1.

Introduction to SCM
Supply Chain  a sequence or chain (or network) of activities (or processes) from multiple actors required to bring (or move) the goods or
services to the customer

also logistic service

Material & Information flow mgnmt

 The term supply chain management (SCM) was developed to express the need to integrate the product flow, bringing the product to the
end user through original suppliers.
 The basic idea behind SCM is that companies involve themselves in a supply chain by exchanging information about market demand,
distribution capacity and production capabilities.

Supply chain length

1. Basic (direct)  1st tier
2. Extended  2nd tier
3. Ultimate  all

Value chain is not supply chain. Supply chain is not logistics

- Value chain  activities that companies perfom to deliver a good product
- Supply chain  concentrates in the supply part- It links value chains
o Sc strategy  function (as HR) integrated set of choices that result in superior SC performance

Key SC choices
 Risk & Resilience
 Forecasting / Planning
 Sourcing
 Inventory
 Capacity
 Location
 Transportation

Risk and Resilience

Risk = Exposure to a potential loss
 Reduce risk  more certainty about profits  increase business value
 Enhance business value by
o Reducing the exposure
o Manage risk items with high probabilityand/or severe loss

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 2. Forecasting

Accurate forecasts are critical to meet demand  risk of overforecasting. Forecasts are:
 Imperfect due to uncertainty  minimize the average error over time
 More accurate for groups of items than for individual products
 More accurate for shorter time than for longer time

Type of models:
1. Qualitative (judgamental)
 Educated guesses based on intuition, knowledge and experience
 Biased by motivation, mood or conviction of the forecaster
 Able to incorporate latest changes and “inside information”

2. Quantitative
 Based on mathematical models (Objective) and require quantifiable data

Time series models

 Generate a forecast based on patterns in the data (naïve method, simple (moving) average, exponential smoothing
 Trends and seasonal effects might need to be included

Basic patterns
 Level: data fluctuates around a constant mean
 Trend: data exhibits a (non-)linear increasing or decreasing pattern over time
 Seasonality: data exhibits a repetitive pattern (= fixed length and magnitude)
 Cycles: data exhibits an irregular pattern (≠ fixed length and magnitude)
Data = pattern (predictable) + random variation (non-predictable, error term)

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Level pattern
 Naïve method: next period’s forecast = current period’s actual
 Simple average: next period’s forecast = average of all available actual data
 Simple moving average (SMA): next period’s forecast = average of actual data of the n most recent periods
Larger number of observations n  less subject to randomness, but also less responsive to potential changes in demand
 Weighted moving average: next period’s forecast = weighted average of actual
data of the most recent periods

 Exponential smoothing: next period’s forecast = weighted sum of current period’s actual and current period’s forecast
Most frequently used method thanks to:
• Good performance under many conditions
• Ease of use
• Ease of understanding
Use the naïve method to generate an initial forecast for the first period.
Less subject to randomness and responsive to potential changes in demand

Causal or associative models

 Assume that the forecast is related to other variables in the environment
 Complicated because a case-specific model needs to constructed (linear regression, multiple regression)

Trend pattern
Need to compensate for the lagging that would occur  trend-adjusted exponential smoothing
 Smoothing the level
o Predicts next period’s level based on the actual data and the forecast of the current period, without considering that the trend
continues in the next period

 Smoothing the trend

o Predicts next period’s trend based on the trend modeled in the current period and the expected level difference between the
next and the current period

Seasonality pattern
 Seasonal index: percentage by which the value in a particular season is above or below the mean
 Forecasting procedure
1. Calculate average demand per season (= total annual demand / n seasons)
2. Determine the seasonal index for every season of every available year
3. Determine the average seasonal index for every season
4. Calculate the average demand per season for next year
5. Multiply next year’s average demand by each seasonal index

Casual models: Linear regression

 Dependent variable Y = forecast
 This forecast is assumed to be linearly related to an independent variable X
 Determine the parameters (intercept a and slope b) of the least-squares straight line
 Correlation coefficient r close to 1 or -1 strong positive/negative linear relationship between X and Y
 Squared correlation coefficient r² close to 1  regression line fits the data well

