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Globalization of economy Entry of Multiple players. Shortening of product lifecycles Corporate mergers and acquisitions

Supply Chain Management

Need for Supply Chain Management From the traditional approach to Materials Management----

In SCM raw material are procured, items are manufacture, move to warehouses for storage then move to sell.

Vendor Decisions Scheduling Requirements Compliance Inbound Logistics

Production Scheduling Raw Material Requirements Capital Needs Quality

Warehousing Inventory Levels Re-order Quantities Safety stock Needs Inventory Management

Accounting Profit/loss Inventory Investments Parts Picking Financial Agreements

Distribution Customer Service Outbound Logistics Channel Service

Marketing Sales Goals Market Research Product Strategies Financial Agreements




What is SCM?
Functions rather than processes Does not control more than a few steps Duplicating and competing functions Focus on function and assigned completion Emergence of functional silos


Ware housing

Supply Chain Management

Why need to be managed ?

Increases Profitability Reduced Costs Increase in service quality Improvement in Financial performance Increase in Customer satisfaction Customer retention

Supply Chain Management involves the flows between and among stages in a supply chain to maximize total profitability. (Chopra and Meindl, 2001)

Exploring supply chain requires a thorough under standing of FUNCTIONING OF SUPPLY CHAIN


THE SUPPLY CHAIN Supply chain is network of various business entities and processes linking Suppliers, Operations and Customers
Suppliers Operations Customers



Distributors D1


S1 D2 S2 D3 S3 Flows Material Information Money D4

R1 R2 R3

Objective is to optimize the over all performance of the entire network


ASSESSMENTS in Supply Chain

TRADITIONAL APPROACH Independent inventory management policies Minimization of firm costs Short-term focus Information sharing limited to current transaction Corporate philosophies not relevant Each to their own success or failure Independent actions and information systems INTEGRATED APPROACH Joint reduction of channel inventories Channel-wide cost savings Long-term perspective As required for planning and monitoring Compatible corporate philosophies Sharing of risks and rewards

Supply Chain Activities are Changing

Traditional procurement vs. Strategic SCM

relationship with suppliers Multiple sources Item-based purchasing/ inventory policies Churning of the supplier base/bid mentality

Long-term mutually beneficial supplier relationships Single source Commodity-based purchasing/inventory policies Long-term contract (quality and fair price)

Supply Chain Activities are Changing

Traditional procurement vs. Strategic SCM Mission of the Supply Chain: Enhancing the customers experience through excellence in delivering the right products, services, resources and information seamlessly to the right place at the right time!

Just in case
purchasing (build inventory) Large batch purchases and monthly deliveries

Just in time purchasing (minimize inventory) Small batch deliveries tied to large batch purchases, focused on manufacturing timelines Electronic payment upon receipt of goods Focus on lowest total cost of ownership

Pay upon match of

invoice, PO and receiving report Focus on lowest


Why Improve???
Increased competition puts downward pressure on prices Increased requirements for mass customization Increased demand for better service levels Outsourcing an ever increasing number of processes

Values That End Customers Are Looking For Today

High product variety Customized products Detailed product information Choice - opportunity to select Rapid order fulfillment Excellent service (assumed) Quality/reliability (assumed) Low price (assumed)

External Drivers of Supply Chain Management

More demanding customers Shortening of product life cycle

Description of SCM
Demand Planning Supply Planning Demand Fulfillment

Government Regulation

Supply Chain Management

Globalization of business

Develop an accurate, reliable view of market demand by identifying market trends and predicting changes in customer preferences.

Advanced Information and communication practices

Increased competitive environment


Description of SCM
Demand Planning Supply Planning Demand Fulfillment

Description of SCM
Demand Planning Supply Planning Demand Fulfillment

Ensure that the enterprise is prepared to meet the forecasted demand by generating a constrained, optimal supply plan into RESPONSE BUFFERS

Provide fast, accurate, and reliable delivery commitments to customer orders based on planned supply into RESPONSE BUFFERS. Monitor and Manage Order commitments in a profitable way.

Traditional Material Flow System

Material Flow Integration Stage I






Distribution STAGE I

Manufacturing firms had three separate material flow systems Buffered each system with inventory

STAGE I Integration - Physical Distribution Management- integration within The Distribution Loop Integration of finished goods transportation, warehousing, inventory and customer service function



Material Flow Integration Stage II= Logistics

Material Flow Integration - Stage III = Supply Chain Management





Procurement Operations




Integration of materials across procurement/ operations/distribution sub-systems of the firm Requires elimination of inventory buffers through better information interfaces Does not require change in organizational structure of firm

Manage inventory flow from vendor through firm all the way to retailer Primary Resource Transformation is trading information for inventory as in EDI, ECR, JIT etc. Focus on BOTH level and velocity of inventory


Integrated Supply Chain Approach



Supply chain is network of various business entities and processes linking Suppliers, Operations and Customers

Distribution Manufacturing Purchasing




Looks at the entire chain Global rather than local focus Integrated rather than fragmented approach

Objective is to optimize the over all performance of the entire network

Sample definitions of Supply Chain

Beamon (1999): an integrated process where raw materials are transformed into final products then delivered to customers. Berry (1995): a system whose constituent parts include material supplies, production facilities, distribution services and customer linked together by feed forward flow of materials and feed back flow of information. Ganeshan and Harrison (1999): a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products and distribution of products to customers. Johnson (1995): a process of strategically managing the movement and storage of materials, parts, and finished inventory from suppliers through the firm and on to the customers. Kalakota (2000): an integrating process based on flawless delivery of basic and customized services.

