SUPPLY CHAIN

MANAGEMENT

Prof. Shikha Aggarwal

Introduction
to the course
• Competitive Necessities versus Distinctive Capabilities
• Hit pause button on globalization ?
• That’s not my cup of gin. Or is it, now ?
• ‘Organization’ mindset to ‘Supply chain’ mindset
• Where to start ?
Introduction
to supply
chains
WHAT IS A
BUSINESS MODEL?
“ ..a plan for the successful operation of a
business, identifying sources of revenue, the
intended customer base, products, and details
of financing.”
• Who are your key partners?
• What are your key activities?
• What are your value propositions?
• How are your customer relationships?
• What are your customer segments?
• What are your key resources?
• What channels do you use?
• What is your cost structure?
• What is your revenue stream?
COURSE FLOW

UNDERSTAND - Basics, Scope, Flows

DESIGN - Sourcing, Facilities, Logistics, Distribution

COORDINATE - Align, Integrate and Collaborate

MANAGE - Optimize, Improve, Innovate

RETHINK - Incorporate Technologies and Trends

DEFINITION
A supply chain consists of all parties involved, directly or indirectly, in fulfilling a
customer request. The supply chain includes not only the manufacturer and suppliers,
but also transporters, warehouses, retailers, and even customers themselves.

Within each organization, such as a manufacturer, the supply chain includes all functions
involved in receiving and filling a customer request.

These functions include, but are not limited to, new product development, marketing,
operations, distribution, finance, and customer service.
 SUPPLY CHAIN EXAMPLE

TIER-1
TIER-2

TIER-2
SUPPLIERS
TIER-3

TIER-3
SUPPLIERS
Objective,
scope and
decisions
 SUPPLY CHAIN EXAMPLE-
MANUFACTURING

CEREAL
MANUFACTURER
TIER-1
TIER-2

TIER-2
SUPPLIERS
TIER-3

TIER-3
SUPPLIERS
 SUPPLY CHAIN EXAMPLE-
SERVICES

HOTEL MANAGEMENT
COMPANY
TIER-1
TIER-2

TIER-2
SUPPLIERS
TIER-3

TIER-3
SUPPLIERS
EVOLUTION
 The value (or supply chain surplus) a supply
chain generates is the difference between what
the value of the final product is to the customer
OBJECTIVE and the costs the entire supply chain incurs in
filling the customer’s request.

Supply Chain Surplus = Customer Value - Supply Chain Cost

MAXIMIZE THE
OVERALL VALUE
Consumer surplus remains with the
consumer as the difference between
the value of the product and its price

Supply chain profitability (rest of the supply chain surplus),

is the difference between the revenue generated from the
customer and the overall cost across the supply chain.
 ü Executive Management defines company strategy and allocates resources to
achieve it.
ü Supply Management coordinates the upstream supply base, finding the right
INTERNAL suppliers and building the right relationships with them.

SUPPLY ü Operations transforms the inputs acquired from suppliers into more highly valued
products.

CHAIN ü Logistics moves and stores materials so they are available when and where they
are needed.
ü Marketing manages the downstream relationships with customers, identifying
their needs and communicating to them how the company can meet those needs.
ü Human Resources designs the systems used to hire, train, and develop the
company’s employees.
ü Accounting maintains business records that provide information needed to
VALUE CHAIN control operations.
ü Finance acquires and controls the capital required to operate the business.
ü Information Technology builds and maintains the systems needed to capture and
communicate information among decision makers.
ü Research and Development (R&D) is responsible for new product design.
 Set of activities and processes associated
with new product introduction.
Includes:
o product design phase
o associated capabilities and
knowledge
o sourcing decisions
o production plans
DEVELOPMENT
CHAIN
DECISION PHASES

PLANNING DECISIONS OPERATIONAL DECISIONS

STRATEGIC ▪ cover a period of a few ▪ span from minutes to days
DECISIONS months to a year and and include
include decisions sequencing production and
▪ relate to supply chain regarding production
configuration. filling specific orders.
planning, ▪ define the constraints for
▪ Have a long-term subcontracting, and
impact for several planning decisions, and
promotions over that planning decisions define
years. period. the constraints for
operational decisions.
SCOPE OF SUPPLY CHAIN
SUPPLY CHAIN
PROCESS VIEWS: CYCLE VIEW

The processes in a supply chain are divided into a series of cycles, each
performed at the interface between two successive stages of the supply
chain. Cycle view divides
processes into
…Sub-processes cycles
Four Process Cycles…
• Clearly defines the
processes involved and
the owners of each
process.

