Production and Operations

Management Systems

Chapter 9: Supply Chain Management

Sushil K. Gupta
Martin K. Starr

2014
1
After reading this chapter, you should
be able to:
 Define supply chain capacity and explain how it is measured.
 Identify upstream and downstream partners for a chosen product
 Identify activities of acquisition chain management
 Discuss the importance of the purchasing function
 Explain the role of purchasing agents
 Highlight the importance of ethics in purchasing
 Describe the process of receiving, inspection and storage
 Describe the use of bids in purchasing
 Identify steps for supplier certification

2
After reading this chapter, you should
be able to (continued):
 Discuss systems issues in global sourcing
 Explain how distribution chains involve many partners
 Discuss the role of e-business
 Identify Competition, Conflict, Collaboration and Coordination (C4) issues
 Discuss the importance of Radio Frequency Identification (RFID)
 Explain how logistics and distribution planning can minimize costs
 Make coordinated forecasting and inventory decisions.
 Describe the bullwhip effect and its implications for supply chains.

3
 Introduction
The primary focus in supply chain management is managing the movement
of material.
Raw material and component parts flow from suppliers to manufacturer and
are converted into finished products.
Finished goods are then transported to the final consumer through several
intermediate organizations.
A service supply chain may not involve the movement of materials but
involves the design of interlinked operations.

Example, the linkages between travel agents, airlines, hotels and cruise lines to
provide an overall pleasurable experience to the clients going on a cruise forms the
supply chain.

 
 

4
 Wine Supply Chain*
o Grape Grower
o Wine Producer
o Bulk Distributor
o Transit Cellar
o Filler / Packer
o Finished Goods Distributor
o Retailer
*Source: Wine Supply Chain Traceability, GS1 Application
Guide (
http://www.gs1.org/docs/traceability/GS1_wine_traceabil
ity.pdf
)

5
 Tourism Supply Chain (TSC)*

o Tourists and tour

operators are the
customers.
o The retailers are travel
agents and travel
agencies.
o Other partners include
resorts, hotels, airlines
and cruise ships, etc.
*Zhang, X., Song, H., Huang, G.Q., (2009).
“Tourism supply chain management: A new
research agenda”. Tourism Management, 30,
345-358

6
 Top Performing Supply Chains
o The top-performing supply chains possess three very different qualities*.

 Great supply chains are agile. They react speedily to sudden changes in
demand or supply.
 They adapt over time as market structures and strategies evolve.
 They align the interests of all the firms in the supply network.

Only supply chains that are agile, adaptable, and aligned provide companies
with sustainable competitive advantage.
*Lee, Hau, L., The Triple-A Supply Chain, Harvard Business Review, October, 2004, Page: 102-112.

7
 Framework to Match Demand and
Supply Uncertainties
Lee, Hau L.*,has integrated product uncertainty with supply uncertainty and has
proposed a two dimensional matrix for designing supply chains.

He has categorized supply chains as:

o Efficient
o Responsive
o Risk hedging
o Agile

  Demand Uncertainty
Low (Functional Products) High (Innovative Products)
Supply Low (Stable Process) Efficient supply chains Responsive supply chains
Uncertainty High (Evolving Risk hedging supply chains Agile supply chains
Process)

*Lee, Hau L., Aligning Supply Chain Strategies with Product Uncertainties, California Management Review, Volume 44, Number 3, Spring 2002, pages 105-119.

8
 Product Characteristics Influence
Supply Chains
Product characteristics are important in designing a supply chain.
According to Fisher*these characteristics include:
• Product life cycle
• Demand predictability
• Product variety
• Market standards for lead times and service
Based on demand patterns products fall into one of two categories:
• Functional (e.g. food and gas – predictable and stable demand, long
product life cycles)
• Innovative (e.g. fashion apparel and personal computers)
Ideal supply-chain strategy:
• More efficient for functional products
• More responsive for innovative products
 

*Fisher, Marshall, L., What Is the Right Supply Chain for Your Product?, Harvard Business Review, March-April, 1997, Page: 105-116.

9
 Phases of a Supply Chain
Competition, conflict, collaboration and coordination (C4 ) issues span across
all stages of a supply chain*.

Design of supply chains, therefore, involves not only minimizing the cost of
moving material but also managing the intricate behavioral relationships
among supply chain partners.
 
