Determining%20Optimal%20Level%20of%20Product%20Availability

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Determining Optimal Level of Product Availability
???? Determining Optimal Level of Product
Availability

• Optimal Matching of Supply and Demand (III)

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Levers for Increasing Supply Chain Profitability

• Decreasing the costs of overstocking and
  understocking
• Reducing the demand uncertainty

• Improved forecasting to lower uncertainty
• Quick response reduce lead time to increase
  number of orders per season
• Postponement of product differentiation
• Tailored sourcing

Microsoft?
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BENETTON
Benetton
Benetton
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BENETTON
Benetton????????????,? ???????????,?????? ?????,??
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Benetton
Benetton
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BENETTON
72hr
12day
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Microsoft?
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ZARA
Microsoft?
Microsoft?
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zara.com
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Whats Quick Response?

• A widely used strategy

• By general merchandise, soft-lines retailers and
  manufacturers
• To reduce retail out-of-stocks, forced markdown,
  merchandising system and operating costs

• A partnership strategy

• Suppliers and retailers work together to respond
  more rapidly to consumer needs
• By sharing POS information to jointly forecast
  future demand for replenishable items, and to
  continuously monitor trends to detect
  opportunities for new items

• A JIT strategy

• Spread through the supply chain and seamlessly
  linked at each stage by electronic data
  interchange

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Whats Quick Response?

• A widely used strategy

• A widely used strategy

• By general merchandise, soft-lines retailers and
  manufacturers
• To reduce retail out-of-stocks, forced markdown,
  merchandising system and operating costs

• A partnership strategy

• A partnership strategy

• Suppliers and retailers work together to respond
  more
• rapidly to consumer needs
• By sharing POS information to jointly forecast
  future demand for replenishable items, and to
  continuously monitor trends to detect
  opportunities for new items

• A JIT strategy

• A JIT strategy

• Spread through the supply chain and seamlessly
  linked at each stage by electronic data
  interchange

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Basic Elements of QR
Time horizons
Time horizons
Information
Logistics
Information
Logistics
Supplier/ Manufacturer relationships
Manufacturing Operations
Supplier/ Manufacturer relationships
Manufacturing Operations
Philosophical/ Cultural change
Philosophical/ Cultural change
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Example US Textile and Apparel Industry in 1986
Fiber

• Synthetics (75) highly concentrated
• Ten firms provide more than 90 of market

Fiber

• More fragmented
• 6,000 firms
• 12 firms provide 1/4 of market

Fabric
Fabric

• Extremely fragmented
• 15,000 firms (70 employ fewer than 50 people)

Apparel
Apparel

• Increasing concentration
• Major categories
• Department stores
• Mass merchandisers
• Mail order
• Chains
• Specialty stores

Retail
Retail
Consumer
Consumer
Increasing sophistication Expectation of
variety/change Wide choice of retail outlets
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The Inefficiencies

• Long supply chain
• Problems of long supply chain
• 1985-1986 overall loss - 25 billion

• From raw material to consumer purchase was 66
  weeks
• 11weeks in-plant time
• 40 weeks in warehouse or transit
• 15 weeks in store

• Expensive to finance
• Too much or too little product was produced and
  distributed

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Expected Results through QR
Fiber, Fabric, Apparel, and Retail Inventories
(Working Weeks)
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Fig. 6-15
Weeks
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QR system
Average Cost per Unit
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Example Benetton

• Benetton deliver knitted goods in the hottest new
  colors seemingly overnight.
• It knitted the sweaters in neutral yarn and then
  dyed them to meet market demand.
• Putting in place fast and sophisticated retailer
  reporting systems.
• Key technologies
• Bar code systems
• Computer networks
• Automated distribution center
• EDI or Internet-based EC
• CIM

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ECR(Efficient Consumer Response)

• ECR is a Global Industry Strategy in which
  Retailers and Suppliers Work Together to Deliver
  Better Consumer Satisfaction and Value.

