Supply Chain Management

By

[Link]
Professor
Department of Production Engg
National Institute of Technology
Tiruchirappalli-15,TN
• Evolution of Supply Chain Management
• Fundamentals of Supply Chain Management
• Supply Chain Networks
• Supply Chain Flows
• Supply chain planning: Strategic,
operational and tactical.
• Decision phases in supply chain
• Overview of supply chain models and
modeling systems
Historical Background
• Inventory lot-sizing models
• Time-series forecasting
• Production Planning & Control
• Purchasing
• Sales & Distribution

All these functions have existed for a century !

The Transition (1970 – 1995)
• Inventory models came under attack
(70’s)
• Enter MRP  MRP II  ERP
• And from Japan, JIT, TQM, Kaizen, etc.

What happened thereafter?

 The Motive ?
– Better coordination /integration of functions
– Shorter time to manufacture
– Globalization
– Emergence of IT
• Led to the evolution of…
Supply Chain Management
Evolution

Supply Chain Management

Enterprise Resource Planning
Manufacturing Resource Planning
Material Requirements Planning
Lot-Size Models
Thumb - Rules
Ancient Times The first supply chain was the barter system

Traces of outsourcing was seen when Charles S. Rolls

1904 became selling agent for cars made by F. Henry Royce

The essence of SCM was understood with the first phase

1960-1975 characterized as an inventory ‘push’ era that focused
primarily on physical distribution of finished goods

1975-1990 Companies began migrating from an inventory push to

a customer pull channel

1980 Emergence of SCM

1985 WalMart introduced the concept of Cross Docking

1996 Internet revolutionized the distribution system of

the business

1998 Concept of e-commerce changed the definition of

business
 Why Supply Chain ?
Earlier Today
Companies No two companies at the Competition at all levels.
same level of competition.

The main motive was to in- Main motive is customer ser-

crease vice.
production.

Production differentiation Product differentiated nearer

very early the
and far from customer. customer.

Reaction approach of indus- Action approach of industries.

tries.
Customer Customer did not care about Customers demand exact
specifications. specifications.

Less market moving powers More power devolved to the

customer
 SUPPLY CHAIN MANAGEMENT
What is it?

….More than Technology Distributor

Customers s

Total system approach to

managing the entire flow of
information, materials and Supplier Factories/
services from raw material Plants
suppliers through factories,
the distribution centers and
warehouses to end customer.
An Example - General Motors
In the early 80s GM’s Service Parts Operation
was very efficient as their Parts Distribution
Centers used scientific inventory management
techniques and sophisticated transportation
algorithms to manage their routing schedules. Yet
GM’s service to end customers was
consistently poorer than their competitors.

WHY?
...And the answer is...
… the inventory control of
the GM dealers was bad!
Therein lay their
supply chain problem.

While GM’s services to their immediate customers, the

dealers, was impeccable and factory performance
great , because of poor inventory control at the
dealers’ , the wrong parts were stocked and
the information system on inventory and part
usage were largely out of date!
 Postponement
High

Before Postponement

Inventory

After Postponement

Goal
Low
Poor Excellent
Service
The In the right At the right At
right quantities moment minimal
product cost
s

Flexibility Delivery Delivery Inventory

Reliability time/ Level
Lead
time
 Overview of Supply chain
Supply /Inbound Logistics Production Distribution/Outbound logistics

SUPPLIERS MANUFACTURERS CUSTOMERS

THIRD PARTY DISTRIBUTORS/

LOGISTICS WAREHOUSES
Product Flow
Information Flow
Cash Flow
Process/Work Flow
People Flow
 Supply Chain Relays

Suppliers Manufacturer Distributor Retailer Customer

Inventory? Special Order? Warranty?

New Technology? Increased Demand? International Sales?

