SUPPLY CHAIN MANAGEMENT

SESSION 21& 23
SUPPLY CHAIN ANALYTICS
 SUPPLY CHAIN ANALYTICS
• Core Components
• Data analytics:
• The process of examining datasets using specialized
systems and software to draw conclusions about the
information they contain.
• Within the supply chain, this requires collating and
analyzing data from a series of complementary systems.
• Data visualization:
• The process of helping people understand the significance
of data by placing it in a visual context.
• Patterns, trends and correlations that might go
undetected in text-based data can be exposed and
recognized more easily.
• Technology platform:
• The underlying infrastructure — often including an
analytics engine — that allows for the capture, storage,
retrieval, aggregation, analysis, and reporting of all
transactions taking place within the supply chain and with
trading partners.
 SUPPLY CHAIN ANALYTICS

The Order to Cash cycle The Procure to Pay cycle

 SUPPLY CHAIN ANALYTICS
• Stages
• Stage 1: Obtain the Right Data.
• What data do you have?
• What format is it in?
• Where is it stored?
• Is it up-to-date and relevant for the type of analysis you want to undertake?
 SUPPLY CHAIN ANALYTICS
• Stages
• Stage 2: Define the data for analysis.
• What do you want to measure?
• How many datasets do you want to include?
• How often are you going to refresh or update this data?
• How are you going to display the results?
• What type of reports do you need to create?
 SUPPLY CHAIN ANALYTICS
• Stages
• Stage 3: Discover the insights.
• How are you going to visualize the data?
• How much drilling down will be required?
• How will executives need to be able to interrogate the data?
• Are you able to predict outcomes and trends?
 SUPPLY CHAIN ANALYTICS
• Types of Analytics
• Descriptive analytics
• Looks at data and analyzes past events for insight as to how to approach the future.
• investigate the reasons behind past failure and success.
• What happened, where, and why?
• Predictive analytics
• Uses historical and transactional data to determine the probable future outcome of an event or a
likelihood of a situation occurring.
• It utilizes patterns found in the data to identify future risks and opportunities.
• What will happen and what should be done next?
• Prescriptive analytics
• Synthesizes big data, business rules, and machine learning to make predictions.
• It goes beyond predicting future outcomes by also suggesting actions to benefit from the
predictions and showing the decision maker the implications of each decision option.
• What are my best outcomes and what do I need to do to make them happen?
SUPPLY CHAIN ANALYTICS

The landscape for supply chain analytics

 SUPPLY CHAIN ANALYTICS
• Starting at the top with corporate
goals ensures that the analytics are
aligned with the business’s overall
needs.
• Many organizations have built their
analytics capabilities in the opposite
direction.
• Addressing a specific operational
problem, and then developed analytics
to address the specific question.
• As companies mature in their use of
analytics, they tend to increasingly
take a top-down approach.
• The key is to find the correct balance
for the situation and company.
Top-down versus bottom-up analytics development.
 SUPPLY CHAIN ANALYTICS
• Supply Chain Operations Reference (SCOR) model

