Introduction To Global Supply Chain Management

Introduction to
Global Supply Chain Management
Written by
Prof. Dr. Hermann Kraxenberger, MBA
Lausanne, 15th of July 2007

Contents
CHAPTER 2 SUPPLY CHAIN MANAGEMENT (SCM) ................................................................................ 3
2.1. FUNDAMENTALS OF SCM ............................................................................................................................. 3
2.1.1. Definitions ............................................................................................................................................. 3
2.1.2. Building blocks of SCM......................................................................................................................... 5
2.1.2.1. Customer Service ............................................................................................................................................. 6
2.1.2.2. Integration ....................................................................................................................................................... 7
2.1.2.3. Coordination .................................................................................................................................................... 9
2.1.3. Origins of SCM ................................................................................................................................... 10
2.1.4. Objectives and Potential of Supply Chain Management ..................................................................... 11
2.1.5. Types of Supply Chains ....................................................................................................................... 13
2.1.5.1. The Demand Side .......................................................................................................................................... 13
2.1.5.2. The Supply Side ............................................................................................................................................ 14
2.1.5.3. Supply chain strategies .................................................................................................................................. 15
2.1.6. Inter-organizational concepts of SCM ................................................................................................ 17
2.1.6.1. Just in time (JIT) ............................................................................................................................................ 17
2.1.6.2. Quick response (QR) ..................................................................................................................................... 18
2.1.6.3. Continuous replenishment (CR) .................................................................................................................... 18
2.1.6.4. Vendor Managed Inventory (VMI) ................................................................................................................ 18
2.1.6.5. Efficient consumer response (ECR) .............................................................................................................. 19
2.1.6.6. Collaborative Planning, Forecasting and Replenishment (CPFR) ................................................................. 20
2.1.7. The Supply Chain Operations Reference Model ................................................................................. 20
2.2. SUPPLY CHAIN ANALYSIS ........................................................................................................................... 23
2.2.1. Analysis of Supply Chain Typology..................................................................................................... 23
2.2.1.1. Functional attributes ...................................................................................................................................... 23
2.2.1.2. Structural attributes........................................................................................................................................ 26
2.2.2. Inventory Analysis ............................................................................................................................... 27
2.2.3. Performance measurement and analysis ............................................................................................ 32
2.3. SUPPLY CHAIN PLANNING ............................................................................................................................ 35
2.3.1. Planning methods and principles ........................................................................................................ 35
2.3.2. Planning tasks along the SC network.................................................................................................. 38
2.3.2.1. Long-term planning tasks .............................................................................................................................. 39
2.3.2.2. Mid-term planning tasks ................................................................................................................................ 40
2.3.2.3 Short-term planning tasks ............................................................................................................................... 41
2.3.2.4. Coordination and Integration ......................................................................................................................... 43
Chapter 2
Supply Chain Management (SCM)
‘The battleground of the next decade will be supply chain

Versus supply chain.’
- Warren Hausman, Standford University, 2001
2.1. Fundamentals of SCM
2.1.1. Definitions
The object of Supply Chain Management (SCM) is the supply chain which represents,
according to Christopher, ‘a network of organisations that are involved, through upstream
and downstream linkages, in the different processes and activities that produce value in the
form of products and services in the hands of the ultimate customer’.1
As Figure 2-1 shows, a network usually does not only focus on flows within a single chain,
but usually will have to deal with divergent and convergent flows within a complex network
resulting from many different customer orders to be handled in parallel.2 In order to reduce
complexity, an organisation may concentrate only on a portion of the overall supply chain.
1
Christopher (1998): p. 15
2
See Stadtler (2003): p. 7
Supply Chain Management Page: 4
For example, an organization may focus its supply chain activities from the downstream
direction of the customer to the upstream direction of the component or raw material supplier.
Raw material Parts Component Producer Distributor/ Retailer Consumer

supplier supplier supplier Wholesaler
Material flow
Information flow
Financial flow
Figure 2-1: Example of a supply chain network
As Supply Chain Management evolved from logistic theories, some authors don’t distinguish
between Logistics and Supply Chain Management and define Supply Chain Management as
‘a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses,
and stores so that merchandise is produced and distributed at the right quantities, to the right
locations, and at the right time, in order to minimize system wide costs while satisfying
service level requirements.’3
Many definitions on the concept of Supply Chain Management have been provided in the
literature and it seems there are only slight variations of the definitions. The major difference
in definitions is the level of integration between supplier, manufacturer, logistics provider and
customer. Some older definitions which evolved from logistics clearly set the integration cut
at the company border and focus on the intra-organisational flow orientation, whereas newer
definitions focus on the inter-organisational optimization. One of these older definitions is
provided by Werner, who defines Supply Chain Management as the integrated company
3
See Simchi-Levi et alii (2003): p. 1-2
activities of delivering, disposal and recycling including the financial and information flow.’4 All
newer definitions imply that a supply chain consists of separate organisations which are
linked by material, information and financial flows. These organisations are normally firms
that produce parts, components and end products, logistic service providers and the
(ultimate) customer himself.
The overall objective of Supply Chain Management is to increase competitiveness. Individual
companies are not responsible for the competitiveness of its products or services in the eyes
of the customer but the supply chain with its network of organisations defines the level of
competitiveness. Obviously, this organisational structure requires a win-win situation for all
participants in the supply chain in the long run while in the short run it may not be the case
for all entities. Important key measurements for competitiveness are quality, cost and time
performance indicators. There are two broad means for improving competitiveness of a
supply chain. The first is a closer integration of the organisations involved and the second is
a better coordination of material, information and financial flows.5
2.1.2. Building blocks of SCM

The house of SCM illustrates many facets of SCM. The roof stands for the ultimate goal of
SCM – competitiveness – and the means – customer service. Competitiveness can be
improved in many ways, e.g. by reducing costs, increasing flexibility with respect to changes
in customer demands or by providing superior quality of products or services.
The roof rests on two pillars representing the two main components of SCM, namely
integration of a network of organizations and coordination of information, material and
financial flows.
The two main components which incur some degree of novelty will be broken down into their
building blocks. Firstly, forming a supply chain requires the choice of suitable partners for a
mid-term partnership. Secondly, to become an effective and successful network organization,
consisting of legally separated organizations, calls for practising inter-organizational
collaboration. Thirdly, for an inter-organizational supply chain, new concepts of leadership
aligning strategies of the partners involved are important.
Coordination of flows along the supply chain can be executed efficiently by utilizing the latest
developments in information and communication technology. These allow processes formerly
executed manually to be automated. Especially, activities at the interface of two entities can
4
Werner (2001): p. 5
5
See Lee (1998): p. 1
be scrutinized and duplicate activities can be reduced to a single activity. Process orientation
thus often incorporates a redesign followed by a standardization of the new process.
For executing customer orders, the availability of materials, personnel, machinery and tools
has to be planned. Although production and distribution planning as well as purchasing have
been in use of several decades, these functions mostly have been isolated and limited in
scope. Coordination plans of several sites and several legally separated organizations
represent a new challenge which is taken up by an Advanced Planning Systems (APS).
6
Figure 2-2: House of Supply Chain Management
2.1.2.1. Customer Service

