17Apr12

What is a Supply Chain?

All parties involved, directly or indirectly, in fulfilling a

SUPPLY CHAIN MANAGEMENT

Introduction

customer request
Involves the flow of information, product and funds

between different stages

What is SCM?

Decisions
Supply Chain Strategy/Design

Set of approaches to efficiently integrate suppliers manufacturers, warehouses and stores so that merchandise is produced and distributed at the right quantities, to the right locations at the right time in order to minimize systemwide costs while satisfying service level requirements.

Supply Chain Planning

Supply Chain Operations

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Decisions
Supply Chain Strategy/Design
How to structure the supply chain stages, resource allocation,

Decisions
Supply Chain Planning
Maximize the supply chain surplus* that can be generated over the

what role each stage will perform

Whether to outsource?

planning horizon given the strategic/design constraints

Forecasting Which markets will be supplied from which locations

Location and capacities of production and warehouse facilities Defines the constraints within which planning must be done Typically, long term and difficult/expensive to alter at short notice

Inventory policies to be followed Typically, quarter to quarter Define operating policies

* Supply chain surplus represents the value addition by the supply chain function of an organization. Supply chain surplus = revenue generated from a customer - total cost incurred to produce and deliver the product

Decisions
Supply Chain Operation
Time horizon is weekly or daily

Why is SCM Difficult?

Intersection with development chain at the production

point
Development chain is the set of activities associated with
Make decisions regarding individual customer orders Allocate inventory/resources to individual orders, set order fill date,

developing a new product

Product design, make/buy decisions, strategic partnerships

generate pick lists, set delivery schedules of trucks, place replenishment orders

Challenging to minimize systemwide costs and maintain

systemwide service levels

Uncertainty and risk are inherent in every SC Sources of uncertainty?

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Intersection of SC and Dev. Chains

Uncertainty and Risk

Commitments have to be made in advance Forecasts are wrong! Demand is not the only source of uncertainty Recent trends make things more uncertain Lean manufacturing Outsourcing Off-shoring

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Inventory
Why is inventory required?

INVENTORY MANAGEMENT AND RISK POOLING

Decisions inventory policy

Techniques/models

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Notation
D items per day: Constant demand rate Q items per order: Order quantities are fixed, i.e., each time the warehouse places an

EOQ
Total cost at every cycle:

order, it is for Q items.

K, fixed setup cost, incurred every time the warehouse places an order. h, inventory carrying cost accrued per unit held in inventory per day that the unit is held

(also known as, holding cost)

T, cycle length in days Lead time = 0 ????

Therefore, total cost and optimal quantity:

(the time that elapses between the placement of an order and its receipt)
Initial inventory = 0 Planning horizon is long (infinite).

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Sensitivity Analysis
Q is a multiple b of the optimal order quantity Q*. For a given b, the quantity ordered is Q = bQ*

Uncertainty
The forecast is always wrong! Difficult to match supply and demand The longer the horizon, the worse the forecast

b Increase in cost

.5 25%

.8 2.5%

.9 0.5%

1 0

1.1 .4%

1.2 1.6%

1.5 8.9%

2 25%

Aggregate forecasts are more accurate Single period model Short lifecycle products One ordering opportunity Make advance commitment Maximize profit

How?

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Multiple Order Opportunities

Continuous review policy Inventory is reviewed continuously An order is placed when the inventory reaches a particular level or reorder point. Inventory can be continuously reviewed Periodic review policy Inventory is reviewed at regular intervals Appropriate quantity is ordered after each review. It is impossible or inconvenient to frequently review inventory and place orders if necessary.

Continuous Review Policy

Daily demand is random and follows a normal distribution. Every time the distributor places an order from the manufacturer, the

distributor pays a fixed cost (K) plus an amount proportional to the quantity ordered.

Inventory holding cost is charged per item per unit time. Inventory level is continuously reviewed, and if an order is placed, the

order arrives after the appropriate lead time.

If a customer order arrives when there is no inventory on hand to fill

the order (i.e., when the distributor is stocked out), the order is lost.

The distributor specifies a required service level.

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Notation
AVG = Average daily demand faced by the distributor STD = Std. dev. of daily demand faced by the distributor L = Replenishment lead time from the supplier to the distributor in

Continuous Review Policy

Use a (Q, R) policy Average demand during lead time: L x AVG Safety stock: Reorder Level, R:

days
h = Cost of holding one unit of the product for one day at the

distributor
= service level.

This implies that the probability of stocking out is 1 -

Order Quantity, Q:

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Variable Lead Times

AVGL = Average lead time STDL = Standard deviation R = Reorder Level

Periodic Review
Short Intervals (e.g. Daily) Define two inventory levels s and S During each inventory review, if the inventory position falls below s, order enough to raise the inventory position to S. (s, S) policy Longer Intervals (e.g. Weekly or Monthly) May make sense to always order after an inventory level review. Determine a target inventory level, the base-stock level During each review period, the inventory position is reviewed Order enough to raise the inventory position to the base-stock level. Base-stock level policy

Safety Stock

Order quantity

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(s, S) Policy
Calculate the Q and R values as if this were a continuous

Base Stock Level Policy

Determine a target inventory level, the base-stock level Each review period, review the inventory position is

review model
Set s equal to R Set S equal to R+Q. Assume:

reviewed and order enough to raise the inventory position to the base-stock level

r = length of the review period L = lead time AVG = average daily demand STD = standard deviation of this daily demand.

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Base Stock Level Policy

Average demand during an interval of r + L days=

Risk Pooling
What is risk?

Safety Stock= How to measure variability and CV

Who else does it?

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Risk Pooling
Lifeboat example Mean weight = 160 lbs SD = 30 lbs Sizing to accommodate 99.997% passengers (4) Options Individual boats 16 seater boats What if SD = 50 lbs? What if boats can seat 36 people? Relationship between CV1 and CV16

Risk Pooling
Bad consequences of variability are due to extreme values Pooling is the practice of combining multiple sources of variability to

make extreme values less likely, which in turn reduces the amount of buffering that is required.
Influenced by
The magnitude of variability Number of individual sources that can be combined

Remember,

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Types of Pooling
Temporal over time Geographically over areas By product line or product family

Pooling Practices
Centralization

Standardization

Postponement By consumer group - socio-economic characteristics Worksharing cross training

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Tailored Sourcing
Split demand into two parts certain and uncertain Volume based Product based Use a combination of two supply sources One focused on cost but not able to handle uncertainty The other able to handle uncertainty but at higher cost

Echelon Inventory
Le = echelon lead time, lead time between the retailer and the distributor plus the lead time between the distributor and its supplier, the wholesaler. AVG = average demand at the

retailer
STD = standard deviation of

demand at the retailer

Reorder point

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4-Stage Example
Average weekly demand faced by the retailer is 45 Standard deviation of demand is 32

Costs and Order Quantities

K Retailer 250 200 205 500 D 45 45 45 45 H 1.2 .9 .8 .7 Q 137 141 152 255

At each stage, management is attempting to maintain a

Distributor Wholesaler Manufacturer

service level of 97%

Lead time between each of the stages, and between the

manufacturer and its suppliers is 1 week

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Re-order Point
For the retailer, R=1*45+1.88*32*1 = 105 For the distributor, R=2*45+1.88*32*2 = 175 For the wholesaler, R=3*45+1.88*32*3 = 239 For the manufacturer, R=4*45+1.88*32*4 = 300

FORECASTING Review