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Lecture Notes for Supply chain management MGT 2015

561- Must be read in collaboration with text book

Start of lecture notes chapter 1

• The basic theme discussed in this chapter is the understanding of what really
supply chain management is, and what are the different decisional phases
involved in any decision pertaining to supply chain management.
• The different supply chain macro processes both within the supply chain and
at the input and output of the supply chain have been identified.

• After the introduction of the macro processes a classification approach have


been introduced, in this classification approach the different processes can
be either classified as push or pull.

• The basic distinction between push and pull process is that push process is in
the anticipation of the customer demand while the pull process is triggered
after the arrival of the customer demand.

• Definition: Supply Chain Management is primarily concerned with the


efficient integration of suppliers, factories, warehouses and stores so that
merchandise is produced and distributed in the right quantities, to the right
locations and at the right time, and so as to minimize total system cost
subject to satisfying service requirements.

Notice: – Who is involved – Cost and Service Level – It is all about


integration

Today’s Supply Chain Challenges

 Global supply chain with long lead times


 Rising and shifting customer expectations

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Lecture Notes for Supply chain management MGT 2015
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 Increase in labor costs in developing countries Increase in labor costs in


developing countries
 Increase in logistics costs
 Importance of sustainability
 Unprecedented Volatility

Conflicting Objectives in the Supply Chain

Purchasing

 Stable volume requirements


 Flexible delivery time
 Little variation in mix
 Large quantities

Manufacturing

 Long run production


 High quality
 High productivity
 Low production cost

Warehousing

 Low inventory
 Reduced transportation costs
 Quick replenishment capability

Customers

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Lecture Notes for Supply chain management MGT 2015
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 Short order lead time


 High in stock
 Enormous variety of products
 Low prices

End of Lecture Notes Chapter 1

Start of lecture notes chapter 2

What is "Strategic Fit"? - in a business scenario "strategic fit means aligning


supply chain strategy with competitive strategy." Companies build a competitive
strategy to target a set of customer segments and build strategies to satisfy needs
and priorities of those customer segments. Companies also study what competitors
are doing and what changes they can offer to have a competitive advantage, like
winning customers by offering a lower price on the product or by providing large
varieties of the product or by providing better services. Companies can achieve
these strategies by ensuring that their supply chain capabilities are able to support
these strategies.

Companies have to understand the need and priorities of targeted customer


segments and the uncertainty of their demand. There are many factors which
influence the demand of customer like price, convenience of purchase, urgency of
the product, size of the lot, delivery lead time, etc. The customers of one segment
tend to have more or less the same demand pattern, so to satisfy the uncertainty of
demand for the target segments the supply chain has to build the strategy and
capabilities accordingly. The demand uncertainty of target segments is called

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

"Implied Demand Uncertainty" which is different from "Demand Uncertainty"


which reflects the overall uncertainty of demand for a product.

Now the question arises as to how to handle this implied demand uncertainty? For
this, companies have to build the supply chain capabilities of responsiveness and
efficiency. Being a strategic fit is all about building the supply chain strategies to
face the customer demand and uncertainty or in other words a supply chain which
is able to supply big quantities required, in the shortest lead time, covering large
product portfolios and providing better services. Having these capabilities makes a
responsive supply chain. Responsiveness towards customer demand for quantity
and quality comes at a price. For example, to respond to a large product portfolio a
company needs to increase the production and storage capacity which will increase
the cost. The increase in cost will have an inverse effect on the efficiency of the
supply chain. So a strategic decision to increase the responsiveness will have
additional cost which will lower the efficiency. It's a trade-off between
responsiveness and efficiency. Some companies being more responsive will have
less efficient supply chain and if companies need an efficient supply chain then
they have to lower the level of responsiveness. Strategically companies have to
decide on the level of responsiveness they need to provide and try to bring the
efficiency by enhancing the processes and technologies.

From purchase of raw material to delivery of final product to the customer, a


supply chain has different stages and the demand uncertainty is different for each
stages. It is very important to understand the demand at each stage of supply chain
and choose the appropriate level of responsiveness or efficiency for that level. To
make it clearer let's have an example of Dell computers which uses the direct order

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

model where customers can configure computers and place orders online. Dell
gives a choice to customers to make customized models for their requirement, and
delivers them at their door steps. This increased the implied demand uncertainty
for Dell which needs a responsive supply chain. To provide these services to the
customer there will be additional costs involved for carrying huge inventory for all
the parts which cannot be charged to the customers because Dell has to be
competitive in the market to survive. As a solution to this increased cost Dell
closely collaborates with suppliers, which allows Dell to operate with only a few
hours of inventory for some parts and a few days of inventory for other common
components. This way the supplier will have less demand uncertainty which can be
handled through an efficient supply chain. Thus Dell absorbs most the uncertainty
and provides responsiveness in supply chain and its supplier being efficient
absorbs very little uncertainty. To achieve strategic fit companies need to bring
consistency between implied demand uncertainty and supply chain responsiveness.
For a high implied demand uncertainty we need a responsive supply chain and for
a low implied demand uncertainty we need an efficient supply chain.

