Department of Decision Science

Quantitative Techniques in Management

Conceptual Questions

Module II: Operating Decisions

Q. What is supply chain management?

Ans. Supply chain management (SCM) is the management of all activities that facilitate the

fulfillment of a customer order for a manufactured good to achieve satisfied customers at

reasonable cost. This includes not only the obvious functions of managing materials within the

supply chain, but also the flows of information and money that are necessary to coordinate the

activities.

A supply chain is the system of organizations, people, activities, information and resources

involved in moving a product or service from supplier to customer. Supply chain activities

transform raw materials and components into a finished product that is delivered to the end

customer.

Supply chain consists of series of activities in which a product or a material is just transfer from

the one point to the final point. while in the value chain, instead of just transfering we add certain

values to it.

eg- suppose a supply chain is there

farmers-wholesaler-retailer-consumer

if the apples just passes through d same channels without any grading sorting then its a supply
chain. While if at each stage, we add some values to the apples like grading, sorting, packaging,

cool storing. Then this is called value chain.

Figure: Supply Chain

Supply Chain Management is can also be understood as the design and management of processes

across organizational boundaries with the goal of matching supply and demand in the most cost

effective way.

Q. Explain the role of supply chains in the broader context of value chains.

Ans. A supply chain is a key subsystem of a value chain that focuses primarily on the physical

movement of goods and materials along with supporting information flows through the supply,
production, and distribution processes; whereas a value chain is broader in scope and

encompasses all pre- and post- production services to create and deliver the entire customer

benefit package (see Figure Financing and preventive maintenance, for example, are pre-and

post-production services, respectively, that more fully characterize the value chain.

Figure: Pre- and Post-service View of the Value Chain

Q. Explain the typical structure of facilities and tiers in a supply chain.

Ans. A goods-producing supply chain generally consists of suppliers, manufacturers,

distributors, retailers, and customers, as illustrated in Figure1. Raw materials and components are

ordered from suppliers and must be transported to manufacturing facilities for production and

assembly into finished goods. Finished goods are shipped to distributors who operate distribution

centers. At each factory, distribution center, and retail store, inventory generally is maintained to

improve the ability to meet demand quickly. As inventory levels diminish, orders are sent to the

previous stage upstream in the process for replenishing stock. Orders are passed up the supply
chain, fulfilled at each stage, and shipped to the next stage. However, not all supply chains have

each of the stages. OEMs depend on a network of suppliers and often have rather complex

supply chains. In the auto industry, the supply chain has the structure shown in Figure 2. Tier 1

suppliers are those that provide components for final assembly such as seats, dashboards,

suspension systems, etc. They in turn depend on a network of suppliers (Tier 2) for smaller

components and parts.

Figure 1: Typical Goods-Producing Hierarchical Supply Chain View

Figure 2: Supply Chain Structure in the Automotive Industry

Q. Describe the five functions of the SCOR model of supply chain management.

Ans.

1. Plan – developing a strategy that balances resources with requirements and establish and

communicate plans for the entire supply chain. This includes management policies and aligning

the supply chain plan with financial plans.

2. Source – procuring goods and services to meet planned or actual demand. This includes

identifying and selecting suppliers, scheduling deliveries, authorizing payments, and managing

inventory.

3. Make – transforming goods and services to a finished state to meet demand. This includes

production scheduling, managing work-in-process, manufacturing, testing, packaging, and

product release.
4. Deliver – managing orders, transportation, and distribution to provide the goods and services.

This entails all order management activities from processing customer orders to routing

shipments, managing goods at distribution centers, and invoicing the customer.

5. Return – customer returns; maintenance, repair, and overhaul; and dealing with excess goods.

This includes return authorization, receiving, verification, disposition, and replacement or credit.

Q. What are the key characteristics of Dell’s supply chain approach? How do they contribute

to developing the company’s competitive advantage?

Ans. The Value (Supply) Chain and Dell

• Dell sells highly customized personal computer, servers, computer workstations, and

peripherals.

• Computers are assembled only in response to individual orders purchased through a

direct sales model.

• Dell’s value chain electronically links customers, suppliers, assembly operations, and

shippers.

• Preproduction services focused on gaining the customer include corporate partnerships,

technical support, and strong supplier relationships.

