Supply Chain Design
Session 16
Supply Chain
!! Linking
chain
various players within the entire value
!! Suppliers !! Manufacturers !! Distributors/ !! Customer
Wholesalers/ Retailers
!! Measuring
!! Inventory
Supply Chain performance:
Turnover = COGS/ Avg Inventory value !! Weeks of Supply = (Avg Inventory value/ COGS) x 52
Net value Rs. 912,150 Cost of revenue 706,850 Cost of production material 321,150 Production materials on hand 11,700 WIP and FG on hand 1,950 Production materials days supply 6 days Inventory Turnover = 706,805 = 51. 78 turns/yr 11,700 + 1,950
Supply Chain Design Strategy
!! Dell !! Managing
!!
demand supply
Price/ Promotions
!! Managing
!!
Inventory !! Seasonality
!! Bull
!!
whip effect !! Types:
Efficient SC !! Risk-hedging SC !! Responsive SC !! Agile SC
Support Strategies
!! Outsourcing
!! Vertical
integration vs. outsourcing
at expertise to outsource
!! Looking
!! Logistics
!! Cost
and service level impact !! Design for logistics in product development
!! Transportation
Mode and Value Density !! Global sourcing !! Mass Customization
Strategic Capacity Planning
!! Service
vs. Product !! Level of capacity-intensive resources:
!! Facilities !! Equipment !! Labor
force
!! Best
operating level
!! Process
design capacity !! Minimized unit cost
!! Capacity
utilization rate =
Capacity used Best Operating Level
Strategic Capacity Planning
!! Economies
and diseconomies of scale !! Economies of scope !! Capacity flexibility
!! Flexible
plant equipment !! Flexible processes switchover !! Flexible workers task switching
!! Lagging
vs. leading capacity !! Frequent vs. Infrequent capacity expansions !! Outsourcing !! Using Decision Trees
Trips Logistics
!! 1000
sq. ft. of warehouse space needed for 1000 units of demand !! Current annual demand = 100,000 units !! Demand can either go up or fall by 20% with equal probability !! Lease price = $1.00 per sq. ft. per year !! Current annual Spot market price = $1.20 per sq. ft. !! Spot prices can either go up or fall by10% with equal probability !! Revenue = $1.22 per unit of demand !! k = 0.1
Trips Logistics
Three options:
1.! 2.!
Get all warehousing space from the spot market as needed Sign a three-year lease for a fixed amount of warehouse space and get additional requirements from the spot market
Option 1
Period 1 Period 0
D=120 p=$1.32
0.25 0.25 0.25
D=144 p=$1.45 D=144 p=$1.19 D=96 p=$1.45 p=$0.97 D=96 p=$1.19 D=96 p=$0.97 D=64 p=$1.45 D=64 p=$1.19 D=64 p=$0.97
0.25 0.25
0.25
D=120 p=$1. 08
D=100 p=$1.20
0.25
D=80 p=$1.32
0.25
D=80 p=$1.08
Decision Node D= 144, p = $1.45 D= 144, p = $1.19 D= 144, p = $0.97 D= 96, p = $1.45 D= 96, p = $1.19 D= 96, p = $0.97 D= 64, p = $1.45 D= 64, p = $1.19 D= 64, p = $0.97
Period 2 Calculation for Spot Market Option Revenue Cost 144,000 x 1.22 144,000 x 1.45 144,000 x 1.22 144,000 x 1.19 144,000 x 1.22 144,000 x 0.97 96,000 x 1.22 96,000 x 1.45 96,000 x 1.22 96,000 x 1.19 96,000 x 1.22 96,000 x 0.97 64,000 x 1.22 64,000 x 1.45 64,000 x 1.22 64,000 x 1.19 64,000 x 1.22 64,000 x 0.97 Period 1 Calculation for Spot Market Option
Profit ($33,120) $4,320 $36,000 ($22,080) $2,880 $24,000 ($14,720) $1,920 $16,000
Decision Node D= 120, p = $1.32 D= 120, p = $1.08 D= 80, p = $1.32 D= 80, p = $1.08
Expected Profit from Period 1 ($12,000) $16,800 ($8,000) $11,200
Total PV of EP ($22,909) $32,073 ($15,273) $21,382
Period 1 Period 0
D=120 p=$1.32
0.25 0.25
D=144 p=$1.45
0.25 0.25 0.25
D=144 p=$1.19 D=96 p=$1.45 D=96 p=$1.19
D=100 p=$1.20
Decision Node D= 144, p = $1.45 D= 144, p = $1.19 D= 96, p = $1.45 D= 96, p = $1.19
Period 2 Calculation for Spot Market Option Revenue Cost 144,000 x 1.22 144,000 x 1.45 144,000 x 1.22 144,000 x 1.19 96,000 x 1.22 96,000 x 1.45 96,000 x 1.22 96,000 x 1.19
Profit ($33,120) $4,320 ($22,080) $2,880
Trips Logistics Option 1
!! NPV
(Spot Market Option) = Total Profit for period 0 + PVEP at period 1 = $ 2,000 + $3,471 = $ 5,471
Making SC Design Decisions Under Uncertainty in Practice
!! Combine
strategic planning and financial planning during network design !! Use multiple metrics to evaluate supply chain networks !! Use financial analysis as an input to decision making, not as the decision-making process !! Use estimates along with sensitivity analysis
