Fluent Essays

1) Review Chapter 6 “Designing Global Supply Chain Networks" power point slides for you will have to write up what you learned from this chapter. PLEASE EXEMPLIFY HIGH LEVEL ANALYSIS WITH YOUR WRITING (i.e. 3 Paragraphs Minimum)   2) Link for Ted Talk: This will be part of you participation points: (i.e. 3 Paragraphs Minimum): Modern-day slavery in supply chains: Dan Viederman | TEDxBerkeley  https://www.youtube.com/watch?v=QIv8tfrQGhY Supply Chain Management: Strategy, Planning, and Operation Seventh Edition Chapter 6 Designing Global Supply Chain Networks Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available) 1 Learning Objectives 6.1 Identify factors that need to be included in total cost when making global sourcing decisions. 6.2 Define relevant risks and explain different strategies that may be used to mitigate risk in global supply chains. 6.3 Understand decision tree methodologies used to evaluate supply chain design decisions under uncertainty. 6.4 Use decision tree methodologies to value flexibility and make onshoring/offshoring decisions under uncertainty. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Impact of Globalization on Supply Chain Networks (1 of 2) Opportunities to simultaneously increase revenues and decrease costs Accompanied by significant additional risk and uncertainty Difference between success and failure often the ability to incorporate suitable risk mitigation into supply chain design Uncertainty of demand and price drives the value of building flexible production capacity Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Impact of Globalization on Supply Chain Networks (2 of 2) Table 6-1 Results of Accenture Survey on Sources of Risk That Affect Global Supply Chain Performance Risk Factors Percentage of Supply Chains Affected Natural disasters 35 Shortage of skilled resources 24 Geopolitical uncertainty 20 Terrorist infiltration of cargo 13 Volatility of fuel prices 37 Currency fluctuation 29 Port operations/custom delays 23 Customer/consumer preference shifts 23 Performance of supply chain partners 38 Logistics capacity/complexity 33 Forecasting/planning accuracy 30 Supplier planning/communication issues 27 Inflexible supply chain technology 21 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (1 of 4) Comparative advantage in global supply chains Quantify the benefits of offshore production along with the reasons Two reasons offshoring fails Focusing exclusively on unit cost rather than total cost Ignoring critical risk factors Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved The Offshoring Decision: Total Cost A global supply chain with offshoring increases the length and duration of information, product, and cash flows The complexity and cost of managing the supply chain can be significantly higher than anticipated Quantify factors and track them over time Big challenges with offshoring is increased risk and its potential impact on cost Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (2 of 4) Table 6-2 Dimensions to Consider When Evaluating Total Cost from Offshoring Performance Dimension Activity Affecting Performance Impact of Offshoring Order communication Order placement More difficult communication Supply chain visibility Scheduling and expediting Poorer visibility Raw material costs Sourcing of raw material Could go either way depending on raw material sourcing Unit cost Production, quality (production and transportation) Labor/fixed costs decrease; quality may suffer Freight costs Transportation modes and quantity Higher freight costs Taxes and tariffs Border crossing Could go either way Supply lead time Order communication, supplier production scheduling, production time, customs, transportation, receiving Lead time increase results in poorer forecasts and higher inventories Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (3 of 4) Table 6-2 [Continued] Performance Dimension Activity Affecting Performance Impact of Offshoring On-time delivery/lead time uncertainty Production, quality, customs, transportation, receiving Poorer on-time delivery and increased uncertainty resulting in higher inventory and lower product availability Minimum order quantity Production, transportation Larger minimum quantities increase inventory Product returns Quality Increased returns likely Inventories Lead times, inventory