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OPERATNS 476
Jeannette Song
Session 2
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Plan
Review of last class Supply chain strategies What is the right supply chain for your product? What kind of supply chain partner would you like to choose, as a supplier and as a customer? Review: Newsvendor model Case: 7-Eleven Japan
Review of Session 1
What is a supply chain?
Products, value added activities/ tiers, facilities, players, flows of materials, information and cash
What is supply chain management? Purpose & ideal Elements Challenges Some principles and innovations Example: Supply chain of a bottle of Listerine Case: Barilla
VMI (Vendor Managed Inventory; also known as Continuous Replenishment)
Why and how? Collaboration and incentives: external and internal
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Functional or innovative?
Before devising a supply chain strategy, we need to consider the nature of its products
Product Characteristics
Functional:
long life cycle (2 years) 1ow contribution margin (520%) low product variety (10-20 per category) low forecast error (10%) low stockout rate (1-2%) no forced markdowns (0%) long make-to-order leadtime (6+ months)
Innovative:
short life cycle (0.3 -1 year) high contribution margin (2060%) high product variety (often millions per category) high forecast error (40-100%) high stock-out rate (10-40%) many markdowns (10-25% of full price) short make-to-order lead time (1 day to 2 weeks)
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What to do:
Accept and reduce demand uncertainty: Finding sources of new data to learn more about demand Postpone variety as much as possible, component commonality Avoid uncertainty: Pay a premium for flexibility: faster transportation, lower transportation and factory utilization, smaller batches Hedge against uncertainty: Buffer inventory and excess capacity.
Focus on flexibility:
Avoid emphasis on traditional explicit costs (inventory holding, transportation efficiency, manufacturing utilization) Recognize that opportunity cost of lost sales and poor service are 11 high
Efficient
Mismatch
Responsive
Mismatch
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So Many Choices!
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Customers
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Model
Variables: D = demand for newspapers --- distribution F Q = # of newspapers to purchase from distributor p = price per newspaper w = cost per newspaper v = salvage value Profits are
Marginal Analysis
Some notation G = marginal revenue for buying and selling one unit (=pw) L = marginal loss for buying and not selling one unit (=w-v)
G (1 F (Q ) ) = G P ( D Q )
L F (Q ) = L P ( D Q )
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Optimal Solution
marginal benefit = marginal cost
G 1 F ( Q * ) = LF ( Q * )
Optimal solution:
F (Q * ) =
G pw = G+ L pv
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Normal Demand
Demand (D) is has a normal distribution F with mean E[D]= and standard deviation Compute ratio = G/(G+L) Set z* = NORMSINV(ratio)
Q* = + z*
= mean demand + safety stock
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Solution
G =$2.50 $1 = $1.50 L = $1 $0.25 = $0.75 ratio = 1.5/(1.5+0.75) = 0.6667 safety factor z* = normsinv(0.6667) = 0.45 order quantity Q* = 200 + (0.45)(50) = 221.54 Safety stock = Q*- =221.54-200 = 21.54 (extra units ordered above the mean demand)
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Role of information technology Role of partnership and incentives Culture; continuous improvement; innovation
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7-11
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7-11
Japan USA Taiwan Thailand South Korea China 11,747 6,157 4,588 4,055 1,513
1,277 (*Beijing 53)
73 77 59 14
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SEJ Financials
Revenue from Operations
SEJ Financials
Operating Income
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SEJ Financials
Net Income / Net Income per Share
SEJ Timeline
1973 November York Seven Co., Ltd., established Licensing agreement and area service contract concluded with The Southland Corporation, USA (currently Seven-Eleven, Inc.) 1974 1975 May June First store opened (Toyosu Store, Koto-ku, Tokyo) 24-hour operations (Toramaru Store, Koriyama, Fukushima Prefecture) begun Total number of stores reached 100 Integration of suppliers and joint delivery started Corporate name changed to Seven-Eleven Japan Co., Ltd. Ordering using Terminal Seven launched
1976
May September
1978
January August
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SEJ Timeline
1980 1982 1984 1985 November October February May August 1987 March April October 1988 March November December
Jeannette Song
