Notes: Traditionally logistics and supply chain management has been measured in terms transportation and inventory costs and the administration required to manage both. Traditionally firms would have an inventory manager and a transportation manager. This view is very narrow and causes significant problems in the proper functioning of the supply chain.
Notes: Key message here is that logistics costs are a significant fraction of the total value of a product. The problem here is that this a purely cost based view of the supply chain and drives a firm to simply reducing logistics costs. This is an incomplete picture. Manuf. Cost Marketing cost R&D Logistics Profits Pharma 15% 32% 15% 35% Consumable 48% 21% 27% 4% Computer 35% 25% 25% 15%
Material not available.WHY? Length of chain, quality, price Too little or too little material available Too many or two few customers Breakdowns There is a limit to the profit that can be extracted from the chain. Must be shared
SIMPLE MODEL: Understanding of the limit to total surplus or profits in a Supply Chain. The Supply Chain surplus (Total Revenue – Total Costs) is only so big. Must support all A cliché but a neglected fact. Stronger links are continuing to bully weaker links and weaker links are trying to deceive stronger links! Why?
The design of a supply chain architecture involves making four strategic decisions Market reach defines the geographical boundaries of the enterprise customer base The direct vs. indirect vs. virtual channel decision impacts responsiveness, flexibility, inventory, and cost structure The make vs. buy decision impacts flexibility, inventory, cost structure, and time-to-market The sole source vs. single source, vs. multi-sourced decision determines the continuity of supply risk for the enterprise
The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage. One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done. This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner.
In this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes. They key difference is the uncertainty during the two phases. Give examples at Amazon and Borders to illustrate the two views
Homework End of Lesson 1
Lesson 2 Supply Chain performance – Strategic fit and scope Competitive strategy – how a company will satisfy customer needs; how adds value; how differentiates itself
Implied Demand Uncertainty – Uncertainity over and above the normal customer demand; due to the variability of the supply chain process Competitive strategy and functional strategies must be consistent and functional strategies must support each other and overall strategy Strategic Fit by – Understanding 1) The customer 2) The Supply Chain 3) Achieving strategic fit
Products with high demand uncertainty associated with: Less mature and less direct competition – more margin Forecasting less accurate Lead time dynamic – high oversupply, high stockout Mark downs high
Example Dell: Somewhat High uncertainty and Responsive strategy Wall Mart: Less uncertainty with Efficient strategy Match Supply Chain responsiveness with implied demand uncertainty in zone of Strategic Fit All functional strategies must support supply chain’s level of responsiveness
Same company sells high and low demand uncertainty products – Independent supply chains for different products (if large enough) or tailor SC to meet individual product Product Life Cycle: Move from Responsiveness to Efficiency Initial – Demand very uncertain Growth – High margins, time critical Mature – Availability crucial; differentiate Decline – Cost critical
Strategic scope must cover all boxes, at least at the supply chain end. Each stage must have fit across its vertical boxes and supply chain strategy spanning all players. This fit allows the countering of multiple owners and helps avoid local optimization. END OF LESSON 2
Lesson 3 How does a supply chain make the efficiency / responsiveness tradeoff and position at the appropriate point - using Inventory, Transportation, Facilities, and Information decisions.
Stress the importance of time compression in supply chain. Detail NPD (New Product Develop) time as well as material flow time. The advantage of lower flow times is magnified for short product life cycles. Consider a firm with a 10 day material flow time versus a 90 day material flow time(rough comparison of Dell and Compaq in Early 1998). For a six month product life cycle this advantage is significant. For a three year product life cycle this advantage is somewhat less significant. Base goal in a supply chain : Flow time reduction (this is what the operations course was all about)
Notes: Dell is a niche player. Compaq has a broader set of customers served. Compaq cannot come up with a single supply chain that is best in all instances. The same case can be made for Amazon as well - different people use the web channel as either a convenience or to get a better deal. Currently Amazon is trying to satisfy both with a single supply channel. Is this appropriate in the long term.
6 Lesson 3 Demand – Product and Services required from a company The slide shows that demand has uncertain forecasts and certain customer orders. The rule is never forecast what you can book as orders, or calculate (remember dependent demand) As a corollary always try to find out what the customer wants – before trying to forecast it
Remember whenever there is an alternative – do not forecast ! (READ SLIDE – Discuss each point) Two numbers – how much and when Elements- Not biased Compensates for known events Range of forecast error specified Regular review with mktg and sales
Slide 41 General principles: (READ and give example) -Aggregate level: Forecasting Monthly expen on food versus what you spend day to day -Shorter periods close to today: Spending on food – can budget for next few weeks vs. next few months – tastes change, prices change etc -Set of numbers – represents inexact science -Mostly always wrong!
Slide 42 Main techniques: Qualitative – that is subjective or judgmental, not statistical (READ TYPES AND DESCRIBE) Management Review-most popular Delphi- panel of experts Market research – conduct survey Quantitative- that is using data (READ Types WE WILL COVER EACH OF THESE)
Slide 43 When do we use a particular technique? (READ SLIDE) Qualitative – New Products since there is no history and no data. To provide management insight to the numbers Quantitative – Needs historical data and data that has the characteristics of Available – not too much time or money to collect Consistent – can be relied upon Accurate- very imp. Must reflect what is measured Units not $’s as the conversion is difficult
20 Slide 44 Here are some sales figures for Products A to E What actions should be taken? 2. What should be June’s forecast? – by Product, for the entire group? Take 5 minutes to work out
10 Slide 45 Simple Moving averages and weighted moving averages Look at the forecast for the 3 period moving average: For the 4 th period: Forecast=(180+160+220)/3=186.6 Work out the forecast for the 4 period moving average Understand the formula
11 Slide 46 Weighted moving average Similar to moving average, except the periods are weighted, the sum of the weight being = 1.00. Usually more importance (higher weight) is given to the most recent period In example, weightage is .5,.3,,2 for the last three periods Then the forecast for the fourth period is [180(.2)+160(.3)+220(.5)] / 3 = 194 Work out the forecast for the 4 weighted period moving average Understand the formula
13 Slide 48 Exponential smoothing Similar to weighted moving average except there is no need to have all the detailed historical numbers as the exponential is based on the number of periods being considered. For a=.2, no. of periods in 9, and for a=.5, no. of periods is 3. The weight or exponential (a) determines the reactivity of the forecast. The higher the more reactive (like a few moving average periods) Examine the formula and understand them
14 Slide 49 Example: Where the demand in period 2 is 160 and the forecast was 180 If a=.1 Period 3 forecast= 180+.1(180-160) = 180+.1(-20) = 180-2 = 178 Work out the forecasts for a=.5 and a=.9 Observe the reactiveness or how close the new forecast is to the actual demand
What does / would Pfizer use as an independent variable?
Most random series have a Normal Distribution in each a measurement called Sigma is used. Sigma corresponds to the area under the curve and hence the probability of the event occurring. Ex Height Mean 70” Sigma 2”, then +/- 1sigma or 68% of the population will have height between 68” and 72”. What height range are 95% of the population?
8 Slide 59 Show how to calculate the Standard Deviation ( – go through and understand the working (Explain)
9 Slide 60 Show how to calculate the Standard Deviation (Explain)
7 Slide 61 Shows how to understand Bias and MAD (Explain)
5 Lesson 6 – More forecasting Slide 58 Here are some basic formula: Cumulative sum of error is the arithmetic sum of the forecast errors Bias shows whether the forecast error is positive or negative MAD is a the average of the absolute sum of the forecast errors Standard Deviation is a statistical measure of a distribution. It is used to understand the probability of an event occurring
10 Slide 64 A Confidence interval is a value along the X axis, called ‘z’ value, that indicates probability. The z value is the x value less the mean, divided by the standard deviation There is a direct relationship between Standard Deviation and MAD
11 Slide 65 Chart of z values Example z=2.5 has a probability of 99.38% of occurring
16 Slide 66 Work the problem, using the z chart of the previous slide
Method MAD 3-month moving average 7.1 3-month weighted moving average 7.9 Exponential smoothing 7.1 Linear regression 5.7
WORK AN EXAMPLE ON FLIP CHART: SALES 30 pm: BI= 90: EI 30; PP = 360+90-30 = 420 OR 70pm
Given the forecast to determine the production level, inventory level, capacity for each period that maximizes the profit
DEMAND IS FILLED BY PROD + CHANGE IN INVEN + CHANGE IN BLOG + SUBCONTRACT CURRENT DEMAND: Dt = PRODt + (OPEN INV – CURR INV) + Ct + (CURR BLOG – OPEN BLOG)
Discuss role of information technology in reducing product specific order cost both at the ordering and receiving end when aggregating across multiple products. On the transportation end this relates supply points or delivery points located close to each other.
Notes: Contact lenses with different warranty. On one extreme is the IBM system/360 mainframe where the system was customized for each customer. This is very expensive and soon disappeared. An effort was made to develop a standardized product that filled most of the needs at a lower cost. One may build many views of a database of cases and readings to satisfy marketing professionals, operations, new product etc. Here design of the data base becomes important since the kinds of views that are easily feasible will depend upon the way the data base has been designed. For example if articles can be sorted and searched based on key words that are assigned, it may be much easier to design different views. Personalized newspapers and web profiles which only show a certain view of the web. Here we have “postponed” differentiation to the point of delivery.
Notes: HP deskjets can be configured to be black and white or color by customer Gillette sensor which “automatically adjusts to the contours of your face.” ATMs The key here is to identify the most personal, most individual characteristics. These are then embedded within the product or service. This is a lot of effort in terms of the development phase. Here we have “postponed” product differentiation to the customer.
