Quantitative Models in Operations

and Supply Chain Management

G. Srinivasan
Professor
Department of Management Studies
Indian Institute of Technology Madras
Chennai

New Delhi-110001
2010
QUANTITATIVE MODELS IN OPERATIONS AND SUPPLY CHAIN MANAGEMENT
G. Srinivasan

© 2010 by PHI Learning Private Limited, New Delhi. All rights reserved. No part of this book
may be reproduced in any form, by mimeograph or any other means, without permission in
writing from the publisher.

ISBN-978-81-203-3981-1

The export rights of this book are vested solely with the publisher.

Published by Asoke K. Ghosh, PHI Learning Private Limited, M-97, Connaught Circus,
New Delhi-110001 and Printed by Baba Barkha Nath Printers, Bahadurgarh, Haryana-124507.
 Contents

Preface ix

1. Introduction to Operations and Supply Chain Management 1–24

1.1 Changing Customer 2
1.2 Requirements of Manufacturing 3
1.3 History of Manufacturing Systems 4
1.4 Improvements Based on Manufacturing Methodologies 5
1.5 Improvements Based on Human Resources and Processes 8
1.6 Methodologies Based on Information Systems and Decisions 9
1.7 Improvements to Business Performance 10
1.8 Synchronous Manufacturing (SM) 10
1.8.1 Statistical Fluctuations and Random Events 11
1.8.2 Principles in Synchronous Manufacturing 11
1.8.3 Capacity Constrained Resource (CCR) 12
1.8.4 A Systematic Approach to Improve Performance 12
1.9 Agility Principles 13
1.10 Supply Chain Management 14
1.10.1 Supply Chain Decisions 16
1.10.2 Purchasing in Supply Chain 17
1.10.3 Electronic Commerce 18
1.10.4 Types of Supply Chain 18
1.10.5 Supply Chain Metrics 19
1.11 Logistics 19
1.12 Bullwhip Effect 20
1.13 Role of Manufacturing and Operations Management 21
Questions 23

2. Location and Layout Decisions 25–53

2.1 Model 1: p-Median Location Models 26
2.2 Model 2: Fixed Charge Problem or Location—Allocation Problem 28
2.3 Model 3: Fixed Charge with Dedicated Facilities 31
2.4 Model 4: Supply Chain—Location and Allocation in Multiple Stages 31
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2.5 Model 5: Supply Chain—Location and Allocation in Multiple Stages

and Dedicated Supply 33
Exercises 35
Questions 35
2.6 Facilities Layout 35
2.7 Mathematical Programming Formulation 39
2.8 Heuristic Algorithms 39
2.8.1 Computerized Algorithm for Layout CRAFT 40
2.8.2 Some Observations 42
2.9 Cellular Layout—Cellular Manufacturing Systems 43
2.9.1 Mathematical Programming Formulation 44
2.10 Production Flow Analysis 45
2.11 Rank Order Clustering 47
2.12 Methods Involving a Distance Matrix 49
Exercises 50
Questions 53

3. Production Planning Decisions 54–99

3.1 Forecasting 54
3.1.1 Choice of a 59
3.1.2 Time Series Models with Trend 60
3.1.3 Exponential Smoothing-based Linear Trend Model 61
3.1.4 Holt’s Method for Trend (Holt, 1957) 62
3.1.5 Other Trend Models 63
3.1.6 Seasonal Models 63
3.1.7 Winters Model for Seasonal Forecasting (Winters, 1960) 64
3.1.8 Other Forecasting Models 66
3.1.9 Goodness of the Forecast 67
Exercises 68
Questions 73
3.2 Aggregate Planning 74
3.2.1 Graphical Approach 75
3.2.2 Tabular Method 76
3.2.3 Linear Programming Model 80
3.2.4 Transportation Problem 84
3.2.5 Dynamic Programming 86
3.2.6 Quadratic Model 89
Exercises 90
Questions 92
3.3 Disaggregation 93
3.3.1 Constant Demand and Capacity 93
3.3.2 Increasing T by Reallocating the Inventory 95
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3.3.3 Time-varying Demand and Capacity 96
3.3.4 Some Observations 98
Exercises 99
Questions 99