• Useful for operational

decisions because it
specifies the roles and
responsibilities of each
member and the desired
outcome for each
process.
SUPPLY CHAIN
PROCESS VIEWS: PUSH/PULL VIEW

The processes in a supply chain are divided into two categories,

depending on whether they are executed in response to a customer Pull processes are
order or in anticipation of customer orders. initiated by a customer
order,
…Build-to-order push processes are
Make-to-Stock.. initiated & performed in
anticipation of customer
orders.
• Categorizes processes
based on whether they
are initiated in response
to a customer order (pull)
or in anticipation of a
customer order (push).

• useful for strategic

decisions relating to
supply chain design.

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Strategy
SUPPLY CHAIN
ALIGNMENT

Competitive Strategy

Supply Chain Strategy

Supply Chain Structure

Efficiency Responsiveness

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SUPPLY CHAIN
ACHIEVING STRATEGIC FIT
3
2
1 Understanding the supply Achieving strategic fit:
Understanding the
chain capabilities:
customer and supply chain
uncertainty:

Understand the customer Each of the many types of If a mismatch exists

needs for each targeted supply chains is designed to between what the supply
segment and the uncertainty perform different tasks well. chain does particularly well
these needs impose on the and the desired customer
supply chain. A company must understand needs-
what its supply chain is
Define the desired cost and designed to do well. the company will either
service requirements. need to restructure the
identify the extent of the supply chain to support the
unpredictability of demand and competitive strategy or alter
supply that the supply chain its competitive strategy.
must be prepared for.
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SUPPLY CHAIN
ACHIEVING STRATEGIC FIT: STEPS (1/3)

UNDERSTANDING THE CUSTOMER AND SUPPLY CHAIN UNCERTAINTY

Impact of Customer Needs on Implied Impact of Supply Source Capability on

Demand Uncertainty Supply Uncertainty

Customer Needs Demand Uncertainty

Supply Source Supply Uncertainty
Range of quantity required Capability
increases
Frequent breakdowns
Lead time decreases
Unpredictable and low yields
Variety of products required
increases Poor quality
Number of channels through Limited supply capacity
which product may be
acquired increases Inflexible supply capacity

Rate of innovation increases Evolving production process

Required service level increases

Uncertainty from the customer and the supply chain can be combined and
mapped on the implied uncertainty spectrum.
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SUPPLY CHAIN
ACHIEVING STRATEGIC FIT: STEPS (2/3)

UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES

Implied Uncertainty (Demand and Supply) Spectrum

Cost-Responsiveness Efficient
Frontier
The Responsiveness Spectrum

The second step in achieving strategic fit between

competitive and supply chain strategies is to
understand the supply chain and map it on the
responsiveness spectrum.

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SUPPLY CHAIN
ACHIEVING STRATEGIC FIT: STEPS (3/3)

Match Responsiveness with the Implied Uncertainty

Assign roles to different stages of

1 the supply chain that ensure the
appropriate level of responsiveness.

Assign different levels of

2 responsiveness and efficiency to
each stage of the supply chain

Adjusting the role of each of its

3 stages- making one stage more
responsive allows other stages to
focus on becoming more efficient.

Ensure all functions of firm must

4 maintain consistent strategies that
support the competitive strategy.
the Zone of Strategic Fit

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SUPPLY CHAIN
EFFICIENCY VERSUS RESPONSIVENESS

Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand

Create modularity to allow postponement of product

Product design strategy Maximize performance at a minimum product cost
differentiation

Lower margins because price is a prime customer Higher margins because price is not a prime
Pricing strategy
driver customer driver

Maintain capacity flexibility to buffer against

Manufacturing strategy Lower costs through high utilization
demand/supply uncertainty

Maintain buffer inventory to deal with demand/supply

Inventory strategy Minimize inventory to lower cost
uncertainty

Lead-time strategy Reduce, but not at the expense of costs Reduce aggressively, even if the costs are significant

Select based on speed, flexibility, reliability, and

Supplier strategy Select based on cost and quality
quality

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SUPPLY CHAIN
EXPANDING STRATEGIC SCOPE

• Scope of strategic fit

– The functions and stages within a supply chain that devise an integrated
strategy with a shared objective
– One extreme: each function at each stage develops its own strategy
– Other extreme: all functions in all stages devise a strategy jointly

