Decision Support

Systems and IT
Phil Simchi-Levi
David Kaminsky
kaminsky@ieor.berkeley.edu
Philip Kaminsky
Edith Simchi-Levi
 Outline of Presentation

 Supply Chain Capabilities

 Logistics Network Design

 Supply Chain Master Planning

 Demand Planning

 Inventory Planning

 Information Technology

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Capabilities required for
supply chain excellence
 Strategic network
design
 Supply chain master

planning
 Operational planning

 Operational execution

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Capabilities required to achieve

supply chain excellence

Demand Supply Chain
Network Design Planning Master Planning Inventory Planning Fulfillment
Resource
Forecast & utilization / cycle
Decision focus Infrastructure Forecast Error stock Safety stock Customer Service

Planning Horizon 2 to 5 years 1-12 months 12 months 1 month Hours

Aggregation Level Family Item Classes Item Order

Frequency Yearly Monthly/Weekly Monthly/Weekly Monthly/Weekly Real-time

ROI * 60% to 70% ?? 15% to 20% 5% to 10% 1% to 5%

Implementation Very Short Medium Short Short Long

Users Very few Few Few Few Many

*Forrester “Balancing supply and demand” March 2002
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Network Design: Key
Issues
 Pick the optimal number, location, and size of
warehouses and/or plants
 Determine optimal sourcing strategy
– Which plant/vendor should produce which product
 Determine best distribution channels
– Which warehouses should service which customers

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Network Design: Key
Issues
The objective is to balance service level against
 Production/ purchasing costs
 Inventory carrying costs
 Facility costs (handling and fixed costs)
 Transportation costs
That is, we would like to find a minimal-annual-cost
configuration of the distribution network that satisfies
product demands at specified customer service levels.

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Network Design Tools:
Major Components
 Mapping
– Mapping allows you to visualize your supply chain and solutions
– Mapping the solutions allows you to better understand different scenarios
– Color coding, sizing, and utilization indicators allow for further analysis
 Data
– Data specifies the costs of your supply chain
– The baseline cost data should match your accounting data
– The output data allows you to quantify changes to the supply chain
 Engine
– Optimization Techniques

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Mapping Allows You to
Visualize Your Supply Chain

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Displaying the Solutions Allows
you To Compare Scenarios

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Key Drivers for Network
Design
Profitability
Competitiveness

Profits Assets
Fixed cost of DC’s
Fixed cost of X-docks
Revenue Expenses Fixed cost of plants
Service levels Cost of private fleet
Inbound transportation
- proximity to Outbound transportation
key markets - location of facilities
Distribution drives this cost
channels Inventory costs
Variable production and
warehousing costs
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Typical Strategic Network
Design Applications
 Evaluate the optimal distribution network to reduce
costs and improve service
 Determine how to optimally consolidate two
networks after a merger
 Develop an e-commerce distribution strategy
 Quickly respond to RFP’s
 Perform due diligence studies
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Who is Involved?
 Operations
– Can include transportation, warehousing, manufacturing, and vendors
– Provides information on how the business runs and what is possible
 Sales/Marketing
– Provides information on service level constraints and evaluates how
different scenarios will impact sales
– Provides forecast data
 Finance
– Determines cost inputs and validates cost of scenarios
 Information Technology
– Assists with data collection

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Network Design
Optimization
The key is to balance
$90
the total costs with
$80 service requirements
$70
Cost (millions $)

$60
Total Cost
$50 Transportation Cost
$40 Fixed Cost
Inventory Cost
$30

$20

$10

$-

0 2 4 6 8 10
Number of Warehouses
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Industry Benchmarks:
Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg.
# of
WH 3 14
- High margin product
- Service not important (or
easy to ship express)
- Inventory expensive
relative to transportation
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools
McGraw-Hill/Irwin
25
- Low margin product
- Service very important
- Outbound transportation
expensive relative to inbound
© 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Limitations of Strategic Tools and
the Need for Tactical Tools
 Strategic tools do not consider time
periods
– Demand varies over time
– Production capacity can vary over time
 Strategic models cannot identify the
month in which warehouses will be out
of capacity or demand will not be
satisfied

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Need for Tactical
Planning Tools
Demand
Safety Stock
DC
Capacity

Production
Capacity

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Supply Chain Master
Planning
 A supply chain master plan identifies
production quantities, distribution strategies
and storage requirements by efficiently
allocating supply chain resources to
minimize system-wide cost or maximize
profit over multiple time periods

