Chapter
12 Supply Chain Design
DISCUSSION QUESTIONS
1. For any supply chain there is a theoretical efficiency curve that maps the
relationship between total costs and performance. Most firms, if their actual costs
and performance are plotted, will be in a position where total costs exceed those
indicated by the efficiency curve for a given level of performance. Firms can move
closer to the efficiency curve through better forecasting, inventory management,
operations planning and scheduling, and resource planning. all of these tactics can
reduce costs while improving performance. However, quantum levels of
improvement can be had by improving the design of the supply chain itself.
Improvements can be made in inventory placement, mass customization strategies,
outsourcing, and facility location.
2. Walmart’s approach is to generate a competitive situation between suppliers and to
drive down prices. One of the major competitive priorities in Walmart’s business is
low cost, thereby keeping retail prices to a minimum. Walmart is dealing with
standardized goods in high volumes, and consequently uses an efficient supply
chain. The Limited deals with fashion goods that have shorter life cycles.
Therefore, the Limited needs a more flexible supply chain and also more control
over the supply channels. Mast Industries provides the capability to produce fashion
goods quickly.
3. Canon has chosen to keep its manufacturing process close to its manufacturing
process to take advantage of concurrent engineering. They have chosen a strategy of
speedy introduction of new products. Separating the manufacturing process by
offshoring to a low cost country (such as China) would delay the introduction of
new products, even though manufacturing costs would be less. Locating design
engineers close to the manufacturing process allows for quick changes to new
designs to overcome initial production problems. GM has initiated the joint venture
with Shanghai Auto Industry Corporation to gain a foothold in a growing market for
cars. The lower labor rates enable margins to be maintained and they overcome any
additional logistical costs for shipping components to China or for exporting the
cars to other countries. The need for fast reactions to new product introductions is
not great because new product introductions are not as frequent as is the case for
Canon. GM is competing on price and not on new product development speed. GM
runs the risk of technology transfer and the possibility of setting up SAIC as a
competitor.
12-1
Copyright © 2016 Pearson Education, Inc.
,12-2 l PART 3 l Managing Supply Chains
PROBLEMS
Measuring Supply Chain Performance
1. EBI Solar
a. Inventory turnover = (Annual sales at cost)/(Average aggregate inventory value)
Thus, 4.50 = 2,500,000 / Average aggregate inventory value
Average aggregate inventory value = $555,556
Weekly sales = Cost of goods sold / 52 = $2,500,000/52 = $48,077
Weeks of supply = Average aggregate inventory value / weekly sales =
$555,556/48,077 = 11.56 weeks of supply
b. Average aggregate inventory value = raw material + work-in-process + finished
goods = $100,500+$25,800+$16,200 = $142,500
Inventory turnover = (Annual sales at cost)/(Average aggregate inventory
value) = $2,500,000/$142,500 = 17.54
Weeks of supply = Average aggregate inventory value / weekly sales =
$142,500/48,077 = 2.96 weeks of supply
2. Cyberphone Company
a. Current Year’s average aggregate inventory value
= $48,000,000/6 = $8,000,000
Next year’s average aggregate inventory value
= ($48,000,000 × 1.25)/6 = $10,000,000
Increase in the average aggregate inventory value
= ($10,000,000 – 8,000,000) = $2,000,000
b. Number of turns to support next year’s sales with no increase in inventory value
= (1.25)(6) = 7.5 turns.
3. Precision Enterprises. Average aggregate inventory value
= Raw materials + WIP + Finished goods
= $3,129,500 + $6,237,000 + $2,686,500
= $12,053,000
a. Sales per week = Cost of goods sold/52 weeks per year
= $32,500,000/52
= $625,000
Weeks of supply = Average aggregate inventory value/
Weekly sales
= $12,053,000/$625,000
= 19.28 wk
b. Inventory turnover = (Annual sales at cost)/(Average
aggregate inventory value)
= $32,500,000/$12,053,000
= 2.6964 turns/year
Copyright © 2016 Pearson Education, Inc.