FIGURE 3-3: Example supply chain activities within the SCOR reference model.
 SUPPLY CHAIN ANALYTICS
• Supply Chain Operations Reference (SCOR) model
• SCOR model and examples of decisions at the three levels
 SUPPLY CHAIN ANALYTICS
• Supply Chain Operations Reference (SCOR) model
• Analytic techniques used in supply chain management
 SUPPLY CHAIN ANALYTICS
• Supply Chain Operations Reference (SCOR) model: Key Performance Indices
• Business metrics: Business metrics measures an activity that delivers value to the
business.
• ASN timeliness: The number of timely ASN (Advanced Shipping Notices) creation instances as a
percentage of total ASNs for a time period
• Delivery timeliness: The number of “on-time” deliveries as a percentage of total number of
deliveries for a time period
• Invoice accuracy: Measures whether invoices accurately reflect orders placed in terms of
product, quantities, and price by supplier, during a specified period of time
• Price variance: The actual invoiced cost of a purchased item, compared to the price at the time
of order A price variance exists if the price on the purchase order (PO) doesn’t match with the
invoiced price.
• Order acceptance rate: Fully acknowledged POs as a percentage of total number of POs within a
given period of time
• Quantity variance: The difference between the quantity delivered and the quantity invoiced for
goods received for a purchase order A quantity variance exists if the quantity entered into the
invoice doesn’t match this open quantity.
• Top partners by spend: The top trading partners by the economic spend over a period of time
• Top products by invoiced amount: The top products by invoiced amount over a period of time
 SUPPLY CHAIN ANALYTICS
• Supply Chain Operations Reference (SCOR) model: Key Performance Indices
• Operational metrics: Operational metrics look at how well your supply chain is
performing every day.
• Transaction volume by document type: The number and type of documents sent and
received over a period of time (days, months, years)
• Transaction volume by trading partner: The number and type of documents sent and
received, ordered by the top ten and bottom ten partners
• Custom metrics: These are developed specifically to address a business need
that may be unique to your business.
• Average invoice $ value by customer/supplier: Used to consider the cost of processing a
deal in comparison to its dollar value. If a partner is sending frequent invoices for $10
and your processing cost is $25, this would be an opportunity to improve the process.
• Total spend with strategic customers/suppliers: The amount of spend associated with a
trading partner based on invoices; may be compared to POs to understand where lost
sales opportunities.
 SUPPLY CHAIN ANALYTICS: REPORT
• Level 1: Standard reports.
• What happened? When did it happen? Think of a quarterly financial
report. Standard reports tell you where you are but aren’t very useful as
a basis for long-range planning.
• Level 2: Ad hoc reports.
• How many? How often? Where? Ad hoc reports answer very pointed
questions about limited datasets. They are useful for gathering the quick
facts needed to make limited-scope decisions.
• Level 3: Drilldown.
• Where exactly is the problem? How do I find the answers? Drilldown
enables you to look behind a summary value to see the data underneath
it. For example, whereas a standard report might provide the overall sales
for a particular month, a drilldown might show you a list of individual
sales transactions included in that total.
• Level 4: Alerts.
• When should I react? What actions are needed now? An alert is a pre-set
query — driven by business rules — that lets you know when something
happens — good or bad. For example, you might set an alert to let you
know when the inventory for a particular part number falls below a
certain level.
• Levels 1 - 4 are concerned mainly with descriptive analytics
 SUPPLY CHAIN ANALYTICS
• Level 5: Statistical analysis.
• Why is this happening? What opportunities am I missing?
This is a deep dive into a particular dataset to enable
frequency, trend, or regression analysis to see why things
are happening.
• Level 6: Forecasting.
• What if these trends continue? How much will be needed,
and when? Forecasting is one of the hottest markets —
and hottest analytical applications — right now. Effective
forecasting can help supply just enough inventory, so you
don’t run out or have too much.
• Level 7: Predictive modeling.
• What will happen next? How will it affect my business?
Predictive modeling suggests the likely outcomes for a
certain set of actions under a specific set of circumstances.
• Level 8: Optimization.
• How do we do things better? What is the best decision for
a complex problem? Optimization is a type of prescriptive
analytics that takes resources and needs into consideration
and helps find the best possible way to accomplish goals.
• Levels 5 – 6 predictive & Levels 7 – 8 prescriptive.
 SUPPLY CHAIN ANALYTICS
• Things to Avoid
• Use of dirty data:
• If there are errors in your data, your analysis is going to be flawed.
• Your decisions will be based on poor data, and, once discovered, it will raise questions over any
future analysis.
• This is the top reason analytics initiatives fail.
• Measure too much:
• If you try to measure everything, you’ll end up measuring nothing.
• Too many metrics brings back a huge amount of data, leading to confusion and a lack of focus.
• You’ll miss the insight in the data.
• Measure too little:
• At the other end of the scale, you can measure too little.
• Measuring a single metric in isolation from everything else may help improve that metric
• Will miss the relationships between metrics that drive improvement in your business processes.
 SUPPLY CHAIN ANALYTICS
• Things to Avoid
• Create conflicting metrics:
• Define your goal clearly and build metrics around it -> establish conflicting metrics.
• For example, setting a high fill-rate goal could inadvertently lead to inventory overstocks.
• Use of outdated data and metrics:
• Need to make sure your data is up to date (or at least still relevant).
• Ensure that the metrics still reflect your business goals.
• Not establish ownership:
• As with any technology program, executive buy-in matters.
• Failure to establish executive-level sponsorship is likely to lead to your analytics initiative
stalling and slow adoption across your organization.
MANAGING ECONOMIES OF
SCALE IN A SUPPLY CHAIN:
CYCLE INVENTORY
 INVENTORY MANAGEMENT-DEMAND FORECASTS
• Uncertain demand makes demand forecast critical for inventory related
decisions:
• What to order?
• When to order?
• How much is the optimal order quantity?
• Approach includes a set of techniques
• INVENTORY POLICY!!
 ROLE OF CYCLE INVENTORY IN A SUPPLY CHAIN
• Lot or batch size
• The quantity that a stage of a supply chain either produces or purchases at a time
• Cycle inventory
• The average inventory in a supply chain due to either production or purchases in lot sizes
that are larger than those demanded by the customer
Q: Quantity in a lot or batch size
D: Demand per unit time
• Inventory Profile
ROLE OF CYCLE INVENTORY IN A SUPPLY CHAIN

