Chapter 6: Supply Chain
Management (SCM)
IE 3265 POM
R. R. Lindeke
UMD-MIE
Topics For Discussion:
Defining the issues of SCM
Major Players
How we can work in this new model
Vender relationships
Data Management
Major Issues:
Bullwhip effect
Transportation problems
Location issues
What is SCM?
Supply Chain management deals with the control of
materials, information, and financial flows in a network
consisting of suppliers, manufacturers, distributors, and
customers (Stanford Supply Chain Forum Website)
Call it distribution or logistics or supply chain
management... In industry after industry . . . executives
have plucked this once dismal discipline off the loading
dock and placed it near the top of the corporate
agenda. Hard-pressed to knock out competitors on
quality or price, companies are trying to gain an edge
through their ability to deliver the right stuff in the right
amount of time (Fortune Magazine, 1994)
Growing Interest in SCM Why?
As manufacturing becomes more
efficient (or is outsourced), companies
look for ways to reduce costs
Several significant success stories:
Efficient SCM at Walmart, HP, Dell Computer
SCM considers the broad, integrated,
view of materials management from
purchasing through distribution
The huge growth of interest in the web
has spawned web-based models for
supply chains: from dot com retailers
to B-2-B business models
Mass Customization:
Designing Final Choices into Supply
Chains
Several companies have been able to
cut costs and improve service by
postponing the final configuration of the
product until the latest possible point in
the supply chain. Examples:
Hewlett Packard printer configuration
Postponement of final programming of
semiconductor devices all routines loaded,
only certain ones activated
Assemble to order rather than assemble to
stock (Dell Computer)
Design For Logistics:
Many firms now consider SCM issues in
the design phase of product development
One example is IKEA whose furniture
comes in simple to assemble kits that
allows them to store the furniture in the
same warehouse-like locations where
they are displayed and sold
Shipping container designs for FedEx and
UPS airfreight
Dunnage control in Big Auto
Efficient Design of the Supplier
Base
Part of streamlining the supply chain is
reducing the number and variety of
suppliers
The Japanese have been very successful in
this arena (theyre an Island so getting
materials there has always been a problem)
In the mid 1980s Xerox trimmed its
number of suppliers from 5,000 to 400.
Overseas suppliers were chosen based on cost
Local suppliers were chosen based on delivery
speed
In 1996, Ford Motor reduced their supplier
count by more than 60%
Dell Designs the Ultimate Supply
Chain!
Dell Computer has been one of the
most successful PC retailers. Why? To
solve the problem of inventory
becoming obsolete, Dells solution:
Dont keep any inventory! - All PCs are
made to order and parts shipped directly
from manufacturers when possible.
Compare to the experience of Compaq
Corporation initial success selling
through low cost retail warehouses but
they did not garner web-based sales
Data Exchange A Critical Idea
EDI: Electronic Data Interchange
Involves the Transmission of
documents electronically in a
predetermined format from company
to company. (Not web based.)
The formats are complex and
expensive. It appears to be on the
decline as web-based systems grow.
Data and Products ETailing
E-tailing: Direct to customer sales on the
web the so-called Click & Mortor retail
model
Perhaps best known e-tailer is Amazon.com,
originally a web-based discount book seller
Today, Amazon.com sells a wide range of
products (we can think of many, many similar
organizations)
Amazon and others spawned so called dot
com stock explosion in the NASDAQ (1997
to April, 2000)
Today, many traditional bricks and mortar
retailers also offer sales over the web, often
at lower prices
Dealing with Data the modern
way
B2B (business to business) supply chain
management:
While not as visible and sexy as E-tailing, it
appears that B2B supply chain management
is the true growth industry!
Web searches yield over 80 matches for
supply chain software providers. Some of the
major players in this market segment include:
Agile Software based in Silicon Valley.
i2 Technologies based in Dallas.
Ariba based in Silicon Valley
Data Transfer in Supply Chains:
Vendor Managed Inventory (the real
solution?)
Walmart and P & G
Target and Pepsi/Coke
But Barilla SpA. An Italian pasta producer
pioneered the use of VMI (Vendor Managed
Inventory)
They obtained sales data directly from
distributors and decide on delivery sizes based
on that information
This is in opposition to allowing distributors (or
even retailers) to independently decide on
order sizes!
