Supply Chain Management: An Overview

1
Supply Chain Management An Overview

• Fangruo Chen
• Graduate School of Business
• Columbia University
• New York

2
Outline

• The Newsvendor Model
• Supply chain models
• Centralized decision making
• Multi-echelon production/inventory models
• Control rules based on local information
• Value of information sharing
• Decentralized decision making
• Contracts for aligning incentives
• Market design, e-commerce
• Coalitions in supply chains
• Incentives for information sharing
• Interdisciplinary research
• Conclusions

3
It all starts from here

• The Newsvendor Model
• One selling period, with random demand
• Inventory/production decision made before demand
  realization
• Overage cost Co and underage cost Cu
• For example, Co c-v, Cu p-c, p sales price,
  c purchase cost,
• v salvage value
• Optimal decision

4
An immediate generalization The base-stock model

• Infinite planning horizon, with iid demands
• Fixed leadtime
• Inventory holding cost h, backorder penalty cost
  b
• Inventory position outstanding orders on-hand
  inventory
  backorders
• Optimal base-stock level

leadtime
order
delivery
5
Other generalizations

• Fixed ordering cost (s, S) policy
• Nonstationary or correlated demands
• Capacity constraints modified base-stock
  policies
• Random leadtimes
• Etc.

6
Supply chain models with centralized decision
making

• Serial structure
• Echelon stock (or echelon inventory position)
• Optimal policy echelon base-stock policy
• Clark and Scarf (1960), Federgruen and Zipkin
  (1984), Chen and Zheng (1994)

N
N-1
1
Iid demands
7
Other structures

• Assembly systems
• Distribution systems

Rosling (1989)
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Generalizations

• Fixed ordering costs batch policies, e.g., (R,Q)
  policy (optimal policies unknown in general)
• Capacity constraints
• Expediting options
• Nonstationary or correlated demands
• For many multi-echelon inventory models,
  attention focused on performance evaluation

9
Control rules based on local information
Installation stock
N
N-1
1
Echelon stock

• Echelon stock requires centralized demand
  information, whereas installation stock is local
  information
• The difference in performance between echelon
  stock policy and installation stock policy is
  value of information

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Supply chain information sharing

• Types of information
• Inventory/demand
• Demand forecast
• Advance warnings of customer demands
• Etc.

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Example 1 Point-of-sales data
suppliers
materials
information
retailers

• Questions
• How do you use the information, e.g., VMI (vendor
  managed inventory)?
• What is the value of this information?

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Example 2 Sharing of demand forecasts
CPFR (Collaborative Planning, Forecast, and
Replenishment)
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Example 3 Advance warnings of customer demands
demand leadtime
a customer places an order
order delivery date
Price discounts may be offered to consumers for
placing orders in advance of demands. A question
is what is the optimal pricing strategy?
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Decentralized supply chains

• Settings
• Multiple decision makers
• With different information
• With potentially conflicting goals
• Tools
• Contract theory
• Game theory

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Double marginalization
c
Retailer order quantity
supplier
w
Supply chain optimal quantity
retailer
p, v
D
Problem w gt c, Q lt Qo Reason Double margins
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Coordinating contracts

• Two-part tariff
• wc, fixed transfer payment from buyer to seller
• Buy-back contract
• Supplier pays retailer b per unit of unsold
  inventory
• Revenue sharing contract
• Retailer gives supplier a fixed percentage of his
  revenue, and in return, supplier sells below cost
• Quantity flexibility contract
• Supplier gives the retailer a credit, w-v, for
  every unit of unsold inventory up to a fixed
  percentage of order quantity
• Quantity discounts
• The more you buy, the more you save.
• Etc.

17
More complex coordination problems
supplier
retailers
Complicating factors

• Pricing decisions at retail level
• Multi-period dynamic inventory control
• Competition in the retail market
• Legal issues

18
Other decentralized supply chains
suppliers
market
manufacturers

• Design of market mechanisms
• Double auctions/game theory
• Market clearing price total supply total demand

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Coalitions in supply chains

• Members of a supply chain can form a coalition to
  exert greater influence
• Stable coalition structures? The use of
  cooperative game theory

Coalitions?
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Incentives for information sharing

• Members of a supply chain often possess different
  information about cost, demand, quality, etc. How
  do you create incentives for them to share the
  information.
• Example

supplier
manufacturer
retailer
1. New product introduction
2. Manufacturer typically has more information
about the new products market potential
than either the supplier or the retailer has.
3. A simple announcement that the product will do
very well will not be believed.

• Typical solutions
• Screening the less-informed party moves first,
  offering a menu of contracts.
• Signaling the party with more information moves
  first, by offering a contract.

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Screening An example

• Salesforce management
• Sales people have better information about the
  market
• Their fresh field information is beneficial to
  the firms production/inventory planning
• How does the firm motivate its salesforce to
  reveal their information and, at the same time,
  to work hard?
• Gonik (1978) implemented the following scheme at
  IBA Brazil

w
v
u
x
F
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Interdisciplinary Research
Economics Contract theory Game
theory Information econ. Agency theory
Supply chain mgmt
Marketing Pricing Channel selection Product
variety Salesforce mgmt
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Product variety and supply chain management

• Ideal-point model of consumer preference
• Every consumer has an ideal level of product
  attribute x0
• Willingness to pay for a product with attribute
  x

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Salesforce incentives and production

• Quota incentive system

Compensation
Slope
quarterly sales
25
Salesforce incentives and production (cont.)

• Hockey-stick phenomenon

sales
time
1Q
2Q
3Q
4Q
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Conclusions

• More emphasis on decentralized supply chains
• Competition
• Cooperation
• Coordination (from system design standpoint)
• More interdisciplinary research

Golden era for SCM!