1

IE5105 Modelling for

Supply Chain Systems
Lecture 1
Thursday, 16 January 2020

Nugroho PUJOWIDIANTO (Nugi)

isenap@nus.edu.sg
WeChat ID: Pujowidianto
LinkedIn
 2

Course Instructor’s Introduction

• Nickname: Nugi (pronounced as /ˈnʊɡɪ/)

• Key Milestones
– 2002: moved to Singapore
– 2006: a Bachelor from NTU 2002 2006 2013 2014

– 2013: a PhD from NUS

– 2013: joined HP
– 2014: a husband
– 2018: a father
Mechanical Industrial & Optimal
Engineering Systems Computing
• Contact (Manufacturing Engineering Budget
and Systems Allocation
– isenap@nus.edu.sg Engineering) (OCBA)

– LinkedIn
– LumiNUS Forum
 3

Course Overview and

Administration
 4

Syllabus
1. Introduction to Supply Chain

2. Supply Chain Performance

3. Planning and Managing Inventories in Supply Chain

4. Inventory Reduction Strategies

5. Supply Chain Coordination

6. Network Design

7. Transportation in Supply Chain

 5

Learning Outcomes
The students, upon completion of this module, will be able to
• Appreciate the value and role for Supply Chain Management
• Develop inventory models to help manage inventory effectively
• Apply risk pooling concepts to reduce demand variability
• Identify factors that support supply chain coordination
• Formulate mathematical models to describe and solve network
design problems
• Apply mathematical models to analyze transportation problems
• Apply learnings from Supply Chain cases
 6

Textbook

Supply Chain Management: Strategy,

Planning, and Operation, Global Edition, 7/E

Sunil Chopra

ISBN-10: 129225789X

ISBN-13: 9781292257891
 7

Lecture Schedule
(every Thu 6 pm to 8:45 pm)
Lecture 1: 16 Jan Lecture 7: 5 Mar
Lecture 8: 12 Mar
Lecture 2: 23 Jan
Lecture 9: 19 Mar
Lecture 3: 30 Jan
Lecture 10: 26 Mar (Quiz 2)
Lecture 4: 6 Feb Lecture 11: 2 Apr
Lecture 5: 13 Feb Lecture 12: 9 Apr
Lecture 13: 16 Apr
Lecture 6: 20 Feb (Quiz 1)
Mid-term Break: 27 Feb
 8

Course Assessments
• Format:
– Closed-book with one A4-reference sheet

• Weights and Schedule:

– Quiz 1 (20%):
▪ Thu, 20 February 2020
▪ Lecture as usual from 6 pm
▪ 1-hour quiz from 7:45 pm to 8:45 pm
– Quiz 2 (15%):
▪ Thu, 26 March 2020
▪ Lecture as usual from 6 pm
▪ 1-hour quiz from 7:45 pm to 8:45 pm
– Final Exam (65%)
▪ Thu, 30 April 2020
▪ 2-hour exam from 9 am to 11 am
 9

Introduction to Supply Chain

 10

What is Supply Chain?

 11

What is the difference

between supply chain and
logistics?
 12

What is modeling?
 13

What are examples of

supply chain modeling?
 14

What are examples of

supply chain modeling?
 15

What are examples of

supply chain modeling?
 16

What are examples of

supply chain modeling?

Image source:
https://www.fibre2fashion.com/industry-
article/7852/the-bullwhip-effect
 17

What are examples of

supply chain modeling?
 18

What are examples of

supply chain modeling?
 19

What are examples of

supply chain modeling?
 20

What Is a Supply Chain? (1 of 3)

• All parties involved, directly or indirectly, in fulfilling a

customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each organization, the supply chain includes all
functions involved in receiving and fulfilling a customer
request (new product development, marketing,
operations, distribution, finance, customer service)
 21

What Is a Supply Chain? (2 of 3)

• Customer is an integral part of the supply chain

• Includes movement of products from suppliers to
manufacturers to distributors and information, funds, and
products in both directions
• May be more accurate to use the term “supply network”
or “supply web”
• Typical supply chain stages: customers, retailers,
wholesalers, distributors, manufacturers, suppliers
 22

What Is a Supply Chain? (3 of 3)

