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Supply Chain Engineeringmn 1223888125143515 8
Supply Chain Engineeringmn 1223888125143515 8
2 2
) ( X X n
Y X XY n
Supply Chain Engineering MN 799 54#
TRENDED TIME SERIES FORECASTING
Question: How do you forecast a seasonal item
Y(forecast) = [A (intercept) + X (trend) x T (time period) ]
x S (seasonality factor)
FIRST DETERMINE LEVEL AND TREND - IF SEASONAL
DESEASONALIZE
THEN FORECAST USING EXPONENTIAL OR TREND
RESEASONALIZE
Supply Chain Engineering MN 799 55#
Seasonal Series Indexing
Seasonal
Month Year 1 Year 2 Year 3 Total Index
Jan 10 12 11 33 0.33
Feb 13 13 11 37 0.37
Mar 33 38 29 100 1.00
Apr 45 54 47 146 1.46
May 53 56 55 164 1.64
Jun 57 56 55 168 1.68
Jul 33 27 34 94 0.94
Aug 20 18 19 57 0.57
Sep 19 22 20 61 0.61
Oct 18 18 15 51 0.51
Nov 46 50 45 141 1.41
Dec 48 53 47 148 1.48
Total 395 417 388 1200 12.00
Yr 1 Yr2
Supply Chain Engineering MN 799 56#
Seasonal Series Indexing
Sample Data Continued
Monthly Total (MT)
Formula: Seasonal Index (SI) =
Average Month (AM)
33
SI
JAN
= = .33
100
94
SI
JUL
= = .94
100
Where:
1200
AM = = 100
12
1. FIND SEASONALITY FOR EACH PERIOD
2. DEASONALIZE
3. PROJECT USING EXPONENTIAL, REGRESSION ETC
4. REASONALIZE
Supply Chain Engineering MN 799 57#
Given
Deseasonalized Seasonal
Demand Forecast Index
July 34 36 0.94
Aug 0.57
Rationale and Computations
1. Deseasonalize current (July) actual demand
2. Use exponential smoothing to project deseasonalized data one
period ahead (o = .2)
3. Reseasonalize forecast for desired month (August)
= Deseasonalized forecast seasonal factor
= 36.03 0.57 = 20.53 or 21
36.03 (36) (0.8) (36.17) (0.2) )F (1 D F
T T 1 T
= + = + =
+
o o
Integrative Example: Calculating a Forecast
with Seasonal Indexes and Exponential Smoothing
36.17 34/0.94
index Seasonal
demand Actual
= =
36.17 34/0.94
index Seasonal
demand Actual
= =
36.17 34/0.94
index Seasonal
demand Actual
= = 36.17 34/0.94
index Seasonal
demand Actual
= =
34
0.94
Supply Chain Engineering MN 799 58#
Exercise
Boler Corp has the following sales history:
Quarter Year1 Year2
1 140 210
2 280 350
3 70 140
4 210 280
What seasonal index for each quarter could be used to forecast the
sales of the product for Year 3?
What would be a forecast for year 3 using an a=0.3 and assuming the
forecast for year 2 was 1000? What would be the forecast for each
quarter in this forecast?
Supply Chain Engineering MN 799 59#
Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998).
95.44%
99.74%
68.26%
x
Normal Distribution
Using the Measures of Variability
Supply Chain Engineering MN 799 60#
Standard Deviation (sigma)
F=
A =
Actual
Error
(Sales Error
Period Forecast Sales Forecast) Square
d
1 1,000 1,200 200 40,000
2 1,000 1,000 0 0
3 1,000 800
200
40,000
4 1,000 900
100
10,000
5 1,000 1,400 400 160,000
6 1,000 1,200 200 40,000
7 1,000 1,100 100 10,000
8 1,000 700
300
90,000
9 1,000 1,000 0 0
10 1,000 900 100
10,000
10,000 10,200 200 400,000
Supply Chain Engineering MN 799 61#
Standard Deviation Continued
Standard Deviation
( )
( )
200
10
400,000
n
F A
211
9
400,000
1 n
F A
2
i i
2
i i
= =
-
=
= =
-
-
=
NOTE: About the use of n or n - 1 in the above equations
n Use with a large population (> 30 observations)
n - 1 Use with a small population (< 30 observations)
Standard Deviation
Supply Chain Engineering MN 799 62#
Cumulative sum of error =
Bias =
Mean Absolute Deviation (MAD)
=
( ) 200 F A
i i
=
= = =
= = =
= =
6
1
6
1
6
1
6
1
6
1
6
1
6
1
6
1
30 10 5
2 6 500
300 640
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
C P S
I O L
H W
Min
Supply Chain Engineering MN 799 112#
Aggregate Planning (Define Constraints Linking
Variables)
Workforce size for each month is based on hiring and
layoffs
. 80 , 6 ,..., 1
0
,
0
1
1
= =
= +
+ =
W where t for
L H W W
or
L H W W
t t t t
t t t t
Supply Chain Engineering MN 799 113#
Aggregate Planning (Constraints)
Production for each month cannot exceed capacity
. 6 ,..., 1
, 0 4 40
, 4 40
=
> +
+ s
t for
P O W
O W P
t t t
t t t
Supply Chain Engineering MN 799 114#
Aggregate Planning (Constraints)
Inventory balance for each month
. 500 , 0
, 000 , 1 , 6 ,..., 1
, 0
,
6 0
0
1 1
1 1
> =
= =
= + + +
+ + = + +
I
and
S
I
where t for
S I S D C P I
S I S D C P I
t t t t t t t
t t t t t t t
Supply Chain Engineering MN 799 115#
Aggregate Planning (Constraints)
Over time for each month
. 6 ,..., 1
, 0 10
, 10
=
>
s
t for
O W
W O
t t
t t
Supply Chain Engineering MN 799 116#
SOLVING PROBLEM USING EXCEL
STEP 1 BUILD DECISION VARIABLE TABLE (fig8.1)
ALL CELLS 0, EXCEPT PERIOD 0 FOR WORKFORCE AND INVENTORY
ENTER DEMAND (TABLE 8.4)
STEP 2 CONSTRUCT CONSTRAINT TABLE (fig8.2)
STEP 3 CREATE a CELL HAVING THE OBJECTIVE FUNCTION
(Formula 8.1) Optimizing TOTAL COSTS (Fig 8.3)
STEP 4 USE TOOLS SOLVER (Fig 8.4)
REPEAT IF OPTIMUM SOLUTION NOT OBTAINED
HOMEWORK (see homework)
Supply Chain Engineering MN 799 117#
AGGREGATE PLANNING IN PRACTICE
MAKE PLANS FLEXIBLE BECAUSE FORECASTS
ARE ALWAYS WRONG
PERFORM SENSITIVITY ANALYSIS ON THE INPUTS I.E.
LOOK AT EFFECTS OF HIGH/LOW
RERUN THE AGGREGATE PLAN AS NEW DATA
EMERGES
USE AGGREGATE PLANNING AS CAPACITY
UTILIZATION INCREASES
WHEN UTILIZATION IS HIGH, THERE IS LIKELY TO BE
CAPACITY LIMITATIONS AND ALL THE ORDERS WILL
NOT BE PRODUCED
Supply Chain Engineering MN 799 118#
Process Flow Measures
FLOW RATE (R
t
), CYCLE TIME (T
t
), & INVENTORY (I
t
)
RELATIONSHIPS
F = Flow Rate or Throughput is output of a line in pieces per time
T = Cycle time is the time taken to complete an operation
I = Inventory is the material on the line
LITTLEs LAW: Av. I = Av. R x Av. T x Variability factor Examples:
If Inventory is 100 pieces and Cycle time is 10 hours, the Throughput rate is 10 pcs
per hour
If Cycle time is halved; Throughput is doubled
If Inventory is halved; cycle time is halved
See Equation 8.6 How do we get Av Inv of 895 and Flow time of 0.34 months
on page 227/216
Supply Chain Engineering MN 799 119#
Homework
Ex. Work out Inventory, Rate and cycle time for values in
Tables 8.4,8.5
Supply Chain Engineering MN 799 120#
Supply Chain Network Basics Lesson 4
Guest Lecture go to Poly Blackboard
Supply Chain Engineering MN 799 121#
MANAGING SUPPLY AND DEMAND
PREDICTABLE VARIABILITY (LESSON 6)
Predictable Variability Change in Demand that can be forecast or guided
MANAGING DEMAND Short time price discounts, trade promotions
MANAGING SUPPLY Capacity, Inventory, Subcontracting & Backlog, Purchased product
MANAGING CAPACITY
TIME FLEXIBILITY FROM WORKFORCE (OVERTIME)
USE OF SEASONAL WORKFORCE
USE OF SUBCONTRACTING
USE OF DUAL FACILITIES DEDICATED AND FLEXIBLE
DESIGN PRODUCT FLEXIBILITY INTO PRODUCTION
USE OF MULTI-PURPOSE MACHINES (CNC MACHINE CENTERS)
MANAGING INVENTORY
USING COMMON COMPONENTS ACROSS MULTIPLE PRODUCTS
BUILD INVENTORY OF HIGH DEMAND OR PREDICTABLE DEMAND PRODUCTS
Supply Chain Engineering MN 799 122#
MANAGING DEMAND (Predictable Variability)
Manage demand with pricing
Factors influencing the timing of a promotion:
Impact on demand; product margins; cost of holding inventory; cost of
changing capacity
Demand increase (from discounting) due to:
Market growth
Stealing market share
Forward buying
Discount of $1 increases period demand by 10%
Reduce price by $1 in Jan, increases sales by 10% in first month - Tab 9.4,
9.5 effect on cost, profit, inventory
If discount is in April, highest demand month - Tab 9.6, 9.7
See the effects of various combination Tab 9-12
Summary Tab 9.12 & 9.13 Discuss
Supply Chain Engineering MN 799 123#
PREDICTABLE VARIABILITY IN PRACTICE
COORDINATE MARKETING, SALES AND OPERATIONS
SALES AND OPERATIONS PLANNING
ONE GOAL MAXIMIZING PROFIT, ONE GAME PLAN
TAKE PREDICABLE VARIABILITY INTO ACCOUNT
WHEN MAKING STRATEGIC DECISIONS
PARTNER WITH PRINCIPAL CUSTOMERS, ELIMINATE
PREDICTIONS!
