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SUPPLY CHAIN ENGINEERING…MN 799 <ul><li>TEXT: SUPPLY CHAIN MANAGEMENT  –  Chopra and Meindl – Prentice Hall </li></ul><ul>...
GUIDELINES <ul><li>GRADING: </li></ul><ul><ul><li>HOMEWORK – 20% </li></ul></ul><ul><ul><li>BEER GAME – 5% </li></ul></ul>...
DEFINITION OF A SUPPLY CHAIN <ul><li>WHAT IS A SUPPLY CHAIN? </li></ul><ul><li>A SUPPLY CHAIN COVERS THE FLOW OF MATERIALS...
Traditional View: Logistics in the Economy <ul><li>1990 1996 2006 </li></ul><ul><li>Freight Transportation $352, $455  $80...
Traditional View: Logistics in the Manufacturing Firm <ul><li>Profit 4% </li></ul><ul><li>Logistics Cost 21% </li></ul><ul...
Supply Chain Management: The Magnitude in the Traditional View <ul><li>Estimated that the grocery industry could save $30 ...
HAMBURGERS AND FRIES <ul><li>  HAMBURGERS (4/LB) </li></ul><ul><li>CATTLE FARM – 50c/lb </li></ul><ul><li>BUTCHER </li></u...
What problems do you foresee in this Supply Chain? Please write some down  Burger and Fries Examine this process – What do...
Understanding the Supply Chain   … a chain is only as good as its weakest link      Recall that saying? The saying applies...
OBJECTIVES OF A SUPPLY CHAIN <ul><li>MAXIMIZE OVERALL VALUE GENERATED </li></ul><ul><ul><li>SATISFYING CUSTOMER NEEDS AT A...
DECISION PHASES IN A SUPPLY CHAIN <ul><li>OVERALL STRATEGY OF COMPANY – EFFICIENT OR RESPONSIVE </li></ul><ul><li>SUPPLY C...
Basic Supply Chain Architectures  ( Examples ) 1. Indirect Channel 2. Direct Channel 3. Virtual Channel Supplier Supplier ...
SOLE SOURCE SINGLE SOURCE MULTI-SOURCE INDIRECT CHANNEL DIRECT CHANNEL VIRTUAL CHANNEL MAKE vs. BUY Supply Demand Supply C...
SUPPLY CHAIN FRAMEWORK AND INFRASTRUCTURE  <ul><ul><li>PRINCIPLE: </li></ul></ul><ul><ul><li>BUILD A COMPETITIVE INFRASTRU...
Cycle View of Supply Chains   DEFINES ROLES AND RESPONSIBILITIES OF MEMBERS OF SUPPLY CHAIN Customer Order Cycle Replenish...
PROCESS VIEW OF A SUPPLY CHAIN <ul><li>CUSTOMER ORDER CYCLE </li></ul><ul><ul><li>TRIGGER: MAXIMIZE CONVERSION OF CUSTOMER...
PROCESS VIEW OF A SUPPLY CHAIN <ul><li>REPLENISHMENT CYCLE </li></ul><ul><ul><li>REPLENISH INVENTORIES AT RETAILER AT MINI...
PROCESS VIEW OF A SUPPLY CHAIN <ul><li>PROCUREMENT CYCLE </li></ul><ul><ul><li>SEVERAL TIERS OF SUPPLIERS </li></ul></ul><...
A Customer’s View of the Supply Chain  Order the product... with configuration complexity on-line Pay for the product... i...
Push/Pull View of Supply Chains   PULL – PROCESSES IN RESPONSE TO A CUSTOMER ORDER PUSH – PROCESSES IN ANTICIPATION OF A C...
UNDERSTANDING THE SUPPLY CHAIN <ul><li>Homework </li></ul><ul><li>EXAMPLES:  </li></ul><ul><ul><li>EXAMPLES OF SUPPLY CHAI...
SUPPLY CHAIN PERFORMANCE – STRATEGIC FIT AND SCOPE  ( Lesson 2) New Product Development Marketing and Sales Operations Dis...
ACHIEVING STRATEGIC FIT <ul><li>Step 1. Understanding the Customer and Demand </li></ul><ul><ul><li>Quantity - Lot size </...
Levels of Implied Demand Uncertainty Low High Price Responsiveness Customer Need Implied Demand Uncertainty Attributes (Ta...
SUPPLY SOURCE UNCERTAINTY <ul><li>TABLE 2.3 SUPPLY UNCERTAINTY </li></ul><ul><ul><li>FREQUENT BREAKDOWNS </li></ul></ul><u...
Step 2 - Understanding the Supply Chain:  Cost-Responsiveness Efficient Frontier (Table: 2.4) High Low  Low High Exercise:...
Step 3. Achieving Strategic Fit Low Cost High Cost Companies try to move  Zone of Strategic fit Implied uncertainty spectr...
SCOPE <ul><li>Comparison of Efficient & Responsive Supply Chain Table 2.4 </li></ul><ul><ul><li>EFF Vs RESPON. STRATEGY fo...
Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Cha...
Drivers of Supply Chain Performance  TRADE OFF FOR EACH DRIVER Competitive Strategy Supply Chain Strategy Efficiency Respo...
INVENTORY <ul><ul><li>‘WHAT’ OF SUPPLY CHAIN </li></ul></ul><ul><ul><li>MISMATCH BETWEEN SUPPLY AND DEMAND </li></ul></ul>...
TRANSPORTATION <ul><li>‘ HOW’ OF SUPPLY CHAIN </li></ul><ul><li>LARGE IMPACT ON RESPONSIVENESS AND EFFICIENCY </li></ul><u...
FACILITIES <ul><li>‘WHERE’ OF SUPPLY CHAIN </li></ul><ul><li>TRANSFORMED (FACTORY) OR STORED (WAREHOUSE) </li></ul><ul><li...
INFORMATION <ul><li>AFFECTS EVERY PART OF SUPPLY CHAIN </li></ul><ul><ul><li>CONNECTS ALL STAGES </li></ul></ul><ul><ul><l...
Considerations for Supply Chain Drivers
MAJOR OBSTACLES TO ACHIEVING FIT <ul><li>Multiple global owners / incentives in a supply chain </li></ul><ul><ul><li>Infor...
OBSTACLES TO ACHIEVING STRATEGIC FIT <ul><li>INCREASING VARIETY OF PRODUCTS </li></ul><ul><li>DECREASING PRODUCT LIFE CYCL...
Dealing with Product Variety: Mass Customization Mass Customization Low High High Low Long Short Lead Time Cost Customizat...
Fragmentation of Markets and Product Variety <ul><li>Are the  requirements  of all market segments served identical? </li>...
HOMEWORK <ul><li>Page 49 – Nordstrom </li></ul><ul><ul><li>Answer Questions 1 to 4 </li></ul></ul><ul><li>Answer the above...
REVIEW QUESTIONS <ul><li>WHAT IS STRATEGIC FIT? HOW IS IT ACHIEVED? </li></ul><ul><ul><li>COMPANY’S APPROACH TO MATCH DEMA...
Forecasting (uncertainty) Order service (certainty) Demand management Demand-Management Activities RULE: Do not forecast w...
DETERMINING DEMAND <ul><li>FORECASTING </li></ul><ul><ul><li>TWO TYPES – WRONG AND LUCKY </li></ul></ul><ul><ul><li>TWO NU...
FORECASTING <ul><li>GENERAL PRINCIPLES: </li></ul><ul><ul><li>MORE ACCURATE AT THE AGGREGATE LEVEL </li></ul></ul><ul><ul>...
FORECASTING <ul><li>MAIN TECHNIQUES: </li></ul><ul><ul><li>QUALITATIVE  </li></ul></ul><ul><ul><ul><li>MANAGEMENT REVIEW <...
FORECASTING <ul><li>QUALITATIVE </li></ul><ul><ul><li>USEFUL ON NEW PRODUCTS </li></ul></ul><ul><ul><li>AS A SUPPLEMENT TO...
WORK OUT JUNE’s FORECASTS FOR ALL SKU’s
Simple Moving Averages (SMA) Simple Moving Average (SMA) Where  F = Forecast T = Current time period D = Demand n = Number...
Weighted Moving Averages Weighted Moving Average (WMA) Where:  F = Forecast T = Current time period D = Demand n = Number ...
Exponential Smoothing   Decision þ  Select or compute a smoothing constant (  ) þ  Relationship of exponential smoothi...
Period Demand  Forecast  Forecast Forecast     (   = .1) (  = .5) (  = .9) 0 180   start-up  start-up start-up 1 160 ...
Simple Trended Series — Example    Algebraic Trend Projection X   Y a.  Trend (“rise” over “run”) = (13 - 4)/3 = 3 = b  0...
REGRESSION ANALYSIS <ul><li>Regression formula b=slope, a=intercept </li></ul><ul><li>Slope b= Intercept </li></ul><ul><li...
TRENDED TIME SERIES FORECASTING <ul><li>Question: How do you forecast a seasonal item </li></ul><ul><li>Y (forecast)  = [A...
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 ...
Seasonal Series Indexing  Sample Data —  Continued <ul><li>FIND SEASONALITY FOR EACH PERIOD </li></ul><ul><li>DEASONALIZE ...
   Given       Deseasonalized  Seasonal   Demand   Forecast   Index July   34   36   0.94 Aug   0.57    Rationale and Co...
Exercise <ul><li>Boler Corp has the following sales history: </li></ul><ul><li>Quarter Year1 Year2 </li></ul><ul><li>1 140...
Normal Distribution Using the Measures of Variability Source: Adapted from  CPIM Inventory Management Certification Review...
Standard Deviation ( sigma) F= A = Actual Error (Sales –  Error Period Forecast Sales Forecast) Squared   ...
Standard Deviation —  Continued Standard Deviation   About the use of n or  n - 1 in the above equations  n  Us...
Bias and MAD Cumulative sum of error = Bias = Mean Absolute Deviation (MAD) = ( )  n   F  i i = = -   F  n ...
<ul><li>   Cumulative Sum of Error  </li></ul><ul><li>   Bias </li></ul><ul><li>   Mean Absolute  Deviation  (MAD) </li...
<ul><li>   Definition  </li></ul><ul><li>  A confidence interval is a measure of distance, increments of which are repres...
z            ack Expressing z Values  (for +ve probabilities) Probabilit y D  +1 SD +2 SD +3 SD Cumul...
Application Problem — Service Level <ul><li>   Given </li></ul><ul><li> Average sales for item P is 50 units per week wit...
Homework <ul><li>Q1 - 2. A demand pattern for ten periods for a certain product was given as 127, 113, 121, 123, 117, 109,...
Supply Chain Network Fundamentals William T. Walker, CFPIM, CIRM, CSCP Practitioner, Author, and Supply Chain Architect
<ul><li>Understanding How Supply Chains Work </li></ul><ul><li>The Value Principle and Network Stakeholders </li></ul><ul>...
Learning Objectives <ul><li>By teaching the principles of supply chain management  to understand how a supply chain networ...
A  SUPPLY CHAIN   is  the global network  used to deliver products and services  from raw materials to end customers  thro...
Network Terminology Physical Flow Info Flow Cash Flow &quot;Source&quot;  &quot;Make&quot;  &quot;Deliver&quot;  &quot;Ret...
Supplier Customer Trading Partner $ 3 M 1 M 2 M 3 $ 1 $ 2 Cash Material Material moves downstream to the customer. Cash mo...
Suppliers Customers Trading Partner Shareholders Employees Value is the Perfect Order The Value Principle: Every stakehold...
The Network Rules <ul><li>In an effective supply chain network </li></ul><ul><li>each trading partner works to...   </li><...
The Network Trust Factor <ul><li>Network trust is based upon  personal relationships </li></ul><ul><li>and the  perception...
Bill Of Materials For Example Items:  A3, B2, B5, C1, C2, C3, D1 Suppliers: S1, S2, S3, S4, S5 Item Master - Stock Keeping...
Supply Chain Network Map Upstream  Midstream  Downstream Driven by the Bill Of Materials  Driven by the Delivery Channel
<ul><li>Start midstream and imagine finished goods  sitting on a rack at the central depot. </li></ul><ul><li>Now, use the...
The Velocity Principle: In network implementation  throughput is maximized  when order-to-delivery-to-cash velocity is max...
The Network Flow Model From:  William T. Walker,  Supply Chain Architecture: A Blueprint for Networking the Flow of Materi...
Logistics Touches Every Subcycle <ul><li>Transportation moves material from seller to buyer </li></ul><ul><li>In some case...
Import/ Export Boundaries Country A exports and Country B imports in a forward supply chain. Country B exports and Country...
The Variability Principle:   In network implementation throughput is maximized  when order-to-delivery-to-cash variability...
Outward Signs of Variability <ul><li>Unplanned demand </li></ul><ul><li>Backordered inventory </li></ul><ul><li>Inventory ...
To Maximize Velocity <ul><li>Eliminate unnecessary process steps </li></ul><ul><li>Shorten the longest serial process step...
Push/Pull Boundary Pull Push Order Push/Pull  Boundary Forecast Demand Supply
Customer Lead Time Customer Demand Pull Push Order Build-To-Order (BTO) Push/Pull  Boundary Customer Demand Pull Push Buil...
<ul><li>Know the competitive situation; for example, if competitive products are off-the-shelf, then the push/pull boundar...
The Vocalize Principle: In network operations throughput is maximized by pulling supply to demand  by vocalizing actual de...
Common Causes of Stockouts L Quantity Time R SS L Q Quantity Time R SS L Q Quantity Time R SS Q Demand Uncertainty Supply ...
The Planning Interface Pull To Demand Push From Forecast Sales & Operations Plan Master Schedule Downstream The Supply Cha...
Push Inventory And Capacity Ending Inventory = Starting Inventory  - Forecasted Demand + Production When actual demand exc...
I Throughput Pull Zone Order C Pull Inventory And Capacity Max Max Ending Inventory = Starting Inventory  - Actual Demand ...
The Visualize Principle:     In network operations throughput is maximized by pushing supply to demand  by visualizing act...
Packaging And Labeling [ ] Transportation and warehousing costs are a function of cubic dimensions and weight. [ ] Items t...
Track and Trace Track Trace
Apply Technology To Visualize <ul><li>Bar Code and 2D Bar Code </li></ul><ul><li>Point Of Use Laser Scanners </li></ul><ul...
Measuring Network Inventory 1. Look for leakages between upstream issues and downstream receipts. 2. Look for inventory ba...
To Vocalize <ul><li>Be precise about units and configurations </li></ul><ul><li>Acknowledge and handshake all information ...
Suppliers Customers Trading Partner Employees We win! Shareholders Work the 5V Principles to maximize throughput. In Summa...
AGGREGRATE PLANNING (Chap8) Lesson 5 <ul><li>PROCESS OF DETERMINING LEVELS OF  </li></ul><ul><ul><li>PRODUCTION RATE </li>...
AGGREGRATE PLANNING STRATEGIES <ul><li>STRATEGIES - SYNCHRONIZING PRODUCTION WITH DEMAND  </li></ul><ul><ul><li>CHASE- USI...
SOP FORMAT <ul><li>PRODUCTION PLAN = SALES + END INV – BEGIN INV </li></ul><ul><li>PRODUCTION PER MONTH =  PRODUCTION PLAN...
Sales and Operations Planning Strategies
Production Rates and Levels Application 1 — Make-to-Stock  <ul><li>Table Format (Inventory) </li></ul><ul><li>Period 0   1...
Production Rates and Levels Application 2 — Make-to-Order <ul><li>Table Format (Backlog) </li></ul><ul><li>Period   0   1 ...
OPTIMIZATION THRU LINEAR PROGRAMMING <ul><li>AGGREGATE PLANNING MODEL –  RED TOMATO Pp 210 (105) </li></ul><ul><ul><li>MAX...
Aggregate Planning (Define Decision Variables) <ul><li>W t  = Workforce size for month  t ,  t  = 1, ..., 6 </li></ul><ul>...
Aggregate Planning  8.2 DEMAND Table 8.1 (5.1)
Aggregate Planning (Define Objective Function) Monthly
Aggregate Planning (Define Constraints Linking Variables) <ul><li>Workforce size for each month is based on hiring and lay...
Aggregate Planning (Constraints) <ul><li>Production for each month cannot exceed capacity </li></ul>
Aggregate Planning (Constraints) <ul><li>Inventory balance for each month </li></ul>
Aggregate Planning (Constraints) <ul><li>Over time for each month </li></ul>
SOLVING PROBLEM USING EXCEL <ul><li>STEP 1 BUILD  DECISION VARIABLE TABLE (fig8.1) </li></ul><ul><ul><li>ALL CELLS 0, EXCE...
AGGREGATE PLANNING IN PRACTICE <ul><li>MAKE PLANS FLEXIBLE BECAUSE FORECASTS ARE ALWAYS WRONG </li></ul><ul><ul><li>PERFOR...
Process Flow Measures  <ul><li>FLOW RATE (R t ), CYCLE TIME (T t ), & INVENTORY (I t ) RELATIONSHIPS </li></ul><ul><ul><li...
Homework <ul><li>Ex . Work out Inventory, Rate and cycle time for values in Tables 8.4,8.5 </li></ul>
Supply Chain Network Basics – Lesson 4 <ul><li>Guest Lecture – go to Poly Blackboard </li></ul>
MANAGING SUPPLY AND DEMAND PREDICTABLE VARIABILITY  ( LESSON 6 ) <ul><li>Predictable Variability – Change in Demand that c...
MANAGING DEMAND (Predictable Variability) <ul><li>Manage demand with pricing </li></ul><ul><ul><li>Factors influencing the...
PREDICTABLE VARIABILITY IN PRACTICE <ul><li>COORDINATE MARKETING, SALES AND OPERATIONS </li></ul><ul><ul><li>SALES AND OPE...
MANUFACTURING - MANAGING LEAD TIME <ul><li>CRITICAL DRIVER OF ALL MANUFACTURE </li></ul><ul><ul><li>LAYOUT AND WORKPLACE O...
