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PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
ANSWER KEY FOR INTERNAL ASSESSMENT TEST –2
Date
30/9/2015
Subject & Code : Supply Chain Management – 14MBAMM306
Name of faculty: Ravi Urs
Max Marks: 50
Section
:A
Time
: 11.30 AM – 1.00 PM
Note: Answer all questions
1. a
What is setup cost?
Every time there is a change in the product being manufactured, the production line has to be set up for the
new product. This change in the production line would involve getting new raw materials, making the
machines ready for new operations, making arrangements for the movement of the semi-finished goods
and paper work. During this process of changeover the production line is idle. This cost is known as the
setup cost.
3
b What is JIT system?
2. a
MBA III

JIT is a methodology aimed primarily at elimination of inventories and reducing flow times within
production as well as response times from suppliers and to customers.

It is a way of thinking, working and management to eliminate wastes in the manufacturing process

It originated and was development in Japan, largely in the 1960s and 1970s and particularly at
Toyota
3
Explain the concept of EOQ. What are its applications?

The EOQ model is applicable when the demand for an item has a constant or nearly
constant rate and when the entire quantity ordered arrives in inventory at one point of
time

This model is also known as the fixed-order quantity system (Q system) or a continuous
review system

In this system order is placed for the same constant or fixed amount (known as economic
order quantity) whenever the inventory on hand reaches a certain predetermined level
known as re-order level or re-order point

Continual record of inventory level for every item is maintained

The order that is placed to replenish the stock of inventory is fixed quantity which
minimizes the total inventory carrying, ordering and shortage costs
7
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PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management

The function of the EOQ model is to determine the optimal order size that minimizes the
total inventory cost

The formula for EOQ and Re-order level are derived under a set of simplifying and
restrictive assumptions, as follows:
o
Demand is known with certainty and is relatively constant over time
o
No shortage are allowed
o
Lead time for the receipt of orders is constant
o
The order quantity is received all at once
The EOQ quantity can be found by using the formula:
Q = √ 2DCo/Ce
Where,
Q = EOQ
D= Annual demand of the item
Co = Ordering cost per order
MBA III
USN
1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
Ce = Annual cost of holding one unit of inventory
b Explain the Weighted-Point Method of vendor rating.
3. a

The advantage for the buyer in this method of evaluation is that a number of evaluation
criteria can be proportioned to correspond with the values of the firm.

It forces the buyer to define the key attributes of a supplier and objectively evaluate
them, thus eliminating the subjective evaluation done in categorical method.

The organization assigns weights to the different evaluation criteria.

The actual performance for each attribute is multiplied by each of the weightage given to
that corresponding attribute. Such product for all the attributes is then added to get a
composite performance index that can be quantitatively used to compare suppliers.

Regular notification to suppliers about their performance helps in:
o
Isolating supplier problem
o
Stimulates supplier performance
o
Strengthens the buyer-seller relationship.
Explain the various design options for a transportation network.


MBA III
7
10
Direct Shipment Network
In this model, the buyer structures his transportation network so that all shipments come directly
USN
1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
from each supplier to each buyer location

The routing of each shipment is specified and the supply chain manager only needs to decide on
the quantity to ship and the mode of transportation

It is suitable when demand at the buyer locations is large enough that optimal replenishment lot
sizes are close to a TL from each supplier to each location


It eliminates intermediate warehouses

It is simple to operate and coordinate

The shipment decision is completely local, and the decision made on one shipment does not
influence others

The transportation time from supplier to buyer location is short as shipment is direct

MBA III
Advantages
Disadvantages

The costs of this model for small buyer locations is very high

If a TL carrier is used, it results in high supply chain inventory

It LTL carrier is used, it increases transportation cost and delivery time increases

If package carrier is used, the transportation costs increases

The receiving costs are very high
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1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management



A milk run is a route on which a truck either delivers product from a single supplier to multiple
retailers or goes from multiple suppliers to a single buyer location

In direct shipping with milk runs, a supplier delivers directly to multiple buyer locations on a truck
or a truck picks up deliveries destined for the same buyer location from many suppliers

In this model the routing of each milk run becomes very important

MBA III
Direct Shipping with Milk Runs
Advantages

It eliminates intermediate warehouses

It is cost effective as milk runs lower the transportation costs by consolidating shipments to
multiple locations on a single truck

It is suitable when very frequent small deliveries are needed on a regular basis and either a set of
suppliers or a set of retailers is in geographic proximity
USN
1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management


MBA III
All shipments via Central Distribution System

In this model, suppliers do not send shipments directly to buyer locations

The buyer divides locations by geographic regions and a DC is built for each region

Suppliers send their shipments to the DC and the DC then forwards appropriate shipments to each
buyer location

