supply chain dynamics

10th August 2001 N. R. S. Raghavan, [email protected]

Supply Chain DynamicsSupply Chain Dynamics

N. R. SRINIVASA RAGHAVANAsst. Professor

Department of Management StudiesIISc

[email protected]


IntroductionIntroduction

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


Research in SCMResearch 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)


1. Channel Research1. 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.


Channel Research (contd)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.


Features of PPFeatures 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)


Channel Research: CODPChannel 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 L2REstimated based on expected inventories at echelons given by the inventory control policies

Cost of Lost Sales: increase @ ~20% from R2LEstimated based on given demand distribution and probability of stock outs


2. Research on Collaboration and 2. Research on Collaboration and CoordinationCoordinationBowersox: 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


Research on Collaboration and Research on Collaboration and Coordination (contd)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 ICTSCM/ERP Solutions

B2B Markeplaces

B2C and CRM


3. Location and Control of 3. Location and Control of InventoriesInventoriesHanssmann: 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


Location and Control of Location and Control of Inventories (Contd)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


4. Hierarchical 4. Hierarchical Production/Distribution PlanningProduction/Distribution PlanningHax 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)


Hierarchical Planning (Contd)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 availableEg. A-Teams of IBM


5. Bullwhip Effect in Supply Chains5. Bullwhip Effect in Supply Chains

Forrestor: Industrial Dynamics, HBR, 36:4, 1958First 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


Bullwhip Effect (contd) 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



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


Bullwhip Effect: Some IllustrationsBullwhip Effect: Some Illustrations



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)


Counter-Measures for BWECounter-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


Counter-Measures for BWE (contd)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


Counter-Measures for BWE (contd)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)


The Distribution GameThe 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

supply chain dynamics

Documents

optimal inventory location

serial inventory locations

channel research alderson

manufacturing pp

expected inventories

feasiblechannel research

latest possible point

scnlogistics pp