Cycle View of Supply Chain

It defines the processes involved and the owners of each process. It is very useful when considering operational decisions, because it clearly specifies the roles and responsibilities of each member of the supply chain and the desired outcome for each process

Customer Order Cycle

Replenishment Cycle

Customer Arrival

Customer Order Receiving

Retail Order Trigger

Retail Order Receiving

Customer Order Entry

Customer Order Fulfilment

Retail Order Entry

Retail Order Fulfilment

Manufacturing Cycle

Procurement Cycle

Order Arrival


Order based on Manufacturers Production Schedule or Suppliers Stocking Needs

Receiving at Manufacturer

Production Scheduling

Manufacturing and Shipping

Supplier Production Scheduling

Component Manufacturing and Shipping

Push/Pull View of Supply Chain

Push/Pull view of supply chain process categorizes processes based on whether they are initiated in response to a customer order (pull) or in anticipation of a customer order (push). This view is very useful when considering strategic decisions relating to supply chain design

Procurement, Manufacturing and Replenishment cycles

Customer Order Cycle

Customer Order Arrives


Views on SCM



Academic View Industry View

Modeling for Distribution, Inventory Service

Integration Implementation Bottom Line Improvement

Functional Domain of a SC Manager

Forecasting demand Selecting suppliers Ordering materials Inventory control Shipping & delivery Information management Quality management Customer service

Uncertainty In Supply Chain

Erroneous forecasts Late deliveries Poor quality Canceled orders Erroneous information Problems in Transportation network Impact of government policies

Design of Supply Chain

Strategic issue Benchmark to learn what is possible Work with suppliers & customers to achieve goals Control inventory Manage Distribution network effectively Meet customer Expectations!!!

Select Examples of SC in India

Type of Industry Select Examples Apparel Madura Coats, Reliance


Maruti, Hero-Honda, Telco, Mahindra & Mahindra


Reliance, Asian Paints, Goodlass Nerolac

Consumer Durables

Samsung, LG, Godrej

Fast Moving Consumer Goods

Hindustan Lever, Proctor & Gamble, Coca-Cola, Pepsi


Godrej, Cadbury, Parle, Amul, Dabur


Wipro, HCL


Bennett Coleman & Co(Times of India,) HT Media Ltd (Hindustan Times)

Supply Chain Building Blocks

Structural Building Blocks

Suppliers Manufacturing / Assembly Plants Warehouses Distribution Centers Retailers / Customers Logistics Network
Inbound Outbound

Logical Structural

IT / ITEC Informational

Customers Orders

Logical Building Blocks

Examples of Decisions
Supplier Selection (Tactical) Plant Location (Strategic) Product Line Selection (Strat) Inventory Control (Tactical) Production Scheduling (Ops) Dynamic routing (Ops) MTO vs MTS vs BTO (Str)






Mathematical Models
Optimization Models (LP, ILP, MILP, CO, DP) Stochastic Models (Markov chains, Queuing networks, etc.) Statistical Models Game Theory Simulation Machine learning Auctions and Mechanism Design

Information Building Blocks

IT : MRP, ERP, EDI Internet Technologies Sensor Networks E-Commerce, E-Markets E-CRM Decision Support Software Standards

Competitive and Supply Chain Strategy

A companys competitive strategy defines the set of customer needs that it seeks to satisfy through its products and services A supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the company, manufacture of the product or operation to provide the service, and distribution of the product to the customer, along with any follow-up service Strategic fit means that both the competitive and supply chain strategies have the same goal

Action plan to achieve mission Shows how mission will be achieved Company has a business strategy Functional areas have strategies

Strategy Process
Company Mission Business Strategy Functional Area Functional Area Strategies Marketing Decisions Operations

Six Strategic Objectives..1

Operational excellence: - Improving the efficiency of business operations to achieve higher profitability. E.g. Wal-Mart New products, services and business models: - E.g. Apple Inc. transformed old business model.

Finance/Accounting Decisions

Six Strategic Objectives..2

Customer & supplier intimacy: - Make use of IS to satisfy and delight the customer. Improved decision making: - Many managers operate in information fog ; - Dont have the right information at the right time to make an informed decision. - Result is overproduction of goods/services; misallocation of resources etc. - Increase in cost and loss of customers.

Six Strategic Objectives..3

Competitive advantage: - Organization achieve competitive advantage doing things better than competitors; - Charging less for superior products; - Responding to customers and suppliers in real time; Survival: - Necessities of doing business; - Driven by industry level changes;

Porters Classic Model

Porters Classic Model

Develop strategies to confront five competitive forces: Competitors: All organizations share market space with other competitors. New market entrants: In free economy, new companies are always entering the market place. Substitutes: In every industry, there are substitutes that customers might use if prices become high.

Porters Classic Model

Customers: Profitable company depends on its ability to attract and retain customers. Power of customers grows if they can easily switch to competitors products and services. Suppliers: - The market power of suppliers can have significant impact on firms profits. - The more different suppliers a firm has, the greater control over suppliers in terms of price, quality and delivery schedules.

Competitive Strategies..1
Five basic competitive strategies to counter the threat of competitive forces: Cost leadership strategy: by becoming a low cost producer of products/ services. Differentiation strategy: developing ways to differentiate products/services form competitors.
Flexibility Reliability Timeliness

Innovative strategy: involves finding new ways of doing business; development of unique products or entry into unique markets/market niches.

Competitive Strategies..2
Growth strategy: Expanding a companys capacity to produce goods and services, expanding into global markets, diversifying into new products and services. Alliance strategy: Establishing new business linkages and alliances with customers/suppliers, competitors/consultants.

Competitive Strategies..3
In addition to this, other competitive strategies: Locking customers/suppliers: By building valuable relationships, which deters them from abandoning the org. for its competitors. Building switching costs: E.g. by use of IT, Wal-Mart has made customers dependent on continued use of innovative IS.

Business Value Chain

Business Value Chain

These activities can be grouped as: Primary activities- mostly related to production and distribution of goods/services. -Include inbound logistics, operations, outbound logistics, sales and marketing. Support activities- make the delivery of primary activities possible;

Business Value Chain

Support activities- Comprises of human resources (employee hiring, recruiting and training); technology (improving products and process); procurement ( purchasing I/P). At each stage of value chain, how IS can be used to improve operational efficiency, customer-supplier intimacy, value addition etc. can be analyzed.

Business Value Chain

Firms value chain is linked with value chain of its suppliers, distributors, and customers. Performance depends also on how well the firm co-ordinates with direct/indirect suppliers, customers etc.

Types of Decisions
1. Strategic or long-range decisions 2. Tactical or medium- range decisions 3. Operational planning and control or shortrange decisions Why is facility location so important?
Facility location has a long-term impact on the supply chain & must be part of the firms strategy. Companies can locate anywhere in the world due to increased globalization, technology infrastructure, transportation, communications, & open markets, Location still matters- clusters in many industries show that innovation & competition are geographically concentrated.