End of lecture notes chapter 2

Start of lecture notes chapter 3

Supply Chain Drivers & Metrics

Drivers of Supply Chain The major drivers of Supply chain performance consists
of three logistical drivers & three cross-functional drivers. Logistical drivers: •
Facilities • Inventory • Transportation Cross-functional drivers: • Information •
Sourcing • Pricing Company’s supply chain achieve the balance between

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

responsiveness & efficiency that best meets the needs of the company competitive
strategy.

Drivers of Supply Chain Performance Efficiency Responsiveness Supply chain


structure Inventory Transportation Facilities Information Drivers Sourcing Pricing

FACILITIES are the actual physical locations in the supply chain network where
product are stored, assembled or fabricated. The two major types of facilities are : •
Production sites(factories) • Storage sites(warehouses) Factories can be built to
accommodate one of two approaches to manufacturing: 1. Product Focus: A
factory that takes a product focus performs the range of different operations
required to make a given product line from fabrication of different product parts to
assembly of these parts. 2. Functional focus: A functional focus approach
concentrates on performing just a few operations such as only making a select
group of parts or doing only assembly

Contd…. Warehousing: There are three main approaches to use in warehousing: 1.


Stock keeping unit (SKU) storage: In this approach all of a given type of product is
stored together. 2. Job lot storage: In this approach all the different products related
to the needs of a certain type of customer or related to the needs of a particular job
are stored together. 3. Crossdocking: In this approach, product is not actually
warehoused in the facility, instead the facility is used to house a process where
trucks from suppliers arrive and unload large quantities of different products.
These large lots are then broken down into smaller lots. Smaller lots of different
products are recombined according to the needs of the day and quickly loaded onto
outbound trucks that deliver the product to their final destination. So the
fundamental trade-off that managers face when making facilities decision between

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

the cost of the number, location & type of facilities (efficiency) & the level of
responsiveness that these facilities provide the company’s customer.

INVENTORY encompasses all the raw materials, work in process, and finished
goods within a supply chain. Changing inventory policies can dramatically alter
the supply chain’s efficiency & responsiveness. There are three basic decisions to
make regarding the creation and holding of inventory: 1. Cycle Inventory: This is
the amount of inventory needed to satisfy demand for the product in the period
between purchases of the product. 2. Safety Inventory: inventory that is held as a
buffer against uncertainty. If demand forecasting could be done with perfect
accuracy, then the only inventory that would be needed would be cycle inventory.
3. Seasonal Inventory: This is inventory that is built up in anticipation of
predictable increases in demand that occur at certain times of the year.

TRANSPORTATION entails moving inventory from point to point in the supply


chain . Transportation can take the form of many combinations of modes & routes,
each with its own performance characteristics. There are six basic modes of
transport that a company can choose from: • Ship which is very cost efficient but
also the slowest mode of transport. It is limited to use between locations that are
situated nest to navigable waterways & facilities such as harbor & canals. • Rails
which is also very cost efficient but can be slow. This mode is also restricted to use
between locations that are served by rail lines. • Pipelines can be very efficient but
are restricted to commodities that are liquid or gases such as water, oil & natural
gas. • Trucks are a relatively quick & very flexible mode of transport. Trucks can
go almost anywhere. The cost of this mode is prone to fluctuations though, as the
cost of fuel fluctuates and the condition of road varies. • Airplanes are a very fast

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

mode of transport and are very responsive. This mode is also very expensive mode
& is somewhat limited by the availability of appropriate airport facilities. •
Electronic transport is the fastest mode of transport and it is very flexible & cost
efficient. However , it can be only be used for movement of certain types of
products such as electric energy, data, & products composed of data such as music,
pictures & text.

INFORMATION serves as the connection between various stages of a supply


chain, allowing them to coordinate & maximize total supply chain profitability. It
is also crucial to the daily operations of each stage in a supply chain for e.g a
production scheduling system. Information is used for the following purpose in a
supply chain: 1. Coordinating daily activities related to the functioning of other
supply chain drivers: facility, inventory & transportation. 2. Forecasting &
planning to anticipate& meet future demands. Available information is used to
make tactical forecasts to guide the setting of monthly & quarterly production
schedules & time table 3. Enabling technologies: many technologies exist to share
& analyze information in the supply chain. Managers must decide which
technologies to use & how to integrate these technologies into their companies like
internet, ERP, RFID.

SOURCING is the set of business processes required to purchase goods &


services. Managers must first decide which tasks will be outsourced & those that
will be performed within the firm. Components of sourcing decisions • In-House or
outsource: The most significant sourcing decision for a firm is whether to perform
a task in-house or outsource it to a third party. This decision should be driven in
part by its impact on the total supply chain profitability. • Supplier selection: It

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

must be decided on the number of suppliers they will have for a particular activity.
The must then identify the criteria along which suppliers will be evaluated & how
they will be selected like through direct negotiations or resort to an auction.

