Supply Chain Management: Strategy, Planning, and Operation, 7e (Chopra)
Chapter 13 Linking Product Availability to Profits
13.1 True/False Questions
1) A supply chain can use a high level of product availability to improve its responsiveness and
attract customers.
2) A high level of product availability requires less inventory, which will keep costs down for the
supply chain.
3) A supply chain needs to achieve a balance between the level of availability and the cost of
inventory that maximizes supply chain revenues.
4) Whether the optimal level of availability is high or low depends on where a particular
company believes they can maximize profits.
5) The cost of overselling is denoted by Co and is the loss incurred by a firm for each unsold unit
at the end of the selling season.
6) The cost of understocking is denoted by Cu and is the margin lost by a firm for each lost sale
because there is no inventory on hand.
7) The cost of underselling is a key factor that influences the optimal level of product
availability.
8) With reduced demand uncertainty, a supply chain manager can better match supply and
demand by reducing both overstocking and understocking.
9) A supply chain can increase revenue by using a high level of product availability.
10) The costs of overstocking and understocking have a direct impact on both the optimal cycle
service level and profitability.
11) As the ratio of the cost of overstocking to the cost of understocking gets smaller, the optimal
level of product availability decreases.
12) An increase in forecast accuracy increases both the overstocked and understocked quantity
and decreases a firm’s profits.
13) Quick response results in the manufacturer making a lower profit in the short term if all else
is unchanged.
14) A managerial lever to increase profitability is to decrease the salvage value of each unit.
15) As the standard deviation of the forecast error increases, the expected overstock decreases.
16) As the standard deviation of the forecast error increases, the expected profit decreases.
17) As the number of order cycles per season decreases, the leftover inventory at the end of the
season increases.
18) If quick response allows multiple orders in the season, profits increase and the overstock
quantity increases.
19) Gianni’s makes only vanilla ice cream and mashes in fudge, cookie dough, or feathers
depending on whether the customer wants fudge ripple, cookie dough, or horsefeathers ice
cream. They are following a postponement strategy.
20) The production cost without postponement is usually higher than the production cost with
postponement.
21) Postponement is valuable for a firm that sells a large variety of products with demand that is
independent and comparable in size.
22) Postponement is less valuable for a firm that sells a variety of products with one dominant
product than for a firm that has a portfolio of products that are equivalent in demand and
revenue.
23) Tailored postponement allows a firm to increase its profitability by only postponing the
uncertain part of the demand and producing the predictable part at a lower cost without
postponement.
24) Responsive strategies like postponement are most effective when demand uncertainty is
high.
25) Inexpensive production methods should be used for unpredictable demand while more
expensive production methods should be used for stable demand.
1) The level of product availability
A) is also referred to as the customer service level.
B) is an important component of any supply chain’s responsiveness.
C) increases revenues for the supply chain by increasing sales.
D) Only A and B are true.
2) A high level of product availability requires
A) large inventories and tends to raise costs for the supply chain.
B) large inventories and tends to reduce costs for the supply chain.
C) small inventories and tends to raise costs for the supply chain.
D) small inventories and tends to reduce costs for the supply chain.
3) A high level of product availability requires ________, which raises supply chain costs.
A) large inventories
B) increased revenues
C) reduced costs
D) understocking the product
4) A supply chain needs to achieve a balance between the level of availability and the cost of
inventory that
A) maximizes supply chain revenues.
B) minimizes supply chain costs.
C) maximizes supply chain profitability.
D) maximizes supply chain availability.
5) The level of product availability, also referred to as the ________, is one of the primary
measures of a supply chain’s responsiveness.
A) no stock out level
B) reliability level
C) customer service level
D) logistics measure
6) Whether the optimal level of product availability is high or low depends on where a particular
company believes they can
A) minimize cost.
B) maximize revenue.
C) maximize profits.
D) maximize product availability.
7) The loss incurred by a firm for each unsold unit at the end of the selling season is
A) the cost of overstocking the product.
