1. No category

Supply Chain Management

Managing the Supply Chain
 Key to matching demand with supply
 Cost and Benefits of inventory

Levers for reducing mismatch costs
 Cycle Inventory and Economies of Scale
 Safety Inventory and Uncertainty

Structuring Supply Chains
 Centralization & Pooling efficiencies
 Postponement
 Accurate Response
–
–
Palu Gear
Movie Rental Business
Supply Chain Management
Slide 1
© Van Mieghem
What is Supply Chain Management?
Managing supply chain flows and assets to maximize supply chain
surplus in a sustainable manner.
The Procurement
or supply system
Raw Material
supply points
Movement/
Transport
The Operating
System
Raw Material
Storage
Movement/
Transport
The Distribution System
Manufacturing
STORAGE
PLANT 1
STORAGE
PLANT 2
STORAGE
PLANT 3
Movement/
Transport
Finished Goods
Storage
Movement/
Transport
WAREHOUSE
A
WAREHOUSE
B
WAREHOUSE
C
MARKETS
Supply Chain Management
Slide 2
© Van Mieghem
Wal-Mart Financials over time
12 months
ending 1/31 of:
(Millions USD)
2011
2010
2009
2008
2007
Total Revenue
418,952
408,214
404,374
377,023
348,368
Cost of
Revenue, Total
315,287
304,657
304,056
284,137
263,979
Gross Profit
103,665
100,389
97,031
89,684
80,780
SG&A
Expense
81,020
79,607
77,520
70,934
63,892
5,089
4,144
3,905
3,642
2,840
33,160
34,511
35,159
33,685
Accounts
Receivable Trade, Net
Total Inventory 36,318
What questions would you ask the Wal-Mart CFO?
Supply Chain Management
Slide 3
© Van Mieghem
Amazon Financials over time
12 months
ending 12/31 of:
2010
(Millions USD)
2009
2008
2007
2006
Total Revenue
34,204
24,509
19,166
14,835
10,711
Cost of
26,561
Revenue, Total
18,978
14,896
11,482
8,255
Gross Profit
5,531
4,270
3,353
2,456
988
827
682
382
2,171
1,399
1,200
877
7,643
Total
Receivables,
1,587
Net
Total Inventory 3,202
What questions would you ask the Amazon CFO?
Supply Chain Management
Slide 4
© Van Mieghem
The Role of Inventory in the Supply Chain
 Goal: Match supply and demand
 Otherwise: Mismatch cost:
– Overstocking = available amount > demand

liquidation, obsolescence, holding
– Under-stocking = demand > available amount

lost sales and resulting lost margin and future sales
 What are the causes (challenges) driving this mismatch?
Supply Chain Management
Slide 5
© Van Mieghem
Magazine sales at newsstands:
as % of copies shipped to newsstands
In Style
People
Vanity Fair
Vogue
The New Yorker
GQ
New York
Esquire
Rolling Stone
Us
Talk
64.7%
54.5%
45.6%
42.1%
39.9%
39.4%
35.1%
31.0%
28.0%
23.9%
18.0%
Data for Oct. 1999 – Oct. 2000
Supply Chain Management
Slide 6
© Van Mieghem
The challenge of increased responsiveness:
A Key to Matching Supply and Demand
When would you rather place your bet?
A
A:
B:
C:
D:
Supply Chain Management
B
C D
A month before start of Derby
The Monday before start of Derby
The morning of start of Derby
The winner is an inch from the finish line
Slide 7
© Van Mieghem
Push/Pull View of Supply Chains
Push/Pull
Boundary
Procurement,
Manufacturing and
Customer order cycle
Replenishment cycles
PUSH PROCESSES
Process 1
Process
2
PULL PROCESSES
Process
3
Process
k
Process
k+1
Process
N
Customer
Order Arrives
Supply Chain Management
Slide 8
© Van Mieghem
Role of Inventory in the Supply Chain
Improve Matching of Supply
and Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Economies of Scale
Supply / Demand
Variability
Seasonal
Variability
Cycle Inventory
Safety Inventory
Seasonal Inventory
Figure Error! No text of
Supply Chain Management
Slide 9
© Van Mieghem
Supply Chain Management

Managing the Supply Chain
 Key to matching demand with supply
 Cost and Benefits of inventory

