Chapter 6 solution

2. Unipart, a manufacturer of auto parts, is considering two B2B marketplaces to purchase its MRO supplies. Both marketplaces offer a full line of supplies at very similar prices for products and shipping. Both provide similar service levels and lead mes. However, their fee structures are quite different. The first marketplace, Parts4u.com, sells all of its products with a 5 percent commission tacked on top of the price of the product (not including shipping). AllMRO.com’s pricing is based on a subscripon fee of $10 million that must be paid up front for a two- year period and a commission of 1 percent on each transacon’s product price. Unipart spends about $150 million on MRO supplies each year, although this varies with their ulizaon. Next year will likely be a strong year, in which high ulizaon will keep MRO spending at $150 million. However, there is a 25 percent chance that spending will drop by 10 percent. The second year, there is a 50 percent chance that the spending level will stay where it was in the first year and a 50 percent chance that it will drop by another 10 percent. Unipart uses a discount rate of 20 percent. Assume all costs are incurred at the beginning of each year (so Year 1 costs are incurred now and Year 2 costs are incurred in a year). From which B2B marketplace should Unipart buy its parts? To determine which B2B marketplace Unipart should buy its parts from, we need to compare the present value of costs associated with each option. Let's first calculate the costs associated with each option: Option 1: parts4u.com  Commission rate: 5% on product price (not including shipping)  Cost of MRO supplies: $150 million  Cost of commission: 5% x $150 million = $7.5 million Option 2: allmro.com  Subscription fee: $10 million (paid upfront for 2-year period)  Commission rate: 1% on product price (not including shipping)  Cost of MRO supplies: $150 million in Year 1, $135 million in Year 2 (if spending drops by 10%)  Cost of subscription fee: $10 million Now, let's calculate the present value of each option using a discount rate of 20%: Option 1: parts4u.com  Year 1 cost: $7.5 million  Year 2 cost (if spending drops by 10%): $6.75 million  Present value of Year 1 cost: $7.5 million / 1.2^1 = $6.25 million  Present value of Year 2 cost: $6.75 million / 1.2^2 = $4.43 million  Total present value cost: $6.25 million + $4.43 million = $10.68 million Explanation: The calculated present value cost of $10.68 million represents the total cost of Option 1 (parts4u.com) over the two-year period, discounted at a rate of 20% per year. This

value takes into account the commission cost of 5% on the product price, which amounts to $7.5 million in Year 1. In Year 2, there is a 25% chance of spending dropping by 10%, which would result in a commission cost of $6.75 million. These future costs are discounted to their present value using the discount rate of 20% to account for the time value of money. Therefore, the total present value cost of Option 1 is the sum of the present value of the costs incurred in Year 1 and Year 2, which amounts to $10.68 million. Option 2: allmro.com Year 1 cost: $10 million + (1% x $150 million) = $11.5 million Year 2 cost (if spending drops by 10%): $1.35 million + (1% x $135 million) = $2.85 million Present value of Year 1 cost: $11.5 million / 1.2^1 = $9.58 million Present value of Year 2 cost: $2.85 million / 1.2^2 = $1.88 million Total present value cost: $9.58 million + $1.88 million = $11.46 million Based on these calculations, Unipart should choose parts4u.com as it has the lower present value cost of $10.68 million, compared to allmro.com's present value cost of $11.46 million. Explanation: The calculated present value cost of $11.46 million represents the total cost of Option 2 (allmro.com) over the two-year period, discounted at a rate of 20% per year. This value takes into account the subscription fee of $10 million paid upfront in Year 1, as well as the commission cost of 1% on the product price, which amounts to $1.5 million in Year 1 and $1.35 million in Year 2 if spending drops by 10%. These future costs are discounted to their present value using the discount rate of 20% to account for the time value of money. Therefore, the total present value cost of Option 2 is the sum of the present value of the costs incurred in Year 1 and Year 2, which amounts to $11.46 million. Since Option 1 (parts4u.com) has a lower present value cost of $10.68 million, Unipart should choose this option to minimize its costs. 3. Alphacap, a manufacturer of electronic components, is trying to select a single supplier for the raw materials that go into its main product, the doublecap. This is a new capacitor that is used by cellular phone manufacturers to protect microprocessors from power spikes. Two companies can provide the necessary materials—MulChem and Mixemat. MulChem has a solid reputaon for its products and charges a higher price on account of its reliability of supply and delivery. MulChem dedicates plant capacity to each customer, and therefore supply is ensured. This allows MulChem to charge $1.20 for the raw materials used in each doublecap. Mixemat is a small raw materials supplier that has limited capacity but charges only $0.90 for a unit’s worth of raw materials. Its reliability of supply, however, is in queson. Mixemat does not have enough capacity to supply all its customers all the me. This means that orders to Mixemat are not guaranteed. In

