Hide Notes 

Slide 1: SUPPLY CHAIN ENGINEERING…MN 799 • TEXT: SUPPLY CHAIN MANAGEMENT – Chopra and Meindl – Prentice Hall • COURSE OUTLINE – Description – – – – – – – – – – – – – – – – – Book pages 1/22 Introduction, curriculum, rules, exams, Infrastructure (1-27) 1/27 Strategic Fit and Scope. Supply Chain Drivers (27-51) 2/05 No Class 2/12 Demand Management (169-204) 2/19 Aggregate Planning, Managing (205-225) 2/26 Guest Lecture Network Operations (71-168) 3/04 Managing Supply and Demand (121-144) 3/11 Class trip to see Supply Chain in Operation 3/18 No Class 3/25 Mid Term 4/01 Managing Inventory(249-295); 4/08 Product Availability (297-384) 4/15 Sourcing and Procurement (387-410) 4/22 Transportation (411-219); Facility Decisions (109-133) 4/29 Beer Game 5/06 Co-ordination Information Information Technology & E-Business (477- 557) 5/13 FINAL EXAMINATION Supply Chain Engineering MN 799 1#
Slide 2: GUIDELINES • GRADING: – – – – HOMEWORK – 20% BEER GAME – 5% MID TERM – 30% FINAL – 45% • HOMEWORK MUST BE COMPLETED IN TIME. LATE SUBMISSIONS WILL START WITH A ‘B’ GRADE • CLASSES WILL START AT 6.00PM AND GO STRAIGHT THRU TO 8.00PM Supply Chain Engineering MN 799 2#
Slide 3: DEFINITION OF A SUPPLY CHAIN • WHAT IS A SUPPLY CHAIN? • A SUPPLY CHAIN COVERS THE FLOW OF MATERIALS, INFORMATION AND CASH ACROSS THE ENTIRE ENTERPRISE • SUPPLY CHAIN MANAGEMENT IS THE INTEGRATED PROCESS OF INTEGRATING, PLANNING, SOURCING, MAKING AND DELIVERING PRODUCT, FROM RAW MATERIAL TO END CUSTOMER, AND MEASURING THE RESULTS GLOBALLY • TO SATISFY CUSTOMERS AND MAKE A PROFIT • WHY A ‘SUPPLY CHAIN’? Supply Chain Engineering MN 799 3#
Slide 4: Traditional View: Logistics in the Economy • • • • • • • 1990 1996 2006 Freight Transportation $352, $455 $809 B % Freight 57% 62% Inventory Expense $221, $311 $ 446 B % Inventory 39% 33% Administrative Expense $27, $31 $ 50 B Logistics related activity 11%, 10.5%,9.9% % of GNP. Source: Cass Logistics Homework: What are 2007 statistics? Supply Chain Engineering MN 799 4#
Slide 5: Traditional View: Logistics in the Manufacturing Firm • Profit • Logistics Cost • Marketing Cost 27% 48% Manufacturing Cost Homework: What it the profile for Consumables; Pharamas and Computers Supply Chain Engineering MN 799 5# 4% 21% Profit Logistics Cost Marketing Cost • Manufacturing Cost
Slide 6: Supply Chain Management: The Magnitude in the Traditional View • Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies – A typical box of cereal spends 104 days from factory to sale – A typical car spends 15 days from factory to dealership • Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed • P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand • Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago Supply Chain Engineering MN 799 6#
Slide 7: HAMBURGERS AND FRIES • • • • • • HAMBURGERS (4/LB) CATTLE FARM – 50c/lb BUTCHER PACKAGING DISTRIBUTION CENTER RETAILER CUSTOMER • • • • • FRIES (3Large/lb) POTATO FARM 25C/lb POTATO PROCESSOR DISTRIBUTION CENTER RETAILER CUSTOMER Provide Sales Price at each stage Provide Sales Price at each stage Supply Chain Engineering MN 799 7#
Slide 8: Burger and Fries Examine this process – What do you observe? What problems do you foresee in this Supply Chain? Please write some down Supply Chain Engineering MN 799 8#
Slide 9: Understanding the Supply Chain … a chain is only as good as its weakest link Recall that saying? The saying applies to the principles of building a competitive infrastructure: Supplier Manufacturer Wholesaler Retailer Customer …there is a limit to the surplus or profit in a supply chain Strong, well-structured supply chains are critical to sustained competitive advantage. We are all part of a Supply Chain in everything we buy Supply Chain Engineering MN 799 9#
Slide 10: OBJECTIVES OF A SUPPLY CHAIN • MAXIMIZE OVERALL VALUE GENERATED – – – – SATISFYING CUSTOMER NEEDS AT A PROFIT VALUE STRONGLY CORRELATED TO PROFITABILITY SOURCE OF REVENUE – CUSTOMER COST GENERATED WITHIN SUPPLY CHAIN BY FLOWS OF INFORMATION, PRODUCT AND CASH – FLOWS OCCUR ACROSS ALL STAGES – CUSTOMER, RETAILER, WHOLESALER, DISTRIBUTOR, MANUFACTURER AND SUPPLIER – MANAGEMENT OF FLOWS KEY TO SUPPLY CHAIN SUCCESS UNDERSTAND EACH OBJECTIVE Supply Chain Engineering MN 799 10#
Slide 11: DECISION PHASES IN A SUPPLY CHAIN • OVERALL STRATEGY OF COMPANY – EFFICIENT OR RESPONSIVE • SUPPLY CHAIN STRATEGY OR DESIGN ? – LOCATION AND CAPACITY OF PRODUCTION AND WAREHOUSE FACILITIES? – PRODUCTS TO BE MANUF, PURCHASED OR STORED BY LOCATION? – MODES OF TRANSPORTATION? – INFORMATION SYSTEMS TO BE USED? – CONFIGURATION MUST SUPPORT OVERALL STRAGEGY • SUPPLY CHAIN PLANNING? – OPERATING POLICIES – MARKETS SERVED, INVENTORY HELD, SUBCONTRACTING, PROMOTIONS, …? • SUPPLY CHAIN OPERATION? – DECISIONS AND EXECUTION OF ORDERS? Supply Chain Engineering MN 799 11#
Slide 12: Basic Supply Chain Architectures (Examples) 1. Indirect Channel Supplier Factory Supplier Wholesale Wholesale Retailer Retailer Retailer Customer Customer Customer 2. Direct Channel Supplier Supplier Fabricator Supplier Factory Integrator Customer Supplier 3. Virtual Channel Supplier Supplier Fabricator Factory Credit Service Express Freight Virtual Store Customer 12# Supply Chain Engineering MN 799 C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Slide 13: Supply Chain Architecture Demand LOCAL MARKET REGIONAL MARKET GLOBAL MARKET Strategic Issues . Demand Reach . Demand Risk •Cost Structure • Asset Utilization • Responsiveness Supply Risk 13# INDIRECT CHANNEL DIRECT CHANNEL VIRTUAL CHANNEL MAKE vs. BUY SOLE SOURCE SINGLE SOURCE MULTI-SOURCE Supply Supply Chain Engineering MN 799 C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Slide 14: SUPPLY CHAIN FRAMEWORK AND INFRASTRUCTURE PRINCIPLE: BUILD A COMPETITIVE INFRASTRUCTURE This principle is about VELOCITY Supply Chain Engineering MN 799 14#
Slide 15: Cycle View of Supply Chains DEFINES ROLES AND RESPONSIBILITIES OF MEMBERS OF SUPPLY CHAIN Customer Customer Order Cycle to Retailer Replenishment Cycle to Distributor to Manufacturer Manufacturing Cycle Procurement Cycle Supply Chain Engineering MN 799 to Supplier 15#
Slide 16: PROCESS VIEW OF A SUPPLY CHAIN • CUSTOMER ORDER CYCLE – TRIGGER: MAXIMIZE CONVERSION OF CUSTOMER ARRIVALS TO CUSTOMER ORDERS – ENTRY: ENSURE ORDER QUICKLY AND ACCURATELY COMMUNICATED TO ALL SUPPLY CHAIN PROCESSES – FULFILLMENT: GET CORRECT AND COMPLETE ORDERS TO CUSTOMERS BY PROMISED DUE DATES AT LOWEST COST – RECEIVING: CUSTOMER GETS ORDER Supply Chain Engineering MN 799 16#
Slide 17: PROCESS VIEW OF A SUPPLY CHAIN • REPLENISHMENT CYCLE – REPLENISH INVENTORIES AT RETAILER AT MINIMUM COST WHILE PROVIDING NECESSARY PRODUCT AVAILABILITY TO CUSTOMER – RETAIL ORDER: • TRIGGER – REPLENISHMENT POINT – BALANCE SERVICE AND INVENTORY • ENTRY – ACCURATE AND QUICK TO ALL SUPPLY CHAIN • FULFILLMENT – BY DISTRIBUTOR OR MFG. – ON TIME • RECEIVING – BY RETAILER, UPDATE RECORDS • MANUFACTURING CYCLE – INCLUDES ALL PROCESSES INVOLVED IN REPLENISHING DISTRIBUTOR (RETAILER) INVENTORY, ON TIME @ OPTIMUM COST – ORDER ARRIVAL – PRODUCTION SCHEDULING – MANUFACTURING AND SHIPPING – RECEIVING Supply Chain Engineering MN 799 17#
Slide 18: PROCESS VIEW OF A SUPPLY CHAIN • PROCUREMENT CYCLE – SEVERAL TIERS OF SUPPLIERS – INCLUDES ALL PROCESSES INVOLVED IN ENSURING MATERIAL AVAILABLE WHEN REQUIRED • SUPPLY CHAIN MACRO PROCESSES • CRM – All processes focusing on interface between firm and customers • ISCM – A processes internal to firm • SRM – All processes focusing on interface between firm and suppliers Supply Chain Engineering MN 799 18#
Slide 19: FRONT OFFICE A Customer’s View on linethe Supply Chain of Ex.-Travel arrangements Order the product... with configuration complexity on-line Take delivery... the next day at home, and get started without a hassle Pay for the product... in a foreign currency by credit card Supply Chain Engineering MN 799 Service the product... anywhere in the world 19# C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.