 Background
A supply chain

Acquire raw materials and parts

Transform these raw materials and parts into finished prod-
An integrated system ucts
which synchronizes
Add value to these products
a series of inter-re-
lated business pro-
Distribute and promote products to either retailers/customers
cesses in order to
Facilitate information exchange among various business en-
tities

To enhance the operational efficiency, profitability and com-

Main objective petitive position of a firm and its supply chain partners
 Background
Supply Chain Management : definition
The integration of key business processes
from end-users through original suppliers
that provide products, services, and information and add value
for customers and other stakeholders(Cooper(1997))

The supply chain process

Third Party Logistics Providers

Suppliers Manufacturers Distributors Retailers Customers

Inbound Logistics Outbound Logistics

Materials Management Physical Distribution
 Background
Supply Chain
Material management(inbound logistics)

The acquisition and storage of raw materials, parts, and supplies

The complete cycle of material flow from the purchase and internal control of
production materials to the planning and control of WIP

Physical distribution(outbound logistics)

All outbound logistics activities related to providing customer service.

Order receipt and processing, inventory deployment, storage and handling,

outbound transportation, consolidation, pricing, promotional support, returned
product handling, and life cycle support…
 Background
The successful integration of the entire SC process

Depends heavily on the availability of accurate and timely in-

formation that can be shared by all members of the SC.
Functions Associated with
Supply Chain Management
• Forecasting • Shipping &
demand
delivery
• Selecting suppliers
• Information
• Ordering materials
• Inventory control management
• Scheduling • Quality
production management
• Customer service
Need for Supply Chain Management

• Improve operations
• Increasing levels of outsourcing
• Increasing transportation costs
• Competitive pressures
• Increasing globalization
• Increasing importance of e-commerce
• Complexity of supply chains
• Manage inventories
 Creating an Effective Supply Chain

• Develop strategic objectives and tactics

• Integrate and coordinate activities in the

internal supply chain

• Coordinate suppliers with customers

• Coordinate planning and execution

• Form strategic partnerships

 Challenges
• Barriers to integration of organizations

• Getting top management on board

• Dealing with trade-offs

• Small businesses

• Variability and uncertainty

• Long lead times

 Trade-offs
“
• Lot-size-inventory
• Bullwhip effect

• Inventory-transportation costs

• Lead time-transportation costs

• Product variety-inventory

• Cost-customer service
Supply Chains
Benefits
There are many benefits to integrating functional systems.

• Tangible benefits:
– Inventory reduction
– Personnel reduction
– Productivity improvement
– Order management improvement
– Financial-close cycle improvements
– IT cost reduction
– Procurement cost reduction
– Cash management improvements
– Revenue/profit increases
– Transportation logistics cost
reduction
– Maintenance reduction
– On-time delivery improvement.
Supply Chains Benefits
Continued

• Intangible benefits:
– Information visibility
– New/improved processes
– Customer responsiveness
– Standardization
– Flexibility
– Globalization
– Business performance
– Reduction in duplication of entries
– controls and reconciliation are enhanced
– rapid assimilation of data into the organization

Systems can be integrated internally and externally. Internal

integration refers to integration between applications inside a
company, whereas external integration refers to integration of
applications among business partners.
 The type of a Supply Chain partnership

Autonomous channel captains or strategic business units

Primary  Actually perform operational and/or managerial activities

partner  Create a specific product or service for a particular customer

or market

Companies that simply provide resources, knowledge, and utility

Secondary  Transportation carriers, consulting firms

partner  Third-party logistics providers, IT service providers

 On-line brokers, and educational institutions

Structural dimensions of the Supply Chain

Network
Horizontal structure The number of tiers across the SC
The number of suppliers and customers represented
Vertical structure
within each tier
Characteristics of Supply Chain links

The firm integrates a SC process with one or more customer/suppliers

Managed PL Connect multi-tier SC partners as the firm is actively involved in the

management of tier one and a number of other links beyond tier one

Not fully controlled by a firm

Monitored PL The firm is involved in monitoring or auditing how the link is integrated
and managed

The firm neither actively manages, nor monitors

Not managed PL The firm fully trusts its partners’ ability to manage the process links ap-

propriately
Between both partners and non-members of the company’s SC
Non-member PL Not integral parts of the firm’s SC structure, but can dictate the
performance of the firm

