Supply Chain SustainabilityChapter 15Copyright ©2016.docx

Supply Chain Sustainability
Chapter 15
Copyright ©2016 Pearson Education, Inc. All rights reserved.
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What is Sustainability?
Sustainability
A characteristic of processes that are meeting humanity’s needs
without harming future generations.
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2
Sustainability
Sustainability Challenges:
Environmental protection
Productivity improvement
Risk minimization
Innovation
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3
Supply Chains and Sustainability
Environmental
Responsibility
Financial
Responsibility
Social
Responsibility
Supply Chains
and
Sustainability
Figure 15.1
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The Three Elements of
Supply Chain Sustainability
Financial Responsibility
Environmental Responsibility
- Reverse Logistics
- Efficiency
Social Responsibility
- Disaster Relief Supply Chains
- Ethics

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Humanitarian Logistics
Humanitarian Logistics
The process of planning, implementing and controlling the
efficient, cost-effective flow and storage of goods and
materials, as well as related information, from the point of
origin to the point of consumption for the purpose of alleviating
the suffering of vulnerable people.
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Reverse Logistics
Reverse Logistics
The process of planning, implementing and controlling the
efficient, cost-effective flow of products, materials, and
information from the point of consumption back to the point of
origin for returns, repair, remanufacture, or recycling.
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Closed-Loop Supply Chain
Closed-Loop Supply Chain
A supply chain that integrates forward logistics with reverse
logistics, thereby focusing on the complete chain of operations

from the birth to the death of a product.
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Flows in a Closed-Loop Supply Chain
Production process
Distribution/
Retailers
Product information
New service/product development process
Recycle parts and materials
Remanufacture
Repair
Returns processor
Customers
Direct reuse
Waste disposal
Forward flow
Reverse flow
Figure 15.2
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Reverse Logistics
Financial Implications
Fee
Deposit fee
Take back (transportation)
Trade-in
Community programs (Second Harvest)
Secondary markets (Big Lots, dollar stores, etc.)

Copyright ©2013 Pearson Education, Inc. publishing as Prentice
Hall
13 - 010
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Energy Efficiency
Carbon footprint
The total amount of greenhouse gasses produced to support
operations, usually expressed in equivalent tons of carbon
dioxide (CO2)
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Transportation Distance
Route Planning
Shortest route problem
Find the shortest distance between two cities in a network or
map.
Traveling salesman problem
Find the shortest possible route that visits each city exactly
once and returns to the starting city.
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Nearest Neighbor Heuristic
Steps
Start with the city that is designated as the central location. Call

this city the start city. Place all other cites in an unvisited set.
Choose the city in the unvisited set that is closest to the start
city. Remove that city from the unvisited set.
Repeat the procedure with the latest visited city as the start city.
Conclude when all cities have been visited, and return back to
the central location.
Compute the total distance traveled along the selected route.
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Four-City Traveling Salesman Problem
Central Hub
A
C
B
130
90
85
80
100
120
Figure 15.3
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Example 15.1
Hillary and Adams, Inc. is a privately-owned firm located in
Atlanta that serves as the regional distributor of natural food
products for Georgia, Kentucky, North Carolina, South
Carolina, and Tennessee.
Every week, a truck leaves the large distribution center in
Atlanta to stock local warehouses located in Charlotte, NC,

Charleston, SC, Columbia, SC, Knoxville, TN, Lexington KY,
and Raleigh, NC.
The truck visits each local warehouse only once, and returns to
Atlanta after all the deliveries have been completed.
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Example
15.1From/ToAtlantaCharlestonCharlotteColumbiaKnoxvilleLexi
ngtonRaleighAtlanta0319244225214375435Charleston31902091
16373540279Charlotte244209093231398169Columbia22511693
0264430225Knoxville2143732312640170351Lexington3755403
984301700498Raleigh4352791692253514980
The distance between any two cities in miles is given below:
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Example 15.1
John Jensen is worried about the rising fuel costs and is
interested in finding a route that would minimize the distance
traveled by truck.
Use the Nearest Neighbor heuristic to identify a route for the
truck and compute the total distance traveled.
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Example 15.1
Step 1
Start with Atlanta and place all other cities in the unvisited set.

Charleston, Charlotte, Columbia, Knoxville, Lexington, Raleigh
Step 2
Select the closest city to Atlanta in the unvisited set, which is
Knoxville.
Remove Knoxville from the unvisited set.
The partial route is now Atlanta-Knoxville which is:
214 miles
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Example 15.1
Step 3
Scan the unvisited set for the city closest to Knoxville, which is
Lexington.
Remove Lexington from the unvisited set.
The partial route is now Atlanta-Knoxville-Lexington which is:
214 + 170 = 384 miles
Step 4
Repeat this procedure until all cities have been removed from
the unvisited set.
Connect the last city to Atlanta to finish the route.
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Example 15.1
Step 5 - Compute the total distance traveled along the selected
route
Using Nearest Neighbor
Atlanta
Knoxville
Lexington
Charlotte

Columbia
Charleston
Raleigh
Atlanta
Total distance starting with Atlanta
214 + 170+ 398 + 93 + 116 + 279 + 435 =
1,705 miles
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Example 15.1
Use the Nearest Neighbor heuristic again to see if a better
solution exists:
Charleston – Columbia – Charlotte – Raleigh –
Knoxville – Lexington – Atlanta – Charleston
+ 93 + 169 + 351 + 170 + 375 + 319 =
1,593 miles
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Example 15.1
Charlotte – Columbia – Charleston – Raleigh –
Knoxville – Lexington – Atlanta – Charlotte
93 + 116 + 279 + 351 + 170 + 375 + 244 =
1628 miles
Columbia – Charlotte – Raleigh – Charleston –
Atlanta – Knoxville – Lexington – Columbia
93 + 169 + 279 + 319 + 214 + 170 + 430 =

1674 miles
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Example 15.1
Knoxville – Lexington – Atlanta – Columbia –
Charlotte – Raleigh – Charleston – Knoxville
170 + 375 + 225 + 93 + 169 + 279 + 373 =
1684 miles
Lexington – Knoxville – Atlanta – Columbia –
Charlotte – Raleigh – Charleston – Lexington
170 + 214 + 225 + 93 + 169 + 279 + 540 =
1690 miles
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Example 15.1
Raleigh – Charlotte – Columbia – Charleston –
Atlanta – Knoxville – Lexington – Raleigh
169 + 93 + 116 + 319 + 214 + 170 + 498 =
1579 miles
Of the 7 routes , the best one starts with Raleigh for a travel
distance of 1579 miles.
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Application 15.1
Equipment Repair Inc. is a privately owned firm located in

Monroe Kansas.
Each workday a repair vehicle is dispatched to customer
locations that have requested an equipment repair.
After all repairs have been completed, the vehicle must be
returned to the shop in Monroe.
For one particular day, 5 customers in 5 different cities must be
visited.
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Application 15.1
The distance between any two customers in miles reported by
city name is given below:
To/FromMonroeApexConcordDoverOxfordMonroe-
15301020Apex15-122225Concord3012-526Dover10225-
18Oxford20252618-
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Application 15.1
Use the Nearest Neighbor heuristic to identify an efficient route
for the truck and compute the truck’s total distance traveled.
Start with Monroe and place all other cities in the unvisited set.
Select the closest city to Monroe in the unvisited set, which is
Dover. Remove Dover from the unvisited set.
The partial route is now Monroe – Dover, which is 10 miles.

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Application 15.1
Repeat the procedure until all cities have been removed from
the unvisited city set. Connect the last city to Monroe to
complete the route.
Scan the unvisited set for the city closest to Dover,
which is Concord.
Remove Concord from the unvisited set.
The partial route is now Monroe-Dover – Concord, which is:
10 + 5 = 15 miles.
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Application 15.1
Compute the total distance traveled along the selected route.
The route using the nearest neighbor heuristic is:
= 10 +5 + 12 + 25 + 20
= 72 miles
Dover – Concord – Apex – Oxford – Monroe
Monroe –
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Application 15.1
Concord – Dover – Monroe – Oxford – Apex
= 72 miles
Concord – Dover – Monroe – Apex – Oxford – Concord
= 81 miles
= 12 + 5 + 10 + 20 + 25
= 5 + 10 + 15 + 25 + 26

Apex –
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Application 15.1
Dover – Concord – Apex – Monroe – Oxford – Dover
= 70 miles
Dover – Concord – Apex – Monroe – Oxford
= 70 miles
= 5 + 12 + 15 + 20 + 18
= 18 + 5 + 12 + 15 + 20
Oxford –
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Application 15.1
This approach results in the following best route:
Dover – Concord – Apex – Monroe – Oxford – Dover
= 70 miles
= 5 + 12 + 15 + 20 + 18
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Freight Density
Freight rates are based on the following factors:
The freight density
The shipment’s weight
The distance the shipment is moving
The commodity’s susceptibility to damage

The value of the commodity
The commodity’s loadability and handling characteristics.
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Calculating Break-Even weight
To determine the break-even weight between two adjacent
weight breaks we define the following variables:
x = break-even weight
A = lower weight bracket
B = next highest weight bracket
C = freight rate relative to A
D = freight rate relative to B
Break-even weight: x = (BD)/C
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Weight Breaks and Freight Class
($/cwt)Class< 500 (lbs)500 (lbs)1,000 (lbs)2,000 (lbs)5,000
(lbs)10,000 (lbs)> 20,000
(lbs)50.0034.4028.3224.2523.0417.5815.7410.4755.0036.9430.5
026.1224.8218.9317.4111.5860.0039.5932.6927.9926.6020.291
9.0812.6965.0041.9434.6429.6628.1821.4920.2713.4870.0044.6
436.8631.5629.9922.8821.9414.5977.5048.1039.7234.0132.322
4.6523.8515.8685.0051.9042.8636.7034.8726.6026.2417.4592.5
055.8946.1539.5237.5628.6428.3818.87100.0060.2749.7742.61
40.5030.8930.7720.46
Table 15.2

