emp-supply chain.ppt

S. Chopra/Operations/Supply Chain 1

Supply Chain Management Managing Material Waiting Time


Outline

A key to matching supply and demand Levers for improved matching of supply and

demand The bullwhip effect: Barilla The impact of aggregation


The Supply Chain

The Procurementor supply system

The OperatingSystem The Distribution System

Raw Materialsupply points

Movement/Transport

Raw MaterialStorage Movement/

TransportMovement/Transport

STORAGE

STORAGE

STORAGE

PLANT 1

PLANT 2

PLANT 3

WAREHOUSE

WAREHOUSE

WAREHOUSE

Movement/Transport

MARKETS

ManufacturingFinished GoodsStorage

A

B

C


Key Financial Indicators of Supply Chain Performance

Return on Assets Net Present Value … …

These are LAGGING indicators. What must the supply chain do to achieve this?


Costs of not Matching Supply and Demand

Cost of overstocking – liquidation, obsolescence, holding

Cost of under-stocking – lost sales and resulting lost margin


Accurately Matching Demand with Supply is the Key Challenge: Inventories ... by 1990 Wal-Mart was already winning an important

technological war that other discounters did not seem to know was on. “Wal-Mart has the most advanced inventory technology in the business and they have invested billions in it”. (NYT, Nov. 95).

WSJ, Aug. 93: Dell Computer stock plunges. The company was sharply off in forecast of demand resulting in inventory writedowns.

BW 1997:


Mass Customization

Mass Production– Produce goods and services at low enough cost that

nearly everyone can afford them Mass Customization

– Produce goods and services at affordable prices with enough variety and customization that nearly everyone can find exactly what they want


Implications

Markets have become increasingly heterogeneous Demand for individual products is very unstable Along with shorter development cycles comes

shorter product life cycles How to provide increased variety and keep costs

down?


A Key to Matching Supply and Demand

When would you rather place your bet?

A B C DA: A month before start of DerbyB: The Monday before start of DerbyC: The morning of start of DerbyD: The lead horse is an inch from the finish line


Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES


Role of Inventory in the Supply ChainImprove Matching of Supply

and Demand

Improved Forecasting

Reduce Material Flow Time

Reduce Waiting Time

Reduce Buffer Inventory

Economies of ScaleSupply / Demand

VariabilitySeasonal

Variability

Cycle Inventory Safety InventoryFigure Error! No text of

Seasonal Inventory


Demand uncertainty and forecasting Forecasts are usually (always?) wrong A good forecast includes a measure of forecast

error, e.g., standard deviation The forecast horizon must at least be as large as

the lead time. The longer the forecast horizon, the less accurate the forecast

Aggregate forecasts tend to be more accurate than disaggregate forecasts.


Demand uncertainty and forecasting

Year Demand Forecast Error1986 2701987 3091988 2741989 2681990 2681991 316


Uncertainty

Uncertainty

InformationUncertainty

CustomerDemand

Uncertainty





Information Uncertainty: Barilla Spa

Why are order sizes at Pedrignano so much more variable than those at Cortese?

What can Barilla do to improve coordination in its supply chain?


The Bull-Whip Effect:Causes

Rational and Optimizing Players in Supply Chain– Order Batching – Price Variations– Sales Force Incentives– Demand Signal Processing – Rationing Game


Reducing Batch Size

Wal-Mart: 3 day replenishment cycle Seven Eleven Japan: Multiple daily replenishment P&G: Mixed truck loads Efforts required in:

– Transportation (Cross docking)– Information– Receiving


Quantity Discounts

Cost/Unit

Order Quantity

$3$2.96

$2.92

5,000 10,000

Quantity Discounts


Trade Promotions

0

50

100

150

200

250

300

350

Consumption

•Trade Promotions


Trade promotions

0

100

200

300

400

500

600

700

800

ShipmentsConsumption

•Trade Promotions


The Bullwhip Effect: Countermeasures Order Batching

– Reduce setup cost, aggregation during transport, switch to volume based quantity discounts (rolling horizon)

Price Variations– Every day low pricing, sell-thru based promotions

Sales Force Incentives– Incentives based on sell-thru, rolling horizon

Demand Signal Processing – Supply chain visibility, collaborative forecasting and planning

Rationing Game– Turn and earn




Tackling Demand Uncertainty

The longer the forecast horizon, the less accurate the forecast– Supply Chain Goal: Quick Response

Aggregate forecasts tend to be more accurate than disaggregate forecasts– Supply Chain Goal: Accurate Response


Quick Response

Shorten supply lead time Increase replenishment frequency Coordinate supply chain


A Key to Accurate Response: Inventory Pooling

System A (Decentralized) System B (Centralized)

Which of the two systems provides a higher level of service for a given levelof safety stock?


Accurate Response Examples

Information centralization: Wal-Mart, The Gap, mail order

Specialization: W.W. Grainger

Product substitution: Dell, Category

Management


Accurate Response at Dell

•Geographical aggregation: One location in the US; three locations worldwide

•SKU aggregation: Postponement and componentcommonality

Customer orderarrives

Final Assembly and deliveryManufacture common components


Hewlett Packard: Postponement

Vancouver DC Sale

NoPostponement(unit cost cheap)

Postponement(unit costexpensive)

Localization at DC

Localization at Vancouver


Improved Matching of Supply and Demand

Improve Matching ofSupply and Demand

Improved Forecasting

Reduce Material FlowTime

Reduce Waiting Time

Reduce Buffer Inventory

Economies of ScaleSupply / Demand

Variability Seasonal Variability

1. Reduce fixed cost perbatch

2. Evaluate quantitydiscounts

3. Reduce trade promotions

1. Reduce demand variability2. Reduce delivery lead time3. Reduce variability of delivery lead time4. Pool the safety stock using

Physical Centralization Information centralization Specialization Raw material commonality / postponement Substitution

Reduceinformationuncertainty

emp-supply chain.ppt

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