Week 02 - Design For SCM

Basic Models in Supply Chain Management 1
A Premise
 Skills learned in this Supply Chain Management class will be of great use no matter
what path students choose to follow.
 The class is developed with the premise that good strategic decisions cannot be made
without access to relevant analytics, and all analytics should be designed to support
decision making.
 As a result, students will develop critical thinking, the ability to formulate and analyze
problems, and support their recommendations with analytics that uses data literacy
and computing skills.

Design for Supply Chain Management
Most of the slides of this part of the lecture were prepared

over my teaching lifetime based on the material that I
have learned & benefited from this book
Ardavan Asef-Vaziri
Competitive Strategy and Supply Chain Strategic Fit
 Competitive Strategy defines the set of customer needs a company seeks to satisfy
through its products and services.
 Product Development Strategy. The portfolio of the products that the company
will develop.
 Marketing and Sales Strategy. How the market will be segmented, product
positioned, priced, and promoted.
 Finance Strategy. Source and use of funds.
 Supply Chain Strategy. The nature of in-house and outsourced processes,
procurement, manufacturing or services, distribution, transportation, follow-up
services.
 Strategic fit requires that all functions within a firm and stages in the supply chain
target the same goal—one that is consistent with customer needs.
 A lack of strategic fit  SC surplus  SC profitability.

The Objective of a Supply Chain
 Supply Chain Surplus = Value to the Customer – Supply Chain Costs
 Customer Surplus = Value to the Customer – Price
 Supply Chain Profit = The difference between the price and Summation of all costs to
be shared across all stages of the supply chain.
 Success is measured by total supply chain surplus, not profits at an individual stage.
 Customer is the only source of revenue.
 Supply Chain Management is management of Facilities
Transportation
Inventory Information
Pricing Sourcing
 Understanding the Trade-offs. Investing more in one lever generally allows the supply
chain to invest less in one or more of the other levers.
Basic Models in Supply Chain Management Copyright © 2019, SCM, Sunil Chopra, Pearson Education, Inc 5
Strategic Fit and Levers to Deal With Uncertainty
 To achieve strategic fit, a company must first understand the needs of the customers
and the capabilities of all supply sources.
 Both the needs and the capabilities should be used to identify the implied
uncertainty that the supply chain must absorb.
 Supply chain’s capabilities are defined in terms of efficiency and responsiveness –
efficiency (C-Cost) and differentiation (TQV-Time.Quality.Variety).
 Tailoring the supply chain is essential to achieving strategic fit when supplying a
wide variety of customers with many products through different channels.
 The implied uncertainty that a supply chain needs to absorb depends on the needs
of the customer segments targeted.
 To achieve strategic fit, a supply chain must find the right balance between
investments in the levers to effectively serve the target customer segments.
 Decisions are evaluated based on their impact on overall supply chain performance
not a function or a stage  supply chain surplus.

Decision Phases in a Supply Chain
 Supply chain strategy or design
 How to structure the supply chain over the next several years
 Supply chain planning
 Decisions over the next quarter or year
 Supply chain operation
 Daily or weekly operational decisions
Strategy or Design Decisions
 Supply chain strategy decisions must support strategic objectives. To maximize
supply chain surplus under competitive strategy constraints.
 Long-term, less frequent, and expensive to reverse decisions– must consider market
uncertainty
 Strategic Decisions
 Outsource supply chain functions
 Capacity, location, capital intensity, and flexibility
 Production and storage nodes for the product mix
 Transportation nodes and links and modes of transportation
 Information infrastructure
Planning Decisions
 Supply Chain Planning Decisions are fixed by the Supply Chain Strategy. Maximize
SC surplus under SC strategy constraints.
 Starts with demand forecast for the coming year. Must consider demand uncertainty,
exchange rates, and competition over the time horizon in planning decisions
 Planning Decisions
 Which markets will be supplied from which locations
 Inventory policies- cycle, safety, seasonal, and pipeline Inventory
 Subcontracting
 Timing and size of market promotions
Supply Chain Operation Decisions
 Performs under SC strategy and Planning constraints. The goal is to handle customer
orders as effectively as possible.
 Time horizon is from days to minutes.
 Operations Decisions
 Allocate orders to inventory or production
 Set order due dates and delivery schedules
 Allocate orders to shipments
 Generate pick lists at a warehouse
Process Views of a Supply Chain- Cycle View & Push/Pull View
 Cycle View: The processes are divided into cycles, each performed at the interface
between two successive stages of a supply chain. Each cycle starts with an order
placed by one stage of the supply chain and ends when the order is received from the
supplier stage. They include customer order cycle, replenishment cycle,
manufacturing cycle, and procurement cycle.
 Push/Pull View: The processes are divided into two categories. Pull processes are
performed in response to a customer order. Push processes are performed in
anticipation of customer orders. Push to pull may happen at interface of a pair of
cycles where the down steam follows pull and the upstream is on push.
 In a push system units are allowed to enter the process independent of current
inventory in process. In a pull system the resource furthest downstream (closest to the
market) is paced by market demand. Pull system provides a more global view of how
supply chain processes relate to customer orders.
Process Views of a Supply Chain- Cycle View & Push/Pull View
L. L. Bean Ethan Allen Supply Chain for Customized Furniture
Supply Chain Systems
 Customer Relationship Management (CRM)
 Internal Supply Chain Management (ISCM)
 Supplier Relationship Management (SRM)
Financial Indices
The majority of the slides of this part of the lecture were

prepared over my teaching lifetime based on the material
that I have learned & benefited from this book
Ardavan Asef-Vaziri
Financial Measures of Performance
Ratios (Metrics) Amazo n Formula (Range) Formula (Cell)

