Newsvendor Model: Information and Bullwhip Effect:

– marginal cost of under-stocking = marginal cost of over-stocking è Causes of Bullwhip Effect:

Cu*Pr(D>Q*) = Co*Pr(D<=Q*) ; where Cu = p-c ; Co = c-s
è Pr(D<=Q*) = (p-c)/(p-s) = Cu/(Co+Cu) è Critical Fractile
Ordering Under Capacity Constraints: (for product i)
Marginal Contribution of Qi+1 unit = pi[1-Pr(D<=Qi)] + si[Pr(D<=Qi] - ci
è Ciu*[1-Pr(D<=Qi)] - Cio*Pr(D<=Qi) è λ
Steps:
1. Set Qi = 0 for all products
2. Compute the marginal contribution for all products
3. Increase Qj , for the product j with the largest marginal contribution, by 1
4. If all the capacity is not used up and there is some product with a positive
marginal contribution, return to Step 2, else stop
- marginal contribution is the same at optimality & is equal to shadow price of
the capacity constraint (λ) at optimality
è Ciu*[1-Pr(D<=Q*] - Cio*Pr(D<=Q*) = λ è Pr(D<=Q*)=(Ciu - λ)/(Ciu +Cio)
- Calculate Q* from above for any mean and sd,
Expected Overstock = S max(Qi*- Di) X Pr(Demand = Di)
Expected Understock = S max(Di - Qi*) X Pr(Demand = Di)
Expected Profit = {S Pr(Demand = Di)*[pi*max(Di ,Qi*) + si*max(Qi*-Di ,0)]} – ci*Qi*
- ways to reduce uncertainty : (i) Improved Forecasts, (ii) Quick Response (Multi
orders), (iii) Postponement of product differentiation till better forecasts [Note:
for a dominant product, postponement might reduce profitability]
- Value of postponement is larger the more uncertain and the less correlated the
individual product demands
- Postponement may inc manufacturing cost
- Use Tailored Postponment
1. Increased Batching: (i) High order cost or full truckload (TL) economies, (ii) Lot
size based discounts, (iii) Correlated ordering
Counters: (i) EDI & Computer Assisted Ordering (CAO) (ii) Discounts on
assorted truckload consolidated by 3rd party logistics (iii) Regular delivery
appointment. – Spread out ordering by customers over time (iv) Volume
and not lot size discounts
2. Price fluctuations: (i) High-low pricing leading to forward buying, inc.
perceived variability of demand (ii) Delivery & sell-through not synchronized
Counters: (i) EDLP, (ii)Limited purchase quantities (iii) Scan / sell-thru based
promotions (iv) Promote to end customer
3. Sales force incentives: (i)Sales force incentives based on “sell-in” leading to
forward buying, (ii) Sales force incentives over a fixed time horizon, e.g., based on
monthly thresholds, increases variability of “demand” = Sales “hockey stick”
phenomenon
Counters: (i) Focus sales force incentives on increasing sell-thru (ii)
Incentives based on rolling horizon (iii) Sales force do not compete with
each other but with the competition
4. Information distortion: (i) No visibility of end demand, (ii) Multiple forecasts
based on orders, (iii) Long and uncertain lead times
Counters: (i) Share sell-thru data and sales projections (ii) Direct sales (iii)
Single control of replenishment (iv) Lead time reductions
5. Rationing and shortage gaming: (i) Allocation scheme based on order size (e.g.
proportional), (ii) Unrestricted orders & free return policy, (iii) Ignorance of supply
conditions
6. Behavioural obstacles: (i) Lack of trust, (ii) Local reaction
Counters: (i) Allocation based on past sales (ii) Shared capacity and supply
information (iii) Building trust and partnership
Implement Collaborative Planning: replace sequential optimization with joint optimiz.
Secured Information Sharing: Can facilitate greater supply chain collaboration
Benefits: (i) Better demand forecasts (ii) better inventory management (iii) Ability to
leveraging lowest cost options (iv) Better inventory and replenishment planning (v)
Better targeted promotions

