 Benefits to the suppliers
88
• BreakEven Analysis.
89
DECISION MAKING
MODELS
Dr.M.MutasimBillah
Example A1
• A hospital is considering a new procedure to be offered at $200 per

patient. The fixed cost per year would be $100,000, with total
variable costs of $100 per patient. What is the break-even quantity
for this service? Use both algebraic and graphic approaches to get
the answer.
To Accompany Krajewski & Ritzman Operations Management:

Strategy and Analysis, Seventh Edition © 2004 Prentice Hall,
Inc. All rights reserved.
Break-Even Analysis
Break-Even Analysis
400 –
Dollars (in thousands)
300 –
200 –
100 –
| | | |
0– 500 1000 1500 2000
Example A.1 – page 33 Patients (Q)
Break-Even Analysis
Quantity Total Annual Total Annual
(patients) Cost ($) Revenue ($)
(Q) (100,000 + 100Q) (200Q)
400 –
0 100,000 0
2000 300,000
Dollars (in thousands) 400,000
300 –
200 –
100 –
| | | |
0– 500 1000 1500 2000
Example A.1 Patients (Q)
Break-Even Analysis
(Q) (100,000 + 100Q) (200Q) (2000, 400)
0 400100,000
– 0
2000 Dollars (in thousands) 300,000 400,000
300 – Total annual revenues
200 –
100 –
| | | |
0– 500 1000 1500 2000
Break-Even Analysis
(Q) (100,000 + 100Q) (200Q)
(2000, 400)
0 400100,000
– 0
2000 Dollars (in thousands) 300,000 400,000
300 – Total annual revenues (2000, 300)
Total annual costs
200 –
100 – Fixed costs
| | | |
0– 500 1000 1500 2000
Break-Even Analysis
(Q) (100,000 + 100Q) (200Q)
(2000, 400)
0 400100,000
– 0
2000 300,000 400,000
Profits
Total annual costs
200 – Break-even quantity
100 – Fixed costs

Loss
| | | |
0– 500 1000 1500 2000
Break-Even Analysis
(2000, 400)
400 –
Profits
Total annual costs
200 – Break-even quantity
100 – Fixed costs

Loss
| | | |
0– 500 1000 1500 2000
Figure A.1 Patients (Q)
Example A2
Sensitivity Analysis of Sales Forecast
• If the most pessimistic sales forecast for the proposed

service in Figure A.1 were 1,500 patients, what would
be the procedure’s total contribution to profit and
overhead per year?
To Accompany Krajewski & Ritzman Operations Management:

Strategy and Analysis, Seventh Edition © 2004 Prentice Hall,
Inc. All rights reserved.
Sensitivity Analysis
400 –
Profits
Total annual costs
200 –
100 – Fixed costs

Loss
| | | |
0– 500 1000 1500 2000
Example A.2 – page 34 Patients (Q)
400 –
Profits
Total annual costs
200 – Forecast = 1,500
100 – Fixed costs

Loss
| | | |
0– 500 1000 1500 2000
pQ – (F + cQ)
400 –
Profits
Total annual costs
200 – Forecast = 1,500
100 – Fixed costs

Loss
| | | |
0– 500 1000 1500 2000
pQ – (F + cQ)
200(1500) – [100,000 + 100(1500)]
400 –
$50,000 Profits
Total annual costs
200 – Forecast = 1,500
100 – Fixed costs

Loss
| | | |
0– 500 1000 1500 2000
Problem 1 class practice
• 1. Mary Williams, owner of Williams Products, is evaluating whether to introduce

a new product line. After thinking through the production process and the costs of
raw materials and new equipment, Williams estimates the variable costs of each
unit produced and sold at $6 and the fixed costs per year at $60,000.
• a. If the selling price is set at $18 each, how many units must be produced and
sold for Williams to break even? Use both graphic and algebraic approaches to get
your answer.
• b. Williams forecasts sales of 10,000 units for the first year if the selling price is
set at $14 each. What would be the total contribution to profits from this new
product during the first year?
• c. If the selling price is set at $12.50, Williams forecasts that first-year sales would
increase to 15,000 units. Which pricing strategy ($14.00 or $12.50) would result in
the greater total contribution to profits?
• d. What other considerations would be crucial to the final decision about making
and marketing the new product?
Class Practice
• The owner of a small manufacturing business has patented a new

device for washing dishes and cleaning dirty kitchen sinks. Before
trying to commercialize the device and add it to his or her existing
product line, the owner wants reasonable assurance of success.
Variable costs are estimated at $7 per unit produced and sold. Fixed
costs are about $56,000 per year.
• a. If the selling price is set at $25, how many units must be produced
and sold to break even? Use both algebraic and graphic approaches.
• b. Forecasted sales for the first year are 10,000 units if the price is
reduced to $15. With this pricing strategy, what would be the
product’s total contribution to profits in the first year?
Make or Buy
• The manager of a fast-food restaurant featuring hamburgers is adding

salads to the menu. For each of the two new options, the price to the
customer will be the same. The make option is to install a salad bar
stocked with vegetables, fruits, and toppings and let the customer
assemble the salad. The salad bar would have to be leased and a part-time
employee hired. The manager estimates the fixed costs at $12,000 and
variable costs totaling $1.50 per salad. The buy option is to have
preassembled salads available for sale. They would be purchased from a
local supplier at $2.00 per salad. Offering preassembled salads would
require installation and operation of additional refrigeration, with an
annual fixed cost of $2,400. The manager expects to sell 25,000 salads per
year. What is the make-or-buy quantity?
Make-or-Buy Decisions
Figure A.2
Fm – Fb
Q=
cb – cm
12,000 – 2,400
Q=
Example A.3 2.0 – 1.5
Fm – Fb
Q=
cb – cm
Example A.3
Q = 19,200 salads
Problem 6
• A news clipping service is considering modernization. Rather than manually clipping and
photocopying articles of interest and mailing them to its clients, employees electronically
input stories from most widely circulated publications into a database. Each new issue is
searched for key words, such as a client’s company name, competitors’ names, type of
business, and the company’s products, services, and officers. When matches occur,
affected clients are instantly notified via an online network. If the story is of interest, it is
electronically transmitted, so the client often has the story and can prepare comments
for follow-up interviews before the publication hits the street. The manual process has
fixed costs of $400,000 per year and variable costs of $6.20 per clipping mailed. The price
charged the client is $8.00 per clipping. The computerized process has fixed costs of
$1,300,000 per year and variable costs of $2.25 per story electronically transmitted to the
client.
• a. If the same price is charged for either process, what is the annual volume beyond
which the automated process is more attractive?
• b. The present volume of business is 225,000 clippings per year. Many of the clippings
sent with the current process are not of interest to the client or are multiple copies of the
same story appearing in several publications. The news clipping service believes that by
improving service and by lowering the price to $4.00 per story, modernization will
increase volume to 900,000 stories transmitted per year. Should the clipping service
modernize?
Class exercise.
• Hahn Manufacturing purchases a key component of one of its products
from a local supplier. The current purchase price is $1,500 per unit.
Efforts to standardize parts succeeded to the point that this same
component can now be used in five different products. Annual
component usage should increase from 150 to 750 units. Management
wonders whether it is time to make the component in-house rather
than to continue buying it from the supplier. Fixed costs would increase
by about $40,000 per year for the new equipment and tooling needed.
The cost of raw materials and variable overhead would be about
$1,100 per unit, and labor costs would be $300 per unit produced.
• a. Should Hahn make rather than buy?
• b. What is the break-even quantity?
Break Even Solved Problem 1
• The owner of a small manufacturing business has patented a new device
for washing dishes and cleaning dirty kitchen sinks. Before trying to
commercialize the device and add it to his or her existing product line, the
owner wants reasonable assurance of success. Variable costs are
estimated at $7 per unit produced and sold. Fixed costs are about $56,000
per year.
• a. If the selling price is set at $25, how many units must be produced and
sold to break even? Use both algebraic and graphic approaches.
• b. Forecasted sales for the first year are 10,000 units if the price is reduced
to $15. With this pricing strategy, what would be the product’s total
contribution to profits in the first year?
Solved Problem 1
250 –
200 –
Total revenues
150 –
Break-even
quantity
100 –
$77.7
Total costs
50 – 3.1
| | | | | | | |
0–
1 2 3 4 5 6 7 8
Figure A.7
Units (in thousands)
Jennings Company
• 2. A product at the Jennings Company enjoyed reasonable sales
volumes, but its contributions to profits were disappointing. Last
year, 17,500 units were produced and sold. The selling price is $22
per unit, the variable cost is $18 per unit, and the fixed cost is
$80,000.
• a. What is the break-even quantity for this product? Use both graphic
and algebraic approaches to get your answer.
• b. If sales were not expected to increase, by how much would
Jennings have to reduce their variable cost to break even?
• c. Jennings believes that a $1 reduction in price will increase sales by
50 percent. Is this enough for Jennings to break even? If not, by how
much would sales have to increase?

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Supply Chain Management: Strategy,

Planning, and Operation

Figure 2-1 The Value Chain in a Company

– New service/product development process:

– Customer relationship process: A process

– Eg (bank customer relationship officer)

• A process that provides vital resources

Figure 2-3 Cost-Responsiveness Efficient Frontier

Figure 2-4 The Responsiveness Spectrum

Figure 2-5 Finding the Zone of Strategic Fit

Blank Efficient Supply Chains Responsive Supply Chains

Supply demand at the lowest

Demand planning is a multi-step operational supply chain management

Supply chain planning (SCP) is the component of supply chain management

• Raw Material Procurement

Operations of administrative and physical functions associated with

Distribution is the process of making a product or service available for the

3.1 Describe key financial measures of firm performance.

3.6 Define the key performance metrics for information and

Figure 3-1 Supply Chain Decision-Making Frame work

The major drivers of supply chain performance are facilities,

The major facility related decisions include identifying the

The major inventory related decisions include identifying the

The major transportation related decisions include designing the

The major information related decisions include coming up with

The major sourcing related decisions include deciding whether an

The major pricing related decisions include deciding whether the

Prepared by Mark A. Jacobs, PhD

You should be able to:

You should be able to:

Purchasing - key business function for acquiring

Purchasing contributes to these objectives by:

Step 2- Materials requisition submitted to buyer –

Step 3- Buyer assigns qualified suppliers to bid –

Step 4- Buyer reviews closed bids & selects a supplier

Advantages of the e-Procurement System

• A hospital is considering a new procedure to be offered at $200 per

To Accompany Krajewski & Ritzman Operations Management:

300 – Total annual revenues

300 – Total annual revenues (2000, 300)

Total annual costs

100 – Fixed costs

300 – Total annual revenues (2000, 300)

Total annual costs

200 – Break-even quantity

100 – Fixed costs

300 – Total annual revenues (2000, 300)

Total annual costs

200 – Break-even quantity

100 – Fixed costs

• If the most pessimistic sales forecast for the proposed

To Accompany Krajewski & Ritzman Operations Management:

300 – Total annual revenues

Total annual costs

100 – Fixed costs

300 – Total annual revenues

Total annual costs

200 – Forecast = 1,500

100 – Fixed costs