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MANAGING THE SUPPLY CHAIN Vish V. Krishnan The University of Texas at Austin AGENDA Dynamics of Supply Chains: The Beer Game Discussing the Beer Game Supply Chain Overview and Decision Sequence Selecting the Right Supply Chain Orders Sold to Customers Used Order Cards Orders Placed

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managing the supply chain

MANAGING THE SUPPLY CHAIN

Vish V. Krishnan

The University of Texas at Austin

agenda
AGENDA
  • Dynamics of Supply Chains: The Beer Game
  • Discussing the Beer Game
  • Supply Chain Overview and Decision Sequence
  • Selecting the Right Supply Chain
beer game board
Orders Sold

to Customers

Used Order

Cards

Orders

Placed

Incoming

Orders

Orders

Placed

Incoming

Orders

Orders

Placed

Incoming

Orders

Raw

Material

4

4

4

4

4

4

Order Cards

4

Production

Delay

....

RETAILER

WHOLESALER

DISTRIBUTOR

FACTORY

Current

Inventory

........

........

Current

Inventory

.........

.........

Current

Inventory

.........

.........

Current

Inventory

.........

.........

Production

Delay

....

Shipping

Delay

....

Shipping

Delay

....

Shipping

Delay

....

Shipping

Delay

....

Shipping

Delay

....

Shipping

Delay

....

Beer Game Board
beer game instructions
Beer Game Instructions
  • You are a Beer Supply Chain
    • Retailer
    • Wholesaler
    • Distributor
    • Factory
    • Gong-Beater (different)
  • You each manage an Inventory
    • Each receives orders of Beer (with a shipping delay) from supplier. Factory receives its WIP (with a prodn delay).
    • Each fills customer’s orders for beer
  • Goal
    • Minimize Costs
      • $0.50/week/case carrying cost
      • $1/week/case backlog cost
beer game cont
Beer Game (cont.)
  • Choose a team name
  • ONLY Retailers know consumer orders (No one speaks to each other)
  • Set-up
    • 12 cases in each inventory
    • 4 in each shipping delay
    • Sticky with “4” in each orders box
    • Deck (DON’T TURN OVER) in front of retailer
    • You each have sticky pad for new orders
    • You need a record sheet for Inventory, backlog, etc. per week (mark posn)
  • Orders filled = Backlog + New Orders
  • Do first few weeks together.
steps of game
Steps of Game

1. Receive Inventory & Advance Shipping delays

Factories advance Production delays

2. Fill Incoming Orders (incl Backlog)

Retailer gets order card from deck &

turns card face down afterwards

Kill old order slips

Use backlog chart if needed

3. Advance Order slips (except Factories)

4. Record Inventory/Backlog

5. Place & Record Orders

  • Put face down, so write on sticky side

Factories Brew

  • Put Raw Materials into 1st Production Delay
inventory backlog chart
Inventory/Backlog Chart
  • Enter team name and your name up top.
  • Circle position.
  • Add up inventory and backlog columns.
  • Multiply inventories by 0.50 and add to backlogs to get total cost.
  • How to calculate Backlogs: Discussion
order inventory graphs
Order & Inventory Graphs
  • Order graph
    • Enter team name and check off position.
    • Mark order at each week on graph
  • Inventory graph
    • Do same thing, but mark backlog as negative inventory
  • Blank Customer Order graph
    • Retailers don’t do this (and keep quiet about it!)
    • Roughly sketch out what you think consumer order stream was.
beer game summary
Beer Game Summary

RANGE OF SCORES: 200 – 10000

Our range:

Game developed at the System Dynamic Group at MIT

and played around the world.

Illustrates many interesting issues

- Multi-level Supply Chains

- Balancing Inventory costs with stockout costs

- Bullwhip effect (demand distortions)

How do you get consistently low scores/win the game?

lessons learned from the beer game
Lessons Learned from the Beer Game
  • People become their Positions
  • Inaction
  • Excessive Action
  • Information Distortion - Bullwhip
slide11
Increasing Variability Up the Supply Chain

