Determining Optimal Level of Product Availability

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Determining Optimal Level of Product Availability
????(2) Determining Optimal Level of Product
Availability

• Optimal Matching of Supply and Demand (III)

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Supply Chain Decision-Making Framework
Competitive strategy
Supply chain strategy
Supply chain structure
Inventory
Transportation
Facilities
Information
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Levers for Increasing Supply Chain Profitability

• Decreasing the costs of overstocking and
  understocking
• Reducing the demand uncertainty

• Improved forecasting to lower uncertainty
• Quick response reduce lead time to increase
  number of orders per season
• Postponement of product differentiation
• Tailored sourcing

Microsoft?
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BENETTON
Benetton
Benetton
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BENETTON
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Benetton
Microsoft?
Benetton
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BENETTON
72hr
12day
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Microsoft?
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ZARA
Microsoft?
Microsoft?
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zara.com
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Whats Quick Response?

• A widely used strategy

• By general merchandise, soft-lines retailers and
  manufacturers
• To reduce retail out-of-stocks, forced markdown,
  merchandising system and operating costs

• A partnership strategy

• Suppliers and retailers work together to respond
  more rapidly to consumer needs
• By sharing POS information to jointly forecast
  future demand for replenishable items, and to
  continuously monitor trends to detect
  opportunities for new items

• A JIT strategy

• Spread through the supply chain and seamlessly
  linked at each stage by electronic data
  interchange

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Basic Elements of QR
Time horizons
Information
Logistics
Supplier/ Manufacturer relationships
Manufacturing Operations
Philosophical/ Cultural change
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Example US Textile and Apparel Industry in 1986
Fiber

• Synthetics (75) highly concentrated
• Ten firms provide more than 90 of market

• More fragmented
• 6,000 firms
• 12 firms provide 1/4 of market

Fabric
Apparel

• Extremely fragmented
• 15,000 firms (70 employ fewer than 50 people)

Retail

• Increasing concentration
• Major categories
• Department stores
• Mass merchandisers
• Mail order
• Chains
• Specialty stores

Consumer
Increasing sophistication Expectation of
variety/change Wide choice of retail outlets
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The Inefficiencies

• Long supply chain
• From raw material to consumer purchase was 66
  weeks
• 11weeks in-plant time
• 40 weeks in warehouse or transit
• 15 weeks in store
• Problems of long supply chain
• Expensive to finance
• Too much or too little product was produced and
  distributed
• 1985-1986 overall loss - 25 billion

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The Response

• Awaken the industry
• Focus on the entire supply chain rather than
  separate functions within it
• Targeting the common goals
• Serve the consumer with the right products at the
  right time, and the right price
• The total supply chain would achieve major gains
  in both efficiency and effectiveness

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Expected Results through QR
Fiber, Fabric, Apparel, and Retail Inventories
(Working Weeks)
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Fig. 6-15
Weeks
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QR system
Average Cost per Unit
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Example Benetton

• Benetton deliver knitted goods in the hottest new
  colors seemingly overnight.
• It knitted the sweaters in neutral yarn and then
  dyed them to meet market demand.
• Putting in place fast and sophisticated retailer
  reporting systems.
• Key technologies
• Bar code systems
• Computer networks
• Automated distribution center
• EDI or Internet-based EC
• CIM

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ECR(Efficient Consumer Response)

• ECR is a Global Industry Strategy in which
  Retailers and Suppliers Work Together to Deliver
  Better Consumer Satisfaction and Value.

