THE PRACTICE OF SUPPLY CHAIN MANAGEMENT
THE PRACTICE OF SUPPLY CHAIN
MANAGEMENT
INTERNATIONAL SERIES IN
OPERATIONS RESEARCH & MANAGEMENT SCIENCE
Frederick S. Hillier, Series Editor
Stanford University
Balsamo, S., Persone, V., & Onvural, R. / ANALYSIS OF QUEUEING NETWORKS WITH
BLOCKING
Bouyssou, D. et al. / EVALUATION AND DECISION MODELS: A Critical Perspective
Hanne, T. / INTELLIGENT STRATEGIES FOR META MULTIPLE CRITERIA DECISION
MAKING
Saaty, T. & Vargas, L. / MODELS, METHODS, CONCEPTS and APPLICATIONS OF THE
ANALYTIC HIERARCHY PROCESS
Chatterjee, K. & Samuelson, W. / GAME THEORY AND BUSINESS APPLICATIONS
Hobbs, B. et al. / THE NEXT GENERATION OF ELECTRIC POWER UNIT COMMITMENT
MODELS
Vanderbei, R.J. / LINEAR PROGRAMMING: Foundations and Extensions, 2nd Ed.
Kimms, A. / MATHEMATICAL PROGRAMMING AND FINANCIAL OBJECTIVES FOR
SCHEDULING PROJECTS
Baptiste, R, Le Rape, C , & Nuijten, W. / CONSTRAINT-BASED SCHEDULING
Feinberg, E. & Shwartz, A. / HANDBOOK OF MARKOV DECISION PROCESSES: Methods
and Applications
Ramfk, J. & Vlach, M. / GENERALIZED CONCAVITY IN FUZZY OPTIMIZATION AND
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Song, J. & Yao, D. / SUPPLY CHAIN STRUCTURES: Coordination, Information and
Optimization
Kozan, E. & Ohuchi, A. / OPERATIONS RESEARCH/MANAGEMENT SCIENCE AT WORK
Bouyssou et al. / AIDING DECISIONS WITH MULTIPLE CRITERIA: Essays in Honor of
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Cox, Louis Anthony, Jr. / RISK ANALYSIS: Foundations, Models and Methods
Dror, M., L'Ecuyer, R, & Szidarovszky, F. / MODELING UNCERTAINTY: An Examination of
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Dokuchaev, N. / DYNAMIC PORTFOLIO STRATEGIES: Quantitative Methods and Empirical
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Sarker, R., Mohammadian, M., & Yao, X. / EVOLUTIONARY OPTIMIZATION
Demeulemeester, R. & Herroelen, W. / PROJECT SCHEDULING: A Research Handbook
Gazis, D.C. / TRAFFIC THEORY
Zhu, J. / QUANTITATIVE MODELS FOR PERFORMANCE EVALUATION AND BENCHMARKING
Ehrgott, M. & Gandibleux, X. / MULTIPLE CRITERIA OPTIMIZATION: State of the Art
Annotated Bibliographical Surveys
Bienstock, D. / Potential Function Methods for Approx. Solving Linear Programming Problems
Matsatsinis, N.F. & Siskos, Y. / INTELLIGENT SUPPORT SYSTEMS FOR MARKETING
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Alpern, S. & Gal, S. / THE THEORY OF SEARCH GAMES AND RENDEZVOUS
Hall, R.W. / HANDBOOK OF TRANSPORTATION SCIENCE—2nd Ed.
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Maros, I. / COMPUTATIONAL TECHNIQUES OF THE SIMPLEX METHOD
Harrison, Lee, & Neale / THE PRACTICE OF SUPPLY CHAIN MANAGEMENT: Where
Theory And Application Converge
* A list of the early publications in the series is at the end of the book *
THE PRACTICE OF SUPPLY CHAIN
MANAGEMENT: WHERE THEORY
AND APPLICATION CONVERGE
Terry P. Harrison
Penn State University
Hau L. Lee
Stanford University
John J. Neale
Optiant, Inc.
Springer
Library of Congress Cataloging-in-Publication Data
Harrison, Terry P.
The practice of supply chain management: where theory and application converge /
Terry P. Harrison, Hau L. Lee, John J. Neale
p. cm. (International series in operations research & management science)
Includes bibliographical references and index,
ISBN 1-4020-7988-5 (hardcover) ISBN 0-387-24099-3 (paperback)
HC38.5.H369 2003
658.7—dc21
2003047501
Printed on acid-free paper.
First printing of paperback edition 2005
© 2004 Springer Science&Business Media, Inc. (hardcover)
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CONTENTS
Contributors
vii
Introduction to The Practice of Supply Chain Management
xi
CORE CONCEPTS AND PRACTICES
1.
2.
Principles for the Strategic Design of Supply Chains
Terry P. Harrison
Tactical Planning for Reinventing the Supply Chain
David Simchi-Levi, Edith Simchi-Levi, and Michael Watson
3
13
3.
The Role of Inventory in Superior Supply Chain Performance
John J. Neale, Brian T. Tomhn, and Sean P. Willems
31
4.
Supply Chain Performance Metrics
Warren H. Hausman
61
EMERGING SUPPLY CHAIN PRACTICES
5.
6.
7.
Sourcing Strategy and Supplier Relationships:
Alliances versus eProcurement
David F. Fyke and M. Eric Johnson
77
Supply-Chain Coordination: How Companies Leverage
Information Flows to Generate Value
Susan Cohen Kulp, Ehe Ofek, and Jonathan Whitaker
91
Supply-Chain.Net: The Impact of Web-based Technologies on
Supply Chain Management
Enver Yiicesan and Luk N. Van Wassenhove
109
8.
e-Business and Supply Chain Integration
Hau L. Lee and Seungjin Whang
9.
Managing Product Variety through Postponement:
Concept and Applications
S. Venkatesh and Jayashankar M. Swaminathan
139
Creating and Leveraging Options in the High Technology
Supply Chain
Corey Bilhngton and Blake Johnson
157
Managing Supply Chains with Differentiated Service
Requirements—Models and Applications
Morris A. Cohen, Vinayak Deshpande, and Yunzeng Wang
175
10.
11.
123
vi
Contents
SUPPLY CHAIN IN ACTION
12.
13.
14.
Data-Rich Supply Chain Management: The Case of
Seven Eleven Japan
Seungjin Whang
199
Lucent Technologies: Achieving the "Impossible"
By Using Provisioning and Postponement
David W. Hoyt and Enrique Lopez-Tello
209
Measuring the Benefits of Product Standardization and
Postponement of Configuration in a Supply Chain
Tony Davila and Marc Wouters
221
15.
Combinatorial Auctions in Procurement
Wedad Elmaghraby and Pinar Keskinocak
16.
The Benefits of Business-to-Business Applications for
Fabless Semiconductor Companies
Barchi Peleg
259
Supply Chain Management at a Chip Tester
Manufacturer
Srinagesh Gavirneni
277
17.
18.
Aerospace Supply Chain Dynamics
Thomas Bilczo, Larry Bugbee, Jonathan Fitzhugh,
Dave Gilbert, Steve Halladin, James Rubert, and
Benny Budiman
19.
Agent Models of Supply Network Dynamics:
Analysis, Design, and Operation
S. Brueckner, H. Baumgaertel, V. Parunak,
R. Vanderbok, and J. Wilke
Index
245
293
315
345
CONTRIBUTORS
Hartwig Baumgaertel
DaimlerChrysler Corp.
Research & Technology
Alt-Moabit 96a
D-10559 Berlin
Germany
Thomas Bilczo
Senior Project Manager
The Boeing Company
PO Box 3707, MS: 7A-CC
Seattle, WA 98124
USA
Corey Billington
President
2ndedison, Inc.
516 2nd Avenue
Redwood City, CA 94063
USA
Sven A. Brueckner
Altarum Institute
3520 Green Court, Suite 300
Ann Arbor, MI 48105-1570
USA
Benny Budiman
Dept. of Mechanical Engineering
MIT
77 Massachusetts Ave, Room 35-023
Cambridge, MA 02139
USA
Larry Bugbee
Advanced Computing Technologist
The Boeing Company
POBox3707, MS:2R-91
Seattle, WA 98124
USA
Morris A. Cohen
Matsushita Professor of Manufacturing
and Logistics
The Wharton School
University of Pennsylvania
Philadelphia, PA 19104-6340
USA
Susan Cohen Kulp
Harvard Business School
Morgan Hall, Room 433
Soldiers Field Road
Boston, MA 02163
USA
Tony Davila
Stanford Business School
518 Memorial Way
Stanford University
Stanford, CA 94305-5015
USA
Vinayak Deshpande
Krannert School of Management
Purdue University
West Lafayette, IN 47907
USA
Wedad Elmaghraby
Assistant Professor
School of Industrial & Systems
Engineering
Georgia Institute of Technology
765 Per St Drive
Atlanta, GA 30332
USA
Jonathan Fitzhugh
Associate: Boeing Ventures
The Boeing Company
609 Concordia Circle
Twin Falls, ID 83301
USA
Srinagesh Gavirneni
Operations & Decision
Technologies
Kelley School of Business
Indiana University
Contributors
Vlll
Bloomington, IN 47405
USA
Dave Gilbert
3320 Hudson Court
Pleasanton, CA 94588
USA
Stephen Halladin
Associate Technical Fellow
The Boeing Company
PO Box 3707, MS: 5H-71
Seattle, WA 98124
USA
Terry P. Harrison
Supply Chain & Information Systems
Dept.
Smeal College of Business
Administration
Penn State University
University Park, PA 16802
USA
Warren H. Hausman
Dept. of Management Science &
Engineering
Terman 312
Stanford University
Stanford, CA 94305-4026
USA
David W. Hoyt
Graduate School of Business
518 Memorial Way
Stanford University
Stanford, CA 94305
USA
Blake Johnson
2ndedison, Inc.
516 2nd Avenue
Redwood City, CA 94063
USA
M. Eric Johnson
Center for Digital Strategies
Tuck School of Business
Dartmouth College
Hanover, NH 03755
USA
Pinar Keskinocak
Assistant Professor
School of Industrial & Systems
Engineering
Georgia Institute of Technology
765 Ferst Drive
Atlanta, GA 30332
USA
Hau L. Lee
Graduate School of Business
Stanford University
Stanford, CA 94305
USA
John J. Neale
Optiant, Inc.