lot size Q
Cycle inventory = =
2 2

average inventory
Average flow time =
average flow rate

Average flow time

cycle inventory Q
resulting from cycle = =
demand 2D
inventory
 ROLE OF CYCLE INVENTORY IN A SUPPLY CHAIN
• Lower cycle inventory
• Decreases vulnerability to demand changes
• Lowers working capital requirements
• Lowers inventory holding costs
• Cycle inventory is held to
• Take advantage of economies of scale
• Reduce costs in the supply chain
 ROLE OF CYCLE INVENTORY IN A SUPPLY CHAIN
• Average price paid per unit purchased is a key cost in the lot-sizing decision
Material cost = C
• Fixed ordering cost
• All costs that do not vary with the size of the order but are incurred each time an order is
placed
Fixed ordering cost = S
• Holding cost
• The cost of carrying one unit in inventory for a specified period of time
Holding cost = H = hC
 ROLE OF CYCLE INVENTORY IN A SUPPLY CHAIN
Following costs considered in lot sizing decisions
• Average price per unit purchased, $ C / unit
• Fixed ordering cost incurred per lot, $ S / lot
• Holding cost incurred per unit per year, $ H / unit / year = hC
 ROLE OF CYCLE INVENTORY IN A SUPPLY CHAIN
• Economies of scale exploited in three typical situations
1. A fixed cost is incurred each time an order is placed or produced
2. The supplier offers price discounts based on the quantity purchased per lot
3. The supplier offers short-term price discounts or holds trade promotions
 ROLE OF CYCLE INVENTORY IN A SUPPLY CHAIN
• Cycle inventory builds up in a supply chain because product is produced or
purchased in large lots to lower the sum of material, ordering, and holding costs
by exploiting economies of scale.
• Opportunities to exploit economies of scale arise if a fixed cost is incurred each
time an order is placed or produced, the supplier offers price discounts based on
the quantity purchased per lot, or the supplier offers short-term price discounts.
• A reduction in cycle inventory improves a supply chain’s ability to match supply
with demand.
 ECONOMIES OF SCALE TO EXPLOIT FIXED COSTS
• Lot sizing for a single product (E O Q)
D = Annual demand of the product
S = Fixed cost incurred per order
C = Cost per unit
h = Holding cost per year as a fraction of product cost
• Basic assumptions
• Demand is steady at D units per unit time
• No shortages are allowed
• Replenishment lead time is fixed
 LOT SIZING - SINGLE PRODUCT (ECONOMIC ORDER QUANTITY)
Annual material cost = CD
D
Number of orders per year =
Q
D
Annual ordering cost =   S
Q 
Q  Q 
Annual holding cost =   H =   hC
2 2
D Q 
Total annual cost, TC =   S +   hC + CD
Q  2
2DS
• The Economic Order Quantity (E O Q) Q* =
hC

