IIFTK/SCM Invited Lectures

Understanding the supply chain

Dr. Pramod K. Mishra (OM & QT Area)

School of Management Studies
University of Hyderabad
([Link]@[Link])

07/31/2021 1
 What is a supply chain?
Supply chain (SC):

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a

customer request. The supply chain not only includes the manufacturer and suppliers,
but also transporters, warehouses, retailers and even customers themselves.

Value chain (VC):

Source: Chopra & Meindl (2014) ; Porter (1985)

07/31/2021 2
 What is SCM?

Supply chain management (SCM):

“SCM is a set of approaches utilised to efficiently integrate

suppliers, manufacturers, warehouses and stores so that the
merchandise is produced and distributed at the right quantities, to
the right locations and at the right time.”

--- Simchi-Levi et al. (2009)

07/31/2021 3
 SCM - boundaries and relationships
“Supply chain management is an integrating function with primary
responsibility for linking major business functions and business processes
within and across companies into a cohesive and high-performing business
model. It includes all of the logistics management activities noted above, as
well as manufacturing operations, and it drives coordination of processes and
activities with and across marketing, sales, product design, finance, and
information technology.”

Source: [Link]
07/31/2021 4
 LM - boundaries and relationships
“Logistics management activities typically include inbound and outbound

transportation management, fleet management, warehousing, materials

handling, order fulfillment, logistics network design, inventory management,

supply/demand planning, and management of third party logistics services

providers. To varying degrees, the logistics function also includes sourcing and

procurement, production planning and scheduling, packaging and assembly,

and customer service.”

Source: [Link]
07/31/2021 5
 Historical perspectives

1. First revolution (1910-1920): Ford Motors (traditional)

2. Second revolution (1960-1970): Toyota Motors (TPS)

3. Third revolution (1995-till today): Dell Inc.

(customized)

07/31/2021 6
 Objective of a supply chain

To maximize overall value generated:

supply chain surplus (value) =

customer value – supply chain cost

07/31/2021 7
 Drivers of supply chain

1. Finance 5. Sourcing

2. Facilities 6. Pricing

3. Inventory 7. Information

4. Transportation

to be continued…..
07/31/2021 8
 Process views of a supply chain

• Cycle view:

– Customer order cycle (retailer-customer)

– Replenishment cycle (distributor-retailer)

– Manufacturing cycle (manufacturer-distributor)

– Procurement cycle (supplier-manufacturer)

07/31/2021 9
 Push/pull view of a supply chain

Source: Chopra and Meindl (2014)

07/31/2021 10
 Types of supply chains
Functional Innovative
Attributes
(e.g., GCMMF SC) (e.g., Zara SC)
Product demand Predictable Unpredictable

PLC >= 2 years 3 months to 1 year

Contribution margin 5 to 20% 20% to 60%

Product variety Low High

Avg. forecast error 10% 40% - 100%

Avg. stock-out rate 1%-2% 10% - 40%

Avg. forced markdown 0% 10% - 25%

Source: Fisher (1997)

07/31/2021 11
 Matching SCs with product types

Functional products Innovative products

(like staple food) (like fashion items)

Efficient Match Mismatch

Responsive Mismatch Match

Source: Fisher (1997)

Discussion: what happens when Zara emulates the practices of GCMMF and vice-versa?

07/31/2021 12
 References/suggested readings
1. Chopra, S., & Meindl, P. (2014). Supply chain management: strategy, planning and operation. New

Delhi: Pearson Education.

2. Fisher, M. (1997). What is the right supply chain for your product? Harvard Business Review,

March-April, 83-93.

3. Larson, P. D., & Halldorsson, A. (2004). Logistics versus supply chain management: an international

survey. International Journal of Logistics: Research and Applications, 7(1), 17-31.

4. Porter, M. E. (1985). Competitive advantage: creating and sustaining superior performance. New
York: Free Press.
5. Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., & Shankar, R. (2009). Designing and managing the

supply chain – concepts, strategies and case studies. New Delhi: Tata McGraw-Hill.

6. Perspective of supply chain accessed at [Link] on 25th May, 2015.

07/31/2021 13
 Disclaimer!
The content of this presentation is solely intended to be used by MBA-IV trimester
“Supply Chain Management (SCM)” students of IIFT Kolkata. Nobody should
post/upload/share any class material e.g., cases, texts, ppts, video recordings etc. in/on
to any social networking sites, print media, YouTube etc. without the prior permission
of the concerned teacher “Dr. Pramod K. Mishra”. Disciplinary action may be
recommended to IIFT Kolkata against the concerned student/s for such misconduct.
Further, the instructor, Dr. Pramod K. Mishra, declares that the sources of various
concepts/theories/images/data etc. cited in the presentation are duly acknowledged and
missing acknowledgement, if any, should be construed as a mere coincidence.

07/31/2021 14
 IIFTK/SCM Invited Lectures

Supply chain performance metrics

Dr. Pramod K. Mishra (OM & QT Area)

School of Management Studies
University of Hyderabad
([Link]@[Link])

08/07/2021 1
 Supply chain drivers

1. Finance 5. Information

2. Facility 6. Sourcing

3. Inventory 7. Pricing

4. Transportation

08/07/2021 2
 Finance related metrics
 Return on equity (ROE) = net income/shareholder equity

 Return on assets (ROA) = net income/assets = (net income/sales)*(sales/assets)

 Accounts payable turnover (APT) = cost of goods sold/accounts payable (how

many times a company pays for its purchases/expenses in a year)

 Accounts receivable turnover (ART) = sales/accounts receivables (how many

times a company collects its money due to business in a year)

 Inventory turnover ratio (INVT) = cost of goods sold (or sales)/inventory

 Cash to cash cycle time (C2C) = (weeks receivable/ART) + (weeks in

inventory/INVT) – (weeks payable/APT)

08/07/2021 3
 Facility related metrics
 Capacity and capacity utilization

 Processing/set up/down/idle time

 Production cost per unit

 Quality losses due to defects, wastes or rework

 Cycle/flow time (theoretical vs. actual)

 Product variety (total no of products produced/processed)

 Volume contribution of top 20 percent SKUs

 Average production batch size

 Production service level (production order completion)

08/07/2021 4
 Inventory related metrics
 Cash-to-cash cycle time =

inventory days of supply + days sales outstanding – days payable outstanding

 Average inventory (in terms of units, demand and financial value)

 Product with more than a specified number of days of inventory

 Average replenishment batch size

 Average safety inventory (both in terms of units and days of demand)

 Seasonal inventory (product inflow vs. sales)

 Fill rate (fraction of orders upon demand that are met on time)

 Fraction of time out of stock (good indicator of lost sales)

 Obsolete inventory (inventory remaining outside a specific date)

08/07/2021 5
 Transportation related metrics
 Average in bound transportation cost (as a percentage of sales or cost
of goods sold)

 Average incoming shipment size

 Average inbound transportation cost per shipment

 Average outbound transportation cost (as a percentage of sales often)

 Average outbound shipment size

 Average outbound transportation cost per shipment

 Fraction transported by mode (e.g. road, rail, air, sea)

08/07/2021 6
 Information related metrics

 Forecasting horizon (>= lead time)

 Frequency of update

 Forecasting error

 Seasonal factors

 Variance from plan (planned vs actual)

 Ratio of demand variability to order variability

08/07/2021 7
 Sourcing related metrics
 Days payable outstanding (days gap between receipt of supply and
payment made)

 Average purchase price

 Range of purchase price (quantity and price correlations)

 Average purchase quantity per order

 Supply quality

 Supply lead time

 Fraction of on-time deliveries

 Supplier reliability (lead time and ordered quantity variations)

08/07/2021 8
 Pricing related metrics
 Profit margin

 Days sales outstanding (days gap between sales made and payment collected)

 Incremental fixed cost per order

 Incremental variable cost per unit

 Average sales price

 Average order size

 Range of sales price over a time period

 Range of periodic sales over a time period

08/07/2021 9
 Empirical investigation

*Source: PRTM (1997) as said in Stephens (Supply Chain Council Report)

08/07/2021 10
 References/suggested readings
1. Chopra, S., & Meindl, P. (2014). Supply chain management: strategy, planning and operation. New Delhi: Pearson
Education.

2. Lambert, D. M., & Pohlen, T. L. (2001). Supply chain metrics. The International Journal of Logistics Management,
12(1), 1-19.

3. Lee, H. L. (2002). Aligning supply chain strategies with product uncertainties. California Management Review,
44(3), 105-119.

4. Roh, J., Hong, P., & Min, H. (2014). Implementation of a responsive supply chain strategy in global complexity: the
case of manufacturing firms. Int. J. Production Economics, 147(2014), 198-210.

5. Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., & Shankar, R. (2009). Designing and managing the supply chain –
concepts, strategies and case studies. New Delhi: Tata McGraw-Hill.

6. Stephens, S. (n.d). Supply chain council (SCC) & supply chain operations reference (SCOR) model overview.
PRTM’s 1997 Integrated Supply Chain Benchmarking study, [Link]. (can be accessed online).

7. Supply chain operations reference (SCOR): can be accessed at [Link]

08/07/2021 11
 Disclaimer!
The content of this presentation is solely intended to be used by MBA-IV trimester
“Supply Chain Management (SCM)” students of IIFT Kolkata. Nobody should
post/upload/share any class material e.g., cases, texts, ppts, video recordings etc. in/on
to any social networking sites, print media, YouTube etc. without the prior permission
of the concerned teacher “Dr. Pramod K. Mishra”. Disciplinary action may be
recommended to IIFT Kolkata against the concerned student/s for such misconduct.
Further, the instructor, Dr. Pramod K. Mishra, declares that the sources of various
concepts/theories/images/data etc. cited in the presentation are duly acknowledged and
missing acknowledgement, if any, should be construed as a mere coincidence.

08/07/2021 12
 IIFTK/SCM Invited Lectures

Sourcing decisions in a supply chain

Dr. Pramod K. Mishra (OM & QT Area)

School of Management Studies
University of Hyderabad
([Link]@[Link])

08/14/2021 1
 Product categorization and sourcing

08/14/2021 2
 Benefits of effective sourcing
• Better economies of scale can be achieved if orders are aggregated

• More efficient procurement transactions can significantly reduce the overall

cost of purchasing

• Design collaboration can result in products that are easier to manufacture

and distribute, resulting in lower overall costs

• Good procurement processes can facilitate coordination with suppliers

• Appropriate supplier contracts can allow for the sharing of risk

• Firms can achieve a lower purchase price by increasing competition

through the auctions

08/14/2021 3
 Sourcing operations

Sourcing is the set of business processes required to purchase

goods and services:

– Supplier scoring and assessment

– Supplier selection and contract negotiation

– Design collaboration

– Procurement

– Sourcing planning and analysis

08/14/2021 4
 Sourcing criteria
Criteria Direct materials Indirect materials

Maintenance, repair and support

Use Production
operations (MRO)

Selling, general and

Accounting Cost of goods sold
administrative expenses (SG&A)

Impact on production Any delay will delay production Less direct impact

Processing cost relative to

Low High
value of transaction

Number of transactions Low High

08/14/2021 5
 Supplier scoring and assessment
Performance
Category components Quantifiable?
category

Supplier price Labour, material, overhead, local taxes, and compliance costs Yes

Net payment terms, delivery frequency, minimum lot size,

Supplier terms Yes
quantity discounts

All transportation costs from source to destination, packaging

Delivery costs Yes
costs

Supplier inventory, including raw material, in process and

Inventory costs Yes
finished goods, in-transit inventory, finished goods inventory

Warehousing and material handling costs to support additional

Warehousing cost Yes
inventory

continued…..
08/14/2021 6
 Continued…..
Performance
Category components Quantifiable?
category

Quality costs Cost of inspection, rework, product returns Yes

Reputation Reputation impact of quality problems No

Other costs Exchange rate trends, taxes, duties Yes

Support Management overhead and administrative support Difficult

Replenishment lead time, on-time performance, flexibility,

Supplier
information coordination capability, design coordination To some extent
capabilities
capability, supplier viability etc.

08/14/2021 7
 Some techniques

For supplier selection the following methods can

be employed:

• Factor Rating Method

• Analytic Hierarchy Process (AHP)

08/14/2021 8
 Analytic Hierarchy Process (AHP)
1. Develop the criteria of assessment along with the alternatives

2. Determine the relative importance of criteria w.r.t goal (pairwise comparison)

3. Normalize pairwise comparison matrix

4. Calculate the criteria weights

5. Calculate the consistency (multiplying weights with step 2 matrix)

6. Finding the ratio between weighted sum and criteria weights

7. Finding the max (lambda max) and consistency index (CI)

8. Consistency ratio (CR) (to calculate using random index (RI))

9. If CR < 0.10, hence, it is inferred that the matrix is consistent

continued…..
08/14/2021 9
 Pair-wise comparison

Source: [Link]
08/14/2021 10
 AHP calculations

Pairwise comparison: A = Where: aij = 1/aji

∑ ∑ ∑

A (normalized) = ∑ ∑ ∑

∑ ∑ ∑

continued…..
08/14/2021 11
 Continued…..

∑ ∑
⋯∑

∑ ∑
⋯∑
C= ; C=

⋯
∑ ∑ ∑

AC=A*C = * =

08/14/2021 12
 Continued…..

max =

CI = and

CR = CI/RI

n (matrix order) 1 2 3 4 5 6 7 8 9 10

RI 0 0 0.58 0.9 1.12 1.24 1.32 1.41 1.45 1.49

If CR < 0.10, hence, it is inferred that the matrix is consistent

Source: Saaty (1980)

08/14/2021 13
 Contract negotiation
 Buyback contracts:

− Allows a retailer to return unsold inventory up to a specified amount at

an agreed upon price

− Increases the optimal order quantity for the retailer, resulting in higher
product availability and profits for both the retailer and the supplier

− If v, c, b and are, respectively, the manufacturing cost and wholesale

price, buyback price and salvage value; p is the retail price then:
Expected manufactur ing profit  O * ( c – v ) – (b – s M )  expected overstock at retailer

08/14/2021 14
 Continued…..

Expected retailer profit =

08/14/2021 15
 Continued…..
 Revenue-sharing contracts:

– The buyer pays a minimal amount for each unit purchased from the
supplier but shares a fraction (f) of the revenue for each unit sold

– Decreases the cost per unit charged to the retailer effectively decreasing
the cost of overstocking

Expected manufactur ers profits  ( c – v )O *  fp (O * – expected overstock at retailer)

Expected retailer profit  (1 – f ) p ( O * – expected overstock at retailer)

 s R  expected overstock at retailer – cO *

08/14/2021 16
 The procurement process
The process in which the supplier sends product in response to orders placed by the
buyer:
• Goal is to enable orders to be placed and delivered on schedule at the lowest
possible cost
• Focus for direct materials should be on improving coordination and visibility
with supplier
• Focus for indirect materials should be on decreasing the transaction cost for
each order
• Focus on consolidation of orders, wherever possible, to take advantage of
economies of scale and quantity discounts

08/14/2021 17
 Tailored sourcing

Scenarios Responsive source Low-cost source

Product life cycle Early phase Mature phase
Demand volatility High Low
Demand volume Low High
Product value High Low
Rate of product obsolescence High Low
Desired quality High Low to medium
Engineering/design support High Low

08/14/2021 18
 Risks in outsourcing
• The process is broken • Ineffective contracts

• Underestimation of the cost • Loss of operational visibility

of coordination • Negative reputational impact

• Inability to meet demand on
• Reduced customer/supplier
time
contact
• An increase in procurement
• Loss of internal capability costs
• Leakage of sensitive data and • Loss of intellectual property
information

08/14/2021 19
 Exercise on AHP
Alternative sources of supply
Alternatives Price Delivery costs Quality costs Reputation
Supplier 1 2500 160 120 5
Supplier 2 2000 160 80 3
Supplier 3 3000 320 160 4
Supplier 4 2750 320 80 1
Supplier 5 2250 160 160 2

Sourcing criteria

Criteria Price Delivery costs Quality costs Reputation

Price 1.00 5.00 4.00 7.00
Delivery costs 1.00 3.00
Quality costs 2.00 1.00 3.00
Reputation 1.00
08/14/2021 20
 Exercise on contracts
Buy-back Revenue sharing
Whole sale Buyback Order size Whole sale Revenue Order size
price © price (b) (O) price © sharing (%) (O)
5 0 1000 1 0.30 1000
5 2 1096 1 0.45 1096
5 3 1170 1 0.60 1170
6 0 924 2 0.30 924
6 2 1000 2 0.45 1000
6 4 1129 2 0.60 1129
7 0 843 3 0.30 843
7 4 1000 3 0.45 1000
7 6 1202 3 0.60 1202

Mean (demand) 1000

SD (demand) 300
Retail price (p) ($) 10
Retailer’s salvage (s) ($) 0
Manufacturer’s salvage (sm) 0
Manufacturer's cost ($) 1
08/14/2021 21
 References/suggested readings
1. Analytic hierarchy process from
[Link] accessed on
August 13, 2021.

2. Chopra, S., & Meindl, P. (2014). Supply chain management: strategy, planning and operation. New Delhi:
Pearson Education.

3. Dweiri, F., Kumar, S., Khan, S. A., & Jain, V. (2016). Designing an integrated AHP based decision support
system for supplier selection in automotive industry. Expert Systems With Applications, 62(2016), 273-
283.

4. Fredriksson, A., & Patrik, J. (2009). Assessing consequences of low-cost sourcing in China. International
Journal of Physical Distribution & Logistics Management, 39(3), 227-249.

5. Saaty, T. L. (1980). The Analytic Hierarchy Process. New York: McGraw-Hill.

6. Zirpoli, F., & Becker, M. C. (2011). What happens when you outsource too much? MIT Sloan
Management Review, 52(2), 59-64.

08/14/2021 22
 Disclaimer!
The content of this presentation is solely intended to be used by MBA-IV trimester
“Supply Chain Management (SCM)” students of IIFT Kolkata. Nobody should
post/upload/share any class material e.g., cases, texts, ppts, video recordings etc. in/on
to any social networking sites, print media, YouTube etc. without the prior permission
of the concerned teacher “Dr. Pramod K. Mishra”. Disciplinary action may be
recommended to IIFT Kolkata against the concerned student/s for such misconduct.
Further, the instructor, Dr. Pramod K. Mishra, declares that the sources of various
concepts/theories/images/data etc. cited in the presentation are duly acknowledged and
missing acknowledgement, if any, should be construed as a mere coincidence.

08/14/2021 23
 IIFTK/SCM Invited Lectures

Strategic fit in a supply chain

Dr. Pramod K. Mishra (OM & QT Area)

School of Management Studies
University of Hyderabad
([Link]@[Link])

08/11/2021 1
 Competitive and supply chain strategies

 Competitive strategy: the set of customer needs a firm seeks to satisfy

through its products and services

 Supply chain strategy:

– Determines the nature of material procurement, transportation of

materials, manufacture of product or creation of service,
distribution of product

– Consistency and support between supply chain strategy, competitive

strategy and other functional strategies is important

08/11/2021 2
 Strategy implications
• Low price:

– low variation in products/services

– high-volume

– maximum use of resources

– standardized work, material and inventory

• High quality:

– supplier quality

– robust product and process design

• Quick response:

– extra capacity

– higher levels of inventory

continued…..
08/11/2021 3
 Continued…..
• Newness/innovation:

– large investment in research and development

– process modifications to suit new products or services

• Product or service variety:

– high variation in resources and/or design

– higher worker skills

– cost estimation, scheduling, quality assurance, inventory management

etc. become complex

– matching supply to demand more difficult

continued…..
08/11/2021 4
 Continued…..

