Through Operation Research

MARIUS M. SOLOMON

CRT, University of MontrealMarch, 2000

CRT, University of MontrealMarch, 2000

Logistics Evolution

NationalRegional

Local

Global

Progression of Competitive AdvantageProgression of Competitive Advantage

Low WageRates

Low WageRates

ScaleFacilities

ScaleFacilities

FocusedProduction

FocusedProduction

Increased Variety

Increased Variety

Fast ResponseTime

Fast ResponseTime

Quality

Quality

Cost BasedManagement

Cost BasedManagement

Time BasedManagement

Time BasedManagement

‘50s

‘60s

‘70s

‘80s‘80s

‘90s E-BusinessE-Business

Technology Enabled

Management

Technology Enabled

Management

2000

Source: Adapted from Stalk and Hout, Competing Against Time, 1991

Competitive Advantage

Source: Adapted from Gunn, Manufacturing for Competitve Advantage, Ballinger, 1987

Global MarketsGlobal Competitors

World-Class Manufacturing

Technology

Quality

People

Planning

Strategic Vision

Management Resources

DistributionProduction Process

Planning and ControlProduct and Process Design

Aftersale Service and Support

Supp

liers

TQC JIT

Integration

Customers

CIM/CIL

Speed

Recent Evolution

Demand Forecasting Purchasing

Requirements Planning

Manufacturing Inventory

Materials Handling

Distribution Planning

Production Planning

Warehousing

Industrial Packaging

Inventory

Order ProcessingTransportation

Customer Service

Materials Management

Supply Chain

Physical Distribution

Fragmentation

1960s

Evolving Integration

1980s

Total Integration

2000s

Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West 1992

Logistics Integration

Demand Forecasting Purchasing

Requirements Planning

Production Planning

Manufacturing Inventory

Warehousing

Materials Handling

Industrial Packaging

Inventory

Distribution Planning Order

Processing

Transportation

Customer ServiceInformation

Technology

The physical, financial, and information networks thatmove the materials, funds, and related information through the full logistics process ... from acquisition of raw materials to delivery of finished products to the end user.

Jim Kelly, Chairman and CEO of United Parcel Service, American Chamber of Commerce, Beijing, China, May 4, 1999

Production Storage Customer

Material Flow and Storage

Information Flow and Storage

Plan Implement Control

The Supply Chain

Raw Materials

Nodes and Linksin a Logistics System

Retailer

Plant

Warehouse

Retailer

Warehouse

Node

Node

Node

Node

Node

Link

Link

Link

LinkLink

Typical Supply Chain Network

Suppliers Plants

DistributionCenters

Customers

Throughput levels Employment levels Distribution routes

Vehicle scheduling Order tracking Inventory replenishment

Hierarchy of Logistics Management Decisions

STRATEGIC

TACTICAL

OPERATIONAL

Location Choice Transport Mode Selection Vendor Choice

Uncertainty

Scope

Time frame

Logistics Environments

External -Macro Intrafirm-Micro

Value-added Role Time Utility Place Utility Economic Impacts Economic Importance

Interfirm - Distribution Channels

Channel Structure Relationships

Competitive Advantage Value Chain Logistics Interfaces

with Value Activities

Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West , 1992.

ProductionForm Utility

Logistics

Place Utility

Marketing

Possession Utility

Fundamental Utility Creation in the Economy

Time Utility

Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West, 1992.

Human Resource Management

The Generic Value Chain

Source: Michael E. Porter, Competitive Advantage, Free Press, 1985.

Support Activities

Inbound Logistics

OperationsOutbound Logistics

Marketing and Sales

Service

Procurement

Technology Development

Firm Infrastructure

Primary Activities

Margin

Margin

Cost leadership Differentiation Focus

Conflicting Objectives

Fewer

Objectives

High revenues through:

High levels of product availability

Sales and Marketing

Cost-effective production through:

High, capacity utilizationLong production runs

Production

Reduce investments and costs through:

Fewer facilitiesLower inventory levels

Finance and

accounting

Implications

Customer Service

Disrupting factors in

production

Inventories

Higher

Higher

Lower

Lower

More

Source: Magee, Copacino, Rosenfield, Modern Logistics Management, Wiley, 1985.

Few set-ups

Logistics

Cost Trade-offs in Logistics Product

Price Promotion

Place / Customer Service Levels

Total Cost =Transportation costs + Inventory carrying costs +...

Source: Lambert and Stock, Strategic Logistics Management, Irwin, 1993.

Inventory carrying costs

Lot quantity costOrder processing and information

costs

Warehousing costs (throughput cost

not storage)

Transportation costs

Log

isti

csM

arketing

Distribution Channels

Retailers

Farm and Raw

Materials

Wholesalers

Consumers and

Government

Manufacturers and Industrial Users

Inventory Repositioning

Distribution Channel -- Loose Links, Independent Businesses

Source: Adapted from Bowersox and Closs, Logistical Management McGraw-Hill, 1996.