D DhC
• The optimal ordering frequency n* = =
Q* 2S
 LOT SIZING - SINGLE PRODUCT (ECONOMIC ORDER QUANTITY)
Demand for the Deskpro computer at best Buy is 1000 units per month. Best Buy
incurs a fixed order placement, transportation and receiving cost of $ 4000 each
time an order is placed. Each computer costs Best Buy $500 and the retailer has an
annual holding cost of 20 percent. Evaluate the number of computers that the
store manager should order in each replenishment lot.
 LOT SIZING - SINGLE PRODUCT (ECONOMIC ORDER QUANTITY)
• Annual demand, D = 1,000*12 = 12,000 units
• Order cost per lot, S = $4,000
• Unit cost per computer, C = $500
• Holding cost per year as a fraction of unit cost, h = 0.2
2  12,000  4,000
Optimal order size = Q* = = 980
0.2  500
Q * 980
Cycle inventory = = = 490
2 2
D 12,000
Number of orders per year = = = 12.24
Q* 980
D Q* 
Annual ordering and holding cost = S+  hC = $97,980
Q*  2 
Q* 490
Average flow time = = = 0.041 = 0.49 month
2D 12,000
 LOT SIZING - SINGLE PRODUCT (ECONOMIC ORDER QUANTITY)
• Total ordering and holding costs are relatively stable around the economic order
quantity. A firm is often better served by ordering a convenient lot size close to the E O
Q rather than the precise E O Q.
• In deciding the optimal lot size the trade off is between setup (order) cost and holding
cost.
• If demand increases by a factor of k, the optimal lot size increases by a factor of 𝑘
• If demand increases by a factor of 4, it is optimal to increase batch size by a factor of 2 and produce
(order) twice as often. Cycle inventory (in days of demand) should decrease as demand increases.
• The number of orders placed per year should also increase by a factor of 𝑘
• Flow time attributed to cycle inventory should decrease by a factor of 𝑘
• To reduce the optimal lot size by a factor of k, the fixed order cost S must be reduced by
a factor of 𝑘 2
• If lot size is to be reduced, one has to reduce fixed order cost. To reduce lot size by a factor of 2,
order cost has to be reduced by a factor of 4.
 AGGREGATING MULTIPLE PRODUCTS IN A SINGLE ORDER
• Transportation is a significant contributor to the fixed cost per order
• Can possibly combine shipments of different products from the same supplier
• Same overall fixed cost
• Shared over more than one product
• Effective fixed cost is reduced for each product
• Lot size for each product can be reduced
• Can also have a single delivery coming from multiple suppliers or a single truck
delivering to multiple retailers
• Aggregating across products, retailers, or suppliers in a single order allows for a
reduction in lot size for individual products because fixed ordering and
transportation costs are now spread across multiple products, retailers, or
suppliers
 AGGREGATING MULTIPLE PRODUCTS IN A SINGLE ORDER
• Suppose there are 4 computer products: Deskpro, Litepro, Medpro, and Heavpro
• Assume demand for each is 1000 units per month
• If each product is ordered separately:
• Q* = 980 units for each product
• Total cycle inventory = 4(Q/2) = (4)(980)/2 = 1960 units
• Aggregate orders of all four products:
• Combined Q* = 1960 units
• For each product: Q* = 1960/4 = 490
• Cycle inventory for each product is reduced to 490/2 = 245
• Total cycle inventory = 1960/2 = 980 units
• Average flow time, inventory holding costs will be reduced
 LOT SIZING WITH MULTIPLE PRODUCTS OR CUSTOMERS
• In practice, the fixed ordering cost is dependent at least in part on the variety
associated with an order of multiple models
• A portion of the cost is related to transportation (independent of variety)
• A portion of the cost is related to loading and receiving (not independent of variety)
• Three scenarios:
1. Each product manager orders his or her model independently.
• Lots are ordered and delivered independently for each product
2. The product managers jointly order every product in each lot.
• Lots are ordered and delivered jointly for all products
3. Product managers order jointly but not every order contains every product; that is, each
lot contains a selected subset of the products.
• Lots are ordered and delivered jointly for a selected subset of models
 LOT SIZING WITH MULTIPLE PRODUCTS OR CUSTOMERS
• A key to reducing lot size without increasing costs is reducing the fixed
cost associated with each lot.
