Chopra/Meindl 4/e

CHAPTER 10

1. What is the bullwhip effect and how does it relate to lack of coordination in a
supply chain?
The bullwhip effect refers to the fluctuation in orders along the length of the
supply chain as orders move from retailers to wholesalers to manufacturers to
suppliers. The bullwhip effect relates directly to the lack of coordination (demand
information flows) within the supply chain. Each supply chain member has a
different idea of what demand is, and the demand estimates are grossly distorted
and exaggerated as the supply chain partner is distanced from the customer.
2. What is the impact of lack of coordination on the performance of a supply chain?
The impact of lack of coordination is degradation of responsiveness and poor cost
performance for all supply chain members. As the bullwhip effect rears its ugly
head, supply chain partners find themselves with excessive inventory followed by
stockouts and backorders. The fluctuations in inventory result in increased
holding costs and lost sales, which in turn spike transportation and material
handling costs. Ultimately, the struggle with cost and responsiveness hurts the
relationships among supply chain partners as they seek to explain their lack of
performance.
3. In what way can improper incentives lead to a lack of coordination in a supply
chain? What countermeasures can be used to offset this effect?
Incentive obstacles occur in situations when different participants in the supply
chain are motivated by self interest.
Incentives that focus only on the local impact of an action result in decisions
being made that achieve a local optimum but can avoid a global (supply chain)
optimum. All supply chain partners must agree on global performance measures
and structure rewards such that members are appropriately motivated.
Sales force incentives also are responsible for counterproductive supply chain
behavior. Commissions that are based on a single short time frame can be gamed
by the sales force to maximize commission but these actions inadvertently
increase demand variability and exert pressure on the supply chain. Commissions
should be structured to provide incentives to consistently sell large volumes of
product over a broad time frame to the sell-through point.
4. How do trade promotions and price fluctuations affect coordination in a supply
chain? What pricing and promotion policies can facilitate coordination?
Trade promotions and price fluctuations make supply chain coordination more
difficult. Customers seek to purchase goods for less and engage in forward buying

Chopra/Meindl 4/e
which creates spikes in demand that may exceed capacity. All parties would
benefit if the supply chain used every day low pricing (EDLP) to mitigate forward
buying and allow procurement, production, and logistics to function at a steadier
pace. If price incentives must be offered, the chain is better served by
implementing a volume-based quantity discount plan instead of a lot size based
quantity discount, i.e., providing incentives to purchase large quantities over a
long period of time, perhaps a year.
Chapter 11
1. Consider a supermarket deciding on the size of its replenishment order from
Proctor & Gamble. What costs should it take into account when making this
decision?
The main cost categories for the supermarkets inventory policy are material
costs, ordering costs, and holding costs. Material cost is the money paid to Proctor
and Gamble for the goods themselves. Ordering costs, also called procurement
costs, are incurred by requesting the goods from the supplier and are fixed in the
sense that they do not vary with the size of the order. Examples of such fixed
costs are the labor required to place the order, handle the resultant paperwork and
the transportation fee to ship the order. The holding cost is the cost to carry one
unit in inventory for a specified period of time, usually one year. This cost is
variable and includes the cost of capital and all of the costs associated with
physically storing inventory shrinkage, spoilage or obsolescence, insurance, the
cost of capital, the cost of the warehouse space, etc.
2. Discuss how various costs for the supermarket change as it decreases the lot size
ordered from Proctor & Gamble.
As the lot size ordered from the supplier decreases, the holding cost (variable with
respect to lot size) decreases. As the lot size decreases, the ordering cost remains
the same, but the annual ordering cost will rise since the total number of orders
each year must increase. As the lot size decreases, the cost of the materials will
drop on a per-order basis but will stay the same on an annual basis since total
annual demand hasnt changed.
The exception to this occurs if the supplier has a price break for an order size
above a certain threshold; in this case the cost of the goods might increase if the
reduced order size is not sufficient to trigger a substantial per unit discount.
3. As demand at the supermarket chain grows, how would you expect the cycle
inventory measured in days of inventory to change? Explain.
As the demand at the supermarket chain grows, we would expect the cycle
inventory as measured in days of inventory to also increase, although the increase
in cycle inventory is only 40% of the increase in demand. This is because the
relationship between the optimal lot size Q* and the annual demand D is

Chopra/Meindl 4/e

2DS
. Since D is under the radical, its doubling to 2D does not translate to
hC
a jump from a Q* to a 2Q* order; it translates to a jump from a Q* to a 1.4Q* order.
Q*

