Mid-Term Examination. Suggested Solution to ECLT 5940 Supply Chain Management. Time: 7:00 9:45 PM

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1 Mid-Term Examination Suggested Solution to ECLT 5940 Supply Chain Management Time: 7:00 9:45 PM 1. This is an open-book/note examination. 2. One cannot lend books/notes to others. 3. There are totally 9 pages (including this page) 4. Write your answer in the space provided in this book. 5. Answer all SEVEN (7) questions Name Student ID 1

2 1. Choose only one from the multiple choices below. (20 marks, 2 marks each) 1) Which of the following activities needs forecasting the least? a. Material requirement planning (MRP) b. Distribution resource planning (DRP) c. Constructing a bill of materials (BOM) d. Master production scheduling (MPS) 2) When can the net requirement not equal the planned order receipt in MRP? a. Safety stock > 0 b. Lot-for-lot policy c. Lead time >0 d. Lot-size policy: x or multiple of x, where x is a given number and >1 (say, 8). 3) Which of the following statement is generally true? a. If method A has larger MAD than method B, then MAPE of method B is larger than method A b. If the tracking signal of method A is larger than method B, then MSE of method B is larger than method A c. If method A has larger MAD than method B, then MAPE of method A is also larger than method B d. If the tracking signal of method A is larger than method B, then the Bias of method B is larger than method A 4) Suppose two simple exponential smoothing forecasts are computed for =0.1 and =0.3 using the same demand data. Which of the following statement is true? a. The =0.3 forecast responds more rapidly to demand changes and more stable than =0.1. b. The =0.1 forecast responds more rapidly to demand changes and more stable than =0.3. c. The =0.1 forecast responds less rapidly to demand changes and less stable than =0.3. d. The =0.3 forecast responds more rapidly to demand changes but less stable than =0.1. 5) The time-series model that uses past forecasts and past demand data to generate a new forecast is the a. Naïve approach b. Moving average approach c. Static method d. Exponential smoothing method 2

3 6) As the ratio of the cost of overstocking to the cost of understocking gets smaller, a. the optimal level of product availability becomes irrelevant. b. the optimal level of product availability decreases. c. the optimal level of product availability remains stable. d. the optimal level of product availability increases. e. none of the above 7) The level of product availability a. is also referred to as the customer service level. b. is an important component of any supply chain s responsiveness. c. increases revenues for the supply chain by increasing sales. d. All of the above are true. e. Only a and b are true. 8) A high level of product availability requires a. large inventories and tends to raise costs for the supply chain. b. large inventories and tends to reduce costs for the supply chain. c. small inventories and tends to raise costs for the supply chain. d. small inventories and tends to reduce costs for the supply chain. e. none of the above 9) The loss incurred by a firm for each unsold unit at the end of the selling season is a. the cost of overstocking the product. b. the cost of stocking the product. c. the cost of understocking the product. d. the cost of overselling the product. e. the cost of underselling the product. 10) The margin lost from current as well as future sales if the customer does not return should be included in a. the cost of overstocking the product. b. the cost of stocking the product. c. the cost of understocking the product. d. the cost of overselling the product. e. the cost of underselling the product. 3

4 2. Answer the following two questions. (11 marks) 1) The procedure and logic of DRP is similar to MRP. (7 marks) a. What is the counterpart of the bill-of-materials in DRP (or which part of DRP corresponds to the bill-of-materials in MRP)? (4) b. What is the counterpart of Master Production Schedule (MPS) in DRP? (3) Solution: a) Distribution network or distribution structure in DRP (full mark). For example, CDC (parent) -> multiple regional DC s (children) -> Stores (a tree structure). b) Demand Forecasts at the lowest level of the distribution network (full mrak). For example, store level demand forecasts. These demand generates request for the upper level DC, and so on. MPS in MRP is the ultimate demand for planning and meeting store level demand forecasts in this example is the purpose of DRP. 2) What is Pipeline Inventory? (4 marks) Solution: Pipeline inventory refers to inventory during any means of transportation. 3. Answer the following questions (15 marks) Excel Computers is interested to develop a forecast of demand for its computers. The demand data for the past 6 moths is given below. Month Demand Ft( =0.3) Ft( =0.5) Error MAD Bias RSFE TS =0.3 =0.5 =0.3 =0.5 =0.3 =0.3 =0.3 1 Jan Feb March Apr May Jun Jul Note: RSFE = running sum of fore. errors, TS = tracking signal. a. Develop exponential smoothing forecasts for July Sept using smoothing constants of 0.3 and 0.5. The forecast for period 1 is given as 37. (Use the above table to carry out your calculation.) (7 marks) Solution: Use the formula Ft=Ft-1+Alpha*(At-1-Ft-1) 4

