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How to Coordinate The Uncoordinated Supply Chain Case Study Approach

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  • Where all values taken from previous equations
  • Transcript

    • 1. How to coordinate the uncoordinated Supply Chain? Case study approach Abhijeet Ghadge M.Tech., IIT Kharapur INDIA
    • 2. Co-ordination In Supply Chain
      • Coordination in Supply Chain refers to Coordination of information, materials and financial flow between organizations in supply chain.
      • Brings many organizations as an united team with well established communication channels and optimized resource allocation.
    • 3. Why Supply Chain Suffers?
      • When each member of supply chain tries to maximize their own profit.
      • When each member or group of supply chain tries to optimize individually instead of coordinating their efforts.
    • 4. Why Coordination is Important in SCM?
      • Communication and Coordination among members of a supply chain enhances its effectiveness which lead to the benefit of whole supply chain.
      • For success in the global marketplace requires whole supply chains to compete against other supply chains.
    • 5. Kind of coordination involve in SC
      • Horizontal Coordination
        • Coordination among entities involve at same level of Supply Chain.
        • Example: Coordination between supplier to supplier or within the firm.
      • Vertical Coordination
        • Coordination among entities involve at different levels of Supply Chain.
        • Example: Coordination between supplier to retailer or distributor to retailer
    • 6. Solving SCM problems through coordination
      • Location Decision of Franchisees of One Organization
      • Warehouse Decision for Organization
      • Demand Forecasting in Supply Chain
      • Product Pricing and Marginal cost Problem between Suppliers and Retailers
      • Identifying right sourcing contract for products
    • 7. 1. Location Decision of Franchisees of One Organization
    • 8. Location Decision of Franchisees of One Organization
      • A franchise has multiple outlet to serve customers, spread out over a town, a city or country.
      • Problem for franchise is, where they have to locate their franchisees to get maximum profit in Supply Chain.
      • In two ways they can select location
        • Two or more Franchisees whose location are coordinated by Franchisor.
        • Two or more Franchisees that control their own location.
    • 9. Example: Location Decision of Franchisees
      • Isaac’s Ice Cream had been selling ice-creams in the city, now Isaac wanted to expand his market to reach summertime tourist by selling his ice-creams through small-carts along the boardwalk on 4 mile beach.
      • Isaac company decided to open two franchisees on the beach in 4 mile boardwalk.
    • 10. Example: Location Decision of Franchisees
      • Now Isaac company has two option to establish these franchisees;
        • Two Franchisees whose locations are coordinated by Isaac company (Franchisor).
        • Two Franchisees that control their own locations.
    • 11. Example: Location Decision of Franchisees
      • Suppose that a franchisor wishes to open two ice cream parlor along a stretch of road 4-mile long.
      • Potential customers cluster with mile marker [MM] 0,1,2,3 & 4 and each cluster has n number of customer.
      • Customer demand is sensitive primarily to distance traveled by customer.
    • 12. Example: Location Decision of Franchisees MM 00 n customer MM 01 n customer MM 02 n customer MM 04 n customer MM 03 n customer 4 Mile Beach with n customers on each clusters 1 Mile 2 Mile 3 Mile 4 Mile Franchisee 1 Franchisee 1 Case 1 : Franchisor choosing location for both Franchisees Case 2: Two Franchisees that control their own locations Franchisee 1 Franchisee 2
    • 13. Two Franchisees whose locations are coordinated by Franchisor
      • If the franchisor can locate these franchisees anywhere on the 4-mile of the road, the franchisor will try to maximize total demand of supply chain.
      • Demand for franchise will be maximized when the franchise 1(F1) is located at MM1 and franchise 2(F2) is located at MM3.
    • 14. Two Franchisees whose locations are coordinated by Franchisor
      • Total demand depends on distance traveled by customer, hence, Demand D given as;
        • For Franchise 1 demand D 1
    • 15. Two Franchisees whose locations are coordinated by Franchisor
        • For Franchise 2 demand D 2
      • Total demand for Supply Chain;
    • 16. Two Franchisees that control their own locations
      • In this case, both franchisee try to maximize their own profit and demand, knowing that the other franchisee exists and reacting accordingly.
      • In this case best location for each one is MM2 and if both franchisees chooses MM2 then;
      • Total demand D;
    • 17. 2. Warehouse Decision for Organization
    • 18. Warehouse Decision for Organization
      • The warehouse is a point in the logistics system where a firm stores or hold raw materials, semi finished goods or finished goods.
