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LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN

HOMEWORK 4 – SOLUTION

Question 1:
Consider a supply chain of a fashion item as below cost-benefit details:
F=$100,000 ; c=$55 ; w=$80 ; s=$20 ; p=$125.
a. Calculate the supply chain’s marginal profit.
b. Calculate the supply chain’s marginal loss.
c. Provided that the optimal policy is to produce 14,000 units, calculate the total expected
supply chain’s profit under this demand’s scenario:
Demand, Probability,
D (units) Prob
8,000 0.11
10,000 0.11
12,000 0.28
14,000 0.22
16,000 0.18
18,000 0.1

SOLUTION
a. The supply chain’s marginal profit is:
Supply chain’s marginal profit = p - c = 125 – 55 = $70

b. The supply chain’s marginal loss is:


Supply chain’s marginal loss = c – s = 55 – 20 = $35

c. Provided that the optimal policy is to produce 14,000 units, the expected supply
chain’s profit is:
𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝑄 − 𝑐𝑄
𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝐷 − 𝑐𝑄 + 𝑠(𝑄 − 𝐷)

• With D = 8,000: Profit (D=8,000) = p*D – c*Q + s*(Q-D)


= 125*8,000 – 55*14,000 + 20*(14,000 – 8,000) = $350,000

• With D = 10,000: Profit (D=10,000) = p*D – c*Q + s*(Q-D)


= 125*10,000 – 55*14,000 + 20*(14,000 – 10,000) = $560,000

• With D = 12,000: Profit (D=12,000) = p*D – c*Q + s*(Q-D)


= 125*12,000 – 55*14,000 + 20*(14,000 – 12,000) = $770,000

• With D = 14,000: Profit (D=14,000) = p*D – c*Q


= 125*14,000 – 55*14,000 = $980,000

• With D = 16,000: Profit (D=16,000) = p*Q – c*Q


= 125*14,000 – 55*14,000 = $980,000

• With D = 18,000: Profit (D=16,000) = p*Q – c*Q


= 125*14,000 – 55*14,000 = $980,000

1
• Total expected profit of the supply chain = 350,000 * 0.11 + 560,000 * 0.11 + 770,000
* 0.28 + 980,000 * 0.22 + 980,000 * 0.18 + 980,000 * 0.10 – 100,000 = $705,700

Question 2:
Consider the following demand scenario for a 2-stage supply chain:
Demand Probability
2,000 26%
2,100 30%
2,200 29%
2,300 15%
Suppose the manufacturer produces at a cost of c=$20/unit and sells to the retailer at w=$40/
unit. Then, the retailer sells to end users for p=$50/unit during season, they will sell unsold
units for s=$10/unit after season.
a. Calculate the retailer’s marginal profit and loss.
b. Calculate the manufacturer’s marginal profit.
c. Provided that the order policy of the retailer is 2,200 units, then what is the expected
profit for the retailer?
d. Then, what is the expected profit for the manufacturer if the retailer concludes an order
of 2,200 units?
e. If the manufacturer reduces the wholesale price to the distributor to $35/ unit if the
retailer buys at least 2,100 units, what type of the contract is this?

SOLUTION
c=$20 ; w=$40 ; p=$50 ; s=$10

a. The retailer’s marginal profit is:


Retailer’s marginal profit = p – w = 50 – 40 = $10
The retailer’s marginal loss is:
Retailer’s marginal loss = w – s = 40 – 10 = $30

b. The manufacturer’s marginal profit:


Manufacturer’s marginal profit = w – c = 40 – 20 = $20

c. If Q=2,200 units, the expected profit for the retailer is:


𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝑄 − 𝑤𝑄
𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑝𝐷 − 𝑤𝑄 + 𝑠(𝑄 − 𝐷)

• With D = 2,000: Profit (D=2,000) = p*D – w*Q + s*(Q-D)


= 50*2,000 – 40*2,200 +10*(2,200 – 2,000) = $14,000

• With D = 2,100: Profit (D=2,100) = p*D – w*Q + s*(Q-D)


= 50*2,100 – 40*2,200 + 10*(2,200 – 2,100) = $18,000

• With D = 2,200: Profit (D=2,100) = p*D – w*Q


= 50*2,200 – 40*2,200 = $22,000

2
• With D = 2,300: Profit (D=2,100) = p*Q – w*Q
= 50*2,200 – 40*2,200 = $22,000

• Total expected profit of the retailer = 14,000 * 0.26 + 18,000 * 0.30 + 22,000 * 0.29 +
22,000 * 0.15 = $18,720

d. If Q=2,200 units, the expected profit for the manufacturer is:


Total expected profit of the manufacturer
= (w – c)*Q = (40 – 20)*2,200 = $44,000

e. If the manufacturer reduces the wholesale price to the distributor to $35/ unit if the
retailer buys at least 2,100 units, this type of the contract is: Sales Rebate
contract/Typical contract

3
LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN
HOMEWORK 5 – SOLUTION

Question 1:
Consider a supply chain with the manufacturer, the retailer and end-users, using a buy-back
contract, as below cost-benefit & demand forecasting details:
F=$120,000 ; c=$30 ; w=$75 ; b=$50 ; p=$122 ; s=$15;
Demand 1,800 1,920 2,040 2,160
Probability 26% 27% 29% 18%
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 4 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize retailer’s
expected profit.
SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑅𝑀𝑃) = 𝑝 − 𝑤 = 122 − 75 = 47
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑅𝑀𝐿) = 𝑤 − 𝑏 = 75 − 50 = 25
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 75 − 30 = 45

b. Calculate the expected profit of the retailer and the manufacturer for 4 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Retailer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑅𝑀𝑃
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑅𝑀𝑃 − (𝑄 − 𝐷) × 𝑅𝑀𝐿
Q/D 1800 1920 2040 2160 Retailer’s profit
1800 84.60 84.60 84.60 84.60 84.60
1920 81.60 90.24 90.24 90.24 87.99
2040 78.60 87.24 95.88 95.88 89.05
2160 75.60 84.24 92.88 101.52 87.61
Thus, the retailer should order 2,040 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 − 𝐹 − (𝑄 − 𝐷) × (𝑏 − 𝑠)

1
Q/D 1800 1920 2040 2160 Manufacturer’s profit
1800 -39.00 -39.00 -39.00 -39.00 -39.00
1920 -37.80 -33.60 -33.60 -33.60 -34.69
2040 -36.60 -32.40 -28.20 -28.20 -31.52
2160 -35.40 -31.20 -27.00 -22.80 -29.56
Thus, the manufacturer should produce 2,160 units to maximize the expected profit.

Question 2:
Consider a supply chain with the manufacturer, the retailer and end-users, using a revenue-
sharing contract with 12% of revenue-shared from the retailer to the supplier, as below cost-
benefit & demand forecasting details:
F=$120,000 ; c=$30 ; w=$55 ; b=$50 ; p=$122 ; s=$15 ;
Demand 1,800 1,920 2,040 2,160
Probability 26% 27% 29% 18%
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 4 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize retailer’s
expected profit.

SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑅𝑀𝑃) = 𝑝 − 𝑤 = 122 − 55 = 67
• 𝑅𝑒𝑡𝑎𝑖𝑙𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑅𝑀𝐿) = 𝑤 − 𝑠 = 55 − 15 = 40
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 55 − 30 = 25

b. Calculate the expected profit of the retailer and the manufacturer for 4 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Retailer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑝 × (1 − 0.12) − 𝑄 × 𝑤
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑝 × (1 − 0.12) − 𝐷 × 𝑤 − (𝑄 − 𝐷) × 𝑅𝑀𝐿
Q/D 1800 1920 2040 2160 Retailer’s profit
1800 94.25 94.25 94.25 94.25 94.25
1920 89.45 100.53 100.53 100.53 97.65
2040 84.65 95.73 106.81 106.81 98.06
2160 79.85 90.93 102.01 113.10 95.25

2
Thus, the retailer should order 2,040 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 + 𝑄 × 𝑃 × 0.12 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 + 𝐷 × 𝑃 × 0.12 − 𝐹
Q/D 1800 1920 2040 2160 Manufacturer’s profit
1800 -48.65 -48.65 -48.65 -48.65 -48.65
1920 -45.65 -43.89 -43.89 -43.89 -44.35
2040 -42.65 -40.89 -39.13 -39.13 -40.52
2160 -39.65 -37.89 -36.13 -34.38 -37.21
Thus, the manufacturer should produce 2,160 units to maximize the expected profit.

Question 3:
Consider a supply chain with the manufacturer, the distributor and the retailer, using a pay-
back contract, as below cost-benefit & demand forecasting details:
F=$120,000 ; c=$50 ; w=$75 ; s=$15 ; v=$19 ; p=$120;
The demand forecasting can be found as below:
D (units) 9,000 9,450 9,923 10,419 10,940 11,487
Prob 0.14 0.09 0.26 0.21 0.18 0.12
a. Calculate the manufacturer’s marginal profit, manufacturer’s marginal loss,
distributor’s marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 6 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize distributor’s
expected profit.

SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 75 − 50 = 25
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑀𝑀𝐿) = 𝑐 − 𝑠 − 𝑣 = 50 − 15 − 19 = 16
• 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑜𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝐷𝑀𝑃) = 𝑝 − 𝑤 = 120 − 75 = 45

b. Calculate the expected profit of the retailer and the manufacturer for 6 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Distributor:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝐷𝑀𝑃
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝐷𝑀𝑃 − (𝑄 − 𝐷) × 𝑣

3
Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 405.00 405.00 405.00 405.00 405.00 405.00 405.00
9250 400.25 416.25 416.25 416.25 416.25 416.25 414.01
9500 395.50 424.30 427.50 427.50 427.50 427.50 422.73
9750 390.75 419.55 438.75 438.75 438.75 438.75 430.30
10000 386.00 414.80 445.07 450.00 450.00 450.00 436.59
10250 381.25 410.05 440.32 461.25 461.25 461.25 440.00
10500 376.50 405.30 435.57 467.32 472.50 472.50 442.32
10750 371.75 400.55 430.82 462.57 483.75 483.75 442.37
11000 367.00 395.80 426.07 457.82 491.16 495.00 441.73
11250 362.25 391.05 421.32 453.07 486.41 506.25 438.90
11500 357.50 386.30 416.57 448.32 481.66 516.67 435.97
We have:
10,419 < 𝟏𝟎, 𝟕𝟓𝟎 < 10,940
{ |𝟏𝟎, 𝟕𝟓𝟎 − 10,419| = 331 → 𝑄 ∗ = 10,940
|𝟏𝟎, 𝟕𝟓𝟎 − 10,940| = 190
Thus, the distributor should order 10,940 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑀𝑀𝑃 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑀𝑀𝑃 − 𝐹 − (𝑄 − 𝐷) × 𝑀𝑀𝐿
Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 105.00 105.00 105.00 105.00 105.00 105.00 105.00
9250 101.00 111.25 111.25 111.25 111.25 111.25 109.82
9500 97.00 115.45 117.50 117.50 117.50 117.50 114.45
9750 93.00 111.45 123.75 123.75 123.75 123.75 118.34
10000 89.00 107.45 126.84 130.00 130.00 130.00 121.41
10250 85.00 103.45 122.84 136.25 136.25 136.25 122.64
10500 81.00 99.45 118.84 139.18 142.50 142.50 123.17
10750 77.00 95.45 114.84 135.18 148.75 148.75 122.24
11000 73.00 91.45 110.84 131.18 152.54 155.00 120.87
11250 69.00 87.45 106.84 127.18 148.54 161.25 118.10
11500 65.00 83.45 102.84 123.18 144.54 166.97 115.27
We have:
10,419 < 𝟏𝟎, 𝟓𝟎𝟎 < 10,940
{ |𝟏𝟎, 𝟓𝟎𝟎 − 10,419| = 81 → 𝑄 = 10,419
|𝟏𝟎, 𝟓𝟎𝟎 − 10,940| = 440
Thus, the manufacturer should produce 10,419 units to maximize the expected profit.

Question 4:

4
Consider a supply chain with the manufacturer, the distributor and the retailer, using a cost-
sharing contract with 32% payment of the manufacturer’s production cost from the distributor,
as below cost-benefit & demand forecasting details:
F=$120,000 ; c=$50 ; w=$60 ; s=$15 ; p=$120;
The demand forecasting can be found as below:
D (units) 9,000 9,450 9,923 10,419 10,940 11,487
Prob 0.14 0.09 0.26 0.21 0.18 0.12
a. Calculate the manufacturer’s marginal profit, manufacturer’s marginal loss,
distributor’s marginal profit.
b. Calculate the expected profit of the retailer and the manufacturer for 6 above-mentioned
demand scenarios. Then, conclude on which production quantity Q to maximize
manufacturer’s expected profit, which production quantity Q to maximize distributor’s
expected profit.

SOLUTION
a. Calculate the retailer’s marginal profit, retailer’s marginal loss, manufacturer’s
marginal profit.
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑀𝑀𝑃) = 𝑤 − 𝑐 = 60 − 50 = 10
• 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑙𝑜𝑠𝑠 (𝑀𝑀𝐿) = 𝑐 − 𝑠 = 50 − 15 = 35
• 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑜𝑟 ′ 𝑠 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝐷𝑀𝑃) = 𝑝 − 𝑤 = 120 − 60 = 60

b. Calculate the expected profit of the retailer and the manufacturer for 6 above-
mentioned demand scenarios. Then, conclude on which production quantity Q to
maximize manufacturer’s expected profit, which production quantity Q to maximize
retailer’s expected profit.
Distributor:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝐷𝑀𝑃 − 𝑄 × 𝑐 × 0.32
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝐷𝑀𝑃 − 𝑄 × 𝑐 × 0.32
Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 396.00 396.00 396.00 396.00 396.00 396.00 396.00
9250 392.00 407.00 407.00 407.00 407.00 407.00 404.90
9500 388.00 415.00 418.00 418.00 418.00 418.00 413.53
9750 384.00 411.00 429.00 429.00 429.00 429.00 421.08
10000 380.00 407.00 435.38 440.00 440.00 440.00 427.43
10250 376.00 403.00 431.38 451.00 451.00 451.00 431.08
10500 372.00 399.00 427.38 457.14 462.00 462.00 433.71
10750 368.00 395.00 423.38 453.14 473.00 473.00 434.21
11000 364.00 391.00 419.38 449.14 480.40 484.00 434.06
11250 360.00 387.00 415.38 445.14 476.40 495.00 431.86
11500 356.00 383.00 411.38 441.14 472.40 505.22 429.57
We have:

5
10,419 < 𝟏𝟎, 𝟕𝟓𝟎 < 10,940
{ |𝟏𝟎, 𝟕𝟓𝟎 − 10,419| = 331 → 𝑄 ∗ = 10,940
|𝟏𝟎, 𝟕𝟓𝟎 − 10,940| = 190
Thus, the distributor should order 10,940 units to maximize the expected profit.

