Professional Documents
Culture Documents
1-1
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1-3
Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago
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1-5
Outline
What is a Supply Chain? Decision Phases in a Supply Chain Process View of a Supply Chain The Importance of Supply Chain Flows Examples of Supply Chains
1-6
1-7
Plastic Producer
Tenneco Packaging
Paper Manufacturer
Timber Industry
1-10
Customer
Funds
1-11
1-12
1-14
1-15
Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse must take into account market uncertainty
2007 Pearson Education 1-16
1-17
Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon
1-18
1-20
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
2007 Pearson Education 1-21
PUSH PROCESSES
PULL PROCESSES
1-24
The relative proportion of push and pull processes can have an impact on supply chain performance
1-25
Integration among the above three macro processes is critical for effective and successful supply chain management
1-26
7-Eleven
What factors influence decisions of opening and closing stores? Location of stores? Why has 7-Eleven chosen off-site preparation of fresh food? Why does 7-Eleven discourage direct store delivery from vendors? Where are distribution centers located and how many stores does each center serve? How are stores assigned to distribution centers? Why does 7-Eleven combine fresh food shipments by temperature? What point of sale data does 7-Eleven gather and what information is made available to store managers? How should information systems be structured?
1-29
Toyota
Where should plants be located, what degree of flexibility should each have, and what capacity should each have? Should plants be able to produce for all markets? How should markets be allocated to plants? What kind of flexibility should be built into the distribution system? How should this flexible investment be valued? What actions may be taken during product design to facilitate this flexibility?
2007 Pearson Education 1-31
1-32
Amazon.com
Why is Amazon building more warehouses as it grows? How many warehouses should it have and where should they be located? What advantages does selling books via the Internet provide? Are there disadvantages? Why does Amazon stock bestsellers while buying other titles from distributors? Does an Internet channel provide greater value to a bookseller like Borders or to an Internet-only company like Amazon? Should traditional booksellers like Borders integrate e-commerce into their current supply? For what products does the e-commerce channel offer the greatest benefits? What characterizes these products?
2007 Pearson Education 1-33
Outline
Competitive and supply chain strategies Achieving strategic fit Expanding strategic scope
2-2
2-3
Finance, Accounting, Information Technology, Human Resources New Product Development Marketing Operations and Sales
Distribution
Service
2-5
2-6
A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy Example of strategic fit -- Dell
2007 Pearson Education 2-7
2-8
2-9
2-10
2-11
2-12
Variety of products required increases Demand per product becomes more disaggregated Number of channels increases Rate of innovation increases Required service level increases Total customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand
2-13
2-14
Correlation Between Implied Demand Uncertainty and Other Attributes (Table 2.2)
Attribute Product margin Avg. forecast error Avg. stockout rate Low Implied Uncertainty Low 10% 1%-2% High Implied Uncertainty High 40%-100% 10%-40% 10%-25%
2-15
2-16
Low
Cost
High
2007 Pearson Education
Low
2-18
2-19
Highly efficient
Somewhat efficient
Somewhat responsive
Highly responsive
Hanes apparel
Dell
2-20
Responsiveness spectrum
Uncertain demand
2-21
2-22
2-24
2-27
2-28
Five categories:
Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope
2-29
2-30
2-31
3-1
Outline
Drivers of supply chain performance A framework for structuring drivers Facilities Inventory Transportation Information Sourcing Pricing Obstacles to achieving fit
2007 Pearson Education 3-2
Inform ation
Pricing
3-4
Facilities
Role in the supply chain
the where of the supply chain manufacturing or storage (warehouses)
3-5
Capacity (flexibility versus efficiency) Manufacturing methodology (product focused versus process focused) Warehousing methodology (SKU storage, job lot storage, cross-docking) Overall trade-off: Responsiveness versus efficiency
2007 Pearson Education 3-6
Inventory
Role in the supply chain Role in the competitive strategy Components of inventory decisions
3-7
3-9
Safety inventory
inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales
Seasonal inventory
inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production
Transportation
Role in the supply chain Role in the competitive strategy Components of transportation decisions
3-11
3-12
3-13
3-14
Information
Role in the supply chain Role in the competitive strategy Components of information decisions
3-15
3-16
3-17
Sourcing
Role in the supply chain Role in the competitive strategy Components of sourcing decisions
3-19
3-20
3-21
3-22
Pricing
Role in the supply chain Role in the competitive strategy Components of pricing decisions
3-23
3-24
3-25
3-26
3-27
Summary
What are the major drivers of supply chain performance? What is the role of each driver in creating strategic fit between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)? What are the major obstacles to achieving strategic fit? In the remainder of the course, we will learn how to make decisions with respect to these drivers in order to achieve strategic fit and surmount these obstacles
2007 Pearson Education 3-28
Outline
The
Role of Distribution in the Supply Chain Factors Influencing Distribution Network Design Design Options for a Distribution Network The Value of Distributors in the Supply Chain Distribution Networks in Practice Summary of Learning Objectives
4-2
the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain Distribution directly affects cost and the customer experience and therefore drives profitability Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness Examples: Wal-Mart, Dell, Proctor & Gamble, Grainger