PRICING determines how much a firm will charge for goods & services that it
makes available in the supply chain. Pricing affects the behavior of the buyer of the
good or services, thus affecting supply chain performance, for example, if a
transportation company varies its charges based on the lead time provided by the
customers, it’s very likely that customers who value efficiency will order early &
customers who value responsiveness will be willing to wait & order just before
they need a product transported. This directly affects the supply chain in terms of
the level of responsiveness required as well as the demand profile that the supply
chain attempts to serve. Pricing is also a lever that can be used to match supply &
demand. Components of Pricing Decisions: • Fixed Price versus Menu pricing: A
firm must decide whether it will charge a fixed price for its supply chain activities
or have a menu with prices that vary with some other attribute, such as response
time or location of delivery. • Everyday low pricing versus High-Low pricing

Obstacles to Achieving Strategic fit • Increasing variety of products • Decreasing


product life cycles • increasingly demanding customers • Fragmentation of supply
chain ownership • Globalization

End of lecture notes chapter 3

Start of lecture notes chapter 4

Factors Influencing Distribution Network Design

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

Why do you require a distribution network between manufacturing facility and


customer location?

The performance of no distribution network system or a distribution network in


place or proposed has to be evaluated on two major dimensions.

1. The customer needs that are being met.

2. Cost of the network or costs incurred in the meeting those needs.

The distribution network can change the satisfaction of the following customer
needs that differ from product to product as well as from distribution outlet to
distribution outlet.

 Response time

 Product variety

 Product availability

 Customer experience

 Order visibility

 Returnability

When customers demand less response time, the firm needs more outlets close to
the customer. When customers are happy with larger response times, the firm can
more centralized facilities.

Changing the distribution network design affects the following supply chain costs:

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

 Inventory cost

 Transportation cost

 Facilities and handling related cost

 Information system cost

As the number of facilities in a supply chain increases, the inventory and resulting
inventory costs also increase. For example, Amazon has fewer facilities and
therefore is able to turn its inventory about twelve times a year. Borders have about
400 facilities and it achieves only about two turns per year.

As long as inbound transportation costs to warehouses are kept the same,


increasing the number of facilities decreases total transportation cost. But, if the
number of facilities is increased to a point where there is a significant loss of
economies of scale in inbound transportation (as full truck loads are not
employed), increasing the number of facilities increases total transportation cost.

A distribution network with more than one warehouse allows initially to reduce
transportation cost relative to a network with a single warehouse. Total logistics
costs are the sum of inventory, transportation, and facility costs for a supply chain
network. As the number of facilities is increased, total logistics costs first decrease
and then increase. Each firm should have at least the number of facilities that
minimize total logistics costs.

As a firm wants to further reduce the response time to its customers, it may have to
increase the number of facilities beyond the point that minimizes logistics costs. A
firm should add facilities beyond the cost- minimizing point only if managers are

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

confident that the increase in revenues because of better responsiveness is greater


than the increase in costs because of the additional facilities.

There are two key decisions when designing a distribution network:

 Will product be delivered to the customer location or picked up from a


preordained site (door delivery or a retail facility delivery)?

 Will product flow through an intermediary or a distribution channel separate


from retailer (or intermediate location)?

Based on the choices for the two decisions, there are six distinct distribution
network designs that are classified as follows:

 Manufacturer storage with direct shipping

 Manufacturer storage with direct shipping and in-transit merge (cross


docking)

 Distributor storage with package carrier delivery

 Distributor storage with last mile delivery

 Manufacturer / distributor storage with costumer pickup

 Retail storage with customer pickup

While the book gives above categories We can Manufacturer, Distributor, Retailer
as three entities. Customer pickup or door delivery as two options. If the door
delivery options is used the mode of door delivery. Also there is transport between

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Lecture Notes for Supply chain management MGT 2015
561- Must be read in collaboration with text book

manufacturer and distributor, distributor and retailer and between manufacturer


and retailers.

The customer preference for each alternative, resulting demand for the product or
products and cost of the distribution arrangement come into the picture to take the
distribution system decision.

Only niche companies will end up using a single type of distribution network.
Most companies are employ a combination of different types for different
products, different customers and different usage situations. In a company, fast
moving and emergency items are stocked locally and customers can either pick
them up directly or have them shipped depending upon the urgency. Slower
moving items are stocked at a national distribution center from where they are
shipped to the customer within a day or two. Very slow moving items are typically
drop shipped from the manufacturer and involve a longer lead time. .

End of lecture notes chapter 4

No lecture notes for chapter 5 as it has practical decision making procedures


and the theory is covered by chapter 4 and chapter 6

Start of lecture notes chapter 6

In years past, companies redesigned their supply chain networks infrequently,


usually in response to a significant change in operations prompted by a merger or
acquisition, the introduction of a new product, or a shift in sales profiles.

Today, however, market dynamics drive leading companies to examine supply


chain design more often.

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Lecture Notes for Supply chain management MGT 2015
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Take global sourcing, for example. Many companies undertake complex global
sourcing initiatives, but fail to support them with similarly diligent network design
analyses, notes Iain Prince, a senior manager with Accenture's global supply chain
practice.

