Supply Chain Management

Supply Chain Management Lecture 6

Outline • Today • Homework 1 due • Chapter 4 • Introduction to Excel Solver? • Next week • Chapter 5

Facilities Inventory Transportation Information Sourcing Pricing Designing a Supply Chain Network In designing a supply chain, we need to consider how all supply chain drivers should be used together to support the competitive strategy of a company and maximize supply chain profits Corporate Strategy Competitive Strategy Supply Chain Strategy Responsiveness Efficiency

Factors Influencing Distribution Network Design • Performance of a distribution network should be evaluated along two dimensions • Customer needs that are met (customer service) • Response time (Time it takes for a customer to receive an order) • Product variety (Number of different products that are offered) • Product availability (Probability of having a product in stock) • Customer experience (Ease of placing and receiving orders) • Order visibility (Ability of customers to track their orders) • Returnability (Ease of returning unsatisfactory merchandise) • Cost of meeting customer needs (supply chain cost) • Inventory (All raw materials, WIP, and finished goods) • Transportation (Moving inventory from point to point) • Facility & handling (Locations where product is stored, assembled, or fabricated) • Information (Data and analysis of all drivers in a supply chain)

Design Options For a Distribution Network • Two key decisions when designing a distribution network • Will the product be delivered to the customer location or picked up from a preordained site? • Will product flow through an intermediary?

Example: Retail stores such as Wal-Mart and JCPenney Customers pick up product from retailers Low transportation cost High facility cost Relative easy returnability Increased inventory cost No order tracking necessary If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer Effective for fast moving items Manufacturers Distributor Warehouse Distributor Warehouse Retailer Retailer Retailer Consumers Retail Storage with Customer Pickup

Example: eBags Products are shipped directly to the consumer from the manufacturer Retailer is an information collector: Passes orders to the manufacturers It does not hold product inventory Inventory is centralized at manufacturer Drop shipping offers the manufacturer the opportunity to postpone customization Effective for high value, large variety, low demand products High transportation cost Manufacturers Retailer Consumers Manufacturer Storage with Direct Shipping (Drop Shipping)

Example: Furniture retailers merge couches and coffee tables produced by different manufacturers Dell merges a Dell PC with a Sony flat screen Shipments from multiple manufactures are merged before making a single delivery to the consumer Shipments to Mergers are larger so economies of scale is achieved Mergers increase facility costs Response time may go up Manufacturers Retailer Mergers Consumers Manufacturer Storage with Direct Shipping and In-Transit Merge

Example: Amazon Inventory is held at a warehouse which ships to customer by carriers With respect to direct shipping Inventory aggregation is less Higher inventory costs Facility costs are higher Less information to track Warehouses are physically closer to consumers which leads to Faster response time Lower transportation cost Not effective for slow moving items Manufacturers Distributor Warehouse Distributor Warehouse Consumers Distributor Storage with Carrier Delivery

Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress Warehouse delivers to customers instead of carrier Warehouses are located closer to consumers Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher. Products must be flowing fast to justify the infrastructure Processing cost are high Manufacturers Distributor Warehouse Distributor Warehouse Consumers Distributor Storage with Last Mile Delivery

Example: 7dream.com Customers come to pick up sites (warehouse, retailer) to get the products If consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costs Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located. Significant amount of information is required Increased handling cost Manufacturers Distributor Warehouse Distributor Warehouse Consumers Manufacturer or Distributor Storage With Customer Pickup

Comparing Distribution Networks 1 = strongest performance 6 = weakest performance

Design Options For a Distribution Network • Retail Storage with Consumer Pickup • Manufacturer Storage with Direct Shipping • Manufacturer Storage with Direct Shipping and In-Transit Merge • Distributor Storage with Carrier Delivery • Distributor Storage with Last Mile Delivery • Manufacturer or Distributor Storage with Consumer Pickup

Manufacturers Manufacturers Manufacturers Manufacturers Manufacturers Manufacturers Retailer Distributor Warehouse Distributor Warehouse Distributor Warehouse Retailer Distributor Warehouse Distributor Warehouse Distributor Warehouse Mergers Distributor Warehouse Distributor Warehouse Retailer Retailer Retailer Consumers Consumers Consumers Consumers Consumers Consumers Design Options For a Distribution Network

From brick-and-mortar to click-and-mortar What has been the impact of e-business on supply chain cost? What has been the impact of e-business on customer service? In the future, do you see the number of distributors decreasing, increasing, or staying about the same? Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle? Why should an e-business such as Amazon.com build more warehouses as its sales volume grows?