Manufacturer:
• 𝑄 ≤ 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑄 × 𝑤 − 𝑄 × (1 − 0.32) × 𝑐 − 𝐹
• 𝑄 > 𝐷: 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐷 × 𝑤 − 𝑄 × (1 − 0.32) × 𝑐 − 𝐹 + (𝑄 − 𝐷) × 𝑠
Q/D 9000 9450 9923 10419 10940 11487 Distributor’s
profit
9000 114.00 114.00 114.00 114.00 114.00 114.00 114.00
9250 109.25 120.50 120.50 120.50 120.50 120.50 118.93
9500 104.50 124.75 127.00 127.00 127.00 127.00 123.65
9750 99.75 120.00 133.50 133.50 133.50 133.50 127.56
10000 95.00 115.25 136.54 140.00 140.00 140.00 130.57
10250 90.25 110.50 131.79 146.50 146.50 146.50 131.56
10500 85.50 105.75 127.04 149.36 153.00 153.00 131.78
10750 80.75 101.00 122.29 144.61 159.50 159.50 130.41
11000 76.00 96.25 117.54 139.86 163.30 166.00 128.55
11250 71.25 91.50 112.79 135.11 158.55 172.50 125.15
11500 66.50 86.75 108.04 130.36 153.80 178.42 121.67
We have:
10,419 < 𝟏𝟎, 𝟓𝟎𝟎 < 10,940
{ |𝟏𝟎, 𝟓𝟎𝟎 − 10,419| = 81 → 𝑄 = 10,419
|𝟏𝟎, 𝟓𝟎𝟎 − 10,940| = 440
Thus, the manufacturer should produce 10,419 units to maximize the expected profit.

6
LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN
HOMEWORK 6 – SOLUTION

Question 1:
a. Give a detailed numerical example or real-life case study of using capacity reservation
contract.
b. What are the advantages and disadvantages of capacity reservation contracts?

SOLUTION
b. What are the advantages and disadvantages of capacity reservation contracts?
Advantages Disadvantages
• Supplier can get confirmed orders • Buyer can get loss of money if the
without forecasting, which can help Supplier did not follow the contract.
to eliminate the bullwhip effect. • Buyer may make the wrong forecast
• Supplier can easily manage their and cannot adjust when the
production lines by knowing a fixed reservation is made, which can result
order quantity through the capacity in excess inventory.
reservation contract. • Supplier may have to spend an
• Buyer can have a certain number of amount as discount to encourage the
products delivered at the right time. Buyer to make reservations.
• Buyer can flexibly order an
additional quantity when the demand
exceed the supply, which help to
eliminate the scenario of abundant
inventory.
• Buyer can purchase at a lower price
resulting in higher profit, which
encourage the buyer to make more
reservation and therefore the supplier
can earn more profit.

Question 2:
Ms.Taay is a franchise chain selling Ha Long bubble yogurt, a local specialty which is made
of yogurt and warm pearls with coconut milk. Currently, their menu has 20 different flavors of
yogurt, whose ingredients are plain yogurt and flavored syrup.
As this chain is opening many new stores every quarter, the chain’s managers try to find a way
to optimize their production, aiming for a customer service level of 95%.
Assuming that weekly demand at a specific store for each flavor is independent and normally
distributed with N(100, 144), while the replenishment lead time from the chain’s factory is one
week.

1
a. How much safety stock will this store have to hold if the yogurt is flavored at the chain’s
factory and held in inventory at the store as individual yogurt flavors?
b. How much safety stock will this store have to hold if the store holds plain yogurt and
flavored syrups (supplied by the chain’s factory) separately and only mixes flavors on
demand?
c. Which option may conclude a less quantity of safety stock? What is the gap of safety
stock between these two alternatives?

SOLUTION
𝑘 = 20; 𝐶𝑆𝐿 = 0.95; 𝐷 = 100; 𝜎𝐷 = √144 = 12; 𝐿 = 1
a. How much safety stock will this store have to hold if the yogurt is flavored at the
chain’s factory and held in inventory at the store as individual yogurt flavors?
• 𝑠𝑠 = 𝑘 × 𝐹𝑠−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 20 × 1.645 × √1 × 12 = 395

b. How much safety stock will this store have to hold if the store holds plain yogurt and
flavored syrups (supplied by the chain’s factory) separately and only mixes flavors
on demand?
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √20 × 12 = 53.67
• 𝑠𝑠 = 𝐹𝑠−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 1.645 × √1 × 53.67 = 88

c. Which option may conclude a less quantity of safety stock? What is the gap of safety
stock between these two alternatives?
• The option of mixing flavors at store concludes a less safety stock.
• The gap of safety stock = 395 – 88 = 307 (units)

Question 3:
An online retailer is debating whether to serve the United States through four regional
distribution centers or one national distribution center. Weekly demand in each region is
normally distributed, with a mean of 1,200 and a standard deviation of 200.
Demand experienced in each region is independent, and supply lead time is 3 weeks. The online
retailer has a holding cost of 25 percent, and the cost of each product is $1,200. The retailer
promises its customers next-day delivery. With four regional distribution centers, the retailer
can provide next-day delivery using ground transportation at a cost of $12/unit. With a single
national distribution center, the retailer will have to use a more expensive mode of transport
that will cost $15/unit for next-day service. Building and operating four regional DCs costs
$120,000 per year more than building and operating one national distribution center.
Assume a desired CSL of 0.95.
a. What is the required safety inventory for the decentralized option of having four
regional distribution centers?
b. What is the required safety inventory for the centralized option of having only one
national distribution center?

2
c. What distribution network do you recommend according to safety inventory level and
cost?

