How soul resources be organised to best achieve service and operating objectives?
What are the service requirements for each customer segment?
What ICT is required to gain maximum efficiency in logistics operations? Can current inventory management support more stringent service demands?
Are there opportunities to reduce transportation costs in the long and short run?
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Key Management Questions on Logistics
How can operation integration be achieved amongst the supply chain members? What supply chain structure best minimises cost and provides competitive levels of service?
What materials/storage technologies will facilitate the attainment of service objectives?
staple products bought in regular numbers satisfaction of basic needs - stable predictable demand patterns
Functional Products
new products difficult to predict demand patterns high profit margins and volatile demand
Innovative Products promote flow of information with suppliers and customers
physical function - conversion of raw materials to products transportation etc market mediation - ensuring the variety of products in markets matches consumer requirements
develop collaborative relationship with suppliers Agility: respond to short term changes in demand or supply quickly; handle external disruptions smoothly
Distinctive Functions of Supply Chains
design for postponement build inventory buffers of inexpensive components dependable logistics system contingency planning and crisis management teams monitor global economy to determine new supply bases and markets
Lee 2004 - The Triple A Supply Chain Adaptability: adjust design of supply chain to meet structural shifts, modify supply network to strategies, products and technologies (1) Definition of product as functional or innovative
develop fresh suppliers through intermediaries evaluate needs of ultimate consumers create flexible product designs determine location of product in lifecycle and technology cycle exchange information with customers and vendors
Allignment: create incentives for better performance
identify clear roles and tasks for suppliers and customers equitable sharing of risks costs and gains of improvement
Fisher 1997 - Effective Supply Chains
Effective and High Performing Supply Chains
Devising Ideal Supply Chain Strategy hidden actions by partners Incentive problems exist for a number of reasons
hidden information and data poorly designed incentives
acknowledgement of problem
(2) Is supply chain Physically Efficient or Responsive?
diagnosis of cause Incentive problems can be tackled by
creating or redesigning incentives that induce partners to behave differently changing contracts to reward good behaviour
Narayanan 2004 - Aligning Incentives in Supply Chains
gathering and sharing hidden data Incentives can be redesigned by
using intermediaries or personal relationships to develop trust conducting incentive audits when entering new markets or introducing new technology educating managers on processes in other parts of the chain
Incentive problems can be prevented by
(3) Match Product with Supply Chain
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making discussions less personal by allowing managers to investigate problems in other areas
Strategic Level: decisions with long term impact on the organisation - product design and strategic partnering T actical Level:decisions over quarters or years - purchasing and production or inventory policies
Issues operate on 3 levels
Operational Level: daily decisions scheduling and lead times Simchi-Levi 2007
Configuration of Distribution Network Inventory Control Production Sourcing Supply Contracts
Key Issues in Supply Chain Management
"...is a set of approaches utilised efficiently to integrate, suppliers, m anufacturers, warehouses and stores, so that m erchandise is produced and distributed at the right quantities, to the right locations and at the right tim e in order to m inim ise system wide costs while satisfying service level requirem ents"
supply chain continues to be influenced by a range of environmental factors including growing customer expectations and technological changes
Distribution Strategies Supply Chain Integration and Strategic Partnering
supply chain management takes into consideration every facility that has a cost impact
Outsourcing and Off shoring Product Design ICT and Decision Support Systems Customer Value Smart Pricing
What is Supply Chain Management? 1. Matching supply chain characteristics with product characteristics 2. Ability to replace traditional supply chain strategies with those which yield global optimisation
3 critical factors enabling firms to address issues of complexity and increase competitiveness
The Complexity
3. Ability to effectively manage risk and uncertainty supply chain management takes on a systems approachto increase effectiveness and efficiency of the entire distribution system
Introduction to Supply Chain Management
Supply chain management encompasses the firm's activities at a number of levels supply chain strategy cannot be developed in isolation - directly affected by the development chain and other corporate strategies
1980s identification of cost reduction strategies - JIT, Kanban, Lean TQM manufacturing costs have reduced significantly -next steps on cost reduction around supply chain management
What makes supply chain management difficult?
