1

INSE 6290– Quality in Supply Chain Design

Fall 2017, Instructor: Dr. Chun Wang

Recommended Readings
1) Lecture notes: Lecture 1, Lecture 2 and Lecture 3 (can be found in Moodle)
2) Reference: Simchi-Levi Chapter2 (available in the library; see course outline for the
complete title of the book)

Assignment 1
Due on Sep. 27, 2017, submitted through Moodle. Assignment weight: 5% Special
instructions:
1) Your will have needed background to answers questions 7, 8, 9, and 10 after Lecture 3.

Questions:
1. Consider the continuous review policy (Q, R). Explain why the expected level of inventory
before receiving the order is
× ×√

while the expected level of inventory immediately after receiving the order is
+ × ×√

2. Consider the base-stock in periodic review. Explain why the expected level of inventory
after receiving an order is equal to
× + × ×√+

while the expected level of inventory before an order arrives is

3. Imagine that you operate a department store. List five products you sell, and order them from
lowest target service level to highest target service level. Justify your ordering.
4. Although we typically model inventory-related costs as either fixed or variable, in the real
world the situation is more complex. Discuss some inventory-related costs that are fixed in the
short term but may be considered variable if a longer time horizon is considered.
5. When is a model such as the economic lot sizing model, which ignores randomness, useful?
6. What are the penalties of facing highly variable demand? Are there any advantages?
 2

7. Give a specific example of risk pooling (a) across locations, (b) across time, and (c) across
products.
8. When would you expect demand for a product in two stores to be positively correlated?
When would you expect it to be negatively correlated?
9.
10. Consider a supply chain consisting of a single manufacturing facility, a crossdock, and two retail
11.
12. outlets. Items are shipped from the manufacturing facility to the cross-dock facility and from
there to the retail outlets. Let 1 be the lead time from the factory to the cross-dock facility and 2
be the lead time from the crossdock facility to each retail outlet. Let = 1 + 2. In the analysis
below, we fix and vary 1 and 2.
13.
14. Compare the amount of safety stock in two systems, one in which lead time from the cross-dock
facility to a retail outlet is zero (i.e., 1 = Land 2 = 0 ) and a second system in which the lead time
from the factory to the cross-dock facility is equal to zero (i.e., 1 = 0 Land 2 = ).
15.
16. To reduce safety stock, should the cross-dock facility be closer to the factory or the retail
outlets? For this purpose, analyze the impact of increasing 1 , and therefore decreasing 2, on total
safety stock.
17. KLF Electronics is an American manufacturer of electronic equipment. The company has a
single manufacturing facility in San Jose, California. KLF Electronics distributes its products
through five regional warehouses located in Atlanta, Boston, Chicago, Dallas, and Los Angeles.
In the current distribution system, the United States is partitioned into five major markets, each
of which is served by a single regional warehouse. Customers, typically retail outlets, receive
items directly from the regional warehouse in their market. That is, in the current distribution
system, each customer is assigned to a single market and receives deliveries from one regional
warehouse. The warehouses receive items from the manufacturing facility. Typically, it takes
about two weeks to satisfy an order placed by any of the regional warehouses. Currently, KLF
provides their customers with a service level of about 92 percent. In recent years, KLF has seen a
significant increase in competition and huge pressure from their customers to improve the
service level and reduce costs. To improve the service level and reduce costs, KLF would like to
consider an alternative distribution strategy in which the five regional warehouses are replaced
with a single, central warehouse that will be in charge of all customer orders. This warehouse
should be one of the existing warehouses. The company CEO insists that whatever distribution
strategy is used, KLF will design the strategy so that service level is increased to about 98
percent.
Answer the following three questions:
a. A detailed analysis of customer demand in the five market areas reveals that the demand in
the five regions is very similar; that is, it is common that if weekly demand in one region is
above average, so is the weekly demand in the other regions. How does this observation affect
the attractiveness of the new system?
b. To perform a rigorous analysis, you have identified a typical product, Product A. Table 2-11
provides historical data and includes weekly demand for this product for the last 12 weeks in
each of the market areas. An order (placed by a warehouse to the factory) costs $5,550 (per
 3

order), and holding inventory costs $1.25 per unit per week. In the current distribution system,
the cost of transporting a product from the manufacturing facility to a warehouse is given in
Table 2-12 (see the column "Inbound"). Table 2-12 also provides information about
transportation cost per unit from each warehouse to the stores in its market area (see the
column "Outbound"). Finally, Table 2-13 provides information about transportation costs per
unit product from each existing regional warehouse to all other market areas, assuming this
regional warehouse becomes the central warehouse.
Suppose you are to compare the two systems for Product A only; what is your
recommendation? To answer this question, you should compare costs and average inventory
levels for the two strategies assuming demands occur according to the historical data. Also,
you should determine which regional warehouse will be used as the centralized warehouse.
c. It is proposed that in the centralized distribution strategy, that is, the one with a single
warehouse, products will be distributed using UPS Ground Service, which guarantees that
products will arrive at the warehouse in three days (0.5 week). Of course, in this case,
transportation cost for shipping a unit product from a manufacturing facility to the warehouse
increases. In fact, in this case, transportation costs increase by 50 percent. Thus, for instance,
shipping one unit from the manufacturing facility to Atlanta will cost $18.Would you
recommend using this strategy? Explain your answer.
4