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McGraw-Hill Higher Education ‘Aino The McGraw Hil Compo DDISIGNING AND MANAGING THE SUPPLY CHAIN ‘Copyright © 2000 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the ‘Une Stevo Amer, Escep ae permite under the United Sates Copyright Act 1976, ‘opartef us pubbestion nay berspoduced or ited nny for ory an teans ot ‘Sore inadatubenr tetra ystem, wou! te pie wee permission ofthe publisher This hooks printed on aire paper 294567890RGR/FOR909876543210 ssn o2se261687 Vice president Editor Chief Mia! W. Junior Publisher: oy. Saoed Senior sponsoring eon Sit nbs Eston eortinaton late Shaper Senior maetingwanager Collet). Subic Projo manages Kimberly Mona ‘Mattage new book proucon: Mele Slat Desgne: Suzmne Noweaer Supplement corres Fase M. Range Now ida ‘Chole Peto (Coonpontor hats ne. “ypetce 10/2 Paitin Frnt Quo Printing Book Groupee brary of Congress Cataloging -Publeton Data Sich Le, David ‘Designing and managing the supply chain / Davi inc Le, hip Raminey, Bath Sich Lev zen In¢lade bibliographical references and index aN oo7oa42 [hye dstriation of goods—Managerent, 2. Marketing channele-Management. 3 Basins ogsts. 4 Inu Drocurement Kaminsky Philp. Simcht-Lei, Bab. invite BesiIs7S05_ 2000 e85-—del seam p//oneeenhe com "To our children, Sara and Yuval, who have the patience and humor to survive our work logether DSL,ESL ‘Tomy fay, for hele support and encouragement THE IRWIN/MCGRAW-HILL SERIES Operations and Decision Sciences (ONS MANAGEMENT and Closs, Logistical Management: The Integrated Supply Chain First Edition uilano, and Jacobs, Production and Operations Management, tition onstein, and Greenlavs, PROSIM for Windows, Third Edition \"Apte, Manufacturing Automation, First Eition silano, and Chase, Fundamentals of Operations Management, ition 4 Burt, Purchasing and Supply Management, Sixth Edition slobal Operations Management, Firs! Edition ‘ns and Fitzsimmons, Service Management: Operations, Strategy, tion Technology, Second Edition Larson, Project Management: The Managerial Process, first Edition afacturing Strategy: Text & Cases, Third Edition Spearman, Factory Physics, Second Eaition rd Stock, Strategic Logistics Management, Thind Edition 1nd Fearon, Purchasing and Supply Chain Management, Edition sd Denzler, Operations Management, Second Edition shadsi, and Yakie, HOM Operations Management Software for ¢s, First Edition Production and Operations Analysis, Thind Edition Competitive Manufacturing Management, Firs! Edition d Cho, Operations Scheduling, Fist Edition ‘and Uzumeri, Managing Product Families, Firs! Edition | Operations Management: Contemporary Concepts and Cases, tion ser and Knod, Operations Management: Customer-Focused Principles, ition vi, Kaminsky, Simchi-Levi, Designing and Managing theSupply Chain: ts, Strategies, and Case Studies, First Edition Business Dynamics: Systems Thinking and Modeling for a Complex First Edition 1, Production/Operations Management, Sixth Eiition Beery, and Whybark, Manufacturing Planning & Control Systems, ition sundations of Inventory Management, First Edition ITATIVE METHODS AND MANAGEMENT SCIENCE arraway, Frey, Pfeifer, Quantitative Business Analysis: Casebook, ition arraway, Frey, Pfeifer, Quantitative Business Analysis: Text and Cases, ition fusman, and Bierman, Quantitative Analysis for Business Decisions, dition About the Authors David Simchi-Levi is Professor of Industrial Engineering and Manage- ‘ment Science at Northwestern University. Prior to joining the faculty at Northwestern, he taught at Columbia University. Professor Simchi-Levi received his Ph.D. in operations research from Tel-Aviv University and has won awards for his work in supply chain, logistics, and transportation. He is the co-author, with Julien Bramel, of The Logic of Logistics, published by Springer-Verlag, and the founder and chairman of LogicTools, Inc, a co pany that provides decision support software for supply chain and logis ‘management. Philip Kaminsky is Assistant Professor of Industrial Engineering at the University of California at Berkeley. He received his Pa. in Industrial Engineering from Northwestem University. Prior to his graduate studies, he worked for the production division of Merck & Co,, Ine. He has con- sulted in the areas of supply chain and production management, Edith Simchi-Levi is President of LogicTools, Inc. She received her BS. in Mathematics and Computer Science from Tel-Aviv University. She has extensive experience in software