SOLUTION
𝑘 = 4; 𝐷 = 1,200; 𝜎𝐷 = 200; 𝐿 = 3; 𝐻 = 25%; 𝑐 = $1,200; 𝐶𝑆𝐿 = 0.95
a. What is the required safety inventory for the decentralized option of having four
regional distribution centers?
• 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 4 × 1.645 × √3 × 200 = 2,279

b. What is the required safety inventory for the centralized option of having only one
national distribution center?
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √4 × 200 = 400
• 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 1.645 × √3 × 400 = 1,140

c. What distribution network do you recommend according to safety inventory level


and cost?
• 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑜𝑛 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑖𝑜𝑛
= (𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 ) × 𝐻 × 𝑐
= (2,279 − 1,140) × 25% × 1,200 = $341,700
• 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑓𝑎𝑐𝑖𝑙𝑖𝑡𝑦 𝑐𝑜𝑠𝑡𝑠 𝑜𝑛 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑖𝑜𝑛 = $120,000
• 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑡𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡𝑠 𝑜𝑛 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑖𝑜𝑛
= 52 × 1,200 × (15 − 12) × 4 = $748,800
The annual costs for the HCMC branch office will be increased by $748,800 - $341,700 -
$120,000 = $287,100 upon aggregation.
→ It is better to run four regional distribution centers instead of one national distribution center.

Question 4:
Assume that ANC Company, a supplier of MRO products, has 2,000 stores distributed
throughout the United States. Consider two products—large electric motors and industrial
cleaners. Large electric motors are high-value items with low demand, whereas the industrial
cleaner is a low-value item with high demand. Each motor costs $750 and each can of cleaner
costs $50. Weekly demand for motors at each store is normally distributed, with a mean of 25
and a standard deviation of 50. Weekly demand for cleaner at each store is normally distributed,
with a mean of 1,500 and a standard deviation of 150. Demand experienced by each store is
independent, and supply lead time for both motors and cleaner is four weeks. ANC Company
has a holding cost of 20 percent. For each of the two products, evaluate the reduction in safety
inventories that will result if they are removed from retail stores and carried only in a
centralized DC. Assume a desired CSL of 0.90.
(Requirement: Show step-by-step manual calculation for this problem)

3
SOLUTION
Motors Cleaner
Inventory is stocked in each store
Mean weekly demand per store (𝜇) 25 1,500
Standard deviation (𝜎) 50 150
Coefficient of variation (𝑐𝑣 = 𝜎/𝜇) 2 0.1
Safety inventory per store
(𝑠𝑠𝑝𝑒𝑟 𝑠𝑡𝑜𝑟𝑒 = 𝐹𝑠−1 (0.9) × √𝐿 × 𝜎) 128 384
Total safety inventory
(𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝑠𝑠) 256,000 768,000
Value of safety inventory
(𝑣𝑎𝑙𝑢𝑒𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 × 𝑐𝑜𝑠𝑡) 192,000,000 38,400,000
Inventory is aggregated at the DC
Mean weekly aggregate demand (𝜇 𝐶 = 𝑘 × 𝜇) 50,000 3,000,000
Standard deviation of aggregate demand
(𝜎 𝐶 = √𝑘 × 𝜎) 2,236 6,708
Coefficient of variation 𝑐𝑣 = 𝜎 𝑐 /𝜇 𝑐 ) 0.04 0.0022
Aggregate safety inventory
(𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑠−1 (0.9) × √𝐿 × 𝜎 𝐶 ) 5,731 17,194
Value of safety inventory
(𝑣𝑎𝑙𝑢𝑒𝑎𝑔𝑔𝑟𝑒𝑎𝑔𝑎𝑡𝑒𝑑 = 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 × 𝑐𝑜𝑠𝑡) 4,298,250 859,700
Savings
Total inventory saving on aggregation
(= 𝑣𝑎𝑙𝑢𝑒𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑣𝑎𝑙𝑢𝑒𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 ) 187,701,750 37,540,300
Total holding cost saving on aggregation
(= 𝑐𝑜𝑠𝑡 × 𝐻 × (𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 )) 37,540,350 7,508,060
Holding cost saving per unit sold
(= 𝑇𝑜𝑡𝑎𝑙 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑠𝑎𝑣𝑖𝑛𝑔/(𝜇 𝐶 × 52)) 14.44 0.048
Savings as a percentage of product cost
(= 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑠𝑎𝑣𝑖𝑛𝑔 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑠𝑜𝑙𝑑/𝑐𝑜𝑠𝑡) 1.93% 0.10%

4
LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN
HOMEWORK 7 – SOLUTION

Question 1:
Icie is a chain of retail stores that sells 32 flavors of slushy – a partially frozen drink made with
crushed ice and fruit-flavored syrup. The weekly demand for each flavor of slushy is
independent and is normally distributed with N(100,121). The replenishment lead time from
the factory is three weeks and Icie aims for a customer service level of 95%.
a. How much safety stock will Icie have to hold if the slushies are mixed at the factory
and held in inventory at the retail store as individual flavors?
b. How does the safety stock requirement change if Icie holds the crushed ice and adds
the fruit-flavored syrup on demand?
c. Based on the results of part a and b, which strategy should Icie use to optimize the
amount of safety stock? Why?
(Requirement: Show step-by-step manual calculation for this problem)

SOLUTION
𝑘 = 32; 𝐶𝑆𝐿 = 0.95; 𝐷 = 100; 𝜎𝐷 = √121 = 11; 𝐿 = 3
a. How much safety stock will Icie have to hold if the slushies are mixed at the factory
and held in inventory at the retail store as individual flavors?
• 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝐹𝑠−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 32 × 1.645 × √3 × 11 = 1,003

b. How does the safety stock requirement change if Icie holds the crushed ice and adds
the fruit-flavored syrup on demand?
• 𝜎𝐶𝐷 = √𝑘 × 𝜎𝐷 = √32 × 11 = 62.23
• 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑠−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 1.645 × √3 × 62.23 = 177

c. Based on the results of part a and b, which strategy should Icie use to optimize the
amount of safety stock? Why?
• Icie should hold the crushed ice and add the fruit-flavored syrup on demand since this
strategy results in lower safety stock level (𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 177 < 1,003 =
𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 ).

Question 2:
a. What are the benefits and drawbacks of postponement?
b. A new technology allows books to be printed in 10 minutes. Fahasa has decided to
purchase these machines for each store. It must decide which books to carry in stock
and which books to print on demand using this technology. Do you recommend it for
best sellers or for other books? Why?

1
SOLUTION
a. What are the benefits and drawbacks of postponement?
Benefits Drawbacks
• Reduce the amount of incorrect • Demand that is unpredictable and
inventory, expedited delivery negatively connected.
expenses, and obsolete and • Too many alternatives for
markdown items. localization.
• Component manufacture in low-cost • Longer lead times, higher inventory
countries becomes more efficient. levels, and inventory that is skewed.
• Customers have more options
without incurring more fees.
• With less assets and capital, global
markets are reached faster.
• For new items, deeper customer
insights are gathered.
• It is possible to concentrate on
supply innovation and product
design.
• There is time to focus on high-value
intellectual property rather than
routine execution approaches.

b. A new technology allows books to be printed in 10 minutes. Fahasa has decided to


purchase these machines for each store. It must decide which books to carry in stock
and which books to print on demand using this technology. Do you recommend it for
best sellers or for other books? Why?
Fahasa should carry in stocks for best sellers because they have steady demand, less demand
uncertainty and are more likely to be sold. Books belonging to unique genres or aimed at a
specified customer target can be printed on demand using the new technology since the product
variation is high.

