Supply Chain Management: Design, Coordination and Operation

764 Pages·2003·5.459 MB·English

by  S.C. Graves, and A.G. de Kok (Eds.)

Contents
CHAPTER 1
Introduction
A.G. de Kok and Stephen C. Graves 1
1. Introduction 1
2. Main business trends that created SCM 2
3. Outline of the volume 11
PART I Supply Chain Design
CHAPTER 2
Supply Chain Design and Planning – Applications of Optimization
Techniques for Strategic and Tactical Models
Ana Muriel and David Simchi-Levi 17
1. Introduction 17
Part I: Production/Distribution Systems
2. Introduction 19
3. Piece-wise linear concave costs 22
4. All-unit discount transportation costs 39
Part II: Pricing to improve supply chain performance
5. Introduction 65
6. Coordinating pricing and inventory decisions 66
7. Pricing models with production capacity limits 74
8. Computational results and insights 76
Part III: Supply chain design models
9. Introduction 77
10. The single-source capacitated facility location problem 78
11. A distribution system design problem 82
12. Conclusions 88
References 89
CHAPTER 3
Supply Chain Design: Safety Stock Placement and
Supply Chain Configuration
Stephen C. Graves and Sean P. Willems 95
v
vi Contents
1. Introduction 95
2. Approaches to safety stock placement 97
3. Model formulation 102
4. Heavy industry and consumer packaged goods example 107
5. Supply-chain configuration 120
6. Conclusion 129
References 131
CHAPTER 4
Supply Chain Design: Flexibility Considerations
J.W.M. Bertrand 133
1. Introduction 133
2. Conceptual research on manufacturing flexibility 135
3. The flexible machine investment problem; volume
and mix flexibility 142
4. Resource flexibility, range, mobility, uniformity
and throughput time 152
5. Empirical research on flexibility 161
6. Supply chain flexibility 164
7. Design for supply chain flexibility 172
8. Conclusion 191
References 193
CHAPTER 5
Design for Postponement
Jayashankar M. Swaminathan and Hau L. Lee 199
1. Introduction 199
2. Postponement enablers 201
3. Process standardization 202
4. Process resequencing 213
5. Component standardization 218
6. Related strategies and other benefits 221
7. Conclusions 223
References 224
PART II Supply Chain Coordination
CHAPTER 6
Supply Chain Coordination with Contracts
Ge´rard P. Cachon 229
1. Introduction 229
2. Coordinating the newsvendor 233
Contents vii
3. Coordinating the newsvendor with price-dependent demand 257
4. Coordinating the newsvendor with effort-dependent demand 264
5. Coordination with multiple newsvendors 271
6. Coordinating the newsvendor with demand updating 285
7. Coordination in the single-location base-stock model 292
8. Coordination in the two-location base-stock model 297
9. Coordination with internal markets 312
10. Asymmetric information 316
11. Conclusion 329
References 332
CHAPTER 7
Information Sharing and Supply Chain Coordination
Fangruo Chen 341
1. Introduction 341
2. Value of information 343
3. Incentives for sharing information 377
4. Future research 410
References 413
CHAPTER 8
Tactical Planning Models for Supply Chain Management
Jayashankar M. Swaminathan and Sridhar R. Tayur 423
1. Introduction 423
2. Notations used 427
3. Stationary and independent demand 428
4. Alternative demand assumptions 436
5. Generalizations 440
6. Applications 446
7. Conclusions and future directions 448
References 449
PART III Supply Chain Operations
CHAPTER 9
Planning Hierarchy, Modeling and Advanced
Planning Systems
Bernhard Fleischmann and Herbert Meyr 457
1. Types of supply chains 458
2. Supply chain planning 468
viii Contents
3. Advanced planning systems: General structure 480
4. Advanced planning systems: Particular systems 508
References 519
CHAPTER 10
Supply Chain Operations: Serial and Distribution
Inventory Systems
Sven Axsa¨ ter 525
1. Introduction 525
2. Different ordering policies 528
3. Serial systems 536
4. Order-up-to-S policies in distribution systems 541
5. Batch-ordering in distribution systems 551
6. Conclusions 554
References 556
CHAPTER 11
Supply Chain Operations: Assemble-to-Order Systems
Jing-Sheng Song and Paul Zipkin 561
1. Introduction 561
2. One-period models 563
3. Multi-period, discrete-time models 567
4. Continuous-time models 575
5. Research on system design 590
6. Summary and future directions 592
References 593
CHAPTER 12
Planning Supply Chain Operations: Definition and
Comparison of Planning Concepts
Ton G. de Kok and Jan C. Fransoo 597
1. Introduction 597
2. The hierarchical nature of SCP 608
3. Constraints for SCOP 618
4. Mathematical programming models for supply chain planning 626
5. Stochastic demand models for supply chain planning 633
6. Comparison of supply chain planning concepts for general
supply chains 655
7. Summary and issues for further research 667
References 671
Contents ix
CHAPTER 13
Dynamic Models of Transportation Operations
Warren B. Powell 677
1. Operational challenges in transportation 682
2. A general modeling framework 698
3. Algorithmic strategies 707
4. Modeling operational problems 724
5. Implementation issues for operational models 752
6. Summary remarks 753
References 754
Subject Index 757
A.G.de KokandS.C. Graves, Eds., HandbooksinOR &MS, Vol. 11
(cid:1) 2003Elsevier B.V.Allrights reserved.
