VTU Supply Chain

Supply Chain
Management
Change to change otherwise change will change you © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Module 1
Introduction to supply Chain Management
• Supply chain – objectives – importance –

decision phases – process view –
competitive and supply chain strategies –
achieving strategic fit – supply chain
drivers – obstacles – framework – facilities
– inventory – transportation – information
– sourcing – pricing.
definition
• A supply chain consists of all parties
involved directly or indirectly in fulfilling a
customer request.
• It includes manufacturer supplier,
transporters, warehouses, retailers and
customers.
Supply chain management in
HUL
Objectives
• Objective 1: enhance the supply chain
value
Supply chain value is the difference
between final worth of product to customer
minus costs supply chain incurs in filling
the customers request.
• Objective 2: Increase the supply chain
profitability.
Supply chain profitability is the difference
between the revenue generated from the
customer and the overall cost across the
value chain.
• Objective 3: Maximize the customer
satisfaction
• Objective 4: Have product replenishment
at right time.
Importance of supply chain
• Transportation and information
infrastructure facilitates effective flow of
goods and information.
• Proper management of product,
information and fund flows increases the
profitability.
• Involving customers in supply chain
improves the effectiveness.
• Zero inventory system and JIT reduces the
cost of manufacturing.
[Decision Phases of a Supply Chain ]
• Supply chain strategy or design

• Supply chain planning
• Supply chain operation
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
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
Supply Chain Planning
• 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
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)
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)
Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
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.
Push/Pull View of Supply
Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles
PUSH PROCESSES PULL PROCESSES
Customer
Order Arrives
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
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
– Big Bazaar
– Hindustan Unilever.
• The relative proportion of push and pull processes can
have an impact on supply chain performance
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 critical for effective and
successful supply chain management
Competitive and Supply
•
Chain Strategies
Competitive strategy: defines the set of customer needs
a firm seeks to satisfy through its products and services
• Product development strategy: specifies the portfolio of
new products that the company will try to develop
• Marketing and sales strategy: specifies how the market
will be segmented and product positioned, priced, and
promoted
• Supply chain strategy:
– determines the nature of material procurement, transportation of
materials, manufacture of product or creation of service,
distribution of product
– Consistency and support between supply chain strategy,
competitive strategy, and other functional strategies is important
The Value Chain: Linking
Supply Chain and Business
Strategy
Finance, Accounting, Information Technology, Human Resources
New Marketing
Product and Operations Distribution Service
Development Sales
Achieving Strategic Fit
• Strategic fit:
– Consistency between customer priorities of competitive strategy
and supply chain capabilities specified by the supply chain
strategy
– Competitive and supply chain strategies have the same goals
• A company may fail because of a lack of strategic fit or because its
processes and resources do not provide the capabilities to execute
the desired strategy
How is Strategic Fit Achieved?
• Step 1: Understanding the customer and
supply chain uncertainty
• Step 2: Understanding the supply chain
• Step 3: Achieving strategic fit
Step 1: Understanding the
Customer and Supply Chain
Uncertainty
• Identify the needs of the customer
segment being served
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
Customer and Supply Chain
Uncertainty
• Overall attribute of customer demand
• Demand uncertainty: uncertainty of
customer demand for a product
• Implied demand uncertainty: resulting
uncertainty for the supply chain given the
portion of the demand the supply chain
must handle and attributes the customer
desires
Step 1: Understanding the Customer and Supply Chain
Uncertainty
• Implied demand uncertainty also related to

customer needs and product attributes
• First step to strategic fit is to understand
customers by mapping their demand on
the implied uncertainty spectrum
Achieving Strategic Fit
• Understanding the Customer
– Lot size
– Response time Implied
– Service level Demand
– Product variety Uncertainty
– Price
– Innovation
Impact of Customer Needs on
Implied Demand Uncertainty
Customer Need Causes implied demand
uncertainty to increase because …
Range of quantity increases Wider range of quantity implies
greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required increases Demand per product becomes more

disaggregated
Number of channels increases Total customer demand is now
disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges in demand
Levels of Implied Demand
Uncertainty
Predictable Predictable supply and uncertain Highly uncertain
supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand
Salt at a An existing A new

supermarket automobile communication
model device
Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum
Correlation Between Implied Demand
Uncertainty and Other
Attribute Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High
Avg. forecast error 10% 40%-100%
Avg. stockout rate 1%-2% 10%-40%
Avg. forced season- 0% 10%-25%

end markdown
Supply Chain
• How does the firm best meet demand?
• Dimension describing the supply chain is supply chain
responsiveness
• Supply chain responsiveness -- ability to
– respond to wide ranges of quantities demanded
– meet short lead times
– handle a large variety of products
– build highly innovative products
– meet a very high service level
Supply Chain
• There is a cost to achieving responsiveness
• Supply chain efficiency: cost of making and delivering the product to
the customer
• Increasing responsiveness results in higher costs that lower
efficiency
• Second step to achieving strategic fit is to map the supply chain on
the responsiveness spectrum
Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness
High
Low
Cost
High Low
Step 3: Achieving Strategic Fit
• Step is to ensure that what the supply
chain does well is consistent with target
customer’s needs
Responsiveness Spectrum
Highly Somewhat Somewhat Highly

efficient efficient responsive responsive
Integrated Hanes Most Dell

steel mill apparel automotive
production
Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
supply chain
Responsiven
ess spectrum
Efficient
supply chain
Certain Implied Uncertain

demand uncertainty demand
spectrum
Step 3: Achieving Strategic Fit
• All functions in the value chain must
support the competitive strategy to
achieve strategic fit
• Two key points
– there is no right supply chain strategy
independent of competitive strategy
– there is a right supply chain strategy for a
given competitive strategy
Comparison of Efficient and
Responsive Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense Aggressively reduce even if
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on
modes responsive (fast) modes
Other Issues Affecting Strategic
Fit
• Multiple products and customer segments
• Product life cycle
• Competitive changes over time
Multiple Products and Customer
Segments
• Firms sell different products to different customer segments (with
different implied demand uncertainty)
• The supply chain has to be able to balance efficiency and
responsiveness given its portfolio of products and customer
segments
• Two approaches:
– Different supply chains
– Tailor supply chain to best meet the needs of each product’s
demand
Product Life Cycle
• The demand characteristics of a product and the needs of a
customer segment change as a product goes through its life cycle
• Supply chain strategy must evolve throughout the life cycle
• Early: uncertain demand, high margins (time is important), product
availability is most important, cost is secondary
• Late: predictable demand, lower margins, price is important
Product Life Cycle
• Examples: pharmaceutical firms, Intel
• As the product goes through the life cycle,
the supply chain changes from one
emphasizing responsiveness to one
emphasizing efficiency
Competitive Changes Over
Time
• Competitive pressures can change over
time
• More competitors may result in an
increased emphasis on variety at a
reasonable price
• The Internet makes it easier to offer a wide
variety of products
• The supply chain must change to meet
these changing competitive conditions
Expanding Strategic Scope
• Scope of strategic fit
– The functions and stages within a supply chain that devise
an integrated strategy with a shared objective
– One extreme: each function at each stage develops its
own strategy
– Other extreme: all functions in all stages devise a strategy
jointly
• Five categories:
– Intracompany intraoperation scope
– Intracompany intrafunctional scope
– Intracompany interfunctional scope
– Intercompany interfunctional scope
– Flexible interfunctional scope
Drivers of Supply Chain
Performance
• Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
• Information
– data and analysis regarding inventory, transportation, facilities
throughout the supply chain
– potentially the biggest driver of supply chain performance
• Sourcing
– functions a firm performs and functions that are outsourced
• Pricing
– Price associated with goods and services provided by a firm to the
supply chain
A Framework for Structuring
Drivers
Competitive Strategy
Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure
Logistical Drivers
Facilities Inventory Transportation
Information Sourcing Pricing
Cross Functional Drivers
Facilities
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities
(responsiveness priority)
• Components of facilities decisions
Components of Facilities
Decisions
• Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused versus process focused)
• Warehousing methodology (SKU storage, job lot storage, cross-docking)
• Overall trade-off: Responsiveness versus efficiency
Inventory
• Components of inventory decisions
Inventory: Role in the Supply
Chain
• Inventory exists because of a mismatch

