1

Logistics & Supply Chain

Management Strategies
Peerapol Sittivijan
E-mail:peerapol_jt@yahoo.com
August 19, 2009
Guest Lecture at KMUTNB







2
Outline
What is supply chain & why it is important?
The Value of Information: Bullwhip Effect
Risk Pooling Strategy
Push, Pull, Push-Pull Strategy
Distribution Strategy
Revenue Management
3
Introduction
Copyright 2003 D.
Simchi-Levi
Manufacturing
Plants
Regional
Warehouses
(Distribution
Centers)
Field Wrhs
(Dist. Centers)
Retail
Stores
Customers
A Typical Supply Chain
Suppliers
Copyright 2003 D.
Simchi-Levi
Example 1: Wal-Mart
Customers Request:
Buying detergent,
clothes, TV, ...
Wal-Mart
Stores

Wal-Mart
or third-party
distribution
centers

Procter & Gamble
Plastic Producer
Fabric Producer
Da-Fa Clothing, Inc. (China)
SONY Factory (Malaysia)
Electronics Components Producer
Chemical Producer
Zipper Producer
Thread Producer
Plastic Producer
Supply Chain Examples
Copyright 2003 D.
Simchi-Levi
Suppliers
IC Mfg
PC Board
Subassembly
Suppliers
FAT
US DCs
Europe
DCs
Far East
DCs
Suppliers
Suppliers
Retailer
Retailer
Retailer
Example 2: Hewlett & Packard (HP)
FAT = Final assembly & test
IC Mfg = Integrated circuit manufacturing
PC Board = Printed circuit board
Consumers
Consumers
Consumers
Supply Chain Examples (Contd)
Copyright 2003 D.
Simchi-Levi
Example 3: Dell
Customers order
computers on-line

Dell
Assembly
Plants

Monitors by SONY (Mexico)
Keyboards by Acer (Taiwan)
CPU by Intel (USA)
Other components
Supply Chain Examples (Contd)
Copyright 2003 D.
Simchi-Levi
Definition:
Supply Chain Management is primarily concerned with the
efficient integration of suppliers, factories, warehouses and
stores so that merchandise is produced and distributed in
the right quantities, to the right locations and at the right
time, and so as to minimize total system cost subject to
satisfying service requirements.
Notice:
Who is involved
Cost and Service Level
It is all about integration
Supply Chain Management
Copyright 2003 D.
Simchi-Levi
Processes Involved in SCM
Suppliers Manufacturers Distributors Retailers Consumers
Customer order
1. Order arrival
(retail stores
call/mail order center,
website)
2. Order entry
3. Order fulfillment
4. Order receiving
Replenishment
1. Retail order trigger
(inventory low)
2. Retail order entry
3. Retail order fulfillment
4. Retail order receiving
Manufacturing
1. Order arrival from Distr.
2. Production scheduling
3. Manufacturing & shipping
4. Order receiving by Distr.
Procurement
1. Order from Mfg
2. Supplier production scheduling
3. Component manufacturing/shipping
4. Order receiving by Mfg
Copyright 2003 D.
Simchi-Levi
TYPICAL DECISIONS
Strategic
Tactical
TYPE TIME FRAME
Supply chain strategies (Sell direct or through
retailers? Outsource or in-house? Focus on cost or
customer service?)
Supply chain network design (How many plants?
Location and capacities of plants and warehouses?)
Product mix at each plant
years
Workforce & Production planning
Inventory policies (safety stock level)
Which locations supply which markets
Transportation strategies
3 mo.- 1year
Operational
Production scheduling
Distribution scheduling and routing
Place inventory replenishment orders
Lead time quotations
daily
Supply Chain Decisions
Copyright 2003 D.
Simchi-Levi
Conflicting local objectives across SC
Manufacturers Distributors Retailers Consumers
Convenience
Short lead time
Large variety of
products
Few stores
Low inventory
Little variety
Close to DCs
Low inventory
Few DCs
Large shipments
Large production batches
Copyright 2003 D.
Simchi-Levi
Objective of SCM
SCM is concerned with the efficient management of
a supply chain so as to maximize supply chain profitability
across the entire supply chain

