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Oliver and Webber coined SCM in 1982. Their Thesis: ... Collaboration and Cooperation (Bowersox 1969) ... Research on Collaboration and Coordination (contd) ... – PowerPoint PPT presentation

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Title: Supply%20Chain%20Dynamics

Supply Chain Dynamics
N. R. SRINIVASA RAGHAVAN Asst. Professor Departmen
t of Management Studies IISc
  • Oliver and Webber coined SCM in 1982
  • Their Thesis
  • Top Management alone can ensure non-conflicting
    functional objectives along SCN
  • An integrated systems strategy be developed and
  • Coordination of M-I-F flows is challenging yet

Research in SCM
  • Research in Integration and Coordination started
    much before 1982
  • Channel Research (Alderson 1957)
  • Collaboration and Cooperation (Bowersox 1969)
  • Location and Control of Inventories in SCN's
    (Hanssmann 1959)
  • Hierarchical Production Planning (Hax and Meal
  • Bullwhip effect in SCN's (Forrestor 1958)

1. Channel Research
  • Alderson Market Behavior and Executive Action
    (book) 1957 Principles of Postponement
  • Product postponement occurs in two ways
  • Manufacturing PP Changes in form and identity
    occur _at_ the latest possible point in the SCN
  • Logistics PP Changes in inventory location occur
    _at_ the latest possible point in time
  • HP Deskjet Printers Lee et al., Interfaces,
  • Power cords, Voltage requirements, fonts, etc.

Channel Research (contd)
  • Advantages of PP
  • Hedge against uncertain customer demand
  • Reduce inventory holding cost
  • Reduce Logistics/Warehousing costs
  • Minimize imbalance in stock distribution
  • Eliminate stages in Manufacturing
  • Eg packaging, customer does assembly etc.

Features of PP
  • Loss of Economies of Scale!
  • Requires quick set ups and agile procurement
  • Reduced risk of product obsolescence
  • Requires increased capability to process,
    transmit, and deliver orders
  • Product should be "DFPP"
  • (Should be technically and economically feasible)

Channel Research CODP
  • The location of decoupling point depends on the
    product BOM A, V, X, T
  • Relevant more for X and T
  • Trade-off between
  • Inventory holding costs increase _at_ 20 from L2R
  • Estimated based on expected inventories at
    echelons given by the inventory control policies
  • Cost of Lost Sales increase _at_ 20 from R2L
  • Estimated based on given demand distribution and
    probability of stock outs

2. Research on Collaboration and Coordination
  • Bowersox Physical Distribution Development, J of
    Marketing, Vol 33, 1969
  • Individual objectives of different functional
    units within a firm may counteract overall
  • Manufacturing Long production runs
  • Procurement Lowest procurement costs
  • Marketing FGI Staging and infinite assortments
  • Finance Low inventories
  • Logistics FTL's

Research on Collaboration and Coordination (contd)
  • Tom Malone (MIT, CCS) Computers, Networks, and
    the Corporation, Scientific American, 2653, 1991
  • Compares performance of various organization
    structures wrt organizational goals and KPI's
  • Information Sharing (Transparency) using ICT
  • SCM/ERP Solutions
  • B2B Markeplaces
  • B2C and CRM

3. Location and Control of Inventories
  • Hanssmann Optimal inventory location and control
    in pdn/distbn networks, Mangement Science, 74,
  • Analytical model (DP) of interacting inventories
    with three serial inventory locations
  • Each location follows periodic rev, order up to
  • Lead time is a positive multiple of review period
  • Customer demand is Normal
  • Trades off shortage costs with inventory holding
    costs considers revenues as a function of
    delivery time

Location and Control of Inventories (Contd)
  • Supply Rationing Problem Given shortage in
    supplies, how to allocate stock across echelons
  • Threshold policies for high priority customers
    (Ha 1997)
  • Minimize total imbalance in stock distribution
    s.t. service level constraints (Van der Heijden
  • Hundreds of articles in various journals
    including OR, MS, EJOR, JORS, IJPR, IJPDLM, JOM,
  • Logistics given scant treatment in IC problems
    assumed deterministic
  • Results in failure of such models in practice