Wholesaler Orders to Manufacturer

Consumer Sales

20

20

15

15

Order

Order

Quantity

Quantity

10

10

5

5

0

0

Time

Time

Retailer Orders to Wholesalers

Manufacturer Orders to Supplier

20

20

15

15

Order

Order

Quantity

10

Quantity

10

5

5

0

0

Time

Time

Source: Lee, Padmanabhan, and Whang

slide12
Bullwhip in Electronics Industry

1

1

4

4

7

7

10

10

13

13

16

16

19

19

22

22

25

25

28

28

31

31

34

34

37

37

40

40

43

43

46

46

49

49

52

52

Order variability is amplified up the supply chain

Peripheral Product

Consumables

45,000

40,000

350,000

35,000

300,000

30,000

250,000

25,000

20,000

200,000

15,000

150,000

10,000

100,000

5,000

50,000

Unit orders from a major retailer to manufacturer

Total unit sales at outlets of retailer

Source: Lee, Padmanabhan, and Whang

what are supply chains
Retail

Enterprise

Suppliers

Distributors

What are Supply Chains?
  • Supply chain is an agent-based view
    • Across firms
    • Beyond neighbors (more than supplier management)
  • Increasingly becoming supply web mgmt.!
supply web management
Corporate

Sales

Office

Plant

Suppliers

Distributors

Customers

Sales

Office

Suppliers

Plant

Distribution Center

Customers

Suppliers

Supply Web Management
defining supply chain management
Defining Supply Chain Management

Supply Chain Management - Coordination and integration of all the activities (buy, create, move, and sell) involved in delivering a product from the supplier’s supplier to the customer’s customer.

On-time delivery of Quality Product at Low Cost.

Matching supply and demand in uncertain environments.

Why is Supply Chain Management not easy?

Number of linkages to be orchestrated.

Global sourcing

Demanding markets

Meeting fluctuating customer demand with constant supply.

Think about a product like a Ford Explorer!

managing a global supply chain
Managing a Global Supply Chain

Makes aSubassembly

Moves it to a Warehouse

Stores it at Warehouse

Buys Components

Stores it at Dealers

Moves itto Dealers

Final Assembly

Sells it to

Consumers

Adapted from I2 Presentation

Improved Distribution Not Better Production is Key Goal in Mergers - Wall Street Journal

why supply chain management
Why Supply Chain Management?
  • Supply Chain Management accelerates the cash conversion cycle and improves ROIC.
  • Cash Conversion Cycle(CCC): Rate at which inventory is turned into cash; Time difference between when you receive payment from customers and when you pay your suppliers.

Pay suppliers Get paid by customers

  • Return on invested capital (ROIC) has become the mantra in valuing firms:
    • ROIC = After-tax operating earnings divided by [total assets minus non-interest-bearing current liabilities]; Removes the vagaries of GAAP and tells you how well the company is run (compared to ROE); Operating performance independent of the financing means. Also called EVA approach used by the creme de la cremeof firms
  • Supply chain management accelerates cash conversion and dramatically increases ROIC, contributing to better shareholder value.
the rise of specialization and outsourcing
The Rise of Specialization and Outsourcing
  • Increasingly firms are turning to suppliers for most of their value added activities.
    • Value chain is shrinking
    • Suppliers deliver components in software as well as services
  • In services, capacity planning and management takes the role of inventory.
    • Capacity cannot be added in a short notice.
    • Demand is unpredictable.
    • How do you meet fluctuating demand with nearly fixed capacity?
supply chain decision sequence
Supplier Selection

Plan &

Order

Monitor& Improve

Design

Supply Chain Decision Sequence
  • What should be the design of a supply chain?
  • How do you decide when to make and when to buy?
  • What opportunities does technology offer for negotiation and supplier selection?
  • How do you monitor and improve supply chains?
supply chain effectiveness
Efficiency (Low cost)

Responsiveness

Supply Chain Effectiveness
  • Supply chain performance can be measured in terms of their cost, lead time, on time delivery (consistency), and other performance measures.
  • Beyond a certain point, supply chains face trade-offs:
organizing framework matching supply chains and products
Organizing Framework: Matching Supply Chains and Products

Functional Product Innovative product

Efficient

Chain

Responsive

chain

MATCH

MIS-MATCH

MATCH

MIS-MATCH

key takeaways
Key Takeaways
  • The beer game shows how outsourcing does not solve all problem – coordination within the supply chain become paramount.
    • Bullwhip effect or volatility amplification in a supply chain.
  • Supply chain management: What is it and Why?
    • Moves the focus beyond neighbors to the entire “value system” : from supplier’s suppliers to customer’s customers.
    • Difficult because unpredictable demand must often be matched with inflexible supply.
    • Relevant because it can contribute to increasing ROIC and shareholder value
  • Supply Chain Design
    • What makes a supply chain efficient may make it less responsive. At the frontier, there may be a trade-off between efficiency and responsiveness.
    • Ensure there is a fit between your products/markets and the supply chains.
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