supply chain question and need the explanation and answer to help me learn.
A chemical manufacturer is setting up capacity in Europe and North
America for the next three years. Annual demand in each market is
2 million kilograms (kg) and is likely to stay at that level. The two
choices under consideration are building 4 million units of capacity
in North America or building 2 million units of capacity in each of
the two locations. Building two plants will incur an additional one-
time cost of $2 million. The variable cost of production in North
America (for either a large or a small plant) is currently $10/kg,
whereas the cost in Europe is 9 euro/kg. The current exchange rate
is 1 euro for U.S. $1.33. Over each of the next three years, the
dollar is expected to strengthen by 10 percent, with a probability of
0.5, or weaken by 5 percent, with a probability of 0.5. Assume a
discount factor of 10 percent. What should the chemical
manufacturer do? At what initial cost differential from building the
two plants will the chemical manufacturer be indifferent between
the two options?
Week 8: Global SC Network48
Example 1
Requirements: no limit | .doc file
BANA 290: Supply Chain AnalyticsSpring 2023Week 8: Global SC Network 1Week 8: Global SC Network This Photoby Unknown Author is licensed under CC BY-SA-NC
2AgendaWeek 8: Global SC Network •Chapter 6: Global Supply Chain Network–Costs Elements in Global Sourcing–Risks in Global Supply Chains–Decisions Tree application in designing SC under uncertainty–Models for Facility Location and Capacity Allocation•Chapter10:CoordinationinSupplyChain–Bullwhip Effect•Chapter17:Sustainability inSC–The Role of Sustainability–Sustainability and SC Drivers•Simulation Game Preparation•Homework–HW #5
Impact of Globalization on Supply Chain Networks (1 of 2)•Opportunities to simultaneously increase revenues and decrease costs•Accompanied by significant additional risk and uncertainty•Difference between success and failure often the ability to incorporate suitable risk mitigation into supply chain design•Uncertainty of demand and price drives the value of building flexible production capacityWeek 8: Global SC Network 3
Impact of Globalization on Supply Chain Networks (2 of 2)Table 6-1 Results of Accenture Survey on Sources of Risk That Affect Global Supply Chain PerformanceRisk FactorsPercentage of Supply Chains AffectedNatural disasters35Shortage of skilled resources24Geopolitical uncertainty20Terrorist infiltration of cargo13Volatility of fuel prices37Currency fluctuation29Port operations/custom delays23Customer/consumer preference shifts23Performance of supply chain partners38Logistics capacity/complexity33Forecasting/planning accuracy30Supplier planning/communication issues27Inflexible supply chain technology21Week 8: Global SC Network 4
Importance of Total Cost (1 of 4)•Quantify the benefits of offshore production along with the reasons•Two reasons offshoring fails1.Focusing exclusively on unit cost rather than total cost2.Ignoring critical risk factorsWeek 8: Global SC Network 5
Importance of Total Cost (2 of 4)Table 6-2 Dimensions to Consider When Evaluating Total Cost from Offshoring Performance DimensionActivity Affecting PerformanceImpact of OffshoringOrder communicationOrder placementMore difficult communicationSupply chain visibilityScheduling and expeditingPoorer visibilityRaw material costsSourcing of raw materialCould go either way depending on raw material sourcingUnit costProduction, quality (production and transportation)Labor/fixed costs decrease; quality may sufferFreight costsTransportation modes and quantityHigher freight costs Taxes and tariffsBorder crossingCould go either waySupply lead timeOrder communication, supplier production scheduling, production time, customs, transportation, receivingLead time increase results in poorer forecasts and higher inventoriesWeek 8: Global SC Network 6
