Supply Chain Design & Management Exams

What is the Newsvendor Model?

A single period model where a manager considers a product with variable demand during a short selling season. The manager must balance the costs of ordering too little against the costs of ordering too much. Examples: - Manufacturers having to choose capacity before the launch of a new product, knowing that the new product will become obsolete quickly. - Fashion apparel retailers. - Retailers with special promotions.

What are Environmental Responsibilities?

Addresses the ecological needs of the planet and the firm's stewardship of the natural resources used in the production of services and products. Leave as small an environmental footprint as possible so that future generations can make use of abundant natural resources.

Agree/Disagree: All customers are not created equal

Agree - customers have different needs. Segment them to best support them.

How do we choose an inventory model?

Can we replenish inventory? - No: Use single-period model (Newsvendor) - Yes: Use Multi-period model and continue What is the replenishment trigger? - Inventory model: Use continuous review model - Time period: Use periodic review model

EOQ Model: What are the Values? What is Q*? What is Carrying Cost? What is Ordering Cost? What is Total Cost?

D = Constant Demand Q = Order Quantity K = Ordering Cost h = Inventory Cost per item per unit time Q* = SQRT(2KD/h) CC = Qh/2 OC = DK/Q TC = (Qh/2) + (DK/Q)

Changing How We Analyze Data: Big Data / Analytics

Data often collected in real time. Designed to sense and respond to changes in the business & its environment. Involves the use of mathematical techniques to understand large data sets to identify relationships and patterns that may have been previously unknown.

Suggestions for Pruning a Product Portfolio

Depend on data; do not ask customers! (Loaded question? Mistaken emotional response?) Classify products into tiers: core, niche, seasonal, holiday, filler (accounts for a large % of products, but a small % of sales). Place absolute limits on the number of products you offer Implement mass customization (i.e., build products after customer order them) Focus on product integration that benefits the customer (instead of product variety) Make sure product developers work closely with operational and customer-facing employees

What is Logistics Enhancement?

Design / re-design products and packaging to improve density factor and size, as well as "optimizing" number of pallets per load Ideally want to design something Ex. Xerox couldn't store two large copiers atop each other during shipping. They had to redesign the copier to fit as they desired.

What is the Coefficient of Variation?

standard deviation/mean The larger a coefficient of variation is, the larger the variability is

It May be Cheaper to Manufacture at Home

•When designing supply chains, managers usually rely on the discounted cash flow model to evaluate alternatives. However, this approach typically undervalues flexibility. •Thus, companies may end up with supply chains that are lean and low cost under normal circumstances, yet extremely expensive if the unexpected occurs. •Need for flexibility has risen due to increases in the volatility of demand volume, demand mix, transportation and labor costs, commodity prices, etc. Flexibility is NOT free, but it turns out that even a small amount of flexibility can provide almost all the benefits of full flexibility

How do you calculate a Z value given a service rate?

Find the Z value for the service rate minus 0.5 The service rate is Z sd's above the average

3 R's Examples

Reduce examples: -Coca-Cola redesign Dasani bottle to reduce 30% weight -Park Plaza Boston and others eliminate bar soap and install dispenser Reuse / Remanufacture examples: -Caterpillar remanufactures 2 million engines, hydraulics and drivetrain (140 million pounds annually) -Xerox remanufacturers toner cartridges

What is the Bullwhip Effect?

(The increase in variability as one travels up in the supply chain) Suppliers and retailers have observed that while customer demand for specific products is fairly stable, inventory and back-order levels fluctuate significantly across their supply chain. •Example: Pampers Diapers Supply Chain

What does a S&OP process need to be successful?

- All the key players to be on board, serious, prepared, and educated - Need a champion / coordinator - Create S&OP calendar (key players need to show up prepared) - Design the S&OP document: tools to use, level of detail, agree on basic definitions --- When is a shipment, a shipment? --- What compromises backlogs? --- When is production, production? --- When is finished goods, finished goods? - Define the performance metrics - Design / Refine / Document the process steps Link S&OP to ERP

What are some managerial challenges to using AI in demand forecasting?

- Availability and accuracy of data - Availability of external data in the form of market intelligence - One-off events - Resistance to using existing statistical tools - Correctly interpreting the data

What are some Stockout Costs?

- Lost sales - Lost customers - Back order costs

Recommended Strategies to Mitigate Supply Chain Disruptions

1. Mapping & monitoring supply network Identify the location of tier-1 & tier-2 suppliers, examine inbound/outbound product flows Monitor suppliers & qualify alternative suppliers for mission critical parts 2. Diversify supply base & build better relationships Global suppliers from multiple regions, ideally with at least one based in the home country to protect against border closures 3. Build redundancy in the supply chain / Employ Segmentation Redundancy is counterintuitive for most supply chain professionals; need to change incentives! Tailoring inventory strategy & Strategic positioning of safety stocks in a supply chain can provide more resiliency, without incurring exuberant costs 4. Achieve network agility (Maintain capacity cushions) Setting up alternative manufacturing sites and assembly nodes 5. Utilizing technology solutions to improve supply chain resiliency at low cost Toyota has pursued some of the above strategies as it became more risk averse to supply disruptions after 2011 Tsunami...

Strategies to Consider

1. Segment the Demand Chain -Source low-margin products in low-cost regions, while higher-margin products with high demand variability close to the ultimate point of use and/or secure the fastest shipping & handling for the highest margin/most variable products 2. Reduce Transportation Content -Use facilities near ports to perform value-added services such as cross-docking (e.g., Home Depot & Wal-Mart have built large warehouse facilities in Savannah, GA) -Consider point-to-point ocean shipping -Explore other alternatives (e.g., air freight- costly but reducing lead time) 3. Use Transportation More Efficiently -Seek larger consolidated shipments -Smoothing demand to secure lower cost capacity -Make freight easier to handle & reduce carrier dock costs (e.g., well labeled, matching freight & paperwork, reduce "airspace") 4. Invest in Premiums Capabilities -Seek preferred treatment from shippers or port service providers (e.g., load last, unload first, offload containers directly into rail cars) -Obtain/maintain C-TPAT (Customs-Trade Partnership Against Terrorism) certification to demonstrate the integrity of security practices and receive expedited processing at U.S. ports. -"Safe Framework of Standards" (adopted in 2005 by World Customs Organization) is a voluntary initiative for participants who meet minimum security criteria, providing a company with expedited processing worldwide. 5. Bring Manufacturing Home ("reshoring", "onshoring", "rural sourcing", "rural outsourcing", etc.) -GM announced plans to shift approximately 600 jobs from a production facility in Mexico to Arlington, TX (24/7 Wall St., June 27, 2018) -Ford moved manufacturing of F-650 & F-750 trucks from Mexico to Avon Lake, Ohio, and Ecoboost Engines from Spain to Cleveland (USA Today, Apr. 23, 2016) According to recent CSCMP surveys: concerned about rising costs, longer lead times, and quality/safety issues nearly half of the supply chain professionals are considering sourcing closer to home.