• Sustainability:

– proper location planning

– robust product/service and process design

– judicious in-house and outsourcing decisions

– returns policies and waste management

08/11/2021 5
 Achieving strategic fit

Strategic fit (synchronizing competitive and supply

chain strategies):

 Understanding the customer and supply chain

uncertainties

 Understanding the supply chain capabilities

 Achieving strategic fit

08/11/2021 6
 Understanding the uncertainties
• Identify the needs of the customer segment being served:

– Demand uncertainties

– Implied demand uncertainties

• Quantity of product needed in each lot

• Response time customers will tolerate

• Variety of products needed

• Service level required

• Price of the product

• Desired rate of innovation in the product

08/11/2021 7
 Customer needs and implied demand uncertainty

Customer needs Impacts

Wider range of quantity implies greater
Range of quantity increases
variance in demand
Lead time decreases Less time to react to orders
Demand per product becomes more
Variety of products required increases
disaggregated
Total customer demand is now
Number of channels increases
disaggregated over more channels
New products tend to have more
Rate of innovation increases
uncertain demand
Firm now has to handle unusual surges
Required service level increases
in demand

08/11/2021 8
 Implied demand uncertainty

Implied demand uncertainty

Attributes
Low High

Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season-
0% 10%-25%
end markdown

08/11/2021 9
 Push (MTS) and pull (MTO)
Procurement, Customer order cycle
Manufacturing and
Replenishment cycles

Push processes Pull processes

Customer order arrives

Source: Chopra & Meindl (2014)

08/11/2021 10
 Supply chain capabilities
How does the firm best meet its demand?

Strategy/goal Efficient Responsive

Primary goal Lowest cost Quick response
Modularity to allow
Product design strategy Minimum product cost
postponement
Pricing strategy Lower margins Higher margins
Manufacturing strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Reduce but not at expense Aggressively reduce even if
Lead time strategy
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Greater reliance on low cost Greater reliance on
Transportation strategy
modes responsive (fast) modes

08/11/2021 11
 Achieving strategic fit
Step is to ensure that what supply chain is
Responsive
consistent with target customers’ needs?
supply chain

Responsivene
ss spectrum

Efficient
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
Chopra & Meindl (2014)

08/11/2021 12
 Challenges in strategic fit

• Increasing product varieties and decreasing PLCs

• Globalization and increasing uncertainty

• Fragmentation of supply chain ownership

• Changing technology and business environment

• Environment and sustainability

08/11/2021 13
 References/suggested readings

1. Chopra, S., & Meindl, P. (2014). Supply chain

management: strategy, planning and operation. New
Delhi: Pearson Education.

2. Lee, H. L. (2002). Aligning supply chain strategies

with product uncertainties. California Management
Review (Spring), 105-119.

08/11/2021 14
 Disclaimer!
The content of this presentation is solely intended to be used by MBA-IV trimester
“Supply Chain Management (SCM)” students of IIFT Kolkata. Nobody should
post/upload/share any class material e.g., cases, texts, ppts, video recordings etc. in/on
to any social networking sites, print media, YouTube etc. without the prior permission
of the concerned teacher “Dr. Pramod K. Mishra”. Disciplinary action may be
recommended to IIFT Kolkata against the concerned student/s for such misconduct.
Further, the instructor, Dr. Pramod K. Mishra, declares that the sources of various
concepts/theories/images/data etc. cited in the presentation are duly acknowledged and
missing acknowledgement, if any, should be construed as a mere coincidence.

08/11/2021 15
 IIFTK/SCM Invited Lectures

Inventory management and control

Dr. Pramod K. Mishra (OM & QT Area)

School of Management Studies
University of Hyderabad
([Link]@[Link])

08/18/2021 1
 Activities of inventory management
• Stock control • Meeting requirements of production plants

• Purchasing • Permitting flexibility in plant scheduling

• Holding off increasing capacity and

• Storage of materials
exploiting economies of scale
• Accounting
• To take advantage of distribution factors or
• Classification costs

• Protecting against strikes and work

stoppage

• Speculating against price and cost changes

08/18/2021 2
 Q and P Models

Source: Jacobs & Chase (2008)

08/18/2021 3
 Review policies

Source: Jacobs & Chase (2008)

08/18/2021 4
 Key factors impacting EOQ
• Inventory holding cost • Ordering cost

– Cost of capital – Buyer time

– Obsolescence cost – Transportation costs

– Handling cost – Receiving costs

– Occupancy cost – Other costs, if any

– Other costs, if any

08/18/2021 5
 Economic order quantity (EOQ)
Annual demand = D

Number of orders per year = D/Q

Annual material cost = CD

Annual order cost = (D/Q)S

Annual holding cost = (Q/2)H = (Q/2)hC

Total annual cost = TC = CD + (D/Q)S + (Q/2)hC

EOQ or optimal lot size = Sqrt(2DS/H)

Ordering frequency = Sqrt(DH/2S)

Source: Chopra & Meindl (2012)

08/18/2021 6
 Aggregating multiple products in a single order

• Transportation is a significant contributor to the fixed cost per order

• Can combine shipments of different products from the same supplier:

– same overall fixed cost

– shared over more than one product

– effective fixed cost is reduced for each product

– lot size for each product can be reduced

• Can also have a single delivery coming from multiple suppliers or a single
truck delivering to multiple retailers

08/18/2021 7
 EOQ models with aggregation
• Products ordered and delivered jointly:

– optimal ordering frequency:

Where:

n = total no orders placed in a year

S* = S + SA+ SB + SC

S = fixed ordering cost

SA , SB and SC are variable ordering costs

08/18/2021 8
 Quantity discounts
(based on fixed lot size)
 Based on the quantity purchased per lot

 Lot size-based discounts tend to raise cycle inventory

 It encourages the firms to increase the size of each lot

 Useful when the manufacturer incurs a very high fixed cost

per order

 Useful when commodity/product price is driven by the

market

08/18/2021 9
 Quantity discounts
(based on volume in a specified time period)
 The firms has the choice to exercise their order as per their
demand over a specific time period

 Useful when the manufacturer does not incur a very high

fixed cost per order

 Useful when the firm has the market power in controlling

commodity/ product prices

 Compatible with small lots that reduce the cycle inventory

08/18/2021 10
 EOQ task
Particulars Model A Model B Model C Model D

Demand/year (units) 2,000 1,000 600 750

Fixed ordering cost/order (INR) 2,500 2,500 2,500 2,500

Variable ordering cost/order
500 1,000 0 250
(INR)
Model cost/unit (INR) 225 180 110 75

Holding cost/year (%) 0.15 0.10 0.20 0.18

Task: compare inventory costs for both with and without aggregation?

08/18/2021 11
 Safety stock/inventory
Inventory carried for the purpose of satisfying demand that exceeds the
amount forecasted in a given period:

– Average inventory is therefore cycle inventory plus safety

inventory (safety stock)

– Raising the level of safety inventory provides higher levels of

product availability and customer service

– Raising the level of safety inventory also raises the level of

average inventory and therefore increases holding costs

08/18/2021 12
 CSL, SS, ESC and fr
• Cycle service level (CSL): fraction ROP  D L
 ss

of replenishment cycles that end CSL  F ( ROP , D ,

L L
)
 NORMDIST ( ROP , D L ,  ,1 )
with all customer demand met L

( CSL )  
1
ss  F S L

 NORMSINV(C SL)   L

• Expected shortage per cycle (ESC):

the average units of demand that are
not satisfied from inventory in stock
per replenishment cycle

• fr + (ESC/EOQ) = 1.0

08/18/2021 13
 Inventory before and after replenishment

• Inventory before replenishment = Safety stock (ss) = Service

level (z) X (Std. deviation of demand/unit time) X Sqrt(lead time)

• Inventory after replenishment = EOQ + ss = EOQ + Service level

(z) X (Std. deviation of demand/unit time) X Sqrt(lead time)

• Cycle inventory = ½(Inventory before replenishment +

Inventory after replenishment ) = (EOQ/2) + Service level (z) X
(Std. deviation of demand/unit time) X Sqrt(lead time)

08/18/2021 14
 Inventory control techniques

• ABC (A – high usage, B – medium usage, C – low

usage)
• HML (H – high cost, M – medium cost, L – low cost)
• FSN (F – fast moving, S – slow moving, N – no
moving)
• VED (V – vital, E – essential, D – desirable)
• Sources of supply (imported, local/national supplies)

08/18/2021 15
 ABC classification
Percentage
Percentage Review
Items value of
of items policy
annual usage

Close
About 20% About 80% day to
Class A
(5-25%) (40-80%) day
control

About 30% About 15% Regular

Class B
(20–40%) (15-40%) review

About 50% About 5% Infreque

Class C nt
(40-75%) (5-20%) review

08/18/2021 16
 ABC classification task
Item number Unit cost (INR) Annual demand (units)

101 5 48,000

102 11 2,000

103 15 300

104 8 800

105 7 4,800

106 16 1,200

107 20 18,000

108 4 300

109 9 5,000

110 12 500

08/18/2021 17
 Controlling ABC inventory
 A-items:

• should have tight inventory control

• more secured storage areas

• better sales forecasts

• re-orders should be frequent

• avoiding stock-outs is a priority

 B-items:

• benefit from an intermediate status between A and C

continued…..
08/18/2021 18
 Continued…..
C-items:

• re-ordering is made less frequently

• a typical inventory policy consists of having only one unit on

hand

• reordering only when an actual purchase is made

• leads to stock-out situation after each purchase which is an

acceptable due to low demand and higher risk of excessive
inventory costs

08/18/2021 19
 References/suggested readings
1. Azzi, A., Battini, D., Faccio, M., Persona, A., & Sgarbossa, F. (2014). Inventory
holding costs measurement: a multi-case study. The International Journal of
Logistics Management, 25(1), 109-132.

2. Chopra, S., & Meindl, P. (2012). Supply chain management: strategy, planning
and operation. New Delhi: Prentice Hall.

3. Jacobs, F. R., & Chase, R. B. (2008). Operations and supply chain management –
the core. New Delhi, India: McGraw-Hill Publications.

4. Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., & Shankar R. (2009). Designing
and managing the supply chain – concepts, strategies and case studies. New
Delhi: Tata McGraw-Hill Education.

08/18/2021 20
 Disclaimer!
The content of this presentation is solely intended to be used by MBA-IV trimester
“Supply Chain Management (SCM)” students of IIFT Kolkata. Nobody should
post/upload/share any class material e.g., cases, texts, ppts, video recordings etc. in/on
to any social networking sites, print media, YouTube etc. without the prior permission
of the concerned teacher “Dr. Pramod K. Mishra”. Disciplinary action may be
recommended to IIFT Kolkata against the concerned student/s for such misconduct.
Further, the instructor, Dr. Pramod K. Mishra, declares that the sources of various
concepts/theories/images/data etc. cited in the presentation are duly acknowledged and
missing acknowledgement, if any, should be construed as a mere coincidence.

08/18/2021 21
Supply Chain Management

Introduction

Indian Institute of Foreign Trade

 Introduction to
Supply Chain Management

• What is a Supply Chain?

• Evolution of Supply Chain Management
• Decision Phases in a Supply Chain
• Important Elements of SCM
• Process View of a Supply Chain
• Key Observations
• Current Trends
• Global Optimisation
• Uncertainty and Risk
 What is a Supply Chain?
• Flow of products and services from:
– Raw materials manufacturers
– Intermediate products manufacturers
– End product manufacturers
– Wholesalers and distributors and
– Retailers
• To – the respective Customers
• Connected by transportation and storage
activities
• Integrated through information, planning,
and integration activities
• Cost and service levels
What is a Supply Chain?
Supply Chain Snapshot
 What is
Supply Chain Management?
• Supply chain management is a set of
approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses,
and stores, so that merchandise is
produced and distributed at the right
quantities, to the right locations, and at the
right time, in order to minimize system
wide costs while satisfying service level
requirements.
 Two Other Formal Definitions
The design and management of seamless, value-
added process across organizational boundaries
to meet the real needs of the end customer
Institute for Supply Management
Managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry
and order management, distribution across all
channels, and delivery to the customer
The Supply Chain Council
The SCM Network

Transportation Costs
 The Objective of a Supply Chain
• Maximize overall value created

• Supply chain value: difference between what the

final product is worth to the customer and the
effort the supply chain expends in filling the
customer’s request

• Value is correlated to supply chain profitability

(difference between revenue generated from the
customer and the overall cost across the supply
chain)
 The Objective of a Supply Chain

• Example: Dell receives INR 50000 from a customer for a

computer (revenue)
• Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Difference between INR 50000 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
• Supply chain success should be measured by total
supply chain profitability, not profits at an individual stage
 The Objective of a Supply Chain
• Sources of supply chain revenue: the customer

• Sources of supply chain cost: flows of information,

products, or funds between stages of the supply chain

• Supply chain management is the management of

flows between and among supply chain stages to
maximize total supply chain profitability
 Evolution of
Supply Chain Management

1950s & 1960s

Manufacturers focused on mass production techniques
as their principal cost reduction and productivity
improvement strategies
1960s-1970s
Introduction of new computer technology led to
development of Materials Requirements Planning
(MRP) and Manufacturing Resource Planning (MRPII)
to coordinate inventory management and improve
internal communication
 Evolution of
Supply Chain Management
1980s & 1990s
Intense global competition led manufacturers to
adopt:
– Supply Chain Management (SCM)
– Just-In-Time (JIT)
– Total Quality Management (TQM)
– Business Process Reengineering (BPR)
 Evolution of
Supply Chain Management
2000s and Beyond
Companies will focus on relationships, sustainability,
and social responsibility

Companies will focus on improving supply chain

capabilities with initiatives such as:
– Third-party service providers (3PLs)
– Integrating logistics
– Using transportation to facilitate rapid
response
 Evolution of
Supply Chain Management
Further
Refinement of
SCM Capabilities

SCM
Formation/
Extensions

JIT, TQM, BPR,

Alliances

Inventory Management/Cost
Optimization

Traditional Mass Manufacturing

1950s 1960s 1970s 1980s 1990s 2000s Beyond

Decision Phases of a Supply Chain

• Supply chain strategy or design

• Supply chain planning

• Supply chain operation

 Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and
what processes 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
– 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
• 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 Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies
are determined
• Goal is to implement the operating policies as effectively
as possible
• 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)
 The Foundations of
Supply Chain Management
• Supply
– Supply base rationalization, supplier alliances, SRM, global
sourcing, ethics and sustainability
• Operations
– Demand management, CPFR, MRP, ERP, inventory visibility,
lean systems, Six Sigma quality systems
• Logistics
– Logistics management, customer relationship management,
network design, RFID, global supply chains, sustainability,
service response logistics
• Integration
– Risk and security management, performance measurement,
green supply chains
 Important Elements of
Supply Chain Management
Supply Trends:
– Supplier management - improve performance
through
• Supplier evaluation (determining supplier
capabilities)
• Supplier certification (third party or internal
certification to assure product quality and service
requirements)
– Strategic partnerships - successful and trusting
relationships with top-performing suppliers
– Ethics and sustainability – recognizing suppliers’
impact on reputation and carbon footprint
 Important Elements of
Supply Chain Management

Operations Trends:
– Demand management - match demand to available
capacity
– Linking buyers & suppliers via MRP and ERP
systems
– Use lean systems to improve the flow of materials to
reduce inventory levels
– Employ Six Sigma to improve quality compliance
among suppliers
 Important Elements of
Supply Chain Management
Logistics Trends:
– Transportation management - tradeoff decisions
between cost & timing of delivery / customer service
via trucks, rail, water & air
– Customer relationship management - strategies to
ensure deliveries, resolve complaints, improve
communications, & determine service requirements
– Network design - creating distribution networks
based on tradeoff decisions between cost &
sophistication of distribution system
 Important Elements of
Supply Chain Management

Integration Trends:
– Supply Chain Process Integration - when supply
chain participants work for common goals. Requires
intra-firm functional integration. Based on efforts to
change attitudes & adversarial relationships

– Supply Chain Performance Measurement - Crucial

for firms to know if procedures are working
 Process View of a Supply Chain

• 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 Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor

Manufacturing Cycle
Manufacturer

Procurement Cycle

Supplier
 Cycle View of a Supply Chain
• Each cycle occurs at the interface between two
successive stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• Cycle view clearly defines processes involved and the
owners of each process. Specifies the roles and
responsibilities of each member and the desired
outcome of each process.
Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
 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
 Supply Chain Macro Processes in
a Company
• Supply chain processes discussed in the two views can
be classified into:
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
• Integration among the above three macro processes is
critical for effective and successful supply chain
management
 Key Observations
• Integrated activity
– Among functions such as logistics, manufacturing,
distribution, design/engineering, marketing, finance
etc.
– Multiple organisations i.e., suppliers, customers& 3
PL providers
– Coordination of conflicting goals, metrics, etc.
• Responsible for multiple flows
– Information (orders, status, contracts)
– Physical (finished goods, raw material, WIP)
– Financial (payment, credits, etc.)
 Key Observations
• Most analysis involves trade-offs
– Across different entities
– Across metrics: Cost, Service, Time, Risk, etc.

