Supply Chain Management
Lecture 6
Outline
• Today
– Homework 1 due
– Chapter 4
– Introduction to Excel Solver?
• Next week
– Chapter 5
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
Facilities Inventory Transportation Information Sourcing Pricing
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)
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?
Retail Storage with Customer Pickup
• Example: Retail stores such as
Wal-Mart and JCPenney
• Customers pick up product from
retailers
Manufacturers
Distributor
Warehouse
Retailer
Distributor
Warehouse
Retailer
Retailer
–
–
–
–
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
Consumers
Manufacturer Storage with Direct
Shipping (Drop Shipping)
• Example: eBags
• Products are shipped directly to
the consumer from the
manufacturer
• Retailer is an information
collector:
Manufacturers
Retailer
Consumers
– 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
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
Manufacturers
Mergers
Consumers
Retailer
• 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
Distributor Storage with Carrier Delivery
• Example: Amazon
• Inventory is held at a
warehouse which ships to
customer by carriers
• With respect to direct shipping
Manufacturers
Distributor
Warehouse
Distributor
Warehouse
–
–
–
–
Inventory aggregation is less
Higher inventory costs
Facility costs are higher
Less information to track
• Warehouses are physically
closer to consumers which
leads to
Consumers
– Faster response time
– Lower transportation cost
• Not effective for slow moving
items
Distributor Storage with Last Mile
Delivery
• Example: Milk delivery, Grocery
delivery (Peapod, Albertsons),
Denver Mattress
• Warehouse delivers to
customers instead of carrier
Manufacturers
Distributor
Warehouse
Distributor
Warehouse
– 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.
Consumers
– Products must be flowing fast
to justify the infrastructure
– Processing cost are high
Manufacturer or Distributor Storage With
Customer Pickup
• Example: 7dream.com
• Customers come to pick up
sites (warehouse, retailer) to
get the products
Manufacturers
– If consumers are willing to pick
up the products, let them do so.
Otherwise, they would be
charged for the delivery costs
Distributor
Warehouse
Consumers
Distributor
Warehouse
• 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
Comparing Distribution Networks
Retail
Manufacturer Manufacturer Distributor
Distributor Manufacturer
storage with storage with storage with storage with storage with storage with
customer
direct
in transit
package
last mile
customer
pickup
shipping
merge
delivery
delivery
pickup
Reponse time
1
4
4
3
2
4
Product variety
4
1
1
2
3
1
Product availability
4
1
1
2
3
1
Cusomter experience
1-5
4
3
2
1
5
Time to market
4
1
1
2
3
1
Order visibility
1
5
4
3
2
6
Returnability
1
5
5
4
3
2
Inventory
4
1
1
2
3
1
Transportation
1
4
3
2
5
1
Facility and handling
6
1
2
3
4
5
Information
1
4
4
3
2
5
1 = strongest performance
6 = weakest performance
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
Design Options For a Distribution
Network
Manufacturers
Manufacturers
Distributor
Warehouse
Retailer
Retailer
Distributor
Warehouse
Manufacturers
Retailer
Consumers
Manufacturers
Consumers
Retailer
Retailer
Consumers
Distributor
Warehouse
Mergers
Consumers
Manufacturers
Distributor
Warehouse
Distributor
Warehouse
Consumers
Manufacturers
Distributor
Warehouse
Distributor
Warehouse
Consumers
Distributor
Warehouse
From brick-and-mortar to click-andmortar
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 product’s life cycle?
Why should an e-business such as Amazon.com build
more warehouses as its sales volume grows?
Dell: Network Design (Europe)
A successful distribution network satisfies
customer needs at the lowest possible cost
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 doesn’t want to be there.
“Our supply chain needs to change dramatically,” Cannon said.
Dell: Network Design
Dell’s 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. Here’s 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.
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 that’s about a 5% reduction in total costs.