** Possible Solutions

1.Activity-based costing (ABC): Traces costs to activities performed and then relates them to specific product or customer segment that generate revenue. -Identifying the activities, related expenses, and the drivers of expenses represent the biggest challenges in the ABC approach. 2.Comprehensive supply chain metrics: - Cash-to-cash cycle time: time required to convert a dollar spent on inventory into a dollar collected from sales revenue- impacted by logistics, operations, marketing (i.e., pricing and terms of sale), procurement (supplier pricing and terms), etc. Days Sales Outstanding + Days Inventory Held - Days Payable Outstanding

Major Challenges in Supply Chain Integration

1.Many supply chain related expenses cut across organizational units 2.Traditional accounting practice fails to assign appropriate inventory carrying costs 3.Two largest individual expenses (i.e., transportation & inventory) are generally reported in a manner that obscures their importance rather than highlight them (e.g., transp. costs/mile, warehouse picking expense, etc.) 4. Companies focus on what they can see & measure rather than what is relatively invisible and hard to measure (e.g., lost revenue does not show up on the income statement, thus companies tend to focus on supply chain solutions that are slow and cheap rather than fast and more expensive).

Primary Reasons for Rethinking Supply Chain Strategies

1.Shrinking East Asia's cost advantage 2.Advances in manufacturing technology shrinking global manufacturing cost differentials / accelerating localization of supply chains 3.A shift towards protectionism, creating unprecedented level of uncertainty about trade policies

Seven SC Principles to Understand

1.Supply chains have more moving parts and layers than you probably imagine. 2.Sudden spikes in demand can be easily misread. 3.Because demand is hard to predict, many companies turned to just-in-time production. Which can work fine, sometimes. 4.Ordering more than you actually need makes shortages worse. 5.The longer the distribution chain, the more susceptible it is to disruption. 6.Congestion removes capacity from the system. 7.Bottlenecks are hard to spot because so few can see the whole picture.

What is Postponement Strategy?

A form of Risk Pooling. The undifferentiated product is built based on long-term forecasts (i.e., push strategy), but differentiation occurs in response to market demand (i.e., pull strategy). Postponement is an underutilized, but effective supply chain strategy (Oracle and Ernst & Young survey): - According to a survey, in 5 years 47% of manufacturers will produce modular platforms centrally, while using small local factories, suppliers and distributors to tailor final products for local demand (SCMR) - 91% of the survey respondents who have implemented postponement strategies noted "significant improvement" in customer satisfaction

Outsourcing Spectrum: Make vs Buy

A major simplifying assumption is that sourcing can be treated as either make or buy. However, actual sourcing relationships are more complex. Also, the sourcing decision requires careful evaluation of every component part, not just the finished product. 1.Make: full control over all aspects of the supply chain in-house 2.Virtual Factory ("I manage my product on my line in your factory"): outsource direct labor & facility 3.Mixed ("you manage my product on my line in your factory"): outsource direct labor, facility, production engineering & materials 4.Manufacturing Service ("you manage my product on your line in your factory"): outsource direct labor, facility, production engineering, materials, equipment & process design 5.Original Device Manufacturing ("you manage your product on your line in your factory"): outsource direct labor, facility, production engineering, materials, equipment, process design & product design 6.Buy: outsourcing all aspects of the supply chain

Changing How We Make Decisions: AI / Machine Learning

AI should be utilized to drive improvements in the KPIs that are critical to the success of the supply chain organization- rather than a panacea that will magically transform the supply chain. AI has the most significant impact when it augments human workers instead of replacing them (people needed to train machines, explain their outputs & ensure their responsible use). Machine learning is a type of AI which explores ways to enable computer programs to improve their output based on learning from data inputs.

How do you calculate annual ordering cost? How do you calculate annual carrying / holding cost? How do you calculate total annual cost?

AOC = # of orders per year x cost of 1 order ACC = (Order Quantity / 2)* x unit cost x carrying cost TAC = AOC + ACC * Ave Inventory = Order Quantity / 2

Outsourcing

An "easy way" to increase profits (?) Nike, Cisco, Apple, etc. outsource most of their manufacturing -Each primarily focuses on research, marketing -Each has gotten into trouble: -Nike reported unexpected profit shortfalls due to inventory problems - Cisco had to write down $ 2.25 billion in obsolete inventory -Apple was charged with poor working condition of its contract manufacturers' labor

How are Service Level and Inventory Level affected by Lead Time?

As lead time increases, the inventory level required to achieve a particular service level will increase as well.

Complexity of Global Supply Chains

Auto manufacturers: Average of 250 tier-1 suppliers; 18,000 across all tiers Aerospace manufacturers: Average of 200 tier-1 suppliers; 12,000 across all tiers Technology companies: Average of 125 tier-1 suppliers; 7,000 across all tiers

Challenges Facing Blockchain Adoption

Bad data (inaccurate, missing, not timely) Building trust within the supply network to adopt and agree on standards Governance of the technology (in a distributed model, no one party is responsible for the system - all are) Laws and regulations

What is the key activity of S&OP?

Balancing demand (orders / forecast) and supply (inventory / capacity).

Outsourcing Benefits and Risks

Benefits: -Economies of scale reduce manufacturing costs (e.g., Xerox) -Risk pooling - lower demand uncertainties due to aggregation (e.g., Flextronics) -Reduced capital investment / shorten time to market (e.g., Boeing) -Focus on core competencies (e.g., Nike) -Increase flexibility & strengthen global footprint (e.g., Toyota) -Gain access to and leverage each other's value chains to enter new business segments (e.g., Philips & Sara Lee: cup-by-cup coffee maker) Risks: -Loss of competitive knowledge -"Developing" a potential competitor -Potential responsibility for labor and/or environmental performance problems of outsourcing partners

How is Zara an example of a Winning Supply Chain?

Brings thousands of new items to market each year, generally with a 2-3 week lead time Managers send customers feedback to in-house designers via handheld devices Acquire fabric in only 4 colors and postpone dyeing and printing Reduced inventory, obsolescence costs, and high service levels Focus on "system optimization" vs "local optimization"

How is a Probabilistic Forecast turned into Average Demand?

Calculate the weighted average of the probabilistic forecast.

What are three types of Inventory Costs?

Carrying / Holding Costs Ordering / Setup / Fixed Costs Stockout Costs

What are some environmental supply chain solutions?

Closed-loop supply chain -Reverse logistics -- Convenient collection -- Efficient reverse transportation -- Return processing -3 Rs: Reduce, Reuse / Remanufacture, Recycle Logistics efficiency

Efficient Reverse Transportation

Compress items together to transport them easier (ex. garbage cubes)

Example Case Study: Strategic Positioning of Safety Stocks

Contract manufacturer of circuit boards and other high-tech parts (2,700 high-value products; short life cycles) Competitive pressures to commit to short lead times (much shorter than manufacturing lead time) Kept inventory of finished products for many of its SKUs Managed its supply chain based on long-term forecasts (push based or make-to-stock strategy) Huge financial and shortage risks Focused on developing a new hybrid SC strategy (i.e., Push/Pull strategy ) with the following objectives: -Reducing inventory and financial risks -Providing customers with competitive lead times & high service levels

Costs & Benefits of Analytics

Costs: -Can be very expensive- data collection, secure data delivery, analysis software, human capital, interpretation & communications. -Unavailable, inaccurate & lack of timely data make the best data analytics tool ineffective. -Can take a long time to implement. Benefits: -More informed, more accurate & faster decision making. -Can provide visibility that helps solve problems. -Can improve margins through lower costs, shorter time to market, better customer satisfaction & reduce errors. -Can lead to innovative insights on products & processes.

What is Risk Pooling? For the same service level (fill rate), which system will require less inventory? Why? What are the other trade-offs?