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What is Efficient Consumer Response?
A strategy in which distributors and suppliers
are working closely together to maximize grocery
consumer satisfaction and minimize cost.
Timely, accurate, paperless information flow
Supplier
Distributor
Retail store
Consumer household
Smooth, continual product flow matched to
consumption
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Anatomy of Efficient Consumer Response
A consumer purchases Product A from a
supermarket. The transaction is recorded by the
stores scanner.
The scanner forwards the transaction record to an
in-store computer. The Product A manufacturer,
whose computers interface with the retailers,
notes the transaction and automatically reorders
a replacement unit on a just-in-time basis.
An automatic ordering system allows the product A
supplier to match production to demand using
product movement information and forecasting.
Because production is tied directly into demand,
retailers become increasingly freed from the need
for excess inventory and warehousing of excess
inventory, thus opening the door for increased
cross-docking and direct store delivery shipments.
The retailers in-store computer acknowledges
receipt of the shipment and automatically issues
a computer-generated payment or electronic fund
transfer payment, eliminating the need for paper
invoices and streamlining the accounting process.
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Efficient Consumer Response Process
Change management
Replenishment
Replenishment
Manufacturing business strategy
Retail business strategy
Integrated EDI Continuous replenishment Computer-a
ssisted ordering Flow-through distribution Activit
y-based costing Category management Flexible
manufacturing
Promotion
Promotion
Store assortments
Store assortments
Product introductions
Product introductions
Open communication
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ECR Strategies Objectives
Strategies Objectives
Efficient Store Assortment Optimize the productivity of inventories and store space at the consumer interface
Efficient Replenishment Optimize time and cost in the replenishment system
Efficient Promotion/Pricing Maximize the total system efficiency of trade and consumer promotion pricing
Efficient Product Introductions Maximize the effectiveness of new product development and introduction activities
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ECR Components

• Logistics (Supply Side)
• Continuous Replenishment
• Cross Docking
• Category Management (Demand Side)
• Understanding Consumer Needs
• Decisions Made with Data
• Category vs. Brand Focused
• Total Systems Approach
• Enabling Technologies (Tools)
• Electronic Fund Transfer (EFT)
• Electronic Data Interchange (EDI)
• Activity Based Costing (ABC)
• Item Coding Database Maintenance

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Example Throughput Time Improvement of Dry
Grocery
CURRENT DRY GROCERY CHAIN
Supplier warehouse 38 days
Distribution warehouse (Forward buy 9 days, turn
inventory 31 days) 40 days
Retail store 26 days
Packing line
Consumer Purchase
104 days
ECR DRY GROCERY CHAIN
Supplier warehouse 27 days
Distributor warehouse 12 days
Retail store 22 days
Packing line
Consumer Purchase
61 days
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ECR Requirements

• Think Total Supply Chain
• Multi-Function, Multi-Echelon Cooperation
• Convert Efficiencies to Customer Value
• Drive True Efficiency and Recognize Inefficiency
• Emphasize on Consumer
• Work Together to Create Demand
• Change Business Processes
• Identify Whats Wrong Today
• Trust
• To be Partners
• Share Data

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Example PGs CRP Process
Direct store level shipment
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Stores
Store Delivery
Orders
Dedicated Carriers and Prescheduled Appointments
Demand and Inventory
Customer Distribution Centers
Ordering info
Shipping info.
Ordering info
P G Plant
Customer Headquarters
Orders
Demand and Inventory
P G Headquarters
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Barriers

• Lack of Trust
• Lack of Fairness - Open Trading
• No Information Sharing
• Lack of Resource Commitment
• Lack of Industry Standards
• Culture (Negotiation Environment)
• Measurement/Rewards

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Quick Response Multiple Orders per Season

• Ordering shawls at a department store
• Selling season 14 weeks
• Original replenishment lead time 15 weeks
• Reduced replenishment lead time 6 weeks
• Cost per handbag 40
• Sale price 150
• Disposal price 30
• Holding cost 2 per week
• Expected weekly demand 20
• SD of weekly demand 15

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Quick Response Multiple Orders per Season

• Two ordering policies
• A single order must arrive at the beginning of
  the season to cover the entire seasons demand
• Two orders are placed in the season, one arriving
  at the beginning of the season and the other
  arriving at the beginning of the eighth week
• Two situations
• The buyers forecast accuracy doesnt improve for
  second order
• The buyers forecast accuracy does improve for
  second order

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Impact of Quick Response Forecast doesnt
improve for second order (SD15 )
20 ? 7 1.75 ? ? 15
209 ? 2 - 69

