Here are the key points about inventory as a driver of supply chain performance: - Inventory is a major cost but enables responsiveness by bridging mismatches between supply and demand. - The level and placement of inventory impacts efficiency and responsiveness. Higher inventory improves responsiveness at the cost of efficiency. - Inventory levels and management should be aligned with competitive strategy - more inventory is needed for responsive strategies focusing on availability and fill rates. - Common inventory components include cycle inventory to bridge replenishment cycles and safety stock to protect against uncertainties in demand or supply. Managing these components is important to balance costs and customer service. - Information technology can help optimize inventory levels by improving demand forecasting, replenishment processes,

1. SUPPLY CHAIN ENGINEERING…MN 799
• TEXT: SUPPLY CHAIN MANAGEMENT – Chopra and Meindl – Prentice Hall
• COURSE OUTLINE – Description Book pages
– 1/22 Introduction, curriculum, rules, exams, Infrastructure (1-27)
– 1/27 Strategic Fit and Scope. Supply Chain Drivers (27-51)
– 2/05 No Class
– 2/12 Demand Management (169-204)
– 2/19 Aggregate Planning, Managing (205-225)
– 2/26 Guest Lecture Network Operations (71-168)
– 3/04 Managing Supply and Demand (121-144)
– 3/11 Class trip to see Supply Chain in Operation
– 3/18 No Class
– 3/25 Mid Term
– 4/01 Managing Inventory(249-295);
– 4/08 Product Availability (297-384)
– 4/15 Sourcing and Procurement (387-410)
– 4/22 Transportation (411-219); Facility Decisions (109-133)
– 4/29 Beer Game
– 5/06 Co-ordination Information Information Technology & E-Business (477- 557)
– 5/13 FINAL EXAMINATION
Supply Chain 1#

2. GUIDELINES
• GRADING:
– HOMEWORK – 20%
– BEER GAME – 5%
– MID TERM – 30%
– FINAL – 45%
• HOMEWORK MUST BE COMPLETED IN TIME.
LATE SUBMISSIONS WILL START WITH A ‘B’
GRADE
• CLASSES WILL START AT 6.00PM AND GO
STRAIGHT THRU TO 8.00PM
Supply Chain 2#

3. DEFINITION OF A SUPPLY CHAIN
• WHAT IS A SUPPLY CHAIN?
• A SUPPLY CHAIN COVERS THE FLOW OF
MATERIALS, INFORMATION AND CASH ACROSS
THE ENTIRE ENTERPRISE
• SUPPLY CHAIN MANAGEMENT IS THE
INTEGRATED PROCESS OF INTEGRATING,
PLANNING, SOURCING, MAKING AND
DELIVERING PRODUCT, FROM RAW MATERIAL
TO END CUSTOMER, AND MEASURING THE
RESULTS GLOBALLY
• TO SATISFY CUSTOMERS AND MAKE A PROFIT
• WHY A ‘SUPPLY CHAIN’?
Supply Chain 3#

4. Traditional View: Logistics in the Economy
1990 1996 2006
• Freight Transportation $352, $455 $809 B
• % Freight 57% 62%
• Inventory Expense $221, $311 $ 446 B
• % Inventory 39% 33%
• Administrative Expense $27, $31 $ 50 B
• Logistics related activity 11%, 10.5%,9.9%
• % of GNP.
Source: Cass Logistics
Homework: What are 2007 statistics?
Supply Chain 4#

5. Traditional View: Logistics in the Manufacturing
Firm
• Profit 4%
Profit
• Logistics Cost Logistics
21%
Cost
• Marketing Cost 27% Marketing
Cost
• Manufacturing Cost 48%
Manufacturing
Cost
Homework: What it the profile for Consumables; Pharamas and Computers
Supply Chain 5#

6. Supply Chain Management: The Magnitude in the
Traditional View
• Estimated that the grocery industry could save $30 billion (10% of
operating cost by using effective logistics and supply chain strategies
– A typical box of cereal spends 104 days from factory to sale
– A typical car spends 15 days from factory to dealership
• Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995
because laptops were not available when and where needed
• P&G estimates it saved retail customers $65 million by collaboration
resulting in a better match of supply and demand
• Laura Ashley turns its inventory 10 times a year, five times faster than
3 years ago
Supply Chain 6#

7. HAMBURGERS AND FRIES
HAMBURGERS (4/LB) FRIES (3Large/lb)
• CATTLE FARM – 50c/lb • POTATO FARM 25C/lb
• BUTCHER • POTATO PROCESSOR
• PACKAGING • DISTRIBUTION CENTER
• DISTRIBUTION CENTER • RETAILER
• RETAILER • CUSTOMER
• CUSTOMER
Provide Sales Price at each stage Provide Sales Price at each stage
Supply Chain 7#

8. Burger and Fries
Examine this process – What do you observe?
What problems do you foresee in this Supply Chain? Please write some down
Supply Chain 8#

9. Understanding the Supply Chain
…
a chain is only as good as its weakest link
Recall that saying? The saying applies to the principles of
building a competitive infrastructure:
Supplier Manufacturer Wholesaler Retailer Customer
…there is a limit to the surplus or profit in a supply chain
Strong, well-structured supply chains are critical to sustained
competitive advantage.
We are all part of a Supply Chain in everything we buy
Supply Chain 9#

10. OBJECTIVES OF A SUPPLY CHAIN
• MAXIMIZE OVERALL VALUE GENERATED
– SATISFYING CUSTOMER NEEDS AT A PROFIT
– VALUE STRONGLY CORRELATED TO PROFITABILITY
– SOURCE OF REVENUE – CUSTOMER
– COST GENERATED WITHIN SUPPLY CHAIN BY FLOWS OF
INFORMATION, PRODUCT AND CASH
– FLOWS OCCUR ACROSS ALL STAGES – CUSTOMER,
RETAILER, WHOLESALER, DISTRIBUTOR, MANUFACTURER
AND SUPPLIER
– MANAGEMENT OF FLOWS KEY TO SUPPLY CHAIN
SUCCESS
UNDERSTAND EACH OBJECTIVE
Supply Chain 10#

11. DECISION PHASES IN A SUPPLY CHAIN
• OVERALL STRATEGY OF COMPANY – EFFICIENT OR
RESPONSIVE
• SUPPLY CHAIN STRATEGY OR DESIGN ?
– LOCATION AND CAPACITY OF PRODUCTION AND WAREHOUSE
FACILITIES?
– PRODUCTS TO BE MANUF, PURCHASED OR STORED BY LOCATION?
– MODES OF TRANSPORTATION?
– INFORMATION SYSTEMS TO BE USED?
– CONFIGURATION MUST SUPPORT OVERALL STRAGEGY
• SUPPLY CHAIN PLANNING?
– OPERATING POLICIES – MARKETS SERVED, INVENTORY HELD,
SUBCONTRACTING, PROMOTIONS, …?
• SUPPLY CHAIN OPERATION?
– DECISIONS AND EXECUTION OF ORDERS?
Supply Chain 11#

12. Basic Supply Chain Architectures (Examples)
1. Indirect Channel
Retailer Customer
Supplier Wholesale
Factory Retailer Customer
Supplier Wholesale
Retailer Customer
2. Direct Channel
Supplier Supplier
Supplier
Fabricator Factory Integrator Customer
Supplier
3. Virtual Channel
Supplier
Credit Virtual
Service Store
Supplier Fabricator Factory
Express Customer
Freight
Supply Chain 12#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

13. Supply Chain Architecture
Demand
LOCAL REGIONAL GLOBAL Strategic Issues
MARKET MARKET MARKET . Demand Reach
INDIRECT CHANNEL
DIRECT CHANNEL . Demand Risk
VIRTUAL CHANNEL
MAKE •Cost Structure
vs. • Asset Utilization
BUY • Responsiveness
SOLE SOURCE
SINGLE SOURCE
MULTI-SOURCE Supply Risk
Supply
C 1999. William T. Walker, CFPIM,Supply APICS Educational & Research Foundation. 13#
CIRM with the Chain All Rights Reserved.

14. SUPPLY CHAIN FRAMEWORK AND
INFRASTRUCTURE
PRINCIPLE:
BUILD A COMPETITIVE
INFRASTRUCTURE
This principle is about
VELOCITY
Supply Chain 14#

15. Cycle View of Supply Chains
DEFINES ROLES AND RESPONSIBILITIES OF MEMBERS OF
SUPPLY CHAIN
Customer
to
Customer Order Cycle
Retailer
Replenishment Cycle to
Distributor
Manufacturing Cycle to
Manufacturer
Procurement Cycle to
Supplier
Supply Chain 15#

16. PROCESS VIEW OF A SUPPLY CHAIN
• CUSTOMER ORDER CYCLE
– TRIGGER: MAXIMIZE CONVERSION OF CUSTOMER
ARRIVALS TO CUSTOMER ORDERS
– ENTRY: ENSURE ORDER QUICKLY AND ACCURATELY
COMMUNICATED TO ALL SUPPLY CHAIN PROCESSES
– FULFILLMENT: GET CORRECT AND COMPLETE ORDERS
TO CUSTOMERS BY PROMISED DUE DATES AT LOWEST
COST
– RECEIVING: CUSTOMER GETS ORDER
Supply Chain 16#

17. PROCESS VIEW OF A SUPPLY CHAIN
• REPLENISHMENT CYCLE
– REPLENISH INVENTORIES AT RETAILER AT MINIMUM COST WHILE
PROVIDING NECESSARY PRODUCT AVAILABILITY TO CUSTOMER
– RETAIL ORDER:
• TRIGGER – REPLENISHMENT POINT – BALANCE SERVICE AND
INVENTORY
• ENTRY – ACCURATE AND QUICK TO ALL SUPPLY CHAIN
• FULFILLMENT – BY DISTRIBUTOR OR MFG. – ON TIME
• RECEIVING – BY RETAILER, UPDATE RECORDS
• MANUFACTURING CYCLE
– INCLUDES ALL PROCESSES INVOLVED IN REPLENISHING
DISTRIBUTOR (RETAILER) INVENTORY, ON TIME @ OPTIMUM COST
– ORDER ARRIVAL
– PRODUCTION SCHEDULING
– MANUFACTURING AND SHIPPING
– RECEIVING
Supply Chain 17#

18. PROCESS VIEW OF A SUPPLY CHAIN
• PROCUREMENT CYCLE
– SEVERAL TIERS OF SUPPLIERS
– INCLUDES ALL PROCESSES INVOLVED IN ENSURING
MATERIAL AVAILABLE WHEN REQUIRED
• SUPPLY CHAIN MACRO PROCESSES
• CRM – All processes focusing on interface between firm and
customers
• ISCM – A processes internal to firm
• SRM – All processes focusing on interface between firm and
suppliers
Supply Chain 18#

19. FRONT OFFICE
A Customer’s View on linethe Supply Chain
Ex.-Travel arrangements
of
Order the product... Take delivery...
with configuration complexity on-line the next day at home, and
get started without a hassle
Pay for the product... Service the product...
in a foreign currency by credit card anywhere in the world
Supply Chain 19#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

20. Push/Pull View of Supply Chains
PULL – PROCESSES IN RESPONSE TO A CUSTOMER ORDER
PUSH – PROCESSES IN ANTICIPATION OF A CUSTOMER ORDER
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles Customer
Order arrives
PUSH PROCESSES PULL PROCESSES
Supply Chain 20#

21. UNDERSTANDING THE SUPPLY CHAIN
• Homework
• EXAMPLES:
– EXAMPLES OF SUPPLY CHAINS –1.5 – pp 20-25
– WHAT ARE SOME OF THE KEY ISSUES IN THESE SUPPLY
CHAINS
– ANALYSE AND COMMENT ON 7-Eleven and Amazon– ANSWER
QUESTIONS 1TO 6 FOR EACH
Supply Chain 21#

22. SUPPLY CHAIN PERFORMANCE – STRATEGIC
FIT AND SCOPE (Lesson 2)
FILM – CHAIN REACTION
Business Strategy
New Product Marketing
Strategy Strategy
Supply Chain Strategy
New Marketing
Product and Operations Distribution Service
Development Sales Supply and
Manufacture
Finance, Accounting, Information Technology, Human Resources
EXAMPLES? Supply Chain 22#

23. ACHIEVING STRATEGIC FIT
• Step 1. Understanding the Customer and Demand
– Quantity - Lot size Implied
– Response time Demand
– Product variety Uncertainty
– Service level See Table 2.1
– Price Regular Demand
– Innovation Uncertainty due to
customers demand and
Implied Demand
Uncertainty due to
uncertainty in
Supply Chain
Supply Chain 23#

24. Levels of Implied Demand Uncertainty
Detergent High Fashion
Long lead time steel Emergency steel
Customer Need
Price Responsiveness
Low High
Implied Demand Uncertainty Attributes (Table 2-2)
Low Implied Uncertainty High Implied Uncertainty
Product Margin Low – High
Aver. Forecast Error 10% 40-100%;
Aver. Stockout rate 1-2% 10-40%;
Aver. markdown 0% 10-25%
Supply Chain 24#

25. SUPPLY SOURCE UNCERTAINTY
• TABLE 2.3 SUPPLY UNCERTAINTY
– FREQUENT BREAKDOWNS
– UNPREDICTABLE AND/OR LOW YIELDS
– POOR QUALITY
– LIMITED SUPPLIER CAPACITY
– INFLEXIBLE SUPPLY CAPACITY
– EVOLVING PRODUCTION PROCESSES
• LIFE CYCLE POSITION OF PRODUCT
– NEW PRODUCTS HIGH UNCERTAINTY
• DEMAND AND SUPPLY UNCERTAINTY FIG 2.2
Supply Chain 25#

26. Step 2 - Understanding the Supply Chain:
Cost-Responsiveness Efficient Frontier (Table: 2.4)
Responsiveness – to Quantity, Time, Variety, Innovation, Service level
Exercise: Give examples of products that are:
Highly efficient, Somewhat efficient,
Responsiveness Somewhat responsive and highly responsive
High
Low
Fig 2.3 High Low Cost (efficient)
Supply Chain 26#

27. Step 3. Achieving Strategic Fit
Responsive
Companies try to move
supply chain Zone of Strategic fit High Cost
f
Responsiveness n e o Fit
spectrum Zo egic
t
Stra
Low Cost
Efficient
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
Supply Chain 27#

28. SCOPE
• Comparison of Efficient & Responsive Supply Chain Table 2.4
– EFF Vs RESPON. STRATEGY for DESIGN; PRICING; MANUF; INVEN; LEAD
TIME; SUPPLIER
– THERE IS A RIGHT SUPPLY CHAIN STRATEGY FOR A GIVEN COMPETITIVE STRATEGY
(without a competitive strategy there is no right supply chain!)
• OTHER ISSUES AFFECTING STRATEGIC FIT
– MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS
• TAILOR SC TO MEET THE NEEDS OF EACH PRODUCT’S DEMAND
– PRODUCT LIFE CYCLE Fig 2.8
• AS DEMAND CHARACTERISTICS CHANGE, SO MUST SC STRATEGY - EXAMPLES
– COMPETITIVE CHANGES OVER TIME (COMPETITOR)
• EXPANDING STRATEGIC SCOPE
– INTERCOMPANY INTERFUNCTIONAL SCOPE
• MAXIMIZE SUPPLY CHAIN SURPLUS VIEW – EVALUATE ALL ACTIONS IN
CONTEXT OF ENTIRE SUPPLY CHAIN (FIG 2.12)
– FLEXIBLE INTERCOMPANY INTERFUNCTIONAL SCOPE
• FLEXIBILITY CRITICAL AS ENVIRONMENT BECOMES DYNAMIC
Supply Chain 28#

29. Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
Supply Chain 29#

30. Drivers of Supply Chain Performance
Competitive Strategy
Supply Chain Strategy
Efficiency Responsiveness
Supply chain structure
Inventory Transportation Facilities Information
Drivers
TRADE OFF FOR EACH DRIVER
Supply Chain 30#

31. INVENTORY
– ‘WHAT’ OF SUPPLY CHAIN
– MISMATCH BETWEEN SUPPLY AND DEMAND
– MAJOR SOURCE OF COST
– HUGE IMPACT ON RESP0NSIVENESS
– MATERIAL FLOW TIME
• I = R T (I – Inventory, R – Throughput, T – Flow time)
– ROLE IN COMPETITIVE STRATEGY
– COMPONENTS
• CYCLE INVENTORY – AVERAGE INVENTORY BETWEEN
REPLENISHMENTS
• SAFETY INVENTORY - TO COVER DEMAND AND SUPPLY
UNCERTAINITY
• SEASONAL INVENTORY – COUNTERS PREDICTABLE
VARIATION
– OVERALL TRADE OFF: RESPONSIVENESS VS
EFFICIENCY
Supply Chain 31#