Demand variability is reduced if one aggregates demand across products, locations, time, etc. A supplier that supplies two warehouses that each support a market can be switched to just one warehouse that supports both markets. For the same service level, the system with one warehouse will require less inventory. Above-average demand in one market could be offset by below-average demand in the other market. Trade Offs: - Fixed / Ordering Cost - Better in Sys 2 - Inbound Transportation Cost - Better in Sys 2 - Outbound Transportation Cost - Better in Sys 1

Supply Chains are More Vulnerable Than Ever

Efficiency introduces risk: -Outsourcing / Global sourcing -Complexity and interdependency of the supply base -Supply consolidations -Risk pooling -Lean / just-in-time systems

What are some lessons from top-performing supply chains?

Efficient silos do not create effective supply chains Excellent supply chains focus on cross-functional alignment

When does Risk Pooling work Best? What are some examples of risk pooling?

High coefficient of variation, which reduces required safety stock. Negatively correlated demand. Examples: Grainger, IKEA

What are the two types of forecasts?

Lucky and Lousy

Changing Where We Get Data: Internet of Things

Internet-enabled forklifts and warehouse shelving that continually collect and share data about location & condition of goods and equipment to help optimize fulfillment. Trucks integrate data about speed, road conditions, vehicle performance, ambient temperature & humidity to optimize routing, notify customers or partners and schedule asset maintenance. Internet-enabled retail shelves and vending machines monitor & communicate stock levels in real-time.

Sourcing Strategy and Product Life Cycle

Introduction Stage: •Decentralized procurement •Multiple sourcing •Supply base development •Early supplier involvement Growth Phase: •Vertical integration •Dual sourcing •Capacity reservation •Fast logistics •Decentralized distribution •Collaborative planning and forecasting Maturity Stage: •Centralized operations for economies of scale •Competitive bidding •Single sourcing •Lean operations •Postponement •Product/process redesign Decline Stage: •Alternate markets •Recovering value from products

What are some assumptions made while Managing Inventory in a Supply Chain?

Inventory decisions are made by a single decision maker with the objective of minimizing system-wide costs. The decision maker has access to inventory information at every stage of the warehouse (retailers, warehouse, etc.).

Key Lessons: Disruptive Technologies in the SC

Involve end users & make sure their needs are being met. Start small, with simple and controlled analytics 'experiments' then move to more complex analytics over multiple years. Ultimately, disruption doesn't mean extinction. Disruption CAN mean extinction, if managers stick their head in the sand & ignore the disruption (just ask the manufacturers of vacuum tubes, steam locomotives and the former managers of Sears and Kodak). The winning organization will be those that apply the right technology to the right application.

What's Different About COVID Supply Chain Disruptions?

Length of the disruption is long & unpredictable Simultaneously impacts various geographic areas around the global Disrupting both supply and demand •The resulting bullwhip effect triggering even more significant demand increases in the upstream supply chains COVID-19 Pandemic is Not a quick-hit disaster, creating bottlenecks in every link of the supply chain; moving bottlenecks preventing the market from reaching equilibrium quickly...

Benefits of Blockchain

Less requirement of trust between supply chain partners (no one company has control of all the data) Higher level of security Less reliance on banking services / lower overhead Quicker settlement of financial transactions Greater availability of real-time information

How is Dell an example of Winning Supply Chain?

Less than 3 days worth of inventory Allow customers to customize orders Collects cash from suppliers several weeks prior to paying suppliers Major problem: lack of product innovation

What is Sustainability?

Meeting the needs of the present, without compromising the ability of future generations to meet their needs. Responsible stewardship of capital, ecological and human resources.

Are you Buying or Selling Customers?

Most companies don't know whether they are making or losing money on a customer, as many costs are tracked at the aggregate level. Customer segmentation is key.

What mistakes do companies make with forecasts?

Most companies treat the world as if it were predictable. - They are aware of demand uncertainty, but act as if their forecasts represent reality. - They rarely consider both the average and variability of demand in their planning process, and adopt a "one-size-fits-all" methodology. Many managers often desire improved demand forecasting software, such as AI and machine learning.

Supply Chain Disruptions Are Common

Natural disasters Acts of war or terrorism IT / Telecommunications outage Supplier failure Labor disputes Cyber attacks Data breaches Changing political landscape (e.g., trade policies, tariffs)

Blockchain SC Applications

Processing supply chain financing transactions Executing smart contracts (automatic execution of events whenever certain, pre-specified criteria are met) Tracking inventory & assets (e.g., assigning serial number to individual diamonds to authenticate & track them from dirt to consumer; reduce incidence of synthetic diamonds mistaken for real ones, purchases of "blood diamonds" mined in war zones & insurance fraud) Verifying materials country of origin Verifying material / product end-of-life Customs brokerage business; tracking every person who has had possession of a truck; automating equipment-maintenance records; identifying every person who handles sensitive cargo

What are some conflicting objectives in the supply chain?

Purchasing / Sourcing Manufacturing / Operations Warehousing / Distribution Marketing / Sales Engineering / Product Development Finance / Accounting

Recommendations

Push safety stocks upstream (towards manuf.) as far as possible to take advantage of risk pooling, especially for items with high demand variability. Calculate safety stocks based on "actual data" by utilizing appropriate inventory models & identify areas for improvement. Reduce avg. and std. dev. of transportation & processing times as much as possible to reduce the required safety stocks. Reduce std. dev. of demand by avoiding batching at various stages (i.e., aligning incentives). This will result in further safety stock reductions. -"Draining the swamp at the end of quarter / year!" Design standard data collection mechanisms to collect the appropriate data (data integrity was an issue). Establish a formalized process and avoid over-riding the system. Use data/models to set corporate inventory targets & identify areas for improvements to achieve the targets.

What Determines the Reorder Point?

R = (Ave Demand)(Ave Lead Time) + Safety Stock

## Results

Reduction of total inventories by 10% and 22% by utilizing appropriate Single-Echelon & Multi-Echelon Inv. Models, respectively. Main problems: - Holding safety stocks in wrong locations; holding too much safety stocks at certain DCs, while too little at others. Fairly linear relationship existed between the ser. level & safety stocks up to 95% ser. level. But, to achieve a ser. level above 97-98% significant extra safety stocks were required (as should be expected!). Identification of areas for improvement -Examples: Avg. transit time from SF to Seattle: 6 days with a std. dev. of 3.2; LA to Phoenix: 7 days with a std. dev. of 4; a few took about 20 days!

Supply Chains Were Generally Not Resilient

Resiliency: the ability to recover quickly & effectively from the disruption Trucking & port bottlenecks / sick workers / workers not showing up Export bans Panic-buying Most supply chain networks are designed for efficiency, not resilience Over-reliance on offshore manufacturing Lack of transparency to assess existing supply Poor alignment & coordination among federal & state government agencies for critical products Measuring supply chain resilience is challenging

What is Supply Chain Management?

SCM encompasses the planning & management of all activities through which products and services are created and distributed to customers: - sourcing and procurement - manufacturing and operations - warehousing - logistics and transportation Importantly, it also includes coordination and collaboration with channel partners including suppliers, intermediaries, third-party service providers, and customers.

Given a SD for one unit time, how do you calculate SD for multiple time units?

SDs are not additive, but variances are (assuming independence) SD-n = (SD-1)SQRT(n)

How is Optimal Order Quantity in the Newsvendor model calculated?

