analysis
...al with demand uncertainty by developing confidence intervals for forecasts. Standard deviations, also known as standard error of the forecasts, deals with uncertainties by developing best-estimate forecasts and the ranges within which the actual data are likely to fall (http://www.trade10.com/standard_deviati.htm) and can be used to measure the variability or volatility of any data set (N. Gaither, 2004). Another issue to be concerned is the number of standard deviations (this is given by the case study it is about twice the standard deviation of the buying committee’s forecasts for that style. According to Appendix B of the text book (N. Gaither, 2004), a number of standard deviation out from the mean of the distribution of about 2 implies that there is only 5 to 10 percent probability (2.5 percent to 5 percent in either tail) of exceeding the limits by chance (Supply Chains). Gail: Upper limit = 1017 + 388 = 1405 units Lower limit = 1017 - 388 = 629 units Isis: Upper limit = 1042 + 646 = 1688 units Lower limit = 1042 - 646 = 396 units Entice: Upper limit = 1358 + 496 = 1854 units Lower limit = 1358 - 496 = 862 units Assault: Upper limit = 2525 + 680 = 3205 units Lower limit = 2525 - 680 = 1845 units Teri: Upper limit = 1100 + 762 = 1862 units Lower limit = 1100 - 762 = 338 units Electra: Upper limit = 2150 + 807 = 2957 units Lower limit = 2150 - 807 = 1343 units Stephanie: Upper limit = 1113 + 1048 = 2161 units Lower limit = 1113 - 1048 = 65 units Seduced: Upper limit = 4017 + 1113 = 5130 units Lower limit = 4017 - 1113 = 2904 units Anita: Upper limit = 3296 + 2094 = 5390 units Lower limit = 3296 - 2094 = 1202 units Daphne: Upper limit = 2383 + 1394 = 3777 units Lower limit = 2383 - 1394 = 989 units These figures suggests that there is a 90 percent probability that the annual sales will be between 629 and 1405 units for Gail style’s parkas; 396 units and 1688 units for Isis style’s parkas, 862 units and 1854 unit for Entice, 1845 units and 3205 units for Assault, 338 and 1862 units for Teri, 1343 and 2957 units for Electra, 65 and 2161 units for Stephanie, 2904 and 5130 units for Seduced, 1202 and 5390 units for Anita, 989 and 3777 units for Daphne. There is only a 10 percent probability that the sales will fall outside these limits (Analytics Operations Engineering, Inc). These numbers is the demand uncertainty (N. Gaither, 2004) and the risk associated with early production of each style can be estimated by the lower limit. We work out a sum of lower limit of 10573 parkas which fall within the capacity of the early production of 1000 parkas. Therefore, the risks can be estimated before the second production of the year. 3. Which of the 10styles should be made in Hong Kong and which should be produced in China? The key is to minimize costs and risks as well as to ensure several constraints are met. Gail(1017@110) + Isis(1042@99) + Entice(1358@80) + Assault(2525@90) + Teri(1100@123) + Electra(2150@173) + Stephanie(1113@133) + Seduced(4017@73) + Anita(3296@93) + Daphne(2383@148) The two constraints to be meet is described as followings: 1. Half to be produced in China, the rest to be produced in H.K (10000 units each). 2. Meet minimum order quantity per style (600 units in H.K. and 1200 unit in china) To meet restraints on the minimum order quantity of 1200 units in same style for parkas produced in China, style Gail, Isis, Teri and Stephanie which fall below 1200 units are not considered to be produced in China. (1017 + 1042 + 1100 + 1113)/10000. The sum of Gail, Isis, Teri, Stephanie styles’ parkas uses up 42% of the Honk Kong factories’ capacity. It is assumed that the estimated profit made by each parka is at the same percentage of their wholesale price within a factory. Therefore, a parka with higher selling price can generally make more profit than that with lower price and the degree of increasing seems to be higher in China’s Factory than that in a H.K. factory. In order words, in order to maximize profits, parkas with higher price should be produced in the factories in China. For this reason, Electra ($173), Daphne ($148), Anita ($93), should be produced in China. 2150 + 2383 + 3296 = 7829 The rest of the capacity in China would be used up by producing 1925 units of style Assault and 246 units of Entice. The reason of producing 1925 units of Assault is that a minimum of 600 units or order quantity have to be met for parkas produced in H.K. Therefore, with consideration of the above factors, Gail, Isis, Teri, Assault, Stephanie Seduced should be produced in Hong Kong. Electra, Daphne, Anita, Assault, Entice should be produced in China (note that 1925 parkas of Assault style is produced in China and the rest in H.K). Weakness of this answer is that the risks associated with late production (due to delayed lead time and production time) to meet quota has been ignored. Therefore, no hedging is in place in case of incident. 4. What are the long-term costs, advantages and risks of producing in China versus Hong Kong? At present, the company is taking advantages of competitive production cost in china over Hong Kong. However, this might not last long as China’s situation is in threat to be changed and this can be explained in the following aspects. Shift of comparative advantage At this stage, the company enjoys the cheap production cost provided by China. However, according to the product cycle theory, this comparative advantage of factor costs tends to be exploiting over time as production expands. Labor cost in fact become more expensive due to a rise in demand of labor resulting from the increasing number of factories built in China. In addition, these increasing factories raise production in China and turn the country to be a net exporter who makes a surplus in its balance of payment account. In theory, at this stage of the product cycle, there should be a shift of location of production and export to others countries that provide cheap labor. However it is not the case which is happening in China at the moment. (International business 7ed) Currency convertibility China’s dollar, Reminbi, is not fully convertible and therefore the value of Reminbi is not following the movement of the actual supply and demand curve. This explains why the huge trade surplus has been made while the labor cost staying the same and no trend can be seen that a shift of location of production and export is likely to happen. Ideally, it is believed that countries should all seek for full currency convertibility. However, it requires a national, unified financial system to cope with the stress that is the result of greater exchange rate flexibility. In addition, such system should have a large net exposure to currency risk and should have strong incentives for developing the hedging instruments and forward markets. Rise in resources price Moreover, primary commodities are subject to change in price based on the supply and ...