Supply Chain Management Lecture 17. Outline Today –Survey –Midterm –Brief semester overview –Start with Chapter 10 Next week –Chapter 10 3e: Sections

Supply Chain Management

Lecture 17

Outline

• Today– Survey– Midterm– Brief semester overview – Start with Chapter 10

• Next week– Chapter 10

• 3e: Sections 1, 2 (up to page 273), 6• 4e: Sections 1, 2, 3 (up to page 260)

Supply Chain Stages

• A typical supply chain may involve a variety of stages

Manufacturer Distributor Retailer CustomerSupplier

Most supply chains are actually supply networks

Q1

Push/Pull View of Supply Chain Processes

Customer order arrives

PULL PROCESSES

PUSH PROCESSES

Execution is initiated in response to customer orders

(reactive)

Execution is initiated in anticipation of customer orders

(speculative)

Processes are divided based on the timing of their execution relative to a customer order

Q2

Cycle View of Supply Chain Processes

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Cycle view defines the processes

involved and the owner of each process

Q3

2. Understanding the Supply Chain Capabilities

• Supply chain capabilities– Supply chain responsiveness

• Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc

– Supply chain efficiency (low cost)

Highly efficient

Highly responsive

Somewhat responsive

Somewhat efficient

Integrated steel mills

Hanes apparel Most automotiveproduction

Seven-Eleven Japan

Q4

1. Understanding the Customer and Supply Chain Uncertainty

• Understanding customer uncertainty– Demand varies along certain attributes

• Quantity in each lot, response time, variety of products needed, convenience, price, innovation, etc

– Implied demand uncertainty• Demand uncertainty due to the portion of demand that the

supply chain is targeting, not the entire demand

Customer need Causes implied demand uncertainty to…Range of quantity increasesResponse time decreasesVariety of products increasesNumber of channels through which product may be aquired increasesRate of innovation increasesRequired service level increases

Customer need Causes implied demand uncertainty to…Range of quantity increases IncreaseResponse time decreases IncreaseVariety of products increases IncreaseNumber of channels through which product may be aquired increases

Increase

Rate of innovation increases IncreaseRequired service level increases Increase

Q5

Key Observations

1. There is no supply chain strategy that is always right

2. There is a right supply chain strategy for a given competitive strategy

Q6

From Strategy to Decisions

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

Logistical drivers Cross functional drivers

Q7

2. Understanding the Supply Chain Capabilities

• Supply chain capabilities– Supply chain responsiveness

• Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc

– Supply chain efficiency (low cost)

Highly efficient

Highly responsive

Somewhat responsive

Somewhat efficient

Integrated steel mills

Hanes apparel Most automotiveproduction

Seven-Eleven Japan

Q8

Transportation Cost and Number of Facilities

Number of Facilities

TransportationCosts

Q9

Response Time and Number of Facilities


Response Time

Q10

Factors Influencing Distribution Network Design

• Performance of a distribution network should be evaluated along two dimensions– Customer needs that are met (customer service)

• Response time (Time it takes for a customer to receive an order)• Product variety (Number of different products that are offered)• Product availability (Probability of having a product in stock)• Customer experience (Ease of placing and receiving orders)• Order visibility (Ability of customers to track their orders)• Returnability (Ease of returning unsatisfactory merchandise)

– Cost of meeting customer needs (supply chain cost)• Inventory (All raw materials, WIP, and finished goods)• Transportation (Moving inventory from point to point)• Facility & handling (Locations where product is stored, assembled,

or fabricated)• Information (Data and analysis of all drivers in a supply chain)

Q11

Retail Storage with Customer Pickup

• Example: Retail stores such as Wal-Mart and JCPenney

• Customers pick up product from retailers– Low transportation cost– High facility cost– Relative easy returnability– Increased inventory cost

• No order tracking necessary– If the product is available at the

retailer, the consumer buys. Otherwise goes to another retailer

• Effective for fast moving items

Retailer

Consumers

RetailerRetailer

DistributorWarehouse

Manufacturers


Q12

Distributor Storage with Carrier Delivery

• Example: Amazon• Inventory is held at a

warehouse which ships to customer by carriers

• With respect to direct shipping– Inventory aggregation is less– Higher inventory costs– Facility costs are higher– Less information to track

