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

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

3 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

4 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

5 Slight variation in consumer demand can greatly impact the Supply Chain 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 Causes of supply-demand mismatches

6 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 Causes of supply-demand mismatches

7 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

8 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

9 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

10 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

11 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

12 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

13 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 Solutions to reduce demand-supply mismatches

14 Match or realign supply chains and product characteristics Functional productInnovative product Product Life cyclemore than 2 years3 to 12 months Contribution Margin5% to 20%20% to 60% Product varietyLow (10 to 20 variants)high (millions) Average Forecast error10%40 to 100% Average Stock out rate1 to 2%10 to 40% Average markdowns 0%10 to 25% Lead time required for6 to 12 months1 to 15 days make-to- order Focus of supply chainefficiencyresponsiveness What to use when?

15 Physically EfficientMarket responsiveness Purposesupply predictable respond quickly to demand at low costunpredictable demand to minimize stockout markdowns Manufacturing focus high average utilizationhave excess buffer capacity Inventory strategyhigh inventory turnsdeploy significant safety minimize inventorystocks of parts/finished good Lead time focusshorten lead time butinvest to reduce lead time without cost increase Choosing suppliersselect mainly for costselect mainly for flexibility and qualityspeed and quality Product-design strategymaximize performanceuse modular design to minimize costpostpone differentiation as long as possible from Flow of informationamong supply chain market place to supply partners chain partners Causes of Supply-demand mismatches

16 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) Efficient supply of functional products

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