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 1#

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 2#

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 3#

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 4#

5. Traditional View: Logistics in the Manufacturing
Firm
• Profit 4%
Profit
• Logistics Cost Logistics
21%
Cost
• Marketing Cost 27% Marketing
Cost
• Manufacturing Cost 48%
Manufacturing
Cost
Homework: What it the profile for Consumables; Pharamas and Computers
Supply Chain 5#

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 6#

7. HAMBURGERS AND FRIES
HAMBURGERS (4/LB) FRIES (3Large/lb)
• CATTLE FARM – 50c/lb • POTATO FARM 25C/lb
• BUTCHER • POTATO PROCESSOR
• PACKAGING • DISTRIBUTION CENTER
• DISTRIBUTION CENTER • RETAILER
• RETAILER • CUSTOMER
• CUSTOMER
Provide Sales Price at each stage Provide Sales Price at each stage
Supply Chain 7#

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 8#

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 9#

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 10#

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 11#

12. Basic Supply Chain Architectures (Examples)
1. Indirect Channel
Retailer Customer
Supplier Wholesale
Factory Retailer Customer
Supplier Wholesale
Retailer Customer
2. Direct Channel
Supplier Supplier
Supplier
Fabricator Factory Integrator Customer
Supplier
3. Virtual Channel
Supplier
Credit Virtual
Service Store
Supplier Fabricator Factory
Express Customer
Freight
Supply Chain 12#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

13. Supply Chain Architecture
Demand
LOCAL REGIONAL GLOBAL Strategic Issues
MARKET MARKET MARKET . Demand Reach
INDIRECT CHANNEL
DIRECT CHANNEL . Demand Risk
VIRTUAL CHANNEL
MAKE •Cost Structure
vs. • Asset Utilization
BUY • Responsiveness
SOLE SOURCE
SINGLE SOURCE
MULTI-SOURCE Supply Risk
Supply
C 1999. William T. Walker, CFPIM,Supply APICS Educational & Research Foundation. 13#
CIRM with the Chain All Rights Reserved.

14. SUPPLY CHAIN FRAMEWORK AND
INFRASTRUCTURE
PRINCIPLE:
BUILD A COMPETITIVE
INFRASTRUCTURE
This principle is about
VELOCITY
Supply Chain 14#

15. Cycle View of Supply Chains
DEFINES ROLES AND RESPONSIBILITIES OF MEMBERS OF
SUPPLY CHAIN
Customer
to
Customer Order Cycle
Retailer
Replenishment Cycle to
Distributor
Manufacturing Cycle to
Manufacturer
Procurement Cycle to
Supplier
Supply Chain 15#

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 16#

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 17#

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 18#

19. FRONT OFFICE
A Customer’s View on linethe Supply Chain
Ex.-Travel arrangements
of
Order the product... Take delivery...
with configuration complexity on-line the next day at home, and
get started without a hassle
Pay for the product... Service the product...
in a foreign currency by credit card anywhere in the world
Supply Chain 19#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

20. Push/Pull View of Supply Chains
PULL – PROCESSES IN RESPONSE TO A CUSTOMER ORDER
PUSH – PROCESSES IN ANTICIPATION OF A CUSTOMER ORDER
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles Customer
Order arrives
PUSH PROCESSES PULL PROCESSES
Supply Chain 20#

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 21#

22. SUPPLY CHAIN PERFORMANCE – STRATEGIC
FIT AND SCOPE (Lesson 2)
FILM – CHAIN REACTION
Business Strategy
New Product Marketing
Strategy Strategy
Supply Chain Strategy
New Marketing
Product and Operations Distribution Service
Development Sales Supply and
Manufacture
Finance, Accounting, Information Technology, Human Resources
EXAMPLES? Supply Chain 22#

23. ACHIEVING STRATEGIC FIT
• Step 1. Understanding the Customer and Demand
– Quantity - Lot size Implied
– Response time Demand
– Product variety Uncertainty
– Service level See Table 2.1
– Price Regular Demand
– Innovation Uncertainty due to
customers demand and
Implied Demand
Uncertainty due to
uncertainty in
Supply Chain
Supply Chain 23#