"This is a critical disconnect, because a wholesale revamp of sourcing processes


and policies affects virtually every aspect of an organization's supply chain
network," he says.

Global sourcing creates a whole new network-design ballgame, he explains,


because of several factors:

 The influence of low-cost labor.

 Geographic distances and their impact on service and availability.

 Barriers associated with language and technology sophistication.

 Volatility and reliability issues.

 Cultural and political barriers related to local governance.

 Additional supply chain links, handoffs, and customs challenges.

 Inventory visibility problems.

 The role of immediacy and perishability in determining the optimal


network.

 The impact of extensive transit times on inventory cost and ownership.

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"Companies must assess network-related tradeoffs to reconcile the convenience


and reliability of local or near-shore suppliers against the economies associated
with sourcing from low-cost countries," Prince says.

"If companies do not conduct a holistic assessment of global sourcing's impact on


their supply chain network, their new suppliers may be the only ones who benefit
from the arrangement."

THE NEW REALITY

As globalization increases, firms across all industries must grapple with a number
of new realities.

"Many companies are multi-national, but do not operate in an integrated, global


fashion," says Jamie Hintlian, a partner with Accenture's health and life sciences
supply chain management practice.

"They may have a presence in a variety of markets on different continents, but only
a limited ability to coordinate and leverage global supply and demand. That
presents both a tremendous opportunity and a challenge.

"For a global organization to function effectively, it must implement a truly global


planning process, with strict rules for creating and aggregating forecasts around the
world," Hintlian says.

Truly global companies face many challenges—from cultural and language


differences, to disparate business processes within the same company, to different
rules or practices for managing supply and demand.

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Lecture Notes for Supply chain management MGT 2015
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Many companies that grow through acquisitions, for instance, maintain extensive
manufacturing capacity around the world—some of which are redundant or
inefficient. In these situations, companies need to optimize or rationalize their
networks to fewer sites that are capable of serving global markets.

"Companies need to ask: 'How do we establish a supply and demand network and
reconcile it with global sales and operations planning so we make the most of our
rationalized corporate infrastructure?'" Hintlian adds.

Companies have also begun to recognize that the supply chain is critical to making
international business strategies function effectively.

"Organizations are starting to develop business and supply chain strategy


concurrently and collaboratively," Hintlian says. "In the past, business strategy was
developed, then articulated across the organization, with various departments
working independently to execute that strategy.

The result? Organizations with conflicting functional goals."

DESIGNING FOR TOTAL LANDED COST

Working collaboratively on global supply chain design requires examining


different areas of the business and how they impact the supply chain. Modeling
supply chain flow, and pinpointing areas for improvement, is a smart way to begin.

"Enterprises designing a global supply chain should start by surveying the


business, looking at trade flows, understanding where trade partners succeed and
fail, and projecting where company growth is heading," says Jim Preuninger, CEO

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Lecture Notes for Supply chain management MGT 2015
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of Management Dynamics Inc., an East Rutherford, N.J.-based software company


that provides global trade management solutions.

"Based on this data," Preuninger explains, "they can model the business and run
benchmarks against the information to identify and prioritize opportunities for
improvement.

"One organization may look to improve customer service by providing better in-
transit shipment visibility. Another may want to automate its purchasing
department so it can identify the total landed cost for multiple global sourcing
options," he says.

Designing and managing a global supply chain from a total-landed-cost


perspective means factoring in the cost of carrying inventory over time.

"Companies are not only managing the costs of capital and carrying inventory, they
are also managing obsolescence costs," notes Raj Pinkar, vice president, global
solutions and implementation, UPS Supply Chain Solutions.

"A firm that manufactures high-end, high-value laptop computers with a six-month
average life span, for example, shouldn't transport its cargo on a ship that adds 21
days to the supply chain."

Visibility is also critical to the success of a global supply chain. Companies that
can effectively track shipments in transit have a better handle on freight status, and
can make transportation decisions on the fly.

"When a shipment arrives at the destination port, a company could, for example,
opt for a DC bypass model—immediately moving product to its destination instead

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Lecture Notes for Supply chain management MGT 2015
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of placing it in a warehouse—then releasing it," says Charles Covert, vice


president, consulting service and solutions implementation, UPS Supply Chain
Solutions.

"The availability of accurate supply chain information as needed is the real key to
success," agrees C. John Langley, professor of supply chain management, Georgia
Institute of Technology. "In the absence of valuable data, companies need to
protect themselves. If they are uncertain about delivery reliability, they carry extra
inventory.

"Instead, they should quantify delivery time variability, then scientifically


determine how much inventory to carry."

RISKY BUSINESS

Risk mitigation is another increasingly important consideration for companies


designing a global supply chain.

As Western organizations continue to outsource manufacturing to low-cost


countries in Asia, the Caribbean, Eastern Europe, and Latin America, the
frequency and severity of supply chain disruptions increase significantly.