32. TRANSPORTATION
• ‘HOW’ OF SUPPLY CHAIN
• LARGE IMPACT ON RESPONSIVENESS AND EFFICIENCY
• ROLE IN COMPETITIVE STRATEGY
• COMPONENTS
– MODE – AIR, TRUCK, RAIL, SHIP, PIPELINE, ELECTRONIC
– ROUTE SELECTION
– IN HOUSE OR OUTSOURCE
• OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY
Supply Chain 32#

33. FACILITIES
• ‘WHERE’ OF SUPPLY CHAIN
• TRANSFORMED (FACTORY) OR STORED
(WAREHOUSE)
• ROLE IN COMPETITIVE STRATEGY
• COMPONENTS
– LOCATION - CENTRAL OR DECENTRAL
– CAPACITY – FLEXIBILITY VS EFFICIENCY
– MANUFACTURING METHODOLOGY – PRODUCT OR
PROCESS FOCUS
– WAREHOUSING METHODOLOGY – STORAGE – SKU, JOB
LOT, CROSSDOCKING
• OVERALL TRADE OFF: RESPONSIVENESS VS
EFFICIENCY
Supply Chain 33#

34. INFORMATION
• AFFECTS EVERY PART OF SUPPLY CHAIN
– CONNECTS ALL STAGES
– ESSENTIAL TO OPERATION OF ALL STAGES
• ROLE IN COMPETITIVE STATEGY
– SUBSTITUTE FOR INVENTORY
• COMPONENTS
– PUSH VS PULL
– COORDINATION AND INFORMATION SHARING
– FORECASTING AND AGGREGATE PLANNING
– ENABLING TECHNOLOGIES
• EDI
• INTERNET
• ERP
• SCM
• OVERALL TRADE OFF: RESPONSIVENESS VS EFFICIENCY ?
Supply Chain 34#

35. Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability
Transportation Consolidation Speed
Facilities Consolidation / Proximity /
Dedicated Flexibility
Information What information is best suited for
each objective
Supply Chain 35#

36. MAJOR OBSTACLES TO ACHIEVING FIT
• Multiple global owners / incentives in a supply chain
– Information Coordination & Contractual Coordination
Local optimization and lack of global fit
• Increasing product variety / shrinking life cycles / demanding
customers/customer fragmentation
Increasing demand and supply uncertainty
Supply Chain 36#

37. OBSTACLES TO ACHIEVING STRATEGIC FIT
• INCREASING VARIETY OF PRODUCTS
• DECREASING PRODUCT LIFE CYCLES
• INCREASINGLY DEMANDING CUSTOMERS
• FRAGMENTATION OF SUPPLY CHAIN OWNERSHIP
• GLOBALIZATION
• DIFFICULTY EXECUTING NEW STRATEGIES
• ALL INCREASE UNCERTAINTY
Supply Chain 37#

38. Dealing with Product Variety: Mass Customization
Long
Lead Time
Short
Mass
Customization
t ion Low Low Co
za st
mi
sto
Cu
High
High
Supply Chain 38#

39. Fragmentation of Markets and Product Variety
• Are the requirements of all market segments served
identical?
• Are the characteristics of all products identical?
• Can a single supply chain structure be used for all
products / customers?
• No! A single supply chain will fail different customers
on efficiency or responsiveness or both.
Supply Chain 39#

40. HOMEWORK
• Page 49 – Nordstrom
– Answer Questions 1 to 4
• Answer the above questions for Amazon.com
• Page 67
– Answer Questions 1 to 4
Supply Chain 40#

41. REVIEW QUESTIONS
• WHAT IS STRATEGIC FIT? HOW IS IT ACHIEVED?
– COMPANY’S APPROACH TO MATCH DEMAND REQUIREMENTS
AND SUPPLY POSITIONING
– MULTIPLE PRODUCTS AND CUSTOMER SEGMENTS
– PRODUCT LIFE CYCLE
• WHAT IS STRATEGIC SCOPE?
– INTERCOMPANY, INTERFUNCTIONAL EXTENSION
• WHAT ARE THE SUPPLY CHAIN DRIVERS. WHAT ARE
THEIR ROLES AND COMPONENTS?
– INVENTORY; FACILITIES; TRANSPORTATION; INFORMATION
• OBSTACLES
Supply Chain 41#

42. Demand-Management Activities Lesson 3
Forecasting (uncertainty) Order service (certainty)
Demand management
RULE: Do not forecast what you can plan, calculate, or extract from
supply chain feedback.
Source: Adapted from Plossl, “Getting the Most from Forecasts,” APICS 15th International Conference Proceedings, 1972
Supply Chain 42#

43. DETERMINING DEMAND
• FORECASTING
– TWO TYPES – WRONG AND LUCKY
– TWO NUMBERS – QUANTITY AND DATE
– ELEMENTS of a GOOD FORECASTING SYSTEM:
• EQUAL CHANCE OF BEING OVER OR UNDER
• INCLUDES KNOWN FUTURE EVENTS
• HAS RANGE OR FORECAST ERROR ESTIMATE
• REVIEWED REGULARLY
Supply Chain 43#

44. FORECASTING
• GENERAL PRINCIPLES:
– MORE ACCURATE AT THE AGGREGATE LEVEL
– MORE ACCURATE FOR SHORTER PERIODS OF TIME CLOSER TO
PRESENT
– SET OF NUMBERS TO WORK FROM, NOT TO WORK TO
– MOSTLY ALWAYS WRONG
– EXAMPLE: MONTHLY vs DAILY EXPENDITURE
Supply Chain 44#

45. FORECASTING
• MAIN TECHNIQUES:
– QUALITATIVE
• MANAGEMENT REVIEW
• DELPHI METHOD
• MARKET RESEARCH
– QUANTITIVE
• MOVING AVERAGE
• WEIGHTED MOVING AVERAGE
• EXPONENTIAL SMOOTHING
• REGRESSION ANALYSIS
• SEASONALILTY
• PYRAMID
Supply Chain 45#

46. FORECASTING
• QUALITATIVE
– USEFUL ON NEW PRODUCTS
– AS A SUPPLEMENT TO QUANTITATIVE NUMBERS
• QUANTITATIVE
– NEEDS HISTORICAL DATA OR PROJECTED DATA
– AVAILABLE
– CONSISTENT
– ACCURATE
– UNITS - MEASURABLE
Supply Chain 46#

47. WORK OUT JUNE’s FORECASTS FOR
ALL SKU’s
Month
SKU Jan Feb Mar Apr May Jun
A 25 21 23 2321 21
B 27 23 26 21 25
C 16 18 17 23 30
D 23 26 25 52 23
E 29 30 ? 26 28
Total 120 118 91 2443 127
What actions should be taken?
What is forecast for June?
For each SKU? For total?
Supply Chain 47#

48. Simple Moving Averages (SMA)
Simple Moving Average (SMA) DΤ + DΤ- 1 + DΤ- 2
F +1 =
Τ
n
Demand (3-period) (4-period)
Forecast Forecast
180 start-up start-up
160
220 186.6
200 193.3 190
260 226.6 210
240 233.3 230
Where F = Forecast T = Current time period
D = Demand n = Number of periods( max)
Exercise: Work out the SMA for two periods
Question: What determines the number of periods used? Why?
Supply Chain 48#

49. Weighted Moving Averages
Weighted Moving Average (WMA) FT + 1 = WTD T + WT − 1D T − 1... + ...WT − n+ 1D T − n+ 1
Forecast Forecast
Demand
(.2, .3, .5)(.1, .2, .3, .4)
180 start-up start-up
160
220 194
200 198 196
26 23 224
0240 4
238 236
Where: F = Forecast T = Current time period
D = Demand n = Number of periods (max)
W = Weight, where greatest weight
applies to most recent period and sum of weights = 1
Exercise: Work out forecast for two periods with weights of 0.4,0.6
What periods and weights will use for forecasting soap and fashion clothes Why?
Supply Chain 49#

50. Exponential Smoothing
Decision
þ Select or compute a smoothing constant (α )
þ Relationship of exponential smoothing to simple
moving average
Formulas Where
1 T+ 1 = α
FT +F= = T D (1+− − α )F T
F D + + (1 − α )F
D T (1 )FT F = forecast value
T+1 T T T = current time period
FT 1 T + FT= Fαα (D T − F
or or +F= = + +(D T(D FT−)F T))
or F 1 FT + α − D = demand
T+1 T T T
α = exponential factor
<1
α= 2 Where
n+ 1 n = number of past periods
to be captured
Supply Chain 50#

51. Exponential Smoothing —
Continued
FT+1 = FT + a (DT – FT)
Period Demand Forecast Forecast Forecast
(α = .1) (α = .5) (α = .9)
0 180 start-up start-up start-up
1 160 180 180 180
2 220 178 170 162
3 200 182 195 214
4 260 184 198 201
5 240 192 229 254
6 196 234 241
Work out forecasts with α=0.3
What α’s will use for forecasting soap and fashion clothes Why?
Supply Chain 51#

52. Simple Trended Series — Example
 Algebraic Trend Projection
X Y a. Trend (“rise” over “run”) = (13 - 4)/3 = 3 = b
0 4 b.Y-intercept (a) = “compute”
1 7 the Y value for X = 0, thus Y-int = 4
2 10
3 13 c. Period 4: Y = a + bX = 4 + 3 (4 [for period 4]) = 16
13
10
Rise
7
4 Run
1 2 3
Supply Chain 52#

53. REGRESSION ANALYSIS
• Regression formula b=slope, a=intercept
• Slope b= n∑ XY − ∑ X ∑ Y
Intercept
n ∑ X − (∑ X )
2 2 a = Y - bX
• and
Y = a + bX
• Work out this example:
b=
• Year Variable Y (Passengers)
• 1 77
• 2 75
• 3 72
• 4 73
• 5 71
• What is the regression equation? What is the forecast for Year 6?
Supply Chain 53#

54. TRENDED TIME SERIES FORECASTING
• Question: How do you forecast a seasonal item
• Y(forecast) = [A (intercept) + X (trend) x T (time period) ]
x S (seasonality factor)
• FIRST DETERMINE LEVEL AND TREND - IF SEASONAL
DESEASONALIZE
• THEN FORECAST USING EXPONENTIAL OR TREND
• RESEASONALIZE
Supply Chain 54#

55. Seasonal Series Indexing
Seasonal
Month Year 1 Year 2 Year 3 Total Index
Jan 10 12 11 33 0.33
Feb 13 13 11 37 0.37
Mar 33 38 29 100 1.00
Apr 45 54 47 146 1.46
May 53 56 55 164 1.64
Jun 57 56 55 168 1.68
Yr 1 Yr2
Jul 33 27 34 94 0.94
Aug 20 18 19 57 0.57
Sep 19 22 20 61 0.61
Oct 18 18 15 51 0.51
Nov 46 50 45 141 1.41
Dec 48 53 47 148 1.48
Total 395 417 388 1200 12.00
Supply Chain 55#

56. Seasonal Series Indexing
Sample Data — Continued
1. FIND SEASONALITY FOR EACH PERIOD
2. DEASONALIZE
3. PROJECT USING EXPONENTIAL, REGRESSION ETC
4. REASONALIZE
Where:
Monthly Total (MT) 1200
Formula: Seasonal Index (SI) = AM = = 100
Average Month (AM) 12
33
SIJAN = = .33
100
94
SIJUL = = .94
100
Supply Chain 56#

57. Integrative Example: Calculating a Forecast
with Seasonal Indexes and Exponential Smoothing
 Given
Deseasonalized Seasonal
Demand Forecast Index
July 34 36 0.94
Aug 0.57
 Rationale and Computations
1. Deseasonalize current (July) actual demand
Actual demand = 34/0.94 = 36.17
34
Actual demand = 34/0.94 = 36.17
Actual demand demand = = 34/0.94 = 36.17
Actual = 34/0.94 36.17
Seasonal index 0.94
Seasonal index
Seasonal index
Seasonal index
2. Use exponential smoothing to project deseasonalized data one
period ahead (α = .2)
FT +1 = α D T + (1 − α )FT = (0.2) (36.17) + (0.8) (36) = 36.03
3. Reseasonalize forecast for desired month (August)
= Deseasonalized forecast × seasonal factor
= 36.03 × 0.57 = 20.53 or 21
Supply Chain 57#

58. Exercise
• Boler Corp has the following sales history:
• Quarter Year1 Year2
• 1 140 210
• 2 280 350
• 3 70 140
• 4 210 280
• What seasonal index for each quarter could be used to forecast the
sales of the product for Year 3?
• What would be a forecast for year 3 using an a=0.3 and assuming the
forecast for year 2 was 1000? What would be the forecast for each
quarter in this forecast?
Supply Chain 58#

59. Normal Distribution
Using the Measures of Variability
x
68.26%
95.44%
99.74%
Source: Adapted from CPIM Inventory Management Certification Review Course (APICS, 1998).
Supply Chain 59#

60. Standard Deviation (sigma)
A= Error
F= Actual (Sales – Error
Period Forecast Sales Forecast) Square
1 1,000 1,200 200 d40,000
2 1,000 1,000 0 0
3 1,000 800 – 200 40,000
4 1,000 900 – 100 10,000
5 1,000 1,400 400 160,000
6 1,000 1,200 200 40,000
7 1,000 1,100 100 10,000
8 1,000 700 – 300 90,000
9 1,000 1,000 0 0
10 1,000 900 – 100 10,000
10,000 10,200 200 400,000
Supply Chain 60#

61. Standard Deviation — Continued
∑ (Αi - Fi)
2
Standard Deviation 400,000
= = =211
n -1 9
∑ (Ai
2
- F) 400,000
Standard Deviation =
i
= =200
n 10
ΝΟΤΕ: About the use of n or n - 1 in the above equations
n Use with a large population (> 30 observations)
n - 1 Use with a small population (< 30 observations)
Supply Chain 61#

62. Bias and MAD
A= Error
F= Actual (Sales – Absolute
Period Forecast Sales Forecast) Error
Cumulative sum of error = 1 1,000 1,200 200 200
∑ ( A i − Fi ) = 200 2 1,000 1,000 0 0
3 1,000 800 – 200 200
4 1,000 900 – 100 100
Bias = 5 1,000 1,400 400 400
∑ (Αi - Fi ) = 200 = 20 6 1,000 1,200 200 200
n 10 7 1,000 1,100 100 100
8 1,000 700 – 300 300
Mean Absolute Deviation (MAD) 9 1,000 1,000 0 0
= ∑ Αi - Fi = 1600 = 160 10 1,000 900 – 100 100
n 10
10,000 10,200 200 1,600
Supply Chain 62#

63. Measures of Forecast Error
 Cumulative Sum of Error ∑(A - F)
i i
 Bias ∑ (Ai - Fi )
n
 Mean Absolute Deviation (MAD)
∑ Αi - Fi
n
 Standard Deviation=1.25 MAD or
∑(Α i - Fi)2 or ∑(Ai - Fi )2
NOTE: About the use of n or n-1 in the above equations n - 1 n
n Use with a large population (> 30 observations)
n-1 Use with a small population (< 30 observations)
Supply Chain 63#

64. Confidence Intervals
 Definition
A confidence interval is a measure of distance, increments of
which are represented by the z value
 Formulas 2 2
∑ (Ai - Fi ) ∑ (Ai - Fi )
s ( Std Dev) =
1 OR
n -1 n
Distance - Mean = x i - x
z=
StandardDeviation s
 Relationship or x i = x + z s
 1 standard deviation (σ) = 1.25 × MAD
 In the example data σ = 1.25 × MAD
= 1.25 × 160 = 200
Source: Raz and Roberts, “Statistics,” 1987
Supply Chain 64#

65. Expressing z Values (for +ve
probabilities)
Probabilit
y
Βack
D +1 SD +2 SD +3 SD
Cumulative normal distribution from left side of distribution (x
+ z)
z .0 .1 .2 .3 .4 .5 .6 .7 .8 .9
0.0 .5000 .5398 .5793 .6179 .6554 .6915 .7257 .7580 .7881 .8159
1.0 .8413 .8643 .8849 .9032 .9192 .9332 .9452 .9554 .9641 .9713
2.0 .9773 .9821 .9861 .9893 .9918 .9938 .9953 .9965 .9974 .9981
3.0 .9987 .9990 .9930 .9995 .9997 .9998 .9998 .9999 .9999 .9999
Supply Chain 65#

