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Chain
Course Outline
• Introduction to Supply Chain Risks and
disruption, Sources of Risks, their characteristics,
supply chain ripple effect, the bullwhip effect,
disruption tails, and disruption overlays.
• Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th
Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky.
McGraw Hill Education. Copyright © 2022
Total
100%
Some key points about Supply Chain
Every supply chain should focus on seven rights: the right product to the right
customer at the right time in the right quantity with the right quality at the
right place and at the right cost.
Source: Introduction to supply chain resilience: Management, modelling, technology, by Dmitry Ivanov. Springer Nature , 2021.
Recent Supply Chain Disruptions
Recent Disruptions
Kaga Toshiba Electronics, the Toshiba subsidiary responsible for manufacturing power semiconductors, has
halted production with no restart date scheduled.
LCD panel and substrate maker Eizo has seen partial damage to its buildings and equipment in addition to
water and electricity cuts.
Recent Disruptions
Warning on Red Sea Ships: Houthis warned of attacks on Israeli-bound ships in the Red Sea. The Red Sea is a major route for
oil and fuel shipments globally.
Source: Introduction to supply chain resilience: Management, modelling, technology, by Dmitry Ivanov. Springer Nature , 2021.
Supply Chain Risk and Risk Management
A set of activities that are coordinated in order to direct and control the end-to-
end supply chain of a business in terms of S.C. risks is known as supply chain
risk management.
Types of Planning in SC
Strategic levels planning decisions have a long-lasting effect on the organization
For example,
• decisions regarding product design
• what to make internally and what to outsource,
• selection of the suppliers,
• strategic partnering,
• decisions on the number, location and capacity of warehouses, and
manufacturing plants.
These decisions are very useful to establish the future direction of the
organisation, as it usually contains the organization's vision, mission, goals and
key measures of success. Source: Chapter 1: Designing and managing the Supply chain
Types of Planning in SC
Tactical level Planning decisions includes decisions that are typically updated
between once every quarter and once every year.
For example,
• scheduling
• lead time
• quotations
• routing
• truck loading
Source: Chapter 1: Designing and managing the Supply chain
Interrelations of uncertainty, risk, disturbance, and disruption
(Dmitry Ivanov 2018a)
Interrelations of uncertainty, risk, disturbance, and
disruption (Ivanov 2018a)
1. Uncertainty:
2. Risk :
Risk arise from uncertainty. Risks can be identified, analyzed, controlled, and
regulated.
According to March and Shapira (1987), risk is a product of the probability of occurrence of a
negative event and the resulting amount of damage or impact.
Interrelations of uncertainty, risk, disturbance, and
disruption (Ivanov 2018a)
3. Disturbance
A disturbance is the consequence of risks.
Disturbance may cause a deviation (disruption) in the supply chain or not (e.g., a
supply chain can be robust and adaptive enough to overcome the disturbance).
4. Disruption
Operational disruption (e.g., a decrease in fill rate due to some demand fluctuation) or severe
disruptions (e.g., supplier unavailability or market disruption) are the results of disturbance
influences.
They may affect operations, processes, plans, network structures, goals, or strategies. To adjust
the supply chain in the case of deviations, adaptation measures need to be taken.
Supply Chain Risks
From the perspective of impact severity, different types of risks
in the supply chain can be classified into:
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology by Dmitry Ivanov. Springer Nature, 2021.
Recurrent Risks
Re-current risks are often smaller in scale and cause temporary breakdowns in supply
chain streams.
Drought, floods, freezing temperatures, severe storms, tropical cyclones, wildfires, winter storms
Disruption supply chain risks
Disruption is considered an HILF (High Impact Low Frequency) event.
For example, each summer, countries in Southeast Asia and the associated
supplier locations are hit by typhoons.
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology by Dmitry Ivanov. Springer Nature, 2021.
Disruption supply chain risks
2. The hazard disruptions are close to known-unknown uncertainty, i.e., we
know which events can happen but we do not know when they would happen
and what their impact is.
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology by Dmitry Ivanov. Springer Nature, 2021 .
Disruption supply chain risks
3. The deep disruptions are related to the unknown-unknown uncertainty, i.e.,
we do not know what can happen and when, and what the consequences are.
The deep disruptions represent the most complex case for decision-making.
Natural disasters (i.e. Earthquake in Japan, 2007 Production breakdown in Toyota’s supply chains
floods, earthquake, amounted to 55,000 cars
tsunami, Hurricane ) Earthquake and tsunami in Japan, 2011 Massive collapses in global automotive and electronics
supply chains; Toyota lost its market leadership position
Floods in Chennai, India, in 2015 Production of academic literature has been stopped at
many international publishing houses
Examples of Disruptions in Supply chain
Factor Example Impact
Terrorism September 11, 2001 Five Ford plants have been closed for a long time
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology by Dmitry Ivanov. Springer Nature, 2021.
Examples of Disruptions in Supply chain
Factor Example Impact
Epidemics and COVID-19 global pandemic in 2020–2021 Worldwide disruptions in supply and demand,
pandemics devastating effects in many global and local supply
chains; ripple effects; supply chain collapses and
long-term performance degradation
Man-made disasters Transportation disruption in Suez Canal in Many ripple effects in global supply chains due to
March 2021 delayed deliveries and destabilization of the global
shipment schedules
Examples of Disruptions in Supply chain
Factor Example Impact
Strikes Strikes at Hyundai plants in 2016 Production of 130,000 cars has been affected
Legal contract Disputes Volkswagen and Prevent Group Six German factories face production halt on parts
contract dispute in summer 2016 shortage; 27,700 workers were affected, with some
sent home and others moved to short-time working
Ripple Effect
In several contexts, disruptions can be localized without an associated cascading
effect throughout a network.
Source: https://savvy.directorprep.com/blog/the-ripple-effect
Ripple Effect Definition Source: Ivanov, D. (2018b).
DF2:- According to Dolgui et al. (2020), the ripple effect “refers to structural
dynamics and describes a downstream propagation of the downscaling in
demand fulfilment in the supply chain as a result of a severe disruption.”
DF3:- Ivanov et al. (2014b) state that the “ripple effect describes the impact of a
disruption on supply chain performance and disruption-based scope of changes
in the supply chain structures and parameters.”
These definitions imply that the ripple effect refers to multi-stage networks and
triggering failures in the network elements as a domino or cascading effect.
Examples of Ripple Effect Source: Ivanov, D. (2018b).