between supply and demand
• Source of cost and influence on
responsiveness
• Inventory and throughput are “synonymous” in a
supply chain
Inventory: Role in Competitive
Strategy
• If responsiveness is a strategic
competitive priority, a firm can locate
larger amounts of inventory closer to
customers
• If cost is more important, inventory can be
reduced to make the firm more efficient
• Trade-off
Components of Inventory
Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments
– Depends on lot size
• Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible
production
• Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
Transportation
• Components of transportation decisions
Transportation: Role in the
Supply Chain
• Moves the product between stages in the
supply chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities
Transportation: Role in the
Competitive Strategy
• If responsiveness is a strategic
competitive priority, then faster
transportation modes can provide greater
responsiveness to customers who are
willing to pay for it
• Can also use slower transportation modes
for customers whose priority is price (cost)
• Can also consider both inventory and
transportation to find the right balance
Components of Transportation
Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource
• Overall trade-off: Responsiveness versus
efficiency
Information
• Components of information decisions
Information: Role in the Supply
Chain
• The connection between the various
stages in the supply chain – allows
coordination between stages
• Crucial to daily operation of each stage in
a supply chain – e.g., production
scheduling, inventory levels
Information:
Role in the Competitive Strategy
• Allows supply chain to become more
efficient and more responsive at the same
time (reduces the need for a trade-off)
• Information technology
• What information is most valuable?
Components of Information
Decisions
• Push (MRP) versus pull (demand
information transmitted quickly throughout
the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI, Internet, ERP systems
– Supply Chain Management software
• Overall trade-off: Responsiveness versus
Sourcing
• Components of sourcing decisions
Sourcing: Role in the Supply
Chain
• Set of business processes required to
purchase goods and services in a supply
chain
• Supplier selection, single vs. multiple
suppliers, contract negotiation
Sourcing:
• Sourcing decisions are crucial because
they affect the level of efficiency and
responsiveness in a supply chain
• In-house vs. outsource decisions-
improving efficiency and responsiveness
Components of Sourcing
Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply
chain profits
Pricing
• Components of pricing decisions
Pricing: Role in the Supply
Chain
• Pricing determines the amount to charge
customers in a supply chain
• Pricing strategies can be used to match
demand and supply
Sourcing:
• Firms can utilize optimal pricing strategies
to improve efficiency and responsiveness
• Low price and low product availability; vary
prices by response times
• Example 3.7: Amazon
Components of Pricing
Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low
pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits
Obstacles to Achieving
Strategic Fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies
• MODULE 2
• Designing the supply chain network
• Designing the distribution network – role of
distribution – factors influencing distribution
– design options – e-business and its
impact – distribution networks in practice –
network design in the supply chain – role
of network – factors affecting the network
design decisions – modeling for supply
chain.
The Role of Distribution
in the Supply Chain
• Distribution: the steps taken to move
and store a product from the supplier
stage to the customer stage in a supply
chain
• Distribution directly affects cost and the
customer experience and therefore drives
profitability
• Choice of distribution network can
achieve supply chain objectives from low
cost to high responsiveness
Factors Influencing
Distribution Network Design
• Distribution network performance
evaluated along two dimensions at the
highest level:
– Customer needs that are met
– Cost of meeting customer needs
• Distribution network design options must
therefore be compared according to their
impact on customer service and the cost
to provide this level of service
Factors Influencing
Distribution Network Design
• Elements of customer service influenced by network
structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Order visibility
– Returnability
• Supply chain costs affected by network structure:
– Inventories and Transportation
– Facilities and handling
– Information
Service and Number of
Facilities
Number of
Facilities
Response
Time
The Cost-Response Time
Frontier
Local FG
Hi
Mix
Regional FG
Local WIP
Cost Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers

Low
Low Response Time Hi
Inventory Costs and Number
of Facilities
Inventory
Costs
Number of facilities
Transportation Costs and
Number of Facilities
Transportation
Costs
Facility Costs and Number
of Facilities
Facility
Costs
Total Costs Related to
Total Costs
Total Costs
Facilities
Inventory
Transportatio
n
Variation in Logistics Costs and Response
Time with Number of Facilities
Response Time
Total Logistics Costs
Design Options for a
Distribution Network
• Manufacturer Storage with Direct Shipping
• Manufacturer Storage with Direct Shipping
and In-Transit Merge
• Distributor Storage with Carrier Delivery
• Distributor Storage with Last Mile Delivery
• Manufacturer or Distributor Storage with
Consumer Pickup
• Retail Storage with Consumer Pickup
• Selecting a Distribution Network Design
Manufacturer Storage with
Direct Shipping
Manufactur
er
Retailer
Customers
Product
Flow
Information
Flow
In-Transit Merge Network
Factories
Retaile In-Transit Merge by

r Carrier
Customer
s
Product
Flow
Information
Flow
Distributor Storage with
Carrier Delivery
Factories
Warehouse Storage
by
Distributor/Retailer
Customers
Product
Information
Flow
Flow
© Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Change to change otherwise change will change you
Distributor Storage with Last
Mile Delivery
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information flow
Manufacturer or Distributor Storage with
Customer Pickup (Fig. 4.10)
Factories
Retaile Cross Dock DC

r
Pickup
Sites
Customer
s
E-Business and the Distribution
Network
• Impact of E-Business on Customer
Service
• Impact of E-Business on Cost
• Using E-Business: Dell, Amazon, Peapod,
Grainger
Distribution Networks in Practice
• The ownership structure of the distribution
network can have as big as an impact as
the type of distribution network
• The choice of a distribution network has
very long-term consequences
• Consider whether an exclusive distribution
strategy is advantageous
• Product, price, commoditization, and
criticality have an impact on the type of
distribution system preferred by customers
Network Design Decisions
• Facility role
• Facility location
• Capacity allocation
• Market and supply allocation
Factors Influencing
Network Design Decisions
• Strategic
• Technological
• Macroeconomic
• Political
• Infrastructure
• Competitive
• Logistics and facility costs
A Framework for
Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES
PRODUCTION TECHNOLOGIES REGIONAL DEMAND

Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination
Conventional Network
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC
Customer
Component Store
Vendor Manufacturin
DC g Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
Tailored Network: Multi-Echelon
Finished Goods Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC
Store 3
Gravity Methods for
Location
• Ton Mile-Center
Solution
– x,y: Warehouse Coordinates
( x  x n)  ( y  y n)
2 2

– xn, yn : Coordinates of d n
x
 Dn F d
k
delivery location n n n
x n 1 n
– dn : Distance to delivery  Dn d
F k
n
n 1 n
location n y
 Dn F d
k
n n
– Fn : Annual tonnage to y n 1
F
n
 Dn d
k
n
delivery location n n 1 n
Min  d n Dn F n
Network Optimization Models
• Allocating demand to production
facilities
• Locating facilities and allocating
Key Costs:
capacity
• Fixed facility cost
• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
Which plants to establish? How to configure the network?
Demand Allocation Model
• Which market is n m
served by which plant? Min cij xij

i 1 j 1
• Which supply sources s.t.

are used by a plant? n
 x  D , j  1,...,m
i 1
ij j
xij = Quantity shipped m
from plant site i to  x  K , i  1,...,n

j 1
ij i
customer j 0
x ij
Plant Location with Multiple
Sourcing
• yi = 1 if plant is located
at site i, 0 otherwise
• xij = Quantity shipped
n n m
Min f y   c x
from plant site i to i 1
i i
i 1 j 1
ij ij
s.t.
customer j n
 x  D , j  1,...,m
i 1
ij j
 x  K y , i  1,...,n
j 1
ij i i
 y  k ; y {0,1}
i 1
i i
Plant Location with Single
Sourcing
• yi = 1 if plant is located n n m
Min f y   D j c x
at site i, 0 otherwise i 1
i i
i 1 j 1
ij ij
• xij = 1 if market j is s.t.

supplied by factory i, 0 n
x ij
 1, j  1,...,m
otherwise i 1
n
 D j x  K y , i  1,...,n
j 1
ij i i
xij, y {0,1} i
• MODULE 3 (5 Hours)
• Designing and Planning
Transportation Networks.
• Role of transportation - modes and their
performance - transportation
infrastructure and policies - design
options and their trade-offs - Tailored
transportation
Factors Affecting
Transportation Decisions
• Carrier (party that moves or transports the product)
– Vehicle-related cost
– Fixed operating cost
– Trip-related cost
• Shipper (party that requires the movement of the product
between two points in the supply chain)
– Transportation cost
– Inventory cost
– Facility cost
Transportation Modes
• Trucks
– TL
– LTL
• Rail
• Air
• Package Carriers
• Water
• Pipeline
Truckload (TL)
• Average revenue per ton mile (1996) =
9.13 cents
• Average haul = 274 miles
• Average Capacity = 42,000 - 50,000 lb.
• Low fixed and variable costs
• Major Issues
– Utilization
– Consistent service
– Backhauls
Less Than Truckload (LTL)
• Average revenue per ton-mile (1996) = 25.08 cents
• Higher fixed costs (terminals) and low variable costs
• Major issues:
– Location of consolidation facilities
– Utilization
– Vehicle routing
– Customer service
Rail
• Average revenue / ton-mile (1996) = 2.5 cents
• Average load = 80 tons
• Key issues:
– Scheduling to minimize delays / improve service
– Off-track delays (at pickup and delivery end)
– Yard operations
– Variability of delivery times
Air
• Key issues:
– Location/number of hubs
– Location of fleet bases/crew bases
– Schedule optimization
– Fleet assignment
– Crew scheduling
– Yield management
Package Carriers
• Companies like FedEx, UPS,, that carry small
packages ranging from letters to shipments of about
150 pounds
• Expensive
• Rapid and reliable delivery
• Small and time-sensitive shipments
• Preferred mode for e-businesses
• Consolidation of shipments (especially important for
package carriers that use air as a primary method of
transport)
Water
• Limited to certain geographic areas
• Ocean, inland waterway system, coastal
waters
• Very large loads at very low cost
• Slowest
• Dominant in global
Pipeline
• High fixed cost
• Primarily for crude petroleum, refined
petroleum products, natural gas
• Best for large and predictable demand
• Would be used for getting crude oil to a
port or refinery, but not for getting
refined gasoline to a gasoline station
(why?)
Intermodal
• Use of more than one mode of transportation to move a
shipment to its destination
• Most common example: rail/truck
• Also water/rail/truck or water/truck
• 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)
• Key issue involves the exchange of information to facilitate
transfer between different transport modes
Design Options for a
Transportation Network
• What are the transportation options?
Which one to select? On what basis?
• Direct shipping network
• Direct shipping with milk runs
• All shipments via central DC
• Shipping via DC using milk runs
• Tailored network
Trade-offs in Transportation
Design
• Transportation and inventory cost trade-
off
– Choice of transportation mode
– Inventory aggregation
• Transportation cost and responsiveness
trade-off
Choice of Transportation Mode
• A manager must account for inventory
costs when selecting a mode of
transportation
• A mode with higher transportation costs
can be justified if it results in significantly
lower inventories
Inventory Aggregation:
Inventory vs. Transportation
•
Cost
As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases
– Outbound transportation cost increases
• Inventory aggregation decreases supply chain costs if
the product has a high value to weight ratio, high
demand uncertainty, or customer orders are large
• Inventory aggregation may increase supply chain costs if
the product has a low value to weight ratio, low demand
uncertainty, or customer orders are small
Trade-offs Between Transportation Cost
and Customer Responsiveness
• Temporal aggregation is the process of
combining orders across time
• Temporal aggregation reduces
transportation cost because it results in
larger shipments and reduces variation in
shipment sizes
• However, temporal aggregation reduces
customer responsiveness
Tailored Transportation
• The use of different transportation networks
and modes based on customer and product
characteristics
• Factors affecting tailoring:
– Customer distance and density
– Customer size
– Product demand and value
Role of IT in Transportation
• The complexity of transportation decisions
demands to use of IT systems
• IT software can assist in:
– Identification of optimal routes by minimizing
costs subject to delivery constraints
– Optimal fleet utilization
– GPS applications
Risk Management in Transportation
• Three main risks to be considered in