Facilities Location
Critical Decision long lasting impact on financial, employment and distribution patterns.
Factors affecting Location Decision Capital Banking facilities , loans etc Raw Material Availability, suppliers Labor supply , skills , costs Competition Economic aspects Wages to staff, taxes profits Non economic impacts- Ecological , environmental and social. Political Considerations


Why Sourcing important???

For many organizations Inbound logistics involves more time as compared to outbound. Potential area for price reduction TV supply chain inbound is 68 days Riken (Piston ring manufacturer)- -- 12 TOYOTA plants (Financial times,2007) Fire at Philips semiconductor Nokia and Ericsson ($400 Million loss), (Sloan
Management Review, 2007)

Process of Buying

Obtaining the right material In Right quantities With right delivery (time and place) From the right source and at the right price

Type of Sourcing

How Many Suppliers to Use

Reasons Favoring a Single Supplier
To establish a good relationship Less quality variability Lower cost Transportation economies Proprietary product or process Volume too small to split

a) Single Sourcing: Planned decision to select one supplier for an item where several suppliers are available b) Multiple sourcing: More than one supplier for an item.

Reasons Favoring More than One Supplier Need capacity Spread risk of supply interruption Create competition Information Dealing with special kinds of business

Supplier Selection and evaluation

The process of selecting suppliers, is complex and should be based on multiple criteria:

Technical ability Manufacturing capability Quality Cost Reliability

Order System and cycle time Capacity Price Location Service

Some Trends : Global Sourcing


Examples of Global Strategies

Boeing both sales and production are worldwide. Sony purchases components from suppliers in Thailand, Malaysia, and around the world. GM is building four similar plants in Argentina, Poland, China, and Thailand

Management of Suppliers and Distributors

Plans to help achieve company mission Affect long-term competitive position Strategic options
Few suppliers Keiretsu network Local/Global Suppliers

Strategic Alliance and Supplier Certification Programs

Supplier certification programs -one way to identify strategic alliance candidates.

B2B example ::

Established by Jack Ma, a English teacher (1999) Today:: is the world's leading B2B e-commerce company Together our marketplaces form a community of more than 27 million registered users from over 200 countries and regions. HQ: Hangzhou in eastern China with 5200 fulltime employees

Early supplier involvement (ESI) is perhaps one of the most effective supply chain integrative techniques.

Lessons:: Key for successful partnerships Building Trust Shared Vision and objectives Personal Relationships Mutual benefits Commitment and Top management Support Change Management Information Sharing Shared Measurements Continuous Improvements

Managing supply chain is treated as strategic weapon. This era can be referred as a business war between supply chains and supply chains not between organizations and organizations

Traditional Planning Approach

Characterized by Sequential, Decomposed, Slow
Procurement (Material) Manufacturing (Capacity) Sales & Distribution (Demand)

Aggregate Production Planning

C U S T O M E R Optimize to Mfg objectives Optimize to Logistics obj Optimize to Sales & Mktg obj

Overview of Planning Levels

Long-range plans

The integration through information is aimed to address:

Flexibility and Variety Quality Responsiveness Low cost Edging towards agility

Product and service design Location / layout Long term capacity

Intermediate plans (General levels)

Employment Output and inventories Subcontracting and backorders

Short-range plans (Detailed plans)

Machine loading Job assignments Production lot size and order quantities

Aggregate Plan
Aggregate Plan: A statement of a companys production rates, workforce levels, and inventory holding based on estimates of customer requirements and capacity limitations

Aggregate Production Planning (APP)

Determines resource capacity to meet demand For intermediate time horizon, 6-12 months Not feasible to build new facility May be feasible to hire/lay off workers, overtime, or subcontract Adjusting capacity OR managing demand

Service Industry Staffing Plan Regarding staffs and labor related factors

Manufacturing Industry Production Plan Regarding production rates and inventory

Aggregate Plan Managerial Inputs

Current machine capacities Plans for future capacities Workforce capacities Current staffing level Distribution and marketing Customer needs Demand forecasts Competition behavior

Aggregate Plan Outputs

Aggressive Alternatives Complementary Products Reactive Alternatives Competitive Pricing

Materials Supplier capabilities Storage capacity Materials availability

Aggregate plan

Accounting and finance Cost data Financial condition of firm

Size of Workforce and Workforce Adjustment

Aggregate plan

Units or dollars Of Backlogs, backorders , or stockout

Engineering New products Product design changes Machine standards

Human resources Labor-market conditions Training capacity

Inventory Levels

Production per month (in units or $)

Units or dollars subcontracted

Aggregate Planning Strategies

Alter demand to match capacity

Demand Options
Pricing Promotion Back orders

Alter capacity to match demand

Some of each
Balancing demand and capacity over the entire planning horizon

New demand

Capacity Options
Hire and layoff workers Overtime/slack time Part-time workers Inventories Subcontracting

Chase Demand



Chase Approach
Investment in inventory is low Labor utilization in high (overtime)

Level Production
Demand Production

The cost of adjusting output rates and/or workforce levels

Level Approach
Stable output rates and workforce

Mixed Strategy

Greater inventory costs Increased overtime and idle time Resource utilizations vary over time



Aggregate Planning Strategies

1. Chase #1: vary workforce level to match demand 2. Chase #2: vary output rate to match demand 3. Level #1: constant workforce level

Aggregate Plan to Master Schedule

Aggregate Planning

Possible Alternatives during Slack Season

Layoffs Layoffs, undertime, vacations No layoffs, building anticipation inventory, undertime, vacations Layoffs, building anticipation inventory, undertime, vacations

Possible Alternatives during Peak Season

Hiring Hiring, overtime, subcontracting No hiring, depleting anticipation inventory, overtime, subcontracting, backorders, stockouts Hiring, depleting anticipation inventory, overtime, subcontracting, backorders, stockouts


4. Level #2: constant output rate

Master Schedule

Disaggregating the Aggregate Plan

Disaggregating the Aggregate Plan

Master schedule: The result of disaggregating an aggregate plan; shows quantity and timing of specific end items for a scheduled horizon. Rough-cut capacity planning: Approximate balancing of capacity and demand to test the feasibility of a master schedule.