MANAGING INVENTORY <ul><li>The role of inventory in the supply chain  </li></ul><ul><ul><li>Cycle Inventory (making or pur...
Role of Inventory in the Supply Chain <ul><li>Overstocking: Amount available exceeds demand </li></ul><ul><ul><li>Liquidat...
ROLE OF CYCLE INVENTORY (10.1) <ul><li>Q – lot or batch size of an order </li></ul><ul><li>D – Demand </li></ul><ul><li>Wh...
Cycle Inventory related costs in Practice <ul><li>Inventory holding costs – usually expressed as a % per $ per year </li><...
Fixed costs: Optimal Lot Size and Reorder Interval (EOQ)  <ul><li>C: Cost per unit ($C/unit) </li></ul><ul><li>h: Holding ...
Example 10.1 <ul><li>Demand, D = 12,000 computers per year </li></ul><ul><li>Unit cost, C = $500 </li></ul><ul><li>Holding...
EXPLOITING ECONOMIES OF SCALE <ul><li>SINGLE LOT SIZE OF SINGLE PRODUCT (EOQ) = Q </li></ul><ul><ul><li>ANNUAL MATERIAL CO...
Reducing Lot Size - Aggregating <ul><li>Exercise:  </li></ul><ul><li>To reduce Q from 980 to 200, how much must order cost...
LOT SIZING WITH MULTIPLE PRODUCTS & CUSTOMERS <ul><li>Lot sizing with Multiple Product or Customers </li></ul><ul><ul><li>...
Impact of product specific order cost Tailored aggregation  – Higher volume products ordered more frequently and lower vol...
Delivery Options <ul><li>No Aggregation: Each product ordered separately </li></ul><ul><li>Complete Aggregation: All produ...
Economies of Scale to exploit Quantity Discounts <ul><li>Two common Lot Size based discount schemes </li></ul><ul><ul><li>...
WHY QUANTITY DISCOUNTS <ul><ul><li>Improved coordination to increase total supply chain profits </li></ul></ul><ul><ul><ul...
Quantity Discounts <ul><li>Discounts improve coordination between Supplier and Retailer to maximize Supply Chain profits. ...
Strategies for  reducing fixed costs <ul><li>Wal-Mart: 3 day replenishment cycle  </li></ul><ul><li>Seven Eleven Japan: Mu...
ESTIMATING CYCLE INVENTORY COSTS <ul><li>HOLDING COSTS </li></ul><ul><ul><li>Cost of capital </li></ul></ul><ul><ul><li>Ob...
Lessons From Aggregation <ul><li>Key to reducing cycle inventory is reducing lot size. Key to reducing lot size without in...
Lessons From Discounting Schemes <ul><li>Lot size based discounts increase lot size and cycle inventory in the supply chai...
Levers to Reduce Lot Sizes Without Hurting Costs <ul><li>Cycle Inventory Reduction </li></ul><ul><ul><li>Reduce transfer a...
Discussions on Site Visit <ul><li>Macy’s Distribution Center (DC) </li></ul><ul><li>In teams please answer the following: ...
Mid Term <ul><li>Show your calculations </li></ul><ul><li>Do not get stuck on any question </li></ul><ul><li>Strategy appl...
Role of Inventory in the Supply Chain ( LESSON 7) Cost Availability Efficiency Responsiveness
WHY HOLD SAFETY INVENTORY? (SAFETY STOCK) <ul><li>DEMAND UNCERTAINTY </li></ul><ul><li>SUPPLY UNCERTAINTY </li></ul><ul><l...
APPROPRIATE LEVEL OF SAFETY STOCK DEPENDS ON:   UNCERTAINTY OF DEMAND OR SUPPLY  REPLENISHMENT LEAD TIME  & DESIRED SERVIC...
Replenishment policies <ul><li>Replenishment policies </li></ul><ul><ul><li>When to reorder? </li></ul></ul><ul><ul><li>Ho...
Continuous Review Policy: Safety Inventory and Cycle  Demand Uncertainty & Service Level <ul><li>L : Lead time for repleni...
FORMULAS USED FOR CALCULATING SERVICE LEVELS
Example 11.1&2, 11.4 (Continuous Review Policy) = 8.xx New book <ul><li>11.1 :  R  = 2,500 /week;   R  = 500 </li></ul><u...
Examples of Safety Stock Calculations <ul><li>Weekly demand for Lego at Wal Mart is normally distributed with a mean of 25...
Factors Affecting Fill Rate <ul><li>Fill Rate:  Proportion of customer demand that is satisfied from Inventory. Directly r...
Evaluating Safety Inventory Given Fill Rate Required safety stock grows rapidly with increase in the desired  Product avai...
Impact of Supply Uncertainty <ul><li>Considering variation in Demand and in Replenishment Lead time (Ex 11.6) </li></ul><u...
Impact of Supply Uncertainty ( ( See Ex. 11.6 & Table 11.2) <ul><li>Ex.11.6:   R  = 2,500/day;   R  = 500;  L  = 7 days; ...
Basic Quick Response Initiatives <ul><li>Reduce information uncertainty in demand </li></ul><ul><li>Reduce replenishment l...
Factors Affecting Value of Aggregation <ul><li>DEMAND CORRELATION –  </li></ul><ul><ul><li>AS CORRELATION INCREASES, THE S...
IMPACT OF AGGREGRATION ON SAFETY STOCK <ul><li>HOW TO REDUCE SS WITHOUT REDUCING CSL? </li></ul><ul><ul><li>AGGREGRATION R...
IMPACT OF AGGREGRATION ON SAFETY STOCK <ul><li>HOW TO REDUCE SS WITHOUT REDUCING CSL? </li></ul><ul><ul><li>PRODUCT SUBSTI...
Example 11.9: Value of Component Commonality Y Axis – SS Quantity; X Axis – No. of common components Without component com...
ESTIMATING AND MANAGING SS IN PRACTICE <ul><li>ACCOUNT FOR LUMPY SUPPLY CHAIN DEMAND </li></ul><ul><ul><li>CAUSED BY LARGE...
Mass Customization I:  Customize Services  Around  Standardized  Products Deliver customized services as well as standardi...
Mass Customization II: Create  Customizable  Products and Services Deliver standard (but  customizable) products or servic...
Mass Customization III: Provide  Quick Response  Throughout Value Chain  Reduce Delivery Cycle Times Reduce selection and ...
Mass Customization IV: Provide  Point of Delivery Customization Deliver standardize portion Market customized products or ...
Mass Customization V:  Modularize  Components to  Customize End Products Deliver customized product Market customized prod...
Types of Modularity for Mass Customization Component Sharing Modularity Cut-to-Fit Modularity Bus Modularity Mix Modularit...
Example of Point of  Service Replenishment <ul><li>Safety Stock and Re-order point management in Toyota Another advantage ...
Cautions in Implementing Postponement and Modularity <ul><li>End products must look suitably different to the consumer </l...
Summary of Learning Objectives Reduce Buffer Inventory Economies of Scale Supply / Demand Variability Seasonal Variability...
HOMEWORK <ul><li>Page 336 Q4 and Q5 </li></ul><ul><li>Provide actual examples of the five types of customization </li></ul>
OPTIMUM LEVEL OF PRODUCT AVAILABILITY  Exercise: Swimsuit Production Lesson 8 <ul><li>Fashion items have short life cycles...
Demand Distribution      
Exercise <ul><li>Scenario One: </li></ul><ul><ul><li>Suppose you make 12,000 jackets and demand ends up being 13,000 jacke...
Profitability Calculations
Profitability scenarios
OPTIMAL LEVEL OF PRODUCT AVAILABILITY <ul><li>FACTORS AFFECTING OPTIMAL PRODUCT AVAILABILITY </li></ul><ul><ul><li>COST OF...
Parkas at L.L. Bean <ul><li>Cost per parka = $45 </li></ul><ul><li>Sale price per parka = $100 </li></ul><ul><li>Discount ...
Summary <ul><li>Tradeoff between ordering enough to meet demand and ordering too much </li></ul><ul><li>Several quantities...
How much to order? Parkas at L.L. Bean (Table 12.1) The probability that demand is greater than 1100 is 0.29 but the proba...
Parkas at L.L. Bean (Table  12.2) Expected Marginal Contribution of each 100 parkas Fig 9.1
Optimal Order Quantity Optimal Order Quantity = 13 0.917 Prob
Optimal level of service (Eqn. 12.1) <ul><li>p  = retail sale price;  s  = outlet or salvage price;  </li></ul><ul><li>c  ...
Order Quantity for a Single Order (ex 12.1) <ul><li>Salvage value = $80 </li></ul><ul><li>C o   =  Cost of overstocking  <...
MANAGERIAL LEVERS TO IMPROVE PROFITABILITY <ul><li>How to Estimate Demand Distribution? </li></ul><ul><ul><li>Historical d...
Levers for Increasing Supply Chain Profitability <ul><li>Increase salvage value (cost of overstock) or decrease margin los...
Levers for Increasing Supply Chain Profitability <ul><li>Postponement of product differentiation </li></ul><ul><ul><li>Bet...
Tailored Sourcing: Multiple Sourcing Sites
Dual Sourcing Strategies
SUPPLY CHAIN CONTRACTS <ul><li>DOUBLE MARGINALIZATION (SUBOPTIMIZATION) </li></ul><ul><ul><li>BUY BACK (Ex. Mfg cost 10, r...
SETTING OPTIMAL LEVELS OF PRODUCT AVAILABILITY <ul><li>USE ANALYTICAL FRAMEWORK TO INCREASE PROFITS </li></ul><ul><ul><li>...
CASE STUDY – OPTIMIZED DEMAND PULL <ul><li>HIGHLY VARIABLE, HI TECH, HIGH COST </li></ul><ul><ul><li>12 MONTH ROLLING FORE...
SOURCING and  PROCUREMENT  ( CH 14 ) Lesson 9   <ul><li>SOURCING </li></ul><ul><ul><li>Entire set of business processes to...
EFFECTIVE SOURCING <ul><li>ECONOMIES OF SCALE – ORDERS AGGREGRATED </li></ul><ul><li>MORE EFFICIENT PROCUREMENT TRANSACTIO...
IN HOUSE OR OUTSOURCE <ul><li>HOW DO THIRD PARTIES INCREASE SUPPLY CHAIN SURPLUS </li></ul><ul><ul><li>CAPACITY AGGREGRATI...
RISKS OF USING A THIRD PARTY <ul><li>THE PROCESS IS BROKEN – lack control </li></ul><ul><li>UNDERESTIMATE COST OF COORDINA...
SUPPLIER SCORING AND ASSESSMENT MUST BE BASED ON IMPACT ON  TOTAL COST (Tab14-3) <ul><li>IN ADDITION TO PRICE  </li></ul><...
SOURCING DECISIONS <ul><li>SUPPLIER PERFORMANCE BASED ON IMPACT ON  TOTAL COST  (see Table 14.1) </li></ul><ul><ul><li>Ex....
SOURCING DECISIONS <ul><li>CONTRACTS </li></ul><ul><ul><li>BUYBACK OR RETURN CONTRACTS </li></ul></ul><ul><ul><ul><li>LOWE...
SOURCING DECISIONS <ul><li>SOURCING DECISIONS IN PRACTICE </li></ul><ul><ul><li>USE MULTIFUNCTIONAL TEAMS </li></ul></ul><...
Make or Buy Decision <ul><ul><li>Cost </li></ul></ul><ul><ul><li>Time </li></ul></ul><ul><ul><li>Capacity Utilization </li...
Make-or-Buy Decision <ul><li>Original Data: </li></ul><ul><li>Produce 10,000 units </li></ul><ul><ul><li>Cost Factors </li...
Cost Avoidance Analysis (Solution) <ul><ul><li>Solution </li></ul></ul><ul><ul><li>Cost avoided by purchasing </li></ul></...
SUPPLIER PARTNERSHIPS <ul><li>QUALIFICATION AND SELECTION </li></ul><ul><ul><li>RATIONALIZATION OF SUPPLIER BASE </li></ul...
HOMEWORK <ul><li>Exercises 1 & 2 </li></ul>
MANAGING TRANSPORTATION IN A SUPPLY CHAIN (Chap 13) – Lesson 10 <ul><li>Key modes of transport and major issues </li></ul>...
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  • Hello I am currently taking Supply Chain Engineering. Could you offer an advice?
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  • hi :
    so good to see you are from Poly . i am taking Supply Chain Engineering this fall

    hope i can ask some questions if you have time
    Jay
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  • Transcript of "Poly Supply Chain Engin Mn"

    1. 1. SUPPLY CHAIN ENGINEERING…MN 799 <ul><li>TEXT: SUPPLY CHAIN MANAGEMENT – Chopra and Meindl – Prentice Hall </li></ul><ul><li>COURSE OUTLINE – Description Book pages </li></ul><ul><ul><li>1/22 Introduction, curriculum, rules, exams, Infrastructure (1-27) </li></ul></ul><ul><ul><li>1/27 Strategic Fit and Scope. Supply Chain Drivers (27-51) </li></ul></ul><ul><ul><li>2/05 No Class </li></ul></ul><ul><ul><li>2/12 Demand Management (169-204) </li></ul></ul><ul><ul><li>2/19 Aggregate Planning, Managing (205-225) </li></ul></ul><ul><ul><li>2/26 Guest Lecture Network Operations (71-168) </li></ul></ul><ul><ul><li>3/04 Managing Supply and Demand (121-144) </li></ul></ul><ul><ul><li>3/11 Class trip to see Supply Chain in Operation </li></ul></ul><ul><ul><li>3/18 No Class </li></ul></ul><ul><ul><li>3/25 Mid Term </li></ul></ul><ul><ul><li>4/01 Managing Inventory(249-295); </li></ul></ul><ul><ul><li>4/08 Product Availability (297-384) </li></ul></ul><ul><ul><li>4/15 Sourcing and Procurement (387-410) </li></ul></ul><ul><ul><li>4/22 Transportation (411-219); Facility Decisions (109-133) </li></ul></ul><ul><ul><li>4/29 Beer Game </li></ul></ul><ul><ul><li>5/06 Co-ordination Information Information Technology & E-Business (477- 557) </li></ul></ul><ul><ul><li>5/13 FINAL EXAMINATION </li></ul></ul>
    2. 2. GUIDELINES <ul><li>GRADING: </li></ul><ul><ul><li>HOMEWORK – 20% </li></ul></ul><ul><ul><li>BEER GAME – 5% </li></ul></ul><ul><ul><li>MID TERM – 30% </li></ul></ul><ul><ul><li>FINAL – 45% </li></ul></ul><ul><li>HOMEWORK MUST BE COMPLETED IN TIME. LATE SUBMISSIONS WILL START WITH A ‘B’ GRADE </li></ul><ul><li>CLASSES WILL START AT 6.00PM AND GO STRAIGHT THRU TO 8.00PM </li></ul>
    3. 3. DEFINITION OF A SUPPLY CHAIN <ul><li>WHAT IS A SUPPLY CHAIN? </li></ul><ul><li>A SUPPLY CHAIN COVERS THE FLOW OF MATERIALS, INFORMATION AND CASH ACROSS THE ENTIRE ENTERPRISE </li></ul><ul><li>SUPPLY CHAIN MANAGEMENT IS THE INTEGRATED PROCESS OF INTEGRATING, PLANNING, SOURCING, MAKING AND DELIVERING PRODUCT, FROM RAW MATERIAL TO END CUSTOMER, AND MEASURING THE RESULTS GLOBALLY </li></ul><ul><li>TO SATISFY CUSTOMERS AND MAKE A PROFIT </li></ul><ul><li>WHY A ‘SUPPLY CHAIN’? </li></ul>
    4. 4. Traditional View: Logistics in the Economy <ul><li>1990 1996 2006 </li></ul><ul><li>Freight Transportation $352, $455 $809 B </li></ul><ul><li>% Freight 57% 62% </li></ul><ul><li>Inventory Expense $221, $311 $ 446 B </li></ul><ul><li>% Inventory 39% 33% </li></ul><ul><li>Administrative Expense $27, $31 $ 50 B </li></ul><ul><li>Logistics related activity 11%, 10.5%,9.9% </li></ul><ul><li>% of GNP. </li></ul>Source: Cass Logistics Homework: What are 2007 statistics?
    5. 5. Traditional View: Logistics in the Manufacturing Firm <ul><li>Profit 4% </li></ul><ul><li>Logistics Cost 21% </li></ul><ul><li>Marketing Cost 27% </li></ul><ul><li>Manufacturing Cost 48% </li></ul>Homework: What it the profile for Consumables; Pharamas and Computers Profit Logistics Cost Marketing Cost Manufacturing Cost
    6. 6. Supply Chain Management: The Magnitude in the Traditional View <ul><li>Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies </li></ul><ul><ul><li>A typical box of cereal spends 104 days from factory to sale </li></ul></ul><ul><ul><li>A typical car spends 15 days from factory to dealership </li></ul></ul><ul><li>Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed </li></ul><ul><li>P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand </li></ul><ul><li>Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago </li></ul>
    7. 7. HAMBURGERS AND FRIES <ul><li> HAMBURGERS (4/LB) </li></ul><ul><li>CATTLE FARM – 50c/lb </li></ul><ul><li>BUTCHER </li></ul><ul><li>PACKAGING </li></ul><ul><li>DISTRIBUTION CENTER </li></ul><ul><li>RETAILER </li></ul><ul><li>CUSTOMER </li></ul><ul><li>Provide Sales Price at each stage </li></ul><ul><li>FRIES (3Large/lb) </li></ul><ul><li>POTATO FARM 25C/lb </li></ul><ul><li>POTATO PROCESSOR </li></ul><ul><li>DISTRIBUTION CENTER </li></ul><ul><li>RETAILER </li></ul><ul><li>CUSTOMER </li></ul><ul><li>Provide Sales Price at each stage </li></ul>
    8. 8. What problems do you foresee in this Supply Chain? Please write some down Burger and Fries Examine this process – What do you observe?
