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– 1/22 Introduction, curriculum, rules, exams, Infrastructure (1-27)– 1/27 Strategic Fit and Scope. Supply Chain Drivers (27-51)– 2/05 No Class– 2/12 Demand Management (169-204)– 2/19 Aggregate Planning, Managing (205-225)– 2/26 Guest Lecture Network Operations (71-168)– 3/04 Managing Supply and Demand (121-144)– 3/11 Class trip to see Supply Chain in Operation– 3/18 No Class – 3/25 Mid Term – 4/01 Managing Inventory(249-295); – 4/08 Product Availability (297-384) – 4/15 Sourcing and Procurement (387-410)– 4/22 Transportation (411-219); Facility Decisions (109-133)– 4/29 Beer Game – 5/06 Co-ordination Information Information Technology & E-Business (477- 557) – 5/13 FINAL EXAMINATION
Supply Chain Engineering MN 799 2#
GUIDELINES
• GRADING:– HOMEWORK – 20%– BEER GAME – 5%– MID TERM – 30%– FINAL – 45%
• HOMEWORK MUST BE COMPLETED IN TIME. LATE SUBMISSIONS WILL START WITH A ‘B’ GRADE
• CLASSES WILL START AT 6.00PM AND GO STRAIGHT THRU TO 8.00PM
Supply Chain Engineering MN 799 3#
DEFINITION OF A SUPPLY CHAIN• WHAT IS A SUPPLY CHAIN?• A SUPPLY CHAIN COVERS THE FLOW OF
MATERIALS, INFORMATION AND CASH ACROSS THE ENTIRE ENTERPRISE
• SUPPLY CHAIN MANAGEMENT IS THE INTEGRATED PROCESS OF INTEGRATING, PLANNING, SOURCING, MAKING AND DELIVERING PRODUCT, FROM RAW MATERIAL TO END CUSTOMER, AND MEASURING THE RESULTS GLOBALLY
• TO SATISFY CUSTOMERS AND MAKE A PROFIT• WHY A ‘SUPPLY CHAIN’?
Source: Cass Logistics Homework: What are 2007 statistics?
Supply Chain Engineering MN 799 5#
Traditional View: Logistics in the Manufacturing Firm
• Profit 4%
• Logistics Cost 21%
• Marketing Cost 27%
• Manufacturing Cost 48%
ProfitLogistics
Cost
Marketing Cost
Manufacturing Cost
Homework: What it the profile for Consumables; Pharamas and Computers
Supply Chain Engineering MN 799 6#
Supply Chain Management: The Magnitude in the Traditional View
• Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies– A typical box of cereal spends 104 days from factory to sale– A typical car spends 15 days from factory to dealership
• Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed
• P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand
• Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago
What problems do you foresee in this Supply Chain? Please write some down
Burger and FriesExamine this process – What do you observe?
Supply Chain Engineering MN 799 9#
Understanding the Supply Chain …a chain is only as good as its weakest link Recall that saying? The saying applies to the principles of building a competitive infrastructure:
Strong, well-structured supply chains are critical to sustained competitive advantage.
Manufacturer Wholesaler Retailer CustomerSupplier
…there is a limit to the surplus or profit in a supply chain
We are all part of a Supply Chain in everything we buy
Supply Chain Engineering MN 799 10#
OBJECTIVES OF A SUPPLY CHAIN
• MAXIMIZE OVERALL VALUE GENERATED– SATISFYING CUSTOMER NEEDS AT A PROFIT– VALUE STRONGLY CORRELATED TO PROFITABILITY– SOURCE OF REVENUE – CUSTOMER– COST GENERATED WITHIN SUPPLY CHAIN BY FLOWS OF
INFORMATION, PRODUCT AND CASH– FLOWS OCCUR ACROSS ALL STAGES – CUSTOMER,
RETAILER, WHOLESALER, DISTRIBUTOR, MANUFACTURER AND SUPPLIER
– MANAGEMENT OF FLOWS KEY TO SUPPLY CHAIN SUCCESS
UNDERSTAND EACH OBJECTIVE
Supply Chain Engineering MN 799 11#
DECISION PHASES IN A SUPPLY CHAIN• OVERALL STRATEGY OF COMPANY – EFFICIENT OR
RESPONSIVE• SUPPLY CHAIN STRATEGY OR DESIGN ?
– LOCATION AND CAPACITY OF PRODUCTION AND WAREHOUSE FACILITIES?
– PRODUCTS TO BE MANUF, PURCHASED OR STORED BY LOCATION?– MODES OF TRANSPORTATION?– INFORMATION SYSTEMS TO BE USED?– CONFIGURATION MUST SUPPORT OVERALL STRAGEGY
• INCREASING VARIETY OF PRODUCTS• DECREASING PRODUCT LIFE CYCLES• INCREASINGLY DEMANDING CUSTOMERS• FRAGMENTATION OF SUPPLY CHAIN OWNERSHIP• GLOBALIZATION• DIFFICULTY EXECUTING NEW STRATEGIES• ALL INCREASE UNCERTAINTY
Supply Chain Engineering MN 799 38#
Dealing with Product Variety: Mass Customization
MassCustomization
Low
HighHigh
Low
Long
Short
Lea
d T
ime
Cost
Customization
Supply Chain Engineering MN 799 39#
Fragmentation of Markets and Product Variety
• Are the requirements of all market segments served identical?
• Are the characteristics of all products identical?
• Can a single supply chain structure be used for all products / customers?
• No! A single supply chain will fail different customers on efficiency or responsiveness or both.
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HOMEWORK
• Page 49 – Nordstrom– Answer Questions 1 to 4
• Answer the above questions for Amazon.com• Page 67
– Answer Questions 1 to 4
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REVIEW QUESTIONS• WHAT IS STRATEGIC FIT? HOW IS IT ACHIEVED?
– COMPANY’S APPROACH TO MATCH DEMAND REQUIREMENTS AND SUPPLY POSITIONING
– MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS– PRODUCT LIFE CYCLE
• WHAT IS STRATEGIC SCOPE?– INTERCOMPANY, INTERFUNCTIONAL EXTENSION
• WHAT ARE THE SUPPLY CHAIN DRIVERS. WHAT ARE THEIR ROLES AND COMPONENTS?– INVENTORY; FACILITIES; TRANSPORTATION; INFORMATION
• OBSTACLES
Supply Chain Engineering MN 799 42#
Forecasting (uncertainty) Order service (certainty)
Demand management
Demand-Management Activities
RULE: Do not forecast what you can plan, calculate, or extract from supply chain feedback.
Source: Adapted from Plossl, “Getting the Most from Forecasts,” APICS 15th International Conference Proceedings, 1972
Lesson 3
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DETERMINING DEMAND
• FORECASTING– TWO TYPES – WRONG AND LUCKY– TWO NUMBERS – QUANTITY AND DATE– ELEMENTS of a GOOD FORECASTING SYSTEM:
• EQUAL CHANCE OF BEING OVER OR UNDER• INCLUDES KNOWN FUTURE EVENTS• HAS RANGE OR FORECAST ERROR ESTIMATE• REVIEWED REGULARLY
Supply Chain Engineering MN 799 44#
FORECASTING• GENERAL PRINCIPLES:
– MORE ACCURATE AT THE AGGREGATE LEVEL– MORE ACCURATE FOR SHORTER PERIODS OF TIME CLOSER TO
PRESENT– SET OF NUMBERS TO WORK FROM, NOT TO WORK TO– MOSTLY ALWAYS WRONG
– EXAMPLE: MONTHLY vs DAILY EXPENDITURE
Supply Chain Engineering MN 799 45#
FORECASTING• MAIN TECHNIQUES:
– QUALITATIVE • MANAGEMENT REVIEW• DELPHI METHOD• MARKET RESEARCH
Work out forecasts with =0.3What ’s will use for forecasting soap and fashion clothes Why?
Supply Chain Engineering MN 799 52#
Simple Trended Series — Example
Algebraic Trend ProjectionX Y a. Trend (“rise” over “run”) = (13 - 4)/3 = 3 = b 0 41 72 103 13 c. Period 4: Y = a + bX = 4 + 3 (4 [for period 4]) =
16
b.Y-intercept (a) = “compute”the Y value for X = 0, thus Y-int = 4
1 2 3
13
10
7
4 Run
Rise
Supply Chain Engineering MN 799 53#
REGRESSION ANALYSIS
• Regression formula b=slope, a=intercept
• Slope b= Intercept• and
• Work out this example:• Year Variable Y (Passengers)• 1 77• 2 75• 3 72• 4 73• 5 71• What is the regression equation? What is the forecast for Year 6?
Xb-Ya
bXaY b
22 )( XXnYXXYn
Supply Chain Engineering MN 799 54#
TRENDED TIME SERIES FORECASTING
• Question: How do you forecast a seasonal item
• Y(forecast) = [A (intercept) + X (trend) x T (time period) ] x S (seasonality factor)
• FIRST DETERMINE LEVEL AND TREND - IF SEASONAL DESEASONALIZE
• THEN FORECAST USING EXPONENTIAL OR TREND• RESEASONALIZE
Integrative Example: Calculating a Forecast with Seasonal Indexes and Exponential Smoothing
36.1734/0.94 index Seasonaldemand Actual 36.1734/0.94 index Seasonal
demand Actual 36.1734/0.94 index Seasonaldemand Actual 36.1734/0.94 index Seasonal
demand Actual 340.94
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Exercise• Boler Corp has the following sales history:• Quarter Year1 Year2• 1 140 210• 2 280 350• 3 70 140• 4 210 280• What seasonal index for each quarter could be used to forecast the
sales of the product for Year 3?• What would be a forecast for year 3 using an a=0.3 and assuming the
forecast for year 2 was 1000? What would be the forecast for each quarter in this forecast?
NOTE: About the use of n or n-1 in the above equations n Use with a large population (> 30 observations) n-1 Use with a small population (< 30 observations)
Measures of Forecast Error
F( ) - i i
A
( )n
FA i i -
nF ii -
( )nF
ii
-- ( )
nFA
i i -or
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Definition A confidence interval is a measure of distance, increments of which are represented by the z value
Formulas
Relationship 1 standard deviation () = 1.25 MAD In the example data = 1.25 MAD
= 1.25 160 = 200Source: Raz and Roberts, “Statistics,” 1987
Confidence Intervals
( ) ( ) ( )
s
s
s
zxxor
xxDeviationStandard
MeanDistancez
nFA
ORnFA
DevStd
i
i
2
ii
2
ii
+=
-=-=
-
-
-=
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Expressing z Values (for +ve probabilities)
Probabilit y
D +1 SD +2 SD +3 SD
Cumulative normal distribution from left side of distribution (x + z)
z
ack
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Application Problem — Service Level Given
Average sales for item P is 50 units per week with a standard deviation of 4
Required What is the probability that more than 60 units will be sold?
a. .006 b. .494 c. .506 d. .994
Supply Chain Engineering MN 799 67#
Homework
Q1 - 2. A demand pattern for ten periods for a certain product was given as 127, 113, 121, 123, 117, 109, 131, 115, 127, and 118. Forecast the demand for period 11 using each of the following methods: a three-month moving average, a three-month weighted moving average using weights of 0.2, 0.3, and 0.5, exponential smoothing with a smoothing constant of 0.3, and linear regression. Compute the MAD for each method to determine which method would be preferable under the circumstances. Also calculate the bias in the data, if any, for all four methods, and explain the meaning.
Q2 - The following information is presented for a product:• 2001 2002• Forecast Demand Forecast Demand• Quarter I 200 226 210 218
Quarter II 320 310 315 333• Quarter III 145 153 140 122• Quarter IV 230 212 240 231• a) What are the seasonal indicies that should be used for each quarter? • What is the MAD for the data above?
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Supply Chain NetworkFundamentals
William T. Walker, CFPIM, CIRM, CSCPPractitioner, Author, and Supply Chain Architect
Supply Chain Engineering MN 799 69#
• Understanding How Supply Chains Work• The Value Principle and Network Stakeholders• Mapping a Supply Chain Network• The Velocity and Variability Principles• Locating the Push/Pull Boundary• The Vocalize and Visualize Principles• Summary
Session Outline
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Learning Objectives
By teaching the principles of supply chain management to understand how a supply chain network works...
We learn how to map a supply chain network.
We learn how to engineer reliable network infrastructure by maximizing velocity and minimizing variability.
