Introduction SEEM Revenue Management. US 20 cents Glue. A Partial Overview of SCM

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1 Introduction to SEEM 5630 Stochastic Inventory and Revenue Management A Partial Overview of SCM A clock for $3.97 in WalMart including all of the costs in transportation from China to US. What s the manufacturing costs -- $1? $2? Think about wages, materials, etc. US 20 cents Glue WalMart WalMart

2 CK Jeans WalMart WalMart Adidas socks: $14.99/6 pairs WalMart A clock for $3.97 in WalMart including all of the costs in transportation from $ g p China to US. What s the manufacturing costs -- $1? $2? Think about wages, materials, etc.

3 Smile Curve 微笑曲線 Definition A firm s Supply chain consists of all processes and activities iti that t are necessary to bring products to market. It includes procurement to acquire raw material; manufacturing to convert raw materials into components and final products; and distribution to respond to market demand Supply Chain Source: Adapted from the Stan Shih: Smile Curve concept. SCM is a set of approaches to manage the SC, i.e., to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantity, to the right location, and at the right time. Efficiently means minimizing the system-wide cost while satisfying service level requirement, or maximizing the total profit. Book: The Travels of a T-Shirt in the Global Economy A process overview: manufacturing Pietra Rivoli holds up the Fort Lauderdale t-shirt that guided her journey. Can T-shirt manufacturers survive in Africa? SCM activities and main business processes (Source: Ernst and Young Consulting)

4 Who Cares About Inventory? This course try to cover some topics in SCM Textbooks no formal Assignments: 5 sets (almost every week, some questions will be released) and due in every other week (40%) A midterm exam in class (30%) Out of stock for Christmas, Wall Street Journal Dec 4, 2008 Believe e e it or not, there e is actually a product out of stock this Holiday season - Amazon s Kindle. Oprah announced that she loves her Kindle and sales have exceeded Amazon s expectations. it does illustrate that challenges of meeting highly uncertain demand. Apparently - Better Scratch no one. That Kindle That s Off why Your there List $1.16 trillion of it in the US economy. Picture from MOHI 1-13 Take-home exam (30%) Do not copy from each other, although discussion among you is encouraged. Review of SCM Basics This is a research-oriented course Except maybe 3 classes, mainly mathematical materials Do not forget your thesis will be measured based on your contribution to the literature Manufacturer (Campbell s ) Customer (Park n Shop DC, Stores) Consumers Nevertheless, I will introduce from the context some practical concepts/jargons, as well, typically y in passing Models are not just math. exercises Do not forget you will be teaching or working in industry Customer places an order what happens in a supply chain? Work efficiently but not too hard!

5 Chain Reaction Customer order When and In What Quantity to Buy/Make/move / of Each Parts/Finished i Goods? Push/Pull Processes Campbell ssoup Chicken Order to farms (1 wk ) Issuing orders + producing (1 wk)... Can Orders to Metal Processor How are Activities Activated in a SC? With pull processes, execution is initiated in response to a customer order - - reactive With push processes, execution is initiated in anticipation of customer orders -- speculative Order to Steel Maker... Chicken raising (30 wks)... Hatching eggs(4 wks) Waiting hens to lay eggs ( 3 mos) 18 Material Requirements Planning (MRP) MRP & Production Planning Process Mfg. computer information system Determines quantity & timing of dependent demand items Forecast & Firm Orders APP Resource Availability Gross Requirements Scheduled Receipts 5 30 Available Net Requirements 7 Planned Order Receipts 7 Planned Order Releases 7 Material Requirements Planning Master Production Scheduling How many and When for FG?

6 MRP System Input & Output MRP System Input & Output What items make up the product How long to make items What to make & when Material Requirements Planning Sys. What items to make & when What is in stock What is on order Bill of Materials Item Master Master Production Schedule Material Requirements Planning Sys. Planned Order & Other Reports Inventory Status Purchasing Data Master Production Schedule Shows items to be produced End item, customer order, module Derived from aggregate plan Example Item/Week Oct 3 Oct 10 Oct 17 Oct 24 Bill-of-Material (BOM) List of components & quantities needed to make product Provides product structure (tree) Parents: Items above given level Children: Items below given level Shows low-level coding Top level is 0; next level is 1 etc. Product A Product X

7 Bill-of-Material Product Structure Tree DVD Players A CM/OED Bicycle(1) P/N 1000 Handle Bars (1) P/N 1001 Frame Assy (1) P/N 1002 Wheels ((2)) P/N 1003 Frame ((1)) P/N 1004 Lead Time About bout 10 0 pages Input Wait Time Move Time Queue Setup Run Time Time Time Output