Inventory management by each channel

participant

Distributor

Retailer

Company Truck

Common Carrier

Local Delivery

Manufacturer

Manufacturer

The Supply Chain

Textile Production

Apparel Retail

Raw

Materials Customers

Apparel Pipeline

Information sharing Joint planning

Pipeline inventory management

Organization of Production-Distribution System

Organization of Production-Distribution System

3

2

2

6

Inventory

Inventory

Inventory

1 1

1

1

1

0.5

0.5

Factory

FactoryWarehouse

Distributors

Retailers

Orders FromCustomers Delivery of Goods

To Customers

Weeks

Forrester, J.W. (1958) Industrial Dynamics: A Major Breakthrough for Decision Makers. Harvard Business Review.

The Apparel PipelineThe Apparel Pipeline

TextileProduction

Apparel Retail

Material

CustomerRaw

Source: Blackburn, Time Based Competition, 1991

Average Time:66 Weeks



Information sharing

Joint planning

Information sharing

Joint planning

Effect of Lead Time on Retailer’s Stocking Decision

Effect of Lead Time on Retailer’s Stocking Decision

FO

RE

CA

ST

ER

RO

R (

%)

FO

RE

CA

ST

ER

RO

R (

%)

TIMETIME

+/-20% +/-40%

+40

-40

+20

-20

0 +/-10%

-26 Weeks

-16Weeks

Start ofSeason


Two-Way Flows in Apparel ChainTwo-Way Flows in Apparel Chain

Textiles Apparel RetailPoint of

Sale

Product

Orders andCapacity

Commitments

Inventory andOrder Information

SalesInformation


Keys to Fast-Cycle Logistics

InformationSharing

InformationSharing

CulturalChange From

Top Down

CulturalChange From

Top Down

InformationTechnology

InformationTechnology

PartnershipsPartnerships ShorterManufacturing

Cycles

ShorterManufacturing

Cycles

Fast CycleLogistics

Fast CycleLogistics


OR Contributions

Economics Game theory Information Management

Inventory Models Inventory Control and Vehicle Routing Distribution Requirements Planning Enterprise Resource Planning Multiobjective Decision Support Systems

Economics

Capacity Choice and Allocation: Strategic Behavior and Supply Chain Performance, G. Cachon and M. Lariviere, Management Science/Vol. 45, No. 8, August 1999 Truth telling provides some advantages to the supply chain that

should be weighed against the costs of inducing it

Competitive and Cooperative Inventory Policies in a Two-Stage Supply Chain, G. Cachon and P. Zipkin, Management Science/Vol. 45, No. 7, July 1999 Competition generally lowers supply chain inventory relative to the

optimal solution

Economics

The Role of Returns Policies in Pricing and Inventory Decisions for Catalogue Goods Authors: H. Emmons and S. Gilbert, Management Science /Vol. 44, No. 2, February 1998 Relationship of such policies return policies on both retailer’s and

manufacturer’s profits

Capacity Allocation Using Past Sales: When to Turn-and-Earn G. Cachon and M Lariviere, Management Science/Vol. 45, No. 5, May 1999 Turn-and-earn allocation does not generally coordinate the system, and

in certain cases is a means for the supplier to increase profits at the expense of retailers

Economics

Centralization of Stocks: Retailers vs. Manufacturer, R. Anupindi and Y. Bassok, Management Science/Vol. 45, No. 2, February 1999 Shows that centralizing stocks by retailers increases profits for the

manufacturer up to a certain level of “market search” in the supply chain

Value of Information in Capacitated Supply Chains, S. Gavirneni, et al., Management Science/Vol. 45, No. 1, January 1999 Examine benefits of partial vs complete information sharing in a

supplier-retailer setting

Economics

The Quantity Flexibility Contract and Supplier-Customer Incentives, A. Tsay, Management Science/Vol. 45, No. 10, October 1999Quantity Flexibility (QF) contract and its implications for the

behavior and performance of suppliers and customers

Quantity Flexibility Contracts and Supply Chain Performance, A. Tsay and W. Lovejoy, Manufacturing & Service Operations Management Vol 1, No 2, 1999 Analysis extended to multiple time periods

Economics

Coordinating Investment, Production, and Subcontracting, J. Van Mieghem, Management Science/Vol. 45, No. 7, July 1999Analysis of the role of transfer prices and of the bargaining

power of buyer and supplier

Decentralized Multi-Echelon Supply Chains: Incentives and Information : H. Lee and S. Whang, Management Science/Vol. 45, No. 5, May 1999Desirable properties of performance measurement schemes

that align the incentives and interests of the multiple managers in decentralized supply chains

Economics

Echelon Reorder Points, Installation Reorder Points, and the Value of Centralized Demand Information, F. Chen, Management Science /Vol. 44, No. 12, Part 2 of 2, December 1998

Examine cost difference between an echelon stock and an installation stock policy.