The repercussions of a supply chain failure can be extraordinarily severe. At stake


are billions of dollars in stock market capitalization, market-share losses from
failed product launches, or even the possibility of business failure.

"Most organizations are not adequately prepared to manage supply chain risks,"
says a recent research paper published by the Supply Chain Research Consortium
at North Carolina State University.

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Lecture Notes for Supply chain management MGT 2015
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"Recent studies suggest only 5 percent to 25 percent of Fortune 500 companies are
prepared to handle crises or disruptions, and a $50-million to $100-million cost
impact can be incurred for each day a company's supply chain network is
disrupted," the paper reports.

"Stock market reaction to supply chain disruptions is also significant," the report
says. "Firms that have announced major supply chain problems have seen
shareholder values drop 10.28 percent on average, with an average recovery time
of 50 trading days."

High-tech markets are particularly vulnerable. Sony, for instance, has pulled its
digital camera manufacturing out of China and moved it into Japan.

"Sony executives recognized that the difficulty of coping with unpredictable


market requirements for digital cameras was not aligned with the slow
responsiveness, disruption potential, and inflexibility of long supply lines from
China," the paper explains.

"Sony realized that manufacturing in China is not a cure-all for pricing pressure,
especially in fast-changing, high-tech consumer markets."

Certain attributes of a company's global supply chain environment can amplify or


mitigate the impact of disruptions, finds the research. These "disruption amplifiers"
fall into one of two categories:

1. The extent to which a firm relies on global sources of supply.

2. The complexity of the product or process. (See sidebar, below, for a list of
specific amplifiers in these two areas.)

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Lecture Notes for Supply chain management MGT 2015
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"One technique companies use to protect against increased risk is creating a


priority supply chain for products or materials that would have a greater negative
economic impact if their supply were interrupted," notes Langley.

"Companies take a portion of the supply flow for these products and create a
reliable alternative. "This strategy may be costly, but it can minimize the impact of
supply chain failure," he says.

SPREAD IT AROUND

UPS' Pinkar agrees.

"When companies design a global supply chain, they should not keep all their eggs
in one basket," he advises. "An effective global supply chain, for example, would
include a few manufacturing or sourcing locations dispersed around the globe—in
China and Eastern Europe, for instance.

"That way, if one plant has difficulty getting product into or out of a manufacturing
facility, the company can shift production to another location.

"Companies need to identify failure risk points and design alternatives," he says.

Once they recover from a supply chain disruption, many companies take steps to
redesign their networks in order to minimize or eliminate a recurrence.

Strategies include developing tools to allow dynamic management of supply chain


systems, and redesigning/re-optimizing the supply chain, according to respondents
to the Supply Chain Research Consortium study.

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"In supply chain systems, optimization cannot be a single, static model," the study
notes. "Rather, tools that adjust with the dynamic nature of supply chain events are
needed.

These tools should have global scope for enterprise redesign considerations, and
need to provide solutions in real time or near real time."

Designing a global supply chain has grown more complicated as companies source
and sell far and wide—and collaboration is key. "Managing a successful global
supply chain today is like coaching a football team," says Langley.

"If every player does what he does best individually, the team won't win many
games because it is not operating as a team. The same applies to a supply chain. If
a company tries to keep inventory levels, transportation costs, and stockout rates
low, it won't develop a successful global supply chain.

"Instead, companies have to balance trade-offs to facilitate optimal functioning,"


he continues. "Leading companies are becoming skilled at determining the mix of
activities that provides optimal service at an acceptable cost."

RETHINKING TRANSPORTATION ON A GLOBAL SCALE

In 2005, American Power Conversion Corp. (APC), West Kingston, R.I., a $2-
billion provider of AC- and DC-based back-up power products and services,
realized its supply chain needed help. Rapid growth was straining the staff and
existing supply chain processes.

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"Because the business was growing so quickly, everyone was absorbed in their
narrow scope of responsibility," recalls Carl Rossi, APC's director of
transportation.

"The company lost sight of transportation and distribution center operations as a


whole. Employees spent their days putting out fires and no one paid attention to the
big picture."

It was time for a change. The company added a vice president of supply chain in
September 2005, and hired Rossi in November 2005. When he arrived, Rossi
found a fractured organization.

"My team was scattered around the world," he says. "We manufacture 60 percent
of our products in the Philippines, 35 percent in India, and the rest in China.

"We sell all over the world, and operate distribution centers in Europe, Africa,
Asia, the Middle East, North America, and South America. The DCs are all
managed by third parties, but manufacturing is company owned and operated.

"I quickly found out the company captured little data on transportation movement,
pricing, and service, and put no central focus on these areas," he continues. "That
lack of focus meant each of our entities maintained its own processes and
procedures."

In addition, Rossi realized that APC paid excessive transportation costs. In 2005,
for instance, the company spent $39 million on air freight, in large part as a
reactionary fix for problems that cropped up in its global supply chain.

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The first action Rossi took was to meet with his direct reports around the world and
craft a strategy to rein in those excessive transport costs, starting with air freight.

