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Slides_for_class_2 - Commodity products Key concepts...

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Copyright, Blake Johnson Commodity products: Key concepts Commodity products: Definition  Multiple buyers and sellers Substitutable  (perfectly, or close) Central role of price Changes to balance overall supply and demand, across market participants Supply chain: Markets don’t always “clear”   rationing, excess capacity Key source of uncertainty: Future supply-demand balance Determines future price Contract in advance or take your chances with future market conditions? Price and quantity Not enough capacity   Availability risk (buyer) Too much capacity   Capacity utilization risk (supplier) Important characteristics: Product storability (e.g. gold, electricity, DRAM, lettuce) Capacity cost structure, lead time, and useful life Construction lead time, fixed cost, and useful life (e.g. technology change) Variable operating cost (per unit) Demand (uncertainty, cyclicality/seasonality, technology) Concentration: Number of buyers and suppliers “True” commodities have many of both In supply chain there are often a few big buyers and / or suppliers
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Copyright, Blake Johnson Range forecast and range plan Demand Probability  of demand Very low Very high Range forecast  Range plan  “Problem for supply chain to solve” Lowest cost, long lead time supply   Save $$ (HP) How much flex? At what by lead time? - Long: Cheaper, but risky  (place bet early)  - Short: costly, constrained - Same supplier - Different suppliers   (Intel, Agilent) Proactively plan for range forecast Demand 1 3 6 Month 6 3 1 Month 0 Demand range forecast Supply chain planning and execution Commit Flex Demand “Commit” region “Flex” region Min Supply range  by lead time 100 118 130 85 78 74 Max Month 1 3 6 Updated  flex
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Copyright, Blake Johnson Key characteristics of commodity products:  Presence of multiple buyers and suppliers Benefits / simplifications: Multiple firms to buy from / sell to Main issue is price  Quantity issues do arise (excess, constraints), but are not common Challenges: Predict and manage future supply / demand balance Suppliers: What are other suppliers doing? Capacity, production, inventory, delivery lead time…? Pricing – now and for future delivery Buyers:  What is the overall supply base doing? What deals are other buyers cutting with suppliers (price, quantity, time horizon)? Psychology and gaming! Fluctuations in overall supply-demand balance shifts power between 
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This note was uploaded on 06/16/2010 for the course MS&E 369 taught by Professor Blakejohnson during the Spring '08 term at Stanford.

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Slides_for_class_2 - Commodity products Key concepts...

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