PREEMPT (PROMOS ETC.), DO NOT JUST REACT TO
PREDICTABLE VARIABILITY
Supply Chain Engineering MN 799 124#
MANUFACTURING - MANAGING LEAD TIME
CRITICAL DRIVER OF ALL MANUFACTURE
LAYOUT AND WORKPLACE ORGANIZATION
CONSTRAINT MANAGEMENT
VARIABILITY AND QUEUES
LOT SIZES AND SET UP REDUCTION
WORK IN PROCESS
FLEXIBILITY
MUST BE COMPANY FOCUS
MEASURED AND MONITORED
X BUTT TO BUTT
Supply Chain Engineering MN 799 125#
MANAGING INVENTORY
The role of inventory in the supply chain
Cycle Inventory (making or purchasing inventory in large
lots) takes advantage of economies of scale to lower total cost
material cost, fixed ordering cost and holding cost.
Why hold inventory?
Economies of scale
Batch size and cycle time
Quantity discounts
Short term discounts / Trade promotions
Stochastic variability of supply and demand
Evaluating service level given safety inventory
Evaluating safety inventory given desired service level
Levers to improve performance
Supply Chain Engineering MN 799 126#
Role of Inventory in the Supply Chain
Overstocking: Amount available exceeds demand
Liquidation, Obsolescence, Holding
Understocking: Demand exceeds amount available
Lost margin and future sales
Goal: Matching supply and demand
Supply Chain Engineering MN 799 127#
ROLE OF CYCLE INVENTORY (10.1)
Q lot or batch size of an order
D Demand
When demand steady : Cycle Inven = lot size/2 = Q/2
Saw tooth diagram
Average flow time = cycle inven / demand = Q/2D
C material cost
S fixed ordering cost
H holding cost
h cost of holding $1 in inventory for one year
H = hC cost of holding one piece for one year
Supply Chain Engineering MN 799 128#
Cycle Inventory related costs in Practice
Inventory holding costs usually expressed as a % per $ per year
Cost of capital (Opportunity cost of capital)
Obsolescence or spoilage cost
Handling cost
Occupancy cost (space cost)
Miscellaneous costs (security, insurance)
Order costs (same as set up costs in a machining environment)
Buyer time
Transportation costs
Receiving costs
Other costs
Cycle Inventory exists in a supply chain because different stages
exploit economies of scale to lower total cost material cost,
fixed ordering cost and holding cost
Supply Chain Engineering MN 799 129#
Fixed costs: Optimal Lot Size and Reorder Interval
(EOQ)
C: Cost per unit ($C/unit)
h: Holding cost per year as a fraction of
product cost ($%/unit/Year)
H: Holding cost per unit per year
Q: Lot Size
D: Annual demand
S: Setup or Order Cost
Annual order cost = (D/Q)S
Annual inventory cost = (Q/2)hC
Optimum Q = \ 2DS/hC
T: Reorder interval (Q/D)
# orders/yr = D/Q = Optimal order freq
Total Annual Cost = CD+(D/Q)S+(Q/2)hC
See Fig 10-2 Showing effects of Lot Size
DH
S
T
H
DS
Q
hC H
2
2
=
=
=
Supply Chain Engineering MN 799 130#
Example 10.1
Demand, D = 12,000 computers per year
Unit cost, C = $500
Holding cost, h = 0.2
Fixed cost, S = $4,000/order
What is the order quantity Q, the flow time, the reorder
interval and Total cost?
Q = 980 computers
Cycle inventory = Q/2 = 490
Flow time = Q/2D = 0.049 month
Reorder interval, T = 0.98 month
Total Cost = 49,000 + 49,000 + 6,000,000 = $6,098,000
Supply Chain Engineering MN 799 131#
EXPLOITING ECONOMIES OF SCALE
SINGLE LOT SIZE OF SINGLE PRODUCT (EOQ) = Q
ANNUAL MATERIAL COST = CD
NO. OF ORDERS PER YEAR = D/Q
ANNUAL ORDER COST = (D/Q)*S
ANNUAL HOLDING COST = (Q/2)H = (Q/2)hC
TOTAL ANNUAL COST (TC) = CR+(D/Q)*S+(Q/2)hC
Optimal lot size Q* = \2DS/hC
Optimal ordering frequency = n* = D/Q* = \DhC/2S
Key Point: Total Ordering and Holding costs are relatively stable
around the EOQ and a convenient lot size around the EOQ is OK
(rather than a precise EOQ)
Key Point: If demand increases by a factor of k, the optimal lot
size and no of orders increases by a factor of \k. Flow time
decreases by a factor of \k
Key point: To reduce Q by a factor of k, fixed cost S must be
reduced by a factor of k
2
Supply Chain Engineering MN 799 132#
Reducing Lot Size - Aggregating
Exercise:
To reduce Q from 980 to 200, how much must order cost be reduced
Key point: To reduce Q by a factor of k, fixed cost S must be reduced
by a factor of k
2
Supply Chain Engineering MN 799 133#
LOT SIZING WITH MULTIPLE PRODUCTS & CUSTOMERS
Lot sizing with Multiple Product or Customers
Aggregating replenishment across products, retailers or suppliers in a single order,
allows for a reduction in lot sizes because fixed costs spread across multiple
products and businesses
Ordering and delivering independently (See Ex.10.3)
Each order has independent Holding, Ordering and Annual costs with independent
EOQs and Flow Times Table 10-1
Total cost = $155,140
Total cost Ordered and delivered jointly (See Ex.10.4)
Independent holding costs but combined fixed order cost Table 10-2
Total Cost = $136,528
Transportation capacity constraint aggregating multiple products from same
supplier; single delivery from multiple suppliers (Ex. 10-5)
Key Point The key to reducing cycle inventory is reducing lot size. The key
to reducing lot size without increasing costs is to reduce fixed costs associated
with each lot by reducing the fixed cost itself or aggregating lots across
multiple products, customers or suppliers. We reduce lot size to reduce cycle
time
Supply Chain Engineering MN 799 134#
Impact of product specific order cost
Total Costs Product
specific order
cost = $1000
No
Aggregation
$155,140 (10-3)
Complete
Aggregation
$136,528 (10-4)
Tailored
Aggregation
$130,767 (10-6)
Tailored aggregation Higher volume products
ordered more frequently and lower volume products
ordered less frequently (rather than ordered and
delivered jointly) 10-6
Summary
Supply Chain Engineering MN 799 135#
Delivery Options
No Aggregation: Each product ordered separately
Complete Aggregation: All products delivered on each
truck
Tailored Aggregation: Selected subsets of products on
each truck
Supply Chain Engineering MN 799 136#
Economies of Scale to exploit Quantity Discounts
Two common Lot Size based discount schemes
All unit quantity discounts
Pricing based on specific quantity break points
Marginal unit quantity discounts or multiblock tariffs
Pricing based on quantity break points, but the price is not the
average per block, but the marginal cost of a unit that
decreases at breakpoint
See example in book on these discounts pages 276-280
Supply Chain Engineering MN 799 137#
WHY QUANTITY DISCOUNTS
Improved coordination to increase total supply chain profits
Commodity Products = price set by market.
Large Manufacturers should use lot based quantity discounts, to
maximize profits (cycle inventory will increase)
The supply chain profit is lower if each stage makes pricing decisions
independently, maximizing its own profit
Coordination to maximize profit
Two part tariff or quantity discounts supplier passes on some of the
profit to the retailer, depending on volume
Extraction of surplus through price discrimination
Trade Promotions
Lead to significant forward buying by the retailer
Retailer should pass on optimal discount to customer and keep rest for
themselves
Supply Chain Engineering MN 799 138#
Quantity Discounts
Discounts improve coordination between Supplier and Retailer to
maximize Supply Chain profits.
Quantity Discounts are a form of manufacturer returning some reduced
costs (less orders) to the retailer (costs increase as more holding costs)
Supply chain profit is lower, if each stage of supply chain independently
makes its pricing decisions with the objective of maximizing its own
profit. A coordinated solution results in higher profit
For products that have market power, two-part tariffs or volume based
quantity discounts can be used to achieve coordination in the supply chain
and maximize profits
Promotions lead to significant increase in lot size and cycle inventory,
because of forward buying by the retailer. This generally reduces the
supply chain profits 280-281
Supply Chain Engineering MN 799 139#
Strategies for reducing fixed costs
Wal-Mart: 3 day replenishment cycle
Seven Eleven Japan: Multiple daily replenishment
P&G: Mixed truck loads
Efforts required in:
Transportation (Cross docking)
Information
Receiving
Aggregate across products, supply points, or delivery points
in a single order, allows reduction of lot size for
individual products Ex 10.6
Supply Chain Engineering MN 799 140#
ESTIMATING CYCLE INVENTORY COSTS
HOLDING COSTS
Cost of capital
Obsolescence or spoilage costs
Handling costs
Occupancy cost
Miscellaneous
Order Cost
Buyer time
Transportation costs
Receiving costs
Other costs
Supply Chain Engineering MN 799 141#
Lessons From Aggregation
Key to reducing cycle inventory is reducing lot size. Key
to reducing lot size without increasing costs is to reduce
the fixed cost itself by aggregation (across multiple
products, customers or suppliers)
Aggregation allows firm to lower lot size without
increasing cost
Complete aggregation is effective if product specific fixed
cost is a small fraction of joint fixed cost
Tailored aggregation is effective if product specific fixed
cost is large fraction of joint fixed cost
Supply Chain Engineering MN 799 142#
Lessons From Discounting Schemes
Lot size based discounts increase lot size and cycle
inventory in the supply chain
The supply chain profit is lower if each stage
independently makes pricing decisions with the objective
of maximizing its own profit. Coordinated solution results
in higher profit
Lot size based discounts are justified to achieve
coordination for commodity products competitive market
and price fixed by market
Volume based discounts with some fixed cost passed on to
retailer are more effective in general
Volume based discounts are better over rolling horizon
Supply Chain Engineering MN 799 143#
Levers to Reduce Lot Sizes Without Hurting
Costs
Cycle Inventory Reduction
Reduce transfer and production lot sizes
Aggregate fixed cost across multiple products, supply points, or
delivery points
Are quantity discounts consistent with manufacturing and
logistics operations?