"Collectively, our manufacturing, sales, and logistics team members designed and
implemented an approval process to shut off all but critical use of air freight while
we looked at the root causes driving that use," he explains.

AIR AND OCEAN RFQ

APC utilized too many air carriers—14—so Rossi cut that number to three, then
relayed this information to the carriers. "I showed them our current volume, shared
our goal, and launched an RFQ for our global airfreight business," he explains.

At the same time, the company developed a new RFQ for ocean freight, where it
also used too many providers.

"We move 28,000 TEUs a year, but we weren't receiving volume pricing because
we did not have one focal point for managing ocean freight," Rossi explains.

Rossi's next step was to gather APC employees from every plant around the world
at the Rhode Island headquarters for the company's first global transportation
meeting.

"Our field staff knows more about the daily activities of our global supply chain
than the corporate executives," says Rossi. "They all felt that we could do better.

"I asked everyone attending the meeting to explain their role, and list their
transportation requirements," he continues. "We quickly identified that the

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requirements of a factory in the Philippines are different from those of a plant in


China."

A GLOBAL TRANSPORTATION COUNCIL

At the meeting, the group decided to develop an actively managed supply chain
that would identify and meet participants' needs, and at the same time, reconcile
those needs with overall corporate demands. The group established a global
transportation council to collectively oversee APC's transportation activities.

"Before this initiative, we didn't have a clear picture of our weekly transportation
spend," says Rossi. "Now, one key employee—Louis Galvin in Galway, Ireland—
is responsible for collecting weekly freight expenses worldwide.

"We also capture distribution costs. As a result, we can actively manage using facts
rather than gut feelings."

After the meeting adjourned, the U.S. team got down to business, concentrating on
reining in APC's maverick spending. A core team of APC transportation specialists
conducted face-to-face meetings with the ocean carriers that responded to the
company's RFQ.

After the second round of negotiations, Rossi and the specialists presented their
findings to the global transportation council, and received its buy-in.

"The end result is a smaller base of ocean carriers, which allows us to conduct
quarterly business reviews with each one. When we experience problems, we have
a forum for resolving issues," Rossi says.

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Lecture Notes for Supply chain management MGT 2015
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The transportation council next looked into the issue of excessive airfreight spend.
What business issues led to the company's heavy reliance on air cargo?

"By 2005, production levels at our plants in India and the Philippines had grown so
much they ran out of places to store packaging material," explains Rossi. "The
plant began storing corrugated cartons and wooden pallets outside.

"During the monsoon season, we received wet pallets, cartons, and product coming
into the United States via ocean container."

The wet pallets also provided a fertile breeding ground for bugs.

"We couldn't use the products in these containers, so we had to contract airfreight
replacements to fill our orders. Our hardware products include a transformer, a
battery, and circuitry—they are heavy, which means they are expensive to ship by
air," Rossi notes.

MEANINGFUL RESULTS

In 2005, 36 percent of APC's shipments from manufacturing plants to its


distribution center were transported by air. In 2006, the company cut that number
to 18 percent.

"But that doesn't tell the whole story," notes Rossi. "Because of our inadequate
method for tracking freight expenses, we knew we also spent $15 million on air
freight for other product categories. We brought that under control, too. So in total,
we reduced airfreight expenditure from $39 million to $12.5 million."

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APC remedied the problems that were forcing it to use air freight by eliminating
their root causes. Today, APC plants store all corrugated material and pallets
inside, and the company changed its pallet composition to a type of wood that
insects can't infest and that doesn't absorb moisture.

At its Indian facilities, the company instituted a container liner program—which


Rossi and his team call the "baked potato"—for certain products. "We line the
container with a big foil bag, load the goods, and seal it up," he says. "No moisture
can get in."

Since redesigning its supply chain network to include visibility into global
transportation expenditures, APC can leverage its total transportation spend with
carriers.

"We have sent a clear message to the carrier base that they can't cut their own deal
with our facilities in other countries," says Rossi.

The benefits of more effectively managing global transportation are impressive.


Using a consensus-driven global approach, APC significantly reduced
transportation costs and removed waste during the past year.

HAPPY CAMPERS

"Transportation accounted for 11.3 percent of revenue in the fourth quarter of


2005; in Q4 2006, it was down to 8.2 percent of revenue. As result of this
collaborative effort, we reduced year-over-year ocean container costs by about 11
percent," Rossi says.

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Needless to say, APC senior management is delighted. "My boss is quite happy,"
affirms Rossi. "We achieved positive results because we boosted our staff's
enthusiasm about their roles.

"It's rare to achieve a direct correlation between action and clear financial results,"
he says, "but that is exactly what we accomplished."

End of lecture notes chapter 6

Start of lecture notes chapter 7

Forecasting is an imperfect science, but it is also a necessity for most businesses.


That's particularly true when it comes to supply chain management. Proper
forecasting helps ensure you have enough supply on hand to satisfy demand.
Business analysts use supply chain management systems and other tools to forecast
demand weeks and months in advance.

