Course: Supply Chain and Logistics Management

Lesson 1 - Introduction
Prof. Dr. Ir. Francesco Viti
Chair of Transport Planning & Management
University of Luxembourg
Research Unit - Engineering
 Introduction
• 10 theory lectures
• 2 exercises sessions
• Beer Game (last week)

• Lecturer
– Prof. F. Viti francesco.viti@uni.lu
– Prof. E. Cipriani (guest 1st lecture)

• Written exam (1 theory + 3 exercises)

2
 Teaching material
• Course slides
• Selection of articles (pdfs in Moodle)
• Book chapters (pdfs in Moodle)
• Supply chain management. Chopra and Meindl, Prentice Hall
• Designing and managing the supply chain. Simchi-Levi, Kaminsky and
Simchi-Levi, McGraw Hill
• Supply chain network economics. Nagurney, Edward Elgar
• A theory of supply chains. Daganzo, Springer

3 3
 Outline intro lecture
• Part 1: Supply Chain
– What is a Supply Chain?
– Definitions and basic terminology
– Goals
– Key players
– Performance measures
– Constraints

• Part 2: Logistics

4 4
 What is a supply chain?

Wikipedia:
System of organizations, people, technology, activities, information
and resources involved in moving a product or service from supplier to
customer

5 5
 Definition of a Supply Chain (1)
who
Network of manufacturers and service providers
does
that work together to transform and move goods
from raw material through to the end product. what

– It includes coordination and collaboration with channel partners

(suppliers, intermediaries, third-party service providers, and
customers)
– Manufacturers and service providers are linked through
physical, information and monetary flows
– Supply Chain Management integrates supply and demand
management within and across companies

6 6
 Definition of a Supply Chain (2)
• All stages involved in fulfilling a customer request
– System’s view
– Interaction between companies
• All functions involved in fulfilling a customer request
– product development,
– marketing,
– operations,
– distribution,
– finance,
– customer service.

• Better names: “supply networks” or “supply webs”

• Example: Laptop supply chain https://vimeo.com/36053523

7 7
 Supply chain & Operations Mgm

• Production & operations • Supply Chain management

management
– Linked mainly to manufacturing
(transformation process)
– Planning, scheduling and control
of transformation
– Vision of a network of interconnected
businesses, among which
manufacturing
– Coordination of operations with
partners in production
– Active management of activities and
relationships (contracts)

INPUTS OUTPUTS
TRANSFORMATION
• Materials • Tangible goods
PROCESS
• Intangible needs • Fulfilled services
• Manufacturing operations
• Information • Satisfied
• Service operations
customers

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 Supply Chain & Logistics
• Logistics Mgm
– Management of the flow of goods
– Plant & storage location problem
– Transportation strategy
• Vehicles routing
• Distribution strategies
– Warehousing/inventory mgm
– Shipment
• Lot-sizing (large quantities vs.
continuous delivery)
• (Multi-)modal choices
• Supply chain Mgm
– Encompasses the planning and
management of all activities
involved in sourcing and
procurement, conversion, and all
logistics activities
• Deals more with purchasing and
procurement
• Focuses on the economical aspects
in logistics
– Includes coordination and
collaboration with partners
(suppliers, intermediaries, third-
party service providers, and
customers)
• System’s view
• System optimization
9
 Basic elements
• Input elements
– Raw materials (e.g. gold, minerals, oil)
– Components or half-processed materials (composites, half-finished products)
– Natural resources (sunlight, water flows,…)
– Ideas/intangible things (services)
• Middle elements (owned, shared, mixed)
– Factories, buildings, roads
– Technology, equipment
– Personnel/human resources
– Partnerships, contracts
– Continuous/discrete (truck containers vs. Pipelines)
• End products
– Physical goods (products)
– Services (iPhone / iTunes)

10 10
 Supply Chain Flows

Value-Added Services
Supplier Manufacturer Distributor Retailer Customer

Material/Product Flow

Orders/Demand Flow

Information Flow

Returns/Recylcing
11
Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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 Processes involved

Procurement
1. Order from Mfg
2. Supplier production scheduling
3. Component manufacturing/shipping
4. Order receiving by Mfg
Replenishment
1. Retail order trigger (inventory low)
2. Retail order entry
3. Retail order fulfillment
4. Retail order receiving

Suppliers Manufacturers Distributors Retailers Consumers

Manufacturing Customer order

1. Order arrival from Distr. 1. Order arrival (retail stores
2. Production scheduling call/mail order center, website)
3. Manufacturing & shipping 2. Order entry
4. Order receiving by Distr. 3. Order fulfillment
4. Order receiving