• 20 ? 14 1.75 ? ? 15

Single Order Single Order Single Order Single Order Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season
Service Level Order Size Average Overstock Expect. Profit Initial Order OUL for 2nd Order Average Total Order Ending Invent. Expect. Profit
0.96 378 97 23,624 209 209 349 69 26,590
0.94 367 86 24,034 201 201 342 60 27,085
0.91 355 73 24,617 193 193 332 52 27,154
0.87 343 66 24,386 184 184 319 43 26,944
0.81 329 55 24,609 174 174 313 36 27,413
0.75 317 41 25,205 166 166 302 32 26,916
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Observations

• Its possible to provide the same level of
  product availability to the customer with less
  inventory if a second follow-up order is allowed
• The average overstock to be disposed of at the
  end of the sales season is less if two orders are
  allowed
• The profits are higher if second order is allowed

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Leftover Inventory vs. Number of Order Cycles per
Season
Unsold Inventory at End of Season
Number of Order Cycles per Season
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Expected Profit vs. Number of Order Cycles per
Season
Expected Profit
Number of Order Cycles per Season
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Forecast Improves for Second Order (SD3 instead
of 15)
20 ? 7 1.75 ? ? 3
Single Order Single Order Single Order Single Order Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season Two Orders in Season
Service Level Order Size Average Overstock Expect. Profit Initial Order OUL for 2nd Order Average Total Order Ending Invent. Expect. Profit
0.96 378 96 23,707 209 153 292 19 27,007
0.94 367 84 24,303 201 152 293 18 27,371
0.91 355 76 24,154 193 150 288 17 26,946
0.87 343 63 24,807 184 148 288 14 27,583
0.81 329 52 24,998 174 146 283 14 27,162
0.75 317 44 24,887 166 145 282 14 27,268
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Notes

• Quick response is clearly advantageous to a
  retailer.
• But as the retailer order size drops, the
  manufacturer sells less to the retailer. Thus,
  the manufacturer make a lower profit in the short
  term if all else is unchanged. It seems to
  benefit retailer at the expense of the
  manufacturer.

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Meaning of Postponement

• Delay the timing of the crucial processes in
  which end products assume their specific
  functionality, features, identities, or
  personality
• Can be viewed as information strategy
• 3 different kinds of postponement
• pull, logistics, form

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Pull Postponement

• BTS vs BTO
• Decoupling point the point from which the
  process switches from a build-to-stock mode to
  the build-to-order mode.
• Meaning of pull postponement
• Making the decoupling point earlier in the
  process.

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Pull Postponement

• Basic Elements
• The process steps must be sequenced so that the
  less differentiating steps are performed at prior
  to the decoupling point.
• After the decoupling point, the process steps can
  be performed flexible and fast.
• Accurate order capture for BTO.
• Example National Bicycle, Benetton.

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• ?????(Postponement Differentiation)?
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• ????????(Resequencing)
• ?? Benetton, postpone dyeing until after
  assembled. Cost 10 more expensive, new machine
  purchased and employee retrained.
• ?? US disk drive manufacturing. Insert generic
  circuit board into assembly, complete much of the
  testing, remove the generic circuit board, and
  add customer-specific boards later.

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• ??????(Commonality)
• ?????????????????
• ?? Printer manufacturing, redesign the new and
  old products to share a common circuit board and
  printhead such that final process can be delayed.

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• ???(Modularity)
• ??????????????,????????????????????????? HP
  Laser Jet
• ?????????????????????,???????????????????print-a
  nd-pigment mixture, Levis jeans

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• ???(Standardization)
• ?????????????????.
• ?????????(Agile Supply Networks)
• ?????????????, ???????????????????.

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Logistics Postponement

• Meaning
• Redesign the tasks in the SC so that some of the
  customization steps can be performed downstream
  closer to the customers.

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Concurrent and Parallel Processing

• Concurrent and parallel processing involves
  modifying the manufacturing process so that steps
  that were previously performed in a sequence can
  be completed at the same time.
• reduce lead time
• reduce inventory cost
• A key is the concept of modularity or decoupling

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Requirements for logistics postponement

• can not lead to quality degradation.
• downstream sites have capability to perform the
  task without excessive cost and time.
• potentially to procure the necessary components
  or modules for the customization.
• the engineering team is able and willing to
  design products and processes to defer the steps
  effectively.

