Tag Archives: Zaragoza Logistics Center

From Teaching to Learning: The Case of Supply Chain Tools

Why teaching Supply Chain tools is so challenging

Alejandro Serrano –  Aug 2013 | Spain

Last week I had a very enlightening conversation with the person in charge of logistics at a medium-size company ($200m turnover). He argued that analytical-tool teaching, such as linear programming, should be removed from supply chain and MBA programs. He claimed that the only important “analytical” tools to be taught at such programs should be Excel. In addition, a number of management tools such as change management, team building, project management, and the like should be included in the teaching curriculum.

I have to admit that I was a bit surprised by his categorical opinion of the uselessness of analytical tools in this field. But he is not alone: I have found a number of managers who either neglect or underestimate the value of analytical tools at work, judging them as too theoretical, non-implementable, and totally disconnected from reality, the routine of a normal company working day.

This evidence clearly shows a disconnection between what is taught at graduate supply chain and MBA programs and what is perceived as needed in the industry. From the academic perspective, it is easy to argue that the problem is that, more often than not, these managers do not have the solid background that is usually needed to understand and carry out a decent analytical analysis followed by a successful implementation. And I agree that this might be the case.

source: inboundlogistics.com

source: inboundlogistics.com

But having said that, consider another plausible explanation: supply chain or MBA students may well understand those tools, and grasp a number of concepts, while being unaware of how useful they may be within a business context. Let me use an example from my own experience. As an MBA student, I was taught the “newsboy logic” to be applied in settings where  1)  demand is uncertain and 2) there are underage and overage costs depending on the decisions made. But I was never challenged to find business contents where this logic could be applied, so I did not. Years later, as a supply chain masters student, I was presented with the same logic, again in a specific context, where a purchasing manager had to decide on how much inventory to buy under the same conditions of random demand and under- and overage costs. But again, I was not pushed to think further and extrapolate the interesting insights of the model from the inventory sphere to others. Only several years later, did I realise the potential of the model and how it could be applied in different realms. For instance, as the COO in a 3PL in a seasonal industry, I should have used the logic model to calculate how many people to train several months ahead of the uncertain season peak. Unfortunately for my previous company, I did not.

All in all, I am convinced of the usefulness of analytical tools and know that they can be a great source of competitive advantage. As an instructor, the takeaway is that I should constantly remind my students why those tools that we teach are useful (they’d better be!)  and how and where they should be applied in practice. It may seem like an easy recipe to follow, but too many instructors fail at using it, either because they do not consider it important (unfortunately many instructors lack industry experience) or they overestimate students’ ability to retain classroom concepts and immediately convert them into ready-to-use managerial tools.

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ZLC, a safe bet

The crisis forces us to establish priorities when deciding what to do with public money. ZLC is one of the most promising bets to achieve economic growth.

Alejandro Serrano – Heraldo de Aragón, Sep 1, 2012| Spain

Original article is aquí (in Spanish)

The years of economic bonanza drew many public and semipublic initiatives to our region geared to incentivizing economic growth in the region. Aramón, walqa, and Motorland are all examples of initiatives of this kind. In the university realm, the existing infrastructure was extended to create new campuses in Huesca and Teruel. Lastly, as a result of an agreed commitment to logistics, given our region’s potential in this industry, we witnessed the creation of PLAZA—with its younger brothers PLHUS and Platea—on the one hand, and the establishment of Zaragoza Logistics Center (ZLC) by  MIT (the world’s leading school of engineering), on the other. Years prior to joining this latter project, I already praised its creation and the commitment shown by the regional government to this project  in this newspaper (April 2004, May 2005).

Source: Heraldo de Aragón

With the advent of the economic crisis, the rules of the game have undergone a profound change. It is no longer about achieving all the goals established at a lower cost, but rather about achieving the greatest number of goals on a restrictive budget. In other words, it has become necessary to establish priorities, because it is impossible to achieve everything, which implies abandoning certain commitments viable in the boom years in order to commit firmly to others. In this regard, it would be disastrous for our region to apply a ‘one size fits all’ economy, attempting to keep all the projects running by reducing the budget of all initiatives, good ones and bad ones, by a similar percentage.

What criteria should be followed to establish which projects should be given priority? Logically, focus should be placed on those projects that are aligned with the strategy of the region, which can be inferred from the electoral program presented by the governing party last year. It stated that Aragón should be a “territory of excellence in teaching”, “achieve an optimal collaboration between companies and University”, “attract international teachers and researchers” and seek excellence “in those areas of knowledge susceptible to becoming niches of excellence comparable with the best in the world”, mentioning logistics as the first example.