Service Level = (underage cost) / (overage cost + underage cost) Underage Cost = (revenue / unit) - (variable cost / unit) Overage Cost = (variable cost / unit) - (salvage value / unit) If the service level is above 0.5, the order quantity is above average demand. If the level is below 0.5, the order quantity is below average demand. Calculate the absolute value of (0.5 - SL), and find the associated Z value. Optimal Order Quantity = Average Demand +/- (z)(sd) Add (z)(sd) if order quantity is above average. Subtract (z)(sd) if order quantity is below average.

Changing Where We Get Data: External Data Sources

Social Media: Twitter, Facebook, LinkedIn, etc. User comments / complaints. Web-based Data Sources: U.S. government, international organizations. Customer Browsing Habits: in-store tracking using cameras, web logins, in-store tracking. Customer Buying Habits: Survey data, loyalty cards. Geographic Mapping: Google Earth. Wearables: Google glass, fitbit, etc.

Why is Supply Chain Management Complex?

Supply Chain Integration - Conflicting objectives - Sharing supply chain profits System Variations Over Time - Increasing volatility of demand volume, demand mix, transportation and labor costs, commodity prices, etc. - Increasing volatility in supply resulting in disruptions Matching Supply and Demand while Managing Capacity Constraints and Optimizing Asset Utilization Role of Information Systems The Human Elements

Jam Electronics Case: What are some solutions to the company's supply chain issues?

Supply chain alignment SKU rationalization SKU segmentation (types of transportation) Postponement

What is a Continuous Replenishment Strategy?

Suppliers receive point-of-sales (POS) data and use them to prepare shipments at previously agreed upon intervals to maintain specific levels of inventory

Changing How We Verify & Process Transactions; Track Assets / People: Blockchain

Technology behind cryptocurrencies / bitcoin A distributed ledger or database, shared across a network of multiple computers; each computer keeps a copy of the ledger. Every new piece of data is encrypted, verified & added as a new "block" to the chain of data stored. Nothing can change unless all parties agree to it; no time consuming reconciliation of records needed. The blockchain prevents fraud without requiring a central authority. A blockchain consists of 3 components: a transaction, a transaction record & a system that verifies & stores the record.

What is Supply Chain Management primarily concerned with?

The efficient integration of suppliers, factories, warehouses, and stores, so that merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, to minimize total system cost subject to satisfying service requirements. - Many functions are involved - Requires systems approach - Integration is the key - Flow of information, products, services, and funds between different stages

Benefits of Updated Supply Chain

The supply chain is more flexible, and you are not stuck with the finished product. You can use its materials in other finished products the company supports. Lead times are shorter / more certain Takes advantage of risk pooling effects Lower Inventory Carrying Costs

What is the Cash to Cash Cycle?

The time between purchasing raw materials and collecting payment from the subsequent product's sale. C2C = DIH + DSO - DPO DIH = Days Inventory Held = (365 x Inventories) / COGS DSO = Days Sales Outstanding = (365 x Receivables) / Revenues DPO = Days Payables Outstanding = (365 x Payables) / COGS

What are Third-Party Logistics?

Third-Party Logistics: -Outsourcing all or part of the firm's materials management, inbound / outbound logistics, and distribution functions (e.g., Ryder performing all Whirlpool's inbound logistics, etc.) -About a $831 Billion industry in 2019; expected to grow annually at a 8.3% rate until 2027; Amazon has positioned itself to be the disruptor -The "Uberization" of Warehousing (SCMR) -Advantages: •To better focus on core strengths •To deal with technological changes better •Providing customers with better, more flexible service -Disadvantages: •Loss of control (as with other outsourcing activities), especially outbound logistics.

How should a supply chain strategy change over a product's life cycle?

To retain strategic fit, a supply chain strategy must be adjusted over the life cycle of a product and as the competitive landscape changes. The age of "one size fits all" is over!

## Toyota Partial Outsourcing

Toyota typically produces 30% of its transmission in-house, while subcontracting the rest to suppliers. Employees at Saginaw Steering report that Toyota is their most demanding customer and has a better sense of what it wants than other manufacturers, who are more willing to leave details to Saginaw. Because Toyota produces some of the components in-house, it better understands how to integrate these components into the drive-train system. Toyota does not outsource its engines, as it pursues partial outsourcing only for parts that are of intermediate integrality to the system.

When should a company not focus on supply chain profitability?

When its divisions do not work well together.

Buzz Group Exercise: Strategic Positioning of Safety Stocks in the Supply Chain

Where to Keep Safety Stocks?

Should supply chain profitability be shared across all supply chain stages? Why / why not?

Yes - it makes the supply chain more fair for smaller businesses who are attempting to succeed No - it makes sense to focus efforts on functions that are stable and rich for success Ultimately - there's no correct answer. Different situations lead to different ideal outcomes

Additional Recommendations for Essential Industries (Healthcare, Pharma)

1. Government involvement to ensure resilient supply chains Similar to the 2008 financial crisis when the U.S. government instituted a stress test for banks, essential supply chains should pass stress tests. 2. Better alignment & coordination among federal & state government agencies To avoid turning state governments into rivals, competing for the same constrained supplies. 3. Better transparency of Strategic National Stockpile

Disruptive Technologies in the Supply Chain

Changing Where We Get Data: The Internet of Things and Public Rivers of Data Changing How We Analyze Data: Big Data / Analytics Changing How We Use Data: •Changing How We Make Decisions - Artificial Intelligence / Machine Learning •Changing How We Build - 3D Printing / Additive Manufacturing •Changing How We Move - Autonomous Vehicles •Changing How We Verify & Process Transactions; Track Assets / People - Blockchain

Hierarchical Model to Decide Whether to Outsource or Not

Customer Importance -How important is the component to the customer? -Does the component affect customer choice / experience? Component Clockspeed -How fast does the component's technology change relative to other components in the system? Competitive Position -Does the firm have a competitive advantage producing this component? Capable Suppliers -How many capable suppliers exist? Product Architecture -How modular or integral is this element to the overall architecture of the system?

AI / ML SC Applications

Improving production planning & scheduling Improving demand forecast accuracy Inspection & maintenance of assets Reducing freight costs / improving supplier delivery performance Leveraging the experience of the most productive order pickers in the warehouse to create system-directed lists / sequences for all order pickers.

Changing How We Move: Autonomous Vehicles

Inbound & outbound shipments may become less reliant on human interaction. Drone-based delivery may become a new standard for fast delivery. Self-driving forklifts (autonomous vehicles combined with advanced robotics) could be the next evolution of autonomous vehicles in the distribution center. Risks of technology failure are exacerbated in Just-in-Time inventory and logistics systems.

Partial Outsourcing

Partial outsourcing may dominate complete in-sourcing or complete outsourcing. Advantages are: -Learn the supplier's cost structures and derive bargaining leverage over them -Use the outside suppliers as leverage to discipline the internal units -Deal with the business cycle / variability in demand -Retain some of the integration learning

What are some Carrying / Holding Costs? What is a reasonable range for these costs?