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Form Postponement

• Meaning
• postponement is achieved through the change in
  the form of the product structure by
  standardizing some of the process steps or
  components.
• Example HP Laser Printer.

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Postponement Enablers

• Products or processes should be modular in
  structure.
• Design engineer should be aware of the importance
  of SCM to pursuit design for postponement
  opportunity.
• Must involve multiple functions or organization
  in collaboration.
• Quantify the costs and benefits to determine the
  best point for postponement

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The Value of Postponement

• Improve matching of supply and demand need to
  qualify the benefit with additional cost
• Increase profitability differentiate after
  receiving customer order so that inventories can
  be reduced
• Valuable for selling a large variety of products
  with demand that is independent and comparable in
  size

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Value of Postponement Benetton

• For each color
• Mean demand 1,000 SD 500
• For each garment
• Sale price 50
• Salvage value 10
• Production cost using option 1 (thread are dyed
  and the garment was knitted) with long lead time
  20
• Production cost using option 2 (dying was
  postponed until after the garment was knitted)
  22
• What is the value of postponement?

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Value of Postponement Benetton

• Option 1
• CSL (p - c) /(p - s) 30/40 0.75
• O NORMINV(0.75, 1000, 500) 1,337 units of
  each color
• Expected profits from each color 23,644
• Expected overstock for each color 412
• Expected understock for each color 75
• 5348 sweaters are produced, expected profit of
  94,576 with an average of 1,648 sweaters sold on
  clearance and 300 customers turns away for lack
  of sweaters

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Value of Postponement Benetton

• Option 2 c 22 instead of 20
• CSL (p - c) /(p - s) 28/40 0.70
• OA NORMINV(0.70, 1000?4, 500? ) 4,524
  units
• Expected profits 98,092
• Expected overstock for each color 715
• Expected understock for each color 190
• Expected profit increases from 94,576 to 98,092
• Expected overstock declines from 1,648 to 715
• Expected understock declines from 300 to 190

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Value of Postponement with Dominant Product

• Color with dominant demand (red) Mean 3,100,
  SD 800
• Other three colors Mean 300, SD 200
• Option 1
• CSL 0.75
• Optimal production of red sweaters O
  NORMINV(0.75, 3100, 800) 3,640 expected profit
  82,831, expected overstock 659, expected
  understock 119
• Optimal production of each other color sweater
  435 expected profit 6,458, expected overstock
  165, expected understock 30
• Total production 4,945, expected profit
  102,205, expected overstock 1,154, expected
  understock 209

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Value of Postponement with Dominant Product

• Option 2
• ?A 3100 3?300 4,000 ?A
• Total production 4,457 expected profit
  99,872,
• expected overstock 623, expected understock
  166
• Expected profit without postponement 102,205
• Expected profit with postponement 99,872

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Meaning of Pure Postponement

• Postponement may reduce overall profit for a firm
  if a single product contributes the majority of
  the demand, since the increased manufacturing
  expense due to postponement outweighs the small
  benefit from aggregation

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Tailored Postponement Benetton

• On the portion of the certain demand,
  postponement provides little value, thus, company
  needs to use lower cost method.
• On the portion of the uncertain demand,
  postponement significantly improves forecast
  accuracy, thus, company is willing to incur
  higher cost to achieve the benefit.
• Produce Q1 units for each color using Option 1
  and QA units (aggregate) using Option 2

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Tailored Postponement Benetton
Manufacturing Policy Manufacturing Policy Average Profit Average Overstock Average Understock
Q1 QA Average Profit Average Overstock Average Understock
0 4524 97847 510 210
1337 0 94377 1369 282
700 1850 102730 308 168
800 1550 104603 427 170
900 950 101326 607 266
900 1050 101647 664 230
1000 850 100312 815 195
1000 950 100951 803 149
1100 550 99180 1026 211
1100 650 100510 1008 185
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The Benefit of Tailored Postponement

• Tailored postponement allows a firm to increase
  its profitability by postponing only the
  uncertain part of the demand and producing the
  predictable part at a lower cost without
  postponement

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The Meaning of Tailored Sourcing