• Warehouses are physically closer to consumers which leads to– Faster response time– Lower transportation cost

• Not effective for slow moving items


Manufacturers

Consumers


Q13

Manufacturer Storage with Direct Shipping (Drop Shipping)

• Example: eBags• Products are shipped directly to

the consumer from the manufacturer

• Retailer is an information collector: – Passes orders to the

manufacturers– It does not hold product

inventory• Inventory is centralized at

manufacturer• Drop shipping offers the

manufacturer the opportunity to postpone customization

• Effective for high value, large variety, low demand products

• High transportation cost

Retailer

Manufacturers

Consumers

Q14

Inventory Cost and Number of Facilities


InventoryCosts

Q15

Total Logistics Costs

Inventory Costs

LogisticsCosts


Transportation Costs

Facility Costs

Logistics Costs

Q16

Factors Influencing Network Design Decisions

• Technological factors– Compare your supplies to the final product, considering whether

value, weight, volume or other factors change – Availability of production technologies– High or low fixed cost

• Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars)

Which products gain/lose weight in the production process?

Q17


• Political factors– Political stability

• Infrastructure factors– Availability of transportation terminals, labor

• Most of Amazon’s distribution centers are located near airports

• Competitive factors– Positive externalities (many stores in a mall makes it more

convenient for customers – one location for everything the customers need)

Q18


• Technological factors– Compare your supplies to the final product, considering whether

value, weight, volume or other factors change – Availability of production technologies– High or low fixed cost

• Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars)

Which products gain/lose weight in the production process?

Q19

Discounted Cash Flow Analysis

• The present value of future cash is found by using a rate of return k– A dollar today is worth more than a dollar tomorrow– A dollar today can be invested and earn a rate of return

k over the next period

Today… Tomorrow…$1 $1*(1 + k)

$1/(1 + k) $1

Today… Tomorrow…$1 $1*(1 + k)

Q20

Impact of Uncertainty in Network Design


Building flexibility into supply chain operations allows the supply chain to deal with uncertainty more

effectively

Q21

Role of Forecasting

Push Push Push

Push Push

Push

Pull

Pull

Pull


Is demand forecasting more important for a push or pull system?

Q22

Summary: Simple Exponential Smoothing Method

1. Estimate level• The initial estimate of level L0 is the average of all historical

data• L0 = (∑i Di)/ n

• Revise the estimate of level for all periods using smoothing constant • Lt+1 = Dt+1 + (1 – )*Lt

2. Forecast• Forecast for future periods is

• Ft+n = Lt

0

500

1000

1500

2000

2500

3000

3500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter

Dem

and

Forecast Ft+n = Lt

Q23

Types of Forecasts

• Qualitative– Primarily subjective, rely on judgment and opinion

• Time series– Use historical demand only

• Causal– Use the relationship between demand and some

other factor to develop forecast

• Simulation– Imitate consumer choices that give rise to demand

Q24

Characteristics of Forecasts

1. Forecasts are always wrong!

2. Long-term forecasts are less accurate than short-term forecasts

3. Aggregate forecasts are more accurate than disaggregate forecasts

4. Information gets distorted when moving away from the customer

Q25

Time Series Forecasting

Observed demand =

Systematic component + Random component

L Level (current deseasonalized demand)T Trend (growth or decline in demand)S Seasonality (predictable seasonal fluctuation)

The goal of any forecasting method is to predict the systematic component (Forecast) of demand and measure the size and

variability of the random component (Forecast error)

Q26

Aggregate Planning Strategies

• Basic strategies– Level strategy (using inventory as lever)

• Synchronize production rate with long term average demand• Swim wear

– Chase (the demand) strategy (using capacity as lever)• Synchronize production rate with demand• Fast food restaurants

– Time flexibility strategy (using utilization as lever)• High levels excess (machine and/or workforce) capacity• Machine shops, army

