50 file4 annex_2.4-scm

Day-1
Definition, Nature and Principles of
Supply Chain Management (SCM)Supply Chain Management (SCM)
Session Speaker
K.M. Sharath Kumar
1M.S Ramaiah School of Advanced Studies - Bangalore
K.M. Sharath Kumar

Session Objectives
• To understand the role of Supply Chain Management in
Manufacturing and Service OrganisationsManufacturing and Service Organisations
• To critique the impact of Supply Chain in gaining• To critique the impact of Supply Chain in gaining
competitive advantage
• To assimilate the legal framework and negotiation tactics
in cross-border transactionsin cross border transactions

Session Outline
Hi t f l i ti d S l Ch i M t (SCM)• History of logistics and Supply Chain Management (SCM)
• Objectives of SCM
Ch ll d i i i M hi T l i d• Challenges and opportunities in Machine Tool industry
supply chain
• Kraljic’s matri• Kraljic’s matrix
• Cross-border negotiation
L l f k i b d ti ti• Legal framework in cross border negotiation

Rationale for SCM
Adding Value in Every Thing We DoAdding Value in Every Thing We Do

Rationale for Logistics and Supply Chain
Management (SCM)g ( )
• Defeat of the British in the American war of Independence:
At the height of war, 12000 troops had to be equipped and fedAt the height of war, 12000 troops had to be equipped and fed
from the far away Britain.
• Gulf war in 1991: Half a million people and half a million
tones of equipment had to be airlifted 12,000 km with a furthero es o equ p e ad o be a ed ,000 w a u e
2.3 million tones of equipment moved by sea- all in impossible
time frames.

Supply Chain Management (SCM)-Supply Chain Management (SCM)
Definition
Here are two definitions:
h fThe design and management of seamless, value-added
process across organisational boundaries to meet the real
needs of the end customerneeds of the end customer
- Institute for Supply Management

Supply Chain Management (SCM)-Supply Chain Management (SCM)
Definition
Managing supply and demand,
sourcing raw materials and parts,
manufacturing and assembly,
warehousing and inventory tracking,
order entry and order management,
distribution across all channels, and
delivery to the customer.
-The Supply Chain Council

SCM : Schematic

Evolutionary Timeline of SCM

A business process
Cost
Performance
Timeliness
Product Interface
Performance
T h l I t fS i I t f
Customer
S i I t f Technology InterfaceService InterfaceService Interface
O i i P dOrganisation
Individual Society AutomationProcesses
Products

Value created and addedValue created and added
by outside firm providing
MIS
Value created
and delivered
by
Value created
and delivered
by
Value
created
and
Value
created by
purchasing
and materials
management
by
production/
operations
management
delivered
by
Finance,
HR and
Total value
created
and
delivered
for
created
and
delivered
by
supplier
Marketing
for
customer
Value created and added
by outside firm providing
Logistics
12
Logistics
M.S Ramaiah School of Advanced Studies - Bangalore

SUPPLY CHAIN
Customer
SUPPLY CHAIN
Customer
Enterprise
Processes
Supplier
Enquiries
Quotations
OrdersSupplier Orders
Supplies
Invoices
Money
13
Money

One Variant
6,200 Distinct Parts
Imported from 17 CountriesImported from 17 Countries
From 240 Suppliers
Assembled in 1 Plant
Within few minutes
Exported to 34 Countries
Same daySame day
Without becoming inventory!
Suzuki Grand Vitara
14

Competition is no longer betweenCompetition is no longer betweenCompetition is no longer betweenCompetition is no longer between
Companies:Companies:
It is between supply chainsIt is between supply chains

Value Chain

1
CostCost
1
P l
2 3
People
QualityQuality TechnologyTechnology
Delivery
& Service
Delivery
& Service
4
& Service& Service

Succeed in Technology bySucceed in Technology by
Connecting with People

2010 Onwards
Achieve Competitive Advantage by:p g y
Focusing on both Core and Non-
Core CompetenciesCore Competencies
Ford Company Scenario

Aston Martin

Ford India introduces its Roadside
Assistance (RSA) service in Agra
- 21 July 2010, Business Line

Riding Solo, Honda Shifts to Top Gear on 2-Riding Solo, Honda Shifts to Top Gear on 2
wheelers
Company to focus on new models, expandp y f , p
dealer network
Mr Shinji AoyamaS j oy
Source: Business Line, 5 January 2011

We have combined the leading edge technology of Nissan
ith A h k L l d Li it d' d li bilit twith Ashok Leyland Limited's delivery capability to
l t th j t i t ff ti "complete the project in a cost effective manner".
Nissan Motor senior vice President and theNissan Motor senior vice President and the
JV chairman
Dr. Andy Palmer
24
y

Alto in India is Rs 1 lakhAlto in India is Rs. 1 lakh
cheaper than in Chinap
- Shinzo Nakanishi,Shinzo Nakanishi,
MD and CEO of MSIL
(09 A 2010 E i Ti )
25
(09 Aug 2010, Economic Times)

Customers get Ambushed

Ambushed Every Where

What SCM is not ?What SCM is not ?
SCM is not :SCM is not :
• Buying
• Developing suppliers o Blind man touchingDeveloping suppliers
• Logistics
• Warehousing
o Blind man touching
elephant
o All these together ?
• Inventory Control
• Kanban
M k B d i i
g
• Make-Buy decision
• Manufacturing
• Distribution

Bottom line SituationBottom-line Situation
SCM l k t th f b i i t d• SCM looks at the process from beginning to end
holistically in a seamless way instead of glorifying
unduly/underplaying an in-between event as stand aloney p y g
• The customer does not see, does not have to see, the
glorification of any event. He just wants the product/service
early and cheap. He is not impressed if you just improve the
situation by working on logistics or shorten the manufacturingsituation by working on logistics, or shorten the manufacturing
lead time or you do all and even more, but still do not deliver
results.

Some ExamplesSome Examples
– You get Dell laptop in 10 days after ordering. They in turnou ge e p op 0 d ys e o de g. ey u
order all parts to their vendors only after you order.
Incidentally the beautiful consignment reaches your
doorsteps.
– Seven KMs above ground level, on a London bound flight
from Bangalore at 7 am, when Thames is almost in sight,
you get Vada Sambar very tasty more or less so at leastyou get Vada Sambar, very tasty, more or less so at least.
Sitting in Bangalore through internet you book a 2nd class– Sitting in Bangalore, through internet you book a 2nd class
ticket from Varanasi to Pratabgarh ten days before. The
ticket is delivered to your e-mail ID.

