supply

Supply Chain Coordination

All stages of the chain take actions that are aligned and increase total supply chain surplus

Coordination difficulties

Manufacturer increases the price to maximize its own profit. Retailer decreases purchaing cost to increase its own profit

Costly coordination fixes

Buying out all parts of the supply chain

Less costly fix

Design contracts

Simple Wholesale price contract

The retailer buys products from the supplier at a fixed wholesale price per unit and then sells them to customers at a higher retail price, keeping the difference as profit.

Global Optimization strategy

Making decisions that maximize total profit for the entire supply chain, rather than for each individual firm.

centralized decision making

A system where one decision-maker (or one unified entity) makes decisions for the entire supply chain to maximize total profit

Double Marginalization

When each firm in a vertical chain marks up its price above its marginal cost, thereby increasing the price of the final product.

Wholesale price contract

Buyer assumes the risk from demand uncertainty.
Supplier takes no risk.
Buyer then limits the order quantity, there is a significant increase in the likelihood of out of stock

Global optimization

Supplier now shares the risk of stock-out as part of the whole.
Buyer increases the quantity and reduces the stock-out probability.
Increasing profits for both the supplier and the buyer.

Effective contracts

allocate profit to each partner in a way that no partner can improve his profit by deciding to deviate from the optimal set of decisions

Revenue Sharing Contract

an agreement where the supplier and the buyer or manufacturer share the revenue generated from the sale of the products

Buy Back contract

Seller agrees to buy back unsold goods from the buyer for some agreed-upon price
. Buyer has incentive to order more
Supplier's risk increases.
Increase in buyer's order quantity
Decreases the likelihood of out of stock
Compensates the supplier for the higher risk

Revenue sharing pros

Can achieve global optimum
Provides risk sharing between parties
Allows flexible allocation of supply chain profit

revenue sharing cons

Requires continuous monitoring and thus increases administrative cost for the supplier
Buyers have an incentive to push competing products with higher profit margins.
Revenue sharing can impact sales effort

Buyback pros

Can achieve global optimum
Provides risk sharing between parties
Allows flexible allocation of supply chain profit

Buyback cons

Require suppliers to have an effective reverse logistics system and may increase logistics costs.
Retailers have an incentive to push the products not under the buy back contract.
Retailer's risk is much higher for the products not under the buyback contract

Network management

Design or reconfiguration of the logistics network in order to minimize annual system-wide cost subject to a variety of service level requirements

Network planning

Matching Supply and Demand by deciding
... where to position inventory,
... from where to source inventory.
Complexity: Long-lasting and hard-to-reverse decisions

4Rs of Network management

Right number of facilities,
Right location of each facility,
Right size of each facility,
Right distribution of each product

Increasing the number of warehouses typically yields:

An improvement in service level due to the reduction in average travel time to the customers
An increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demands.
An increase in overhead and setup costs
A reduction in outbound transportation costs: transportation costs from the warehouses to the customers
An increase in inbound transportation costs: transportation costs from the suppliers and/or manufacturers to the warehouses

Improvement in service level

due to the reduction in average travel time to the customers

Increase in inventory costs

due to increased safety stocks required to protect each warehouse against uncertainties in customer demands

Increase in overhead and set up costs

warehouse capital investment

Reduction in outbound transportation costs

transportation costs from the warehouses to the customers

Increase in inbound transportation costs

transportation costs from the suppliers and/or manufacturers to the warehouses.

Heuristic #1

Choose the warehouse with the lowest outbound (delivery) cost to the customer until capacity is reached.

Heuristic 2

Choose the warehouse with the lowest total cost (inbound + outbound transportation).

Optimization Model Formulation

Minimize the total transportation cost
Subject to
Each market's demand is fully met
The total amount shipped from a factory cannot exceed its capacity
All variables are non-negative

High variability low volume products

Inventory risk the main challenge for
Position them mainly at the primary warehouses
demand from many retail outlets can be aggregated reducing inventory costs

Low variability high volume products

Position close to the retail outlets at the secondary warehouses
Ship fully loaded trucks as close as possible to the customers reducing transportation costs

Low variability low volume products

Require more analysis since other characteristics are important, such as profit margins, etc

Routing and scheduling objective

minimize total costs by decreasing, the number of vehicles needed, and the total travel time/distance of vehicles

