Determining Optimal Level of Product Availability

Determining Optimal Level of

Product Availability
Optimal Matching of Supply and
Demand (III)

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3.0

Pull Postponement:EX.2

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Wikipedia

Pull Postponement
Basic Elements:
The process steps must be sequenced so that the
less differentiating steps are performed at prior to
the decoupling point.
After the decoupling point, the process steps can
be performed flexible and fast.
Accurate order capture for BTO.
Example: National Bicycle, Benetton.


(Postponement Differentiation)


(Resequencing)
: Benetton, postpone dyeing until after
assembled. Cost: 10% more expensive, new
machine purchased and employee retrained.
: US disk drive manufacturing. Insert generic
circuit board into assembly, complete much of the
testing, remove the generic circuit board, and add
customer-specific boards later.


(Commonality)

: Printer manufacturing, redesign the new

and old products to share a common circuit board
and printhead such that final process can be
delayed.

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(Modularity)

HP Laser Jet

print-andpigment mixture, Levis jeans

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(Standardization):
.
(Agile Supply Networks)
,
.

Concurrent and Parallel Processing

Concurrent and parallel processing involves
modifying the manufacturing process so that steps
that were previously performed in a sequence can
be completed at the same time.
reduce lead time
reduce inventory cost
A key is the concept of modularity or decoupling

10

Logistics Postponement
Meaning:
Redesign the tasks in the SC so that some of
the customization steps can be performed
downstream closer to the customers.

WIKIPEDIA

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Requirements for logistics postponement

can not lead to quality degradation.
downstream sites have capability to perform the
task without excessive cost and time.
potentially to procure the necessary components or
modules for the customization.
the engineering team is able and willing to design
products and processes to defer the steps
effectively.

12

Form Postponement
Meaning:
postponement is achieved through the change in
the form of the product structure by standardizing
some of the process steps or components.
Example: HP Laser Printer.

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Postponement Enablers
Products or processes should be modular in
structure.
Design engineer should be aware of the importance
of SCM to pursuit design for postponement
opportunity.
Must involve multiple functions or organization in
collaboration.
Quantify the costs and benefits to determine the best
point for postponement

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The Value of Postponement

Improve matching of supply and demand: need to
qualify the benefit with additional cost
Increase profitability: differentiate after receiving
customer order so that inventories can be reduced
Valuable for selling a large variety of products with
demand that is independent and comparable in size

15

Value of Postponement: Benetton

For each color

Benetton Group (
http://www.benettongroup.com/)
46 52 65

Mean demand = 1,000; SD = 500

For each garment

Sale price = $50
Salvage value = $10
Production cost using option 1 (thread are dyed and the
garment was knitted) with long lead time = $20
Production cost using option 2 (dying was postponed until
after the garment was knitted) = $22

What is the value of postponement?

16

Value of Postponement: Benetton

Option 1:
CSL* = (p - c) /(p - s) = 30/40 = 0.75

Benetton Group (
http://www.benettongroup.com/)
46 52 65

1,337X4=5348

O* = NORMINV(0.75, 1000, 500) = 1,337 units of each color

Expected profits from each color = $23,644

23,644X4=94,576

Expected overstock for each color = 412

Expected understock for each color = 75
5348 sweaters are produced, expected profit of $94,576
with an average of 1,648 sweaters sold on clearance and
300 customers turns away for lack of sweaters

17

Value of Postponement: Benetton

Benetton Group (
http://www.benettongroup.com/)
46 52 65

Option 2: c = $22 instead of $20

CSL* = (p - c) /(p - s) = 28/40 = 0.70

= NORMINV(0.70, 1000 x 4, 500 x ) = 4,524 units

O*A
.
Expected profits = $98,092
Expected overstock for each color = 715

Expected understock for each color = 190

Expected profit increases from $94,576 to $98,092

Expected overstock declines from 1,648 to 715
Expected understock declines from 300 to 190
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Value of Postponement with

Dominant Product
Benetton Group (
http://www.benettongroup.com/)
46 52 65

Color with dominant demand (red): Mean = 3,100,

SD = 800
Other three colors: Mean = 300, SD = 200
Option 1:
CSL* = 0.75

Optimal production of red sweaters O* = NORMINV(0.75,

3100, 800) = 3,640; expected profit = $82,831, expected
overstock = 659, expected understock = 119
Optimal production of each other color sweater = 435;
expected profit = $6,458, expected overstock = 165,
3640+4,35X3=4,945
$82,831 + $6,458 =4,945
expected
understock = 30
Total production = 4,945, expected profit = $102,205,
expected overstock = 1,154, expected understock = 209
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2
2
8
0
2
0
3
8
7
2

Value of Postponement with

Dominant Product
Option 2:
A = 3100 + 3300 = 4,000; A =

Total production = 4,457; expected profit = $99,872,

expected overstock = 623, expected understock = 166

Expected profit without postponement = $102,205
Expected profit with postponement = $99,872

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Meaning of Pure Postponement

Postponement may reduce overall profit for a firm if a
single product contributes the majority of the
demand, since the increased manufacturing expense
due to postponement outweighs the small benefit
from aggregation