13
 SC Network representation

Raw material 14 End product

14
 Sources of complexity

• SC network often very large, with many players and roles,

facilities and connections
• Conflicting objectives, constraints and priorities
• Variable process/delivery times, dynamics
• Forecasting issues, uncertainty
• Market changes
• …

15 15
 Supply Chain goals
Customer
• amount produced
• quality levels
• reduced prices
• technology advancements
• social status symbol
• …
16
Companies
• most efficient use of resources
• cost-effective distribution
• small storage needs
• high revenues
• market leadership
• …
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 Supply Chain Management
Managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing and inventory
tracking, order entry and order management, distribution across
all channels, and delivery to the customer
-- The Supply Chain Council

SCM is about efficient integration of suppliers, factories, warehouses

and stores so that merchandise is produced and distributed:
– In the right quantities
– To the right locations
– At the right time

17
 Benefits of SC management
• Greater savings opportunities
– Only 7% of companies today effectively manage their supply chain.
These companies are 73% more profitable than other manufacturers.
– Estimated that the US grocery industry save $30 billion (10% of
operating cost) by effective logistics and supply chain strategies

• Customer needs as part of the supply chain

– Compaq estimated a loss of $1 billion in sales in 1995 because
laptops were not available when and where needed
– When the 1 gig processor was introduced by AMD, the price of the 800
mb processor dropped by 30%
– P&G estimates it saved retail customers $65 million by collaboration
resulting in a better match of supply and demand

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 Goal of SC management
• Supply chain value  difference btw final product worth to the
customer and effort in filling customer’s request

Supply chain profits

customer willingness to pay – total costs

F(demand, price) F(production, transportation,

cost of materials, storage,…)

• Both components not easy to be estimated

–Total costs has many (interrelated) components (manufacturing,
logistics, transactions, …)
–Willingness to pay  Customer value

19 19
 Customer value
• Evolution of willingness to pay
– Internal quality (measurable)
• focus on product, value depends on supply chain costs
– Customer satisfaction (surveys)
• focus on customer, real value replaced by the perceived one
– Customer value (relative value) 
• focus on market leadership, e.g. value of product depends on market
alternatives and competitive advantages (product differentiation, lower prices)

• Dimensions to define consumer value:

– Conformance to requirements
– Product selection and variety
– Price
– Services offered
– Experience / Brand reputation
– Advertising

20 20
 Conflicting objectives across SC

Manufacturers Distributors Retailers Consumers

Large production batches Low inventory Few stores Convenience

Few DCs Low inventory Short lead time
Little variety Large variety of
Close to DCs products

Large shipments

21 21
 Supply Chain decision levels
TIME FRAME TYPE TYPICAL DECISIONS
•Supply chain strategies (Sell direct or through retailers?
Outsource or in-house? Focus on cost or customer service?)
years
Strategic •Supply chain network design (How many plants?
Location and capacities of plants and warehouses?)
•Product mix at each plant

•Workforce & Production planning

•Inventory policies (safety stock level)
3 mo.- 1year Tactical •Which locations supply which markets
•Transportation strategies

•Production scheduling
daily Operational •Distribution scheduling and routing
•Place inventory replenishment orders
•Lead time quotations

22 22
 Decision making levels
• Strategic Level
– Network optimization (number, location, size of warehousing, distribution centers,
and facilities,…)
– Strategic partnerships between suppliers, distributors, and customers
– Where-to-make and make-buy decisions.

• Tactical Level
– Production & inventory decisions (contracting, scheduling, quantity,…)
– Transportation strategy (frequency, routes, and contracting)

• Operational Level
– Daily production and distribution planning
– Inbound operations (transportation from suppliers, receiving inventory)
– Production operations (consumption of materials, flow of finished goods
– Outbound operations (order fulfillments, warehousing,…)

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 Efficiency vs. risks

INCREASE REDUCE RISK

EFFICIENCY
Distribution network configuration X
Inventory control X
Supply contracts X
Distribution strategies X X
Strategic partnerships X
Outsourcing and procurement X
Product design X X
Information technology X X
Customer value X

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 Benefits of SC management
• Supply chain activities 10% US GDP
• Large company saves when investing on more efficient SC
strategies (average 5% profit margin, 15% less inventory,…)
• Leadership achieved by many firms because of successful SC
strategies
• More satisfied customers

• Some example you may know…

25 25
 Colruyt
• Mixture own products and others
• Mixed own and 3PL logistics
• Extreme cost-efficient solutions
• Integrated chain (food, energy,
clothing…)
• Dreambaby, bio-planet, collishop, e-
shops,…