, Supply Chain Design l CHAPTER 12 l 12-3
4. Spearman Fishing Industries
Inventory turnover = (Annual sales at cost)/(Average
aggregate inventory value)
10.0 = $985,000/Average aggregate
inventory value
Average aggregate inventory value = $985,000/10 = $98,500
5. Bawl Corporation. Average aggregate inventory value can be calculated as: Average
aggregate inventory value = Raw materials + WIP + Finished goods
= $2,470,000 + $1,566,000 + $1,200,000
= $5,236,000
a. Sales per week = Cost of goods sold/52 weeks per year
= $48,000,000/52
= $923,077
Weeks of supply = Average aggregate inventory value/Weekly sales
(at cost) = $5,236,000/$923,077
= 5.7 wk
b. Inventory turnover = (Annual sales at cost)/(Average aggregate
inventory value)
= $48,000,000/$5,236,000
= 9.17 turns/year
6. A retailer
a. a. Sales per week = Cost of goods sold/52 weeks per year
= $3,500,000/52
= $67,308
Weeks of supply = Average aggregate inventory value/Weekly
sales (at cost) = $1,200,000/$67,308
= 17.8 wk
b. Inventory turnover = (Annual sales at cost)/(Average aggregate
inventory value)
= $3,500,000/$1,200,000
= 2.9 turns/year
7. Sapphire Aerospace
a. Average
Part Number Inventory (units) Value ($/unit) Total Value ($)
RM-1 20,000 1.00 20,000
RM-2 5,000 5.00 25,000
RM-3 3,000 6.00 18,000
RM-4 1,000 8.00 8,000
WIP-1 6,000 10.00 60,000
WIP-2 8,000 12.00 96,000
FG-1 1,000 65.00 65,000
FG-2 500 88.00 44,000
Average aggregate inventory value: $336,000
Copyright © 2016 Pearson Education, Inc.
, 12-4 l PART 3 l Managing Supply Chains
b. Average weekly sales at cost = $6,500,000/52
= $125,000
Weeks of supply = $336,000/$125,000
= 2.688 weeks.
c. Inventory turnover = Annual sales (at cost) /Average aggregate inventory value
= $6,500,000/$336,000
= 19.34 turns.
8. Dogs-R-Us versus K-9 Inc.
a. The following Excel spreadsheet provides the total average inventory value by
inventory category for both firms. The average aggregate inventory value = the
sum of the total inventory value of all categories.
Dogs-‐R-‐Us
K-‐9
Inc.
Cost
of
Goods
Sold
$560,000.00
$640,000.00
Average
Average
Value
Total
Value
Total
Category
Inventory
Inventory
per
Unit
Value
per
Unit
Value
in
Units
in
Units
Dog
Beds
200
$55.00
$11,000.00
140
$55.00
$7,700.00
Dog
Bones
&
Treats
1200
$2.50
$3,000.00
250
$2.50
$625.00
Pet
Feeders
50
$12.50
$625.00
20
$12.50
$250.00
Flea
&
Tick
350
$7.50
$2,625.00
75
$7.50
$562.50
Dog
Kennels
10
$65.00
$650.00
2
$65.00
$130.00
Dog
Pens
10
$220.00
$2,200.00
3
$220.00
$660.00
Patio
Pet
Doors
5
$120.00
$600.00
2
$120.00
$240.00
Dog
Ramps
5
$150.00
$750.00
2
$150.00
$300.00
Pet
Strollers
10
$40.00
$400.00
2
$40.00
$80.00
Pet
Supplements
1400
$4.50
$6,300.00
150
$4.50
$675.00
Dog
Toys
250
$2.20
$550.00
100
$2.20
$220.00
Average
Aggregate
Inventory
Value
$28,700.00
$11,442.50
b. Average Weekly Sales at Cost Dogs-R-Us = $560,000/52 = $10,769.23
K-9 Inc. = $640,000/52 = $12,307.69
Weeks of Supply Dogs-R-Us = $28,700.00/$10,769.23 = 2.67
K-9 Inc. = $11,442.50/$12,307.69 = 0.93
c. Inventory Turnover Dogs-R-Us = $560,000/$28,700 = 19.51
K-9 Inc. = $640,000/$11,442.50 = 55.93
Outsourcing Processes
9. Large global automobile manufacturer
a. We must use the break-even equation for evaluating processes:
F − Fb
Q= m
cb − cm
Q = ($6 million - $4 million)/($8.00 - $5.00) = 666,667 solenoids.
Consequently, the automobile manufacturer would need to use 666,667 or more
solenoids to make a financial case to retain manufacture of them in-house.
Copyright © 2016 Pearson Education, Inc.