• Postproduction services focus on keeping the customer, including billing, shipping,

returns, and technical support.

Figure: A Value Chain Model of Dell, Inc.

Q. What are the common metrics used to measure supply chain performance? Why are they

important from both customer and internal perspectives?

Ans. Understanding and Measuring Supply Chain Performance: These basic metrics

typically balance customer requirements as well as internal supply chain efficiencies. Such

metrics provide leading and lagging indicators of performance, allowing both real-time control

and helping to identify opportunities for longer-term improvement.

• Supply chain metrics balance customer requirements and internal supply chain

efficiency.

• Delivery reliability is measured by perfect order fulfillment.

• Responsiveness is measured by order fulfillment lead time or perfect delivery fulfillment.

• Customer-related measures measure the level of customer satisfaction.

Figure: Common Metrics Used to Measure Supply Chain Performance

Q. Explain the bullwhip effect. Why is it important for managers to understand it? What can

they do to reduce it?

Ans. The bullwhip effect results from order amplification in the supply chain. Order

amplification is a phenomenon that occurs when each member of a supply chain “orders up” to

buffer his or her own inventory. In the case of a distributor, this might mean ordering extra

finished goods; for a manufacturer, this might mean ordering extra raw materials or parts. Order

amplification increases as one moves back up the supply chain away from the retail customer.

For example, small increases in demand by customers will cause distribution centers to increase

their inventory. This leads to more frequent or larger orders called cycle inventory to be placed

with manufacturing.

Manufacturing, in turn, will increase their purchasing of materials and components from

suppliers. Because of lead times in ordering and delivery between each element of the supply
chain, by the time the increased supply reaches the distribution center, customer demand may

have leveled off or even dropped, resulting in an oversupply. This will trigger a reduction in

orders back through the supply chain, resulting in undersupply later in time. Essentially, the time

lags associated with information and material flow causes a mismatch between the actual

customer demand and the supply chain’s ability to satisfy that demand as each component of the

supply chain seeks to manage its operations from its own perspective. This results in large

oscillations of inventory in the supply chain network and characterizes the bullwhip effect.

Instead of ordering based on observed fluctuations in demand at the next stage of the supply

chain (which are amplified from other stages downstream), all members of the supply chain

should use the same demand data from the point of the supply chain closest to the customer.

Modern technology such as point-of-sale data collection, electronic data interchange, and radio

frequency identification chips can help to provide such data.

Other strategies include using smaller order sizes, stabilizing price fluctuations, and sharing

information on sales, capacity and inventory data among the members of the supply chain.

Figure: Order Amplification for HP Printers (Source: Callioni, Gianpaolo, and Billington, Corey,

“Effective Collaboration,” OR/MS Today, October 2001, pp. 34–39.)

Q. Contrast the differences between efficient and responsive supply chain designs and give

an example of each. Can a supply chain be both efficient and responsive?

Ans. Efficient supply chains are designed for efficiency and low cost by minimizing inventory

and maximizing efficiencies in process flow. A focus on efficiency works best for goods and

services with highly predictable demand; and stable product lines with long life cycles which do

not change frequently, and low contribution margins. Responsive supply chains focus on

flexibility and responsive service, and are able to react quickly to changing market demand and

requirements. Responsive supply chain have the ability to quickly respond to market changes

and conditions faster than traditional supply chains, are supported by information technology that

provide real time, accurate, information to managers across the supply chain, and use

information to identify market changes and redirect resources to address these changes.

In today’s world, however, it is difficult to design a purely responsive supply chain without also

focusing on efficiency. In many ways, efficiency and responsiveness go hand in hand – by

streamlining operations to improve efficiency, responsiveness also naturally improves. Dell, for

example, could be characterized as more of a responsive supply chain than an efficient one or

one could argue it simultaneously does both.

Q. Explain the difference between a push and a pull system? How does each affect supply

chain performance?

Ans. A push system produces goods in advance of customer demand using a forecast of sales

and moves them through supply chain to points of sale where they are stored as finished goods
inventory. A push system has several advantages, such as immediate availability of goods to

customers and the ability to reduce transportation costs by using full truckload shipments to

move goods to distribution centers. Push systems work best when sales patterns are consistent

and when there are a small number of distribution centers and products. A pull system produces

only what is needed at upstream stages in the supply chain in response to customer demand

signals from downstream stages. Pull systems can greatly lower cost by reducing inventory

requirements and ensure that the customer has the latest possible technology (or freshest goods if

they are perishable).

