SCM Dynamics


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SCM Dynamics

  1. 1. Supply Chain Dynamics <ul><ul><li>Mihir Kumar Jhaveri </li></ul></ul>
  2. 2. Introduction <ul><li>Oliver and Webber coined SCM in 1982 </li></ul><ul><li>Their Thesis: </li></ul><ul><ul><li>Top Management alone can ensure non-conflicting functional objectives along SCN </li></ul></ul><ul><ul><li>An integrated systems strategy be developed and implemented </li></ul></ul><ul><ul><li>Coordination of M-I-F flows is challenging yet rewarding </li></ul></ul>
  3. 3. Decisions in SCM <ul><li>Academic work on Integration and Coordination started much before 1982: </li></ul><ul><ul><li>Product Postponement (Alderson 1957) </li></ul></ul><ul><ul><li>Collaboration and Cooperation (Bowersox 1969) </li></ul></ul><ul><ul><li>Location and Control of Inventories in SCN's (Hanssmann 1959) </li></ul></ul><ul><ul><li>Hierarchical Production Planning (Hax and Meal 1975) </li></ul></ul><ul><ul><li>Bullwhip effect in SCN's (Forrestor 1958) </li></ul></ul>
  4. 4. 1. Product Postponement <ul><li>Product postponement occurs in two ways: </li></ul><ul><ul><ul><li>Manufacturing PP: Changes in form and identity occur @ the latest possible point in the SCN </li></ul></ul></ul><ul><ul><ul><li>Logistics PP: Changes in inventory location occur @ the latest possible point in time </li></ul></ul></ul><ul><li>HP Deskjet Printers: </li></ul><ul><ul><ul><li>Power cords, Voltage requirements, fonts, etc. </li></ul></ul></ul>
  5. 5. Product Postponement (contd) <ul><li>Advantages of PP: </li></ul><ul><ul><li>Hedge against uncertain customer demand </li></ul></ul><ul><ul><li>Reduce inventory holding cost </li></ul></ul><ul><ul><li>Reduce Logistics/Warehousing costs </li></ul></ul><ul><ul><li>Minimize imbalance in stock distribution </li></ul></ul><ul><ul><li>Eliminate stages in Manufacturing </li></ul></ul><ul><ul><ul><li>Eg: packaging, customer does assembly etc. </li></ul></ul></ul>
  6. 6. Features of PP <ul><li>Loss of Economies of Scale! </li></ul><ul><li>Requires quick set ups and agile procurement </li></ul><ul><li>Reduced risk of product obsolescence </li></ul><ul><li>Requires increased capability to process, transmit, and deliver orders </li></ul><ul><li>Product should be &quot;DFPP&quot; </li></ul><ul><ul><li>(Should be technically and economically feasible) </li></ul></ul>
  7. 7. 2. Collaboration and Coordination <ul><li>Individual objectives of different functional units within a firm may jeopardize overall efficiency </li></ul><ul><ul><ul><li>Manufacturing: Long production runs </li></ul></ul></ul><ul><ul><ul><li>Procurement: Lowest procurement costs </li></ul></ul></ul><ul><ul><ul><li>Marketing: Infinite assortments </li></ul></ul></ul><ul><ul><ul><li>Finance: Low inventories </li></ul></ul></ul><ul><ul><ul><li>Logistics: Full Truck Loads </li></ul></ul></ul>
  8. 8. Collaboration and Coordination (contd) <ul><li>Information Sharing (Transparency) using ICT </li></ul><ul><ul><ul><li>SCM/ERP Solutions </li></ul></ul></ul><ul><ul><ul><li>B2B Markeplaces </li></ul></ul></ul><ul><ul><ul><li>B2C and CRM </li></ul></ul></ul>
  9. 9. 3. Location and Control of Inventories <ul><li>Supply Rationing Problem: Given shortage in supplies, how to allocate stock across echelons </li></ul><ul><ul><ul><li>Threshold policies for high priority customers (Ha 1997) </li></ul></ul></ul><ul><ul><ul><li>Minimize total imbalance in stock distribution s.t. service level constraints (Van der Heijden 1997) </li></ul></ul></ul><ul><li>Hundreds of articles in various journals including OR, MS, EJOR, JORS, IJPR, IJPDLM, JOM, etc. </li></ul>
  10. 10. 4. Hierarchical Production/Distribution Planning <ul><li>Hierarchical integration of production planning and scheduling </li></ul><ul><ul><ul><li>Provide effective decision support for different DM levels within a hierarchical organization </li></ul></ul></ul><ul><li>Based on the following scheme: </li></ul><ul><ul><ul><li>Decompose to get hierarchical structure (Stgc-Tac-Opn) </li></ul></ul></ul><ul><ul><ul><li>Do Aggregation where possible (eg. Forecasts: agg. on time,products,markets; Capacity: agg. On resources) </li></ul></ul></ul><ul><ul><ul><li>Hierarchical coordination (by setting targets+getting f/b) </li></ul></ul></ul>
