1. Supply Chain Management
SYST 4050 Slides
Supply Chain Management
Lecture 17
Chapter 1

2. Outline Today Next week Survey Midterm Brief semester overview
SYST 4050 Slides
Outline
Today
Survey
Midterm
Brief semester overview
Start with Chapter 10
Next week
Chapter 10
3e: Sections 1, 2 (up to page 273), 6
4e: Sections 1, 2, 3 (up to page 260)
Chapter 1

3. Most supply chains are actually supply networks
SYST 4050 Slides Q1
Supply Chain Stages
A typical supply chain may involve a variety of stages
Supplier
Manufacturer
Distributor
Retailer
Customer
Most supply chains are actually supply networks
Chapter 1

4. Push/Pull View of Supply Chain Processes
SYST 4050 Slides Q2
Push/Pull View of Supply Chain Processes
Execution is initiated in response to customer orders
(reactive)
PULL PROCESSES
Customer order arrives
Execution is initiated in anticipation of customer orders
(speculative)
PUSH PROCESSES
Processes are divided based on their timing relative to the timing of a customer order
They key difference is the uncertainty during the two phases
At the time of execution of a pull process customer demand is known
At the time of execution of a push process customer demand is not known (and must be forecasted)
Processes are divided based on the timing of their execution relative to a customer order
Chapter 1

5. Cycle View of Supply Chain Processes
SYST 4050 Slides Q3
Cycle View of Supply Chain Processes
Customer
Customer Order Cycle
Cycle view defines the processes involved and the owner of each process
Retailer
Replenishment Cycle
Distributor
Each cycle occurs at the interface between two successive stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Chapter 1

6. 2. Understanding the Supply Chain Capabilities
SYST 4050 Slides Q4
2. Understanding the Supply Chain Capabilities
Supply chain capabilities
Supply chain responsiveness
Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc
Supply chain efficiency (low cost)
Celestial Seasoning
ProBuild
Mortgage
Interceptor Body Armor
Crocs
Netflix
Highly efficient
Highly responsive
Somewhat responsive
Somewhat efficient
Integrated steel mills
Hanes apparel
Most automotive production
Seven-Eleven Japan
Chapter 1

7. 1. Understanding the Customer and Supply Chain Uncertainty
SYST 4050 Slides Q5
1. Understanding the Customer and Supply Chain Uncertainty
Understanding customer uncertainty
Demand varies along certain attributes
Quantity in each lot, response time, variety of products needed, convenience, price, innovation, etc
Implied demand uncertainty
Demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand
Understanding customer uncertainty: Demand varies along certain attributes
Implied demand uncertainty is demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand
Demand uncertainty reflects the uncertainty of customer demand for a product
Chapter 1

8. SYST 4050 Slides Q6
Key Observations
There is no supply chain strategy that is always right
There is a right supply chain strategy for a given competitive strategy
A company’s competitive strategy defines (relative to its competitors) the set of customer needs that it seeks to satisfy through its products and services
Chapter 1

9. From Strategy to Decisions
SYST 4050 Slides Q7
From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
To understand how a company can improve supply chain performance in terms of responsiveness and efficiency we must examine (and make decisions about) the drivers of supply chain performance
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Logistical drivers
Cross functional drivers
Chapter 1

10. 2. Understanding the Supply Chain Capabilities
SYST 4050 Slides Q8
2. Understanding the Supply Chain Capabilities
Supply chain capabilities
Supply chain responsiveness
Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc
Supply chain efficiency (low cost)
Celestial Seasoning
ProBuild
Mortgage
Interceptor Body Armor
Crocs
Netflix
Highly efficient
Highly responsive
Somewhat responsive
Somewhat efficient
Integrated steel mills
Hanes apparel
Most automotive production
Seven-Eleven Japan
Chapter 1

11. Transportation Cost and Number of Facilities
SYST 4050 Slides Q9
Transportation Cost and Number of Facilities
Transportation
Costs
Includes both inbound and outbound transportation cost
If the number of facilities is increased to a point where inbound lot sizes are very small and result in a significant loss of economies of scale in inbound transportation, increasing the number of facilities increases total transportation cost
Number of Facilities
Chapter 1

12. Response Time and Number of Facilities
SYST 4050 Slides
Q10
Response Time and Number of Facilities
Number of Facilities
Response Time
Chapter 1