Example :
The earthquake and tsunami in Japan in 2011 disrupted multiple suppliers in the
automotive industry and led to production breaks and material shortages
worldwide, leading to numerous ripple effects in global supply chains.
Source: Ivanov, D. (2018b). Revealing interfaces of supply chain resilience and sustainability: A simulation study.
International Journal of Production Research, 56(10), 3507–3523
Reasons and Countermeasures for the Ripple Effect
Reasons Supply chain Ripple effect impact Countermeasures
designs
Single Sourcing In the non-disrupted scenario, it is Multiple/dual
irrational to avoid lean practices. At the sourcing/ backup
same time, a capacity disruption may suppliers
Leanness Low Inventory result in the ripple effect and Risk mitigation
performance decreases inventory
Inflexible Postponement
capacity
To share data, use electronic data interchange (EDI) and the internet
What can be disturbed? Structures and critical performance (such as Operational parameters such as lead
supplier unavailability or revenue) time and inventory
What happens after the Short-term stabilization and middle- and long- Short-term coordination to balance
disturbance? term recovery; high coordination efforts and demand and supply
investments
What is performance impact? Output performance can decrease, such as in Current operational performance can
annual revenues or profits decrease such as in daily or weekly
stock out/overage costs
Risk Pooling
Risk pooling is an important concept in supply chain management.
O'Neill might streamline its product line by adopting a single Hammer 3/2 suit, or
"Universal Hammer," instead of two separate designs.
Risk Pooling
For the same service level, which system will require more
inventory? Why?
For the same total inventory level, which system will have
better service? Why?
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
ACME is considering the following alternative strategy:
Replace the two warehouses with a single warehouse
located between Paramus and Newton that will serve all
customer orders. We will refer to this proposed system
as the centralized distribution system. The CEO insists
that the same service level, 97 percent, be maintained
regardless of the logistics strategy employed.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Obviously, the current distribution system with two
warehouses has an important advantage over the single
warehouse system because each warehouse is close to a
particular subset of customers, decreasing delivery time.
However, the proposed change also has an important
advantage; it allows ACME to achieve either the same service
level of 97 percent with much lower inventory or a higher
service level with the same amount of total inventory.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
• Intuitively, this is explained as follows. With random
demand, it is very likely that a higher-than-average demand
at one retailer will be offset by a lower-than-average
demand at another. As the number of retailers served by a
warehouse goes up, this likelihood also goes up. Indeed, this
is precisely the third principle of all forecasts described at
the beginning of Section 3.2.2: aggregate forecasts are more
accurate. How much can ACME reduce inventory if the
company decides to switch to the centralized system but
maintain the same 97 percent service level?
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
• To answer that question, we need to perform a more rigorous
analysis of the inventory policy that ACME should use in both the
current system and the centralized system. We will explain this
analysis for two specific products, Product A and Product B,
although the analysis must be conducted for all products.
• For both products, an order from the factory costs $60 per order, and
holding inventory costs are $0.27 per unit per week. In the current
distribution system, the cost of transporting a product from a
warehouse to a customer is, on average, $1.05 per product. It is
estimated that in the centralized distribution system, the
transportation cost from the central warehouse will be, on average,
$1.10 per product. For this analysis, we assume that delivery lead
time is not significantly different in the two systems.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
• Tables 3-5 and 3-6 provide historical data for Products A and
B, respectively. The tables include weekly demand
information for each product for the last eight weeks in each
market area. Observe that Product B is a slow-moving
product: the demand for Product B is fairly small relative to
the demand for Product A. Table 3-7 provides a summary of
average weekly demand and the standard deviation of weekly
demand for each product. It also presents the coefficient of
variation of demand faced by each warehouse.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
This is defined as follows:
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
• Notice that the average inventory for Product A at the warehouse in
Paramus, New Jersey, is about
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
• The higher the coefficient of variation, the greater the
benefit obtained from centralized systems; that is, the
greater the benefit from risk pooling. This is explained
as follows. Average inventory includes two
components: one proportional to average weekly
demand (Q) and the other proportional to the standard
deviation of weekly demand (safety stock). Since the
reduction in average inventory is achieved mainly
through a reduction in safety stock, the higher the
coefficient of variation, the larger the impact of safety
stock on inventory reduction.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
• The benefits from risk pooling depend on the behavior of
demand from one market relative to demand from another.
Due to many varieties of denominations, the supply chain of recharge coupons was overloaded with these
coupons at different supply chain stages, such as service provider, distributor, retailer, etc.
Despite huge inventory, customers always complained about the non-availability of other denominations
that they were looking for.
This was due to the working capital limitation of a large number of small retailers who could not afford to
keep sufficient inventory of all denominations or maintain frequent replenishment from distributors.
DESMISE OF MOBILE RECHARGE COUPONS IN INDIA: A CLASSIC
CASE OF DELAYED PRODUCT DIFFERENTIATION
Of late, service providers have come up with an e-recharge system, through which a
retailer can refill the customer’s mobile talk-time account with any denomination
through electronic mode.
This completely arrested the existing twin problem of physical inventory for some
denominations along with the stock-out situation for the remaining denominations.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Asian Paints Mastered the management of Push-Pull
Supply Chain
BACKGROUND
• Asian Paints started in 1942 as a partnership firm by four friends: Mr. Champaklal H.
Choksey, Mr. Chimanlal N. Choksi, Mr. Suryakant C. Dani, and Mr. Arvind R. Vakil.
• They started making paints in a garage. During World War II, there was a temporary
ban on import of paints. The crisis in the paint market was an opportunity for Asian
Paints.
• It captured this opportunity with both hands and started fulfilling orders. In 1945, this
partnership firm became a private limited company, which was named as Asian Oil
and Paint Co. Pvt. Ltd.
• In these initial days, APL concentrated on its supply chain to cater to the needs of
smaller and mid-cities of India as these markets were ignored by then-leading players
in the paint business, such as British Paints and Jenson & Nicholson.
• Year 1957 was an important year for APL as it started its plant in Bhandup, Mumbai.