Dell to Migrate Manufacturing
Operations from Ireland to Poland
Example: Dell Network Design Decision
$31
$19
$23
Example: Dell Network Design Decision
Romenia
Poland
Ireland
France
23
19
31
Germany
9
15
11
Italy
23
21
40
Spain
29
26
40
United Kingdom
33
36
20
Capacity
80,000
80,000
80,000
Cost
$ 18,000,000.00 $ 17,500,000.00 $ 24,500,000.00
Demand
15,000.00
20,000.00
13,000.00
12,000.00
19,000.00
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
Introduction to Excel Solver
• Installing Excel Solver
– Goto Tools > Add-ins…
– Select “Solver Add-in” and press OK
• Opening Excel Solver
– Goto Tools > Solver
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
Example: Profit Maximization Problem
8 Feet Aluminum Frame Doors
4x6 Wood Frame Windows
Windsor Glass Company
Plant 1
(Aluminum frames)
1 hour
Excess cap. 4 hours
Plant 2
(Wood frames)
2 hours
Excess cap. 12 hours
Plant 3
(Glass and assembly)
Profits
3 hours
2 hours
$3,000
$5,000
Excess cap. 18 hours
Windsor Glass Company Model
• Inputs
Production time per batch (hours)
Plant 1
Plant 2
Plant 3
Profit per batch
Doors
1
0
3
$3,000
Windows
0
2
2
$5,000
Available time (hours)
4
12
18
• Decision variables
– X1 number of batches of doors produced
– X2 number of batches of windows produced
Windsor Glass Company Model
• Objective function
– Maximize
3000 X1 + 5000 X2
Production time per batch (hours)
Plant 1
Plant 2
Plant 3
Profit per batch
Doors
1
0
3
$3,000
Windows
0
2
2
$5,000
Available time (hours)
4
12
18
Windsor Glass Company Model
• Constraints
– Hours available in Plant 1
X1  4
– Hours available in Plant 2
2 X2  12
– Hours available in Plant 3
3 X1 + 2 X2  18
– Nonnegative production quantities
X1  0, X2  0
Production time per batch (hours)
Plant 1
Plant 2
Plant 3
Profit per batch
Doors
1
0
3
$3,000
Windows
0
2
2
$5,000
Available time (hours)
4
12
18
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
2 X2
3 X1 + 2 X2
X1, X2
<= 4
<= 12
<= 18
>= 0
(Available hours Plant 1)
(Available hours Plant 2)
(Available hours Plant 3)
(nonnegativity)
Windsor Glass Company Model
• Objective function
– Maximize 3000 X1 + 5000 X2
Objective function
Maximize profit
=SUMPRODUCT(E4:E5,H4:H5)
Windsor Glass Company Model
• Constraints
–
–
–
–
0
X1<= 4 - X1
<= 4
0
2 <=
X2 12 - 2 X2 <= 12
0
3 <=
X1 +182 -X32 X1 -<=
2X
182
X1, X2 >= 0
>= 0
(Available hours Plant 1)
(Available hours Plant 2)
(Available hours Plant 3)
(nonnegativity)
Constraints
Plant 1
Doors
Windows
Available time (hours) =B6-SUMPRODUCT(B4:B5,H4:H5)
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 <= 4 - X1
0 <= 12 - 2 X2
0 <= 18 - 3 X1 - 2 X2
X1, X2
>= 0
(Available hours Plant 1)
(Available hours Plant 2)
(Available hours Plant 3)
(nonnegativity)
Windsor Glass Company Model using
Excel Solver
Objective function
Decision variables
Constraints
Windsor Glass Company Model using
Excel
Inputs
Variables
Production time per batch (hours)
Plant 1
Plant 2
Plant 3
Doors
1
0
Windows
0
2
Available time (hours)
4
12
Profit per batch
3
$3,000
2
$5,000
18
Constraints
Plant 1
Doors
Windows
Available time (hours)
Plant 2
2
Objective function
Maximize profit
$
36,000
Plant 3
0
Profit per batch
0
Doors
Windows
2
6