Logistics Engineering and Supply
Chain Design
by
Dr. Nguyen Van Hop
1
Chapter 1: Introduction to Supply Chain
Design
Introduction
Supply Chain Decisions
The Supply Chain Processes
1. Introduction
What are Components of a Supply Chain System?
What are Supply Chain Objectives?
What is Supply Chain Design?
1.1. A Supply Chain
Material Flow
Information flow Cash
Flow
An Old Concepts !
A Supply Chain is defined by the suppliers, plants,
warehouses, distribution system, flows of products from each
product’s origin to the final customer, and associated flows of
information and $.
Supply Chain Management: Planning, organizing, directing, &
controlling flows of materials, information, money
Goals:
Produce and distribute products at the right quantities,
to the right place, at the right time
Minimize total cost while satisfy service level
requirements
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Case Study
NIKE logistics center
[Link]
How UPS Cargo Containers Work
[Link]
Simulation
[Link]
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1.2. The Objectives of a Supply Chain
Maximize overall value created
Supply Chain Surplus
= Customer Value – Supply Chain Cost
The Objectives of a Supply Chain
Example: a customer purchases a wireless router from
Best Buy for $60 (revenue)
Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
Difference between $60 and the sum of all of these costs
is the supply chain profit
Supply chain profitability is total profit to be shared across
all stages of the supply chain
Success should be measured by total supply chain
profitability, not profits at an individual stage
The Objectives of a Supply Chain
Customer the only source of revenue
Sources of cost include flows of information,
products, or funds between stages of the supply
chain
Effective supply chain management is the
management of flows between and among
supply chain stages to maximize total supply
chain surplus
1.3. What is Supply Chain Design?
The number and locations of the facilities is a critical factor
in the success of any supply chain. In fact, some experts
suggest that 80% of the costs of the supply chain are
locked in with the location of the facilities and the
determination of optimal flows of product between them.
The most successful companies recognize this and place
significant emphasis on strategic planning by determining
the best facility locations and product flows.
The discipline used to determine the optimal location and
size of facilities and the flow through the facilities is called
supply chain network design.
A SC Design Project Answer the Following Questions
How many warehouses should we have, where should they be,
how large should they be, what products will they distribute and
how will we serve our different types of customers?
How many plants or manufacturing sites should we have, where
should they be, how large should they be, how many production
lines should we have and what products (SKU) should they
make, and which warehouses should they service?
Which products should we make internally and which should we
source from outside firms?
If we source from outside firms, which suppliers should we use?
What is the trade-off between the number of facilities and
overall costs?
Questions (cont.)
What is the trade-off between the number of facilities and the
service level? How much does it cost to improve the service
level?
What is the impact of changes in demand, labor cost, and
commodity pricing on the network?
When should we make product to best manage and plan for
seasonality in the business?
How do we ensure the proper capacity and flexibility within the
network? To meet demand growth, do we When do we need to
add this capacity?
How can we reduce the overall supply chain costs?
What Kind of Data?
Quantitative Data: Why Does Geography Matter? →
Transportation Cost, Service Level, Risks, Local Labor, Skills,
Materials, and Utilities, Taxes, Carbon Emissions, etc.
Quantitative Data: Why Have Warehouses? → Consolidation of
Products, Buffer Lead Time, Service Levels, Production Lot
Sizes, Inventory Pre-Build, Transportation Mode Trade-offs →
DC, Cross-dock, Plant-attached WH, hub, Central WH, ….
Quantitative Data: Why Have Multiple Plants? → Service Levels,
Transportation Costs, Economies of Scale, Taxes, Steps in the
Production Process → A Manufacturing or Assembly Site, A
Supplier, Third-Party Manufacturing Site.
Data (Cont.)
Data Precision Versus Significance: What Is the Right Level in
Modeling? → demand data, transportation costs, …
Nonquantifiable Data: What Other Factors Need to Be
Considered? → Firm’s Strategy, Risks, Disruption Cost,
Willingness to Change, Public Relations and Branding,
Competitors, Union versus Non-Union, Tax Rebates,
Relationships with Trucking Companies, Warehousing
Companies, and Other Supply Chain Partners.
Nonquantifiable Data: What Are the Organizational Challenges?
→ Sales Team, Operations Team (Production), Operations
Team (Warehousing), Logistics Team (Transportation), Finance
Team.
2. Decision Phases of a Supply Chain
Supply chain strategy or design (strategic decisions)
How to structure the supply chain over the next several years
Supply chain planning (tactical decisions)
Decisions over the next quarter or year
Supply chain operation (operational decisions)
Daily or weekly operational decisions
Supply Chain Strategy or Design
Decisions about the structure of the supply chain and
what processes (flow of products) each stage will perform
Strategic supply chain decisions
Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation, supplying sources, etc.