4 Van de Graaff Drive
Burlington, MA 01803
USA
Elie Ofek
Harvard Business School
Morgan Hall, Room 195
Soldiers Field Road
Boston, MA 02163
USA
Barchi Peleg
Dept. of Management
Science & Engineering
Terman Center #350
Stanford University
Stanford, CA 94305-4026
USA
David F. Fyke
Center for Digital Strategies
Tuck School of Business
Dartmouth College
Hanover, NH 03755
USA
Contributors
James Rubert
Advanced Computing Technologist
The Boeing Company
POBox3707, MS:2R-91
Seattle, WA 98124
USA
David Simchi-Levi
Professor of Engineering Systems
MIT
77 Massachusetts Avenue
Room 1-171
Cambridge, MA 02139-4307
USA
Edith Simchi-Levi
LogicTools, Inc.
35 Corporate Drive, 4th Floor
Burlington, MA 01803
USA
Enrique Lopez-Tello
Av de Bruselas 8
Lucent Technologies
28108 Alcobendas, Madrid
Spain
Jayashankar M. Swaminathan
Kenan-Flagler Business School
University of North Carolina
Chapel Hill, NC 27599
USA
Brian T. Tomlin
Kenan-Flagler Business School
University of North Carolina
Chapel Hill, NC 27599
USA
Ray VanderBok
Altarum Institute
3520 Green Court, Suite 300
Ann Arbor, MI 48105-1570
USA
H. Van Dyke Parunak
Altraum Institute
3520 Green Court, Suite 300
Ann Arbor, MI 48105-1570
USA
Luk Van Wassenhove
The Henry Ford Chaired Professor of
Manufacturing
Professor of Operations Management
INSEAD
Boulevard de Constance
77305 Fontainbleau Cedex
France
S. Venkatesh
Ph.D.
Supply Chain Group
Imaging & Printing
Hewlett-Packard Company
Sunnyvale, CA 94086
USA
Yunzeng Wang
Weatherhead School of Management
Case Western Reserve University
Cleveland, OH 44106-7235
USA
Michael Watson
LogicTools, Inc.
311 S. Wacker Drive, Suite 4550
Chicago, IL 60606
USA
Seungjin Whang
Jagdeep & Roshni Singh Professor of
Operations
Information & Technology
518 Memorial Way
Stanford University
Stanford, CA 94305-5015
USA
Jonathan D. Whitaker
Associate Partner
Accenture
100 Peachtree Street, Suite 1300
Atlanta, GA 30303
USA
Contributors
Joerg Wilke
DaimlerChrysler Corp.
Research & Technology
Alt-Moabit 96a
D-10559 Berlin
Germany
Sean P. Willems
Assistant Professor of Operations
and Technology Management
Boston University School of
Management
595 Commonwealth Avenue
Boston, MA 02215
USA
Marc Wouters
School of Business & Public
Administration
University of Twente
PO Box 217
7500 AE Enschede
The Netherlands
Enver Yucesan
Professor of Operations Management
INSEAD
Boulevard de Constance
77305 Fontainbleau Cedex
France
INTRODUCTION TO THE PRACTICE OF
SUPPLY CHAIN MANAGEMENT''
For over a decade, there has been an increasing interest in the use of supply chain
methods to improve performance across the entire business enterprise. Supply chain
management has become a standard part of the business lexicon, and many firms now
have a functional supply chain group. In addition to individual companies, numerous
industries have recognized the importance of supply chain integration. Initiatives that
aim at getting multiple companies to work together toward a more streamlined and
efficient supply chain have been developed. The most well known of such industrywide initiatives include the Quick Response of the apparel industry, the Efficient
Consumer Response of the grocery industry, the Efficient Foodservice Response of
the foodservice industry, as well as other initiatives in the pharmaceutical, automobile,
aerospace, personal computer, and semiconductor industries.
The widespread interest in supply chain management has led to innovative ways
to re-engineer the supply chain, new software solutions to help companies plan and
operate their supply chain, and new business models and services for existing and new
players in the supply chain. The advances of the Internet have helped fuel the development of these innovations and new operating models. New ways to communicate,
connect, transact and collaborate among supply chain partners have emerged. New
channels of distribution as well as creative products and services have also come to
the marketplace.
At the same time, research interest in supply chain management has also been
increasing. Practice in the field has sparked the interest of the research community and
we have witnessed an explosive growth of research output on the theories and methods
of supply chain management. Some of these new research developments have found
their way into practice as companies have begun experiments using the developments.
Implementation and experimentation naturally lead to new ideas, and the practiceresearch-practice-research cycle continues.
This is no doubt a very exciting time for supply chain practitioners as well as
researchers.
The objective of this book is to provide an overview of this important practiceresearch cycle. The focus of the book is on supply chain practice, but as described
above supply chain practice has been heavily influenced by supply chain research.
Supply chain practice has also stimulated new directions for research. It is our intent
that this book provide the reader with:
• A set of tutorials on key supply chain methods and practices
• A review of what supply chain practices are like in multiple industries
• A description of how innovative ideas and new research methodologies have been
used in practice
• We thank Corey Billington for his efforts and contributions in the early stages of this book.
xii
Introduction to The Practice of Supply Chain Management
• An identification of the enablers of successful implementation of such ideas in
practice
• A report on the new insights and research directions that can be gained from observing these practices.
We have organized the book into three sections.
Core Concepts and Practices
In the first section, we provide an overview of core supply chain concepts and practices. We begin by examining the approaches used when making strategic decisions
about supply chain infrastructure. "Principles for the Strategic Design of Supply
Chains" provides an overview of the key concepts and methods for supply chain
design within a global context. With the infrastructure established, we next turn our
attention to the opportunities and challenges of optimizing tactical supply chain decisions. "Tactical Planning for Reinventing the Supply Chain" gives a structured view
of what, how, and why different planning protocols are used in industry. Different
market and product characteristics may require different approaches for tactical planning in a supply chain. "The Role of Inventory in Superior Supply Chain Performance"
gives a thorough and comprehensive description of the key fundamentals of inventory
management within a supply chain. It describes how different companies have either
mastered these fundamentals to gain competitive advantage or have suffered because
they did not. It also discusses the development of new ways of managing inventory
and describes how these ways are being put into practice. Supply chain management
must start with performance measures, as performance measures induce incentives
and incentives change behaviors. "Supply Chain Performance Metrics" is a tutorial on
the basic concepts in supply chain performance measures and how companies can use
them for their advantage.
Emerging Supply Chain Practices
The second section of the book highlights new developments and innovations in supply chain management and reports on their use in industry. Sourcing strategies have
shifted rapidly in the past few years with the increasing adoption of outsourcing and
eProcurement. "Sourcing Strategy and Supplier Relationships: Alliances versus
eProcurement" provides a framework to examine how companies can manage
suppliers most effectively. It provides advice on what type of supplier relationship is
best for specific situations and presents a number of examples observed in practice. In
"Supply-Chain Coordination: How Companies Leverage Information Flows to
Generate Value," the authors report on new supply chain integration initiatives such as
information sharing, collaborative planning, and collaborative design. These different
initiatives have resulted in the creation of new value for the supply chain, as demonstrated by the consumer goods industry. In "Supply Chain.Net: The Impact of Webbased Technologies on Supply Chain Management," we see how Internet-based
Introduction to The Practice of Supply Chain Management
xiii
exchanges have been formulated and developed in recent years. Some models of
such exchanges have been successful, but others are still struggling. In what ways do
exchanges add value to the supply chain? How are they changing the business relationships of supply chain partners? In "e-Business and Supply Chain Integration," a
comprehensive picture of the impact of Internet-based e-Business technologies on
supply chain integration is given. Some of these technologies are helping supply chain
efficiencies, while others are actually creating new business models and markets for
companies. The multiple dimensions of supply chain integration through e-Business
are described with examples from practice. "Managing Product Variety through
Postponement: Concept and Applications" describes the history and current development of the concept of postponement in product and process design. This concept has
been very useful for companies to cope with the ever-increasing demand for product
variety and mass customization. The different types of postponement and how companies have made use of them are described. "Creating and Leveraging Options in the
High-Technology Supply Chain" discusses what companies can do to borrow the
familiar financial concept of options and apply it to supply chain designs and operations. This is potentially a very powerful concept, and the authors describe some early
applications in industry. Finally, we consider the movement toward "customer centric"
supply chain solutions. In "Managing Supply Chains with Differentiated Service
Requirements—Models and Applications," the authors examine supply chains characterized by multiple customer segments, each with different service needs. Methods
are proposed to manage inventory plans and material flows in service parts supply
chains with differentiated customer classes. The approach was driven by observing the
practices and challenges in two real-life service supply chains.
Supply Chain in Action
The third section of the book is devoted to examples of the application and implementation of sound supply chain concepts or principles in specific company settings.
It is here we see supply chain practice in real-life cases. In "Data-Rich Supply Chain
Management," we observe how legendary retailer Seven-Eleven Japan has embraced
and fully implemented the concept of using consumer point of sale data to run all the
operations of its supply chain. From product design, replenishment planning, and
logistics to product delivery, shelf configuration, and category management, the company makes use of data and has created one of the most efficient supply chains in the
world. In "Lucent Technologies: Achieving the 'Impossible' by Using Provisioning
and Postponement," we observe how the Spanish division of Lucent Technologies was
able to apply postponement concepts to win a major contract to provide telecommunication switching systems for Saudi Arabia. These concepts also enabled the company to complete the project on time to the satisfaction of the customer. In "Measuring
the Benefits of Product Standardization and Postponement of Configuration in a
Supply Chain," the combined use of accurate performance metrics and postponement
principles resulted in tremendous value and savings for Quantum Corporation, a
key disk drive manufacturer. In "Combinatorial Auctions in Procurement," the use
of high-powered optimization techniques enabled The Home Depot to work with
xiv
Introduction to The Practice of Supply Chain Management
transportation providers in bidding transportation jobs for the company. The result
was significant savings for The Home Depot. "The Benefits of Business-to-Business
Applications for Fabless Semiconductor Companies" describes how e-business tools
were used to help Adaptec, a fabless semiconductor manufacturer, communicate and
integrate its operations with its supply chain partners. In "Supply Chain Management
at a Chip Tester Manufacturer", a linear programming model is used to help a manufacturer plan production in a very challenging environment. In "Aerospace Supply
Chain Dynamics" we observe how Boeing utilized systems dynamics and simulation
modeling techniques to both identify problems in raw material supply and explore
ways to avoid such problems. Finally, "Agent Models of Supply Network Dynamics:
Analysis, Design, and Operation" describes a simulation methodology used by
DaimlerChrysler to evaluate different data dissemination policies for the automotive
supply chain.
Overall, this collection of chapters provides a snapshot of the state-of-the-art in the
extensive and dynamic landscape of supply chain practice.