4-3
Distribution
network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service
4-4
Response Time
2004 Prentice-Hall, Inc. 4-6
Cost
Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers
Low Low
2004 Prentice-Hall, Inc.
Response Time
Hi
4-7
Number of facilities
2004 Prentice-Hall, Inc. 4-8
Number of facilities
2004 Prentice-Hall, Inc. 4-9
Number of facilities
2004 Prentice-Hall, Inc. 4-10
Total Costs
Number of Facilities
2004 Prentice-Hall, Inc. 4-11
Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4.5)
Response Time
Number of Facilities
2004 Prentice-Hall, Inc. 4-12
Storage with Direct Shipping Manufacturer Storage with Direct Shipping and InTransit Merge Distributor Storage with Carrier Delivery Distributor Storage with Last Mile Delivery Manufacturer or Distributor Storage with Consumer Pickup Retail Storage with Consumer Pickup Selecting a Distribution Network Design
2004 Prentice-Hall, Inc. 4-13
Retailer
Customers
Retailer
Customers
Distributor/Retailer Warehouse
Retailer
Cross Dock DC
Pickup Sites
4-18
Response Time Product Variety Product Availability Customer Experience Order Visibility Returnability Inventory Transportation Facility & Handling Information 2004 Prentice-Hall, Inc.
1 4 4 1 to 5 1 1 4 1 6 1
4 1 1 4 5 5 1 4 1 4
4 1 1 3 4 5 1 3 2 4
3 2 2 2 3 4 2 2 3 3
2 3 3 1 2 3 3 5 4 2
4 1 1 5 6 2 1 1 5 5
4-19
+2 +1 -1 -2 +1 -1 +2 -1 -2
-2 -1 +1 +2 -1 +2 -2 +2 +1
-1 0 0 +1 -1 +1 -2 0 +2
0 +1 +1 0 +2 +1 -1 +1 +2
+1 0 -1 -2 +1 0 +1 0 +2
-1 0 +1 +1 0 -2 -2 +2 -1
4-20
Consumer Goods in India Distributing MRO Products (Grainger) Distributing Electronic Components
4-21
ownership structure of the distribution network can have as big as an impact as the type of distribution network The choice of a distribution network has very longterm consequences Consider whether an exclusive distribution strategy is advantageous Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers
2004 Prentice-Hall, Inc. 4-22
are the key factors to be considered when designing the distribution network? What are the strengths and weaknesses of various distribution options? What roles do distributors play in the supply chain?