Decentralized Supply Chains Subject to Information Delays, F. Chen, Management Science/Vol. 45, No. 8, August 1999 Information lead times play the same role as the

production/transportation counterparts in the determination of the optimal replenishment strategies, but they are less costly

Inventory Models

Managing Supply Chain Demand Variability with Scheduled Ordering Policies, G. Cachon, Management Science/Vol. 45, No. 6, June 1999 Identify two strategies that reduce the supplier’s demand variance and

also reduce total supply chain costs

The Stabilizing Effect of Inventory in Supply Chains, M. Baganha and M. Cohen, Operations Research Vol. 46, Supp. No. 3, May–June 1998 Model helps to explain the “bullwhip” effect and indicates

mechanisms that can promote stabilization

Inventory Models

A Single-Item Inventory Model for a Nonstationary Demand Process, S. Graves, Manufacturing & Service Operations Management Vol. 1, No. 1, 1999Demand process for the upstream stage is more variable than that

for the downstream stage

Probabilistic Analyses and Algorithms for Three-Level Distribution Systems

Wal-Mart’s cross-docking strategy Integrate inventory control and vehicle routing for a

distribution system consisting of a single vendor, a fixed number of warehouses, and many retailers

Warehouses receive fully loaded trucks from the vendor but never hold inventory

Warehouses serve only to coordinate the frequency, time and sizes of deliveries to retailers

Source: L. Chen and D. Simchi-Levi, MANAGEMENT SCIENCE/Vol. 44, No. 11, Part 1 of 2, November 1998

Distribution Requirements Planning

A Dynamic Model For Requirements Planning With Application To Supply Chain Optimization, S. Graves, et al., Operations Research Vol. 46, Supp. No. 3, May–June 1998

Use a model for a single production stage as a building block for modeling a network of stages

Apply the DRP model to strategic inventory placement in the film manufacturing processes at Kodak

Extended-Enterprise Supply-ChainManagement at IBM Personal

Systems Groupand Other Divisions

Source: G. Lin et al., ITERFACES 30: 1 January–February 2000 (pp. 7–25)

Cooperative Multiobjective Decision Support

for the Paper Industry

Source: S. Murthyet al., I TERFACES 29: 5 September–October 1999 (pp. 5–30)

The A-team

architecture

Unifi: Begin at Home - ERP

Keys to competing: Automation and process control systems Message to supply chain: Cooperate as if vertically integrated

Companywide program of linkages among processes and machines Exchanging production and quality information with suppliers over the

Internet Daily WIP information to make-to-order customers

Computer to computer exchanges Allow partners to come in, rather than pushing data out Spin off as Manufacturing-Systems Consultant

Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.

Mercury Marine: Dealer focus

Vertically integrated Supplier consigns truckload loads to factory and gets

paid as used

MercNet - Private electronic network for parts ordering moved to the Internet

Share forecasts and collaborate with dealers on promotions Resistance from sales on electronic ordering


Rocketdyne: Suppliers Beyond the Firewall

Brought engineering, manufacturing and suppliers together from the start

Alleviated job-shop problems with Manufacturing Execution System (MES)Computer connections to work areas

Linked with MRP and Product Data ManagementIncluded suppliers via the InternetDedicated server, control on depth of system access


Adaptec: Value Added Cycle Time

100 day cycle time Manually entered information Different computer systems

Treat suppliers as partners Incompatible systems: SAP vs homemade ERP

Extricity Internet Software Fast orders, drawings, confirmations

Cycle time dropped to 55 day WIP shrank from $18 M to $9 M If customers would share forecasts, Adaptec could deliver

directly rather than from the current 22 FG warehouses


Nimbus: Streamlined Supply Chain by Merging

Most studios outsource production, distribution, and packaging of VHS tapes and DVDs

Technicolor - largest converter of movies to VHSPeople, systems, and facilities capability to handle

distribution

Nimbus’ sales rose to $89 M in first six months of 1999Consolidation of production facilities and other supply

chain moves - $10.2 M savings for the first half of 1999

Conclusions

Integration and coordinationProduction and DistributionRouting and LocationRouting and Inventory

Dynamic Problems

Real Time

Conclusions

Increase in fast-cycle logistics for companies of all size Doing business faster, and especially smarter

replacing inventory with information

With real-time information companies can manage inventory in motion, rather than at rest

Supply chains are increasingly moving online Can dramatically reduce overhead and obsolescence

while speeding time to market

Source: Fedex Corporation, 1999 Annual Report

Through Operation Research

Business

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