Supply-Chain Management: A View of the Future

Leroy B. Schwarz Krannert School of Management Purdue University

Supported by e-Enterprise Center at Discovery Park

Outline
Supply-Chain Management of Yesterday
How Modeled How Practiced

Supply-Chain Management of Today

How Practiced How Modeled

Outline (cont.)
Introduce Paradigm called: IDIB Portfolio Describe My Vision of the Futureof SCM Provide an Overview of 2 Projects
Collaborative Decision-Making and Implementation Secure Supply-Chain Collaboration

SCM Models of Yesterday

Took Centralized Perspective
Assumed Single, Systemwide Objective Function: F(x1, x2, x3, ...) Assumed System Information was:
Available Omnipresent

Assumed Implementation was Contractible

 Typical Results:
Characteristics of the Optimal Policy for Special Structures
Clark & Scarf, 60 Schwarz, 73

Examination of Heuristics for More General Structures

Clark & Scarf, 62 Roundy, 85

SCM Practice of Yesterday

Single-Owner Chains Took a Centralized Perspective
Single Objective Function: F(x1, x2, x3, ...) De-Centralized Decision-Making Information: Not Available or, at best, Asymmetric Implementation: De-Centralized; NOT Contractible

 Consequently:
Supply Chains Managed as Separate Entities, regardless of their ownership
Ex.: Local Objective Functions: F1(x1), F2(x2), ...

Examples
USAF Logistics Command Consumable Inventory System IBM Service-Parts Inventory System

Consequences of this:
==> Huge Buffers
Raw, WIP, and Finished-Goods Inventories Capacity Buffers (e.g., understated capacity) Leadtime Buffers (e.g., overstated leadtime)

Yesterdays Relationship: Mismatched

Models
Too Specialized Required More Information than Practice Had

Practice
Inexperienced with Models & Computers Confused by Models Suspicious of Models

SCM Practice Today

The Beginnings of Real SCM for SingleOwner Chains
Ex: Wal-Marts Retail Link Targets Partners OnLine

Capabilities
Broadcast SKU-level Data Across the Chain Observe Status ==> Implemetation Contractible

 Results:
Huge Reductions in Buffers ==> Lower Operating Costs Improved Competitiveness
Lower Prices More Customization Higher Availability

 Development of Technologies to Support Multiple-Owner SCM

Internet is Providing Experience E-Markets
Providing Buyer-Supplier Linkages

Data Standardization; e.g. RosettaNet

Beginnings of SCM for Multiple-Owner Supply Chains

VMI, Quick Repsonse VICS CPFR Campaign

 Huge Challenges for Multi-Owner Chains

Multiple often Conflicting Objective Functions Technical Difficulties in Sharing Information
SKU Identification Time-Frame

Fear about Information Sharing

Vertical Leakage Horizontal Leakage

SCM Models of Today

Models with Multi-Ownership, Competing Objective Functions, and Asymmetric Information
Roots in Economics 1980s Work of Monahan, Pasternak Contemporary Work
Supply-Chain Coordination with Contracts, G. Cachon (forthcoming) Information-Sharing and Supply-Chain Coordination, F. Chen (forthcoming)

 Models for Assessing the Impact of Decentralized Decision-Making and/or Asymmetric Information
Ex: Lee, et al. Bullwhip Paper (MS 43:4)

Results:
Assessments of Agency Loss
Non-bathtub Shaped Loss Functions

Contracting Mechanisms to Improve/Optimize Performance

Relationship Today: Out of Step

Models beginning to include ownership and private-information issues, but
Little Work on How to Share Information or How to Collaborate on Decision-Making or Implementation Ignoring the Development of More Sophisticated Centralized Models

Relationship Today: Out of Step

Practice ready to Dance but No Model Partner
Using simple models based on pull down menus in ERP systems Swimming in Data, but uncertain about how to use it

What About the Future of SCM?

First.......

The IDIB Portfolio

a.k.a. The Information, Decision-Making, Implementation, Buffer Portfolio

Managing anything can be viewed as 4 related activities:

Getting Information Making Decisions Implementing Decisions Buffering against Imperfections in information, decision-making, or implementation

Every Management System is, in fact, 4 Sub-Systems

The Information System provides information The Decision-Making System makes decisions The Implementation System implements decisions The Buffer System copes with imperfections in information, decision-making, or implementation

Each Sub-System has Cost and Quality Characteristics

The Information System
Quality Characteristics
Accuracy Leadtime Aggregation Level Horizon Etc.

Cost: Increasing and Marginally-Increasing with Quality

Each ... Characteristics (cont.)

The Decision-Making System
Quality Characteristics
Optimality; i.e., how good? Leadtime; i.e., how long to make? Etc.

Cost: Increasing and Marginally-Increasing with Quality

Each ... Characteristics (cont.)