Where to get data? ROE
Earning Before Interest
2.81%
365650
=Net_Income/Total_Stockholder_Equity
=Net_Income+Interest_Expense*(1-Tax_Rate)
=B13/J9
=B13+B9*(1-B14)
Income statement ROA 0.91% =Earning_Before_Interest/Total_Assets =N3/F12
ROFL (FIN Leverages) 0.019 =ROE-ROA =N2-N4
Balance Sheet Profit Margin 0.49% =Earning_Before_Interest/Total_Revenue =N3/B2
Asset Turnover 1.85 =Total_Revenue/Total_Assets =B2/F12
APT 2.48 =Cost_of_Goods_Sold/Accounts_Payable =B3/J2
ART 15.62 =Total_Revenue/Net_Receivables =B2/F4
INVT 7.31 =Cost_of_Goods_Sold/Inventory =B3/F5
PPET 6.80 =Total_Revenue/Property_Plant_and_Equipment_PPE =B2/F9
C2C -0.20 =1/ART+1/INVT-1/APT =1/N9+1/N10--1/N8
SG&A/Revenue 26.23% =Selling_General_and_Administrative/Total_Revenue =B5/B2
Supply Chain Drivers and Metrics

Ardavan Asef-Vaziri
SC Decisions & Drivers of SC
Each driver affects the balance between responsiveness and efficiency and the resulting
strategic fit. Thus, it is important for supply chain designers to structure the six drivers
appropriately to achieve strategic fit.
Competition Space and Service Factors
Efficiency
Doing Things Right
Price
Time Variety
Quality
Differentiation
Effectiveness
Doing Right Things

Facilities - Key Performance Metrics
 Increasing the number, capacity, and flexibility of facilities, and decreasing the
number of markets served by each facility increases responsiveness but hurts
efficiency.
 Key Facility-related Metrics
 Number & Capacity & Location
 Flexibility
 Capital-Labor Ratio
 Utilization
 Processing/Setup/Down/Idle Time
 Theoretical & Actual Flow and Cycle Time
 Production Batch Size

Inventory - Key Performance Metrics
 The major inventory related decisions include identifying the batch size, the safety
inventory, the seasonal inventory, and the level of product availability.
 Safety inventory and level of product availability  increases responsiveness but
hurts efficiency. Batch size  and seasonal inventory  increases holding costs but
may decrease production, transportation, and purchasing costs.
 Key inventory-related metrics
 Average inventory
 Inventory turns & days of supply
 Average replenishment batch size
 Average safety inventory
 Seasonal inventory
 Service level (fraction of time out of stock) & Fill rate

Transportation - Key Performance Metrics
 Transportation related decisions include designing the transportation network and
selecting the transportation mode. Faster modes of transport are more expensive but
can improve responsiveness while helping decrease inventory and facility costs.
 Key Transportation-related Metrics
 Inbound transportation: total costs, number of shipments,
average inbound transportation cost per shipment
 Outbound transportation: total costs, number of shipments,
average inbound transportation cost per shipment
 Fraction transported by mode

Logistics costs represented as a part of US economy (% of GDP)
DSO 581 Supply Chain Management

The US Business Logistics cost Was about 7.7% of GDP in 2017
$ Billions %
Carrying Costs (Goes to Inventory Cost of Logistics)
Financial cost (WACC x total business inventory) 151.6 10%
Other (obsolescence, shrinkage, insurance, handling) 128.4 9%
Storage 148.0 10%
Subtotal 428.0 29%
Transportation Costs – Truck and Other Modes
Full truckload 289.4 19%
Less than truckload 62.4 4%
Private or dedicated 289.6 19%
Motor carriers 641.4 43%
Water 41.0 3%
Pipelines 36.4 2%
Rail 80.5 5%
Air freight 67.2 4%
Parcel 99.0 7%
Subtotal 965.5 65%
Shipper ‘s administrative costs 50.7 3%
Carrier’s support activities 50.5 3%
Total Logistics Costs 1,494.7
Source: The Council of Supply Chain Management Professionals’ 26thAnnual State of Logistics Report®

How did Apple do it?
In 1997, most computer When iPod sales took off in 2001,

manufacturers transported products Apple realized it could pack so many
by sea, a far cheaper option than air of the music players on planes that it
freight. To ensure that the company’s became economical to ship them
new iMacs would be widely available directly from Chinese factories to
at Christmas the following year, Jobs consumers’ doors
• (BusinessWeek, November 2011)
paid $50 million to buy up all the
available holiday air freight space. The
move handicapped rivals such as
Compaq that later wanted to book air
transport.
DSO 581 Supply Chain Management 24

Information - Key Performance Metrics
 The major information related decisions include coming up with a demand plan as
well as a sales & operations plan that optimally matches supply and demand.
 It is important that information is shared across the supply chain to ensure that plans
at different stages are coordinated.
 Key Information-related Metrics
 Forecast Horizon
 Forecast Error
How did Amazon do it?
• Amazon uses • Amazon went • In 2012,

analytics of from a single Amazon.com
customers’ past fulfillment purchased Kiva
purchases and center in the Systems, a
browsing nineties to more warehouse
patterns to offer than 60 automation
them fulfillment company
additional/new centers in US
products to (and another 60
buy; algorithms in the rest of
help place items the world) in
on shelves 2016, enabling
them fast
deliveries to
customers