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Supply Chain Master
Planning
 Allows the supply chain to replace
sequential optimization with global
optimization
– In sequential optimization each part of the
supply chain is optimized with no, or very
little, regards to other supply chain components
 Traditional supply chain strategies

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Sequential Optimization vs.
Global Optimization
Sequential Optimization

Procurement Manufacturing Distribution

Demand
Planning Planning Planning
Planning
Global Optimization

Supply Chain Master Planning

Procurement Manufacturing Distribution

Demand
Planning Planning Planning
Planning

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Supply Chain Master
Planning: A Case Study
 CPG Example
– Showing the benefits of global optimization

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Supply Chain Master Planning:
CPG Manufacturer

Demand varies
Production/purchases Starting inv by week
fixed on short term positions for and changes
basis every product in week to week
every DC

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Challenges
How much to How to best
commit to for replenish DC’s
each supplier

High demand
variability

overflow
How to Coordinate How to minimize
Production and Demand the use of overflow
Planning warehouses

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 The Extended Supply
Chain

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Data Integration

 Files updated from the ERP Systems

– Demand Forecast
– Starting Inventory positions
– Locked in production schedule (4 weeks out)
– Remaining shelf life

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Savings

Traditional Planning
Optimization

Total Cost Prod Cost Inv Costs Trans Vendor Expired Overflow
Cost Costs Prod's WH

With traditional planning, the firm had to optimize on just a few

variables (production costs). With tactical planning, they could create
plans that were optimal across many parameters.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 CPG Conclusions
 Master supply chain planning output
– New production plan and order from suppliers
– Inter-facility moves, out of territory moves, where to store excess
product
– New inventory plan
– Replenishment lanes
– Profitability/total cost of the given plan
 Benefits
– Reduced costs by optimizing over total supply chain costs
– Better use of existing assets (both plants and inventory)
– Created a coordinated plan
 Better plan for extra resources

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Outline of Presentation

 Supply Chain Capabilities

 Logistics Network Design

 Supply Chain Master Planning

 Demand Planning

 Inventory Planning

 Information Technology

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Demand Planning
Functionality:
 Statistical forecasting
 OLAP (Online Analytical Processing)
– The ability to analyze data along multiple dimensions
 Event and promotion management support
– The ability to track the impact of events and promotions
using historical data
– Forecast demand taking into account promotions

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Demand Planning
Functionality:
 Lifecycle and new product support
– Forecast new product demand based on models from
similar products, demand history or other market models
– Manage product lifecycle based on factors such as
substitution, cannibalization, or phase-out
 Support collaborative forecasting
– Within the organization
– With suppliers and customers

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Outline of Presentation

 Supply Chain Capabilities

 Logistics Network Design

 Supply Chain Master Planning

 Demand Planning

 Inventory Planning

 Information Technology

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 There are four levels of
Inventory Planning

Level 1
 Manual management within one facility
 Goal – Avoid Stock-outs
 Process
 Periodic review with manual inventory checking
 Tight management of usage rates, lead times & safety stock
 ABC analysis
 Software: Databases, no inventory management
products
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 There are four levels of
Inventory Planning

Level 2
 Scientific methodology within one facility
 Goal – Optimize local inventory
 Process
 Determine safety stock based on replenishment lead times,
forecast errors and service level
 Software:
 Demand planning, inventory management or replenishment tools

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 There are four levels of
Inventory Planning

Level 3
 Strategic positioning of inventory across the Supply Chain
 Goal: Collaborative global optimization of Inventory Levels
 Process:
 Optimize committed lead times based on the entire supply chain
 Position inventory strategically to minimize system wide cost
 Satisfy service level requirements
 Software:
 Advanced Inventory Planning

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 There are four levels of
Inventory Planning

X X

Level 4
 Tactical Supply Chain Adjustment to Optimize Inventory
 Goal: Design the supply chain based on service requirements
 Process:
 Optimize the suppliers based on service commitment, price and inventory
requirements
 Software:
 Advanced Inventory Planning
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Capabilities required to achieve
supply chain excellence
Demand Supply Chain
Network Design Planning Master Planning Inventory Planning Fulfillment
Resource
Forecast & utilization / cycle
Decision focus Infrastructure Forecast Error stock Safety stock Customer Service

