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exam2010 - THE UNIVERSITY OF HONG KONG B.ENG LEVEL II/III...

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Unformatted text preview: THE UNIVERSITY OF HONG KONG B.ENG. LEVEL II/III EXAMINATIONS DEPARTMENT OF INDUSTRIAL AND MANUFACTURING SYSTEMS ENGINEERING SUPPLY CHAIN DESIGN AND DEVELOPMENT (IMSE0201) Answer Question 1 in Section A and any two questions in Section B. Electronic Calculators: Candidates may use any calculator which fulfils the following criteria: (a) it should be self-contained, silent, battery-operated and pocket-sized; (b) it should have numeral-display facilities only and should be used only for the purpose of calculation. (c) it should not have any printing device, alphanumeric keyboard, or graphic display; and (d) it should not contain any recorded data or program. It is the candidate's responsibility to ensure that the calculator operates satisfactorily and the candidate must record the name and type of the calculator on the front page of the examination scripts. Lists of permitted/prohibited calculators will not be made available to candidates for reference, and the onus will be on the candidate to ensure that the calculator used will not be in violation of the criteria listed above. SECTION A (Compulsory) Question 1 (50 marks) Silver Battery (SB), a well-established manufacturing company listed in the stock exchange of Hong Kong, specializes in design, manufacturing and marketing of various types of batteries for portable applications. SB’s products have a reputation in the market for being cost efficient. SB manufactures two major product lines: Standard Battery and Specialty Battery. Standard Battery includes all types of standardized batteries sold in supermarkets and retail chain stores. The popular types of these standardized batteries are AA-size, AAA-size, C-size and D-size batteries. SB expects to sell 10 million units of Standard Battery in year 2010. Sales of Standard Battery have grown consistently at 10 percent per year, and this growth rate is expected to continue in the next three years. Specialty Battery products are batteries designed for a wide range of applications, like industrial OEM (original equipment manufacturer), emergency lighting, field instrument, and consumer electronics. SB has the local engineering staff, design expertise and state of the art manufacturing resources needed to meet its customers’ battery application requirements. Annual sales of Specialty Battery products for the current year are expected to be 1 million units. The company anticipates a rapid 30 percent per annum growth rate of this product line in the next three years. The manufacturing of batteries is a competitive industry, and margins on standardized batteries are low. SB has two local competitors who manufacture and sell high-quality standardized batteries at competitive prices. (IMSE0201 — page 1 of 5) The following diagram shows SB's production and distribution network: US China Plant Europe Asia SB has two manufacturing plants, one in China and the other in Korea. Currently, the Hong Kong plant specializes in producing Standard Battery and has a production capacity of 10 million units, while the Korea plant produces both product lines with respective capacities of 5 million units and 2.5 million units for producing Standard Battery and Specialty Battery. SB has two distributions centres (DCs) in Hong Kong and Singapore. The table below gives the delivery lead times in its logistics network. Delivery lead time (days) China Plant Korea Plant Hong Kong DC 3 9 Singapore DC 9 11 Delivery lead time (da s) US market Europe market Asia market Hong Kong DC 10 14 3 Singapore DC 14 10 5 It is estimated that the current daily demand distribution of Specialty Battery in the three markets can be approximated by normal distribution with means and standard deviations shown in the table below. Market Mean Standard deviation US 550 400 Europe 800 670 Asia 1400 1 100 The following two tables give the relevant data of Standard Battery compiled by SB. China Plant Koreas Plant Transportation cost to Hong Kong DC (SS/unit) 5 10 Transportation cost to Singapore DC ($/unit) 15 10 Production cost ($/unit) 20 30 US market Europe market Asia market Transportation cost from Hong Kong DC ($/unit) 20 25 10 (IMSE0201 — page 2 of 5) Transportation cost from Singapore DC ($/unit) 25 20 15 Market demand (in million units) 3.5 3.3 3.2 (a) Identify the order winners of SB’s two product lines. Explain briefly. [5 marks] (b) It is estimated that the inventory turnover ratios of Standard Battery and Specialty (C) ((1) Battery are 20 and 8, respectively. Assuming that each unit of both types of battery requires 0.001 cubic metres storage space, find the average storage space required by each type of batteries in the next three years. [6 marks] SB's logistics department has suggested outsourcing its physical distribution to a third- party logistics service provider. (i) Currently, SB's accounting