It also came up with good-quality paint using phenolic and maleic acid resins.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Asian Paints Mastered the management of
Push-Pull Supply Chain
BACKGROUND
In 1967, APL got the distinction of becoming the largest paint company in
India. Since then, this top position remained glued to APL. Much of its intense
growth should be attributed to the induction of visionary professionals such as
P. M. Murthy and K. B. S. Anand, both of whom joined APL in the 1970s.
As per the Integrated Report 2020-21 of APL, the following statement speaks
volumes about APL’s business intent: At Asian Paints, we are in the business of
creating a fresh meaning for every space we touch, with a commitment towards
making a difference and improving lives.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Asian Paints Mastered the management of Push-Pull
Supply Chain
The operational capacity of APL is 1,730,000 KL of paints per annum
(as of 2020-21), which comes through 26 paint manufacturing plants
spanning over 14 countries and serving consumers in over 60
countries.
In India, the major manufacturing plants are located at Rohtak in
Haryana (plant production capacity (PPC) 400,000 KL/year), Khandala
in Maharashtra (PPC 300,000 KL/year), Mysuru in Karnataka (PPC
300,000 KL/year), Visakhapatnam in Andhra Pradesh (PPC of 300,000
KL/year), Sriperumbudur in Tamil Nadu (PPC 140,000 KL/ year),
Ankleshwar in Gujarat (PPC 130,000 KL/ year), Patancheru in
Telengana (PPC 80,000 KL/ year), and Kasna in Uttar Pradesh (PPC of
89,000 KL/year).
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Asian Paints Mastered the management of Push-Pull
Supply Chain
• Technologies involving Industry 4.0 are used at the plants for better management
of their supply chain. Data-driven analytics help in predictive and prescriptive
analytics. The focus of manufacturing facilities is on capacity utilization, system
flexibility, operational scalability, human safety, and business sustainability.
• Sensors on different machines churn out data related to the material used,
manufacturing parameters, etc.
• Using analytics frameworks, these real-time data help APL in optimizing cost
and manufacturing performance, such as cycle time reduction, carbon footprint
reduction, and material cost reduction. In addition, the analytics help in
managing its entire distribution network.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
SUPPLY CHAIN OF ASIAN PAINTS
The supply chain of APL offers a wide range of paints, both for decorative and industrial segments. In fact, in
the decorative paint market, APL has a market share of over 40 percent in India. Five important market forces
have played their role in driving the demand side of APL’s supply chain. These are:
1. The aspiration of retail consumers, as well as industry users, has grown considerably in recent years.
2. The average frequency with which home- painting is undertaken has gone up in recent years, and now it is
close to an average of 4-5 years in India.
3. The Government of India has undertaken many initiatives to provide homes to the homeless
(Pradhanmantri Awas Yojana), incentivizing rural and BPL (below the poverty line) populations to have
cemented (pucca) homes, etc.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
SUPPLY CHAIN OF ASIAN PAINTS
4. As of February 2022, from a 28 percent slab of GST, the paint industry has come to a much lower
slab of 18 percent GST.
5. A lot of industry demand is coming from the reality and construction sector, which is being
fuelled through low housing loans.
In addition, there are a few other important offerings of APL such as wall coverings, adhesives, and
services. In the downstream of its supply chain, in 2020-21, there were over 70,000 dealers in India,
18 Beautiful Homes Stores, and over 450 Colour Ideas stores. Compared with around 35,000
dealers in 2013-14, the expansion of dealers’ network of APL is phenomenal.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
• From factories, mainly base paints are shipped to about 150
company warehouses, which directly ship paint to dealers or
hardware stores, which also perform the role of dealer in the
APL’s supply chain.
• These hardware stores are like mom-and-pop stores. Most
SUPPLY retail consumers hire painters or contractors for their
CHAIN OF requirements. These painters and/or contractors are the
supply chain link between consumers and dealer/hardware
ASIAN stores. The order fulfillment and replenishment cycle of APL
is one of the very best in India. The business model aims to
PAINTS have same-day delivery to dealers. Thus, the procurement
lead time of dealers is very short. As a golden rule or guru
mantra of the supply chain, under demand uncertainty, a
shorter procurement lead time means lesser stock at the
dealer’s shop.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
SUPPLY CHAIN OF ASIAN PAINTS
Thus, due to the short and reliable procurement lead time of dealers, they
are able to manage their stores with very little inventory.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
DEMAND SCENARIO IN THE PAINT INDUSTRY
Demand management is very complex in the paint industry. This is mainly due to the following reasons:
(a) Paint demand is highly seasonal in India. This is driven by festivals such as Deepawali, etc. It also depends upon
weather conditions, local issues, personal preference, and demography.
(b) The shelf life of a majority of paints is shorter. This means that it is a more perishable product than many other
FMCG products.
(c) There is a large number of colors and shades (called stock keeping units or SKUs) in the catalog of paint offered to
consumers.
(d) The paint business is also driven by local painters and contractors, whose availability affects the demand. For
example, during the COVID-19 time, many such labourers migrated from big and mid-size cities to their hometowns.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
MAGIC OF PUSH-PULL SUPPLY CHAIN OF ASIAN
PAINTS
In earlier times, due to a large number of shades and colors, there was always a great
possibility of witnessing a huge inventory of one SKU (say, dark green paint), and
simultaneously, at the same time, there existed a huge stock out of another SKU (say,
light green paint). This is due to changing customer preference and unpredictability in
demand. From the supply chain point of view, both inventory and stock-outs are
financial losses.
While, inventory has a carrying cost, stock-outs have an opportunity cost of not making
profit, which APL could have made, had there been no stock-outs.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
MAGIC OF PUSH-PULL SUPPLY CHAIN OF ASIAN PAINTS
To manage such a situation, APL now uses a dealer tinting machine (DTM), which is a coloring
machine available to the dealers of APL.
In the early 1990s, DTM concepts and technology were brought to India by another paint
company, Jenson and Nicholson, but soon, from the mid-1990s, APL started arming its dealers
with DTM. The number of dealers with DTM has exceeded 45,000 by the year 2021-21.
The purpose of arming dealers with DTM is to implement a supply chain strategy called a
delayed product differentiation or postponement strategy. From the factory, base paint,
which is a generic product, reaches the dealers via local distribution centers or depots.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
MAGIC OF PUSH-PULL SUPPLY CHAIN OF ASIAN
PAINTS
Only when a customer order is frozen at the dealer shop, the ordered quantity of
base (or white) paint is put into the DTM machine. A typical DTM has the facility
to mix three colors and 16 colorants into the base paint.