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Measuring forecast accuracy
Important to measure accuracy over multiple periods:
 Mean absolute deviation (MAD) measures the average of the absolute errors
 Mean squared error (MSE) measures the average of the squared errors  penalized large errors
Both can be used to measure the size of errors ≠ measuring bias
 The tracking signal monitors (exposes bias (+ or -)) the quality of the forecast and should remain within the interval [-4, 4]

Selecting the right model

Influencing factors
 Quantitative data available
 Required level of accuracy vs. costs (collecting and processing data, software, etc.)
 Length of the forecast horizon
 Patterns in the data
Decision makers might use a combination of different forecasting methods (spreadsheets, software..)

Forecasts form the basis of many other operational decisions:

 Production planning
 Orders of raw materials
 Workforce planning
 Capacity and location needs
 Competitive priorities, process changes or technological purchases
Collaborative planning, forecasting and replenishment (CPFR) might improve the performance of partners in a supply chain

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 3. Sourcing

The process of selecting suppliers to provide goods and services Vertical integration (Backward integration or forward)
 How to choose between suppliers? Insourcing: the manufacturer provides products and service in-
o Availability house
o Cost Outsourcing: the manufacturer pays suppliers or third parties for
o Quality their products or services
o Speed and reliability
 One or more suppliers per item?
 Partnership with a supplier?

Make-or-buy decision: Kraljic matrix: 4 different sourcing strategies

 Volume  indifference point
 Quality and functionality
 Required skills
 Available capital for investment
A product or service should not be outsourced if it is
 A company’s core competency
Critical to the company’s success or survival

Partnering: developing a long-term relationship with a supplier based on mutual trust, shared vision, shared information, and shared risks
 Strategic in nature
 Driven by end-customer expectations
 Critical success factors of partnering
o Impact: attaining higher levels of productivity and competitivene

ss
 Elimination of duplication and waste
 Leveraging core competencies
 Creating new opportunities
o Intimacy: trust to share all information on sales, operations, etc.
o Vision: agreement on the goals of the partnership and the role of each partner

Early supplier involvement (ESI): critical suppliers are part of a cross-functional product design team (shared expertise, shorter time to market)

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 4. Inventory management

Make-to-stock strategy
Standarized products for inmediate sale

Assembly-to-order strategy
Standard components which are
combined to customer specifications

Make-to-order strategy
Products to customer specifications,
produced after the order is received

Types of inventory:
 Raw materials: purchased items or extracted materials that are transformed into components or products
 Components: parts or subassemblies used in the final product
 Work-in-process: unfinished products that are in process
 Finished products: products that are ready to be sold to customers
 Distribution: finished products in the distribution system
 Maintenance, repair and operating inventory: supplies that are used in the production process without being part of the final product

Inventory purposes
 Anticipation inventory (seasonal): built in anticipation of future demand, to maintain level production (e.g., promotional programs,
seasonal fluctuations, vacations)
 Fluctuation inventory or safety stock: carried as a buffer against unexpected demand variations, to assure customer service levels
 Lot-size inventory or cycle stock: results from the actual quantity ordered or produced, to lower unit costs (e.g., quantity discounts,
production minimum)
 Transportation or pipeline inventory: items in movement between locations
 Speculative or hedge inventory: protection against future events (e.g., strikes, price increase, product scarcity

Inventory management objectives

1. Provide desired customer service level
 Percentage of orders shipped on schedule
 Percentage of line items shipped on schedule
 Percentage of dollar volume shipped on schedule
 Idle time due to material and component shortages
2. Ensure cost-efficient operations
 Carry work-in-process inventory between workstations, to avoid idle time
 Maintain a level workforce despite seasonal demand, to avoid cost of overtime, hiring and firing, training, subcontracting, etc.
 Schedule long production runs, to decrease setup cost
 Order large volumes, to receive quantity discounts
3. Minimize inventory-related investments

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Inventory-related costs
 Item costs: direct costs associated with the purchase (I.e., purchase price, transportation, insurance, taxes, handling, (production))
 Holding costs: variable expenses related to the volume of inventory (I.e., capital (interest rate/rate of return), storage, risk)
 Ordering costs: fixed costs incurred for each order placed (E.g., administration, handling, (setup))
 Shortage costs: incurred when demand exceeds supply (E.g., back order handling, loss of customer goodwill, lost sales)