Chapter 1
Introduction
A.G. de Kok
TechnischeUniversiteit,Eindhoven
Stephen C. Graves
MassachusettsInstituteofTechnology
1 Introduction
Supply Chain Management (SCM) has been a very visible and influential
research topic in the field of operations research (OR) over the course of the
last decade of the twentieth century. The problems and experiences that have
emerged from business practices have stimulated many researchers to
contributetoadeeperunderstandingaboutunderlyingphenomenaandcausal
relationships. Supply Chain Management has also served as an application
area, where existing OR methods and techniques have been applied to new
models for new problems, to new models for old problems that regained
attentionandtoexistingmodelsforoldproblems.Inthelastcasewefindthat
progress has been made to extend existing results, stimulated by the apparent
need for such extensions.
OnemightnaturallystartahandbookonSCMwithadefinitionoftheterm
SupplyChainManagement.Wehavedecidedtoresistthistemptationasthere
are already too many competing definitions, and we do not see value in
attempting to create a new definition or synthesize one from the current
contenders. SCM has developed into a notion that covers strategic, tactical
and operational management issues. We have made an attempt to structure
theareabymeansofthechaptersinthishandbook.Bynomeansdoweclaim
to deal with all management issues commonly understood as being part of
Supply Chain Management. Nevertheless, we do believe that this handbook
covers abroad range ofSCM issues that lend themselves tobeing formulated
and analysed with mathematical models.
As appropriate for an OR handbook, this volume focuses primarily on
supply chains as a context to apply OR methods and models. As a
consequence, we are concerned with the decision-making processes that arise
in SCM and are derived from managerial and economic considerations. In
particular, we investigate and explore how OR can support decisions in the
design,planningandoperationofasupplychain.Bydoingso,weidentifythe
1
2 Introduction
richness ofSCM as anORapplication field, which promises another ‘Golden
Decade’ of research.
In this introduction we provide an overview of SCM as an OR application
area. Since many of the chapters in this handbook carefully position a
particular aspect ofSCM ina businessandeconomic context, wedeliberately
restrict the introduction to a high-level of abstraction. This allows us to
discussanumberofrelevanttrendsinthebusinessenvironmentthatprovedto
be the main impetus for the prospering of SCM during the last decade of the
twentiethcentury.Theaddedvalueofsuchanoverviewshouldbetoposition
SCM in its business context and to provide a framework to understand and
position the subsequent chapters of this handbook in relation to each other.
2 Main business trends that created SCM
In this section we discuss the main business trends during the late eighties
and nineties of the twentieth century that provided the fertile soil from which
SCM developed.
2.1 Core competencies
Prahalad and Hamel (1990) argue that a number of companies have
achieved significantly better results than their competitors by focussing on
only a few competencies, so-called core competencies, and by outsourcing
other non-core activities to companies that have a core competence on those
activities. This reasoning has gained a lot of attention from large, highly
vertically-integrated companies, such as Philips Electronics, Unilever, P&G,
General Motors, etc. and has been adopted at a surprisingly fast pace.
Whereas implementation of a company-wide information systems, such as
an Enterprise Resource Planning (ERP) system, typically has taken three to
seven years within these large companies, the implementation of the core-
competency strategy has often been accomplished within one or two years.
