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Lecture 1

Supply Chain management

Supply Chain encompasses all activities associated with the flow and transformation of goods and
services from the raw materials stage through to the end-user, as well as the associated information
and monetary flows.
Operations and supply chain processes can be categorized as follows:
Planning: processes needed to operate an existing supply chain strategically
Sourcing: selection of suppliers that will deliver the goods and services needed to
create the firms product
Making: where product is produced or the service is provided
Delivering: referred to logistic processes
Returning: involves the processes for receiving worn-out, defective, and excess
products back from customers and support for customers who have problems with
delivered product

Drawing a supply chain:

- Flows of information mainly go both ways, while flows of materials dont always go both
- When e.g. factory, warehouse and service desk are located at same place, no arrows
between these but blocks touching each other

- Supplies raw materials, semi-finished products and finished products to downstream
Several strategies:
- Supplying demand at lowest possible costs.
- Responding quickly to changing requirements and demand to minimize stock outs.
- Sharing market research for jointly development of products and services.

- Assemblage of products and services.
- Make-or Buy decisions concerning components and semi-finished products.
Objective of purchasing:
- Identify products and services that can be obtained externally
- Develop, evaluate and determine the best supplier, price and delivery for those products and
Selection of suppliers
Manufacturers that decide to buy instead of making products can follow three-stage process:
- Vendor evaluation: finding potential vendors and determining likelihood of their becoming
good suppliers
- Vendor development: assuming that a firm wants to proceed with supplier, how to integrate
activities into its own system?
- Negotiations: several strategies exist to determine price(s)

- Distribution of products from manufacturers to retailers and customers.
Activities are, for example:
- Temporarily storage of products in warehouses to balance fluctuations in production and
- Transportation of products by, for example, trucks, trains, airplanes, ships or pipelines.
Distribution represents, on average, 25% of the total costs of products

Customers buy products and services:
- Direct delivery of products after ordering on the Internet or phone
- Retailers, supermarkets, service organisations etc. offer products and services to customers.

Downstream flows: Supplier to customer

Upstream flows (Return flows): customer to supplier

Reasons for the occurrence of return flows are, for example,

- recycling of products
- money back guarantee for unsatisfied customers
- repairs
- empty packaging materials
- waste
- returned new products

Transformation Process
Products and Services

Global logistics
- International supply chains: Flow of goods and services from suppliers to customers (and vice
versa) located all over the world.
Reasons for globalization:
- Reduction of costs
- Improvement of supply chain
- Providing better goods and services
- Attract new markets
- Learn to improve operations
- Attract and retain global talent

Differences global and local supply chains

Distances and time differences
Exchange rates
Variety of products
Foreign rules

Supply chain management

- Can be defined as the efforts to integrate the processes in the supply chain.
- Cooperation, effective coordination and integration of materials and information and trust
throughout the supply chain might be necessary to obtain a valuable chain with satisfied
- Simultaneously, attention can be paid to reduction of costs.

Various trends impact the performance of a supply chain. Examples of these trends are:
Trends supply chain management: ever faster
Cycle time reduction: The cycle time of a supply chain equals the total time required to complete
the total process from raw materials to the delivery of the finished product to the customers.
Efficient consumer response: Extensive collaboration between firms to respond
faster/better/cheaper to the ever changing demands and wishes of customers.
Just-in-time: Philosophy of continuous and forced problem solving that drives out waste (storage,
inspection, waiting etc.)

Trends supply chain management: production process

Postponement: delaying any modifications or customization to the product as long as possible in
production process. For example, Hewlett-Packard adds power system the moment the destination
country of the printer is known.
Channel assembly: postponement (vertraging) of final assembly until distribution. For example,
Dell makes a computer in its warehouse from standardized components after the order of a
Standardization: Reduction of the number of variations in materials and components as an aid to
cost reduction.

Trends: outsourcing
Third party logistics: Core activities are executed by the company itself. Other activities are
outsourced. Major candidates for outsourcing are logistics activities.
Vendor managed inventories: The supplier is in the general case of Vendor Managed Inventory
responsible for the management of the inventories of his product at each location within the supply

Trends: communication
E-commerce: E-commerce is the collective noun for all techniques, which take care of the fact that
all transactions can be executed in a paperless environment. EDI, Internet and e-mail are examples of
these kinds of techniques.
Internet: On the Internet suppliers can offer their products against fixed prices. Another way, to
buy or sell products on the Internet is to participate in an auction. With Internet all aspects of the
traditional purchase process can be executed.
EDI (Electronic Data Interchange): With EDI standard documents are exchanged between
computers. For example, orders of customers, requests for production and so on. With EDI
information can be exchanged, in contrast to paper based systems, within a few minutes. As a result,
an effective inventory management, a better service and a better way of communicating can be

Research in lean
Lean manufacturing: aggressively seeks to eliminate causes of production defects
- Center for Operational Excellence
The research within this area contains a variety of topics, such as:
- design of manufacturing systems,
- layout issues,
- design of planning and control systems,
- product development,
- Maintenance
- lean principles in service organizations (e.g., hospitals).
Projects performed in cooperation with industrial organizations.
Many graduate students are involved in research projects.
Logistics is a part of the supply chain process.
- Logistics is the part of the supply chain process that plans, implements, and controls the
efficient, effective flow and storage of goods, service and related information from the point
of origin to the point of consumption in order to meet customer's requirements.
Logistics activities occur in nodes (punten) in the supply chain and between several nodes in the
supply chain.
Examples of logistics activities are: transportation and inventory of products.

