Transcript The Laws of Supply Chain Physics John A. Muckstadt Cornell University December 6, 2001 © Muckstadt, Murray, Rappold.

The Laws of
Supply Chain Physics
John A. Muckstadt
Cornell University
December 6, 2001
© Muckstadt, Murray, Rappold. All Rights Reserved.
Raw Materials
Random, Non-Stationary
Consumer Demand
A Typical Supply Chain
Time
Raw Material Suppliers
(Internal or External)
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Plants
Downstream
Customers
Traditional View of Decision
Hierarchy
• Strategic Planning
– Product markets, M&A, Allocation of Assets
• Tactical Planning
– Sales & Operations Planning
– Plant Operations Planning
• Operations
– Detailed Scheduling
– Execution
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Planning Issues
• Customer demand is highly uncertain and non-stationary.
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Demand Estimates by Quarter
Planned Production Capacity
Demand Estimates by Quarter
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Actual Demand by Day
Nominal Production Capacity
Actual Demand
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Planning Issues
• Customer demand is highly uncertain and non-stationary.
• Product-level forecasts are uncertain over short time
horizons.
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Customer Demand
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The Effect of Product Level Forecasts on Production
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Planning Issues
• Customer demand is highly uncertain and non-stationary.
• Product-level forecasts are uncertain over short time
horizons.
• Limited production capacity necessitates inventory in certain
products in order to meet customer service objectives.
• Uncertainty in production capacity, yields, and supplier
delivery performance also dictates additional safety stock.
• The supply chain planner must be able to gather and
assimilate state-of-the-world data and to make resource
allocation decisions under uncertainty that will have farreaching consequences in future time periods.
• The supply chain planner must adhere to the laws of supply
chain physics.
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Raw Materials
Random, Non-Stationary
Consumer Demand
A Typical Supply Chain
Time
Raw Material Suppliers
(Internal or External)
© Muckstadt, Murray, Rappold. All Rights Reserved.
Plants
Downstream
Customers
First Law of Supply Chain Physics
Local optimization results in global disharmony
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Raw Materials
Random, Non-Stationary
Consumer Demand
A Typical Supply Chain
Time
Raw Material Suppliers
(Internal or External)
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Plants
Downstream
Customers
Second Law of Supply Chain Physics
• The average amount of inventory in a system is equal to
the product of the demand rate and the average time a
unit is in the system (Little’s Law)
L = lW
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The Impact of Uncertainty and
Limited Capacity
• Consider a single plant location subject to random
customer demands received periodically.
• The plant has a finite production capacity in each period.
• Demand must be satisfied in the period in which it arises.
• Question: What are the relationships among:
– customer service,
Production facility with
limited capacity
– inventory requirements, and
Finished goods inventory
– production capacity usage?
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Random
customer
demand
Central Issue
• How much inventory is required to
minimize costs or to support a specific
customer service level objective?
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Mean demand 50 units/period
Std Dev 7.1 units/period
Customer Demand Max Capacity 58 units / period
80
70

49.99

7.12

0.14
11
21
60
Units
50
40
30
20
10
0
1
31
41
51
61
71
81
91
101 111 121 131 141 151 161 171 181 191
Period
Day
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
49.99

6.22
Production
 0.12
70
60
Units
50
40
30
20
10
0
1
11
21
31
41
51
61
71
81
91
101 111 121 131 141 151 161 171 181 191
Period
Day
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
10
Inventory Level
4.24

2.39

0.56
Mean demand 50 units/day
Std Dev 7.1 units/day
99.5% Customer Service (Fill Rate)
5
0
Units
1
11
21
31
41
51
61
71
81
91
101 111 121 131 141 151 161 171 181 191
-5
-10
-15
-20
Period
Day
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
40
Inventory Level
5.60

35.69

6.38
Mean demand 50 units/day
Std Dev 23 units/day
Max Capacity 58 units / day
81.9% Customer Service (Fill Rate)
20
0
1
11
21
31
41
51
61
71
81
91
101 111 121 131 141 151 161 171 181 191
Units
-20
-40
-60
-80
-100
-120
Period
Day
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50

(47.48)

