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Supply-Chain Management:
A View of the Future
 Outline

Chain Management
Logistics & Supply
Supply-Chain Management of “Yesterday”
How Modeled
How Practiced
Supply-Chain Management of “Today”
How Practiced
How Modeled
 Outline (cont.)

Chain Management
Logistics & Supply
Introduce Paradigm called:

“IDIB Portfolio”

Describe My Vision of the “Future”of SCM

Provide an Overview of 2 Projects

Collaborative Decision-Making and Implementation

Secure Supply-Chain Collaboration

 SCM Models of “Yesterday”

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

Assumed Implementation was “Contractible”

 Typical Results:

Chain Management
Logistics & Supply
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”

Chain Management
Logistics & Supply
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
Chain Management
Consequently:
Logistics & Supply
“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:

Chain Management
Logistics & Supply
==> Huge Buffers
Raw, WIP, and Finished-Goods Inventories
Capacity Buffers (e.g., understated capacity)
Leadtime Buffers (e.g., overstated leadtime)
 “Yesterday’s” Relationship: “Mismatched”

Chain Management
Logistics & Supply
Models
Too Specialized
Required More Information than Practice Had
Practice
Inexperienced with Models & Computers
Confused by Models
Suspicious of Models
 SCM Practice “To
Targday”

Chain Management
Logistics & Supply
The Beginnings of “Real” SCM for Single-Owner Chains
Ex: Wal-Mart’s Retail Linket’s Partners OnLine
Capabilities
Broadcast SKU-level Data Across the Chain
Observe Status ==> Implemetation “Contractible”
Chain Management
Logistics & Supply
Results:
Huge Reductions in Buffers ==> Lower Operating Costs

Improved Competitiveness
Lower Prices
More Customization
Higher Availability
 Development of Technologies to Support Multiple-Owner SCM

Chain Management
Internet is Providing Experience
Logistics & Supply
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
Chain Management
Huge Challenges for Multi-Owner Chains
Logistics & Supply
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”

Chain Management
Logistics & Supply
Models with Multi-Ownership, Competing Objective Functions,
and Asymmetric Information
Roots in Economics
1980’s Work of Monahan, Pasternak
Contemporary Work
“Supply-Chain Coordination with Contracts”, G. Cachon
(forthcoming)
“Information-Sharing and Supply-Chain Coordination”, F. Chen
(forthcoming)
Chain Management
Logistics & Supply
Models for Assessing the Impact of Decentralized Decision-Making an
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”
Chain Management
Logistics & Supply
Models beginning to include ownership and private-information issue

Little Work on How to Share Information or How to Collaborate on Decision

or Implementation
Ignoring the Development of More Sophisticated “Centralized” Models
 Relationship “Today”:
“Out of Step”
Chain Management
Logistics & Supply
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
Chain Management
Logistics & Supply
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
Chain Management
Logistics & Supply
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
Chain Management
Logistics & Supply
The Information System
Quality Characteristics
Accuracy
Leadtime
Aggregation Level
Horizon
Etc.
Cost: Increasing and Marginally-Increasing with Quality
 Each ... Characteristics (cont.)

Chain Management
Logistics & Supply
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.)

Chain Management
Logistics & Supply
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.)
Chain Management
Logistics & Supply
The Buffer System
Quality Characteristics
Form
Robustness
Etc.

Cost: Increasing and Marginally-Increasing with Quality

 IDIB “Portfolio”?

Chain Management
Logistics & Supply
Like a Financial Portfolio, the IDIB System requires an investment
of Dollars

Like a Financial Porfolio, each Subsystem’s 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....