Aggregate production planning is a powerful tool for resources management Suitable aggregate production planning strategy for an organization depends on various organizational and environmental factors

Management of Inventories


Globalization Accelerated Pace of Change Transition to Market Driven Rapid Growth of Knowledge based service sector Change in demographic profile

Impact On Business ..?

Intense Competition Survival of the Fittest Need To know Knowledge in Power Customer in Control Ability to Change fast enough to Meet Emerging Challenges
Customer cant wait if the goods as demanded are not available he will shift to the competitor

Why we need inventories

To meet anticipated demand To smooth production requirements To protect against stock-outs To help hedge against price increases To take advantage of quantity discounts

Disadvantages of Inventory
Higher costs

Item cost (if purchased) Ordering (or setup) cost

Costs of forms, clerks wages etc.

Holding (or carrying) cost

Building lease, insurance, taxes etc.

Difficult to control Hides production problems

Objective of Inventory Control

To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
Level of customer service Costs of ordering and carrying inventory Customer ??? Internal External or Both

Scope of Inventory Management

Materials Requirement Planning & Control Procurement Inventory control Receiving and Inspection (Time and cost) Transportation Material handling Disposal of materials Value analysis (Gears in watch; Eye drops)

Responsibilities of Inventory Management

Cost Reduction Optimum Service Level Quality Assurance Low Level of Capital tied up

Why control materials ?

Rs @2% Lakhs saving on matl. Materials Labour Overhead Profit Total 70.00 16.00 26.00 18.00 130.00 68.60 16.00 26.00 19.40 130.00 @ 2% saving on labour 70.00 15.68 26.00 18.32 130.00

Coordinated Inter-departmental Effort

Typical Costs..
Costs of purchasing Packing costs Transportation costs Insurance premium Cost of Receiving Inspection costs Material Handling costs Loss caused by scrap, rework Inventory carrying costs Cost of Paper work

Key Inventory Terms

Lead time: time interval between ordering and receiving the order Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year Ordering costs: costs of ordering and receiving inventory Shortage costs: costs when demand exceeds supply

What is Inventory?
Stock of materials Stored capacity

Inventory Classifications


194-1994 T/Maker Co.

Process stage

Number & Value

Demand Type


1995 Corel Corp.

Raw Material WIP Finished Goods

A Items B Items C Items

Independent Dependent

Maintenance Operating

Inventory:: Demand based

Inventory: a stock or store of goods
Independent Demand

Inventory :: Demand based..2

Independent demand finished goods, items that are ready to be sold
E.g. a computer

Dependent Demand







Dependent demand components of finished products

E.g. parts that make up the computer

Independent demand is uncertain. Dependent demand is certain.

Inventories :: Process stage

Raw materials & purchased parts Partially completed goods called work in progress Finished-goods inventories

Inventories:: Others
Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers

(manufacturing firms) or merchandise (retail stores)

Factors contributing to high inventory

difficulty in standardization frequent modifications difficulty in disposing of items No scientific policy upgradation of technology hence items become obsolete Inability to predict the consumption pattern overbuying of items inability to decide on critical/non-critical items few suppliers sending items in more than desired quantities

Selective Inventory Control :Pareto Analysis or ABC analysis

Pareto analysis (sometimes referred to as the 80/20 rule and as ABC analysis) is a method of classifying items, events, or activities according to their relative importance. ABC analysis is used to prioritize the items.

Classifying Items as ABC

Selective Inventory Control

ABC (Based on Price and volume of use) VED (Vital, Essential, and Desirable) FSN (Fast, Slow, and Normal). HML (High, Medium, and Low) SDE (Scarce, Difficult, and Easy to Obtain) GOLF (Government, Ordinary, Local, and Foreign)

% Annual Rs Usage
100 80 60

Class A B C

% Rs 80 15 5

% Items 15 30 55


20 0 0

C % of Inventory Items
50 100

Inventory management : some mathematical models

Economic order quantity (EOQ) model
The order size that minimizes total annual cost

Assumptions of EOQ Model

Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts

Economic production model Quantity discount model

Total Cost
Annual Annual Total cost = carrying + ordering cost cost TC = Q H 2 + DS Q

Figure 12.4C

Cost Minimization Goal

The Total-Cost Curve is U-Shaped
TC = Q D H+ S 2 Q

Annual Cost

Ordering Costs
QO (optimal order quantity) Order Quantity (Q)


Some trends in Inventory Management

JIT is a philosophy of continuous improvement in which non-value-adding activities (or wastes) are identified and removed for the purposes of: Improving Delivery Adding Flexibility Increase innovativeness

Reducing Cost Improving Quality Improving Performance

JIT/Lean Production
Just-in-time (JIT): A highly
coordinated processing system in which goods move through the system, and services are performed, just as they are needed,

Sources of Waste
Overproduction Waiting time Unnecessary transportation Processing waste Inefficient work methods Product defects


lean production pull (demand) system

JIT operates with very little fat

Different Kinds of Waste

Waste from Over-production Waste of Motion Transportation waste Processing waste Defective Products Excess Inventory Information waste Energy waste Manpower waste

Reducing waste: Increase Problem Visibility Lower the Water to Expose the Rocks

Missed Due Dates Late Deliveries

Too Much Space


Too much paperwork Engineering Change Orders Long queues

Scrap & Rework

Poor Quality 100% inspection

Machine Downtime

Comparison of JIT and Traditional

Inventory Deliveries Lot sizes Setup; runs Vendors Workers

Select benefits of JIT Systems

Reduced inventory levels Flexibility Reduced lead times Increased productivity Increased equipment utilization Reduced space requirements

Much to offset forecast errors, late deliveries

Minimal necessary to operate Many, small Small Many, short runs

Few, large Large Few, long runs

Long-term relationships are unusual Necessary to do the work



Conventional Inventory Management


monitors inventory levels places orders

Vendor Managed Inventory (VMI)


manufactures/purchases product assembles order loads vehicles routes vehicles makes deliveries

Problems with Conventional Inventory Management

Large variation in demands on production and transportation facilities workload balancing utilization of resources unnecessary transportation costs

Vendor Managed Inventory Customer

trusts the vendor to manage the inventory


urgent v/s non-urgent orders setting priorities

monitors customers inventory customers call/fax/e-mail remote telemetry units set levels to trigger call-in controls inventory replenishment & decides when to deliver how much to deliver how to deliver

Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs Others
Campbell Soup Johnson & Johnson Barilla (the pasta manufacturer) Indian case:; Praxair India (in collaboration with Wipro infotech)

VMI: Advantages
Increased customer service Increased revenues Lower inventory levels Lower cost of transactions Reduced supply risk

Praxairs Business
VMI (Vendor Managed Inventory)
Inventory is managed by vendor . WalMart
Works on the 3PL model to manage their inventories 3PL service provider not only maintains the inventories at Wal Mart but the same partner maintains for its COMPITITOR (K-Mart)

Praxair is the largest producer and distributor of atmospheric and specialty gases in North and South America and one of the largest players Plants worldwide 44 countries USA 70 plants South America 20 plants
Product classes packaged products bulk products lease manufacturing equipment Distribution 1/3 of total cost

Efficient supply chains rests on the pillars of TRUST (HBR, 2001)

Praxairs Business
Bulk products
Distribution 750 tanker trucks 100 rail cars 1,100 drivers drive 80 million miles per year Customers 45,000 deliveries/month to 10,000 customers Variation 4 deliveries/customer/day to 1 delivery/customer/2 months Routing varies from day to day

VMI Implementation at Praxair

Convince management and employees of new methods of doing business Convince customers to trust vendor to do inventory management Pressure on vendor to perform - Trust easily shaken Praxair currently manages 80% of bulk customers inventories Demonstrate benefits

VMI Implementation at Praxair

Praxair receives inventory level data via telephone calls: 1,000 per day fax: 500 per day remote telemetry units: 5,000 per day Forecast customer demands based on historical data customer production schedules customer exceptional use events Logistics planners use decision support tools to plan whom to deliver to when to deliver how to combine deliveries into routes how to combine routes into driver schedules

VMI Essentials
TRUST Accurate information provided on a timely basis Inventory levels that meet demands Confidential information kept confidential TECHNOLOGY Automated electronic messaging systems to exchange sales and demand data, shipping schedules, and invoicing

Framework for Transitioning to Effective and efficient system of Inventory Management

Get top management commitment Decide which parts need most effort Obtain support of workers Start by trying to reduce setup times Gradually convert operations Convert suppliers to JIT / VMI Prepare for obstacles

Summary and Lessons

Management of Inventories in supply chain not only leads to increased profitability but also helps in achieving customer service and responsiveness The management of inventory is complex and no generic model is available for its management.


Information Management in Supply Chain


Information Technology : Internal Integration

Linking various business functions Purchasing Manufacturing Inventory Finance Marketing Distribution etc Shared data & integrated processes

Information Technology : External Integration

Inter-organizational Systems (Extranet) Link firms systems with external entities (Suppliers, distributors, retailers etc.) Shared data & integrated processes

IT for Supply Chain

Warehouse/ Depot

Benefits due to Integrated Information across SC

Integrated view of resources and constraints



Improved channel efficiency by sharing of information between suppliers & customers Reduced inventory levels Reduced production costs
R. M.

Future Trend Marketing Planning

Enhanced Quality Customer driving the entire chain

Past Sales Record

Typical IT solutions
EDI ERP Information sharing with suppliers and distributors Information integrated within the organization

EDI and business cycle

Vendor Customer

Intranet Collaborative working Internet Global linkage of various entities e-commerce/ Managing the money flow e-procurement faster DatawareStorage of data and tracking of housing/ customers Data mining Bar coding Technology Smart Cards RFID

Documents , Images, Purchase orders, queries ,

Order entry, Shipment notice, Invoices, etc. EDI service Network EDI destinations

Branch office

Distributors Transportation

Company s Computer with EDI software


EDI provides a function known as store and forward

Typical Benefits of EDI

Grater effectiveness/efficiency Competitive advantage Reduced transaction costs and time Optimized inventory Reduced costs Improved decision making

What is ERP?
ERP stands for: Enterprise Resource Planning systems ERP attempts to integrate all data and processes of an organization into a unified system. A key ingredient of most ERP systems is the use of a unified database to store data for the various system modules.

Select ERP solution Providers

Baan People Soft Jd Edwards Oracle SAP (Highest market share)

Select reasons:: ERP Failure

Underestimate the cost of implementation. Improper training on modules. No attention to critical modules that connected together processes or were expected to contribute to system payback. Allow shortcuts and offline activity necessary due to missing modules or lack of training.

Implementation Success
Must be well planned and thought through. Top down driven, management must take on two roles:
Disciplinarian to stick to plan. Compassionate support for stressful issues.

Advantages of Intranet: distributing information with in organization e.g. Design to manufacturing Internet: Information exchanges across web E-procurement solutions E- commerce: Commerce (Business) over web Blue tooth M-commerce

Must have goals and milestones.

These must be achievable.

Bar Coding Technology

Set of bars with varying widths and spaces between bars Reading through OCR (Optical Character Recognition) Uses photo sensor to convert bar code to electrical signal. Scanner measures relative width of bars and spaces. Bar code symbols can be converted in to codes.

Application area: Bar coding

Retails Book land and ISSN numbering (International Standard Serial Numbering) Tradeoff in investing for better information flow and other inventory reduction methods.
Saves Time Improves efficiency and cost reduction Reduces error

Smart Cards
Looks like credit card with a embedded computer chip (microprocessor with internal memory chip). e.g. RTO License BPCL used for monitoring and control of trucks basically for fuel monitoring.

What is RFID?
RFID = Radio Frequency Identification. An ADC (Automated Data Collection) technology that:
uses radio-frequency waves to transfer data between a reader and a movable item to identify, categorize, track.. does not require physical sight or contact. Performs the operation using low cost components. Attempts to provide unique identification and

Other ADC technologies: Bar codes, OCR.

RFID system components

RFID tags: Smart labels

A paper label with RFID inside


RFID Reader
and a chip attached to it

an antenna, printed, etched or stamped ... on a substrate e.g. a plastic foil ...