We learn how the Bill Of Materials relates to the network.
We learn how locating the push/pull boundary converts network operations from Build-To-Stock to Build-To-Order.
We learn how to maximize throughput by engineering the means to vocalize demand and to visualize supply.
Supply Chain Engineering MN 799 71#
A SUPPLY CHAIN is the global network used to deliver products and services from raw materials to end customers through engineered flows of information, material, and cash.
Contributed to the APICS Dictionary, 10th Edition by William T. Walker
Supply Chain Engineering MN 799 72#
Network Terminology
Physical FlowInfo Flow
Cash Flow
"Source" "Make" "Deliver" "Return" Upstream Midstream Downstream Reverse Stream Zone Zone Zone Zone
Customer
Value-Adding Value-Subtracting
Supply Chain Engineering MN 799 73#
Supplier Customer Trading
Partner
$3
M1 M2 M3
$1 $2Cash
Material
Material moves downstream to the customer.Cash moves upstream to the supplier.
Supply Chain Network Operations
Supply Chain Engineering MN 799 74#
Suppliers Customers Trading Partner
Shareholders
Employees
Value isthe Perfect
Order
Value isEmployment
Stability
Value isReturn In
Investment
Value isContinuityof Demand
The Value Principle:The Value Principle:Every stakeholder wins when throughput is maximized.
Supply Chain Engineering MN 799 75#
The Network RulesIn an effective supply chain networkeach trading partner works to... Maximize velocity, Minimize variability, Vocalize demand, and Visualize supply ...in order to maximize throughput providingValue for each stakeholder. However, a lack of trust often gets in the way.
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The Network Trust FactorNetwork trust is based upon personal relationshipsand the perception that things are okay regarding:
Transportation moves material from seller to buyer In some cases orders/ invoices/ cash move by mail Warehouse issues trigger invoices Warehouse receipts trigger payments
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Import/ Export Boundaries
Country A Country B Buyer
Return
Seller ShipmentExports Imports
ExportsImports
Country A exports and Country B imports in a forward supply chain.
Country B exports and Country A imports in a reverse supply chain.
Import duty and export licensing add complexity to network linkages decreasing velocity and increasing variability.
Supply Chain Engineering MN 799 84#
The Variability Principle:The Variability Principle: In network implementationthroughput is maximized
when order-to-delivery-to-cash variability is minimizedby minimizing process variance.
The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how:
Variability – what is likely to change from one delivery to the next?
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Outward Signs of Variability Unplanned demand Backordered inventory Inventory leakage Capacity constraints Lower than normal yields Longer than expected transit times Delays in clearing Customs Delayed payment
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To Maximize Velocity Eliminate unnecessary process steps Shorten the longest serial process steps by
eliminating queue time and automating steps Convert serial process steps into
parallel process steps
To Minimize Variability Rank order the variances Minimize the root cause of largest variance Continue with the next largest variance, etc.
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Push/Pull Boundary
PullPush
Order
Push/Pull Boundary
Forecast
Demand Supply
Supply Chain Engineering MN 799 88#
Customer Lead Time
CustomerDemand
PullPush
OrderBuild-To-Order (BTO)
Push/Pull Boundary
CustomerDemand
PullPush
Build-To-Stock (BTS)
Push/Pull Boundary
Order
F/C
F/C
Supply Chain Engineering MN 799 89#
1. Know the competitive situation; for example, ifcompetitive products are off-the-shelf, then thepush/pull boundary must be close to the customer.
2. The push/pull boundary is a physical inventory location that bisects the entire supply chain.
3. Order-To-Delivery Cycle Time = Order Processing and Transmission Time + Shipment Processing, Picking, and Packing Time + Transportation and Customs Clearance Time
How To Locate A Push/Pull Boundary
Supply Chain Engineering MN 799 90#
The Vocalize Principle:The Vocalize Principle:In network operations
throughput is maximizedby pulling supply to demand
by vocalizing actual demand at the network constraint.
The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how:
Vocalize – who knows the full requirements of the order?
Supply Chain Engineering MN 799 91#
Common Causes of Stockouts
L
Quantity
Time
RSS
L
Q
Quantity
Time
RSS
L
Q
Quantity
Time
RSS
Q
Demand Uncertainty
Supply Uncertainty
Lead Time Variability (LT = Cycle Time + Transit Time)
Supply Chain Engineering MN 799 92#
The Planning Interface
Pull ToDemand
Push From Forecast
Sales & Operations PlanMaster Schedule
DownstreamThe Supply Chain Network
Push Zone Pull Zone
Push/Pull Boundary
I
MRP MaterialsRequirements
CRP CapacityRequirements
I
Upstream
C C
CapableNetwork
PreloadInventory
Throughput
Supply Chain Engineering MN 799 93#
IThroughput
Push ZoneForecast
Safety Safety
C
Push Inventory And Capacity
Ending Inventory = Starting Inventory - Forecasted Demand + Production
When actual demand exceeds forecasted demand,either capacity or inventory can constrain productioncausing lead time to expand.
Supply Chain Engineering MN 799 94#
IThroughput
Pull ZoneOrder
C
Pull Inventory And Capacity
Max Max
Ending Inventory = Starting Inventory - Actual Demand + Production
Throughput is limited to the smaller of limited inventoryor limited capacity.
Supply Chain Engineering MN 799 95#
The Visualize Principle:The Visualize Principle:
In network operationsthroughput is maximized
by pushing supply to demand by visualizing actual inventory supply across the network.
The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how:
Visualize – where is the inventory now and when will it be available?
Supply Chain Engineering MN 799 96#
[ ] Transportation and warehousing costsare a function of cubic dimensions and weight.
[ ] Items that have to be repalletized fortransport or storage cost more.
[ ] Cartons, plastic cushions, and labelsmay be missing from the product BOM.
[ ] RFID/ bar code on all packaging.
[ ] Select a wall thickness and box burststrength to protect the product.
[ ] Keep Country Of Origin labeling consistent from the product to the outside packaging.
Cartons
MasterCarton
Unit Load
Packaging And Labeling
Supply Chain Engineering MN 799 97#
Track and Trace
TrackTrace
Supply Chain Engineering MN 799 98#
Apply Technology To Visualize• Bar Code and 2D Bar Code
• Point Of Use Laser Scanners
• Radio Frequency Identification (RFID)
• Global Positioning by Satellite (GPS)
• Wireless Communication
Supply Chain Engineering MN 799 99#
Measuring Network Inventory
1. Look for leakages between upstream issues and downstream receipts.2. Look for inventory balance discrepancies at each trading partner.3. Look for process yield issues within each trading partner.
• GIVEN DEMAND FORECAST – DETERMINE PRODUCTION, INVENTORY/BACKLOG AND CAPACITY LEVEL FOR EACH PERIOD
• FUNDAMENTAL TRADE-OFFS– CAPACITY(REGULAR TIME, OVERTIME, SUBCONTRACING)/COST– INVENTORY/SERVICE LEVEL– BACKLOG/LOST SALES
Supply Chain Engineering MN 799 103#
AGGREGRATE PLANNING STRATEGIES• STRATEGIES - SYNCHRONIZING PRODUCTION WITH DEMAND
– CHASE- USING CAPACITY AS THE LEVER• BY VARYING MACHINE OR WORKFORCE (numbers or flexibility)• DIFFICULT TO IMPLEMENT AND EXPENSIVE. LOW LEVELS OF
INVENTORY– TIME FLEXIBILITY – UTILIZATION AS THE LEVER
• IF EXCESS MACHINE CAPACITY, VARYING HOURS WORKED (workforce stable, hours vary)
• LOW INVENTORY AND LOWER UTILISATION THAN CHASE• USEFUL WHEN INVENTORY COST HIGH AND CAPACITY CHEAP
– LEVEL – USING INVENTORY AS THE LEVER• STABLE WORKFORCE AND CAPACITY• LARGE INVENTORIES AND BACKLOGS• MOST PRACTICAL AND POPULAR
Supply Chain Engineering MN 799 104#
SOP FORMAT
• PRODUCTION PLAN = SALES + END INV – BEGIN INV• PRODUCTION PER MONTH = PRODUCTION PLAN
NUMBER OF PERIODS• PRODUCTION PLAN = SALES – END BACKLOG +
BEGIN BACKLOG
1 2 3 4 5 6
SALES
PRODUCTION
INVENTORY/ BACKLOG
PERIOD
Supply Chain Engineering MN 799 105#
Sales and Operations Planning Strategies
M a s t e r P l a n n i n g , R e v . 4 . 2
T o t a la n n u a l
( o r p e r i o d )0 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 u n i t s
L e v e l M e t h o dP r o d u c t i o n 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 4 0S a l e s 5 5 5 1 5 2 5 3 5 3 5 3 5 3 5 2 5 1 5 5 2 4 0I n v e n t o r y 3 0 4 5 6 0 7 5 8 0 7 5 6 0 4 5 3 0 1 5 1 0 1 5 3 0 5 4 0C a p a c i t y - - - - - - - - - - - - 0
C h a s e S t r a t e g yP r o d u c t i o n 5 5 5 1 5 2 5 3 5 3 5 3 5 3 5 2 5 1 5 5 2 4 0S a l e s 5 5 5 1 5 2 5 3 5 3 5 3 5 3 5 2 5 1 5 5 2 4 0I n v e n t o r y 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 0 3 6 0C a p a c i t y - - - 1 1 1 - - - 1 1 1 6
Supply Chain Engineering MN 799 106#
Production Rates and Levels Application 1 — Make-to-Stock
FOR A LEVEL STRATEGY WORK OUT THE PRODUCTION PLAN AND BACKLOG BY PERIOD
PRODUCTION = SALES + BEGIN BL - END BL
Supply Chain Engineering MN 799 108#
OPTIMIZATION THRU LINEAR PROGRAMMING• AGGREGATE PLANNING MODEL – RED TOMATO Pp 210 (105)
– MAXIMIZING HIGHEST PROFIT OVER TIME PERIOD– DETERMINE DECISION VARIABLES PP212(107)– OBJECTIVE FUNCTION – MINIMIZE TOTAL COST
• DEVELOP EQUATIONS FOR ALL THE COST ELEMENTS- Eq 5/8.1– CONSTRAINTS EQUATIONS
• WORKFORCE• CAPACITY• INVENTORY• OVERTIME
– OPTIMIZE OBJECTIVE FUNCTION– FORECAST ERROR
• SAFETY INVENTORY• SAFETY CAPACITY
Supply Chain Engineering MN 799 109#
Aggregate Planning (Define Decision Variables)Wt = Workforce size for month t, t = 1, ..., 6Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6Pt = Production in month t, t = 1, ..., 6It = Inventory at the end of month t, t = 1, ..., 6St = Number of units stocked out at the end of month t, t = 1, ..., 6Ct = Number of units subcontracted for month t, t = 1, ..., 6Ot = Number of overtime hours worked in month t, t = 1, ..., 6
Excel File
Supply Chain Engineering MN 799 110#
Aggregate Planning 8.2
Item CostMaterials $10/unitInventory holding cost $2/unit/monthMarginal cost of a stockout $5/unit/monthHiring and training costs $300/workerLayoff cost $500/workerLabor hours required 4/unitRegular time cost $4/hourOver time cost $6/hourCost of subcontracting $30/unit
• Workforce size for each month is based on hiring and layoffs
.80,6,...,10
,
0
1
1
WwheretforLHWW
orLHWWtttt
tttt
Supply Chain Engineering MN 799 113#
Aggregate Planning (Constraints)
• Production for each month cannot exceed capacity
.6,...,1,0440
,440
tforPOW
OWPttt
ttt
Supply Chain Engineering MN 799 114#
Aggregate Planning (Constraints)
• Inventory balance for each month
.500,0,000,1,6,...,1
,0,
60
0
11
11
IandSIwheretfor
SISDCPISISDCPI
ttttttt
ttttttt
Supply Chain Engineering MN 799 115#
Aggregate Planning (Constraints)
• Over time for each month
.6,...,1,010
,10
tforOWWO
tt
tt
Supply Chain Engineering MN 799 116#
SOLVING PROBLEM USING EXCEL
• STEP 1 BUILD DECISION VARIABLE TABLE (fig8.1)– ALL CELLS 0, EXCEPT PERIOD 0 FOR WORKFORCE AND INVENTORY– ENTER DEMAND (TABLE 8.4)
• STEP 2 CONSTRUCT CONSTRAINT TABLE (fig8.2)• STEP 3 CREATE a CELL HAVING THE OBJECTIVE FUNCTION
– (Formula 8.1) Optimizing TOTAL COSTS (Fig 8.3)• STEP 4 USE TOOLS SOLVER (Fig 8.4)• REPEAT IF OPTIMUM SOLUTION NOT OBTAINED
• HOMEWORK (see homework)
Supply Chain Engineering MN 799 117#
AGGREGATE PLANNING IN PRACTICE
• MAKE PLANS FLEXIBLE BECAUSE FORECASTS ARE ALWAYS WRONG– PERFORM SENSITIVITY ANALYSIS ON THE INPUTS – I.E.