8 Lead Times & Product Structure Li Fung Trading 香港利丰贸易行 Handle Bars 2 wk. Lead time Inside fabrics: Taiwan Frame 2 wk. 3 wk. Wheels 1 wk. Frame Assy 1 wk. Bicycle Time (weeks) Cover 外套 : S. Korea Staffing Materials: China Assembly:China Zips 拉链 : Japan Made-in-HK? Shipped thru HK => USA,EC Label 标签, Deco. 装饰, Strings 带子, Buttons 纽扣等等 : HK Component A Solution* MRP Logic A master schedule calls for X starting 2 units of product X in week 1, 20 in week 2, & 10 in week 4. The planned order A(1) B(1) releases for product Y are 15 in week 4, and 15 in week 5. Determine the gross requirements for component Y A. A(1) C(3) X Y A(1) B(1) A(1) C(3) Planned Order Releases X Planned Order Releases Y Week Week Qty Qty Qty Week Gross Requirements A

9 MRP Report (Week #, beg. of Nov.) Gross Requirements Scheduled Receipts 5 30 Available Inventory Net Requirements 7 Planned Order Receipts 7 Planned Order Releases 7 Lead time = 3; lot policy = lot-for for-lot (LFL); on-hand = 20 units; safety stock = 0 units. MRP Report Gross Requirements Scheduled Receipts 5 30 Available Inventory Total 23 quantity 3 33 required by all parents Net Requirements 7 Planned Order Receipts 7 Planned Order Releases 7 Lead time = 3; lot policy = lot-for for-lot (LFL); on-hand = 20 units; safety stock = 0 units. MRP Report Gross Requirements Scheduled Receipts 5 30 Available Inventory 20 Quantity 23 3 & 33 estimated 8 0 Net Requirements completion date of 7 Planned Order Receipts in-process orders 7 Planned Order Releases 7 Lead time = 3; lot policy = lot-for for-lot (LFL); on-hand = 20 units; safety stock = 0 units. MRP Report Gross Requirements Scheduled Receipts 5 30 Available Inventory Net Requirements Actual & projected 7 Planned Order Receipts inventory available for 7 Planned Order Releases use (excludes safety 7 stock ) Lead time = 3; lot policy = lot-for for-lot (LFL); on-hand = 20 units; safety stock = 0 units.

10 MRP Report Gross Requirements `Gross Scheduled Receipts Requirements 5 30 less Available Inventory 20 Available 23 3 inventory Net Requirements 7 Planned Order Receipts 7 Planned Order Releases 7 Lead time = 3; lot policy = lot-for for-lot (LFL); on-hand = 20 units; safety stock = 0 units. MRP Report Gross Requirements Scheduled Receipts Quantity 5 & 30 due Available Inventory date of orders should be Net Requirements received 7 Planned Order Receipts 7 Planned Order Releases 7 Lead time = 3; lot policy = lot-for for-lot (LFL); on-hand = 20 units; safety stock = 0 units. MRP Report Gross Requirements Scheduled Receipts 5 30 Quantity & Available Inventory planned 3 start Net Requirements date of orders 7 Planned Order Receipts 7 Planned Order Releases 7 Lead time = 3; lot policy = lot-for for-lot (LFL); on-hand = 20 units; safety stock = 0 units. Someone once asked me if there was any real difference between engineers, scientists, and managers in today's high tech companies. Although the differences are often subtle to an outsider, you can tell one from another simply by the questions they ask. Engineering: "How will this work?" Science: "Why will this work?" Management: "When will this work?"

11 Summary of MRP Application: a Distribution Network An Explosion Central DC Part A1. Part A6 Part B1 Part B2 Region ADC Region B DC Component A Component B DC A1. DC A10 DC B1 DC Bx Product XX Implosion A Distribution Network Local DC Demand Forecasts LTa1 LTa Central DC LTb Region ADC Region B DC LTa10 LTb1 LTbx DC A1. DC A10 DC B1 DC Bx WK DC a DC a DC bx

12 Translating into Regional DC Distribution Resource Planning (DRP) Lead-time information LTa Central DC LTb WK DC a DC a Should be available no later than 5 - LTa1 LTa1 Region ADC Region B DC LTa10 LTb1 LTbx DC A1. DC A10 DC B1 DC Bx An implosion Forecast = gross req. In Transit= scheduled receipt Backorder(s) or on-hand inventory at t=0; +: onhand, --: shortage Los Angeles Vitamin C Tablets 100/bottles End-of-the-period On-hand balance 500 inventory (on-hand) Beginning-of-theperiod order Safety stock 200 Lead time (wk) 2 Lot-size 300 Note that here safety stock is not deducted from on-hand! Past due Forecast In transit Projected on-hand Plnd Shpmts-Rcpt.Date Plnd Shpmts-Ship.Date Montreal On-hand balance 160 Safety stock 75 Lead time (wk) 2 Lot-size 150 Past due Forecast In transit 150 Projected on-hand Plnd Shpmts-Rcpt.Date 150 Plnd Shpmts-Ship.Date 150

