David Simchi-Levi, MIT professor and co-founder of LogicTools, a division of ILOG

In this talk, David concentrated on the major trade-off facing supply chain operators - that between increasing plant capacity without increasing risk.

Redundancy

It’s difficult to build a forecast to build in risk. One way is to go through scenario (what-if) analysis. The problem here is that it can be difficult to predict every possible scenario and to determine which scenario will best fit your situation.

David suggests another approach - one borrowed from the financial sector - of working out the lowest cost portfolio and working in some redundancy to cover risk. The example used looks at the structure of the total cost function as you change the number of distribution centers. The graph looks something like a narrow-bottomed frying pan. The main point is that in a number of different scenarios, total cost does not change dramatically. Therefore you can pick the scenario with the maximum redundancy at this lower cost level. There may be a slight increase in total cost as a result of this, but risk is reduced substantially.

Network planning

Why is concentrating on the distribution network important?

• Consumers are demanding this more and more
• Europe now offers financial incentives for companies that cut carbon emissions
• High carbon emissions means low SC efficiency
• Future legislation is expected in US more in line with those in Europe

By applying network modeling, you can design a distribution network that satisfies customer demand yet minimizes carbon emissions. The key is to find the right trade-off between cost, service and carbon emissions.

Risk pooling

Inventory is can be stockpiled at different points in the supply chain for risk pooling. Overall the supply chain will be more efficient and maintain forecast accuracy.

In closing, David signaled the significant increase in the level of risk over the last few years. This is where supply chain planning can provide real value.