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  • 1. MIT Forum for Supply Chain Innovation MIT Forum for Supply Chain Innovation Research Laboratory Strategy Training Massachusetts Institute of Technology 77 Massachusetts Avenue (Room 1-179) Cambridge, Massachusetts 02139, USA Co-Research Director Dr. Charles Fine, Professor of Operations Management, MIT Co-Research Director Dr. David Simchi-Levi, Professor of Engineering Systems, MIT Executive Director Dr. Shoumen Datta, Engineering Systems, School of Engineering, MIT MIT Forum for Supply Chain Innovation MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 1
  • 2. MIT Forum for Supply Chain Innovation Research Laboratory Simulation & Modeling Software Tools Business Strategy Training Tools for Executive Learning Workshops & Symposium Primary Objectives ⇒ Create innovative supply chain strategies that can be implemented to derive real-world business value ⇒ Fuel innovation through research, cross-fertilization of visionary concepts and best practices ⇒ Determine business value of strategy thru simulation or modeling using innovative software development ⇒ Create tools to train executives of sponsors to grasp evolving supply chain dynamics and supply networks ⇒ Foster industry adoption of select innovative strategy through world-wide dissemination Organization  Overview  Research  Laboratory  Business Strategy  Training OVERVIEW The MIT Forum for Supply Chain Innovation (FSCI) is a corporate sponsored consortium that provides research, educational software, strategy sessions and training. The Forum focuses on collaboration between academia and industry. It provides an unique environment to explore basic research and application in supply chain management. Corporate sponsors receive privileged access to various activities and resources of the Forum. They may also engage actively in providing data, ideas and research projects. MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 2
  • 3. MIT Forum for Supply Chain Innovation RESEARCH MIT faculty and students will engage in research activities that may include supply chain related problems faced by a Forum sponsor. Data from sponsor can be used in collaboration with the sponsor. Qualified personnel from the sponsor may cooperate in this research activity. Proprietary information will be dealt with sensitivity and confidentiality determined on a case by case basis. Publications are knowledge products in the public domain. Exceptions will be considered as appropriate (e.g. intellectual property possibilities stemming from research findings). Research activities will address a wide range of problems. The outcomes may be used in the Business Strategy offerings of the Forum. Theoretical concepts may convert to software applications in the Laboratory and such tools may form a part of the Training possibilities at the Forum. Examples of research projects are on page 5. Sponsors are encouraged to apply to send qualified personnel as Fellows-in-Residence to immerse in research and/or Forum activities for a specified length of time (this requires additional cost and is subject to academic approval by MIT). LABORATORY Transforming theoretical insights into software tools capable of simulation or modeling supply chain related issues may form a core focus of the FSCI Laboratory. Sponsors may consider short-term (2-day) or long-term (Fellows-in-Residence) participation in software development of tools and innovative applications as an academic collaboration exercise. The evolution of this process cannot be pre-chartered. The tools that may evolve from the FSCI Laboratory will be made available to training sponsors for a length of time (1 year) before the tools are released in the academic domain. This mechanism ensures that sponsors derive “first- mover” advantage. Qualified personnel (academically approved by MIT) from sponsors may use the FSCI Laboratory to simulate their supply chain “what if” analysis on a short-term basis. Such requests must take into account MIT student activities and Laboratory occupancy. Request for extended activities (and costs) will have to be determined on a case by case basis if a Laboratory project is key to a sponsor and if it is within the possibilities of the Forum and MIT. BUSINESS STRATEGY Strategic supply chain vision and innovative directions are key offerings from the Forum to its sponsors. The sponsors, invited personnel and academic experts will contribute in these Business Strategy brainstorming sessions, several times a year. Participation will be by invitation. Non-member participants will be invited based on the merit of their contribution or leadership. Graduate students will participate to formulate concepts and provide feedback after they subject ideas to an in depth analysis or testing of the concept in the Laboratory. Business Strategy brainstorming may be requested by sponsors in their corporate environment and may involve participation of their strategic teams. The nature and organization of such sessions will be determined on a case by case basis as well as costs, if applicable. TRAINING Sponsors may train personnel and executives for short periods (2-4 days) using learning tools or participate in Forum workshops (1-2 days) that may include sessions using learning tools from the Laboratory. Workshops may also draw upon the vast wealth of other MIT resources and faculty. Global dissemination of strategic concepts and fostering industry adoption will be achieved by organization of annual symposium, participation in thought leadership and trade associations or government committees, as appropriate. Training needs for MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 3
