supply chains
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AD680-Spring19-Lecture_02-BBcopy1.pptxAD680: Global Supply Chains Lecture 2: Manufacturing & Service Supply Chain Strategy
Boston University
Metropolitan College
Fall 2019
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Lecture 2: Topics
Supply Chain Planning Game
Supply Chain Design
New Realities in US-Based Supply Chain Management
Responsive vs Efficient Supply Chains
Key Concepts in Global Supply Chain Strategy
Supply Chain Strategy
Supply Chain Costs
Serving Multiple Markets
Supply Chain Complexity
Bullwhip Effect
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Supply Chain Planning Game
Mimics the job of a supply chain planner
five products available for sale
product life cycle is one season
Orders placed with supplier twice during season
Initial order is based on preliminary sales forecast
replenishment order based on updated sales forecast
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Production Details
Revenue is $30/unit sold.
Costs are materials and labor (with small “skeleton” labor crew paid even if not used, and available overtime).
Materials cost per unit produced = $10.
Labor cost per unit produced:
Regular time = $5/unit
Overtime = $6 (producing an order more than 600 units requires overtime)
Capacity limitations per production cycle:
skeleton labor crew capacity = 300 units (even if less than 300 units are ordered, producing an order of 300 units must be paid)
Unsold items bought by discounters at $3/unit.
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Preliminary Forecast & Its Uncertainty
Forecast Error: The actual sales may go from 0 to twice of the forecast.
For example, Product A is forecasted to sell 40 units during the initial production cycle but the actual sales may range between between 0 and 80 units during the initial production cycle and between 0 and 400 units for the entire season.
Part 1: (a) Planner chooses initial production quantities for each product.
(b) Demand is simulated (consistent with forecast).
(c) Sales, overstocks, and understocks are calculated.
(d) Forecast for the remainder of the year is generated, with an improved uncertainty level.
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Example:
Updated Forecast:
Average Forecast Error = 25% (uniformly distributed)
Product A
Remainder of
Year Demand Expectation
120
180
60
Actual Sales
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Part 2: (a) Planner chooses replenishment production quantities for each product.
(b) Demand is simulated (consistent with forecast).
(c) Sales, overstocks, and understocks are calculated.
(d) Operating profit is compared with the “best case” (if demand were known with certainty).
Results show both profit achieved and max profit that would have been achieved if demand was known with certainty (that is, if perfect planning decisions were made).
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Revenue & Costs:
For this example, “perfect” ordering decisions would have resulted in an operating profit of $13,050.
The $8,970 operating profit is 69% of the maximum operating profit that could have been realized.
Test your ability to create superior supply chain order quantities.
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Supply Chain Planning Exercise: Execution
Typically, max operating profit is not known within the organization. Hence, supply chain management can require “leaps of faith” that only become visible in the long run.
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SUPPLY CHAIN
DESIGN CRITERIA
PRODUCT
TYPE
Cost efficiency
responsiveness
“commodity”
(functional)
“fashion”
(innovative)
match
mismatch
mismatch
match
Main Supply Chain Design Options
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Supply Chain Design
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Supply Chain Design
| Product Classification | Forecast Uncertainty | Best SC Design | Production Lead Times | Operations Approach | Main Buffer |
| Commodity | Low | Cost Efficient | Long | Push | Inventory |
| Innovative | High | Responsive | Short | Pull | Capacity |
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Is hybrid supply chain design possible?
How about service supply chains? Is it possible to achieve a cost effective service supply chain?
[Class Discussion]
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Supply Chain Strategy
Long term approach a firm uses to match supply with demand in the most effective way possible.
Marketing Strategy Goals:
Maintain competitive advantages and improve a firm’s profitability by identifying new markets and finding ways to increase market share in existing markets.
The integration of marketing and supply chain design ensures that when a firm undertakes a fundamental change in any element of its marketing (supply chain) strategy, a corresponding supply chain (marketing) analysis would need to be undertaken.
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Supply Chain Costs
Highly visible
direct labor
direct materials
Moderately visible
transportation
capacity (labor, tooling, machines, supplies, facilities)
Primarily hidden
preparation (machine setup, order processing)
inventory carrying (also known as holding)
overstocks (obsolescence, scrap, discounting)
understocks (stockout, backlog, lost sales)
coordination (planning, tracking, expediting)
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Preparation Cost
Setup costs for manufacturing
processing, expenses, labor, materials
Ordering cost for purchasing
processing, expenses, overhead, shipping
Generally, these costs are used to create a “standard unit cost” for an item.