Notes: The idea here is to shrink all times so that a significant part of the chain can be postponed. Discuss in detail with the Sport Obermeyer story. Mention the apparel industry in the US. Mention that markdowns are the key problem in the apparel industry. Quick response allows the manufacturer to provide products that are in tune with customer needs since there is little in the supply chain. It brings the customer closer to the development making the loop much quicker.
Notes: Paint mixing Mention HP in this case. Lenscrafters for glasses. This method works when there are a few inherently individual characteristics in an otherwise standardized product. The rest is produced centrally in advance. All build-to-order computer manufacturers Dell, Micron, Compaq is moving to it, essentially do this form of customization. In this form of customization, modularity plays an important role.
Notes: Computer industry
Notes: Component sharing modularity: HP, Dell, Create a book (individualizes books using personal information on a child) Cut-to-fit: National bicycle. Sized to fit individual customers. Englert’s gutter and roofing machine produces gutters for a specific house not requiring seams. Observe that the raw material is held in pooled form. Bus modularity: Individualized magazines based on Selectronic binding by R.R. Donnelly. Key here is the presence of a bus (superset) of components that are slected among to get different products. Product design is key here Mix modularity: Paint mixed in the store itself. Fertilizer mixed. Anything with a recipe. Key design factor is the mixing device sine that will usually be at point of sale or delivery. Sectional modularity: LEGO. Agfa’s Shared Document Management System (Xerox is doing the same). “Document objects” can be any size and any type (tables etc.) and can be put together in any way desired by the user. Interfaces are key here. Lego has simple interfaces but in general that is not true. Once again this allows for pooling.
Notes: What information is required to make the ordering decision? Stress cost of understocking and overstocking. How to evaluate these costs for this example?
Notes: Mention that L.L. Grain is a mail order company deciding on the number of units of a Fall jacket to order. An estimate of demand using past information and expertise of buyers is given here. What should the appropriate order quantity be? In general distribution may not be known. Discuss methodology used in the Matching supply and demand article as a possibility in deciding on demand uncertainty (distribution).
Notes: Discuss marginal benefit and marginal cost of each jacket. We keep increasing order size as long as expected benefit exceeds expected cost.
Notes: Explain how formula is derived using decision tree.
Notes: Mention some forecasting methods. Focus on discussion in Accurate response article on use of expert opinion. Contrast with Adelphi method which would try to obtain a consensus. Here we use the difference in opinion among buyers as a measure of uncertainty.
Notes: Clever here refers to the ability of a firm to service these different requirements in the most cost effective way without hurting customer service in any case. The key ability will be one to make the right tradeoffs and come up with optimal structures for communication, inventory, transportation, and location.
Notes: Safety stock = 3 days demand for rail and 2 days demand for truck. Daily demand = 120,000/365 = 329 motors. Transit inventory = 120,000*5/365 = 986 for rail 120,000*3/365 = 658 for truck Case discussion: Mention role of incentives in choice of mode. Stress importance of considering beyond mere transportation cost.
Notes: EDLP Every day low price Synchronize delivery and purchase. That is, manufacturer may give hi-lo prices and retailers may order large quantities, but mfr. will deliver them over multiple periods. Special Purchase contracts - E.g., discounts for total minimum commitments.
Notes: Direct marketing channels not subject to bull whip effect due to demand signal processing. E.g., Dell-Direct of Dell Computers. The manufacturer has control of the entire supply chain.
Notes: Also seen in NOVA; access to sell-thru data by manufacturer allows him to schedule production based on sales rather than orders. Reduce transaction costs - EDI - CAO - McKesson’s “Economost” Discounts for ordering assortments rather than single product full-truckloads. Coordination of delivery schedules. Third party logistics can consolidate orders from multiple retailers.
Notes: Allocate supply in proportion to retailers market share in previous period. GM, TI, HP … Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing. Special contracts that restrict ordering (e.g., HP, SUN) - our paper on forecasts and flexibility - reserve capacity (Seagate reserves a portion of supplier’s capacity) Free return policies and generous order cancellation can lead to gaming.
Notes: EDLP Synchronize delivery and purchase. That is, manufacturer may give hi-lo prices and retailers may order large quantities, but mfr. will deliver them over multiple periods. Special Purchase contracts - E.g., discounts for total minimum commitments.
Notes: Historically SC driven by either Power or Trust Allocate supply in proportion to retailers market share in previous period. GM, TI, HP … Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing. Special contracts that restrict ordering (e.g., HP, SUN) - our paper on forecasts and flexibility - reserve capacity (Seagate reserves a portion of supplier’s capacity) Free return policies and generous order cancellation can lead to gaming.
APS – Produces schedules what, how much and where to make taking into account material availability, plant capacity and other business objectives Highly analytical and can optimize solutions. Add on to ERP
SUPPLY CHAIN ENGINEERING…MN 799• TEXT: SUPPLY CHAIN MANAGEMENT – Chopra and Meindl – Prentice Hall• COURSE OUTLINE – Description Book pages – 1/22 Introduction, curriculum, rules, exams, Infrastructure (1-27) – 1/27 Strategic Fit and Scope. Supply Chain Drivers (27-51) – 2/05 No Class – 2/12 Demand Management (169-204) – 2/19 Aggregate Planning, Managing (205-225) – 2/26 Guest Lecture Network Operations (71-168) – 3/04 Managing Supply and Demand (121-144) – 3/11 Class trip to see Supply Chain in Operation – 3/18 No Class – 3/25 Mid Term – 4/01 Managing Inventory(249-295); – 4/08 Product Availability (297-384) – 4/15 Sourcing and Procurement (387-410) – 4/22 Transportation (411-219); Facility Decisions (109-133) – 4/29 Beer Game – 5/06 Co-ordination Information Information Technology & E-Business (477- 557) – 5/13 FINAL EXAMINATION Supply Chain 1#
GUIDELINES• GRADING: – HOMEWORK – 20% – BEER GAME – 5% – MID TERM – 30% – FINAL – 45%• HOMEWORK MUST BE COMPLETED IN TIME. LATE SUBMISSIONS WILL START WITH A ‘B’ GRADE• CLASSES WILL START AT 6.00PM AND GO STRAIGHT THRU TO 8.00PM Supply Chain 2#
DEFINITION OF A SUPPLY CHAIN• WHAT IS A SUPPLY CHAIN?• A SUPPLY CHAIN COVERS THE FLOW OF MATERIALS, INFORMATION AND CASH ACROSS THE ENTIRE ENTERPRISE• 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• TO SATISFY CUSTOMERS AND MAKE A PROFIT• WHY A ‘SUPPLY CHAIN’? Supply Chain 3#
Traditional View: Logistics in the Economy 1990 1996 2006 • Freight Transportation $352, $455 $809 B • % Freight 57% 62% • Inventory Expense $221, $311 $ 446 B • % Inventory 39% 33% • Administrative Expense $27, $31 $ 50 B • Logistics related activity 11%, 10.5%,9.9% • % of GNP.Source: Cass Logistics Homework: What are 2007 statistics? Supply Chain 4#
Traditional View: Logistics in the Manufacturing Firm • Profit 4% Profit • Logistics Cost Logistics 21% Cost • Marketing Cost 27% Marketing Cost • Manufacturing Cost 48% Manufacturing CostHomework: What it the profile for Consumables; Pharamas and Computers Supply Chain 5#
Supply Chain Management: The Magnitude in the Traditional View• Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies – A typical box of cereal spends 104 days from factory to sale – A typical car spends 15 days from factory to dealership• Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed• P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand• Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago Supply Chain 6#
HAMBURGERS AND FRIES HAMBURGERS (4/LB) FRIES (3Large/lb)• CATTLE FARM – 50c/lb • POTATO FARM 25C/lb• BUTCHER • POTATO PROCESSOR• PACKAGING • DISTRIBUTION CENTER• DISTRIBUTION CENTER • RETAILER• RETAILER • CUSTOMER• CUSTOMERProvide Sales Price at each stage Provide Sales Price at each stage Supply Chain 7#
Burger and Fries Examine this process – What do you observe?What problems do you foresee in this Supply Chain? Please write some down Supply Chain 8#
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:Supplier Manufacturer Wholesaler Retailer Customer …there is a limit to the surplus or profit in a supply chain Strong, well-structured supply chains are critical to sustained competitive advantage. We are all part of a Supply Chain in everything we buy Supply Chain 9#
OBJECTIVES OF A SUPPLY CHAIN• MAXIMIZE OVERALL VALUE GENERATED – SATISFYING CUSTOMER NEEDS AT A PROFIT – VALUE STRONGLY CORRELATED TO PROFITABILITY – SOURCE OF REVENUE – CUSTOMER – COST GENERATED WITHIN SUPPLY CHAIN BY FLOWS OF INFORMATION, PRODUCT AND CASH – FLOWS OCCUR ACROSS ALL STAGES – CUSTOMER, RETAILER, WHOLESALER, DISTRIBUTOR, MANUFACTURER AND SUPPLIER – MANAGEMENT OF FLOWS KEY TO SUPPLY CHAIN SUCCESS UNDERSTAND EACH OBJECTIVE Supply Chain 10#
DECISION PHASES IN A SUPPLY CHAIN• OVERALL STRATEGY OF COMPANY – EFFICIENT OR RESPONSIVE• SUPPLY CHAIN STRATEGY OR DESIGN ? – LOCATION AND CAPACITY OF PRODUCTION AND WAREHOUSE FACILITIES? – PRODUCTS TO BE MANUF, PURCHASED OR STORED BY LOCATION? – MODES OF TRANSPORTATION? – INFORMATION SYSTEMS TO BE USED? – CONFIGURATION MUST SUPPORT OVERALL STRAGEGY• SUPPLY CHAIN PLANNING? – OPERATING POLICIES – MARKETS SERVED, INVENTORY HELD, SUBCONTRACTING, PROMOTIONS, …?• SUPPLY CHAIN OPERATION? – DECISIONS AND EXECUTION OF ORDERS? Supply Chain 11#
Basic Supply Chain Architectures (Examples) 1. Indirect Channel Retailer Customer Supplier Wholesale Factory Retailer Customer Supplier Wholesale Retailer Customer 2. Direct Channel Supplier Supplier Supplier Fabricator Factory Integrator Customer Supplier 3. Virtual Channel Supplier Credit Virtual Service Store Supplier Fabricator Factory Express Customer Freight Supply Chain 12# C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Supply Chain Architecture Demand LOCAL REGIONAL GLOBAL Strategic IssuesMARKET MARKET MARKET . Demand Reach INDIRECT CHANNEL DIRECT CHANNEL . Demand Risk VIRTUAL CHANNEL MAKE •Cost Structure vs. • Asset Utilization BUY • Responsiveness SOLE SOURCE SINGLE SOURCE MULTI-SOURCE Supply Risk Supply C 1999. William T. Walker, CFPIM,Supply APICS Educational & Research Foundation. 13# CIRM with the Chain All Rights Reserved.