The requisite quantity of colour and colourants is mixed with the base paint by a
computerized system. This system is fed with the customer’s ordered quantity and
code of the selected shade, which is displayed in a colour catalogue, available with
the dealer. After mixing the base paint with colour and colourants, it is stirred and
packed at the dealer shop. Over 5,000 different shades of paints (called SKUs) can
be produced from a single base paint by using a DTM.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
MAGIC OF PUSH-PULL SUPPLY CHAIN OF ASIAN PAINTS
1. Stock-outs are rare now as the base-paint stock can be converted into any of the
available 5,000 SKUs demanded by customers after looking at the shade catalog of APL.
Therefore, the supply chain downstream of the decoupling point, which is DTM for this
case of APL, is the demand-driven or pull-type supply chain.
This part of the supply chain behaves as a make-to-order supply chain. This feature of
APL’s supply chain is the hallmark of a just-in-time or lean supply chain.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
MAGIC OF PUSH-PULL SUPPLY CHAIN OF ASIAN PAINTS
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
A few learning lessons or guru mantras of this case study are as
follows:
• GM-1: Delayed product differentiation (postponement strategy) helps a ‘push-based supply
chain portion’ and a ‘pull-based supply chain portion’ to coexist within the same supply
chain.
• GM-2: The upstream of the push-pull boundary is a forecast-driven system, for which the
greatest advantage comes by virtue of forecasting accuracy coming through an aggregate
forecast of the generic product.
• GM-3: The downstream of the push-pull boundary is nearer to the point of sale. Therefore,
the demand-driven downstream behaves close to a just-in-time system. Here, the customized
products (such as different SKUs of paints) are managed as make-to-order, rather than make-
to-stock.
• GM-4: At the push-pull boundary, there is a need to have a strategic inventory of generic
products (like the base paint). This strategic inventory helps the planning at either side of the
push-pull boundary get decoupled. For this reason, this push-pull boundary is also called a
decoupling point.
Source: Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies (4th Edition) by David Simchi Levi, Edith Simchi Levi, Ravi Shankar, Philip Kaminsky. McGraw Hill Education. Copyright © 2022
Supply chain Supply chain resilience is the firm’s capability to
withstand, adapt, and recover from disruptions to meet
resilience customer demand and ensure the target performance.
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Supply Chain Resilience
• Supply chains must be designed in a way to withstand disruptions (i.e., supply chain should exhibit
low vulnerability) and recover from disruptions quickly and at a minimal cost (i.e., supply chain
should offer high recoverability).
• Disruption risks such as tsunamis, fires, and strikes may have high impact on supply chain operations
and performance.
• Lack of supply chain resilience may result in financial losses, mismatches of demand and supply, and
destabilization of normal operational policies in production, distribution, and inventory control in the
face of today’s inevitable supply chain disruptions (Ivanov et al. 2016b, Pavlov et al. 2019; Gupta et
al. 2020, Yoon et al. 2020).
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Supply Chain: Robustness, Agility and Lean
Aspect Supply Chain Robustness Supply Chain Agility Lean Supply Chain
Eliminating waste and maximizing efficiency
Focus Withstanding disruptions and shocks Adapting quickly to changing circumstances
Using some proactive capabilities (i.e., inventory), a supply chain can absorb negative
disruption impacts (e.g., supply unavailability) without performance degradation.
However, if proactive capabilities do not help, performance (e.g., on-time delivery or
revenue) can decline.
In this case, reactive capabilities should be employed to restore the performance and
operations.
This takes time and creates costs. Thus far, building a resilient supply chain is based on
mitigating risks, preparedness for disruptions, stabilization, and recovery.
Risk = Virus
Resilience = Immune System
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Proactive vs. Reactive Approaches to Supply Chain
Disruptions
Aspect Proactive Approach Reactive Approach
Reactive
Risk Identification risks and vulnerabilities. materialize or post-occurrence.
Approaches to
Implementation of preventive measures Implementation of recovery and
Mitigation Strategies and risk mitigation strategies. contingency plans.
Costs associated with reacting to
Disruptions Examples
- Diversifying suppliers to reduce
dependence on a single source.
- Rerouting shipments in response to
unexpected transport issues.
Resilience Collaboration
Partnership
and Building strong relationships with suppliers, logistics
providers, and other stakeholders. Collaborative planning,
forecasting, and risk mitigation strategies.
Risk Management and Identifying potential risks and vulnerabilities in the supply
chain. Developing and implementing proactive
Contingency Planning contingency plans to mitigate the impact of disruptions.
Morbi Bridge Collapse
Regular Inspections and Maintenance: Implement rigorous routines to identify and address
issues before they become critical.
Risk Assessment and Mitigation: Proactively assess vulnerabilities and implement measures like
weight restrictions and traffic flow management.
Modernization and Retrofitting: Prioritize upgrades for older bridges to meet current safety
standards and improve load capacity.
Public Awareness and Education: Educate the public about bridge safety practices and
responsible usage.
Emergency Response and Rescue: Swift and efficient protocols
for saving lives and minimizing further harm.
Reactive
Approaches: Structural Stabilization and Repair: Ensure remaining structure
stability and facilitate safe access for repair crews.
Picking Up
the Pieces Compensation and Support: Provide financial assistance,
medical care, and counseling to victims and affected families.
4. Ensure competition, availability and design quality when a redundancy of suppliers is implemented.
Supply Chain Resilience
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Adaptation in supply chain resilience
6. Enhancing 7. Optimizing
5. Implementing 8. Conducting
collaboration and inventory
agile practices. scenario planning.
communication. management.
11. Promoting a
12. Monitoring and
9. Investing in 10. Establishing culture of
evaluating
employee training. redundancy plans. continuous
performance.
improvement.
Redundancy
Balancing vulnerabilities and capabilities is a major concern in supply chain resilience management.
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Balancing Vulnerabilities and Capabilities
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Supply Chain Resilience Capabilities
Three major Resilience capabilities
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Supply Chain Resilience Capabilities
Redundancy
In redundancy, different reserves (material inventory, capacities, and network design
redundancy), as well as facility fortification, can be named.
The redundancies are intended to protect the supply chain against disruptions based
on certain reserves or backups. This issue is related to the supply chain robustness.
Many companies invest in structural redundancy (e.g., Toyota extends its supply
chain subject to multiple sourcing and building new facilities on the supply side).
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Quiz-1
• ABC, a company that produces and distributes electronic equipment in
Southern India, faces a distribution problem. The current distribution system
partitions the Southern into three markets, each with a single warehouse. One
warehouse is in City-A, the second is in City-B, and the third is in City-C.
