risk pooling –“theory”eclt5940/protected/risk_pool.pdf · 2010-11-25 · risk pooling...
TRANSCRIPT
Risk Pooling
• Risk Pooling – “Theory”
• Applications
– Differentiation Postponement/Delay
– Location, …
– Read 11.4 (“Impact of Aggregation …”)
1. On page 1, it said “We can’t run our business with this level of unproductive
assets.” What are these assets?
2. What is “the I-word” referred to?
3. Is the ink-jet printer a commodity or fashionable product?
4. At the European DC, did HP have too much stock or too little stock?
5. What were the symptoms of the problem in the European DC?
6. When customers buy ink-jet printers, is brand/product loyalty playing an
important factor in their choosing which products to buy?
7. How did the Vancouver Division impress visitors? Was the line suitable for high
volume or low volume production? Why?
8. Were Ink-Jet Printers completely built in the Vancouver factory? Can a printer
that was built for the Germany market be directly sold in Italy market? Why? Be
precise.
9. What were the performance evaluation criteria for European DC? Should the DC
manager be concerned about the inventory level?
10. What were the alternatives for resolving the inventory and service crisis?
HP Case - handed out – preparation questions
Coefficient of Variation
CV = Standard Dev / Average demand
Demand series 1: CV1 = 0.5
Demand series 2: CV2 = 2.0
Which is more volatile?
Risk Pooling
• Which sales are more volatile: the regional
sales or sales at the store level?
• Which demand is more volatile : a family
of products or individual members of the
family?
• Do people wait longer in a multiple-
waiting-lines system than a single-waiting-
line system?
• Implication for forecasting ?
Family vs. Individual Products
Time
Sales
A
B
C
N
Family vs. Individual Products
Model Mean Stdv CV
X 42 32 0.78
XX 420 203 0.46
XY 15,830 5,624 0.36
XH 2,301 1,168 0.51
XC 4,208 2,204 0.52
XY 309 103 0.34
Total 23,109 6,244 0.27
Pooling, Profit & Service Level
(An Example)
• Two products (paints) differ only in colour
• It is fast to mix to the required colour upon
receiving orders
• Assume that the demand for each follows a
distribution given by tossing a dice
An Example
• Alternative I: Make to Stock
• Alternative II: Make to Order (for colouring
only)
• Order-up-to inventory replenishment policy
• One season, c=$2.5, p=$12.5, s=0
For Alternative I: 5 units for each
• For Alternative II: ?
Preliminary Calculations
1 2 3 4 5 6
1 1,1 x
2 x
3 x
4 4,3 4,5 x
5 5,4 5,5 x
6 x x x x x xChance of stockout?
Preliminary Calculations
If D1=4, D2 =5, profit = ?;
If D1=6, D2=4, profit = ?.
1 2 3 4 5 6
1 1,1 x
2 x
3 x
4 4,3 4,5 x
5 5,4 5,5 x
6 x x x x x x
Preliminary Calculations
If D1=4, D2 =5, profit = 90-2.5 = 87.5; If D1=6, D2=4,
profit = 90-2.5 = 87.5. If D1=2, D2=6, profit=70-7.5=62.5
1 2 3 4 5 6
1 1,1 x
2 x
3 x
4 4,3 4,5 x
5 5,4 5,5 x
6 x x x x x x
• Holding 10 units of “generic” colour -
pigment, the chance of stocking out in a
period is only
3/36 = 1/12 = 0.083
The “risk” of disservice is lowered.
• Even holding 9 units, a higher level of
“service” will be achieved (as compared with
Alternative 1)
Preliminary Calculations
1 2 3 4 5 6
1 2 3 4 5 6 7
2 3 4 5 6 7 8
3 4 5 6 7 8 9
4 5 6 7 8 9 10
5 6 7 8 9 10 11
6 7 8 9 10 11 12
If D1=4, D2 =5, profit = 90-2.5 = 87.5;
If D1=6, D2=4, profit = ? If D1=2, D2=6, profit?
