Supply Chain Management

Lecture 6
Outline

• Today
– Homework 1 due
– Chapter 4
– Introduction to Excel Solver?
• Next week
– Chapter 5
Designing a Supply Chain Network

In designing a supply chain, we need to

consider how all supply chain drivers
should be used together to support the
competitive strategy of a company and
maximize supply chain profits
Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

Factors Influencing Distribution Network
Design
• Performance of a distribution network should be evaluated
along two dimensions
– Customer needs that are met (customer service)
• Response time (Time it takes for a customer to receive an order)
• Product variety (Number of different products that are offered)
• Product availability (Probability of having a product in stock)
• Customer experience (Ease of placing and receiving orders)
• Order visibility (Ability of customers to track their orders)
• Returnability (Ease of returning unsatisfactory merchandise)
– Cost of meeting customer needs (supply chain cost)
• Inventory (All raw materials, WIP, and finished goods)
• Transportation (Moving inventory from point to point)
• Facility & handling (Locations where product is stored, assembled, or fabricated)
• Information (Data and analysis of all drivers in a supply chain)
Design Options For a Distribution Network

• Two key decisions when designing a distribution

network
– Will the product be delivered to the customer location
or picked up from a preordained site?
– Will product flow through an intermediary?
 Retail Storage with Customer Pickup
• Example: Retail stores such as
Manufacturers
Wal-Mart and JCPenney
• Customers pick up product from
retailers
– Low transportation cost
– High facility cost
– Relative easy returnability
Distributor Distributor – Increased inventory cost
Warehouse Warehouse • No order tracking necessary
– If the product is available at the
retailer, the consumer buys.
Retailer Retailer Retailer Otherwise goes to another
retailer
• Effective for fast moving items

Consumers
 Manufacturer Storage with Direct Shipping
(Drop Shipping)
• Example: eBags
Manufacturers • Products are shipped directly to
the consumer from the
manufacturer
• Retailer is an information
collector:
– Passes orders to the
manufacturers
Retailer – It does not hold product
inventory
• Inventory is centralized at
manufacturer
• Drop shipping offers the
manufacturer the opportunity to
Consumers postpone customization
• Effective for high value, large
variety, low demand products
• High transportation cost
 Manufacturer Storage with Direct Shipping
and In-Transit Merge
• Example:
Manufacturers – Furniture retailers merge
couches and coffee tables
produced by different
manufacturers
– Dell merges a Dell PC with a
Sony flat screen
Mergers • Shipments from multiple
Retailer
manufactures are merged
before making a single delivery
to the consumer
• Shipments to Mergers are
larger so economies of scale is
Consumers achieved
• Mergers increase facility costs
• Response time may go up
 Distributor Storage with Carrier Delivery

• Example: Amazon
Manufacturers • Inventory is held at a
warehouse which ships to
customer by carriers
• With respect to direct shipping
– Inventory aggregation is less
– Higher inventory costs
Distributor Distributor
Warehouse Warehouse – Facility costs are higher
– Less information to track
• Warehouses are physically
closer to consumers which
leads to
Consumers
– Faster response time
– Lower transportation cost
• Not effective for slow moving
items
 Distributor Storage with Last Mile Delivery
• Example: Milk delivery, Grocery
Manufacturers
delivery (Peapod, Albertsons),
Denver Mattress
• Warehouse delivers to
customers instead of carrier
– Warehouses are located closer
to consumers
– Transportation costs go up
Distributor Distributor because warehouses are not
Warehouse Warehouse as effective as package carriers
in aggregating loads to have
economies of scale
• Warehouse may need to own a
trucking fleet so the physical
infrastructure costs are higher.
Consumers – Products must be flowing fast
to justify the infrastructure
– Processing cost are high
 Manufacturer or Distributor Storage With
Customer Pickup
• Example: 7dream.com
Manufacturers • Customers come to pick up
sites (warehouse, retailer) to
get the products
– If consumers are willing to pick
up the products, let them do so.
Otherwise, they would be
charged for the delivery costs
Distributor Distributor • Order tracking is crucial.
Warehouse Warehouse Consumers must be alerted
when their order is ready for
pick up. Once a consumer
arrives at the pick up site, the
products must be quickly
located.
Consumers • Significant amount of
information is required
• Increased handling cost
Comparing Distribution Networks
Retail Manufacturer Manufacturer Distributor Distributor Manufacturer
storage with storage with storage with storage with storage with storage with
customer direct in transit package last mile customer
pickup shipping merge delivery delivery pickup
Reponse time 1 4 4 3 2 4
Product variety 4 1 1 2 3 1
Product availability 4 1 1 2 3 1
Cusomter experience 1-5 4 3 2 1 5
Time to market 4 1 1 2 3 1
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility and handling 6 1 2 3 4 5
Information 1 4 4 3 2 5