• This may be achieved by aggregating lots across multiple products, customers, or
suppliers.
• Complete aggregation, where all products are included in each order, is
very effective when product-specific order costs are small.
• If product-specific order costs are large, tailored aggregation, where only a
subset of products is included in each order, is more effective.
 ECONOMIES OF SCALE TO EXPLOIT QUANTITY DISCOUNTS
• Lot size-based discount – discounts based on quantity ordered in a single lot
• Volume based discount – discount is based on total quantity purchased over a
given period
• Two common schemes
• All-unit quantity discounts
• Marginal unit quantity discount or multi-block tariffs
• Two basic questions
• What is the optimal purchasing decision for a buyer seeking to maximize profits?
How does this decision affect the supply chain in terms of lot sizes, cycle
inventories, and flow times?
• Under what conditions should a supplier offer quantity discounts? What are
appropriate pricing schedules that a supplier seeking to maximize profits should
offer?
 ECONOMIES OF SCALE TO EXPLOIT QUANTITY DISCOUNTS
• Lot-size–based quantity discounts increase the lot size and cycle inventory within
the supply chain because they encourage buyers to purchase in larger quantities
to take advantage of the decrease in price.
• The relative increase in cycle inventory because of quantity discounts increases as
the buyer reduces fixed costs per order.
MANAGING UNCERTAINTY IN A
SUPPLY CHAIN:
SAFETY INVENTORY
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
• Why hold Safety Inventory?
• Demand uncertainty
• Forecasts are rarely completely accurate
• If average demand is 1000 units per week, then half the time actual demand will be greater
than 1000, and half the time actual demand will be less than 1000 -- what happens when
actual demand is greater than 1000?
• If you kept only enough inventory in stock to satisfy average demand, half the time you
would run out
• Supply uncertainty
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
The Role of Safety Inventory
• Safety inventory is carried to satisfy demand that exceeds
the amount forecasted
• Raising the level of safety inventory increases product availability
and thus the margin captured from customer purchases
• Raising the level of safety inventory increases inventory holding
costs
• Very important in high-tech or other industries where obsolescence is a
significant risk (where the value of inventory, such as PCs, can drop in
value)
• Three key questions
• What is the appropriate level of product availability?
• How much safety inventory is needed for the desired level of
product availability?
Inventory Profile with Safety
• What actions can be taken to reduce safety inventory without Inventory
hurting product availability?
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
Determining the Appropriate Level of Safety Inventory
• Measuring demand uncertainty
• Measuring product availability
• Replenishment policies
• Evaluating cycle service level and fill rate
• Evaluating safety level given desired cycle service level or fill rate
• Impact of required product availability and uncertainty on safety inventory
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
Determining the Appropriate Level of Safety Inventory
• Appropriate level of safety inventory determined by:
• supply or demand uncertainty
• desired level of product availability
• Higher levels of uncertainty require higher levels of safety inventory given a
particular desired level of product availability
• Higher levels of desired product availability require higher levels of safety
inventory given a particular level of uncertainty
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
Measures of Product Availability
• Product availability
• A firm’s ability to fill a customer’s order out of available inventory
• Stockout
• A customer order arrives when product is not available
• Product Fill Rate (fr)
• Fraction of product demand satisfied from product in inventory
• Order Fill Rate
• Fraction of orders filled from available inventory
• Cycle Service Level (CSL)
• Fraction of replenishment cycles that end with all customer demand being met
• Replenishment cycle – the interval between two successive replenishment deliveries
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
Measuring Demand Uncertainty