Levers for reducing mismatch costs
 Cycle Inventory and Economies of Scale
 Safety Inventory and Uncertainty
Supply Chain Management
Slide 10
© Van Mieghem
Palü Gear: Cycle Inventory
& Economies of Scale
Annual jacket revenues at a Palü Gear retail store are roughly $1M. Palü
jackets sell at an average retail price of $325, which represents a mark-up
of 30% above what Palü Gear paid its manufacturer. Being a profit center,
each store made its own inventory decisions and was supplied directly from
the manufacturer by truck. A shipment up to a full truck load, which was
about 1500 jackets, was charged a flat fee of $2,200. To exploit economies
of scale, stores typically ordered full truck loads. (Palü’s cost of capital is
approximately 20%.)
What order size would you recommend for a Palü store in current supply
network?
manufacturer
retailer
Supply Chain Management
Slide 11
© Van Mieghem
Economies of Scale:
Inventory Build-Up Diagram
R: Annual demand rate,
Q: Number of wind breakers per
replenishment order


Inventory
Number of orders per year = R/Q.
Q
Average number of wind breakers in
inventory = Q/2 .
Inventory Profile:
# of wind breakers in
inventory over time.
-R = Demand
rate
Q/2
“cycle stock”
Time t
Supply Chain Management
Slide 12
© Van Mieghem
Accurate Response to Scale Economies:
Economic Order Quantity EOQ
Total annual
costs
2 SRH
H Q/2: Annual
holding cost
S R /Q:Annual
setup cost
Order Size Q
Fixed cost per order
The order quantity that
minimizes total supply
chain cost is:
Supply Chain Management
2 SR
QEOQ 
H
Slide 13
Annual unit demand
Annual unit holding cost
© Van Mieghem
Optimal Economies of Scale:
For a Palü Gear retailer
R = 3077 units/ year
r = 0.20/year
C = $ 250 / unit
S = $ 2,200 / order
Unit annual holding cost = H = 0.20/yr x $250 = $50/yr
Optimal order quantity = Q = sqrt(2 x 3077 x 2200/50) = 520
Number of orders per year = R/Q = 5.9
Time between orders = Q/R = 0.17yr = 8.8weeks
Annual order cost = (R/Q)S = $13,008.87/yr
Average inventory I = Q/2 = 260
Annual holding cost = (Q/2)H =$13,008.87/yr
Average flow time T = I/R = 0.084 yr = 4.4weeks
Supply Chain Management
Slide 14
© Van Mieghem
Costs associated with batches

Order Costs (S)
– Setup/Changeover of process
– Transportation
– Receiving

Holding costs (H)
– Physical holding cost
– Cost of capital
– Cost of obsolescence
Supply Chain Management
Slide 15
© Van Mieghem
Learning Objectives:
Batching & Economies of Scale
 Increasing batch size Q of order (or production) increases
average inventories (and thus flow times).
– Average inventory for a batch size of Q is Q/2.
 The optimal batch size minimizes supply chain costs by
trading off setup cost and holding cost and is given by the
EOQ formula.
 To reduce batch size, one must reduce setup cost (time).
 Economies of scale are manifested by the square-root
relationship between QEOQ and (R, S):
– If demand increases by a factor of 4, it is optimal to increase batch size
by a factor of 2 and produce (order) twice as often.
– To reduce batch size by a factor of 2, setup cost has to be reduced by a
factor of 4.
Supply Chain Management
Slide 16
© Van Mieghem
Demand uncertainty and forecasting:
How good is “your forecast?”
Year
1994
1995
1996
1997
1998
1999
Demand
323
258
303
304
284
285
Forecast
?
?
?
?
?
30
25
20
15
10
5
0
260
Bin:
Supply Chain Management
Slide 17
1
270
2
280
3
290
4
300
5
310
6
320
7
© Van Mieghem
8
Demand uncertainty and forecasting:
Key Facts about Forecasting

Forecasts should capture all available knowledge: historical data, “market
intelligence,” etc.

