Supply Chain Management-Introduction,

Performance, Driver and Metrics

Class 1 , 2, 3, 4, 5
(Chopra, Meindl, and Kalra, Chapter
1,2,3,4,5)
P R O F. A R N A B A D H I K A R I
 Supply Chain Syllabus
Module 1: Introduction to Supply Chain Management (SCM), Performance, Driver,
Network Planning- (Skill set: Strategic, Tactical, and Operational)
Module 2: Inventory management: Managing Economies of Scale in a supply chain
( Cycle inventory, Safety inventory)- (Skill set: Tactical and Operational)
Module 3: Recent Trends in Supply Chain (Technology, Sustainability,
Transportation network) (Skill set: Strategic and Operational)
Module 4: Game theoretic analysis in supply chain (Skill set: Strategic)
Main motivation : HBS, MIT
http://www.iscea.net/india
https://cscmp.org/CSCMP/Certification/CSCMP/Certify/SCPro__Certification_Ove
rview.aspx?hkey=7b7d5e70-1024-436e-b526-7221ae604783

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Importance of Supply Chain
Management

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 Importance of Supply Chain
Management
IMPROVE CUSTOMER SERVICES COST REDUCTION

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 The Celebration Experimentation!!

https://www.youtube.com/watch?v=XGXZrOYtmnw

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 Supply chain-definition
Supply chain management is a set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and stores, so that merchandise is
produced and distributed at the right quantities, to the right locations, and at the
right time, in order to minimize system wide costs while satisfying service level
requirements The objective of SCM is to be efficient and cost-effective across the
entire system.

Typical supply chain stages: customers, retailers, wholesalers/distributors,

manufacturers, component/raw material suppliers.

All stages may not be present in all supply chains (e.g., no retailer or distributor
for Dell)

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Supply chain-definition

https://www.youtube.com/watch?v=lZPO5RclZEo

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Supply chain

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Objective of a supply chain
Objective: Maximize overall value generated

Supply Chain Surplus = Customer Value – Supply Chain Cost

Example: a customer purchases a wireless router from Best Buy for $60
(revenue).Supply chain incurs costs (information, storage, transportation,
produce components, assembly, etc.)

Difference between $60 and the sum of all of these costs is the supply chain
profit

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 Objective of a supply chain
Supply chain profitability is total profit to be shared across all stages of the
supply chain. Success should be measured by total supply chain profitability,
not profits at an individual stage.

Customer the only source of revenue.

Sources of cost include flows of information, products, or funds between stages

of the supply chain.

Effective supply chain management is the management of supply chain assets

and product, information, and fund flows to grow the total supply chain surplus.

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Importance of
supply chain decisions-Success Stories

Wal-Mart, $1 billion sales in 1980 to $469 billion in 2013

Dell, $56 billion in 2006, adopted new supply chain strategies

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Importance of
supply chain decisions-Failure Stories
Failure stories

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Role of a Supply Chain manager

Inventory Management
Distribution Management
Logistics Management
Procurement Management (contract design)
https://www.youtube.com/watch?v=ZP5yNjNdaUs

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Caselet- manager’s decision
dilemma

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Decision phases in a supply chain
Design Termed as Supply Chain Decisions Time Horizon
phases
Supply Chain Strategic  Outsource supply chain functions Long term (3
Strategy  Locations and capacities of facilities years-10 years)
 Products to be made or stored at various locations
 Modes of transportation
 Information systems
Supply Chain Tactical  Which markets will be supplied from which locations Middle (3
Planning  Planned buildup of inventories months-2
 Subcontracting years)
 Inventory policies
 Timing and size of market promotions
Supply Chain Operational  Allocate orders to inventory Day to day
Operation  Set order due dates,
 Generate pick lists at a warehouse
 Allocate an order to a particular shipment,
 Set delivery schedules
 Place replenishment orders

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Strategic (Long-term)

Tactical (Middle-term)

Operational (Day
to day)

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Process views of a supply chain
Cycle View Push/Pull View