Chain Management
Logistics & Supply
.... 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 Ignor
the IDIB Portfolio
Chain Management
Logistics & Supply
Example: The Newsvendor Model
Information-System Quality Assumed
Implementation is Ignored
Select Decision-Rule to Minimize Buffer-System Cost
 IDIB Portfolio View of Newsvendor
“Problem”
Chain Management
Logistics & Supply
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?
Chain Management
Logistics & Supply
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:

Chain Management
Logistics & Supply
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:
Chain Management
Logistics & Supply
In a (Q,r) system:
If all leadtimes are fixed, then the information-system, 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:

Chain Management
Logistics & Supply
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 Off-Shore Supplier
Reducing Implementation Quality (Leadtime); Increasing Buffer
Inventory
 The IDIB Perspective on State-of-the-Art
Practice in SCM
Chain Management
Logistics & Supply
Involves the sharing of past, present, and future-oriented
information between buyer-supplier 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?
Chain Management
Logistics & Supply
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

Chain Management
Logistics & Supply
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 Supply-Chain Decision-
Making
Starting Point is “Collaborative Planning,
Forecasting, and Replenishment” (CPFR)
 What is CPFR?
Chain Management
Logistics & Supply
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:

Chain Management
Logistics & Supply
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:

Chain Management
Logistics & Supply
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: Who’s Behind it?

Federated
Department Stores
CORNING
Consumer Products
FIELDCREST CANNON

JCPenney Staples
Mead
School & Office Schnuck
Markets

Benchmarking
Partners QRS
 CPFR History:

Chain Management
Logistics & Supply
‘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 & Wegman’s, etc.
‘00:1st Production Rollout: K-Mart
 CPFR’s Future:

Chain Management
Logistics & Supply
“n-Tier” Collaboration
Extension to Include Master-Scheduling Decisions
Include Transportation
 Research Topics in CPFR:

Chain Management
Logistics & Supply
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?
 Logistics & Supply
Chain Management
Secure Supply-Chain Collaboration
 The Starting Point....

Chain Management
Logistics & Supply
“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

Chain Management
Information Private
Logistics & Supply

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

Chain Management
SMC is Decades Old
Logistics & Supply
Elegant Theory
General Results w.r.t. Existence, Complexity, etc.
Recently, Practical Protocols for Specific Problems

Ex. Electronic Voting

Information Retrieval
 SMC Paradigm
Chain Management
Logistics & Supply
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
Supply-Chain 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:

Chain Management
Logistics & Supply
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.):

Chain Management
Logistics & Supply
Develop Proof-of-Concept Software

Examine Security versus Cost Tradeoffs

 Ex: Capacity Allocation

Chain Management
Logistics & Supply
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, qi, about its market that influences its order
to the supplier; Supplier has prior Pr(q)
S
If Ordersi > K, Supplier Uses Pre-announced Allocation
Mechanism
 Cachon and Lariviere (MS, ‘99)
Chain Management
Logistics & Supply
Examine this scenario from perspective of the retailers in
non-cooperative setting
Linear Demand: Market-Clearing Price, r(q)

r(q) = qi - 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)

Chain Management
Examine this scenario — and a newsvendor scenario — from
Logistics & Supply
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’ qi’s
 Allocation Mechanisms

Chain Management
Logistics & Supply
Supplier has Capacity K
Retailers place orders: q1, q2, q3,..qN
Assume Sqi > K

Linear Allocation: qi’ = qi - (Sqi- K)/N’

Proportional Allocation: qi’ = qi • (K/ Sqi )

 Proportional Allocation Protocol

Chain Management
Logistics & Supply
1. Retailers choose a random R;
2. Every retailer sends its R•qi to Supplier
3. System computes:
D = (R•Sqi/K)
and sends it to all the retailers
4. Every retailer computes its allocation:
qi’ = R•qi/D
and sends to supplier
 Notes:

Chain Management
Logistics & Supply
We are assuming that retailers will tell the truth; i.e., reveal the
quantity they truly want; (one that is consisent with their qi)

Supply Chain Profit will be reduced

if they don’t

Contracting Mechanisms will be

Required
 Notes:

Chain Management
The Supplier Learns each Retailer’s qi, but not qi
Logistics & Supply
Supplier Might be able to Infer qi

Shipping Proxies
 We Have Only Just Begun...

Chain Management
Logistics & Supply
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
Bob’s Objective is fB(xA, xB); Alice’s is fA((xA, xB)