      • The firms can use distributed warehousing or centralized warehousing for storage system.
    • 19. Example: Warehouse Decision for Organization
      • Isaac’s Ice Cream has grown and now selling their products over the other state through 200 retail-outlets, which are equally distributed between these two states.
      • In first state, Isaac company leased warehouse space near each shop.
      • In second state, Isaac company tried storing goods for all 100 shops in that state at a central location.
    • 20. Example: Warehouse Decision for Organization
      • In second state, company pays only for storage space and ordering and receiving costs.
      • Firm has always carried safety stock to protect against unusual high demand.
      • In centralized warehousing, two benefits are involved;
            • Economies of scale in setup costs and holding costs
            • Risk pooling in stochastic demand environment
    • 21. Economic Order Quantity Costs
      • Benefits of centralized warehousing in terms of economies-of-scale given by EOQ,
      • For distributed warehousing;
    • 22. Economic Order Quantity Costs
      • Benefits of centralized warehousing in terms of economies-of-scale given by EOQ,
      • For Centralized Warehousing
      In this condition supplier combine the whole demand instead of single client demand.
    • 23. Economic Order Quantity Costs
      • The saving percent for centralized warehousing with respect to distributed warehousing;
      EOQ of Distributed SC EOQ of Coordinated SC
    • 24. Numerical Example: Economic Order Quantity Costs
      • With regard to EOQ costs, Saving %= [1-( √N)/N]x100
      Solving as Saving %=(1- √N/N)*100 =(1- √7/7)*100 =(1-0.3779)*100 =62.20% Number of Clients Cost Saving % 2 29.29 3 42.26 4 50.00 5 55.28 6 59.18 7 62.20 8 64.64 9 66.67 10 68.38 Number of Clients Cost Saving % 11 69.85 12 71.13 20 77.64 25 80.00 40 84.42 50 85.86 100 90.00 1000 96.84 2500 98.00
    • 25. Risk pooling benefits in Centralized Warehousing: Newsvendor Environment
      • Suppose that i th firm choosing its optimal order quantity has expected overage and underage costs equal to K σ i .
      • Where σ i is firms i’s standard deviation of demand
      • And K is constant.
      • For distributed SC
      • Each client has same overage and underage cost per unit, but with normal probability demand distribution with mean µ and variance σ 2 ;
      • For N client overage and underage cost = NK σ
    • 26. Risk pooling benefits in Centralized Warehousing: Newsvendor Environment
      • For Centralized SC
      • If supplier combines the demands of its all clients N,
      • Normal probability demand distribution with mean Nµ and variance N σ 2 ,
      • For N client overage and underage cost ,
    • 27. Risk pooling benefits in Centralized Warehousing: Safety Stock & Service Level
      • The safety stock equals to z σ , where z represents the number of standard deviation over the mean to achieve a desired cycle service level,
      • In distributed warehousing system,
      • Safety Stock Level for Supply Chain = z σ N
      • In centralized warehousing system,
      • Supplier combines the demand for all clients
      • Safety Stock Level for Supply Chain = z σ√ N
    • 28. Risk pooling benefits in Centralized Warehousing: Safety Stock & Service Level
      • Saving Cost % for it coordinated SC,
      • Service Levels can improve in centralized warehousing system by improving z value in centralized warehousing;
      Standard deviation in distributed SC Standard deviation in coordinated SC
    • 29. Numerical Example: Cycle Service Level Z new Service levels from Z table Number of Clients 70.00% Z old = 0.5244 80.00% Z old =0.8416 90.00% Z old =1.2816 2 77.08% 88.30% 96.50% 3 81.81% 92.75% 98.68% 4 85.29% 95.38% 99.48% 5 87.95% 97.01% 99.79% 6 90.05% 98.04% 99.92% 7 91.73% 98.70% 99.97% 8 93.10% 99.14% 99.99% 9 94.22% 99.42% 99.99% 10 95.14% 99.61% 100.00% 15 97.51% 99.94% 100.00% 25 99.56% 100.00% 100.00% 50 99.99% 100.00% 100.00% 100 100.00% 100.00% 100.00%
    • 30. 3. Demand Forecasting in Supply Chain
    • 31. Coordinated Demand Forecasting
      • Demand of products varies from downstream to upstream in supply chain due to bullwhip effect in supply chain.