• Four categories:
– Intracompany intraoperation scope
– Intracompany intrafunctional scope
– Intracompany interfunctional scope
– Intercompany interfunctional scope

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SUPPLY CHAIN
EXPANDING STRATEGIC SCOPE

Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy Intracompany
interfunctional
Intercompany
Product Dev. interfunctional
Strategy

Supply Chain Intracompany

Strategy intrafunctional Intracompany
intraoperation
Marketing
Strategy

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SUPPLY CHAIN
DRIVERS

Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness
Supply Chain Structure

Facilities Inventory Transportation Information Sourcing Pricing

Cross functional “drivers”

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Drivers
SUPPLY CHAIN
DRIVERS- FACILITIES

• Role in the supply chain

– the “where” of the supply chain Components of
– manufacturing or storage
facilities decisions
(warehouses)
• Role in the competitive strategy
– economies of scale (efficiency
priority) • Location
– larger number of smaller facilities – centralization (efficiency) vs.
(responsiveness priority) decentralization (responsiveness)
– other factors to consider (e.g., proximity to
customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused
versus process focused)
• Warehousing methodology (SKU storage, job lot
storage, cross-docking)

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SUPPLY CHAIN
DRIVERS- INVENTORY

Unexpected changes in customer demand (always hard to

predict, and uncertainty is growing)
Short product life cycles Uncertain supply
Product proliferation Quantity
Quality
Costs
Delivery time

Inventory exists because of a mismatch between supply and demand

Source of cost and influence on responsiveness
If you move your inventory faster, you don’t need as much inventory (inventory
velocity)
If responsiveness is a strategic competitive priority, a firm can locate larger amounts
of inventory closer to customers
If cost is more important, inventory can be reduced to make the firm more
efficient
Trade-off: More inventory increases responsiveness, less inventory increases
efficiency (reduces cost).

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SUPPLY CHAIN
DRIVERS- TRANSPORTATION

• Moves the product between stages in the • If responsiveness is a strategic competitive

supply chain priority, then faster transportation modes can
provide greater responsiveness to customers
• Impact on responsiveness and efficiency
who are willing to pay for it
• Faster transportation allows greater
• Can also use slower transportation modes for
responsiveness but lower efficiency
customers whose priority is price (cost)
• Also affects inventory and facilities
Mode(s) of Transportation
Air: fastest but most expensive
Truck: Relatively quick, inexpensive and very flexible mode
Rail: Inexpensive mode to be used for large quantities
Ship: Slowest but often the most economical
Pipeline: Used (primarily) for oil and gas
Electronic transportation: for goods as music and movies

Route and Network Selection

route: path along which a product is shipped
network: collection of locations and routes

Insource or Outsource to some 3PL provider

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SUPPLY CHAIN
DRIVERS- INFORMATION

• The connection between the various stages in

the supply chain – allows coordination ü Push (MRP) versus pull (demand information
between stages transmitted quickly throughout the supply
chain)
ü Coordination and information sharing
• Crucial to daily operation of each stage in a ü Forecasting and aggregate planning
supply chain: e.g., production scheduling, ü Extent and modes of information sharing and
inventory levels coordination
ü Pricing and revenue management policies
• Allows supply chain to become more efficient
and more responsive at the same time
(reduces the need for a trade-off)

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SUPPLY CHAIN
DRIVERS- INFORMATION

• Information exchange is necessary for the most extensive modes of coordination sought in
contemporary supply chains. It allows the supply chain to improve simultaneously its efficiency
and responsiveness.

• Information-related decisions
– Push vs. pull
– Extent and modes of information sharing and coordination
– Forecasting and Aggregate Planning schemes
– Pricing and revenue management policies
– Enabling Technologies:
• Electronic Data Interchange (EDI): Enables paperless transactions, primarily for
“backend” operations of the SC.
• The Internet and the WWW.
• Enterprise Resource Planning (ERP): enables transactional tracking and global
visibility of information in the SC.
• Supply Chain Management (SCM) software: decision support tools.

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SUPPLY CHAIN
DRIVERS- SOURCING

Set of business processes required to purchase

goods and services in a supply chain

Supplier selection, single vs. multiple suppliers,

contract negotiation

In-house vs. outsource

Supplier evaluation and selection

Procurement process

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SUPPLY CHAIN
DRIVERS- PRICING

• Pricing strategies can be used to match demand

and supply
• Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness
• Low price and low product availability; vary
prices by response times
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing

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 Risk
Management
SUPPLY CHAIN
RISK MANAGEMENT

For managers, risk is a threat that something might happen

to disrupt normal activities or stop things happening as
planned.