Information systems
Supply chain design must support strategic objectives
Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty
Supply Chain Planning
Definition of a set of policies that govern short-
term operations
Fixed by the supply configuration from previous
phase
Starts with a forecast of demand in the coming
year
Supply Chain Planning
Planning decisions:
Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting, backup locations
Inventory policies
Timing and size of market promotions
Must consider in planning decisions demand uncertainty,
exchange rates, competition over the time horizon
Supply Chain Operations
Time horizon is weekly or daily
Decisions regarding individual customer orders
Supply chain configuration is fixed and policies are
determined
Goal is to implement the operating policies as effectively
as possible (operating rules)
Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an
order to a particular shipment, set delivery schedules,
place replenishment orders
Much less uncertainty (short time horizon)
3. The Supply Chain Processes
Cycle View: processes in a supply chain are divided
into a series of cycles, each performed at the
interfaces between two successive supply chain
stages
Push/Pull View: processes in a supply chain are
divided into two categories depending on whether
they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)
Cycle View
of Supply
Chain
Processes
Push/Pull View of Supply Chains
Push/Pull View of
Supply Chain Processes
Supply chain processes fall into one of two categories
depending on the timing of their execution relative to
customer demand
Pull: execution is initiated in response to a customer
order (reactive)
Push: execution is initiated in anticipation of customer
orders (speculative)
Push/pull boundary separates push processes from pull
processes
Push/Pull View of
Supply Chain Processes
Useful in considering strategic decisions relating to supply chain design –
more global view of how supply chain processes relate to customer orders
Can combine the push/pull and cycle views →The relative proportion of
push and pull processes can have an impact on supply chain performance
Examples: Push/Pull View of Dell/IKEA
Supply Chain Macro Processes
Supply chain processes discussed in the two views
can be classified into
Customer Relationship Management (CRM)
Internal Supply Chain Management (ISCM)→
WMS/TMS/ERP
Supplier Relationship Management (SRM)
Integration among the above three macro processes
is critical for effective and successful supply chain
management → How?
Supply Chain Macro Processes
Examples of Supply Chains
Gateway and Apple
Zara
W.W. Grainger and McMaster-Carr
Toyota
Amazon
Gateway and Apple
1. Why did Gateway choose not to carry any finished-product inventory
at its retail stores? Why did Apple choose to carry inventory at its
stores?
2. Should a firm with an investment in retail stores carry any finished-
goods inventory? What are the characteristics of products that are
most suitable to be carried in finished-goods inventory? What
characterizes products that are best manufactured to order?
3. How does product variety affect the level of inventory a retail store
must carry?
4. Is a direct selling supply chain without retail stores always less
expensive than a supply chain with retail stores?
5. What factors explain the success of Apple retail and the failure of
Gateway country stores?
Zara
1. What advantage does Zara gain against the competition by having a very
responsive supply chain?
2. Why has Inditex chosen to have both in-house manufacturing and
outsourced manufacturing? Why has Inditex maintained manufacturing
capacity in Europe even though manufacturing in Asia is much cheaper?
3. Why does Zara source products with uncertain demand from local
manufacturers and products with predictable demand from Asian
manufacturers?
4. What advantage does Zara gain from replenishing its stores multiple
times a week compared to a less frequent schedule? How does the
frequency of replenishment affect the design of its distribution system?
5. Do you think Zara’s responsive replenishment infrastructure is better
suited for online sales or retail sales?
W.W. Grainger and McMaster-Carr
1. How many DCs should be built and where should they be located?
2. How should product stocking be managed at the DCs? Should all DCs carry all
products?
3. What products should be carried in inventory and what products should be left
with the supplier to be shipped directly in response to a customer order?
4. What products should W.W. Grainger carry at a store?
5. How should markets be allocated to DCs in terms of order fulfillment? What
should be done if an order cannot be completely filled from a DC? Should there
be specified backup locations? How should they be selected?
6. How should replenishment of inventory be managed at the various stocking
locations?
7. How should Web orders be handled relative to the existing business? Is it
better to integrate the Web business with the existing business or to set up
separate distribution?
8. What transportation modes should be used for order fulfillment and stock
replenishment?
Toyota
1. Where should plants be located, what degree of
flexibility should each have, and what capacity
should each have?
2. Should plants be able to produce for all markets?
3. How should markets be allocated to plants?
4. What kind of flexibility should be built into the
distribution system?
5. How should this flexible investment be valued?
6. What actions may be taken during product design to
facilitate this flexibility?
Amazon and Independent Merchants
1. Why did Amazon decide to allow other merchants to use its supply
chain expertise?
2. What advantages do merchants have when partnering with
Amazon?
3. Should Amazon stock every product it sells?
4. What advantage can bricks-and-mortar players derive from setting
up an online channel? How should they use the two channels to
gain a maximum advantage?
5. What advantages or disadvantages do large book retailers gain by
letting Amazon manage their supply chain?
6. For which products does the online channel offer the greatest
advantage relative to retail stores? What characterizes these
products?