Sourcing - Key Performance Metrics
 The sourcing related decisions include deciding whether an activity will be insourced
or outsourced, identifying key factors in supplier selection.
 Key Sourcing-related Metrics
 Supply quality and reliability
 Lead time & percentage on-time deliveries
 Average and range of purchase price
 Average purchase quantity
 Days payable outstanding
Pricing - Key Performance Metrics
 The major pricing related decisions include deciding whether the firm will offer (i)
quantity discounts, (ii) everyday low pricing, (iii)prices that vary over time, and (iv) a
fixed price or a menu of prices that vary along some dimension such as response time.
 Key Pricing-related Metrics
 Profit margin
 Average sale price
 Average order size
 Range of sale price
 Range of periodic sales
 Days sales outstanding
 Incremental fixed cost per order
 Incremental variable cost per unit
Gartner Supply Chain Top 25 (2019)
25% peer opinion, 25% Gartner opinion, 20% ROA, 10% inventory turnover,
10% revenue growth, 10% CSR(Corporate Social Responsibility)
1. Colgate- 5. Cisco
2. Inditex 3. Nestle 4. Pepsico
Palmolive Systems
9.
6. Intel 7. HP Inc 8. J&J 10. Nike
Starbucks
11.
14.
Schneider 12. Diageo 13. Alibaba 15. L’Oreal
WalMart
Electric
20. The
18. Novo 19. Home
16. H&M 17. 3M Coca Cola
Nordisk Depot
Co.
21.
24. Akzo
Samsung 22. BASF 23. Adidas 25. BMW
Nobel
Electronics
Gartner Supply Chain Masters 2019
Example of Products: Tide
Example of Products:
Ben&Jerry, Sunlight

Why Inventory
Ardavan Asef-Vaziri
Why We
Why Only Enough are interested in reducing inventory
Inventory?
 Inventory has cost
 Physical carrying costs – we need storage and human resources.
 Financial costs (opportunity cost) – We could have invested our capital elsewhere
and benefit from it.
 Risk of obsolescence due to change in customer preferences, and due to
technological changes.
 Inventory covers problems
 Even if we produce low quality product, there is enough inventory downstream.
 Untrustworthy suppliers, machine breakdowns, long changeover times, too much
scrap do not show up.
 Long flow time, Feedback loop is long, not-uniform operations.

Inventory
 Reasons for holding inventory
 Economies of scale
 Seasonal demand
 Seasonal Supply
 Decoupling the sub-processes
 The flow time (it is not zero)
 Types of Inventory
 Cycle inventory. the average inventory used to satisfy demand between receipt of supplier
shipments. It is half of the order size
 Safety inventory. the inventory held against variability in mand. There is 50% probability that the
demand exceeds the expectations (the average demand). Being stocked out is costly.
 Decoupling inventory (buffers)
 Seasonal inventory
 Pipeline inventory

Types of Inventory
 Seasonal inventory is needed due to the gap between supply and demand.
 As long as it is costly to add and subtract capacity, firms will desire to smooth
production relative to sales by seasonal inventory.
 It is usually due to seasonality in demand, either due to season or discounts and
sales promotions (Campbell’s soup sells more in January and June due to discounts
in January and price increase in July).
 It can be due to seasonality in supply too. Sugar beets are available in less than two
months per year, leading to a huge inventory for a process to turn them into sugar
over the rest of the year.
 Pipeline Inventory is needed since a flow unit has to spent a greater than 0 time in
the process. Throughput is not 0 too. RT=I. Neither T nor R is 0. This is true both for
transformation (changing flow units from one form to another) as well as
transportation processes.

Inventory classification by value/control (ABC classification):
how important is an item?
A items B items C items

Walmart’s turns change from year to year
10 140
9
120
Inventory Turns
8
Annual Inventory Turns
100
Days of Supply
7
6
80
5
60
4
3 40
Days of Supply
2
20
1
0 0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Year

Process Flow Analysis
The Little’s Law
An Example of Finance & Operations Interfaces
Eyes must be washed; to see things differently.
Sohrab Sepehri, Persian Poet, 1928 – 1980.
Parts of the slides of this lecture were prepared over

my teaching lifetime based on the material that I have
learned & benefited from this book
Recorded Lecture (20 Minutes) https://youtu.be/X5AmE8SVT1Q

Little’s Law - Finance
Talking about Throughput (input-to-output) and Inventory in terms of $$
In this course we assume Units Sold = Units Produced
Flow time may also be referred to as days of supply.
Throughput is computed in terms of $$ Cost of Goods Sold not in terms of $$ Sales.
R = Cost of Goods Sold (CGS)
I = Cost of Average Inventory
Rev = Gross Sales
Gross Margin = (Rev-CGS)/Rev =1-CGS/Rev
Inventory Turn = Throughput divided by average inventory.
Inventory Turn = R/I
Since R in $ is measured as CGS
Inventory Turn = CGS/I

Total Sales is 20M per year. Gross Margin in is 25%. Inventory turn is 7.5 times. Compute
the average inventory.
Gross Margin = (Rev-CGS)/Rev =1-CGS/Rev
0.25 =1-CGS/20  -0.75=-CGS/20  CGS= 15 Million
InvTurns = CGS/I
7.5=15/I  7.5I=15  I = 15/7.5=2 Millions
For how long a unit of inventory stays in this system. Assume a month is 30 days.
InvTurns = R/I each $ in inventory is replaced InvTurns times.
Therefore each $ is there for 1/InvTurn year
T= I/InvTurns  InvTurns= CGS/I
T = 1/(CGS/I)  T=I/CGS
In general T=I/R  Little’s Law RT=I
In our example, each unit of inventory is replaced 7.5 times.
One unit of inventory stays for 1/7.5 = Year
One unit of inventory stays for 12(1/7.5) Months
Flow Time = 1.6 Months
RT=I  T=I/R (throughput*flow time(T)= inventory)
T=I/CGS
T= 2/15 = 0.1333333 what?
0.1333333 year because R is in terms of year.
T= 0.1333333(12) = 1.6 mounts or 48 days
Suppose each product costs $100.
Suppose inventory carrying cost of a unit of product per year is 20% of its cost. That
means if we keep one unit product for one full year it has a cost of H= 0.20(100) = $20.
Compute total inventory carrying cost per year.
We already know that I=2M
Therefore, carrying cost is 0.2(2000000) = $400,000 per year.
Compute the inventory carrying cost of each unit produced.
How many products have we produced?
A unit produced was in inventory for one year, its cost was $20.
But each unit produced stays in inventory only for 1/7.5 year.
Inventory carrying cost per unit of product = 20/7.5 = 2.67