Figure 1-1 Stages of an Automotive Supply Chain

 23

Case Study: Seven Eleven

 24

Flows in a Supply Chain

Figure 1-2 The Three Flows in a Supply Chain

 25

The Objective of a Supply Chain (1 of 3)

• Maximize net value generated

Supply Chain Surplus = Customer Value − Supply
Chain Cost
 26

The Objective of a Supply Chain (2 of 3)

• Example: a customer purchases a wireless router from

Best Buy for $60 (revenue)
• Supply chain incurs costs (convey information, produce
components, storage, transportation, transfer funds, etc.)
• Difference between $60 and the sum of all of these costs
is the supply chain profitability
• Supply chain profitability is total profit to be shared across
all stages of the supply chain
• Success should be measured by total supply chain
surplus, not profits at an individual stage
 27

The Objective of a Supply Chain (3 of 3)

• Customer the only source of revenue

• Sources of cost include flows of information, products, or
funds between stages of the supply chain
• Effective supply chain management involves the
management of supply chain assets and product,
information, and fund flows to grow the total supply chain
surplus
 28

Importance of Supply Chain Decisions

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

• Seven-Eleven Japan, ¥1 billion sales in 1974 to ¥2.7
trillion in 2016
• Webvan folded in two years
• Borders, $4 billion in 2004, declared bankruptcy in 2010
• Dell, $56 billion in 2006, adopted new supply chain
strategies
 29

Case Study: Zara

 30

Case Study: Zara

http://www.thirdeyesight.in/articles/ImagesFashion_Zara_Part_I.pdf
 31

Supply Chain Decision Phases

Strategic decisions define the constraints for planning decisions and
planning decisions define the constraints for operational decisions

1. Supply chain strategy of design (typically made for the long term)
– Decides on supply chain configuration:
▪ What the chain’s configuration will be
▪ How resources will be allocated
▪ What processes each stage will perform

2. Supply chain planning (typically a quarter to a year)

– Goal: maximize supply chain surplus over the planning horizon given the
constraints established during the strategic or design phase

3. Supply chain operation (short term – weekly or daily)

– Goal: handle incoming customer orders in the best possible manner
 32

Supply Chain Strategy or Design

• Decisions about the configuration of the supply chain, allocation of
resources, and what processes each stage will perform
• Strategic supply chain decisions
– Outsource supply chain functions
– 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
 33

Supply Chain Planning (1 of 2)

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

operations
• Fixed by the supply configuration from strategic phase
• Goal is to maximize supply chain surplus given
established constraints
• Starts with a forecast of demand in the coming year
 34

Supply Chain Planning (2 of 2)

• Planning decisions:
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting
– Inventory policies
– Timing and size of market promotions
• Must consider demand uncertainty, exchange rates,
competition over the time horizon in planning decisions
 35

Supply Chain Operation

• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and planning policies are
defined
• Goal is to handle incoming customer orders 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)
 36

Process Views of a Supply Chain

1. Cycle View: The processes in a supply chain are

divided into a series of cycles, each performed at the
interface between two successive stages of the supply
chain.
2. Push/Pull View: The processes in a supply chain are
divided into two categories, depending on whether they
are executed in response to a customer order or in
anticipation of customer orders. Pull processes are
initiated by a customer order, whereas push processes
are initiated and performed in anticipation of customer
orders.
 37

Cycle View of Supply Chain Processes (1 of 2)

Figure 1-3 Supply Chain Process Cycles

 38

Cycle View of Supply Chain Processes (2 of 2)

Figure 1-4 Subprocesses in Each Supply Chain Process Cycle

 39

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
 40

Figure 1-5 Push/Pull View of Supply

Chains
 41

Push/Pull View – L.L. Bean

Figure 1-6 Push/Pull Processes for the L.L. Bean Supply Chain
 42

Push/Pull View – Ethan Allen

Figure 1-7 Push/Pull Processes for Ethan Allen Supply Chain for
Customized Furniture
 43

Supply Chain Macro Processes

Supply chain processes discussed in the two views can be

classified into
1. Customer Relationship Management (CRM):
– all processes at the interface between the firm and its
customers
2. Internal Supply Chain Management (ISCM):
– all processes that are internal to the firm
3. Supplier Relationship Management (SRM):
– all processes at the interface between the firm and its
suppliers
 44