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SUPPLY CHAIN
RISK IN SUPPLY CHAIN

Risks can appear at any point in a supply chain

from initial suppliers through to final customers

§ interrupt the supply of materials or the demand for

products
§ cause sudden peaks in demand or collapses
§ range in scope from a minor delay through to a
natural disaster

And different risks can be linked!

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SUPPLY CHAIN
RISK IN SUPPLY CHAIN (contd.)

Internal risks

§ Less dramatic, but more widespread in their effects.

• Risks to operations that managers can control
• For instance, risks from suppliers can be avoided by multiple sourcing,
• Rsks to the flow of materials are reduced by holding stocks

External risks
• Outside managers’ control.
• Managers can design operations that work as efficiently as possible
within a risky environment.
• For instance, there is a continuing risk of hurricanes at some places

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SUPPLY CHAIN
RISK IN SUPPLY CHAIN: SOURCES

q Strategic – arising from strategic decisions made within organizations that directly
increase the risk

q Natural – arising from unforeseen natural events such as extreme weather, lightning,
earthquakes, flood, landslides or outbreaks of diseases

q Political – such as government instability, new legislation, regulations, policies, permits,

treaties, customs barriers, conflicts or wars

q Economic – from the broad economic environment, including interest rates, inflation,
currency exchange rates, taxes and growth

q Physical – risks to buildings and facilities, such as traffic accidents, equipment failure,
congestion or limited capacity

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SUPPLY CHAIN
RISK IN SUPPLY CHAIN: SOURCES (Contd.)

q Supply – all issues with the movement of materials into an organization, including
sources, supply market conditions, constraints, limited availability, supplier
reliability, lead times, material costs, delays, etc.

q Market – all aspects of customer demand, such as level of demand, variability,

alternative products, competition and patterns of change

q Transport – for all movements of materials, including risks to the infrastructure,

vehicles, facilities and loads

q Products – risks arising from product features, including technology used,

innovation, product mix, range, volumes, materials used

q Operations – arising from the nature of activities in the organization, type of

process, complexity, technology, special conditions, after-sales service, etc.

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SUPPLY CHAIN
RISK IN SUPPLY CHAIN: SOURCES (Contd.)

q Financial – all money transactions, including payments, prices, costs, sourcing of

funds, profit and general financial performance;

q Information – including the availability of data, data transfer, accuracy, reliability,

security of systems, etc;

q Organization – arising from the way the organization works, including its
structure, disputes, types of interactions, subcontractors, communication
flows, culture, etc;

q Planning – risks from the design and execution of plans for operations, including
mismatch between supply and demand, inadequate detail, missed constraints,
poor forecasting, lack of synchronization, etc.

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SUPPLY CHAIN
RISK IN SUPPLY CHAIN: SOURCES (Contd.)

q Technical – and new technology in processes, communications, new products,

process designs and reliability;

q Criminal – arising from all illegal activities, such as theft, fraud, bribery,
vandalism and terrorism;

q Safety – to people and facilities, including accidents, hazardous substances

and fire;

q Human – from all the complex interactions between people, including working
requirements, aims, culture, human errors and industrial action;

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SUPPLY CHAIN
RISK IN SUPPLY CHAIN- CONSEQUENCES

The main risk to a supply chain is disruption to the flow of materials.

A dominant feature of supply chains is that all members are linked together,
and a risk to one is automatically transferred to all other members.

What should managers do ?

Should not wait to see what damaging events occur and then start thinking about
their response.
Be proactive, identifying potential risks and planning their responses in advance.

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 Building
Resilience
SUPPLY CHAIN
VULNERABILITY ANALYSIS

Source: Sheffi and Rice, 2005

18/07/22 48
SUPPLY CHAIN
VULNERABILITY MAP

Source: Sheffi and Rice, 2005

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SUPPLY CHAIN
THE DISRUPTION PROFILE

Source: Sheffi and Rice, 2005

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SUPPLY CHAIN
SUPPLY CHAIN RESILIENCE

The ability of an organization to bounce back quickly from

supply chain disruption.

