Supply Chain Management

Chapter-03
Information Visibility

Supply Chain

Technology and Collaboration

Prof. Manoj K Srivastava
mks@mdi.ac.in http://mks507.vistapanel.net

Operations Management Area Management Development Institute-Gurgaon

Part

01

Supply Chain Technology Information Visibility: RFID

Role of Technology in Services

Technology Technology Technology

Customer

Server

Customer

Server

Customer

Server

A. Technology-Free Service Encounter

B. Technology-Assisted Service Encounter

C. Technology-Facilitated Service Encounter

Technology Customer Server Customer

Technology Server

D. Technology-Mediated Service Encounter

E. Technology-Generated Service Encounter

Source: Craig M. Froehle and Aleda V. Roth, New Measurement Scales for Evaluating Perceptions of the Technology-mediated Customer Service Experience, Journal of Operations Management, 22/1 (February 2004), pg. 3

 Radio Frequency Identification

Identification system that consists of chip-based tags and readers

Data is stored and retrieved remotely using radio waves Onboard sensors Product information

Major Player: IBM, Texas Instruments

The RFID device serves the same purpose as a bar code or a magnetic strip on the back of a credit card or ATM card; it provides a unique identifier for that object.

What is EPC?
The Electronic Product Code (EPC) is an identification scheme for universally identifying physical objects via Radio Frequency Identification (RFID) tags and other means.
Extremely long barcodes, this greater data capacity affects the business process because it in turn allows a greater degree of unique identification. The Key Difference
UPC contains just enough information to identify the class of a product EPC contains more information to identify the product uniquely It is not necessary for UPC to be universal

A typical example would be an automotive tyre

Universal Product Code (UPC) will say this is a class-x tyre The Electronic Product Code (EPC) will say this is a class-x tyre with a serial #35686975.

RFID: UPC vs. EPC

UPC
-Requires line-of-sight readers -Only one product can be scanned at a time
-Tags can be read from many ranges -Many products can be scanned simultaneously

EPC

-Tags can store large amounts of data

-Uniquely identifies products

Research says worldwide RFID spending will jump from $300 million in 2004 to $2.8 billion by 2009, and that most will centre on the global supply chain (EPC Global the Source January 2005)

An AMR Research study found early EPC/RFID adopters in the retail and consumer
packaged goods (CPG) industries have lowered their supply chain costs between three and five percent.

UPC= A class of product

EPC= specific instance of a product

Beyond Barcode
268 million companies can each categorize 16 million different products and each product category may contain over 687 billion individual items.

Architecture

How It works.

RFID Tag Components

Types of Tags
Passive
Operational power scavenged from reader radiated power Require no internal power source or maintenance

Semi-passive
Operational power provided by battery

Active
Operational power provided by battery - transmitter built into tag More reliable and efficient in rugged environments

LF

MF

HF

VHF

UF

MICROWAVE

100 kHz GHz

Low Freq. MediumF req.

1 MHz
HighFreq .

10 MHz

100 MHz
Ultra High Freq.

1 GHz
Microwave Freq.

10

134 kHz
T1-RFID

13.56 MHz
T1-RFID

915 MHz 2.45 GHz

UHF T1-RFID1 Hyper X

ITEM

PACKAGING

TRANSPORT UNIT

UNIT LOAD

CONTAINER

MOVEMENT VEHICLE

Bar Code

Passive RFID
125 kHz & 13.56 MHz 868 MHz EPCglobal ISO 15693 & ISO 14443-3 Gen 2 ISO 18000-6

Active RFID
ISO 18000-7

GPRS

Frequencies of operation
Frequency Range Tag cost Applications
Pet and ranch animal identification Car key locks

Low-frequency 125 - 148 KHz

3 feet

$1+

Tags need to be closer to the reader Poor discrimination

Library book identification Clothing identification smart cards

High-frequency 3 feet $0.50 13.56 MHz Tags can be read from relatively greater distances
Tags can hold more information

Ultra-high freq 915 MHz

25 feet

$0.50

Supply chain tracking: Box, pallet, container, trailer tracking

Microwave: 2.45GHz

100 feet

$25+

Highway toll collection Vehicle fleet identification

Applications of RFID

Applications
Keyless entry EPC Proximity cards Libraries Security device
Bookstores

Animal and human implantation

Avid Pet-ID VeriChip

RFID-privacy legislation
REAL ID Act

Size comparison
(RFID chip, Dime, Rice)

How is an RFID chip implanted?

