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ISYE 4301Supply Chain EconomicsFall 2016

Paul Griffin & Pinar Keskinocak

Instructors

Paul Griffin Pinar Keskinocak

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Paul Griffin

Joined ISyE faculty in 2015 (previously at Penn State and Georgia Tech)

Research and teaching interests: health systems and supply chain engineering

Birthplace: Albany, Georgia Outside interests: Baseball and poetry Favorite movie: Wizard of Oz

Pinar Keskinocak

Education Ph.D. in Operations Research, Carnegie Mellon University M.S. in Industrial Administration, Carnegie Mellon University B.S. and M.S. in Industrial Engineering, Bilkent University

Experience Faculty member at Georgia Tech since 1999 Co-director, Center for Health and Humanitarian Systems IBM T.J. Watson Research Center, Yorktown Heights, NY

Research Health and humanitarian applications Supply chain management Revenue management (Price/lead time quotation, auctions)

Teaching ISYE 3104 - Supply Chain Models: Manufacturing & Warehousing ISYE 4231 (3133) - Engineering Optimization ISYE 4105 - Senior Design ISYE 6230 - Economic Decision Analysis ISYE 6320– Health and Public Applications of OR/MS Executive teaching

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What is this course about?

The interactions of multiple players (decision makers) in a supply chain and the resulting dynamics in a market environment

What is a supply chain and who are the players?

Suppliers Manufacturing Distribution Channels/retailers End consumers

Materials, products, services, information, money

A typical private sector supply chain

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Source: i2 Technologies

Customer

A typical private sector supply chain

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Suppliers Manufacturing Distribution Channels/retailers End consumers

Materials, products, services, information, money

Supply chain activitiesDesign Manufacturing ProcurementPlanning and forecasting Order fulfillment Distribution

A typical private sector supply chain

Deliver the right product to the right place at the right time (for the right price), while minimizing system-wide costs and satisfying service requirements.

The goal in SCM:

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Players/Stakeholders, Interactions

Customers

Suppliers Competitors

Business partners

Other entities in the market

Company XYZ

Decentralized, but interconnectedComplex tradeoffs, conflicting objectives

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Conflicting objectives

… in the supply chain … within a single organization

Marketing/Sales: more finished goods inventory, fast delivery, many package types, special wishes/promotions

Production: bigger batch size, depots at factory, latest ship date, decrease changeovers, stable production plan

Distribution: full truckload, low depot costs, low distribution costs, small # of SKUs, stable distribution plan

“It is a sad reality that all too often emergencies trigger a huge scramble among aid organisations for donor money to support their own relief initiatives. This is often to the detriment of valuable coordination. Sometimes little attention is paid to what other agencies are doing amid single-minded approaches to maximise marketing opportunities.” – Fenton, 2003

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Losing Sight of the Common Objective

I'm glad that the holeis not on our side!

Source: Mumin Kurtulus

Suppliers Manufacturing Distribution Channels/retailers End consumers

Materials, products, services, information, money

Supply chain activitiesDesign Manufacturing ProcurementPlanning and forecasting Order fulfillment Distribution

Decentralized, but interconnectedComplex tradeoffs, conflicting objectives

• Vertical integration• Coordinate with contracts • Collaborate

Inefficiencies

Potential solutions to eliminate inefficienciesSupply chains are… which leads to …

A typical private sector supply chain

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Donors & suppliers

• Government• Foundations• Companies• Individuals

Recipient agency

• UN agencies•WFP, …

• NGOs• IFRC• WVI• CARE• Red Cross•…

• Governments

Delivering agency

• Global or local NGOs• Local organizations or governments• Military

People in need

Public Sector Supply Chain Example -Players/Stakeholders, Interactions

Others indirectly involved: international media, general public in donor countries, … 13

Public Sector Supply Chain Goals (examples)

Health program Given a budget, meet the needs of as many

beneficiaries as possible in the timeframe Emergency

Deliver emergency products to as many beneficiaries as quickly as possible

Long-term Development Program Deliver the right product at the right time to the right

place/recipients for the right cost

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What is this course about?

The interactions of multiple players (decision makers) in a supply chain and the resulting dynamics in a market environment Suppliers, manufacturers, retailers, consumers, etc. Government agencies, donors, recipients, etc.

Strategic behavior: Each player in the market acts on self-interest, e.g., tries to optimize its own objectives

In choosing an action, a player considersthe potential responses/reactions of other players

A tool for analysis: Game Theory

Motivation for better coordination and collaboration

Bigger share of the pieOR Increase the size of the pieOR

BOTH!!

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Course Goal and Topics

Goal: Conceptual and modeling skills to understand, model, and effectively manage supply chains using a systems perspectiveTopics:

Demand modeling Pricing and revenue management Strategic interactions in supply chains Collaboration and coordination Information, incentives and agency models Models of differentiation Supply chain strategies Supply chain performance (productivity)

Examples of Strategic Interactions in Supply Chains

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Competition on Price

Intel vs. AMD

Advanced Micro Devices (AMD) has slashed prices of its desktop and mobile Athlon processors just days after a similar move by rival Intel. "We're going to do what it takes to stay competitive" on prices, said an AMD representative. AMD's move is also designed to clear out inventory and make way for faster new desktop and mobile processors. AMD's aggressive price-chopping means the company doesn't want to give up market share gains, even at the cost of losses on the bottom line, analysts said. -- ZDNet News, May 30, 2002

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Intel vs. AMD (cont.)

