RV SCM Session 1 To 6

Introduction to Supply Chain Management
Rakesh V | IIM Lucknow 1

Imagine you call up Sreeji Store and order a box of
Cadbury chocolates. Ever wondered the entire
chain of operations that went into that chocolate
reaching you?

How do I establish the last mile? Delivery
fleet, scheduling, routing of vehicles

Someone shipped it to stores even before

A different mode of transport here

Where do I locate? How do I
design the layout?

Whom do I get my
products/services from? At what
prices? Payment terms

How can I forecast demand? What
is the variability that I expect?

How much do I order? How much
do I produce? Which are the
critical items for me?

How do I share value across different firms? How much surplus can I generate? How
much do I pass on to end consumer?

How do I coordinate and choreograph this entire chain of activities across firms?
Material
Finances
Information

Supply Chain Management
“A set of approaches to efficiently integrate

suppliers, manufacturers, warehouses, and stores,
so that products are produced and distributed in
the right quantities, right locations and at the right
time, in order to minimize system wide costs and while
satisfying service level requirements”
Simchi Levi et al. ‘Designing and Managing the Supply Chain’, McGraw Hill

Logistics Management
“..that part of supply chain management that plans,

implements, and controls the efficient, effective
forward and reverse flow and storage of goods, services and
related information between the point of origin and
the point of consumption in order to meet
customers' requirements”
-Council of Supply Chain Management Professionals

Several economic and business problems can be
traced to a basic supply chain management
problem.

Why is Supply Chain Management difficult?

Reason 1: Complexity

Reason 2: Conflicting Objectives
Less inventory please,

Sorry, Economies of Mumbai is expensive
scale in Lucknow! real estate !
Plant Manager Warehouse Manager

Reason 3: Proliferation of Product lines

Reason 4: Increasingly global supply chains

Reason 5: Dynamic and Uncertain

Reason 6: Shorter life cycles
Example:
Newsvendor model

Levels of Decisions
• Strategic – decisions for the next several years
• Tactical – decisions over the next quarter/year
• Operational – daily/weekly operations

Some decisions in Supply Chain Management
• Distribution – structure, number of levels
• Network design – location, transportation
• Warehousing
• Inventory
• Sourcing
• Product Design
• Decision Support Systems
• Pricing and revenue Management
• Coordination
• Incentives, contracts
• Sustainable Supply Chain, CLSCM
Evolution of Supply Chain
• 1. ‘Ford’ Era
– Vertically integrated
– Less responsive

– Less responsive
• 2. ‘Toyota’ Era
– Keiretsu
– Still rigid

– Less responsive
• 2. ‘Toyota’ Era
– Keiretsu
– Still rigid
• 3. ‘Dell’ Era
– Highly responsive
– Extensive IT

• 1. ‘Ford’ Era • 4. We are possibly

– Vertically integrated seeing the next
– Less responsive revolution
• 2. ‘Toyota’ Era unfolding – IoT, AI
– Keiretsu 3D Printing, Cloud
– Still rigid
etc. This might
coincide with the
• 3. ‘Dell’ Era
4th Industrial
– Highly responsive
Revolution
– Extensive IT

Supply Chain strategic fit

Functional Innovative
Products Products
Nature of demand More predictable Less Predictable
Product Lifecycle Longer Shorter
Variety Less More
Contribution Margin Low High
Lead time for MTO Low High
End of Season Sales? No Yes

Implied Uncertainty Spectrum

Efficient and Responsive Supply Chains
Blank Efficient Supply Chains Responsive Supply Chains
Primary goal Supply demand at the lowest cost Respond quickly to demand
Create modularity to allow
Maximize performance at a
Product design strategy postponement of product
minimum product cost
differentiation
Lower margins because price is a Higher margins because price is not a
Pricing strategy
prime customer driver prime customer driver
Lower costs through high Maintain capacity flexibility to buffer
Manufacturing strategy
utilization against demand/supply uncertainty
Maintain buffer inventory to deal with
Inventory strategy Minimize inventory to lower cost
demand/supply uncertainty
Reduce, but not at the expense of Reduce aggressively, even if the costs
Lead-time strategy
costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality

Responsiveness Spectrum

Strategic Fit

Which type of process do we need at Growth
stage, Maturity?

But in all this, we assumed the supply to be
stable. What if supply uncertainty kicks in?