66. Application Problem — Service Level
 Given
Average sales for item P is 50 units per week with a standard
deviation of 4
 Required
What is the probability that more than 60 units will be sold?
a. .006
b. .494
c. .506
d. .994
Supply Chain 66#

67. Homework
Q1 - 2. A demand pattern for ten periods for a certain product was given as 127, 113, 121,
123, 117, 109, 131, 115, 127, and 118. Forecast the demand for period 11 using each of
the following methods: a three-month moving average, a three-month weighted moving
average using weights of 0.2, 0.3, and 0.5, exponential smoothing with a smoothing
constant of 0.3, and linear regression. Compute the MAD for each method to determine
which method would be preferable under the circumstances. Also calculate the bias in
the data, if any, for all four methods, and explain the meaning.
Q2 - The following information is presented for a product:
• 2001 2002
• Forecast Demand Forecast Demand
• Quarter I 200 226 210 218
Quarter II 320 310 315 333
• Quarter III 145 153 140 122
• Quarter IV 230 212 240 231
• a) What are the seasonal indicies that should be used for each quarter?
• What is the MAD for the data above?
Supply Chain 67#

68. Supply Chain Network
Fundamentals
William T. Walker, CFPIM, CIRM, CSCP
Practitioner, Author, and Supply Chain Architect
Supply Chain 68#

69. Session Outline
• Understanding How Supply Chains Work
• The Value Principle and Network Stakeholders
• Mapping a Supply Chain Network
• The Velocity and Variability Principles
• Locating the Push/Pull Boundary
• The Vocalize and Visualize Principles
• Summary
Supply Chain 69#

70. Learning Objectives
By teaching the principles of supply chain management
to understand how a supply chain network works...
 We learn how to map a supply chain network.
 We learn how to engineer reliable network infrastructure
by maximizing velocity and minimizing variability.
 We learn how the Bill Of Materials relates to the network.
 We learn how locating the push/pull boundary converts
network operations from Build-To-Stock to Build-To-Order.
 We learn how to maximize throughput by engineering
the means to vocalize demand and to visualize supply.
Supply Chain 70#

71. A SUPPLY CHAIN is
the global network
used to deliver products and services
from raw materials to end customers
through engineered flows of
information, material, and cash.
Contributed to the APICS Dictionary, 10th Edition by William T. Walker
Supply Chain 71#

72. Network Terminology
"Source" "Make" "Deliver" "Return"
Upstream Midstream Downstream Reverse Stream
Zone Zone Zone Zone
Customer
Physical Flow
Info Flow
Cash Flow
Value-Adding Value-Subtracting
Supply Chain 72#

73. Supply Chain Network Operations
Material moves downstream to the customer.
Cash moves upstream to the supplier.
Material
M1 M2 M3
Supplier Trading Customer
Partner
Cash
$3 $2 $1
Supply Chain 73#

74. The Value Principle:
Every stakeholder wins when throughput is maximized.
Value is
Return In
Investment
Shareholders
Value is
Trading the Perfect
Value is Suppliers Customers Order
Partner
Continuity
of Demand Employees
Value is
Employment
Stability
Supply Chain 74#

75. The Network Rules
In an effective supply chain network
each trading partner works to...
 Maximize velocity,
 Minimize variability,
 Vocalize demand, and
 Visualize supply
...in order to maximize throughput providing
Value for each stakeholder.
However, a lack of trust often gets in the way.
Supply Chain 75#

76. The Network Trust Factor
Network trust is based upon personal relationships
and the perception that things are okay regarding:
 Network operating rules are clear
 Supply and demand information is shared
 Performance measures are agreed upon
 Relationship non-disclosures are kept secret
 Inventory investment is not a win-lose game
Supply Chain 76#

77. Bill Of Materials
Item Master Product Structure
- Stock Keeping Unit (SKU) Number - Parent To Child Relationship
- Description - Quantity Per Relationship
- Unit Of Measure
- Approved Supplier
- Country Of Origin For Example
- Cost Items: A3, B2, B5, C1, C2, C3, D1
- Lead Time Suppliers: S1, S2, S3, S4, S5
BOM Level 0. A3
S1
BOM Level 1. B5 B2 S2
BOM Level 2. C1 C2 C3 S4
S3
BOM Level 3.
D1 S5
Supply Chain 77#

78. Supply Chain Network Map
Upstream Midstream Downstream
Driven by the Bill Of Materials Driven by the Delivery Channel
Supply Chain 78#

79. How To
Map A Network
1. Start midstream and imagine finished goods
sitting on a rack at the central depot.
2. Now, use the Bill Of Materials and work
upstream to reach each raw material supplier.
3. Then, identify each different fulfillment
channel used to reach the local mission.
4. Determine which organizations are trading partners versus nominal trading
partners.
5. Logistics service providers, information
service providers, and financial service
providers are not part of the network map.
Supply Chain 79#

80. The Velocity Principle:
In network implementation
throughput is maximized
when order-to-delivery-to-cash velocity is maximized
by minimizing process cycle time.
The 5V Principles of Supply Chain Management explain how a supply
chain network works by answering what, when, where, why, and how:
Velocity – how are relationships connected to make the delivery?
Supply Chain 80#

81. The Network Flow Model
Material Material
Order-To-Stock Order-To-Delivery
Trading
Supplier Info Info Customer
Partner
Invoice-To-Cash Invoice-To-Pay
Cash Cash
From: William T. Walker, Supply Chain Architecture: A Blueprint for
Networking the Flow of Material, Information, and Cash, CRC Press,
©2005.
Supply Chain 81#

82. Logistics Touches Every Subcycle
Order-To-Stock Order-To-Delivery
Invoice-To-Cash Invoice-To-Pay
 Transportation moves material from seller to buyer
 In some cases orders/ invoices/ cash move by mail
 Warehouse issues trigger invoices
 Warehouse receipts trigger payments
Supply Chain 82#

83. Import/ Export Boundaries
Return
Imports Exports
Countr y A Seller Shipment Buyer
Countr y B
Exports Imports
Country A exports and Country B imports in a forward supply chain.
Country B exports and Country A imports in a reverse supply chain.
Import duty and export licensing add complexity to network linkages
decreasing velocity and increasing variability.
Supply Chain 83#

84. The Variability Principle:
In network implementation
throughput is maximized
when order-to-delivery-to-cash variability is minimized
by minimizing process variance.
The 5V Principles of Supply Chain Management explain how a supply
chain network works by answering what, when, where, why, and how:
Variability – what is likely to change from one delivery to the next?
Supply Chain 84#

85. Outward Signs of Variability
 Unplanned demand
 Backordered inventory
 Inventory leakage
 Capacity constraints
 Lower than normal yields
 Longer than expected transit times
 Delays in clearing Customs
 Delayed payment
Supply Chain 85#

86. To Maximize Velocity
 Eliminate unnecessary process steps
 Shorten the longest serial process steps by
eliminating queue time and automating steps
 Convert serial process steps into
parallel process steps
To Minimize Variability
 Rank order the variances
 Minimize the root cause of largest variance
 Continue with the next largest variance, etc.
Supply Chain 86#

87. Push/Pull Boundary
Order
Supply Push Pull Demand
Push/Pull
Boundary
Forecast
Supply Chain 87#

88. Customer Lead Time
Build-To-Order (BTO) Order
Push Pull Customer
Demand
Push/Pull
F/C Boundary
Build-To-Stock (BTS) Order
Push Pull Customer
Demand
Push/Pull
F/C Boundary
Supply Chain 88#

89. How To
Locate A Push/Pull Boundary
1. Know the competitive situation; for example, if
competitive products are off-the-shelf, then the
push/pull boundary must be close to the customer.
2. The push/pull boundary is a physical inventory location that bisects the entire
supply chain.
3. Order-To-Delivery Cycle Time =
Order Processing and Transmission Time +
Shipment Processing, Picking, and Packing Time +
Transportation and Customs Clearance Time
Supply Chain 89#

90. The Vocalize Principle:
In network operations
throughput is maximized
by pulling supply to demand
by vocalizing actual demand at the network constraint.
The 5V Principles of Supply Chain Management explain how a supply
chain network works by answering what, when, where, why, and how:
Vocalize – who knows the full requirements of the order?
Supply Chain 90#

91. Common Causes of Stockouts
Quantity
Q Demand Uncertainty
R
SS
Time
L
Quantity
Lead Time Variability
Q
(LT = Cycle Time + Transit Time)
R
SS
Time
L
Quantity Supply Uncertainty
Q
R
SS
Time
L
Supply Chain 91#

92. The Planning Interface
MRP Materials Sales & Operations Plan Push From
Requirements Master Schedule Forecast
CRP Capacity
Requirements
Preload
Inventory Pull To
Capable Demand
Network
Push Zone Pull Zone
I C I C
Throughput
Push/Pull Boundary
Upstream The Supply Chain Network Downstream
Supply Chain 92#

93. Push Inventory And Capacity
Push Zone
Forecast
I C
Throughput
Safety Safety
Ending Inventory = Starting Inventory
- Forecasted Demand
+ Production
When actual demand exceeds forecasted demand,
either capacity or inventory can constrain production
causing lead time to expand.
Supply Chain 93#

94. Pull Inventory And Capacity
Pull Zone
Order
I C
Max Max Throughput
Ending Inventory = Starting Inventory
- Actual Demand
+ Production
Throughput is limited to the smaller of limited inventory
or limited capacity.
Supply Chain 94#

95. The Visualize Principle:
In network operations
throughput is maximized
by pushing supply to demand
by visualizing actual inventory supply across the network.
The 5V Principles of Supply Chain Management explain how a supply
chain network works by answering what, when, where, why, and how:
Visualize – where is the inventory now and when will it be available?
Supply Chain 95#

96. Packaging And Labeling
[ ] Cartons, plastic cushions, and labels
Cartons may be missing from the product BOM.
[ ] RFID/ bar code on all packaging.
[ ] Select a wall thickness and box burst
Master strength to protect the product.
Carton
[ ] Keep Country Of Origin labeling consistent
from the product to the outside packaging.
[ ] Transportation and warehousing costs
Unit Load are a function of cubic dimensions and weight.
[ ] Items that have to be repalletized for
transport or storage cost more.
Supply Chain 96#

97. Track and Trace
Tra
c e Tra
ck
Supply Chain 97#

98. Apply Technology To Visualize
• Bar Code and 2D Bar Code
• Point Of Use Laser Scanners
• Radio Frequency Identification (RFID)
• Global Positioning by Satellite (GPS)
• Wireless Communication
Supply Chain 98#

99. Measuring Network Inventory
Upstream Issues = Downstream Receipts
Ending Inventory = Starting Inventory + Receipts – Issues
Complete Products Reflect BOM Part Proportions
1. Look for leakages between upstream issues and downstream receipts.
2. Look for inventory balance discrepancies at each trading partner.
3. Look for process yield issues within each trading partner.
Supply Chain 99#

100. To Vocalize
 Be precise about units and configurations
 Acknowledge and handshake all information
 Don't skip any link holding inventory in the chain
To Visualize
 Measure throughput rather than production
 Measure the network capacity constraint
 Measure total network inventory
Supply Chain 100#

101. In Summary
Work the 5V Principles to maximize throughput.
I win!
Shareholders
Trading We win!
Suppliers Customers
We win! Partner
Employees
I win!
Supply Chain 101#

102. AGGREGRATE PLANNING (Chap8) Lesson 5
• PROCESS OF DETERMINING LEVELS OF
– PRODUCTION RATE
– WORKFORCE
– OVERTIME
– MACHINE CAPACITY
– SUBCONTRACTING
– BACKLOG
– INVENTORY
• GIVEN DEMAND FORECAST – DETERMINE PRODUCTION,
INVENTORY/BACKLOG AND CAPACITY LEVEL FOR EACH PERIOD
• FUNDAMENTAL TRADE-OFFS
– CAPACITY(REGULAR TIME, OVERTIME, SUBCONTRACING)/COST
– INVENTORY/SERVICE LEVEL
– BACKLOG/LOST SALES
Supply Chain 102#

103. AGGREGRATE PLANNING STRATEGIES
• STRATEGIES - SYNCHRONIZING PRODUCTION WITH DEMAND
– CHASE- USING CAPACITY AS THE LEVER
• BY VARYING MACHINE OR WORKFORCE (numbers or flexibility)
• DIFFICULT TO IMPLEMENT AND EXPENSIVE. LOW LEVELS OF
INVENTORY
– TIME FLEXIBILITY – UTILIZATION AS THE LEVER
• IF EXCESS MACHINE CAPACITY, VARYING HOURS WORKED (workforce
stable, hours vary)
• LOW INVENTORY AND LOWER UTILISATION THAN CHASE
• USEFUL WHEN INVENTORY COST HIGH AND CAPACITY CHEAP
– LEVEL – USING INVENTORY AS THE LEVER
• STABLE WORKFORCE AND CAPACITY
• LARGE INVENTORIES AND BACKLOGS
• MOST PRACTICAL AND POPULAR
Supply Chain 103#

104. SOP FORMAT
PERIOD 1 2 3 4 5 6
SALES
PRODUCTION
INVENTORY/
BACKLOG
• PRODUCTION PLAN = SALES + END INV – BEGIN INV
• PRODUCTION PER MONTH = PRODUCTION PLAN
NUMBER OF PERIODS
• PRODUCTION PLAN = SALES – END BACKLOG +
BEGIN BACKLOG
Supply Chain 104#

105. Sales and Operations Planning Strategies
Total
annual
(or period)
0 1 2 3 4 5 6 7 8 9 10 11 12 units
Level Method
Production 20 20 20 20 20 20 20 20 20 20 20 20 240
Sales 5 5 5 15 25 35 35 35 35 25 15 5 240
Inventory 30 45 60 75 80 75 60 45 30 15 10 15 30 540
Capacity ∆ - - - - - - - - - - - - 0
Chase Strategy
Production 5 5 5 15 25 35 35 35 35 25 15 5 240
Sales 5 5 5 15 25 35 35 35 35 25 15 5 240
Inventory 30 30 30 30 30 30 30 30 30 30 30 30 30 360
Capacity ∆ - - - 1 1 1 - - - 1 1 1 6
Master Planning, Rev. 4.2
Supply Chain 105#

106. Production Rates and Levels Application 1 — Make-to-Stock
• Table Format (Inventory)
Period 0 1 2 3 4
Forecast 150 150 150 150
Production plan
Inventory 200 100
FOR A LEVEL STRATEGY, WORK OUT THE PRODUCTION PLAN AND
INVENTORY BY PERIOD
PRODUCTION = SALES + END INV – BEGIN INV
Supply Chain 106#

107. Production Rates and Levels
Application 2 — Make-to-Order
• Table Format (Backlog)
Period 0 1 2 3 4
Forecast 150 150 150 150
Production plan
Backlog 200 100
FOR A LEVEL STRATEGY WORK OUT THE PRODUCTION PLAN AND BACKLOG BY
PERIOD
PRODUCTION = SALES + BEGIN BL - END BL
Supply Chain 107#

108. OPTIMIZATION THRU LINEAR PROGRAMMING
• AGGREGATE PLANNING MODEL – RED TOMATO Pp 210 (105)
– MAXIMIZING HIGHEST PROFIT OVER TIME PERIOD
– DETERMINE DECISION VARIABLES PP212(107)
– OBJECTIVE FUNCTION – MINIMIZE TOTAL COST
• DEVELOP EQUATIONS FOR ALL THE COST ELEMENTS- Eq 5/8.1
– CONSTRAINTS EQUATIONS
• WORKFORCE
• CAPACITY
• INVENTORY
• OVERTIME
– OPTIMIZE OBJECTIVE FUNCTION
– FORECAST ERROR
• SAFETY INVENTORY
• SAFETY CAPACITY
Supply Chain 108#

109. Excel File
Aggregate Planning (Define Decision Variables)
Wt = Workforce size for month t, t = 1, ..., 6
Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6
Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6
Pt = Production in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units stocked out at the end of month t, t = 1, ..., 6
Ct = Number of units subcontracted for month t, t = 1, ..., 6
Ot = Number of overtime hours worked in month t, t = 1, ..., 6
Supply Chain 109#

110. Aggregate Planning 8.2
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit
DEMAND Table 8.1 (5.1)
Supply Chain 110#