• A combination of two supply sources one focusing
  on cost but unable to handle uncertainty well,
  and the other focusing on flexibility to handle
  uncertainty but a higher cost
• A backup policy
• Disadvantage increasing complexity of
  implementation

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Tailored Sourcing

• Sourcing alternatives
• Low cost, long lead time supplier
• Cost 245, Lead time 9 weeks
• High cost, short lead time supplier
• Cost 250, Lead time 1 week

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Tailored Sourcing Strategies
Fraction of demand from overseas supplier Annual Profit
0 37,250
50 51,613
60 53,027
100 48,875
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Tailored Sourcing Multiple Sourcing Sites
Characteristic Primary Site Secondary Site
Manufacturing Cost High Low
Flexibility (Volume/Mix) High Low
Responsiveness High Low
Engineering Support High Low
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Dual Sourcing Strategies
Strategy Primary Site Secondary Site
Volume based dual sourcing (Benetton) Fluctuation Stable demand
Product based dual sourcing(Levi Strauss) Unpredictable products, Small batch Predictable, large batch products
Model based dual sourcing Newer products Older stable products
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Contracts for Product Availability and Supply
Chain Profits

• Many shortcomings in supply chain performance
  occur because the buyer and supplier are separate
  organizations and each tries to optimize its own
  profit
• Total supply chain profits might therefore be
  lower than if the supply chain coordinated
  actions to have a common objective of maximizing
  total supply chain profits
• Double marginalization results in suboptimal
  order quantity
• An approach to dealing with this problem is to
  design a contract that encourages a buyer to
  purchase more and increase the level of product
  availability
• The supplier must share in some of the buyers
  demand uncertainty

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Contracts for Product Availability and Supply
Chain Profits

• Many shortcomings in supply chain performance
  occur because the buyer and supplier are separate
  organizations and each tries to optimize its own
  profit
• Total supply chain profits might therefore be
  lower than if the supply chain coordinated
  actions to have a common objective of maximizing
  total supply chain profits
• Double marginalization results in suboptimal
  order quantity
• An approach to dealing with this problem is to
  design a contract that encourages a buyer to
  purchase more and increase the level of product
  availability
• The supplier must share in some of the buyers
  demand uncertainty

• Buybacks by publishers
• Tech Fiber produces jacket at v 10 and charges
  a wholesale price of c 100. Ski Adventure
  sells jacket for p 200. Demand is normal
  distributed with ?1,000 and ?300. Unsold
  jackets have no salvage value.
• Should TF be willing to buy back unsold jackets?
  Why?
• CSLSA 0.5, SA orders 1,000, expected profit
  76,063 TF sells 1,000 for a total profit of
  90,000. Total expected SC profit 166,063

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Impact of Supply Chain Contracts on
Profitability Buyback Contracts

• Buybacks by publishers
• Tech Fiber produces jacket at v 10 and charges
  a wholesale price of c 100. Ski Adventure
  sells jacket for p 200. Demand is normal
  distributed with ?1,000 and ?300. Unsold
  jackets have no salvage value.
• Should TF be willing to buy back unsold jackets?
  Why?
• CSLSA 0.5, SA orders 1,000, expected profit
  76,063 TF sells 1,000 for a total profit of
  90,000. Total expected SC profit 166,063

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The Categories of Supply Contract

• Horizon Length
• Pricing linear (proportional) or non-linear
  (two-part tariff) buyback, holding cost
  subsidies, payment for inability to supply
• Periodicity of ordering fixed or random
• Quantity commitment
• Total minimum commitment quantity or dollar
  value
• Periodical commitment
• Demand commitment
• Capacity commitment

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The Categories of Supply Contract

• Flexibility
• Magnitude or frequency of adjustments
• Delivery commitment
• Lead time
• Shipment policy
• Quality defect rates, specifications
• Information sharing

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Supplier Selection and Contracts

• Contracts for Product Availability and Supply
  Chain Profits
• Buyback Contracts
• Revenue-Sharing Contracts
• Quantity Flexibility Contracts
• Contracts to Coordinate Supply Chain Costs
• Contracts to Increase Agent Effort
• Contracts to Induce Performance Improvement

