Supply Chain Dynamics - PowerPoint by fcc15007

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									     Supply Chain Dynamics



                    N. R. SRINIVASA RAGHAVAN
                            Asst. Professor
                   Department of Management Studies
                                  IISc
                     raghavan@mgmt.iisc.ernet.in




10th August 2001                  N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
     Introduction

    Oliver and Webber coined SCM in 1982
    Their Thesis:
      Top Management alone can ensure non-
      conflicting functional objectives along SCN
      An integrated systems strategy be developed and
      implemented
      Coordination of M-I-F flows is challenging yet
      rewarding


10th August 2001           N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
     Research in SCM

Research in Integration and Coordination started much
before 1982:
  Channel Research (Alderson 1957)
  Collaboration and Cooperation (Bowersox 1969)
  Location and Control of Inventories in SCN's
  (Hanssmann 1959)
  Hierarchical Production Planning (Hax and Meal
  1975)
  Bullwhip effect in SCN's (Forrestor 1958)
10th August 2001         N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
     1. Channel Research

Alderson: Market Behavior and Executive Action
(book) 1957: Principles of Postponement
   Product postponement occurs in two ways:
          Manufacturing PP: Changes in form and identity occur @
          the latest possible point in the SCN
          Logistics PP: Changes in inventory location occur @ the
          latest possible point in time
HP Deskjet Printers: Lee et al., Interfaces, 1995.
          Power cords, Voltage requirements, fonts, etc.


10th August 2001                    N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
     Channel Research (contd)

Advantages of PP:
  Hedge against uncertain customer demand
  Reduce inventory holding cost
  Reduce Logistics/Warehousing costs
  Minimize imbalance in stock distribution
  Eliminate stages in Manufacturing
          Eg: packaging, customer does assembly etc.




10th August 2001                   N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
     Features of PP

Loss of Economies of Scale!
Requires quick set ups and agile procurement
Reduced risk of product obsolescence
Requires increased capability to process, transmit, and
deliver orders
Product should be "DFPP"
 (Should be technically and economically feasible)



10th August 2001           N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
     Channel Research: CODP

The location of decoupling point depends on the
product BOM: A, V, X, T
          Relevant more for X and T
Trade-off between:
  Inventory holding costs: increase @ ~20% from L2R
          Estimated based on expected inventories at echelons given
          by the inventory control policies
     Cost of Lost Sales:        increase @ ~20% from R2L
          Estimated based on given demand distribution and
          probability of stock outs

10th August 2001                   N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
2. Research on Collaboration and
Coordination
Bowersox: Physical Distribution Development, J of
Marketing, Vol 33, 1969
Individual objectives of different functional units
within a firm may counteract overall efficiency
          Manufacturing: Long production runs
          Procurement: Lowest procurement costs
          Marketing: FGI Staging and infinite assortments
          Finance: Low inventories
          Logistics: FTL's


10th August 2001                   N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Research on Collaboration and
Coordination (contd)
Tom Malone (MIT, CCS): Computers, Networks, and
the Corporation, Scientific American, 265:3, 1991
   Compares performance of various organization
   structures wrt organizational goals and KPI's
Information Sharing (Transparency) using ICT
          SCM/ERP Solutions
          B2B Markeplaces
          B2C and CRM



10th August 2001              N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
3. Location and Control of
Inventories
Hanssmann: Optimal inventory location and control in
pdn/distbn networks, Mangement Science, 7:4, 1959
Analytical model (DP) of interacting inventories with
three serial inventory locations:
          Each location follows periodic rev, order up to policy
          Lead time is a positive multiple of review period
          Customer demand is Normal
          Trades off shortage costs with inventory holding costs;
          considers revenues as a function of delivery time


10th August 2001                    N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Location and Control of
Inventories (Contd)
Supply Rationing Problem: Given shortage in supplies,
how to allocate stock across echelons
          Threshold policies for high priority customers (Ha 1997)
          Minimize total imbalance in stock distribution s.t. service
          level constraints (Van der Heijden 1997)
Hundreds of articles in various journals including OR,
MS, EJOR, JORS, IJPR, IJPDLM, JOM, etc.
Logistics given scant treatment in IC problems:
assumed deterministic
          Results in failure of such models in practice
10th August 2001                    N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
4. Hierarchical
Production/Distribution Planning
Hax and Meal: Hierarchical integration of production
planning and scheduling, Studies in Management Sc.,
Vol 1, 1975.
          Provide effective decision support for different DM levels
          within a hierarchical organization
Based on the following scheme:
          Decompose to get hierarchical structure (Stgc-Tac-Opn)
          Do Aggregation where possible (eg. Forecasts: agg. on
          time,products,markets; Capacity: agg. On resources)
          Hierarchical coordination (by setting targets+getting f/b)

