Advanced Supply Chain Management (POM 625) - Lecture 1 - Dr. Jinwook Lee

Advanced Supply Chain Management (POM 625) - Lecture 1 - Dr. Jinwook Lee

Topics of Lecture 1 - Introduction - What is Supply Chain Management? - Issues of SCM - Goals, importance, and strategies of SCM - A Brief Review of Linear Programming - Using Excel Solver in solving LP problems: - Production Planning Problems - Transportation Problems - Capital Budgeting Problem 6/23/14 Jinwook Lee 2

Flows in SCM 6/23/14 Jinwook Lee 3

Stages of a detergent Supply Chain 6/23/14 Jinwook Lee 4

Stages of Supply Chain 6/23/14 Jinwook Lee 5

Supply Chains of Apple Inc. 6/23/14 Jinwook Lee 6

What is SCM? - Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, so as to minimize total system cost subject to satisfying service requirement. 6/23/14 Jinwook Lee 7

The Goal of SCM - Maximization of the overall value generated. - Supply Chain Surplus = Customer Value Supply Chain Cost - Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed: - In the right quantities - To the right locations - At the right time - In order to - Minimize total cost - Satisfy customer service requirements 6/23/14 Jinwook Lee 8

Growing Interest in SCM - As manufacturing becomes more efficient (or is outsourced), companies look for ways to reduce cost - Several significant success stories (Walmart, HP, Dell, Apple, etc.) - The huge growth of interest in the web has spawned web-based models for supply chains: from dot com retailers to B-2-B business models. 6/23/14 Jinwook Lee 9

What makes SCM difficult? - Supply Chain strategies cannot be determined in isolation. They are directly affected by another chain that most organizations have, the development chain that includes the set of activities associated with new product introduction. - It is challenging to design and operate a supply chain so that total systemwide costs are minimized, and systemwide service levels are maintained. - Uncertainty and risk are inherent in every supply chain. 6/23/14 Jinwook Lee 10

SCM is core! 6/23/14 Jinwook Lee 11

Typical Supply Chain for a Manufacturer Supplier } Supplier Storage Mfg. Storage Dist. Retailer Customer Supplier 6/23/14 Jinwook Lee 12

Typical Supply Chain for a Service Supplier Supplier }Storage Service Customer 6/23/14 Jinwook Lee 13

Importance of SCM - Firms have discovered value-enhancing and long-term benefits - Who benefits most? Firms with: - Large inventories - Large number of suppliers - Complex products - Customers with large purchasing budgets - Benefits - Lower purchasing/inventory costs, higher quality/customer service 6/23/14 Jinwook Lee 14

Phases in a Supply Chain Supply chain strategy or design How to structure the supply chain over the next several years Supply chain planning Decisions over the next quarter or year Supply chain operation Daily or weekly operational decisions 6/23/14 Jinwook Lee 15

The Value Chain 6/23/14 Jinwook Lee 16

Achieving Strategic Fit and Scope Strategic fit competitive and supply chain strategies have aligned goals A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy 6/23/14 Jinwook Lee 17

How is Strategic Fit Achieved? 1. Understanding the customer and supply chain uncertainty 2. Understanding the supply chain 3. Achieving strategic fit 6/23/14 Jinwook Lee 18

Strategies for SCM All of the advanced strategies, techniques, and approaches for SCM are focused on: - Global optimization - Managing uncertainty 6/23/14 Jinwook Lee 19

Sequential vs. Global Optimization Sequential Optimization Procurement Planning Manufacturing Planning Distribution Planning Demand Planning Global Optimization Supply Contracts/Collaboration/Information Systems and DSS Procurement Planning Manufacturing Planning Distribution Planning Demand Planning 6/23/14 Jinwook Lee 20

Why is Global Optimization Hard? - The supply chain is complex. - Different facilities have conflicting objectives. - The supply chain is a dynamic system. - The power structure changes. - The system varies over time. - And, more importantly, there is always uncertainty and risk!! 6/23/14 Jinwook Lee 21

Level of Demand Uncertainty 6/23/14 Jinwook Lee 22

Decision making in SCM - SCM, as we ve seen, is all about integration. - How do we make the right decision over a complex system where many business entities are involved? 6/23/14 Jinwook Lee 23

Linear Programming - People are interested in finding way to the best outcome. In business, we want to find out the optimal solution to maximize profit or minimize cost. - Mathematical programming (or optimization) is the action of choosing the best solution of the objective given a defined domain limitations. - If the objective and domain are linear functions, then the associated optimization problem is called linear programming or LP. 6/23/14 Jinwook Lee 24

Linear Programming - LP is the problem of minimizing (maximizing) a linear cost (profit) function subject to linear equalities or inequalities (socalled constraints). - Linear function - A function f is linear if the followings are satisfied: 1. f(x+y) = f(x) + f(y) for all x, y in the same size vector space 2. f(cx) = cf(x) for any real number c 6/23/14 Jinwook Lee 25

Linear Programming - Major components for LP - Decision variables - Objective function - Constraints - Four assumptions of LP 1. Proportionality 2. Additivity 3. Divisibility 4. Certainty 6/23/14 Jinwook Lee 26

A very simple example (Production Planning) Suppose GM makes a profit of $200 on each Chevy, $300 on each Buick, $500 on each Cadillac. - These get 20, 18, 16 miles per gallon, respectively. And Congress insists that the average mileage of these must get 18 at least. - The plant can assemble a Chevy in 1 minute, a Buick in 2 minutes, a Cadillac in 3 minutes. What is the optimal solution to maximize profit in 8 hours? 6/23/14 Jinwook Lee 27