• Each interface in the supply chain represents

– Movement of goods
– Information flows
– Transfer of title
– Purchase and sale
 Key Observations
• Every facility that impacts costs need to be
considered
– Suppliers’ suppliers
– Customers’ customers
• Efficiency and cost-effectiveness throughout the
system is required
– System level approach
• Multiple levels of activities
– Strategic – Tactical – Operational
 Key Observations
• Supply chain strategy linked to the Development
Chain

• Challenging to minimize system costs and

maximize system service levels

• Inherent presence of uncertainty and risk

 Current Trends in
Supply Chain Management
Expanding the Supply Chain
– Companies are expanding partnerships and
building facilities in foreign markets
• Right shoring for maximum flexibility and
minimum cost
– The expansion involves:
• Breadth - foreign manufacturing, office & retail
sites, foreign suppliers & customers
• Depth - second and third tier suppliers &
customers
 Current Trends in
Supply Chain Management

Increasing Supply Chain Responsiveness

– Firms will increasingly need to be more flexible and
responsive to customer needs
– Supply chains will need to benchmark industry
performance and meet and improve on a continuous
basis
– Responsiveness improvement will come from more
effective and faster product & service delivery
systems
 Current Trends in
Supply Chain Management
The GREENING of Supply Chains –
• Producing, packaging, moving, storing, delivering
and other supply chain activities can be harmful to
the environment
• Supply chains will work harder to reduce
environmental degradation
• Increasingly more and more of the consumers are
influenced by a firm’s environmental friendliness
reputation
• Recycling and conservation are a growing
alternative in response to high cost of natural
resources
 Current Trends in
Supply Chain Management
• Reducing Supply Chain Costs
– Cost reduction achieved through:
• Reduced purchasing costs
• Reducing waste
• Reducing excess inventory, and
• Reducing non-value added activities
– Continuous Improvement through
• Benchmarking - improve over competitors’
performance
• Trial & error
• Increased knowledge of supply chain processes
 Global Optimisation
• Geographically dispersed complex network

• Conflicting objectives of different facilities

• Dynamic system
– Variations over time
– Matching demand-supply difficult
– Different levels of inventory and backorders

• Recent developments have increased risks

– Lean production/Off-shoring/Outsourcing
Global Computer Industry Supply Chain
Tracing back the screen we stare at for the bulk of our time
 Global Apparel Value Chain
Tracing back the clothing you are wearing
 Global Optimisation
The Development Chain
• Set of activities and processes associated
with new product introduction. Includes:
– product design phase
– associated capabilities and knowledge
– sourcing decisions
– production plans
 Global Optimisation
The Development Chain
 Globally Dispersed Operations
An Illustration: How an Apparel MNC may make a Dress

Product Design QC & Shipping

[Hong Kong] [Hong Kong]

Yarn Spinning Weaving Stitching

[Korea] [Taiwan] [Indonesia]

Zippers+…
[Japan+…]
 Uncertainty and Risk Factors
Matching Supply and Demand a Major Challenge

• Reasons
– Raw material shortages
– Internal and supplier parts shortages
– Productivity inefficiencies
– Sales and earnings shortfall
– Larger than anticipated inventories
– Stiff competition
– General slowdown in the market
– Higher than expected orders for new products over
existing products
 Uncertainty and Risk Factors
Fluctuations of Inventory and Backorders
throughout the Supply Chain
 Uncertainty and Risk Factors
• Forecasting
• Demand is not the only source of
uncertainty
• Recent trends make things more uncertain
– Lean manufacturing
– Outsourcing
– Off-shoring
 Uncertainty and Risk Factors
• Environmental / Accidental / Socio Political
Factors
– Covid 19 – Waves – 1,2
– Jat reservation movement
– Japan Tsunami
– Thailand Floods
– Fire at Supplier Plant
– Port Strike
– Transport Strike
Supply Chain Management

Strategy

Indian Institute of Foreign Trade

 Supply Chain Management
Strategy

• Supply Chain Excellence

• Business Strategy and Supply Chain Strategy
• Aligning the Strategies
• Challenges
Competitive Advantage and the ‘Three Cs’
Customers
Needs seeking benefits at
acceptable prices

Global Business &

Regulatory Environment

Assets and Assets and

utilisation Cost differentials utilisation

Company Competitor
Buyer behaviour when faced
with a stock-out
9%

31%
15%

Do not purchase item

Delay purchase
Substitute different brand
Substitute same brand
Buy item at another store

26%
19%
The Impact of Supply Chain on Marketing

Consumer Customer Supply chain Marketing

franchise franchise efficiency effectiveness

● Brand values ● Customer Service ● Flexibility ● Market share

● Corporate image ● Partnership ● Reduced asset base ● Customer retention
● Availability ● Quick response ● Low-cost supplier ● Superior ROI
 SUPPLY CHAIN EXCELLENCE
FOUR PILLARS ON A FOUNDATION

SUPPLY CHAIN EXCELLENCE

Responsiveness Reliability Resilience Relationships

COST
 MANAGING THE 4 Rs & THE C
• Responsiveness : Time-based competition is now the
norm. The focus is on agility.
• Reliability : Unreliable processes create uncertainty and
variability. Equally, lack of visibility adds to uncertainty.
• Resilience : Today’s turbulent and volatile markets
require supply chains that are capable of dealing with the
unexpected and the unplanned.
• Relationships : As supply chains become more
complex and as out-sourcing increases dependency on
suppliers, the need for relationship management
increases.
• Cost : Optimisation across all elements of the SC
SUPPLY CHAIN EXCELLENCE

High

Relative
Customer
Value
Low

High Low

Relative
Delivered Cost
 Linking Customer Value to
Supply Chain Strategy
Identify
value What do our customers value?
segments

Define the How do we translate these

value requirements into an offer?
proposition

Identify the What does it take to succeed in

market this market?
winners

Develop How do we deliver against this

the supply proposition?
chain
strategy
 Supply Chain Strategy & Design
flows from Business Strategy

• What is our overall Business Strategy?

– How will we win Today?
– How will we win in the Future?
• What must the Supply Chain deliver to
best support our Business Strategy?
• How do we ensure that our Supply Chain
Design can deliver against our Strategic
Priorities?
 Supply Chain Strategy & Design
flows from Business Strategy

• Which individual capabilities do we need

to improve?
– Plan
– Source
– Make
– Fulfill
– Recover
 Supply Chain Strategy & Design
flows from Business Strategy

• How do we get the right Enablers in

place?
– Organisation & Decision rights
– Metrics
– Sales & Operations Planning
– IT Systems
 Supply Chain Management
Strategy

• Competitive and Supply Chain Strategies

• Achieving strategic alignment

• Expanding strategic scope

 Competitive and Supply
Chain Strategies
• Competitive strategy: defines the set of customer needs
a firm seeks to satisfy through its products and services
• Product development strategy: specifies the portfolio of
new products that the company will try to develop
• Marketing and sales strategy: specifies how the market
will be segmented and product positioned, priced, and
promoted
• Supply chain strategy:
– determines the nature of material procurement, transportation of
materials, manufacture of product or creation of service,
distribution of product
– Consistency and support between supply chain strategy,
competitive strategy, and other functional strategies is important
 The Value Chain: Linking Supply
Chain and Business Strategy

Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales
 Achieving Strategic Alignment
• Strategic alignment:
– Consistency between customer priorities of
competitive strategy and supply chain capabilities
specified by the supply chain strategy
– Competitive and supply chain strategies have the
same goals
• A company may fail because of a lack of
strategic alignment or because its processes
and resources do not provide the capabilities
to execute the desired strategy
 How is Strategic Alignment
Achieved?

• Step 1: Understanding the customer and

supply chain uncertainty

• Step 2: Understanding the supply chain

• Step 3: Achieving strategic alignment

 Step 1: Understanding the Customer
and Supply Chain Uncertainty
• Identify the needs of the customer
segment being served
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
 Step 1: Understanding the Customer
and Supply Chain Uncertainty
• Overall attribute of customer demand
• Demand uncertainty: uncertainty of
customer demand for a product
• Implied demand uncertainty: resulting
uncertainty for the supply chain given the
portion of the demand the supply chain
must handle and attributes the customer
desires
 Identify the Needs of the Customer
Segment being served
• What does the customer actually
– Want ?
– Need ?
• Essential
• Desirable
• Variations for different target customer
segments
Quantity of Product needed in each Lot

• One
• Small
• Large
• Small quantities in multiple lots
• Large quantities in fewer lots
• Other combinations
• Impact on Size / Weight / Volume
 Response Time Acceptable to the
Customers
• How important is it to the customer?
– Is it critical?
– Will have an impact on his willingness to pay for
it
• May vary across customer segments or even within
the same segment
• What is feasible?
• What is available?
• Is it expected to change over the medium/ long
term
 Variety of Products needed

• What are the key product features?

• Different combinations of the features
which satisfy varying customer needs?
• Do all the segments being served have the
same requirements?
• Are specific configurations preferred by
different target segments?
• Locational / Seasonal / Economic
variations
 Service Level required

• What service level does the customer

expect?
• What will the customer be satisfied with?
• Does this requirement change for the
same customer at different times or
situations?
• Does it remain the same for a customer
but varies across customer segments
 Price of the Product

• How important is Price for the Product and

for the target Customer?
• How does it vary across segments?
• How much is the customer happy to pay
for desirable features v/s essential?
• Impact of price related promotions on the
customer?
• Customer awareness of factors affecting
price?
 Desired rate of Innovation in the
Product
• Is the product / features expected to
change / continue to change in the short /
medium / long term due to the impact of
– Customer requirements / awareness
– Technology / Research
– Regulations
– Sustainability
Overall attribute of Customer Demand

• The combined impact of the attributes

mentioned (plus any industry specific
ones)
• Is it the same across the served
segments?
• Is it significantly different across
segments?
• Is it expected to change and if yes how?
 Demand Uncertainty and
Implied Demand Uncertainty
• Demand Uncertainty
– Uncertainty of customer demand for a product

• Implied Demand Uncertainty

– Resulting uncertainty for the supply chain
given the portion of the demand the supply
chain must handle and attributes the
customer desires
 Understanding the Customer
• Lot size
• Response time
• Service level Implied
• Product variety Demand
Uncertainty
• Price
• Innovation
 Impact of Customer Needs on
Implied Demand Uncertainty
Customer Need Causes implied demand
uncertainty to increase
because …
Range of quantity increases Wider range of quantity implies
greater variance in demand
Lead time decreases Less time to react to orders

Variety of products required Demand per product becomes

increases more disaggregated
Number of channels increases Total customer demand is now
disaggregated over more
channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges in demand
Levels of Implied Demand
Uncertainty

Predictable Predictable Supply & uncertain Highly uncertain

Supply & Demand or uncertain Supply and Supply and Demand
Demand predictable Demand or somewhat
uncertain Supply and Demand

Toothpaste at a An existing A new medicine

Provision Store Automobile model

The Implied Uncertainty – Supply and Demand

Correlation Between Implied Demand
Uncertainty and Other Attributes
Attribute Low Implied High Implied
Uncertainty Uncertainty
Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stock out rate 1%-2% 10%-40%

Avg. forced season- 0% 10%-25%

end markdown
 Step 2: Understanding the
Supply Chain
• How does the company best meet demand?
• Dimension describing the supply chain is supply
chain responsiveness
• Supply chain responsiveness -- ability to
– respond to wide ranges of quantities
demanded
– meet short lead times
– handle a large variety of products
– build highly innovative products
– meet a very high service level
 Step 2: Understanding the
Supply Chain
• There is a cost to achieving responsiveness
• Supply chain efficiency: cost of making and
delivering the product to the customer
• Increasing responsiveness results in higher costs
that lower efficiency
• Cost-responsiveness efficient frontier
• Supply chain responsiveness spectrum
• Second step to achieving strategic alignment is to
map the supply chain on the responsiveness
spectrum
 Understanding the Supply Chain:
Cost-Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
 Responsiveness Spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Amul Hanes Most Dominos

apparel automotive
production
 Step 3: Achieving Strategic
Alignment

• Step is to ensure that what the supply

chain does well and is consistent with
target customer’s needs
• Uncertainty/Responsiveness map
• Zone of strategic fit
• Examples: Dominos, Amul
Achieving Strategic Alignment shown
on Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiven
ess spectrum

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
 Step 3: Achieving Strategic
Alignment
• All functions in the value chain must support the
competitive strategy to achieve strategic alignment
• Two extremes: Efficient supply chains (Amul) and
responsive supply chains (Dominos)
• Two key points
– there is no right supply chain strategy independent of
competitive strategy
– there is a right supply chain strategy for a given
competitive strategy
 Comparison of Efficient and
Responsive Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at Aggressively reduce even
expense of greater cost if costs are significant
Supplier selection Cost and low quality Speed, flexibility, quality
strategy
Transportation strategy Greater reliance on low Greater reliance on
cost modes responsive (fast) modes
 Challenges in achieving
Strategic Alignment
• Globalisation
• Multiple products and customer segments
• Technology
• Product life cycle
• Competitive changes over time
• Business Environment
• Segment Ownership
• Infrastructure & Logistics
• Sustainability
 Globalisation

• Global Sourcing
• International Market presence
• Longer chains
• Diverse socio political and cultural
influences
• Time zone and language barriers
 Multiple Products and
Customer Segments

• Firms sell different products to different

customer segments (with different implied
demand uncertainty)
• Capability to handle the variety
• After sales support
• Ability to influence customer to chose product
 Multiple Products and
Customer Segments

• The supply chain has to be able to balance

efficiency and responsiveness given its portfolio
of products and customer segments
• Approaches:
– Different supply chains
– Tailor supply chain to best meet the needs of
each product’s demand
 Technology
• Diverse technologies trying to fulfill the
same need

• Fading boundaries between product

categories

• Example
– Mobile phones
 Product Life Cycle
• Early
– uncertain demand
– high margins (time is important)
– product availability is most important
– cost is secondary
• Late
– predictable demand
– lower margins
– price is important
• As the product goes through the life cycle, the supply
chain changes from one emphasizing responsiveness to
one emphasizing efficiency
 Product Life Cycle

• Unpredictable product life expectancy

• Shortening life cycles
• Portfolios with products at different stages of life
cycle
• The demand characteristics of a product and the
needs of a customer segment change as a
product goes through its life cycle
• Supply chain strategy must evolve throughout
the life cycle
 Competitive Changes Over
Time

• Competitive pressures can change over time

• More competitors may result in an increased
emphasis on variety at a reasonable price
• The Internet makes it easier to offer a wide
variety of products
• The supply chain must change to meet these
changing competitive conditions
 Business Environment

• Regulatory requirements over different

segments of the supply chain
• Taxation rules
• Import / Export Duties
• Ethical shades
• Government intervention
• Uncertainty
 Segment Ownership

• Trend towards outsourcing

• Different segments owned by different
entities
• Objectives and strategies bound to differ
• Alignment essential to maximise supply
chain surplus while delivering results
• Multichannel requirements
 Infrastructure & Logistics

• Reach
• Mode of transport
• Quality
• Capability
• Impact of natural events
 Sustainability

• Customer expectation of environment friendly

supply chains

• Impact of non sustainable practices on

Corporate image

• Community pressure affecting location decisions

 Expanding Strategic Scope
• Scope of strategic alignment
– The functions and stages within a supply
chain that devise an integrated strategy with a
shared objective

– One extreme: each function at each stage

develops its own strategy

– Other extreme: all functions in all stages

devise a strategy jointly
 Expanding Strategic Scope
• Five categories:
– Intracompany intraoperation scope

– Intracompany intrafunctional scope

– Intracompany interfunctional scope

– Intercompany interfunctional scope

– Flexible interfunctional scope

 Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
Intracompany Intraoperational Scope

• One operation within a functional area

in a company
• Each operation within each stage of the
supply chain devises a strategy
independently and attempts to optimize
its own performance independently
• Usually results in different operations
having conflicting objectives – does not
maximize total supply chain profits
 Strategic Scope:
Intracompany Intraoperation Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitiv
e Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 Intracompany Intrafunctional Scope

• Strategic fit is expanded to include all

operations within a function
• Attempt to maximize performance for
the entire function
 Strategic Scope:
Intracompany Intrafunctional Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 Intracompany Interfunctional Scope

• All functional strategies within a

company are developed to support each
other and the company’s competitive
strategy
• Strategic fit is expanded to include all
functions in a firm
• Goal is to maximize company profit
 Strategic Scope:
Intracompany Interfunctional Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
Intercompany Interfunctional Scope
• The only positive cash flow for the
supply chain occurs when the
customer pays for the product –
all other cash flows are resettling of
accounts within the chain and add to
total supply chain cost
• Supply chain surplus
– Difference between what the customer
pays and total supply chain cost
– Total profit to be shared among all
members of the supply chain
 Intercompany Interfunctional Scope

• Increasing supply chain surplus increases the

amount to be shared
• All stages coordinate strategy across all functions
to ensure that they best meet the customer’s
needs and maximize supply chain surplus
• Also provides more speed by managing the
interfaces between supply chain stages
• Each company must evaluate its actions in the
context of the entire supply chain
 Strategic Scope:
Intercompany Interfunctional Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
Flexible Intercompany Interfunctional Scope

• Ability to achieve strategic fit when

partnering with stages that change over
time in the supply chain
• Customer needs and members of the
supply chain change over time
• A firm may have to partner with many
different firms over time
Supply Chain Management
Performance Drivers and Measures

Indian Institute of Foreign Trade

 Overview
• Drivers of supply chain performance
• A framework for structuring drivers
• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing
• Performance Measures
• Obstacles to achieving fit
Supply Chain Snapshot
 Drivers of Supply Chain
Performance
• Facilities
– places where inventory is stored, assembled, or
fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply
chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
 Drivers of Supply Chain
Performance
• Information
– data and analysis regarding inventory, transportation,
facilities throughout the supply chain
– potentially the biggest driver of supply chain
performance
• Sourcing
– functions a firm performs and functions that are
outsourced
• Pricing
– Price associated with goods and services provided by
a firm to the supply chain
 A Framework for
Structuring Drivers

Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

Supply Chain Decisions
Structuring Drivers

Strategy
(Design)

Planning

Operation
 Supply Chain Decisions
Structuring Drivers

• Strategic

• How many warehouses should Flipkart build?

• Where should they be built?
• Strategic decisions relate to allocation of
resources.
 Supply Chain Decisions
Structuring Drivers

• Planning

• Which SKUs are stocked in house?

• What replenishment policies to follow?
• Geographical responsibility by warehouse.
• Planning decisions relate to policies for
utilization of resources.
 Supply Chain Decisions
Structuring Drivers

• Operation

• How is a specific order to be filled?