13. Factors Influencing Distribution Network Design
SYST 4050 Slides
Q11
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

14. Retail Storage with Customer Pickup
SYST 4050 Slides
Q12
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

15. Distributor Storage with Carrier Delivery
SYST 4050 Slides
Q13
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

16. Manufacturer Storage with Direct Shipping (Drop Shipping)
SYST 4050 Slides
Q14
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

17. Inventory Cost and Number of Facilities
SYST 4050 Slides
Q15
Inventory Cost and Number of Facilities
Inventory
Costs
Number of Facilities
Chapter 1

18. Total Logistics Costs Q16 Logistics Costs Number of Facilities
SYST 4050 Slides
Q16
Total Logistics Costs
Logistics
Costs
Number of Facilities
Transportation Costs
Facility Costs
Logistics Costs
Inventory Costs
Each company should have at least the number of facilities that minimize total logistics costs
Chapter 1

19. Factors Influencing Network Design Decisions
SYST 4050 Slides
Q17
Factors Influencing Network Design Decisions
Technological factors
Compare your supplies to the final product, considering whether value, weight, volume or other factors change
Availability of production technologies
High or low fixed cost
Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars)
Technological factors
* High fixed costs (less facilities) – Intel Semiconductor manufacturing
* Low fixed costs (more facilities) - Coca Cola bottling
Macroeconomic factors
* Trade agreements (NAFTA, EU, APTA–Asian Pacific Trade Agreement, AFTZ–African Free Trade Zone) have led to consolidation
* End of quotas has led to consolidation of apparel manufacturing in China
* Flexible facilities (capacity) can help reduce the effect of exchanges rates
Political factors *
Infrastructure factors
* Amazon distribution centers are all close to airports
Which products gain/lose weight in the production process?
Chapter 1

20. Factors Influencing Network Design Decisions
SYST 4050 Slides
Q18
Factors Influencing Network Design Decisions
Political factors
Political stability
Infrastructure factors
Availability of transportation terminals, labor
Most of Amazon’s distribution centers are located near airports
Competitive factors
Positive externalities (many stores in a mall makes it more convenient for customers – one location for everything the customers need)
Chapter 1

21. Factors Influencing Network Design Decisions
SYST 4050 Slides
Q19
Factors Influencing Network Design Decisions
Technological factors
Compare your supplies to the final product, considering whether value, weight, volume or other factors change
Availability of production technologies
High or low fixed cost
Semiconductor manufacturing takes place only in 5-6 countries worldwide (building one plant costs about 1 to 4 billion dollars)
Technological factors
* High fixed costs (less facilities) – Intel Semiconductor manufacturing
* Low fixed costs (more facilities) - Coca Cola bottling
Macroeconomic factors
* Trade agreements (NAFTA, EU, APTA–Asian Pacific Trade Agreement, AFTZ–African Free Trade Zone) have led to consolidation
* End of quotas has led to consolidation of apparel manufacturing in China
* Flexible facilities (capacity) can help reduce the effect of exchanges rates
Political factors *
Infrastructure factors
* Amazon distribution centers are all close to airports
Which products gain/lose weight in the production process?
Chapter 1

22. Discounted Cash Flow Analysis
SYST 4050 Slides
Q20
Discounted Cash Flow Analysis
The present value of future cash is found by using a rate of return k
A dollar today is worth more than a dollar tomorrow
A dollar today can be invested and earn a rate of return k over the next period
Discount rate: The rate used to discount future cash flows to their present values
Chapter 1

23. Impact of Uncertainty in Network Design
SYST 4050 Slides
Q21
Impact of Uncertainty in Network Design
Supplier
Manufacturer
Distributor
Retailer
Customer
Natural disasters, supplier bankruptcies, labor disputes, information infrastructure breakdown, inaccurate forecasts, exchange rate risks
Uncertainty is propagated through the supply chain(s) and leads to inefficient processes
If there is no uncertainty in the supply chain, the performance can be optimal
The presence of uncertainty stimulates the creation of buffers in time, capacity and inventory to prevent a possible bad performance of the chain. These buffers restrict the operational performances and may cancel the competitive advantage of the organization
Building flexibility into supply chain operations allows the supply chain to deal with uncertainty more effectively
Chapter 1

