Supply Chain Management SYST 4050 Slides Supply Chain Management Lecture 17 Chapter 1

Outline Today Next week Survey Midterm Brief semester overview SYST 4050 Slides Outline Today Survey Midterm Brief semester overview Start with Chapter 10 Next week Chapter 10 3e: Sections 1, 2 (up to page 273), 6 4e: Sections 1, 2, 3 (up to page 260) Chapter 1

Most supply chains are actually supply networks SYST 4050 Slides Q1 Supply Chain Stages A typical supply chain may involve a variety of stages Supplier Manufacturer Distributor Retailer Customer Most supply chains are actually supply networks Chapter 1

Push/Pull View of Supply Chain Processes SYST 4050 Slides Q2 Push/Pull View of Supply Chain Processes Execution is initiated in response to customer orders (reactive) PULL PROCESSES Customer order arrives Execution is initiated in anticipation of customer orders (speculative) PUSH PROCESSES Processes are divided based on their timing relative to the timing of a customer order They key difference is the uncertainty during the two phases At the time of execution of a pull process customer demand is known At the time of execution of a push process customer demand is not known (and must be forecasted) Processes are divided based on the timing of their execution relative to a customer order Chapter 1

Cycle View of Supply Chain Processes SYST 4050 Slides Q3 Cycle View of Supply Chain Processes Customer Customer Order Cycle Cycle view defines the processes involved and the owner of each process Retailer Replenishment Cycle Distributor Each cycle occurs at the interface between two successive stages Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor) Manufacturing cycle (distributor-manufacturer) Procurement cycle (manufacturer-supplier) Manufacturing Cycle Manufacturer Procurement Cycle Supplier Chapter 1

2. Understanding the Supply Chain Capabilities SYST 4050 Slides Q4 2. Understanding the Supply Chain Capabilities Supply chain capabilities Supply chain responsiveness Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc Supply chain efficiency (low cost) Celestial Seasoning ProBuild Mortgage Interceptor Body Armor Crocs Netflix Highly efficient Highly responsive Somewhat responsive Somewhat efficient Integrated steel mills Hanes apparel Most automotive production Seven-Eleven Japan Chapter 1

1. Understanding the Customer and Supply Chain Uncertainty SYST 4050 Slides Q5 1. Understanding the Customer and Supply Chain Uncertainty Understanding customer uncertainty Demand varies along certain attributes Quantity in each lot, response time, variety of products needed, convenience, price, innovation, etc Implied demand uncertainty Demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand Understanding customer uncertainty: Demand varies along certain attributes Implied demand uncertainty is demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand Demand uncertainty reflects the uncertainty of customer demand for a product Chapter 1

SYST 4050 Slides Q6 Key Observations There is no supply chain strategy that is always right There is a right supply chain strategy for a given competitive strategy A company’s competitive strategy defines (relative to its competitors) the set of customer needs that it seeks to satisfy through its products and services Chapter 1

From Strategy to Decisions SYST 4050 Slides Q7 From Strategy to Decisions Corporate Strategy Competitive Strategy Supply Chain Strategy To understand how a company can improve supply chain performance in terms of responsiveness and efficiency we must examine (and make decisions about) the drivers of supply chain performance Responsiveness Efficiency Facilities Inventory Transportation Information Sourcing Pricing Logistical drivers Cross functional drivers Chapter 1

2. Understanding the Supply Chain Capabilities SYST 4050 Slides Q8 2. Understanding the Supply Chain Capabilities Supply chain capabilities Supply chain responsiveness Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc Supply chain efficiency (low cost) Celestial Seasoning ProBuild Mortgage Interceptor Body Armor Crocs Netflix Highly efficient Highly responsive Somewhat responsive Somewhat efficient Integrated steel mills Hanes apparel Most automotive production Seven-Eleven Japan Chapter 1

Transportation Cost and Number of Facilities SYST 4050 Slides Q9 Transportation Cost and Number of Facilities Transportation Costs Includes both inbound and outbound transportation cost If the number of facilities is increased to a point where inbound lot sizes are very small and result in a significant loss of economies of scale in inbound transportation, increasing the number of facilities increases total transportation cost Number of Facilities Chapter 1

Response Time and Number of Facilities SYST 4050 Slides Q10 Response Time and Number of Facilities Number of Facilities Response Time Chapter 1

