 All right, welcome back. Hopefully you had some discussions. Obviously you weren't busy voting because only four people have voted right now So take this time to place your vote in how many Should may have an air shipment if so, what should the quantity be zero, which means don't order now? 5 10 15 20 25 and we did it in increments of five because you have to ship in full cases So that's a common problem in reality and a lot of the problems would give you an sd1x We don't give that to you just so you get Understand how the mechanics work, but in real life you almost always have a case size to some point So I'm just gonna keep the lathering on until I get at least 20% of you voting So there's a little over 50 of you here, so I expect at least 10 We're at five now, so it's like a telethon. I'm gonna keep talking But so there's a bunch of different ways the reason why I like this problem Let me just give you some background is this was just one piece of it The real problem is these are fashion items and so they're only introduced for about six months And so then they go away So embedded in this problem of should I airship or not is the whole idea of I don't want to have a lot of extra Inventory at the end in fact the bigger question is what should my inventory policy be? For these items if I have to order them say X months ahead of time Right before the selling season starts I only have one or two chances to place in order during that short short selling period So this naturally suggests a newsboy or a news vendor problem, right? Because you have to make a decision ahead of time and then you only have a couple chances to Remedy or to do intermediate orders. That's kind of a complicated problem because we never really talked about Newsboy with two periods. I think I hinted at it when I talked about Tom Brady jerseys But generally I focus on a single period And so you can imagine if I have a chance for my selling period is this if I have a chance in the middle To do another order then what do you think that initial order of Q would be would it be greater or smaller? Hopefully thinking it through it'll be a little smaller than if you didn't have that period that That secondary ordering period because now I can recover So I don't need to order enough so much that I cover all the way I can order low and see how the sales go because then I could adjust that second order to Uncover it demand increased or make it really low in case demand didn't materialize So a lot of these fashion item Situations you'll have the advanced order and then one or two weeks in you'll have a chance for a secondary order Maybe at a little higher rate But still it's a chance to recover because you don't know what your demand is going to look like That was the more the problem but I wanted to focus in on one little aspect of it and that's this one and You could think of a couple different Implications of this but two approaches kind of came to mind and I'm still not a 10 you guys need to vote you need to vote Let me see what you're thinking So if you haven't voted yet take this time to place a vote whether you think it should be 0 5 10 15 20 or 25 I Promise I won't make fun of you if you give a wrong answer Because there's really is no right or wrong answer. It's just it's based on the assumptions that you're making So, okay, I think we're there. Okay, so it looks like we're evenly split You know actually the most predominant. Do they see the pole? This is very short, but let me just give you a preview as Arthur switches to it The most dominant one is is none So the idea and so let me talk about the pole and then I'll talk about the approach that I think everyone took Most people will you can see it now? It's getting there. Okay. Yeah, most of the the majority said zero Because don't do anything now and some hinted that maybe we should do something in a few days Other answers range 10 was the next most the common and then 20 and 25 one each So Two approaches to this in in my opinion that came to top mind as soon as I made started talking about this and I went Over it down first is you figure meet your CSL Your cycle service level the second is look at profitability For cycle service level you go to 95% and so the basic approach would be okay What is 95% how much inventory do you need for 95% and what some people make mistakes with and what I did the first time And in my Sergio corrected me is I look for over the entire length of the ocean LL not 40 days when in fact it's were five days in so you have 35 days left of Your time so do I have enough inventory for 35 days? So you look at the demand over the 35 days and I think that came out to be What seven what did it come out to be 86 with a standard deviation of 16 and now some people said well, this is already shipped There's no I don't need to do standard deviation anymore. That's not really true because if you look at ocean shipping Yes, there's some variability on the upfront But there's also shipped port-to-port variability and then at the other end So I wouldn't take all the variability out just because it left I would keep that in So you have this variability and so then it's pretty mechanical to figure okay I need how much do you need to have 95% and The current for 102 bags. I found out that that would give you a probability of stock out of 83% Is that right do I have that 17% so it gives you oh That's backwards, right? Yeah. Yeah, so