plenary speaker hau lee pres

8/8/2019 Plenary Speaker Hau Lee Pres

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Building Supply ChainExcellence in Emerging

Economies

Hau L. Lee

Stanford University

POMS-Vancouver 2010


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Source: WTO Report, 2008

Global Trade Growth


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Globalization Trends

Selling to and Sourcing fromOutside of Home Market

27%

35%

42%

22%

31%

38%

FY02

FY05

FY08

Source: Accenture Global Operations Survey, 2005

Sourcing

Revenue Generated

Growing middle class:

1.5 billion in 52

developing nations

300 million in China, with

1% annual growth Tripled in India since 1985

Emergence of BRICs (Brazil,Russia, India, China):

15% of G6 today Half of G6 by 2025

Surpass G6 in less than 40years


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Supply Chain Trends

Increasing trend of outsourcing and offshoring toemerging economies.

Challenges of underdeveloped infrastructures inemerging economies.

Complexity and diversity of cultures and needs. Emerging economies are not just a source of supply

and manufacturing, but could become markets andsources of innovation.

But trade barriers, tariffs, special agreements,regulations are also on the rise.

Rising importance of sustainability and socialresponsibility.


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Key Considerations in Supply Chain

Research with Emerging Economies

Data availability and accuracy

Rapid dynamic changes

Complexity of inter-country trade flows andcultural differences

Different incentives and objectives of different

stakeholders other than profit maximization Need to understand the details of all process

steps


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Examples of Research Topics

Supply chain design

Product design for diverse market needs

Process efficiency improvements

Business model re-engineering

Socially responsible supply chains

Environmentally sound businesses

Logistics coordination

Innovations and new product development


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Supply chain design






Logistics coordination

Innovations and new product development


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Network Design

Value chain

design

Location &

deployment

Product

configuration

Total Landed Cost Analysis

Variable cost Setup cost Safety stocks Transit stock

WIP Custom duties Taxes Freight

Market presence Sourcing Compliance Security


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Increasing Regional Trade Agreements

Source - WTO


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Renaults

Logan Car

0 20000 40000 60000 80000 100000

Romania

Russia

France

Morocco

Algeria

Turkey

Columbia

Spain

Germany

Ukraine

2006 Sales


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Network of Agreements

Romania

Turkey

E. Europe

EU

Russia

Brazil

Columbia

India

Morocco

Russia,

Ukraine

Columbia,

Ecuador,

Venezuela

Maghreb

region,

Egypt,

Tunisia,

Jordan

CKD

CBU

Suppliers

Parts


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Implications for Research

Supply chain design still a very hard problem, inaddition to the usual NP-hard nature of mixed-integerprogramming optimization.

Standard, linear cost of customs and duties may notbe sufficient for supply chain design.

Need the integrate the network of trade agreementswith the bill of materials (the DNA) of products in the

design problem. But trade agreements and government policies changerapidly, so need to develop dynamic models forsupply chain design.


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Supply chain design






Logistics coordination Innovations and new product development


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Workstation Postponement Boundary

ChassisPower

Supply

Backplane

&I/O Card

Processor

Board Graphics

Board HardDisk

Memory

Postponement Boundary

Manufacturing Distribution

Build-to-Stock (Push) Build-to-Order (Pull)


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Model

One factory, multiple DCs

Factory builds intermediate products and

stocks at DCs

DCs configures products to order

Promised response time to customers

Imodules, fixed assembly sequence

Total CostMin:ObjectiveP

1

P

P +1

I

Factory

DCs


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Complications with Emerging Economies

Customs duty rates vary greatly.

Classification of product may result in vastlydifferent duty rates.

Availability of local component supply sourcesvary.

Labor cost and efficiency vary greatly for final

customization process steps. Additional testing sometimes necessary.

Quality and reliability concerns.


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Base Case Analysis

0

1

2

3

4

5

6

7

8

9

10

Alla

tDC

Backplane

Processor

Graphics

Store&Mem

Alla

tFactory

Postponement Boundary

Supply

Chain Cost

($10M perYear)

SourcingDifferentialProcessingDifferential

Test

Trans.

Duty

Inventory


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Evolution of Postponement

Factory:Core assembly,customization

Market DC:Distribution

Market DC:Customization,

distribution

DC MarketsSuppliers Factory

Factory:Core assembly

Pre-

Postponement

Market DCPostponement

Offshoring

Offshore

Postponement

Market DC:Customization,

distribution

Factory in LCC:Core assembly

Factory in LCC:Core assembly,customization,

Market DC:Distribution

New

Postponement

Factory in LCC:Core assembly

Near-Market DC:Customization,

distribution


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Supply Chain Evolution

70s

80s

90s

Today

Mfg Strategy

W. Europe

E. Europe

China

Dual-Response

Drivers

Capability & control

Cost reduction

Cost & supply network

Service pressure, China

cost, oil prices


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Optimal product design and postponement strategiesincreasingly valuable as more emerging marketsbecome part of demand points.