SCM is at play behind all thisSCM is at play behind all this
amazing transformation in
Value Chain

Fit Between Corporate and Functionalp
Strategies (Chopra & Meindl)
Corporate Competitive Strategy
Supply ChainProduct Marketingpp y
or Operations
Strategy
Development
Strategy
Marketing
and Sales
Strategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy

The primary “drivers” for achieving strategic fitThe primary drivers for achieving strategic fit
in Supply Chain Strategy
(adapted from Chopra & Meindl)(adapted from Chopra & Meindl)
Corporate Strategy
Supply Chain Strategypp y gy
Efficiency Responsiveness
Facilities Inventory Transportation Information
Market
S t ti
33
y p
Segmentation

Importance of Supply Chain Management?Importance of Supply Chain Management?
–Cont.
Firms with Supply Chain Management:
1 Start with key suppliers and move on to1. Start with key suppliers and move on to
other suppliers.
2 Similar protocol for customers and2. Similar protocol for customers and
shippers as well.
3. Integrate second tier suppliers and3. Integrate second tier suppliers and
customers.
(second tier refers to the customer’s(
customers and the supplier’s
suppliers)

Objectives of SCM

Objectives of a Supply Chain
• Maximise overall value created
- Supply chain value: difference between what the finalpp y
product is worth to the customer and the effort the supply
chain expends in filling the customer’s request
V l i l t d t l h i fit bilit- Value is correlated to supply chain profitability
(difference between revenue generated from the customer and
the overall cost across the supply chain)pp y )
- Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Increase Supply chain profitability (total profit to be shared
across all stages of the s ppl chain)across all stages of the supply chain)
• Balance Supply and Demand
38
• Balance Supply and Demand

Components of Supply Chain
ManagementManagement

Supply Chain
• Organisations must embrace technologies that can
ff i l d h i l h ieffectively manage and oversee their supply chains
Distribution or disposal

Benefits of SCM
 I t d ti Inventory reduction
 Productivity Improvement
 P l d ti Personnel reduction
 Cost reduction
 High customer satisfaction High customer satisfaction
 Increased profit
 On time delivery fulfillment On-time delivery fulfillment
 Revenue/profit increase
 Better cash management Better cash management
 Better order management

Past and FuturePast and Future
• GLOBALISATIONG O S ON
– Whether for buying or selling, no one confines to his own
country these days.y y
• 50% under garments in the world are from Tiruppur, India
• In Indian Super markets, imported potato wafers compete with
l l b dlocal brands.
• Roses are exported from India daily.
• Many international brands of Gadgets to day do not put placeMany international brands of Gadgets to day do not put place
of manufacture any more because they cannot assign any one
country for adding maximum value in the supply chain. E.q.,
Philips– Philips
– Black and Decker

Supply Chain Competitiveness
C i• Competitor
• Competition
• Competitiveness

Source: Presentation from K.C. Manjunath, GE-Triveni

Supply Chain Competitiveness : Toyota Way
“When Toyota developed Prius hybrid car, a core part of
computer system, Insulated Gate Bipolar Transistor had to be
developed.
Toyota was not good at semiconductors. But they decided to
develop and put up a new plant for Manufacture. Why?
Toyota wanted ‘Self-reliance’ as this Technology would lead to
f t & ill i th titi d t “future & will give them competitive advantage “

SCM : Activities

Effects of Supply Chain Problems
 Problems with the Supply Chain have caused armies to lose
wars & companies to go out of business, for example…p g , f p
I WWII G
In 1999 ToysRUS
had problems
In WWII, Germany
encountered
problems supplying
supplying to
holiday shoppers
& lost business
problems supplying
troops in Russia,
which contributed to
their collapse & lost business.their collapse.

Sources of Supply Chain Problems
UNCERTAINTY POOR COORDINATION
 In demand forecast
 With Internal units and
business partners
 In delivery times &
production delays
 Ineffective customer
service
production delays
 High inventory costs,
loss of revenue & extra
cost for expediting
iservices.

B ll hi D H dBull whip or Dragon Head

B ll hip EffectBullwhip Effect
Occurs when slight demand variability is magnified asOccurs when slight demand variability is magnified as
information moves back upstream

Equilibrium & Bull whipped
Information
q pp
Information
Suppliers Producers Distributors Retailers
Products &
Services
Products &
Services
Products &
Services
10 Units 10 Units 10 Units
Suppliers Producers Distributors Retailers
Products &
Services
Products &
Services
Products &
Services
Cash
Cash
Suppliers
Information Flow
SuppliersSuppliersSuppliers
Retailers
Distributors
Producers
Suppliers
20 Units
Products &
Services
40 Units
Products &
Services
Products &
Services
80 Units
Producers
Suppliers
Distributors
Producers
Suppliers
Retailers
Distributors
Producers
Suppliers
20 Units40 Units80 Units
Cash Flow
40 Units160 Units 80 Units 40 Units80 Units160 Units 40 Units80 Units

Shrinking Uncertainty in SC
Source:

Buyer-Supplier Relationship
“Exit – Voice – Loyalty”Exit Voice Loyalty

Sustainability is the WaySustainability is the Way
Forward
Mulling new supplier system tog pp y
minimise natural disaster: Boeing
Source: 4 July 2011, Reuters

Evolution of the Indian Machine ToolEvolution of the Indian Machine Tool
Industry
Ph 1 Th E l Y (th l t )• Phase 1: The Early Years (three clusters)
Ph 2 E d f th G ld Y• Phase 2 : End of the Golden Years
Ph 3 1968 1983 A I i l T h l• Phase 3 – 1968 to 1983: Access to International Technology
via Collaborations becomes Difficult
• Phase 4 : The 1980s Open General License (OGL)
• Phase 5 – The 1990s: The Liberalisation Years

Introduction to Machine Tool Industryy
• Indian Machine tool industry grew 13% annually over 2008-11
(TAGMA)(TAGMA)
• Indian Machine tool makers target 67% domestic market share• Indian Machine tool makers target 67% domestic market share
by 2020 (IMTMA)
• As per available statistics (4th Census of MSME Sector), this
sector employs an estimated 59.7 million persons spread overp y p p
26.1 million enterprises
• It is estimated that in terms of value, MSME sector accounts
for about 45% of the manufacturing output and around 40% of
57
the total export of the country

International Comparison of Machine ToolInternational Comparison of Machine Tool
Industries
• Japan:• Japan:
- Massive and low cost production with higher reliability
and flexibility CNC machine toolsy
- Collaborative development of components with
li h b id d i b ioversea suppliers has been considered important business
• Germany:Germany:
- Associations play an important role in promoting
collaborations
- Industrial policies have been effective in strengthening
upstream, downstream supply chains and collaborations

International Comparison of Machine ToolInternational Comparison of Machine Tool
Industries Contd.
• Italy:• Italy:
- Innovation networks have been in the form of clusters
• USA:
- Composed of SMEs
- Grappling because of lack of coordination in technology
d di istandardisation
- Short term transaction relationship between
manufacturer supplier and clientsmanufacturer, supplier and clients
• China:
- Picked up from 1995 in the form of scattered SMEs
- Further diversified into metal cutting and metal forming
i d t
industry

Auto sector to drive Die andAuto sector to drive Die and
Machine Tool Industry in Indiay
constitutes 50% of Die & Machineconstitutes 50% of Die & Machine
Tool market
TAGMA d IMTMA- TAGMA and IMTMA

An Estimate of Potential aboutAn Estimate of Potential about
Machine Tool Industry
The two-wheeler industry adding a capacity of
700,000 vehicles every year, calls for an overall
investment of close to Rs 1,000 crore (Rs 10 billion)
per annum, of which at least 60 per cent would be
in the form of machine tools.
Source:Sou ce:

Machine Tool Industry SC Challenges
D t it t i t i I di hi t l i d t i• Due to capacity constraints in Indian machine tool industries,
European, Taiwanese and Korean machine tool makers are
harvesting the Indian ordersharvesting the Indian orders
• With the need to frequently introduce new models as aWith the need to frequently introduce new models as a
competitive measure, design and supply of such machine
tools needs to be intact with high flexibility
• Vendors rarely stick to delivery commitments in comparisony y p
with international counterparts