12 Supply Chain Design
DISCUSSION QUESTIONS
1. For any supply chain there is a theoretical efficiency curve that maps the
relationship between total costs and performance. Most firms, if their actual costs
and performance are plotted, will be in a position where total costs exceed those
indicated by the efficiency curve for a given level of performance. Firms can move
closer to the efficiency curve through better forecasting, inventory management,
operations planning and scheduling, and resource planning. all of these tactics can
reduce costs while improving performance. However, quantum levels of
improvement can be had by improving the design of the supply chain itself.
Improvements can be made in inventory placement, mass customization strategies,
outsourcing, and facility location.
2. Walmart’s approach is to generate a competitive situation between suppliers and to
drive down prices. One of the major competitive priorities in Walmart’s business is
low cost, thereby keeping retail prices to a minimum. Walmart is dealing with
standardized goods in high volumes, and consequently uses an efficient supply
chain. The Limited deals with fashion goods that have shorter life cycles.
Therefore, the Limited needs a more flexible supply chain and also more control
over the supply channels. Mast Industries provides the capability to produce fashion
goods quickly.
3. Canon has chosen to keep its manufacturing process close to its manufacturing
process to take advantage of concurrent engineering. They have chosen a strategy of
speedy introduction of new products. Separating the manufacturing process by
offshoring to a low cost country (such as China) would delay the introduction of
new products, even though manufacturing costs would be less. Locating design
engineers close to the manufacturing process allows for quick changes to new
designs to overcome initial production problems. GM has initiated the joint venture
with Shanghai Auto Industry Corporation to gain a foothold in a growing market for
cars. The lower labor rates enable margins to be maintained and they overcome any
additional logistical costs for shipping components to China or for exporting the
cars to other countries. The need for fast reactions to new product introductions is
not great because new product introductions are not as frequent as is the case for
Canon. GM is competing on price and not on new product development speed. GM
runs the risk of technology transfer and the possibility of setting up SAIC as a
competitor.
12-1
Copyright © 2016 Pearson Education, Inc.
,12-2 l PART 3 l Managing Supply Chains
PROBLEMS
Measuring Supply Chain Performance
1. EBI Solar
a. Inventory turnover = (Annual sales at cost)/(Average aggregate inventory value)
Thus, 4.50 = 2,500,000 / Average aggregate inventory value
Average aggregate inventory value = $555,556
Weekly sales = Cost of goods sold / 52 = $2,500,000/52 = $48,077
Weeks of supply = Average aggregate inventory value / weekly sales =
$555,556/48,077 = 11.56 weeks of supply
b. Average aggregate inventory value = raw material + work-in-process + finished
goods = $100,500+$25,800+$16,200 = $142,500
Inventory turnover = (Annual sales at cost)/(Average aggregate inventory
value) = $2,500,000/$142,500 = 17.54
Weeks of supply = Average aggregate inventory value / weekly sales =
$142,500/48,077 = 2.96 weeks of supply
2. Cyberphone Company
a. Current Year’s average aggregate inventory value
= $48,000,000/6 = $8,000,000
Next year’s average aggregate inventory value
= ($48,000,000 × 1.25)/6 = $10,000,000
Increase in the average aggregate inventory value
= ($10,000,000 – 8,000,000) = $2,000,000
b. Number of turns to support next year’s sales with no increase in inventory value
= (1.25)(6) = 7.5 turns.
3. Precision Enterprises. Average aggregate inventory value
= Raw materials + WIP + Finished goods
= $3,129,500 + $6,237,000 + $2,686,500
= $12,053,000
a. Sales per week = Cost of goods sold/52 weeks per year
= $32,500,000/52
= $625,000
Weeks of supply = Average aggregate inventory value/
Weekly sales
= $12,053,000/$625,000
= 19.28 wk
b. Inventory turnover = (Annual sales at cost)/(Average
aggregate inventory value)
= $32,500,000/$12,053,000
= 2.6964 turns/year
Copyright © 2016 Pearson Education, Inc.
