MANAGING THE SUPPLY CHAIN

1. MANAGING THE SUPPLY CHAIN Vish V. Krishnan The University of Texas at Austin

2. AGENDA • Dynamics of Supply Chains: The Beer Game • Discussing the Beer Game • Supply Chain Overview and Decision Sequence • Selecting the Right Supply Chain

3. Orders Sold to Customers Used Order Cards Orders Placed Incoming Orders Orders Placed Incoming Orders Orders Placed Incoming Orders Raw Material 4 4 4 4 4 4 Order Cards 4 Production Delay .... RETAILER WHOLESALER DISTRIBUTOR FACTORY Current Inventory ........ ........ Current Inventory ......... ......... Current Inventory ......... ......... Current Inventory ......... ......... Production Delay .... Shipping Delay .... Shipping Delay .... Shipping Delay .... Shipping Delay .... Shipping Delay .... Shipping Delay .... Beer Game Board

4. Beer Game Instructions • You are a Beer Supply Chain • Retailer • Wholesaler • Distributor • Factory • Gong-Beater (different) • You each manage an Inventory • Each receives orders of Beer (with a shipping delay) from supplier. Factory receives its WIP (with a prodn delay). • Each fills customer’s orders for beer • Goal • Minimize Costs • $0.50/week/case carrying cost • $1/week/case backlog cost

5. Beer Game (cont.) • Choose a team name • ONLY Retailers know consumer orders (No one speaks to each other) • Set-up • 12 cases in each inventory • 4 in each shipping delay • Sticky with “4” in each orders box • Deck (DON’T TURN OVER) in front of retailer • You each have sticky pad for new orders • You need a record sheet for Inventory, backlog, etc. per week (mark posn) • Orders filled = Backlog + New Orders • Do first few weeks together.

6. Steps of Game 1. Receive Inventory & Advance Shipping delays Factories advance Production delays 2. Fill Incoming Orders (incl Backlog) Retailer gets order card from deck & turns card face down afterwards Kill old order slips Use backlog chart if needed 3. Advance Order slips (except Factories) 4. Record Inventory/Backlog 5. Place & Record Orders • Put face down, so write on sticky side Factories Brew • Put Raw Materials into 1st Production Delay

7. Inventory/Backlog Chart • Enter team name and your name up top. • Circle position. • Add up inventory and backlog columns. • Multiply inventories by 0.50 and add to backlogs to get total cost. • How to calculate Backlogs: Discussion

8. Order & Inventory Graphs • Order graph • Enter team name and check off position. • Mark order at each week on graph • Inventory graph • Do same thing, but mark backlog as negative inventory • Blank Customer Order graph • Retailers don’t do this (and keep quiet about it!) • Roughly sketch out what you think consumer order stream was.

9. Beer Game Summary RANGE OF SCORES: 200 – 10000 Our range: Game developed at the System Dynamic Group at MIT and played around the world. Illustrates many interesting issues - Multi-level Supply Chains - Balancing Inventory costs with stockout costs - Bullwhip effect (demand distortions) How do you get consistently low scores/win the game?

10. Lessons Learned from the Beer Game • People become their Positions • Inaction • Excessive Action • Information Distortion - Bullwhip

11. Increasing Variability Up the Supply Chain Wholesaler Orders to Manufacturer Consumer Sales 20 20 15 15 Order Order Quantity Quantity 10 10 5 5 0 0 Time Time Retailer Orders to Wholesalers Manufacturer Orders to Supplier 20 20 15 15 Order Order Quantity 10 Quantity 10 5 5 0 0 Time Time Source: Lee, Padmanabhan, and Whang

12. Bullwhip in Electronics Industry 1 1 4 4 7 7 10 10 13 13 16 16 19 19 22 22 25 25 28 28 31 31 34 34 37 37 40 40 43 43 46 46 49 49 52 52 Order variability is amplified up the supply chain Peripheral Product Consumables 45,000 40,000 350,000 35,000 300,000 30,000 250,000 25,000 20,000 200,000 15,000 150,000 10,000 100,000 5,000 50,000 Unit orders from a major retailer to manufacturer Total unit sales at outlets of retailer Source: Lee, Padmanabhan, and Whang

13. Retail Enterprise Suppliers Distributors What are Supply Chains? • Supply chain is an agent-based view • Across firms • Beyond neighbors (more than supplier management) • Increasingly becoming supply web mgmt.!

14. Corporate Sales Office Plant Suppliers Distributors Customers Sales Office Suppliers Plant Distribution Center Customers Suppliers Supply Web Management

15. Defining Supply Chain Management Supply Chain Management - Coordination and integration of all the activities (buy, create, move, and sell) involved in delivering a product from the supplier’s supplier to the customer’s customer. On-time delivery of Quality Product at Low Cost. Matching supply and demand in uncertain environments. Why is Supply Chain Management not easy? Number of linkages to be orchestrated. Global sourcing Demanding markets Meeting fluctuating customer demand with constant supply. Think about a product like a Ford Explorer!

16. Managing a Global Supply Chain Makes aSubassembly Moves it to a Warehouse Stores it at Warehouse Buys Components Stores it at Dealers Moves itto Dealers Final Assembly Sells it to Consumers Adapted from I2 Presentation Improved Distribution Not Better Production is Key Goal in Mergers - Wall Street Journal

17. Why Supply Chain Management? • Supply Chain Management accelerates the cash conversion cycle and improves ROIC. • Cash Conversion Cycle(CCC): Rate at which inventory is turned into cash; Time difference between when you receive payment from customers and when you pay your suppliers. Pay suppliers Get paid by customers • Return on invested capital (ROIC) has become the mantra in valuing firms: • ROIC = After-tax operating earnings divided by [total assets minus non-interest-bearing current liabilities]; Removes the vagaries of GAAP and tells you how well the company is run (compared to ROE); Operating performance independent of the financing means. Also called EVA approach used by the creme de la cremeof firms • Supply chain management accelerates cash conversion and dramatically increases ROIC, contributing to better shareholder value.

18. The Rise of Specialization and Outsourcing • Increasingly firms are turning to suppliers for most of their value added activities. • Value chain is shrinking • Suppliers deliver components in software as well as services • In services, capacity planning and management takes the role of inventory. • Capacity cannot be added in a short notice. • Demand is unpredictable. • How do you meet fluctuating demand with nearly fixed capacity?

19. Supplier Selection Plan & Order Monitor& Improve Design Supply Chain Decision Sequence • What should be the design of a supply chain? • How do you decide when to make and when to buy? • What opportunities does technology offer for negotiation and supplier selection? • How do you monitor and improve supply chains?

20. Efficiency (Low cost) Responsiveness Supply Chain Effectiveness • Supply chain performance can be measured in terms of their cost, lead time, on time delivery (consistency), and other performance measures. • Beyond a certain point, supply chains face trade-offs:

21. Organizing Framework: Matching Supply Chains and Products Functional Product Innovative product Efficient Chain Responsive chain MATCH MIS-MATCH MATCH MIS-MATCH

22. Key Takeaways • The beer game shows how outsourcing does not solve all problem – coordination within the supply chain become paramount. • Bullwhip effect or volatility amplification in a supply chain. • Supply chain management: What is it and Why? • Moves the focus beyond neighbors to the entire “value system” : from supplier’s suppliers to customer’s customers. • Difficult because unpredictable demand must often be matched with inflexible supply. • Relevant because it can contribute to increasing ROIC and shareholder value • Supply Chain Design • What makes a supply chain efficient may make it less responsive. At the frontier, there may be a trade-off between efficiency and responsiveness. • Ensure there is a fit between your products/markets and the supply chains.