The Implementation System
Quality Characteristics
Accuracy; i.e., conformance to decision Leadtime; i.e., how long to implement Etc.

Cost: Increasing and Marginally-Increasing with Quality

Each ... Characteristics (cont.)

The Buffer System
Quality Characteristics
Form Robustness Etc.

Cost: Increasing and Marginally-Increasing with Quality

IDIB Portfolio?
Like a Financial Portfolio, the IDIB System requires an investment of Dollars Like a Financial Porfolio, each Subsystems Characteristics Should Complement the Characteristics of the Others
Ex: Robust Buffer System Complements an Inaccurate Information System Ex: Tradeoffs Among Buffer Sub-Systems

Managing the IDIB Portfolio....

.... means changing the nature and quality of its 4 sub-systems so that total portfolio cost which includes the cost of imperfect buffering is minimized This is NOT Rocket Science!

Most Operations-Research Models Ignore the IDIB Portfolio

Example: The Newsvendor Model
Information-System Quality Assumed Implementation is Ignored Select Decision-Rule to Minimize BufferSystem Cost

IDIB Portfolio View of Newsvendor Problem

The Problem is that acquistion/production decsion must be made before demand occurs What if:
Production was instantaneous? Production Decision and Implementation Leadtime Horizon of Known Demand?

What is the Value-Added of the IDIB Paradigm?

Vantage Point on the Majority of Operations-Research Models Vantage Point on Past/Present Practice Vantage Point on the Future

1st Axiom of the IDIB Portfolio:

Given an existing IDIB Portfolio, increasing the quality of one of its components typically facilitates decreasing the quality of at least one of its other three components while maintaining the same level of customer service
the Tradeoff Axiom

Examples:
In a (Q,r) system:
If all leadtimes are fixed, then the informationsystem, decision-making, and implementation leadtimes tradeoff one-for-one If any of these leadtimes are variable, then reducing their variance facilitates reducing safety stock (buffer) inventory

Examples from Practice:

Schneider National
Increasing Quality of I, D, and I; Reducing B; improving service

Manufacturer Making Transition from a Push (e.g., MRP) to Pull (e.g., JIT)
Reducing Buffer Inventory, increasing Buffer Capacity

Domestic Manufacturer Outsourcing to OffShore Supplier

Reducing Implementation Quality (Leadtime); Increasing Buffer Inventory

The IDIB Perspective on Stateof-the-Art Practice in SCM

Involves the sharing of past, present, and future-oriented information between buyersupplier pair; and/or Involves delegation of decision-making or implementation to the supplier .....So, then what is the future.......?

2nd Axiom of the IDIB Portfolio:

Investment to improve the quality of any single component of the IDIB Portfolio will, over some range, decrease total cost of the Portfolio; but, beyond some quality level, increase total cost of the Portfolio
Do-Nothing-in-Excess Axiom

The Future of Supply-Chain Management Involves Collaborative Decision-Making and/or Implementation

Why?
For Supply Chains that already share information, the returns from additional information sharing are diminishing

For Supply Chains that are already delegating some decision-making, the returns from additional delegation are marginally diminishing

Two Personal Projects

Models for Collaborative Decision-Making
How to Improve Decision-Making and Implementation Based on Shared Information

Protocols for Secure Supply-Chain Management

How to Improve Decision-Making and Implementation without Sharing Information

Models for Collaborative SupplyChain Decision-Making

with Vinayak Deshpande & Jennifer Ryan

Starting Point is Collaborative Planning, Forecasting, and Replenishment (CPFR)

What is CPFR?
A process model, shared by the buyer and supplier, through which inventory status-, forecast-, and promotion-oriented information are shared and replenishment decisions generated

The 9 Process Steps:

Step 1: Develop Front-End Agreement: Roles, Measurement, Readiness Step 2: Create Joint Business Plan: Strategies and Tactics Step 3: Create Sales Forecast: Buyer or Supplier Step 4: Identify Exceptions for Sales Forecast

The 9 Process Steps:

Step 5: Resolve/Collaborate on Exception Items Step 6: Create Order Forecast Step 7: Identify Exceptions for Order Forecast Step 8: Resolve/Collaborate on Exception Items Step 9: Order Generation

CPFR: Whos Behind it?

Federated
Department Stores

CORNING
FIELDCREST CANNON Consumer Products

Mead
School & Office

JCPenney
Schnuck Markets

Staples

Benchmarking Partners

QRS

CPFR History:
95/96: Wal-Mart Warner-Lambert CFAR Pilot 97: VICS Develops CPFR Initiative 98: VICS CPFR Guidelines Published 99: Pilots Between
Kimberly-Clark & K-Mart, P&G & Meier, Target, Wal-Mart Nabisco & Wegmans, etc.

