Logistics:

1
Tighter Supply Chains
through Operations Research
MARIUS M. SOLOMON
CRT, University of Montreal March, 2000
2
Logistics Evolution
Local
Regional
National
Global
3
Progression of Competitive Advantage
Quality
Increased Variety
80s
80s
Fast Response Time
Focused Production
E-Business
90s
Scale Facilities
70s
2000
Technology Enabled Management
Low Wage Rates
60s
50s
Time Based Management
Cost Based Management
Source Adapted from Stalk and Hout, Competing
Against Time, 1991
4
Competitive Advantage
Strategic Vision
Global Competitors
Planning

Global Markets
World-Class Manufacturing
Quality
Speed
Technology
People
Management Resources
Customers

Aftersale Service and Support
Distribution
Suppliers
Production Process
Planning and Control
Product and Process Design
Integration
TQC
JIT
CIM/CIL
Source Adapted from Gunn, Manufacturing for
Competitve Advantage, Ballinger, 1987
5
Recent Evolution
Total Integration 2000s
Fragmentation 1960s
Evolving Integration 1980s
Demand Forecasting
Purchasing
Requirements Planning
Production Planning
Materials Management
Manufacturing Inventory
Supply Chain
Warehousing
Materials Handling
Industrial Packaging
Physical Distribution
Inventory
Distribution Planning
Order Processing
Transportation
Customer Service
Source Adapted from Coyle, Bardi, and Langley,
The Management of Business Logistics, West 1992
6
Logistics Integration
Distribution Planning
Order Processing
Warehousing
Transportation
Inventory
Materials Handling
Customer Service
Information Technology
Industrial Packaging
Demand Forecasting
Purchasing
Production Planning
Manufacturing Inventory
Requirements Planning
7
So what exactly is this Supply Chain?

• The physical, financial, and information networks
  thatmove the materials, funds, and related
  information through the full logistics process
  ... from acquisition of raw materials to delivery
  of finished products to the end user.

Jim Kelly, Chairman and CEO of United Parcel
Service, American Chamber of Commerce, Beijing,
China, May 4, 1999
8
The Supply Chain

• Plan
• Implement
• Control

Material Flow and Storage
Customer
Production
Storage
Raw Materials
Information Flow and Storage
9
Nodes and Links in a Logistics System
Node
Node
Link
Retailer
Warehouse
Node
Link
Node
Link
Plant
Retailer
Link
Link
Warehouse
Node
10
Typical Supply Chain Network
Suppliers
Plants
Customers
Distribution Centers
11
Hierarchy of Logistics Management Decisions
Location Choice Transport Mode Selection
Vendor Choice
STRATEGIC
Uncertainty
Throughput levels Employment levels Distribution
routes
Time frame
TACTICAL
Scope
Vehicle scheduling Order tracking
Inventory replenishment
OPERATIONAL
12
Logistics Environments
Interfirm - Distribution Channels
External -Macro
Intrafirm-Micro
Value-added Role Time Utility
Place Utility Economic Impacts
Economic Importance
Competitive Advantage Value Chain Logistics
Interfaces with Value Activities
Channel Structure Relationships
Source Adapted from Coyle, Bardi, and Langley,
The Management of Business Logistics, West ,
1992.
13
Fundamental Utility Creation in the Economy
Production
Form Utility
Logistics
Marketing
Possession Utility
Place Utility
Time Utility
Source Adapted from Coyle, Bardi, and Langley,
The Management of Business Logistics, West, 1992.
14
The Generic Value Chain
Cost leadership Differentiation Focus
Firm Infrastructure
Support Activities
Human Resource Management
Margin
Technology Development
Procurement
Inbound Logistics
Outbound Logistics
Marketing and Sales
Margin
Operations
Service
Primary Activities
Source Michael E. Porter, Competitive Advantage,
Free Press, 1985.
15
Conflicting Objectives
Objectives
Implications
Logistics
High revenues through
Higher
Customer Service
Sales and Marketing
High levels of product availability
Lower
Cost-effective production through
Disrupting factors in production
More
Production
High, capacity utilization
Fewer
Long production runs
Few set-ups
Reduce investments and costs through
Finance and accounting
Higher
Inventories
Fewer facilities
Lower inventory levels
Lower
Source Magee, Copacino, Rosenfield, Modern
Logistics Management, Wiley, 1985.
16
Cost Trade-offs in Logistics
Product
Price
Promotion
Marketing
Place / Customer Service Levels
Inventory carrying costs
Transportation costs
Logistics
Order processing and information costs
Warehousing costs (throughput cost not storage)
Lot quantity cost
Total Cost Transportation costs Inventory
carrying costs ...
Source Lambert and Stock, Strategic Logistics
Management, Irwin, 1993.
17
Distribution Channels
Manufacturers and Industrial Users
Retailers
Inventory Repositioning
Farm and Raw Materials
Consumers and Government
Wholesalers
18
Distribution Channel -- Loose Links, Independent
Businesses
Inventory management by each channel participant
Manufacturer
Company Truck
Manufacturer
Distributor
Common Carrier
Retailer
Local Delivery
Source Adapted from Bowersox and Closs,
Logistical Management McGraw-Hill, 1996.
19
The Supply Chain
Apparel Pipeline
Raw
Textile Production
Apparel
Retail
Materials
Customers
Pipeline inventory management
Information sharing Joint planning
20
Organization of Production-Distribution System
6
Inventory
Factory
1
1
Factory Warehouse
2
Weeks
0.5
Inventory
2
1
Distributors
1
0.5
Inventory
3
Retailers
1
Orders From Customers
Delivery of Goods To Customers
Forrester, J.W. (1958) Industrial Dynamics A
Major Breakthrough for Decision Makers. Harvard
Business Review.
21
The Apparel Pipeline
Customer
Raw
Material
Average Time 66 Weeks
Pipeline inventory management
Information sharing Joint planning
Source Blackburn, Time Based Competition, 1991
22
Effect of Lead Time on Retailers Stocking
Decision
40
20
0
FORECAST ERROR ()
-20
-40
TIME
-26 Weeks
-16 Weeks
Start of Season
Source Blackburn, Time Based Competition, 1991
23
Two-Way Flows in Apparel Chain
Product
Point of Sale
Textiles
Apparel
Retail
Orders and Capacity Commitments
Inventory and Order Information
Sales Information
Source Blackburn, Time Based Competition, 1991
24
Keys to Fast-Cycle Logistics
Cultural Change From Top Down
Information Technology
Partnerships
Shorter Manufacturing Cycles
Information Sharing
Fast Cycle Logistics
Source Blackburn, Time Based Competition, 1991
25
OR Contributions