The Little’s Law RT=I
I = Inventory = how many flow units are in the process
R = Flow Rate = rate at which flow units enter or leave the process
T = Flow Time = total time a flow unit is in the process
RT=I
R: 10 callers per minute; T: each spends 3 minutes
RT=I 10(3)=30 callers online
Suppose in a non-COVID19 busy day, 20,000 visitors attend Universal Studio. 90% of
visitors take a Transformers 3D rides. On average there are 8 visitor in each car (room).
On average there are 21 cars in use. On average how long a rite takes?
R = 0.9 (20,000) = 18,000 per day
R= 18,000/10 = 1800 per hour
R= 1800/60= 30 per minute.
RT=I  30T = 8(21)  T=5.6 mins from start to re-start

One Example on the Little’s Law

Parts of the slides of this lecture that were prepared

have learned & benefited from this book ends here.
Practice. Compute the Flow Time (8 mins) https://youtu.be/6RRp73I7L7c

Practice. Compute the Flow Time
80%
30 /hr
I=8 T = 12 I=5 T = 25
Standard Products Customized Products
R= 30 /hr
Proportion R/hr R/min I T (min)
W1 1 30 0.5 8 16
P1 1 30 0.5 6 12
W2 0.2 6 0.1 5 50
P2 0.2 6 0.1 2.5 25
Standard 28 0.8 In Station-1, Plant-1, in Country-1

Customized 103 0.2 In Station-2, Plant-2, in Country-2
Prototype 43 0.71667 43 I 21.5

Another Examples on the Little’s Law

Parts of the slides of this lecture that were prepared

have learned & benefited from this book ends here.
Practice. Compute the Flow Time (5 mins)
https://youtu.be/ccZudq3ebgo

50%
50% 50%
50%
5 years
160 per yr 5 years 5 years 5 years
Consultant 5 years
Sr Consultant Department Manager Partner
Head
Each phase takes 5 years

Partner = 50%(20)=10
How many employees this firm has?
# of Partners = 10(5) =50
What is average life-time of an employee in this firm
Total # of Employees?
# of Consultant = 160(5)=800
# of employees 1550
Senior Consultant Rate =50%(160)= 80/year
Average Years in the firm?
# Senior Consultant = 80*5= 400
T=1550/160= 9.875
Department Head Rate = 50%(80)=40
# of Department Heads = 40(5) =200
Manager Rate = 50%(40)=20
# of Managers = 20(5) =100
Pipline Inventory
Pipeline Inventory. We produce 30 products per hour. Each product goes through 3
stations for activity times of 5, 7, and 8 minutes. Compute pipeline inventory?
Theoretical Flow Time = 5+7+8 = 20 minutes
T = 20 mins
R= 30 per hr or 0.5 per min
RT=I
0.5(20) = 10 = Pipeline inventory
Actual inventory is much higher since this is the time that flow units spend with
processors not in waiting and transportation.
Flow Time  Theoretical Flow Time 

I Encourage You to Watch the First 9 Minutes of This Lecture

Lead Time, Re-Order Point, Cycle Service
Level, and Fill Rate
Parts of the slides of this lectures were prepared

over my teaching lifetime based on the material
that I have learned from the following book
Ardavan Asef-Vaziri
Lead Time, Re-Order Point, Cycle Service
Level, and Fill Rate
Parts of the slides of this lectures were prepared

over my teaching lifetime based on the material
Ardavan Asef-Vaziri
Service Level vs Fill Rate-Example-1. Uniform Distribution
Order Lead Time: time from placing an order to receiving it.
Cycle Service Level (CSL): probability of fulfilling the demand.
Fill Rate (FR): proportion of the demand filled.
Suppose demand during lead time has a uniform distribution [1, 10].
Suppose you have 8 units. Compute SL and FR.
FR is always higher than SL. Demand SL
1
FR
1
FR
1
1
2 1 1 1
3 1 1 1
4 1 1 1
5 1 1 1
6 1 1 1
7 1 1 1
8 1 1 1
9 0 8/9 0.88889
10 0 8/10 0.8
0.8 0.96889

Service Level vs Fill Rate Example 2. Normal Distribution
Demand has Normal distribution N~100, 20. Suppose you have Q units.
Simulate 1000 periods. Report SL & FR for Q=140, Q=100, Q=...
Right click to open the file
Ctrl~ to see the formulas. Ctrl~ again to go back to normal view.
MeanLTD 100 StdDevLTD 20 Q 1 140 Demand (N~100, 20).
Period Demand Stockout Sales SL FR 1000 140 Simulate 1000 periods.
1 90 1 90 1.000 0.987 0.99854 Report Service Level and Fill Rate if we have
2
3
114
88
1
1
114
88
1.000
1.000
0.987
Average Demand 100.546
Q=
Q=
140
100
https://youtu.be/7RurbY9b-mY
4 104 1 104 1.000 Average Sales 100.399
5 128 1 128 1.000 FR 0.99854
6 84 1 84 1.000
180
7 93 1 93 1.000
8 89 1 89 1.000 160
9 114 1 114 1.000 140

10 127 1 127 1.000
120
11 63 1 63 1.000
12 119 1 119 1.000 100
13 89 1 89 1.000
80
14 115 1 115 1.000
15 92 1 92 1.000 60
16 78 1 78 1.000 40
17 68 1 68 1.000
20
995 128 1 128 1.000
996 101 1 101 1.000 0
0 200 400 600 800 1000 1200
997 75 1 75 1.000
998 109 1 109 1.000
999 103 1 103 1.000
1000 74 1 74 1.000