Options Available Multichem Mixemat On the s Price per DoubleCap in USD 1.20 0.90 2 Discounted Rate for AlphaCap @ 20% (USD) 0.96 0.72 2 Production Capacity in Units Meets demand 90000 - Demand Scenario - No. of Units Scenario 1 Scenario 2 No. of Units - High Demand No. of Units - Low Demand Current Year Sale by AlphaCap (Units made) 100000 100000 - Next Year 1 110000 100000 - Next Year 2 132000 (20% Rise) 90000 (10% Drop) - Costing Costing in USD - complete batch Multichem M High Demand Scenario Low Demand Scenario High Demand Scenario Current Year - - - Next Year 1 105600 (@0.96 USD / Unit) 96000 (@0.96 USD / Unit) 144800 (@0.72 USD / Unit for 90K Units, 4USD for 20K Units) Next Year 2 126720 (@0.96 USD / Unit) 86400 (@0.96 USD / Unit) 232800 (@0.72 USD / Unit for 90K Units, 4USD for 42K Units) In a high demand scenario, AlphaCap should select Multichem which will prove beneficial on the procurement cost against Mixemat; since Multichem can suffice the total demand @ 0.96 USD flat for all required units.  However if AlphaCap chooses Mixemat, it needs to procure 90K units @ 0.72 USD per unit and the next 10K units will be procured @ 4 USD per piece in a high demand scenario. This means a higher cost by 39200 USD (144800-105600 USD) in year 1 and 106080 USD (232800- 126720 USD) in year 2. This would make Multichem a safe and economically viable option. However in a low demand scenario, AlphaCap should rather choose Mixemat over Multichem which will be more economically viable option.  This is so because the cost of procurement for supplier Multichem is higher to Mixemat by 0.24 USD (0.96-0.72 USD; discounted rate for Alphacap) which makes overall cost reduced in case of Mixemat in a low / poor demand scenario. Even procuring 10K units "on the spot" in first year after 90K units are sufficed from Mixemat will prove to be more viable than procuring it from Multichem at a higher rate. In this case AlphaCap will be saving 11200 USD in year 1 (96000-84800 USD) and 21600 USD in Year 2 (86400-64800 USD) by choosing Mixemat over Multichem.

However there is an uncertainty to market dynamics always and the forecast to the same is still untapped in the complete picture. This basically means that there is no explicit data to support the fact that demand would be low or high necessarily in coming two years. Substantiating this fact by evaluating various economic factors and studying dependent variables for the final product would have made the assumptions on demand and supply much more concrete. After assuming that 75% chances of demand is likely to be on a higher side, Multichem will be better choice. Thanks 4. Bell Computer is reaching a crossroads. This PC manufacturer has been growing at a rapid rate, causing problems for its operaons as it tries to keep up with the surging demand. Bell execuves can plainly see that within the next half year, the systems used to coordinate its supply chain are going to fall apart because they will not be able to handle the volume of Bell projects they will have. To solve this problem, Bell has brought in two supply chain soware companies that have made proposals on systems that could cover the volume and the complexity of tasks Bell needs to have handled. These two soware companies are offering different types of products, however. The first company, SCSoware, proposes a system for which Bell will purchase a license. This will allow Bell to use the soware as long as it wants. However, Bell will be responsible for maintaining this soware, which will require significant resources. The second company, SC–ASP, proposes that Bell pay a subscripon fee on a monthly basis for SC– ASP to host Bell’s supply chain applicaons on SC–ASP’s machines. Bell employees will access informaon and analysis via a web browser. Informaon will be fed automacally from the ASP servers to the Bell servers whenever necessary. Bell will connue to pay the monthly fee for the soware, but all maintenance will be performed by SC–ASP. How should Bell go about making a decision regarding which soware company to choose? What specific pieces of informaon does Bell need to know (both about the soware and about the future condions Bell will experience) to make a decision? What are some of the qualitave issues Bell must think about when making this decision? Bell Computer is facing a critical decision regarding its supply chain management system. Here's a structured approach to help Bell make an informed decision: Explanation: ### 1. **Cost Analysis**:

- **Support**: What kind of support do both companies offer? Is there 24/7 support? ### 4. **Future Conditions**: - **Flexibility**: If Bell's needs change, how easy is it to change or upgrade the system? - **Exit Strategy**: If Bell decides to switch providers or systems in the future, how easy is it to migrate data and processes? ### 5. **Qualitative Issues**: - **Vendor Reputation**: What's the reputation of both SCSoftware and SC–ASP in the industry? - **User Experience**: How user-friendly is the software? This can impact training costs and user adoption rates. - **Strategic Alignment**: Does the solution align with Bell's long-term strategic goals? - **Risk**: What are the potential risks associated with each option? For instance, with SC–ASP, there's a dependency on an external provider. 6. **Excel Analysis**: - Create a spreadsheet comparing the total cost of ownership (TCO) for both options over a set period (e.g., 5 years). Explanation: - Factor in all costs, including initial, ongoing, and potential future costs. - Use the spreadsheet to forecast potential ROI for each option based on projected benefits (e.g., increased efficiency, reduced downtime). - Include qualitative factors as weighted scores. For instance, give each qualitative factor a weight based on its importance, and score each software option. Sum the scores to get a total qualitative score for each option. By systematically analyzing both options from multiple angles, Bell can make a well-informed decision that aligns with its operational needs, budget, and long-term strategic goals.

5 Reliable is a cell phone manufacturer serving the Asian and North American markets. Current annual demand of its product in Asia is 2 million, whereas the demand in North America is 4 million. Over the next two years, demand in Asia is expected to go up either by 50 percent, with a probability of 0.7, or by 20 percent, with a probability of 0.3. Over the same period, demand in North America is expected to go up by 10 percent, with a probability of 0.5, or go down 10 percent, with a probability of 0.5. Reliable currently has a producon facility in Asia with a capacity of 2.4 million units per year and a facility in North America with a capacity of 4.2 million per year. The variable producon cost per phone in Asia is $15, and the variable cost per phone in North America is $17. It costs $3 to ship a phone between the two markets. Each phone sells for $40 in both markets. Reliable is debang whether to add 2 million units or 1.5 million units of capacity to the Asia plant. The larger plant increase will cost $18 million, whereas the smaller addion will cost $15 million. Assume that Reliable uses a discount factor of 10 percent. What do you recommend? To analyze the situation and make a recommendation, let's break down the information provided step by step: 1. Current Demand: - Asia: 2 million units - North America: 4 million units 2. Expected Demand Changes: - Asia: - 70% probability of a 50% increase in demand (1.5 million units) - 30% probability of a 20% increase in demand (0.4 million units) - North America: - 50% probability of a 10% increase in demand (0.4 million units) - 50% probability of a 10% decrease in demand (-0.4 million units) 3. Production Capacity: - Asia: 2.4 million units per year - North America: 4.2 million units per year 4. Costs and Prices: - Variable production cost per phone in Asia: $15 - Variable cost per phone in North America: $17 - Shipping cost per phone between markets: $3 - Selling price per phone: $40 5. Plant Capacity Expansion: - Option 1: Add 2 million units of capacity to the Asia plant for $18 million.