LOOK AT EFFECTS OF HIGH/LOW
• RERUN THE AGGREGATE PLAN AS NEW DATA EMERGES
• USE AGGREGATE PLANNING AS CAPACITY UTILIZATION INCREASES– WHEN UTILIZATION IS HIGH, THERE IS LIKELY TO BE
CAPACITY LIMITATIONS AND ALL THE ORDERS WILL NOT BE PRODUCED
Supply Chain Engineering MN 799 118#
Process Flow Measures • FLOW RATE (Rt), CYCLE TIME (Tt), & INVENTORY (It)
RELATIONSHIPS– F = Flow Rate or Throughput is output of a line in pieces per time– T = Cycle time is the time taken to complete an operation– I = Inventory is the material on the line– LITTLE’s LAW: Av. I = Av. R x Av. T x Variability factor Examples:
• If Inventory is 100 pieces and Cycle time is 10 hours, the Throughput rate is 10 pcs per hour
• If Cycle time is halved; Throughput is doubled• If Inventory is halved; cycle time is halved
See Equation 8.6 How do we get Av Inv of 895 and Flow time of 0.34 months on page 227/216
Supply Chain Engineering MN 799 119#
Homework
• Ex. Work out Inventory, Rate and cycle time for values in Tables 8.4,8.5
Supply Chain Engineering MN 799 120#
Supply Chain Network Basics – Lesson 4
• Guest Lecture – go to Poly Blackboard
Supply Chain Engineering MN 799 121#
MANAGING SUPPLY AND DEMANDPREDICTABLE VARIABILITY (LESSON 6)
• Predictable Variability – Change in Demand that can be forecast or guided– MANAGING DEMAND – Short time price discounts, trade promotions
• TIME FLEXIBILITY FROM WORKFORCE (OVERTIME)• USE OF SEASONAL WORKFORCE• USE OF SUBCONTRACTING• USE OF DUAL FACILITIES – DEDICATED AND FLEXIBLE• DESIGN PRODUCT FLEXIBILITY INTO PRODUCTION• USE OF MULTI-PURPOSE MACHINES (CNC MACHINE CENTERS)
– MANAGING INVENTORY• USING COMMON COMPONENTS ACROSS MULTIPLE PRODUCTS• BUILD INVENTORY OF HIGH DEMAND OR PREDICTABLE DEMAND PRODUCTS
Supply Chain Engineering MN 799 122#
MANAGING DEMAND (Predictable Variability)• Manage demand with pricing
– Factors influencing the timing of a promotion:• Impact on demand; product margins; cost of holding inventory; cost
Discount of $1 increases period demand by 10%Reduce price by $1 in Jan, increases sales by 10% in first month - Tab
9.4, 9.5 – effect on cost, profit, inventory If discount is in April, highest demand month - Tab 9.6, 9.7• See the effects of various combination Tab 9-12• Summary Tab 9.12 & 9.13 Discuss
Supply Chain Engineering MN 799 123#
PREDICTABLE VARIABILITY IN PRACTICE
• COORDINATE MARKETING, SALES AND OPERATIONS– SALES AND OPERATIONS PLANNING– ONE GOAL MAXIMIZING PROFIT, ONE GAME PLAN
• TAKE PREDICABLE VARIABILITY INTO ACCOUNT WHEN MAKING STRATEGIC DECISIONS
• PARTNER WITH PRINCIPAL CUSTOMERS, ELIMINATE PREDICTIONS!
• PREEMPT (PROMOS ETC.), DO NOT JUST REACT TO PREDICTABLE VARIABILITY
Supply Chain Engineering MN 799 124#
MANUFACTURING - MANAGING LEAD TIME
• CRITICAL DRIVER OF ALL MANUFACTURE– LAYOUT AND WORKPLACE ORGANIZATION– CONSTRAINT MANAGEMENT– VARIABILITY AND QUEUES– LOT SIZES AND SET UP REDUCTION– WORK IN PROCESS– FLEXIBILITY
• MUST BE COMPANY FOCUS• MEASURED AND MONITORED
– X BUTT TO BUTT
–
Supply Chain Engineering MN 799 125#
MANAGING INVENTORY
• The role of inventory in the supply chain – Cycle Inventory (making or purchasing inventory in large
lots) takes advantage of economies of scale to lower total cost – material cost, fixed ordering cost and holding cost.
• Why hold inventory?– Economies of scale
• Batch size and cycle time• Quantity discounts• Short term discounts / Trade promotions
– Stochastic variability of supply and demand• Evaluating service level given safety inventory• Evaluating safety inventory given desired service level
• Levers to improve performance
Supply Chain Engineering MN 799 126#
Role of Inventory in the Supply Chain
• Overstocking: Amount available exceeds demand– Liquidation, Obsolescence, Holding
• Understocking: Demand exceeds amount available– Lost margin and future sales
Goal: Matching supply and demand
Supply Chain Engineering MN 799 127#
ROLE OF CYCLE INVENTORY (10.1)• Q – lot or batch size of an order• D – Demand• When demand steady : Cycle Inven = lot size/2 = Q/2
Saw tooth diagram• Average flow time = cycle inven / demand = Q/2D
• C – material cost• S – fixed ordering cost• H – holding cost• h – cost of holding $1 in inventory for one year• H = hC cost of holding one piece for one year
Supply Chain Engineering MN 799 128#
Cycle Inventory related costs in Practice
• Inventory holding costs – usually expressed as a % per $ per year– Cost of capital (Opportunity cost of capital)– Obsolescence or spoilage cost– Handling cost– Occupancy cost (space cost)– Miscellaneous costs (security, insurance)
• Order costs (same as set up costs in a machining environment)– Buyer time– Transportation costs– Receiving costs– Other costs
• Cycle Inventory exists in a supply chain because different stages exploit economies of scale to lower total cost – material cost, fixed ordering cost and holding cost
Supply Chain Engineering MN 799 129#
Fixed costs: Optimal Lot Size and Reorder Interval (EOQ)
C: Cost per unit ($C/unit)h: Holding cost per year as a fraction of
product cost ($%/unit/Year)H: Holding cost per unit per yearQ: Lot SizeD: Annual demand S: Setup or Order CostAnnual order cost = (D/Q)SAnnual inventory cost = (Q/2)hCOptimum Q = 2DS/hCT: Reorder interval (Q/D)# orders/yr = D/Q = Optimal order freqTotal Annual Cost = CD+(D/Q)S+(Q/2)hC
See Fig 10-2 Showing effects of Lot Size
DHST
HDSQ
hCH
2
2
Supply Chain Engineering MN 799 130#
Example 10.1
Demand, D = 12,000 computers per yearUnit cost, C = $500Holding cost, h = 0.2Fixed cost, S = $4,000/orderWhat is the order quantity Q, the flow time, the reorder
interval and Total cost?Q = 980 computers Cycle inventory = Q/2 = 490Flow time = Q/2D = 0.049 monthReorder interval, T = 0.98 monthTotal Cost = 49,000 + 49,000 + 6,000,000 = $6,098,000
Supply Chain Engineering MN 799 131#
EXPLOITING ECONOMIES OF SCALE• SINGLE LOT SIZE OF SINGLE PRODUCT (EOQ) = Q
– ANNUAL MATERIAL COST = CD– NO. OF ORDERS PER YEAR = D/Q– ANNUAL ORDER COST = (D/Q)*S– ANNUAL HOLDING COST = (Q/2)H = (Q/2)hC– TOTAL ANNUAL COST (TC) = CR+(D/Q)*S+(Q/2)hC– Optimal lot size Q* = 2DS/hC– Optimal ordering frequency = n* = D/Q* = DhC/2S – Key Point: Total Ordering and Holding costs are relatively stable
around the EOQ and a convenient lot size around the EOQ is OK (rather than a precise EOQ)
– Key Point: If demand increases by a factor of k, the optimal lot size and no of orders increases by a factor of k. Flow time decreases by a factor of k
– Key point: To reduce Q by a factor of k, fixed cost S must be reduced by a factor of k2
Supply Chain Engineering MN 799 132#
Reducing Lot Size - Aggregating
• Exercise: • To reduce Q from 980 to 200, how much must order cost be reduced• Key point: To reduce Q by a factor of k, fixed cost S must be reduced
by a factor of k2
Supply Chain Engineering MN 799 133#
LOT SIZING WITH MULTIPLE PRODUCTS & CUSTOMERS
• Lot sizing with Multiple Product or Customers– Aggregating replenishment across products, retailers or suppliers in a single order,
allows for a reduction in lot sizes because fixed costs spread across multiple products and businesses
– Ordering and delivering independently (See Ex.10.3)• Each order has independent Holding, Ordering and Annual costs with independent
EOQ’s and Flow Times – Table 10-1• Total cost = $155,140
– Total cost Ordered and delivered jointly (See Ex.10.4)• Independent holding costs but combined fixed order cost Table 10-2• Total Cost = $136,528
– Transportation capacity constraint – aggregating multiple products from same supplier; single delivery from multiple suppliers (Ex. 10-5)
• Key Point –The key to reducing cycle inventory is reducing lot size. The key to reducing lot size without increasing costs is to reduce fixed costs associated with each lot – by reducing the fixed cost itself or aggregating lots across multiple products, customers or suppliers. We reduce lot size to reduce cycle time
Supply Chain Engineering MN 799 134#
Impact of product specific order cost
Total Costs Product specific order cost = $1000
No Aggregation
$155,140 (10-3)
Complete Aggregation
$136,528 (10-4)
Tailored Aggregation
$130,767 (10-6)
Tailored aggregation – Higher volume products ordered more frequently and lower volume products ordered less frequently (rather than ordered and delivered jointly) 10-6
Summary
Supply Chain Engineering MN 799 135#
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
Supply Chain Engineering MN 799 136#
Economies of Scale to exploit Quantity Discounts
• Two common Lot Size based discount schemes– All unit quantity discounts
• Pricing based on specific quantity break points
– Marginal unit quantity discounts or multiblock tariffs• Pricing based on quantity break points, but the price is not the
average per block, but the marginal cost of a unit that decreases at breakpoint
– See example in book on these discounts pages 276-280
Supply Chain Engineering MN 799 137#
WHY QUANTITY DISCOUNTS– Improved coordination to increase total supply chain profits
• Commodity Products = price set by market. • Large Manufacturers should use lot based quantity discounts, to
maximize profits (cycle inventory will increase)• The supply chain profit is lower if each stage makes pricing decisions
independently, maximizing its own profit• Coordination to maximize profit
– Two part tariff or quantity discounts – supplier passes on some of the profit to the retailer, depending on volume
– Extraction of surplus through price discrimination– Trade Promotions
– Lead to significant forward buying by the retailer– Retailer should pass on optimal discount to customer and keep rest for
themselves
Supply Chain Engineering MN 799 138#
Quantity Discounts• Discounts improve coordination between Supplier and Retailer to
maximize Supply Chain profits.• Quantity Discounts are a form of manufacturer returning some reduced
costs (less orders) to the retailer (costs increase as more holding costs) • Supply chain profit is lower, if each stage of supply chain independently
makes its pricing decisions with the objective of maximizing its own profit. A coordinated solution results in higher profit
• For products that have market power, two-part tariffs or volume based quantity discounts can be used to achieve coordination in the supply chain and maximize profits
• Promotions lead to significant increase in lot size and cycle inventory, because of forward buying by the retailer. This generally reduces the supply chain profits 280-281
Aggregate across products, supply points, or delivery points in a single order, allows reduction of lot size for individual products Ex 10.6
Supply Chain Engineering MN 799 140#
ESTIMATING CYCLE INVENTORY COSTS
• HOLDING COSTS– Cost of capital– Obsolescence or spoilage costs– Handling costs– Occupancy cost– Miscellaneous
• Order Cost– Buyer time– Transportation costs– Receiving costs– Other costs
Supply Chain Engineering MN 799 141#
Lessons From Aggregation
• Key to reducing cycle inventory is reducing lot size. Key to reducing lot size without increasing costs is to reduce the fixed cost itself by aggregation (across multiple products, customers or suppliers)
• Aggregation allows firm to lower lot size without increasing cost
• Complete aggregation is effective if product specific fixed cost is a small fraction of joint fixed cost
• Tailored aggregation is effective if product specific fixed cost is large fraction of joint fixed cost
Supply Chain Engineering MN 799 142#
Lessons From Discounting Schemes
• Lot size based discounts increase lot size and cycle inventory in the supply chain
• The supply chain profit is lower if each stage independently makes pricing decisions with the objective of maximizing its own profit. Coordinated solution results in higher profit
• Lot size based discounts are justified to achieve coordination for commodity products – competitive market and price fixed by market
• Volume based discounts with some fixed cost passed on to retailer are more effective in general– Volume based discounts are better over rolling horizon
Supply Chain Engineering MN 799 143#
Levers to Reduce Lot Sizes Without Hurting Costs
• Cycle Inventory Reduction– Reduce transfer and production lot sizes
• Aggregate fixed cost across multiple products, supply points, or delivery points
– Are quantity discounts consistent with manufacturing and logistics operations?