SUPPLY CHAIN FRAMEWORK AND INFRASTRUCTURE PRINCIPLE: BUILD A COMPETITIVE INFRASTRUCTURE This principle is about VELOCITY Supply Chain 14#
Cycle View of Supply ChainsDEFINES ROLES AND RESPONSIBILITIES OF MEMBERS OF SUPPLY CHAIN Customer to Customer Order Cycle Retailer Replenishment Cycle to Distributor Manufacturing Cycle to Manufacturer Procurement Cycle to Supplier Supply Chain 15#
PROCESS VIEW OF A SUPPLY CHAIN• CUSTOMER ORDER CYCLE – TRIGGER: MAXIMIZE CONVERSION OF CUSTOMER ARRIVALS TO CUSTOMER ORDERS – ENTRY: ENSURE ORDER QUICKLY AND ACCURATELY COMMUNICATED TO ALL SUPPLY CHAIN PROCESSES – FULFILLMENT: GET CORRECT AND COMPLETE ORDERS TO CUSTOMERS BY PROMISED DUE DATES AT LOWEST COST – RECEIVING: CUSTOMER GETS ORDER Supply Chain 16#
PROCESS VIEW OF A SUPPLY CHAIN• REPLENISHMENT CYCLE – REPLENISH INVENTORIES AT RETAILER AT MINIMUM COST WHILE PROVIDING NECESSARY PRODUCT AVAILABILITY TO CUSTOMER – RETAIL ORDER: • TRIGGER – REPLENISHMENT POINT – BALANCE SERVICE AND INVENTORY • ENTRY – ACCURATE AND QUICK TO ALL SUPPLY CHAIN • FULFILLMENT – BY DISTRIBUTOR OR MFG. – ON TIME • RECEIVING – BY RETAILER, UPDATE RECORDS• MANUFACTURING CYCLE – INCLUDES ALL PROCESSES INVOLVED IN REPLENISHING DISTRIBUTOR (RETAILER) INVENTORY, ON TIME @ OPTIMUM COST – ORDER ARRIVAL – PRODUCTION SCHEDULING – MANUFACTURING AND SHIPPING – RECEIVING Supply Chain 17#
PROCESS VIEW OF A SUPPLY CHAIN• PROCUREMENT CYCLE – SEVERAL TIERS OF SUPPLIERS – INCLUDES ALL PROCESSES INVOLVED IN ENSURING MATERIAL AVAILABLE WHEN REQUIRED• SUPPLY CHAIN MACRO PROCESSES• CRM – All processes focusing on interface between firm and customers• ISCM – A processes internal to firm• SRM – All processes focusing on interface between firm and suppliers Supply Chain 18#
FRONT OFFICEA Customer’s View on linethe Supply Chain Ex.-Travel arrangements ofOrder the product... Take delivery...with configuration complexity on-line the next day at home, and get started without a hasslePay for the product... Service the product...in a foreign currency by credit card anywhere in the world Supply Chain 19# C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Push/Pull View of Supply Chains PULL – PROCESSES IN RESPONSE TO A CUSTOMER ORDERPUSH – PROCESSES IN ANTICIPATION OF A CUSTOMER ORDER Procurement, Customer Order Manufacturing and Cycle Replenishment cycles Customer Order arrives PUSH PROCESSES PULL PROCESSES Supply Chain 20#
UNDERSTANDING THE SUPPLY CHAIN• Homework• EXAMPLES: – EXAMPLES OF SUPPLY CHAINS –1.5 – pp 20-25 – WHAT ARE SOME OF THE KEY ISSUES IN THESE SUPPLY CHAINS – ANALYSE AND COMMENT ON 7-Eleven and Amazon– ANSWER QUESTIONS 1TO 6 FOR EACH Supply Chain 21#
SUPPLY CHAIN PERFORMANCE – STRATEGIC FIT AND SCOPE (Lesson 2) FILM – CHAIN REACTION Business Strategy New Product Marketing Strategy Strategy Supply Chain Strategy New Marketing Product and Operations Distribution Service Development Sales Supply and ManufactureFinance, Accounting, Information Technology, Human ResourcesEXAMPLES? Supply Chain 22#
ACHIEVING STRATEGIC FIT• Step 1. Understanding the Customer and Demand – Quantity - Lot size Implied – Response time Demand – Product variety Uncertainty – Service level See Table 2.1 – Price Regular Demand – Innovation Uncertainty due to customers demand and Implied Demand Uncertainty due to uncertainty in Supply Chain Supply Chain 23#
Levels of Implied Demand Uncertainty Detergent High Fashion Long lead time steel Emergency steel Customer Need Price Responsiveness Low HighImplied Demand Uncertainty Attributes (Table 2-2) Low Implied Uncertainty High Implied UncertaintyProduct Margin Low – HighAver. Forecast Error 10% 40-100%;Aver. Stockout rate 1-2% 10-40%;Aver. markdown 0% 10-25% Supply Chain 24#
SUPPLY SOURCE UNCERTAINTY• TABLE 2.3 SUPPLY UNCERTAINTY – FREQUENT BREAKDOWNS – UNPREDICTABLE AND/OR LOW YIELDS – POOR QUALITY – LIMITED SUPPLIER CAPACITY – INFLEXIBLE SUPPLY CAPACITY – EVOLVING PRODUCTION PROCESSES• LIFE CYCLE POSITION OF PRODUCT – NEW PRODUCTS HIGH UNCERTAINTY• DEMAND AND SUPPLY UNCERTAINTY FIG 2.2 Supply Chain 25#
Step 2 - Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier (Table: 2.4) Responsiveness – to Quantity, Time, Variety, Innovation, Service level Exercise: Give examples of products that are: Highly efficient, Somewhat efficient,Responsiveness Somewhat responsive and highly responsive High Low Fig 2.3 High Low Cost (efficient) Supply Chain 26#
Step 3. Achieving Strategic Fit Responsive Companies try to move supply chain Zone of Strategic fit High Cost fResponsiveness n e o Fit spectrum Zo egic t Stra Low Cost Efficient supply chain Certain Implied Uncertain demand uncertainty demand spectrum Supply Chain 27#
SCOPE• Comparison of Efficient & Responsive Supply Chain Table 2.4 – EFF Vs RESPON. STRATEGY for DESIGN; PRICING; MANUF; INVEN; LEAD TIME; SUPPLIER – THERE IS A RIGHT SUPPLY CHAIN STRATEGY FOR A GIVEN COMPETITIVE STRATEGY (without a competitive strategy there is no right supply chain!)• OTHER ISSUES AFFECTING STRATEGIC FIT – MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS • TAILOR SC TO MEET THE NEEDS OF EACH PRODUCT’S DEMAND – PRODUCT LIFE CYCLE Fig 2.8 • AS DEMAND CHARACTERISTICS CHANGE, SO MUST SC STRATEGY - EXAMPLES – COMPETITIVE CHANGES OVER TIME (COMPETITOR)• EXPANDING STRATEGIC SCOPE – INTERCOMPANY INTERFUNCTIONAL SCOPE • MAXIMIZE SUPPLY CHAIN SURPLUS VIEW – EVALUATE ALL ACTIONS IN CONTEXT OF ENTIRE SUPPLY CHAIN (FIG 2.12) – FLEXIBLE INTERCOMPANY INTERFUNCTIONAL SCOPE • FLEXIBILITY CRITICAL AS ENVIRONMENT BECOMES DYNAMIC Supply Chain 28#
Drivers of Supply Chain Performance Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Supply chain structureInventory Transportation Facilities Information Drivers TRADE OFF FOR EACH DRIVER Supply Chain 30#
INVENTORY– ‘WHAT’ OF SUPPLY CHAIN– MISMATCH BETWEEN SUPPLY AND DEMAND– MAJOR SOURCE OF COST– HUGE IMPACT ON RESP0NSIVENESS– MATERIAL FLOW TIME • I = R T (I – Inventory, R – Throughput, T – Flow time)– ROLE IN COMPETITIVE STRATEGY– COMPONENTS • CYCLE INVENTORY – AVERAGE INVENTORY BETWEEN REPLENISHMENTS • SAFETY INVENTORY - TO COVER DEMAND AND SUPPLY UNCERTAINITY • SEASONAL INVENTORY – COUNTERS PREDICTABLE VARIATION– OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY Supply Chain 31#
TRANSPORTATION• ‘HOW’ OF SUPPLY CHAIN• LARGE IMPACT ON RESPONSIVENESS AND EFFICIENCY• ROLE IN COMPETITIVE STRATEGY• COMPONENTS – MODE – AIR, TRUCK, RAIL, SHIP, PIPELINE, ELECTRONIC – ROUTE SELECTION – IN HOUSE OR OUTSOURCE• OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY Supply Chain 32#
FACILITIES• ‘WHERE’ OF SUPPLY CHAIN• TRANSFORMED (FACTORY) OR STORED (WAREHOUSE)• ROLE IN COMPETITIVE STRATEGY• COMPONENTS – LOCATION - CENTRAL OR DECENTRAL – CAPACITY – FLEXIBILITY VS EFFICIENCY – MANUFACTURING METHODOLOGY – PRODUCT OR PROCESS FOCUS – WAREHOUSING METHODOLOGY – STORAGE – SKU, JOB LOT, CROSSDOCKING• OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY Supply Chain 33#
INFORMATION• AFFECTS EVERY PART OF SUPPLY CHAIN – CONNECTS ALL STAGES – ESSENTIAL TO OPERATION OF ALL STAGES• ROLE IN COMPETITIVE STATEGY – SUBSTITUTE FOR INVENTORY• COMPONENTS – PUSH VS PULL – COORDINATION AND INFORMATION SHARING – FORECASTING AND AGGREGATE PLANNING – ENABLING TECHNOLOGIES • EDI • INTERNET • ERP • SCM• OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY ? Supply Chain 34#
Considerations for Supply Chain DriversDriver Efficiency ResponsivenessInventory Cost of holding AvailabilityTransportation Consolidation SpeedFacilities Consolidation / Proximity / Dedicated FlexibilityInformation What information is best suited for each objective Supply Chain 35#
MAJOR OBSTACLES TO ACHIEVING FIT• Multiple global owners / incentives in a supply chain – Information Coordination & Contractual Coordination Local optimization and lack of global fit• Increasing product variety / shrinking life cycles / demanding customers/customer fragmentation Increasing demand and supply uncertainty Supply Chain 36#
OBSTACLES TO ACHIEVING STRATEGIC FIT• INCREASING VARIETY OF PRODUCTS• DECREASING PRODUCT LIFE CYCLES• INCREASINGLY DEMANDING CUSTOMERS• FRAGMENTATION OF SUPPLY CHAIN OWNERSHIP• GLOBALIZATION• DIFFICULTY EXECUTING NEW STRATEGIES• ALL INCREASE UNCERTAINTY Supply Chain 37#