 The processes in a supply chain are  The processes in a supply chain are divided
divided into a series of cycles, each into two categories, depending on whether
performed at the interface between they are executed in response to a customer
two successive stages of the supply order or in anticipation of customer orders.
chain.  Pull processes are initiated by a customer
 This view is useful when considering order
operational decisions as it specifies  Push processes are initiated and performed
the roles and responsibilities of each in anticipation of customer orders.
of the supply chain members and the  Push/pull boundary separates push
desired outcome for each process. processes from pull processes

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Push and Pull view

https://www.youtube.com/watch?v=DoXE_lX3Zzo

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Cycle view
of supply
chain processes

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Cycle view of
supply chain processes
Description of sub-processes

Buyer returns reverse

Supplier stage flow to supplier or
markets product third party

Buyer stage places Buyer stage receives

order supply

Supplier stage Supplier stage

receives order supplies product

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Push/Pull view of supply chains

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Real life examples

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Example-L.L. bean

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Example-Ethan Allen

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Supply chain macro processes
Supply Chain Macro Processes

Supplier Relationship Internal Supply Chain Customer Relationship

Management (SRM) Management (ISCM) Management (CRM):
All processes at the All processes that are All processes at the
interface between the internal to the firm interface between the
firm and its suppliers firm and its customers

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Competitive and supply
chain strategies
Strategies Definition
Competitive strategy It defines the set of customer needs a firm seeks to satisfy
through its products and services
Product development It specifies the portfolio of new products that the company
strategy will try to develop
Marketing and sales It specifies how the market will be segmented and product
strategy positioned, priced, and promoted
Supply chain strategy It determines the nature of material procurement,
transportation of materials, manufacture of product or
creation of service, distribution of product

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Achieving strategic fit
Strategic fit – competitive and supply chain strategies have aligned
goals
A company may fail because of a lack of strategic fit or because its
processes and resources do not provide the capabilities to execute the
desired strategy
How is Strategic Fit Achieved?
Understanding the customer and supply chain uncertainty
Understanding the supply chain capabilities
Achieving strategic fit

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Understanding the customer and supply
chain uncertainty
Demand uncertainty – uncertainty of customer demand for a product

Implied demand uncertainty – resulting uncertainty for the supply chain given
the portion of the demand the supply chain must handle and attributes the
customer desires

Supply Uncertainty-Uncertainty related to raw material

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Class exercise-Products on the uncertainty
spectrum-decision makers dilemma

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Class exercise-Products on the
uncertainty spectrum-decision
makers dilemma
1. Salt
2. New communication device
3. Existing automobile
B. uncertain supply and
predictable demand /
predictable supply and C. Highly uncertain
A. Predictable
uncertain demand supply and demand
supply and demand

Match A, B, C with 1, 2, and 3

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Implied uncertainty
(demand and supply) spectrum

• A-1
• B-3
• C-2

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 Understanding supply chain capabilities
Supply chain responsiveness is the ability to
 Respond to wide ranges of quantities demanded
 Meet short lead times
 Handle a large variety of products
 Build highly innovative products
 Meet a high service level
 Handle supply uncertainty
Responsiveness comes at a cost

Supply chain efficiency: It is the inverse to the cost of making and delivering the
product to the customer

Cost-responsiveness efficient frontier curve: It shows the lowest possible cost for a
given level of responsiveness

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Efficient and Responsive supply chains
Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand
Create modularity to allow
Maximize performance at a
Product design strategy postponement of product
minimum product cost
differentiation
Lower margins because price is a Higher margins because price is
Pricing strategy
prime customer driver not a prime customer driver
Maintain capacity flexibility to
Manufacturing strategy Lower costs through high utilization buffer against demand/supply
uncertainty
Maintain buffer inventory to deal
Inventory strategy Minimize inventory to lower cost
with demand/supply uncertainty
Reduce, but not at the expense of Reduce aggressively, even if the
Lead-time strategy
costs costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality

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 Responsive
Efficient

Balance between Efficiency and Responsiveness

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Cost-Responsiveness efficient frontier

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Products on the efficiency and responsiveness
spectrum-decision makers dilemma
A. B.