ABC classification
How to determine the appropriate level of control and frequency of review for inventory items?
Pareto’s law (20/80): items are segmented based on annual dollar volume
 A items: high dollar volume  continuous review (EOQ model) Typically 20% of the items, representing 60-80% of inventory value
 B items: medium dollar volume  periodic review (TI model) Typically 30% of the items, representing 25-35% of inventory value
 C items: low dollar volume  less frequent review or two-bin system  Typically 50% of the items, representing 5-15% value

Determining order quantities

1. Multiple-period models
 Fixed order quantity models  continuous review
o Economic order quantity (EOQ)
o Economic production quantity (EPQ)
o Extensions to the EOQ model: quantity discounts, safety stock
 Fixed time interval models  periodic review
o Target inventory (TI)
2. Single-period model

Economic order quantity (EOQ)

Objective: satisfy demand with minimized sum of order costs and holding costs to be determined: when to order and how many items /order?
Assumptions
• The total demand D is known and constant (no safety stock needed)
• All demand needs to be satisfied on time (no backorders possible)
• The lead time L is known and constant
• The fixed ordering cost S is known and constant (independent of the quantity ordered)
• The holding cost is known and proportional to the average inventory level
• No quantity discounts are applicable
• The ordered items are delivered at once

Order size that minimizes TC? 

When to place a new order 

Economic production quantity (EPQ)

 Inventory is gradually replenished and can be used as soon as it arrives (e.g., internally made items)
o Higher optimal order quantity Q:
o Lower inventory level and cost:
 Production rate p must be larger than depletion rate d
 Maximum inventory level Imax must be smaller than EPQ

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Quantity discount model
 Vendors allow quantity discounts when large quantities are ordered
 multiple unit price levels (P) depending on the quantity ordered

1. Starting from the lowest item price P, check which value of P is the first for which a feasible EOQ is obtained and compute the TC
2. Also compute the TC for all order quantities Q at price breaks to curves associated with a lower item price P
3. Select the option involving the lowest TC

Demand uncertainty
 If demand during the lead time is uncertain, companies might invest in safety stock to decrease the probability of shortages:
o Increased reoder point R
o Unaffected reorder quantity Q
o Increased total cost TC
 Determine an adequate level of safety stock (SS) based on the order-cycle service level: the probability that demand during the lead
time will not exceed on-hand inventory

 The use of safety stock changes the reorder point R: the company places a new order when the remaining stock is 250 units (instead of
200 units), which creates a buffer to avoid stockouts during the lead time
 The amount of safety stock to hold depends on the variability of demand and lead time and the desired order-cycle service level.

Order-cycle service level approach

 Assumption: demand during lead time is normally distributed with mean µL and standard deviation σL

Target inventory model

 Periodic review system: the inventory on hand is measured at fixed time intervals (e.g., once per week)  review period RP
 The order quantity Q is variable and determined based on the difference between a target inventory level (TI) and the current inventory
level on hand (OH)
 Advantages:
• No need to continuously monitor the inventory level
• Items from the same supplier can be reviewed on the same day to save order costs
 Disadvantages:
• Replenishment quantities vary and may not qualify for quantity discounts
• Higher average inventory levels needed to protect against stockouts

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  Order qty
 Target inventory level based on the expected demand during a review period and the lead time
 Compared to continuous review models, a larger safety stock is needed to protect the company against uncertainty during the review
period as well:

Single-period inventory model

 Designed for products with the following characteristics:
• Sold at their regular price at a specific occasion or during a short period (e.g., newspapers, perishable products)
• A discrete demand distribution is known
• The salvage value is less than the purchasing cost  a loss is made on products that cannot be sold at their regular price
 Objective: how many products to stock in order to maximize expected profit?

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 5. Capacity planning

Capacity planning = establishing the maximum output rate of a facility (e.g., organization, division, machine)
 First level: strategic investments in new facilities and equipment
• Long-term commitments of expensive resources
• Risky due to uncertainty in demand forecasting
• Purchased in chucks rather than in smooth increments
 Second level: tactical, short-term planning of workforce, inventories, day-today use of machines, etc.

