Supply Chain Management Introduction Outline What is supply chain management? Significance of supply chain management. Push vs. Pull processes utdallas.edu/~metin 1 A Generic Supply Chain Sources: plants vendors ports Regional Field Warehouses:Warehouses: stocking stocking points points Customers, demand centers sinks Supply Inventory Purchase utdallas.edu/~metin Transportati on Invento ry 2 Traditional View: Cost breakdown of a manufactured good Profit 10% Supply Chain Cost 20% Marketing Cost 25% Manufacturing Cost 45% Profit Supply Chain Cost Marketing Cost Manufacturing Cost Effort spent for supply chain activities are invisible to the customers. utdallas.edu/~metin 3 Transportation and inventory managers Supply Chains in US Economy in 2007 Logistics related activity 11%, 10.5%, 10.1% of GDP in 1990, 1996, 2007. Inventory Carrying Costs - 2,026 B inventory 487 B - Interest 103 B - Taxes, Obsolescence, Depreciation, Insurance - Warehousing 111 B Transportation Costs 671 B - - - - - - - 273 B Truck - Intercity 455 B Truck - Local 216 B Railroads 58 B Water (International 33 + Domestic 5) Oil pipelines Air (International 16 + Domestic 25) Forwarders Shipper Related Costs Logistics Administration utdallas.edu/~metin Total 38 B 10 B 41 B 30 B 8B 54 B 1397 B 4 Importance of Supply Chain Management In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report Frequent Supply shortages Tier 1 Supplier Glitch-Wrong Material, Machine is Down - effect snowballs Low order fill rates Inefficient logistics Manufacturer Distributor High inventories through the chain Retailer Customer Ineffective promotions High stockouts High landed costs to the shelf Eliminating inefficiencies in supply chains can save millions of $. utdallas.edu/~metin 5 What can Supply Chain Management do? P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration with retailers resulting in a better match of supply and demand. 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 - Faster turnaround of the goods is better? National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time . Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago - inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory. - To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE. utdallas.edu/~metin 6 Top 25 Supply Chains AMR research http://www.amrresearch.com publishes reports on supply chains and other issues. The Top 25 supply chains report comes out in Novembers. The table on the right-hand side is from The Second Annual Supply Chain Top 25 prepared by Kevin Riley and Released in November 2005. utdallas.edu/~metin 7 SCM Generated Value Minimizing supply chain costs while keeping a reasonable service level customer satisfaction/quality/on time delivery, etc. This is how SCM contributes to the bottom line SCM is not strictly a cost reduction paradigm! utdallas.edu/~metin 8 A picture is better than 1000 words! How many words would be better than 3 pictures? - A supply chain consists of Supplier Manufacturer Distributor Upstream Retailer Customer Downstream - aims to Match Supply and Demand, profitably for products and services SUPPLY SIDE - achieves The right Product utdallas.edu/~metin + + + + + DEMAND SIDE = The right The right The right The right The right Price Store Quantity Customer Time Higher Profits 9 An example: Detergent supply chain P&G or other manufacturer Plastic cup Producer Chemical manufacturer (e.g. Oil Company) utdallas.edu/~metin Third party DC Tenneco Packaging Paper Manufacturer Albertson's Supermarket Customer wants detergent Chemical manufacturer (e.g. Oil Company) Timber Industry 10 Cycle View of Supply Chains Customer Customer Order Cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle Any cycle 0. Customer arrival 1. Customer triggers an order 2. Supplier fulfils the order 3. Customer receives the order Manufacturer Procurement Cycle Supplier utdallas.edu/~metin 11 Flows in a Supply Chain Material Supplier Information Customer Funds The flows resemble a chain reaction. utdallas.edu/~metin 12 Push vs Pull System What instigates the movement of the work in the system? In Push systems, work release is based on downstream demand forecasts - Keeps inventory to meet actual demand - Acts proactively e.g. Making generic job application resumes today (e.g.: exempli gratia) In Pull systems, work release is based on actual demand or the actual status of the downstream customers - May cause long delivery lead times Acts reactively e.g. Making a specific resume for a company after talking to the recruiter utdallas.edu/~metin 13 Push/Pull View of Supply Chains Typically, Procurement, Manufacturing and Replenishment cycles PUSH PROCESSES Typically, Customer Order Cycle PULL PROCESSES Customer Order Arrives Push-Pull boundary utdallas.edu/~metin 14 Examples of Supply Chains Dell / Compaq, computer (assembly) industry - Dell buys some components for a product from its suppliers after that product is purchased by a customer. Extreme case of a pull process. Amazon / Barnes and Noble, bookstores - Amazon is strictly an online store. Amazon uses more pull processes. Zara / Benetton, apparel (=clothing) industry - Zara is a Spanish company selling apparel with a short design-to-sale cycle to avoid markdowns. Zara uses relatively more pull. Toyota / GM / Volkswagen, car manufacturers - Toyota provides reasonable quality at reasonable cost. Car manufacturing is mostly done as push process. utdallas.edu/~metin 15 Summary Components of supply chains. Significance of supply chain management. Push vs. Pull processes. utdallas.edu/~metin 16 utdallas.edu/~metin 17 Supply Chain Strategy Mission-Strategy-Tactics-Decisions SCM vs. Product Development and Marketing Achieving Strategic Fit utdallas.edu/~metin 18 Supply Chain Strategy A General View: Mission-Strategy-Tactics-Decisions - Mission, Mission statement The reason for existence of an organization - Strategy A plan for achieving organizational goals - Tactics The actions taken to accomplish strategies - Operational decisions Day to day decisions to support tactics utdallas.edu/~metin 19 Ex: Life Strategy for Ted Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: Goal: Strategy: Tactics: Operations: utdallas.edu/~metin Live a good life Successful career, good income Obtain a master's degree Select a college and a concentration Register, buy books, take courses, study, graduate, get a job 20 Linking SC and Business Strategy Competitive (Business) Strategy Product Development Strategy Marketing Strategy -Portfolio of products -Frequent discounts -Timing of product introductions Supply Chain Strategy -Coupons New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources utdallas.edu/~metin 21 Strategies: Product Development It relates to Technologies for future operations (via patents) and Set of products/services Be the technology leader IBM workstations Offer many products Dell computers Offer products for locals Tata's Nano at $2500=100000 rupees Production at Singur, West Bengal, India; l x w x h=3.1 x 1.5 x 1.6 meters; Top speed: 105km/hr; Engine volume 623 cc; Mileage 50 miles/gallon; Annual sales target 200,000. utdallas.edu/~metin 22 Strategies: Marketing and SCM Marketing and sales strategy relates to positioning, pricing and promotion of products/services - e.g. Never offer more than 40% discount - e.g. EDLP = every day low price At Wal-Mart - e.g. Demand smoothing via coupons BestBuy Supply chain management strategy relates to procurement, transportation, storage and delivery - e.g. Never use more than 1 supplier for every input - e.g. Never expedite orders just because they are late - e.g. Always use domestic suppliers within the sales season not in advance. utdallas.edu/~metin 23 Fitting the SC to the customer or vice versa? Understand the customer Wishes Understand the Capabilities of your SC Match the Wishes with the Capabilities Challenge: How to meet extensive Wishes with