Dell: Network Design (Europe) A successful distribution network satisfies customer needs at the lowest possible cost

Dell: Network Design As Cannon noted, the Dell build-to-order and “do it all ourselves” model served the company well for almost 20 years, but “the environment has changed.” Just a few years ago, Dell was positioned as the supply chain place where most of us needed to be: almost no finished goods or parts inventory; negative cash-to-cash cycle (paid by customers before paying suppliers); “have it your way” flexibility/the epitome of mass customization; sophisticated demand management techniques to drive buyers to what was most profitable or available in terms of PC configurations; cut out the middleman. Now, it appears, Dell itself doesn’t want to be there. “Our supply chain needs to change dramatically,” Cannon said.

Dell: Network Design Dell’s approach added a lot of complexity – and cost. He said, for example, that for many models, there were as many as 500,000 configuration options. Why do that? “Because we could,” Cannon said. “We had a very flexible supply chain that allowed us to offer that level of configuration choice.” That approach, in turn actually led to higher product costs in many cases. Here’s how. Base/entry models had to be built in a way that permitted all these add-ons to much higher end models. So, if/when customers configured their way up to a high-end unit, Dell made good money. But if a customer stayed with a basic offering, the company lost margin because the base unit versus the competition had extra costs to support the potential of high-end add-ons.

Dell: Network Design Dell has said it believes it can save $3 billion annually from various measures, and Cannon said most of that will come out of these changes to the supply chain over the next 2-3 years. It had sales of $61 billion last year, so that’s about a 5% reduction in total costs. Dell to Migrate Manufacturing Operations from Ireland to Poland

Example: Dell Network Design Decision $31 $19 $23

Example: Dell Network Design Decision

What is an Optimization Problem • Generally, an optimization problem seeks a solution where decisions need to be made in a constrained or limited resource environment • Most supply chain optimization problems require matching demand and supply when one, the other, or both may be limited • An optimization problem comprises three major components • Decision variables • Constraints • Objective

Introduction to Excel Solver • Installing Excel Solver • Goto Tools > Add-ins… • Select “Solver Add-in” and press OK • Opening Excel Solver • Goto Tools > Solver

Example: Profit Maximization Problem • The Windsor Glass Company is planning to launch two new products. • 8 feet glass door with aluminum framing • 4x6 feet window with wood framing • Management of the company wants to determine what mixture of both products would be most profitable

Example: Profit Maximization Problem 8 Feet Aluminum Frame Doors 4x6 Wood Frame Windows Windsor Glass Company Plant 1(Aluminum frames) 1 hour Profits Plant 3 (Glass and assembly) Excess cap. 4 hours 3 hours $3,000 2 hours $5,000 Plant 2(Wood frames) Excess cap. 18 hours 2 hours Excess cap. 12 hours

Windsor Glass Company Model • Inputs • Decision variables • X1 number of batches of doors produced • X2 number of batches of windows produced

Windsor Glass Company Model • Objective function • Maximize3000 X1 + 5000 X2

Windsor Glass Company Model • Constraints • Hours available in Plant 1X1 4 • Hours available in Plant 22 X2 12 • Hours available in Plant 33 X1 + 2 X2 18 • Nonnegative production quantitiesX1 0, X2 0

Windsor Glass Company Model • Decision variables • X1 number of batches of doors produced • X2 number of batches of windows produced • Objective function • Maximize 3000 X1 + 5000 X2 • Constraints • X1 <= 4 (Available hours Plant 1) • 2 X2 <= 12 (Available hours Plant 2) • 3 X1 + 2 X2 <= 18 (Available hours Plant 3) • X1, X2 >= 0 (nonnegativity)

Windsor Glass Company Model • Objective function • Maximize 3000 X1 + 5000 X2

Windsor Glass Company Model • Constraints • 0 <= 4 - X1 (Available hours Plant 1) • 0 <= 12 - 2 X2 (Available hours Plant 2) • 0 <= 18 - 3 X1 - 2 X2 (Available hours Plant 3) • X1, X2 >= 0 (nonnegativity) • Constraints • X1 <= 4 (Available hours Plant 1) • 2 X2 <= 12 (Available hours Plant 2) • 3 X1 + 2 X2 <= 18 (Available hours Plant 3) • X1, X2 >= 0 (nonnegativity)

Windsor Glass Company Model • Decision variables • X1 number of batches of doors produced • X2 number of batches of windows produced • Objective function • Maximize 3000 X1 + 5000 X2 • Constraints • 0 <= 4 - X1 (Available hours Plant 1) • 0 <= 12 - 2 X2 (Available hours Plant 2) • 0 <= 18 - 3 X1 - 2 X2 (Available hours Plant 3) • X1, X2 >= 0 (nonnegativity)

Windsor Glass Company Model using Excel Solver Objective function Decision variables Constraints

Windsor Glass Company Model using Excel

Supply Chain Management