      • As demand of products varies in supply chain, So forecasting of demand of product also varies from downstream to upstream.
      • Due to lack of communication between retailers, distributor, wholesaler and supplier demand forecasting may suffer in supply chain.
    • 32. Example: Coordinated Demand Forecasting Wholesaler and Retailer work individually without sharing any information Table 1 Next period Forecast=Current consumer’s Demand
    • 33. Example: Coordinated Demand Forecasting Wholesaler and Retailer sharing consumer’s demand information Table 2
    • 34. Example: Coordinated Demand Forecasting
      • Equations for Table 1;
      • For Retailer,
      • Next period forecast= Consumer current demand
      • C5 = B5
      • * On-hand Inventory =
      • Max[( Previous On-hand Inventory + Previous In Transit Inventory – Previous Back order – Current Consumer demand),0]
      • D5= MAX(D4 + G4 – E4 – B5, 0)
    • 35.
      • * Back Order =
      • Max[( Previous Backorder + Current Consumer demand – Previous On-hand Inventory – Previous In Transit Inventory), 0]
      • E5 = MAX( E4 + B5 – D4 – G4, 0)
      • * Order Placed by Retailer =
      • Max[( Next Period forecast – (On-hand Inventory + wholesaler’s Previous Backorder – Retailer’s Previous Backorder)), 0]
      • F5 = MAX ( C5 – (D5 + J4 – E5), 0)
      Example: Coordinated Demand Forecasting
    • 36.
      • * In Transit Inventory for Retailer =
      • Min[( Order Placed by Retailer + Wholesaler’s Previous Backorder), (Wholesaler’s On-hand Inventory + wholesaler’s In Transit Inventory)]
      • G5 = MIN (F5 + J4 , I4 + L4)
      • Equations for Table 1;
      • For Wholesaler;
      • * Next Forecast = Order Placed by Retailer
      • H5 = B5
      Example: Coordinated Demand Forecasting
    • 37.
      • * Wholesaler’s On-hand Inventory =
      • Max[( Previous On-hand Inventory + Previous In Transit Inventory – Previous Backorder – Order Placed by Retailer ) , 0]
      • I5 = MAX ( I4 + L4 – J4 – F5 , 0 )
      • * Wholesaler’s Backorder =
      • Max[( Wholesaler’s Previous Backorder + Order Placed by Retailer - Previous Wholesaler’s On-hand Inventory – Previous Wholesaler’s In Transit Inventory) , 0]
      • J5 = MAX ( J4 + F5 – I4 – L4 , 0 )
      Example: Coordinated Demand Forecasting
    • 38.
      • * Order Placed by Wholesaler =
      • Max[( Next Period forecast – (Wholesaler’s Current On-hand Inventory – Current Backorder for Wholesaler) , 0]
      • K5 = MAX ( H5 – (I5 – J5) , 0 )
      • For Table 2,
      • Everything will remain same except Next period forecast of wholesaler.
      • Next Period forecast for wholesaler = Current Consumer demand
      • H5 = B5
      Example: Coordinated Demand Forecasting
    • 39. Example: Coordinated Demand Forecasting
      • From table 1, wholesaler’s forecast equal to the order received from retailer in current period.
      • And therefore wholesaler’s on-hand inventory is very high due to low information sharing between them.
      • From table 2, retailer and wholesaler are sharing the information of customer demand.
    • 40.
      • Therefore wholesaler’s forecasting is equal to retailer’s forecasting.
      • When demand information is shared, the wholesaler’s total on-hand inventory held over 20 periods is 42% smaller.
      • In the uncoordinated case wholesaler overreacting to the retailer’s catch-up order and assuming that consumer demand will be larger in future.
      Example: Coordinated Demand Forecasting
    • 41. 4. Product Pricing and Marginal cost Problem between Suppliers and Retailers
    • 42. Coordinated Pricing
      • Pricing of products is important factor for demand and demand vary according to pricing.
      • The Supply Chain loses money when the firms do not coordinate their pricing.
      • In traditional way, supplier first set the wholesale price and the retailer react accordingly and set his own price according to his marginal cost.
    • 43. Coordinated Pricing
      • In pricing, can explain by taking two cases;
        • Case 1: A System with One Retailer and One Supplier
        • Case 2; A System with One Retailer and N-1 Supplier
      • Suppose
              • P = Retail Price of Product
              • Q = Quantity Sold
    • 44. Case 1: A System with One Retailer and One Supplier
      • Let Marginal cost for supplier and retailer equal to $90 and $10 respectively.
