1. Supply Chain Management
Managing the Supply Chain
Key to matching demand with supply
Cost and Benefits of inventory
Levers for reducing mismatch costs
Cycle Inventory and Economies of Scale
Safety Inventory and Uncertainty
Structuring Supply Chains
Centralization & Pooling efficiencies
Postponement
Accurate Response
Palu Gear
Movie Rental Business
J.A. Van Mieghem/Operations/Supply Chain Mgt

2. What is Supply Chain Management?
Managing supply chain flows and assets to maximize supply chain surplus in a sustainable manner.
The Procurement
or supply system
The Operating
System
The Distribution System
Raw Material
supply points
Movement/
Transport
Storage
STORAGE
PLANT 1
PLANT 2
PLANT 3
WAREHOUSE
MARKETS
Manufacturing
Finished Goods A B C
Key flows in the supply chain are - information, product, and cash (payments up/down SC). It is through these flows that a supply chain fills a customer order.
The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows.
Dell: what SC flows are key to Dell’s success? Why? Direct sales, low inventories MTO, merge-in-transit.
Information Customers: close contact; match D&S by steering to available stuff, share demand, production schedules with component manufacturers – have steady demand in large assembly plants so suppliers can plan and replenish easily => Dell can keep low comp. inventories.
Compaq/HP: what challenges do they face with indirect model?
SC surplus = profit: what end customer has paid - total cost expended by supply chain in filling order.
Sustainable: SC-wide view.
Improve SC surplus for remaining parties.
Each remaining party should have viable existence surplus increase at the expense of another.
Unsustainable: push inventory to suppliers. SC wide, could be beneficial (aggregation, less value), but what if cost kills supplier. QR.
Sustainable: Bullwhip
Marks and Spencer.
J.A. Van Mieghem/Operations/Supply Chain Mgt

3. Wal-Mart Financials over time
12 months ending 1/31 of:
(Millions USD)
2011
2010
2009
2008
2007
Total Revenue
418,952
408,214
404,374
377,023
348,368
Cost of Revenue, Total
315,287
304,657
304,056
284,137
263,979
Gross Profit
103,665
100,389
97,031
89,684
80,780
SG&A Expense
81,020
79,607
77,520
70,934
63,892
Accounts Receivable - Trade, Net
5,089
4,144
3,905
3,642
2,840
Total Inventory
36,318
33,160
34,511
35,159
33,685
What questions would you ask the Wal-Mart CFO?

4. Amazon Financials over time
12 months ending 12/31 of:
(Millions USD)
2010
2009
2008
2007
2006
Total Revenue
34,204
24,509
19,166
14,835
10,711
Cost of Revenue, Total
26,561
18,978
14,896
11,482
8,255
Gross Profit
7,643
5,531
4,270
3,353
2,456
Total Receivables, Net
1,587
988
827
682
382
Total Inventory
3,202
2,171
1,399
1,200
877
What questions would you ask the Amazon CFO?

5. The Role of Inventory in the Supply Chain
Goal: Match supply and demand
Otherwise: Mismatch cost:
Overstocking = available amount > demand
liquidation, obsolescence, holding
Under-stocking = demand > available amount
lost sales and resulting lost margin and future sales
What are the causes (challenges) driving this mismatch?
Notes:
J.A. Van Mieghem/Operations/Supply Chain Mgt

6. Magazine sales at newsstands: as % of copies shipped to newsstands
In Style
People
Vanity Fair
Vogue
The New Yorker GQ
New York
Esquire
Rolling Stone Us
Talk
64.7%
54.5%
45.6%
42.1%
39.9%
39.4%
35.1%
31.0%
28.0%
23.9%
18.0%
Data for Oct – Oct. 2000

7. The challenge of increased responsiveness:
The challenge of increased responsiveness: A Key to Matching Supply and Demand
When would you rather place your bet? A B C D
Notes:
A: A month before start of Derby
B: The Monday before start of Derby
C: The morning of start of Derby
D: The winner is an inch from the finish line
J.A. Van Mieghem/Operations/Supply Chain Mgt

8. Push/Pull View of Supply Chains
Boundary
Procurement,
Customer order cycle
Manufacturing and
Replenishment cycles
PUSH PROCESSES
PULL PROCESSES
Process 1
Process 2
Process 3
Process k
Process
k+1
Process N
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
Customer
Order Arrives
J.A. Van Mieghem/Operations/Supply Chain Mgt

9. Role of Inventory in the Supply Chain
Cost
Availability
Responsiveness
Efficiency
Notes:
S. Chopra/Operations/Supply Chain