(Point) Forecasts are usually (always?) wrong
 A good forecast has at least 2 numbers: it includes a measure of forecast error or
variability, e.g., standard deviation s


Operational response =
The longer the forecast horizon, the less accurate the forecast
 The forecast horizon must at least be as large as the lead time
 Demand during shorter lead times has less variability


Operational response =
Aggregate forecasts tend to be more accurate
 Pooled demand has less “relative variability” (s /mean)

Operational response =
Supply Chain Management
Slide 18
© Van Mieghem
Learning Objectives
safety inventory and uncertainty
 Safety stock is a hedge against uncertainty
 Need more safety stock when there is an increase in
– service level,
– demand variability or forecast error,
– delivery lead time,
– delivery lead time variability.
Supply Chain Management
Slide 19
© Van Mieghem
Supply Chain Management

Managing the Supply Chain
 Key to matching demand with supply
 Cost and Benefits of inventory

Levers for reducing mismatch costs
 Cycle Inventory and Economies of Scale
 Safety Inventory and Uncertainty

Structuring Supply Chains
 Centralization & Pooling efficiencies
 Postponement
 Accurate Response
–
–
Palu Gear
Movie Rental Business
Supply Chain Management
Slide 20
© Van Mieghem
Structuring Drivers of Supply Chain Performance to Improve
Matching of Supply and Demand
Improve Matching of
Demand with Supply
Transportation
Supply Chain Management
Inventory
Information
Slide 21
Facilities
© Van Mieghem
Structuring Inventory for Accurate Response
System A (Decentralized)
System B (Centralized)
How do both systems compare?
Supply Chain Management
Slide 22
© Van Mieghem
Actions to improve supply chain profitability:
Various possibilities to pool: Aggregation Actions

Physical centralization
Multiple locations

Information centralization

Specialization

Substitution
Multiple products

Commonality

Postponement
Supply Chain Management
Slide 23
© Van Mieghem
Accurate Response using Speed
Principle: Long term forecasts are less accurate than short term
forecasts.
Action: Shorten time of information and physical flows
 Reduce replenishment lead time
 Reduce supply uncertainty or replenishment lead time
uncertainty
 Increase reorder frequency or go to continuous review
 Speed, however, comes at a cost!
Supply Chain Management
Slide 24
© Van Mieghem
Mexico-China?

You are a $10B high-tech US manufacturer of wireless transmission
components, about 20SKUs. Intense global competition put pressure on
margins and working capital
 You have two assembly plants, one in China and another in Mexico, that
supply a warehouse in McAllen, TX.
 How can you best manage this existing global network?
insight.kellogg.northwestern.edu
Global Dual Sourcing Strategies
Should you source your carbon fiber
bicycle frames from Mexico or
China?
Based on the Research of Gad Allon
And Jan A. Van Mieghem
Supply Chain Management
Slide 25
© Van Mieghem
Digital Tech & Social Media to improve information

The value of early information and forecast updating
Actual total sales: Each data point represents the forecast and the actual season sales for a particular item (at the style-color level).
4000
4000
3500
3500
Initial Forecast
3000
4000
3500
Updated Forecast after
observing 20% of sales
3000
2500
2500
2500
2000
2000
2000
1500
1500
1500
1000
1000
1000
500
500
500
0
0
0
0
500

1000 1500 2000 2500 3000 3500 4000
0
500
1000 1500 2000 2500 3000 3500 4000
Even for stable products, clickstream tracking of nontransactional websites can improve holding and
backlogging costs by 5% (Huang & Van Mieghem
2011)
Supply Chain Management
Slide 26
Updated Forecast after
observing 80% of sales
3000
0
500 1000 1500 2000 2500 3000 3500 4000
insight.kellogg.northwestern.edu
From Web Visits to Firm Orders:
Analyzing web visitor click data to
streamline sales efforts
Based on the research of Tingliang
© Van
Huang And
Jan Mieghem
A. Van Mieghem
Movie Rental Business
Supply Chain Management
Slide 27
© Van Mieghem
Summary:
Improved Matching of Supply and Demand
Improve Matching of
Supply and Demand
Improved Forecasting
Reduce Material Flow
Time
Reduce Waiting Time
Reduce Buffer Inventory
Supply / Demand
Variability
Economies of Scale
1.
2.
3.
Reduce fixed cost per
batch
Evaluate quantity
discounts
Reduce trade promotions
Supply Chain Management
1.
2.
3.
4.
Seasonal Variability
Reduce demand variability
Reduce delivery lead time
Reduce variability of delivery lead time
Pool the safety stock using
Physical Centralization
Information centralization
Specialization
Raw material commonality / postponement
Substitution
Slide 28
Reduce
information
uncertainty
© Van Mieghem