Frank Dante

Supply Chain Management (SCM)

Defining the issues of SCM Major Players

How we can work in this new model Vender relationships Data Management

Major Issues: Bullwhip effect Transportation problems Location issues

Topics For Discussion:

“Supply Chain management deals with the control of materials, information, and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers” (Stanford Supply Chain Forum Website)

“Call it distribution or logistics or supply chain management... In industry after industry . . . executives have plucked this once dismal discipline off the loading dock and placed it near the top of the corporate agenda. Hard-pressed to knock out competitors on quality or price, companies are trying to gain an edge through their ability to deliver the right stuff in the right amount of time” (Fortune Magazine, 1994)

What is SCM?

As manufacturing becomes more efficient (or is outsourced), companies look for ways to reduce costs

Several significant success stories: Efficient SCM at Walmart, HP, Dell Computer

SCM considers the broad, integrated, view of materials management from purchasing through distribution

The huge growth of interest in the web has spawned web-based models for supply chains: from “dot com” retailers to B-2-B business models

Growing Interest in SCM – Why?

Several companies have been able to cut costs and improve service by postponing the final configuration of the product until the latest possible point in the supply chain. Examples: Hewlett Packard printer configuration Postponement of final programming of

semiconductor devices – all routines loaded, only certain ones activated

Assemble to order rather than assemble to stock (Dell Computer)

Mass Customization:Designing Final Choices into Supply

Chains

Many firms now consider SCM issues in the design phase of product development

One example is IKEA whose furniture comes in simple to assemble kits that allows them to store the furniture in the same warehouse-like locations where they are displayed and sold

Shipping container designs for FedEx and UPS – airfreight

Dunnage control in Big Auto

Design For Logistics:

Part of streamlining the supply chain is reducing the number and variety of suppliers

The Japanese have been very successful in this arena (they’re an Island – so getting materials there has always been a problem)

In the mid 1980’s Xerox trimmed its number of suppliers from 5,000 to 400.

Overseas suppliers were chosen based on cost Local suppliers were chosen based on delivery speed

In 1996, Ford Motor reduced their supplier count by more than 60%

Efficient Design of the Supplier Base

Dell Computer has been one of the most successful PC retailers. Why? To solve the problem of inventory becoming obsolete, Dell’s solution: Don’t keep any inventory! - All PC’s are made to order and parts shipped directly from manufacturers when possible. Compare to the experience of Compaq Corporation – initial success selling through low cost retail warehouses but they did not garner web-based sales

Dell Designs the Ultimate Supply Chain!

EDI: Electronic Data Interchange Involves the Transmission of documents

electronically in a predetermined format from company to company. (Not web based.)

The formats are complex and expensive. It appears to be on the decline as web-based systems grow.

Data Exchange – A Critical Idea

E-tailing: Direct to customer sales on the web – the so-called Click & Mortor retail model Perhaps best known e-tailer is Amazon.com,

originally a web-based discount book seller Today, Amazon.com sells a wide range of

products (we can think of many, many similar organizations)

Amazon and others spawned so called “dot com” stock explosion in the NASDAQ (1997 to April, 2000)

Today, many traditional “bricks and mortar” retailers also offer sales over the web, often at lower prices

Data and Products – E-Tailing

B2B (business to business) supply chain management: While not as visible and “sexy” as E-tailing, it

appears that B2B supply chain management is the true growth industry!

Web searches yield over 80 matches for supply chain software providers. Some of the major players in this market segment include: Agile Software based in Silicon Valley. i2 Technologies based in Dallas. Ariba based in Silicon Valley

Dealing with Data – the modern way

Walmart and P & G Target and Pepsi/Coke But … Barilla SpA. An Italian pasta producer

pioneered the use of VMI (Vendor Managed Inventory)

They obtained sales data directly from distributors and decide on delivery sizes based on that information

This is in opposition to allowing distributors (or even retailers) to independently decide on order sizes!

Data Transfer in Supply Chains: Vendor Managed Inventory (the real solution?)

Order Growth – The Bullwhip Effect – An Important issue

First noticed by P&G executives examining the order patterns for Pampers disposable diapers. They noticed that order variation increased dramatically as one moved from retailers to distributors to the factory. The causes are not completely understood but have to do with batching of orders and building in safety stock at each level Problem: increases the difficulty of planning at the factory level

Information Transfer in Supply Chains: cause of ‘The Bullwhip

Effect’

Inventory management and demand forecasting models such as those discussed in this course

The transportation problem and more general network formulations for describing flow of goods in a complex system

Analytical methods for determining delivery routes for product distribution – optimal location of new resources

There has been a Revitalization in the Analytical Tools needed to

Support SCM

The Goal is to reduce total transportation costs throughout the supply chain

Usually solved with some approach to the “Transportation Problem”

Our approach will be the Balanced Matrix model

Focusing on the Distribution Problem:

We must have a Supply/Demand balance to solve In this problem that requirement is met

If it is not met, we must create “Dummy” sources (at $0 move costs) or Dummy Sinks (also at $0 move costs) to achieve the require S/D balance

In the Transportation Problem:

Goal is to minimize the total cost of shipping We will allocate products to cells – any

allocation means the row resource will ship product to the column demand

The process is an iterative one that requires a feasible starting point Can start by using NW Corner approach Can start using a more structured VAM (Vogel

Approximation method)

The Transportation problem:

Determine Row Penalty number (PNi) –the difference between lowest and 2nd lowest cost in row Here: R1 is 1; R2 is 1: R3 is 2

Determine Column Penalty Number (PNj) – the difference between the lowest and 2nd lowest col. Cost Here: C1: 3; C2: 0; C3: 0

Choose R or C with greatest penalty cost – here is C1 If there is a tie, break tie by choosing C or R with smallest

costs Max out the allocation in chosen C or R at lowest cost cell

then x-out the C or R And so on after allocation (after we recompute PN’s!)

