Supply Chain Management

1
Supply Chain Management

• Lecture 6

2
Outline

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

3
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
4
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)

5
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?

6
Retail Storage with Customer Pickup

• 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

7
Manufacturer Storage with Direct Shipping (Drop
Shipping)

• 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

8
Manufacturer Storage with Direct Shipping and
In-Transit Merge

• 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

9
Distributor Storage with Carrier Delivery

• 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

10
Distributor Storage with Last Mile 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

11
Manufacturer or Distributor Storage With Customer
Pickup

• 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

12
Comparing Distribution Networks
1 strongest performance 6 weakest performance
13
Design Options For a Distribution Network

1. Retail Storage with Consumer Pickup
2. Manufacturer Storage with Direct Shipping
3. Manufacturer Storage with Direct Shipping and
   In-Transit Merge
4. Distributor Storage with Carrier Delivery
5. Distributor Storage with Last Mile Delivery
6. Manufacturer or Distributor Storage with Consumer
   Pickup

14
Design Options For a Distribution Network
15
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 products life
cycle?
Why should an e-business such as Amazon.com build
more warehouses as its sales volume grows?
16
Dell Network Design (Europe)
A successful distribution network satisfies
customer needs at the lowest possible cost
17
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 doesnt want to be
there. Our supply chain needs to change
dramatically, Cannon said.
18
Dell Network Design
Dells 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. Heres 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.
19
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 thats about a
5 reduction in total costs.
Dell to Migrate Manufacturing Operations from
Ireland to Poland
20
Example Dell Network Design Decision
19
31
23
21
Example Dell Network Design Decision
22
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

23
Introduction to Excel Solver

• Installing Excel Solver
• Goto Tools gt Add-ins
• Select Solver Add-in and press OK
• Opening Excel Solver
• Goto Tools gt Solver

24
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

25
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
26
Windsor Glass Company Model

• Inputs
• Decision variables
• X1 number of batches of doors produced
• X2 number of batches of windows produced

27
Windsor Glass Company Model

• Objective function
• Maximize3000 X1 5000 X2

28
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

29
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 lt 4 (Available hours Plant 1)
• 2 X2 lt 12 (Available hours Plant 2)
• 3 X1 2 X2 lt 18 (Available hours Plant 3)
• X1, X2 gt 0 (nonnegativity)

30
Windsor Glass Company Model

• Objective function
• Maximize 3000 X1 5000 X2

31
Windsor Glass Company Model

• Constraints
• X1 lt 4 (Available hours Plant 1)
• 2 X2 lt 12 (Available hours Plant 2)
• 3 X1 2 X2 lt 18 (Available hours Plant 3)
• X1, X2 gt 0 (nonnegativity)

• Constraints
• 0 lt 4 - X1 (Available hours Plant 1)
• 0 lt 12 - 2 X2 (Available hours Plant 2)
• 0 lt 18 - 3 X1 - 2 X2 (Available hours Plant 3)
• X1, X2 gt 0 (nonnegativity)

32
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 lt 4 - X1 (Available hours Plant 1)
• 0 lt 12 - 2 X2 (Available hours Plant 2)
• 0 lt 18 - 3 X1 - 2 X2 (Available hours Plant 3)
• X1, X2 gt 0 (nonnegativity)

33
Windsor Glass Company Model using Excel Solver
Objective function
Decision variables
Constraints
34
Windsor Glass Company Model using Excel