24. Levels of Implied Demand Uncertainty
Detergent High Fashion
Long lead time steel Emergency steel
Customer Need
Price Responsiveness
Low High
Implied Demand Uncertainty Attributes (Table 2-2)
Low Implied Uncertainty High Implied Uncertainty
Product Margin Low – High
Aver. Forecast Error 10% 40-100%;
Aver. Stockout rate 1-2% 10-40%;
Aver. markdown 0% 10-25%
Supply Chain 24#

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 25#

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,
Responsiveness Somewhat responsive and highly responsive
High
Low
Fig 2.3 High Low Cost (efficient)
Supply Chain 26#

27. Step 3. Achieving Strategic Fit
Responsive
Companies try to move
supply chain Zone of Strategic fit High Cost
f
Responsiveness n e o Fit
spectrum Zo egic
t
Stra
Low Cost
Efficient
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
Supply Chain 27#

28. SCOPE
• Comparison of Efficient & Responsive Supply Chain Table 2.4
– EFF Vs RESPON. STRATEGY for DESIGN; PRICING; MANUF; INVEN; LEAD
TIME; SUPPLIER
– THERE IS A RIGHT SUPPLY CHAIN STRATEGY FOR A GIVEN COMPETITIVE STRATEGY
(without a competitive strategy there is no right supply chain!)
• OTHER ISSUES AFFECTING STRATEGIC FIT
– MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS
• TAILOR SC TO MEET THE NEEDS OF EACH PRODUCT’S DEMAND
– PRODUCT LIFE CYCLE Fig 2.8
• AS DEMAND CHARACTERISTICS CHANGE, SO MUST SC STRATEGY - EXAMPLES
– 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 28#

29. Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
Supply Chain 29#

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 30#

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 31#

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 32#

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 33#

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 34#

35. Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability
Transportation Consolidation Speed
Facilities Consolidation / Proximity /
Dedicated Flexibility
Information What information is best suited for
each objective
Supply Chain 35#

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 36#

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 37#

38. Dealing with Product Variety: Mass Customization
Long
Lead Time
Short
Mass
Customization
t ion Low Low Co
za st
mi
sto
Cu
High
High
Supply Chain 38#

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 39#

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 40#

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 41#

42. Demand-Management Activities Lesson 3
Forecasting (uncertainty) 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 42#

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 43#

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 44#

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 45#

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 46#

47. WORK OUT JUNE’s FORECASTS FOR
ALL SKU’s
Month
SKU Jan Feb Mar Apr May Jun
A 25 21 23 2321 21
B 27 23 26 21 25
C 16 18 17 23 30
D 23 26 25 52 23
E 29 30 ? 26 28
Total 120 118 91 2443 127
What actions should be taken?
What is forecast for June?
For each SKU? For total?
Supply Chain 47#

48. Simple Moving Averages (SMA)
Simple Moving Average (SMA) DΤ + DΤ- 1 + DΤ- 2
F +1 =
Τ
n
Demand (3-period) (4-period)
Forecast Forecast
180 start-up start-up
160
220 186.6
200 193.3 190
260 226.6 210
240 233.3 230
Where F = Forecast T = Current time period
D = Demand n = Number of periods( max)
Exercise: Work out the SMA for two periods
Question: What determines the number of periods used? Why?
Supply Chain 48#

49. Weighted Moving Averages
Weighted Moving Average (WMA) FT + 1 = WTD T + WT − 1D T − 1... + ...WT − n+ 1D T − n+ 1
Forecast Forecast
Demand
(.2, .3, .5)(.1, .2, .3, .4)
180 start-up start-up
160
220 194
200 198 196
26 23 224
0240 4
238 236
Where: F = Forecast T = Current time period
D = Demand 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 49#