Supply chain profitability = total revenue - total cost
Manage globally, not locally
Consider both cost and customer service
(Optimal tradeoff between cost and customer service)
(Companies do not compete, their supply chains do)
Copyright 2003 D.
Simchi-Levi
Procurement
Planning
Manufacturing
Planning
Distribution
Planning
Demand
Planning
Sequential Optimization
Supply Contracts/Collaboration/Information Systems and DSS
Procurement
Planning
Manufacturing
Planning
Distribution
Planning
Demand
Planning
Global Optimization
Sequential Optimization vs.
Global Optimization
Copyright 2003 D.
Simchi-Levi
Success for SCM in Practices
P&G developed close relationship with their
suppliers and jointly created business plans to
eliminate wasteful practices across the entire
supply chain. As a result, it could save $85 million
in 18 months.
Wal-Mart is the largest and highest-profit retailer in
the world by initiating the cross-docking strategy.
Goods are continuously delivered to warehouses
without ever sitting in inventory.

Zhi-Long Chen

15
The Value of Information:
Bullwhip Effect
Copyright 2003 D.
Simchi-Levi
Information Age
Internet, Wi-Fi, XML, Web service and Data
warehouse
Provide abundance of available information
Opportunity to effectively design and manage
integrated supply chain
In modern supply chain, information replace
inventory


Copyright 2003 D.
Simchi-Levi
The Bullwhip Effect
End-customers demand does not
vary much, however, inventory and
back-order levels considerably
fluctuate
the wholesaler receives
orders from the retailer and
place orders to the distributor
Without end-customers
demand data, the wholesaler
use the order from the
retailer to perform the
forecast and make orders
External Demand
Retailer
Order lead time
Wholesaler
Order lead time
Distributor
Order lead time
Manufacturer
Production lead time
Delivery lead time
Delivery lead time
Delivery lead time
Copyright 2003 D.
Simchi-Levi
The Bullwhip Effect (Contd)
Since variability in orders by the retailer is much
higher than the end-customers demand, wholesaler
is forced to carry more safety to maintain the same
service level as retailer
This results in higher inventory levels and costs at
higher stages in a supply chain
The Bullwhip Effect (Contd)
Copyright 2004 D. Simchi-Levi
O
r
d
e
r

S
i
z
e

Time
Customer
Demand
Retailer Orders
Distributor Orders
Production Plan
Example 1: P&G Diapers
Copyright 2004 D. Simchi-Levi
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
Copyright 2003 D.
Simchi-Levi
Factors Affecting Variability
Demand Forecasting: Inventory policies such as
s,S uses the forecast of mean and S.D. of demand
to make orders so higher S.D. of demand, higher
variability of order quantities
Lead Time: With a longer lead time, a small change
in estimate of demand variability is magnified in
significant change in
Order-up-to-level = Q + AVG L + z STD
L
Average demand
over lead time
Safety stock
Copyright 2003 D.
Simchi-Levi
Factors Affecting Variability (Contd)
Batch ordering: A large order followed by several
periods of no orders and followed by another period
of a large order
Price fluctuation: Retailers tends to stock up
inventories when prices are lower. This can lead to
batch ordering
Inflated orders: Retailers tends to stock up
inventories when they suspect that products will be
in short supply. This can also lead to distortion of
demand estimation
Copyright 2003 D.
Simchi-Levi
Methods to Cope with Bullwhip Effect
Reducing uncertainty: By centralizing the demand
information throughout the SC, each stage of the
SC can perceive the complete information on actual
end-customers demand
Reducing variability: Reduce the variability of end-
customers demand, for example, everyday low
pricing
Lead time reduction: Cross-docking to reduce
delivery lead times and EDI to reduce information
lead time
Copyright 2003 D.
Simchi-Levi
Centralizing Demand Information
Centralized demand information: each stage of a
supply chain receives the customers demand
information at the POS and uses it to plan their
inventory and production plans
2
k
1 i
2
i
k
1 i
i k
p
) L 2(
p
L 2
1
Var(D)
) Var(Q