Supply Chain Management

Many businesses have to be on point when it comes to ordering supplies to meet


the demand of its customers. An overestimation of demand leads to bloated
inventory and high costs. Underestimating demand means many valued customers
won't get the products they want. Supply chain management is the process by
which a company ensures it has just enough supply to meet demand. According to
the Association for Operations Management (APICS), supply chain management
involves the "design, planning, execution, control and monitoring of supply chain
activities." A few of the objectives are to build a competitive infrastructure,
synchronize supply with demand and measure a company's performance.

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Forecasting

Forecasting demand, and coordinating activities to meet demand, are full-time


jobs. Companies with global operations use sophisticated software and systems to
forecast demand, but small businesses can forecast supply chain needs using
simple techniques. The methods of moving averages and exponential smoothing
seek to smooth out demand to allow for seasonality in the results. With moving
averages, you drop the oldest sales numbers and add newer numbers, making the
average move over time. For example, to calculate sales over a four-week moving
average, add weeks two through five, drop the sales from week one and divide by
four. Exponential smoothing is similar to moving averages except that older data
receives progressively less weight and new data receives greater weight. When
there is definitive trend, however, the moving averages and exponential smoothing
forecasts might lag behind the trend.

High Inventory

If your business overestimates demand, it ends up with more inventory than is


necessary. This can increase your labor and storage costs if workers have to move
this inventory to another storage facility to make way for new inventory. If your
business supplies perishable goods, you might incur a further loss due to
deterioration of unsold inventory. In such a case, you might need to sell inventory
at a discount, which reduces your company's profit margins and income.

Shortage of Inventory

Suppose you suddenly find yourself inundated with large orders. This is a nice
problem to have -- if you have enough inventory to meet demand. It's not so nice if

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you failed to forecast how much supply you would need and wind up with a
shortage of inventory. In such a case, some disgruntled customers might take their
business elsewhere. One option is to make a large, last-minute rush order, but this
usually leads to much higher supplier prices, which reduces your profit margins
and net income.

Insight

Supply chain management (SCM) software can help facilitate the process of
forecasting and measuring the supply chain synchronizes the supply and demand
cycle through the use of real-time information. As a result, inventory is less likely
to sit unused. For example, a baked goods manufacturer using SCM software can
monitor its inventories and place an electronic order to its suppliers in anticipation
of a spike in demand. Experience is also an asset when it comes to managing your
supply chain. Having years of demand data helps you better predict future demand.

End of lecture notes chapter 7

Start of lecture notes chapter 8

When you look ahead three to 18 months to determine your supply needs, you can
use the techniques of aggregate planning. This approach gives you a
comprehensive view of the supplies you'll need to meet the demand for your
products. By ordering for the entire planning period, you can qualify for bulk
discounts and avoid shortages. The process of aggregate planning requires you to
make an appraisal of your company's ability to sell and deliver.

A Solid Demand Forecast

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You need to anticipate the demand for your products before you can plan your
supply ordering. Use previous years as a guide, as well as industry trends,
economic forecasts and feedback from your marketing manager to determine the
probable demand for your products in the coming months. Your forecast tells you
how much you need to produce to meet demand so that you know the quantity of
supplies you will need to maintain productivity.

Production Capacity

Your ability to produce depends on machinery, work staff and efficiency. You can
evaluate your production department to determine how many products you can
reasonably produce during the period you are planning for. This could be less than
demand. Use your production ability to set goals for producing products that are
realistic. Allow for personnel shortages and machinery maintenance.

Limits on Capital

No matter what quantity of supplies you would like to order, you must take your
cash into account. You may be limited by what you can afford. If you plan to
borrow to buy supplies, include the interest costs in your estimates of the profits
you will make from the products you manufacture. In short, make sure you have
the capital to purchase the supplies you will need.

Putting It All Together

Aggregate planning is a balancing act between what you think you can sell, how
much you can produce and the raw materials you can afford. You may find that
you have to compromise. For example, if you anticipate a demand for 10,000 units

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Lecture Notes for Supply chain management MGT 2015
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but your production capacity is 9,000 units, order only enough supplies for 9,000
units. To give another example, if demand and production capacity suggest you
could make and sell 10,000 units but you can only afford supplies for 8,000 units,
use the lower figure for your supplies. In other words, what you need to produce
must always be compared to what you can afford to produce. You don't have to
stretch your budget to meet the demands of the market.

End of lecture notes chapter 8

No lecture notes for chapter 9. It contains practical decision making and not
theory

Start of lecture notes chapter 10

Coordination implies actions by various agents in the supply chain that are aimed
at increase in total supply chain profits. It also implies that supply chain agents
avoid actions that improve their local profits but hurt total profits. Hence supply
chain coordination principles require each stage of the supply chain to take into
account the impact its actions have on other stages.

A lack of coordination creates "bullwhip effect" in the supply chain. Due to this
effect, fluctuations in sales become larger and larger fluctuations in orders at
higher stages in the supply chain. This leads to situations wherein large shortages
or large surplus capacities are felt in the supply chain cyclically.