50. Exponential Smoothing
Decision
þ Select or compute a smoothing constant (α )
þ Relationship of exponential smoothing to simple
moving average
Formulas Where
1 T+ 1 = α
FT +F= = T D (1+− − α )F T
F D + + (1 − α )F
D T (1 )FT F = forecast value
T+1 T T T = current time period
FT 1 T + FT= Fαα (D T − F
or or +F= = + +(D T(D FT−)F T))
or F 1 FT + α − D = demand
T+1 T T T
α = exponential factor
<1
α= 2 Where
n+ 1 n = number of past periods
to be captured
Supply Chain 50#

51. Exponential Smoothing —
Continued
FT+1 = FT + a (DT – FT)
Period Demand Forecast Forecast Forecast
(α = .1) (α = .5) (α = .9)
0 180 start-up start-up start-up
1 160 180 180 180
2 220 178 170 162
3 200 182 195 214
4 260 184 198 201
5 240 192 229 254
6 196 234 241
Work out forecasts with α=0.3
What α’s will use for forecasting soap and fashion clothes Why?
Supply Chain 51#

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
Rise
7
4 Run
1 2 3
Supply Chain 52#

53. REGRESSION ANALYSIS
• Regression formula b=slope, a=intercept
• Slope b= n∑ XY − ∑ X ∑ Y
Intercept
n ∑ X − (∑ X )
2 2 a = Y - bX
• and
Y = a + 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?
Supply Chain 53#

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 54#

55. Seasonal Series Indexing
Seasonal
Month Year 1 Year 2 Year 3 Total Index
Jan 10 12 11 33 0.33
Feb 13 13 11 37 0.37
Mar 33 38 29 100 1.00
Apr 45 54 47 146 1.46
May 53 56 55 164 1.64
Jun 57 56 55 168 1.68
Yr 1 Yr2
Jul 33 27 34 94 0.94
Aug 20 18 19 57 0.57
Sep 19 22 20 61 0.61
Oct 18 18 15 51 0.51
Nov 46 50 45 141 1.41
Dec 48 53 47 148 1.48
Total 395 417 388 1200 12.00
Supply Chain 55#

56. Seasonal Series Indexing
Sample Data — Continued
1. FIND SEASONALITY FOR EACH PERIOD
2. DEASONALIZE
3. PROJECT USING EXPONENTIAL, REGRESSION ETC
4. REASONALIZE
Where:
Monthly Total (MT) 1200
Formula: Seasonal Index (SI) = AM = = 100
Average Month (AM) 12
33
SIJAN = = .33
100
94
SIJUL = = .94
100
Supply Chain 56#

57. Integrative Example: Calculating a Forecast
with Seasonal Indexes and Exponential Smoothing
 Given
Deseasonalized Seasonal
Demand Forecast Index
July 34 36 0.94
Aug 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 0.94
Seasonal index
Seasonal index
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 57#

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 58#

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 59#

60. Standard Deviation (sigma)
A= Error
F= Actual (Sales – Error
Period Forecast Sales Forecast) Square
1 1,000 1,200 200 d40,000
2 1,000 1,000 0 0
3 1,000 800 – 200 40,000
4 1,000 900 – 100 10,000
5 1,000 1,400 400 160,000
6 1,000 1,200 200 40,000
7 1,000 1,100 100 10,000
8 1,000 700 – 300 90,000
9 1,000 1,000 0 0
10 1,000 900 – 100 10,000
10,000 10,200 200 400,000
Supply Chain 60#

61. Standard Deviation — Continued
∑ (Αi - Fi)
2
Standard Deviation 400,000
= = =211
n -1 9
∑ (Ai
2
- F) 400,000
Standard Deviation =
i
= =200
n 10
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 61#

62. Bias and MAD
A= Error
F= Actual (Sales – Absolute
Period Forecast Sales Forecast) Error
Cumulative sum of error = 1 1,000 1,200 200 200
∑ ( A i − Fi ) = 200 2 1,000 1,000 0 0
3 1,000 800 – 200 200
4 1,000 900 – 100 100
Bias = 5 1,000 1,400 400 400
∑ (Αi - Fi ) = 200 = 20 6 1,000 1,200 200 200
n 10 7 1,000 1,100 100 100
8 1,000 700 – 300 300
Mean Absolute Deviation (MAD) 9 1,000 1,000 0 0
= ∑ Αi - Fi = 1600 = 160 10 1,000 900 – 100 100
n 10
10,000 10,200 200 1,600
Supply Chain 62#