Customer service is a multi-dimensional notation and consists of three elements according to
Christopher:7
1. Pre-transaction
2. Transaction
3. Post-transaction
6
See Stadtler (2003): p. 10
7
See Christopher (1998): p. 39
Pre-transactional elements relate to a company’s activities preceding a contract. It

concerns customer access to information regarding the products and services of a firm
offers, the existence of an adequate link between organizations involved. For standard
products ordered routinely (e.g. screws) an impersonal purchase via the Internet may be
sufficient. However, large projects will require several, intense personal links between the
organizations involved at different levels of the hierarchy. Finally, flexibility to meet individual
customer requirements may be an important element for qualifying for and winning an order.
Transactional elements are all activities which contribute to order fulfilment in the eyes of a
customer. Availability of products from stock may be one option. If a product or service has to
be made on demand, order cycle times play an important role. During delivery times a
customer may be provided with information on the current status and location of an order.
Delivery of goods can include several additional services, like an introduction into the use of
a product or its maintenance.
Post-transactional elements concern the service provided once the order is fulfilled. This
includes elements like repairing or exchanging defective parts and maintenance, dealing with
customer complaints and product warranties.
For measuring customer service and for setting targets, key performance indicators are used
in practice, like e.g. the maximum order lead-time, the portion of orders delivered within x
days, the portion of orders without rejects or the fill rate.8 (For details see chapter 2.2.3.)
2.1.2.2. Integration
Integration refers according to Stadtler to the special building blocks that cause firms to
collaborate in the long-term in the generation of product or service with the aim of improving
competitiveness of a supply chain as a whole.9
Integration consists of 3 building blocks:
1. Choice of partners
2. Inter-organizational collaboration
3. Leadership
8
See Silver et alii (1998), p. 41
9
See Stadtler (2003), p. 12
The choice of partners starts with analyzing the activities associated with generating a
product or service for a certain market segment. Firstly, activities will be assigned to existing
members of a supply chain, if these relate to their core competencies. Secondly, activities
relating to standard products and services widely available on the market and with no
potential of differentiation in the eyes of the ultimate customer will be bought from outside the
supply chain. Thirdly, for all remaining activities, a partner to join the supply chain has to be
looked fro in the curse of a make-or-buy decision procedure.10
Selection criteria should not be based solely on costs, but on the future potential of a partner
to support the competitiveness of the supply chain. A suitable organizational culture and a
commitment to contribute to the aims of the supply chain will be of great importance. A
possible partner may bring in specialized know-how regarding a production process or
development competence. For global supply chains, additional criteria have to be considered
like taxes, exchange rates, etc.
Inter-organizational collaboration is a necessity for an effective supply chain. A supply

chain is regarded as a cross between pure market interaction and a hierarchy. It tries to
combine the best features of the two. Ideally, each entity within a supply chain will
concentrate on its core competencies and will be relieved from stringent decision procedures
and administrative routines attributed to a large hierarchy. Information and know-how is
shared openly among members. Competition among members along the supply chain is
substituted by the commitment towards improving competitiveness of the supply chain as a
whole. These features are assumed to enhance innovativeness and flexibility with respect to
taking up new market trends.11
Entities within a supply chain are legally independent but are economically highly dependent
on each other. The structure of a supply chain will only remain stable if there is a win-win
situation for each member. If this is not achieved in the short-term by usual price
mechanisms, compensation schemes must be found for the long-run.
Leadership is important in light of the ideal of self-organizing, poly-centric actors forming a

supply chain. Some decisions should be made for the supply chain as a whole, like the
cancellation of a partnership or the integration of a new partner. Similarly aligning strategies
among partners may require some form of leadership.12
10
See Schneider and Bauer (1994): p. 67 - 89
11
See Burns and Stalker (1961): p. 121
12
See Rockhold (1998): p. 12
In practice, leadership may be executed either by a focal company or a steering committee.

A focal company is a member having the largest power, the best know-how of products and
processes or has the greatest share of values created during order fulfilment. A steering
committee may be introduced, consisting of representatives of all members of the supply
chain, if there is no focal company existing in the supply chain.
2.1.2.3. Coordination
The second main component of SCM is the coordination of information, material and financial
flows.
Coordination comprises according to Stadtler three building blocks:13
1. Information technology
2. Process orientation
3. Advanced planning
Advances in information technology (IT) made it possible to process information at

different locations in the supply chain and thus enable the application of advanced planning.
Cheap and large storage devices allow to store and retrieve historical mass data, like e.g.
past sales. These Data Warehouses may now be used for a better analysis of the customer
habits as well as for more precise demand forecasts. Communication via electronic data
interchange (EDI) can be established through private and public nets, the most popular being
the Internet. Members within a supply chain can be informed instantaneously and cheaply.
As an example, a sudden breakdown of a production-line can be distributed to all members
of a supply chain concerned as a so-called alert.
Process orientation aims at coordinating all the activities involved in customer order
fulfilment in the most efficient way. It starts with an analysis of the existing supply chain, the
current allocation of activities to its members. Key performance indicators can reveal
weaknesses, bottlenecks and waste within a supply chain, especially at the interface
between its members. A comparison with best practices may support this effort. As a result,
some activities will be subject to improvement efforts, while some others may be reallocated.
Advanced planning incorporates long-term, mid-term and short-term planning levels.

Software products, so-called Advanced Planning Systems, are available to support planning
13
See Stadler (2003): p. 14
tasks. Advanced Planning Systems (APS) do not substitute but supplement existing
Enterprise Resource Planning (ERP) Systems. APS are taking over planning tasks while an
ERP system is required as a transaction and execution system for orders.14 APS are
intended to remedy the defects of ERP systems through a closer integration of planning
modules, adequate modelling of bottleneck capacities, a hierarchical planning concept and
the use of latest algorithmic developments of heuristics and optimizer functions. Since
planning is executed in a computer’s core storage, plans may be updated easily and
continuously (e.g. in case of demand changes). Advanced planning allows to realize
bottlenecks in advance and to make the best use of them. Alternative modes of operations
may be evaluated, thus reducing costs and improving profits. Different scenarios of future
developments can be planned for to identify a robust next step for the upcoming planning
interval. Furthermore, it is no longer necessary to provide lead-time estimates as an input for
planning. This should enable companies using APS to reduce planned lead-times drastically
compared with those resulting from an ERP system.
2.1.3. Origins of SCM

The term SCM has first been established by two consultants, namely Oliver and Weber, in
the US as early as 1982. Oliver and Weber declared SCM as a top management
responsibility because SCM has to balance conflicting functional objectives and requires an
integrated system strategy.15 In the late 80’s theories discovered the playground of SCM in
US where publications were made by Bothe, Christopher, Davis, Ellram / Cooper to name a
few. In Germany the term has been established in the mid nineties. The first book on Supply
Chain Management has been published by Werner as recently as 2000.
The idea of SCM by integrating company activities was born based on the value chain
concept of Michael Porter16. The root of the value chain concept might also explain the focus
on supply in the terms of Supply Chain Management. Werner postulates in his first German
publication that at least the term ‘demand’ has to be added to create a meaningful description
of the topic Supply Chain Management.17
Research into integration and coordination of functional units evolved already before the term
SCM in 1982.
14
See Drexl et alii (1994): p. 145
15
See Oliver, Weber (1992): p. 63-75
16
See Porter (1999): p. 12
17
See Werner (2001): p. 4
Four great contributions are the following:

1. The channel research of Alderson in 1957 stated the advantages of postponement
strategies in a supply chain. Postponement serves to reduce market risk, because the
product will stay in an undifferentiated state as long as possible allowing to better
cope with the unexpected market shifts.18
2. Bowersox showed in his study of collaboration and cooperation in 1969 that different
functional units within a company have individual objectives that might counteract the
overall efficiency.19
3. The bullwhip effect in production-distribution networks research of Forrester 1958
described the increasing amplification of orders occurring within a supply chain the
more one moves upstream even if end item demand is fairly stable.20
4. Hax and Meal have shown in 1975 how to build hierarchically coordinated, solvable
models which provide effective decision support for the different decision making
levels within a hierarchical organization.21
2.1.4. Objectives and Potential of Supply Chain Management

The global objectives of SCM can be defined based on the definition of SCM and its intra-
and inter-organizational concepts. For instance improving customer service, creation of
transparency along the supply chain network, global information availability or optimization of
complexity can be typical objectives of SCM. Although these objectives are providing a clear
strategic focus of an organization, they are not measurable and adequate for performing
operative controlling measures. For operative controlling purposes, SCM objectives need to
be differentiated into measurable objectives. Following this controlling based definition, the
main objective of Supply Chain Management is to gain cost, time and quality advantages.22
Cost advantages SCM are mainly targeted by reducing inventory costs. The transparency of
the consumer demand should help to reduce the Bullwhip effect. Through better coordination
of demand and supply based on the end-consumer level and an improved inventory control,
safety stocks can be reduced and capital is released for value-creating processes. Additional
18
See Alderson (1957)
19
See Bowersox (1969): p. 63-70
20
See Forrester (1958)
21
See Hax and Meal (1975)
22
See Busch et alii (2004): pp. 8
cost advantages can be created by a strategic optimization of the whole supply network. For
instance, global and hierarchical supply chain planning or synergies in production,
procurement and transports can bring significant cost reductions.
SCM generates time advantages in two functional areas. First, the time to market of new
products can be dramatically reduced by integrating suppliers and customers. Second, the
order fulfilment time can be improved by a process-oriented and hierarchically coordinated
planning in the area of procurement, production and logistics.
A further objective of SCM is achieving quality advantages. Especially trust among all
participants in the supply chain enables a more intense cooperation.
Figure 2-3 shows the weighted objectives of SCM within a survey of fortune 1000
companies.23
Cost
100%
80%
Time to market Profit
60%
40%
20%
Product quality 0% Market share
Customer satisfaction Market volume
Growth
Figure 2-3: Objectives of Supply Chain Management