= =
+ + >
[
=
+ + >
k
1 i
2
2
i i
k
]
p
2L
p
2L
[1
Var(D)
) Var(Q
L
i
= Lead time from stage i to i+1

p = No. of customers demand observation
Copyright 2003 D.
Simchi-Levi
Retailer-Supplier Partnerships
Quick response: suppliers receive POS
data from retailers and use it to prepare
production and inventory activities,
however, the retailers still prepare
individual orders
Continuous replenishment: similar to
quick response but suppliers use the data
to prepare shipments at predetermined
levels of inventory
Vendor-managed inventory (VMI): the
suppliers decide on the appropriate
inventory policies
Efficiency Trust
Zhi-Long Chen

26
Risk Pooling
Zhi-Long Chen

27
Risk Pooling
Consider two systems:
Warehouse 1
Warehouse 2
Market 1
Market 2
Supplier
Decentralized System:
Two warehouses,
each serving
one customer
Warehouse
Market 1
Market 2
Supplier
Centralized System:
One warehouse,
serving both
customers
Questions:
Q1: For the same service level, which system will require more inventory?
Q2: For the same total inventory level, which system will have better service?
Zhi-Long Chen

28
Compare the two systems:
one product
maintain 97% service level
$60 fixed order cost
$0.27 weekly holding cost
1 week lead time
historical data on demand available (see table on next slide),
assume these data correctly represent demand distributions
Risk Pooling
Zhi-Long Chen

29
Risk Pooling Example
Week 1 2 3 4 5 6 7 8
Market 1 33 45 37 38 55 30 18 58
Market 2 46 35 41 40 26 48 18 55
Total 79 80 78 78 81 78 36 113
Historical demand data
Zhi-Long Chen

30
Risk Pooling Example
AVG STD
Market 1 39.3 13.2
Market 2 38.6 12.0
Total 77.9 20.7
Summary of historical data
Decentralized WH1
Decentralized WH2
Centralized
WH
Zhi-Long Chen

31
Given n observations of a random variable, X
1
, X
2
, ..., X
n
,
find mean, variance, and coefficient of variation
Mean
n
X
X
n
i
i
=
=
1
Variance:
1
) (
1
2
2

=

=
n
X X
n
i
i
o
Standard deviation:
1
) (
1
2

=

=
n
X X
n
i
i
o
Coefficient of variation:
X
CV
o
=
Excel: Function AVERAGE()
Excel: Function STDEV()
Quick Review of Statistics
Zhi-Long Chen

32
(s, S) Policy


I
n
v
e
n
t
o
r
y

L
e
v
e
l

S
s
0
Lead
Time
Lead
Time
Inventory Position
Q
*

Use EOQ model to determine optimal order quantity

Q
*
=

Set S = Q* + s


2 KAVG
h
Where
K = setup (ordering) cost
AVG = mean demand rate
h = unit holding cost per unit time
SS
Zhi-Long Chen

33
More specifically.
Model with uncertain demand, constant lead time
L = constant lead time
AVG = mean demand rate
STD = stdev of demand rate
Assume: Demand rate follows Normal(AVG, STD
2
)
Reorder point: s = AVG L + z STD
L
Average demand
over lead time
Safety stock
Answer: Demand over lead time follows Normal(AVG L, STD
2
L)
Question: what is the distribution of demand over lead time?
Zhi-Long Chen