*PL : Process Links

 Supply Chain constraints

Financial Technical capability

Capacity Production Available space for inventory stocking

Supply and manufacturing

Maximum holding time for backorders

Delivery time windows
Service compliance Manufacturing due dates
The number of driving hours for truck

drivers

The extent of de- Vertical integration of SC

mand
• Supply chain decision variables

Location Where *** should be located

Allocation Which *** should serve which customers, market segments

Centralization/decentralization of distribution network

Network structure The exact timing of expansion or elimination of mfg. or dist. fa-

cilities

Number of facilities How many *** are needed

and equipment

Number of The number of stages by combing or separating them

stages(echelons)
• Supply chain decision variables-cont’d

Delivery or pickup routes

Service sequence Schedules of vehicles serving customers

Volume Optimal purchasing volume, production, shipping volume

Inventory level Optimal amount of every raw material, part, WIP, finished goods, SKU

Size of work- The number of truck drivers or order pickers

force

Which suppliers, IT service providers, third-party logistics providers

The extent of
should be used for long-term outsourcing contacts and single/multiple
outsourcing
sourcing
Supply Chain Planning
• Strategic decisions (location,
capacities, available modes, product
assignments) fixed
• Forecast for coming year
• Assignment of markets to supply points
• Inventory accumulation plan (e.g., seasonal goods)
• Manufacturing subcontracting
• Backup locations for inventory in stockouts

 Less uncertainty than design phase

 Establishes guidelines within which supply chain
will operate
 Classification of
Supply Chain Decisions

Decisions

Temporal Functional

• Procurement
• Replenishment
• Strategic
• Production
• Tactical/Planning
• Distribution
• Operational
• Logistics
• Global
Supply Chain Execution with
Decisions
Forecasting
Aggregate
Inventory
Planning
Replenishment
Capacity
Decisions
Planning
MPS/Sourcing
Inventory
Order Entry Order Fulfillment
Availability
and Processing Confirmation Planning - Schedule
Production
Allocate
Order Decisions Inventory Production Decisions
- Priority
Orders

Production
Scheduling

Distribution Pick and Schedule Customer

Scheduling Load Delivery Service

Distribution Decisions
 Temporal Decisions
• Strategic decisions
1. These decisions target the long term objectives.
2. Involves design and planning.

• Tactical decisions
1. Manages the supply chain
2. Time interval ranges from weeks to months.

• Operational decisions
1. Short term decisions focused on the real time
activities of the supply chain
 Functional Decisions
• Procurement decisions
1) Supplier selection
2) Direct delivery from suppliers
3) Vendor Managed Inventories

• Manufacturing/ Production decisions

1) Plant location
2) Product selection
3) Capacity planning
4) Production Scheduling
 Functional Decisions
• Distribution decisions
1) Configuration of distribution facilities
2) Location
3) Customer allocation

• Logistics decisions
1) Selection of ports
2) Direct delivery
3) Mode of transport

• Global decisions
1) Planning under uncertainty
2) Product and process selection
 Supply Chain Decision Taxonomy

Strategic
SCM Demand Plan
APS Transport & Inventory
Planning
Planning
Supplier
Apps Manuf
Transport execution & CRM/SFA
Execution
System WMS
Operational

Supplier Manufacturer Distributor Retailer Customer

SCM – Supply Chain Management

APS – Advanced Planning and Scheduling
CRM – Customer Relationship Management
SFA – Sales Force Automation
WMS – Warehouse Management System
 Decisions in Supply Chain
• Product design
• Production structure
• Plant location - Plant layout and logistics
• Production planning
• Packaging
• Choice of markets / sources
• Distribution / dealer network design
• Location of warehouses
• Allocation decision
• Inventory management - stocking levels
• Transportation - mode choice, shipment size
and routing decision, and transport contracting
Supply chain Decision
Hierarchy
 Location-allocation decisions  Outsourcing
 Demand planning  Supplier selection
Competitive  Distribution channel planning  Information technology(IT) selection
Strategy  Strategic alliances  Pricing