Machine Tool Industry SC ChallengesMachine Tool Industry SC Challenges
Contd.
N d t i t b t ti ll i IT th b i id• Need to invest substantially more in IT on the business side,
such as SCM and CRM in order to handle complaints before
they become a source of frictionthey become a source of friction
• Change relationships with parts vendors to become partnersChange relationships with parts vendors to become partners
in development rather than not being just customers
• Many critical components of a modern CNC machine tool
are not made in the countryy

Machine Tool Industry SC ChallengesMachine Tool Industry SC Challenges
Contd.
S hi ti t d hi h t d t lif l d• Sophisticated machinery, short product life-cycles, and
demanding user requirements have increased competition in
the machine tool marketthe machine tool market
• Small and medium enterprises (SMEs) face problems inSmall and medium enterprises (SMEs) face problems in
coordinating their supply chain due to lack of resources and
improper directions

A Case
Bharat Fritz Werner Ltd. was able to developp
and deliver, a complex nine-axis CNC multi-
tasking machine for machining rear axletasking machine for machining rear axle
housings of commercial vehicles in a single
tset up

Machine Tool Industry SC Opportunities
T h l t i t d i ti l t thi d f• Two-wheeler sector is today importing nearly two-thirds of
its requirements of machine tools
• Improve delivery capability through better internal practices
by maximising in-built capacityby maximising in built capacity
• Scope for exporting machine tools from here to countries• Scope for exporting machine tools from here to countries
such as Poland, Czechoslovakia and Turkey, which are
emerging as major auto component suppliers to westerng g j p pp
Europe and west Asia, despite competition from Taiwan and
Korea

Machine Tool Industry SC OpportunitiesMachine Tool Industry SC Opportunities
Contd.
D t h t i f d t' lif l i t• Due to shortening of a product's life cycle, companies are to
focus on their service offers in order to ensure an advantage
in competitionin competition
• Scope for collaborative design of tools digitalScope for collaborative design of tools, digital
manufacturing systems, and integrated production
management systems, to augment new products to market
• Strategic collaborations by integrating the upstream,g y g g p
midstream, and downstream parts of their supply chains

Machine Tool Industry SC OpportunitiesMachine Tool Industry SC Opportunities
Contd.
• Specialisation and coordination mechanism for technological
innovation have been dynamically evolvinginnovation have been dynamically evolving
• Export opportunity exists to step up share of exports in the• Export opportunity exists to step up share of exports in the
world market due to price competitiveness

UK Manufacturers Take on the
Supply Chain Challenge
Present ScenarioPresent Scenario
(12 January 2012)
Source: MTD Website

Rationale for the Study
SMEs should focus on information flow and
t l d t di th bmutual understanding among the members
of supply chain
Source: Rajesh K SinghSource: Rajesh K. Singh
Indian Institute of Foreign Trade (IIFT), New Delhi,
Business Process Management Journal, Vol. 17 No. 4, 2011,pp. 619-638
70
g , , ,pp

Efficient Consumer Response (ECR)
• Consumer: An orientation toward the needs of the
consumer
• Efficient Response: A process oriented
optimisation of the supply chainoptimisation of the supply chain

Efficient Consumer Response (ECR)
V ti l ll b ti i f t i d• Vertical collaboration in manufacturing and
retailing with the objective of an efficient
ti f ti f dsatisfaction of consumer needs
• All efforts should stand towards improved customer
satisfaction
Source: Dr Dirk SeifertSource: Dr. Dirk Seifert
Harvard Business School

Concept of ECR in SCM
• Efficient replenishment
• Efficient administration• Efficient administration
• Efficient operating standards

Collaborative Planning Forecasting Replenishment
(CPFR)
Definition:f
Sharing of forecast and related business information among
trading partners in the supply chain to enable automatic product
replenishmentreplenishment.
American Production and Inventory Control Society (APICS).
Objective of CPFR- optimize supply chain through improved
demand forecasts, with the right product delivered at right time to
the right location, with reduced inventories, avoidance of stock-the right location, with reduced inventories, avoidance of stock
outs, & improved customer service.
Value of CPFR- broad and open exchange of forecasting
information to improve forecasting accuracy where both the buyerinformation to improve forecasting accuracy where both the buyer
and seller collaborate through joint knowledge of base sales,
promotions, store openings or closings, & new product
introductions
74 M.S Ramaiah School of Advanced Studies - Bangalore
introductions.

Wal-Mart, Warner-Lambert,
SAP
H d i VAATZ CHyundai – VAATZ Concept
Open Standards,Broad Requirements &
S t ti I t tiSystematic Integration

What Collaboration Should Be?
“ D Thi Diff tl ”“ Do Things Differently”
• B2B Extranet Planning Systems
• Competitive Advantage-StrategicCompetitive Advantage Strategic
• Competitive Duration-Medium to Long
D i C t Eli i ti th h• Drivers-Cost Elimination through
synchronization
• Barriers-Medium Technology;Large People

THE CPFR 9 STEPSTHE CPFR 9 STEPS
•Develop Collaborative Arrangementp g
•What info are we going to Share?
•Create Joint Business PlanCreate Joint Business Plan
• How are we going to do business?
•Create Sales Forecast –
•What does the future look like?
•Identify Exceptions for Sales Forecast –
•What we know that the supplier doesn’t
•What the supplier knows that we don’t

THE CPFR 9 STEPS..contd
• Resolve/Collaborate on Exception Items
• How are we going to overcome the
exceptions?
C O• Create Order Forecast
• What can we live with and move forward
with?
• Identify Exceptions for Order Forecast
R l /C ll b t E ti• Resolve/Collaborate on Exception
Items
• Generate the Orders

BEFORE CPFR – LIMITED COLLABORATIONBEFORE CPFR LIMITED COLLABORATION
O dOrder
1.
22
Government Vendor
Characteristics:Characteristics:
•Limited visibility of future demand
requirements
Inventories to buffer against
unexpected demand
• Both partners forecast independently
• Outages cause adversarial relationships
unexpected demand

POST CPFR
Government
Collaborative Joint Business Sales Forecast Firm Order
Government
Order
Retailer
Sales
Forecast
Supplier
Sales
Forecast
Joint Sal;es
Forecast Display Units
Needed On-
Hand On-Hand Receipt Need
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0
OrderOrderOrder
Collaborative
Arrangement
Joint Business
Plan
Sales Forecast
Collaboration
Firm Order
Past Fzn Zone
Order Forecasts with tolerances
0 61 61
0 989 0 989
2,559 1,855 0 1,855
2,993 3,492 2,773 719
3,656 7,166 10,845 -3,679
9,208 0
3,848 7,308 15,146 -7,838
3,400 10,273 14,840 -4,567
3,724 361 15,735 22,124 -6,389
3,016 361 14,719 21,803 -7,084
13,988 0
Characteristics:
•Dual insights provide a better forecast demand
• Long term view of demand requirements
• Both partners jointly forecast
Vendor
p j y
• Earlier visibility of issues through the exceptions
• Monitor POS data via the private exchange/web
portal; compare to forecast
p ; p
• Focus of relationship becomes win-win

Summaryy
In order to smoothen the supply chain “bull whip”, we needpp y p ,
accurate visibility of demands:
• CPFR is an industry standard “guideline” for collaboration
• Collaboration requires “trust”q
• Collaboration is a transformational strategy
–Roles and responsibilities can change–Roles and responsibilities can change
• Collaboration facilitates long-term B2B relationships
C ll b ti t hi t b i / i• Collaborative partnerships must be win / win
• Collaborative benefits can be huge!