34
Risk Pooling Example
AVG STD SS s Q S
Average
Inventory
Warehouse 1 39.3 13.2 25.08 65 132 197 91
Warehouse 2 38.6 12.0 22.8 62 131 193 88
Centralized
Warehouse
77.9 20.7 39.35 118 186 304 132
Optimal inventory policies
Decentralized system:
total SS = 47.88
total avg. invent. = 179
L SS = z STD
s = AVG L + SS
Q = sqrt(2K AVG/h)
Safety Stock
Reorder Point
Order Quantity
Order-up-to-level S = s + Q
Average Inventory ~ SS + Q/2
Zhi-Long Chen

35
Risk Pooling: Important
Observations
Centralizing inventory control reduces both safety stock
and average inventory level for the same service level.
(This phenomenon is called risk pooling)
Root Cause: Demand Variability (i.e. STD)
Variability of aggregated demand is lower than total variability of
individual demands
SS = (z)(STD)(sqrt(L))
Avg inventory = SS + Q/2
Everything else being equal,
a system with a lower demand
variability requires a lower SS
& lower avg inventory
Question: Why variability of aggregated demand is lower than
total variability of individual demands ?
Zhi-Long Chen

36
Warehouse
Market 1
Market 2
d
1
+d
2
: (, o
2
)
Calculating demand variability of
centralized system
Warehouse 1
Warehouse 2
Market 1
Market 2
d
1
: (
1
, o
1
2
)
d
2
: (
2
, o
2
2
)
o
2

= o
1
2
+ o
2
2
+ 2o
1
o
2
,

where -1 s s 1
: correlation coefficient of d
1
, d
2
o

s o
1
+ o
2

Conclusions:
1. Stdev of aggregated demand is
less than the sum of stdev of individual
demands
2. If demands are independent or
negatively correlated, the std of
aggregated demand is much less
1. If d
1
, d
2
positively correlated, > 0
2. If d
1
, d
2
negatively correlated, < 0

=
1
+
2
o = ??
o

o
1
+o
2
1 0 -1
2
2
2
1
o o +
P.C. N.C. Ind.
Zhi-Long Chen

37
More Observations
In general, total safety stock & average inventory
both increase with the number of stocking locations
Total SS
(Avg. Inv.)
# of stocking locations
Zhi-Long Chen

38
Decentralized Centralized
Inbound transportation cost
(from factories to warehouses)
Facility/Labor cost
Outbound transportation cost
(from warehouses to retailers)
Inventory cost
Responsiveness to customers
Lower
Lower
Higher
Lower
Lower
Centralized vs. Decentralized
Zhi-Long Chen

39
Critical Points about Risk Pooling
Centralizing inventory reduces both safety stock and
average inventory in the system.

The benefits from risk pooling depend on the behavior of
demand from one market relative to the demand form
another (demand correlations).

The higher the coefficient of variation, the greater the
benefit obtained from centralized system.


Zhi-Long Chen

40
Push, Pull, Push-Pull
Strategy

Copyright 2003 D.
Simchi-Levi
Push Strategy
Production and distribution decision based on long
term forecasts
Take long time to react to the changing marketplace
Problems
- Inability to meet changing demand patterns
- Product obsolescence
- Excessive inventories for large safety stock
- Low service levels

Copyright 2003 D.
Simchi-Levi
Pull Strategy
Production and distribution based on demand driven
by fast information flow to transfer demand data
Coordinate with true customer demand rather than
forecast demand
Advantages
- Reduced lead times (better
anticipation and coordination)
- Decreased inventory levels at
retailers and manufacturers
- Decreased system variability
- Better response to changing
markets
disadvantages
- Harder to leverage economies
of scale (manufacturing and
transportation)
- Doesnt work in the case that
lead times are too long
David Simchi-Levi
Matching Supply Chain Strategies
with Products

Pull Push
Pull



Push
I
Computer
II
Furniture,
Automobile
IV
Books, CDs
III
Grocery
Demand
uncertainty
(C.V.)
Delivery cost
Unit price
L H
H







