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Slide 1Supply Chain Management© Van Mieghem 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
Slide 2Supply Chain Management© Van Mieghem 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 Raw Material Storage Movement/ Transport Movement/ Transport STORAGE PLANT 1 PLANT 2 PLANT 3 WAREHOUSE Movement/ Transport MARKETS Manufacturing Finished Goods Storage A B C
Slide 3Supply Chain Management© Van Mieghem 12 months ending 1/31 of: (Millions USD) 20112010200920082007 Total Revenue418,952408,214404,374377,023348,368 Cost of Revenue, Total 315,287304,657304,056284,137263,979 Accounts Receivable - Trade, Net 5,0894,1443,9053,6422,840 Total Inventory36,31833,16034,51135,15933,685 Gross Profit103,665100,38997,03189,68480,780 SG&A Expense 81,02079,60777,52070,93463,892 Wal-Mart Financials over time What questions would you ask the Wal-Mart CFO?
Slide 4Supply Chain Management© Van Mieghem Total Receivables, Net 1,587988827682382 Total Inventory3,2022,1711,3991,200877 12 months ending 12/31 of: (Millions USD) 2010 2009200820072006 Total Revenue34,20424,50919,16614,83510,711 Cost of Revenue, Total 26,56118,97814,89611,4828,255 Gross Profit7,6435,5314,2703,3532,456 What questions would you ask the Amazon CFO? Amazon Financials over time
Slide 5Supply Chain Management© Van Mieghem 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?
Slide 6Supply Chain Management© Van Mieghem 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. 1999 – Oct. 2000
Slide 7Supply Chain Management© Van Mieghem The challenge of increased responsiveness: A Key to Matching Supply and Demand When would you rather place your bet? A B C D 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
Slide 8Supply Chain Management© Van Mieghem Push/Pull View of Supply Chains Customer Order Arrives PUSH PROCESSES Process 1 Process 2 Process 3 Process k Process k+1 Process N Push/Pull Boundary PULL PROCESSES Procurement, Manufacturing and Replenishment cycles Customer order cycle
Slide 9Supply Chain Management© Van Mieghem Role of Inventory in the Supply Chain
Slide 10Supply Chain Management© Van Mieghem 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
Slide 11Supply Chain Management© Van Mieghem 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 Palü Gear: Cycle Inventory & Economies of Scale
Slide 12Supply Chain Management© Van Mieghem 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. Q Time t Inventory Profile : # of wind breakers in inventory over time. Inventory Q/2 “cycle stock” -R = Demand rate
Slide 13Supply Chain Management© Van Mieghem Accurate Response to Scale Economies: Economic Order Quantity EOQ The order quantity that minimizes total supply chain cost is: H Q/2: Annual holding cost Order Size Q Total annual costs S R /Q:Annual setup cost Annual unit demand Fixed cost per order Annual unit holding cost
Slide 14Supply Chain Management© Van Mieghem Optimal Economies of Scale: For a Palü Gear retailer R = 3077 units/ yearC = $ 250 / unit r = 0.20/yearS = $ 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 = 0.084 yr = 4.4weeks
Slide 15Supply Chain Management© Van Mieghem 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
Slide 16Supply Chain Management© Van Mieghem 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 Q EOQ 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.
Slide 17Supply Chain Management© Van Mieghem Demand uncertainty and forecasting: How good is “your forecast?” Year Demand Forecast 1994323 1995258? 1996303? 1997304? 1998284? 1999285?
Slide 18Supply Chain Management© Van Mieghem 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 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 Operational response = Aggregate forecasts tend to be more accurate Pooled demand has less “relative variability” ( /mean) Operational response =
Slide 19Supply Chain Management© Van Mieghem 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.
Slide 20Supply Chain Management© Van Mieghem 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
Slide 21Supply Chain Management© Van Mieghem Structuring Drivers of Supply Chain Performance to Improve Matching of Supply and Demand Improve Matching of Demand with Supply TransportationInformationInventoryFacilities
Slide 22Supply Chain Management© Van Mieghem Structuring Inventory for Accurate Response System A (Decentralized)System B (Centralized) How do both systems compare?
Slide 23Supply Chain Management© Van Mieghem Actions to improve supply chain profitability: Various possibilities to pool: Aggregation Actions Physical centralization Information centralization Specialization Substitution Commonality Postponement Multiple locations Multiple products
Slide 24Supply Chain Management© Van Mieghem 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!
Slide 25Supply Chain Management© Van Mieghem 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? 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
Slide 26Supply Chain Management© Van Mieghem 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) 0 500 1000 1500 2000 2500 3000 3500 4000 05001000150020002500300035004000 0 500 1000 1500 2000 2500 3000 3500 4000 05001000150020002500300035004000 0 500 1000 1500 2000 2500 3000 3500 4000 05001000150020002500300035004000 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
Slide 27Supply Chain Management© Van Mieghem Movie Rental Business
Slide 28Supply Chain Management© Van Mieghem Summary: Improved Matching of Supply and Demand
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Strategic Decisions (Part II). Decision Phases of a Supply Chain Supply chain strategy or design Automate flow of information between company and supply.
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McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 4 Supply Contracts.
Independent Demand Inventory Systems 1. Inventory Inventory: a store of goods held for future use Types of inventory: raw materials, work-in- process,
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McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Merchandising Activities Chapter 6.
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