development and numerous consulting, projects in logistics and supply chain management. SEE Foreword In the last few years we have seen an explosion of publications on supply’ chain management; numerous books have been published and many ar ticles have appeared in academic, trade, and popular magazines. These publications are either too technical—and therefore inaccessible to prac- titioners and students—or they lack the breadth and depth that the topic deserves. Certainly, itis difficult to find a book appropriate for teaching supply chain management to business or engineering students. Designing and Managing the Supply Chain solves this problem! ‘The book is an important contribution and major milestone for the supply chain community. Itis the first book that covers a comprehensive breadth ofsupply chain topics in depth, and addresses the major challenges in this area. It was written by experts from academia and industry who have been researching, consulting, and developing software for supply chain management for many years. This book includes many classic and new case studies, numerous ex- amplesas well as in-depth analysis of some of the technical issues involved in inventory management, network design, and strategic partnering, to name a few. It is therefore an ideal textbook for classes on supply chain ‘management at the undergraduate, Master’s, and M.B.A. levels. Since each chapter is self-contained, instructors can pick the chapters they want touse, depending on the length ofthe class and its requirements. The book comes with two computerized games. The Computerized Beer Game pro- vides an excellent instructional fool that engages students in managing a supply chain and provides a starting point for discussing the value of in- formation in the supply chain, strategic partnering, centralized decision Foner soar sen dn mange le ig Te ruc muy ay mapa co peo Te ee Gee cot cpm mn sry a amg te cepts tet leet FE ig nae empemengoae et Hau L. Lee Kleiner Perkins, Mayfield, Sequoia Capital Professor Director, Stanford Global Supply Chain Forum Stanford University Preface This book grew out of a number of supply chain management courses and Executive Education programs we have taught at Northwestern Univer: sity over the past several years, as well as numerous consulting projects land supply chain decision-support systems we have developed at Logic- ‘Tools. The courses, taught in the Master of Management in Manufacturing (MMM) program, a joint M.A. program between the Kellogg School ‘of Business and McCormick School of Engineering at Northwestern Uni- ‘versity and in Executive Education programs sponsored by Kellogg, have Spawned many innovative and effective supply chain education concepts. ‘The focus in these programs has been on presenting, in an easily accessible manner, recently developed state-of-the-art models and solution methods important in the design, control, and operation of supply chains. The con- sulting projects and decision-support systems developed by LogicTools have focused on applying these advanced techniques to solvespecific prob- Jems faced by our client Titerest in supply chain management, both in industry and in academia, has grown rapidly over the past several years. A number of major forces have contributed to this trend. First, in recent years it has become clear that many companies have reduced manufacturing, costs as much as prac- tically possible. Many of these companies are discovering the magnitude fof savings that can be achieved by planning and managing their supply Chain more effectively. Indeed, a striking example is Wal-Mart's success, ‘which is partly attributed to implementing a new logistics strategy called cross-docking, At the same time, information and communication sys- tems havebeen widely implemented, and provide access tocomprehensive data from all components of the supply chain. Finally, deregulation of the Price transportation industry has led to the development of a variety of trans- portation modes and reduced transportation costs, while significantly in- creasing the complexity of logistics systems. Itis therefore not surprising that many companies are involved in the analysis of their supply chains. In most cases, however, this analysis is performed based on experience and intuition; very few analytical mod- els or design tools have been used in this process. In contrast, in the last two decades the academic community has developed various models and tools for supply chain