Volume discounts on rolling horizon
Two-part tariff volume based discount in stages
Are trade promotions essential?
EDLP (Every day low pricing)
Base on sell-thru (customers) rather than sell-in (retailers)
HOMEWORK
EXERCISES 1 AND 2 Pp291/297
Supply Chain Engineering MN 799 144#
Discussions on Site Visit
Macys Distribution Center (DC)
In teams please answer the following:
What is the size of the operation
What strategy do they adopt and why
What are the key competitive practices
How do they deal with each of the Supply Chain Drivers
Measurements used for efficiency?
How can they improve their operations?
Supply Chain Engineering MN 799 145#
Mid Term
Show your calculations
Do not get stuck on any question
1. Strategy applications and implications 15
2. Demand Management 20
3. Aggregate Demand 20
4. Cycle Inventory 20
5. Supply Chain Networks 25
Supply Chain Engineering MN 799 146#
Role of Inventory in the Supply Chain (LESSON 7)
Improve Matching of Supply
and Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Economies of Scale
Supply / Demand
Variability
Seasonal
Variability
Cycle Inventory Safety Inventory
Figure Error! No text of
Seasonal Inventory
Supply Chain Engineering MN 799 147#
WHY HOLD SAFETY INVENTORY? (SAFETY STOCK)
DEMAND UNCERTAINTY
SUPPLY UNCERTAINTY
TODAYS ENVIRONMENT
INTERNET MAKES SEARCH EASIER
PRODUCT VARIETY GROWN WITH CUSTOMIZATION
EASE AND VARIETY PUTS PRESSURE ON PRODUCT
AVAILABILITY
PUSH UP LEVELS OF INVENTORY / SAFETY STOCK
KEY QUESTIONS
APPROPRIATE LEVEL OF SAFETY STOCK
WHAT ACTIONS IMPROVE AVAILABILITY AND REDUCE
SAFETY STOCK?
Measures of product availability
Product fill rate (fr)
Order fill rate
Cycle service level (CSL) - THIS COURSE WILL DEAL mainly WITH CSL
Supply Chain Engineering MN 799 148#
APPROPRIATE LEVEL OF SAFETY STOCK DEPENDS ON:
UNCERTAINTY OF DEMAND OR SUPPLY
REPLENISHMENT LEAD TIME & DESIRED SERVICE LEVEL
CSL Cycle service level -CSL is the fraction of replenishment cycles
that end with all the customer demand being met. A replenishment
cycle is the interval between two successive replenishment deliveries
Time
Inventory
Cycle Inventory Q/2
Safety Stock
Demand during
Lead time
ROP
Lot Size = Q
SS = ROP - DL
Supply Chain Engineering MN 799 149#
Replenishment policies
Replenishment policies
When to reorder?
How much to reorder?
Continuous Review: Order fixed quantity when total
inventory drops below Reorder Point (ROP)
Periodic Review: Order at fixed time intervals to raise total
inventory to Order up to Level (OUL)
Factors driving safety inventory
Demand and/or Supply uncertainty
Desired level of product availability
Replenishment lead time
Demand Uncertainty Av.Demand; Stnd Devn; Lead Time
Supply Chain Engineering MN 799 150#
Continuous Review Policy: Safety Inventory and Cycle
Demand Uncertainty & Service Level
L: Lead time for replenishment
D: Average demand per unit time
o
D
:Standard deviation of demand
per period
D
L
:
Mean demand during lead time
o
L
: Standard deviation of demand
during lead time
CSL: Cycle service level
Probability of not stocking out in
replenishment cycle
SS: Safety inventory
ROP: Reorder point
Cv: Coefficient of variance
Average I nventory = Q/2 + SS
SS = ROP - RL
Supply Chain Engineering MN 799 151#
FORMULAS USED FOR CALCULATING SERVICE LEVELS
) 1 , 1 , 0 , / ( ] 1 , 1 , 0 , / ( 1 [ (
/ ) ( / 1
) 1 , , , ( ) , (
/
) , , (
,
o o o
o o
o
o o
o
L L L
L L L
L
L L
L
D L
L
ss NORMDIST ss NORMDIST ss orESC
Q ESC Q Q ESC f r
ROP NORMDIST D ROP F CSL
cv
ROP F CSL
ss ROP
L
LD
D
D
D
D
+ =
= =
= =
=
=
+ =
=
=
Supply Chain Engineering MN 799 152#
Example 11.1&2, 11.4 (Continuous Review Policy)
= 8.xx New book
11.1: R = 2,500 /week; o
R
= 500
L = 2 weeks; Q = 10,000; ROP = 6,000 CSL = 90%
SS = ROP - D
L
=
Average Inventory =
Average Flow Time =
11.2: Evaluating CSL given a replenishment policy
CSL = Prob (demand during lead time <= ROP)
Distribution of demand during lead time of 2 weeks
Cycle service level, CSL = F(R
L
+ ss, R
L
, o
L
) = F(ROP, R
L
, o
L
)
Excel: NORMDIST (ROP, R
L
, o
L
,1)
X
1
= Xbar + Z o
L
or ROP = R
L +
Z o
L
Calculate the % z represents. Calculate Safety
Stock for above
o o D L
L
L
DL
D
=
=
Z Chart
Supply Chain Engineering MN 799 153#
Examples of Safety Stock Calculations
Weekly demand for Lego at Wal Mart is normally distributed with a mean of
2500 boxes and a standard deviation of 500. The replenishment lead time is 2
weeks. Assuming a continuous replenishment policy, evaluate the safety
inventory that the store should carry to achieve a cycle service of 90 percent
Supply Chain Engineering MN 799 154#
Factors Affecting Fill Rate
Fill Rate: Proportion of customer demand that is satisfied from
Inventory. Directly related to CSL
Safety inventory: Safety inventory is increased by:
Increasing fill rate (Table 11-1)
Increasing CSL
Increasing supplier lead time by factor k SS increases by factor of SQRT k
Increasing standard deviation of demand by factor k SS increases by factor
of k
Lot size: Fill rate increases on increasing the lot size even though cycle service
level does not change.
Actions: 1. Reduce supplier Lead Time L
2. Reduce underlying uncertainty of demand o
R
Supply Chain Engineering MN 799 155#
Evaluating Safety Inventory Given Fill Rate
Fill Rate Safety Inventory
97.5% 67
98.0% 183
98.5% 321
99.0% 499
99.5% 767
Required safety stock grows rapidly with increase in the desired
Product availability
The required SS grows rapidily with increase in desired Fill Rate
The required SS increases with increase in Lead time and the of demand
Supply Chain Engineering MN 799 156#
Impact of Supply Uncertainty
Considering variation in Demand and in Replenishment
Lead time (Ex 11.6)
D: Average demand per period
o
D
: Standard deviation of demand per period
L: Average lead time for replenishment
s
L
: Standard deviation of supply lead time
s D
D
L L
L
D L
DL
2 2
2
+ =
=
o
o
Standard Deviation
of demand during lead time
Mean demand
during lead time
Supply Chain Engineering MN 799 157#
Impact of Supply Uncertainty ((See Ex. 11.6 & Table 11.2)
Ex.11.6: R = 2,500/day; o
R
= 500; L = 7 days; Q = 10,000;
CSL = 0.90 (z=1.29); s
L =
Standard Deviation of lead time=7days What is S.S?
Large potential benefits of reducing Lead time or lead time variability in
reduction of Safety stock
SS units SS (d) Stnd Dev(o
L )
Safety inventory when s
L
= 0 1,695 0.68 1,323
Safety inventory when s
L
= 1 3,625 1.45 2,828
Safety inventory when s
L
= 2 6,628 2.65 5,172
Safety inventory when s
L
= 3 9,760 3.90 7,616
Safety inventory when s
L
= 4 12,927 5.17 10,087
Safety inventory when s
L
= 5 16,109 6.44 12,750
Safety inventory when s
L
= 6 19,298 7.72 16,109
Safety inventory when s
L
= 7 is 22,491 8.99 17,550
Supply Chain Engineering MN 799 158#
Basic Quick Response Initiatives
Reduce information uncertainty in demand
Reduce replenishment lead time
Reduce supply uncertainty or replenishment lead
time uncertainty
Increase reorder frequency or go to continuous
review
Supply Chain Engineering MN 799 159#
Factors Affecting Value of Aggregation
DEMAND CORRELATION
AS CORRELATION INCREASES, THE SS BENEFIT OF AGGREGRATION
DECREASES
IF THERE IS LITTLE CORRELATION BETWEEN DEMAND, AGGREGRATION
REDUCES STND. DEVN. OF DEMAND AND HENCE SAFETY STOCK (see ex.
11.7, Table 11.3)
Coefficient Of Variation = Stnd Devn/Mean (uncertainty relative to size of demand) p=0 No
Correlation
THE HIGHER THE COEFFICIENT OF VARIATION OF AN ITEM, THE
GREATER THE REDUCTION IN SAFETY STOCK AS A RESULT OF
CENTRALIZATION (LOW COEFFICIENT OF VARIATION ALLOW
ACCURATE FORECASTING AND DECENTRALIZED STOCKING)
REDUCING SUPPLY VARIATION REDUCES SAFETY STOCK WITHOUT
REDUCING CSL
VALUE OF A PRODUCT
DIRECTLY DETERMINES THE SAFETY STOCK LEVEL
Supply Chain Engineering MN 799 160#
IMPACT OF AGGREGRATION ON SAFETY STOCK
HOW TO REDUCE SS WITHOUT REDUCING CSL?