  • 4. MIT Forum for Supply Chain Innovation specific sponsors may require on-site sessions or involve mass approach. Such cases will be considered and determination made about feasibility and costs. Internet delivery of training will be a focal consideration. Sponsors shall have access to “learn-at-your-own-pace” tools, when they become available. Sponsorship of the MIT Forum for Supply Chain Innovation Charter Sponsor $500,000 (one time only) Privileges: Representative on Board of Overseers (Guiding Body for Forum) Representative on FSCI Council (Organizational activities of Forum) Access to Research, Laboratory, Business Strategy, Training Optional: One Fellow-in-Residence for one year at no additional cost Optional: Additional Fellow-in-Residence for one year for $100,000 Optional: May choose to host Board, Council and Business Strategy meetings No annual membership for the first two years Sponsorship fee of $100,000 per annum commencing from 3rd year Founding Sponsor $250,000 (one time only) Privileges: Representative on Board of Overseers (Guiding Body for Forum) Representative on FSCI Council (Organizational activities of Forum) MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 4
  • 5. MIT Forum for Supply Chain Innovation Access to Research, Laboratory, Business Strategy, Training Optional: Fellow-in-Residence for one year (upon MIT approval) for $100,000 Sponsorship fee of $100,000 per annum Corporate Sponsor $100,000 per annum Privileges: Representative on FSCI Council (Organizational activities of Forum) Access to Research, Laboratory, Business Strategy Additional: Training costs (usage dependent) Optional: Fellow-in-Residence for one year (upon MIT approval) for $100,000 Forum Sponsor $50,000 per annum Privileges: Representative on FSCI Council (Organizational activities of Forum) Access to Research, Business Strategy Additional: Laboratory (usage dependent) Additional: Training costs (usage dependent) Optional: Fellow-in-Residence for one year (upon MIT approval) for $100,000 Organizational Issues:  Board of Overseers may meet once each quarter  FSCI Advisory and Academic Council may meet once each quarter  Business Strategy Group may meet once each quarter  One symposium likely be held each year for 2002-2003 and two per year beginning 2004  Workshops will be determined based on request, need, topics and availability of resources RESEARCH TOPICS Research topics at the MIT Forum for Supply Chain Innovation may be suggested by the sponsors. It is the aim of FSCI to conduct academically rigorous research that is also useful and applicable to the problems faced by the FSCI sponsors. The following research topics are suggestions that indicate some areas of expertise already brewing within the Forum. Research activities of the Forum may draw from the vast resources of MIT and the intellectual strength of its students and faculty, at large. [1] Dynamic Pricing to Improve Supply Chain Performance Traditional manufacturer-dealer structures are increasingly threatened by 3rd party etailers taking advantage of the Internet. Dynamic pricing and revenue management together with Direct-to-Customer business model can be used by manufacturers to respond to these challenges. By coordinating production and inventory decisions with dynamic pricing, the automotive industry may increase profits and improve supply chain performance. To illustrate these benefits, we discuss a strategy that incorporates pricing, production scheduling and inventory control under production capacity limits. Using computational analysis, we quantify MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 5
  • 6. MIT Forum for Supply Chain Innovation the profit potential and sales variability due to dynamic pricing and suggest that it is possible to achieve significant benefits with few price changes. [2] Impact of e-Business on Supply Chain Strategies The Internet has re-defined business models to improve the performance of extended enterprise, popularly referred to as e-Business. The focus has been on improving intra-organizational, business-to-consumer (B2C) and business-to-business (B2B) transactions. This shift allowed a number of companies to employ a hybrid approach: the Push-Pull supply chain paradigm. In this research we review and analyze the evolution of supply chain strategies, traditional and hybrid. This analysis fuels the development of a framework that allows companies to identify appropriate supply chain strategy depending on product characteristics. Finally, we introduce new opportunities that contribute to the momentum of this emerging supply chain paradigm. [3] Optimizing Buy/Make Decisions We are developing a basic framework of questions that may generate business-specific answers. Analysis of these business conditions may help to optimize futrure buy/make decisions which are dynamic and adaptable. What is the impact of Internet usage on your procurement process? When you outsource, how do you ensure timely supply of components? What procurement strategy your company usees for individual