NETWORK OPERATIONS OPTIMIZATION - PROFIT MODEL The objective function is given by fl jal ‘ol jal S Quant, < Dem, forj=1,...,2 iat Youant, < Cap, for i=1,..4m yal Quant, >0 fori =1,....m, f=l,...,0 MODEL Profit maximization model is given by SS <> © kK capmervre & Cr a a ee | er) rn ) mo mS mew m8t00, a ee} Bs moss ‘orate 729000 co * i Kk oc © mw o 0 me 0 ww wm 0 8 0 6 oe «© o 8 | = ¢@ se «4 a a i) e > mw 4 « 0 200 125 — Revenue = 885,700 (165*1030+135*950+1000*280+200*975+125*900) — Variable cost = 640,470 — Gross profit (revenue - variable cost) = 885,700 - 640,470 = 245,230 — Net profit = Gross profit - Fixed cost = 245,230 - 228,000 = 17,230MPACT OF UNCERTAINTY ON NETWORK DES Uncertainty refers to fluctuations which are a part of the supply chat » Demand fluctuations: Can lead to excess of sales or loss of sales + Supply disruptions: Can be caused by natural disasters, transportati supplier bankruptcies and other events. * Changing customer preferences: + Regulatory changes: Impact the transportation of goods, the location of facilities Building flexibility into supply chain operations allows the supp with uncertainty in a manner that will maximize profits. EVALUATING NETWORK DESIGN DECISIONS USI TREE * Choice between a long term (or less flexible) and a short term (of flexible) option. If uncertainty is ignored long term option will al be selected because it is typically cheaper. * A decision tree is a graphic device that can be used to evaluate deci uncertainty. DHARGAWE ANANTH, SITEVALUATING NETWORK DESIGN DECISIONS USING DECISION TREES In any global supply chain, demand, prices, exchange rates, and several other factors are uncertain and are likely to fluctuate during the life of any supply chain decision. If uncertainty is ignored, a manager will always sign long-term contracts which are cheaper. Such decisions can hurt the firm, however, if future demand or prices are not as forecast at the time of the decision. It is thus important to provide a methodology that allows managers to incorporate this uncertainty into their network design process. A decision tree is a graphic device used to evaluate decisions under uncertainty. Decision trees with Discounted Cash Flow (DCFs) can be used to evaluate supply chain design decisions given uncertainty in prices, demand, exchange rates, and inflation. (Discounted Cash Flow analysis is based on the fundamental premise that “one rupee today is worth more than one rupee tomorrow”)Decision Tree Analysis The decision tree analysis methodology is summarized as follows: 1. Identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated. 2. Identify factors such as demand, price, and exchange rate whose fluctuation will be considered over the next T periods. 3. Identify representations of uncertainty for each factor; that is, determine what distribution to use to model the uncertainty. 4. Identify the periodic discount rate k for each period. 5. Represent the decision tree with defined states in each period, as well as the transition probabilities between states in successive periods. 6. Starting at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step. Expected cash flows at each state in a given period should be discounted back when included in the previous period.DECISION TREE METHODOLOG 5. Represent the decision tree with defined states in each peri transition probabilities between states in successive period. 6. Starting at period T, work back to period 0, identifying the and the expected cash flows at each state in a given period should back when included in the previous period. EXAMPLE 1 A manager must decide on the size of a video arcade to construé has narrowed the choices to two — large or small. Demand can bé high with probabilities 0.4 and 0.6 respectively. If small facility is b demand, the payoff is 40000. If high demand is there, then there are do nothing (40), overtime (55), expand (55). If building larg f considered, and the demand is low, you have two options: do nothi reduce prices (50). At high demand the payoff is 70000. Construct and. lecision tree and determine which alternative should be chosen imizeexpected monetary value. EXAMPLE 1 Period 0 1 2MULTIPLE ITEM MULTIPLE LOCATION INVE MANAGEMENT Selective Inventory Control Techniques: * ABC Classification: very important, moderate importance, little i * FSN Classification: Fast moving, Slow