Dealing with Product Variety: Mass Customization Long Lead Time Short Mass Customization t ion Low Low Co za st mi sto CuHigh High Supply Chain 38#
Fragmentation of Markets and Product Variety• Are the requirements of all market segments served identical?• Are the characteristics of all products identical?• Can a single supply chain structure be used for all products / customers?• No! A single supply chain will fail different customers on efficiency or responsiveness or both. Supply Chain 39#
HOMEWORK• Page 49 – Nordstrom – Answer Questions 1 to 4• Answer the above questions for Amazon.com• Page 67 – Answer Questions 1 to 4 Supply Chain 40#
REVIEW QUESTIONS• WHAT IS STRATEGIC FIT? HOW IS IT ACHIEVED? – COMPANY’S APPROACH TO MATCH DEMAND REQUIREMENTS AND SUPPLY POSITIONING – MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS – PRODUCT LIFE CYCLE• WHAT IS STRATEGIC SCOPE? – INTERCOMPANY, INTERFUNCTIONAL EXTENSION• WHAT ARE THE SUPPLY CHAIN DRIVERS. WHAT ARE THEIR ROLES AND COMPONENTS? – INVENTORY; FACILITIES; TRANSPORTATION; INFORMATION• OBSTACLES Supply Chain 41#
Demand-Management Activities Lesson 3 Forecasting (uncertainty) Order service (certainty) Demand management 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 Supply Chain 42#
DETERMINING DEMAND• FORECASTING – TWO TYPES – WRONG AND LUCKY – TWO NUMBERS – QUANTITY AND DATE – ELEMENTS of a GOOD FORECASTING SYSTEM: • EQUAL CHANCE OF BEING OVER OR UNDER • INCLUDES KNOWN FUTURE EVENTS • HAS RANGE OR FORECAST ERROR ESTIMATE • REVIEWED REGULARLY Supply Chain 43#
FORECASTING• GENERAL PRINCIPLES: – MORE ACCURATE AT THE AGGREGATE LEVEL – MORE ACCURATE FOR SHORTER PERIODS OF TIME CLOSER TO PRESENT – SET OF NUMBERS TO WORK FROM, NOT TO WORK TO – MOSTLY ALWAYS WRONG – EXAMPLE: MONTHLY vs DAILY EXPENDITURE Supply Chain 44#
FORECASTING• MAIN TECHNIQUES: – QUALITATIVE • MANAGEMENT REVIEW • DELPHI METHOD • MARKET RESEARCH – QUANTITIVE • MOVING AVERAGE • WEIGHTED MOVING AVERAGE • EXPONENTIAL SMOOTHING • REGRESSION ANALYSIS • SEASONALILTY • PYRAMID Supply Chain 45#
FORECASTING• QUALITATIVE – USEFUL ON NEW PRODUCTS – AS A SUPPLEMENT TO QUANTITATIVE NUMBERS• QUANTITATIVE – NEEDS HISTORICAL DATA OR PROJECTED DATA – AVAILABLE – CONSISTENT – ACCURATE – UNITS - MEASURABLE Supply Chain 46#
WORK OUT JUNE’s FORECASTS FOR ALL SKU’s Month SKU Jan Feb Mar Apr May Jun A 25 21 23 2321 21 B 27 23 26 21 25 C 16 18 17 23 30 D 23 26 25 52 23 E 29 30 ? 26 28 Total 120 118 91 2443 127 What actions should be taken? What is forecast for June? For each SKU? For total? Supply Chain 47#
Simple Moving Averages (SMA) Simple Moving Average (SMA) DΤ + DΤ- 1 + DΤ- 2 F +1 = Τ n Demand (3-period) (4-period) Forecast Forecast 180 start-up start-up 160 220 186.6 200 193.3 190 260 226.6 210 240 233.3 230 Where F = Forecast T = Current time period D = Demand n = Number of periods( max) Exercise: Work out the SMA for two periodsQuestion: What determines the number of periods used? Why? Supply Chain 48#
Weighted Moving Averages Weighted Moving Average (WMA) FT + 1 = WTD T + WT − 1D T − 1... + ...WT − n+ 1D T − n+ 1 Forecast Forecast Demand (.2, .3, .5)(.1, .2, .3, .4) 180 start-up start-up 160 220 194 200 198 196 26 23 224 0240 4 238 236 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 Exercise: Work out forecast for two periods with weights of 0.4,0.6What periods and weights will use for forecasting soap and fashion clothes Why? Supply Chain 49#
Exponential SmoothingDecisionþ Select or compute a smoothing constant (α )þ Relationship of exponential smoothing to simple moving average Formulas Where 1 T+ 1 = α FT +F= = T D (1+− − α )F T F D + + (1 − α )F D T (1 )FT F = forecast value T+1 T T T = current time period FT 1 T + FT= Fαα (D T − F or or +F= = + +(D T(D FT−)F T)) or F 1 FT + α − D = demand T+1 T T T α = exponential factor <1 α= 2 Where n+ 1 n = number of past periods to be captured Supply Chain 50#
Exponential Smoothing — Continued FT+1 = FT + a (DT – FT)Period Demand Forecast Forecast Forecast (α = .1) (α = .5) (α = .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 Work out forecasts with α=0.3What α’s will use for forecasting soap and fashion clothes Why? Supply Chain 51#
Simple Trended Series — Example Algebraic Trend Projection X Y a. Trend (“rise” over “run”) = (13 - 4)/3 = 3 = b 0 4 b.Y-intercept (a) = “compute” 1 7 the Y value for X = 0, thus Y-int = 4 2 10 3 13 c. Period 4: Y = a + bX = 4 + 3 (4 [for period 4]) = 16 13 10 Rise 7 4 Run 1 2 3 Supply Chain 52#
REGRESSION ANALYSIS• Regression formula b=slope, a=intercept• Slope b= n∑ XY − ∑ X ∑ Y Intercept n ∑ X − (∑ X ) 2 2 a = Y - bX• and Y = a + bX• Work out this example: b=• Year Variable Y (Passengers)• 1 77• 2 75• 3 72• 4 73• 5 71• What is the regression equation? What is the forecast for Year 6? Supply Chain 53#
TRENDED TIME SERIES FORECASTING• Question: How do you forecast a seasonal item• Y(forecast) = [A (intercept) + X (trend) x T (time period) ] x S (seasonality factor)• FIRST DETERMINE LEVEL AND TREND - IF SEASONAL DESEASONALIZE• THEN FORECAST USING EXPONENTIAL OR TREND• RESEASONALIZE Supply Chain 54#
Seasonal Series Indexing Sample Data — Continued 1. FIND SEASONALITY FOR EACH PERIOD 2. DEASONALIZE 3. PROJECT USING EXPONENTIAL, REGRESSION ETC 4. REASONALIZE Where: Monthly Total (MT) 1200Formula: Seasonal Index (SI) = AM = = 100 Average Month (AM) 12 33 SIJAN = = .33 100 94 SIJUL = = .94 100 Supply Chain 56#
Integrative Example: Calculating a Forecastwith Seasonal Indexes and Exponential Smoothing Given Deseasonalized Seasonal Demand Forecast Index July 34 36 0.94 Aug 0.57 Rationale and Computations 1. Deseasonalize current (July) actual demand Actual demand = 34/0.94 = 36.17 34 Actual demand = 34/0.94 = 36.17 Actual demand demand = = 34/0.94 = 36.17 Actual = 34/0.94 36.17 Seasonal index 0.94 Seasonal index Seasonal index Seasonal index 2. Use exponential smoothing to project deseasonalized data one period ahead (α = .2) FT +1 = α D T + (1 − α )FT = (0.2) (36.17) + (0.8) (36) = 36.03 3. Reseasonalize forecast for desired month (August) = Deseasonalized forecast × seasonal factor = 36.03 × 0.57 = 20.53 or 21 Supply Chain 57#
Exercise• Boler Corp has the following sales history:• Quarter Year1 Year2• 1 140 210• 2 280 350• 3 70 140• 4 210 280• What seasonal index for each quarter could be used to forecast the sales of the product for Year 3?• What would be a forecast for year 3 using an a=0.3 and assuming the forecast for year 2 was 1000? What would be the forecast for each quarter in this forecast? Supply Chain 58#
Normal Distribution Using the Measures of Variability x 68.26% 95.44% 99.74%Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998). Supply Chain 59#
Standard Deviation — Continued ∑ (Αi - Fi) 2Standard Deviation 400,000 = = =211 n -1 9 ∑ (Ai 2 - F) 400,000Standard Deviation = i = =200 n 10 ΝΟΤΕ: 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) Supply Chain 61#
Bias and MAD A= Error F= Actual (Sales – Absolute Period Forecast Sales Forecast) ErrorCumulative sum of error = 1 1,000 1,200 200 200 ∑ ( A i − Fi ) = 200 2 1,000 1,000 0 0 3 1,000 800 – 200 200 4 1,000 900 – 100 100Bias = 5 1,000 1,400 400 400 ∑ (Αi - Fi ) = 200 = 20 6 1,000 1,200 200 200 n 10 7 1,000 1,100 100 100 8 1,000 700 – 300 300Mean Absolute Deviation (MAD) 9 1,000 1,000 0 0= ∑ Αi - Fi = 1600 = 160 10 1,000 900 – 100 100 n 10 10,000 10,200 200 1,600 Supply Chain 62#
Measures of Forecast Error Cumulative Sum of Error ∑(A - F) i i Bias ∑ (Ai - Fi ) n Mean Absolute Deviation (MAD) ∑ Αi - Fi n Standard Deviation=1.25 MAD or ∑(Α i - Fi)2 or ∑(Ai - Fi )2 NOTE: About the use of n or n-1 in the above equations n - 1 n n Use with a large population (> 30 observations) n-1 Use with a small population (< 30 observations) Supply Chain 63#
Confidence Intervals Definition A confidence interval is a measure of distance, increments of which are represented by the z value Formulas 2 2 ∑ (Ai - Fi ) ∑ (Ai - Fi ) s ( Std Dev) = 1 OR n -1 n Distance - Mean = x i - x z= StandardDeviation s Relationship or x i = x + z s 1 standard deviation (σ) = 1.25 × MAD In the example data σ = 1.25 × MAD = 1.25 × 160 = 200Source: Raz and Roberts, “Statistics,” 1987 Supply Chain 64#