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Example 15.2
One of the products produced by Kitchen Tidy is Squeaky
Kleen, a tile cleaner used by restaurants and hospitals. Squeaky
Kleen comes in 5-gallon containers, each weighing 48 lbs.
Currently Kitchen Tidy ships four pallets of 25 units each week
to a distribution center.
The freight classification for this commodity is 100.
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Example 15.2
In an effort to be environmental responsible, Kitchen Tidy
asked their product engineers to evaluate a plan to convert
Squeaky Kleen into a concentrated liquid by removing some
water from the product which would allow the engineers to
design a smaller container so 50 units can be loaded on each
pallet.
Each container would weigh only 42 pounds.
This would reduce the freight density and the freight class to
92.5.
What would the savings in freight costs be with the new product
design?
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Example 15.2
Current Product Design:
Weekly shipment =
(Number of pallets)(units per pallet)(pounds per unit)
(4) * (25) * (48) = 4,800 pounds
Break-even weight (Freight Class = 100)
(50) * (30.89) / (40.50) = 38.14 or 3,814 pounds
**The shipment qualifies for the lower freight rate**
Total weekly shipping cost
(48) * (30.89) = $1,482.72
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Example 15.2
New Product Design:
Weekly shipment =
(Number of pallets)(units per pallet)(pounds per unit)
(2) * (50) * (42) = 4,200 pounds
Break-even weight (Freight Class = 92.5)
(50) * (28.64) / (37.56) = 38.126 or 3,813 pounds
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Example 15.2
New Product Design:
Total weekly shipping cost
(42) * (28.64) = $1,202.88
Savings =
$1,482 - $1,202.88 = $279.84 per week
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Application 15.2
Kayco Stamping in Ft. Worth, Texas ships sheet metal
components to a switch box assembly plant in Waterford,
Virginia.
Each component weights approximately 25 lbs and 50
components fit on a standard pallet.
A complete pallet ships as freight class 92.5.
Calculate the shipment cost for 3 and 13 pallets.
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Application 15.2
At 3 pallets or 150 pieces
Shipping Weight

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Application 15.2
Shipping Weight
(150) * (25) = 3,750 pounds
(50) * (28.64) / (37.56) = 38.13 or 3,813 pounds
**The shipment does NOT qualify for the lower freight rate**
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Application 15.2
Total shipping cost
The per-unit shipping charge

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Application 15.2
Total shipping cost
(37.5) * (37.56) = $1,408.50
$1408.50/150 = $9.39
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Application 15.2
Shipping Weight
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Application 15.2
Shipping Weight
(650) * (25) = 16,250 pounds

(200) * (18.87) / (28.38) = 132.98 or
13,298 pounds
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Application 15.2
Total shipping cost
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Application 15.2
Total shipping cost
(162.5) * (18.87) = $3,066.38
$3,066.38/650 = $4.72

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Transportation Mode
Major Modes of Transportation
Air freight
Trucking
Shipping by Water
Rail
Pipeline
Airwaves / internet / cloud
Intermodal shipments
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Transportation Mode
Transportation Technology
Relative drag
Payload ratio
Propulsion systems
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Disaster Relief Supply Chains
Disaster – A serious disruption of the functioning of society
causing widespread human, material, or environmental losses
which exceed the ability of the affected people to cope using
only its own resources.
Human-related

Natural
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52
Humanitarian Supply Chain Operations
Prepare
Disaster
Response
Recovery
Forecasts and Early Warnings
Figure 15.4
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53
Managing Disaster Relief Operations
Understand that the timetable and ultimate customer for a
supplier changes rapidly.
Design the supply chain to link the preparation activities to the
initial response activities and the recovery activities.
Link disaster relief headquarters with operations in the field.

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Life Cycle of Disaster Relief
Brief needs assessment
Development of initial supply chains for flexibility
Speedy distribution of supplies to the affected regions based on
forecasted needs
Increased structuring of the supply chain as time progresses:
receive supplies by fixed schedule or on request
Dismantling/turning over of the supply chain to local agencies.
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Supply Chain Management Challenges
Design implications
Command and control
Cargo security
Donor independence
Change in work flow
Local infrastructure
High employee turnover
Poor communication
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Supply Chain Ethics
Buyer-Supplier Relationships
Identifying ethical and unethical work practices

Facility Location
Inventory Management
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Supply Chain Ethics
Buyer-Supplier Relationships
SA8000:20014
Child Labor
Forced Labor
Health and Safety
Freedom of Association and Right to Collective Bargaining
Discrimination
Discipline
Working hours
Compensation
Management Systems
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Managing Sustainable Supply Chains
Develop a sustainable supply chain framework.
Gather data on current supplier performance and use that
information to screen new suppliers.
Require compliance across all business units.
Engage in active supplier management utilizing ethical means.
Provide periodic reports on the impact of supply chains on
sustainability.

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Solved Problem 1
Greenstreets Recycling Inc. collects used motor oil from several
collection sites around the Greater Stanford area.
In order to minimize the use, and thereby the cost of its labor,
vehicle, and energy resources, the company is interested in
locating the shortest route that will allow its collection vehicle
to visit each collection site exactly once.
Provide an efficient route for the collection vehicle.
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Solved Problem 1From/ToABCDEFA-2550484160B25-
35222343C5035-254765D482225-2440E41234724-
21F6043654021-
The distance between any two sites in miles is given below
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Solved Problem 1
Begin at the recycling facility (Site A) and proceed to its
nearest neighbor (Site B) which is 25 miles away.
From Site B proceed to its nearest neighbor
Proceed from B to D – 22 miles
From Site D proceed to site E
24 miles
From Site E proceed to site F

21 miles
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Solved Problem 1
From Site F proceed to Site C
65 miles
From Site C return to Site A
50 miles
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Solved Problem 1
Compute the total distance traveled along the selected route
Using Nearest Neighbor
A
B
D
E
F
C
A
Total Distance starting at site A
25 + 22 + 24 + 21 + 65 + 50 =
207 miles

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Solved Problem 1
Use the Nearest Neighbor heuristic again to see if a better
solution exists:
B – D – E – F – A – C – B
22 + 24 + 21 + 60 + 50 + 35
212 miles
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Solved Problem 1
C – D – B – E – F – A – C
25 + 22 + 23 + 21 + 60 + 50
201 miles
D – B – E – F – A – C – D
22 + 23 + 21 + 60 + 50 + 25
201 miles
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Solved Problem 1
E – F – D – B – A – C – E
21 + 40 + 22 + 25 + 50 + 47
205 miles
F – E – B – D – C – A – F
21 + 23 + 22 + 25 + 50 + 60
201 miles

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Solved Problem 1
The routes starting with C, D and F all have the same distance
and sequence.
With recycling facility at A the best route:
A – F – E – B – D – C – A = 201 miles
Reverse order = same distance
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Solved Problem 2
Kayco Stamping in Ft. Worth, Texas ships
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Supply Chain Integration
Chapter 14
14-‹#›

What is Supply Chain Integration?
The effective coordination of supply chain processes though the
seamless flow of information up and down the supply chain.
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Upstream
Tier 3
Tier 2
Tier 1
Downstream
Information flows
Cash flows
Tomato
suppliers
Tomato
paste
factories
Tomato
grading
stations

Retail
sales
Consumers
Ketchup
factory
Figure 14.1
14-‹#›
3
Supply Chain Disruptions
External Causes
Environmental Disruptions
Supply Chain Complexity
Loss of Major Accounts
Loss of Supply
Customer-Induced Volume Changes
Service and Product Mix Changes
Late Deliveries
Underfilled Shipments
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Supply Chain Disruptions
Internal Causes
Internally Generated Shortages
Quality Failures

Poor Supply Chain Visibility
Engineering Changes
Order Batching
New Service or Production Introductions
Service or Product Promotions
Information Errors
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Supply Chain Dynamics
Bullwhip Effect
The phenomenon in supply chains whereby ordering patterns
experience increasing variance as you proceed upstream in the
chain.
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Supply Chain Dynamics
The Bullwhip Effect
9,000
7,000
5,000

3,000
0
Order quantity
Month of April
Day 1
Day 30
Day 1
Day 30
Day 1
Day 30
Day 1
Day 30
Consumers’ daily demands
Retailers’ daily orders to manufacturer
Manufacturer’s weekly orders to package supplier
Package supplier’s weekly orders to cardboard supplier
Figure 14.2
14-‹#›
Integrated Supply Chains
External Supply Chain Linkages
First-Tier Supplier
Service/Product Provider
Support Processes
External Suppliers

Support Processes
Supplier relationship process
New service/ product development process
Order fulfillment process
Business-to-business (B2B) customer relationship process
External Consumers
Supplier relationship process
New service/ product development process
Order fulfillment process
Business-to-consumer (B2C) customer relationship process

Figure 14.3
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8
Integrated Supply Chains
SCOR (Supply Chain Operations Reference) Model
Plan
Source (purchasing)
Make (manufacturing)
Delivery
Return (returned product)
Hall
12 - 09
14-‹#›
SCOR Model
Figure 14.4
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New Service/Product Development

Design
Analysis
Development
Full Launch
Service or product not profitable
Need to rethink the new offering or production process
Post-launch review
Figure 14.5
14-‹#›
Hall
12- 12
14-‹#›
Supplier Relationship Process

14-‹#›
13
Example 14.1
Compton Electronics manufactures laptops for major computer
manufacturers. A key element of the laptop is the keyboard.
Compton has identified three potential suppliers for the
keyboard, each located in a different part of the world.
Important cost considerations are the price per keyboard, freight
costs, inventory costs, and contract administrative costs. The
annual requirements for the keyboard are 300,000 units. Assume
Compton has 250 business days a year. Managers have acquired
the following data for each supplier.
Which supplier provides the lowest annual total cost to
Compton?
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14
Example 14.1Annual Freight CostsShipping Quantity
(units/shipment)Supplier10,00020,00030,000Belfast$380,000$2
60,000$237,000Hong
Kong$615,000$547,000$470,000Shreveport$285,000$240,000$
200,000Keyboard Costs and Shipping Lead
TimesSupplierPrice/UnitAnnual Inventory Carrying
Cost/UnitShipping Lead Time (days)Administrative