management, Unfortunately, the first generation of this technology was not robust or flexible enough to allow industry to use it effectively. This, however, has changed over the last few years during which improved analysis and insight, and effective models and decision: support systems, have been developed, but these are not necessarily famil- iar to industry. Indeed, to our knowledge there is no published work that discusses these problems, models, concepts, and tools at an appropriate level. In this book, we intend to fill this gap by providing state-of-the-art models, concepts, and solution methods important in the design, control, operation, and management of supply chain systems. In particular, we haveattempted to convey both the intuition behind many key supply chain concepts and to provide simple techniques that can be used to analyze various aspects of te supply chain. ‘The emphasis is on a format that will be accessible to executives and. practitioners, as well as students interested in careers in related industries In addition, it wil introduce readers to information systems and decision- support tools that can aid in the design, analysis, and control of supply chains, “The book is written to serve as: + A textbook for M.B.A.-level logistics and supply chain management + A textbook for BS. and MSS. industrial engineering courses on logistics and supply chain management. + A reference for teachers, consultants, and practitioners involved in any one of the processes that make up the supply chain. Ofcourse, supply chain managementisa very broad area, and it would bbe impossible fora single book to cover all of the relevant areas in depth, Indeed, there isconsiderable disagreement in academia and industry about exactly what these relevant areas are, Nevertheless, we have attempted to provide a broad introduction to many critical facets of supply chain man- agement. Although many essential supply chain management issues are interrelated, we have strived wherever possible to make each chapter as self-contained as possible, so that the reader can refer directly to chapters covering topics of interest. The discussion ranges from basic topics of in- Proce xi Pie et can planer ede ens BE ae ls mane col a Cooper ia ae en making ne ln eo Fane ee ta Re eee eae cee nen a a a ore Hon ite Prin in Opts Ma ae Sigh arin Guth Nr ea y Acknowledgments Itis our pleasure to acknowledge all those who helped us with this manu- script. First, we would like to thank Dr. Myron Feinstein, former director ‘of supply chain strategy development at Unilever, New York City, who read through and commented on various chapters. Similarly, we are in- debted to the reviewers, Professors Michael Ball (University of Maryland), Wendell Gilland (University of North Carolina, Chapel Hill), Eric John- son (Vanderbilt University), Douglas Morrie (The University of Texas, “Austin), Michae! Pangburn (Pennsylvania State University), Powell Robin- son (Texas A&M University), Wiliam Tallon (Northern Ilinois University), and Rachel Yang (University of Dinois, Urbana-Champaign). Their com- ‘ments were invaluable in improving the organization and presentation of the book. Weare also grateful to Deniz Caglar, a Ph.D. candidate at North~ ‘western University, for his comments on earlier drafts of the book. In addition, we thank Dr. Kathleen A. Stair and Ms. Ann Stuart for carefully editing and proofreading many chapters. Finally, we wish to thank Ms, Colleen Tuscher, who assisted us in the initial stage of the project, our editor, Mr. Scott Isenberg, and his as- sistant, Ms. Nicolle Schieffer, of Irwin/ McGraw-Hill, who encouraged us throughoutand helped uscomplete thebook. Also, thanks toMs. Kimberly ‘oranda and the production staff at McGraw-Hill for their help. David Simchi-Levi, Evanston, Illinois Philip Kaminsky, Berkeley, Califo Faith Simchi-Levi, Northbrook, Illinois Case: Case: List of Cases The Bis Corporation JAM Electronics: Service Level Crisis Case: Swimsuit Production Case: Barilla SpA (A) Case: Barilla SpA (B) Barilla SpA (C) Modern Book Distribution, Inc. Audio Duplication Services, Inc. : Wal-Mart Changes Tactics to Meet International Tastes : Hewlett-Packard: DeskJet Printer Supply Chain Dell’s Direct Business Model Backup in the Espresso Lane ERP Brews Instant Success . Supply Chain Management Smooths Production Flow Brief Contents 11 Introduction to Supply Chain Management 1 2 Logistics Network Configuration 15 3. Inventory Management and Risk Pooling 39 4 The Value of Information 67 5 Distribution Strategies 109 6 Strategic Alliances 121 7 International Issues in Supply Chain Management| 145 8 Coordinated Product and Supply Chain Design 167 9 Customer Value and Supply Chain Management 197 10 Information Technology for Supply Chain Management 215 1 Decision-Support Systems for Supply Chain Management 249 Appendix A The Computerized Beer Game 275 ‘Appendix B ‘The Risk Pool Game 293, Bibliography 303 Index 309 Contents 1 Introduction to Supply Chain Management 1 1.1 What Is Supply Chain Management? 