department currently uses the number of direct labour hour used in the physical distribution of the two product lines as a basis to allocate all indirect costs. What are the advantages and disadvantages of such a basis? Discuss how SB can determine a more accurate estimate for its physical distribution cost. [7 marks] (ii) Discuss the advantages and disadvantages of hiring a third-party logistics provider. [5 marks] Formulate the problem of finding the flow of Standard Battery in SB's production and distribution network in the current year that minimizes the sum of production and transportation costs as a linear program. [10 marks] SB’s logistics manager is studying the optimal arrangement for distributing Specialty Battery. The manager is now evaluating the following two alternatives: Alternative 1 - set up a new distribution centre in Seattle, US and each distribution centre serve only one sales region (Hong Kong serving Asia, Singapore serving Europe and Seattle serving US). Alternative 2 - expand and convert the existing distribution centre either in Hong Kong or Singapore as the centralized DC and close down the other one. (i) Discuss the effects of centralization of inventory on SB's operations. [5 marks] (ii) Suppose that the delivery lead time from the Korea plant to the new distribution centre in Seattle is 2 weeks and the required service level is 95%. Determine the alternative that minimizes the total amount of safety stock needs to be kept in the distribution centre(s). [12 marks] (IMSE0201 — page 3 of 5) SECTION B (Answer any two questions in this section) Question 2 (a) Discuss the major factors contributing to a common phenomenon that in a supply chain a manufacturer faces a much higher level of fluctuating demand when compared with a retailer? [7 marks] (b) Best Food, a local Chinese food maker, produces rice dumplings for coming Dragon Boat Festival at a cost of $10 per dumpling and sells the dumplings to Bright Star, a local restaurant chain, at a price of $16 each. Bright Star can sell each dumpling at a price of $30 to its customers before the festival. Any unsold dumplings can be sold at a price of $10 each after the festival. The demand for the dumplings before the festival is given below: Demand Probability 2000 0.15 4000 0.40 6000 0.25 8000 0.20 (i) Determine the purchase quantity of dumplings that maximizes the expected profit of Bright Star. [6 marks] (ii) Bright Star has proposed the following two alternatives for amending the current sales agreement of dumplings: Alternative 1 - share 20% of its sales revenue of dumplings with Best Food on the condition that it reduces the selling price from $16 to $10 per dumpling. Alternative 2 - share 5% of its sales revenue of dumplings with Best Food on the condition that it buys back any unsold dumplings from Bright Star at a price of$14 each. Which alternative should Best Food take? Why? [12 marks] Question 3 A local apparel retailer operates ten outlets, with more than half of the outlets being located within 5 minutes walking distance from each other. All the outlets are run independently; each outlet manager sends a weekly order to the retailer’s central warehouse to replenish its stock held in his outlet. Currently, the complete inventory approach of stocking all items for immediate customer fulfillment is adopted in all the outlets. The value of inventories kept in the outlets is high compared with the sales revenue due to uncertain demand for many different combinations of pattern, colour and size. The retailer notices that the amount of markdowns to promote the sales of discontinued product inventory is increasing. To reduce the inventories, the retailer has recently installed a standard point-of—sales (POS) system in all its outlets so that each outlet manager can have a real-time monitoring of inventories in his store. However, there is no noticeable drop in inventories after the system installation. The retailer has hired you as the consultant to work with the retailer’s project team on inventory reduction. (IMSE0201 — page 4 of 5) (a) In the first working meeting, some project team members comment that the POS system installed does not help reducing the inventories and the inventories kept in the outlets are not evenly distributed. They often encounter situations that a popular item stocks out in an outlet while many units of the item are stocked in the neighbouring outlets. (i) Why the POS system is not an effective tool to reduce inventories? [4 marks] (ii) One project team member notices that the demand distributions for most items are similar in all the outlets and the outlet managers use the same stock replenishment method. Why are possible root causes for the uneven distribution of inventories? [4 marks] (b) In the meeting, someone has suggested applying concept of risk pooling to reduce inventories. (i) What is risk pooling? Use a simple numerical example to show how it works. [6 marks] (ii) Describe how to apply the concept to reduce the retailer’s