Supply chain management consists of three distinct phases:
Acquisition Chain – purchasing of materials
Transformation Process - production of goods
Distribution Chain – distribution of finished products

*See, Gupta, Sushil, Christos Koulamas and George J. Kyparisis, E-Business: A Review of Research Published in Production and Operations Management
(1992-2008), Production and Operations Management, Volume 18, Issue 6, November – December 2009, page 604-620.
 

10
 Phases of a Supply Chain (continued)
In this presentation we will focus on:
Acquisition chain
• The functions and activities in the acquisition chain end at the OEM.
Suppliers to the OEM are called first tier suppliers; second tier supplies
to first tier; third tier to second, and so forth.

Distribution chain
• The functions and activities in the distribution chain start from the
OEM manufacturer and end with the final consumer.

There are some functions that are common to both phases.

On the other hand there are functions that are unique to each phase.

OEM = original equipment manufacturer.

11
 Acquisition Chain Management
(ACM)
o Acquisition chain represents all partners that are linked to provide raw
materials, component parts, and special services to a manufacturing company.
o Materials management (MM) is the bulk of acquisition chain activities.
o The main classes of materials that have to be purchased and managed include raw
materials, component parts and subassemblies.
o Finished product can be also be procured as part of the overall make or buy
strategy of a company.
o Two systems measures—‘‘turnover’’ (T) and ‘‘days of inventory’’(DOI)—are very
helpful for monitoring how well purchasing and inventory managers do their job.
o Acquisition Chain Management (ACM) connects the external sourcing of
supplies to the internal scheduling.
Traditionally this topic is known as purchasing and materials management.
 

12
 Systems Perspective of Materials
Management for Incoming Stock

• Some companies have Demand for Stock by Offices,

Maintenance, Cafeteria, Etc. and
Demand for Stock by the Production
Departments in Various Locations
external control over
shipments of finished Engineering, Design, Inventory
goods to distributors Research & Development Management

and customers as part

of MM. Purchasing Agents Purchasing Records
specialized by types of items, etc. Computer tied in with Accounting
• Other companies limit
MM to the regulation
Suppliers from Accounting
and use of incoming all over the world. Takes care of Account Payable
stock. The Office of the Vice President of
• Figure on RHS shows Materials Management
Receiving
Keeps records of deliveries
the functions that must Incoming Stock
be coordinated. Inspection of all incoming materials
before production’s use or warehousing

13
 Functions of Purchasing
 Ordering the right quantity of materials meeting all quality standards at the
best possible prices.
 Receiving materials.
 Inspecting the incoming goods.
 Selection of suppliers and vendors.
 Develop stable relationships with suppliers/vendors.
 Keep track of engineering design changes (EDCs) that may affect material
requirements.
 Purchasing must be adept at coordinating the materials that are needed for
start-ups.
• The purchasing function is primarily concerned with managing vendors and
suppliers.
• The distinction between vendors and suppliers is a matter of local usage.

14
 Changing Role of Purchasing
o The traditional role of purchasing agents (PAs) has been to bring the
organization the needed supplies.
o The role is changing and becoming more integrated within the
organization.
o The purchasing department in the twenty-first century also functions as an
information-gathering agency.
o Purchasing is expected to be on top of new materials, new suppliers, new
distribution channels, new prices, new technology and new processes that
produce quality levels previously not attainable.
o The role now requires and is based on having a wide and informed net of
important information.
o Up-to-date purchasing departments have a global reach via satellites and
telecommunications capabilities that constantly expand horizons.

15
 Changing Role of Purchasing (continued)
o Sourcing (generic name for purchasing) has become a global systems term.
o Purchasing departments must be responsive to the marketing strategies of
the various suppliers from whom they obtain required materials.
o The price-tag approach (push suppliers on price) has been thrown out in
favor of a long-term relationship with special trusted suppliers.

Make or buy decisions by P/OM are influenced by the information that

purchasing can provide.

The decisions often depend on the terms to buy, including price, quality,
delivery, and innovations, among other considerations, which purchasing
learns about and communicates to the P/OM team.

16
 Purchasing Agents
o Purchasing Agents (PAs) are responsible for carrying out functions of
purchasing.
o When the purchasing process is technical, the purchasing agent may be an
engineer or a person who has worked with the production department.
o It is important that PAs document the history of purchasing including what
the costs were, who the major suppliers were, what discounts were
obtained, what quality levels were achieved, and delivery periods for
specific items.
o The skills and experience of purchasing agents are not readily transferable
between different industries.
o They may vary between companies even in the same industry.