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The Response

• Awaken the industry
• Targeting the common goals
• The total supply chain would achieve major gains
  in both efficiency and effectiveness

• Focus on the entire supply chain rather than
  separate functions within it

• Serve the consumer with the right products at the
  right time, and the right price

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What is Efficient Consumer Response?
A strategy in which distributors and suppliers
are working closely together to maximize grocery
consumer satisfaction and minimize cost.
Timely, accurate, paperless information flow
Supplier
Distributor
Retail store
Consumer household
Smooth, continual product flow matched to
consumption
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Anatomy of Efficient Consumer Response
A consumer purchases Product A from a
supermarket. The transaction is recorded by the
stores scanner.
The scanner forwards the transaction record to an
in-store computer. The Product A manufacturer,
whose computers interface with the retailers,
notes the transaction and automatically reorders
a replacement unit on a just-in-time basis.
An automatic ordering system allows the product A
supplier to match production to demand using
product movement information and forecasting.
Because production is tied directly into demand,
retailers become increasingly freed from the need
for excess inventory and warehousing of excess
inventory, thus opening the door for increased
cross-docking and direct store delivery shipments.
The retailers in-store computer acknowledges
receipt of the shipment and automatically issues
a computer-generated payment or electronic fund
transfer payment, eliminating the need for paper
invoices and streamlining the accounting process.
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Efficient Consumer Response Process
Change management
Replenishment
Replenishment
Manufacturing business strategy
Retail business strategy
Manufacturing business strategy
Retail business strategy
Integrated EDI Continuous replenishment Computer-a
ssisted ordering Flow-through distribution Activit
y-based costing Category management Flexible
manufacturing
Promotion
Promotion
Store assortments
Store assortments
Product introductions
Product introductions
Open communication
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ECR Strategies Objectives
Strategies Objectives
Efficient Store Assortment Optimize the productivity of inventories and store space at the consumer interface
Efficient Replenishment Optimize time and cost in the replenishment system
Efficient Promotion/Pricing Maximize the total system efficiency of trade and consumer promotion pricing
Efficient Product Introductions Maximize the effectiveness of new product development and introduction activities
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ECR Components

• Logistics (Supply Side)
• Continuous Replenishment
• Cross Docking
• Category Management (Demand Side)
• Understanding Consumer Needs
• Decisions Made with Data
• Category vs. Brand Focused
• Total Systems Approach
• Enabling Technologies (Tools)
• Electronic Fund Transfer (EFT)
• Electronic Data Interchange (EDI)
• Activity Based Costing (ABC)
• Item Coding Database Maintenance

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Example Throughput Time Improvement of Dry
Grocery
CURRENT DRY GROCERY CHAIN
Supplier warehouse 38 days
Distribution warehouse (Forward buy 9 days, turn
inventory 31 days) 40 days
Retail store 26 days
Packing line
Consumer Purchase
104 days
ECR DRY GROCERY CHAIN
Supplier warehouse 27 days
Distributor warehouse 12 days
Retail store 22 days
Packing line
Consumer Purchase
61 days
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Example PGs CRP Process
Wikipedia
Direct store level shipment
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Stores
Store Delivery
Orders
Dedicated Carriers and Prescheduled Appointments
Demand and Inventory
Customer DistributionCenters
Ordering info
Shipping info.
Ordering info
P G Plant
Customer Headquarters
Wikipedia
Orders
Demand and Inventory
P G Headquarters
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ECR Requirements

• Think Total Supply Chain
• Multi-Function, Multi-Echelon Cooperation
• Convert Efficiencies to Customer Value
• Drive True Efficiency and Recognize Inefficiency
• Emphasize on Consumer
• Work Together to Create Demand
• Change Business Processes
• Identify Whats Wrong Today
• Trust
• To be Partners
• Share Data

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Barriers

• Lack of Trust
• Lack of Fairness - Open Trading
• No Information Sharing
• Lack of Resource Commitment
• Lack of Industry Standards
• Culture (Negotiation Environment)
• Measurement/Rewards

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Quick Response Multiple Orders per Season

• Ordering shawls at a department store
• Selling season 14 weeks
• Original replenishment lead time 15 weeks
• Reduced replenishment lead time 6 weeks
• Cost per handbag 40
• Sale price 150
• Disposal price 30
• Holding cost 2 per week
• Expected weekly demand 20
• SD of weekly demand 15

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Quick Response Multiple Orders per Season

• Ordering shawls at a department store
• Selling season 14 weeks
• Original replenishment lead time 15 weeks
• Reduced replenishment lead time 6 weeks
• Cost per handbag 40
• Sale price 150
• Disposal price 30
• Holding cost 2 per week
• Expected weekly demand 20
• SD of weekly demand 15

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Quick Response Multiple Orders per Season

• Two ordering policies
• Two situations

• A single order must arrive at the beginning of
  the season to cover the entire seasons demand

• Two orders are placed in the season, one arriving
  at the beginning of the season and the other
  arriving at the beginning of the eighth week