transportation are:
– Risk that the shipment is delayed
– Risk of disruptions
– Risk of hazardous material
• Risk mitigation strategies:
– Decrease the probability of disruptions
– Alternative routings
– In case of hazardous materials the use of
modified containers, low-risk transportation
models, modification of© Prof.
physical and chemical
Prasad Kulkarni, MBA department GIT Belgaum.
• MODULE 4 (6 Hours)
• Sourcing and Pricing.
• Sourcing – In-house or Outsource – 3rd and 4th PLs –
supplier scoring and assessment, selection – design
collaboration – procurement process – sourcing planning
and analysis.
• Pricing and revenue management for multiple customers,
perishable products, seasonal demand, bulk and spot
contracts.
The Role of Sourcing
in a Supply Chain
• Sourcing is the set of business
processes required to purchase goods
and services
• Sourcing processes include:
– Supplier scoring and assessment
– Supplier selection and contract negotiation
– Design collaboration
– Procurement
– Sourcing planning and analysis
Benefits of Effective
Sourcing Decisions
• Better economies of scale can be achieved if
orders are aggregated
• More efficient procurement transactions can
significantly reduce the overall cost of
purchasing
• Design collaboration can result in products that
are easier to manufacture and distribute,
resulting in lower overall costs
• Good procurement processes can facilitate
coordination with suppliers
• Appropriate supplier contracts can allow for the
sharing of risk
• Firms can achieve a lower purchase price by
increasing competition through the use of
Change auctions
to change otherwise change will change you © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Supplier Scoring and
Assessment
• Supplier performance should be compared
on the basis of the supplier’s impact on
total cost
• There are several other factors besides
purchase price that influence total cost
Supplier Assessment Factors
• Replenishment Lead Time • Pricing Terms
• On-Time Performance • Information
• Supply Flexibility Coordination Capability
• Delivery Frequency / • Design Collaboration
Minimum Lot Size Capability
• Supply Quality • Exchange Rates,
• Inbound Transportation Taxes, Duties
Cost • Supplier Viability
Supplier Selection- Auctions and
Negotiations
• Supplier selection can be performed through
competitive bids, reverse auctions, and direct
negotiations
• Supplier evaluation is based on total cost of using a
supplier
• Auctions:
– Sealed-bid first-price auctions
– English auctions
– Dutch auctions
– Second-price (Vickery) auctions
Contracts and Supply Chain Performance
• Contracts for Product Availability and

Supply Chain Profits
– Buyback Contracts
– Revenue-Sharing Contracts
– Quantity Flexibility Contracts
• Contracts to Coordinate Supply Chain
Costs
• Contracts to Increase Agent Effort
• Contracts to Induce Performance
Contracts for Product
Availability and Supply Chain
•
Profits
Many shortcomings in supply chain performance
occur because the buyer and supplier are separate
organizations and each tries to optimize its own profit
• Total supply chain profits might therefore be lower
than if the supply chain coordinated actions to have
a common objective of maximizing total supply chain
profits
• Recall Chapter 10: double marginalization results in
suboptimal order quantity
• An approach to dealing with this problem is to design
a contract that encourages a buyer to purchase more
and increase the level of product availability
• The supplier must share in some of the buyer’s
demand uncertainty, however
Contracts for Product Availability and Supply
Chain Profits: Buyback Contracts
• Allows a retailer to return unsold inventory up to a
specified amount at an agreed upon price
• Increases the optimal order quantity for the retailer,
resulting in higher product availability and higher profits
for both the retailer and the supplier
• Most effective for products with low variable cost, such as
music, software, books, magazines, and newspapers
• Downside is that buyback contract results in surplus
inventory that must be disposed of, which increases
supply chain costs
• Can also increase information distortion through the
supply chain because the supply chain reacts to retail
orders, not actual customer demand
Chain Profits: Revenue Sharing Contracts
• The buyer pays a minimal amount for each

unit purchased from the supplier but
shares a fraction of the revenue for each
unit sold
• Decreases the cost per unit charged to the
retailer, which effectively decreases the
cost of overstocking
• Can result in supply chain information
distortion, however, just as in the case of
buyback contracts
Chain Profits: Quantity Flexibility Contracts
• Allows the buyer to modify the order (within

limits) as demand visibility increases closer
to the point of sale
• Better matching of supply and demand
• Increased overall supply chain profits if the
supplier has flexible capacity
• Lower levels of information distortion than
either buyback contracts or revenue
sharing contracts
Contracts to Coordinate
Supply Chain Costs
• Differences in costs at the buyer and supplier can lead to decisions
that increase total supply chain costs
• Example: Replenishment order size placed by the buyer. The
buyer’s EOQ does not take into account the supplier’s costs.
• A quantity discount contract may encourage the buyer to purchase a
larger quantity (which would be lower costs for the supplier), which
would result in lower total supply chain costs
• Quantity discounts lead to information distortion because of order
batching
Contracts to Increase Agent
Effort
• There are many instances in a supply chain where an agent acts on
the behalf of a principal and the agent’s actions affect the reward for
the principal
• Example: A car dealer who sells the cars of a manufacturer, as well
as those of other manufacturers
• Examples of contracts to increase agent effort include two-part tariffs
and threshold contracts
• Threshold contracts increase information distortion, however
Contracts to Induce
Performance Improvement
• A buyer may want performance improvement from a supplier who
otherwise would have little incentive to do so
• A shared savings contract provides the supplier with
a fraction of the savings that result from the performance
improvement
• Particularly effective where the benefit from improvement accrues
primarily to the buyer, but where the effort for the improvement
comes primarily from the supplier
Design Collaboration
• 50-70 percent of spending at a manufacturer is through procurement
• 80 percent of the cost of a purchased part is fixed in the design
phase
• Design collaboration with suppliers can result in reduced cost,
improved quality, and decreased time to market
• Important to employ design for logistics, design for manufacturability
• Manufacturers must become effective design coordinators
throughout the supply chain
The Procurement Process
• The process in which the supplier sends product in response to
orders placed by the buyer
• Goal is to enable orders to be placed and delivered on schedule at
the lowest possible overall cost
• Two main categories of purchased goods:
– Direct materials: components used to make finished goods
– Indirect materials: goods used to support the operations of a firm
• Focus for direct materials should be on improving coordination and
visibility with supplier
• Focus for indirect materials should be on decreasing the transaction
cost for each order
• Procurement for both should consolidate orders where possible to
take advantage of economies of scale and quantity discounts
Product Categorization by Value
and Criticality
High
Critical Items Strategic Items