your probability of stocking out 17% So just 102 bags if you assume 35 days and all that you really don't have enough. You're only providing 83% probability of Cycle service level in other words 17% of the time you probably stock out So in that respect if I wanted to make sure I hit CSL I could ship I think it's 10 point something like 11 rounding up to 15 Ship 15 bags. That's if you wanted to make sure at that point in time You had enough inventory to cover that full 35 days So then you can go in and say okay How many bags does it take and you can figure that out and they end up being like I said 11 round of 15 But you might ask two questions one is is that profitable and two why do I have to do it now? And so let me talk about the delay one first because I think that's something that a lot of people suggested was really getting to like the policy and So for that the question is I'm sure I ship now or should I wait? So if I ship now, I'm gonna ship a certain quantity and it's gonna show up in 10 days So they'll still be 25 days left before ocean comes Do we think they have enough to cover that next 10 days? Looks like it because they're you know very very strong. You can figure it out What's the probability that they would stock out within 10 days? I'm guessing it's gonna be really really small probably less than 10% So then you could and the next question is well when should I place in order should I check tomorrow to see what the inventory under five days from now 20 days from now, you know, you're not gonna ship 15 days from now Because you have 10 days left so 35 months at 25 days So 25 days from now you're not gonna do because then it would it would come the same time ocean would So you can start backing off when's the last time you could have that it would affect And you can you can do it that way so some people suggested check every five days or every next 10 days That's fine You could actually think about a policy that checks inventory on hand because that comes pretty quickly You can get that at the end of the day and compare that to the 95% the inventory level required For 95% cycle surface level without amount of remaining time and as you can guess is that time period gets smaller Both things will go down. And so the question is when inventory on hand dips below that Then you can trigger an order. That's one thought But you can hold off for a while. So that's creating a slightly different policy for that One of our students my mom asked if it would be okay to round down to 10 Sure, sure. So then what do you? So you say is it okay? Sure So what does it mean? so you're actually having a slightly different cycle service level and so Realistically, it's no big deal, right? You'd probably have a 94% cycle service hole So the question is generally you round up because it's better to be a little overstocked But you have to look at the whole situation like I explained for these bags. They're fashion items So you don't want to have any extra Maybe I would go down unless you sell with the profit margin is on these things though, right? So I'd rather sell one and have one extra then not have one. So you have that trade-off So I would have to tell you it depends in this case. I would probably actually not order anything right now. I Would probably go with zero you because delaying makes more sense. I Haven't thought that originally, but I think that makes sense But let me give you another perspective and that is if you look at profitability Before I leave that anything else you want to talk about the first purchase you insert you have it slightly different No, I think we had the same approach. We just Yeah, I was our proposal was to order 15 bags three cases to maintain the cycle service level at 95% If that's important for the company Well, my actually trying to and she voted as opposed to some of you other people haven't voted yet And she said 10 for me to reach the 95% And so there might be a reason actually that I didn't get into and I didn't find out about that your decision is now or never Maybe you don't have a decision five ten days. I don't know But if I had no chance of delay and I wanted to stay with 95% I would ship I would ship 15 bags because I the way the profit is looking here. It's pretty profitable So I wouldn't want to be short Okay, but let's talk about the second approach and that's profitability So hopefully you guys look at the profit a little bit to find out what it is and actually if you want to maximize profit You can look at the expected profit if you do nothing Right, just don't ship anything by air freight and that came out to be around 3700 dollars 3,725 or something like that and all I did was the probability of the price Comes expected demand minus expected units short minus the cost of the goods. So let me I'll put this up Arthur, let me know when they see that. Yeah, so this should look familiar to you It's just a profitability statement. It's for news vendor, but it applies for a single period the first term is looking at the Expected demand multiplied by the profit Excuse me the price minus the salvage value And then you've got the cost of the good soul and that's C minus G the cost minus that salvage value times Q the amount you ordered and the last term is the expected unit short And as you would expect you have the price you get Minus the salvage value plus this big B, which is like an extra penalty if you're