Clustering

Assignment of trucks to customers

Routing

Sequencing customers (The orders in which trucks will visit)

Scheduling

Exact time visits (including loading and unloading times)

Clustering: Savings matrix model

At each iterative step, combine routes with the highest savings into a new feasible route.
Two routes can be combined into a feasible route if the total deliveries across both routes do not exceed the vehicle's capacity

Nearest neighbor

Insert the nearest neighbor (closest to the point last visited by the vehicle until all customers have been visited)

Sweep

Insert in the order of a sweep (a line is swept either clockwise or counterclockwise from the DC)
Sweep needs a picture

Nearest Insertion

At each step, insert the customer with the smallest minimum increase from the current trip

2 opt exchange

Breaks a trip at two points to obtain two paths that can be reconnected in two possible ways
. The length for each reconnection is evaluated and the shortest trip is retained.
The procedure is continued on the new trip until no further improvement results

3 opt exchange

Breaks a trip at three points to obtain three paths that can be reconnected to form up to eight different trips.
The length for each reconnection is evaluated and the shortest trip is retained.
The procedure is continued on the new trip until no further improvement results

Aggregate Planning

process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon

Goals of Aggregate Planning

▪ goal is to maximize profit
▪ decisions made at a product family (not SKU) level
▪ time frame of 3 to 18 months
▪ how can a firm best use the facilities it has?

Aggregate planning costs

• • Labor - regular and over time
  • Subcontracting
  • Hiring or Layoff
  • Adding or reducing machine
  • Inventory - Holding or Stockout

Aggregate planning constraints

• Limits on overtime and layoffs
• Capital
• Service level

Chase strategy

Vary machine capacity or workforce to match demand
- Use for high inventory holding and low capacity changing costs.

Chase strategy pros

Low levels of inventory

Chase strategy cons

▪ Difficult to vary capacity and workforce on short notice,
▪ Expensive to vary capacity,
▪ Negative morale on workforce.

Level Strategy

Keep machine capacity and workforce levels stable with a constant output
- Use for low inventory holding and backlog costs.

level strategy cons

▪ Fluctuating inventory levels over time,
▪ Carry inventory from high to low demand periods,
▪ Large inventories and backlogs may accumulate

level strategy pros

Higher work morale

Mixed strategy

Combination of level and chase

Predictable variability

- is change in demand that can be forecasted
▪ can cause increased costs and decreased responsiveness in the supply chain

Handling predictive variability strategies:

▪ Manage supply using capacity, inventory, subcontracting, and backlogs
▪ Manage demand using pricing and trade promotions

Pricing and Revenue Optimization (PRO) Inputs

•Price Response Functions
•Unit Costs
•Goals
•Pricing Strategies
•Product Availability
•Competitive Prices and Availabilities

PRO outputs

Recommended Prices by
•Product •Market Segment •Channel

Price response function

Represents the demand for the single product of a single seller as a function of the price

Demand Function

specifies how the entire market responds to price changes

Types of price response functions

non-negative, continuous, differentiable, downward sloping, satiating, finite.

Continuous

No gaps or jumps. For every between 0 and D, there is a price p ≤ P

Differentiable

Smooth so we can define aslope at every price point; d'(p)

Downward sloping

Raising prices would lead to decreased demand and vice versa

Satiating

Demand at p=0 is some finite amount, say D.

Finite

There exists some P so that d(p)= 0 for all p ≥ P.

Slope

measures how demand changes in response to a price change around p

Properties of price elasticity

▪ It is always larger than 0.
▪ Independent of units: Elasticity of gasoline same whether it is measured in gal/$ or liters/Euro.
▪ It just depends on price at which it is measured.
▪ High elasticity: > 1 means price sensitive
▪ Low elasticity: < 1 means price insensitive

Short term discounts

Low elasticity in the short run but higher in the long run

Non ending price cycle

Companies keep changing prices in response to each other → never settles

Price elasticity

How sensitive demand is to price changes

Change capacity

Hire workers

Add machines

👉 Usually expensive + slow

Change price

Lower price → increase demand

Raise price → reduce demand

👉 Usually faster + cheaper

Variable pricing

👉 Change prices depending on conditions

Workforce balance

Wt=Wt−1+Ht−Ft

Overtime constraint

Ot≤8Wt

Inventory balance

It−1+Xt=Dt+St−1+It−St