Supply Chain Management Managing Material Waiting TimeOutlineThe Supply ChainKey Financial Indicators of Supply Chain PerformanceCosts of not Matching Supply and DemandAccurately Matching Demand with Supply is the Key Challenge: InventoriesMass CustomizationImplicationsA Key to Matching Supply and DemandPush/Pull View of Supply ChainsRole of Inventory in the Supply ChainDemand uncertainty and forecastingSlide 13UncertaintySlide 15Slide 16Slide 17Information Uncertainty: Barilla SpaThe Bull-Whip Effect: CausesReducing Batch SizeQuantity DiscountsTrade PromotionsTrade promotionsThe Bullwhip Effect: CountermeasuresSlide 25Slide 26Tackling Demand UncertaintyQuick ResponseA Key to Accurate Response: Inventory PoolingAccurate Response ExamplesAccurate Response at DellHewlett Packard: PostponementImproved Matching of Supply and DemandS. Chopra/Operations/Supply Chain 1Supply Chain Management Managing Material Waiting TimeS. Chopra/Operations/Supply Chain 2OutlineA key to matching supply and demandLevers for improved matching of supply and demandThe bullwhip effect: BarillaThe impact of aggregationS. Chopra/Operations/Supply Chain 3The Supply ChainThe Procurementor supply systemThe OperatingSystemThe Distribution SystemRaw Materialsupply pointsMovement/TransportRaw MaterialStorageMovement/TransportMovement/TransportSTORAGESTORAGESTORAGEPLANT 1PLANT 2PLANT 3WAREHOUSEWAREHOUSEWAREHOUSEMovement/TransportMARKETSManufacturingFinished GoodsStorageABCS. Chopra/Operations/Supply Chain 4Key Financial Indicators of Supply Chain PerformanceReturn on AssetsNet Present Value……These are LAGGING indicators. What must the supply chain do to achieve this?S. Chopra/Operations/Supply Chain 5Costs of not Matching Supply and DemandCost of overstocking –liquidation, obsolescence, holdingCost of under-stocking –lost sales and resulting lost marginS. Chopra/Operations/Supply Chain 6Accurately Matching Demand with Supply is the Key Challenge: Inventories... by 1990 Wal-Mart was already winning an important technological war that other discounters did not seem to know was on. “Wal-Mart has the most advanced inventory technology in the business and they have invested billions in it”. (NYT, Nov. 95).WSJ, Aug. 93: Dell Computer stock plunges. The company was sharply off in forecast of demand resulting in inventory writedowns.BW 1997:S. Chopra/Operations/Supply Chain 7Mass CustomizationMass Production–Produce goods and services at low enough cost that nearly everyone can afford themMass Customization–Produce goods and services at affordable prices with enough variety and customization that nearly everyone can find exactly what they wantS. Chopra/Operations/Supply Chain 8ImplicationsMarkets have become increasingly heterogeneousDemand for individual products is very unstableAlong with shorter development cycles comes shorter product life cyclesHow to provide increased variety and keep costs down?S. Chopra/Operations/Supply Chain 9A Key to Matching Supply and DemandWhen would you rather place your bet?ABCDA: A month before start of DerbyB: The Monday before start of DerbyC: The morning of start of DerbyD: The lead horse is an inch from the finish lineS. Chopra/Operations/Supply Chain 10Push/Pull View of Supply ChainsProcurement,Manufacturing andReplenishment cyclesCustomer OrderCycleCustomerOrder ArrivesPUSH PROCESSES PULL PROCESSESS. Chopra/Operations/Supply Chain 11Role of Inventory in the Supply ChainImprove Matching of Supplyand DemandImproved ForecastingReduce Material Flow TimeReduce Waiting TimeReduce Buffer InventoryEconomies of ScaleSupply / DemandVariabilitySeasonalVariabilityCycle InventorySafety InventoryFigure Error! No text ofSeasonal InventoryS. Chopra/Operations/Supply Chain 12Demand uncertainty and forecastingForecasts are usually (always?) wrongA good forecast includes a measure of forecast error, e.g., standard deviationThe forecast horizon must at least be as large as the lead time. The longer the forecast horizon, the less accurate the forecastAggregate forecasts tend to be more accurate than disaggregate forecasts.S. Chopra/Operations/Supply Chain 13Demand uncertainty and forecastingYear Demand Forecast Error1986 2701987 3091988 2741989 2681990 2681991 316S. Chopra/Operations/Supply Chain 14UncertaintyUncertaintyInformationUncertaintyCustomerDemandUncertaintyS. Chopra/Operations/Supply Chain 15S. Chopra/Operations/Supply Chain 16S. Chopra/Operations/Supply Chain 17S. Chopra/Operations/Supply Chain 18Information Uncertainty: Barilla SpaWhy are order sizes at Pedrignano so much more variable than those at Cortese?What can Barilla do to improve coordination in its supply chain?S. Chopra/Operations/Supply Chain 19The Bull-Whip Effect:CausesRational and Optimizing Players in Supply Chain–Order Batching –Price Variations–Sales Force Incentives–Demand Signal Processing –Rationing GameS. Chopra/Operations/Supply Chain 20Reducing Batch SizeWal-Mart: 3 day replenishment cycle Seven Eleven Japan: Multiple daily replenishmentP&G: Mixed truck loadsEfforts required in:–Transportation (Cross docking)–Information–ReceivingS. Chopra/Operations/Supply Chain 21Quantity DiscountsCost/UnitOrder Quantity$3$2.96$2.925,00010,000Quantity DiscountsS. Chopra/Operations/Supply Chain 22Trade Promotions050100150200250300350Consumption•Trade PromotionsS. Chopra/Operations/Supply Chain 23Trade promotions0100200300400500600700800ShipmentsConsumption•Trade PromotionsS. Chopra/Operations/Supply Chain 24The Bullwhip Effect: CountermeasuresOrder Batching –Reduce setup cost, aggregation during transport, switch to volume based quantity discounts (rolling horizon)Price Variations–Every day low pricing, sell-thru based promotionsSales Force Incentives–Incentives based on sell-thru, rolling horizonDemand Signal Processing –Supply chain visibility, collaborative forecasting and planningRationing Game–Turn and earnS. Chopra/Operations/Supply Chain 25S. Chopra/Operations/Supply Chain 26S. Chopra/Operations/Supply Chain 27Tackling Demand UncertaintyThe longer the forecast horizon, the less accurate the forecast–Supply Chain Goal: Quick ResponseAggregate forecasts tend to be more accurate than disaggregate forecasts–Supply Chain Goal: Accurate ResponseS. Chopra/Operations/Supply Chain 28Quick ResponseShorten supply lead timeIncrease replenishment frequencyCoordinate
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