Order Growth The Bullwhip
Effect An Important issue
Information Transfer in Supply
Chains: cause of The Bullwhip
Effect
First noticed by P&G executives examining
the order patterns for Pampers disposable
diapers.
They noticed that order variation
increased dramatically as one moved from
retailers to distributors to the factory.
The causes are not completely understood
but have to do with batching of orders and
building in safety stock at each level
Problem: increases the difficulty of
planning at the factory level
There has been a Revitalization in
the Analytical Tools needed to
Support SCM
Inventory management and demand
forecasting models such as those discussed
in this course
The transportation problem and more
general network formulations for describing
flow of goods in a complex system
Analytical methods for determining delivery
routes for product distribution optimal
location of new resources
Focusing on the Distribution
Problem:
The Goal is to reduce total
transportation costs throughout
the supply chain
Usually solved with some approach
to the Transportation Problem
Our approach will be the Balanced
Matrix model
Lets do one, by example:
\To
From
Des Moines
Evansville
Ft.
Lauderdale
Demand
Albuquerqu
e
Cost of moving
a unit of
product from
Row to column
location
Boston
Cleveland
$5
$4
$3
$8
$4
$3
$9
$7
$5
300
200
Capacity
100
300
300
200
/700
700/
In the Transportation
Problem:
We must have a Supply/Demand
balance to solve
In this problem that requirement is met
If it is not met, we must create
Dummy sources (at $0 move
costs) or Dummy Sinks (also at $0
move costs) to achieve the require
S/D balance
The Transportation
problem:
Goal is to minimize the total cost of shipping
We will allocate products to cells any
allocation means the row resource will ship
product to the column demand
The process is an iterative one that requires
a feasible starting point
Can start by using NW Corner approach
Can start using a more structured VAM (Vogel
Approximation method)
Starting with a VAM
Solution technique:
Determine Row Penalty number (PNi) the difference
between lowest and 2nd lowest cost in row
Determine Column Penalty Number (PNj) the
difference between the lowest and 2 nd lowest col.
Cost
Here: C1: 3; C2: 0; C3: 0
Choose R or C with greatest penalty cost here is C1
Here: R1 is 1; R2 is 1: R3 is 2
If there is a tie, break tie by choosing C or R with smallest
costs
Max out the allocation in chosen C or R at lowest cost cell
then x-out the C or R
And so on after allocation (after we recompute PNs!)
Phase 1 of VAM:
Step A
PNr1 PNr2 PNr3
DM
$5
100
$4
$3
$8
$4
200
$3
100
FL
$9
200
$7
$5
100
PNc1 3
PNc2 1
--
xout
2
2
--
--
5 x-out
X-out
Costing The model:
Current:
Before proceeding, check if the Feasible
solution is (or isnt) degenerate:
100*5 + 200*9 +200*4 + 100*3 + 100*5 =
$3900
Number of allocation must be at least: m +n - 1
= 3 + 3 - 1 = 5 (we have 5 is the above set so
the solution is not degenerate! See next slide if
it was)
Now, we must determine if its optimal?
We must continue to a second phase to
determine this!
Dealing with Degeneracy
(when it
is found)
We must allocate a very small amount of material
movement (call it ) to any independent cell
An independent cell is any one where we can not
complete a stepping motion of only horizontal and
vertical movements through filled cells to return to
the originating cell
We call this the -path. (this would be done by alternating adding
or subtracting assignments of material to any filled cell we step on)
Note any cell were a path can be build is a dependent cell
We would add sufficient s to reach allocated cells
count of m + n 1 number (make the solution nondegenerate)
Here since R1C1 is independent check for yourself
we will fill it with units this makes our solution
non-degenerate 5 cells are allocated!
Entering Phase II:
Determining Optimality
We will explore the MODI (modified
distribution) algorithm
After finding a non-degenerate initial
solution, add a row of Kjs and a column
of Ris to the Matrix
To begin, Assign a zero value to any R or
K position
For each allocated cell, the following
expression must be satisfied:
Ri + Kj + ci,j = 0
Starting MODI with a
Indicator cost for
possible R/K allocation:
this cell (=
R+K+c)
Kj
Ri
DM
0
E
FL
-2
-4
-5
-2
-1
$5
100
$4
+2
$3
$8
+1 $4
200
$9
200
$7
+2
100
$3
100
300
+1 $5
100
300
MODI continued:
Examine all indicator values for empty cells if
all are non-negative the solution is optimal
If some are negative then develop a -path
beginning at most negative cell (here is R3C3)
Complete the -path by stepping only to filled
cells (and pivoting) while alternatively
subtracting then adding allocation
After completing the path, determine the -
cell with the smallest quantity and choose its
value for substitute it along the whole path
Note here: all indicators are positive thus we
have the optimal solution!