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Inventory Carrying Cost
Storage costs (annually, 5%-10% of an item’s cost)
rent, depreciation, storage expenses, taxes, energy, handling, recordkeeping
Risk costs (annually, 5%-10% of an item’s cost)
pilferage, insurance, damage
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Overstock & Understock Cost
Overstock: discounts, discards, donations, scrap
Understock: backorders, lost sales opportunity, lost customer, poor reputation
Often, these costs are monitored by calculating obsolete cost
Often, these costs are monitored by calculating service level
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Coordination Cost
ERP (enterprise resource planning) systems are comprehensive software packages that plan, coordinate, and track labor, materials, and capital resources
often used to coordinate supply chain activities
most popular package is SAP
A recent survey of 63 companies with annual revenues ranging from $12 million to $63 billion indicated that the average implementation cost $10.6 million and took 23 months to complete
source: www.entrepreneur.com
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[Class Discussion]
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Serving Multiple Markets
What are the challenges faced by companies that serve to multiple markets?
How does serving multiple markets affect the supply chain design?
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Supply Chain Complexity
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Uncertainties increase as the supply chain grows.
What are the uncertainties in a supply chain?
Global supply chain expansion also increases the uncertainties that must be considered when designing a supply chain.
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Supply Chain Complexity
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Bullwhip Effect
The “bullwhip” (also called whiplash) effect refers to distortions in perceived demand that increase as decisions move upstream (i.e., away from consumers).
The bullwhip effect is characterized by two elements:
distortion of perceived demand, and
propagation of demand variance as decisions go upstream.
As a result, inventory and backlogs dominate, even though demand variation is not excessive.
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The “beer game” has been used for many years to illustrate this phenomenon.
Example: Variance Propagation
retailer
wholesaler
distributor
factory
0
0
0
0
NET INVENTORY
TIME
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downstream
upstream
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Example: Quantity Discounts
A retailer experiences a short term increase in sales, but within normal range of demand variation:
planners over-react when placing orders with wholesalers, and
combined with quantity discounts, these orders include an additional increase to receive bulk a quantity discount.
The wholesaler sees a sudden increase in order quantities and becomes concerned about future shortages:
planners increase order quantities from its distributors, including additional quantities to take advantage of additional bulk discounts.
And so on, as we proceed upstream in the supply chain.
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Causes of Bullwhip Effect
Individual decision making
supply planners see a “threat” of shortages.
Types of incentives
generally based on service level goals.
Demand forecasting methods
over-reaction to short term demand variances.
Pricing strategies
order batching, price fluctuations, promotions.
Gaming of orders
especially when shortage potential exists.
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Bullwhip Remedies
Coordination among supply chain members
e.g., real time information exchange.
Culture change
e.g., decrease pressure to always achieve lower price targets for purchases.
Lead time reduction
mitigates effect of demand uncertainty by allowing forecasts to be made within a shorter time frame.
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Discussion Assignment
Discussion #1 – Article: What It Takes to Reshore Manufacturing Successfully by Willy C. Shih, MIT Sloan Management Review, Vol. 56, No. 1, Fall 2014
For this group discussion, read the article and provide insight that will add value to the topics it addresses. For example, you may agree or disagree with one or more points being made regarding the benefits and challenges of reestablishing manufacturing in the U.S. Or, you may wish to provide additional information related to other topics addressed (e.g., more recent but highly relevant information, more relevant examples, etc.). You should provide justification for your arguments by detailing your experiences or those that have been recently published (e.g., peer reviewed articles, magazine stories, or newspaper accounts).
You are required to create one post (using 150-250 words) and respond to the post of one other student (using 100-200 words). Your main post is due by Day 5 at 11:59 PM, and your response to another student’s post must be completed by Day 7 at 11:59 PM.
Grades will be based on the criteria described in the Discussion Participation Grades table found in the syllabus.
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Case Study: Amazon
Please see the questions on BB.
Your team should submit one Word file, with a title page containing your names and the case study name.
Please submit a printed copy.
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ProductInitial PeriodFull Year
A40200
B60300
C20100
D50250
E30150
Total2001000
Preliminary Forecast
ProductProductionDemandSalesOverstocksUnderstocks
A
B
C
D
E
Total00000
ProductProductionDemandSalesOverstocksUnderstocks
A
B
C
D
E
Total00000
Initial Production
Replenishment Production