1998 - $898bn 2005 - $1.18tn costs in US associated with high fuel costs and driver shortages
State of Logistics Report - account of US logistics bills and trends in transportation and inventory costs many big companies such as Procter & Gamble use strategic partnering to reduce costs
allows control of variation or Bullwhip effect allows reduction of inventory and smoothes out production Internet introduced new channels adding greater complexity to supply chain management
challenges posed by design and operation of supply chain across an entire system to minimise cost customer demand and industry trends uncertainty and risk inherent in every supply chain
Evolution of Supply Chain Management
Product Design
many partners have maximised the use of information sharing to better predict demand levels
Internal knowledge and Capabilities
activities and processes associated with product introduction
The Development Chain 1990s pressure for cost reduction led to outsourcing and Internet growth led to development of e-business
Sourcing decisions and production plans
Development and Supply Chains intersect at the point of production different managers will be responsible for different elements of these chains reverse logistics chain
2000s - application of technology such as ERP systems - opportunities to improve supply chain resiliency
in many organisations additional chains will intersect with the supply chain
The supply chain is a complex network dispersed over wide location
supply chains operate in uncertain environments dilemma of committing to manufacturing process prior to realisation of demand
Global Optimisation
Matching Supply and Demand Fluctuation of inventory and back order levels impossible to accurately determine demand even using advanced forecasting techniques Forecasting doesn't solve the problem delivery lead times manufacturing yields transportation times
Demand is not the only source of uncertainty
component availability impact of 911 on lean processes in the USA outsourcing and impact of natural disasters
Recent cost reduction trends including Lean and outsourcing increase risk
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spare parts chain
Managing Uncertainty & Risk
Number of factors will challenge the creation of a globally optimal integrated solution
Different facilities will have conflicting objectives - suppliers vs manufacturers Dynamism of supply chain - evolution over time System variation over time - accounting for cost and demand variation over time
expert panels Judgement Methods
Delphi model
used to compensate mismatch between supply and demand - protection of operation from environmental shocks
market surveys and testing Market Research Methods
can make the operation less competitive and responsive to market needs.
Buffer/Safety Inventories
Moving Average: each forecast as average of previous demand points Exponential Smoothing: each forecast as weighted average of previous forecast and demand point
where production systems needs to make more than one product and occurs in batch production systems
Forecasting Types Cycle Inventories
Time Series Methods
need to ensure sufficient stock in place when making other products.
Trend Analysis: regression analysis and Holt method
in process layout transformed resources move between specialised areas - each batch of work in progress inventory joins a queue awaiting its turn on the process.
Inventory Types
Seasonal Data Analysis forecasts based on non predicted data i.e. GDP, weather, unemployment etc
De-coupling Inventory Causal Methods
building of inventories based around environmental variations i.e. seasonal market demand to ensure supplies exits during periods of high demand. Anticipation Inventories material in transit from one part of the operation and the next
tool used to address variability in the supply chain Pipeline Inventories
demand variability is reduced if aggregate demand in pooled across locations Standard Deviation: measure of variation of demand from average Coefficient of Variation: ratio of standard deviation to average demand
shorter lifecycle of many products Model requires understanding of 2 key principles
Risk Pooling
centralising inventory reduces safety stock and average inventory in the system higher coefficient variation the greater benefit of centralisation
Unexpected changes in customer demand
Inventory Management and Risk Pooling
presence of competing products
quantity, quality and cost of supply
Why is Inventory Held?