00:1st Production Rollout: K-Mart

CPFRs Future:
n-Tier Collaboration
Extension to Include Master-Scheduling Decisions Include Transportation

Research Topics in CPFR:

Process Model: How and Where does the CPFR model (e.g., forecast collaboration) fit into the supply-chain process? Front-End Agreements: How Should agreements be structured, performance measured, and benefits shared? Data Sharing: How should data be shared (aggregation/disaggregation issues)? Exception Processing: What constitutes an exception?

Secure Supply-Chain Collaboration

with Mikhail Atallah & Vinayak Deshpande

The Starting Point....

Information Asymmetry is one of the major sources of inefficiency in Managing Supply Chains ==> Wrong Investment in Capacity ==> Misallocation of Resources ==> Distorted Prices ==> Reduced Customer Service ==> Unnecessary Additional Costs

.... there are Very Good Reasons for Keeping Private Information Private
Fear that Supply-Chain Partner will Take Advantage of Private Information Fear that Private Information will Leak to a Competitor

So, then, the Obvious Question...

Is it possible to enjoy the benefits of Information-Sharing without Disclosing Private Information?

It Depends

If the Value of Private Information is the Information Itself, then.. ...obviously, information must be disclosed for value to be created

But, if the Value of Private Information is a Decision ....... ...then it is possible to create value without Disclosing Private Information

Example
In CPFR: Determine agreed-upon planned orders without sharing forecasts, etc.

Secure Multi-Party Computation

SMC is Decades Old Elegant Theory General Results w.r.t. Existence, Complexity, etc. Recently, Practical Protocols for Specific Problems
Ex. Electronic Voting Information Retrieval

SMC Paradigm
Alice has Private Information: XA Bob has Private Information: XB Want to Determine f(XA, XB) f(XA, XB) is well defined No Trusted Third Party Provide f(XA, XB) to Alice, Bob, both, or Neither

We are Developing Secure Multi-Party Protocols for SupplyChain Management: Secure Supply-Chain Collaboration

More Specifically...
...we are developing protocols to enable Supply-Chain Partners to Make Decisions that Cooperatively Achieve Desired System Goals without Revealing Private Information

Our Goals:
Develop and Apply SSCC Protocols to Some Well-Known SCM Problems Simple e-Auction Scenarios Simple Capacity-Allocation Scenarios Bullwhip Scenarios Compare Effectiveness of Protocols vs. non-cooperative decision-making

Our Goals (cont.):

Develop Proof-of-Concept Software Examine Security versus Cost Tradeoffs

Ex: Capacity Allocation

Single Supplier; N Retailers; Single Sales Period Supplier has constant marginal production cost, but fixed capacity, K Retailers operate in non-competing markets; each retailer i has private information, Ui, about its market that influences its order to the supplier; Supplier has prior Pr(U) If 7Ordersi > K, Supplier Uses Preannounced Allocation Mechanism

Cachon and Lariviere (MS, 99)

Examine this scenario from perspective of the retailers in non-cooperative setting Linear Demand: Market-Clearing Price, r(q) r(q) = Ui - q Several Very Interesting Results
Retailers will over-order even if Pareto allocation mechanism is used Supplier and Supply-Chain Profit can increase if a truth-telling mechanism is replaced by manipulable one.

Deshpande & Schwarz (02)

Examine this scenario and a newsvendor scenario from perspective of maximizing Supply-Chain Profit assuming truth-telling Derive conditions under which two commonly-used allocation mechanisms maximize supply-chain profit Our SSCC Protocols use these mechanisms without revealing the retailers Uis

Allocation Mechanisms
Supplier has Capacity K Retailers place orders: q1, q2, q3,..qN Assume 7qi > K Linear Allocation: qi = qi - (7qi- K)/N Proportional Allocation: qi = qi (K/ 7qi )

Proportional Allocation Protocol

1.Retailers choose a random R; 2.Every retailer sends its Rqi to Supplier 3.System computes: D = (R7qi/K) and sends it to all the retailers 4.Every retailer computes its allocation: qi = Rqi/D and sends to supplier

Notes:
We are assuming that retailers will tell the truth; i.e., reveal the quantity they truly want; (one that is consisent with their Ui) Supply Chain Profit will be reduced if they dont Contracting Mechanisms will be Required

Notes:
The Supplier Learns each Retailers qi, but not Ui Supplier Might be able to Infer Ui Shipping Proxies

We Have Only Just Begun...

Tough Issues to Deal with:
SMC Complexities; e.g.,
How to Deal with Collusion Computational Complexity (e.g., simultaneity)

Supply-Chain Modeling Complexities; e.g.

Contracting/Incentive Issues

SSCC Complexities; e.g.,

Inverse Optimization Bobs Objective is fB(xA, xB); Alices is fA((xA, xB)

Discussion....