Slide 20: Push/Pull View of Supply Chains PULL – PROCESSES IN RESPONSE TO A CUSTOMER ORDER PUSH – PROCESSES IN ANTICIPATION OF A CUSTOMER ORDER Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order arrives PUSH PROCESSES PULL PROCESSES Supply Chain Engineering MN 799 20#
Slide 21: UNDERSTANDING THE SUPPLY CHAIN • Homework • EXAMPLES: – EXAMPLES OF SUPPLY CHAINS –1.5 – pp 20-25 – WHAT ARE SOME OF THE KEY ISSUES IN THESE SUPPLY CHAINS – ANALYSE AND COMMENT ON 7-Eleven and Amazon– ANSWER QUESTIONS 1TO 6 FOR EACH Supply Chain Engineering MN 799 21#
Slide 22: SUPPLY CHAIN PERFORMANCE – STRATEGIC FIT AND SCOPE (Lesson 2) FILM – CHAIN REACTION Business Strategy New Product Marketing Strategy Strategy Supply Chain Strategy New Product Development Marketing and Operations Distribution Sales Supply and Manufacture Service Finance, Accounting, Information Technology, Human Resources EXAMPLES? Supply Chain Engineering MN 799 22#
Slide 23: ACHIEVING STRATEGIC FIT • Step 1. Understanding the Customer and Demand – – – – – – Quantity - Lot size Response time Product variety Service level Price Innovation Implied Demand Uncertainty See Table 2.1 Regular Demand Uncertainty due to customers demand and Implied Demand Uncertainty due to uncertainty in Supply Chain Supply Chain Engineering MN 799 23#
Slide 24: Levels of Implied Demand Uncertainty Detergent Long lead time steel High Fashion Emergency steel Customer Need Price Responsiveness Low High Implied Demand Uncertainty Attributes (Table 2-2) Low Implied Uncertainty High Implied Uncertainty Product Margin Aver. Forecast Error Aver. Stockout rate Aver. markdown Low – 10% 1-2% 0% High 40-100%; 10-40%; 10-25% 24# Supply Chain Engineering MN 799
Slide 25: SUPPLY SOURCE UNCERTAINTY • TABLE 2.3 SUPPLY UNCERTAINTY – – – – – – FREQUENT BREAKDOWNS UNPREDICTABLE AND/OR LOW YIELDS POOR QUALITY LIMITED SUPPLIER CAPACITY INFLEXIBLE SUPPLY CAPACITY EVOLVING PRODUCTION PROCESSES • LIFE CYCLE POSITION OF PRODUCT – NEW PRODUCTS HIGH UNCERTAINTY • DEMAND AND SUPPLY UNCERTAINTY FIG 2.2 Supply Chain Engineering MN 799 25#
Slide 26: Step 2 - Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier (Table: 2.4) Responsiveness – to Quantity, Time, Variety, Innovation, Service level Exercise: Give examples of products that are: Highly efficient, Somewhat efficient, Somewhat responsive and highly responsive Responsiveness High Low Fig 2.3 High Supply Chain Engineering MN 799 Low Cost (efficient) 26#
Slide 27: Step 3. Achieving Strategic Fit Responsive supply chain Companies try to move Zone of Strategic fit High Cost Responsiveness spectrum f e o F it n Zo egic t tra S Low Cost Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand 27# Supply Chain Engineering MN 799
Slide 28: SCOPE • Comparison of Efficient & Responsive Supply Chain Table 2.4 – EFF Vs RESPON. STRATEGY for DESIGN; PRICING; MANUF; INVEN; LEAD TIME; SUPPLIER • (without a competitive strategy there is no right supply chain!) OTHER ISSUES AFFECTING STRATEGIC FIT – MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS – PRODUCT LIFE CYCLE Fig 2.8 • AS DEMAND CHARACTERISTICS CHANGE, SO MUST SC STRATEGY - EXAMPLES – THERE IS A RIGHT SUPPLY CHAIN STRATEGY FOR A GIVEN COMPETITIVE STRATEGY • TAILOR SC TO MEET THE NEEDS OF EACH PRODUCT’S DEMAND • – COMPETITIVE CHANGES OVER TIME (COMPETITOR) EXPANDING STRATEGIC SCOPE – INTERCOMPANY INTERFUNCTIONAL SCOPE • MAXIMIZE SUPPLY CHAIN SURPLUS VIEW – EVALUATE ALL ACTIONS IN CONTEXT OF ENTIRE SUPPLY CHAIN (FIG 2.12) – FLEXIBLE INTERCOMPANY INTERFUNCTIONAL SCOPE • FLEXIBILITY CRITICAL AS ENVIRONMENT BECOMES DYNAMIC Supply Chain Engineering MN 799 28#
Slide 29: Strategic Scope Suppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer Supply Chain Engineering MN 799 29#
Slide 30: Drivers of Supply Chain Performance Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Supply chain structure Inventory Transportation Facilities Information Drivers TRADE OFF FOR EACH DRIVER Supply Chain Engineering MN 799 30#
Slide 31: INVENTORY – – – – – ‘WHAT’ OF SUPPLY CHAIN MISMATCH BETWEEN SUPPLY AND DEMAND MAJOR SOURCE OF COST HUGE IMPACT ON RESP0NSIVENESS MATERIAL FLOW TIME • I = R T (I – Inventory, R – Throughput, T – Flow time) – ROLE IN COMPETITIVE STRATEGY – COMPONENTS • CYCLE INVENTORY – AVERAGE INVENTORY BETWEEN REPLENISHMENTS • SAFETY INVENTORY - TO COVER DEMAND AND SUPPLY UNCERTAINITY • SEASONAL INVENTORY – COUNTERS PREDICTABLE VARIATION – OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY Supply Chain Engineering MN 799 31#
Slide 32: TRANSPORTATION • • • • ‘HOW’ OF SUPPLY CHAIN LARGE IMPACT ON RESPONSIVENESS AND EFFICIENCY ROLE IN COMPETITIVE STRATEGY COMPONENTS – MODE – AIR, TRUCK, RAIL, SHIP, PIPELINE, ELECTRONIC – ROUTE SELECTION – IN HOUSE OR OUTSOURCE • OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY Supply Chain Engineering MN 799 32#
Slide 33: FACILITIES • ‘WHERE’ OF SUPPLY CHAIN • TRANSFORMED (FACTORY) OR STORED (WAREHOUSE) • ROLE IN COMPETITIVE STRATEGY • COMPONENTS – LOCATION - CENTRAL OR DECENTRAL – CAPACITY – FLEXIBILITY VS EFFICIENCY – MANUFACTURING METHODOLOGY – PRODUCT OR PROCESS FOCUS – WAREHOUSING METHODOLOGY – STORAGE – SKU, JOB LOT, CROSSDOCKING • OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY Supply Chain Engineering MN 799 33#
Slide 34: INFORMATION • AFFECTS EVERY PART OF SUPPLY CHAIN – CONNECTS ALL STAGES – ESSENTIAL TO OPERATION OF ALL STAGES • ROLE IN COMPETITIVE STATEGY – SUBSTITUTE FOR INVENTORY • COMPONENTS – – – – PUSH VS PULL COORDINATION AND INFORMATION SHARING FORECASTING AND AGGREGATE PLANNING ENABLING TECHNOLOGIES • • • • EDI INTERNET ERP SCM • OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY ? Supply Chain Engineering MN 799 34#
Slide 35: Considerations for Supply Chain Drivers Driver Inventory Transportation Facilities Information Efficiency Cost of holding Consolidation Responsiveness Availability Speed Consolidation / Proximity / Dedicated Flexibility What information is best suited for each objective Supply Chain Engineering MN 799 35#
Slide 36: MAJOR OBSTACLES TO ACHIEVING FIT • Multiple global owners / incentives in a supply chain – Information Coordination & Contractual Coordination Local optimization and lack of global fit • Increasing product variety / shrinking life cycles / demanding customers/customer fragmentation Increasing demand and supply uncertainty Supply Chain Engineering MN 799 36#
Slide 37: OBSTACLES TO ACHIEVING STRATEGIC FIT • • • • • • • INCREASING VARIETY OF PRODUCTS DECREASING PRODUCT LIFE CYCLES INCREASINGLY DEMANDING CUSTOMERS FRAGMENTATION OF SUPPLY CHAIN OWNERSHIP GLOBALIZATION DIFFICULTY EXECUTING NEW STRATEGIES ALL INCREASE UNCERTAINTY Supply Chain Engineering MN 799 37#
Slide 38: Dealing with Product Variety: Mass Customization Long Lead Time Short Mass Customization ion Low Low zat mi sto Cu High Supply Chain Engineering MN 799 Co st High 38#
Slide 39: Fragmentation of Markets and Product Variety • Are the requirements of all market segments served identical? • Are the characteristics of all products identical? • Can a single supply chain structure be used for all products / customers? • No! A single supply chain will fail different customers on efficiency or responsiveness or both. Supply Chain Engineering MN 799 39#
Slide 40: HOMEWORK • Page 49 – Nordstrom – Answer Questions 1 to 4 • Answer the above questions for Amazon.com • Page 67 – Answer Questions 1 to 4 Supply Chain Engineering MN 799 40#