24. Is demand forecasting more important for a push or pull system?
SYST 4050 Slides
Q22
Role of Forecasting
Supplier
Manufacturer
Distributor
Retailer
Customer
Push
Push
Push
Pull
Push
Push
Pull
Push: in anticipation of customer demand
Pull: in response of customer demand
Forecasting is used for both push and pull processes
Push processes: Managers must plan the level of activity, be it production, transportation, or any other planned activity.
Pull processes: Managers must plan the level of available capacity and inventory
Always: Managers must forecast what customer demand will be
Manufacturer: Production scheduling decisions, materials requirement planning, purchasing
Distributor: Ordering, warehouse capacity
Retailer: Shelf space
Dell orders PC components in anticipation of customer orders (inventory)
Dell performs assembly in response to customer orders (capacity)
Intel needs forecasts to determine production and inventory levels. Intel’s suppliers need forecasts to determine production and inventory levels.
Mature products with stable demand (milk, paper towels) are usually the easiest to forecast.
Scheduling existing resources
How many employees do we need and when?
How much product should we make in anticipation of demand?
Acquiring additional resources
When are we going to run out of capacity?
How many more people will we need?
How large will our back-orders be?
Determining what resources are needed
What kind of machines will we require?
Which services are growing in demand? declining?
What kind of people should we be hiring?
Push
Pull
Is demand forecasting more important for a push or pull system?
Chapter 1

25. Summary: Simple Exponential Smoothing Method
SYST 4050 Slides
Q23
Summary: Simple Exponential Smoothing Method
Estimate level
The initial estimate of level L0 is the average of all historical data
L0 = (∑i Di)/ n
Revise the estimate of level for all periods using smoothing constant 
Lt+1 = Dt+1 + (1 – )*Lt
Forecast
Forecast for future periods is
Ft+n = Lt
Forecast Ft+n = Lt
Chapter 1

26. Types of Forecasts Q24 Qualitative Time series Causal Simulation
SYST 4050 Slides
Q24
Types of Forecasts
Qualitative
Primarily subjective, rely on judgment and opinion
Time series
Use historical demand only
Causal
Use the relationship between demand and some other factor to develop forecast
Simulation
Imitate consumer choices that give rise to demand
Qualitative
They are primarily subjective; rely on judgment and opinion, intuition, surveys, or comparative techniques. They produce information typically no quantitative, and subjective. Its non-scientific nature makes it difficult to standardize or validate for accuracy, Appropriate when there is little historical data or there is market intelligence.
Time Series
It uses historical demand only; appropriate when the basic demand pattern varies little between years, the basic premise is that the future demand pattern will be mostly a replication. It uses mathematician and statistical models as forecasting tools which can be static or adaptive to new demand patterns.
Causal
It uses the relationship between demand and some other factor (e.g. the state of the economy, interest rates) to develop forecast. For example, if is know how level service can influence sales, then by knowing the level of service provided, the level of sales can be projected. We can say that service causes sales. Another example is forecasting the impact of price promotion on demand. Usually it is very difficult to find good cause-and-effect relationships.
Simulation
This method imitates consumer choices that give rise to demand. It can combine time series and causal methods
Chapter 1

27. Characteristics of Forecasts
SYST 4050 Slides
Q25
Characteristics of Forecasts
Forecasts are always wrong!
Long-term forecasts are less accurate than short-term forecasts
Aggregate forecasts are more accurate than disaggregate forecasts
Information gets distorted when moving away from the customer
Chapter 1

28. Time Series Forecasting
SYST 4050 Slides
Q26
Time Series Forecasting
Observed demand =
Systematic component + Random component
L Level (current deseasonalized demand)
T Trend (growth or decline in demand)
S Seasonality (predictable seasonal fluctuation)
The goal of any forecasting method is to predict the systematic component of demand
The goal of any forecasting method is to predict the systematic component (Forecast) of demand and measure the size and variability of the random component (Forecast error)
Chapter 1

29. Aggregate Planning Strategies
SYST 4050 Slides
Q27
Aggregate Planning Strategies
Basic strategies
Level strategy (using inventory as lever)
Synchronize production rate with long term average demand
Swim wear
Chase (the demand) strategy (using capacity as lever)
Synchronize production rate with demand
Fast food restaurants
Time flexibility strategy (using utilization as lever)
High levels excess (machine and/or workforce) capacity
Machine shops, army
Tailored strategy
Combination of the chase, level, and time flexibility strategies
Chapter 1