In our effort to understand the success of the core-competency strategy in
terms of its adoption by global companies, we identify a number of circum-
stances that seem to characterize the late eighties business environment.
2.1.1 Short-term focus
In the Westerneconomic world the eighties were adecade of relatively low
economic growth and high unemployment rates. In that climate a short-term
focus prevailed. The core-competency strategy allowed firms to increase their
return on investments (ROI) and related business performance indicators
almost instantaneously: outsourcing non-core competencies eliminated the
associated fixed cost in the denominator of ROI, which typically resulted in
increasing the ROI. The economic climate permitted big multinational
companies to outsource high-cost operations to companies with lower costs;
Ch. 1. Introduction 3
forinstance,companieswithunionoperationsandexpensivelabourcontracts
would outsource these operations to non-union companies with more cost
flexibility.Thus,firmscouldsubstantiallyreducenotonlyfixedcosts,butalso
the variable product costs as well.
The first companies adopting the core-competency strategy showed
immediate improvements in their balance sheets, resulting in rapid increases
in their stock market value. Many companies decided to reap similar benefits
and started outsourcing, as well.
2.1.2 Technological improvements require high capital investments
By the end of the eighties, multinational companies with a tradition of
capital-intensive manufacturing, such as electronics, white goods, automotive
and consumer packaged goods, had invested for three decades in
manufacturing mechanization and automation. This process replaced labour
with capital, to the point that their capital–labour ratio approached that of
primary industries, such as chemicals and metals. In fact, most of these
vertically integratedcompaniesfoundthatmoreandmoreoftheaddedvalue
from their manufacturing had shifted upstream in their supply chains, from
assembly to fabrication. Consequently, the investments required for further
improvementsin labourproductivityandprocesscapabilitieskeptincreasing.
A sector that was archetypical for such capital investment requirements was
thesemiconductorindustrythatemergedintheearlyseventiesandmaturedin
the eighties. Many multinational electronics manufacturers had their own
semiconductor division.
These capital investment requirements demanded a strategic assessment.
Most companies decided to concentrate on their brands, implying that they
concentrated on Marketing and Sales, and Research and Development of
their product portfolio as well as on Purchasing in order to leverage their
buying power. Upstream manufacturing activities were outsourced to
subcontractors. Interestingly, but logically, a number of these subcontractors
decided to consider manufacturing their core competence and started a
processofacquisitionsthatcontinuestodate.Intheelectronicsindustrythese
companies are currently called Electronics Manufacturing Services (EMS)
companies; in the semiconductor industry these companies are known as
foundries. Apparently it is possible for them to carry the burden of large
capitalinvestmentsthatcouldnotbecarriedbytheglobalmulti-billionbrand-
owners. A possible explanation can be found in the stock market, again. The
stock market analysts seem to have lower ROI expectations of these new
manufacturing conglomerates than of the brand-owners.
Whether the current situation with multinational brand-owners focussing
on Marketing and Sales, Research and Development, and Purchasing and
multinational ‘service companies’ focussing on manufacturing and logistics is
a stable economic equilibrium remains to be seen. In his thought-provoking
book Clockspeed, Fine (1998), provides empirical evidence of his theory
thatthebusinessenvironmentshowsaconstantprocessofverticalintegration
4 Introduction
and disintegration, stimulated by competition based on technological break-
throughsandfosteredbyinternalinertiaoflargevertically-integratedcompanies.
2.1.3 SCM as core competence
Intheearlyninetiesanumberofcompanies,suchasHewlett-Packard(HP),
recognizedthatSCMwasoneoftheircorecompetencies.AlthoughHPwasin
thetestandmeasurementindustryandthecomputerindustrysincethe1950’s,
by the early nineties the company had evolved from a business-to-business
company into a business-to-consumer company delivering PCs and printers
via a dealer network to the consumers. In parallel to concentration on
Research and Development (in particular software and printing technology),
MarketingandSales,andoutsourcingmanufacturing,HPdevelopedtheskills
for ‘worldclass’ SCM. HP recognized that one of its key differentiators could
betoofferbothspeedofdeliveryandproductdiversitytothemarket,andthat
this could be done without owning traditional manufacturing assets. Lee and
Billington (1993, 1995) discuss the main ideas behind the HP approach. They
introduce the term postponement in the SCM field, implying that product
diversity is created as close as possible to the consumer, thereby allowing for
efficiencies upstream in the supply chain. The postponement concept is
developed and explored in Chapter 5.