63. Measures of Forecast Error
 Cumulative Sum of Error ∑(A - F)
i i
 Bias ∑ (Ai - Fi )
n
 Mean Absolute Deviation (MAD)
∑ Αi - Fi
n
 Standard Deviation=1.25 MAD or
∑(Α i - Fi)2 or ∑(Ai - Fi )2
NOTE: About the use of n or n-1 in the above equations n - 1 n
n Use with a large population (> 30 observations)
n-1 Use with a small population (< 30 observations)
Supply Chain 63#

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=
StandardDeviation s
 Relationship or x i = x + z s
 1 standard deviation (σ) = 1.25 × MAD
 In the example data σ = 1.25 × MAD
= 1.25 × 160 = 200
Source: Raz and Roberts, “Statistics,” 1987
Supply Chain 64#

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 .1 .2 .3 .4 .5 .6 .7 .8 .9
0.0 .5000 .5398 .5793 .6179 .6554 .6915 .7257 .7580 .7881 .8159
1.0 .8413 .8643 .8849 .9032 .9192 .9332 .9452 .9554 .9641 .9713
2.0 .9773 .9821 .9861 .9893 .9918 .9938 .9953 .9965 .9974 .9981
3.0 .9987 .9990 .9930 .9995 .9997 .9998 .9998 .9999 .9999 .9999
Supply Chain 65#

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. .006
b. .494
c. .506
d. .994
Supply Chain 66#

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 67#

68. Supply Chain Network
Fundamentals
William T. Walker, CFPIM, CIRM, CSCP
Practitioner, Author, and Supply Chain Architect
Supply Chain 68#

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 69#

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 70#

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 71#

72. Network Terminology
"Source" "Make" "Deliver" "Return"
Upstream Midstream Downstream Reverse Stream
Zone Zone Zone Zone
Customer
Physical Flow
Info Flow
Cash Flow
Value-Adding Value-Subtracting
Supply Chain 72#

73. Supply Chain Network Operations
Material moves downstream to the customer.
Cash moves upstream to the supplier.
Material
M1 M2 M3
Supplier Trading Customer
Partner
Cash
$3 $2 $1
Supply Chain 73#

74. The Value Principle:
Every stakeholder wins when throughput is maximized.
Value is
Return In
Investment
Shareholders
Value is
Trading the Perfect
Value is Suppliers Customers Order
Partner
Continuity
of Demand Employees
Value is
Employment
Stability
Supply Chain 74#

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 75#

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 76#

77. Bill Of Materials
Item Master Product Structure
- Stock Keeping Unit (SKU) Number - Parent To Child Relationship
- Description - Quantity Per Relationship
- Unit Of Measure
- Approved Supplier
- Country Of Origin For Example
- Cost Items: A3, B2, B5, C1, C2, C3, D1
- Lead Time Suppliers: S1, S2, S3, S4, S5
BOM Level 0. A3
S1
BOM Level 1. B5 B2 S2
BOM Level 2. C1 C2 C3 S4
S3
BOM Level 3.
D1 S5
Supply Chain 77#

78. Supply Chain Network Map
Upstream Midstream Downstream
Driven by the Bill Of Materials Driven by the Delivery Channel
Supply Chain 78#

79. How To
Map A Network
1. Start midstream and imagine finished goods
sitting on a rack at the central depot.
2. Now, use the Bill Of Materials and work
upstream to reach each raw material supplier.
3. Then, identify each different fulfillment
channel used to reach the local mission.
4. Determine which organizations are trading partners versus nominal trading
partners.
5. Logistics service providers, information
service providers, and financial service
providers are not part of the network map.
Supply Chain 79#