in transit and production Increase Working capital Inventories and financial reconciliation Increase Hidden costs Order communication, invoicing errors, managing exchange rate risk Higher hidden costs Stockouts Ordering, production, transportation with poorer visibility Increase Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (4 of 4) Key elements of total cost Supplier price Terms Delivery costs Inventory and warehousing Cost of quality Customer duties, value added-taxes, local tax incentives Cost of risk, procurement staff, broker fees, infrastructure, and tooling and mold costs Exchange rate trends and their impact on cost Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Summary of Learning Objective 1 It is critical that global sourcing decisions be made while accounting for total cost. Besides unit cost, total cost should include the impact of global sourcing on freight, inventories, lead time, quality, on-time delivery, minimum order quantity, working capital, and stock- outs. Other factors to be considered include the impact on supply chain visibility, order communication, invoicing errors, and the need for currency hedging. Offshoring typically lowers labor and fixed costs but increases risk, freight costs, and working capital. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (1 of 6) Risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations Critical for global supply chains to be aware of the relevant risk factors and build in suitable mitigation strategies Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (2 of 6) Table 6-3 Supply Chain Risks to Be Considered During Network Design Category Risk Drivers Disruptions Natural disaster, war, terrorism Labor disputes Supplier bankruptcy Delays High capacity utilization at supply source Inflexibility of supply source Poor quality or yield at supply source Systems risk Information infrastructure breakdown System integration or extent of systems being networked Forecast risk Inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base Information distortion Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (3 of 6) Table 6-3 [Continued] Category Risk Drivers Intellectual property risk Vertical integration of supply chain Global outsourcing and markets Procurement risk Exchange-rate risk Price of inputs Fraction purchased from a single source Industry-wide capacity utilization Receivables risk Number of customers Financial strength of customers Inventory risk Rate of product obsolescence Inventory holding cost Product value Demand and supply uncertainty Capacity risk Cost of capacity Capacity flexibility Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (4 of 6) Good network design can play a significant role in mitigating supply chain risk Every mitigation strategy comes at a price and may increase other risks Global supply chains should generally use a combination of rigorously evaluated mitigation strategies along with financial strategies to hedge uncovered risks Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (5 of 6) Table 6-4 Tailored Risk Mitigation Strategies During Network Design Risk Mitigation Strategy Tailored Strategies Increase capacity Focus on low-cost, decentralized capacity for predictable demand. Build centralized capacity for unpredictable demand. Increase decentralization as cost of capacity drops. Get redundant suppliers More redundant supply for high-volume products, less redundancy for low-volume products. Centralize redundancy for low-volume products in a few flexible suppliers. Increase responsiveness Favor cost over responsiveness for commodity products. Favor responsiveness over cost for short–life cycle products. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (6 of 6) Table 6-4 [Continued] Risk Mitigation Strategy Tailored Strategies Increase inventory Decentralize inventory of predictable, lower value products. Centralize inventory of less predictable, higher value products. Increase flexibility Favor cost over flexibility for predictable, high-volume products. Favor flexibility for unpredictable, low-volume products. Centralize flexibility in a few locations if it is expensive. Pool or aggregate demand Increase aggregation as unpredictability grows. Increase source capability Prefer capability over cost for high-value, high-risk products. Favor cost over capability for low-value commodity products. Centralize high capability in flexible source if possible. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Flexibility, Chaining, and Containment (1 of 3) Three broad categories of flexibility New product flexibility Ability to introduce new products into the market at a rapid rate Mix flexibility Ability to produce a variety of products within a short period of time Volume flexibility Ability to operate profitably at different levels of output Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Flexibility, Chaining, and Containment (2 of 3) Figure 6-1 Different Flexibility Configurations in Network Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Flexibility, Chaining, and Containment (3 of 3) As flexibility is increased, the marginal benefit derived from the increased flexibility decreases With demand uncertainty, longer chains pool available capacity Long chains may have higher fixed cost than multiple smaller chains Coordination more difficult across with a single long chain Flexibility and chaining are effective when dealing with demand fluctuation but less effective when dealing with supply disruption Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Summary of Learning Objective 2 The performance of a global supply chain is affected by risk and uncertainty in a number of input factors such as supply, demand, price, exchange rates, and other economic factors. These risks can be mitigated by building suitable flexibility in the supply chain network. Operational strategies that help mitigate risk in global supply chains include carrying excess capacity and inventory, flexible capacity, redundant suppliers, improved responsiveness, and aggregation of demand. Hedging fuel costs and currencies are financial strategies that can help mitigate risk. It is important to keep in mind that no risk mitigation strategy will always pay off. These mitigation strategies are designed to guard against certain extreme states of the world that may arise in an uncertain global environment. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Using Decision Trees (1 of 2) Several different decisions 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? Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Using Decision Trees (2 of 2) Executives need a methodology that allows them to estimate global currency instability, unpredictable commodities costs, uncertainty about customer demand, political or social unrest in key markets, and potential changes in government regulations the uncertainty in demand and price forecast Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Discounted Cash Flows Supply chain decisions should be evaluated as a sequence of cash flows over time Discounted cash flow (D C F) analysis evaluates the present value of any stream of future cash flows and allows managers to compare different cash flow streams in terms of their financial value Based on the time value of money – a dollar today is worth more than a dollar tomorrow Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Discounted Cash Flow Analysis Where C0, C1,…,CT is stream of cash flows over T periods N P V = net present value of this stream K = rate of return Compare N P V of different supply chain design options The option with the highest N P V will provide the greatest financial return Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Trips Logistics Example (1 of 3) Demand = 100,000 units 1,000 sq. ft. of space for every 1,000 units of demand Revenue = $1.22 per unit of demand Sign a three-year lease or obtain warehousing space on the spot market? Three-year lease cost = $1 per sq. ft. Spot market cost = $1.20 per sq. ft. k = 0.1 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Trips Logistics Example (2 of 3) Expected annual profit if Warehousing space is obtained = (100,000 × $1.22) − (100,000 × $1.20) from spot market = $2,000 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Trips Logistics Example (3 of 3) Expected annual profit with Three year lease = (100,000 × $1.22) − (100,000 × $1.00) Blank = $22,000 N P V of signing lease is $60,182 − $5,471 = $54,711 higher than spot market Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Basics of Decision Tree Analysis A decision tree is a graphic device used to evaluate decisions under uncertainty Identify the number and duration