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Supply Chain Management Managing Material Waiting Time

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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  1. Supply Chain ManagementManaging Material Waiting Time S. Chopra/Operations/Supply Chain

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. Role of Inventory in the Supply Chain Cost Availability Responsiveness Efficiency S. Chopra/Operations/Supply Chain

  12. 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

  13. Demand uncertainty and forecasting Year Demand Forecast Error 1986 270 1987 309 1988 274 1989 268 1990 268 1991 316 S. Chopra/Operations/Supply Chain

  14. Uncertainty Uncertainty Information Uncertainty Customer Demand Uncertainty S. Chopra/Operations/Supply Chain

  15. S. Chopra/Operations/Supply Chain

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  17. S. Chopra/Operations/Supply Chain

  18. 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

  19. 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

  20. 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

  21. Quantity Discounts Quantity Discounts Cost/Unit $3 $2.96 $2.92 10,000 5,000 Order Quantity S. Chopra/Operations/Supply Chain

  22. Trade Promotions • Trade Promotions S. Chopra/Operations/Supply Chain

  23. Trade promotions • Trade Promotions S. Chopra/Operations/Supply Chain

  24. 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

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  27. 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

  28. Quick Response • Shorten supply lead time • Increase replenishment frequency • Coordinate supply chain S. Chopra/Operations/Supply Chain

  29. A Key to Accurate Response: Inventory Pooling S. Chopra/Operations/Supply Chain

  30. 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

  31. 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

  32. 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

  33. Improved Matching of Supply and Demand S. Chopra/Operations/Supply Chain

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