&'
Sports Obermeyer Case 𝐶𝑜𝑉 = ()*+
- When costs and margins are different use marginal contribution
approach as mentioned above
- When costs and margins are same, use equi fractile solution:
- Coefficient of Variation (CV ) of demand serves as a measure of risk
- Higher the CV, lower is the order quantity as fraction of mean demand
- Speculative capacity for low risk product and reactive capacity for high
risk high cost products
First Order in November from HK: Manage risk by choosing to order items by
raising the probability of Prob(D < Q + 600) and equating it.
Designing the Supply Chain Network Facility Decisions
Phase 1: Distribution Network
Service Factors: Customer needs è (i) Response time (ii) Product variety (iii) Product
availability (iv) Customer experience (v) Order visibility Returnability
Cost Factors: Cost of meeting needs è (i) Inventories (ii) Transportation Facilities (iii)
handling Information
Phase 2: Regional Facility Configuration
Factors: (i) Regional demand configuration (ii)Taxes and tariffs (iii) Fixed facility cost
(economies of scale) (iv) Transportation cost (v) Production cost (vi) Inventory cost (vii)
Coordination cost

Phase 3: Select Suitable Sites

• x,y: Warehouse Coordinates Gravity Model -Ton Mile Center Solution:
• xn ,yn : Coordinates of location n Makes sense when
• dn : Distance to/from location n we have identified
• Fn : Tonnage (cost/ton-mile the locations to be
to/from location n) linked & simply want
• Dn : Tons to/from location n to min. the travel cost
First Order in November from China: As min order quantity is high, prob. of
overstocking of each item is higher in china; choose china only for cost savings Phase 4: Decide Facility Location and Capacity Allocation
+
Which plants to keep open? (
𝑀𝑖𝑛 / / 𝑐12 𝑥12
What capacity to assign to each plant? 245
145
Which markets to assign to each plant? Given : ∑+145 𝑥12 = 𝐷2 ; ∑(
245 𝑥12 = 𝐾
BioPharma Case:
- To obtain the benefits of total flexibility system does not require that each plant be
totally flexible; rather a little flexibility can achieve almost all benefits of total flexibility
- Chain = group of products and plants which are all connected. No product within a
chain is built by a plant outside the chain; no plant in the chain builds a product outside
the chain
- Fewer and longer chains should be created
Changes to achieve reactive capacity: (i) Common components – gierge fabric, - Capacity planning easier for -vely correlated products in a plant
standardized zipper, (ii) Pre-positioning inventory of raw materials, (iii) air freight,
(iv) consensus forecasts, (iv) small batch first for quality assurance
- Diminishing value of reactive capacity: need only for “uncertain” part
- Methods to increase sourcing flexibility: (i) Reduce min. order quantities (ii) Fi =Fixed cost to keep plant I open
Increase reactive capacity (iii) Decrease lead-times (iv) Get early information Pik = Fixed cost to produce k in plant i
- Order highest volume, lowest risk products from China and lower volume Cijk = unit shipping cost of product k from plant i
highest risk products from HK to region j
Si = production capacity plant i
Facility Investment Strategy : Djk = Demand of k in region j
Hedging Strategy: Match revenue and cost exposure yi = (1,0) if plant I is open/closed
Flexible Strategy: (i) Excess total capacity in multiple plants (ii) Flexible tech. dik = (1,0) if plant I produces k or not
xijk= quantity of k transported from i to j
Supply Chain Processes:
Buy – Procurement / Financing / Hiring
Make / Create – Design / Manufacturing / Production / Service
Sell – Distribution / Marketing
Move – Logistics / Transportation / Warehousing
Buy + Make / Create + Sell + Move = SCM processes
A supply chain consists of all organizations involved directly or
indirectly in fulfilling the customer request
Drivers of supply chain management:
1) Facilities – Location, capacity, # of, technology/automation,
function 2)Inventory - Make to order, make to stock, Stocking
locations and SKUs, Service level, Degree of sharing inventory,
information needs, Aggregate planning to cater to seasonal demand,
