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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

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 Inventories

  • 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 Inventories

  • 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 Inventories

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, Inventories

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 Inventories

Cost

Availability

Responsiveness

Efficiency

S. Chopra/Operations/Supply Chain


Demand uncertainty and forecasting
Demand uncertainty and forecasting Inventories

  • 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 Inventories

Year Demand Forecast Error

1986 270

1987 309

1988 274

1989 268

1990 268

1991 316

S. Chopra/Operations/Supply Chain


Uncertainty
Uncertainty Inventories

Uncertainty

Information

Uncertainty

Customer

Demand

Uncertainty

S. Chopra/Operations/Supply Chain





Information uncertainty barilla spa
Information Uncertainty: Barilla Spa Inventories

  • 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: InventoriesCauses

  • 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 Inventories

  • 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 Inventories

Quantity Discounts

Cost/Unit

$3

$2.96

$2.92

10,000

5,000

Order Quantity

S. Chopra/Operations/Supply Chain


Trade promotions
Trade Promotions Inventories

  • Trade Promotions

S. Chopra/Operations/Supply Chain


Trade promotions1
Trade promotions Inventories

  • Trade Promotions

S. Chopra/Operations/Supply Chain


The bullwhip effect countermeasures
The Bullwhip Effect: InventoriesCountermeasures

  • 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




Tackling demand uncertainty
Tackling Demand Uncertainty Inventories

  • 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 Inventories

  • 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 Inventories

S. Chopra/Operations/Supply Chain


Accurate response examples
Accurate Response Examples Inventories

  • 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 Inventories

  • 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: InventoriesPostponement

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 Inventories

S. Chopra/Operations/Supply Chain


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