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SUPPLY CHAIN
BUILDING SUPPLY CHAIN RESILIENCE

Design is matched to Demand

Parallel Paths

Shorter Supply Chains

Higher Stocks

Spare Capacity

Agility

Decoupling Point

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SUPPLY CHAIN
SUPPLY CHAIN RESILIENCE: FRAMEWORK

§ Supply Chain Understanding

Supply Chain Re-engineering § Supply Chain Design Principles
§ Supply Base Strategy

§ Collaborative Planning
Supply Chain Collaboration
§ Supply Chain Intelligence

Agility § Visibility
§ Velocity and Acceleration

§ Supply Chain Continuity Teams

Risk Management Culture § Broad-level Responsibility
§ Factor Risk Considerations into Decision-making

Source: Christopher & Peck, 2004

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Sourcing
SUPPLY CHAIN
BUILDING SUPPLY CHAIN RESILIENCE

Design is matched to Demand

Parallel Paths

Shorter Supply Chains

Higher Stocks

Spare Capacity

Agility

Decoupling Point

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DESIGNING SUPPLY CHAINS
ORDER FULFILLMENT

Order fulfilment is the process that actually makes and delivers a

product or service.

Three functions are responsible:

o Purchasing – acquires the inputs

used to support production
o Production – converts inputs into
outputs that customers value
o Logistics – transports and stores
goods assuring access

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DESIGNING SUPPLY CHAINS
PURCHASING MANAGEMENT: EVOLUTION

Four developments during the 80s and 90s increased the importance of
purchasing:

1. Purchased inputs became a primary operating cost

2. Just-in-time emphasized cooperative, long-term buyer-
supplier relationships
3. Information technology provided information needed to
strategically manage relationships
4. Better trained and more competent managers entered supply
arena

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DESIGNING SUPPLY CHAINS
SOURCING VERSUS PURCHASING

Sourcing decisions and purchasing activities serve to link a

company with its supply chain partners

o Sourcing decisions –
High level, often strategic decisions regarding which products or services will be provided internally and
which will be provided by external supply-chain partners
o Purchasing –
The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and
following up to ensure supplier performance

Sourcing decisions are high-level, MAKE OR BUY DECISION

often strategic decisions that
address: • In-House –
The use of resources within the firm
§What will use resources within the to provide products or services
firm
• Outsourcing –
§What will be provided by supply The use of supply chain partners
chain partners to provide products or services

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DESIGNING SUPPLY CHAINS
SOURCING PROCESS

IT STARTS WITH.. THE PROCESS

Recognition and Description of Need Supplier Selection

ü Identification
• Well-managed companies use a ü Evaluation
purchasing policy or procedure ü Approval
handbook to guide interactions ü Monitoring
between internal users and sourcing
• Purchase requisition is used to Need Transaction
clearly describe and communicate Communication Management
needs to sourcing ü Price
ü Recognition Determination
• Item description, requisitioning ü Description ü Purchase
Order
department, authorizing signature, ü Supplier
purchase quantity, delivery day, and Payment
location are necessary information Relationship
Management
ü Performance
Monitoring
ü Improvement

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DESIGNING SUPPLY CHAINS
BENIFITS OF SOURCING

o Better economies of scale can be achieved if

orders are aggregated
o More efficient transactions can significantly reduce
the overall cost of purchasing
o Good procurement processes can facilitate
coordination with suppliers
o Design collaboration can result in products that are
easier to manufacture and distribute, resulting in
lower overall costs
o Appropriate supplier contracts can allow for the
sharing of risk
o Firms can achieve a lower purchase price by
increasing competition through the use of auctions

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DESIGNING SUPPLY CHAINS
OUTSOURCING

Advantages

High strategic flexibility

Low investment risk Disadvantages
Improved cash flow
Access to state-of-the-art products
and services Possibility of choosing a bad supplier
Loss of control over the process and
core technologies
Communication and coordination
challenges
“Hollowing out” of the corporation

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DESIGNING SUPPLY CHAINS
SOURCING- PLANNING AND ANALYSIS

o A firm should periodically analyze its procurement spending

and supplier performance and use this analysis as an input for
future sourcing decisions

o Procurement spending should be analyzed to ensure

appropriate economies of scale

o Supplier performance analysis should be used

to build a portfolio of suppliers with
complementary strengths

o Cheaper but lower performing suppliers should be used to

supply base demand

o Higher performing but more expensive suppliers should be used

to buffer against variation in demand and supply from the other
source

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DESIGNING SUPPLY CHAINS
MAKING SOURCING DECISIONS

q Use multifunction teams

q Ensure appropriate coordination across regions
and business units
q Always evaluate the total cost of ownership
q Build long-term relationships with key suppliers

