DETERMINING OPTIMAL LEVEL OF PRODUCTIVITY

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DETERMINING OPTIMAL LEVEL OF PRODUCTIVITY

• The Purpose of Supply Chains

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AGENDA

• INTRODUCTION/IMPORTANCE (9.1)
• FACTORS AFFECTING (9.2)
• MANAGERIAL LEVERS (9.3)
• CONTRACTS (9.4)

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AGENDA

• SETTING IN PRACTICE (9.5)
• SUMMARY AND CONCLUSIONS (9.6)

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INTRODUCTION

• Measures
• Cycle Service Levels
• Fill Rate
• Fraction Demand met with Inventory
• A.k.a., Customer Service Level

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INTRODUCTION
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AGENDA

• FACTORS AFFECTING (9.2)

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OVERVIEW

• Cost of Overstocking
• CO
• Loss on Each Item at End

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OVERVIEW

• Cost of Under Stocking
• CU
• Loss at Margin Because not Available
• Current
• Future

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OVERVIEW
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OVERVIEW

• Expected Value
• Let

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OVERVIEW

• Expected Value
• Then Expected Demand

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OVERVIEW

• Expected Value
• And Fill Rate (fr)

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SINGLE SEASONAL ORDER

• Given

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SINGLE SEASONAL ORDER

• Given

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SINGLE SEASONAL ORDER

• At the Margin

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SINGLE SEASONAL ORDER

• Optimal CSL

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SINGLE SEASONAL ORDER

• Optimal Order Size

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SINGLE SEASONAL ORDER

• Expected Profit

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SINGLE SEASONAL ORDER

• Expected Overstock

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SINGLE SEASONAL ORDER

• Expected Understock

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CONTINUOUSLY STOCK ITEMS

• Inputs

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CONTINUOUSLY STOCK ITEMS

• Inputs

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CONTINUOUSLY STOCK ITEMS

• Inputs

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CONTINUOUSLY STOCK ITEMS

• Demand is Backlogged

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CONTINUOUSLY STOCK ITEMS

• Demand is Lost

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AGENDA

• MANAGERIAL LEVERS (9.3)

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OVERVIEW

• Two Obvious Levers
• Increase Salvage Value
• Decrease Marginal Loss from Stockout

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OVERVIEW

• Another Lever Reduce Uncertainty
• Improved Forecasting
• Quick Response
• Postponement
• Tailored Sourcing

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IMPROVING FORECASTS

• Demand Planning
• Variation of Cost, Inventories, Profit

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IMPROVING FORECASTS
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QUICK RESPONSE

• What
• Reducing L
• Thereby, Improving Forecast Accuracy
• Therefore, Better Synchronizing Demand and Supply

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QUICK RESPONSE

• Multiple Orders
• Optimal Order Quantity Not Deterministic
• Must Use Simulation (Appendix 9F)

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QUICK RESPONSE

• Consequences of Multiple Orders
• Increase Availability with Less Inventory
• Average Overstock Decreases
• Profits Increase

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QUICK RESPONSE

• Consequences of Multiple Orders

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QUICK RESPONSE

• Consequences of Multiple Orders

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POSTPONEMENT

• What
• Delay Differentiation
• Prior Differentiation
• Aggregate Forecast Accuracy
• Earlier

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POSTPONEMENT

• What
• Delayed Differentiation
• Individual Forecast Accuracy
• Later

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POSTPONEMENT

• Economics
• Higher Cost per Unit
• Improved Customer Service
• Synchronization
• Heuristic Solution

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TAILORED SOURCING

• Two Sources
• Low Cost, Inflexible WRT Uncertainty
• Higher Cost, Able to Handle Uncertainty

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AGENDA

• CONTRACTS (9.4)

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OVERVIEW

• What
• Reality
• Not Dreams

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OVERVIEW

• Profitability
• Supply Chain
• Individual Company in Supply Chain
• Double Marginalization

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RETURNS POLICY BUY BACK

• Net Effects
• Increase Salvage Value
• Increase Order Size
• Increase Supply Chain Profits

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RETURNS POLICY BUY BACK

• Variables

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RETURNS POLICY BUY BACK

• Expected Manufacturer Profit

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QUANTITY FLEXIBILITY

• What
• Retailer Allowed to Change Order Size
• After Observing Demand (Ex Post)

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QUANTITY FLEXIBILITY

• Variables

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QUANTITY FLEXIBILITY

• Given

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QUANTITY FLEXIBILITY

• Expected Purchased by Retailer (QR)

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VMI

• Replenishment Triggered by Manufacturer
• Mitigate Double Marginalization
• Competing Products are Difficult

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AGENDA

• SETTING IN PRACTICE (9.5)

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CONSIDERATIONS

• Use Analytical Framework
• Know Present Levels of Availability
• Use Approximate Costs
• Be Robust
• Estimate Range of Stockout Costs
• Match Availability with Strategy

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SUMMARY AND CONCLUSIONS(8.7)