L
Economies of
Scale
David Simchi-Levi
Selecting the Best SC Strategy
Higher demand uncertainty suggests pull
High importance of economies of scale suggests
push
High uncertainty/ EOS not important such as the
computer industry implies pull
Low uncertainty/ EOS important such as groceries
implies push
Demand is stable
Transportation cost reduction is critical
Pull would not be appropriate here.
David Simchi-Levi
Selecting the Best SC Strategy
Low uncertainty but low value of economies of scale
(high volume books and cds)
Either push strategies or push/pull strategies might be most
appropriate

High uncertainty and high value of economies of scale
For example, the furniture or automobile industry
How can production be pull but delivery push?
Is this a pull-push system?
David Simchi-Levi
Push-Pull Strategy
Pull strategy normally leads to a reduction in lead times, inventory
level and system costs and better resource utilization
Unfortunately, it is impractical to implement a pull-based system
throughout the entire supply chain
Due to too long lead times, necessary of economies of scale in
production and transportation
Therefore, a combination of push and pull strategies is preferred
End customer Raw materials Components Assembly
Push strategy Pull strategy
Dells push-pull strategy
David Simchi-Levi 47
Locating the Push-Pull Boundary
The push section:
Uncertainty is relatively low
Economies of scale important
Long lead times
Complex supply chain structures

Thus:
Management based on forecasts is appropriate
Focus is on cost minimization
Achieved by effective resource utilization supply chain
optimization
David Simchi-Levi 48
The pull section:
High uncertainty
Simple supply chain structure
Short lead times
Thus
Reacting to realized demand is important
Focus on service level
Flexible and responsive approaches
Locating the Push-Pull Boundary
David Simchi-Levi
Characteristics and Skills
Raw
Material
Customers
Pull
Push
Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness

David Simchi-Levi 50
Locating the Push-Pull Boundary
David Simchi-Levi 51
Locating the Push-Pull Boundary
The push section requires:
Supply chain planning
Long term strategies
The pull section requires:
Order fulfillment processes
Customer relationship management
Buffer inventory at the boundaries:
The output of the tactical planning process
The input to the order fulfillment process.
Zhi-Long Chen

52
Distribution Strategy

David Simchi-Levi 53
Types of Distribution Strategies
Direct Shipping
Shipping via Warehouses
Shipping via Cross Docks
Third Party Logistics (3PL)
David Simchi-Levi 54
Direct Shipping (Contd)
Advantages:
Avoids the expense of operating a distribution center
Lead times are reduced

Disadvantages:
Risk pooling strategy cannot be applied in this case
Transportation costs of manufacturing and retailer increase
because inventory must be sent in smaller volumes (less than
truck load)

David Simchi-Levi 55
Shipping Via Warehouses
Advantages:
Better service from regional locations
Transportation economies
Mixing functions
Risk pooling over the manufacturing or procurement
lead time
Differentiated stocking and service policies


David Simchi-Levi 56
Shipping Via Warehouses (Contd)
Design and planning issues:
Number of echelons
Number and location of distribution centers
Stock location: what items to stock at each DC
Replenishment policies inventory & transportation;
who serves whom
Information systems



David Simchi-Levi 57
Shipping Via Cross docks
Warehouses:
Receiving, Sorting, Storing, Order Picking, Shipping
Cross Docks = Warehouses without inventory
Receiving, Sorting, Shipping
Sorting
Receiving
Inbound shipments
Shipping
Outbound shipments
Requires coordination & IT support
David Simchi-Levi 58
Shipping Via Cross docks (Contd)
Goods spend at most 48 hours in the warehouse
Cross Docking avoids inventory and handling costs,
Stores trigger orders for products
Very difficult to manage
Requires advanced information technology
All of Wal-Marts distribution centers, suppliers and
stores are electronically linked to guarantee that any
order is processed and executed in a matter of hours