Normal Random Number Generator
Mean= 100 StdDev= 20 NORM.INV.FORMULA NORM.INV.SOLVER
Increment X1≤x x≤X2 0.44 0.63 3.81858E-06
0.12012 0 97 P(0<=x<=97) =0.44 106.6370669 10.49778095
x f(x) 0<=x<=97 P(X<=106.637)=0.63 P(X<=10.498)=0
40.000 0.000 0.000
40.120 0.000 0.000
40.240 0.000 0.000 P(0<=x<=97) =0.44
40.360 0.000 0.000
40.480 0.000 0.000
40.601 0.000 0.000
40.721 0.000 0.000
40.841 0.000 0.000
40.961 0.000 0.000
41.081 0.000 0.000
41.201 0.000 0.000
41.321 0.000 0.000
41.441 0.000 0.000
41.562 0.000 0.000
40.0
43.8
47.7
51.5
55.4
59.2
63.1
66.9
70.8
74.6
78.4
82.3
90.0
93.8
97.7
101.5
120.7
124.6
132.3
139.9
143.8
147.6
151.5
159.2
86.1
105.3
109.2
113.0
116.9
128.4
136.1
155.3
41.682 0.000 0.000
41.802 0.000 0.000
41.922 0.000 0.000

Besides process postponement, we can also postpone
place of differentiation
Customize near Allow the

the customer customer to
customize
DSO 581 Design for SCM 57
Postponement (1 of 2)
 Delay product differentiation or customization until closer to the
time the product is sold
 Have common components in the supply chain for most of the
push phase
 Move product differentiation as close to the pull phase of the
supply chain as possible
 Inventories in the supply chain are mostly aggregate
58
Postponement (2 of 2)
Figure 12-6 Supply Chain Flows without and with

Postponement
59
Example of postponement implementation
Black Red Plain 160
100 200 300 =100+100*RANDBETWEEN(0,1) =100+100*RANDBETWEEN(0,1) =SUM(A2:B2)
100 100 200
100 100 200
100 100 200
200 100 300
100 200 300
200 200 400
200 100 300 Demand 100 200
100 100 200
Product
100 200 300
100 200 300
200 200 400 50% 50%
200 100 300
200 200 400
200 200 400
200 100 300 50% 50%
200 100 300
200 200 400
200 200 400
200 200 400 Produce 150 of each color ahead of time
12 11 23 7 TRUE Produce 300 which can be dyed after demand is observed

Value of Postponement
100 different paint colors, R = 30/week, R = 10, L = 2 weeks, CSL = 0.95
Average Demand During Lead time = LTD= 2*30=60
Standard deviation of demand during Lead time =StdDevLTD=
StdDevLTD= = SQRT(L)*SigmaD = SQRT(2)*10= 14.14
ROP =NORM.INV(0.95,60,14.14) = 83.25823
Isafety-One= 83.26-60=23.26
Isafety-All= 100*23.26= 2326
Average 100 Products in two weeks = 100*30*2= 6000
StdDev 100 Products = SQRT(100)*10=100
Average 100 Products in two weeks = SQRT(2)*100=141.4
ROP-100 products =NORM.INV(0.95,6000,141.4) = 6233
Isafety-One=6233-6000-233
233 vs 2326

Postponement
Four shirts, the same design, different color. Demand N~(100,25).
If we dye them first and prefer to have a 95.45% service level,
how much safety stock do we need?
Q for one color =NORM.INV(0.95,100,25) = 141.1213407
Isafety for one color = 141.1213407 -100 = 41.1213407
Isafety for one colors =4(41.1213407) = 164.4853628
What if we have a high-speed dyeing machine and could postpone dyeing the
uncolored fabric to when the demand comes with the same service level?
Average Demand for all colors = 4(100) =400
Standard Deviation of Demand for all colors = SQRT(4)(25) =50
=NORM.INV(0.95,400,50) = 482.2426813  Isafety 482.2426813-400
Isafety = 82. 2426813 that is
82. 2426813/ 164.4853628 or 50% improvement
Postponement
Purple Green Blue Red Plain
36 100 114 133 383 =ROUND(NORMINV(RAND(),100,25),0)
102 165 91 97 455 =SUM(A3:D3)
145 110 60 121 436
117 102 132 95 446 132 =ROUND(NORM.INV(0.9,100,25),0)
59 85 51 137 332 464 =ROUND(NORM.INV(0.9,400,2*25),0)
116 97 86 94 393 0.8788 =G6/(4*G5)
132 92 122 126 472
80 107 115 89 391
84 122 147 67 420
132 116 103 94 445
131 94 147 78 450
126 103 114 101 444
55 33 116 47 251
93 102 102 103 400
65 156 129 123 473
94 94 137 67 392
102 100 93 102 397
110 95 108 61 374
118 123 76 166 483
140 129 141 103 513
2 2 4 3 4 4 FALSE =E22>F22

Capacity- Product Mix
Multi-Product Flow
Parts of the slides of this lectures were prepared over my teaching lifetime based
on the material that I have learned & benefited from this book
Ardavan Asef-Vaziri
The Lego Production Problem
You have a set of Legos Weekly supply
8 small bricks of raw materials
6 large bricks
8 Small Bricks
These are your “raw materials”.
6 Large Bricks
You have to produce tables and chairs
out of these Legos. These are your Products
“products”.
How many chairs and how many
tables do you produce?
Chair Table
Les assume X1 as the number of chairs Profit = 15 cents per Chair Profit = 20 cents per Table
and X2 as the number of tables we
produce

Mathematical Formulation
X1 is the number of Chairs
X2 is the number of Tables
Large brick constraint
X1+2X2  6
Small brick constraint Chairs Tables LHS RHS
Large Bricks 1 2 6 <= 6
2X1+2X2  8
Small Bricks 2 2 8 <= 8
Objective function is Profit 15 20 70
Maximize 15X1+20 X2 Dec. Var. 2 2
X1 ≥ 0
X2 ≥ 0