of time periods that will be considered (T) Identify factors that will affect the value of the decision and are likely to fluctuate over the next T periods Evaluate decision using a decision tree Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Decision Tree Methodology Identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated Identify factors whose fluctuation will be considered Identify representations of uncertainty for each factor Identify the periodic discount rate k for each period Represent the decision tree with defined states in each period as well as the transition probabilities between states in successive periods Starting at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Decision Tree – Trips Logistics (1 of 3) Three warehouse lease options Get all warehousing space from the spot market as needed Sign a three-year lease for a fixed amount of warehouse space and get additional requirements from the spot market Sign a flexible lease with a minimum charge that allows variable usage of warehouse space up to a limit, with additional requirement from the spot market Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Decision Tree – Trips Logistics (2 of 3) 1000 sq. ft. of warehouse space needed for 1000 units of demand Current demand = 100,000 units per year Binomial uncertainty: Demand can go up by 20% with p = 0.5 or down by 20% with 1 − p = 0.5 Lease price = $1.00 per sq. ft. per year Spot market price = $1.20 per sq. ft. per year Spot prices can go up by 10% with p = 0.5 or down by 10% with 1 − p = 0.5 Revenue = $1.22 per unit of demand k = 0.1 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Decision Tree (1 of 2) Figure 6-2 Decision Tree for Trips Logistics, Considering Demand and Price Fluctuation Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (1 of 9) Analyze the option of not signing a lease and using the spot market Start with Period 2 and calculate the profit at each node For D = 144, p = $1.45, in Period 2: C(D = 144, p = 1.45,2) = 144,000 × 1.45 = $208,800 P(D = 144, p = 1.45,2) = 144,000 × 1.22 − C(D = 144, p = 1.45, 2) = 175,680 − 208,800 = −$33,120 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (2 of 9) Table 6-5 Period 2 Calculations for Spot Market Option Blank Revenue Cost C(D =, p =, 2) Profit P(D =, p =, 2) D = 144, p = 1.45 144,000 × 1.22 144,000 × 1.45 −$33,120 D = 144, p = 1.19 144,000 × 1.22 144,000 × 1.19 $4,320 D = 144, p = 0.97 144,000 × 1.22 144,000 × 0.97 $36,000 D = 96, p = 1.45 96,000 × 1.22 96,000 × 1.45 −$22,080 D = 96, p = 1.19 96,000 × 1.22 96,000 × 1.19 $2,880 D = 96, p = 0.97 96,000 × 1.22 96,000 × 0.97 $24,000 D = 64, p = 1.45 64,000 × 1.22 64,000 × 1.45 −$14,720 D = 64, p = 1.19 64,000 × 1.22 64,000 × 1.19 $1,920 D = 64, p = 0.97 64,000 × 1.22 64,000 × 0.97 $16,000 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (3 of 9) Expected profit at each node in Period 1 is the profit during Period 1 plus the present value of the expected profit in Period 2 Expected profit E P(D =, p =, 1) at a node is the expected profit over all four nodes in Period 2 that may result from this node P V E P(D =, p =, 1) is the present value of this expected profit and P(D =, p =, 1), and the total expected profit, is the sum of the profit in Period 1 and the present value of the expected profit in Period 2 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (4 of 9) From node D = 120, p = $1.32 in Period 1, there are four possible states in Period 2 Evaluate the expected profit in Period 2 over all four states possible from node D = 120, p = $1.32 in Period 1 to be E P(D = 120, p = 1.32,1) = 0.2 × [P(D = 144, p = 1.45,2) + P(D = 144, p = 1.19,2) + P(D = 96, p = 1.45,2) + P(D = 96, p = 1.19,2) = 0.25 × [−33,120 + 4,320 − 22,080 + 2,880] = −$12,000 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (5 of 9) The present value of this expected value in Period 1 is Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (6 of 9) The total expected profit P(D = 120, p = 1.32,1) at node D = 120, p = 1.32 in Period 1 is the sum of the profit in Period 1 at this node, plus the present value of future expected profits possible from this node Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (7 of 9) Table 6-6 Period 1 Calculations for Spot Market Option Node E P(D =, p =, 1) P(D =, p =, 1) = D × 1.22 – D x p + start fraction E P at left parenthesis