Assignment 3

Due Weds, November 1, 2006 at class
You have a choice to hand in Part II or Part IV (choice of cases)

Part I Supply Chain Management and The Virtual Build-to-Order: Dell Computer Corporation

Sidebar: How to Reduce the Bullwhip Effect

(Taken from Forio Business Simulations at Forio.com)

One way to reduce the bullwhip effect is through better information, either in the form of improved communication along the supply chain or (presumably) better forecasts. Because managers realize that end-user demand is more predictable than the demand experienced by factories, they attempt to ignore signals being sent through the supply chain and instead focus on the end-user demand. This approach ignores day-to-day fluctuations in favor of running level.

Another solution is to reduce or eliminate the delays along the supply chain. In both real supply chains and simulations of supply chains, cutting order-to-delivery time by half can cut supply chain fluctuations by 80%. In addition to savings from reduced inventory carry costs, operating costs also decline because less capacity is needed to handle extreme demand fluctuations.

In addition to cycle time reductions throughout the supply chain, Hau Lee, V. Padmanabhan, and Seungjin Whang recommend the following actions to reduce the supply chain management bullwhip effect:

Focus on end-user demand through point-of-sale (POS) data collection, electronic data interchange (EDI), and vendor-managed inventories (VMI) to reduce distortions in downstream communication.
Work with vendors to create smaller order increments and reduce order batching. Order batching exacerbates demand fluctuations.
Maintain stable prices for products. Price fluctuations encourage customers to over-purchase when prices are low and cut back on orders when prices are high, leading to large demand fluctuations.
Allocate demand among customers based on past orders, not present orders to reduce hoarding behavior when shortages occur.

5. Reduce lead times (Alan added this)

1. How Dell Keeps from Stumbling - This is a business week article from May 2001 that is essentially an interview with his VP in charge of supply chain management. He throws out a few operational figures for your perusal.

2. Dell Americas Desktop Operations - An article from Oct 2001 issue of Industry Week. It has the usual flowery kudos to Dell except that it also spends a bit describing the manufacturing layout.

1. Why do you suppose Dell is able to have "zero finished goods inventory"? What does this company do to help achieve this? (e.g. What types of information does Dell need to attain zero finished goods sitting in inventory?)

2. Michael Dell has said that if his company were vertically rather than virtually integrated, it would need five times as many employees and would suffer from a "drag effect." What do you think he means by this? Randy Mott is the senior vice president and chief information officer. Mott and Michael Dell have been quipped on more than one occasion: "Inventory stifles innovation". They have also said: "Inventory is evil". What do you suppose they mean?

3. Describe the bullwhip effect. Now...after you've described the bullwhip effect, I have a thought question for you. Suppose you're a retailer. If you have perfect information about customer demand characteristics (mean and standard deviation) and no communication breakdowns with your supply chain, would your supply chain still experience a bullwhip effect? I don't mind if you have the wrong answer as long as you have a thoughtful one.

In the high-tech universe, Dell Computer Corp. is a force of nature. In less than 20 years, company founder Michael S. Dell has amassed a personal fortune of $16 billion and built a $25 billion company, besting the likes of IBM, Hewlett-Packard, and Compaq Computer in the process. Along the way, his build-to-order model has blossomed into a new manufacturing paradigm. It's hard to find any recent article on mass customization or outsourcing that doesn't mention Dell.

Dell has attracted some good people: Randy Mott is the senior vice president and chief information officer. He was formerly CIO of Walmart for many years; Kevin Rollins is the heir apparent and is President and Chief Operating Officer. Rollins was once in line to interview for the top position at HP.

Ford CEO Jacques Nasser envisioned building a "lifestyle company that happens to sell cars and trucks," he said in 1999. The goal: Grow Ford into a company that gets perhaps half its revenue from selling vehicles, the rest from offshoot businesses. Nasser tried to propel an e-Ford initiative (shades of Dell!) but canceled a program dubbed Model E that was to have given free personal computers and low-cost Internet access to all of its 364,000 employees worldwide.