Slide 41: REVIEW QUESTIONS • WHAT IS STRATEGIC FIT? HOW IS IT ACHIEVED? – COMPANY’S APPROACH TO MATCH DEMAND REQUIREMENTS AND SUPPLY POSITIONING – MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS – PRODUCT LIFE CYCLE • WHAT IS STRATEGIC SCOPE? – INTERCOMPANY, INTERFUNCTIONAL EXTENSION • WHAT ARE THE SUPPLY CHAIN DRIVERS. WHAT ARE THEIR ROLES AND COMPONENTS? – INVENTORY; FACILITIES; TRANSPORTATION; INFORMATION • OBSTACLES Supply Chain Engineering MN 799 41#
Slide 42: Demand-Management Activities Forecasting (uncertainty) Lesson 3 Order service (certainty) Demand management RULE: Do not forecast what you can plan, calculate, or extract from supply chain feedback. Source: Adapted from Plossl, “Getting the Most from Forecasts,” APICS 15th International Conference Proceedings, 1972 Supply Chain Engineering MN 799 42#
Slide 43: DETERMINING DEMAND • FORECASTING – TWO TYPES – WRONG AND LUCKY – TWO NUMBERS – QUANTITY AND DATE – ELEMENTS of a GOOD FORECASTING SYSTEM: • • • • EQUAL CHANCE OF BEING OVER OR UNDER INCLUDES KNOWN FUTURE EVENTS HAS RANGE OR FORECAST ERROR ESTIMATE REVIEWED REGULARLY Supply Chain Engineering MN 799 43#
Slide 44: FORECASTING • GENERAL PRINCIPLES: – MORE ACCURATE AT THE AGGREGATE LEVEL – MORE ACCURATE FOR SHORTER PERIODS OF TIME CLOSER TO PRESENT – SET OF NUMBERS TO WORK FROM, NOT TO WORK TO – MOSTLY ALWAYS WRONG – EXAMPLE: MONTHLY vs DAILY EXPENDITURE Supply Chain Engineering MN 799 44#
Slide 45: FORECASTING • MAIN TECHNIQUES: – QUALITATIVE • MANAGEMENT REVIEW • DELPHI METHOD • MARKET RESEARCH – QUANTITIVE • • • • • • MOVING AVERAGE WEIGHTED MOVING AVERAGE EXPONENTIAL SMOOTHING REGRESSION ANALYSIS SEASONALILTY PYRAMID Supply Chain Engineering MN 799 45#
Slide 46: FORECASTING • QUALITATIVE – USEFUL ON NEW PRODUCTS – AS A SUPPLEMENT TO QUANTITATIVE NUMBERS • QUANTITATIVE – – – – – NEEDS HISTORICAL DATA OR PROJECTED DATA AVAILABLE CONSISTENT ACCURATE UNITS - MEASURABLE Supply Chain Engineering MN 799 46#
Slide 47: WORK OUT JUNE’s FORECASTS FOR ALL SKU’s SKU A B C D E Total Jan 25 27 16 23 29 120 Feb 21 23 18 26 30 118 Month Mar 23 26 17 25 ? 91 Apr 2321 21 23 52 26 2443 May 21 25 30 23 28 127 Jun What actions should be taken? What is forecast for June? For each SKU? For total? Supply Chain Engineering MN 799 47#
Slide 48: Simple Moving Averages (SMA) Simple Moving Average (SMA) Demand 180 160 220 200 260 240 F +1 = Τ DΤ + DΤ- 1 n (4-period) Forecast start-up + DΤ- 2 (3-period) Forecast start-up 186. 6 193. 3 226. 6 233. 3 Where F = Forecast D = Demand T = Current time period n = Number of periods( max) 190 210 230 Exercise: Work out the SMA for two periods Question: What determines the number of periods used? Why? Supply Chain Engineering MN 799 48#
Slide 49: Weighted Moving Averages Weighted Moving Average (WMA) FT + 1 = WTD T + WT − 1D T − 1... + ...WT − n+ 1D T − n+ 1 Demand 180 Forecast Forecast (.2, . 3, . 5)(.1, . 2, . 3, .4) start-up start-up Where: F = Forecast D = Demand 160 220 194 200 198 196 26 23 224 0 4 240 238 236 T = Current time period n = Number of periods (max) W = Weight, where greatest weight applies to most recent period and sum of weights = 1 Exercise: Work out forecast for two periods with weights of 0.4,0.6 What periods and weights will use for forecasting soap and fashion clothes Why? Supply Chain Engineering MN 799 49#
Slide 50: Exponential Smoothing  Decision þ Select or compute a smoothing constant (α ) þ Relationship of exponential smoothing to simple moving average FT +F= = T D (1+− − α )F T α D T (1 )FT 1 T+ 1 = F D + + (1 − α )F or or +F= = + +(D T(D FT−)F T)) FT 1 T + FT= Fαα (D T − F or F 1 FT + α − T+1 T T T T+1 T T Formulas α= 2 n+ 1 Where F = forecast value T = current time period D = demand α = exponential factor <1 Where n = number of past periods to be captured 50# Supply Chain Engineering MN 799
Slide 51: Exponential Smoothing — Continued FT+1 = FT + a (DT – FT) Period Demand 0 1 2 3 4 5 6 180 160 220 200 260 240 Forecast (α = .1) start-up 180 178 182 184 192 196 Forecast (α = .5) start-up 180 170 195 198 229 234 Forecast (α = .9) start-up 180 162 214 201 254 241 Work out forecasts with α=0.3 What α’s will use for forecasting soap and fashion clothes Why? Supply Chain Engineering MN 799 51#
Slide 52: Simple Trended Series — Example  Algebraic Trend Projection X Y a. Trend (“rise” over “run”) = (13 - 4)/3 = 3 = b 0 4 b.Y-intercept (a) = “compute” 1 7 the Y value for X = 0, thus Y-int = 4 2 10 3 13 c. Period 4: Y = a + bX = 4 + 3 (4 [for period 4]) = 16 13 10 7 4 1 Run 2 3 Supply Chain Engineering MN 799 52# Rise
Slide 53: REGRESSION ANALYSIS • Regression formula b=slope, a=intercept • Slope b= • and n∑ XY − ∑ X ∑ Y n ∑ X − (∑ X ) 2 2 Intercept a = Y - bX • Work out this example: b= • Year Variable Y (Passengers) • • • • • • 1 77 2 75 3 72 4 73 5 71 What is the regression equation? What is the forecast for Year 6? Y = a + bX Supply Chain Engineering MN 799 53#
Slide 54: TRENDED TIME SERIES FORECASTING • Question: How do you forecast a seasonal item • Y(forecast) = [A (intercept) + X (trend) x T (time period) ] x S (seasonality factor) • FIRST DETERMINE LEVEL AND TREND - IF SEASONAL DESEASONALIZE • THEN FORECAST USING EXPONENTIAL OR TREND • RESEASONALIZE Supply Chain Engineering MN 799 54#
Slide 55: Seasonal Series Indexing Seasonal Month Year 1 Year 2 Year 3 Total Index Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 10 13 33 45 53 57 33 20 19 18 46 48 395 12 13 38 54 56 56 27 18 22 18 50 53 417 11 11 29 47 55 55 34 19 20 15 45 47 388 33 37 100 146 164 168 94 57 61 51 141 148 1200 0.33 0.37 1.00 1.46 1.64 1.68 0.94 0.57 0.61 0.51 1.41 1.48 12.00 55# Yr 1 Yr2 Supply Chain Engineering MN 799
Slide 56: Seasonal Series Indexing Sample Data — Continued 1. 2. 3. 4. FIND SEASONALITY FOR EACH PERIOD DEASONALIZE PROJECT USING EXPONENTIAL, REGRESSION ETC REASONALIZE Monthly Total (MT) Average Month (AM) 33 100 94 100 = = .33 .94 Where: 1200 AM = = 100 12 Formula: Seasonal Index (SI) = SIJAN = SIJUL = Supply Chain Engineering MN 799 56#
Slide 57: Integrative Example: Calculating a Forecast with Seasonal Indexes and Exponential Smoothing  Given July Aug Demand 34 Deseasonalized Forecast 36 Seasonal Index 0.94 0.57  Rationale and Computations 1. Deseasonalize current (July) actual demand Actual demand = 34/0.94 = 36.17 34 Actual demand = 34/0.94 = 36.17 Actual demand demand = = 34/0.94 = 36.17 Actual = 34/0.94 36.17 Seasonal index Seasonal index Seasonal index 0.94 Seasonal index 2. Use exponential smoothing to project deseasonalized data one period ahead (α = .2) FT +1 = α D T + (1 − α )FT = (0.2) (36.17) + (0.8) (36) = 36.03 3. Reseasonalize forecast for desired month (August) = Deseasonalized forecast × seasonal factor = 36.03 × 0.57 = 20.53 or 21 Supply Chain Engineering MN 799 57#
Slide 58: Exercise • • • • • • • Boler Corp has the following sales history: Quarter Year1 Year2 1 140 210 2 280 350 3 70 140 4 210 280 What seasonal index for each quarter could be used to forecast the sales of the product for Year 3? • What would be a forecast for year 3 using an a=0.3 and assuming the forecast for year 2 was 1000? What would be the forecast for each quarter in this forecast? Supply Chain Engineering MN 799 58#
Slide 59: Normal Distribution Using the Measures of Variability x 68.26% 95.44% 99.74% Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998). Supply Chain Engineering MN 799 59#