13 MRP & DRP Summary at Central Distribution Center (Factory) Week Past due LA Montreal 150 NY Vancouver 150 Toronto 150 Chicago TOTALS P#1 P#2 LT1 Model1 LT2 Prod Plan CDC MRP: what, when, how much to make or order DRP: what, when & how much needed at CDC Want to learn more Only about a few firms MRP: can do wikipedia.org so! => MRP Or textbook: Render and Heizer, Oper. Mgmt. Order Point System 定货点法 Why do we need Distribution Centers? Each location (installation) implements some re-order levels to replenish stock Target levels (Min, Max) (Min, c, Max) RDC 提前期 LT a RDC CDC RDC 中央配送中心 RDC Reactive rather than anticipative (DRP) LT a1 Retailers

14 Multiple Products 地区中心RDC/ 顾客1 新科-后勤 ABC 供應商A SembCorp Logistics : 供應商 B CDC RDC/ CUSTOMER 2 在中 销售消费 在中国销售消费品-后勤支持 勤支持 中央配送中心 供應商 C Moosa Sharafali Frank Chen, Mark Goh, Jacob Lee, Ou Jihong, Teo Chung Piaw Dept. of Decision Sciences, NUS RDC CUSTOMER 3 Goh Puay Guan, Pragash Sivanathan SembCorp Logistics 可能的货栈 地点 Harbin Shenyang Ulumuqi Beijing j g Tianjin Xian Wuxi Chengdu Wuhan Suzhou G Guangzhou h Shanghai Ningbo Xi Xiamen Hong Kong

15 新科 - 安达网络 涵盖 270 城市 - 4 天内 超过 50% 的货物可以在 2 天内,98% 在 3 天内运到 持续改进服务和涵盖区域 广泛应用运筹学技术 3PL 供应厂家 采购 Purchases 生产厂家 Production/ Manuf-ing Colgate 厂家货栈 DC 批发站 wholesale Marketing & Sales 外协! 零售商场 Distribution 系统概述 Current 目前的 Warehouses 仓库 ( ) Potential Warehouses 可供选择的仓 File 库地点 优化 Optimizer i Scale of the problem: Factories 厂家资 File 料 Customers 客户资 File 料 成本资料 Cost File 系统处理 Prepro cess ing User Input of other data like parameters 其它资料 : like 服务水 service lead time, service 平, 交货时间 lead level time, etc., 等 service level etc. 结果输出 Optimal Solution Display o f the 屏幕显示 so lution on the map 结果 18 product categories 14 plants 159 customer zones 151 possible RDCc (currently 8 in oper.) Optimization must be fast

16 An example of pull system -- A Case: an electronic product SC Vendors 供应商 KA-CM 合同制造商 QW--OEM 电子公司 DC - 配送中心 Retailers Forecasting What Is Forecasting? Types of Forecasts by Time Horizon Process of predicting a future event Forecasting is Always Wrong 640K should be enough for anybody. -- Bill Gates, 1981 I think there is a world mkt for maybe 5 computers - Thomas Watson, Chairman of IBM, 1955 Quant f methods - educated guessing Forecasting v.s. Planning Sales will be $200 Million! Short-range forecast Up to 1 year; usually < 3 months Procurement, worker assignments Medium-range forecast 3 months to 3 years Sales & production planning, budgeting Long-range forecast 3 + years Capacity planning, facility location 63 64

17 Quantitative Forecasting Methods 1 st & 2 nd Law of Forecasting Qualitative Simulation Quantitative Forecasting Time Series Models 時間序列 Causal Models 因果關係 1. In forecasting, we assume the future will behave like the past If behavior changes, our forecasts can be terrible 2. Even given 1, there is a limit to how accurate forecasts can be (or nothing can be predicted with complete accuracy) The achievable accuracy depends on the magnitude of the noise component Moving Average Exponential Smoothing Trend & Season Regression A future is continuation of the past 65 (short run) 66 Monthly Demand for Sport-3506 TS of a Raw Material s Price Monthly Demand Raw Material Price De m and Price ($/Unit) Price Month Period 67 68

18 Monthly Australian Red Wine Sales Time Series Components Series Sales Original T.S Time Time Series Components ERP: Enterprise Resource Planning Trend Cyclical Black Box Seasonal Random 71 72

19 Next Week Basic Inventory Model Introduce the modeling framework and a number of concepts Base-stock/Order-up-to Policy Preparations Idea of Dynamic Programming Expectation random variables, distribution Homework: Part 1 of HW#1: In Axsater: 1) 2.1; 2) 2.3; 3) Compare the forecasting results from MA with N=3 and alpha =0.4 from Exp. Smoothing; which method is better? (Suggested read Axsater, Sections )