Supply Chain Management Managing Material Waiting Time S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Outline A key to matching supply and demand Levers for improved matching of supply and demand The bullwhip effect: Barilla The impact of aggregation S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

The Supply Chain 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 Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Key Financial Indicators of Supply Chain Performance Return on Assets Net Present Value … These are LAGGING indicators. What must the supply chain do to achieve this? Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Costs of not Matching Supply and Demand Cost of overstocking liquidation, obsolescence, holding Cost of under-stocking lost sales and resulting lost margin Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Accurately Matching Demand with Supply is the Key Challenge: Inventories ... by 1990 Wal-Mart was already winning an important technological war that other discounters did not seem to know was on. “Wal-Mart has the most advanced inventory technology in the business and they have invested billions in it”. (NYT, Nov. 95). WSJ, Aug. 93: Dell Computer stock plunges. The company was sharply off in forecast of demand resulting in inventory writedowns. BW 1997: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Mass Customization Mass Production Mass Customization Produce goods and services at low enough cost that nearly everyone can afford them Mass Customization Produce goods and services at affordable prices with enough variety and customization that nearly everyone can find exactly what they want . S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Implications Markets have become increasingly heterogeneous Demand for individual products is very unstable Along with shorter development cycles comes shorter product life cycles How to provide increased variety and keep costs down? S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

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 lead horse is an inch from the finish line Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives PUSH PROCESSES PULL PROCESSES S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

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

Demand uncertainty and forecasting Forecasts are usually (always?) wrong A good forecast includes a measure of forecast error, e.g., standard deviation The forecast horizon must at least be as large as the lead time. The longer the forecast horizon, the less accurate the forecast Aggregate forecasts tend to be more accurate than disaggregate forecasts. Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Demand uncertainty and forecasting Year Demand Forecast Error 1986 270 1987 309 1988 274 1989 268 1990 268 1991 316 Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Uncertainty Uncertainty Customer Information Demand Uncertainty S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

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Information Uncertainty: Barilla Spa Why are order sizes at Pedrignano so much more variable than those at Cortese? What can Barilla do to improve coordination in its supply chain? S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

The Bull-Whip Effect: Causes Rational and Optimizing Players in Supply Chain Order Batching Price Variations Sales Force Incentives Demand Signal Processing Rationing Game Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Reducing Batch Size Wal-Mart: 3 day replenishment cycle Seven Eleven Japan: Multiple daily replenishment P&G: Mixed truck loads Efforts required in: Transportation (Cross docking) Information Receiving S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Quantity Discounts Quantity Discounts Cost/Unit $3 $2.96 $2.92 5,000 Notes: 5,000 10,000 Order Quantity S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Trade Promotions Trade Promotions Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Trade promotions Trade Promotions Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

The Bullwhip Effect: Countermeasures Order Batching Reduce setup cost, aggregation during transport, switch to volume based quantity discounts (rolling horizon) Price Variations Every day low pricing, sell-thru based promotions Sales Force Incentives Incentives based on sell-thru, rolling horizon Demand Signal Processing Supply chain visibility, collaborative forecasting and planning Rationing Game Turn and earn S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

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Tackling Demand Uncertainty The longer the forecast horizon, the less accurate the forecast Supply Chain Goal: Quick Response Aggregate forecasts tend to be more accurate than disaggregate forecasts Supply Chain Goal: Accurate Response Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Quick Response Shorten supply lead time Increase replenishment frequency Coordinate supply chain S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

A Key to Accurate Response: Inventory Pooling Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Accurate Response Examples Information centralization: Wal-Mart, The Gap, mail order Specialization: W.W. Grainger Product substitution: Dell, Category Management Notes: S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Accurate Response at Dell Geographical aggregation: One location in the US; three locations worldwide SKU aggregation: Postponement and component commonality Manufacture common components Final Assembly and delivery Customer order arrives S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

Hewlett Packard: Postponement Vancouver DC Sale Localization at Vancouver No Postponement (unit cost cheap) Notes: Localization at DC Postponement (unit cost expensive) S. Chopra/Operations/Supply Chain S. Chopra/Operations/Supply Chain

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