Slide 60: Standard Deviation (sigma) F= Period Forecast 1 2 3 4 5 6 7 8 9 10 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 10, 000 A= Actual Sales 1, 200 1, 000 800 900 1, 400 1, 200 1, 100 700 1, 000 900 10, 200 Error (Sales – Forecast) 200 0 Error Square d 000 40, 0 40, 000 10, 000 160, 000 40, 000 10, 000 90, 000 0 10, 000 400, 000 – 200 – 100 400 200 100 – 300 0 – 100 200 Supply Chain Engineering MN 799 60#
Slide 61: Standard Deviation — Continued ∑ (Αi - Fi) n -1 2 Standard Deviation = = 400, 000 =211 9 400, 000 =200 10 Standard Deviation = ∑ (Ai n - F) i 2 = ΝΟΤΕ : About the use of n or n - 1 in the above equations n Use with a large population (> 30 observations) n - 1 Use with a small population (< 30 observations) Supply Chain Engineering MN 799 61#
Slide 62: Bias and MAD Error F= Actual ( Sales – Absolute Period Forecast Sales Forecast) Error A= Cumulative sum of error = 1 2 ∑ ( A i − Fi ) = 200 3 4 Bias = 5 ∑ (Αi - Fi ) = 200 = 20 6 10 n 7 8 Mean Absolute Deviation (MAD) 9 10 ∑ Αi - Fi = 1600 = 160 = 10 n 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 000 1, 200 1, 000 800 900 1, 400 1, 200 1, 100 700 1, 000 900 200 0 – 200 – 100 400 200 100 – 300 0 – 100 200 200 0 200 100 400 200 100 300 0 100 1, 600 10, 00010, 200 Supply Chain Engineering MN 799 62#
Slide 63: Measures of Forecast Error  Cumulative Sum of Error  Bias  Mean Absolute Deviation (MAD)  Standard Deviation=1.25 MAD or ∑(A i - F) i ∑ (Ai n - Fi ) ∑ Αi n - Fi NOTE: About the use of n or n-1 in the above equations n - 1 n Use with a large population (> 30 observations) n-1 Use with a small population (< 30 observations) ∑(Α i - Fi)2 or ∑(Ai - Fi )2 n Supply Chain Engineering MN 799 63#
Slide 64: Confidence Intervals  Definition A confidence interval is a measure of distance, increments of which are represented by the z value  Formulas 2 2 ∑ (Ai - Fi ) ∑ (Ai - Fi ) s ( Std Dev) = 1 OR n -1 n Distance - Mean = x i - x z= s Standard Deviation  Relationship or x i = x + z s  1 standard deviation (σ) =  In the example data σ = = 1.25 × 160 = Source: Raz and Roberts, “Statistics,” 1987 1.25 × MAD 1.25 × MAD 200 Supply Chain Engineering MN 799 64#
Slide 65: Expressing z Values (for +ve probabilities) Probabilit y Βack D +1 SD +2 SD +3 SD Cumulative normal distribution from left side of distribution (x + z) z 0.0 1.0 2.0 3.0 .0 .1 .2 .3 .4 .5 .6 .7 .8 .9 .5000 .5398 .8413 .8643 .9773 .9821 .9987 .9990 .5793 .6179 .8849 .9032 .9861 .9893 .9930 .9995 .6554 .6915 .7257 .9192 .9332 .9452 .9918 .9938 .9953 .9997 .9998 .9998 .7580 .7881 .8159 .9554 .9641 .9713 .9965 .9974 .9981 .9999 .9999 .9999 65# Supply Chain Engineering MN 799
Slide 66: Application Problem — Service Level  Given Average sales for item P is 50 units per week with a standard deviation of 4  Required What is the probability that more than 60 units will be sold? a. b. c. d. .006 .494 .506 .994 Supply Chain Engineering MN 799 66#
Slide 67: Homework Q1 - 2. A demand pattern for ten periods for a certain product was given as 127, 113, 121, 123, 117, 109, 131, 115, 127, and 118. Forecast the demand for period 11 using each of the following methods: a three-month moving average, a three-month weighted moving average using weights of 0.2, 0.3, and 0.5, exponential smoothing with a smoothing constant of 0.3, and linear regression. Compute the MAD for each method to determine which method would be preferable under the circumstances. Also calculate the bias in the data, if any, for all four methods, and explain the meaning. Q2 - The following information is presented for a product: • 2001 2002 • Forecast Demand Forecast Demand • Quarter I 200 226 210 218 Quarter II 320 310 315 333 • Quarter III 145 153 140 122 • Quarter IV 230 212 240 231 • a) What are the seasonal indicies that should be used for each quarter? • What is the MAD for the data above? Supply Chain Engineering MN 799 67#
Slide 68: Supply Chain Network Fundamentals William T. Walker, CFPIM, CIRM, CSCP Practitioner, Author, and Supply Chain Architect Supply Chain Engineering MN 799 68#
Slide 69: Session Outline • • • • • • • Understanding How Supply Chains Work The Value Principle and Network Stakeholders Mapping a Supply Chain Network The Velocity and Variability Principles Locating the Push/Pull Boundary The Vocalize and Visualize Principles Summary Supply Chain Engineering MN 799 69#
Slide 70: Learning Objectives By teaching the principles of supply chain management to understand how a supply chain network works...  We learn how to map a supply chain network.  We learn how to engineer reliable network infrastructure by maximizing velocity and minimizing variability.  We learn how the Bill Of Materials relates to the network.  We learn how locating the push/pull boundary converts network operations from Build-To-Stock to Build-To-Order.  We learn how to maximize throughput by engineering the means to vocalize demand and to visualize supply. Supply Chain Engineering MN 799 70#
Slide 71: A SUPPLY CHAIN is the global network used to deliver products and services from raw materials to end customers through engineered flows of information, material, and cash. Contributed to the APICS Dictionary, 10th Edition by William T. Walker Supply Chain Engineering MN 799 71#
Slide 72: Network Terminology "Source" Upstream Zone Physical Flow Info Flow Cash Flow "Make" Midstream Zone "Deliver" Downstream Zone "Return" Reverse Stream Zone Customer Value-Adding Value-Subtracting Supply Chain Engineering MN 799 72#
Slide 73: Supply Chain Network Operations Material moves downstream to the customer. Cash moves upstream to the supplier. M1 Supplier Material M2 Trading Partner $2 M3 Customer Cash $3 $1 Supply Chain Engineering MN 799 73#
Slide 74: Every stakeholder wins when throughput is maximized. Value is Return In Investment The Value Principle: Shareholders Value is Continuity of Demand Suppliers Trading Partner Employees Value is Employment Stability Customers Value is the Perfect Order Supply Chain Engineering MN 799 74#
Slide 75: The Network Rules In an effective supply chain network each trading partner works to...  Maximize velocity,  Minimize variability,  Vocalize demand, and  Visualize supply ...in order to maximize throughput providing Value for each stakeholder. However, a lack of trust often gets in the way. Supply Chain Engineering MN 799 75#
Slide 76: The Network Trust Factor Network trust is based upon personal relationships and the perception that things are okay regarding:  Network operating rules are clear  Supply and demand information is shared  Performance measures are agreed upon  Relationship non-disclosures are kept secret  Inventory investment is not a win-lose game Supply Chain Engineering MN 799 76#
Slide 77: Bill Of Materials Item Master - Stock Keeping Unit (SKU) Number - Description - Unit Of Measure - Approved Supplier - Country Of Origin - Cost - Lead Time BOM Level 0. BOM Level 1. BOM Level 2. BOM Level 3. C1 S1 B5 C2 S3 A3 B2 S2 C3 S4 D1 S5 Supply Chain Engineering MN 799 77# Product Structure - Parent To Child Relationship - Quantity Per Relationship For Example Items: A3, B2, B5, C1, C2, C3, D1 Suppliers: S1, S2, S3, S4, S5
Slide 78: Supply Chain Network Map Upstream Midstream Downstream Driven by the Bill Of Materials Driven by the Delivery Channel 78# Supply Chain Engineering MN 799
