Professional Documents
Culture Documents
McGraw-Hill/Irwin
5.1 Introduction
Value of using any type of information technology Potential availability of more and more information throughout the supply chain Implications this availability on effective design and management of the integrated supply chain
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Information Types
Inventory levels Orders Production Delivery status
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More Information
Helps reduce variability in the supply chain. Helps suppliers make better forecasts, accounting for promotions and market changes. Enables the coordination of manufacturing and distribution systems and strategies. Enables retailers to better serve their customers by offering tools for locating desired items. Enables retailers to react and adapt to supply problems more rapidly. Enables lead time reductions.
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t 1
2 t
t 1 i =t p
) ( Di t ) 2 p 1
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Var (Q ) 2 L 2 L2 1+ + 2 Var ( D ) p p
When p is large and L is small, the bullwhip effect is negligible. Effect is magnified as we increase the lead time and decrease p.
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Variance of the orders placed by a given stage of a supply chain is an increasing function of the total lead time between that stage and the retailer
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Managerial Insights
Variance increases up the supply chain in both centralized and decentralized cases Variance increases:
Additively with centralized case Multiplicatively with decentralized case
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Strategic partnerships
Changing the way information is shared and inventory is managed Vendor managed inventory (VMI)
Manufacturer manages the inventory of its product at the retailer outlet VMI the manufacturer does not rely on the orders placed by a retailer, thus avoiding the bullwhip effect entirely.
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Retailer forecasts
Typically based on an analysis of previous sales at the retailer. Future customer demand influenced by pricing, promotions, and release of new products. Including such information will make forecasts more accurate.
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Global Optimization
Issues:
Who will optimize? How will the savings obtained through the coordinated strategy be split between the different supply chain facilities?
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Other Methods
Inventory pooling (Chapter 7) Distributor Integration (Chapter 8)
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Many firms actively look for suppliers with shorter lead times Many potential customers consider lead time a very important criterion for vendor selection. Much of the manufacturing revolution of the past 20 years led to reduced lead times Other methods:
Distribution network designs (Chapter 6) Effective information systems (e.g., EDI) Strategic partnering (Chapter 8) (Sharing point-of-sale (POS) data with supplier)
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Manufacturing
High productivity through production efficiencies and low production costs Known future demand pattern with little variability.
Retailers
Short order lead times and efficient, accurate order delivery
Customers
In-stock items, enormous variety, and low prices.
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Manufacturer should have as much time as possible to react to the needs of downstream supply chain members. Distributors/retailers can have factory status and manufacturer inventory data:
they can quote lead times to customers more accurately. develops an understanding of, and confidence in, the manufacturers ability. allows reduction in inventory in anticipation of manufacturing problems
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In many cases
demand is much less than TL Items sit for a long time before consumption leading to higher inventory costs.
Lead times can be reduced if items are transported immediately after they are manufactured or arrive from suppliers. Cannot be completely eliminated
Information can be used to reduce its effect. Control transportation costs reducing the need to hold items until a sufficient number accumulate. Improved forecasting techniques and information systems reduce the other components of lead time may not be essential to reduce the transportation component.
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Strategies:
Delayed Differentiation (Chapter 6)
Ship generic products as far as possible down the supply chain
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In multi-stage decentralized manufacturing supply chains many of the performance benefits of detailed information sharing can be achieved if only a small amount of information is exchanged between supply chain participants. Exchanging more detailed information or more frequent information is costly.
Understand the costs and benefits of particular pieces of information How often this information is collected How much of this information needs to be stored How much of this information needs to be shared In what form it needs to shared
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Summary
The bullwhip effect suggests that variability in demand increases as one moves up in the supply chain. Increase in variability causes significant operational inefficiencies Specific techniques to counteract bullwhip effect
Information sharing, i.e., centralized demand information. Incentives to share credible forecasts Alignments of expectations associated with the use of information.
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Planning Question
How should Reebok plan and manage inventory to manage costs while providing the flexibility required to meet demand for NFL Replica jerseys?
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Impact
No direct competition for product 100% market share Demand is concentrated over five month period If product is not quickly available to meet demand the opportunity is lost Lost sales cost more than inventory overstocks, but come with a high risk of obsolescence
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Consumers
Contract Manufacturers
Reebok Warehouse
2 - 16 weeks
4-8 weeks
3-12 weeks
1 week
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Purchasing Cycle
JulyOct
Reebok places orders on CMs for April delivery; primarily orders blanks (~20% of annual buy) Reebok places orders for dressed jerseys based on retailers advance orders & remaining inventory (~ 15 20%) Reebok orders dressed & blank jerseys, based on forecasts and inventory targets Last purchase phase is most challenging
Stephen C. Graves Copyright 2003. All Rights Reserved
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Jan-Feb MarJune
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Salvage Value for unsold Dressed Jersey = $7 Holding Cost for unsold Blank Jersey = $1.04 Salvage Value for unsold Blank Jersey = $9.50 - 1.04 = $8.46
Stephen C. Graves Copyright 2003. All Rights Reserved
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What should inventory target be for dressed jerseys for each player? And blank jerseys for team?
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B = ( otherplayers ) + B = ( otherplayers ) B
starplayers
E [UnmetDemand ]
( otherplayers )
f ( x | B , B ) is approx. prob.density function for demand for blanks E [UnmetDemand ] = ( x B ) f ( x | B , B )dx E [ Blanks _ Sold ] = B E [UnmetDemand ] E [ Blanks _ Unsold ] = B E [ Blanks _ Sold ]
B
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Newsvendor-based Approach
Solve newsvendor for entire team to get total quantity of blanks and dressed jerseys to buy, and more importantly: Get service measure for team = probability of not stocking out (critical ratio) Solve newsvendor for each star player to determine how many dressed jerseys to procure from CM, where underage cost reflects option to use blanks Given the dressed jersey quantities, re-solve newsvendor for entire team to find blank jerseys to procure
Stephen C. Graves Copyright 2003. All Rights Reserved
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Nave NV model
BRADY,TOM #12 LAW,TY #24 BROWN, TROY #80 VINATIERI, ADAM #04 BRUSCHI, TEDY #54 SMITH, ANTOWAIN #32 Total -- Dressed Other Players --- Blanks Totals Exected Profit Newsboy Order 41018 14092 10879 10501 7983 3059 87531 38027 125558 $ 944,033 E[Sold] 28918 9935 7670 6688 5084 1948 60244 22898 83142 E[Unsold] 12100 4157 3209 3812 2898 1111 27287 15129 42416 E[Unmet Demand] 1845 634 489 581 442 169 4161 377 4537
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Risk-Pool NV 100 95 5 28
Nave NV 100 96 4 47
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Actual
Nave NV
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Conclusion
Context fashion items, seasonal, high uncertainty in demand Newsvendor with Risk Pooling provides way to plan for and exploit postponement options Results in higher profits, 95% service level, better mix of end-of-year inventory. Results in much different inventory plan greater use of blanks and local finishing Project resulted in planning tool and new insights for planning for Reebok, and a thesis! A second project focused on forecasting
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