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Tailored Postponement: Benetton

Benetton Group (
http://www.benettongroup.com/)
46 52 65

On the portion of the certain demand, postponement

provides little value, thus, company needs to use
lower cost method.
On the portion of the uncertain demand,
postponement significantly improves forecast
accuracy, thus, company is willing to incur higher
cost to achieve the benefit.
Produce Q1 units for each color using Option 1 and
QA units (aggregate) using Option 2

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Tailored Postponement: Benetton

Manufacturing Policy

23

Q1

QA

Average
Profit

Average
Overstock

Average
Understock

4524

$97847

510

210

1337

$94377

1369

282

700

1850

$102730

308

168

800

1550

$104603

427

170

900

950

$101326

607

266

900

1050

$101647

664

230

1000

850

$100312

815

195

1000

950

$100951

803

149

1100

550

$99180

1026

211

1100

650

$100510

1008

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The Benefit of Tailored Postponement

Tailored postponement allows a firm to increase its
profitability by postponing only the uncertain part of
the demand and producing the predictable part at a
lower cost without postponement

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The Meaning of Tailored Sourcing

A combination of two supply sources: one focusing
on cost but unable to handle uncertainty well, and the
other focusing on flexibility to handle uncertainty but
a higher cost
A backup policy
Disadvantage: increasing complexity of
implementation

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Tailored Sourcing
Sourcing alternatives
Low cost, long lead time supplier
Cost = $245, Lead time = 9 weeks
High cost, short lead time supplier
Cost = $250, Lead time = 1 week

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Tailored Sourcing Strategies

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Fraction of demand from

overseas supplier

Annual Profit

0%

$37,250

50%

$51,613

60%

$53,027

100%

$48,875

Tailored Sourcing: Multiple Sourcing Sites

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Characteristic

Primary Site

Secondary Site

Manufacturing Cost

High

Low

Flexibility
(Volume/Mix)

High

Low

Responsiveness

High

Low

Engineering Support

High

Low

Dual Sourcing Strategies

Benetton Group (
http://www.benettongroup.com/)
46 52 65

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Strategy

Primary Site

Secondary Site

Volume based dual

sourcing (Benetton)

Fluctuation

Stable demand

Product based dual

sourcing(Levi
Strauss)

Unpredictable
products, Small
batch

Predictable, large
batch products

Model based dual

sourcing

Newer products

Older stable
products

Contracts for Product Availability and

Supply Chain Profits
Many shortcomings in supply chain performance occur because
the buyer and supplier are separate organizations and each
tries to optimize its own profit
Total supply chain profits might therefore be lower than if the
supply chain coordinated actions to have a common objective of
maximizing total supply chain profits
Double marginalization results in suboptimal order quantity
An approach to dealing with this problem is to design a contract
that encourages a buyer to purchase more and increase the
level of product availability
The supplier must share in some of the buyers demand
uncertainty

30

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Contracts for Product Availability and

Supply Chain Profits
Many
shortcomings
in supply Chain
chain performance
occuron
because
Impact
of Supply
Contracts
the buyer and supplier are separate organizations and each
Profitability:
Buyback Contracts
tries to optimize
its own profit
Total supply chain profits might therefore be lower than if the

Buybacks
by publishersactions to have a common objective of
supply
chain coordinated
maximizing
total
supply chain

Tech Fiber
produces
jacket profits
at v = $10 and charges a
wholesale
price of c =results
$100.inSki
Adventureorder
sells quantity
jacket for
Double
marginalization
suboptimal
p = $200. Demand is normal distributed with =1,000 and
An =300.
approach
to dealing
with
thisno
problem
to design a contract
Unsold
jackets
have
salvageisvalue.
that encourages a buyer to purchase more and increase the
TFavailability
be willing to buy back unsold jackets? Why?
levelof Should
product
SA orders
expected
= $76,063;
SA = 0.5,

TheCSL
supplier
must
share1,000,
in some
of theprofit
buyers
demand
uncertainty
TF sells 1,000 for a total profit of $90,000. Total expected
SC profit = $166,063

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Contracts for Product Availability and

Supply Chain Profits
Many shortcomings in supply chain performance occur because
the buyer and supplier are separate organizations and each
tries to optimize its own profit
Total supply chain profits might therefore be lower than if the
supply chain coordinated actions to have a common objective of
maximizing total supply chain profits
Double marginalization results in suboptimal order quantity
An approach to dealing with this problem is to design a contract
that encourages a buyer to purchase more and increase the
level of product availability
The supplier must share in some of the buyers demand
uncertainty

32

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The Categories of Supply Contract

Horizon Length
Pricing: linear (proportional) or non-linear (two-part
tariff); buyback, holding cost subsidies, payment for
inability to supply
Periodicity of ordering: fixed or random
Quantity commitment:
Total minimum commitment: quantity or dollar value
Periodical commitment
Demand commitment
Capacity commitment