4. Production Control Decisions 100–144

4.1 Sequencing and Scheduling—An Introduction 100
4.1.1 Assumptions in Scheduling 101
4.1.2 Objectives in Scheduling 101
4.2 Scheduling in Single Processor 103
4.2.1 Total Flow Time with Ready Times 104
4.2.2 Sequencing with Due Dates 105
4.3 Scheduling in Parallel Processors 106
Exercises 106
Questions 107
4.4 Flow Shop Scheduling 107
4.4.1 n-job, Two-machine Problem to Minimize Makespan 107
4.4.2 n-job Three-machine Problem to Minimize Makespan 109
4.4.3 Branch and Bound Algorithm 110
4.4.4 Heuristics 115
4.4.5 Minimizing Total Flow Time 118
4.4.6 Some Comments/Observations on Flow Shop Scheduling 119
Exercises 120
Questions 123
4.5 Job Shop Scheduling 123
4.5.1 Dispatching Rules and Tie Breaking Rules 126
4.5.2 Using the Best Dispatching Rule 128
4.5.3 Other Job Shop Scheduling Problems 129
Exercises 129
Questions 131
4.6 Line Balancing 131
Exercises 135
Questions 136
4.7 Just-in-Time Manufacturing and Theory of Constraints 136
4.7.1 Number of Kanbans in the System 136
4.7.2 Multiple Products 137
4.7.3 Computing the Safety Stock and the Number of Containers 138
4.7.4 Theory of Constraints 138
4.7.5 How Much to Produce 139
4.7.6 Production Control in TOC 141
Exercises 143
Questions 144
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5. Cycle Inventory Models 145–187

5.1 Continuous Demand Instantaneous Replenishment Model 147
5.2 Considering Backordering 148
5.3 Inventory Model with Discount 150
5.3.1 All Quantity Discount 151
5.3.2 Marginal Quantity Discount 151
5.3.3 One Off Discount 152
Exercises 153
Questions 154
5.4 Multiple Items Inventory Models 154
5.4.1 Constraint on Total Number of Orders 154
5.4.2 Multiple Items Inventory (Constraint on Inventory Value) 157
5.4.3 Multiple Items Inventory (Constraint on Space) 160
5.4.4 Multiple Items Inventory and Multiple Constraints 163
5.4.5 Saving Part of Ordering Cost by Joint Ordering 164
5.4.6 Unequal Number of Orders and Joint Ordering 165
Exercises 168
Questions 169
5.5 Production–Consumption Models 169
5.5.1 Basic Production–Consumption Model 169
5.5.2 Production–Consumption Model with Backordering 170
5.6 Production Inventory Models 172
5.7 The Economic Lot Scheduling Problem 173
5.8 Two-stage Model with Constant Demand 175
5.8.1 With Time-varying Demand 177
Exercises 177
Questions 177
5.9 Lot Sizing—Time-varying Demand 178
5.9.1 Time-varying Demand—Mathematical Programming Model 179
5.9.2 Dynamic Programming Model 181
5.9.3 Heuristic Based on Economic Order Quantity 182
5.9.4 Lot for Lot Heuristic 183
5.9.5 Part Period Balancing 183
5.9.6 Silver–Meal Heuristic (Silver and Meal, 1973) 184
5.9.7 Based on Cost/Unit Quantity Ordered 185
Exercises 187
Questions 187

6. Safety Stock Models 188–203

6.1 Discrete Distribution—ROL Computation Based on Costs 188
6.2 Discrete Distribution Based on Service Level 190
6.3 Continuous Review-Integrated Model 190
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6.4 Computing Safety Stock—Normal Distribution 192
6.5 Decision Using Cost/Stock-Out Model 192
6.6 Decision Using Fractional Cost/Unit/Short Model 193
6.7 Periodic Review-Integrated Model 194
6.8 Newsvendor Problem 196
Exercises 197
Questions 198
6.9 Multiple Items with Probabilistic Demand 198
6.10 Serial System 199
6.11 Cross-Docking—Ordering and Allocation Policies 201
Exercises 203
Questions 203