Terry P. Harrison
Hau L. Lee
John J. Neale
December 19, 2002
CORE CONCEPTS AND PRACTICES
1
PRINCIPLES FOR THE
STRATEGIC DESIGN OF
SUPPLY CHAINS
Terry P. Harrison
Departnnent of Supply Chain and Infornnation Systenns
Snneal College of Business Adnninistration
Penn State University
University Park, PA 16802
4
Harrison
Abstract
I review principles and methods of global supply chain design from a variety of viewpoints,
with special emphasis on processes that have been used successfully in practice. The
perspective is focused on the practitioner who is interested in an overview of the key concepts
and application of supply chain design within a global context.
1. Introduction
Over the past ten years supply chain management (SCM) has become an important
focus of competitive advantage for firms and organizations. The impact of supply chain
management has increased steadily, drawing on developments in information systems,
management science, logistics, operations management, and other fields. The promise
of supply chain management is better use and deployment of resources across the entire
enterprise. While it has long been a goal to consider the impacts of managerial decisions across the complete organization, the tools, concepts and computing environment
have only been available for the past decade to realize this potential on a large scale.
A supply chain is the set of value-adding activities that connects a firm's suppliers to the firm's customers. The basic unit of a supply chain activity is
Receive input from supplier -^ Add value -^ Deliver to customer.
Here a "supplier" may be an external vendor or an upstream process within the firm.
Similarly, a customer may be the final customer of the finished product or service, or
a downstream operation that uses the output of one process as the input to another.
Three types of flows occur throughout the supply chain: (1) product, (2) information,
and (3) funds. These flows travel both upstream and downstream within the supply
chain. Effectively coordinating these three kinds of flows is the overarching goal of
supply chain management.
Managing the supply chain requires a wide range of methods and principles.
One way of classifying supply chain management analysis is to divide the area into
the strategic component—supply chain design (SCD), and the tactical/operational
piece—supply chain operations or execution (SCE).
Supply chain design is the process of determining the supply chain infrastructure—the plants, distribution centers, transportation modes and lanes, production
processes, etc. that will be used to satisfy customer demands. These studies are strategic in scope, use a time horizon of many months or years, and typically assume little
or no uncertainty with the data.
Supply chain execution is the process of determining solutions to more tactical and
operational issues such as local inventory polices and deployment, manufacturing and
service schedules, transportation plans, etc. In these instances, production and transportation data are usually assumed to vary according to a known probability distribution, while the infrastructure is assumed fixed (or nearly so). The time period for the
analysis typically spans days, weeks or months, and focuses on implementing detailed
short-term plans.
In this chapter, I describe the important considerations of designing a supply chain
from a global (versus domestic) perspective. Supply chain design has a large impact
on various measures of performance such as profitability, customer service, flexibility
Principles for the Strategic Design of Supply Chains
5
and reliability. It is a critical source of competitive advantage given that as much as
80% of total product cost may be fixed by these decisions.
2. Distinguishing Characteristics of Supply Chain Design
in a Global Context
Supply chain design decisions are often made in an environment that is rich with
uncertainty, filled with multiple, conflicting objectives and incomplete information.
Typically the following aspects are part of this environment.
• Supply chain redesign In practice, supply chain design decisions are rarely
focused on "green field" situations. More typically supply chain design questions
are the result of mergers, acquisitions, downsizing, or a significant shift in corporate strategy. In these situations, questions are centered on rationalizing the supply
chain in response to incremental changes to the supply chain infrastructure.
• A novel process Many firms are inexperienced at examining changes to the supply chain when the metrics span the entire organization.
• Impacts affect multiple groups Changes in the design of a supply chain often lead
to impacts that span large parts of the organization. Often there is no one person or
group that has deep experience with measuring or assessing these impacts. On the
plus side, the largest positive impacts of supply chain design frequently occur at the
boundary of organizational units.
• Organizational incentives may work against change The outcome of a supply
chain design may require changes that cause one group to have a decrease in
existing measures of performance while resulting in an improvement of firm-level
measures. For example, carrying additional inventory at a particular location may
cause costs within that reporting area to increase, but would ultimately lead to a
lower cost across the supply chain.
• Coordination across functional boundaries A key benefit of supply chain design
is that it often requires coordination between groups that typically do not interact.
This collaboration leads to a better understanding of cross-functional issues.
• Data needs are difficult to satisfy Since supply chain design spans many areas of the
organization, the data required to support analysis must be drawn from many sources.
The data may be measured at different frequencies, may use different scales or may
be contained in "private" sources that are difficult to obtain. For example, in one study
we found that various plant managers had their own estimates of production costs,
which were quite different from the corporate measures. Additionally, some types of
data may not exist anywhere within the firm. Examples would be manufacturing costs
for a new process or transportation costs on a lane that has never been used.
All of these considerations are common to supply chain design in both a domestic and global context. Additionally, global supply chain design requires consideration
of duties and duty drawback, local content, taxes and exchange rates. The interplay of
these issues leads to decision making environments that are particularly difficult,
complex and critical to the firm's long term performance.
Duties are costs assessed for the importation of goods. The cost of the duty is typically based on the value of the imported good, the type of good imported, and the
6
Harrison
country of origin. In the case where the imported good is used to manufacture another
product that is subsequently exported, some or all of the duty cost may be recovered
as duty drawback.
In order to provide domestic manufacturing opportunities, some countries require
a minimum local content before a firm is permitted to sell a particular product. This
restriction requires that a specified fraction of the value added to the final product
must occur within the country where the product is sold.
Differing tax rates may greatly affect the choice of location for key operations.
Often tax regulations are complex, but much of the impact may be captured in models. The effect of differing tax rates is likely to concentrate the high value-added activities in countries that serve as tax havens. However, these effects are balanced against
the costs of net duty, procurement, production and distribution.
Lastly, exchange rates greatly affect supply chain performance. The value of
improvements in supply chain design and execution can be overshadowed by unfavorable currency movements. Various authors have proposed models to use the supply
chain itself as a financial hedge against these currency fluctuations.
3. Typical Kinds of Supply Chain Design Analyses
Supply chain design addresses a wide range of strategic infrastructure issues for the
firm. The following examples highlight many of the key issues that are typically
considered.
Manufacturing Strategy
•
•
•
•
How many plants are needed
Where should each plant be located
What products should each plant make
What process technologies should each employ, and how much of each process is
needed
• What markets should each plant serve
Supply Base Design
• Simultaneously determine supplier selection for all parts within commodity groups
• Allocate suppliers to plants
Distribution Strategy
• Should we ship direct or stock regionally
• How many DCs are needed and where should they be located
• Which DCs will server which customers
• What transportation modes will be used
Outsourcing
• What portions of the supply chain remain in-house versus outsourced
• Cost tradeoffs versus service considerations
Principles for the Strategic Design of Supply Chains
New Product and Process Design
What infrastructure should be used when new products are added to existing lines
At what demand points are additional sources of supply needed and where should
they be located
Experience with a number of supply chain design projects over the past ten years
leads me to conclude that the benefits of a well-conceived and executed supply chain
can be substantial. Some representative outcomes are:
•
•
•
•
Decreased costs of 5-60%, with 10% typical
Decreased service times of 25-75%, with 30% typical
Foster cross functional teamwork and "out of the box" thinking
Provide an objective assessment of alternatives in the politically charged environment of strategic supply chain decision making
4. Modeling Approaches
The first aspect in performing a supply chain design study is to determine the type of
modeling approach to be used. Modeling means to develop a mathematical representation (or model) of the supply chain. This mathematical model is manipulated and the
behavior is observed. If the supply chain model is sufficiently accurate, then the
insights gained from analysis of the supply chain model can be used on the physical
supply chain to obtain similar results.
Supply chain models may vary in many aspects, such as the level of detail, the
length of time they represent, the performance measures used, etc. Currently, given a
particular supply chain model, there are three primary approaches to conducting this
analysis. These are: (1) optimization, (2) simulation, and (3) heuristics.
Optimization is an analysis method that determines the best possible method of
designing a particular supply chain. The mathematical model has some objective that
is maximized or minimized, such as total system cost (minimize) or profit (maximize).
The drawback of using optimization is the difficulty in developing a model that is sufficient detailed and accurate in representing the physical supply chain, while keeping
the model simple enough to be solved. Further, optimization models tend to require
more data than other approaches. However, when the model of the supply chain is true
to the actual supply chain, and the model is not too complex to solve, optimization
produces the best possible insights into questions related to supply chain design. In
those instances it is the method of choice.
Simulation is imitating the behavior of one system with another. In this case,
the simulation model imitates the physical supply chain. By making changes to the
simulated supply chain, one expects to gain an understanding of the dynamics of the
physical supply chain.
Probabilistic simulation models allow for the most general and flexible representation of the supply chain and the firms' operating policies, and therefore provide the
ability to examine issues that are too detailed or complex for optimization models.
However, in supply chain design, one is typically looking for strategic, first order
effects, so this relative advantage of simulation is less important. Simulation modeling
8
Harrison
is more prevalent when investigating supply chain execution (as opposed to design)
questions.
One serious drawback to the use of simulation is that it only assesses the performance of a pre-specified design—it does not create or suggest the design. On the
other hand, simulation easily incorporates the effects of uncertainty, unlike most practical optimization approaches. Simulation is an ideal tool for further analyzing the
performance of a proposed design derived from an optimization model.
Heuristics are intelligent rules that often lead to good, but not necessarily the best,
supply chain design solutions. Heuristic approaches typically are easier to implement
and require less data. However, the quality of the solution is usually unknown. Unless
there is a reason that optimization cannot be used, heuristics are an inferior approach.
5. Data Needs
The most challenging aspect of a supply chain design project, other than the actual
implementation, is collecting a complete and accurate set of data. The activities and
data needs of supply chain management cover virtually all areas of the firm, which
requires a comprehensive data collection effort. Data typically reside in a variety of
locations and forms, from handwritten notes in someone's desk to large, enterprisewide databases. The outcome is that collecting and verifying data is a time consuming,
difficult and iterative process. However, the quality of the analysis and the potential for
substantial impact is directly linked to the quality and completeness of the data. Firms
that use activity-based costing often can fulfill supply chain data needs more easily.
A typical strategic design of a global supply chain would include the following
kinds of data, at a minimum: locations, process, product and movements.
Location data is the starting point for describing any supply chain network and
would likely include:
•
•
•
•
•
•
•
•
fixed costs of opening, closing or maintaining a facility,
variable costs of operating the facility,
geo-referenced data to denote the facility's physical location,
the location's country for determining tax effects,
trading alliances, such as the European Union, for assessing duty effects,
capacities and processes available at the facility,
inventories and inventory policies,
demand by product.
Process data provides a description of a location's ability for adding value. It
includes manufacturing, service, retail or transportation capabilities, and packaging
options.
Product data includes the list of stock keeping units, their physical attributes,
revenue and cost, bill of material relationships, and structure.
