Chapter 6

Question 1

Impact of Globalization on supply chain Networks

Answer 1

Globalization offers companies opportunities to simultaneously grow revenues and decrease costs
-The opportunities from globalization are often accompanied by significant additional risk

Question 2

There will be a good deal of uncertainty in demand, prices, exchange rates, and the competitive market over the lifetime of a supply chain network

Answer 2

Therefore, building flexibility into SC operations allows the SC to deal with uncertainty in a manner that will maximize profits

Question 3

Companies have failed to gain from offshoring for two primary reasons

Answer 3

1. focusing exclusively on unit cost rather than total cost when making the offshoring decision.
2. ignoring critical risk factors.

Question 4

The Offshoring Decision: Total Cost

Answer 4

Total cost can be identified by focusing on the complete sourcing process

Question 5

Offshoring to low-cost countries is likely to be most attractive for products with:

Answer 5

• High labor content
• Large production volumes
• Relatively low variety
• Low transportation costs

Question 6

Discounted Cash Flow (DCF) analysis

Answer 6

evaluates the present value of any stream of future cash flows and allows management to compare two streams of cash flows in terms of their financial value.

Question 7

DCF analysis is based on the fundamental premise that (based on the time value of money) – a dollar today is worth more than a dollar tomorrow

Answer 7

because a dollar today may be invested and earn a return in addition to the dollar invested.

Question 8

The present value of future cash flows is found by using a discount factor.

Answer 8

If a dollar today can be invested and earn a rate of return ‘k’ over the next period, an investment of $1 today will result in 1 + k dollars in the next period.

An investor would therefore be indifferent between obtaining $1 in the next period or $1/(1+k) in the current period.

Thus, $1 in the next period is discounted by the

Discount Factor = 1/ (1+k)

to obtain its present value.

Question 9

A manager makes several decisions when designing a supply chain network. For instance:

Answer 9

• Should the firm sign a long-term contract for warehousing space or get space from the spot market as needed?
• What should the firm’s mix of long-term and spot market be in the portfolio of transportation capacity?
• How much capacity should various facilities have? What fraction of this capacity should be flexible?

Question 10

If uncertainty is ignored, a manager will always sign long-term contracts (because they are typically cheaper) and avoid all flexible or backup capacity (because it is more expensive).

Answer 10

Such decisions can hurt the firm, however, if future demand or prices are not as forecast at the time of the deacon.

Question 11

Bellman’s Principle

Answer 11

for any choice of strategy in a given state, the optimal strategy in the next period is the one that is selected if the entire analysis is assumed to begin in the next period.

This principle allows the optimal strategy to be solved in a backward fashion starting at the last period.
Expected future cash flows are discounted back and included in the decision currently under consideration.
The value of the node in period 0 gives the value of the investment, as well as the decisions make during each time period.

Question 12

Uncertainty in demand and economic factors should be included in the financial evaluation of supply chain design decisions.

Answer 12

The inclusion of uncertainty typically decreases the value of rigidity and increases the value of flexibility.

Question 13

Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,

Answer 13

cannot be altered in the short term.

Question 14

Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,

Answer 14

often remain in place for several years.

Question 15

Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,

Answer 15

define the boundaries within which the supply chain must compete.

Question 16

Long-term contracts for both warehousing and transportation requirements will be more effective if

Answer 16

the demand and price of warehousing do not change in the future.
and
the price of warehousing goes up in the future.

Question 17

Short-term contracts for both warehousing and transportation requirements will be more effective

Answer 17

if either demand or the price of warehousing drops in the future.

Question 18

The degree of demand and price uncertainty has

Answer 18

a significant influence on the appropriate portfolio of long- and short-term warehousing space that a firm should carry.

Question 19

Uncertainty of demand and price

Answer 19

drives the value of building flexible production capacity at a plant.

Question 20

If price and demand do vary over time in a global network,

Answer 20

flexible production capacity can be reconfigured to maximize profits in the new environment.

Question 21

A firm may choose to build a flexible global supply chain even in the presence of little demand or supply uncertainty if

Answer 21

uncertainty exists in exchange rates or prices.

Question 22

The present value of a future stream of cash flows is what that stream

Answer 22

is worth in today’s dollars.

Question 23

The process of evaluating the present value of any stream of future cash flows so that management can compare two streams of cash flows in terms of their financial value is

Answer 23

discounted cash flow (DCF) analysis.