David Simchi-Levi 59
Shipping Via Cross docks (Contd)
Goods spend at most 48 hours in the warehouse
Cross Docking avoids inventory and handling costs,
Stores trigger orders for products
Very difficult to manage
Requires advanced information technology
All of Wal-Marts distribution centers, suppliers and
stores are electronically linked to guarantee that any
order is processed and executed in a matter of hours





David Simchi-Levi 60
Shipping Via Cross docks (Contd)
Wal-Mart operates a private satellite-communications
system that sends point-of-sale data to all its vendors
allowing them to have a clear vision of sales at the
stores
Needs a fast and responsive transportation system
Wal-Mart has a dedicated fleet of 2000 truck that serve
their 19 warehouses. This allows them to ship goods
from warehouses to stores in less than 48 hours
replenish stores twice a week on average





David Simchi-Levi 61
Comparing Three Strategies
W2
Factory
W1
W3
Decentralized system: r = 1, L

Safety stock at each warehouse proportional to

Total safety stock
i
L 1 o +
3
i
i 1
z L 1 o
=
~ +

David Simchi-Levi 62
Comparing Three Strategies
(Contd)
W2
Factory
W1
W3
Idealized system: r=1, L

Total safety stock


Safety stock at each warehouse
3
2
i
i
3
i 1
i
i 1
z L 1
o
o
o
=
=
~ +

3
2
i
i 1
z L 1 o
=
~ +

David Simchi-Levi 63
Comparing Three Strategies
(Contd)
W2
Factory
W1
W3
Cross-dock system: r = 1, L = L
1
+ L
2


Each period:
System replenishment order = d
1
+ d
2
+ d
3

Allocate stock

receipts to balance inventories
Transship allocations
L
1

L
2

David Simchi-Levi 64
Comparing Three Strategies
Total safety stock
Decentralized

Idealized
Cross-dock
n L 1 o ~ +
n L 1 o ~ +
1
2
L
n L 1
n
o ~ + +
n identical warehouses,
each with standard deviation of demand = o
Stephen C. Graves

65
L
1
=0 L
1
=2 L
1
=5 L
1
=8 L
1
=10 Ideal
n=1 166 166 166 166 166 166
n=2 332 316 292 265 245 235
n=3 497 466 415 357 312 287
n=5 829 766 661 536 433 371
n=10 1658 1517 1275 975 707 524
Safety stock
L = 10, o = 50, n warehouses with same o
Cross-Docking v.s. Idealized System
Stephen C. Graves

66
# of Ws One-echelon Two-echelon
n=1 150 212
n=2 300 342
n=3 450 457
n=4 600 566
n=5 750 671
Decentralized v.s. CDC
Zhi-Long Chen

67
Revenue Management

Copyright 2002 D. Simchi-Levi
Revenue Management
Example:
A cruise ship with C=400 identical cabins
The Price-Quantity relationship
Copyright 2002 D.
Simchi-Levi
Revenue Management
Price
No.
seats
2000
1000
P=2000-2Q
Copyright 2002 D. Simchi-Levi
Revenue Management
Example:
A cruise ship with C=400 identical cabins
The Price-Quantity relationship
What is the price that the company should
charge to maximize revenue?
Copyright 2002 D.
Simchi-Levi
Revenue Management
Price
No.
seats
P
0
=1200

C=500
Revenue=480,000
Copyright 2002 D.
Simchi-Levi
Revenue Management
Price
No.
seats
P
0
=1200

C=400
Money on the Table=160,000
Copyright 2002 D.
Simchi-Levi
Revenue Management
Price
No.
seats
P
2
=1600


Q
2
=200

Copyright 2002 D.
Simchi-Levi
Revenue Management
Price
No.
seats
Q
1
=400
P
1
=1200

Q
2
=200
P
2
=1600
Revenue=1600(200) + 1200(400-200)=560,000
Copyright 2002 D. Simchi-Levi
Revenue Management
Can we increase revenue more?
Copyright 2002 D.
Simchi-Levi
Revenue Management
Price
No.
seats
Q
1
=400
P
1
=1200

Q
2
=200
P
2
=1600
P
3
=1800
Q
3
=100
Revenue=1800(100) + 1600(200-100) +
1200(400-200)=580,000
Copyright 2002 D. Simchi-Levi
How can the firm prevent customers
from moving from one class to another?

