1. Supply Chain Management Lecture 27

2. Detailed Outline Tuesday April 27Review –Simulation strategy –Formula sheet (available online) –Review final Thursday April 29Simulation Game –Thursday April 29 is the last day to turn in homework Tuesday May 4Final 7:30pm – 10:00pm

3. Assignment You can make the following changes to the supply chain –Add capacity to the factory (increase only) –Change the order quantity (i.e. batch size) –Change the reorder point –Change the type of transportation (mail or truck)

4. Hints Create a general strategy beforehand All inventory and capacity will be obsolete at the end of the simulation Most investments pay off, but it takes time

5. Analysis questions When are transportation cost per drum minimized? What is minimum transportation cost per drum? What is the physical annual holding cost of one drum? What is the financial annual holding cost of one drum (what is the opportunity cost)? What is the total holding cost of one drum?

6. Analysis questions Ignore the batch production cost. What is the maximum margin that can be obtained from selling one drum? –Retail price per drum –Production cost per drum –Minimum transportation cost per drum –Minimum holding cost per drum –Fulfillment cost per drum –Maximum margin per drum

7. Final Exam Chapter 10 –(3e) Sections 1, 2 (up to page 273), 6 –(4e) Sections 1, 2, 3 (up to page 260) Chapter 11 –Sections 1,2 (skipping “Evaluating Safety Inventory Given Desired Fill Rate”),3, 7,8 Chapter 12 –Sections 1, 2 (up to and including Example 12.2), 3 Chapter 14 –Sections 1, 2, 3, 4, 6 (buyback and revenue sharing contracts only), 7, 8,9 Chapter 15 –Sections 1, 2

8. Final Exam Chapter 10 –Sections(3e) 1, 2, 6 Section 2 up to page 273 –Sections(4e) 1, 2, 3 Section 3 up to page 260 –Important concepts Cycle inventory Factors influencing inventory holding cost Factors influencing ordering cost Average flow time EOQ model for single product EOQ model for multiple products (ordered and delivered independently) EOQ model for multiple products (ordered and delivered jointly)

9. Why Order in Large/Small Lots? Fixed ordering cost: S (cost incurred per order/lot) –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 Q1

10. Economic Order Quantity (EOQ) Optimal order quantity Q* Q2

11. Final Exam Chapter 11 –Sections 1, 2, 3, 7, 8 Skipping –11.2 “Evaluating Safety Inventory Given Desired Fill rate” –Important concepts Safety inventory Measures of product availability –Product fill rate –Order fill rate –Cycle service level Replenishment policies –Continuous review –Periodic review How to reduce safety inventory without increases safety inventory? Time Inventory

12. Measuring Demand Uncertainty Inventory Time Average Inventory Cycle Inventory Safety Inventory CycleLead time (L) Reorder point (ROP) Demand (D) Demand during lead time D L = LD Order quantity/lot size (Q) Standard deviation of demand over lead time  L = (  L)  D Q4

13. Measuring Product Availability 1.Cycle service level (CSL) Fraction of replenishment cycles that end with all customer demand met Probability of not having a stockout in a replenishment cycle 2.Product fill rate (fr) Fraction of demand that is satisfied from product in inventory Probability that product demand is supplied from available inventory 3.Order fill rate Fraction of orders that are filled from available inventory Q5

14. Final Exam Chapter 12 –Sections 1, 2, 3 Section 2 up to and including Example 12.2 –Important concepts Cost of overstocking Cost of understocking Optimal CSL and order quantity with a single order in a season Managerial levers to improve supply chain profitability –Increase salvage value –Decrease margin lost from stockout –Reduce demand uncertainty »Improved forecasting »Quick response »Postponement »Tailored sourcing

15. The Newsboy/Newsvendor Problem One time decision under uncertainty –Demand is uncertain –Plan inventory for a single cycle Trade-off –Ordering too much (waste, salvage value < cost) –Ordering too little (excess demand is lost) Examples –Restaurants –Fashion –High tech Q7

16. Impact of Quick Response Quick response is a set of actions a supply chain takes to reduce replenishment lead time Selling season ~14 weeks Lead time ~30 weeks Selling season ~14 weeks Lead time ~14 weeks Selling season ~14 weeks Lead time ~4 weeks Q8

17. Final Exam Chapter 14 –Sections 1, 2, 3, 4, 6, 7, 8, 9 Section 6 buyback and revenue sharing contracts only –Important concepts Outsourcing versus offshoring Sourcing process –Supplier scoring and assessment –Supplier selection and contract negotiation –Design collaboration –Procurement –Sourcing planning and analysis How do third parties increase the supply chain surplus? What are risks of using a third party? 3PL and 4PL Supplier scoring and assessment Design collaboration Supplier selection and contract negotiation Procurement Sourcing planning and analysis

18. Factors besides purchase price that influence total cost Q9

19. Final Exam Chapter 15 –Sections 1, 2 –Important concepts Revenue management 4 conditions when revenue management has a significant impact Allocating capacity to a segment under uncertainty Spoilage and spill q 1000 800 600 400 200 800600400200 p q 1000 800 600 400 200 800600400200 p