    9. 9. Understanding the Supply Chain … a chain is only as good as its weakest link   Recall that saying? The saying applies to the principles of building a competitive infrastructure: Manufacturer Wholesaler Retailer Customer Supplier … there is a limit to the surplus or profit in a supply chain We are all part of a Supply Chain in everything we buy Strong, well-structured supply chains are critical to sustained competitive advantage.
    10. 10. OBJECTIVES OF A SUPPLY CHAIN <ul><li>MAXIMIZE OVERALL VALUE GENERATED </li></ul><ul><ul><li>SATISFYING CUSTOMER NEEDS AT A PROFIT </li></ul></ul><ul><ul><li>VALUE STRONGLY CORRELATED TO PROFITABILITY </li></ul></ul><ul><ul><li>SOURCE OF REVENUE – CUSTOMER </li></ul></ul><ul><ul><li>COST GENERATED WITHIN SUPPLY CHAIN BY FLOWS OF INFORMATION, PRODUCT AND CASH </li></ul></ul><ul><ul><li>FLOWS OCCUR ACROSS ALL STAGES – CUSTOMER, RETAILER, WHOLESALER, DISTRIBUTOR, MANUFACTURER AND SUPPLIER </li></ul></ul><ul><ul><li>MANAGEMENT OF FLOWS KEY TO SUPPLY CHAIN SUCCESS </li></ul></ul>UNDERSTAND EACH OBJECTIVE
    11. 11. DECISION PHASES IN A SUPPLY CHAIN <ul><li>OVERALL STRATEGY OF COMPANY – EFFICIENT OR RESPONSIVE </li></ul><ul><li>SUPPLY CHAIN STRATEGY OR DESIGN ? </li></ul><ul><ul><li>LOCATION AND CAPACITY OF PRODUCTION AND WAREHOUSE FACILITIES? </li></ul></ul><ul><ul><li>PRODUCTS TO BE MANUF, PURCHASED OR STORED BY LOCATION? </li></ul></ul><ul><ul><li>MODES OF TRANSPORTATION? </li></ul></ul><ul><ul><li>INFORMATION SYSTEMS TO BE USED? </li></ul></ul><ul><ul><li>CONFIGURATION MUST SUPPORT OVERALL STRAGEGY </li></ul></ul><ul><li>SUPPLY CHAIN PLANNING? </li></ul><ul><ul><li>OPERATING POLICIES – MARKETS SERVED, INVENTORY HELD, SUBCONTRACTING, PROMOTIONS, …? </li></ul></ul><ul><li>SUPPLY CHAIN OPERATION? </li></ul><ul><ul><li>DECISIONS AND EXECUTION OF ORDERS? </li></ul></ul>
    12. 12. Basic Supply Chain Architectures ( Examples ) 1. Indirect Channel 2. Direct Channel 3. Virtual Channel Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Customer Customer Customer Customer Customer Factory Factory Factory Wholesale Wholesale Integrator Express Freight Retailer Retailer Retailer Virtual Store Fabricator Fabricator Credit Service C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
    13. 13. SOLE SOURCE SINGLE SOURCE MULTI-SOURCE INDIRECT CHANNEL DIRECT CHANNEL VIRTUAL CHANNEL MAKE vs. BUY Supply Demand Supply Chain Architecture <ul><li>Strategic Issues </li></ul><ul><li>. Demand Reach . Demand Risk </li></ul><ul><li>Cost Structure </li></ul><ul><li>Asset Utilization </li></ul><ul><li>Responsiveness Supply Risk </li></ul>LOCAL REGIONAL GLOBAL MARKET MARKET MARKET C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
    14. 14. SUPPLY CHAIN FRAMEWORK AND INFRASTRUCTURE <ul><ul><li>PRINCIPLE: </li></ul></ul><ul><ul><li>BUILD A COMPETITIVE INFRASTRUCTURE </li></ul></ul><ul><li>This principle is about </li></ul><ul><li>VELOCITY </li></ul>
    15. 15. Cycle View of Supply Chains DEFINES ROLES AND RESPONSIBILITIES OF MEMBERS OF SUPPLY CHAIN Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retailer Distributor Manufacturer Supplier to to to to
    16. 16. PROCESS VIEW OF A SUPPLY CHAIN <ul><li>CUSTOMER ORDER CYCLE </li></ul><ul><ul><li>TRIGGER: MAXIMIZE CONVERSION OF CUSTOMER ARRIVALS TO CUSTOMER ORDERS </li></ul></ul><ul><ul><li>ENTRY: ENSURE ORDER QUICKLY AND ACCURATELY COMMUNICATED TO ALL SUPPLY CHAIN PROCESSES </li></ul></ul><ul><ul><li>FULFILLMENT: GET CORRECT AND COMPLETE ORDERS TO CUSTOMERS BY PROMISED DUE DATES AT LOWEST COST </li></ul></ul><ul><ul><li>RECEIVING: CUSTOMER GETS ORDER </li></ul></ul>
    17. 17. PROCESS VIEW OF A SUPPLY CHAIN <ul><li>REPLENISHMENT CYCLE </li></ul><ul><ul><li>REPLENISH INVENTORIES AT RETAILER AT MINIMUM COST WHILE PROVIDING NECESSARY PRODUCT AVAILABILITY TO CUSTOMER </li></ul></ul><ul><ul><li>RETAIL ORDER: </li></ul></ul><ul><ul><ul><li>TRIGGER – REPLENISHMENT POINT – BALANCE SERVICE AND INVENTORY </li></ul></ul></ul><ul><ul><ul><li>ENTRY – ACCURATE AND QUICK TO ALL SUPPLY CHAIN </li></ul></ul></ul><ul><ul><ul><li>FULFILLMENT – BY DISTRIBUTOR OR MFG. – ON TIME </li></ul></ul></ul><ul><ul><ul><li>RECEIVING – BY RETAILER, UPDATE RECORDS </li></ul></ul></ul><ul><li>MANUFACTURING CYCLE </li></ul><ul><ul><li>INCLUDES ALL PROCESSES INVOLVED IN REPLENISHING DISTRIBUTOR (RETAILER) INVENTORY, ON TIME @ OPTIMUM COST </li></ul></ul><ul><ul><li>ORDER ARRIVAL </li></ul></ul><ul><ul><li>PRODUCTION SCHEDULING </li></ul></ul><ul><ul><li>MANUFACTURING AND SHIPPING </li></ul></ul><ul><ul><li>RECEIVING </li></ul></ul>
    18. 18. PROCESS VIEW OF A SUPPLY CHAIN <ul><li>PROCUREMENT CYCLE </li></ul><ul><ul><li>SEVERAL TIERS OF SUPPLIERS </li></ul></ul><ul><ul><li>INCLUDES ALL PROCESSES INVOLVED IN ENSURING MATERIAL AVAILABLE WHEN REQUIRED </li></ul></ul><ul><li>SUPPLY CHAIN MACRO PROCESSES </li></ul><ul><li>CRM – All processes focusing on interface between firm and customers </li></ul><ul><li>ISCM – A processes internal to firm </li></ul><ul><li>SRM – All processes focusing on interface between firm and suppliers </li></ul>
    19. 19. A Customer’s View of the Supply Chain Order the product... with configuration complexity on-line Pay for the product... in a foreign currency by credit card Service the product... anywhere in the world Take delivery... the next day at home, and get started without a hassle Ex.-Travel arrangements on line FRONT OFFICE C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
    20. 20. Push/Pull View of Supply Chains PULL – PROCESSES IN RESPONSE TO A CUSTOMER ORDER PUSH – PROCESSES IN ANTICIPATION OF A CUSTOMER ORDER Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order arrives PUSH PROCESSES PULL PROCESSES
    21. 21. UNDERSTANDING THE SUPPLY CHAIN <ul><li>Homework </li></ul><ul><li>EXAMPLES: </li></ul><ul><ul><li>EXAMPLES OF SUPPLY CHAINS –1.5 – pp 20-25 </li></ul></ul><ul><ul><li>WHAT ARE SOME OF THE KEY ISSUES IN THESE SUPPLY CHAINS </li></ul></ul><ul><ul><li>ANALYSE AND COMMENT ON 7-Eleven and Amazon– ANSWER QUESTIONS 1TO 6 FOR EACH </li></ul></ul>
    22. 22. SUPPLY CHAIN PERFORMANCE – STRATEGIC FIT AND SCOPE ( Lesson 2) New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources Business Strategy New Product Strategy Marketing Strategy Supply Chain Strategy Supply and Manufacture FILM – CHAIN REACTION EXAMPLES?
    23. 23. ACHIEVING STRATEGIC FIT <ul><li>Step 1. Understanding the Customer and Demand </li></ul><ul><ul><li>Quantity - Lot size </li></ul></ul><ul><ul><li>Response time </li></ul></ul><ul><ul><li>Product variety </li></ul></ul><ul><ul><li>Service level </li></ul></ul><ul><ul><li>Price </li></ul></ul><ul><ul><li>Innovation </li></ul></ul>Implied Demand Uncertainty See Table 2.1 Regular Demand Uncertainty due to customers demand and Implied Demand Uncertainty due to uncertainty in Supply Chain
    24. 24. Levels of Implied Demand Uncertainty Low High Price Responsiveness Customer Need Implied Demand Uncertainty Attributes (Table 2-2) Low Implied Uncertainty High Implied Uncertainty Product Margin Low – High Aver. Forecast Error 10% 40-100%; Aver. Stockout rate 1-2% 10-40%; Aver. markdown 0% 10-25% Detergent Long lead time steel High Fashion Emergency steel
    25. 25. SUPPLY SOURCE UNCERTAINTY <ul><li>TABLE 2.3 SUPPLY UNCERTAINTY </li></ul><ul><ul><li>FREQUENT BREAKDOWNS </li></ul></ul><ul><ul><li>UNPREDICTABLE AND/OR LOW YIELDS </li></ul></ul><ul><ul><li>POOR QUALITY </li></ul></ul><ul><ul><li>LIMITED SUPPLIER CAPACITY </li></ul></ul><ul><ul><li>INFLEXIBLE SUPPLY CAPACITY </li></ul></ul><ul><ul><li>EVOLVING PRODUCTION PROCESSES </li></ul></ul><ul><li>LIFE CYCLE POSITION OF PRODUCT </li></ul><ul><ul><li>NEW PRODUCTS HIGH UNCERTAINTY </li></ul></ul><ul><li>DEMAND AND SUPPLY UNCERTAINTY FIG 2.2 </li></ul>
    26. 26. Step 2 - Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier (Table: 2.4) High Low Low High Exercise: Give examples of products that are: Highly efficient, Somewhat efficient, Somewhat responsive and highly responsive Cost (efficient) Responsiveness Responsiveness – to Quantity, Time, Variety, Innovation, Service level Fig 2.3
    27. 27. Step 3. Achieving Strategic Fit Low Cost High Cost Companies try to move Zone of Strategic fit Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum Zone of Strategic Fit
    28. 28. SCOPE <ul><li>Comparison of Efficient & Responsive Supply Chain Table 2.4 </li></ul><ul><ul><li>EFF Vs RESPON. STRATEGY for DESIGN; PRICING; MANUF; INVEN; LEAD TIME; SUPPLIER </li></ul></ul><ul><ul><li>THERE IS A RIGHT SUPPLY CHAIN STRATEGY FOR A GIVEN COMPETITIVE STRATEGY (without a competitive strategy there is no right supply chain!) </li></ul></ul><ul><li>OTHER ISSUES AFFECTING STRATEGIC FIT </li></ul><ul><ul><li>MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS </li></ul></ul><ul><ul><ul><li>TAILOR SC TO MEET THE NEEDS OF EACH PRODUCT’S DEMAND </li></ul></ul></ul><ul><ul><li>PRODUCT LIFE CYCLE Fig 2.8 </li></ul></ul><ul><ul><ul><li>AS DEMAND CHARACTERISTICS CHANGE, SO MUST SC STRATEGY - EXAMPLES </li></ul></ul></ul><ul><ul><li>COMPETITIVE CHANGES OVER TIME (COMPETITOR) </li></ul></ul><ul><li>EXPANDING STRATEGIC SCOPE </li></ul><ul><ul><li>INTERCOMPANY INTERFUNCTIONAL SCOPE </li></ul></ul><ul><ul><ul><li>MAXIMIZE SUPPLY CHAIN SURPLUS VIEW – EVALUATE ALL ACTIONS IN CONTEXT OF ENTIRE SUPPLY CHAIN (FIG 2.12) </li></ul></ul></ul><ul><ul><li>FLEXIBLE INTERCOMPANY INTERFUNCTIONAL SCOPE </li></ul></ul><ul><ul><ul><li>FLEXIBILITY CRITICAL AS ENVIRONMENT BECOMES DYNAMIC </li></ul></ul></ul>
    29. 29. Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy
    30. 30. Drivers of Supply Chain Performance TRADE OFF FOR EACH DRIVER Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Drivers
    31. 31. INVENTORY <ul><ul><li>‘WHAT’ OF SUPPLY CHAIN </li></ul></ul><ul><ul><li>MISMATCH BETWEEN SUPPLY AND DEMAND </li></ul></ul><ul><ul><li>MAJOR SOURCE OF COST </li></ul></ul><ul><ul><li>HUGE IMPACT ON RESP0NSIVENESS </li></ul></ul><ul><ul><li>MATERIAL FLOW TIME </li></ul></ul><ul><ul><ul><li>I = R T (I – Inventory, R – Throughput, T – Flow time) </li></ul></ul></ul><ul><ul><li>ROLE IN COMPETITIVE STRATEGY </li></ul></ul><ul><ul><li>COMPONENTS </li></ul></ul><ul><ul><ul><li>CYCLE INVENTORY – AVERAGE INVENTORY BETWEEN REPLENISHMENTS </li></ul></ul></ul><ul><ul><ul><li>SAFETY INVENTORY - TO COVER DEMAND AND SUPPLY UNCERTAINITY </li></ul></ul></ul><ul><ul><ul><li>SEASONAL INVENTORY – COUNTERS PREDICTABLE VARIATION </li></ul></ul></ul><ul><ul><li>OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY </li></ul></ul>
    32. 32. TRANSPORTATION <ul><li>‘ HOW’ OF SUPPLY CHAIN </li></ul><ul><li>LARGE IMPACT ON RESPONSIVENESS AND EFFICIENCY </li></ul><ul><li>ROLE IN COMPETITIVE STRATEGY </li></ul><ul><li>COMPONENTS </li></ul><ul><ul><li>MODE – AIR, TRUCK, RAIL, SHIP, PIPELINE, ELECTRONIC </li></ul></ul><ul><ul><li>ROUTE SELECTION </li></ul></ul><ul><ul><li>IN HOUSE OR OUTSOURCE </li></ul></ul><ul><li>OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY </li></ul>
    33. 33. FACILITIES <ul><li>‘WHERE’ OF SUPPLY CHAIN </li></ul><ul><li>TRANSFORMED (FACTORY) OR STORED (WAREHOUSE) </li></ul><ul><li>ROLE IN COMPETITIVE STRATEGY </li></ul><ul><li>COMPONENTS </li></ul><ul><ul><li>LOCATION - CENTRAL OR DECENTRAL </li></ul></ul><ul><ul><li>CAPACITY – FLEXIBILITY VS EFFICIENCY </li></ul></ul><ul><ul><li>MANUFACTURING METHODOLOGY – PRODUCT OR PROCESS FOCUS </li></ul></ul><ul><ul><li>WAREHOUSING METHODOLOGY – STORAGE – SKU, JOB LOT, CROSSDOCKING </li></ul></ul><ul><li>OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY </li></ul>
    34. 34. INFORMATION <ul><li>AFFECTS EVERY PART OF SUPPLY CHAIN </li></ul><ul><ul><li>CONNECTS ALL STAGES </li></ul></ul><ul><ul><li>ESSENTIAL TO OPERATION OF ALL STAGES </li></ul></ul><ul><li>ROLE IN COMPETITIVE STATEGY </li></ul><ul><ul><li>SUBSTITUTE FOR INVENTORY </li></ul></ul><ul><li>COMPONENTS </li></ul><ul><ul><li>PUSH VS PULL </li></ul></ul><ul><ul><li>COORDINATION AND INFORMATION SHARING </li></ul></ul><ul><ul><li>FORECASTING AND AGGREGATE PLANNING </li></ul></ul><ul><ul><li>ENABLING TECHNOLOGIES </li></ul></ul><ul><ul><ul><li>EDI </li></ul></ul></ul><ul><ul><ul><li>INTERNET </li></ul></ul></ul><ul><ul><ul><li>ERP </li></ul></ul></ul><ul><ul><ul><li>SCM </li></ul></ul></ul><ul><li>OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY ? </li></ul>
    35. 35. Considerations for Supply Chain Drivers
    36. 36. MAJOR OBSTACLES TO ACHIEVING FIT <ul><li>Multiple global owners / incentives in a supply chain </li></ul><ul><ul><li>Information Coordination & Contractual Coordination </li></ul></ul><ul><li>Increasing product variety / shrinking life cycles / demanding customers/customer fragmentation </li></ul>Increasing demand and supply uncertainty Local optimization and lack of global fit
    37. 37. OBSTACLES TO ACHIEVING STRATEGIC FIT <ul><li>INCREASING VARIETY OF PRODUCTS </li></ul><ul><li>DECREASING PRODUCT LIFE CYCLES </li></ul><ul><li>INCREASINGLY DEMANDING CUSTOMERS </li></ul><ul><li>FRAGMENTATION OF SUPPLY CHAIN OWNERSHIP </li></ul><ul><li>GLOBALIZATION </li></ul><ul><li>DIFFICULTY EXECUTING NEW STRATEGIES </li></ul><ul><li>ALL INCREASE UNCERTAINTY </li></ul>
    38. 38. Dealing with Product Variety: Mass Customization Mass Customization Low High High Low Long Short Lead Time Cost Customization
    39. 39. Fragmentation of Markets and Product Variety <ul><li>Are the requirements of all market segments served identical? </li></ul><ul><li>Are the characteristics of all products identical? </li></ul><ul><li>Can a single supply chain structure be used for all products / customers? </li></ul><ul><li>No! A single supply chain will fail different customers on efficiency or responsiveness or both. </li></ul>
    40. 40. HOMEWORK <ul><li>Page 49 – Nordstrom </li></ul><ul><ul><li>Answer Questions 1 to 4 </li></ul></ul><ul><li>Answer the above questions for Amazon.com </li></ul><ul><li>Page 67 </li></ul><ul><ul><li>Answer Questions 1 to 4 </li></ul></ul>
    41. 41. REVIEW QUESTIONS <ul><li>WHAT IS STRATEGIC FIT? HOW IS IT ACHIEVED? </li></ul><ul><ul><li>COMPANY’S APPROACH TO MATCH DEMAND REQUIREMENTS AND SUPPLY POSITIONING </li></ul></ul><ul><ul><li>MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS </li></ul></ul><ul><ul><li>PRODUCT LIFE CYCLE </li></ul></ul><ul><li>WHAT IS STRATEGIC SCOPE? </li></ul><ul><ul><li>INTERCOMPANY, INTERFUNCTIONAL EXTENSION </li></ul></ul><ul><li>WHAT ARE THE SUPPLY CHAIN DRIVERS. WHAT ARE THEIR ROLES AND COMPONENTS? </li></ul><ul><ul><li>INVENTORY; FACILITIES; TRANSPORTATION; INFORMATION </li></ul></ul><ul><li>OBSTACLES </li></ul>
    42. 42. Forecasting (uncertainty) Order service (certainty) Demand management Demand-Management Activities RULE: Do not forecast what you can plan, calculate, or extract from supply chain feedback. Source: Adapted from Plossl, “Getting the Most from Forecasts,” APICS 15th International Conference Proceedings , 1972 Lesson 3