RF Antenna




Some RFID tags

Tags can be attached to almost anything:
Items, cases or pallets of products, high value goods vehicles, assets, livestock or personnel

Passive Tags
Do not require power Draws from Interrogator Field Lower storage capacities (few bits to 1 KB) Shorter read ranges (4 inches to 15 feet) Usually Write-Once-Read-Many/Read-Only tags Cost around 25 cents to few dollars Battery powered (Cost around 50 to 250 dollars) Higher storage capacities (512 KB) Longer read range (300 feet) Typically can be re-written by RF Interrogators

Active Tags


RFID tag memory

Read-only tags
Tag ID is assigned at the factory during manufacturing Can never be changed No additional data can be assigned to the tag

Some RFID readers

Write once, read many (WORM) tags

Data written once, e.g., during packing or manufacturing Tag is locked once data is written Similar to a compact disc or DVD

Tag data can be changed over time Part or all of the data section can be locked

RFID application points

RFID applications
Manufacturing and Processing
Inventory and production process monitoring Warehouse order fulfillment

Supply Chain Management

Assembly Line

Inventory tracking systems Logistics management

Inventory control and customer insight Auto checkout with reverse logistics

Handheld Applications

Access control Counterfeiting and Theft control/prevention

Shipping Portals

Bill of Lading Material Tracking

Location Tracking
Traffic movement control and parking management Wildlife/Livestock monitoring and tracking

Smart groceries
Add an RFID tag to all items in the grocery. As the cart leaves the store, it passes through an RFID transceiver. The cart is rung up in seconds.

Smart cabinet
Reader antennas placed under each shelf 1. Tagged item is removed from or placed in Smart Cabinet Smart Cabinet periodically interrogates to assess inventory Server/Database is updated to reflect items disposition Designated individuals are notified regarding items that need attention (cabinet and shelf location, action required) 2.


4. Passive read/write tags affixed to caps of containers

Source: How Stuff Works

Smart fridge
Recognizes whats been put in it Recognizes when things are removed Creates automatic shopping lists Notifies you when things are past their expiration

Smart groceries enhanced

Track products through their entire lifetime.

Shows you the recipes that most closely match what is available
Source: How Stuff Works

RFID advantages over bar-codes

No line of sight required for reading Multiple items can be read with a single scan Each tag can carry a lot of data (read/write) Individual items identified and not just the category Passive tags have a virtually unlimited lifetime Active tags can be read from great distances Can be combined with barcode technology

Supply Chain of Petrol

Every time we visit petrol pump, we find that it is available every time,
all the time. For you, and for countless other motorists.

Think, somebody must have put the petrol into the tank for you to pump from.

Somebody must have prospected for oil, found it, and then dug the well to extract it. Next, somebody must have shipped the oil to a refinery, converted it into Petrol , and then transported the it to your favorite petrol station.

The supply chain for Petrol is indeed quite reliable, so much so that most consumers take it for granted
A) B)

Demand predictions are reliable and effective Distribution system is efficient

Demand pattern:: Analysis..1

Demand assessment: Ordering by retailer

Order Size

Customer Demand

Order Size

Customer Demand Retailer Orders



Demand assessment: Ordering by distributor

Distributor Orders

Demand assessment: Production Plan

Production Plan

Distributor Orders

Order Size

Customer Demand Retailer Orders

Order Size

Customer Demand Retailer Orders



Bullwhip Effect in Supply Chains

Forrestor: Industrial Dynamics, HBR, 36:4, 1958 BWE describes the increasing amplification of orders occuring within a SC
Resembles a whip lash

Bullwhip Effect
The bullwhip effect is a phenomenon observed in supply chains wherein the demand variability increases as one moves upstream from retailers to distributors to manufacturers

Occurs even if end-item demand is fairly stable!

Forrestor studied a simulation model of the simplest tandem supply chain with four entities: Retailer, DC, W/H, Plant
Manufacturers Warehouses/ Distributors


Bullwhip Effect

Bullwhip Effect Example: P&G Diapers

In 2001, Cisco was forced to write down $2.2 billion worth of obsolete inventory, due to uncertain variations in its demand in its supply chain.

Impacts of Bullwhip
It distorts the order information & amplifies order variability.

Bullwhip effect - an example

Chronology of company Xs supply chain problem.
Higher costs

Impact of Bullwhip Effect:

-- Inventory: More safety stock needed -- Transportation: Lower utilization of transportation -- Warehousing: More warehouse capacity needed -- Manufacturing: Lower capacity utilization -- Customer Service: Lower service level, more likely to cause stockouts and lost sales

Company X produces SOAPS for sale on the open market. Customer demand for Company Xs SOAPS become stagnant Retailers offer a sales promotion to boost sales of Company X widgets

Example continued
Retailers fail to notify manufacturers of sales promotion Company X recognizes that demand for SOAPS have increased. Company X increases inventory to allow for increased manufacturing of SOAPS Company X notifies part suppliers of increased demand. Suppliers increase inventory to meet demand.

Moral of the story

Distorted information along the supply chain caused inventory levels to increase along the supply chain which may result in increased inventory costs, poor customer service, adjusted capacity and many other problems associated with the bullwhip effect.

Supply Chain in Equilibrium

Customer demand forecast = 10 units

Supply Chain Disrupted

Customer Demand forecast = 20 units Information Flow
Suppliers Producers Products & Services
80 Units 160 Units 80 Units

10 Units

Products & Services

10 Units

10 Units

Products & Services

10 Units

Products & Distributors Services

10 Units 10 Units


Products & Services

40 Units

Distributors Products & Services

20 Units 40 Units


Retailers are selling product at a constant rate and price. Firms along the supply chain are able to set their inventory to meet demand.

Cash Flow
As demand increases, the distributor decides to accommodate the forecasted demand and increase inventory to buffer against unforeseen problems in demand. Each step along the supply chain increases their inventory (double in this example) to accommodate demand fluctuations. The top of the supply chain receives the harshest impact of the whip effect.


= Inventory Levels


= Inventory Levels

Bullwhip :: Major causes..1..

Demand forecasting updating Neglecting to order in an attempt to reduce inventory No communication up and down the supply chain No coordination up and down the supply chain Delay times for information and material flow

Bull whip :: Major causes ..2..

Forecasting is often updated based on the order history from immediate customers The longer the lead time, the greater the fluctuation The longer planning horizon, the greater possibility of scheduling changes and demand changes

Demand Forecasting Updating

Natural economic behavior Periodic ordering - the economics of transportation such as full truckload (FTL) and less-than-truckload rates Push ordering

Remedial measures to counteract bullwhip effect ..1..