Demand Uncertainty
Low High
Low
Supply Uncertainty
High
Source: Hau Lee, Aligning Supply Chain Strategies with Product Uncertainties,
California Management Review
Demand Uncertainty
Low High
Efficient Supply
Low
Supply Uncertainty
Chain
Basis of competition is
efficiency.
JIT, Lean, Scale,
Productivity, D2C.
Eg: Toyota,
Walmart(some
categories)
High
Demand Uncertainty
Low High
Responsive Supply
Low
Supply Uncertainty
Chain
Short life-cycle of products. Less focus

on forecasting and inventory planning.
High
Postponement, build to order.

Eg: Dell
Demand Uncertainty
Low High
Uncertainties in yield, lead time, supply

Low etc.
Supply Uncertainty
‘Plan B’ in sourcing, Inventory pools,

Market exchanges
Eg: Subway
Risk-Hedging
High
Supply Chain
Demand Uncertainty
Low High
Combination of risk-hedging and

Low responsive strategies. Tricky
Supply Uncertainty
Eg: Fabless semiconductor companies

like AMD
High
Agile Supply Chain
Demand Uncertainty
Low High
Efficient Supply Responsive Supply

Low
Supply Uncertainty
Chain Chain
Risk-Hedging
High
Agile Supply Chain

Supply Chain
Emerging logic: Too much focus on efficiency can be extremely
counterproductive to supply chains. Instead, modern supply
chains require AAA capability
Agility, Adaptability, Alignment
Read: https://hbr.org/2004/10/the-triple-a-supply-chain

Serial, Distribution, and Assembly Structures
Assembly Serial Distribution

Essentially, a Supply Chain Strategy includes:
• Decisions on efficiency (lean-ness), responsiveness, risk-

hedging and agility
• Decisions on Supply Chain structure and integration
• Decisions on speculation vs postponement
• Decisions on centralization vs decentralization
In the context of the product type, lifecycle stage, competitors

etc.

Some Frameworks to model Supply Chain

Framework 1: Cycles and push/pull boundaries
Push/Pull view

Cycle View

In each of these cycles there are subprocesses, that can be
classified as:
• Supplier Relationship Management (SRM) – Source, Negotiate,
Buy, Vendor Selection, Design Collaboration
• Internal Supply Chain Management (ISCM) – Demand planning,
scheduling, transportation
• Customer Relationship Management (CRM) – Market, Price, Sell,
Order Management
In the context of the product type, lifecycle stage, competitors

etc.
Framework 2: Supply Chain decision making
framework

Framework 3: The SCOR Model
Reference: https://scor.ascm.org/processes/introduction
Each of the blocks are further divided into a list of sub-processes
For example:
• Return
• Return Defective Product
• Identify defective product condition
• Disposition
• Request return
• Return authorization
• Schedule shipment
• Return defective product

Further, SCOR identifies metrics across performance attributes like
Reliability, Cost, Responsiveness, and Asset Management Efficiency
The metrics are further divided into level 1, level 2 and level 3
metrics
For example:
• Reliability
• Level 1: Perfect Order Fulfillment
• Level 2: Percentage of orders delivered in full
• Level 3: Item accuracy
• Level 3: Quantity accuracy

Inventory

Company – TATA Steel

Company – P&G - HH

Company – Future Retail

Financial considerations
• Valuation of Inventory – How?

• Current assets – Net Current Assets, Current Ratio,
Quick Ratio
• Business cycles
• Inventory turnover
– COGS/Average Inventory
– An indicator of efficiency of an supply chain
– Influenced by distribution network, degree of vertical
integration, accounting convention etc
– Too much focus can be counter productive

Reasons for holding inventory
Economies of Scale in production, transportation etc

– Cycle stock
Uncertainty in demand, lead times, replenishment
quantities – Safety stock , Seasonal stock
Distance– Pipeline stock
System boundaries– Decoupling stock
Price instability – Speculation stock
Service Requirements– MRO Inventory

Types of Inventory Models
Demand – Independent, Dependent
Demand – Constant, Deterministic,
Stochastic
Lead times – 0, >0, stochastic
Horizon – Single Period, Finite, Infinite
Products – One product, Multiple products
Capacity – Constrained, unconstrained
Service – No shortage, shortages allowed
Discounts – Bulk discounts, No Discounts
Perishability – Perishable, Non- Perishable

The Economic Order Quantity (EOQ)
Model

Assumptions - EOQ
Stochastic
Capacity – Constrained, Unconstrained

Relevant Costs
Carrying Costs or Holding Costs

Opportunity costs, storage costs, material handling costs,
power, special requirements, obsolescence, pilferage,
spoilage, depreciation etc.
Key point: Depends on average inventory
Ordering Costs
Paperwork, communication, freight, inspection,
transportation, salary in purchasing dept, reject and rework,
delay etc
Key point: Depends on number of orders
Key Question
How much to order?