Again, need to examine product classification andduty implications for partially assembled product.

Complete considerations of cost and risk componentsnecessary.

Need to consider dynamic, not static, strategies, asmarket conditions change more rapidly in emergingeconomies.


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Supply chain design








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Stanford Trade Process Model*

Pre-Export

TransportArrangement &

Export Filing

TransportExecution &CustomsClearance

Post ImportSettlement &Reconciliation

Order Collaboration

Classification

Compliance MgtTrade Finance Set Up

Manufacturing

Freight Booking

Goods Picked, Packed

Export DeclarationSecurity Filings

Shipping Doc Prep

Goods Transported

Goods Tracking

Customs ClearanceFinance Doc Prep

Goods Received

Data Reconciliation

Loan ProcessingFinancial Settlement

Duty Relief Mgt

* Joint research with Warren Hausman, sponsored by Tradebeam


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Information-Based Innovations

ProcessExcellence

Process

Redesign

Focus

Faster

More accurate

More reliable

Re-sequencing

Parallel processing

Elimination

Values

Shorter cycle time

Less delays & reworks Lower capital tied up

Faster cash cycle

Less penalties from

errors

Accurate duty payment

and refunds


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IT-Enabled Benefits

0

20

40

60

80

100

120

Manufacture

to Invoice

Cycle

Days

Days of

Sales

Outstanding

Order to

Receipt

Cycle

0%

5%

10%

15%

20%

25%

30%

35%

Benefit as % o f Sales Pro fit Increase (%) In termed iaries as % of their

sales

Base Case

IT-Enabled

Exporter

Importer

* Joint research with Warren Hausman, China-US apparel trade lane


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Process improvement must be grounded on deepunderstanding of how the process works, but there aremuch greater complexity and diversity of processflows in emerging economies.

Data is a big challenge: needs to do more empiricalwork (interviews, ethnographical methods, secondarydata, etc.).

Powerful link of IT and process improvements.

Since some investments are necessary, it isworthwhile to do research on the values of processimprovements.


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Supply chain design








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Soy Bean Supply Chain in India

Farmers Mandis

ITC

Other Buyers

Inbound

logisticsin bulk

Display & visual

inspection

Auction (spot market)

Outbound logistics

& payment

Congestion at Mandis can hold up farmers for days.

Price uncertainty faced by farmersmaterial flow must precede price

information discovery.

Farmers rely on word of mouth or localized previous prices.

Farmers vulnerable to delayed payments.

Source: Anupindi & Suvakumar, 2007


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ITC e-Choupal

Farmers ITC Processing

Other Buyers

Selected farmers (Sanchalak) maintain computers and inspect products. Price transparency provided to farmers.

Direct sales to ITC enabled.

Material flows occur only after sales to ITC or price discovery to Mandis.

Mandis

e-Choupal

Internet KioskMarket conditions,prices, weather,

knowledge

Mandi

Prices

Authorized

Prices



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Win-Win Value Proposition

370 375

120 215

0 200 400 600 800

Before

After

Farmer

ITC

Transaction Costs in Rupees per metric ton



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ITC e-Choupal

6,000 e-Choupals & more than120 hubs in 9 states, 36,000villages; empowering 3.5million e-farmers. 6,000 e-Choupal installations

Started with soya bean, nowcovering wheat, coffee, shrimpand other aqua products.

Reverse flow of fertilizers,household goods, seeds, etc.

back to farmers. Aims at extending to 100,000

villages and 10 millione-farmers in next decade.


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Modeling ITC and Farmers Incentives*

ITC e-Choupal investments helped reduced

production costs of farmers

Farmers in network benefit directly, and can sell

directly to ITC (implicit agreement) or to mandis. Farmers outside of network can also benefit, based on

e-Choupals investment, but have to sell to mandis.

Would farmers honor implicit agreement, and is itworthwhile for ITC to provide training to non-

network farmers?

* Chen et al., Working Paper, 2008.


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Decisions by Players

Training Investmentsfor Non-Network Farmers

Quantity Producedfor ITC and Mandis

Quantity Producedfor Mandis

Also, need to model prices (endogenous or

exogenous) and capacity of ITC.

ITCIn-NetworkFarmers Out-of-NetworkFarmers



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Some Results

Implicit agreement between farmers and ITC

behaves like a formal agreementfarmers

always give priority to sell directly to ITC.

It is also optimal for ITC to provide the best

training investment to out-of-network farmers,

since ITC also needs to purchase from open

market (mandis).



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Emerging economies offer great opportunity forbusiness model re-engineering that can directlyimprove business results and serving the mass.

Analyzing differential values to different direct andindirect stakeholders of such changes important.

Fertile ground for incentive alignment research.

Parallel research on cost efficiency & agility of ultra-

low cost products for extreme affordability (e.g., onelap-top per child, Tata Nano cars, D.Light, andShanzhai cell phones, etc.)