CostsBelfast $100$20.00 15$180,000Hong Kong
$96$19.20 25$300,000Shreveport $99$19.80
5$150,000
14-‹#›
15
Example 14.1
The average requirements per day are:
Total Annual Cost =
pD + Freight costs + (Q/2 + dL)H + Administrative costs
d =
300,000/250 = 1,200 keyboards
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16
Example 14.1
BELFAST: Q = 10,000 units.
Material costs = pD =
Freight costs = $380,000
Administrative costs= $180,000
Total Annual Cost =
= (10,000 units/2
+ 1200 units/day(15 days))$20/unit/year

= $460,000
= $31,020,000
$30,000,000 + $380,000
+ $460,000 + $180,000
= $30,000,000
($100/unit)(300,000 units)
14-‹#›
17
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Example 14.1Total Annual Costs for the Keyboard
SuppliersShipping
QuantitySupplier10,00020,00030,000BelfastHong
KongShreveport
14-‹#›
18
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Example 14.1Total Annual Costs for the Keyboard
SuppliersShipping
QuantitySupplier10,00020,00030,000BelfastHong
KongShreveport$31,020,000$31,000,000$31,077,000$30,352,80
0$30,406,800$30,465,800$30,387,000$30,415,000$30,434,000

14-‹#›
19
Green Purchasing
Green purchasing – The process of identifying, assessing, and
managing the flow of environmental waste and finding ways to
reduce it and minimize its impact on the environment.
Choose environmentally conscious suppliers.
Use and substantiate claims such as green, biodegradable,
natural, and recycled.
Use sustainability as criteria for certification.
14-‹#›
Example 14.2
The management of Compton Electronics has done a total cost
analysis for three international suppliers of keyboards (see
Example 14.1). Compton also considers on-time delivery,
consistent quality, and environmental stewardship in its
selection process. Each criterion is given a weight (total of 100
points), and each supplier is given a score (1 = poor, 10 =
excellent) on each criterion. The data are shown in the
following table.ScoreCriterionWeightBelfastHong
KongShreveportTotal Cost25589On-Time
Delivery30967Consistent Quality30896Environment15968
14-‹#›

Example 14.2
Belfast =
Hong Kong =
Shreveport =
Preferred
For example, the Belfast weighted score is:
The weighted score for each supplier is calculated by
multiplying the weight by the score for each criterion and
arriving at a total.
14-‹#›
Design collaboration
Early supplier involvement
Presourcing
Value analysis
Negotiation
Competitive orientation
Cooperative orientation
14-‹#›

Buying
Electronic Data Interchange (EDI)
Catalog Hubs
Exchanges
Auctions
Locus of Control
14-‹#›
Information Exchange
Radio Frequency Identification (RFID)
Vendor-Managed Inventories (VMI)
14-‹#›
Using Information Systems to Achieve Competitive Advantage
Supermarkets and large retail stores such as Walmart use sales
data captured at the checkout counter to determine which items
have sold and need to be reordered. Walmart’s continuous

replenishment system (also known as Vendor Managed
Inventory – VMI) transmits orders to restock directly to its
suppliers (wrong). The system enables Walmart to keep costs
low while fine-tuning its merchandise to meet customer
demands.
14-‹#›
26
Build a competitive advantage that helps to build the business
while driving down costs.
Improve customer satisfaction – drives additional sales.
Provides more detailed data, closer to the point of actual
demand, to help develop better production and inventory
plans/forecasts, ultimately leading to lower inventories at the
manufacturer.
Reduces lead-time from “order to delivery” (the order
fulfillment process) and provides an additional set of eyes to
manage the customer’s inventory that will ultimately lead to
lower inventories at the retailer and manufacturer.
Transfers responsibility of retailer inventory management to the
vendor.
Improve the business relationship between the two trading
partners.
VMI’s Objectives

14-‹#›
Customer Benefits
Reduces and balances inventory levels
Improves cash flow
More productive use of the Buyers time
Improves service level to distribution centers and stores,
reducing out of stocks
Reduces administrative costs
Warehouse efficiencies (reduced space requirements, less
product handling, stabilize staffing/reduce overtime)
Reduce damage/unsaleables
14-‹#›
Improve reliability (on time deliveries)
Shorter lead-time/cycle-time
Higher truckload utilization
Increased volume
Increased profitability
Dedicated Single Point of Contact (SPOC)
Preferential treatment on order fulfillment, product allocations,
shipments
Customer Benefits (continued)
14-‹#›
Supplier/Manufacturer Benefits
Reduces and balances inventory levels

Shorter lead-time/cycle-time
Higher truckload utilization
Improves cash flow, increases sales and profitability
Improves “perfect order” %
Increases service level to distribution centers and stores,
reducing out of stocks (reliability) – increasing sales
Warehouse efficiencies (reduced space requirements, less
product handling, stabilize staffing/reduce overtime)
Reduce damage/unsaleables
14-‹#›
VMI Performance Measures
Inventory levels ($, weeks on hand, turns)
On time deliveries
Order/case completeness
Out of stocks/cuts to stores (increased reaction time)
Communication (problems before they happen, special
promotions, etc.)
Perfect orders – on-time, complete and billed accurately
14-‹#›
VMI – Combined With Consignment
Who knows what consignment is?
14-‹#›
Consignment Concept

Customer pays based on scan data (actual sales) versus receipt
of goods
Customer builds trust in inventory control capabilities of
supplier
Customer no longer needs to manage inventory on a
daily/weekly basis
Eliminates 2% terms discount (2% 10, net 30)
Eliminate invoicing
Customer required to be Vendor Managed Inventory (VMI),
Electronic Funds Transfer (EFT) capable
Incents efficient behaviors
14-‹#›
Consignment Timeline
14-‹#›
35
Radio Frequency Tags
14-‹#›
35
Order Fulfillment Process

Customer Demand Planning
Supply Planning
Production
Logistics
Ownership
Facility location
Mode selection
Capacity level
Cross-docking
The Perfect Order
On-Time
Complete
Billed Accurately
14-‹#›
Example 14.3
Tower Distributors provides logistical services to local
manufacturers. Tower picks up products from the
manufacturers, takes them to its distribution center, and then
assembles shipments to retailers in the region. Tower needs to
build a new distribution center; consequently, it needs to make a
decision on how many trucks to have. The monthly amortized
capital cost of ownership is $2,100 per truck. Operating variable
costs are $1 per mile for each truck owned by Tower. If
capacity is exceeded in any month, Tower can rent trucks at $2
per mile. Each truck Tower owns can be used 10,000 miles per
month. The requirements for the trucks, however, are uncertain.
Managers have estimated the following probabilities for several
possible demand levels and corresponding fleet sizes.

14-‹#›
Example 14.3
If Tower Distributors wants to minimize the expected cost of
operations, how many trucks should it have?Requirements
(miles/month)100,000150,000200,000250,000Fleet Size
(trucks)10152025Probability0.20.30.40.1
14-‹#›
Example 4.3
C = monthly capital cost of ownership
+ variable operating cost per month + rental costs if needed
C(100,000 miles/month) =
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles) = $121,000
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(150,000 miles – 100,000 miles)
= $221,000
+ ($1/mile)(100,000 miles)
= $321,000
+ ($1/mile)(100,000 miles)
= $421,000

14-‹#›
Example 14.3
Next, calculate the expected value for the 10 truck fleet size
alternative as follows:
Expected Value (10 trucks) =
Using similar logic, we can calculate the expected costs for
each of the other fleet-size options:
0.2($121,000) + 0.3($221,000)
+ 0.4($321,000) + 0.1($421,000) = $261,000
0.2($131,500) + 0.3($181,500)
+ 0.4($281,500) + 0.1($381,000) = $231,500
0.2($142,000) + 0.3($192,000)
+ 0.4($242,000) + 0.1($342,000) = $217,000
0.2($152,500) + 0.3($202,500)
+ 0.4($252,500) + 0.1($302,500) = $222,500
The preferred option is 20 trucks.
14-‹#›
The Customer Relationship Process
Marketing
Business-to-Consumer Systems
Business-to-Business Systems
Order Placement
Cost Reduction
Revenue Flow Increase
Global Access
Pricing Flexibility
Customer Service

14-‹#›
41
Supply Chain Risk Management
The practice of managing the risk of any factor or event that can
materially disrupt a supply chain, whether within a single firm
or across multiple firms.
14-‹#›
Operational Risks – Threats to the effective flow of materials,
services, and products in a supply chain
Strategic Alignment
Upstream/Downstream Supply Chain Integration
Visibility
Flexibility and Redundancy
Short Replenishment Lead Times
Small Order Lot Sizes
Rationing Short Supplies
Everyday low pricing (EDLP)
Cooperation and Trustworthiness
14-‹#›
43

Financial Risks – Threats to the financial flows in a supply
chain, such as prices, costs, and profits.
Low Cost Hopping
Hedging
Production Shifting
Futures Contract
14-‹#›
44
Security Risks - Threats to a supply chain that could potentially
damage stakeholders, facilities, or operations.
Access Control
Physical Security
Shipping and Receiving
Transportation Service Provider
ISO 28000
14-‹#›
45
Performance MeasuresCustomer RelationshipOrder

FulfillmentSupplier RelationshipPercent of orders taken
accurately
Time to complete the order placement process
Customer satisfaction with the order placement process
Customer’s evaluation of firm’s environmental stewardship
Percent of business lost because of supply chain
disruptionsPercent of incomplete orders shipped
Percent of orders shipped on-time
Time to fulfill the order
Percent of botched services or returned items
Cost to produce the service or item
Customer satisfaction with the order fulfillment process
Inventory levels of work-in-process and finished goods
Amount of greenhouse gasses emitted into the air
Number of security breachesPercent of suppliers’ deliveries on-
time
Suppliers’ lead times
Percent defects in services and purchased materials
Cost of services and purchased materials
Inventory levels of supplies and purchased components
Evaluation of suppliers’ collaboration on streamlining and
waste conversion
Amount of transfer of environmental technologies to suppliers
14-‹#›
46
Performance measures
Costs
Time
Quality
Environmental impact