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DESIGNING SUPPLY CHAINS
SOURCING STRATEGIES

q Single sourcing –
The buying firm depends on a single company for all or nearly all of an item or
service

q Dual sourcing –
Using two suppliers for the same purchased product or service
q Multiple sourcing –
The buying firm shares its business across multiple suppliers
q Cross sourcing –
Using a single supplier for a certain part or service and another supplier with the
same capabilities for a similar part

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DESIGNING SUPPLY CHAINS
WHETHER TO OUTSOURCE

§ Customer Importance
How important is the component to the customer?
What is the impact of the component on customer experience?
Does the component affect customer choice?
§ Component Clockspeed
How fast does the component’s technology change relative to
other components in the system?
§ Competitive Position
Does the firm have a competitive advantage producing this
component?
§ Capable Suppliers
How many capable suppliers exist?

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Inventory
DESIGNING SUPPLY CHAINS
INVENTORY MANAGEMENT

Inventory can be either:

Raw Materials
Work-in-Process (WIP)
Finished Goods

Inventory is one of the largest expenses for most companies

Two basic models address these questions:

Fixed order quantity – orders the same quantity at different intervals
Fixed order interval – orders different quantities at fixed intervals

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DESIGNING SUPPLY CHAINS
NEED FOR INVENTORY

o Results from the managerial decisions to procure or produce items in groups or lots
in order to spread the fixed set up or ordering cost over large number of items
o Firms operate in an environment where goods are produced in anticipation of a
future demand i.e. production and demand happen at different points in time
o To ensure availability of products, when required by customers

Major Decisions involved in Inventory

Management

What quantity should be ordered?

When should the order be placed?

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DESIGNING SUPPLY CHAINS
EOQ MODEL COSTS

Order Costs Carrying Costs

• Placing order • Warehousing
• Tracking shipment • Overhead
• Receiving shipment • Capital
• Inspecting shipment • Insurance
• Document costs • Labor
• Invoice Costs
• Setup Cost
• Labor and materials used in setup

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DESIGNING SUPPLY CHAINS
EOQ TOTAL COST CURVE

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DESIGNING SUPPLY CHAINS
EOQ COSTS

A
Annual Order Costs = S
Q
1 1
Annual Carrying Costs = QCP or QW
2 2
1 A
Total Costs = QCP + S
2 Q
2AS 2AS Where :
EOQ = or
CP W A = Annual Demand
Q = Order Quantity
C = Cost per Unit of Inventory
S = Cost per Order or Setup
P = Carrying Cost as a Percentage
W = CP or the Annual Cost to Carry One Unit in Dollars

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DESIGNING SUPPLY CHAINS
EOQ TOTAL COST CURVE

The manager of Hogan Kitchenware gathered the following data. He expects to

sell 44,000 measuring cups this year. Hogan purchases the measuring cups for
$0.75 each from its supplier, Shatter Industries. Every order that is placed costs
Hogan $8.00 to process. The manager at Hogan estimates his company’s
inventory carrying cost to be 12 percent. Hogan Kitchenware is open for business
365 days per year.

Calculate the number of measuring cups that should be ordered.

What is the order, holding, and total cost of inventory?

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DESIGNING SUPPLY CHAINS
FIXED ORDER QUANTITY APPROACH

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DESIGNING SUPPLY CHAINS
REORDER POINT: QUESTION

Using the data from this same example and an 8 days lead time,
calculate the reorder point for Hogan Kitchenware.

(SAME EXAMPLE)

The manager of Hogan Kitchenware gathered the following data. He expects to

sell 44,000 measuring cups this year. Hogan purchases the measuring cups for
$0.75 each from its supplier, Shatter Industries. Every order that is placed costs
Hogan $8.00 to process. The manager at Hogan estimates his company’s
inventory carrying cost to be 12 percent. Hogan Kitchenware is open for business
365 days per year. Calculate the number of measuring cups that should be
ordered.

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DESIGNING SUPPLY CHAINS
EOQ IMPLICATIONS

ü EOQ Model is fairly robust despite assumptions that are

unrealistic for most companies.

ü Technology can reduce the order costs by automating

the process.

ü By reducing order/setup cost, batch size can be

reduced meaning that companies can hold less
inventory but receive shipments more often.