[in percent of interviewed companies]
The above figures highlight the outstanding importance of Supply Chain Management as
means for cost and profit optimization and for improving customer service levels.
Figure 2-4 displays the perceived benefit of Supply Chain Management that justifies
investments of up to 10.4% in the consumer goods manufacturers and up to 29.4% in the
retailing industry of total investments.24
23
See Busch et alii (2003): p. 10
24
See Baumgarten (2002): p. 15-16
Demand planning
6
5
Production 4 Marketing
3
2
1
Procurement 0 Product development
Inventory management Warehousing
Transportation
25
Figure 2-4: Perceived benefit of investments in SCM
Figure 2-4 also shows that the main perceived benefit from SCM can be linked to two main
reasons, namely improvements in inventory management and Demand planning. In addition,
the overall optimization of the supply chain offers synergistic potentials in procurement,
production, distribution and Sales. These synergies can provoke, for instance in the retail
industry, a saving potential of 2.5%-3.5% of the turnover according to Philippson et alii.26
2.1.5. Types of Supply Chains

A supply chain can basically be classified by the product it supplies and be split into a
demand and supply side.
2.1.5.1. The Demand Side

Fisher divides products primarily on the basis of their demand pattern into functional or
innovative products. Functional products satisfy basic needs that do not change over time,
have a predictable and stable demand with low uncertainties. Innovative products are
characterized by short product life cycles, unpredictable demand and non basic needs that
lead to the purchase. 27
25
26
See Philippson et alii (1999): p. 5
27
See Fisher (1997): p. 105-116
Lee provides a comprehensive list of demand characteristics that lead to the classification of
functional and innovative products.28
functional innovative
low demand uncertainties high demand uncertainties
more predictable demand difficult to forecast
stable demand variable demand
long product life short selling season
low inventory cost high inventory cost
low profit margins high profit margins
low product variety high product variety
higher volume per SK low volumes per SKU
low stock out cost high stockout cost
low obsolescence high obsolescence
Table 2-1: Demand characteristics
The ability to produce large volumes of individually customized products and deliver them at
close to mass production prices is called mass customization.29 The concept of mass
customization is especially attractive for innovative products that are produced in large
quantities. This can ensure high profit margins while having low supply chain costs.
2.1.5.2. The Supply Side

On the supply side, Lee proposes a differentiation between a ‘stable’ and an ‘evolving’ supply
process. A stable supply process is characterized by a mature manufacturing technology and
a well established supply base which only changes insignificantly. In contrast, an evolving
supply process is one where the manufacturing technology is changing rapidly and under
continuous development and the supply base might be limited in size and experience. Table
2-2 summarizes the differences between a stable and evolving supply process. 30
28
See Lee (2002): p. 105-119
29
See Simchi-Levi et alii (2003): p. 116
30
See Lee (2002): p. 105-116
stable evolving
less breakdowns vulnerable to breakdowns
stable and higher yields variable and lower yields
less quality problems potential quality problems
more supply sources limited supply sources
reliable suppliers unreliable suppliers
less process changes more process changes
less capacity constraint potential capacity constraint
easier to changeover difficult to changeover
exible in exible
dependable lead time variable lead time
Table 2-2: Supply characteristics
In some supply chains, the process uncertainty which relates to the production of the product
itself is so important that it is quoted as the third uncertainty in a supply chain. In the above
overview, provided by Lee, this risk is subsumed under less breakdowns and less process
changes. 31
2.1.5.3. Supply chain strategies

Before defining a certain supply chain strategy, it is necessary to understand the sources of
the uncertainties and explore ways to reduce these uncertainties. According to Lee, there are
two types of uncertainty reduction strategies: demand and supply uncertainty reduction
strategies. Demand uncertainty reduction strategies could be to improve communication and
data sharing along the supply chain to avoid the negative effect of the bullwhip effect.32
Supply uncertainty reduction strategies aim at reducing or even avoiding the uncertainties
concerning supply. An example for that strategy could be the interdisciplinary use of
information in the product development phase or the use of supplier hubs at the producer’s
plant. However, not all uncertainties can be removed and therefore supply chains require
special strategies according to their demand and supply characteristics. Lee defines four
basic supply chain strategies which are visualized in figure 2-5. 33
31
See for instance Chopra / Meindl (2004): p. 29-43
32
The bullwhip effect describes the increasing amplification of orders occurring within a supply chain
the more one moves upstream. See for instance Simchi-Levi et alii (2003): p. 101-110
33
See Lee (2002): p. 105-116
DEMAND UNCERTAINTIES
Low High
(functional products) (innovative products)
SUPPLY UNCERTAINTIES
Low Efficient Responsive

(stable process) Supply chain Supply chain
Risk-hedging Agile
High Supply chain Supply chain
(evolving process)
Figure 2-5: Supply chain strategies for different product and process types
(1) Efficient supply chains utilize strategies aimed at creating cost efficiencies in the
supply chain. Cost efficiencies can be achieved by minimizing non value added
activities, deploying scale economics and optimization techniques and establishing
systems for demand, inventory and capacity exchange.
(2) Risk-Hedging supply chains utilize strategies that hedge the risks in the supply
chain by pooling and sharing resources in a supply chain so that the risks in supply
disruption can also be shared.
(3) Responsive supply chains utilize strategies aimed at being responsive and flexible
to the changing and diverse needs of the customers, such as mass customization and
build to order techniques.
(4) Agile supply chains utilize strategies that support being responsive and flexible to
customer needs, while the risk of supply shortages or disruptions are hedged by
pooling inventory or capacity resources. The applied strategies are similar to the ones
in the risk-hedging and responsive supply chains.
2.1.6. Inter-organizational concepts of SCM

Since the establishment of Supply Chain Management in the late eighties, several concepts
to synchronize the material and information flow emerged. These concepts vary significantly
from their conceptual core approaches and from the industry focus. The main process-
oriented concepts of SCM will be highlighted in this chapter and are summarized in Fig. 2-6.
JIT
QR QR
CR
VMI VMI
ECR
CPFR
Supplier Producer Retailer Customer
Supply Chain
Figure 2-6: Inter-organizational concepts of SCM
2.1.6.1. Just in time (JIT)

Just in time (JIT) is a concept that aims at synchronizing the material deliveries in the right
amount and quality with the point in time of the demand in production. The objective of JIT is
to minimize inventories of preliminary products. The concept first evolved in the car industry
when car manufacturers tried to optimize their supply chain upstream with their part and
component suppliers.
The fundamental key principle of JIT is the so called ‘pull principle’. The pull principle
prescribes that a source (producing entity) in a production system only delivers parts to a
sink (consuming entity), if the sink is requesting parts. Special cards, so called Kanbans, are
used as information carriers which identify the parts in the Kanban and which trigger an
order. The material flow of a source is activated in a Kanban control cycle by the steering
information of a sink. The activated source is delivering the demanded parts according to the
order.
The JIT concept is a decentralized approach which calls for a constant demand, a limited
product variety and it leads to a significant reduction of inventory, lead time and a
synchronized material flow.
2.1.6.2. Quick response (QR)

Quick Response is a delivery or distribution concept between producer and retailer or
between producer and supplier. Some authors define it as the further development of the JIT
concept for products with highly fluctuating demand.34 The purchase order of the downstream
organization is triggered in the quick response concept by its existing customer demand.
The Point of Sales data of the retailer is sent directly through EDI technology to the producer
who adjusts his production according to the downstream demand and delivers the retailer
with the requested goods.
The Quick Response concept focuses on the attainment of short production and delivery
times by minimized inventory. Quick Response is widely used in the textile and clothes
industry as well as in the consumer goods industry. These industries use the concept to
balance material and information flow of seasonal goods with high variants, short product life
cycles, long lead times and fluctuating demands. The Quick Response concept ensures the
demand oriented delivery of goods to the receiving storage location of the downstream
partner, who is in charge of the inventory. Inventory and capital cost reduction as well as
flexibility gains of changing customer demands are the main benefits of the concept.
2.1.6.3. Continuous replenishment (CR)

