Supply Chain Management SYST 4050 Slides Supply Chain Management Lecture 6 Chapter 1

Outline Today Next week Homework 1 due Chapter 4 SYST 4050 Slides Outline Today Homework 1 due Chapter 4 Introduction to Excel Solver? Next week Chapter 5 Chapter 1

Designing a Supply Chain Network SYST 4050 Slides Designing a Supply Chain Network In designing a supply chain, we need to consider how all supply chain drivers should be used together to support the competitive strategy of a company and maximize supply chain profits Corporate Strategy Competitive Strategy Supply Chain Strategy Responsiveness Efficiency Facilities Inventory Transportation Information Sourcing Pricing Chapter 1

Factors Influencing Distribution Network Design SYST 4050 Slides Factors Influencing Distribution Network Design Performance of a distribution network should be evaluated along two dimensions Customer needs that are met (customer service) Response time (Time it takes for a customer to receive an order) Product variety (Number of different products that are offered) Product availability (Probability of having a product in stock) Customer experience (Ease of placing and receiving orders) Order visibility (Ability of customers to track their orders) Returnability (Ease of returning unsatisfactory merchandise) Cost of meeting customer needs (supply chain cost) Inventory (All raw materials, WIP, and finished goods) Transportation (Moving inventory from point to point) Facility & handling (Locations where product is stored, assembled, or fabricated) Information (Data and analysis of all drivers in a supply chain) Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service Chapter 1

Design Options For a Distribution Network SYST 4050 Slides Design Options For a Distribution Network Two key decisions when designing a distribution network Will the product be delivered to the customer location or picked up from a preordained site? Will product flow through an intermediary? Chapter 1

Retail Storage with Customer Pickup SYST 4050 Slides Retail Storage with Customer Pickup Example: Retail stores such as Wal-Mart and JCPenney Customers pick up product from retailers Low transportation cost High facility cost Relative easy returnability Increased inventory cost No order tracking necessary If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer Effective for fast moving items Retailer Consumers Distributor Warehouse Manufacturers Chapter 1

Manufacturer Storage with Direct Shipping (Drop Shipping) SYST 4050 Slides Manufacturer Storage with Direct Shipping (Drop Shipping) Example: eBags Products are shipped directly to the consumer from the manufacturer Retailer is an information collector: Passes orders to the manufacturers It does not hold product inventory Inventory is centralized at manufacturer Drop shipping offers the manufacturer the opportunity to postpone customization Effective for high value, large variety, low demand products High transportation cost Retailer Manufacturers Consumers This model is also referred to as drop-shipping. Retailers carries no inventory. All inventory is at the manufacturer’s site. This is eBags model, which takes orders and arranges for the manufacturer’s to ship directly to the customers. Transportation cost is high because the average outbound distance to the end customer is large. Package carriers are used and are more expensive than TL or LTL. A good information infrastructure is needed. Response time tends to be large. eBags Nordstrom.com (for slow moving footwear) W.W. Grainer (for slow moving items) Chapter 1

Manufacturer Storage with Direct Shipping and In-Transit Merge SYST 4050 Slides Manufacturer Storage with Direct Shipping and In-Transit Merge Example: Furniture retailers merge couches and coffee tables produced by different manufacturers Dell merges a Dell PC with a Sony flat screen Shipments from multiple manufactures are merged before making a single delivery to the consumer Shipments to Mergers are larger so economies of scale is achieved Mergers increase facility costs Response time may go up Retailer Mergers Consumers Manufacturers Chapter 1

Distributor Storage with Carrier Delivery SYST 4050 Slides Distributor Storage with Carrier Delivery Example: Amazon Inventory is held at a warehouse which ships to customer by carriers With respect to direct shipping Inventory aggregation is less Higher inventory costs Facility costs are higher Less information to track Warehouses are physically closer to consumers which leads to Faster response time Lower transportation cost Not effective for slow moving items Distributor Warehouse Manufacturers Consumers Chapter 1

Distributor Storage with Last Mile Delivery SYST 4050 Slides Distributor Storage with Last Mile Delivery Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress Warehouse delivers to customers instead of carrier Warehouses are located closer to consumers Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher. Products must be flowing fast to justify the infrastructure Processing cost are high Distributor Warehouse Manufacturers Consumers Chapter 1