AnothercompanythathasmadeSCMitscorecompetenceisDell.Priorto
Dell, PC manufacturers sold PCs through their dealer network, implying
substantial capital investments in inventory by the dealers and exposure to
obsolescenceriskforthemanufacturer.Incontrast,Delldecidedtoselldirect
to the customer using the Internet as its marketing and sales channel. Dell is
then able to assemble to order each client’s PC, thereby eliminating the need
for final product inventory. The Dell business model requires that Dell’s
suppliersholdstocksofcomponentsinconsignmentatornearDell’sassembly
factories. Thus Dell operates its supply chain with minimal inventories on its
books.
Whereas the above is a somewhat idealized description, Dell does operate
its supply chain with considerably less inventory than its competitors, while
providing customized products with short delivery lead times. The Dell
example should be considered a showcase of ‘worldclass’ SCM. It shows the
potentialforoperatinglow-inventory,high-flexibilityandcustomized-product
supplychains.Inmanyindustrialsectorsthepotentialmustbehuge,giventhe
fact that many sectors have much lower market diversity than the PC sector.
2.1.4 Relevance for Operation Research applied to supply chains
Thedisintegration ofthebrand-owningcompanieshasledtoanenormous
increaseinthenumberofcontractualrelationshipsbetweenbrand-ownersand
theirsubcontractorsandsuppliers,aswellasbetweenbrand-ownersandtheir
downstream channel partners. Contracts are the mechanisms by which the
brand-owner can leverage its buying power, yielding lower purchase prices,
higher product quality and greater delivery reliability and speed. As such, the
Ch. 1. Introduction 5
careful design of contracts is paramount to the profitability of the brand-
owner. These contracts are also critical to assuring the sustainability of
the supplier or subcontractor, recognizing their need to obtain sufficient
economies of scale and scope. Furthermore, these contracts are essential
mechanismsforfindingeffectivewaystospreadtheriskacrossasupplychain.
In Chapters 6 and 7 of this handbook supply chain contracts are extensively
discussed. Chapter 6 focuses on the design of contracts in general with an
emphasis on risk sharing, while Chapter 7 examines the design of contracts
with respect to sharing of demand and supply information.
The myriad of relationships between legally independent companies
operating a supply chain from commodities to consumers poses structurally
complex network design problems to each of these companies. Whereas
contractual relationships are one-to-one by definition, the network design
problem is a many-to-many problem. Apart from questions concerning
locations of factories and warehouses, tactical issues of safety stock
positioning, capacity slack positioning and transportation mode selection
have to be addressed. Operations research has wide applicability to
these issues, and has provided very useful decision support. In this volume,
Chapter 2 covers the application of optimization models and methods to
supply chain design. Chapter 3 discusses the strategic positioning of safety
stocks, while Chapter 4 focuses on investments in resources across the supply
chain so that a strategic trade-off between customer service, market diversity
and supply chain flexibility investments can be made.
2.2 The Bullwhip effect
One particular phenomenon that has attracted great attention in industry
and academia is the Bullwhip effect. In the late fifties Forrester (1958)
conductedexperimentalresearchthatrevealedthatdemandvariationsamplify
from link to link going upstream in the supply chain, i.e., from consumers to
raw materials. By means of simulation, he identified the root causes of this
variation amplification: information distortion and information delay.
Lee,PadmanabhanandWhang(1997)builtuponandextendedtheideasof
Forrester to identify common business practices that led to information
distortion and information delays. This paper stimulated a large amount of
work on understanding the phenomenon and developing counter measures.
This work drew upon and applied concepts from the OR literature, including
echelon stock concepts, inventory pooling and forecasting processes that
inducedthe bestestimates offuturedemand. Thelatterseems obvious,butin
many situations incentives are not aligned between business functions,
yielding wishful thinking forecasts or target sales forecasts. Echelon stock
concepts and inventory pooling stimulated the implementation of Vendor
Managed Inventory (VMI) concepts.
The implementation and dissemination of these concepts improved the
overall knowledge base on Supply Chain Management. In general, one may