Operations and Supply Chain

Management
SESSION 6

S H I VA N E E P E T H E
Forecasting: Seasonality Check

Refer to the original data for CMA and the dataset titled Data 2 in the updated CMA sheet

Note on Exponential Smoothing

Single period Inventory: Newsvendor
Assumptions:
Purely perishable product
Demand with a known distribution
Selling price per unit, production/procurement cost per unit
Unsold product is salvaged at per unit
Logically, order of quantity is placed for a single period

Expected profit function to be solved for deciding optimal order quantity

A Newsvendor and her Supplier
Retailer works like a newsvendor
p
Supplier sells order quantity to the retailer at the price of

Retailer
Based on Cachon, double marginalization when “transfer” is a
wholesale price contract
w

Contracts help to mitigate this situation

Supplier

Increase the “pie” and split it as fairly as possible c

Does co-ordination = centralization?
Coordination is essentially when independent firms in a supply chain make decisions acting in
the interest of the entire supply chain

Centralization is when a single agent makes decisions for the entire system.
However, in a distribution chain context it refers to a situation where the firm chooses to
maintain a common decision line to the end of the supply chain

Can coordination occur in a completely decentralised supply chain?

 Centralised versus Decentralised Distribution Network
Retailer 1
A Manufacturer Warehouse

Retailer 2

Warehouse 1 Retailer 1
B Manufacturer

Warehouse 2 Retailer 2
Inventory under various policies
DEMAND AT THE RETAILERS RELEVANT COSTS
Week Retailer-1 Retailer-2 • Lead time of procuring products from the
1 33 46 Manufacturer to the Warehouse is 1 week
2 45 35 • Ordering cost
3 37 41
• Weekly Holding cost
4 38 40
5 55 26 • Intended Service level
•Corresponding z-value
6 30 48
7 18 18 •Let’s use a continuous review policy, since it
8 58 55 has a lower inventory requirement
(39.25 , 13.18) (38.62, 12.05)
Which is better?
Supply Chain A - Centralised Supply Chain B - Decentralised

Mean Demand 77.87 39.25 and 38.62

Std.Dev Demand 17.85 13.18 and 12.05

Safety Stock 33.58 or approx. 34 24.79 + 22.66 or approx. 25+23 =

48
EOQ 526.2 or approx. 527 373.57 + 370.57 or 374+371 = 745

Average Inventory 297.5 212 + 208.5 = 420.5

Re-order Point 78+34 = 112 (40+25) and (39+23)

Why Centralized?
Risk Pooling: Demand variability reduces at higher aggregation level
◦ Higher demand at one location will get offset by lower demand at another

Lower operating costs

Easier to manage
Easier to improve
Increased availability
◦ Think about a store like Clarks or Bata: instore vs online
 Is there a flip-side to centralisation?
Transit issues
◦ High shipping costs, vulnerable to disruptions

Long last-mile delivery

Solution? Decentralized Systems

Faster Delivery
Cheaper Shipping
Very flexible and responsive to the local atmosphere
But faces drawbacks such as high operating costs, lack of potential oversight in logistical issues, lack of control by parent
organisation

Discuss how e-commerce fits into this landscape

Thank You!