Criticality
General Items Bulk Purchase Items
Low
Low High
Value/Cost
Sourcing Planning and Analysis
• A firm should periodically analyze its procurement
spending and supplier performance and use this analysis
as an input for future sourcing decisions
• Procurement spending should be analyzed by part and
supplier to ensure appropriate economies of scale
• Supplier performance analysis should be used to build a
portfolio of suppliers with complementary strengths
– Cheaper but lower performing suppliers
should be used to supply base demand
– Higher performing but more expensive
suppliers should be used to buffer against
variation in demand and supply from the other
source
Making Sourcing
Decisions in Practice
• Use multifunction teams
• Ensure appropriate coordination across
regions and business units
• Always evaluate the total cost of
ownership
• Build long-term relationships with key
suppliers
The Role of Revenue
Management in the Supply
•
Chain
Revenue management is the use of pricing to increase the profit
generated from a limited supply of supply chain assets
• Supply assets exist in two forms: capacity and inventory
• Revenue management may also be defined as the use of differential
pricing based on customer segment, time of use, and product or
capacity availability to increase supply chain profits
• Most common example is probably in airline pricing
Conditions Under Which Revenue
Management Has the Greatest
Effect
• The value of the product varies in different market
segments (Example: airline seats)
• The product is highly perishable or product waste occurs
(Example: fashion and seasonal apparel)
• Demand has seasonal and other peaks (Example:
products ordered at Amazon.com)
• The product is sold both in bulk and on the spot market
(Example: owner of warehouse who can decide whether
to lease the entire warehouse through long-term
contracts or save a portion of the warehouse for use in
the spot market)
Revenue Management for
Multiple Customer Segments
• If a supplier serves multiple customer segments with a
fixed asset, the supplier can improve revenues by setting
different prices for each segment
• Prices must be set with barriers such that the segment
willing to pay more is not able to pay the lower price
• The amount of the asset reserved for the higher price
segment is such that the expected marginal revenue
from the higher priced segment equals the price of the
lower price segment
Multiple Customer Segments
pL = the price charged to the lower price segment
pH = the price charged to the higher price segment
DH = mean demand for the higher price segment
sH = standard deviation of demand for the higher price segment
CH = capacity reserved for the higher price segment
RH(CH) = expected marginal revenue from reserving more capacity
= Probability(demand from higher price segment > CH) x pH
RH(CH) = pL
Probability(demand from higher price segment > CH) = pL / pH
CH = F-1(1- pL/pH, DH,sH) = NORMINV(1- pL/pH, DH,sH)
Example : ToFrom Trucking
Revenue from segment A = pA = $3.50 per cubic ft
Revenue from segment B = pB = $3.50 per cubic ft
Mean demand for segment A = DA = 3,000 cubic ft
Std dev of segment A demand = sA = 1,000 cubic ft
CA = NORMINV(1- pB/pA, DA,sA)
= NORMINV(1- (2.00/3.50), 3000, 1000)
= 2,820 cubic ft
If pA increases to $5.00 per cubic foot, then
CA = NORMINV(1- pB/pA, DA,sA)
= NORMINV(1- (2.00/5.00), 3000, 1000)
= 3,253 cubic ft
Revenue Management
for Perishable Assets
• Any asset that loses value over time is perishable
• Examples: high-tech products such as computers and
cell phones, high fashion apparel, underutilized capacity,
fruits and vegetables
• Two basic approaches:
– Vary price over time to maximize expected revenue
– Overbook sales of the asset to account for
cancellations
Revenue Management
• Overbooking or overselling of a supply
chain asset is valuable if order cancellations
occur and the asset is perishable
• The level of overbooking is based on the
trade-off between the cost of wasting the
asset if too many cancellations lead to
unused assets and the cost of arranging a
backup if too few cancellations lead to
committed orders being larger than the
available capacity
Revenue Management
p = price at which each unit of the asset is sold
c = cost of using or producing each unit of the asset
b = cost per unit at which a backup can be used in the case of asset
shortage
Cw = p – c = marginal cost of wasted capacity
Cs = b – c = marginal cost of a capacity shortage
O* = optimal overbooking level
s* = Probability(cancellations < O*) = Cw / (Cw + Cs)
Revenue Management
If the distribution of cancellations is known to be normal with
mean mc and standard deviation sc then
O* = F-1(s*, mc, sc) = NORMINV(s*, mc, sc)
If the distribution of cancellations is known only as a function
of the booking level (capacity L + overbooking O) to have
a mean of m(L+O) and std deviation of s(L+O), the optimal
overbooking level is the solution to the following equation:
O = F-1(s*,m(L+O),s(L+O))
= NORMINV(s*,m(L+O),s(L+O))
Example
Cost of wasted capacity = Cw = $10 per dress
Cost of capacity shortage = Cs = $5 per dress
s* = Cw / (Cw + Cs) = 10/(10+5) = 0.667
mc = 800; sc = 400
O* = NORMINV(s*, mc,sc)
= NORMINV(0.667,800,400) = 973
If the mean is 15% of the booking level and the coefficient of
variation is 0.5, then the optimal overbooking level is the
solution of the following equation:
O = NORMINV(0.667,0.15(5000+O),0.075(5000+O))
Using Excel Solver, O* = 1,115
Revenue Management
for Seasonal Demand
• Seasonal peaks of demand are common in
many supply chains
• Examples: Most retailers achieve a large
portion of total annual demand in December
(Amazon.com)
• Off-peak discounting can shift demand from
peak to non-peak periods
• Charge higher price during peak periods
and a lower price during off-peak periods
Bulk and Spot Customers
• Most consumers of production, warehousing, and
transportation assets in a supply chain face the
problem of constructing a portfolio of long-term bulk
contracts and short-term spot market contracts
• The basic decision is the size of the bulk contract
• The fundamental trade-off is between wasting a
portion of the low-cost bulk contract and paying more
for the asset on the spot market
• Given that both the spot market price and the
purchaser’s need for the asset are uncertain, a
decision tree approach as discussed in Chapter 6
should be used to evaluate the amount of long-term
bulk
Change contract
to change towillsign
otherwise change change you © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
For the simple case where the spot market price is known
but demand is uncertain, a formula can be used
cB = bulk rate
cS = spot market price
Q* = optimal amount of the asset to be purchased in bulk
p* = probability that the demand for the asset does not
exceed Q*
Marginal cost of purchasing another unit in bulk is cB. The
expected marginal cost of not purchasing another unit in
bulk and then purchasing it in the spot market is (1-p*)cS.
If the optimal amount of the asset is purchased in bulk, the
marginal cost of the bulk purchase should equal the
expected marginal cost of the spot market purchase, or cB
= (1-p*)cS
Solving for p* yields p* = (cS – cB) / cS
If demand is normal with mean m and std deviation s, the
optimal amount Q* to be purchased in bulk is
Q* = F-1(p*,m,s) = NORMINV(p*,m,s)
Example 15.6
Bulk contract cost = cB = $10,000 per million units
Spot market cost = cS = $12,500 per million units
m = 10 million units
s = 4 million units
p* = (cS – cB) / cS = (12,500 – 10,000) / 12,500 = 0.2
Q* = NORMINV(p*,m,s) = NORMINV(0.2,10,4) = 6.63
The manufacturer should sign a long-term bulk contract for
6.63 million units per month and purchase any
transportation capacity beyond that on the spot market
Using Revenue Management
in Practice
• Evaluate your market carefully
• Quantify the benefits of revenue management
• Implement a forecasting process
• Apply optimization to obtain the revenue
management decision
• Involve both sales and operations
• Understand and inform the customer
• Integrate supply planning with revenue management
Role of Information Technology
in a Supply Chain
• Information is the driver that serves as the “glue” to
create a coordinated supply chain
• Information must have the following characteristics to be
useful:
– Accurate
– Accessible in a timely manner
– Information must be of the right kind
• Information provides the basis for supply chain
management decisions
– Inventory
– Transportation
– Facility
Characteristics of Useful
Supply Chain Information
• Accurate
• Accessible in a timely manner
• The right kind
• Provides supply chain visibility
Use of Information
in a Supply Chain
• Information used at all phases of
decision making: strategic, planning,
operational
• Examples:
– Strategic: location decisions
– Operational: what products will be
produced during today’s production run
Use of Information
in a Supply Chain
• Inventory: demand patterns, carrying
costs, stockout costs, ordering costs
• Transportation: costs, customer
locations, shipment sizes
• Facility: location, capacity, schedules of
a facility; need information about trade-
offs between flexibility and efficiency,
demand, exchange rates, taxes, etc.
Role of Information Technology
in a Supply Chain
• Information technology (IT)
– Hardware and software used throughout
the supply chain to gather and analyze
information
– Captures and delivers information needed
to make good decisions
• Effective use of IT in the supply chain
can have a significant impact on supply
chain performance
The Importance of Information
in a Supply Chain
• Relevant information available
throughout the supply chain allows
managers to make decisions that take
into account all stages of the supply
chain
• Allows performance to be optimized for
the entire supply chain, not just for one
stage – leads to higher performance for
each individual firm in the supply chain
The Supply Chain IT
Framework
• The Supply Chain Macro Processes
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
– Plus: Transaction Management Foundation
• Why Focus on the Macro Processes?
• Macro Processes Applied to the Evolution
of Software
Macro Processes in a Supply
Chain
(Figure 16.1)
Supplier Internal Customer
Relationshi Supply Relationshi
p Chain p
Managemen Managemen Managemen
t (SRM) t (ISCM) t (CRM)
Transaction Management Foundation