Tracking Inventory

Wireless / Batch Inventory Management Where is it? What is it? What is inside the box?

Material Handling By Destination Where is it going? Where has it been? Should it be here?

Material Handling Aggregate / De-aggregate What have I assembled or disassembled? How many do I have? Do I have enough?

Material Handling Inspecting / Maintaining Has this been repaired? Is this under warrantee? Has this been inspected? Is this complete? What is the assets status or state?

Human Tracking

Animals Tracking

Shops Security

Doors and Garages Security

www.Rj12.net

Product Monitoring and Control

Shopping

RFID Implant

Electronic Passport

Contactless payment

Library Inventory Process

RFID also has had a significant impact on inventory processes in libraries. With a full hand-held wand which is passed alongside the books on the shelves; by tagged collection, inventory can be taken with a portable, he reader picks up the individual signals from each item's tag, without needing to remove or even tip the books outward from the shelves.
With RFID not only does the cost of doing an inventory in the library go down, the odds of actually completing regular inventories goes up. Inventory with RFID has also proven to be extremely useful and cost-effective in terms of locating lost or miss helved items. Even Searching for books by just typing its name on the Reader .

Internet of Things
Civil liberties groups (among others) have become increasingly concerned about the use of RFIDs to track the movements of individuals. For example, passports will soon be required to contain some sort of RFID device to speed border crossings. Scanners placed throughout an airport, for example, could track the location of every passport over time, from the moment you left the parking lot to the moment you got on your plane. There are also concerns about the fact that, even after you leave the store, any RFID devices in the things you buy are still active. This means that a thief could walk past you in the mall and know exactly what you have in your bags, marking you as a potential victim. A thief could even circle your house with an RFID scanner and pull up data on what you have in your house before he robs it. Military hardware and even clothing make use of RFID tags to help track each item through the supply chain. Some analysts are concerned that, if there are particular items associated with high-level officers, roadside bombs could be set to go off when triggered by an RFID scan of cars going by. There was a recent report revealing clandestine tests at a Wal-Mart store where RFID tags were inserted in packages of lipstick, with scanners hidden on nearby shelves. When a customer picked up a lipstick and put it in her cart, the movement of the tag was registered by the scanners, which triggered surveillance cameras. This allowed researchers 750 miles away to watch those consumers as they walked through the store, looking for related items.

"Imagine an Internet of things, where everyday objects, rooms, and machines are connected to one another and to the larger digital world. - Business 2.0

RFID Capabilities

RFID Capabilities

1995

Comprehensiveness

2003
Source: http://www.symbol.com/products/rfid/rfid_next_generation.html

Part

02

Supply Chain Coordination (Bullwhip effect)

No clear identification of owner and customers of measures

(joint determination is very essential)

Fill The Gaps

Not evaluating consequences and outcomes

(Efficacy is prerequisite to customer satisfaction)

Imbalance between efficiency and effectiveness

(key processes has to be identified and owned)

Lack of Process Orientation of measurement

(Physical Orientation alone is not a suitable indicator)

Lack of Measures of relationships

(economic, physical, psychological measures are equally important)

Lack of real-time visibility

(every affected party must be informed)

Lack of Multi-firm optimization

(have to look beyond sub-optimization)

* Source: various authors

Supply Chain Problems

Adding value along the chain is essential for competitiveness, however problems exist especially in complex or long chains and in cases where many business partners are involved. due to uncertainties need to coordinate several activities, internal units, and business partners. Demand forecasts are a major source of uncertainties
Competition Prices Weather conditions Technological development Customer confidence Machine failures Road conditions Shipments