Question 3:
Apple manufactures 20 laptops with four distinct components: processor, memory, hard drive
and motherboard. Under the disaggregate option, Apple designs specific components for each
laptop, resulting in 20x4=80 distinct components. Under the common-component option,
Apple designs laptops such that two distinct processors, two distinct memory units, two distinct
hard drives and two distinct motherboards can be combined to create 20 laptops. Monthly
demand for each of the 20 laptops is independent and normally distributed, with a mean of
10,000 and a standard deviation of 2,000. The replenishment lead time for each component is
one month. Apple is targeting a CSL of 95 percent for component inventory.
a. Evaluate the safety inventory requirements with and without the use of component
commonality.

2
b. Calculate the percentage of safety inventory that was reduced by using component
commonality.

SOLUTION
Let NORMSINV(0.95) = 1.645.
a. Evaluate the safety inventory requirements with and without the use of component
commonality.
We first evaluate the disaggregate option, in which components are specific to a laptop. For
each component, we have:
• 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 = 2,000
Given a lead time of one month and a total of 80 components across 20 laptops, we obtain:
• 𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 = 80 × 𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(0.95) × √1 × 2,000 =
𝟐𝟔𝟑, 𝟐𝟎𝟎 𝑢𝑛𝑖𝑡𝑠
In the case of component commonality, each component ends up in 10 finished products (20
laptops divided by 2 types of processors/memory units/hard drives/motherboards). Therefore,
the demand at the component level is the sum of demand across 10 products.
• 𝑆𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑝𝑒𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑐𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡 = 𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(0.95) × √1 × √10 ×
2,000 = 10,404 (𝑢𝑛𝑖𝑡𝑠)
With component commonality, there are a total of 8 distinct components (2 distinct processors
+ 2 distinct memory units + 2 distinct hard drives + 2 distinct motherboards).
• 𝑇𝑜𝑡𝑎𝑙 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 = 8 × 10,404 = 𝟖𝟑, 𝟐𝟑𝟐
Thus, having each component common to 8 products results in a reduction in safety inventory
for Apple from 263,200 to 83,232 units.

b. Calculate the percentage of safety inventory that was reduced by using component
commonality.
263,200 − 83,232
𝑅𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 = ( ) × 100 = 68.38%
263,200

Question 4:
a. Give an example of modular and nonmodular products and processes.
b. How do standardization strategies help managers deal with demand variability and the
difficulty of making accurate forecasts?
c. What are the advantages and disadvantages of integrating suppliers into the product
development process?

SOLUTION
a. Give an example of modular and nonmodular products and processes.

3
• Modular products: The classic example of a modular product is the personal
computer, which can be customized by combining different video cards, hard drives,
memory chips, and so forth.
• Modular process: A manufacturing process consists of discrete operations, so that
inventory can be stored in partially manufactured form between operations.
• Nonmodular products: The glasses, table, chair which cannot be customized.
• Nonmodular process: A manufacturing process consists of integration operations, so
that inventory cannot be stored in partially manufactured form between operations.

b. How do standardization strategies help managers deal with demand variability and
the difficulty of making accurate forecasts?
Standardization strategies assist managers in dealing with demand fluctuation and accurate
forecasts by reducing the uncertainty of forecasts by employing aggregate forecasting across
all goods, resulting in a more accurate forecast. Standardization aids managers in dealing with
demand variability by allowing items to be differentiated based on demand at the point of sale.
As a result, the items that buyers want are those that are assembled using component parts that
may also be utilized for other products

c. What are the advantages and disadvantages of integrating suppliers into the product
development process?
Advantages:
• Increasing collaboration and visibility.
• The organization may not have the expertise to manufacture those new things.
• Firms with greater agility may be better able to adapt to unpredictability by identifying
and eliminating waste in the supply chain.
• Increasing profit margins.
Disadvantages:
• If the terms of supply chain integration do not meet their business goals, it will have an
impact on procurement and supply costs, as those who are willing to follow the new
rules may pay a higher price.
• If there is a lapse in inspections or compliance, the entire system will be brought down.

4
LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN
HOMEWORK 8 – SOLUTION

Question 1:
Consider a retailer selling a single item. Based on past experience, management estimates the
relationship between demand, D, and price, p, by the linear function D = 2000 − 0.6p. The
retailer is considering differential pricing strategies for different market segments.
a. At what price is revenue maximized? What is the total revenue if this price is applied?
b. If the retailer employs the two-tier pricing strategy, in which he introduces two prices
(𝑝1 = $1,000 and 𝑝2 = $1,600), what is the total revenue?
c. If the retailer employs the three-tier pricing strategy (𝑝1 = $1,000, 𝑝2 = $1,600 and
𝑝3 = $1,800), what is the total revenue?
d. Which strategy will include the highest total revenue? How much higher in $ and %
of this strategy comparing with the other two policies?

SOLUTION
a. At what price is revenue maximized? What is the total revenue if this price is applied?
Retailer’s total revenue: 𝑇𝑅 = 𝑝𝐷
⇔ 𝑇𝑅 = 𝑝(2000 − 0.6𝑝) = 2000𝑝 − 0.6𝑝2
• Take the first derivative of 𝑇𝑅 with respect to 𝑝:
𝜕𝑇𝑅 5000
= 2000 − 1.2𝑝 = 0 ⇔ 𝑝 = = $1,666.67
𝜕𝑝 3
• The total revenue at this price:
2
5000 5000 2
𝑇𝑅 = 2000𝑝 − 0.6𝑝 = 2000 × − 0.6 × ( ) = $1,666,666.67
3 3

b. If the retailer employs the two-tier pricing strategy, in which he introduces two prices
(𝒑𝟏 = $𝟏, 𝟎𝟎𝟎 and 𝒑𝟐 = $𝟏, 𝟔𝟎𝟎), what is the total revenue?
• 𝑝1 = 1,000 ⇒ 𝐷1 = 2,000 − 0.6 × 1,000 = 1,400
• 𝑝2 = 1,600 ⇒ 𝐷2 = 2,000 − 0.6 × 1,600 = 1,040
• 𝑇𝑅𝑡𝑤𝑜−𝑡𝑖𝑒𝑟 = 𝑝2 𝐷2 + 𝑝1 (𝐷1 − 𝐷2 ) = 1,600 × 1,040 + 1,000 × (1,400 − 1,040) =
$2,024,000

c. If the retailer employs the three-tier pricing strategy (𝒑𝟏 = $𝟏, 𝟎𝟎𝟎, 𝒑𝟐 = $𝟏, 𝟔𝟎𝟎
and 𝒑𝟑 = $𝟏, 𝟖𝟎𝟎), what is the total revenue?
• 𝑝1 = 1,000 ⇒ 𝐷1 = 2,000 − 0.6 × 1,000 = 1,400
• 𝑝2 = 1,600 ⇒ 𝐷2 = 2,000 − 0.6 × 1,600 = 1,040
• 𝑝3 = 1,800 ⇒ 𝐷3 = 2,000 − 0.6 × 1,800 = 920
• 𝑇𝑅𝑡ℎ𝑟𝑒𝑒−𝑡𝑖𝑒𝑟 = 𝑝3 𝐷3 + 𝑝3 (𝐷2 − 𝐷3 ) + 𝑝1 (𝐷1 − 𝐷2 ) = 1,800 × 920 + 1,600 ×
(1,040 − 920) + 1000 × (1,400 − 1,040) = $2,208,000

d. Which strategy will include the highest total revenue? How much higher in $ and %
of this strategy comparing with the other two policies?
Strategy One-tier Two-tier Three-tier
TR 1,666,666.67 2,024,000.00 2,208,000.00
Gap 541,333.33 184,000.00 -
% 32.48% 9.09% 0.00%