• Volume discounts on rolling horizon• Two-part tariff – volume based discount in stages
– Are trade promotions essential?• EDLP (Every day low pricing)• Base on sell-thru (customers) rather than sell-in (retailers)
• HOMEWORK• EXERCISES 1 AND 2 Pp291/297
Supply Chain Engineering MN 799 144#
Discussions on Site Visit• Macy’s Distribution Center (DC)• In teams please answer the following:
– What is the size of the operation– What strategy do they adopt and why– What are the key competitive practices– How do they deal with each of the Supply Chain Drivers
• Measurements used for efficiency?
• How can they improve their operations?
Supply Chain Engineering MN 799 145#
Mid Term• Show your calculations• Do not get stuck on any question1. Strategy applications and implications 152. Demand Management 203. Aggregate Demand 204. Cycle Inventory 205. Supply Chain Networks 25
Supply Chain Engineering MN 799 146#
Role of Inventory in the Supply Chain (LESSON 7)
Improve Matching of Supplyand 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
– INTERNET MAKES SEARCH EASIER– PRODUCT VARIETY GROWN WITH CUSTOMIZATION– EASE AND VARIETY PUTS PRESSURE ON PRODUCT
AVAILABILITY– PUSH UP LEVELS OF INVENTORY / SAFETY STOCK
• KEY QUESTIONS– APPROPRIATE LEVEL OF SAFETY STOCK– WHAT ACTIONS IMPROVE AVAILABILITY AND REDUCE
SAFETY STOCK?Measures of product availability
– Product fill rate (fr)– Order fill rate– Cycle service level (CSL) - THIS COURSE WILL DEAL mainly WITH CSL
Supply Chain Engineering MN 799 148#
APPROPRIATE LEVEL OF SAFETY STOCK DEPENDS ON: UNCERTAINTY OF DEMAND OR SUPPLY REPLENISHMENT LEAD TIME & DESIRED SERVICE LEVELCSL – Cycle service level -CSL is the fraction of replenishment cycles that end with all the customer demand being met. A replenishment cycle is the interval between two successive replenishment deliveries
Time
InventoryCycle Inventory Q/2
Safety Stock
Demand during Lead time
ROP
Lot Size = Q
SS = ROP - DL
Supply Chain Engineering MN 799 149#
Replenishment policies
• Replenishment policies– When to reorder?– How much to reorder?
Continuous Review: Order fixed quantity when total inventory drops below Reorder Point (ROP)
Periodic Review: Order at fixed time intervals to raise total inventory to Order up to Level (OUL)
Factors driving safety inventory– Demand and/or Supply uncertainty– Desired level of product availability– Replenishment lead time
• Demand Uncertainty– Av.Demand; Stnd Devn; Lead Time
Supply Chain Engineering MN 799 150#
Continuous Review Policy: Safety Inventory and Cycle Demand Uncertainty & Service Level
L: Lead time for replenishmentD: Average demand per unit timeD:Standard deviation of demand
per periodDL : Mean demand during lead time L: Standard deviation of demand
during lead timeCSL: Cycle service level –
Probability of not stocking out in replenishment cycle
SS: Safety inventoryROP: Reorder pointCv: Coefficient of variance
Average Inventory = Q/2 + SS
SS = ROP - RL
Supply Chain Engineering MN 799 151#
FORMULAS USED FOR CALCULATING SERVICE LEVELS
)1,1,0,/(]1,1,0,/(1[(/)(/1
)1,,,(),(/
),,(
,
LLL
LLLL
LL
L
DL
L
ssNORMDISTssNORMDISTssorESCQESCQQESCfr
ROPNORMDISTDROPFCSLcv
ROPFCSL
ssROP
L
LD
D
DD
D
Supply Chain Engineering MN 799 152#
Example 11.1&2, 11.4 (Continuous Review Policy) = 8.xx New book
11.1: R = 2,500 /week; R = 500L = 2 weeks; Q = 10,000; ROP = 6,000 CSL = 90%SS = ROP - DL = Average Inventory = Average Flow Time =11.2: Evaluating CSL given a replenishment policyCSL = Prob (demand during lead time <= ROP)Distribution of demand during lead time of 2 weeks
Cycle service level, CSL = F(RL + ss, RL , L ) = F(ROP, RL , L ) Excel: NORMDIST (ROP, RL , L ,1)
X1= Xbar + Z L or ROP = RL + Z L Calculate the % z represents. Calculate Safety Stock for above
DL
L
L
DLD
Z Chart
Supply Chain Engineering MN 799 153#
Examples of Safety Stock Calculations• Weekly demand for Lego at Wal Mart is normally distributed with a mean of
2500 boxes and a standard deviation of 500. The replenishment lead time is 2 weeks. Assuming a continuous replenishment policy, evaluate the safety inventory that the store should carry to achieve a cycle service of 90 percent
Supply Chain Engineering MN 799 154#
Factors Affecting Fill Rate• Fill Rate: Proportion of customer demand that is satisfied from
Inventory. Directly related to CSL• Safety inventory: Safety inventory is increased by:
– Increasing fill rate (Table 11-1)– Increasing CSL– Increasing supplier lead time by factor k – SS increases by factor of SQRT k – Increasing standard deviation of demand by factor k – SS increases by factor
of k• Lot size: Fill rate increases on increasing the lot size even though cycle service
level does not change.
Actions: 1. Reduce supplier Lead Time L 2. Reduce underlying uncertainty of demand R
Supply Chain Engineering MN 799 155#
Evaluating Safety Inventory Given Fill Rate
Fill Rate Safety Inventory
97.5% 67
98.0% 183
98.5% 321
99.0% 499
99.5% 767
Required safety stock grows rapidly with increase in the desired Product availability
The required SS grows rapidily with increase in desired Fill RateThe required SS increases with increase in Lead time and the σ of demand
Supply Chain Engineering MN 799 156#
Impact of Supply Uncertainty
Considering variation in Demand and in Replenishment Lead time (Ex 11.6)
• D: Average demand per period D: Standard deviation of demand per period• L: Average lead time for replenishment sL: Standard deviation of supply lead time
sDD
LL
L
DL
DL222
Standard Deviationof demand during lead time
Mean demand during lead time
Supply Chain Engineering MN 799 157#
Impact of Supply Uncertainty ((See Ex. 11.6 & Table 11.2)
Ex.11.6: R = 2,500/day; R = 500; L = 7 days; Q = 10,000; CSL = 0.90 (z=1.29); sL = Standard Deviation of lead time=7days What is S.S? Large potential benefits of reducing Lead time or lead time variability in
reduction of Safety stockSS units SS (d) Stnd Dev(L )
Safety inventory when sL = 0 1,695 0.68 1,323Safety inventory when sL = 1 3,625 1.45 2,828Safety inventory when sL = 2 6,628 2.65 5,172Safety inventory when sL = 3 9,760 3.90 7,616Safety inventory when sL = 4 12,927 5.17 10,087Safety inventory when sL = 5 16,109 6.44 12,750Safety inventory when sL = 6 19,298 7.72 16,109Safety inventory when sL = 7 is 22,491 8.99 17,550
Supply Chain Engineering MN 799 158#
Basic Quick Response Initiatives
• Reduce information uncertainty in demand• Reduce replenishment lead time• Reduce supply uncertainty or replenishment lead
time uncertainty• Increase reorder frequency or go to continuous
review
Supply Chain Engineering MN 799 159#
Factors Affecting Value of Aggregation• DEMAND CORRELATION –
– AS CORRELATION INCREASES, THE SS BENEFIT OF AGGREGRATION DECREASES
– IF THERE IS LITTLE CORRELATION BETWEEN DEMAND, AGGREGRATION REDUCES STND. DEVN. OF DEMAND AND HENCE SAFETY STOCK (see ex. 11.7, Table 11.3)
• Coefficient Of Variation = Stnd Devn/Mean (uncertainty relative to size of demand) p=0 No Correlation
– THE HIGHER THE COEFFICIENT OF VARIATION OF AN ITEM, THE GREATER THE REDUCTION IN SAFETY STOCK AS A RESULT OF CENTRALIZATION (LOW COEFFICIENT OF VARIATION ALLOW ACCURATE FORECASTING AND DECENTRALIZED STOCKING)
• REDUCING SUPPLY VARIATION REDUCES SAFETY STOCK WITHOUT REDUCING CSL
• VALUE OF A PRODUCT– DIRECTLY DETERMINES THE SAFETY STOCK LEVEL
Supply Chain Engineering MN 799 160#
IMPACT OF AGGREGRATION ON SAFETY STOCK• HOW TO REDUCE SS WITHOUT REDUCING CSL?