- Capital Costs - Storage Costs - Space and Utilities - Workers and Equipment - Insurance and Taxes - Obsolescence - Damage - Shrinkage Carrying cost is usually defined as a percentage of the dollar value of inventory per year. Reasonable range: 15% - 35%

Utilize Technology Solutions

•Cross-entity collaborations by utilizing cloud-based collaborative platforms to enhance information sharing (P&G) •Real-time network visibility solutions to integrate data across the entire supply chain (5G technology and blockchain) •Cross-entity collaborations by utilizing cloud-based collaborative platforms to enhance information sharing (P&G) •Supplier monitoring (Artificial Intelligence) •Advanced analytics to make good decisions quickly: prepare contingency plans / relocate inventory (P&G) •Developing a database to identify components that are supplied by one manufacturer & are difficult to replace (Toyota) •Utilizing additive manufacturing / 3D printing to make products

Impact of Demand Variability on Lead Time for Different Capacity Utilizations

As you increase your capacity utilization from a high percentage to another, lead time increases exponentially. - The more variable a supply chain is, the earlier this effect is seen. Responsiveness slows rapidly at higher levels of capacity utilization More SKUs, new products, uncertainty / more variability intensify this phenomenon Variance reduction is often the key to achieving high efficiency production systems Capacity is costly! The only way to achieve high capacity utilization without long waiting times is to have low variability.

Summary

By determining the "optimal" location of inventory at various stages (supply chain stages that produce to stock keep safety stocks, while the make-to-order stages keep no safety stocks). Take advantage of the risk-pooling concept. The winning organizations will be those that apply the right principle to the right application. "Smart buffering" (vs. across-the-board buffering), can lead to less finished goods and less system inventory. -Buzz Group Exercise: Is this contrary to the Lean Concepts? -- No, you are spending money upfront to save money later. Replacing traditional supply chain strategies that are sequential and attempt to optimize locally by a globally optimized supply chain strategy.

What is the problem with Inventory Models? What are some common inventory models?

Inventory models are not very widely used - There is a lack of knowledge regarding the models, and mathematics can be intimidating - Data is sometimes not readily available - Economic Order Quantity Model - Continuous Review System - Periodic Review System - Multi-Echelon Inventory Models

## Significance of China / Asia

Largest automobile market 480 of the Fortune 500 are already in China High growth rate in Asia may result in 50% of the world's GDP by 2030

Final Thoughts

Optimizing the supply chain would require: •Holistic / systemic view (supported by a holistic metric) •Cross-functional alignment •Strong relationships with key partners (leading to better communication, information sharing, and mutual insight) •Pursing a segmented strategy •Strategic positioning of safety stocks •Utilizing postponement when possible (more pull, less push) There is a need to improve supply chain resiliency, without incurring exuberant costs •Striking a balance between costs & resiliency is the key challenge

## Overview of Consulting Project at a Fortune 500 Company

Problem: Poor service levels despite keeping excessive inventory in the multi-echelon system (i.e., 3 Manuf. Plants, 7 Centralized DCs and 20 Regional DCs) The project involved: -Flow charting the supply chain for 4 key items -Developing appropriate inventory models and placing safety stocks strategically to "optimize" the supply chains -Comparing the "optimized" supply chains with the current ones & identifying areas for improvement -Examining the relationship between the amount of inv. held in the system and the service level -Providing recommendations & educational seminars

Changing How We Build: 3D Printing / Additive Manufacturing

Shifting to additive production means limitless customization and greater intricacy. This can change WHAT you sell. Shifting to additive production may result in huge changes in operations: where you produce, how you distribute, as well as changes in raw materials, suppliers, labor & energy footprint. Small fabrication sites close to customers become feasible. Spare parts can be manufactured on demand.

Components of SCM Costs

Sourcing Costs - Purchase cost / unit - Contracting - Ordering - Tariffs / taxes - Fixed operating Receiving / Inbound Logistics Costs - Inbound transportation - Receiving & inspection - Shrinkage, damage & spoilage - Insurance - Order processing - Fixed operating - Inventory carrying (raw materials / component parts) Manufacturing / Operations Costs - Direct labor / overtime - Setup / changeover -Tooling - Inventory carrying (work-in-progress) - Overhead & fixed administrative - Packaging, defects, reworks, returns, recalls, service failures & disposal Distribution Costs -Fixed operating -Handling / labor -Inventory carrying (finished goods) -Order processing -Obsolescence / shrinkage / spoilage / damage -Insurance -Outbound transportation Marketing / Sales Costs -Market research -Advertising -Customer relationship management -Returns & exchanges -Backorder -Loss of goodwill / opportunity

The Bullwhip Effect: Managerial Insights

The bullwhip effect exists, in part, due to the retailers' need to estimate the mean and variance of demand The increase in variability is an increasing function of the lead time The more complicated the demand models and the forecasting techniques, the greater the increase Centralizing demand information can significantly reduce, but will not eliminate, the bullwhip effect The bullwhip effect exists even when demand information is completely centralized and all stages of the supply chain use the same forecasting technique and inventory policy The supply-demand mismatch is further exacerbated by the bullwhip effect

Jam Electronics Case: Why are only 70% of orders delivered on time?

Too many SKUs to manage (too complex) Not enough priority leads to a high variety in lead times Too variable demand Long lead time

What Determines the Safety Stock?

Variability in Demand Variability in Lead Time Average Demand Average Lead Time Desired Service Level

Examples of Logistics Efficiency

Vehicle routing -UPS reduced truck miles by 100 million (using advanced algorithms, AI and ML) Increase freight density -Production postponement to reduce shipping volume Optimize transportation mode -436 ton-mile by 1 gallon of gas by railroad Transportation technology -Walmart uses diesel-electric refrigerated trucks to achieve annual saving of $75 million and 400,000 ton of CO2

A Few More Considerations

•Factors contributing to reshoring include: labor costs, energy costs, transportation costs, currency exchange, automation, additive manufacturing / 3D printing, desire for shorter supply chains to reduce risk, concerns around IP protection, more responsive to demand changes and marketing power of "Made in America" label •Companies should more carefully assess the total costs of production. Asia is no longer the default choice •Companies now have a broader set of sourcing options. They should define bundles of activities and select the best option for each bundle: offshoring, nearshoring (locations in neighboring countries), farmshoring (lower cost locations in the company's home country) or reshoring •There are skeptics.... Much of the reshoring activity so far seems to be assembly-related, rather than manufacturing from scratch; also about ¾ of companies reshored to existing locations. •Some companies are utilizing Asian plants to serve Asian customers, while North American plants to serve North American customers, etc. •Favorable product characteristics for reshoring include: -High freight cost Vs. labor cost -Frequent design changes -Volatility in demand -Intellectual property risk -Regulatory & compliance requirements

Moving Parts of Our Value Chain to China?

•General progression: -Setting up manufacturing facilities in China -Making China a major sourcing location -Incorporating China facilities into the global manufacturing network and building distribution networks to reach China's more prosperous regions -Locating research, product development, manufacturing, sourcing, distribution and marketing, etc. in the most appropriate place): "One-World Strategy"

Global Sourcing

•In late 90s / early 2000s many companies rushed to source in low-cost regions (i.e., low unit product cost); in some cases this was a strategic trap - thinking that this will result in lower total costs. •Decision making process to outsource: -Gut-level decision / follow others ... -Consider direct & indirect costs (i.e., shipping, nesting & de-nesting of containers at both ends, storage, handling, procurement, insurance & financing) -Consider direct, indirect & hidden costs (i.e., longer & more variable lead times, additional inventory, loss of sales, overtime premiums, expedited material handling costs, discounted inventory, higher administrative / coordination costs, extra costs from idled ships, rerouting ships to other ports, currency fluctuations, intellectual property losses, quality/safety problems, higher corporate taxes, on-site medical facilities, etc.)