In the Continuous Replenishment concept the producer is in charge of the inventory in the
receiving storage location of the retailer. The replenishment of goods is based on the point of
sales data of the retailer which ensures a constant and standardized way of delivering goods.
The main progress step in the Continuous Replenishment concept in relation to Quick
Response concept is that the producer is managing the retailer’s inventory and that inventory
and Sales data of the retailer is shared among both partners.35
2.1.6.4. Vendor Managed Inventory (VMI)

In the Vendor Managed Inventory concept the inventory of the customer (producer or
retailer), which is located at the customer site, is managed by the supplier. The supplier takes
over the responsibility of managing the inventory which allows him an optimized
replenishment of the storage location in terms of replenishment quantity and time according
to his own optimized resources. The replenishment of goods is based on concrete material
flow data of the storage location and not on daily sales figures of the customer. Therefore,
34
See Christopher (1998): p. 192
35
See Werner (2001): p. 55-57
the customer and the supplier are agreeing on minimum and maximum stock levels in the
storage location. All other parameters like frequency and amount of the replenishment run
can be freely defined by the supplier. VMI calls for a high degree of trust between the supply
chain partners and the correct factual treatment of shared planning data.36
2.1.6.5. Efficient consumer response (ECR)

The concept of Efficient Consumer Response was developed in 1992 by the American Food
Marketing Institute and is based on the combination of logistical concepts and marketing
oriented approaches. The concept is mainly applied in the food industry and focuses on the
integration of the consumer in the supply chain network.
The key element of the concept is the integration of the information flow between producer
and retailer. The exchange of information within a standardized communication platform (e.g.
EDI) enables both partners a coordinated material flow and collaborative marketing activities.
The logistical components of the ECR concept are Continuous Replenishment (CR), Cross
Docking (CD) and Synchronized Production (SP). Cross Docking is a new approach for
structuring the picking process. The producer is in this concept not directly shipping to the
retailer, but to a cross docking station. There, full pallets from the producer are picked
dependent on the target location and shipped directly to the retailer store. The advantages
coming from the CD approach are reduced transportation costs because of full truck loads to
and from the cross docking station and the transmission of aggregated data per CD station
and not per retail store. Synchronized Production (SP) is related to the fact that the
production plan of the producer is synchronized with the real consumer demand and
therefore inefficiencies of a pure forecast driven production can be avoided.37
The marketing components of ECR ensure a cooperative optimization of the product
assortment and consist of Efficient Production Introduction (EPI), Efficient Store Assortment
(ESA) and Efficient Promotion (EP). EPI includes the efficient development and introduction
of new products. In the product development phase producer and retailer are working
together to define a consumer oriented product design that fits’ to each others core
competencies to enable a competitive development time and a successful market launch.
The ESA concept focuses on the harmonization of articles in the retailer stores and on the
optimization of assortments to increase a higher efficiency. The assortment consists thereby
of mass articles with high turnover relevance, profit articles with high profit contribution and
strategy articles for winning a new consumer. EP enables the coordination of promotional
36
37
See Seifert (2003): p. 3-5
activities between supply chain partners which positively contributes to inventory synergies
and lower costs of the total logistical system.38
2.1.6.6. Collaborative Planning, Forecasting and Replenishment (CPFR)

The newest of all concepts described in this chapter is CPFR. This concept has its roots in
the famous pilot project between the producer Procter and Gamble and the US retailer chain
Wal-Mart who decided to exchange Sales forecast data via a standardized internet platform.
As early as 1998 a CPFR committee was launched and the first standardized CPFR
voluntary guidelines including a standardized process model were issued.39
CPFR is based on the described concepts of JIT, QR, CR, VMI and ECR and aims at
eliminating their weaknesses by further integration and enhancement of the concepts. The
main benefit from CPFR is a collaboration of all partners in a supply chain network. This
includes information sharing throughout the network to provide a Sales forecast based on the
real consumer demand, proactive issue solving, improved capacity usage, lower pipeline
inventory and high customer service levels.
2.1.7. The Supply Chain Operations Reference Model

The Supply Chain Operations Reference (SCOR) model is a tool for representing, analysing
and configuring supply chains. The SCOR model was developed by the Supply Chain
Council (SCC), formed in 1996 as an independent non-profit-organisation by AMR Research
and the consulting firm Pittiglio Rabin Todd & Mc Grath (PRTM) as well as sixty nine of the
world’s leading companies (Compaq, Procter & Gamble, 3M …). Its mission today is to
perpetuate the use of the SCOR model through technical development, research, education
and conference events. By the end of 2001, the council’s technical community had released
five subsequent versions of SCOR, providing updates to process elements, metrics,
practices and technology. According to Bolstorff and Rosenbaum, the council has attracted
about 750 members worldwide.40
The SCOR-model consists of a system of process definitions that are used to standardize
processes relevant for SCM. The council recommends modelling a supply chain from the
suppliers’ suppliers to the customers’ customers. Processes such as customer interactions
38
See Seifert (2003): p. 11-26
39
See ebenda (2003): p. 30
40
See Bolstorff / Rosenbaum (2003): p. 2
(e.g. order entries through paid invoice …), physical material transactions (e.g. supplies,
products …) market interactions (e.g. demand fulfilment …) and post-delivery customer
service (as of SCOR 4.0) are supported. Sales and marketing as well as product
development and research are not addressed within the SCOR model. 41
The SCOR model differentiates between five standard processes in SCM which can be
defined as the following:42
 Plan: Processes that balance aggregate demand and supply to develop a course of
action which best meets sourcing, production and delivery requirements
 Source: Processes that procure goods and services to meet planned or actual
demand.
 Make: Processes that transform product to a finished state to meet planned or actual
demand.
 Deliver: Processes that provide finished goods and services to meet planned or
actual demand, typically including order management, transportation management
and distribution management.
 Return: Processes associated with returning or receiving returned products for any
reason. These processes extend into post-delivery customer support.
The standard processes are divided into three hierarchical levels: 5 process types, 22
process categories and process elements. Level One defines the number of supply chains
and how their performances are measured. It consists of five elementary process types:
source, make, deliver and return, coordinated by the process type plan. Level Two defines
the configuration of planning, execution and enabling processes in material flow, using
standard categories like make-to-stock, make-to-order and engineer-to-order. The five
process types of level one are divided into 22 process categories, including five enable
process categories for each process type. Level Three defines the process elements used to
transact sales orders, purchase orders, work orders, return authorizations, replenishment
and forecast. Detailed metrics and best practices for these elements are part of the SCOR
model. Furthermore, most elements provide an input stream (information and material) and /
or an output stream. The process elements are decomposed on the fourth level. Companies
implement their specific management practices at this level. Figure 2-7 provides an overview
of the levels and the schematics of the SCOR model.43
41
See Meyr et alii (2003): p. 46
42
See Bothe / Nissen (2003): p. 29 Formatted: English (U.K.)
43
See Bolstorff / Rosenbaum (2003): p. 2-6
44
Figure 2-7: Levels and schematic of the SCOR model
The SCOR model supports performance measurement on each level. Level One metrics
provide an overview of the supply chain to evaluate management. Level Two and Three
include more specific and detailed metrics corresponding to process categories and
elements. The metrics are systematically divided into the five categories reliability, flexibility,
responsiveness, cost and assets. Reliability as well as flexibility and responsiveness are
external (customer driven), whereas cost and assets are internal points of view.45
44
See Supply Chain Council (2004)
45
See Meyr et alii (2003): p. 50-53
2.2. Supply Chain Analysis
2.2.1. Analysis of Supply Chain Typology

The supply chain typology is a tool to analyze, visualize and discuss the structure of a supply
chain by a set of attributes. It enables the formulation of structural changes and strategies to
improve the supply chain performance.46
The typology categorizes different supply chain network according to functional attributes
describing the focal organization and structural attributes analyzing the relations among its
entities.
2.2.1.1. Functional attributes

Functional attributes of a supply chain entity can be grouped into four categories:
1. Procurement type
2. Production type
3. Distribution type
4. Sales type
Category Functional attributes