– AGGREGRATION REDUCES STANDARD DEVIATION OF DEMAND, ONLY IF DEMAND ACROSS AREAS IS NOT CORRELATED, THAT IS EACH AREA IS INDEPENDENT
• See Table 11.4 p323– AGGREGRATION REDUCES SS BY THE SQRT OF NUMBER OF AREAS
AGGREGRATED (REDUCING NUMBER OF STOCKING LOCATIONS)–SQUARE ROOT LAW (Ex. AMAZON) See Fig 11.4
– INFORMATION CENTRALIZATION – ORDERS FILLED FROM WAREHOUSE CLOSEST TO CUSTOMER
– SPECIALIZATION BY LOCATION • LOW DEMAND, SLOW MOVING ITEMS: CENTRALIZED – HIGH
COEFFICIENT OF VARIATION• HIGH DEMAND, FAST MOVING ITEMS: DECENTRALIZED – LOW
COEFFICIENT OF VARIATION
– Centralization Disadvantage: • Increase in Response time; • Increase in Transport costs
Supply Chain Engineering MN 799 161#
IMPACT OF AGGREGRATION ON SAFETY STOCK
• HOW TO REDUCE SS WITHOUT REDUCING CSL?– PRODUCT SUBSTITUTION
• MANUFACTURER DRIVEN – AGGREGATE DEMAND & REDUCE SS; • IF PRODUCTS STRONGLY CORRELATED, LESS VALUE IN SUBSTITUTION • CUSTOMER DRIVEN – TWO WAY SUBSTITUTION – ALLOWS REDUCTION
IN SS WHILE MAINTAINING HIGH PRODUCT AVAILABILITY• GREATER THE VARIABILITY AND LESS THE CORRELATION OF
DEMAND, THE GREATER THE BENEFIT IN SUBSTITUTION– COMPONENT COMMONALITY (TABLE 11.5)
• WITHOUT COMMONALITY, UNCERTAINTY OF DEMAND FOR COMPONENTS SAME AS THAT FOR PRODUCT (SEE Ex. 11.9)
– POSTPONMENT• DELAY DIFFERENTIATION OR CUSTOMIZATION AS CLOSE TO SALE
TIME AS POSSIBLE– COMMON COMPONENTS IN PUSH PHASE– POWERFUL CONCEPT FOR E-COMMERCE
Supply Chain Engineering MN 799 162#
Example 11.9: Value of Component CommonalityY Axis – SS Quantity; X Axis – No. of common components
050000
100000150000200000250000300000350000400000450000
1 2 3 4 5 6 7 8 9
SS
Without component commonality and postponment, product differentiation Occurs early in the Supply Chain and inventories are disaggregate
Supply Chain Engineering MN 799 163#
ESTIMATING AND MANAGING SS IN PRACTICE• ACCOUNT FOR LUMPY SUPPLY CHAIN DEMAND
– CAUSED BY LARGE LOT SIZES & ADDS TO VARIABILITY– EMPIRICALLY – RAISING SS BY HALF LOT SIZE
• ADJUST INVENTORY POLICY IF DEMAND SEASONAL– CHANGE BOTH MEAN AND STND DEVN
• USE SIMULATION TO TEST INVENTORY POLICIES– EXCEL
• START WITH A PILOT• MONITOR SERVICE LEVELS• FOCUS ON REDUCING SAFETY STOCK• PERIODIC REVIEW REPLENISHMENT REQUIRES MORE SAFETY STOCK
THAN CONTINUOUS REVIEW POLICIES
Supply Chain Engineering MN 799 164#
Mass Customization I: Customize Services Around Standardized Products
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Deliver customized services aswell as standardized productsand services
Market customized services with standardizedproducts or services
Continue producing standardized products or services
Continue developing standardized products or services
Source: B. Joseph Pine
Supply Chain Engineering MN 799 165#
Mass Customization II: Create Customizable Products and Services
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Deliver standard (but customizable) productsor services
Market customizable products or services
Produce standard (but customizable) products or services
Develop customizable products or services
Supply Chain Engineering MN 799 166#
Mass Customization III: Provide Quick Response Throughout Value Chain
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Reduce Delivery Cycle Times
Reduce selection and order processing cycle times
Reduce Production cycle time
Reduce development cycle time
Supply Chain Engineering MN 799 167#
Mass Customization IV: Provide Point of Delivery Customization
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Deliver standardize portion
Market customized products or services
Produce standardized portion centrally
Develop products where point of delivery customization is feasible
Point of deliverycustomization
ens Warehouse and Restaurants
Supply Chain Engineering MN 799 168#
Mass Customization V: Modularize Components to Customize End Products
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Deliver customized product
Market customized products or services
Produce modularized components
Develop modularized products
utos
Supply Chain Engineering MN 799 169#
Types of Modularity for Mass Customization
Component Sharing Modularity
Cut-to-Fit Modularity
Bus Modularity
Mix Modularity
Sectional Modularity
Supply Chain Engineering MN 799 170#
Example of Point of Service Replenishment• Safety Stock and Re-order point management in Toyota
Another advantage of Toyota’s new system is that safety stock criteria can be adjusted according to seasonal requirements. Previously, the company had no ability to recognize the seasonality of items such as wiper blades. It worked from one forecast model — a simple moving average — that didn’t allow for fine-tuning or sudden shifts in consumer taste. Reorder points were recalculated just once a month.
To support the new system, Toyota implemented Exam Inventory, a solution made by Entity Software in Epson, U.K. Exam is an inventory management program that runs on a PC and is fed raw data directly from a computer. As a result, Toyota (GB) was able to fully customize the package to its needs with minimal impact on the company’s larger computers. The software allows for more sophisticated forecasting and more accurate calculation of reorder points (ROPs), while keeping safety stocks low.
Toyota now has moved to weekly ROP calculations and hopes eventually to carry out that function on a daily basis when the technology permits, Results of the program so far include an improvement in Toyota’s service level from 94 percent to 96 percent, reduction in the number of manual order changes from 3,000 a day to 50, and reduction in run times from 12 to 3.5 hours.
Supply Chain Engineering MN 799 171#
Cautions in Implementing Postponement and Modularity
• End products must look suitably different to the consumer• Design and production costs can only be justified over a
family of products• Performance and cost of a product can be optimized by
eliminating modularity. Do a small set of products provide most of the sales?
•Reduce fixed cost•Aggregate across products•Volume discounts•EDLP•Promotion on Sell thru
•Quick Response measures•Reduce Info Uncertainty•Reduce lead time•Reduce supply uncertaint
•Accurate Response measures•Aggregation•Component commonalit and postponement
Supply Chain Engineering MN 799 173#
HOMEWORK
• Page 336 Q4 and Q5
• Provide actual examples of the five types of customization
Supply Chain Engineering MN 799 174#
OPTIMUM LEVEL OF PRODUCT AVAILABILITY Exercise: Swimsuit Production Lesson 8
• Fashion items have short life cycles, high variety of competitors• SnowTime Sporting Goods
– New designs are completed– One production opportunity– Based on past sales, knowledge of the industry, and economic conditions,
the marketing department has a probabilistic forecast– The forecast averages about 13,000, but there is a chance that demand will
be greater or less than this• Production cost per unit (C): $80• Selling price per unit (S): $125• Salvage value per unit (V): $20• Fixed production cost (F): $100,000• Q is production quantity, D demand• Profit = Revenue - Variable Cost - Fixed Cost + Salvage
Supply Chain Engineering MN 799 175#
Demand Distribution
Demand Scenarios
0%5%
10%15%20%25%30%
Sales
Pro
babi
lity
Supply Chain Engineering MN 799 176#
Exercise• Scenario One:
– Suppose you make 12,000 jackets and demand ends up being 13,000 jackets.
– Suppose you make 12,000 jackets and demand ends up being 11,000 jackets.
– Profit = 125(11,000) - 80(12,000) - 100,000 + 20(1000) = $ 335,000• Find order quantity that maximizes weighted average profit.• Average demand is 13,100 (work out – Σp.D)• Question: Will this quantity be less than, equal to, or greater than
average demand?• Look at marginal cost Vs. marginal profit
– if extra jacket sold, profit is 125-80 = 45– if not sold, cost is 80-20 = 60
• So we will make less than average
Supply Chain Engineering MN 799 177#
Profitability Calculations
Expected Profit
$0
$100,000
$200,000
$300,000
$400,000
8000 12000 16000 20000
Order Quantity
Prof
it
Supply Chain Engineering MN 799 178#
Profitability scenarios
0%
20%
40%
60%
80%
100%
Cost
Prob
abili
ty
Q=9000
Q=16000
Supply Chain Engineering MN 799 179#
OPTIMAL LEVEL OF PRODUCT AVAILABILITY
• FACTORS AFFECTING OPTIMAL PRODUCT AVAILABILITY– COST OF OVERSTOCKING Co
– COST OF UNDERSTOCKING Cu• LOST SALES• LOST CUSTOMERS
• EXAMPLE OF L.L.BEAN (Table 12.1)– For all references New Book 12.xx
Supply Chain Engineering MN 799 180#
Parkas at L.L. Bean
Cost per parka = $45Sale price per parka = $100Discount price per parka = $50Holding and transportation cost = $10
• Profit from selling parka = $100-$45 = $55• Cost of overstocking = $45+$10-$50 = $5• Expected demand = =1026, ordered 1000 parkas CSL51%• Expected profit from ordering 1000 parkas = $49,900• See formula on page 224
– Expected profit =
)(1000)10
41()])(1000()([ cpiiii
iPpscDcpD
ii pD
Supply Chain Engineering MN 799 181#
Summary• Tradeoff between ordering enough to meet demand and ordering too much• Several quantities have the same average profit• Average profit does not tell the whole story• Question: 9000 and 16000 units lead to about the same average
profit, so which do we prefer? Work out probabilities of profit and loss• The optimal order quantity is not necessarily equal to average forecast demand
(13,100)• The optimal quantity depends on the relationship between marginal profit and
marginal cost• As order quantity increases, average profit first increases and then decreases• As production quantity increases, risk increases. In other words, the
probability of large gains and of large losses increases
Supply Chain Engineering MN 799 182#
How much to order? Parkas at L.L. Bean (Table 12.1)Demand
(00’s) Probabability Cumulative Probability of
demand being this size or less Probability of demand greater than this size
The probability that demand is greater than 1100 is 0.29 but the probability that demand is greater than or equal to 1100 is 0.49. O.51 is the probability that the demand is 1000 or less. Thus, 1-0.51 = 0.49 is the probability that the demand is greater than 1000 = probability that demand is greater than or equal to 1100
Supply Chain Engineering MN 799 183#
Parkas at L.L. Bean (Table 12.2)Expected Marginal Contribution of each 100 parkas Fig 9.1
Additional 100s
Expected Marginal Benefit
Expected Marginal Cost
Expected Marginal Contribution
11th 5500.49 = 2695 500.51 = 255 2695-255 = 2440
12th 5500.29 = 1595 500.71 = 355 1595-355 = 1240
13th 5500.18 = 990 500.82 = 410 990-410 = 580
14th 5500.08 = 440 500.92 = 460 440-460 = -20
15th 5500.04 = 220 500.96 = 480 220-480 = -260
16th 5500.02 = 110 500.98 = 490 110-490 = -380
17th 5500.01 = 55 500.99 = 495 55-495 = -440
Supply Chain Engineering MN 799 184#
Optimal Order Quantity
0
0.2
0.4
0.6
0.8
1
1.2
4 5 6 7 8 9 10 11 12 13 14 15 16 87
Probability
Optimal Order Quantity = 13
0.917
Prob
Supply Chain Engineering MN 799 185#
Optimal level of service (Eqn. 12.1)p = retail sale price; s = outlet or salvage price; c = purchase price; Co = cost of overstocking by one unit, Co = c - sCu = cost of understocking by one unit, Cu = p - cCSL* = Optimal SL. Optimal order size O* If O* +1, expected marginal benefit from increasing order size by 1 = (1-
CSL*)(p - c) (understocking cost x prob of understock)If O* -1, Expected Marginal Cost = CSL*(c - s).