• Demand has a systematic component and a random component
• The estimate of the random component is the measure of demand uncertainty
• Random component is usually estimated by the standard deviation of demand
• Uncertainty of demand during lead time is what is important
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
Measuring Demand Uncertainty
• D = Average demand per period
• σD = Standard deviation of demand (forecast error) per period
• Lead time (L) is the gap between when an order is placed and when it is received
• Evaluating Demand Distribution over L Periods L L
Lead time (L) is normally distributed with DL =  Di s L =  s i 2 + 2 i j s i s j
i =1 i =1 i> j
DL = Average lead time
σL = Standard deviation of lead time 𝐷𝐿 = 𝐷𝐿 𝜎𝐿 = 𝐿 𝜎𝐷
• Coefficient of variation
• cv = s /m
• Size of uncertainty relative to demand
MANAGING UNCERTAINTY IN A SUPPLY CHAIN: SAFETY INVENTORY
Replenishment policy
• Decisions regarding when to reorder and how much to reorder
• Continuous review
• Inventory is continuously tracked
• Order for a lot size Q is placed when the inventory declines to the reorder point (R O P)
• Periodic review
• Inventory status is checked at regular periodic intervals
• Order is placed to raise the inventory level to a specified threshold
 DETERMINING THE APPROPRIATE LEVEL OF SAFETY INVENTORY
Evaluating Safety Inventory Given a Reorder Point
• Expected demand during lead time = D × L
• Safety inventory, ss = R O P − D × L
• Assume that weekly demand for phones at B&M office supplies is normally
distributed, with a mean of 2,500 and a standard deviation of 500. The
manufacturer takes two weeks to fill an order placed by the B&M manager. The
store manager currently orders 10,000 phones when the inventory on hand drops
to 6,000. Evaluate the safety inventory and average inventory carried by B&M.
Also evaluate the average time a phone spends at B&M.
 DETERMINING THE APPROPRIATE LEVEL OF SAFETY INVENTORY
Evaluating Cycle Service Level Given a Reorder Point
CSL = Prob(ddlt of L weeks  ROP )
• ddlt = demand during lead time
• CSL = F(ROP, DL, σL) = NORMDIST(ROP, DL, σL, 1)
• Weekly demand for phones at B& M office supplies is normally distributed, with a
mean of 2,500 and a standard deviation of 500. The replenishment lead time is
two weeks. Assume that the demand is independent from one week to the next.
Evaluate CSL resulting from a policy of ordering 10,000 phones when there are
6000 phones in the inventory.
 DETERMINING THE APPROPRIATE LEVEL OF SAFETY INVENTORY
Evaluating Required Safety Inventory Given a Desired Cycle Service Level
• Desired cycle service level = CSL
• Mean demand during lead time = DL
• Standard deviation of demand during lead time = σL
• Probability(demand during lead time ≤ DL + ss ) = CSL
• Identify safety inventory ss so that
F(DL + ss, DL, sL) = CSL
DL + ss = F –1(CSL,DL ,σ L ) = NORMINV (CSL,DL ,σ L )
ss = F –1(CSL,DL ,σ L ) – DL = NORMINV (CSL,DL ,σ L ) – DL
ss = FS–1(CSL )  s L = FS–1(CSL )  Ls D
= NORMSINV (CSL )  Ls D
 DETERMINING THE APPROPRIATE LEVEL OF SAFETY INVENTORY
Evaluating Required Safety Inventory Given a Desired Cycle Service Level
• Weekly demand for Legos at a Walmart store is normally distributed, with a mean
of 2,500 boxes and a standard deviation of 500. The replenishment lead time is
two weeks. Assuming a continuous review replenishment policy, evaluate the
safety inventory that the store should carry to achieve a CSL of 90 percent.
 DETERMINING THE APPROPRIATE LEVEL OF SAFETY INVENTORY
Evaluating Fill Rate Given a Reorder Point
• Expected Shortage per Replenishment Cycle (ESC)
• The average units of demand that are not satisfied from inventory in stock per
replenishment cycle
ESC (Q – ESC )
• Product fill rate fr = 1 – =
Q Q

ESC =  ( x – ROP )f ( x )dx
x =ROP

  ss    ss 
ESC = –ss 1 – Fs    + s Lfs  
  s L   sL 

ESC = −ss[1 – NORMDIST (ss / sL ,0,1,1)]

+ sLNORMDIST (ss / sL ,0,1,0)
 DETERMINING THE APPROPRIATE LEVEL OF SAFETY INVENTORY
Evaluating Fill Rate Given a Reorder Point
• Weekly demand for phones at B&M is normally distributed, with a mean of 2,500
and a standard deviation of 500. The replenishment lead time is two weeks.
Assume that the demand is independent from one week to the next. Evaluate the
fill rate resulting from the policy of ordering 10,000 phones when there are 6,000
phones in inventory.