The First Step to Fixing US Manufacturing

•Large U.S. manufacturing firms averaged higher returns on invested capital from 1997 to 2013 than those posted by large European, South Korean, Japanese & Chinese manufacturers •Some tier-one suppliers are performing well, but many tier-two and -three suppliers are struggling; hollowing out the domestic supply base •Large companies generally take a transactional approach with suppliers and regard them purely as a cost center •To make U.S. manufacturing more globally competitive, small and mid-size suppliers need to be shored up across entire industries...

Mitigation Strategies vs Contingency Planning

•Mitigation Strategies: Firm takes some action in advance of a disruption regardless of whether a disruption occurs -Increase inventory: Hershey Company keeps six months' inventory of milk chocolate in a refrigerated warehouse -Increase capacity: Medtronic opened a second DC in Europe after a risk assessment •Contingency Planning: Firm takes action only in the event that a disruption occurs -Backups: Each Walmart DC has two or three nearby DCs that are designated as backup DCs -Alternate suppliers: Cisco considers both dual sourcing and qualification of alternate suppliers

China Strategy: Final Thoughts

•Need to develop a new China strategy that is not a stand-alone business model (i.e., sourcing from or selling in China), but integrating the China business with operations elsewhere (i.e., "One-World Strategy") •China should be approached as a collection of different consumer segments instead of a mass market. China is not one China.....

Resulting Turmoil Generated Calls for Reshoring Production

•No panacea given the desire to serve other huge markets (Asian, European, etc.) •China is a sole source for thousands of items; reducing dependency will take substantial time and investment -80% of all face masks are manufactured in China (Boykoff & Sebastian, 2020) -For certain drugs 80-90% of active pharmaceutical ingredients are produced in China or India (DeVore, 2020)

SC Issues Complaints

•Politicians and public officials around the globe complain... •CEOs / C-Level executives regularly blame supply chain woes for operational, customer service and/or financial challenges... •General public complains and wonders what the heck supply chains are and why they are out of whack?! Disruptions are up 46% year-over-year (SCQ, July 2022); Top disruptors include: COVID & Russia/Ukraine War

The Old Paradigm: Push Strategies

•Production decisions based on long-term forecasts •Ordering decisions based on inventory & forecasts •What are the problems with push strategies? -Inability to meet changing demand patterns -Excessive inventory -Excessive production variability -High obsolescence costs -Poor service levels

US Manufacturing Employment

•Reduced by about 5 million jobs since 2000. •Most experts cite "Technology / Automation" as the main reason (workers transitioned from fields to factories, now moving from factories to service centers / healthcare centers...) •"Reshoring Initiative", claims 757,000 manufacturing have been brought back to the U.S. (2010-2018) due to reshoring & foreign direct investment -Provides free Total Cost of Ownership Estimator software to compare the cost of offshoring and domestic sourcing: www.reshorenow.org/TCO_Estimator.cfm

Off- On- or Re-Shoring: Benchmarking of Current Manufacturing Location Decisions

•Reshoring & off-shoring is happening at the same time. It is complicated as companies are evaluating multiple factors, making trade-offs, and assessing different products & technologies. •Same companies are making opposing decisions for different products. •There is no dominant reason for sourcing production volume- companies make different decisions for a variety of reasons (not just cost comparisons, but more complex trade-offs involving cost, quality, market access, delivery lead time and risk). •At times even competitors in the same industry, manufacturing similar products & utilizing the same technologies are making opposing decisions.

Problems Investing in China

•Restrictions on foreign ownership •Competition from inexpensive knockoffs •Rivalry from state-owned enterprises •Selective enforcement of World Trade Organization norms •Intellectual property concerns

Emerging Trends in Global Sourcing

•Similar to demand risks, supply risks are becoming a great concern for many companies -Some are backing off their "lean" operations due to the lack of transportation reliability •Consider dimensions such as "Supply Risk" & "Profit Impact" to develop a segmented sourcing strategy •Consider risks involved in sourcing in low-cost regions by carefully examining direct, indirect & hidden costs. Also, consider "flexibility" (and do NOT undervalue it) to develop a "One-World Strategy" •The disruptive technologies (e.g., big data & analytics, the Internet of things, mobile technology, advanced robotics / autonomous vehicles, additive manufacturing / 3D printing) have the potential to revolutionize supply chains, resulting in more reshoring •Utilizing comprehensive supply chain metrics can help align the supply chain •Expanded Panama Canal has significant impact on shipping routes. -Mega-ships carrying about 14,000 containers are able to navigate through (vs. 5,000 containers before the expansion) -About 2/3 of the container ships entering U.S. from East Asia pass through Long Beach & LA, CA terminals -The expanded canal's economic viability is cloudy due to safety concerns (tug boats escorting ships) & quality of construction -About 10% of container traffic between East Asia and the U.S. could shift from West Coast ports to East/Gulf Coast ports -West Coast ports will still be the fastest option for shipping to many destinations- but not necessarily the cheapest; for price-sensitive cargo, using East Coast ports to ship to inland destinations will become attractive, altering the location of distribution centers •Arctic ice melt could radically change shipping routes, particularly Asia-to-Europe & Asia-to-West Coast North America routes (CSCMP's Supply Chain Quarterly) -Shanghai to Hamburg: Northern Route: 8,700 miles Vs. Suez Canal Route: 12,400 miles

Major Obstacles in Implementing Postponement Strategy

•Sufficient level of top management support to deal with the degree of change needed and to align the organization •Requires a flexible production system - if poorly executed could result in cost overruns & longer lead times! •The product/process needs to be designed appropriately or re-designed -Product Modularity / Product Standardization -Packaging design / re-design Close collaboration with outsourcing partners is essential

How do different functions in an organization view Inventory? What is Inventory Optimization generally viewed as?

- Sales: an "opportunity" - Finance: a "liability" - Supply chain: a "buffer" Inventory optimization is still viewed as more "nice to have" than "need to have"

Agree/Disagree: Ship every parcel order the day the order is received

Disagree - different parcels have different ideal shipping strategies. Same day shipping is not practical for all orders.

What do you calculate in the Periodic Review model?

Order Interval (OI) = Q / D = once / time unit Optimal Order Interval (OI*) = Q* / D Exposure Period = OI + LT Target (T) = AVG(OI + L) + (Z)(STD)SQRT(OI + L) Order Quantity (Q) = T - on-hand inv. Ave Inv = (OI x AVG)/2 + (Z)(STD)SQRT(OI + L)

What are some Current Challenges Facing Supply Chain Managers?

•Matching supply & demand by utilizing operational flexibility •Measuring the supply chain financial performance •Employing appropriate sourcing strategies •Creating and claiming value in supply chain negotiations •The impact of disruptive technologies (e.g., big data analytics, AI/ machine learning, Internet of things, additive manufacturing / 3D printing, blockchain) on supply chains •Coping with supply chain disruptions by utilizing mitigation & contingency planning strategies (supply chain efficiency Vs. increasing resiliency across the supply chain) •Worries about trade wars and "tit-for-tat" tariffs continue to create business uncertainty, bottlenecks and higher costs due to COVID

Push vs Pull Strategies

•Push processes are executed in anticipation of customer orders (i.e., demand is not known and must be forecasted) •Pull processes are initiated in response to customer orders (i.e., demand is known with certainty) Customer order arrives in between push and pull processes. Postponement is essentially a push/pull system. •Example: The Desk Jet printer manufacturing at Hewlett-Packard

What is the Zone of Strategic Fit?