Procurement type Number and type of products procured
Sourcing type
Flexibility of suppliers
Supplier lead time and reliability
Materials‘ life cycle
Production type Organization of the production process
Repetition of operations
Changeover characteristics
Bottlenecks in production
Woring time flexibility
Distribution type Distribution structure
Pattern of delivery
Deployment of transportation means
Loading restrictions
Sales type Relations to customers
Availability of future demands
Demand curve
Products' life cycle
Number of product types
Bill-of-materials (BOM)
47
Table 2-3: Functional attributes of a supply chain typology
46
See Rohde (2004): p. 54
1. Procurement type: relates to the number and type of products to be procured, the latter
one ranging from standard products to highly specific products requiring special product
know-how or production process know-how. The following attribute depicts the sourcing type,
better know by its properties: single sourcing, double sourcing and multiple sourcing.
Sourcing contracts with suppliers are usually valid in the medium-term (e.g. the product’s life
cycle). The flexibility of suppliers with respect to the amounts to be supplied may be
important. Amounts may either be fixed; have a lower or upper bound due to given contracts
with suppliers or may be freely available. Lead time and reliability of suppliers are closely
related. The lead time of a supplier defines the average time interval between ordering a
specific material and its arrival. The shorter lead times are, the more reliable the promised
arrival dates are. The life cycles of components or materials have direct impact on the risk of
obsolescence of inventories. The shorter the life cycles are, the more often one has to care
about substituting old materials with newer ones.
2. Production type: is formed by many attributes. The two most important attributes are the
organization of the production process and the repetition of operations. Process organization
and flow lines represent well-know properties of the production process. Process
organization requires that all resources capable of performing a special task are located in
the same are. Usually a product has to pass through several shops until it is finished. A flow
shop exists if all products pass the shops in the same order. A flow line exists in case
resources are arranged next to each other corresponding to the sequence of operations
required by the products to be manufactured on it. Usually capacities within a flow line are
synchronized and intermediate inventories are not possible.
The attribute repetition of operations has three broad properties, mass production, batch
production and making one-of-a-kind products. In mass production the same product is
generated constantly over a long period of time. In batch production several units of a given
operation are grouped together to form a batch and are executed one after the other. Several
batches are loaded on a resource sequentially. At the start of a batch a setup is required,
incurring some setup costs or setup time. When making one-of-a-kind products which are
specific to a customer order, special care is needed to schedule many operations for a single
order.48
The influence of setup costs and setup times is specified by the attribute changeover
characteristics. If setup costs or times even vary with respect to sequence of the batches,
sequence dependent changeover costs are given. If production capacity is a serious
47
48
See Silver et alii (1998): pp. 36
problem, the attribute bottleneck in production tries to characterize the reason. In a multi-
stage production system, the bottleneck machines may be stationary and known, or shifting
depending on the mix of the demand. One way to increase capacity is to provide more
working time. The capability and lead times to adapt working time to changing demand
pattern are described by the attribute working time flexibility.49
3. Distribution type: consists of the distribution structure, the pattern of delivery, the
deployment of transportation means, and possible loading restrictions. The distribution
structure describes the network of links between the factory and the customers. A one-stage
distribution structure exists if there are only direct links between a factory and its customers.
In case the distribution network has one intermediate layer (e.g. central warehouse or
regional warehouse) a two stage distribution structure is given.
The pattern of delivery is either cyclic or dynamic. In a cyclic pattern, goods are transported
at fixed intervals of time. A dynamic pattern is given if delivery is made depending on
demand for transportation. As regards the deployment of transportations means one can
distinguish the deployment of vehicles on routes and a given transportation capacity on
individual links in the distribution network. Loading restrictions like the requirement of a full
truck load may form a further requirement. 50
4. Sales type: depends largely on the relation to its customers. One extreme may be a
downstream entity in the supply chain while the other extreme may be a pure market relation
with many competitors. This attribute is closely related to the availability of future demands.
These may be known or have to be forecasted. The existence of reliable demand forecast is
best described by the length of the forecast horizon. Besides the general availability of
demand information, the shape of the demand curve is of interest. Demand for a specific
product may, for example, be quite static, sporadic, or seasonal.
The typical length and the current stage of a product’s life cycle significantly influences
appropriate marketing, production planning and financial strategies. As regards the products
to be sold one should discriminate the number of product types offered and the degree of
customisation. The latter one may range from standard products to highly specific products.
In the light of mass customization some way in the middle becomes more and more
important: constituting customer-specific products from a variety of product options and
alternatives being offered. The attribute bill-of-materials (BOM) shows the way that raw
49
See Schneeweiss (1999): pp. 10
50
materials and components are composed or decomposed in order to generate the final
products.51
2.2.1.2. Structural attributes
Structural attributes of a supply chain are grouped according to table 2-4 into two categories:
1. Topography of a supply chain
2. Integration and coordination
Category Structural attributes

Topography of a supply chain Network structure
Degree of globalization
Location of decoupling point
Major constraints
Integration and coordination Legal position
Balance of power
Direction of coordination
Type of information exchanged
52
Table 2-4: Structural attributes of a supply chain typology
1. Topography of a supply chain: describes the material flows from upstream to

downstream entities which are serial, convergent, divergent, or a mixture of the three. The
degree of globalization ranges from supply chains operating in a singly country to those with
entities in several continents. Global supply chains have to take into account tariffs and
impediments to trade as well as exchange rates varying over time. The decoupling point53
may differ between product groups, varying from an engineer-to-order over a make-to-order
to a make-to-stock strategy. The attribute major constraints gives an impression what the
main bottlenecks of the supply chain as a whole are. These may, for example, be limited
production capabilities of some entities or the limited availability of some critical material.
51
See Meyr et alii (2004): pp. 58
52
53
The decoupling point is the first stage or location in the material flow where a further processing step
or a change in the location of a product will only be executed with respect to a customer order.
2. Integration and coordination: concerns the attributes legal position, balance of power,
direction of coordination and type of information exchanged.
The legal separation of entities, a so-called inter-organizational supply chain, makes the
central coordination of flows much more difficult than an internal supply chain. Also the
balance of power within an inter-organization supply chain plays a vital role for decision
making. A dominant member in the supply chain can act as a focal firm.
As regards information flows, several attributes may be considered. The direction of
coordination defines the vertical and horizontal degree to which information is shared in a
supply chain network. Vertical information flows comply with hierarchical planning. Horizontal
flows between two entities ensure information sharing of local information (e.g. to overcome
the effects of a breakdown of a machine). Also the type of information exchange between
members influences planning. For example some entities may not reveal their manufacturing
costs but are willing to provide information about available capacities.
2.2.2. Inventory Analysis

The often claimed citation ‘inventories hide faults’ suggests avoiding any inventory in a
supply chain. This way of thinking is attributed to the Just-in-time-philosophy, which aligns
the processes in the supply chain such that almost no inventories are necessary. This is only
possible in some specific industries or certain sections of a supply chain and for selected
items.
In all other cases inventories are necessary and therefore need to be managed in an efficient
way. Inventories in supply chains are always the result of inflow and outflow processes
(transport, production, etc.). This means that the isolated minimization of inventories is not a
reasonable objective of SCM, instead they have to be managed together with the
corresponding supply chain processes. Inventories cause costs, but also provide benefits, in
particular reduction of costs of the inflow and outflow processes. Thus, the problem is to find
the right trade-off between the costs for holding inventories and the benefits.54
Inventory decomposes into different components according to the motives for holding
inventory. The most important components are highlighted in table 2-5 and will be described
in detail in the following paragraphs. The distinction of stock components is necessary for the
identification of benefits, the identification of determinants of the inventory level and setting
target inventory levels (e.g. in an APS solution).
54
See Sürie and Wagner (2004): pp. 36
Stock component Determinants Benefits
Production lot-sizing stock Setup frequency Reduced setup time and cost
Transportation lot-sizing
Shipment quantity Reduced transportation costs
stock
Inventory in transit Transportation time Reduced transportation costs
Reduced costs for overtime and for
Seasonal stock Demand peaks, tight capacity
investments
Lead time, producton planning Increased utilization, reduced
Work-in-process
and control investments in additional capacity
Demand and lead time Increased service level, reduced costs
Safety stock
uncertainty, process uncertainties for emergency shipments and lost
55
Table 2-5: Stock components, determinants, and benefits
Production lot-sizing stock