During the first quarter of 2002, AMD increased processor shipments from the fourth quarter of 2001, topping 8 million, but processor revenue declined by 3% sequentially. In effect, the company sold more chips for less money than in the fourth quarter.

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Prisoner’s dilemma

Burger King vs. McDonald’s

Burger King Corp. will put its flagship Whopper hamburger on sale for 99 cents beginning Friday … The move is likely to intensify and prolong the burger price wars that have been roiling the U.S. fast-food industry in recent months. Burger King officials had said earlier that while they were reluctant to discount the Whopper, they had little choice given a $1 menu at archrival McDonald's Corp. that included a Whopper-like hamburger, called the Big 'N Tasty.

– Chicago Sun-Times, January 3, 2003

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Competition on Output

U.S. Auto manufacturing

Through June 7, 2002, U.S. vehicle output was up 7.7% from a year ago (Ward's Automotive Reports) GM's second-quarter production is up 12% from a year

ago. The company says third-quarter output will increase 0.6%.

Ford's second-quarter production is up 4%, and the company expects the third quarter to be up 16%.

DaimlerChrysler's Chrysler Group but said production through May 2002 is up 3.2%.

Analysts warn that automakers may end up spending more on rebate deals in late summer to clear out too many cars being built now. – USA Today, June 14, 2002

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Oil production

OPEC decided to slash its crude oil production by 1.5 million barrels a day (6%).The issue came to a head this autumn as the weakening world economy, together with the uncertainty caused by the Sept. 11 attacks on the United States, dragged down prices some 30 percent. … The cut is expected to lift OPEC's benchmark price to $22 a barrel - the group's minimum target price.

Rival, independent producers such as Russia and Norway promised reciprocal cuts that were smaller than expected. OPEC, which has already reduced its official production by 3.5 million barrels a day this year, is weary of doing so only to see producers outside the group increase their market share as a result.

– CBS News, December 28, 2001 25

What are some common elements in these examples?

What are the differences? Product type, big vs. small player, motivation behind

actions, etc.

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Players in a supply chain

Suppliers

Manufacturing

Warehousing

Distribution

Customers

Horizontalinteractions

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Million-plus 501(c)(3) public charities in the U.S. ~$260 billion donated to charities in the U.S. in 2005 ~70,000 private foundations, ~$425 billion in

foundation assets, ~$25 billion to charities annually "By February 2005, the international community had

donated $500 per person affected by the tsunami, compared to just 50 cents for each person affected by Uganda’s 18-year war."

“Horizontal” interactions in humanitarian supply chains

Source: Business Week, August 28, 2006 28

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Competition in humanitarian supply chains

Sometimes what we imagine aid agencies would all work together for the greater good, but unfortunately, on the ground that doesn’t always happen. It’s about what each charity can do so they’re working, some of the time, in competition rather than collaboration and because of that, then they’re not most effective and so they’re not saving as many lives as they could. – Editor from Lancet, British medical journal

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Competing for funding, media attention, resources, turf

“Many NGOs operate as competitors seeking contracts in the aid market, raising funds with polished media campaigns and lobbying governments as hard as any other business.” (1)

“… the superior financial resources controlled by national and international NGOs meant that international NGOs sometimes hired away trained staff and personnel from local NGOs” (2)

“This spring in Kosovo, “there were instances of several NGOs competing to work in the same camps, duplication of essential services,” complains an Oxfam worker.” (1)

Sources: (1) Sins of the secular missionaries, Jan 27, 2000, The Economist(2) Moore at al. (2003), International NGOs and the Role of Network Centrality in Humanitarian Aid Operations: A Case Study of Coordination During the 2000 Mozambique Floods, Disasters, 27 (4), 305-318. 30

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Players in a supply chain

Suppliers

Manufacturers/Retailers

Warehousing

Distribution

Customers

Verticalinteractions

Horizontalinteractions

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Supplier-manufacturer interactionsUS auto man.

Suppliers

Suppliers Toyota “Toyota helped us dramatically improve our production system. We started by making one component, and as we improved, [Toyota] rewarded us with orders for more components. Toyota is our best customer.”