1
Question 2:
The Park Hyatt Philadelphia has 118 King/Queen rooms. Full fare is $225 targeting business
travelers. Also, Hyatt offers a discount fare of $159 for a mid‐week stay targeting leisure
travelers. Demand for low fare rooms is abundant. Most of the high fare demand occurs within
a few days of the actual stay and follows an exponential distribution with mean 27.3.
a. What are the unit overstocking cost and the unit understocking cost?
b. What are the probability of overstocking and the probability of understocking?
c. How many rooms should be protected for full fares to minimize expected cost
(maximize expected total revenue)? Hint: Use inverse-transformation of exponential
cumulative distribution.
SOLUTION
1
𝑝𝐹 = $225; 𝑝𝐷 = $159; 𝐷𝐹 ~𝐸𝑥𝑝𝑜(27.3); 𝐷𝐷 = ∞
a. What are the unit overstocking cost and the unit understocking cost?
• 𝑐𝑜 = 𝑝𝐷 = $159
• 𝑐𝑢 = 𝑝𝐹 − 𝑝𝐷 = 225 − 159 = $66

b. What are the probability of overstocking and the probability of understocking?


𝑐𝑢 66 22
𝐹(𝑥 ∗ ) = Pr(𝑌 ≤ 𝑥 ∗ ) = = = ≈ 29%
𝑐𝑢 + 𝑐𝑜 66 + 159 75
𝑐𝑜 159 53
1 − 𝐹(𝑥 ∗ ) = Pr(𝑌 ≥ 𝑥 ∗ ) = = = ≈ 71%
𝑐𝑢 + 𝑐𝑜 66 + 159 75

c. How many rooms should be protected for full fares to minimize expected cost
(maximize expected total revenue)? Hint: Use inverse-transformation of exponential
cumulative distribution.
1 1
𝐸𝑥𝑝(𝜆) = 𝐸𝑥𝑝 ( ) → 𝜆 =
𝜇 27.3

𝐹(𝑥 ∗ ) = Pr(𝑌 ≤ 𝑥 ∗ ) = 1 − 𝑒 −𝜆𝑥 , with 𝑥 ∗ ≥ 0
1 22
→ 𝑥 ∗ = − ln[1 − Pr(𝑌 ≤ 𝑥 ∗ )] = −27.3 × ln (1 − ) = 9.47 ≈ 9 (𝑟𝑜𝑜𝑚𝑠)
𝜆 75

2
LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN
HOMEWORK 9 – SOLUTION

Question 1:
Given the following transportation network and data:

No. of suppliers = 4 No. of warehouses = 2


No. of warehouses = 2 No. of customers = 8
Truck capacity = 40,000 units Truck capacity = 40,000 units
Cost per load = $1,200 Cost per load = $1,300
Cost per delivery = $110 Cost per delivery = $120
Holding cost = $0.3/year Holding cost = $0.4/year
Annual sales = 120,000 units/store Annual sales = 120,000 units/store
a. Find the total annual cost of direct network from suppliers to warehouses.
b. Find the total annual cost of milk run network from suppliers to warehouses if the
suppliers running milk runs to two warehouses on each truck.
c. Find the total annual cost of direct network from warehouses to customers.
d. Find the total annual cost of milk run network from warehouses to customers if the
warehouses running milk runs to two customers on each truck.
e. If you were to choose either direct shipping from suppliers to customers or setting up
milk runs from suppliers to customers, what network do you recommend? Why?

SOLUTION
a. Find the total annual cost of direct network from suppliers to warehouses.
• Batch size shipped from each supplier to each store = 40,000 units
• Number of shipments per year from each supplier to each store = 120,000/40,000 = 3
• Annual trucking cost for direct network = 3*(1,200+110)*2*4 = $31,440
• Average inventory at each store for each product = 40,000/2 = 20,000 units
• Annual inventory cost for direct network = 20,000*0.3*2*4 = $48,000
• Total annual cost of direct network = 31,440 + 48,000 = $79,440

b. Find the total annual cost of milk run network from suppliers to warehouses.

1
• Batch size shipped from each supplier to each store = 40,000/2 = 20,000 units
• Number of shipments per year from each supplier to each store = 120,000/20,000 = 6
• Cost per shipment per store (two stores/truck) = 1,200/2 + 110 = $710
• Annual trucking cost for milk run network = 6*710*2*4 = $34,080
• Average inventory at each store for each product = 20,000/2 = 10,000 units
• Annual inventory cost for milk run network = 10,000*0.3*2*4 = $24,000
• Total annual cost of milk run network = 34,080 + 24,000 = $58,080

c. Find the total annual cost of direct network from warehouses to customers.
• Batch size shipped from each warehouse to each customer = 40,000 units
• Number of shipments per year from each warehouse to each customer = 120,000/40,000
=3
• Annual trucking cost for direct network = 3*(1,300+120)*8*2 = $68,160
• Average inventory at each store for each product = 40,000/2 = 20,000 units
• Annual inventory cost for direct network = 20,000*0.4*8*2 = $128,000
• Total annual cost of direct network = 68,160 + 128,000 = $196,160

d. Find the total annual cost of milk run network from warehouses to customers.
• Batch size shipped from each warehouse to each supplier = 40,000/2 = 20,000 units
• Number of shipments per year from each warehouse to each customer = 120,000/20,000
=6
• Cost per shipment per store (two stores/truck) = 1,300/2 + 120 = $770
• Annual trucking cost for milk run network = 6*770*8*2 = $73,920
• Average inventory at each store for each product = 20,000/2 = 10,000 units
• Annual inventory cost for milk run network = 10,000*0.4*8*2 = $64,000
• Total annual cost of milk run network = 73,920 + 64,000 = $137,920

e. If you were to use either direct shipping from suppliers to customers or setting up
milk runs from suppliers to customers, what network do you recommend? Why?

Supplier → Warehouse Warehouse → Customer Total


Direct network $79,440 $196,160 $275,600
Milk run network $58,080 $137,920 $196,000
Since the total annual cost of milk run network, setting up milk runs from suppliers to
customers is recommended.

Question 2:
Given the table below from example in Slide 14 of Chapter 8:

2
1

Provide detailed calculation for the total annual cost for inventory and transportation using
Alternative 2, 3, and 4.