 New product development  Network restructuring

 Inventory control  Material handling

 Production/distribution coor-
Tactical Plans dination
 Equipment selection

 Layout design
 Order/freight consolidation

Operational  Vehicle routing/scheduling  Record keeping

Routines  Workforce scheduling  Packaging
 Pitfalls in SCM
• Inadequate inventory management

• Inadequate definition of customer service

• Lack of logistic skills

• Inefficient Information system

• Ignoring the impact of uncertainties]

• Organizational barriers

• Inadequate Information Sharing

• Incomplete supply chain

• Big-bang approach
 WALMART Supply Chain

Suppliers Manufacturer Cross Dock Retailer Customer

Inventory? Special Order? Warranty?

New Technology? Increased Demand?

 Dell Computer Supply
Chain

Suppliers Dell Assembly Customer

Sony

Inventory? Special Order? Warranty?

New Technology? Increased Demand? International Sales?

 Comparison of Dell and Ford Supply Chain
Customers
Institutional
Customers

Dealers

DELL T2 T1
T3
FORD

Suppliers Suppliers
Individual (in Tiers)
Customers

Source: Austi n, Robert, D., Ford Motor Company: Supply Chai n Management Teachi ng Note. HBS No. 601172. Copyright © 2001 Presi dent and Fellows Harvard College.

Ford Motor Company Exhibit TN-1; Slide 1 of 1

Supply Chain
Modeling &
Optimization
TECHNOLOGY

Optimization

Science (Knowledge) Engineering (Action)

 Supply Chain Optimization
• Optimization is used to improve a
company’s supply chain performance in
variety of areas

• Reduced Supply Costs

• Improved Product Margins

(Profit per additional unit produced)

• Increased Manufacturing Throughput

(Production at all levels)

• Better Return on Assets

(Net income after expenses/interest)
 SCM Model
• SCM focuses on
• Globalization
• Information management tools

• SCM integrates
• The supply chain operations: Plan, Source, Make,
Deliver & Return

• SCM transforms
• Ideas into deliverable products and services.

• Supply Chain Planning (SCP) Model / Software

• Supply Chain Execution (SCE) Model / Software

Scope of Supply Chain
Modeling
• Three levels of decision hierarchy

 Location-allocation decisions  Outsourcing

 Demand planning  Supplier selection
Competitive  Distribution channel planning  Information technology(IT) selection
Strategy  Strategic alliances  Pricing

 New product development  Network restructuring

 Inventory control  Material handling

 Production/distribution coor-
Tactical Plans dination
 Equipment selection

 Layout design
 Order/freight consolidation

Operational  Vehicle routing/scheduling  Record keeping

Routines  Workforce scheduling  Packaging
• Optimization need Model
Guess…..What model is this ?

min i j cijxij
s.t. j xij < si, i,
i xij > dj, j,

xij > 0, i, j.

This is a way to lose a student !

Transportation Model !

min i j cijxij
s.t. j xij < si, i,
i xij > dj, j,

xij > 0, i, j.

Costs PLANT Bearings

Supplier Chennai Madurai Cochin Coimbatore Available
Kumar 21 50 40 35 275,000
Ganesh 35 30 22 42 400,000
Sudhir 55 20 25 70 300,000
Gopal 43 25 37 58 500,000
Capacity 200,000 600,000 225,000 350,000
 Model
Model
ss
“The essence of Operations Research lies in the construction
and use
of models.”

A model is a simplified representation of something real.

There are different types of models.

Types of Optimization Models
 Model Formulations

• Different types of optimization model formulations exist:

• Baseline model formulation
• Linear Programming formulation
• Classical non-linear formulation
• Goal Programming formulation
• Compromise Decision Support Problem formulation
• etc.

• Basic classifications are:

• Constrained versus unconstrained
• Linear versus non-linear
• Single objective versus multi-objective

• Another classification can be made by variables:

• Continuous / discrete / mixed-integer
 Modeling Approaches to SCM

Supply Chain Modeling

Deterministic Stochastic Hybrid Heuristic IT Driven Simulation

Network MIP Optimal Dynamic

Design Optimization Control Programming
WMS ERP GIS
Theory

WMS – Warehouse Management System

ERP – Enterprise Resource Planning
GIS – Geographic Information System
 Deterministic Models
• Assumption:
• Model parameters are known with certainty.