In this regard,  Zaragoza Logistics Center has many of the attributes required to be part of the group of initiatives to be focused on. Some examples: The ZLC international masters course has been ranked the best logistics program in Spain in the last two years (El Mundo newspaper ranking). As to collaboration with companies, ZLC worked both with Aragon companies (two consultancy projects currently under way with Saica; seventeen alumni contracted by Transportes Carreras to date, …) and multinationals (the list is long: companies such as Adidas, Amazon, BASF, Caterpillar, Cummins, DHL, P&G or Roche have come to Zaragoza to finance projects or hire students). These brilliant students (from Aragón or from elsewhere) will eventually reach decision-making positions in the multinationals that are now hiring them. And it is then when the investment made will more than yield its return, in the form of job creation, projects or research centers.

The first significant initiative of this kind that comes off shall justify economically the existence of ZLC for more than a hundred years. But we have to give it more time. It is not fair to demand from  ZLC in 10 years of existence something that nobody has demanded from the University of Zaragoza in 450 years. ZLC is still a “start-up” in the academic sector. MIT has just celebrated its 150th birthday. Harvard Business School celebrated its centenary in 2008. Excellence in academia takes its time. It is tempting to forget priorities and focus on short-sighted, short-term projects. But if we really want our region to become a reference for others and not turn it into a piece of land with no hope, we should continue to give our firm commitment to ZLC and other similar initiatives.

To know more about ZLC please follow the link www.zlc.edu.es

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ZLC, una apuesta segura

La crisis obliga a establecer prioridades y a decidir qué hacer con el dinero público. El ZLC supone una de las apuestas con mejores perspectivas para el futuro desarrollo de Aragón

Alejandro Serrano – Heraldo de Aragón, Sep 1, 2012| España

Accede a la noticia de Heraldo de Aragón pulsando aquí

     Read it in English

Los años de bonanza trajeron a nuestra comunidad autónoma multitud de iniciativas públicas o semipúblicas para incentivar el crecimiento económico en la región. Así nacieron por ejemplo Aramón, walqa, o Motorland. En el ámbito universitario se desdobló la infraestructura existente para crear nuevos campus en Huesca y Teruel. Finalmente, en una clara apuesta por la logística, y dado el potencial de nuestra región en este capítulo, se impulsó la creación de PLAZA—con sus hermanos menores PLHUS y Platea—por un lado y del Zaragoza Logistics Center (ZLC) de la mano del MIT (primera escuela de ingeniería del mundo) por otro. Años antes de unirme a este último proyecto ya alabé en este periódico (abril 2004, mayo 2005) la creación del mismo y la apuesta que el gobierno regional había hecho por él.

Fuente: Heraldo de Aragón

Con la llegada de la crisis económica las reglas del juego han cambiado profundamente. Ya no se trata de conseguir todos los objetivos marcados al menor coste, sino de conseguir el mayor número de objetivos dado un presupuesto restrictivo. Es decir, hay que marcar prioridades porque no todo se puede conseguir, lo que implica desechar algunas de las apuestas que podían ser sostenidas en los años de bonanza para apostar decididamente por el resto. En este sentido, sería nefasto para nuestra comunidad aplicar una economía de “café para todos”, tratando de mantener todos los proyectos en marcha reduciendo un porcentaje similar el presupuesto de todas las iniciativas, buenas y malas.

¿Cuál debe ser el criterio para marcar qué proyectos potenciar? Lógicamente es preciso seleccionar aquéllos que estén alineados con la estrategia de la región, que puede inferirse del programa electoral que el partido en el gobierno presentó el año pasado. En él se habla de que Aragón debe ser un “territorio de excelencia en la enseñanza”, “alcanzar la óptima colaboración entre empresas y Universidad”, fomentar “la atracción de docentes e investigadores internacionales” y buscar la excelencia “en aquellas áreas de conocimiento que sean susceptibles de convertirse en nichos de excelencia equiparables a los mejores del mundo”, poniendo como ejemplo de esto último en primer lugar la logística.

En este sentido, el Zaragoza Logistics Center posee muchos de los atributos requeridos para estar dentro del grupo de las iniciativas por las que apostar. Algunos ejemplos: el máster internacional de ZLC ha sido considerado como el mejor programa de logística en España en los dos últimos años (ranking del diario El Mundo). En cuanto a la colaboración con empresas, ZLC trabaja tanto con empresas aragonesas (dos proyectos de consultoría actualmente en marcha con Saica; diecisiete exalumnos contratados por Transportes Carreras hasta la fecha, …) como multinacionales (la lista es larga: empresas como Adidas, Amazon, BASF, Caterpillar, Cummins, DHL, P&G o Roche han venido a Zaragoza a financiar proyectos o a contratar alumnos). Estos alumnos brillantes (aragoneses o no) llegarán con el tiempo a los ámbitos de decisión de las multinacionales que ahora los contratan. Y es entonces cuando retornará con creces la inversión efectuada, en forma de creación de empleo, proyectos o centros de investigación.