Example for Alternative 1:


• Cycle inventory = Q/2 = 2,000/2 = 1,000 motors
• Safety inventory = L/2 days of demand = (6/2)(120,000/365) = 986 motors
• In-transit inventory = 120,000(5/365) = 1,644 motors
• Total average inventory = 1,000 + 986 + 1,644 = 3,630 motors
• Annual holding cost using AM Rail = 3,630 x $30 = $108,900
• Annual transportation cost using AM Rail = 120,000 x 0.65 = $78,000
• The total annual cost for inventory and transportation using AM Rail = $186,900

SOLUTION
Alternative 2:
Lot size = 2,500 motors ~ 250 cwt = 150 + 100 cwt
Shipping cost for each lot size: 150 x 8 + 100 x 6 = $1,800/cwt
• Cycle inventory = Q/2 = 2,500/2 = 1,250 motors
• Safety inventory = L/2 days of demand = (4/2)(120,000/365) = 658 motors
• In-transit inventory = 120,000(3/365) = 986 motors
• Total average inventory = 1,250 + 986 + 658 = 2,894 motors
• Annual holding cost using Golden = 2,894 x $30 = $86,820
• Annual transportation cost using Golden = (120,000/2,500) x $1,800 = $86,400
• The total annual cost for inventory and transportation using Golden = $86,820 +
$86,400 = $173,220

Alternative 3:
Lot size = 4,000 motors ~ 400 cwt = 150 + 100 + 150 cwt
Shipping cost for each lot size: 150 x 8 + 100 x 6 + 150 x 4 = $2,400/cwt
• Cycle inventory = Q/2 = 4,000/2 = 2,000 motors
• Safety inventory = L/2 days of demand = (4/2)(120,000/365) = 658 motors
• In-transit inventory = 120,000(3/365) = 986 motors
• Total average inventory = 2,000 + 986 + 658 = 3,644 motors

3
• Annual holding cost using Golden (old proposal) = 3,644 x $30 = $109,320
• Annual transportation cost using Golden (old proposal) = (120,000/4,000) x $2,400 =
$72,000
• The total annual cost for inventory and transportation using Golden (old proposal) =
$109,320 + $72,000 = $181,320

Alternative 4:
Lot size = 4,000 motors ~ 400 cwt = 150 + 100 + 150 cwt
Shipping cost for each lot size: 150 x 8 + 100 x 6 + 150 x 3 = $2,250/cwt
• Cycle inventory = Q/2 = 4,000/2 = 2,000 motors
• Safety inventory = L/2 days of demand = (4/2)(120,000/365) = 658 motors
• In-transit inventory = 120,000(3/365) = 986 motors
• Total average inventory = 2,000 + 986 + 658 = 3,644 motors
• Annual holding cost using Golden (new proposal) = 3,644 x $30 = $109,320
• Annual transportation cost using Golden (new proposal) = (120,000/4,000) x $2,250 =
$67,500
• The total annual cost for inventory and transportation using Golden (new proposal) =
$109,320 + $67,500 = $176,820

4
SOLUTION

LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN


QUIZ 2 – GROUP 2
Duration: 15 minutes

Question:

Canon has started selling on Amazon along with its retail stores. Management has to decide
which products to carry at the retail stores and which products to carry at a central warehouse
to be sold only on Amazon. Canon currently has 225 retail stores in Vietnam. Weekly demand
for laser printer at each store is normally distributed with N(100,502). Each laser printer costs
$120. Weekly demand for inkjet cartridge at each store is normally distributed with
N(550,1002). Each inkjet cartridge costs $65. Canon has a holding cost of 20 percent. The
supply lead time for both products is four weeks. The targeted CSL is 90 percent. Assume
demand from one week to the next to be independent. Given that F-1(0.90) = 1.282.
a. How much reduction in holding cost can Canon expect on moving laser printer from
the retail stores to Amazon?
b. How much reduction in holding cost can Canon expect on moving inkjet cartridge from
the retail stores to Amazon?
c. Based on the results of part a and b, which of the two products should Canon carry at
the stores, which should it carry at the central warehouse for Amazon?

Answer:
𝑘 = 225; 𝐻 = 20%; 𝐿 = 4; 𝐶𝑆𝐿 = 0.90
Laser printer: 𝐷 = 100; 𝜎_𝐷 = 50; 𝑐 = $120
Inkjet cartridge: 𝐷 = 550; 𝜎_𝐷 = 100; 𝑐 = $65
a. How much reduction in holding cost can Canon expect on moving laser printer
from the retail stores to Amazon?
• 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 225 × 𝐹𝑆−1 (0.90) × √4 × 50 = 28,845
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √225 × 50 = 750
• 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.90) × √4 × 750 = 1,923
• 𝑅𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑖𝑛 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = (𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 ) × 𝐻 × 𝑐
= (28,845 − 1,923) × 20% × 120 = $646,128

b. How much reduction in holding cost can Canon expect on moving inkjet cartridge
from the retail stores to Amazon?
• 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 225 × 𝐹𝑆−1 (0.90) × √4 × 100 = 57,690
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √225 × 100 = 1,500
• 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.90) × √4 × 1,500 = 3,846
• 𝑅𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑖𝑛 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = (𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 ) × 𝐻 × 𝑐

Page 1 of 2
= (57,690 − 3,846) × 20% × 65 = $699,927

c. Based on the results of part a and b, which of the two products should Canon carry
at the stores, which should it carry at the central warehouse for Amazon?
Canon should carry laser printer at the stores and carry inkjet cartridge at the central warehouse
for Amazon.

Page 2 of 2
SOLUTION

LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN


QUIZ 2 – GROUP 3
Duration: 15 minutes

Question:

Grieg is a multinational retail chain for household electrical devices. The company currently
has 25 stores across Vietnam. Weekly demand for refrigerators at each store is normally
distributed with N(300,3002). Normally, it takes the supplier four weeks to fulfill a
replenishment order, which is placed separately by each store. Grieg is targeting a CSL of 95
percent. Given that F-1(0.95) = 1.645.
a. How much safety inventory of refrigerators should Grieg carry at each retail store?
b. Grieg is considering moving refrigerators to the online channel. By using this strategy,
all refrigerators would be stocked in a single national warehouse. Assume that Grieg
can move refrigerators to the online channel without losing demand (the online demand
is a sum of demand at each retail store). How much saving in safety inventory can Grieg
expect from going online if all stores have demand that is independent and identically
distributed?
c. How much saving in safety inventory can Grieg expect from going online if demand
across stores has a correlation coefficient of ρ = 0.5?

