Supply Chain Management
Managing Material Waiting Time
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Outline
 A key
to matching supply and demand
 Levers for improved matching of supply and
demand
 The bullwhip effect: Barilla
 The impact of aggregation
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The Supply Chain
The Procurement
or supply system
Raw Material
supply points
Movement/
Transport
The Operating
System
Raw Material
Storage
Movement/
Transport
The Distribution System
Manufacturing
STORAGE
PLANT 1
STORAGE
PLANT 2
STORAGE
PLANT 3
Movement/
Transport
Finished Goods
Storage
WAREHOUSE
WAREHOUSE
WAREHOUSE
Movement/
Transport
A
B
C
MARKETS
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Key Financial Indicators of Supply
Chain Performance
 Return
on Assets
 Net Present Value
…
…
These are LAGGING indicators. What must the
supply chain do to achieve this?
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Costs of not Matching Supply and
Demand
 Cost
of overstocking
– liquidation, obsolescence, holding

Cost of under-stocking
– lost sales and resulting lost margin
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Accurately Matching Demand with
Supply is the Key Challenge: Inventories



... by 1990 Wal-Mart was already winning an important
technological war that other discounters did not seem to know
was on. “Wal-Mart has the most advanced inventory
technology in the business and they have invested billions in
it”. (NYT, Nov. 95).
WSJ, Aug. 93: Dell Computer stock plunges. The company
was sharply off in forecast of demand resulting in inventory
writedowns.
BW 1997:
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Mass Customization
 Mass
Production
– Produce goods and services at low enough cost that
nearly everyone can afford them

Mass Customization
– Produce goods and services at affordable prices with
enough variety and customization that nearly everyone
can find exactly what they want
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Implications
 Markets
have become increasingly heterogeneous
 Demand for individual products is very unstable
 Along with shorter development cycles comes
shorter product life cycles
 How to provide increased variety and keep costs
down?
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A Key to Matching Supply and Demand
When would you rather place your bet?
A
A:
B:
C:
D:
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B
C D
A month before start of Derby
The Monday before start of Derby
The morning of start of Derby
The lead horse is an inch from the finish line
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Push/Pull View of Supply Chains
Procurement,
Manufacturing and
Replenishment cycles
PUSH PROCESSES
Customer Order
Cycle
PULL PROCESSES
Customer
Order Arrives
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Role of Inventory in the Supply Chain
Improve Matching of Supply
and Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Economies of Scale
Supply / Demand
Variability
Seasonal
Variability
Cycle Inventory
Safety Inventory
Seasonal Inventory
Figure Error! No text of
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Demand uncertainty and forecasting

Forecasts are usually (always?) wrong

A good forecast includes a measure of forecast
error, e.g., standard deviation

The forecast horizon must at least be as large as
the lead time. The longer the forecast horizon, the
less accurate the forecast
 Aggregate
forecasts tend to be more accurate than
disaggregate forecasts.
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Demand uncertainty and forecasting
Year
1986
1987
1988
1989
1990
1991
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Demand
270
309
274
268
268
316
Forecast
Error
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Uncertainty
Uncertainty
Information
Uncertainty
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Customer
Demand
Uncertainty
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Information Uncertainty: Barilla Spa
 Why
are order sizes at Pedrignano so much more
variable than those at Cortese?
 What can Barilla do to improve coordination in its
supply chain?
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The Bull-Whip Effect:
Causes
 Rational
–
–
–
–
–
and Optimizing Players in Supply Chain
Order Batching
Price Variations
Sales Force Incentives
Demand Signal Processing
Rationing Game
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Reducing Batch Size
 Wal-Mart:
3 day replenishment cycle
 Seven Eleven Japan: Multiple daily replenishment
 P&G: Mixed truck loads
 Efforts required in:
– Transportation (Cross docking)
– Information
– Receiving
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Quantity Discounts
Quantity Discounts
Cost/Unit
$3
$2.96
5,000
$2.92
10,000
Order Quantity
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Trade Promotions
•Trade Promotions
350
300
250
200
Consumption
150
100
50
0
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Trade promotions
•Trade Promotions
800
700
600
500
400
Shipments
Consumption
300
200
100
0
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The Bullwhip Effect: Countermeasures

Order Batching
– Reduce setup cost, aggregation during transport, switch to volume
based quantity discounts (rolling horizon)

Price Variations
– Every day low pricing, sell-thru based promotions

Sales Force Incentives
– Incentives based on sell-thru, rolling horizon

Demand Signal Processing
– Supply chain visibility, collaborative forecasting and planning

Rationing Game
– Turn and earn
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Tackling Demand Uncertainty
 The
longer the forecast horizon, the less
accurate the forecast
– Supply Chain Goal: Quick Response
 Aggregate
forecasts tend to be more accurate
than disaggregate forecasts
– Supply Chain Goal: Accurate Response
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Quick Response
 Shorten
supply lead time
 Increase replenishment frequency
 Coordinate supply chain
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A Key to Accurate Response: Inventory
Pooling
Which of the two systems provides a higher level of service for a given level
of safety stock?
System A (Decentralized)
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System B (Centralized)
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Accurate Response Examples

Information centralization: Wal-Mart, The
Gap, mail order

Specialization: W.W. Grainger

Product substitution: Dell, Category
Management
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Accurate Response at Dell
•Geographical aggregation: One location in the US;
three locations worldwide
•SKU aggregation: Postponement and component
commonality
Manufacture common
components
Final Assembly and delivery
Customer order
arrives
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Hewlett Packard: Postponement
DC
Vancouver
Sale
Localization at Vancouver
No
Postponement
(unit cost
cheap)
Localization at DC
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Postponement
(unit cost
expensive)
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Improved Matching of Supply and
Demand
Improve Matching of
Supply and Demand
Improved Forecasting
Reduce Material Flow
Time
Reduce Waiting Time
Reduce Buffer Inventory
Supply / Demand
Variability
Economies of Scale
1.
2.
3.
Reduce fixed cost per
batch
Evaluate quantity
discounts
Reduce trade promotions
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1.
2.
3.
4.
Seasonal Variability
Reduce demand variability
Reduce delivery lead time
Reduce variability of delivery lead time
Pool the safety stock using
Physical Centralization
Information centralization
Specialization
Raw material commonality / postponement
Substitution
Reduce
information
uncertainty
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