4-23
5-1
Outline
A strategic framework for facility location Multi-echelon networks Gravity methods for location Plant location models
5-2
5-3
Cost
Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers
Low Low
2007 Pearson Education
Response Time
Hi
5-5
Number of Facilities
2007 Pearson Education 5-6
Where inventory needs to be for a one week order response time - typical results --> 1 DC
Customer DC
Where inventory needs to be for a 5 day order response time - typical results --> 2 DCs
Customer DC
Where inventory needs to be for a 3 day order response time - typical results --> 5 DCs
Customer DC
Where inventory needs to be for a next day order response time - typical results --> 13 DCs
Customer DC
Where inventory needs to be for a same day / next day order response time - typical results --> 26 DCs
Customer DC
Transportation
Number of facilities
2007 Pearson Education 5-12
Cost of Operations
Number of Facilities
2007 Pearson Education 5-13
REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK
AVAILABLE INFRASTRUCTURE
5-14
Conventional Network
Vendor DC Materials DC Finished Goods DC Customer DC Customer Store Customer Store Plant Warehouse Components DC Vendor DC Final Assembly
2007 Pearson Education
Vendor DC
Finished Goods DC
Customer DC
Customer Store
5-15
5-16
dn : Distance to delivery
location n
Min
d nDnF n
( x x n) + ( y y n) D nx F d x= D nF d D ny F d y= D nF d
n
n =1
n =1
n =1
n =1
5-17
s.t .
x
i =1 m
ij
D K
, j = 1,..., m , i = 1,..., n
x
j =1
ij
ij
5-19
f y + c x
i i i =1 j =1 ij
ij
s.t.
x = D , j = 1,..., m
i =1 n ij j
x K y , i = 1,..., n
j =1 m ij i i
y k ; y {0,1}
i =1 i i
2007 Pearson Education 5-20
f y + D j c x
i i i =1 j =1 ij
ij
s.t.
x
i =1 n j =1
ij
= 1, j = 1,..., m
D j x K y , i = 1,..., n
ij i i
xij , y {0,1}
i
5-21
Outline
The Impact of Uncertainty on Network Design Decisions Discounted Cash Flow Analysis Representations of Uncertainty Evaluating Network Design Decisions Using Decision Trees AM Tires: Evaluation of Supply Chain Design Decisions Under Uncertainty Making Supply Chain Decisions Under Uncertainty in Practice Summary of Learning Objectives
2007 Pearson Education 6-2
C 0 , C1 ,..., CT is a stream of cash flows over T periods NPV = the net present va lue of this stream of cash flows k = rate of return
Compare NPV of different supply chain design options The option with the highest NPV will provide the greatest financial return
2007 Pearson Education 6-5
6-7
The NPV of signing the lease is $54,711 higher; therefore, the manager decides to sign the lease However, uncertainty in demand and costs may cause the manager to rethink his decision
2007 Pearson Education 6-8
Representations of Uncertainty
Binomial Representation of Uncertainty Other Representations of Uncertainty
6-9
6-11
In general, for the additive binomial, period T has all possible outcomes P+tu-(T-t)d, for t=0, 1, , T
6-12
6-16
Trips Logistics
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
2007 Pearson Education 6-17
0.25
D=100 p=$1.20
0.25
D=80 p=$1.32
0.25
D=80 p=$1.08
6-18
C(D=144, p=1.45,2) = 144,000x1.45 = $208,800 P(D=144, p =1.45,2) = 144,000x1.22 C(D=144,p=1.45,2) = 175,680-208,800 = -$33,120 Profit for other nodes are evaluated in a similar fashion (shown in Table 6.1)
2007 Pearson Education 6-19
6-24
6-26
6-27
Period=1
P(D=120, p=1.32, 1)=120000x1.22 - (100000x1+20000x1.32) + 0.25[11880+23320+21120+21120]/1.1 = 37600 (Table 6-6)
Period=0
P(D=100, p=1.2, 0) = 100000x1.22 (100000x1) + 0.25x[37600+47718+33600+33873] = 56725 = NPV(flexible lease) Net profit = 56725 10000 = 46725
2007 Pearson Education 6-28
6-29
U.S. Expected Demand = 100,000; Mexico Expected Demand = 50,000 1US$ = 9 pesos Demand goes up or down by 20 percent with probability 0.5 and exchange rate goes up or down by 25 per cent with probability 0.5.
