ISOM 3770: Global Supply Chain

Management

Session 13. Midterm Review

Xuan Wang
Dept. of ISOM, HKUST

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 Topics
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Sourcing Information Pricing

Cross Functional Drivers

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 Topics
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Sourcing Information Pricing

Cross Functional Drivers

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 Designing Distribution Networks
• Responsiveness vs. Efficiency trade-off
– How are the logistics costs and performance measures affected
by the # of facilities
• 6 common network designs
– Where is the inventory held?
– Who is responsible for the order processing?
– Who takes care of the order delivery?
• Omni-channel retailing: online + offline channels
– Product: pickup vs. home delivery
– Information: face-to-face vs. remote
– Impact on customer service: response time, product variety,
return convenience, customer experience, order visibility, etc.
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 Network Design Optimization

• Capacitated Plant Location Model

– to decide on locations and capacities
– to assign current demand to facilities and
identify transportation lanes

• Gravity Model will NOT be covered

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 HW 1 Question 2
• Refer to the complete SunOil Model (with decision variables xij,
yiL, and yiH). Now suppose we have an additional single sourcing
requirement. That is, each consumer market can only be served
by a single plant site.

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 Topics
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Sourcing Information Pricing

Cross Functional Drivers

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 Inventory Management

• Newsvendor model

• Economic Order Quantity (EOQ) model

• Continuous review inventory model

• Periodic review inventory model

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 Newsvendor Model
• Fundamental rationale: use Supply to meet
Random Demand
– Cu, Co
– Optimal CSL (in-stock probability)
– Q
– E[lost sales] =
– E[sales] = μ - E[lost sales]
– E[leftover inventory] = Q - E[sales]
– E[profit]

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 Continuous Review Inventory Model
• As soon as inventory drops below a reorder point ROP,
a fixed order quantity Q is ordered

INVENTORY
Order
Quantity Q

ROP
Expected lead
time demand

Safety Stock Safety Stock (SS)

lead time L TIME 10

 Continuous Review Inventory Model
• The role of ROP: the “supply” to fulfill demand during
Lead Time
• Two types of service level
– Type I Service Level (CSL): In-stock probability
– Type II Service Level (Fill Rate): The fraction of demand
fulfilled on time
Expected # of stockouts per year L(z) × σL
Type II Service level = 1 − = 𝟏𝟏 −
Expected annual demand Q

ROP = Expected demand during lead time + Safety Stock

= µL + 𝒛𝒛∗ × σL
= µD × �
𝑳𝑳 + 𝒛𝒛∗ × �
𝑳𝑳𝝈𝝈𝟐𝟐𝑫𝑫 + 𝝁𝝁𝟐𝟐𝑫𝑫 𝒔𝒔𝟐𝟐𝑳𝑳
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 Type I vs. Type II Service Level

Example: ROP = 190

Probability of no-stockout (CSL) = 8/10

Order cycle Demand Stock- Type I service = 80%

during LT outs
1 180 0
2 75 0
3 235 45
Fraction of demand satisfied on average
4 140 0
5 180 0 (fill rate) = 1 - 5.5/145 = 0.962
6 200 10
7 150 0 Type II service = 96.2%
8 90 0
9 160 0
10 40 0
Average: 145 5.5

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 HW1 Q3
• Rainbow Colors paint store uses a continuous review inventory system
to control its stock levels.
• Distribution of monthly demand is approximately Normal(28, 82).
• Replenishment lead time for this paint is 2 months.
• Each can of paint costs the store $6.
• Fixed cost of replenishment is $15 per order and holding costs are
based on a 30% annual interest rate

(1) What is the optimal lot size (economic order quantity) Q*?

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 HW1 Q3
• Rainbow Colors paint store uses a continuous review inventory system
to control its stock levels.
• Distribution of monthly demand is approximately Normal(28, 82).
• Replenishment lead time for this paint is 2 months.
• Each can of paint costs the store $6.
• Fixed cost of replenishment is $15 per order and holding costs are
based on a 30% annual interest rate

(2) What is the optimal ROP if Rainbow Colors wants to achieve a 90%
cycle service level (i.e., Type I service level)?