(TFM)
Customer Relationship
Management
• The processes that take place between an
enterprise and its customers downstream
in the supply chain
• Key processes:
– Marketing
– Selling
– Order management
– Call/Service center
Internal Supply Chain
Management
• Includes all processes involved in planning for and fulfilling
a customer order
• ISCM processes:
– Strategic Planning
– Demand Planning
– Supply Planning
– Fulfillment
– Field Service
• There must be strong integration between the ISCM and
CRM macro processes
Supplier Relationship
Management
• Those processes focused on the interaction
between the enterprise and suppliers that
are upstream in the supply chain
• Key processes:
– Design Collaboration
– Source
– Negotiate
– Buy
– Supply Collaboration
• There is a natural fit between ISCM and
SRM processes
The Transaction Management
Foundation
• Enterprise software systems (ERP)
• Earlier systems focused on automation of
simple transactions and the creation of an
integrated method of storing and viewing
data across the enterprise
• Real value of the TMF exists only if
decision making is improved
• The extent to which the TMF enables
integration across the three macro
processes determines its value
The Future of IT in the Supply
Chain
• At the highest level, the three SCM macro
processes will continue to drive the
evolution of enterprise software
• Software focused on the macro processes
will become a larger share of the total
enterprise software market and the firms
producing this software will become more
successful
• Functionality, the ability to integrate across
macro processes, and the strength of their
ecosystems, will be keys to success
Supply Chain Information
Technology in Practice
• Select an IT system that addresses the
company’s key success factors
• Take incremental steps and measure
value
• Align the level of sophistication with the
need for sophistication
• Use IT systems to support decision
making, not to make decisions
• Think about the future
Lack of SC Coordination
and the Bullwhip Effect
• Supply chain coordination – all stages in the
supply chain take actions together (usually
results in greater total supply chain profits)
• SC coordination requires that each stage
take into account the effects of its actions
on the other stages
• Lack of coordination results when:
– Objectives of different stages conflict or
– Information moving between stages is distorted
Bullwhip Effect
• Fluctuations in orders increase as they
move up the supply chain from retailers
to wholesalers to manufacturers to
suppliers
• Distorts demand information within the
supply chain, where different stages
have very different estimates of what
demand looks like
• Results in a loss of supply chain
coordination
• Examples: Proctor & Gamble
The Effect of Lack of
Coordination on Performance
• Manufacturing cost (increases)
• Inventory cost (increases)
• Replenishment lead time (increases)
• Transportation cost (increases)
• Labor cost for shipping and receiving (increases)
• Level of product availability (decreases)
• Relationships across the supply chain (worsens)
• Profitability (decreases)
• The bullwhip effect reduces supply chain profitability by
making it more expensive to provide a given level of
product availability
Obstacles to Coordination
in a Supply Chain
• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles
Incentive Obstacles
• When incentives offered to different
stages or participants in a supply chain
lead to actions that increase variability
and reduce total supply chain profits –
misalignment of total supply chain
objectives and individual objectives
• Local optimization within functions or
stages of a supply chain
• Sales force incentives
Information Processing
Obstacles
• When demand information is distorted as it moves
between different stages of the supply chain, leading
to increased variability in orders within the supply
chain
• Forecasting based on orders, not customer demand
– Forecasting demand based on orders magnifies
demand fluctuations moving up the supply chain
from retailer to manufacturer
• Lack of information sharing
Operational Obstacles
• Actions taken in the course of placing and filling
orders that lead to an increase in variability
• Ordering in large lots (much larger than dictated by
demand) –
• Large replenishment lead times
• Rationing and shortage gaming (common in the
computer industry because of periodic cycles of
component shortages and surpluses)
Pricing Obstacles
• When pricing policies for a product lead
to an increase in variability of orders
placed
• Lot-size based quantity decisions
• Price fluctuations (resulting in forward
buying) – Figure 17.3
Behavioral Obstacles
• Problems in learning, often related to communication in
the supply chain and how the supply chain is structured
• Each stage of the supply chain views its actions locally
and is unable to see the impact of its actions on other
stages
• Different stages react to the current local situation rather
than trying to identify the root causes
• Based on local analysis, different stages blame each
other for the fluctuations, with successive stages
becoming enemies rather than partners
• No stage learns from its actions over time because the
most significant consequences of the actions of any one
stage occur elsewhere, resulting in a vicious cycle of
actions and blame
•Change
Lack of otherwise
to change trust change
results in you
will change opportunism, duplication
© Prof. Prasad Kulkarni, ofGITeffort,
MBA department Belgaum.
Managerial Levers to
Achieve Coordination
• Aligning Goals and Incentives
• Improving Information Accuracy
• Improving Operational Performance
• Designing Pricing Strategies to Stabilize
Orders
• Building Strategic Partnerships and
Trust
Aligning Goals and Incentives
• Align incentives so that each participant
has an incentive to do the things that
will maximize total supply chain profits
• Align incentives across functions
• Pricing for coordination
• Alter sales force incentives from sell-in
(to the retailer) to sell-through (by the
retailer)
Improving Information Accuracy
• Sharing point of sale data
• Collaborative forecasting and planning
• Single stage control of replenishment
– Continuous replenishment programs
(CRP)
– Vendor managed inventory (VMI)
Improving Operational
Performance
• Reducing replenishment lead time
– Reduces uncertainty in demand
– EDI is useful
• Reducing lot sizes
– Computer-assisted ordering, B2B exchanges
– Shipping in LTL sizes by combining shipments
– Technology and other methods to simplify receiving
– Changing customer ordering behavior
• Rationing based on past sales and sharing information to
limit gaming
– “Turn-and-earn”
– Information sharing
Designing Pricing Strategies
to Stabilize Orders
• Encouraging retailers to order in smaller lots and reduce
forward buying
• Moving from lot size-based to volume-based quantity
discounts (consider total purchases over a specified time
period)
• Stabilizing pricing
– Eliminate promotions (everyday low pricing, EDLP)
– Limit quantity purchased during a promotion
– Tie promotion payments to sell-through rather than
amount purchased
• Building strategic partnerships and trust – easier to
implement these approaches if there is trust
Building Strategic Partnerships
and Trust in a Supply Chain
• Background
• Designing a Relationship with
Cooperation and Trust
• Managing Supply Chain Relationships
for Cooperation and Trust
Building Strategic Partnerships
and Trust in a Supply Chain
• Trust-based relationship
– Dependability
– Leap of faith
• Cooperation and trust work because:
– Alignment of incentives and goals
– Actions to achieve coordination are easier
to implement
– Supply chain productivity improves by
reducing duplication or allocation of effort
to appropriate stage
– Greater information ©sharing results
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Trust in the Supply Chain
• Table 17.2 shows benefits
• Historically, supply chain relationships are based on
power or trust
• Disadvantages of power-based relationship:
– Results in one stage maximizing profits, often at
the expense of other stages
– Can hurt a company when balance of power
changes
– Less powerful stages have sought ways to resist
Building Trust into a
Supply Chain Relationship
• Deterrence-based view
– Use formal contracts
– Parties behave in trusting manner out of self-
interest
• Process-based view
– Trust and cooperation are built up over time as a
result of a series of interactions
– Positive interactions strengthen the belief in
cooperation of other party
• Neither view holds exclusively in all situations
Building Trust into a
Supply Chain Relationship
• Initially more reliance on deterrence-
based view, then evolves to a process-
based view
• Co-identification: ideal goal
• Two phases to a supply chain
relationship
– Design phase
– Management phase
Designing a Relationship
with Cooperation and Trust
• Assessing the value of the relationship
and its contributions
• Identifying operational roles and
decision rights for each party
• Creating effective contracts
• Designing effective conflict resolution
mechanisms
Assessing the Value of the
Relationship and its
Contributions
• Identify the mutual benefit provided
• Identify the criteria used to evaluate the
relationship (equity is important)
• Important to share benefits equitably
• Clarify contribution of each party and
the benefits each party will receive
Identifying Operational Roles
and Decision Rights for Each
Party
• Recognize interdependence between parties
– Sequential interdependence: activities of one
partner precede the other
– Reciprocal interdependence: the parties come
together, exchange information and inputs in both
directions
• Sequential interdependence is the traditional supply
chain form
• Reciprocal interdependence is more difficult but can
result in more benefits
Effects of Interdependence on
Supply Chain Relationships
Partner High Level of
Relatively Interdependence
High Powerful
Effective
Relationship
Organization’s
Dependence
Organization
Low Level of Relatively
Low Powerful
Interdependenc
e
Low High
Partner’s Dependence
Creating Effective Contracts
• Create contracts that encourage
negotiation when unplanned
contingencies arise
• It is impossible to define and plan for
every possible occurrence
• Informal relationships and agreements
can fill in the “gaps” in contracts
• Informal arrangements may eventually
be formalized in later contracts
Designing Effective Conflict
Resolution Mechanisms
• Initial formal specification of rules and
guidelines for procedures and
transactions
• Regular, frequent meetings to promote
communication
• Courts or other intermediaries
Managing Supply Chain
Relationships for Cooperation and
Trust
• Effective management of a relationship
is important for its success
• Top management is often involved in
the design but not management of a
relationship
• -- process of alliance evolution
• Perceptions of reduced benefits or
opportunistic actions can significantly
impair a supply chain partnership
Achieving Coordination in
Practice
• Quantify the bullwhip effect
• Get top management commitment for coordination
• Devote resources to coordination
• Focus on communication with other stages
• Try to achieve coordination in the entire supply chain
network
• Use technology to improve connectivity in the supply
chain
• Share the benefits of coordination equitably
Role of Forecasting
in a Supply Chain
• The basis for all strategic and planning decisions in a
supply chain
• Used for both push and pull processes
• Examples:
– Production: scheduling, inventory, aggregate
planning
– Marketing: sales force allocation, promotions, new
production introduction
– Finance: plant/equipment investment, budgetary
planning
– Personnel: workforce planning, hiring, layoffs
• All of these decisions are interrelated
Characteristics of Forecasts
• Forecasts are always wrong. Should
include expected value and measure of
error.
• Long-term forecasts are less accurate
than short-term forecasts (forecast
horizon is important)
• Aggregate forecasts are more accurate
than disaggregate forecasts
Forecasting Methods
• Qualitative: primarily subjective; rely on judgment
and opinion
• Time Series: use historical demand only
– Static
– Adaptive
• Causal: use the relationship between demand and
some other factor to develop forecast
• Simulation
– Imitate consumer choices that give rise to demand
– Can combine time series and causal methods
Components of an Observation
Observed demand (O) =
Systematic component (S) + Random component (R)
Level (current deseasonalized demand)
Trend (growth or decline in demand)
Seasonality (predictable seasonal fluctuation)
• Systematic component: Expected value of demand