Under the current distribution system, customers, typically retailers, receive
items directly from the warehouses, and the warehouses receive items from a
manufacturing facility. The lead time for delivery to each of the warehouses is
about two weeks, and with sufficient manufacturing capacity. The current
distribution strategy is to provide a 99 percent service level. An order from the
factory costs ₹6000 per order, and inventory holding costs are ₹8 per unit per
week. Demand for the past 6 weeks is given in the table below.
Week 1 2 3 4 5 6
City-A 202 275 226 232 336 183
City-B 336 260 314 310 204 360
City-C 222 290 250 256 352 208
a) What is the percentage of average inventory saved, if the company plans for a single
warehouse instead of three warehouses at present?
b) What is the percentage of average inventory saved if the company plans for a single
warehouse for city A, city B, and City C as it is? What is your comment on this
approach and why?
Redundancy
Examples:
• Multiple suppliers for critical
materials
• Inventory buffer stocks
• Diversified transportation routes
Adaptation
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Strategic Understanding of Supply Chain Resilience
Criterion Efficient supply chain Responsive supply chain Resilient supply chain
Primary goal Supply demand at the Respond quickly to Ensure demand fulfillment
lowest cost demand in the presence of
disruptions
Network organization Centralized global Responsive local and Diversification,
global balance localization, segmentation
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Criterion Efficient supply Responsive supply Resilient supply
Strategic Understanding chain chain chain
of Supply Chain Pricing strategy Lower margins Higher margins Higher prices
Resilience because price is a because price is not caused by the costs
prime customer a prime customer of resilience
driver driver
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Strategic Understanding of Supply Chain Resilience
Supplier strategy Select based on cost Select based on speed, Supplier risk
and quality flexibility, reliability and exposure analysis;
quality backup suppliers and
dual sourcing
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Examples:
• Amazon: Renowned for its efficient order fulfillment with fast
delivery times.
• Highly automated warehouses: Robots handle
picking, packing, and shipping, minimizing human error and
maximizing speed.
• Densely located warehouses: Warehouses are positioned close to
customers, reducing transportation times.
• Sophisticated inventory management: Predictive analytics helps
maintain optimal stock levels while avoiding overstocking or
stockouts.
Example
• Operates in over 180 countries and faces diverse risks. They achieve
resilience through:
• Local sourcing: Procures raw materials closer to production
facilities, reducing reliance on long-distance transportation.
• Flexible production: Can adapt production processes to different
situations and resource availability.
• Business continuity planning: Has plans in place to respond to
various disruptions
Supply Chain Resilience Management
Supply chain resilience management is based on four major areas: Identify, Quantify, Mitigate, and Respond
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Supply chain resilience capabilities
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Supply chain recovery strategies
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Resilience capacity of supply chains with three lines of defense
Source: Introduction to Supply Chain Resilience: Management, Modelling, Technology, by Dmitry Ivanov. Springer Nature, 2021.
Decision-Making under an Uncertain
Environment
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc
• O’Neil Inc. is a designer and manufacturer of apparel, wetsuits, and
accessories for water sports: surf, dive, water-ski, wake-board,
triathlon, and wind surf.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc
◼ However, they do require a three-month lead time on all orders.
Generate forecast
of demand and
submit an order
to TEC Spring selling season
Nov Dec Jan Feb Mar Apr May Jun Jul Aug
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCESS FOR EVALUATING THE PROBABILITY DEMAND IS EITHER LESS THAN OR
EQUAL TO Q (WHICH IS F(Q)) OR MORE THAN Q ( WHICH IS 1 − F(Q))
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
◼ Generate a demand model to represent demand
➢ Use empirical demand distribution
➢ Choose a distribution function
◼ the normal distribution,
◼ the Poisson distribution.
◼ Choose an objective
➢ maximize expected profit
➢ satisfy a fill rate constraint.
◼ Choose a quantity to order
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
Demand Models
O’Neil Inc Hammer 3/2
What is a demand model?
◼ A demand model specifies what demand outcomes are possible and the probability of these outcomes.
◼ Traditional distributions from statistics can be used as demand models:
➢ e.g., the normal, gamma, Poisson distributions
POISSON
GAMMA
NORMAL
Probability
Probability
0 50
100 150 200 0 1 2 3 4 5 6 7 8 9 10
Demand Demand
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
As a result, actual sales in the previous season might not be a good guide for expected demand
in the upcoming season.
In addition to the product redesign, factors that could influence expected demand include the
pricing and marketing strategy for the upcoming season, changes in fashion, changes in the
economy (e.g., is demand moving toward higher or lower price points), changes in
technology, and overall trends for the sport.
To account for all of these factors, O’Neill surveyed the opinion of a number of individuals
in the organization on their personal demand forecast for the Hammer 3/2.
The survey’s results were averaged to obtain the initial 3,200-unit forecast. This represents
the “intuition” portion of our demand forecast.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
Historical forecast performance at O’Neill
7000
6000
.
