Supply Chain Design

Session 16

Supply Chain
!! Linking

chain

various players within the entire value

!! Suppliers !! Manufacturers !! Distributors/ !! Customer

Wholesalers/ Retailers

!! Measuring
!! Inventory

Supply Chain performance:

Turnover = COGS/ Avg Inventory value !! Weeks of Supply = (Avg Inventory value/ COGS) x 52

Net value Rs. 912,150 Cost of revenue 706,850 Cost of production material 321,150 Production materials on hand 11,700 WIP and FG on hand 1,950 Production materials days supply 6 days Inventory Turnover = 706,805 = 51. 78 turns/yr 11,700 + 1,950

Supply Chain Design Strategy

!! Dell !! Managing
!!

demand supply

Price/ Promotions

!! Managing
!!

Inventory !! Seasonality
!! Bull
!!

whip effect !! Types:

Efficient SC !! Risk-hedging SC !! Responsive SC !! Agile SC

Support Strategies
!! Outsourcing
!! Vertical

integration vs. outsourcing

at expertise to outsource

!! Looking

!! Logistics
!! Cost

and service level impact !! Design for logistics in product development

!! Transportation

Mode and Value Density !! Global sourcing !! Mass Customization

Strategic Capacity Planning

!! Service

vs. Product !! Level of capacity-intensive resources:

!! Facilities !! Equipment !! Labor

force

!! Best

operating level

!! Process

design capacity !! Minimized unit cost

!! Capacity

utilization rate =

Capacity used Best Operating Level

Strategic Capacity Planning

!! Economies

and diseconomies of scale !! Economies of scope !! Capacity flexibility

!! Flexible

plant equipment !! Flexible processes switchover !! Flexible workers task switching

!! Lagging

vs. leading capacity !! Frequent vs. Infrequent capacity expansions !! Outsourcing !! Using Decision Trees

Trips Logistics
!! 1000

sq. ft. of warehouse space needed for 1000 units of demand !! Current annual demand = 100,000 units !! Demand can either go up or fall by 20% with equal probability !! Lease price = $1.00 per sq. ft. per year !! Current annual Spot market price = $1.20 per sq. ft. !! Spot prices can either go up or fall by10% with equal probability !! Revenue = $1.22 per unit of demand !! k = 0.1

Trips Logistics
Three options:
1.! 2.!

Get all warehousing space from the spot market as needed Sign a three-year lease for a fixed amount of warehouse space and get additional requirements from the spot market

Option 1
Period 1 Period 0
D=120 p=$1.32

0.25 0.25 0.25

D=144 p=$1.45 D=144 p=$1.19 D=96 p=$1.45 p=$0.97 D=96 p=$1.19 D=96 p=$0.97 D=64 p=$1.45 D=64 p=$1.19 D=64 p=$0.97

0.25 0.25

0.25
D=120 p=$1. 08

D=100 p=$1.20

0.25
D=80 p=$1.32

0.25
D=80 p=$1.08

Decision Node D= 144, p = $1.45 D= 144, p = $1.19 D= 144, p = $0.97 D= 96, p = $1.45 D= 96, p = $1.19 D= 96, p = $0.97 D= 64, p = $1.45 D= 64, p = $1.19 D= 64, p = $0.97

Period 2 Calculation for Spot Market Option Revenue Cost 144,000 x 1.22 144,000 x 1.45 144,000 x 1.22 144,000 x 1.19 144,000 x 1.22 144,000 x 0.97 96,000 x 1.22 96,000 x 1.45 96,000 x 1.22 96,000 x 1.19 96,000 x 1.22 96,000 x 0.97 64,000 x 1.22 64,000 x 1.45 64,000 x 1.22 64,000 x 1.19 64,000 x 1.22 64,000 x 0.97 Period 1 Calculation for Spot Market Option

Profit ($33,120) $4,320 $36,000 ($22,080) $2,880 $24,000 ($14,720) $1,920 $16,000

Decision Node D= 120, p = $1.32 D= 120, p = $1.08 D= 80, p = $1.32 D= 80, p = $1.08

Expected Profit from Period 1 ($12,000) $16,800 ($8,000) $11,200

Total PV of EP ($22,909) $32,073 ($15,273) $21,382

Period 1 Period 0
D=120 p=$1.32

0.25 0.25

D=144 p=$1.45

0.25 0.25 0.25

D=144 p=$1.19 D=96 p=$1.45 D=96 p=$1.19

D=100 p=$1.20

Decision Node D= 144, p = $1.45 D= 144, p = $1.19 D= 96, p = $1.45 D= 96, p = $1.19

Period 2 Calculation for Spot Market Option Revenue Cost 144,000 x 1.22 144,000 x 1.45 144,000 x 1.22 144,000 x 1.19 96,000 x 1.22 96,000 x 1.45 96,000 x 1.22 96,000 x 1.19

Profit ($33,120) $4,320 ($22,080) $2,880

Trips Logistics Option 1

!! NPV

(Spot Market Option) = Total Profit for period 0 + PVEP at period 1 = $ 2,000 + $3,471 = $ 5,471

Making SC Design Decisions Under Uncertainty in Practice

!! Combine

strategic planning and financial planning during network design !! Use multiple metrics to evaluate supply chain networks !! Use financial analysis as an input to decision making, not as the decision-making process !! Use estimates along with sensitivity analysis