2007 Pearson Education 6-31
AM Tires
Period 0 Period 1 Period 2
RU=144 RM = 72 E=14.06 RU=120 RM = 60 E=11.25 RU=120 RM = 60 E=6.75 RU=120 RM = 40 E=11.25 RU=100 RM=50 E=9 RU=120 RM = 40 E=6.75 RU=80 RM = 60 E=11.25 RU=80 RM = 60 E=6.75 RU=80 RM = 40 E=11.25 RU=80 RM = 40 E=6.75 RU=144 RM = 72 E=8.44 RU=144 RM = 48 E=14.06 RU=144 RM = 48 E=8.44 RU=96 RM = 72 E=14.06 RU=96 RM = 72 E=8.44 RU=96 RM = 48 E=14.06 RU=96 RM = 48 E=8.44
6-32
AM Tires
Four possible capacity scenarios: Both dedicated Both flexible U.S. flexible, Mexico dedicated U.S. dedicated, Mexico flexible For each node, solve the demand allocation model:
Plants U.S. Mexico
2007 Pearson Education
100,000 100,000
6,000 50,000
6-35
6-37
Outline
The role of forecasting in a supply chain Characteristics of forecasts Components of forecasts and forecasting methods Basic approach to demand forecasting Time series forecasting methods Measures of forecast error Forecasting demand at Tahoe Salt Forecasting in practice
7-2
Characteristics of Forecasts
Forecasts are always wrong. Should include expected value and measure of error. Long-term forecasts are less accurate than shortterm forecasts (forecast horizon is important) Aggregate forecasts are more accurate than disaggregate forecasts
7-4
Forecasting Methods
Qualitative: primarily subjective; rely on judgment and opinion Time Series: use historical demand only
Static Adaptive
Causal: use the relationship between demand and some other factor to develop forecast Simulation
Imitate consumer choices that give rise to demand Can combine time series and causal methods
2007 Pearson Education 7-5
Components of an Observation
Observed demand (O) = Systematic component (S) + Random component (R)
Level (current deseasonalized demand) Trend (growth or decline in demand) Seasonality (predictable seasonal fluctuation) Systematic component: Expected value of demand Random component: The part of the forecast that deviates from the systematic component Forecast error: difference between forecast and actual demand
2007 Pearson Education 7-6
Demand Dt 8000 13000 23000 34000 10000 18000 23000 38000 12000 13000 32000 41000
7-7
Forecasting Methods
Static Adaptive
Moving average Simple exponential smoothing Holts model (with trend) Winters model (with trend and seasonality)
7-9
7-10
7-11
Static Methods
Assume a mixed model: Systematic component = (level + trend)(seasonal factor) Ft+l = [L + (t + l)T]St+l = forecast in period t for demand in period t + l L = estimate of level for period 0 T = estimate of trend St = estimate of seasonal factor for period t Dt = actual demand in period t Ft = forecast of demand in period t
2007 Pearson Education 7-12
Static Methods
Estimating level and trend Estimating seasonal factors
7-13
7-14
Demand Dt 8000 13000 23000 34000 10000 18000 23000 38000 12000 13000 32000 41000
7-15
7-17
Deseasonalizing Demand
Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower integer
7-18
Deseasonalizing Demand
For the example, p = 4 is even For t = 3: D3 = {D1 + D5 + Sum(i=2 to 4) [2Di]}/8 = {8000+10000+[(2)(13000)+(2)(23000)+(2)(34000)]}/8 = 19750 D4 = {D2 + D6 + Sum(i=3 to 5) [2Di]}/8 = {13000+18000+[(2)(23000)+(2)(34000)+(2)(10000)]/8 = 20625
7-19
Deseasonalizing Demand
Then include trend Dt = L + tT where Dt = deseasonalized demand in period t L = level (deseasonalized demand at period 0) T = trend (rate of growth of deseasonalized demand) Trend is determined by linear regression using deseasonalized demand as the dependent variable and period as the independent variable (can be done in Excel) In the example, L = 18,439 and T = 524
2007 Pearson Education 7-20
7-21
7-22
7-23
7-25
Adaptive Forecasting
The estimates of level, trend, and seasonality are adjusted after each demand observation General steps in adaptive forecasting Moving average Simple exponential smoothing Trend-corrected exponential smoothing (Holts model) Trend- and seasonality-corrected exponential smoothing (Winters model)
2007 Pearson Education 7-26
Moving Average
Used when demand has no observable trend or seasonality Systematic component of demand = level The level in period t is the average demand over the last N periods (the N-period moving average) Current forecast for all future periods is the same and is based on the current estimate of the level Lt = (Dt + Dt-1 + + Dt-N+1) / N Ft+1 = Lt and Ft+n = Lt After observing the demand for period t+1, revise the estimates as follows: Lt+1 = (Dt+1 + Dt + + Dt-N+2) / N Ft+2 = Lt+1