10. Supply Chain Management
Managing the Supply Chain
Key to matching demand with supply
Cost and Benefits of inventory
Levers for reducing mismatch costs
Cycle Inventory and Economies of Scale
Safety Inventory and Uncertainty
J.A. Van Mieghem/Operations/Supply Chain Mgt

11. Palü Gear: Cycle Inventory & Economies of Scale
Annual jacket revenues at a Palü Gear retail store are roughly $1M. Palü jackets sell at an average retail price of $325, which represents a mark-up of 30% above what Palü Gear paid its manufacturer. Being a profit center, each store made its own inventory decisions and was supplied directly from the manufacturer by truck. A shipment up to a full truck load, which was about 1500 jackets, was charged a flat fee of $2,200. To exploit economies of scale, stores typically ordered full truck loads. (Palü’s cost of capital is approximately 20%.)
What order size would you recommend for a Palü store in current supply network?
retailer
manufacturer
J.A. Van Mieghem/Operations/Supply Chain Mgt

12. Economies of Scale: Inventory Build-Up Diagram
R: Annual demand rate,
Q: Number of wind breakers per replenishment order
Number of orders per year = R/Q.
Average number of wind breakers in inventory = Q/2 .
Inventory
Inventory Profile:
# of wind breakers in
inventory over time. Q
-R = Demand
rate
Q/2
“cycle stock”
Time t
J.A. Van Mieghem/Operations/Supply Chain Mgt

13. Accurate Response to Scale Economies: Economic Order Quantity EOQ
Total annual costs
H Q/2: Annual holding cost
S R /Q:Annual setup cost
Order Size Q
Fixed cost per order
The order quantity that minimizes total supply chain cost is:
Annual unit demand
Annual unit holding cost
J.A. Van Mieghem/Operations/Supply Chain Mgt

14. Optimal Economies of Scale: For a Palü Gear retailer
R = 3077 units/ year C = $ 250 / unit
r = 0.20/year S = $ 2,200 / order
Unit annual holding cost = H = 0.20/yr x $250 = $50/yr
Optimal order quantity = Q = sqrt(2 x 3077 x 2200/50) = 520
Number of orders per year = R/Q = 5.9
Time between orders = Q/R = 0.17yr = 8.8weeks
Annual order cost = (R/Q)S = $13,008.87/yr
Average inventory I = Q/2 = 260
Annual holding cost = (Q/2)H =$13,008.87/yr
Average flow time T = I/R = yr = 4.4weeks
J.A. Van Mieghem/Operations/Supply Chain Mgt

15. Costs associated with batches
Order Costs (S)
Setup/Changeover of process
Transportation
Receiving
Holding costs (H)
Physical holding cost
Cost of capital
Cost of obsolescence

16. Learning Objectives: Batching & Economies of Scale
Increasing batch size Q of order (or production) increases average inventories (and thus flow times).
Average inventory for a batch size of Q is Q/2.
The optimal batch size minimizes supply chain costs by trading off setup cost and holding cost and is given by the EOQ formula.
To reduce batch size, one must reduce setup cost (time).
Economies of scale are manifested by the square-root relationship between QEOQ and (R, S):
If demand increases by a factor of 4, it is optimal to increase batch size by a factor of 2 and produce (order) twice as often.
To reduce batch size by a factor of 2, setup cost has to be reduced by a factor of 4.
J.A. Van Mieghem/Operations/Supply Chain Mgt

17. Demand uncertainty and forecasting: How good is “your forecast?”
Year Demand Forecast ? ? ? ?
? 
The numbers in the updated slide are the batting averages for Ken Griffey Jr, who played for the Seattle Mariners until the end of the 1999 season. The story is as follows:
At the end of 1999 Griffey demanded a trade to the Cincinatti Reds, who had to decide how much he was worth. He was offered $117 m for 9 years, presumably on the belief that he would once again break As Marty noted this morning, the industry average is about .260, and breaking .300 consistently puts you in Hall of Fame contention.
Griffey started off the year 2000 with the Reds very badly, with injuries, but managed to pull off a respectable .271 for the 2000 season. Respectable, yes, but worth $117 million??
This of course goes along with the example, in that forecasts are usually off and people tend to overestimate. Griffey has much more name recognition with non-sports fans than Danny Tartabull.
By the way, Ken Griffey Jr is also known as "Junior." His father, Ken Griffey, was also a star.
A very timely update - the Reds just put Ken Griffey Jr. on the disabled list (DL). He has a partially torn left hamstring. Hamstring injuries are, like diamonds, potentially forever! This example just keeps getting better!
The Mariners (Griffey's former team), by the way, despite losing to Chicago, are the first team to get 20 wins before May.
J.A. Van Mieghem/Operations/Supply Chain Mgt