Sales forecasts are not needed, reducing uncertainty and simplifying the management of

materials and purchasing functions.

The point in the supply chain that separates the push system from the pull system is called the

push-pull boundary. The location of the push-pull boundary can affect how responsive a supply

chain is. Many firms try to push as much of the finished product as possible close to the

customer to speed up response and reduce work in process inventory requirements.

Figure: Supply Chain Push-Pull Systems and Boundaries

Q. What is contract manufacturing? Why is it important?

Ans. A contract manufacturer is a firm that specializes in certain types of goods-producing

activities, such as customized design, manufacturing, assembly, and packaging, and works under

contract for end users. Outsourcing to contract manufacturers can offer significant competitive
advantages, such as access to advanced manufacturing technologies, faster product time-to-

market, customization of goods in regional markets, and lower total costs resulting from

economies of scale.

Q. Explain multi-site management and supply chain issues that are pertinent to service

organizations.

Ans. Multi-site management is the process of managing geographically dispersed service

providing facilities. Supply chains are vital to multi-site management, and in each of these cases,

it can be difficult to design a good supporting supply chain. Today, entrepreneurial ventures are

continually being born and developed, and require effective supply chain planning as they

expand and multiply to new locations. Some of these ventures might offer a stable set of goods

and services, and replicate themselves in new locations. Many hotel chains, fast food operations,

schools, libraries, branch banks, and retail stores fall in this category. Others might maintain a

relatively small set of locations, but change or expand their bundle of goods and services

continuously. Still others might do both – expand in multiple locations and add new goods and

services as the venture grows. This growth strategy of trying to do both simultaneously is risky

and creates more opportunities for failure. Multi-site management strategies help manage growth

and the supply chain across multiple locations.

Q. Define inventory and provide some examples.

Ans. Inventory is any asset held for future use or sale. These assets may be physical goods

used in operations, and include raw materials, parts, subassemblies, supplies, tools, equipment or

maintenance and repair items. For example, a small pizza business must maintain inventories of
dough, toppings, sauce, and cheese, as well as supplies such as boxes, napkins, and so on.

Hospitals maintain inventories of blood and other consumables, and railroads have inventories of

rail cars and maintenance parts. Retail stores such as Best Buy maintain inventories of finished

goods – televisions, appliances, DVDs – for sale to customers. In some service organizations,

inventories are not physical goods that customers take with them, but provide capacity available

for serving customers. Some common examples are airline seats, concert seats, hotel rooms, and

call center phone lines. Inventories can also be intangible; for example, many organizations

maintain “inventories” of intellectual assets and best practice knowledge bases.

Q. What is inventory management? Why is it an important function in OM? Explain the

different types of inventories maintained in a typical value chain and explain their purpose.

Ans. Inventory management involves planning, coordinating, and controlling the acquisition,

storage, handling, movement, distribution, and possible sale of raw materials, component parts

and subassemblies, supplies and tools, replacement parts and other assets that are needed to

meet customer wants and needs. It is important in OM because the lack of the proper levels of

inventory can result in both unnecessary and excessive costs as well as dissatisfaction to the

customer with possible loss of future business, while maintaining large stocks of inventory is

costly and wasteful.

High levels of inventory can represent a significant investment and tie up capital that can be used

more productively elsewhere.

Raw materials, component parts, subassemblies, and supplies are inputs to manufacturing

and service-delivery processes. Work-in-process (WIP) inventory consists of partially-finished

products in various stages of completion that are waiting further processing. Finished goods

inventory are completed products ready for distribution or sale to customers. Inventory that has

been ordered but not yet received and is in transit is called pipeline inventory. Anticipation

inventory is built up during the off-season to meet future estimated demand. Cycle inventory

(also called order or lot size inventory) is inventory that results from purchasing or producing

in larger lots than are needed for immediate consumption or sale. Safety stock inventory is an

additional amount that is kept over and above the average amount required to meet demand.