AGGREGRATION REDUCES STANDARD DEVIATION OF DEMAND,
ONLY IF DEMAND ACROSS AREAS IS NOT CORRELATED, THAT IS
EACH AREA IS INDEPENDENT
See Table 11.4 p323
AGGREGRATION REDUCES SS BY THE SQRT OF NUMBER OF AREAS
AGGREGRATED (REDUCING NUMBER OF STOCKING LOCATIONS)
SQUARE ROOT LAW (Ex. AMAZON) See Fig 11.4
INFORMATION CENTRALIZATION ORDERS FILLED FROM
WAREHOUSE CLOSEST TO CUSTOMER
SPECIALIZATION BY LOCATION
LOW DEMAND, SLOW MOVING ITEMS: CENTRALIZED HIGH
COEFFICIENT OF VARIATION
HIGH DEMAND, FAST MOVING ITEMS: DECENTRALIZED LOW
COEFFICIENT OF VARIATION
Centralization Disadvantage:
Increase in Response time;
Increase in Transport costs
Supply Chain Engineering MN 799 161#
IMPACT OF AGGREGRATION ON SAFETY STOCK
HOW TO REDUCE SS WITHOUT REDUCING CSL?
PRODUCT SUBSTITUTION
MANUFACTURER DRIVEN AGGREGATE DEMAND & REDUCE SS;
IF PRODUCTS STRONGLY CORRELATED, LESS VALUE IN SUBSTITUTION
CUSTOMER DRIVEN TWO WAY SUBSTITUTION ALLOWS REDUCTION
IN SS WHILE MAINTAINING HIGH PRODUCT AVAILABILITY
GREATER THE VARIABILITY AND LESS THE CORRELATION OF
DEMAND, THE GREATER THE BENEFIT IN SUBSTITUTION
COMPONENT COMMONALITY (TABLE 11.5)
WITHOUT COMMONALITY, UNCERTAINTY OF DEMAND FOR
COMPONENTS SAME AS THAT FOR PRODUCT (SEE Ex. 11.9)
POSTPONMENT
DELAY DIFFERENTIATION OR CUSTOMIZATION AS CLOSE TO SALE
TIME AS POSSIBLE
COMMON COMPONENTS IN PUSH PHASE
POWERFUL CONCEPT FOR E-COMMERCE
Supply Chain Engineering MN 799 162#
Example 11.9: Value of Component Commonality
Y Axis SS Quantity; X Axis No. of common components
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
1 2 3 4 5 6 7 8 9
SS
Without component commonality and postponment, product differentiation
Occurs early in the Supply Chain and inventories are disaggregate
Supply Chain Engineering MN 799 163#
ESTIMATING AND MANAGING SS IN PRACTICE
ACCOUNT FOR LUMPY SUPPLY CHAIN DEMAND
CAUSED BY LARGE LOT SIZES & ADDS TO VARIABILITY
EMPIRICALLY RAISING SS BY HALF LOT SIZE
ADJUST INVENTORY POLICY IF DEMAND SEASONAL
CHANGE BOTH MEAN AND STND DEVN
USE SIMULATION TO TEST INVENTORY POLICIES
EXCEL
START WITH A PILOT
MONITOR SERVICE LEVELS
FOCUS ON REDUCING SAFETY STOCK
PERIODIC REVIEW REPLENISHMENT REQUIRES MORE SAFETY STOCK
THAN CONTINUOUS REVIEW POLICIES
Supply Chain Engineering MN 799 164#
Mass Customization I: Customize Services Around
Standardized Products
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver customized services as
well as standardized products
and services
Market customized services with standardized
products or services
Continue producing standardized products or services
Continue developing standardized products or services
Source: B. Joseph Pine
Supply Chain Engineering MN 799 165#
Mass Customization II: Create Customizable
Products and Services
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver standard (but
customizable) products
or services
Market customizable products or services
Produce standard (but customizable) products or services
Develop customizable products or services
Supply Chain Engineering MN 799 166#
Mass Customization III: Provide Quick Response
Throughout Value Chain
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Reduce Delivery Cycle Times
Reduce selection and order processing cycle
times
Reduce Production cycle time
Reduce development cycle time
Supply Chain Engineering MN 799 167#
Mass Customization IV: Provide Point of Delivery
Customization
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver standardize portion
Market customized products or services
Produce standardized portion centrally
Develop products where point of delivery customization is feasible
Point of delivery
customization
Mens Warehouse and Restaurants
Supply Chain Engineering MN 799 168#
Mass Customization V: Modularize Components to
Customize End Products
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver customized product
Market customized products or services
Produce modularized components
Develop modularized products
Autos
Supply Chain Engineering MN 799 169#
Types of Modularity for Mass Customization
Component Sharing Modularity
Cut-to-Fit Modularity
Bus Modularity
Mix Modularity
Sectional Modularity
Supply Chain Engineering MN 799 170#
Example of Point of Service Replenishment
Safety Stock and Re-order point management in Toyota
Another advantage of Toyotas new system is that safety stock criteria can be adjusted
according to seasonal requirements. Previously, the company had no ability to recognize
the seasonality of items such as wiper blades. It worked from one forecast model a
simple moving average that didnt allow for fine-tuning or sudden shifts in consumer
taste. Reorder points were recalculated just once a month.
To support the new system, Toyota implemented Exam Inventory, a solution made by
Entity Software in Epson, U.K. Exam is an inventory management program that runs on
a PC and is fed raw data directly from a computer. As a result, Toyota (GB) was able to
fully customize the package to its needs with minimal impact on the companys larger
computers. The software allows for more sophisticated forecasting and more accurate
calculation of reorder points (ROPs), while keeping safety stocks low.
Toyota now has moved to weekly ROP calculations and hopes eventually to carry out
that function on a daily basis when the technology permits, Results of the program so far
include an improvement in Toyotas service level from 94 percent to 96 percent,
reduction in the number of manual order changes from 3,000 a day to 50, and reduction
in run times from 12 to 3.5 hours.
Supply Chain Engineering MN 799 171#
Cautions in Implementing Postponement and
Modularity
End products must look suitably different to the consumer
Design and production costs can only be justified over a
family of products
Performance and cost of a product can be optimized by
eliminating modularity. Do a small set of products provide
most of the sales?
Supply Chain Engineering MN 799 172#
Summary of Learning Objectives
Reduce Buffer Inventory
Economies of Scale
Supply / Demand
Variability
Seasonal
Variability
Cycle Inventory Safety Inventory
Seasonal Inventory
Match Supply & Demand
Reduce fixed cost
Aggregate across
products
Volume discounts
EDLP
Promotion on Sell
thru
Quick Response measures
Reduce Info Uncertainty
Reduce lead time
Reduce supply uncertaint
Accurate Response measures
Aggregation
Component commonalit
and postponement
Supply Chain Engineering MN 799 173#
HOMEWORK
Page 336 Q4 and Q5
Provide actual examples of the five types of customization
Supply Chain Engineering MN 799 174#
OPTIMUM LEVEL OF PRODUCT AVAILABILITY
Exercise: Swimsuit Production Lesson 8
Fashion items have short life cycles, high variety of competitors
SnowTime Sporting Goods
New designs are completed
One production opportunity
Based on past sales, knowledge of the industry, and economic conditions,
the marketing department has a probabilistic forecast
The forecast averages about 13,000, but there is a chance that demand will
be greater or less than this
Production cost per unit (C): $80
Selling price per unit (S): $125
Salvage value per unit (V): $20
Fixed production cost (F): $100,000
Q is production quantity, D demand
Profit = Revenue - Variable Cost - Fixed Cost + Salvage
Supply Chain Engineering MN 799 175#
Demand Distribution
Demand Scenarios
0%
5%
10%
15%
20%
25%
30%
8
0
0
0
1
0
0
0
0
1
2
0
0
0
1
4
0
0
0
1
6
0
0
0
1
8
0
0
0
Sales
P
r
o
b
a
b
i
l
i
t
y
11 11
28
22
18
10
Supply Chain Engineering MN 799 176#
Exercise
Scenario One:
Suppose you make 12,000 jackets and demand ends up being 13,000
jackets.
Profit = 125(12,000) - 80(12,000) - 100,000 = $440,000
Scenario Two:
Suppose you make 12,000 jackets and demand ends up being 11,000
jackets.
Profit = 125(11,000) - 80(12,000) - 100,000 + 20(1000) = $ 335,000
Find order quantity that maximizes weighted average profit.
Average demand is 13,100 (work out p.D)
Question: Will this quantity be less than, equal to, or greater than
average demand?