Seven Eleven-Japan Hanes Apparel

C. D.

Steel Mill Automotive Production

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Class exercise-Products on the
uncertainty spectrum-decision
makers dilemma
1. Seven Eleven-Japan
2. Hanes Apparel
3. Steel Mill
4. Automotive Production

D. Highly
A. Highly B. Somewhat- C. Somewhat- responsive
efficient efficient responsive

Match A, B, C, D with 1, 2, 3, and 4

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Responsiveness spectrum

• A-3
• B-2
• C-4
• D-1

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Zone of strategic fit

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 Summary-achieving strategic fit
The first step in achieving strategic fit between competitive and supply chain strategies is
to understand customers and supply chain uncertainty. Uncertainty from the customer
and the supply chain can be combined and mapped on the implied uncertainty 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.

The final step in achieving strategic fit is to match supply chain responsiveness
with the implied uncertainty from demand and supply. The supply chain design
and all functional strategies within the firm must also support the supply chain’s level
of responsiveness.

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Tailoring the supply chain
Achieve strategic fit while serving many customer segments with a variety of
products across multiple channels
Requires sharing some links in the supply chain with some products, while
having separate operations for other links
When supplying multiple customer segments with a wide variety of products
through several channels, a firm must tailor its supply chain to achieve strategic
fit.

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 Expanding strategic scope
Scopes Definition
Scope of strategic fit the functions within the firm and stages across the supply
chain that devise an integrated strategy with an aligned
objective
Intraoperation Scope: Minimize Each stage of the supply chain devises strategy
Local Cost View independently
Intrafunctional Scope: Minimizing Firms align all operations within a function
Total Functional Cost
Interfunctional Scope: Maximize Functional strategies are developed to align with one
Company Profit another and the competitive strategy
Intercompany Scope: Maximize Supplier and customer work together and share
Supply Chain Surplus information to reduce total cost and increase supply chain
surplus
Agile intercompany scope a firm’s ability to achieve strategic fit when partnering
with supply chain stages that change over time

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 Intercompany Scope

Inter functional Scope Inter functional Scope

Agile intercompany scope

Intercompany Scope

Inter functional Scope

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Supply chain concepts
Concept Description
Systems  It emphasizes interdependence not only between functions within an
Concept organization but also among multiple organizations that collectively
deliver products and services to the customer.
 Neglect of the appreciation of intra-company, inter-functional
interdependence can result in unintended losses and wastages.
Total Cost  This concept emphasizes the need for inter-company co-ordination, co-
Concept operation, and collaboration in all activities from design and
development to manufacturing and distribution to optimize the total
cost, and thereby, maximize the value delivered to the customer.
Trade Off  The “trade-off” concept enjoins upon the decision makers to explore the
Concept possibilities of choosing among alternatives or combination of
alternatives in fulfilling a supply chain objective to minimise costs.
 Faster transportation through a more expensive mode may be acceptable
if it helps lower inventories carried and increases responsiveness to a
time sensitive customer.

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Total Cost Concept Trade Off Concept

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Financial measures of performance

Return on Equity (ROE)

Return on assets (ROA)

Accounts Payable Turnover

(APT)

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 Financial measures of performance
Key components of asset turnover are accounts receivable turnover (ART); inventory
turnover (INVT); and property, plant, and equipment turnover (PPET)

 Key components of asset turnover are accounts receivable turnover (ART); inventory
turnover (INVT); and property, plant, and equipment turnover (PPET)

 Cash-to-cash (C2C) cycle roughly measures the average amount time from when cash
enters the process as cost to when it returns as collected revenue
 C2C =– Weeks Payable (1/APT) + Weeks in Inventory (1/INVT)
+ Weeks Receivable (1/ART)

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Financial measures of performance
Financial measures (not part of financial statements)

 Markdowns: discounts required to convince customers to buy excess

inventory

 Lost sales: represent customer sales that did not materialize because of the
absence of products the customer wanted to buy

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 Problem 1-Financial impacts of supply
chain decisions
“ Friends Reunion,” an USA-based Start up, sells antiques. The excerpts from its balance
statements and income statements for the years 2017,2018, 2019, and 2020 are presented
below. Also, it’s known that there is an 20% decrease in Transportation cost in 2018, 20%
decrease in Warehousing cost in 2019, and 20% decrease in Inventory in 2020 compared
to the previous year.
Compute (a) Gross margin (b) Net income © Return on asset (ROA) and
Inventory turnover for each of the years and comment on the performance