short You should it's in the key concept documents. Hopefully you've tattooed this formula on your on your body somewhere But the idea is that you can look at it from profitability and so and Initially, I'm assuming no G and no big B. So no salvage value and no Extra penalty for stock out and in that case the profitability if you ship 15 bags Reduce the profitability by over 1,300 dollars And the real lesson here is a member if you set a cycle service of 95 percent Chances are that's not the most profitable level. In fact usually when you set a cycle service level The behavior is that you're assuming the stockout cost is massive when in fact even for here for a high margin value It doesn't make sense. In fact, I didn't figure out. Did you guys figure out? What the what the max profit would be I think you'd have to ship bags back to have the prop the maximum profit number So remember because when you do the maximum profit, you're looking at the cost of shortage and excess and you're balancing that However, you can go a step further and introduce a salvage value and then an extra penalty for stockout because We can look at the loss in margin, right? If I don't sell one then it's I don't get that margin But also I might incur a penalty that these people might say you know what these bags. They're never in stock I'm never gonna shop here again. I'm gonna go buy something else And so you have this other penalty that is incredibly difficult to find This big B But what you can do is is back into it So let me talk about both of these these letters the G and the B the G is the salvage value So for news boy, we've kind of made the assumption at the end of the selling period if I have actually inventory there It goes away It's I have to scrap it burn it and I don't get any revenue and that's not the case For a news boy problem. It is right after that period. You can't do anything But I can assume a salvage value So what if I assume a G and I can make an assumption here that it's you know, I take a holding cost I take Two months off or three months off or think about the discount that I'd be able to sell it for So let's say the salvage value is 10% less you can figure out that way and figure that in And figure out what your optimal value should be the challenge is If my salvage value is not that much different from my purchase price Then it's gonna say order as much as but this ship it there because the profit is so high So it gets a little tricky So you have to really factor in the total discount such that the product is being eliminated And that gets a little tricky, but let me talk about the B So if you have this salvage this big penalty for stocking out You can actually figure what that should be to make so the profitability of the two solutions are equal So in other words if I ship 15 bags, I can backwards calculate What would the stock out cost have to be that dish will be be such that it makes sense Because then I can go back and say, you know what this is what that be value is So do we think the stock out cost is this and when I give my initial calculations, which I don't think are quite right Did you fix that number too? Wow is it comes out to be about $1,100 a bag So if you think the bags go for how much did I say? What are the price of the bags? Yeah, so this is almost 8x So if you think the loss of a stock out results in a future revenue stream loss of about $1,100 Then you should ship the bags. So it's another way to look at it at the problem So there's two different solutions there By and then the part two that are three Formalizing the policy. It's actually a really interesting question because what no one has said that I can see yet If I said a long-term strategy here It will affect things. We didn't talk about safety stock We don't know how much safety stock there is But imagine that if I introduced this way of bringing things in 10 days instead of 40 days What do you think the safety stock will do? It'll probably go down, right? So I would step back and say because essentially then its cost of air is the cost of stocking out And I can put that in and try to find what my optimal policy would be. So this is essentially like a V2 or a P2 pricing Strategy where you have you know cycle service level in the item fill rate and then you have a P1 P2 And so this would be I'm sorry V1 V2. This would be a V2 cost per item and then you can figure out What that is and come up with that optimal Strategy because by introducing this expedited freight You're reducing your cycle your Safety stock and that might give you bigger savings one of our learners Thomas P. Layton Comments that he doesn't think that a salvage value applies to this back It is unknown if there is any this mini study of an older bag Meaning that a three month old bag is as valuable as a new bag. Oh, that is so not true so the question is this is a fashion item and so I Bet if you talk to anyone from the company, they would disagree with you Because there is a drop. I mean physically. Yes, it's the same bag But just like clothes just like how much would you pay for an iPhone 5? Versus the iPhone 7 or whatever that's coming out. So And it's not just functionality. It's just the style. So there is a definite drop There is perishability in these fashion items The question is how much does it bleed? Is it a hard stop at six months when they stop selling or can they start selling these through an