Look at marginal cost Vs. marginal profit
if extra jacket sold, profit is 125-80 = 45
if not sold, cost is 80-20 = 60
So we will make less than average
Supply Chain Engineering MN 799 177#
Profitability Calculations
Expected Profit
$0
$100,000
$200,000
$300,000
$400,000
8000 12000 16000 20000
Order Quantity
P
r
o
f
i
t
Supply Chain Engineering MN 799 178#
Profitability scenarios
0%
20%
40%
60%
80%
100%
-
3
0
0
0
0
0
-
1
0
0
0
0
0
1
0
0
0
0
0
3
0
0
0
0
0
5
0
0
0
0
0
Cost
P
r
o
b
a
b
i
l
i
t
y
Q=9000
Q=16000
Supply Chain Engineering MN 799 179#
OPTIMAL LEVEL OF PRODUCT AVAILABILITY
FACTORS AFFECTING OPTIMAL PRODUCT
AVAILABILITY
COST OF OVERSTOCKING Co
PROFIT FROM SALES
INVENTORY HOLDING COSTS
OBSELESCENCE SALVAGE COSTS
COST OF UNDERSTOCKING Cu
LOST SALES
LOST CUSTOMERS
EXAMPLE OF L.L.BEAN (Table 12.1)
For all references New Book 12.xx
Supply Chain Engineering MN 799 180#
Parkas at L.L. Bean
Cost per parka = $45
Sale price per parka = $100
Discount price per parka = $50
Holding and transportation cost = $10
Profit from selling parka = $100-$45 = $55
Cost of overstocking = $45+$10-$50 = $5
Expected demand = =1026, ordered 1000 parkas CSL51%
Expected profit from ordering 1000 parkas = $49,900
See formula on page 224
Expected profit =
) ( 1000 )
10
4
1 ( )] )( 1000 ( ) ( [ c p i i i i
i
P p s c D c p D
=
+
i i p D
H
= 2, o
H
= 5, CSL= 0.997, Holding cost = 25%
Lowval (cost $30/unit, 0.04 lbs/unit) demand in each territory
L
= 20, o
L
= 5
UPS rate: $0.66 + 0.26x {for replenishments}
FedEx rate: $5.53 + 0.53x {for customer shipping}
where x is quantity shipped in lbs
Factory 1 week replenish, local inventory 4 wks replenish
Average customer order 1 Highval & 10 Lowval
Option A Replenish weekly instead of every 4 weeks
Option B Elimin inventory in territories, aggregate all inven in one
warehouse, replenish warehouse once a week
Supply Chain Engineering MN 799 226#
Inventory Aggregation at HighMed (13.6)
Current
Scenario
Option 1 Option 2
# Locations 24 24 1
Reorder Interval 4 weeks 1 week 1 week
Inventory Cost $54,366 $29,795 $8,474
Shipment Size(dltxlt) 8 H + 80 L 2 H + 20 L 1 H + 10 L
Transport Cost $530 $1,148 $14,464
Total Cost $54,896 $30,943 $22,938
I f shipment size to customer is 0.5H + 5L, total cost of option 2
increases to $36,729.
Supply Chain Engineering MN 799 227#
Physical Inventory Aggregation: Inventory vs.
Transportation cost
Firms can significantly reduce SS by physically aggregating
inventory in one location
As a result of physical aggregation
Inventory costs decrease
Inbound transportation cost decreases one destination DC
Outbound transportation cost increases several deliveries
Advantageous when inventory and facility costs form a large
fraction of supply chain costs
Large value to weight ratio (ex PCs)
High demand uncertainty and large value (ex designer dresses)
Large customer orders to cover economies of scale on outbound
transportation
Supply Chain Engineering MN 799 228#
Tailored Transportation (Table 13.9)
Factors affecting tailoring Optimizing response vs cost
Customer distance and density
Short distance Med distance Long distance
Hi Density Private fleet milk runs Crossdock, milk runs Crossdock, milk runs
Med Dens Third party milk runs LTL carrier LTL or package carrier
Low Dens Third party milk runs or LTL LTL or package carr Package carrier
Customer size
Large can use a TL; medium and small LTL use LTL or milk runs
Product demand and value (Table 13.10)
Product Hi value Lo value
High demand Disaggreg cycle inven Disaggreg all inven, use inexpen trans
Aggregate safety stock, for replen inven
inexpen transp for replen, cycle &
fast mode for safety inventory
Low demand Aggregate all inven. Use fast Aggregate Safety inven only. Use inexpen
trans for filling cust orders trans for replen cycle inven
Supply Chain Engineering MN 799 229#
ROUTING AND SCHEDULING IN
TRANSPORTATION Chapter 5)
Framework for Network Design Decisions (Table 5.2)
Phase I : Define a supply chain strategy
Phase II: Define regional facility configuration
Phase III: Select a set of desirable potential sites
Phase IV: Location Choices
Exercise Sun Oil Fig 5-3
Phase II Network Optimization Models: Capacitated Plant
Location Model
Decide on Network design that maximizes profits
Phase III: Gravity Location Models (Table 5-1) Work out
manually
Identify the distance matrix
Identify the savings matrix
Assign customers to vehicles or routes
Sequence customers within routes
Supply Chain Engineering MN 799 230#
RISK MANAGEMENT IN TRANSPORTATION
RISK THAT SHIPMENT IS DELAYED
RISK THAT SHIPMENT DOES NOT REACH ITS
FINAL DESTINATION, BECAUSE INTERMEDIATE
NODES DISRUPTED
RISK OF HAZARDOUS MATERIAL
Supply Chain Engineering MN 799 231#
MAKING TRANSPORTATION DECISIONS IN
PRACTICE
ALIGN TRANSPORTATION STRATEGY WITH COMPETITIVE
STRATEGY
CONSIDER BOTH IN HOUSE AND OUTSOURCED TRANSPORTATION
STRATEGIC IMPORTANCE AND PROFITABILITY
DESIGN A TRANSPORTATION NETWORK THAT CAN HANDLE E-
COMMERCE
DECREASE IN SHIPMENT SIZE & INCREASE IN HOME DELIVERY
USE TECHNOLOGY TO IMPROVE TRANSPORTATION PERFORMANCE
IDENTIFY LOCATION AND SHIPMENT IN VEHICLE
DESIGN FLEXIBILITY INTO THE TRANSPORTATION NETWORK
TAKE INTO ACCOUNT UNCERTAINTYIN DEMAND AND IN AVAILABILITY OF
TRANSPORTATION
Supply Chain Engineering MN 799 232#
HOMEWORK
EXERCISE 13.1 Coal and MRO
Ex 13.2 Work out single location and 1 week replenishment
EXAMPLE HIGHMED (Ex 13.2)
WORK OUT OPTION A & IF SHIPMENT SIZE IS 0.5H + 5.0L
WHAT ARE YOUR CONCLUSIONS?
Supply Chain Engineering MN 799 233#
FACILITY DECISIONS: Network Design Decisions
Lesson 11 (Chap 4)
FACILITY ROLE
What processes are performed
FACILITY LOCATION
Where should facilities be located
CAPACITY ALLOCATION
How much capacity should be allocated to each facility
MARKET & SUPPLY ALLOCATION
What markets should each facility serve
What supply sources should feed each facility
Supply Chain Engineering MN 799 234#
Factors Influencing Network Design Decisions
Strategic
Cost or Responsiveness focus
Technological
Fixed costs and flexibility determine consolidation
Macroeconomic
Tariffs and Tax incentives. Stability of currency
Political stability - clear commerce & legal rules
Infrastructure
sites, labor, transportation, highways, congestion, utilities
Competition
Logistics and facility costs
Supply Chain Engineering MN 799 235#
The Cost-Response Time Frontier
Local FG
Mix
Regional FG
Local WIP
Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Cost
Response Time
Hi (LONG) Low (QUI CK)
Low
Hi
Supply Chain Engineering MN 799 236#
LOGISTICS AND FACILITIES COSTS
INVENTORY COSTS
TRANSPORTATION COSTS
INBOUND AND OUTBOUND
FACILITY (SETUP AND OPERATING) COSTS
TOTAL LOGISTICS COSTS
SEE SUCCEEDING CHARTS
Supply Chain Engineering MN 799 237#
Service and Number of Facilities
Number of Facilities
Response
Time
Costs
Costs
Response
Time
AS THE NUMBER OF FACILITIES INCREASE,
RESPONSE TIME REDUCES, AND COST INCREASES
Supply Chain Engineering MN 799 238#
Costs and Number of Facilities
Costs
Number of facilities
Inventory
Transportation
Facility costs
Frequent inbound trans
Supply Chain Engineering MN 799 239#
Percent Service
Level Within
Promised Time
Transportation
Cost Build-up as a function of facilities
C
o
s
t
o
f
O
p
e
r
a
t
i
o
n
s
Number of Facilities
Inventory
Facilities
Total Costs
Labor
Supply Chain Engineering MN 799 240#
FRAMEWORK FOR NETWORK DESIGN DECISIONS
DEFINE A SUPPLY CHAIN STRATEGY
COMPETITIVE STATEGY, COMPETITION, SWOT
DEFINE A REGIONAL FACILITY STRATEGY
LOCATION, ROLES AND CAPACITY
SELECT DESIRABLE SITES
HARD INFRASTURCTURE TRANSPORT, UTILITIES,
SUPPLIERS, WAREHOUSES
SOFT INFRASTRUCTURE SKILLED WORKFORCE,
COMMUNITY
CHOOSE LOCATION
PRICE LOCATION AND CAPACITY ALLOCATION
SEE FRAMEWORK NEXT
Supply Chain Engineering MN 799 241#
A Framework for Global Site Location (107)
PHASE I
Supply Chain
Strategy
PHASE II
Regional Facility
Configuration
PHASE III
Desirable Sites
PHASE IV
Location Choices
Competitive STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network
PRODUCTION TECHNOLOGIES
Cost, Scale/Scope impact, support
required, flexibility
COMPETITIVE
ENVIRONMENT
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS
Labor, materials, site specific
GLOBAL COMPETITION
TARIFFS AND TAX
INCENTIVES
REGIONAL DEMAND
Size, growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
AVAILABLE
INFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory, coordination
Supply Chain Engineering MN 799 242#
Tailored Network: Multi - Echelon Finished Goods
Network
Regional
Finished
Goods DC
Regional
Finished
Goods DC
Customer 1
DC
Store 1
National
Finished
Goods DC
Local DC
Cross-Dock
Local DC
Cross-Dock
Local DC
Cross-Dock
Customer 2
DC
Store 1
Store 2
Store 2
Store 3
Store 3
Supply Chain Engineering MN 799 243#
Network Optimization Models
Allocating demand to production facilities
Locating facilities and allocating capacity
Speculative Strategy
Single sourcing
Hedging Strategy
Match revenue and cost exposure
Flexible Strategy
Excess total capacity in multiple plants
Flexible technologies
Which plants to establish? How to configure the network?