    43. 43. DETERMINING DEMAND <ul><li>FORECASTING </li></ul><ul><ul><li>TWO TYPES – WRONG AND LUCKY </li></ul></ul><ul><ul><li>TWO NUMBERS – QUANTITY AND DATE </li></ul></ul><ul><ul><li>ELEMENTS of a GOOD FORECASTING SYSTEM: </li></ul></ul><ul><ul><ul><li>EQUAL CHANCE OF BEING OVER OR UNDER </li></ul></ul></ul><ul><ul><ul><li>INCLUDES KNOWN FUTURE EVENTS </li></ul></ul></ul><ul><ul><ul><li>HAS RANGE OR FORECAST ERROR ESTIMATE </li></ul></ul></ul><ul><ul><ul><li>REVIEWED REGULARLY </li></ul></ul></ul>
    44. 44. FORECASTING <ul><li>GENERAL PRINCIPLES: </li></ul><ul><ul><li>MORE ACCURATE AT THE AGGREGATE LEVEL </li></ul></ul><ul><ul><li>MORE ACCURATE FOR SHORTER PERIODS OF TIME CLOSER TO PRESENT </li></ul></ul><ul><ul><li>SET OF NUMBERS TO WORK FROM, NOT TO WORK TO </li></ul></ul><ul><ul><li>MOSTLY ALWAYS WRONG </li></ul></ul><ul><ul><li>EXAMPLE: MONTHLY vs DAILY EXPENDITURE </li></ul></ul>
    45. 45. FORECASTING <ul><li>MAIN TECHNIQUES: </li></ul><ul><ul><li>QUALITATIVE </li></ul></ul><ul><ul><ul><li>MANAGEMENT REVIEW </li></ul></ul></ul><ul><ul><ul><li>DELPHI METHOD </li></ul></ul></ul><ul><ul><ul><li>MARKET RESEARCH </li></ul></ul></ul><ul><ul><li>QUANTITIVE </li></ul></ul><ul><ul><ul><li>MOVING AVERAGE </li></ul></ul></ul><ul><ul><ul><li>WEIGHTED MOVING AVERAGE </li></ul></ul></ul><ul><ul><ul><li>EXPONENTIAL SMOOTHING </li></ul></ul></ul><ul><ul><ul><li>REGRESSION ANALYSIS </li></ul></ul></ul><ul><ul><ul><li>SEASONALILTY </li></ul></ul></ul><ul><ul><ul><li>PYRAMID </li></ul></ul></ul>
    46. 46. FORECASTING <ul><li>QUALITATIVE </li></ul><ul><ul><li>USEFUL ON NEW PRODUCTS </li></ul></ul><ul><ul><li>AS A SUPPLEMENT TO QUANTITATIVE NUMBERS </li></ul></ul><ul><li>QUANTITATIVE </li></ul><ul><ul><li>NEEDS HISTORICAL DATA OR PROJECTED DATA </li></ul></ul><ul><ul><li>AVAILABLE </li></ul></ul><ul><ul><li>CONSISTENT </li></ul></ul><ul><ul><li>ACCURATE </li></ul></ul><ul><ul><li>UNITS - MEASURABLE </li></ul></ul>
    47. 47. WORK OUT JUNE’s FORECASTS FOR ALL SKU’s
    48. 48. Simple Moving Averages (SMA) Simple Moving Average (SMA) Where F = Forecast T = Current time period D = Demand n = Number of periods( max) Forecast Forecast Demand (3-period   4-period   start-up start-up             Exercise: Work out the SMA for two periods Question: What determines the number of periods used? Why? n D D D F 2       - - + + + =
    49. 49. Weighted Moving Averages Weighted Moving Average (WMA) Where: F = Forecast T = Current time period D = Demand n = Number of periods (max) W = Weight, where greatest weight applies to most recent period and sum of weights = 1 Forecast Forecast Demand    start-up start-up             Exercise: Work out forecast for two periods with weights of 0.4,0.6 What periods and weights will use for forecasting soap and fashion clothes Why?
    50. 50. Exponential Smoothing   Decision þ Select or compute a smoothing constant (  ) þ Relationship of exponential smoothing to simple moving average Where n = number of past periods to be captured Where F = forecast value T = current time period D = demand  = exponential factor <1 Formulas
    51. 51. Period Demand Forecast Forecast Forecast (  = .1) (  = .5) (  = .9) 0 180 start-up start-up start-up 1 160 180 180 180 2 220 178 170 162 3 200 182 195 214 4 260 184 198 201 5 240 192 229 254 6 196 234 241 Exponential Smoothing — Continued F T+1 = F T + a (D T – F T ) Work out forecasts with  =0.3 What  ’s will use for forecasting soap and fashion clothes Why?
    52. 52. Simple Trended Series — Example  Algebraic Trend Projection X Y a. Trend (“rise” over “run”) = (13 - 4)/3 = 3 = b 0 4 1 7 2 10 3 13 c. Period 4: Y = a + bX = 4 + 3 (4 [for period 4]) = 16 b. Y-intercept (a) = “compute” the Y value for X = 0, thus Y-int = 4 1 2 3 13 10 7 4 Run Rise
    53. 53. REGRESSION ANALYSIS <ul><li>Regression formula b=slope, a=intercept </li></ul><ul><li>Slope b= Intercept </li></ul><ul><li>and </li></ul><ul><li>Work out this example: </li></ul><ul><li>Year Variable Y (Passengers) </li></ul><ul><li>1 77 </li></ul><ul><li>2 75 </li></ul><ul><li>3 72 </li></ul><ul><li>4 73 </li></ul><ul><li>5 71 </li></ul><ul><li>What is the regression equation? What is the forecast for Year 6? </li></ul>
    54. 54. TRENDED TIME SERIES FORECASTING <ul><li>Question: How do you forecast a seasonal item </li></ul><ul><li>Y (forecast) = [A (intercept) + X (trend) x T (time period) ] x S (seasonality factor) </li></ul><ul><li>FIRST DETERMINE LEVEL AND TREND - IF SEASONAL DESEASONALIZE </li></ul><ul><li>THEN FORECAST USING EXPONENTIAL OR TREND </li></ul><ul><li>RESEASONALIZE </li></ul>
    55. 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
    56. 56. Seasonal Series Indexing Sample Data — Continued <ul><li>FIND SEASONALITY FOR EACH PERIOD </li></ul><ul><li>DEASONALIZE </li></ul><ul><li>PROJECT USING EXPONENTIAL, REGRESSION ETC </li></ul><ul><li>REASONALIZE </li></ul> 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
    57. 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 (  = .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          Integrative Example: Calculating a Forecast with Seasonal Indexes and Exponential Smoothing 34 0.94
    58. 58. Exercise <ul><li>Boler Corp has the following sales history: </li></ul><ul><li>Quarter Year1 Year2 </li></ul><ul><li>1 140 210 </li></ul><ul><li>2 280 350 </li></ul><ul><li>3 70 140 </li></ul><ul><li>4 210 280 </li></ul><ul><li>What seasonal index for each quarter could be used to forecast the sales of the product for Year 3? </li></ul><ul><li>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? </li></ul>
    59. 59. Normal Distribution Using the Measures of Variability Source: Adapted from CPIM Inventory Management Certification Review Course ( APICS, 1998).
    60. 60. Standard Deviation ( sigma) F= A = Actual Error (Sales –  Error Period Forecast Sales Forecast) Squared              –      –                     –            –      
    61. 61. Standard Deviation — Continued Standard Deviation   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 ( ) ( )    n F A     n F  2 i i 2 i i = = - = = = - - =  
    62. 62. Bias and MAD Cumulative sum of error = Bias = Mean Absolute Deviation (MAD) = ( )  n   F  i i = = -   F  n   i i = = -  F = A = Actual Error  Sales – Absolute  Period Forecast Sales Forecast) Error              –      –                     –            –      
    63. 63. <ul><li> Cumulative Sum of Error </li></ul><ul><li> Bias </li></ul><ul><li> Mean Absolute Deviation (MAD) </li></ul><ul><li> Standard Deviation =1.25 MAD or </li></ul><ul><li>NOTE: About the use of n or n-1 in the above equations </li></ul><ul><li> n Use with a large population (> 30 observations) </li></ul><ul><li> n-1 Use with a small population ( < 30 observations) </li></ul>Measures of Forecast Error F ( )  - i i A ( ) n F A  i i  - n F  i  i  - ( )  n F    i  i - -  ( ) n F A  i i  - or
    64. 64. <ul><li> Definition </li></ul><ul><li> A confidence interval is a measure of distance, increments of which are represented by the z value </li></ul><ul><li> Formulas </li></ul><ul><li> Relationship </li></ul><ul><li> 1 standard deviation (  ) = 1.25  MAD </li></ul><ul><li> In the example data  = 1.25  MAD </li></ul><ul><li> = 1.25  160 = 200 </li></ul><ul><li>Source: Raz and Roberts, “Statistics,” 1987 </li></ul>Confidence Intervals ( ) ( ) ( ) s s s z x x or x x Deviation Standard Mean Distance z n F A OR  n F A Dev Std  i i 2 i i 2 i i + = - = - = - - - =  
    65. 65. z            ack Expressing z Values (for +ve probabilities) Probabilit y D +1 SD +2 SD +3 SD Cumulative normal distribution from left side of distribution (x + z)                                            
    66. 66. Application Problem — Service Level <ul><li> Given </li></ul><ul><li> Average sales for item P is 50 units per week with a standard deviation of 4 </li></ul><ul><li> Required </li></ul><ul><li> What is the probability that more than 60 units will be sold? </li></ul><ul><li> a. .006 </li></ul><ul><li> b. .494 </li></ul><ul><li> c. .506 </li></ul><ul><li> d. .994 </li></ul>
    67. 67. Homework <ul><li>Q1 - 2. A demand pattern for ten periods for a certain product was given as 127, 113, 121, 123, 117, 109, 131, 115, 127, and 118. Forecast the demand for period 11 using each of the following methods: a three-month moving average, a three-month weighted moving average using weights of 0.2, 0.3, and 0.5, exponential smoothing with a smoothing constant of 0.3, and linear regression. Compute the MAD for each method to determine which method would be preferable under the circumstances. Also calculate the bias in the data, if any, for all four methods, and explain the meaning. </li></ul><ul><li>Q2 - The following information is presented for a product: </li></ul><ul><li>2001 2002 </li></ul><ul><li>Forecast Demand Forecast Demand </li></ul><ul><li>Quarter I 200 226 210 218 Quarter II 320 310 315 333 </li></ul><ul><li>Quarter III 145 153 140 122 </li></ul><ul><li>Quarter IV 230 212 240 231 </li></ul><ul><li>a) What are the seasonal indicies that should be used for each quarter? </li></ul><ul><li>What is the MAD for the data above? </li></ul>
    68. 68. Supply Chain Network Fundamentals William T. Walker, CFPIM, CIRM, CSCP Practitioner, Author, and Supply Chain Architect
    69. 69. <ul><li>Understanding How Supply Chains Work </li></ul><ul><li>The Value Principle and Network Stakeholders </li></ul><ul><li>Mapping a Supply Chain Network </li></ul><ul><li>The Velocity and Variability Principles </li></ul><ul><li>Locating the Push/Pull Boundary </li></ul><ul><li>The Vocalize and Visualize Principles </li></ul><ul><li>Summary </li></ul>Session Outline
    70. 70. Learning Objectives <ul><li>By teaching the principles of supply chain management to understand how a supply chain network works... </li></ul><ul><li>We learn how to map a supply chain network. </li></ul><ul><li>We learn how to engineer reliable network infrastructure by maximizing velocity and minimizing variability. </li></ul><ul><li>We learn how the Bill Of Materials relates to the network. </li></ul><ul><li>We learn how locating the push/pull boundary converts network operations from Build-To-Stock to Build-To-Order. </li></ul><ul><li>We learn how to maximize throughput by engineering the means to vocalize demand and to visualize supply. </li></ul>
    71. 71. A SUPPLY CHAIN is the global network used to deliver products and services from raw materials to end customers through engineered flows of information, material, and cash. Contributed to the APICS Dictionary, 10th Edition by William T. Walker
    72. 72. Network Terminology Physical Flow Info Flow Cash Flow &quot;Source&quot; &quot;Make&quot; &quot;Deliver&quot; &quot;Return&quot; Upstream Midstream Downstream Reverse Stream Zone Zone Zone Zone Customer Value-Adding Value-Subtracting
    73. 73. Supplier Customer Trading Partner $ 3 M 1 M 2 M 3 $ 1 $ 2 Cash Material Material moves downstream to the customer. Cash moves upstream to the supplier. Supply Chain Network Operations
    74. 74. Suppliers Customers Trading Partner Shareholders Employees Value is the Perfect Order The Value Principle: Every stakeholder wins when throughput is maximized. Value is Employment Stability Value is Return In Investment Value is Continuity of Demand
    75. 75. The Network Rules <ul><li>In an effective supply chain network </li></ul><ul><li>each trading partner works to... </li></ul><ul><li>Maximize velocity , </li></ul><ul><li>Minimize variability , </li></ul><ul><li>Vocalize demand, and </li></ul><ul><li>Visualize supply </li></ul><ul><li>...in order to maximize throughput providing </li></ul><ul><li>Value for each stakeholder. </li></ul><ul><li>However, a lack of trust often gets in the way. </li></ul>
    76. 76. The Network Trust Factor <ul><li>Network trust is based upon personal relationships </li></ul><ul><li>and the perception that things are okay regarding: </li></ul><ul><li>Network operating rules are clear </li></ul><ul><li>Supply and demand information is shared </li></ul><ul><li>Performance measures are agreed upon </li></ul><ul><li>Relationship non-disclosures are kept secret </li></ul><ul><li>Inventory investment is not a win-lose game </li></ul>
    77. 77. Bill Of Materials For Example Items: A3, B2, B5, C1, C2, C3, D1 Suppliers: S1, S2, S3, S4, S5 Item Master - Stock Keeping Unit (SKU) Number - Description - Unit Of Measure - Approved Supplier - Country Of Origin - Cost - Lead Time Product Structure - Parent To Child Relationship - Quantity Per Relationship S3 S5 S4 S2 S1 D1 A3 B5 B2 C1 C2 C3 BOM Level 0. BOM Level 1. BOM Level 2. BOM Level 3.
    78. 78. Supply Chain Network Map Upstream Midstream Downstream Driven by the Bill Of Materials Driven by the Delivery Channel
    79. 79. <ul><li>Start midstream and imagine finished goods sitting on a rack at the central depot. </li></ul><ul><li>Now, use the Bill Of Materials and work upstream to reach each raw material supplier. </li></ul><ul><li>Then, identify each different fulfillment channel used to reach the local mission. </li></ul><ul><li>Determine which organizations are trading partners versus nominal trading partners. </li></ul><ul><li>Logistics service providers, information service providers, and financial service providers are not part of the network map. </li></ul>How To Map A Network
    80. 80. The Velocity Principle: In network implementation throughput is maximized when order-to-delivery-to-cash velocity is maximized by minimizing process cycle time. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Velocity – how are relationships connected to make the delivery?
    81. 81. The Network Flow Model From: William T. Walker, Supply Chain Architecture: A Blueprint for Networking the Flow of Material, Information, and Cash , CRC Press, ©2005. Supplier Customer Trading Partner Order-To-Delivery Order-To-Stock Invoice-To-Pay Invoice-To-Cash Material Material Cash Cash Info Info
    82. 82. Logistics Touches Every Subcycle <ul><li>Transportation moves material from seller to buyer </li></ul><ul><li>In some cases orders/ invoices/ cash move by mail </li></ul><ul><li>Warehouse issues trigger invoices </li></ul><ul><li>Warehouse receipts trigger payments </li></ul>Order-To-Delivery Order-To-Stock Invoice-To-Pay Invoice-To-Cash
    83. 83. Import/ Export Boundaries Country A exports and Country B imports in a forward supply chain. Country B exports and Country A imports in a reverse supply chain. Import duty and export licensing add complexity to network linkages decreasing velocity and increasing variability. Country A Country B Buyer Return Seller Shipment Exports Imports Exports Imports
    84. 84. The Variability Principle: In network implementation throughput is maximized when order-to-delivery-to-cash variability is minimized by minimizing process variance. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Variability – what is likely to change from one delivery to the next?