Expressing z Values (for +ve probabilities) Probabilit y Βack D +1 SD +2 SD +3 SD Cumulative normal distribution from left side of distribution (x + z) z .0 .1 .2 .3 .4 .5 .6 .7 .8 .90.0 .5000 .5398 .5793 .6179 .6554 .6915 .7257 .7580 .7881 .81591.0 .8413 .8643 .8849 .9032 .9192 .9332 .9452 .9554 .9641 .97132.0 .9773 .9821 .9861 .9893 .9918 .9938 .9953 .9965 .9974 .99813.0 .9987 .9990 .9930 .9995 .9997 .9998 .9998 .9999 .9999 .9999 Supply Chain 65#
Application Problem — Service Level Given Average sales for item P is 50 units per week with a standard deviation of 4 Required What is the probability that more than 60 units will be sold? a. .006 b. .494 c. .506 d. .994 Supply Chain 66#
HomeworkQ1 - 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.Q2 - The following information is presented for a product:• 2001 2002• Forecast Demand Forecast Demand• Quarter I 200 226 210 218 Quarter II 320 310 315 333• Quarter III 145 153 140 122• Quarter IV 230 212 240 231• a) What are the seasonal indicies that should be used for each quarter?• What is the MAD for the data above? Supply Chain 67#
Supply Chain Network Fundamentals William T. Walker, CFPIM, CIRM, CSCP Practitioner, Author, and Supply Chain Architect Supply Chain 68#
Session Outline• Understanding How Supply Chains Work• The Value Principle and Network Stakeholders• Mapping a Supply Chain Network• The Velocity and Variability Principles• Locating the Push/Pull Boundary• The Vocalize and Visualize Principles• Summary Supply Chain 69#
Learning ObjectivesBy teaching the principles of supply chain managementto understand how a supply chain network works... We learn how to map a supply chain network. We learn how to engineer reliable network infrastructure by maximizing velocity and minimizing variability. We learn how the Bill Of Materials relates to the network. We learn how locating the push/pull boundary converts network operations from Build-To-Stock to Build-To-Order. We learn how to maximize throughput by engineering the means to vocalize demand and to visualize supply. Supply Chain 70#
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 Supply Chain 71#
Network Terminology "Source" "Make" "Deliver" "Return" Upstream Midstream Downstream Reverse Stream Zone Zone Zone Zone CustomerPhysical Flow Info Flow Cash Flow Value-Adding Value-Subtracting Supply Chain 72#
Supply Chain Network Operations Material moves downstream to the customer. Cash moves upstream to the supplier. Material M1 M2 M3Supplier Trading Customer Partner Cash $3 $2 $1 Supply Chain 73#
The Value Principle:Every stakeholder wins when throughput is maximized. Value is Return In Investment Shareholders Value is Trading the Perfect Value is Suppliers Customers Order Partner Continuity of Demand Employees Value is Employment Stability Supply Chain 74#
The Network RulesIn an effective supply chain networkeach trading partner works to... Maximize velocity, Minimize variability, Vocalize demand, and Visualize supply...in order to maximize throughput providingValue for each stakeholder.However, a lack of trust often gets in the way. Supply Chain 75#
The Network Trust FactorNetwork trust is based upon personal relationshipsand the perception that things are okay regarding: Network operating rules are clear Supply and demand information is shared Performance measures are agreed upon Relationship non-disclosures are kept secret Inventory investment is not a win-lose game Supply Chain 76#
Bill Of MaterialsItem Master Product Structure- Stock Keeping Unit (SKU) Number - Parent To Child Relationship- Description - Quantity Per Relationship- Unit Of Measure- Approved Supplier- Country Of Origin For Example- Cost Items: A3, B2, B5, C1, C2, C3, D1- Lead Time Suppliers: S1, S2, S3, S4, S5BOM Level 0. A3 S1BOM Level 1. B5 B2 S2BOM Level 2. C1 C2 C3 S4 S3BOM Level 3. D1 S5 Supply Chain 77#
Supply Chain Network Map Upstream Midstream DownstreamDriven by the Bill Of Materials Driven by the Delivery Channel Supply Chain 78#
How To Map A Network1. Start midstream and imagine finished goods sitting on a rack at the central depot.2. Now, use the Bill Of Materials and work upstream to reach each raw material supplier.3. Then, identify each different fulfillment channel used to reach the local mission.4. Determine which organizations are trading partners versus nominal trading partners.5. Logistics service providers, information service providers, and financial service providers are not part of the network map. Supply Chain 79#
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 supplychain network works by answering what, when, where, why, and how:Velocity – how are relationships connected to make the delivery? Supply Chain 80#
Logistics Touches Every Subcycle Order-To-Stock Order-To-Delivery Invoice-To-Cash Invoice-To-Pay Transportation moves material from seller to buyer In some cases orders/ invoices/ cash move by mail Warehouse issues trigger invoices Warehouse receipts trigger payments Supply Chain 82#
Import/ Export Boundaries Return Imports ExportsCountr y A Seller Shipment Buyer Countr y B Exports ImportsCountry 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. Supply Chain 83#
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 supplychain network works by answering what, when, where, why, and how:Variability – what is likely to change from one delivery to the next? Supply Chain 84#
Outward Signs of Variability Unplanned demand Backordered inventory Inventory leakage Capacity constraints Lower than normal yields Longer than expected transit times Delays in clearing Customs Delayed payment Supply Chain 85#
To Maximize Velocity Eliminate unnecessary process steps Shorten the longest serial process steps by eliminating queue time and automating steps Convert serial process steps into parallel process steps To Minimize Variability Rank order the variances Minimize the root cause of largest variance Continue with the next largest variance, etc. Supply Chain 86#
Customer Lead Time Build-To-Order (BTO) Order Push Pull Customer Demand Push/PullF/C Boundary Build-To-Stock (BTS) Order Push Pull Customer Demand Push/PullF/C Boundary Supply Chain 88#
How To Locate A Push/Pull Boundary1. Know the competitive situation; for example, if competitive products are off-the-shelf, then the push/pull boundary must be close to the customer.2. The push/pull boundary is a physical inventory location that bisects the entire supply chain.3. Order-To-Delivery Cycle Time = Order Processing and Transmission Time + Shipment Processing, Picking, and Packing Time + Transportation and Customs Clearance Time Supply Chain 89#
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 supplychain network works by answering what, when, where, why, and how:Vocalize – who knows the full requirements of the order? Supply Chain 90#
Common Causes of StockoutsQuantity Q Demand Uncertainty R SS Time L Quantity Lead Time Variability Q (LT = Cycle Time + Transit Time) R SS Time L Quantity Supply Uncertainty Q R SS Time L Supply Chain 91#
The Planning Interface MRP Materials Sales & Operations Plan Push From Requirements Master Schedule Forecast CRP Capacity Requirements Preload Inventory Pull To Capable Demand Network Push Zone Pull Zone I C I C Throughput Push/Pull BoundaryUpstream The Supply Chain Network Downstream Supply Chain 92#
Push Inventory And Capacity Push Zone Forecast I C Throughput Safety Safety 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. Supply Chain 93#
Pull Inventory And Capacity Pull Zone Order I C Max Max ThroughputEnding Inventory = Starting Inventory - Actual Demand + ProductionThroughput is limited to the smaller of limited inventoryor limited capacity. Supply Chain 94#
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 supplychain network works by answering what, when, where, why, and how:Visualize – where is the inventory now and when will it be available? Supply Chain 95#
Packaging And Labeling [ ] Cartons, plastic cushions, and labelsCartons may be missing from the product BOM. [ ] RFID/ bar code on all packaging. [ ] Select a wall thickness and box burstMaster strength to protect the product.Carton [ ] Keep Country Of Origin labeling consistent from the product to the outside packaging. [ ] Transportation and warehousing costsUnit Load are a function of cubic dimensions and weight. [ ] Items that have to be repalletized for transport or storage cost more. Supply Chain 96#
