Supply Chain Management

Lecture 27

Detailed Outline

• Tuesday April 27 Review– Simulation strategy– Formula sheet (available online)– Review final

• Thursday April 29 Simulation Game– Thursday April 29 is the last day to turn in homework

• Tuesday May 4 Final 7:30pm – 10:00pm

Assignment

• You can make the following changes to the supply chain– Add capacity to the factory (increase only)– Change the order quantity (i.e. batch size)– Change the reorder point– Change the type of transportation (mail or truck)

Hints

• Create a general strategy beforehand• All inventory and capacity will be obsolete at the

end of the simulation• Most investments pay off, but it takes time

Analysis questions

• When are transportation cost per drum minimized?

• What is minimum transportation cost per drum?

• What is the physical annual holding cost of one drum?

• What is the financial annual holding cost of one drum (what is the opportunity cost)?

• What is the total holding cost of one drum?

Analysis questions

• Ignore the batch production cost. What is the maximum margin that can be obtained from selling one drum?– Retail price per drum– Production cost per drum– Minimum transportation cost per drum– Minimum holding cost per drum– Fulfillment cost per drum– Maximum margin per drum

Final Exam

• Chapter 10– (3e) Sections 1, 2 (up to page 273), 6– (4e) Sections 1, 2, 3 (up to page 260)

• Chapter 11– Sections 1,2 (skipping “Evaluating Safety Inventory Given Desired

Fill Rate”),3, 7 ,8

• Chapter 12– Sections 1, 2 (up to and including Example 12.2), 3

• Chapter 14– Sections 1, 2, 3, 4, 6 (buyback and revenue sharing contracts only),

7, 8 ,9

• Chapter 15– Sections 1, 2

Final Exam

• Chapter 10– Sections(3e) 1, 2, 6

• Section 2 up to page 273

– Sections(4e) 1, 2, 3 • Section 3 up to page 260

– Important concepts• Cycle inventory• Factors influencing inventory holding cost• Factors influencing ordering cost• Average flow time• EOQ model for single product• EOQ model for multiple products (ordered and

delivered independently)• EOQ model for multiple products (ordered and

delivered jointly)

hC

DSQ

2*

Why Order in Large/Small Lots?• Fixed ordering cost: S (cost incurred per order/lot)

– Increase the lot size to decrease the fixed ordering cost per unit

• Holding cost: H (cost of carrying one unit in inventory)– Decrease the lot size to decrease holding cost

• Material cost: C (cost per unit)

Lot size Q is chosen by trading off holding costs against fixed ordering costs

Fixed cost Material costConvenience store Low HighSam's Club High Low

Q1

Economic Order Quantity (EOQ)• Optimal order quantity

H

SDEOQ

2Q*

Q2

Final Exam

• Chapter 11– Sections 1, 2, 3, 7, 8

• Skipping– 11.2 “Evaluating Safety Inventory Given Desired Fill rate”

– Important concepts• Safety inventory• Measures of product availability

– Product fill rate– Order fill rate– Cycle service level

• Replenishment policies– Continuous review– Periodic review

• How to reduce safety inventory without increases safety inventory?

Time

Inventory

Measuring Demand Uncertainty

Inventory

Time

AverageInventory

CycleInventory

SafetyInventory

CycleLead time (L)

Reorder point (ROP)

Demand (D)

Demand during lead time DL = LD

Order quantity/lot size (Q)

Standard deviation of demand over lead time L = (L)D

Q4

Measuring Product Availability1. Cycle service level (CSL)

• Fraction of replenishment cycles that end with all customer demand met

• Probability of not having a stockout in a replenishment cycle

2. Product fill rate (fr)• Fraction of demand that is satisfied from product in inventory• Probability that product demand is supplied from available

inventory

3. Order fill rate• Fraction of orders that are filled from available inventory

Q5

Final Exam

• Chapter 12– Sections 1, 2, 3

• Section 2 up to and including Example 12.2

– Important concepts• Cost of overstocking • Cost of understocking• Optimal CSL and order quantity with a single order in

a season• Managerial levers to improve supply chain profitability

– Increase salvage value– Decrease margin lost from stockout– Reduce demand uncertainty

» Improved forecasting» Quick response» Postponement» Tailored sourcing

The Newsboy/Newsvendor Problem• One time decision under uncertainty

– Demand is uncertain– Plan inventory for a single cycle

• Trade-off– Ordering too much

• (waste, salvage value < cost)

– Ordering too little• (excess demand is lost)

• Examples– Restaurants– Fashion– High tech

Q7

Impact of Quick Response

• Quick response is a set of actions a supply chain takes to reduce replenishment lead time

Selling season~14 weeks

Lead time~30 weeks

Selling season~14 weeks

Lead time~14 weeks

Selling season~14 weeks

Lead time~4 weeks

Q8

Final Exam

• Chapter 14– Sections 1, 2, 3, 4, 6, 7, 8, 9

• Section 6 buyback and revenue sharing contracts only

– Important concepts• Outsourcing versus offshoring• Sourcing process

– Supplier scoring and assessment– Supplier selection and contract negotiation– Design collaboration– Procurement– Sourcing planning and analysis

• How do third parties increase the supply chain surplus?

• What are risks of using a third party?• 3PL and 4PL

Supplier scoring

and assessment

Designcollaboration

Supplier selection

and contract

negotiation

Procurement

Sourcing planning

and analysis

Factors besides purchase price that influence total cost

Purchase price of

componentCycle

inventorySafety

inventoryTransporta-

tion cost

Product introduction

timeReplenishment lead time XOn-time performance XSupply flexibility XDelivery frequency X X XSupply quality X XInbound transportation cost XPricing terms X XInformation coordination X XDesign collaboration X X X X XExchange rates and taxes XSupplier viability X X

Q9

Final Exam

• Chapter 15– Sections 1, 2– Important concepts

• Revenue management• 4 conditions when revenue management has a

significant impact • Allocating capacity to a segment under uncertainty• Spoilage and spill

q

1000

1000

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600

400

200

800600400200

p

q

1000

1000

800

600

400

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800600400200

p