    85. 85. Outward Signs of Variability <ul><li>Unplanned demand </li></ul><ul><li>Backordered inventory </li></ul><ul><li>Inventory leakage </li></ul><ul><li>Capacity constraints </li></ul><ul><li>Lower than normal yields </li></ul><ul><li>Longer than expected transit times </li></ul><ul><li>Delays in clearing Customs </li></ul><ul><li>Delayed payment </li></ul>
    86. 86. To Maximize Velocity <ul><li>Eliminate unnecessary process steps </li></ul><ul><li>Shorten the longest serial process steps by eliminating queue time and automating steps </li></ul><ul><li>Convert serial process steps into parallel process steps </li></ul>To Minimize Variability <ul><li>Rank order the variances </li></ul><ul><li>Minimize the root cause of largest variance </li></ul><ul><li>Continue with the next largest variance, etc. </li></ul>
    87. 87. Push/Pull Boundary Pull Push Order Push/Pull Boundary Forecast Demand Supply
    88. 88. Customer Lead Time Customer Demand Pull Push Order Build-To-Order (BTO) Push/Pull Boundary Customer Demand Pull Push Build-To-Stock (BTS) Push/Pull Boundary Order F/C F/C
    89. 89. <ul><li>Know the competitive situation; for example, if competitive products are off-the-shelf, then the push/pull boundary must be close to the customer. </li></ul><ul><li>The push/pull boundary is a physical inventory location that bisects the entire supply chain. </li></ul><ul><li>Order-To-Delivery Cycle Time = Order Processing and Transmission Time + Shipment Processing, Picking, and Packing Time + Transportation and Customs Clearance Time </li></ul>How To Locate A Push/Pull Boundary
    90. 90. The Vocalize Principle: In network operations throughput is maximized by pulling supply to demand by vocalizing actual demand at the network constraint. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Vocalize – who knows the full requirements of the order?
    91. 91. Common Causes of Stockouts L Quantity Time R SS L Q Quantity Time R SS L Q Quantity Time R SS Q Demand Uncertainty Supply Uncertainty Lead Time Variability (LT = Cycle Time + Transit Time)
    92. 92. The Planning Interface Pull To Demand Push From Forecast Sales & Operations Plan Master Schedule Downstream The Supply Chain Network Push Zone Pull Zone Push/Pull Boundary I MRP Materials Requirements CRP Capacity Requirements I Upstream C C Capable Network Preload Inventory Throughput
    93. 93. Push Inventory And Capacity Ending Inventory = Starting Inventory - Forecasted Demand + Production When actual demand exceeds forecasted demand, either capacity or inventory can constrain production causing lead time to expand. I Throughput Push Zone Forecast Safety Safety C
    94. 94. I Throughput Pull Zone Order C Pull Inventory And Capacity Max Max Ending Inventory = Starting Inventory - Actual Demand + Production Throughput is limited to the smaller of limited inventory or limited capacity.
    95. 95. The Visualize Principle: In network operations throughput is maximized by pushing supply to demand by visualizing actual inventory supply across the network. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Visualize – where is the inventory now and when will it be available?
    96. 96. Packaging And Labeling [ ] Transportation and warehousing costs are a function of cubic dimensions and weight. [ ] Items that have to be repalletized for transport or storage cost more. [ ] Cartons, plastic cushions, and labels may be missing from the product BOM. [ ] RFID/ bar code on all packaging. [ ] Select a wall thickness and box burst strength to protect the product. [ ] Keep Country Of Origin labeling consistent from the product to the outside packaging. Cartons Master Carton Unit Load
    97. 97. Track and Trace Track Trace
    98. 98. Apply Technology To Visualize <ul><li>Bar Code and 2D Bar Code </li></ul><ul><li>Point Of Use Laser Scanners </li></ul><ul><li>Radio Frequency Identification (RFID) </li></ul><ul><li>Global Positioning by Satellite (GPS) </li></ul><ul><li>Wireless Communication </li></ul>
    99. 99. Measuring Network Inventory 1. Look for leakages between upstream issues and downstream receipts. 2. Look for inventory balance discrepancies at each trading partner. 3. Look for process yield issues within each trading partner. Upstream Issues = Downstream Receipts Ending Inventory = Starting Inventory + Receipts – Issues Complete Products Reflect BOM Part Proportions
    100. 100. To Vocalize <ul><li>Be precise about units and configurations </li></ul><ul><li>Acknowledge and handshake all information </li></ul><ul><li>Don't skip any link holding inventory in the chain </li></ul><ul><li>Measure throughput rather than production </li></ul><ul><li>Measure the network capacity constraint </li></ul><ul><li>Measure total network inventory </li></ul>To Visualize
    101. 101. Suppliers Customers Trading Partner Employees We win! Shareholders Work the 5V Principles to maximize throughput. In Summary I win! I win! We win!
    102. 102. AGGREGRATE PLANNING (Chap8) Lesson 5 <ul><li>PROCESS OF DETERMINING LEVELS OF </li></ul><ul><ul><li>PRODUCTION RATE </li></ul></ul><ul><ul><li>WORKFORCE </li></ul></ul><ul><ul><li>OVERTIME </li></ul></ul><ul><ul><li>MACHINE CAPACITY </li></ul></ul><ul><ul><li>SUBCONTRACTING </li></ul></ul><ul><ul><li>BACKLOG </li></ul></ul><ul><ul><li>INVENTORY </li></ul></ul><ul><li>GIVEN DEMAND FORECAST – DETERMINE PRODUCTION, INVENTORY/BACKLOG AND CAPACITY LEVEL FOR EACH PERIOD </li></ul><ul><li>FUNDAMENTAL TRADE-OFFS </li></ul><ul><ul><li>CAPACITY(REGULAR TIME, OVERTIME, SUBCONTRACING)/COST </li></ul></ul><ul><ul><li>INVENTORY/SERVICE LEVEL </li></ul></ul><ul><ul><li>BACKLOG/LOST SALES </li></ul></ul>
    103. 103. AGGREGRATE PLANNING STRATEGIES <ul><li>STRATEGIES - SYNCHRONIZING PRODUCTION WITH DEMAND </li></ul><ul><ul><li>CHASE- USING CAPACITY AS THE LEVER </li></ul></ul><ul><ul><ul><li>BY VARYING MACHINE OR WORKFORCE (numbers or flexibility) </li></ul></ul></ul><ul><ul><ul><li>DIFFICULT TO IMPLEMENT AND EXPENSIVE. LOW LEVELS OF INVENTORY </li></ul></ul></ul><ul><ul><li>TIME FLEXIBILITY – UTILIZATION AS THE LEVER </li></ul></ul><ul><ul><ul><li>IF EXCESS MACHINE CAPACITY, VARYING HOURS WORKED (workforce stable, hours vary) </li></ul></ul></ul><ul><ul><ul><li>LOW INVENTORY AND LOWER UTILISATION THAN CHASE </li></ul></ul></ul><ul><ul><ul><li>USEFUL WHEN INVENTORY COST HIGH AND CAPACITY CHEAP </li></ul></ul></ul><ul><ul><li>LEVEL – USING INVENTORY AS THE LEVER </li></ul></ul><ul><ul><ul><li>STABLE WORKFORCE AND CAPACITY </li></ul></ul></ul><ul><ul><ul><li>LARGE INVENTORIES AND BACKLOGS </li></ul></ul></ul><ul><ul><ul><li>MOST PRACTICAL AND POPULAR </li></ul></ul></ul>
    104. 104. SOP FORMAT <ul><li>PRODUCTION PLAN = SALES + END INV – BEGIN INV </li></ul><ul><li>PRODUCTION PER MONTH = PRODUCTION PLAN </li></ul><ul><li>NUMBER OF PERIODS </li></ul><ul><li>PRODUCTION PLAN = SALES – END BACKLOG + BEGIN BACKLOG </li></ul>PERIOD INVENTORY/ BACKLOG PRODUCTION SALES 6 5 4 3 2 1
    105. 105. Sales and Operations Planning Strategies
    106. 106. Production Rates and Levels Application 1 — Make-to-Stock <ul><li>Table Format (Inventory) </li></ul><ul><li>Period 0 1 2 3 4 </li></ul><ul><li>Forecast 150 150 150 150 </li></ul><ul><li>Production plan </li></ul><ul><li>Inventory 200 100 </li></ul><ul><li>FOR A LEVEL STRATEGY, WORK OUT THE PRODUCTION PLAN AND INVENTORY BY PERIOD </li></ul>PRODUCTION = SALES + END INV – BEGIN INV
    107. 107. Production Rates and Levels Application 2 — Make-to-Order <ul><li>Table Format (Backlog) </li></ul><ul><li>Period 0 1 2 3 4 </li></ul><ul><li>Forecast 150 150 150 150 </li></ul><ul><li>Production plan Backlog 200 100 </li></ul><ul><li>FOR A LEVEL STRATEGY WORK OUT THE PRODUCTION PLAN AND BACKLOG BY PERIOD </li></ul>PRODUCTION = SALES + BEGIN BL - END BL
    108. 108. OPTIMIZATION THRU LINEAR PROGRAMMING <ul><li>AGGREGATE PLANNING MODEL – RED TOMATO Pp 210 (105) </li></ul><ul><ul><li>MAXIMIZING HIGHEST PROFIT OVER TIME PERIOD </li></ul></ul><ul><ul><li>DETERMINE DECISION VARIABLES PP212(107) </li></ul></ul><ul><ul><li>OBJECTIVE FUNCTION – MINIMIZE TOTAL COST </li></ul></ul><ul><ul><ul><li>DEVELOP EQUATIONS FOR ALL THE COST ELEMENTS- Eq 5/8.1 </li></ul></ul></ul><ul><ul><li>CONSTRAINTS EQUATIONS </li></ul></ul><ul><ul><ul><li>WORKFORCE </li></ul></ul></ul><ul><ul><ul><li>CAPACITY </li></ul></ul></ul><ul><ul><ul><li>INVENTORY </li></ul></ul></ul><ul><ul><ul><li>OVERTIME </li></ul></ul></ul><ul><ul><li>OPTIMIZE OBJECTIVE FUNCTION </li></ul></ul><ul><ul><li>FORECAST ERROR </li></ul></ul><ul><ul><ul><li>SAFETY INVENTORY </li></ul></ul></ul><ul><ul><ul><li>SAFETY CAPACITY </li></ul></ul></ul>
    109. 109. Aggregate Planning (Define Decision Variables) <ul><li>W t = Workforce size for month t , t = 1, ..., 6 </li></ul><ul><li>H t = Number of employees hired at the beginning of month t , t = 1, ..., 6 </li></ul><ul><li>L t = Number of employees laid off at the beginning of month t , t = 1, ..., 6 </li></ul><ul><li>P t = Production in month t , t = 1, ..., 6 </li></ul><ul><li>I t = Inventory at the end of month t , t = 1, ..., 6 </li></ul><ul><li>S t = Number of units stocked out at the end of month t , t = 1, ..., 6 </li></ul><ul><li>C t = Number of units subcontracted for month t , t = 1, ..., 6 </li></ul><ul><li>O t = Number of overtime hours worked in month t , t = 1, ..., 6 </li></ul>Excel File
    110. 110. Aggregate Planning 8.2 DEMAND Table 8.1 (5.1)
    111. 111. Aggregate Planning (Define Objective Function) Monthly
    112. 112. Aggregate Planning (Define Constraints Linking Variables) <ul><li>Workforce size for each month is based on hiring and layoffs </li></ul>
    113. 113. Aggregate Planning (Constraints) <ul><li>Production for each month cannot exceed capacity </li></ul>
    114. 114. Aggregate Planning (Constraints) <ul><li>Inventory balance for each month </li></ul>
    115. 115. Aggregate Planning (Constraints) <ul><li>Over time for each month </li></ul>
    116. 116. SOLVING PROBLEM USING EXCEL <ul><li>STEP 1 BUILD DECISION VARIABLE TABLE (fig8.1) </li></ul><ul><ul><li>ALL CELLS 0, EXCEPT PERIOD 0 FOR WORKFORCE AND INVENTORY </li></ul></ul><ul><ul><li>ENTER DEMAND (TABLE 8.4) </li></ul></ul><ul><li>STEP 2 CONSTRUCT CONSTRAINT TABLE (fig8.2) </li></ul><ul><li>STEP 3 CREATE a CELL HAVING THE OBJECTIVE FUNCTION </li></ul><ul><ul><li>(Formula 8.1) Optimizing TOTAL COSTS (Fig 8.3) </li></ul></ul><ul><li>STEP 4 USE TOOLS SOLVER (Fig 8.4) </li></ul><ul><li>REPEAT IF OPTIMUM SOLUTION NOT OBTAINED </li></ul><ul><li>HOMEWORK (see homework) </li></ul>
    117. 117. AGGREGATE PLANNING IN PRACTICE <ul><li>MAKE PLANS FLEXIBLE BECAUSE FORECASTS ARE ALWAYS WRONG </li></ul><ul><ul><li>PERFORM SENSITIVITY ANALYSIS ON THE INPUTS – I.E. LOOK AT EFFECTS OF HIGH/LOW </li></ul></ul><ul><li>RERUN THE AGGREGATE PLAN AS NEW DATA EMERGES </li></ul><ul><li>USE AGGREGATE PLANNING AS CAPACITY UTILIZATION INCREASES </li></ul><ul><ul><li>WHEN UTILIZATION IS HIGH, THERE IS LIKELY TO BE CAPACITY LIMITATIONS AND ALL THE ORDERS WILL NOT BE PRODUCED </li></ul></ul>
    118. 118. Process Flow Measures <ul><li>FLOW RATE (R t ), CYCLE TIME (T t ), & INVENTORY (I t ) RELATIONSHIPS </li></ul><ul><ul><li>F = Flow Rate or Throughput is output of a line in pieces per time </li></ul></ul><ul><ul><li>T = Cycle time is the time taken to complete an operation </li></ul></ul><ul><ul><li>I = Inventory is the material on the line </li></ul></ul><ul><ul><li>LITTLE’s LAW: Av. I = Av. R x Av. T x Variability factor Examples: </li></ul></ul><ul><ul><ul><li>If Inventory is 100 pieces and Cycle time is 10 hours, the Throughput rate is 10 pcs per hour </li></ul></ul></ul><ul><ul><ul><li>If Cycle time is halved; Throughput is doubled </li></ul></ul></ul><ul><ul><ul><li>If Inventory is halved; cycle time is halved </li></ul></ul></ul><ul><ul><li>See Equation 8.6 How do we get Av Inv of 895 and Flow time of 0.34 months on page 227/216 </li></ul></ul>
    119. 119. Homework <ul><li>Ex . Work out Inventory, Rate and cycle time for values in Tables 8.4,8.5 </li></ul>
    120. 120. Supply Chain Network Basics – Lesson 4 <ul><li>Guest Lecture – go to Poly Blackboard </li></ul>
    121. 121. MANAGING SUPPLY AND DEMAND PREDICTABLE VARIABILITY ( LESSON 6 ) <ul><li>Predictable Variability – Change in Demand that can be forecast or guided </li></ul><ul><ul><li>MANAGING DEMAND – Short time price discounts, trade promotions </li></ul></ul><ul><li>MANAGING SUPPLY – Capacity, Inventory, Subcontracting & Backlog, Purchased product </li></ul><ul><ul><li>MANAGING CAPACITY </li></ul></ul><ul><ul><ul><li>TIME FLEXIBILITY FROM WORKFORCE (OVERTIME) </li></ul></ul></ul><ul><ul><ul><li>USE OF SEASONAL WORKFORCE </li></ul></ul></ul><ul><ul><ul><li>USE OF SUBCONTRACTING </li></ul></ul></ul><ul><ul><ul><li>USE OF DUAL FACILITIES – DEDICATED AND FLEXIBLE </li></ul></ul></ul><ul><ul><ul><li>DESIGN PRODUCT FLEXIBILITY INTO PRODUCTION </li></ul></ul></ul><ul><ul><ul><li>USE OF MULTI-PURPOSE MACHINES (CNC MACHINE CENTERS) </li></ul></ul></ul><ul><ul><li>MANAGING INVENTORY </li></ul></ul><ul><ul><ul><li>USING COMMON COMPONENTS ACROSS MULTIPLE PRODUCTS </li></ul></ul></ul><ul><ul><ul><li>BUILD INVENTORY OF HIGH DEMAND OR PREDICTABLE DEMAND PRODUCTS </li></ul></ul></ul>
    122. 122. MANAGING DEMAND (Predictable Variability) <ul><li>Manage demand with pricing </li></ul><ul><ul><li>Factors influencing the timing of a promotion: </li></ul></ul><ul><ul><ul><li>Impact on demand; product margins; cost of holding inventory; cost of changing capacity </li></ul></ul></ul><ul><li>Demand increase (from discounting) due to: </li></ul><ul><ul><li>Market growth </li></ul></ul><ul><ul><li>Stealing market share </li></ul></ul><ul><ul><li>Forward buying </li></ul></ul><ul><li>Discount of $1 increases period demand by 10% </li></ul><ul><li>Reduce price by $1 in Jan, increases sales by 10% in first month - Tab 9.4, 9.5 – effect on cost, profit, inventory </li></ul><ul><li>If discount is in April, highest demand month - Tab 9.6, 9.7 </li></ul><ul><li>See the effects of various combination Tab 9-12 </li></ul><ul><li>Summary Tab 9.12 & 9.13 Discuss </li></ul>
    123. 123. PREDICTABLE VARIABILITY IN PRACTICE <ul><li>COORDINATE MARKETING, SALES AND OPERATIONS </li></ul><ul><ul><li>SALES AND OPERATIONS PLANNING </li></ul></ul><ul><ul><li>ONE GOAL MAXIMIZING PROFIT, ONE GAME PLAN </li></ul></ul><ul><li>TAKE PREDICABLE VARIABILITY INTO ACCOUNT WHEN MAKING STRATEGIC DECISIONS </li></ul><ul><li>PARTNER WITH PRINCIPAL CUSTOMERS, ELIMINATE PREDICTIONS! </li></ul><ul><li>PREEMPT (PROMOS ETC.), DO NOT JUST REACT TO PREDICTABLE VARIABILITY </li></ul>
