IT Enabled Supply Chain Management Bent Steenholt Kragelund Welcome to IT Enabled Supply Chain Management Bent Steenholt Kragelund benk@itu.dk 1

Today's Agenda Understanding the Supply Chain The Beer Game

Course material Textbook: Chopra, S & Meindl, P (2012) Supply Chain Management, Strategy, planning and Operation (5th edition), Pearson Global edition of the book will work as well Selected readings to be provided

Understanding the Supply Chain

What is a Supply Chain? All stages involved, directly or indirectly, in fulfilling a customer request Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers Within each company, the supply chain includes all functions involved in fulfilling a customer request (product development, marketing, operations, distribution, finance, customer service)

What is a Supply Chain? Customer is an integral part of the supply chain Includes movement of products from suppliers to manufacturers to distributors and information, funds, and products in both directions May be more accurate to use the term “supply network” or “supply web” Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers All stages may not be present in all supply chains (e.g., no retailer or distributor for Dell)

Beer supply chain example Hops supplier Hops supplier Hops supplier Malt supplier Malt supplier Malt supplier Yeast supplier Yeast supplier Product flow Brewery Distributor Regional Wholesaler Grocery Store Consumer Aluminum supplier Funds & information flows Can / bottle producer Glass supplier Packaging materials flow

Flows in a Supply Chain – the supply web 8

The Objective of a Supply Chain Maximize overall value created Supply Chain Surplus = Customer Value – Supply Chain Cost

The Objective of a Supply Chain Customer the only source of revenue Sources of cost include flows of information, products, or funds between stages of the supply chain Effective supply chain management is the management of flows between and among supply chain stages to maximize total supply chain surplus

Decision Phases of a Supply Chain Supply Chain Phase Frequency 1. Supply chain strategy or design Several years 2. Supply chain planning Quarterly / yearly 3. Supply chain operation Daily / weekly Supply Chain strategy or design Decisions about the structure of the supply chain and what processes each stage will perform Strategic supply chain decisions Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty 2. Planning Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year Planning decisions: Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon)

Cycle View of Supply Chain Processes Processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage. One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done. This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner. 12

Cycle View of Supply Chain Processes

Push/Pull View of Supply Chains Processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull - reactive) or in anticipation of a customer order (push - speculative) In this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes. They key difference is the uncertainty during the two phases. Give examples at Amazon and Borders to illustrate the two views 14

Push/Pull View of – L.L. Bean

Push/Pull View – Dell

The beer game

Introduction to the Beer Game The purpose of the Beer Game is to experience systemic effects and to introduce the need for supply chain and network management. Specifically it shows: How single parts in a system influence each other. How individual thinking differs from systemic thinking (network thinking). Potentials for systems optimization and the use of information systems. The Beer Game setup The Beer Game supply chain consists of four stages: The retailer (orange) has to fulfil the end consumer’s orders. The wholesaler (yellow) has to fulfil the retailer’s orders. The distributor (green) has to fulfil the wholesaler’s orders. The factory (blue) has to produce the beer to fulfil the distributor’s orders. The Beer Game is played in groups of 3, each of these groups sits around one table and plays one supply chain stage (see figure).

Table layout Every table has the same layout that shows four different areas (see figure): The place for incoming orders (inbox) – coming from the downstream stage The place for outgoing orders (outbox) – going to the upstream stage The place for incoming deliveries (receiving) – coming from the upstream stage The place for outgoing deliveries (dispatch) – going to the downstream stage Deliveries are “on the road” for 2 weeks (lead time); production also takes 2 weeks. This lead time delay is represented by 2 two extra fields between the tables that hold the deliveries and are moved forward in each week.

General playing procedure The game runs in weeks and it starts in week 1. In each week, each supply chain group has to proceed with the following steps: Receive new deliveries and update the play sheet (“incoming” and “available”). Receive orders in the inbox and update the play sheet (“new order” and “to ship”) Calculate the total amount that will be shipped (“your delivery”), note down the amount, and place it in a box in the dispatch area on your table. Agree on a new order amount, note down the number, and put it in an envelope in the outbox field. The goal Your goal is to minimize your cost! (Remember that you compete against the same stage in the other supply chains – retailer against retailer, distributor against distributor etc.) There are two different kinds of cost: Inventory cost: Items in stock cost € 0,50 per week in holding costs. Backorder cost: If an incoming order cannot be (fully) fulfilled, items are outstanding and have to be put on “backorder” to be fulfilled in the following week(s). Each item on backorder costs € 1,00 per week.

What is a backorder? If an incoming order cannot be fully fulfilled due to a lack of available items in the inventory, items go on backorder. In this case your inventory is empty and a number of items have to appear as backorder in your play sheet. What happens in the next week? In the following week, you will add the old backorder to the new incoming order to calculate the amount “to ship”. Again, if the available inventory is too little to fulfil the amount “to ship”, items have to be put on backorder and will cost $ 1,00 per item.

Some general rules No communication is allowed between supply chain groups, supply chain groups must not talk to each other at any time! If stock is available, an order has to be fulfilled. Every order has to be fulfilled, either in the current week (if enough stock is available) or in one of the next weeks (items go on backorder). Either the inventory or the backorder, one of them is always zero (0)!

Delay Factory Distributor Wholesaler Retailer Delay Delay Delay

Distributor Outgoing order Incoming order Delay Delay Incoming Wholesaler Delay Delay Incoming delivery Outgoing delivery Factory

The initial table set-up Delay Factory Distributor Wholesaler Retailer Delay Delay Delay D D D D D D D D D D D D D D

The play-sheet

Step 1: Delivery IN 5 Distributor Outgoing order Incoming order Delay 20

Step 2: Order IN 4 5 Distributor Outgoing order Incoming order Delay delivery Outgoing delivery 4

Step 3: Prepare delivery Distributor 4 Outgoing order Incoming order 5 Delay Delay Incoming delivery Outgoing delivery

Backorder 5 Distributor Outgoing order Incoming order Delay Delay Delivery Backorder Distributor Outgoing order Incoming order 5 Delay Delay Incoming delivery Outgoing delivery

Step 4: Place your order 3 4 Distributor This is entirely your decision Keep your cost low ! Distributor Outgoing order Incoming order Delay Delay Incoming delivery Outgoing delivery 4 3 3

The initial table set-up Delay Factory Distributor Wholesaler Retailer Delay Delay Delay D D D D D D D D D D D D D D

Between weeks - Logistics Delay Factory Distributor Wholesaler Retailer Delay Delay Delay D D D D D D D D D D D D

Ready to play? Three assistants needed Form groups of 3 Each group should have a Laptop / Tablet capable of running excel Download the play-sheet from the course blog Rename to Table-n where n is 1,2 or 3 Open the right tab depending on your role