1 Challenges in Managing Supply Chains Vinod R. Singhal Scheller College of Business Georgia Institute of Technology Atlanta, GA, 30332 [email protected]

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Challenges in Managing Supply Chains

Vinod R. SinghalScheller College of Business

Georgia Institute of TechnologyAtlanta, GA, 30332

[email protected]

May 1, 2013Presented in the MOT Program at Sogang University

Seoul, South Korea

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•Matching demand and supply

- Efficiently

- Reliably

- Responsive

What is Effective Supply Chain Management?

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• Nature of demand- higher uncertainty- increased variety (less pooling of demand)- short product life cycle (less demand history)

• Nature of competition- increased competition- customization, low cost, quick response time

( customer and/or competition driven)

• Nature of supply chains (more complex)- globalization - many levels to coordinate- more tightly coupled- long lead times

Causes of supply-demand mismatches

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• Operational issues- less reliable and more inaccurate forecasts- poor planning- operational constraints- long lead times- high set up costs

• Measurement issues- poor understanding of issues and costs of mismatches- no tracking of stockout costs and forecasts errors- poor measurement system to make trade-off


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ConsumerRetailer

Manufacturer.-

Supplier

Slight variation in consumer demand can greatly impact the Supply Chain

• Bullwhip effect

- Demand information distortion

- Variability of demand seen by manufacturers is

higher than that seen by retailers

- Variability of production greater than variability

of demand


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• Order batching

- High order costs

- Full Truck Load Economics

- Correlated ordering

• Rationing game

- Expected shortage

- Ignorance of supply conditions (imaginary

shortage)

- Unrestricted orders and free return policy

- Proportional rationing scheme• Price variations - High-low pricing

• Adversarial relationship between supply chain partners


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• Level of capacity- investment in new capacity- operational improvement

• Time of capacity commitment- early commitment (speculative capacity)- delayed commitment (reactive capacity)- sequence products with low variability early- use speculative capacity for less risky products (low variability/low forecast error)- use reactive capacity for more risky products (high variability / high forecast error)- reduce lead times

Solutions to reduce demand-supply mismatches

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• Reduce uncertainty (obtain market information earlier)- use of information technology- identify new sources of data that could serve as leading indicator- incentives for ordering early / solicit early orders from customers

• Avoid uncertainty- reduce lead times- increase flexibility

• Hedge uncertainty- careful placement of buffers- excess capacity- more inventory


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• Managing processing of demand signals

- Access sell through or pos data

- Single point of forecasting

- Single control of replenishment (VMI)

- Continuous replenishment programs (CRP)

- Lead time reduction

- Direct marketing (reduce intermediaries)

• Managing order batching

- EDI and CAO

- Discount on assorted truck load

- Consolidation by 3rd party logistics

- Regular delivery appointment


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• Rationing game

- Allocate based on past sales

- Share capacity and supply information

- Limited order change and order return flexibility

over time

- Enable reservation of capacity

• Price variations

- Every day low pricing (EDLP)

- Long-term contracts (EDLP but spaced out)

• Relationship between supply chain partners

- cooperative (enlarge the pie, share the savings)

versus hands off ( carve the pie differently)


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• Eliminate wide swings in demand distortion

• Joint collaborative planning and execution demand planning (share information to get a truer demand signal)

• Communication of capacity, production, and promotion plans

• Joint decision making

• Need to have mutually agreeable measures of performance

• Agreement on how to achieve mutual goals and share gains


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• Postpone differentiation of products and services- product design- process design- configuration of the entire supple chain network

• Modular Product Design (standard and unique modules)- Manufacture and assembly standard components early, unique components late- Manufacture modules at the same time to shorten lead time- Easily diagnose and isolate potential quality

problems- Higher demand uncertainty, higher lead time, short product life cycle and higher distribution costs

all support more standardization


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• Modular process design- postponement by separating into independent sub

processes (paint mix)- re-sequencing or rearranging the sub-processes (Benetton)- perform standard process early and customize processes late (HP)

• Supply Networks- little or no modularity supports a centralized warehouse- extensive modularity supports decentralized warehouses- light manufacturing and assembly at the decentralized warehouses


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• Match or realign supply chains and product characteristics

Functional product Innovative product

Product Life cycle more than 2 years 3 to 12 months

Contribution Margin 5% to 20% 20% to 60%

Product variety Low (10 to 20 variants) high (millions)

Average Forecast error 10% 40 to 100%

Average Stock out rate 1 to 2% 10 to 40%

Average markdowns 0% 10 to 25%

Lead time required for 6 to 12 months 1 to 15 days

make-to- order

Focus of supply chain efficiency responsiveness

What to use when?

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Physically Efficient Market responsiveness

Purpose supply predictable respond quickly to

demand at low cost unpredictable demand

to minimize stockout

markdowns

Manufacturing focus high average utilization have excess buffer

capacity

Inventory strategy high inventory turns deploy significant safety

minimize inventory stocks of parts/finished

good

Lead time focus shorten lead time but invest to reduce lead time

without cost increase

Choosing suppliers select mainly for cost select mainly for flexibility

and quality speed and quality

Product-design strategy maximize performance use modular design to

minimize cost postpone differentiation

as long as possible from

Flow of information among supply chain market place to supply

partners chain partners

Causes of Supply-demand mismatches

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• Cost cutting had reached a point of diminishing returns in an organization

• Next source of leverage is better coordination across supply chains

• Share information to enable continuous replenishment program

• Avoid price promotions, go with EDLP

• Competitive model (carve the existing pie differently) or cooperative model (enlarge the existing pie and share the gains)

Efficient supply of functional products

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• Accept uncertainty (forecasts error will be high)

• Reduce uncertainty (obtain market information earlier)

• Avoid uncertainty

• Hedge uncertainty

Responsive supply of innovative products

Documents

1 Challenges in Managing Supply Chains Vinod R. Singhal Scheller College of Business Georgia Institute of Technology Atlanta, GA, 30332 [email protected]