1 = strongest performance
6 = weakest performance
Design Options For a Distribution Network

1. Retail Storage with Consumer Pickup

2. Manufacturer Storage with Direct Shipping
3. Manufacturer Storage with Direct Shipping and
In-Transit Merge
4. Distributor Storage with Carrier Delivery
5. Distributor Storage with Last Mile Delivery
6. Manufacturer or Distributor Storage with
Consumer Pickup
Design Options For a Distribution Network
Manufacturers
Manufacturers Manufacturers

Distributor Distributor
Warehouse Warehouse Retailer Retailer
Mergers

Retailer Retailer Retailer

Consumers Consumers

Consumers
Manufacturers Manufacturers Manufacturers

Distributor Distributor Distributor Distributor Distributor Distributor

Warehouse Warehouse Warehouse Warehouse Warehouse Warehouse
From brick-and-mortar to click-and-mortar

What has been the impact of e-business on supply chain

cost?
What has been the impact of e-business on customer
service?
In the future, do you see the number of distributors
decreasing, increasing, or staying about the same?

Is e-business likely to be more beneficial in the early part

or the mature part of a product’s life cycle?

Why should an e-business such as Amazon.com build

more warehouses as its sales volume grows?
Dell: Network Design (Europe)

A successful distribution network satisfies

customer needs at the lowest possible cost
Dell: Network Design
As Cannon noted, the Dell build-to-order and “do it all ourselves”
model served the company well for almost 20 years, but “the
environment has changed.”

Just a few years ago, Dell was positioned as the supply chain
place where most of us needed to be: almost no finished goods or
parts inventory; negative cash-to-cash cycle (paid by customers
before paying suppliers); “have it your way” flexibility/the epitome
of mass customization; sophisticated demand management
techniques to drive buyers to what was most profitable or
available in terms of PC configurations; cut out the middleman.

Now, it appears, Dell itself doesn’t want to be there.

“Our supply chain needs to change dramatically,” Cannon said.

Dell: Network Design
Dell’s approach added a lot of complexity – and cost. He said, for
example, that for many models, there were as many as 500,000
configuration options.

Why do that? “Because we could,” Cannon said. “We had a very

flexible supply chain that allowed us to offer that level of
configuration choice.”

That approach, in turn actually led to higher product costs in many

cases. Here’s how. Base/entry models had to be built in a way that
permitted all these add-ons to much higher end models. So,
if/when customers configured their way up to a high-end unit, Dell
made good money. But if a customer stayed with a basic offering,
the company lost margin because the base unit versus the
competition had extra costs to support the potential of high-end
add-ons.
Dell: Network Design
Dell has said it believes it can save $3 billion annually from various
measures, and Cannon said most of that will come out of these
changes to the supply chain over the next 2-3 years. It had sales of
$61 billion last year, so that’s about a 5% reduction in total costs.

Dell to Migrate Manufacturing

Operations from Ireland to Poland
Example: Dell Network Design Decision

$31 $19

$23
Example: Dell Network Design Decision

Romenia Poland Ireland Demand

France 23 19 31 15,000.00
Germany 9 15 11 20,000.00
Italy 23 21 40 13,000.00
Spain 29 26 40 12,000.00
United Kingdom 33 36 20 19,000.00
Capacity 80,000 80,000 80,000
Cost $ 18,000,000.00 $ 17,500,000.00 $ 24,500,000.00
What is an Optimization Problem
• Generally, an optimization problem seeks a
solution where decisions need to be made in a
constrained or limited resource environment
– Most supply chain optimization problems require
matching demand and supply when one, the other, or
both may be limited
• An optimization problem comprises three major
components
– Decision variables
– Constraints
– Objective
Introduction to Excel Solver