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Supply chain design








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Causes of Deaths in 2002

0 1000 2000 3000 4000 5000 6000

Infectiousdiseases

Respiratoryinfections

Maternal

Preinatal

Nutritionaldeficiencies

Otherdiseases*

Injuries

* Cancer, diabetes, neuropsychiatric disorders, cardiovascular diseases and respiratory diseases, etc.

US, Canada,Cuba

Africa


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Maternal Mortality Ratio(per 100,000 livebirths, 2008)

Hogan et al.,Lancelot, 2010


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Health Care in Africa

Short life expectancy: 49 years vs 77 in the US.

6% of population, or 25 million, had HIV/AIDS.

Infrastructure and logistics challenges: No integrated road, transportation and logisticsnetwork

Rural communities (with 62% of population)accessible only by single-lane sand or dirt paths.

Only 20-30% lived within 2 km of a road.

Big problem of the last mile to deliver medicineand health care to the bulk of the population.


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Motorcycle as Solution

Ability to access terraininaccessible by four-wheelvehicles.

Lower cost to purchase andoperate.

Fewer and less complicatedtools to maintain.

Lower carbon emissions than

four-wheel vehicles. Less subject to abuse by

corrupt officials.


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Transport Resource Management

Standardization of vehicle fleets. Preventive maintenance practices:

Self pre-ride checks by health workers

Monthly service by Riders-trained technician.

Extend useful life of motorcycles from 20,000 km to80,000 km.

Hub-and-spokes model for service support.

Spare parts inventory management.

Fixed service cost per km model to cover localhub, service parts, gas, protective gear, training and

logistics management.

Based on Stanford case, 2008


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Impact (2001-2002)

% of population indicating

increased visits100%

8%

Gokwe Binga

% change in malarial deaths

-0.21

0.44

Gokwe Binga

Frequency of health worker visits

49%

22%

35%

5%

13%

68%

3%5%

Gokwe Binga

Never / do notremember

Less thanmonthly

Monthly

Weekly

Based on Stanford case, 2008


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Research Problems*

How to measure effectiveness of programLogistics improvements

Health workers productivity improvements

Public health improvements Incentive issues and resulting performance

under different business models

Predictive models of performancesDifferent geographies, needs and terrainsDifferent business models

* Research grant to Stanford University from Gates Foundation


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Business Models with Governments

Business models used and proposed:

On-demand service

Managed care based on mileage

Total ownership model.

Incentives create different behaviors on:

Maintenance and service schedule

Inventory and stocking depot control

Vehicle retirement decisions


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A Vehicle Replacement Model*

Used field data to 44 vehicle replacements atIFRC relative to stated IFRC policy (5 year or

150,000 km).

Developed optimal replacement policy andanalyzed current policys effectiveness.

Data from 2002-6 for Afghanistan, Ethiopia,

Georgia and Sudan, covering 449 vehicles. Significance of problem due to IFRC policy

being used by many other NGOs.

* Martinez and Van Wassenhove, working paper, 2009


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Data is the Beast

Field data includes: procurement cost, vehicle

operation mileage, accident records,

maintenance costs (preventive & others), and

salvage values.

Data in records not totally reliable.

Internal data migration errors.

Personal usage not captured.



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Stated Policy Not Followed

Odo

meter(000

km)

Below 5 Above 5

> 150

< 150

Age in Years

16

110

84

5

No. of Retired Vehicles and

Their Ages and Odometers

HQ purchased vehicles,

National Delegation

(ND) responsible for

operational &

maintenance costs, andpaid depreciation cost to

HQ up to 5 years.

Revenue from sale of

retired vehicle went toHQ.

Interesting incentive

problem arose.



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Optimal Replacement Policy

Develop analytical models of operational cost

and salvage value as a function of age and

odometer.

Formulate dynamic program for optimal

replacement policy.

Optimal replacement odometer found at

100,000 km.

Average savings of 8.7% can be achieved.



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Riders for Health Project*

Pilot to start in 20 counties of Gambia (withvariations of business models), eventually

rolling out to whole country & other countries.

Measurement systems are to be put in place:daily log records, GPS devices on vehicles,

and on-site manual audits, etc.

Predictive model building. Vehicle operational and replacement modeling

based on different business models.

* Research grant to Stanford University from Gates Foundation


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Data is still the beastneed more creative methods tocollect data, or ways to use coarse data in research.

Performance measurement researchwhat is theright measure that would link to efficient use ofresources for social good?

Big incentive alignment problem, but stakeholderscan include operators, government, NGOs, donors,and the general mass.

Implications for regular commercial supply chainmanagement.


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Key Issues of Research Topics

Supply chain networkdesign

Product design fordiverse market needs

Process efficiencyimprovements


Socially responsiblesupply chains


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Final Remarks

Great opportunities exist for OM research involvingemerging economies.

Use detailed field/teaching cases to build right

models. Data is the challenge, but sometimes support for

collaborations is there.

Beware of the dynamicsboth complicates but also

enriches your problem.

Incentive issues are BIG but exciting research

problems.

plenary speaker hau lee pres

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