10th August 2001                    N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Hierarchical Planning (Contd)
Other elements:
          Model building for each decision unit using a mathematical
          model (ILP/DP/QN/PN) keeping solvability in mind
          Model solving: Solution procedure detailed to get the plan
Cohen and Lee, OR 1989: Solved an integrated
inventory/production/distribution model hierarchically
Software Agent based frameworks available
          Eg. A-Teams of IBM



10th August 2001                   N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
5. Bullwhip Effect in Supply Chains
Forrestor: Industrial Dynamics, HBR, 36:4, 1958
          First research paper to illustrate systems dynamics in SCN's
          Base for developing Distribution Games
          "BWE" coined by P&G
BWE describes the increasing amplification of orders
occuring within a SC
          Resembles a whip lash
Occurs even if end-item demand is fairly stable!
          Forrestor studied a simulation model of the simplest tandem
          supply chain with four entities: Retailer, DC, W/H, Plant

10th August 2001                    N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect (contd)
Assumptions of Forrestor's model:
          Each entity can make use of only locally available info
          Time delays between ordering and receipt of order
          It takes 3 weeks for retailer to process the order, half a week
          to transmit it to DC
          The DC takes 1 week to process the order and one week to
          ship to the retailer, who takes one week to ship to end
          customer; assumptions for other entities likewise..
To study impact of a one time +10% change in retail
sales on orders placed and inventory levels

10th August 2001                     N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect (contd)
Forrestor's results:
  "...A sudden 10% increase in retail sales implies a
  peaking of 34% on orders @ 14th week in factory
  w/h, resulting in factory output peaking in 21st week
  (including a 6 week lead time) by a whopping 45%.."
Amplified and out of phase fluctuations in ordering
and inventory levels
          Avoidable inventory and shortage costs; Unstable system
RELEVANT EVEN TODAY!
                   Replace week by day in the above analysis

10th August 2001                        N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect: Some Illustrations




10th August 2001   N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect: Some Illustrations




10th August 2001   N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect (contd)
Causes of BWE: (Empirical: Lee et al: 1997;
Analytical: Chen et al: 2000)
  Demand Signal Processing (frequent updates of
  forecasts; only next echelon orders considered)
  Order Batching (to realise logistics EoS+Reducing
  order processing costs)
  Price Fluctuations (resulting in over-reactions)
  Supply Rationing (Proportionate rationing;
  unrestricted order acceptance+free return policy)

10th August 2001          N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Counter-Measures for BWE
Avoid multiple demand forecasts
  Order based on ultimate customer demand
  Use EDI+POS+VMI
  Choose a good forecasting method (PLC has a major
  say)
  Move from decentralized DM to centralized planning
  (visibility+control is better)
  Remove layers in channel if possible
Eg: HP, Apple, IBM, P&G/Walmart
10th August 2001         N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Counter-Measures for BWE (contd)
Break order batches
  Increase frequency of ordering (OP costs reduced by
  EDI)
  Resort to standardization to minmize OP costs
  Use 3PL to make small batch replenishments
  economical
  Aggregate across retail outlets to utilize FTL EoS
  Reduce safety stocks by cutting lead times
Eg: 3PL using Fedex, P&G
10th August 2001          N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Counter-Measures for BWE (contd)
Stabilize prices
   EDLP (P&G)
   Special purchase contracts
Eliminate shortage gaming
   Allocate based on past sales (Sun)
   Share capacity and information (HP, Motorola)
   Limit flexibility wrt time (HP, Seagate)



10th August 2001          N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
The Distribution Game
Sterman: Modeling managerial behavior-
Misperceptions of f/b in a dynamic DM expt,
Management Science, 35:3, 1989
   "Beer Distribution Game"
   Bounded rationality depicts decision makers
   Orders based on current inventory status, amount
   ordered by direct successors, past performance
   Over-reaction; increases steadily towards u/s end of
   SCN

10th August 2001           N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in

								
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