Preliminary Calculations
1 2 3 4 5 6
1 2 3 4 5 6 7
2 3 4 5 6 7 8
3 4 5 6 7 8 9
4 5 6 7 8 9 10
5 6 7 8 9 10 11
6 7 8 9 10 11 12
If D1=4, D2 =5, profit = 90-2.5 = 87.5; If D1=6, D2=4,
profit = 100. If D1=2, D2=6, profit=80-5=75.
Additional cost?
1 2 3 4 5 6
1 2 3 4 5 6 7 8 9 10 11 12
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
“Theory”
,1|| general,In )(
,1 If )(
,1 If )(
,0 If )(
2)(
)( , Let
, Stdv
,Mean
, :products Two
2221
21
2121
21
21
21
d
c
b
a
xVar
xmeanxxx
xx
Why?
Negative
correlation
Why?
Positive
correlation
Why?
No correlation
Sub-summary
• Pooling allows excess demand of one
product to cancel insufficient demand of
another ==> increase service level / reduce
inventory
• Pooling allows excess demand of one
location to cancel insufficient demand of
another ==> increase service level / reduce
inventory
Implications?
• Variety is the “culprit” of high forecasting
errors, and higher forecasting accuracy can be
achieved if only a few varieties are offered
• Since we can not reduce them, we must find a
way to get around
– By postponing mass customisation
– By redesigning the product
• Universal products and common parts
(modules)
Product Variety Proliferation
• Product proliferation exists in various
forms
– global mkt: “protocols”, languages, phases,
elec.
– local mkt: multiple models differ in features &
capacities
– mkting strategies
• Marketing strategy is the major reason
The world of The Long Tail
Product variety is increasing
• Crest toothpastes have 35 options
(flavors and package sizes)
• HP workstations have 500,000 options
(RAM cards, video cards, graphic cards,
monitors, disk drives, etc..)
• GM cars have 20,000,000 versions (color,
interior combinations, drive train
configurations, and option choices)
Pitfalls of increasing product variety
Demand may not increase
total demand spread over more SKUs
Forecasting nightmare
High manufacturing cost
High inventory cost
Poor availability of product to customers
Product support and service costs
“Mark-down” sales at the end of product life
Risk pooling strategies
• The objective of a risk pooling strategy is to redesign the supply chain,
the production process or the product to either reduce the uncertainty
the firm faces or to hedge uncertainty so that the firm is in a better
position to mitigate the consequence of uncertainty.
• Four versions of risking pooling:
– product pooling -- delayed differentiation/postponement
– location pooling
– lead time pooling
• delayed differentiation (HP case)
• consolidated distribution
– capacity pooling
14-27
Postponement
• Key idea - postpone the commitment of WIP into a particular finished product –SKU
• Delay of product differentiation closer to time of sale.
• Prior to point of postponement, only certain degree of aggregate forecast needed
• Individual forecasts more accurate close to time of sale
Postponement Concepts
• Mainly two forms
– Logistics Postponement: moving customisation point
closer to customers - out of mgr functions
– Form Postponement: delaying differentiation point by
standardisation or process re-sequencing
Logistics Postponement
Manufac- Integra- Customi- Locali- Pack-
turing tion sition tion ing
Supply Chain Process
Distribution Centers
Factory
Logistic Postponement by Process
Resequencing: Paint Retail
Colour pigments,
paint mixing,
packaging
Retail sales
Colour pigments,
white paint
Retail sales,
paint mixing
packaging
Nippon: combined
Before module design of the
metal frame
Integration+ship DC
DC+ pannel assembly
Fib
Fab.
Black
White
Black
WhiteIntegration+ship
Dishwasher
Operations Buffer
Log PP: More Examples
• Rheem Manufacturing Co., kept 120 SKUs (heaters)
at its factory. Some were overstocked while other
fall short - only different in several elements
– Using a 3rd party to hold around 10 basic models
and parts
– Filling orders in hours and saving 15% of
inventory cost
• Even Coffee Rosters use it
• Of course, PC mfgrs apply it
• Some done by customers. More real life examples?