Avoid multiple demand forecast updates Break order batches Stabilize prices

Remedial measures to counteract bullwhip effect..2..

Summary and Lessons

Effective management of demand essentially requires::
Correct and timely forecast Seamless information flow across organization Effective management of resources Relationship with channel partners Commitment towards customer This will lead to productivity and profitability to all channel partners as a whole

Reduce variability and uncertainty.

1. POS 2. Sharing information 3. Year round low pricing

Reduce lead times.

1. EDI 2. Cross Docking

Alliance arrangements.
1. Vendor managed inventory 2. On-site vendor representative

Essentials for effective distribution system

(Accounts for 30-60% of distribution costs)

Transportation and Warehousing

Distribution inventory
All finished goods inventory at any point of time and accounts for 25-30% cost of distribution

Warehouses (distribution centers) Material handling Protective packaging Order processing and communication

Transportation Modes
Road Freight (Trucks)

Road Freight (Trucks) Advantages

Through movement direct from consignor to consignee Flexibility routes and loading routines can be easily altered, operate day and night Less capital costs Fast turn-around Minimum delays


Rail Air Package Carriers Water Pipeline Ropeways


Truckload (TL) Low fixed and variable costs Major Issues

Utilization Consistent service

Susceptibility to weather and road conditions in spite of the best protection Unsuitability for heavy loads rail transport more economical for bulk loads Unsuitability for long distances again the rail telescopic rates are more favourable

Less Than Truckload (LTL) Major issues:

Location of consolidation facilities Utilization Vehicle routing Customer service

Advantages of Rail
Economy more so for goods over long distances Efficiency of energy Reliability not affected by weather conditions

Uneconomical for small shipments and short distances Not suitable for remote stations Costly terminal handling facilities Inflexible time schedules

Key issues:
Scheduling to minimize delays / improve service Off-track delays (at pickup and delivery end) Yard operations Variability of delivery times

Air Transport Advantages

Faster mode Reduction in cost particularly inventory Broad service range Increasing capabilities Disadvantages:
High cost Weather affects flight conditions Limitations on heavy consignments

Air Transport
Key issues:
Location/number of hubs Location of fleet bases/crew bases Schedule optimization Fleet assignment Crew scheduling Yield management

Water Transport
Advantages: Mass movement of bulk Lowest freight cost Preferred for long haul of low value commodities Disadvantages: Not for quick transit Suitable for certain types on commodities only

Limited to certain geographic areas Ocean, inland waterway system, coastal waters Very large loads at very low cost Slowest Dominant in global trade (autos, grain, apparel, etc.)

Pipeline Movement
Reliable, continuous, all weather transport Low energy consumption hence low cost Low maintenance and operating costs Underground, no space problem Can traverse difficult terrain Minimal transit losses Operation round the clock, safe Economies of scale double the throughput for only 30% additional cost

Disadvantage is in the high investment cost

High fixed cost Primarily for crude petroleum, refined petroleum products, natural gas Best for large and predictable demand Would be used for transferring oils

In hilly or inaccessible areas Long and circuitous routes with streams / deep valleys For commodities capable of movement in ropeway buckets Short haulages of less than 50 kms Areas where other carriers are uneconomical

Heavy investments Limitations on size and quantity of haul

Package Carriers
Companies like FedEx, UPS, USPS, that carry small packages ranging from letters to shipments of about 150 pounds Expensive Rapid and reliable delivery Small and time-sensitive shipments Preferred mode for e-businesses (e.g., Amazon, Dell, McMaster-Carr)

Sample template chart of Relative Merits

Parameter Speed Versatility Reliability Availability Continuity of service Distribution cost Total score Overall ranking Weigh tage 30 10 20 10 10 20 100 10 Rail 5 6 6 7 6 4 5.4 2 Road 6 8 8 8 7 5 6.7 1 Air 8 5 5 5 5 6 6.1 4 Water 4 6 5 6 5 6 5.1 5 Pipe line 3 3 7 3 8 7 5.1 5 Rope way 3 2 4 2 3 8 4.0 6

How to decide on the right carrier?

Trade-offs in Transportation Design

Transportation and inventory cost trade-off
Choice of transportation mode Inventory aggregation

Choice of Transportation Mode

A manager must account for inventory costs when selecting a mode of transportation A mode with higher transportation costs can be justified if it results in significantly lower inventories

Transportation cost and responsiveness trade-off

Inventory Aggregation: Inventory vs. Transportation Cost

As a result of physical aggregation
Inventory costs decrease Inbound transportation cost decreases Outbound transportation cost increases

The warehouse is where the supply chain holds or stores goods. Functions of warehousing include:
Transportation consolidation Product mixing Cross-docking Service Protection against contingencies Smoothing

Inventory aggregation decreases supply chain costs if the product has a high value to weight ratio, high demand uncertainty, or customer orders are large Inventory aggregation may increase supply chain costs if the product has a low value to weight ratio, low demand uncertainty, or customer orders are small

Ware house Management Objectives

Providing efficient service to users Reduce cost of carrying goods Providing correct, updated stock figures Controlling inventory Preventing damage to or obsolescence of materials Achieve all of the above with good housekeeping


Material handling

Customer service

Information transfer

Storage function

Receive goods Identify goods Sort goods Dispatch to storage Hold inventory Recall, select goods Dispatch the shipment Prepare records and advices



Purpose of Warehousing
To provide desired level of customer service at the lowest possible total cost It is that part of the firms logistics system that stores products (RM, Packing Materials, WIP, FG) Stores product between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored Distribution warehousing relates mainly to FG

Reasons for Warehousing

Service related
Maintain source of supply Support customer service policies Meet changing market conditions Overcome time and space differentials Support JIT programs of suppliers and customers Provide customers with the right mix of products at all times Temporary storage of materials to be disposed or re-cycled

Cost related
Achieve production economies Achieve transportation economies Take advantage of Quantity Purchase discounts and forward buys Least Logistics cost for a desired level of customer service

Support manufacturing Mix products from multiple facilities for shipment to a single customer Break-bulk Aggregate Used more as a flow-thru point than as a hoarding point

