AD680 Global Supply Chains
Problem Set #2: Inventory Aggregation
Your friend Jane, an entrepreneur living in Boston, needs your help. Jane is considering opening an online store
to sell a product that will have a logo of one of the top universities in Boston. She is very secretive at this point
and will not tell you the type of product – just that it comes in five colors and will contain one of the 8 logos (i.e.,
there are 40 different configurations of the product). She asked another friend to make demand forecasts. The
forecast indicates level demand over the year, with the average weekly demand and the standard deviation of
the weekly demand forecast shown in Table 1. Demand will be independent across products but demand will
be positively correlated over time.
Table 1: Demand Forecast
Jane has also contracted with an offshore manufacturing facility to produce the products. Their lead-time
agreement specifies that ordered products will be received 12 weeks after the order is placed. Jane will place
orders on a weekly basis (once per week). Jane has the option of printing the logo herself (after a customer
places an order) or having the offshore supplier print the logo. She estimates her average printing cost to be
$0.75 per unit. Unfortunately, because the supplier’s manufacturing processes are typically setup to include
printing, there will be no decrease in supplier production costs if Jane prints the logos. The offshore production
costs per unit are shown in Table 2.
Table 2: Production Costs
Jane needs help with inventory planning. In particular, she has two options in mind. The first option will consist
of holding final product inventory for all 40 of the product configurations. She likes this option because she
would be able to immediately ship products to customers. The second option would consist of holding inventory
of the five product colors, and printing the university logos herself before shipment to customers. She likes this
option because it simplifies inventory requirements.
For this assignment, create an Excel spreadsheet to evaluate the two options. The comparison should compare:
(a) the annual holding cost of safety stock for the “no aggregation” option, where all 40 final product
configurations are held in inventory, and (b) the annual holding cost of safety stock plus the increased printing
cost for the “aggregation” option, where inventory is held by color so that only 5 different items are held in
inventory. When analyzing the two alternatives, use a target product fill rate of 99%.
After explaining inventory holding costs to Jane, you agree to use an annual holding rate of 35% for your
analysis because jane will need to rent warehouse space. However, this value is uncertain. So, you agree to use
a graphical display to show her how the options compare if the annual holding rate is changed over a range from
15% to 50%.
The assessment of this work will be based on the accuracy and clarity of your spreadsheet and the graph.
Submit one Excel file, using a file name Lastname_PS2.
Red Blue White Green Gray
Harvard 11.4 11.4 11.2 10.8 8.6
MIT 13.2 14.8 14.0 14.4 13.2
Tufts 5.0 6.0 4.2 7.2 4.0
Brandeis 5.2 4.8 6.4 8.0 5.2
BC 15.8 11.2 12.6 14.4 15.0
BU 13.0 12.0 15.0 17.8 14.2
Northeastern 8.8 9.2 6.6 8.0 6.2
U-Mass 15.0 14.8 9.8 11.2 9.2
The Forecast
Weekly Forecast Information
Red Blue White Green Gray
4.5 4.5 4.5 4.3 3.5
5.3 5.9 5.6 5.9 5.3
2.1 2.4 1.6 2.9 1.6
2.1 1.9 2.7 3.2 2.1
6.4 4.5 5.1 5.9 6.1
5.3 4.8 6.1 7.2 5.6
3.5 3.7 2.7 3.2 2.4
6.1 5.9 4.0 4.5 3.7
Weekly Forecast Information
Forecast Standard Deviation
Red Blue White Green Gray
$20.00 $18.00 $17.00 $18.00 $19.00
Offshore Poduction Costs
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