• Reduced replenishment lead time 6 weeks

• The buyers forecast accuracy doesnt improve for
  second order

• The buyers forecast accuracy does improve for
  second order

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Impact of Quick Response Forecast doesnt
improve for second order (SD15 )
Single Order Single Order Single Order Single Order Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season
Service Level Order Size Average Overstock Expect. Profit Initial Order OUL for 2nd Order Average Total Order Ending Invent. Expect. Profit
0.96 378 97 23,624 209 209 349 69 26,590
0.94 367 86 24,034 201 201 342 60 27,085
0.91 355 73 24,617 193 193 332 52 27,154
0.87 343 66 24,386 184 184 319 43 26,944
0.81 329 55 24,609 174 174 313 36 27,413
0.75 317 41 25,205 166 166 302 32 26,916
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Observations

• Its possible to provide the same level of
  product availability to the customer with less
  inventory if a second follow-up order is allowed
• The average overstock to be disposed of at the
  end of the sales season is less if two orders are
  allowed
• The profits are higher if second order is allowed

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Leftover Inventory vs. Number of Order Cycles per
Season
Unsold Inventory at End of Season
Number of Order Cycles per Season
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Expected Profit vs. Number of Order Cycles per
Season
Expected Profit
Number of Order Cycles per Season
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Forecast Improves for Second Order (SD3 instead
of 15)
Single Order Single Order Single Order Single Order Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season
Service Level Order Size Average Overstock Expect. Profit Initial Order OUL for 2nd Order Average Total Order Ending Invent. Expect. Profit
0.96 378 96 23,707 209 153 292 19 27,007
0.94 367 84 24,303 201 152 293 18 27,371
0.91 355 76 24,154 193 150 288 17 26,946
0.87 343 63 24,807 184 148 288 14 27,583
0.81 329 52 24,998 174 146 283 14 27,162
0.75 317 44 24,887 166 145 282 14 27,268
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Impact of Quick Response Forecast doesnt
improve for second order (SD15 )
Single Order Single Order Single Order Single Order Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season
Service Level Order Size Average Overstock Expect. Profit Initial Order OUL for 2nd Order Average Total Order Ending Invent. Expect. Profit
0.96 378 97 23,624 209 209 349 69 26,590
0.94 367 86 24,034 201 201 342 60 27,085
0.91 355 73 24,617 193 193 332 52 27,154
0.87 343 66 24,386 184 184 319 43 26,944
0.81 329 55 24,609 174 174 313 36 27,413
0.75 317 41 25,205 166 166 302 32 26,916
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Forecast Improves for Second Order (SD3 instead
of 15)
Single Order Single Order Single Order Single Order Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season
Service Level Order Size Average Overstock Expect. Profit Initial Order OUL for 2nd Order Average Total Order Ending Invent. Expect. Profit
0.96 378 96 23,707 209 153 292 19 27,007
0.94 367 84 24,303 201 152 293 18 27,371
0.91 355 76 24,154 193 150 288 17 26,946
0.87 343 63 24,807 184 148 288 14 27,583
0.81 329 52 24,998 174 146 283 14 27,162
0.75 317 44 24,887 166 145 282 14 27,268
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Notes

• Quick response is clearly advantageous to a
  retailer.
• But as the retailer order size drops, the
  manufacturer sells less to the retailer. Thus,
  the manufacturer make a lower profit in the short
  term if all else is unchanged. It seems to
  benefit retailer at the expense of the
  manufacturer.

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Meaning of Postponement

• Delay the timing of the crucial processes in
  which end products assume their specific
  functionality, features, identities, or
  personality
• Can be viewed as information strategy
• 3 different kinds of postponement

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Pull Postponement

• Delay the timing of the crucial processes in
  which end products assume their specific
  functionality, features, identities, or
  personality
• Can be viewed as information strategy
• 3 different kinds of postponement

pull

• BTS vs BTO
• Decoupling point the point from which the
  process switches from a build-to-stock mode to
  the build-to-order mode.
• Meaning of pull postponement
• Making the decoupling point earlier in the
  process.

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Pull PostponementEX.1
Wikipedia
Wikipedia
Microsoft?
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Pull PostponementEX.2
flickr.com Like_the_Grand_Canyon
flickr.com Like_the_Grand_Canyon
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39 Wikimedia Commons ??????http//commons.wikimedia.org/wiki/FileKfc_of_china.jpg,????2012/2/23?



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