Forming the -Path (starts in R2C3)
if we had erroneously allocated as seen below and
requiring an addition
Smallest - Allocated
amount
Kj
Ri
DM
0
E
0
FL
-5
-4
-3
$5
+
$4
- $3
Ind: 0
100
100
$8
Ind: +3
$3
- 300
200
$9
$5
$4
+
100
- $7
300
After 100 unit re-allocation now
recompute Rs and Ks &
Indicators
Kj
-4
Ri
-1
0
Cap.
DM
$5
$4
+2
-1
$3
+2
100
$3
100
300
$5
100
300
+100
E
-3
FL
-5
$8
+1 $4
200
$9
200
$7
+1
Looking at this Matrix
All indicators are now positive this
indicates an optimal solution!
Note this agrees with optimal solution found
earlier!!!
Relax value to zero makes cell 1,1
allocation 100 units
Optimal transportation cost is:
5*100 + 4*200 + 3*100 + 9*200 + 5*100 =
3900
Lets try one:
/To
Fr/
A
B
C
Demand
10
Cap.
4
3
6
/13
13/
But the Transportation
Problem can be solved by
LP!
Define an
Objective
Function:
c
m
i 1
j 1
ij
X ij
where :
cij is cell cost and X ij is amount moved
Subject to:
n
j 1
m
i 1
X ij ai for 1 i m
X ij b j for 1 j n
where:
a i are all shipment from a source (capacity)
b j are all shipments into a "sink" (Demand)
Our Example (by LP
Solver)
Variables
XDM-A
XDM-B
XDM-C
Values:
V*C
Costs:
CapC1
CapC2
XE-A
XE-B
XE-C
XFL-A
DemC2
DemC3
1
1
1
1
1
1
XFL-C
CapC3
DemC1
XFL-B
1
1
OBJ.Fn.
0
100
300
300
300
200
200
Applying Solver:
Examining Results:
Optimal Value = $3900 (as we
found by hand!)
Ship: 100 DM-A; 200 FL-A; 200 E-B;
100 E-C; 100 FL-C
All as we found using the VAM
Heuristic
Much Faster and easier using LP!
Expansion to Transshipment
Problem
When a system is allowed to use
intermediate warehousing sites they
are Source sites or even Sink sites in
regular transportation problem for
reducing the total cost of transportation
we call the problem the transshipment
network problem
We require more costs to be obtained but
typically, in most complex S. Chains,
companies find savings of from 7 to 15%
(or more) in implementations that allow
transshipment
Expansion to Transshipment
Problem
In the general Transshipment problem the transport
network is expanded to allow movement between
sources and between sinks (and even back to other
sources)
Expansion to Transshipment
Problem
Extracted from:
J. P. Ignizio,
Linear
Programming in
Single- &
MultipleObjective
Systems,
Prentice Hall
The
1982original
transportatio
n problem
Another Level of Transport the
delivery route problem
This problem is usually one of very large scale
(classically called the Traveling Salesman Problem)
Because of this, we typically can not find an
absolutely optimal solution but rather only near
optimal solution as seen in our textbook
Here, the knowns are the costs of travel from point to
point throughout the network and we try to save costs by
ganging up trips
Solution typically follows along a line of attack
based on the Assignment Problem
See Handout, focus on the Shortest Route Problem
Delivery Optimization:
Realistically, a delivery vehicle can
only carry so much so this may
reduce effectiveness of solutions
Deliverys take Real Time again
this must be considered during
scheduling and routing
Loading of vehicles is very critical
to control step 2 time load in
reverse delivery order!
Looking at the Locating of New
Facilities:
Considerations:
Labor Climate
Transportation issues:
Proximity to markets
Proximity to suppliers & resources
Proximity to parent company (sharing
expertise, purchasing, drop routing)
could be plus or minus!