• From where?
• Shipping mode etc.
• Operation decisions relate to filling specific
orders given the resources.
 Supply Chain Decisions
Structuring Drivers

• The time frame for each decision

• how the strategic decision defines constraints
for the planning decision
• which defines constraints for the operation
decision.
 Facilities

• Role in the supply chain

• Role in the competitive strategy
• Components of inventory decisions
Facilities : Role in the Supply Chain

• The “where” of the supply chain

• Manufacturing or storage (warehouses)
Facilities : Role in Competitive Strategy

• Economies of scale (efficiency priority)

• Larger number of smaller facilities
(responsiveness priority)
Components of Facilities Decisions
• Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other factors to consider (e.g., proximity to
customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused
versus process focused)
• Warehousing methodology (SKU storage, job
lot storage, cross-docking)
• Overall trade-off: Responsiveness versus
efficiency
Facility related Performance Measures

• Product Variety
• Cost per unit
• Capacity utilisation
• Defective percentage
• Production batch size
• Flow time efficiency
• Cost per unit Area
• Profit per unit Area
 Inventory

• Role in the supply chain

• Role in the competitive strategy
• Components of inventory decisions
Inventory: Role in the Supply Chain
• Inventory exists because of a mismatch
between supply and demand
• Source of cost and influence on
responsiveness
• Impact on
– material flow time: time elapsed between when
material enters the supply chain to when it exits
the supply chain
– throughput
• rate at which sales to end consumers occur
• I = RT (Little’s Law)
• I = inventory; R = throughput; T = flow time
Inventory : Role in Competitive Strategy
• If responsiveness is a strategic
competitive priority, a firm can locate
larger amounts of inventory closer to
customers
• If cost is more important, inventory can be
reduced to make the firm more efficient
• Trade-off
Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments
– Depends on lot size
• Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible
production
• Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
Inventory related Performance Measures

• Average Inventory
• Inventory Turns
• Fill Rate
• Out of Stock Time
• Obsolete Inventory
• Inventory Loss – Damage , Pilferage
• ICC
 Transportation

• Role in the supply chain

• Role in the competitive strategy
• Components of transportation decisions
 Transportation: Role in the Supply
Chain

• Moves the product between stages in the

supply chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities
 Transportation:
Role in the Competitive Strategy
• If responsiveness is a strategic
competitive priority, then faster
transportation modes can provide greater
responsiveness to customers who are
willing to pay for it
• Can also use slower transportation modes
for customers whose priority is price (cost)
• Can also consider both inventory and
transportation to find the right balance
 Components of
Transportation Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource
• Overall trade-off: Responsiveness versus
efficiency
 Transportation related Performance
Measures
• Inbound Transportation
– Average
• Cost
• Size
• Cost per Shipment
• Outbound Transportation
– Average
• Cost
• Size
• Cost per Shipment
 Transportation related Performance
Measures
• Cost per mode of shipment
• Value , Percentage
– Road
– Rail
– Sea
– Air
• Premium Shipment
– Cost
– Percentage
 Information

• Role in the supply chain

• Role in the competitive strategy
• Components of information decisions
 Information: Role in
the Supply Chain

• The connection between the various

stages in the supply chain – allows
coordination between stages
• Crucial to daily operation of each stage in
a supply chain – e.g., production
scheduling, inventory levels
 Information:
Role in the Competitive Strategy
• Allows supply chain to become more
efficient and more responsive at the same
time (reduces the need for a trade-off)
• Information technology
• What information is most valuable?
• Relevant information – overload
• Utility / Limitation – ability to act
 Components of Information
Decisions
• Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
• Overall trade-off: Responsiveness versus
efficiency
 Information related Performance
Measures
• Update frequency
• Data error percent
• System uptime
• Information Cost
– Capex
– Operating
 Sourcing

• Role in the supply chain

• Role in the competitive strategy
• Components of sourcing decisions
 Sourcing: Role in the Supply Chain
• Set of business processes required to
purchase goods and services in a supply
chain
• Supplier selection, single vs. multiple
suppliers, contract negotiation
 Sourcing:
Role in the Competitive Strategy

• Sourcing decisions are crucial because

they affect the level of efficiency and
responsiveness in a supply chain
• In-house vs. outsource decisions-
improving efficiency and responsiveness
Components of Sourcing Decisions

• In-house versus outsource decisions

• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply
chain profits
 Sourcing related Performance
Measures
• On time delivery percentage
• Quality of supplies
• Cost
– Average for a period
– Range across suppliers
– Decrease / Increase percentage
• Lead time
• Quantity – average lot
• Payables ageing / outstanding
 Pricing

• Role in the supply chain

• Role in the competitive strategy
• Components of pricing decisions
 Pricing: Role in
the Supply Chain

• Pricing determines the amount to charge

customers in a supply chain
• Pricing strategies can be used to match
demand and supply
 Pricing :
Role in the Competitive Strategy

• Firms can utilize optimal pricing strategies

to improve efficiency and responsiveness
• Low price and low product availability; vary
prices by response times
 Components of Pricing Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low
pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits
Pricing related Performance Measures
• Profitability
• Receivables ageing / outstanding
• Sale price range and average
• Order size range and average
• Price – self v/s competition
• Orders at different price
• Incremental cost
– Fixed
– Variable
 Considerations for
Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity / Flexibility

Dedicated
Information What information is best suited for each
objective
Sourcing Cost Flexibility

Pricing Predictability Influence

 Obstacles to Achieving
Strategic Fit

• Increasing variety of products

• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies
Major Obstacles to Achieving Fit
• Multiple owners / incentives in a supply
chain

Local optimization and lack of global fit

• Increasing product variety / shrinking life

cycles / customer fragmentation

Increasing implied uncertainty

 Supply Chain Management

Sourcing / Purchasing / Procurement

Indian Institute of Foreign Trade

 Overview
• The Make or Buy Decision
• The Role of Sourcing in a Supply Chain
• Role of the Supply Base
• Supplier Scoring and Assessment
• Supplier Selection and Contracts
• Design Collaboration
• The Procurement Process
• Sourcing Planning and Analysis
• Making Sourcing Decisions in Practice
 Sourcing Decisions
The Make or Buy Decision
Outsourcing –
Buying materials and components from suppliers
instead of making them in-house. The trend has
moved toward outsourcing.
Backward vertical integration –
Refers to acquiring sources of supply
Forward vertical integration –
Refers to acquiring customer’s operations
The Make or Buy decision is a strategic decision
 Sourcing Decisions
The Make or Buy Decision
Reasons for Buying or Outsourcing

– Cost advantage –
• Especially for components that are non-vital to the
organization’s operations, suppliers may have
economies of scale

– Insufficient capacity –
• A firm may be at or near capacity and
subcontracting from a supplier may make better
sense
 Sourcing Decisions
The Make or Buy Decision
Reasons for Buying or Outsourcing

– Lack of expertise –
• Firm may not have the necessary technology and
expertise

– Quality –
• Suppliers have better technology, process, skilled
labor, and the advantage of economy of scale
 Sourcing Decisions
The Make or Buy Decision
Reasons for Making
– Protect proprietary technology
– No competent supplier
– Better quality control
– Use existing idle capacity
– Control of lead-time transportation, and
warehousing cost
– Lower cost
 Sourcing Decisions
The Make or Buy Decision
The Make-or-Buy Break-Even Analysis
Costs Make Buy
Fixed INR 25000 INR 500
Variable INR 5 INR 7
Annual Requirements 15,000

Find break-even point Q by setting the total cost of the two options
equal to
one another and solving for Q:
Total Cost to Make = Total Cost to Buy
25,000 + 5Q = 500 + 7Q
7Q − 5Q = 25,000 − 500
2Q = 24,500
Q = 12,250 units = Break-even point
 Sourcing Decisions
The Make or Buy Decision
The Make-or-Buy Break-Even Analysis
Total Cost for both options at the Break-even Point
TCBE = 25,000 + 5×12,250 = INR 86,250
Costs Make Buy
Fixed INR 25000 INR 500 Total Cost for the Make Option at 15,000 units;
Variable INR 5 INR 7
TCMake = 25,000 + 5×15,000 = INR 100,000
Annual Requirements 15,000

Total Cost for the Buy Option at 15,000 units;

TCBuy = 500 + 7×15,000 = INR 105,500

Cost Difference =TCBuy −TCMake

= 105,500 − 100,000
= INR 5,500
 The Role of Sourcing
in a Supply Chain
• Sourcing is the set of business processes
required to purchase goods and services
• Sourcing processes include:
– Supplier scoring and assessment
– Supplier selection and contract negotiation
– Design collaboration
– Procurement
– Sourcing planning and analysis
Benefits of Effective Sourcing Decisions

• Better economies of scale can be

achieved if orders are aggregated

• More efficient procurement transactions

can significantly reduce the overall cost of
purchasing

• Design collaboration can result in products

that are easier to manufacture and
distribute, resulting in lower overall costs
and faster development
Benefits of Effective Sourcing Decisions

• Good procurement processes can

facilitate coordination with suppliers

• Appropriate supplier contracts can allow

for the sharing of risk

• Firms can achieve a lower purchase price

by increasing competition through the use
of auctions
 Roles of Supply Base
Supply Base - list of suppliers that a firm uses to acquire its
materials, services, supplies, and equipment
– Firms emphasize long-term strategic supplier alliances consolidating
volume into one or fewer suppliers, resulting in a smaller supply base

Preferred suppliers provide:

– Product and process technology and expertise to support
buyer’s operations, particularly new product development and
value analysis
– Information on latest trends in materials, processes, or designs
– Information on the supply market
– Capacity for meeting unexpected demand
– Cost efficiency due to economies of scale
 Supplier Scoring and Assessment
• Supplier performance should be compared
on the basis of the supplier’s impact on
total cost

• There are several other factors besides

purchase price that influence total cost
Supplier Assessment Factors
The process of selecting suppliers, is complex and
should be based on multiple criteria:
• Location
• Quality
• Reliability
• Capacity
• Communication capability
• Information Coordination Capability
• Sustainability
• Compliance Record
 Supplier Assessment Factors
The process of selecting suppliers, is complex and should
be based on multiple criteria:
• Product and process
technologies
• Willingness to share
technologies &
information
• Design Collaboration
Capability
– Early supplier involvement
(ESI)
– Concurrent engineering
(CE)
 Supplier Assessment Factors
The process of selecting suppliers, is complex and
should be based on multiple criteria:

• Cost
• Total cost of ownership or acquisition
• Commercial Terms
• Inbound Transportation Cost
• Exchange Rates, Taxes, Duties
• Supplier Viability
 Supplier Assessment Factors
The process of selecting suppliers, is complex and
should be based on multiple criteria:

• Service
• Order system & cycle time
• Replenishment Lead Time
• On-Time Performance
• Delivery Frequency / Minimum Lot Size
• Supply Flexibility
 Total Cost of Ownership
• Price
– Discounts
• Commercial Terms
– Payment
– Delivery
• Lot size
• Delivery Frequency
• Taxes and Duties
 Total Cost of Ownership
• Logistic Costs
– Packaging
• Long / short distance
• Seaworthy
• Roadworthy
– Transportation
– Loading and Unloading
 Total Cost of Ownership
• Quality cost
– Inspection
– Segregation
– Rework
– Disruption
– Warranty
– Product liability
– Goods replacement and return
– Reputation
 Total Cost of Ownership
• Inventory cost
– Self
– Supplier
• Transaction cost
– Order processing
– Communication
– Travel
 Total Cost of Ownership
• For Capital Equipment
– Tooling cost
– Operating cost
– AMC
– Repair cost
– Downtime cost
– Environmental cost
 How Many Suppliers to Use
Single-source - a risky proposition. Current trends favor
fewer sources.
Reasons Favoring a Reasons Favoring
Single Supplier Multiple Suppliers
 To establish a good  Need capacity
relationship  Spread risk of supply
 Less quality variability interruption
 Lower cost  Create competition
 Transportation economies  Information
 Proprietary product or  Dealing with special
process kinds of business
 Volume too small to split
 Supplier Selection and Contracts

• Contracts for Product Availability and Supply

Chain Profits
– Buyback Contracts
– Revenue-Sharing Contracts
– Quantity Flexibility Contracts
• Contracts to Coordinate Supply Chain Costs
• Contracts to Increase Agent Effort
• Contracts to Induce Performance Improvement
 Contracts for Product Availability
and Supply Chain Profits

• Shortcomings in supply chain performance

– buyer and supplier are separate organizations
– each tries to optimize its own profit
• Total supply chain profits might therefore
be suboptimal
• Coordinated actions required to have a
common objective of maximizing total
supply chain profits
 Contracts for Product Availability
and Supply Chain Profits

• Double marginalisation results in

suboptimal order quantity
• To deal with this problem
– Design a contract that encourages a buyer to
purchase more
– Increase the level of product availability
– Supplier must share in some of the buyer’s
demand uncertainty, however
 Contracts for Product Availability and
Supply Chain Profits: Buyback Contracts
• Allows a retailer to return unsold inventory
– up to a specified amount
– at an agreed upon price
• Increases the optimal order quantity for
the retailer
• Results in
– higher product availability
– higher profits
for both the retailer and the supplier
 Contracts for Product Availability and
Supply Chain Profits: Buyback Contracts

• Most effective for products with low

variable cost, such as books, magazines,
newspapers etc.
• Downside
– buyback contract results in surplus inventory
– that must be disposed of
– which increases supply chain costs
 Contracts for Product Availability and
Supply Chain Profits: Buyback Contracts

• Can also increase information distortion

– through the supply chain
– because the supply chain reacts to retail
orders
– not actual customer demand
 Contracts for Product Availability and
Supply Chain Profits: Revenue Sharing
Contracts

• The buyer pays a lower initial amount

– for each unit purchased from the supplier
– but shares a fraction of the revenue for each
unit sold
 Contracts for Product Availability and
Supply Chain Profits: Revenue Sharing
Contracts

• Decreases
– cost per unit charged to the retailer
– which effectively decreases the cost of
overstocking
• Can result in supply chain information
distortion
– as in the case of buyback contracts
 Contracts for Product Availability and
Supply Chain Profits: Quantity Flexibility
Contracts
• Allows the buyer to modify the order
(within limits) as demand visibility
increases closer to the point of sale
• Better matching of supply and demand
• Increased overall supply chain profits if the
supplier has flexible capacity
• Lower levels of information distortion than
either buyback contracts or revenue
sharing contracts
 Contracts to Coordinate
Supply Chain Costs

• Differences in costs
– at the buyer and supplier
– can lead to decisions that increase total
supply chain costs
• Example: Replenishment order size
placed by the buyer. The buyer’s Order
Quantity and Frequency does not take into
account the supplier’s costs.
 Contracts to Coordinate
Supply Chain Costs
• A quantity discount contract
– may encourage the buyer to purchase a
larger quantity (which would be lower costs
for the supplier)
– which would result in lower total supply chain
costs
• Quantity discounts lead to
– information distortion
– because of order batching
 Contracts to Increase Agent Effort
• Many instances in a supply chain where
agent acts on the behalf of a principal
• Agent’s actions affect the reward for the
principal
• Example: A car dealer who sells the cars
of a manufacturer, as well as those of
other manufacturers
 Contracts to Induce
Performance Improvement
• A buyer may want performance
improvement
– from a supplier
– who would have little incentive to do so
• Shared savings contract
– provides the supplier with
a fraction of the savings
– that result from the performance improvement
 Contracts to Induce
Performance Improvement

• Particularly effective
– where the benefit from improvement accrues
primarily to the buyer,
– but where the effort for the improvement
comes primarily from the supplier
 Design Collaboration
• 50-70 percent of spending at a
manufacturer is through procurement
• 80 percent of the cost of a purchased part
is fixed in the design phase
• Design collaboration with suppliers can
result in
– reduced cost
– improved quality
– decreased time to market
 Design Collaboration

• Important to employ design for

– Manufacturability
– Logistics

• Manufacturers must become effective

design coordinators throughout the supply
chain
 The Procurement Process

• The process in which

– the supplier sends product
– in response to orders placed by the buyer
• Goal is to
– enable orders to be placed
– and delivered
• on schedule
• at the lowest possible overall cost
 The Procurement Process
• Two main categories of purchased goods:
– Direct materials: components used to make
finished goods
– Indirect materials: goods used to support the
operations of a firm

• Focus for direct materials should be on

improving coordination and visibility with
supplier
 The Procurement Process

• Focus for indirect materials should be on

decreasing the transaction cost for each
order
• Procurement for both
– should consolidate orders where possible
– to take advantage of
• economies of scale
• quantity discounts
Sourcing Planning and Analysis
• A firm should periodically analyze
– its procurement spending
– supplier performance
Use this analysis as an input for future sourcing
decisions
• Procurement spending should be analyzed
by
– part
– supplier
to ensure appropriate economies of scale
Sourcing Planning and Analysis
• Supplier performance analysis should be
used to build a portfolio of suppliers with
complementary strengths
– Cheaper but lower performing suppliers
should be used to supply base demand
– Higher performing but more expensive
suppliers should be used to buffer against
variation in
• demand
• supply from the other source
 Purchasing
Centralized vs. Decentralized
Purchasing Organization is dependent on
many factors, such as market conditions &
types of materials required
– Centralized Purchasing - purchasing
department located at the firm’s corporate
office makes all the purchasing decisions
– Decentralized Purchasing - individual, local
purchasing departments, such as plant level,
make their own purchasing decisions
 Purchasing
Centralized vs. Decentralized
Advantages - Advantages -
Centralization Decentralization
• Concentrated volume- • Closer knowledge of
Leveraging purchase requirements
volume • Local sourcing
• Avoid duplication • Less bureaucracy
• Specialization
• Lower transportation
costs
• No competition within
units
• Common supply base
 Purchasing
Centralized vs. Decentralized
• A hybrid purchasing organization
 Decentralized-centralized (large multiunit org)-
decentralized corporate and centralized at business
unit
 Centralized-decentralized (large org w/centralized
control) centralized large national contracts at
corporate level and decentralized items specific to
business unit
 International Purchasing/
Global Sourcing
Reasons for Global Sourcing –
Opportunity to improve quality, cost, and
delivery performance

Potential Challenges –
Requires additional skills and knowledge
to deal with international suppliers,
logistics, communication, political
environment, and other issues
 Procurement for Government &
Non-Profit Agencies
Public Procurement or Public Purchasing – purchasing
& supply function for government & non-profit sector.

Public Procurement is characterized by:

 Competitive bidding - contract is usually awarded to lowest priced
responsive & responsible bidder
 Sealed Bids are used to satisfy the Invitation for Bid (IFB) and are
opened in public display
 Bid or Surety Bonds - successful bidder will accept contract
 Performance Bonds - work will be on time and meet specifications
 Bonus / Penalty Terms - incentive to fulfill contract
 Payment Bonds - protection against 3rd party liens not fulfilled by
bidder
 Making Sourcing
Decisions in Practice

• Use multifunction teams

• Ensure appropriate coordination across
regions and business units
• Always evaluate the total cost of
ownership
• Build long-term relationships with key
suppliers
Supply Chain Management

Inventory Management

Indian Institute of Foreign Trade

 Overview
• Functions of Inventory
• Types of Inventory
• Managing Inventory
– ABC Analysis
– Record Accuracy
– Cycle Counting
– Control of Service Inventories
 Overview
• Inventory Models
– Independent vs. Dependent Demand
– Holding, Ordering, and Setup Costs
• Inventory Models for Independent Demand
– The Basic Economic Order Quantity (EOQ) Model
– Minimizing Costs
– Reorder Points
– Production Order Quantity Model
– Quantity Discount Models
 Overview
• Probabilistic Models and Safety Stock
– Other Probabilistic Models
• Single-Period Model
• Fixed-Period (P) Systems
 Inventory Management

The objective of inventory management is to

strike a balance between inventory
investment and customer service
 Functions of Inventory
• To decouple or separate various parts of
the production process
• To decouple the firm from fluctuations in
demand and provide a stock of goods
that will provide a selection for customers
• To take advantage of quantity discounts
• To hedge against inflation
 Types of Inventory
• Raw material
– Purchased but not processed
• Work-in-process
– Undergone some change but not completed
– A function of cycle time for a product
• Maintenance/repair/operating (MRO)
– Necessary to keep machinery and processes productive
• Finished goods
– Completed product awaiting shipment
 ABC Analysis
• Divides inventory into three classes based
on annual dollar volume
– Class A - high annual value
– Class B - medium annual value
– Class C - low annual dollar value
(Value = Price X Quantity)

• Used to establish policies that focus on the

few critical parts and not the many trivial
ones
 ABC Analysis

Percent of Percent of
Item Annual Unit Annual
Number of Annual
Stock Volume x Cost = Value Class
Items Value
Number (units) (INR) (INR)
Stocked (%)
#10286 20% 1,000 90.00 90,000 38.8 A

#11526 500 154.00 77,000 33.2 A

#12760 1,550 17.00 26,350 11.3 B

#10867 30% 350 42.86 15,001 6.4 B

#10500 1,000 12.50 12,500 5.4 B

 ABC Analysis

Percent of Unit Annual Percent of

Item Annual
Number of Cost Value Annual
Stock Volume x = Class
Items Value
Number (units) (INR) (INR)
Stocked (%)
#12572 600 14.17 8,502 3.7 C

#14075 2,000 .60 1,200 0.5 C

#01036 50% 100 8.50 850 0.4 C

#01307 1,200 .42 504 0.2 C

#10572 250 .60 150 0.1 C

8,550 232,057 100.00

 ABC Analysis
A Items
80 –
Percent of annual value

70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items
 ABC Analysis
• Criteria other than annual value may be
used
• Anticipated engineering changes
• Delivery problems
• Quality problems
• High unit cost
 ABC Analysis

• Policies employed may include

• More emphasis on supplier development
for A items
• Tighter physical inventory control for A
items
• More care in forecasting A items
 Cycle Counting