A product with certain demand should have an efficient supply chain. A product with an implied uncertainty spectrum should have a responsive spectrum. A product with uncertain demand should have a responsive supply chain. Companies want their products to mature and become efficient in productions.

Bullwhip Effect: Too Many Green Volvo Cars

In the mid-1990s, there was an excessive stocks of green Volvo cars. To get rid of them, the Sales and Marketing group began offering attractive special deals. But, nobody informed the Manufacturing group about the promotions. Manufacturing noted the increase in sales as a sign that consumers had started to like green cars, and ramped up production!!!

Should you determine safety stocks for all items based on experience?

No, different items have different parameters. Don't use "One Size Fits All" You need to consider all factors that affect safety stocks

What was the Silk Road?

Several trade routes connecting China and Europe.

Why is Supply Chain Management so Relevant?

- Increasing competition - Availability of better information systems (Big data analytics, AI, machine learning, blockchain) - Increasing product variety / decreasing product life cycles - Increasingly demanding customers - Less vertical integration / today's global supply chains are longer, more valuable, and cross more borders - Globalization: "Multi-Polar World" - multiple pockets of demand sources, supply sources, and innovation - Ensuring social responsibility and accountability - Operations / manufacturing efficiency has already been achieved to a large extent - "Green" movement - mandated environmental regulations - General increase in the level of risk - Resiliency has become more critical

What are some Ordering / Setup / Fixed Costs?

- Purchase order costs - Setup and teardown costs - Production control costs (issuing and closing orders, scheduling, loading, and expediting) The ordering cost depends on the number of orders placed, not the quantity ordered.

Where do we hold inventory in the supply chain? Why do we hold inventory?

- Retailers - Wholesalers - Distribution Centers - Manufacturers - Suppliers - Variability in Demand - Variability in Lead Time / Supply - Economies of Scale

What are some ways to design a flexible supply chain at a reasonable cost?

- Shorten lead times (through concurrent engineering, design for scm principles, lean principles, etc.). The shorter the forecasting horizon, the more accurate the forecast. - Utilize make-to-order strategy instead of make-to-stock strategy or use postponement / delayed differentiation. Aggregate demand is less variable then disaggregate demand, thus easier to forecast. - Develop strategic partnerships to enhance communications across the supply chain. - Minimize demand variation - Categorize SKUs based on average and standard deviation of demand, and adapt the supply chain to serve each segment appropriately. - Maintain capacity cushions, work overtime, etc.

What are some key questions of S&OP?

- What was this month's forecast? - What was this month's actual demand? - Why the difference? Conduct analysis. - What are we doing about it? Develop action plan. - What are we doing moving forward? Updating the forecast?

Average Demand vs Variability of Demand: Four Categories

1: High Volume, predictable demand - make-to-stock strategy is probably appropriate 2: Medium volume, low to medium variability - use Kanban/JIT production system - use cellular manufacturing / reduce setup time 3: Low volume products - Make to order strategy? - Manufacturing on-demand cost effective - Use postponement 4: Medium to high volume, high variability - Items on promotion - Potential to negatively effect overall customer service - Make-to-order / manufacturing on-demand with quick cycle time - Use postponement - Set maximum order quantities on list price / large orders would take longer - Offer a price discount on large orders that are placed so many weeks before they are needed

What is ABC / Pareto Inventory Classification?

A method where percentages of the items are grouped into classifications (A, B, and C) based on annual dollar volume. A items are the most important, and should use the continuous review inventory system. B items should use either the continuous or periodic review inventory system. C items should use the periodic review inventory system.

What is the Periodic Review Inventory Model? What do you want to know in this model? What is different about this model?

A model that assumes that you can only order inventory at certain points in time How much to order? T - on-hand inv. (varies) When to Order? Order Intervals (fixed) This model is easier to implement, but is less efficient. You can assume demand is variable, and lead time is constant.

What is the Continuous Review Inventory Model? What do you want to know in this model? What are the variables featured in this model?

A model that assumes that you can order inventory at any given point. How much to order? Q* (fixed) When to order? R (varies) D = constant demand rate L = constant lead time AVG = average demand STD = standard deviation of demand AVGL = average lead time STDL = standard deviation of lead time Z = # of sd (based on desired lead time)

What is Cross-Docking?

A strategy that Walmart made famous. Warehouses function as inventory coordination points rather than inventory storage points. Warehouses rarely keep items for more than 12 hours. Advantages: Reduced inventory costs & lead times. Disadvantages: Significant start-up investment in IT; Requires fast and responsive transportation system.

Omni-Channel Retailing

Amazon Prime (started in 2005- free 2-day shipping on qualified items) is the catalyst for the evolution Brick-and-mortar retailers devised strategies to counter free shipping by deploying solutions that leverage their stores With the growth of mobile and e-commerce, Omni-Channel Strategy has emerged, where retailers attempt to satisfy all demand (Internet, catalog and in-store) from anywhere - a retail store, a distribution center, a third-party distributor, or drop-shipped from a manufacturer Customers want to buy from anywhere- in a store, on a laptop or from their smartphones and tablets; they want to pick it up from anywhere, and want to return it anywhere. Retail store operations are challenged, as they are not setup for efficient handling and picking of orders like distribution centers; also retail store inventory accuracy is low... Has resulted in renewed interest in radio frequency identification (RFID) technology.

What is Sales & Operations Planning (S&OP)?

An integrated process through which the leadership team continually strives for alignment and synchronization among all functions of the organization. The S&OP plan includes an updated forecast that lead to a sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Short product life cycles and high demand volatility require a tighter S&OP planning than steadily consumed products.

How are the EOQ and Batch Size linked?

An optimal policy balances between inventory carrying cost and ordering cost Order quantity (batch size) and inventory should grow slower than demand. The total cost is not particularly sensitive to the optimal order quantity. Q = b Q* As b differs from 1, the total cost increases The key to reducing batch size is reduction of the fixed costs associated with each batch.

What are the three cases in the continuous review inventory model? What is Average Inventory?

Case 1: Constant Demand and Lead Time R = D x L (No safety stocks) Case 2: Variable Demand, Constant Lead Time R = (AVG x L) + (Z)SQRT(L)(STD) Safety Stocks = (Z)SQRT(L)(STD) Case 3: Variable Demand and Lead Time R = (AVG x AVGL) + (Z)SQRT[ AVGL(STD)^2 + (AVG)^2(STDL)^2] Safety Stock equals the second value Ave Inv = (Q/2) + Safety Stocks

What is Takeback Facilitation?

Design / re-design product and packaging to reduce reverse logistics / supply chain costs More critical considering shorter product life cycles Supply chain sustainability

What are some methods of Designing for Supply Chain?

Designing products with the supply chain in mind (integral part of product development & product management processes) - results in significant lead time and cost reduction in the long-term. - Risk Pooling (one of the most powerful tools to address variability in the supply chain) - Cross-docking - Logistics Enhancements - Takeback Facilitation - Postponement / Delayed Differentiation

What did Yurkiewicz's research into forecasting conclude?

Different programs routinely give different forecasts for the same data, even when using the same forecasting model and parameters! This could mean several things, including that forecasting software is not as accurate as claimed.

Agree/Disagree: Always use optimization models to determine the location and level for manufacturing and inventory.

