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Lecture-1 slide.pdf

  1. 1. The Supply Chain Dynamics David Simchi-Levi Professor of Engineering Systems Massachusetts Institute of Technology Tel: 617-253-6160 E-mail: dslevi@mit.edu
  2. 2. ©Copyright 2021 D. Simchi-Levi Outline of the Presentation  The Bullwhip Effect  Causes  Impact  Strategies
  3. 3. ©Copyright 2021 D. Simchi-Levi The Bullwhip Effect and its Impact on the Supply Chain • Consider the order pattern of a single color television model sold by a large electronics manufacturer to one of its accounts, a national retailer. Figure 1. Order Stream Huang at el., Working paper, Philips Lab
  4. 4. ©Copyright 2021 D. Simchi-Levi Figure 2. Point-of-sales Data-Original Figure 3. POS Data After Removing Promotions The Bullwhip Effect and its Impact on the Supply Chain
  5. 5. ©Copyright 2021 D. Simchi-Levi Figure 4. POS Data After Removing Promotion & Trend The Bullwhip Effect and its Impact on the Supply Chain
  6. 6. ©Copyright 2021 D. Simchi-Levi Higher Variability in Orders Placed by Computer Retailer to Manufacturer Than Actual Sales Retail sales versus Orders to PC Manufacturers
  7. 7. ©Copyright 2021 D. Simchi-Levi Increasing Variability of Orders Up the Supply Chain Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
  8. 8. ©Copyright 2021 D. Simchi-Levi We Conclude …. • Order Variability is amplified up the supply chain; upstream echelons face higher variability. • What you see is not what they face.
  9. 9. ©Copyright 2021 D. Simchi-Levi The Bullwhip Effect Customers Retailers P&G
  10. 10. ©Copyright 2021 D. Simchi-Levi What are the Causes…. • Promotional sales • Volume and Transportation Discounts – Forward Buying: Forward buying involves purchasing during manufacturer promotional periods enough products to meet retailer demands for many months • Inflated orders - IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas - Same with Motorola’s Cellular phones
  11. 11. ©Copyright 2021 D. Simchi-Levi What are the Causes…. • Single retailer, single manufacturer. – Retailer observes customer demand, Dt. – Retailer orders qt from manufacturer. Retailer Manufacturer Dt qt L
  12. 12. ©Copyright 2021 D. Simchi-Levi Order-up-to-Policy L z L B σ µ + = • = Expected daily demand • = Standard deviation of daily demand • L = Lead Time • z = Safety Factor µ σ
  13. 13. ©Copyright 2021 D. Simchi-Levi What are the Causes…. • Promotional sales • Volume and Transportation Discounts • Inflated orders • Demand Forecast • Long cycle times
  14. 14. ©Copyright 2021 D. Simchi-Levi What are the Causes…. • Single retailer, single manufacturer. – Retailer observes customer demand, Dt. – Retailer orders qt from manufacturer. Retailer Manufacturer Dt qt L
  15. 15. ©Copyright 2021 D. Simchi-Levi Var(q)/Var(D): For Various Lead Times L=5 L=3 L=1 0 2 4 6 8 10 12 14 0 5 10 15 20 25 30 L=5 L=3 L=1 Var(Q) Var(D) Number of (Monthly) Demand Data used to Generate a Forecast
  16. 16. ©Copyright 2021 D. Simchi-Levi What are the Causes…. • Single retailer, single manufacturer. – Retailer observes customer demand, Dt. – Retailer orders qt from manufacturer. Retailer Manufacturer Dt qt L
  17. 17. ©Copyright 2021 D. Simchi-Levi Consequences…. • Increased safety stock • Reduced service level
  18. 18. ©Copyright 2021 D. Simchi-Levi Inventory and Service Levels Service Level L H H L Inventory Level 100% service level
  19. 19. ©Copyright 2021 D. Simchi-Levi Inventory and Service Levels Service Level L H H L Inventory Level 100% service level
  20. 20. ©Copyright 2021 D. Simchi-Levi Inventory and Service Levels Service Level L H H L Inventory Level For a given inventory level service level is reduced
  21. 21. ©Copyright 2021 D. Simchi-Levi Inventory and Service Levels Service Level L H H L Inventory Level For a given service level, inventory level is increased
  22. 22. ©Copyright 2021 D. Simchi-Levi Responsiveness Efficiency High Cost Low Cost Short Response Long Response A C B Current Strategy Trade-Offs between Responsiveness vs. Efficiency 22
  23. 23. ©Copyright 2021 D. Simchi-Levi • Single retailer, single manufacturer. – Retailer observes customer demand, Dt. – Retailer orders qt from manufacturer. Consequences…. Retailer Manufacturer Dt qt L
  24. 24. ©Copyright 2021 D. Simchi-Levi Consequences…. • Increased safety stock • Reduced service level • Inefficient allocation of resources • Increased transportation costs
  25. 25. ©Copyright 2021 D. Simchi-Levi Multi-Stage Supply Chains Consider a multi-stage supply chain: – Stage i places order qi to stage i+1. – Li is lead time between stage i and i+1. Retailer Stage 1 Manufacturer Stage 2 Supplier Stage 3 qo=D q1 q2 L1 L2
  26. 26. ©Copyright 2021 D. Simchi-Levi Multi-Stage Systems:Var(qk)/Var(D) 0 5 10 15 20 25 30 0 5 10 15 20 25 Dec, k=5 Cen, k=5 Dec, k=3 Cen, k=3 k=1
  27. 27. ©Copyright 2021 D. Simchi-Levi The Bullwhip Effect: Managerial Insights • Exists, in part, due to the retailer’s need to estimate the mean and variance of demand. • The increase in variability is an increasing function of the lead time. • The more complicated the demand models, the greater the increase. • Centralized demand information can reduce the bullwhip effect, but will not eliminate it.
  28. 28. ©Copyright 2021 D. Simchi-Levi Coping with the Bullwhip Effect in Leading Companies • Reduce Variability and Uncertainty - POS - Sharing Information - Year-round low pricing • Reduce Lead Times - EDI - Cross Docking • Alliance Arrangements – Vendor managed inventory – On-site vendor representatives
  29. 29. ©Copyright 2021 D. Simchi-Levi Coping with the Bullwhip Effect in Leading Companies • Reduce Variability and Uncertainty - POS - Sharing Information - Year-round low pricing • Reduce Lead Times - EDI - Cross Docking • Alliance Arrangements – Vendor managed inventory – On-site vendor representatives
  30. 30. Source: Barilla SpA (A), Janice H. Hammond, Harvard
  31. 31. Exhibit 12 Weekly Demand for Barilla Dry Products from Cortese’s Northeast Distribution Center to the Pedrignano CDC, 1989. Source: Barilla SpA (A), Janice H. Hammond, Harvard
  32. 32. Implementation at a CPG Company Source: Barilla SpA (A), Janice H. Hammond, Harvard
  33. 33. Implementation at a CPG Company Source: Barilla SpA (A), Janice H. Hammond, Harvard
  34. 34. ©Copyright 2021 D. Simchi-Levi Inventory and Service Levels Service Level L H H L Inventory Level 100% service level
  35. 35. ©Copyright 2021 D. Simchi-Levi Inventory and Service Levels Service Level L H H L Inventory Level 100% service level
  36. 36. Source: Barilla SpA (A), Janice H. Hammond, Harvard
  37. 37. Source: Barilla SpA (A), Janice H. Hammond, Harvard
  38. 38. ©Copyright 2021 D. Simchi-Levi

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