Total number of stores reached 1,000 POS system introduced EOB ordering system introduced Total number of stores reached 2,000 Introduction of computers capable of displaying graphs Introduction of interactive registers capable of transmitting information to and from the headquarters and stores Three-times-a-day delivery of cooked rice items started Total number of stores reached 3,000 Payment of Tokyo Electric Power Co., Inc., bills becomes possible at 7-Eleven stores Payment of Tokyo Gas Co., Ltd., bills becomes possible at 7-Eleven stores Control system to keep cooked rice items at 20 in factories, delivery trucks, and display cases started The Southland Corporation's Hawaii operations acquired
35 Fuqua School of Business
SEJ Timeline
1990 June September 1991 March Total number of stores reached 4,000 Introduction of Fourth-Generation Total Information System Acquisition of The Southland Corporations equity and participation in management Payment of Nippon Telegraph and Telephone Corporation telephone bills becomes possible at 7-Eleven stores ISDN (Integrated Services Digital Network) launched Store image refreshment begun Introduction of new executive office information system Total number of stores reached 5,000 "Seven-Eleven Midorino Kikin" established
36 Jeannette Song Fuqua School of Business
April
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SEJ Timeline
1994 1995 April May June 1996 January March April October November Payment for installment purchases becomes possible at 7-Eleven stores Total number of stores reached 6,000 Payment for mail-order purchases becomes possible at 7-Eleven stores Introduction of new display cases Introduction of weather information system Sale of international phone cards launched Introduction of color photocopiers Sale of game software launched
SEJ Timeline
1997 June November December 1998 March October 1999 March Total number of stores reached 7,000 Introduction of Fifth-Generation Total Information System Introduction of power saving devices in 7-Eleven stores Sale of music CDs launched Launch of magazines and periodicals subscription service Introduction of new POS registers Sales of nutritional drinks launched November Total number of stores reached 8,000 Launch of e-Shopping! Books service Payment service for Internet shopping introduced
38 Jeannette Song Fuqua School of Business
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SEJ Timeline
2000 February August 2001 April May August 2002 February May November
Jeannette Song
Establishment of e-commerce company, 7dream.com (service commenced in July 2000) Establishment of meal delivery service company, Seven-Meal Service Co., Ltd. Establishment of IYBank Co., Ltd., through joint investment with Ito-Yokado Co., Ltd. Installation of IYBank ATMs in stores begins Introduction of items free of food additives and artificial colorings Total number of stores reached 9,000 Installation of open display cases usable for refrigerated and hot beverages begun Launch of ticket issuing service using Multifunction Copiers
39 Fuqua School of Business
SEJ Timeline
2003 2004 August January April 2005 February February Total number of stores reached 10,000 Establishment of SEVEN-ELEVEN (BEIJING) CO., LTD., as a joint venture First store in the People's Republic of China opened (Dongzhimen Store, Dongcheng District, Beijing) Total number of stores with IYBank ATMs reached 9,652 7-Eleven, Inc., became a subsidiary of Seven-Eleven Japan, integrating the management of the IY Group's convenience store operations to SEJ
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Innovative or functional?
http://www.youtube.com/watch?v=vKsmf4TWToM
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Facilities
Plants, warehouses, stores, etc.
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Efficient
Responsive
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Avoid uncertainty
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SEJ Strategy
Increase responsiveness in its supply chain for its innovative products
Product Demand Supply Chain Types Functional Innovative
Efficient
Responsive
SEJ Strategy
Sell innovative products on a large scale through a responsive and efficient supply chain!!
Product Demand Supply Chain Types Functional Innovative
Efficient
Responsive
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Retail Execution
Daily ordering -Based on POS data
-Frequency based on product category -Back-up IT systems at store for ordering
Dynamic store layout and display to increase utilization -Display decisions left to store managers Frequent delivery -Joint delivery program for efficiency
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7-Dream.com
Clicks and Mortar strategy Key to diversifying product line, and attracting younger customers Promote brand image as innovative Partnership
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Summary
Match supply chain design with product characteristics Newsvendor model review
Tradeoff of overage and underage costs
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