Columbia University Graduate School of Business B8815 Supply Chain Management Spring 2008 Tue 2:15pm-5:30pm, Uris 331

Medini R Singh (212) 854-0664 (work) (646) 823-5917 (mobile) (631) 675-0442 (home) ms2149@columbia.edu 502 Uris Hall Office Hours: Tuesdays: 05:45 06:45pm and by appointment Teaching Assistant TBA Course Description: Supply chains have been around for as long as the business of production itself. What is new is their management. Activities such as purchasing, warehousing, inventory control and transport were once considered part of the cost of running a business. Now these activities come together as supply-chain managementa strategic function that has taken center-stage on CEOs agenda. What explains the success of Wal-Mart in retailing, Dell in the personal-computer business, Zara in fashion, Toyota in automobile production and Li & Fung in the trading business? Efficient and responsive supply-chain management. There are several reasons for supply chain functions growing influence on the bottom line. First, businesses are doing less and less within their own organization and relying more and more on their supply chain partners. This may be due to increased complexity, scale economy or to focus on core competencies. Whatever the reason, the success of a firm is increasingly dependent on what happens outside its organizational boundaries. Second, supply chains are becoming longer and more complex. Stretched across several continents, spanned by road, rail, sea, air and now, by internetthe task of ensuring that all these things work together seamlessly is frustratingly difficult and requires constant attention. Third, supply chain is becoming more envelopingit includes everything from buying raw materials to managing suppliers, warehousing, operating transport fleets, taking orders, collecting payments, repairing products and even reverse logisticsthe task of recycling unused and end-of-product-life-cycle items. Finally, supply disruption
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represents a significant danger for many firms and managing this risk is becoming a pressing issue. Ironically, as supply chains have become leaner this risk has only increased. The new JIT converts are celebrating their lean international supply chains, unaware that a dock strike in California or an earthquake in Turkey can have a calamitous effect on their business. The Supply Chain Management course will focus on how to coordinate and integrate various activities into a seamless process. The emphasis will be on managing material and information flow across different partners in the chain. The alignment of incentives, design and evaluation of contracts and strategies to reduce and hedge uncertainties will receive significant attention. This course will explore: Key variables, control levers, and critical tradeoffs in supply chains The enabling role of the Internet Matching supply chain strategies to market needs How to cope with uncertainties in supply chains Managing information flows for supply chains Diagnostics for supply chain performance Inventory/service tradeoffs Distribution strategies Sourcing and supplier management Role of intermediaries Supply flexibility Risks in supply chain

The course will include both individual and group work. Assignments will indicate if the work should be submitted as a group or individually. Case groups may have four or five members while individual assignments should be addressed individually. Grading will be based on case analyses, two exams and assignments as discussed below. Grading: Your grade in the course will be based on your individual, as well as group efforts and performance. We will use the following weighting scheme: Class Participation Homework and Case Assignments Midterm Final Examination
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Class discussion is an important part of the design of the course. Therefore your participation will be graded, and when necessary, people will be called on to add to the discussion. The quality of your participation in discussions will be judged based primarily on your ability to move the class discussion forward. The content, depth and relevance of comments to the discussion are important as well. So that we can accurately access your participation, you should bring your tent (name) card to class throughout the term. Each week there will be an assignment related to the case and/or the subject. Guidelines for preparing for the cases as well as assignments will be distributed a week in advance. Sometimes these assignments will be group efforts while others must be prepared individually (the nature of the assignment will be specified). Assignments are due at the beginning of class. You may discuss the cases and assignments with colleagues in your class. However, the work submitted for grading must reflect your own thinking and contribution. I will assume that each member of the team has contributed equally to a group assignment, unless noted otherwise. Mid-term and final exams will be open-book with access to class notes.

Required Readings: Readings are avialble in the coursepack. Optional Technical Reference: 1. Inventory Management and Production Planning and Scheduling by Edward A. Silver, David F. Pyke, and Rein Peterson, 1998, 0-471-11947-4 2. Matching Supply with Demand: An Introduction to Operations Management by Gerard Cachon, 2006, McGraw-Hill Irwin 3. The Resilient Enterprise by Yossi Sheffi, 2005, MIT Press

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Detailed Schedule
This is a tentative schedule. Real schedule may vary slightly depending upon our progress. Check ANGEL for updates.