• Random component: The part of the forecast that deviates
from the systematic component
• Forecast error: difference between forecast and actual demand
Time Series Forecasting
Quarter Demand Dt
II, 1998 8000
III, 1998 13000 Forecast demand for the
IV, 1998 23000 next four quarters.
I, 1999 34000
II, 1999 10000
III, 1999 18000
IV, 1999 23000
I, 2000 38000
II, 2000 12000
III, 2000 13000
IV, 2000 32000
I, 2001 41000
50,000
40,000
30,000
20,000
10,000
0
,2
,3
,4
,1
,2
,3
,4
,1
,2
,3
,4
,1
97
97
97
98
98
98
98
99
99
99
99
00
Forecasting Methods
• Static
• Adaptive
– Moving average
– Simple exponential smoothing
– Holt’s model (with trend)
– Winter’s model (with trend and
seasonality)
Basic Approach to
Demand Forecasting
• Understand the objectives of forecasting
• Integrate demand planning and forecasting
• Identify major factors that influence the demand
forecast
• Understand and identify customer segments
• Determine the appropriate forecasting technique
• Establish performance and error measures for the
forecast
Time Series
Forecasting Methods
• Goal is to predict systematic component
of demand
– Multiplicative: (level)(trend)(seasonal factor)
– Additive: level + trend + seasonal factor
– Mixed: (level + trend)(seasonal factor)
• Static methods
• Adaptive forecasting
Static Methods
• Assume a mixed model:
Systematic component = (level + trend)(seasonal factor)
Ft+l = [L + (t + l)T]St+l
= forecast in period t for demand in period t + l
L = estimate of level for period 0
T = estimate of trend
St = estimate of seasonal factor for period t
Dt = actual demand in period t
Ft = forecast of demand in period t
Static Methods
• Estimating level and trend
• Estimating seasonal factors
Estimating Level and Trend
• Before estimating level and trend,
demand data must be deseasonalized
• Deseasonalized demand = demand that
would have been observed in the
absence of seasonal fluctuations
• Periodicity (p)
– the number of periods after which the
seasonal cycle repeats itself
– for demand at Tahoe Salt (Table 7.1,
Figure 7.1) p = 4 © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
(Table 7.1)
Quarter Demand Dt
II, 1998 8000
III, 1998 13000 Forecast demand for the
IV, 1998 23000 next four quarters.
I, 1999 34000
II, 1999 10000
III, 1999 18000
IV, 1999 23000
I, 2000 38000
II, 2000 12000
III, 2000 13000
IV, 2000 32000
I, 2001 41000
(Figure 7.1)
50,000
40,000
30,000
20,000
10,000
0
,2
,3
,4
,1
,2
,3
,4
,1
,2
,3
,4
,1
97
97
97
98
98
98
98
99
99
99
99
00
Estimating Level and Trend
• Before estimating level and trend,
demand data must be deseasonalized
• Deseasonalized demand = demand that
would have been observed in the
absence of seasonal fluctuations
• Periodicity (p)
– the number of periods after which the
seasonal cycle repeats itself
– for demand at Tahoe Salt (Table 7.1,
Figure 7.1) p = 4 © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Deseasonalizing Demand
[Dt-(p/2) + Dt+(p/2) + S 2Di] / 2p for p even

Dt = (sum is from i = t+1-(p/2) to t+1+(p/2))
S Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower
integer
For the example, p = 4 is even
For t = 3:
D3 = {D1 + D5 + Sum(i=2 to 4) [2Di]}/8
= {8000+10000+[(2)(13000)+(2)(23000)+(2)(34000)]}/8
= 19750
D4 = {D2 + D6 + Sum(i=3 to 5) [2Di]}/8
= {13000+18000+[(2)(23000)+(2)(34000)+(2)(10000)]/8
= 20625
Then include trend
Dt = L + tT
where Dt = deseasonalized demand in period t
L = level (deseasonalized demand at period 0)
T = trend (rate of growth of deseasonalized demand)
Trend is determined by linear regression using deseasonalized demand
as the dependent variable and period as the independent variable
(can be done in Excel)
In the example, L = 18,439 and T = 524
Time Series of Demand
(Figure 7.3)
50000
40000
Demand
30000 Dt
20000 Dt-bar
10000
0
1 2 3 4 5 6 7 8 9 10 11 12
Period
Estimating Seasonal Factors
Use the previous equation to calculate
deseasonalized demand for each period
St = Dt / Dt = seasonal factor for period t
In the example,
D2 = 18439 + (524)(2) = 19487 D2 =
13000
S2 = 13000/19487 = 0.67
The seasonal factors for the other periods
are calculated in the same manner
(Fig. 7.4)
t Dt Dt-bar S-bar
1 8000 18963 0.42 = 8000/18963
2 13000 19487 0.67 = 13000/19487
3 23000 20011 1.15 = 23000/20011
4 34000 20535 1.66 = 34000/20535
5 10000 21059 0.47 = 10000/21059
6 18000 21583 0.83 = 18000/21583
7 23000 22107 1.04 = 23000/22107
8 38000 22631 1.68 = 38000/22631
9 12000 23155 0.52 = 12000/23155
10 13000 23679 0.55 = 13000/23679
11 32000 24203 1.32 = 32000/24203
12 41000 24727 1.66 = 41000/24727
The overall seasonal factor for a “season” is then
obtained by averaging all of the factors for a
“season”
If there are r seasonal cycles, for all periods of the
form pt+i, 1<i<p, the seasonal factor for season i is
Si = [Sum(j=0 to r-1) Sjp+i]/r
In the example, there are 3 seasonal cycles in the
data and p=4, so
S1 = (0.42+0.47+0.52)/3 = 0.47
S2 = (0.67+0.83+0.55)/3 = 0.68
S3 = (1.15+1.04+1.32)/3 = 1.17
S4 = (1.66+1.68+1.66)/3 = 1.67
Estimating the Forecast
Using the original equation, we can forecast the next four
periods of demand:
F13 = (L+13T)S1 = [18439+(13)(524)](0.47) = 11868

F14 = (L+14T)S2 = [18439+(14)(524)](0.68) = 17527
F15 = (L+15T)S3 = [18439+(15)(524)](1.17) = 30770
F16 = (L+16T)S4 = [18439+(16)(524)](1.67) = 44794
Adaptive Forecasting
• The estimates of level, trend, and seasonality are
adjusted after each demand observation
• General steps in adaptive forecasting
• Moving average
• Simple exponential smoothing
• Trend-corrected exponential smoothing (Holt’s
model)
• Trend- and seasonality-corrected exponential
smoothing (Winter’s model)
Basic Formula for
Ft+1 = (Lt + lT)St+1 = forecast for period t+l in period t
Lt = Estimate of level at the end of period t
Tt = Estimate of trend at the end of period t
St = Estimate of seasonal factor for period t
Ft = Forecast of demand for period t (made period t-1
or earlier)
Dt = Actual demand observed in period t
Et = Forecast error in period t
At = Absolute deviation for period t = |Et|
MAD = Mean Absolute Deviation = average value of At
General Steps in
• Initialize: Compute initial estimates of level (L0), trend (T0),
and seasonal factors (S1,…,Sp). This is done as in static
forecasting.
• Forecast: Forecast demand for period t+1 using the
general equation
• Estimate error: Compute error Et+1 = Ft+1- Dt+1
• Modify estimates: Modify the estimates of level (Lt+1),
trend (Tt+1), and seasonal factor (St+p+1), given the error
Et+1 in the forecast
• Repeat steps 2, 3, and 4 for each subsequent period
Moving Average
• Used when demand has no observable trend or
seasonality
• Systematic component of demand = level
• The level in period t is the average demand over the last
N periods (the N-period moving average)
• Current forecast for all future periods is the same and is
based on the current estimate of the level
Lt = (Dt + Dt-1 + … + Dt-N+1) / N
Ft+1 = Lt and Ft+n = Lt
After observing the demand for period t+1, revise the
estimates as follows:
Lt+1 = (Dt+1 + Dt + … + Dt-N+2) / N
Ft+2
Change = Lotherwise
to change t+1 change will change you © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Moving Average Example
From Tahoe Salt example (Table 7.1)
At the end of period 4, what is the forecast demand for periods
5 through 8 using a 4-period moving average?
L4 = (D4+D3+D2+D1)/4 = (34000+23000+13000+8000)/4 =
19500
F5 = 19500 = F6 = F7 = F8
Observe demand in period 5 to be D5 = 10000
Forecast error in period 5, E5 = F5 - D5 = 19500 - 10000 =
9500
Revise estimate of level in period 5:
L5 = (D5+D4+D3+D2)/4 = (10000+34000+23000+13000)/4 =
20000
Simple Exponential Smoothing
• Used when demand has no observable trend or seasonality
• Systematic component of demand = level
• Initial estimate of level, L0, assumed to be the average of all historical
data
L0 = [Sum(i=1 to n)Di]/n
Current forecast for all future periods is equal to the current estimate
of the level and is given as follows:
Ft+1 = Lt and Ft+n = Lt
After observing demand Dt+1, revise the estimate of the level:
Lt+1 = aDt+1 + (1-a)Lt
Lt+1 = Sum(n=0 to t+1)[a(1-a)nDt+1-n ]
Simple Exponential Smoothing
Example
From Tahoe Salt data, forecast demand for period 1 using
exponential smoothing
L0 = average of all 12 periods of data
= Sum(i=1 to 12)[Di]/12 = 22083
F1 = L0 = 22083
Observed demand for period 1 = D1 = 8000
Forecast error for period 1, E1, is as follows:
E1 = F1 - D1 = 22083 - 8000 = 14083
Assuming a = 0.1, revised estimate of level for period 1:
L1 = aD1 + (1-a)L0 = (0.1)(8000) + (0.9)(22083) = 20675
F2 = L1 = 20675
Note that the estimate of level for period 1 is lower than in
period
Change 0 otherwise change will change you
to change
Trend-Corrected Exponential
Smoothing (Holt’s Model)
• Appropriate when the demand is assumed to have a level
and trend in the systematic component of demand but no
seasonality
• Obtain initial estimate of level and trend by running a linear
regression of the following form:
Dt = at + b
T0 = a
L0 = b
In period t, the forecast for future periods is expressed as
follows:
Ft+1 = Lt + Tt
Ft+n = Lt + nTt
Trend-Corrected Exponential
Smoothing (Holt’s Model)
After observing demand for period t, revise the estimates for
level and trend as follows:
Lt+1 = aDt+1 + (1-a)(Lt + Tt)
Tt+1 = b(Lt+1 - Lt) + (1-b)Tt
a = smoothing constant for level
b = smoothing constant for trend
Example: Tahoe Salt demand data. Forecast demand for
period 1 using Holt’s model (trend corrected exponential
smoothing)
Using linear regression,
L0 = 12015 (linear intercept)
T0 = 1549 (linear slope)
Holt’s Model Example
(continued)
Forecast for period 1:
F1 = L0 + T0 = 12015 + 1549 = 13564
Observed demand for period 1 = D1 = 8000
E1 = F1 - D1 = 13564 - 8000 = 5564
Assume a = 0.1, b = 0.2
L1 = aD1 + (1-a)(L0+T0) = (0.1)(8000) + (0.9)(13564) =
13008
T1 = b(L1 - L0) + (1-b)T0 = (0.2)(13008 - 12015) +
(0.8)(1549)
= 1438
F2 = L1 + T1 = 13008 + 1438 = 14446
F5 = L1 + 4T1 = 13008 + (4)(1438) = 18760
Trend- and Seasonality-Corrected Exponential Smoothing
• Appropriate when the systematic component of demand is

