Strategic Decisions (Part II)

Decision Phases of a Supply Chain Supply chain strategy or design Automate flow of information between company and supply chain partners Supply chain planning Generate demand forecasts for a product (demand planning) and help develop sourcing and manufacturing plans for that product Supply chain operation Manage the flow of products through distribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner

Supply Chain Planning Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year

Supply Chain Planning Planning decisions: Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

Capacity Management in a Supply Chain Managing capacity Time flexibility from workforce Use of seasonal workforce Use of subcontracting Use of dual facilities – dedicated and flexible Designing product flexibility into production processes

The Capacity Management Problem Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s (supply chain’s) profit over the planning horizon Specify the planning horizon (typically 3-18 months) Specify the duration of each period Specify key information required to develop capacity management plan

Capacity Management Strategies Trade-off between capacity, inventory, backlog/lost sales Chase strategy – using capacity as the lever Time flexibility from workforce or capacity strategy – using utilization as the lever Level strategy – using inventory as the lever Mixed strategy – a combination of one or more of the first three strategies

Chase Strategy Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies However, in practice, it is often difficult to vary capacity and workforce on short notice Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Should be used when inventory holding costs are high and costs of changing capacity are low

Time Flexibility Strategy Can be used if there is excess machine capacity Workforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale problems of the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are high and capacity is relatively inexpensive

Level Strategy Maintain stable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time Inventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periods Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog costs are relatively low

Decision Phases of a Supply Chain Supply chain strategy or design Automate flow of information between company and supply chain partners Supply chain planning Generate demand forecasts for a product (demand planning) and help develop sourcing and manufacturing plans for that product Supply chain operation Manage the flow of products through distribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner

Supply Chain Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon)

Drivers of Supply Chain Performance Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites Inventory raw materials, WIP, finished goods within a supply chain inventory policies Transportation combinations of transportation modes and routes

Drivers of Supply Chain Performance Information data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance Sourcing functions a firm performs and functions that are outsourced Pricing Price associated with goods and services provided by a firm to the supply chain

Supply Chain Performance Measurement Metrics for measuring supply chain performance: Fill rate (the ability to fill orders by the due date) Average time from order to delivery The number of days of supply in inventory Forecast accuracy The cycle time for sourcing and making a product

Case Study :Toyota’s Demand Planning With more than 1,200 accessory part numbers Toyota was experiencing greater business complexity and increased business volume regarding new models and parts The spreadsheet-based system Toyota used to manage its supply chain processes was less than optimal. Toyota’s accessory supply administrators had to go into the spreadsheets to manually enter and extract critical vehicle information.

Toyota’s Challenges To automate the forecasting process To allow more time to examine demand drivers To remove inefficiencies from the supply chain

Toyota’s Supply Chain Solution Replace existing spreadsheet-based system Enable administrators to investigate issues during ordering process Analyze part numbers more effectively

How did i2 Technology help? Toyota chose i2 Demand Planner™ as the solution to forecast future demand for its automotive parts and accessories. Demand Planner provides an environment that combines the best statistical techniques, unlimited causal factors, and the ability to manage multiple inputs with best-in-class, multi-dimensional data representation and analysis in a user-friendly manner.

The Outcome increased forecasters’ efficiency Improved communication among supply chain divisions Reduced inventory shortages and overages resulting from poor forecasting

Discuss the following questions: What problems do Toyota address? How does i2 Technology supply chain solution help solve these problems? What issues and challenges do Toyota present? What can be done to address these issues? What are the business as well as the technology issues that should be addressed when i2 Technology provide Toyota demand planning solution?