Door and Window
Two products (Product1 and Product2)
and three resources (Resource1,
Resource2, Resource3).
Contribution Margin of product 1 and
Product2 are $300 and $500,
respectively.
Product1 needs 1 hour of Resource1,
nothing of Resource2, and 3 hours of
resource3. Product2 needs nothing
from Resource1, 2 hours of Resource2,
and 2 hours of resource3.
Available hours of resources 1, 2, 3 are 4,
12, 18, respectively.
Formulate the Problem
Solve the problem using solver in excel
Formulation
Objective Function
Z = 300X1 +500X2
Constraints
Door Window LHS RHS
Resource 1
Station-1 1 0 <= 4
X1 4
Resource 2 Station-2 2 0 <= 12
2X2  12 Station-3 3 2 0 <= 18
Resource 3 Profot 300 500 0
3X1+ 2X2  18 DecVar
Nonnegativity
X1 0, X2 0

Solver Optimal Solution
Door Window LHS RHS
Station-1 1 2 <= 4
Station-2 2 12 <= 12
Station-3 3 2 18 <= 18
Profot 300 500 3600
DecVar 2 6
We can increase capacity of Sta-1 from 4 to 5 hours at a cost of $55. What is your
decision?
We can increase either the capacity of Sta-2 from 12 to 13 hours, or the capacity of Sta-
3 form 18 to 19 hours at a cost of $110. What is your decision?

Infeasible, Feasible, Optimal
Given the following problem Infeasible; Violates Constraint 3
Maximize Z = 3x1 + 5x2 Infeasible; Violates nonnegativity

Subject to: the following constraints Feasible; z = 3×3+ 5×4 = 29
Infeasible; Violates Constraint 2
x1 ≤4 Feasible; z = 3×2+ 5×6 = 36 and
2x2 ≤ 12 Optimal
3x1 + 2x2 ≤ 18
x1, x2 ≥ 0
What combination of x1 and x2 could be the optimal
solution?
A) x1 = 4, x2 = 4
B) x1 = -3, x2 = 6
C) x1 = 3, x2 = 4
D) x1 = 0, x2 = 7
E) x1 = 2, x2 = 6
Product Mix: Three Products & Three Resources
Three Products (Prod-1, Prod-2, and Prod-3) go through three resource pools (Res-1, Res-
2, Res-3).
Currently the product mix is Prod-1: 20%, Prod-2: 30%, and Prod-3: 50%.
The profit margins are Prod-1=$10, Prod-2=$24, and Prod-3=$30.
There are 3 resource units in the first resource pool, 2 resource units in the second
resource pool, and 1 resource in the third resource pool. Each resource unit has 480
minutes per day.
Where is the bottleneck?
Compute the capacity in term of the aggregate product.
Compute the optimal product mix.
Compute the total net profit.
The time required by each product at each resource pool in minute is given below.
Three Products & Three Resources https://youtu.be/Dtsh2yVP7rw
Prod-1 Prod-2 Prod-3 Aggregate Tp c Rp/min Rp/day R=min(Rp) U@R=Rp
Res-1 24 20 14.8 3 0.203 97.3 40 0.4111
Res-2 12 12 20 16 2 0.125 60 40 0.6667
Res-3 15 15 12 1 0.083 40 40 1.0000
0.2 0.3 0.5
10 24 30
8 12 20 =40
Profit 968
Suppose there are ample demand for all products. What product mix do you propose?

Three Products & Three Resources
Prod-1 Prod-2 Prod-3 LHS

Res-1 24 20 1152 <= 1440 =480*K2 3
Res-2 12 12 20 960 <= 960 =480*K3 2
Res-3 15 15 480 <= 480 =480*K4 1
Profit 10 24 30 1248
Produc Mix 48 32 0
Product mix is 48, 32, and 0.

Prod-1= 48/(48+32)= 60%
Prod-2=40%
Prod-3=0%
Total Profit = $1248
Increase in Profit $1248-$968= $280/day

Res-1 24 20 1272 <= 1440 =480*K2 3
Res-2 12 12 20 1020 <= 1020 2
Res-3 15 15 480 <= 480 =480*K4 1
Profit 10 24 30 1298
Produc Mix 53 32 0

Res-1 24 20 1056 <= 1440 =480*K2 3
Res-2 12 12 20 960 <= 960 =480*K3 2
Res-3 15 15 540 <= 540 1
Profit 10 24 30 1304
Produc Mix 44 36 0
Sh-Price-Res-1 = 0/ hour, Sh-Price-Res-2 = 50/ hour, Sh-Price-Res-3 = 56/ hour

This analysis, however, is valid only for limited ranges.
Prod-1 Prod-2 Prod-3

Res-1 24 20 1160 =SUMPRODUCT(B2:D2,$B$6:$D$6) <= 1440 =480*K2 3
Res-2 12 12 20 960 =SUMPRODUCT(B3:D3,$B$6:$D$6) <= 960 =480*K3 2
Res-3 15 15 480 =SUMPRODUCT(B4:D4,$B$6:$D$6) <= 480 =480*K4 1
Profit 10 24 30 1246.67 =SUMPRODUCT(B5:D5,$B$6:$D$6)
Produc Mix 46.6667 30 2
Market 1 30 1.333333333 <= 30
1248
If we could have sold 32 units, profit was 1248. The market is limited to 30 units, and
the new profit is $1.33 less. Therefore, it worth to spend up to $1.33/2 = $0.66 to
increase the sales of product-1 by one unit.