Starting with a VAM Solution technique:

We must allocate a very small amount of material movement (call it ) to any independent cell

An independent cell is any one where we can not complete a “stepping motion” of only horizontal and vertical movements through filled cells to return to the originating cell We call this the -path. (this would be done by alternating adding

or subtracting assignments of material to any filled cell we step on) Note any cell were a path can be build is a dependent cell

We would add sufficient ’s to reach allocated cells count of m + n – 1 number (make the solution non-degenerate)

Here since R1C1 is independent – check for yourself – we will fill it with units – this makes our solution non-degenerate – 5 cells are allocated!

Dealing with Degeneracy (when it is found)

We will explore the MODI (modified distribution) algorithm After finding a non-degenerate initial

solution, add a row of Kj’s and a column of Ri’s to the Matrix

To begin, Assign a zero value to any R or K position For each allocated cell, the following expression must be satisfied:

Ri + Kj + ci,j = 0

Entering Phase II: Determining Optimality

Examine all indicator values for empty cells – if all are non-negative the solution is optimal

If some are negative then develop a -path beginning at most negative cell (here is R3C3)

Complete the -path by stepping only to filled cells (and pivoting) while alternatively subtracting then adding allocation

After completing the path, determine the “-” cell with the smallest quantity and choose its value for “” – substitute it along the whole path

Note here: all indicators are positive thus we have the optimal solution!

MODI continued:

All indicators are now positive – this indicates an optimal solution! Note this agrees with optimal solution found

earlier!!! Relax value to zero – makes cell 1,1

allocation 100 units Optimal transportation cost is:

5*100 + 4*200 + 3*100 + 9*200 + 5*100 = 3900

Looking at this Matrix

Optimal Value = $3900 (as we found ‘by hand’!)

Ship: 100 DM-A; 200 FL-A; 200 E-B; 100 E-C; 100 FL-C

All as we found using the VAM Heuristic Much Faster and easier using LP!

Examining Results:

When a system is allowed to use intermediate ‘warehousing’ sites – they are Source sites or even Sink sites in regular transportation problem – for reducing the total cost of transportation we call the problem the transshipment network problem

We require more costs to be obtained but typically, in most complex S. Chains, companies find savings of from 7 to 15% (or more) in implementations that allow transshipment

Expansion to Transshipment Problem

This problem is usually one of very large scale (classically called the Traveling Salesman Problem)

Because of this, we typically can not find an absolutely optimal solution but rather only near optimal solution – as seen in our textbook Here, the knowns are the costs of travel from point to

point throughout the network and we try to save costs by “ganging up” trips

Solution typically follows along a line of attack based on the “Assignment Problem”

See Handout, focus on the Shortest Route Problem

Another Level of Transport – the delivery route problem

Realistically, a delivery vehicle can only carry so much – so this may reduce effectiveness of solutions

Delivery’s take Real Time – again this must be considered during scheduling and routing

Loading of vehicles is very critical to control step 2 time – load in reverse delivery order!

Delivery Optimization:

Considerations: Labor Climate Transportation issues:

Proximity to markets Proximity to suppliers & resources Proximity to parent company (sharing expertise,

purchasing, drop routing) – could be plus or minus!

Quality of transportation system

Looking at the Locating of New Facilities:

Consideration, cont. Costs to operate (utilities, taxes, real estate

costs, construction) Expansion considerations

Room available for growth? Construction to modify structure?

Any local incentives to re-locate? Quality of Life (schools, recreational

possibilities, health care – cost, availability)

Looking at the Locating of New Facilities:

Most organization compare several alternatives They identify weighting factors for the

characteristics then narrow choices 1st consider regions 2nd narrow search to communities 3rd consider specific sites Done by collecting data addressing the various factors

under study After data is collected and weighted, make

selection (typically by starting with quantitative decision follow with qualitative analysis)

Looking at the Locating of New Facilities:

In the final analysis the decision typically comes down to a “Center of Gravity Solution” that minimizes the total travel distance between the Facility and all possible Contact facilities Contact facilities may be sources of Raw

Materials or other Suppliers or they may be destinations for Product stored in or made at the new facility under design

Location Decisions in SCM:

DC 1

Store C

Store E

Store G

Store FDC 2

Store D

Store A

Store B

Lets Consider an Example:

(where should we put our new Distribution Center?)

Outsourcing of the logistics function (example: Saturn outsourced their logistics to Ryder Trucks. Outsourcing of manufacturing is a major trend these days)

Moving towards more web based transactions systems

Improving the information flows along the entire chain

Trends in Supply Chain Management

Moving manufacturing offshore to save direct costs complicates and adds expense to supply chain operations, due to: increased inventory in the pipeline Infrastructure problems Political problems Dealing with fluctuating exchange rates Obtaining skilled labor

Global Concerns in SCM