OR/MS Today - April 2001 Cyberspace International E-business and Consumer Electronics: Procedures vs. Models By ManMohan S. Sodhi If a tree falls in a forest when there is no one around, does it make a sound? We will come to that in a bit. In the meantime, consider a global consumer electronics firm implementing a supply-chain planning solution for determining the quantities of different products to ship from a few factories (each with its own shipping warehouse) to different regions of the world for the next few weeks? In my article in March-April 2001 of Interfaces [1], I discussed this situation to exemplify an Internet-based supply-chain solution for this company. Here is another perspective. Anyone with an operations research background would create a network model with multiple time periods (in this case days or weeks) and multiple products. We know the supply, i.e., the production schedule by product and week for each of the factories; the demand for each product by week for each shipping location; and the transportation costs from the factories/warehouses to the shipping locations and to each other. Production capacity is already incorporated into the supply schedule so there is no need to add any capacity to the model itself. Demand can exceed supply so we need to incorporate penalties for delays and for not meeting the demand at all; these penalties could vary by location and by product. But in this, the best of all worlds, we do not use models. We use processes, procedures, steps and recipes in preference to mathematical models. The electronics company uses the following procedure once a week using priorities assigned to sales regions and to individual customers (such as Best Buy or Circuit City in the United States) within each region: Obtain orders (and backorders for unfulfilled demand) by week from each region for the next few weeks, each region aggregating orders from customers in its area; Obtain weekly supply (production) schedule for then next few weeks from the different factories; For each product, sort these orders by order date and region priority, and fill orders to the extent possible starting from the top of the sorted list; if there is any supply left over, go to the next region's order; and Repeat this procedure within each region for its customers, allocating product to each customer-based on order delay and by customer priority. While this procedure is simple, it is not simple-minded. Region managers and customers view the procedure for allocating goods in short supply as being fair partly because of its transparency. The procedure encourages the regions and their customers to not pad their forecasts and to align to corporate sales goals if they want to increase their priority. For hot-selling goods, even low-priority customers eventually get their orders filled. Unsurprisingly, the company preferred this simple sorting procedure to the network modeling approach for implementing the supply-chain planning solution. Still, this procedure may be better suited for the chemical fertilizer industry than it is for the dynamic consumer electronics industry. The large error in forecasting demand for new (and highly profitable) electronics goods translates into the need for reacting quickly to changing demand rather than holding regions and customers to their inaccurate forecasts made 10 to15 weeks ago. The company can become more responsive by using the network model than by using the current procedure since it could create a new plan any time a customer or region modifies its forecasts. And, it could use the model to ship from different factories to the same location while minimizing the total transportation cost. What does all this have to do with the Internet? The whole point of the Internet for e-business is real-time sharing of information and the resulting customer expectations, which in turn require a company to become more responsive to demand than before. So when this electronics company truly starts doing e-business, the network model will be much more valuable than the above procedure. That is why the Internet is a wonderful window of opportunity for OR. I recently heard rumors about another consumer-electronics company having already spent more than $150 million on its yet unfinished implementation of supply-chain planning solutions! No, this is not ERP. In addition to the possible problems of missing software functionality and the required integration of numerous systems, it might also be the case that the company is trying to force-fit processes into the software when they could or should be using optimization models using, for instance, the approach outlined in [2]. As for trees falling in forests, I don't know and I don't care. But OR professionals should hear something when companies drop zillions of dollars on solutions where modeling and OR could be quite useful. References Sodhi, M., (2001), "Applications and Opportunities for Operations Research in Internet-enabled Supply Chains and Electronic Marketplaces," Interfaces, Vol. 31, No. 2 (March-April). (Retrievable from http://silmaril.smeal.psu.edu/interfaces/ebiz/sodhi.html.) Sodhi, M., (2000), "Getting the most from planning solutions," Supply Chain Management Review — Global Supplement, Vol. 4, No. 1, pp. 19-23. ManMohan S. Sodhi (MohanSodhi@AOL.com) is senior director at Gandiva and founding editor of Scometrics. He is president of the Logistics Section of INFORMS, the founder of the OR news group, sci.op-research, and helped design and create INFORMS Online. Table of Contents OR/MS Today Home Page OR/MS Today copyright © 2001 by the Institute for Operations Research and the Management Sciences. All rights reserved. Lionheart Publishing, Inc. 506 Roswell Street, Suite 220, Marietta, GA 30060, USA Phone: 770-431-0867 | Fax: 770-432-6969 E-mail: lpi@lionhrtpub.com URL: http://www.lionhrtpub.com Web Site © Copyright 2001 by Lionheart Publishing, Inc. All rights reserved.