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 80#

81. The Network Flow Model
Material Material
Order-To-Stock Order-To-Delivery
Trading
Supplier Info Info Customer
Partner
Invoice-To-Cash 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 81#

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 82#

83. Import/ Export Boundaries
Return
Imports Exports
Countr y A Seller Shipment Buyer
Countr y B
Exports Imports
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 83#

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 84#

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 85#

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 86#

87. Push/Pull Boundary
Order
Supply Push Pull Demand
Push/Pull
Boundary
Forecast
Supply Chain 87#

88. Customer Lead Time
Build-To-Order (BTO) Order
Push Pull Customer
Demand
Push/Pull
F/C Boundary
Build-To-Stock (BTS) Order
Push Pull Customer
Demand
Push/Pull
F/C Boundary
Supply Chain 88#

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.
2. The push/pull boundary is a physical inventory location that bisects the entire
supply chain.
3. Order-To-Delivery Cycle Time =
Order Processing and Transmission Time +
Shipment Processing, Picking, and Packing Time +
Transportation and Customs Clearance Time
Supply Chain 89#

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 90#

91. Common Causes of Stockouts
Quantity
Q Demand Uncertainty
R
SS
Time
L
Quantity
Lead Time Variability
Q
(LT = Cycle Time + Transit Time)
R
SS
Time
L
Quantity Supply Uncertainty
Q
R
SS
Time
L
Supply Chain 91#

92. The Planning Interface
MRP Materials Sales & Operations Plan Push From
Requirements Master Schedule Forecast
CRP Capacity
Requirements
Preload
Inventory Pull To
Capable Demand
Network
Push Zone Pull Zone
I C I C
Throughput
Push/Pull Boundary
Upstream The Supply Chain Network Downstream
Supply Chain 92#

93. Push Inventory And Capacity
Push Zone
Forecast
I C
Throughput
Safety Safety
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 93#

94. Pull Inventory And Capacity
Pull Zone
Order
I C
Max Max Throughput
Ending Inventory = Starting Inventory
- Actual Demand
+ Production
Throughput is limited to the smaller of limited inventory
or limited capacity.
Supply Chain 94#

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 95#

96. Packaging And Labeling
[ ] Cartons, plastic cushions, and labels
Cartons may be missing from the product BOM.
[ ] RFID/ bar code on all packaging.
[ ] Select a wall thickness and box burst
Master strength to protect the product.
Carton
[ ] Keep Country Of Origin labeling consistent
from the product to the outside packaging.
[ ] Transportation and warehousing costs
Unit Load are a function of cubic dimensions and weight.
[ ] Items that have to be repalletized for
transport or storage cost more.
Supply Chain 96#

97. Track and Trace
Tra
c e Tra
ck
Supply Chain 97#

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 98#

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 99#

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 100#

101. In Summary
Work the 5V Principles to maximize throughput.
I win!
Shareholders
Trading We win!
Suppliers Customers
We win! Partner
Employees
I win!
Supply Chain 101#

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 102#

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 103#

104. SOP FORMAT
PERIOD 1 2 3 4 5 6
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
Supply Chain 104#

105. Sales and Operations Planning Strategies
Total
annual
(or period)
0 1 2 3 4 5 6 7 8 9 10 11 12 units
Level Method
Production 20 20 20 20 20 20 20 20 20 20 20 20 240
Sales 5 5 5 15 25 35 35 35 35 25 15 5 240
Inventory 30 45 60 75 80 75 60 45 30 15 10 15 30 540
Capacity ∆ - - - - - - - - - - - - 0
Chase Strategy
Production 5 5 5 15 25 35 35 35 35 25 15 5 240
Sales 5 5 5 15 25 35 35 35 35 25 15 5 240
Inventory 30 30 30 30 30 30 30 30 30 30 30 30 30 360
Capacity ∆ - - - 1 1 1 - - - 1 1 1 6
Master Planning, Rev. 4.2
Supply Chain 105#

