CTL.

SC2x -Supply Chain Design

Introduction to
Supply Chain Design

MIT Center for

Transportation & Logistics
 We know what a supply chain is . . .
Two or more parties linked by a flow of resources – typically material,
information, and money – that ultimately fulfill a customer request.

Information (order)

Information (status)

Physical (delivery)

Financial (payment)

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. . . and that they involve multiple parties . . .

. . . with complex and non-linear relationships . . .

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 . . . and that they can take many different forms.
Customer
Rubber
Mfg Tire Retailer
Supplier Hardware
Supplier
Supplier
Gear
Supplier
Wholesaler
Customer
Pedal
Supplier
Supplier
Bicycle Retailer

Casting
Smelter
Plant
Wholesaler Customer
Frame
Supplier
Retailer

Pigment
Supplier
Paint
Supplier Retailer Customer
Chemical
Mfg

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 But, what is supply chain design?

Information (order)

Information (status)

Physical (delivery)

Financial (payment)

Image Source: Arntzen, B. MIT Center for Transportation & Logistics, Hi-Viz Research Project (2013)

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 What do we mean by “design”?
design verb de·sign \di-ˈzīn\
n to plan and make decisions about (something that is being
built or created)
n to create the plans, drawings, etc., that show how
(something) will be made
n to plan and make (something) for a specific use or purpose
http://www.merriam-webster.com/dictionary

design noun
a specification of an object (or system), manifested by some
agent, intended to accomplish goals, in a particular
environment, using a set of primary (or fundamental)
components, satisfying a set of requirements, subject to
some constraints.
adapted from Ralph, P. and Wand, Y. (2009), “A proposal for a formal definition of the design concept”.

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 Why is Supply Chain Design important?

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 Because you have choices!
• There are many different ways to:
n Forecast product demand
n Position and manage inventory
n Move product between facilities
n Segment and collaborate with customers
n Select and work with suppliers
n Organize the supply chain function
n Select locations for manufacturing and distribution
n etc.
• There is no single best way for all situations – even
within a single firm!
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 Quick Review: Demand Forecasting
Product Technology
Current (Have History) New (No History)

Market Penetration Product Development

(Have History)
Current

Forecasting Approach: Forecasting Approach:

Quantitative analysis of similar situations Analysis of similar items: “looks-like”
with item using history analysis or analogous forecasting

Time Series, Exponential Smoothing,

Market

Regression Regression of “looks like” items

Market Development Diversification

(No History)

Forecasting Approach: Forecasting Approach:

New

Customer and market analysis to Scenario planning & analysis to

understand market dynamics and drivers understand key uncertainties & factors

Customer Panels, Experimental Delphi, Expert Panel, Scenario

Planning, Bass Diffusion
Adapted from Kahn, Kenneth (2006) New Product Forecasting.
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 Quick Review: Demand Forecasting
• Forecasts are always wrong
è Use ranges & track forecast error
• Aggregated forecasts are more accurate
è Risk pooling reduces CV
• Shorter time horizon forecasts are more accurate
è Postpone customization as late as possible

et = At – Ft
Mean Deviation Mean Absolute Root Mean
(MD) Percent Error (MAPE) Squared Error (RMSE)
n n et n

åe t ∑A åe 2
t
MD = t =1
MAPE = t=1 t RMSE = t =1

n n n
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 Quick Review: Inventory Management
Policy: How much to order and when
n EOQ – deterministic demand with infinite horizon
w Trading off fixed and variable costs
w Order Q* every T* time periods /Order Q* when IP=μDL
n Newsvendor – variable demand over single period
w Trading off shortage and excess costs
w Order Q* at start of period where P[x≤Q]=CR

σ ??
Variability

NV
Demand

EOQ
0
1 period Infinite
Horizon
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 Quick Review: Periodic vs. Continuous
Continuous Review (s,Q) Periodic Review (R, S)
n Order Q if IP ≤ s n Order S-IP every R periods

s+Q S
Inventory Position

Inventory Position
s

L L Time L L Time
R R

2ct D
s = µ DL + kσ DL Q* = S = μDL+R + kσDL+R
ce
Q è D*R, sèS, LèL+R
CTL.SC2x - Supply Chain Design Lesson: Introduction to Supply Chain Design
 Quick Review: $, L, σ

$, L, σ
B

Transportation Options
A
$, L, σ

$, L, σ

One-to-One – direct or point to point movements from origin to destination

DC

One-to-Many – multi-stop moves from a single origin to many destinations

DC

Many-to-Many – moving from multiple origins to multiple destinations usually

with a hub or terminal

DC
T
DC

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 Quick Review: Total Cost Equation
! D$ !Q $
TC = cD + ct # & + ce # + kσ DL + DL & + cs P[StockOutType]
"Q% "2 %

• Connection to Forecasting & Transportation

• Forecasting Impact – expected demand and error
• Transportation Impact – costs and lead time
• Setting Safety Stock
• Service Based Metrics – set k to meet expected LOS
• Cost Based Metrics – find k that minimizes total costs
2
µ DL = µ Lµ D σ DL = µ Lσ + (µ D ) σ L2
2
D

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 How to select the right design?

