OPER3208-001 Supply Chain Management

OPER3208-001Supply Chain Management

Fall 2006

Instructor: Prof. Setzler

• Taylor, Chapters 4

Chapter 4: Supply Chains as Systems (Taylor)

• Integrating a supply chain requires assembling an ad hoc collection of facilities into a coherent system that can function with a single purpose

• System Theory– How are systems designed– How do systems work– How are systems controlled


• Business Cybernetics– Cybernetics—a system is viewed as an assembly of

components that interact to produce collective behavior

• Examples of systems– Computers– Plants– Animals– Ecologies– Nations– Companies– Factories– Supply chains


• Business Cybernetics– Key insight of cybernetics

• There are common principles across all these different kinds of systems, principles that help explain the behavior of each other

• One of the key contributions of cybernetic was the insight that all systems can be seen as transforming inputs into outputs– When systems are designed by people they usually produce

outputs that have greater value than the inputs» i.e., supply chains

ProcessInput Output


• Business Cybernetics– A system transforms inputs into outputs

• Example,– Computers take large volumes of raw data and

transform (distill) it into useful information– Factories use raw materials to produce finished goods

– Humans take in food and transform it into energy


• Business Cybernetics– Systems may have controls and monitors

• Natural systems are usually self-regulating– i.g., ecologies

• Systems made by people are designed to be controlled and monitored so that performance can be improved over time– Control is achieved by regulating the flow of inputs

» Equivalent to having knobs on their inputs

– Monitoring involves measuring the resulting output

» Equivalent to having gauges on their outputs


• Business Cybernetics– Figure 4.1, notice that not all inputs have

knobs, and not all outputs have gauges


• Business Cybernetics– Inside the system, a number of components

—which might be systems in their own right—interact to transform the inputs into outputs


• Business Cybernetics– Not all inputs are subject to control– In Figure 4.1, notice that not all inputs have

knobs, and not all outputs have gauges• Even the best-designed systems usually have

some inputs that can’t be controlled by people– For supply chains these might be things like economic

cycles, and natural disasters– Extrinsic factors—outside the span of control– Intrinsic factors—inside the span of control

» Example, plant capacity, and budget allocations


• Business Cybernetics– Monitoring outputs is a matter of selection

• It may not be possible to measure every output

• Even if it is possible to measure every output, systems usually have so many outputs that it’s not cost-effective to measure them all

• Preferred approach—measure the set of outputs that are most helpful in monitoring and controlling the system


• Business Cybernetics– The first goal is understanding a system

• Each manager in the chain is given responsibility of a set of knobs, and each one sees the readings on a set of gauges– The goal is for everyone to set their knobs just right in

order to maximize the outputs of the chain– It’s important that managers have some shared

understanding of how the settings affect the operations of the chain


• Business Cybernetics– Understanding permits prediction and control

• Figure 4.2 shows the relationships among three key process in managing systems– Understanding

» Provides insight necessary to predict how a system will behave in response to changes in inputs

– Prediction» Allows you to control the system by making the best

combination of adjustments– Control

» Comparing predicted with actual results deepens understanding of a system, allowing for more accurate predictions and improving control

• Understanding, prediction, and control form the heart of any successful management process


• Business Cybernetics• Understanding, prediction, and control form the

heart of any successful management process• Figure 4.2


• Business Cybernetics– Understanding is usually neglected

• Of the 3 processes, understanding is the most important, yet the most neglected

• The emphasis proceeds in the other direction: Control is the primary concern, prediction is invoked only as needed to improve control, and understanding is viewed as an incidental by-product rather than the prime mover– This is self-defeating in the long run

• Understanding belongs in the front of the process


• Business Cybernetics– Understanding is essential for supply chains

• The basic mechanics of a supply chain are simple, but the behavior as a whole can be very difficult to understand, much less predict and control

• When it comes to systems of this level of complexity, understanding is not a luxury; it’s a necessity


• A Rogues Gallery of Relations– Relations map inputs to outputs

• One of the most basic characteristics of systems is the way in which they map values on the inputs to the values on the output– This mapping is called relation


• A Rogues Gallery of Relations– The mapping can be viewed as a graph

• Figure 4.3


• A Rogues Gallery of Relations– The mapping can be viewed as a graph

• Imagine controlling a system to understand relations• Figure 4.3

– Single component» Black box—all that matters is the relationship between the input and the

output– Single input

» Values range from0 to 100

» knob– Single output

» Values range from 0 to 100

» Gauge One possible relationship knob from 0 to 100 and output from 20 to 80


• A Rogues Gallery of Relations– Relations come in many forms

• This system is easy to understand

• Relations in real-word are rarely so simple

• Figure 4.4 illustrates five different types of relations– All of these relations are found in SC systems