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Logistics
DESIGNING SUPPLY CHAINS
ORDER CYCLE

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DESIGNING SUPPLY CHAINS
ORDER FULFILMENT ACTIVITIES

q Placing facilities in the right location and leveraging

appropriate process technologies to reduce the
combined production and delivery time.

q Carrying the right quantity and mix of inventory.

q Streamlining order processing eliminating unnecessary

steps.
q Assure order-entry accuracy

q Developing good relationships with reliable

transportation companies reduces transit times and
increases on-time delivery performance.

q Adopting appropriate technologies and implementing

innovative materials handling processes can increase
flow speed through warehouses.

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DESIGNING SUPPLY CHAINS
LOGISTICS

Logistics is that part of supply chain management that plans, implements, and controls the efficient,
effective forward and reverse flow and storage of goods, services and related information between
the point of origin and the point of consumption in order to meet customers' requirements
Council for Supply Chain Management Professional(CSCMP)

PROCESSES
Materials management is concerned with the inbound movement and storage of raw materials, purchased
components, and subassemblies entering and flowing through the conversion process.

Physical distribution focuses on the outbound transportation and storage of finished products from point
of manufacture to where customers wish to acquire them.

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DESIGNING SUPPLY CHAINS
LOGISTICS ACTIVITES

q Inbound and outbound transportation

management
q Fleet management
q Warehousing
q Materials handling
q Order fulfillment
q Designing and managing facility network
q Inventory management
q Supply or demand planning

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DESIGNING SUPPLY CHAINS
LOGISTICS ACTIVITES

Activity Basic Roles and Responsibilities

Customer service focus on understanding what customers want and measuring

Customer
logistics performance against these customer requirements.
Service

Forecasts—estimates of demand—must be developed to help plan other

Demand logistics activities, allocate resources, and provide high levels of service at low
Forecasting costs.
Accurate documentation helps assure that the product gets to the customer on
Documentation time. Documentation is particularly vital in international shipments.

Data on carriers, customers, and inventories must be turned into useful

Information decision-making information. Information replaces inventory in today's logistics
Management systems.
Product must be available to meet production requirements and customer
Inventory demand. However, inventory is expensive. Inventory control must support high
Management levels of customer service with as little inventory as possible.

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DESIGNING SUPPLY CHAINS
LOGISTICS ACTIVITES

Activity Basic Roles and Responsibilities

Because handling materials costs money and can lead to damage, factories and
Material Handling warehouses are designed to minimize the total amount handling.

Order processing initiates work. Many orders are transmitted electronically,

Order Processing improving speed and accuracy of the fulfillment process.

Packaging protects the product throughout the distribution process. Packaging

Packaging also conveys information about the product and presents an attractive
appearance.

Parts and Service Needed spare and replacement parts must be available to support sales.
Support This type of support increases customer loyalty.

Location can provide access to inputs like low-cost labor and materials. It can
Site Selection also affect customer service levels, providing access to important consumer
Location markets.

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DESIGNING SUPPLY CHAINS
LOGISTICS ACTIVITES

Activity Basic Roles and Responsibilities

Return Goods Defective products and inaccurate orders must be returned efficiently. “Reverse
Handling logistics" is very important to achieving high levels of customer satisfaction.

Handling excess materials is often overlooked. However, this is an important

Salvage and logistics activity, especially when hazardous materials or recyclable items must
Recycling be managed.

Transportation Transportation is the most visible logistics activity. Five modal options exist: rail,
Management truck, air, water, and pipeline.

Warehouse/DC Storing products until they are ready for use is the role of warehousing. A variety
Management of products are also consolidated into a single customer shipment.

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DESIGNING SUPPLY CHAINS
FACTORS AFFECTING LOGISTICS

q Nature of products
q Facility locations
q Availability of infrastructure
q Modes of available transportation
q Government policies

OTHER ELEMENTS
q Packaging and Material Handling
q Interface with other functions
q Information flow

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DESIGNING SUPPLY CHAINS
TRANSPORTATION

Air Fastest but most expensive

Relatively quick, inexpensive and

Truck very flexible mode

Inexpensive mode to be used for

Rail large quantities

Ship Slowest but most economical

Used (primarily) for oil and gas

Pipeline

Electronic For goods like data, songs,

transportation music etc.

