Topics of interest

• Supply chain and its strategic fit • Sourcing in a supply chain

• Drives and flows in a supply chains • Transportation in a supply chain

• Decision phases in a supply chain • Information in a supply chain

• Macro processes in a supply chain • Pricing and revenue management in a

• Network design in a supply chain supply chain

• Forecasting and aggregate planning in • Coordination in a supply chain

a supply chain • Performance measurement in a supply

• Inventory management in a supply chain

chain

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 Supply chain management

SCM is a set of approaches utilised to efficiently integrate

suppliers, manufacturers, warehouses and stores so that the
merchandise is produced and distributed at the right quantities, to
the right locations and at the right time.

--- Simchi-Levi et al. (2008)

Supply chain surplus (value) = customer value – supply chain cost

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 How is demand met in a supply chain?
• Cycle view:

– Customer order cycle (retailer-customer)

– Replenishment cycle (distributor-retailer)

– Manufacturing cycle (manufacturer-distributor)

– Procurement cycle (supplier-manufacturer)

• Push/pull view:

– Demand fulfillment in response to a customer order (pull)

– Demand fulfillment in anticipation of a customer order (push)

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 How to achieve strategic fit?

Source: Chopra and Meindl (2014)

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 What drives a supply chain?
1. Finance (investment decisions and improving financial performance of the
firm)

2. Location (where to locate the manufacturing facilities)

3. Sourcing (make or buy decisions and supplier development)

4. Production (what to produce and how much to produce)

5. Inventory (methods for improving the efficiency and effectiveness of

inventory management)

6. Transportation (selection of the optimum transportation systems)

7. Pricing and revenue (optimizing revenue by setting up appropriate pricing)

8. Information (what information is needed and how to process and share)

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 Decision phases of a supply chain

• Supply chain strategy or design

• Supply chain planning

• Supply chain operation

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 Supply chain macro processes

Supply chain processes discussed in the two views can be

classified into:

– Supplier relationship management (SRM)

– Internal supply chain management (ISCM)

– Customer relationship management (CRM)

Note: Integration among the above three macro processes is

critical for effective and successful supply chain management

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 Network design decisions
For a trade-off between efficiency and responsiveness:

• How to get the supply and which suppliers should deliver which
facility?

• Where to produce and with what capacities?

• Where to store and how to transport?

• How to market and which facility should deliver or meet the demand
for which market?

• What are the constraints in each function?

• How to exploit economies of scale and scope?

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 Factors influencing network decisions

• Customer service : • Supply chain costs: • Geo-political issues:

– response time – inventories – technology

– product variety – transportation – macroeconomic

– product – facilities and conditions

availability handling – political situations

– customer – Information – infrastructure

experience – competition
– time to market

– order visibility

– returnability

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 Design of distribution networks

1. Manufacturer storage with direct shipping

2. Manufacturer storage with direct shipping and in-transit

merge

3. Distributor storage with carrier delivery

4. Distributor storage with last mile delivery

5. Manufacturer or distributor storage with consumer pickup

6. Retail storage with consumer pickup

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 Methods for network design

1. Factor rating method

2. Centre of gravity method

3. Load-distance method

4. Critical path method (CPM)

5. Transportation and assignment models etc.

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 Uncertainties in the network
• Supply chain design decisions include investments in number and
size of plants, number of trucks, number of warehouses etc.

• These decisions cannot be easily changed in the short- term

• There will be a good deal of uncertainty in demand, prices,

exchange rates and the competitive market over the lifetime of a
supply chain network

Topics of discussion: how can the supply chains deal with

uncertainties?

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 Forecasting methods
• Simple/weighted moving average
• Simple exponential smoothing
• Holt’s model
• Winters’ model
• Regression based models
• Auto-regressive integrated moving average (ARIMA)
• Auto-regressive integrated moving average with exogenous
variables (ARIMAX)

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 Forecasting in practice

• Errors in forecasting can cause significant misallocation of

resources
• Long lead times, seasonality, short product life cycles, few
customers and lumpy demand
• Improper orders placed by intermediaries in a supply chain
• Mitigation strategies:
– Increasing the responsiveness of the supply chain
– Utilizing opportunities for pooling of demand

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 The aggregate planning problem
• Considering the forecast and profit maximization for each period:

– Determine the production level

– Determine the inventory level

– Determine the capacity level

• Specify the planning horizon

• Specify the duration of each period

• Specify key information required to develop an aggregate plan

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 Aggregate planning strategies
• Chase strategy – using capacity as the lever

• Time flexibility from workforce or capacity strategy –

using utilization as the lever

• Level strategy – using inventory as the lever

• Mixed strategy – a combination of one or more of the

first three strategies

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 Activities of inventory management

• Stock control

• Purchasing

• Storage of materials

• Accounting (materials, records)

• Classification (e.g., ABC analysis)

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 Factors impacting EOQ
• Inventory holding cost • Weighted average cost of capital (WACC):
– Cost of capital − WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]
– Obsolescence cost − E = Market value of the company's equity
– Handling cost − D = Market value of the company's debt
– Occupancy cost − V = Total market value of the company (E + D)
– Other costs, if any − Re = Cost of equity
• Ordering cost − Rd = Cost of debt
– Buyer time − T = Tax rate
– Transportation costs

– Receiving costs

– Other costs, if any

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 EOQ and aggregation of orders
• Transportation is a significant contributor to the fixed cost per order