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 HW1 Q3
• Rainbow Colors paint store uses a continuous review inventory system
to control its stock levels.
• Distribution of monthly demand is approximately Normal(28, 82).
• Replenishment lead time for this paint is 2 months.
• Each can of paint costs the store $6.
• Fixed cost of replenishment is $15 per order and holding costs are
based on a 30% annual interest rate
(3) What is the Type II service level that corresponds to the previous policy?

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 HW1 Q3
• Rainbow Colors paint store uses a continuous review inventory system
to control its stock levels.
• Distribution of monthly demand is approximately Normal(28, 82).
• Replenishment lead time for this paint is 2 months.
• Each can of paint costs the store $6.
• Fixed cost of replenishment is $15 per order and holding costs are
based on a 30% annual interest rate

(4) Suppose the firm orders in the batch size of Q* computed in (1). What
is the optimal ROP if Rainbow Colors wants to ensure that 90% of the
demand are satisfied on time?

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 Periodic Review Inventory Model
• Inventory is reviewed at the start of each review
period and an order is placed to bring inventory
position up to an order-up-to level S

• Inventory Position = Inventory Level + Pipeline

Inventory
• Inventory Level = On-hand Inventory – Backordered Units
Inventory level can be negative: backordered units

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 Periodic Review Inventory Model
• Inventory is reviewed at the start of each review
period and an order is placed to bring inventory
position up to an order-up-to level S

• The role of S: the “supply” to fulfill demand during

(Review period + Lead Time)

S = Expected demand during (review period + lead time)

+ Safety Stock
= µT+L + 𝒛𝒛∗ × σT+L
= µD × (T + �
𝑳𝑳) + 𝒛𝒛∗ × (𝑻𝑻 + �
𝑳𝑳)𝝈𝝈𝟐𝟐𝑫𝑫 + 𝝁𝝁𝟐𝟐𝑫𝑫 𝒔𝒔𝟐𝟐𝑳𝑳

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 HW 1 Question 4
• Weekly demand for the desk is normally distributed with mean 40
and standard deviation 20, and demands across different periods
are independent from each other.
• The lead time from the assembly plant to your store is two weeks.

(A) Suppose you use the order-up-to model to manage inventory with
S = 220, and inventory is reviewed every week. You are about to place
an order and note that your current on-hand inventory level is 100 and
you have 85 desks still in transit. How many desks will you order?

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 HW 1 Question 4
• Weekly demand for the desk is normally distributed with mean 40
and standard deviation 20, and demands across different periods
are independent from each other.
• The lead time from the assembly plant to your store is two weeks.

(B) What is the optimal order-up-to level if you want to target a 98%
cycle service level?

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 HW 1 Question 4
• Weekly demand for the desk is normally distributed with mean 40
and standard deviation 20, and demands across different periods
are independent from each other.
• The lead time from the assembly plant to your store is two weeks.

(C) Now suppose you decide to adopt a continuous review policy to

manage inventory, and ROP is set to be 80. What is the average number
of lost sales in a replenishment cycle?

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 Risk Pooling Strategies
• Location Pooling
• Product Pooling
• Lead Time Pooling
– Consolidated Distribution
– Delayed Differentiation
• Capacity Pooling
– Make resource flexible to produce multiple products
– A little flexibility is all you need

When are the risk pooling strategies more beneficial?

• Correlation
• Uncertainty
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 HW1 Q5
• An apparel company is selling a newly designed dress to its customers
located in two different regions.
• Customer demands from both regions follow a Normal(1,000, 2002).
• Correlation coefficient of the demands from the two regions is equal to −𝟏𝟏
• The company runs a centralized warehouse; inventory is held at the
warehouse and will be shipped to the two regions
• Based on the above demand forecast, what is the optimal inventory that the
company should order for the warehouse

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 Topics
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Sourcing Information Pricing

Cross Functional Drivers

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 Sales and Operations Planning
in a Supply Chain
• How to respond to predictable variability in a
supply chain?
– Manage supply: capacity and inventory
• Trade-off?
– Manage demand: pricing and promotion
• Impact of price promotion? Where does the increased
demand come from? What is the appropriate timing to
do price promotion?
• Linear program formulation for S&OP

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Good Luck with the Midterm!

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