5 b. Based on the simple observation of the two forecasts, which forecast ( =0.3 or =0.5) will you choose and why? (Use the above table to carry out your calculation. Note that the table may contain useless columns/rows/cells..) (8 marks) Since MAD for =0.5 is smaller, the best choice is to choose the forecast for =0.5, which is A new program has been introduced in the Hong Kong Ocean Park for the past year. The number of audiences attending the program over the year is depicted in the figure below. In order to better plan the staff and facilities, the manager of the park wants to forecast the number of audiences for each week of the next year. Can you apply the standard forecasting methods (such as the Static, MA, Exp. Smooth, or other time-series methods) to this set of data (which is represented by the plot here)? Provide your reasoning. (8 marks) Week Be brief. You can answer in the space below. Solution: Time-series forecasting methods assume future is the continuation of the present and past. Understandably, there must be some seasonality to attendance in Ocean Park. Moreover, this is a new programme. However, there is only one year observation, which is not possible to tell the seasonality. Hence the dataset can not be used for the input of a standard forecasting method. A less structured/formal or qualitative method is preferred; e.g., multiply a factor k on the number of each week and then use this as the forecast for the corresponding week of next year, where k can be regarded as the growth rate (k >= 1) or decreasing rate (k<1). 5

6 5. Consider two products which are currently manufactured at COSMOS Machinery Ltd. To assemble a unit of A, 1 unit of C and D are required, whereas to assemble 1 unit of C requires 2 units of D and 1 unit of E. To assemble 1 unit of B requires 1 unit of E and 3 units of D. The gross requirements for products A and B and other relevant information are given below. (24 marks) Master plan (or gross requirement) for products A & B Period Product A Product B Item Lot Policy Beginning Inventory Scheduled Receipts Lead Time Safety Stock A Lot-for-lot B Lot-for-lot C Q = D Lot-for-lot in period E Lot-for-lot in period a. Construct the product structure trees of A and B. (6) b. Using the relevant information, determine the schedule of planned order releases for Item C. (10 marks) c. Determine the gross requirement for Item D. (8 marks) You should try to show your solution in the table below. (You may make additional assumptions if needed.) 6

7 1 A L=1 1B L=1 1C 1D 1E 3D 1E 2D 7

8 Product A / Week Gross requirements Scheduled receipt Available Inv Net requirements Plan. order receipt Plan. order release Product B Gross requirements Scheduled receipt Available Inv Net requirements Plan. order receipt Plan. order release Item C Gross requirements Scheduled receipt Available Inv Net requirements 20 Plan. order receipt 100 Plan. order release 100 Item D Gross requirements Scheduled receipt 150 Available Inv Net requirements Plan. order receipt Plan. order release Item E Gross requirements Scheduled receipt Available Inv. Net requirements Plan. order receipt Plan. order release Note: You may find it unnecessary fill all the cells in the above table to answer the questions.. 8

9 6. A manufacturer of seasonal products has introduced a new product. The anticipated demand is normally distributed with a mean of µ= 100 and a standard deviation of = 50. Each unit costs $75 to manufacture and the introductory price is to be $125 to achieve this level of sales. Any unsold units at the end of the season are unlikely to be very valuable and will be disposed of in a discount shop for $25 each. It costs $10 to hold a unit in inventory for the entire season. [A Normal table is appended] (16 marks) a. What is the cost of overstocking? (2) b. What is the cost of understocking? (2) c. How many units should be manufactured for sale? (8) d. What is the chance of having leftover inventory (which will be for discount sale) at the end of selling season? (4) Solution: a. Co=c-s+h= =60 b. Cu=p-c=125-75=50 c. P{D<=Q}=Cu/(Cu+Co)=50/(50+60)=0.4545, according to the normal distribution table, we get z= Thus Q*= µ+ *z=100+50*(-0.11)=95 d. The chance of having leftover inventory is 45.45%. 7. A magazine vendor estimated that the average weekly sales of a magazine was 50 copies. Its selling price was $30. (6 marks) a. Then someone claims that the average revenue from the sales of this magazine was $1500 per week. Explain why this statement is correct or incorrect. (3 marks) b. Explain whether the weekly average demand was 50 copies or not. (3 marks) Solution: a. This statement is correct since the average sales, not the demand, was 50 copies. The price for selling one copy was $30, thus the total revenue is exactly $30*50=$1500 per week. e. The demand actually is greater than the average sales as the demand may be greater than the on-hand inventory, which results in lost sales. 9

10 Appendix The Standard Normal Distribution and z-score Table F(z) 0 z z