• Can combine shipments of different products from the same supplier:

– same overall fixed cost

– shared over more than one product

– effective fixed cost is reduced for each product

– lot size for each product can be reduced

• Can also have a single delivery coming from multiple suppliers or a single truck
delivering to multiple retailers

• Allows for a reduction in lot size for individual products because fixed ordering and
transportation costs are now spread across multiple products, retailers or suppliers

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 Measuring product availability
Firm’s ability to fill a customer’s order out of available inventory:

• Stock-out: a customer order arrives when product is not available

• Order fill rate: fraction of orders that are filled from available inventory

• Cycle service level (CSL): fraction of replenishment cycles that end with all customer
demand met (probability that demand during the lead time will be lower than or equal to
reorder point (ROP))

• Product fill rate (fr): fraction of demand that is satisfied from the inventory:

– Increases with the increase in safety stock and cycle service level

– Increases with the lot size even though cycle service level does not change

• Expected shortage per cycle (ESC): the average units of demand that are not satisfied from
inventory in stock per replenishment cycle (fr+ (ESC/Q) = 1.0)

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 Make or buy decisions?

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 Supplier scoring and assessment

• Supplier price • Quality costs

• Supplier terms • Reputation

• Delivery costs • Support

• Inventory costs • Supplier capabilities

• Warehousing cost • Other costs, if any

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 Supplier selection and contracting

Supplier selection can be performed through

competitive bidding process or through direct
negotiations:

– Buyback contracts

– Revenue sharing contracts

– Quantity flexibility contracts

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 Intermodal/multimodal transportations
• Use of more than one mode of transportation to move a shipment to its
destination

• Has grown considerably with increased use of containers

• Increased global trade has also increased use of intermodal transportation

• More convenient for shippers (one entity provides the complete service)

• Facilitate exchange of information between different transport modes

• Reduce/stop pilferage and controls damage in different climatic conditions

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 Design options for transportation network

• Should transportation be direct or through an

intermediate site?

• Should the intermediate site stock product or only

serve as a cross-docking location?

• Should each delivery route supply a single

destination or multiple destinations (milk run)?

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 Trade-offs in transportation design

• Transportation and inventory cost trade-off

– Choice of transportation mode

– Inventory aggregation through EOQ

• Transportation cost and responsiveness trade-off

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 IT in supply chains

• Bar code

• Point-of-sale ( POS)

• Electronic data interchange (EDI)

• Radio frequency identification (RFID)

• Global positioning system (GPS)

• Internet of things (IOT)

• Block chain technologies

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 Coordination and the bullwhip effect
• Supply chain coordination:

– All stages in the supply chain take actions together

– Each stage take into account the effects of its actions on the other
stages

• Lack of coordination results when:

– Objectives of different stages conflict

– Information moving between stages is distorted

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 Issues with bullwhip effect
The magnification of variability in orders in the supply-chain:

Why does it happen: What it impacts:

• Incentive obstacles • Manufacturing cost

• Information processing • Inventory cost

obstacles • Transportation cost
• Long lead times • Labor cost for shipping
• Batch ordering and receiving

• Rationing • Level of product

• Shortage gaming availability

• Pricing obstacles • Relationships across the

• Behavioral obstacles supply chain

• Profitability

• Replenishment lead
time

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 Strategies to minimize bullwhip effect

• Aligning goals and incentives

• Improving information accuracy

• Improving operational performance

• Designing pricing strategies to stabilize orders

• Building strategic partnerships and trust

Topics of discussion: can you think of reverse bullwhip

effect in a supply chain?
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 Pricing and revenue management (PRM)

• Use of pricing to increase the profit from a limited supply

of assets

• Supply assets exist in two forms – capacity and inventory

• The product is highly perishable or product waste occurs

• Demand has seasonal and other peaks

• The product is sold both in bulk and on the spot market

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Pricing for multiple customer segments
Two fundamental issues should be handled
in practice:

How can the firm differentiate between

the two segments and structure its
pricing to make one segment pay more
than the other?

How can the firm control demand such

that the lower-paying segment does not
utilize the entire availability of the asset?

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 PRM in practice

Effective use of revenue management increases firm profits and

improves service for the more valuable customer segment:

Create different versions of a product targeted at different

segments

Price based on the value assigned by each segment

Use different prices for each segment

Forecast at the segment level

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 Supply chain performance metrics
1. Finance related metrics

2. Facility related metrics

3. Inventory related metrics

4. Transportation related metrics

5. Information related metrics

6. Sourcing related metrics

7. Pricing related metrics

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 References/suggested readings
1. Chopra, S., & Meindl, P. (2012). Supply chain management: strategy, planning and
operation. New Delhi: Prentice Hall.

2. Fisher, M. (1997). What is the right supply chain for your product? Harvard Business
Review, March-April, 83-93.

3. Marcos Paulo Valadares de Oliveira, M. P., McCormack, K., & Trkman, P. (2012). Business
analytics in supply chains – the contingent effect of business process maturity. Expert
Systems with Applications, 39(2012), 5488–5498.

4. Sezen, B. (2008). Relative effects of design, integration and information sharing on supply
chain performance. Supply Chain Management: An International Journal, 13(3), 233–240.

5. Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., & Shankar, R. (2009). Designing and
managing the supply chain – concepts, strategies and case studies. New Delhi: Tata
McGraw-Hill.

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