Chapter 4 Homework Solutions

1. Supply chain contracts design.xls

2. Ch4 Question 1 in PP 117:
a. Barilla experiences wild fluctuations in pasta demand while variability in end-customer
demand is quite small. This amplification in demand variability in the supply chain is
known as the bullwhip effect, and it strains Barillas manufacturing and logistics
operations. Several factors contribute to this effect:
1. Transportation discounts, which induce distributors to order larger quantities less
frequently
2. Trade promotions and volume discounts that create demand fluctuations.
3. Delivery lead times of an average of 10 days from Barilla to the distributors.
4. Product proliferation, which makes forecasting more difficult.
5. Poor communication between parties in the supply chain.
6. Sequential decision-making process in the supply chain, i.e., no collaboration.
The JITD program transfers decision-making authority for determining Barilla-distributor
shipments from the distributor to Barilla. Rather than simply filling orders specified by
the distributor, Barilla would monitor the flow of its product through the distributors
warehouse, and then decide what to ship to the distributor and when to ship it.
This system alleviates many of the problems listed above, and enables Barilla to make
manufacturing and logistics decisions that benefit the entire system.
b. The most significant internal barrier to JITD is raised by the sales reps, who feel that
JITD would diminish their role in managing inventory and setting up promotions,
potentially threatening their job security. Giorgio Maggiali needs to explain and
demonstrate to the sales force that the proposed program would in fact increase customer
service level by reducing stock-outs, and potentially lead to cost savings. Ultimately,
JITD would help the sales reps to manage the orders more efficiently by increasing
visibility of the demand process. JITD is not a substitute for the sales force; it is a tool
that is made available to them for better customer service. Also, Maggiali needs to
explain that JITD is a company-wide effort, essential for Barilla.s long-term success.

c. As a customer (distributors/retailers), JITD would at first be disconcerting because I

would be losing control of my inventory. In order for me to agree to JITD, Barilla needs
to convincingly demonstrate the specific benefits that JITD will have for me.
d. The proposed system will be effective if it can be implemented correctly, and indeed,
subsequent results showed that JITD was very effective. In order to show value, it would
be useful to demonstrate that JITD benefits the distributors (lowering inventory,
improving their service levels, and increasing their returns on assets) by running
experiment at one or more of Barillas 18 depots. If customers will not agree to JITD, they
may at least agree to collaborative forecasting or increased supply chain visibility.
3. Question 2 in PP 117
a. E-commerce and the Internet allow upstream parties, e.g., suppliers, to have access to
more accurate demand information. It mitigates the bullwhip effect by preventing
distortion and miscommunication of demand information, and reducing the lead-time in
order processing.
b. Express delivery reduces lead times, and the associated demand variance. Note that in
the formulas in Sections 4.2.1 and 4.2.2, the variability of demand is proportional to the
lead times in the system.
c. Collaborative forecasts help all stakeholders in the supply chain to arrive at a common,
agreed-upon forecast of end-customer demand and reduce the bullwhip effect.
d. Periodic promotions create artificial demand peaks and bottoms and increase the
variance in customer demand, which amplifies the bullwhip effect. By everyday low
pricing, these demand fluctuations can be prevented, alleviating the bullwhip effect
partly.
e. Vendor-managed inventory allows the supplier to monitor downstream demand and to
make a well-informed decision about how much to keep on-hand and how much to ship
to its customers. Thus, the supplier does not have to rely on order data to forecast demand
and thus reduces the bullwhip effect.
f. Supply contracts align incentives in the supply chain, and reduce the uncertainty in
demand by determining agreed-upon supply limits, thereby reducing the bullwhip effect.