84.50

1.78
Inventory Level
Mean demand 50 units/day
Std Dev 23 units/day
Max Capacity 53 units / day
49.5% Customer Service (Fill Rate)
0
1
11
21
31
41
51
61
71
81
91
101 111 121 131 141 151 161 171 181 191
Units
-50
-100
-150
-200
-250
Period
Day
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Example
Fill Rate vs. Inventory Investment
100.00%
Demand Mean is 100 units/period
Demand StdDev is 30 units
Capacity Utilization is 85%
90.00%
80.00%
Fill Rate
70.00%
60.00%
50.00%
Need 60 units to support a 90% service level.
Need 77 units to support a 95% service level.
Need 100 units to support a 98% service level.
40.00%
30.00%
20.00%
10.00%
0.00%
0
100
200
300
Inventory
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400
500
Capacity Utilization increased to 95%
Fill Rate vs. Inventory Investment
100.00%
90.00%
Demand Mean is 100 units/period
Demand StdDev is 30 units
Capacity Utilization is 95%
80.00%
Fill Rate
70.00%
60.00%
50.00%
Need 198 units to support a 90% service level.
Need 258 units to support a 95% service level.
Need 335 units to support a 98% service level.
40.00%
30.00%
20.00%
or roughly 330% more inventory for
the same level of service.
10.00%
0.00%
0
100
200
300
Inventory
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400
500
Third Law of Supply Chain Physics
• Inventories are a consequence of supply chain design
and customer service objectives.
• Supply chains are dynamic systems.
– Capacity Utilization
– Inventory Levels
– Customer Service
are NOT independent
• Pick any two, and the other is determined.
• The exact mathematical representation depends on the
forms of the stochastic processes generating demands
and governing productive capacity.
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Fourth Law of Supply Chain Physics
The value of collaboration and
information sharing diminish as the
capacity utilization is either
extremely high or extremely low.
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Sources and Effects of
Supply Chain Uncertainty
• Supply chain design and management are significant
determinants of operational uncertainty.
• Uncertainty is often created by the structure and rules
employed in the operation of a supply chain.
–
–
–
–
Lead times
Forecasting mechanisms
Capacity allocation rules
Inventory stocking policies
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An Example Supply Chain Environment
Product
Information
Lead Time
Production
Order
• Forecasting mechanism
• Stocking policies
• Level of information sharing
Downstream
BU
Lead Time
• Forecasting mechanism
• Stocking policies
Order
Customer
Operations
Demand
Product
Consumer
Demand
( Mean, Variance )
Information Sharing
Time
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Customer Demand
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Central Warehouse Demand
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Factory Demand
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Factory Demand with Information Sharing
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Lead Time Reduction and No Information Sharing
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Lead Time Reduction with Information Sharing
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Fifth Law of Supply Chain Physics
• Effective supply chain design will reduce uncertainty
dramatically and improve operational and financial
performance significantly.
• However, residual uncertainty will exist and must be
effectively considered in a decision support environment.
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Historical Demand by Quarter
Mean
StdDev
= 741.2 units per day
= 69.1 units per day
Coeff Var = 0.09
Production Capacity
Demand
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Historical Demand by Month
Mean
StdDev
= 741.2 units per day
= 131.1 units per day
Coeff Var = 0.18
Production Capacity
Demand
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Historical Demand by Day
Mean
StdDev
= 741.2 units per day
= 771.8 units per day
Coeff Var = 1.04
Production Capacity
Demand
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Complications
• All products are not demanded equally.
• All customers do not behave in the same manner.
• Operating strategies and implementing decision support
systems must contend with these differences and respect
the operational trade-offs throughout the supply chain.
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Distribution of Products
Cumulative % of Total Capacity Demanded
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1
21
41
61
81
101
121
141
161
181
Rank
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201
221
241
261
281
301
321
Example Product A
Total Units =
Total Demand
80
39- Part X700P220A1B
289
Average =
1.0
StdDev =
6.4
CV =
6.4
70
60
Total Qty
50
40
30
20
10
0
09/01/98
10/21/98
12/10/98
01/29/99
03/20/99
Day
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05/09/99
06/28/99
08/17/99
10/06/99
Example Product B
Total Units =
Total Demand
100
36- Part X700P220A1B
338
Average =
1.2
StdDev =
6.1
CV =
5.3
90
80
70
Total Qty
60
50
40
30
20
10
0
09/01/98
10/21/98
12/10/98
01/29/99
03/20/99
Day
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05/09/99
06/28/99
08/17/99
10/06/99
Example Product C
Total Units =
Total Demand
140
15- Part X700PPTA1C
1,051
Average =
3.6
StdDev =
13.4
CV =
3.7
120
Total Qty
100
80
60
40
20
0
09/01/98
10/21/98
12/10/98
01/29/99
03/20/99
Day
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05/09/99
06/28/99
08/17/99
10/06/99
Example Product D
Total Units =
Total Demand
100
33- Part X700P220A1B
390
Average =
1.3
StdDev =
8.9
CV =
6.6
90
80
70
Total Qty
60
50
40
30
20
10
0
09/01/98
10/21/98
12/10/98
01/29/99
03/20/99
Day
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05/09/99
06/28/99
08/17/99
10/06/99
Sixth Law of Supply Chain Physics
• Accurate item level forecasts are often not
statistically accurate for most items over a
short-time horizon.
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Dealing With Residual Uncertainty:
The No B/C Production-Inventory
Strategy
• Store capacity only in items for which it is possible to estimate
demand distributions and to use capacity effectively to produce
requirements for other items upon demand.
• Keep inventory to mitigate against the uncertainty in the total
demand for capacity. The amount of inventories kept depends on the
variation in aggregate demand for capacity and the variation in the
available capacity in each time period.
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Seventh Law of Supply Chain Physics
• Keep your assets in their most flexible
form for as long as it is economically
and operationally possible.
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Summary: Guiding Principles
1.
Know customer requirements.
2.
Construct a lean supply chain organization.
3.
Build tightly-coupled information infrastructures.
4.
Build tightly-coupled business processes.
5.
Construct tightly-coupled decision support
systems.
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“There is nothing more difficult to plan,
nor more dangerous to manage,
nor more doubtful of success,
than the creation of a new order of things.
For the reformer has fierce enemies in all who would
profit from the preservation of the old,
and only lukewarm defenders in those who would gain
from the new.
This lukewarmness arises partly from the fear of their
adversaries, who have law in their favor, and partly
from the incredulity of mankind, who do not truly
believe in anything new until they have had an actual
experience of it.”
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Niccolo Machiavelli - 1513