Thus expected marginal contribution of O* to O* +1 (1-CSL*)Cu - CSL* Co (or optimally) = 0
CSL*= prob. (dem. =< O* ) = Cu / (Cu + Co) = (p-c) (p-s)
Supply Chain Engineering MN 799 186#
Order Quantity for a Single Order (ex 12.1)
Salvage value = $80
Co = Cost of overstocking
= c-s = $20
Cu = Cost of understocking
= p – c = $150
O* = Optimal order size
46810018.1350*
88.020150
150
)(Pr *CSL *
xzO
Demandob
CCC
R
ou
u
Supply Chain Engineering MN 799 187#
MANAGERIAL LEVERS TO IMPROVE PROFITABILITY
• How to Estimate Demand Distribution?– Historical data: Time series forecasting
Key: Forecast must include estimated demand and uncertainty (standard deviation) of demand
Supply Chain Engineering MN 799 188#
Levers for Increasing Supply Chain Profitability• Increase salvage value (cost of overstock) or decrease margin lost from stockout –
backup sourcing; rain checks. • As Co/Cu gets smaller, optimal level of product availability (CSL) increases (see Fig
12.2). Companies with high margin have high cost of understocking and so provide high CSL
• Improved forecasting to lower demand uncertainty (table 12.3) – CSL is constant. Optimum order size decreases and Expected profit increases
• Quick response Reduce replenishment lead time so as to increase number of orders per season (table 12.4, 12.5). With two or more orders:– Possible to provide same CSL with less inventory– Average overstock at end of season is less– Profits higher with second order
• If quick response allows multiple orders in the season, profits increase and overstock quantity reduces (Fig 12.4,12.5)
Supply Chain Engineering MN 799 189#
Levers for Increasing Supply Chain Profitability
• Postponement of product differentiation– Better match of supply and demand for products not positively
correlated and about the same size– Postponment may reduce overall profits, if one product contributes
to majority of demand (extra cost of later manufacturing)– Tailored postponement only uncertain part of demand, producing
predictable part at lower cost without postponement
• Tailored supply sourcing – focus on two sources– One source focus on cost; unable to handle uncertainty –
predictable portion– One source focus on flexibility; at a higher cost – unpredictable
• HOW DO THIRD PARTIES INCREASE SUPPLY CHAIN SURPLUS– CAPACITY AGGREGRATION– INVENTORY AGGREGRATION– TRANSPORTATION AGGREGRATION– WAREHOUSING AGGREGRATION– PROCUREMENT AGGREGRATION– INFORMATION AGGREGRATION– RECEIVABLE AGGREGRATION– RELATIONSHIP AGGREGRATION– LOWER COSTS AND HIGHER QUALITY (Table 14.1)
Supply Chain Engineering MN 799 198#
RISKS OF USING A THIRD PARTY• THE PROCESS IS BROKEN – lack control• UNDERESTIMATE COST OF COORDINATION• REDUCED SUPPLIER/CUSTOMER CONTACT• LOSS OF INTERNAL CAPABILITY AND GROWTH IN THIRD
PARTY POWER• LEAKAGE OF SENSITIVE DATA AND INFORMATION• INEFFECTIVE CONTRACTS
• THIRD AND FOURTH PARTY PROVIDERS (Table 14-2)– Transportation– Warehousing– Information technology– Reverse Logistics– International– Special skills/handling
Supply Chain Engineering MN 799 199#
SUPPLIER SCORING AND ASSESSMENTMUST BE BASED ON IMPACT ON TOTAL COST (Tab14-3)
• IN ADDITION TO PRICE • REPLENISHMENT LEAD TIME; • ON TIME PERFORMANCE• SUPPLY FLEXIBILITY • DELIVERY FREQUENCY/ MINIMUM LOT SIZE• SUPPLY QUALITY• INBOUND TRANSPORTATION COSTS• INFORMATION COORDINATION CAPABILITY• DESIGN COST REDUCTION• EXCHANGE RATES, TAXES AND DUTIES• SUPPLIER VISIBILITY• RESPONSIVENESS
Supply Chain Engineering MN 799 200#
SOURCING DECISIONS• SUPPLIER PERFORMANCE BASED ON IMPACT ON TOTAL
COST (see Table 14.1)– Ex. Green Thumb gets bearings at $1.00 in lots of 2,000 with a lead time
of 2 weeks and a stnd devn of 1 week. New supplier offers $0.97 with lot size of 8000, a lead time of 6 weeks and stnd devn of 4 weeks. Given 1000 bearings needed per week with a stnd devn of 300 and that holding costs are 25% and CSL is 95% which supplier should be selected
Supply Chain Engineering MN 799 201#
SOURCING DECISIONS• CONTRACTS
– BUYBACK OR RETURN CONTRACTS• LOWERS COST OF OVERSTOCKING
– REVENUE SHARING CONTRACTS• REDUCES COST PER UNIT TO RETAILER & COST OF OVERSTOCKING
– QUANTITY FLEXIBILITY CONTRACTS – BEST• RETAILER CAN MODIFY ORDER CLOSER TO POINT OF SALE
– CONTRACTS TO INDUCE PERFORMANCE IMPROVEMENT• SHARED SAVINGS CONTRACT
• DESIGN COLLABORATION– HELPS REDUCE COST, IMPROVE QUALITY AND TIME TO MARKET
• PROCUREMENT PROCESS – FOCUS ON IMPROVING DIRECT MATERIALS COORDINATION AND
VISIBILITY WITH SUPPLIER– LOOKING SEPARATELY AT DIRECT AND INDIRECT MATERIAL COSTS (14-7)– CLASSIFYING ITEMS PER COST AND CRITICALITY (FIG 14.2)– FOCUS ON IMPROVING INDIRECT MATERIALS BY DECREASING
TRANSACTION COST OF ORDER– BOTH SHOULD CONSOLIDATE ORDERS FOR ECONOMIES OF SCALE
Supply Chain Engineering MN 799 202#
SOURCING DECISIONS
• SOURCING DECISIONS IN PRACTICE– USE MULTIFUNCTIONAL TEAMS– ENSURE APPROPRIATE COORDINATION ACROSS
REGIONS AND BUSINESS UNITS– ALWAYS EVALUATE TOTAL COST OF OWNERSHIP– BUILD LONG TERM RELATIONSHIP WITH KEY
SUPPLIERS
Supply Chain Engineering MN 799 203#
Make or Buy Decision
– Cost– Time– Capacity Utilization– Control of Production/Quality– Design Secrecy– Supplier Reliability and Technical Expertise– Volume– Workforce Stability
Supply Chain Engineering MN 799 204#
Make-or-Buy Decision•Original Data:•Produce 10,000 units
• Each Logistically Distinct Business (LDB) will have distinct requirements in terms of– Inventory– Transportation– Facility– Information
Key: How to gain efficiencies while tailoring logistics?
Supply Chain Engineering MN 799 213#
FACTORS AFFECTING TRANSPORTATION DECISIONS
• CARRIER– VEHICLE RELATED COST – cost of vehicle– FIXED OPERATING COST – terminals, labor– TRIP RELATED COST – fuel, labor– QUANTITY RELATED COST - weight– OVERHEAD COST – planning, dispatching
• SHIPPER– TRANSPORTATION COST – cost per Ton mile– INVENTORY COST – holding – FACILITY COST - storage– PROCESSING COST – loading unloading– SERVICE LEVEL COST – not making delivery
Supply Chain Engineering MN 799 214#
Transportation Modes (See Table 13.1 )
• Trucks– TL – LTL – Carload – Intermodal
• Rail• Air • Package Carriers• Water• Pipeline
DISCUSS USES AND ISSUES
Supply Chain Engineering MN 799 215#
AIR
• Freight Revenue 777b 2002 (96.7% change from 1993)• Average revenue / ton-mile (1996) = 58.75 cents• Average haul = 1,260 miles• Average load = 10.5 tons• 1998 Freight expense $22.678b• Key Issues
– Location/Number of hubs– Location of fleet bases / crew bases– Schedule optimization– Fleet assignment– Crew scheduling– Yield management
• Best Use
Supply Chain Engineering MN 799 216#
Truckload (TL)
• Freight Revenue 6,660b (42.2% change from 1993)• Average revenue per ton mile (1996) = 9.13 cents• Average haul = 274 miles• Average Capacity = 42,000 - 50,000 lb.• 1998 Freight expense $ 401.68billion• Low fixed and variable costs• Major Issues
– Utilization (Idle and empty travel)– Consistent service– Backhauls
• Best Use?
Supply Chain Engineering MN 799 217#
Less Than Truckload (LTL)
• Average revenue per ton-mile (1996) = 25.08 cents• Average haul = 646 miles• 1998 Freight expense with TL• Higher fixed costs (terminals) and low variable costs• Major Issues
– Location of consolidation facilities– Utilization– Vehicle routing– Customer service (delivery time and reliability)
• Best Use?
Supply Chain Engineering MN 799 218#
Rail
• Freight Revenue 388b (39.2% change from 1993)• Average revenue / ton-mile (1996) = 2.5 cents• Average haul = 720 miles• Average load = 80 tons• 1998 Freight expense $35.35billion• Key Issues
– Scheduling to minimize delays / improve service– Off track delays (at pick up and delivery end) – Yard operations, transitions– Variability of delivery times
• Best Use?
Supply Chain Engineering MN 799 219#
Other Modes• Water – 0.73c per ton mil
– Freight Revenue 867b (39.9% change from 1993)– average haul miles 500 internal to 1500 coast– 1998 Freight expense $ 25.35b– Cheapest mode for global shipping– Issues: delays at ports, customs, management of containers
• Pipe – 1.40c per ton mile– Freight Revenue 285b (-8.7% change from 1993)– Average haul 400 products to 760 crude– 1998 Freight expense $ 8.74b– Issues: Infrastructure
• Intermodal– Freight Revenue 1,111b (67% change from 1993)– Combination – most common truck/rail– Very useful in global trade– Issues: exchange of information to facilitate transfer
Supply Chain Engineering MN 799 220#
Tradeoffs in Transportation Design
• Transportation, facility, and inventory cost tradeoff– Choice of transportation mode– Inventory aggregation
• Transportation cost and responsiveness tradeoff• Ranking of Transportation Modes in terms of Supply
Chain performance – Table 13-3
Supply Chain Engineering MN 799 221#
DESIGN OPTIONS FOR TRANSP NETWORK• DIRECT SHIP NETWORK (fig 13.2)
– IF REPLENISHMENT LARGE ENOUGH FOR TL• DIRECT SHIP WITH MILKRUNS (fig 13.3)
– SINGLE SUPPLIER TO MULTIPLE RETAILER OR VICE VERSA– ELIMINATE INTERMEDIATE WAREHOUSES– LOWER TRANSPORTATION COSTS
• ALL SHIPMENTS VIA CDC (FIG 13.4, 13.5)– DC STORE INVENTORY OR TRANFER LOCATION– CROSS DOCKING– SHIP VIA DC WITH MILK RUN
• TAILORED NETWORK (FIG 13.5)
EXERCISE: ADVANTAGES AND DISADVANTAGES OF EACH – next slide
Supply Chain Engineering MN 799 222#
PROS AND CONS OF TRANP. NETWORKS (Tab 13.2)
Network Structure Pros Cons
Direct Shipping *No intermediate Whse* Simple to coordinate
*High inventories*Significant Receiving expense
Direct Shipping with milk runs *Lower transp costs small lots*Lower inventories
* More coordination complexity
All shipments via CDC with inventory storage
*Consolidation less inbound transp cost
*Increased Inventory*Increased handling
Ship via CDC with cross docking
*Very low inventory*Consolidation-less trans Cost
* More coordination complexity
Shipping via DC using milk runs
* Lower outbound trans cost for small lots
*Further increase in coordin complexity
Tailored network *Match trans choice with needs *Highest coordin complexity
Supply Chain Engineering MN 799 223#
TRADE OFFS IN TRANSPORTATION DESIGNTRANSPORTATION AND INVENTORY COST TRADE-OFF
• Choice of Transport Mode: Eastern Electric Corp (Ex 13.1)
• Annual demand = 120,000 motors Traditional lot size 3000
• Cost per motor = $120 Weight 10lbs
• Current order size = See Table 13.4
• Safety stock carried = 50% of demand during delivery lead time
• Lead times – 1 day to process, transit time days - rail 5, road 3
• Work out the total cost for each transport proposal See Table 13.5
• Proposal Quantity over 250cwt $4/cwt to $3/cwt and shipment batch size 4000. What
should plant do
Total Costs = Inventory costs (include Cycle, Safety) + Transportation costs (depend on
weight and form of transport)
Supply Chain Engineering MN 799 224#
Eastern Electric Corporation (Table 13.5)
Alternative (Lot size)
Transport Cost
Cycle Inventory
Safety Inventory
Transit Inventory
Inventory Cost
Total Cost
AM Rail (2,000)
$78,000 1,000 986 1,644 $108,900 $186,900
Northeast Trucking (1,000)
$90,000 500 658 986 $64,320 $154,320
Golden (500)
$96,000 250 658 986 $56,820 $152,820
Golden (2,500)
$86,400 1,250 658 986 $86,820 $173,220
Golden (3,000)
$78,000 1,500 658 986 $94,320 $172,320
Golden (4,000)
$67,500 2,000 658 986 $109,320 $176,820
Supply Chain Engineering MN 799 225#
Inventory Aggregation at HighMed Ex 13.2 (Table 13.6)
Highval (cost $200/unit, 0.1 lbs/unit) demand in each territoryH = 2, H = 5, CSL= 0.997, Holding cost = 25%
Lowval (cost $30/unit, 0.04 lbs/unit) demand in each territoryL = 20, L = 5
UPS rate: $0.66 + 0.26x {for replenishments}FedEx rate: $5.53 + 0.53x {for customer shipping} where x is quantity shipped in lbsFactory 1 week replenish, local inventory 4 wks replenishAverage customer order – 1 Highval & 10 LowvalOption A – Replenish weekly instead of every 4 weeksOption B – Elimin inventory in territories, aggregate all inven in one
warehouse, replenish warehouse once a week
Supply Chain Engineering MN 799 226#
Inventory Aggregation at HighMed (13.6)
Current Scenario
Option 1 Option 2
# Locations 24 24 1 Reorder Interval 4 weeks 1 week 1 week Inventory Cost $54,366 $29,795 $8,474 Shipment Size(dltxlt) 8 H + 80 L 2 H + 20 L 1 H + 10 L Transport Cost $530 $1,148 $14,464 Total Cost $54,896 $30,943 $22,938
If shipment size to customer is 0.5H + 5L, total cost of option 2 increases to $36,729.