106. Production Rates and Levels Application 1 — Make-to-Stock
• Table Format (Inventory)
Period 0 1 2 3 4
Forecast 150 150 150 150
Production plan
Inventory 200 100
FOR A LEVEL STRATEGY, WORK OUT THE PRODUCTION PLAN AND
INVENTORY BY PERIOD
PRODUCTION = SALES + END INV – BEGIN INV
Supply Chain 106#

107. Production Rates and Levels
Application 2 — Make-to-Order
• Table Format (Backlog)
Period 0 1 2 3 4
Forecast 150 150 150 150
Production plan
Backlog 200 100
FOR A LEVEL STRATEGY WORK OUT THE PRODUCTION PLAN AND BACKLOG BY
PERIOD
PRODUCTION = SALES + BEGIN BL - END BL
Supply Chain 107#

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 108#

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 109#

110. Aggregate Planning 8.2
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit
DEMAND Table 8.1 (5.1)
Supply Chain 110#

111. Aggregate Planning (Define Objective Function)
Monthly
6 6
Min ∑ 640W t + ∑ 300 H t
t =1 t =1
6 6 6
+ ∑ 500 Lt + ∑ 6 Ot + ∑ 2 I t
t =1 t =1 t =1
6 6 6
+ ∑ 5 S t + ∑10 Pt + ∑ 30 C t
t =1 t =1 t =1
Supply Chain 111#

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 112#

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 113#

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 114#

115. Aggregate Planning (Constraints)
• Over time for each month
Ot ≤ 10W t,
10W t − Ot ≥ 0,
for t = 1,...,6.
Supply Chain 115#

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 116#

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 117#

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 118#

119. Homework
• Ex. Work out Inventory, Rate and cycle time for values in
Tables 8.4,8.5
Supply Chain 119#

120. Supply Chain Network Basics – Lesson 4
• Guest Lecture – go to Poly Blackboard
Supply Chain 120#

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 121#

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 122#

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 123#

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 124#

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 125#

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 126#

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 127#

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 128#

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 H = hC
Q: Lot Size
D: Annual demand
2 DS
Q=
S: Setup or Order Cost
Annual order cost = (D/Q)S
Annual inventory cost = (Q/2)hC
Optimum Q = √ 2DS/hC
H
T: Reorder interval (Q/D)
2S
T=
# 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 DH
Supply Chain 129#

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 130#

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 131#

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 132#

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 133#

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 Product
specific order
cost = $1000
No $155,140 (10-3)
Aggregation
Complete $136,528 (10-4)
Aggregation
Tailored $130,767 (10-6)
Aggregation
Supply Chain 134#

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 135#

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 136#

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 137#

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 138#

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 139#

140. ESTIMATING CYCLE INVENTORY COSTS
• HOLDING COSTS
– Cost of capital
– Obsolescence or spoilage costs
– Handling costs
– Occupancy cost
– Miscellaneous
• Order Cost
– Buyer time
– Transportation costs
– Receiving costs
– Other costs
Supply Chain 140#

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 141#

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 142#

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 143#

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 144#

145. Mid Term
• Show your calculations
• Do not get stuck on any question
1. Strategy applications and implications 15
2. Demand Management 20
3. Aggregate Demand 20
4. Cycle Inventory 20
5. Supply Chain Networks 25
Supply Chain 145#

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 Seasonal
Economies of Scale Variability Variability
Cycle Inventory Safety Inventory Seasonal Inventory
Figure Error! No text of
Supply Chain 146#

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 147#

148. Lot Size = Q
Inventory
Cycle Inventory Q/2
ROP
Safety Stock SS = ROP - DL
Demand during Time
Lead 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 148#

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 149#

150. Continuous Review Policy: Safety Inventory and Cycle
Demand Uncertainty & Service Level
L: Lead time for replenishment SS = ROP - RL
D: Average demand per unit time
σ D:Standard deviation of demand Average Inventory = Q/2 + SS
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
Supply Chain 150#