Promotions planning
3) Transportation - Modes of transportation, Cross docking, 3PL, Route
selection, network selection
4)Information - Demand forecasting, Information sharing and
coordination, IT: ERP, Internet/EDI, special packages
Grocery Gateway:
Value Proposition - Groceries at affordable prices, delivered to your
doorstep, when you want it
Supply Chain Strategy - Low-cost, high service logistics execution in one
market; had their own fleet and inventory
Key objectives in designing order picking operations:
1. Pick Rate
2. Flow Time - Time required to get an order from order entry point to the
shipping dock
3. Accuracy - product numbering scheme, product labels, product
packaging, design of picking documents, location numbering scheme,
storage equipment, lighting conditions, picking method used;
Technologies aiding in picking accuracy: pick-to-light systems,
counting scales, and bar code scanners
Increasing SPHOA improves profitability.
Need operations at scale for in-house transportation to be profitable
Limit Fleet Capacity -> Identify markets with higher overall profitability
Designing Transportation: Higher responsiveness => more frequent, smaller
outbound shipment sizes => higher transportation costs
Factors affecting unit delivery cost: distance, density and size of customer
Tailored Service: higher density areas / larger customers => shorter response time
(higher frequency); higher density areas / smaller customers => temporal aggregation
(lower frequency)
Tailored pricing: Same response time to all but price higher to low density areas
Building Routes :
Saving matrix
method
- Identify dist.
matrix
- Identify savings
matrix (dist. savings
by combining
routes)
– Assign customers
to vehicles or routes
- Sequence
customers within
routes
1. Combine 6 & 11; highest savings – 34;
total load - 107
2. Combine 7 to 6 & 11 route; second
highest savings – 34; total load =163
3. 5 & 10 can’t be combined with 6,7
&11 route because of load constraint
4. Start new route with 3 & 4, next highest
savings
Determine delivery sequences performing
route improvement optimization to lower
dist. and transportation costs
Service Level: Prob. of non-stockout in a cycle
Inventory Management System
Fill Rate - Proportion of demand filled per cycle
Continuous Review Inventory Periodic Review Inventory
Order fixed quantity (Q) when T: # of periods between two orders
inventory reach Reorder point (ROP) 1. OUL with zero lead time
2. OUL with lead time
Alko Case: Period review inventory system with lead time; Centralized vs
Decentralized distribution network; OUL and avg inventory from above formulas
Annual cost for part in region = Annual transport. cost + Annual invent. holding cost
1. Decentralized Distribution System:
Annual transportation cost = # of products x average demand / day x (TL cost plant
to DC + LTL cost DC to customer) x 365 days / yr
Annual inventory holding cost = # of products x average inventory x inventory
holding cost / unit / day x 365 days / yr
2. Centralized Distribution System:
Annual transportation cost = # of products x average demand / day x (TL cost plant
to central DC + LTL cost central DC to customer) x 365 days / yr
Annual inventory holding cost = # of products x average inventory x inventory
holding cost / unit / day x 365 days / yr
- As correlation between demand across regions increases the benefit of
aggregation decreases
- Aggregation decreases inventories and facility costs, but increases
transportation and product design costs and hurts response time
- Tailored aggregation: aggregate items with (i) high CV , (ii) long replenishment
lead time, (iii) high value, (iv) independent or -ve correlated demand (disaggregate
items with +ve correlated demand), (v) high desired level of availability
- Types of inventory consolidation: (i) Physical/Geographical (ii) Temporal
- Impact of Aggregation: (i) Decreased inventory costs, (ii) Decreased inbound
transportation costs (iii) Increased outbound transportation costs
- Inventory aggregation decreases supply chain costs if: (i) product has high value
to weight ratio, (ii) high demand uncertainty, (iii) customer orders are large