18. Demand uncertainty and forecasting: Key Facts about Forecasting
Forecasts should capture all available knowledge: historical data, “market intelligence,” etc.
(Point) Forecasts are usually (always?) wrong
A good forecast has at least 2 numbers: it includes a measure of forecast error or variability, e.g., standard deviation s
Operational response =
The longer the forecast horizon, the less accurate the forecast
The forecast horizon must at least be as large as the lead time
Demand during shorter lead times has less variability
Aggregate forecasts tend to be more accurate
Pooled demand has less “relative variability” (s /mean)
J.A. Van Mieghem/Operations/Supply Chain Mgt

19. Learning Objectives safety inventory and uncertainty
Safety stock is a hedge against uncertainty
Need more safety stock when there is an increase in
service level,
demand variability or forecast error,
delivery lead time,
delivery lead time variability.
J.A. Van Mieghem/Operations/Supply Chain Mgt

20. Supply Chain Management
Managing the Supply Chain
Key to matching demand with supply
Cost and Benefits of inventory
Levers for reducing mismatch costs
Cycle Inventory and Economies of Scale
Safety Inventory and Uncertainty
Structuring Supply Chains
Centralization & Pooling efficiencies
Postponement
Accurate Response
Palu Gear
Movie Rental Business
J.A. Van Mieghem/Operations/Supply Chain Mgt

21. Structuring Drivers of Supply Chain Performance to Improve Matching of Supply and Demand
Demand with Supply
Transportation
Inventory
Information
Facilities
J.A. Van Mieghem/Operations/Supply Chain Mgt

22. Structuring Inventory for Accurate Response
System A (Decentralized)
System B (Centralized)
Notes:
How do both systems compare?
J.A. Van Mieghem/Operations/Supply Chain Mgt

23. Actions to improve supply chain profitability:
Actions to improve supply chain profitability: Various possibilities to pool: Aggregation Actions
Physical centralization
Information centralization
Specialization
Substitution
Commonality
Postponement
Multiple locations
Information centralization: Wal-Mart, The Gap, mail order
Product substitution: Dell, Category Management
Multiple products
J.A. Van Mieghem/Operations/Supply Chain Mgt

24. Accurate Response using Speed
Principle: Long term forecasts are less accurate than short term forecasts.
Action: Shorten time of information and physical flows
Reduce replenishment lead time
Reduce supply uncertainty or replenishment lead time uncertainty
Increase reorder frequency or go to continuous review
Speed, however, comes at a cost!
J.A. Van Mieghem/Operations/Supply Chain Mgt

25. Global Dual Sourcing
Mexico-China?
You are a $10B high-tech US manufacturer of wireless transmission components, about 20SKUs. Intense global competition put pressure on margins and working capital
You have two assembly plants, one in China and another in Mexico, that supply a warehouse in McAllen, TX.
How can you best manage this existing global network?
Emphasize that you have an existing global network (or at least have the option to change already identified locations. We shall not discuss how to find locations and related setup costs.)
The two key questions we want to address: you may have an existing SKU that is:
1. offshored to a low cost location; should you bring it back?
2. sourced locally; should you offshore it?
Or you may have a new SKU in the pipeline…
A good tool to analyze those decisions is TLC—how many of you found it better to use China for the SKUs in mini-case 6? How did you compute TLC?
insight.kellogg.northwestern.edu
Global Dual Sourcing Strategies
Should you source your carbon fiber bicycle frames from Mexico or China?
Based on the Research of Gad Allon And Jan A. Van Mieghem
Do no copy nor poste on the Internet.

26. Digital Tech & Social Media to improve information
The value of early information and forecast updating
Even for stable products, clickstream tracking of non-transactional websites can improve holding and backlogging costs by 5% (Huang & Van Mieghem 2011)
500
1000
1500
2000
2500
3000
3500
4000
Actual total sales: Each data point represents the forecast and the actual season sales for a particular item (at the style-color level).
Updated Forecast after observing 20% of sales
Initial Forecast
Updated Forecast after observing 80% of sales
insight.kellogg.northwestern.edu
From Web Visits to Firm Orders:
Analyzing web visitor click data to streamline sales efforts
Based on the research of Tingliang Huang And Jan A. Van Mieghem

27. Movie Rental Business

28. Summary: Improved Matching of Supply and Demand
Notes:
S. Chopra/Operations/Supply Chain