Session 1

January 29, 2008 Topic: Introduction; Matching Supply with Demand. Class Plan: 1.1 1.2 Reading: Read the articles posted below. Think about the following questions: 1. Why supply chain management has gained importance in recent years? 2. Is Just-In-Time a bad idea for supply chain of medical products? Introduction Variability and Risk in Supply Chains: The Newsvendor Model

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Session 2

February 5, 2008 Topic: Dysfunctional Supply Chains Class Plan: We will discuss Sorenson research (see the questions below). We will then continue with our discussion of the two-stage supply chain and its coordination problem (please do the assignment before class). Case: Sorenson Research Co: Prepare the following questions for discussion (nothing to turn in). 1. What are the problems Sorenson Research Company is faced with in December 1976? What are the causes of these problems? Analyze various elements of Sorenson's supply chain: distribution channel, incentive system, inventory positioning, stocking policy, reshipment policy, mode of transportation, accuracy and timeliness of information. 2. What are the overall objectives of Sorenson's supply chain? Does it achieve these objectives? 3. Consider Larry Harmer's plan to improve the system. Summarize the plan and analyze the effects of this plan on Sorenson's operations. 4. Suppose you are asked to propose a plan to help Sorenson Research decrease inventories and costs and improve customer service. Propose a plan and analyze the impact of your plan. Group Assignment: For the two-stage supply chain discussed in the last class (see Two-stage Supply Chain posted below), analyze the following: 1. Retailer's decision. Given market price for product, p=$10, and a wholesale price, w=$5, how much should the retailer order? Hint: use the newsvendor model. 2. Retailer's decision--sensitivity analysis. Change w and repeat Q1 above. How does optimal order quantity vary with w? A graph will be helpful. 3. Manufacturer's decision. Find manufacturer's profit for w=$5. Given how retailer's order quantity changes with wholesale price w, find manufacturers profit as w changes. Plot manufacturer's profit as a function of w. 4. What is the best wholesale price? How much money will the manufacturer make if she charges the best wholesale price, w*? What to turn in?: Your answer to Q1-Q4 of the group assignment.

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Session 3

February 12, 2008 Topic: Vertically Integrated vs. Independent Manufacturer-Retailer Chain; Linkage between Inventory Management and Working Capital Class Plan: In the first half, we will compare the profits for the vertically integrated supply chains to the independent manufacturer-retailer chain to see which one works better (see the assignment below). We will then consider how to compute retailers profit when demand is normally distributed. We will also quantify the impact of centralization on inventory and service leve (you already have the handout)l. Please bring your computer. In the second half, we will discuss the Northco(A) case. Northco(A): Prepare the following questions for discussion (nothing to turn in): 1. What makes it difficult for Northco to match supply with demand? How should Michaels think about the costs of over and understocking? Identify the elements of over and understocking costs in this case. 2. Identify changes to the way Northco does business currently that would enable it to better match supply with demand. Identify the costs and difficulties associated with implementing each of these changes. 3. Examine Northcos forecasting process (look at the Exhibits 3-4 and the Appendx 1). How good is this forecast process? What modification would you suggest for a better forecast? Individual Assignment : In the last class, we developed a spreadsheet to calculate expected shortage, expected leftover and retailers expected profit, given a wholesale price, w (chosen by the manufacturer) and an order quantity, Q (chosen by a retailer). 1. Finding the Optimal Order Quantity: For w=$4, plot retailers expected profit as a function of order quantity, Q. Choose an order quantity that maximizes retailers expected profit (because the profit function is flat near optimal, more than one value of Q may give the same profit). Verify that the optimal order quantity, Q*=60, obtained from the newsvendor model indeed gives the maximum expected profit for the retailer. Compare your answer to the retailers expected profit, plotted in the modified spreadsheet, Supply_Chain_Profit_Calculation_v2, posted below. What is the maximum expected profit retailer can get if she chooses the best order quantity, Q*=60? What will be the suppliers (manufacturers) profit? What will be the total expected supply chain profit (manufacturers+retailers profit)? 2. We have found two ways to compute retailers optimal decision: (i) by computing expected retailers profit for each Q and choosing the Q that maximizes the expected profit, and (ii) by newsvendor model. What are the relative strengths and weaknesses of each method? 3. Repeat Q1 for different values of wholesale price, w. (You may change w in
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the spreadsheet, Supply_Chain_Profit_Calculation_v2, to see how retailers expected profit function changes). For each w, compute retailers optimal order quantity, retailers (maximized) expected profit, suppliers profit corresponding to the retailers optimal order quantity and the total expected supply chain profit. 4. Plot retailers expected profit, suppliers profit and the total supply chain profit as a function of wholesale price, w. What w is best for the supplier? What profits will the supplier and the retailer make, if the supplier chooses this w? What will be the total expected supply chain profit for this independent manufacturer-retailer supply chain? 5. Suppose the supply chain was vertically integrated. That is, the manufacturer and retailer were part of the same organization. The marginal cost of manufacturing was still $2 and the product was sold for $10. The product was made before demand was known. The demand distribution remains the same. What will be the optimal production quantity? What will be the expected profit for the vertically integrated chain? (Hint: there is no wholesale price now; the manufacturer and retailer decide together how much to produce, given c=$2 and p=$10). 6. Compare the total supply chain profit computed in Q5 and Q6. Are they different? Explain the difference and its consequences. What to turn-in? Your answer to Q4 and Q5 only.