17
 Purchasing Agents (continued)
o Differentiation exists by types of materials, buying and shipping terms, and
supplier purchasing traditions.
o Purchasing agents (PA’s) make buying decisions that involve enormous
amounts of money. Ethics of PAs are very important for any company.
o The fact that suppliers influence purchasing decisions through gifts is not
considered illegal or unethical in some places in the world.
o Cultural and legal factors can play major roles in determining PAs’ success
in global sourcing.

18
 Receiving, Inspection and Storage
o Receiving and Shipping docks (often at the same location) have to be
properly designed for these processes.
o After unloading supplies, there is usually an assigned area to store them.
o Cross-docking may be used to transfer goods from incoming trucks at
the receiving dock to outgoing trucks at the shipping dock.
o Designs of such facilities differ depending upon
• Types of supplies unloaded.
• What the supplies are unloaded from (trucks, freight cars, hopper cars,
ships, planes, etc.).
• Where they are unloaded and to where they go.

Smart warehouses that use bar codes and RFID permit optimal use of
storage space and minimal time for retrieval.

19
 Requiring Bids Before Purchase
o Bidding is a process by which the buyer requests competing companies
(suppliers) to specify:
 Prices
 Delivery dates
 Quality specifications
 Other checks and assurances

o Bids can be requested where the price is fixed and the creativity and
quality of the solution is at stake.
• Advertising agencies bid for accounts that have a set budget.
• Consulting organizations work under specific budget allocations.

Bid requests (requests for proposal – RFP) state specifically all of the
conditions that must be met.

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 Requiring Bids Before Purchase (continued)
o The main focus in bidding cases is to satisfy a constituency that purchases
made under its watch have been made at the lowest reasonable cost.
o Many companies use bids to provide assurance that purchasing decisions
are not influenced by gifts (graft) of any kind.
o Bidding is a useful protection when suspicion exists that special purchasing
deals are being made between suppliers and company personnel.
o Many industries, particularly governmental agencies, are legally required
to use bidding procedures for buying items that cost more than a given
(relatively expensive) amount.
With trust and transparency, the need for bidding (in the first place) is diminished.

21
Requiring Bids Before Purchase (continued)
o Costs of purchasing are likely to decrease by inviting more companies to
participate in the bidding process.
o However, a low bidder may not produce quality work.
o With a large number of bidders, qualified suppliers may leave the bidding
process – leaving the field open to less qualified companies.
o Oligopolies (where the market is dominated by only a few vendors) can
present serious restrictive trade practices. Cartels exist (such as OPEC)
which have formal agreements between producers for collusion concerning
volume of production and prices.
o Managing bidding can be a costly process because it requires:
• Evaluation of vendors on multiple criteria (lowest costs, consistent quality,
engineering design capability, fastest delivery, vendor reliability, etc.).
• Cost of reviewing each company’s bid which can be time-consuming and
expensive.

22
 E-auctions and Bidding Models
o Use of the Internet for auctions (e-auctions) is increasing*.
o E-auctions have become popular for both forward and reverse auctions.
• Forward Auctions: Several buyers and one seller.
• Reverse Auctions: Several sellers and one buyer (the purchasing
scenario).
o E-auctions can be used for consumer-to-consumer (C2C) and business-to
consumer (B2C) auctions through commercial vendors like eBay and
Yahoo!
o e-commerce vendors (such as FreeMarkets) focus on business-to-business
(B2B) and e-procurement auctions.
o Bidding models rely on probabilistic analyses.

*See, Gupta, Sushil, Christos Koulamas and George J. Kyparisis, E-Business: A Review of Research Published in Production and Operations Management
(1992-2008), Production and Operations Management, Volume 18, Issue 6, November – December 2009, page 604-620.

23
 Certification of Suppliers
o Suppliers’ organizations need to be certified to assure conformance with
standards.
o Certification may be required before a supplier is allowed to participate in
a bidding contest.
o Certification is expensive. It is time-consuming– so focus on A-type items.
o Certification helps in developing long-term relationships with suppliers.
o Potential suppliers are advised how to upgrade those capabilities on which
they are rated as deficient.
o A comprehensive dynamic systems plan alters conditions for certification
overtime in line with the company’s strategies.