La primera de estas iniciativas de calado que cristalice justificará económicamente  la existencia de ZLC durante más de cien años. Pero hay que darle tiempo al tiempo. No se le puede exigir a ZLC en 10 años de existencia lo que por ejemplo no se le ha exigido a la Universidad de Zaragoza en 450. ZLC es todavía una “start-up” en el sector académico. El MIT acaba de cumplir 150 años. La escuela de negocios de Harvard celebró su centenario en 2008. La excelencia en el ámbito universitario toma su tiempo. Es tentador olvidarse de las prioridades y apostar por políticas miopes y cortoplacistas. Pero si de verdad queremos hacer de nuestra comunidad un referente para otras y no convertirla en un solar sin esperanza debemos seguir apostando firmemente por ZLC y otras iniciativas similares.

Para saber más sobre ZLC www.zlc.edu.es

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Bizi-Zaragoza: A Supply Chain View

How to mitigate the “rush hour effect” using Supply Chain Tools

Alejandro Serrano – . Apr 19, 2012 | Spain

Bizi-Zaragoza rents bikes to users who need to ride for short periods of time within the city. Bikes are located in 130+ stations in the city, mainly downtown. To get a bike, a user goes to a station and unlock the desired bike with his or her user card. To return it, he or she has to find a station with an empty slot and identify him or herself again.

Bizi Station. Source: http://www.heraldo.es

The idea is very interesting, and has been proved successful in several cities. The system in place, however, is far from perfect, since users face two major challenges. On the one hand, a user looking for a bike may find the nearest station empty (see black dots in the picture below). On the other hand, a user looking for a slot to leave a bike may find the nearest station full (see purple dots). Furthermore, stations downtown tend to fill quickly in the morning and empty in the afternoon/evening. Good on-line information may be helpful to find a bike or a spot, but still the bottom line is that the typical user my find the service unreliable when his meeting with her boss starts at 9am, and he has to plan for extra 20 minutes of safety time to park his bike so as not to be late.

To mitigate this situation, and according to today’s Heraldo de Aragón(*), a local newspaper, Bizi managers constantly check on-line those stations with no bikes, and send vans with additional bikes to “replenish” those empty stations in no more than 10 minutes. Here is some anecdotal evidence that this may not be the case. The following picture (borrowed from the company web site) shows the map of all stations at 10:02:45 am today. There were 13 empty stations (marked in black in the map), mainly in the periphery.

Ten minutes later, the picture was the following

As it can be observed, 12 of those 13 stations were still empty. Twenty minutes later, there was a new picture.

In this case, 8 of 13 stations were still empty. Thirty minutes later (picture not reported) still 8 of 13 stations were still empty. A similar problem can be observed with full stations (purple dots in the maps).

The question that arises next is how to mitigate this problem. A feasible option is to place stock (i.e. bikes) according to demand patterns to obtain a given service level. For instance, let us say that for the last 50 Mondays, between 7:30 am and 9:00 am, station#77 has observed a demand pattern that can be considered normally distributed, with mean 10 and standard deviation 2 (that implies that roughly 2/3 of the days demand is between 8 and 12 bikes). How many bikes are needed to guarantee an average service level of, say, 99%? The answer is

ROUNDUP(10+2*NORMSINV(0.99),0)=15 bikes

Therefore, rather that being reactive, Bizi managers could be proactive by replenishing inventory at night before users go to work early in the morning. The previous analysis is quite simple and can be easily extended for all stations and for full stations. The good news is that the company should have a lot of data, given that users sign in every time they take or leave a bike. To improve forecasting methods, individual patterns can be studied, since the system knows the ID of the user that takes or leaves a bike.

Finally, there is the problem of devoting workforce to move bikes from one station to the other. A potential solution may be to charge more to those users who do not make “return trips” within a day. If so, users have incentives to return bikes to where they were in the evening, significantly reducing the amount of bikes to be moved at night.

To know more about Supply Chain www.zlc.edu.es

(*) The piece of news is here (in Spanish)

The web page of Bizi Zaragoza is here

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To centralize or not to centralize, that is the question

How much safety stock to hold? A ubiquitous question in supply chain network design

Alejandro Serrano –  Apr 2012 | Spain

When a firm designs from scratch its distribution network, a repetitive question arises sooner or later: should we have a centralized or a decentralized network? In a pure centralized network, a large, central distribution center (CDC) contains all the finished-good inventory of the company. In a pure decentralized setting, inventory for each SKU is splitted among several smaller regional distribution centers (RDC).