Companies have different interpretations of what capacity means

Companies can measure capacity based on inputs or outputs

Design capacity: maximum output rate under ideal conditions

 Can only be maintained for a short period of time (E.g., by using overtime, maximum use of equipment, subcontracting)
Effective capacity: maximum output rate under realistic conditions
But, how effectively is the available capacity used?  measure the capacity utilization

Capacity considerations
Best operating level = output volume that minimizes the average unit cost, determined per facility
• Economies of scale: average cost of a unit produced reduces when the amount of output increases
• Diseconomies of scale: average cost of each additional unit increases  point beyond best operating level
The best operating level depends on the size of the facility

Capacity planning decisions

1. Identify capacity requirements
• Forecasting methods  specific facility requirements
• Capacity cushions  greater flexibility
• Strategic implications  position in the market relative to competitors
2. Develop capacity alternatives
• Do nothing
• Expand large now
• Expand small now, with option to add later
3. Evaluate capacity alternatives
• Decision tree:
o Build the decision tree from the present to the future
 Squares represent decisions that the company can take (“nodes”)
 Circles represent chance events that the company has no control over  the sum of the probabilities in all branches
should equal 1
 Arrows indicate the outcome associated with every alternative (“branches”)
o Solve the decision tree from the future to the present
 At a chance event, compute the expected value based on the given probabilities
 In a decision node, choose the alternative having the highest expected value

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 6. Global production networks (GPN´s)

Where to locate?
Increasing Geographic mobility:
 Decreasing Trade barriers
 Lower (efficient) transport means & costs
(containerization)
 + Economies of scale

GPN are build on:

 Global transportation networks
 Zero trade barriers
 Scale

Corporate location models: Where to make?

Geographic mobility: Think projects, not sectors

Mobility trade-off

Why has Ineos chosen Antwerp over USA/Rotterdam?

Must haves: Global port, local and regional market
Differentiating factors: Know-how of labor force, synergies in opex/capex boosting ROI

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 7. Location

Check location requirements using a

Project definition
facility location questionnaire
Define basic requirement of the project + detect critical location factors
 Facility type (Production, Warehouse, R&D)
 Quantitative:
o Capital investment (site area, investment cost, planning construction)
o Operations (labor, logistics, utilities  power consumption, natural gas, water volume, ph, heat requirements, boiler)
 Financial assumptions
 Currency
 Min return on own investment capital
 Investment costs – Available capital budget range:
o cost of site and buildings
o cost of equipment and tooling
o raw material and finished products inventory
o other working capital requirements :
 cash
 accounts receivable
 work in process
 Sources and cost of financing (banks/debt or equity/own money)
 Value of projected annual sales initially and ultimately
 Tax rate & structure (repatriation of dividends, royalties, …)

Critical location factors:

 When agreed on project definition and project requirements, the project team has to agree on the critical success factors of the project.
 Critical location factors do not allow a compromise and should be fully matched by the supply side.
 The analysis of the critical location factors allows to identify and reduce the area of search.

Search area
Delineate the geographic area matching the critical requirements (see example)

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Cost and quality analysis
Kosten & Kwaliteit Factors

Cost economics of the location – ROI analysis

Evaluate - Chek-in
How would you evaluate and compare overall cost attractiveness of locations on the short-list?
 National factors
 Regional factors
 Site-specific factors
Location quality intangibles
1. Structure/Group in Location drivers,
2. apply an expert judgement (very good, good, mediocre, weak, very weak)
3. Quantify the quality by using a Multi-Criteria Analysis
HR availability, roads, medical facilities, housing, HR mobility..

Evaluate the options:

- Cost-quality

Implementation

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 8. Marine transport systems
- 90% boat – 10 % plane
- Plane also called courier services  <1m3 < 250 kg 2-5 times more expensives
- Boat can be FCL (full container load) or LCL (less than container load)

Origin logistics  Intermodal logistics  Destination logistics

- Port-to-port
- Door-to-door
- Producer-to-consumer

Buyer group
Cost only Frequent user of multi-modal
Cost-quality balance Occasional user of multi-modal
Special goods Hardly/never user of multi-modal??