The buyer’s materials management information system (MMIS) has to be able to handle many
suppliers and potential suppliers for hundreds and even thousands of A-type items.

24
 Certification of Suppliers (continued)
o Rating procedures include formal evaluations of price, quality, delivery
time, and the ability to improve all three, and more.
o Scoring Models are very useful to evaluate and certify a group of vendors.
o Accepted suppliers are regularly reviewed to make certain that they
maintain their ‘‘winning’’ status.

25
 Global Sourcing
Trent and Monczka* distinguish between international purchasing and global
sourcing and identify seven features that characterize organizations which are
effective in global sourcing.

oInternational purchasing involves a commercial transaction between a buyer and

a supplier located in different countries.

oGlobal sourcing, on the other hand, involves integrating and coordinating

common items, materials, processes, technologies, designs and suppliers across
worldwide buying, design and operating locations.
 

Trent, Robert J. and Robert M. Monzcka, Achieving Excellence in Global Sourcing, Sloan Management Review, Fall 2005.  

26
 Global Sourcing (continued)
Seven features of organizations which are effective in global sourcing:

 Executive commitment to global sourcing

 Rigorous and well-defined processes
 Availability of needed resources
 Integration through information technology
 Supportive organizational design
 Structured approaches to communication
 Methodologies for measuring savings

27
 Global Sourcing (continued)
o Procurement decisions in the era of globalization are no longer based
entirely on an understanding of direct purchase costs or on easily
observable transaction costs, such as transport expenses and import duties,
but on many other types of transaction costs as well, including those
related to cultural, institutional and political differences.*

o An over dependency on first-tier suppliers is dangerous for OEMs (original

equipment manufacturers). It weakens their control over costs, reduces
their ability to stay on top of technology developments and shifts in
demand, and makes it difficult to ensure that their suppliers are operating
in a socially and environmentally sustainable fashion.**
*Butter, Frank A.G. den and Kess A. Linse, Rethinking Procurement in the Era of Globalization, Sloan Management Review, Fall
2008. 
**Choi, Thomas, and Tom Linton, Don’t Let Your Supply Chain Control Your Business, Harvard Business Review, December
2011, pages 112-117.

28
 Global Sourcing (continued)
A manufacturer may be in a difficult situation if its contract manufacturer
(CM) becomes its competitor.*
To avoid such a situation, the OEM should do the following:

 Modesty about revealing one’s secrets.

 Caution about whom one consorts with.
 A judicious degree of intimacy, loyalty, and generosity toward one’s
partners and customers.
 Use surplus intellectual property to enter markets beyond those for
their core products.

Ironically, CMs’ barrier-breaking abilities can offer OEMs access to new markets—and
sometimes a way out of the dilemma.
* Arruñada, Benito and Xosé H. Vázquez, When Your Contract Manufacturer Becomes Your Competitor, Harvard Business
Review, Sept 2006

29
 Distribution Chain
o The distribution chain starts once an item has been manufactured.
o The objective is to deliver the product to the consumer at the right time and
at minimum cost.

Note: The terms distribution chain and supply chain are used interchangeably
from this point onwards.

30
 Decisions in a Supply Chain
 The distribution chain shown below consists of a manufacturer,
distributor(s), wholesaler(s) and retailers(s).
 A partner to the right is called a downstream partner.
 A partner to the left is called an upstream partner.
 Thus, retailer is a downstream partner of wholesaler and distributor is an
upstream partner.
 Materials flow downstream and orders flow upstream. Information flows
in both directions.
Note: Materials may flow upstream as in a reverse supply chain.
Distribution (Supply) Chain with Four Levels

Materials Flow

Manufacture Distributor Wholesaler Retailer Customer

Order Flow

31
 Decisions in a Supply Chain (continued)
Distribution Channel
oShip the product directly to the retailer or have intermediate partners like
wholesalers and distributors.
oUse of e-channels.
oMixed channels
oNumber of wholesalers, distributors and retailers.

Location Decisions
oLocation of the manufacturing plant or multiple plants.
oLocations of the supply chain partners.

•In a supply chain the relative location of partners is important because that establishes the
distribution network and affects the cost of goods transported.

