Supply chain management managing material waiting time
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Supply Chain Management Managing Material Waiting Time. Outline. A key to matching supply and demand Levers for improved matching of supply and demand The bullwhip effect: Barilla The impact of aggregation. The Procurement or supply system. The Operating System. The Distribution System.

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Supply Chain Management Managing Material Waiting Time

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Supply chain management managing material waiting time

Supply Chain ManagementManaging Material Waiting Time

S. Chopra/Operations/Supply Chain


Outline

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


The supply chain

The Procurement

or supply system

The Operating

System

The Distribution System

Finished Goods

Storage

Raw Material

supply points

Raw Material

Storage

Movement/

Transport

Manufacturing

Movement/

Transport

Movement/

Transport

Movement/

Transport

PLANT 1

WAREHOUSE

A

STORAGE

PLANT 2

WAREHOUSE

B

STORAGE

PLANT 3

WAREHOUSE

C

STORAGE

MARKETS

The Supply Chain

S. Chopra/Operations/Supply Chain


Key financial indicators of supply chain performance

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?

S. Chopra/Operations/Supply Chain


Costs of not matching supply and demand

Costs of not Matching Supply and Demand

  • Cost of overstocking

    • liquidation, obsolescence, holding

  • Cost of under-stocking

    • lost sales and resulting lost margin

S. Chopra/Operations/Supply Chain


Accurately matching demand with supply is the key challenge inventories

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


Mass customization

Mass Customization

  • Mass Production

    • 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


Implications

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


A key to matching supply and demand

A Key to Matching Supply and Demand

When would you rather place your bet?

A

B

D

C

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

S. Chopra/Operations/Supply Chain


Push pull view of supply chains

Procurement,

Customer Order

Manufacturing and

Cycle

Replenishment cycles

PUSH PROCESSES

PULL PROCESSES

Customer

Order Arrives

Push/Pull View of Supply Chains

S. Chopra/Operations/Supply Chain


Role of inventory in the supply chain

Role of Inventory in the Supply Chain

Cost

Availability

Responsiveness

Efficiency

S. Chopra/Operations/Supply Chain


Demand uncertainty and forecasting

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.

S. Chopra/Operations/Supply Chain


Demand uncertainty and forecasting1

Demand uncertainty and forecasting

YearDemandForecastError

1986270

1987309

1988274

1989268

1990268

1991316

S. Chopra/Operations/Supply Chain


Uncertainty

Uncertainty

Uncertainty

Information

Uncertainty

Customer

Demand

Uncertainty

S. Chopra/Operations/Supply Chain


Supply chain management managing material waiting time

S. Chopra/Operations/Supply Chain


Supply chain management managing material waiting time

S. Chopra/Operations/Supply Chain


Supply chain management managing material waiting time

S. Chopra/Operations/Supply Chain


Information uncertainty barilla spa

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


The bull whip effect causes

The Bull-Whip Effect:Causes

  • Rational and Optimizing Players in Supply Chain

    • Order Batching

    • Price Variations

    • Sales Force Incentives

    • Demand Signal Processing

    • Rationing Game

S. Chopra/Operations/Supply Chain


Reducing batch size

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


Quantity discounts

Quantity Discounts

Quantity Discounts

Cost/Unit

$3

$2.96

$2.92

10,000

5,000

Order Quantity

S. Chopra/Operations/Supply Chain


Trade promotions

Trade Promotions

  • Trade Promotions

S. Chopra/Operations/Supply Chain


Trade promotions1

Trade promotions

  • Trade Promotions

S. Chopra/Operations/Supply Chain


The bullwhip effect countermeasures

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


Supply chain management managing material waiting time

S. Chopra/Operations/Supply Chain


Supply chain management managing material waiting time

S. Chopra/Operations/Supply Chain


Tackling demand uncertainty

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

S. Chopra/Operations/Supply Chain


Quick response

Quick Response

  • Shorten supply lead time

  • Increase replenishment frequency

  • Coordinate supply chain

S. Chopra/Operations/Supply Chain


A key to accurate response inventory pooling

A Key to Accurate Response: Inventory Pooling

S. Chopra/Operations/Supply Chain


Accurate response examples

Accurate Response Examples

  • Information centralization: Wal-Mart, The Gap, mail order

  • Specialization: W.W. Grainger

  • Product substitution: Dell, Category Management

S. Chopra/Operations/Supply Chain


Accurate response at dell

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


Hewlett packard postponement

Hewlett Packard: Postponement

DC

Sale

Vancouver

Localization at Vancouver

No

Postponement

(unit cost

cheap)

Localization at DC

Postponement

(unit cost

expensive)

S. Chopra/Operations/Supply Chain


Improved matching of supply and demand

Improved Matching of Supply and Demand

S. Chopra/Operations/Supply Chain


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