Uncertainties exist in delivery times

Quality problems may also create production delays

Coordination in supply chains

Obstacles
Incentive Obstacles Information Processing Obstacles Operational Obstacles Pricing Obstacles Behavioral Obstacles

Coordination in a Supply Chain

Managerial Levers
Aligning Goals and Incentives Improving Information Accuracy Improving Operational Performance Designing Pricing Strategies to Stabilize Orders Building Strategic Partnerships and Trust

Achieving Coordination in Practice

Quantify the bullwhip effect Get top management commitment for coordination Devote resources to coordination Focus on communication with other stages Try to achieve coordination in the entire supply chain network Use technology to improve connectivity in the supply chain Share the benefits of coordination equitably

Obstacles to Coordination in a Supply Chain

Incentive Obstacles Information Processing Obstacles Operational Obstacles Pricing Obstacles

Behavioral Obstacles

Managerial Levers to Achieve Coordination

Aligning Goals and Incentives Improving Information Accuracy Improving Operational Performance Designing Pricing Strategies to Stabilize Orders

Building Strategic Partnerships and Trust

What a Supply Chain Problem can do

Problems with the Supply Chain have caused armies to lose wars & companies to go out of business, for example
In WW II, Germany encountered problems supplying troops in Russia, which contributed to their collapse. In 1999 ToysRUS had problems supplying to holiday shoppers & lost business.

Supply Chain Problems

Adding value along the chain is essential for competitiveness, however problems exist especially in complex or long chains and in cases where many business partners are involved. due to uncertainties need to coordinate several activities, internal units, and business partners. Demand forecasts are a major source of uncertainties
Competition Prices Weather conditions Technological development Customer confidence Machine failures Road conditions Shipments

Uncertainties exist in delivery times

Quality problems may also create production delays

Local optimization and lack of global fit

SCM is big:
Variety of products and services Spoiled/ demanding customers Multiple owners (procurement, production, inventory, marketing) / multiple objectives Globalization

Increasing implied uncertainty

Instability and Randomness:
Increasing product variety Shrinking life cycle Customer fragmentation

Conflicting Objectives in Supply Chain

1. Decentralized supply chain: each member has his own interest and act independently 2. Self-interested decision makers: every member of the supply chain optimizes his own objective.

3. These self-interested members decisions may not align with the optimal decisions for the overall performance of the supply chain.
4. Inefficiencies across supply chain lead to decentralization cost

5. Solution: to coordinate the members to act as if they are a centralized supply chain (i.e., one decision-maker makes decisions in behalf of the whole supply chain)

Supply Chain Uncertainty

One goal in SCM:

respond to uncertainty in customer demand without creating costly excess inventory

Factors that contribute to uncertainty

Negative effects of uncertainty

lateness incomplete orders

Inventory

inaccurate demand forecasting long variable lead times late deliveries incomplete shipments product changes batch ordering price fluctuations and discounts inflated orders

insurance against supply chain uncertainty

Distinctions between the primary modes of integration

Integration with suppliers and customers

Integration with selected first tier customers or service providers

Integration with selected first tier, and increasingly second tier suppliers

Cross-functional integration within a selected organization

Frequent Supply shortages

Inefficient logistics

Low order fill rates

Tier 1 Supplier

Manufacturer

Distributor

Retailer

Customer

High stockouts

Glitch-Wrong Material, Machine is Down effect snowballs

High inventories through the chain

Ineffective promotions

High landed costs to the shelf

Bullwhip effect

What is Bullwhip Effect?

The bullwhip effect is a phenomenon observed in supply chains where the demand variability increases as one moves up the supply chain from customers towards to distributors to manufacturers.
At P&G, diaper orders issued by distributors have a degree of variability that cannot be explained by consumer fluctuations alone At Hewlett-Packard, the orders placed to the printer division by resellers have much bigger swings and variations that customer demands

Bullwhip effect refers to the phenomenon where orders to the supplier tend to have larger variance than sales to the buyer (i.e., information distortion) and the distortion propagates upstream in an amplified form (i.e., variance amplification).