The DC is the extra layer between suppliers and buyer locations

One of the role of a DC is to store inventory and the other is to serve as a transfer location

DCs can help to reduce supply chain costs when suppliers are located far from the buyer locations
and transportation costs are very high

DC helps by allowing a supply chain to achieve economies of scale from inbound transportation to
a point close to the final destination

Economies of inbound supply is achieved by making each supplier send a large shipment to the DC
that contains products for all locations the DC serves

The outbound transportation costs are less as DCs are located closer to buyer locations

DCs hold inventory and send product to buyer locations in smaller replenishments

When the replenishment demand is very high, DCs can provide cross-docking facility from the
incoming supplier trucks to the trucks going to buyer locations. There is no inventory storage at the
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PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
DC
o

MBA III
Shipping via DC Using Milk Runs

Milk runs can be used from a DC if lot sizes to be delivered to each buyer location are small

Milk runs reduce outbound transportation costs by consolidating small shipments

This model requires a significant degree of coordination and suitable routing and scheduling of
milk runs
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PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
o
o

In this model, material is shipped from a DC in large trucks (or other high capacity modes) to a
cross-dock point close to the customer location

At the cross-dock point, the deliveries are moved into smaller trucks for local delivery

This network allows responsive delivery to areas that do not have large enough local demand to
justify a DC but can be reached from an existing DC in a reasonable time

It has the advantage of cheaper mode of transportation is used for most of the travel distance with
quicker but more expensive modes of transport used for the last mile
o
MBA III
Shipping via Line Haul with Cross-Docking
Tailored Network

It is an option of suitable combination of previous options that reduces the cost and improves
responsiveness of the supply chain

Here the transportation uses a combination of cross-docking, milk runs, and TL and LTL carriers,
along with package carriers

The goal is to use the appropriate option in each situation

High-demand products to high-demand retail outlets may be shipped directly

Low-demand products or shipments to low-demand retail outlets are consolidated to and from the
DC

The complexity of managing this network is high because different shipping procedures are used
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PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
for each product and retail outlet
b

This network needs significant investment if information infrastructure to facilitate coordination

It allows for selective use of a shipment method to minimize the transportation as well as
inventory costs
Explain the different methods of stock valuation.
“First-in, First-out” method (FIFO)

In this method the materials are issued in strict chronological order, which means,
whatever material was received fist will be consumed first

This method ensures that the materials are issued at actual cost and stocks are valued as
per the latest price paid

It has the limitation that the process becomes cumbersome when too many changes in
price levels occur
“Last-in, First-out” method (LIFO)

In this method the materials which are coming last are issued first

It has the advantage that the production cost will be taken at the latest price or market
price if the materials is received recently

When prices are raising, this system calculates higher cost of production, reducing the
profits and hence the tax paid

When prices are fluctuating, LIFO leads to minimize unrealized gains or losses in inventory

It has the limitation that the process becomes cumbersome when too many changes in
price levels occur
Average price method
MBA III

In this method, the issues are valued on the basis of a simple average price

The prices of purchases prior to any issue are added and the average price is calculated by
10
USN
1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
dividing the total value by the number of purchase

It is simple and gives reasonably valid estimates

It has the disadvantage of being inaccurate because the prices are not weighted by the
quantities purchased and hence the average price calculated does not give a true picture
Weighted average method

Here the rate is calculated by dividing the total cost by the number of items and this rate
is applied to issues

As more purchases are made, a new average is calculated and this new rate is applied to
subsequent issues

It is a realistic method as it reflects the price levels resulting in stabilization of cost figures
Actual price method

In this method actual cost is charged for the materials to be issued from the store

This method is used when the purchases are made for specific purposes such as spare
parts, special dies, jigs and fixtures and other special equipments

Each material receipt is recorded in a separate ledger and the material issues are given
and billed at the actual purchase cost

This method is used where few costly items or non-standard materials are purchased to
meet production requirements against specific customer orders
Replacement price or current value or market value method
MBA III

In this method, the materials are priced at the prevailing market price on the date of issue

The principle is that the materials issued for production on a particular day should be
charged at the rate at which these materials could be replaced immediately from the new
purchase on the same day

This method can be applied for items which are standard and whose prices can be easily
USN
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PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
obtained
Advantages

This method is relevant for pricing the product made out of these materials

It enables comparison of operating efficiencies with those of competitors
Disadvantages

It is difficult to find out actual price at every issue from the stores

The stock on hand is continuously under estimated when prices increase, because the
costing according to receipts are done at actual and issues are done at higher rates

When the prices are falling, the stock on hand is overestimated resulting in writing off
huge amounts
Standard price or standard cost method
MBA III

In this method, a forecasted unit price for a specific period is six months to a year or more

The forecasted or standard price is computed by considering the market conditions, usage
rates, storage conditions, current market price, trend of the price, etc.