Disagree - don't always optimize, as some optimization assumptions may not be accurate. Additionally, the range of potentially optimized values may be large.

Agree/Disagree: Manage for minimum cost

Disagree - minimize system cost, not just all costs

Why are forecasts usually wrong?

Forecast inaccuracy has been on the rise due to growing complexity driven by multichannel marketing, increasing influence of demand shaping (media, promotions, new product introductions), the impact of the internet on buying behaviors, etc.

What does the Economic Order Quantity Model do? What are some Assumptions of this model?

Illustrates the trade-offs between inventory carrying cost and ordering cost - Demand is known and constant (D) - Order quantities are fixed (Q) - Setup / ordering costs are fixed (K) - Inventory carrying cost per item per unit time (h) - No lead times - Initial inventory is 0

What is an Echelon? What is Echelon Inventory Position?

In a distribution system, each stage or level (warehouse, retailers, etc.) is referred to as an echelon. Echelon inventory position at any stage of the system is equal to the inventory on hand at the echelon, plus all downstream inventory (inventory at that level and below). Ex. EIP at the warehouse = OHI at the warehouse + Inventory in transit to retailers + OHI at the retailers

How much inventory should be kept by retailers and warehouses? What if there is not enough inventory in the warehouse to meet all demands from retailers?

Individual retailers should utilize the continuous review inventory system. Warehouses should also use that system, but should take echelon inventory position into account. Various factors should be taken into consideration, including which retailers are the most profitable, and how much demand can even be fulfilled.

What are some Principles of Supply Chain Management?

Integrate supply chain strategy with the corporate strategy and adjusting supply chain strategy over the product life cycle and as the competitive landscape changes. Segment customers based on the service needs, and adapt the supply chain to serve each segment profitably. Customize the logistics network to the service requirements and profitability of customer segments. Listen to market signals and align demand planning accordingly across the supply chain. Differentiate products closer to the customer and reduce lead times across supply chain. Maintain inventories in an undifferentiated form for as long as possible. Manage sources of supply strategically to reduce the total cost of owning materials and services. Develop a supply chain-wide IR strategy that supports multiple levels of decision making. Reduce variation in the system to allow the supply chain to generate higher throughput with lower inventory and lower operating expense. Utilize supply chain-wide performance metrics to gauge collective success and take appropriate corrective actions.

Significance of Variation

Many are programmed to think in terms of averages and do not consider the importance of the variation around those averages. It is such variation (in demand, supply, lead times) that causes many of the costly supply chain disruptions! Risk can be thought of as variation relative to the mean. The lower the variation, the higher the predictability - Savings can be quantified. Increasing variability always degrades the performance of a production or service system.

What are some typical dilemmas faced by supply chain professionals? What are some Key Success Factors?

Meeting customers' mounting demands vs the need for profitable growth. - Holistic / Systematic approach to supply chain management - Improve the demand signal / decrease response time - Do not take a one size fits all approach

Modular Products vs Processes

Product & Process modularity are the key drivers of a standardization strategy that lowers inventory costs and improves forecasting accuracy. Modular Product - a product assembled from a variety of modules such that, for each module, there are a number of options Modular Process - a manufacturing process consisting of discrete operations, so that inventory can be stored in partially manufactured form between operations Particularly critical for innovative products characterized by fast clock speeds, short product life cycles, high product variety, unpredictable demands, and high margins.

Impact of Unmanaged Product Proliferation / Innovation

Product offerings have expanded at unprecedented rates - often popular products are sold in various sizes, brands, colors, fabrics and flavors. Why? -Increase sales; deter competitors from entering market; fear that removing products would upset important customers; big retailers requesting unique versions just for them preventing customers from comparison shopping But, instead of improving long-term profitability, these tactics often lead to: -Higher manufacturing, inventory & obsolescence costs; reduced supply chain efficiency; confused customers; shortage of popular products; difficulty monitoring competitive developments & product recalls; insufficient shelf space for best-selling, core products

Newer Paradigm: Pull Strategies

Production is demand driven - Production and distribution coordinated with true customer demand - Firms respond to specific orders Pull Strategies result in: - Lower inventory levels at retailers and manufacturers - Lower system variability - Better response to changing markets But: - Harder to leverage economies of scale - Doesn't work in all cases According to the 6th Global Survey of Supply Chain Progress (SCMR): 30% are still pursuing push, 32% are in the process of moving from push to pull, and 38% are in a pull situation ...

How to Cope with the Bullwhip Effect?

Reduce variability -Centralized demand information (use POS data / RFID) -Employ the same forecasting methods & buying practices / Collaborative Planning, Forecasting & Replenishment (CPFR) -Reduce variation in customer demand (e.g., eliminate price fluctuations, transp. discounts, poor incentives, etc.) -Set maximum order quantity Reduce lead times -Order lead times (i.e., time it takes to produce & ship an order), use lean principles, cross-docking, etc. -Information lead times (i.e., time it takes to process an order), use web-based data exchanges, RFID, etc. Arrange alliances/strategic partnerships -Vendor managed inventory (VMI) -On-site vendor representatives (i.e., information sharing)

Emerging Trends in Inventory Management, Forecasting, and Design for Supply Chain

Reduction of inventory costs continues to play a major role in supply chain initiatives The applications of "Design for Supply Chain" principles are on the rise It is important to avoid adopting a "one-size-fits-all" supply chain policy for different products as well as manufacturing and distribution The more promising alternatives to forecasting has the potential to improve matching supply and demand and lower costs Supply chain related strategic alliances continue to grow and play a critical role

Sourcing in Low-Cost Region vs Producing In-House in NA: How does this change affect Revenues, Cost, Fixed Assets, and Working Capital?

Revenues - could decrease if customers dislike foreign products, could increase if lower costs mean more items could be produced, likely stay the same Costs - likely decrease because of outsourcing to a foreign company Fixed Assets - likely decrease because you own less assets involved in production Working Capital - could do everything

What affects the Appropriate Service Levels? For what factors will a SKU's service level be higher?

Service levels are sometimes dictated by downstream customers. Everything else being equal, the higher the service level, the higher the inventory level. The marginal impact on service level decreases with inventory level. For a particular inventory level, the longer the lead time to the facility, the lower the level of service is. Everything else being equal, service level should be higher for SKUs with - Higher profit margin - Higher volume - Lower variability - Shorter lead time

## Bullwhip Effect Caused by Tariffs

Some importers pushed their suppliers to ship as much merchandise as possible into the U.S. at the end of 2018 (shifting orders planned for Q1 2019 to Q4 2018). Ports experienced a huge influx of import containers straining capacity. The unexpected wave of "best the tariffs" cargo taxed not only seaports but also those of ocean carriers, railroads and truckers causing delays, bottlenecks, equipment shortages throughout the transportation system. The fallout included higher transportation costs, containers arriving as much as 2-months late and 2-4 week delays in loading containers onto intermodal rail.

What is Vendor Managed Inventory / Consignment? How does VMI benefit the retailer / buyer? How does VMI benefit the vendor / seller?

Vendor/supplier decides on the appropriate inventory levels of each of the products and the inventory policy to maintain these levels...eventually eliminated retailer oversight or specific orders - Vendors own inventory until it is sold Retailer / Buyer: - Less work if the vendor does it (+ less risk responsibility) Vendor / Seller: - They don't lose market share - They have the opportunity to optimize a larger portion of their supply chain using a retailer's data

What is the objective of a supply chain?

maximize the overall value generated