• Economics
• Game theory
• Information Management
• Inventory Models
• Inventory Control and Vehicle Routing
• Distribution Requirements Planning
• Enterprise Resource Planning
• Multiobjective Decision Support Systems

26
Economics

• Capacity Choice and Allocation Strategic
  Behavior and Supply Chain Performance, G. Cachon
  and M. Lariviere, Management Science/Vol. 45, No.
  8, August 1999
• Truth telling provides some advantages to the
  supply chain that should be weighed against the
  costs of inducing it
• Competitive and Cooperative Inventory Policies in
  a Two-Stage Supply Chain, G. Cachon and P.
  Zipkin, Management Science/Vol. 45, No. 7, July
  1999
• Competition generally lowers supply chain
  inventory relative to the optimal solution

27
Economics

• The Role of Returns Policies in Pricing and
  Inventory Decisions for Catalogue Goods Authors
  H. Emmons and S. Gilbert, Management Science
  /Vol. 44, No. 2, February 1998
• Relationship of such policies return policies on
  both retailers and manufacturers profits
• Capacity Allocation Using Past Sales When to
  Turn-and-Earn G. Cachon and M Lariviere,
  Management Science/Vol. 45, No. 5, May 1999
• Turn-and-earn allocation does not generally
  coordinate the system, and in certain cases is a
  means for the supplier to increase profits at the
  expense of retailers

28
Economics

• Centralization of Stocks Retailers vs.
  Manufacturer, R. Anupindi and Y. Bassok,
  Management Science/Vol. 45, No. 2, February 1999
• Shows that centralizing stocks by retailers
  increases profits for the manufacturer up to a
  certain level of market search in the supply
  chain
• Value of Information in Capacitated Supply
  Chains, S. Gavirneni, et al., Management
  Science/Vol. 45, No. 1, January 1999
• Examine benefits of partial vs complete
  information sharing in a supplier-retailer setting

29
Economics

• The Quantity Flexibility Contract and
  Supplier-Customer Incentives, A. Tsay, Management
  Science/Vol. 45, No. 10, October 1999
• Quantity Flexibility (QF) contract and its
  implications for the behavior and performance of
  suppliers and customers
• Quantity Flexibility Contracts and Supply Chain
  Performance, A. Tsay and W. Lovejoy,
  Manufacturing Service Operations Management Vol
  1, No 2, 1999
• Analysis extended to multiple time periods

30
Economics

• Coordinating Investment, Production, and
  Subcontracting, J. Van Mieghem, Management
  Science/Vol. 45, No. 7, July 1999
• Analysis of the role of transfer prices and of
  the bargaining power of buyer and supplier
• Decentralized Multi-Echelon Supply Chains
  Incentives and Information H. Lee and S. Whang,
  Management Science/Vol. 45, No. 5, May 1999
• Desirable properties of performance measurement
  schemes that align the incentives and interests
  of the multiple managers in decentralized supply
  chains

31
Economics

• Echelon Reorder Points, Installation Reorder
  Points, and the Value of Centralized Demand
  Information, F. Chen, Management Science /Vol.
  44, No. 12, Part 2 of 2, December 1998
• Examine cost difference between an echelon stock
  and an installation stock policy.
• Decentralized Supply Chains Subject to
  Information Delays, F. Chen, Management
  Science/Vol. 45, No. 8, August 1999
• Information lead times play the same role as the
  production/transportation counterparts in the
  determination of the optimal replenishment
  strategies, but they are less costly