Transportation Consolidation

Materials Handling

Supply and Product Mixing

Definition: Efficient short distance movement in or between buildings and a transportation agency. Four dimensions
Movement Time Quantity Space


Interest in packaging is widespread
Warehousing Transportation Size

The Role of Packaging

Identify product and provide information Improve efficiency in handling and distribution Customer interface Protect product

Marketing Production Legal

Packaging Materials Considerations

Basic considerations include:
Soft materials Plastic Environmental issues Recycling (reverse logistics)

Reverse Logistics
Movement of goods from the market or customer back to the company The need:
Increased awareness of the environment Stringent legislation For some it is part of the business Profitability of dealing with scrap, surplus

Surplus, obsolescence can result due to:

Over optimistic sales forecasts, change in product specs, errors in estimating material usage, losses in processing or overbuying based on incentives

Summary and lessons

TOTAL COST Total Cost Transportation Transportation Cost Cost

Transportation and warehousing are essential backbones of effective distribution system. Mode of transportation depends on various parameters including density, weight, fragile nature etc parameters. Cost and inventory tradeoff is subjective and need to be worked out with individual cases

Inventory Material handling



Number of Ware houses

Companies using performance measurement are more likely to achieve leadership positions & twice as likely to handle a major change successfully. Performance measurements vary from company to company. Adding several tiers of suppliers & customers complicates performance measurement. Performance measures must be visible & communicated to all members of the SC.

Performance Measurement in supply chain

Performance Measurement should Provide Direction

By looking at a firms key measures, one should be able to determine the firms direction, determine their strategy. A firm lacking good, consistent measures will tend to be going in all directions.

Different Levels Need Different Measures

Measurements should be hierarchical

Upper Management Middle Management Operational Departments

Will need 2-4 measures

Will need 2-4 per area -not all the same Will need 3-5 per dept or process

Measurement Mistakes to Avoid

Gaps exist where there are no measures for areas deemed strategically important.
Examples: Customer satisfaction, employee involvement,

Complex Relationships
Customer satisfaction ??? Or Service Quality Customer Loyalty???? Repurchase Intentions??? More business, Competitiveness and Profitability

False Alarms Occur where there are detailed measures for areas which are not strategically important.
Examples: many efficiency measures
Vollmann and Schmenner, International Journal of Operations & Production Management, 1994

Issues in performance measurement system

How well the organization is doing? Is the organization meeting its goals? Are the customers happy? Are the processes in control? If and where improvements are necessary?

Challenges to Performance Measurements

Measure only the right things Avoid meaningless efforts Use the results proactively and productively

Principles of PM system design

Speed, reliability , and simplicity are the main criteria for efficient metrics Arranging indicators by priority Visualizing the function content Classifying objectives of the function or team Selecting indicators that deal with quality Formatting the metrics effectively

Characteristics of Effective Metrics

Independence Appropriateness Objectivity Regularity Linkage with other indicators Coherence Simplicity Cumulative Realistic

Performance measurement system (PMS): Desirable Features

Transparent Simple Self-regulating Objective Motivating and stimulating to all stakeholders

Performance measurement system (PMS): Desirable Features (contd.)

PMS should have multiple criteria Primary purpose should not be to reward or to punish Performance-to-schedule measures must use group, not individual results Specific goals must be established and reviewed PM must be understood by those whose performance is being measured. PM data must be available for constant review

Other Useful Performance Guidelines

The metrics must be consistent with overall corporate strategy. focus on customer. Focus upon processes not functions. Use a balanced approach in selecting and developing metrics. Precise cost measurement is an important Use technology to achieve efficient performance measurement.

Some operational performance indicators

Delivery performance Order fulfillment performance Fill rate (Make-to-stock) Order fulfillment lead time Perfect order fulfillment Supply-chain response time Production flexibility

Financial performance indicators

Return on inventory investment Inventory investment/working capital Percentage inventory increase(decrease) vs percentage increase(decrease) in sales Percentage inventory increase(decrease) vs percentage increase(decrease) in cost of sales stock write-offs

Some Other indicators .1

Total supply-chain management cost Value-added productivity Warranty cost or returns processing cost Cash-to-cash cycle time Inventory days of supply Asset turns

Some Other indicators .2

Financial : ROI, Turnover ratio Productivity: Total productivity Efficiency: Realized prodn/Planned Prodn Customer LT: Time from order to delivery Prodn LT: Time from order relapse to finished product Prodn flexibility: ability to respond efficiently to demand variation

Some Non-financial Measures

Lead time for customer order delivery Number of Corrections Amount of Time needed to answer a phone Number of Complaints Conformance Quality Time to Respond to Change Request

The Balanced Scorecard Framework

A Balanced Scorecard
Customer Perspective
How do customers see us?

Financial Perspective GOALS MEASURES

How do we look to shareholders?

Internal Business Perspective GOALS MEASURES

What must we excel at?

Internal Perspective
What must we excel at?

Innovation and Learning Perspective

Can we continue to improve and create value?

Financial Perspective
How do we look to our stakeholders?
Kaplan and Norton, The Balanced Scorecard, 1996

Customer Perspective GOALS MEASURES

How do customers see us?

Innovation & Learning Perspective GOALS MEASURES

Can we continue to improve and create value?

Supply Chain Performance Framework

Customer Service Metrics Goals Measures

Operational Metrics
Waste Reduction Time Compression Unit Cost Reduction

Supply chain cost of ownership Supply chain cycle efficiency % of supply chain target cost achieved Product finalization point Inventory turns & days of inventory Supplier evaluations

Operational Metrics Goals Measures

Financial Metrics Goals Measures

Product/process innovation Inventory Management Supplier performance

Financial Metrics
Profit margins Cash flows Revenue growth Return on assets Return on equity

Customer Service Metrics

Flexible response Product/service innovation Customer satisfaction Customer value Delivery performance

Profit margin by supply chain partners Cash-to-cash cycle on receivables & payables Customer growth & profitability Return on supply chain asset Return on supply chain equity

Number of choices & average response time Customer contact points and product finalization points Order fulfillment rate Customer profitability Delivery speed & reliability

Summary and lessons

Performance measures are not generic They change with time They change with organization and the type of business
Large number of performance measures Measure depends on business process Measures change with time Various perspectives (customer, stakeholders and internal need to be considered for PM

Thank You