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 Problem 1-Financial impacts of supply
chain decisions
Friends Reunion 2017 2018 2019 2020
Sales 90000 90000 90000 90000
COGS 48000 48000 48000 48000
Cost structure 2017 2018 2019 2020
Transportation cost 3600 3600 3600
Warehousing cost 3000 3000 3000
Inventory cost 1200 1200 1200
Asset 2017 2018 2019 2020
Inventory (IN) 10000 10000 10000
Total Assets (TA) 150000 150000 150000 150000

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Problem 1-solution
Friends Reunion 2017 2018 2019 2020
Sales 90000 90000 90000 90000
COGS 48000 48000 48000 48000
Gross Margin 42000 42000 42000 42000
Cost structure 2017 2018 2019 2020
Transportation cost 3600 2880 3600 3600
Warehousing cost 3000 3000 2400 3000
Inventory cost 1200 1200 1200 960
Net Income (NI) 34200 34920 34800 34440
Asset 2017 2018 2019 2020
Inventory (IN) 10000 10000 10000 8000
Total Assets (TA) 150000 150000 150000 150000
Ratio analysis 2017 2018 2019 2020
ROA (NI/TA) 22.8 23.28 23.2 22.96
Inventory turns/year
(COGS/IN) 4.8 4.8 4.8 6

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 Problem 1-Implications
 Improvement in NI, ROA, ITR is desirable
Higher inventory turnover ratio means less capital is used for inventory and
more capital is available for other usage of organizations
Transportation cost reduction can be achieved using slower mode of
transportation. On the other hand, it can have a negative impact on the service
quality.
Warehouse cost reduction can be achieved through the procurement of advanced
technical equipment. It signifies that the increase in the total asset, which, in-turn
can reduce ROA.

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Framework for
structuring supply chain drivers

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Supply chain drivers
Drivers Description
Facilities The physical locations in the supply chain network where product is
stored, assembled, or fabricated
Inventory All raw materials, work in process, and finished goods within a supply
chain
Transportation Moving inventory from point to point in the supply chain
Information Data and analysis concerning facilities, inventory, transportation,
costs, prices, and customers throughout the supply chain
Sourcing Who will perform a particular supply chain activity
Pricing How much a firm will charge for the goods and services that it makes
available in the supply chain

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Real Life example

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Facilities
Role in the supply chain

 Increase responsiveness by increasing the number of facilities, making them

more flexible, or increasing capacity.

Tradeoffs between facility, inventory, and transportation costs

◦ Increasing number of facilities increases facility and inventory costs,

decreases transportation costs and reduces response time

◦ Increasing the flexibility or capacity of a facility increases facility costs but

decreases inventory costs and response time

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 Facilities
Components of facilities decisions
 Role

• Flexible, dedicated, or a combination of the two

• Product focus or a functional focus

 Location

◦ Where a company will locate its facilities

◦ Centralize for economies of scale, decentralize for responsiveness

◦ Consider macroeconomic factors, quality of workers, cost of workers and facility,

availability of infrastructure, proximity to customers, location of other facilities, tax
effects

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Inventory
Role in the Supply Chain
• Mismatch between supply and demand
• Exploit economies of scale
• Reduce costs
• Improve product availability
• Affects assets, costs, responsiveness, material flow time

Overall trade-off
• Increasing inventory generally makes the supply chain more responsive

• A higher level of inventory facilitates a reduction in production and transportation costs

because of improved economies of scale

• Inventory holding costs increase

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Transportation
Components of Transportation Decisions

Design of transportation network

• Modes, locations, and routes

• Direct or with intermediate consolidation points

• One or multiple supply or demand points in a single run

Choice of transportation mode

• Air, truck, rail, sea, and pipeline

• Information goods via the Internet

• Different speed, size of shipments, cost of shipping, and flexibility

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 Transportation
Overall trade-off: Responsiveness versus efficiency

The cost of transporting a given product (efficiency) and the speed with which
that product is transported (responsiveness)

Using fast modes of transport raises responsiveness and transportation cost but
lowers the inventory holding cost

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 Information
Role in the Supply Chain

Improve the utilization of supply chain assets and the coordination of supply chain flows to
increase responsiveness and reduce cost

Information is a key driver that can be used to provide higher responsiveness while
simultaneously improving efficiency
Components of Information Decisions