Uncertainty Factor Lead Times
3 critical factors of risk pooling
benefits of risk pooling depend on behaviour of demand
Economies of Scale within transportation systems
cheaper deliver of larger quantities encourages increased inventories
Obsolescence Damage and deterioration identifies trade offs between ordering and storage costs
Disadvantages of Holding Inventory
zero inventory ordering property orders should be received when inventory reaches 0 optimal policy balances inventory holding cost per unit time with set up cost per unit time
Expense of retrieval Hazards of storage (chemicals) Expense of storage against inventory value
Economic Lot Size Model 1915
Duplication at different locations
total inventory cost is insensitive to order quantities attempts to determine the advantages and disadvantages of holding stock. approach and process undertaken to determine inventory management
similar to break even point that compares total cost of ordering and holding inventory
understanding relationships between forecast demand and optimal order quantity
customer demand - known or unknown replenishment lead time number of products under consideration
Inventory Policy
The Economic Order Quantity
length of planning horizon product and transportation
Characteristics of the supply chain
maintenance costs
obsolescence opportunity costs
forecasts are always wrong
service level requirements
longer forecast horizons create worse forecasts aggregate forecasts are more accurate Independent Demand: demand for products not reliant on other demands therefore forecasting must be used
Impact of Demand Uncertainty
Dependent Demand: when process has fixed schedule and possible to predict demand for components. Inventory planning system can be designed to calculate quantities and timing of demand for components. range of demand scenarios can be determined with any given probability given any order quantity a firm can determine average or expected profit for each scenario Single Period Models
optimal order quantity is not equal to forecast or average demand - depends on relationship between marginal profit and costs inventory reviewed continuously and order placed when inventory gets to reorder point
Continuous Review Policy
Multiple Order Opportunities
most appropriate when inventory data is easily accessible inventory reviewed at regular intervals and appropriate level is ordered Model works best when costs of keeping stock are high
Periodic Review Policy
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Single Stage Inventory Control
finding balance between inventory, transportation and manufacturing costs match supply and demand under uncertainty by positioning and management of inventory
Network Planning: Process by which a firm structures and manages the supply chain
effective resource utilisation Network Design: Physical configuration of the supply chain
plants, warehouses, distribution and sourcing
number of facilities - plants and warehouses location of each facility size of each facility Key Strategic Decisions for Network Design
allocation of space for products determination of sourcing requirements determination of distribution strategies
Supply Chain Master Planning: process of coordinating and allocating production and distribution strategies and resources to maximise profit
annual system costs production and purchasing costs
this can be challenging when faced with seasonal demand and forecasting volatility
key objective to design network for cost minimisation
Sourcing Strategies - where should each product be produced Supply Chain Master Plan - what are production quantities, shipment size and storage requirements?
location of customers/retailers/existing warehouses and distribution centres all products/volumes and transportation requirements - i.e. refrigeration
Resource Allocation Data Collection - network configuration data sources
models developed can focus on 2 key variables
what impact will forecasting changes have on the supply chain
annual demand per product by customer location transportation rates by model warehousing costs - labour, inventory and fixed costs
will leased warehouse space alleviate capacity? when and where should seasonal inventory be stored?
inventory holding costs transportation costs
Global Optimisation: process that considers interaction between various levels of supply chain and maximises overall performance
shipment sizes and frequencies Supply Chain Master Planning identifies potential bottlenecks in the system and answers a series of key questions
critical for firms dealing with large numbers of possible customers customers located in close proximity are clustered or collected into grid
what is the impact of running overtime?
all customers in single grid are located at the centre - customer zone aggregation often occurs through allocation of postal code Data Aggregation
common approaches to data aggregation
aggregate products into 20-50 product groups
WIP Inventory Types
important to distinguish between internal and external fleets internal fleet costs: annual cost/mileage per truck, amount delivered and effective capacity
Network Planning
important to understand interaction of various facilities in a network and their impact on inventory policy
Transportation Rates
Strategic Safety Stock
Inventory Positioning & Logistics Coordination
class: standard rates
low variability - high volume
exception: less expensive commodity
cost of transportation is function of distance between 2 points Mileage Estimation
focus of strategy towards local optimisation
high variability - low volume
external fleet costs: more complex in US truckload carriers divide states into single zones 3 basic freight types
many companies aim to keep inventory close to the customers positioning inventory in the supply chain should be done using models that consider the entire chain
ensure each zone has identical amount of total demand
when estimating transportation costs important to note rates are linear with distance but not with volume
each of the above needs own inventory control mechanism
which facilities should make to order and which ones make to stock? - Dependant on service requirements
Product Type
Network Design
raw materials
Make to Order Facility: waiting for orders prior to manufacturing
Distribution Pattern - all products picked up and destined for same source
aggregate demand points into 200 zones
critical importance of positioning inventory key in managing long and complex supply chains
finished product
Items are aggregated into a number of product groups based on 2 factors
distances can be estimated through street networksor straight line Handling Costs: labour and utility cost proportional to annual flow
Integration of Inventory Positioning and Network Design
classification of products
Fixed Costs: non proportional cost components Warehouse Costs
Storage Costs: inventory holding proportional average positive inventory levels Inventory turnover ratio= annual sales/average inventory level
low variability - low volume Pull or Push strategy based on product types
can be analyses through inventory turnover ratio Warehouse Capacities geographical and infrastructure consideration natural resources and labour availability Potential Warehouse Location
local industry and tax regulation public interest does the model make sense?
