Hello, I have a question regarding - Supply Chain Management 5th Edition Chapter 6 Problem 2CS.

The problem statement, shown below, discusses the use of a Chinese Supplier and a Local supplier. Question 1 requires the following: "Draw a decision tree reflecting the uncertainy over the next two periods. Identify each node in terms of demand and exchange rate and the transition probabilities."

The question clearly states "Identify each node in terms of demand and exchange rate". The problem statement explains that "Demand in the current period was 1,000 units". However the decision tree shown below has not identified demand as 1,000 units in Period 0, but instead uses the ordering policy of the company 1,040 units. - Why does the decision tree (shown below) use 1040 units in Period 0? If the ordering policy of the company is meant to be used in the decision tree analysis, then the problem statement clearly states that 1040 units are ordered in Periods 1 and 2, not period 0. See: "Given that expected demand is 1,000 units over each of the next two periods, management decides to order 1,040 units from the chinese supplier for each of the next two periods".

Also, the second decision tree shown in the Step by Step solution (see underneath problem statement) identifies the local supplier cost ($10/unit) in Period 0. Why is this? The problem statement requires us to" Identify each node in terms of demand and exchange rate" - The local supplier cost is not the exchange rate, nor does it appear to be required in Question 1.

If this is correct, how is the transitional probabilities for local supplier costs calculated between nodes in the second decision tree? The problem statement does not state how local supplier costs will fluctuate over time.

Thank you in advance.

CASE STUDY The Sourcing Decision at Forever Young Forever Young is a retailer of trendy and low-cost The company has historically outsourced production to apparel in the United States. The company divides the China given the lower costs. Sourcing from the Chinese year into four sales seasons of about three months each supplier costs 55 yuan/unit (inclusive of all delivery and brings in new merchandise for each season costs), which at the current exchange rate of 6.5 yuan/ 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 $10/unit but do so exactly equal the demand observed by Forever quickly enough that Forever Young w be able to Young make supply in the season exactly match demand. Management is concerned about the highe r variable cost A Potential Hybrid Strategy but finds the flexibility of the onshore supplier very attractive. The challenge is to value the responsiveness The local supplier has also offered another proposal that provided by the local supplier. would allow Forever Young to use both suppliers, each playing a different role. The Chinese supplier would produce a base quantity for the season and the local Uncertainties Faced by Forever Young supplier would cover any shortfalls that result. The short To better compare the two suppliers. management ead time of the local supplier would ensure that no sale identifies demand and exchange rates as the two major are lost. In other words, if Forever Young committed to a uncertainties faced by the company. Over each of the base load of 900 units with the Chinese supplier in a next two periods assume them to be a year each), given period and demand was 900 units or less, nothing demand may go up by 10 percent with a probability of would be ordered from the local supplier. If demand 0.5 or down by 10 percent with a probability of 0.5 however, was larger than 900 units (say 1,100), the Demand in the current period was 1,000 units. Similarly, shortfa of 200 units would be supplied by the local over each of the next two periods, the yuan may supplier. Under a hybrid strategy, the local supplier strengthen by 5 percent with a probability of 0.5 or would end up supplying only a small fraction of the weaken by 5 percent with a probability of 0.5. The season's demand. For this extra flexibility and reduced exchange rate in the current period was 6.5 yuan/$ volumes, however, the local supplier proposes to charge $11/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 1. Draw a decision tree reflecting the uncertainty over the Forever Young commits to an order before observing 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? Wha oss if the unit remains unsold at the end of the season the NPV of expected profit over the next two periods for each of the two choices? Assume a discount factor of (oss of about $8.50), management decide to commit to 0.1 per period. an order that is somewhat higher than expected demand 3. What do you think about the hybrid approach? Is it Given that expected demand is 1,000 units over each of worth paying the local supplier extra to use her as part the next two periods, management decides o order For the hybrid approach, assume of a hybrid strate 040 units from the Chinese supplier for each of the ha order a base load of 900 units management w next two periods. If demand in a period turns out to be from the Chinese supplier for each of the two periods. higher than 1,040 units, Forever Young wi sell 1,040 making up any shortfa 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 040, the company will have left over product for which hybrid option assuming a discount factor of k 0.1 per not be able to recover any revenue t W period