      • Total Revenue for Retailer = PxQ
      • Marginal Revenue for Retailer is the derivative of total revenue (eq.1) with respect to Q;
    • 45. Case 1: A System with One Retailer and One Supplier
      • Taking Retailer and supplier as a one firm.
      • Total Marginal Cost for Supply Chain=$90+$10
      • =$100
      • Optimal quantity Q * given as;
      • Total Channel profits = Q(P-C) ……..(7)
      • = 200[500-($90+$10)]=$80,000
      • Where C = Supply Chain Marginal Costs
    • 46. Case 1: A System with One Retailer and One Supplier
      • Taking Retailer and supplier as two individual part of Supply chain.
      • From eq.6, wholesaler know that Retailer will set marginal cost according to wholesaler’s price charged.
      • So, 900-4Q=10 + W
      • Where W = Wholesale price charged
      • Therefore demand curve for Supplier;
      • W = 890 – 4Q ……(8)
      • Therefore supplier’s total revenue W x Q = 890Q-4Q 2
    • 47.
      • Marginal Costs = 890 – 8Q ……(9)
      • From this equation;
      • 90 = 890 – 8Q
      • (As marginal cost for supplier is $90)
      • Q * = 100 Unit
      • W * = 890 – 4 x 100 (From Equation 8)
      • W * = $490
      • Total revenue of Supplier = 100[$490 - $90] = $40,000
      • (From eq. 7)
      Case 1: A System with One Retailer and One Supplier
    • 48. Case 1: A System with One Retailer and One Supplier
      • Retailer also will sell same quantity as supplier’s.
      • Retail Price P = 900 – 2 x 100
      • Retail Price P * = $700
      • (From equation (4))
      • Total revenue for Retailer = 100[$700-($10+$490)]
      • = $20,000
      • Total Channel Profit = $40,000 + $ 20,000
      • = $ 60,000
      • Which is 33% lesser than coordinated pricing, Cooperative optimization produces more than independent optimization would produce.
    • 49. Case 2: A System with One Retailer and N-1 Supplier
      • Now in this case, One Retailer and N-1 Suppliers are involve.
      • In this, supply chain consisting of one retailer, and retailer’s supplier and retailer’s supplier’s supplier and so on.
      • In this case Retailer’s linear demand curve given as;
      • Where ( a, b>0 )
    • 50. Case 2: A System with One Retailer and N-1 Supplier
      • Now let represent the system profit under coordination pricing and represent the system profit under uncoordinated pricing.
      • Let C i be the marginal cost of firm i (i=1,2,3……N) and where i = 1 denotes the retailer, i = 2 denotes the retailer’s supplier and i = 3 denotes the retailer's supplier’s supplier.
    • 51. Case 2: A System with One Retailer and N-1 Supplier
      • denote the price charged by firm i.
      • is a decision variable and represent the quantity sold to the final customer.
      • represent the optimal quantity for profit maximization .
    • 52. Case 2: A System with One Retailer and N-1 Supplier
      • For Coordinated Supply Chain
      • If there is coordination among the N firms, all the N firms are considered as one organization,
      • Thus Marginal revenue;
      • and Marginal Cost given as;
      • Retail Price given as;
    • 53. Case 2: A System with One Retailer and N-1 Supplier
      • For Coordinated System, Value of eq. (12) putting in eq. (10);
      • So, total Profit given as;
    • 54. Case 2: A System with One Retailer and N-1 Supplier
      • From equation 13 and 14;
      • Total profit in coordinated Supply Chain;
    • 55. Case 2: A System with One Retailer and N-1 Supplier
      • For Uncoordinated Supply Chain
      • If there is no coordination among the N firms,
      • From eq. (11);
      Price Set by m th Firm
    • 56. Case 2: A System with One Retailer and N-1 Supplier
      • Putting m=N+1;
      System contain One Retailer and N-1 Suppliers therefore P N+1 =0
    • 57. Case 2: A System with One Retailer and N-1 Supplier
      • The Profit of Firm m equals;
      • Putting all values;
      P m+1 = P m P m+1
    • 58. Case 2: A System with One Retailer and N-1 Supplier
      • From above equations;
    • 59. Case 2: A System with One Retailer and N-1 Supplier
      • Putting Value of from equation (17);
      • Profit For firm ‘m’;
      Multiplying by 4 in numerator & denominator
    • 60.