26
 DELL vs. Macbooks

Dell  Pull
Mac  Push
Dell  - assembling strategy end of SC
- no manufacturing
MAC  - limited versions
- quality control fully in-house
27
 IKEA
• Own products (furniture, food, …)
• Global supply (>50 countries)
• Push system (standard waiting
for furniture 8-12 weeks)
• Modular strategy (pieces
reutilized in different models)
• Final assembly by costumer
• Smart product design for logistics

28
 Learning outcomes
1. Critically analyze Supply Chains
• Facility Location problems
• Network optimality and equilibrium
• Impact of changes in network structure

2. Learn about supply chain dynamics

• Identify and understand the cause of delays in the process
• Understand the propagation of delays in the SC
• Identify the factors that determine SC dynamics

3. Study tools to improve SC management

• Risk management and policies
• Coordination of SC elements
• Information & control

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Logistics

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 History of logistics

• The military origins

• The use of information technology
• The revolution of the Just in Time
• The great changes of the logistics of the 1980s
and 1990s
• The contributions of the great civil and military
projects

31
 History of logistics
• Since the ancient times logistics was behind the
organization of production (pyramids)
• It was born, as an independent discipline, in the
military field: an army must receive adequate
means and resources when needed
• The concept of timeliness in the availability of
resources causes dramatic defeats due to the
struggle in understanding its importance.

32
 History of logistics
• As time goes by, the focus on the logistics
increases making it a separate discipline with
techniques and specific methodologies.
• The success of logistics arises from this
evolution.

33
 Military origins
• Several solutions were gradually identified:
– Protected warehouses within strongholds
– Fleets of vehicles to transport weapons and supplies
– Rules establishing rations and modes of supply
– Definition of standard contracts with suppliers
– Creation of a specialized body
– The army of Napoleon in Russia (600,000 men) was
badly restocked

34
 Military origins
• Battle of Normandy: 2 years of preparation
introducing many innovations:
– Logistics centers
– Maintenance centers
– Advanced transportation planning
– Conception of ships, aircraft and land vehicles both
special-purpose and flexible
– Supply planned with extreme care
– Use of packaging, containers, …, and development of
a theory of the packaging
– The concept of temporary infrastructures simple to be
located 35
 Operational research
• Different scientific methods to solve operational
problems
• Optimum size of the American military convoys to
escape the German submarines
• Network design of depots to optimally refuel
several points
• Timing of renewal of a fleet to reduce investment
costs
• Several algorithms were developed (more or less
sophisticated) requiring the growth of the first
machines for mechanical calculation
36
 Logistics in industry
• Logistics struggles to establish itself in the
economic field, but becomes essential with the
intensification of the competitive environment
• The standardization process, basis of the Fordist
production model, becomes critical to meet the
needs of diversification and gradual
interdependence of markets
• The oil crisis of 1973 causes a global economic
crisis which the industrial system struggles to
face

37
 The JiT revolution
• Car: after the first oil crisis and the subsequent
reduction in car sales, Toyota was the first to react.
• The car is a product with cyclical demand, of great
value but of limited added value.
• The imperative is to reduce the stock.
• So far, stocks were based on sales forecasts.
• Toyota began producing based on the arrival of
orders.
• This seemed to be impossible because of the time
necessary for the production and delivery of the
product, too long for a demanding consumer
38
 Reduction of cost production
• It was thus invented the principle of kanban (tag),
and were radically revised contracts with suppliers
• Relocation of establishments
• Automation:
– Staff monitors the machines and does not work directly
– Maintenance more complex
– Organisation in production cells
– Quality is a must: Total Quality Control to produce
effectively and as much as possible automated. To reduce
downtime and the cost of inventories.
– Computer systems become more complex and integrated
– Definition of ISO standards 39
 Reduction of cost production
• This is not oriented towards:
– A cheaper product that may not meet market
requirements
– A more sophisticated product that may be too
expensive and complex
• This is intended for producing the best solution
according to customer needs

40
 Large scale retail distribution
• Previously, logistics of the mass distribution was
based on the supply with the following problems:
– High stocks (supermarkets), thus reducing the sales area
– Delivery not organized
– Logistics control and its costs controlled by suppliers
• Platforms receive the goods, group and send to the
stores within 150 km distance.

41
 Why managing supply chains?
• Profit 4% Profit
Logistics
• Logistics Cost 21% Cost

Marketing
• Marketing Cost 27%
Cost

Manufacturing
• Manufacturing Cost 48% Cost

Retail profit is 2-4% while logistics costs are 15-20% so any reduction of them was
interesting to mass distribution: development of distribution platforms

42
 Large scale retail distribution
• After, they have specialized in placing even at a
greater distance from the stores
• Contractual relations and ways of outsourcing
varied
• These developments have greatly contributed to
modify the distribution system in Europe and in the
world.

