OPRE 6366

GLOBAL
SUPPLY CHAIN
MANAGEMENT

9-1
SALES AND OPERATIONS
PLANNING

9-2
Matching Supply and Demand

Supply = Demand
Supply < Demand => Lost revenue opportunity
Supply > Demand => Inventory
Manage Supply –Productions Management
Manage Demand –Marketing

9-3
Managing Predictable Variability with Supply

Manage capacity
• Time flexibility from workforce (OT and otherwise)
• Seasonal workforce (agriculture workers)
• Subcontracting
• Counter cyclical products: complementary products
• Similar products with negatively correlated demands
• Snow blowers and Lawn Mowers
• AC pumps and Heater pumps
• Flexible capacities/processes: Dedicated vs. flexible

9-4
Managing Predictable Variability with Inventory

• Component commonality
• Component commonality increase the benefit of postponement.
More on this later
• Build seasonal inventory of predictable products in
preseason
• Nothing can be learned by procrastinating
• Keep inventory of predictable products in the downstream
supply chain and keep the others (spare parts) at the
upstream

9-5
Managing Predictable Variability with Pricing
Revisit Green Clothing
• Manage demand with pricing Baseline pricing: Cost = $1,128,500;
Revenue = $1,600,000, Profit=$471,500
• Demand increases from discounting
• Market growth
• Stealing market share from competitors
• Forward buying stealing your own market share from the future
• Discount of $1 in a period increases that period’s demand by
10% (market and market share growth) and moves 20% of
next two months demand forward (forward buying)
• Can you gather this information – price sensitivity of the
demand-easily? Does your company have this information?
9-6
 Baseline with price of $50
Scenario name: Baseline, 50
Month Demand Forecast
January 3,200
February 6,000
March 6,400
April 7,600
May 4,400 Revenue = $1,600,000
June 4,400 Cost = $1,160,000
Total 32,000 Profit = $440,000
Revenue = 32,000 * $50 = $1,600,000

9-7
Off-peak (Jan) Discount from $50 to $49
Scenario name: Off-peak, small market growth, 49
Month Demand Forecast
January 6,000 = 3,200*(1.1) + (6,000+6,400)*0.2
February 4,800 = 6,000*0.8
March 5,120 = 6,400*0.8
April 7,600
May 4,400 Revenue = $1,610,000
June 4,400 Cost = $1,158,040
Total 32,320 Profit = $451,960

Baseline, 50 Off-peak, small, 49

Revenue = $1,600,000 more demand => Revenue = $1,610,000
Cost = $1,160,000 more stable demand => Cost = $1,158,040
Profit = $440,000 Profit = $451,960
Discounting during off-peak => Revenue ↑ & Profit ↑
9-8
Peak (Apr) Discount from $50 to $49
Scenario name: Peak, small market growth, 49
Month Demand Forecast
January 3,200
February 6,000
March 6,400
April 10,120 = 7,600*1.1+(4,400+4,400)*0.2
May 3,520 = 4,400*0.8 Revenue = $1,627,880
June 3,520 = 4,400*0.8 Cost = $1,197,880
Total 32,760 Profit = $430,000

Baseline, 50 Off-peak, small, 49 Peak, small, 49

Revenue = $1,600,000 Revenue = $1,610,000 more demand => Revenue = $1,627,880
Cost = $1,160,000 Cost = $1,158,040 less stable demand => Cost = $1,197,880
Profit = $440,000 Profit = $451,960 Profit = $430,000

Discounting during peak => Revenue ↑ & Profit ↓

9-9
 Demand Management
• Pricing and Aggregate Planning must be done jointly
• Factors affecting discount timing and their new values
• Consumption:100% increase in consumption instead of 10%
increase
• Forward buy, still 20% of the next two months
• Product Margin: Impact of higher margin. What if discount
from $41 to $40 instead of from $50 to $49.)

9-10
 Consumption Increase 100%
Off-peak (Jan) Discount from $50 to $49
Scenario name: Off-peak, huge market growth, 49
Month Demand Forecast
January 8,880 = 3,200*(2) + (6,000+6,400)*0.2
February 4,800 = 6,000*0.8
March 5,120 = 6,400*0.8
April 7,600
May 4,400 Revenue = $1,751,120
June 4,400 Cost = $1,269,720
Total 35,200 Profit = $481,400

Baseline, 50 Off-peak, huge, 49

Revenue = $1,600,000 more demand => Revenue = $1,751,120
Cost = $1,160,000 more stable demand => Cost = $1,269,720
Profit = $440,000 Profit = $481,400

Discounting during off-peak => Revenue ↑ & Profit ↑

9-11
 Consumption Increase 100%
Peak (Apr) Discount from $50 to $49
Scenario name: Peak, huge market growth, 49
Month Demand Forecast
January 3,200
February 6,000
March 6,400
April 16,960 = 7,600*2+(4,400+4,400)*0.2
May 3,520 = 4,400*0.8 Revenue = $1,963,040
June 3,520 = 4,400*0.8 Cost = $1,471,480
Total 39,600 Profit = $491,560