Logistics environments
Production environments
- Goods: products that can be bought by customers.
Distribution environments
Service environments such as hospitals, banks, etc.
- Services: Activities that typically produce an intangible product, such as education, lodging,
entertainment, government, financial and health services

We distinguish the following parts of the logistics process:

- Materials Management: all activities to move materials, components and information
efficiently to and within the production process and all activities to use the production
process efficiently.
- Physical Distribution: refers to the movement of goods and information outward from the
end of the assembly line to the customer.
- Reverse logistics: logistics management skills to manage reverse flows.

Materials management
In these sub-systems various decisions need to be made. Examples of these decision problems are:
Purchase decisions:
Selection of suppliers of raw materials
Selection of suppliers of components
Selection of suppliers of semi-finished products
Make or buy decisions

Inventory management: managing and controlling inventories of raw materials, components, semi-
finished products and finished products until the central warehouse.

Planning of production decisions:

Material requirements planning
Forecasting of demand and orders
Planning of production process
Design of production process

Material handling:
Storage and internal transport of raw materials, components and semi-finished products
Choice equipment for intern transport in factory
Handling of raw materials, components, semi-finished products and finished products until the
central warehouse.

Physical distribution

In these sub-systems various decisions need to be made. Examples of these decision problems are:
Inventory management:
How many products should we order?
Optimal order size
Optimal order moment
Forecast of demand

Function in distribution channel
Optimal location
Materials handling
Layout of warehouse
Internal transport equipment
Orderpicking systems (for retrieving orders from the warehouse)
Choice for mode of transportation (e.g. train, truck or ship)
Outsourcing or doing it yourself?
Planning of routes

Electronical order system is never a logistical cost

Exercise lecture 1 over doen!

Objectives and constraints

To measure and study the performance of logistics systems we can formulate objectives and
constraints. An objective is an expression that maximizes or minimizes some goal. Examples of
objectives are:
maximize quantity to be produced
maximize profit
maximize service
minimize costs
minimize cycle times

Constraints are restrictions that limit the degree to which an manager can pursue an objective.
Examples of constraints are:
Total waiting times < 1 hour
total inventory < 100 units
occupancy degree > 0.90

Logistics control
Performance entire supply chain
- Quality of product
- Possibilities to respond to demand of customers
- Inventory levels
- Cycle time of supply chain
Performance within a single organisation
- Number of products handled within warehouses within a certain time
The supply chain is as strong as it weakest link!

Efficient and effective

Efficiency: do the job right at
- Minimal investments and costs
- And utilization rates and throughput times
Effective: do the right job
- The right products
- At the right time
- To the right customers
- at the right quality
- and at the right quantity

- Single factor productivity: (outputs, good and or services) / input factor
- Input factors: labour, capital, management
- Example: 1000 units produced in 250 hours
- Productivity = 1000/250 = 4 units per hour

- Multifactor (or total factor) productivity includes all inputs:

- Each individual input can be expressed in, for example, euros.
- Example:
Costs for staff: 640 euro per day
Costs system: 800 euro per day
Output: 14 units
Multifactor productivity: 14/(640+800) = 0.0097 units/dollar
Lecture 2
Performance analysis
This is the initial design.
Is it a good or bad design?
Possible criteria
deterministic throughput time,
design capacity
location and maximum capacity of the bottleneck,
departure rate (=throughput),
(productive) utilization

Objective: To organize and design the various processes as efficient as possible such that
customers are satisfied and operating costs are minimized.

Analytical project outline

Problem definition
Define general objectives project. Be realistic.
Define performance measures to evaluate system
Describe system
Collect data
Realise that data often contain errors (or is not what you think it is).
Understand the system. Otherwise, you cannot judge the input data.
Conceptual model
Summary of input data
A document with all assumptions
Description of all processes and interactions
Roughly resembles the flow diagram
Model implementation
Make model in a software environment
Check if your model corresponds with conceptual model.
Check if your model corresponds to reality.
Quantitative approach: run model with data of last year.
Qualitative approach: face validity & Turing test
Create alternative models
Output analysis
Analyse performance of the models
Compare models based on their performance.
Ensure that your results are reliable
Write a clear report and present your results

Alternatives to find an estimate for a certain performance measure (such as
production speed, or waiting time of customers)
Educated guess (deterministic performance estimation)
Experimentation with the real system
Experimentation with physical models (on scale or full-size)
Experimentation (or calculating) with analytical models (mathematical, statistical
etc.) (in lecture 3)
Experimentation with simulation models

Deterministic performance estimation

Widely applicable
Easy and fast
Gives a rough estimate only
Analytical modeling (such as waiting lines)
Applicability is limited
Complex calculation
Limited number of performance criteria
Exact results
Widely applicable
Complex model building
Results for almost any performance criterion
No exact results (confidence intervals)

The idea behind simulation is to:
Imitate a real-world situation mathematically
Study its properties and operating characteristics
Draw conclusions and make action recommendations based on the results of the
The model is an approximation of reality
You cannot determine all characteristics or not all characteristics can be modeled.
You cannot incorporate all external influences.
Incorporated external influences will be approximated.
For example, based on real data you can determine a theoretical probability
In simulation, the most important question you should continuously be asking yourself is:
Is the model close enough to reality, such that we can draw accurate conclusions?