1 12 Why Supply Chain Management? 5 13. TheComplexity 7 14. Key Issues in Supply Chain Management 8 15 Book Objectives and Overview 11 2 Logistics Network Configuration 15 Case: The Bis Corporation 15 21 Introduction 17 22 DataCollection 20 221 Data Aggregation 20 222 Transportation Rates 23 223 Mileage Estimation 24 224 Warehouse Costs 26 225 Warehouse Capacities 27 226 Potential Warehouse Locations 28 22.7 Service Level Requirements 28 228 FutureDemand 29 23 Modeland Data Validation 29 24 Solution Techniques 30 24.1 Heuristics and the Need for Exact Algorithms 30 242 Simulation Models and Optimization Techniques 33 25 Key Features of a Network Configuration DSS 34 ‘orporation Distribution Problem 36 Cone 3 Inventory Management and Risk Pooling 39 Case: JAM Electronics: Service Level Crisis 39 3.1 Introduction 41 32_A Single Warehouse Inventory Example 43, 321 The Economic Lot Size Model 43 322. The Effect of Demand Uncertainty 46 Case: Swimsuit Production 46 323 Multiple Order Opportunities 51 324 No Fixed Order Costs 51 325 Fixed Onder Costs 54 326 Variable Lead Times 56 33° RiskPooling 56 34 Centralized versus Decentralized Systems 60) 35. Managing Inventory in the Supply Chain 61 36. Practical Issues 63 Summary 65 4 The Value of Information 67 Case: Barilla SpA (A). 67 41 Introduction. 81 42. ‘The Bullwhip Effect 82 421 Quantifying the Bullwhip Eifect 86 422 The impact of Centralized Information on the Bullichip fect 88 423 Methods for Coping with the Bullwhip Effect 91 ase: Barilla SpA (8). 93. Case: Barilla Sp (C) 95 43> Effective Forecasts 99 44 Information forthe Coordination of Systems 100 45. Locating Desired Products 101 46 Lead TimeReduction 101 47 Integrating the Supply Chain 102 47. Conflicting Objectives in the Supply Chain 108, 472 Designing the Supply Chain for Conflicting Goals 103 Summary 107 5 Distribution Strategies 109 Case: Modern Book Distribution, Inc. 108 5.1 Introduction 111 Conents xix 52 Contratized versus Decentralized Control 111 5.3. Distribution Strategies 112 53.1 Direct Shipment 113 53.2 Cross-Docking 113, 54° Transshipment 116 55° Central versus Local Facilities 116 56 Push versus Pull Systems 117 561 Push-Based Supply Chain 118 562 Pull-Based Supply Chain 119 Summary 120 Strategic Alliances 121 Case: Audio Duplication Services, Inc. (ADS) 121 64 Introduction 122 62 A Framework for Strategic Alliances 123 63. Third-Party Logistics 126 63.1 WhatIs3PL? 126 632 Advantages and Disadvantages of IPL 126 633 3PLIssuesand Requirements 129 634 3PL Implementation Issues 130 64 Retailer-Supplier Partnerships 131 64.1 Typesof RSP 132 64.2 Requirements for RSP_ 133 643 Inventory Ownership in RSP 134 644 Issuesin RSP Implementation 135 645 Steps in RSP Implementation 136 646 Advantages and Disadvantages of RSP_ 136 647 Successes and Failures 138 65 Distributor Integration 140 65:1 Types of Distributor Integration 141 652. Issues in Distributor Integration 142 Summary 143, Intemational Issues in Supply Chain Management 145 (Case: Wal-Mart Changes Tactics to Mest International Tastes 145 71 Introduction 49 72.2 Global Market Forces 150 71.2 Technological Forces 151 713 Global Cost Forces 152 744 Political and Economic Forces 152 Contents 7.2__ Risks and Advantages of International Supply Chains 721 Risks 154 72.2 Addressing Global Risks 155 723 Requirements for Global Strategy Implementation 157 153 73 Issues in International Supply Chain Management 158 7.3.1 International versus Regional Products 158 732 Local Autonomy versus Central Control 159 73.3 Miscellaneous Dangers 160 74 Regional Differences in Logistics 161 7.4.1 Cultural Differences 161 10 742 Infrastructure 162 7.43. Performance Expectation and Evaluation 163 7.4.4 Information System Availability 164 74.5 Human Resources 164 Summary 165 8 Coordinated Product and Supply Chain Design 167 Case: Hewlett-Packard: DeskJet Printer Supply Chain 167 811 Introduction 177 BL Design for Logistics: Overview 177 81.2 Economic Packaging and Transportation 177 843 Concurrent and Parallel Processing 179 B14 Postponement 181 815 important Considerations B16 ThePush-Pull Boundary B17 Case Analysis 186 82. Supplier Integration into New Product Development 189 ‘82.1 The Spectrum of Supplier Integration 189 822 Keys to Effective Supplier Integration 190 823 A “Bookshelf” of Technologies and Suppliers 191 83 Mass Customization 19) 83.1 What Is Mass Customization? 