Global Supply ChainsGlobal Supply Chains
 Some of the issues involved in
global supply chains;global supply chains;
 legal issues, customs fees
and taxes
Global Supply Chains = Supply
 language and cultural
differences
 fast changes in currencyGlobal Supply Chains = Supply
chains that involve suppliers
and/or customers in other
fast changes in currency
exchange rates
 political instabilities.
countries.

Principles and Standards for EthicalPrinciples and Standards for EthicalPrinciples and Standards for EthicalPrinciples and Standards for Ethical
Supply Management ConductSupply Management Conductpp y gpp y g
LOYALTY TO YOUR ORGANISATIONLOYALTY TO YOUR ORGANISATION
JUSTICE TO THOSE WITH WHOM YOUJUSTICE TO THOSE WITH WHOM YOU
DEALDEAL
FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION

Business CultureBusiness Culture
Western
• Perfectionist
Indian
• Functionalist
• Engineer
• Planning
• Businessman
• Improvisationg
• Facts matter
• Mauls for non-compliance
p
• People matter
• Bonus for successp
• Single task at a time • Multi-task at a time

Supplier Negotiation and SourcingSupplier Negotiation and Sourcing
Challenges

Evaluating & Selecting Key Suppliers
Wh l ti li f t t iWhen evaluating suppliers for a strategic
partnering, purchase cost becomes relatively
less important.less important.
-Tata Nano V/S A-Segment Cars
Key Supplier Selection is conducted by a cross
functional team selection approach whereinpp
purchasing staff, primary users, product
designers, and manufacturing personnel
participate.
- Buyer Audit

Kraljic’s Matrix

STRATEGIC SOURCING FOR SUCCESFUL
SUPPLY CHAIN MANAGEMENT
Why Strategic Sourcing?
- Lehman Brothers Case

TYPES OF SUPPLIERS
• TECHNOLOGY
MACHINERY/CAPITAL EQUIPMENT• MACHINERY/CAPITAL EQUIPMENT
• RAW MATERIAL
COMPONENTS• COMPONENTS
• FINISHED PRODUCTS

NEED FOR GLOBAL SUPPLIERSNEED FOR GLOBAL SUPPLIERS
• QUALITY
• TECHNOLOGY
• COST
• SERVICE

GENERALLY NON NEGOTIABLE ITEMSGENERALLY NON-NEGOTIABLE ITEMS
• SPECIFICATIONS
• PAYMENT TERMS

ISSUES IN NEGOTIATIONISSUES IN NEGOTIATION
• CULTURE
• EXCHANGE RATE
• DEGREE OF TRANSPARENCY REQUIRED – OUR
MINDSET/ OUR MANAGEMENT’S MINDSETMINDSET/ OUR MANAGEMENT’S MINDSET

Supplier Strategies
Pl t h l hi i i
Supplier Strategies
• Plans to help achieve company mission
• Affect long-term competitive position
• Strategic options
– Many suppliersy pp
– Few suppliers
– Keiretsu network
– Vertical integration
– Virtual company Pl
V tua co pa y Plan
98
© 1995 Corel Corp.

Daimler Chrysler’s Supplier Cost Reduction
Effort
Supplier Suggestion Model SavingsSupplier Suggestion Model Savings
Rockwell Use passenger car door
locks on trucks
Dodge
trucks
$280,000
Rockwell Simplify design/substitute
materials on manual
window system
Various $300,000
window system
3M Change tooling for wood-
grain panels to allow three
Caravan,
Voyager
$1,500,000
from one die
Trico Change wiper-blade
formulation
Various $140,000
formulation
Leslie Metal
Arts
Exterior lighting suggestions Various $1,500,000

Many Suppliers StrategyMany Suppliers Strategy
• Many sources per item
• Adversarial relationship
• Short-term
• Little openness• Little openness
• Negotiated, sporadic PO’s
• High prices
• Infrequent, large lots
• Delivery to receiving dock
© 1995 Corel Corp.

Few Suppliers Strategy
• 1 or few sources per item
Few Suppliers Strategy
• 1 or few sources per item
• Partnership (JIT)
• Long-term, stable
• On-site audits & visits
• Exclusive contracts
• Low prices (large orders) © 1995
• Low prices (large orders)
• Frequent, small lots
© 995
Corel
Corp.
• Delivery to point of use
101

Tactics for Close Supplier Relationships
TacticTactic
Red ce total n mber of
ResultsResults
• Average 20% reduction in 5• Reduce total number of
suppliers
• Certify suppliers
• Average 20% reduction in 5
years
• Certify suppliers
• Ask for JIT delivery from
key suppliersy pp
• Involve key suppliers in new
product design
• Develop software linkages to
li
102
suppliers

Vertical Integration StrategyVertical Integration Strategy
Raw Material
(Suppliers)
• Ability to produce
goods previously
BackwardBackward
IntegrationIntegration
purchased
– Setup operations
CurrentCurrent
TransformationTransformation
– Buy supplier
• Make-buy issue
ForwardForward
IntegrationIntegration
• Major financial
commitment
Finished GoodsFinished Goods
(Customers)(Customers)
commitment
• Hard to do all things
well
103
(Customers)(Customers)well

Forms of Vertical IntegrationForms of Vertical Integration
Iron Ore Silicon Farming Raw Material
(Suppliers)
Steel Flour Milling Backward
Integration
Automobiles
Integrated
Circuits
Current
Transformation
Distribution
System
Circuit Boards
Forward
Integration
Dealers
Computers
Watches
Calculators
Finished Goods
(Customers)
Baked Goods

Keiretsu Network Strategy
• Japanese word for ‘affiliated chain’
Keiretsu Network Strategy
• Japanese word for affiliated chain
• System of mutual alliances and
hicross-ownership
– Company stock is held by allied firms
• Lowers need for short-term profits
• Links manufacturers, suppliers, distributors, &pp
lenders
– ‘Partnerships’ extend across entire supply chainp pp y

Virtual Company StrategyVirtual Company Strategy
• Network of independent companies• Network of independent companies
– Linked by technology
• PC’s, faxes, Internet etc.
– Each contributes core competencies
– Typically provide services
• Payroll, editing, designing
• May be long or short-term
– Usually, only until opportunity is met
© 1995 Corel Corp.
Usually, only until opportunity is met

Overview of Global Procurement:
Cross Border NegotiationsCross Border Negotiations
Interpretation, Enforcement and Dispute
ResolutionResolution

Precedence's are Referred but notPrecedence s are Referred but not
Followed
Sales Act High Court Verdict on S/W CD’s
C L (P Ch )Common Law (Prone to Changes)

Legal System Framework
Category 1 Category 2 Category 3
Supreme Court, Federal
Apex Judiciary
• II round
• Takes 10-12 months
• Court of last resort
High Court • I round
• Takes 6 months
• 50-60% disputes sorted
District/Province/Civil
Court
p
• Takes 24 – 30 months

Arbitration – Alternative
to litigation
Special Jurisdiction
Place of evidence is
very vital
• Headed by professionals
t j dnot judges
• Three member committee
• Two Industry Veterans and
one retired judge
j g

Points to Remember
C t t di t b t t i t i l t• Contract dispute between any two companies cannot violate
the Country law
• Law to be referred has to be mentioned in the contract• Law to be referred has to be mentioned in the contract
Ex: Bombay court may look into Hongkong/Singapore laws
to deal with broadcasting rightsto deal with broadcasting rights
• Choice of Forum – Depending on the issue• Choice of Forum Depending on the issue
• Choice of Law – Decided by Parties

Regulators
Example:
• TRAI
• SEBI
• AAI etc.

