IE 457 Slides01-SupplyChain-Dr. Ammar Y. Alqahtani

6/1/2020
IE 457:
Supply Chain Management
(Supply Chain Engineering)
Dr. Ammar Y. Alqahtani

Assistant Professor of Industrial Engineering
College of Engineering
King Abdulaziz University
Chapter 1: ©Dr. Ammar Y. Alqahtani Supply Chain Management: Strategy, Planning, & 1
Operation
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Outline
• Introduction
• What is a Supply Chain?
• Decision Phases in a Supply Chain
• Process View of a Supply Chain
• Supply Chain Macro Processes in a Firm
• Summary of Learning Objectives
Operation
Traditional View: Logistics in the Economy

(1990, 1996)
• Freight Transportation $352, $455 Billion
• Inventory Expense $221, $311 Billion
• Administrative Expense $27, $31 Billion
• Logistics Related Activity 11%, 10.5% of GNP
Source: Cass Logistics
(US GNP in 2013 was about $16 Trillion! Gross National Product is a
broad measure of a nation's total economic activity. GNP is the value
of all finished goods and services produced in a country in one year
by its nationals.)
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How big are a billion and a trillion?
• One billion is written as the number "1" followed by 9

zeroes and one trillion is written as the number "1"
followed by 12 zeroes
• One billion seconds = 31.5 years!
• One trillion seconds = 31,546 years!
• US national debt is about 17 trillion dollars!
• This number is currently increasing at the rate of about
4.2 billion dollars per day
Operation
Traditional View: Logistics in the Manufacturing Firm
• Profit 4% Profit
Logistics
• Logistics Cost 21% Cost
Marketing
Cost
• Marketing Cost 27%
• Manufacturing Cost 48%

Manufacturing
Cost
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Evolution of Supply Chain
Further
Refinement of
SCM Capabilities
SCM
Formation/
Extensions
JIT, TQM, BPR,

Alliances
Inventory Management/Cost
Optimization
Traditional Mass Manufacturing
1950s 1960s 1970s 1980s 1990s 2000s Beyond
Operation
Supply Chain:
The Magnitude in the Traditional View
• Estimated that the grocery industry could save $30 billion
(10% of operating cost) by using effective logistics and
supply chain strategies
– A typical box of cereal spends 104 days from factory to sale
– A typical car spends 15 days from factory to dealership
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Supply Chain:
The True Magnitude
• Compaq estimated that it lost $0.5 billion to $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
Operation
What is a Supply Chain?
• Involves all stages, directly or indirectly, in fulfilling a

customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each company, the supply chain includes all
functions involved in fulfilling a customer request (product
development, marketing, operations, distribution, finance,
customer service)
• Examples: Detergent supply chain (Wal-Mart), Dell
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Customer wants
P&G or other Wal-Mart or Wal-Mart
detergent and goes
manufacturer Third party DC Store to Wal-Mart
Chemical
Plastic Pactiv
manufacturer
Producer Packaging
(e.g. Oil Company)
Chemical
Paper Timber
manufacturer
Manufacturer Company
(e.g. Oil Company)
Operation
• Customer is an integral part of the supply chain

• Includes movement of products from suppliers to
manufacturers to distributors, but also includes
movement of information, funds, and products in both
directions
• Probably more accurate to use the term “supply network”
or “supply web”
• Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
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Supply Chain Stages
suppliers manufacturer distributors retailers customers
R
c
supplier u
DC R s
R t
supplier plant o
R m
e
DC R
supplier r
R s
Operation
Supply Chain Network
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Flows in a Supply Chain
Information Capacity, promotion, delivery, orders

Material Raw materials, work-in-progress, finished goods
Funds Credits, consignment, payment terms, invoice
Suppliers Manufacturers Distributors Retailers Customers
Information
Material
Payments, consignment Funds
Source: Adapted from Hau Lee, SCMR, Sep-Oct, 2000.
Operation
The Objective of a Supply Chain
• Maximize overall value created

• Supply chain value: difference between what the final
product is worth to the customer and the effort the supply
chain expends in filling the customer’s request
𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 = 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑉𝑎𝑙𝑢𝑒 − 𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐶𝑜𝑠𝑡
• Value is correlated to supply chain profitability (difference

between revenue generated from the customer and the
overall cost across the supply chain)
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• Example: Dell receives $2000 from a customer for a

computer (revenue)
• Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Difference between $2000 and the sum of all of these
costs is the supply chain profit
• Supply chain profitability is total profit to be shared across
all stages of the supply chain
• Supply chain success should be measured by total
supply chain profitability, not profits at an individual stage
Operation
• Sources of supply chain revenue: the customer

• Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain
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Importance of Supply Chain Decisions
• Wal-Mart, $1 billion sales in 1980 to $482 billion in 2016

• Seven-Eleven Japan, ¥1 billion sales in 1974 to ¥2.7
trillion in 2016
• Webvan folded in two years
• Borders, $4 billion in 2004, declared bankruptcy in 2010
• Dell, $56 billion in 2006, adopted new supply chain
strategies
Operation
What is Supply Chain Management?

• A set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses and stores, so that
merchandise is produced and distributed in the right
quantities, to the right locations, and at the right time,
in order to minimize system-wide costs while satisfying
service level requirements.
Source: Simchi-Levi and Kaminsky (2003)
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What is Supply Chain Engineering?
• Supply Chain Engineering (SCE) emphasizes the design

of the supply chain network and uses mathematical
models and methods to determine the optimal strategies
for managing the supply chain.
Source: Ravindran and Warsing (2013)
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Decision Phases of a Supply Chain
• Supply chain strategy or design (strategic)

• Supply chain planning (tactical)
• Supply chain operation (operational)
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Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and

what processes each stage will perform
• Strategic supply chain decisions
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty
Operation
Supply Chain Planning
• Definition of a set of policies that govern short-term

operations
• Fixed by the supply configuration from previous phase
• Starts with a forecast of demand in the coming year
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Supply Chain Planning (Cont.)
• Planning decisions:
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
• Must consider in planning decisions demand uncertainty,
exchange rates, competition over the time horizon
Operation
Supply Chain Operation

• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies
are determined
• Goal is to implement the operating policies as effectively
as possible
• Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an
order to a particular shipment, set delivery schedules,
place replenishment orders
• Much less uncertainty (short time horizon)
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Process View of a Supply Chain
• Cycle view: processes in a supply chain are divided into

a series of cycles, each performed at the interfaces
between two successive supply chain stages
• Push/pull view: processes in a supply chain are divided

into two categories depending on whether they are
executed in response to a customer order (pull) or in
anticipation of a customer order (push)
Operation
Cycle View of a Supply Chain

• Each cycle occurs at the interface between two
successive stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• Cycle view clearly defines processes involved and
the owners of each process. Specifies the roles and
responsibilities of each member and the desired
outcome of each process.
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Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Operation
Cycle View of a Supply Chain

• Note that in this case there are five stages
• And there are four process cycles
• Important differences between the cycles are:
– Uncertainty of order
– Scale of order
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Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two categories
depending on the timing of their execution relative to
customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of customer
orders (speculative)
• Push/pull boundary separates push processes from pull
processes
Operation
Push/Pull View of Supply Chains
Procurement, Customer Order

Manufacturing and Cycle
Replenishment cycles
PUSH PROCESSES PULL PROCESSES
Customer
Order Arrives
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Push/Pull View of
Supply Chain Processes
• Useful in considering strategic decisions relating to

supply chain design – more global view of how supply
chain processes relate to customer orders
• Can combine the push/pull and cycle views
– Make to Stock (e.g. L.L. Bean)
– Build to Order (e.g. Dell)
• The relative proportion of push and pull processes can
have an impact on supply chain performance
Operation
Make-To-Stock (L. L. Bean)
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Build-To-Order (Dell)
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Potential Opportunities Exploited by Dell
• Revenue opportunities
– 24 hour access for order placement
– Direct sales
– Providing customization and large selection information
– Flexibility on pricing and promotion
– Faster time to market
– Efficient funds transfer - reduce working capital
• Revenue negatives
– Longer response time than store
– no help with selection
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Potential Opportunities Exploited by Dell
• Cost opportunities
– Direct sales eliminating intermediary
– Customer participation: Call center & catalog costs
– Information sharing in supply chain
– Reduce facility costs
– Geographical centralization and reduced inventories
– Postpone product differentiation to after order is placed using
product platforms and common components
• Outbound transportation costs increase
Operation
Opportunities Potential
• Significant, but must be combined with component

commonality, and build to order. Must move product
customization to pull phase of supply chain and hold
inventories as common components during the push
phase
• Opportunity most significant for new, hard to forecast
products
• Complements strength of existing retail channels
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Supply Chain View in the

