1. Supply Chain Management Fall, 2004 Dr. Lu Note 2
Supply Chain Basics
Supply Chain Management
Fall, 2004
Dr. Lu
Note 2

2. Outline The supply chain processes Service metrics Performance drivers
Cycle view and pull push view
Service metrics
Average lead time, fill rate
Performance drivers
Inventory, transportation, information and facility
Basic facts and their implications in SCM
Economy of scale, risk pooling and information principle
Introduction to the beer game

3. SCM Is Hot
The competition becomes between a supply chain to another chain
The Increased complexity of supply chain
Emergence of global supply chain
More demanding customers
Shorter production lifecycles
Outsourcing, decentralized control and more…
Feasibilities
radical improvement in information technology and communication capabilities

4. Cycle View of Supply Chain Processes
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier

5. Customer order cycle Customer arrival Customer order entry
Customer order fulfillment
Customer order receiving

6. Replenishment cycle Retail order trigger Retail order entry
Retail order fulfillment
Retail order receiving

7. Manufacturing cycle
Order arrival from the distributor, retailer, or customer
Production scheduling
Manufacturing and shipping
Receiving at the distributor, retailer, or customer

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

9. Supply Chain Service Metrics
Average lead time
Percentage of demand met immediately from stock (fill rate)
Percentage of orders filled within a prespecified time window
Percentage of orders filled correctly

10. Supply Chain Cost Ordering/transaction costs Inventory costs
Ordering processing equipment, labor
Inventory costs
Capital, obsolescence, insurance, storage
Transportation
Truck, airfreight, shipping, labor
Facilities
Warehouses, retail space
Taxes and tariffs

11. Drivers of Supply Chain Performance
Inventory
Facility
Transportation
Information

12. Inventory
Inventory is the raw materials, work in process and the finished products within a supply chain
Provides good service to the customer
The higher inventory means higher fill rate
Helps to take advantages of economies of scale in production and distribution
Inventory can be used as a tool to reduce cost
It incur cost
Cost of space, equipment, labor
Cost of insurance, tax
Cost of perished, damaged goods
Cost of obsolescence
Cost of capital

13. Inventory the Evil

14. Nordstrom Target high-end customer
They are willing to pay premium price for high service level
Stock high inventory to provide high service level
High inventory cost can be justified by the high price

15. Transportation
Transportation moves the products from one stage to another stage
Modes of transportation
Air, truck, Rail, Pipeline, Electronic transportation
In house or outsource the transportation
Outsource usually can reduce cost, however, flexibility is restrict
Overall trade-off
Responsiveness or efficiency

16. Facilities
Facilities is where of the inventory are stored and transported to and from
Decision about facilities
Location
Capacity
Overall trade-off
Responsiveness and efficiency

17. Information Information is critical in today’s SCM
Coordination needs the information sharing
The demand information, status of inventory, status of the supply…
Good decision need to be based on the good information
Forecast need to be based on good information

18. Major Tradeoffs in Decision Making
Inventory costs vs. transportation
Frequent shipments are expensive, but reduce inventory
Inventory vs. service level
More inventory provides better service, but is more costly
Inventory vs. information
Better information (more accurate demand forecast and more reliable supplier deliveries) reduces inventory, but requires efforts and investments

19. Challenges Future is always uncertain
Demand uncertainty
Supply variability
The existence lead times worsen the situation
Transportation from one location to another
Production time
Order processing time
While inventory can serve as a buffer to cope with the above difficulties, it is costly
Opportunity cost of capital
Maintenance, obsolescence, etc.
Different players with different objectives

20. Obstacles Increasing variety of product Decreasing product cycle
Customer is more demanding
Globalization

21. SCM Tactics for the Challenge
Future is always uncertain
demand forecasting
mechanism to reduce the variability of the demand at some cost
The existence lead times worsen the situation
Information technology, e-business
While inventory can serve as a buffer to cope with the above difficulties, it is costly
Inventory management
Different players with different objectives
Supply chain coordination

22. Basic Facts (1) There exists fixed costs
Production set-up, facility construction/equipment purchasing, transportation cost
Fixed costs implies economies of scale
Order more will reduce the average fixed cost per item

23. Economies of Scale
When there is fixed cost in producing or purchasing, the more one produces or purchases, the less the per unit cost will be
Implications for SCM
A central warehouse realizes economies of scale in consolidated purchasing
Fewer large warehouses leads to lower total overhead cost relative to many smaller warehouse
Outsource activities that are not core competence of economy and utilize someone else’s economy of scale