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 How do you decide?
• Supply chain design is an art & science
n A science because we can . . .
w Quantify the impact of different choices
w Find the optimal trade-offs between costs and service
w Select the best approach given characteristics of product,
supplier, customers, markets, etc.
n But, it is still an art because . . .
w Future is still uncertain – especially for longer term
w Assumptions rarely hold true completely
w Data are never completely accurate (regardless of
selected precision!)
w Situations change over time – sometimes abruptly
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 Segment by Product Characteristics

Functional Innovative
Demand Predictable Unpredictable
Life Cycle Long > 2 yrs Short <1 yr
Margin 5% to 20% 20% to 60%
Variety Low (10-20) High
Error at Production ~10% ~40-100%
Avg Stockout Rates 1% to 2% 10% to 40%
Forced Mark down 0% 10% - 25%
Lead time for MTO 6 mon to 1 yr 1 day to 2 wks
Supply Chain Objective Efficiency Match Supply & Demand
Source: Fisher, M. (1997)
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 Segment by Product Characteristics

Functional Innovative
Demand Forecasting • Time series analysis with detailed • Qualitative Methods
trends & seasonality • “Looks like” analysis
Approach
• Bass Model
Inventory • Periodic review policies • Single period models
• Build up inventory for peaks • Forward placement for initial
management
launch
Transportation • Ocean and Full Truckload (TL) • Air, Parcel, and LTL
• Minimum Order Quantities to DCs • Ship direct to store
Management
• Cost dominates speed • Speed dominates cost

• These are directional segments – not hard and fast rules

• Most firms use a “portfolio” of supply chains to be successful.
• Functional products can be “innovative” – new products, promotions, etc.
• Over time, “innovative” products can become functional
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 Situations Change
• High Tech Components
n Computer chips
w Market has shifted from PCs to Laptops to Tablets to Smartphones
w Cost of chips in Smartphones is ~ 1/5 that of in PCs!
n Memory Storage
w Price has dropped from 1.50 $/MB in 2000 to 0.56 ¢/MB in 2015

• Pharmaceutical Industry
n New drugs are protected by patents – exclusivity
n Drugs eventually move off of patent and generic
manufacturers can then produce them

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 Supply Chain Portfolio
Original HP Inkjet SC: Early 1990’s

Fast / High Cost Intermediate Slow/Low Cost

Design
Manufacturing On shore
Location (e.g., US/Europe)
International Rail/Truck
Shipping
Final Assembly On Shore
Location
Order Fulfillment On Shore
Location (Factory/DC)
Inventory Stocking Build to Stock
Model

Source: Olavsun, Lee, & DeNyse (2010) Adapted from Sheffi (2010)

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 Supply Chain Portfolio
Postponement Inkjet SC: Late 1990’s

Fast / High Cost Intermediate Slow/Low Cost

Design
Manufacturing Off shore (e.g.,
Location China, Vietnam)
International Ocean
Shipping
Final Assembly On Shore
Location
Order Fulfillment On Shore
Location (Factory/DC)
Inventory Stocking Configure to Order
Model

Source: Olavsun, Lee, & DeNyse (2010) Adapted from Sheffi (2010)

CTL.SC2x - Supply Chain Design Lesson: Introduction to Supply Chain Design 21

 Supply Chain Portfolio
Cost Competition Inkjet: 2000’s

Fast / High Cost Intermediate Slow/Low Cost

Design
Manufacturing Off shore (e.g.,
Location China, Vietnam)
International Ocean
Shipping
Final Assembly Off Shore
Location
Order Fulfillment On Shore
Location (Factory/DC)
Inventory Stocking Build to Stock
Model

Source: Olavsun, Lee, & DeNyse (2010) Adapted from Sheffi (2010)

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 Supply Chain Design Portfolio
Decision variables for SC Design :
(One option is chosen from each column)

Fast / High Cost Intermediate Slow/Low Cost

Design
Manufacturing On shore Near shore Off shore
Location (e.g., US/Europe) (e.g., Mexico/ Romania) (e.g., China, Vietnam)

International Air Freight Rail/Truck Ocean

Shipping
Final Assembly On Shore Near Shore Off Shore
Location
Order Fulfillment On Shore Near Shore Off Shore
Location (Factory/DC) (Factory/DC) (Factory/DC)
Inventory Stocking Build to Stock Configure to Order Build to Order
Model

