OPER3208001 Supply Chain Management

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OPER3208-001Supply Chain Management

• Fall 2006
• Instructor Prof. Setzler

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• Taylor, Chapters 4

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Chapter 4 Supply Chains as Systems (Taylor)

• Integrating a supply chain requires assembling an
  ad hoc collection of facilities into a coherent
  system that can function with a single purpose
• System Theory
• How are systems designed
• How do systems work
• How are systems controlled

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Cyberneticsa system is viewed as an assembly of
  components that interact to produce collective
  behavior
• Examples of systems
• Computers
• Plants
• Animals
• Ecologies
• Nations
• Companies
• Factories
• Supply chains

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Key insight of cybernetics
• There are common principles across all these
  different kinds of systems, principles that help
  explain the behavior of each other
• One of the key contributions of cybernetic was
  the insight that all systems can be seen as
  transforming inputs into outputs
• When systems are designed by people they usually
  produce outputs that have greater value than the
  inputs
• i.e., supply chains

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• A system transforms inputs into outputs
• Example,
• Computers take large volumes of raw data and
  transform (distill) it into useful information
• Factories use raw materials to produce finished
  goods
• Humans take in food and transform it into energy

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Systems may have controls and monitors
• Natural systems are usually self-regulating
• i.g., ecologies
• Systems made by people are designed to be
  controlled and monitored so that performance can
  be improved over time
• Control is achieved by regulating the flow of
  inputs
• Equivalent to having knobs on their inputs
• Monitoring involves measuring the resulting
  output
• Equivalent to having gauges on their outputs

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Figure 4.1, notice that not all inputs have
  knobs, and not all outputs have gauges

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Inside the system, a number of componentswhich
  might be systems in their own rightinteract to
  transform the inputs into outputs

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Not all inputs are subject to control
• In Figure 4.1, notice that not all inputs have
  knobs, and not all outputs have gauges
• Even the best-designed systems usually have some
  inputs that cant be controlled by people
• For supply chains these might be things like
  economic cycles, and natural disasters
• Extrinsic factorsoutside the span of control
• Intrinsic factorsinside the span of control
• Example, plant capacity, and budget allocations

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Monitoring outputs is a matter of selection
• It may not be possible to measure every output
• Even if it is possible to measure every output,
  systems usually have so many outputs that its
  not cost-effective to measure them all
• Preferred approachmeasure the set of outputs
  that are most helpful in monitoring and
  controlling the system

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• The first goal is understanding a system
• Each manager in the chain is given responsibility
  of a set of knobs, and each one sees the readings
  on a set of gauges
• The goal is for everyone to set their knobs just
  right in order to maximize the outputs of the
  chain
• Its important that managers have some shared
  understanding of how the settings affect the
  operations of the chain

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Understanding permits prediction and control
• Figure 4.2 shows the relationships among three
  key process in managing systems
• Understanding
• Provides insight necessary to predict how a
  system will behave in response to changes in
  inputs
• Prediction
• Allows you to control the system by making the
  best combination of adjustments
• Control
• Comparing predicted with actual results deepens
  understanding of a system, allowing for more
  accurate predictions and improving control
• Understanding, prediction, and control form the
  heart of any successful management process

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Understanding, prediction, and control form the
  heart of any successful management process
• Figure 4.2

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Understanding is usually neglected
• Of the 3 processes, understanding is the most
  important, yet the most neglected
• The emphasis proceeds in the other direction
  Control is the primary concern, prediction is
  invoked only as needed to improve control, and
  understanding is viewed as an incidental
  by-product rather than the prime mover
• This is self-defeating in the long run
• Understanding belongs in the front of the process

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Chapter 4 Supply Chains as Systems (Taylor)

• Business Cybernetics
• Understanding is essential for supply chains
• The basic mechanics of a supply chain are simple,
  but the behavior as a whole can be very difficult
  to understand, much less predict and control
• When it comes to systems of this level of
  complexity, understanding is not a luxury its a
  necessity

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Relations map inputs to outputs
• One of the most basic characteristics of systems
  is the way in which they map values on the inputs
  to the values on the output
• This mapping is called relation

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• The mapping can be viewed as a graph
• Figure 4.3

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• The mapping can be viewed as a graph
• Imagine controlling a system to understand
  relations
• Figure 4.3
• Single component
• Black boxall that matters is the relationship
  between the input and the output
• Single input
• Values range from
• 0 to 100
• knob
• Single output
• Values range from
• 0 to 100
• Gauge
• One possible relationship
• knob from 0 to 100 and
• output from 20 to 80