-Senior executive, supplier to Ford, GM, Chrysler, and Toyota, July 2001**

“The Big Three [US automakers] set annual cost-reduction targets [for the parts they purchase]. To realize those targets, they’ll do anything. [They’ve unleashed] a reign of terror, and it gets worse every year. You can’t trust anyone [in those companies]”

-Director, interior systems supplier to Ford, GM, and Chrysler, October 1999*

* and ** Source: Building Deep Supplier Relationships, HBR, December 2004 Source: Mumin Kurtulus

Arm’s Length

Partnership

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Manufacturer-retailer interactions: Inflated orders (rationing game)

During shortage periods manufacturers allocate products to customers proportional to order size e.g., if total supply is 50% of total orders, all customers receive

50% of what they order Inflated or duplicate orders during shortage periods Returns and cancellations later Customer orders give little info to the supplier Example: Motorola cell phones

Shortage during Christmas season in 1992 and 1993 Excess ordering in 1994, record 4th quarter earnings Channels swamped with inventory, stock tumbled almost 10%

Possible remedy: allocation based on past sales or forecast accuracy 33

Examples of “vertical” interactions in humanitarian supply chains

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Inflated estimates of need

“… local traditional authorities were involved in listing affected households. The listing process sometimes was falsified because traditional leaders registered more than the actual number of households, in order to get more assistance. … the numbers of affected people were inflated … even by the national government and some NGOs.”

“CCM was busy with an independent assessment... The difference in numbers between the two assessments was substantial. …some administrative authorities took advantage of the fact that people gathered in one place for food distribution, and used this as an opportunity for political mobilisation.”

Possible remedy Assessment by an independent 3rd party Solid criteria and formal process for assessment

Source: Matsimbe (2003), The Role of Local Institutions in Reducing Vulnerability to Recurrent Natural Disasters and in Sustainable Livelihoods Development 35

Media, Donors, NGOs

“The level of media interest in an emergency broadly determines the pressure on some agencies to be involved, as they may feel that their donors expect them to be involved in high-profile emergencies, even when good practice might suggest otherwise.” (1)

“ … international NGOs were sometimes under significant pressure to spend money in a short period of time, thus leading to ‘short-term’ thinking and fewer relevant projects with long-term benefits” (2)

Sources: (1) Seaman (1999), Malnutrition in Emergencies: How Can W e Do Better and Where Do the Responsibilities Lie?, Disasters23(4), 306-315. (2) Moore at al. (2003), International NGOs and the Role of Network Centrality in Humanitarian Aid Operations: ACase Study of Coordination During the 2000 Mozambique Floods, Disasters, 27 (4), 305-318. 36

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Military, NGOs

“… Indonesian military coordinated the use of military assets provided by foreign governments …. NGOs were often excluded from use of the assets for assessment and starting response operations. …. In the critical first two weeks it was easier for journalists to travel on helicopters than NGO staff. The military operating in these areas did not systematically collect information about affected populations. What little information was collected was not made available to NGOs.”

Source: Volz, C., 2005. Humanitarian coordination in Indonesia: an NGO viewpoint. Forced Migration Review July, 26–27

Government, NGOs

“The failure of some NGOs to report their presence and activities to governmental authorities represents only one aspect of the frequently tested relations between governmental and non-governmental organisations.”

“President Rafael Correa … is a declared enemy of any civil society organization that doesn’t adhere to his government’s vision of centralized, top-down power. He never misses an opportunity to criticize nongovernmental organizations that are not aligned with his politics, and has even closed down those that incur his displeasure.”

Source: Moore at al. (2003), International NGOs and the Role of Network Centrality in Humanitarian Aid Operations: A Case Study of Coordination During the 2000 Mozambique Floods, Disasters, 27 (4), 305-318.Source: New York Times, http://www.nytimes.com/2016/04/23/opinion/in-ecuador-political-aftershocks.html?emc=eta1&_r=0, 38

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CARE Example – Food aid

“CARE, one of the world's biggest charities, is walking away from some $45 million a year in federal financing, saying American food aid is not only plagued with inefficiencies, but also may hurt some of the very poor people it aims to help.”

“Under the system, the U.S. government buys the goods from American agribusinesses, ships them overseas, mostly on U.S.-flagged carriers, and then donates them to the aid groups as an indirect form of financing. The groups sell the products on the market in poor countries and use the money to finance their anti-poverty programs. It amounts to about $180 million a year.”

Source: CARE gives up U.S. funding in flap over food aid, Atlanta Journal Constitution, Aug. 16, 200739

Class discussion

Who are the players/stakeholders? What are their incentives? What is CARE’s motivation in this move? How does CARE’s move impact competition in

this market?

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Modeling strategic interactions using game theory

Many types of games: board games, card games, video games, field games (e.g., football), etc. A zero-sum game is one in which the players' interests are in direct

conflict, e.g. in football, one team wins and the other loses. A game is non-zero sum, if players interests are not always in direct

conflict, so that there are opportunities for both to gain. Focus on games where:

There are 2 or more players. There is some choice of action where strategy matters. The game has one or more outcomes. The outcome depends on the strategies chosen by all players; there is

strategic interaction. What does this rule out?

Games of pure chance, e.g., lotteries, slot machines. (Strategies don't matter).

Games without strategic interaction between players, e.g. Solitaire.41

Elements of a game

The players how many players are there? does nature/chance play a role?

A complete description of what the players can do – the set of all possible actions.

A description of the payoff consequences for each player for every possible combination of actions chosen by all players playing the game.

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