D =, p =, 1 right parenthesis over left parenthesis 1 + k right parenthesis end fraction D = 120, p = 1.32 −$12,000 −$22,909 D = 120, p = 1.08 $16,000 $32,073 D = 80, p = 1.32 −$8,000 −$15,273 D = 80, p = 1.08 $11,000 $21,382 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (8 of 9) For Period 0, the total profit P(D = 100, p = 120,0) is the sum of the profit in Period 0 and the present value of the expected profit over the four nodes in Period 1 E P(D = 100, p = 1.20,0) = 0.25 × [P(D = 120, p = 1.32,1) + P(D = 120, p = 1.08,1) + P(D = 96, p = 1.32,1) + P(D = 96, p = 1.08,1)] = 0.25 × [−22,909 + 32,073 − 15,273) + 21,382] = $3,818 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Spot Market Option (9 of 9) P(D = 100, p = 1.20,0) = (100,000 × 1.22) − (100,000 × 1.20)+ P V E P(D = 100, p = 1.20,0) = $2,000 + $3,471 = $5,471 Therefore, the expected N P V of not signing the lease and obtaining all warehouse space from the spot market is given by N P V (Spot Market) = $5,471 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Fixed Lease Option (1 of 5) Table 6-7 Period 2 Profit Calculations at Trips Logistics for Fixed Lease Option Node Leased Space Warehouse Space at Spot Price (S) Profit P(D =, p =, 2) = D × 1.22 − (100,000 × 1 + S x p) D = 144, p = 1.45 100,000 sq. ft. 44,000 sq. ft. $11,880 D = 144, p = 1.19 100,000 sq. ft. 44,000 sq. ft. $23,320 D = 144, p = 0.97 100,000 sq. ft. 44,000 sq. ft. $33,000 D = 96, p = 1.45 100,000 sq. ft. 0 sq. ft. $17,120 D = 96, p = 1.19 100,000 sq. ft. 0 sq. ft. $17,120 D = 96, p = 0.97 100,000 sq. ft. 0 sq. ft. $17,120 D = 64, p = 1.45 100,000 sq. ft. 0 sq. ft. −$21,920 D = 64, p = 1.19 100,000 sq. ft. 0 sq. ft. −$21,920 D = 64, p = 0.97 100,000 sq. ft. 0 sq. ft. −$21,920 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Fixed Lease Option (2 of 5) Table 6-8 Period 1 Profit Calculations at Trips Logistics for Fixed Lease Option Node E P(D =, p =, 1) Warehouse Space at Spot Price (S) P(D =, p =, 1) = D x 1.22−(100,000 x 1 + S x p) + E P(D =, p = ,1)(1 + k) D = 120, p = 1.32 0.25 × [P(D = 144, p = 1.45,2) + P(D = 144, p = 1.19,2) + P(D = 96, p = 1.45,2) + P(D = 96, p = 1.19,2)] = 0.25 × (11,880 + 23,320 + 17,120 + 17,120) = $17,360 20,000 $35,782 D = 120, p = 1.08 0.25 × (23,320 + 33,000 + 17,120 + 17,120) = $22,640 20,000 $45,382 D = 80, p = 1.32 0.25 × (17,120 + 17,120−21,920 − 21,920) = −$2,400 0 −$4,582 D = 80, p = 1.08 0.25 × (17,120 + 17,120 − 21,920 −21,920) = −$2,400 0 −$4,582 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Fixed Lease Option (3 of 5) Using the same approach for the lease option, N P V (Lease) = $38,364 E P(D = 100, p = 1.20,0) = 0.25 × [P(D = 120, p = 1.32,1) + P(D = 120, p = 1.08,1) + P(D = 80, p = 1.32,1) + P(D = 80, p = 1.08,1)] = 0.25 × [35,782 + 45,382 − 4,582 − 4,582] = $18,000 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Fixed Lease Option (4 of 5) P(D = 100, p = 1.20,0) = (100,000 × 1.22) − (100,000 × 1) + P V E P(D = 100, p = 1.20,0) = $22,000 + $16,364 = $38,364 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Fixed Lease Option (5 of 5) Recall that when uncertainty was ignored, the N P V for the lease option was $60,182 However, the manager would probably still prefer to sign the three-year lease for 100,000 sq. ft. because this option has the higher expected profit Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Flexible Lease Option (1 of 2) Table 6-9 Period 2 Profit Calculations at Trips Logistics with Flexible Lease Contract Node Warehouse Space at $1 (W) Warehouse Space at Spot Price (S) Profit P(D =, p =, 2) = D × 1.22 − (W× 1 + S × p) D = 144, p = 1.45 100,000 sq. ft. 44,000 sq. ft. $11,880 D = 144, p = 1.19 100,000 sq. ft. 44,000 sq. ft. $23,320 D = 144, p = 0.97 100,000 sq. ft. 44,000 sq. ft. $33,000 D = 96, p = 1.45 96,000 sq. ft. 0 sq. ft. $21,120 D = 96, p = 1.19 96,000 sq. ft. 0 sq. ft. $21,120 D = 96, p = 0.97 96,000 sq. ft. 0 sq. ft. $21,120 D = 64, p = 1.45 64,000 sq. ft. 0 sq. ft. $14,080 D = 64, p = 1.19 64,000 sq. ft. 0 sq. ft. $14,080 D = 64, p = 0.97 64,000 sq. ft. 0 sq. ft. $14,080 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Evaluating the Flexible Lease Option (2 of 2) Table 6-10 Period 1 Profit Calculations at Trips Logistics with Flexible Lease Contract Node E P(D =, p =, 1) Warehouse Space at $1 (W) Warehouse Space at Spot Price (S) P(D =, p =, 1) = D × 