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Relations come in many forms
• This system is easy to understand
• Relations in real-word are rarely so simple
• Figure 4.4 illustrates five different types of
  relations
• All of these relations are found in SC systems
• The relations become more difficult to understand
  and control as you move from left to right
• Knowing which one you are dealing with when
  changing an input is essential to achieving good
  control

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Relations come in many forms
• Figure 4.4

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Linear relations are straight lines
• Mapping of inputs to outputs is described by a
  straight line
• Linear relations
• Easy to understand
• Easy to predict
• Easy to control
• Increasing the input by a constant
• amount always produces the same,
• constant increase in the output

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Monotonic relations always go up
• The only restriction on this relation is that
  increasing the input never reduces the output
• There are no guarantees regarding the shape of
  the curve
• Makes it harder to use the knob to control
• the output
• Small adjustments in the knob could produce
• big changes in the output in one part of the
• range and little or no change in another

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Continuous relations change smoothly
• The only guarantee with this relation is that the
  output will rise or fall smoothly with changes in
  the input, without any sudden jumps
• The mapping can take any form
• Control is even harder because the input can
  drive the output higher, push it lower, or how a
  system
• works
• The best you can do sweep the knob back and
• forth and watching the gauge
• Trying to find the best spot
• Example, price and profit

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Single-valued relations change abruptly
• Even harder because even the smallest change in
  input can produce a huge leap in the output
• No smooth transition between successive levels
• The only thing you can count on is that it will
• always produce the same output for any
• given input
• Very common in SCs
• Example, quantity discounts introduce
• discontinuities between price and
• quantities

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• Multi-valued relations can do anything
• It doesnt guarantee the same output for a given
  input
• A small change to input can not only produce a
  sudden leap, it can shift the relation over to
  another curve, so that reversing the change
  doesnt put things
• back the way they were
• Example, this relation is a naturally occurring
• pattern in the demand for fashion-based
• products

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Chapter 4 Supply Chains as Systems (Taylor)

• A Rogues Gallery of Relations
• We are biased toward linear relations
• We naturally assume that all systems are linear
• Easier to understand
• We are very bad at detecting and understanding
  any other kind of relation
• Non-linear relations are very common in SCs

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Combinations produce new kinds of behavior
• What happens when 2 or more components are
  combined?
• Even the simplest combinations can produce
  behavior that is surprising
• Figure 4.5 shows 3 components hooked together to
  form a chain
• The output of each becoming the input of the next

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Combinations produce new kinds of behavior
• Figure 4.5

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Delays take components out of phase
• It only takes a tiny alteration
• to make this system
• behave differently
• from the simpler one
• A small delay from the time the component
  receives a change in its input to the time that
  change is reflected in its output
• Figure 4.6 illustrates the impact of such a delay

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Delays take components out of phase
• Figure 4.6
• The 3 components are no longer that same at any
  given time
• The components are said to be out of phase with
  each other
• In SCs delays
• occur in all
• 3 flows

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Phase shifts cause havoc in supply chains
• Imagine that A, B, C are a retailer, producer,
  and supplier, respectively
• The signal of interest is the level of demand

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Phase shifts cause havoc in supply chains
• At time t in Figure 4.6,
• demand at the producer (B)
• is right on the average value
• (middle line)
• Demand at the retailer (A)
• is below average
• Demand at the supplier (C)
• is unusually high
• Each company might reach totally different
  conclusions about how the chain should respond to
  current demand
• If any company tries to make a correction on its
  own, it is almost certain to throw the other 2
  out of balance

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Phase shifts are usually invisible
• Phase shifts are not this easy to detect and
  handle in the real-world
• The amount of delay introduced by each component
  varies both within and across components
• It takes very little variation to turn the neat
  curves of Figure 4.6 into wild, unpredictable
  swings
• Phase shifts are rarely apparent even in the best
  of circumstances
• All the member of the chain know is that they are
  experiencing different levels of demand
• There may be no way to know whether those are
  simple delay effects or real disagreements that
  are cause for concern

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Distortions introduce further complications
• More confusion is introduced if there is any
  distortion of the signal from one component to
  the next
• Real-world systems often show a pattern of
  increasing distortion as signals travel upstream

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Economies of scale distort signals
• Distortions of incoming signals can come from
  many sources
• Introduced accidentally or intentionally
• Economies of scale represent a common source of
  distortion
• Customers order more than they need in order to
  get quantity discounts
• Producers run larger batches than necessary to
  reduce unit costs
• Etc
• Such distortions may save money in immediate
  operations, but the distortions they cause in the
  signals for demand, supply, and cash have a much
  higher cost than most companies realize