33

The Categories of Supply Contract

Flexibility:
Magnitude or frequency of adjustments

Delivery commitment:
Lead time
Shipment policy

Quality: defect rates, specifications

Information sharing

34

Supplier Selection and Contracts

Contracts for Product Availability and Supply Chain
Profits
Buyback Contracts
Revenue-Sharing Contracts
Quantity Flexibility Contracts

Contracts to Coordinate Supply Chain Costs

Contracts to Increase Agent Effort
Contracts to Induce Performance Improvement

35

Supplier Selection and Contracts

ImpactforofProduct
Supply
Chainand
Contracts
on
Contracts
Availability
Supply Chain
Profits
Profitability: Buyback Contracts

Buyback Contracts
Buybacks by publishers
Revenue-Sharing Contracts
Tech Fiber produces jacket at v = $10 and charges a
Quantity
Flexibility
wholesale
price of Contracts
c = $100. Ski Adventure sells jacket for
p = $200. Demand is normal distributed with =1,000 and
Contracts
to Coordinate
Supply
Chain
Costs
=300. Unsold
jackets have
no salvage
value.

Should
be willingAgent
to buy back
unsold jackets? Why?
Contracts
to TF
Increase
Effort
CSL = 0.5, SA orders 1,000, expected profit = $76,063;

SA
Contracts
to Induce Performance Improvement

TF sells 1,000 for a total profit of $90,000. Total expected

SC profit = $166,063

36

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Supplier Selection and Contracts

ImpactforofProduct
Supply
Chainand
Contracts
on
Contracts
Availability
Supply Chain
Profits
Profitability: Buyback Contracts
Buyback Contracts
For entire SC, SC makes $190 for each jacket sold, and
Revenue-Sharing
Contracts
only loses $10. Thus,
the cost of understocking is $190, and
the cost of overstock is $10.
Quantity
Flexibility Contracts
The optimal CSL for entire SC is 0.95 and produce 1,493
Contracts
to Coordinate Supply Chain Costs
jackets. Total SC profit is $183,812.

Contracts to Increase Agent Effort

Contracts to Induce Performance Improvement
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Return Policy : Buyback

contracts
Issue of Double Marginalization
Wholesale price c
Buyback price b
Manufacturing salvage value $sM
The salvage value for retailer is s=b
Optimal order quantity O*
Expected manufacturing profit
=
= O*(c-v)
O*(c-v)
b
b
expected
expected overstock
overstock at
at retailer
retailer
v
38

Buyback Contracts
Wholesal
e Price c

39

Buyback
price b

Optimal
Order
Size for
SA

Expected Expected Expected Expected

Profit for Returns
Profit for Supply
to TF
SA
TF
Chain
Profit

$100

$0

1000

76063

120

90000

166063

100

30

1067

80154

156

91338

171492

100

60

1170

85724

223

91886

177610

110

962

66252

102

96230

162482

110

78

1191

78074

239

100480

178555

110

105

1486

86938

493

96872

183810

120

924

56819

80

101640

158459

120

96

1221

70508

261

109225

179733

120

116

1501

77500

506

106310

183810

Buyback Contracts
Manufactures can use buyback contracts to increase their own
profit as well as total supply chain profits. Buyback contract also
encourage retailers increase product availability
Manufactures need to consider the cost associated with a return
As the cost associated with a return increases, buyback
contracts become less attractive.
Applications: (1) bookstores return the cover of the book to
reduce the cost of return; (2) manufactures use holding cost
subsidies.

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Contracts for Product Availability and Supply

Chain Profits: Buyback Contracts
Allows a retailer to return unsold inventory up to a specified
amount at an agreed upon price
Increases the optimal order quantity for the retailer, resulting in
higher product availability and higher profits for both the retailer
and the supplier
Most effective for products with low variable cost, such as
music, software, books, magazines, and newspapers
High tech industry provides price support for retailers due to
price drop rapidly

41

Contracts for Product Availability and Supply

Chain Profits: Buyback Contracts
Downside:
Results in surplus inventory that must be disposed of,
which increases supply chain costs
Lead the retailer to exert less effort to sell
May increase information distortion through the supply
chain because the supply chain reacts to retail orders,
not actual customer demand

42

Revenue Sharing Contracts

Manufacture charges the retailer a low wholesale
price and shares a fraction of the revenue generated
by the retailer.
The retailer cost will be decreased due to lower
overstock cost, thus, retailer will increase the level of
product availability resulting higher profits for both
manufacturer and retailer.

43

EX:BLOCKBUSTER

Basher Eyre _Geograph

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)
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6, 13

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16-19, 22,
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Benetton Group (http://www.benettongroup.com/)

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46

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Microsoft Office 2007 Microsoft

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(http://dir.coolclips.com/Food/Vegetables/Vegetable_groups/ba
mboo,_woodcut_style_vc001509.html), Free 150 pixel Jpeg
Image 2012/03/16 52 65

11

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2012/02/24

30, 32

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31, 36, 37

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Microsoft Office 2007 Microsoft

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Microsoft Office 2007 Microsoft

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/
Geograph Basher Eyre
(http://www.geograph.org.uk/photo/834743)
2012/02/24 CC 2.0