5000
3000
2000
1000
0
0 1000 2000 3000 4000 5000 6000 7000
Forecast
Forecasts and actual demand for surf wet-suits from the previous season
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
Empirical distribution function of forecast accuracy Product description
JR ZEN FL 3/2
Forecast
90
Actual demand
140
Error* A/F Ratio**
-50 1.56
EPIC 5/3 W/HD 120 83 37 0.69
JR ZEN 3/2 140 143 -3 1.02
WMS ZEN-ZIP 4/3 170 163 7 0.96
• Data from O’Neil previous spring season with wetsuits in the HEATWAVE 3/2
JR EPIC 3/2
170
180
212
175
-42
5
1.25
0.97
surf category. WMS ZEN 3/2
ZEN-ZIP 5/4/3 W/HOOD
180
270
195
317
-15
-47
1.08
1.17
WMS EPIC 5/3 W/HD 320 369 -49 1.15
• Start by evaluating the actual demand to forecast demand EVO 3/2
JR EPIC 4/3
380
380
587
571
-207
-191
1.54
1.50
ratio (the A/F ratio) from past observations. WMS EPIC 2MM FULL 390 311 79 0.80
HEATWAVE 4/3 430 274 156 0.64
ZEN 4/3 430 239 191 0.56
EVO 4/3 440 623 -183 1.42
ZEN FL 3/2 450 365 85 0.81
HEAT 4/3 460 450 10 0.98
ZEN-ZIP 2MM FULL 470 116 354 0.25
HEAT 3/2 500 635 -135 1.27
WMS EPIC 3/2 610 830 -220 1.36
WMS ELITE 3/2 650 364 286 0.56
ZEN-ZIP 3/2 660 788 -128 1.19
ZEN 2MM S/S FULL 680 453 227 0.67
EPIC 2MM S/S FULL 740 607 133 0.82
EPIC 4/3 1020 732 288 0.72
WMS EPIC 4/3 1060 1552 -492 1.46
JR HAMMER 3/2 1220 721 499 0.59
HAMMER 3/2 1300 1696 -396 1.30
HAMMER S/S FULL 1490 1832 -342 1.23
EPIC 3/2 2190 3504 -1314 1.60
ZEN 3/2 3190 1195 1995 0.37
ZEN-ZIP 4/3 3810 3289 521 0.86
WMS HAMMER 3/2 FULL 6490 3673 2817 0.57
* Error = Forecast - Actual demand
** A/F Ratio = Actual demand divided by Forecast
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
We see from the data key observations
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and
Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
O’Neill’s Hammer 3/2 normal distribution forecast- 3200 (Forecasted demand)
Product description Forecast Actual demand Error A/F Ratio
JR ZEN FL 3/2 90 140 -50 1.5556 Note that: the forecast is not random, but the
EPIC 5/3 W/HD 120 83 37 0.6917 A/F ratio is random. Hence, the randomness
JR ZEN 3/2 140 143 -3 1.0214 in actual demand is directly related to the
WMS ZEN-ZIP 4/3 170 156 14 0.9176 randomness in the A/F ratio. Using standard
… … … … … results from statistics and the above equation,
ZEN 3/2 3190 1195 1995 0.3746 we get the following results:
ZEN-ZIP 4/3 3810 3289 521 0.8633
WMS HAMMER 3/2 FULL 6490 3673 2817 0.5659 Expected actual demand = Expected A/F
Average 0.9975 ratio × Forecast
Standard deviation 0.3690
Step 2 Evaluate the A/F ratio for each product in the data set.
Evaluate the average of the A/F ratios (that is, the expected A/F ratio) and the standard deviation of the A/F ratios.
Step 3 The mean and standard deviation of the normal distribution that we will use as the forecast can now be
evaluated with the following two equations:
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
The order quantity that maximizes
expected profit
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
O’Neil Inc Hammer 3/2
“Too much” and “too little” costs
• Co = overage / over-stock cost
• The consequence of ordering one more unit than what you would have ordered had you
known the demand.
• Suppose you had left over inventory (you over-ordered). Co is the increase in profit
you would have enjoyed had you ordered one fewer unit.
• For the Hammer 3/2 Co = Cost – Salvage value = c – v = 110 – 90 = 20
In the case of the Hammer 3/2, the underage cost is Cu = Price − Cost
and the overage cost is Co = Cost − Salvage value.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCEDURE TO FIND THE ORDER QUANTITY THAT MAXIMIZES EXPECTED
PROFIT IN THE NEWSVENDOR MODEL
For example, the critical ratio 0.80 falls between z = 0.84 and z = 0.85. Then
choose the larger of those two z values.)
A second method is to use the Excel function Normsinv: z = Normsinv
(Critical ratio).
Overage cost, the loss incurred when a unit is ordered but not sold.
In other words, the overage cost is the per-unit cost of overordering. For the Hammer 3/2, we
have Co = 20.
Cu be the underage cost, the opportunity cost of not ordering a unit that could have been
sold.
Cu is the gain from selling a unit. In other words, the underage cost is the per-unit opportunity
cost of underordering. For the Hammer 3/2, Cu = 80
we need to choose Q to strike the balance between them that results in the maximum
expected profit.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCEDURE TO FIND THE ORDER QUANTITY THAT MAXIMIZES EXPECTED
PROFIT IN THE NEWSVENDOR MODEL
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCEDURE TO FIND THE ORDER QUANTITY THAT MAXIMIZES EXPECTED
PROFIT IN THE NEWSVENDOR MODEL
Now that we have defined the overage and underage costs, we need
to choose Q to strike the balance between them that results in the
maximum expected profit.
The expected loss on a unit is the cost of having the unit in inventory (the
overage cost) times the probability it is left in inventory.
For the Qth unit, that probability is F(Q): It is left in inventory if demand is less
than Q.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCEDURE TO FIND THE ORDER QUANTITY THAT MAXIMIZES EXPECTED
PROFIT IN THE NEWSVENDOR MODEL
The expected gain on a unit is the benefit of selling a unit (the underage cost)
times the probability the unit is sold, which in this case occurs if demand is
greater than Q. The probability demand is greater than Q is (1 − F(Q)).
C ×F(Q)= C ×(1−F(Q))
o u
Cu
F (Q ) = *
Co + Cu
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCEDURE TO FIND THE ORDER QUANTITY THAT MAXIMIZES EXPECTED
PROFIT IN THE NEWSVENDOR MODEL
The order quantity that maximizes expected profit is the order quantity Q such
that demand is less than or equal to Q with probability C /(C + C ). u o u
That ratio with the underage and overage costs is called the critical ratio.
We know for the Hammer 3/2 that C = 80 and C = 20, so the critical ratio is 0.80 u o
We need to find the order quantity Q such that there is an 80 percent probability
that demand is Q or lower.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCEDURE TO FIND THE ORDER QUANTITY THAT MAXIMIZES EXPECTED
PROFIT IN THE NEWSVENDOR MODEL
The first is to use the Excel function, Normsinv(), and the second is to use the
Standard Normal Distribution Function Table.
The critical ratio is 0.80 and Normsinv(0.80) returns 0.84. That means that there is an 80
percent chance the outcome of a standard normal will be 0.84 or lower.
