Supply Chain Management

1
Supply Chain Management

• Lecture 14

2
Outline

• October 8
• Simulation game briefing
• Finish chapter 8 start? with chapter 9
• October 13
• No class (network design simulation assignment
  due)
• October 15
• Simulation results?
• Finish up chapter 9
• Midterm overview
• October 20
• Midterm

3
Announcement

• Homework 4
• Due Friday October 16
• No office hours on Monday October 12 and
  Wednesday October 14
• Instead additional office hours on Friday October
  16 and Monday October 19

4
Simulation Assignment (25)

• Design the supply chain network for Jacobs
  Industries on the fictional continent of Pangea
• Jacobs only product is an industrial chemical
  that can be mixed with air to form a foam (used
  in air conditioner retrofit kits)

5
Demand

• Demand for Jacobs product in Pangea
• Existing and new markets

Hardwood floor laminates
Air conditioner retrofit kit
Premium home appliances
Premium home appliances
Insulation products
6
Assignment

• Jacobs management would like to design a supply
  chain network for Pangea. Its current network
  consist of a factory in Calopeia with a capacity
  of 20. You have been hired to suggest a network
  design that will maximize profits for Jacobs
  Industry. Designing such a network is complex and
  includes the following decisions
• Should the factory in Calopeia be expanded?
• Should factories in other regions be built? If
  so, what should their capacity be?
• Should all markets/regions be served? If not,
  which markets/regions should be served?

7
Production parameters

• You have 20,000,000 to design your network
• The cost of building a factory is 500,000
  regardless of the factory capacity
• The cost of capacity is 50,000

20
8
Production parameters

• You have 20,000,000 to design your network
• The cost of building a factory is 500,000
  regardless of the factory capacity
• The cost of capacity is 50,000

40
2050,000 1,000,000
5
500,000 550,000 750,000
9
Transportation parameters

• Finished drums are shipped from the factory
  warehouse by mail to the customers
• Factories can ship to all the regions in Pangea
• Shipping time is 1 day independent of origin and
  destination

10
Financial and Other Parameters

• All customers pay 1450 per drum and the
  production cost is 1200 per drum
• The drum must be shipped within 24 hours of
  receiving the order or the order is lost
• Orders may be partially filled and one order may
  be filled from multiple factories
• Each factory has warehouse space to hold up to
  500 finished drums
• If warehouse space is used completely, the
  factory will remain idle until warehouse space
  becomes available.
• Interest accrues on cash at 10 per year,
  compounded daily.

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The Goal

• Your network design will run from day 1 till day
  1460
• Investment in capital (such as new factories and
  factory capacity) will become obsolete on day
  1460

The winning team is the one with the highest
cash position on day 1460
12
Example Aggregate planning at RedTomatoTools

• RedTomatoTools
• A small manufacturer of gardening equipment

Shovels Spades Forks
Generic tool, call it Shovel
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Example Red Tomato Tools

• Constraints
• Workforce, hiring, and layoff constraints
• Capacity constraints
• Inventory balance constraints
• Overtime limit constraints
• Inventory at end of Period 6 is at least 500
• Stockout at end of Period 6 equals 0

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Example Red Tomato Tools
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Average Flow Time

• Average flow time
• Average time one unit spends in inventory

Average inventoryThroughput
Average flow time
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Example Red Tomato Tools
Average inventoryThroughput
Average flow time
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Average Inventory
Average Inventory (0.5(I0 I1) 0.5(I1
I2) 0.5(I2 I3) 0.5(I3 I4)
0.5(I4 I5) 0.5(I5 I6))/6
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Average Inventory
Average Inventory (0.5I0 0.5I1 0.5I1
0.5I2 0.5I2 0.5I3 0.5I3 0.5I4
0.5I4 0.5I5 0.5I5
0.5I6)/6
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Average Inventory
Average Inventory (0.5I0 0.5I6 I1 I2
I3 I4 I5)/6 (0.5(I0 I6) I1 I2
I3 I4 I5)/6
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Average Flow Time

• Littles Law
• Average flow time Average Inventory
  Throughput

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Increased Holding Cost

• What happens to the aggregate plan if inventory
  holding cost increase?