151. FORMULAS USED FOR CALCULATING SERVICE LEVELS
D L
= LD
σ L
= Lσ D
ROP = D L + ss
CSL = F ( ROP, D L ,σ L )
cv = σ / µ
CSL = F ( ROP, DL ,σ L ) = NORMDIST ( ROP, D L ,σ L ,1)
fr = 1 − ESC / Q = (Q − ESC ) / Q
orESC = −( ss[1 − NORMDIST ( ss / σ L ,0,1,1] + σ L NORMDIST ( ss / σ L ,0,1,1)
Supply Chain 151#

152. Example 11.1&2, 11.4 (Continuous Review Policy)
= 8.xx New book
11.1: R = 2,500 /week; σR = 500
L = 2 weeks; Q = 10,000; ROP = 6,000 CSL = 90%
SS = ROP - DL =
Average Inventory = Z Chart
Average Flow Time =
11.2: Evaluating CSL given a replenishment policy
CSL = Prob (demand during lead time <= ROP)
Distribution of demand during lead time of 2 weeks
D = DL
L
Cycle service level, CSL = F(RL + ss, RL , σL ) = F(ROP, RL , σL )
σ = Lσ
L D
Excel: NORMDIST (ROP, RL , σL ,1)
X1= Xbar + Z σL or ROP = RL + Z σL Calculate the % z represents. Calculate Safety
Stock for above
Supply Chain 152#

153. Examples of Safety Stock Calculations
• Weekly demand for Lego at Wal Mart is normally distributed with a mean of
2500 boxes and a standard deviation of 500. The replenishment lead time is 2
weeks. Assuming a continuous replenishment policy, evaluate the safety
inventory that the store should carry to achieve a cycle service of 90 percent
Supply Chain 153#

154. Factors Affecting Fill Rate
• Fill Rate: Proportion of customer demand that is satisfied from
Inventory. Directly related to CSL
• Safety inventory: Safety inventory is increased by:
– Increasing fill rate (Table 11-1)
– Increasing CSL
– Increasing supplier lead time by factor k – SS increases by factor of SQRT k
– Increasing standard deviation of demand by factor k – SS increases by factor
of k
• Lot size: Fill rate increases on increasing the lot size even though cycle service
level does not change.
Actions: 1. Reduce supplier Lead Time L
2. Reduce underlying uncertainty of demand σ R
Supply Chain 154#

155. Evaluating Safety Inventory Given Fill Rate
Required safety stock grows rapidly with increase in the desired
Product availability
Fill Rate Safety Inventory
97.5% 67
98.0% 183
98.5% 321
99.0% 499
99.5% 767
The required SS grows rapidily with increase in desired Fill Rate
The required SS increases with increase in Lead time and the σ of demand
Supply Chain 155#

156. Impact of Supply Uncertainty
Considering variation in Demand and in Replenishment
Lead time (Ex 11.6)
• D: Average demand per period
∀ σ D: Standard deviation of demand per period
• L: Average lead time for replenishment
∀ sL: Standard deviation of supply lead time
Mean demand
during lead time D = DL L
σ
2 2
Standard Deviation
of demand during lead time = Lσ L
2
D +D s L
Supply Chain 156#

157. Impact of Supply Uncertainty ((See Ex. 11.6 & Table 11.2)
Ex.11.6: R = 2,500/day; σR = 500; L = 7 days; Q = 10,000;
CSL = 0.90 (z=1.29); sL = Standard Deviation of lead time=7days What is S.S?
Large potential benefits of reducing Lead time or lead time variability in
reduction of Safety stock
SS units SS (d) Stnd Dev(σ L )
Safety inventory when sL = 0 1,695 0.68 1,323
Safety inventory when sL = 1 3,625 1.45 2,828
Safety inventory when sL = 2 6,628 2.65 5,172
Safety inventory when sL = 3 9,760 3.90 7,616
Safety inventory when sL = 4 12,927 5.17 10,087
Safety inventory when sL = 5 16,109 6.44 12,750
Safety inventory when sL = 6 19,298 7.72 16,109
Safety inventory when sL = 7 is 22,491 8.99 17,550
Supply Chain 157#