Revenues – How?
Levers for Improved Supply Chain Performance
Hall
12 - 47
14-‹#›
47
Revenues
Improved quality
Improved customer service
Perfect orders (on-time + complete + billed accurately
Lower costs leading to lower prices
Efficient behaviors (order as we make from where we make)
Levers for Improved Supply Chain Performance
Hall
12 - 48
14-‹#›
48
Solved Problem 1
Eagle Electric Repair is a repair facility for several major
electronic appliance manufactures. Eagle wants to find a low-
cost supplier for an electric relay switch used in many
appliances. The annual requirements for the relay switch (D) are

100,000 units. Eagle operates 250 days a year. The following
data are available for two suppliers. Kramer and Sunrise, for the
part:Freight CostsShipping Quantity
(Q)Supplier2,00010,000Price/Unit (p)Carrying Cost/Unit
(H)Lead Time (L)(days)Administrative
CostsKramer$30,000$20,000$5.00$1.005$10,000Sunrise$28,000
$18,000$4.90$0.989$11,000
14-‹#›
Solved Problem 1
The daily requirements for the relay switch are:
100,000/250 = 400 units
d =
We must calculate the total annual costs
for each alternative:
Total annual cost = Material costs + Freight costs
+ Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL) H + Administrative costs
14-‹#›
Solved Problem 1
Kramer
Q = 2,000:
Q = 10,000:
The analysis reveals that using Sunrise and a shipping quantity
of 10,000 units will yield the lowest annual total costs.

Sunrise
Q = 2,000:
Q = 10,000:
($5.00)(100,000) + $30,000 + (2,000/2 + 400(5))($1) + $10,000
= $543,000
($5.00)(100,000) + $20,000 + (10,000/2 + 400(5))($1) +
$10,000
= $537,000
($4.90)(100,000) + $28,000 + (2,000/2 + 400(9))($0.98) +
$11,000
= $533,508
(4.90)(100,000) + $18,000 + (10,000/2 + 400(9))($0.98) +
$11,000
= $527,428
14-‹#›
Solved Problem 2
Eagle Electric Repair wants to select a supplier based on total
annual cost, consistent quality, and delivery speed. The
following table shows the weights management assigned to each
criterion (total of 100 points) and the scores assigned to each
supplier (Excellent = 5, Poor =
1).ScoresCriterionWeightKramerSunriseTotal annual
cost3045Consistent quality4034Delivery speed3053
Which supplier should Eagle select, given these criteria and
scores?
14-‹#›

Solved Problem 2
Using the preference matrix approach, the weighted scores for
each supplier are:ScoresCriterionWeightKramerSunriseTotal
annual cost3045Consistent quality4034Delivery speed3053
WSKramer =
WSSunrise =
Preferred
14-‹#›
Solved Problem 3
Schneider Logistics Company has built a new warehouse in
Columbus, Ohio, to facilitate the consolidation of freight
shipments to customers in the region. How many teams of dock
workers should he hire to handle the cross docking operations
and the other warehouse activities? Each team costs $5,000 a
week in wages and overhead. Extra capacity can be
subcontracted at a cost of $8,000 a team per week. Each team
can satisfy 200 labor hours of work a week. Management has
estimated the following probabilities for the
requirements:Requirements (hours/wk)200400600Number of
teams123Probability0.200.500.30
How many teams should Schneider hire?
14-‹#›
Solved Problem 3
We use the expected value decision rule by first computing the
cost for each option for each possible level of requirements and
then using the probabilities to determine the expected value for

each option. The option with the lowest expected cost is the one
Schneider will implement. We demonstrate the approach using
the “one team” in-house option.
One Team In-House
C(200) =
C(400) =
C(600) =
Expected Value =
0.20($5,000) + 0.50($13,000) + 0.30($21,000) =
$13,800
$5,000 + $8,000 + $8,000 = $21,000
$5,000 + $8,000 = $13,000
$5,000
14-‹#›
Solved Problem 3
A table of the complete results is below.Weekly Labor
RequirementsIn-House200 hrs400 hrs600 hrsExpected ValueOne
teamTwo teamsThree teams
14-‹#›
Solved Problem 3
A table of the complete results is below.
Based on the expected value decision rule,
Schneider should employ two teams at the warehouse.
$5,000$13,000$21,000$13,800
$10,000$10,000$18,000$12,400
$15,000$15,000$15,000$15,000Weekly Labor
RequirementsIn-House200 hrs400 hrs600 hrsExpected ValueOne
teamTwo teamsThree teams

14-‹#›
010203040506012Days
Order To Payment Cycle Comparison
Order GeneratedOrder AcquiredOrder ShippedOrder
Recieved1st Case Moved1st PaymentLast Case MovedLast
Payment
Average
Payment
Average
Payment
Chart1113119261315151
Average Payment
Average Payment
Order Generated
Order Acquired
Order Shipped
Order Recieved
1st Case Moved
1st Payment
Last Case Moved
Last Payment
Days
Order To Payment Cycle Comparison
Sheet1non conconsignmentorder genrated11order
acquired1order shipped33order received11first case moved5first
EFT payment191last case moved5last EFT payment261total5117
Sheet2
Sheet3

Supply Chain Logistic Networks
Chapter 13
13-‹#›
What is a Facility Location?
Facility Location
The process of determining geographic sites for a firm’s
operations.
Distribution center (DC)
A warehouse or stocking point where goods are stored for
subsequent distribution to manufacturers, wholesalers, retailers,
and customers.
13-‹#›
2
Factors Affecting Location Decisions
The Factor Must Be Sensitive to Location
The Factor Must Have a High impact on the Company’s Ability
to Meet Its Goals

13-‹#›
3
Dominant Factors in Manufacturing
Favorable Labor Climate
Proximity to Markets
Impact on Environment
Quality of Life
Proximity to Suppliers and Resources
Proximity to the Parent Company’s Facilities
Utilities, Taxes, and Real Estate Costs
Other Factors
13-‹#›
Dominant Factors in Services
Proximity to Customers
Transportation Costs and Proximity to Markets
Location of Competitors
Site-Specific Factors
13-‹#›

Load-Distance Method
A mathematical model used to evaluate locations based on
proximity factors
Euclidean distance
The straight line distance, or shortest possible path, between
two points
Rectilinear distance
The distance between two points with a series of 90-degree
turns, as along city blocks
13-‹#›
6
Application 13.1
What is the distance between (20, 10) and (80, 60)?
Euclidean distance:
dAB = (xA – xB)2 + (yA – yB)2 =
(20 – 80)2 + (10 – 60)2 = 78.1
Rectilinear distance:
dAB = |xA – xB| + |yA – yB| =
|20 – 80| + |10 – 60| = 110
13-‹#›
7

Calculating a load-distance score
Varies by industry
Use the actual distance to calculate ld score
Use rectangular or Euclidean distances
Find one acceptable facility location that minimizes the ld score
Formula for the ld score
i
13-‹#›
8
Application 13.2
Management is investigating which location would be best to
position its new plant relative to two suppliers (located in
Cleveland and Toledo) and three market areas (represented by
Cincinnati, Dayton, and Lima). Management has limited the
search for this plant to those five locations. The following
information has been collected. Which is best, assuming
rectilinear distance?Locationx,y
coordinatesTrips/yearCincinnati(11,6)15Dayton(6,10)20Clevela
nd(14,12)30Toledo(9,12)25Lima(13,8)40
13-‹#›

9
Application 13.2Locationx,y
coordinatesTrips/yearCincinnati(11,6)15Dayton(6,10)20Clevela
nd(14,12)30Toledo(9,12)25Lima(13,8)4015(9) + 20(0) + 30(10)
+ 25(5) + 40(9)= 92015(9) + 20(10) + 30(0) + 25(5) + 40(5)=
66015(8) + 20(5) + 30(5) + 25(0) + 40(8)= 69015(4) + 20(9) +
30(5) + 25(8) + 40(0)= 59015(0) + 20(9) + 30(9) + 25(8) +
40(4)= 810Cincinnati = Dayton = Cleveland = Toledo = Lima =
13-‹#›
10
Center of Gravity
Center of Gravity
A good starting point to evaluate locations in the target area
using the load-distance model.
Find x coordinate, x*, by multiplying each point’s x coordinate
The center of gravity’s y coordinate y* found the same way
x* =
i
i
y* =

i
i
13-‹#›
11
Example 13.1
A supplier to the electric utility industry produces power
generators; the transportation costs are high. One market area
includes the lower part of the Great Lakes region and the upper
portion of the southeastern region. More than 600,000 tons are
to be shipped to eight major customer locations as shown
below:Customer LocationTons Shippedx, y CoordinatesThree
Rivers, MI 5,000 (7, 13)Fort Wayne, IN 92,000 (8,
12)Columbus, OH 70,000 (11, 10)Ashland, KY 35,000
(11, 7)Kingsport, TN 9,000 (12, 4)Akron, OH
227,000 (13, 11)Wheeling, WV 16,000 (14,
10)Roanoke, VA 153,000 (15, 5)
13-‹#›
Example 13.1
What is the center of gravity for the electric utilities supplier?
Customer LocationTons Shippedx, y CoordinatesThree Rivers,
MI 5,000 (7, 13)Fort Wayne, IN 92,000 (8,

227,000 (13, 11)Wheeling, WV 16,000 (14,
10)Roanoke, VA 153,000 (15, 5)
The center of gravity is calculated as shown below:
x* = =
i
i
i
i
5 + 92 + 70 + 35 + 9 + 227 + 16 + 153 = 607
5(7) + 92(8) + 70(11) + 35(11) + 9(12) + 227(13)
+ 16(14) + 153(15) = 7,504
= 12.4
7,504
607
13-‹#›
Example 13.1
x* = =
i
i
i
5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11)
+ 16(10) + 153(5) = 5,572