32
 Decisions in a Supply Chain (continued)
Mode of Transportation
oTrucks, trains, airplanes, or ships etc.
• The choice depends on the product and the cost of transportation. For example,
perishable products like fresh food items may have to be transported by air.
Refrigerated trucking is another popular option.

Extent of Vertical Integration

oA manufacturing company is considered more vertically integrated if it owns
the intermediaries.
A company that owns trucks is more vertically integrated as compared to the one
that uses a trucking company.

oThe network for the flow of goods has to be designed.

33
 Decisions in a Supply Chain (continued)
We shall study the distribution chain under the following topics:

E-Business
Logistics
Forecasting and Inventory

34
 E-Business*
E-business is a multi-dimensional discipline that involves:
• Application of technology.
• Study of customers’ attitudes, expectations, and satisfaction.
• Identification of internal organizational environment.
• Study of the relationships among partners in the supply chain,
• Development of collaborative strategies and coordination mechanisms.
• Development of analytical models.
Web-based functions span across:
• Product design
• E-auction and procurement
• Vendor development
• Customer relations management
• Logistics and distribution, and pricing.

*For a detailed discussion of e-business developments that are presented in this section, see Gupta, Sushil, Christos Koulamas and George J. Kyparisis, E-Business: A
Review of Research Published in Production and Operations Management (1992-2008), Production and Operations Management, Volume 18, Issue 6, November –
December 2009, page 604-620

 
 

35
 E-Business System Design
P/OM can make significant contributions to the profitability of the Internet-
based businesses (Starr*).
A user-friendly web interface that improves customer satisfaction includes:
• System flexibility
• Quality of service
• Product attributes
• Perceived ease of using the e-business systems
Customer characteristics, especially with heterogeneous customers, need to
be considered in the design of e-business systems.
E-process adoption is easier if the internal organizational environment
supports the e-process and the e-process leads to improved organizational
performance.

*Starr, M. 2003. Application of POM to e-business: B2C e-shopping. International Journal of Operations and Production Management 23(1) 105-124.

36
 Competition, Conflict, Collaboration
and Coordination (C4)
 Suppliers compete to win the manufacturer’s supply orders.
 Retailers compete among themselves for increasing their market share.
 Manufacturers compete with their own retailers by opening parallel
Internet channels – a case of mixed channels supply chain.

Some of the strategies to reduce conflict include:

• Revisions in the wholesale prices.
• Diversion of customers to the direct channel by the reseller for a
commission.
• Fulfilling the demand only through the reseller. 
• The retailer adds other features and value to differentiate his/her product.
• The manufacturer makes a side payment to the retailer to reduce conflict.

Competition results in conflict which in turn leads competing entities to collaborate and coordinate
to arrive at a win-win situation for everyone.

37
Radio Frequency Identification (RFID)
 Radio frequency identification (RFID) is an enabling technology for real
time data collection.
 RFID uses wireless non-contact radio-frequency electromagnetic fields for
data transfer, to automatically identify and track tags attached to objects (
http://en.wikipedia.org/wiki/Radio-frequency_identification).
 RFID tracks the movement and flow of items in a supply chain and provides
visibility to managers about the location and condition of the tracked items.
 The real time information is valuable because it helps to increase asset
utilization and to minimize inventory and logistics related costs.
 RFID also minimizes delays in information transmission leading to improved
information sharing among the partners in a supply chain.
 The design of RFID systems is critical because installing RFID technology
infrastructure entails a large initial investment and significant potential risks
in technology adoption.

38
 Business Value of RFID
The business value of RFID comes from the visibility it provides to managers about the items tracked.
It emanates from labor cost savings, shrinkage reduction and inventory visibility.
RFID has an impact on reducing information asymmetries.
 The stages in the evolution of RFID business value include (see Dutta et al.*):
Technology deployment and integration,
Integration with business processes,
Development of new business architectures for employees, policies and organizational structures.
Three dimensions for an RFID value proposition include:
RFID technology
Quantification of the RFID business value
Incentives for RFID adoption and implementation.
*Dutta, A., H. L. Lee, S. Whang. 2007. RFID and operations management: technology, value, and incentives. Production and Operations Management 16(5) 646-655.