Importance of Total Cost (3 of 4)Table 6-2 [Continued]Performance DimensionActivity Affecting PerformanceImpact of OffshoringOn-time delivery/lead time uncertaintyProduction, quality, customs, transportation, receivingPoorer on-time delivery and increased uncertainty resulting in higher inventory and lower product availabilityMinimum order quantityProduction, transportationLarger minimum quantities increase inventoryProduct returnsQualityIncreased returns likelyInventoriesLead times, inventory in transit and productionIncreaseWorking capitalInventories and financial reconciliationIncreaseHidden costsOrder communication, invoicing errors, managing exchange rate riskHigher hidden costsStockoutsOrdering, production, transportation with poorer visibilityIncreaseWeek 8: Global SC Network 7
Importance of Total Cost (4 of 4)•Key elements of off-shoring total cost (Ferreira & Prokopets,2009)1.Supplier price2.Terms3.Delivery costs4.Inventory and warehousing5.Cost of quality6.Customs duties, value added-taxes, local tax incentives7.Cost of risk, procurement staff, broker fees, infrastructure, and tooling and mold costs8.Exchange rate trends and their impact on costWeek 8: Global SC Network 8
Risk Management in Global Supply Chains(1 of 6)•Risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations•Critical for global supply chains to be aware of the relevant risk factors and build in suitable mitigation strategiesWeek 8: Global SC Network 9
Risk Management in Global Supply Chains(2 of 6)Table 6-3 Supply Chain Risks to Be Considered During Network DesignCategoryRisk DriversDisruptionsNatural disaster, war, terrorism Labor disputesSupplier bankruptcyDelaysHigh capacityutilization at supply source Inflexibility of supply source Poor quality or yield at supply sourceSystems riskInformation infrastructure breakdown System integration or extent of systems being networkedForecast riskInaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base Information distortionWeek 8: Global SC Network 10
Risk Management in Global Supply Chains(3 of 6)Table 6-3 [Continued]CategoryRisk DriversIntellectual property riskVertical integration of supply chainGlobal outsourcing and marketsProcurement riskExchange-rate riskPrice of inputs Fraction purchased from a single source Industry-wide capacity utilizationReceivables riskNumber of customersFinancial strength of customersInventory riskRate of product obsolescence Inventory holding cost Product value Demand and supply uncertaintyCapacity riskCost of capacityCapacity flexibilityWeek 8: Global SC Network 11
Risk Management in Global Supply Chains(4 of 6)•Good network design can play a significant role in mitigating supply chain risk•Every mitigation strategy comes at a price and may increase other risks•Global supply chains should generally use a combination of rigorously evaluated mitigation strategies along with financial strategies to hedge uncovered risksWeek 8: Global SC Network 12
Risk Management in Global Supply Chains(5 of 6)Table 6-4 Tailored Risk Mitigation Strategies During Network DesignRisk Mitigation StrategyTailored StrategiesIncrease capacityFocus on low-cost, decentralized capacity for predictable demand. Build centralized capacity for unpredictable demand. Increase decentralization as cost of capacity drops.Get redundant suppliersMore redundant supply for high-volume products, less redundancy for low-volume products. Centralize redundancy for low-volume products in a few flexible suppliers.Increase responsivenessFavor cost over responsiveness for commodity products. Favor responsiveness over cost for short–life cycle products.Week 8: Global SC Network 13
Risk Management in Global Supply Chains(6 of 6)Table 6-4 [Continued]Risk Mitigation StrategyTailored StrategiesIncrease inventoryDecentralize inventory of predictable, lower value products. Centralize inventory of less predictable, higher value products.Increase flexibilityFavor cost over flexibility for predictable, high-volume products. Favor flexibility for unpredictable, low-volume products. Centralize flexibility in a few locations if it is expensive.Pool or aggregate demandIncrease aggregation as unpredictability grows.Increase source capabilityPrefer capability over cost for high-value, high-risk products. Favor cost over capability for low-value commodity products. Centralize high capability in flexible source if possible.Week 8: Global SC Network 14