products? What issues should be considered or critical when making these decisions? What are the roles that outsourcing and procurement play in the supply chain? What are the make/buy policies that are available for your particular company? What are the risk and benefits associated with outsourcing many of the firm's activities? Is there a strategic procurement framework that the firm considers for product procurement? What are the key issues involved in deciding what to make and what to buy from external suppliers? Do you use an independent e-market, public e-market or focused on developing your own e-marketplace? [4] Supply Contracts Research on supply contracts aims to explore when and how to strike the right balance between cost and risk (price risk, inventory risk). [5] Business Cycle Modeling in the Electronics Supply Chain A key component of the electronics industry industrial supply chain is the semiconductor capital equipment industry, which exhibits highly cyclical demand patterns. A small drop in end user demand for personal computers and communications equipment may result in steep drops in semiconductor chip demand which, in turn, results in yet larger reduction in demand for semiconductor capital equipment. This amplification of changes in demand (Bull Whip Effect) is magnified as you move away from end users. Fluctuation in supply chain is a result of multiple dynamic processes, which lead to poor ability to accurately forecast changes in the magnitude and direction of demand. This project is developing system dynamics models for demand forecasting in the electronics industries. The model will integrate work on supply chain dynamics, systems dynamics methodologies with current best-practices in business cycle modeling and demand forecasting. Sponsors of the Forum collectively support the development of a common modeling platform for the forecasting model. The sponsors may tailor the model for their need. Sponsors shall have the opportunity to interact with the research and modeling team and also serve as a community in which members may share best practices and study emerging supply chain strategies. [6] Service Supply Chains MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 6
  • 7. MIT Forum for Supply Chain Innovation In the manufacturing sector, it is axiomatic that supply chains serve consumers through "channel masters" (Toyota, Dell, Wal*Mart) who take responsibility for the integrity of the entire chain of firms and activities that collectively deliver value to the consumer. In many parts of the service sector, however, such notions are quite novel. Consider the chain of firms that provides financial securities to retail consumers (investing public). The Enron-Andersen debacle amply illustrates why Wall Street needs supply chain management. In fact, there are few supply chains that are purely manufacturing chains or service chains. Most are some combination of manufactured products and services. This project will work to build theory and practices that bring supply chain management to the service sector and service-intensive components of the manufacturing sector. Case studies may commence with financial services and communications. [7] Dynamic Supply Chain Evolution In fast-clockspeed industries, supply chains are ever-changing. In such environments, supply chains must be continuously designed and re-designed as technologies, business strategies and environmental factors exhibit constant churn. This project will examine the value chain dynamics of one particularly dynamic and complex value chain -- communications -- and attempt to build a constructive roadmap for the evolutionary paths of the chain. The communications value chain comprises multiple manufacturing segments (lasers, fiber optic cable, switches, routers) as well as multiple service segments (telephone access, communications network provision, media broadcasting). This work may engage other programs at MIT with relevant technology and aims to analyse five dynamic processes: (1) business cyclen dynamics, (2) industry structure dynamics, (3) corporate strategy dynamics, (4) technology dynamics and (5) regulatory dynamics. [8] Supply Chain Integration As the outsourcing rage continues and more firms decide to focus on only that which is core, supply networks are growing exponentially in size and complexity. As a result, OEM firms (and others as well) increasingly need robust supply chain integration capabilities. For every outsourcing decision, someone has to "put the pieces back together again" before an integrated product or service can be delivered to a customer. Often companies discover (the hard way) that supply chain disintegration (outsourcing) does not eliminate the need for supply chain integration. This Forum aims to explore supply chain integration on two levels. First, by creating a data base to examine statistically how supply chain integration capabilities relate to firm’s performance. Second, build conceptual models to examine strategic and economic issues related to supply chain aggregation and dis-aggregation decisions, including issues related to the concurrent design of products and supply chains that support them. [9] Multi-Agent Systems for Supply Chain Innovation (Agent-based Modeling) Linearisation of real world conditions to fit mathematical models may create lack of real-time adaptability in supply