32
Inventory Models

• Managing Supply Chain Demand Variability with
  Scheduled Ordering Policies, G. Cachon,
  Management Science/Vol. 45, No. 6, June 1999
• Identify two strategies that reduce the
  suppliers demand variance and also reduce total
  supply chain costs
• The Stabilizing Effect of Inventory in Supply
  Chains, M. Baganha and M. Cohen, Operations
  Research Vol. 46, Supp. No. 3, MayJune 1998
• Model helps to explain the bullwhip effect and
  indicates mechanisms that can promote
  stabilization

33
Inventory Models

• A Single-Item Inventory Model for a Nonstationary
  Demand Process, S. Graves, Manufacturing
  Service Operations Management Vol. 1, No. 1, 1999
• Demand process for the upstream stage is more
  variable than that for the downstream stage

34
Probabilistic Analyses and Algorithms for
Three-Level Distribution Systems

• Wal-Marts cross-docking strategy
• Integrate inventory control and vehicle routing
  for a distribution system consisting of a single
  vendor, a fixed number of warehouses, and many
  retailers
• Warehouses receive fully loaded trucks from the
  vendor but never hold inventory
• Warehouses serve only to coordinate the
  frequency, time and sizes of deliveries to
  retailers

Source L. Chen and D. Simchi-Levi, MANAGEMENT
SCIENCE/Vol. 44, No. 11, Part 1 of 2, November
1998
35
Distribution Requirements Planning

• A Dynamic Model For Requirements Planning With
  Application To Supply Chain Optimization, S.
  Graves, et al., Operations Research Vol. 46,
  Supp. No. 3, MayJune 1998
• Use a model for a single production stage as a
  building block for modeling a network of stages
• Apply the DRP model to strategic inventory
  placement in the film manufacturing processes at
  Kodak

36
Extended-Enterprise Supply-ChainManagement at
IBM Personal Systems Groupand Other Divisions
Source G. Lin et al., ITERFACES 30 1
JanuaryFebruary 2000 (pp. 725)
37
Cooperative Multiobjective Decision Supportfor
the Paper Industry
The A-team architecture
Source S. Murthyet al., I TERFACES 29 5
SeptemberOctober 1999 (pp. 530)
38
Unifi Begin at Home - ERP

• Keys to competing Automation and process control
  systems
• Message to supply chain Cooperate as if
  vertically integrated
• Companywide program of linkages among processes
  and machines
• Exchanging production and quality information
  with suppliers over the Internet
• Daily WIP information to make-to-order customers
• Computer to computer exchanges
• Allow partners to come in, rather than pushing
  data out
• Spin off as Manufacturing-Systems Consultant

Source How a Tighter Supply Chain Extends the
Enterprise, Fortune, November 8, 1999.
39
Mercury Marine Dealer focus

• Vertically integrated
• Supplier consigns truckload loads to factory and
  gets paid as used
• MercNet - Private electronic network for parts
  ordering moved to the Internet
• Share forecasts and collaborate with dealers on
  promotions
• Resistance from sales on electronic ordering

Source How a Tighter Supply Chain Extends the
Enterprise, Fortune, November 8, 1999.
40
Rocketdyne Suppliers Beyond the Firewall

• Brought engineering, manufacturing and suppliers
  together from the start
• Alleviated job-shop problems with Manufacturing
  Execution System (MES)
• Computer connections to work areas
• Linked with MRP and Product Data Management
• Included suppliers via the Internet
• Dedicated server, control on depth of system
  access

Source How a Tighter Supply Chain Extends the
Enterprise, Fortune, November 8, 1999.
41
Adaptec Value Added Cycle Time

• 100 day cycle time
• Manually entered information
• Different computer systems
• Treat suppliers as partners
• Incompatible systems SAP vs homemade ERP
• Extricity Internet Software
• Fast orders, drawings, confirmations
• Cycle time dropped to 55 day
• WIP shrank from 18 M to 9 M
• If customers would share forecasts, Adaptec could
  deliver directly rather than from the current 22
  FG warehouses

Source How a Tighter Supply Chain Extends the
Enterprise, Fortune, November 8, 1999.
42
Nimbus Streamlined Supply Chain by Merging

• Most studios outsource production, distribution,
  and packaging of VHS tapes and DVDs
• Technicolor - largest converter of movies to VHS
• People, systems, and facilities capability to
  handle distribution
• Nimbus sales rose to 89 M in first six months
  of 1999
• Consolidation of production facilities and other
  supply chain moves - 10.2 M savings for the
  first half of 1999

43
Conclusions

• Integration and coordination
• Production and Distribution
• Routing and Location
• Routing and Inventory
• Dynamic Problems
• Real Time

44
Conclusions

• Increase in fast-cycle logistics for companies of
  all size
• Doing business faster, and especially smarter
• replacing inventory with information
• With real-time information companies can manage
  inventory in motion, rather than at rest
• Supply chains are increasingly moving online
• Can dramatically reduce overhead and obsolescence
  while speeding time to market

Source Fedex Corporation, 1999 Annual Report