Supply Chain Videocast - Supply Chain Digest - The … · Supply Chain Videocast ... Part 3:...

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Supply Chain Videocast Operations Rules 2012 Part 3: Managing Complexity Through Long Tail Analysis

Transcript of Supply Chain Videocast - Supply Chain Digest - The … · Supply Chain Videocast ... Part 3:...

Supply Chain Videocast

Operations Rules 2012

Part 3: Managing Complexity Through Long Tail Analysis

Broadcast Made Possible by:

Operations Rules 2012 3-Part Videocast Series

Part 1: Mitigating Supply Chain Risk/New

Risk Exposure Index

• Now Available On-Demand

Part 2: Supply Chain Segmentation for

Improved Profitability

• Now Available On-Demand

Part 3: Managing Complexity through

Long Tail Analysis

On-Demand Videocasts at www.scdigest.com/supply_chain_videocasts.php

Complexity Management: Long Tail

Analysis

David Simchi-Levi

E-mail: [email protected]

Professor, Massachusetts

Institute of Technology

Supply

Sources: plants vendors ports

Regional Warehouses: stocking points

Field Warehouses: stocking points

Customers, demand centers sinks

Production/ purchase costs

Inventory & warehousing costs

Transportation costs

Inventory & warehousing costs

Transportation costs

©Copyright 2012 D. Simchi-Levi 5

Supply Produce Distribute Sell

Plan/Design

Source

•Product Architecture

•Make/Buy

•Early Supplier Involvement

•Strategic Partnerships

•Suppliers Selection

•Supply Contracts

Fulfillment Supply Chain

Develo

pm

en

t Su

pp

ly C

hain

The Enterprise Fulfillment and Development Supply Chains

©Copyright 2012 D. Simchi-Levi 6

Complexity and its Challenges • Development Supply chain

– Hundreds of products

– Thousands of suppliers

• Fulfillment Supply chain – Multiple channels

– Customers in different regions

– Different packaging and labeling

– Many facilities

• The impact of complexity – Forecast accuracy

– Service level

– Inventory levels

– Cost (set-ups, inventory, …) and margins

©Copyright 2012 D. Simchi-Levi 7

Complexity and its Challenges • Development Supply chain

– Hundreds of products

– Thousands of suppliers

• Fulfillment Supply chain – Multiple channels

– Customers in different regions

– Different packaging and labeling

– Many facilities

• The impact of complexity – Forecast accuracy

– Service level

– Inventory levels

– Cost (set-ups, inventory, …) and margins

Our objective is to understand the hidden cost of complexity

and identify effective ways to manage it

©Copyright 2012 D. Simchi-Levi 8

9

What We’ll Cover …

• The Curse of Variability

Drivers and Impact

• Matching Products and Strategies

Push-Pull Supply Chains

• Complexity Management

The Long Tail Approach

• Summary

©Copyright 2012 D. Simchi-Levi

Demand variability & uncertainty complicate

operations and supply chain strategy and planning

Retail sales versus Orders to PC Manufacturers

The Bullwhip Effect:

• Order Variability is amplified up the supply chain

• Upstream echelons face higher variability

10

©Copyright 2012 D. Simchi-Levi

What are the Causes….

• Promotional sales

• Volume and Transportation Discounts

• Inflated orders

• Demand Forecast

• Long cycle times

• Lack of visibility

11

Consequences….

• Increased safety stock

• Reduced service level

• Inefficient allocation of resources

• Increased transportation costs

12 ©Copyright 2012 D. Simchi-Levi

13

What We’ll Cover …

• The Curse of Variability

Drivers and Impact

• Matching Products and Strategies

Push-Pull Supply Chains

• Complexity Management

The Long Tail

• Summary

©Copyright 2012 D. Simchi-Levi

Push-Pull Supply Chains

The Supply Chain Time Line

Low Uncertainty High Uncertainty

Customers Suppliers

PUSH STRATEGY PULL STRATEGY

Push-Pull Boundary

14

©Copyright 2012 D. Simchi-Levi

Matching Supply Chain Strategies

with Products

I IV

III II

Demand uncertainty

(C.V.)

Delivery cost

Unit price

L H

H

L

Economies of

Scale

15

Pull Push

Pull

Push

©Copyright 2012 D. Simchi-Levi

Matching Supply Chain Strategies

with Products

I IV

III II

Demand uncertainty

(C.V.)

Delivery cost

Unit price

L H

H

L

Economies of

Scale

16

Pull Push

Pull

Push

©Copyright 2012 D. Simchi-Levi

Matching Supply Chain Strategies

with Products

I IV

III II

Demand uncertainty

(C.V.)