assumed to have a level, trend, and seasonal factor
• Systematic component = (level+trend)(seasonal factor)
• Assume periodicity p
• Obtain initial estimates of level (L0), trend (T0), seasonal
factors (S1,…,Sp) using procedure for static forecasting
• In period t, the forecast for future periods is given by:
Ft+1 = (Lt+Tt)(St+1) and Ft+n = (Lt + nTt)St+n
Trend- and Seasonality-Corrected Exponential Smoothing
(continued)
After observing demand for period t+1, revise estimates for

level, trend, and seasonal factors as follows:
Lt+1 = a(Dt+1/St+1) + (1-a)(Lt+Tt)
Tt+1 = b(Lt+1 - Lt) + (1-b)Tt
St+p+1 = g(Dt+1/Lt+1) + (1-g)St+1
a = smoothing constant for level
b = smoothing constant for trend
g = smoothing constant for seasonal factor
Example: Tahoe Salt data. Forecast demand for period 1
using Winter’s model.
Initial estimates of level, trend, and seasonal factors are
obtained as in the static forecasting case
Trend- and Seasonality-Corrected Exponential
Smoothing Example (continued)
L0 = 18439 T0 = 524 S1=0.47, S2=0.68, S3=1.17, S4=1.67
F1 = (L0 + T0)S1 = (18439+524)(0.47) = 8913
The observed demand for period 1 = D1 = 8000
Forecast error for period 1 = E1 = F1-D1 = 8913 - 8000 = 913
Assume a = 0.1, b=0.2, g=0.1; revise estimates for level and trend for
period 1 and for seasonal factor for period 5
L1 = a(D1/S1)+(1-a)(L0+T0) =
(0.1)(8000/0.47)+(0.9)(18439+524)=18769
T1 = b(L1-L0)+(1-b)T0 = (0.2)(18769-18439)+(0.8)(524) = 485
S5 = g(D1/L1)+(1-g)S1 = (0.1)(8000/18769)+(0.9)(0.47) = 0.47
F2 = (L1+T1)S2 = (18769 + 485)(0.68) = 13093
Measures of Forecast Error
• Forecast error = Et = Ft - Dt
• Mean squared error (MSE)
MSEn = (Sum(t=1 to n)[Et2])/n
• Absolute deviation = At = |Et|
• Mean absolute deviation (MAD)
MADn = (Sum(t=1 to n)[At])/n
s = 1.25MAD
Measures of Forecast Error
• Mean absolute percentage error (MAPE)
MAPEn = (Sum(t=1 to n)[|Et/ Dt|100])/n
• Bias
• Shows whether the forecast consistently under- or
overestimates demand; should fluctuate around 0
biasn = Sum(t=1 to n)[Et]
• Tracking signal
• Should be within the range of +6
• Otherwise, possibly use a new forecasting method
TSt = bias / MADt
Forecasting Demand at Tahoe
Salt
• Moving average
• Simple exponential smoothing
• Trend-corrected exponential smoothing
• Trend- and seasonality-corrected
exponential smoothing
Forecasting in Practice
• Collaborate in building forecasts
• The value of data depends on where you
are in the supply chain
• Be sure to distinguish between demand
and sales
Collaborative Planning, Forecasting And
Replenishment (CPFR)
• Initiatives that have attempted to create efficiency and
effectiveness through integration of supply chain activities
and processes have been identified as quick response,
electronic data interchange (EDI), short cycle manufacturing,
vendor managed inventory (VMI), continuous replenishment
planning (CRP) and efficient consumer response (ECR).
• CPFR has become recognized as a breakthrough business
model for planning, forecasting and replenishment. Using
this approach, retailers, transport providers, distributors and
manufacturers can utilize available internet-based
technologies to collaborate from operational planning
through execution. CPFR simplifies and streamlines overall
demand planning.
CPFR Business Model
• Development of CPFR came from an effort by
Wal Mart and one of its suppliers, Warner-
Lambert Company, particularly with regard to its
Listerine brand product. In addition to
rationalizing inventories of specific line items
and addressing out-of-stock occurrences, these
two companies collaborated to increase their
forecasting accuracy, so as to have just the
right amount of inventory where it was needed,
when it was needed.
• CPFR emphasizes a sharing of consumer
purchasing data among and between trading
partners for the purpose of helping to govern
supply chain activities. In this manner, CPFR
creates a significant, direct link between the
consumer and the supply chain.
• The CPFR initiative begins with the sharing
of marketing plans between trading partners.
Once an agreement is reached on the timing
and planned sales of specific products, and a
commitment is made to follow that plan
closely, the plan is then used to create a
forecast, by stock-keeping unit, by week, and
by quantity. The planning can be for thirteen,
twenty-six, or fifty two weeks.
Order Fulfillment and Order Management
• Three critical elements of collaborative planning
are collaborative demand planning, joint
capacity planning, and synchronized order
fulfillment. This type of planning improves quality
of the demand signal for the entire supply chain
through a constant exchange of information from
one end to the other that goes well beyond
traditional practices.
• The Order-Management system represents
the principal means by which buyers and sellers
communicate information relating to individual
orders of product. Effective order management
is a key to operational efficiency and customer
satisfaction.
Collaborative Planning
Collaborative demand
planning
Synchronized
Order fulfillment
Joint Capacity
planning
Order Management Functions
• Receive order
• Enter order – manual/electronic
• Verify and check order for accuracy
• Check credit
• Check inventory availability
• Process back order
• Acknowledge order
• Modify order
• Suspend order
• Check pricing and promotion
• Identify shipping point
• Generate picking documents
• Originate shipment
• Inquire order status
• Deliver order
• Measure service level
• Measure quality of service
Order and Replenishment Cycles
• When referring to outbound-to-customer
shipments, we typically use the term order
cycle. The term replenishment cycle is used
more frequently when referring to the
acquisition of additional inventory, as in
materials management. Basically one firm’s
order cycle is another’s replenishment cycle.
Major components of Order Cycle
Order Order Order Order

placement processing preparation shipment
• Order Placement – Order-placement time can vary significantly, from
taking days or weeks to being instantaneous. Company experiences
indicate that improvements in order-placement systems and processes
offer some of the greatest opportunities for significantly reducing the
length and variability of the overall order. Significant increases were
projected for Internet facilitated resources such as E-marketplace,
Extranets and E-mail.
• Order Processing – The order-processing function usually involves
checking customer credit, transferring information to sales records,
sending the order to the inventory and shipping areas, and preparing
shipping documents.
• Order Preparation – Depending on the commodity being handled and
other factors, the order-preparation process sometimes may be very
simple and performed manually or, perhaps, may be relatively complex
and highly automated.
• Order Shipment – Shipment time extends from the moment an order is
placed upon the transport vehicle for movement, until the moment it is
received and unloaded at the buyer’s location.
Customer Service
• Having the right product, at the right time, in
the right quantity, without damage or loss, to
the right customer is an underlying principle
of logistics systems that recognizes the
importance of customer service.
• Another aspect of customer service that
deserves mention is the growing consumer
awareness of the price/quality ratio and the
special needs of today’s consumers, who are
time conscious and who demand flexibility.
The Traditional Logistics/Marketing Interface
Product
Price Promotion
Place/Customer service
levels
Inventory carrying Transportatio