Reebok (2006)
• Demand for jerseys averages 30,000 per week or 1.5
million each year. The different choices of team name,
player name, color scheme, and size makes it extremely
difficult to predict demand of an individual item during the
pre-season.
• At a price of $25 for a long-sleeve t-shirt or $250 for an
authentic jersey, the cost of lost sales is greater than the
cost to ship, unpack, finish and reship a jersey from a local
finishing center.
• The blank jerseys arrive in the US and are ready for screen
printing and embroidering at Reebok DC
PC: indirect model (traditional)
Suppliers
VARsMfr factory Distribution
Centers
Distributor Customers
PC
CompanyOrders
Product
Configuration:
Disk, memory...
Hybrid Model
Suppliers
VARsFactory: core Distribution
Centers
Distributor Customers
PC
CompanyOrders
Product
Assembly
+Configuration
Other examples of delayed
differentiation
• Private label soup manufacturer:
– Problem: many different private labels (Giant, Kroger, A&P, etc)
– Solution: Hold inventory in cans without labels, add label only
when demand is realized.
• Black and Decker:
– Sell the same drill to different retailers that want different
packaging.
– Store drills and package only when demand is realized.
• Nokia:
– Customers want different color phones.
– Design the product so that color plates can be added quickly and
locally. 14-38
HP Case
Form Postponementby Common Part
Before After
Sometimes called
standardization
PCA FA&T Customizatio
PCA FA&T
Customization
Operations Buffer
Mono
Color
Mono
Color
Mono/Color Printers
Form Postponement by Process Reengineering
PCB Insertion
Series of tests and burn-in
Coupon PCB
Common
tests
Customisation
tests
The US company:
design and
distribution
How to Fulfill Orders?
滿足客戶定單的模式?
• New or low demand products - MTO
• Mature products, several of them sharing a few
core components,high total vol. -ATO
• Mature products, high vol., without common
cores -- MTS“Divide and
conquer”
Several A+B+C products share a
core component核心基件
某核心件
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
XYZ101
ABC203
IWV-0091
XYB-01
Total/sum
US DCsell-thru
CV of SKU’s: 0.75-1.34, while CV of agg. ~ 0.72
Benetton: Process Reengineering Benetton: Process Reengineering
Purchase Yarn
Dye Yarn
Finish Yarn
Knit Garment Parts
Join Parts
Old Sequence
Purchase Yarn
Knit Garment Parts
Join Parts
Dye Garment
Finish Garment
New Sequence
This process
is postponed
Example: BenettonExample: Benetton• A world leader in knitwear
Dyeing vats for the finished knitted product. Wool Plant in Castrette, near Treviso. Knitting
division. Computerized knitting loom capable of
automatically producing the most complex product
designs
Knitting Dyeing
Process Redesign for Supply Chain:Process Redesign for Supply Chain:
Postponement at BenettonPostponement at Benetton
dye
knit
Dyeing
operations
postponed
Dye yarn only after the season’s fashion preferences become more
established (knit lead-time much longer than dyeing lead-time).
Example: single product; four colors
knit
dye
Outcome: Reduces demand uncertainty & inventoryOutcome: Reduces demand uncertainty & inventory
Modular vs. Integral DesignModular vs. Integral Design
One-to-one mapping between functional elements and components
One-to-one mapping between functional elements and components
Interfaces between components not coupled
Complex mapping from functional elements to components
Complex mapping from functional elements to components
Interfaces between components are coupled
Modular design
Integral design
integralmodular
Why is Modular Design Preferred?Why is Modular Design Preferred?
• Example: Chrysler (2000?)
It needs to renew its Durango and Cherokee lines.
Currently, each car has very little component commonality with the other,
since both use integral designs. Chrysler is considering a modular platform
design, in which 60% of the components, in terms of dollar value (chassis,
transmission, underbody, etc.) are common to the new Cherokee and
Durango.
Suppose the monthly demand for the Cherokee, in 000s, N(50,202), for the
Durango is N(40,202). Assume
US$15,000/car to manufacture, and that lead-time across components is
constant at one month (for simplicity). Consider annual holding cost of a
component to be 12% of the component value. Assume a 95% CSL.