Model and Data Validation
is data consistent can the results be explained
mathematical optimizations models algorithms and heuristic algorithms Solution Techniques
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simulation models - individual ordering pattern/specific inventory policies/inventory movements
the rise of outsourcing processes has increased the role and value of the procurement process effective procurement strategies require the development of strong relationships with suppliers and can be both formal and informal number of firms have started to look at flexible contracts for non strategic components
pricing and volume discounts minimum and maximum quantities Supply Contracts: formalisation of relationship with suppliers
companies select multiple suppliers for commodities reducing costs and increasing responsiveness
shortage risks
an ineffective strategy that doesn't consider needs of the entire chain
procurement strategy has to consider driving down costs and reducing key risks
Flexible/Option Contracts: buyer prepays reservation price in return for commitment to reserve capacity to a certain level
Sequential Supply Chain: each party in chain determines its own course of action
Contracts for Non Strategic Components
Long Term Contracts: elimination of financial risk specifying fixed amounts delivered at certain point in time
product and material quality product return polices
inventory risk due to uncertain demand price risk due to market volatility
delivery lead times
forces buyers to assume all of the risks associated with the supply chain
Strategic Components Buy-Back Contracts: sellers agree to buy back goods at higher than salvage value
Non Strategic Contract Types
Spot Purchase: looking for additional supply in the open market
Revenue Sharing Contracts: buyer shares revenue with seller in return for an overall discount
Supply Contracts Risk Sharing: number of other contractual approaches that spread risks across the chain
Portfolio Contract: buyers sign multiple contract to optimise expected profit - contracts differ in price and level of flexibility allowing for hedging against risks
incentive of buyer to order more units due to risk mitigation limitation: requires supplier to have effective reverse logistics system limitation: require suppliers to monitor buyer revenue which increases costs
Quantity - Flexibility Contracts: supplier provides full refund for unsold items under a specific quantity Sales Rebate Contracts: direct incentive to retailer for selling any item above a certain quantity Global Optimisation: attempts to identify where profit is maximised across the supply chain
can contracts be designed that address the issue of conflicting data on demand forecasting? Capacity Reservation Contracts: manufacturer pays to reserve a certain level of capacity with supplier - signals true forecast
2 key contract types allow for credible information sharing
Advance Purchase Contracts: suppliers charge advance purchase price for orders placed prior to building capacity
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requires firm to surrender decision making power to an external unbiased agency
important to consider appropriate contracts when the supplier has make to stock MTS chain
Contracts with Asymmetric Information
Contracts for Make to Stock and Make to Order Supply Chains
variety of contracts allow risk sharing and reduce manufacturing risk
Pay-Back Contracts: buyer agrees to pay agreed price for any unit produced but not purchased Cost Sharing Contracts: buyer shares part of production cost in return for wholesale discount
limitation - contract requires manufacturer to share production cost information
obtaining and sharing information is not free and consideration must be given to exploring cost and benefit of exchanging information in some cases information will have a decreasing marginal value - once a piece of information has been shared there is little value in sharing more
Decreasing Marginal Value of Information
while customer demand for specific products doesn't vary inventory and back order levels fluctuate significantly Because customer demand is rarely perfectly stable, businesses must forecast demand in order to properly position inventory and other resources. Bullwhip Effect reflects the increase in variability as we travel up the supply chain
raw materials suppliers need stable volume requirements manufacturers want high productivity through efficiencies and lower production costs
Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants will increase their orders Demand Forecasting: traditional inventory management processes enhance bullwhip
Conflicting Objectives in the Supply Chain
materials warehousing and outbound logistics want to minimise transportation costs and inventory levels
Lead Times: calculation of safety stock leads to multiplication of customer demand times
Lot-Size Inventory: manufacturers want larger lot sizes but there is pressure tor educe them for easier control
Information and Supply Chain Trade-Offs
The Bullwhip Effect
Main Contribution Factors to Variability
Inventory-Transportation Cost Lead Time-Transportation Cost: trade off between holding items until it is cheaper to transport or shipping immediately to reduce lead time
Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are a given, companies often carry an inventory buffer called "safety stock".