    124. 124. MANUFACTURING - MANAGING LEAD TIME <ul><li>CRITICAL DRIVER OF ALL MANUFACTURE </li></ul><ul><ul><li>LAYOUT AND WORKPLACE ORGANIZATION </li></ul></ul><ul><ul><li>CONSTRAINT MANAGEMENT </li></ul></ul><ul><ul><li>VARIABILITY AND QUEUES </li></ul></ul><ul><ul><li>LOT SIZES AND SET UP REDUCTION </li></ul></ul><ul><ul><li>WORK IN PROCESS </li></ul></ul><ul><ul><li>FLEXIBILITY </li></ul></ul><ul><li>MUST BE COMPANY FOCUS </li></ul><ul><li>MEASURED AND MONITORED </li></ul><ul><ul><li>X BUTT TO BUTT </li></ul></ul>
    125. 125. MANAGING INVENTORY <ul><li>The role of inventory in the supply chain </li></ul><ul><ul><li>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. </li></ul></ul><ul><li>Why hold inventory? </li></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><ul><ul><li>Batch size and cycle time </li></ul></ul></ul><ul><ul><ul><li>Quantity discounts </li></ul></ul></ul><ul><ul><ul><li>Short term discounts / Trade promotions </li></ul></ul></ul><ul><ul><li>Stochastic variability of supply and demand </li></ul></ul><ul><ul><ul><li>Evaluating service level given safety inventory </li></ul></ul></ul><ul><ul><ul><li>Evaluating safety inventory given desired service level </li></ul></ul></ul><ul><li>Levers to improve performance </li></ul>
    126. 126. Role of Inventory in the Supply Chain <ul><li>Overstocking: Amount available exceeds demand </li></ul><ul><ul><li>Liquidation, Obsolescence, Holding </li></ul></ul><ul><li>Understocking: Demand exceeds amount available </li></ul><ul><ul><li>Lost margin and future sales </li></ul></ul><ul><li>Goal: Matching supply and demand </li></ul>
    127. 127. ROLE OF CYCLE INVENTORY (10.1) <ul><li>Q – lot or batch size of an order </li></ul><ul><li>D – Demand </li></ul><ul><li>When demand steady : Cycle Inven = lot size/2 = Q/2 </li></ul><ul><li>Saw tooth diagram </li></ul><ul><li>Average flow time = cycle inven / demand = Q/2D </li></ul><ul><li>C – material cost </li></ul><ul><li>S – fixed ordering cost </li></ul><ul><li>H – holding cost </li></ul><ul><li>h – cost of holding $1 in inventory for one year </li></ul><ul><li>H = hC cost of holding one piece for one year </li></ul>
    128. 128. Cycle Inventory related costs in Practice <ul><li>Inventory holding costs – usually expressed as a % per $ per year </li></ul><ul><ul><li>Cost of capital (Opportunity cost of capital) </li></ul></ul><ul><ul><li>Obsolescence or spoilage cost </li></ul></ul><ul><ul><li>Handling cost </li></ul></ul><ul><ul><li>Occupancy cost (space cost) </li></ul></ul><ul><ul><li>Miscellaneous costs (security, insurance) </li></ul></ul><ul><li>Order costs (same as set up costs in a machining environment) </li></ul><ul><ul><li>Buyer time </li></ul></ul><ul><ul><li>Transportation costs </li></ul></ul><ul><ul><li>Receiving costs </li></ul></ul><ul><ul><li>Other costs </li></ul></ul><ul><li>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 </li></ul>
    129. 129. Fixed costs: Optimal Lot Size and Reorder Interval (EOQ) <ul><li>C: Cost per unit ($C/unit) </li></ul><ul><li>h: Holding cost per year as a fraction of product cost ($%/unit/Year) </li></ul><ul><li>H: Holding cost per unit per year </li></ul><ul><li>Q: Lot Size </li></ul><ul><li>D: Annual demand </li></ul><ul><li>S: Setup or Order Cost </li></ul><ul><li>Annual order cost = (D/Q)S </li></ul><ul><li>Annual inventory cost = (Q/2)hC </li></ul><ul><li>Optimum Q =  2DS/hC </li></ul><ul><li>T: Reorder interval (Q/D) </li></ul><ul><li># orders/yr = D/Q = Optimal order freq </li></ul><ul><li>Total Annual Cost = CD+(D/Q)S+(Q/2)hC </li></ul><ul><li>See Fig 10-2 Showing effects of Lot Size </li></ul>
    130. 130. Example 10.1 <ul><li>Demand, D = 12,000 computers per year </li></ul><ul><li>Unit cost, C = $500 </li></ul><ul><li>Holding cost, h = 0.2 </li></ul><ul><li>Fixed cost, S = $4,000/order </li></ul><ul><li>What is the order quantity Q, the flow time, the reorder interval and Total cost? </li></ul><ul><li>Q = 980 computers </li></ul><ul><li>Cycle inventory = Q/2 = 490 </li></ul><ul><li>Flow time = Q/2D = 0.049 month </li></ul><ul><li>Reorder interval, T = 0.98 month </li></ul><ul><li>Total Cost = 49,000 + 49,000 + 6,000,000 = $6,098,000 </li></ul>
    131. 131. EXPLOITING ECONOMIES OF SCALE <ul><li>SINGLE LOT SIZE OF SINGLE PRODUCT (EOQ) = Q </li></ul><ul><ul><li>ANNUAL MATERIAL COST = CD </li></ul></ul><ul><ul><li>NO. OF ORDERS PER YEAR = D/Q </li></ul></ul><ul><ul><li>ANNUAL ORDER COST = (D/Q)*S </li></ul></ul><ul><ul><li>ANNUAL HOLDING COST = (Q/2)H = (Q/2)hC </li></ul></ul><ul><ul><li>TOTAL ANNUAL COST (TC) = CR+(D/Q)*S+(Q/2)hC </li></ul></ul><ul><ul><li>Optimal lot size Q* =  2DS/hC </li></ul></ul><ul><ul><li>Optimal ordering frequency = n* = D/Q* =  DhC/2S </li></ul></ul><ul><ul><li>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) </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Key point: To reduce Q by a factor of k, fixed cost S must be reduced by a factor of k 2 </li></ul></ul>
    132. 132. Reducing Lot Size - Aggregating <ul><li>Exercise: </li></ul><ul><li>To reduce Q from 980 to 200, how much must order cost be reduced </li></ul><ul><li>Key point: To reduce Q by a factor of k, fixed cost S must be reduced by a factor of k 2 </li></ul>
    133. 133. LOT SIZING WITH MULTIPLE PRODUCTS & CUSTOMERS <ul><li>Lot sizing with Multiple Product or Customers </li></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Ordering and delivering independently (See Ex.10.3) </li></ul></ul><ul><ul><ul><li>Each order has independent Holding, Ordering and Annual costs with independent EOQ’s and Flow Times – Table 10-1 </li></ul></ul></ul><ul><ul><ul><li>Total cost = $155,140 </li></ul></ul></ul><ul><ul><li>Total cost Ordered and delivered jointly (See Ex.10.4) </li></ul></ul><ul><ul><ul><li>Independent holding costs but combined fixed order cost Table 10-2 </li></ul></ul></ul><ul><ul><ul><li>Total Cost = $136,528 </li></ul></ul></ul><ul><ul><li>Transportation capacity constraint – aggregating multiple products from same supplier; single delivery from multiple suppliers (Ex. 10-5) </li></ul></ul><ul><li>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 </li></ul>
    134. 134. Impact of product specific order cost Tailored aggregation – Higher volume products ordered more frequently and lower volume products ordered less frequently (rather than ordered and delivered jointly) 10-6 Summary
    135. 135. Delivery Options <ul><li>No Aggregation: Each product ordered separately </li></ul><ul><li>Complete Aggregation: All products delivered on each truck </li></ul><ul><li>Tailored Aggregation: Selected subsets of products on each truck </li></ul>
    136. 136. Economies of Scale to exploit Quantity Discounts <ul><li>Two common Lot Size based discount schemes </li></ul><ul><ul><li>All unit quantity discounts </li></ul></ul><ul><ul><ul><li>Pricing based on specific quantity break points </li></ul></ul></ul><ul><ul><li>Marginal unit quantity discounts or multiblock tariffs </li></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul><ul><ul><li>See example in book on these discounts pages 276-280 </li></ul></ul>
    137. 137. WHY QUANTITY DISCOUNTS <ul><ul><li>Improved coordination to increase total supply chain profits </li></ul></ul><ul><ul><ul><li>Commodity Products = price set by market. </li></ul></ul></ul><ul><ul><ul><li>Large Manufacturers should use lot based quantity discounts, to maximize profits (cycle inventory will increase) </li></ul></ul></ul><ul><ul><ul><li>The supply chain profit is lower if each stage makes pricing decisions independently, maximizing its own profit </li></ul></ul></ul><ul><ul><ul><li>Coordination to maximize profit </li></ul></ul></ul><ul><ul><ul><ul><li>Two part tariff or quantity discounts – supplier passes on some of the profit to the retailer, depending on volume </li></ul></ul></ul></ul><ul><ul><li>Extraction of surplus through price discrimination </li></ul></ul><ul><ul><li>Trade Promotions </li></ul></ul><ul><ul><ul><ul><li>Lead to significant forward buying by the retailer </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Retailer should pass on optimal discount to customer and keep rest for themselves </li></ul></ul></ul></ul>
    138. 138. Quantity Discounts <ul><li>Discounts improve coordination between Supplier and Retailer to maximize Supply Chain profits. </li></ul><ul><li>Quantity Discounts are a form of manufacturer returning some reduced costs (less orders) to the retailer (costs increase as more holding costs) </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>
    139. 139. Strategies for reducing fixed costs <ul><li>Wal-Mart: 3 day replenishment cycle </li></ul><ul><li>Seven Eleven Japan: Multiple daily replenishment </li></ul><ul><li>P&G: Mixed truck loads </li></ul><ul><li>Efforts required in: </li></ul><ul><ul><li>Transportation (Cross docking) </li></ul></ul><ul><ul><li>Information </li></ul></ul><ul><ul><li>Receiving </li></ul></ul><ul><li>Aggregate across products, supply points, or delivery points in a single order, allows reduction of lot size for individual products Ex 10.6 </li></ul>
    140. 140. ESTIMATING CYCLE INVENTORY COSTS <ul><li>HOLDING COSTS </li></ul><ul><ul><li>Cost of capital </li></ul></ul><ul><ul><li>Obsolescence or spoilage costs </li></ul></ul><ul><ul><li>Handling costs </li></ul></ul><ul><ul><li>Occupancy cost </li></ul></ul><ul><ul><li>Miscellaneous </li></ul></ul><ul><li>Order Cost </li></ul><ul><ul><li>Buyer time </li></ul></ul><ul><ul><li>Transportation costs </li></ul></ul><ul><ul><li>Receiving costs </li></ul></ul><ul><ul><li>Other costs </li></ul></ul>
    141. 141. Lessons From Aggregation <ul><li>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) </li></ul><ul><li>Aggregation allows firm to lower lot size without increasing cost </li></ul><ul><li>Complete aggregation is effective if product specific fixed cost is a small fraction of joint fixed cost </li></ul><ul><li>Tailored aggregation is effective if product specific fixed cost is large fraction of joint fixed cost </li></ul>
    142. 142. Lessons From Discounting Schemes <ul><li>Lot size based discounts increase lot size and cycle inventory in the supply chain </li></ul><ul><li>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 </li></ul><ul><li>Lot size based discounts are justified to achieve coordination for commodity products – competitive market and price fixed by market </li></ul><ul><li>Volume based discounts with some fixed cost passed on to retailer are more effective in general </li></ul><ul><ul><li>Volume based discounts are better over rolling horizon </li></ul></ul>
    143. 143. Levers to Reduce Lot Sizes Without Hurting Costs <ul><li>Cycle Inventory Reduction </li></ul><ul><ul><li>Reduce transfer and production lot sizes </li></ul></ul><ul><ul><ul><li>Aggregate fixed cost across multiple products, supply points, or delivery points </li></ul></ul></ul><ul><ul><li>Are quantity discounts consistent with manufacturing and logistics operations? </li></ul></ul><ul><ul><ul><li>Volume discounts on rolling horizon </li></ul></ul></ul><ul><ul><ul><li>Two-part tariff – volume based discount in stages </li></ul></ul></ul><ul><ul><li>Are trade promotions essential? </li></ul></ul><ul><ul><ul><li>EDLP (Every day low pricing) </li></ul></ul></ul><ul><ul><ul><li>Base on sell-thru (customers) rather than sell-in (retailers) </li></ul></ul></ul><ul><li>HOMEWORK </li></ul><ul><ul><ul><li>EXERCISES 1 AND 2 Pp291/297 </li></ul></ul></ul>
    144. 144. Discussions on Site Visit <ul><li>Macy’s Distribution Center (DC) </li></ul><ul><li>In teams please answer the following: </li></ul><ul><ul><li>What is the size of the operation </li></ul></ul><ul><ul><li>What strategy do they adopt and why </li></ul></ul><ul><ul><li>What are the key competitive practices </li></ul></ul><ul><ul><li>How do they deal with each of the Supply Chain Drivers </li></ul></ul><ul><li>Measurements used for efficiency? </li></ul><ul><li>How can they improve their operations? </li></ul>
    145. 145. Mid Term <ul><li>Show your calculations </li></ul><ul><li>Do not get stuck on any question </li></ul><ul><li>Strategy applications and implications 15 </li></ul><ul><li>Demand Management 20 </li></ul><ul><li>Aggregate Demand 20 </li></ul><ul><li>Cycle Inventory 20 </li></ul><ul><li>Supply Chain Networks 25 </li></ul>
    146. 146. Role of Inventory in the Supply Chain ( LESSON 7) Cost Availability Efficiency Responsiveness
    147. 147. WHY HOLD SAFETY INVENTORY? (SAFETY STOCK) <ul><li>DEMAND UNCERTAINTY </li></ul><ul><li>SUPPLY UNCERTAINTY </li></ul><ul><li>TODAY’S ENVIRONMENT </li></ul><ul><ul><li>INTERNET MAKES SEARCH EASIER </li></ul></ul><ul><ul><li>PRODUCT VARIETY GROWN WITH CUSTOMIZATION </li></ul></ul><ul><ul><li>EASE AND VARIETY PUTS PRESSURE ON PRODUCT AVAILABILITY </li></ul></ul><ul><ul><li>PUSH UP LEVELS OF INVENTORY / SAFETY STOCK </li></ul></ul><ul><li>KEY QUESTIONS </li></ul><ul><ul><li>APPROPRIATE LEVEL OF SAFETY STOCK </li></ul></ul><ul><ul><li>WHAT ACTIONS IMPROVE AVAILABILITY AND REDUCE SAFETY STOCK? </li></ul></ul><ul><li>Measures of product availability </li></ul><ul><ul><li>Product fill rate ( fr ) </li></ul></ul><ul><ul><li>Order fill rate </li></ul></ul><ul><ul><li>Cycle service level (CSL) - THIS COURSE WILL DEAL mainly WITH CSL </li></ul></ul>
    148. 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
    149. 149. Replenishment policies <ul><li>Replenishment policies </li></ul><ul><ul><li>When to reorder? </li></ul></ul><ul><ul><li>How much to reorder? </li></ul></ul><ul><li>Continuous Review : Order fixed quantity when total inventory drops below Reorder Point (ROP) </li></ul><ul><li>Periodic Review : Order at fixed time intervals to raise total inventory to Order up to Level (OUL) </li></ul><ul><li>Factors driving safety inventory </li></ul><ul><ul><li>Demand and/or Supply uncertainty </li></ul></ul><ul><ul><li>Desired level of product availability </li></ul></ul><ul><ul><li>Replenishment lead time </li></ul></ul><ul><li>Demand Uncertainty– Av.Demand; Stnd Devn; Lead Time </li></ul>
    150. 150. Continuous Review Policy: Safety Inventory and Cycle Demand Uncertainty & Service Level <ul><li>L : Lead time for replenishment </li></ul><ul><li>D: Average demand per unit time </li></ul><ul><li> D :Standard deviation of demand per period </li></ul><ul><li>D L : Mean demand during lead time </li></ul><ul><li> L : Standard deviation of demand during lead time </li></ul><ul><li>CSL : Cycle service level – Probability of not stocking out in replenishment cycle </li></ul><ul><li>SS: Safety inventory </li></ul><ul><li>ROP : Reorder point </li></ul><ul><li>Cv: Coefficient of variance </li></ul>Average Inventory = Q/2 + SS SS = ROP - RL
