Strategic Decisions (Part II)

Decision Phases of a Supply Chain Supply chain strategy or design

Automate flow of information between company and supply chain partners

Supply chain planning Generate demand forecasts for a product

(demand planning) and help develop sourcing and manufacturing plans for that product

Supply chain operation– Manage the flow of products through

distribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner

Supply Chain Planning

Definition of a set of policies that govern short-term operations

Fixed by the supply configuration from previous phase

Starts with a forecast of demand in the coming year

Supply Chain Planning

Planning decisions: Which markets will be supplied from which

locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions

Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

Capacity Management in a Supply Chain

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

The Capacity Management Problem Given the demand forecast for each period in the

planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s (supply chain’s) profit over the planning horizon

Specify the planning horizon (typically 3-18 months)

Specify the duration of each period Specify key information required to develop

capacity management plan

Capacity Management Strategies

Trade-off between capacity, inventory, backlog/lost sales

Chase strategy – using capacity as the lever Time flexibility from workforce or capacity

strategy – using utilization as the lever Level strategy – using inventory as the

lever Mixed strategy – a combination of one or

more of the first three strategies

Chase Strategy

Production rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies

However, in practice, it is often difficult to vary capacity and workforce on short notice

Expensive if cost of varying capacity is high Negative effect on workforce morale Results in low levels of inventory Should be used when inventory holding costs are

high and costs of changing capacity are low

Time Flexibility Strategy

Can be used if there is excess machine capacity Workforce is kept stable, but the number of

hours worked is varied over time to synchronize production and demand

Can use overtime or a flexible work schedule Requires flexible workforce, but avoids morale

problems of the chase strategy Low levels of inventory, lower utilization Should be used when inventory holding costs are

high and capacity is relatively inexpensive

Level Strategy

Maintain stable machine capacity and workforce levels with a constant output rate

Shortages and surpluses result in fluctuations in inventory levels over time

Inventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periods

Better for worker morale Large inventories and backlogs may accumulate Should be used when inventory holding and backlog

costs are relatively low

Decision Phases of a Supply Chain

Supply chain strategy or design Automate flow of information between

company and supply chain partners Supply chain planning

Generate demand forecasts for a product (demand planning) and help develop sourcing and manufacturing plans for that product

Supply chain operation– Manage the flow of products through

distribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner

Supply Chain Operation

Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating

policies are determined Goal is to implement the operating policies as

effectively as possible Allocate orders to inventory or production, set

order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders

Much less uncertainty (short time horizon)

Drivers of Supply Chain Performance

Facilities places where inventory is stored, assembled,

or fabricated production sites and storage sites

Inventory raw materials, WIP, finished goods within a

supply chain inventory policies

Transportation combinations of transportation modes and

routes

Drivers of Supply Chain Performance Information

data and analysis regarding inventory, transportation, facilities throughout the supply chain

potentially the biggest driver of supply chain performance

Sourcing functions a firm performs and functions that

are outsourced Pricing

Price associated with goods and services provided by a firm to the supply chain

Metrics for measuring supply chain performance:

Supply Chain Performance Measurement

1. Fill rate (the ability to fill orders by the due date)

2. Average time from order to delivery

3. The number of days of supply in inventory

4. Forecast accuracy

5. The cycle time for sourcing and making a product

Case Study :Toyota’s Demand Planning

With more than 1,200 accessory part numbers Toyota was experiencing greater business complexity and increased business volume regarding new models and parts

The spreadsheet-based system Toyota used to manage its supply chain processes was less than optimal. Toyota’s accessory supply administrators had to go into the spreadsheets to manually enter and extract critical vehicle information.

Toyota’s Challenges To automate the forecasting process

To allow more time to examine demand drivers

To remove inefficiencies from the supply chain

Toyota’s Supply Chain Solution Replace existing spreadsheet-based system Enable administrators to investigate issues

during ordering process Analyze part numbers more effectively

How did i2 Technology help?

Toyota chose i2 Demand Planner™ as the solution to forecast future demand for its automotive parts and accessories.

Demand Planner provides an environment that combines the best statistical techniques, unlimited causal factors, and the ability to manage multiple inputs with best-in-class, multi-dimensional data representation and analysis in a user-friendly manner.

The Outcome

increased forecasters’ efficiency Improved communication among

supply chain divisions Reduced inventory shortages and

overages resulting from poor forecasting

Discuss the following questions: What problems do Toyota address? How

does i2 Technology supply chain solution help solve these problems?

What issues and challenges do Toyota present? What can be done to address these issues?

What are the business as well as the technology issues that should be addressed when i2 Technology provide Toyota demand planning solution?