moving, Not moving * VED Classification: Vital, Essential and desirable. Eg maintenance management $DL72"35%4 SDL75°35%4 oscil PAAR" lique75*35%4 ABC Classification ABC categorization has been used with success in following areas: * Allocation of managerial time * Improvement efforts * Setting up of service levels * Stocking Decision in the distribution system Class Percentage of items Percentage of total sales value A 5-15 55-75 B 20-30 20-30 € 55-75 5-15SE EEE MARNAV EME + Revenue management is the use of pricing to increase the suppl and profit generated from a limited availability of supply chain as: Supply chain assets exist in two forms — capacity and inventory * Capacity assets in the supply chain exists for production, transpor storage. * Inventory assets exist throughout the supply chain and are carried to product availability PRICE AND REVENUE MANAGEME! + One approach is to charge a lower price to customers willing to orders far in advance and a higher price to customers looking for capacity at the last minute. + Another approach is to charge a lower price to customers with long contracts and a higher price to customers looking to purchase cay last minute. The third approach is to charge higher price during periods of hii lower prices during periods of low demand. PRICE AND REVENUE MANAGEME! Revenue management adjusts the pricing and available supply of as’ more of the following conditions exist * Value of product varies in different market segments. + The product is highly perishable * Demand has seasonal and other peaks * The product is sold both in bulk and on the spot market. ig: Airline seats, fashion apparel PRICE AND REVENUE MANAGEMENT - Law of DI Optimal Pricing Decision ‘or a general case of the linear demand curve, the formula is as follows: D = a ~ bp /here D is the demand, p is the price and a and b are parameters of the demand tis the quantity demanded when the pricing is 0. Inis.slope.of the Demand Curve, tells us how steep the demand curve wiPRICE AND REVENUE MANAGEMENT - Law of Di! Optimal Pricing Decision — a a One can easily show that the optimal price denoted as p* is as follows: a y* =~ and revenue* = reaped e PRICE AND REVENUE MANAGEMENT - Law of DI Optimal Pricing Decision Pricing under capacity constraints: If Capacity > Demand, it makes sense to work with a lower capacity rather than to fill up the plane. But if Demand > Capacity, then it will fix the price as follows: pt Saoapaciy PRICE AND REVENUE MANAGEMENT - Law of DI Optimal Pricing Decision Pricing in a situation involving significant variable cost: Let us assume that variable cost is c per unit. We know that Profit = Revenue — variable cost — fixed cost So optimal profit will be when nee? - ve PRICE AND REVENUE MANAGEMENT FOR MULTIP! SEGMENTS A classic example for this is airline industry. Consider ToFrom, a trucking firm that has purchased six trucks, total capacity of 6,000 cubic feet, to use for transport betweer and St. Louis. The monthly lease charge, driver, and mainten: expense is $1,500 per truck. Market research has indicated that lemand curve for trucking capacity is d = 10,000 — 2,000pEg: A Home Depot store selling paint orders the base paint anticipation of customer orders, whereas it performs final mi paint in response to customer orders. Collaborative forecasting for Coca-Cola and its bottlers. Co decides on the timing of various promotions based on the dem. forecast over the coming quarter. Promotion decisions are then incorporated into an updated demand forecast CHARACTERISTICS OF FORECAS Forecasts are always inaccurate and should thus include expected value of the forecast and a measure of forecast consider two car dealers. One of them expects sales to ran: 100 and 1,900 units, whereas the other expects sales to ran: between 900 and 1,100 units. Long-term forecasts are usually less accurate than short-term — forecasts CHARACTERISTICS OF FORECAS Aggregate forecasts are usually more accurate than disa: forecasts, as they tend to have a smaller standard deviati relative to the mean. For example, it is easy to forecast the’ domestic product (GDP) of the United States for a given year than a 2 percent error. 1 In general, the farther up the supply chain a company is (or farther it is from the consumer), the greater is the distortio! information it receives. One classic example of this is the effect’.