Challenges in Managing Supply Chains Vinod R. Singhal Scheller College of Business Georgia Institute of Technology Atlanta, GA, 30332 vinod.singhal@scheller.gatech.edu May 1, 2013 Presented in the MOT Program at Sogang University Seoul, South Korea

What is Effective Supply Chain Management? Matching demand and supply Efficiently Reliably Responsive

Causes of supply-demand mismatches Nature of demand - higher uncertainty - increased variety (less pooling of demand) - short product life cycle (less demand history) Nature of competition - increased competition - customization, low cost, quick response time ( customer and/or competition driven) Nature of supply chains (more complex) globalization many levels to coordinate more tightly coupled long lead times

Causes of supply-demand mismatches Operational issues - less reliable and more inaccurate forecasts - poor planning - operational constraints - long lead times - high set up costs Measurement issues poor understanding of issues and costs of mismatches no tracking of stockout costs and forecasts errors poor measurement system to make trade-off

Causes of supply-demand mismatches Bullwhip effect - Demand information distortion - Variability of demand seen by manufacturers is higher than that seen by retailers - Variability of production greater than variability of demand 2,000 4,000 6,000 8,000 10,000 Units/Week Consumer Retailer Manufacturer. - Supplier Slight variation in consumer demand can greatly impact the Supply Chain

Causes of supply-demand mismatches Order batching - High order costs - Full Truck Load Economics - Correlated ordering Rationing game - Expected shortage - Ignorance of supply conditions (imaginary shortage) - Unrestricted orders and free return policy - Proportional rationing scheme Price variations - High-low pricing Adversarial relationship between supply chain partners

Solutions to reduce demand-supply mismatches Level of capacity - investment in new capacity - operational improvement Time of capacity commitment - early commitment (speculative capacity) - delayed commitment (reactive capacity) - sequence products with low variability early - use speculative capacity for less risky products (low variability/low forecast error) - use reactive capacity for more risky products (high variability / high forecast error) - reduce lead times

Solutions to reduce demand-supply mismatches Reduce uncertainty (obtain market information earlier) - use of information technology - identify new sources of data that could serve as leading indicator - incentives for ordering early / solicit early orders from customers • Avoid uncertainty - reduce lead times - increase flexibility • Hedge uncertainty - careful placement of buffers - excess capacity - more inventory

Solutions to reduce demand-supply mismatches Managing processing of demand signals - Access sell through or pos data - Single point of forecasting - Single control of replenishment (VMI) - Continuous replenishment programs (CRP) - Lead time reduction - Direct marketing (reduce intermediaries) • Managing order batching - EDI and CAO - Discount on assorted truck load - Consolidation by 3rd party logistics - Regular delivery appointment

Solutions to reduce demand-supply mismatches Rationing game - Allocate based on past sales - Share capacity and supply information - Limited order change and order return flexibility over time - Enable reservation of capacity • Price variations - Every day low pricing (EDLP) - Long-term contracts (EDLP but spaced out) • Relationship between supply chain partners - cooperative (enlarge the pie, share the savings) versus hands off ( carve the pie differently)

Solutions to reduce demand-supply mismatches Eliminate wide swings in demand distortion Joint collaborative planning and execution demand planning (share information to get a truer demand signal) Communication of capacity, production, and promotion plans Joint decision making • Need to have mutually agreeable measures of performance • Agreement on how to achieve mutual goals and share gains

Solutions to reduce demand-supply mismatches Postpone differentiation of products and services - product design - process design - configuration of the entire supple chain network • Modular Product Design (standard and unique modules) - Manufacture and assembly standard components early, unique components late - Manufacture modules at the same time to shorten lead time - Easily diagnose and isolate potential quality problems - Higher demand uncertainty, higher lead time, short product life cycle and higher distribution costs all support more standardization

Solutions to reduce demand-supply mismatches Modular process design - postponement by separating into independent sub processes (paint mix) - re-sequencing or rearranging the sub-processes (Benetton) - perform standard process early and customize processes late (HP) • Supply Networks - little or no modularity supports a centralized warehouse - extensive modularity supports decentralized warehouses - light manufacturing and assembly at the decentralized warehouses

• Match or realign supply chains and product characteristics What to use when? • Match or realign supply chains and product characteristics Functional product Innovative product Product Life cycle more than 2 years 3 to 12 months Contribution Margin 5% to 20% 20% to 60% Product variety Low (10 to 20 variants) high (millions) Average Forecast error 10% 40 to 100% Average Stock out rate 1 to 2% 10 to 40% Average markdowns 0% 10 to 25% Lead time required for 6 to 12 months 1 to 15 days make-to- order Focus of supply chain efficiency responsiveness

Causes of Supply-demand mismatches Physically Efficient Market responsiveness Purpose supply predictable respond quickly to demand at low cost unpredictable demand to minimize stockout markdowns Manufacturing focus high average utilization have excess buffer capacity Inventory strategy high inventory turns deploy significant safety minimize inventory stocks of parts/finished good Lead time focus shorten lead time but invest to reduce lead time without cost increase Choosing suppliers select mainly for cost select mainly for flexibility and quality speed and quality Product-design strategy maximize performance use modular design to minimize cost postpone differentiation as long as possible from Flow of information among supply chain market place to supply partners chain partners

Efficient supply of functional products • Cost cutting had reached a point of diminishing returns in an organization • Next source of leverage is better coordination across supply chains • Share information to enable continuous replenishment program • Avoid price promotions, go with EDLP • Competitive model (carve the existing pie differently) or cooperative model (enlarge the existing pie and share the gains)

Responsive supply of innovative products Accept uncertainty (forecasts error will be high) • Reduce uncertainty (obtain market information earlier) • Avoid uncertainty • Hedge uncertainty