The production lot-sizing stock or also called cycle stock is used to cover the demand
between two consecutive production runs of the same product. The role of cycle stock is to
reduce the costs for setting up and cleaning the production facility (setup or changeover
costs). Finding the right trade-off between fixed setup costs and inventory costs is usually a
critical task, as this decision may also depend on the lot-size of other products.56
For the inventory analysis of final items in a make-to-stock environment it is sufficient to
consider a cyclic production pattern with average lot-sizes qp over a time interval that covers
several production cycles. Then, the inventory level follows the so-called ‘saw-tooth’ pattern,
which is shown in Figure 2-8. The average cycle stock CS is half the average lot-size: CS=qp
/2. The average lot-size can be calculated from the total number of production setups su and
the total demand dp during the analysis interval: qp = dp / su.
55
See Sürie and Wager (2004): p. 38
56
See Sürie and Wagner (2004): p. 38
Inventory
qp
CS = qp/2
Time
Figure 2-8: Stock components, determinants, and benefits
Transportation lot-sizing stock

The same principle of reducing the amount of fixed costs per lot applies to transportation
links. Each truck causes some amount of fixed costs which arise for a transport from
warehouse A to warehouse B. If this truck is only loaded partially, then the cost per unit
shipped is higher than for a full truckload. Therefore, it is economical to batch transportation
quantities up to a full load and to ship them together. Then, one shipment has to cover the
demand until the next shipment arrives at the destination. The decision on the right
transportation lot-size usually has to take into account the dependencies with other products’
shipments on the same link and the capacity of the transport unit used.57
For the inventory analysis the average transportation quantity qt can be derived from the
number of shipments s during the analysis interval and the total demand dt for the product at
the destination warehouse by qt = dt / s. In contrast to the production lot-sizing stock, the
average transportation lot-sizing stock equals, not half, but the whole transportation quantity
qt. Therefore, the average stock level at each warehouse is one half of the transportation lot-
size and, the transportation lot-sizing stock sums up to TLS = qt.
Inventory in transit
While the transportation lot-sizing stock is held at the start and end stock points of a
transportation link, there exists also inventory that is currently transported in-between. This
57
See Sürie and Wagner (2004): p. 39
stock component only depends on the transportation time and the demand because on
average the inventory ‘held on the trucks’ equals the demand which occurs during the
transportation time. The inventory in transit is independent of the transportation frequency
and the therefore also independent of the transportation lot-size. The inventory in transit can
be reduced at the expense of increasing transportation costs, if the transportation time is
reduced by faster transportation mode (e.g. plane instead of truck transport).58
The average inventory in transit TI is calculated by multiplying the average transportation
time by the average demand. For instance, if the transportation time is two days and the
average amount to be transported is 50 pieces per day, then TI is equal to 100 pieces.
Seasonal stock or pre-built stock

In seasonal industries (e.g. consumer packaged goods) inventories are held to buffer future
demand peaks which exceed the production capabilities. There is a trade-off between the
level of regular capacity, additional overtime capacity and seasonal stock. The seasonal
stock can help to reduce lost sales, costs for working overtime or opportunity costs for
unused machines and technical equipment. In contrast to other stock components which are
defined by SKU, the seasonal stock is common for a group of items sharing the same tight
capacity. Figure 2-9 shows how the total amount of seasonal inventory can be calculated
from the capacity profile of a complete seasonal cycle. In the example the seasonal stock is
built up in periods 3 and 4 and used for demand fulfilment in periods 6 and 7. The total
seasonal stock is calculated using the assumption that all products are pre-produced in the
same quantity as they are demanded in the bottleneck periods. In practice, it is
recommended to pre-build those products, which create only small holding costs and which
can be forecasted with high certainty.59
140 60
120 50
100 Capacity
40
80 Pre-production
30 Seasonal Stock
60 Demand
20
40
20 10
0 0
Nov
Jan
Jun
Jul
Aug
May
Apr
Feb
Sep
Oct
Mar
Dec
May
Mar
Apr
Nov
Aug
Jul
Oct
Dec
Jan
Feb
Jun
Sep
Figure 2-9: Example for the determination of seasonal stock
58
See Chopra and Meindl (2004): pp. 252
59
Work-in-process inventory (WIP)

The WIP inventory can be found in every supply chain, because the production process
takes some time during which the raw materials and components are transformed to finished
products. In a multi-stage production process the production lead time consists of the actual
processing times on the machines and additional waiting times of the products between the
operations. The benefits of the WIP are that it prevents bottleneck machines from starving for
material and maintains a high utilization of the resources. Thus, WIP may avoid investments
in additional capacities. The waiting time part of production lead time is also influenced by the
production planning and control system which should schedule the orders in a way that short
lead times are ensured. Therefore, it is possible to reduce the WIP by making effective use of
an APS.60
According to Little’s law the average production lead time LT is proportional to the WIP level.
If dt is the average demand per unit of time, then WIP = LT x dt.61
Safety stock
Safety stock has to protect against uncertainty which may arise from internal processes like
production lead time, from unknown customer demand and from uncertain supplier lead
times. This implies that the main drivers for the safety stock level are production and
transport disruptions, forecasting errors, and lead time variations. The benefit of safety stock
is that it allows quick customer service and avoids lost sales, emergency shipments, and the
loss of goodwill. Furthermore, safety stock for raw materials enables smoother flow of goods
in the production process and avoids disruptions due to stock-outs at the raw material level.
Besides the uncertainty mentioned above, the main driver for safety stock is the length of the
lead time (transportation, production or procurement), which is necessary to replenish the
stock.62
60
61
62
2.2.3. Performance measurement and analysis

Companies of a supply chain may focus on improving company-specific or function-specific
performances measures. In order to improve the performance of an entire supply chain, both
approaches may be inadequate. E.g., if a company of a supply chain optimizes the capacity
utilization due to high investment costs, it may overlook that this can lead to high queuing or
waiting times. This is due to the trade-off between capacity utilization and responsiveness.63
Due to the differences in the goals and strategies of supply chains, different measures for
different types of supply chains are necessary to determine the value and competitiveness of
a supply chain. Generally speaking, for efficient and risk-hedging supply chains, measures
such as plant capacity utilization and inventory turns of the whole supply chains may be
adequate. For responsive and agile supply chains, a measure, such as the product
availability, may be more appropriate.
However, to be sure that supply chains perform well, measures that improve the entire
supply chain are necessary. Hausman proposes and describes supply chain performance
measures, which he calls ”metrics”, that support global supply chain performance
improvements, i.e., improvements that cross company boundaries and improve the
performance of the entire supply chain.64 Hausman states that a supply chain should have at
least one performance measure on each of the following three dimensions in addition to
quality (Hausman regards quality as given in modern supply chain management thinking):
service metrics, assets (inventory metrics), and speed metrics. Figure 2-10 depicts these
three dimensions.
Service
Assets Speed
Figure 2-10: Dimensions of performance metrics of supply chains
63
See Hausman (2003): pp. 33
64
See Hausman (2003): p. 64
Service Metrics: service metrics measure how well a supply chain serves its customers.
Since it is generally difficult to quantify costs of stock-outs or late deliveries, targets are set
on customer levels.
Customer service metrics are different for the two different environments build-to-stock and
build-to-order. Build-to-stock items are items that should be immediately available for
purchase for the customer (e.g., office supply products), while for build-to-order the customer
is willing to wait for his order fulfilment a certain time.
Some common service metrics for build-to-stock environments are:

• line item fill rate is the percentage of ”lines” of all customer orders that are filled
immediately.
• complete order fill rate is the percentage of which all lines of an order have been filled
(the distinction between line item or complete order fill rate is important in case of a
large number of lines per order).
• delivery process on time is the percentage of the delivery processes that are on time.
This metric is included because it is important for the (safety and cycle) inventory and
subsequently for the cost of a product.
• costs of back-ordered/lost sales are the costs of back-ordered and lost sales in a period.
• number of back orders are the number of back orders in a period.
• aging of back orders is the time it takes to fill a back order.
Some common service metrics for build-to-order environments are:

• quoted customer response time (also standard lead time) is the time a customer is told
to wait for order fulfilment.
• percentage on-time completion is the percentage of orders completed on time.
• delivery process on time is the percentage of the delivery processes that are on time.
• costs of late orders are the costs that arise from late orders.
• number of late orders are the number of late orders in a period.
• aging of late orders is the time it takes to complete an order that is late.
Assets (Inventory Metrics): these metrics measure the inventory involvement throughout
the supply chain.
There are two common metrics:

• monetary value of the supply chain inventory is measured in a currency and relates to
the value of inventory as an asset on the firm’s balance sheet.
• time supply or inventory turns. Time supply accounts for the time the supply chain can
surf and relates to the inventory flow. Inventory turns are the cost of goods sold per
inventory value.
From a supply chain perspective, it is important to see these metrics in combination with the
achieved service level the supply chain provides.
In a manufacturing setting, inventory in supply chains is disaggregated according to the type

of inventory, e.g., raw material, work-in-process, and finished goods. For analysis of the
supply chain, these types should be seen as aggregated to avoid (costly) shifts between
types at the end of an accounting period.
Speed Metrics: these are metrics related to timeliness, speed, responsiveness, and
flexibility.
• cycle (flow) time at a node is the total time it takes to fulfil an order.
• supply chain cycle time is the total time it would take to fulfil a new order if all upstream
and in-house inventory levels were zero.
• cash conversion cycle is the duration between paying for raw material or components and
getting paid by the customers. An estimate of the cash flow conversion cycle is the sum
of inventory and accounts receivable minus the accounts payable (measured in days of
supply).
• ”upside” flexibility is a measure of flexibility for demand that is higher than forecasted,
which is particularly interesting in high-tech industry. ”Upside” flexibility refers to the
requirement for a supplier to be prepared to deliver an additional percentage within
specified time windows.
• quoted customer response time (in build-to-order environment) already mentioned above
2.3. Supply chain planning
2.3.1. Planning methods and principles

Planning supports decision making by anticipating a future development, identifying
alternatives of future activities and selecting the best plan according to defined objectives.
Domschke and Scholl subdivide planning into several phases:65
1. Recognition and analysis of a decision problem
2. Definition of objectives
3. Forecasting of future developments
4. Identification and evaluation of feasible activities
5. Selection of good solutions
As supply chain networks are complex, not every detail has to be considered in a plan and
during a planning process. Therefore it is necessary to abstract from reality and use a
simplified copy, a so called model, for the structure of a plan. For planning purposes a model
is always an optimization model which contains an objective function that has to be
optimized. Such an objective function could, for instance, be the optimization of capacity
usage in certain locations to minimize asset costs.
Plans are in reality always linked to a planning horizon. When reaching the end of the
planning horizon, at the latest, a new plan has to be made that reflects the current status of
the supply chain towards the end of the planning horizon. Planning tasks are usually
classified according to the length of the planning horizon and the importance of the
decision.66 Anthony in 1965 first classified into three different planning levels:67
 Long-term planning: covers typically all planning activities that are strategic
decisions and create the presupposition for the development of a supply chain in the
future. These decisions concern the design and structure of a supply chain and have
long-term effects, noticeable for several years. A typical long-term planning activity for
a cigarette manufacturer could be to define which production centre will be loaded
with which volume and with which product assortment for the next 3 to 5 years.
65
See Domschke and Scholl (2003), p. 30
66
See Fleischmann et alii (2003): p. 71
67
See Anthony (1965)
 Mid-term planning: determines an outline of the regular operations, in particular

rough quantities and times for the flows and resources in the given supply chain. The
typical planning horizon is 12 months, enabling the consideration of seasonal
developments. For a cigarette manufacturer the mid-term planning process delivers a
production plan for each single production centre on a product level and on a monthly
basis.
 Short-term planning: has to specify all activities as detailed instructions for
immediate execution and control. Therefore, short term planning models require the
highest degree of detail and accuracy. The planning horizon is between one day and
3 months. The short term plan of a cigarette manufacturer contains the information
what product volume has to be produced on which machine at what time.
As the future is hardly predictable, a plan will always deviate from the reality. As a result,
plans and their deviation have to be controlled and revised in case the discrepancy is too
large. Planning on a rolling horizon basis is an implementation of this plan-control-revision
interaction. The planning horizon (e.g. one year) is divided into periods (e.g. months). At the
beginning of January a plan is made that covers 12 single months from January until
December. However, only the first period, the so-called frozen period, is actually put into
practice. At the beginning of the second period (February), a new plan is created that
considers the actual development of the first period and updates the forecast for the next 12
months. The new planning horizon overlaps and updates the previous one, so that planning
information becomes more accurate in the shorter time horizon and adds a new month at the
end of the planning cycle.68 Figure 2-11 shows an example of a 12-months-rolling forecast.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
100 80 90 70 60 70 85 90 100 100 110 120
Frozen
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
105 90 80 70 70 80 80 80 100 110 110 130
Frozen + 1 planning month
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
105 90 80 70 70 80 80 80 100 110 110 130
Frozen + 1 planning month
Figure 2-11: Rolling horizon planning
68
A more efficient way of updating the plan is event-oriented-planning. This planning

philosophy includes the idea that a plan is not updated at each time interval but in case of an
important event. Such event may be the increase of a Sales forecast or the reduction of
factory capacity due to a machine breakdown. This more sophisticated planning procedure
calls for a continuous update of planning data, at least daily, to identify the best planning
scenario. This is the case for an Advanced Planning System (APS).69
Optimal supply chain planning is neither possible in form of a monolithic system that
performs all planning tasks simultaneously nor by performing the various planning tasks
successively. Hierarchical planning is a compromise between practicability and the
consideration of the interdependencies between the planning tasks. The main idea of
hierarchical planning is to break down the total planning task into planning modules assigned
to different organisational levels where each level covers the complete supply chain but the
tasks differ from level to level. On the highest level there is only one module, the
development of an enterprise wide, long term but rough plan. The lower the levels are, the
more restricted are the supply chain sections covered by one plan, the shorter is the horizon
and the more detailed is the plan. Plans for different supply chain sections on one level are
coordinated by a more comprehensive plan on the next upper level in the hierarchical
structure.70
Disaggregation
long-term
Aggregation
mid-term
short-term
information flows
71
Figure 2-12: Hierarchy of planning tasks
69
See ebenda (2003): p. 73
70
71
Meyr (2004): p. 41
The increasing degree of detail is achieved by disaggregating data and results when going
down in the hierarchy. Aggregation concerns products: aggregated into groups, resources:
aggregated into capacity groups and time: aggregated into longer periods. The modules are
linked by vertical and horizontal information flows. The result of a higher planning module
sets restrictions for the subordinate plans, and the results of the latter yield feedback
information on performances (e.g. utilization) to the higher level.72
APS try to ‘computerize’ planning tasks. This might incur some problems for many human
planners because they may be afraid of being substituted by machines. This fear is based
upon three major advantages of APS: they visualize information, reduce planning time, and
allow an easy application of optimization methods. However, modelling is always a picture of
reality and therefore human knowledge and experience is required to bridge the gap between
model and reality. Planning systems remain decision support systems and even in event-
oriented planning modes it is the human planner who decides whether a plan has to be
revised.73
2.3.2. Planning tasks along the SC network

The supply chain network can be divided into internal supply chains of each single entity in
the network, each consisting of four main supply chain processes with substantially different
planning tasks. Procurement includes all sub processes which provide resources (e.g.
materials) necessary for the production process. Limited capacity of resources is the input to
the production process and its sub processes. Distribution is transporting the products
between the production centre and the customers, either retailer or production plants
processing the products. All the above described logistical processes are driven by demand
forecasts and order figures provided by the Sales process. 74
The supply chain planning matrix classifies the planning tasks in two dimensions: ‘planning
horizon’ and ‘supply chain process’. Figure 2-13 shows the typical tasks which occur in most
supply chain types, but with various factors due to the particular businesses. The supply
chain planning matrix can also be used to position the software modules of most APS
vendors. (See chapter 3)
72
73
See Schneeweiss (1999): p. 32
74
See Rohde et alii (2003): p. 76
75
Figure 2-13: The supply chain planning matrix
2.3.2.1. Long-term planning tasks76
Product Programme and Strategic Sales Planning:

The firm’s decision about the product programme should be based on a long-range forecast
which shows the possible sales of the whole product range. Such a forecast includes
dependencies between existing product lines and future product developments, and also the
potential of new sales regions. Long range forecasts consider information on product life-
cycles and economical, political, and competitive factors. The products are typically
aggregated into product groups or product families sharing common characteristics for
production, logistics and sales. Marginal profits of potential sales and fixed costs for assets
have to be considered in the objective function of the product programme optimization
problem.
Physical Distribution Structure:

The physical structure comprises the number and sizes of warehouses and cross docking
points including the necessary transportation links. Typical factors for the decision are the
product programme, the sales forecast, the planned production capacity in each plant and
75
See Meyr (2004): p. 73
76
See Fleischmann et alii (2003): p. 76-79
the underlying cost structure. The objective is to minimize the long-term costs for
transportation, inventory, handling and investments in assets.
Materials Programme and Supplier Selection:

The materials programme is in direct correlation to the product programme because the final
product consists of some predefined components and raw materials. Sometimes different
materials can be used for the same purpose or the same material is used according to mass
customization in many products. In order to select the right material price, quality and
availability must be considered which are the parameters for a directly linked supplier rating.
Cooperations:
Whole supply chain networks and not just companies are competing against each other.
Therefore planning and evaluation of collaboration concepts gain importance and lead to
further reduction of costs (e.g. procurement or logistics cost reduction by strategic
cooperation within the supply chain). Concepts delivering significant improvements in the
supply chain performance through cooperation are CPFR, VMI or JIT. (See also chapter 2.5).
2.3.2.2. Mid-term planning tasks77
Mid-term Sales Planning:

The main task in mid-term sales planning is forecasting the potential sales for product groups
in specific regions per time bucket (weeks or months) for a defined time range typically 12
months. As the forecasts are input for master production planning, the products are grouped
according to the production characteristics. The mid-term sales plan also contains marketing
events and promotions on sales. The forecast quality directly affects the level of safety stocks
for finished products in the network and therefore the objective of the sales planning is to
minimize the forecast error.
Distribution Planning:
Mid-term distribution planning consists of the planning of transports and determination of the
necessary stock levels. A feasible plan fulfils the estimated demand and considers the
available transportation and storage capacities while minimizing the relevant costs. Inventory
77
holding and transportation costs are elements of the objective function. The planning horizon
consists of weekly or monthly buckets including aggregated capacities.
Master production scheduling and capacity planning:

The result of this planning task shows how to use the available production capacity of one or
more facilities in a cost efficient manner. Master production scheduling (MPS) deals with
seasonal fluctuations of demand and calculates the necessary amounts of production
resources including the amount of overtime. The plan is typically based on families of
products and weekly or monthly time buckets and does not consider single production steps
of the production process. The objective is to balance the cost of capacity against the cost of
inventories including seasonal effects and the cost of transportation between the locations of
the supply network.
Personnel planning:
Personnel planning calculates the necessary personnel requirements involved in each
production stage to fulfil a certain production schedule. This planning step includes the
specific know-how of personnel groups and their availability according to the labour
contracts. Often the planning includes additional part time labour forces who are employed
on a short term basis in order to have flexible capacity to cover seasonal fluctuations.
Material requirements planning:

Material requirements planning (MRP) translates the primary demand into a secondary
demand to support lot-sizing decisions for every item in the bill-of-material (BOM). The MRP
concept is suitable for A-class components, whereas for C-class items stochastic inventory
systems are adequate. Mid-term planning ensures the availability of materials by considering
economic order quantities and safety stock levels for an agreed service level for production.
2.3.2.3 Short-term planning tasks78
Short-term Sales Planning:

The short-term sales planning comprises the fulfilment of customer orders from stocks.
Therefore, the stock on hand has to be partitioned in committed stocks and the available-to-
78
promise (ATP) quantity. If a customer requests a product, the sales person checks online the
inventory and changes, in case the query can be fulfilled from the ATP stock, the requested
amount of stock from ATP stock into committed stock. The capable-to-promise (CTP)
approach is an extension of the traditional ATP task in where the salesperson is empowered
to create new production orders.
Warehouse Replenishment and Transport Planning:

Where the mid-term distribution planning suggests weekly or monthly transportation volumes
on an aggregated basis, the short-term warehouse replenishment breaks down this plan into
daily buckets on a single product level. This schedule then considers detailed transportation
capacities (e.g. available capacity of each truck) and real customer orders. The actual and
planned production volumes set the frame for the transportation plan and also restrict the
possible degree of customer service in case the optimization model considers cost-minimized
routing to the customer locations.
Lot-sizing and Machine Scheduling:

Short-term production planning determines the lot-sizes and the sequences of lots on the
machines. Lot-sizing is a trade-off function between costs of changeovers and stock holding.
The defined lots are scheduled according to due dates and the available capacity on an
hourly or even minutely basis. As production processes are becoming more complex and
output optimized, the likelihood of an interruption or delay of the production process may
occur. Therefore the shop floor has to be controlled actively and production orders have to be
rescheduled properly.
Short-term Personnel Planning:

The short-term personnel planning defines the appropriate personnel of the shop floor taking
knowledge and capabilities into account. The detailed schedule is created with consideration
of employee agreements and costs.
Ordering Materials:
The amount of material might already have been committed by the mid-term contracting, so
that the short-term task is to generate sales orders for the supplier and reschedule the order
dates in a cost efficient way in order to optimize inventory and transportation costs.
2.3.2.4. Coordination and Integration79
Horizontal information flows:

The main horizontal information flows go upstream from the customer via the producer to the
supplier including customer orders, sales forecasts, internal orders for warehouse
replenishment and for production, as well as purchasing orders. The horizontal flow displays
the importance of correct customer data that drives the whole supply chain. In order to avoid
the unfavourable bullwhip effect, the information exchange throughout the whole supply
chain is crucial and ensures improved supply chain performance.
Vertical information flows:

The vertical information flows coordinate data exchange from an upper aggregated to a lower
disaggregated planning level according to the hierarchical planning approach. Typical
information, which is aggregated, are production quantities allocated to production processes
or sites as well as capacities. Upward flows provide the upper level with more detailed data
on the actual performance of the supply chain, e.g., production rates and utilization. This
information can be used in the upper level to measure the quality of mid and long-term plans
and to take corrective actions.
79
Advanced Planning Systems Page: 44
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Introduction To Global Supply Chain Management

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Introduction To Global Supply Chain Management

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Introduction to

Global Supply Chain Management

Lausanne, 15th of July 2007

‘The battleground of the next decade will be supply chain

- Warren Hausman, Standford University, 2001

2.1. Fundamentals of SCM

Raw material Parts Component Producer Distributor/ Retailer Consumer

Figure 2-1: Example of a supply chain network

2.1.2. Building blocks of SCM

2.1.2.1. Customer Service

Pre-transactional elements relate to a company’s activities preceding a contract. It

Inter-organizational collaboration is a necessity for an effective supply chain. A supply

Leadership is important in light of the ideal of self-organizing, poly-centric actors forming a

In practice, leadership may be executed either by a focal company or a steering committee.

Advances in information technology (IT) made it possible to process information at

Advanced planning incorporates long-term, mid-term and short-term planning levels.

2.1.3. Origins of SCM

Four great contributions are the following:

2.1.4. Objectives and Potential of Supply Chain Management

Customer satisfaction Market volume

Figure 2-3: Objectives of Supply Chain Management

Inventory management Warehousing

2.1.5. Types of Supply Chains

2.1.5.1. The Demand Side

2.1.5.2. The Supply Side

2.1.5.3. Supply chain strategies

Low Efficient Responsive

2.1.6. Inter-organizational concepts of SCM

Supplier Producer Retailer Customer

Figure 2-6: Inter-organizational concepts of SCM

2.1.6.1. Just in time (JIT)

2.1.6.2. Quick response (QR)

2.1.6.3. Continuous replenishment (CR)

2.1.6.4. Vendor Managed Inventory (VMI)

2.1.6.5. Efficient consumer response (ECR)

2.1.6.6. Collaborative Planning, Forecasting and Replenishment (CPFR)

2.1.7. The Supply Chain Operations Reference Model

2.2. Supply Chain Analysis

2.2.1. Analysis of Supply Chain Typology

2.2.1.1. Functional attributes

Category Functional attributes

2.2.1.2. Structural attributes

Category Structural attributes

1. Topography of a supply chain: describes the material flows from upstream to

2.2.2. Inventory Analysis

Stock component Determinants Benefits

Production lot-sizing stock

Transportation lot-sizing stock

Seasonal stock or pre-built stock

Figure 2-9: Example for the determination of seasonal stock

Work-in-process inventory (WIP)

2.2.3. Performance measurement and analysis

Some common service metrics for build-to-stock environments are:

Some common service metrics for build-to-order environments are:

There are two common metrics:

In a manufacturing setting, inventory in supply chains is disaggregated according to the type

2.3. Supply chain planning

2.3.1. Planning methods and principles

 Mid-term planning: determines an outline of the regular operations, in particular

Figure 2-11: Rolling horizon planning

A more efficient way of updating the plan is event-oriented-planning. This planning

2.3.2. Planning tasks along the SC network

2.3.2.1. Long-term planning tasks76