Cross-Training For Mass-Customization
Parts of the slides of this lectures were prepared over my teaching lifetime based
on the material that I have learned & benefited from this book
Ardavan Asef-Vaziri
Base Windoor n& Flexible Windoor
Door Window LHS RHS Available
Station-1 1 -2 <= 0 4
Station-2 2 0 <= 0 12
Station-3 3 2 0 <= 0 18
Profot 300 500 3600
DecVar 2 6
Door Window LHS RHS Ys Available

Station-1 1 0 <= 0 0.25 4
Station-2 2 0 <= 0 0.75 12
Station-3 3 2 0 <= 0 0 18
Profot 300 500 4050 SUM=1 1
DecVar 1 7.5
Base and Flexible 3-Products and 3-Resources
Prod-1 Prod-2 Prod-3 LHS RHS Available
Resource-1 24 20 -160 <= 0 1440
Resource-2 12 12 20 0 <= 0 960
Resource-3 15 15 0 <= 0 480
Profit 20 30 50 2133.33
Product Mix 26.67 0 32
Prod-1 Prod-2 Prod-3 LHS RHS Y Available

Resource-1 24 20 0 <= 0 0 1440
Resource-2 12 12 20 0 <= 0 0.22222 960
Resource-3 15 15 0 <= 0 0.77778 480
Profit 10 24 30 2560 SUM=1 1
Product Mix 0 106.667 0

Design Options For Distribution Networks

Ardavan Asef-Vaziri
Manufacturing Storage With Direct (or Drop) Shipping
Customer  Retailer. Retailer takes the order. Manufacturer delivers the product directly to customer. It
is mostly for slow moving items. Example eBaga, Nordstrom, W.W. Grainger.
Manufacturing Storage With Direct Shipping and In-Transit Merge
In drop shipping where each product is individually sent by its manufacturer directly to the end
customer. In-transit merge combines parts of the order coming from different manufacturers, and the
customers gets a single delivery. Example Apple in Europe for a collection of peripherals
Distributor Storage With Carrier Delivery
Inventory is held not by manufacturer at factory, but by distributor/retailer in intermediate warehouses.

Package carriers transport products to customer. Ex, Amazon, W.W. Grainger, and MC Master/Carr
Distributor Storage With Last Mile Delivery
Distributor/Retailers deliver the product (instead of package carrier). Last mile delivery in the grocery
industry. Ex. Amazon Fresh, Peapod, Tesco, Google Express.
Manufacturer or Distributor Storage with customer Pickup
Inventory is stored at manufacturer or distributor warehouse. Customer places the order online, then go
to the designated pickup places. Examples. Amazon, 7deam.
Retail Storage With Customer Pickup
Traditional. Examples.

Comparative Service Performance of Delivery Network Designs
Manu. Storage Manu. Storage Distri. Storage Distri. Storage Manu./Distri. Storage Retail Storage
Blank
Direct Shipping In-Transit Merge Carrier Delivery Last-Mile Delivery Customer Pickup Customer Pickup
Response time 4 4 3 2 4 1
Product variety 1 1 2 3 1 4
Product availability 1 1 2 3 1 4
Customer experience 4 3 2 1 5 2.5
Time tomarket 1 1 2 3 1 4
Order visibility 5 4 3 2 6 1
Returnability 5 5 4 3 2 1
Response time 4 4 3 2 4 1
Product variety 1 1 2 3 1 4
1 corresponds to the best performance and 6 the worst performance.
Product/Customer Characteristics and Delivery Network Designs
Manu. Manu. Distri. Distri. Manu./Distri. Retail

Blank
Direct In-Transit Carrier Last-Mile Customer Customer
High-demand Product 2 -2 -1 0 1 -1
Medium-demand Product 1 -1 0 1 0 0
Low-demand Product -1 1 0 1 -1 1
Very-low-demand product -2 2 1 0 -2 1
High value product -1 2 1 1 0 2
Quick response desired 2 -2 -2 -1 1 -2
High variety product -1 2 0 1 0 2
Low customer effort -2 1 2 2 2 -1
+2: Very Suitable; +1: Somewhat Suitable; 0: Neutral; −1: Somewhat Unsuitable; −2: Very Unsuitable.
Alternatives in Omni-Channel Retailing
NETWORK DESIGN

Supply Chain Network Design
1
2
Warehouse
3 markets
Plant One 1
2 3
1
Warehouse 2
One markets
3
Plant
1
Warehouse
2
Two
DSO 581 Design for SCM 3 92
Supply chain network strategies
Centralized - Decentralized-
a single different
warehouse serves warehouses serve
all customers different markets
Inventories
Response time
Overhead costs
Service level
Transportation costs

DISTRIBUTION STRATEGIES

Wal-Mart delivers about 85% of its goods through its warehouse system and uses
distribution strategy called cross-docking
Inspecting, Sorting, Labeling, Staging

Goods spend at most Stores trigger orders
48 hours in the for products.
warehouse, • Requires linking Wal-Mart’s
• Avoids inventory and distribution centers, suppliers
handling costs and stores to guarantee that
• Very difficult to manage any order is processed and
executed in a matter of hours
https://www.youtube.com/watch?v=OS5CrureJoE
Summary
Cross-docking
attempts to achieve the
By postponing variety
benefits of risk pooling
in supply chain we try
(exploit scale
to exploit economies of Mass customization
economies in inventory)
scale in production, allows manufacturing
while retaining quick
transportation, customized products on
response time to
inventory and possibly a large scale
customer by having
provide better response
transit or
to market changes
transshipment points
close to customers

Summary
By centralizing inventories The supply chain network

we exploit scale economies in chosen depends on
warehousing, material • product characteristics (weight/value,
handling, inventory and variety, obsolescence, profit margin,
possibly inbound etc.),
• market characteristics (response time
transportation costs.
desired, geographic factors,
• There may be a decrease in response competition), and
time and diseconomies in outbound • costs of (and scale economies in)
logistics transportation, warehousing, etc.