Risk and Mitigations in Global SCThe performance of a global supply chain is affected by risk and uncertainty in a number ofinput factors such as supply, demand, price, exchange rates, and other economic factors. These risks can be mitigated by building suitable flexibility in the supply chain network. Operational strategies that help mitigate risk in global supply chains include carrying excess capacity and inventory, flexible capacity, redundant suppliers, improved responsiveness, and aggregation of demand. Hedging fuel costs and currencies are financial strategies that can help mitigate risk. It is important to keep in mind that no risk mitigation strategy will always pay off. These mitigation strategies are designed to guard against certain extreme states of the world that may arise in an uncertain global environment.Week 8: Global SC Network 15
Using Decision Trees (1 of 2)❑Several different decisions❑Should the firm sign a long-term contract for warehousing space or get space from the spot market as needed?❑What should the firm’s mix of long-term and spot market be in the portfolio of transportation capacity?❑How much capacity should various facilities have? What fraction of this capacity should be flexible?Week 8: Global SC Network 16
Using Decision Trees (2 of 2)•Executives need a methodology that allows them to estimate global currency instability, unpredictable commodities costs, uncertainty about customer demand, political or social unrest in key markets, and potential changes in government regulations the uncertainty in demand and price forecastWeek 8: Global SC Network 17
Discounted Cash Flows•Supply chain decisions should be evaluated as a sequence of cash flows over time•Discounted cash flow (DCF) analysis evaluates the present value of any stream of future cash flows and allows managers to compare different cash flow streams in terms of their financial value•Based on the time value of money –a dollar today is worth more than a dollar tomorrowWeek 8: Global SC Network 18
Discounted Cash Flow AnalysisWhereC0, C1,…,CTis stream of cash flows over TperiodsNPV = net present value of this streamK = rate of return•Compare NPV of different supply chain design options•The option with the highest NPV will provide the greatest financial returnWeek 8: Global SC Network 19
Trips Logistics Example (1 of 3)•Demand = 100,000 units•1,000 sq. ft. of space for every 1,000 units of demand•Revenue = $1.22 per unit of demand•Sign a three-year lease or obtain warehousing space on the spot market?•Three-year lease cost = $1 per sq. ft.•Spot market cost = $1.20 per sq. ft.•k= 0.1Week 8: Global SC Network 20
Trips Logistics Example (2 of 3)Expected annual profit if Warehousing space is obtained=(100,000 ×$1.22) −(100,000 ×$1.20)from spot market=$2,000Option 1: Rent annually with a higher rent price ($1.2/sqft)Week 8: Global SC Network 21
Trips Logistics Example (3 of 3)Expected annual profit with Three yearlease=(100,000 ×$1.22) −(100,000 ×$1.00)=$22,000NPV of signing lease is $60,182 −$5,471 = $54,711 higher than spot marketOption 1I: Sign a Three-Year Contract ($1.0/sqft)Week 8: Global SC Network 22
Basics of Decision Tree Analysis•A decision tree is a graphic device used to evaluate decisions under uncertainty¥Identify the number and duration of time periods that will be considered (T)¥Identify factors that will affect the value of the decision and are likely to fluctuate over the next Tperiods¥Evaluate decision using a decision treeWeek 8: Global SC Network 23