Movements data provides a description of the logistics network, and is often the
most extensive and difficult data need. Every possible link that provides a movement
between locations must be included. Each transportation link is described by a cost, a
capacity, a transit time and a transportation mode. For many links, such as ground
Principles for the Strategic Design of Supply Chains
9
transport in the United States, standard tariffs are widely available. Some common
rate sources are:
YFSY U.S. Class Rates 500
Yellow Freight System, Inc.
10990 Roe Ave
Overland Park, KS 66211-1213
Service Guide—Domestic Services
United Parcel Service of America, Inc.
55 Glenlake Parkway, NE
Atlanta, GA 30328
The North American Truckload Rate Index
Class 8 Solutions, Inc.
RO. Box 25672
Woodbury, MN 55125-0672
CzarLite(TM) LTL Rating System
SMC^
500 Westpark Drive
Suite 300
Peachtree City, GA 30269
RDWY U.S. Class Rates 507
Roadway Express
1077 Gorge Blvd.
Akron, OH 44309
However for other rates, such as ocean movement of goods between countries, no
standard sources may exist.
The data collection phase of a global supply chain design effort is a formidable
challenge and is the single largest barrier to initiating a study. While large, enterprisewide information systems have greatly reduced the effort of assembling this data, for
most firms assembling the full complement of necessary data is a time consuming,
difficult, and error-prone process. It is a most important step in the design of a supply
chain. It is also the least structured and verifiable.
6. Analysis
Regardless of the analysis technique used to identify preferred supply chain configurations, the procedure is roughly the same. The key steps are to establish a baseline
design and systematically modify the data to develop intuition about the structure of
the supply chain and to identify key performance levers.
In a baseline design, the flows are fixed to current practice. This permits validation of the data by comparing various cost and operational characteristics to externally
verified measures. For example, the fixed and variable costs of production and
distribution, taxes and duties may be compared against known values. Discrepancies
10
Harrison
can be identified and traced to data deficiencies, errors or omissions. Similarly, operations and logistics metrics for production, inventory and distribution can be compared to current practice. The completion of a baseline design provides confidence
that the fundamental operating characteristics of the supply chain have been correctly
modeled.
Next, different aspects of the data are varied and the model solved to determine
the response of the supply chain. Typically, these kinds of change would include the
removal of certain facilities, changes in capacities or especially demands, or the forcing of flows that are required for reasons that cannot be captured by the model.
The exact set of analyses is problem specific. However, common to every study is
the need to determine the sensitivity of the solution to demand variability and changes
in the structure of manufacturing or distribution costs. It is important to perform the
analysis with an orientation to finding a good set of solutions rather than a single
design. Usually, the recommended design is further modified to account for organizational issues that cannot be modeled.
7. The State of the Art
Studies of the impact of information flows throughout the supply chain, along with the
effect of uncertainty within the supply chain are overarching themes to many current
research efforts. One promising area within this general theme is the study of combining simulation methods with optimization methods in an iterative way. This
approach leverages the strength of traditional strategic optimization models with an
ability to examine detailed, stochastic elements of the supply chain. For example,
Chatfield et al. (2000a, 2000b) describe a supply chain simulator of this type. In conjunction with this work, Chatfield et al. (1999) report on the development of a high
level language, based on XML, to allow detailed description of an arbitrary supply
chain. This Supply Chain Markup Language (SCML) permits the exchange of supply
chain models in a way that is free of any particular solution method or computer
implementation.
Demand uncertainty is one of the single most important factors affecting a supply
chain design. Characterizing the data and incorporating these effects are areas of
intense research. There is good reason for this interest, as some analyses have shown
that omitting the effects of uncertainty can lead to inferior supply chain designs. An
emerging trend is toward robust supply chain design. That is, instead of assuming a
particular demand scenario and finding the best design to meet those requirements,
robust supply chain design seeks to configure the supply chain infrastructure so that
it performs well over a wide variety of possible demand scenarios. Given the possibility of supply chain difficulties due to terrorist attack, information system failures or
simply catastrophic events, robust supply chain design offers some promise of building "hardened" and responsive supply chains to a variety of disruptive factors.
Supply chain metrics are a complementary area of study to supply chain design.
Metrics are the means to measure things, and supply chain metrics are how the overall performance of the supply chain is assessed. Traditional measures are usually not
able to incorporate a system wide perspective. Current research in supply chain metrics
Principles for the Strategic Design of Supply Chains
11
allows for more focused and appropriate measurement of the potential performance of
supply chain designs.
Lastly, supply chain design methods are being combined with other important
business processes such as product design, market design, pricing, and high-level
financial models. The trend is to extend further the reach and interconnectivity of
methods to manage the firm's actions. Research contributions in modeling, optimization and information systems are a driving force.
8. Conclusions
Global supply chain design is an important area of supply chain research and practice.
The impacts of a good supply chain design are significant, resulting in lower costs,
better coordination and improved customer service. There are many organizational
considerations in implementing a supply chain design, and often the non-quantifiable
benefits of cross-functional coordination are as important as the explicit cost savings.
The effect of duties, duty drawback, local content, taxes and exchange rates fluctuations are additional factors introduced by a global supply network.
A variety of techniques, tools and software exist for global supply chain design.
However, unless mitigating circumstances exist, optimization methods are the preferred
approach. The combination of optimization with simulation techniques is a promising
research direction to improve decision making for global supply chain design.
Further Reading
Supply chain applications with measurable outcomes have appeared in the literature
for more than 15 years. For example, the paper by Kleutghen and McGee (1985)
reports on an early application at Pfizer. Subsequent papers describe applications of
increasing scope, size, and impact (Arntzen et al. 1995; Lee and Billington 1995;
Camm et al. 1997; Brown et al. 2000; D'Alessandro et al. 2000; Guide et al. 2000;
Hahn et al. 2000; Karabakal et al. 2000; Lin et al. 2000; and Rao et al. 2000).
Vidal and Goetschalckx (1997) and Goetschalckx et al. (2002) provide extensive
reviews of models and applications of strategic supply chain design.
Within the past few years textbooks focused on various aspects of supply chain
management have also appeared with increasing frequency. For someone unfamiliar
with supply chain management, Handfield and Nichols (1999) provide an introduction
to basic supply chain concepts. The texts by Simchi-Levi et al. (2002) and Chopra and
Meindl (2001) are excellent references on a variety of supply chain issues and methods, including supply chain design. Lastly, the recent text by Shapiro (2001) covers
more technical detail, especially regarding optimization techniques.
References
Arntzen, Bruce, Brown, G.G., Harrison, T.R, and L.L. Trafton, Global supply chain management at Digital Equipment Corporation. Interfaces, 25(1), 69-93 (1995).
12
Harrison
Brown, Alexander, Lee, H., and R. Petrakian, Xilinx improves its semiconductor supply chain
using product and process postponement. Interfaces, 30(4), 65-80 (2000).
Camm, J.D., Chorman, T.E., Dill, F.A., Evans, J.R., Sweeney, D.J., and G.W. Wegryn, Blending
OR/MS, judgment, and GIS: restructuring P&G's supply chain. Interfaces, 27(1), 128-142
(1997).
Chatfield, D., Harrison, T., and J. Hayya, A Generalized Supply Chain Modeling Language.
INFORMS Fall 1999 meeting, November 1999, Philadelphia, PA (1999). URL: http://www2.
informs.org/Conf/Philadelphia99/TALKSAVB09.html
Chatfield, D., Harrison, T., and J. Hayya, SISCO: The Simulator for Integrated Supply Chain
Operations. INFORMS Spring 2000 meeting. May 2000, Salt Lake City Utah (2000a). URL:
http://www2.informs.org/Conf/SaltLake2000/TALKS/MB07.html
Chatfield, D., Harrison, T., and J. Hayya, Utilizing SISCO: The Simulator for Integrated Supply
Chain Operations. INFORMS 2000 Annual Meeting, November 2000, San Antonio, Texas
(2000b). URL: http://www.informs.Org/Conf/SanAntonio2000//TALKS/TE20.html
Chopra, S. and P. Meindl, Supply Chain Management: Strategy, Planning and Operation.
Prentice-Hall, Upper Saddle River, New Jersey (2001). ISBN 0-13-026465-2.
D'Alessandro, Anthony, and A. Baveja, Divide and conquer: Rohm and Haas' response to a
changing specialty chemicals market. Interfaces, 30(6), 1-16 (2000).
Goetschalckx, M., Vidal, C.J., and K. Dogan, Modeling and design of global logistics systems:
a review of integrated strategic and tactical model and design algorithms. European Journal
of Operational Research, 143(1), 1-18 (2002).
Guide, V. Daniel R., Jr., Jayaraman, V., Srivastava, R., and W.C. Benton. Supply-chain management for recoverable manufacturing systems. Interfaces, 30(3), 125-142 (2000).
Hahn, Chan K., Duplaga, E., and J. Hartley, Supply-chain synchronization: lessons from
Hyundai Motor Company. Interfaces, 30(4), 32-45 (2000).
Handfield, R. and E. Nichols, Jr., Introduction to Supply Chain Management. Prentice Hall,
Upper Saddle River, New Jersey (1999). ISBN 0-13-621616-1.
Karabakal, N., Gunal, A., and W. Ritchie, Supply-chain analysis at Volkswagen of America.
Interfaces, 30(4), 46-55 (2000).
Kleutghen, P. and J.C. McGee, Development and implementation of an integrated inventory
management program at Pfizer Pharmaceuticals. Interfaces, 15(1), 69-87 (1985).
Lee, H.L. and C. Billington, The evolution of supply-chain-management models and practice at
Hewlett-Packard. Interfaces, 25(5), 42-63 (1995).
Lin, G., Ettl, M., Buckley, S., Bagchi, S., Yao, D., Naccarato, B., Allan, R., Kim, K., and
L. Koenig, Extended-enterprise supply-chain management at IBM personal systems group
and other divisions. Interfaces, 30(1), 7-25 (2000).
Rao, Uday, Scheller-Wolf, A., and S. Tayur, Development of a rapid-response supply chain at
caterpillar. Operations Research, 48(2), 189-204 (2000).
Simchi-Levi, D., Kaminsky, P., and E. Simchi-Levi, Designing and Managing the Supply
Chain: Concepts, Strategies and Case Studies, Second Edition. Irwin Mc-Graw-Hill, Boston,
Massachusetts (2002). ISBN 0-256-26168-7.
Shapiro, J., Modeling the Supply Chain. Duxbury, Pacific Grove, California (2001).
ISBN 0-534-37363-1.
Vidal, C. and M. Goetschalckx, Strategic production-distribution models: a critical review with
emphasis on global supply chain models. European Journal of Operational Research, 98(1),
1-18 (1997).