Slide 79: How To Map A Network 1. 2. 3. 4. 5. Start midstream and imagine finished goods sitting on a rack at the central depot. Now, use the Bill Of Materials and work upstream to reach each raw material supplier. Then, identify each different fulfillment channel used to reach the local mission. Determine which organizations are trading partners versus nominal trading partners. Logistics service providers, information service providers, and financial service providers are not part of the network map. Supply Chain Engineering MN 799 79#
Slide 80: The Velocity Principle: In network implementation throughput is maximized when order-to-delivery-to-cash velocity is maximized by minimizing process cycle time. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Velocity – how are relationships connected to make the delivery? Supply Chain Engineering MN 799 80#
Slide 81: The Network Flow Model Material Order-To-Stock Material Order-To-Delivery Supplier Info Invoice-To-Cash Trading Partner Info Customer Invoice-To-Pay Cash Cash From: William T. Walker, Supply Chain Architecture: A Blueprint for Networking the Flow of Material, Information, and Cash, CRC Press, ©2005. Supply Chain Engineering MN 799 81#
Slide 82: Logistics Touches Every Subcycle Order-To-Stock Order-To-Delivery Invoice-To-Cash Invoice-To-Pay  Transportation moves material from seller to buyer  In some cases orders/ invoices/ cash move by mail  Warehouse issues trigger invoices  Warehouse receipts trigger payments Supply Chain Engineering MN 799 82#
Slide 83: Import/ Export Boundaries Imports Return Shipment Exports Imports Exports Buyer Country A Seller Country B Country A exports and Country B imports in a forward supply chain. Country B exports and Country A imports in a reverse supply chain. Import duty and export licensing add complexity to network linkages decreasing velocity and increasing variability. Supply Chain Engineering MN 799 83#
Slide 84: The Variability Principle: In network implementation throughput is maximized when order-to-delivery-to-cash variability is minimized by minimizing process variance. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Variability – what is likely to change from one delivery to the next? Supply Chain Engineering MN 799 84#
Slide 85: Outward Signs of Variability         Unplanned demand Backordered inventory Inventory leakage Capacity constraints Lower than normal yields Longer than expected transit times Delays in clearing Customs Delayed payment Supply Chain Engineering MN 799 85#
Slide 86: To Maximize Velocity    Eliminate unnecessary process steps Shorten the longest serial process steps by eliminating queue time and automating steps Convert serial process steps into parallel process steps To Minimize Variability    Rank order the variances Minimize the root cause of largest variance Continue with the next largest variance, etc. Supply Chain Engineering MN 799 86#
Slide 87: Push/Pull Boundary Order Supply Push Push/Pull Boundary Pull Demand Forecast Supply Chain Engineering MN 799 87#
Slide 88: Customer Lead Time Build-To-Order (BTO) Push F/C Push/Pull Boundary Order Customer Demand Pull Build-To-Stock (BTS) Push F/C Push/Pull Boundary Order Pull Customer Demand Supply Chain Engineering MN 799 88#
Slide 89: How To Locate A Push/Pull Boundary 1. Know the competitive situation; for example, if competitive products are off-the-shelf, then the push/pull boundary must be close to the customer. The push/pull boundary is a physical inventory location that bisects the entire supply chain. Order-To-Delivery Cycle Time = Order Processing and Transmission Time + Shipment Processing, Picking, and Packing Time + Transportation and Customs Clearance Time 2. 3. Supply Chain Engineering MN 799 89#
Slide 90: The Vocalize Principle: In network operations throughput is maximized by pulling supply to demand by vocalizing actual demand at the network constraint. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Vocalize – who knows the full requirements of the order? Supply Chain Engineering MN 799 90#
Slide 91: Common Causes of Stockouts Quantity Q R SS Quantity R SS L Q R SS Supply Chain Engineering MN 799 Demand Uncertainty Time L Q Lead Time Variability (LT = Cycle Time + Transit Time) Time Quantity Supply Uncertainty L Time 91#
Slide 92: The Planning Interface MRP Materials Requirements CRP Capacity Requirements Sales & Operations Plan Master Schedule Push From Forecast Preload Inventory Capable Network Push Zone C Pull Zone C Pull To Demand I Upstream I Push/Pull Boundary The Supply Chain Network Supply Chain Engineering MN 799 Throughput Downstream 92#
Slide 93: Push Inventory And Capacity Push Zone Forecast I Safety C Safety Throughput Ending Inventory = Starting Inventory - Forecasted Demand + Production When actual demand exceeds forecasted demand, either capacity or inventory can constrain production causing lead time to expand. Supply Chain Engineering MN 799 93#
Slide 94: Pull Inventory And Capacity Pull Zone Order Max I C Max Throughput Ending Inventory = Starting Inventory - Actual Demand + Production Throughput is limited to the smaller of limited inventory or limited capacity. Supply Chain Engineering MN 799 94#
Slide 95: The Visualize Principle: In network operations throughput is maximized by pushing supply to demand by visualizing actual inventory supply across the network. The 5V Principles of Supply Chain Management explain how a supply chain network works by answering what, when, where, why, and how: Visualize – where is the inventory now and when will it be available? Supply Chain Engineering MN 799 95#
Slide 96: Packaging And Labeling Cartons [ ] Cartons, plastic cushions, and labels may be missing from the product BOM. [ ] RFID/ bar code on all packaging. Master Carton [ ] Select a wall thickness and box burst strength to protect the product. [ ] Keep Country Of Origin labeling consistent from the product to the outside packaging. [ ] Transportation and warehousing costs are a function of cubic dimensions and weight. [ ] Items that have to be repalletized for transport or storage cost more. Unit Load Supply Chain Engineering MN 799 96#
Slide 97: Track and Trace Tra ce Tra ck Supply Chain Engineering MN 799 97#
Slide 98: Apply Technology To Visualize • Bar Code and 2D Bar Code • Point Of Use Laser Scanners • Radio Frequency Identification (RFID) • Global Positioning by Satellite (GPS) • Wireless Communication Supply Chain Engineering MN 799 98#
Slide 99: Measuring Network Inventory Upstream Issues = Downstream Receipts Ending Inventory = Starting Inventory + Receipts – Issues Complete Products Reflect BOM Part Proportions 1. Look for leakages between upstream issues and downstream receipts. 2. Look for inventory balance discrepancies at each trading partner. 3. Look for process yield issues within each trading partner. Supply Chain Engineering MN 799 99#
Slide 100: To Vocalize  Be precise about units and configurations  Acknowledge and handshake all information  Don't skip any link holding inventory in the chain To Visualize  Measure throughput rather than production  Measure the network capacity constraint  Measure total network inventory Supply Chain Engineering MN 799 100#
Slide 101: In Summary Work the 5V Principles to maximize throughput. I win! Shareholders We win! Suppliers Trading Partner Employees I win! Customers We win! Supply Chain Engineering MN 799 101#