    151. 151. FORMULAS USED FOR CALCULATING SERVICE LEVELS
    152. 152. Example 11.1&2, 11.4 (Continuous Review Policy) = 8.xx New book <ul><li>11.1 : R = 2,500 /week;  R = 500 </li></ul><ul><li>L = 2 weeks; Q = 10,000; ROP = 6,000 CSL = 90% </li></ul><ul><li>SS = ROP - D L = </li></ul><ul><li>Average Inventory = </li></ul><ul><li>Average Flow Time = </li></ul><ul><li>11.2: Evaluating CSL given a replenishment policy </li></ul><ul><li>CSL = Prob (demand during lead time <= ROP) </li></ul><ul><li>Distribution of demand during lead time of 2 weeks </li></ul><ul><li>Cycle service level, CSL = F( R L + ss, R L ,  L ) = F( ROP , R L ,  L ) </li></ul><ul><li>Excel: NORMDIST ( ROP , R L ,  L ,1) </li></ul><ul><li>X 1 = Xbar + Z  L or ROP = R L + Z  L Calculate the % z represents. Calculate Safety Stock for above </li></ul>Z Chart
    153. 153. Examples of Safety Stock Calculations <ul><li>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 </li></ul>
    154. 154. Factors Affecting Fill Rate <ul><li>Fill Rate: Proportion of customer demand that is satisfied from Inventory. Directly related to CSL </li></ul><ul><li>Safety inventory : Safety inventory is increased by: </li></ul><ul><ul><li>Increasing fill rate (Table 11-1) </li></ul></ul><ul><ul><li>Increasing CSL </li></ul></ul><ul><ul><li>Increasing supplier lead time by factor k – SS increases by factor of SQRT k </li></ul></ul><ul><ul><li>Increasing standard deviation of demand by factor k – SS increases by factor of k </li></ul></ul><ul><li>Lot size : Fill rate increases on increasing the lot size even though cycle service level does not change. </li></ul>Actions: 1. Reduce supplier Lead Time L 2. Reduce underlying uncertainty of demand  R
    155. 155. Evaluating Safety Inventory Given Fill Rate 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 σ of demand
    156. 156. Impact of Supply Uncertainty <ul><li>Considering variation in Demand and in Replenishment Lead time (Ex 11.6) </li></ul><ul><li>D : Average demand per period </li></ul><ul><li> D : Standard deviation of demand per period </li></ul><ul><li>L : Average lead time for replenishment </li></ul><ul><li> s L : Standard deviation of supply lead time </li></ul>Standard Deviation of demand during lead time Mean demand during lead time
    157. 157. Impact of Supply Uncertainty ( ( See Ex. 11.6 & Table 11.2) <ul><li>Ex.11.6: R = 2,500/day;  R = 500; L = 7 days; Q = 10,000; </li></ul><ul><li>CSL = 0.90 (z=1.29); s L = Standard Deviation of lead time=7days What is S.S? </li></ul><ul><li>Large potential benefits of reducing Lead time or lead time variability in reduction of Safety stock </li></ul><ul><li>SS units SS (d) Stnd Dev(  L ) </li></ul><ul><li>Safety inventory when s L = 0 1,695 0.68 1,323 </li></ul><ul><li>Safety inventory when s L = 1 3,625 1.45 2,828 </li></ul><ul><li>Safety inventory when s L = 2 6,628 2.65 5,172 </li></ul><ul><li>Safety inventory when s L = 3 9,760 3.90 7,616 </li></ul><ul><li>Safety inventory when s L = 4 12,927 5.17 10,087 </li></ul><ul><li>Safety inventory when s L = 5 16,109 6.44 12,750 </li></ul><ul><li>Safety inventory when s L = 6 19,298 7.72 16,109 </li></ul><ul><li>Safety inventory when s L = 7 is 22,491 8.99 17,550 </li></ul>
    158. 158. Basic Quick Response Initiatives <ul><li>Reduce information uncertainty in demand </li></ul><ul><li>Reduce replenishment lead time </li></ul><ul><li>Reduce supply uncertainty or replenishment lead time uncertainty </li></ul><ul><li>Increase reorder frequency or go to continuous review </li></ul>
    159. 159. Factors Affecting Value of Aggregation <ul><li>DEMAND CORRELATION – </li></ul><ul><ul><li>AS CORRELATION INCREASES, THE SS BENEFIT OF AGGREGRATION DECREASES </li></ul></ul><ul><ul><li>IF THERE IS LITTLE CORRELATION BETWEEN DEMAND, AGGREGRATION REDUCES STND. DEVN. OF DEMAND AND HENCE SAFETY STOCK (see ex. 11.7, Table 11.3) </li></ul></ul><ul><ul><ul><li>Coefficient Of Variation = Stnd Devn/Mean (uncertainty relative to size of demand) p=0 No Correlation </li></ul></ul></ul><ul><ul><li>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) </li></ul></ul><ul><li>REDUCING SUPPLY VARIATION REDUCES SAFETY STOCK WITHOUT REDUCING CSL </li></ul><ul><li>VALUE OF A PRODUCT </li></ul><ul><ul><li>DIRECTLY DETERMINES THE SAFETY STOCK LEVEL </li></ul></ul>
    160. 160. IMPACT OF AGGREGRATION ON SAFETY STOCK <ul><li>HOW TO REDUCE SS WITHOUT REDUCING CSL? </li></ul><ul><ul><li>AGGREGRATION REDUCES STANDARD DEVIATION OF DEMAND, ONLY IF DEMAND ACROSS AREAS IS NOT CORRELATED, THAT IS EACH AREA IS INDEPENDENT </li></ul></ul><ul><ul><ul><li>See Table 11.4 p323 </li></ul></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>INFORMATION CENTRALIZATION – ORDERS FILLED FROM WAREHOUSE CLOSEST TO CUSTOMER </li></ul></ul><ul><ul><li>SPECIALIZATION BY LOCATION </li></ul></ul><ul><ul><ul><li>LOW DEMAND, SLOW MOVING ITEMS: CENTRALIZED – HIGH COEFFICIENT OF VARIATION </li></ul></ul></ul><ul><ul><ul><li>HIGH DEMAND, FAST MOVING ITEMS: DECENTRALIZED – LOW COEFFICIENT OF VARIATION </li></ul></ul></ul><ul><ul><li>Centralization Disadvantage: </li></ul></ul><ul><ul><ul><li>Increase in Response time; </li></ul></ul></ul><ul><ul><ul><li>Increase in Transport costs </li></ul></ul></ul>
    161. 161. IMPACT OF AGGREGRATION ON SAFETY STOCK <ul><li>HOW TO REDUCE SS WITHOUT REDUCING CSL? </li></ul><ul><ul><li>PRODUCT SUBSTITUTION </li></ul></ul><ul><ul><ul><li>MANUFACTURER DRIVEN – AGGREGATE DEMAND & REDUCE SS; </li></ul></ul></ul><ul><ul><ul><li>IF PRODUCTS STRONGLY CORRELATED, LESS VALUE IN SUBSTITUTION </li></ul></ul></ul><ul><ul><ul><li>CUSTOMER DRIVEN – TWO WAY SUBSTITUTION – ALLOWS REDUCTION IN SS WHILE MAINTAINING HIGH PRODUCT AVAILABILITY </li></ul></ul></ul><ul><ul><ul><li>GREATER THE VARIABILITY AND LESS THE CORRELATION OF DEMAND, THE GREATER THE BENEFIT IN SUBSTITUTION </li></ul></ul></ul><ul><ul><li>COMPONENT COMMONALITY (TABLE 11.5) </li></ul></ul><ul><ul><ul><li>WITHOUT COMMONALITY, UNCERTAINTY OF DEMAND FOR COMPONENTS SAME AS THAT FOR PRODUCT (SEE Ex. 11.9) </li></ul></ul></ul><ul><ul><li>POSTPONMENT </li></ul></ul><ul><ul><ul><li>DELAY DIFFERENTIATION OR CUSTOMIZATION AS CLOSE TO SALE TIME AS POSSIBLE </li></ul></ul></ul><ul><ul><ul><ul><li>COMMON COMPONENTS IN PUSH PHASE </li></ul></ul></ul></ul><ul><ul><ul><ul><li>POWERFUL CONCEPT FOR E-COMMERCE </li></ul></ul></ul></ul>
    162. 162. Example 11.9: Value of Component Commonality Y Axis – SS Quantity; X Axis – No. of common components Without component commonality and postponment, product differentiation Occurs early in the Supply Chain and inventories are disaggregate
    163. 163. ESTIMATING AND MANAGING SS IN PRACTICE <ul><li>ACCOUNT FOR LUMPY SUPPLY CHAIN DEMAND </li></ul><ul><ul><li>CAUSED BY LARGE LOT SIZES & ADDS TO VARIABILITY </li></ul></ul><ul><ul><li>EMPIRICALLY – RAISING SS BY HALF LOT SIZE </li></ul></ul><ul><li>ADJUST INVENTORY POLICY IF DEMAND SEASONAL </li></ul><ul><ul><li>CHANGE BOTH MEAN AND STND DEVN </li></ul></ul><ul><li>USE SIMULATION TO TEST INVENTORY POLICIES </li></ul><ul><ul><li>EXCEL </li></ul></ul><ul><li>START WITH A PILOT </li></ul><ul><li>MONITOR SERVICE LEVELS </li></ul><ul><li>FOCUS ON REDUCING SAFETY STOCK </li></ul><ul><li>PERIODIC REVIEW REPLENISHMENT REQUIRES MORE SAFETY STOCK THAN CONTINUOUS REVIEW POLICIES </li></ul>
    164. 164. Mass Customization I: Customize Services Around Standardized Products 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 DEVELOPMENT PRODUCTION MARKETING DELIVERY
    165. 165. Mass Customization II: Create Customizable Products and Services Deliver standard (but customizable) products or services Market customizable products or services Produce standard (but customizable) products or services Develop customizable products or services DEVELOPMENT PRODUCTION MARKETING DELIVERY
    166. 166. Mass Customization III: Provide Quick Response Throughout Value Chain Reduce Delivery Cycle Times Reduce selection and order processing cycle times Reduce Production cycle time Reduce development cycle time DEVELOPMENT PRODUCTION MARKETING DELIVERY
    167. 167. Mass Customization IV: Provide Point of Delivery Customization 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  ens Warehouse and Restaurants DEVELOPMENT PRODUCTION MARKETING DELIVERY
    168. 168. Mass Customization V: Modularize Components to Customize End Products Deliver customized product Market customized products or services Produce modularized components Develop modularized products  utos DEVELOPMENT PRODUCTION MARKETING DELIVERY
    169. 169. Types of Modularity for Mass Customization Component Sharing Modularity Cut-to-Fit Modularity Bus Modularity Mix Modularity Sectional Modularity
    170. 170. Example of Point of Service Replenishment <ul><li>Safety Stock and Re-order point management in Toyota Another advantage of Toyota’s 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 didn’t 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 company’s 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 Toyota’s 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. </li></ul>
    171. 171. Cautions in Implementing Postponement and Modularity <ul><li>End products must look suitably different to the consumer </li></ul><ul><li>Design and production costs can only be justified over a family of products </li></ul><ul><li>Performance and cost of a product can be optimized by eliminating modularity. Do a small set of products provide most of the sales? </li></ul>
    172. 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 <ul><li>Reduce fixed cost </li></ul><ul><li>Aggregate across products </li></ul><ul><li>Volume discounts </li></ul><ul><li>EDLP </li></ul><ul><li>Promotion on Sell </li></ul><ul><li>thru </li></ul><ul><li>Quick Response measures </li></ul><ul><ul><li>Reduce Info Uncertainty </li></ul></ul><ul><ul><li>Reduce lead time </li></ul></ul><ul><ul><li>Reduce supply uncertaint </li></ul></ul><ul><li>Accurate Response measures </li></ul><ul><ul><li>Aggregation </li></ul></ul><ul><ul><li>Component commonalit and postponement </li></ul></ul>
    173. 173. HOMEWORK <ul><li>Page 336 Q4 and Q5 </li></ul><ul><li>Provide actual examples of the five types of customization </li></ul>
    174. 174. OPTIMUM LEVEL OF PRODUCT AVAILABILITY Exercise: Swimsuit Production Lesson 8 <ul><li>Fashion items have short life cycles, high variety of competitors </li></ul><ul><li>SnowTime Sporting Goods </li></ul><ul><ul><li>New designs are completed </li></ul></ul><ul><ul><li>One production opportunity </li></ul></ul><ul><ul><li>Based on past sales, knowledge of the industry, and economic conditions, the marketing department has a probabilistic forecast </li></ul></ul><ul><ul><li>The forecast averages about 13,000, but there is a chance that demand will be greater or less than this </li></ul></ul><ul><li>Production cost per unit (C): $80 </li></ul><ul><li>Selling price per unit (S): $125 </li></ul><ul><li>Salvage value per unit (V): $20 </li></ul><ul><li>Fixed production cost (F): $100,000 </li></ul><ul><li>Q is production quantity, D demand </li></ul><ul><li>Profit = Revenue - Variable Cost - Fixed Cost + Salvage </li></ul>
    175. 175. Demand Distribution      
    176. 176. Exercise <ul><li>Scenario One: </li></ul><ul><ul><li>Suppose you make 12,000 jackets and demand ends up being 13,000 jackets. </li></ul></ul><ul><ul><li>Profit = 125(12,000) - 80(12,000) - 100,000 = $440,000 </li></ul></ul><ul><li>Scenario Two: </li></ul><ul><ul><li>Suppose you make 12,000 jackets and demand ends up being 11,000 jackets. </li></ul></ul><ul><ul><li>Profit = 125(11,000) - 80(12,000) - 100,000 + 20(1000) = $ 335,000 </li></ul></ul><ul><li>Find order quantity that maximizes weighted average profit. </li></ul><ul><li>Average demand is 13,100 (work out – Σ p.D) </li></ul><ul><li>Question: Will this quantity be less than, equal to, or greater than average demand? </li></ul><ul><li>Look at marginal cost Vs. marginal profit </li></ul><ul><ul><li>if extra jacket sold, profit is 125-80 = 45 </li></ul></ul><ul><ul><li>if not sold, cost is 80-20 = 60 </li></ul></ul><ul><li>So we will make less than average </li></ul>
    177. 177. Profitability Calculations
    178. 178. Profitability scenarios
    179. 179. OPTIMAL LEVEL OF PRODUCT AVAILABILITY <ul><li>FACTORS AFFECTING OPTIMAL PRODUCT AVAILABILITY </li></ul><ul><ul><li>COST OF OVERSTOCKING Co </li></ul></ul><ul><ul><ul><li>PROFIT FROM SALES </li></ul></ul></ul><ul><ul><ul><li>INVENTORY HOLDING COSTS </li></ul></ul></ul><ul><ul><ul><li>OBSELESCENCE – SALVAGE COSTS </li></ul></ul></ul><ul><ul><li>COST OF UNDERSTOCKING Cu </li></ul></ul><ul><ul><ul><li>LOST SALES </li></ul></ul></ul><ul><ul><ul><li>LOST CUSTOMERS </li></ul></ul></ul><ul><li>EXAMPLE OF L.L.BEAN (Table 12.1) </li></ul><ul><ul><li>For all references New Book 12.xx </li></ul></ul>
    180. 180. Parkas at L.L. Bean <ul><li>Cost per parka = $45 </li></ul><ul><li>Sale price per parka = $100 </li></ul><ul><li>Discount price per parka = $50 </li></ul><ul><li>Holding and transportation cost = $10 </li></ul><ul><li>Profit from selling parka = $100-$45 = $55 </li></ul><ul><li>Cost of overstocking = $45+$10-$50 = $5 </li></ul><ul><li>Expected demand = =1026, ordered 1000 parkas CSL51% </li></ul><ul><li>Expected profit from ordering 1000 parkas = $49,900 </li></ul><ul><li>See formula on page 224 </li></ul><ul><ul><li>Expected profit = </li></ul></ul>
    181. 181. Summary <ul><li>Tradeoff between ordering enough to meet demand and ordering too much </li></ul><ul><li>Several quantities have the same average profit </li></ul><ul><li>Average profit does not tell the whole story </li></ul><ul><li>Question: 9000 and 16000 units lead to about the same average profit, so which do we prefer? Work out probabilities of profit and loss </li></ul><ul><li>The optimal order quantity is not necessarily equal to average forecast demand (13,100) </li></ul><ul><li>The optimal quantity depends on the relationship between marginal profit and marginal cost </li></ul><ul><li>As order quantity increases, average profit first increases and then decreases </li></ul><ul><li>As production quantity increases, risk increases. In other words, the probability of large gains and of large losses increases </li></ul>
    182. 182. How much to order? Parkas at L.L. Bean (Table 12.1) The probability that demand is greater than 1100 is 0.29 but the probability that demand is greater than or equal to 1100 is 0.49. O.51 is the probability that the demand is 1000 or less. Thus, 1-0.51 = 0.49 is the probability that the demand is greater than 1000 = probability that demand is greater than or equal to 1100