2007 Pearson Education 7-29
7-33
7-35
7-39
7-41
Forecasting in Practice
Collaborate in building forecasts The value of data depends on where you are in the supply chain Be sure to distinguish between demand and sales
7-42
7-43
Outline
Responding to predictable variability in a supply chain Managing supply Managing demand Implementing solutions to predictable variability in practice
9-2
Managing Supply
Managing capacity
Time flexibility from workforce Use of seasonal workforce Use of subcontracting Use of dual facilities dedicated and flexible Designing product flexibility into production processes
Managing inventory
Using common components across multiple products Building inventory of high demand or predictable demand products
2007 Pearson Education 9-4
Inventory/Capacity Trade-off
Leveling capacity forces inventory to build up in anticipation of seasonal variation in demand Carrying low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season
9-5
Managing Demand
Promotion Pricing Timing of promotion and pricing changes is important Demand increases can result from a combination of three factors:
Market growth (increased sales, increased market size) Stealing share (increased sales, same market size) Forward buying (same sales, same market size)
9-6
Demand Management
Pricing and aggregate planning must be done jointly Factors affecting discount timing
Product margin: Impact of higher margin ($40 instead of $31) Consumption: Changing fraction of increase coming from forward buy (100% increase in consumption instead of 10% increase) Forward buy
9-7
Peak (April) Discount: 100% Increase in Consumption, Sale Price = $40 ($39)
Month January February March April May June Demand Forecast 1,600 3,000 3,200 8,480 1,760 1,760
9-12
9-13
9-14
9-15
9-16
Outline
The Role of Revenue Management in the Supply Chain Revenue Management for Multiple Customer Segments Revenue Management for Perishable Assets Revenue Management for Seasonable Demand Revenue Management for Bulk and Spot Customers Using Revenue Management in Practice Summary of Learning Objectives
2007 Pearson Education 15-2
15-5
15-8
15-9
15-10
Example 15.5
Cost of wasted capacity = Cw = $10 per dress Cost of capacity shortage = Cs = $5 per dress s* = Cw / (Cw + Cs) = 10/(10+5) = 0.667 c = 800; c = 400 O* = NORMINV(s*, c,c) = NORMINV(0.667,800,400) = 973 If the mean is 15% of the booking level and the coefficient of variation is 0.5, then the optimal overbooking level is the solution of the following equation: O = NORMINV(0.667,0.15(5000+O),0.075(5000+O)) Using Excel Solver, O* = 1,115
2007 Pearson Education 15-12
15-13
15-16
Example 15.6
Bulk contract cost = cB = $10,000 per million units Spot market cost = cS = $12,500 per million units = 10 million units = 4 million units p* = (cS cB) / cS = (12,500 10,000) / 12,500 = 0.2 Q* = NORMINV(p*,,) = NORMINV(0.2,10,4) = 6.63 The manufacturer should sign a long-term bulk contract for 6.63 million units per month and purchase any transportation capacity beyond that on the spot market
2007 Pearson Education 15-17
15-19
Outline
Role of Cycle Inventory in a Supply Chain Economies of Scale to Exploit Fixed Costs Economies of Scale to Exploit Quantity Discounts Short-Term Discounting: Trade Promotions Managing Multi-Echelon Cycle Inventory Estimating Cycle Inventory-Related Costs in Practice
10-2
Inventory profile: plot of the inventory level over time (Fig. 10.1) Cycle inventory = Q/2 (depends directly on lot size) Average flow time = Avg inventory / Avg flow rate Average flow time from cycle inventory = Q/(2D)
2007 Pearson Education 10-4
10-5
Primary role of cycle inventory is to allow different stages to purchase product in lot sizes that minimize the sum of material, ordering, and holding costs Ideally, cycle inventory decisions should consider costs across the entire supply chain, but in practice, each stage generally makes its own supply chain decisions increases total cycle inventory and total costs in the supply chain
2007 Pearson Education 10-6
10-8
H = hC 2 DS Q* = H n* = 2S DH
10-9
Example 10.1
Demand, D = 12,000 computers per year d = 1000 computers/month Unit cost, C = $500 Holding cost fraction, h = 0.2 Fixed cost, S = $4,000/order Q* = Sqrt[(2)(12000)(4000)/(0.2)(500)] = 980 computers Cycle inventory = Q/2 = 490 Flow time = Q/2d = 980/(2)(1000) = 0.49 month Reorder interval, T = 0.98 month