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Impact of Supply Chain Contracts on
Profitability Buyback Contracts

• Buybacks by publishers
• Tech Fiber produces jacket at v 10 and charges
  a wholesale price of c 100. Ski Adventure
  sells jacket for p 200. Demand is normal
  distributed with ?1,000 and ?300. Unsold
  jackets have no salvage value.
• Should TF be willing to buy back unsold jackets?
  Why?
• CSLSA 0.5, SA orders 1,000, expected profit
  76,063 TF sells 1,000 for a total profit of
  90,000. Total expected SC profit 166,063

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Impact of Supply Chain Contracts on
Profitability Buyback Contracts

• For entire SC, SC makes 190 for each jacket
  sold, and only loses 10. Thus, the cost of
  understocking is 190, and the cost of overstock
  is 10.
• The optimal CSL for entire SC is 0.95 and produce
  1,493 jackets. Total SC profit is 183,812.

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Return Policy Buyback contracts

• Issue of Double Marginalization
• Wholesale price c
• Buyback price b
• Manufacturing salvage value sM
• The salvage value for retailer is sb
• Optimal order quantity O
• Expected manufacturing profit
• O(c-v) b ? expected overstock at retailer

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Buyback Contracts
Wholesale Price c Buy-back price b Optimal Order Size for SA Expected Profit for SA Expected Returns to TF Expected Profit for TF Expected Supply Chain Profit
100 0 1000 76063 120 90000 166063
100 30 1067 80154 156 91338 171492
100 60 1170 85724 223 91886 177610
110 0 962 66252 102 96230 162482
110 78 1191 78074 239 100480 178555
110 105 1486 86938 493 96872 183810
120 0 924 56819 80 101640 158459
120 96 1221 70508 261 109225 179733
120 116 1501 77500 506 106310 183810
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Buyback Contracts

• Manufactures can use buyback contracts to
  increase their own profit as well as total supply
  chain profits. Buyback contract also encourage
  retailers increase product availability
• Manufactures need to consider the cost associated
  with a return
• As the cost associated with a return increases,
  buyback contracts become less attractive.
• Applications (1) bookstores return the cover of
  the book to reduce the cost of return (2)
  manufactures use holding cost subsidies.

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Contracts for Product Availability and Supply
Chain Profits Buyback Contracts

• Allows a retailer to return unsold inventory up
  to a specified amount at an agreed upon price
• Increases the optimal order quantity for the
  retailer, resulting in higher product
  availability and higher profits for both the
  retailer and the supplier
• Most effective for products with low variable
  cost, such as music, software, books, magazines,
  and newspapers
• High tech industry provides price support for
  retailers due to price drop rapidly

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Contracts for Product Availability and Supply
Chain Profits Buyback Contracts

• Downside
• Results in surplus inventory that must be
  disposed of, which increases supply chain costs
• Lead the retailer to exert less effort to sell
• May increase information distortion through the
  supply chain because the supply chain reacts to
  retail orders, not actual customer demand

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Revenue Sharing Contracts

• Manufacture charges the retailer a low wholesale
  price and shares a fraction of the revenue
  generated by the retailer.
• The retailer cost will be decreased due to lower
  overstock cost, thus, retailer will increase the
  level of product availability resulting higher
  profits for both manufacturer and retailer.

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Revenue Sharing Contracts

• Manufacturers production cost v
• Wholesale price charged by manufacturer c
• Manufacturer shares a fraction f of the
  retailers revenue
• Retailer charges a retail price p and has a
  salvage value sR for unsold items.
• The understocking cost Cu (1-f)p c
• The overstocking cost Co c sR

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Revenue Sharing Contracts
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Revenue Sharing Contracts

• Example TF charges only c 10 for each jacket,
  SA sells the jacket for p 200 and shares f of
  the revenue to TF. Demand at this price is normal
  distributed with a mean 1000 and a standard
  deviation 300. Assume that no salvage value for
  any leftover jackets.