Push versus Pull: Different information requirements and uses

Coordination and information sharing: Supply chain coordination, all stages of a supply
chain work toward the objective of maximizing total supply chain profitability based on
shared information

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Information
Sales and operations planning (S&OP):The process of creating an overall
supply plan (production and inventories) to meet the anticipated level of demand
(sales)

Enabling technologies
• Electronic data interchange (EDI)

• The Internet

• Enterprise resource planning (ERP) systems

• Supply chain management (SCM) software

• Radio frequency identification (RFID)

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 Information
Role in the Competitive Strategy

Improves visibility of transactions and coordination of decisions across the

supply chain

Right information can help a supply chain better meet customer needs at lower
cost

More information increases complexity and cost of both infrastructure and

analysis exponentially while marginal value diminishes

Share the minimum amount of information required to achieve coordination

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Sourcing
Role in the Supply Chain
 Set of business processes required to purchase goods and services

 Will tasks be performed by a source internal to the company or a third party

 Increase the size of the total surplus to be shared across the supply chain
Role in the Competitive Strategy
 Sourcing decisions are crucial because they affect the level of efficiency and
responsiveness in a supply chain

 Outsource to responsive third parties if it is too expensive to develop their

own

 Keep responsive process in-house to maintain control

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Pricing
Role in the Supply Chain
 Pricing determines the amount to charge customers for goods and services

 Affects the supply chain level of responsiveness required and the demand
profile the supply chain attempts to serve

 Pricing strategies can be used to match demand and supply

 Objective should be to increase firm profit

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Network Planning
Network Planning-It refers to Distribution Network Planning by opening new
distribution centers.

Distribution – the steps taken to move and store a product from the supplier
stage to the customer stage in a supply chain.

Supplier Manufacturer Retailer End consumer

Main trade off in the network planning: Customer responsiveness vs. cost

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Different dimensions of customer
service and cost
Customer Service Cost

 Product availability  Inventory

 Product variety  Transportation
 Customer experience  Inbound
 Response time  Outbound
 Order visibility  Facilities
 Returnability  Information
 Time to market

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Different dimensions of customer service
and cost-Online Shopping Example

Customer: Product variety

Manager: Inventory

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Different dimensions of customer service
and cost-Online Shopping Example
Customer Experience

Customer: Response time

Manager: Inventory and
Transportation

Customer: Product Availability

Manager: Inventory

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Different dimensions of customer service
and cost-Online Shopping Example

Customer: Order visibility

Manager: Transportation and Facilities

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 Relationship between different cost
components vs. number of facility
locations
Inventory Costs and Facility Costs and Transportation Costs and
Number of Facilities Number of Facilities Number of Facilities

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Logistics Cost, Response Time, and
Number of Facilities

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 Design Options for a
Distribution Network
 Key Decision Issues
 Product Perspective

Manufacturer
Retailer End consumer
storage
storage

 Will product flow through an intermediary (or intermediate location)?

 Customer Perspective

Manufacturer Facility
storage End consumer
Location

 Product be delivered to the customer location or picked up from a prearranged site?

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Design Options for a
Distribution Network
 Manufacturer storage with direct shipping
 Manufacturer storage with direct shipping and in-transit merge
 Distributor storage with carrier delivery
 Distributor storage with last-mile delivery
 Manufacturer/distributor storage with customer pickup
 Retail storage with customer pickup

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Manufacturer Storage with
Direct Shipping

https://www.youtube.com/watch?v=_zdDFUmpifc&ab_channel=Rob
D
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Manufacturer Storage with
Direct Shipping

 Example: Dell

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Performance evaluation-service factor
Service Factor Performance
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer Good in terms of home delivery but can suffer if order from several
experience manufacturers is sent as partial shipments.
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time may
vary by product, thus complicating receiving.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.
Time to market Fast, with the product available as soon as the first unit is produced.

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Performance evaluation- Cost factor
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of aggregation
are highest for low-demand, high-value items. Benefits are
large if product customization can be postponed at the
manufacturer.

Transportation Higher transportation costs because of increased distance and

disaggregate shipping.
Facilities and handling Lower facility costs because of aggregation. Some saving on
handling costs if manufacturer can manage small shipments or
ship from production line.
Information Significant investment in information infrastructure to integrate
manufacturer and retailer.