Answer:
𝑘 = 25 ; 𝐷 = 300; 𝜎𝐷 = 300; 𝐿 = 4; 𝐶𝑆𝐿 = 0.95
a. How much safety inventory of refrigerators should Grieg carry at each retail store?
• 𝑠𝑠 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 25 × 𝐹𝑆−1 (0.95) × √4 × 300 = 24,675

b. How much saving in safety inventory can Grieg expect from going online if all stores
have demand that is independent and identically distributed?
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √25 × 300 = 1,500
• 𝑠𝑠 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.95) × √4 × 1,500 = 4,935
• 𝑆𝑎𝑣𝑖𝑛𝑔 𝑖𝑛 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 24,675 − 4,935 = 19,740

c. How much saving in safety inventory can Grieg expect from going online if demand
across stores has a correlation coefficient of ρ = 0.5?
• 𝜎𝐷𝐶 = √𝑘𝜎 2 + 𝑘(𝑘 − 1)𝜌𝜎 2 = √25 × 3002 + 25 × (25 − 1) × 0.5 × 3002 = 5,408
• 𝑠𝑠 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.95) × √4 × 5,408 = 17,792
• 𝑆𝑎𝑣𝑖𝑛𝑔 𝑖𝑛 𝑠𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 24,673 − 17,792 = 6,883

Page 1 of 1
SOLUTION

LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN


QUIZ 2 – GROUP 4
Duration: 15 minutes

Question:

The Ho Chi Minh City (HCMC) branch office of a Dutch dishwasher company is considering
setting up either one distribution center for each of its east, south, west and north regions or
simply one center in District 1 for the whole of HCMC. The weekly demand for the Dutch
dishwasher is normally distributed with a mean of 750 units and a standard deviation of 300
units. Although the demand for each region is independent, the supply lead time is
approximately four weeks. Each machine costs $800 and the holding cost is 25 percent. With
the next-day delivery promise, the branch office needs to bear an inland trucking cost of
$11/unit for all four regional centers. However, if a single distribution center in District 1 is
decided upon, a more expensive transport fleet is needed and that will cost $15/unit for the
next-day service. Setting up and operating each of the four regional DCs costs $45,000 per year
more than building and operating the single District 1 distribution center.
Assume that the Dutch company would like a CSL of 0.95 and there are 52 weeks in a year.
Given that F-1(0.95) = 1.645.
a. How much safety inventory will the HCMC branch office carry if the dishwasher is
carried at all four regional centers?
b. How much safety inventory will the HCMC branch office carry if the dishwasher is
carried at a single distribution center in District 1?
c. Evaluate the changes in inventory, transportation, and facility costs upon aggregation.
What should the HCMC branch office decide based on the cost consideration?

Answer:
𝑘 = 4; 𝐻 = 25%; 𝐿 = 4; 𝐶𝑆𝐿 = 0.95; 𝐷 = 750; 𝜎𝐷 = 300; 𝑐 = $800
a. How much safety inventory will the HCMC branch office carry if the dishwasher is
carried at all four regional centers?
• 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 4 × 𝐹𝑆−1 (0.95) × √4 × 300 = 3,948

b. How much safety inventory will the HCMC branch office carry if the dishwasher is
carried at a single distribution center in District 1?
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √4 × 300 = 600
• 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.95) × √4 × 600 = 1,974

Page 1 of 2
c. Evaluate the changes in inventory, transportation, and facility costs upon
aggregation. What should the HCMC branch office decide based on the cost
consideration?
• 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑜𝑛 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑖𝑜𝑛
= (𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 ) × 𝐻 × 𝑐
= (3,948 − 1,974) × 25% × 800 = $394,800
• 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑓𝑎𝑐𝑖𝑙𝑖𝑡𝑦 𝑐𝑜𝑠𝑡𝑠 𝑜𝑛 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑖𝑜𝑛 = 4 × 45,000 = $180,000
• 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑡𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡𝑠 𝑜𝑛 𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑖𝑜𝑛
= 52 × 750 × (15 − 11) × 4 = $624,000
The annual costs for the HCMC branch office will be increased by $624,000 - $394,800 -
$180,000 = $49,200 upon aggregation.
→ It is better to run the four centers in the east, south, west, and north regions instead of the
District 1 center.

Page 2 of 2
SOLUTION

LOGISTICS ENGINEERING & SUPPLY CHAIN DESIGN


QUIZ 2 – GROUP 5
Duration: 15 minutes

Question:

G2000 has started selling on Lazada Flagship Store along with its retail stores. Management
has to decide which products to carry at the retail stores and which products to carry at a central
warehouse to be sold only on Lazada. G2000 currently has 900 retail stores in Vietnam. Weekly
demand for free-size leggings at each store is normally distributed with N(800,1002). Each pair
of leggings costs $30. Weekly demand for black pencil dress at each store is normally
distributed with N(50,502). Each dress costs $100. G2000 has a holding cost of 25 percent. The
supply lead time for both products is four weeks. The targeted CSL is 95 percent. Assume
demand from one week to the next to be independent. Given that F-1(0.95) = 1.645.
a. How much reduction in holding cost can G2000 expect on moving free-size leggings
from the retail stores to Lazada Flagship Store?
b. How much reduction in holding cost can G2000 expect on moving black pencil dress
from the retail stores to Lazada Flagship Store?
c. Based on the results of part a and b, which of the two products should G2000 carry at
the stores, which should it carry at the central warehouse for Lazada Flagship Store?

Answer:
𝑘 = 900; 𝐻 = 25%; 𝐿 = 4; 𝐶𝑆𝐿 = 0.95
Free-size leggings: 𝐷 = 800; 𝜎𝐷 = 100; 𝑐 = $30
Black pencil dress: 𝐷 = 50; 𝜎𝐷 = 50; 𝑐 = $100
a. How much reduction in holding cost per unit sold can G2000 expect on moving
free-size leggings from the retail stores to Lazada Flagship Store?
• 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 900 × 𝐹𝑆−1 (0.95) × √4 × 100 = 296,100
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √900 × 100 = 3,000
• 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.95) × √4 × 3,000 = 9,870
• 𝑅𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑖𝑛 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = (𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 ) × 𝐻 × 𝑐
= (296,100 − 9,870) × 25% × 30 = $2,146,725

b. How much reduction in holding cost per unit sold can G2000 expect on moving black
pencil dress from the retail stores to Lazada Flagship Store?
• 𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 = 𝑘 × 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷 = 900 × 𝐹𝑆−1 (0.95) × √4 × 50 = 148,050
• 𝜎𝐷𝐶 = √𝑘 × 𝜎𝐷 = √900 × 50 = 1,500
• 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 = 𝐹𝑆−1 (𝐶𝑆𝐿) × √𝐿 × 𝜎𝐷𝐶 = 𝐹𝑆−1 (0.95) × √4 × 1,500 = 4,935
• 𝑅𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑖𝑛 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = (𝑠𝑠𝑑𝑒𝑐𝑒𝑛𝑡𝑟𝑎𝑙𝑖𝑧𝑒𝑑 − 𝑠𝑠𝑎𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 ) × 𝐻 × 𝑐

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= (148,050 − 4,935) × 25% × 100 = $3,577,875

c. Based on the results of part a and b, which of the two products should G2000 carry
at the stores, which should it carry at the central warehouse for Lazada Flagship
Store?
G2000 should carry free-size leggings at the stores and carry black pencil dress at the central
warehouse for Lazada Flagship Store.

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