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Session 4
February 19, 2008

Topic: Revenue-Sharing Contract; Generalization to Normal Distribution Class Plan: We will analyze the revenue sharing contract and a few other contracts. We will then generalize our discussion to normally distributed demand and compute retailer's and manufacturer's profits in this setting. Group Assignments: Use the spreadsheet developed in the last class, Supply Chain_Profit_with_Revenue_Sharing, to answer following questions: 1. For 50-50 revenue sharing ( =0.50), what wholesale price will the manufacturer choose to maximize her expected profit? What wholesale price should she choose to coordinate the channel? Recall that a supply chain is coordinated if there is no loss of supply chain profit due to independent players in the chain. 2. Suppose the manufacturer has complete freedom to choose and w. How should she exercise her choice so that channel remains coordinated? Try different values of and find corresponding w that coordinates the supply chain. 3. Are the terms of such contract enforceable? What information each side needs for revenue-sharing to work effectively? 4. How uncertain is the profit for each member of the chain? 5. What is fundamentally different about the revenue sharing contract that makes it possible to increase channel profit compared to the whole-sale contract? What to turn in? Your group's answer to Q1 and Q2 only. Read: 1. Aligning Incentives in Supply Chains 2. Turning the Supply Chain into a Revenue Chain

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Session 5
February 26, 2008 Topic: Return Contracts for Supply Chain Coordination Group Assignment: 1. Why do manufacturers allow return of unsold goods? Give your reasoning using examples where returns are prevalent. 2. Analysis of Unlimited Return with Restocking Fee Consider the two-stage manufacturer-retailer supply chain discussed in Session 1. Suppose the manufacturer charges a wholesale price, w, for each unit of product that it supplies to the retailer. However, the retailer can return any unsold product to the manufacturer and get a refund, s, for each unit. Assume that s < w, that is the manufacturer refunds only part of the money; however there is no restriction on the quantity that can be returned. a) For w=$6 and s=$5, find retailers and manufactures expected profits. What is the expected supply chain profit? Is the supply chain coordinated for these values of contract parameters? b) In general, how would you set w and s such that the chain is coordinated? (Recall that a supply chain is coordinated if there is no loss of supply chain profit due to independent players in the chain) c) For wholesale price, w=$6, what will the manufacture offer as refund if she wants to maximize her own profit? d) How would your answers to Q2a, Q2b and Q2c change if the demand was distributed normally with a mean of 100 and standard deviation of 10 (instead of a uniformly distribued demand between 1 and 100) 3 Analysis of Limited Return without Restocking Fee Suppose the manufacturer charges a wholesale price, w, for each unit of product that it supplies to the retailer. The retailer can return up to B units of unsold product to the manufacturer for a full refund. How should the retailer decide the optimal order quantity to maximize her expected profit?

What to turn-in? Your group's answer to Q2a and Q2c only. Try other questions to prepare for the class. Individual Assignments Due: CompToday, a computer retailer, orders personal digital assistants (PDAs) from PalmSpring, a manufacturer of these devices. PalmSpring requires its retailers to place orders several months ahead of the product launch date so that PDAs are available at its retailers in time. CompToday estimates the demand for PalmSpring IIIexe to be Normally distributed with mean 500 and standard deviation 100 based on past history of PDA sales and several fancy new features in the IIIexe. CompToday pays a wholesale price of $100 for each IIIexe and sells it at a retail price of $175. Assume that any leftover PDAs have negligible salvage value and ignore other retailing costs. 1. How many IIIexe PDAs should CompToday order from PalmSpring?
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2. Suppose PalmSpring offers to its retailers the following return option. At the end of the selling season (marked by the release of even better, faster, lighter PDAs by PalmSpring), retailers can return the unsold stock of IIIexe. PalmSpring will charge, however, a return and restocking fee of $20 for each PDA returned. In effect, CompToday can sell the leftover PDAs to PalmSpring for $80 each. Under this return option, how many IIIexe PDAs should CompToday order from PalmSpring? What may possibly be PalmSprings motivation in offering a return option to its retailers? 3. Suppose PalmSpring now offers an emergency shipment option to its retailers (in addition to the return option as explained in Q2). Retailers can order IIIexe PDAs during the selling season (after the demand is known) at a wholesale price of $115. The emergency shipment arrives immediately such that no demand is lost due to this late order. PalmSpring still offers the wholesale price of $100 for advance orders to its retailers. Given the option of getting an unlimited in-season shipment (albeit, at a premium), should CompToday order any PDAs in advance? If so, how many? 4. Compare your answers to Q1 and Q3. What may possibly be PalmSprings motivation in offering emergency shipment option, in addition to the return option, to its retailers? If you were running PalmSpring, what type of supply contract would you offer to your retailers to better match demand with supply? What to turn in? Your answer to Q1, Q2 and Q3.