Slide 102: AGGREGRATE PLANNING (Chap8) Lesson 5 • PROCESS OF DETERMINING LEVELS OF – PRODUCTION RATE – WORKFORCE – OVERTIME – MACHINE CAPACITY – SUBCONTRACTING – BACKLOG – INVENTORY GIVEN DEMAND FORECAST – DETERMINE PRODUCTION, INVENTORY/BACKLOG AND CAPACITY LEVEL FOR EACH PERIOD FUNDAMENTAL TRADE-OFFS – CAPACITY(REGULAR TIME, OVERTIME, SUBCONTRACING)/COST – INVENTORY/SERVICE LEVEL – BACKLOG/LOST SALES Supply Chain Engineering MN 799 102# • •
Slide 103: AGGREGRATE PLANNING STRATEGIES • STRATEGIES - SYNCHRONIZING PRODUCTION WITH DEMAND – CHASE- USING CAPACITY AS THE LEVER • BY VARYING MACHINE OR WORKFORCE (numbers or flexibility) • DIFFICULT TO IMPLEMENT AND EXPENSIVE. LOW LEVELS OF INVENTORY – TIME FLEXIBILITY – UTILIZATION AS THE LEVER • IF EXCESS MACHINE CAPACITY, VARYING HOURS WORKED (workforce stable, hours vary) • LOW INVENTORY AND LOWER UTILISATION THAN CHASE • USEFUL WHEN INVENTORY COST HIGH AND CAPACITY CHEAP – LEVEL – USING INVENTORY AS THE LEVER • STABLE WORKFORCE AND CAPACITY • LARGE INVENTORIES AND BACKLOGS • MOST PRACTICAL AND POPULAR Supply Chain Engineering MN 799 103#
Slide 104: SOP FORMAT PERIOD SALES PRODUCTION INVENTORY/ BACKLOG • • • PRODUCTION PLAN = SALES + END INV – BEGIN INV PRODUCTION PER MONTH = PRODUCTION PLAN NUMBER OF PERIODS PRODUCTION PLAN = SALES – END BACKLOG + BEGIN BACKLOG 1 2 3 4 5 6 Supply Chain Engineering MN 799 104#
Slide 105: Sales and Operations Planning Strategies Level Method 0 1 2 3 4 5 6 7 8 Total annual (or period) 9 10 11 12 units 240 240 540 0 240 240 360 6 Production 20 20 20 20 20 20 20 20 20 20 20 20 Sales 5 5 5 15 25 35 35 35 35 25 15 5 Inventory 30 45 60 75 80 75 60 45 30 15 10 15 30 Capacity ∆ ------------ Chase Strategy Production 5 5 5 15 25 35 Sales 5 5 5 15 25 35 Inventory 30 30 30 30 30 30 30 Capacity ∆ --111 35 35 35 25 15 5 35 35 35 25 15 5 30 30 30 30 30 30 --111 Master Planning, Rev. 4.2 Supply Chain Engineering MN 799 105#
Slide 106: Production Rates and Levels Application 1 — Make-to-Stock • Table Format (Inventory) Period 0 Forecast Production plan Inventory 200 1 150 2 150 3 150 4 150 100 FOR A LEVEL STRATEGY, WORK OUT THE PRODUCTION PLAN AND INVENTORY BY PERIOD PRODUCTION = SALES + END INV – BEGIN INV Supply Chain Engineering MN 799 106#
Slide 107: Production Rates and Levels Application 2 — Make-to-Order • Table Format (Backlog) Period Forecast Production plan Backlog 0 200 1 150 2 150 3 150 4 150 100 FOR A LEVEL STRATEGY WORK OUT THE PRODUCTION PLAN AND BACKLOG BY PERIOD PRODUCTION = SALES + BEGIN BL - END BL Supply Chain Engineering MN 799 107#
Slide 108: OPTIMIZATION THRU LINEAR PROGRAMMING • AGGREGATE PLANNING MODEL – RED TOMATO Pp 210 (105) – MAXIMIZING HIGHEST PROFIT OVER TIME PERIOD – DETERMINE DECISION VARIABLES PP212(107) – OBJECTIVE FUNCTION – MINIMIZE TOTAL COST • DEVELOP EQUATIONS FOR ALL THE COST ELEMENTS- Eq 5/8.1 – CONSTRAINTS EQUATIONS • • • • WORKFORCE CAPACITY INVENTORY OVERTIME – OPTIMIZE OBJECTIVE FUNCTION – FORECAST ERROR • SAFETY INVENTORY • SAFETY CAPACITY Supply Chain Engineering MN 799 108#
Slide 109: Excel File Aggregate Planning (Define Decision Variables) Wt = Workforce size for month t, t = 1, ..., 6 Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6 Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6 Pt = Production in month t, t = 1, ..., 6 It = Inventory at the end of month t, t = 1, ..., 6 St = Number of units stocked out at the end of month t, t = 1, ..., 6 Ct = Number of units subcontracted for month t, t = 1, ..., 6 Ot = Number of overtime hours worked in month t, t = 1, ..., 6 Supply Chain Engineering MN 799 109#
Slide 110: Aggregate Planning 8.2 Item Materials Inventory holding cost Marginal cost of a stockout Hiring and training costs Layoff cost Labor hours required Regular time cost Over time cost Cost of subcontracting DEMAND Table 8.1 (5.1) Supply Chain Engineering MN 799 Cost $10/unit $2/unit/month $5/unit/month $300/worker $500/worker 4/unit $4/hour $6/hour $30/unit 110#
Slide 111: Aggregate Planning (Define Objective Function) Monthly Min ∑ 640W t + ∑ 300 H t t =1 t =1 6 6 + ∑ 500 Lt + ∑ 6 Ot + ∑ 2 I t t =1 6 t =1 t =1 6 6 6 + ∑ 5 S t + ∑10 Pt + ∑ 30 C t t =1 t =1 t =1 Supply Chain Engineering MN 799 111# 6 6
Slide 112: Aggregate Planning (Define Constraints Linking Variables) • Workforce size for each month is based on hiring and layoffs W t = W t −1 + H t − Lt, or W t − W t −1 − H t + Lt = 0 for t = 1,...,6, where W 0 = 80. Supply Chain Engineering MN 799 112#
Slide 113: Aggregate Planning (Constraints) • Production for each month cannot exceed capacity Pt ≤ 40W t + Ot 4 , 40W t + Ot 4 − Pt ≥ 0, for t = 1,...,6. Supply Chain Engineering MN 799 113#
Slide 114: Aggregate Planning (Constraints) • Inventory balance for each month I t −1 + Pt + C t = Dt + S t −1 + I t − S t , I t −1 + Pt + C t − Dt − S t −1 − I t + S t = 0, for t = 1,...,6,where I 0 = 1,000, S 0 = 0,and I 6 ≥ 500. Supply Chain Engineering MN 799 114#
Slide 115: Aggregate Planning (Constraints) • Over time for each month Ot ≤ 10W t, 10W t − Ot ≥ 0, for t = 1,...,6. Supply Chain Engineering MN 799 115#
Slide 116: SOLVING PROBLEM USING EXCEL • STEP 1 BUILD DECISION VARIABLE TABLE (fig8.1) – ALL CELLS 0, EXCEPT PERIOD 0 FOR WORKFORCE AND INVENTORY – ENTER DEMAND (TABLE 8.4) • STEP 2 CONSTRUCT CONSTRAINT TABLE (fig8.2) • STEP 3 CREATE a CELL HAVING THE OBJECTIVE FUNCTION – (Formula 8.1) Optimizing TOTAL COSTS (Fig 8.3) • STEP 4 USE TOOLS SOLVER (Fig 8.4) • REPEAT IF OPTIMUM SOLUTION NOT OBTAINED • HOMEWORK (see homework) Supply Chain Engineering MN 799 116#
Slide 117: AGGREGATE PLANNING IN PRACTICE • MAKE PLANS FLEXIBLE BECAUSE FORECASTS ARE ALWAYS WRONG – PERFORM SENSITIVITY ANALYSIS ON THE INPUTS – I.E. LOOK AT EFFECTS OF HIGH/LOW • RERUN THE AGGREGATE PLAN AS NEW DATA EMERGES • USE AGGREGATE PLANNING AS CAPACITY UTILIZATION INCREASES – WHEN UTILIZATION IS HIGH, THERE IS LIKELY TO BE CAPACITY LIMITATIONS AND ALL THE ORDERS WILL NOT BE PRODUCED Supply Chain Engineering MN 799 117#
Slide 118: Process Flow Measures • FLOW RATE (Rt), CYCLE TIME (Tt), & INVENTORY (It) RELATIONSHIPS – – – – F = Flow Rate or Throughput is output of a line in pieces per time T = Cycle time is the time taken to complete an operation I = Inventory is the material on the line LITTLE’s LAW: Av. I = Av. R x Av. T x Variability factor Examples: • If Inventory is 100 pieces and Cycle time is 10 hours, the Throughput rate is 10 pcs per hour • If Cycle time is halved; Throughput is doubled • If Inventory is halved; cycle time is halved See Equation 8.6 How do we get Av Inv of 895 and Flow time of 0.34 months on page 227/216 Supply Chain Engineering MN 799 118#
Slide 119: Homework • Ex. Work out Inventory, Rate and cycle time for values in Tables 8.4,8.5 Supply Chain Engineering MN 799 119#
Slide 120: Supply Chain Network Basics – Lesson 4 • Guest Lecture – go to Poly Blackboard Supply Chain Engineering MN 799 120#
Slide 121: MANAGING SUPPLY AND DEMAND PREDICTABLE VARIABILITY (LESSON 6) • • Predictable Variability – Change in Demand that can be forecast or guided – MANAGING DEMAND – Short time price discounts, trade promotions MANAGING SUPPLY – Capacity, Inventory, Subcontracting & Backlog, Purchased product – MANAGING CAPACITY • • • • • • TIME FLEXIBILITY FROM WORKFORCE (OVERTIME) USE OF SEASONAL WORKFORCE USE OF SUBCONTRACTING USE OF DUAL FACILITIES – DEDICATED AND FLEXIBLE DESIGN PRODUCT FLEXIBILITY INTO PRODUCTION USE OF MULTI-PURPOSE MACHINES (CNC MACHINE CENTERS) – MANAGING INVENTORY • USING COMMON COMPONENTS ACROSS MULTIPLE PRODUCTS • BUILD INVENTORY OF HIGH DEMAND OR PREDICTABLE DEMAND PRODUCTS Supply Chain Engineering MN 799 121#