Example- Little’s Law
Ardavan Asef-Vaziri
A Production Process, Model R1, R2, R3, S1, S2. Numbers in 1000 Units
Country-A 70%
Products S
200/month
IA = 25 Two Models
30%
25%
10%
Country-B
1000/month Country-O 25%
IR = 200 IB = 150 90%
50%
Products R 800/month
Three Models
Ignore Transportation Time

R = 1000
I = IIR + IA + IB = 200 + 25 + 150 = 375
T = I/R = 375/1000 = 0.375 month or 0.375(30) = 11.25 days

K4. Questions
Compute average flow time.
Compute average flow time at Country O.
Compute average flow time at Country A.
Compute average flow time at Country B.
Compute average flow time of S-Model.
Compute average flow time of R-Model

Flow Time at Each Sub-process (or activity)
Average Flow Time for Country-O.
Throughput RO = 1,000/month
Average Inventory IIR = 200
TIR = 200/1,000 = 0.2 months = 6 days Country-O.
Average Flow Time for Country-A.
Throughput RA = 250/month
Average Inventory IA = 25
TA = 25/250 months = 0.1 months = 3 days in Country-A.
Average Flow Time for sub-process Country B.
Throughput RB = 250 /month
Average Inventory IB = 150
TB = 150/250 months = 0.6 months = 18 days in Country-B

K4. Routing, Flow Time, and Percentage of Each Flow units
Model-S1: O & A
Model-S2: O & B
Model R1: O
Model R2: O &A
Model R3: O&B
TO = 6 days
TA = 3 days
TB = 18 days
We also need percentages of each of the five flow units

K4. New Process: Intermediate Probabilities
A 70% 20%
Models-S
T=3
30%
25%
10%
100% B
O 25%
T=6 T = 18
90%
50%
80%
Models-R

K4. New Process: Intermediate Probabilities
A 17.5% 20%
Models-S
T=3
7.5%
25%
2.5%
100% B
O 25%
T=6 T = 18
22.5%
50%
80%
Models-R

K4. Flow Time of the Accepted Applications
Model-S1: O & A  S1(T) = 6 + 3 = 9  S1 = 17.5 %
Model-S1: O & B  S2(T) = 6 + 18  S2= 2.5 %
Average Flow time for S-Models =

[0.175(9)+0.025(24)] / (0.175+.025) = 10.875

K4. Flow Time of Rejected Applications
Model-R1: O  R1(T) = 6  R1(%) = 50%
Model-R2: O & A  R2(T) = 6+3 = 9  R2(%) = 7.5%
Model-R3: O & B  R3(T) = 6+18 = 24  R3(%) = 22.5%
Average Flow time of R-Model
0.5 0.075 0.225

( 6)  (9)  (24)  = 11.343
0.8 0.8 0.8
Check our computations:

Average flow time of an application
0.8(11.343)+0.2(10.875) = 11.25
Did I need to solve for the R-Models?

B 30% D
T = 15 T = 18 70%
40% 10%
100% A F 100%
T = 10 T = 10
40%
60% 30%
C 20% E
T = 12 T = 16

Week 02 - Design For SCM

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Basic Models in Supply Chain Management 1

Basic Models in Supply Chain Management 2

Most of the slides of this part of the lecture were prepared

Basic Models in Supply Chain Management 4

Basic Models in Supply Chain Management 6

L. L. Bean Ethan Allen Supply Chain for Customized Furniture

The majority of the slides of this part of the lecture were

Ratios (Metrics) Amazo n Formula (Range) Formula (Cell)

The majority of the slides of this part of the lecture were

Basic Models in Supply Chain Management 18

Basic Models in Supply Chain Management 19

Basic Models in Supply Chain Management 20

Basic Models in Supply Chain Management 21

DSO 581 Supply Chain Management

Basic Models in Supply Chain Management 22

Basic Models in Supply Chain Management 23

In 1997, most computer When iPod sales took off in 2001,

DSO 581 Supply Chain Management 24

• Amazon uses • Amazon went • In 2012,

DSO 581 Supply Chain Management 26

Example of Products: Tide

DSO 581 Supply Chain Management 30

Basic Models in Supply Chain Management 32

Basic Models in Supply Chain Management 33

Basic Models in Supply Chain Management 34

A items B items C items

DSO 581 Supply Chain Management 35

Basic Models in Supply Chain Management 36

Parts of the slides of this lecture were prepared over

Basic Models in Supply Chain Management 38

Basic Models in Supply Chain Management 39

Basic Models in Supply Chain Management 42

Basic Models in Supply Chain Management 43

Eyes must be washed; to see things differently.

Parts of the slides of this lecture that were prepared

Basic Models in Supply Chain Management 45

Standard Products Customized Products

Standard 28 0.8 In Station-1, Plant-1, in Country-1

Basic Models in Supply Chain Management 46

Eyes must be washed; to see things differently.

Parts of the slides of this lecture that were prepared

Basic Models in Supply Chain Management 48

Each phase takes 5 years

Theoretical Flow Time = 5+7+8 = 20 minutes

Flow Time  Theoretical Flow Time 

Basic Models in Supply Chain Management 50

Basic Models in Supply Chain Management 51

Parts of the slides of this lectures were prepared

Parts of the slides of this lectures were prepared

Basic Models in Supply Chain Management 54

9 114 1 114 1.000 140

Basic Models in Supply Chain Management 55

Basic Models in Supply Chain Management 56

Customize near Allow the

Figure 12-6 Supply Chain Flows without and with

Basic Models in Supply Chain Management 60

Basic Models in Supply Chain Management 61

Basic Models in Supply Chain Management 63

Basic Models in Supply Chain Management 66

Basic Models in Supply Chain Management 67

Basic Models in Supply Chain Management 69

Basic Models in Supply Chain Management 70

Maximize Z = 3x1 + 5x2 Infeasible; Violates nonnegativity