B) the cost of stocking the product.
C) the cost of understocking the product.
D) the cost of overselling the product.
8) The margin lost by a firm for each lost sale because there is no inventory on hand is
A) the cost of overstocking the product.
B) the cost of stocking the product.
C) the cost of understocking the product.
D) the cost of overselling the product.
9) The margin lost from current as well as future sales if the customer does not return should be
included in
A) the cost of overstocking the product.
B) the cost of stocking the product.
C) the cost of understocking the product.
D) the cost of overselling the product.
Scenario 13.1 — Nefarious
The tenured professor routinely led student groups on factory tours in exotic locales, and one
popular destination was an island south of Miami. The students enjoyed this happy little island
and the professor liked it because he could supplement his income by bringing back a few boxes
souvenirs he could sell to his friends. The souvenirs cost the professor $125 a box and he sells
them for $290 a box. Souvenirs that dry out due to age can be sold for $80. Experience has
shown that the demand for boxes of these souvenirs has a mean of 80 with a standard deviation
of 20.
10) The professor’s suitcase has room for 50 boxes of souvenirs. How many boxes does he
expect to have left once his friends have bought what they want?
A) 0
B) 1
C) 2
D) 3
11) The professor’s suitcase has room for 50 boxes of souvenirs. What is his expected profit?
A) $10,241
B) $11,975
C) $9,863
D) $8,127
12) What is the optimal quantity of boxes for the professor to bring back home to sell to his
friends?
A) 88
B) 74
C) 96
D) 82
13) Naturally, the professor will purchase the optimal number of boxes. (He’s had a course or
two in supply chain management and knows this model well.) What is his expected profit from
purchasing the optimal number of boxes?
A) $11,975
B) $11,455
C) $11,165
D) $10,835
14) Naturally, the professor will purchase the optimal number of boxes. (He’s had a course or
two in supply chain management and knows this model well.) What is the expected number of
boxes that he doesn’t sell?
A) 5
B) 18
C) 13
D) 7
15) Naturally, the professor will purchase the optimal number of boxes. (He’s had a course or
two in supply chain management and knows this model well.) If each of his friends purchases
only one box, how many friends will he turn away because he runs out of boxes of souvenirs?
A) 5
B) 3
C) 2
D) 1
16) The costs of overstocking and understocking have a direct impact on
A) the optimal cycle service level but not profitability.
B) profitability but not the optimal cycle service level.
C) both the optimal cycle service level and profitability.
D) neither the optimal cycle service level nor profitability.
17) Use Scenario 13.3 to answer the question. What is the mean and standard deviation of
demand during lead time?
A) DL = 600, σL = 86.60
B) DL = 200, σL = 50
C) DL = 10,400, σL = 252.38
D) DL = 10,400, σL = 50
18) Use Scenario 13.3 to answer the question. What is the customer service level?
A) 0.40
B) 0.50
C) 0.60
D) 0.70
19) Use Scenario 13.3 to answer the question. What is the cost of understocking?
A) $0.02
B) $0.03
C) $0.04
D) $0.05
20) Use Scenario 13.3 to answer the question. Suppose the Banana Stand decides to cut their lot
size in half. What is the new customer service level?
A) .65
B) .60
C) .55
D) .50
21) Use Scenario 13.3 to answer the question. Suppose the Banana Stand decides to cut their lot
size in half. What is the new cost of understocking?
A) $0.02
B) $0.03
C) $0.04
D) $0.05
22) Use Scenario 13.3 to answer the question. Suppose the Banana Stand loses all demand
during a stockout and each lost sale results in a loss of $2 profit. What is the customer service
level?
A) 0.9950
B) 0.9905
C) 0.9505
D) 0.9055
23) Which of the following would be a strategy to decrease the margin lost in a stockout?
A) Arranging for backup sourcing
B) Discarding the unused material
C) Selling unsold product to an outlet store
D) Reducing the level of cycle inventory
24) As the ratio of the cost of overstocking to the cost of understocking gets smaller,
A) the optimal level of product availability becomes irrelevant.