2007 Pearson Education 10-10
10-11
Example 10.2
If desired lot size = Q* = 200 units, what would S have to be? D = 12000 units C = $500 h = 0.2 Use EOQ equation and solve for S: S = [hC(Q*)2]/2D = [(0.2)(500)(200)2]/(2)(12000) = $166.67 To reduce optimal lot size by a factor of k, the fixed order cost must be reduced by a factor of k2
2007 Pearson Education 10-12
Can also have a single delivery coming from multiple suppliers or a single truck delivering to multiple retailers Aggregating across products, retailers, or suppliers in a single order allows for a reduction in lot size for individual products because fixed ordering and transportation costs are now spread across multiple products, retailers, or suppliers
2007 Pearson Education 10-14
10-17
Delivery Options
No Aggregation: Each product ordered separately Complete Aggregation: All products delivered on each truck Tailored Aggregation: Selected subsets of products on each truck
10-18
Annual order cost = 9.75 $7,000 = $68,250 Annual total cost = $136,528
2007 Pearson Education 10-21
10-22
10-23
Quantity Discounts
Lot size based
All units Marginal unit
Volume based How should buyer react? What are appropriate discounting schemes?
10-24
10-26
$3
$2.96
$2.92
10-30
10-31
10-32
Pass some fixed cost to retailer (enough that he raises order size from 6,324 to 9,165)
2007 Pearson Education 10-33
10-35
10-36
What is the impact on the behavior of the retailer and on the performance of the supply chain? Retailer has two primary options in response to a promotion:
Pass through some or all of the promotion to customers to spur sales Purchase in greater quantity during promotion period to take advantage of temporary price reduction, but pass through very little of savings to customers
2007 Pearson Education 10-37
CQ dD = + (C - d )h C - d
Forward buy = Qd - Q*
10-38
Qd = Forward buy =
2007 Pearson Education 10-39
Retailer only passes through half the promotion discount and demand increases by only 7.5%
2007 Pearson Education 10-40
Trade Promotions
When a manufacturer offers a promotion, the goal for the manufacturer is to take actions (countermeasures) to discourage forward buying in the supply chain Counter measures
EDLP Scan based promotions Customer coupons
10-41
Order cost
10-44
Outline
The role of safety inventory in a supply chain Determining the appropriate level of safety inventory Impact of supply uncertainty on safety inventory Impact of aggregation on safety inventory Impact of replenishment policies on safety inventory Managing safety inventory in a multi-echelon supply chain Estimating and managing safety inventory in practice
11-3
11-4
11-6
11-7
Higher levels of uncertainty require higher levels of safety inventory given a particular desired level of product availability Higher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty
2007 Pearson Education 11-8
11-10
Replenishment Policies
Replenishment policy: decisions regarding when to reorder and how much to reorder Continuous review: inventory is continuously monitored and an order of size Q is placed when the inventory level reaches the reorder point ROP Periodic review: inventory is checked at regular (periodic) intervals and an order is placed to raise the inventory to a specified threshold (the order-up-to level)
2007 Pearson Education 11-12
= DL
1
ss = F S (CSL) L ROP = D L + ss
= L D L
CSL = F ( ROP, D L , L )
Average Inventory = Q/2 + ss
11-13
11-14
=
L
L = (500) 2 = 707
Cycle service level, CSL = F(DL + ss, DL, L) = = NORMDIST (DL + ss, DL, L) = NORMDIST(6000,5000,707,1)
= 0.92 (This value can also be determined from a Normal probability distribution table)
2007 Pearson Education 11-15
Fill Rate
Proportion of customer demand satisfied from stock Stockout occurs when the demand during lead time exceeds the reorder point ESC is the expected shortage per cycle (average demand in excess of reorder point in each replenishment cycle) ss is the safety inventory Q is the order quantity
11-18
ss ss ESC = 250 = ss 1 F S + L f S L L
Evaluating Safety Inventory Given Fill Rate (try different values of ss)
F ill R ate 97.5% 98.0% 98.5% 99.0% 99.5%
2007 Pearson Education
= DL DL
= L + D L D
2
2 L
11-23
= L + D sL L
2 D 2 2
2 2 2
11-25
11-26
Impact of Aggregation
D = D
C i =1
2007 Pearson Education
C D C L
i =1 C 1
2 i
ss = F s (CSL) L