chain. A common example of this is the Bull Whip Effect that depicts wide fluctuations in supply chain. The discrete, dynamic and distributed nature of data and applications require that supply chain solutions not merely respond to requests for information but intelligently anticipate, adapt and actively support users. Agents can support a clearly discernible task or process, interact with each other in a specified environment (say, inventory management), interact with other Agents directly or via a message bus, continuously harness real-time data (for example, from RFID tags, GPS, sensors) and share this data with other Agents to offer true real-time adaptability in supply chain. This concept is at the heart of Multi-Agent System and it is one of the research topics at the Forum. Real- time adaptability may affect a vast array of static or pre-set business processes. It is likely that many processes may change to evolve into the paradigm shift that is leading toward the adaptable business network (ABN). In particular, real-time adaptability may revolutionize supply chain management, fostering supply chain innovation through deployment of Multi-Agent Systems. Agent-based modeling draws clues from natural behaviour of biological communities of ants, wasps, termites, birds, fishes and wolves, to name a few. MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 7
  • 8. MIT Forum for Supply Chain Innovation In commercial supply chain software (i2, SAP, Oracle, Manugistics) processes are defined in terms of rates and flows (consumption, production). System variables (cost, rebates, transportation time, out-of-stock) evaluate or integrate sets of algebraic equations (ODE, ordinary differential equations or PDE, partial differential equations) relating these variables to optimise for best results (best price, shortest lead time, minimal inventory). The process (EBM or equation-based modeling) assumes that these parameters are linear in nature and relevant data are available. In the real world, events are non-linear, actions are discrete and information about data is distributed. Research at the Forum may contribute to solutions where Agents-based supply chain software may function continuously and autonomously in a particular environment, often inhabited by other Agents (Multi-Agent Systems) and processes. Continuity and autonomy indicates that Agents are able to execute processes or carry out activities in a flexible and intelligent manner that is both adaptive and responsive to changes in the environment without requiring constant human guidance, intervention or top-down control from a system operator. An Agent that functions continuously in an environment over a period of time would be able to learn from experience (patterns). In addition, Agents that inhabit an environment with other Agents (Multi- Agent Systems) are able to communicate, cooperate and are mobile (from one environment to another). The mobile, networked, autonomous, self-learning, adaptive Agent may have radically different principles compared to those that were developed for monolithic systems. Examination of naturally occurring Agent- based systems suggests design principles for the next generation of Agents. While particular circumstances may warrant deliberate exceptions, in general, the research in the Forum may align with these concepts: [1] Agents should correspond to “things” in the problem domain rather than to abstract functions. [2] Agents should be small in mass, time (able to forget) and scope (avoid global knowledge action). [3] Multi-Agent Systems should be decentralized (no single point of control/failure). [4] Agents should be neither homogeneous nor incompatible but diverse. [5] Agent communities should include a dissipative mechanism (entropy leak). [6] Agents should have ways of caching and sharing what they learn about their environment. [7] Agents should plan and execute concurrently rather than sequentially. Computer-based modeling has largely used system dynamics based on ODE. However, a multitude of industrial and businesses, including supply chain management, are struggling to respond in real-time. Eventually this transition may emerge as real-time adaptable business network. This paradigm shift will make it imperative to model software based both with agents and equations. The question is no longer whether to select one or the other approach but to establish a mix of both and develop criteria for selecting one or other approach, that can offer solutions. The “balance” is itself subject to change. For experts supply chain management, the situation is analogous to “push-pull” strategy where the push-pull boundary may shift with changing demand. Difference in representational focus between ABM vs EBM has consequences for how models are modularized. EBM’s represent the system as a set of equations that relate observables to one another. The basic unit of the model, the equation, typically relates observables whose values are affected by the actions of multiple individuals, so the natural modularization often crosses boundaries among individuals. ABM represents the internal behaviour of each individual. An Agent’s behaviour may depend on observables generated by other individuals, but does not directly access the representation of those individuals’ behaviours, so the natural modularization follows boundaries among