- 1 st step is always to define decision variables: Let x i denote the number of Chevy, Buick, Cadillac, i=1,2,3, respectively. - 2 nd step is to find a formulation of objective function: Maximize 200 x 1 + 300 x 2 + 500 x 3-3 rd step to to find a set of constraints: a) Mileage: b) Time limit: c) Nonnegativity: 6/23/14 Jinwook Lee 28

Then, we can write the complete LP model as: 6/23/14 Jinwook Lee 29

A bit tricky but still simple example (Another Production Planning Problem) Chandler Oil has 5000 barrels of type 1 crude oil and 10000 barrels of type 2 crude oil available. Chandler sells both gasoline and heating oil, which are produced by blending together the two types of crude oil (in addition to other processes not mentioned here). Each barrel of type 1 crude oil has quality level of 10; each barrel of type 2 crude oil has a quality level 5. Gasoline must have a quality level of at least 8, and heating oil must have a quality level of at least 6. Gasoline and heating oil sell for $25 and $20 per barrel, respectively. Selling each barrel of gasoline incurs an advertising cost of $0.20, and selling each barrel of heating oil incurs an advertising cost of $0.10. Assume that Chandler can sell as much of both products as it is able to produce. Within its existing supplies of crude oil, how much of each product should Chandler sell to maximize its profit? 6/23/14 Jinwook Lee 30

- 1 st step is always to define decision variables: - 2 nd step is to find a formulation of objective function: - 3 rd step to to find a set of constraints: 6/23/14 Jinwook Lee 31

Then, we can write the complete LP model as: 6/23/14 Jinwook Lee 32

The Transportation Problem (general case) The Brazilian coffee company processes coffee beans into coffee at m plants. The coffee is then shipped every week to n warehouses in major cities for retail, distribution, and exporting. Suppose that the unit shipping cost from plant i to warehouse j is c ij. Furthermore, suppose that the production capacity at plant i is a i and that the demand at warehouse j is b j. It is desired to find the production-shipping pattern x ij from plant i to ware house j, i=1,, m, j=1,, n, which minimizes the overall shipping cost. This is the well-known transportation problem, and this can be formulated as a linear program. 6/23/14 Jinwook Lee 33

The Transportation Problem (general case) This problem can be written up as: 6/23/14 Jinwook Lee 34

Two Interconnected Transportation Problem Consolidated Mining Company mines zinc ore at two locations: Blue Mesa (New Mexico) and Dry Pass (Washington State). Once mined, each ton of ore must be moved to one of two processing plants, one near Boise (Idaho), and the other in West Texas. The processed ore is then shipped to three customers, Galvanic Industries, MunchCo, and American Metals. These customers require 600, 400, and 700 tons per day of processed ore, respectively. Blue Mesa can produce up to 800 tons of ore per day at a cost of $12/ton. Dry pass can produce up to 1000 tons of ore per day at a cost of $10/ton. The Boise plant can process up to 1000 tons of ore per day at a cost of $17/ton. The West Texas plant can handle up to 700 tons per day at $15/ton. 6/23/14 Jinwook Lee 35

Two Interconnected Transportation Problem Shipping costs per ton between the mines, plants, and customers are given in the following two tables: Shipping cost to From Mine Boise West TX Blue Mesa $4.50 $3.00 Dry Pass $3.50 $6.00 Shipping cost from To Customer Boise West TX Galvanic $2.25 $5.75 MunchCo $3.35 $2.95 American Metals $6.00 $7.10 What pattern of production, processing, and shipping will allow the firm to meet customer demands at the lowest possible cost? 6/23/14 Jinwook Lee 36

Two Interconnected Transportation Problem For this type of problem, drawing may be helpful to get some idea to formulate a suitable LP problem: 6/23/14 Jinwook Lee 37

Two Interconnected Transportation Problem Decision variables: Objective function: Constraints: 6/23/14 Jinwook Lee 38

Two Interconnected Transportation Problem Then, we can write the complete LP model as: 6/23/14 Jinwook Lee 39

Capital Budgeting Problem A municipal construction project has funding requirements over the next four years of $2 million, $8 million, and $5 million, respectively. Assume that all of the money for a given year is required at the beginning of the year. The city intends to sell exactly enough long-term bonds to cover the project funding requirements, and all of these bonds, regardless of when they are sold, will be paid off (mature) on the same date in a distant future year. The long term bond market interest rates (that is, the costs of selling bonds) for the next four years are projected to be 7 percent, 6 percent, 6.5 percent, and 7.5 percent, respectively. Bond interest paid will commence one year after the project is complete and will continue over 20 years, after which the bonds will be paid off. During the same period, the short term interest rates on time deposits (that is, what the city can earn on deposits) are projected to be 6 percent, 5.5 percent, and 4.5 percent, respectively (the city will clearly not invest money in short term deposits during the fourth year). What is the city s optimal strategy for selling bonds and depositing funds in time accounts in order to complete the construction project? 6/23/14 Jinwook Lee 40

Decision variables: Capital Budgeting Problem Objective function: Constraints: 6/23/14 Jinwook Lee 41

Capital Budgeting Problem Then, we can write the complete LP model as: 6/23/14 Jinwook Lee 42