Advantages simulation:
Can be used for complex situations where analytical models are not useful.
Comparing alternatives is an easy job.
Possibility to perform experiments without investments.
Possibility to perform experiments without disturbances in the system (What-If analyses).
Possibility to examine the system during a long time period.
Possibility to incorporate uncertainty in system.
Possibility to gain insight in the system by using animation.
Possibility to find integrated solutions.
(Almost all large companies use simulation for investment issues.)
Disadvantages simulation:
Optimisation is not possible.
Difficult to analyse and interpret results.
Results are incorrect if input is incorrect (GIGO). Validation of the models is required.
Difficult to make simulation models.
Computation times are high.
Education, money and time are required.
Results look impressive. As a consequence, the value of the results is overestimated.

Deterministic throughput time

Interarrival time: Time between two subsequent arrivals of products at their entrance in the process.
Arrival rate: number of products that arrive per time unit (e.g. number of products that arrive per
Throughput time : Time that passes between the moment at which the customer/product enters the
system and the moment at which the customer/product is ready.
Deterministic throughput times can be estimated by adding up the expected processing times of the
different processes. Steps for calculating deterministic throughput time with multiple paths :
1. Estimate deterministic throughput time for one of the paths
2. Multiply resulting deterministic throughput time with probability that the path will be followed
3. Repeat 1 and 2 until all paths are handled
4. Total deterministic throughput time = sum of results of step 2 for all paths

Deterministic means that you ignore any probability distributions and just use the
average value (or mean or expected value)
Furthermore, we will ignore waiting line effects in the system
It is in general smaller than or equal to the actual average throughput time.

Design and effective capacity

Design capacity: Theoretical maximum output of a system or process in a given period.
Effective capacity: Capacity that can be expected given the product mix, methods of scheduling,
maintenance and standards of quality.
Sufficient design capacity??:

Serial or parallel processing

Serial means that steps are performed consecutively (one after the other)
Parallel means that steps can be performed simultaneously.
If we say that a single process consists of x parallel servers (machines or operators), we mean
each product only needs to be treated by one of the servers;
the other server(s) can simultaneously treat other product(s).

Bottleneck: an operation that limits output of production in the system.

If design capacity of all processes is sufficient, then we say that the arrival process is the bottleneck.
When determining the bottleneck, only the processes itself count, not the flowtime of
For each process, look clearly if it is a block or not.

Departure rate
Departure rate (or: throughput): number of products that leave the system per time unit.
- Determined by speed op bottleneck
- Only if the arrival process is the bottleneck, then the departure rate equals the arrival rate
Utilization rate
- total operating time / total time of
- actual output/design capacity of
- arrival rate / aantal desks x production rate
- production time / arrival time

Efficiency = actual output/effective capacity (capacity without repair, breaks etc.)

The utilisation rate for a workstation consisting of n identical, parallel servers can be computed
from = (n), : arrival rate and : production rate

Productive utilization rate is calculated similar to normal utilization, only now set-up times are


Work in progress
(W.I.P.) : The number of products that have been taken into production, but have not yet been
In general, the WIP cannot be computed exactly:

However, Littles equation holds: L = W

L is the average WIP,
W the average throughput time,
is the average number of produced units per time-unit

Another estimation for WIP is

i is the utilization of machine i.
Xi is the batch size on machine i.

i 1
i i

(Production time / arrival time) x amount of products per productionde + (production time / arrival
time) x amount of products per production

Demand versus capacity

Demand exceeds capacity: increase of capacity
Capacity exceeds demand: stimulating of demand
Matching capacity and demand:
making staffing changes
adjusting equipment and processes
improving methods to increase throughput
redesigning product

Throughput time = 15.3 minutes

5 + 2 + 1 + 3 + (0,3 x 12) + (0,7 x 1) = 15.3 min
Departure rate = 8*7.23 = 57.8 customers per day
Bottleneck, either the searching or the service desk
Searching is: 50 / 5 = 12
Service desk is: 1 + 3 + (0,3 x 12) + (0,7 x 1) = 8.3
60 / 8.3 = 7.23
8 * 7.23 = 57.8 customers
Utilisation of process searching = 83.3%
Utilisation of service desk = 100%
WIP (with Little) = 1/6*15.3 = 2.55 customers

- In deterministic performance estimation we assume there is no uncertainty. In a simulation
model we can imitate variability.
- In deterministic performance estimation we are overly optimistic. Therefore, the
deterministic estimate will be
too low for throughput times
too low for Work-In-Progress
quite good for the departure rate
quite good for the utilisation rate