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Revenue Sharing Contracts
Wholesale Price c Revenue-Sharing Fraction f Optimal Order Size for SA Expected Overstock At SA Expected Profit for SA Expected Profit for TF Expected Supply Chain Profit
10 0.3 1440 449 124273 59429 183702
10 0.5 1384 399 84735 98580 183315
10 0.7 1290 317 45503 136278 181781
10 0.9 1000 120 7606 158457 166063
20 0.3 1320 342 110523 71886 182409
20 0.5 1252 286 71601 109176 180777
20 0.7 1129 195 33455 142051 175506
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Revenue Sharing Contracts

• Observations revenue sharing with a lower
  wholesale price allows both retailers and
  manufactures to increase their profit. The
  revenue sharing encourages retailers to increase
  the level of product availability
• Applications video rental industry, such as
  Blockbuster.

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Contracts for Product Availability and Supply
Chain Profits Revenue Sharing Contracts

• The buyer pays a minimal amount for each unit
  purchased from the supplier but shares a fraction
  of the revenue for each unit sold
• Decreases the cost per unit charged to the
  retailer, which effectively decreases the cost of
  overstocking

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Contracts for Product Availability and Supply
Chain Profits Revenue Sharing Contracts

• Have a similar effect as buyback contracts but
  eliminate the cost of returns
• Lower retailer effort
• Suited for products with low variable cost and a
  high cost of return
• Result in supply chain information distortion
• Enabler require an information infrastructure to
  monitor sales at retailer

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Quantity Flexibility Contracts

• If a retailer order O units the manufacturer
  commits to supplying up to Q (1?)O and the
  retailer commits to buying q (1-?)O
• How can quantity flexibility contracts help
  increase profitability?

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Quantity Flexibility Contracts

• Manufacturing cost per unit v
• Wholesale price c
• Retailing price p
• Retailer salvage value sR
• Manufacture salvage value sM
• Demand ??(???2)

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Quantity Flexibility Contracts

• Scenario
• Retailer orders O units, manufacture commits to
  supply Q units
• Manufacturer produces Q units
• Retailer purchases q units if demand R is less
  than q R units of demand R is between q and Q Q
  units if demand is higher than Q

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Quantity Flexibility Contracts

• Expected quantity purchased by retailer

• Expected quantity sold by retailer

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Quantity Flexibility Contracts

• Expected overstock at retailer
• Expected retailer profit
• Expected manufacture profit

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Quantity Flexibility Contracts
? ? Wholesale price c Order size O Expected purchase by SA Expected sale by SA Expected profits for SA Expected profits for TF Expected supply chain profit
0.00 0.00 100 1,000 1,000 880 76,063 90,000 166,063
0.20 0.20 100 1,050 1,024 968 91,167 89,830 180,997
0.40 0.40 100 1,070 1,011 994 97,689 86,122 183,811
0.00 0.00 110 962 962 860 66,252 96,200 162,452
0.15 0.15 110 1,014 1,009 945 78,153 99,282 177,435
0.42 0.42 110 1,048 1,007 993 87,932 95,879 183,811
0.00 0.00 120 924 924 838 56,819 101,640 158,459
0.2 0.2 120 1,000 1,000 955 70,933 108,000 178,933
0.5 0.5 120 1,040 1,003 996 78,874 104,803 183,677
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Quantity Flexibility Contract

• Common for components in the electronic and
  computer industry
• Example
• Benetton retailer required to place order 7
  months before delivery, but allow retailer to
  alter up to 30 quantity ordered in any color and
  assign to another color 3 months before delivery
  and allow retailer to alter up to 10 after the
  start of the season

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Contracts for Product Availability and Supply
Chain Profits Quantity Flexibility Contracts

• Allows the buyer to modify the order (within
  limits) as demand visibility increases closer to
  the point of sale
• Better matching of supply and demand
• Increased overall supply chain profits if the
  supplier has flexible capacity
• Can be effective if a supplier sells to multiple
  retailers with independent demand

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Contracts for Product Availability and Supply
Chain Profits Quantity Flexibility Contracts

• Downsize
• Supplier needs to have inventory or excess
  flexible capacity
• Lower levels of information distortion than
  either buyback contracts or revenue sharing
  contracts due to aggregation of uncertainty from
  supplier
• Lower retailer effort

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Vendor-Managed Inventory(VMI)

• VMI manufacturer or supplier is responsible for
  all decisions regarding product inventories at
  the retailer
• Requirements share info from retailers
• Benefits
• Increase profit of manufacturer
• Improve manufacturer forecast accuracy
• Avoid double marginalization
• Drawbacks
• Impact of product substitution to bring higher
  inventory in retailer

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CPFR Model

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CP
CF
CR
Business Wire??
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??CPFR???