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Demand amplification is one result
• Figure 4.7

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Chapter 4 Supply Chains as Systems (Taylor)

• The Dynamics of Delay
• Demand amplification is one result
• Imagine that each component in the chain
  increases the signal it receives by 50
• Results Larger and larger swings of the signal
  as it moves up the chain
• The bullwhip effecta natural outcome of
  traditional practices
• found in all SCs
• The only way to rid
• the problem is to
• eliminate the
• practices that
• cause it (Ch 13)

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Outputs can be fed back into inputs
• So far, the signals have all traveled in the same
  direction
• From inputs towards outputs
• Most real-world systems have additional pathways
  that carry signals upstream as well
• From outputs back to inputs
• Such signals are called feedback because they
  feed information about the output back into the
  input
• Feedback creates a loop in the system
• The proper use of feedback is critical to
  producing useful, effective systems

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Outputs can be fed back into inputs
• Figure 4.8

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Feedback comes in many forms
• The most basic kind of feedback simply takes a
  portion of the output and mixes it in with the
  incoming signal
• The more common kind of feedback in SCs uses a
  separate signal that communicates information
  about the current output to an upstream component
  rather than redirecting part of the original
  signal

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Feedback comes in many forms
• Feedback can be entirely automatic, or it can
  require human intervention

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Positive feedback amplifies incoming signals
• The purpose of feedback is to provide information
  about current output to the upstream portions of
  a system
• This allows the upstream portions to tune their
  behavior to better regulate that output

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Positive feedback amplifies incoming signals
• Imagine that the external signal going into
  component A is rising at a constant rate
• Without feedback, the output will also rise at
  the same constant rate
• If output of component B includes a feedback
  signal to A that causes it to amplify its
  response to the incoming signal, then the output
  of A will go up at an ever-increasing rate
• This kind of feedback is called positive feedback
  because it amplifies the incoming signal strength
• The result of positive feedback is an
  ever-accelerating increase in output level

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Figure 4.9

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Positive feedback amplifies incoming signals
• The result of positive feedback is an
  ever-accelerating increase in the output level

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Negative feedback dampens signals
• Imagine altering the feedback mechanism so that
  the output of B is sued to decrease As response
  to the incoming signal rather than increase it
• This is called negative feedback because
• it dampens incoming signals
• With negative feedback, each increase
• in the original signal has a smaller effect
• on the output
• This type of feedback tends to keep
• a system with set bounds

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Positive feedback fuels growth
• The 2 kinds of feedback have radically different
  effects on a system
• Positive feedback
• Encourages movement in a particular direction and
  acts to promote unbounded growth
• Example Compound interest on bank accounts feeds
  interest back into the principal

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Negative feedback promotes stability
• Negative feedback limits movement in a particular
  direction
• It is most frequently used to promote stability
  in a system
• Example A regressive tax system because it
  reduces the increase in net income as gross
  income goes up

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Negative feedback promotes stability
• Negative feedback in economic systems is often
  expressed as the law of diminishing returns
• Each additional dollar invested produces a
  smaller return then the previous one
• Of the 2 kinds of feedback, negative feedback is
  used much more extensively in the design of
  systems because of its ability to keep a system
  within reasonable operating bounds

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Feedback is vital to supply chains
• Examples
• Vendor-managed inventory (VMI) lets suppliers
  directly monitor inventory levels in distribution
  centers and retail stores
• Gives them much earlier feedback on the flow of
  products and allows them to tune their production
  accordingly
• The use of point-of-sale (POS) systems in the
  quick response (QR) program improves this
  feedback by pushing the flow gauge all the way
  out to the cash register and detecting the
  movement of goods the moment it occurs

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• All three flows benefit from feedback
• Feedback facilitates the flow of demand and cash
  back up the chain
• Free exchange of information across SCs provide
  the feedback necessary to regulate all 3 flows
  across the chain

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Information is replacing inventory
• The great power of feedback in SCs is that it
  reduces uncertainty by giving companies advance
  information about upcoming variations in demand
  and supply
• Allows them to better cope with variations

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Information is replacing inventory
• Without advance notice, the only protection
  against variability in supply and demand is to
  hold enough inventory to handle the greatest
  demand and the lowest supply that are likely to
  occur, and inventory is a very expensive form of
  insurance

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Chapter 4 Supply Chains as Systems (Taylor)

• Feedback and Stability
• Information is replacing inventory
• Insight Information can reduce the need for
  inventory has led to systematic efforts within
  many industries to replace inventory with
  information wherever possible
• Substituting information for inventory is one of
  the most vital aspects of SCM