• Items are counted and records updated on a periodic basis

• Often used with ABC analysis
to determine cycle
• Has several advantages
• Eliminates shutdowns and interruptions
• Eliminates annual inventory adjustment
• Trained personnel audit inventory accuracy
• Allows causes of errors to be identified and corrected
• Maintains accurate inventory records
 Cycle Counting Example
• 5,000 items in inventory, 500 A items, 1,750 B items,
2,750 C items
• Policy is to count A items every month (20 working days),
B items every quarter (60 days), and C items every six
months (120 days)

Item Number of Items

Class Quantity Cycle Counting Policy Counted per Day
A 500 Each month 500/20 = 25/day
B 1,750 Each quarter 1,750/60 = 29/day
C 2,750 Every 6 months 2,750/120 = 23/day
77/day
 Control of Service Inventories

• Can be a critical component of profitability

• Losses may come from shrinkage or pilferage
• Applicable techniques include
– Good personnel selection, training, and discipline
– Tight control on incoming shipments
– Effective control on all goods leaving facility
 Independent v/s
Dependent Demand

• Independent demand - the demand for

item is independent of the demand for
any other item.
• Dependent demand - the demand for
item is dependent upon the demand for
some other item.
Holding, Ordering, and Setup Costs
• Holding costs - the costs of holding or
“carrying” inventory over time
• Ordering costs - the costs of placing an
order and receiving goods
• Setup costs - cost to prepare a machine
or process for manufacturing an order
 Holding Costs
Cost (and range)
Category as a Percent of
Inventory Value
Warehousing costs (building rent or 2% (2 - 6%)
depreciation, operating costs, taxes,
insurance)
Material handling costs (equipment lease or 2% (1 - 3.5%)
depreciation, power, operating cost)
Labor cost 1% (1 - 3%)
Investment costs (borrowing costs, taxes, 12% (6 - 24%)
and insurance on inventory)
Pilferage, space, and obsolescence 1% (1 - 4%)
Overall carrying cost 18%
 Holding Costs
Cost (and range)
Category as a Percent of
Inventory Value
Warehousing costs (building rent or 2% (2 - 6%)
depreciation, operating costs, taxes,
insurance)
Material handling costs (equipment lease or 2% (1 - 3.5%)
depreciation, power, operating cost)
Labor cost 1% (1 - 3%)
Investment costs (borrowing costs, taxes, 12% (6 - 24%)
and insurance on inventory)
Pilferage, space, and obsolescence 1% (1 - 4%)
Overall carrying cost 18%
 Inventory Models for Independent
Demand
• Need to determine when and how
much to order

• Basic economic order quantity

• Production order quantity
• Quantity discount model
 Basic EOQ Model
• Important assumptions
– Demand is known, constant, and independent
– Lead time is known and constant
– Receipt of inventory is instantaneous and
complete
– Quantity discounts are not possible
– Only variable costs are setup and holding
– Stock outs can be completely avoided
 Inventory Usage Over Time

Usage rate Average

Order inventory
Inventory level

quantity = Q on hand
(maximum
Q
inventory
level) 2

Minimum
inventory

0
Time
 Minimizing Costs
Objective is to minimize total costs
Total cost of
holding and
setup (order)

Minimum
total cost
Annual cost

Holding cost

Setup (or order)

cost
Optimal order Order quantity
quantity (Q*)
 The EOQ Model
Annual setup cost =
D
Q
S

Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year

Annual setup cost = (Number of orders placed per year)

x (Setup or order cost per order)

Annual demand Setup or order

=
Number of units in each order cost per order

= D (S)
Q
 The EOQ Model
Annual setup cost =
D
Q
S
Q
Q = Number of pieces per order Annual holding cost = H
2
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year

Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)

Order quantity
= (Holding cost per unit per year)
2

= Q (H)
2
 The EOQ Model
Annual setup cost =
D
Q
S
Q
Q = Number of pieces per order Annual holding cost = H
2
Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year

Optimal order quantity is found when annual setup cost

equals annual holding cost

D Q
S = H
Q 2
Solving for Q*
2DS = Q2H
Q2 = 2DS/H
Q* = 2DS/H
 An EOQ Example
Determine optimal number of rivets to order
D = 1,000 units
S = INR10 per order
H = INR 0.50 per unit per year

2DS
Q* =
H
2(1,000)(10)
Q* = = 40,000 = 200 units
0.50
 An EOQ Example
Determine optimal number of rivets to order
D = 1,000 units Q* = 200 units
S = INR 10 per order
H = INR 0.50 per unit per year

Expected Demand
number of =N= = D
orders Order quantity Q*

N= 1,000 = 5 orders per year

200
 An EOQ Example
Determine optimal number of rivets to order
D = 1,000 units Q* = 200 units
S = INR10 per order N = 5 orders per year
H = INR 0.50 per unit per year

Expected time Number of working

between orders days per year
=T=
N

T= 250 = 50 days between orders

5
 An EOQ Example
Determine optimal number of rivets to order
D = 1,000 units Q* = 200 units
S = INR 10 per order N = 5 orders per year
H = INR 0.50 per unit per year T = 50 days

Total annual cost = Setup cost + Holding cost

D Q
TC = S + H
Q 2

1,000 200
TC = (INR10) + (INR.50)
200 2

TC = (5)(INR10) + (100)(INR .50) = INR 50 + INR 50 = INR100

 An EOQ Example
Management underestimated demand by 50%
D = 1,000 units 1,500 units Q* = 200 units
S = INR10 per order N = 5 orders per year
H = INR.50 per unit per year T = 50 days

D Q
TC = Q S + 2 H

1,500 200
TC = (INR10) + (INR 0.50) = INR 75 + INR 50 = INR 125
200 2

Total annual cost increases by 25%

 An EOQ Example
Actual EOQ for new demand is 244.9 units
D = 1,000 units 1,500 units Q* = 244.9 units
S = INR 10 per order N = 5 orders per year
H = INR 0.50 per unit per year T = 50 days

D Q
TC = Q S + 2 H
Only 2% less than
1,500 244.9 the total cost of INR
TC = (INR10) + (INR 0.50) 125 when the order
244.9 2
quantity was 200

TC = INR 61.24 + INR 61.24 = INR122.48

The total cost curve is relatively flat in the area of the EOQ
 Reorder Points
 EOQ answers the “how much” question
 The reorder point (ROP) tells “when” to
order
Demand Lead time for a
ROP = per day new order in days
=dxL
D
d= Number of working days in a year
 Reorder Point Curve
Q*
Inventory level (units)

Resupply takes place as order arrives

Slope = units/day = d

ROP
(units)

Time (days)
Lead time = L
 Reorder Point Example
Demand = 8,000 Phones per year
250 working day year
Lead time for orders is 3 working days

D
d=
Number of working days in a year

= 8,000/250 = 32 units

ROP = d x L

= 32 units per day x 3 days = 96 units

Production Order Quantity Model

• Used when inventory builds up over a

period of time after an order is placed

• Used when units are produced and sold

simultaneously
 Production Order Quantity
Model
Part of inventory cycle during
which production (and usage)
is taking place
Inventory level

Demand part of cycle

with no production
Maximum
inventory

t Time
 Production Order Quantity Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
t = Length of the production run in days
Annual inventory = (Average inventory level) x Holding cost
holding cost per unit per year

Annual inventory = (Maximum inventory level)/2

level

Maximum = Total produced during – Total used during

inventory level the production run the production run

= pt – dt
 Production Order Quantity
Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
t = Length of the production run in days

Maximum Total produced during Total used during

= –
inventory level the production run the production run
= pt – dt
However, Q = total produced = pt ; thus t = Q/p

Maximum Q Q d
inventory level = p –d =Q 1–
p p p

Maximum inventory level Q d

Holding cost = (H) = 1– H
2 2 p
Production Order Quantity Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
D = Annual demand

Setup cost = (D/Q)S

Holding cost = 1 HQ[1 - (d/p)]
2

(D/Q)S = 1 HQ[1 - (d/p)]

2
2DS
Q2 =
H [1 - (d/p)]

Q* = 2DS
p H[1 - (d/p)]
 Production Order Quantity
Example
D = 1,000 units p = 8 units per day
S = INR 10 d = 4 units per day
H = INR 0.50 per unit per year

Q* = 2DS
H[1 - (d/p)]

Q* = 2(1,000 )(10) = 80,000

0.50[1 - (4/8)]

= 282.8 or 283 units

Production Order Quantity Model

Note:

D 1,000
d=4= =
Number of days the plant is in operation 250

When annual data are used the equation becomes

2DS
Q* =
H 1– annual demand rate
annual production rate
 Quantity Discount Models
 Reduced prices are often available when
larger quantities are purchased
 Trade-off is between reduced product cost
and increased holding cost

Total cost = Setup cost + Holding cost + Product cost

D Q
TC = Q S + 2 H + PD
 Quantity Discount Models
A typical quantity discount schedule
D = Annual Requirement = 5000 units
S = Ordering Cost per Order = INR 49
I = Inventory Holding Cost as % of Price = 0.2

Discount
Discount
Discount Quantity Discount (%) Price (P)
Number
(INR)
1 0 to 999 no discount 5.00
2 1,000 to 1,999 4 4.80
3 2,000 and over 5 4.75
 Quantity Discount Models
Steps in analyzing a quantity discount
• For each discount, calculate Q*
• If Q* for a discount doesn’t qualify,
choose the smallest possible order size
to get the discount
• Compute the total cost for each Q* or
adjusted value from Step 2
• Select the Q* that gives the lowest total
cost
 Quantity Discount Models
Total cost curve for discount 2
Total cost
curve for
discount 1
Total cost INR

Total cost curve for discount 3

b
a Q* for discount 2 is below the allowable range at point a
and must be adjusted upward to 1,000 units at point b

1st price 2nd price

break break

0 1,000 2,000
Order quantity
 Quantity Discount Example
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 units /order
(.2)(5.00)

2(5,000)(49)
Q2* = = 714 units /order
(.2)(4.80)

2(5,000)(49)
Q3* = = 718 units /order
(.2)(4.75)
 Quantity Discount Example
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 units/order
(.2)(5.00)

2(5,000)(49)
Q2* = = 714 units/order
(.2)(4.80) 1,000 — adjusted
2(5,000)(49)
Q3* = = 718 units/order
(.2)(4.75)
2,000 — adjusted
 Quantity Discount Example
Annual Annual Annual
Unit
Discount Order Product Ordering Holding Total Cost
Price
Number Quantity Cost Cost Cost (INR)
(INR )
(INR) (INR) (INR)
1 5.00 700 25,000 350 350 25,700

2 4.80 1,000 24,000 245 480 24,725

3 4.75 2,000 23,750 122.50 950 24,822.50

Choose the price and quantity that gives the lowest

total cost
Buy 1,000 units at INR 4.80 per unit
 The Role of Safety Inventory
in a Supply Chain
• Forecasts are rarely completely accurate
• If average demand is 1000 units per week, then
– half the time actual demand will be greater than 1000
– half the time actual demand will be less than 1000
– what happens when actual demand is greater than 1000?
• If you kept only enough inventory in stock to satisfy
average demand, half the time you would run out
• Safety inventory: Inventory carried for the purpose of
satisfying demand that exceeds the amount forecasted
in a given period
 Role of Safety Inventory
• Average inventory is therefore cycle inventory
plus safety inventory
• There is a fundamental tradeoff:
– Raising the level of safety inventory provides higher
levels of product availability and customer service
– Raising the level of safety inventory also raises the
level of average inventory and therefore increases
holding costs
• Very important in high-tech and FMCG industries
where obsolescence or perishability is a significant
risk
 Two Questions to Answer in
Planning Safety Inventory
• What is the appropriate level of safety
inventory to carry?

• What actions can be taken to improve

product availability while reducing safety
inventory?
 Determining the Appropriate
Level of Safety Inventory
• Measuring demand uncertainty
• Measuring product availability
• Replenishment policies
• Evaluating cycle service level and fill rate
• Evaluating safety level given desired cycle
service level or fill rate
• Impact of required product availability and
uncertainty on safety inventory
 Determining the Appropriate
Level of Safety Inventory
• Appropriate level of safety inventory determined
by:
– supply or demand uncertainty
– desired level of product availability
• Higher levels of uncertainty require higher levels
of safety inventory given a particular desired
level of product availability
• Higher levels of desired product availability
require higher levels of safety inventory given a
particular level of uncertainty
Measuring Demand Uncertainty
• Demand has a systematic component and a random
component
• The estimate of the random component is the measure
of demand uncertainty
• Random component is usually estimated by the standard
deviation of demand
• Notation:
D = Average demand per period
sD = standard deviation of demand per period
L = lead time = time between when an order is placed and when it
is received
• Uncertainty of demand during lead time is what is
important
 Measuring Product Availability
• Product availability: a firm’s ability to fill a
customer’s order out of available inventory
• Stockout: a customer order arrives when product
is not available
• Product fill rate (fr): fraction of demand that is
satisfied from product in inventory
• Order fill rate: fraction of orders that are filled
from available inventory
• Cycle service level: fraction of replenishment
cycles that end with all customer demand met
 Replenishment Policies
• Replenishment policy: decisions regarding when
to reorder and how much to reorder
• Continuous review: inventory is continuously
monitored and an order of size Q is placed when
the inventory level reaches the reorder point
ROP
• Periodic review: inventory is checked at regular
(periodic) intervals and an order is placed to
raise the inventory to a specified threshold (the
“order-up-to” level)
 Probabilistic Models and
Safety Stock
 Used when demand is not constant or certain
 Use safety stock to achieve a desired service
level and avoid stock outs

ROP = d x L + ss

Annual stockout costs = the sum of the units short x the probability
x the stockout cost/unit
x the number of orders per year
 Safety Stock Example
ROP = 50 units Stock out cost = INR40 per frame
Orders per year = 6 Carrying cost = INR 5 per frame per year

Number of Units Probability

30 .2
40 .2
ROP  50 .3
60 .2
70 .1
1.0
 Safety Stock Example
ROP = 50 units Stock out cost = INR 40 per frame
Orders per year = 6 Carrying cost = INR 5 per frame per year

Total
Safety Additional Holding Cost
Stock Cost (INR) Stock out Cost (INR) (INR)

20 (20)(5) =100 0 100

10 (10)(5) = 50 (10)(.1)(40)(6) = 240 290

0 0 (10)(.2)(40)(6) + (20)(.1)(40)(6) = 960 960

A safety stock of 20 frames gives the lowest total cost

ROP = 50 + 20 = 70 frames
 Probabilistic Demand
Use prescribed service levels to set safety
stock when the cost of stockouts cannot be
determined

ROP = demand during lead time + ZsdLT

where Z = number of standard deviations

sdLT = standard deviation of demand during lead
time
Probabilistic Demand

Probability of Risk of a stockout

no stockout (5% of area of
95% of the time normal curve)

Mean ROP = ? kits Quantity

demand
350
Safety
stock
0 z
Number of
standard deviations
 Probabilistic Example
Average demand = m = 350 kits
Standard deviation of demand during lead time = sdLT = 10 kits
5% stockout policy (service level = 95%)

Using Table, for an area under the curve of 95%, the Z = 1.65

Safety stock = ZsdLT = 1.65(10) = 16.5 kits

Reorder point = expected demand during lead time + safety

stock
= 350 kits + 16.5 kits of safety stock
= 366.5 or 367 kits
 Probabilistic Demand

Minimum demand during lead time

Inventory level

Maximum demand during lead time

Mean demand during lead time

ROP = 350 + safety stock of 16.5 = 366.5
ROP 
Normal distribution probability of
demand during lead time
Expected demand during lead time (350 kits)

Safety stock 16.5 units

0 Lead
time Time
Place Receive
order order
 Other Probabilistic Models
When data on demand during lead time is
not available, there are other models
available

• When demand is variable and lead

time is constant
• When lead time is variable and
demand is constant
• When both demand and lead time
are variable
 Other Probabilistic Models
Demand is variable and lead time is constant

ROP = (average daily demand

x lead time in days) + ZsdLT

where sd = standard deviation of demand per day

sdLT = sd lead time
 Probabilistic Example
Average daily demand (normally distributed) = 15
Standard deviation = 5
Lead time is constant at 2 days
90% service level desired Z for 90% = 1.28
From Table

ROP = (15 units x 2 days) + ZsdLT

= 30 + 1.28(5)( 2)
= 30 + 9.02 = 39.02 ≈ 39

Safety stock is about 9 units

 Other Probabilistic Models
Lead time is variable and demand is constant

ROP = (daily demand x average lead time in

days) + Z x (daily demand) x sLT

where sLT = standard deviation of lead time in days

 Probabilistic Example
Z for 98% = 2.055
Daily demand (constant) = 10 From Table
Average lead time = 6 days
Standard deviation of lead time = sLT = 3
98% service level desired

ROP = (10 units x 6 days) + 2.055(10 units)(3)

= 60 + 61.65 = 121.65

Reorder point is about 122 units

Other Probabilistic Models
Both demand and lead time are variable

ROP = (average daily demand

x average lead time) + ZsdLT

where sd = standard deviation of demand per day

sLT = standard deviation of lead time in days
sdLT = (average lead time x sd2)
+ (average daily demand)2 x sLT2
 Probabilistic Example
Average daily demand (normally distributed) = 150
Standard deviation = sd = 16
Average lead time 5 days (normally distributed)
Standard deviation = sLT = 1 day
95% service level desired
Z for 95% = 1.65
From Table

ROP = (150 packs x 5 days) + 1.65sdLT

= (150 x 5) + 1.65 (5 days x 162) + (1502 x 12)
= 750 + 1.65(154) = 1,004 packs
 Single Period Model

• Only one order is placed for a product

• Units have little or no value at the end of the
sales period

Cs = Cost of shortage = Sales price/unit – Cost/unit

Co = Cost of extra units = Cost/unit – Salvage value

Service level = Cs
Cs + Co
 Single Period Example
Average demand = m = 120 papers/day
Standard deviation = s = 15 papers
Cs = cost of shortage = INR1.25 - INR.70 = INR.55
Co = cost of extra units = INR.70 - INR.30 = INR.40

Cs
Service level =
Cs + Co

.55 Service
= level
.55 + .40 57.8%

= .55 = .578
.95 m = 120
Optimal stocking level
 Single Period Example

From Table, for the area .578, Z  .20

The optimal stocking level

= 120 copies + (.20)(s)

= 120 + (.20)(15) = 120 + 3 = 123 papers

The stockout risk = 1 – service level

= 1 – .578 = .422 = 42.2%

 Fixed-Period (P) Systems

 Orders placed at the end of a fixed period

 Inventory counted only at end of period
 Order brings inventory up to target level

 Only relevant costs are ordering and holding

 Lead times are known and constant
 Items are independent from one another
 Fixed-Period (P) Systems
Target quantity (T)

Q4
Q2
On-hand inventory

Q1 P
Q3

Time
 Fixed-Period (P) Example
3 jackets are back ordered No jackets are in stock
It is time to place an order Target value = 50

Order amount (Q) = Target (T) - On-

hand inventory - Earlier orders not yet
received + Back orders
Q = 50 - 0 - 0 + 3 = 53 jackets
 Fixed-Period Systems

• Inventory is only counted at each

review period
• May be scheduled at convenient times
• Appropriate in routine situations
• May result in stockouts between
periods
• May require increased safety stock
Impact of Required Product Availability
and Uncertainty on Safety Inventory
• Desired product availability (cycle service level
or fill rate) increases, required safety inventory
increases
• Demand uncertainty (sL) increases, required
safety inventory increases
• Managerial levers to reduce safety inventory
without reducing product availability
– reduce supplier lead time, L (better relationships with
suppliers)
– reduce uncertainty in demand, sL (better forecasts,
better information collection and use)
 Impact of Aggregation
on Safety Inventory
• Models of aggregation
– Centralisation
– Information centralisation
– Specialization
– Product substitution
– Component commonality
– Postponement
 Centralisation
• If number of independent stocking locations
decreases by n, the expected level of safety
inventory will be reduced by square root of n
(square root law)
• Many e-commerce retailers attempt to take
advantage of centralisation compared to bricks
and mortar retailers
• Aggregation has two major disadvantages:
– Increase in response time to customer order
– Increase in transportation cost to customer
– Some e-commerce firms have reduced aggregation to mitigate
these disadvantages
 Information Centralisation
• Virtual aggregation
• Information system that allows access to current
inventory records in all warehouses from each
warehouse
• Most orders are filled from closest warehouse
• In case of a stockout, another warehouse can fill
the order
• Better responsiveness, lower transportation cost,
higher product availability, but reduced safety
inventory
 Specialization
• Stock all items in each location or stock different
items at different locations?
– Different products may have different demands in
different locations
– There can be benefits from aggregation
• Benefits of aggregation can be affected by:
– coefficient of variation of demand (higher cv yields
greater reduction in safety inventory from
centralisation)
– value of item (high value items provide more benefits
from centralisation)
 Product Substitution

• Substitution: use of one product to satisfy

the demand for another product

– Manufacturer-driven one-way substitution

– Customer-driven two-way substitution

 Component Commonality

• Using common components in a variety of

different products

• Can be an effective approach to exploit

aggregation and reduce component
inventories
 Postponement
• The ability of a supply chain to delay
product differentiation or customisation
until closer to the time the product is sold

• Goal is to have common components in

the supply chain for most of the push
phase and move product differentiation as
close to the pull phase as possible
 Estimating and Managing
Safety Inventory in Practice
• Account for the fact that supply chain
demand is lumpy
• Adjust inventory policies if demand is
seasonal
• Use simulation to test inventory policies
• Start with a pilot
• Monitor service levels
• Focus on reducing safety inventories
Supply Chain Management

Logistics / Transportation

Indian Institute of Foreign Trade

 Overview
• The role of transportation in the Supply Chain
• Factors affecting transportation decisions
• Modes of transportation and their
performance characteristics
• Design options for a transportation network
• Trade-offs in transportation design
• Making transportation decisions in practice
• Performance Metrics
• Challenges
Supply Chain Snapshot
 Introduction
Logistics is necessary to:
– Move goods from suppliers to buyers
– Move finished goods to the customer
Products have little value to the customer
until they are moved to the customer’s point
of consumption
– Time utility- products are delivered at the right
time.
– Place utility- products are delivered to the
desired location.
 Introduction
Logistics is:
“…that part of supply chain management
that plans, implements, and controls the
efficient, effective flow and storage of goods,
services, and related information from point
of origin to point of consumption in order to
meet customer requirements.”