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Increased Holding Cost
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Increased Holding Cost

• What happens to the aggregate plan if inventory
  holding cost increase?
• Motivates carrying less inventory and resorting
  to excess capacity, backlogs, or subcontracting
• Leads to increase in total supply chain cost

What happens to average time in inventory?
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Lower Overtime Cost

• What happens to the aggregate plan if overtime
  cost decrease?

25
Lower Overtime Cost
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Lower Overtime Cost

• What happens to the aggregate plan if overtime
  cost decrease?
• Motivates the increase in number of hours worked
  in overtime
• Leads to decrease in total supply chain cost

What happens to average time in inventory?
27
Higher Seasonal Fluctuation

• What happens to the aggregate plan if seasonal
  fluctuation of demand grows?

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Higher Seasonal Fluctuation

• What happens to the aggregate plan if seasonal
  fluctuation of demand grows?
• Synchronization of supply and demand becomes more
  difficult
• Motivates the increase of either inventory or
  backlogs
• Leads to increase in total supply chain cost

What happens to average time in inventory?
29
Reality Check
What aggregate planning strategy is used the most
in practice?
30
Case Study

• Jewelry
• 1200 standard items plus customized orders
• Uncertain demand
• Valuable products
• Cricket balls
• 4 models
• Lengthy training (for stitching operation)

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Case Study Results

• In general, the chase strategy is used when
• Products are valuable
• Products are bulky or hard to store
• Products are perishable or carry an appreciable
  risk of obsolescence
• High variety
• Accurate sales predictions are hard to obtain
  making stockpiling hazardous
• Fashion items
• In general, the level strategy is used when
• Operators take a long time to become proficient
  at critical tasks
• Products with negligible probability of
  obsolescence
• Low variety
• Forecasts are quite good

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Aggregate Planning

• What are some industries in which aggregate
  planning would be particularly important?
• Manufacturing and service industries
• What are the characteristics of these industries
  that make them good candidates for aggregate
  planning?
• Aggregate planning is most useful in industries
  characterized by relatively long lead times and
  finite amounts of capacity

How is the aggregate planning process different
for service industries when compared to the
manufacturing industries?
33
Higher Seasonal Fluctuation

• What happens to the aggregate plan if seasonal
  fluctuation of demand grows?
• Synchronization of supply and demand becomes more
  difficult
• Motivates the increase of either inventory or
  backlogs
• Leads to increase in total supply chain cost

34
Managing Predictable Variability

• Predictable variability
• Change in demand that can be forecasted
• Can cause increased costs and decreased
  responsiveness in the supply chain
• A firm can handle predictable variability using
  two broad approaches
• Manage supply
• Manage demand

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Managing Supply

• Managing capacity
• Time flexibility from workforce
• Use of seasonal workforce
• Use of subcontracting
• Use of dual facilities dedicated and flexible
• Designing product flexibility into production
  processes
• Managing inventory
• Using common components across multiple products
• Building inventory of high demand or predictable
  demand products

36
Managing Demand

• Pricing and other forms of promotion
• Timing of promotion is important
• Demand increases from promotion can result from a
  combination of three factors
• Market growth (increased sales, increased market
  size)
• Increase in consumption from both new and
  existing customers
• Example Toyota Camry attracting buyers who were
  considering lower-end models
• Stealing share (increased sales, same market
  size)
• Product substitution (overall demand stays the
  same)
• Example Toyota Camry attracting buyers who were
  considering Honda Accord
• Forward buying (same sales, same market size)
• Customers move up purchases (does not increase
  sales)

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Timing of Promotion
Why would a firm want to offer pricing promotions
during its low-demand periods?
Why would a firm want to offer pricing promotions
during its peak-demand periods?