, Supply Chain Design l CHAPTER 12 l 12-3
4. Spearman Fishing Industries
Inventory turnover = (Annual sales at cost)/(Average
aggregate inventory value)
10.0 = $985,000/Average aggregate
inventory value
Average aggregate inventory value = $985,000/10 = $98,500
5. Bawl Corporation. Average aggregate inventory value can be calculated as: Average
aggregate inventory value = Raw materials + WIP + Finished goods
= $2,470,000 + $1,566,000 + $1,200,000
= $5,236,000
a. Sales per week = Cost of goods sold/52 weeks per year
= $48,000,000/52
= $923,077
Weeks of supply = Average aggregate inventory value/Weekly sales
(at cost) = $5,236,000/$923,077
= 5.7 wk
b. Inventory turnover = (Annual sales at cost)/(Average aggregate
inventory value)
= $48,000,000/$5,236,000
= 9.17 turns/year
6. A retailer
a. a. Sales per week = Cost of goods sold/52 weeks per year
= $3,500,000/52
= $67,308
Weeks of supply = Average aggregate inventory value/Weekly
sales (at cost) = $1,200,000/$67,308
= 17.8 wk
b. Inventory turnover = (Annual sales at cost)/(Average aggregate
inventory value)
= $3,500,000/$1,200,000
= 2.9 turns/year
7. Sapphire Aerospace
a. Average
Part Number Inventory (units) Value ($/unit) Total Value ($)
RM-1 20,000 1.00 20,000
RM-2 5,000 5.00 25,000
RM-3 3,000 6.00 18,000
RM-4 1,000 8.00 8,000
WIP-1 6,000 10.00 60,000
WIP-2 8,000 12.00 96,000
FG-1 1,000 65.00 65,000
FG-2 500 88.00 44,000
Average aggregate inventory value: $336,000
Copyright © 2016 Pearson Education, Inc.
, 12-4 l PART 3 l Managing Supply Chains
b. Average weekly sales at cost = $6,500,000/52
= $125,000
Weeks of supply = $336,000/$125,000
= 2.688 weeks.
c. Inventory turnover = Annual sales (at cost) /Average aggregate inventory value
= $6,500,000/$336,000
= 19.34 turns.
8. Dogs-R-Us versus K-9 Inc.
a. The following Excel spreadsheet provides the total average inventory value by
inventory category for both firms. The average aggregate inventory value = the
sum of the total inventory value of all categories.
Dogs-‐R-‐Us
K-‐9
Inc.
Cost
of
Goods
Sold
$560,000.00
$640,000.00
Average
Average
Value
Total
Value
Total
Category
Inventory
Inventory
per
Unit
Value
per
Unit
Value
in
Units
in
Units
Dog
Beds
200
$55.00
$11,000.00
140
$55.00
$7,700.00
Dog
Bones
&
Treats
1200
$2.50
$3,000.00
250
$2.50
$625.00
Pet
Feeders
50
$12.50
$625.00
20
$12.50
$250.00
Flea
&
Tick
350
$7.50
$2,625.00
75
$7.50
$562.50
Dog
Kennels
10
$65.00
$650.00
2
$65.00
$130.00
Dog
Pens
10
$220.00
$2,200.00
3
$220.00
$660.00
Patio
Pet
Doors
5
$120.00
$600.00
2
$120.00
$240.00
Dog
Ramps
5
$150.00
$750.00
2
$150.00
$300.00
Pet
Strollers
10
$40.00
$400.00
2
$40.00
$80.00
Pet
Supplements
1400
$4.50
$6,300.00
150
$4.50
$675.00
Dog
Toys
250
$2.20
$550.00
100
$2.20
$220.00
Average
Aggregate
Inventory
Value
$28,700.00
$11,442.50
b. Average Weekly Sales at Cost Dogs-R-Us = $560,000/52 = $10,769.23
K-9 Inc. = $640,000/52 = $12,307.69
Weeks of Supply Dogs-R-Us = $28,700.00/$10,769.23 = 2.67
K-9 Inc. = $11,442.50/$12,307.69 = 0.93
c. Inventory Turnover Dogs-R-Us = $560,000/$28,700 = 19.51
K-9 Inc. = $640,000/$11,442.50 = 55.93
Outsourcing Processes
9. Large global automobile manufacturer
a. We must use the break-even equation for evaluating processes:
F − Fb
Q= m
cb − cm
Q = ($6 million - $4 million)/($8.00 - $5.00) = 666,667 solenoids.
Consequently, the automobile manufacturer would need to use 666,667 or more
solenoids to make a financial case to retain manufacture of them in-house.
Copyright © 2016 Pearson Education, Inc.
