SUPPLY CHAIN MANAGEMENT
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Chapter2Iyerppts1.pptxManaging Supply Chains: Concepts, Tools, Applications Chapter 2: Chain Structure
These powerpoints are a companion to the book: Managing Supply Chains: Concepts, Tools and Applications by Ananth. V . Iyer, Hercher Publishing Inc., ISBN 978-1-939297-01-3
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Outline
Possible Chain Structures
Order Variability and the Bullwhip Effect
Risk Pooling
Optimizing Supply Chains
Applications
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Standard Supply Chain Configurations
Chain
Assembly
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Supply Chain Configurations
Distribution
Network
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Order Variability in a serial chain (section 2.2)
Suppose node 1 faces a demand μ with a lead time L between successive steps and S period of safety stock
The base-stock (planned inventory position) is (L+S)μ for a node
If customer demand increases to μ+K, then node 1 increases its base-stock to (L+S) (μ+K)
The order placed with node 2 then becomes
(L+S)(μ+K)-((L+S)μ-μ-K) = μ+K+(L+S)K = μ+K(L+S+1)
Following this for successive nodes, the order placed by node n would be
μ+K(L+S+1)n
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Bullwhip Effect
The increase in order size due to lack of information visibility is
(L+S+1)n
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((L+S)n+1)
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Bullwhip Takeaways
Reducing chain length can decrease variability
Information or delivery delays increase this ratio
This increase in variability is called the Bull-Whip Effect and is related to supply chain structure
Examples – see next two slides
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P&G Data showing order variability,Lee et al [80]
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Order variability upstream, Lee et al[80]
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Risk Pooling
n retailers sharing a common warehouse inventory, supply lead time of L
Each faces period demand with a mean μ and a variance of σ2
The common pool of inventory planned, given an instock probability of ser, is
(n L μ) +(Zser σ
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Risk Pooling
If each location carried inventory separately, the required inventory would be
(n L μ) + (Zser n σ
Thus, the reduction in safety stock is proportional to
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Risk Pooling takeaways
Consolidation warehouses can significantly decrease forecast error by pooling retail demand variability
Given more stable demand, suppliers can be chosen based on cost even if lead times are longer
The combined effect can be used to justify the benefit of a consolidation warehouse in a supply chain
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Supply Networks
The network shows possible paths, and associated cost/unit, for product to go from the plant to the distribution center to the customer zones. Plant 2 is capacity constrained. The goal is to minimize total cost.
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Formulating the problem (Section 15.1)
Decision Variables:
X(P1,W1) = flow from plant P1 to warehouse W1
X(P1,W2), X(P2,W1), X(P2,W2) defined similarly
X(W1,C1): flow from warehouse W1 to customer zone C1
X(W1,C2),X(W1,C3),X(W2,C1),X(W2,C2),X(W2,C3),
X(W3,C1),X(W3,C2),X(W3,C3) defined similarly
All variables are flows and hence >= 0
Constraints
X(P2,W1)+X(P2,W2) <= 60,000 (Plant 2 capacity constraint)
X(W1,C1)+X(W1,C2)+X(W1,C3)=X(P1,W1)+X(P2,W1)
Warehouse 1 outflows match inflows
X(W2,C1)+X(W2,C2)+X(W2,C3)=X(P1,W2)+X(P2,W2)
Warehouse 2 outflows match inflows
X(W1,C1)+X(W2,C1) = 50,000
X(W1,C2)+X(W2,C2)=100,000
X(W1,C3)+X(W2,C3)=50,000
These three constraints ensure that customer zone demands are satisfied by shipments from warehouses
Objective
The goal in selecting flows is to minimize total costs, described as
Minimize
(5 X(P1,W2))+(4 X(P2,W1))+(2 X(P2,W2))+(3 X(W1,C1))+(3 X(W1,C2))+(4 X(W1,C3))+(2 X(W2,C1))+(1 X(W2,C2))+(1 X(W2,C3))
An optimal solution a) needs to be feasible, b) should minimize the cost above.. Solution is illustrated using the Excel solver next.
Solution using Excel Solver
Please see the spreadsheets posted and watch the video for solution of this problem using the Excel Solver
Applications of the Solver Models
Section 2.10 describes use of a capacity configuration model at General Motors.
Decisions were the level of flexibility of capacity at each plant given unknown demand scenarios
While capacity had to be chosen, its deployment was after demand was revealed.
Capacity decisions were chosen to maximize profits subject to downside risk constraints.
Incorporating Global tax Impacts
Section 2.13 describes an application of a network model to leverage existing tax rules
The Digital Equipment Corp. example focused on choosing capacity and manufacturing decisions to leverage duty drawbacks for re-exports in the same or different condition and returns in a different condition
The result of such analysis may be production of some low margin items in more expensive locations that also have markets for high margin imports.
Chapter Summary
The supply chain structure can impact demand variability
Consolidation warehouses can improve performance by reducing inventories
Optimizing supply chain flows in response to changing demand and supply conditions is necessary to align supply and demand conditions profitably
