Supply Chain Management

1. Supply Chain Management Lecture 15

2. Outline (last week) • February 25 (Today) • Network design simulation description • Chapter 8 • Homework 4 (short) • March 2 • Chapter 8, 9 • Network design simulation due before 5:00pm • March 4 • Simulation results • Midterm overview • Homework 4 due • March 9 • Midterm

3. Outline • March 2 (Today) • Network design simulation • Chapter 8, 9 • Chapter 8 • Sections 1, 2, and 3 only • Chapter 9 • Sections 1, 2, and part of 3 only • March 4 • Simulation results • Midterm overview • Important sections • Formula sheet • Practice questions • March 9 • Midterm

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 • Average demand for Jacob’s product in Pangea • Existing and new markets 250

6. Assignment • Jacobs management would like to design a supply chain network for Pangea. It’s 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? • What regions should each factory serve?

7. Questions • What to do with Fardo? • Service Fardo demand from the mainland • Service Fardo demand from local (to be built) factory • Don’t service Fardo demand • What to do with Calopeia? • Add capacity to existing factory or not • Service other regions or not • What to do with Sorange, Entworpe, and Tyran? • Built new factory or not • Service other regions or not

8. From Forecasting to Planning Capacity How should a company best utilize the resources that it has?

9. From Forecasting to Planning Capacity How much should be produced and when?

10. Aggregate Planning • Aggregate planning • A general plan that determines ideal levels of capacity, production, subcontracting, inventory, stockouts, and even pricing over a specified time horizon (i.e. planning horizon) • Production rate (number of units to produce) • Workforce (number of workers needed) • Overtime (number of overtime hours) • Machine capacity level (machine capacity needed) • Subcontracting (subcontracted capacity) • Backlog (total demand carried over to future periods) • Inventory on hand (total inventory carried over to future periods)

11. Aggregate Planning • Aggregate planning involves aggregate decisions rather than stock-keeping unit (SKU)-level decisions for a medium term planning horizon (3-18 months) All-Terrain Vehicle (ATV) EngineAssembly Transmission Model A Model B Model C Automatic Manual

12. Aggregate Planning Strategies • Basic strategies • Level strategy (using inventory as lever) • Synchronize production rate with long term average demand • Swim wear • Chase (the demand) strategy (using capacity as lever) • Synchronize production rate with demand • Fast food restaurants • Time flexibility strategy (using utilization as lever) • High levels excess (machine and/or workforce) capacity • Machine shops, army • Tailored strategy • Combination of the chase, level, and time flexibility strategies

13. Case Study Results • In general, the chasestrategy 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 levelstrategy 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

14. Aggregate Planning in Services Is aggregate planning useful for the service industry? What is the major variable in managing supply for service industries?

15. Managing Supply • Managing capacity • Time flexibility from workforce • Use of seasonal workforce • Use of subcontracting • Use of flexible facilities • Managing inventory • Built inventory for high-demand or predictable demand products • Use common components across multiple products

16. Managing Demand • Pricing and other forms of promotion • Timing of promotion is important

17. 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?

18. Why would a firm want to offer pricing promotions during its low-demand periods? Market growth – new customers Forward buying – existing customers move up purchases

19. Why would a firm want to offer pricing promotions in its peak-demand periods? • Price sensitivity is higher during periods of peak demand • Brands that are losing market share reduce prices Stealing share – customers substitute the firm’s product for a competitor product

20. 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)

21. Factors Affecting Promotion Timing Favors promotion during low-demand periods Favors promotion during peak-demand periods Favors promotion during peak-demand periods Favors promotion during peak-demand periods Favors promotion during low-demand periods Favors promotion during low-demand periods Favors promotion during low-demand periods