4. The manager at the supermarket wants to decrease the lot size without increasing
the costs he incurs. What actions can he take to achieve his objective?
One action would be to simply decrease the lot size and let the robust nature of
the EOQ model work its magic. The total cost curve on either side of the optimal
order quantity, the Q*, is relatively flat, so movements in either direction have
little impact on total annual procurement and carrying costs.
If greater cuts in lot size are desired, the manager can aggregate multiple products
in a single order. Recall that the EOQ model is based on a one-product-at-a-time
assumption; if multiple products are aggregated, then the fixed procurement cost
is spread over all of the items and dramatic lot size reductions are possible. If the
same products are being ordered by another supermarket in the same chain (or at
least by stores that are willing to cooperate) the combined orders can be delivered
by a single truck making multiple stops, thereby reducing transportation expense.
Other techniques that should be deployed when aggregating across product lines
include advanced shipping notices and RFID tags that will make inventory
tracking and warehouse management simpler.
5. adad
Supply chain is coordinated if the decision the retailer and supplier can maximize
total supply chain profits. The result of this independent decision making can be a
lack of coordination in a supply chain, because some actions that having an
impact to maximizing the profit retailer may not apply the same to the profit of
supply chain. This decision has an effect on overall supply chain costs including
inventory holding costs, production costs, transportation costs, and warehousing
costs.
Chapter 9
1. Discuss how a company can get sales and operations to work together with the
common goal of coordinating supply and demand to maximize profitability.
Sales/marketing and operations often find themselves at cross purposes; as the
authors note, marketing often has incentives based on revenue, whereas
operations has incentives based on cost. The cachet of new products, service
guarantees, co-promotions, and other marketing vehicles is quite often lost on
members of the organization that must fulfill promises made by their friends in
marketing. As with all collaborations, open communication is a must on a nearconstant basis. Regular planning meetings must include full cross-functional
participation and critical information must be shared as sales and operations
occur. Having common performance measures is another way to get these two
groups to work together for the common good of the company. Holding both

Chopra/Meindl 4/e
groups responsible for Customer service, accuracy, on time delivery and quality
and rewarding them jointly for achieving these goals will greatly increase their
willingness to work together.
2. How can a firm use pricing to change demand patterns?
A change in price, one of marketings Four Ps, will change demand assuming that
there is some elasticity in demand. A firm can shift demand from a popular
product or time to a less-popular product or what is traditionally an off-peak
demand period by lowering prices. A firm can collect data on the impact of price
changes on demand and use the correlation as an input into supply chain
aggregate planning. In the absence of such coordination, it is virtually guaranteed
that supply chain partners will face demand levels they had not anticipated and
will be unable to satisfy. The increase in demand results from a combination of a)
market growth, b) stealing share, and c) forward buying. The first two increase
demand for the product and the third robs sales from the future.
3. Why would a firm want to offer pricing promotions in its peak-demand periods?
If we assume that a pricing promotion serves to increase demand, then there are a
couple of reasons a firm may offer pricing promotions during peak demand
periods. Even at peak demand, the firm may have excess capacity and could meet
this demand. The nature of the product and supply chain may be such that a
promotion today results in an order that both the supply chain and customer
recognize will be filled in the future, perhaps during an anticipated low demand
period. If a firm produces a product that is at the end of its life cycle, there may be
incentive to exhaust accumulated materials and labor skills that are dedicated to
its production. Finally, a firm may be practicing a form of predatory pricing if it
senses that a competitor, teetering on the brink of extinction, is starved for sales.
4. Why would a firm want to offer pricing promotions during its low-demand
periods?
Pricing promotions during low-demand periods should serve to increase demand
and sales. The increase in demand results from a combination of the following
three factors:
Market growth sales may be realized from customers that were not considering
this product at the higher price.
Stealing share sales may be realized from customers that were considering a
competitors product.
Forward buying sales may be stolen from the future by customers that feel that
price may rise in the future.
Chapter 17

Chopra/Meindl 4/e
1. What processes within each macro process are best suited to being enabled by IT?
What processes are least suited?
The macro processes in a supply chain are customer relationship management
(CRM), internal supply chain management (ISCM), and supplier relationship
management (SRM). Taken collectively, these macro processes span the entire
supply chain.
CRM processes focus on the downstream interactions between the enterprise and
its customers. The key processes under CRM are marketing, selling, and order
management, and of these three, the creative sub-processes of the marketing and
selling processes are least suited to IT enablement. The best suited processes for
IT enablement are pricing and profitability calculations, sales force automation,
and order configuration and tracking. Within order management, virtually all
processes reap the benefits of information technology.
ISCM processes focus on internal operations within the enterprise and include
strategic planning, demand planning, supply planning, fulfillment, and field
service. The use of IT to facilitate ISCM sub-processes is presented in glowing
terms in separate chapters in this text. Huge gains in efficiency and
responsiveness have been achieved via the application of IT to all aspects of
ISCM.
SRM processes focus on upstream interaction between the enterprise and its
suppliers and includes the sub-processes of design collaboration, sourcing,
negotiating, buying, and supply collaboration. The authors indicate in chapter 14
that sourcing-related IT has had the most ups and downs of any supply chain
software sector, with the primary problems being loss of flexibility and the
requirement of collaboration. Electronic marketplaces once flourished but have
since withered. This is not to say that IT does not play a role in SRM processes; in
fact, all areas are supported by IT software.