43
 Recent developments
• In US:
– trade marketing, partnership between producer and distributor
– ECR (Efficient Customer Response): “supply chain
management system that requires the sharing of the retailer's
sales and advertising information with the supplier which is
used to generate orders shipped from the supplier based upon
projected customer demand”. The goal is to reduce inventory
and associated handling costs at the retailer.
– Cross Docking: distribution system where products received at
the warehouse are not received into stock but are prepared for
shipment to another location (retail, comsumer)
– EDI (Electronic Data Interchange): standard for electronically
exchanging data
44
 Recent developments
• Worldwide:
– Globalization of product flows
– Logistics as a strategic aspect for decisions on new
plants
– E-commerce and home delivery
– Distinction between transport companies and logistics
companies with its own hubs

45
 Recent developments
• Logistics companies provide:
– Warehousing
– Inventory management
– Order preparation
– IT management of logistics
– Labelling
– Packing
– Software integration
– Putting products on the shelves in supermarkets

46
 Recent developments
• Companies outsourced production; thus they deal with:
– Marketing
– Logistics
• They are called Transnational:
– Nike, Ikea, McDonald’s, Benetton
• Logistics plays a key role like brand and patents

47
 The future
• Development of:
– Supply chain approaches to enhance flexibility
– International commerce and thus internationalization of
logistics
– Transport companies and logistics companies
• Transition from a regional distribution level to an
international service provider level with new proper
logistics roles

48
 The future
• Development of:
– reverse logistics (environmental protection)
– doorstep sales, mail order and e-commerce
– cooperation between logistics companies
– road transport and its intermodal variables
• Mechanization of warehouses and transport

49
 Internet of things
• New paradigm expressing the integration of several
technologies and communications solutions.
• Identification and tracking technologies, wired and
wireless sensors, smart objects and actuator
networks.
• Result of synergetic activities conducted in different
fields of knowledge, such as telecommunications,
information technology, electronics and social
sciences

50
 The role of logistics in economy
• Logistics plays an important role in the economy of
a country in terms of costs and productivity
• For example, in the US it is estimated that the cost
of logistics amounts to about 10% of GDP
• Substantial reduction in costs guaranteed by
deregulation and optimization of inventory
techniques (competition) in the period 1980 - 1999

51
 The role of logistics in economy

• An increase in logistics costs implies an increase

of price of products and on the inflation so
affecting consumers
• Logistics supports any activity of sales and
production: if delivery is not made in the
appropriate time and place the customer can not
buy and all economic activities within the supply
chain are damaged

52
 Trend of Logistics Costs

• Logistics costs as a percentage of GDP have

declined in US from 16 % in 1980, to less than 10
% in 2009.
• Early to mid-1970s it was about 20%.
• This reflects a serious improvement in the
efficiency of logistics systems.
• It has been estimated that the total logistics cost
incurred by USA organizations in 2006 was 1,305
$ billion, corresponding to approximately 9,9 % of
the US GDP.

53
 Trend of Logistics Costs

System Cost ($ Billions)

Inventory Carrying Costs 446

Transport Costs 801
Shipper Related Costs 8
Logistics Administration 50
Total Logistics Costs 1,305

54
 Trend of Logistics Costs

Inventory Carrying Costs ($ Billions)

Interest 93
Taxes, Obsolescence, 252
Depreciation, Insurance
Warehousing 101
Subtotal 446

55
 Trend of Logistics Costs
Transport Costs ($ Billions)
Motor Carriers • Truck – Intercity 452
• Truck – Local 203
Subtotal 635
Other Carriers • Railroads 54
• Water 37
• Oil Pipelines 10
• Air 38
• Forwarders 27
Subtotal 166
Total 801
56
Trend of Logistics Costs (US GDP %)
14

12
Packaging
10 Transport
Warehousing
8 Inventory
Administration
6

0
1987 1993 1998 2003 2008

57
 Logistics and environment
• Logistics and transport have a strong impact in terms of
environmental sustainability
• The transport system causes more than 30% of the
national energy requirements and is responsible for over
28% of greenhouse gas emissions
• Since 1997 to 2010 emissions increased by over 22%
when the Kyoto envisaged a reduction of 8.5% by 2012
(compared to 1990)
• It is estimated that in Italy the annual costs of urban
congestion are about 15 billions / year
• It is estimated that in Europe the loss of GDP due to
congestion, pollution and noise is 2%, 1.5%, 0.6%, resp.
58
 A global logistics system

Consolidator/freight
forwarder, 3PL
Manufacturer Port
trucking
Home

Small parcel
delivery

Warehouse: 3PL,
deconsolidator,
Retailer wholesaler, DC 59