Inventory Profile

Notations
Lot sizing for a single product (EOQ)
D = Annual demand of the product
S = Ordering Costs (per order)
C = Cost per unit
h = Holding cost per year as a fraction of product cost

Cycle inventory, Flow time
Cycle Inventory = Lot Size/2 = Q/2

(How do we get it?)

Cost components and total cost
Lot sizing for a single product (EOQ)
Annual material cost = CD
Number of orders per year = D/Q
Annual ordering Cost = (D/Q) S
Annual Holding Cost = (Q/2)H = (Q/2)hC
Total Annual Cost , TC = (D/Q) S + (Q/2)hC + CD

Cost components and total cost

Lot Sizing
The economic order quantity (E O Q)

2DS
Optimal lot size, Q* =
hC
The optimal ordering frequency
D DhC
n* = =
Q* 2S

Some Properties of EOQ
If demand increases by a factor of k, the optimal lot

size increases by a factor of √𝑘
The number of orders placed per year should also
increase by a factor of √𝑘
Flow time attributed to cycle inventory should
decrease by a factor of √𝑘
To reduce the optimal lot size by a factor of k, the
fixed order cost S must be reduced by a factor of 𝑘 2

Example
Demand for a computer is 1000 units per month.

Ordering costs of $4000 is incurred each time an order
is placed. Each computer costs $500 and there is an
annual holding cost of 20%. Evaluate the optimal
order quantity, average inventory, flow time, number of
orders per year, annual ordering and holding costs.

Digression - Little’s Law

?
You maintain a tall wine rack at home ( ☺ ) which is almost always full. Once in a while
you invite your friends for dinner at home and start taking out a few wine bottles. You
have an arrangement with a local vendor who replenishes adequate number of bottles in
your wine rack the next morning itself. Out of sheer curiosity, you took old bills for last
year and found out your wine consumption pattern as follows
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
12 10 8 9 5 4 4 7 7 6 6 10
What is the average time a bottle of wine stays with you?
Answer: Insufficient Information!

Little’s Law
A fundamental law that defines the relationship between

Work-In-Process Inventory (WIP), Cycle Time (CT) and
Throughput Rate (TH)
“The average number of customers in a system (over some

interval) is equal to their average arrival rate, multiplied by their
average time in the system.”
Little’s Law : WIP = TH X CT

Little’s Law
So in the first example, what is the average ‘length of stay’

of wine bottles if the rack has a capacity of 20 bottles.
What is the solution if the rack has a capacity of 100

bottles

Applications of Little’s Law
1. Estimating ageing of stock, average cycle time

2. Estimating queue length
3. Estimating waiting time
4. Inventory turns (Ratio of throughput to average
inventory) from cycle time alone
5. Planned inventory in number of days
Applied in diverse situations like workforce management,

call center operations, banking, retail, receivables, courts!

Properties of Little’s law
1. It works only in times when system is reasonably stable

2. Has no distributional assumptions on arrival/departure
3. Works irrespective of queue priority rules.
4. Applicable at the level of system as well as subsystem.

Inventory – Deterministic Models (contd..)

Constant lead time model
stochastic

Inventory Profile

Reorder Point
If l is the lead time and c is the cycle time, ( l < c ), then

the reorder point is calculated as
D
ROP = l 
365
If ( l > c ), then find new l* as remainder when l is

divided by c. Then calculate ROP using l*

Production Order Quantity
stochastic
Capacity – Production Rate Finite,
Unconstrained
Inventory Profile

Equations
2𝐷𝑆
𝑄∗ =
𝐷
ℎ𝐶(1 − )
𝑃
Where D is the usage (consumption) rate and P is the

production rate
Model implicitly assumes P is greater than D

EOQ with Back Ordering
stochastic

Inventory Profile

Equations
𝑄∗ =
2𝐷𝑆 (ℎ𝐶 + 𝐾)
∗
ℎ𝐶
ℎ𝐶 𝐾 𝐼2 = 𝑄
ℎ𝐶 + 𝐾
Where 𝑄∗ is the optimal order quantity, 𝐼2 is the back

order level, 𝐾 is the shortage cost (backorder cost) in
same units as hC

Discount Models
stochastic
Discounts – Bulk discounts , No Discounts

All unit discount model
The price per unit for all the quantity ordered will be
altered based on the order quantity per cycle.

Optimal Order Quantity
Step 1: Starting from lowest price bracket and working
towards the highest price, calculate Q* for each bracket
till the first feasible EOQ is found. The first feasible
EOQ along with price-break quantities for all lower
prices are possible options
Step 2: Calculate total annual cost (including material

cost), and select the option that gives the lowest value
of total cost

Marginal discount model
Also called multi-block tariffs. The marginal cost of a
unit decreases at break point.