Decision Tree Methodology1.Identify the duration of each period (month, quarter, etc.) and the number of periods Tover which the decision is to be evaluated2.Identify factors whose fluctuation will be considered3.Identify representations of uncertainty for each factor4.Identify the periodic discount rate kfor each period5.Represent the decision tree with defined states in each period as well as the transition probabilities between states in successive periods6.Starting at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each stepWeek 8: Global SC Network 24
Decision Tree –Trips Logistics (1 of 3)•Trips Logistics warehouse lease options1.Get all warehousing space from the spot market as needed2.Sign a three-year lease for a fixed amount of warehouse space and get additional requirements from the spot market3.Sign a flexible lease with a minimum charge that allows variable usage of warehouse space up to a limit, with additional requirement from the spot marketWeek 8: Global SC Network 25
Decision Tree –Trips Logistics (2 of 3)•1000 sq. ft. of warehouse space needed for 1000 units of demand•Current demand = 100,000 units per year•Binomial uncertainty: Demandcan go up by 20% with p= 0.5 or down by 20% with 1 − p= 0.5•Lease price = $1.00 per sq. ft. per year•Spot market price = $1.20 per sq. ft. per year•Spot prices can go up by 10% with p= 0.5 or down by 10% with 1 − p= 0.5•Revenue = $1.22 per unit of demand•k= 0.1Week 8: Global SC Network 26
Decision Tree (3 of 3)Figure 6-2 Decision Tree for Trips Logistics, Considering Demand and Price FluctuationWeek 8: Global SC Network 27
Evaluating the Spot Market Option•Analyze the option of not signing a lease and using the spot market•Start with Period 2 and calculate the profit at each nodeFor D= 144, p= $1.45, in Period 2:C(D= 144, p= 1.45,2) = 144,000 ×1.45= $208,800P(D= 144, p= 1.45,2) = 144,000 ×1.22−C(D= 144, p= 1.45, 2)= 175,680 −208,800= −$33,120Week 8: Global SC Network 28
Evaluating the Spot Market OptionTable 6-5 Period 2 Calculations for Spot Market OptionBlankRevenueCostC(D=, p=, 2)ProfitP(D=, p=, 2)D= 144, p= 1.45144,000 ×1.22144,000 ×1.45−$33,120D= 144, p= 1.19144,000 ×1.22144,000 ×1.19$4,320D= 144, p= 0.97144,000 ×1.22144,000 ×0.97$36,000D= 96, p= 1.4596,000 ×1.2296,000 ×1.45−$22,080D= 96, p= 1.1996,000 ×1.2296,000 ×1.19$2,880D= 96, p= 0.9796,000 ×1.2296,000 ×0.97$24,000D= 64, p= 1.4564,000 ×1.2264,000 ×1.45−$14,720D= 64, p= 1.1964,000 ×1.2264,000 ×1.19$1,920D= 64, p= 0.9764,000 ×1.2264,000 ×0.97$16,000Week 8: Global SC Network 29
Decision TreeFigure 6-2 Decision Tree for Trips Logistics, Considering Demand and Price Fluctuation−$33,120$4,320−$22,080$2,880Week 8: Global SC Network 30
Evaluating the Spot Market Option•Expected profit at each node in Period 1 is the profit during Period 1 plus the present value of the expected profit in Period 2•Expected profit EP(D=, p=, 1) at a node is the expected profit over all four nodes in Period 2 that may result from this node•PVEP(D=, p=, 1) is the present value of this expected profit and P(D=, p=, 1), and the total expected profit, is the sum of the profit in Period 1 and the present value of the expected profit in Period 2Week 8: Global SC Network 31
Evaluating the Spot Market Option•From node D= 120, p= $1.32 in Period 1, there are four possible states in Period 2•Evaluate the expected profit in Period 2 over all four states possible from node D= 120, p= $1.32 in Period 1 to beEP(D= 120, p= 1.32,1) = 0.25 ×[P(D= 144, p= 1.45,2) + P(D= 144, p= 1.19,2)+ P(D= 96, p= 1.45,2)+ P(D= 96, p= 1.19,2)= 0.25 ×[−33,120 + 4,320 − 22,080 + 2,880]= −$12,000Week 8: Global SC Network 32
Evaluating the Spot Market Option The present value of this expected value in Period 1 isWeek 8: Global SC Network 33
Evaluating the Spot Market Option •The total expected profit P(D = 120, p= 1.32,1) at node D= 120, p= 1.32 in Period 1 is the sum of the profit in Period 1 at this node, plus the present value of future expected profits possible from this nodeWeek 8: Global SC Network 34
Decision TreeFigure 6-2 Decision Tree for Trips Logistics, Considering Demand and Price Fluctuation−$33,120$4,320−$22,080$2,880EP=-$12,000PVEP =-$10,909P=-$22,909Week 8: Global SC Network 35