30. Q28 F6 = L5 L5 = (D5+D4+D3+D2)/4 L5 = 292.75 SYST 4050 Slides
Chapter 1

31. Q29 F6 = L3 + 3T3 F5 = 125.0 Forecast Ft+n = Lt + nTt SYST 4050 Slides
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32. Q30 APE1 = |E1/D1|*100 = 11.05 APE2 = |E2/D2|*100 = 4.26
SYST 4050 Slides
Q30
APE1 = |E1/D1|*100 = 11.05
APE2 = |E2/D2|*100 = 4.26
MAPE2 = (APE1 + APE2)/2 = 7.65
Chapter 1

33. Overview Chapter 10, 11, 12 Chapter 14, 15
SYST 4050 Slides
Overview
Chapter 10, 11, 12
Inventory and product availability
Chapter 14, 15
Sourcing and pricing
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Chapter 1

34. Types of Inventory Raw material inventory
SYST 4050 Slides
Types of Inventory
High flexibility
High cost
Raw material inventory
Stocked at plant or supplier
Lowest cost
Work-in-process (WIP) Inventory
Raw materials transformed by operations
Need just enough
Finished-goods inventory
WIP after final operation
Stocked at plant, DC, retail store
Chapter 1

35. The Importance of Inventory
SYST 4050 Slides
The Importance of Inventory
Every other time in the modern era that the U.S. economy has contracted more than 5% in a quarter, falling inventories have been a major reason, if not the single biggest factor. Usually, really bad recessions are worsened by the need for companies to get rid of all the stuff they made but nobody bought. Once the inventories are sold off, the economy can grow quickly again because idled workers are called back.
But so far in this recession, the inventory cycle hasn't been a major factor, outside of the housing and auto sectors. … This recession is rooted in a severe credit squeeze and a fundamental readjustment in consumer demand, not in the typical inventory cycle.
Source: MarketWatch. Jan 25, 2009
Chapter 1

36. The Importance of Inventory
SYST 4050 Slides
The Importance of Inventory
Firms can reduce costs by reducing inventory, but customers become dissatisfied when an item is out of stock
The objective of inventory management is to strike a balance between inventory investment and customer service
Chapter 1

37. Demand Average demand for Jacob’s product in Pangea
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Demand
Average demand for Jacob’s product in Pangea
Existing and new markets
250
Chapter 1

38. Inventory Decisions How much to order? When to order?
SYST 4050 Slides
Inventory Decisions
How much to order?
Order quantity or lot size (Q)
When to order?
Order frequency (n)
Find an inventory policy that is optimal with respect to some criteria (usually cost)
Chapter 1

39. Inventory Profile Average demand D
SYST 4050 Slides
Inventory Profile
Average demand D
Inventory Q
Lot size Q
Q/2
Average inventory due to cycle inventory Q/2
Time
Cycle
Average inventory Average demand
Average flow time = = Q/2D
Chapter 1

40. Cycle Inventory: Example
SYST 4050 Slides
Cycle Inventory: Example
Given
Q = 1000 units (lot size)
D = 100 units/day (demand)
Average inventory
Q/2 = 1000/2 = 500 (average inventory level from cycle inventory)
Average flow time
Q/2D = 1000/(2*100) = 5 days (time a unit spends in the supply chain)
Lower inventory is better because
Average flow time is lower
Working capital requirements are lower
Lower inventory holding costs
Chapter 1

41. Why Order in Large/Small Lots?
SYST 4050 Slides
Why Order in Large/Small Lots?
Fixed ordering cost: S (cost incurred per order)
Increase the lot size to decrease the fixed ordering cost per unit
Holding cost: H (cost of carrying one unit in inventory)
Decrease the lot size to decrease holding cost
Material cost: C (cost per unit)
Lot size Q is chosen by trading off holding costs against fixed ordering costs
Chapter 1

42. Economies of Scale to Exploit Fixed Costs
SYST 4050 Slides
Economies of Scale to Exploit Fixed Costs
Economic order quantity (EOQ)
Optimal lot size for a single product
Chapter 1