Factors Influencing Distribution Network Design SYST 4050 Slides Q11 Factors Influencing Distribution Network Design Performance of a distribution network should be evaluated along two dimensions Customer needs that are met (customer service) Response time (Time it takes for a customer to receive an order) Product variety (Number of different products that are offered) Product availability (Probability of having a product in stock) Customer experience (Ease of placing and receiving orders) Order visibility (Ability of customers to track their orders) Returnability (Ease of returning unsatisfactory merchandise) Cost of meeting customer needs (supply chain cost) Inventory (All raw materials, WIP, and finished goods) Transportation (Moving inventory from point to point) Facility & handling (Locations where product is stored, assembled, or fabricated) Information (Data and analysis of all drivers in a supply chain) Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service Chapter 1

Retail Storage with Customer Pickup SYST 4050 Slides Q12 Retail Storage with Customer Pickup Example: Retail stores such as Wal-Mart and JCPenney Customers pick up product from retailers Low transportation cost High facility cost Relative easy returnability Increased inventory cost No order tracking necessary If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer Effective for fast moving items Retailer Consumers Distributor Warehouse Manufacturers Chapter 1

Distributor Storage with Carrier Delivery SYST 4050 Slides Q13 Distributor Storage with Carrier Delivery Example: Amazon Inventory is held at a warehouse which ships to customer by carriers With respect to direct shipping Inventory aggregation is less Higher inventory costs Facility costs are higher Less information to track Warehouses are physically closer to consumers which leads to Faster response time Lower transportation cost Not effective for slow moving items Distributor Warehouse Manufacturers Consumers Chapter 1

Manufacturer Storage with Direct Shipping (Drop Shipping) SYST 4050 Slides Q14 Manufacturer Storage with Direct Shipping (Drop Shipping) Example: eBags Products are shipped directly to the consumer from the manufacturer Retailer is an information collector: Passes orders to the manufacturers It does not hold product inventory Inventory is centralized at manufacturer Drop shipping offers the manufacturer the opportunity to postpone customization Effective for high value, large variety, low demand products High transportation cost Retailer Manufacturers Consumers This model is also referred to as drop-shipping. Retailers carries no inventory. All inventory is at the manufacturer’s site. This is eBags model, which takes orders and arranges for the manufacturer’s to ship directly to the customers. Transportation cost is high because the average outbound distance to the end customer is large. Package carriers are used and are more expensive than TL or LTL. A good information infrastructure is needed. Response time tends to be large. eBags Nordstrom.com (for slow moving footwear) W.W. Grainer (for slow moving items) Chapter 1

Inventory Cost and Number of Facilities SYST 4050 Slides Q15 Inventory Cost and Number of Facilities Inventory Costs Number of Facilities Chapter 1

Total Logistics Costs Q16 Logistics Costs Number of Facilities SYST 4050 Slides Q16 Total Logistics Costs Logistics Costs Number of Facilities Transportation Costs Facility Costs Logistics Costs Inventory Costs Each company should have at least the number of facilities that minimize total logistics costs Chapter 1

Factors Influencing Network Design Decisions SYST 4050 Slides Q17 Factors Influencing Network Design Decisions Technological factors Compare your supplies to the final product, considering whether value, weight, volume or other factors change Availability of production technologies High or low fixed cost Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars) Technological factors * High fixed costs (less facilities) – Intel Semiconductor manufacturing * Low fixed costs (more facilities) - Coca Cola bottling Macroeconomic factors * Trade agreements (NAFTA, EU, APTA–Asian Pacific Trade Agreement, AFTZ–African Free Trade Zone) have led to consolidation * End of quotas has led to consolidation of apparel manufacturing in China * Flexible facilities (capacity) can help reduce the effect of exchanges rates Political factors * Infrastructure factors * Amazon distribution centers are all close to airports Which products gain/lose weight in the production process? Chapter 1

Factors Influencing Network Design Decisions SYST 4050 Slides Q18 Factors Influencing Network Design Decisions Political factors Political stability Infrastructure factors Availability of transportation terminals, labor Most of Amazon’s distribution centers are located near airports Competitive factors Positive externalities (many stores in a mall makes it more convenient for customers – one location for everything the customers need) Chapter 1

Factors Influencing Network Design Decisions SYST 4050 Slides Q19 Factors Influencing Network Design Decisions Technological factors Compare your supplies to the final product, considering whether value, weight, volume or other factors change Availability of production technologies High or low fixed cost Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars) Technological factors * High fixed costs (less facilities) – Intel Semiconductor manufacturing * Low fixed costs (more facilities) - Coca Cola bottling Macroeconomic factors * Trade agreements (NAFTA, EU, APTA–Asian Pacific Trade Agreement, AFTZ–African Free Trade Zone) have led to consolidation * End of quotas has led to consolidation of apparel manufacturing in China * Flexible facilities (capacity) can help reduce the effect of exchanges rates Political factors * Infrastructure factors * Amazon distribution centers are all close to airports Which products gain/lose weight in the production process? Chapter 1