» The relations become more difficult to understand and control as you move from left to right

– Knowing which one you are dealing with when changing an input is essential to achieving good control


• A Rogues Gallery of Relations– Relations come in many forms

• Figure 4.4


• A Rogues Gallery of Relations– Linear relations are straight lines

• Mapping of inputs to outputs is described by a straight line

• Linear relations– Easy to understand– Easy to predict– Easy to control

» Increasing the input by a constant

amount always produces the same,

constant increase in the output


• A Rogues Gallery of Relations– Monotonic relations always go up

• The only restriction on this relation is that increasing the input never reduces the output

• There are no guarantees regarding the shape of the curve– Makes it harder to use the knob to control

the output

– Small adjustments in the knob could produce

big changes in the output in one part of the

range and little or no change in another


• A Rogues Gallery of Relations– Continuous relations change smoothly

• The only guarantee with this relation is that the output will rise or fall smoothly with changes in the input, without any sudden jumps

• The mapping can take any form• Control is even harder because the input can drive the

output higher, push it lower, or how a system works– The best you can do sweep the knob back and

forth and watching the gauge» Trying to find the best spot» Example, price and profit


• A Rogues Gallery of Relations– Single-valued relations change abruptly

• Even harder because even the smallest change in input can produce a huge leap in the output– No smooth transition between successive levels– The only thing you can count on is that it will

always produce the same output for any given input» Very common in SCs» Example, quantity discounts introduce

discontinuities between price and quantities


• A Rogues Gallery of Relations– Multi-valued relations can do anything

• It doesn’t guarantee the same output for a given input– A small change to input can not only produce a sudden

leap, it can shift the relation over to another curve, so that reversing the change doesn’t put things

back the way they were

– Example, this relation is a naturally occurring

pattern in the demand for fashion-based

products


• A Rogues Gallery of Relations– We are biased toward linear relations

• We naturally assume that all systems are linear– Easier to understand

– We are very bad at detecting and understanding any other kind of relation

– Non-linear relations are very common in SCs


• The Dynamics of Delay– Combinations produce new kinds of

behavior• What happens when 2 or more components are

combined?– Even the simplest combinations can produce behavior

that is surprising

– Figure 4.5 shows 3 components hooked together to form a chain

» The output of each becoming the input of the next


• The Dynamics of Delay– Combinations produce new kinds of

behavior• Figure 4.5


• The Dynamics of Delay– Delays take components out of phase

• It only takes a tiny alteration

to make this system

behave differently

from the simpler one– A small delay from the time the component receives a

change in its input to the time that change is reflected in its output

– Figure 4.6 illustrates the impact of such a delay


• The Dynamics of Delay– Delays take components out of phase

• Figure 4.6– The 3 components are no longer that same at any

given time» The components are said to be “out of phase” with

each other

• In SCs delays

occur in all

3 flows


• The Dynamics of Delay– Phase shifts cause havoc in supply chains

• Imagine that A, B, & C are a retailer, producer, and supplier, respectively

• The signal of interest is the level of demand


• The Dynamics of Delay– Phase shifts cause havoc in supply chains

• At time t in Figure 4.6, – demand at the producer (B)

is right on the average value (middle line)

– Demand at the retailer (A) is below average

– Demand at the supplier (C) is unusually high

• Each company might reach totally different conclusions about how the chain should respond to current demand– If any company tries to make a correction on its own, it is

almost certain to throw the other 2 out of balance


• The Dynamics of Delay– Phase shifts are usually invisible

• Phase shifts are not this easy to detect and handle in the real-world

• The amount of delay introduced by each component varies both within and across components

• It takes very little variation to turn the neat curves of Figure 4.6 into wild, unpredictable swings

• Phase shifts are rarely apparent even in the best of circumstances– All the member of the chain know is that they are

experiencing different levels of demand» There may be no way to know whether those are simple

delay effects or real disagreements that are cause for concern


• The Dynamics of Delay– Distortions introduce further complications

• More confusion is introduced if there is any distortion of the signal from one component to the next– Real-world systems often show a pattern of increasing

distortion as signals travel upstream


• The Dynamics of Delay– Economies of scale distort signals

• Distortions of incoming signals can come from many sources– Introduced accidentally or intentionally– Economies of scale represent a common source of distortion