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In-Transit Merge Network

 Example: Dell with Sony monitor

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Performance evaluation-service factor
Service Factor Performance
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer Better than drop-shipping because only a single delivery is
experience received.
Response time Similar to drop-shipping; may be marginally higher.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
Time to market Similar to drop-shipping.

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Performance evaluation- Cost factor
Cost Factor Performance
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.

Facilities and Handling costs higher than drop-shipping at carrier;

handling receiving costs lower at customer.
Information Investment is somewhat higher than for drop-shipping.

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Distributor Storage with
Last Mile/Carrier Delivery

https://www.youtube.com/watch?v=XV-PCJM4RsA

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Distributor Storage with
Carrier Delivery

 Example: Amazon

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Performance evaluation-service factor
Service Factor Performance
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.
Response time Faster than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Time to market Higher than manufacturer storage.

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Performance evaluation- Cost factor
Cost Factor Performance
Inventory Higher than manufacturer storage. Difference is not
large for faster moving items but can be large for very
slow-moving items.
Transportation Lower than manufacturer storage. Reduction is highest
for faster moving items.
Facilities and Somewhat higher than manufacturer storage. The
handling difference can be large for very slow-moving items.
Information Simpler infrastructure compared to manufacturer
storage.

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Distributor Storage with
Last Mile Delivery

 Example: Peapod

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Performance evaluation-service factor
Service Factor Performance
Product variety Somewhat less than distributor storage with package carrier
delivery but larger than retail stores.
Product availability More expensive to provide availability than any other option
except retail stores.
Customer experience Very good, particularly for bulky items.
Response time Very quick. Same day to next-day delivery.
Order visibility Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and
more expensive than a retail network.
Time to market Slightly higher than distributor storage with package carrier
delivery.

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Performance evaluation- Cost factor
Cost Factor Performance
Inventory Higher than distributor storage with package carrier delivery.
Transportation Very high cost given minimal scale economies. Higher than
any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or distributor
storage with package carrier delivery, but lower than a chain of
retail stores.
Information Similar to distributor storage with package carrier delivery.

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Manufacturer or Distributor Storage with
Customer Pickup

 Example: Seven-Eleven

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Performance evaluation-service factor
Service Factor Performance
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home delivery.
Experience is sensitive to capability of pickup location.
Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day delivery possible for items stored
locally at pickup site.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.
Time to market Similar to manufacturer storage options.

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Performance evaluation- Cost factor
Cost Factor Performance
Inventory Can match any other option, depending on the location of
inventory.
Transportation Lower than the use of package carriers, especially if using an
existing delivery network.
Facilities and handling Facility costs can be high if new facilities have to be built.
Costs are lower if existing facilities are used. The increase in
handling cost at the pickup site can be significant.
Information Significant investment in infrastructure required.

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Retail Storage with Customer Pickup:
Performance evaluation-service factor
Service Factor Performance
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or negative
experience by customer.
Response time Same-day (immediate) pickup possible for items stored locally at
pickup site.
Order visibility Trivial for in-store orders. Difficult, but essential, for online and
phone orders.
Returnability Easier than other options because retail store can provide a
substitute.
Time to market Highest among distribution options.

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Retail Storage with Customer Pickup:
Performance evaluation-cost factor
Cost Factor Performance

Inventory Higher than all other options.

Transportation Lower than all other options.

Facilities and Higher than other options. The increase in handling cost at the
handling pickup site can be significant for online and phone orders.

Information Some investment in infrastructure required for online and

phone orders.