= 9.2
5,572
607
What is the center of gravity for the electric utilities supplier?
Customer LocationTons Shippedx, y CoordinatesThree Rivers,
MI 5,000 (7, 13)Fort Wayne, IN 92,000 (8,
227,000 (13, 11)Wheeling, WV 16,000 (14,
10)Roanoke, VA 153,000 (15, 5)
13-‹#›
Example 13.1
The resulting load-distance score is
i
5(5.4 + 3.8) + 92(4.4 + 2.8) + 70(1.4 + 0.8) + 35(1.4 + 2.2)
+ 90(0.4 + 5.2) + 227(0.6 + 1.8) + 16(1.6 + 0.8) + 153(2.6 +
4.2)
= 2,662.4
where
di = |xi – x*| + |yi – y*|
Using rectilinear distance, what is the resulting load–distance
score for this location?Customer LocationTons Shippedx, y
CoordinatesThree Rivers, MI 5,000 (7, 13)Fort Wayne, IN
92,000 (8, 12)Columbus, OH 70,000 (11,
10)Ashland, KY 35,000 (11, 7)Kingsport, TN 9,000
(12, 4)Akron, OH 227,000 (13, 11)Wheeling, WV
16,000 (14, 10)Roanoke, VA 153,000 (15, 5)

13-‹#›
Application 13.3
A firm wishes to find a central location for its service. Business
forecasts indicate travel from the central location to New York
City on 20 occasions per year. Similarly, there will be 15 trips
to Boston, and 30 trips to New Orleans. The x, y-coordinates
are (11.0, 8.5) for New York, (12.0, 9.5) for Boston, and (4.0,
1.5) for New Orleans. What is the center of gravity of the three
demand points?
x* = =
i
i
y* = =
i
i
(20 + 15 + 30)
= 8.0
(20 + 15 + 30)
= 5.5
13-‹#›
16

Break-Even Analysis
Compare location alternatives on the basis of quantitative
factors expressed in total costs
Determine the variable costs and fixed costs for each site
Plot total cost lines
Identify the approximate ranges for which each location has
lowest cost
Solve algebraically for break-even points over the relevant
ranges
13-‹#›
17
Example 13.2
An operations manager narrowed the search for a new facility
location to four communities. The annual fixed costs (land,
property taxes, insurance, equipment, and buildings) and the
variable costs (labor, materials, transportation, and variable
overhead) are as follows:CommunityFixed Costs per
YearVariable Costs per
UnitA$150,000$62B$300,000$38C$500,000$24D$600,000$30
13-‹#›
Example 13.2
Step 1
Plot the total cost curves for all the communities on a single
graph. Identify on the graph the approximate range over which

each community provides the lowest cost.
Step 2
Using break-even analysis, calculate the break-even quantities
over the relevant ranges. If the expected demand is 15,000 units
per year, what is the best location?
13-‹#›
Example 13.2 $62(20,000) = $1,240,000
$1,390,000CommunityFixed CostsVariable Costs
(Cost per Unit)(No. of Units)Total Cost
(Fixed + Variable)A$150,000B$300,000C$500,000D$600,000
$38(20,000) = $760,000 $1,060,000 $24(20,000) =
$480,000 $980,000 $30(20,000) = $600,000 $1,200,000
To plot a community’s total cost line, let us first compute the
total cost for two output levels: Q = 0 and Q = 20,000 units per
year. For the Q = 0 level, the total cost is simply the fixed
costs. For the Q = 20,000 level, the total cost (fixed plus
variable costs) is as follows:
13-‹#›
A best
B best

C best
Example 13.2
The figure shows the graph of the total cost lines.
| | | | | | | | | | | |
0 2 4 6 8 10 12 14 16 18 20 22
1,600 –
1,400 –
1,200 –
1,000 –
800 –
600 –
400 –
200 –
–
Annual cost (thousands of dollars)
Q (thousands of units)
A
B
C
D
6.25
14.3
Break-even point
Break-even point
(20, 980)

(20, 1,390)
(20, 1,200)
(20, 1,060)
A is best for low volumes
B for intermediate volumes
C for high volumes.
We should no longer consider community D, because both its
fixed and its variable costs are higher than community C’s.
Figure 13.3
13-‹#›
Example 13.2(A)(B)$150,000 + $62Q = $300,000 + $38QQ =
6,250 units
The break-even quantity between B and C lies at the end of the
range over which B is best and the beginning of the final range
where C is best. (B)(C)$300,000 + $38Q = $500,000 + $24QQ =
14,286 units
The break-even quantity between A and B lies at the end of the
first range, where A is best, and the beginning of the second
range, where B is best.
13-‹#›

Example 13.2(A)(B)$150,000 + $62Q = $300,000 + $38QQ =
6,250 units
The break-even quantity between B and C lies at the end of the
range over which B is best and the beginning of the final range
where C is best. (B)(C)$300,000 + $38Q = $500,000 + $24QQ =
14,286 units
The break-even quantity between A and B lies at the end of the
first range, where A is best, and the beginning of the second
range, where B is best.
No other break-even quantities are needed. The break-even
point between A and C lies above the shaded area, which does
not mark either the start or the end of one of the three relevant
ranges.
13-‹#›
By chance, the Atlantic City Community Chest has to close
temporarily for general repairs. They are considering four
temporary office locations:
Application 13.4Property AddressMove-in CostsMonthly
RentBoardwalk$400$50Marvin Gardens $280$24St. Charles
Place $360$10Baltic Avenue $60$60
Use the graph on the next slide to determine for what length of
lease each location would be favored?
Hint: In this problem, lease length is analogous to volume.
13-‹#›
24

Application 13.4
| | | | | | | | |
0 1 2 3 4 5 6 7 8
Months →
Total Cost →
500 –
–
400 –
–
300 –
–
200 –
–
100 –
–
–
Boardwalk
St Charles Place
Marvin Gardens
Baltic Avenue
Fs + csQ = FB + cBQ
Q =
FB – Fs
cs – cB

= = 6 months
– 300
– 50
=
$60 – $360
$10 – $60
The short answer: Baltic Avenue if 6 months or less, St.
Charles Place if longer
13-‹#›
25
Transportation Method
Transportation method for location problems
A quantitative approach that can help solve multiple-facility
location problems
13-‹#›
26
Setting Up the Initial Tableau
Create a row for each plant (existing or new) and a column for
each warehouse
Add a column for plant capacities and a row for warehouse

demands and insert their specific numerical values
Each cell not in the requirements row or capacity column
represents a shipping route from a plant to a warehouse. Insert
the unit costs in the upper right-hand corner of each of these
cells.
The sum of the shipments in a row must equal the corresponding
plant’s capacity and the sum of shipments in a column must
equal the corresponding warehouse’s demand.
13-‹#›
Transportation MethodPlantWarehouse CapacitySan Antonio,
TX (1)Hot Spring, AR (2)Sioux Falls, SD
(3)Phoenix5.006.005.40400Atlanta7.004.606.60500Requirement
s200400300900900
Initial Tableau
Figure 13.4
13-‹#›
Dummy plants or warehouses
The sum of capacities must equal the sum of demands
If capacity exceeds requirements we add an extra column (a
dummy warehouse)
If requirements exceed capacity we add an extra row (a dummy
plant)
Assign shipping costs to equal the stockout costs of the new

cells
Finding a solution
The goal is to find the least-cost allocation pattern that satisfies
all demands and exhausts all capacities.
13-‹#›
29
Example 13.3
The optimal solution for the Sunbelt Pool Company, found with
POM for Windows, is shown below and displays the data inputs,
with the cells showing the unit costs, the bottom row showing
the demands, and the last column showing the supply capacities.
Figure 13.5a
13-‹#›
Example 13.3
Below shows how the existing network of plants supplies the
three warehouses to minimize costs for a total of $4,580.
All warehouse demand is satisfied:
Warehouse 1 in San Antonio is fully supplied by Phoenix

Warehouse 2 in Hot Springs is fully supplied by Atlanta.
Warehouse 3 in Sioux Falls receives 200 units from
Phoenix and 100 units from Atlanta, satisfying its 300-unit
demand.
Figure 13.5b
13-‹#›
Example 13.3
Below shows the total quantity and cost of each shipment.
The total optimal cost reported in the upper-left corner of the
previous table is $4,580, or 200($5.00) + 200($5.40) +
400($4.60) + 100($6.60) = $4,580.
Figure 13.5c
13-‹#›
Example 13.3
Figure 13.6
13-‹#›
What is a GIS?
GIS – Geographical Information System

A system of computer software, hardware, and data that the
firm’s personnel can use to manipulate, analyze, and present
information relevant to a location decision.
13-‹#›
A five step GIS framework
Step 1: Map the data
Step 2: Split the area
Step 3: Assign a facility location
Step 4: Search for alternative sites
Step 5: Compute ld scores and check capacity
The GIS Method
for Locating Multiple Facilities
13-‹#›
35
Inventory Placement
Centralized placement
Keeping all the inventory of a product at a single location such
as at a firm’s manufacturing plant or a warehouse and shipping
directly to each of its customers
Inventory pooling
A reduction in inventory and safety stock because of the
merging of variable demands from customers
Forward placement

Locating stock closer to customers at a warehouse, DC,
wholesaler, or retailer
13-‹#›
A Systematic Location
Selection Process
Step 1: Identify the important location factors and categorize
them as dominant or secondary
Step 2: Consider alternative regions; then narrow to
alternative communities and finally specific sites
Step 3: Collect data on the alternatives
Step 4: Analyze the data collected, beginning with the
quantitative factors
Step 5: Bring the qualitative factors pertaining to each site
into the evaluation
13-‹#›
37
A new medical facility, Health-Watch, is to be located in Erie,
Pennsylvania. The following table shows the location factors,
weights, and scores (1 = poor, 5 = excellent) for one potential
site. The weights in this case add up to 100 percent. A weighted
score (WS) will be calculated for each site. What is the WS for
this site?
Example 13.4Location FactorWeightScoreTotal patient miles
per month254Facility utilization203Average time per emergency
trip203Expressway accessibility154Land and construction

costs101Employee preferences105
13-‹#›
38
The WS for this particular site is calculated by multiplying each
factor’s weight by its score and adding the results:
Example 13.4Location FactorWeightScoreTotal patient miles
per month254Facility utilization203Average time per emergency
trip203Expressway accessibility154Land and construction
costs101Employee preferences105
WS =
5)
= 100 + 60 + 60 + 60 + 10 + 50
= 340
The total WS of 340 can be compared with the total weighted
scores for other sites being evaluated.
13-‹#›
39
0.91.61.81.65.9
Management is considering three potential locations for a new
cookie factory. They have assigned scores shown below to the
relevant factors on a 0 to 10 basis (10 is best). Using the
preference matrix, which location would be preferred?
Application 13.50.51.83.01.26.50.80.82.42.86.8Location
FactorWeightThe