Manufacturers orders to its suppliers

Wholesalers orders to manufacturer

Stores orders to wholesaler

Sales from store

Time

Time Time

Time

Time

Supplier

Manufacturer

Wholesaler

Retail Store

Consumers

Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for distributors, manufacturers, and suppliers.

DCs weekly orders to Manufacturer

9,000

Manufacturers weekly production quantity

Order quantity

7,000

Retailers daily orders to distribution center Babies daily demand for diapers

5,000

3,000

0 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30

Causes

price fluctuation

poor demand forecasting Bullwhip Effect erratic shifts in orders up and down the supply chain

order batching

rationing within the chain

 Order synchronization

Bullwhip effect: Causes

Multiple retailers who tend to order around the same time period Manufacturers responding to an MRP system that place raw material orders at the beginning of the month In order to save on shipping or ordering costs, firms order a full pallet or full truck load

Order batching Trade promotions and forward buying

Supplier offers a discount on product ordered in a specific time period Supplier offers a quantity discount A retailer orders a large quantity intending to take advantage of a discount and sells excess product to a second retailer (this strategy is called diversion) A retailer who is not sure that demand is stable over time may act aggressively when faced with periods of lower or higher than expected demand
A retailer who wants to insure product from an under-capacitated supplier may over order expecting to only receive a portion of the ordered quantity IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas Long lead times magnify this effect

Reactive and over-reactive ordering

Shortage gaming

Demand forecast updating / Inflated Orders

Long cycle times

Effects

Even slight demand uncertainties and variability become magnified if each distinct entity on the chain, makes ordering and inventory decisions with respect to its own interest above those of the chain

Distorted information can lead to tremendous inefficiencies excessive inventories poor customer service lost revenues ineffective shipments missed production schedules.

A common way to solve the bullwhip problem is by sharing information along the supply chain through EDI, extranets, and groupware technologies. For example employing a vendor-managed inventory (VMI) strategy, the vendor monitors inventory levels and when it falls below the threshold for each product this automatically triggers an immediate shipment.

Remedies

Bullwhip effect: Remedies

Centralizing demand information occurs when customer demand information is available to all members of the supply chain.

Reducing uncertainty. This can be accomplished by centralizing demand information.

Reducing variability. This can be accomplished by using a technique made popular by WalMart and then Home Depot called everyday low pricing (EDLP). EDLP eliminates promotions as well as the shifts in demand that accompany them. Reducing lead time. Order times can be reduced by using EDI (electronic data interchange). Strategic partnerships. The use of strategic partnerships can change how information is shared and how inventory is managed within the supply chain. These will be discussed later.

Cross-docking. This involves unloading goods arriving from a supplier and immediately loading these
goods onto outbound trucks bound for various retailer locations. This eliminates storage at the retailers inbound warehouse, cuts the lead time, and has been used very successfully by WalMart and Xerox among others.

Delayed differentiation. This involves adding differentiating features to standard products late in the
process. For example, Bennetton decided to make all of their wool sweaters in undyed yarn and then dye the sweaters when they had more accurate demand data. Another term for delayed differentiation is postponement.

Direct shipping. This allows a firm to ship directly to customers rather than through retailers. This
approach eliminates steps in the supply chain and reduces lead time. Reducing one or more steps in the supply chain is known as disintermediation. Companies such as Dell use this approach.

Sharing Information: Retailers may give the supplier frequent access to actual consumer demand data
so that the supplier can make its production plans accordingly.

Vendor Managed inventory: The retailer no longer decides when and how much inventory to order.
Instead, the supplier decides the timing and quantity of shipments to the retailer (e.g. P&G and Wal-Mart)

Smoothing the flow of products: Supplier and the retailers coordinate the timing of orders so that
retailers do not place orders at the same time.