Slide 122: MANAGING DEMAND (Predictable Variability) • Manage demand with pricing – Factors influencing the timing of a promotion: • Impact on demand; product margins; cost of holding inventory; cost of changing capacity • Demand increase (from discounting) due to: – Market growth – Stealing market share – Forward buying Discount of $1 increases period demand by 10% Reduce price by $1 in Jan, increases sales by 10% in first month - Tab 9.4, 9.5 – effect on cost, profit, inventory If discount is in April, highest demand month - Tab 9.6, 9.7 • See the effects of various combination Tab 9-12 • Summary Tab 9.12 & 9.13 Discuss Supply Chain Engineering MN 799 122#
Slide 123: PREDICTABLE VARIABILITY IN PRACTICE • COORDINATE MARKETING, SALES AND OPERATIONS – SALES AND OPERATIONS PLANNING – ONE GOAL MAXIMIZING PROFIT, ONE GAME PLAN • TAKE PREDICABLE VARIABILITY INTO ACCOUNT WHEN MAKING STRATEGIC DECISIONS • PARTNER WITH PRINCIPAL CUSTOMERS, ELIMINATE PREDICTIONS! • PREEMPT (PROMOS ETC.), DO NOT JUST REACT TO PREDICTABLE VARIABILITY Supply Chain Engineering MN 799 123#
Slide 124: MANUFACTURING - MANAGING LEAD TIME • CRITICAL DRIVER OF ALL MANUFACTURE – – – – – – LAYOUT AND WORKPLACE ORGANIZATION CONSTRAINT MANAGEMENT VARIABILITY AND QUEUES LOT SIZES AND SET UP REDUCTION WORK IN PROCESS FLEXIBILITY • MUST BE COMPANY FOCUS • MEASURED AND MONITORED – X BUTT TO BUTT – Supply Chain Engineering MN 799 124#
Slide 125: MANAGING INVENTORY • The role of inventory in the supply chain – Cycle Inventory (making or purchasing inventory in large lots) takes advantage of economies of scale to lower total cost – material cost, fixed ordering cost and holding cost. • Why hold inventory? – Economies of scale • Batch size and cycle time • Quantity discounts • Short term discounts / Trade promotions – Stochastic variability of supply and demand • Evaluating service level given safety inventory • Evaluating safety inventory given desired service level • Levers to improve performance Supply Chain Engineering MN 799 125#
Slide 126: Role of Inventory in the Supply Chain • Overstocking: Amount available exceeds demand – Liquidation, Obsolescence, Holding • Understocking: Demand exceeds amount available – Lost margin and future sales Goal: Matching supply and demand Supply Chain Engineering MN 799 126#
Slide 127: ROLE OF CYCLE INVENTORY (10.1) • Q – lot or batch size of an order • D – Demand • When demand steady : Cycle Inven = lot size/2 = Q/2 Saw tooth diagram • Average flow time = cycle inven / demand = Q/2D • • • • • C – material cost S – fixed ordering cost H – holding cost h – cost of holding $1 in inventory for one year H = hC cost of holding one piece for one year Supply Chain Engineering MN 799 127#
Slide 128: Cycle Inventory related costs in Practice • Inventory holding costs – usually expressed as a % per $ per year – Cost of capital (Opportunity cost of capital) – Obsolescence or spoilage cost – Handling cost – Occupancy cost (space cost) – Miscellaneous costs (security, insurance) • Order costs (same as set up costs in a machining environment) – Buyer time – Transportation costs – Receiving costs – Other costs • Cycle Inventory exists in a supply chain because different stages exploit economies of scale to lower total cost – material cost, fixed ordering cost and holding cost Supply Chain Engineering MN 799 128#
Slide 129: Fixed costs: Optimal Lot Size and Reorder Interval (EOQ) C: Cost per unit ($C/unit) h: Holding cost per year as a fraction of product cost ($%/unit/Year) H: Holding cost per unit per year Q: Lot Size D: Annual demand S: Setup or Order Cost Annual order cost = (D/Q)S Annual inventory cost = (Q/2)hC Optimum Q = √ 2DS/hC T: Reorder interval (Q/D) # orders/yr = D/Q = Optimal order freq Total Annual Cost = CD+(D/Q)S+(Q/2)hC See Fig 10-2 Showing effects of Lot Size H = hC 2 DS Q= H T= 2S DH 129# Supply Chain Engineering MN 799
Slide 130: Example 10.1 Demand, D = 12,000 computers per year Unit cost, C = $500 Holding cost, h = 0.2 Fixed cost, S = $4,000/order What is the order quantity Q, the flow time, the reorder interval and Total cost? Q = 980 computers Cycle inventory = Q/2 = 490 Flow time = Q/2D = 0.049 month Reorder interval, T = 0.98 month Total Cost = 49,000 + 49,000 + 6,000,000 = $6,098,000 Supply Chain Engineering MN 799 130#
Slide 131: EXPLOITING ECONOMIES OF SCALE • SINGLE LOT SIZE OF SINGLE PRODUCT (EOQ) = Q – – – – – – ANNUAL MATERIAL COST = CD NO. OF ORDERS PER YEAR = D/Q ANNUAL ORDER COST = (D/Q)*S ANNUAL HOLDING COST = (Q/2)H = (Q/2)hC TOTAL ANNUAL COST (TC) = CR+(D/Q)*S+(Q/2)hC Optimal lot size Q* = √2DS/hC – Optimal ordering frequency = n* = D/Q* = √DhC/2S – Key Point: Total Ordering and Holding costs are relatively stable around the EOQ and a convenient lot size around the EOQ is OK (rather than a precise EOQ) – Key Point: If demand increases by a factor of k, the optimal lot size and no of orders increases by a factor of √k. Flow time decreases by a factor of √k – Key point: To reduce Q by a factor of k, fixed cost S must be reduced by a factor of k2 Supply Chain Engineering MN 799 131#
Slide 132: Reducing Lot Size - Aggregating • Exercise: • To reduce Q from 980 to 200, how much must order cost be reduced • Key point: To reduce Q by a factor of k, fixed cost S must be reduced by a factor of k2 Supply Chain Engineering MN 799 132#
Slide 133: LOT SIZING WITH MULTIPLE PRODUCTS & CUSTOMERS • Lot sizing with Multiple Product or Customers – Aggregating replenishment across products, retailers or suppliers in a single order, allows for a reduction in lot sizes because fixed costs spread across multiple products and businesses – Ordering and delivering independently (See Ex.10.3) • Each order has independent Holding, Ordering and Annual costs with independent EOQ’s and Flow Times – Table 10-1 • Total cost = $155,140 – Total cost Ordered and delivered jointly (See Ex.10.4) • Independent holding costs but combined fixed order cost Table 10-2 • Total Cost = $136,528 – Transportation capacity constraint – aggregating multiple products from same supplier; single delivery from multiple suppliers (Ex. 10-5) • Key Point –The key to reducing cycle inventory is reducing lot size. The key to reducing lot size without increasing costs is to reduce fixed costs associated with each lot – by reducing the fixed cost itself or aggregating lots across multiple products, customers or suppliers. We reduce lot size to reduce cycle time Supply Chain Engineering MN 799 133#
Slide 134: Impact of product specific order cost Tailored aggregation – Higher volume products ordered more frequently and lower volume products ordered less frequently (rather than ordered and delivered jointly) 10-6 Summary Total Costs No Aggregation Product specific order cost = $1000 $155,140 (10-3) Complete $136,528 (10-4) Aggregation Tailored $130,767 (10-6) Aggregation Supply Chain Engineering MN 799 134#
Slide 135: Delivery Options • No Aggregation: Each product ordered separately • Complete Aggregation: All products delivered on each truck • Tailored Aggregation: Selected subsets of products on each truck Supply Chain Engineering MN 799 135#
Slide 136: Economies of Scale to exploit Quantity Discounts • Two common Lot Size based discount schemes – All unit quantity discounts • Pricing based on specific quantity break points – Marginal unit quantity discounts or multiblock tariffs • Pricing based on quantity break points, but the price is not the average per block, but the marginal cost of a unit that decreases at breakpoint – See example in book on these discounts pages 276-280 Supply Chain Engineering MN 799 136#