Key Costs:
Fixed facility cost
Transportation cost
Production cost
Inventory cost
Coordination cost
Supply Chain Engineering MN 799 244#
Gravity Methods for Location Min. cost of transportn 316,116)
ASSUMPTION: TRANSPORT COSTS GROW LINEARLY WITH SHIPMENTS
Ton Mile-Center Solution
(Table 11.29, 5.1)
x,y: Warehouse Coordinates
x
n
, y
n
: Coordinates of delivery location n
d
n
: Distance to delivery location n
F
n
: Cost per ton mile to delivery location n
D
n
Quantity to be shipped
F
i
= D
n
F
n
=
=
=
=
=
=
+ =
n
i i
i
n
i
i
i
i
n
i i
i
n
i
i
i i
n
d
F
d
F
y
d
F
d
F x
y y
x
x
d
y
x
n
n
1
1
1
1
2
2
) (
) (
Min
+
) (
) (
2
2
y y x
x F
i
i i
Total Cost TC=
=
k
n 1
D
n
d
n
F
n
Reiterate x,y calculation till x,y values close
Supply Chain Engineering MN 799 245#
Demand Allocation Model (pp319) (Table 5.2)
Which market is served by which plant?
Which supply sources are used by a plant?
x
ij
= Quantity shipped from plant site i to
customer j
C
ij
= cost to produce & ship one unit from
factory i to market j
n = no. of factory locations
m = no. of markets
D
j
= Annual demand from market j
K
i
= Annual capacity of factory i
0
.
1
1
1 1
>
s
=
=
=
= =
x
K x
D x
x c
ij
i
m
j
ij
j
n
i
ij
n
i
m
j
ij ij
st
Min
All mkt demand satisfied
No factory capacity exceed
Supply Chain Engineering MN 799 246#
NETWORK DESIGN DECISIONS IN PRACTICE
DO NOT UNDERESTIMATE THE LIFE SPAN
LONG LIFE HENCE LONG TERM CONSEQUENCES
ANTICIPATE EFFECT FUTURE DEMANDS, COSTS AND TECHNOLOGY
CHANGE
STORAGE FACILITIES EASIER TO CHANCE THAN PRODUCTION
FACILITIES
DO NOT GLOSS OVER CULTURAL IMPLICATIONS
LOCATION URBAN, RURAL, PROXIMITY TO OTHERS
DO NOT IGNORE QUALITY OF LIFE ISSUES
WORKFORCE AVAILABILITY AND MORALE
FOCUS ON TARIFFS& TAX INCENTIVES WHEN LOCATING
FACILITIES
PARTICULARLY IN INTERNATIONAL LOCATIONS
Supply Chain Engineering MN 799 247#
HOMEWORK
Page 330 Exercise 2
Supply Chain Engineering MN 799 248#
BEER GAME Lesson 12
Beer Game
HOMEWORK
WRITE UP A SUMMARY OF THE LESSONS FROM
THE BEER GAME
GIVE AN EXAMPLE OF THIS PHENOMENA IN REAL
LIFE
WHAT WOULD YOU DO TO CORRECT IT
Supply Chain Engineering MN 799 249#
DISCUSSION OF BEER GAME
GET INTO SAME TEAMS
FORMULATE TWO OR LEARNINGS WHAT IS THE
EFFECT; WHY IS IT CAUSED; HOW CAN IT BE
REDUCED?
FROM THE GAME
FROM YOUR INTUITION
FROM YOUR KNOWLEDGE OR INDUSTRY
PRESENT THEM TO CLASS FOR DISCUSSION
Supply Chain Engineering MN 799 250#
SUPPLY CHAIN COORDINATION (Chap 16) Lesson 13
The role of Information Technology
What is coordination? Take action to increase total SC profits
Obstacles to coordination:
The Bull-Whip Effect every trading partner must understand effect of its
actions on other trading partners
Effect of lack of coordination
Increased costs Manufacturing, Inventory, Transportation, labor
Increased Replenishment lead time
Lower level of Product availability
Countermeasures to achieve coordination
The role of information technology in a supply chain
Supply Chain Engineering MN 799 251#
Supplier
Manufacturer
Retailer
Customer
Distributor
As Information Moves Thru A Supply Chain
Demand uncertainty
becomes more
AND MORE
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 252#
Bullwhip Effect
Time
Retailers Orders
Time
Wholesalers Orders
Time
Manufacturers Orders
The magnification of variability in orders in the supply-chain.
A lot of retailers
each with little
variability in their
orders.
can lead to
greater variability for
a fewer number of
wholesalers, and
can lead to even
greater variability
for a single
manufacturer.
Supply Chain Engineering MN 799 253#
Information Coordination: The Bullwhip Effect
Consumer Sales at Retailer
0
100
200
300
400
500
600
700
800
900
1000
1
3
5
7
9
1
1
1
3
1
5
1
7
1
9
2
1
2
3
2
5
2
7
2
9
3
1
3
3
3
5
3
7
3
9
4
1
C
o
n
s
u
m
e
r
d
e
m
a
n
d
Retailer's Orders to Wholesaler
0
100
200
300
400
500
600
700
800
900
1000
1
3
5
7
9
1
1
1
3
1
5
1
7
1
9
2
1
2
3
2
5
2
7
2
9
3
1
3
3
3
5
3
7
3
9
4
1
R
e
t
a
i
l
e
r
O
r
d
e
r
Wholesaler's Orders to Manufacturer
0
100
200
300
400
500
600
700
800
900
1000
1
3
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Manufacturer's Orders with Supplier
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400
500
600
700
800
900
1000
1
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7
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Supply Chain Engineering MN 799 254#
Impact of the Bullwhip Effect
Performance Measure I mpact on Performance
Manufacturing Cost
Inventories
Lead Time
Transport Cost
Shipping & Receiving Cost
Customer Service Level
Profitability
Supply Chain Engineering MN 799 255#
Bull Whip Effect - Incentive Obstacles
Contributing factors
Incentives based on sell-in leading to forward buy
Localized optimization Ex Transportation Mgr linked to lowest transport cost
even if inventory cost increased
Sales Force incentives quantity sold to next stage, not final customer
Buying policies based on max profits at one stage of supply chain
Counter Measures
Align goals and incentives across functions
Price for coordination -
Focus sales force on increasing sell-thru to customer
Incentives based on rolling horizon
Sales force do not compete with each other but with the competition
Supply Chain Engineering MN 799 256#
The Bullwhip Effect: Information Processing Obstacles
Contributing factors
No visibility of end demand
Multiple forecasts, based on orders received not customer demand (magnifies incr/decr)
Long lead-time
Lack of information sharing
Counter Measures
Collaborative forecasting and planning (CFAR, CPFR)
Access sell-thru or POS data. Sharing POS data
Direct sales (natural on web)
Single control of replenishment continuous replenishment and VMI
Leadtime reduction
State of Practice
Sell-thru data in contracts (e.g., HP, Apple, IBM)
CFAR, CPFR, CRP, VMI (P&G and Walmart)
Quick Response Mfg. Strategy
Dell direct supply to customer
Supply Chain Engineering MN 799 257#
Bull Whip Effect - Operational Obstacles (Batching)
Contributing factors
High Order Cost Ordering large lots
Large replenishment times
Full TL economies
Random or correlated ordering
Counter Measures
Reduce replenishment lead time EDI, manuf techniques, Advanced Shipping
notices (ASN), & Computer Assisted Ordering (CAO)
Reduce Lot sizes reduce fixed costs to (order, manuf, transport, receive)
Discounted on Assorted Truckload, consolidated by 3rd party logistics
Regular delivery appointment, milk runs, mixing deliveries
Volume and not lot size discounts
State of Practice
McKesson, Nabisco, ...
3rd party logistics in Europe, emerging in the U.S.
P & G
Supply Chain Engineering MN 799 258#
Bull Whip Effect - Operational Obstacles (Rationing
Game)
Contributing factors
Rationing and Shortage gaming (inflating order rewarded)
Proportional rationing scheme
Ignorance of supply conditions
Unrestricted orders & free return policy
Counter Measures
Allocation based on past sales.
Shared Capacity and Supply Information
Flexibility Limited over time, capacity reservation
State of Practice
Saturn, HP
Schedule Sharing (HP with TI and Motorola)
HP, Sun, Seagate
Supply Chain Engineering MN 799 259#
Bull Whip Effect - Pricing Obstacles
Contributing factors
Lot size based quantity discounts
High-Low Pricing leading to forward buy
Delivery and Purchase not synchronized
Counter Measures
Lot size based to Volume based quantity discounts
EDLP (Every day low pricing)
Limited purchase quantities
Scan based promotions
State of Practice
P&G (resisted by some retailers)
Scan based promotion
Supply Chain Engineering MN 799 260#
Managerial Implications of the Bull Whip Effect -
Behavioral Factors
Contributing factors
Lack of trust
Local reaction to current local condition
Each stage sub optimizes
Each stage blames each other for fluctuations
Counter Measures
Building trust and partnership
Aligning incentives and objectives co-identification
Sharing information sales and production
Eliminating duplication (Inspection)
State of Practice
Wal-Mart and P&G with CFAR
Supply Chain Engineering MN 799 261#
How Should A Middle Link Behave?
IF: The Middle Link makes an independent decision to increase production
THEN: Finished goods inventory increases for the Middle Link
THEN: Return On Assets are reduced for the Enterprise, and
there is no improvement in end-to-end throughput!
IF: The Middle Link makes an independent decision to decrease production
THEN: The system constraint moves to the Middle Link
THEN: There is no reduction in operational costs for the Enterprise, and
profit margins are lowered for every trading partner!