24. Basic Facts (2) There exists variation and hence risk
Demand, processes
Variation degrades system performance and there exists an effect of risk pooling
When variation reduces, with same cost, the service level can be improved

25. Risk Pooling
Demand variability is reduced if one aggregates demand across locations because it is more likely that high demand from one customer can be offset by low demand from another customer
We also call it “the square root effect”
Let D=D1+D2+…+Dn, where Di is the demand in location i, when Di are independent and var(Di)=σ2, then var(D)=nσ2

26. Implication of Risk Pooling in SCM
Centralized inventory enjoys the risk pooling effect and therefore requires less investment
This is another reason why we see central warehouses
Delaying product differentiation reduces the inventory of common components and/or standardized semi-productions
Since it pools the risk of demand fore different products
Postpone, Dell’s ATO system

27. Implication of Risk Pooling in SCM
Examples:
demand is i.i.d. we have two items, the transportation time from the warehouse to the retailer store is negligible 2 1 1 2

28. Examples: ATO demand is i.i.d. we have two items
The product is AB or AC
We have two components for either A, B or C 1 2 1 1 1

29. Basic Facts (3) Information accumulates over time
Observe demand, quality, etc.
More information helps make better decisions

30. Information
Uncertainty is largely due to lack of information, so more information helps to increases the predictability of the environment and therefore helps to make better decision
Implication in the SCM
A central warehouse in effect delays the inventory allocation decision to a later point, at which better allocations can be made using more accurate estimation of the local demand and the stock levels in each stores
Delayed customization utilizes this fact too
Centralized decisions are better than the local decisions: VMI is an implication of this idea; Inventive schemes should be created so that to induce an decentralized system to act like a centralized system: coordination

31. Implication of Information
The magic of relocating
Demand is i.i.d.
Re-allocate 20
=== 10 10 10 10 10 10 10 10 10 10 10 10
-20 10
-20
-20

32. Purpose
Experience first hand the flow of materials through a distribution system.
Understand what is happening in each stage
Understand the information distortion

33. The Beer Game Manufacturer Beers Distributor Wholesaler Retailer
Orders
Customers

34. Four Players on a Team Factory Distributor Wholesaler Retailer Orders
Delay
Factory
Distributor
Wholesaler
Retailer
Orders
Material

35. Beer Game Four players without communication
Manufacturer
Distributor
Retailer
Four players without communication
Event sequence in each stage:
Receives Beer (after Shipping Delay)
Receives Orders from Downstream
Ships Beer Downstream to meet Orders
Orders Beer from Upstream (the only decision)
Wholesaler

36. Parameters
Unsatisfied demand is fully backlogged (all demand is to be satisfied)
No capacity constraints
Parameters
Ordering lead time is two weeks for each stage
Inventory cost/week is $1.00
Backlog cost/week is $2.00
Objective function: Minimize Total Supply Chain Cost
Total Cost = Sum of Costs at all four Stages

37. Playing the Game Cost – Inventory & Stockout Goal – Minimize Costs
Delays
No Communication within the Team
Two decisions each period – How much to ship? How much to order?
Must click on “Submit Button” to enter decision.
Play a few rounds to get the hang of it…

38. Game Tasks Plot your Weekly Orders Plot your Inventory and Backlog
Plot your Guess on Consumer Demand Pattern
Calculate Total Cost at your Stage
Sum Costs over all Four Stages

39. Playing Game Group name:ust_001, ust_002,…,ust_009,ust_010
The retailer will create the game names
The other players choose to join in the game
When there are four players, the first player (retailer) will start the game and place order
There are some initial shipments between all the stages and at the stages
Make decision based on your own information!

40. How to Start the Game Go to the website: Choose Start or Join
Choose Start or Join
The retailer choose start and the other players choose join
Choose your role: the first player choose the retailer
The retailer starts the game
The game will last for 52 weeks
You can end it earlier

41. Discussion
What, if anything, is unrealistic about this game? Is reality more complicated or less complicated?
Why are there delays between each stages?
What happened?
Variance in Orders
Inventory/Shortages – Feast or Famine
What was the actual demand at the retailer?
Did you find yourself “blaming” the person upstream for your problems?
What commonalities do you see in the graphs for the different teams?
What pattern do you see? What is the cost of this?
What are the reasons that such patterns are seen in the supply chain?

42. Summary An process view of supply chain
Drivers for the performance of supply chain
Challenges in supply chain management
Some basics and principles
Next week
Achieving strategic fit and scope
Discuss of beer game