111. Aggregate Planning (Define Objective Function)
Monthly
6 6
Min ∑ 640W t + ∑ 300 H t
t =1 t =1
6 6 6
+ ∑ 500 Lt + ∑ 6 Ot + ∑ 2 I t
t =1 t =1 t =1
6 6 6
+ ∑ 5 S t + ∑10 Pt + ∑ 30 C t
t =1 t =1 t =1
Supply Chain 111#

112. Aggregate Planning (Define Constraints Linking
Variables)
• Workforce size for each month is based on hiring and
layoffs
W t = W t −1 + H t − Lt, or
W t − W t −1 − H t + Lt = 0
for t = 1,...,6, where W 0 = 80.
Supply Chain 112#

113. Aggregate Planning (Constraints)
• Production for each month cannot exceed capacity
Pt ≤ 40W t + Ot 4 ,
40W t + Ot 4 − Pt ≥ 0,
for t = 1,...,6.
Supply Chain 113#

114. Aggregate Planning (Constraints)
• Inventory balance for each month
I t −1 + Pt + C t = Dt + S t −1 + I t − S t ,
I t −1 + Pt + C t − Dt − S t −1 − I t + S t = 0,
for t = 1,...,6,where I 0 = 1,000,
S 0 = 0,and I 6 ≥ 500.
Supply Chain 114#

115. Aggregate Planning (Constraints)
• Over time for each month
Ot ≤ 10W t,
10W t − Ot ≥ 0,
for t = 1,...,6.
Supply Chain 115#

116. SOLVING PROBLEM USING EXCEL
• STEP 1 BUILD DECISION VARIABLE TABLE (fig8.1)
– ALL CELLS 0, EXCEPT PERIOD 0 FOR WORKFORCE AND INVENTORY
– ENTER DEMAND (TABLE 8.4)
• STEP 2 CONSTRUCT CONSTRAINT TABLE (fig8.2)
• STEP 3 CREATE a CELL HAVING THE OBJECTIVE FUNCTION
– (Formula 8.1) Optimizing TOTAL COSTS (Fig 8.3)
• STEP 4 USE TOOLS SOLVER (Fig 8.4)
• REPEAT IF OPTIMUM SOLUTION NOT OBTAINED
• HOMEWORK (see homework)
Supply Chain 116#

117. AGGREGATE PLANNING IN PRACTICE
• MAKE PLANS FLEXIBLE BECAUSE FORECASTS
ARE ALWAYS WRONG
– PERFORM SENSITIVITY ANALYSIS ON THE INPUTS – I.E.
LOOK AT EFFECTS OF HIGH/LOW
• RERUN THE AGGREGATE PLAN AS NEW DATA
EMERGES
• USE AGGREGATE PLANNING AS CAPACITY
UTILIZATION INCREASES
– WHEN UTILIZATION IS HIGH, THERE IS LIKELY TO BE
CAPACITY LIMITATIONS AND ALL THE ORDERS WILL
NOT BE PRODUCED
Supply Chain 117#

118. Process Flow Measures
• FLOW RATE (Rt), CYCLE TIME (Tt), & INVENTORY (It)
RELATIONSHIPS
– F = Flow Rate or Throughput is output of a line in pieces per time
– T = Cycle time is the time taken to complete an operation
– I = Inventory is the material on the line
– LITTLE’s LAW: Av. I = Av. R x Av. T x Variability factor Examples:
• If Inventory is 100 pieces and Cycle time is 10 hours, the Throughput rate is 10 pcs
per hour
• If Cycle time is halved; Throughput is doubled
• If Inventory is halved; cycle time is halved
See Equation 8.6 How do we get Av Inv of 895 and Flow time of 0.34 months
on page 227/216
Supply Chain 118#

119. Homework
• Ex. Work out Inventory, Rate and cycle time for values in
Tables 8.4,8.5
Supply Chain 119#

120. Supply Chain Network Basics – Lesson 4
• Guest Lecture – go to Poly Blackboard
Supply Chain 120#

121. MANAGING SUPPLY AND DEMAND
PREDICTABLE VARIABILITY (LESSON 6)
• Predictable Variability – Change in Demand that can be forecast or guided
– MANAGING DEMAND – Short time price discounts, trade promotions
• MANAGING SUPPLY – Capacity, Inventory, Subcontracting & Backlog, Purchased
product
– MANAGING CAPACITY
• TIME FLEXIBILITY FROM WORKFORCE (OVERTIME)
• USE OF SEASONAL WORKFORCE
• USE OF SUBCONTRACTING
• USE OF DUAL FACILITIES – DEDICATED AND FLEXIBLE
• DESIGN PRODUCT FLEXIBILITY INTO PRODUCTION
• USE OF MULTI-PURPOSE MACHINES (CNC MACHINE CENTERS)
– MANAGING INVENTORY
• USING COMMON COMPONENTS ACROSS MULTIPLE PRODUCTS
• BUILD INVENTORY OF HIGH DEMAND OR PREDICTABLE DEMAND PRODUCTS
Supply Chain 121#

122. MANAGING DEMAND (Predictable Variability)
• Manage demand with pricing
– Factors influencing the timing of a promotion:
• Impact on demand; product margins; cost of holding inventory; cost of
changing capacity
• Demand increase (from discounting) due to:
– Market growth
– Stealing market share
– Forward buying
Discount of $1 increases period demand by 10%
Reduce price by $1 in Jan, increases sales by 10% in first month - Tab
9.4, 9.5 – effect on cost, profit, inventory
If discount is in April, highest demand month - Tab 9.6, 9.7
• See the effects of various combination Tab 9-12
• Summary Tab 9.12 & 9.13 Discuss
Supply Chain 122#

123. PREDICTABLE VARIABILITY IN PRACTICE
• COORDINATE MARKETING, SALES AND OPERATIONS
– SALES AND OPERATIONS PLANNING
– ONE GOAL MAXIMIZING PROFIT, ONE GAME PLAN
• TAKE PREDICABLE VARIABILITY INTO ACCOUNT
WHEN MAKING STRATEGIC DECISIONS
• PARTNER WITH PRINCIPAL CUSTOMERS, ELIMINATE
PREDICTIONS!
• PREEMPT (PROMOS ETC.), DO NOT JUST REACT TO
PREDICTABLE VARIABILITY
Supply Chain 123#

124. MANUFACTURING - MANAGING LEAD TIME
• CRITICAL DRIVER OF ALL MANUFACTURE
– LAYOUT AND WORKPLACE ORGANIZATION
– CONSTRAINT MANAGEMENT
– VARIABILITY AND QUEUES
– LOT SIZES AND SET UP REDUCTION
– WORK IN PROCESS
– FLEXIBILITY
• MUST BE COMPANY FOCUS
• MEASURED AND MONITORED
– X BUTT TO BUTT
–
Supply Chain 124#

125. MANAGING INVENTORY
• The role of inventory in the supply chain
– Cycle Inventory (making or purchasing inventory in large
lots) takes advantage of economies of scale to lower total cost –
material cost, fixed ordering cost and holding cost.
• Why hold inventory?
– Economies of scale
• Batch size and cycle time
• Quantity discounts
• Short term discounts / Trade promotions
– Stochastic variability of supply and demand
• Evaluating service level given safety inventory
• Evaluating safety inventory given desired service level
• Levers to improve performance
Supply Chain 125#

126. Role of Inventory in the Supply Chain
• Overstocking: Amount available exceeds demand
– Liquidation, Obsolescence, Holding
• Understocking: Demand exceeds amount available
– Lost margin and future sales
Goal: Matching supply and demand
Supply Chain 126#

127. ROLE OF CYCLE INVENTORY (10.1)
• Q – lot or batch size of an order
• D – Demand
• When demand steady : Cycle Inven = lot size/2 = Q/2
Saw tooth diagram
• Average flow time = cycle inven / demand = Q/2D
• C – material cost
• S – fixed ordering cost
• H – holding cost
• h – cost of holding $1 in inventory for one year
• H = hC cost of holding one piece for one year
Supply Chain 127#

128. Cycle Inventory related costs in Practice
• Inventory holding costs – usually expressed as a % per $ per year
– Cost of capital (Opportunity cost of capital)
– Obsolescence or spoilage cost
– Handling cost
– Occupancy cost (space cost)
– Miscellaneous costs (security, insurance)
• Order costs (same as set up costs in a machining environment)
– Buyer time
– Transportation costs
– Receiving costs
– Other costs
• Cycle Inventory exists in a supply chain because different stages
exploit economies of scale to lower total cost – material cost,
fixed ordering cost and holding cost
Supply Chain 128#

129. Fixed costs: Optimal Lot Size and Reorder Interval
(EOQ)
C: Cost per unit ($C/unit)
h: Holding cost per year as a fraction of
product cost ($%/unit/Year)
H: Holding cost per unit per year H = hC
Q: Lot Size
D: Annual demand
2 DS
Q=
S: Setup or Order Cost
Annual order cost = (D/Q)S
Annual inventory cost = (Q/2)hC
Optimum Q = √ 2DS/hC
H
T: Reorder interval (Q/D)
2S
T=
# orders/yr = D/Q = Optimal order freq
Total Annual Cost = CD+(D/Q)S+(Q/2)hC
See Fig 10-2 Showing effects of Lot Size DH
Supply Chain 129#

130. Example 10.1
Demand, D = 12,000 computers per year
Unit cost, C = $500
Holding cost, h = 0.2
Fixed cost, S = $4,000/order
What is the order quantity Q, the flow time, the reorder
interval and Total cost?
Q = 980 computers
Cycle inventory = Q/2 = 490
Flow time = Q/2D = 0.049 month
Reorder interval, T = 0.98 month
Total Cost = 49,000 + 49,000 + 6,000,000 = $6,098,000
Supply Chain 130#

131. EXPLOITING ECONOMIES OF SCALE
• SINGLE LOT SIZE OF SINGLE PRODUCT (EOQ) = Q
– ANNUAL MATERIAL COST = CD
– NO. OF ORDERS PER YEAR = D/Q
– ANNUAL ORDER COST = (D/Q)*S
– ANNUAL HOLDING COST = (Q/2)H = (Q/2)hC
– TOTAL ANNUAL COST (TC) = CR+(D/Q)*S+(Q/2)hC
– Optimal lot size Q* = √2DS/hC
– Optimal ordering frequency = n* = D/Q* = √DhC/2S
– Key Point: Total Ordering and Holding costs are relatively stable
around the EOQ and a convenient lot size around the EOQ is OK
(rather than a precise EOQ)
– Key Point: If demand increases by a factor of k, the optimal lot
size and no of orders increases by a factor of √k. Flow time
decreases by a factor of √k
– Key point: To reduce Q by a factor of k, fixed cost S must be
reduced by a factor of k2
Supply Chain 131#

132. Reducing Lot Size - Aggregating
• Exercise:
• To reduce Q from 980 to 200, how much must order cost be reduced
• Key point: To reduce Q by a factor of k, fixed cost S must be reduced
by a factor of k2
Supply Chain 132#

133. LOT SIZING WITH MULTIPLE PRODUCTS & CUSTOMERS
• Lot sizing with Multiple Product or Customers
– Aggregating replenishment across products, retailers or suppliers in a single order,
allows for a reduction in lot sizes because fixed costs spread across multiple
products and businesses
– Ordering and delivering independently (See Ex.10.3)
• Each order has independent Holding, Ordering and Annual costs with independent
EOQ’s and Flow Times – Table 10-1
• Total cost = $155,140
– Total cost Ordered and delivered jointly (See Ex.10.4)
• Independent holding costs but combined fixed order cost Table 10-2
• Total Cost = $136,528
– Transportation capacity constraint – aggregating multiple products from same
supplier; single delivery from multiple suppliers (Ex. 10-5)
• Key Point –The key to reducing cycle inventory is reducing lot size. The key
to reducing lot size without increasing costs is to reduce fixed costs associated
with each lot – by reducing the fixed cost itself or aggregating lots across
multiple products, customers or suppliers. We reduce lot size to reduce cycle
time
Supply Chain 133#

134. Impact of product specific order cost
Tailored aggregation – Higher volume products
ordered more frequently and lower volume products
ordered less frequently (rather than ordered and
delivered jointly) 10-6
Summary
Total Costs Product
specific order
cost = $1000
No $155,140 (10-3)
Aggregation
Complete $136,528 (10-4)
Aggregation
Tailored $130,767 (10-6)
Aggregation
Supply Chain 134#

135. Delivery Options
• No Aggregation: Each product ordered separately
• Complete Aggregation: All products delivered on each
truck
• Tailored Aggregation: Selected subsets of products on
each truck
Supply Chain 135#

136. Economies of Scale to exploit Quantity Discounts
• Two common Lot Size based discount schemes
– All unit quantity discounts
• Pricing based on specific quantity break points
– Marginal unit quantity discounts or multiblock tariffs
• Pricing based on quantity break points, but the price is not the
average per block, but the marginal cost of a unit that
decreases at breakpoint
– See example in book on these discounts pages 276-280
Supply Chain 136#

137. WHY QUANTITY DISCOUNTS
– Improved coordination to increase total supply chain profits
• Commodity Products = price set by market.
• Large Manufacturers should use lot based quantity discounts, to
maximize profits (cycle inventory will increase)
• The supply chain profit is lower if each stage makes pricing decisions
independently, maximizing its own profit
• Coordination to maximize profit
– Two part tariff or quantity discounts – supplier passes on some of the
profit to the retailer, depending on volume
– Extraction of surplus through price discrimination
– Trade Promotions
– Lead to significant forward buying by the retailer
– Retailer should pass on optimal discount to customer and keep rest for
themselves
Supply Chain 137#

138. Quantity Discounts
• Discounts improve coordination between Supplier and Retailer to
maximize Supply Chain profits.
• Quantity Discounts are a form of manufacturer returning some reduced
costs (less orders) to the retailer (costs increase as more holding costs)
• Supply chain profit is lower, if each stage of supply chain independently
makes its pricing decisions with the objective of maximizing its own
profit. A coordinated solution results in higher profit
• For products that have market power, two-part tariffs or volume based
quantity discounts can be used to achieve coordination in the supply
chain and maximize profits
• Promotions lead to significant increase in lot size and cycle inventory,
because of forward buying by the retailer. This generally reduces the
supply chain profits 280-281
Supply Chain 138#

139. Strategies for reducing fixed costs
• Wal-Mart: 3 day replenishment cycle
• Seven Eleven Japan: Multiple daily replenishment
• P&G: Mixed truck loads
• Efforts required in:
– Transportation (Cross docking)
– Information
– Receiving
Aggregate across products, supply points, or delivery points
in a single order, allows reduction of lot size for
individual products Ex 10.6
Supply Chain 139#

140. ESTIMATING CYCLE INVENTORY COSTS
• HOLDING COSTS
– Cost of capital
– Obsolescence or spoilage costs
– Handling costs
– Occupancy cost
– Miscellaneous
• Order Cost
– Buyer time
– Transportation costs
– Receiving costs
– Other costs
Supply Chain 140#

141. Lessons From Aggregation
• Key to reducing cycle inventory is reducing lot size. Key
to reducing lot size without increasing costs is to reduce
the fixed cost itself by aggregation (across multiple
products, customers or suppliers)
• Aggregation allows firm to lower lot size without
increasing cost
• Complete aggregation is effective if product specific fixed
cost is a small fraction of joint fixed cost
• Tailored aggregation is effective if product specific fixed
cost is large fraction of joint fixed cost
Supply Chain 141#

142. Lessons From Discounting Schemes
• Lot size based discounts increase lot size and cycle
inventory in the supply chain
• The supply chain profit is lower if each stage
independently makes pricing decisions with the objective
of maximizing its own profit. Coordinated solution results
in higher profit
• Lot size based discounts are justified to achieve
coordination for commodity products – competitive market
and price fixed by market
• Volume based discounts with some fixed cost passed on to
retailer are more effective in general
– Volume based discounts are better over rolling horizon
Supply Chain 142#

143. Levers to Reduce Lot Sizes Without Hurting
Costs
• Cycle Inventory Reduction
– Reduce transfer and production lot sizes
• Aggregate fixed cost across multiple products, supply points, or
delivery points
– Are quantity discounts consistent with manufacturing and
logistics operations?
• Volume discounts on rolling horizon
• Two-part tariff – volume based discount in stages
– Are trade promotions essential?
• EDLP (Every day low pricing)
• Base on sell-thru (customers) rather than sell-in (retailers)
• HOMEWORK
• EXERCISES 1 AND 2 Pp291/297
Supply Chain 143#

144. Discussions on Site Visit
• Macy’s Distribution Center (DC)
• In teams please answer the following:
– What is the size of the operation
– What strategy do they adopt and why
– What are the key competitive practices
– How do they deal with each of the Supply Chain Drivers
• Measurements used for efficiency?
• How can they improve their operations?
Supply Chain 144#

145. Mid Term
• Show your calculations
• Do not get stuck on any question
1. Strategy applications and implications 15
2. Demand Management 20
3. Aggregate Demand 20
4. Cycle Inventory 20
5. Supply Chain Networks 25
Supply Chain 145#

146. Role of Inventory in the Supply Chain (LESSON 7)
Improve Matching of Supply
and Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Supply / Demand Seasonal
Economies of Scale Variability Variability
Cycle Inventory Safety Inventory Seasonal Inventory
Figure Error! No text of
Supply Chain 146#

147. WHY HOLD SAFETY INVENTORY? (SAFETY STOCK)
• DEMAND UNCERTAINTY
• SUPPLY UNCERTAINTY
• TODAY’S ENVIRONMENT
– INTERNET MAKES SEARCH EASIER
– PRODUCT VARIETY GROWN WITH CUSTOMIZATION
– EASE AND VARIETY PUTS PRESSURE ON PRODUCT
AVAILABILITY
– PUSH UP LEVELS OF INVENTORY / SAFETY STOCK
• KEY QUESTIONS
– APPROPRIATE LEVEL OF SAFETY STOCK
– WHAT ACTIONS IMPROVE AVAILABILITY AND REDUCE
SAFETY STOCK?
Measures of product availability
– Product fill rate (fr)
– Order fill rate
– Cycle service level (CSL) - THIS COURSE WILL DEAL mainly WITH CSL
Supply Chain 147#

148. Lot Size = Q
Inventory
Cycle Inventory Q/2
ROP
Safety Stock SS = ROP - DL
Demand during Time
Lead time
APPROPRIATE LEVEL OF SAFETY STOCK DEPENDS ON:
UNCERTAINTY OF DEMAND OR SUPPLY
REPLENISHMENT LEAD TIME & DESIRED SERVICE LEVEL
CSL – Cycle service level -CSL is the fraction of replenishment
cycles that end with all the customer demand being met. A
replenishment cycle is the interval between two successive
replenishment deliveries
Supply Chain 148#

149. Replenishment policies
• Replenishment policies
– When to reorder?
– How much to reorder?
Continuous Review: Order fixed quantity when total
inventory drops below Reorder Point (ROP)
Periodic Review: Order at fixed time intervals to raise total
inventory to Order up to Level (OUL)
Factors driving safety inventory
– Demand and/or Supply uncertainty
– Desired level of product availability
– Replenishment lead time
• Demand Uncertainty– Av.Demand; Stnd Devn; Lead Time
Supply Chain 149#

150. Continuous Review Policy: Safety Inventory and Cycle
Demand Uncertainty & Service Level
L: Lead time for replenishment SS = ROP - RL
D: Average demand per unit time
σ D:Standard deviation of demand Average Inventory = Q/2 + SS
per period
DL : Mean demand during lead time
σ L: Standard deviation of demand
during lead time
CSL: Cycle service level –
Probability of not stocking out in
replenishment cycle
SS: Safety inventory
ROP: Reorder point
Cv: Coefficient of variance
Supply Chain 150#

151. FORMULAS USED FOR CALCULATING SERVICE LEVELS
D L
= LD
σ L
= Lσ D
ROP = D L + ss
CSL = F ( ROP, D L ,σ L )
cv = σ / µ
CSL = F ( ROP, DL ,σ L ) = NORMDIST ( ROP, D L ,σ L ,1)
fr = 1 − ESC / Q = (Q − ESC ) / Q
orESC = −( ss[1 − NORMDIST ( ss / σ L ,0,1,1] + σ L NORMDIST ( ss / σ L ,0,1,1)
Supply Chain 151#

152. Example 11.1&2, 11.4 (Continuous Review Policy)
= 8.xx New book
11.1: R = 2,500 /week; σR = 500
L = 2 weeks; Q = 10,000; ROP = 6,000 CSL = 90%
SS = ROP - DL =
Average Inventory = Z Chart
Average Flow Time =
11.2: Evaluating CSL given a replenishment policy
CSL = Prob (demand during lead time <= ROP)
Distribution of demand during lead time of 2 weeks
D = DL
L
Cycle service level, CSL = F(RL + ss, RL , σL ) = F(ROP, RL , σL )
σ = Lσ
L D
Excel: NORMDIST (ROP, RL , σL ,1)
X1= Xbar + Z σL or ROP = RL + Z σL Calculate the % z represents. Calculate Safety
Stock for above
Supply Chain 152#

153. Examples of Safety Stock Calculations
• Weekly demand for Lego at Wal Mart is normally distributed with a mean of
2500 boxes and a standard deviation of 500. The replenishment lead time is 2
weeks. Assuming a continuous replenishment policy, evaluate the safety
inventory that the store should carry to achieve a cycle service of 90 percent
Supply Chain 153#

154. Factors Affecting Fill Rate
• Fill Rate: Proportion of customer demand that is satisfied from
Inventory. Directly related to CSL
• Safety inventory: Safety inventory is increased by:
– Increasing fill rate (Table 11-1)
– Increasing CSL
– Increasing supplier lead time by factor k – SS increases by factor of SQRT k
– Increasing standard deviation of demand by factor k – SS increases by factor
of k
• Lot size: Fill rate increases on increasing the lot size even though cycle service
level does not change.
Actions: 1. Reduce supplier Lead Time L
2. Reduce underlying uncertainty of demand σ R
Supply Chain 154#

155. Evaluating Safety Inventory Given Fill Rate
Required safety stock grows rapidly with increase in the desired
Product availability
Fill Rate Safety Inventory
97.5% 67
98.0% 183
98.5% 321
99.0% 499
99.5% 767
The required SS grows rapidily with increase in desired Fill Rate
The required SS increases with increase in Lead time and the σ of demand
Supply Chain 155#

156. Impact of Supply Uncertainty
Considering variation in Demand and in Replenishment
Lead time (Ex 11.6)
• D: Average demand per period
∀ σ D: Standard deviation of demand per period
• L: Average lead time for replenishment
∀ sL: Standard deviation of supply lead time
Mean demand
during lead time D = DL L
σ
2 2
Standard Deviation
of demand during lead time = Lσ L
2
D +D s L
Supply Chain 156#

157. Impact of Supply Uncertainty ((See Ex. 11.6 & Table 11.2)
Ex.11.6: R = 2,500/day; σR = 500; L = 7 days; Q = 10,000;
CSL = 0.90 (z=1.29); sL = Standard Deviation of lead time=7days What is S.S?
Large potential benefits of reducing Lead time or lead time variability in
reduction of Safety stock
SS units SS (d) Stnd Dev(σ L )
Safety inventory when sL = 0 1,695 0.68 1,323
Safety inventory when sL = 1 3,625 1.45 2,828
Safety inventory when sL = 2 6,628 2.65 5,172
Safety inventory when sL = 3 9,760 3.90 7,616
Safety inventory when sL = 4 12,927 5.17 10,087
Safety inventory when sL = 5 16,109 6.44 12,750
Safety inventory when sL = 6 19,298 7.72 16,109
Safety inventory when sL = 7 is 22,491 8.99 17,550
Supply Chain 157#

158. Basic Quick Response Initiatives
• Reduce information uncertainty in demand
• Reduce replenishment lead time
• Reduce supply uncertainty or replenishment lead
time uncertainty
• Increase reorder frequency or go to continuous
review
Supply Chain 158#

159. Factors Affecting Value of Aggregation
• DEMAND CORRELATION –
– AS CORRELATION INCREASES, THE SS BENEFIT OF AGGREGRATION
DECREASES
– IF THERE IS LITTLE CORRELATION BETWEEN DEMAND, AGGREGRATION
REDUCES STND. DEVN. OF DEMAND AND HENCE SAFETY STOCK (see ex.
11.7, Table 11.3)
• Coefficient Of Variation = Stnd Devn/Mean (uncertainty relative to size of demand) p=0 No
Correlation
– THE HIGHER THE COEFFICIENT OF VARIATION OF AN ITEM, THE
GREATER THE REDUCTION IN SAFETY STOCK AS A RESULT OF
CENTRALIZATION (LOW COEFFICIENT OF VARIATION ALLOW
ACCURATE FORECASTING AND DECENTRALIZED STOCKING)
• REDUCING SUPPLY VARIATION REDUCES SAFETY STOCK WITHOUT
REDUCING CSL
• VALUE OF A PRODUCT
– DIRECTLY DETERMINES THE SAFETY STOCK LEVEL
Supply Chain 159#

160. IMPACT OF AGGREGRATION ON SAFETY STOCK
• HOW TO REDUCE SS WITHOUT REDUCING CSL?
– AGGREGRATION REDUCES STANDARD DEVIATION OF DEMAND,
ONLY IF DEMAND ACROSS AREAS IS NOT CORRELATED, THAT IS
EACH AREA IS INDEPENDENT
• See Table 11.4 p323
– AGGREGRATION REDUCES SS BY THE SQRT OF NUMBER OF AREAS
AGGREGRATED (REDUCING NUMBER OF STOCKING LOCATIONS)–
SQUARE ROOT LAW (Ex. AMAZON) See Fig 11.4
– INFORMATION CENTRALIZATION – ORDERS FILLED FROM
WAREHOUSE CLOSEST TO CUSTOMER
– SPECIALIZATION BY LOCATION
• LOW DEMAND, SLOW MOVING ITEMS: CENTRALIZED – HIGH
COEFFICIENT OF VARIATION
• HIGH DEMAND, FAST MOVING ITEMS: DECENTRALIZED – LOW
COEFFICIENT OF VARIATION
– Centralization Disadvantage:
• Increase in Response time;
• Increase in Transport costs
Supply Chain 160#

161. IMPACT OF AGGREGRATION ON SAFETY STOCK
• HOW TO REDUCE SS WITHOUT REDUCING CSL?
– PRODUCT SUBSTITUTION
• MANUFACTURER DRIVEN – AGGREGATE DEMAND & REDUCE SS;
• IF PRODUCTS STRONGLY CORRELATED, LESS VALUE IN SUBSTITUTION
• CUSTOMER DRIVEN – TWO WAY SUBSTITUTION – ALLOWS REDUCTION
IN SS WHILE MAINTAINING HIGH PRODUCT AVAILABILITY
• GREATER THE VARIABILITY AND LESS THE CORRELATION OF
DEMAND, THE GREATER THE BENEFIT IN SUBSTITUTION
– COMPONENT COMMONALITY (TABLE 11.5)
• WITHOUT COMMONALITY, UNCERTAINTY OF DEMAND FOR
COMPONENTS SAME AS THAT FOR PRODUCT (SEE Ex. 11.9)
– POSTPONMENT
• DELAY DIFFERENTIATION OR CUSTOMIZATION AS CLOSE TO SALE
TIME AS POSSIBLE
– COMMON COMPONENTS IN PUSH PHASE
– POWERFUL CONCEPT FOR E-COMMERCE
Supply Chain 161#

162. Example 11.9: Value of Component Commonality
Y Axis – SS Quantity; X Axis – No. of common components
450000
400000
350000
300000
250000
SS
200000
150000
100000
50000
0
1 2 3 4 5 6 7 8 9
Without component commonality and postponment, product differentiation
Occurs early in the Supply Chain and inventories are disaggregate
Supply Chain 162#

163. ESTIMATING AND MANAGING SS IN PRACTICE
• ACCOUNT FOR LUMPY SUPPLY CHAIN DEMAND
– CAUSED BY LARGE LOT SIZES & ADDS TO VARIABILITY
– EMPIRICALLY – RAISING SS BY HALF LOT SIZE
• ADJUST INVENTORY POLICY IF DEMAND SEASONAL
– CHANGE BOTH MEAN AND STND DEVN
• USE SIMULATION TO TEST INVENTORY POLICIES
– EXCEL
• START WITH A PILOT
• MONITOR SERVICE LEVELS
• FOCUS ON REDUCING SAFETY STOCK
• PERIODIC REVIEW REPLENISHMENT REQUIRES MORE SAFETY STOCK
THAN CONTINUOUS REVIEW POLICIES
Supply Chain 163#

164. Mass Customization I: Customize Services Around
Standardized Products
Source: B. Joseph Pine
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Deliver customized services as
well as standardized products
and services
Market customized services with standardized
products or services
Continue producing standardized products or services
Continue developing standardized products or services
Supply Chain 164#

165. Mass Customization II: Create Customizable
Products and Services
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Deliver standard (but
customizable) products
or services
Market customizable products or services
Produce standard (but customizable) products or services
Develop customizable products or services
Supply Chain 165#

166. Mass Customization III: Provide Quick Response
Throughout Value Chain
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Reduce Delivery Cycle Times
Reduce selection and order processing cycle
times
Reduce Production cycle time
Reduce development cycle time
Supply Chain 166#

167. Mass Customization IV: Provide Point of Delivery
Customization
Μens Warehouse and Restaurants
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Point of delivery
customization
Deliver standardize portion
Market customized products or services
Produce standardized portion centrally
Develop products where point of delivery customization is feasible
Supply Chain 167#

168. Mass Customization V: Modularize Components to
Customize End Products
Αutos
DEVELOPMENT PRODUCTION MARKETING DELIVERY
Deliver customized product
Market customized products or services
Produce modularized components
Develop modularized products
Supply Chain 168#

169. Types of Modularity for Mass Customization
Component Sharing Modularity
Cut-to-Fit Modularity
Bus Modularity
Mix Modularity
Sectional Modularity
Supply Chain 169#

170. Example of Point of Service Replenishment
• Safety Stock and Re-order point management in Toyota
Another advantage of Toyota’s new system is that safety stock criteria can be adjusted
according to seasonal requirements. Previously, the company had no ability to recognize
the seasonality of items such as wiper blades. It worked from one forecast model — a
simple moving average — that didn’t allow for fine-tuning or sudden shifts in consumer
taste. Reorder points were recalculated just once a month.
To support the new system, Toyota implemented Exam Inventory, a solution made by
Entity Software in Epson, U.K. Exam is an inventory management program that runs on
a PC and is fed raw data directly from a computer. As a result, Toyota (GB) was able to
fully customize the package to its needs with minimal impact on the company’s larger
computers. The software allows for more sophisticated forecasting and more accurate
calculation of reorder points (ROPs), while keeping safety stocks low.
Toyota now has moved to weekly ROP calculations and hopes eventually to carry out
that function on a daily basis when the technology permits, Results of the program so far
include an improvement in Toyota’s service level from 94 percent to 96 percent,
reduction in the number of manual order changes from 3,000 a day to 50, and reduction
in run times from 12 to 3.5 hours.
Supply Chain 170#

171. Cautions in Implementing Postponement and
Modularity
• End products must look suitably different to the consumer
• Design and production costs can only be justified over a
family of products
• Performance and cost of a product can be optimized by
eliminating modularity. Do a small set of products provide
most of the sales?
Supply Chain 171#

172. Summary of Learning Objectives
Match Supply & Demand
Reduce Buffer Inventory
Supply / Demand Seasonal
Economies of Scale Variability Variability
Cycle Inventory Safety Inventory Seasonal Inventory
•Reduce fixed cost •Quick Response measures
•Aggregate across •Reduce Info Uncertainty
products •Reduce lead time
•Volume discounts •Reduce supply uncertaint
•EDLP •Accurate Response measures
•Promotion on Sell •Aggregation
thru •Component commonalit
and postponement
Supply Chain 172#

173. HOMEWORK
• Page 336 Q4 and Q5
• Provide actual examples of the five types of customization
Supply Chain 173#

174. OPTIMUM LEVEL OF PRODUCT AVAILABILITY
Exercise: Swimsuit Production Lesson 8
• Fashion items have short life cycles, high variety of competitors
• SnowTime Sporting Goods
– New designs are completed
– One production opportunity
– Based on past sales, knowledge of the industry, and economic conditions,
the marketing department has a probabilistic forecast
– The forecast averages about 13,000, but there is a chance that demand will
be greater or less than this
• Production cost per unit (C): $80
• Selling price per unit (S): $125
• Salvage value per unit (V): $20
• Fixed production cost (F): $100,000
• Q is production quantity, D demand
• Profit = Revenue - Variable Cost - Fixed Cost + Salvage
Supply Chain 174#