    183. 183. Parkas at L.L. Bean (Table 12.2) Expected Marginal Contribution of each 100 parkas Fig 9.1
    184. 184. Optimal Order Quantity Optimal Order Quantity = 13 0.917 Prob
    185. 185. Optimal level of service (Eqn. 12.1) <ul><li>p = retail sale price; s = outlet or salvage price; </li></ul><ul><li>c = purchase price; </li></ul><ul><li>C o = cost of overstocking by one unit, C o = c - s </li></ul><ul><li>C u = cost of understocking by one unit, C u = p - c </li></ul><ul><li>CSL * = Optimal SL. Optimal order size O * </li></ul><ul><li>If O * +1, expected marginal benefit from increasing order size by 1 = (1 -CSL * )(p - c ) ( understocking cost x prob of understock ) </li></ul><ul><li>If O * -1, Expected Marginal Cost = CSL * ( c - s ). </li></ul><ul><li>Thus expected marginal contribution of O * to O * +1 </li></ul><ul><li>(1 -CSL * ) C u - CSL *  C o (or optimally) = 0 </li></ul><ul><li>CSL * = prob. (dem. =< O * ) = C u / (C u + C o ) = (p-c) </li></ul><ul><li> (p-s) </li></ul>
    186. 186. Order Quantity for a Single Order (ex 12.1) <ul><li>Salvage value = $80 </li></ul><ul><li>C o = Cost of overstocking </li></ul><ul><li> = c-s = $20 </li></ul><ul><li>C u = Cost of understocking </li></ul><ul><li> = p – c = $150 </li></ul><ul><li>O * = Optimal order size </li></ul>
    187. 187. MANAGERIAL LEVERS TO IMPROVE PROFITABILITY <ul><li>How to Estimate Demand Distribution? </li></ul><ul><ul><li>Historical data: Time series forecasting </li></ul></ul><ul><ul><li>Dependent factors: Regression, causal forecasting </li></ul></ul><ul><ul><li>Expert opinion: Buying committee </li></ul></ul><ul><li>Key: Forecast must include estimated demand and uncertainty (standard deviation) of demand </li></ul>
    188. 188. Levers for Increasing Supply Chain Profitability <ul><li>Increase salvage value (cost of overstock) or decrease margin lost from stockout – backup sourcing; rain checks. </li></ul><ul><li>As C o /C u gets smaller, optimal level of product availability (CSL) increases (see Fig 12.2). Companies with high margin have high cost of understocking and so provide high CSL </li></ul><ul><li>Improved forecasting to lower demand uncertainty (table 12.3) – CSL is constant. Optimum order size decreases and Expected profit increases </li></ul><ul><li>Quick response Reduce replenishment lead time so as to increase number of orders per season (table 12.4, 12.5). With two or more orders: </li></ul><ul><ul><li>Possible to provide same CSL with less inventory </li></ul></ul><ul><ul><li>Average overstock at end of season is less </li></ul></ul><ul><ul><li>Profits higher with second order </li></ul></ul><ul><li>If quick response allows multiple orders in the season, profits increase and overstock quantity reduces (Fig 12.4,12.5) </li></ul>
    189. 189. Levers for Increasing Supply Chain Profitability <ul><li>Postponement of product differentiation </li></ul><ul><ul><li>Better match of supply and demand for products not positively correlated and about the same size </li></ul></ul><ul><ul><li>Postponment may reduce overall profits, if one product contributes to majority of demand (extra cost of later manufacturing) </li></ul></ul><ul><ul><li>Tailored postponement only uncertain part of demand, producing predictable part at lower cost without postponement </li></ul></ul><ul><li>Tailored supply sourcing – focus on two sources </li></ul><ul><ul><li>One source focus on cost; unable to handle uncertainty – predictable portion </li></ul></ul><ul><ul><li>One source focus on flexibility; at a higher cost – unpredictable portion </li></ul></ul>
    190. 190. Tailored Sourcing: Multiple Sourcing Sites
    191. 191. Dual Sourcing Strategies
    192. 192. SUPPLY CHAIN CONTRACTS <ul><li>DOUBLE MARGINALIZATION (SUBOPTIMIZATION) </li></ul><ul><ul><li>BUY BACK (Ex. Mfg cost 10, retailer cost 100, selling 200 – SC profit 190, retailer profit – 100, manuf profit 90). EACH TRY TO MAXIMIZE OWN PROFIT, NOT THE SUPPLY CHAINS) </li></ul></ul><ul><ul><li>RETAILER ORDERS LESS AS THE LOSS FROM UNSOLD PRODUCT HIGH (100). Loss to Supply Chain is 10 only </li></ul></ul><ul><ul><li>MANUFACTURER IN BUYING BACK UNSOLD PRODUCT, INCREASES SALVAGE VALUE, AND INDUCES RETAILER TO ORDER MORE (table 9.70 </li></ul></ul><ul><ul><li>TOTAL SUPPLY CHAIN PROFITS INCREASE </li></ul></ul><ul><li>QUANTITY FLEXIBILITY CONTRACTS </li></ul><ul><ul><li>MANUFACTURER ALLOWS RETAILER TO CHANGE CONTRACTS AFTER CHANGING DEMAND </li></ul></ul><ul><ul><li>INCREASES PROFITABILITY OF ALL AND TOTAL SUPPLY CHAIN </li></ul></ul><ul><li>VMI REPLENISHMENT BY MANUFACTURER (Ex. P&G/WALMART) </li></ul><ul><ul><ul><li>CONTROL OF REPLENISHMENT MOVES TO MANUFACTURER </li></ul></ul></ul><ul><ul><ul><li>CUSTOMER INFORMATION TO MANUFACTURER </li></ul></ul></ul>
    193. 193. SETTING OPTIMAL LEVELS OF PRODUCT AVAILABILITY <ul><li>USE ANALYTICAL FRAMEWORK TO INCREASE PROFITS </li></ul><ul><ul><li>COMPANIES SET TARGETS WITHOUT ANALYSIS </li></ul></ul><ul><li>BEWARE OF PRESET LEVELS OF AVAILABILITY </li></ul><ul><ul><li>OFTEN SET WITHOUT JUSTIFICATION </li></ul></ul><ul><ul><li>WORK ANALYSIS TO MAXIMIZE PROFITS </li></ul></ul><ul><li>USE APPROXIMATE COSTS AS PROFIT MAXIMIZING SOLUTIONS ARE ROBUST </li></ul><ul><li>ESTIMATE A RANGE FOR STOCKING OUT </li></ul><ul><li>ENSURE THAT LEVELS OF PRODUCT AVAILABILITY FIT WITH STRATEGY </li></ul><ul><li>HOME WORK Page 373 Ex. 1 and 3 </li></ul>
    194. 194. CASE STUDY – OPTIMIZED DEMAND PULL <ul><li>HIGHLY VARIABLE, HI TECH, HIGH COST </li></ul><ul><ul><li>12 MONTH ROLLING FORECAST WITH MANUFACTURING LEAD TIME COMMITTED </li></ul></ul><ul><ul><li>CHANGE OUTSIDE LEAD TIME LIMITED TO +/- 20% </li></ul></ul><ul><ul><li>TWO YEAR FORECAST ON YEAR FORECAST COMMITTED TO, NOT MONTHLY QUANTITIES </li></ul></ul><ul><ul><li>INCENTIVES FOR INCREASED FORECAST, DISCOUNTS FOR REDUCED FORECASTS </li></ul></ul><ul><ul><li>REPLENISHMENT RATE DRIVEN BY MAX/MIN ON HAND LEVELS </li></ul></ul><ul><ul><li>WEEKLY ON HAND </li></ul></ul><ul><ul><li>MONTHLY 12 MONTH ROLLING FORECAST </li></ul></ul>
    195. 195. SOURCING and PROCUREMENT ( CH 14 ) Lesson 9 <ul><li>SOURCING </li></ul><ul><ul><li>Entire set of business processes to purchase goods and services </li></ul></ul><ul><ul><li>Includes: </li></ul></ul><ul><ul><ul><li>Selection of supplies </li></ul></ul></ul><ul><ul><ul><li>Design of supplier contracts </li></ul></ul></ul><ul><ul><ul><li>Product design collaboration </li></ul></ul></ul><ul><ul><ul><li>Procurement of material </li></ul></ul></ul><ul><ul><ul><li>Evaluation of Supplier performance </li></ul></ul></ul><ul><li>PROCUREMENT </li></ul><ul><ul><li>Process of purchasing materials, products and services </li></ul></ul><ul><ul><li>COGS 50% or more of product cost </li></ul></ul><ul><ul><li>Even higher % with outsourcing </li></ul></ul>
    196. 196. EFFECTIVE SOURCING <ul><li>ECONOMIES OF SCALE – ORDERS AGGREGRATED </li></ul><ul><li>MORE EFFICIENT PROCUREMENT TRANSACTIONS (LESS) REDUCES OVERALL COST </li></ul><ul><li>DESIGN COLLABORATION </li></ul><ul><li>IMPROVE FORECASTING </li></ul><ul><li>CONTRACTS FOR SHARING RISK </li></ul><ul><li>LOWER PURCHASING PRICE </li></ul>
    197. 197. IN HOUSE OR OUTSOURCE <ul><li>HOW DO THIRD PARTIES INCREASE SUPPLY CHAIN SURPLUS </li></ul><ul><ul><li>CAPACITY AGGREGRATION </li></ul></ul><ul><ul><li>INVENTORY AGGREGRATION </li></ul></ul><ul><ul><li>TRANSPORTATION AGGREGRATION </li></ul></ul><ul><ul><li>WAREHOUSING AGGREGRATION </li></ul></ul><ul><ul><li>PROCUREMENT AGGREGRATION </li></ul></ul><ul><ul><li>INFORMATION AGGREGRATION </li></ul></ul><ul><ul><li>RECEIVABLE AGGREGRATION </li></ul></ul><ul><ul><li>RELATIONSHIP AGGREGRATION </li></ul></ul><ul><ul><li>LOWER COSTS AND HIGHER QUALITY (Table 14.1) </li></ul></ul>
    198. 198. RISKS OF USING A THIRD PARTY <ul><li>THE PROCESS IS BROKEN – lack control </li></ul><ul><li>UNDERESTIMATE COST OF COORDINATION </li></ul><ul><li>REDUCED SUPPLIER/CUSTOMER CONTACT </li></ul><ul><li>LOSS OF INTERNAL CAPABILITY AND GROWTH IN THIRD PARTY POWER </li></ul><ul><li>LEAKAGE OF SENSITIVE DATA AND INFORMATION </li></ul><ul><li>INEFFECTIVE CONTRACTS </li></ul><ul><li>THIRD AND FOURTH PARTY PROVIDERS (Table 14-2) </li></ul><ul><ul><li>Transportation </li></ul></ul><ul><ul><li>Warehousing </li></ul></ul><ul><ul><li>Information technology </li></ul></ul><ul><ul><li>Reverse Logistics </li></ul></ul><ul><ul><li>International </li></ul></ul><ul><ul><li>Special skills/handling </li></ul></ul>
    199. 199. SUPPLIER SCORING AND ASSESSMENT MUST BE BASED ON IMPACT ON TOTAL COST (Tab14-3) <ul><li>IN ADDITION TO PRICE </li></ul><ul><li>REPLENISHMENT LEAD TIME; </li></ul><ul><li>ON TIME PERFORMANCE </li></ul><ul><li>SUPPLY FLEXIBILITY </li></ul><ul><li>DELIVERY FREQUENCY/ MINIMUM LOT SIZE </li></ul><ul><li>SUPPLY QUALITY </li></ul><ul><li>INBOUND TRANSPORTATION COSTS </li></ul><ul><li>INFORMATION COORDINATION CAPABILITY </li></ul><ul><li>DESIGN COST REDUCTION </li></ul><ul><li>EXCHANGE RATES, TAXES AND DUTIES </li></ul><ul><li>SUPPLIER VISIBILITY </li></ul><ul><li>RESPONSIVENESS </li></ul>
    200. 200. SOURCING DECISIONS <ul><li>SUPPLIER PERFORMANCE BASED ON IMPACT ON TOTAL COST (see Table 14.1) </li></ul><ul><ul><li>Ex. Green Thumb gets bearings at $1.00 in lots of 2,000 with a lead time of 2 weeks and a stnd devn of 1 week. New supplier offers $0.97 with lot size of 8000, a lead time of 6 weeks and stnd devn of 4 weeks. Given 1000 bearings needed per week with a stnd devn of 300 and that holding costs are 25% and CSL is 95% which supplier should be selected </li></ul></ul>
    201. 201. SOURCING DECISIONS <ul><li>CONTRACTS </li></ul><ul><ul><li>BUYBACK OR RETURN CONTRACTS </li></ul></ul><ul><ul><ul><li>LOWERS COST OF OVERSTOCKING </li></ul></ul></ul><ul><ul><li>REVENUE SHARING CONTRACTS </li></ul></ul><ul><ul><ul><li>REDUCES COST PER UNIT TO RETAILER & COST OF OVERSTOCKING </li></ul></ul></ul><ul><ul><li>QUANTITY FLEXIBILITY CONTRACTS – BEST </li></ul></ul><ul><ul><ul><li>RETAILER CAN MODIFY ORDER CLOSER TO POINT OF SALE </li></ul></ul></ul><ul><ul><li>CONTRACTS TO INDUCE PERFORMANCE IMPROVEMENT </li></ul></ul><ul><ul><ul><li>SHARED SAVINGS CONTRACT </li></ul></ul></ul><ul><li>DESIGN COLLABORATION </li></ul><ul><ul><li>HELPS REDUCE COST, IMPROVE QUALITY AND TIME TO MARKET </li></ul></ul><ul><li>PROCUREMENT PROCESS </li></ul><ul><ul><li>FOCUS ON IMPROVING DIRECT MATERIALS COORDINATION AND VISIBILITY WITH SUPPLIER </li></ul></ul><ul><ul><li>LOOKING SEPARATELY AT DIRECT AND INDIRECT MATERIAL COSTS (14-7) </li></ul></ul><ul><ul><li>CLASSIFYING ITEMS PER COST AND CRITICALITY (FIG 14.2) </li></ul></ul><ul><ul><li>FOCUS ON IMPROVING INDIRECT MATERIALS BY DECREASING TRANSACTION COST OF ORDER </li></ul></ul><ul><ul><li>BOTH SHOULD CONSOLIDATE ORDERS FOR ECONOMIES OF SCALE </li></ul></ul>
    202. 202. SOURCING DECISIONS <ul><li>SOURCING DECISIONS IN PRACTICE </li></ul><ul><ul><li>USE MULTIFUNCTIONAL TEAMS </li></ul></ul><ul><ul><li>ENSURE APPROPRIATE COORDINATION ACROSS REGIONS AND BUSINESS UNITS </li></ul></ul><ul><ul><li>ALWAYS EVALUATE TOTAL COST OF OWNERSHIP </li></ul></ul><ul><ul><li>BUILD LONG TERM RELATIONSHIP WITH KEY SUPPLIERS </li></ul></ul>
    203. 203. Make or Buy Decision <ul><ul><li>Cost </li></ul></ul><ul><ul><li>Time </li></ul></ul><ul><ul><li>Capacity Utilization </li></ul></ul><ul><ul><li>Control of Production/Quality </li></ul></ul><ul><ul><li>Design Secrecy </li></ul></ul><ul><ul><li>Supplier Reliability and Technical Expertise </li></ul></ul><ul><ul><li>Volume </li></ul></ul><ul><ul><li>Workforce Stability </li></ul></ul>
    204. 204. Make-or-Buy Decision <ul><li>Original Data: </li></ul><ul><li>Produce 10,000 units </li></ul><ul><ul><li>Cost Factors </li></ul></ul><ul><ul><ul><li>Raw material $9,000 </li></ul></ul></ul><ul><ul><ul><li>Direct labor $12,000 </li></ul></ul></ul><ul><ul><ul><li>Variable factory overhead $5,000 </li></ul></ul></ul><ul><ul><ul><li>Fixed factory overhead $24,000 </li></ul></ul></ul><ul><ul><li>Total Cost to Make $50,000 </li></ul></ul><ul><ul><li>Make cost per unit = $50,000/10,000 = $5.00/unit </li></ul></ul><ul><ul><li>Purchase proposal = $4.50/unit </li></ul></ul><ul><ul><li>Should the product be bought? </li></ul></ul><ul><li>Factors to Consider: </li></ul><ul><ul><li>1. You only avoid 80% of the variable factory overhead cost </li></ul></ul><ul><ul><li>2. And only avoid 10% of the fixed factory overhead cost </li></ul></ul>
    205. 205. Cost Avoidance Analysis (Solution) <ul><ul><li>Solution </li></ul></ul><ul><ul><li>Cost avoided by purchasing </li></ul></ul><ul><ul><li>Total cost to make $50,000 </li></ul></ul><ul><ul><ul><li>Less cost avoided: </li></ul></ul></ul><ul><ul><ul><li>Raw material $9,000 </li></ul></ul></ul><ul><ul><ul><li>Direct labor $12,000 </li></ul></ul></ul><ul><ul><ul><li>Variable factory overhead ($5,000@0.80) $4,000 </li></ul></ul></ul><ul><ul><ul><li>Fixed factory overhead ($24,000@0.10) $2,400 </li></ul></ul></ul><ul><ul><li>Total Avoided Cost $27,400 </li></ul></ul><ul><ul><li>Analysis </li></ul></ul><ul><ul><li>Cost not avoided $22,600 </li></ul></ul><ul><ul><li>Plus cost to purchase $45,000 </li></ul></ul><ul><ul><li>Total cost to purchase $67,600 </li></ul></ul><ul><ul><ul><ul><li>Compare to cost to make $50,000 </li></ul></ul></ul></ul><ul><ul><li>Increase in cost to purchase $17,600 </li></ul></ul><ul><ul><li>Actual cost per purchased item 67500/1000 = $6.75/unit ! </li></ul></ul>
    206. 206. SUPPLIER PARTNERSHIPS <ul><li>QUALIFICATION AND SELECTION </li></ul><ul><ul><li>RATIONALIZATION OF SUPPLIER BASE </li></ul></ul><ul><li>PARTNERSHIP </li></ul><ul><ul><li>WIN-WIN AND TRUST </li></ul></ul><ul><ul><li>SHARING OF RISK AND COMMITMENT </li></ul></ul><ul><ul><li>PRICE REDUCTIONS AND INCREASES BASED ON FORECAST </li></ul></ul><ul><ul><li>RATE REPLENISHMENT </li></ul></ul><ul><li>MEAUREMENT AND FEEDBACK </li></ul><ul><ul><li>QUALITY, DELIVERY, RESPONSIVENESS </li></ul></ul><ul><ul><li>QUARTERLY FEEDBACK </li></ul></ul><ul><ul><li>IMPLICATIONS </li></ul></ul>
    207. 207. HOMEWORK <ul><li>Exercises 1 & 2 </li></ul>
    208. 208. MANAGING TRANSPORTATION IN A SUPPLY CHAIN (Chap 13) – Lesson 10 <ul><li>Key modes of transport and major issues </li></ul><ul><li>Transportation System Design </li></ul><ul><li>Tradeoffs in transportation design – costs vs. responsiveness </li></ul><ul><ul><li>Transportation and inventory: Choice of mode </li></ul></ul><ul><ul><li>Transportation and inven
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