Book Industry
• From Push Systems
e.g. Barnes and Noble
• To Pull Systems
e.g. Amazon.Com
• And Now to Push-Pull Systems

e.g. Amazon.Com, 1999-Present
- Seven warehouses
- Three million square feet
- Best sellers are stocked
Operation
Retailing: Amazon.com
Customer Customer
Pull Pull
Amazon Retail Store
Distributor Warehouse (?) Push

Push
Publisher Publisher
Amazon Supply Chain Bookstore Supply Chain

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Potential Opportunities Exploited by Amazon
• Revenue opportunities
– 24 hour access for order placement
– Providing large selection and other information
– Attract customers who do not want to go to store
– Flexibility on pricing
– Efficient funds transfer
• Revenue negatives
– Intermediary (distributor) reduces margin
– Longer response time than bookstore
Operation
Potential Opportunities Exploited by Amazon
• Cost opportunities
– Reduce facility costs
– Geographical centralization and reduced inventories: Most
effective for low volume, hard to forecast books, least effective
for high volume best sellers
• Cost increases
– Outbound transportation costs increase
– Handling cost increase
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Opportunities Potential
• Going on-line, by itself, offers lower cost advantages

(may be some disadvantages) than in Dell model given
current form of books
• Cost and availability advantages are more significant for
low volume books
• On-line channel has significant cost benefit if books are
downloadable
Operation
Supply Chain Macro Processes in a Firm
• Supply chain processes discussed in the two views can

be classified into:
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
• Integration among the above three macro processes is
crucial for effective and successful supply chain
management
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Supply Chain Macro Processes in a Firm
Operation
2020 SC Rankings by Gartner
• Based on 50% weight to public financial data [Return on

Assets (25%), Inventory Turns (15%) and Revenue
Growth (10%)] and 50% weight to voting by 32 AMR
analysts (25%) and peer panel of 156 senior level SC
executives from companies (25%).
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Rank Company
1 Cisco Systems
2 Colgate-Palmolive
3 Johnson & Johnson
4 Schneider Electric
5 Nestlé
6 PepsiCo
7 Alibaba
8 Intel
9 Inditex
10 L’Oréal
11 Walmart
12 HP Inc.
Chapter 1: ©Dr. Ammar Y. Alqahtani 13 Coca Cola Company

Supply Chain Management: Strategy, Planning, & 47
Operation

Rank Company
14 Diageo
15 Lenovo
16 Nike
17 AbbVie
18 BMW
19 Starbucks
20 H&M
21 British American Tobacco
22 3M
23 Reckitt Benckiser
24 Biogen
25 Kimberly-Clark
Operation
Source: AMR Research / Gartner Report (2020)
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Supply Chain Leaders
• Supply Chain leaders carry

– 15% less inventory,
– are 60% faster-to-market,
– complete 17% “more perfect” orders,
– have 35% shorter cash-to-cash cycle and
– have 5% higher profit margins.
Operation
Examples of Supply Chains
• Gateway and Apple

• Zara
• W.W. Grainger and McMaster-Carr
• Toyota
• Amazon
• Macy's
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Gateway and Apple

1. Why did Gateway choose not to carry any finished-product inventory at
its retail stores? Why did Apple choose to carry inventory at its stores?
2. What are the characteristics of products that are most suitable to be
carried in finished-goods inventory in a retail store? What characterizes
products that are best manufactured to order?
3. How does product variety affect the level of inventory a retail store must
carry?
4. Is a direct selling supply chain without retail stores always less expensive
than a supply chain with retail stores?
5. What factors explain the success of Apple retail and the failure of
Gateway Country stores?
Operation
Zara
1. What advantage does Zara gain against the competition by having

a very responsive supply chain?
2. Why has Inditex chosen to have both in-house manufacturing and
outsourced manufacturing? Why has Inditex maintained
manufacturing capacity in Europe even though manufacturing in
Asia is much cheaper?
3. Why does Zara source products with uncertain demand from local
manufacturers and products with predictable demand from Asian
manufacturers?
4. What advantage does Zara gain from replenishing its stores
multiple times a week compared to a less frequent schedule?
5. Do you think Zara’s responsive replenishment infrastructure is
better suited for online sales or retail sales?
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W.W. Grainger and McMaster-Carr
1. How many DCs should be built and where should they be