limited Capabilities? utdallas.edu/~metin 24 Achieving Strategic Fit: Consistent SCM and Competitive strategies Fit SC to the customer Understanding the Customer - - - - - - - Range of demand, pizza hut stable Production lot size, seasonal products Response time, organ transplantation Service level, product availability Product variety Innovation Accommodating poor quality utdallas.edu/~metin Implied (Demand) Uncertainty for SC Implied trouble for SC 25 Contributors to Implied Demand Uncertainty Commodities Detergent Long lead time steel Price Low Customized products High Fashion Clothing Emergency steel, for maintenance/replacement Customer Need Responsiveness Implied Demand Uncertainty Short lead times, product variety, distribution channel variety, frequent innovations and high customer service levels all increase the Implied Demand Uncertainty utdallas.edu/~metin High 26 Understanding the Supply Chain: Cost-Responsiveness Tradeoff Responsiveness (in time, high service level and product variety) High Efficiency frontier Fix responsiveness Inefficient Impossible Inefficiency Region Low High Low Cost in $ Why decreasing slope (concave) for the efficiency frontier? utdallas.edu/~metin 27 Achieving Strategic Fit: Wishes vs. Capabilities Responsive (high cost) supply chain Gourmet dinner of it e F n Zo egic t ra t S Responsivenes spectrum Efficient (low cost) supply chain utdallas.edu/~metin Lunch buffet Certain demand Implied uncertainty spectrum Uncertain demand 28 Loosing the strategic fit: Webvan Webvan started a merger with HomeGrocer in Sept 2000 and completed in May 2001. Declared bankruptcy in July 2001. Why? - \"Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day\". - Short to midterm cash mismanagement. Venture capital of $1.2 B run out. - Merger costs: duplicated work force, integration of technology, realignment of facilities. Peapod has the same business model but more focused in terms of service and locations. It actually survives with its parent company Royal Ahold's (Dutch Retailer) cash. - Delivers now at a fee of $6.95 within a day. utdallas.edu/~metin 29 Big retailers' Strategy Wal-Mart: Efficiency Target: More quality and service Carrefour: International, ambiance K-Mart: Confused. - Squeezed between Target and Wal-Mart - Reliance on coupon sales - Do coupons stabilize or destabilize a Supply chain? K-Mart and Sears merged in November 2004 utdallas.edu/~metin K-Mart gets cash Sears gets presence outside malls 30 Other Factors Multiple products in a SC. Multiple customers for a given product - Separate channels (supply chains) or Tailored supply chains e.g. Barnes and Noble: Retailing and/or e-tailing - Product and/or customer classes e.g. UTD library loans books for 6 months (2 weeks) to faculty (students) Customer segmentation by pricing Competitors: more, faster and global UTD online programs compete globally Macroeconomic factors for visibility Forecasting Home Depot sales from S&P 500 price index. Forecasting AC sales from new Housing starts utdallas.edu/~metin 31 Achieving Strategic Fit over a Shortening Product Lifecycle SCM strategy moves towards efficiency and low implied uncertainty as products age - e.g. Air travel is becoming more efficient e.g. Southwest airlines lead the drive for efficiency e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005. Responsive - e.g. Flat screen display producer (high cost) AU Optronics of Taiwan was looking supply chain for ways to make its SC more efficient in June 2004. Replacement sales - Selling to replace broken units. e.g. AC replacement is about 50% of the market. utdallas.edu/~metin of it Efficient e F n (low cost) Zo egic t supply chain tra S Certain demand Uncertain demand 32 Summary Mission-Strategy-Tactics-Decisions SCM vs. Product Development and Marketing Achieving Strategic Fit utdallas.edu/~metin 33 utdallas.edu/~metin 34 Supply Chain Drivers Components Logistical: Inventory, Transportation, Facilities Cross-Functional: Information, Sourcing, Pricing Challenges Obstacles: Size and Change Common Problems utdallas.edu/~metin 35 Drivers of Supply Chain How to achieve Efficiency Responsiveness Supply chain structure 1. Inventory 4. Information utdallas.edu/~metin 2. Transportation 5. Sourcing 3. Facilities 6. Pricing Logistical Drivers CrossFunctional Drivers 36 1. Inventory Convenience: Cycle inventory - No customer buys eggs one by one Unstable demand: Seasonal inventory - Bathing suits - Xmas toys and computer sales Randomness: Safety inventory - 20% more syllabi than the class size were available in the first class - Compaq's loss in 95 Pipeline inventory - Work in process or transit utdallas.edu/~metin 37 Little's law For averages = expected values I=R.T I=pipeline inventory=work in process; R=output per time=throughput; T=delay time=flow time 10/minute Spend 1 minute Flow time? Thruput? Pipeline Inventory? utdallas.edu/~metin 38 2. Transportation Air Truck Rail Ship Pipeline Electronic utdallas.edu/~metin 39 3. Facilities Production - Flexible vs. Dedicated - Flexibility costs Remember BMW's motto: \"a sports car disguised as a sedan\" Service: Can your instructor teach music as well as SCM? Sports: A playmaker who shoots well is rare. Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping - Receiving, Sorting, Storing, Packaging, Shipping is not trivial. Blockbuster DC (Distribution Center) in McKinney. This DC receives products (DVDs for new releases / old releases / re-mastered releases, computer games, posters, movie souvenirs) from various suppliers. It ships them to Blockbuster stores all over North America. Each store receives a box of products. DC sorts products, places them in boxes, decides on full/half-full box, ships the boxes. DC also stores products in aisles dedicated to recent 40 utdallas.edu/~metin movies, old movies and computer games. 4. Information Role in the supply chain - Connector between the various stages in the supply chain Integration to create synergies is a central theme in supply chain management - Crucial to daily operation of each stage in a supply chain E.g., production scheduling, inventory levels Role in the competitive strategy - Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) utdallas.edu/~metin 41 Quality of Information Information drives the decisions: - Good information means good decisions IT helps: MRP, ERP, SAP, EDI Relevant information? How to use information? utdallas.edu/~metin 42 Information Technology in a Supply Chain: Analytical Applications Strategic SCM Planning APS Supplier Apps MES Operational Supplier utdallas.edu/~metin Manufacturer Transport & Inventory Planning Transport execution & WMS Distributor Retailer Dem Plan CRM/SFA Customer 43 ERP Systems Allows for Wider focus Push (MRP) versus Pull (demand information transmitted quickly throughout the supply chain) Provide Real-time information Facilitate Coordination and Information sharing Transactional IT Expensive and difficult to implement - About 25% of ERP installations are cancelled within a year - About 70% of ERP installations go over the budget utdallas.edu/~metin 44 IT Push utdallas.edu/~metin 45 Supply Chain Software Push utdallas.edu/~metin Source Kanakamedala, Ramsdell, Srivatsan (2003). McKinsey Quarterly, No 1. 46 5. Sourcing Role in the supply chain - Set of processes required to purchase goods and services - Supplier selection, single vs. multiple suppliers, contract negotiation Role in the competitive strategy - Sourcing is crucial. It affects efficiency and responsiveness in a supply chain - In-house vs. outsource decisions- improving efficiency and responsiveness TI: More than half of the revenue spent for sourcing. Cisco sources: Low-end products (e.g. home routers) from contract manufacturers in China. Components of sourcing decisions - In-house versus outsource decisions; Supplier evaluation and selection - Procurement process: Every department of a firm buy from suppliers independently (= decentralized sourcing), or all together (=centralized sourcing). utdallas.edu/~metin To centralize sourcing, EDS (HP) reduced the number of officers with purchasing authorization. 