individuals. This fundamental difference in model structure gives ABM a key advantage in commercial applications such as adaptable supply chain management, in two ways: First, in an ABM, each firm has its own Agents. An Agent’s internal behaviours are not required to be visible to the rest of the system, so firms can maintain proprietary information about their internal operations. Groups of firms can conduct joint modeling exercises (Public MarketPlace) while keeping their individual Agents on their own computers, maintaining whatever controls are needed. Construction of EBM require disclosure of relationships that each firm maintains on observables so that equations can be formulated and evaluated. Distributed execution of EBM is not impossible, but does not naturally respect boundaries among the individuals (why public e-MarketPlaces failed to take-off). MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 8
  • 9. MIT Forum for Supply Chain Innovation Second, in many cases, simulation of a system is part of a larger project whose desired outcome is a control scheme that more or less automatically regulates the behaviour of the entire system. Agents correspond one- to-one with the individuals (firms or divisions of firms) in the system being modeled, and their behaviours are analogs of the real behaviours. These two characteristics make Agents a natural locus for the application of adaptive techniques that can modify their behaviours as Agents execute, so as to control emergent behavior of the overall system. Migration from simulation model to adaptive control model is much straightforward in ABM than EBM. One can imagine a member of adaptable business network or supply chain using its simulation Agent as the basis for an automated control Agent that handles routine interactions with trading partners. It is much less likely that such a firm would submit aspects of its operation to an external “equation manager” that maintains specified relationships among observables from several firms. ABM’s support more direct experimentation. Managers playing “what-if” games with the model can think directly in terms of familiar business processes, rather than having to translate them into equations relating observables. ABM’s are easier to translate back into practice. One purpose of “what-if” experiments is to identify improved business practices that ca be implemented. If the model is expressed and modified directly in terms of behaviours, implementation of its recommendations is a matter of transcribing the modified behaviours of Agents into task descriptions for the underlying physical entities in the real world. The disadvantages of EBM result largely from the use of averages of critical system variables over time and space. EBM assumes homogeneity among individuals but individuals in real systems are often heterogeneous. When the dynamics are non-linear, local variations from the averages can lead to significant deviations in overall system behavior. In business applications driven by ‘if-then’ decisions, non-linearity is the rule. Because ABM’s are inherently local, it is natural to let each Agent monitor the value of system variables locally, without averaging over time and space and thus without losing the local idiosyncrasies that can determine overall system behavior. The approach to system design and supply chain management with Agents in the software landscape is at odds with the centralized top-down tradition in current systems. The question usually arises in terms of the contrast between local and global optimization. Decision-makers fear that by turning control of a system over to locally autonomous Agents without a central decision-making body, they will lose value that could have been captured by an integrated (enterprise) global approach. The benefits of Agent-based architecture approaches vs centralized ones are conditional, not absolute. In a stable environment, a centralized approach can be optimized to out-perform the initial efforts of an opportunistic distributed system of Agents. If the distributed system has appropriate learning capabilities, it will eventually become as efficient. Market conditions are marked by rapid and unpredictable change, not stability. Change and contingency are inescapable features of the real world. The appropriate comparison is not between local and global optima but between static versus adaptable systems. Real-time adaptability is crucial to supply chain management. Contacts Shoumen Datta Executive Director MIT Forum for Supply Chain Innovation Engineering Systems Division School of Engineering Massachusetts Institute of Technology 77 Massachusetts Avenue (Room 1-179) Cambridge, Massachusetts 02139 Phn 1.617.452.3211 Fax 1.617.258.6775 MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 9
  • 10. MIT Forum for Supply Chain Innovation Email Charles H. Fine Chrysler LFM Professor of Management Massachusetts Institute of Technology Sloan School of Management 50 Memorial Drive (Room E53-390) Cambridge, Massachusetts 02142 Tel 1-617-253-3632 Fax 1-617-258-7579 Email David Simchi-Levi Professor of Engineering Systems School of Engineering Massachusetts Institute of Technology 77 Massachusetts Avenue (Room 1-171) Cambridge, Massachusetts 02139-4307 Phn 1.617-253-6160 Fax 1.617-258-8029 Email MIT Forum for Supply Chain Innovation (Established: 2002 Q1) Page 10