One of the key questions mangers usually struggle with when deciding about centralizing inventories or not is how many units of each SKU should be held in each case. It is a relevant question, because holding inventory usually entails significant holding costs, both financial and material.

Let us learn the basics of how to answer that question by means of a very simple example: Assume that the demand of a typical product in the portfolio in a stable market is normally distributed, with mean 400 units/period and standard deviation 80 units/period. The market is divided into four identical regions with independent demand. The firm service level target is 95%, thus in the (assumed current) CDC there should be 532 units to maximize expected profit:

(If it is not clear to you why this formula is used, please bear with me; it will be explained in a subsequent post)

Now consider that your company is planning to change its distribution strategy from centralized to decentralized, and so you consider having  four identical RDCs, one per region. The average demand in any region will be 1/4 of total demand, or 400 / 4 = 100 units. The regional variance will be 1/4 of total variance (assuming demand independence across regions), thus the standard deviation in any region will be

The quantity per RDC is

The total inventory is 166 x 4 = 633 units. The safety stock needed, i.e., the amount of inventory to hold above the average demand is 532 – 400 = 131.5 units in the centralized case and 633 – 400 = 263 units in the decentralized case. Interestingly, the latter quantity is exactly two times the former. It is not a coincidence that 2 is the squared root of 4. In fact, when switching from 1 to n DCs, overall safety stock is multiplied by √n. For instance, had we considered 9 RDCs, total inventory to hold would have been 400 + 3 x 131.5 = 795 units.

Of course there may be more involved scenarios (e.g. constraints or demand correlations across regions) that modify the optimal solution. However, keeping in mind this simple square-root formula as a rule of thumb for safety stock will help make back-of-the envelope calculations when quick business decisions have to be made.

To know more about Supply Chain www.zlc.edu.es

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Adidas to cut its assortment by 25%

How many SKUs should a firm offer?

Alejandro Serrano – . Apr 2012 | Spain

Herbert Hainer, CEO of Adidas AG, announced last Saturday* that the company has plans to cut 25% of its 46,897 SKUs. An argument used by Mr. Hainer to justify their decision is that 20% of the current assortment generates 80% of sales.

If this roughly is the case–which should not be surprising, according to Pareto’s law, it means that 80% of the assortment accounts for 20% of sales. And most likely, within the remaining 80% SKUs, Pareto’s law still holds, i.e., 80% of that 80% account for 20% of the remaining 20% of sales, and so on and so for. Working in this fashion we can prepare the following table for how much the SKUs with the least sales sell.

How much SKUs with the least seales sell according to Pareto's Law

As the last row shows, cutting SKUs by 25% means removing those items that contribute to 0.006% of sales, or $1.2m, since Adidas sells roughly $18b. Remarkably, those 12,294 items  only sell $83 (roughly 1 unit) on average worldwide! Therefore, it makes a lot of sense to remove them from the assortment.

The natural question to ask at this point is why pruning 25% of the items and not more. Should Adidas also remove the second-to-last row items (15,367 SKUs!), which sell $400 on average worldwide? What about the third-to-last row?

These question nicely illustrates the usual trade-off between Marketing and Supply Chain departments in the retailing industry. A marketing-driven organization, like Adidas, argues that adding an SKU to the assortment increases sales. The more variety offered, the higher the chances that the customer likes whatever is on the shelf thus the probability of making one additional sale. The penalty to pay is in the form of, mainly, inventory holding cost and ordering cost. In good times (Adidas increased sales by 10% last year) this penalty tends to be underestimated.

Indeed there is no clear answer to the question posed above, but we can have a look at other industries to shed some light on the issue. For instance, in the telecommunication telephone manufacturing industry,  Apple sells only 2 SKUs (i-phone 4, either black or white), whilst Nokia sells at least one model for each market segment (for instance, it sells 37 different models only in Germany). Other successful companies have followed the same trend of reducing the number of SKUs to focus on reducing supply chain costs. Good examples include Lidl in Germany or Mercadona in Spain.

A holistic view of the company is necessary to make sound decisions when answering the question of ow many SKUs in the assortment are needed. Supply chain costs should be carefully pondered before blindly following the advice of marketing experts.

(*) Frankfurter Allgemeine Zeitung. The link to the piece of news is here  (in German)

 To know more about Supply Chain www.zlc.edu.es

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