costs n costs
Warehousing
Lot quantity
costs
costs
Order processing
and information
costs
Defining Customer Service
• Customer service is a process for providing competitive
advantage and adding benefits to the supply chain in
order to maximize the total value to the ultimate
customer.
• According to marketers, there are three levels of product:
1. The core benefit or service, which constitutes what the
buyer is really buying.
2. The tangible product, or the physical product or service
itself;
3. The augmented product, which includes benefits that
are secondary to, but an integral enhancement to, the
tangible product the customer is purchasing. Logistical
customer service, installation warranties and after-sale
service are examples of augmented product features.
Examples of the various forms that customer service may
take include the following:
1. Revamping a billing procedure to accommodate a
customer’s request.
2. Providing financial and credit terms.
3. Guaranteeing delivery within specified time periods.
4. Providing prompt and congenial sales representatives.
5. Extending the option to sell on consignment.
6. Providing material to aid in a customer’s sales
presentation.
7. Installing the product.
8. Maintaining satisfactory repair parts inventories.
Levels of Customer Service
• Customer service as an activity – This level treats
customer service as a particular task that a firm must
accomplish to satisfy the customer’s needs. Order
processing, billing and invoicing, product returns and
claims handling are all typical examples of this level
of customer service.
• Customer service as performance measures –
This level emphasizes customer service in terms of
specific performance measures, such as the
percentage of orders delivered on time and complete
and the number of orders processed within
acceptable time limits.
• Customer service as a philosophy – This level
elevates customer service to a firm-wide commitment
to providing customer satisfaction through superior
customer service by laying emphasis on quality and
quality management. © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Elements of Customer Service
Customer service has multifunctional interest for a
company; but, from the point of view of the
logistics function, we can view customer service
as having four traditional dimensions:
• Time – The time factor is usually order cycle
time, particularly from the perspective of the
seller looking at customer service. On the other
hand, the buyer usually refers to the time
dimension as the lead time, or replenishment
time.
• Dependability – Dependability can be more
important than lead time. The customer can
minimize its inventory level if lead time is fixed.
1. Cycle time – A seller who can assure the customer
of a given level of lead time, plus some tolerance,
distinctly differentiates its product from that of its
competitor. The seller that provides a dependable
lead time permits the buyer to minimize the total
cost of inventory, stockouts, order processing and
production scheduling.
2. Safe delivery – If goods arrive damaged or are lost,
the customer cannot use the goods as intended. A
shipment containing damaged goods aggravates
several customer cost centers – inventory,
production and marketing.
3. Correct orders – An improperly filled order forces
the customer to reorder, if the customer is not angry
enough to buy from another supplier. If a customer
who is an intermediary in the marketing channel
experiences a stockout, the stockout cost also
directly affects the seller.
• Communications – The two logistics activities
vital to order-filling are the communication of
customer order information to the order-filling
area and the actual process of picking out of
inventory the items ordered. In the order
information stage, the use of EDI or Internet-
enabled communications can reduce errors in
transferring order information from the order to
the warehouse receipt.
• Convenience – Convenience is another way of
saying that the logistics service level must be
flexible. Basically, logistics requirements differ
with regard to packaging, the mode and carrier
the customer requires, routing and delivery
times.
Performance Measures for Customer Service
Typical
Element Brief
Measurement
Description
Product Usually defined as percent in Unit
availability stock (target performance % availability in
level) in some base unit (i.e. base units
order, product, dollars)
Elapsed time from order Speed and

Order cycle time
placement to order receipt. consistency
Usually measured in time units
and variation from standard or
target order cycle
Distribution
system flexibility Ability of system to respond
Response time
to special and/or unexpected
to special
needs of customer.
requests
Distribution Ability of firm’s information
system system to respond in Speed, accuracy
information timely and accurate and message detail
manner to customer’s of response
requests for information
Distribution Efficiency of procedures

Response and
system and time required to
recovery time
malfunction recover from distribution
requirements
system malfunction (i.e.
errors in billing, shipping,
damage , claims).
Postsale Efficiency in providing

product Response time,
product support after
support quality of
delivery, including
response
technical, information,
spare parts, or
equipment modification,
as appropriate.
Expected cost of stockouts
A principal benefit of inventory availability and,
hence of customer service is to reduce the
incidence of stockouts. Once we develop a
convenient way to calculate the costs of a
stockout, we can use stockout probability
information to determine the expected
stockout cost. Last, we can analyse
alternative customer service levels directly
by comparing the expected cost of stockouts
with the revenue enhancing benefits of
customer service.
Effects of stockouts
• A stockout occurs when desired quantities of
finished goods are not available when and
where a customer needs them. When a seller
is unable to satisfy demand with available
inventory, one of four possible events may
occur:
1. The customer waits until the product is
available
2. The customer back orders the product
3. The seller loses a sale
4. The seller loses a customer © Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Back Order
A company having to back order an item that is
out of stock will incur expenses for special
order processing and transportation.
The extra order processing traces the back
order’s movement , in addition to the normal
processing for regular replenishments.
The customer usually incurs extra
transportation charges because a back order
is typically a smaller shipment and often
incurs higher rates.
Lost sales
Most firms find that although some customers may prefer a
back order, others will turn to alternative supply sources.
Most companies have competitors who produce substitute
products; and when one source does not have an item
available, the customer will order that item from another
source. In such cases, the stockout has caused a lost
sale.
The seller’s direct loss is the loss of profit on the item that
was unavailable when the customer wanted it.
Thus, a seller can determine direct loss by calculating profit
on one item and multiplying it by the number the customer
ordered. For eg. If the order was for 100 units and the
profit is Rs. 10 per unit, the loss is Rs 1000.
Lost Customer
• The customer permanently switches to
another supplier. A supplier who loses
a customer loses a future stream of
income.
Determining the Expected Cost of
Stockouts
• The first step is to identify a stockout’s potential consequences.
These include a back order, a lost sale, and a lost customer. The
second step is to calculate each result’s expense or loss of profit
and then to estimate the cost of a single stockout.
• Assume : 70% of all stockouts result in a back order, and a back
order requires extra handling costs of Rs. 6; 20% results in a lost
sale for the item, and this loss equals Rs. 20 in lost profit margin;
and 10% result in a lost customer, or a loss of Rs. 200.
• Overall impact :
70% of Rs 6 = Rs. 4.20
20% of Rs. 20 = Rs 4
10% of Rs. 200 = Rs 20
Total estimated cost per stockout = Rs 28.20
A firm should carry additional inventory to protect against stockouts
only as long as carrying the additional inventory costs less than
Rs. 28.20.
Channels of Distribution
• A channel of distribution consists of one or
more companies or individuals who
participate in the flow of goods, services,
information and finances from the producer to
the final user or consumer. This
encompasses a variety of intermediary firms,
including those that we classify as
wholesalers or retailers.
Types of Channels
Managing distribution channels requires firms to
coordinate and integrate logistics and
marketing activities in a manner consistent with
overall corporate strategy.
• Logistical channel refers to the means by
which products flow physically from where they
are available to where they are needed.
• Marketing channels refers to the means by
which necessary transactional elements are
managed. (e.g. customer orders, billing,
accounts receivable etc.)
Logistical and Marketing Channels
Logistical channel Marketing
Channel E-Procurement
Supplier
Transportatio
n National account
Manufacturer sales
Transportatio Wholesaler/
n Distributor
Distribution center
Transportatio Retail customer

n
Retail store
Change to change otherwise change will change you Consumer

Example of channels of distribution
for the food products manufacturing
industry
Food Manufacturing firms
Food Service Grocery Food Internet

distributors wholesalers brokers (direct)
Restaurant Specialty
s (airlines
etc.) Retail
Retail Institutio Retail
chains Interne
groce nal chains
(local and t
rs buyers
regional) retailer
Consumers of manufactured food products


VTU Supply Chain

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VTU Supply Chain

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Supply Chain

• Supply chain – objectives – importance –

• Supply chain strategy or design

PUSH PROCESSES PULL PROCESSES

• Supply chain processes fall into one of two

• Implied demand uncertainty also related to

Variety of products required increases Demand per product becomes more

Salt at a An existing A new

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Attribute Low Implied High Implied

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season- 0% 10%-25%

Highly Somewhat Somewhat Highly

Integrated Hanes Most Dell

Certain Implied Uncertain

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

• Inventory exists because of a mismatch

Central Raw Material and Custom production

Custom production with raw material at suppliers

Total Logistics Costs

Retaile In-Transit Merge by

Retaile Cross Dock DC

PRODUCTION TECHNOLOGIES REGIONAL DEMAND

FACTOR COSTS PHASE IV LOGISTICS COSTS

Which plants to establish? How to configure the network?

served by which plant? Min cij xij

• Which supply sources s.t.

from plant site i to  x  K , i  1,...,n

• xij = 1 if market j is s.t.

• Three main risks to be considered in

• Contracts for Product Availability and

• The buyer pays a minimal amount for each

• Allows the buyer to modify the order (within

Critical Items Strategic Items

General Items Bulk Purchase Items

Transaction Management Foundation

Level (current deseasonalized demand)

Trend (growth or decline in demand)

Seasonality (predictable seasonal fluctuation)

• Systematic component: Expected value of demand

[Dt-(p/2) + Dt+(p/2) + S 2Di] / 2p for p even

F13 = (L+13T)S1 = [18439+(13)(524)](0.47) = 11868

• Appropriate when the systematic component of demand is

After observing demand for period t+1, revise estimates for

F2 = (L1+T1)S2 = (18769 + 485)(0.68) = 13093

Order Order Order Order

Inventory carrying Transportatio

Elapsed time from order Speed and

Distribution Efficiency of procedures

Postsale Efficiency in providing

Transportatio Retail customer

Change to change otherwise change will change you Consumer

Food Service Grocery Food Internet

Consumers of manufactured food products

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