2
TACTICAL PLANNING
FOR REINVENTING
THE SUPPLY CHAIN
David Simchi-Levi
Massachusetts Institute of Technology
Cannbridge MA
Edith Simchi-Levi
LogicTools Inc.
Chicago IL
Michael Watson
LogicTools Inc.
Chicago IL
D. Simchi-Levi, E. Simchi-Levi, and Watson
14
1. Introduction
Fierce competition in today's global markets, the introduction of products with short
life cycles, and the heightened expectations of customers have forced business enterprises to invest in, and focus attention on their supply chains. This, together with continuing advances in communications and transportation technologies, such as mobile
communication and overnight delivery, has motivated the continuous evolution of the
supply chain, and techniques to manage it.
In a typical supply chain, raw materials are procured, items are produced at one or
more factories, shipped to warehouses for intermediate storage, and then shipped to
retailers or customer
MANAGEMENT
INTERNATIONAL SERIES IN
OPERATIONS RESEARCH & MANAGEMENT SCIENCE
Frederick S. Hillier, Series Editor
Stanford University
Balsamo, S., Persone, V., & Onvural, R. / ANALYSIS OF QUEUEING NETWORKS WITH
BLOCKING
Bouyssou, D. et al. / EVALUATION AND DECISION MODELS: A Critical Perspective
Hanne, T. / INTELLIGENT STRATEGIES FOR META MULTIPLE CRITERIA DECISION
MAKING
Saaty, T. & Vargas, L. / MODELS, METHODS, CONCEPTS and APPLICATIONS OF THE
ANALYTIC HIERARCHY PROCESS
Chatterjee, K. & Samuelson, W. / GAME THEORY AND BUSINESS APPLICATIONS
Hobbs, B. et al. / THE NEXT GENERATION OF ELECTRIC POWER UNIT COMMITMENT
MODELS
Vanderbei, R.J. / LINEAR PROGRAMMING: Foundations and Extensions, 2nd Ed.
Kimms, A. / MATHEMATICAL PROGRAMMING AND FINANCIAL OBJECTIVES FOR
SCHEDULING PROJECTS
Baptiste, R, Le Rape, C , & Nuijten, W. / CONSTRAINT-BASED SCHEDULING
Feinberg, E. & Shwartz, A. / HANDBOOK OF MARKOV DECISION PROCESSES: Methods
and Applications
Ramfk, J. & Vlach, M. / GENERALIZED CONCAVITY IN FUZZY OPTIMIZATION AND
DECISION ANALYSIS
Song, J. & Yao, D. / SUPPLY CHAIN STRUCTURES: Coordination, Information and
Optimization
Kozan, E. & Ohuchi, A. / OPERATIONS RESEARCH/MANAGEMENT SCIENCE AT WORK
Bouyssou et al. / AIDING DECISIONS WITH MULTIPLE CRITERIA: Essays in Honor of
Bernard Roy
Cox, Louis Anthony, Jr. / RISK ANALYSIS: Foundations, Models and Methods
Dror, M., L'Ecuyer, R, & Szidarovszky, F. / MODELING UNCERTAINTY: An Examination of
Stochastic Theory, Methods, and Applications
Dokuchaev, N. / DYNAMIC PORTFOLIO STRATEGIES: Quantitative Methods and Empirical
Rules for Incomplete Information
Sarker, R., Mohammadian, M., & Yao, X. / EVOLUTIONARY OPTIMIZATION
Demeulemeester, R. & Herroelen, W. / PROJECT SCHEDULING: A Research Handbook
Gazis, D.C. / TRAFFIC THEORY
Zhu, J. / QUANTITATIVE MODELS FOR PERFORMANCE EVALUATION AND BENCHMARKING
Ehrgott, M. & Gandibleux, X. / MULTIPLE CRITERIA OPTIMIZATION: State of the Art
Annotated Bibliographical Surveys
Bienstock, D. / Potential Function Methods for Approx. Solving Linear Programming Problems
Matsatsinis, N.F. & Siskos, Y. / INTELLIGENT SUPPORT SYSTEMS FOR MARKETING
DECISIONS
Alpern, S. & Gal, S. / THE THEORY OF SEARCH GAMES AND RENDEZVOUS
Hall, R.W. / HANDBOOK OF TRANSPORTATION SCIENCE—2nd Ed.
Glover, R & Kochenberger, G.A. / HANDBOOK OF METAHEURISTICS
Graves, S.B. & Ringuest, J.L. / MODELS AND METHODS FOR PROJECT SELECTION:
Concepts from Management Science, Finance and Information Technology
Hassin, R. & Haviv, M. / TO QUEUE OR NOT TO QUEUE: Equilibrium Behavior in Queueing
Systems
Gershwin, S.B. et SLI / ANALYSIS & MODELING OF MANUFACTURING SYSTEMS
Maros, I. / COMPUTATIONAL TECHNIQUES OF THE SIMPLEX METHOD
Harrison, Lee, & Neale / THE PRACTICE OF SUPPLY CHAIN MANAGEMENT: Where
Theory And Application Converge
* A list of the early publications in the series is at the end of the book *
THE PRACTICE OF SUPPLY CHAIN
MANAGEMENT: WHERE THEORY
AND APPLICATION CONVERGE
Terry P. Harrison
Penn State University
Hau L. Lee
Stanford University
John J. Neale
Optiant, Inc.
Springer
Library of Congress Cataloging-in-Publication Data
Harrison, Terry P.
The practice of supply chain management: where theory and application converge /
Terry P. Harrison, Hau L. Lee, John J. Neale
p. cm. (International series in operations research & management science)
Includes bibliographical references and index,
ISBN 1-4020-7988-5 (hardcover) ISBN 0-387-24099-3 (paperback)
HC38.5.H369 2003
658.7—dc21
2003047501
Printed on acid-free paper.
First printing of paperback edition 2005
© 2004 Springer Science&Business Media, Inc. (hardcover)
All rights reserved. This work may not be translated or copied in whole or in part without
the written permission of the publisher (Springer Science-i-Business Media, Inc., 233 Spring
Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or
scholarly analysis. Use in connection with any form of information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
know or hereafter developed is forbidden.
The use in this publication of trade names, trademarks, service marks and similar terms,
even if the are not identified as such, is not to be taken as an expression of opinion as to
whether or not they are subject to proprietary rights.
Printed in the United States of America.
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SPIN 11367611
CONTENTS
Contributors
vii
Introduction to The Practice of Supply Chain Management
xi
CORE CONCEPTS AND PRACTICES
1.
2.
Principles for the Strategic Design of Supply Chains
Terry P. Harrison
Tactical Planning for Reinventing the Supply Chain
David Simchi-Levi, Edith Simchi-Levi, and Michael Watson
3
13
3.
The Role of Inventory in Superior Supply Chain Performance
John J. Neale, Brian T. Tomhn, and Sean P. Willems
31
4.
Supply Chain Performance Metrics
Warren H. Hausman
61
EMERGING SUPPLY CHAIN PRACTICES
5.
6.
7.
Sourcing Strategy and Supplier Relationships:
Alliances versus eProcurement
David F. Fyke and M. Eric Johnson
77
Supply-Chain Coordination: How Companies Leverage
Information Flows to Generate Value
Susan Cohen Kulp, Ehe Ofek, and Jonathan Whitaker
91
Supply-Chain.Net: The Impact of Web-based Technologies on
Supply Chain Management
Enver Yiicesan and Luk N. Van Wassenhove
109
8.
e-Business and Supply Chain Integration
Hau L. Lee and Seungjin Whang
9.
Managing Product Variety through Postponement:
Concept and Applications
S. Venkatesh and Jayashankar M. Swaminathan
139
Creating and Leveraging Options in the High Technology
Supply Chain
Corey Bilhngton and Blake Johnson
157
Managing Supply Chains with Differentiated Service
Requirements—Models and Applications
Morris A. Cohen, Vinayak Deshpande, and Yunzeng Wang
175
10.
11.
123
vi
Contents
SUPPLY CHAIN IN ACTION
12.
13.
14.
Data-Rich Supply Chain Management: The Case of
Seven Eleven Japan
Seungjin Whang
199
Lucent Technologies: Achieving the "Impossible"
By Using Provisioning and Postponement
David W. Hoyt and Enrique Lopez-Tello
209
Measuring the Benefits of Product Standardization and
Postponement of Configuration in a Supply Chain
Tony Davila and Marc Wouters
221
15.
Combinatorial Auctions in Procurement
Wedad Elmaghraby and Pinar Keskinocak
16.
The Benefits of Business-to-Business Applications for
Fabless Semiconductor Companies
Barchi Peleg
259
Supply Chain Management at a Chip Tester
Manufacturer
Srinagesh Gavirneni
277
17.
18.
Aerospace Supply Chain Dynamics
Thomas Bilczo, Larry Bugbee, Jonathan Fitzhugh,
Dave Gilbert, Steve Halladin, James Rubert, and
Benny Budiman
19.
Agent Models of Supply Network Dynamics:
Analysis, Design, and Operation
S. Brueckner, H. Baumgaertel, V. Parunak,
R. Vanderbok, and J. Wilke
Index
245
293
315
345
CONTRIBUTORS
Hartwig Baumgaertel
DaimlerChrysler Corp.
Research & Technology
Alt-Moabit 96a
D-10559 Berlin
Germany
Thomas Bilczo
Senior Project Manager
The Boeing Company
PO Box 3707, MS: 7A-CC
Seattle, WA 98124
USA
Corey Billington
President
2ndedison, Inc.
516 2nd Avenue
Redwood City, CA 94063
USA
Sven A. Brueckner
Altarum Institute
3520 Green Court, Suite 300
Ann Arbor, MI 48105-1570
USA
Benny Budiman
Dept. of Mechanical Engineering
MIT
77 Massachusetts Ave, Room 35-023
Cambridge, MA 02139
USA
Larry Bugbee
Advanced Computing Technologist
The Boeing Company
POBox3707, MS:2R-91
Seattle, WA 98124
USA
Morris A. Cohen
Matsushita Professor of Manufacturing
and Logistics
The Wharton School
University of Pennsylvania
Philadelphia, PA 19104-6340
USA
Susan Cohen Kulp
Harvard Business School
Morgan Hall, Room 433
Soldiers Field Road
Boston, MA 02163
USA
Tony Davila
Stanford Business School
518 Memorial Way
Stanford University
Stanford, CA 94305-5015
USA
Vinayak Deshpande
Krannert School of Management
Purdue University
West Lafayette, IN 47907
USA
Wedad Elmaghraby
Assistant Professor
School of Industrial & Systems
Engineering
Georgia Institute of Technology
765 Per St Drive
Atlanta, GA 30332
USA
Jonathan Fitzhugh
Associate: Boeing Ventures
The Boeing Company
609 Concordia Circle
Twin Falls, ID 83301
USA
Srinagesh Gavirneni
Operations & Decision
Technologies
Kelley School of Business
Indiana University
Contributors
Vlll
Bloomington, IN 47405
USA
Dave Gilbert
3320 Hudson Court
Pleasanton, CA 94588
USA
Stephen Halladin
Associate Technical Fellow
The Boeing Company
PO Box 3707, MS: 5H-71
Seattle, WA 98124
USA
Terry P. Harrison
Supply Chain & Information Systems
Dept.