Manufacturer or Distributor Storage With Customer Pickup SYST 4050 Slides Manufacturer or Distributor Storage With Customer Pickup Example: 7dream.com Customers come to pick up sites (warehouse, retailer) to get the products If consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costs Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located. Significant amount of information is required Increased handling cost Distributor Warehouse Manufacturers Consumers Chapter 1

Comparing Distribution Networks SYST 4050 Slides Comparing Distribution Networks 1 = strongest performance 6 = weakest performance Chapter 1

Design Options For a Distribution Network SYST 4050 Slides Design Options For a Distribution Network Retail Storage with Consumer Pickup Manufacturer Storage with Direct Shipping Manufacturer Storage with Direct Shipping and In-Transit Merge Distributor Storage with Carrier Delivery Distributor Storage with Last Mile Delivery Manufacturer or Distributor Storage with Consumer Pickup Chapter 1

Design Options For a Distribution Network SYST 4050 Slides Design Options For a Distribution Network Retailer Consumers Distributor Warehouse Manufacturers Retailer Manufacturers Consumers Retailer Mergers Consumers Manufacturers Distributor Warehouse Manufacturers Consumers Distributor Warehouse Manufacturers Consumers Distributor Warehouse Manufacturers Consumers Chapter 1

From brick-and-mortar to click-and-mortar SYST 4050 Slides From brick-and-mortar to click-and-mortar What has been the impact of e-business on supply chain cost? What has been the impact of e-business on customer service? In the future, do you see the number of distributors decreasing, increasing, or staying about the same? Impact of e-business on customer service Response time to customers Longer for products that cannot be downloaded Product variety Easier to provide a larger product variety Product availability Aggregation of inventory allows for improved availability Customer experience Much broader reach Time to market Easier to introduce new products quickly Returnability Cost of reverse flows increases Impact of e-business on supply chain cost Inventory An e-business requires less inventory due to aggregation Postponement can lower inventory cost Facilities An e-business requires less facilities because of centralizing operations Reduced handling costs because fewer intermediaries are used Transportation Apart from digital products an e-business tends to have higher transportation cost (across the entire supply chain) Information Significant information infrastructure is needed Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle? Why should an e-business such as Amazon.com build more warehouses as its sales volume grows? Chapter 1

Dell: Network Design (Europe) SYST 4050 Slides Dell: Network Design (Europe) A successful distribution network satisfies customer needs at the lowest possible cost Chapter 1

SYST 4050 Slides Dell: Network Design As Cannon noted, the Dell build-to-order and “do it all ourselves” model served the company well for almost 20 years, but “the environment has changed.” Just a few years ago, Dell was positioned as the supply chain place where most of us needed to be: almost no finished goods or parts inventory; negative cash-to-cash cycle (paid by customers before paying suppliers); “have it your way” flexibility/the epitome of mass customization; sophisticated demand management techniques to drive buyers to what was most profitable or available in terms of PC configurations; cut out the middleman. Now, it appears, Dell itself doesn’t want to be there. “Our supply chain needs to change dramatically,” Cannon said. Chapter 1

SYST 4050 Slides Dell: Network Design Dell’s approach added a lot of complexity – and cost. He said, for example, that for many models, there were as many as 500,000 configuration options. Why do that? “Because we could,” Cannon said. “We had a very flexible supply chain that allowed us to offer that level of configuration choice.” That approach, in turn actually led to higher product costs in many cases. Here’s how. Base/entry models had to be built in a way that permitted all these add-ons to much higher end models. So, if/when customers configured their way up to a high-end unit, Dell made good money. But if a customer stayed with a basic offering, the company lost margin because the base unit versus the competition had extra costs to support the potential of high-end add-ons. Chapter 1

Dell to Migrate Manufacturing Operations from Ireland to Poland SYST 4050 Slides Dell: Network Design Dell has said it believes it can save $3 billion annually from various measures, and Cannon said most of that will come out of these changes to the supply chain over the next 2-3 years. It had sales of $61 billion last year, so that’s about a 5% reduction in total costs. Dell to Migrate Manufacturing Operations from Ireland to Poland Chapter 1