It is normal with mean 3,192 and standard deviation 1,181. To convert our z into an order
quantity that makes sense for our actual demand forecast, we use the following equation:
Q = μ+z×σ
Hence, using our Excel method, the expected profit maximizing order quantity for the Hammer 3/2 is Q = 3,192 + 0.84 ×
1,181 = 4,184.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
A PROCEDURE TO FIND THE ORDER QUANTITY THAT MAXIMIZES EXPECTED
PROFIT IN THE NEWSVENDOR MODEL
Again, we want to find the z such that the probability the standard normal is z or less is equal
to the critical ratio, which in this case is 0.80.
we see that Φ(0.84) = 0.7995 and Φ(0.85) = 0.8023, neither of which is exactly the 0.80
probability we are looking for: z = 0.84 yields a slightly lower probability (79.95 percent) and
z = 0.85 yields a slightly higher probability (80.23 percent). What should we do? The rule is
simple, which we will call the round-up rule:
Round-up rule. Whenever you are looking up a target value in a table and the target value
falls between two entries, choose the entry that leads to the larger order quantity.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Hammer 3/2’s expected profit maximizing order quantity
• The critical ratio is 0.80
• Find the critical ratio inside the Standard Normal Distribution Function Table:
z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.5 0.6915 0.6950 0.6985 0.7019 0.7054 0.7088 0.7123 0.7157 0.7190 0.7224
0.6 0.7257 0.7291 0.7324 0.7357 0.7389 0.7422 0.7454 0.7486 0.7517 0.7549
0.7 0.7580 0.7611 0.7642 0.7673 0.7704 0.7734 0.7764 0.7794 0.7823 0.7852
0.8 0.7881 0.7910 0.7939 0.7967 0.7995 0.8023 0.8051 0.8078 0.8106 0.8133
0.9 0.8159 0.8186 0.8212 0.8238 0.8264 0.8289 0.8315 0.8340 0.8365 0.8389
If the critical ratio falls between two values in the table, choose the greater z-statistic …
this is called the round-up rule.
Choose z = 0.85
165
Performance measures
This section shows us how to evaluate a number of relevant performance
measures, such as the
which inform us about how likely it is for customers to be able to find the
product they want.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Performance measurements
• For any order quantity the following performance measures needs to be
evaluated
• Expected profit
• In-stock probability
• Probability all demand is satisfied
• Stock-out probability
• Probability some demand is lost
• Expected lost sales
• The expected number of units by which demand will exceed the order quantity
• Expected sales
• The expected number of units sold.
• Expected left over inventory
• The expected number of units left over after demand (but before salvaging)
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Expected Leftover Inventory
The expected leftover inventory is the average (or expected) number of units still not sold at
the end of the selling season.
Demand can be more than our order quantity, in which case leftover inventory is zero, or
demand can be less then our order quantity, in which case there is some positive amount of
leftover inventory.
Expected leftover inventory is the average of all of those events (the cases with no leftover
inventory and all cases with positive leftover inventory) taking into account the likelihood of
each possible demand.
I (z) : It is the expected inventory if demand followed a standard normal distribution, and we ordered z units.
There are two methods to evaluate I(z), one using Excel and one using a table.
With either method, we first find the z-statistic that corresponds to our chosen order quantity, Q = 3,500:
The first method then uses the following Excel formula to evaluate the expected inventory if demand were a standard
normal distribution, I(z):
B. Use the z-statistic to look up in the Standard Normal Inventory Function Table the expected
leftover inventory, I(z), with the standard normal distribution.
D. With Excel, expected leftover inventory can be evaluated with the following equation:
If the demand forecast is a discrete distribution function table, then expected leftover inventory
equals the inventory function for the chosen order quantity, I(Q).
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Expected Sales
Expected sales is the expected number of units sold given demand and the
order quantity.
the sum of sales and leftover inventory must equal the total number of
purchased units, Q:
if O’Neill orders 3,500 Hammer 3/2s, then expected lost sales = 3,192 − 2,859 =
333.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Expected Lost Sales
When demand is normally distributed, we can use the following equation for
expected lost sales:
In mathematical optimization and decision theory, a loss function or cost function is a function that maps an event
or values of one or more variables into a real number intuitively representing some "cost" associated with the
event.
With an order quantity of 3,500 units and a normal distribution demand forecast, the expected
profit for the Hammer 3/2 is
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
In-Stock Probability and Stockout Probability
The in-stock probability is the probability that the firm ends the
season having satisfied all demand. (Equivalently, the in-stock
probability is the probability that the firm has stock available for
every customer.)
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Stockout Probability
The stockout probability is the probability the firm stocks out for some
customer during the selling season (i.e., a lost sale occurs). Because the
firm stocks out if demand exceeds the order quantity,
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Stockout Probability
The in-stock probability is not the only measure of customer service.
The fill rate is the probability a customer is able to purchase a unit (i.e., does not
experience a stockout).
This is not the same as the in-stock probability, which is the probability that all
demand is satisfied. For example, say we order Q = 100 and demand turns out to
be 101.
Most customers were able to purchase a unit (the fill rate is high) but the firm did
not satisfy all demand (in-stock is not satisfied)
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Expected lost sales of Hammer 3/2s with Q = 3000
• Suppose O’Neill orders 3000 Hammer 3/2s.
• How many sales will be lost on average?
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
In-stock probability
In-stock probability: percentage of seasons without a stock out
InstockProbability = P(Demand ≤ Q)
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Evaluate the in-stock probability
• What is the in-stock probability if the order quantity is Q = 3000?
• Evaluate the z-statistic for the order quantity :
Q− 3000 − 3192
z= = = −0.16
1181
• Look up F(z) in the Std. Normal Distribution Function Table:
• F(z)=F (-0.16) = 0.4364
• Answer :
• If 3000 units are orders, then there is a 43.64% chance all demand will be satisfied.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Other Measures of Service Performance
• The stock-out probability is the probability some demand is not satisfied:
➢Some demand is not satisfied if demand exceeds the order quantity, thus…
➢Stock-out probability = 1 – F(Q)
= 1 – In-stock probability
= 1 –0.4364 = 56.36%
• The fill rate is the fraction of demand that can purchase a unit:
➢The fill rate is also the probability a randomly chosen customer can purchase a unit.
➢The fill rate is not the same as the in-stock probability!
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Fill rate
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Local store sells 1 paint bucket daily, 50 units
in stock, 1-day lead time
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Product Pooling: Universal Design
Two Hammer 3/2 wetsuits are available from O'Neill, both of which are
indistinguishable from one another save for the silk-screened logo.
O'Neill might streamline its product line by adopting a single Hammer 3/2 suit, or
"Universal Hammer," instead of two separate designs.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Product Pooling
• Demand for the Surf Hammer is Normally distributed with mean 3192 and standard deviation
1181.
• Demand for the Dive Hammer has the same distribution as the Surf Hammer.
