Supply Chain Dynamics
N. R. SRINIVASA RAGHAVAN
Asst. Professor
Department of Management Studies
IISc
raghavan@mgmt.iisc.ernet.in
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Introduction
Oliver and Webber coined SCM in 1982
Their Thesis:
Top Management alone can ensure nonconflicting functional objectives along SCN
An integrated systems strategy be developed and
implemented
Coordination of M-I-F flows is challenging yet
rewarding
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Research in SCM
Research in Integration and Coordination started much
before 1982:
Channel Research (Alderson 1957)
Collaboration and Cooperation (Bowersox 1969)
Location and Control of Inventories in SCN's
(Hanssmann 1959)
Hierarchical Production Planning (Hax and Meal
1975)
Bullwhip effect in SCN's (Forrestor 1958)
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
1. Channel Research
Alderson: Market Behavior and Executive Action
(book) 1957: Principles of Postponement
Product postponement occurs in two ways:
Manufacturing PP: Changes in form and identity occur @
the latest possible point in the SCN
Logistics PP: Changes in inventory location occur @ the
latest possible point in time
HP Deskjet Printers: Lee et al., Interfaces, 1995.
Power cords, Voltage requirements, fonts, etc.
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Channel Research (contd)
Advantages of PP:
Hedge against uncertain customer demand
Reduce inventory holding cost
Reduce Logistics/Warehousing costs
Minimize imbalance in stock distribution
Eliminate stages in Manufacturing
Eg: packaging, customer does assembly etc.
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Features of PP
Loss of Economies of Scale!
Requires quick set ups and agile procurement
Reduced risk of product obsolescence
Requires increased capability to process, transmit, and
deliver orders
Product should be "DFPP"
(Should be technically and economically feasible)
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Channel Research: CODP
The location of decoupling point depends on the
product BOM: A, V, X, T
Relevant more for X and T
Trade-off between:
Inventory holding costs: increase @ ~20% from L2R
Estimated based on expected inventories at echelons given
by the inventory control policies
Cost of Lost Sales:
increase @ ~20% from R2L
Estimated based on given demand distribution and
probability of stock outs
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
2. Research on Collaboration and
Coordination
Bowersox: Physical Distribution Development, J of
Marketing, Vol 33, 1969
Individual objectives of different functional units
within a firm may counteract overall efficiency
Manufacturing: Long production runs
Procurement: Lowest procurement costs
Marketing: FGI Staging and infinite assortments
Finance: Low inventories
Logistics: FTL's
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Research on Collaboration and
Coordination (contd)
Tom Malone (MIT, CCS): Computers, Networks, and
the Corporation, Scientific American, 265:3, 1991
Compares performance of various organization
structures wrt organizational goals and KPI's
Information Sharing (Transparency) using ICT
SCM/ERP Solutions
B2B Markeplaces
B2C and CRM
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
3. Location and Control of
Inventories
Hanssmann: Optimal inventory location and control in
pdn/distbn networks, Mangement Science, 7:4, 1959
Analytical model (DP) of interacting inventories with
three serial inventory locations:
Each location follows periodic rev, order up to policy
Lead time is a positive multiple of review period
Customer demand is Normal
Trades off shortage costs with inventory holding costs;
considers revenues as a function of delivery time
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Location and Control of
Inventories (Contd)
Supply Rationing Problem: Given shortage in supplies,
how to allocate stock across echelons
Threshold policies for high priority customers (Ha 1997)
Minimize total imbalance in stock distribution s.t. service
level constraints (Van der Heijden 1997)
Hundreds of articles in various journals including OR,
MS, EJOR, JORS, IJPR, IJPDLM, JOM, etc.
Logistics given scant treatment in IC problems:
assumed deterministic
Results in failure of such models in practice
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
4. Hierarchical
Production/Distribution Planning
Hax and Meal: Hierarchical integration of production
planning and scheduling, Studies in Management Sc.,
Vol 1, 1975.
