Supply Chain Management Chapter 6

Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space, cannot be altered in the short term
TRUE
The degree of demand and price uncertainty has a significant influence on the appropriate portfolio of long- and short-term warehousing space that a firm should carry
TRUE
If price and demand vary over time in a global network, flexible production capacity can be reconfigured to maximize profits in the new environment
TRUE
A firm may choose to build a flexible global supply chain even in the presence of little demand or supply uncertainty if certainty exists in exchange rates or prices
FALSE
Offshoring typically lowers labor, working capital and fixed costs but increases risk and freight costs
FALSE
Appropriate flexibility is an effective approach for a global supply chain to deal with a variety of risks and uncertainties. Extra flexibility is always worth the cost.
FALSE
The present value of a stream of cash flows is what that stream is worth in today’s dollars
TRUE
The rate of return k is also referred to as the present value of capital
FALSE
A negative NPV for an option indicates that the option will lose money for the supply chain
TRUE
Discounted cash flow (DCF) analysis evaluates the present value of any stream of future cash flows and allows management to compare two streams of cash flows in terms of their financial value.
TRUE
When faced with uncertain conditions it is always best to sign long-term contracts (because they are typically cheaper) and avoid all flexible capacity (because it is more expensive).
FALSE
The value of flexibility increases with an increase in uncertainty.
TRUE
In reality, demand and prices are highly uncertain and are likely to fluctuate during the life of any supply chain decision.
TRUE
Long-term contracts for both warehousing and transportation requirements will be more effective if the demand and price of warehousing do not change in the future or if the price of warehousing goes up.
TRUE
During network design, managers need a methodology that allows them to estimate the certainty in their forecast of demand and price and then incorporate this certainty into the decision-making process.
FALSE
In a complex decision tree, there are thousands of possible paths that may result from the first period to the last.
TRUE
Simulation methods are very good at evaluating a decision where the path itself is decision dependent.
FALSE
The main advantage of simulation models is that they can provide low-cost evaluations of complex situations.
FALSE
Strategic planning and financial planning should be combined during supply chain network design.
TRUE
Financial analysis should be used as an input to decision making, not as the decision-making process.
TRUE
Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,
cannot be altered in the short term.
Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,
often remain in place for several years
Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,
define the boundaries within which the supply chain must compete
The opportunities from globalization are often accompanied by
significant additional risk.
Among the sources of risk identified in global supply chains, the lowest among these four is
terrorist infiltration of cargo
Among the sources of risk identified in global supply chains, the highest among these four is
natural disasters
As Adam Smith put it so eloquently in the Wealth of Nations, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it,…
…better buy it from them with some part of our own industry
A global supply chain with offshoring
increases the length of the product flow and increases the duration of the information flow.
A global supply chain with offshoring would tend to see which of these performance dimensions decrease?
Supply Chain Visibility
A global supply chain with offshoring would tend to see which of these performance dimensions increase?
Minimum Order Quantity
Offshoring to low-cost countries is most attractive for products with
large production volume.
The tailored strategy “Focus on low-cost, decentralized capacity for predictable demand” follows which risk mitigation strategy?
Increase capacity.
A labor dispute is a risk driver to be considered during network design. What category does a “labor dispute” belong to?
Disruptions
What is the type of this network design?

(Couldn’t paste the picture but 8 circlers and lot of interconnecting arrows)