Source: Olavsun, Lee, & DeNyse (2010) Adapted from Sheffi (2010)

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 Roadmap of SC2x – Supply Chain Design

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 Roadmap for CTL.SC2x

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 Designing the Physical Flow
• How should materials flow through a supply chain?
n Modeling the problem
w Transportation & Transshipment Problems
w Facility Location Problem
w Supply Chain Network Design Problem
n Solving the problem
w Finding the balance between costs and level of service
w Optimization of Mixed Integer Linear Programs
n Interpreting and implementing the solution
w Conducting sensitivity analysis of solutions
w Using optimization as a decision support tool
w Running network design projects in the real-world

CTL.SC2x - Supply Chain Design Lesson: Introduction to Supply Chain Design 26

 Managing the Information Flow

Customers
Suppliers

Source Make Deliver

Source: Make: Deliver:

Working Coordinating Collaborating
with suppliers manufacturing with Customers
• Sourcing strategies • Production planning • Distribution Channel
• Procurement • Bill of Material (BOM) Design
methods • Fixed horizon planning • Aggregate Planning
• Optimization Based • Material/Distribution • Sales & Operations
Procurement Resource Planning Planning (S&OP)
(MRP/DRP) systems
Source: Supply-Chain Operations Reference
(SCOR) Model from Supply Chain Council

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 Understanding the Financial Flow
How to translate Supply Chain concepts and actions . . .
n Inventory levels by type (raw, WIP, finished goods)
n Facility, equipment, labor, or software/system investments
n Outsourcing vs. Insourcing
. . . into the language of the Chief Financial Officer (CFO).
n Income Statements (Profit & Loss)
n Balance Sheets (Assets & Liabilities)
n Cash Flows (sources and uses of cash by activity)
Discuss Five Main Concepts & Tools
n Activity Based Costing
n Working Capital (Cash-to-Cash Cycle)
n Discounted Cash Flow Analysis
n Supply Chain Finance
n Financial Analysis (DuPont etc.)
CTL.SC2x - Supply Chain Design Lesson: Introduction to Supply Chain Design 28
 Designing the Organization

• How should a supply chain be organized?

• Organizational Structure
n How should the supply chain function be organized?
n When and what to centralize/decentralize?
• Processes & Performance Metric Systems
n What are the primary processes in Supply Chains?
n How to measure the performance of these processes?
n How to establish metrics and metric systems?

CTL.SC2x - Supply Chain Design Lesson: Introduction to Supply Chain Design 29

 Roadmap for CTL.SC2x

4 Lessons

6 Lessons

5 Lessons

1 Lesson

CTL.SC2x - Supply Chain Design Lesson: Introduction to Supply Chain Design 30

 CTL.SC2x -Supply Chain Design
Questions, Comments, Suggestions?
Use the Discussion Forum!

“Wilson’s excited to get started – I hope you are too!”

Yankee Golden Retriever Rescued Dog
(www.ygrr.org)
MIT Center for
Transportation & Logistics caplice@mit.edu
 Images & References
• Slide 5
n Arntzen, B. MIT Center for Transportation & Logistics, Hi-Viz Research Project (2013)
• Slides 17 & 18
n Fisher, M. (1997) “What Is the Right Supply Chain for Your Product?,” Harvard Business Review.
n By Balougador (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0
(http://creativecommons.org/licenses/by-sa/3.0/)],
http://commons.wikimedia.org/wiki/File%3ACampbellsModif.png
n By 彭家杰 (Own work) [GPL (http://www.gnu.org/licenses/gpl.html), GFDL (http://www.gnu.org/copyleft/fdl.html) or
CC-BY-SA-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/3.0)],
http://commons.wikimedia.org/wiki/File%3ASmart_phone.jpg
• Slides 20-23
n Olavsun, Lee, & DeNyse (2010) “A Portfolio Approach to Supply Chain Design,” Supply Chain Management Review.
Adapted from Sheffi (2010) ESD.260 Course Notes
n “Hp500-1" by Oguenther - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia
Commons - http://commons.wikimedia.org/wiki/File:Hp500-1.png#mediaviewer/File:Hp500-1.png
n "Hp-deskjet-895cxi". Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons -
http://commons.wikimedia.org/wiki/File:Hp-deskjet-895cxi.jpg#mediaviewer/File:Hp-deskjet-895cxi.jpg
n "MFHP1600" by LupisSM - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0-2.5-2.0-1.0 via
Wikimedia Commons - http://commons.wikimedia.org/wiki/File:MFHP1600.JPG#mediaviewer/File:MFHP1600.JPG
• Slide 31
n Photo by permission of Wilson the Dog.

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