outlet? Outlet channel because if they keep it in there If they keep that older item in the same stock, then it cannibalizes from their new products Which they make higher margins on so I would I disagree a little bit that the value does drop It's any kind of fashion item anyone who's bought Fashionable clothes not me my wife does though should you pay more? When something's just launched and then later on it loses in value. That's why they have to discount it You know there break up room they were commenting what would happen if the man was back order But you know back ordered. That's an interesting question then Ocean no air if it's back or you're not losing anything Right. So what the heck unless you're paying a penalty which usually they're not so if it's back orders think about iPhones They're what they're really clever a lot of the Companies do now is you do advanced orders and Amazon so you do an advanced order for something Essentially, you're getting a demand signal and so if we have back orders here, then I wouldn't even entertain here I would have it just come in ocean because I know they're waiting for me And I would yeah, I'd wait as long as possible because then who cares if I stock out Yeah any other Yeah, they Down into using the existing inventory on hand as a demand trigger. Yeah, probably is the coverage a month versus delayed emergency T-minus 10 covering a spectacle play with this man our ability. I guess this they are talking about the policy Yeah, yeah, so you get to the policy. I think So if you're able to order later on Then you don't need to order now and that's the thing so the policy would have to come up The two things would happen if you suit this in a policy one is your your cycle stock Excuse me your safety stock level would go down and then it would be a little more complicated than just a If you assume it's periodic every day as a period you can check every day even though you might not order every day So you could have an RS you could introduce an RSS a little less than a big S So I only look at it if it's below and above a certain number But those numbers are not static anymore Both of those numbers change as my time we go to the ocean Shipment arrives, right? So I don't even know what you would call this policy. I Also, don't know any inventory system currently in the market that would handle it I'm trying to think because usually you have to put a static Quantity and what we're saying is the the little s in the big S the min quantity the max quantity Shrinks as you get closer to this time window and then goes back up again once you ship So it's kind of a dynamic inventory policy. There's a paper there somewhere for someone to write about this And so it could be an interesting problem So we have like 10 minutes left and so if you have any last burning questions send them through the chat We'll respond to everything we get. Thanks that the voting has come in much more now We're up to almost almost 50% awesome Thanks for participating and again. This is just a rough idea of how you'd approach it And I don't know what the right answer would be I would in this case if you're allowed to I'd delay a little bit Let's still look for that trigger and use air very selectively because this might allow me to lower my safety stock Because they're with every fashion item. This isn't the only item they have they might have tens or hundreds of items You can treat them a little differently and then you can some will sell more some will sell less So you can lower down your initial quantity here and use air To adjust if something's a really big seller, you know You can use this more expensive but faster transport to minimize your total safety stock and your total costs So we want to collect more of these kind of problems So please email me if you have anything else that any problem Do you think would be interesting for the group to solve or to talk about? Because the big thing I want you to take away is that it's not always obvious and it's not always just the math Because a lot of what happened here is you got to understand the other things going on With the company and in the situation So thanks, okay That was really interesting and I hope you enjoyed it now I would like to ask please to just share with us some final thoughts to wrap up You see one X and also like give us some good reason to roll a C2 X Yeah, so hopefully you're taking this in order. I think there's a wave took SC0 X Probably with Amat is that right Sergio and then FC1 X Here breakers zero is right before and then you'll take SC2 X with Sergio And so in one X zero actually is all methodology Hopefully you're taking in order and this was the first one you've taken if it is I recommend you take zero next instead of two Because in SC2 X we're gonna do we're gonna use mixing your linear programming a lot And I'll talk about that in a second. Let me talk about SC1 X SC1 X used all the methodologies that you learned in zero and supply chain analytics to solve the basic fundamental trade-offs And that's what we're doing here trade off of shortage and excess Like transportation and inventory looking at cost and level of service and where it gets really interesting is when you Don't have all the numbers or the numbers are squishy and that's like 99% of all cases in business Very rarely will an EOQ problem run up to you and announce itself. Hey, I'm an EOQ problem or I'm a newsboy