Baseline, 50 Off-peak, huge, 49 Peak, huge, 49

Revenue = $1,600,000 Revenue = $1,751,120 more demand => Revenue = $1,963,040
Cost = $1,160,000 Cost = $1,269,720 more demand => Cost = $1,471,480
Profit = $440,000 Profit = $481,400 Profit = $491,560

Discounting during peak => Revenue ↑ & Profit ↑

9-12
 Reduced Margin of $41
Baseline
Scenario name: Baseline, 41
Month Demand Forecast
January 3,200
February 6,000
March 6,400
April 7,600
May 4,400 Revenue = $1,312,000
June 4,400 Cost = $1,160,000
Total 32,000 Profit = $152,000
Revenue = 32,000 * $41 = $1,312,000

9-13
Off-peak (Jan) Discount from $41 to $40
Consumption Increase 100%
Scenario name: Off-peak, huge market growth, 40
Demand Forecast
Month Same as Off-peak, huge, 49
January 8,880
February 4,800
March 5,120
April 7,600
May 4,400 Revenue = $1,434,320
June 4,400 Cost = $1,269,720
Total 35,200 Profit = $164,600

Baseline, 41 Off-peak, huge, 40

Revenue = $1,312,000 more demand => Revenue = $1,434,320
Cost = $1,160,000 more demand => Cost = $1,269,720
Profit = $152,000 Profit = $164,600
Discounting during off-peak => Revenue ↑ & Profit ↑
9-14
Peak (Apr) Discount from $41 to $40
Consumption Increase 100%
Scenario name: Peak, huge market growth, 40
Demand Forecast
Month Same as Peak, huge, 49
January 3,200
February 6,000
March 6,400
April 16,960
May 3,520 Revenue = $1,606,640
June 3,520 Cost = $1,471,480
Total 39,600 Profit = $135,160

Baseline, 41 Off-peak, huge, 40 Peak, huge, 40

Revenue = $1,312,000 Revenue = $1,434,320 more demand => Revenue = $1,606,640
Cost = $1,160,000 Cost = $1,269,720 more demand => Cost = $1,471,480
Profit = $152,000 Profit = $164,600 Profit = $135,160

Discounting during peak => Revenue ↑ & Profit ↓

9-15
 What dominates?
Demand growth, Demand stability, Margin size
Discount => Demand growth, Off-peak Discount => Demand stability
Gold Medal
Silver Medal Off-peak, small, 49
Baseline, 50 Profit = $451,960 Bronze Medal
Profit = $440,000 Peak, small, 49
Profit = $430,000
Demand stability > Demand growth when consumption of 10% and large margin
Gold Medal
Silver Medal Peak, huge, 49
Bronze Medal Off-peak, huge, 49 Profit = $491,560
Baseline, 50 Profit = $481,400
Profit = $440,000

Demand growth > Demand stability when consumption of 100% and large margin

Gold Medal
Silver Medal Off-peak, huge, 40
Baseline, 41 Profit = $164,600 Bronze Medal
Profit = $152,000 Peak, huge, 40
Profit = $135,160

Demand stability > Demand growth when consumption of 100% and small margin
9-16
Performance Under Different Scenarios
Discount Promotion Consumption Forward Average
Price Price period increase buy Profit ($K) inventory
$50 $50 N/A N/A N/A $440 914
$50 $49 Off-peak 10% 20% $452 497
$50 $49 Peak 10% 20% $430 789
$50 $49 Off-peak 100% 20% $481 509
$50 $49 Peak 100% 20% $492 789
$41 $41 N/A N/A N/A $152 914
$41 $40 Off-peak 100% 20% $165 509
$41 $40 Peak 100% 20% $135 789

Use rows in blue to explain Christmas discounts.

Limited forward buy wrt consumption.

9-17
Discount Timing by Forward Buy Amount
Discount => Forward Buy, Off-peak Discount => Demand stability
Gold Medal
Silver Medal Off-peak, small, 49
Baseline, 50 Profit = $451,960 Bronze Medal
Profit = $440,000 Peak, small, 49
Profit = $430,000
Forward buy large wrt to consumption growth of 10%

Gold Medal
Silver Medal Peak, huge, 49
Bronze Medal Off-peak, huge, 49 Profit = $491,560
Baseline, 50 Profit = $481,400
Profit = $440,000
Forward buy small wrt to consumption growth of 100%

Small Forward Buy => Discount During Peak

9-18
 Summary
• Optimality of peak vs. off-peak discounting depends on
• Forward buy vs. Market growth
• Large vs. Small margin

9-19