Supply Chain Engineering MN 799 227#
Physical Inventory Aggregation: Inventory vs. Transportation cost
• Firms can significantly reduce SS by physically aggregating inventory in one location
• As a result of physical aggregation– Inventory costs decrease– Inbound transportation cost decreases – one destination DC– Outbound transportation cost increases – several deliveries
• Advantageous when inventory and facility costs form a large fraction of supply chain costs– Large value to weight ratio (ex PC’s)– High demand uncertainty and large value (ex designer dresses)– Large customer orders to cover economies of scale on outbound
transportation
Supply Chain Engineering MN 799 228#
Tailored Transportation (Table 13.9)
• Factors affecting tailoring – Optimizing response vs cost– Customer distance and density
» Short distance Med distance Long distance
Hi Density Private fleet milk runs Crossdock, milk runs Crossdock, milk runsMed Dens Third party milk runs LTL carrier LTL or package carrierLow Dens Third party milk runs or LTL LTL or package carr Package carrier
– Customer size• Large can use a TL; medium and small LTL use LTL or milk runs
– Product demand and value (Table 13.10)• Product Hi value Lo value• High demand Disaggreg cycle inven Disaggreg all inven, use inexpen trans
» Aggregate safety stock, for replen inven» inexpen transp for replen, cycle &» fast mode for safety inventory
• Low demand Aggregate all inven. Use fast Aggregate Safety inven only. Use inexpen» trans for filling cust orders trans for replen cycle inven
Supply Chain Engineering MN 799 229#
ROUTING AND SCHEDULING IN TRANSPORTATION Chapter 5)
• Framework for Network Design Decisions (Table 5.2)– Phase I : Define a supply chain strategy– Phase II: Define regional facility configuration– Phase III: Select a set of desirable potential sites– Phase IV: Location Choices– Exercise Sun Oil Fig 5-3
• Phase II Network Optimization Models: Capacitated Plant Location Model– Decide on Network design that maximizes profits
• Phase III: Gravity Location Models (Table 5-1) – Work out manually– Identify the distance matrix– Identify the savings matrix– Assign customers to vehicles or routes– Sequence customers within routes
Supply Chain Engineering MN 799 230#
RISK MANAGEMENT IN TRANSPORTATION
• RISK THAT SHIPMENT IS DELAYED• RISK THAT SHIPMENT DOES NOT REACH ITS
FINAL DESTINATION, BECAUSE INTERMEDIATE NODES DISRUPTED
• RISK OF HAZARDOUS MATERIAL
Supply Chain Engineering MN 799 231#
MAKING TRANSPORTATION DECISIONS IN PRACTICE
• ALIGN TRANSPORTATION STRATEGY WITH COMPETITIVE STRATEGY
• CONSIDER BOTH IN HOUSE AND OUTSOURCED TRANSPORTATION– STRATEGIC IMPORTANCE AND PROFITABILITY
• DESIGN A TRANSPORTATION NETWORK THAT CAN HANDLE E-COMMERCE
– DECREASE IN SHIPMENT SIZE & INCREASE IN HOME DELIVERY• USE TECHNOLOGY TO IMPROVE TRANSPORTATION PERFORMANCE
– IDENTIFY LOCATION AND SHIPMENT IN VEHICLE• DESIGN FLEXIBILITY INTO THE TRANSPORTATION NETWORK
– TAKE INTO ACCOUNT UNCERTAINTYIN DEMAND AND IN AVAILABILITY OF TRANSPORTATION
Supply Chain Engineering MN 799 232#
HOMEWORK
• EXERCISE 13.1 Coal and MRO• Ex 13.2 Work out single location and 1 week replenishment• EXAMPLE HIGHMED (Ex 13.2)
– WORK OUT OPTION A & IF SHIPMENT SIZE IS 0.5H + 5.0L– WHAT ARE YOUR CONCLUSIONS?
– Incentives based on sell-in leading to forward buy– Localized optimization Ex Transportation Mgr linked to lowest transport cost –
even if inventory cost increased– Sales Force incentives – quantity sold to next stage, not final customer– Buying policies based on max profits at one stage of supply chain
• Counter Measures– Align goals and incentives across functions– Price for coordination - – Focus sales force on increasing sell-thru to customer– Incentives based on rolling horizon– Sales force do not compete with each other but with the competition
Supply Chain Engineering MN 799 256#
The Bullwhip Effect: Information Processing Obstacles
• Contributing factors– No visibility of end demand– Multiple forecasts, based on orders received not customer demand (magnifies incr/decr)– Long lead-time– Lack of information sharing
• Counter Measures– Collaborative forecasting and planning (CFAR, CPFR)– Access sell-thru or POS data. Sharing POS data– Direct sales (natural on web)– Single control of replenishment – continuous replenishment and VMI– Leadtime reduction
• State of Practice– Sell-thru data in contracts (e.g., HP, Apple, IBM)– CFAR, CPFR, CRP, VMI (P&G and Walmart)– Quick Response Mfg. Strategy– Dell direct supply to customer
– Lot size based quantity discounts– High-Low Pricing leading to forward buy– Delivery and Purchase not synchronized
• Counter Measures– Lot size based to Volume based quantity discounts– EDLP (Every day low pricing)– Limited purchase quantities– Scan based promotions
• State of Practice– P&G (resisted by some retailers)– Scan based promotion
Supply Chain Engineering MN 799 260#
Managerial Implications of the Bull Whip Effect - Behavioral Factors
• Contributing factors– Lack of trust– Local reaction – to current local condition– Each stage sub –optimizes– Each stage blames each other for fluctuations
• Counter Measures– Building trust and partnership– Aligning incentives and objectives – co-identification– Sharing information – sales and production– Eliminating duplication (Inspection)
• State of Practice– Wal-Mart and P&G with CFAR
Supply Chain Engineering MN 799 261#
How Should A Middle Link Behave?
IF: The Middle Link makes an independent decision to increase production
THEN: Finished goods inventory increases for the Middle Link
THEN: Return On Assets are reduced for the Enterprise, and there is no improvement in end-to-end throughput!
IF: The Middle Link makes an independent decision to decrease production
THEN: The system constraint moves to the Middle Link
THEN: There is no reduction in operational costs for the Enterprise, and profit margins are lowered for every trading partner!
THEREFORE: The Middle Link should stay synchronized to the demand signal from the system constraint
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 262#
ACHIEVING COORDINATION IN PRACTICE• QUANTIFY THE BULLWHIP EFFECT• GET TOP MANAGEMENT COMMITMENT • DEVOTE RESOURCES FOR COORDINATION - DEDICATED• FOCUS ON COMMUNICATION WITH OTHER STAGES• TRY TO ACHIEVE COORDINATION IN THE ENTIRE SUPPLY CHAIN
NETWORK• USE TECHNOLOGY TO IMPROVE CONNECTIVITY IN THE SUPPLY SIDE -
INCREASING VISIBILITY&COMMUNICATION• REDUCE TIME TO – ORDER, MAKE, TRANSPORT, REPLENISH• SHARE BENEFITS OF COORDINATION EQUITABLY
Supply Chain Engineering MN 799 263#
Principle: Synchronize Supply With Demand
This principle is about Vocalization.
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 264#
ROLE OF INFORMATION IN SUPPLY CHAIN SUCCESSInformation is the glue that binds the other three drivers, to create an integrated, coordinated supply chain. Provides facts to give visibility of whole supply chain and make sound decisions to improve performance* TYPES – Supplier, Manufacturing, Distribution & Retailing, and Demand* CHARACTERISTICS –Accurate, Timely, Accessible, Appropriate* OPTIMIZING – Inventory, Transportation, Facilities
Information Global Scope
CoordinatedDecisions
Supply ChainSuccess
Global scope enables decisions to maximize the total supply chain profit
Supply Chain Engineering MN 799 265#
USE OF INFORMATION
• INVENTORY– SETTING OPTIMUM INVENTORY POLICIES
• DEMAND PATTERNS, CARRYING COSTS, STOCK OUT COSTS, ORDERING COSTS, SERVICE LEVEL, LEAD TIMES ETC
• TRANSPORTATION– DECIDING NETWORKS, ROUTINGS, MODES, SHIPMENTS AND
Information Technology in a Supply Chain: Legacy SystemsTHERE ARE IT SYSTEMS ACROSS ENTIRE SUPPLY CHAIN
Supplier CustomerRetailerDistributorManufacturer
Strategic
Planning
Operational
STRATEGIC – HIGH ORGANIZATIONAL LEVEL, LONG TIME FRAME, LITTLE LOW LEVEL DETAIL, HIGHLY ANALYTICAL, TOP MANAGERSLEGACY – ONE FUNCTION OR ONE STAGE OF SUPPLY CHAIN, TRANSACTIONAL ABILITY, DIFFICULT TO MODIFY, NO ANALYTICAL
Supply Chain Engineering MN 799 267#
Information Technology in a Supply Chain: ERP Systems
Supplier CustomerRetailerDistributorManufacturer
Strategic
Planning
Operational
ERPPotential
ERP PotentialERP
ERP SYSTEMS – BROAD INFORMATION AVAILABILITY, REAL TIME, CAN USE ENABLING TECHNOLOGY LIKE INTERNET – WEAK ANALYTICAL
Supply Chain Engineering MN 799 268#
Information Technology in a Supply Chain: Analytical Applications
Supplier CustomerRetailerDistributorManufacturer
Strategic
Planning
Operational
SupplierApps
SCM
MES
Dem Plan
Transport execution &WMS
APS Transport & InventoryPlanning
CRM/SFA
Supply Chain Engineering MN 799 269#
The Least Common Denominator OfInformation Technology
For orders, replenishment, payment, returns loops...
LCD
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 270#
Information Technology in a Supply Chain: Future Trends and Issues
• Best of breed versus single integrator• Shifts in Platform Technology
– Client server– Browser based internet– Application service providers (ASP) – owns and hosts software and
charges for third party use of software
• The role of the Internet and B2B exchanges– Exchanges create efficient market
• AUCTIONS, REVERSE AUCTIONS, FIXED PRICE, BID/ASK– Collaboration between buyer and seller essential– Convergence between B2B and Supply Chain
What do you see? Teams – come up with three major trends - present
Supply Chain Engineering MN 799 271#
SUPPLY CHAIN INFORMATION TECHNOLOGY IN PRACTICE
• SELECT AN IT SYSTEM THAT ADDRESSES THE COMPANY’S KEY SUCCESS FACTORS– COMPUTERS – INVENTORY LEVEL, – OIL REFINERY - UTILIZATION
• ALIGN LEVEL OF SOPHISTICATION WITH NEED FOR SOPHISTICATION - KISS
• USE IT SYSTEMS TO SUPPORT DECISION MAKING, NOT TO MAKE DECISIONS
• THINK ABOUT THE FUTURE– WEB-BASED APPLICATIONS– FLEXIBILITY OF SYSTEMS TO ACCOMMODATE CHANGE
Supply Chain Engineering MN 799 272#
Which E-Business is Right for Your Supply Chain?
What is different about e-commerce?
What are some potential opportunities in a supply chain?
Implications of e-business in different industries
Supply Chain Engineering MN 799 273#
Applying the Framework to e-commerce:What is e-commerce?
• Commerce transacted over the Internet– Is product information displayed on the Internet?– Is negotiation over the Internet? EBay– Is the order placed over the Internet? Amazon– Is the order tracked over the Internet?– Is the order fulfilled over the Internet?– Is payment transacted over the Internet?
• Information publicly available, no dedicated connection required
• B to C and B to B• Expected to reduce prices, increase productivity, lower
labor costs
Supply Chain Engineering MN 799 274#
Existing Channels for Business
• Product information – Physical stores, EDI, catalogs, face to face, …
• Negotiation– Face to face, phone, fax, sealed bids, …
• Order placement– Physical store, EDI, phone, fax, face to face, …
• Order tracking– EDI, phone, fax, …
• Order fulfillment– Customer pick up, physical delivery
Supply Chain Engineering MN 799 275#
Potential Revenue Opportunities from E-Business
• Direct sales to customers• 24 hour access for order placement• Accessibility to all customers• Information aggregation• Personalization and Customization of Information• Information sharing in supply chain• Flexibility on pricing and promotion• Price and service discrimination• Faster time to market• Efficient funds transfer - reduce working capital• Disadvantage: Takes longer to deliver, transport costs and shipping time
Supply Chain Engineering MN 799 276#
Potential Cost Opportunities from E-Business• Direct customer contact for manufacturers (no handoffs)• Coordination in the supply chain• Customer participation• Postpone product differentiation to after order is placed• Downloadable product• Reduce product handling with shorter supply chain• Reduce facility and processing costs• Geographical centralization and resulting reduction in inventories• Improving supply chain coordination thru information sharing
Supply Chain Engineering MN 799 277#
POTENTIAL COST DISADVANTAGES
• INCREASED TRANSPORTATION COSTS– INVENTORY AGGREGRATION– SMALLER, MORE FREQUENT ORDERS
• INCREASED HANDLING COSTS– COMPANY HAS TO PICK, PACK AND SHIP
• LARGE INITIAL INVESTMENT in INFORMATION INFRASTRUCTURE– PROGRAMMING – WEB SERVERS
• SECURITY ?? CASH AND PRODUCT
Supply Chain Engineering MN 799 278#
Basic evaluation framework
• How does going on line impact revenues?• How does going on line impact costs?
