1 Draw a decision tree reflecting the uncertainty over the next two periods. Identify each node in terms of demand and exchange rate and the transition probabilities.

Please explain how this decision tree is made up, please provide a solution with an explanation of the first task

Chapter 6 . Designing Global Supply Chain Networks 177 $ gives a variable cost of under $8.50/unit. The Chinese The short lead time of the local supplier allows supplier, however, has a long lead time, forcing Forever Forever Young to keep bringing product in a little bit at a Young to pick an order size well before the start of the time based on actual sales. Thus, if the local supplier is season. This does not leave the company any flexibility used, the company is able to meet all demand in each if actual demand differs from the order size. period without having any unsold inventory or lost sales. A local supplier has come to management with a In other words, the final order from the local supplier proposal to supply product at a cost of $10/unit but do so will exactly equal the demand observed by Forever quickly enough that Forever Young will be able to Young. make supply in the season exactly match demand. Management is concerned about the higher variable cost but finds the flexibility of the onshore supplier very A Potential Hybrid Strategy attractive. The challenge is to value the responsiveness The local supplier has also offered another proposal that provided by the local supplier. would allow Forever Young to use both suppliers, each playing a different role. The Chinese supplier would Uncertainties Faced by Forever Young produce a base quantity for the season and the local supplier would cover any shortfalls that result. The short To better compare the two suppliers, management lead time of the local supplier would ensure that no sales identifies demand and exchange rates as the two major are lost. In other words, if Forever Young committed to a uncertainties faced by the company. Over each of the base load of 900 units with the Chinese supplier in a next two periods (assume them to be a year each), given period and demand was 900 units or less, nothing demand may go up by 10 percent with a probability of would be ordered from the local supplier. If demand, 0.5 or down by 10 percent with a probability of 0.5. however, was larger than 900 units (say 1,100), the Demand in the current period was 1,000 units. Similarly. shortfall of 200 units would be supplied by the local over each of the next two periods, the yuan may supplier. Under a hybrid strategy, the local supplier strengthen by 5 percent with a probability of 0.5 or would end up supplying only a small fraction of the weaken by 5 percent with a probability of 0.5. The season's demand. For this extra flexibility and reduced exchange rate in the current period was 6.5 yuan/$. volumes, however, the local supplier proposes to charge $1 1/unit if she is used as part of a hybrid strategy Ordering Policies with the Two Suppliers Questions Given the long lead time of the offshore supplier, Forever Young commits to an order before observing 1. Draw a decision tree reflecting the uncertainty over the next two periods, Identify each node in terms of demand any demand signal. Given the demand uncertainty over and exchange rate and the transition probabilities. the next two periods and the fact that the margin from 2. If management at Forever Young is to pick only one of the each unit (margin of about $11.50) is higher than the two suppliers, which one would you recommend? What is loss if the unit remains unsold at the end of the season the NPV of expected profit over the next two periods for (loss of about $8.50), management decides to commit to each of the two choices? Assume a discount factor of an order that is somewhat higher than expected demand. & = 0.1 per period. Given that expected demand is 1,000 units over each of 3. What do you think about the hybrid approach? Is it the next two periods, management decides to order worth paying the local supplier extra to use her as part 1,040 units from the Chinese supplier for each of the of a hybrid strategy? For the hybrid approach, assume next two periods. If demand in a period turns out to be that management will order a base load of 900 units from the Chinese supplier for each of the two periods. higher than 1,040 units, Forever Young will sell 1,040 making up any shortfall in each period at the local units. However, if demand turns out to be lower than supplier, Evaluate the NPV of expected profits for the 1,040, the company will have left over product for which hybrid option assuming a discount factor of k = 0.1 per it will not be able to recover any revenue. period.CASE STUDY The Sourcing Decision at Forever Young Forever Young is a retailer of trendy and low-cost apparel in the United States. The company divides the year into four sales seasons of about three months each and brings in new merchandise for each season. The company has historically outsourced production to China given the lower costs. Sourcing from the Chinese supplier costs 55 yuan/unit (inclusive of all delivery costs), which at the current exchange rate of 6.5 yuan!