Evaluating the Spot Market Option (7 of 9)Table 6-6 Period 1 Calculations for Spot Market Option NodeEP(D=, p=, 1)P(D=, p=, 1)= D×1.22 –Dx p+ start fraction E P at left parenthesis D =, p =, 1 right parenthesis over left parenthesis 1 + k right parenthesis end fractionD= 120, p= 1.32−$12,000−$22,909D= 120, p= 1.08$16,000$32,073D= 80, p= 1.32−$8,000−$15,273D= 80, p= 1.08$11,000$21,382Week 8: Global SC Network 36
Evaluating the Spot Market Option•For Period 0, the total profit P(D = 100, p= 120,0) is the sum of the profit in Period 0 and the present value of the expected profit over the four nodes in Period 1EP(D= 100, p= 1.20,0) = 0.25 ×[P(D= 120, p= 1.32,1)+ P(D= 120, p= 1.08,1)+ P(D= 96, p= 1.32,1)+ P(D= 96, p= 1.08,1)]= 0.25 ×[−22,909 + 32,073− 15,273) + 21,382]= $3,818Week 8: Global SC Network 37
Evaluating the Spot Market Option (9 of 9)P(D = 100, p = 1.20,0) = (100,000 ×1.22) − (100,000 ×1.20)+ P V E P(D = 100, p = 1.20,0)= $2,000 + $3,471 = $5,471Therefore, the expected NPV of not signing the lease and obtaining all warehouse space from the spot market is given by NPV (Spot Market) = $5,471Week 8: Global SC Network 38
Decision TreeFigure 6-2 Decision Tree for Trips Logistics, Considering Demand and Price Fluctuation−$33,120$4,320−$22,080$2,880EP=-$12,000PVEP =-$10,909P=-$22,909PVEP =$3,472EP =$3,818P=$5,471Week 8: Global SC Network 39
Evaluating the Fixed Lease Option (1 of 5)Table 6-7 Period 2 Profit Calculations at Trips Logistics for Fixed Lease OptionNodeLeased SpaceWarehouse Spaceat SpotPrice (S)ProfitP(D=, p=, 2)= D×1.22 −(100,000 ×1 + Sx p)D= 144, p= 1.45100,000 sq.ft.44,000 sq.ft.$11,880D= 144, p= 1.19100,000 sq.ft.44,000 sq.ft.$23,320D= 144, p= 0.97100,000 sq.ft.44,000 sq.ft.$33,000D= 96, p= 1.45100,000 sq.ft.0 sq.ft.$17,120D= 96, p= 1.19100,000 sq.ft.0 sq.ft.$17,120D= 96, p= 0.97100,000 sq.ft.0 sq.ft.$17,120D= 64, p= 1.45100,000 sq.ft.0 sq.ft.−$21,920D= 64, p= 1.19100,000 sq.ft.0 sq.ft.−$21,920D= 64, p= 0.97100,000 sq.ft.0 sq.ft.−$21,920Week 8: Global SC Network 40
Evaluating the Fixed Lease Option (2 of 5)Table 6-8 Period 1 Profit Calculations at Trips Logistics for Fixed Lease OptionNodeEP(D=, p=, 1)Warehouse Spaceat SpotPrice (S)P(D=, p=, 1)= Dx 1.22−(100,000 x 1 + Sx p) + EP(D=,p= ,1)/(1 + k)D= 120, p= 1.320.25 ×[P(D= 144, p= 1.45,2) + P(D= 144, p= 1.19,2) + P(D= 96, p= 1.45,2) + P(D= 96, p= 1.19,2)] = 0.25 ×(11,880 + 23,320 + 17,120 + 17,120) = $17,36020,000$35,782D= 120, p= 1.080.25 ×(23,320 + 33,000 + 17,120 + 17,120) = $22,64020,000$45,382D= 80, p= 1.320.25 ×(17,120 + 17,120−21,920 −21,920) = −$2,4000−$4,582D= 80, p= 1.080.25 ×(17,120 + 17,120 −21,920 −21,920) = −$2,4000−$4,582Week 8: Global SC Network 41
Evaluating the Fixed Lease Option (3 of 5)•Using the same approach for the lease option, NPV (Lease) = $38,364EP(D= 100, p= 1.20,0) = 0.25 ×[P(D= 120, p= 1.32,1) + P(D= 120, p= 1.08,1) + P(D= 80, p= 1.32,1) + P(D= 80, p= 1.08,1)]= 0.25 ×[35,782 + 45,382 − 4,582 − 4,582]= $18,000Week 8: Global SC Network 42
Evaluating the Fixed Lease Option (4 of 5)P(D= 100, p= 1.20,0) = (100,000 ×1.22) − (100,000 ×1)+ PVEP(D= 100, p= 1.20,0)= $22,000 + $16,364 = $38,364Week 8: Global SC Network 43
Evaluating the Fixed Lease Option (5 of 5)•Recall that when uncertainty was ignored, the NPV for the lease option was $60,182•However, the manager would probably still prefer to sign the three-year lease for 100,000 sq. ft. because this option has the higher expected profitWeek 8: Global SC Network 44
Evaluating the Flexible Lease Option (1 of 2)Table 6-9 Period 2 Profit Calculations at Trips Logistics with Flexible Lease Contract NodeWarehouse Space at $1 (W)Warehouse Spaceat SpotPrice (S)ProfitP(D=, p=, 2)= D×1.22 −(W×1 + S×p)D= 144, p= 1.45100,000 sq.ft.44,000 sq.ft.$11,880D= 144, p= 1.19100,000 sq.ft.44,000 sq.ft.$23,320D= 144, p= 0.97100,000 sq.ft.44,000 sq.ft.$33,000D= 96, p= 1.4596,000 sq.ft.0 sq.ft.$21,120D= 96, p= 1.1996,000 sq.ft.0 sq.ft.$21,120D= 96, p= 0.9796,000 sq.ft.0 sq.ft.$21,120D= 64, p= 1.4564,000 sq.ft.0 sq.ft.$14,080D= 64, p= 1.1964,000 sq.ft.0 sq.ft.$14,080D= 64, p= 0.9764,000 sq.ft.0 sq.ft.$14,080Week 8: Global SC Network 45
