class4.ppt

©2002 V. Krishnan

MANAGING THE SUPPLY CHAIN

Vish V. Krishnan

The University of Texas at Austin

2

AGENDA

• Dynamics of Supply Chains: The Beer Game

• Discussing the Beer Game• Supply Chain Overview and Decision

Sequence• Selecting the Right Supply Chain

3

Beer Game Board

ProductionDelay

....

ProductionDelay

....

CurrentInventory

.........

.........

ShippingDelay

....

ShippingDelay

....

CurrentInventory

........

........

OrdersPlaced

IncomingOrders

OrdersPlaced

IncomingOrders

OrdersPlaced

IncomingOrders

Used Order Cards

4

4 4 4 4 4 4

Order Cards

RETAILER

CurrentInventory

.........

.........

CurrentInventory

.........

.........

ShippingDelay

....

ShippingDelay

....

ShippingDelay

....

ShippingDelay

....

WHOLESALER DISTRIBUTOR FACTORY

RawMaterial

Orders Soldto Customers

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Beer Game Instructions

• You are a Beer Supply Chain– Retailer– Wholesaler– Distributor– Factory– Gong-Beater (different)

• You each manage an Inventory– Each receives orders of Beer (with a shipping delay) from

supplier. Factory receives its WIP (with a prodn delay). – Each fills customer’s orders for beer

• Goal– Minimize Costs

• $0.50/week/case carrying cost• $1/week/case backlog cost

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Beer Game (cont.)

• Choose a team name• ONLY Retailers know consumer orders (No one

speaks to each other)• Set-up

– 12 cases in each inventory– 4 in each shipping delay– Sticky with “4” in each orders box– Deck (DON’T TURN OVER) in front of retailer– You each have sticky pad for new orders– You need a record sheet for Inventory, backlog, etc.

per week (mark posn)• Orders filled = Backlog + New Orders• Do first few weeks together.

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Steps of Game

1. Receive Inventory & Advance Shipping delaysFactories advance Production delays

2. Fill Incoming Orders (incl Backlog)Retailer gets order card from deck &

turns card face down afterwards Kill old order slipsUse backlog chart if needed

3. Advance Order slips (except Factories)4. Record Inventory/Backlog5. Place & Record Orders

– Put face down, so write on sticky side

Factories Brew – Put Raw Materials into 1st Production Delay

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Inventory/Backlog Chart

• Enter team name and your name up top.• Circle position.• Add up inventory and backlog columns.• Multiply inventories by 0.50 and add to

backlogs to get total cost.• How to calculate Backlogs: Discussion

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Order & Inventory Graphs

• Order graph– Enter team name and check off position.

– Mark order at each week on graph

• Inventory graph– Do same thing, but mark backlog as negative

inventory

• Blank Customer Order graph– Retailers don’t do this (and keep quiet about it!)

– Roughly sketch out what you think consumer order stream was.

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Beer Game Summary

RANGE OF SCORES: 200 – 10000

Our range:

Game developed at the System Dynamic Group at MITand played around the world.

Illustrates many interesting issues- Multi-level Supply Chains- Balancing Inventory costs with stockout costs- Bullwhip effect (demand distortions)

How do you get consistently low scores/win the game?

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Lessons Learned from the Beer Game

• • • People become their Positions• Inaction• Excessive Action• Information Distortion - Bullwhip

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Increasing Variability Up the Supply Chain

Consumer Sales

0

5

10

15

20

Time

Order Quantity

Retailer Orders to Wholesalers

0

5

10

15

20

Time

Order Quantity

Wholesaler Orders to Manufacturer

0

5

10

15

20

Time

Order Quantity

Manufacturer Orders to Supplier

0

5

10

15

20

Time

Order Quantity

Source: Lee, Padmanabhan, and Whang

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1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

40,000

25,000

20,000

15,000

10,000

5,000

30,000

35,000

45,000

300,000

250,000

350,000

200,000

150,000

100,000

50,000

ConsumablesPeripheral Product

Unit orders from a major retailer to manufacturerTotal unit sales at outlets of retailer

Bullwhip in Electronics Industry

Source: Lee, Padmanabhan, and Whang

Order variability is amplified up the supply chain

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What are Supply Chains?