Cross Border Negotiations

What is Negotiation?g
It is the art of creating agreement on a specific issue between two
(or more) parties with 4 differing views (Win/Loose, Win/Win,
Loose/Loose, Loose/Win) imparting or conveying ideas, views or
information from the mind of one person to the mind of the other.
What is Purchasing?
The activity of acquiring goods or services to accomplish theThe activity of acquiring goods or services to accomplish the
goals of an organisation.
What is Purchasing Negotiation?
A process in a finite number of steps consisting mainly of
alternate proposals and counter-proposals or a form of co-
operation with both common and opposed interests with two or
more parties.
more parties.

Golden Rules of Negotiation
1 FORM1. FORM
2 People Buy People First2. People Buy People First
3 Buyers’ are liars and Non Buyers’ are bigger liars3. Buyers are liars and Non-Buyers are bigger liars
4 Emotion Sells and Logic solidifies the sale4. Emotion Sells and Logic solidifies the sale
5 N Gi U5. Never Give Up
6 PMA d K S ili
115
6. PMA and Keep Smiling

Role Play

Session Summary
• Meaning and definition of Supply Chain Management
has been explained.
• Special cases with respect to advantages of SCM has
been discussed.
• Current trends of Supply Chain and it’s impact have
b l id dbeen elucidated.

1M.S Ramaiah SchoolofAdvanced Studies - Bangalore
Session Speaker
K.M. Sharath Kumar
Manufacturing Logistics and
Make or Buy Decisions
Day-2

Session Objectives
• To ascertain the key factors to optimise logistics process
• To assimilate the factors to be considered for Make or Buy
decisions
• To match supply chain strategies with products

Session Outline
• Logistics strategies
• Make or Buy – Factors to be considered
• Span of Process
• Push vs. Pull Scheduling
• Hybrid approach for supply chain

4
Manufacturing Logistics
M.S Ramaiah SchoolofAdvanced Studies - Bangalore

5
CLM DEFINITION OF LOGISTICS
….is that part of the supply chain process that plans,
implements, and controls the efficient, effective
flow and storage of goods, services, and related
information from the point-of-origin to the point-of-
consumption in order to meet customers'
requirements.
Council of Logistics Management, 1998;
www.CLM1.org

6
Logistics - Science of managing (controlling) the movement and
storage of goods (or people) from acquisition to consumption.
Goods: Raw Materials → Final products, and everything in between.
Movement = Transportation (between locations).
Storage = Inventory, Warehousing (at locations).
Difference between acquisition and consumption is a matter of
space and time.
NOTE: Logistics does not deal with Technology of Production, such
as the design of machines, vehicles and the design of finished
products.

Source: Presentation by Mr. K.C. Manjunath,
Triveni Engineering Ltd.

8
Five Business Systems - Tightly Interconnected within the
Organization
Measurement
Decisions
Management
Systems
Reward
Decisions
Strategic
Decisions
Transportation
Decisions
Sourcing
Decisions
Inventory
Decisions
Logistics
Systems
{
Price
Decisions
Promotion
Decisions
Marketing
Systems
Product
Decisions
Place (How,
where, how
much)
}
Production
Scheduling
Decisions
Production
Capacity
Decisions
Shop Floor
Decisions
Manufacturing
Systems
}
Product
Design
Decisions
Process
Design
Decisions Engineering
Systems}

9
Logistics – Mission [A Bill of “Rights”]
• Logistics embodies the effort to deliver:
– the right product
– in the right quantity
– in the right condition
– to the right place
– at the right time
– for the right customer
– at the right cost

10
Activities and Logistics Decisions
Transportation
rate and contract negotiation
mode and service selection
routing and scheduling
Inventories
finished goods policies
supply scheduling
short term forecasting
Warehousing
private vs. public
space determination
warehouse configuration
Stock layout and dock design
stock placement
Cross-docking
FacilityLocation
determining location, number
and size of facilities
allocating demand to facilities
Customer Service
determining customer wants
determining customer response to
service changes
Materials Handling
equipment selection
equipment replacement
order picking procedures
Packaging design
Order Processing
order procedure determination
Coordinating Production
Schedule
aggregate production quantities
sequencing and timing of
production runs

11
Manufacturing Logistics
 Physical Distribution
Recycling/ Returns/ Waste Disposal
Location
Communication

12
Inbound & Outbound Logistics
MANUFACTURING
PROCESSES
INBOUND
LOGISTICS
OUTBOUND
LOGISTICS
SUPPLIER CUSTOMER

13
Reverse Logistics
• To manage the flow & Storage of products and services,
moving backwards through the supply chain
• Supply chains create waste due to packing
• New development in SCM includes the
recycling of products and packing materials,
“disassembly” of products for reuse,
product returns for warranty claims

14
TVS Logistics Case

15
Air Asia Case

16
Freight management goes online in
ThiruvananthapuramRailway division
(August 24, 2010)
Freight Operating Information system will enable traders to
monitor arrival of the freight train, plan out the receipt and
dispatch of consignments to the intended locations, besides
providing adequate time to arrange for labour.

17
Importance of Logistics
• Essential & Expensive - ( GDP )
10 to 13% in India
8% in USA
• Bigger than the profit margin on goods
• Affects Financial Performance

18
Logistics for life sciences still out in the cold
• A goods carrier crossing a State border in India may have to wait
anywhere between two to 24 hours to get the necessary clearances
before it can enter the next State. Compare this to transit across
borders in China, which takes between 15 minutes to two hours.
Or in the EU, where the carrier usually does not have to wait for
more than a few minutes.
• According to World Bank's Logistics Performance Index ranked
India 47 with a score of 3.1 (world average 2.5) in 2010, dropping
from 39 in 2007. The index evaluates the logistics performance of
countries on the basis of following key dimensions such as
Customs clearances, infrastructure, ease of shipment and tracking.
Source:Joint Studyby DHL and Organisationof Pharmaceutical
Producers ofIndia , October 2011

20
Role of logistics managers in strategic
decision
OTHER
MANAGERS
BUSINESS
STRATEGY
LOGISTICS
STRATEGY
ROUTINE
LOGISTICS
DECISIONS
LOGISTICS
MANAGER
DISCUSSIONS &
AGREEMENTS

23
Volvo-Case
Multi Axle Transport Solution

24
Benefits
• Equivalent to 5 : 2-Axle trucks
• Higher Average speed
• Less Breakdowns
• Transportation cost saving of 20-40% to Fleet owners
• Takes 16 m road space but the latter take 90 m
• Cut in fuel consumption by 50%
• Environmental safety

25
Consolidation
• Smaller Operator’s are shrinking
• Large players are outsourcing
• Shift towards bagging quality orders
• Warehousing etc.