Evaluating the Flexible Lease Option (2 of 2)Table 6-10 Period 1 Profit Calculations at Trips Logistics with Flexible Lease ContractNodeEP(D=, p=, 1)Warehouse Space at $1 (W)Warehouse Spaceat SpotPrice (S)P(D=, p=, 1)= D×1.22 −(Wx 1 + Sx p) + EP(D=,p= ,1)(1 + k)D= 120, p= 1.320.25 ×(11,880 + 23,320 + 21,120 + 21,120) = $19,360100,00020,000$37,600D= 120, p= 1.080.25 ×(23,320 + 33,000 + 21,120 + 21,120) = $24,640100,00020,000$47,200D= 80, p= 1.320.25 ×(21,120 + 21,120 + 14,080 + 14,080) = $17,60080,0000$33,600D= 80, p= 1.080.25 ×(21,920 + 21,920 + 14,080 + 14,080) = $17,60080,0000$33,600Week 8: Global SC Network 46
Decision Tree –Trips Logistics (3 of 3)Table 6-11 Comparison of Different Lease Options for Trips LogisticsOptionValueAll warehouse space from the spot market$5,471Lease 100,000 sq. ft. for three years$38,364Flexible lease to use between 60,000 and 100,000 sq. ft.$46,545Week 8: Global SC Network 47
A chemical manufacturer is setting up capacity in Europe and North America for the next three years. Annual demand in each market is 2 million kilograms (kg) and is likely to stay at that level. The two choices under consideration are building 4 million units of capacity in North America or building 2 million units of capacity in each of the two locations. Building two plants will incur an additional one-time cost of $2 million. The variable cost of production in North America (for either a large or a small plant) is currently $10/kg, whereas the cost in Europe is 9 euro/kg. The current exchange rate is 1 euro for U.S. $1.33. Over each of the next three years, the dollar is expected to strengthen by 10 percent, with a probability of 0.5, or weaken by 5 percent, with a probability of 0.5. Assume a discount factor of 10 percent. What should the chemical manufacturer do? At what initial cost differential from building the two plants will the chemical manufacturer be indifferent between the two options?Week 8: Global SC Network 48Example 1
Problem 6-1:Moon Micro is a small manufacturer of servers that currently builds its entire product in Santa Clara, California. As the market for servers has grown dramatically, the Santa Clara plant has reached capacity of 10,000 servers per year. Moon is considering two options to increase its capacity. The first option is to add 10,000 units of capacity to the Santa Clara plant at an annualized fixed cost of $10 million plus $500 labor per server. The second option is to have Molectron, an independent assembler, manufacture servers for Moon at a cost of $2,000 for each server (excluding raw materials cost). Raw materials cost $8,000 per server, and Moon sells each server for $15,000.Moon must make this decision for a two-year time horizon. During each year, demand for Moon servers has an 80 percent chance of increasing 50 percent from the year before and a 20 percent chance of remaining the same as the year before. Molectron’sprices may change as well. They are fixed for the first year but have a 50 percent chance of increasing 20 percent in the second year and a 50 percent chance of remaining where they are.Use a decision tree to determine whether Moon should add capacity to its Santa Clara plant or if it should outsource to Molectron. What are some other factors that we have not discussed that would affect this decision?Week 8: Global SC Network 49Example 2
Lack of Supply Chain Coordination and Its Impact on Performance❑Supply chain coordination –all stages of the chain take actions that are aligned and increase total supply chain surplus❑Requires that each stage share information and take into accountthe effects of its actions on the other stages❑Lack of coordination results when:❑Objectives of different stages conflict❑Information moving between stages is delayed or distortedWeek 8: Global SC Network 50
Bullwhip Effect (1 of 2)•Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers•Distorts demand information within the supply chain•Results from a loss of supply chain coordinationWeek 8: Global SC Network 51