• Price, cost and salvage value for the Universal Hammer are the same as for the other two:
• Hence, Co is 110 – 90 = 20, Cu = 180-110 = 70
• Same critical ratio = 70 /(20 + 70) = 0.7778
• Same optimal z statistic, 0.77
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Product Pooling
• The underage cost for the universal Hammer is still Cu = 190 − 110 = 80 and the
overage cost is still Co = 110 − 90 = 20. Hence, the critical ratio has not
changed:
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Product Pooling
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Product Pooling
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Product Pooling
20 20
deviation of 3.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Standard Deviation and Coefficient of Variation for
pooled demand
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Demand Correlation
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Order Up to Model: Medtronic’s Supply Chain for
Pacemakers:
Micra leadless pacemakers for Azure pacemaker Advisa MRI pacemaker Attesta pacemaker
bradycardia (slow heart rate)
Model numbers: Model numbers: ADDR01, Model numbers:
A2DR01, A3SR01 ADDR03, ADDR06, ATDR01, ATDRS1,
ADDRL1, ADDRS1 ATDRL1, ATSR01
Medtronic
Product
Portfolio
Their product line also includes
Medtronic is a renowned medical
treatments for cardiovascular
technology company known for its
diseases, surgery, diabetes,
cardiac rhythm products like
neurological diseases, spinal surgery,
pacemakers.
and eye/nose/throat diseases.
Supply
Chain
This distribution center serves Medtronic's DCs prioritize
around 500 sales representatives, maintaining high inventory
each with their designated availability for sales representatives
territories. in the field.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
The majority of finished goods inventory is held in the field by
sales representatives.
• Surgeons anticipate the need for pacemakers during surgery but don't know the
specific model until the operation.
• Susan attends each surgery to ensure she has the required pacemaker models
available.
• Susan carries various pacemaker models to cater to different patient needs.
• After surgery, Susan replenishes her inventory by contacting Medtronic's Customer
Service.
• Medtronic's Customer Service forwards Susan's order to Mounds View, DC.
• If the requested model is in stock at the DC, it is sent to Susan via overnight carrier.
• Typically, Susan receives the ordered unit within one day, rarely exceeding two days.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Medtronic’s Supply Chain
• Mounds View DC requests weekly replenishments from production facilities.
• There’s currently a three-week lead time for receiving each order of the InSync
pacemaker.
• Figure 1 displays one year's data on monthly shipments and end-of-month inventory at
the Mounds View DC for the InSync pacemaker.
• Figure 2 provides data on monthly implants (demand) and inventory for the InSync
pacemaker in Susan's territory over the same year.
• Significant variation exists in the number of units demanded at the DC and particularly in
Susan's territory.
• Increased demand in Susan's territory during the summer months isn't reflected in
aggregate shipments through the DC.
• The observed "pattern" in Susan's demand data may not be real, akin to how random
events may sometimes appear as patterns, similar to a splotch of ink on a piece of paper.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Monthly shipments and end-of-month inventory
FIGURE 1 FIGURE 2
Monthly Shipments (Bar) and End-of-Month Inventory (line) for the Insync Pacemaker at Monthly Implants (bar) and End-of- Month Inventory (line) for the InSync Pacemaker in
the Mounds View Distribution Center Susan’s Territory
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
End-of-month inventory refers to
the quantity of goods or products
End-of- that a business has on hand at the
conclusion of a specific month.
Month It represents the remaining stock
Inventory available after all sales and
transactions have been accounted
for during that month.
Medtronic’s Supply Chain
Susan is motivated by
the sales incentive Medtronic’s products
Medtronic’s products
system to avoid have a long shelf life,
are generally quite
missing sales due to minimizing spoilage
small, so it is possible
inventory shortages. concerns. However,
to hold a considerable
Patients and surgeons failure to adhere to a
amount of inventory
won’t wait for back- “first-in-first-out”
in a relatively small
ordered inventory, regime could lead to
space (e.g., the trunk
leading to potential spoilage concerns
of a vehicle).
sales losses to over time.
competitors.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Medtronic’s Supply Chain
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
• The newsvendor and the order-up-to-inventory models are tools
for deciding how much inventory to put at a single location to
serve demand. An equally important decision, and one that we
have ignored so far, is how many different locations the firm
should store inventory to serve demand.
Location Pooling
Currently, there is a single distribution center serving the entire U.S. market.
The question arises: Should each sales representative have their own inventory
stockpile, or should multiple territories be served from a centralized location?
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
• Representatives in adjacent territories could pool their
inventory at a centrally located space, such as a rented
area in a convenient location.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
• Average daily demand for Medtronic's InSync pacemaker in Susan
Magnotto's Madison, Wisconsin, territory follows a Poisson distribution
with a mean of 0.29 units per day.
• Suppose there are adjacent territories, each with a single sales representative,
with the same average daily demand of 0.29 units.
• Instead of individual inventory management, representatives now share a
common pool of inventory, creating a pooled territory and pooled
inventory.
• We now need to assess the performance of the system with pooled
territories, examining the impact of location pooling.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
• The order-up-to model is employed to manage
inventory at the pooled territory.
• A target in-stock probability of 99.9 percent is
maintained, consistent with individual
territories.
• The lead time to replenish the pooled territory
remains at one day, with no anticipated
difference from individual territories.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
• Combining demand from different territories with
Poisson distributions results in a combined demand
distribution with a mean equal to the sum of their
individual means.
• If Susan shares inventory with two nearby
representatives, each with a mean demand of 0.29 units
per day, the total demand across the three territories
equals 3 times 0.29, which is 0.87 units per day.
• The order-up-to model can then be applied to the
pooled territory, assuming a lead time of one day and a
mean demand of 0.87 units.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
In contrast, inventory at
Inventory at individual
Table 1 includes the three pooled territories
territories equals 3.4 units
measure of expected equals 5.3 units divided by
divided by 0.29 daily
inventory in days of 0.87 daily demand,
demand, resulting in 11.7
demand. resulting in 6.1 days of
days of demand.
demand.
For instance, adding two more territories to a pool of six has minimal
impact on inventory investment, while adding two more territories to a pool
of one results in a dramatic inventory reduction.
Most of the benefit from pooling territories comes from combining the first
couple of territories, suggesting little value in combining many territories
together.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
Location pooling generally reduces inventory, as evidenced by Table 1.
However, adding the seventh location to the pool slightly increases inventory.
Demand at each territory is Poisson with an average daily demand of 0.29 units, the target in-stock probability is 99.9
percent, and the lead time is one day.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Figure 1. The Relationship between Expected Inventory (circles) and the
Coefficient of Variation (squares) as Territories Are Pooled
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.
Location Pooling
Demand at each territory is Poisson with average daily demand of 0.29 unit, and the lead time is one day.
Source: Matching Supply with Demand: An Introduction to Operations Management, by Cachon and Terweish, McGraw Hill Education.