THEREFORE: The Middle Link should stay synchronized to the
demand signal from the system constraint
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 262#
ACHIEVING COORDINATION IN PRACTICE
QUANTIFY THE BULLWHIP EFFECT
GET TOP MANAGEMENT COMMITMENT
DEVOTE RESOURCES FOR COORDINATION - DEDICATED
FOCUS ON COMMUNICATION WITH OTHER STAGES
TRY TO ACHIEVE COORDINATION IN THE ENTIRE SUPPLY CHAIN
NETWORK
USE TECHNOLOGY TO IMPROVE CONNECTIVITY IN THE SUPPLY SIDE -
INCREASING VISIBILITY&COMMUNICATION
REDUCE TIME TO ORDER, MAKE, TRANSPORT, REPLENISH
SHARE BENEFITS OF COORDINATION EQUITABLY
Supply Chain Engineering MN 799 263#
Principle:
Synchronize Supply With Demand
This principle is about Vocalization.
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 264#
ROLE OF INFORMATION IN SUPPLY CHAIN SUCCESS
Information is the glue that binds the other three drivers, to create an
integrated, coordinated supply chain. Provides facts to give visibility of
whole supply chain and make sound decisions to improve performance
* TYPES Supplier, Manufacturing, Distribution & Retailing, and
Demand
* CHARACTERISTICS Accurate, Timely, Accessible, Appropriate
* OPTIMIZING Inventory, Transportation, Facilities
I nformation Global
Scope
Coordinated
Decisions
Supply Chain
Success
Global scope enables decisions to maximize the total supply chain profit
Supply Chain Engineering MN 799 265#
USE OF INFORMATION
INVENTORY
SETTING OPTIMUM INVENTORY POLICIES
DEMAND PATTERNS, CARRYING COSTS, STOCK OUT COSTS,
ORDERING COSTS, SERVICE LEVEL, LEAD TIMES ETC
TRANSPORTATION
DECIDING NETWORKS, ROUTINGS, MODES, SHIPMENTS AND
VENDORS
COSTS, CUSTOMER LOCATIONS, SHIP COSTS & LOCATIONS
FACILITY
DETERMINING LOCATION, CAPACITY AND SCHEDULE
TRADE OFFS EFFICIENCY VS FLEXIBILITY; DEMAND, EXCHANGE
RATES, TAXES ETC
Supply Chain Engineering MN 799 266#
Information Technology in a Supply Chain: Legacy Systems
THERE ARE IT SYSTEMS ACROSS ENTIRE SUPPLY CHAIN
Supplier Customer Retailer Distributor Manufacturer
Strategic
Planning
Operational
STRATEGIC HIGH ORGANIZATIONAL LEVEL, LONG TIME FRAME,
LITTLE LOW LEVEL DETAIL, HIGHLY ANALYTICAL, TOP MANAGERS
LEGACY ONE FUNCTION OR ONE STAGE OF SUPPLY CHAIN,
TRANSACTIONAL ABILITY, DIFFICULT TO MODIFY, NO ANALYTICAL
Supply Chain Engineering MN 799 267#
Information Technology in a Supply Chain: ERP Systems
Supplier Customer Retailer Distributor Manufacturer
Strategic
Planning
Operational
ERP
Potential
ERP
Potential
ERP
ERP SYSTEMS BROAD INFORMATION AVAILABILITY, REAL TIME,
CAN USE ENABLING TECHNOLOGY LIKE INTERNET WEAK ANALYTICAL
Supply Chain Engineering MN 799 268#
Information Technology in a Supply Chain:
Analytical Applications
Supplier Customer Retailer Distributor Manufacturer
Strategic
Planning
Operational
Supplier
Apps
SCM
MES
Dem Plan
Transport execution &
WMS
APS
Transport & Inventory
Planning
CRM/SFA
Supply Chain Engineering MN 799 269#
The Least Common Denominator Of
Information Technology
Supply Chain Trading Partners
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Advanced Planning & Scheduling
Enterprise Resource Planning
Data Warehousing
DRP Legacy System
MRP II Legacy System
Electronic Data Interchange
Internet Browser
Electronic Mail
Voicemail
For orders, replenishment, payment, returns loops...
LCD
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 270#
Information Technology in a Supply Chain: Future
Trends and Issues
Best of breed versus single integrator
Shifts in Platform Technology
Client server
Browser based internet
Application service providers (ASP) owns and hosts software and
charges for third party use of software
The role of the Internet and B2B exchanges
Exchanges create efficient market
AUCTIONS, REVERSE AUCTIONS, FIXED PRICE, BID/ASK
Collaboration between buyer and seller essential
Convergence between B2B and Supply Chain
What do you see? Teams come up with three major trends - present
Supply Chain Engineering MN 799 271#
SUPPLY CHAIN INFORMATION
TECHNOLOGY IN PRACTICE
SELECT AN IT SYSTEM THAT ADDRESSES THE
COMPANYS KEY SUCCESS FACTORS
COMPUTERS INVENTORY LEVEL,
OIL REFINERY - UTILIZATION
ALIGN LEVEL OF SOPHISTICATION WITH NEED
FOR SOPHISTICATION - KISS
USE IT SYSTEMS TO SUPPORT DECISION MAKING,
NOT TO MAKE DECISIONS
THINK ABOUT THE FUTURE
WEB-BASED APPLICATIONS
FLEXIBILITY OF SYSTEMS TO ACCOMMODATE CHANGE
Supply Chain Engineering MN 799 272#
Which E-Business is Right for Your Supply Chain?
What is different about e-commerce?
What are some potential opportunities in a supply chain?
Implications of e-business in different industries
Supply Chain Engineering MN 799 273#
Applying the Framework to e-commerce:What is e-commerce?
Commerce transacted over the Internet
Is product information displayed on the Internet?
Is negotiation over the Internet? EBay
Is the order placed over the Internet? Amazon
Is the order tracked over the Internet?
Is the order fulfilled over the Internet?
Is payment transacted over the Internet?
Information publicly available, no dedicated connection
required
B to C and B to B
Expected to reduce prices, increase productivity, lower
labor costs
Supply Chain Engineering MN 799 274#
Existing Channels for Business
Product information
Physical stores, EDI, catalogs, face to face,
Negotiation
Face to face, phone, fax, sealed bids,
Order placement
Physical store, EDI, phone, fax, face to face,
Order tracking
EDI, phone, fax,
Order fulfillment
Customer pick up, physical delivery
Supply Chain Engineering MN 799 275#
Potential Revenue Opportunities from E-Business
Direct sales to customers
24 hour access for order placement
Accessibility to all customers
Information aggregation
Personalization and Customization of Information
Information sharing in supply chain
Flexibility on pricing and promotion
Price and service discrimination
Faster time to market
Efficient funds transfer - reduce working capital
Disadvantage: Takes longer to deliver, transport costs and shipping time
Supply Chain Engineering MN 799 276#
Potential Cost Opportunities from E-Business
Direct customer contact for manufacturers (no handoffs)
Coordination in the supply chain
Customer participation
Postpone product differentiation to after order is placed
Downloadable product
Reduce product handling with shorter supply chain
Reduce facility and processing costs
Geographical centralization and resulting reduction in inventories
Improving supply chain coordination thru information sharing
Supply Chain Engineering MN 799 277#
POTENTIAL COST DISADVANTAGES
INCREASED TRANSPORTATION COSTS
INVENTORY AGGREGRATION
SMALLER, MORE FREQUENT ORDERS
INCREASED HANDLING COSTS
COMPANY HAS TO PICK, PACK AND SHIP
LARGE INITIAL INVESTMENT in INFORMATION
INFRASTRUCTURE
PROGRAMMING
WEB SERVERS
SECURITY ?? CASH AND PRODUCT
Supply Chain Engineering MN 799 278#
Basic evaluation framework
How does going on line impact revenues?
How does going on line impact costs?
Facility (site + personnel)
Inventory
Transportation
Information
Should the e-commerce channel position itself for
efficiency or responsiveness?
Who in the supply chain can extract most value?
Is the value to existing players or new entrants?
Supply Chain Engineering MN 799 279#
The Computer Industry: Dell on-line
Customer Order and
Manufacturing Cycle
Procurement Cycle
Dell Supply Chain Cycles
Procurement cycle
Customer Order and
Manufacturing Cycle
Customer
Order Arrives
PUSH PROCESSES PULL PROCESSES
Supply Chain Engineering MN 799 280#
Potential opportunities exploited by Dell
Revenue opportunities
24 hour access for order placement
Direct sales
Providing customization and large selection information
Flexibility on pricing and promotion
Faster time to market
Efficient funds transfer Negative working capital
Revenue negatives
Longer response time than store and no help with selection
Supply Chain Engineering MN 799 281#
Potential opportunities exploited by Dell
Cost opportunities
Geographical Centralization and reduced inventories (aggregated)
Reduce facility costs no physical distribution or retail
Direct sales eliminating intermediary
Customer participation: Call center & catalog costs
Information sharing in supply chain
Postpone product differentiation to after order is placed using
product platforms and common components
Outbound transportation costs increase
Supply Chain Engineering MN 799 282#
Opportunities
Significant, but must be combined with component
commonality, and build to order. Must move product
customization to pull phase of supply chain and hold
inventories as common components during the push phase
Opportunity most significant for new, hard to forecast
products
Complements strength of existing retail channels
Supply Chain Engineering MN 799 283#
Retailing: Amazon.com
Publisher
Distributor
Amazon
Customer
Amazon Supply Chain
Publisher
Warehouse (?)
Retail Store
Customer
Bookstore Supply Chain
Pull
Pull
Supply Chain Engineering MN 799 284#
Potential opportunities exploited by Amazon
Revenue opportunities
24 hour access for order placement
Providing large selection and other information
Attract customers who do not want to go to store
Flexibility on pricing
Efficient funds transfer
Revenue negatives
Intermediary (distributor) reduces margin
Longer response time than bookstore
Cannot browse
Supply Chain Engineering MN 799 285#
Potential opportunities exploited by Amazon
Cost opportunities
Geographical centralization and reduced inventories: Most
effective for low volume, hard to forecast books, least effective for
high volume best sellers
Reduce facility costs
Cost increases
Outbound transportation costs increase
Handling cost increase
Supply Chain Engineering MN 799 286#
Opportunities
Going on-line, by itself, offers lower cost advantages (may
be some disadvantages) than in Dell model given current
form of books
Cost and availability advantages are more significant for
low volume books
On-line channel has significant cost benefit if books are
downloadable
Supply Chain Engineering MN 799 287#
How should bookstore chains react?