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Session 6
Topic:

March 4, 2008

Global Sourcing and Supplier Management; Manufacturing Flexibility Case: Intercon Japan : Questions: 1. How has Intercon Japan's supplier relationships performed relative to its American counterpart? 2. How do these relationships create value for Intercon Japan? That is, how do they function? 3. Can this style of relating translate to the U. S.? Case: Detroit Motors : Questions: Given at the end of the case. Assignment Due: Your group's answer to Q2 and Q3 of Detroit Motors.

Session 7

March 18, 2008 Mid-Term Examination: In class, open notes.

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Session 8

March 20, 2007 Topic: Sourcing Policy and Buyer-Supplier Relationship Bose Corporation: The JIT II Program (A): 1. How do Bose's history, strategy, and sourcing policies affect supplier relations? Is Bose a good buyer? 2. Where is the buying and selling done in this context? Who are the people involved and what are their roles? 3. Should Bose participate in the JIT II program? Should G&F? What are the potential benefits and risks to each companies? 4. Should Bose vertically integerate into plastics? Why (why not)? 5. Should plants source their own components locally? Why (why not)?

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Session 9
Topic:

March 27, 2007

Tools for Managing Supply Chains Class Plan: Lecture on Periodic & Continuous Review Inventory Models Reading: "Building Deep Supplier Relationships," Jeff Liker and T.Y. Choi, Harvard Business Review, December 2004 Bose Corporation: The JIT II Program (B, C and D)

Session 10
April 3, 2007 Topic: Supply Chain Intermediaries Massimo Menichetti: 1. 2. 3. 4. Analyze the Prato system. Does it work? Why? What is the role of an impannatori? Compare the SPRINT project to CAD. What benefits do these IT tools bring? Should Massimo embrace them? Do you know other industries that share similar characteristics as textile production in the Prato region of Italy? Li & Fung: Read: Fast, Global and Entrepreneurial: Supply Chain Management Hong Kong Style Read: Li & Fung (A). Focus on Company Background, Growth Strategy and Competitive Threats (pp.145-151), skim other parts. 1. What does Li & Fung do? How has its role evolved over time? 2. Why does a buyer go to Li & Fung instead of opening its own buying office, say in China? 3. Compare Li & Fungs role in the apparel supply chain to that of impannetore of the Italys prato region. 4. What role will Li & Fung play in a world where China becomes increasingly dominant apparel manufacturer and quota restrictions are gradually phased out, thanks to Chinas entry into the World Trade Organization?

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Two Scenarios for 21st Century Organizations: Shifting Networks of Small Firms or All-Encompassing "Virtual Countries? by Robert J. Laubacher, Thomas W. Malone, and the MIT Scenario Working Group. http://ccs.mit.edu/21c/21CWP001.html

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Session 11
April 10, 2007 Topic: Challenges in Re-structuring the Supply Chain Campbell Soup Co.: A Leader in Continuous Replenishment Innovations: Questions: 1. How do each of the three pricing structures (existing, EDLP, and CPR2) affect operations? What challenges did EDLP and CPR2 pose to other functional areas of Campbell? 2. What are the implications of maintaining all three pricing mechanisms? If you were a Campbell soup retailer, what pricing mechanism would you prefer? Barilla SpA (A): Questions: 1. What conflicts or barriers internal to Barilla does the JITD program create? What causes these conflicts? As Giorgio Maggiali, how would you deal with these conflicts? 2. As one of Barillas customers, what would your response to JITD be? Why? 3. In the environment in which Barilla operated in 1990, do you believe JITD (or a similar kind of program) would be feasible? Effective? If so, which customer would you target next? How would you convince them that the JITD program was worth trying? If not, what alternatives would you suggest to combat some of the difficulties that Barillas operating system faces? Reading: The Bullwhip Effect in Supply Chains Reading (after class): Barilla SpA (C--D)

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Session 12

April 17, 2007 Topic: Efficient vs. Responsive Supply Chains; Managing Supply Chain Risks Class Plan: 1. 2. 3. 4. Discussion of Barilla Assignment Observations on Zara Efficient vs. Responsive Supply Chains Supply Chain Risks & their Mitigation

Assignments Due: Barilla Assignment (posted last week) Reading: 1. What is the Right Supply Chain for Your Products? 2. Managing Risk to Avoid Supply Chain Breakdown 3. A Supply Chain View of Resilient Enterprise

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