1.22 (W x 1 + S x p) + E P(D =, p = ,1)(1 + k) D = 120, p = 1.32 0.25 × (11,880 + 23,320 + 21,120 + 21,120) = $19,360 100,000 20,000 $37,600 D = 120, p = 1.08 0.25 × (23,320 + 33,000 + 21,120 + 21,120) = $24,640 100,000 20,000 $47,200 D = 80, p = 1.32 0.25 × (21,120 + 21,120 + 14,080 + 14,080) = $17,600 80,000 0 $33,600 D = 80, p = 1.08 0.25 × (21,920 + 21,920 + 14,080 + 14,080) = $17,600 80,000 0 $33,600 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Decision Tree – Trips Logistics (3 of 3) Table 6-11 Comparison of Different Lease Options for Trips Logistics Option Value All warehouse space from the spot market $5,471 Lease 100,000 sq. ft. for three years $38,364 Flexible lease to use between 60,000 and 100,000 sq. ft. $46,545 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Summary of Learning Objective 3 Uncertainty in demand and economic factors should be included in the financial evaluation of supply chain design decisions. Decision trees can be used to evaluate supply chain decisions under uncertainty. Uncertainty along different dimensions over the evaluation period is represented as a tree with each node corresponding to a possible scenario. Starting at the last period of the evaluation interval, the decision tree analysis works back to Period 0, identifying the optimal decision and the expected cash flows at each step. The inclusion of uncertainty typically decreases the value of rigidity and increases the value of flexibility. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Onshore or Offshore The value of flexibility under uncertainty D-Solar demand in Europe = 100,000 panels per year Each panel sells for €70 Annual demand may increase by 20 percent with probability 0.8 or decrease by 20 percent with probability 0.2 Build a plant in Europe or China with a rated capacity of 120,000 panels Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved D-Solar Decision (1 of 21) Table 6-12 Fixed and Variable Production Costs for D-Solar European Plant European Plant Chinese Plant Chinese Plant Fixed Cost (euro) Variable Cost (euro) Fixed Cost (yuan) Variable Cost (yuan) 1 million/year 40/panel 8 million/year 340/panel Table 6-13 Expected Future Demand and Exchange Rate Period 1 Period 1 Period 2 Period 2 Demand Exchange Rate Demand Exchange Rate 112,000 8.64 yuan/euro 125,440 8.2944 yuan/euro Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved D-Solar Decision (2 of 21) European plant has greater volume flexibility Increase or decrease production between 60,000 to 150,000 panels Chinese plant has limited volume flexibility Can produce between 100,000 and 130,000 panels Chinese plant will have a variable cost for 100,000 panels and will lose sales if demand increases above 130,000 panels Yuan, currently 9 yuan/euro, expected to rise 10%, probability of 0.7 or drop 10%, probability of 0.3 Sourcing decision over the next three years Discount rate k = 0.1 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved D-Solar Decision (3 of 21) Period 0 profits = (100,000 × 70) – 1,000,000 − (100,000 × 40) = €2,000,000 Period 1 profits = (112,000 × 70) − 1,000,000 − (112,000 × 40) = €2,360,000 Period 2 profits = (125,440 × 70) − 1,000,000 − (125,440 × 40) = €2,763,200 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved D-Solar Decision (4 of 21) Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Decision Tree (2 of 2) Figure 6-3 Decision Tree for D-Solar Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved D-Solar Decision (5 of 21) Period 2 evaluation – onshore Revenue from the manufacture and sale of 144,000 panels = 144,000 × 70 = €10,080,000 Fixed + variable cost of onshore plant = 1,000,000 + (144,000 × 40) = €6,760,000 P(D = 144, E = 10.89,2) = 10,080,000 − 6,760,000 = €3,320,000 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved D-Solar Decision (6 of 21) Table 6-14 Period 2 Profits for Onshore Option D E Sales Production Cost Quantity Revenue (euro) Cost (euro) Profit (euro) 144 10.89 144,000 144,000 10,080,000 6,760,000 3,320,000 144 8.91 144,000 144,000 10,080,000 6,760,000 3,320,000 96 10.89 96,000 96,000 6,720,000 4,840,000 1,880,000 96 8.91 96,000 96,000 6,720,000 4,840,000 1,880,000 144 7.29 144,000 144,000 10,080,000 6,760,000 3,320,000 96 7.29 96,000 96,000 6,720,000 4,840,000 1,880,000 64 10.89 64,000 64,000 4,480,000 3,560,000 920,000 64 8.91 64,000 …