This leads a fairly correct average standard price being determined

Review of the standard price is done after the stipulated period

The material receipt is at the actual price while the material issued is at standard price

It has the advantage of reflecting the efficient use of materials as the price is insulated
from the fluctuations in the market price

It has the disadvantage of the stock being underestimated when the prices are rising an
overestimation when the prices are falling
USN
1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
Inflated price method
4.

In this method, the cost of materials charged is slightly inflated (raised) than the actual
price

The principle behind this method is that there would be some type of wastage when the
materials is being used like breakage, evaporation, spilling, rejection, etc. the losses for
these wastages can be uniformly distributed if the prices of the materials can be inflated
marginally
Case Study: (Compulsory)
For decades, Adidas has remained at the forefront of the highly competitive sporting goods
industry by continuously updating its product pipeline with cutting-edge designs and
technologies. Providing consistent on time delivery is a vital component of the company’s success.
Adidas America worked with multiple third party logistics providers in the past. As the company’s
needs of customers became more complex—Adidas America hired UPS Supply Chain Solutions to
upgrade its distribution network.
“We needed a full-service logistics provider with substantial resources to support our current
business needs as well as our future ones,” said Bob Henriques, Director of Logistics for Adidas
America. “UPS Supply Chain Solutions enabled us to quickly increase our distribution capacity by
leveraging UPS Supply Chain Solutions’ infrastructure and logistics technology and at the same
time enhance our customer service.”
Each year, Adidas distributes millions of units of footwear, apparel and sporting goods equipment
to thousands of U.S. retailers.
UPS’s Spartanburg, South Carolina, distribution center is linked electronically with UPS facilities in
Hebron, Kentucky and Ontario, California.
Every three months, the company introduces as many as 10,000 new apparel items and 4,000
new footwear items. Many retailers are implementing a just-in-time delivery cycle, requiring more
orders more often as opposed to bulk shipments. The team orders filled by Adidas are also highly
variable, ranging from as few as 50 shipments to as many as 2,500. A high percentage of the units
shipped by Adidas are for priority requests, which must be received within one or two days.
“In our business, we have to react quickly to remain competitive,” Henriques said. “UPS Supply
MBA III
USN
1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
Chain Solutions gives us the flexibility to efficiently ramp up or ramp down our operations. We are
able to consistently fill orders on time, even though our order profile is constantly changing.”
UPS Supply Chain Solutions also boosted Adidas’ ability to adapt its supply chain to meet
customer specifications.
“Complying with customer requirements is extremely important to our business,” Henriques said.
“UPS Supply Chain Solutions has increased our capacity to do business by enabling us to quickly
provide value-added services such as special labeling, garment on hanger and sending electronic
advanced shipment notifications.”
UPS Supply Chain Solutions also supports the Adidas E-Commerce business through interfaces to
the UPS warehouse management system. This interface allows Adidas to fulfill orders and
leverage the UPS package network.
“UPS Supply Chain Solutions has helped us improve the consistency, accuracy and completeness
of our shipments,” Henriques said.
Questions:
a
What are some of the cost cutting measures you can observe in the case?
4
UPS’s Spartanburg, South Carolina, distribution center is linked electronically with UPS facilities in
Hebron, Kentucky and Ontario, California
Many retailers are implementing a just-in-time delivery cycle
UPS Supply Chain Solutions also supports the Adidas E-Commerce business through interfaces to
the UPS warehouse management system
b Do you think Adidas Supply Chain is designed for responsiveness? Justify
Yes, Adidas supply chain is designed for responsiveness
Providing consistent on time delivery is a vital component of the company’s success.
A high percentage of the units shipped by Adidas are for priority requests, which must be received
within one or two days.
UPS Supply Chain Solutions also supports the Adidas E-Commerce business through interfaces to
the UPS warehouse management system. This interface allows Adidas to fulfill orders and
MBA III
3
USN
1 P E
PESIT Bangalore South Campus
Hosur road, 1km before Electronic City, Bengaluru -100
Department of Master of Business Management
leverage the UPS package network.
c
What has been the impact on customer service due to presence of UPS?
UPS Supply Chain Solutions enabled Adidas to quickly increase its distribution capacity
It has enabled Adidas to enhance its customer service
Adidas is able to consistently fill orders on time
UPS Supply Chain Solutions also boosted Adidas’ ability to adapt its supply chain to meet
customer specifications
It has enables Adidas to quickly provide value-added services such as special labeling, garment on
hanger and sending electronic advanced shipment notifications
UPS Supply Chain Solutions has helped Adidas improve the consistency, accuracy and
completeness of its shipments
********
MBA III
3