– Facility (site + personnel)– Inventory– Transportation– Information
• Should the e-commerce channel position itself for efficiency or responsiveness?
• Who in the supply chain can extract most value?• Is the value to existing players or new entrants?
Supply Chain Engineering MN 799 279#
The Computer Industry: Dell on-line
Customer Order andManufacturing Cycle
Procurement Cycle
Dell Supply Chain Cycles
Procurement cycleCustomer Order andManufacturing Cycle
CustomerOrder Arrives
PUSH PROCESSES PULL PROCESSES
Supply Chain Engineering MN 799 280#
Potential opportunities exploited by Dell
• Revenue opportunities– 24 hour access for order placement– Direct sales– Providing customization and large selection information– Flexibility on pricing and promotion– Faster time to market– Efficient funds transfer –Negative working capital
• Revenue negatives– Longer response time than store and no help with selection
Supply Chain Engineering MN 799 281#
Potential opportunities exploited by Dell
• Cost opportunities– Geographical Centralization and reduced inventories (aggregated)– Reduce facility costs – no physical distribution or retail– Direct sales eliminating intermediary– Customer participation: Call center & catalog costs– Information sharing in supply chain– Postpone product differentiation to after order is placed using
product platforms and common components
• Outbound transportation costs increase
Supply Chain Engineering MN 799 282#
Opportunities
• Significant, but must be combined with component commonality, and build to order. Must move product customization to pull phase of supply chain and hold inventories as common components during the push phase
• Opportunity most significant for new, hard to forecast products
• Complements strength of existing retail channels
Supply Chain Engineering MN 799 283#
Retailing: Amazon.com
Publisher
Distributor
Amazon
Customer
Amazon Supply Chain
Publisher
Warehouse (?)
Retail Store
Customer
Bookstore Supply Chain
Pull Pull
Supply Chain Engineering MN 799 284#
Potential opportunities exploited by Amazon
• Revenue opportunities– 24 hour access for order placement– Providing large selection and other information– Attract customers who do not want to go to store– Flexibility on pricing– Efficient funds transfer
• Revenue negatives– Intermediary (distributor) reduces margin– Longer response time than bookstore– Cannot browse
Supply Chain Engineering MN 799 285#
Potential opportunities exploited by Amazon
• Cost opportunities– Geographical centralization and reduced inventories: Most
effective for low volume, hard to forecast books, least effective for high volume best sellers
• Going on-line, by itself, offers lower cost advantages (may be some disadvantages) than in Dell model given current form of books
• Cost and availability advantages are more significant for low volume books
• On-line channel has significant cost benefit if books are downloadable
Supply Chain Engineering MN 799 287#
How should bookstore chains react?
• An on line channel allows it to match Amazon’s revenue advantages
• Use a hybrid approach in stocking and pricing– High volume books for local storage– Low volume books for browsing and purchase on line– Pricing varies by delivery and pick up option
Supply Chain Engineering MN 799 288#
Grocery on-line
Manufacturer
Online Grocer
Customer
On-Line Supply ChainEx. Fresh Direct (NY)
Suppliers
Warehouse (?)
Supermarket
Customer
Supermarket Supply Chain
Supply Chain Engineering MN 799 289#
Key Messages
• Some supply chains are better suited to exploit the cost benefits of going on-line– Ability to increase processes in pull phase– Ability to delay product differentiation– Big inventory benefit from geographical centralization– Significant facility cost reduction on centralization– Transport to customer is a small fraction of product cost
All are achieved if product is downloadable
Supply Chain Engineering MN 799 290#
B2B: Free Markets
• The worldwide market for direct materials procurement is approximately $5 trillion, with the U.S. segment at approximately $1 trillion
Morgan Stanley Dean Witter Internet Industry Research
FreeMarkets is a B2B Internet company that creates online auctions for procurers of direct materials
• MSDW Claim: FreeMarkets’ clients typically achieve savings of 2% to 25%
Supply Chain Engineering MN 799 291#
B2B: Matching Base Demand and Capacity
• Potential opportunities– Ability to reach more bidders and get lower unit price– E Bay and Price Line (price set by customer)
• Key questions– What does it do to total cost of material?– How many bidders do you need to achieve this?– How does this impact cooperative relationships within supply
chain?– Does intermediary provide any value?
Supply Chain Engineering MN 799 292#
B2B: Matching Demand Shortage and Surplus Capacity
• Potential opportunities– Ability to aggregate and display all available surplus capacity– Better match of surplus capacity and unmet demand
Best provided by an intermediary• Key issue
– Total cost (product + transportation + …) must be accounted for in the auction
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Key Messages
• Significant B2B opportunity to use Internet to reduce cost and improve efficiency of existing processes
• Significant B2B opportunity to improve collaboration within existing supply chains
• Auction opportunity for B2B is primarily for matching demand shortage with surplus capacity, not for base load
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USING E-BUSINESS TO CREATE MARKETS
• INTERNET EXCHANGES, MARKETPLACES or PORTALS –– ELECTRONIC MARKETPLACES AND COMMUNITIES OF INTEREST,
WHERE COMPANIES/INDIVIDUALS CAN OBTAIN INFORMATION AND BUY AND SELL PRODUCTS. CAN AGGREGRATE DEMAND AND SUPPLY
– BUYERS CAN USE EXCHANGES BY: • USING THIRD PARTY TO FACILITATE TRANSACTIONS• CONDUCTING AUCTIONS BETWEEN MANY BUYERS AND SELLERS
– ADVANTAGES FOR BUYERS:• REDUCE TRANSACTION COSTS, IMPROVE PERFORMANCE AND
COLLOBORATIVE PLANNING WITHIN THE SUPPLY CHAIN• OFFER BUYERs ABILITY TO SEARCH ACROSS MULTIPLE SUPPLIERS• DOWNWARD PRESSURE ON SELLING PRICES
– ADVANTAGES FOR SELLERS:• REDUCE REPLENISHMENT LEAD TIME AND BETTER SUPPLY DEMAND
MATCH THROUGH IMPROVED COORDINATION• USEFUL IN SELLING SURPLUS INVENTOY & CAPACITY
Supply Chain Engineering MN 799 295#
SETTING UP E-BUSINESS IN PRACTICE• INTEGRATE THE INTERNET WITH THE EXISTING PHYSICAL NETWORK –
CLICKS AND MORTAR– SUCCESS CLOSELY LINKED TO DISTRIBUTION CAPABILITIES OF EXISTING
SUPPLY CHAIN NETWORK
• DEVISE SHIPPING STRATEGIES THAT REFLECT COSTS– MUST INCLUDE SIZE AND WEIGHT CONSIDERATIONS
• OPTIMIZE E-BUSINESS LOGISTICS TO HANDLE PACKAGES NOT PALLETS– NEED TO CONSOLIDATE OR BUNDLE, WITH OTHER SUPPLIERS
• DESIGN THE E-BUSINESS SUPPLY CHAIN TO HANDLE RETURNS EFFICIENTLY
– LIKELY TO BE INCREASED RETURNS – IDEALLY TO ONE LOCATION • KEEP CUSTOMERS INFORMED THROUGHOUT THE ORDER FULFILLMENT
CYCLE– STATUS ON LINE
END
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FINAL EXAM
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Factory Cash-To-Cash Cycle Time1. Arrange the trading partner nodes from supplier to customer.
2. Start with a negative number torepresent the time a factoryhas to pay a supplier’s invoice.
3. Work in a complete, closed loop.
4. Add the incremental time(s) to send the factory invoice down the chain to the next paying trading partner.
5. Add the incremental time(s) foreach node to send the payment back up the chain to the factory.
6. Sum the negative time of step #2 withthe positive loop time of step #4, #5.
CUSTOMER
RETAIL
WHOLESALE
FACTORY
SUPPLIER
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
For each order cycle– Benefit of increasing safety stock by one unit =
(1-CSL)Cu
– Cost of increasing safety stock by one unit = HQ*/R
where– CSL = probability of not stocking out in a cycle with current
level of safety stock = Cycle Service Level– H = cost of holding one unit for one year– R = Annual demand– Q* = Economic order quantity
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Optimal Safety Inventory Levels (Ex 9.3)
CSL = 1-(HQ*/CuR)
R = 100 gallons/week; R= 20; H = $0.6/gal./yearL = 2 weeks; Q = 400; ROP = 300.
What is the imputed cost of stocking out?
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Postponement Adds Value Within LogisticsBy Trading Information For Inventory
Without Postponement:
With Postponement:
TradingPartner
Postponement
FGI Orders None
FGI OrdersNone
Design for generic production Postpone to an actual order
“Postponement is delaying product differentiation until the customer demandis known.” Corey Billington, Hewlett-Packard Strategic Planning and Modeling
TradingPartner
TradingPartner
TradingPartner
TradingPartner
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 301#
1. Arrange the trading partner nodesfrom customer to supplier.
2. Work in a complete, closed loop.
3. Add the incremental time(s) to sendthe order from the customer to thefirst node with product inventory.
4. Add the incremental time to pickthe product from inventory.
5. Add the incremental time(s) to transport the product to the customer.
Customer Order-To-Delivery Cycle Time
CUSTOMER
RETAIL
WHOLESALE
FACTORY
SUPPLIER
Customer Order-To-Delivery Cycle Time
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 302#
Amazon vs Barnes and Noble
• The effect of Barnes and noble Responsive supply chain strategies today, the company is enhancing its original system by transitioning the back-end services fulfillment systems to an on-line, real-time, Microsoft BackOffice-based shipping, order management, and financial reporting system called PRISM—or Pod Receiving and Integrated Shipping Management System. PRISM allows Barnes and Noble to ship products much faster and deliver higher service levels to customers
Amazon is going to become a market leader because of its early start in Web enabled low-cost access to an infinite number of customers. Treating every customer the same, with limited choice of access, is an unwise Barnes and Noble approach. Amazon has several advantages over Barnes and Noble, which could provide significant competitive leverage, such as:•Real-time customer information and transaction data,•Direct customer "dialog" opportunities, and•Low-cost channel operations
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Amazon vs Barnes and Noble
• Both have some unpredictable demand and some predictable demand. Yes basically Amazon is efficient and B&N responsive (to a point). Both try and influence demand by suggesting (and discounting) what they have stock in and want purchased. Amazon stocks what it presumes or knows will be best sellers
I see the future bringing down the price of books further (particularly text books) by even more outsourcing. I also see inventory in supply chain reducing by print on demand, especially for books not commonly popular. There will also be a lot more on line books, and condensed books, that one can read or review
The key question is how will Amazon compete with a Chinese or Indian on line supplier with similar products. I do not think it can compete. I see Amazon partnering with a major Chinese and/or Indian company.
As for Barnes and Noble, they have to also move more to print on demand and outsource more (they are already doing a lot of that). They provide a social function that they are emphasizing, so there will be some need for them, but not as a major book supplier
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Amazon• The company’s management has started to expand the business geographically, as well
as into new product areas. Amazon now has a U.K. subsidiary, headquartered in Slough, west of London, employing around 500 people — Amazon.co.uk — as well as a slightly smaller German one, Amazon.de, headquartered in Regensburg, Germany. It resoled in increasing the overall sales of the company. Amazon is currently achieving a run rate of $280m a year.
Amazon.co.uk started offering same-day delivery, at least within London... So, provided that customers order within a given time window, they are offered the option of same day delivery as a free upgrade. It resulted in better and efficient customer service than any other online stores.
Identifying desirable global locations for new distribution centers is one use Amazon will make of new supply-chain software from Manugistics of Rockville, Md. It would install Manugistics’ NetWORKS solutions to support its global expansion and operational improvement initiatives. It will use NetWORKS Strategy to model fixed and variable network costs, taking into consideration such factors as varying transportation and supplier lead times, and global constraints such as tariffs and taxes. The model will then be used to design an optimal global network