1. A Conversation with Michael Dell - This is a real player video of a presentation for the Sloan Distinguished Speaker Series at the MIT Sloan School of Management. It occurred on September 26, 2002 and you'll need real player and a decent broadband connection to view this.

Homework Questions

1. What kind of business model is Dell running? (hint: it's the same model he ran out of his dorm room). Is Dell really a technology company?

2. What do you see as some key advantages of Dell's supply chain integration? What are the hazards? It's been stated that any business that operates a build-to-order strategy eventually will need to closely integrate its suppliers and customers together. Do you agree with this? Why can't Ford do any of this? Is build-to-order easier in the PC assembly industry? Why or why not?

3. Please characterize Dell’s operations and supply chain. How is it like and unlike Toyota? What are the prerequisites or requirements for having a sleek operations and order fulfillment like Dell? Why do you suppose Ford can’t be like Dell? Ford tried and got the tar beaten out of it.

Whether you do the Sports Obermeyer case or not, this gets us all on the same page. Demand forecasting is an important topic.

1. Making Supply Meet Demand in an Uncertain World - A decent 1994 article that is co-written by Wally Obermeyer, the main person in the case. This sets up the case as well. It's a very structured case with elements in it that are well-covered in your text. Although it may initially seem like I'm giving the case answers for free, it's actually a nightmare for the newbie who has to rely only on the current text and lectures.

1. What is the right supply chain for your product - This was an optional reading in an earlier assignment, but it applies well for this topic and especially for the case. Same first author.

1. There is an article with a rigorous, mathematical rendering of the topic. Upon your request, I can send you an article on "Reducing the Cost of Uncertainty".

The Sport Obermeyer case describes the forecasting, planning, and production processes of a global skiwear supply channel. Although the company has a global supply network, most of its critical outwear products are sourced through the Hong Kong-based company Obersport, a joint venture between Sport Obermeyer and a Hong Kong partner. Obersport, in turn, manages supply and production processes in Hong Kong and China. Sport Obermeyer was founded by Klaus Obermeyer. Klaus used an informal approach to demand forecasting and product strategy. Klaus' son Wally is a recent Harvard MBA and takes a more analytical approach to the business.

You basically have three overarching issues to the case: 1) production planning for short-life cycle fashion products; 2) operational changes the reduce costs of mismatched supply and demand; and 3) coordination issues in a global supply chain.

The production planning problem that Obermeyer faces is a complex optimization problem under uncertainty. You're not expected to formally solve the problem but should be able to identify key issues regarding demand uncertainty, the risk associated with producing a product with uncertain demand, and the general impacts of mismatched supply and demand. At the core of the problem is that it is costly to produce products that do not sell, and costly not to product products that will sell.

You need to consider the following elements: product pricing; demand uncertainty, and expected demand. All else being equal, you should consider why its preferable to produce less expensive products early.

The first step is to evaluate the risk of unit production: devise a way to measure the likelihood that the unit will sell. You will have to construct a demand distribution for each style (mean, standard deviation, assume normal distribution).

Second, you'll need to think about a procurement strategy that minimizes the the expected costs of stockouts and markdowns. What factors need to be considered?

Lastly, with regard to each product, you'll need to consider the relationship between minimum order quantities versus expected demand (and demand uncertainty). You can operationally segment the products using these two variables. I'll create a 2 page handout on working the numbers.

2. How should management think (both short-term and long-term) about sourcing in Hong Kong and China? How should Wally react to the additional information received at Las Vegas? How should Wally think about how much of each style he should order in November?

3. Using the sample data given in Exhibit 10, make a recommendation for how many units of each style Wally should order during the initial phase of production. Assume that all ten styles in the sample problem are made
in HK and that Obermeyer's initial production commitment must be at least 10,000 units. Ignore price differences among styles in your initial analysis.

4. What operational changes would you recommend to Wally to improve performance? What constraints make this problem difficult? If Wally wants to improve his ability to product what the market wants, which of these constraints should he address?