47 6. Pricing Role in the supply chain - Pricing determines the amount to charge customers in a supply chain - Pricing strategies can be used to match demand and supply Price elasticity: Do you know yours? Role in the competitive strategy - Use pricing strategies to improve efficiency and responsiveness - Low price and low product availability; vary prices by response times Amazon: Faster delivery is more expensive Components of pricing decisions - Pricing and economies of scale - Everyday low pricing versus high-low pricing; inventory markdowns - Fixed price versus menu pricing, depending on the product and services Packaging, delivery location, time, customer pick up Bundling products; products and services utdallas.edu/~metin 48 Considerations for Supply Chain Drivers utdallas.edu/~metin 49 Major Obstacles to Achieving Fit: Size 1. SC is big and fragmented - Variety of products/services - Variety of distribution channels Brick & Mortar vs. Online Regular stores vs. Discount Outlets - Spoiled customer - Globalization - Multiple owners Procurement, Production, Inventory, Marketing in a company Manufacturer, Distributor, Retailer in a Supply Chain - Multiple objectives utdallas.edu/~metin 50 Dealing with Multiple Owners / Local Optimization Information Coordination - Information sharing / Shyness / Legal and ethical issues Contractual Coordination - Mechanisms to align local objectives with global ones Coordination with (real) options - Rare in the practice Without coordination, misleading reliance on metrics: - Average safety inventory, Average incoming shipment size, Average purchase price of raw materials. utdallas.edu/~metin Local optimization and lack of global 51 Major obstacles to achieving fit: Change 2. Instability and Randomness: - Instability refers to knowing that there will be a change in the future and also knowing the amount of change. - Randomness refers to only knowing that there will be a change in the future but not knowing the amount of change. - Increasing product variety - Shrinking product life cycles - Customer fragmentation: Push for customization, segmentation - Fragmentation of Supply Chain ownership: Globalization utdallas.edu/~metin Increasing implied 52 Common problems Lack of relevant SCM metrics: How to measure responsiveness? How to measure efficiency, costs, worker performance, etc? Poor inventory status information Theft: Major problem for furniture retailers. Transaction errors: Retailers with inaccurate inventory records for 65% of SKUs Information delays, dated information, incompatible info. systems Misplaced inventory: 16% of items cannot be found at a major retailer Spoilage: active ingredients in the products are losing their properties Product quality and yield Lack of visibility in SCs utdallas.edu/~metin Do you know the inventory your distribution centers hold? Do you know the inventory your fellow retailer holds? 53 Common problems Poor delivery status information Not knowing the order status Ignoring uncertainties - \"The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty.\" - Nitin Nohra, HBR February 2006 issue, p.40. Internal customer discrimination Giving lower priority to internal customers than external customers Elusive inventory costs Cost accounting systems do not capture opportunity costs Managerial accounting does better here SC-insensitive product design utdallas.edu/~metin 54 Summary Components Logistical: Inventory, Transportation, Facilities Cross-Functional: Information, Sourcing, Pricing Challenges Obstacles: Size and Change Common Problems utdallas.edu/~metin 55 utdallas.edu/~metin 56 Case Study: Seven Eleven Japan (SEJ) utdallas.edu/~metin 57 Factual Information on Seven Eleven Japan (SEJ) Established in 1974. The largest convenience store in Japan with value of $95 B. - The third largest retail company in the world after Wal-Mart and Home Depot. In 1985, there were 2000 stores in Japan. Since then, increasing by 400-500 per year. In 2000, total sales $18,000 M, profit $620 M. - Stock value increased by 3000 times from 1974 to 2000. - Return on equity 14% over 2000-2004. Average inventory turnover time 7-8.5 days. - 7-eleven annual inventory turnover rate is 50 in Japan (19 in the U.S.A.) utdallas.edu/~metin 58 Number of Stores: 10356 in 2004. Net Sales: 1,963 B Yen in 2000. utdallas.edu/~metin 59 Individual store and Products A SEJ store is about the half the size of a US 7-eleven store, that is about 110 m2 =1000 square feet. Sales: - Products 32.9% 31.6% 12.0% 25.3% Processed food: drinks, noodles, bread and snacks Fast food: rice ball, box lunch and hamburgers Fresh food: dairy products Non-food: magazines, ladies stockings and batteries. - Services Utility bill paying, installment payments for credit companies, ATMs, photocopying utdallas.edu/~metin 60 More on SEJ More factual info: Average sales about twice of an average US store SKU's offered in store: Over 3,000 (change by time of day, day of week, season) Virtually no storage space No food cooking at the stores Japanese Images of Seven Eleven: Convenient Cheerful and lively stores Many ready made dinner items I buy Famous for its great boxed lunch and dinner \"- On weekends, when I was single, I went to buy lunch and dinner\" SC strategy: Micro matching of supply and demand (by location, time of day, day of week, season) utdallas.edu/~metin 61 Information Strategy Quick access to up-to-date information as opposed to data In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter, DCs and suppliers Customer checkout process - Clerk records the purchased items and sometimes customer's gender, (estimated) age. These Point of Sales (POS) data are transmitted to database at the headquarters. Store hardware: Store computer, POS registers linked to store computer, Graphic Order Terminals, Scanner terminals for receiving Daily use of the data - Headquarters aggregate the data by region, products and time and pass to suppliers and stores by next morning. Store managers deduce trend information. Weekly use of the data - Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100 corporate managers. - Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo on Monday night. - Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy. Tuesday nights, field counselors return back to their regions. utdallas.edu/~metin 62 utdallas.edu/~metin 63 Information Analysis of POS Data Analysis of - - - - Sales for product categories over time SKU (stock keeping unit) Waste or disposal 10 day (or week) sales trend by SKU Sales trends for new product - In the early 1990s, half-prepared fresh noodle sales were going up, new fresh noodle products were quickly developed Sales trend by time and day - Different sales patterns for different sizes of milk at different times of the day results in rearrangement of the milks in the fridge. Extreme store micromanagement. Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?). List of slow moving items - About half of 3000 SKUs are replaced by new ones every year utdallas.edu/~metin 64 Facilities Strategy Limited storage space at stores which have at most 125-150 m2 space - Frequent and small deliveries to stores Deliveries arrive from over 200 suppliers/plants. Products are grouped by the cooling needs - - - - Combined delivery system: frozen foods, chilled foods, room temperature and hot foods. Such product groups are cross-docked at distribution centers (DC). Food DCs store no inventory. A single truck brings a group of products and visits several stores within a geographical region Aggregation: No supplier (not even coke!) delivers direct The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000. Still, at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners. Many outlets, at convenient locations, close to where customers can walk Focus on some territories, not all: When they locate in a place they blanket (a.k.a. clustering) the area with stores; stores open in clusters with corresponding DC's. - 844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. No stores in Kobe. - Success rate of franchise application <= 1/100 utdallas.edu/~metin 65 The Present and the Future Why SEJ does not allow direct delivery from suppliers to retailers? No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA? Point out which of the following strategies can also be used in US (or in Taiwan) - Information strategy - Facilities strategy What, if any, is the risk of micro-matching strategy? Discuss the differences between the Japanese and US (or Taiwanese) consumers with regard to - Frequency and amount of grocery purchase - Use of credit cards vs. cash for purchase - 7-eleven inventory turnover rate is 50 in Japan and 19 in the USA utdallas.edu/~metin 66 Summary Appropriately designed information and facility strategies can greatly improve the performance - supply chain - financial The same strategy can be appropriate or not depending on the business environment: population density, consumer choices, local culture, infrastructure, macroeconomic factors. - Hence, benchmark carefully. utdallas.edu/~metin 67 utdallas.edu/~metin 68 SC Design Facility Location Strategy utdallas.edu/~metin 69 Frequency Decomposition SCs are enormous It is hard to make all decisions at once Integration by smart decomposition Frequency decomposition yields several sets of decisions such that each set is integrated within itself utdallas.edu/~metin 70 Frequency Decomposition Low frequency activity, ~ once a year, high fixed cost - R&D budget - Capacity expansion budget Moderate frequency activity, ~ once a month - Cancellation of specific R&D projects depending on experimental outcomes - Specific machines to purchase High frequency activity, ~ once a day, low fixed cost - What experiments to start / continue today - What to produce utdallas.edu/~metin 71 Facility Location: The Cost-Response Time Frontier An inventory location based point of view 7-Eleven Hi Regional Local Finished Goods (FG) Inventory Regional FG Inventory Cost Local WIP (work-in-process) Central Sam's Club Central FG Inventory Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers Low Pull the inventory upstream Low utdallas.edu/~metin Response Time Hi 72 Where inventory needs to be for a one week order response time - typical results --> 1 DC Customer DC utdallas.edu/~metin 73 3 day order response time - typical results --> 5 DCs Customer DC utdallas.edu/~metin 74 Same day / next day order response time typical results --> 26 DCs Customer DC utdallas.edu/~metin 75 Inbound and outbound shipping with more facilities Supplier Add more facilities for responsiveness Manufacturer Inbound shipment Supplier Manufacturer Customer Outbound shipment Distributor Inbound shipment Retailer Customer Outbound shipment More inbound shipping and less outbound shipping with more facilities. Less (inbound + outbound) shipping costs with more facilities possible, if economies of scale in transportation. utdallas.edu/~metin 76 Costs and Number of Facilities Total SC Inventory Facility costs Costs Transportation Number of facilities No economies of scale in shipment size, SC covers a larger portion with each facility. With economies of scale in inbound shipping to retailers. utdallas.edu/~metin 77 Cost Build-up as a function of facilities Cost of Operations Total Costs Facilities Inventory Transportation Labor Number of Facilities utdallas.edu/~metin 78 Classification of Network Design Decisions Facility function: Plant, DC, Warehouse: What facility performs what function - Packaging at the manufacturer or warehouse - Should a rental computer return location run diagnostic tests on the returned computers or should the testing be done at major warehouses? Question arising from CRU Computer Rental Case done in OPRE6302 Facility location - Starbucks opened up at UTD student apartments in 2005 but closed in 2006! - Recall Japanese 7-eleven and their blanketing strategy - SMU's experimentation with Plano campus: http://www.smu.edu/legacy . Capacity allocation - SOM car park took 80 cars in 2005 and expanded in 2006 to take about 110 cars, further expanded in 2009 to take about 300 cars. Supply and market allocation: Who serves whom - By location: UT Austin serves central Texas students - By grade: UT Arlington serves undergraduate students utdallas.edu/~metin 79 Strategic Factors Influencing Location Decisions Strategic Facilities Lead facility Global Customers Regional Customers Server Offshore VW plants in Mexico Serving Latin America utdallas.edu/~metin Source Suziki's Indian venture Maruti Udyog Nike plants in Korea Lockheed Martin's JSF in Dallas Outpost facility Facilities in Japan; Toyota Prius Contributor Maruti Udyog 80 Factors Influencing Location Decisions Customer response time and local presence Operating costs - main driver for offshoring Technological, - Availability and economies of scale (fixed operational costs) Infrastructure, electricity, phone lines, suppliers Macroeconomic / Politic - - - Semiconductor manufacturing takes place only in 5-6 countries worldwide Tariffs, exchange rate volatility, economic volatility Economic communities: Nafta, EU, Pacific Rim, Efta Stability Logistics and facility costs Competitive - Positive externalities Nissan in India develops car suppliers which can also supply Suziki in India. DFW Telecom corridor hosting Alcatel, Ericsson, Nortel, ... Toyota City, Shopping Malls - Negative externalities, see the next slide utdallas.edu/~metin 81 Negative externality: Market Splitting by Hotelling's Model 0 a a b 1-a-b 1 b Suppose customers (preferences, e.g. sugar content in coke) are uniformly distributed over [0,1] - How much does firm at a get, how about firm at b by locating as above? - If a locates first, where should b locate? - If a estimates how b will locate in response to a's location, utdallas.edu/~metin 82 Steps of Comparing Locations According to McKinsey Global Institute on HBR Jun. 2006 p.91 1. Draw up a list of possible locations 2. Define the decision criteria - Six common criteria used by companies 1. Cost of operating - tax incentives from local/federal governments 2. Availability of the skills 3. Sales potential in the adjacent markets 4. Risk of doing the business 5. Attractiveness of living environments 6. Quality of infrastructure 3. Collect data for each location 4. Weight the criteria Fortisbank of Belgium, wants to enter new large markets, gives highest weight to 3. Citibank, wants a location for a captive IT center, gives the highest weight to 4. Find risk data at - Economist intelligence unit: www.eiu.com - UN Development Program: http://hdr.undp.org/statistics/data/ 5. Rank locations according to weighted sum of their scores 6. Assess the dynamics of the labor pool utdallas.edu/~metin Availability of skilled labor: Top tier universities in large U.S. cities (e.g., Dallas?). 83 Summary Frequency decomposition of activities A strategic framework for facility location - Classification - Factors - Steps utdallas.edu/~metin 84 utdallas.edu/~metin 85 SC Design Facility Location Models utdallas.edu/~metin 86 Analytical Models for SC Design Objective functions - Private sector deals with total costs: minimizes the sum of the distances to the customers Customers 2-10 Customer 1 Public sector locates Private sector locates - Public sector deals with fairness and equity: minimizes the distance to the furthest customer - Location of emergency response units Demand allocation Distance vs. Price vs. Quality: Recall Hotelling model Demand pattern over a geography: Discrete vs. Continuous Distances utdallas.edu/~metin Euclidean vs. Rectilinear Triangular inequality 87 Network Optimization Models Allocating demand to production facilities Locating facilities Determining capacity - some in aggregate planning module Key Costs: Fixed facility cost Transportation cost Production cost utdallas.edu/~metin 88 A transportation network Defined by data K, D and c n supply points/plants m demand points/markets D1 c11 K1 c22 K2 c14 D2 c12 c23 D3 c31 K3 utdallas.edu/~metin c32 c34 D4 89 Demand Allocation Model: Transportation Problem Which market is served by which plant? Which supply sources are used by a plant? n Objective Min cij xij i 1 j 1 Given m demand points, j=1..m with demands Dj Given n supply points, i=1..n with capacity Ki s.t. n Constraints Each unit of shipment from supply point i to demand point j costs cij x D ij j x K i i 1 m j 1 Decision Variables Send supplies from supply points to demand points xij = Quantity shipped from plant site i to customer j utdallas.edu/~metin m x ij ij 0 90 A transportation network Defined by data K, D, c and f Which supply n supply points point operates? D1 c11 y1=yes or no f1,K1 c22 y2=yes or no f2,K2 m demand points c14 D2 c12 c23 D3 c31 y3=yes or no utdallas.edu/~metin f3,K3 c32 c34 D4 91 Plant Location with Multiple Sourcing Which market is served by which plant? Which supply sources are used by a plant? None of the plants are open, a cost of fi is paid to open plant i n Min i 1 n m f y c x i i i 1 j 1 ij ij s.t. n At most k plants will be opened x D i 1 ij j m yi = 1 if plant is located at site i, 0 otherwise xij = Quantity shipped from plant site i to customer j utdallas.edu/~metin x K y j 1 ij i i y {0,1} i 92 Plant Location with Single Sourcing Each customer/market has exactly one supplier Which market is served by which plant? Which supply sources are used by a plant? n None of the plants are open, a cost of f i is paid to open plant i Min i 1 n m f y Dc x i j i i 1 j 1 ij ij s.t. n x i 1 yi = 1 if plant is located at site i, 0 otherwise xij = 1 if market j is supplied by factory i, 0 otherwise Can a plant satisfy the demand of two or more customers with this formulation? utdallas.edu/~metin 1 ij m D x K y j j 1 ij i i yi , xi , j {0,1} 93 Network Optimization Models vs. Gravity Location Models Both Network Optimization Models and Gravity Location Models determine the optimal location of a new facility or facilities. In the Network Optimization Models, the new location must be one of the discrete set of potential locations. - That is why they are more amenable to be solved by a linear program. In the Gravity Location Models, the new location can be anywhere on a continuous line or a rectangle (coordinate system); we do not need to make a list of potential locations in advance. In the Gravity Location Models, the distance is modeled explicitly and generally as Euclidean distance. - That is why we end up with a nonlinear objective and cannot use a linear program. - We shall develop alternative methods. utdallas.edu/~metin 94 Gravity Methods for Location Ton Mile-Center Solution di Given n delivery locations, i=1..n, ai, bi : Coordinates of delivery location i di : Distance to delivery location i Fi : Annual tonnage to delivery location i Locate a warehouse at (x,y) utdallas.edu/~metin n Min x, y i 1 (x 2 ai) ( y 2 bi) 2 F i (ai x) (bi y) n ai Fi i 1 d i x n Fi i 1 d i 2 n bi Fi i 1 d i y n Fi i 1 d i 95 Gravity Methods for Location - A Variant Change the distance d i ( x 2 ai) ( y bi) 2 n Given n delivery locations, i=1..n, ai, bi : Coordinates of delivery location i di : Distance to delivery location i Fi : Annual tonnage to delivery location i Locate a warehouse at (x,y) utdallas.edu/~metin Min Fi (ai x) 2 (bi y ) 2 x, y i 1 n x a F i 1 n i F i 1 i n i y b F i 1 n i F i 1 i i 96 Case Study: Applichem Demand Allocation utdallas.edu/~metin 97 Demand Allocation with Duties Demand Capacity 220 Mexico 37 Canada 45 Venezuela 30 32 Gary 50 Sunchem utdallas.edu/~metin 26 2 Latin America 160 115 200 185 30 Canada 11 45 470 Frankfurt 185 Mexico 36 119 Europe 200 U.S.A 264 Japan 119 98 Demand Allocation with Duties without Duties Mex Mex Mex Mex Can Can Can Can Ven LatAm Ven LatAm Fra Eur Fra Eur Gar U.S.A Gar U.S.A Sun Jap Sun Jap Annual Cost = $72,916,400 Annual Cost = 66,328,100 Without duties, Venezuela and Canada plants are closed and Frankfurt satisfies the excess Canada, Latin America and USA demand. There is consolidation without duties. 99 utdallas.edu/~metin Value of Adding 0.1 M Pounds Capacity (1982) Shadow (dual) prices from LP tells you where to invest. Capacity should be evaluated as an option and priced accordingly. utdallas.edu/~metin 100 Summary Network optimization models Gravity location models utdallas.edu/~metin 101 utdallas.edu/~metin 102 SC Design Facility Location under Uncertainty utdallas.edu/~metin 103 A tree representation of uncertainty One way to represent Uncertainty is a binomial tree Up by 1 down by -1 move with equal probability 2 Normal (0, T ) 2 (1) 2 (0.5) ( 1) 2 (0.5) 1 utdallas.edu/~metin T steps 104 Decision tree - One column of nodes for each time period - Each node corresponds to a future state What is in a state? Price, demand, inflation, exchange rate, your OPRE 6366 grade - Each path corresponds to an evolution of the states into the future - Transition from one node to another determined by probabilities - Evaluate the cost of a path starting from period T and work backwards in time to period 0. utdallas.edu/~metin 105 Decision tree analysis of when I arrive home? Lecture ends Now Now it is about 9 pm and you are wondering what time you will arrive home tonight. This time depends on when your instructor stops teaching: - Your instructor is equally likely to stop at 9:30 pm or at 9:44 pm. 9 pm Pr o .5 9:30 pm 9:44 b= 0 .5 pm It also depends on whether it rains while you are driving home. - If it does not rain, you drive to home in 20 minutes. - If it rains, you drive in 24 minutes. - The rain probability tonight is 75%. b=0 Pro When do you expect to arrive home? utdallas.edu/~metin 0.5 9:30 = b Pro pm 9 pm Pr o b= 0 9:44 .5 pm Expctd Rem 9 pm Time 37 mins Arriving home ; 2 5% n i a r No 20 mins Rain 75% ; 24 mins %; 5 2 n i No ra 20 mins Rain 75% ; 24 mins Expected Travel Time 23 mins Expected Travel Time 23 mins Expected Travel Time 23 mins 106 US Tire Production and Chinese Imports Numbers and quotes are from WSJ Sep 15 2009 article \"Tariff on Tires to Cost Consumers\" - - - - Low end tires cost $50-60 per piece, the same range is $200-250 for high end tires. Not profitable to produce low-end tires in the US. A massive reduction in tire production capacity: In 2005, North America had the capacity of 370 million tires. US imports of Chinese tires in 2008 > 46 M. By 2009, North American capacity has been cut by more than 40 M tires. A further 35 M reduction is in the process. US negotiated with China before China entered World Trade Organization (WTO) and US opened its markets to Chinese products - Negotiated terms allow US to increase tariffs by 50%. Such terms constitute the legal basis for tariff hikes. The tire tariffs of about 30% put on Chinese tires in Fall 2009 will reduce the flow of tires into US. Chinese tires are mostly low end so the low end US market will be impacted most. - Prices for low end tires could increase 20% to 30%. Many importers stopped ordering Chinese tires by about mid-August, fearing they might end up paying a hefty tariff at the U.S. ports. The inventory in the supply chain is not high. Many months will pass before alternative (Indonesian and Brazilian) producers build capacity. \"... any tire manufacturer that wants to get involved in the low-end ... would have to revamp factory ... [for] ... the sizes and types of tires favored by U.S. consumers, a costly and complicated process. Both of the U.S.'s remaining domestic manufacturers, Goodyear and Cooper, make tires in China and sell in the U.S. They will also be adversely impacted. Chinese producers are moving toward producing/selling high-end tires. At a high level: Is protectionism is possible in the 21 st century? At a low level: Students, replace your tires immediately. utdallas.edu/~metin 107 Evaluating Facility Investments: AM Tires Now U.S. Demand = 100,000; Mexico demand = 50,000. Demand is not to be met always. But selling more increases profit. 1US$ = 9 pesos. Sale price $30 in US and 240 pesos in Mexico. Future Demand goes up or down by 20 percent with probability 0.5 and Exchange rate goes up or down by 25 per cent with probability 108 0.5. utdallas.edu/~metin AM Tires How many states in period 2? Consider US demand 4 or 3 states Consider the rest also 4x4x4 or 3x3x3 utdallas.edu/~metin 109 AM Tires Four possible capacity configurations: Both dedicated Both flexible U.S. flexible, Mexico dedicated U.S. dedicated, Mexico flexible Consider the both flexible configuration For each node solve the demand allocation model. Plants Markets utdallas.edu/~metin U.S. U.S. Mexico Mexico 110 AM Tires in period 2: Demand Allocation for DUS = 144; DMex = 72, E = 14.06 2 2 Max m ij x ij i 1 j1 such that 2 x D j ij i 1 2 x ij K i 1.1=240/14.06-15-1 21.2=30-110/14.06-1 9.2=(240-110)/14.06 Compare this problem to the Transportation problem. No contractual agreement with the customers to meet demands. Motivated to sell more to earn more. We maximize the profit now. j 1 xij 0 utdallas.edu/~metin 111 AM Tires: Demand Allocation for DU = 144; DM = 72, E = 14.06; Cheap Peso Plants U.S. Markets 100K; $15 1. 2 $ ; Mexico 44 K 6K; $9.2 U.S. Profit =Revenue-Cost 2 Mexico US Production's contribution=100,000*15-1,100,000=$400,000 Mex Production's contribution=44,000*21.2+6000*9.2-4,400,000/14.06=$675,055 Profit(DU = 144; DM = 72, E = 14.06; Period 2; Both flexible)=$1,075,055 utdallas.edu/~metin 112 AM Tires: Demand Allocation for DU = 144; DM = 72, E = 8.44; Expensive Peso Plants U.S. Mexico Markets 100K; $15 $1 ; K 4 U.S. 6 4 6K; $15.4 Mexico US Production's contribution=100,000*15-1,100,000=$400,000 Mex Production's contribution=44,000*16+6000*15.4-4,400,000/8.44 =704000+92400-521327=$275,073 Profit(DU = 144; DM = 72, E = 8.44; Period 2; Both flexible)=$675,073 utdallas.edu/~metin 113 AM Tires: Demand Allocation for DU = 144; DM = 72, E = 5.06; Very Expensive Peso Plants U.S. Markets 78K; $15 22K Mexico ; $3 1.4 50K; $25.7 U.S. Mexico US Production's contribution=78000*15+22000*31.4-1,100,000=$760,800 Mex Production's contribution=50000*25.7-4,400,000/5.06=$415,435 Profit(DU = 144; DM = 72, E = 8.44; Period 2; Both flexible)=$1,176,235 Cheap Peso profit=$1,075K; Expensive Peso profit=$675K; Very Expensive Peso profit=$1,176K utdallas.edu/~metin 114 Facility Decision at AM Tires Make profit computations for the first year nodes one by one: Compute the profit for a node and add to that (0.9)(1/8)(Sum of the profits of all 8 nodes connected to the current one) utdallas.edu/~metin 115 Risk Hedging via Capacity Strategies Too much capacity or too little capacity. Capacity is a real option. Single sourcing is risky Hedging Strategy - Risk management? E.g. 200 leading financial services companies are examined from 1997-2002. Every other company struck at least once by a risky event. Source: Running with Risk. The McKinsey Quarterly. No.4. 2003. If this survey was repeated in 2008, it would have found that every company ... Managers unfamiliar with risk often focus on relatively simple accounting metrics as net income, earnings per share, return on investment, etc. - Match revenue and cost exposure. Do they move in the same direction? Flexible Strategy - Excess total capacity in multiple plants - Flexible technologies More will be said in aggregate planning chapter utdallas.edu/~metin 116 Summary Decisions under uncertainty - Location - Flexibility Decision trees utdallas.edu/~metin 117 utdallas.edu/~metin 118 Managing Transportation in a Supply Chain utdallas.edu/~metin 119 Transportation Modes Trucks - TL: Truckload. High utilization of trucks. - LTL: Less than truckload. Fast delivery. Suffering from high transportation costs, Lennox wants to use more TL in the future. Rail - Carload - Intermodal Air Package Carriers Water Pipeline utdallas.edu/~metin 120 Milk Runs and Crossdocking Milk run is a loop containing either a single supplier or a single retailer. Milwaukee Crossdocking is useful if deliveries are time sensitive and there are several small dropoffs in proximity, not all of which can be delivered on a single truck. Items are shifted from one truck to another without going in to storage. Timing of truck arrivals/departures is very crucial. St. Louise Milwaukee Small Town utdallas.edu/~metin 121 Design Options for Distribution Drop-Shipping or Direct Shipping to Consumer Manufacturers - It picks consumer orders from customers and passes them to the manufacturers - It does not hold product inventory, rather it is purely for order generation (naturally or via promotions, ads) Retailer Consumers utdallas.edu/~metin Products are shipped directly to the consumer from the manufacturer Manufacturer often uses package carriers for delivery Retailer is an information collector: E.g.: Medical equipment salespeople can be considered as retailers. Dell, Nordstrom catalogues 122 Drop shipping for High-value and low, unpredictable demand items All consumers' needs for a particular product is satisfied from a manufacturer: All finished goods inventory for a product reside at one manufacturer. Finished goods inventory is aggregated over different consumers. - Aggregated demand often has smaller standard deviation than the sum of the standard deviations of the individual demands in the aggregation because extremes cancel out. Manufacturers postpone customization of products until an order is placed. Component and sub-assembly inventory is aggregated over different products. A wide range of products can be provided at a low cost due to postponement. - e.g. Dell uses postponement very effectively. Direct shipment simplifies retailers' functions but complicates manufacturers'. Can manufacturer's handle shipping units one by one to the consumers? Manufacturers and retailers must coordinate their actions using an integrated information systems. Product returns are harder to handle. Response times to consumer orders are longer with direct shipping. Direct shipping increases shipment costs. utdallas.edu/~metin 123 How to reduce shipment costs for moderate demand? In-Transit Merge Manufacturers The distribution network is too extensive with direct shipping and no economies of scale in transportation costs can be achieved. Mergers Retailer Consumers utdallas.edu/~metin Consider merging shipments at Mergers. Shipments to Mergers are larger so economies of scale is achieved. Mergers increase facility costs. Mergers can be done within trucks: Cross-docking becomes useful. Response time may go up. Example: - Furniture retailers merge couches and coffee tables produced by different manufacturers - Dell merges a Dell PC with a Sony flat screen 124 How to reduce transportation costs/response times? Distributor Storage with Carrier Delivery Manufacturers Distributor Warehouse Distributor Warehouse Keep finished goods inventory at a warehouse which ships to consumers using carriers. Shipments from manufacturers to warehouses are in TL or LTL to exploit economies of scale. Warehouses are physically closer to consumers which leads to - Shorter order fulfillment time - Shorter distance to cover with package carriers for outbound shipment. With respect to In-Transit Merge - Inventory aggregation is less because inventory is pushed to warehouses - Higher inventory costs - Facility costs are higher Consumers utdallas.edu/~metin Easier to run. Warehouse meets the demands so infrequent orders from manufacturers to warehouses. Less information to keep track of. Only warehouses need real time demand/order status information. Example: Amazon 125 How to provide more delivery service? Distributor Storage with Last Mile Delivery Very similar to Distributor Storage with Carrier Delivery except that the warehouse delivers to the consumers using Milk Runs. Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale. Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher. Products must be flowing fast to justify the infrastructure. The cost for drivers and load handlers are high. Last mile delivery can be a sound option if labor costs are relatively small with respect to the premium consumers are willing to pay for home delivery. Response times are shorter Manufacturers Distributor Warehouse Distributor Warehouse - - Consumers utdallas.edu/~metin Warehouses are located closer to consumers A private fleet of trucks can deliver faster than package carriers. Home delivery is high customer service; appreciated by the customers for bulky products, e.g. a washer Consumer must pay for delivery costs. - - Peapod charged $9.95/delivery Delivery costs can depend on the time of the day126 How to reduce eliminate consumer's delivery cost? Manufacturer or Distributor Storage with Consumer Pickup Manufacturers Distributor Warehouse Distributor Warehouse Consumers If consumers are willing to pick up the products easily, let them do so. Otherwise, they would be charged for the delivery costs. This is very similar to Last Mile Delivery except that the consumers come to pick up sites (warehouse, retailer) to get the products. Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located. Significant amount of information is required to run. Example: 7dream.com of Japanese 7Eleven - Check it out but it is in Japanese utdallas.edu/~metin 127 How to push products closer to consumers? Retail Storage with Consumer Pickup Manufacturers Retailer Retailer Retailer Consumers utdallas.edu/~metin Consumers can also pick up from retailers. This is the most common form of shopping. This is very similar to consumer pick up from warehouses except that now the consumers go to retailers which are closer to consumers and more conveniently located for pick ups. Inventories at warehouses are aggregated over consumers. Typically a single warehouse serves many more consumers than a single retailer would. Inventory aggregation happens at a greater extent when consumers pick up from the warehouses. No order tracking necessary. If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer Example: All the retail stores. Wal-Mart, Albertson's, Van Heusen Shirts, JCPenny 128 Performance: 1 is good Pickup from Retailer Drop Shipping In-Transit Merge Package Carrier Delivery Last Mile Delivery Pickup from Warehouse Response Time 1 4 4 3 2 4 Product Variety 4 1 1 2 3 1 Product Availability 4 1 1 2 3 1 Customer Experience 5 4 3 2 1 5 Order Visibility 1 5 4 3 2 6 Returnability 1 5 5 4 3 2 Inventory 4 1 1 2 3 1 Transportation 1 4 3 2 5 1 Facility & Handling 6 1 2 3 4 5 Information 1 4 4 3 2 5 utdallas.edu/~metin 129 What value do distributors add to SCs? Economies of scale in inbound transportation costs to distributors by combining shipments of several products coming from the same manufacturer. Economies of scale in outbound transportation costs from distributor to retailers by combining shipments coming from several manufacturers and going to the same retailer. Distributors provide a compromise strategy, for keeping inventories in the SCs, between - Storage at the manufacturer with direct shipments Low inventory cost but high transportation cost - Storage at the retailer with customer pickups High inventory cost but low transportation cost By specializing on distribution, distributors do a better job in logistics of shipments: - On time deliveries - Breaking bulk shipments, e.g., kitting - Shipment tracking utdallas.edu/~metin 130 E-Business and the Distribution Network Impact of E-Business on Customer Service - Faster Response to customer orders New product introductions Modifications of Product portfolios, pricing, promotions Revenue collection - Product variety Number of products - Product availability Number of products in the storage Improved Information and Aggregation Potential - Customer experience Ease (+); After-hours-shopping (+); Distant-shopping (+); Order visibility (-) for the customer. - Profit can increase with the removal of the distributors utdallas.edu/~metin 131 E-Business and the Distribution Network Impact of E-Business on Cost - Inventory Improved Information and Aggregation Potential - Facilities Facility costs Operating costs Simplification of order taking - Transportation Aggregation increases the outbound transportation costs - Information Increased demand visibility Increased supplier visibility Using E-Business: Dell, Amazon, Peapod, Grainger utdallas.edu/~metin 132 Tradeoffs in Transportation Design Transportation, facility, and inventory cost tradeoff - Choice of transportation mode - Inventory aggregation Transportation cost and responsiveness tradeoff - Temporal aggregation leads to economies of scale decreases responsiveness utdallas.edu/~metin 133 Temporal aggregation: Extremes cancel out Day 1 Load: Day 2 Load: 2 trucks at the end of each day (one truck half-full) utdallas.edu/~metin or 3 trucks at the end of the 2. day (both trucks full)? 134 Tailored Transportation By product characteristics: spoilage, life cycle. By customer density and distance - High density, short distance: private fleet, milk runs Milkman, 7-Eleven Japan - Low density, high distance: package carrier Amazon By customer size - Various frequencies of deliveries Delivery on Even days to Retailers L and H , on Odd days to Retailer H By value and volume - If High value, use fast transportation; semiconductor chips - If High volume, can afford to disaggregate inventories that is use several warehouses; Wal-Mart DCs - If High cube (very heavy), locate next to the source (mining industry). utdallas.edu/~metin 135 Routing and Scheduling in Transportation Use frequency decomposition Clustering - Assignment of trucks to demand points (retailers) Saving matrix method Generalized assignment method Routing - Sequencing demand points; improvement of an existing one - Trucks use these sequences to visit demand points Scheduling - Exact time of visits/loading and unloading utdallas.edu/~metin 136 Classification: Vehicle Routing Problems Demand uncertainty - Repair operations, spare parts demand for Xerox machines The nature of operations: pick up / load Planning periods: Single vs. Multiple - In multiple periods, initial configuration of where trucks are every period can be different. Static vs. Dynamic, to the extent real time info used - Wireless technologies can help - After all what are RFID (Radio Frequency ID) tags for? Fleet capacity, known? Strategic vs Operational. Delivery time windows. - I want my paper in the morning my pizza in the night Objective: transportation costs, inventory costs, crew costs utdallas.edu/~metin 137 Summary Distribution network design Clustering and Sequencing For more take \"OPRE 6370: Logistics and Distribution\" offered every Fall semester. utdallas.edu/~metin 138 OPRE 6366. SCM : 3. Aggregate Planning 1. MPS MPS stands for Master Production Schedule. It is a company's plan of how many and when items will be delivered to the customer. MPS includes deliveries that are fixed by the customer and promised by the company. It can include deliveries that are not yet promised but that are still negotiated. It may also include a forecast of customer demand. MPS covers a planning horizon of several months into the future. Initially a bigger portion of MPS is constituted by the firm customer orders and promised deliveries. But towards the end of the planning horizon, a larger portion of MPS is driven by demand forecasts. Since firm orders cannot be altered by the customer and the company tends to hold delivery promises, initial months of MPS is fairly stable. Because of this, the portion of MPS associated with those months is said to be frozen. Outside the frozen horizon, orders can be modified relatively easily so MPS is flexible; see Figure 1. Volume Forecasts Firm Orders Firm Orders Frozen Zone Flexible Zone Time Figure 1: Frozen and flexible parts of MPS. Having fixed the demand during the frozen horizon, companies use linear and integer programming formulations to make production/distribution plans. On the other hand, demands are random during the flexible zone. There are ways of incorporating randomness into linear and integer programs or ways to create models from scratch. What is important is to recognize the random demand during the flexible horizon. Failing to do so, i.e., assuming pseudocertainty, will result in plans that are too adamant to adjust for various demand scenarios that can materialize. Demand forecasting is naturally an important ingredient in MPS construction, especially during the flexible horizon. We will not discuss forecasting methods. We want to emphasize that there are non1 traditional forecasting models (Guerrero and Elizondo [3], and Bodily and Freeland [2]) where demand is assumed to reveal itself in steps over time. Partial and earlier observations of demand is used to forecast the future demand later on. For example, in one of the models it is assumed that the ratio of orders received up to a certain time to the whole demand is approximately constant. After the proportionality constant is estimated, forecasts are readily generated from the partially observed demands. We also note that forecasts for immediate future are more accurate (in terms of less randomness or lower variance) than those for the far future. Thus, planners should handle forecasts of future demands with some suspicion. If possible, it is a smart strategy to wait for forecasts to become more accurate before committing to meet demands. An example of this strategy is the postponement of product differentiation. Demand forecasts are the drivers of the SC operations, once they are ready we can plan the operations as discussed in the next section. 2. Aggregate Planning Strategies 1. Chase (the demand) strategy: produce at the instantaneous demand rate. Example: fast food restaurants. 2. Level strategy: produce at the rate of long run average demand. Example: swim wear production. 3. Time flexibility strategy: high levels of workforce or capacity that suffices to meet any realistic amount of demand. Example: Machining shops, army. 4. Deliver late strategy: convince the customer to wait for the delivery. Example: Spare parts for your Jaguar. These strategies are extreme although we often resort to compromises among the extremes. To achieve such compromises, we need to detail the strategies further, which can be done through a more quantitative approach. 3. Aggregate Planning with Linear and Integer Programming We start with an aggregate formulation example. Suppose a production manager is responsible for scheduling the monthly production levels of a certain product for a planning horizon of twelve months. For planning purposes, the manager was given the following information: The total demand for the product in month j is d j , for j = 1, 2, . . . , 12. These could either be targeted values or be based on forecasts. The cost of producing each unit of the product in month j is c j (dollars), for j = 1, 2, . . . , 12. There is no setup/fixed cost for production. The inventory holding cost per unit for month j is h j (dollars), for j = 1, 2, . . . , 12. These are incurred at the end of each month. The production capacity for month j is m j , for j = 1, 2, . . . , 12. The manager's task is to generate a production schedule that minimizes the total production and inventoryholding costs over this twelve-month planning horizon. To facilitate the formulation of a linear program, the manager decides to make the following simplifying assumptions for now: 2 1. There is no initial inventory at the beginning of the first month. 2. Units scheduled for production in month j are immediately available for delivery at the beginning of that month. This means in effect that the production rate is infinite. 3. Shortage of the product is not allowed at the end of any month. To understand things better, let us consider the first month. Suppose, for that month, the planned production level equals 100 units and the demand, d1 , equals 60 units. Then, since the initial inventory is 0 (Assumption 1), the ending inventory level for the first month would be 0+100-60=40 units. Note that all 100 units are immediately available for delivery (Assumption 2); and that given d1 = 60, one must produce no less than 60 units in the first month, to avoid shortage (Assumption 3). Suppose further that c1 = 15 and h1 = 3. Then, the total cost for the first month can be computed as: 15 100 + 3 40 = 1380 dollars. At the start of the second month, there would be 40 units of the product in inventory, and the corresponding ending inventory can be computed similarly, based on the initial inventory, the scheduled production level, and the total demand for that month. The same scheme is then repeated until the end of the entire planning horizon. 3.1 The Decision Variables The manager's task is to set a production level for each month. Therefore, we have twelve decision variables: x j = the production level for month j, j = 1, 2, . . . , 12. 3.2 The Objective Function Consider the first month again. From the discussion above, we have: The production cost equals c1 x1 . The inventory-holding cost equals h1 ( x1 d1 ), provided that the ending inventory level, x1 d1 , is nonnegative. Therefore, the total cost for the first month equals c1 x1 + h1 ( x1 d1 ). For the second month, we have: The production cost equals c2 x2 . The inventory-holding cost equals h2 ( x1 d1 + x2 d2 ), provided that the ending inventory level, x1 d1 + x2 d2 , is nonnegative. This follows from the fact that the starting inventory level for this month is x1 d1 , the production level for this month is x2 , and the demand for this month is d2 . Therefore, the total cost for the second month equals c2 x2 + h2 ( x1 d1 + x2 d2 ). Continuation of this argument yields that: The total production cost for the entire planning horizon equals 12 c j x j c1 x1 + c2 x2 + + c12 x12 , j =1 where we have introduced the standard summation notation (\"\" means by definition). 3 The total inventory-holding cost for the entire planning horizon equals " # " # " 12 j j =1 k =1 1 h j ( xk dk ) ( xk dk ) h1 2 + h2 k =1 " ( xk dk ) +... k =1 # 12 # ( xk dk ) +h12 k =1 = h1 [ x1 d1 ] + h2 [( x1 d1 ) + ( x2 d2 )] + . . . +h12 [( x1 d1 ) + ( x2 d2 ) + + ( x12 d12 )] . Since our goal is to minimize the total production and inventory-holding costs, the objective function can now be stated as # " 12 j j =1 j =1 k =1 c j x j + h j ( xk dk ) Min 3.3 12 . The Constraints Since the production capacity for month j is m j , we require xj mj for j = 1, 2, . . . , 12; and since shortage is not allowed (Assumption 3), we require j ( xk dk ) 0 k =1 for j = 1, 2, . . . , 12. This results in a set of 24 functional constraints. Of course, being production levels, the x j 's should be nonnegative. 3.4 LP Formulation In summary, we have arrived at the following formulation: " Min 12 12 j j =1 j =1 k =1 # c j x j + h j ( xk dk ) Subject to : xj mj f or j = 1, 2, . . . , 12 j ( xk dk ) 0 f or j = 1, 2, . . . , 12 k =1 xj 0 f or j = 1, 2, . . . , 12 . This is a linear program with 12 decision variables, 24 functional constraints, and 12 nonnegativity constraints. In an actual implementation, we need to replace the c j 's, the h j 's, the d j 's, and the m j 's with explicit numerical values. 4 3.5 An Alternative Formulation for Production Planning In the above formulation, the expression for the total inventory-holding cost in the objective function involves a nested sum, which is rather c