– Tailored strategy• Combination of the chase, level, and time flexibility

strategies

Q27

Q28

Period Demand Level01 3562 2703 2574 2925 3526 293

F6 = L5

L5 = (D5+D4+D3+D2)/4L5 = 292.75

Period Demand Level Trend0 104.0 3.51 108 107.6 3.52 110 110.9 3.53 115 114.5 3.5

0

500

1000

1500

2000

2500

3000

3500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarter

Dem

and

Forecast Ft+n = Lt + nTt

F6 = L3 + 3T3

F5 = 125.0

Q29

Period Demand Forecast MeanAbsolute% Error

01 190 2112 235 225

APE1 = |E1/D1|*100 = 11.05 APE2 = |E2/D2|*100 = 4.26

MAPE2 = (APE1 + APE2)/2 = 7.65

Q30

Overview

• Chapter 10, 11, 12– Inventory and product availability

• Chapter 14, 15– Sourcing and pricing

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

Types of Inventory

• Raw material inventory– Stocked at plant or supplier– Lowest cost

• Work-in-process (WIP) Inventory – Raw materials transformed by operations– Need just enough

• Finished-goods inventory– WIP after final operation– Stocked at plant, DC, retail store

High flexibility

High cost

The Importance of Inventory

Every other time in the modern era that the U.S. economy has contracted more than 5% in a quarter, falling inventories have been a major reason, if not the single biggest factor. Usually, really bad recessions are worsened by the need for companies to get rid of all the stuff they made but nobody bought. Once the inventories are sold off, the economy can grow quickly again because idled workers are called back.

Source: MarketWatch. Jan 25, 2009

But so far in this recession, the inventory cycle hasn't been a major factor, outside of the housing and auto sectors. … This recession is rooted in a severe credit squeeze and a fundamental readjustment in consumer demand, not in the typical inventory cycle.

The Importance of Inventory

• Firms can reduce costs by reducing inventory, but customers become dissatisfied when an item is out of stock

The objective of inventory management is to strike a balance between inventory investment

and customer service

Demand

• Average demand for Jacob’s product in Pangea– Existing and new markets

0

20

40

60

80

100

120

1 145 289 433 577 721 865 1009 1153 1297 1441

0

20

40

60

80

100

120

140

1 145 289 433 577 721 865 1009 1153 1297 1441

0

2

4

6

8

10

12

14

16

18

1 142 283 424 565 706 847 988 1129 1270 1411

0

2

4

6

8

10

12

14

16

18

1 142 283 424 565 706 847 988 1129 1270 1411

0

2

4

6

8

10

12

14

16

18

1 142 283 424 565 706 847 988 1129 1270 1411

250

Inventory Decisions

• How much to order?– Order quantity or lot size (Q)

• When to order?– Order frequency (n)

Find an inventory policy that is optimal with respect to some criteria (usually cost)

Inventory Profile

Inventory

Time

Q

Q/2

0

Cycle

Lot

size

Q

Average demand D

Average inventory due

to cycle inventory Q/2

Average inventoryAverage demand

Average flow time = = Q/2D

Cycle Inventory: Example

• Given– Q = 1000 units (lot size)– D = 100 units/day (demand)

• Average inventory– Q/2 = 1000/2 = 500 (average inventory level from cycle inventory)

• Average flow time– Q/2D = 1000/(2*100) = 5 days (time a unit spends in the supply chain)

• Lower inventory is better because– Average flow time is lower– Working capital requirements are lower– Lower inventory holding costs

Why Order in Large/Small Lots?

• Fixed ordering cost: S (cost incurred per order)– Increase the lot size to decrease the fixed ordering cost per unit

• Holding cost: H (cost of carrying one unit in inventory)– Decrease the lot size to decrease holding cost

• Material cost: C (cost per unit)

Lot size Q is chosen by trading off holding costs against fixed ordering costs

Fixed cost Material costConvenience store Low HighSam's Club High Low

Economies of Scale to Exploit Fixed Costs

• Economic order quantity (EOQ)– Optimal lot size for a single product

Documents

Supply Chain Management Lecture 17. Outline Today –Survey –Midterm –Brief semester overview –Start with Chapter 10 Next week –Chapter 10 3e: Sections