		Volume 15, Number 2

"Civil and Environmental Engineering at MIT"
is published quarterly by the
Civil and Environmental Engineering Department at Massachusetts Institute of Technology,
Bldg. 1-383, 77 Mass. Ave., Cambridge, MA 02139

Editor: Debbie Levey
(617)253-7101
levey@mit.edu

Supply chain management can raise efficiency, lower costs

Prof. David Simchi-Levi (Photo: Jessica Tampas)

Supply Chain research may require highly complex mathematics, but the subject moves straight to the bottom line. In 2000, American companies spent about $950 billion on supply-related activities, according to Prof. David Simchi-Levi, who recently joined the faculty of CEE and Engineering Systems. This sum breaks down into about 60% for transportation-related costs, with the remainder mostly associated with inventory costs. Thus, achieving a five percent reduction in transportation costs would have a huge impact on the supply chain, and eventually on the company's performance. So what exactly is Supply Chain Management? According to Professor Simchi-Levi, "Supply chain management is a discipline that focuses on the integration of suppliers, factories, warehouses, distribution centers, and retail outlets so that the items are produced and distributed to the right customers, at the right time, at the right place, and at the right price. It is important to do this in a way that minimizes costs while satisfying a certain level of service."

An excellent example that illustrates the impact of an effective design and implementation of supply chain strategies is the PC industry," says Simchi-Levi. In this industry, competition is not over technology-all the manufacturers use basically the same technology; based on the Intel and Microsoft platform. Instead, companies compete on price and service level, the two critical elements in the definition of supply chain management. Certain companies in this industry have done very well competing on these two dimensions. "Think about Dell. Here is an example of a company that was able to dominate an industry by improving supply chain performance. How did Dell do that? By designing and implementing a new business model that combines the direct to consumer strategy with a build-to-order concept."

Supply chain management requires sophisticated mathematics to help companies optimize decisions. In particular it calls for Operations Research (OR) methodology, a rapidly developing field. "In the last few years we've seen a significant increase in the awareness and use of OR techniques," says Simchi Levi. "This increase has to do more with availability of information than with advances in OR. Indeed, 10 or 15 years ago, researchers worked on optimizing systems, but there was a lack of essential data needed to plan, manage and control large systems. Now, with advances in telecommunication and information technologies, data is available and thus many companies realize that the implications of this abundance of available information are enormous. It allows them to use it effectively to improve business decisions and this is done, in many cases, by applying OR techniques in a variety of applications including finance, manufacturing, supply chain, logistics and transportation. As a result, we see many software companies that focus on developing tools that incorporate OR methods and help businesses optimize decisions."

The challenge is to develop easy-to-use, off-the-shelf tools that do not require the users to be OR experts. "You don't hire a computer expert to prepare a spreadsheet, and you shouldn't have to hire someone with an advanced degree in OR to use the new tools. The trend is to develop decision support systems that allow professionals who understand the business issues to use the software to improve and optimize decisions within the organization. Thus, a new breed of tools have been developed in the last few years that allow transportation, logistics and supply chain professionals to apply them effectively in much the same way as they apply traditional spreadsheets," says Simchi-Levi, speaking from experience. His wife, Edith Simchi-Levi, runs their software company, Logic Tools Inc, which develops decision-support systems for solving logistics and supply chain management problems. "These systems have been used widely to reduce costs and improve service levels."

In his recent award-winning book, Designing and Managing the Supply Chain, (Philip Kaminsky and Edith Simchi-Levi, co-authors; Irwin/McGraw Hill, 1999), Simchi-Levi cites many examples of companies which use decision support systems to design and manage their supply chains. For example, in the soft drink industry, transportation is the most important cost component in the organization. "Most of the soft drink distributors and manufacturers rely heavily on effective distribution systems. They have invested in this technology for the last five to ten years, because they recognize that this technology can help them move efficiently, reduce costs, better serve their customers and make deliveries on time."

The book also focuses on global companies. For example, many high-tech companies manufacture products in the Far East, ship them for testing and packaging in South America, move them to other countries for assembly into bigger systems, and then send the finished systems to customers all over the world. "These companies are trying to take advantage of different costs and opportunities in various countries. The challenge is to identify the opportunities that allow companies to reduce costs and hedge against risks which exist in the global economy. For example, a company may use a strategy where the supply chain is designed so that losses in one part of the supply chain will be offset by gains in other parts of the supply chain."

Simchi-Levi is now writing a new book, to be published by McGraw-Hill, on the impact of the internet on supply chain management. "Internet technology has forced companies to redefine their business models so as to improve the extended enterprise performance-this is popularly called e business. The focus has been on improving the extended enterprise transactions including Intra-organizational, Business-to-Consumer (B2C) and Business-to-Business (B2B) transactions."

Unfortunately, says Simchi-Levi, "the internet and the emerging e business models have produced expectations that many supply chain problems will be resolved by virtue of these new technology and business models. E business strategies were supposed to reduce cost, increase service level, increase flexibility and of course profits, albeit sometime in the future. Reality has not been as kind to these hopes as many of the new e-businesses have begun to flounder or, at best, not reach their full promise. In many cases, the downfall of some of the latest high-profile internet businesses has been attributed to their logistics strategies."