Slide 137: WHY QUANTITY DISCOUNTS – Improved coordination to increase total supply chain profits • Commodity Products = price set by market. • Large Manufacturers should use lot based quantity discounts, to maximize profits (cycle inventory will increase) • The supply chain profit is lower if each stage makes pricing decisions independently, maximizing its own profit • Coordination to maximize profit – Two part tariff or quantity discounts – supplier passes on some of the profit to the retailer, depending on volume – Extraction of surplus through price discrimination – Trade Promotions – Lead to significant forward buying by the retailer – Retailer should pass on optimal discount to customer and keep rest for themselves Supply Chain Engineering MN 799 137#
Slide 138: Quantity Discounts • • • • • Discounts improve coordination between Supplier and Retailer to maximize Supply Chain profits. Quantity Discounts are a form of manufacturer returning some reduced costs (less orders) to the retailer (costs increase as more holding costs) Supply chain profit is lower, if each stage of supply chain independently makes its pricing decisions with the objective of maximizing its own profit. A coordinated solution results in higher profit For products that have market power, two-part tariffs or volume based quantity discounts can be used to achieve coordination in the supply chain and maximize profits Promotions lead to significant increase in lot size and cycle inventory, because of forward buying by the retailer. This generally reduces the supply chain profits 280-281 Supply Chain Engineering MN 799 138#
Slide 139: Strategies for reducing fixed costs • • • • Wal-Mart: 3 day replenishment cycle Seven Eleven Japan: Multiple daily replenishment P&G: Mixed truck loads Efforts required in: – Transportation (Cross docking) – Information – Receiving Aggregate across products, supply points, or delivery points in a single order, allows reduction of lot size for individual products Ex 10.6 Supply Chain Engineering MN 799 139#
Slide 140: ESTIMATING CYCLE INVENTORY COSTS • HOLDING COSTS – – – – – – – – – Cost of capital Obsolescence or spoilage costs Handling costs Occupancy cost Miscellaneous Buyer time Transportation costs Receiving costs Other costs • Order Cost Supply Chain Engineering MN 799 140#
Slide 141: Lessons From Aggregation • Key to reducing cycle inventory is reducing lot size. Key to reducing lot size without increasing costs is to reduce the fixed cost itself by aggregation (across multiple products, customers or suppliers) • Aggregation allows firm to lower lot size without increasing cost • Complete aggregation is effective if product specific fixed cost is a small fraction of joint fixed cost • Tailored aggregation is effective if product specific fixed cost is large fraction of joint fixed cost Supply Chain Engineering MN 799 141#
Slide 142: Lessons From Discounting Schemes • Lot size based discounts increase lot size and cycle inventory in the supply chain • The supply chain profit is lower if each stage independently makes pricing decisions with the objective of maximizing its own profit. Coordinated solution results in higher profit • Lot size based discounts are justified to achieve coordination for commodity products – competitive market and price fixed by market • Volume based discounts with some fixed cost passed on to retailer are more effective in general – Volume based discounts are better over rolling horizon Supply Chain Engineering MN 799 142#
Slide 143: Levers to Reduce Lot Sizes Without Hurting Costs • Cycle Inventory Reduction – Reduce transfer and production lot sizes • Aggregate fixed cost across multiple products, supply points, or delivery points – Are quantity discounts consistent with manufacturing and logistics operations? • Volume discounts on rolling horizon • Two-part tariff – volume based discount in stages – Are trade promotions essential? • EDLP (Every day low pricing) • Base on sell-thru (customers) rather than sell-in (retailers) • HOMEWORK • EXERCISES 1 AND 2 Pp291/297 Supply Chain Engineering MN 799 143#
Slide 144: Discussions on Site Visit • Macy’s Distribution Center (DC) • In teams please answer the following: – – – – What is the size of the operation What strategy do they adopt and why What are the key competitive practices How do they deal with each of the Supply Chain Drivers • Measurements used for efficiency? • How can they improve their operations? Supply Chain Engineering MN 799 144#
Slide 145: Mid Term • • 1. 2. 3. 4. 5. Show your calculations Do not get stuck on any question Strategy applications and implications Demand Management Aggregate Demand Cycle Inventory Supply Chain Networks 15 20 20 20 25 Supply Chain Engineering MN 799 145#
Slide 146: Role of Inventory in the Supply Chain (LESSON 7) Improve Matching of Supply and Demand Improved Forecasting Reduce Material Flow Time Reduce Waiting Time Reduce Buffer Inventory Supply / Demand Variability Safety Inventory Figure Error! No text of Economies of Scale Cycle Inventory Seasonal Variability Seasonal Inventory 146# Supply Chain Engineering MN 799
Slide 147: WHY HOLD SAFETY INVENTORY? (SAFETY STOCK) • DEMAND UNCERTAINTY • SUPPLY UNCERTAINTY • TODAY’S ENVIRONMENT – INTERNET MAKES SEARCH EASIER – PRODUCT VARIETY GROWN WITH CUSTOMIZATION – EASE AND VARIETY PUTS PRESSURE ON PRODUCT AVAILABILITY – PUSH UP LEVELS OF INVENTORY / SAFETY STOCK • KEY QUESTIONS – APPROPRIATE LEVEL OF SAFETY STOCK – WHAT ACTIONS IMPROVE AVAILABILITY AND REDUCE SAFETY STOCK? Measures of product availability – Product fill rate (fr) – Order fill rate – Cycle service level (CSL) - THIS COURSE WILL DEAL mainly WITH CSL Supply Chain Engineering MN 799 147#
Slide 148: Inventory ROP Lot Size = Q Cycle Inventory Q/2 Safety Stock Demand during Lead time SS = ROP - DL Time APPROPRIATE LEVEL OF SAFETY STOCK DEPENDS ON: UNCERTAINTY OF DEMAND OR SUPPLY REPLENISHMENT LEAD TIME & DESIRED SERVICE LEVEL CSL – Cycle service level -CSL is the fraction of replenishment cycles that end with all the customer demand being met. A replenishment cycle is the interval between two successive replenishment deliveries Supply Chain Engineering MN 799 148#
Slide 149: Replenishment policies • Replenishment policies – When to reorder? – How much to reorder? Continuous Review: Order fixed quantity when total inventory drops below Reorder Point (ROP) Periodic Review: Order at fixed time intervals to raise total inventory to Order up to Level (OUL) Factors driving safety inventory – Demand and/or Supply uncertainty – Desired level of product availability – Replenishment lead time • Demand Uncertainty– Av.Demand; Stnd Devn; Lead Time Supply Chain Engineering MN 799 149#
Slide 150: Continuous Review Policy: Safety Inventory and Cycle Demand Uncertainty & Service Level L: Lead time for replenishment D: Average demand per unit time σ D:Standard deviation of demand per period DL : Mean demand during lead time σ L: Standard deviation of demand during lead time CSL: Cycle service level – Probability of not stocking out in replenishment cycle SS: Safety inventory ROP: Reorder point Cv: Coefficient of variance SS = ROP - RL Average Inventory = Q/2 + SS Supply Chain Engineering MN 799 150#