      • Similarly total profit for Supply Chain;
      • Putting values of these profits;
      Case 2: A System with One Retailer and N-1 Supplier
    • 61. Case 2: A System with One Retailer and N-1 Supplier
      • From eq.(18) & (19), sum series will become geometric series and after summing this series by geometric sum;
      • System Profit Ratio in Coordinated SC vs. Uncoordinated SC, from eq. (15) & (20);
    • 62. 5. Identifying right sourcing contract for products (brief overview of different contracts)
    • 63. Contracts ..a powerful tool
        • A powerful tool in Outsourcing/Procurement to achieve ‘global Optimization’.
        • A tool to better manage trade off between cost and risk.
        • Motivates supply chain parties to reveal their true forecast of customer demand.
        • Encourages to reduce the “Bullwhip effect”.
        • Increases in Administrative cost for maintaining the Contract terms and Conditions.
    • 64. Factors in selecting and negotiating the contract type
      • Price competition
      • Price analysis
      • Type and complexity of the requirement
      • Urgency of the requirement
      • Period of performance or length of production run
      • Contractor’s technical capability and financial responsibility
      • Concurrent contracts
    • 65. Sourcing Contracts in Supply Chain
      • Buyback or Return contract
      • Quantity flexibility contract
      • Revenue sharing Contract
      • There are several other contracts like….
      • Cost sharing contract
      • Portfolio contract
      • Many more…
    • 66. Buyback Contract
      • A manufacturer specifies a wholesale price and a buyback price at which the retailer can return any unsold items at the end of the season/period.
      • Results in an increase in the salvage value for the retailer, which induces the retailer to order a larger quantity
      • The manufacturer is willing to take on some of the cost of overstocking because the supply chain will end up selling more on average.
      • Example :- fashion garments
    • 67. Major results of Buyback Contracts
      • Manufacturer profits and overall supply chain profits increases
      • Counters Double marginalization by lowering the cost of Overstocking .
      • Leads to lower Retailer’s effort in selling in case of Overstocking.
      • Increased Information distortion.
    • 68. Quantity Flexibility (QF) Contract
      • Manufacturer allows retailer to change order quantity after observing demand
      • No returns are required unlike Buy back
      • The manufacturer bears some of the risk of excess inventory
      • Retailer commits to order the set minimum quantity
      • Example :- Electronic and computer Industry
    • 69. Major results of QF Contract
      • higher manufacturer and supply chain profits
      • Increases average amount of Retailers purchase
      • Manufacturer has to bears risk of maintaining excess Inventory.
      • More effective when cost of returns is high.
    • 70. Revenue-Sharing Contract
      • Manufacturer charges Retailer low wholesale price and shares a fraction of revenue generated by the Retailer.
      • There are no returns allowed unlike Buyback contract
      • lower wholesale price decreases cost to Retailer in case of Overstock
      • Retailer increase the level of product availability
      • Example :-Entertainment/music Industry
    • 71. Major results of RS Contract
      • higher supply chain profits
      • Increases average amount of Retailers purchase
      • Manufacturer doesn’t have to bears risk of maintaining excess Inventory.
      • More effective when cost of returns is high.
      • Increased Information distortion.
    • 72. Cost sharing contract
      • Manufacturer and Distributor share part of Production cost
      • Manufacturer gets incentive/share to produce more units
      • Distributors loss due to sharing is compensated by discount on wholesale price.
      • Example :- Core competency manufacturing components
    • 73. Portfolio contract
      • Retailer signs multiple contracts in order to optimize expected profit and reduce risk.
      • It can be combination of any two or more contracts (discussed earlier) based on level of flexibility of contract.
      • Example :-Commodity products with pool of suppliers.
    • 74. Summary
      • In supply chain management, communication and coordination can greatly enhance the effectiveness of Supply Chain.
      • Through coordination we can improve total profit of supply chain management, inventory control, pricing control and demand forecasting.
      • In SCM, the actions of rational managers of firms
      • independently create natural inefficiencies.
    • 75.
      • As with any group of entities, when all member
      • effectively integrated their efforts, synergies may emerge and SC profit also increase.
      • Sourcing contracts allows sharing of risks, increasing supply chain Profit .
      • Coordination in SCM helps to reduce uncertainty in market through proper Information sharing.
    • 76.
      • Questions ??
      • THANK YOU…