Illustration of Chrysler Product Illustration of Chrysler Product
StrategiesStrategies
Current:
Integral
Designs
Proposed:
Modular
Design
Solution to the Chrysler ExampleSolution to the Chrysler Example
Integral Design:
50, 20, 40, 20, 1, 1.64C C D DAVG STD AVG STD L z
2 2
CSafety stock = 1.64 20 (1) 33Cz STD L
2 2
DSafety stock 1.64 20 (1) 33z STD L
Total safety stock: 33 + 33 = 66
Modular Design: 250 40 90, 2 20 28.3AVG STD
2 2Safety stock = 1.64 28.3 (1) 46.4z STD L
Monthly inventory holding cost savings = (66-46.4)*15,000*0.60*(0.12/12) =1,764 (in 000s),
or US$ 21 million per year!
Downside-effect!
External/internal commonality
Postponement Driver 1:
Product Life Cycle
Value of
Postponement
Time
Ramp-up On-going End-of-Life
Fcst Error
Invent. Risk
Shortage Cost
High Lower High
Low Medium High
High Lower Low
When is PP Valuable?
Postponement Value &
Product Life
Total Value of
Postponement
Life Length of Product
Postponement Driver 2:
Demand Forecast Uncertainty
Uncertainty Postponement Value
Demand Higher for higher
Variability variability
Option Higher if negative;
Correlation lower if strongly positive
Forecast Horizon Higher for longer horizon
Demand correlation
• Correlation refers
to how one random
variable’s outcome
tends to be related
to another random
variable’s
outcome.0
2
4
6
8
10
12
14
16
18
20
0 5 10 15 20
0
2
4
6
8
10
12
14
16
18
20
0 5 10 15 20
0
2
4
6
8
10
12
14
16
18
20
0 5 10 15 20
Random demand for two products (x-axis
is product 1, y-axis is product 2). In
scenario 1 (upper left graph) the
correlation is 0, in scenario 2 (upper right
graph) the correlation is -0.9 and in
scenario 3 (the lower graph) the
correlation is 0.90. In all scenarios
demand is Normally distributed for each
product with mean 10 and standard
deviation 3.14-57
Limitations of product
pooling/universal design
• A universal design may not provide key functionality to consumers with
special needs:
– High end road bikes need to be light, high end mountain bikes need to be
durable. It is hard to make a single bike that performs equally well in both
settings.
• A universal design may be more expensive to produce because additional
functionality may require additional components.
• But a universal design may be less expensive to produce/procure because each
component is needed in a larger volume.
• A universal design may eliminate brand/price segmentation opportunities:
– There may be a need to have different brands (e.g., Lexus vs Toyota) and
different prices to cater to different segments.
14-58
Summary: When is PP
Valuable?
• A lot of varieties
• Demand uncertainties over the variety are high
– Negatively correlated, ?
– Positively correlated, ?
• Differentiation is not too costly to perform locally, or
not time consuming
• The “core components” have high value, but
differentiating parts are of low value
Common ObstaclesCommon Obstacles
• Though often design changes do not cost much, people
resist their implementation
• As production cost may increase, prod. people may oppose
to changes
• They also pose challenges to designers
• Indirect cost savings and intangible benefits
No beyond !