An on line channel allows it to match Amazons revenue
advantages
Use a hybrid approach in stocking and pricing
High volume books for local storage
Low volume books for browsing and purchase on line
Pricing varies by delivery and pick up option
Supply Chain Engineering MN 799 288#
Grocery on-line
Manufacturer
Online Grocer
Customer
On-Line Supply Chain
Ex. Fresh Direct (NY)
Suppliers
Warehouse (?)
Supermarket
Customer
Supermarket Supply Chain
Supply Chain Engineering MN 799 289#
Key Messages
Some supply chains are better suited to exploit the cost
benefits of going on-line
Ability to increase processes in pull phase
Ability to delay product differentiation
Big inventory benefit from geographical centralization
Significant facility cost reduction on centralization
Transport to customer is a small fraction of product cost
All are achieved if product is downloadable
Supply Chain Engineering MN 799 290#
B2B: Free Markets
The worldwide market for direct materials procurement is
approximately $5 trillion, with the U.S. segment at approximately $1
trillion
Morgan Stanley Dean Witter Internet Industry Research
FreeMarkets is a B2B Internet company that creates online
auctions for procurers of direct materials
MSDW Claim: FreeMarkets clients typically achieve
savings of 2% to 25%
Supply Chain Engineering MN 799 291#
B2B: Matching Base Demand and Capacity
Potential opportunities
Ability to reach more bidders and get lower unit price
E Bay and Price Line (price set by customer)
Key questions
What does it do to total cost of material?
How many bidders do you need to achieve this?
How does this impact cooperative relationships within supply
chain?
Does intermediary provide any value?
Supply Chain Engineering MN 799 292#
B2B: Matching Demand Shortage and Surplus
Capacity
Potential opportunities
Ability to aggregate and display all available surplus capacity
Better match of surplus capacity and unmet demand
Best provided by an intermediary
Key issue
Total cost (product + transportation + ) must be accounted for in
the auction
Supply Chain Engineering MN 799 293#
Key Messages
Significant B2B opportunity to use Internet to reduce cost
and improve efficiency of existing processes
Significant B2B opportunity to improve collaboration
within existing supply chains
Auction opportunity for B2B is primarily for matching
demand shortage with surplus capacity, not for base load
Supply Chain Engineering MN 799 294#
USING E-BUSINESS TO CREATE MARKETS
INTERNET EXCHANGES, MARKETPLACES or PORTALS
ELECTRONIC MARKETPLACES AND COMMUNITIES OF INTEREST,
WHERE COMPANIES/INDIVIDUALS CAN OBTAIN INFORMATION
AND BUY AND SELL PRODUCTS. CAN AGGREGRATE DEMAND AND
SUPPLY
BUYERS CAN USE EXCHANGES BY:
USING THIRD PARTY TO FACILITATE TRANSACTIONS
CONDUCTING AUCTIONS BETWEEN MANY BUYERS AND SELLERS
ADVANTAGES FOR BUYERS:
REDUCE TRANSACTION COSTS, IMPROVE PERFORMANCE AND
COLLOBORATIVE PLANNING WITHIN THE SUPPLY CHAIN
OFFER BUYERs ABILITY TO SEARCH ACROSS MULTIPLE SUPPLIERS
DOWNWARD PRESSURE ON SELLING PRICES
ADVANTAGES FOR SELLERS:
REDUCE REPLENISHMENT LEAD TIME AND BETTER SUPPLY DEMAND
MATCH THROUGH IMPROVED COORDINATION
USEFUL IN SELLING SURPLUS INVENTOY & CAPACITY
Supply Chain Engineering MN 799 295#
SETTING UP E-BUSINESS IN PRACTICE
INTEGRATE THE INTERNET WITH THE EXISTING PHYSICAL NETWORK
CLICKS AND MORTAR
SUCCESS CLOSELY LINKED TO DISTRIBUTION CAPABILITIES OF EXISTING
SUPPLY CHAIN NETWORK
DEVISE SHIPPING STRATEGIES THAT REFLECT COSTS
MUST INCLUDE SIZE AND WEIGHT CONSIDERATIONS
OPTIMIZE E-BUSINESS LOGISTICS TO HANDLE PACKAGES NOT PALLETS
NEED TO CONSOLIDATE OR BUNDLE, WITH OTHER SUPPLIERS
DESIGN THE E-BUSINESS SUPPLY CHAIN TO HANDLE RETURNS
EFFICIENTLY
LIKELY TO BE INCREASED RETURNS IDEALLY TO ONE LOCATION
KEEP CUSTOMERS INFORMED THROUGHOUT THE ORDER FULFILLMENT
CYCLE
STATUS ON LINE
END
Supply Chain Engineering MN 799 296#
FINAL EXAM
Supply Chain Engineering MN 799 297#
Factory Cash-To-Cash Cycle Time
1. Arrange the trading partner
nodes from supplier to customer.
2. Start with a negative number to
represent the time a factory
has to pay a suppliers invoice.
3. Work in a complete, closed loop.
4. Add the incremental time(s) to
send the factory invoice down the
chain to the next paying trading partner.
5. Add the incremental time(s) for
each node to send the payment back
up the chain to the factory.
6. Sum the negative time of step #2 with
the positive loop time of step #4, #5.
CUSTOMER
RETAIL
WHOLESALE
FACTORY
SUPPLIER
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 298#
Continuously Stocked Items: Optimal Safety
Inventory Levels (Eq 11.6)
For each order cycle
Benefit of increasing safety stock by one unit =
(1-CSL)C
u
Cost of increasing safety stock by one unit = HQ
*
/R
where
CSL = probability of not stocking out in a cycle with current
level of safety stock = Cycle Service Level
H = cost of holding one unit for one year
R = Annual demand
Q
*
= Economic order quantity
Supply Chain Engineering MN 799 299#
Optimal Safety Inventory Levels (Ex 9.3)
CSL = 1-(HQ
*
/C
u
R)
R = 100 gallons/week; o
R
= 20; H = $0.6/gal./year
L = 2 weeks; Q = 400; ROP = 300.
What is the imputed cost of stocking out?
Supply Chain Engineering MN 799 300#
Postponement Adds Value Within Logistics
By Trading Information For Inventory
Without Postponement:
With Postponement:
Trading
Partner
Postponement
FGI Orders
None
FGI Orders
None
Design for generic production Postpone to an actual order
Postponement is delaying product differentiation until the customer demand
is known. Corey Billington, Hewlett-Packard Strategic Planning and Modeling
Trading
Partner
Trading
Partner
Trading
Partner
Trading
Partner
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 301#
1. Arrange the trading partner nodes
from customer to supplier.
2. Work in a complete, closed loop.
3. Add the incremental time(s) to send
the order from the customer to the
first node with product inventory.
4. Add the incremental time to pick
the product from inventory.
5. Add the incremental time(s) to
transport the product to the customer.
Customer Order-To-Delivery Cycle Time
CUSTOMER
RETAIL
WHOLESALE
FACTORY
SUPPLIER
Customer Order-To-Delivery
Cycle Time
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Engineering MN 799 302#
Amazon vs Barnes and Noble
The effect of Barnes and noble Responsive supply chain strategies today, the
company is enhancing its original system by transitioning the back-end
services fulfillment systems to an on-line, real-time, Microsoft BackOffice-
based shipping, order management, and financial reporting system called
PRISMor Pod Receiving and Integrated Shipping Management System.
PRISM allows Barnes and Noble to ship products much faster and deliver
higher service levels to customers
Amazon is going to become a market leader because of its early start in Web
enabled low-cost access to an infinite number of customers. Treating every
customer the same, with limited choice of access, is an unwise Barnes and
Noble approach. Amazon has several advantages over Barnes and Noble,
which could provide significant competitive leverage, such as:
Real-time customer information and transaction data,
Direct customer "dialog" opportunities, and
Low-cost channel operations
Supply Chain Engineering MN 799 303#
Amazon vs Barnes and Noble
Both have some unpredictable demand and some predictable demand. Yes
basically Amazon is efficient and B&N responsive (to a point). Both try and
influence demand by suggesting (and discounting) what they have stock in and
want purchased. Amazon stocks what it presumes or knows will be best sellers
I see the future bringing down the price of books further (particularly text
books) by even more outsourcing. I also see inventory in supply chain
reducing by print on demand, especially for books not commonly popular.
There will also be a lot more on line books, and condensed books, that one can
read or review
The key question is how will Amazon compete with a Chinese or Indian on
line supplier with similar products. I do not think it can compete. I see
Amazon partnering with a major Chinese and/or Indian company.
As for Barnes and Noble, they have to also move more to print on demand and
outsource more (they are already doing a lot of that). They provide a social
function that they are emphasizing, so there will be some need for them, but
not as a major book supplier
Supply Chain Engineering MN 799 304#
Amazon
The companys management has started to expand the business geographically, as well
as into new product areas. Amazon now has a U.K. subsidiary, headquartered in Slough,
west of London, employing around 500 people Amazon.co.uk as well as a slightly
smaller German one, Amazon.de, headquartered in Regensburg, Germany. It resoled in
increasing the overall sales of the company. Amazon is currently achieving a run rate of
$280m a year.
Amazon.co.uk started offering same-day delivery, at least within London... So, provided
that customers order within a given time window, they are offered the option of same
day delivery as a free upgrade. It resulted in better and efficient customer service than
any other online stores.
Identifying desirable global locations for new distribution centers is one use Amazon
will make of new supply-chain software from Manugistics of Rockville, Md. It would
install Manugistics NetWORKS solutions to support its global expansion and
operational improvement initiatives. It will use NetWORKS Strategy to model fixed and
variable network costs, taking into consideration such factors as varying transportation
and supplier lead times, and global constraints such as tariffs and taxes. The model will
then be used to design an optimal global network