» Customers order more than they need in order to get quantity discounts

» Producers run larger batches than necessary to reduce unit costs

» Etc– Such distortions may save money in immediate operations,

but the distortions they cause in the signals for demand, supply, and cash have a much higher cost than most companies realize


• The Dynamics of Delay– Demand amplification is one result

• Figure 4.7


• The Dynamics of Delay– Demand amplification is one result

• Imagine that each component in the chain increases the signal it receives by 50%– Results: Larger and larger swings of the signal as it moves up

the chain» The bullwhip effect—a natural outcome of traditional

practices found in all SCs

» The only way to rid the problem is to eliminate the practices that cause it (Ch 13)


• Feedback and Stability– Outputs can be fed back into inputs

• So far, the signals have all traveled in the same direction– From inputs towards outputs

• Most real-world systems have additional pathways that carry signals upstream as well– From outputs back to inputs

– Such signals are called feedback because they feed information about the output back into the input

– Feedback creates a loop in the system» The proper use of feedback is critical to producing useful,

effective systems


• Feedback and Stability– Outputs can be fed back into inputs

• Figure 4.8


• Feedback and Stability– Feedback comes in many forms

• The most basic kind of feedback simply takes a portion of the output and mixes it in with the incoming signal

• The more common kind of feedback in SCs uses a separate signal that communicates information about the current output to an upstream component rather than redirecting part of the original signal


• Feedback and Stability– Feedback comes in many forms

• Feedback can be entirely automatic, or it can require human intervention


• Feedback and Stability– Positive feedback amplifies incoming signals

• The purpose of feedback is to provide information about current output to the upstream portions of a system– This allows the upstream portions to tune their behavior

to better regulate that output



• Imagine that the external signal going into component A is rising at a constant rate

• Without feedback, the output will also rise at the same constant rate

• If output of component B includes a feedback signal to A that causes it to amplify its response to the incoming signal, then the output of A will go up at an ever-increasing rate– This kind of feedback is called positive feedback because it

amplifies the incoming signal strength» The result of positive feedback is an ever-accelerating increase

in output level


• Feedback and Stability– Figure 4.9



• The result of positive feedback is an ever-accelerating increase in the output level


• Feedback and Stability– Negative feedback dampens signals

• Imagine altering the feedback mechanism so that the output of B is sued to decrease A’s response to the incoming signal rather than increase it– This is called negative feedback because

it dampens incoming signals– With negative feedback, each increase

in the original signal has a smaller effecton the output» This type of feedback tends to keep

a system with set bounds


• Feedback and Stability– Positive feedback fuels growth

• The 2 kinds of feedback have radically different effects on a system– Positive feedback

» Encourages movement in a particular direction and acts to promote unbounded growth

» Example: Compound interest on bank accounts feeds interest back into the principal


• Feedback and Stability– Negative feedback promotes stability

• Negative feedback limits movement in a particular direction

• It is most frequently used to promote stability in a system

• Example: A regressive tax system because it reduces the increase in net income as gross income goes up


• Feedback and Stability– Negative feedback promotes stability

• Negative feedback in economic systems is often expressed as the law of diminishing returns– Each additional dollar invested produces a smaller

return then the previous one

• Of the 2 kinds of feedback, negative feedback is used much more extensively in the design of systems because of its ability to keep a system within reasonable operating bounds


• Feedback and Stability– Feedback is vital to supply chains

• Examples– Vendor-managed inventory (VMI) lets suppliers directly

monitor inventory levels in distribution centers and retail stores» Gives them much earlier feedback on the flow of products

and allows them to tune their production accordingly

– The use of point-of-sale (POS) systems in the quick response (QR) program improves this feedback by pushing the flow gauge all the way out to the cash register and detecting the movement of goods the moment it occurs


• Feedback and Stability– All three flows benefit from feedback

• Feedback facilitates the flow of demand and cash back up the chain

• Free exchange of information across SCs provide the feedback necessary to regulate all 3 flows across the chain


• Feedback and Stability– Information is replacing inventory

• The great power of feedback in SCs is that it reduces uncertainty by giving companies advance information about upcoming variations in demand and supply– Allows them to better cope with variations



• Without advance notice, the only protection against variability in supply and demand is to hold enough inventory to handle the greatest demand and the lowest supply that are likely to occur, and inventory is a very expensive form of insurance



• Insight: Information can reduce the need for inventory has led to systematic efforts within many industries to replace inventory with information wherever possible– Substituting information for inventory is one of the most

vital aspects of SCM

OPER3208-001 Supply Chain Management

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