26
Volvo’s Fuel Cost
Typical Trucks Volvo Trucks
Fuel Consumption 3.5 kmpl 2.5 kmpl
Cost/Tonne KM Rs. 4.60 Rs. 6.40
Load Carried 10 Tonnes 30 Tonnes
Fuel cost/Tonne
KM
Re 0.46 Re 0.21

27
Conclusion
“Big is Better”

28
Indian Government Initiatives
Allowing 100% FDI
Eliminating CST and IT exemptions on Port
development Projects
Improving Multi Modal Transport and PPP

29
Plan for multi-modal venture by 3
logistics PSUs
SCI, Concor, Central Warehousing
Corporation would be equity partners
Source:BL, 5 January2011

30
Delhi may soon levy congestion fee
on vehicles
08 April 2010
Source: ET

31
Railways sees scope for greater
logistics play
Source:ET, September2011

32
Make or Buy Decisions

Make or Buy Choice
• One of the key strategic issue in manufacturing is the
decision regarding
“what to make and what to buy”.
• Companies rarely make their own products/services from
start to end.
• Mostly these decisions have been taken on an ad-hoc
manner and lack adequate scientific consideration.

Make or Buy Choice
• Inability to make in-house
(Technical capability
High-Investment
Low Utilisation)
• Retaining Core Technology
L & T Komatsu-Welding Robot

Make or Buy Choice
• BREAK EVEN ANALYSIS
TOTAL COST -BUY
TOTALCOST -
MAKE
MAKE-VARIABLE
COST
MAKE-FIXED
COST
VOLUME
COST
BREAK
-EVEN

Span of Process

Make-or-Buy Decisions
1. Maintain core competence
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply (quantity or delivery)
5. Utilize surplus labor or facilities
6. Obtain desired quality
7. Remove supplier collusion
8. Obtain unique item that would entail a prohibitive
commitment for a supplier
9. Protect personnel from a layoff
10. Protect proprietary design or quality
11. Increase or maintain size of company
Reasons for Making

Make-or-Buy Decisions
1. Frees management to deal with its core
competence
2. Lower acquisition cost
3. Preserve supplier commitment
4. Obtain technical or management ability
5. Inadequate capacity
6. Reduce inventory costs
7. Ensure alternative sources
8. Inadequate managerial or technical resources
9. Reciprocity
10. Item is protected by a patent or trade secret
Reasons for Buying

Framework for Make/Buy Decisions
• Which component to Manufacture and what to Outsource?
• Identify Core Competencies and it should be made
internally.
Fine & Whitney Framework for Outsourcing
• Dependency on Capacity
• Dependency on Knowledge
Toyotas outsourcing strategies

Make/Buy Decisions
Product Dependent on
knowledge
and capacity
Independent
of knowledge,
Dependent on
capacity
Independent
of knowledge
and capacity
Modular
Outsourcing is
risky
Outsourcing is
an opportunity
Opportunity to
reduce cost
through
outsourcing
Integral
Outsourcing is
very risky
Outsourcing is
an option
Keep
production
internal

Push and Pull Scheduling

• Efficient integration of suppliers, manufacturers,
warehouses, and stores.
• Coordinating activities across the supply chain
• Improve performance through cost reduction,
increasing service level,
reducing the bullwhip effect,
better utilising resources, and
effectively responding to changes
Effective SCM Pre-requisites

Challenges can be met by Integration
– Linking front-end customer demand and back-end
production and manufacturing portion of the supply chain.
• Various supply chain integration strategies:
– Push, pull, push–pull strategy.
– Matching products and industries with supply chain strategies.
– Demand-driven supply chain strategies.
– The impact of the Internet on supply chain integration.

What is Push and Pull?
• MRP is the classic push system. The MRP system
computes production schedule for all levels based on
forecasts of end items sale. Once produced,
subassemblies are pushed to next level whether needed
or not.
Typical PC Manufacturing
• JIT is the classic pull system. The basic mechanism is that
production at one level only happens when initiated by a
request at the higher level. That is, units are pulled
through the system by request.
Dell’s PC Manufacturing

Comparison
• These methods offer two completely different approaches
to basic production planning
• Each has advantages over the other, but neither seems
to be sufficient on its own.
• Both have advantages and disadvantages, suggesting
that both methods could be useful in the same organisation.

Push Vs. Pull Scheduling in SCM
• Push Scheduling
- Traditional Approach
- Move the Job when finished
- Creates Excessive Inventory
• Pull Scheduling
- Coordinated Production
- Driven by Demand( Pulled thru system )
- Extensive use of visual triggers

Customer
D1
D2 D3
D4
RDC1 RDC2
Factory Warehouse
Factory Warehouse
Vendors/Suppliers
Finished
products,
Demand
forecastlevel
Finished
products
Finished
products
WIP
Sub
Assemblies
Components
Demand
Pull
Product
Push

Push-Pull Scheduling in Supply Chain
A Hybrid Approach in Todays
Scenario

Toyota’s Manufacturing Strategy
Dell’s PC Manufacturing Strategy

Push-Pull Supply Chain
• Initial Stages are operated in a push based manner whereas
the remaining stage are operated in a pull based manner.
• Interface between the push based stage and pull based stage
is known as the push-pull boundary
Supply Chain Time Line

Supply Chain Timeline
Push-pull supply chains

General Framework for Time Line
• Make a part of the product to stock – generic product
• The point where differentiation has to be introduced is the
push-pull boundary
• Based on extent of customisation, the position of boundary
on the timeline is decided

Matching Supply Chain Strategies with
Products
Push-pull supply chains

GM’s Case
Failure of Make to Order Strategy

Characteristics of Push & Pull in Supply
Chain
Push Pull
Objective Minimize Cost Maximize Service
Level
Complexity High Low
Focus Resource
Allocation
Responsiveness
Lead Time Long Short
Processes Supply chain
Planning
Order Fulfillment

Implementing a Push–Pull Strategy
• Achieving the appropriate design depends on
many factors:
– product complexity
– manufacturing lead times
– supplier–manufacturer relationships.
• Many ways to implement a push–pull strategy
– location of the push–pull boundary.
• Dell locates boundary at the assembly point
• Furniture manufacturers locate the boundary at the
production point

The Impact of Lead Time
• Longer the lead time, more important it is to
implement a push based strategy.
• Typically difficult to implement a pull strategy when
lead times are so long that it is hard to react to
demand information.

Cases

Grocery Industry
• Typical supermarket employs a push-based strategy
• Peapod was built on pure pull strategy with no inventory and
no facilities.
– Significant service problems with high stock-out rates
– Changed to a push–pullstrategy by setting up a number of warehouses
– Warehousecovers a large geographical area
• Aggregated demand
• Other challenges:
– Reducingtransportationcosts
– Short responsetime
– Low customer density
• Products having low demand uncertainty were treated with
– high economies of scale in transportationcost
– push-based strategy more appropriately.

Book Industry
• Initial model of Amazon.com a pure pull system with no
warehouses and no stock.
– Ingram Book Group supplied most of Amazon’s customer demand.
• As volume and demand increased:
– Amazon.com’s service level was affected by Ingram Book’s
distributioncapacity
– Using Ingram Book in the first few years allowed Amazon.comto
avoid inventory costs but significantly reduced profit margins.
• As demand increased distributor no longer required.
• Current Amazon.com:
– Several warehouses around the countrywhere most of the titles are
stocked.
– Inventory at the warehouses is managed using a push strategy
– Demand satisfied based on individual requests, a pull strategy.
• Slow moving low volume books and CDs are not stocked at
Amazon distribution centers
– Amazon orders those when demand arrives.