Fully flexible network
The present value of a future stream of cash flows is what that stream
is worth in today’s dollars
The process of evaluating the present value of any stream of future cash flows so that management can compare two streams of cash flows in terms of their financial value is
discounted cash flow (DCF) analysis.
The present value of future cash flow is found by
using a discount factor.
The discount factor used to obtain the present value of money in the next period where k represents the rate of return is
1/(1+k)
The rate of return k is also referred to as the
all of the above.
(discount rate/hurdle rate/opportunity cost of capital)
The net present value (NPV) of a stream of cash flows is equal to
the sum of all cash flows for all periods being considered discounted by the rate of return for each period.
A negative NPV (net present value) for an option indicates that the option will
lose money for the supply chain.
The decision with the highest NPV (net present value) will provide a supply chain with
the highest financial return.
What rate of return results in a present value of $23 for $25 received one year from now?
8.4%
What rate of return results in a present value of $432 for $250 received one year from now and another $250 received two years from now?
10.94%
The NPV (net present value) of a cash stream that is equal to $100 per period for 5 periods with a rate of return of 12% per period would be
$403.73
The NPV (net present value) of a cash stream that is equal to $75 per period for 5 periods with a rate of return of 15% per period would be
$312.74
In reality, demand and prices are
highly uncertain and likely to fluctuate during the life of any supply chain decision.
For a global supply chain, exchange rates and inflation are
likely to vary over time in different locations
A decision tree is
a graphic device used to evaluate decisions under uncertainty.
Decision tree analysis is based on Bellman’s principle, which states that for any choice of strategy in a given state,
the optimal strategy in the next period is the one that is selected if the entire analysis is assumed to begin in the next period
Uncertainty in demand and economic factors should be included in the financial evaluation of supply chain design decisions, because
the inclusion of uncertainty may have significant impact on this evaluation
Flexibility should be valued by taking into account uncertainty in demand and economic factors. In general, flexibility will tend to
increase in value with an increase in uncertainty
The appropriate discount rate used in decision tree methodology
should be risk-adjusted and risk may vary by period and decision node.
Firms should use simulation for evaluating decisions when
underlying decision trees are very complex and explicit solutions for the underlying decision tree are difficult to obtain
In a complex decision tree there are
thousands of possible paths that may result from the first period to the last
Short-term contracts for both warehousing and transportation requirements will be more effective
if either demand or the price of warehousing drops in the future
The degree of demand and price uncertainty has
a significant influence on the appropriate portfolio of long-and short-term warehousing space that a firm should carry.
Uncertainty of demand and price
drives the value of building flexible production capacity at a plant
Bahouth Ltd. is planning for the next two years of production and debating whether to construct a large cross-dock facility with 40 truck bays or a smaller one with 20 truck bays. The cost to build the large facility is $2 million and the cost to build the small one is $1.2 million. If they construct a large facility and demand is as high as they hope, then operating costs are $450,000 annually. If they construct a large facility and demand is low, then operating costs are $300,000. If they construct a small facility and demand is low, the operating costs are $275,000 but if they experience high demand, the operating cost of a small facility increases to $600,000. After having conducted some market research, they feel that the likelihood of high demand is 0.7 and the likelihood of small demand is 0.3.

A- Use the information from Scenario 6.1 to determine the expected cost of operating a large facility for two years.

B- Use the information from Scenario 6.1 to determine the expected cost of operating a small facility for a period of two years.

C- Use the information from Scenario 6.1 to determine the cost of the best alternative for a two year period.

D- Use the information from Scenario 6.1 to determine the likelihood of high demand that would make the decision maker indifferent between the two alternatives for a two year operating time.

E – Suppose the contractor has found some materials on Craigslist that can drop the construction cost of a large facility to $1,500,000. These materials cannot be used in the construction of the small facility, so its price remains as indicated in Scenario 6.1. Determine the likelihood of high demand that would make the decision maker indifferent between the two alternatives for a two year time period.

A – $810,000

B – $1,005,500

C – $2,205,000

D – 0.14

E- 1.0

If price and demand do vary over time in a global network,
flexible production capacity can be reconfigured to maximize profits in the new enviroment
A firm may choose to build a flexible global supply chain even in the presence of little demand or supply uncertainty if
uncertainty exists in exchange rates or prices
Simulation models
require a higher setup cost to start and operate compared to decision decision tree tools
Simulation methods are very good at evaluating decisions when
there are different forms of uncertainty
Strategic planning and financial planning
should be combined during supply chain network design
The evaluation of supply chain networks
should use multiple metrics
One of the best ways to speed up the process of financial analysis and arrive at a good decision is to
use estimates backed up by sensitivity analysis when it appears that finding a very accurate input would take an inordinate amount of time