Bullwhip Effect (2 of 2)Figure 10-1Demand Fluctuation at Different Stages of a Supply ChainWeek 8: Global SC Network 52
The Effect on Performance (1 of 2)•Lack of coordination increases variability and hurts supply chain surplus•Impact on costs¥Manufacturing cost¥Inventory cost¥Replenishment lead time¥Transportation cost¥Labor cost for shipping and receiving¥Level of product availability¥Relationships across the supply chainWeek 8: Global SC Network 53
The Effect on Performance (2 of 2)Table 10-1 Impact of the Lack of Coordination on Supply Chain Performance Performance MeasureImpact of the Lack of CoordinationManufacturing costIncreasesInventory costIncreasesReplenishment lead timeIncreasesTransportation costIncreasesShipping and receiving costIncreasesLevel of product availabilityDecreasesProfitabilityDecreasesWeek 8: Global SC Network 54
Obstacles to Coordination in a Supply Chain•Incentive Obstacles•Information Processing Obstacles•Operational Obstacles•Pricing Obstacles•Behavioral ObstaclesWeek 8: Global SC Network 55
Incentive Obstacles❑Occur when incentives offered to different stages or participants in a supply chain leadto actions that increase variability and reduce total supply chain profits❑Local optimization within functions or stages of a supply chain❑Sales force incentivesWeek 8: Global SC Network 56
Information Processing Obstacles❑When demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain❑Forecasting based on orders and not customer demand❑Lack of information sharingWeek 8: Global SC Network 57
Operational Obstacles❑Occur when placing and filling orders lead to an increase in variability❑Ordering in large lots❑Large replenishment lead times❑Rationing and shortage gamingWeek 8: Global SC Network 58
Pricing Obstacles (1 of 2)❑When pricing policies for a product lead to an increase in variability of orders placed❑Lot-size based quantity decisions❑Price fluctuationsWeek 8: Global SC Network 59
Pricing Obstacles (2 of 2)Figure 10-3Retailer Sales and Manufacturer Shipments of SoupWeek 8: Global SC Network 60
Behavioral Obstacles (1 of 2)Problems in learning within organizations that contribute to information distortion1.Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages2.Different stages of the supply chain react to the current local situation rather than trying to identify the root causes3.Different stages of the supply chain blame one another for the fluctuationsWeek 8: Global SC Network 61
Behavioral Obstacles (2 of 2)4.No stage of the supply chain learns from its actions over time 5.A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performanceWeek 8: Global SC Network 62
Some Practical Approaches to Improve Supply Chain Coordination❑Continuous replenishment and vendor-managed inventories❑A single point of replenishment❑CRP –wholesaler or manufacturer replenishes based on POS data❑VMI –manufacturer or supplier is responsible for all decisions regarding inventory❑SubstitutesWeek 8: Global SC Network 63
BullwhipEffect andItsRemedies(Project Presentation Example)Week 8: Global SC Network 64
Week 8: Global SC Network 65
Role of Sustainability in a Supply ChainThe health and survival of every supply chain depends on the health of the surrounding worldExpand the goal of a supply chain beyond the interests of its participantsSustainable development –development that meets the needs of the present without compromising the ability of future generations to meet their own needsWeek 8: Global SC Network 66
Role of Sustainability in a Supply ChainThree pillars of sustainable developmentEconomic sustainabilityEnvironmental sustainabilitySocial sustainabilityFactor categories1.Reducing risk and improving the financial performance of the supply chain 2.Community pressures and government mandates 3.Attracting customers that value sustainabilityWeek 8: Global SC Network 67