For instance, during the 1999 Christmas season when on-line gift shopping increased enormously, many internet companies failed to deliver merchandise on time to customers. As a result, in the last year many dot.com companies have started to establish their own warehouses and distribution system to be able to satisfy the huge seasonal shopping surge without being at the mercy of other distributors. Says Simchi-Levi, "The internet is forcing companies to reconsider the design of their supply chains, the way they collaborate with suppliers and customers, product pricing strategies and a host of issues that were almost impossible to consider in the old economy."

Like professor like grad student...at least in fashion, bow ties carried the day with Prof. Donald Harleman and his students. Send in an update if you're pictured here! (Photo: Mark Batho)

Teaching In his multidisciplinary route to his current position, Simchi-Levi earned an undergraduate degree at the Technion (Israel) in Aeronautical Engineering, then received a masters and PhD in Operations Research at Tel-Aviv University. He joined the faculty of Columbia Univ., and then served on the faculty of Northwestern Univ. for seven years before moving to MIT in the summer of 2000. He remarks, "I came to the US about 14 years ago, intending to stay for one year only. It's been a long year!.

Even before joining the faculty here, Simchi-Levi taught in the MIT Center for Transportation Executive Program for several years. This year he and Prof. Yossi Sheffi started a new program at the Center on internet-based supply chain strategies. "In parallel we are planning to establish a one-day supply chain symposium that brings people from industry and academia to MIT to discuss logistics, distribution, and supply chain management," he says.

From his experience with the MIT classes and the executive programs that he taught previously at Northwestern Univ., Simchi-Levi has seen a significant increase in enrollment. "Executives from industry realize that they need to be exposed to recent advances in logistics, distribution, and supply chain management. They are also eager to hear what other industries are doing. Of course many companies come to find out the impact of the internet and e-commerce on supply chain in general and on their particular industry. We see a very high demand for these types of executive programs both in engineering and business schools."Recently, Simchi-Levi initiated a new one-day symposium sponsored by the Operations Research Center, the Engineering Systems Division and the eBusiness Center of MIT as well as IBM and GM. This annual conference brings together students, faculty and researchers from industry for a day of presentations and discussions on a common research area. The event, which was held at the MIT faculty club on March 16 and involved more than 100 participants, was focused on "Applications of Operations Research Models in e Commerce."

Last autumn Simchi-Levi taught an advanced course in logistics and supply chain management, based on his book, The Logic of Logistics, which attracted students from both CEE and the Operations Research Center. He focused on "advanced supply chain and logistics strategies that help companies reduce costs and increase service levels. The underlying methodology is operations research."

This semester Simchi-Levi is teaching two classes. "One is a systems simulation class where we use discrete event simulation methods to analyze complex systems. For instance, in one project the students need to analyze a complex manufacturing system, identify bottlenecks in the system, determine throughput, and analyze the impact of changes in capacities on system performance. The focus is on teaching a generic tool that can be applied to manufacturing, supply chain, telecommunications, or transportation. Recent surveys indicate that this technique is extremely popular in industry as a tool for analyzing complex systems."

The other class is a graduate level course on logistics and supply chain management that attracts students from the MLog (Masters of Logistics) program, LFM (Leaders for Manufacturing) and MST (Masters in Transportation). Simchi-Levi characterizes the course as "an MBA type of course where the focus is on concepts, insight, and strategies, rather than mathematics, that companies can use to improve supply chain performance."

In parallel to teaching two courses, Simchi-Levi is supervising six PhD students. One is working on issues related to dynamic pricing and its effect on supply chain management, trying to establish the right trade-off between high demand and low price, and low demand and high price. For instance, if two customers try to purchase a PC or a car at times of high demand, the customer who insists on obtaining the product immediately will probably pay full price while the customer who is willing to wait a few weeks may receive a rebate.

In a different project, a PhD student is focusing on how companies can use information available from suppliers and customers in an efficient way and what is the impact of information on supply chain performance.

Another student is working on coordinating inventory and transportation to reduce cost in the supply chain, by taking advantage of the transportation cost function that provides a volume discount to shippers. Economies of scale in transportation costs charged by the carriers motivate shippers to ship large quantities. However, these large size shipments increase inventory costs, making it important to find the right tradeoff between inventory and transportation costs. Two other students are focusing on production scheduling problems and another student is working on spare-part inventory systems.

Demonstrations by CEE students in Cambridge public schools give many children their first hands-on science experience. Water quality seems about to be imperiled in this case.

Engineering Systems Division Simchi-Levi and a number of other CEE professors have joint appointments in the new Engineering Systems Division, which was established in the School of Engineering about two years ago. This new division brings together faculty from management and engineering focusing on methodologies that are important in large scale engineering systems, including economics, political science, engineering, management, and operations research. Daniel Roos from CEE is the Associate Dean for Engineering Systems, and participating CEE faculty include Richard de Neufville, David Marks, Fred Moavenzadeh, Amedeo Odoni, Yossi Sheffi, Joseph Sussman, and John Williams.While there is no undergraduate degree in Engineering Systems, graduate students can earn advanced degrees through participating programs such as the Leaders for Manufacturing (SM in any engineering department plus an MBA from the Sloan School), or the SM in Logistics, Technology & Policy or in Transportation. Opportunities for the PhD include Transportation Studies and Technology, Management and Policy.