  11. 11. 5. Bullwhip Effect in Supply Chains <ul><li>Forrestor: Industrial Dynamics, HBR, 36:4, 1958 </li></ul><ul><ul><ul><li>First research paper to illustrate systems dynamics in SCN's </li></ul></ul></ul><ul><ul><ul><li>Base for developing Distribution Games </li></ul></ul></ul><ul><ul><ul><li>&quot;BWE&quot; coined by P&G </li></ul></ul></ul><ul><li>BWE describes the increasing amplification of orders occuring within a SC </li></ul><ul><ul><ul><li>Resembles a whip lash </li></ul></ul></ul><ul><li>Occurs even if end-item demand is fairly stable! </li></ul><ul><ul><ul><li>Forrestor studied a simulation model of the simplest tandem supply chain with four entities: Retailer, DC, W/H, Plant </li></ul></ul></ul>
  12. 12. Bullwhip Effect (contd) <ul><li>Assumptions of Forrestor's model: </li></ul><ul><ul><ul><li>Each entity can make use of only locally available info </li></ul></ul></ul><ul><ul><ul><li>Time delays between ordering and receipt of order </li></ul></ul></ul><ul><ul><ul><li>It takes 3 weeks for retailer to process the order, half a week to transmit it to DC </li></ul></ul></ul><ul><ul><ul><li>The DC takes 1 week to process the order and one week to ship to the retailer, who takes one week to ship to end customer; assumptions for other entities likewise.. </li></ul></ul></ul><ul><li>To study impact of a one time +10% change in retail sales on orders placed and inventory levels </li></ul>
  13. 13. Bullwhip Effect (contd) <ul><li>Forrestor's results: </li></ul><ul><ul><li>&quot;...A sudden 10% increase in retail sales implies a peaking of 34% on orders @ 14th week in factory w/h, resulting in factory output peaking in 21 st week (including a 6 week lead time) by a whopping 45%..&quot; </li></ul></ul><ul><li>Amplified and out of phase fluctuations in ordering and inventory levels </li></ul><ul><ul><ul><li>Avoidable inventory and shortage costs; Unstable system </li></ul></ul></ul><ul><li>RELEVANT EVEN TODAY! </li></ul><ul><ul><ul><ul><ul><li>Replace week by day in the above analysis </li></ul></ul></ul></ul></ul>
  14. 14. Bullwhip Effect: Some Illustrations
  15. 15. Bullwhip Effect: Some Illustrations
  16. 16. Bullwhip Effect (contd) <ul><li>Causes of BWE: (Empirical: Lee et al: 1997; Analytical: Chen et al: 2000) </li></ul><ul><ul><li>Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered) </li></ul></ul><ul><ul><li>Order Batching (to realise logistics EoS+Reducing order processing costs) </li></ul></ul><ul><ul><li>Price Fluctuations (resulting in over-reactions) </li></ul></ul><ul><ul><li>Supply Rationing (Proportionate rationing; unrestricted order acceptance+free return policy) </li></ul></ul>
  17. 17. Counter-Measures for BWE <ul><li>Avoid multiple demand forecasts </li></ul><ul><ul><li>Order based on ultimate customer demand </li></ul></ul><ul><ul><li>Use EDI+POS+VMI </li></ul></ul><ul><ul><li>Choose a good forecasting method (PLC has a major say) </li></ul></ul><ul><ul><li>Move from decentralized DM to centralized planning (visibility+control is better) </li></ul></ul><ul><ul><li>Remove layers in channel if possible </li></ul></ul><ul><ul><li>Eg: HP, Apple, IBM, P&G/Walmart </li></ul></ul>
  18. 18. Counter-Measures for BWE (contd) <ul><li>Break order batches </li></ul><ul><ul><li>Increase frequency of ordering (OP costs reduced by EDI) </li></ul></ul><ul><ul><li>Resort to standardization to minmize OP costs </li></ul></ul><ul><ul><li>Use 3PL to make small batch replenishments economical </li></ul></ul><ul><ul><li>Aggregate across retail outlets to utilize FTL EoS </li></ul></ul><ul><ul><li>Reduce safety stocks by cutting lead times </li></ul></ul><ul><ul><li>Eg: 3PL using Fedex, P&G </li></ul></ul>
  19. 19. Counter-Measures for BWE (contd) <ul><li>Stabilize prices </li></ul><ul><ul><li>EDLP (P&G) </li></ul></ul><ul><ul><li>Special purchase contracts </li></ul></ul><ul><li>Eliminate shortage gaming </li></ul><ul><ul><li>Allocate based on past sales (Sun) </li></ul></ul><ul><ul><li>Share capacity and information (HP, Motorola) </li></ul></ul><ul><ul><li>Limit flexibility wrt time (HP, Seagate) </li></ul></ul>
  20. 20. The Distribution Game <ul><ul><li>&quot;Beer Distribution Game&quot; </li></ul></ul><ul><ul><li>Bounded rationality depicts decision makers </li></ul></ul><ul><ul><li>Orders based on current inventory status, amount ordered by direct successors, past performance </li></ul></ul><ul><ul><li>Over-reaction; increases steadily towards u/s end of SCN </li></ul></ul><ul><ul><li> </li></ul></ul>