158. Basic Quick Response Initiatives
• Reduce information uncertainty in demand
• Reduce replenishment lead time
• Reduce supply uncertainty or replenishment lead
time uncertainty
• Increase reorder frequency or go to continuous
review
Supply Chain 158#

159. Factors Affecting Value of Aggregation
• DEMAND CORRELATION –
– AS CORRELATION INCREASES, THE SS BENEFIT OF AGGREGRATION
DECREASES
– IF THERE IS LITTLE CORRELATION BETWEEN DEMAND, AGGREGRATION
REDUCES STND. DEVN. OF DEMAND AND HENCE SAFETY STOCK (see ex.
11.7, Table 11.3)
• Coefficient Of Variation = Stnd Devn/Mean (uncertainty relative to size of demand) p=0 No
Correlation
– THE HIGHER THE COEFFICIENT OF VARIATION OF AN ITEM, THE
GREATER THE REDUCTION IN SAFETY STOCK AS A RESULT OF
CENTRALIZATION (LOW COEFFICIENT OF VARIATION ALLOW
ACCURATE FORECASTING AND DECENTRALIZED STOCKING)
• REDUCING SUPPLY VARIATION REDUCES SAFETY STOCK WITHOUT
REDUCING CSL
• VALUE OF A PRODUCT
– DIRECTLY DETERMINES THE SAFETY STOCK LEVEL
Supply Chain 159#

160. IMPACT OF AGGREGRATION ON SAFETY STOCK
• HOW TO REDUCE SS WITHOUT REDUCING CSL?
– AGGREGRATION REDUCES STANDARD DEVIATION OF DEMAND,
ONLY IF DEMAND ACROSS AREAS IS NOT CORRELATED, THAT IS
EACH AREA IS INDEPENDENT
• See Table 11.4 p323
– AGGREGRATION REDUCES SS BY THE SQRT OF NUMBER OF AREAS
AGGREGRATED (REDUCING NUMBER OF STOCKING LOCATIONS)–
SQUARE ROOT LAW (Ex. AMAZON) See Fig 11.4
– INFORMATION CENTRALIZATION – ORDERS FILLED FROM
WAREHOUSE CLOSEST TO CUSTOMER
– SPECIALIZATION BY LOCATION
• LOW DEMAND, SLOW MOVING ITEMS: CENTRALIZED – HIGH
COEFFICIENT OF VARIATION
• HIGH DEMAND, FAST MOVING ITEMS: DECENTRALIZED – LOW
COEFFICIENT OF VARIATION
– Centralization Disadvantage:
• Increase in Response time;
• Increase in Transport costs
Supply Chain 160#

161. IMPACT OF AGGREGRATION ON SAFETY STOCK
• HOW TO REDUCE SS WITHOUT REDUCING CSL?
– PRODUCT SUBSTITUTION
• MANUFACTURER DRIVEN – AGGREGATE DEMAND & REDUCE SS;
• IF PRODUCTS STRONGLY CORRELATED, LESS VALUE IN SUBSTITUTION
• CUSTOMER DRIVEN – TWO WAY SUBSTITUTION – ALLOWS REDUCTION
IN SS WHILE MAINTAINING HIGH PRODUCT AVAILABILITY
• GREATER THE VARIABILITY AND LESS THE CORRELATION OF
DEMAND, THE GREATER THE BENEFIT IN SUBSTITUTION
– COMPONENT COMMONALITY (TABLE 11.5)
• WITHOUT COMMONALITY, UNCERTAINTY OF DEMAND FOR
COMPONENTS SAME AS THAT FOR PRODUCT (SEE Ex. 11.9)
– POSTPONMENT
• DELAY DIFFERENTIATION OR CUSTOMIZATION AS CLOSE TO SALE
TIME AS POSSIBLE
– COMMON COMPONENTS IN PUSH PHASE
– POWERFUL CONCEPT FOR E-COMMERCE
Supply Chain 161#