Role of Sustainability in a Supply ChainMost effort expended in reducing riskActivity slow as actions may require upfront investmentBarriers to increased focus on sustainabilityInsufficient return on investmentCustomers’ unwillingness to pay a premium for green productsDifficulty evaluating sustainability across a product life cycle Week 8: Global SC Network 68
Key Pillars of SustainabilityMeasuring performance along all three pillars may be required to evaluate the impact of sustainability-related effortsTwo fundamental challenges for socialand environmentalpillarsScope of measurementAbsolute of relative measuresWeek 8: Global SC Network 69
Match pillars with SC drivers (Facilities, Inventory, Transportation, Sourcing, Information, Pricing)Measure environmental impact for each driver along each of the social and environmental categoriesClosed-Loop Supply ChainsImprove sustainability by designing products that use fewer resources and can be recycled and remanufactured Designing Sustainable ResourcesWeek 8: Global SC Network 70Potential Solutions
Global Supply Chain Management V2 SimulationHow to Play GuideWeek 8: Global SC Network 71
When companies provide extensive product options, it makes predicting and fulfilling customer demand highly complex. This simulation illustrates how a few key decisions can improve the ability of a company to accurately predict and fulfill demand. You have just been hired as the Supply Chain Manager responsible for production of two new lines of mobile phones. You will be able to make key decisions and see the impact of your decisions on the performance of your company over the span of 4 years. Week 8: Global SC Network 72Challenge
•You are in charge ofreleasing two models of mobile phones: •Model A, a base model•Model B, a high endmodel •Decide which features to include and with whom to outsource the work. Important Info:•Sales season is May through December—there is no demand before May or after December•Demand is anticipated to be consistent over these months You will be judged on the following criteria:Gross MarginNumber of Votes of Confidence by Board Members73Your ObjectivesWeek 8: Global SC Network
•Add up to four options to the base model •*Pay attention to the estimated change in demand created by each option, its impact on profit per unit, and other variables74Design RoomWeek 8: Global SC Network
•Predict the demand of the two phone models for each year•*Remember, demand is spread out evenly across all months from May to December. 75Forecasting RoomWeek 8: Global SC Network
•After choosing suppliers you will advance month by month and observe the accuracy of your forecasts•You will be able to change your production schedule, but this will require a significant payment to your suppliers 76Production RoomWeek 8: Global SC Network
•Review your financial performance •See how well your strategic choices have played out over the year based on Board Member feedback. Week 8: Global SC Network 77Board Room
•When the board meeting ends, return to the Design Room to start the next year •You will repeat the cycle of design, forecasting, production, and board evaluation for four years •Remember that you can track your progress using the scorecard on the left-hand side of the screen•You can refer to previous decisions you made by clicking on the Decision History section.Week 8: Global SC Network 78Good Luck!
Eachpersonshouldrunthesimulationindividuallyand fill out the “Recording Sheets” next session in the class, so make sure to have access to the simulation by next class sessionThenteamsgettogetherandprepare“TeamRecordingSheet”Teams will submit the “Team Recording Sheet” along with “Lessons Learned” report by 6/8/2023.Week 8: Global SC Network 79Grading
Team Assignment #2Week 8: Global SC Network 80Case Study: BioPharma,Inc. (Page 168)Updatetheprovidedcosts on Tables 6-19 and 6-20 based on the following Inflations of countries (find the 2022 costs using the following rates):Brazil: 8%Germany: 1%India: 5%Japan: 0%Mexico: 6%US: 3%Due date:6/1/2023, 11:00 PM
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