Supply Chain Dynamics

1. Supply Chain Dynamics N. R. SRINIVASA RAGHAVAN Asst. Professor Department of Management Studies IISc raghavan@mgmt.iisc.ernet.in N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

2. Introduction • Oliver and Webber coined SCM in 1982 • Their Thesis: • Top Management alone can ensure non-conflicting functional objectives along SCN • An integrated systems strategy be developed and implemented • Coordination of M-I-F flows is challenging yet rewarding N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

3. Research in SCM • Research in Integration and Coordination started much before 1982: • Channel Research (Alderson 1957) • Collaboration and Cooperation (Bowersox 1969) • Location and Control of Inventories in SCN's (Hanssmann 1959) • Hierarchical Production Planning (Hax and Meal 1975) • Bullwhip effect in SCN's (Forrestor 1958) N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

4. 1. Channel Research • Alderson: Market Behavior and Executive Action (book) 1957: Principles of Postponement • Product postponement occurs in two ways: • Manufacturing PP: Changes in form and identity occur @ the latest possible point in the SCN • Logistics PP: Changes in inventory location occur @ the latest possible point in time • HP Deskjet Printers: Lee et al., Interfaces, 1995. • Power cords, Voltage requirements, fonts, etc. N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

5. Channel Research (contd) • Advantages of PP: • Hedge against uncertain customer demand • Reduce inventory holding cost • Reduce Logistics/Warehousing costs • Minimize imbalance in stock distribution • Eliminate stages in Manufacturing • Eg: packaging, customer does assembly etc. N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

6. Features of PP • Loss of Economies of Scale! • Requires quick set ups and agile procurement • Reduced risk of product obsolescence • Requires increased capability to process, transmit, and deliver orders • Product should be "DFPP" (Should be technically and economically feasible) N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

7. Channel Research: CODP • The location of decoupling point depends on the product BOM: A, V, X, T • Relevant more for X and T • Trade-off between: • Inventory holding costs: increase @ ~20% from L2R • Estimated based on expected inventories at echelons given by the inventory control policies • Cost of Lost Sales: increase @ ~20% from R2L • Estimated based on given demand distribution and probability of stock outs N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

8. 2. Research on Collaboration and Coordination • Bowersox: Physical Distribution Development, J of Marketing, Vol 33, 1969 • Individual objectives of different functional units within a firm may counteract overall efficiency • Manufacturing: Long production runs • Procurement: Lowest procurement costs • Marketing: FGI Staging and infinite assortments • Finance: Low inventories • Logistics: FTL's N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

9. Research on Collaboration and Coordination (contd) • Tom Malone (MIT, CCS): Computers, Networks, and the Corporation, Scientific American, 265:3, 1991 • Compares performance of various organization structures wrt organizational goals and KPI's • Information Sharing (Transparency) using ICT • SCM/ERP Solutions • B2B Markeplaces • B2C and CRM N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

10. 3. Location and Control of Inventories • Hanssmann: Optimal inventory location and control in pdn/distbn networks, Mangement Science, 7:4, 1959 • Analytical model (DP) of interacting inventories with three serial inventory locations: • Each location follows periodic rev, order up to policy • Lead time is a positive multiple of review period • Customer demand is Normal • Trades off shortage costs with inventory holding costs; considers revenues as a function of delivery time N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

11. Location and Control of Inventories (Contd) • Supply Rationing Problem: Given shortage in supplies, how to allocate stock across echelons • Threshold policies for high priority customers (Ha 1997) • Minimize total imbalance in stock distribution s.t. service level constraints (Van der Heijden 1997) • Hundreds of articles in various journals including OR, MS, EJOR, JORS, IJPR, IJPDLM, JOM, etc. • Logistics given scant treatment in IC problems: assumed deterministic • Results in failure of such models in practice N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