(i) Network Models.

• Determine location of production, stocking, and sourcing
facilities, and channels through which the products flow.

(ii) Mixed-Integer Programming (MIP) Models.

• Includes models for

• vehicle routing and scheduling,
• facility location and sizing,
• shipment routing and scheduling,
• freight consolidation and
• selection of the mode of transportation.

np-complete - not amenable to optimization.

Modeling become

• NP - complete

•&

• NP- hard
What is P ?

• P = Set of problems than can be solved in

polynomial time
What is NP ?

• NP = Set of problems for which a solution

can be verified in polynomial time
What is Polynomial Time ?

• Reasonable Time
Traveling Salesman Problem (TSP)

3
2

Depot
Traveling Salesman Problem

• A salesperson has to visit a number of cities

• (S)He can start at any city and must finish at

that same city

• The salesperson must visit each city only once

• The number of possible routes is (n!)/2 (where

n is the number of cities)
Combinatorial Explosion
Combinatorial Explosion
Cities Routes
1 1
2 1
3 3
4 12
5 60
6 360
7 2520
8 20160
9 181440
10 1814400
11 19958400
Combinatorial Explosion
A 10 city TSP has 181,000 possible solutions
A 20 city TSP has 10,000,000,000,000,000
possible solutions
A 50 City TSP has
100,000,000,000,000,000,000,000,000,000,00
0,000,000,000,000,000,000,000,000,000,000
possible solutions

There are 1,000,000,000,000,000,000,000

litres of water on the planet
Mchalewicz, Z, Evolutionary Algorithms for Constrained Optimization Problems, CEC 2000 (Tutorial)
 91.9 CPU years on a
Intel Xeon 2.8 GHz processor
What is NP Complete ?

• Minesweeper

• TSP
What is NP-Hard
• Health Care Supply Chain Allocation
Problem

5
Patient 1 Hospital 1
4

Patient 2 6 Hospital 2

3
? Commonly Believed Relationship

NP
P
NP Complete

NP Hard
When modeling become
• np-complete

•&

• np-hard

• We need….
 Heuristic
• Algorithm – Procedural Steps

• All heuristics are algorithms

• But, All algorithms are not heuristic

• Heuristic – Problem Specific Algorithm

• Eg. Vogels Approximation Method to solve

transportation problem
 Heuristic Models
• Intelligent approach that attempts to find
good solutions.

• Empirical approached problem solving

• Thumb Rule

• Quick and Effective

• No guarantee of optimum

• Adequate for real life

Metaheuristic
• General Specific Algorithms
 Stochastic Programming

• Some of the variables are not deterministic.

• Such models are appropriate

• When data evolve over time and

• Decisions need to be made prior to observing the

entire data stream.
 Robust Optimization Models

• Uncertainty about problem data is treated as

unknown-but-bounded.

• Intervals of confidence for the data are

considered.
 Simulation Models

• Both strategic & operational elements.

• Evaluate alternative policies or decisions.
• Dynamic nature of supply chains
 Hybrid models

• Both deterministic & stochastic models.

• Inventory-theoretic & simulation models

– Deal both certainty and uncertainty

 IT Driven Models
• Warehouse management system (WMS)
• Transportation management systems (TMS)
• Integrated transportation tracking,
• Collaborative planning and forecasting
replenishment (CPFR),
• Material requirement planning (MRP),
• Distribution resource planning (DRP),
• Enterprise resource planning (ERP), and
• Geographic information systems (GIS).
 The Future
• Soft issues.
• Multi-objective formulations
• Dynamic decision rules
• Theory of Constraints (TOC)
• Design of model-based Decision Support System

Shall we dream of an AI-driven,

Customer-friendly, People-sensitive
Supply Chain Management System ?
 WHERE DOES SCM STAND
TODAY?
• Fragmented studies

Managers don't know enough AI

AI people don't know enough

Management