B) the optimal level of product availability decreases.
C) the optimal level of product availability remains stable.
D) the optimal level of product availability increases.
25) A company that uses a more expensive short lead time supplier as a backup for a low cost,
long lead time supplier is using
A) tailored sourcing.
B) quick response.
C) postponement.
D) improved forecasting.
26) An increase in forecast accuracy
A) decreases both the overstocked and understocked quantity and decreases a firm’s profits.
B) decreases both the overstocked and understocked quantity and increases a firm’s profits.
C) increases both the overstocked and understocked quantity and decreases a firm’s profits.
D) increases both the overstocked and understocked quantity and increases a firm’s profits.
27) Supply chain managers are able to
A) increase their forecast accuracy as lead times increase.
B) increase their forecast accuracy as lead times decrease.
C) decrease their forecast accuracy as lead times decrease.
D) decrease their forecast accuracy as lead times increase.
28) As lead times decrease, supply chain managers are able to
A) better match supply with demand.
B) better match demand with supply.
C) increase supply chain cost.
D) decrease product availability.
29) In tailored sourcing, firms use a combination of two supply sources,
A) one focusing on cost but unable to handle uncertainty well, and the other focusing on
flexibility to handle uncertainty, but at a higher cost.
B) one focusing on cost and able to handle uncertainty well, and the other focusing on flexibility
to handle uncertainty, but at a higher cost.
C) one focusing on cost but unable to handle uncertainty well, and the other focusing on
flexibility to handle uncertainty at a lower cost.
D) one focusing on cost and able to handle uncertainty well, and the other focusing on flexibility
to handle uncertainty at a lower cost.
30) In product-based tailored sourcing,
A) low-volume products with uncertain demand are obtained from a flexible source.
B) high-volume products with less demand uncertainty are obtained from an efficient source.
C) high-volume products with less demand uncertainty are obtained from a flexible source.
D) A and B only
31) Quick response is clearly advantageous to
A) a distributor in the supply chain.
B) a retailer in the supply chain.
C) a manufacturer in the supply chain.
D) every step in the supply chain.
32) Quick response results in
A) the manufacturer making a lower profit in the long term if all else is unchanged.
B) the manufacturer making a lower profit in the short term if all else is unchanged.
C) the retailer making a lower profit in the short term if all else is unchanged.
D) the distributor making a lower profit in the short term if all else is unchanged.
33) In volume-based tailored sourcing,
A) the predictable part of a product’s demand is produced at an efficient facility.
B) the uncertain portion is produced at an efficient facility.
C) the predictable part of a product’s demand is produced at a flexible facility.
D) the predictable part of a product’s demand is outsourced.
34) Which of these options would NOT increase profitability?
A) Increase the salvage value of each unit.
B) Decrease the margin lost from a stockout.
C) Decrease the uncertainty of demand.
D) Decrease the number of orders per season.
35) As the standard deviation of forecast error increases,
A) expected overstock increases and expected understock increases.
B) expected overstock increases and expected understock decreases.
C) expected overstock decreases and expected understock increases.
D) expected overstock decreases and expected understock decreases.
36) As the standard deviation of forecast error increases,
A) expected profit increases and expected understock increases.
B) expected profit increases and expected understock decreases.
C) expected profit decreases and expected understock increases.
D) expected profit decreases and expected understock decreases.
37) A retailer places an order for the new Bagpipe 2018™ from the supplier and takes note of the
demand pattern. They use this knowledge of the demand to place a second order of Bagpipe
2018 from the supplier. This results in
A) a larger total order placed than when they could order only once per bagpipe season.
B) the same product availability at a lower level of inventory than when they could order only
once per bagpipe season.
C) a slightly larger average overstock to be disposed of at the end of bagpipe season than when
they could order only once.
D) a lower profit than when they could order only once during bagpipe season.