Leisure
Travelers
Business
Travelers
No
Offer
No
Demand
Sensitivity
to
Price
Sensitivity to Duration
Sensitivity to Flexibility
High Low
Low



High
Mail-in Rebate
To differentiate between customers based on their
sensitivity to price
Adding significant hurdle to the buying process; to
receive rebate
Have to complete and mail the coupon to the
manufacturer
Those customers willing to pay the higher price will not
necessarily send the coupon





Copyright 2002 D. Simchi-Levi
A Retailer and a manufacturer.
Retailer faces customer demand.
Retailer orders from manufacturer.

Selling Price=?
Wholesale Price=$900

Retailer Manufacturer
Variable Production Cost=$200
Example
Copyright 2002 D.
Simchi-Levi
Example (Contd)
Deman
d
Price
10000
2000
P=2000-0.2Q
Copyright 2002 D.
Simchi-Levi
Retailer Expected Profit
(No Rebate)
0
200, 000
400, 000
600, 000
800, 000
1, 000, 000
1, 200, 000
1, 400, 000
1, 600, 000
500 1, 000 1, 500 2, 000 2, 500 3, 000 3, 500 3, 654 4, 110 4, 567 4, 547
Order
R
e
t
a
i
l
e
r

E
x
p
e
c
t
e
d

P
r
o
f
i
t
$1,370,096
Copyright 2002 D.
Simchi-Levi
Manufacturer Profit
(No Rebate)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
5
0
0
1
,
0
0
0
1
,
5
0
0
2
,
0
0
0
2
,
5
0
0
3
,
0
0
0
3
,
5
0
0
3
,
6
5
4
4
,
1
1
0
4
,
5
6
7
4
,
5
4
7
4
,
9
6
1
5
,
3
7
4
5
,
7
8
8
6
,
2
0
1
6
,
6
1
4
7
,
0
2
8
7
,
4
4
1
7
,
8
5
5
Order
M
a
n
u
f
a
c
t
u
r
e
r

P
r
o
f
i
t
$1,750,000
Copyright 2002 D.
Simchi-Levi
Example (Contd)
Deman
d
Price
10000
2000
P=2100-0.2Q
Copyright 2002 D.
Simchi-Levi
Retailer Expected Profit
($100 Rebate)
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,110 4,567 4,547 4,961
Order
R
e
t
a
i
l
e
r

E
x
p
e
c
t
e
d

P
r
o
f
i
t
$1,644,115
Copyright 2002 D.
Simchi-Levi
Manufacturer Profit
($100 Rebate)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
1
,
0
0
0
1
,
5
0
0
2
,
0
0
0
2
,
5
0
0
3
,
0
0
0
3
,
5
0
0
4
,
0
0
0
4
,
1
1
0
4
,
5
6
7
4
,
5
4
7
4
,
9
6
1
5
,
3
7
4
5
,
7
8
8
6
,
2
0
1
6
,
6
1
4
7
,
0
2
8
7
,
4
4
1
7
,
8
5
5
8
,
2
6
8
Order
M
a
n
u
f
a
c
t
u
r
e
r

P
r
o
f
i
t
$1,810,392
Zhi-Long Chen

86
Main Reference
Presentation slides of Prof. Zhi-Long Chen in the course
Supply Chain Strategies, MIT, Mass, US.
Simchi-levi, D., Kaminski, P. and Simchi-levi, E. (2004),
Chapter 3, Inventory Management.
Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E.
(2003), Designing and Managing the Supply Chain,
Irwin McGraw Hill, 2nd edition.