slide 1supply chain management© van mieghem supply chain management managing the supply chain key...
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Slide 1Supply Chain Management © 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
Slide 2Supply Chain Management © Van Mieghem
What is Supply Chain Management?
Managing supply chain flows and assets to maximize supply chain surplus in a sustainable manner.
The Procurementor supply system
The OperatingSystem The Distribution System
Raw Materialsupply points
Movement/Transport
Raw MaterialStorage Movement/
TransportMovement/Transport
STORAGE
STORAGE
STORAGE
PLANT 1
PLANT 2
PLANT 3
WAREHOUSE
WAREHOUSE
WAREHOUSE
Movement/Transport
MARKETS
Manufacturing
Finished GoodsStorage
A
B
C
Slide 3Supply Chain Management © Van Mieghem
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
Accounts Receivable - Trade, Net
5,089 4,144 3,905 3,642 2,840
Total Inventory 36,318 33,160 34,511 35,159 33,685
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
Wal-Mart Financials over time
What questions would you ask the Wal-Mart CFO?
Slide 4Supply Chain Management © Van Mieghem
Total Receivables, Net
1,587 988 827 682 382
Total Inventory 3,202 2,171 1,399 1,200 877
12 months ending 12/31 of:(Millions USD) 2010 2009 2008 2007 2006
Total Revenue 34,204 24,509 19,166 14,835 10,711
Cost of Revenue, Total
26,561 18,978 14,896 11,482 8,255
Gross Profit 7,643 5,531 4,270 3,353 2,456
What questions would you ask the Amazon CFO?
Amazon Financials over time
Slide 5Supply Chain Management © 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?
Slide 6Supply Chain Management © Van Mieghem
Magazine sales at newsstands:as % of copies shipped to newsstands
In StylePeopleVanity FairVogueThe New YorkerGQNew YorkEsquireRolling StoneUsTalk
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
Slide 7Supply Chain Management © Van Mieghem
The challenge of increased responsiveness: A Key to Matching Supply and Demand
When would you rather place your bet?
A B C D
A: A month before start of DerbyB: The Monday before start of DerbyC: The morning of start of DerbyD: The winner is an inch from the finish line
Slide 8Supply Chain Management © Van Mieghem
Push/Pull View of Supply Chains
CustomerOrder Arrives
PUSH PROCESSES
Process 1 Process
2 Process
3
Process k
Processk+1
Process
N
Push/Pull Boundary
PULL PROCESSES
Procurement,
Manufacturing and
Replenishment cycles
Customer order cycle
Slide 9Supply Chain Management © Van Mieghem
Improve Matching of Supplyand Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Economies of ScaleSupply / Demand
VariabilitySeasonal
Variability
Cycle Inventory Safety InventoryFigure Error! No text of
Seasonal Inventory
Role of Inventory in the Supply Chain
Slide 10Supply Chain Management © 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
Slide 11Supply Chain Management © Van Mieghem
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?
retailermanufacturer
Palü Gear: Cycle Inventory & Economies of Scale
Slide 12Supply Chain Management © Van Mieghem
Economies of Scale: Inventory Build-Up Diagram
R: Annual demand rate,
Q: Number of wind breakers per replenishment order
Number of orders per year = R/Q.
Average number of wind breakers in inventory = Q/2 .
Q
Time t
Inventory Profile:# of wind breakers in inventory over time.
Inventory
Q/2
“cycle stock”
-R = Demandrate
Slide 13Supply Chain Management © Van Mieghem
Accurate Response to Scale Economies: Economic Order Quantity EOQ
The order quantity that minimizes total supply chain cost is: H
SRQEOQ
2
H Q/2: Annual holding cost
Order Size Q
Total annual costs
S R /Q:Annual setup cost
SRH2
Annual unit demand
Fixed cost per order
Annual unit holding cost
Slide 14Supply Chain Management © Van Mieghem
Optimal Economies of Scale: For a Palü Gear retailer
R = 3077 units/ year C = $ 250 / unit
r = 0.20/year 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
Slide 15Supply Chain Management © 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
Slide 16Supply Chain Management © 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.
Slide 17Supply Chain Management © Van Mieghem
Demand uncertainty and forecasting:How good is “your forecast?”
Year Demand Forecast
1994 323
1995 258?
1996 303?
1997 304?
1998 284?
1999 285?
Bin: 1 2 3 4 5 6 7 8260 270 280 290 300 310 320
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Slide 18Supply Chain Management © Van Mieghem
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 =
Slide 19Supply Chain Management © 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.
Slide 20Supply Chain Management © 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
Slide 21Supply Chain Management © Van Mieghem
Structuring Drivers of Supply Chain Performance to Improve Matching of Supply and Demand
Improve Matching of Demand with Supply
Transportation InformationInventory Facilities
Slide 22Supply Chain Management © Van Mieghem
Structuring Inventory for Accurate Response
System A (Decentralized) System B (Centralized)
How do both systems compare?
Slide 23Supply Chain Management © Van Mieghem
Actions to improve supply chain profitability: Various possibilities to pool: Aggregation Actions
Physical centralization
Information centralization
Specialization
Substitution
Commonality
Postponement
Multiple locations
Multiple products
Slide 24Supply Chain Management © 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!
Slide 25Supply Chain Management © 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 StrategiesShould you source your carbon fiber bicycle frames from Mexico or China?Based on the Research of Gad Allon And Jan A. Van Mieghem
Slide 26Supply Chain Management © Van Mieghem
Digital Tech & Social Media to improve information
The value of early information and forecast updating
Even for stable products, clickstream tracking of non-transactional websites can improve holding and backlogging costs by 5% (Huang & Van Mieghem 2011)
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Actual total sales: Each data point represents the forecast and the actual season sales for a particular item (at the style-color level).
Updated Forecast after observing 20% of sales
Initial ForecastUpdated Forecast after observing 80% of sales
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 Huang And Jan A. Van Mieghem
Slide 27Supply Chain Management © Van Mieghem
Movie Rental Business
Slide 28Supply Chain Management © Van Mieghem
Improve Matching ofSupply and Demand
Improved Forecasting
Reduce Material FlowTime
Reduce Waiting Time
Reduce Buffer Inventory
Economies of Scale
Supply / DemandVariability Seasonal Variability
1. Reduce fixed cost perbatch
2. Evaluate quantitydiscounts
3. Reduce trade promotions
1. Reduce demand variability2. Reduce delivery lead time3. Reduce variability of delivery lead time4. Pool the safety stock using
Physical Centralization Information centralization Specialization Raw material commonality / postponement Substitution
Reduceinformationuncertainty
Summary:Improved Matching of Supply and Demand