problem There's different aspects of it and there's always different approaches you can take You just got to figure out the one that makes sense for your situation. So an SC1 X we taught you Forecasting how that fits into inventory planning and how transportation fits into that Because the biggest thing for supply chain is that product that has the biggest cost to it Where there's a sunk cost that you bought too much the shortage costs So both the forecasting and transportation Feed into that and hopefully you're getting a good understanding of how they interact with each other Better forecasting leads to smaller safety stock faster transportation can also affect the inventory policies as well Brexit 2x we kind of focus in on the design of the flows the physical flow the financial flow and the information flow between a buyer and a seller and so we start with the physical flow and The main tool that we focus on is something mixed in your linear programming So if you don't know what a milk is you shouldn't take SC2x yet. You should go back and take SC0x which starts in one week the 13th of September because that will talk about optimization and We'll talk about linear programming integer programming and mixed integer linear programming because an SC2x we use the heck out of it We use it for network design. We use it for aggregate planning. We use it for production planning We use it for procurement because it is the most widely used tool in practice So mixed into your linear programming. We'll talk about the physical design facility location How you should flow products we've talked about channel strategies So what we were talking about here is a wholesaler where we're shipping things out But there might be another way these bags are sold which are through e-commerce which has a very different demand pattern So we'll talk about that as well, and then we'll introduce Finance we'll talk about supply chain finance and the critical things that you need to know to be able to talk the language of the CFO the chief financial officer, and we'll also Discuss a little bit about procurement How that ties in and also on the other end the customer side will follow that information flow from supplier to final customer And then some of the reverse flow But the whole idea in 2x is to take the methodologies from zero The trade-offs from one and kind of show how they all fit together in the design I like to call it the cornerstone class and I sent that note out or when I introduced myself to the To the class this morning It's the thing that ties together the first two courses with the second the first two are very quantitative Models kind of done in a vacuum, and then the last two are all about practical implications Whether it's dynamics of other partners Border effects disruptions the size of the company practical concerns That's what we really move into but you can't do that until you understand the models So se 2x is the keystone It kind of ties things together, and that's why to me. It's my favorite class I love teaching the first half of it because people finally see how network design works, and that's really a cool concept That's why you should take it and also you should take it while Sergio is still teaching it because he's he's the best And he's sitting in the room All right, so that's that's my consent on it any any last comments or questions in yes Yes, we will be happy to have you in the situa x or it is your eggs. So please and roll and Before attending this live event, let me share with you a few practical issues We will open our final exam of x1x tomorrow at 15 UTC So remember it is a kind of some if you only have four hours to complete it. So plan your time. Well It consists of four problems. You will have plenty of time to do that for hours is more than enough And please carefully read the instructions before beginning to complete the exam. This is really really important Second point I would like to to share with you is an important notice for all of you very tight learners and It's a call for you to verify your ID in the platform in edX because if you don't do that We won't be able to send you your certificates when you pass the course. So please Look at it. And if you haven't done it do it now because remember your ID verification But we do your photo and then you show your ID photo That's not tied to any course. That's done annually So I don't know when the last time you did it but every time you're on a class There's at least three or four learners Who forgot when they did it and they don't get certificates they have to go do this stuff We have to go through this big process and so just check and see when your ID verification Runs out and just re ID verify Yeah, this is very important. And Finally, we are looking for community teaching assistants Well, since you know, we are opening new courses It's a zero X a C2 X and a C4 X and we are looking for motivated learners who want to To help us in the form to help to create a great learning experience for all your fellow learners So easier if you're interested, please fill out the form. We are Sharing in the in the updates in the C1 X and also in the newsletter. I will send to the There will be a link to this form to apply So That's all from my side Anything you would like to add. No, I think I've talked enough Thanks guys. Good luck on the exam that opens tomorrow. Good luck. All right. Thanks guys