Council of Supply Chain Management

Professionals
 Factors Affecting
Transportation Decisions
• Carrier (party that moves or transports the
product)
– Fixed operating cost
– Vehicle-related cost
– Trip-related cost
• Shipper (party that requires the movement of
the product between two points in the supply
chain)
– Transportation cost
– Inventory cost
– Facility cost
 Transportation Modes
• Trucks
– TL
– LTL
• Rail
• Air
• Package Carriers
• Water
• Pipeline
 Trucks
• Most flexible mode of transportation
• Carries > 80% freight
• Competes with rail & air for short-to-medium
hauls.
• Less-than-truckload (LTL) & truck-load (TL)
carriers move small shipments & fees are higher
for LTL than TL.
• Specialized carriers transport liquid petroleum,
household goods, building materials, & other
specialized items.
 Truckload (TL)

• Low fixed and variable costs

• Major Issues
– Utilization
– Consistent service
– Backhauls
 Less Than Truckload (LTL)
• Higher fixed costs (terminals) and low
variable costs

• Major issues:
– Location of consolidation facilities
– Utilization
– Vehicle routing
– Customer service
 Rail
Compete when the distance is long & the
shipments are heavy or bulky.
– Rail slow & inflexible, but have begun purchasing
motor carriers & can thus offer point-to-point pickup &
delivery service known as trailer-on-flatcar (TOFC)
service.
– Rail companies use each other’s rail cars. Keeping
track of rail cars & getting them where needed can be
problematic.
– Railroad infrastructure & aging equipment are also
problems for the railroads.
 Rail
• Key issues:
– Scheduling to minimize delays / improve
service
– Off-track delays (at pickup and delivery end)
– Yard operations
– Variability of delivery times
 Air
Expensive relative to other modes but fast.
Air carriers transport about 5 % of freight.
– Airlines cannot carry extremely heavy or bulky
cargo.
– For light, high value goods over long
distances quickly. Most small cities & towns
do not have airports.
– Half of the goods transported by air are
carried by freight–only airlines, FedEx.
 Air
• Key issues:
– Location/number of hubs
– Location of fleet bases/crew bases
– Schedule optimization
– Fleet assignment
– Crew scheduling
– Yield management
 Package Carriers
• Companies like FedEx and Blue Dart, that
carry small packages ranging from letters to
shipments of about 150 pounds
• Expensive
• Rapid and reliable delivery
• Small and time-sensitive shipments
• Preferred mode for e-businesses
• Consolidation of shipments (especially
important for package carriers that use air as
a primary method of transport)
 Water
Inexpensive, slow & inflexible. Includes
inland waterway, coastal & intercoastal, &
deep-sea.
– Inland waterway transportation is used for
heavy, bulky, low-value materials (e.g., coal,
grain).
– Competes w/rail & pipeline.
– Water carriers are paired w/trucks for door-to-
door delivery.
 Pipeline

• High fixed cost

• Primarily for crude petroleum, refined
petroleum products, natural gas
• Best for large and predictable demand
 Intermodal
• Use of more than one mode of transportation to
move a shipment to its destination
• Most common example: rail/truck
• Also water/rail/truck or water/truck
• Grown considerably with increased use of
containers
• Increased global trade has also increased use of
intermodal transportation
• More convenient for shippers (one entity provides
the complete service)
• Key issue involves the exchange of information to
facilitate transfer between different transport
modes
 Design Options for a
Transportation Network
• What are the transportation options?
Which one to select? On what basis?
• Direct shipping network
• Direct shipping with milk runs
• All shipments via central DC
• Shipping via DC using milk runs
• Tailored network
 Mode Performance
• Cost
• Lot size
• Delivery time
• Time variability
• Damages
Mode Performance Comparison

Mode Cost Lot Time Variability Damage

1 = least 1= 1 = fastest 1 = least 1 = least
smallest
Road 3 2 2 2 3

Rail 2 3 3 3 4

Air 4 1 1 1 2

Water 1 4 4 4 1
Trade-offs in Transportation Design
• Transportation and inventory cost trade-off
– Choice of transportation mode
– Inventory aggregation
• Transportation cost and responsiveness
trade-off
 Choice of Transportation Mode
• A manager must account for inventory
costs when selecting a mode of
transportation
• A mode with higher transportation costs
can be justified if it results in significantly
lower inventories
 Value Density
• Value Density - Price of the material per
unit weight / volume
• Logistics Cost as a percentage of price
varies with Value Density
• Logistics includes
– Loading / Unloading
– Transportation
– Storage
– Trans shipment
– Material handling
– Losses
– Etc.
 Inventory Aggregation: Inventory
vs. Transportation Cost
• As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases
– Outbound transportation cost increases
• Inventory aggregation decreases supply chain
costs if the product has a high value to weight
ratio, high demand uncertainty, or customer orders
are large
• Inventory aggregation may increase supply chain
costs if the product has a low value to weight ratio,
low demand uncertainty, or customer orders are
small
 Trade-offs Between Transportation
Cost and Customer Responsiveness
• Temporal aggregation is the process of
combining orders across time
• Temporal aggregation reduces
transportation cost because it results in
larger shipments and reduces variation in
shipment sizes
• However, temporal aggregation reduces
customer responsiveness
 Tailored Transportation
• The use of different transportation
networks and modes based on customer
and product characteristics
• Factors affecting tailoring:
– Customer distance and density
– Customer size
– Product demand and value
 Warehousing & Distribution
Warehousing
– Allows firms to store purchases, WIP, & finished
goods and perform break bulk and assessment
services
– Provides faster & more frequent deliveries & better
customer service
Cross docking
– To receive, breakdown, repackage, & distribute
components to a manufacturing location or finished
products to customers warehouse. This description
more accurately refers to a distribution center
Cross Docking
 Warehousing & Distribution
Importance & Types of Warehouses
– Support purchasing, production, & distribution.
– Consolidation warehouses collect LTL shipments for
transport in TL or CL quantities.

Private Warehouses
– owned by the firm storing goods.
– Pro- Reduces the cost, offers greater control,
provides better workforce utilization, & can generate
income & tax advantages through leasing of excess
capacity &/or asset depreciation.
– Con- Owning a private warehouse represents a
financial risk & loss of flexibility.
 Warehousing & Distribution
Public Warehouses
– Owned by for profit orgs & contracted out
– Break bulk - shipments are broken down & items are
combined into specific customer orders.
– Repackaging
– Assembly
– Incoming & outgoing quality inspections.
– Material handling, equipment maintenance, &
documentation services
– Storage
– Pro- Provides flexibility & investment cost savings
– Con- Lack of control.
 Warehousing & Distribution
Risk Pooling & Warehouse Location
– As the number of warehouses increases, the system
becomes more decentralized. Responsiveness &
delivery service increase
– However, warehousing operating & inventory costs
also increase. Trade-off between costs & customer
service must be considered
Risk Pooling
– Describes the relationship between the # of
warehouses, inventory, & customer service.
– Risk pooling is estimated by square-root rule
 Warehousing & Distribution

Risk Pooling & Warehouse Location

– square-root rule
N2
S2 = * (S1)
N1

Where: S1 = Total system stock for the N1 warehouses

S2 = Total system stock for the N2 warehouses
N1 = # of warehouses in the existing system, &
N2 = # of warehouses in the proposed system
 Warehousing & Distribution
Warehouse Location
– Market-positioned strategy - warehouses close to
customers to maximize distribution services &
improve transport economies of scale
– Product positioned strategy - close to supply
source for firm to collect goods & consolidate
– Intermediately positioned strategy - midway
between supply source & customers when distribution
requirements are high & product comes from various
locations
 Warehousing & Distribution
Lean Warehousing
Emphasis on warehousing to support
responsive operations:
– Commitment to customers & service quality
– Reduced lot sizes & shipping quantities
– Emphasis on cross docking
– Increased automation
– Increased assembly operations
 Third Party Logistics (3PL)
• Provide reliable & timely delivery required
by SCM
• Used to significant degree by international
logistics
• Favored by small businesses
• Some firms outsource all of their logistics
needs to a lead logistics provider or fourth
party logistics provider (4PL)
 Routing and Scheduling
in Transportation
• The most important operational decision
related to transportation in a supply chain
is the routing and scheduling of deliveries

• Decision of which customers to be visited

by a particular vehicle and the sequence in
which they will be visited
 Reverse Logistics
• Backwards flow of goods from customers in SC
when goods are returned by a customer in the
supply chain
• Retail returns range 6% to 40% of sales
• Often is an unwanted SC activity
• Poor reverse logistics can hurt firm
• Green reverse logistics programs - designed
to return unneeded products for recycling. These
programs reduce environmental impact on
landfills & deal with dangerous contaminants.
 Making Transportation
Decisions in Practice
• Align transportation strategy with competitive
strategy
• Consider both in-house and outsourced
transportation
• Design a transportation network that can handle
e-commerce
• Use technology to improve transportation
performance
• Design flexibility into the transportation network
 Challenges
• Geography
• Infrastructure
• Statutory requirements
• Transport Organisations
• Local / Hyperlocal
• Last Mile
 Challenges - Geography
• Large country so long distances
• Diverse topography
• Different languages
• Varying weather conditions at the same
time across the country
• Festivals , holidays and availability for
business
 Challenges - Infrastructure
• Infrastructure not in good shape or non existent
though improving
• Upkeep and maintenance standards variable
• Limitations on shipments due to constraints
• Increase in transhipments due to access issues
• Communication constraints
• Limited vehicle maintenance support availability
 Challenges – Statutory
Requirements
• Variety of document requirements across
states
• Permit requirements, renewals and costs
• Timing restrictions on entry and movement
• Multiple toll barriers
• Unpredictable time and cost impact
• Misuse of authority
 Challenges – Transport
Organisations
• Sector largely not organised comprising of
small operators and owner drivers
• Impact on type of vehicles, their
maintenance and the driver proficiency
• Limits technology application and
acceptance
• Transport unions at many locations restrict
options
Challenges – Local / Hyperlocal
• Congested area
• Mode of transport for that
• Small quantities
• Tracking
• Shrinkage
• Increase in layers
 Challenges - Last Mile
• Interface with customer can have
unwanted impact on the brand
• High attrition levels result in
– Changing workforce
– Training and control challenge
– Questionable Reliability despite background
checks
– Service level variability
 Challenges – Last Mile
• Increasing cost due to demand supply
mismatch
• Performance measurement important but
challenging
• Direct contact with customer so useful
source of Consumer Behaviour and
Feedback. Largely unused due to above
reasons
 Logistic Innovation
• Indian start-up RIVIGO
– Driver relay model
• 40 Stopover locations
• Driver returns home within 24 hours
• Hubs have facilities for
– Driver
– Truck repair / maintenance
• Rigorous driver selection procedure
• Drive time not more than 4-6 hours at a time
 Logistic Innovation
• RIVIGO
– Company owned fleet of trucks
– All India operation
– Real time vehicle tracking
– Advanced security system
– Multiple vehicle parameter monitoring for
predictive maintenance
– Tie up with OEMs for fleet maintenance
 Logistic Innovation
• RIVIGO - Categories
– FTL
– LTL
• Customer Tracking of LTLs
– Cold Chain
• Real time temperature monitoring
• Repair within 3-4 hours
• Customer can control temperature
 Logistic Innovation
• RIVIGO claims
– 50-70% reduction in transit times
– No breakdowns
– Drastically reduced accident occurrence
– Enhanced security. Significantly
• Lower tampering / pilferage
• Less damage due to temperature variation
– Higher reliability
 Logistic Innovation
• RIVIGO – Industries served
– Automotive
– Apparel
– Pharma
– Fresh food
– Dairy & Frozen foods
– FMCG
Supply Chain Management

Network Design

Indian Institute of Foreign Trade

 Overview

• Strategic framework for facility location

• Multi-echelon networks
• Location models
• Impact of uncertainity
• Performance Measurement
Supply Chain Snapshot
 The Role of Distribution
in the Supply Chain
• Distribution: the steps taken to move and store
a product from the supplier stage to the
customer stage in a supply chain
• Distribution directly affects cost and the
customer experience and therefore drives
profitability
• Choice of distribution network can achieve
supply chain objectives from low cost to high
responsiveness
 Network Design Decisions

• Facility role
• Facility location
• Capacity allocation
• Market and supply allocation
 Factors Influencing
Network Design Decisions
• Distribution network performance evaluated
along two dimensions at the highest level:
– Customer needs that are met
– Cost of meeting customer needs
• Distribution network design options must
therefore be compared according to their impact
on customer service and the cost to provide this
level of service
 Factors Influencing
Network Design Decisions
• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs
 Factors Influencing
Network Design Decisions
• Elements of customer service influenced by network
structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Order visibility
– Returnability
• Supply chain costs affected by network structure:
– Inventories
– Transportation
– Facilities and handling
– Information
Service and Number of Facilities
Response
Time

Number of Facilities
 The Cost-Response Time
Frontier

Hi Local FG
Mix
Regional FG

Local WIP
Cost
Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low

Low Response Time Hi

Costs and Number of Facilities
Inventory

Facility costs
Costs

Transportation

Number of facilities
 Cost Buildup as a Function of Facilities
Total Costs

Percent Service
Cost of Operations

Level Within
Promised Time

Facilities
Inventory
Transportation
Labor

Number of Facilities
 A Framework for
Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

PRODUCTION TECHNOLOGIES
REGIONAL DEMAND
Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK

PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination
 Conventional Network

Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturin
DC g Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
 Tailored Network: Multi-Echelon
Finished Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC

Store 3
Network Optimization Models
• Locating facilities and allocating
capacity
• Allocating demand to production
facilities
Key Costs:

• Fixed facility cost

• Transportation cost
• Production cost
• Inventory cost
• Coordination cost

Which plants to establish? How to configure the network?

 Demand Allocation Model
• Which market is served by which plant?
• Which supply sources are used by a
plant?
If
n = number of potential plant locations / capacity
m = number of markets or demand points
Dj = annual demand from market j
Ki = potential capacity of plant i
 Demand Allocation Model
cij = Cost of producing and n m
shipping one unit from Min  cij xij
i 1 j 1
plant site i to customer j
xij = Quantity shipped from s.t.
plant site i to customer j n
 xij  D j
i 1
m
 xij  K i
j 1

xij  0
 Demand Allocation Model
• f i = annualised fixed n n m

cost of keeping plant Min  f i yi   cij xij

i 1 i 1 j 1
/ source I open
• yi = 1 if plant is s .t .
n


open, 0 otherwise
x  Dj
• xij = Quantity i 1
ij

shipped from plant n

site i to customer j  xij  K i yi

j 1

y {0,1}
i
 Gravity Method for Location
• x,y: Warehouse
( x  xn)  ( y  y n)
2 2
Coordinates
d 
• xn, yn : Coordinates of
n

nx F
delivery location n
 D k
n n
• dn : Distance to delivery d
location n x n 1 n

D nF
k
• Fn : Cost of shipping one
unit per k.m. to delivery
 d
n 1
n

n
location n
D ny F
k
• Dn : Quantity to delivery  d
n n

location n y n 1 n

D nF
k

 d n 1
n

n
Min  d n Dn F n
 The Impact of Uncertainty
on Network Design
• Supply chain design decisions include investments in
number and size of plants, number of trucks, number of
warehouses
• These decisions cannot be easily changed in the short-
term
• There will be a good deal of uncertainty in demand,
prices, exchange rates, and the competitive market over
the lifetime of a supply chain network
• Therefore, building flexibility into supply chain operations
allows the supply chain to deal with uncertainty in a
manner that will maximize profits
Discounted Cash Flow Analysis
• Supply chain decisions are in place for a long
time, so they should be evaluated as a
sequence of cash flows over that period
• Discounted cash flow (DCF) analysis evaluates
the present value of any stream of future cash
flows and allows managers to compare different
cash flow streams in terms of their financial
value
• Based on the time value of money – a rupee
today is worth more than a rupee tomorrow
 Discounted Cash Flow Analysis
1
Discount factor 
1 k
t
T
 1 
NPV  C0     Ct
t 1  1  k 

where
C0 , C1 ,..., CT is a stream of cash flows over T periods
NPV  the net present va lue of this stream of cash flows
k  rate of return

• Compare NPV of different supply chain design options

• The option with the highest NPV will provide the
greatest financial return
 Evaluating Network Design
Decisions Using Decision Trees
• A manager must make many different
decisions when designing a supply chain
network
• Many of them involve a choice between a
long-term (or less flexible) option and a
short-term (or more flexible) option
• If uncertainty is ignored, the long-term
option will almost always be selected
because it is typically cheaper
 Evaluating Network Design
Decisions Using Decision Trees
• Such a decision can eventually hurt the
firm, however, because actual future
prices or demand may be different from
what was forecasted at the time of the
decision
• A decision tree is a graphic device that
can be used to evaluate decisions under
uncertainty
 Decision Tree Methodology
1. Identify the duration of each period (month,
quarter, etc.) and the number of periods T over
the which the decision is to be evaluated.