= L D
C
11-27
Impact of Aggregation
If number of independent stocking locations decreases by n, the expected level of safety inventory will be reduced by square root of n (square root law) Many e-commerce retailers attempt to take advantage of aggregation (Amazon) compared to bricks and mortar retailers (Borders) Aggregation has two major disadvantages:
Increase in response time to customer order Increase in transportation cost to customer Some e-commerce firms (such as Amazon) have reduced aggregation to mitigate these disadvantages
2007 Pearson Education 11-30
Information Centralization
Virtual aggregation Information system that allows access to current inventory records in all warehouses from each warehouse Most orders are filled from closest warehouse In case of a stockout, another warehouse can fill the order Better responsiveness, lower transportation cost, higher product availability, but reduced safety inventory Examples: McMaster-Carr, Gap, Wal-Mart
2007 Pearson Education 11-31
Specialization
Stock all items in each location or stock different items at different locations?
Different products may have different demands in different locations (e.g., snow shovels) There can be benefits from aggregation
Cleaner 1,000 100 0.1 $30 $15,792,000 0.0025 $394,770 $3,849,308 $0.046
11-33
Product Substitution
Substitution: use of one product to satisfy the demand for another product Manufacturer-driven one-way substitution Customer-driven two-way substitution
11-34
Component Commonality
Using common components in a variety of different products Can be an effective approach to exploit aggregation and reduce component inventories
11-35
11-36
Postponement
The ability of a supply chain to delay product differentiation or customization until closer to the time the product is sold Goal is to have common components in the supply chain for most of the push phase and move product differentiation as close to the pull phase as possible Examples: Dell, Benetton
11-37
11-38
11-39
11-40
13-1
Outline
The Role of Sourcing in a Supply Chain Supplier Scoring and Assessment Supplier Selection and Contracts Design Collaboration The Procurement Process Sourcing Planning and Analysis Making Sourcing Decisions in Practice Summary of Learning Objectives
13-2
13-3
13-5
13-6
13-7
Contracts to Coordinate Supply Chain Costs Contracts to Increase Agent Effort Contracts to Induce Performance Improvement
13-8
Contracts for Product Availability and Supply Chain Profits: Buyback Contracts
Allows a retailer to return unsold inventory up to a specified amount at an agreed upon price Increases the optimal order quantity for the retailer, resulting in higher product availability and higher profits for both the retailer and the supplier Most effective for products with low variable cost, such as music, software, books, magazines, and newspapers Downside is that buyback contract results in surplus inventory that must be disposed of, which increases supply chain costs Can also increase information distortion through the supply chain because the supply chain reacts to retail orders, not actual customer demand
2007 Pearson Education 13-10
Contracts for Product Availability and Supply Chain Profits: Revenue Sharing Contracts
The buyer pays a minimal amount for each unit purchased from the supplier but shares a fraction of the revenue for each unit sold Decreases the cost per unit charged to the retailer, which effectively decreases the cost of overstocking Can result in supply chain information distortion, however, just as in the case of buyback contracts
13-11
Contracts for Product Availability and Supply Chain Profits: Quantity Flexibility Contracts
Allows the buyer to modify the order (within limits) as demand visibility increases closer to the point of sale Better matching of supply and demand Increased overall supply chain profits if the supplier has flexible capacity Lower levels of information distortion than either buyback contracts or revenue sharing contracts
13-12
Design Collaboration
50-70 percent of spending at a manufacturer is through procurement 80 percent of the cost of a purchased part is fixed in the design phase Design collaboration with suppliers can result in reduced cost, improved quality, and decreased time to market Important to employ design for logistics, design for manufacturability Manufacturers must become effective design coordinators throughout the supply chain
