20 - Supply Chain Coordination

Supply Chain Management: Coordination Outline: 1. Introduction 2. Vendor Managed Inventory 1. Introduction How can different members of a supply-chain collaborate to provide better service to the final customer at a lower overall cost? With more and more competitions nowadays based on supply chains, the goal of supply chain management is the minimization of total supply chain cost, including - transportation costs - inventory carrying costs - shortage costs Turning adversarial relationship into cooperative and collaborative relationship is often the key to supply chain success.

2. Vendor Managed Inventory (VMI) Barilla’s proposal to distributors: Just-In-Time Distribution (JITD), a.k.a. VMI • Distributor’s warehouse reports inventory and sales data to Barilla. • Barilla decides how much and when to ship product to the distributor. Before: After: Downstream variability at DC: mean demand is about 300, the std. dev. is about 75 Upstream variability is much higher (std. dev = 227) Upstream variability is much higher (std. dev = 227) Manufacturer Distributor’s Warehouse Market

3. Supply Chain Contracts Consider a seasonal apparel supply chain with long lead time and short season: - Also, uncertain demand Your forecast Ratio of sales (left: right) = _____ : _____ Sales forecast of a particular item has the following distribution. Order Cycle • Feb Y-2 : Design process started (the annual international outdoorswear show) • Mar Y-2 : Trade show provided additional input • May Y-2 : Design concepts finalized; sketches sent for prototype production • Sep Y-2 : Designs refined and finalized • Sep Y-2 to Spring Y-1 : Sample garments produced and shown to retailers Order Cycle • Mar Y-1 : Trade show (typically 80% of annual order volume) • Jun-Jul Y-1 : Garments transported from Hong Kong to Denver • Aug Y-1 : Production in August air-shipped to Denver • End of Aug Y-1 : Orders shipped to retailers via UPS and RPS • Sep-Jan Y-1 : Sales season • Dec-Jan Y-1 : Retailers place additional orders

8000 0.11 10000 0.11 12000 0.28 14000 0.22 16000 0.18 18000 0.1 Goal: Order the right quantity to maximize profit. - Production cost per unit (c): $80 - Selling price per unit (r): $125 - Salvage value per unit (s): $20 How to find the corresponding maximum profit? Suppose you make 12,000 jackets. 1. Scenario One: demand is 8,000 (with probability 0.11) Profit = Revenue – Cost + Salvage = 125(8,000) - 80(12,000) + 20(4,000) = $120,000 2. All the scenarios: quantity 12000 probability demand revenue salvage cost profit scenario 1 0.11 8000 1,000,000 $ 80,000 $ 960,000 $ 120,000 $ scenario 2 0.11 10000 1,250,000 $ 40,000 $ 960,000 $ 330,000 $ scenario 3 0.28 12000 1,500,000 $ - $ 960,000 $ 540,000 $ scenario 4 0.22 14000 1,500,000 $ - $ 960,000 $ 540,000 $ scenario 5 0.18 16000 1,500,000 $ - $ 960,000 $ 540,000 $ scenario 6 0.1 18000 1,500,000 $ - $ 960,000 $ 540,000 $ Total expected profit 470,700 $

8000 0.11 0.11 10000 0.11 0.22 12000 0.28 0.5 14000 0.22 0.72 16000 0.18 0.9 18000 0.1 1 Now consider a simple supply chain: Assuming the same demand distribution, how will the retailer order? What is the manufacturer’s profit? How much does the manufacturer want the retailer to order? Is there anything that the distributor and manufacturer can do to increase the profit of both?

8000 0.11 0.11 10000 0.11 0.22 12000 0.28 0.5 14000 0.22 0.72 16000 0.18 0.9 18000 0.1 1 4.1 Buyback Contract What if the retailer can return the unsold items for a partial refund ($40 each)? Ce = 80 – 40 = $40 How much will the retailer order now? Its profit? cost c 80 revenue p 125 salvage s 40 critical rati 0.5294118 quantity 14000 probability demand revenue salvage cost profit scenario 1 0.11 8000 1,000,000 $ 240,000 $ 1,120,000 $ 120,000 $ scenario 2 0.11 10000 1,250,000 $ 160,000 $ 1,120,000 $ 290,000 $ scenario 3 0.28 12000 1,500,000 $ 80,000 $ 1,120,000 $ 460,000 $ scenario 4 0.22 14000 1,750,000 $ - $ 1,120,000 $ 630,000 $ scenario 5 0.18 16000 1,750,000 $ - $ 1,120,000 $ 630,000 $ scenario 6 0.1 18000 1,750,000 $ - $ 1,120,000 $ 630,000 $ Total expected profit 488,900 $ The manufacturer’s profit? quantity 14000 probability demand revenue cost return profit scenario 1 0.11 8000 1,120,000 $ 490,000 $ 240,000 $ 390,000 $ scenario 2 0.11 10000 1,120,000 $ 490,000 $ 160,000 $ 470,000 $ scenario 3 0.28 12000 1,120,000 $ 490,000 $ 80,000 $ 550,000 $ scenario 4 0.22 14000 1,120,000 $ 490,000 $ - $ 630,000 $ scenario 5 0.18 16000 1,120,000 $ 490,000 $ - $ 630,000 $ scenario 6 0.1 18000 1,120,000 $ 490,000 $ - $ 630,000 $ expected profit 563,600 $ manufacturer Total Profit? Win-Win? 488,900+563,600 vs. 470.700 + 540,000 Textbook industry Supplier agrees to purchase leftover at end of the selling season from retailers. There are many variations: (Full refund, full return), (Full refund, partial return), (Partial refund, full return), (Combined return for multi-product orders). What are the benefits and potential drawbacks?