Track and Trace Tra c e Tra ck Supply Chain 97#
Apply Technology To Visualize • Bar Code and 2D Bar Code • Point Of Use Laser Scanners • Radio Frequency Identification (RFID) • Global Positioning by Satellite (GPS) • Wireless Communication Supply Chain 98#
Measuring Network Inventory Upstream Issues = Downstream Receipts Ending Inventory = Starting Inventory + Receipts – Issues Complete Products Reflect BOM Part Proportions1. 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. Supply Chain 99#
To Vocalize Be precise about units and configurations Acknowledge and handshake all information Dont skip any link holding inventory in the chain To Visualize Measure throughput rather than production Measure the network capacity constraint Measure total network inventory Supply Chain 100#
In SummaryWork the 5V Principles to maximize throughput. I win! Shareholders Trading We win! Suppliers Customers We win! Partner Employees I win! Supply Chain 101#
AGGREGRATE PLANNING (Chap8) Lesson 5• PROCESS OF DETERMINING LEVELS OF – PRODUCTION RATE – WORKFORCE – OVERTIME – MACHINE CAPACITY – SUBCONTRACTING – BACKLOG – INVENTORY• GIVEN DEMAND FORECAST – DETERMINE PRODUCTION, INVENTORY/BACKLOG AND CAPACITY LEVEL FOR EACH PERIOD• FUNDAMENTAL TRADE-OFFS – CAPACITY(REGULAR TIME, OVERTIME, SUBCONTRACING)/COST – INVENTORY/SERVICE LEVEL – BACKLOG/LOST SALES Supply Chain 102#
AGGREGRATE PLANNING STRATEGIES• STRATEGIES - SYNCHRONIZING PRODUCTION WITH DEMAND – CHASE- USING CAPACITY AS THE LEVER • BY VARYING MACHINE OR WORKFORCE (numbers or flexibility) • DIFFICULT TO IMPLEMENT AND EXPENSIVE. LOW LEVELS OF INVENTORY – TIME FLEXIBILITY – UTILIZATION AS THE LEVER • IF EXCESS MACHINE CAPACITY, VARYING HOURS WORKED (workforce stable, hours vary) • LOW INVENTORY AND LOWER UTILISATION THAN CHASE • USEFUL WHEN INVENTORY COST HIGH AND CAPACITY CHEAP – LEVEL – USING INVENTORY AS THE LEVER • STABLE WORKFORCE AND CAPACITY • LARGE INVENTORIES AND BACKLOGS • MOST PRACTICAL AND POPULAR Supply Chain 103#
SOP FORMAT PERIOD 1 2 3 4 5 6 SALES PRODUCTION INVENTORY/ BACKLOG• PRODUCTION PLAN = SALES + END INV – BEGIN INV• PRODUCTION PER MONTH = PRODUCTION PLAN NUMBER OF PERIODS• PRODUCTION PLAN = SALES – END BACKLOG + BEGIN BACKLOG Supply Chain 104#
Production Rates and Levels Application 1 — Make-to-Stock • Table Format (Inventory) Period 0 1 2 3 4 Forecast 150 150 150 150 Production plan Inventory 200 100 FOR A LEVEL STRATEGY, WORK OUT THE PRODUCTION PLAN AND INVENTORY BY PERIOD PRODUCTION = SALES + END INV – BEGIN INV Supply Chain 106#
Production Rates and Levels Application 2 — Make-to-Order• Table Format (Backlog) Period 0 1 2 3 4 Forecast 150 150 150 150 Production plan Backlog 200 100FOR A LEVEL STRATEGY WORK OUT THE PRODUCTION PLAN AND BACKLOG BY PERIOD PRODUCTION = SALES + BEGIN BL - END BL Supply Chain 107#
OPTIMIZATION THRU LINEAR PROGRAMMING• AGGREGATE PLANNING MODEL – RED TOMATO Pp 210 (105) – MAXIMIZING HIGHEST PROFIT OVER TIME PERIOD – DETERMINE DECISION VARIABLES PP212(107) – OBJECTIVE FUNCTION – MINIMIZE TOTAL COST • DEVELOP EQUATIONS FOR ALL THE COST ELEMENTS- Eq 5/8.1 – CONSTRAINTS EQUATIONS • WORKFORCE • CAPACITY • INVENTORY • OVERTIME – OPTIMIZE OBJECTIVE FUNCTION – FORECAST ERROR • SAFETY INVENTORY • SAFETY CAPACITY Supply Chain 108#
Excel File Aggregate Planning (Define Decision Variables)Wt = Workforce size for month t, t = 1, ..., 6Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6Pt = Production in month t, t = 1, ..., 6It = Inventory at the end of month t, t = 1, ..., 6St = Number of units stocked out at the end of month t, t = 1, ..., 6Ct = Number of units subcontracted for month t, t = 1, ..., 6Ot = Number of overtime hours worked in month t, t = 1, ..., 6 Supply Chain 109#
Aggregate Planning 8.2 Item CostMaterials $10/unitInventory holding cost $2/unit/monthMarginal cost of a stockout $5/unit/monthHiring and training costs $300/workerLayoff cost $500/workerLabor hours required 4/unitRegular time cost $4/hourOver time cost $6/hourCost of subcontracting $30/unit DEMAND Table 8.1 (5.1) Supply Chain 110#
Aggregate Planning (Define Objective Function) Monthly 6 6 Min ∑ 640W t + ∑ 300 H t t =1 t =1 6 6 6 + ∑ 500 Lt + ∑ 6 Ot + ∑ 2 I t t =1 t =1 t =1 6 6 6 + ∑ 5 S t + ∑10 Pt + ∑ 30 C t t =1 t =1 t =1 Supply Chain 111#
Aggregate Planning (Define Constraints Linking Variables) • Workforce size for each month is based on hiring and layoffsW t = W t −1 + H t − Lt, orW t − W t −1 − H t + Lt = 0for t = 1,...,6, where W 0 = 80. Supply Chain 112#
Aggregate Planning (Constraints)• Production for each month cannot exceed capacity Pt ≤ 40W t + Ot 4 , 40W t + Ot 4 − Pt ≥ 0, for t = 1,...,6. Supply Chain 113#
Aggregate Planning (Constraints) • Inventory balance for each monthI t −1 + Pt + C t = Dt + S t −1 + I t − S t ,I t −1 + Pt + C t − Dt − S t −1 − I t + S t = 0,for t = 1,...,6,where I 0 = 1,000,S 0 = 0,and I 6 ≥ 500. Supply Chain 114#
Aggregate Planning (Constraints)• Over time for each month Ot ≤ 10W t, 10W t − Ot ≥ 0, for t = 1,...,6. Supply Chain 115#
SOLVING PROBLEM USING EXCEL• STEP 1 BUILD DECISION VARIABLE TABLE (fig8.1) – ALL CELLS 0, EXCEPT PERIOD 0 FOR WORKFORCE AND INVENTORY – ENTER DEMAND (TABLE 8.4)• STEP 2 CONSTRUCT CONSTRAINT TABLE (fig8.2)• STEP 3 CREATE a CELL HAVING THE OBJECTIVE FUNCTION – (Formula 8.1) Optimizing TOTAL COSTS (Fig 8.3)• STEP 4 USE TOOLS SOLVER (Fig 8.4)• REPEAT IF OPTIMUM SOLUTION NOT OBTAINED• HOMEWORK (see homework) Supply Chain 116#
AGGREGATE PLANNING IN PRACTICE• MAKE PLANS FLEXIBLE BECAUSE FORECASTS ARE ALWAYS WRONG – PERFORM SENSITIVITY ANALYSIS ON THE INPUTS – I.E. LOOK AT EFFECTS OF HIGH/LOW• RERUN THE AGGREGATE PLAN AS NEW DATA EMERGES• USE AGGREGATE PLANNING AS CAPACITY UTILIZATION INCREASES – WHEN UTILIZATION IS HIGH, THERE IS LIKELY TO BE CAPACITY LIMITATIONS AND ALL THE ORDERS WILL NOT BE PRODUCED Supply Chain 117#
Process Flow Measures• FLOW RATE (Rt), CYCLE TIME (Tt), & INVENTORY (It) RELATIONSHIPS – F = Flow Rate or Throughput is output of a line in pieces per time – T = Cycle time is the time taken to complete an operation – I = Inventory is the material on the line – LITTLE’s LAW: Av. I = Av. R x Av. T x Variability factor Examples: • If Inventory is 100 pieces and Cycle time is 10 hours, the Throughput rate is 10 pcs per hour • If Cycle time is halved; Throughput is doubled • If Inventory is halved; cycle time is halved See Equation 8.6 How do we get Av Inv of 895 and Flow time of 0.34 months on page 227/216 Supply Chain 118#
Homework• Ex. Work out Inventory, Rate and cycle time for values in Tables 8.4,8.5 Supply Chain 119#
Supply Chain Network Basics – Lesson 4• Guest Lecture – go to Poly Blackboard Supply Chain 120#
MANAGING SUPPLY AND DEMAND PREDICTABLE VARIABILITY (LESSON 6)• Predictable Variability – Change in Demand that can be forecast or guided – MANAGING DEMAND – Short time price discounts, trade promotions• MANAGING SUPPLY – Capacity, Inventory, Subcontracting & Backlog, Purchased product – MANAGING CAPACITY • TIME FLEXIBILITY FROM WORKFORCE (OVERTIME) • USE OF SEASONAL WORKFORCE • USE OF SUBCONTRACTING • USE OF DUAL FACILITIES – DEDICATED AND FLEXIBLE • DESIGN PRODUCT FLEXIBILITY INTO PRODUCTION • USE OF MULTI-PURPOSE MACHINES (CNC MACHINE CENTERS) – MANAGING INVENTORY • USING COMMON COMPONENTS ACROSS MULTIPLE PRODUCTS • BUILD INVENTORY OF HIGH DEMAND OR PREDICTABLE DEMAND PRODUCTS Supply Chain 121#
MANAGING DEMAND (Predictable Variability)• Manage demand with pricing – Factors influencing the timing of a promotion: • Impact on demand; product margins; cost of holding inventory; cost of changing capacity• Demand increase (from discounting) due to: – Market growth – Stealing market share – Forward buyingDiscount of $1 increases period demand by 10%Reduce price by $1 in Jan, increases sales by 10% in first month - Tab 9.4, 9.5 – effect on cost, profit, inventoryIf discount is in April, highest demand month - Tab 9.6, 9.7• See the effects of various combination Tab 9-12• Summary Tab 9.12 & 9.13 Discuss Supply Chain 122#
PREDICTABLE VARIABILITY IN PRACTICE• COORDINATE MARKETING, SALES AND OPERATIONS – SALES AND OPERATIONS PLANNING – ONE GOAL MAXIMIZING PROFIT, ONE GAME PLAN• TAKE PREDICABLE VARIABILITY INTO ACCOUNT WHEN MAKING STRATEGIC DECISIONS• PARTNER WITH PRINCIPAL CUSTOMERS, ELIMINATE PREDICTIONS!• PREEMPT (PROMOS ETC.), DO NOT JUST REACT TO PREDICTABLE VARIABILITY Supply Chain 123#