Product versioning
• When pure group pricing is infeasible, firms use other
strategies to differentiate prices. The most notable of these
is designing or developing goods (services, virtual or real)
that may have only minor differences but enable the seller
to exploit diff in price sensitivity among consumers
• Inferior/superior variants
• Inferior goods
– Shell, Modil/Exxon sell excess petro at lower prices to “no-brand”
independent dealers who use their own brands
– Many brand-names sell to “President’s Choice” /Park’n Shop’s
brand
Inferior goods (continued)
Damaged goods – e.g., some stores want to get rid of some stuff by
discount, but … Then, they “damage” them, …
degrading, or disabling a standard good to sell low
Intel: 486SX processor began with 486DX -- full
functioning processor, then dsabled the math co-
processor, to produce a chip is inferior, but more
expensive to produce (1991, DX/SX $588/333); many
software packages come with “professional, educational,
…” versions, most just like “chips”
The concept of damaging” a good seems somewhat
bizarre. However, it works
Superior goods: the recent example: Mengniu Milk
Product line extensions – inferior + superior extensions
PC/Notebooks: 98-99% of the parts/software installed the same:
diff performance – vertical lines
Horizontal line -- Coca-Cola: Classical Coke, Diet Coke, Cherry
Coke, … the same price
QuickBooks (Intuit) Price
Basic edition $199.95
Pro 299.95
Premier 299.95
Enterprise 3,500
Pro-edition: “all the features of basic plus
“advanced tools and customerison options to
boost efficiency/accuracy”; Premier –”Pro +
comprehensive tools for greater insight into
your biz”; Enterprise – “Our most
comprehensive biz mgmt tool for growing biz,
with all the features of Pro & Premier.” In all
likelihood, a tiny diff…
Postponement Driver 1:
Product Life Cycle
Value of
Postponement
Time
Ramp-up On-going End-of-Life
Fcst Error
Invent. Risk
Shortage Cost
High Lower High
Low Medium High
High Lower Low
Postponement Value &
Product Life
Total Value of
Postponement
Life Length of Product
Postponement Driver 2:
Demand Forecast Uncertainty
Uncertainty Postponement Value
Demand Higher for higher
Variability variability
Option Higher if negative;
Correlation lower if strongly positive
Forecast Horizon Higher for longer horizon
Initial forecast
• Inaccurate
• Over-estimate
Sport Obermayer: Revisited
Demand Forecast
Demand Forecast
Forecast incorporated
with first 20% of sales
data
• Relatively accurate
forecast
• Allows a better
prediction of the actual
demand
Demand Forecast
Forecast incorporated
with first 80% of sales
data
• Data obtained after the
Las Vegas show
• Very close to the actual
demand
Accurate ResponseAccurate Response
• AR: an approach to the entire forecasting,
planning, and production process
• AR is a risk-based production sequencing
strategy whereby production of low-risk
products employs speculative prod. capacity
and prod. of higher-risk products is postponed
until additional mkt inform. has been
gathered.
Accurate ResponseAccurate Response
• Applicable to the context of limited capacity and min.
lot size
Time
Time to Retail
Trad. Dolls New Dolls
Accurate ResponseAccurate Response
• Product portfolio consists of two types:
– Items that are fairly predictable or costs with forecasting errors are relatively lower
– Those whose forecasting is based on gambling
• Those in relatively predictable category sh’d be made the furthest in advance in order to reserve greater mfg cap. for making unpredictable items closer to the selling season
• This planning strategy allows companies to make smaller quant. of the unpredictable products in advance, see how well diff. items fare early in the selling season
Accurate ResponseAccurate Response
• Using the production capacity at early stage to fairly predictable items and then 100% to least predictable ones -- risk based prod. Sequencing– Classifying two types of categories - maybe just one
– Identifying demand “indicators” to improve forecast
– Instituting a system for tracking forecasting error
• When the forecast was made, on what inform. it was based, and its level of detail (SKU or agg.)?
– Examples
• Sports Obermeyer
• National Bicycle (Japan)
Summary
• Risk-based SC planning: what is low-risk or
high-risk product? All else being equal,
– Product price
– Uncertainty
– Expected demand quantity
• Min order quantity
– Category 1: expected demand > 2 times of min Q
– Category 2: less than min Q
– Category 3: in between
Summary
• Above are “passive” approach
• Operational changes
– Generic components, holding certain materials and
components can reduce SC costs
– Min. order quantity
– Reactive cap.
– Materials lead times
– Material commonality to improve flexibility
– Obtaining market info earlier?
• Similarities/dis-similarities between SO & LF?
Summary
• Intelligent forecast process
– obtain early signal
– forecast uncertainty as input for prod. planning
– forecast update
• Power of risk-based prod planning
• Use inventory to establish de-coupling point in supply chain
• Material commonality to improve flexibility