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CPFR

• ????

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95
????,?????(Collaborative Planning, Forecasting,
and Replenishment, CPFR)

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96
????,?????(CPFR)

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97
????,?????(CPFR)

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CPFR Roadmap

• Published by VICS (Interindustry Commerce
  Standard Association)
• Nine steps
• Develop guidelines for the relationships
• Develop a joint business plan
• Create a sales forecast
• Identify exceptions for the sales forecast
• Collaborate on exception items
• Create an order forecast
• Identify exceptions for the order forecast
• Resolve/collaborate on exception items
• Generate orders

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Contracts to CoordinateSupply Chain Costs

• Differences in costs at the buyer and supplier
  can lead to decisions that increase total supply
  chain costs
• Example Replenishment order size placed by the
  buyer. The buyers EOQ does not take into
  account the suppliers costs.
• A quantity discount contract may encourage the
  buyer to purchase a larger quantity (which would
  be lower costs for the supplier), which would
  result in lower total supply chain costs but
  higher inventory levels and lot sizes
• Quantity discounts lead to information distortion
  because of order batching

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Contracts to Increase Agent Effort

• There are many instances in a supply chain where
  an agent acts on the behalf of a principal and
  the agents actions affect the reward for the
  principal
• Example A car dealer who sells the cars of a
  manufacturer, as well as those of other
  manufacturers
• Examples of contracts to increase agent effort
  include two-part tariffs (a franchise fee and
  sell product at cost) and threshold contracts
  (increasing margin to dealer for higher
  threshold)
• Threshold contracts increase information
  distortion, however. One way to offer threshold
  incentives over a rolling horizon.

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Contracts to Induce Performance Improvement

• A buyer may want performance improvement from a
  supplier who otherwise would have little
  incentive to do so
• A shared savings contract provides the supplier
  with a fraction of the savings that result from
  the performance improvement such as lead time,
  quality
• Particularly effective where the benefit from
  improvement accrues primarily to the buyer, but
  where the effort for the improvement comes
  primarily from the supplier

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3 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
4 Benetton? ????????(http//www.benetton.com/ ),????2012/1/11????????46?52?65??????(?????????,???????????)
4 Benetton? ????????(http//www.benetton.jp/ ),????2012/1/11????????46?52?65??????(?????????,???????????)
5 Benetton? ????????(http//www.benetton.com/ ),????2012/1/11????????46?52?65??????(?????????,???????????)
5 Benetton? ????????(http//www.benetton.com/ ),????2012/1/11????????46?52?65??????(?????????,???????????)
5, 6 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
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????
?? ?? ???? ??/??
7 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
7 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
7 zara?????????(http//www.zara.com/webapp/wcs/stores/servlet/home/es/es/zara-W2011-r ),????2012/1/11????????46?52?65??????(?????????,???????????)
17 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
17 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
17 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
17 ??????Microsoft Office 2007?????,??Microsoft ??????????46?52?65??????
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17 ??????Codigofonte.net??(http//www.codigofonte.net/galeria-de-imagens/cliparts/23) ,????2012/2/20????????46?52?65??????
23 ???? ?????
23 ??????Codigofonte.net??(http//www.codigofonte.net/galeria-de-imagens/cliparts/visualizar/FABRICA2.gif),????2012/2/18????????46?52?65??????
23 ??????Codigofonte.net??(http//www.codigofonte.net/galeria-de-imagens/cliparts/visualizar/PREDIO4.jpg),????2012/2/22????????46?52?65??????
93 ??????Business Wire??(http//www.businesswire.com/multimedia/home/20040518005256/en/1088537/VICS-CPFR-Moving),????2012/2/22????????46?52?65??????
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