MANUFACTURING - MANAGING LEAD TIME• CRITICAL DRIVER OF ALL MANUFACTURE – LAYOUT AND WORKPLACE ORGANIZATION – CONSTRAINT MANAGEMENT – VARIABILITY AND QUEUES – LOT SIZES AND SET UP REDUCTION – WORK IN PROCESS – FLEXIBILITY• MUST BE COMPANY FOCUS• MEASURED AND MONITORED – X BUTT TO BUTT – Supply Chain 124#
MANAGING INVENTORY• The role of inventory in the supply chain – Cycle Inventory (making or purchasing inventory in large lots) takes advantage of economies of scale to lower total cost – material cost, fixed ordering cost and holding cost.• Why hold inventory? – Economies of scale • Batch size and cycle time • Quantity discounts • Short term discounts / Trade promotions – Stochastic variability of supply and demand • Evaluating service level given safety inventory • Evaluating safety inventory given desired service level• Levers to improve performance Supply Chain 125#
Role of Inventory in the Supply Chain• Overstocking: Amount available exceeds demand – Liquidation, Obsolescence, Holding• Understocking: Demand exceeds amount available – Lost margin and future salesGoal: Matching supply and demand Supply Chain 126#
ROLE OF CYCLE INVENTORY (10.1)• Q – lot or batch size of an order• D – Demand• When demand steady : Cycle Inven = lot size/2 = Q/2 Saw tooth diagram• Average flow time = cycle inven / demand = Q/2D• C – material cost• S – fixed ordering cost• H – holding cost• h – cost of holding $1 in inventory for one year• H = hC cost of holding one piece for one year Supply Chain 127#
Cycle Inventory related costs in Practice• Inventory holding costs – usually expressed as a % per $ per year – Cost of capital (Opportunity cost of capital) – Obsolescence or spoilage cost – Handling cost – Occupancy cost (space cost) – Miscellaneous costs (security, insurance)• Order costs (same as set up costs in a machining environment) – Buyer time – Transportation costs – Receiving costs – Other costs• Cycle Inventory exists in a supply chain because different stages exploit economies of scale to lower total cost – material cost, fixed ordering cost and holding cost Supply Chain 128#
Fixed costs: Optimal Lot Size and Reorder Interval (EOQ)C: Cost per unit ($C/unit)h: Holding cost per year as a fraction of product cost ($%/unit/Year)H: Holding cost per unit per year H = hCQ: Lot SizeD: Annual demand 2 DS Q=S: Setup or Order CostAnnual order cost = (D/Q)SAnnual inventory cost = (Q/2)hCOptimum Q = √ 2DS/hC HT: Reorder interval (Q/D) 2S T=# orders/yr = D/Q = Optimal order freqTotal Annual Cost = CD+(D/Q)S+(Q/2)hCSee Fig 10-2 Showing effects of Lot Size DH Supply Chain 129#
Example 10.1Demand, D = 12,000 computers per yearUnit cost, C = $500Holding cost, h = 0.2Fixed cost, S = $4,000/orderWhat is the order quantity Q, the flow time, the reorder interval and Total cost?Q = 980 computersCycle inventory = Q/2 = 490Flow time = Q/2D = 0.049 monthReorder interval, T = 0.98 monthTotal Cost = 49,000 + 49,000 + 6,000,000 = $6,098,000 Supply Chain 130#
EXPLOITING ECONOMIES OF SCALE• SINGLE LOT SIZE OF SINGLE PRODUCT (EOQ) = Q – ANNUAL MATERIAL COST = CD – NO. OF ORDERS PER YEAR = D/Q – ANNUAL ORDER COST = (D/Q)*S – ANNUAL HOLDING COST = (Q/2)H = (Q/2)hC – TOTAL ANNUAL COST (TC) = CR+(D/Q)*S+(Q/2)hC – Optimal lot size Q* = √2DS/hC – Optimal ordering frequency = n* = D/Q* = √DhC/2S – Key Point: Total Ordering and Holding costs are relatively stable around the EOQ and a convenient lot size around the EOQ is OK (rather than a precise EOQ) – Key Point: If demand increases by a factor of k, the optimal lot size and no of orders increases by a factor of √k. Flow time decreases by a factor of √k – Key point: To reduce Q by a factor of k, fixed cost S must be reduced by a factor of k2 Supply Chain 131#
Reducing Lot Size - Aggregating• Exercise:• To reduce Q from 980 to 200, how much must order cost be reduced• Key point: To reduce Q by a factor of k, fixed cost S must be reduced by a factor of k2 Supply Chain 132#
LOT SIZING WITH MULTIPLE PRODUCTS & CUSTOMERS• Lot sizing with Multiple Product or Customers – Aggregating replenishment across products, retailers or suppliers in a single order, allows for a reduction in lot sizes because fixed costs spread across multiple products and businesses – Ordering and delivering independently (See Ex.10.3) • Each order has independent Holding, Ordering and Annual costs with independent EOQ’s and Flow Times – Table 10-1 • Total cost = $155,140 – Total cost Ordered and delivered jointly (See Ex.10.4) • Independent holding costs but combined fixed order cost Table 10-2 • Total Cost = $136,528 – Transportation capacity constraint – aggregating multiple products from same supplier; single delivery from multiple suppliers (Ex. 10-5)• Key Point –The key to reducing cycle inventory is reducing lot size. The key to reducing lot size without increasing costs is to reduce fixed costs associated with each lot – by reducing the fixed cost itself or aggregating lots across multiple products, customers or suppliers. We reduce lot size to reduce cycle time Supply Chain 133#
Impact of product specific order costTailored aggregation – Higher volume productsordered more frequently and lower volume productsordered less frequently (rather than ordered anddelivered jointly) 10-6SummaryTotal Costs Product specific order cost = $1000No $155,140 (10-3)AggregationComplete $136,528 (10-4)AggregationTailored $130,767 (10-6)Aggregation Supply Chain 134#
Delivery Options• No Aggregation: Each product ordered separately• Complete Aggregation: All products delivered on each truck• Tailored Aggregation: Selected subsets of products on each truck Supply Chain 135#
Economies of Scale to exploit Quantity Discounts• Two common Lot Size based discount schemes – All unit quantity discounts • Pricing based on specific quantity break points – Marginal unit quantity discounts or multiblock tariffs • Pricing based on quantity break points, but the price is not the average per block, but the marginal cost of a unit that decreases at breakpoint – See example in book on these discounts pages 276-280 Supply Chain 136#
WHY QUANTITY DISCOUNTS– Improved coordination to increase total supply chain profits • Commodity Products = price set by market. • Large Manufacturers should use lot based quantity discounts, to maximize profits (cycle inventory will increase) • The supply chain profit is lower if each stage makes pricing decisions independently, maximizing its own profit • Coordination to maximize profit – Two part tariff or quantity discounts – supplier passes on some of the profit to the retailer, depending on volume– Extraction of surplus through price discrimination– Trade Promotions – Lead to significant forward buying by the retailer – Retailer should pass on optimal discount to customer and keep rest for themselves Supply Chain 137#
Quantity Discounts• Discounts improve coordination between Supplier and Retailer to maximize Supply Chain profits.• Quantity Discounts are a form of manufacturer returning some reduced costs (less orders) to the retailer (costs increase as more holding costs)• Supply chain profit is lower, if each stage of supply chain independently makes its pricing decisions with the objective of maximizing its own profit. A coordinated solution results in higher profit• For products that have market power, two-part tariffs or volume based quantity discounts can be used to achieve coordination in the supply chain and maximize profits• Promotions lead to significant increase in lot size and cycle inventory, because of forward buying by the retailer. This generally reduces the supply chain profits 280-281 Supply Chain 138#
Strategies for reducing fixed costs• Wal-Mart: 3 day replenishment cycle• Seven Eleven Japan: Multiple daily replenishment• P&G: Mixed truck loads• Efforts required in: – Transportation (Cross docking) – Information – ReceivingAggregate across products, supply points, or delivery points in a single order, allows reduction of lot size for individual products Ex 10.6 Supply Chain 139#