Session Summary
• Meaning of Logistics, components of Logistics management
have been explained.
• Factors influencing the make or buy decision has been
elucidated.
• Cases with respect to Push-Pull supply chain have been
discussed.

Session Speaker
K.M. Sharath Kumar
Supply Chain (SC) Design
Day-2

Session Objectives
• To identify the role of aggregate planning in supply chain to
manage supply and demand
• To examine the key factors ‘to be’ considered when
designing a distribution network
• To apply optimisation techniques to evaluate trading
partners

Session Outline
• Introduction to SC modelling
• Managing supply through Aggregate planning
• Gravity Model
• Supply Chain Benchmarking
• Data Envelopment Analysis

4
Supply chain Networks

5
Integrated Supply Chain
• Functional Integration
- Purchasing,Manufacturing,Transportation, Warehousing
• Spatial Integration
- Geographically dispersed vendors,
- Facilities & Markets
•Inter-temporal Integration
- Strategic, Tactical & Operational
•Integration of SC & Demand Management

6
Overview of SC Models and Modelling
System
• Need to augment Transactional IT with Analytical
IT
- “Metrics is very important”
• Analytical IT involves
- Descriptive Method
- Normative Method or Optimisation method
or Mathematical Programming method

7
Descriptive Method
• Forecasting Models
- predict demand for company’s finished products, cost of
raw materials etc.
• Cost Relationship
-describes how direct and indirect costs vary
• Resource Utilisation
-how manufacturing activities consume scarce resources
• Simulation Models
-describes parts or all the company’s supply chain that will
operate over time as function of parameters and policies

8
Normative or Optimisation Method
- Helps managers to make better decisions
- Requires descriptive data & models as inputs

9
The primary “drivers” for achieving
strategic fit in Supply Chain Strategy
(adapted from Chopra & Meindl)
CorporateStrategy
SupplyChain Strategy
Efficiency Responsiveness
Facilities Inventory Transportation Information
Market
Segmentation

Introduction to Linear Programming
Problem (LPP)
The most important function of management is effective
decision making.

Definition of LPP
Linear Programming (LP) is a versatile technique for assigning a
fixed amount of resources among competing factors.
A mathematical technique used to obtain an optimal solution in
resource allocation problems, such as production planning,
scheduling, advertising, cost analysis etc.
It is basically used for efficient and effective utilisation of limited
resources to achieve organization objectives (Maximise profits or
Minimise cost).

The General LP Formulation
nix
bxaxaxa
bxaxaxa
bxaxaxa
tS
xcxcxcZMinMax
i
mnmnmm
nn
nn
nn
,...,2,1,0
//...
........................................................
//...
//...
..
.../
2211
22222121
11212111
2211
=≥
=≥≤+++
=≥≤+++
=≥≤+++
+++=
•There are n variables in m constraints to be solved
Max / Min Z = C1x1 + C2x2 + …….Cnxn
Subject to
a11 x1 + a12x2 + …. + a1nxn < /> = b1
a21 x1 + a22x2 + …. + a2nxn < /> = b2
……………………………………
am1 x1 + am2x2 + …. + amnxn < /> = bm
where xi >= 0, i = 1,2,……….n

Formulation of LPP
(Production allocation problem)
Case: 1
A manufacturer produces two models M1 and M2 . Each unit
of model M1 requires 4 hours grinding and 2 hours polishing.
Each unit of model M2 requires 2 hours grinding and 5 hours
of polishing. The manufacturer has 2 grinding wheels
wherein each is available for 40 hours per week only.
Similarly there are 3 polishing machines wherein each is
available for 60 hours per week only. Profit on model M1 is
Rs. 300 per unit and profit on model M2 is 400 per unit. The
manufacturer has to allocate his production capacity so as to
maximize his profit.
 Formulate the LPP.

Formulation of LPP
(Production allocation problem)
Solution:
Let X: Number of units of model M1 to be produced.
Y: Number of units of model M2 to be produced.
Model
M1
Model
M2
Requirement
Number of units X Y Maximize
Grinding time(hrs.) 4 X 2 Y < 80
Polishing time(hrs.) 2 X 5 Y < 180
Profit (Rs) 300 X 400 Y

Conversion to LPP
(Production allocation problem) (cont..d)
Maximum Z = 300X + 400Y
Subject to (S.t) 4 X + 2Y < 80
2X + 5Y < 180
and X > 0, Y > 0
Objective Function
Constraints
Decision variable (non negative)

Formulation of LPP
Case: 2 A firm produces two home products viz. model A
and model B. The production involves three operations-
assembly, painting and testing. The relevant data are as
follows: Hours required for each unit
Unit selling
price
Assembly Painting Testing
Model A
Rs.40
10 2 1
Model B
Rs.60
18 5 2

Case-2 Formulation of LPP (Cont…d)
Total number of hours available each week are
as follows:
Assembly 400
Painting 100
Testing 60
The firm wishes to determine its weekly
product mix so as to maximize profit.
 Formulate the problem as a linear
programming problem(LPP).

Case-2 Formulation of LPP (Cont…d)
Solution:
Let X: Number of units of model A to be produced.
Y: Number of units of model B to be produced.
Model
A
Model
B
Requirement
Number of units X Y
Assembly time(hrs.) 10 X 18 Y < 400
Painting time(hrs.) 2 X 5 Y < 100
Testing time (hrs.) 1 X 2 Y < 60
Profit (Rs) 40 X 60 Y

Case- 2 Conversion to LPP (cont..d)
Maximize Z = 40X + 60Y
Subject to (S.t) 10X +18Y < 400
2 X + 5Y < 100
1X + 2 Y < 60
and X > 0, Y > 0
Objective Function
Constraints
Decision variable (non negative)

Methods for Solving Linear Programming
Problems (LPP)
Important method of solving LPPs
Simplex method using Solver

Managing Supply in a Supply Chain

Aggregate Planning in Supply Chain
• Aggregate planning is a process by which a company
determines ideal levels of
capacity, production,
subcontracting, inventory
stock outs and pricing over a specified time horizon
• Goal is to satisfy demand while maximising profit.
Premium Paper Mill Case
Spring – Annual Reports
Fall - Car Brochure

Aggregate Planning Strategies
• The planner should make trade-off’s among capacity,
inventory and backlog costs/ lost sales.
• If one increases the other two decreases.
• Trade off Strategies (tailored strategies)
- Chase strategy - using capacity as lever
- Time flexibility from workforce or capacity strategy -
using utilisation as a lever
- Level strategy – using inventory as the lever

24
Red Tomato Gardening Tool Case
• Demand for Red Tomato’s
gardening tools is highly
seasonal in spring.
• The first step towards
aggregate planning is to
arrive at effective demand
forecasting.
• Demand forecast for Red
Tomato tools
Month Demand
Forecast
Jan 1600
Feb 3000
Mar 3200
Apr 3800
May 2200
Jun 2200

25
Red Tomato Tools Case Contd…
• Red Tomato sells each tool at $40.
• The company has a starting inventory of 1000 toolsin January.
• At the beginning of January, company has a workforce of 80 employees.
• Plant works 20 days in each month with 8 hrs per day.
• Each employee earns $4 per houron regular time.
• Capacityof the plant is determined by total labourhoursworked.
• As per labour rules, no employee works more than 10 hrs overtime per
month.
• SC manager goal is to have 500 units at the end of june as inventory.
• Minimising cost over the planning horizon is equal to maximising profit
as all demand has to be met.