39
 Business Value of RFID (continued)
Examples:
 
Amini et al.* used RFID to track trauma patients in a hospital.
RFID improved the tracking of patients’ time from about 25% to 80% in the
trauma center where patients spent about ten to twelve hours for their
treatment.
RFID technology’s ability to collect data in a passive manner avoids
interference with medical procedures.
RFID-based simulation models help in analyzing healthcare processes more
thoroughly based on the data collected for process cycle time, patient
throughput rate, and equipment and personnel utilization.

*Amini, M., R. F. Otondo, B. D. Janz, M. G. Pitts. 2007. Simulation modeling and analysis: A collateral application and exposition of RFID technology.
Production and Operations Management 16(5) 586-598.

40
 Business Value of RFID (continued)
Example:

Delen et al.* establish the business value of RFID for a retailer by analyzing
the movement of RFID-tagged cases between distribution centers and retail
stores.
The analysis provides insights about the distribution of lead times among
different products and different combinations of distribution centers and retail
stores.
The RFID-generated information also helps in tracking recalls, delivering
products to the stores as per schedule, and in studying the backroom process
that involves moving the products to the sales floor.
In addition to providing immediate visibility, RFID data utilization leads to
gains due to limited process changes first and then to the major modifications
in the logistics system.
*Delen, D., B. C. Hardgrave, R. Sharda. 2007. RFID for better supply-chain management through enhanced information visibility. Production and Operations
Management 16(5) 613-624.

41
 Adoption and Implementation of RFID
Ngai et al. * present a case study of the design, development and implementation of an RFID-based
traceability system.

The critical success factors for RFID implementation include:

– High organizational motivation,
– Implementation process efficiency,
– Effective cost control,
– RFID skills and knowledge transfer.

Several deployment issues that impede RFID implementation include:

1. Lack of in-house RFID expertise
2. Inadequate technology support from local RFID vendors
3. Existence of different sets of industry standards
4. Unreliable hardware performance
5. Underdeveloped RFID middleware.

*Ngai, E.W.T., T.C.E. Cheng, K.-H. Lai, P.Y.F. Chai, Y.S. Choi, R.K.Y. Sin. 2007. Development of an RFID-based traceability system: Experiences and lessons learned from an aircraft engineering company. Production and
Operations Management 16(5) 554-568.

42
Adoption and Implementation of RFID
(continued)

Overall, the study reports that the RFID-based traceability system has resulted in:

•improved lead times

•competitive differentiation
•savings from reusing RFID tags
•breakthrough productivity by automation
•reduction of human errors in handling the repairable parts
•improved inventory management
•reduced manpower and manual data recording
•real time monitoring and access to detailed information
•reduction of repairable parts loss
•improved customer relationships
 
The return on investment, the business value, and the selection of partners are
important considerations at the strategic level in RFID investment projects

43
 Logistics
Logistics systems outline the distribution strategy.
The example of Rukna Auto Parts company illustrates how distribution
strategies are determined.

The table below shows the following for Rukna Auto Parts Company:
Capacity of each plant (3 plants).
Demand at each distributor (4 distributors).
The cost of transportation per unit from each plant to each distributor.

    Distributors  
  MKG, ASN, GMZ, AKLA,
  Capacity
Inc. Inc. Inc. Inc.
Plants Miami $1.00 $3.00 $3.50 $1.50 20,000
Tempe $5.00 $1.75 $2.25 $4.00 40,000
Columbus $2.50 $2.50 $1.00 $3.00 30,000
 
Demand 25,000 13,500 16,800 34,700  
The totals of supply (90,000) and demand (90,000) match. In a more general and complex problem the
supply and demand may not match. 44
 Logistics
Solution of Rukna Auto Parts
Rukna wants to know
the number of units to
be shipped from each
plant to each distributor
to minimize the cost of
transportation
(distribution).

The best solution to this

problem is given in the
figure on RHS.

The total transportation

cost (minimum for this
problem) is given in cell
G22 ($203,525).
.

45
 Logistics
Solution of Rukna Auto Parts (continued)
• Cells C4 through F6 (highlighted cells) give the number of units shipped from a
plant to a distributor.
• For example, cell C6 gives the number of units shipped from Columbus to MKG
(13,200 units).
• All costs are given in cells C13 to F15.
• For example, cell C15 ($2.50) gives the shipping cost per unit from Columbus to
MKG.
• The total transportation costs for each combination of the plant and distributor are
given in cells C19 to F21.
• The values in these cells (C19 to F21) are obtained by multiplying the number of
units shipped by the shipping cost per unit in the respective cells for each
combination of the plant and distributor.
• For example value in cell C21 ($ 33,000) is obtained by multiplying the value in
cell C6 (13,200) and C15 ($2.50).
The transportation method of linear programming has been used to solve this problem.