Question 24

The present value of future cash flow is found by

Answer 24

using a discount factor.

Question 25

The discount factor used to obtain the present value of money in the next period where k represents the rate of return is

Answer 25

1/(1+k)

Question 26

The rate of return k is also referred to as the

Answer 26

discount rate, hurdle rate, and opportunity cost of capital.

Question 27

The net present value (NPV) of a stream of cash flows is equal to

Answer 27

the sum of all cash flows for all periods being considered discounted by the rate of return for each period.

Question 28

A negative NPV (net present value) for an option indicates that the option will

Answer 28

lose money for the supply chain.

Question 29

The decision with the highest NPV (net present value) will provide a supply chain with

Answer 29

the highest financial return.

Question 30

In reality, demand and prices are

Answer 30

highly uncertain and likely to fluctuate during the life of any supply chain decision.

Question 31

For a global supply chain, exchange rates and inflation are

Answer 31

likely to vary over time in different locations.

Question 32

The binomial representation of uncertainty is based on the assumption that when moving from one period to the next, the value of the underlying factor (such as demand or price)

Answer 32

has only two possible outcomes - up or down.

Question 33

in the commonly used multiplicative binomial, it is assumed that the underlying factor

Answer 33

moves up by a factor u > 1 with probability p.
or
moves down by a factor d < 1 with probability 1 - p.

Question 34

The multiplicative binomial can be used for factors like demand, price, and exchange rates that cannot become negative because it

Answer 34

cannot take on negative values.

Question 35

A logical objection to both the multiplicative and additive binomial is the fact that the underlying factor

Answer 35

takes on only one of two possible values at the end of each period.

Question 36

A decision tree is

Answer 36

a graphic device used to evaluate decisions under uncertainty.

Question 37

Decision tree analysis is based on Bellman’s principle, which states that for any choice of strategy in a given state,

Answer 37

the optimal strategy in the next period is the one that is selected if the entire analysis is assumed to begin in the next period.

Question 38

The first step in decision tree analysis methodology is to

Answer 38

identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated.

Question 39

The last step in decision tree analysis methodology is to

Answer 39

start at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step. Expected cash flows at each step in a given period should be discounted back when included in the previous period.

Question 40

Uncertainty in demand and economic factors should be included in the financial evaluation of supply chain design decisions, because

Answer 40

the inclusion of uncertainty may have a significant impact on this evaluation.

Question 41

Flexibility should be valued by taking into account uncertainty in demand and economic factors. In general, flexibility will tend to

Answer 41

increase in value with an increase in uncertainty.

Question 42

A major factor that makes the decision tree methodology quite powerful is

Answer 42

the choice of discount rate.

Question 43

The appropriate discount rate used in decision tree methodology

Answer 43

should be risk-adjusted and risk may vary by period and decision node.

Question 44

Firms should use simulation for evaluating decisions when

Answer 44

Underlying decision trees are very complex and explicit solutions for the underlying decision tree are difficult to obtain.

Question 45

In a complex decision tree there are

Answer 45

thousands of possible paths that may result from the first period to the last.

Question 46

Simulation models

Answer 46

require a higher setup cost to start and operate compared to decision tree tools.

Question 47

Strategic planning and financial planning

Answer 47

should be combined during supply chain network design.

Question 48

The evaluation of supply chain networks

Answer 48

should use multiple metrics.

Question 49

Financial analysis should be used as

Answer 49

an input to decision making, not as the decision-making process.

Question 50

One of the best ways to speed up the process of financial analysis and arrive at a good decision is to

Answer 50

use estimates backed up by sensitivity analysis when it appears that finding a very accurate input would take an inordinate amount of time.

Question 51

The tailored strategy “Focus on low-cost, decentralized capacity for predictable demand” follows which risk mitigation strategy?

Answer 51

Increase capacity

Question 52

A labor dispute is a risk driver to be considered during network design. What category does a “labor dispute” belong?

Answer 52

Disruptions

Question 53

Simulation methods are very good at evaluating decisions when

Answer 53

there are different forms of uncertainty.

Question 54

The textbook mentions that decision makers should design global supply chain networks considering a portfolio of strategic options including

Answer 54

the option to wait, build excess capacity, build flexible capacity.