- Expected demand increase in North America: (50% * 10% + 50% * -10%) = 0% increase = 0 million units - Total expected demand: 2 million + 0.82 million units = 2.82 million units Profit calculation: - Revenue: 2.82 million units * $40 = $112.8 million - Cost: - Variable production cost in Asia: 2.82 million units * $15 = $42.3 million - Shipping cost: 2.82 million units * $3 = $8.46 million - Additional cost per unit due to capacity expansion: 0.82 million units * $9 = $7.38 million - Total cost: $42.3 million + $8.46 million + $7.38 million = $58.14 million - Profit: Revenue - Cost = $112.8 million - $58.14 million = $54.66 million Option 2: Expected Profit - Expected demand increase in Asia: (70% * 50% + 30% * 20%) = 41% increase = 0.41 * 2 million units = 0.82 million units - Expected demand increase in North America: (50% * 10% + 50% * -10%) = 0% increase = 0 million units - Total expected demand: 2 million + 0.82 million units = 2.82 million units Profit calculation: - Revenue: 2.82 million units * $40 = $112.8 million - Cost: - Variable production cost in Asia: 2.82 million units * $15 = $42.3 million - Shipping cost: 2.82 million units * $3 = $8.46 million - Additional cost per unit due to capacity expansion: 0.82 million units * $10 = $8.2 million - Total cost: $42.3 million + $8.46 million + $8.2 million = $58.96 million - Profit: Revenue - Cost = $112.8 million - $58.96 million = $53.84 million Based on the expected profits, we can see that Option 1 (adding 2 million units of capacity) has a higher expected profit of $54.66 million compared to Option 2's $53.84 million. 6. A European apparel manufacturer has producon facilies in Italy and China to serve its European market, where annual demand is for 1.9 million units. Demand is expected to stay at the same level over the foreseeable future. Each facility has a capacity of 1 million units per year. With the current exchange rates, the producon and distribuon cost from Italy is 10 euro per unit, whereas the producon and distribuon cost from China is 7 euro. Over each of the next three years, the Chinese currency could rise relave to the euro by 15 percent with a probability of 0.5 or drop by 5 percent with a probability of 0.5. An opon being considered is to shut down 0.5 million units of capacity in Italy and move it to China at a one-me cost of 2 million euro. Assume a discount factor of 10 percent over the three years. Do you recommend this opon?

The first step in evaluating this decision is to calculate the current annual costs of production and distribution. With 1.9 million units in annual demand and current production capacities evenly split between Italy and China, 950,000 units are produced in each facility. So the current cost is: Italy: 950,000 units * 10 euro/unit = 9.5 million euro China: 950,000 units * 7 euro/unit = 6.65 million euro Total cost = 9.5 million euro + 6.65 million euro = 16.15 million euro If the company moves 0.5 million units of capacity from Italy to China, the new production will be: Italy: 500,000 units China: 1.4 million units The cost of this move is 2 million euro. We need to estimate the expected costs over the next three years. Yearly costs in the new scenario will be: Italy: 500,000 units * 10 euro/unit = 5 million euro China (with no change in currency value): 1.4 million units * 7 euro/unit = 9.8 million euro So, without currency fluctuations, the total cost = 5 million euro (Italy) + 9.8 million euro (China) = 14.8 million euro/year If we take into account the possible currency fluctuation: Expected cost increase if the currency rises by 15%: 0.5 * 15% * 9.8 million euro = 735,000 euro Expected cost decrease if the currency drops by 5%: 0.5 * 5% * 9.8 million euro = 245,000 euro The net expected change in cost due to currency fluctuations is 735,000 euro - 245,000 euro = 490,000 euro. So the total expected cost per year after adjusting for the possibility of currency fluctuations = 14.8 million euro + 490,000 euro = 15.29 million euro. The expected cost savings per year compared to the current scenario = 16.15 million euro - 15.29 million euro = 860,000 euro. Over three years, this amounts to 860,000 euro/year * 3 years = 2.58 million euro. Discounting these savings over the three years using a discount factor of 10% gives a present value of savings = 2.58 million euro / (1 + 0.10)^3 = 2.07 million euro. As the cost of moving the capacity (2 million euro) is less than the discounted expected savings (2.07 million euro), it could be financially beneficial to move the capacity from Italy to China. From a purely financial and quantitative perspective, it is recommended to move the 0.5 million units of capacity from Italy to China, as the discounted expected savings (2.07 million euro) over the next three years exceed the cost of this move (2 million euro). However, this decision should also consider qualitative factors like supply chain risks, customer perceptions, political stability, and potential impact on lead times or service levels. A more diversified strategy of maintaining