175. Demand Distribution
Demand Scenarios
28%
30%
Probability
25% 22%
18%
20%
11% 11
15% % 10%
10%
5%
0%
00
0
0
0
0
0
00
00
00
00
00
80
10
12
14
16
18
Sales
Supply Chain 175#

176. Exercise
• Scenario One:
– Suppose you make 12,000 jackets and demand ends up being 13,000
jackets.
– Profit = 125(12,000) - 80(12,000) - 100,000 = $440,000
• Scenario Two:
– Suppose you make 12,000 jackets and demand ends up being 11,000
jackets.
– Profit = 125(11,000) - 80(12,000) - 100,000 + 20(1000) = $ 335,000
• Find order quantity that maximizes weighted average profit.
• Average demand is 13,100 (work out – Σp.D)
• Question: Will this quantity be less than, equal to, or greater than
average demand?
• Look at marginal cost Vs. marginal profit
– if extra jacket sold, profit is 125-80 = 45
– if not sold, cost is 80-20 = 60
• So we will make less than average
Supply Chain 176#

177. Profitability Calculations
Expected Profit
$400,000
$300,000
Profit
$200,000
$100,000
$0
8000 12000 16000 20000
Order Quantity
Supply Chain 177#

178. Profitability scenarios
100%
80%
Probability
60% Q=9000
40% Q=16000
20%
0%
00
00
00
0
0
00
00
00
00
00
00
00
30
50
10
-3
-1
Cost
Supply Chain 178#

179. OPTIMAL LEVEL OF PRODUCT AVAILABILITY
• FACTORS AFFECTING OPTIMAL PRODUCT
AVAILABILITY
– COST OF OVERSTOCKING Co
• PROFIT FROM SALES
• INVENTORY HOLDING COSTS
• OBSELESCENCE – SALVAGE COSTS
– COST OF UNDERSTOCKING Cu
• LOST SALES
• LOST CUSTOMERS
• EXAMPLE OF L.L.BEAN (Table 12.1)
– For all references New Book 12.xx
Supply Chain 179#

180. Parkas at L.L. Bean
Cost per parka = $45
Sale price per parka = $100
Discount price per parka = $50
Holding and transportation cost = $10
• Profit from selling parka = $100-$45 = $55
• Cost of overstocking = $45+$10-$50 = $5
• Expected demand = =1026, ordered 1000 parkas CSL51%
•
• See formula on page 224
∑
Expected profit from ordering 1000 parkas = $49,900
Di pi
– Expected profit =
10
∑ [ Di ( p − c ) − (1000 − Di )(c − s )] pi + (1 − Pi )1000 ( p − c )
i= 4
Supply Chain 180#

181. Summary
• Tradeoff between ordering enough to meet demand and ordering too much
• Several quantities have the same average profit
• Average profit does not tell the whole story
• Question: 9000 and 16000 units lead to about the same average
profit, so which do we prefer? Work out probabilities of profit and loss
• The optimal order quantity is not necessarily equal to average forecast demand
(13,100)
• The optimal quantity depends on the relationship between marginal profit and
marginal cost
• As order quantity increases, average profit first increases and then decreases
• As production quantity increases, risk increases. In other words, the
probability of large gains and of large losses increases
Supply Chain 181#

182. How much to order? Parkas at L.L. Bean (Table 12.1)
Demand Probabability Cumulative Probability of Probability of demand
(00’s) demand being this size or less greater than this size
4 .01 .01 .99
5 .02 .03 .97
6 .04 .07 .93
7 .08 .15 .85
8 .09 .24 .76
9 .11 .35 .65
10 .16 .51 .49
11 .20 .71 .29
12 .11 .82 .18
13 .10 .92 .08
14 .04 .96 .04
15 .02 .98 .02
16 .01 .99 .01
17 .01 1.00 .00
The probability that demand is greater than 1100 is 0.29 but the probability that
demand is greater than or equal to 1100 is 0.49. O.51 is the probability that the
demand is 1000 or less. Thus, 1-0.51 = 0.49 is the probability that the demand is
greater than 1000 = probability that demand is greater than or equal to 1100
Supply Chain 182#

183. Parkas at L.L. Bean (Table 12.2)
Expected Marginal Contribution of each 100 parkas Fig 9.1
Additional Expected Expected Expected Marginal
100s Marginal Benefit Marginal Cost Contribution
11th 5500×.49 = 2695 500×.51 = 255 2695-255 = 2440
12th 5500×.29 = 1595 500×.71 = 355 1595-355 = 1240
13th 5500×.18 = 990 500×.82 = 410 990-410 = 580
14th 5500×.08 = 440 500×.92 = 460 440-460 = -20
15th 5500×.04 = 220 500×.96 = 480 220-480 = -260
16th 5500×.02 = 110 500×.98 = 490 110-490 = -380
17th 5500×.01 = 55 500×.99 = 495 55-495 = -440
Supply Chain 183#

184. Optimal Order Quantity
1.2
1
0.917
0.8
Prob
0.6 Probability
0.4
0.2
0
4 5 6 7 8 9 10 11 12 13 14 15 16 87
Optimal Order Quantity = 13
Supply Chain 184#

185. Optimal level of service (Eqn. 12.1)
p = retail sale price; s = outlet or salvage price;
c = purchase price;
Co = cost of overstocking by one unit, Co = c - s
Cu = cost of understocking by one unit, Cu = p - c
CSL* = Optimal SL. Optimal order size O*
If O* +1, expected marginal benefit from increasing order size by 1 = (1-CSL*)
(p - c) (understocking cost x prob of understock)
If O* -1, Expected Marginal Cost = CSL*(c - s).
Thus expected marginal contribution of O* to O* +1
(1-CSL*)Cu - CSL*× Co (or optimally) = 0
CSL*= prob. (dem. =< O* ) = Cu / (Cu + Co) = (p-c)
(p-s)
Supply Chain 185#

186. Order Quantity for a Single Order (ex 12.1)
Salvage value = $80
Co = Cost of overstocking
= c-s = $20
Cu = Cost of understocking *
CSL * = Pr ob( Demand ≤ R ) =
= p – c = $150
C u
=
150
= 0.88
O* = Optimal order size C +Cu o
150 + 20
O* = µ + zσ = 350 + 1.18 x100 = 468
Supply Chain 186#

187. MANAGERIAL LEVERS TO IMPROVE
PROFITABILITY
• How to Estimate Demand Distribution?
– Historical data: Time series forecasting
– Dependent factors: Regression, causal forecasting
– Expert opinion: Buying committee
Key: Forecast must include estimated demand and
uncertainty (standard deviation) of demand
Supply Chain 187#

188. Levers for Increasing Supply Chain Profitability
• Increase salvage value (cost of overstock) or decrease margin lost from stockout –
backup sourcing; rain checks.
• As Co/Cu gets smaller, optimal level of product availability (CSL) increases (see Fig
12.2). Companies with high margin have high cost of understocking and so provide
high CSL
• Improved forecasting to lower demand uncertainty (table 12.3) – CSL is constant.
Optimum order size decreases and Expected profit increases
• Quick response Reduce replenishment lead time so as to increase number of orders
per season (table 12.4, 12.5). With two or more orders:
– Possible to provide same CSL with less inventory
– Average overstock at end of season is less
– Profits higher with second order
• If quick response allows multiple orders in the season, profits increase and overstock
quantity reduces (Fig 12.4,12.5)
Supply Chain 188#

189. Levers for Increasing Supply Chain Profitability
• Postponement of product differentiation
– Better match of supply and demand for products not positively
correlated and about the same size
– Postponment may reduce overall profits, if one product contributes
to majority of demand (extra cost of later manufacturing)
– Tailored postponement only uncertain part of demand, producing
predictable part at lower cost without postponement
• Tailored supply sourcing – focus on two sources
– One source focus on cost; unable to handle uncertainty –
predictable portion
– One source focus on flexibility; at a higher cost – unpredictable
portion
Supply Chain 189#

190. Tailored Sourcing: Multiple Sourcing Sites
Characteristic Primary Site Secondary Site
Manufacturing High Low
Cost
Flexibility High Low
(Volume/Mix)
Responsiveness High Low
Engineering High Low
Support
Supply Chain 190#

191. Dual Sourcing Strategies
Strategy Primary Site Secondary Site
Volume based Fluctuation Stable demand
dual sourcing
Product based Unpredictable Predictable,
dual sourcing products, large batch
Small batch products
Model based Newer Older stable
dual sourcing products products
Supply Chain 191#

192. SUPPLY CHAIN CONTRACTS
• DOUBLE MARGINALIZATION (SUBOPTIMIZATION)
– BUY BACK (Ex. Mfg cost 10, retailer cost 100, selling 200 – SC profit 190, retailer
profit – 100, manuf profit 90). EACH TRY TO MAXIMIZE OWN PROFIT, NOT THE
SUPPLY CHAINS)
– RETAILER ORDERS LESS AS THE LOSS FROM UNSOLD PRODUCT HIGH (100).
Loss to Supply Chain is 10 only
– MANUFACTURER IN BUYING BACK UNSOLD PRODUCT, INCREASES
SALVAGE VALUE, AND INDUCES RETAILER TO ORDER MORE (table 9.70
– TOTAL SUPPLY CHAIN PROFITS INCREASE
• QUANTITY FLEXIBILITY CONTRACTS
– MANUFACTURER ALLOWS RETAILER TO CHANGE CONTRACTS AFTER
CHANGING DEMAND
– INCREASES PROFITABILITY OF ALL AND TOTAL SUPPLY CHAIN
• VMI REPLENISHMENT BY MANUFACTURER (Ex. P&G/WALMART)
• CONTROL OF REPLENISHMENT MOVES TO MANUFACTURER
• CUSTOMER INFORMATION TO MANUFACTURER
Supply Chain 192#

193. SETTING OPTIMAL LEVELS OF PRODUCT
AVAILABILITY
• USE ANALYTICAL FRAMEWORK TO INCREASE PROFITS
– COMPANIES SET TARGETS WITHOUT ANALYSIS
• BEWARE OF PRESET LEVELS OF AVAILABILITY
– OFTEN SET WITHOUT JUSTIFICATION
– WORK ANALYSIS TO MAXIMIZE PROFITS
• USE APPROXIMATE COSTS AS PROFIT MAXIMIZING SOLUTIONS
ARE ROBUST
• ESTIMATE A RANGE FOR STOCKING OUT
• ENSURE THAT LEVELS OF PRODUCT AVAILABILITY FIT WITH
STRATEGY
• HOME WORK Page 373 Ex. 1 and 3
Supply Chain 193#

194. CASE STUDY – OPTIMIZED DEMAND PULL
• HIGHLY VARIABLE, HI TECH, HIGH COST
– 12 MONTH ROLLING FORECAST WITH MANUFACTURING
LEAD TIME COMMITTED
– CHANGE OUTSIDE LEAD TIME LIMITED TO +/- 20%
– TWO YEAR FORECAST ON YEAR FORECAST
COMMITTED TO, NOT MONTHLY QUANTITIES
– INCENTIVES FOR INCREASED FORECAST, DISCOUNTS
FOR REDUCED FORECASTS
– REPLENISHMENT RATE DRIVEN BY MAX/MIN ON HAND
LEVELS
– WEEKLY ON HAND
– MONTHLY 12 MONTH ROLLING FORECAST
Supply Chain 194#

195. SOURCING and PROCUREMENT (CH 14) Lesson 9
• SOURCING
– Entire set of business processes to purchase goods and services
– Includes:
• Selection of supplies
• Design of supplier contracts
• Product design collaboration
• Procurement of material
• Evaluation of Supplier performance
• PROCUREMENT
– Process of purchasing materials, products and services
– COGS 50% or more of product cost
– Even higher % with outsourcing
Supply Chain 195#

196. EFFECTIVE SOURCING
• ECONOMIES OF SCALE – ORDERS AGGREGRATED
• MORE EFFICIENT PROCUREMENT TRANSACTIONS
(LESS) REDUCES OVERALL COST
• DESIGN COLLABORATION
• IMPROVE FORECASTING
• CONTRACTS FOR SHARING RISK
• LOWER PURCHASING PRICE
Supply Chain 196#

197. IN HOUSE OR OUTSOURCE
• HOW DO THIRD PARTIES INCREASE SUPPLY CHAIN SURPLUS
– CAPACITY AGGREGRATION
– INVENTORY AGGREGRATION
– TRANSPORTATION AGGREGRATION
– WAREHOUSING AGGREGRATION
– PROCUREMENT AGGREGRATION
– INFORMATION AGGREGRATION
– RECEIVABLE AGGREGRATION
– RELATIONSHIP AGGREGRATION
– LOWER COSTS AND HIGHER QUALITY (Table 14.1)
Supply Chain 197#

198. RISKS OF USING A THIRD PARTY
• THE PROCESS IS BROKEN – lack control
• UNDERESTIMATE COST OF COORDINATION
• REDUCED SUPPLIER/CUSTOMER CONTACT
• LOSS OF INTERNAL CAPABILITY AND GROWTH IN THIRD
PARTY POWER
• LEAKAGE OF SENSITIVE DATA AND INFORMATION
• INEFFECTIVE CONTRACTS
• THIRD AND FOURTH PARTY PROVIDERS (Table 14-2)
– Transportation
– Warehousing
– Information technology
– Reverse Logistics
– International
– Special skills/handling
Supply Chain 198#

199. SUPPLIER SCORING AND ASSESSMENT
MUST BE BASED ON IMPACT ON TOTAL COST (Tab14-3)
• IN ADDITION TO PRICE
• REPLENISHMENT LEAD TIME;
• ON TIME PERFORMANCE
• SUPPLY FLEXIBILITY
• DELIVERY FREQUENCY/ MINIMUM LOT SIZE
• SUPPLY QUALITY
• INBOUND TRANSPORTATION COSTS
• INFORMATION COORDINATION CAPABILITY
• DESIGN COST REDUCTION
• EXCHANGE RATES, TAXES AND DUTIES
• SUPPLIER VISIBILITY
• RESPONSIVENESS
Supply Chain 199#

200. SOURCING DECISIONS
• SUPPLIER PERFORMANCE BASED ON IMPACT ON TOTAL
COST (see Table 14.1)
– Ex. Green Thumb gets bearings at $1.00 in lots of 2,000 with a lead time
of 2 weeks and a stnd devn of 1 week. New supplier offers $0.97 with lot
size of 8000, a lead time of 6 weeks and stnd devn of 4 weeks. Given
1000 bearings needed per week with a stnd devn of 300 and that holding
costs are 25% and CSL is 95% which supplier should be selected
Supply Chain 200#

201. SOURCING DECISIONS
• CONTRACTS
– BUYBACK OR RETURN CONTRACTS
• LOWERS COST OF OVERSTOCKING
– REVENUE SHARING CONTRACTS
• REDUCES COST PER UNIT TO RETAILER & COST OF OVERSTOCKING
– QUANTITY FLEXIBILITY CONTRACTS – BEST
• RETAILER CAN MODIFY ORDER CLOSER TO POINT OF SALE
– CONTRACTS TO INDUCE PERFORMANCE IMPROVEMENT
• SHARED SAVINGS CONTRACT
• DESIGN COLLABORATION
– HELPS REDUCE COST, IMPROVE QUALITY AND TIME TO MARKET
• PROCUREMENT PROCESS
– FOCUS ON IMPROVING DIRECT MATERIALS COORDINATION AND
VISIBILITY WITH SUPPLIER
– LOOKING SEPARATELY AT DIRECT AND INDIRECT MATERIAL COSTS (14-7)
– CLASSIFYING ITEMS PER COST AND CRITICALITY (FIG 14.2)
– FOCUS ON IMPROVING INDIRECT MATERIALS BY DECREASING
TRANSACTION COST OF ORDER
– BOTH SHOULD CONSOLIDATE ORDERS FOR ECONOMIES OF SCALE
Supply Chain 201#

202. SOURCING DECISIONS
• SOURCING DECISIONS IN PRACTICE
– USE MULTIFUNCTIONAL TEAMS
– ENSURE APPROPRIATE COORDINATION ACROSS
REGIONS AND BUSINESS UNITS
– ALWAYS EVALUATE TOTAL COST OF OWNERSHIP
– BUILD LONG TERM RELATIONSHIP WITH KEY
SUPPLIERS
Supply Chain 202#

203. Make or Buy Decision
– Cost
– Time
– Capacity Utilization
– Control of Production/Quality
– Design Secrecy
– Supplier Reliability and Technical Expertise
– Volume
– Workforce Stability
Supply Chain 203#