Smeal College of Business
Administration
Penn State University
University Park, PA 16802
USA
Warren H. Hausman
Dept. of Management Science &
Engineering
Terman 312
Stanford University
Stanford, CA 94305-4026
USA
David W. Hoyt
Graduate School of Business
518 Memorial Way
Stanford University
Stanford, CA 94305
USA
Blake Johnson
2ndedison, Inc.
516 2nd Avenue
Redwood City, CA 94063
USA
M. Eric Johnson
Center for Digital Strategies
Tuck School of Business
Dartmouth College
Hanover, NH 03755
USA
Pinar Keskinocak
Assistant Professor
School of Industrial & Systems
Engineering
Georgia Institute of Technology
765 Ferst Drive
Atlanta, GA 30332
USA
Hau L. Lee
Graduate School of Business
Stanford University
Stanford, CA 94305
USA
John J. Neale
Optiant, Inc.
4 Van de Graaff Drive
Burlington, MA 01803
USA
Elie Ofek
Harvard Business School
Morgan Hall, Room 195
Soldiers Field Road
Boston, MA 02163
USA
Barchi Peleg
Dept. of Management
Science & Engineering
Terman Center #350
Stanford University
Stanford, CA 94305-4026
USA
David F. Fyke
Center for Digital Strategies
Tuck School of Business
Dartmouth College
Hanover, NH 03755
USA
Contributors
James Rubert
Advanced Computing Technologist
The Boeing Company
POBox3707, MS:2R-91
Seattle, WA 98124
USA
David Simchi-Levi
Professor of Engineering Systems
MIT
77 Massachusetts Avenue
Room 1-171
Cambridge, MA 02139-4307
USA
Edith Simchi-Levi
LogicTools, Inc.
35 Corporate Drive, 4th Floor
Burlington, MA 01803
USA
Enrique Lopez-Tello
Av de Bruselas 8
Lucent Technologies
28108 Alcobendas, Madrid
Spain
Jayashankar M. Swaminathan
Kenan-Flagler Business School
University of North Carolina
Chapel Hill, NC 27599
USA
Brian T. Tomlin
Kenan-Flagler Business School
University of North Carolina
Chapel Hill, NC 27599
USA
Ray VanderBok
Altarum Institute
3520 Green Court, Suite 300
Ann Arbor, MI 48105-1570
USA
H. Van Dyke Parunak
Altraum Institute
3520 Green Court, Suite 300
Ann Arbor, MI 48105-1570
USA
Luk Van Wassenhove
The Henry Ford Chaired Professor of
Manufacturing
Professor of Operations Management
INSEAD
Boulevard de Constance
77305 Fontainbleau Cedex
France
S. Venkatesh
Ph.D.
Supply Chain Group
Imaging & Printing
Hewlett-Packard Company
Sunnyvale, CA 94086
USA
Yunzeng Wang
Weatherhead School of Management
Case Western Reserve University
Cleveland, OH 44106-7235
USA
Michael Watson
LogicTools, Inc.
311 S. Wacker Drive, Suite 4550
Chicago, IL 60606
USA
Seungjin Whang
Jagdeep & Roshni Singh Professor of
Operations
Information & Technology
518 Memorial Way
Stanford University
Stanford, CA 94305-5015
USA
Jonathan D. Whitaker
Associate Partner
Accenture
100 Peachtree Street, Suite 1300
Atlanta, GA 30303
USA
Contributors
Joerg Wilke
DaimlerChrysler Corp.
Research & Technology
Alt-Moabit 96a
D-10559 Berlin
Germany
Sean P. Willems
Assistant Professor of Operations
and Technology Management
Boston University School of
Management
595 Commonwealth Avenue
Boston, MA 02215
USA
Marc Wouters
School of Business & Public
Administration
University of Twente
PO Box 217
7500 AE Enschede
The Netherlands
Enver Yucesan
Professor of Operations Management
INSEAD
Boulevard de Constance
77305 Fontainbleau Cedex
France
INTRODUCTION TO THE PRACTICE OF
SUPPLY CHAIN MANAGEMENT''
For over a decade, there has been an increasing interest in the use of supply chain
methods to improve performance across the entire business enterprise. Supply chain
management has become a standard part of the business lexicon, and many firms now
have a functional supply chain group. In addition to individual companies, numerous
industries have recognized the importance of supply chain integration. Initiatives that
aim at getting multiple companies to work together toward a more streamlined and
efficient supply chain have been developed. The most well known of such industrywide initiatives include the Quick Response of the apparel industry, the Efficient
Consumer Response of the grocery industry, the Efficient Foodservice Response of
the foodservice industry, as well as other initiatives in the pharmaceutical, automobile,
aerospace, personal computer, and semiconductor industries.
The widespread interest in supply chain management has led to innovative ways
to re-engineer the supply chain, new software solutions to help companies plan and
operate their supply chain, and new business models and services for existing and new
players in the supply chain. The advances of the Internet have helped fuel the development of these innovations and new operating models. New ways to communicate,
connect, transact and collaborate among supply chain partners have emerged. New
channels of distribution as well as creative products and services have also come to
the marketplace.
At the same time, research interest in supply chain management has also been
increasing. Practice in the field has sparked the interest of the research community and
we have witnessed an explosive growth of research output on the theories and methods
of supply chain management. Some of these new research developments have found
their way into practice as companies have begun experiments using the developments.
Implementation and experimentation naturally lead to new ideas, and the practiceresearch-practice-research cycle continues.
This is no doubt a very exciting time for supply chain practitioners as well as
researchers.
The objective of this book is to provide an overview of this important practiceresearch cycle. The focus of the book is on supply chain practice, but as described
above supply chain practice has been heavily influenced by supply chain research.
Supply chain practice has also stimulated new directions for research. It is our intent
that this book provide the reader with:
• A set of tutorials on key supply chain methods and practices
• A review of what supply chain practices are like in multiple industries
• A description of how innovative ideas and new research methodologies have been
used in practice
• We thank Corey Billington for his efforts and contributions in the early stages of this book.
xii
Introduction to The Practice of Supply Chain Management
• An identification of the enablers of successful implementation of such ideas in
practice
• A report on the new insights and research directions that can be gained from observing these practices.
We have organized the book into three sections.
Core Concepts and Practices
In the first section, we provide an overview of core supply chain concepts and practices. We begin by examining the approaches used when making strategic decisions
about supply chain infrastructure. "Principles for the Strategic Design of Supply
Chains" provides an overview of the key concepts and methods for supply chain
design within a global context. With the infrastructure established, we next turn our
attention to the opportunities and challenges of optimizing tactical supply chain decisions. "Tactical Planning for Reinventing the Supply Chain" gives a structured view
of what, how, and why different planning protocols are used in industry. Different
market and product characteristics may require different approaches for tactical planning in a supply chain. "The Role of Inventory in Superior Supply Chain Performance"
gives a thorough and comprehensive description of the key fundamentals of inventory
management within a supply chain. It describes how different companies have either
mastered these fundamentals to gain competitive advantage or have suffered because
they did not. It also discusses the development of new ways of managing inventory
and describes how these ways are being put into practice. Supply chain management
must start with performance measures, as performance measures induce incentives
and incentives change behaviors. "Supply Chain Performance Metrics" is a tutorial on
the basic concepts in supply chain performance measures and how companies can use
them for their advantage.
Emerging Supply Chain Practices
The second section of the book highlights new developments and innovations in supply chain management and reports on their use in industry. Sourcing strategies have
shifted rapidly in the past few years with the increasing adoption of outsourcing and
eProcurement. "Sourcing Strategy and Supplier Relationships: Alliances versus
eProcurement" provides a framework to examine how companies can manage
suppliers most effectively. It provides advice on what type of supplier relationship is
best for specific situations and presents a number of examples observed in practice. In
"Supply-Chain Coordination: How Companies Leverage Information Flows to
Generate Value," the authors report on new supply chain integration initiatives such as
information sharing, collaborative planning, and collaborative design. These different
initiatives have resulted in the creation of new value for the supply chain, as demonstrated by the consumer goods industry. In "Supply Chain.Net: The Impact of Webbased Technologies on Supply Chain Management," we see how Internet-based
Introduction to The Practice of Supply Chain Management
xiii
exchanges have been formulated and developed in recent years. Some models of
such exchanges have been successful, but others are still struggling. In what ways do
exchanges add value to the supply chain? How are they changing the business relationships of supply chain partners? In "e-Business and Supply Chain Integration," a
comprehensive picture of the impact of Internet-based e-Business technologies on
supply chain integration is given. Some of these technologies are helping supply chain
efficiencies, while others are actually creating new business models and markets for
companies. The multiple dimensions of supply chain integration through e-Business
are described with examples from practice. "Managing Product Variety through
Postponement: Concept and Applications" describes the history and current development of the concept of postponement in product and process design. This concept has
been very useful for companies to cope with the ever-increasing demand for product
variety and mass customization. The different types of postponement and how companies have made use of them are described. "Creating and Leveraging Options in the
High-Technology Supply Chain" discusses what companies can do to borrow the
familiar financial concept of options and apply it to supply chain designs and operations. This is potentially a very powerful concept, and the authors describe some early
applications in industry. Finally, we consider the movement toward "customer centric"
supply chain solutions. In "Managing Supply Chains with Differentiated Service
Requirements—Models and Applications," the authors examine supply chains characterized by multiple customer segments, each with different service needs. Methods
are proposed to manage inventory plans and material flows in service parts supply
chains with differentiated customer classes. The approach was driven by observing the
practices and challenges in two real-life service supply chains.
Supply Chain in Action
The third section of the book is devoted to examples of the application and implementation of sound supply chain concepts or principles in specific company settings.