2. Identify factors such as demand, price, and

exchange rate, whose fluctuation will be
considered over the next T periods.

3. Identify representations of uncertainty for each

factor; that is, determine what distribution to use
to model the uncertainty.
 Decision Tree Methodology
4. Identify the periodic discount rate k for each
period.

5. Represent the decision tree with defined states

in each period, as well as the transition
probabilities between states in successive
periods.

6. Starting at period T, work back to period 0,

identifying the optimal decision and the
expected cash flows at each step. Expected
cash flows at each state in a given period
should be discounted back when included in the
previous period.
Performance Metrics
 Dimensions of
Performance Metrics
• Establishing appropriate metrics is
important.
– Measuring inappropriate performance can
lead to a company chasing the wrong goal.
– Metrics drive behavior --- what you measure
is what you get.
• Logistics cost metrics should focus on the
total supply chain, not on just one link.
 Dimensions of
Performance Metrics
• The metrics must be consistent with overall corporate
strategy.
• The metrics must focus on customer needs and
expectations.
• Prioritize your metrics.
• Focus upon processes not functions.
• Use a balanced approach in selecting and developing
metrics.
• Precise cost measurement is an important aspect for
gauging improvement.
• Use technology to enhance efficient performance
measurement.
 Performance Metrics
• Effectiveness
– Capacity utilization
– Km per day
– Labour productivity
– Turnover per km
– Number of deliveries
– Trips per period
– Perfect order fulfilment
 Performance Metrics
• Effectiveness
– Total number of orders
– Number of customers
– Product range
– Plan fulfilment
– Total loading capacity (for trucks)
– On-time delivery performance
 Performance Metrics
• Effectiveness
– Market share
– Number of markets that have been penetrated
– Successful contacts – % of successful deals out of
the initial offers
– Effectiveness of distribution planning schedule
– % of orders scheduled to customer request
– % of supplier contracts negotiated meeting target
terms and conditions for quality, delivery, flexibility
and cost
 Performance Metrics
• Efficiency
– Labour utilization
– Overhead percentage
– Overtime hours
– % Absent employees
– Customer service costs
– Order management costs
– Inventories
– Number of trucks in use
– Total delivery costs
 Performance Metrics
• Efficiency
– Average fuel use per km
– % of failed orders
– % of realized km out of planned km
– Total time in repair (for trucks)
– Performance measurements costs
– Human resource costs
– Variable asset costs
– Fixed asset costs
– Information system costs
 Performance Metrics
• Satisfaction
– On-time delivery performance
– Number of customer complains
– Overall customer satisfaction
– % of orders scheduled to customer request
– Satisfaction /Attrition of drivers
– Morale, motivation of personnel
Supply Chain Management

Coordination

Indian Institute of Foreign Trade

 Overview
• Lack of Supply Chain Coordination and the
Bullwhip Effect

• Effect of Lack of Coordination on Performance

• Obstacles to Coordination in the Supply Chain

• Managerial Levers to Achieve Coordination

• Building Strategic Partnerships and Trust Within

a Supply Chain

• Achieving Coordination in Practice

 Lack of SC Coordination
and the Bullwhip Effect
• Supply chain coordination – all stages in the
supply chain take actions together (usually
results in greater total supply chain profits)
• SC coordination requires that each stage
take into account the effects of its actions on
the other stages
• Lack of coordination results when:
– Objectives of different stages conflict or
– Information moving between stages is distorted
 Bullwhip Effect
• Fluctuations in orders increase as they
move up the supply chain from retailers to
wholesalers to manufacturers to suppliers
• Distorts demand information within the
supply chain, where different stages have
very different estimates of what demand
looks like
• Results in a loss of supply chain
coordination
 The Effect of Lack of
Coordination on Performance
• Manufacturing cost (increases)
• Inventory cost (increases)
• Replenishment lead time (increases)
• Transportation cost (increases)
• Labor cost for shipping and receiving (increases)
• Level of product availability (decreases)
• Relationships across the supply chain (worsens)
• Profitability (decreases)
• The bullwhip effect reduces supply chain
profitability by making it more expensive to provide
a given level of product availability
 Obstacles to Coordination
in a Supply Chain

• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles
 Incentive Obstacles
• When incentives offered to different stages
or participants in a supply chain lead to
actions that increase variability and reduce
total supply chain profits – misalignment of
total supply chain objectives and individual
objectives
• Local optimization within functions or
stages of a supply chain
• Sales force incentives
 Information Processing Obstacles
• When demand information is distorted as it
moves between different stages of the
supply chain, leading to increased
variability in orders within the supply chain
• Forecasting based on orders, not
customer demand
– Forecasting demand based on orders
magnifies demand fluctuations moving up the
supply chain from retailer to manufacturer
• Lack of information sharing
 Operational Obstacles
• Actions taken in the course of placing and
filling orders that lead to an increase in
variability
• Ordering in large lots (much larger than
dictated by demand)
• Large replenishment lead times
• Rationing and shortage gaming (common in
the computer industry because of periodic
cycles of component shortages and
surpluses)
 Pricing Obstacles

• When pricing policies for a product lead to

an increase in variability of orders placed
• Lot-size based quantity decisions
• Price fluctuations (resulting in forward
buying)
 Behavioral Obstacles
• Problems in learning, often related to communication
in the supply chain and how the supply chain is
structured
• Each stage of the supply chain views its actions locally
and is unable to see the impact of its actions on other
stages
• Different stages react to the current local situation
rather than trying to identify the root causes
• Based on local analysis, different stages blame each
other for the fluctuations, with successive stages
becoming enemies rather than partners
• No stage learns from its actions over time because the
most significant consequences of the actions of any
one stage occur elsewhere, resulting in a vicious cycle
of actions and blame
• Lack of trust results in opportunism, duplication of
effort, and lack of information sharing
 Managerial Levers to
Achieve Coordination

• Aligning Goals and Incentives

• Improving Information Accuracy
• Improving Operational Performance
• Designing Pricing Strategies to Stabilize
Orders
• Building Strategic Partnerships and Trust
 Aligning Goals and Incentives
• Align incentives so that each participant
has an incentive to do the things that will
maximize total supply chain profits
• Align incentives across functions
• Pricing for coordination
• Alter sales force incentives from sell-in (to
the retailer) to sell-through (by the retailer)
Improving Information Accuracy

• Sharing point of sale data

• Collaborative forecasting and planning
• Single stage control of replenishment
– Continuous replenishment programs (CRP)
– Vendor managed inventory (VMI)
 Improving Operational
Performance
• Reducing replenishment lead time
– Reduces uncertainty in demand
– EDI is useful
• Reducing lot sizes
– Computer-assisted ordering, B2B exchanges
– Shipping in LTL sizes by combining shipments
– Technology and other methods to simplify receiving
– Changing customer ordering behavior
• Rationing based on past sales and sharing
information to limit gaming
– “Turn-and-earn”
– Information sharing
 Designing Pricing Strategies
to Stabilize Orders
• Encouraging retailers to order in smaller lots and
reduce forward buying
• Moving from lot size-based to volume-based
quantity discounts (consider total purchases over
a specified time period)
• Stabilizing pricing
– Eliminate promotions (everyday low pricing, EDLP)
– Limit quantity purchased during a promotion
– Tie promotion payments to sell-through rather than
amount purchased
• Building strategic partnerships and trust – easier
to implement these approaches if there is trust
Building Strategic Partnerships and
Trust in a Supply Chain

• Background
• Designing a Relationship with Cooperation
and Trust
• Managing Supply Chain Relationships for
Cooperation and Trust
Building Strategic Partnerships and
Trust in a Supply Chain
• Trust-based relationship
– Dependability
– Leap of faith
• Cooperation and trust work because:
– Alignment of incentives and goals
– Actions to achieve coordination are easier to
implement
– Supply chain productivity improves by reducing
duplication or allocation of effort to appropriate
stage
– Greater information sharing results
 Trust in the Supply Chain

• Historically, supply chain relationships are

based on power or trust
• Disadvantages of power-based relationship:
– Results in one stage maximizing profits, often at
the expense of other stages
– Can hurt a company when balance of power
changes
– Less powerful stages have sought ways to resist
 Building Trust into a
Supply Chain Relationship
• Deterrence-based view
– Use formal contracts
– Parties behave in trusting manner out of self-
interest
• Process-based view
– Trust and cooperation are built up over time as a
result of a series of interactions
– Positive interactions strengthen the belief in
cooperation of other party
• Neither view holds exclusively in all situations
 Building Trust into a
Supply Chain Relationship
• Initially more reliance on deterrence-based
view, then evolves to a process-based
view
• Co-identification: ideal goal
• Two phases to a supply chain relationship
– Design phase
– Management phase
 Designing a Relationship
with Cooperation and Trust

• Assessing the value of the relationship

and its contributions
• Identifying operational roles and decision
rights for each party
• Creating effective contracts
• Designing effective conflict resolution
mechanisms
 Assessing the Value of the
Relationship and its Contributions

Identify the mutual benefit provided

• Identify the criteria used to evaluate the
relationship (equity is important)
• Important to share benefits equitably
• Clarify contribution of each party and the
benefits each party will receive
 Identifying Operational Roles and
Decision Rights for Each Party
• Recognize interdependence between
parties
– Sequential interdependence: activities of one
partner precede the other
– Reciprocal interdependence: the parties come
together, exchange information and inputs in
both directions
• Sequential interdependence is the
traditional supply chain form
• Reciprocal interdependence is more
difficult but can result in more benefits
Effects of Interdependence on
Supply Chain Relationships
Partner High Level of
Relatively Interdependence
High Powerful
Effective
Relationship
Organization’s
Dependence

Organization
Low Level of Relatively
Low Powerful
Interdependence

Low High

Partner’s Dependence
 Creating Effective Contracts
• Create contracts that encourage
negotiation when unplanned contingencies
arise
• It is impossible to define and plan for every
possible occurrence
• Informal relationships and agreements can
fill in the “gaps” in contracts
• Informal arrangements may eventually be
formalized in later contracts
 Designing Effective Conflict
Resolution Mechanisms

• Initial formal specification of rules and

guidelines for procedures and transactions
• Regular, frequent meetings to promote
communication
• Courts or other intermediaries
Managing Supply Chain Relationships
for Cooperation and Trust
• Effective management of a relationship is
important for its success
• Top management is often involved in the
design but not management of a
relationship
• Process of alliance evolution
• Perceptions of reduced benefits or
opportunistic actions can significantly
impair a supply chain partnership
Achieving Coordination in Practice
• Quantify the bullwhip effect
• Get top management commitment for
coordination
• Devote resources to coordination
• Focus on communication with other stages
• Try to achieve coordination in the entire
supply chain network
• Use technology to improve connectivity in the
supply chain
• Share the benefits of coordination equitably
 What is CPFR?
• Collaborative Planning, Forecasting, and
Replenishment
• Trading partners working together in
planning fulfilling customer demand.
– Links sales and marketing best practices to
supply chain planning and execution
processes.
– Objective is to increase availability to the
customer while reducing inventory,
transportation and logistics costs.
 Modes of CPFR
• Basic CPFR: a limited number of business
processes integrated between a limited number
of supply chain partners
• Developed CPFR: will typically involve a
greater number of data exchanges between
two partners, and may extend to suppliers taking
responsibility for replenishment on behalf of
their customer
• Advanced CPFR goes beyond data exchanges
to synchronise forecasting information systems
and coordinate planning and replenishment
processes
 CPFR Evolution
• CPFR evolved from Efficient Consumer
Response (ECR).
• ECR: Improve supply chain performance
through better coordination of marketing,
production, and replenishment activities.
• Prior to ECR
– Relationships often adversarial.
– Little or no joint planning
– Lack of information sharing results in “unpredictable”
ordering patterns, excessive inventories, service
failures,…
 CPFR Evolution
•
• In 1987, P&G and Wal-Mart pioneered in
Continuous Replenishment Process (CRP)
– Information sharing
– Joint demand forecasting
– Coordinated shipments.

• CRP is best-known as the Vendor-Managed

Inventory (VMI) program. This partnership laid
the foundation for ECR.
 CPFR Evolution
• 1996, CPFR(Collaborative, Planning, Forecasting, and
Replenishment) pilot between Wal-Mart and Warner
Lambert.
• CPFR
– Value chain partners co-ordinate plans to reduce the variance
between supply and demand and share the benefits of a
more efficient and effective supply chain .
– Allow trading partners time to react
• A supplier can build inventory well in advance of receiving a
promotional order and carry less safety stock at other times.
• A retailer can alter the product mix to reduce the impact of
supply problems.
• Adopted by numerous other industries
– Apparel, automotive and high tech.
 Collaborative Planning, Forecasting, &
Replenishment
The Collaborative Process

Joint Business Planning

Retailer
Manufacturer
Common Event
Calendar
Retailer Forecast Manufacturer Forecast
Drivers Drivers
• In stock position • Capacity
• Fill Rate • Order Lead time
• Consumer Demand Joint Forecast • Consumer Behaviour
• Price Changes • Product Availability
• Growth Plans • Promotions
• Distribution Channels • Raw material supply
 CPFR
• A set of guidelines supported and
published by the Voluntary Inter-industry
Commerce Standards (VICS) Association
• Trading partners share their plans for
future events, and then use an exception-
based process to deal with changes or
deviations from plans.
• CPFR Benefits
– More effective inventory management
– Improved customer service
– Improved profitability
The CPFR Reference Model

8 collaboration tasks form

cycle of 4 activities:

A. Strategy & Planning

B. Demand & Supply
Management
C. Execution
D. Analysis.

Each activity consists of

two collaboration tasks.
 CPFR: Key Elements
• The consumer is the ultimate focus of all efforts
• Buyers” (retailers) and “sellers” (manufacturers)
collaborate at every level
• Joint forecasting and order planning reduces
surprises in the supply chain
• The timing and quantity of physical flows is
synchronized across all parties
• Promotions no longer serve as disturbances in
the supply chain
Collaboration Tasks Under CPFR
Supply Chain Management

Information Technology

Indian Institute of Foreign Trade

 Overview
• Importance of IT in SCM
• Categories
• Goals
• Framework
• E Business
 Introduction
• Information technology (IT) an important enabler
of effective supply chain management
• Typically spans the entire enterprise and
beyond, encompassing suppliers on one end
and customers on the other.
• Includes systems that are:
– internal to an individual company
– external which facilitate information transfer between
various companies and individuals
 The Importance of Information
in a Supply Chain
• Relevant information available throughout
the supply chain allows managers to make
decisions that take into account all stages
of the supply chain
• Allows performance to be optimized for the
entire supply chain, not just for one stage
– leads to higher performance for each
individual firm in the supply chain
 Four Categories of IT Systems
• Level I
– Batch processes, independent systems and redundant
data across the organization.
– Focus on spreadsheet and manual manipulation of data
for decision making.
• Level II
– Shared data across the supply chain.
– Decisions made using planning tools
• Level III:
– Complete visibility of internal data
– Key suppliers and customers have access to some of this
data
– Processes are also shared across the supply chain
• Level IV
– Data and processes are shared internally and externally.
 Level I: Disconnected Processes
• Many independent processes.
• Organized functionally with no or low degree of
integration.
• Supply chain planning typically done for each
site independently of other sites.
• Characteristics:
– Functional (silo) strategies.
– Lack of clear, consistent supply chain management
processes.
– No measurements, or measurements not aligned with
company objectives.
 Level II: Internal Integration
• Organized functionally, with a high degree of
integration.
• Decisions made through the integration of key
functional areas.
• Common forecasts applied throughout the
organization.
• Characteristics:
– Integration of some functional information.
– Documented processes followed across the entire
organization.
– Key measurements that are used departmentally
Level III: Intra-Company Integration
and Limited External Integration
• Cross-functionally organized.
• Involves key suppliers and customers in decision
making processes.
• Characteristics:
– Decisions optimized across the internal supply chain.
– Sophisticated processes that involve all affected
internal organizations.
– Key suppliers and customers are included in supply
chain planning.
 Level IV: Multi-Enterprise
Integration
• Multi-enterprise processes
• Common business objectives/extensive
knowledge of the suppliers and customers
business environments.
• Collaboration links trading partners and enables
them to operate as one virtual corporation.
• Characteristics:
– Collaboration across the entire supply chain.
– Internal and external collaborative supply chain
management focus on key service and financial
goals.
– Measures directly link supply chain results to
company goals.
 SCM System Goals
• Collect information on each product from
purchasing to production to delivery or sale point
– provide complete visibility for all parties involved.
• Access any data in the system from a single
point of contact.
• Analyze, plan activities, and make trade-offs
based on information from the entire supply
chain.
• Collaborate with supply chain partners.
– Allows companies to manage uncertainty
 Primary Goal
• Link the point of purchasing through
production seamlessly with the point of
delivery or sale.
• Have an information trail that follows the
product’s physical trail.
• Allows planning, tracking, and estimating lead
times based on real data.
• Any party that has an interest in the
whereabouts of the product should be able to
have access to this information.
Flow of Information and Goods in
the Supply Chain

Flow of information and goods in the supply chain

 Collect Information
• Information Requirements:
– Status of retailer’s orders
– Suppliers’ need to be able to anticipate an incoming order
from the manufacturer.
• Data access requirements:
– From other companies’ information systems
– Across functions and geographic locations inside a
company
– Data in their own terms
• Alert diverse systems to the implications of this
movement
• Requires standardization of product identification
(e.g., bar coding) across companies and industries
– Radio Frequency Identification (RFID) technology an
attempt to address this issue
 Access Data
• Single-point-of-contact
• All available information accessed in one stop and
consistent regardless of:
– the mode of inquiry used (e.g., phone, Internet, kiosk)
– who is making the inquiry.
• Information may reside in various locations within
one company and across several companies.
• Problem of synchronizing data across multiple
systems and making sure data is available real-time
 Analysis Based on Supply Chain
Data
• Data analysis should take into account the
global supply chain picture.
• Information system must be utilized to find
the most efficient ways to produce, assemble,
warehouse, and distribute products
• Different levels of analysis required
(Strategic/Tactical/Operational)
• Systems need to be flexible enough to
accommodate changes in supply chain
strategies.
• Systems need to be highly configurable and
new standards need to be developed.
 Collaborate with Supply Chain
Partners
• Ability to collaborate key for most companies
• Sophisticated alignment of IT systems
• Integration of business processes.
• Collaboration among supply chain partners
– Ability to link and work effectively with suppliers
through supplier relationship management (SRM)
systems.
– Collaboration platforms, whether private or public.
– Customer relationship management (CRM) systems
to provide better contact and understanding of
customer needs.
The Supply Chain IT Framework
• The Supply Chain Macro Processes
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
– Plus: Transaction Management Foundation
• Why Focus on the Macro Processes?
• Macro Processes Applied to the Evolution
of Software
Macro Processes in a Supply
Chain

Supplier Internal Customer

Relationship Supply Relationship
Management Chain Management
(SRM) Management (CRM)
(ISCM)