Step 1: Evaluate the optimal lot size for each price Ci
2D(S + Vi − qi Ci )
Optimal lot size for Ci is Qi =
hCi
Vi = C0 (q1 − q0 ) + C1 (q2 − q1 ) + ... + Ci –1 (qi − qi –1 )

Step 2: Select the order quantity Qi* for each price Ci
1. If qi  Qi  qi +1 then set Qi* = Qi

2. If Qi  qi then set Qi* = qi
3. If Qi  qi +1 then set Qi* = qi +1

Step 3: Calculate the total annual cost of ordering
D  D
TCi =  *  S + V
 i + (Qi
*
− q i )C 
i h / 2 + V
*  i
+ (Q 
i − qi )Ci 
*
 Qi  Qi
Step 4: Select the order size Qi* with the lowest total
cost TCi

Inventory – Probabilistic Models

Assumptions – Probabilistic Models
stochastic

Stockout costs
External
Backorder costs
Loss of sales
Erosion of goodwill, loyalty
Internal
Idle machines, labour – loss of utilization

Safety Stock

Demand during lead time
The following has been demand during lead time for last 25
instances
17 24 27 28 26
24 20 24 24 23
13 31 26 28 34
17 33 29 26 26
24 19 23 25 24

Demand during lead time
5
Frequency
Demand

Demand during lead time - distribution

Service level and inventory
Service Level when mean inventory is 25 and stddev is 5
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
Service Level
0.55
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
0 10 20 30 40 50 60
Inventory

Reorder Point

Reorder Point
Use prescribed service levels to set safety stock when

the cost of stock-outs cannot be determined
ROP = Average demand during lead time + ZσdLT
where Z = Number of standard deviations

σdLT = Standard deviation of demand during lead time

Special case – 1
Lead time is constant, distribution of demand per day

is known

RV SCM Session 1 To 6

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RV SCM Session 1 To 6

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Introduction to Supply Chain Management

Rakesh V | IIM Lucknow 1

Rakesh V | IIM Lucknow 2

Rakesh V | IIM Lucknow 4

Rakesh V | IIM Lucknow 5

Rakesh V | IIM Lucknow 6

Rakesh V | IIM Lucknow 7

Rakesh V | IIM Lucknow 8

Rakesh V | IIM Lucknow 9

Rakesh V | IIM Lucknow 10

Rakesh V | IIM Lucknow 11

Rakesh V | IIM Lucknow 12

“A set of approaches to efficiently integrate

Rakesh V | IIM Lucknow 13

“..that part of supply chain management that plans,

Rakesh V | IIM Lucknow 14

Rakesh V | IIM Lucknow 15

Rakesh V | IIM Lucknow 16

Rakesh V | IIM Lucknow 17

Reason 2: Conflicting Objectives

Less inventory please,

Plant Manager Warehouse Manager

Rakesh V | IIM Lucknow 18

Reason 3: Proliferation of Product lines

Rakesh V | IIM Lucknow 19

Reason 4: Increasingly global supply chains

Rakesh V | IIM Lucknow 20

Reason 5: Dynamic and Uncertain

Rakesh V | IIM Lucknow 21

Reason 6: Shorter life cycles

Rakesh V | IIM Lucknow 22

• Strategic – decisions for the next several years

• Tactical – decisions over the next quarter/year

• Operational – daily/weekly operations

Rakesh V | IIM Lucknow 23

Rakesh V | IIM Lucknow 25

Rakesh V | IIM Lucknow 26

Rakesh V | IIM Lucknow 27

• 1. ‘Ford’ Era • 4. We are possibly

Rakesh V | IIM Lucknow 28

Rakesh V | IIM Lucknow 29

Rakesh V | IIM Lucknow 31

Rakesh V | IIM Lucknow 32

Rakesh V | IIM Lucknow 33

Rakesh V | IIM Lucknow 34

Rakesh V | IIM Lucknow 35

Rakesh V | IIM Lucknow 36

Rakesh V | IIM Lucknow 37

Short life-cycle of products. Less focus

Postponement, build to order.

Uncertainties in yield, lead time, supply

‘Plan B’ in sourcing, Inventory pools,

Combination of risk-hedging and

Eg: Fabless semiconductor companies

Agile Supply Chain

Efficient Supply Responsive Supply

Agile Supply Chain

Agility, Adaptability, Alignment

Rakesh V | IIM Lucknow 44

Assembly Serial Distribution

Rakesh V | IIM Lucknow 45

• Decisions on efficiency (lean-ness), responsiveness, risk-