NeighborhoodSesame
Street Ronald’s
PlayhouseMaterial Supply0.1598Quality of Life0.2984Mild
Climate0.31068Labor Skills0.4347
13-‹#›
40
Solved Problem 1
The new Health-Watch facility is targeted to serve seven census
tracts in Erie, Pennsylvania, whose latitudes and longitudes are
shown below. Customers will travel from the seven census-tract
centers to the new facility when they need health care. What is
the target area’s center of gravity for the Health-Watch medical
facility?LOCATION DATA AND CALCULATIONS FOR
HEALTH WATCHCensus
2,71142.134–
80.041114,225.27–216,991.1516 4,16142.129–
80.023175,298.77–332,975.7017 2,98842.122–
80.055125,860.54–239,204.3425 2,51242.112–
80.066105,785.34–201,125.7926 4,34242.117–
80.052182,872.01–347,585.7827 6,68742.116–
80.023281,629.69–535,113.8028 6,78942.107–
80.051285,864.42–543,466.24Total 30,1901,271,536.04–
2,416.462.80
Table 13.1
13-‹#›

41
This is Figure 9.10 to support Solved Problem 2.
Solved Problem 1
Next we solve for the center of gravity x* and y*. Because the
coordinates are given as longitude and latitude, x* is the
longitude and y* is the latitude for the center of gravity.
x* = = 42.1178
1,271,536.05
30,190
y* = = – 80.0418
– 2,416,462.81
30,190
The center of gravity is (42.12 North, 80.04 West), and is
shown on the map to be fairly central to the target area.
13-‹#›
Solved Problem 1
Figure 13.9
13-‹#›
43
The operations manager for Mile-High Lemonade narrowed the
search for a new facility location to seven communities. Annual
fixed costs (land, property taxes, insurance, equipment, and

buildings) and variable costs (labor, materials, transportation,
and variable overhead) are shown in the following table.
Solved Problem 2
a. Which of the communities can be eliminated from further
consideration because they are dominated (both variable and
fixed costs are higher) by another community?
b. Plot the total cost curves for all remaining communities on
a single graph. Identify on the graph the approximate range over
which each community provides the lowest cost.
c. Using break-even analysis, calculate the break-even
quantities to determine the range over which each community
provides the lowest cost.
13-‹#›
44
Solved Problem 2FIXED AND VARIABLE COSTS FOR MILE-
HIGH LEMONADECommunityFixed Costs per YearVariable
Costs per
BarrelAurora$1,600,000$17.00Boulder$2,000,000$12.00Colora
do
Springs$1,500,000$16.00Denver$3,000,000$10.00Englewood$1
,800,000$15.00Fort
Collins$1,200,000$15.00Golden$1,700,000$14.00
Table 13.2
13-‹#›
45

Solved Problem 2
Location costs (in millions of dollars)
Barrels of lemonade per year (in hundred thousands)
10 –
8 –
6 –
4 –
2 –
–
| | | | | | |
0 1 2 3 4 5 6
Fort Collins
Boulder
Denver
Golden
Break-even point
Break-even point
2.67

Figure 13.10
13-‹#›
46
Solved Problem 2
Aurora and Colorado Springs are dominated by Fort Collins,
because both fixed and variable costs are higher for those
communities than for Fort Collins. Englewood is dominated by
Golden.
Fort Collins is best for low volumes, Boulder for intermediate
volumes, and Denver for high volumes. Although Golden
is not dominated by any community, it is the second or third
choice over the entire range. Golden does not become the
lowest-cost choice at any volume.
13-‹#›
47
Solved Problem 2
c. The break-even point between Fort Collins and Boulder is
$1,200,000 + $15Q = $2,000,000 + $12Q
Q = 266,667 barrels per year
The break-even point between Denver and Boulder is

$3,000,000 + $10Q = $2,000,000 + $12Q
Q = 500,000 barrels per year
13-‹#›
48
Solved Problem 3
The Arid Company makes canoe paddles to serve distribution
centers in Worchester, Rochester, and Dorchester from existing
plants in Battle Creek and Cherry Creek.
Arid is considering locating a plant near the headwaters of Dee
Creek.
Annual capacity for each plant is shown in the right-hand
column of the tableau.
Transportation costs per paddle are shown in the tableau in the
small boxes.
For example, the cost to ship one paddle from Battle Creak to
Worchester is $4.37.
The optimal allocations are also shown. For example, Battle
Creek ships 12,000 units to Rochester.
What are the estimated transportation costs associated with this
allocation pattern?
13-‹#›
49
SourceDestination
CapacityWorchesterRochesterDorchesterBattle
Creek$4.37$4.25$4.8912,000Cherry

Creek$4.00$5.00$5.2710,000Dee
Creek$4.13$4.50$3.7518,000Demand6,00022,00012,00040,0001
2,0006,0004,0006,00012,000
Solved Problem 3
Figure 13.11
13-‹#›
50
Solved Problem 3The total cost is $167,000Ship 12,000 units
from Battle Creek
to Rochester @ $4.25Cost =$51,000Ship 6,000 units from
Cherry Creek
to Worchester @ $4.00Cost =$24,000Ship 4,000 units from
Cherry Creek
to Rochester @ $5.00Cost =$20,000Ship 6,000 units from Dee
Creek
to Rochester @ $4.50Cost =$27,000Ship 12,000 units from Dee
Creek
to Dorchester @ $3.75Cost =$45,000Total =$167,000
13-‹#›
51
An electronics manufacturer must expand by building a second
facility. The search is narrowed to four locations, all of which
are acceptable to management in terms of dominant factors.
Assessment of these sites in terms of seven location factors is

shown in the following table.
For example, location A has a factor score of 5 (excellent) for
labor climate; the weight for this factor (20) is the highest of
any. Calculate the weighted score for each location. Which
location should be recommended?
Solved Problem 4
13-‹#›
52
Solved Problem 4FACTOR INFORMATION FOR
ELECTRONICS MANUFACTURERFactor Score for Each
LocationLocation FactorFactor WeightABCDLabor
climate205445Quality of life162341Transportation
system163432Proximity to markets145344Proximity to
materials122334Taxes122554Utilities105433
13-‹#›
53
CALCULATING WEIGHTED SCORES FOR ELECTRONIC
MANUFACTURERWeighted Score for each LocationLocation
FactorFactor WeightABCDLabor climate20Quality of
life16Transportation system16Proximity to markets14Proximity
to materials12Taxes12Utilities10Totals100
Solved Problem
41008080100324864164864483270425656243636482460604850
403030348370374330

Based on the weighted scores shown below, location C is the
preferred site, although location B is a close second.
13-‹#›
54
This Week’s Discussions
Procter & Gamble (P&G) – What have we learned about P&G
this semester?
13-‹#›
Supply Chain Design
Chapter 12
12-‹#›
What is Supply Chain Design?
Supply Chain Design

Designing a firm’s supply chain to meet the competitive
priorities of the firm’s operations strategy.
12-‹#›
2
Creating An Effective Supply Chain
Identifying external and internal pressures
Dynamic sales volumes
Customer service and quality expectations
Service/product proliferation
Emerging markets
12-‹#›
Service/Product
Processes
Supply Chain
Link Services/Products
with Internal Processes
Link Services/Products
with External Supply Chain
Link Services/Products with Customers,
Suppliers, and Supply Chain Processes

Creating an Effective Supply Chain
Figure 12.1
12-‹#›
Supply Chain Efficiency Curve
Total costs
Supply chain performance
New supply chain efficiency curve with changes in design and
execution
Inefficient supply chain operations
Area of improved operations
Improve perform-ance
Reduce costs
Figure 12.2
12-‹#›
Service Supply Chain

Home
customers
Commercial
customers
Flowers-on-Demand florist
Packaging
Flowers: Local/International
Arrangement materials
FedEx delivery service
Local delivery service
Internet
service
Maintenance services
Figure 12.3
12-‹#›
Manufacturing Supply Chain
East Coast
West Coast
East Europe

West Europe
Retail
USA
Ireland
Distribution centers
Manufacturer
USA
Assembly
Poland
USA
Canada
Australia
Malaysia
Tier 3
Raw materials
Germany
Mexico
USA
China
Tier 2
Components

Germany
Mexico
USA
Tier 1
Major subassemblies
Figure 12.4
12-‹#›
Measuring Supply Chain Performance
Average aggregate inventory value
=
+
Value of each unit of item B
Number of units of item B typically on hand
Value of each unit of item A
Number of units of item A typically on hand
Weeks of supply =
Weekly sales (at cost)
Inventory turnover =
Annual sales (at cost)
Inventory Measures
12-‹#›

8
Ways of measuring Inventory
Units (cases, eaches, etc.)
Coverage (days, weeks, months)
Turn (how many times inventory turns over in a years time
Dollars
Hall
09- 9
12-‹#›
9
Example 12.1
The Eagle Machine Company averaged $2 million in inventory
last year, and the cost of goods sold was $10 million.
The breakout of raw materials, work-in-process, and finished
goods inventories is on the following slide.
The best inventory turnover in the company’s industry is six
turns per year. If the company has 52 business weeks per year,
how many weeks of supply were held in inventory? What was
the inventory turnover? What should the company do?
12-‹#›