located?
2. How should product stocking be managed at the DCs? Should all
DCs carry all products?
3. What products should be carried in inventory and what products
should be left with the supplier to be shipped directly in response
to a customer order?
4. What products should W.W. Grainger carry at a store?
5. How should markets be allocated to DCs in terms of order
fulfillment? What should be done if an order cannot be completely
filled from a DC? Should there be specified backup locations?
How should they be selected?
Operation
Toyota
1. Where should the plants be located, and what degree of

flexibility should be built into each? What capacity
should each plant have?
2. Should plants be able to produce for all markets or only
for specific contingency markets?
3. How should markets be allocated to plants and how
frequently should this allocation be revised?
4. How should the investment in flexibility be valued?
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Amazon
1. Why is Amazon building more warehouses as it grows? How many

warehouses should it have, and where should they be located?
2. Should Amazon stock every product it sells?
3. What advantage can online players derive from setting up a brick-
and-mortar location? How should they use the two channels to gain
maximum advantage?
4. What advantages and disadvantages does the online channel enjoy
in the sale of shoes and diapers relative to a retail store?
5. For what products does the online channel offer the greater
advantage relative to retail stores? What characterizes these
products?
Operation
Macy’s and W.W. Grainger
1. Should online orders be filled from stores or fulfillment centers?

What role(s) should each facility play?
2. How should store inventories be managed in an omni-channel
setting?
3. Should returns be kept at a store or sent to a fulfillment center?
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Summary of Learning Objectives
• What are the cycle and push/pull views of a supply

chain?
• How can supply chain macro processes be classified?
• What are the three key supply chain decision phases and
what is the significance of each?
• What is the goal of a supply chain and what is the impact
of supply chain decisions on the success of the firm?
Operation
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6/1/2020

Dr. Ammar Y. Alqahtani

Traditional View: Logistics in the Economy

How big are a billion and a trillion?

• One billion is written as the number "1" followed by 9

Traditional View: Logistics in the Manufacturing Firm

• Manufacturing Cost 48%

Evolution of Supply Chain

JIT, TQM, BPR,

Traditional Mass Manufacturing

1950s 1960s 1970s 1980s 1990s 2000s Beyond

What is a Supply Chain?

• Involves all stages, directly or indirectly, in fulfilling a

What is a Supply Chain?

What is a Supply Chain?

• Customer is an integral part of the supply chain

Supply Chain Stages

suppliers manufacturer distributors retailers customers

Supply Chain Network

Flows in a Supply Chain

Information Capacity, promotion, delivery, orders

Suppliers Manufacturers Distributors Retailers Customers

The Objective of a Supply Chain

• Maximize overall value created

𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 = 𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟 𝑉𝑎𝑙𝑢𝑒 − 𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐶𝑜𝑠𝑡

• Value is correlated to supply chain profitability (difference

The Objective of a Supply Chain

• Example: Dell receives $2000 from a customer for a

The Objective of a Supply Chain

• Sources of supply chain revenue: the customer

Importance of Supply Chain Decisions

• Wal-Mart, $1 billion sales in 1980 to $482 billion in 2016

What is Supply Chain Management?

Source: Simchi-Levi and Kaminsky (2003)

What is Supply Chain Engineering?

• Supply Chain Engineering (SCE) emphasizes the design

Source: Ravindran and Warsing (2013)

Decision Phases of a Supply Chain

• Supply chain strategy or design (strategic)

Supply Chain Strategy or Design

• Decisions about the structure of the supply chain and

Supply Chain Planning

• Definition of a set of policies that govern short-term

Supply Chain Planning (Cont.)

Supply Chain Operation

Process View of a Supply Chain

• Cycle view: processes in a supply chain are divided into

• Push/pull view: processes in a supply chain are divided

Cycle View of a Supply Chain

Cycle View of Supply Chains

Cycle View of a Supply Chain

Push/Pull View of Supply Chains

Procurement, Customer Order

PUSH PROCESSES PULL PROCESSES

• Useful in considering strategic decisions relating to

Make-To-Stock (L. L. Bean)

Potential Opportunities Exploited by Dell

Potential Opportunities Exploited by Dell

• Significant, but must be combined with component

Supply Chain View in the

• And Now to Push-Pull Systems

Distributor Warehouse (?) Push

Amazon Supply Chain Bookstore Supply Chain

Potential Opportunities Exploited by Amazon