It is here we see supply chain practice in real-life cases. In "Data-Rich Supply Chain
Management," we observe how legendary retailer Seven-Eleven Japan has embraced
and fully implemented the concept of using consumer point of sale data to run all the
operations of its supply chain. From product design, replenishment planning, and
logistics to product delivery, shelf configuration, and category management, the company makes use of data and has created one of the most efficient supply chains in the
world. In "Lucent Technologies: Achieving the 'Impossible' by Using Provisioning
and Postponement," we observe how the Spanish division of Lucent Technologies was
able to apply postponement concepts to win a major contract to provide telecommunication switching systems for Saudi Arabia. These concepts also enabled the company to complete the project on time to the satisfaction of the customer. In "Measuring
the Benefits of Product Standardization and Postponement of Configuration in a
Supply Chain," the combined use of accurate performance metrics and postponement
principles resulted in tremendous value and savings for Quantum Corporation, a
key disk drive manufacturer. In "Combinatorial Auctions in Procurement," the use
of high-powered optimization techniques enabled The Home Depot to work with
xiv
Introduction to The Practice of Supply Chain Management
transportation providers in bidding transportation jobs for the company. The result
was significant savings for The Home Depot. "The Benefits of Business-to-Business
Applications for Fabless Semiconductor Companies" describes how e-business tools
were used to help Adaptec, a fabless semiconductor manufacturer, communicate and
integrate its operations with its supply chain partners. In "Supply Chain Management
at a Chip Tester Manufacturer", a linear programming model is used to help a manufacturer plan production in a very challenging environment. In "Aerospace Supply
Chain Dynamics" we observe how Boeing utilized systems dynamics and simulation
modeling techniques to both identify problems in raw material supply and explore
ways to avoid such problems. Finally, "Agent Models of Supply Network Dynamics:
Analysis, Design, and Operation" describes a simulation methodology used by
DaimlerChrysler to evaluate different data dissemination policies for the automotive
supply chain.
Overall, this collection of chapters provides a snapshot of the state-of-the-art in the
extensive and dynamic landscape of supply chain practice.
Terry P. Harrison
Hau L. Lee
John J. Neale
December 19, 2002
CORE CONCEPTS AND PRACTICES
1
PRINCIPLES FOR THE
STRATEGIC DESIGN OF
SUPPLY CHAINS
Terry P. Harrison
Departnnent of Supply Chain and Infornnation Systenns
Snneal College of Business Adnninistration
Penn State University
University Park, PA 16802
4
Harrison
Abstract
I review principles and methods of global supply chain design from a variety of viewpoints,
with special emphasis on processes that have been used successfully in practice. The
perspective is focused on the practitioner who is interested in an overview of the key concepts
and application of supply chain design within a global context.
1. Introduction
Over the past ten years supply chain management (SCM) has become an important
focus of competitive advantage for firms and organizations. The impact of supply chain
management has increased steadily, drawing on developments in information systems,
management science, logistics, operations management, and other fields. The promise
of supply chain management is better use and deployment of resources across the entire
enterprise. While it has long been a goal to consider the impacts of managerial decisions across the complete organization, the tools, concepts and computing environment
have only been available for the past decade to realize this potential on a large scale.
A supply chain is the set of value-adding activities that connects a firm's suppliers to the firm's customers. The basic unit of a supply chain activity is
Receive input from supplier -^ Add value -^ Deliver to customer.
Here a "supplier" may be an external vendor or an upstream process within the firm.
Similarly, a customer may be the final customer of the finished product or service, or
a downstream operation that uses the output of one process as the input to another.
Three types of flows occur throughout the supply chain: (1) product, (2) information,
and (3) funds. These flows travel both upstream and downstream within the supply
chain. Effectively coordinating these three kinds of flows is the overarching goal of
supply chain management.
Managing the supply chain requires a wide range of methods and principles.
One way of classifying supply chain management analysis is to divide the area into
the strategic component—supply chain design (SCD), and the tactical/operational
piece—supply chain operations or execution (SCE).
Supply chain design is the process of determining the supply chain infrastructure—the plants, distribution centers, transportation modes and lanes, production
processes, etc. that will be used to satisfy customer demands. These studies are strategic in scope, use a time horizon of many months or years, and typically assume little
or no uncertainty with the data.
Supply chain execution is the process of determining solutions to more tactical and
operational issues such as local inventory polices and deployment, manufacturing and
service schedules, transportation plans, etc. In these instances, production and transportation data are usually assumed to vary according to a known probability distribution, while the infrastructure is assumed fixed (or nearly so). The time period for the
analysis typically spans days, weeks or months, and focuses on implementing detailed
short-term plans.
In this chapter, I describe the important considerations of designing a supply chain
from a global (versus domestic) perspective. Supply chain design has a large impact
on various measures of performance such as profitability, customer service, flexibility
Principles for the Strategic Design of Supply Chains
5
and reliability. It is a critical source of competitive advantage given that as much as
80% of total product cost may be fixed by these decisions.
2. Distinguishing Characteristics of Supply Chain Design
in a Global Context
Supply chain design decisions are often made in an environment that is rich with
uncertainty, filled with multiple, conflicting objectives and incomplete information.
Typically the following aspects are part of this environment.
• Supply chain redesign In practice, supply chain design decisions are rarely
focused on "green field" situations. More typically supply chain design questions
are the result of mergers, acquisitions, downsizing, or a significant shift in corporate strategy. In these situations, questions are centered on rationalizing the supply
chain in response to incremental changes to the supply chain infrastructure.
• A novel process Many firms are inexperienced at examining changes to the supply chain when the metrics span the entire organization.
• Impacts affect multiple groups Changes in the design of a supply chain often lead
to impacts that span large parts of the organization. Often there is no one person or
group that has deep experience with measuring or assessing these impacts. On the
plus side, the largest positive impacts of supply chain design frequently occur at the
boundary of organizational units.
• Organizational incentives may work against change The outcome of a supply
chain design may require changes that cause one group to have a decrease in
existing measures of performance while resulting in an improvement of firm-level
measures. For example, carrying additional inventory at a particular location may
cause costs within that reporting area to increase, but would ultimately lead to a
lower cost across the supply chain.
• Coordination across functional boundaries A key benefit of supply chain design
is that it often requires coordination between groups that typically do not interact.
This collaboration leads to a better understanding of cross-functional issues.
• Data needs are difficult to satisfy Since supply chain design spans many areas of the
organization, the data required to support analysis must be drawn from many sources.
The data may be measured at different frequencies, may use different scales or may
be contained in "private" sources that are difficult to obtain. For example, in one study
we found that various plant managers had their own estimates of production costs,
which were quite different from the corporate measures. Additionally, some types of
data may not exist anywhere within the firm. Examples would be manufacturing costs
for a new process or transportation costs on a lane that has never been used.
All of these considerations are common to supply chain design in both a domestic and global context. Additionally, global supply chain design requires consideration
of duties and duty drawback, local content, taxes and exchange rates. The interplay of
these issues leads to decision making environments that are particularly difficult,
complex and critical to the firm's long term performance.
Duties are costs assessed for the importation of goods. The cost of the duty is typically based on the value of the imported good, the type of good imported, and the
6
Harrison
country of origin. In the case where the imported good is used to manufacture another
product that is subsequently exported, some or all of the duty cost may be recovered
as duty drawback.
In order to provide domestic manufacturing opportunities, some countries require
a minimum local content before a firm is permitted to sell a particular product. This
restriction requires that a specified fraction of the value added to the final product
must occur within the country where the product is sold.
Differing tax rates may greatly affect the choice of location for key operations.
Often tax regulations are complex, but much of the impact may be captured in models. The effect of differing tax rates is likely to concentrate the high value-added activities in countries that serve as tax havens. However, these effects are balanced against
the costs of net duty, procurement, production and distribution.
Lastly, exchange rates greatly affect supply chain performance. The value of
improvements in supply chain design and execution can be overshadowed by unfavorable currency movements. Various authors have proposed models to use the supply
chain itself as a financial hedge against these currency fluctuations.
3. Typical Kinds of Supply Chain Design Analyses
Supply chain design addresses a wide range of strategic infrastructure issues for the
firm. The following examples highlight many of the key issues that are typically
considered.
Manufacturing Strategy
•
•
•
•
How many plants are needed
Where should each plant be located
What products should each plant make
What process technologies should each employ, and how much of each process is
needed
• What markets should each plant serve
Supply Base Design
• Simultaneously determine supplier selection for all parts within commodity groups
• Allocate suppliers to plants
Distribution Strategy
• Should we ship direct or stock regionally
• How many DCs are needed and where should they be located
• Which DCs will server which customers
• What transportation modes will be used
Outsourcing
• What portions of the supply chain remain in-house versus outsourced
• Cost tradeoffs versus service considerations
Principles for the Strategic Design of Supply Chains
New Product and Process Design
What infrastructure should be used when new products are added to existing lines
At what demand points are additional sources of supply needed and where should
they be located
Experience with a number of supply chain design projects over the past ten years
leads me to conclude that the benefits of a well-conceived and executed supply chain
can be substantial. Some representative outcomes are:
•
•
•
•
Decreased costs of 5-60%, with 10% typical
Decreased service times of 25-75%, with 30% typical
Foster cross functional teamwork and "out of the box" thinking
Provide an objective assessment of alternatives in the politically charged environment of strategic supply chain decision making
4. Modeling Approaches
The first aspect in performing a supply chain design study is to determine the type of
modeling approach to be used. Modeling means to develop a mathematical representation (or model) of the supply chain. This mathematical model is manipulated and the
behavior is observed. If the supply chain model is sufficiently accurate, then the
insights gained from analysis of the supply chain model can be used on the physical
supply chain to obtain similar results.
Supply chain models may vary in many aspects, such as the level of detail, the
length of time they represent, the performance measures used, etc. Currently, given a
particular supply chain model, there are three primary approaches to conducting this
analysis. These are: (1) optimization, (2) simulation, and (3) heuristics.
Optimization is an analysis method that determines the best possible method of
designing a particular supply chain. The mathematical model has some objective that
is maximized or minimized, such as total system cost (minimize) or profit (maximize).
The drawback of using optimization is the difficulty in developing a model that is sufficient detailed and accurate in representing the physical supply chain, while keeping
the model simple enough to be solved. Further, optimization models tend to require
more data than other approaches. However, when the model of the supply chain is true
to the actual supply chain, and the model is not too complex to solve, optimization
produces the best possible insights into questions related to supply chain design. In
those instances it is the method of choice.
Simulation is imitating the behavior of one system with another. In this case,
the simulation model imitates the physical supply chain. By making changes to the
simulated supply chain, one expects to gain an understanding of the dynamics of the
physical supply chain.
Probabilistic simulation models allow for the most general and flexible representation of the supply chain and the firms' operating policies, and therefore provide the
ability to examine issues that are too detailed or complex for optimization models.
However, in supply chain design, one is typically looking for strategic, first order
effects, so this relative advantage of simulation is less important. Simulation modeling
8
Harrison
is more prevalent when investigating supply chain execution (as opposed to design)
questions.