12. 4. Hierarchical Production/Distribution Planning • Hax and Meal: Hierarchical integration of production planning and scheduling, Studies in Management Sc., Vol 1, 1975. • Provide effective decision support for different DM levels within a hierarchical organization • Based on the following scheme: • Decompose to get hierarchical structure (Stgc-Tac-Opn) • Do Aggregation where possible (eg. Forecasts: agg. on time,products,markets; Capacity: agg. On resources) • Hierarchical coordination (by setting targets+getting f/b) N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

13. Hierarchical Planning (Contd) • Other elements: • Model building for each decision unit using a mathematical model (ILP/DP/QN/PN) keeping solvability in mind • Model solving: Solution procedure detailed to get the plan • Cohen and Lee, OR 1989: Solved an integrated inventory/production/distribution model hierarchically • Software Agent based frameworks available • Eg. A-Teams of IBM N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

14. 5. Bullwhip Effect in Supply Chains • Forrestor: Industrial Dynamics, HBR, 36:4, 1958 • First research paper to illustrate systems dynamics in SCN's • Base for developing Distribution Games • "BWE" coined by P&G • BWE describes the increasing amplification of orders occuring within a SC • Resembles a whip lash • Occurs even if end-item demand is fairly stable! • Forrestor studied a simulation model of the simplest tandem supply chain with four entities: Retailer, DC, W/H, Plant N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

15. Bullwhip Effect (contd) • Assumptions of Forrestor's model: • Each entity can make use of only locally available info • Time delays between ordering and receipt of order • It takes 3 weeks for retailer to process the order, half a week to transmit it to DC • The DC takes 1 week to process the order and one week to ship to the retailer, who takes one week to ship to end customer; assumptions for other entities likewise.. • To study impact of a one time +10% change in retail sales on orders placed and inventory levels N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

16. Bullwhip Effect (contd) • Forrestor's results: • "...A sudden 10% increase in retail sales implies a peaking of 34% on orders @ 14th week in factory w/h, resulting in factory output peaking in 21st week (including a 6 week lead time) by a whopping 45%.." • Amplified and out of phase fluctuations in ordering and inventory levels • Avoidable inventory and shortage costs; Unstable system • RELEVANT EVEN TODAY! • Replace week by day in the above analysis N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

17. Bullwhip Effect: Some Illustrations N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

18. Bullwhip Effect: Some Illustrations N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

19. Bullwhip Effect (contd) • Causes of BWE: (Empirical: Lee et al: 1997; Analytical: Chen et al: 2000) • Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered) • Order Batching (to realise logistics EoS+Reducing order processing costs) • Price Fluctuations (resulting in over-reactions) • Supply Rationing (Proportionate rationing; unrestricted order acceptance+free return policy) N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

20. Counter-Measures for BWE • Avoid multiple demand forecasts • Order based on ultimate customer demand • Use EDI+POS+VMI • Choose a good forecasting method (PLC has a major say) • Move from decentralized DM to centralized planning (visibility+control is better) • Remove layers in channel if possible Eg: HP, Apple, IBM, P&G/Walmart N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

21. Counter-Measures for BWE (contd) • Break order batches • Increase frequency of ordering (OP costs reduced by EDI) • Resort to standardization to minmize OP costs • Use 3PL to make small batch replenishments economical • Aggregate across retail outlets to utilize FTL EoS • Reduce safety stocks by cutting lead times Eg: 3PL using Fedex, P&G N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

22. Counter-Measures for BWE (contd) • Stabilize prices • EDLP (P&G) • Special purchase contracts • Eliminate shortage gaming • Allocate based on past sales (Sun) • Share capacity and information (HP, Motorola) • Limit flexibility wrt time (HP, Seagate) N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

23. The Distribution Game • Sterman: Modeling managerial behavior-Misperceptions of f/b in a dynamic DM expt, Management Science, 35:3, 1989 • "Beer Distribution Game" • Bounded rationality depicts decision makers • Orders based on current inventory status, amount ordered by direct successors, past performance • Over-reaction; increases steadily towards u/s end of SCN N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in