BIA 674 supply chain analytics Lecture 2b Stevens Institute of Technology

Flexible Supply Chains Panos Repoussis Assistant Professor Howe School of Technology Management

Create a Flexible Supply Chain Flexibility comes to cure: Having too little of the right product Having too much of the wrong ones Flexibility – having a fast and efficient supply chain that if needed (in order to avoid a stockout) they can replenish an item within very short lead time

Create a Flexible Supply Chain National Bicycle Case (M. Fisher & A. Raman, chap. 4) Inflexible Mass Production Supply Chain Very long lead times that resulted in stockouts and lost sales Delay in receiving orders from customers Batch production setup with long preparation times for switching between different products Long transportation times among the factory, warehouses and retailers Aggregation of production orders

Create a Flexible Supply Chain National Bicycle Case (M. Fisher & A. Raman, chap. 4) Flexibility finally arrives… Mass Customization Production of customized products with nearly the efficiency of mass production What happened?

Create a Flexible Supply Chain Efficient production of small quantities New production equipment and re-organization of the production layout Ability to offer a wide variety of products Introduction of skilled workers Accommodation of variation in aggregate demand volume High capacity utilization using low demand periods for producing high-end make to stock bikes.

Create a Flexible Supply Chain Very short lead times Direct orders from the retailers to the factory Handling batches of one item (don’t wait for orders to back up) Quicker modes of transportation for custom bikes Average in-stock level of 99.4% of all components required to build a bicycle + 1 week emergency delivery from their suppliers Two week lead time guarantee!

Create a Flexible Supply Chain Where to place the decoupling point (push/pull boundary) is the key! The decoupling point must be placed at a point to allow sufficient inventory to decouple the upstream push processes from the downstream pull processes. To achieve this you must have low variety upstream and high variety downstream!

Does Mass Customization pays? Flexibility comes with a cost. Sophisticated production facilities, need for high-end IT systems for order processing, skilled manpower… But, customization eliminates unsold inventory that has to be marked down at the end of the season You must ensure that your customer is willing to pay a surcharge and wait for a make-to-order product

Flexibility and Speed enablers Choose the appropriate decoupling points Reserve production capacity far in advance Make sure you have appropriate inventory to support push processes Use efficient technologies and skilled line of workers to enable small-lot production Design effectively the supply network Gather information and empower your people to respond rapidly to the changes of the market Partner with your suppliers Provide accurate demand forecasts

How much flexibility do you need? Ability to provide accurate demand forecasts Ability to increase supply chain flexibility Ability to carry stocking inventory Devise an effective supply chain strategy–consider the nature of the demand Maximum flexibility makes sense only for high-margin products with unpredictable demand

Is your product Functional or Innovative? Functional Products Product Life Cycle : > 2 years Contribution Margin : 5% to 20% Product Variety : Low 10 to 20 variants Average Margin of error in the forecast: 10% Average stockoutrate: 1% to 2% Average forced end-of-season markdown as percentage of full price: 0% Lead time for made-to-order products: 6 months to 1 year

Is your product Functional or Innovative? Innovative (Unpredictable Demand) Product Life Cycle : 3 months to 1 year Contribution Margin : 20 % to 60% Product Variety : High (often millions of variants) Average Margin of error in the forecast: 40 to 100 % Average stockoutrate: 10% to 40 % Average forced end-of-season markdown as percentage of full price: 10 % to 25 % Lead time for made-to-order products: 1 day to 2 weeks

Physically efficient Supply Chain Primary purpose: supply predictable demand efficiently at the lowest possible cost Manufacturing focus: maintain high average utilization rate Inventory strategy: generate high turns and minimize inventory throughout the chain Lead-time focus: shorten lead time as long as it doesn’t increase cost Approach to choosing suppliers: select primarily for cost and quality Product-design strategy: maximize performance and minimize cost

Market responsive Supply Chain Primary-purpose: respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns, and obsolete inventory Manufacturing focus: deploy excess buffer capacity Inventory strategy: deploy significant buffer stocks of parts or finished goods Lead-time focus: invest aggressively in ways to reduce lead time Approach to choosing suppliers: select primarily for speed, flexibility, and quality Product-design strategy: use modular design in order to postpone product differentiation for as long as possible

Matching Supply Chains with Products Efficient Supply chains Responsive Supply Chains Functional Products MATCH MISMATCH Innovative Products