Illustrations

Cause 2: Rationing and Shortage Gaming

When product demand exceeds supply, a manufacturer often rations its product to customers. Example:

Dealer 1
Car Manufacturer Available = 200

Order = 100

Received = 67 Received = 133

Dealer 2

Order = 200

Only 2/3 of the order can be fulfilled

Knowing the manufacturer policy, customers exaggerate their real needs when they order (game the system). Example:

Dealer 1 Car Manufacturer Available = 500 Dealer 2

Need = 120
Need = 180

Order = 180 Order = 270

Received = 180 Received = 270

Order more than needed so that if only 2/3 of the order is filled you still get what you actually need

As a result, customers orders give the supplier little information on a products real demand, a particularly vexing problem for new products

Coordinating S.C. Inventory

Consider a simple demand driven supply chain: a buyer and a supplier

Supplier

Buyer

Customers

The buyer produces D = 10,000 units/year of a product at a constant rate. Each time the buyer places an order for a certain component, the ordering cost is Sb = $100. The buyers inventory holding cost is H = $10/yr and optimal ordering quantity: 2 DS 2(10, 000)(100)
EOQb
b

10

447

The supplier produces an order whenever one is received from the buyer. Each time the seller sets up to produce a batch of components, the production setup cost is Ss = $300. The suppliers total (setup) cost = Ss(D/EOQb) = 300(10,000/447) = 6711 Optimal ordering quantity for the centralized supply chain:

EOQSC

2 D ( Sb S s ) H

2(10, 000)(100 300) 894 10

TC = 894 x 10/2 + (10000/894) x 100 = $ 5,589

$ 11,184

$ 8,944 $ 6,711 $ 4,472 $ 3,356

$ 5,589

Suppliers cost (at Q=447) = Ss (D/EOQb) = 300(10,000/447) = $6,711 Buyers cost (at Q=447) = (2 x D x H x Sb) = (2 x 10000 x 10 x 100) = $ 4,472
Suppliers cost (at Q=894) = Ss (D/EOQb) = 300(10,000/894) = $3,356 SC overall cost (at Q=894) = (2 x D x H x (Sb + Ss)) = (2 x 10000 x 10 x 400) = $ 8,944

Supplier cost Buyer cost Supply chain cost

Buyer's optimal Centralized supply chain's quantity optimal quantity Cost saving Q=447 Q=894 $6,711 $3,356 $3,356 $4,472 $5,589 -$1,116 $11,184 $8,944 $2,239

If buyer orders Q=894, supply chains total cost is reduced But, buyer incurs a higher cost, and will not order Q=894 The SC is NOT coordinated without a compensation for buyer
For any order quantity Q, the buyer always bears a fraction of of the total cost of the supply chain
Supplier promises to pay buyer The buyer promises to pay the supplier = = (1) (buys total holding and setup cost) () (suppliers total setup cost)

Buys optimal quantity = SCs optimal quantity = centralized SCs optimal quantity = 894 There exist a such that buyer and suppliers are both better off than ordering Q = 447

Solutions for Battling Bullwhip Effect

Vendor Managed Inventory (VMI)
Vendors take control of inventory management at the retailers

Quick Response (QR)

Vendors receive POS data from retailers, and use this information to synchronize their production and inventory activities.

Vendor Managed Inventory (VMI)

How does it work?
The vendor (supplier) receives inventory and point-of-sales (POS) data from the retailers and calculates how much to ship to retailers. The vendor places orders for supply.

VMI projects
Dillard Department Stores, JCPenney and Wal-Mart Sales increases of 20 to 25% 30% inventory turnover improvements

Types of vendor managed inventory in supply chains

Configuration Type 0 Description of collaborative or vendor managed functions Traditional supply chain
Type I and II have been implemented in supply chains in various sectors

Type I
Type II

Replenishment only

Replenishment and forecasting

Type III
Type IV

Replenishment, forecasting and customer inventory management

Type III and IV are more advanced and require further research and development

Replenishment, forecasting, customer inventory management and distribution planning

Quick Response
The supplier receives POS data from retailers, and use this information to synchronize their production and inventory activities.
The retailer prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

Quick Response vs. VMI

Sales information passed back to the supplier. Bullwhip effect is reduced. Whats the difference?
Who chooses the order quantity?
VMI: Supplier QR: Retailer

Who chooses when to order?

VMI: Supplier QR: Retailer