191 832 Making Mass Customization Work 192 n 833 Mass Customization and Supply Chain Management 194 Summary 195 184 185 9 Customer Value and Supply Chain Management 197 Case: Dell's Direct Business Model 197 9.1 Introduction 198 92. The Dimensions of Customer Value 200 9.2.1 Conformance to Requirements 201 92.2 Product Selection 202 conten xxi 923 Priceand Brand 204 924 Value-Added Services 205 925 Relationships and Experiences 206 93°” Customer Value Measures 208, 9.4 Information Technology and Customer Value 211 Summary 213, Information Technology for Supply Chain Management 215 Case: Backup in the Espresso Lane 215 Case: ERP Brews Instant Success 219 10.1 Introduction 221 102 Goals of Supply Chain Information Technology 223, 103 Standardization 227 104 Information Technology Infrastructure 229 104.1 Interface Devices 229 1042 Communications 230 1043 Databases 231 1044 System Architecture 232 105 Electronic Commerce 234 105.1 Electronic Commerce Levels 236 10.6 Supply Chain Management System Components 239 107 Integrating Supply Chain Information Technology 242 1071 Stages of Development 243 1072 Implementation of ERP and DSS. 245 10.73. “Best-of Breed” versus Single Vendor ERP Solutions 246 Summary 247 Decision-Support Systems for Supply Chain Management 249 Case: Supply Chain Management Smooths Production Flow 249) ML Introduction 251 112. Understanding Decision Support Systems 253 1121 Input Data 254 3122 Analytical Tools 256 1123 Presentation Tools 260 113 Supply Chain Decision Support Systems 264 114 Selecting A Supply Chain DSS 272 Summary 274 Contents Appendix A The Computerized Beer Game 275 Ad Introduction 275 A2. The Traditional Beer Game 275 ‘A21 The Difficulties with the Traditional Beer Game 276 A3 TheScenario 277 ‘Aa Playing aRound 278 Ad.l Introducing the Game 279 AA2 Understanding the Screen 281 A43 Playing the Game 281 A44 Other Features 284 AS Options and Settings 285 ‘ASA FileCommands 285 AS2_ OptionsCommands 285 A53. ThePlayCommands 289 AS4 TheGraphs Commands 289 ASS. The Reports Commands 291 Appendix B. The Risk Pool Game 293 BA Introduction 293 B2 TheScenario 293 B3_ Playing Several Rounds 294 B31 Introducing the Game 294 B32 Understanding the Seren 296 B33 Playing theGame 297 B34 Other Features 297 BA Options and Settings 297 B41 FileCommands 297 B42 PlayCommands 298 B43. The Reports Commands 301 Bibliography 303, Index. 309 comms Introduction to Supply Chain Management 1.1 What Is Supply Chain Management? Fiesce competition in today’s global markets, the introduction of products with shot life cycles, and the heightened expectations of customers have forced business enterprises toinvestin, and focusattention on, theirsupply chains. This, together with continuing advances in communications and transportation technologies (eg, mobile communication and overnight delivery) has motivated the continuous evolution ofthe supply chain and of the techniques to manag: Ina typical supply chain, raw materials are procured, items are pros duced at one oF more factories, shipped to warehouses for intermediate Storage, and then shipped to retailers or customers. Consequently, tore- pany's performance and market share. Of course, one can argue that these three examples are associated with companies that are among, the biggest ‘companies in their espective industries; these companies can implement technologies and strategies that very few others can afford, However, in today’s competitive markets, most companies have no choice; they are forced to integrate their supply chain and engage in strategic partnering. ‘This pressure stems from both their customers and their supply chain part- ners. How can integration be achieved successfully? Clearly, information sharing and operational planning are the keys to a Suezessfully integrated. supply chain, But what information should be shared? How should it be used? How does information affect the design and operation of the sup- ply chain? What level of integration is needed within the organization and ‘with external partners? Finally, what types of partnerships can be