204. Make-or-Buy Decision
•Original Data:
•Produce 10,000 units
Cost Factors
Raw material $9,000
Direct labor $12,000
Variable factory overhead $5,000
Fixed factory overhead $24,000
Total Cost to Make $50,000
Make cost per unit = $50,000/10,000 = $5.00/unit
Purchase proposal = $4.50/unit
Should the product be bought?
•Factors to Consider:
1. You only avoid 80% of the variable factory overhead cost
2. And only avoid 10% of the fixed factory overhead cost
Supply Chain 204#

205. Cost Avoidance Analysis (Solution)
Solution
Cost avoided by purchasing
Total cost to make $50,000
Less cost avoided:
Raw material $9,000
Direct labor $12,000
Variable factory overhead ($5,000@0.80) $4,000
Fixed factory overhead ($24,000@0.10) $2,400
Total Avoided Cost $27,400
Analysis
Cost not avoided $22,600
Plus cost to purchase $45,000
Total cost to purchase $67,600
Compare to cost to make $50,000
Increase in cost to purchase $17,600
Actual cost per purchased item 67500/1000 = $6.75/unit !
Supply Chain 205#

206. SUPPLIER PARTNERSHIPS
• QUALIFICATION AND SELECTION
– RATIONALIZATION OF SUPPLIER BASE
• PARTNERSHIP
– WIN-WIN AND TRUST
– SHARING OF RISK AND COMMITMENT
– PRICE REDUCTIONS AND INCREASES BASED ON FORECAST
– RATE REPLENISHMENT
• MEAUREMENT AND FEEDBACK
– QUALITY, DELIVERY, RESPONSIVENESS
– QUARTERLY FEEDBACK
– IMPLICATIONS
Supply Chain 206#

207. HOMEWORK
• Exercises 1 & 2
Supply Chain 207#

208. MANAGING TRANSPORTATION IN A
SUPPLY CHAIN (Chap 13) – Lesson 10
• Key modes of transport and major issues
• Transportation System Design
• Tradeoffs in transportation design – costs vs.
responsiveness
– Transportation and inventory: Choice of mode
– Transportation and inventory: Consolidation
Supply Chain 208#

209. LOGISTICAL PROCESSES
• TRANSPORTATION
– PALLETIZATION AND CONTAINERIZATION
– FREIGHT FORWARDERS AND CUSTOMS
– TRADE-OFF IN TRANSPORTATION TYPES & TRANSITONS
• WAREHOUSING AND DISTRIBUTION
– CENTRALIZED OR REGIONAL
– REPLENISHMENT STRATEGIES
• DRP
• POINT OF USE
– CROSS DOCKING
• DELIVERY
• GLOBAL SUPPLY CHAINS
Supply Chain 209#

210. Principle:
Leverage World-Wide Logistics
This principle is about Variability.
Supply Chain 210#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

211. Fundamental Logistics Tradeoffs
Supply Chain
Inventory
Units
Landed Cost
Transit Time
Variability
Supply Chain 211#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

212. Tailored Logistics
• Transportation costs in 1996 - $455 billion (6% GNP). In 2005 744b 10%
GDP
• E-com and home delivery of small loads makes transport more significant
– Wal-Mart – low inventory, frequent replenish, cross dock
– Amazon – centralized warehouses, package carriers and postal system
– Dell – centralized assembly, package carriers (Airborne)
• Each Logistically Distinct Business (LDB) will have distinct requirements
in terms of
– Inventory
– Transportation
– Facility
– Information
Key: How to gain efficiencies while tailoring logistics?
Supply Chain 212#

213. FACTORS AFFECTING TRANSPORTATION
DECISIONS
• CARRIER
– VEHICLE RELATED COST – cost of vehicle
– FIXED OPERATING COST – terminals, labor
– TRIP RELATED COST – fuel, labor
– QUANTITY RELATED COST - weight
– OVERHEAD COST – planning, dispatching
• SHIPPER
– TRANSPORTATION COST – cost per Ton mile
– INVENTORY COST – holding
– FACILITY COST - storage
– PROCESSING COST – loading unloading
– SERVICE LEVEL COST – not making delivery
Supply Chain 213#

214. Transportation Modes (See Table 13.1 )
• Trucks
– TL
– LTL
– Carload
– Intermodal
• Rail
• Air
• Package Carriers
• Water
• Pipeline
DISCUSS USES AND ISSUES
Supply Chain 214#

215. AIR
• Freight Revenue 777b 2002 (96.7% change from 1993)
• Average revenue / ton-mile (1996) = 58.75 cents
• Average haul = 1,260 miles
• Average load = 10.5 tons
• 1998 Freight expense $22.678b
• Key Issues
– Location/Number of hubs
– Location of fleet bases / crew bases
– Schedule optimization
– Fleet assignment
– Crew scheduling
– Yield management
• Best Use
Supply Chain 215#

216. Truckload (TL)
• Freight Revenue 6,660b (42.2% change from 1993)
• Average revenue per ton mile (1996) = 9.13 cents
• Average haul = 274 miles
• Average Capacity = 42,000 - 50,000 lb.
• 1998 Freight expense $ 401.68billion
• Low fixed and variable costs
• Major Issues
– Utilization (Idle and empty travel)
– Consistent service
– Backhauls
• Best Use?
Supply Chain 216#

217. Less Than Truckload (LTL)
• Average revenue per ton-mile (1996) = 25.08 cents
• Average haul = 646 miles
• 1998 Freight expense with TL
• Higher fixed costs (terminals) and low variable costs
• Major Issues
– Location of consolidation facilities
– Utilization
– Vehicle routing
– Customer service (delivery time and reliability)
• Best Use?
Supply Chain 217#

218. Rail
• Freight Revenue 388b (39.2% change from 1993)
• Average revenue / ton-mile (1996) = 2.5 cents
• Average haul = 720 miles
• Average load = 80 tons
• 1998 Freight expense $35.35billion
• Key Issues
– Scheduling to minimize delays / improve service
– Off track delays (at pick up and delivery end)
– Yard operations, transitions
– Variability of delivery times
• Best Use?
Supply Chain 218#

219. Other Modes
• Water – 0.73c per ton mil
– Freight Revenue 867b (39.9% change from 1993)
– average haul miles 500 internal to 1500 coast
– 1998 Freight expense $ 25.35b
– Cheapest mode for global shipping
– Issues: delays at ports, customs, management of containers
• Pipe – 1.40c per ton mile
– Freight Revenue 285b (-8.7% change from 1993)
– Average haul 400 products to 760 crude
– 1998 Freight expense $ 8.74b
– Issues: Infrastructure
• Intermodal
– Freight Revenue 1,111b (67% change from 1993)
– Combination – most common truck/rail
– Very useful in global trade
– Issues: exchange of information to facilitate transfer
Supply Chain 219#

220. Tradeoffs in Transportation Design
• Transportation, facility, and inventory cost tradeoff
– Choice of transportation mode
– Inventory aggregation
• Transportation cost and responsiveness tradeoff
• Ranking of Transportation Modes in terms of Supply
Chain performance – Table 13-3
Supply Chain 220#

221. DESIGN OPTIONS FOR TRANSP NETWORK
• DIRECT SHIP NETWORK (fig 13.2)
– IF REPLENISHMENT LARGE ENOUGH FOR TL
• DIRECT SHIP WITH MILKRUNS (fig 13.3)
– SINGLE SUPPLIER TO MULTIPLE RETAILER OR VICE VERSA
– ELIMINATE INTERMEDIATE WAREHOUSES
– LOWER TRANSPORTATION COSTS
• ALL SHIPMENTS VIA CDC (FIG 13.4, 13.5)
– DC STORE INVENTORY OR TRANFER LOCATION
– CROSS DOCKING
– SHIP VIA DC WITH MILK RUN
• TAILORED NETWORK (FIG 13.5)
EXERCISE: ADVANTAGES AND DISADVANTAGES OF EACH – next slide
Supply Chain 221#

222. PROS AND CONS OF TRANP. NETWORKS (Tab 13.2)
Network Structure Pros Cons
Direct Shipping *No intermediate Whse *High inventories
* Simple to coordinate *Significant Receiving
expense
Direct Shipping with milk runs *Lower transp costs small lots * More coordination
*Lower inventories complexity
All shipments via CDC with *Consolidation less inbound *Increased Inventory
inventory storage transp cost *Increased handling
Ship via CDC with cross *Very low inventory * More coordination
docking *Consolidation-less trans Cost complexity
Shipping via DC using milk * Lower outbound trans cost for *Further increase in
runs small lots coordin complexity
Tailored network *Match trans choice with needs *Highest coordin
complexity
Supply Chain 222#

223. TRADE OFFS IN TRANSPORTATION DESIGN
TRANSPORTATION AND INVENTORY COST TRADE-OFF
• Choice of Transport Mode: Eastern Electric Corp (Ex 13.1)
• Annual demand = 120,000 motorsTraditional lot size 3000
• Cost per motor = $120 Weight 10lbs
• Current order size = See Table 13.4
• Safety stock carried = 50% of demand during delivery lead time
• Holding cost =25%. Annual holding cost =120 x 0.25 =$30/motor
• Lead times – 1 day to process, transit time days - rail 5, road 3
• Work out the total cost for each transport proposal See Table 13.5
• Proposal Quantity over 250cwt $4/cwt to $3/cwt and shipment batch size 4000. What
should plant do
Total Costs = Inventory costs (include Cycle, Safety) + Transportation costs (depend on
weight and form of transport)
Supply Chain 223#

224. Eastern Electric Corporation (Table 13.5)
Alternative Transport Cycle Safety Transit Inventory Total
(Lot size) Cost Inventory Inventory Inventory Cost Cost
AM Rail $78,000 1,000 986 1,644 $108,900 $186,900
(2,000)
Northeast $90,000 500 658 986 $64,320 $154,320
Trucking
(1,000)
Golden $96,000 250 658 986 $56,820 $152,820
(500)
Golden $86,400 1,250 658 986 $86,820 $173,220
(2,500)
Golden $78,000 1,500 658 986 $94,320 $172,320
(3,000)
Golden $67,500 2,000 658 986 $109,320 $176,820
(4,000)
Supply Chain 224#

225. Inventory Aggregation at HighMed Ex 13.2 (Table 13.6)
Highval (cost $200/unit, 0.1 lbs/unit) demand in each territory
µH = 2, σH = 5, CSL= 0.997, Holding cost = 25%
Lowval (cost $30/unit, 0.04 lbs/unit) demand in each territory
µL = 20, σL = 5
UPS rate: $0.66 + 0.26x {for replenishments}
FedEx rate: $5.53 + 0.53x {for customer shipping}
where x is quantity shipped in lbs
Factory 1 week replenish, local inventory 4 wks replenish
Average customer order – 1 Highval & 10 Lowval
Option A – Replenish weekly instead of every 4 weeks
Option B – Elimin inventory in territories, aggregate all inven in one
warehouse, replenish warehouse once a week
Supply Chain 225#

226. Inventory Aggregation at HighMed (13.6)
Current Option 1 Option 2
Scenario
# Locations 24 24 1
Reorder Interval 4 weeks 1 week 1 week
Inventory Cost $54,366 $29,795 $8,474
Shipment Size(dltxlt) 8 H + 80 L 2 H + 20 L 1 H + 10 L
Transport Cost $530 $1,148 $14,464
Total Cost $54,896 $30,943 $22,938
If shipment size to customer is 0.5H + 5L, total cost of option 2
increases to $36,729.
Supply Chain 226#

227. Physical Inventory Aggregation: Inventory vs.
Transportation cost
• Firms can significantly reduce SS by physically aggregating
inventory in one location
• As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases – one destination DC
– Outbound transportation cost increases – several deliveries
• Advantageous when inventory and facility costs form a large
fraction of supply chain costs
– Large value to weight ratio (ex PC’s)
– High demand uncertainty and large value (ex designer dresses)
– Large customer orders to cover economies of scale on outbound
transportation
Supply Chain 227#

228. Tailored Transportation (Table 13.9)
• Factors affecting tailoring – Optimizing response vs cost
– Customer distance and density
» Short distance Med distance Long distance
Hi Density Private fleet milk runs Crossdock, milk runs Crossdock, milk runs
Med Dens Third party milk runs LTL carrier LTL or package carrier
Low Dens Third party milk runs or LTL LTL or package carr Package carrier
– Customer size
• Large can use a TL; medium and small LTL use LTL or milk runs
– Product demand and value (Table 13.10)
• Product Hi value Lo value
• High demand Disaggreg cycle inven Disaggreg all inven, use inexpen trans
» Aggregate safety stock, for replen inven
» inexpen transp for replen, cycle &
» fast mode for safety inventory
• Low demand Aggregate all inven. Use fast Aggregate Safety inven only. Use inexpen
» trans for filling cust orders trans for replen cycle inven
Supply Chain 228#

229. ROUTING AND SCHEDULING IN
TRANSPORTATION Chapter 5)
• Framework for Network Design Decisions (Table 5.2)
– Phase I : Define a supply chain strategy
– Phase II: Define regional facility configuration
– Phase III: Select a set of desirable potential sites
– Phase IV: Location Choices
– Exercise Sun Oil Fig 5-3
• Phase II Network Optimization Models: Capacitated Plant
Location Model
– Decide on Network design that maximizes profits
• Phase III: Gravity Location Models (Table 5-1) – Work out
manually
– Identify the distance matrix
– Identify the savings matrix
– Assign customers to vehicles or routes
– Sequence customers within routes
Supply Chain 229#

230. RISK MANAGEMENT IN TRANSPORTATION
• RISK THAT SHIPMENT IS DELAYED
• RISK THAT SHIPMENT DOES NOT REACH ITS
FINAL DESTINATION, BECAUSE INTERMEDIATE
NODES DISRUPTED
• RISK OF HAZARDOUS MATERIAL
Supply Chain 230#

231. MAKING TRANSPORTATION DECISIONS IN
PRACTICE
• ALIGN TRANSPORTATION STRATEGY WITH COMPETITIVE
STRATEGY
• CONSIDER BOTH IN HOUSE AND OUTSOURCED TRANSPORTATION
– STRATEGIC IMPORTANCE AND PROFITABILITY
• DESIGN A TRANSPORTATION NETWORK THAT CAN HANDLE E-
COMMERCE
– DECREASE IN SHIPMENT SIZE & INCREASE IN HOME DELIVERY
• USE TECHNOLOGY TO IMPROVE TRANSPORTATION PERFORMANCE
– IDENTIFY LOCATION AND SHIPMENT IN VEHICLE
• DESIGN FLEXIBILITY INTO THE TRANSPORTATION NETWORK
– TAKE INTO ACCOUNT UNCERTAINTYIN DEMAND AND IN AVAILABILITY OF
TRANSPORTATION
Supply Chain 231#

232. HOMEWORK
• EXERCISE 13.1 Coal and MRO
• Ex 13.2 Work out single location and 1 week replenishment
• EXAMPLE HIGHMED (Ex 13.2)
– WORK OUT OPTION A & IF SHIPMENT SIZE IS 0.5H + 5.0L
– WHAT ARE YOUR CONCLUSIONS?
Supply Chain 232#

233. FACILITY DECISIONS: Network Design Decisions
Lesson 11 (Chap 4)
• FACILITY ROLE
– What processes are performed
• FACILITY LOCATION
– Where should facilities be located
• CAPACITY ALLOCATION
– How much capacity should be allocated to each facility
• MARKET & SUPPLY ALLOCATION
– What markets should each facility serve
– What supply sources should feed each facility
Supply Chain 233#

234. Factors Influencing Network Design Decisions
• Strategic
– Cost or Responsiveness focus
• Technological
– Fixed costs and flexibility determine consolidation
• Macroeconomic
– Tariffs and Tax incentives. Stability of currency
• Political stability - clear commerce & legal rules
• Infrastructure
– sites, labor, transportation, highways, congestion, utilities
• Competition
• Logistics and facility costs
Supply Chain 234#

235. The Cost-Response Time Frontier
Low Local FG
Mix
Regional FG
Local WIP
Cost Central FG
Central WIP
Central Raw Material and Custom production
Custom production with raw material at suppliers
Hi
Low (QUICK) Response Time Hi (LONG)
Supply Chain 235#

236. LOGISTICS AND FACILITIES COSTS
• INVENTORY COSTS
• TRANSPORTATION COSTS
– INBOUND AND OUTBOUND
• FACILITY (SETUP AND OPERATING) COSTS
• TOTAL LOGISTICS COSTS
SEE SUCCEEDING CHARTS
Supply Chain 236#