Example 12.1
Figure 12.5
12-‹#›
Example 12.1
The average aggregate inventory value of $2 million translates
into 10.4 weeks of supply and 5 turns per year, calculated as
follows:
Weeks of supply =
Inventory turns =
= 10.4 weeks
$2 million
($10 million)/(52 weeks)
= 5 turns/year
$10 million
$2 million
12-‹#›
Application 12.1
A recent accounting statement showed total inventories (raw
materials + WIP + finished goods) to be $6,821,000. This year’s
“cost of goods sold” is $19.2 million. The company operates 52
weeks per year. How many weeks of supply are being held?
What is the inventory turnover?
Weeks of supply =

= = 18.5 weeks
$6,821,000
($19,200,000)/(52 weeks)
Inventory turnover =
= 2.8 turns
$19,200,000
$6,821,000
12-‹#›
Financial measures
Total revenue - How can the supply chain help to generate
additional revenues?
Cost of goods sold
Operating expenses
Cash flow
Working capital
Return on assets (ROA)
Measuring Supply Chain Performance
12-‹#›
14
SCM Decisions Affecting ROA
Return on assets (ROA)
Increase ROA with higher net income and fewer total assets

Total assets
Achieve the same or better performance with fewer assets
Working capital
Reduce working capital by reducing inventory investment, lead
times, and backlogs
Fixed assets
Reduce the number of warehouses through improved supply
chain design
Net income
Improve profits with greater revenue and lower costs
Total revenue
Increase sales through better customer service
Cost of goods sold
Reduce costs of transportation and purchased materials
Operating expenses
Reduce fixed expenses by reducing overhead associated with
supply chain operations
Net cash flows
Improve positive cash flows
by reducing lead times and backlogs

Inventory
Increase inventory turnover
Figure 12.6
12-‹#›
Strategic Options for
Supply Chain Design
Efficient supply chains
Make-to-stock (MTS)
Responsive supply chains
Assemble-to-order (ATO)
Make-to-order (MTO)
Design-to-order (DTO)
12-‹#›
EnvironmentsFactorEfficient Supply ChainsResponsive Supply
ChainsDemandPredictable, low forecast errorsUnpredictable,
high forecast errorsCompetitive prioritiesLow cost, consistent
quality, on-time deliveryDevelopment speed, fast delivery
times, customization, volume flexibility, variety, top
qualityNew-service/product
introductionInfrequentFrequentContribution
marginsLowHighProduct varietyLowHigh
Table 12.1

12-‹#›
Supply Chain Designs
Component Supplier
Manufacturer
Finished
Goods
Inventory
Customer
Supply to forecasted demand
Supply to forecast
Ship to order
Customer order
Order based on forecast
Make-to-Stock Strategy
Figure 12.7
12-‹#›
Supply Chain Designs
Component Supplier
Standardized Component
Inventory
Fabrication
Customer
Supply as needed
Customer order
Assemble-to-Order Strategy
Figure 12.8
Assembly

Supply as needed
Supply to
Forecasted
Demand
12-‹#›
Design FeaturesFactorEfficient Supply ChainsResponsive
Supply ChainsOperation strategyMake-to-stock or standardized
services or products; emphasize high volumesAssemble-to-
order, make-to-order, or customized service or products;
emphasize varietyCapacity cushionLowHighInventory
investmentLow; enable high inventory turnsAs needed to enable
fast delivery timeLead timeShorten, but do not increase
costsShorten aggressivelySupplier selectionEmphasize low
prices, consistent quality, on-time deliveryEmphasize fast
delivery time, customization, variety, volume flexibility, top
quality
Table 12.2
12-‹#›
Supply Chain Design Link to Processes
Job
Small Batch
Large Batch
Line
Continuous Flow
Process
Efficient Supply Chain

Responsive Supply Chain
Increasing supply chain flexibility
Increasing service/product volume
Service/Product Characteristics
Figure 12.9
Customized
Standardized
12-‹#›
What is Mass Customization?
Mass customization
A strategy whereby a firm’s highly divergent processes generate
a wide variety of customized services or products at reasonably
low costs.
12-‹#›
Mass Customization
Competitive advantages
Managing customer relationships
Eliminating finished goods inventory
Increasing perceived value of services or products
Supply chain design for mass customization
Assemble-to-order strategy
Modular design
Postponement
Channel Assembly

12-‹#›
Outsourcing Processes
Outsourcing
Paying suppliers and distributors to perform processes and
provide needed services and materials
Offshoring
A supply chain strategy that involves moving processes to
another country
Next-Shoring
A supply chain strategy that involves locating processes in close
proximity to customer demand or product R&D
12-‹#›
Outsourcing Decision Factors
Comparative Labor Costs
Rework and Product Returns
Logistics Costs
Tariffs and Taxes
Market Effects
Labor Laws and Unions
Internet
Energy Costs
Access to Low Cost Capital
Supply Chain Complexity
12-‹#›

Outsourcing Potential Pitfalls
Pulling the Plug too Quickly
Technology Transfer
Process Integration
12-‹#›
Outsourcing Processes
Vertical integration
Backward integration
Forward integration
Make-or-buy decision
12-‹#›
Example 12.2
Thompson manufacturing produces industrial scales for the
electronics industry. Management is considering outsourcing the
shipping operation to a logistics provider experienced in the
electronics industry. Thompson’s annual fixed costs of the
shipping operation are $1,500,000, which includes costs of the
equipment and infrastructure for the operation. The estimated
variable cost of shipping the scales with the in-house operation
is $4.50 per ton-mile. If Thompson outsourced the operation to
Carter Trucking, the annual fixed costs of the infrastructure and

management time needed to manage the contract would be
$250,000. Carter would charge $8.50 per ton-mile. What is the
break-even quantity?
12-‹#›
28
Example 12.2
Q =
Fm – Fb
cb – cm
= 312,500 ton-miles
=
1,500,000 – 250,000
8.50 – 4.50
12-‹#›
29
Solved Problem
A firm’s cost of goods sold last year was $3,410,000, and the
firm operates 52 weeks per year. It carries seven items in
inventory: three raw materials, two work-in-process items, and
two finished goods. The following table contains last year’s
average inventory level for each item, along with its value.
a. What is the average aggregate inventory value?

b. How many weeks of supply does the firm maintain?
c. What was the inventory turnover last year?CategoryPart
NumberAverage LevelUnit ValueRaw materials1 15,000 $
3.002 2,500 5.003 3,000 1.00Work-in-process4
5,000 14.005 4,000 18.00Finished goods6
2,000 48.007 1,000 62.00
12-‹#›
30
Solved Problem
a.$ 45,000 12,500 3,000 70,000 72,000 96,000
62,000 $360,500Part NumberAverage LevelUnit
ValueTotal Value1 $ 3.00=2 5.00=3
1.00=4 14.00=5
18.00=6 48.00=7 62.00=Average
aggregate inventory value=
12-‹#›
31
Solved Problem
b. Average weekly sales at cost = $3,410,000/52 weeks
= $65,577/week
Weeks of supply =

= = 5.5 weeks
$360,500
$65,577
c. Inventory turnover =
Annual sales (at cost)
= = 9.5 turns
$3,410,000
$360,500
12-‹#›
32
Resource Planning
Chapter 11
11-‹#›
What is Resource Planning?

Resource Planning
A process that takes sales and operations plans; processes
information in the way of time standards, routings, and other
information on how services or products are produced; and then
plans the input requirements
11-‹#›
2
Material Requirements Planning (MRP)
A computerized information developed specifically to help
manufacturers manage dependent demand inventory and
schedule replenishment orders
MRP Explosion
A process that converts the requirements of various final
products into a material requirements plan that specifies the
replenishment schedules of all the subassemblies, components,
and raw materials needed to produce final products
Materials Requirements Planning
11-‹#›
3

Inventory
transactions
Inventory
records
Bills of
materials
Engineering
and process
designs
Other
sources
of demand
Authorized
master production
schedule
Material
requirements
plan
MRP
explosion
MRP Inputs
Figure 11.1

11-‹#›
4
Material Requirements Planning
Dependent demand
The demand for an item that occurs because the quantity
required varies with the production plans for other items held in
the firm’s inventory
Parent
An product that is manufactured from one or more components
Component
An item that goes through one or more operations to be
transformed into or become part of one or more parents
11-‹#›
Material Requirements Planning
| | | | | | | | | |
1 5 10
Day
2,000 –
1,500 –
1,000 –
500 –
0

Bicycles
(a) Parent inventory
Reorder point
Order
1,000 on
day 3
Order
1,000 on
day 8
(b) Component demand
2,000 –
1,500 –
1,000 –
500 –
0
Rims
| | | | | | | | | |
1 5 10
Day
Figure 11.2
11-‹#›
6

Master Production Scheduling
Master Production Schedule (MPS)
A part of the material requirements plan that details how many
end items will be produced within specified periods of time
In a Master Production Schedule:
Sums of quantities must equal sales and operations plan.
Production quantities must be allocated efficiently over time.
Capacity limitations and bottlenecks may determine the timing
and size of MPS quantities.
11-‹#›
7
Master Production Scheduling AprilMay12345678Ladder-back
chairKitchen chairDesk chairAggregate production plans for
chair family
150
150
120
120
200
200
200
200
670
670
Figure 11.3

11-‹#›
8
No
Material
requirements
planning
Yes
Authorized master
production
schedule
Are resources
available?
Prospective master
production
schedule
Authorized
production
plan
Figure 11.4
11-‹#›

9
Step 1: Calculate projected on-hand inventories
=
+
–
Projected on-hand
inventory at end
of this week
On-hand
inventory at
end of last week
MPS quantity
due at start
of this week
Projected
requirements
this week
where:
Projected requirements = Max(Forecast, Customer Orders
Booked)
=
Inventory
+
55 chairs
currently
in stock
–

MPS quantity
(0 for week 1)
38 chairs already
promised for
delivery in week 1
= 17 chairs
Developing a Master Production Schedule
11-‹#›
Item: Ladder-back chair
Quantity on Hand:
Forecast
Customer orders (booked)
Projected on-hand inventory
MPS quantity
MPS start
April
1
2