Provide effective decision support for different DM levels
within a hierarchical organization
Based on the following scheme:
Decompose to get hierarchical structure (Stgc-Tac-Opn)
Do Aggregation where possible (eg. Forecasts: agg. on
time,products,markets; Capacity: agg. On resources)
Hierarchical coordination (by setting targets+getting f/b)
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Hierarchical Planning (Contd)
Other elements:
Model building for each decision unit using a mathematical
model (ILP/DP/QN/PN) keeping solvability in mind
Model solving: Solution procedure detailed to get the plan
Cohen and Lee, OR 1989: Solved an integrated
inventory/production/distribution model hierarchically
Software Agent based frameworks available
Eg. A-Teams of IBM
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
5. Bullwhip Effect in Supply Chains
Forrestor: Industrial Dynamics, HBR, 36:4, 1958
First research paper to illustrate systems dynamics in SCN's
Base for developing Distribution Games
"BWE" coined by P&G
BWE describes the increasing amplification of orders
occuring within a SC
Resembles a whip lash
Occurs even if end-item demand is fairly stable!
Forrestor studied a simulation model of the simplest tandem
supply chain with four entities: Retailer, DC, W/H, Plant
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect (contd)
Assumptions of Forrestor's model:
Each entity can make use of only locally available info
Time delays between ordering and receipt of order
It takes 3 weeks for retailer to process the order, half a week
to transmit it to DC
The DC takes 1 week to process the order and one week to
ship to the retailer, who takes one week to ship to end
customer; assumptions for other entities likewise..
To study impact of a one time +10% change in retail
sales on orders placed and inventory levels
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect (contd)
Forrestor's results:
"...A sudden 10% increase in retail sales implies a
peaking of 34% on orders @ 14th week in factory
w/h, resulting in factory output peaking in 21st week
(including a 6 week lead time) by a whopping 45%.."
Amplified and out of phase fluctuations in ordering
and inventory levels
Avoidable inventory and shortage costs; Unstable system
RELEVANT EVEN TODAY!
Replace week by day in the above analysis
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect: Some Illustrations
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect: Some Illustrations
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Bullwhip Effect (contd)
Causes of BWE: (Empirical: Lee et al: 1997;
Analytical: Chen et al: 2000)
Demand Signal Processing (frequent updates of
forecasts; only next echelon orders considered)
Order Batching (to realise logistics EoS+Reducing
order processing costs)
Price Fluctuations (resulting in over-reactions)
Supply Rationing (Proportionate rationing;
unrestricted order acceptance+free return policy)
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Counter-Measures for BWE
Avoid multiple demand forecasts
Order based on ultimate customer demand
Use EDI+POS+VMI
Choose a good forecasting method (PLC has a major
say)
Move from decentralized DM to centralized planning
(visibility+control is better)
Remove layers in channel if possible
Eg: HP, Apple, IBM, P&G/Walmart
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Counter-Measures for BWE (contd)
Break order batches
Increase frequency of ordering (OP costs reduced by
EDI)
Resort to standardization to minmize OP costs
Use 3PL to make small batch replenishments
economical
Aggregate across retail outlets to utilize FTL EoS
Reduce safety stocks by cutting lead times
Eg: 3PL using Fedex, P&G
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
Counter-Measures for BWE (contd)
Stabilize prices
EDLP (P&G)
Special purchase contracts
Eliminate shortage gaming
Allocate based on past sales (Sun)
Share capacity and information (HP, Motorola)
Limit flexibility wrt time (HP, Seagate)
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in
The Distribution Game
Sterman: Modeling managerial behaviorMisperceptions of f/b in a dynamic DM expt,
Management Science, 35:3, 1989
"Beer Distribution Game"
Bounded rationality depicts decision makers
Orders based on current inventory status, amount
ordered by direct successors, past performance
Over-reaction; increases steadily towards u/s end of
SCN
10th August 2001
N. R. S. Raghavan, raghavan@mgmt.iisc.ernet.in