Discounted Cash Flow Analysis SYST 4050 Slides Q20 Discounted Cash Flow Analysis The present value of future cash is found by using a rate of return k A dollar today is worth more than a dollar tomorrow A dollar today can be invested and earn a rate of return k over the next period Discount rate: The rate used to discount future cash flows to their present values Chapter 1

Impact of Uncertainty in Network Design SYST 4050 Slides Q21 Impact of Uncertainty in Network Design Supplier Manufacturer Distributor Retailer Customer Natural disasters, supplier bankruptcies, labor disputes, information infrastructure breakdown, inaccurate forecasts, exchange rate risks Uncertainty is propagated through the supply chain(s) and leads to inefficient processes If there is no uncertainty in the supply chain, the performance can be optimal The presence of uncertainty stimulates the creation of buffers in time, capacity and inventory to prevent a possible bad performance of the chain. These buffers restrict the operational performances and may cancel the competitive advantage of the organization Building flexibility into supply chain operations allows the supply chain to deal with uncertainty more effectively Chapter 1

Is demand forecasting more important for a push or pull system? SYST 4050 Slides Q22 Role of Forecasting Supplier Manufacturer Distributor Retailer Customer Push Push Push Pull Push Push Pull Push: in anticipation of customer demand Pull: in response of customer demand Forecasting is used for both push and pull processes Push processes: Managers must plan the level of activity, be it production, transportation, or any other planned activity. Pull processes: Managers must plan the level of available capacity and inventory Always: Managers must forecast what customer demand will be Manufacturer: Production scheduling decisions, materials requirement planning, purchasing Distributor: Ordering, warehouse capacity Retailer: Shelf space Dell orders PC components in anticipation of customer orders (inventory) Dell performs assembly in response to customer orders (capacity) Intel needs forecasts to determine production and inventory levels. Intel’s suppliers need forecasts to determine production and inventory levels. Mature products with stable demand (milk, paper towels) are usually the easiest to forecast. Scheduling existing resources How many employees do we need and when? How much product should we make in anticipation of demand? Acquiring additional resources When are we going to run out of capacity? How many more people will we need? How large will our back-orders be? Determining what resources are needed What kind of machines will we require? Which services are growing in demand? declining? What kind of people should we be hiring? Push Pull Is demand forecasting more important for a push or pull system? Chapter 1

Summary: Simple Exponential Smoothing Method SYST 4050 Slides Q23 Summary: Simple Exponential Smoothing Method Estimate level The initial estimate of level L0 is the average of all historical data L0 = (∑i Di)/ n Revise the estimate of level for all periods using smoothing constant  Lt+1 = Dt+1 + (1 – )*Lt Forecast Forecast for future periods is Ft+n = Lt Forecast Ft+n = Lt Chapter 1

Types of Forecasts Q24 Qualitative Time series Causal Simulation SYST 4050 Slides Q24 Types of Forecasts Qualitative Primarily subjective, rely on judgment and opinion Time series Use historical demand only Causal Use the relationship between demand and some other factor to develop forecast Simulation Imitate consumer choices that give rise to demand Qualitative They are primarily subjective; rely on judgment and opinion, intuition, surveys, or comparative techniques. They produce information typically no quantitative, and subjective. Its non-scientific nature makes it difficult to standardize or validate for accuracy, Appropriate when there is little historical data or there is market intelligence. Time Series It uses historical demand only; appropriate when the basic demand pattern varies little between years, the basic premise is that the future demand pattern will be mostly a replication. It uses mathematician and statistical models as forecasting tools which can be static or adaptive to new demand patterns. Causal It uses the relationship between demand and some other factor (e.g. the state of the economy, interest rates) to develop forecast. For example, if is know how level service can influence sales, then by knowing the level of service provided, the level of sales can be projected. We can say that service causes sales. Another example is forecasting the impact of price promotion on demand. Usually it is very difficult to find good cause-and-effect relationships. Simulation This method imitates consumer choices that give rise to demand. It can combine time series and causal methods Chapter 1

Characteristics of Forecasts SYST 4050 Slides Q25 Characteristics of Forecasts Forecasts are always wrong! Long-term forecasts are less accurate than short-term forecasts Aggregate forecasts are more accurate than disaggregate forecasts Information gets distorted when moving away from the customer Chapter 1

Time Series Forecasting SYST 4050 Slides Q26 Time Series Forecasting Observed demand = Systematic component + Random component L Level (current deseasonalized demand) T Trend (growth or decline in demand) S Seasonality (predictable seasonal fluctuation) The goal of any forecasting method is to predict the systematic component of demand The goal of any forecasting method is to predict the systematic component (Forecast) of demand and measure the size and variability of the random component (Forecast error) Chapter 1