One serious drawback to the use of simulation is that it only assesses the performance of a pre-specified design—it does not create or suggest the design. On the
other hand, simulation easily incorporates the effects of uncertainty, unlike most practical optimization approaches. Simulation is an ideal tool for further analyzing the
performance of a proposed design derived from an optimization model.
Heuristics are intelligent rules that often lead to good, but not necessarily the best,
supply chain design solutions. Heuristic approaches typically are easier to implement
and require less data. However, the quality of the solution is usually unknown. Unless
there is a reason that optimization cannot be used, heuristics are an inferior approach.
5. Data Needs
The most challenging aspect of a supply chain design project, other than the actual
implementation, is collecting a complete and accurate set of data. The activities and
data needs of supply chain management cover virtually all areas of the firm, which
requires a comprehensive data collection effort. Data typically reside in a variety of
locations and forms, from handwritten notes in someone's desk to large, enterprisewide databases. The outcome is that collecting and verifying data is a time consuming,
difficult and iterative process. However, the quality of the analysis and the potential for
substantial impact is directly linked to the quality and completeness of the data. Firms
that use activity-based costing often can fulfill supply chain data needs more easily.
A typical strategic design of a global supply chain would include the following
kinds of data, at a minimum: locations, process, product and movements.
Location data is the starting point for describing any supply chain network and
would likely include:
•
•
•
•
•
•
•
•
fixed costs of opening, closing or maintaining a facility,
variable costs of operating the facility,
geo-referenced data to denote the facility's physical location,
the location's country for determining tax effects,
trading alliances, such as the European Union, for assessing duty effects,
capacities and processes available at the facility,
inventories and inventory policies,
demand by product.
Process data provides a description of a location's ability for adding value. It
includes manufacturing, service, retail or transportation capabilities, and packaging
options.
Product data includes the list of stock keeping units, their physical attributes,
revenue and cost, bill of material relationships, and structure.
Movements data provides a description of the logistics network, and is often the
most extensive and difficult data need. Every possible link that provides a movement
between locations must be included. Each transportation link is described by a cost, a
capacity, a transit time and a transportation mode. For many links, such as ground
Principles for the Strategic Design of Supply Chains
9
transport in the United States, standard tariffs are widely available. Some common
rate sources are:
YFSY U.S. Class Rates 500
Yellow Freight System, Inc.
10990 Roe Ave
Overland Park, KS 66211-1213
Service Guide—Domestic Services
United Parcel Service of America, Inc.
55 Glenlake Parkway, NE
Atlanta, GA 30328
The North American Truckload Rate Index
Class 8 Solutions, Inc.
RO. Box 25672
Woodbury, MN 55125-0672
CzarLite(TM) LTL Rating System
SMC^
500 Westpark Drive
Suite 300
Peachtree City, GA 30269
RDWY U.S. Class Rates 507
Roadway Express
1077 Gorge Blvd.
Akron, OH 44309
However for other rates, such as ocean movement of goods between countries, no
standard sources may exist.
The data collection phase of a global supply chain design effort is a formidable
challenge and is the single largest barrier to initiating a study. While large, enterprisewide information systems have greatly reduced the effort of assembling this data, for
most firms assembling the full complement of necessary data is a time consuming,
difficult, and error-prone process. It is a most important step in the design of a supply
chain. It is also the least structured and verifiable.
6. Analysis
Regardless of the analysis technique used to identify preferred supply chain configurations, the procedure is roughly the same. The key steps are to establish a baseline
design and systematically modify the data to develop intuition about the structure of
the supply chain and to identify key performance levers.
In a baseline design, the flows are fixed to current practice. This permits validation of the data by comparing various cost and operational characteristics to externally
verified measures. For example, the fixed and variable costs of production and
distribution, taxes and duties may be compared against known values. Discrepancies
10
Harrison
can be identified and traced to data deficiencies, errors or omissions. Similarly, operations and logistics metrics for production, inventory and distribution can be compared to current practice. The completion of a baseline design provides confidence
that the fundamental operating characteristics of the supply chain have been correctly
modeled.
Next, different aspects of the data are varied and the model solved to determine
the response of the supply chain. Typically, these kinds of change would include the
removal of certain facilities, changes in capacities or especially demands, or the forcing of flows that are required for reasons that cannot be captured by the model.
The exact set of analyses is problem specific. However, common to every study is
the need to determine the sensitivity of the solution to demand variability and changes
in the structure of manufacturing or distribution costs. It is important to perform the
analysis with an orientation to finding a good set of solutions rather than a single
design. Usually, the recommended design is further modified to account for organizational issues that cannot be modeled.
7. The State of the Art
Studies of the impact of information flows throughout the supply chain, along with the
effect of uncertainty within the supply chain are overarching themes to many current
research efforts. One promising area within this general theme is the study of combining simulation methods with optimization methods in an iterative way. This
approach leverages the strength of traditional strategic optimization models with an
ability to examine detailed, stochastic elements of the supply chain. For example,
Chatfield et al. (2000a, 2000b) describe a supply chain simulator of this type. In conjunction with this work, Chatfield et al. (1999) report on the development of a high
level language, based on XML, to allow detailed description of an arbitrary supply
chain. This Supply Chain Markup Language (SCML) permits the exchange of supply
chain models in a way that is free of any particular solution method or computer
implementation.
Demand uncertainty is one of the single most important factors affecting a supply
chain design. Characterizing the data and incorporating these effects are areas of
intense research. There is good reason for this interest, as some analyses have shown
that omitting the effects of uncertainty can lead to inferior supply chain designs. An
emerging trend is toward robust supply chain design. That is, instead of assuming a
particular demand scenario and finding the best design to meet those requirements,
robust supply chain design seeks to configure the supply chain infrastructure so that
it performs well over a wide variety of possible demand scenarios. Given the possibility of supply chain difficulties due to terrorist attack, information system failures or
simply catastrophic events, robust supply chain design offers some promise of building "hardened" and responsive supply chains to a variety of disruptive factors.
Supply chain metrics are a complementary area of study to supply chain design.
Metrics are the means to measure things, and supply chain metrics are how the overall performance of the supply chain is assessed. Traditional measures are usually not
able to incorporate a system wide perspective. Current research in supply chain metrics
Principles for the Strategic Design of Supply Chains
11
allows for more focused and appropriate measurement of the potential performance of
supply chain designs.
Lastly, supply chain design methods are being combined with other important
business processes such as product design, market design, pricing, and high-level
financial models. The trend is to extend further the reach and interconnectivity of
methods to manage the firm's actions. Research contributions in modeling, optimization and information systems are a driving force.
8. Conclusions
Global supply chain design is an important area of supply chain research and practice.
The impacts of a good supply chain design are significant, resulting in lower costs,
better coordination and improved customer service. There are many organizational
considerations in implementing a supply chain design, and often the non-quantifiable
benefits of cross-functional coordination are as important as the explicit cost savings.
The effect of duties, duty drawback, local content, taxes and exchange rates fluctuations are additional factors introduced by a global supply network.
A variety of techniques, tools and software exist for global supply chain design.
However, unless mitigating circumstances exist, optimization methods are the preferred
approach. The combination of optimization with simulation techniques is a promising
research direction to improve decision making for global supply chain design.
Further Reading
Supply chain applications with measurable outcomes have appeared in the literature
for more than 15 years. For example, the paper by Kleutghen and McGee (1985)
reports on an early application at Pfizer. Subsequent papers describe applications of
increasing scope, size, and impact (Arntzen et al. 1995; Lee and Billington 1995;
Camm et al. 1997; Brown et al. 2000; D'Alessandro et al. 2000; Guide et al. 2000;
Hahn et al. 2000; Karabakal et al. 2000; Lin et al. 2000; and Rao et al. 2000).
Vidal and Goetschalckx (1997) and Goetschalckx et al. (2002) provide extensive
reviews of models and applications of strategic supply chain design.
Within the past few years textbooks focused on various aspects of supply chain
management have also appeared with increasing frequency. For someone unfamiliar
with supply chain management, Handfield and Nichols (1999) provide an introduction
to basic supply chain concepts. The texts by Simchi-Levi et al. (2002) and Chopra and
Meindl (2001) are excellent references on a variety of supply chain issues and methods, including supply chain design. Lastly, the recent text by Shapiro (2001) covers
more technical detail, especially regarding optimization techniques.
References
Arntzen, Bruce, Brown, G.G., Harrison, T.R, and L.L. Trafton, Global supply chain management at Digital Equipment Corporation. Interfaces, 25(1), 69-93 (1995).
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Harrison
Brown, Alexander, Lee, H., and R. Petrakian, Xilinx improves its semiconductor supply chain
using product and process postponement. Interfaces, 30(4), 65-80 (2000).
Camm, J.D., Chorman, T.E., Dill, F.A., Evans, J.R., Sweeney, D.J., and G.W. Wegryn, Blending
OR/MS, judgment, and GIS: restructuring P&G's supply chain. Interfaces, 27(1), 128-142
(1997).
Chatfield, D., Harrison, T., and J. Hayya, A Generalized Supply Chain Modeling Language.
INFORMS Fall 1999 meeting, November 1999, Philadelphia, PA (1999). URL: http://www2.
informs.org/Conf/Philadelphia99/TALKSAVB09.html
Chatfield, D., Harrison, T., and J. Hayya, SISCO: The Simulator for Integrated Supply Chain
Operations. INFORMS Spring 2000 meeting. May 2000, Salt Lake City Utah (2000a). URL:
http://www2.informs.org/Conf/SaltLake2000/TALKS/MB07.html
Chatfield, D., Harrison, T., and J. Hayya, Utilizing SISCO: The Simulator for Integrated Supply
Chain Operations. INFORMS 2000 Annual Meeting, November 2000, San Antonio, Texas
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2
TACTICAL PLANNING
FOR REINVENTING
THE SUPPLY CHAIN
David Simchi-Levi
Massachusetts Institute of Technology
Cannbridge MA
Edith Simchi-Levi
LogicTools Inc.
Chicago IL
Michael Watson
LogicTools Inc.
Chicago IL
D. Simchi-Levi, E. Simchi-Levi, and Watson
14
1. Introduction
Fierce competition in today's global markets, the introduction of products with short
life cycles, and the heightened expectations of customers have forced business enterprises to invest in, and focus attention on their supply chains. This, together with continuing advances in communications and transportation technologies, such as mobile
communication and overnight delivery, has motivated the continuous evolution of the
supply chain, and techniques to manage it.
In a typical supply chain, raw materials are procured, items are produced at one or
more factories, shipped to warehouses for intermediate storage, and then shipped to
retailers or customer