Quality of transportation system
Looking at the Locating of New
Facilities:
Consideration, cont.
Costs to operate (utilities, taxes, real
estate costs, construction)
Expansion considerations
Room available for growth?
Construction to modify structure?
Any local incentives to re-locate?
Quality of Life (schools, recreational
possibilities, health care cost,
availability)
Looking at the Locating of New
Facilities:
Most organization compare several alternatives
They identify weighting factors for the
characteristics then narrow choices
1st consider regions
2nd narrow search to communities
3rd consider specific sites
Done by collecting data addressing the various factors
under study
After data is collected and weighted, make
selection (typically by starting with quantitative
decision follow with qualitative analysis)
Location Decisions in SCM:
In the final analysis the decision
typically comes down to a Center of
Gravity Solution that minimizes the
total travel distance between the
Facility and all possible Contact
facilities
Contact facilities may be sources of Raw
Materials or other Suppliers or they may
be destinations for Product stored in or
made at the new facility under design
Lets Consider an Example:
(where should we put
our new Distribution
Center?)
Given this information:
Location
Store
C. Sales
(X,Y)
A
(2.5, 2.5)
5
B
(2.5, 4.5)
2
Ca
(5.5, 4.5)
10
D
(5, 2)
7
E
(8, 5)
10
Fb
(7, 2)
20
G
(9, 3.5)
14
Site of Possible DC 1; Site of Possible DC 2
a
Solution is a Type of
Transportation Minimization:
Using Either Euclidian or Recta-linear offsets
Euclidean Distance:
d euclid
X X Y Y
2
DC j
DC j
here : X's or Y's are map coordinates
of stores or Distribution Center
Recta-Linear (RL) Distance:
d RL X i X DC j Yi YDC j
Now What?
Best Location is the one that minimizes
the sum of the total needs of all
Demands times the travel distances
involved:
D d
i
all i
euclid j
for all Sinks
and each possible new Source
Leading to this analysis:
DC 1
5.5
4.5
DC 2
STORE
X Location
Y Location
D Euclid 1
D Euclid 2
D RL 1
D RL 2
Demand
D*DE 1
D*DE 2
D*Drl 1
D*Drl 2
2.5
2.5
3.605551
4.527693
18.02776
22.63846
25
25
2.5
4.5
5.147815
10.29563
14
5.5
4.5
2.915476
10
29.15476
40
2.54951
17.84657
14
21
14
2.54951
3.162278
10
25.4951
31.62278
30
40
2.915476
20
58.30952
80
3.5
3.640055
2.5
4.5
3.5
14
50.96077
35
63
49
176.639
142.711
225
182
From the Analysis: DC 2 minimizes
costs
But is this the Optimal
location?
Perhaps we could place the Center at the
Median of all the current demand
locations?
In an RL sense, form the Cumulative
Weighting (Cum. Demand)
1st: order each target location in increasing
level of X and then Y
Determine the average of this CumWt for
X & Y and place location the is the same
as the site that first exceeds this value
C. Wt. Average is 34
Stor
e
Dem X
.
coor
C.
Wt.
2.5
Sel.
Stor
e
Dem Y
.
coor
C.
Wt.
2.5
20
27
14
2.5
32
10
5.5
24
14
3.5
46
**
20
44
**
4.5
48
10
54
10
4.5
58
14
68
10
68
Locate at: 7 (in X) and 3.5 (in Y) as a rule*
Sel
Optimization using Euclidian
Distances:
1st Compute the Center of
Gravity:
D x
D
D y
D
i
for each location i
Optimization:
Start with X*, Y* determined above as Xcur,
Ycur
Di
g i x, y
Compute:
2
xcur xi ycur yi
then :
xnew
x g x, y
g x, y
y g x, y
g x, y
i
ynew
Stop iteration when X and Y stop changing
Trends in Supply Chain
Management
Outsourcing of the logistics function
(example: Saturn outsourced their logistics
to Ryder Trucks. Outsourcing of
manufacturing is a major trend these days)
Moving towards more web based
transactions systems
Improving the information flows along the
entire chain
Global Concerns in SCM
Moving manufacturing offshore to save
direct costs complicates and adds
expense to supply chain operations,
due to:
increased inventory in the pipeline
Infrastructure problems
Political problems
Dealing with fluctuating exchange rates
Obtaining skilled labor