55
30
30
38
27
17
–13
0
0
Explanation:
Forecast is less than booked orders in week 1; projected on-
hand inventory balance
= 55 + 0 – 38 = 17.
Explanation:
Forecast exceeds booked orders in week 2; projected on-hand
inventory balance = 17 + 0 – 30 = –13. The shortage signals a
need to schedule an MPS quantity for completion in week 2.
Figure 11.6
11-‹#›
The goal is to maintain a nonnegative projected on-hand
inventory balance
As shortages in inventory are detected, MPS quantities should
be scheduled to cover them
Step 2: Determine the timing and size of MPS quantities
=
Inventory
17 chairs in
inventory at the
end of week 1

+
MPS quantity
of 150 chairs
–
Forecast of
30 chairs
= 137 chairs
Developing a Master Production Schedule
11-‹#›
Order Policy: 150 units

Lead Time: 1 week
1
2
3
4
5
6
7
8
April
Forecast
Customer
orders booked
MPS quantity
MPS start
Quantity
on Hand:
30
38
30
27
30
24
30
8
0
35
0
35
0
0
35
35
55

May
17
137
107
77
42
7
122
87
0
150
0
0
0
0
150
0
150
0
0
0
0
150
0
0
Explanation:
On-hand inventory balance = 17 + 150 – 30 = 137. The MPS
quantity is needed to avoid a shortage of 30 – 17 = 13 chairs in
week 2.
Explanation:
The time needed to assemble 150 chairs is 1 week. The
assembly department must start assembling chairs in week 1 to
have them ready by week 2.
Figure 11.7

11-‹#›
13
Available-to-promise (ATP) inventory
The quantity of end items that marketing can promise to deliver
on specific dates
It is the difference between the customer orders already booked
and the quantity that operations is planning to produce
Freezing the MPS
Disallow changes to the near-term portion of the MPS
Reconciling the MPS with Sales and Operations Plans
11-‹#›

Order Policy: 150 units
Lead Time: 1 week
1
2
3
4
5
6
7
8
April
Forecast
Customer
orders booked
MPS quantity
MPS start
Quantity
on Hand:
30
38
30
27
30
24

30
8
0
35
0
35
0
0
35
35
55
May
17
137
107
77
42
7
122
87
0
150
0
0
0
0
150
0
150
0
0
0
0
150
0
0

Available-to-promise (ATP)
inventory
17
91
150
Explanation:
The total of customer orders booked until the next MPS receipt
is 38 units. The ATP = 55 (on-hand) + 0 (MPS quantity) – 38 =
17.
Explanation:
The total of customer orders booked until the next MPS receipt
is 27 + 24 + 8 = 59 units. The ATP = 150 (MPS quantity) – 59 =
91 units..
Figure 11.8
11-‹#›
15
Application 11.1
Determine the MPS for Product A that has a 50-unit policy and
55 units on hand.
The demand forecast and booked orders are shown in the
partially completed plan.
The lead time is one week.

11-‹#›
Application 11.1
Item: Product AOrder Policy: 50 unitsLead Time: 1
weekQuantity on Hand
5512345678910Forecast201040100030204020Customer orders
(booked)302058020000Projected on-hand inventoryMPS
quantityMPS startAvailable-to-promise (ATP) inventory
2555015553233134350505050505050
5
35
50
50
50
11-‹#›
17
Bill of Materials
A record of all the components of an item, the parent-
component relationships, and the usage quantities derived from
engineering and process designs
End items
Intermediate items
Subassemblies
Purchased items
Part commonality (sometimes called standardization of parts or
modularity)
MRP Explosion

11-‹#›
18
Seat cushion
Seat-frame boards
Front legs
A
Ladder-back chair
Back legs
Leg supports
Back slats
MRP Explosion
Bill of Materials for a Ladder-Back Chair
Figure 11.10
11-‹#›
19
J (4)
Seat-frame boards
MRP Explosion

G (4)
Back slats
F (2)
Back legs
I (1)
Seat cushion
H (1)
Seat frame
C (1)
Seat
subassembly
D (2)
Front
legs
B (1)
Ladder-back
subassembly
E (4)
Leg
supports
A
Ladder-back
chair
Figure 11.10
Bill of Materials for a Ladder-Back Chair
11-‹#›

20
MRP Explosion
Inventory record
A record that shows an item’s lot-size policy, lead time, and
various time-phased data.
11-‹#›
21
MRP Explosion
The time-phase information contained in the inventory record
consists of:
Gross requirements
Scheduled receipts
Planned receipts
Planned order releases
=
+
–

Projected on-hand
inventory balance
at end of week t
Inventory on
hand at end of
week t–1
Scheduled or planned receipts in week t
Gross
requirements
in week t
11-‹#›
22
MRP Explosion
The on-hand inventory calculations for each week in the
following slide are as follows
Week 1: 37 + 230 – 150 = 117
Weeks 2 and 3: 117 + 0 – 0 = 117
Week 4: 117 + 0 – 120 = –3
Week 5: –3 + 0 – 0 = –3
Week 6: –3 + 0 – 150 = –153
Week 7: –153 + 0 – 120 = –273
Week 8: –273 + 0 – 0 = –273

11-‹#›
23
MRP ExplosionItem: C
Description: Seat subassemblyLot Size: 230 units
Lead Time: 2 weeksWeek12345678Gross
requirements0000Scheduled
receipts0000000Projected
on-hand
inventory117117–3–3–153–273–273Planned
receiptsPlanned order releases
Explanation:
Gross requirements are the total demand for the two chairs.
Projected on-hand inventory in week 1 is 37 + 230 – 150 = 117
units.
37
120
120
150
150
117
230
Figure 11.11
11-‹#›
24
MRP ExplosionItem: C

Description: Seat subassemblyLot Size: 230 units
receipts23000Projected
on-hand
inventory117117117Planned
37
Without a planned receipt in week 4, a shortage of 3 units will
occur: 117 + 0 + 0 – 120 = –3 units. Adding the planned receipt
brings the balance to 117 + 0 + 230 – 120 = 227 units.
The first planned receipt lasts until week 7, when projected
inventory would drop to 77 + 0 + 0 – 120 = –43 units. Adding
the second planned receipt brings the balance to 77 + 0 + 230 –
120 = 187 units.
120
0
227
230
230
230
230
187
120
0
77015000227
00187
Figure 11.12
11-‹#›

25
Planning lead time
An estimate of the time between placing an order and receiving
the item in inventory.
Planning lead time consists of estimates for:
Setup time
Processing time
Materials handling time between operations
Waiting time
Planning Factors
11-‹#›
26
Lot-sizing rules
Fixed order quantity (FQO) rule maintains the same order
quantity each time an order is issued
Could be determined by quantity discounts, truckload capacity,
minimum purchases, or EOQ
Planning Factors
11-‹#›
27

Lot-sizing rules
Periodic order quantity (POQ) rule allows a different order
quantity for each order issued but issues the order for
predetermined time intervals
Planning Factors
=
–
POQ lot size
to arrive in
week t
Total gross requirements
for P week, including
week t
Projected on-hand
inventory balance at
end of week t–1
11-‹#›
28
Planning Factors
=
–
(POQ lot size)
Gross requirements
for weeks
4, 5, and 6

Inventory at
end of week 3
Using P = 3:
(POQ lot size) = (120 + 0 + 150) – 117 = 153 units
11-‹#›
29
Planning Factors
Figure 11.13
Using POQ Rule
11-‹#›
30
Planning Factors
=
–
L4L lot size
to arrive in
week t
Gross requirements
for week t
Projected on-hand

inventory balance at
end of week t – 1
=
–
(L4L lot size)
Gross requirements
in week 4
Inventory balance
at end of week 3
(L4L lot size) = 120 – 117 = 3 units
Lot-sizing rules
Lot-for-lot (L4L) rule under which the lot size ordered covers
the gross requirements of a single week
11-‹#›
31
Planning Factors
Figure 11.14
11-‹#›
32

Application 11.2Item: H10-A
Description: Chair seat assemblyLot Size: FOQ = 80 units
receipts80Projected
on-hand
inventoryPlanned
20204040404055
Item H10-A is a produced item (not purchased) with an order
quantity of 80 units. Complete the rest of its MRP record using
the fixed order quantity (FOQ) rule
80
80
40
40
80
80
60
11-‹#›
Application 11.3
Now complete the H10-A record using a POQ rule. The P
should give an average lot size of 80 units.
Assume the average weekly requirements are 20 units.
P = = 4 weeks
80
20

11-‹#›
Application 11.3Item: H10-A
Description: Chair seat assembly Lot Size: POQ = 4
receipts80Projected
on-hand
inventoryPlanned
20204040404055
100
100
60
60
0
11-‹#›
Application 11.4
Revise the H10-A record using the lot-for-lot (L4L) Rule.
(Complete the highlighted section)Item: H10-A
Description: Chair seat assemblyLot Size: L4L
receipts80Projected
on-hand
inventoryPlanned
receiptsPlanned order releases204040404055
20
40
40
0

0
60
60
0
11-‹#›
Comparing lot-sizing rules
Planning Factors
FOQ:
= 181 units
227 + 227 + 77 + 187 + 187
5
POQ:
= 60 units
150 + 150 + 0 + 0 + 0
5
L4L:
= 0 units
0 + 0 + 0 + 0 + 0
5
11-‹#›
37
Lot sizes affect inventory, setup, and ordering costs
The FOQ rule generates a high level of average inventory

because it creates inventory remnants.
The POQ rule reduces the amount of average on-hand inventory
because it does a better job of matching order quantity to
requirements.
The L4L rule minimizes inventory investment, but it also
maximizes the number of orders placed.
Planning Factors
11-‹#›
38
Planning Factors
Safety stock for dependent demand items with lumpy demand
(gross requirements) is helpful only when future gross
requirements, the timing or size of scheduled receipts, and the
amount of scrap that will be produced are uncertain.
Used for end items and purchased items to protect against
fluctuating customer orders and unreliable suppliers of
components but avoid using it as much as possible for
intermediate items.
11-‹#›
Planning Factors
Safety Stock
Figure 11.15

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