imple- ‘mented, and which type should be implemented for a given situation? Product Design Effective design plays several critical roles in the supply chain, Most ob- ‘viously certain product designs may increase inventory holding or trans: portation costs relative to other designs, while other designs may facilitate fa shorter manufacturing lead time. Unfortunately, product redesign isof- ten expensive. When is it worthwhile to redesign products soas to reduce logistics costs or supply chain lead times? Ist possible to leverage product Seton 15. Book Obie and Oseraew UL design to compensate for uncertainty in customer demand? Can one guan- tify the amount of savings resulting from such a strategy? What changes Should be made in the supply chain o take advantage ofthe new product design? Finally, new concepts sich as mass customization are increasingly popular. What role docs supply chain management play inthe successful {Implementation ofthese concepts? Information Technology and Decision-Support Systems Information technology isa critical enabler of effective supply chain man- agement. Indeed, muchof the current interest insupply chain management is motivated by the opportunities that appeared due fo the abundance of data and the savings that can be achieved by sophisticated analysis of these data. The primary issue in supply chain management is not whether data ‘can be received, but what data should be transferred; that is, which data, fae significant for supply chain management and which data can safely be ignored? How should the data be analyzed and used? What is the impact of the Internet? What i the role of electronic commerce? What infrastructure is required both internally and between supply chain part- rners? Finally, since information technology and decision-support systems fare both available, can these technologies be viewed as the main tools used to achieve competitive advantage in the market? If they can, then what is preventing others ‘rom using the same technology? Customer Value ‘Customer value is the measure ofa company’s contribution toits customer, ‘based on the entire range of products, services, and intangibles that consti- tute the company’s offerings. In recent years this measure has superseded ‘measures such as quality and customer satisfaction. Obviously, effective supply chain management is critical if a firm wishes to fulfill customer ‘needs and provide value. But what determines customer value in differ- tent industries? How is customer value measured? How is information technology used to enhance customer value in the supply chain? How does supply chain management contribute to customer value? How do ‘emerging trends in customer value, such as development of relationships {and experiences, affect supply chain management? 15 Book Objectives and Overview For many reasons, interest in logistics and supply chain management has grown explosively inthe last few years. This interest has led many compa- hes to analyze their supply chains, In most cases, however, this has been ‘done based on experience and intuition; very few analytical models or de~ sign tools have been used in this process. On the other hand, in the last (Copter Introduction to Suply Cha Management two decades the academic community has developed various models and tools to assist with the management of the supply chain. Unfortunately, the first generation of this technology was not robust or flexible enough to be effectively utilized by industry. This, however, has changed in the last few years. Analysis and insight have improved, and eftective models and decision-support systems have been developed-—but these may not be familiar to industry. This book aims to fill this gap by presenting state-of-the-azt models and solution methods important in the design, conteol, operation, and ‘management of supply chain systems. We intend this book to be useful both as a textbook for MBA-level logistics and supply chain courses, and {asa reference for teachers, consultants, and managers involved in any one of the processes that make up the supply chain, Each chapter includes case studies and numerous examples. In addi tion, each chapter is mostly self-contained, and mathematical and technical sections can be skipped without loss of continuity. Therefore, we believe the bookis accessible to anyone with an interest in some of the many aspects of supply chain management. For example, transportation managers de-

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