46
Forecasting and Inventory Decisions
• Integrated decisions in forecasting and inventory are important for
effective management of supply chain systems.
• Bottlenecks may be created if information is not shared and the
decisions are not coordinated.
• Any one of the components in the supply chain (see figure below)can
be a bottleneck.
• Bottlenecks affect the entire supply chain.
• Contingency planning for supply chain capacity crises must be done
to avoid crippling damage.

47
 Forecasting and Inventory Decisions
 Integrated decisions in forecasting and inventory are important for
effective management of supply chain systems.
 Excessive inventories and shortages may result in supply chains if
information is not shared and the decisions are not coordinated.
 This may lead to amplified demand variability in a supply chain.

 This phenomenon is called bullwhip effect. It means that the orders by a

retailer to its wholesaler to replenish the stock are likely to fluctuate more
than the demand at the retailer.
 This phenomenon continues up the supply chain.

48
 Bullwhip Effect
 The bullwhip phenomenon was first identified by Proctor and Gamble
(P&G) for demand of diapers.
 The major cause of the bull-whip effect is the lack of information about the
actual demand by supply chain partners.
 Each partner in the supply chain does its own demand forecasting and
places replenishment orders.
 This leads to inconsistency if the entire supply chain system is not well
coordinated.
 An integrated forecasting system needs to be developed.
 Such a system requires a transparent information system, trust among
supply chain partners, and ability to make and adjust forecasts at each
level of the supply chain.
 Collaborative forecasting has to be done on a periodic basis – monthly,
weekly etc.

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 The Better Beer Company Game
We study the operations of a supply chain system through the example of what
is popularly known as “the beer game.”
The supply chain is depicted in the figure below.

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The Better Beer Company Game (continued)
Forecasting and inventory decisions are made by the partners in the supply
chain in this game.
Retailers, distributors, and producer (manufacturer) can order too much (beer)
or too little (beer) when information about actual demand for the brand is
delayed along the linkages of a supply chain.
The effects of ordering too much or too little as a result of information delays
can be costly. The resulting imbalance of demand with existing capacity is
important to understand.
The game shows how the performance of a linked system is tied to the
adequacy and timeliness of forecasts about future demand.

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The Better Beer Company Game (continued)
The tables and graphs in the next three slides show the data for simulations
that reflect the effects of delays on supply chain decisions made by producers,
wholesalers, retailers, suppliers, and customers.
These simulations are identified with the Better Beer Company whose product,
called Woodstock, is at the heart of the simulation.

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 Retailers Ordering from Distributors
Begin week 1 with 12 cases of stock on-hand
(SOH).
Supply at the start of the week is 4 cases, so net
SOH is 16 cases.
The demand is for 4 cases, so end of week 1
SOH is 12 cases.
The retailer orders 4 cases (see column “Order
Quantity”).
Assume lead time to be 3 weeks.
Therefore, the 4 cases will be delivered at the
beginning of week 5. Continue to read table on
RHS in this fashion. Note that in weeks 10, 11,
and 12, the end SOH rose to 24 cases, double Note: Demand is shown as a negative number
the normal amount. because demand depletes the inventory level.

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 Distributors Ordering from Producers
(Manufacturers)
Week 1 begins with 64 cases of
beer at the distributor and end
SOH is 64.
Lead time is 4 weeks, so the
order placed at the end of week
1 is received at the beginning of
week 6.
Continue to read table on RHS
in this fashion.

Note: Demand is shown as a negative number because demand

depletes the inventory level.

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Oscillations in Stock On-Hand (SOH)
Oscillations in the Distributor’s Stock On-Hand
Oscillations in the Retailer’s Stock On-Hand (SOH). (SOH).

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 SOH Curves of the Distributor and
Retailer
The figure below compares the end stock on-hand (SOH) results for the
retailer and the distributor. The effect had seemed enormous to the retailer.
However, when the comparison is made with the distributor, the retailer’s
swings were gentle. The effect is going to be even worse at the producer’s
level.

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Thank you

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