Example: Dell Network Design Decision SYST 4050 Slides Example: Dell Network Design Decision $31 $19 $23 Chapter 1

Example: Dell Network Design Decision SYST 4050 Slides Example: Dell Network Design Decision Chapter 1

What is an Optimization Problem SYST 4050 Slides What is an Optimization Problem Generally, an optimization problem seeks a solution where decisions need to be made in a constrained or limited resource environment Most supply chain optimization problems require matching demand and supply when one, the other, or both may be limited An optimization problem comprises three major components Decision variables Constraints Objective Chapter 1

Introduction to Excel Solver SYST 4050 Slides Introduction to Excel Solver Installing Excel Solver Goto Tools > Add-ins… Select “Solver Add-in” and press OK Opening Excel Solver Goto Tools > Solver Chapter 1

Example: Profit Maximization Problem SYST 4050 Slides Example: Profit Maximization Problem The Windsor Glass Company is planning to launch two new products. 8 feet glass door with aluminum framing 4x6 feet window with wood framing Management of the company wants to determine what mixture of both products would be most profitable Chapter 1

Example: Profit Maximization Problem SYST 4050 Slides Example: Profit Maximization Problem 8 Feet Aluminum Frame Doors 4x6 Wood Frame Windows Windsor Glass Company Plant 1 (Aluminum frames) 1 hour Plant 3 (Glass and assembly) Profits Excess cap. 4 hours 3 hours $3,000 Plant 2 (Wood frames) 2 hours $5,000 Excess cap. 18 hours 2 hours Excess cap. 12 hours Chapter 1

Windsor Glass Company Model SYST 4050 Slides Windsor Glass Company Model Inputs Decision variables X1 number of batches of doors produced X2 number of batches of windows produced Chapter 1

Windsor Glass Company Model SYST 4050 Slides Windsor Glass Company Model Objective function Maximize 3000 X1 + 5000 X2 Chapter 1

Windsor Glass Company Model SYST 4050 Slides Windsor Glass Company Model Constraints Hours available in Plant 1 X1  4 Hours available in Plant 2 2 X2  12 Hours available in Plant 3 3 X1 + 2 X2  18 Nonnegative production quantities X1  0, X2  0 Chapter 1

Windsor Glass Company Model SYST 4050 Slides Windsor Glass Company Model Decision variables X1 number of batches of doors produced X2 number of batches of windows produced Objective function Maximize 3000 X1 + 5000 X2 Constraints X1 <= 4 (Available hours Plant 1) 2 X2 <= 12 (Available hours Plant 2) 3 X1 + 2 X2 <= 18 (Available hours Plant 3) X1, X2 >= 0 (nonnegativity) Chapter 1

Windsor Glass Company Model SYST 4050 Slides Windsor Glass Company Model Objective function Maximize 3000 X1 + 5000 X2 Chapter 1

Windsor Glass Company Model SYST 4050 Slides Windsor Glass Company Model Constraints 0 <= 4 - X1 (Available hours Plant 1) 0 <= 12 - 2 X2 (Available hours Plant 2) 0 <= 18 - 3 X1 - 2 X2 (Available hours Plant 3) X1, X2 >= 0 (nonnegativity) Constraints X1 <= 4 (Available hours Plant 1) 2 X2 <= 12 (Available hours Plant 2) 3 X1 + 2 X2 <= 18 (Available hours Plant 3) X1, X2 >= 0 (nonnegativity) Chapter 1

Windsor Glass Company Model SYST 4050 Slides Windsor Glass Company Model Decision variables X1 number of batches of doors produced X2 number of batches of windows produced Objective function Maximize 3000 X1 + 5000 X2 Constraints 0 <= 4 - X1 (Available hours Plant 1) 0 <= 12 - 2 X2 (Available hours Plant 2) 0 <= 18 - 3 X1 - 2 X2 (Available hours Plant 3) X1, X2 >= 0 (nonnegativity) Chapter 1

Windsor Glass Company Model using Excel Solver SYST 4050 Slides Windsor Glass Company Model using Excel Solver Objective function Decision variables Constraints Chapter 1

Windsor Glass Company Model using Excel SYST 4050 Slides Windsor Glass Company Model using Excel Chapter 1