7. Transportation Decisions 204–240

7.1 Transportation Problem 204
7.2 Solving Transportation Problems 206
7.2.1 North-West Corner Rule 206
7.2.2 Minimum Cost Method 207
7.2.3 Vogel’s Approximation Method or Penalty Cost Method 207
7.2.4 Basic Feasible Solution to a Transportation Problem 208
7.2.5 Finding the Optimal Solution to the Transportation Problem 209
7.2.6 Unbalanced Transportation Problems 214
7.3 Multistage Transportation Problems 214
7.3.1 Mathematical Formulation 214
7.3.2 Transportation Solution 216
7.3.3 Multistage Transportation Problem with Node Capacities 217
Exercises 217
Questions 219
7.4 Fixed Charge Transportation Problem 219
7.4.1 Heuristic Solutions to FCTP 220
7.4.2 Multiple Items and Fixed Charge 221
7.4.3 Heuristic Solution for Multiple Items 222
7.5 Truck Allocation Problem 223
7.5.1 Integer Programming (IP) Formulation 223
7.5.2 Branch and Bound Algorithm 224
7.5.3 Multiple Items, Fixed Charge and Truck Allocation 225
7.6 Point to Point Transportation—Multiple Customers to a Single Vehicle 226
7.6.1 Formulation 226
7.6.2 Heuristic Algorithms 227
Exercises 228
Questions 229
7.7 Multiple Customers in a Trip—Travelling Salesman Problem (TSP) 229
7.7.1 Mathematical Programming Formulation 229
 viii Contents

7.7.2 Branch and Bound Algorithm 230

7.7.3 Heuristic Algorithms 234
7.7.4 Nearest Neighbourhood Algorithm (Rosenkrantz et al., 1974
referred in Golden et al., 1980) 234
7.7.5 Three-opt Heuristic 234
7.7.6 Twice Around the Tree Heuristic (Kim, 1975 referred in
Golden, 1980) 235
7.8 Vehicle Routeing Problems 235
7.8.1 Formulation of the VRP 236
7.8.2 Heuristic Solutions 238
Exercises 240
Questions 240

8. Real-life Situations: Learning from Applications 241–279

8.1 Network Design 242
8.2 Lot Sizing 243
8.3 Forecasting 245
8.4 Aggregate Planning 246
8.5 Production Planning and Scheduling 249
8.6 Scheduling Case 251
8.7 Production Control—Simulation of a Production System—
A Software Game 257
8.8 Deterministic Inventory 260
8.9 Supply Chain Inventory 265
8.10 Beer Game 269
8.11 Distribution Planning 273
8.12 Transportation Management 278

Bibliography 281–284

Index 285–286
 Preface

About fifteen years ago, when I started teaching Operations Management to undergraduate
students, I faced the difficulty of identifying a textbook from which I could teach the subject. I
could neither get a book to my satisfaction nor suggest an affordable book to my students.
Today, however, many popular foreign books are available in Indian reprint for graduate
students, particularly the MBA students. Very good books written by Indian authors are also
available for the benefit of MBA students.
Then why do we need another book on this subject? Is it because I have added supply chain
management to the title? Or, is it because of the quantitative emphasis that I have tried to
provide in this book? Or, is it because I believe in a more quantitative approach to the subject?
Or, is there a real need for a book that starts with principles of operations management and leads
to a more complex subject of supply chain management?
When I started teaching Supply Chain Management (SCM) in 2002 to MBA students, I
again faced the problem of identifying a textbook for the subject for my own benefit and for use
by my students. I spent the first two years teaching the course in a more qualitative and
descriptive manner and later shifted to a more quantitative approach since most of the students
had a background in engineering (and science). I could understand the importance of
quantitative models and the need to highlight the concepts in SCM from an understanding of the
basics of operations management.
The three major activities that constitute an effective supply chain management are
manufacturing, distribution, and information technology. Topics from operations management
and operations research are central to the understanding and appreciation of the decision-
making processes in SCM. Hence this book that addresses largely the quantitative models in
operations and supply chain management.
This book has a quantitative bias, as the name suggests. It is meant to understand the
models used in decision-making in operations and supply chain management. It is primarily
designed for the students of mechanical and industrial engineering. Besides, the book will also
be the useful to postgraduate students of management.
G. Srinivasan

ix
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