Figure 1-8 Supply Chain Macro Processes

 45

Supply Chain Performance

Competitive and Supply Chain Strategies
• Competitive strategy defines the set of customer needs a company
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, follow-up service, whether
processes will be in-house or outsourced
• All functional strategies must support one another and the
competitive strategy
The Value Chain

Figure 2-1 The Value Chain in a Company

Achieving Strategic Fit (1 of 2)

• Strategic fit – competitive and supply chain strategies

have aligned goals
• A company may fail because of a lack of strategic fit or
because its overall supply chain design, processes, and
resources do not provide the capabilities to support the
desired strategy
Achieving Strategic Fit (2 of 2)
1. The competitive strategy and all functional strategies
must fit together to form a coordinated overall strategy.
Each functional strategy must support other functional
strategies and help a firm reach its competitive strategy
goal.
2. The different functions in a company must appropriately
structure their processes and resources to be able to
execute these strategies successfully.
3. The design of the overall supply chain and the role of
each stage must be aligned to support the supply chain
strategy.
How Is Strategic Fit Achieved?

1. Understanding the customer and supply chain

uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit
Step 1: Understanding the Customer and
Supply Chain Uncertainty (1 of 2)

• Quantity of product needed in each lot

• Response time customers are willing to tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
Step 1: Understanding the Customer and
Supply Chain Uncertainty (2 of 2)

• Demand uncertainty – uncertainty of customer demand

for a product
• Implied demand uncertainty – resulting uncertainty for
only the portion of the demand that the supply chain
plans to satisfy based on the attributes the customer
desires
Customer Needs and Implied Demand
Uncertainty
Table 2-1 Impact of Customer Needs on Implied Demand
Uncertainty
Customer Need
Range of quantity required increases
Lead time decreases
Variety of products required increases
Required service level increases
Rate of innovation increases
Number of channels through which
product may be acquired increases
Causes Implied Demand Uncertainty to …
Increase because a wider range of the quantity required
implies greater variance in demand
Increase because there is less time in which to react to
orders
Increase because demand per product becomes less
predictable
Increase because the firm now has to handle unusual
surges in demand
Increase because new products tend to have more
uncertain demand
Increase because the total customer demand per channel
becomes less predictable
Implied Uncertainty and Other
Attributes (1 of 2)

1. Products with uncertain demand are often less mature

and have less direct competition. As a result, margins
tend to be high.
2. Forecasting is more accurate when demand has less
uncertainty.
3. Increased implied demand uncertainty leads to
increased difficulty in matching supply with demand. For
a given product, this dynamic can lead to either a
stockout or an oversupply situation.
4. Markdowns are high for products with greater implied
demand uncertainty because oversupply often results.
Implied Uncertainty and Other
Attributes (2 of 2)

Table 2-2 Correlation Between Implied Demand

Uncertainty and Other Attributes

Blank Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High
Average forecast error 10% 40% to 100%
Average stockout rate 1% to 2% 10% to 40%
Average forced season-end markdown 0% 10% to 25%
Impact of Supply Source Capability

Table 2-3 Impact of Supply Source Capability on Supply

Uncertainty

Supply Source Capability Causes Supply Uncertainty to...

Frequent breakdowns Increase

Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase
Implied Uncertainty (Demand and Supply)
Spectrum

Figure 2-2 The Implied Uncertainty (Demand and Supply) Spectrum

Step 2: Understanding Supply Chain
Capabilities (1 of 2)

• How does the firm best meet demand?

• Supply chain responsiveness is the 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 high service level
– Handle supply uncertainty
Step 2: Understanding Supply Chain
Capabilities (2 of 2)

• Responsiveness comes at a cost

• Supply chain efficiency is the inverse to the cost of
making and delivering the product to the customer
• The cost-responsiveness efficient frontier curve
shows the lowest possible cost for a given level of
responsiveness
Cost-Responsiveness Efficient Frontier

Figure 2-3 Cost-Responsiveness Efficient Frontier

Responsiveness Spectrum

Figure 2-4 The Responsiveness Spectrum

Step 3: Achieving Strategic Fit

• Ensure that the degree of supply chain responsiveness is

consistent with the implied uncertainty
• Assign roles to different stages of the supply chain that
ensure the appropriate level of responsiveness
• Ensure that all functions maintain consistent strategies
that support the competitive strategy
Zone of Strategic Fit

Figure 2-5 Finding the Zone of Strategic Fit