Aggregate Planning Strategies SYST 4050 Slides Q27 Aggregate Planning Strategies Basic strategies Level strategy (using inventory as lever) Synchronize production rate with long term average demand Swim wear Chase (the demand) strategy (using capacity as lever) Synchronize production rate with demand Fast food restaurants Time flexibility strategy (using utilization as lever) High levels excess (machine and/or workforce) capacity Machine shops, army Tailored strategy Combination of the chase, level, and time flexibility strategies Chapter 1

Q28 F6 = L5 L5 = (D5+D4+D3+D2)/4 L5 = 292.75 SYST 4050 Slides Chapter 1

Q29 F6 = L3 + 3T3 F5 = 125.0 Forecast Ft+n = Lt + nTt SYST 4050 Slides Chapter 1

Q30 APE1 = |E1/D1|*100 = 11.05 APE2 = |E2/D2|*100 = 4.26 SYST 4050 Slides Q30 APE1 = |E1/D1|*100 = 11.05 APE2 = |E2/D2|*100 = 4.26 MAPE2 = (APE1 + APE2)/2 = 7.65 Chapter 1

Overview Chapter 10, 11, 12 Chapter 14, 15 SYST 4050 Slides Overview Chapter 10, 11, 12 Inventory and product availability Chapter 14, 15 Sourcing and pricing Corporate Strategy Competitive Strategy Supply Chain Strategy Responsiveness Efficiency Facilities Inventory Transportation Information Sourcing Pricing Chapter 1

Types of Inventory Raw material inventory SYST 4050 Slides Types of Inventory High flexibility High cost Raw material inventory Stocked at plant or supplier Lowest cost Work-in-process (WIP) Inventory Raw materials transformed by operations Need just enough Finished-goods inventory WIP after final operation Stocked at plant, DC, retail store Chapter 1

The Importance of Inventory SYST 4050 Slides The Importance of Inventory Every other time in the modern era that the U.S. economy has contracted more than 5% in a quarter, falling inventories have been a major reason, if not the single biggest factor. Usually, really bad recessions are worsened by the need for companies to get rid of all the stuff they made but nobody bought. Once the inventories are sold off, the economy can grow quickly again because idled workers are called back. But so far in this recession, the inventory cycle hasn't been a major factor, outside of the housing and auto sectors. … This recession is rooted in a severe credit squeeze and a fundamental readjustment in consumer demand, not in the typical inventory cycle. Source: MarketWatch. Jan 25, 2009 Chapter 1

The Importance of Inventory SYST 4050 Slides The Importance of Inventory Firms can reduce costs by reducing inventory, but customers become dissatisfied when an item is out of stock The objective of inventory management is to strike a balance between inventory investment and customer service Chapter 1

Demand Average demand for Jacob’s product in Pangea SYST 4050 Slides Demand Average demand for Jacob’s product in Pangea Existing and new markets 250 Chapter 1

Inventory Decisions How much to order? When to order? SYST 4050 Slides Inventory Decisions How much to order? Order quantity or lot size (Q) When to order? Order frequency (n) Find an inventory policy that is optimal with respect to some criteria (usually cost) Chapter 1

Inventory Profile Average demand D SYST 4050 Slides Inventory Profile Average demand D Inventory Q Lot size Q Q/2 Average inventory due to cycle inventory Q/2 Time Cycle Average inventory Average demand Average flow time = = Q/2D Chapter 1

Cycle Inventory: Example SYST 4050 Slides Cycle Inventory: Example Given Q = 1000 units (lot size) D = 100 units/day (demand) Average inventory Q/2 = 1000/2 = 500 (average inventory level from cycle inventory) Average flow time Q/2D = 1000/(2*100) = 5 days (time a unit spends in the supply chain) Lower inventory is better because Average flow time is lower Working capital requirements are lower Lower inventory holding costs Chapter 1

Why Order in Large/Small Lots? SYST 4050 Slides Why Order in Large/Small Lots? Fixed ordering cost: S (cost incurred per order) Increase the lot size to decrease the fixed ordering cost per unit Holding cost: H (cost of carrying one unit in inventory) Decrease the lot size to decrease holding cost Material cost: C (cost per unit) Lot size Q is chosen by trading off holding costs against fixed ordering costs Chapter 1

Economies of Scale to Exploit Fixed Costs SYST 4050 Slides Economies of Scale to Exploit Fixed Costs Economic order quantity (EOQ) Optimal lot size for a single product Chapter 1