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DESIGNING SUPPLY CHAINS
TRANSPORTATION: RAIL

Rail
High fixed, low variable cost structure
Cost
Inexpensive, especially for bulk goods
Speed Relatively slow

Quantities Large quantities; full car load increments most cost effective

Geographical Coverage Widespread on some continents; limited by tracks, landmass

Environmental Low air pollution

Concerns
Distances Medium to long
Required Infrastructure Tracks
Product Variety Large variety of products; ideally suited for bulk goods
Reliability Low loss, damage, less timely (delays at sidings, terminals)
Flexibility Routing limited to track location, little door to door delivery
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DESIGNING SUPPLY CHAINS
TRANSPORTATION: ROAD

Road
High variable, low fixed
Cost
More expensive than rail
Speed Medium speed where sufficient roads exist, about twice as fast as rail

Quantities Limited capacity; larger capacity combination vehicles are geographically limited

Geographical Coverage Widespread on some continents; limited by roads, landmass

Environmental Concerns High pollution, especially in developing countries,

Distances Short to Medium
Roads, vehicles, Routing limited by road location
Required Infrastructure

Product Variety Large variety of products

Reliability Limited loss, damage, more timely than rail
Routing limited to road locations, but still good for JIT, extensive access in countries with well-
Flexibility developed highway systems, door to door delivery possible with appropriate roads

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DESIGNING SUPPLY CHAINS
TRANSPORTATION: PIPELINE
Pipeline

High fixed, low variable

Cost
Very inexpensive

Speed Nature of product makes speed a non-issue

Quantities Large quantities of limited products

Widespread on some continents; limited by unidirectional movement, and the availability of landmass to
Geographical Coverage support pipelines

Environmental Concerns Pipeline leakage, high impact on wildlife, scenic value

Distances Medium most common

Required Infrastructure Pipeline between two points required

Product Variety Primarily petroleum products; only practical for liquid or gas products

Reliability Very low loss or damage, usually timely

Flexibility Routing limited to pipelines

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DESIGNING SUPPLY CHAINS
TRANSPORTATION: SHIP
Ship
• High variable, low fixed
• Very inexpensive
Cost • Less fuel needed

• Inland waterway: Slow

Speed
• Ocean: faster, fewer stops

Quantities Large

Geographical Coverage Global, but limited to natural and constructed waterways.

Environmental Concerns Spillage from accidents, leakage, high impact on fisheries

Distances Long to very long
Ports, ships
Required Infrastructure
Routing limited by waterway, ocean availability
Product Variety Low variety of heavy, bulk, or low-value-by-weight items
Flexibility Port to port

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DESIGNING SUPPLY CHAINS
TRANSPORTATION: AIRPLANE
Airplane
High variable, low fixed
Very expensive
Cost lower packing costs than ship

Fast speed within and between continents; measured in hours or days

Speed

Quantities Relatively small

Geographical Coverage Widespread on some continents; limited by air terminal availability

Environmental Concerns Noise pollution near major population centers

Distances Medium to very long
Airports, navigational aids, airplanes
Required Infrastructure
Routing limited by airport location
Product Variety Large variety of small, high-value-by-weight, often perishable items
Flexibility Air terminal to air terminal

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DESIGNING SUPPLY CHAINS
TRANSPORTATION: INTERNET
Internet
Extremely inexpensive, where infrastructure is in place.
Cost
Low fixed, low variable costs

Extremely fast
Speed

Quantities Limited by number of source transmission lines available, or satellite access

Geographical Coverage Widespread on some continents; limited by transmission capability availability

Environmental Concerns None except where new transmission line construction occurs, then less than other modes

Distances Very short to very long

Telephone lines, satellite, cellular transmission capability
Required Infrastructure
Routing limited by transmission path
Product Variety Limited to digital information; software, music, video, documents, information
Flexibility Computer to computer

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DESIGNING SUPPLY CHAINS
ROAD TRANSPORTATION IN INDIA: DIFFICULTIES

q Fragmentation of industry- unorganized nature

q Lack of standardization be it size of trucks, quality of personnel, lack of training
or running standards
q Low entry barriers and politicization leading to unfair trade practices
q No perceptible development in vehicle standards
q Difficult enforcement of liability
q Infrastructure constraints

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DESIGNING SUPPLY CHAINS
WAREHOUSING

Need for Storage

o Production and demand takes place at different times
o Economies of scale requires firms to produce and transport in lots which
minimize the total cost. When production exceeds demand, the excess
quantity need to be stored
o To avoid stock-out costs
o To tide over uncertainties on the demand and supply side

Functionalities of Warehouse
o Storage - raw material /work-in progress and finished goods
o Distribution warehouses
o Consolidation
o Cross Docking/Product Mixing and Assortment
o Assembly and Product Postponement
o Transit Storage

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