• Supply chain is an agent-based view– Across firms

– Beyond neighbors (more than supplier management)

• Increasingly becoming supply web mgmt.!

SuppliersEnterprise

DistributorsRetail

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Supply Web Management

Suppliers

Customers

Plant

Plant

Distributors

Suppliers

SuppliersDistribution

Center

Sales

Office

Corporate

Sales

OfficeCustomers

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Defining Supply Chain Management

Supply Chain Management - Coordination and integration of all the activities (buy, create, move, and sell) involved in delivering a product from the supplier’s supplier to the customer’s customer. On-time delivery of Quality Product at Low Cost.

Matching supply and demand in uncertain environments.

Why is Supply Chain Management not easy?Number of linkages to be orchestrated.

Global sourcing

Demanding markets

Meeting fluctuating customer demand with constant supply.

Think about a product like a Ford Explorer!

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Managing a Global Supply Chain

Buys Components

Makes aSubassembly Moves it to a

WarehouseStores it at Warehouse

Final Assembly

Moves itto Dealers

Stores it at Dealers

Sells it toConsumers

Adapted from I2 Presentation

Improved Distribution Not Better Production is Key Goal in Mergers - Wall Street Journal

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Why Supply Chain Management?

• Supply Chain Management accelerates the cash conversion cycle and improves ROIC.

• Cash Conversion Cycle (CCC): Rate at which inventory is turned into cash; Time difference between when you receive payment from customers and when you pay your suppliers.

Pay suppliers Get paid by customers

• Return on invested capital (ROIC) has become the mantra in valuing firms:– ROIC = After-tax operating earnings divided by [total assets minus

non-interest-bearing current liabilities]; Removes the vagaries of GAAP and tells you how well the company is run (compared to ROE); Operating performance independent of the financing means.

Also called EVA approach used by the creme de la creme of firms

• Supply chain management accelerates cash conversion and dramatically increases ROIC, contributing to better shareholder value.

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The Rise of Specialization and Outsourcing

• Increasingly firms are turning to suppliers for most of their value added activities.– Value chain is shrinking

– Suppliers deliver components in software as well as services

• In services, capacity planning and management takes the role of inventory.– Capacity cannot be added in a short notice.

– Demand is unpredictable.

– How do you meet fluctuating demand with nearly fixed capacity?

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Supply Chain Decision Sequence

• What should be the design of a supply chain?• How do you decide when to make and when

to buy?• What opportunities does technology offer for

negotiation and supplier selection?• How do you monitor and improve supply

chains?

Supplier Selection

Plan &Order

Design Monitor& Improve

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Supply Chain Effectiveness

• Supply chain performance can be measured in terms of their cost, lead time, on time delivery (consistency), and other performance measures.

• Beyond a certain point, supply chains face trade-offs: Efficiency (Low cost)

Responsiveness

©Andersen Consulting 1999

Organizing Framework: Matching Supply Chains and Products

Functional Product Innovative product

EfficientChain

Responsivechain

MATCH

MATCHMIS-MATCH

MIS-MATCH

©Andersen Consulting 1999

• The beer game shows how outsourcing does not solve all problem – coordination within the supply chain become paramount.– Bullwhip effect or volatility amplification in a supply chain.

• Supply chain management: What is it and Why?– Moves the focus beyond neighbors to the entire “value system” : from supplier’s

suppliers to customer’s customers.– Difficult because unpredictable demand must often be matched with inflexible

supply.– Relevant because it can contribute to increasing ROIC and shareholder value

• Supply Chain Design– What makes a supply chain efficient may make it less responsive. At

the frontier, there may be a trade-off between efficiency and responsiveness.

– Ensure there is a fit between your products/markets and the supply chains.

Key Takeaways