Bullwhip effect reduces the profit of a supply chain by making it more expensive
to provide a given level of product availability.

In what way bullwhip effect increases costs for the supply chain?

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Lecture Notes for Supply chain management MGT 2015
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 In increases manufacturing cost.

 It increases inventory cost.

 It increases replenishment lead-times.

 Increases transportation cost.

 Increases labor cost in shipping and receiving. All items of cost increase
because excess capacity has to be installed to take care of unnecessary peaks
in demand.

 It reduces product availability due to some orders not getting filled when
demand peaks. So some retail outlets may go out of stock.

 Leads to problems of relationships - everybody claims that they have done


right. But still there is problem in the supply chain either as unfilled orders
or excess inventory not having the order from downstream side.

The main reasons for coordination problems in supply chain are distributed owners
of various stages of production & distribution, and product variety.

The fundamental challenge is for supply chains to achieve coordination in spite of


multiple ownership and increased product variety.

What are Obstacles to Coordination in a Supply Chain?

Incentive obstacles

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Lecture Notes for Supply chain management MGT 2015
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If a transport manager's incentive compensation is based on average transport


cost, he tries to optimize his incentive objective without considering its effect on
other supply chain stages.

If sales force has incentive for selling to dealers, they push sales to dealers even
though there is no sale in the period to customers. This will reduce orders from the
dealers in the subsequent periods.

Information processing obstacles

If each supply stage depends on orders from its previous stage without
considering the ultimate sales to the consumer bull whip effect will appear.

Operational obstacles

Economic batch quantities result in large lot sizes which are released
periodically.

Pricing obstacles

Quantity discounts and sales promotion discounts to dealers create distortions


in orders.

Behavioral obstacles

Each stage of the supply chain thinks locally and it unable to see the effect on
the total supply chain and other supply chain stages.

Managerial Levers to Improve Coordination in Supply Chains

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 Aligning goals and incentives

 Improving information accuracy

 Improving operational accuracy

 Designing pricing strategies to stabilize orders

 Building Partnerships and trust

 Building Strategic Partnerships and Trust within a Supply Chain

Mutual Trust is a belief that each agent or party is interested in the other's welfare
and would not take actions without considering their impact on the other stage.

Cooperation and trust in a supply chain relationship leads to the following benefits:

1. They are more likely to take the other party's objectives into consideration when
making decisions.

2. Sharing of information is natural between parties that trust each other.

3. Operational improvements are easier to implement.

4. Pricing schemes are easier to design if both parties are aiming for common
good.

5. Supply chain productivity increases because inspection can be avoided at many


steps.

The key steps to be taken in the design of partnership are:

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1. Assessing the mutual benefit of the partnership.

2. Identifying operations roles for each party in the partnership.

3. Creating effective contracts

4. Designing effective conflict resolution mechanism

End of lecture notes chapter 10

Start of lecture notes chapter 11

Companies that are in the business of selling goods, whether they resell them as
retailers or produce them, need to find ways to manage their inventory levels. The
process of inventory management subdivides inventory into a number of
categories. Cycle stock inventory is among the most important parts of an overall
inventory since it's the first place customer purchases will come from.

Definition

Cycle stock inventory is the portion of an inventory that the seller cycles through
to satisfy regular sales orders. It is part of on-hand inventory, which includes all of
the items that a seller has in its possession. For example, a retailer's on-hand
inventory would include the items on store shelves as well as most of those in a
store room or stock area. Over time, cycle stock inventory refreshes itself, or turns
over, as new items replace older ones that are sold.

Calculating Quantity

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The quantity of a cycle stock inventory is equal to the total on-hand inventory
minus the safety stock inventory. A safety stock is intended to cover variations in
demand, while the cycle stock inventory covers the majority or purchases.
Computing an appropriate safety stock is much more complex as it involves
variables such as changes in demand, the length of time it takes to receive new
inventory after placing an order and the desired inventory fill rate. In a small
business that doesn't have safety stock, cycle stock inventory is the same as the
quantity of on-hand inventory, which does not include inventory that has been paid
for but has not yet arrived.

Accounting

Cycle stock inventory serves an important function in a company's accounting. As


a business sells its cycle stock inventory and replenishes it, its cash flow accounts
for the income it receives and the payments it makes. Cycle stock inventory is also
part of a company's total assets on its balance sheet. To determine the cost of cycle
stock inventory, a business can use the last-in, first-out method or the first-in, first-
out method, which base the price of items in the cycle stock on the most recent or
oldest prices paid, respectively.

Implications for Business

Cycle stock inventory represents the portion of inventory that a business can sell
and replenish according to plan, without dipping into its safety stock. Time of
sustained high demand call for increases to the cycle stock to prevent stockouts,
which occur when there is not enough cycle stock or safety stock to meet customer
demand. Stockouts are costly as they represent lost sales and a failure of inventory

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management. Keeping cycle stock as low as possible saves money on shipping and
storage costs, which is another key role of inventory management in a business.

End of lecture notes

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