Planning Horizon 2 to 5 years 1-12 months 12 months 1 month Hours

Aggregation Level Family Item Classes Item Order

Frequency Yearly Monthly/Weekly Monthly/Weekly Monthly/Weekly Real-time

ROI * 60% to 70% ?? 15% to 20% 5% to 10% 1% to 5%

Implementation Very Short Medium Short Short Long

Users Very few Few Few Few Many

*Forrester “Balancing supply and demand” March 2002
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Trends in Supply Chain
Planning
 Utilization of SCP will increase at all levels
of decision making
 SCP will handle real time data and must

have a short processing time

 SCP will become better integrated with

user’s information systems

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Trends in Supply Chain
Planning
 SCP will allow for collaboration in the same
company and across different companies
 SCP at various levels will be better

synchronized so that decisions are all

coordinated

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Outline of Presentation

 Supply Chain Capabilities

 Logistics Network Design

 Supply Chain Master Planning

 Demand Planning

 Inventory Planning

 Information Technology

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Trends in Information
Technology
 The Browser and the Internet
– Accessibility
– Universal standard
 Improved integration capability
– XML, CPFR, RosettaNet
 Move to Application Service Provider (ASP)
Deployment
 Fast ROI

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Information Technology
 IT in SCM spans both internal and external
systems connecting the firm to its customers
and suppliers
 Companies employ different systems that
support different locations
– Warehouse management systems,
– Production planning,
– Transaction and sales processing
– Decision support systems
– Communications systems: Email, Intranets
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Information Technology

 In many businesses, competitive edge in the

market is achieved through the use of IT
– Banking
– Retail (Wal Mart)
– Airlines (American Airlines)
– Trucking and Shipping (FedEx)

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Goals of IT in SCM

 Collect information on each product from

production to delivery/purchase point and
provide complete visibility for parties
involved.
– Tracking
– Alerting

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Goals of IT in SCM
 Access any data in the system from a
single point of contact. This is
complicated by the fact that one may need
information which resides
– in various locations within one company
– in different companies

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Goals of IT in SCM
 Analyze and plan activities based on total
supply chain information.

– Decision Support Systems

– Advanced Planning Systems

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Goals of IT in SCM
 Collaborate with Supply Chain partners.

– Alignment of IT systems
– Integration of business processes
– Supply chain relationship management
– CPFR

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 How are these Goals
Achieved?
1. Standardization
2. Infrastructure
3. Electronic Commerce
4. Supply Chain System Components

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 How are these Goals
Achieved?
1. Standardization:
 The forces behind them:
– Market forces: cheaper to purchase and maintain
– Interconnectivity
– Reduced software costs
– Economies of scale
 General standards
– Wintel
– Internet: HTML, XML
– Web services

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Emerging Standards

 Supply Chain Operations Reference Model

(SCOR)
 Collaborative Planning Forecasting And
Replenishment (CPFR)
 Rosettanet
 ERPII

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 How are these Goals
Achieved? (Cont.)
2. Infrastructure:
 Many companies have implemented Enterprise
Resource Planning (ERP) systems which create
an enterprise-wide transaction backbone as well
as tie in all the facilities into worldwide financial
systems.
 IT infrastructure typically consists of the following
components:
– Interface/presentation devices
– Communications
– Databases
– System architecture
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 How are these Goals
Achieved? (cont.)

3. Electronic Commerce:
 EC refers to the ability to perform

transactions electronically
 Examples of direct-sell to customers

through the Internet:

– Dell Computer
– Amazon.com
– Peapod
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Table 1

Summary of Electronic Commerce levels

Level number Description Example

1 One-way Email, FTP, Browsing

communication
2 Database access Inquiries, Forms, Purchases,
Tracking
3 Data Exchange EDI, Clearinghouse

4 Sharing processes CPFR, Business communities

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Table 2

Comparison of ERP and DSS Implementation

Implementation Issue ERP DSS
Length 18-48 months 6-12 months
Strategic, tactical,
Value Operational
operational
ROI 2-5 year payback One-year payback
Users All and users Small group
Training Simple Complex

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Table 3

Priorities when Implementing DSS

Industry DSS

Soft-drink distributor Network and Transportation

Computer manufacturer Demand and Production

Consumer products Demand and Distribution

Apparel Demand, Capacity and Distribution

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Table 4

“Best of breed” versus ERP package

Implementation Issue Best of Breed Single-vendor

Length 2-4 years 12-24 months
Cost Higher Lower
Flexibility Higher Lower
Complexity Higher Lower
Quality of solution Higher Lower
Fit to enterprise Higher Lower
Staff training Longer shorter

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi