Operations Management-104
Debabrata Ghosh
Flow of Material
C1
C2
Flow of Information
C3
C4
Flow of Information
C5
C6
VENDORS
INBOUND
TRANSPORTATION
PLANTS
INTERFACILITY
TRANSPORTATION
Source: Supply Chain Management: Text and Cases Janat Shah, Pearson Education India, 2009
Operations Management-104
DISTRBUTION
OUTBOUND
DISTRIBUTION
CENTRES
TRANSPORTATION CUSTOMERS
CENTERS
Flow of Cash
Timber
Company
Unilever or
other
manufacturer
Chemical
Manufacturer
Operations Management-104
Paper
Manufacturer
Spencers or
Third Part DC
Tenco Packaging
Spencers store
Customer
Plastic Producer
Operations Management-104
Product Design
[Hong Kong]
Yarn Spinning
[Korea]
QC & Shipping
[Hong Kong]
Weaving
[Taiwan]
Stitching
[Indonesia]
Zippers+
[Japan+]
Operations Management-104
Source: Designing and Managing the supply chain, Simchi-Levi et.al., Mc-Graw Hill, 3rd Ed., 2008
Operations Management-104
In September 1999, a massive earthquake devastated Taiwan. Companies like Hewlett-Packard and
Dell which sourced a variety of components were severely affected.
2012 and subsequent devastating fires in the apparel manufacturing factories of global retail
players not only indicated a severe gap in safety standards of the workers in those factories but also
brought global brands under pressure for quality audits and maintenance of safety standards of
supplier facilities.
2013 report of fall in demand (post Diwali) for automobiles led to an inventory pile up of over Rs.
20,000 crore forcing several automakers like Maruti and GM in India to either plan a production cut
or periodic plant shutdowns.
Stiff competition
General slowdown in the PC
market
Operations Management-104
The need to understand and improve operations beyond the boundaries of the firm
while dynamically focussing on various components of the chain, has led to growth of
supply chain management studies and practice.
Operations Management-104
Operations Management-104
10
Complexity
U.S. companies spent more than $1 trillion in supply-related activities (1015% of Gross Domestic Product)
Transportation 58%
Inventory 38%
Management 4%
The grocery industry could save $30 billion by using effective logistics
strategies
A typical box of cereal spends 104 days getting from factory to
supermarket.
A typical new car spends 15 days traveling from the factory to the
dealership.
Operations Management-104
11
Customer Order
Cycle
Retailer
Replenishment
Cycle
Distributor
Manufacturing
Cycle
Manufacturer
Procurement Cycle
Supplier
Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008
Operations Management-104
12
Source
Customer Order
Make components
Assembly
Delivery
MTS
Customer Order
Source
Make components
Assembly
Delivery
MTO
Customer Order
Source
Make components
Assembly
Delivery
CTO
Operations Management-104
13
Source: Designing and Managing the supply chain, Simchi-Levi et.al., Mc-Graw Hill, 3rd Ed., 2008
14
1985-1986--
1990--
1996-1997--
Dell goes online; $1 million per day in online sales; $5.3B in annual sales
Dell online sales at $3 million per day; 50% growth rate for 3rd
consecutive year, $7.8B in total annual sales.
2005--
$49.2B in sales
Operations Management-104
15
1997
1998
1999
2000
2001
2002
2003
Revenue
(billion $)
5.3
7.8
12.3
18.2
25.3
31.9
31.2
35.4
Cost of
goods sold
(billion $)
4.2
6.1
9.6
14.1
20.1
25.5
25.7
29.1
Total
Inventory
(million $)
356.7
217.3
184.1
231.8
330.4
349.3
307
306
Source: Operations Management, James R Evans & David A collier, Thomson, 2007
Operations Management-104
16
Dell Computers
Customization.
Medium term relationship with suppliers
Suppliers have to maintain technology and cost leadership.
Bharti-Airtel
Strategic Outsourcing : Network Management with Nokia & Ericsson & IT
Management with IBM
Source: Supply Chain Management: Text and Cases Janat Shah, Pearson Education India, 2009
Operations Management-104
17
2009
1. Apple
1. Apple
74.1
1. Apple
2. McDonalds
2. Amazon
10.0
2. Dell
3. Amazon
3. McDonald's
142.4
3. P&G
4. Unilever
4. Dell
35.6
4.IBM
5. Intel
5. P&G
5.5
5. CISCO
6.P&G
6. Coca-Cola
5.8
6.Nokia
7. CISCO
7.Intel
5.0
7.Wal-Mart
8. Samsung
8. Cisco Systems
11.0
8.Samsung
9. Coca-Cola
9. Wal-Mart Stores
8.3
9. PepsiCo
6.0
10. Toyota
Operations Management-104
18
60%
Semiconductor
Equipment
40%
20%
PC
0%
-20%
Semiconductor
-40%
1995
1996
1997
1998
1999
2000
2001
Annual percentage changes in demand (in $s) at three levels of the semiconductor
supply chain: personal computers, semiconductors and semiconductor manufacturing
equipment.
Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012
Operations Management-104
19
Buyer Practices
Supplier Practices
Incentives offered to buy-in-bulk
Price Promotions
Sales force incentive
Supplier behaviour uncertainty
Shortage Handling
Price Fluctuations
Supplier Inefficiency
Order
Order
Source: Supply Chain Management: Text and Cases Janat Shah, Pearson Education India, 2009
Operations Management-104
20
Information sharing:
Collaborative Planning, Forecasting and Replenishment (CPFR)
Continuous Replenishment
Efficient Promotions
Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008
Operations Management-104
21
Cu
F (Q*)
Cu Co
Expected overstock from an order for Normally distributed demand with mean and s.d.
Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008
Operations Management-104
22
Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008
Operations Management-104
23
Example:
Zamatia makes sunglass at a cost of $35 and sells them to UV for $75.
UV sells them for $115 and salvages left over inventory for $25 per unit.
Demand is normal with mean 250 and standard deviation 125.
UV faces a newsvendor problem.
UV:
Cu = 115 - 75 = 40, Co =75 - 25 = 50, Critical ratio = 40 / 90 = 0.44
Q = + Z* = 250 + (-0.13)*125 = 234
Expected Profit of UV= $5580
Profit of Zamatia = 40*234 = $9360
Total supply chain profit = $14940
What is the order quantity if a single firm made the decision for the supply chain?
Supply chain:
Cu = 115 - 35 = 80, Co =35 - 25 = 10, Critical ratio = 80 / 90 = 0.89
Supply chains critical ratio is much higher than UVs critical ratio!
Q = + Z* = 250 + (1.23)*125 = 404
Expected Profit = $ 17830
Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012
Operations Management-104
24
Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012
Operations Management-104
25
Buy-Back Contracts
Let Zamatia offer Umbra to buy back the leftover sunglasses at the end of the season at a
price of $75
UV incurs a cost of $1.50 per pair for shipping leftover inventory to Zamatia
Zamatias salvages these sunglasses for $26.50
Cu = 115 - 75 = 40, Co =1.50, Critical ratio = 40 / 41.5 = 0.9639
Q = 475
UVs expected profit = $9580
Expected Leftover Inventory = 227
Zamatias expected profit = (475*75) (475*35) (227*75) + (227* 26.5) = $7991
Total supply chain profit = $9580 + $ 7991 = $17571
Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012
Operations Management-104
26
Buy-Back Contracts
Let Zamatia offer Umbra to buy back the leftover sunglasses at the end of the season at a
price of $65
UV incurs a cost of $1.50 per pair for shipping leftover inventory to Zamatia
Zamatias salvages these sunglasses for $26.50
Cu = 115 - 75 = 40, Co =1.50 + 75-65 = 11.50, Critical ratio = 0.7767
Q = 346
UVs expected profit = $8072
Expected Leftover Inventory = 112
Zamatias expected profit = 9528
Total supply chain profit = $17600
There is a wholesale/buy back price combination that makes both firms better off!
Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012
Operations Management-104
27
Buy-Back Contracts
Price Cost
$115 $25
Buy back price $1.5 $115 $115 $75
$71.5
$115 $35
Retailer is allowed to return to the supplier goods left over at the end of the selling season.
Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012
Operations Management-104
28