inventories. [6 marks] (0) In the subsequent meetings, the current complete inventory approach has been criticized as a main cause for high inventory level. Recommend an alternative inventory approach and briefly describe how to evaluate the effectiveness of the approach. [5 marks] Question 4 (a) Discuss the importance of lead time reduction and effective means for reducing lead time. [7 marks] (b) Discuss a simple framework for determining the most suitable type of standardization for different degrees of modularity of products and processes. [7 marks] (0) A company produces 2 similar products, P1 and P2. The company is currently evaluating the costs and benefits of delayed product differentiation. It is found that the weekly demand of the two products can be approximated by normal distributions. The relevant data on the two products are as follows: Product Average weekly demand Standard deviation weekly demand P1 100 50 P2 200 100 A periodic review policy of review cycle length of 5 weeks is used to control the inventory of both products. The production department of the company has estimated that a generic product, which has all the features of products P1 and P2, can be produced at an additional cost of $5 per unit. The set-up costs for producing products P1 and P2 and the generic product are negligible. Assume that the holding cost of each product is $500 per unit per year, the target service level is 97% and the production lead time of all the products (P1, P2 and the generic one) is 2 weeks. Should the company produce the generic product instead of products P1 and P2? [11 marks] (IMSE0201 — page 5 of 5) — End of Paper — (IMSE0201 — page 6 of 5) Suggested Solutions Question 1 0)) Standard Battery 2010 2011 2012 2013 Demand 10,000,000 11,000,000 12,100,000 13,310,000 Average inventory 500,000 550,000 605,000 665,500 Average storage space required 500 550 605 665.5 Specialty Battery 2010 2011 2012 2013 Demand 1,000,000 1,300,000 1,690,000 2.197,000 Average inventory 125,000 162,500 211,250 274,625 Average storage space required 125.0 162.5 211.25 274.625 ((1) Decision variables: Aij amount of Standard Battery flows from Plant i (i = 1 for China, i = 2 for Korea) to DC j (j = 1 for Hong Kong, j = 2 for Singapore) Bij amount of Standard Battery flows from DC j (j = 1, 2) to market k (k = 1 for US, k = 2 for Europe and k = 3 for Asia) Objective: Minimize the annual total production and transportation cost Minimize 20(A11+A12)+30(A21 : A22) : 5A“ : 15A12 1 10A21 : 10A22 1 20B11 : 25B” : 10B13 : 25B21 + 20B22 + 15B23 Subject to A11 + A12 <= 10,000,000 A21 + A22 <= 5,000,000 Bu B12 1313 2 A11 “ A21 1321 322 323 — A12 A22 Bl] “ 321 = 3,500,000 B12 “ 1322 = 3,300,000 B13 “ 323 = 3,200,000 Aij, Bij >= 0 for all i,j and k (6) (ii) Alternatives Safety stock Alternative 1- Hong Kong serving Asia, 1.64*\/(14)*400+1.64*\/(11)*670+ (IMSE0201 — page 7 of 5) Singapore serving Europe and Seattle 1.64*\/(9)*1100 = 11,511 serving US Alternative 2 — the new centralized 1.64*\/(9)*\/(4002+6702+11002)=6,635 distribution centre in Hong Kong Alternative 2 — the new centralized 1.64*\/(11)*\/(4002+6702+11002)=7,336 distribution centre in Singapore Therefore, SC should set up the centralized DC in Hong Kong. (IMSE0201 — page 8 of 5) Question 2 (b) (i) Q = purchase quantity D = demand For given Q and D, Bright Star's profit = 30*min(D,Q) — 16*Q + lO*max(Q-D,O) Q 2000 4000 6000 8000 Expected profit 28000 50000 56000 52000 Therefore, the optimal purchase quantity is 6000 dumplings. 0)) (ii) Without the amendment, Best F ood's profit =6000*(16-10) = 36000 Alternative 1 For given Q and D, Bright Star's profit = 0.8*30*min(D,Q) —10*Q + lO*max(Q-D,0) Q 2000 4000 6000 8000 Expected profit 28000 51800 64400 70000 Therefore, the optimal purchase quantity is 8000 dumplings For given Q and D, Best Food's profit =(10-10)*Q+ 0.2*30*min(D,Q) For Q = 8000, Best Food's expected profit = $30000 Alternative 2 For given Q and D, Bright Star's profit = 0.95*30*min(D,Q) —16*Q + 14*max(Q-D,0) Q 2000 4000 6000 8000 Expected profit 25000 45650 54700 56500 Therefore, the optimal purchase quantity is 8000 dumplings For given Q and D, Best Food's profit =(16-10)*Q+ 0.05*30*min(D,Q) — (14-10) *max(Q-D,0) For Q = 8000, Best Food's expected profit = $ 43500 Therefore, Best Food should take Alternative 2. Question 4 (C) Average inventory level ofPl = 5*100/2 + l.88*\/(2--5) *50 = 498.7 units Average inventory level of P2 = 5*200/2 + 1.88*\/(2--5) *100 = 997.4 units Average inventory level of the generic product = 5 *(100+200)/2 + 1.88*\/(2+5) *‘l (502+1002) = 1306.1 units Annual holding cost ofPl and P2 = 500*(498.7+997.4) = $748,050 Annual holding cost of the generic product = 500*1306.1 = $653,050 (IMSE0201 — page 9 of 5) Additional annual production cost of the generic product = 5 *300*52 =$78,000 Difference in total cost = 748050 - 653050 — 78000: 17000 Therefore, the company should produce the generic product. (IMSE0201 — page 10 of 5) ...
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