ESTIMATING CYCLE INVENTORY COSTS• HOLDING COSTS – Cost of capital – Obsolescence or spoilage costs – Handling costs – Occupancy cost – Miscellaneous• Order Cost – Buyer time – Transportation costs – Receiving costs – Other costs Supply Chain 140#
Lessons From Aggregation• Key to reducing cycle inventory is reducing lot size. Key to reducing lot size without increasing costs is to reduce the fixed cost itself by aggregation (across multiple products, customers or suppliers)• Aggregation allows firm to lower lot size without increasing cost• Complete aggregation is effective if product specific fixed cost is a small fraction of joint fixed cost• Tailored aggregation is effective if product specific fixed cost is large fraction of joint fixed cost Supply Chain 141#
Lessons From Discounting Schemes• Lot size based discounts increase lot size and cycle inventory in the supply chain• The supply chain profit is lower if each stage independently makes pricing decisions with the objective of maximizing its own profit. Coordinated solution results in higher profit• Lot size based discounts are justified to achieve coordination for commodity products – competitive market and price fixed by market• Volume based discounts with some fixed cost passed on to retailer are more effective in general – Volume based discounts are better over rolling horizon Supply Chain 142#
Levers to Reduce Lot Sizes Without Hurting Costs• Cycle Inventory Reduction – Reduce transfer and production lot sizes • Aggregate fixed cost across multiple products, supply points, or delivery points – Are quantity discounts consistent with manufacturing and logistics operations? • Volume discounts on rolling horizon • Two-part tariff – volume based discount in stages – Are trade promotions essential? • EDLP (Every day low pricing) • Base on sell-thru (customers) rather than sell-in (retailers)• HOMEWORK • EXERCISES 1 AND 2 Pp291/297 Supply Chain 143#
Discussions on Site Visit• Macy’s Distribution Center (DC)• In teams please answer the following: – What is the size of the operation – What strategy do they adopt and why – What are the key competitive practices – How do they deal with each of the Supply Chain Drivers• Measurements used for efficiency?• How can they improve their operations? Supply Chain 144#
Mid Term• Show your calculations• Do not get stuck on any question1. Strategy applications and implications 152. Demand Management 203. Aggregate Demand 204. Cycle Inventory 205. Supply Chain Networks 25 Supply Chain 145#
Role of Inventory in the Supply Chain (LESSON 7) Improve Matching of Supply and Demand Improved Forecasting Reduce Material Flow Time Reduce Waiting Time Reduce Buffer Inventory Supply / Demand Seasonal Economies of Scale Variability Variability Cycle Inventory Safety Inventory Seasonal Inventory Figure Error! No text of Supply Chain 146#
WHY HOLD SAFETY INVENTORY? (SAFETY STOCK) • DEMAND UNCERTAINTY • SUPPLY UNCERTAINTY • TODAY’S ENVIRONMENT – INTERNET MAKES SEARCH EASIER – PRODUCT VARIETY GROWN WITH CUSTOMIZATION – EASE AND VARIETY PUTS PRESSURE ON PRODUCT AVAILABILITY – PUSH UP LEVELS OF INVENTORY / SAFETY STOCK • KEY QUESTIONS – APPROPRIATE LEVEL OF SAFETY STOCK – WHAT ACTIONS IMPROVE AVAILABILITY AND REDUCE SAFETY STOCK? Measures of product availability – Product fill rate (fr) – Order fill rate – Cycle service level (CSL) - THIS COURSE WILL DEAL mainly WITH CSL Supply Chain 147#
Lot Size = QInventory Cycle Inventory Q/2 ROP Safety Stock SS = ROP - DL Demand during Time Lead timeAPPROPRIATE LEVEL OF SAFETY STOCK DEPENDS ON:UNCERTAINTY OF DEMAND OR SUPPLYREPLENISHMENT LEAD TIME & DESIRED SERVICE LEVELCSL – Cycle service level -CSL is the fraction of replenishmentcycles that end with all the customer demand being met. Areplenishment cycle is the interval between two successivereplenishment deliveries Supply Chain 148#
Replenishment policies• Replenishment policies – When to reorder? – How much to reorder?Continuous Review: Order fixed quantity when total inventory drops below Reorder Point (ROP)Periodic Review: Order at fixed time intervals to raise total inventory to Order up to Level (OUL)Factors driving safety inventory – Demand and/or Supply uncertainty – Desired level of product availability – Replenishment lead time• Demand Uncertainty– Av.Demand; Stnd Devn; Lead Time Supply Chain 149#
Continuous Review Policy: Safety Inventory and Cycle Demand Uncertainty & Service LevelL: Lead time for replenishment SS = ROP - RLD: Average demand per unit timeσ D:Standard deviation of demand Average Inventory = Q/2 + SS per periodDL : Mean demand during lead timeσ L: Standard deviation of demand during lead timeCSL: Cycle service level – Probability of not stocking out in replenishment cycleSS: Safety inventoryROP: Reorder pointCv: Coefficient of variance Supply Chain 150#
FORMULAS USED FOR CALCULATING SERVICE LEVELSD L = LDσ L = Lσ DROP = D L + ssCSL = F ( ROP, D L ,σ L )cv = σ / µCSL = F ( ROP, DL ,σ L ) = NORMDIST ( ROP, D L ,σ L ,1)fr = 1 − ESC / Q = (Q − ESC ) / QorESC = −( ss[1 − NORMDIST ( ss / σ L ,0,1,1] + σ L NORMDIST ( ss / σ L ,0,1,1) Supply Chain 151#
Example 11.1&2, 11.4 (Continuous Review Policy) = 8.xx New book11.1: R = 2,500 /week; σR = 500L = 2 weeks; Q = 10,000; ROP = 6,000 CSL = 90%SS = ROP - DL =Average Inventory = Z ChartAverage Flow Time =11.2: Evaluating CSL given a replenishment policyCSL = Prob (demand during lead time <= ROP)Distribution of demand during lead time of 2 weeks D = DL LCycle service level, CSL = F(RL + ss, RL , σL ) = F(ROP, RL , σL ) σ = Lσ L DExcel: NORMDIST (ROP, RL , σL ,1)X1= Xbar + Z σL or ROP = RL + Z σL Calculate the % z represents. Calculate Safety Stock for above Supply Chain 152#
Examples of Safety Stock Calculations• Weekly demand for Lego at Wal Mart is normally distributed with a mean of 2500 boxes and a standard deviation of 500. The replenishment lead time is 2 weeks. Assuming a continuous replenishment policy, evaluate the safety inventory that the store should carry to achieve a cycle service of 90 percent Supply Chain 153#
Factors Affecting Fill Rate• Fill Rate: Proportion of customer demand that is satisfied from Inventory. Directly related to CSL• Safety inventory: Safety inventory is increased by: – Increasing fill rate (Table 11-1) – Increasing CSL – Increasing supplier lead time by factor k – SS increases by factor of SQRT k – Increasing standard deviation of demand by factor k – SS increases by factor of k• Lot size: Fill rate increases on increasing the lot size even though cycle service level does not change. Actions: 1. Reduce supplier Lead Time L 2. Reduce underlying uncertainty of demand σ R Supply Chain 154#
Evaluating Safety Inventory Given Fill Rate Required safety stock grows rapidly with increase in the desired Product availability Fill Rate Safety Inventory 97.5% 67 98.0% 183 98.5% 321 99.0% 499 99.5% 767 The required SS grows rapidily with increase in desired Fill RateThe required SS increases with increase in Lead time and the σ of demand Supply Chain 155#
Impact of Supply Uncertainty Considering variation in Demand and in Replenishment Lead time (Ex 11.6) • D: Average demand per period ∀ σ D: Standard deviation of demand per period • L: Average lead time for replenishment ∀ sL: Standard deviation of supply lead time Mean demand during lead time D = DL L σ 2 2Standard Deviationof demand during lead time = Lσ L 2 D +D s L Supply Chain 156#
Impact of Supply Uncertainty ((See Ex. 11.6 & Table 11.2)Ex.11.6: R = 2,500/day; σR = 500; L = 7 days; Q = 10,000;CSL = 0.90 (z=1.29); sL = Standard Deviation of lead time=7days What is S.S?Large potential benefits of reducing Lead time or lead time variability in reduction of Safety stock SS units SS (d) Stnd Dev(σ L )Safety inventory when sL = 0 1,695 0.68 1,323Safety inventory when sL = 1 3,625 1.45 2,828Safety inventory when sL = 2 6,628 2.65 5,172Safety inventory when sL = 3 9,760 3.90 7,616Safety inventory when sL = 4 12,927 5.17 10,087Safety inventory when sL = 5 16,109 6.44 12,750Safety inventory when sL = 6 19,298 7.72 16,109Safety inventory when sL = 7 is 22,491 8.99 17,550 Supply Chain 157#
Basic Quick Response Initiatives• Reduce information uncertainty in demand• Reduce replenishment lead time• Reduce supply uncertainty or replenishment lead time uncertainty• Increase reorder frequency or go to continuous review Supply Chain 158#