4. Hierarchical Production/Distribution Planning
  • Hax and Meal Hierarchical integration of
    production planning and scheduling, Studies in
    Management Sc., Vol 1, 1975.
  • Provide effective decision support for different
    DM levels within a hierarchical organization
  • Based on the following scheme
  • Decompose to get hierarchical structure
  • Do Aggregation where possible (eg. Forecasts
    agg. on time,products,markets Capacity agg. On
  • Hierarchical coordination (by setting
    targetsgetting f/b)

Hierarchical Planning (Contd)
  • Other elements
  • Model building for each decision unit using a
    mathematical model (ILP/DP/QN/PN) keeping
    solvability in mind
  • Model solving Solution procedure detailed to get
    the plan
  • Cohen and Lee, OR 1989 Solved an integrated
    inventory/production/distribution model
  • Software Agent based frameworks available
  • Eg. A-Teams of IBM

5. Bullwhip Effect in Supply Chains
  • Forrestor Industrial Dynamics, HBR, 364, 1958
  • First research paper to illustrate systems
    dynamics in SCN's
  • Base for developing Distribution Games
  • "BWE" coined by PG
  • BWE describes the increasing amplification of
    orders occuring within a SC
  • Resembles a whip lash
  • Occurs even if end-item demand is fairly stable!
  • Forrestor studied a simulation model of the
    simplest tandem supply chain with four entities
    Retailer, DC, W/H, Plant

Bullwhip Effect (contd)
  • Assumptions of Forrestor's model
  • Each entity can make use of only locally
    available info
  • Time delays between ordering and receipt of order
  • It takes 3 weeks for retailer to process the
    order, half a week to transmit it to DC
  • The DC takes 1 week to process the order and one
    week to ship to the retailer, who takes one week
    to ship to end customer assumptions for other
    entities likewise..
  • To study impact of a one time 10 change in
    retail sales on orders placed and inventory levels

Bullwhip Effect (contd)
  • Forrestor's results
  • "...A sudden 10 increase in retail sales implies
    a peaking of 34 on orders _at_ 14th week in factory
    w/h, resulting in factory output peaking in 21st
    week (including a 6 week lead time) by a whopping
  • Amplified and out of phase fluctuations in
    ordering and inventory levels
  • Avoidable inventory and shortage costs Unstable
  • Replace week by day in the above analysis

Bullwhip Effect Some Illustrations
Bullwhip Effect Some Illustrations
Bullwhip Effect (contd)
  • Causes of BWE (Empirical Lee et al 1997
    Analytical Chen et al 2000)
  • Demand Signal Processing (frequent updates of
    forecasts only next echelon orders considered)
  • Order Batching (to realise logistics EoSReducing
    order processing costs)
  • Price Fluctuations (resulting in over-reactions)
  • Supply Rationing (Proportionate rationing
    unrestricted order acceptancefree return policy)

Counter-Measures for BWE
  • Avoid multiple demand forecasts
  • Order based on ultimate customer demand
  • Choose a good forecasting method (PLC has a major
  • Move from decentralized DM to centralized
    planning (visibilitycontrol is better)
  • Remove layers in channel if possible
  • Eg HP, Apple, IBM, PG/Walmart

Counter-Measures for BWE (contd)
  • Break order batches
  • Increase frequency of ordering (OP costs reduced
    by EDI)
  • Resort to standardization to minmize OP costs
  • Use 3PL to make small batch replenishments
  • Aggregate across retail outlets to utilize FTL
  • Reduce safety stocks by cutting lead times
  • Eg 3PL using Fedex, PG

Counter-Measures for BWE (contd)
  • Stabilize prices
  • EDLP (PG)
  • Special purchase contracts
  • Eliminate shortage gaming
  • Allocate based on past sales (Sun)
  • Share capacity and information (HP, Motorola)
  • Limit flexibility wrt time (HP, Seagate)

The Distribution Game
  • Sterman Modeling managerial behavior-Misperceptio
    ns of f/b in a dynamic DM expt, Management
    Science, 353, 1989
  • "Beer Distribution Game"
  • Bounded rationality depicts decision makers
  • Orders based on current inventory status, amount
    ordered by direct successors, past performance
  • Over-reaction increases steadily towards u/s end
    of SCN
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