2007 Pearson Education 13-16
Focus for direct materials should be on improving coordination and visibility with supplier Focus for indirect materials should be on decreasing the transaction cost for each order Procurement for both should consolidate orders where possible to take advantage of economies of scale and quantity discounts
2007 Pearson Education 13-17
Criticality
General Items
Low Low
Value/Cost
13-18
13-20
13-21
Outline
The Role of Information Technology in the Supply Chain The Supply Chain IT Framework Customer Relationship Management Internal Supply Chain Management Supplier Relationship Management The Transaction Management Foundation The Future of IT in the Supply Chain Supply Chain Information Technology in Practice
2007 Pearson Education 17-2
17-4
17-5
17-6
Effective use of IT in the supply chain can have a significant impact on supply chain performance
17-7
17-8
Why Focus on the Macro Processes? Macro Processes Applied to the Evolution of Software
17-9
17-10
17-11
There must be strong integration between the ISCM and CRM macro processes
2007 Pearson Education 17-12
17-14
17-16
17-17
16-1
Objectives
Describe supply chain coordination, the bullwhip effect, and their impact on performance Identify causes of the bullwhip effect and obstacles to coordination in the supply chain Discuss managerial levers that help achieve coordination in the supply chain Describe actions that facilitate the building of strategic partnerships and trust within the supply chain
16-2
Outline
Lack of Supply Chain Coordination and the Bullwhip Effect Effect of Lack of Coordination on Performance Obstacles to Coordination in the Supply Chain Managerial Levers to Achieve Coordination Building Strategic Partnerships and Trust Within a Supply Chain Achieving Coordination in Practice
16-3
16-4
Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers (shown in Figure 16.1) Distorts demand information within the supply chain, where different stages have very different estimates of what demand looks like Results in a loss of supply chain coordination Examples: Proctor & Gamble (Pampers); HP (printers); Barilla (pasta)
16-5
16-7
Incentive Obstacles
When incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits misalignment of total supply chain objectives and individual objectives Local optimization within functions or stages of a supply chain Sales force incentives
16-8
16-9
Operational Obstacles
Actions taken in the course of placing and filling orders that lead to an increase in variability Ordering in large lots (much larger than dictated by demand) Figure 17.2 Large replenishment lead times Rationing and shortage gaming (common in the computer industry because of periodic cycles of component shortages and surpluses)
16-10
Pricing Obstacles
When pricing policies for a product lead to an increase in variability of orders placed Lot-size based quantity decisions Price fluctuations (resulting in forward buying) Figure 17.3
16-11
Behavioral Obstacles
Problems in learning, often related to communication in the supply chain and how the supply chain is structured Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages Different stages react to the current local situation rather than trying to identify the root causes Based on local analysis, different stages blame each other for the fluctuations, with successive stages becoming enemies rather than partners No stage learns from its actions over time because the most significant consequences of the actions of any one stage occur elsewhere, resulting in a vicious cycle of actions and blame Lack of trust results in opportunism, duplication of effort, and lack of information sharing
2007 Pearson Education 16-12
16-13
16-14
16-15
Building strategic partnerships and trust easier to implement these approaches if there is trust
2007 Pearson Education 16-17
16-18
16-19
16-20
Process-based view
Trust and cooperation are built up over time as a result of a series of interactions Positive interactions strengthen the belief in cooperation of other party
16-21
16-22
16-23
16-24
Sequential interdependence is the traditional supply chain form Reciprocal interdependence is more difficult but can result in more benefits Figure 17.4
2007 Pearson Education 16-25
High
Low
Low
Partners Dependence
2007 Pearson Education 16-26
16-27
16-28
16-29
16-30
16-31