Supply Chain Management

Lecture 15

Outline (last week)

February 25 (Today)
Network design simulation description Chapter 8 Homework 4 (short)

March 2
Chapter 8, 9 Network design simulation due before 5:00pm

March 4
Simulation results Midterm overview Homework 4 due

March 9
Midterm

Outline
March 2 (Today)
Network design simulation Chapter 8, 9
Chapter 8
Sections 1, 2, and 3 only

Chapter 9
Sections 1, 2, and part of 3 only

March 4
Simulation results Midterm overview
Important sections Formula sheet Practice questions

March 9
Midterm

Simulation Assignment (25%)

Design the supply chain network for Jacobs Industries on the fictional continent of Pangea
Jacobs only product is an industrial chemical that can be mixed with air to form a foam (used in air conditioner retrofit kits)

Demand
Average demand for Jacobs product in Pangea
Existing and new markets

140 120 120 100 80 60 20 40 20 0 1 145 289 433 577 721 865 1009 1153 1297 1441 0 1 145 289 433 577 721 865 1009 1153 1297 1441 100 80 60 40

18 16 14 18 16 18 16 14 12 10 8 6 4 2 0 1 142 283 424 565 706 847 988 1129 1270 1411 14 12 10 8 6 4 2 0 1 142 283 424 565 706 847 988 1129 1270 1411 12 10 8 6

250

4 2 0 1 142 283 424 565 706 847 988 1129 1270 1411

Assignment
Jacobs management would like to design a supply chain network for Pangea. Its current network consist of a factory in Calopeia with a capacity of 20. You have been hired to suggest a network design that will maximize profits for Jacobs Industry. Designing such a network is complex and includes the following decisions:
Should the factory in Calopeia be expanded? Should factories in other regions be built? If so, what should their capacity be? What regions should each factory serve?
Serve region? Factory? YES Total Capacity? 40 Calopeia YES Sorange YES Tyran YES Entworpe YES Fardo YES

Calopeia Sorange Tyran Entworpe Fardo

YES

20

YES

YES

YES

YES

NO

Questions
What to do with Fardo?
Service Fardo demand from the mainland Service Fardo demand from local (to be built) factory Dont service Fardo demand

What to do with Calopeia?

Add capacity to existing factory or not Service other regions or not

What to do with Sorange, Entworpe, and Tyran?

Built new factory or not Service other regions or not

From Forecasting to Planning

2500 Forecast 2000

Demand

1500 1000 500 0

Capacity

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Month

How should a company best utilize the resources that it has?

From Forecasting to Planning

2500 Forecast 2000

Demand

1500 1000 500 0

Capacity

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Month

How much should be produced and when?

Aggregate Planning
Aggregate planning
A general plan that determines ideal levels of capacity, production, subcontracting, inventory, stockouts, and even pricing over a specified time horizon (i.e. planning horizon)
Production rate (number of units to produce) Workforce (number of workers needed) Overtime (number of overtime hours) Machine capacity level (machine capacity needed) Subcontracting (subcontracted capacity) Backlog (total demand carried over to future periods) Inventory on hand (total inventory carried over to future periods)

Aggregate Planning
Aggregate planning involves aggregate decisions rather than stock-keeping unit (SKU)-level decisions for a medium term planning horizon (3-18 months)
All-Terrain Vehicle (ATV)

Engine Assembly

Transmission

Model A

Model B

Model C

Automatic

Manual

Aggregate Planning Strategies

Basic strategies
Level strategy (using inventory as lever)
Synchronize production rate with long term average demand Swim wear

Chase (the demand) strategy (using capacity as lever)

Synchronize production rate with demand Fast food restaurants

Time flexibility strategy (using utilization as lever)

High levels excess (machine and/or workforce) capacity Machine shops, army

Tailored strategy
Combination of the chase, level, and time flexibility strategies

Case Study Results

In general, the chase strategy is used when
Products are valuable Products are bulky or hard to store Products are perishable or carry an appreciable risk of obsolescence High variety
Accurate sales predictions are hard to obtain making stockpiling hazardous Fashion items

In general, the level strategy is used when

Operators take a long time to become proficient at critical tasks Products with negligible probability of obsolescence Low variety
Forecasts are quite good

Aggregate Planning in Services

Is aggregate planning useful for the service industry? What is the major variable in managing supply for service industries?

Managing Supply
Managing capacity
Time flexibility from workforce Use of seasonal workforce Use of subcontracting Use of flexible facilities

Managing inventory
Built inventory for high-demand or predictable demand products Use common components across multiple products

Managing Demand
Pricing and other forms of promotion
Timing of promotion is important

Timing of Promotion

Why would a firm want to offer pricing promotions during its low-demand periods? Why would a firm want to offer pricing promotions during its peak-demand periods?

Why would a firm want to offer pricing promotions during its low-demand periods?

Market growth new customers Forward buying existing customers move up purchases

Why would a firm want to offer pricing promotions in its peak-demand periods?
Price sensitivity is higher during periods of peak demand Brands that are losing market share reduce prices

Stealing share customers substitute the firms product for a competitor product

Managing Demand
Pricing and other forms of promotion
Timing of promotion is important

Demand increases from promotion can result from a combination of three factors:
Market growth (increased sales, increased market size)
Increase in consumption from both new and existing customers Example: Toyota Camry attracting buyers who were considering lower-end models

Stealing share (increased sales, same market size)

Product substitution (overall demand stays the same) Example: Toyota Camry attracting buyers who were considering Honda Accord

Forward buying (same sales, same market size)

Customers move up purchases (does not increase sales)

Factors Affecting Promotion Timing

Factor
High forward buying High ability to steal market share High ability to increase overall market High margin Low margin High holding cost

Impact on Timing of Promotion

Favors promotion during low-demand periods Favors promotion during peak-demand periods Favors promotion during peak-demand periods Favors promotion during peak-demand periods

Favors promotion during low-demand periods

Favors promotion during low-demand periods Favors promotion during low-demand periods

High costs of changing capacity