Combined shipping decision

1. Logistic path way  port selection
2. Maritime transport  system and service provider selection
3. Load transport  system and service provider selection

Weakest link?

Load approx.. split between the option

- Containers 20 ft or 40 ft  2.385x2.35x5.896 or 12.035

- Max boat size  23.992 TEU (containers) los que mas crecen son los de 10 k to 15 k y lo que mas hay junto a 5-10 k
- Saving in slot cost per TEU 8 k
10k 7% 12k 16% 14k 21% 18k 30%
- To fill these big ships, carriers have to come together in alliances  maersk and MSC are partners and competitors  2M

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Big ships  large volumes concetrated in limited ports, large infraestructure, small competitors less power..
Surcharge  ad-hoc charges, suez canal..
Rotterdam=antwerp in ocean freight rate
Port/terminals are integrated in the maritime transport system which is organised by the ocean carrier
Port attractiveness:
- Geo-location
- Deviation from sailing route
- Distance to hinterland
- Captive (local) market
- Nautical access
- Terminal capacity
- Efficiency of terminals
- Inland connectivity
Ship idle time = money

Port types: (the biggest port is japan and chineses)

- Gateway
- Hub
- Feeder

Terminals  who operates the container terminals?

- Terminal operators, concentrated with few global players: PSA, HPH..
Long term outlook:
- Digitalization  risk of cyberattack
- Climate change
- Manless ships and terminals

Hinterland
60% of EU´s purchasing power located in 50 km area of Rhine (European banana)
- Multimodal  you sign a single contract, employ a Bill of Lading, and use the same transport carrier
- Intermodal  you sign many contracts and do more logistics coordination
Max size inland barge  700 TEU

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 9. Transportation
• Significant supply chain cost (up to 20% of total production cost)
• Major determinant of quick delivery service for some companies

Rail • Long-distance transport of large quantities Natural oligopoly due to high entry costs
• Products with low value and high density (e.g., steel, coil, sugar) Low accessibility (prehaul and endhaul transport needed)
Long transportation times (slow) due to consolidation
Road • Small point-to-point shipments Competitive environment with many relatively small firms
• Manufactured commodities with high value High accessibility and reliability
Flexible but expensive
Air • Emergency shipments and perishable goods Highly concentrated in limited number of carriers
• Products with high value-to-weight ratio Low accessibility
Fast but very expensive due to high variable costs
Waterway • Long-distance transportation of large quantities Cost-efficient mode thanks to large volumes, but very slow
• Bulk products with low value, container transportation, etc. Low accessibility (prehaul and endhaul transportation needed)
Pipelines • Liquid High capital costs, but economical use and long lifetime
Limited accessibility

Europe: Road 50%

Maritime 30% Rail 7%
Air 1% Inland
waterways 3%  in
usa more rail

Intermodal transportation
• At least two modes in a single transport chain
• Goods do not change container
• The largest part by rail or waterway transportation
• The shortest possible prehaul and endhaul by road transportation
• Requires coordination

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 10. The last mile

Final phase of the supply chain where finished goods move from a distribution centre to the final delivery destination
 high contribution to internal and external costs

An increasing share of all transportation costs are incurred in the last mile  40% SC cost  the most polluting / insuficient and expensive part
 Link between urbanization and last mile logistics
o Traffic congestion (will increase in the future)
o Lack of space
o Regulations
 Trend towards fragmentation due to JIT deliveries
o More frequent deliveries
o Lower fill rate of vehicles

E-commerce
1. Business to business (B2B): partly automated procurement process
 Since 1970s: electronic data interchange (EDI) Standardized computer-to-computer communication of business documents (e.g.,
orders, invoices) between companies  specific standards in each industry
 Since 1990s: electronic storefronts (online catalogs) and net marketplaces (online auctions)
2. Business to consumer (B2C): Up to 50% in some markets

Sustainable transportation
Four types of actions:
Awarenes  external costs
s
Avoidance  solution horizontal
cooperation
 Use double deck
trailers
Act & shift  alternative models
 Off-hour deliveries
Anticipate  New technologies
 Alternative fuels

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