26
Various Costs for Red Tomato Case
Item Cost
Material Cost $10/unit
Inventory holdingcost $2/unit/month
Marginal cost of stock-out/backlog $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Laborhours required 4/unit
Regular time cost $4/hour
Overtime cost $6/hour
Cost of subcontracting $30/unit

27
Decision Variables
• Wt = Workforce size for month t
• Ht = number of employees hired at the beginning of month t
• Lt = number of employees laid off at the beginning of month t
• Pt = number of units produced in month t
• It = Inventory at the end of month t
• St = number of units stocked out/backlogged at the end of
month t
• Ct = number of units sub-contracted at the end of month t
• Ot = number of overtime hours worked in month t
where t = 1, 2, ........ , 6

28
Table Containing Decision Variable

29
Table containing Constraints

30
Formulae
Cell Cell Formula Equation
M5
(Wt
Constraints) = D5-D4-B5+C5 Wt = Wt-1 + Ht -Lt
N5
(Capacity
Constraints) = 40*D5+E5/4-I5 Pt ≤ 40 Wt + Ot /4
O5
(Inventory
Constraints) = F4-G4+I5+H5-J5-
F5+G5
It-1 + Pt + Ct = Dt +St-1 +It - St
P5
(Over-time
Constraints) = -E5 + 10 * D5 Ot ≤ 10 Wt
Here, M5 = 0; N5 ≥ 0; O5 = 0; P5 ≥ 0

31
Table containing Objective function
[ ]∑=
+++++++
6
1
3010525003006640i
tttttttt CPSILHoW
We need to arrive at minimised solution

32
Invoking Solver Tool and following
Constraints

33
Solver Steps
• Set Target Cell: C22,
• Equal to : Select Min
• By Changing Cells : B5 : I10
• Subject to Constraints
B5 : I10 ≥ 0 (All decision variables are non-negative)
F10 ≥ 500 ( Inventory at end of period 6 is at least 500)
G10 = 0 (Stock-out at the end of 6 months equals0)
M5 : M10 = 0 (workforce constraints)
N5 : N10 ≥ 0 (capacity constraints)
O5 : O10 = 0 (inventory constraints)
P5 : P10 ≥ 0 (over-time constraints)
Assumelinear model in options and press solve

34
Final Solution

35
Gravity Models in Supply Chain

36
Steel Appliances (SA)
• Gravity location models are used to find locations that
minimises the transportation cost.
• SA manufactures high quality refrigerators and cooking
ranges
- currently one plant in Denver which supplies entire US
- Three parts plant located at Buffalo, Memphis and St. Louis
will supply parts for new factory which will serve Atlanta,
Boston, Jacksonville, Philadelphia and Newyork.
- The coordinates, demand, required supply and shipping cost
has been collected.

37
Supply sources and Markets for SA

39
Gravity Model
• This model assumes that both markets and supply sources
can be located as grid points on plane.
• All distances are calculated as the geometric distance
between two points on the plane.
• Assumes transportation cost linearly grows with quantity
shipped.

40
Input Parameters
• xn, yn : coordinate location of either a market or supply
source n
• Fn: Cost of shipping one unit for one mile between facility
and either market or supply source n
• Dn: Quantity to be shipped between facility and market or
supply source n
• If (x,y) is the location selected for the facility, the distance
dn between the facility at location (x,y) and the supply
source or market n is given by:

41
Formulae
( ) ( ) 



 −+−=
22
yxd nnn
yx
FDd nn
k
n
n
TC ∑=
=
1
Total Cost (TC) is given by:
The optimal location is one that minimises the total TC

43
Equations
Cell Cell formula Equation Copied
to
G5 =SQRT($B$16-E5)^2+($B$17-F5)^2 1 G5:G12
B19 =SUMPRODUCT(G5:G12,D5:D12,
C5:C12)
2 -
Afterentering these formulae, invoke solver to
solve the problem

45
Results
• The coordinates (x, y) = ( 681, 882) has been identified as
the location of the new factory which minimises the total
transportation cost.
• From the map, these coordinates are close to the border of
North Carolina and Virginia.
• The manager should look for desirable sites close to optimal
coordinates that have the required infrastructure and
appropriate worker skills.

47
SC Trading Partners -
Benchmarking
using
Data Envelopment Analysis (DEA)

48
Non-Parametric Analysis Tool
- Data Envelopment
Analysis (DEA)
Analyses multiple outputs and
inputs simultaneously to arrive
at single overall performance
index
Uses Linear Programming
technique to objectively derive
individual weights under
MCDM
Organisation under study is
called as DMU Limitations
• Dependent on data
X$1,00,000

49
Contd.

51
Motivations to use DEA
• Simplicity and ease-of-use
• No need to specify relationships or trade-offs among
performance measures prior to computation
• The frontier principle suits benchmarking goal
• Evaluate multiple outputs and multiple inputs simultaneously
• Addresses quantitative and qualitative data together
• Weights obtained by solving LPP from the data objectively

52
Inferences after using DEA
• Measures operational performance relative to peer groups
• Identify performance gaps in inefficient DMUs
• Evaluate improvement opportunities
• Assess operational progress over time

53
Methodology
- Identification of input (X) and output (Y) variables of DMUs for
performance evaluation through DEA.
- In general, radial efficiency (θ) measure takes the form of ratio
- Considering all ‘m’ inputs and ‘s’ outputs portraying total factor
productivity measure of a DMU, the unknown variable weights will
be represented as vi and ur
Virtual Input = v1x1o + ...............+ vmxmo
Virtual Output = u1y1o + ............... + usyso
- Finally the linear programming techniquewill be used to maximise the
ratio and to determine weights individually
Input
Output
=θ

54
Input and Output Consideration
Consideration
• Principle to be adapted for selecting inputs/outputs:
lower the better for input value
higher the better for output value
• n = max { (m*s), (3*(m+s)) } condition has to be satisfied

55
Basic Charnes Cooper and Rhodes (CCR)
Model
FPo = Fractional Programme

56
Converting FP into LPP
LPo = Linear Programme

57
Inference after Solving LPP

58
Taking Dual* of the LPP (DLP)
Where,
λ is the non-negative Column Vector of Variables
Θ is radial efficiency
X is Input vector and Y is Output vector
xo, yo is DMU under study

59
Example

60
MathematicalFormulation

61
Optimal Solution

62
Reference Set

63
Consolidated Results

64
Output Oriented Model

65
Example-Case (1 Input and 1 Output Case)

66
Graphical Representation
X$1,00,000

67
Demo Session

68
References
1. Chien-Ming Chen, Evaluation and Design of Supply Chain
Operations using DEA, Ph.D. Thesis, Erasmus University
Rotterdam, 2009.
2. William W. Cooper, Lawrence M. Seiford, Kaoru Tone,
Introduction to Data Envelopment Analysis and Its Uses,
Springer, 2006.
3. William W. Cooper, Lawrence M. Seiford, Kaoru Tone, Data
Envelopment Analysis, 2nd edition, Springer, 2007.

Session Summary
• Strategies adapted in aggregate planning with trade-off’s
has been elucidated.
• Facility location model in the form of gravity model has
been applied.
• DEA models to evaluate the trading partners has been
demonstrated.

70
sharath@msrsas.org
M: 0 99005 14038

50 file4 annex_2.4-scm

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