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Hybrid Supply Chain Strategy-Online Food
Delivery (OFD) systems with Dine-In Facility
Direct Delivery Via Intermediary (Agency Model) Dine-in

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Hybrid Supply Chain Strategy-E-
commerce Supply Chain

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Network Design

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 Network Design

The Role of Network Design

Issues related to
network design

Facility role Market and Supply Allocation

Facility Location Capacity Allocation
 What role, what  What market? What supply
 Where should facilities be  How much capacity
processes? sources?
located? at each facility?
 Example :  Example:
 Example :  Example :
 TOYOTA (1997)  Netflix ( DCS reduce from 58
 TOYOTA’s local plants in Caterpillar
 Honda (2008) to 20)
USA (1988)  Amazon ( DCS increase from
20 to 40)

Revisit design decisions after market changes, mergers, or factor cost changes (P&G)

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Importance of facility locations

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 Factors Influencing
Network Design Decisions
Strategic factors (Low cost advantage: Flextronics, Big bazar)

Technological factors

• Production Technology : economies of scale : less high capacity locations. Example: semi conductor industry

• Facilities : lower fixed costs : many bottling plants in Coca Cola

Macroeconomic factors

 Tariffs and taxes

• SEZ, NAFTA,

• Free Trade Zones (production is used for export. Low labor cost, example: China )

• Closed economy(Import quota :India)

 Demand and Exchange Rate Fluctuation

 BMW, Porsche affected between 2002 and 2008 ( one cent increase in EURO costs $75 Million per year)

 ( solution : Flexible capacity)

 Fright and Fuel Price

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Factors Influencing
Network Design Decisions
Political (GPRI )
Infrastructure factors
Competitive factors
Customer response time and local presence
Logistics and Facility costs

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Framework for Network
Design Decisions
Phase I: Define a Strategy/Design
Supply Chain  Clear definition of the firm’s competitive strategy
 Forecast the likely evolution of global competition
 Identify constraints on available capital
 Determine broad supply strategy

Phase II: Define the  Forecast of the demand by country or region

Regional Facility  Economies of scale or scope
Configuration  Identify demand risk, exchange-rate risk, political risk, tariffs,
requirements for local production, tax incentives, and export or import
restrictions
 Identify competitors

Phase III: Select a Set  Hard infrastructure requirements

of Desirable Potential  Soft infrastructure requirements
Sites
Phase IV: Location
Choices

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Framework for Network
Design Decisions

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Models for Facility Location
and Capacity Allocation
Maximize the overall profitability of the supply chain network while providing
customers with the appropriate responsiveness

Many trade-offs during network design

Network design models used

 to decide on locations and capacities

 to assign current demand to facilities and identify transportation lanes

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 Models for Facility Location and
Capacity Allocation
Important information
 Location of supply sources and markets
 Location of potential facility sites
 Demand forecast by market
 Facility, labor, and material costs by site
 Transportation costs between each pair of sites
 Inventory costs by site and as a function of quantity
 Sale price of product in different regions
 Taxes and tariffs
 Desired response time and other service factors

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General Framework for network
planning

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Discussion on components
Objective: Cost minimization
Objective function: Cost function
Constraints: constraints related to capacity of supplier, plant, and
warehouse and demand

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 Mechanisms behind the network
optimization problem
Objective: Cost minimization
Objective function: Cost function
Cost function

Facility opening cost Production and Shipping cost

• Plant/ factory • Supplier to plant/factory
• Warehouses • Plant/factory to warehouse
• Warehouse to market
Constraints: constraints related to capacity of supplier, plant, and warehouse and
demand
Constraints

Capacity constraint Demand constraint

No supplier, plant, and Total demand at respective centre
warehouse can supply more than should be fulfilled
their respective capacity

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Capacitated Plant Location Model

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Capacitated Plant Location Model

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Locating Plants :Capacitated Model With
Single Sourcing

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Locating Plants :Capacitated Model With
Single Sourcing

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Problem statement-Capacitated Plant
location model
Vice president of Sunoil, Manufacturer of petrochemical products is
considering several options to meet worldwide demand
Option 1: To set up a facility location in each region
Advantages?? Disadvantages??
Option 2 Consolidate plant in just a few regions:
Advantages?? Disadvantages??
Annual demand data for each of the 5 regions is given in cells B9:F9.
Cells B4:F8 contains the variable production, inventory, and transportation
cost of producing in one region to meet demand in each individual region.
Problem 1: Lowest cost network fulfilling the demand of all regions.

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Problem statement-Capacitated Plant
location model with single sourcing
Telecomoptic problem for Lowest cost network fulfilling the demand of all
regions where sourcing is possible from only one city

Annual demand data for each of the 5 cities is given in cells B9:F9. Cells
B4:F8 contains the variable production, inventory, and transportation cost
of producing in one region to meet demand in each individual region.

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