Delivery cost

Unit price

L H

H

L

Economies of

Scale

17

Pull Push

Pull

Push

18

What We’ll Cover …

• The Need to Focus

Drivers and Impact

• Matching Products and Strategies

Supply Chain Segmentation

• Complexity Management

The Long Tail Approach

• Summary

©Copyright 2012 D. Simchi-Levi

Case Study: Steel Manufacturing Company

• Blast Furnace producing slabs – Currently slabs are produced using Make-to-Forecast

– About 300 different articles defined by steel grade, width, weight, etc

• Slabs are shipped to manufacturing facility – Lead time of 8-9 weeks

• Rolling Operations

– Slabs are hot or cold rolled into sheet metal or plates

– Production Processing time is 3-4 weeks

– Make-to-Order operations

Raw Materials

Iron Ore &

Carbon Coke Blast Furnace

Finishing

Cold-rolled

Finishing

Hot-rolled

8-9 weeks

3-4 weeks

End User

Final processing

Rolling

19

The Challenge • Poor forecast accuracy:

During a six-month period, the average absolute relative forecast error (ARFE) was above 240%, while the weighted average ARFE was below 130%

• Low fulfillment accuracy: During the same period of time, fulfillment accuracy was

below 50%

• Higher cost: Instability in the supply chain was driving material,

manufacturing and logistics costs up

©Copyright 2012 D. Simchi-Levi 20

©Copyright 2012 D. Simchi-Levi

The Long Tail: Orders Volume, Variability and Margins

21

(1,000,000)

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

0.00 0.50 1.00 1.50 2.00 2.50

Ave

rage

Mo

nth

ly A

rtic

le V

olu

me

Coefficient of Variation

Coeffecient of Variation for Articles with Average Monthly Volume less than 5MM kg(Bubble size represents the absolute value of variable margin)

Unique Articles

©Copyright 2012 D. Simchi-Levi

The Long Tail: Orders Volume, Variability and Margins

22

(1,000,000)

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

0.00 0.50 1.00 1.50 2.00 2.50

Ave

rage

Mo

nth

ly A

rtic

le V

olu

me

Coefficient of Variation

Coeffecient of Variation for Articles with Average Monthly Volume less than 5MM kg(Bubble size represents the absolute value of variable margin)

Unique Articles

©Copyright 2012 D. Simchi-Levi

(1,000,000)

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

0.00 0.50 1.00 1.50 2.00 2.50

Ave

rage

Mo

nth

ly A

rtic

le V

olu

me

Coefficient of Variation

Coeffecient of Variation for Articles with Average Monthly Volume less than 5MM kg(Bubble size represents the absolute value of variable margin)

Unique Articles

The Long Tail: Orders Volume, Variability and Margins

Low CV articles

23

19 articles (9% of total) They account for more

than 50% of the volume These articles should be

managed based on a Push-Pull strategy

That build-to stock of articles and build-to-order of final products

Compete on Time

©Copyright 2012 D. Simchi-Levi

The Supply Chain Strategy for the High Volume Low/Variability

Articles

Raw Materials

Iron Ore &

Carbon Coke Blast Furnace

Finishing

Cold-rolled

Finishing

Hot-rolled

8-9 weeks

3-4 weeks

End User

Final processing

Rolling

19 articles contributing more than 50% of the volume

©Copyright 2012 D. Simchi-Levi

Raw Materials

Iron Ore &

Carbon Coke Blast Furnace

Finishing

Cold-rolled

Finishing

Hot-rolled

8-9 weeks

3-4 weeks

End User

Final processing

Rolling

PUSH STRATEGY PULL STRATEGY

Push-Pull Boundary

Keep Stock

The Supply Chain Strategy for the High Volume Low/Variability

Articles

©Copyright 2012 D. Simchi-Levi

The Long Tail: Orders Volume, Variability and Margins

26

(1,000,000)

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

0.00 0.50 1.00 1.50 2.00 2.50

Ave

rage

Mo

nth

ly A

rtic

le V

olu

me

Coefficient of Variation

Coeffecient of Variation for Articles with Average Monthly Volume less than 5MM kg(Bubble size represents the absolute value of variable margin)

Unique Articles

Many low volume, low margin, high variability articles

These are not productive articles

They are candidates for removal from the business

The Long Tail Approach

Products

Long Tail

Popular Products

Popula

rity

•Is there an opportunity to simplify by managing the tail?

•Does the long tail contribute significantly to revenue?

•Does the long tail include many low margin products?

•What is the hidden cost of products in the long tail?

©Copyright 2012 D. Simchi-Levi 27

Example 2: Demand, variability, and allocated margin

©Copyright 2012 D. Simchi-Levi

1

10

100

1000

0 0.5 1 1.5 2 2.5 3 3.5

Averagem

onthlyshipments(LOGSCALE)

Coeffic

i

entofVaria onofmontlyshipments

30-80%

0-30%

Nega ve

80-90%

Allocat

ed

margin Allocated margin range

Tail accounts for

• 35 % of products

• 1.4% of revenue

• 50% of the negative margin products

Case Study: High-Tech Company

Example 2: Lead Time and the Long Tail

©Copyright 2012 D. Simchi-Levi

29

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

High CV Low CV

4_LT>35

3_LT: 28-35

2_LT:21-27

1_LT<21

Rule: Products in the Long Tail are associated with

Longer Lead Times than other products

Tail accounts for

• 35 % of products

• 1.4% of revenue

• 50% of the negative margin products

• 60% of total cost per unit sold

For each Category, % of products with a given Lead Time

The Impact of Product Life Cycle on Variabiity

©Copyright 2012 D. Simchi-Levi

30

0

0.5

1

1.5

2

2.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Co

eff

icie

nt

of

Var

iati

on

(C

V)

