Solutions_to_Homework__3

Solutions_to_Homework__3 - Management Science &...

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Spring, 2008 Homework #3 Due: Beginning of class, April 29 1. What to say to general management Assume that you have just been made head of supply chain management at your company. You have secured a meeting with general management, and have one hour to describe your plans, how they will benefit the company, and the support you will need from general management to implement them. Briefly summarize the key sources of supply chain uncertainty your company’s operational and financial performance is exposed to, how you would explain them to management, and one or two alternatives for managing them you might propose in order to give management a feeling for the company’s options. Questions: a) The company you work for sells high margin products that require large, long lead time R&D and capacity investments, for example pharmaceuticals or semiconductors. Large, long lead time fixed costs leave the company’s performance exposed to the demand for and the sales price of its products far in the future. Asset-liability matching these exposures is very difficult, since it is rare that customers will have a comparable business risk that would give them with the incentive to enter into a forward-dated, long term contract. For example, even for a generic commodity such as electricity, as discussed in class suppliers frequently struggle to find customers interested in contracts similar in length to the useful life of a power plant, typically 20-30 years. When R&D is involved there is the added risk of its ultimate success, the potential that similar or better competing products will come along, changes in technology will occur that make it irrelevant, etc. With asset-liability matching difficult or impossible, the best you can offer management is 1) high quality analysis to quantify and communicate the risks of the business, and 2) the development of strategies to allow necessary investments to be made in stages, with risk “front-loaded” if possible, and as much cost as possible delayed until the high risk early stages have been completed. b) The company you work for sells high margin fashion products with short product lifecycles, and its largest cost component is marketing. Due to the short lifecycles of the company’s products, most if not all of a product’s
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Solutions_to_Homework__3 - Management Science &...

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