• Installing Excel Solver

– Goto Tools > Add-ins…
– Select “Solver Add-in” and press OK
• Opening Excel Solver
– Goto Tools > Solver
Example: Profit Maximization Problem

• The Windsor Glass Company is planning to

launch two new products.
– 8 feet glass door with aluminum framing
– 4x6 feet window with wood framing
• Management of the company wants to determine
what mixture of both products would be most
profitable
Example: Profit Maximization Problem

8 Feet Aluminum Frame Doors

4x6 Wood Frame Windows
Windsor Glass Company
Plant 1
(Aluminum frames)

1 hour Plant 3 Profits

(Glass and assembly)
Excess cap. 4 hours
3 hours $3,000
Plant 2 2 hours $5,000
(Wood frames)
Excess cap. 18 hours
2 hours
Excess cap. 12 hours
Windsor Glass Company Model

• Inputs
Production time per batch (hours)
Plant 1 Plant 2 Plant 3 Profit per batch
Doors 1 0 3 $3,000
Windows 0 2 2 $5,000
Available time (hours) 4 12 18

• Decision variables
– X1 number of batches of doors produced
– X2 number of batches of windows produced
Windsor Glass Company Model
• Objective function
– Maximize
3000 X1 + 5000 X2

Production time per batch (hours)

Plant 1 Plant 2 Plant 3 Profit per batch
Doors 1 0 3 $3,000
Windows 0 2 2 $5,000
Available time (hours) 4 12 18
Windsor Glass Company Model
• Constraints
– Hours available in Plant 1
X1  4
– Hours available in Plant 2
2 X2  12
– Hours available in Plant 3
3 X1 + 2 X2  18
– Nonnegative production quantities
X1  0, X2  0
Production time per batch (hours)
Plant 1 Plant 2 Plant 3 Profit per batch
Doors 1 0 3 $3,000
Windows 0 2 2 $5,000
Available time (hours) 4 12 18
Windsor Glass Company Model

• Decision variables
– X1 number of batches of doors produced
– X2 number of batches of windows produced
• Objective function
– Maximize 3000 X1 + 5000 X2
• Constraints
– X1 <= 4 (Available hours Plant 1)
– 2 X2 <= 12 (Available hours Plant 2)
– 3 X1 + 2 X2 <= 18 (Available hours Plant 3)
– X1, X2 >= 0 (nonnegativity)
Windsor Glass Company Model

• Objective function
– Maximize 3000 X1 + 5000 X2

Objective function
Maximize profit =SUMPRODUCT(E4:E5,H4:H5)
Windsor Glass Company Model

• Constraints
–0X1<= 4 - X1 <= 4 (Available hours Plant 1)
–02 <=
X2 12 - 2 X2 <= 12 (Available hours Plant 2)
–03 <=
X1 +182 -X32 X1 -<=
2X182 (Available hours Plant 3)
– X1, X2 >= 0 >= 0 (nonnegativity)

Constraints
Plant 1
Doors
Windows
Available time (hours) =B6-SUMPRODUCT(B4:B5,H4:H5)
Windsor Glass Company Model

• Decision variables
– X1 number of batches of doors produced
– X2 number of batches of windows produced
• Objective function
– Maximize 3000 X1 + 5000 X2
• Constraints
– 0 <= 4 - X1 (Available hours Plant 1)
– 0 <= 12 - 2 X2 (Available hours Plant 2)
– 0 <= 18 - 3 X1 - 2 X2 (Available hours Plant 3)
– X1, X2 >= 0 (nonnegativity)
Windsor Glass Company Model using Excel
Solver

Objective function

Decision variables

Constraints
Windsor Glass Company Model using Excel

Inputs Variables
Production time per batch (hours)
Plant 1 Plant 2 Plant 3 Profit per batch
Doors 1 0 3 $3,000 Doors 2
Windows 0 2 2 $5,000 Windows 6
Available time (hours) 4 12 18

Constraints
Plant 1 Plant 2 Plant 3 Profit per batch
Doors
Windows
Available time (hours) 2 0 0

Objective function
Maximize profit $ 36,000