Transaction Management Foundation

(TFM)
 Customer Relationship
Management
• The processes that take place between an
enterprise and its customers downstream
in the supply chain
• Key processes:
– Marketing
– Selling
– Order management
– Call/Service center
Internal Supply Chain Management
• Includes all processes involved in planning
for and fulfilling a customer order
• ISCM processes:
– Strategic Planning
– Demand Planning
– Supply Planning
– Fulfillment
– Field Service
• There must be strong integration between the
ISCM and CRM macro processes
Supplier Relationship Management
• Those processes focused on the interaction
between the enterprise and suppliers that are
upstream in the supply chain
• Key processes:
– Design Collaboration
– Source
– Negotiate
– Buy
– Supply Collaboration
• There is a natural fit between ISCM and SRM
processes
 The Transaction Management
Foundation
• Enterprise software systems (ERP)
• Earlier systems focused on automation of
simple transactions and the creation of an
integrated method of storing and viewing data
across the enterprise
• Real value of the TMF exists only if decision
making is improved
• The extent to which the TMF enables
integration across the three macro processes
determines its value
 SCM System Components
• ERP systems
– attempt to resolve, bring all business
functions together to make an enterprise more
efficient.
– do not help answer the fundamental questions
of what should be made, where, when, and
for whom.
• Such decisions made by human planners
using various analytical tools such as
decision-support systems (DSS).
 DSS
• Range from spreadsheets to expert
systems
• Appropriate DSS depends on:
– nature of the problem, the planning horizon,
and the type of decisions that need to be
made.
• DSS helps in analysis:
– At various planning levels
– Exact nature depends on manufacturing
characteristics, demand fluctuation,
transportation costs, and inventory costs.
 Data Analysis Techniques in DSS
• Queries
– Vast quantities of data make manual analysis
difficult.
– Decisions often facilitated by simply asking
specific questions about the data
• Statistical analysis
– Used to determine trends and patterns in the
data
 Data Analysis Techniques in DSS
• Data mining
– With larger corporate databases
– New tools to look for “hidden” patterns, trends, and
relationships in the data.
• On-line analytical processing (OLAP) tools
– An intuitive way to view corporate data, typically
stored in data warehouses.
– Aggregates data along common business dimensions
– Let users navigate through the hierarchies and
dimensions by drilling down, up, or across levels.
– Also provide sophisticated statistical tools to analyze
these data and tools to present them.
 DSS Interfaces

• Display and report based on the specific

problem being solved.
• Uses analytical tools that have some
specific embedded knowledge of the
problem being solved.
 Analytics Used in DSS
• Calculators
– Simple decision-support tools that facilitate
specialized calculations such as accounting
costs.
• Simulation
– Incorporates random components.
– Create a model of the process on a computer.
– Specify each of the random elements of the
model with a probability distribution.
– Run the model to study effects
 Analytics Used in DSS
Artificial Intelligence (AI)
• Systems that exhibit intelligence by incorporating
some form of learning.
• Concept of agents
– A software process
– Communicate and interact with other agents,
• Expert systems are a type of AI system
– Capture an expert’s knowledge in a database and use
it to solve problems.
– Relies on an extensive database of knowledge,
usually expressed as a set of rules.
– Not extensively used in logistics practice
 Analytics Used in DSS
Mathematical Algorithms
• Can be applied to the data to determine potential
solutions to problems
• Exact algorithms
– Finds a solution that is mathematically the “best possible
solution” or optimal solution.
– May take a long time to run, especially if a problem is complex.
– Input data to these algorithms are often approximated or
aggregated
– Exact solutions to approximate problems may be worth no
more than approximate solutions to approximate problems
• Heuristics
– Provide good, but not necessarily optimal, solutions to problems.
– Typically run much faster
– Most DSSs employ heuristics when using mathematical
algorithms.
– Quality of a good heuristic defined by how rapidly it can give a
solution that is very close to the optimal solution
 Appropriateness of Different Tools
• Typically a hybrid of different tools used
• Factors to consider:
– The type of problem being considered.
– The required accuracy of the solution
– Problem complexity
– The number and type of quantifiable output
measures.
– The required speed of the DSS
– The number of objectives or goals of the decision
maker
 Role of E-Business in a Supply
Chain

• E-business: Execution of business

transactions over the Internet
• B2C: Business to consumer
• B2B: Business to business
 E-Business Transactions

• Providing information across the supply

chain
• Negotiating prices and contracts
• Allowing customers to place orders
• Allowing customers to track orders
• Filling and delivering orders to customers
 E-Business Transactions

• Receiving payment from customers

• Placing orders with suppliers
• Paying suppliers
• These transactions were previously
done through other channels
 The Impact of E-Business on
Supply Chain Performance

• Impact of E-Business on Responsiveness

(which primarily affects a company’s ability
to grow and protect revenue)
• Impact of E-Business on Efficiency (which
primarily affects a company’s costs)
 Impact of E-Business
on Responsiveness

• Offering direct sales to consumers

• 24-hour access from any location
• Wider product portfolio and information
aggregation
• Personalization/customization
• Faster time to market
• Flexible pricing, product portfolio, and
promotions
 Impact of E-Business
on Responsiveness
• Price and service discrimination
• Efficient funds transfer
• Lower stockout levels
• Convenience/automated processes
• Potential revenue disadvantage of e-
business (for customers who require a
short response time)
 Impact of E-Business on Cost

• Inventory
• Facilities
• Transportation
• Information
 The B2B Addition to the
E-Business Framework

• The wide variety of factors potentially

important in B2C transactions can be
reduced to three principal categories:
– Reduced transaction costs
– Improved market efficiencies
– Supply chain benefits
.No. Question Options Answer
1. Manufacturing level
2. Assembly level
The push-pull boundary for Car Industry
1. 3. Distribution level 1
lies in
4. Retailer level
5. -
1. Strategic products
Critical products supplied by vendors like
2. Routine product
Minda Carburetors, Sona Steering, etc. to
2. 3. Leverage product 4
Maruti Suzuki India Ltd. (MSIL), can be
4. Bottleneck product
classified as -
5. -
1. Benchmarks
2. Attributes
Reliability, Responsiveness, Agility, Cost,
3. 3. Metrics 2
and Assets are:
4. Scorecards
5. -
Dupont continues to manufacture its 1. Better quality control
intermediates like Lycra, Teflon etc. What 2. Use existing idle capacity
4. is the fundamental reason for the same in 3. Control of logistics 4
spite of global opportunities to outsource 4. Protect proprietary technology
them? 5. -
Answer rate of customer
1.
inquiries
2. Speed of performing work
5. Responsiveness is best described as: 3. Ability to respond to changes 2
Days before payments are
4.
received
5. -
Supply chain is aligned to
1.
supplier product availability.
Your consumer product company has a
Factory production is tightly
very slow reaction to changes in customer
2. synchronized to customer
demand. In addition, they have excessive
orders.
levels of inventory, a high customer
Demand management and
complaint rate and poor delivery
6. 3. supply chain management are 2
performance. Executive Management has
managed independently.
been advised to move from a Push to a
Pull environment. What characteristics of a Replenishment is determined
Pull environment should improve the 4. by safety stock, safety lead time,
situation? lot sizing queues and set-ups.

5. -
1. High Technology products
Which of the following types of products 2. Innovative products
7. need to be delivered with efficient supply 3. Grocery products 3
chains? 4. All of the above
5. -
1. Supply chain optimization
2. Supply chain integration
Overall supply chain performance is
8. 3. Supply chain restructuring 4
enhanced through ---
4. All of the above
5. -
1. Horizontal Supply chain
Toyota's investments in design and
2. Responsive supply chain
manufacturing capabilities within the firm,
9. 3
as well as sourcing from supplier Denso, is
an example of ¿
 Toyota's investments in design and
manufacturing capabilities within the firm,
9. 3. Tapered integration 3
as well as sourcing from supplier Denso, is
4. Make or buy decision
an example of ¿
5. -
1. Routine product
According to purchase portfolio analysis, 2. Leverage product
10. products like basic chemicals, printing ink 3. Strategic Product 2
etc are known as 4. Bottleneck product
5. -
Answer rate of customer
1.
inquiries
2. Speed of performing work
11. Agility is best described as: 3. Ability to respond to changes 3
Days before payments are
4.
received
5. -
1. Production level
2. Assembly level
12. Push-pull boundary for Amazon lies in 3. Distribution level 3
4. Retailer level
5. -
1. Cost advantage
Godrej uses Videocon facilities during the
2. Insufficient capacity
high-demand season for its operations.
13. 3. Lack of expertise 2
What could be the best reason for such
4. Quality
outsourcing?
5. -
1. Control over logistics
The benefit of economies of
What is the reason that Wal-Mart owns a 2.
scale
14. fleet of trucks, though most retailers do 4
3. Lack of suppliers
not?
4. Both a & b
5. -
The supply chain can be more
1.
responsive
The supply chain control can
Zara which is a leading European firm 2.
be more flexible.
15. manufacturing garments generally does 1
The supply chain costs will go
not outsource most of its activities because- 3.
up
4. All of the above.
5. -
Strong economies of scale of
1.
these firms
Lower transaction costs of these
Most of the firms outsource their IT 2.
firms
16. operations to firms like IBM, WIPRO, etc. 1
Lower supply chain costs of
because ¿ 3.
these firms
4. None of the above.
5. -
Suppliers are ahead in
1.
technology
Cummins procures pistons from the
To control the outsourcing
market despite the strategic nature of the 2.
17. partners 4
product, keeping the ability to develop
3. Less number of players
good piston specifications in house. Why?
4. All the above
 Cummins procures pistons from the
market despite the strategic nature of the
17. 4
product, keeping the ability to develop
good piston specifications in house. Why?

5. -
HP manufactures core components of its 1. Geographic postponement
servers in Taiwan and assembles them for 2. Form Postponement
markets in India, China, Singapore,
18. 3. Logistics postponement 4
Australia etc. for which they maintain
4. (a) or (c).
inventory in these locations. This is an
5. -
example of ¿
In a supply chain with high fluctuations in 1. make-to-order
demand varieties but hardly any 2. make-to-stock
19. fluctuations in demand volumes in raw 3. assemble-to-order 3
material stage, which of the policies is best 4. all of the above
suited: 5. -
1. MTS to MTO
2. MTO to CTO
If for a firm variety explosion takes place
20. 3. MTS to CTO 3
in assembly stage, it should move from
4. CTO to MTS
5. -

[Link]. Question Options Answer

1. Scale and scope of activities
Cultural and linguistic
2.
Which of the following is not indicating a differences
1. difference between Domestic and Scope for configuring value 4
3.
international strategy? chain activities
4. Tools for the strategy analysis
5. -
Special knowledge gained by
1.
the firm
2. Minimum efficiency scale
The efficiency imperative for globalisation
2. 3. Maximum efficiency scale 2
of firms is related to -
Growth requirements of the
4.
firm
5. -
1. Knowledge imperative
2. Growth imperative
When the vendor of a firm follows the firm 3. Efficiency imperative
3. 4
in the globalisation, it is due to ------ Imperative due to globalisation
4.
of customers
5. -
Convergence of consumer
1.
needs
2. Removal of trade barriers
Which of the following is not a
4. Technological developments in 4
Globalisation Push Factor? 3.
telecommunications
4. Social codes
5. -
1. PEST Analysis
2. Porter's Diamond
Which of the following tools is most helpful
Global Integration/Local
5. in scanning the macro environment for 3. 3
Responsiveness Grid
Global Strategy?
4. Five forces analysis
5. -
1. Key Country
In Global positioning element of Global 2. Platform country
6. Strategy framework, a country is not 4
classified as:
 In Global positioning element of Global
6. Strategy framework, a country is not 3. Sourcing Country 4
classified as: 4. Industrial Country
5. -
Ideal National Marketing
1.
Strategy
The Marketing Strategy of a Global Firm 2. Hybrid Strategy
7. with national Product for National Market 1
3. Global Niche Strategy
Segments indicate
4. both b & c
5. -
1. Competitive Risk
2. Economic Risk
The Operation of Cartels can be classified
8. 3. Political Risk 1
as:
4. Operational Risk
5. -
1. Firm Profitability
2. Globalisation Drivers
Which of the following does not form part
9. 3. Globalisation Levers 1
Globalisation Framework of George Yip?
4. Current Resources of the firm
5. -

1. Market Development Objectives

A firm entering a host Country for gaining 2. Research Access Objectives
10. knowledge of the State-of-the-Art Industry 3
3. Learning Objectives
is said to have
4. Coordination Objectives
5. -
1. Global Ambition
2. Global Positioning
Which of the following is classified as an
11. 3. Global Business Systems 4
element of Global strategy?
4. All the above
5. -
Choice of countries and value
1.
proposition
Structure, process and
Global positioning in a global strategy 2.
12. Coordination 1
consists of -
3. HRM
4. All the above
5. -
1. Global Ambition
2. Global Strategy
The GCI and CRI are used as an indicator
13. 3. Economic environment 1
of -
4. Industry performance
5. -
Business operating in several
countries through subsidiaries
1.
with little coordination among
the subsidiaries.
Business operating in several
2.
countries through exports
14. A Multinational Enterprise is - 1
Business operating in several
countries through subsidiaries
3.
with full coordination among the
subsidiaries.
4. None of the above
 5. -
Configuration and coordination
1. of value adding activities across
the globe.
Convergence commonality of
15. Globalisation of industry depends upon - 2. 1
global consumer needs
3. WTO
4. MNEs
5. -
1. -
2. -
16. - 3. - 0
4. -
5. -
Suppliers are ahead in
1.
technology
Cummins procures pistons from the
To control the outsourcing
market despite the strategic nature of the 2.
17. partners 4
product, keeping the ability to develop
3. Less number of players
good piston specifications in house. Why?
4. All the above
5. -
HP manufactures core components of its 1. Geographic postponement
servers in Taiwan and assembles them for 2. Form Postponement
markets in India, China, Singapore,
18. 3. Logistics postponement 4
Australia etc. for which they maintain
4. (a) or (c).
inventory in these locations. This is an
5. -
example of ¿
In a supply chain with high fluctuations in 1. make-to-order
demand varieties but hardly any 2. make-to-stock
19. fluctuations in demand volumes in raw 3. assemble-to-order 3
material stage, which of the policies is best 4. all of the above
suited: 5. -
1. MTS to MTO
2. MTO to CTO
If for a firm variety explosion takes place
20. 3. MTS to CTO 3
in assembly stage, it should move from
4. CTO to MTS
5. -
1. -
2. -
21. - 3. - 0
4. -
5. -
[Link]. Question Actual Answer
The decision phases in a supply chain supply chain
1.
include: operation

LDj = ∑ Dijwi where

What is correct about the load-distance
2. Dij = √(xi - Xj)2 +
method in facility location planning?
(yi - Yj)2

Match the columns for the superior channel

performance:
Distributor storage
Response time with last mile
delivery (A)
Manufacturer
3. Facility and CDBA
storage with
handling
customer pickup (B)
Retail storage with
Transportation
customer pickup (C)
Manufacturer
Customer
storage with direct
experience
shipping (D)
A company would decide whether to
4. outsource or perform a supply chain function design phase
in-house during the:
maximize the
5. The objective of every supply chain is to: overall value
generated
Supplier →
Which sequence of stages is typical for
6. Manufacturer →
product flow in a supply chain?
Distributor
A manufacturer's supply to the distributor in
a manufacturing cycle found to be normally
distributed with a mean of 2,200 units/week
and standard deviation of 450 units/week. If
7. it takes 2 weeks to receive the supply then 74 percent
what service level can be expected from the
distributor for his replenishment cycle given
an ROP which is fixed at 48% of the EOQ =
10,000 units?

From the above question, if the inventory

needs to be halved then what changes the Flow time can be
8.
OEM should make in the process while reduced by half
fulfilling its demand?
how large the
The supply chain strategy category would
9. warehouse in
include a decision about:
Kokomo should be
 Given an SS, an
What do you think is logically not correct increase in the
10. when it comes to CSL, fr , SS, ESC, EOQ EOQ will always
(excluding exceptions)? increase the fr and
the CSL
there is only one
11. For any supply chain: source of revenue,
the customer
''Supply chains that utilize strategies aimed
at being responsive and flexible to customer
needs, while the risks of supply shortages or
12. Agile supply chains
disruptions are hedged by pooling inventory
or other capacity resources'' can be termed
as:
design, planning
The profitability of a supply chain is and operation
13.
impacted primarily by the: categories of
decisions
For an auto-OEM if the throughput is 60
units/hour and the material flow time is 10
14. 600 units
hours then what inventory it should carry to
meet the market demand?

The time horizon of the operation phase is

15. weekly or daily
typically:

For any supply chain, the source of revenue

16. the customer
is generated by:

A distributor wanted to decrease its ordering Lot size can be

17. cost by a factor 2 in a typical ordering cycle, reduced by a factor
what changes it should make in its lot size? 0.29
Information and
product both flow
Which set of supply chain flows is correctly
18. upstream and
described?
downstream in a
supply chain
Customer value
Supply chain surplus involves which two
19. and supply chain
parts?
cost
Each stage in a supply chain is connected
through the flow of products, information,
20. one of the stages
and funds. These flows often occur in both
directions and are usually managed by:
 Match the columns for the inferior channel
performance:

Distributor storage
Response time with last mile
delivery (A)
21. DCAB
Manufacturer
Facility and
storage with
handling
customer pickup (B)
Retail storage with
Transportation
customer pickup (C)
Manufacturer
Customer
storage with direct
experience
shipping (D)

Identify the correct sequence choosing from

either true (T) or false (F) alternatives:
Statements:

Truck freight charges on km basis is inversely

22. proportional to the distance covered TFTF
Cross-docking is related to material handling
at sea ports
Supply chain will ensure competitiveness,
while logistics will ensure cost effectiveness
Procurement methodologies will not
necessarily reduce the transaction cost

the processes in a
supply chain are
divided into a
23. The cycle view of a supply chain holds that: series of activities
performed at the
interface between
successive stages
frequent but
Wal-Mart's supply chain features clusters of
inexpensive
24. stores around distribution centers, which
replenishment at
facilitates:
the stores
all responses in a
supply chain are
The push/pull view of a supply chain holds
25. performed in
that:
anticipation of
customer orders
 If the lead time
and sigma(D)
decrease by a
Understanding the supplier lead time and factor of k, the
the demand uncertainty are some of the key required safety
26.
aspects in the inventory management. In the inventory
context, which of the following is correct: decreases by a
factor of sqrt(k)
and by a factor k,
respectively
If a retailer makes an EOQ of 2,000 units of
an item to the distributor with an ordering
27. cost of INR 500/order, unit cost of INR 100 72,000 units
and holding cost of 1.5%/month then what is
its annual demand?
A manufacturer usually spends a holding
cost of h (in %) which is increasing by 20%
year on year. The growing holding costs have
Lot size can be
posed a big problem while occupancy rates
28. decreased by a
found to be quite uncertain. In such a
factor 9%
situation, what do you suggest the
manufacture to change in terms its order lot
size?

Higher level of vertical integration in the

Intellectual
29. supply chain may lead to ----------- risk in a
property risk
bigger way?

On a 1,500 km trip, if a vehicle expends INR

22/km for 10 tonned cargo then how much it
30. INR 22/km
will expend, approximately, for a cargo size
of 5 tonnes (assuming normal conditions)?