Products in Early Life

Product 1 Product 2

0

0.5

1

1.5

2

2.5

3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Co

eff

icie

nt

of

Var

iati

on

(C

V)

Products in End of Life

Product 3 Product 4

The Impact of Product Life Cycle on Variabiity

©Copyright 2012 D. Simchi-Levi

31

0

0.5

1

1.5

2

2.5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Co

eff

icie

nt

of

Var

iati

on

(C

V)

Products in Early Life

Product 1 Product 2

0

0.5

1

1.5

2

2.5

3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Co

eff

icie

nt

of

Var

iati

on

(C

V)

Products in End of Life

Product 3 Product 4

Rule: The tail is not Static—Products typically start at

the tail and end at the tail

Variability Growth with the Number of Products

©Copyright 2012 D. Simchi-Levi

32

100

120

140

160

180

200

220

240

260

280

300

0.8

0.9

1

1.1

1.2

1.3

1.4

2008 2009 2010 2011 2012

Nu

mb

er

of

Un

iqu

e P

rod

uct

s

Ave

rage

CV

Fiscal periods

Average CV Number of Products

Variability Growth with the Number of Products

©Copyright 2012 D. Simchi-Levi

33

100

120

140

160

180

200

220

240

260

280

300

0.8

0.9

1

1.1

1.2

1.3

1.4

2008 2009 2010 2011 2012

Nu

mb

er

of

Un

iqu

e P

rod

uct

s

Ave

rage

CV

Fiscal periods

Average CV Number of Products

Rule: The more products you have the higher the

variability

Example 3:The Long Tail Approach

©Copyright 2012 D. Simchi-Levi

A

B

C

21, 68%

Low High CoV of Sales (Mar-June’2010)

Medium

32, 15%

7, 3%

% S

ale

s C

on

trib

uti

on

2, 1%

10, 0.6%

45, 7% 27, 2%

Case Study: Foods Business

CoV sales:

•Low: <= 20%,

•Medium: 20%- 50%,

•High > 50%

% Sales Contribution

•A =High,

•B= Medium,

•C= Low

No. of SKUs,

% Sales

34

Complexity Management: Important Findings

• Items in the tail accounts for more inventory per dollar revenue than other items due

– High variability

– Long lead times

By a factor of three of more

• Variability during product lifecycle is high at

– Product introduction

– End-of-life

• Increasing the number of products increases variability for ALL existing products

• Complexity reduction starts at the product design stage

©Copyright 2012 D. Simchi-Levi 35

0%

20%

42%

FY10 Q2FY11 Q4 FY11

43%

68% 70%

FY10 Q2FY11 Q4 FY11

Dell Transformation Results •>99% fewer configurations • 3 times improvement in forecast accuracy

•>30% freight cost reduction on notebooks

•>30% manufacturing cost reduction

Copyright 2011 Dell Inc. All Rights Reserved

ODM volume

Popular, Pre-configured offers

Consumer Notebook Ocean Ship

5%

20%

~70%

FY10 Q2FY11 FY13 Exit

36

Supply Produce Distribute Sell

Plan/Design

Source

•Product Architecture

•Make/Buy

•Early Supplier Involvement

•Strategic Partnerships

•Suppliers Selection

•Supply Contracts

Fulfillment Supply Chain

Develo

pm

en

t Su

pp

ly C

hain

The Enterprise Fulfillment and Development Supply Chains

©Copyright 2012 D. Simchi-Levi 37

Supply Produce Distribute Sell

Plan/Design

Source

•Product Architecture

•Make/Buy

•Early Supplier Involvement

•Strategic Partnerships

•Suppliers Selection

•Supply Contracts

Fulfillment Supply Chain

Develo

pm

en

t Su

pp

ly C

hain

The Enterprise Fulfillment and Development Supply Chains

Need to understand the impact of New Product

Introduction on the tail taking into account BOM,

Volume, Cost, Lead Times… .

©Copyright 2012 D. Simchi-Levi 38

39

What We’ll Cover …

• The Need to Focus

Drivers and Impact

• Matching Products and Strategies

Supply Chain Segmentation

• Complexity Management

The Long Tail Approach

• Summary

40

Key Observations

• Complexity Management

The Long Tail has a huge impact on supply chain performance

Managing complexity starts at the product design level

The benefits of lower variety include better forecast, higher service levels with lower inventory, higher margins

©Copyright 2012 D. Simchi-Levi

Copyright SCDigest

More Resources

• Dr. David Simchi-Levi, MIT

- [email protected]

• Operations Rules web site

– www.oprules.com

• Dan Gilmore, SCDigest

[email protected]