Batch Ordering: distorted variable pattern of orders Price Fluctuation: retailers will increase stock when prices are lower - f orward buying
Supply Chain Trade Offs
Inflated Orders: placed during periods of shortage magnify bullwhip
Product Variety - Inventory frequent suggestion to centralise demand information within a supply chain providing each stage with complete information
Cost-Customer Service: reduced costs come at the expense of customer service and quality
the retailer who sits first in the chain observes customer demand forecasts the mean variance and places on order to wholesaler who then follows through to the distributor Centralised Demand Information Impact of Centralised Information on Bullwhip Effect
retailer doesn't make the forecast instead wholesaler must estimate demand mean Decentralised Demand Information sharing demand information will significantly reduce the impact of bullwhip effects but not eliminate it.
ability to fill customer orders at speed reduction of bullwhip decreased forecast horizon and more accurate forecasts
Key Importance of Lead Time Reduction
Lead Time Reduction
Reduce uncertainty: centralising information and provision of complete data
reduction of finished good inventory
Reduce variability: application of Every Day Low Pricing - EDLP system removing price promotions Methods for Coping with Bullwhip Effect
being able to locate and deliver stock is as effective as having them in inventory
Locating Desired Products
Inventory Pooling and Distributor Integration
Information Sharing and Incentives
all systems across the supply chain are directly connected systems approach must be used to better coordinate decisions local vs global optimisation
Chapter 5 - The Value of Information.mmap - 21/05/2008 -
Strategic Partnerships: changing how information is shared and inventory is managed
The Value of Information
number of methods for meeting customer demand
Reduce Lead Time
in many industries effective information is not shared across the supply chain capacity reservation contracts a number of contract types can be used to encourage the sharing of accurate data
accurate data leads to more effective forecasts
Information for Coordination of Systems
Effective Forecasts
Cooperative Forecasting Systems: sophisticated information systems allow iterative forecasting process to occur through chain collaboration
advance purchase contracts
first of 2 distribution strategies which works to bypass warehouses and distribution centres
Direct Shipment Distribution Strategies few firms use a single type of distribution strategy, rather varying their models based on product type customer demand, location, service level,overarching costs extent of demand variability and cost implications
retailer avoids expense of operating distribution centre Advantages of Direct Shipment
reduced lead times negation of risk pooling effect
Disadvantages of Direct Shipment
Selecting an Appropriate Strategy
increased transportation costs as smaller loads sent to more locations
to best understand the correct approach we must understand the factors that influence distribution strategies variety of characteristics to distinguish between intermediate storage point strategies variation between traditional and cross-docking strategies Centralised vs Decentralised Management: centralised decisions made in single place for entire network emphasis on cost reduction Safety Stock - lower when centralised Overhead - economies of scale reduce overheads Economies of Scale - more expense to manage smaller number of locations
Distribution Strategies
Traditional Warehousing Central vs Local Facilities: where to locate facilities - number of key considerations
Transshipment: shipment of items between facilities at the same level within the supply chain growth of rapid transportation options has made this a critical option mostly considered at retail level allowing the retailer to meet customer demand from inventory of others
Transshipment
Lead Time - can be reduced if larger number of locations placed nearer to customers Service - subject to definition centralisation allows for risk pooling but shipping times will be longer Transportation Cost - directly related to number of warehouses used
Intermediate Inventory Storage Point Strategies first employed by Wal-Mart - warehouses are used as inventory coordination points rather than storage points
requires significant levels of data allowing retailers to see what levels of inventory are held by others
goods spend very little time in storage which limits inventory cost and are transferred immediately to retailers distribution centres, retailers and suppliers need to be linked with advanced information systems
Cross Docking
fast and responsive transportation system needed require significant capital investment and have a number of associated complexities
forecasts are essential effective only in large distribution systems
allows a firm to centralise inventory therefore improving performance and create a push-pull supply chain Inventory Pooling
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customer search: customers faced with no inventory at a dealer will be likely to switch to another - helps to sell more products