237. Service and Number of Facilities
AS THE NUMBER OF FACILITIES INCREASE,
RESPONSE TIME REDUCES, AND COST INCREASES
Response
Response Costs
Time
Time
Costs
Number of Facilities
Supply Chain 237#

238. Costs and Number of Facilities
Inventory
Costs Facility costs
Transportation
Frequent inbound trans
Number of facilities
Supply Chain 238#

239. Cost Build-up as a function of facilities
Total Costs
Cost of Operations
Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor
Number of Facilities
Supply Chain 239#

240. FRAMEWORK FOR NETWORK DESIGN DECISIONS
• DEFINE A SUPPLY CHAIN STRATEGY
– COMPETITIVE STATEGY, COMPETITION, SWOT
• DEFINE A REGIONAL FACILITY STRATEGY
– LOCATION, ROLES AND CAPACITY
• SELECT DESIRABLE SITES
– HARD INFRASTURCTURE – TRANSPORT, UTILITIES,
SUPPLIERS, WAREHOUSES
– SOFT INFRASTRUCTURE – SKILLED WORKFORCE,
COMMUNITY
• CHOOSE LOCATION
– PRICE LOCATION AND CAPACITY ALLOCATION
SEE FRAMEWORK NEXT
Supply Chain 240#

241. A Framework for Global Site Location (107)
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy TARIFFS AND TAX
Capital, growth strategy, INCENTIVES
existing network
PRODUCTION TECHNOLOGIES REGIONAL DEMAND
Cost, Scale/Scope impact, support PHASE II Size, growth, homogeneity,
required, flexibility
Regional Facility local specifications
Configuration
COMPETITIVE
ENVIRONMENT POLITICAL, EXCHANGE
RATE AND DEMAND RISK
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
FACTOR COSTS PHASE IV LOGISTICS COSTS
Labor, materials, site specific Location Choices Transport, inventory, coordination
Supply Chain 241#

242. Tailored Network: Multi - Echelon Finished Goods
Network
Local DC
Cross-Dock Store 1
Regional Customer 1
Finished DC
Goods DC Store 1
Local DC
Cross-Dock
National Store 2
Customer 2
Finished
DC
Goods DC
Local DC Store 2
Cross-Dock
Regional
Finished Store 3
Goods DC
Store 3
Supply Chain 242#

243. Network Optimization Models
• Allocating demand to production facilities
• Locating facilities and allocating capacity
– Speculative Strategy
• Single sourcing
– Hedging Strategy
• Match revenue and cost exposure
– Flexible Strategy Key Costs:
• Excess total capacity in multiple plants
• Flexible technologies •Fixed facility cost
•Transportation cost
•Production cost
•Inventory cost
•Coordination cost
Which plants to establish? How to configure the network?
Supply Chain 243#

244. Gravity Methods for Location – Min. cost of transportn 316,116)
ASSUMPTION: TRANSPORT COSTS GROW LINEARLY WITH SHIPMENTS
Ton Mile-Center Solution
(Table 11.29, 5.1)
– x,y: Warehouse Coordinates
( x − x n) + ( y − y n)
2 2
– xn, yn : Coordinates of delivery location n d n
=
– dn : Distance to delivery location n
∑x F
n
i i
– Fn : Cost per ton mile to delivery location n i =1
– Dn Quantity to be shipped
x= d i
∑F d
n
– Fi = Dn Fn i
i =1 i
Min ∑ F i ( xi − x) + ( y − y ) 2 2 n
yF
i ∑
i =1
i i
Reiterate x,y calculation till x,y values close y= d i
∑F d
k n
∑Dnd nFn
i
Total Cost TC= i =1 i
n =1
Supply Chain 244#

245. Demand Allocation Model (pp319) (Table 5.2)
n m
Min∑∑cij xij
• Which market is served by which plant?
• Which supply sources are used by a plant?
xij = Quantity shipped from plant site i to i =1 j =1
customer j
Cij = cost to produce & ship one unit from
st.
factory i to market j n
n = no. of factory locations
m = no. of markets
∑x
i =1
ij
= Dj
Dj = Annual demand from market j All mkt demand satisfied
m
Ki = Annual capacity of factory i
∑x
j =1
ij
≤ Ki
No factory capacity exceed
x ij
≥0
Supply Chain 245#

246. NETWORK DESIGN DECISIONS IN PRACTICE
• DO NOT UNDERESTIMATE THE LIFE SPAN
– LONG LIFE HENCE LONG TERM CONSEQUENCES
– ANTICIPATE EFFECT FUTURE DEMANDS, COSTS AND TECHNOLOGY
CHANGE
– STORAGE FACILITIES EASIER TO CHANCE THAN PRODUCTION
FACILITIES
• DO NOT GLOSS OVER CULTURAL IMPLICATIONS
– LOCATION – URBAN, RURAL, PROXIMITY TO OTHERS
• DO NOT IGNORE QUALITY OF LIFE ISSUES
– WORKFORCE AVAILABILITY AND MORALE
• FOCUS ON TARIFFS& TAX INCENTIVES WHEN LOCATING
FACILITIES
– PARTICULARLY IN INTERNATIONAL LOCATIONS
Supply Chain 246#

247. HOMEWORK
• Page 330– Exercise 2
Supply Chain 247#

248. BEER GAME Lesson 12
• Beer Game
• HOMEWORK –
• WRITE UP A SUMMARY OF THE LESSONS FROM
THE BEER GAME
• GIVE AN EXAMPLE OF THIS PHENOMENA IN REAL
LIFE
• WHAT WOULD YOU DO TO CORRECT IT
Supply Chain 248#

249. DISCUSSION OF BEER GAME
• GET INTO SAME TEAMS
• FORMULATE TWO OR LEARNINGS – WHAT IS THE
EFFECT; WHY IS IT CAUSED; HOW CAN IT BE
REDUCED?
– FROM THE GAME
– FROM YOUR INTUITION
– FROM YOUR KNOWLEDGE OR INDUSTRY
• PRESENT THEM TO CLASS FOR DISCUSSION
Supply Chain 249#

250. SUPPLY CHAIN COORDINATION (Chap 16) Lesson 13
• The role of Information Technology
– What is coordination? Take action to increase total SC profits
– Obstacles to coordination:
• The Bull-Whip Effect –every trading partner must understand effect of its
actions on other trading partners
– Effect of lack of coordination
• Increased costs – Manufacturing, Inventory, Transportation, labor
• Increased Replenishment lead time
• Lower level of Product availability
– Countermeasures to achieve coordination
– The role of information technology in a supply chain
Supply Chain 250#

251. As Information Moves Thru A Supply Chain
Demand uncertainty
Customer
Retailer becomes more
Distributor A N D M ORE
Manufacturer
distorted
Supplier
Supply Chain 251#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

252. Bullwhip Effect
The magnification of variability in orders in the supply-chain.
Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders
Quantity
Quantity
Quantity
Order
Order
Order
Time Time Time
A lot of retailers …can lead to …can lead to even
each with little greater variability for greater variability
variability in their a fewer number of for a single
orders…. wholesalers, and… manufacturer.
Supply Chain 252#

253. Information Coordination: The Bullwhip Effect
Consumer Sales at Retailer Retailer's Orders to Wholesaler
1000 1000
900 900
Consumer demand
800 800
Retailer Order
700 700
600 600
500 500
400 400
300 300
200 200
100 100
0 0
11
13
25
27
29
37
39
41
1
3
5
7
9
15
17
19
21
23
31
33
35
29
33
37
39
41
1
3
5
7
9
11
13
15
17
19
21
23
25
27
31
35
Wholesaler's Orders to Manufacturer Manufacturer's Orders with Supplier
1000 1000
Manufacturer Order
Wholesaler Order
900 900
800 800
700 700
600 600
500 500
400
400
300
300
200
200
100
100
0
0
11
13
15
17
19
21
37
39
41
1
3
5
7
9
23
25
27
29
31
33
35
22
25
1
4
7
10
13
16
19
28
31
34
37
40
Supply Chain 253#

254. Impact of the Bullwhip Effect
Performance Measure Impact on Performance
Manufacturing Cost
Inventories
Lead Time
Transport Cost
Shipping & Receiving Cost
Customer Service Level
Profitability
Supply Chain 254#

255. Bull Whip Effect - Incentive Obstacles
• Contributing factors
– Incentives based on sell-in leading to forward buy
– Localized optimization Ex Transportation Mgr linked to lowest transport cost –
even if inventory cost increased
– Sales Force incentives – quantity sold to next stage, not final customer
– Buying policies based on max profits at one stage of supply chain
• Counter Measures
– Align goals and incentives across functions
– Price for coordination -
– Focus sales force on increasing sell-thru to customer
– Incentives based on rolling horizon
– Sales force do not compete with each other but with the competition
Supply Chain 255#

256. The Bullwhip Effect: Information Processing Obstacles
• Contributing factors
– No visibility of end demand
– Multiple forecasts, based on orders received not customer demand (magnifies incr/decr)
– Long lead-time
– Lack of information sharing
• Counter Measures
– Collaborative forecasting and planning (CFAR, CPFR)
– Access sell-thru or POS data. Sharing POS data
– Direct sales (natural on web)
– Single control of replenishment – continuous replenishment and VMI
– Leadtime reduction
• State of Practice
– Sell-thru data in contracts (e.g., HP, Apple, IBM)
– CFAR, CPFR, CRP, VMI (P&G and Walmart)
– Quick Response Mfg. Strategy
– Dell direct supply to customer
Supply Chain 256#

257. Bull Whip Effect - Operational Obstacles (Batching)
• Contributing factors
– High Order Cost – Ordering large lots
– Large replenishment times
– Full TL economies
– Random or correlated ordering
• Counter Measures
– Reduce replenishment lead time – EDI, manuf techniques, Advanced Shipping
notices (ASN), & Computer Assisted Ordering (CAO)
– Reduce Lot sizes – reduce fixed costs to (order, manuf, transport, receive)
– Discounted on Assorted Truckload, consolidated by 3rd party logistics
– Regular delivery appointment, milk runs, mixing deliveries
– Volume and not lot size discounts
• State of Practice
– McKesson, Nabisco, ...
– 3rd party logistics in Europe, emerging in the U.S.
– P&G
Supply Chain 257#

258. Bull Whip Effect - Operational Obstacles (Rationing
Game)
• Contributing factors
– Rationing and Shortage gaming (inflating order rewarded)
– Proportional rationing scheme
– Ignorance of supply conditions
– Unrestricted orders & free return policy
• Counter Measures
– Allocation based on past sales.
– Shared Capacity and Supply Information
– Flexibility Limited over time, capacity reservation
• State of Practice
– Saturn, HP
– Schedule Sharing (HP with TI and Motorola)
– HP, Sun, Seagate
Supply Chain 258#

259. Bull Whip Effect - Pricing Obstacles
• Contributing factors
– Lot size based quantity discounts
– High-Low Pricing leading to forward buy
– Delivery and Purchase not synchronized
• Counter Measures
– Lot size based to Volume based quantity discounts
– EDLP (Every day low pricing)
– Limited purchase quantities
– Scan based promotions
• State of Practice
– P&G (resisted by some retailers)
– Scan based promotion
Supply Chain 259#

260. Managerial Implications of the Bull Whip Effect -
Behavioral Factors
• Contributing factors
– Lack of trust
– Local reaction – to current local condition
– Each stage sub –optimizes
– Each stage blames each other for fluctuations
• Counter Measures
– Building trust and partnership
– Aligning incentives and objectives – co-identification
– Sharing information – sales and production
– Eliminating duplication (Inspection)
• State of Practice
– Wal-Mart and P&G with CFAR
Supply Chain 260#

261. How Should A Middle Link Behave?
IF: The Middle Link makes an independent decision to increase production
THEN: Finished goods inventory increases for the Middle Link
THEN: Return On Assets are reduced for the Enterprise, and
there is no improvement in end-to-end throughput!
IF: The Middle Link makes an independent decision to decrease production
THEN: The system constraint moves to the Middle Link
THEN: There is no reduction in operational costs for the Enterprise, and
profit margins are lowered for every trading partner!
THEREFORE: The Middle Link should stay synchronized to the
demand signal from the system constraint
Supply Chain 261#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

262. ACHIEVING COORDINATION IN PRACTICE
• QUANTIFY THE BULLWHIP EFFECT
• GET TOP MANAGEMENT COMMITMENT
• DEVOTE RESOURCES FOR COORDINATION - DEDICATED
• FOCUS ON COMMUNICATION WITH OTHER STAGES
• TRY TO ACHIEVE COORDINATION IN THE ENTIRE SUPPLY CHAIN
NETWORK
• USE TECHNOLOGY TO IMPROVE CONNECTIVITY IN THE SUPPLY SIDE -
INCREASING VISIBILITY&COMMUNICATION
• REDUCE TIME TO – ORDER, MAKE, TRANSPORT, REPLENISH
• SHARE BENEFITS OF COORDINATION EQUITABLY
Supply Chain 262#

263. Principle:
Synchronize Supply With Demand
This principle is about Vocalization.
Supply Chain 263#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

264. ROLE OF INFORMATION IN SUPPLY CHAIN SUCCESS
Information is the glue that binds the other three drivers, to create an
integrated, coordinated supply chain. Provides facts to give visibility of
whole supply chain and make sound decisions to improve performance
* TYPES – Supplier, Manufacturing, Distribution & Retailing, and
Demand
* CHARACTERISTICS –Accurate, Timely, Accessible, Appropriate
* OPTIMIZING – Inventory, Transportation, Facilities
Information Global Coordinated Supply Chain
Scope Decisions Success
Global scope enables decisions to maximize the total supply chain profit
Supply Chain 264#

265. USE OF INFORMATION
• INVENTORY
– SETTING OPTIMUM INVENTORY POLICIES
• DEMAND PATTERNS, CARRYING COSTS, STOCK OUT COSTS,
ORDERING COSTS, SERVICE LEVEL, LEAD TIMES ETC
• TRANSPORTATION
– DECIDING NETWORKS, ROUTINGS, MODES, SHIPMENTS AND
VENDORS
• COSTS, CUSTOMER LOCATIONS, SHIP COSTS & LOCATIONS
• FACILITY
– DETERMINING LOCATION, CAPACITY AND SCHEDULE
• TRADE OFFS EFFICIENCY VS FLEXIBILITY; DEMAND, EXCHANGE
RATES, TAXES ETC
Supply Chain 265#

266. Information Technology in a Supply Chain: Legacy Systems
THERE ARE IT SYSTEMS ACROSS ENTIRE SUPPLY CHAIN
Strategic
Planning
Operational
Supplier Manufacturer Distributor Retailer Customer
STRATEGIC – HIGH ORGANIZATIONAL LEVEL, LONG TIME FRAME,
LITTLE LOW LEVEL DETAIL, HIGHLY ANALYTICAL, TOP MANAGERS
LEGACY – ONE FUNCTION OR ONE STAGE OF SUPPLY CHAIN,
TRANSACTIONAL ABILITY, DIFFICULT TO MODIFY, NO ANALYTICAL
Supply Chain 266#

267. Information Technology in a Supply Chain: ERP Systems
ERP SYSTEMS – BROAD INFORMATION AVAILABILITY, REAL TIME,
CAN USE ENABLING TECHNOLOGY LIKE INTERNET – WEAK ANALYTICAL
Strategic
Planning
Potential
ERP ERP Potential
ERP
Operational
Supplier Manufacturer Distributor Retailer Customer
Supply Chain 267#

268. Information Technology in a Supply Chain:
Analytical Applications
Strategic
SCM
Planning APS Transport & Inventory Dem Plan
Planning
Supplier
Apps
Transport execution & CRM/SFA
MES
WMS
Operational
Supplier Manufacturer Distributor Retailer Customer
Supply Chain 268#

269. The Least Common Denominator Of
Information Technology
For orders, replenishment, payment, returns loops...
Advanced Planning & Scheduling
Enterprise Resource Planning
Data Warehousing
DRP Legacy System
MRP II Legacy System
Electronic Data Interchange
LCD
Internet Browser
Electronic Mail
Voicemail
Supply Chain Trading Partners
Wholesale
Retail
Customer
Supplier
Factory
Supply Chain 269#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

270. Information Technology in a Supply Chain: Future
Trends and Issues
• Best of breed versus single integrator
• Shifts in Platform Technology
– Client server
– Browser based internet
– Application service providers (ASP) – owns and hosts software and
charges for third party use of software
• The role of the Internet and B2B exchanges
– Exchanges create efficient market
• AUCTIONS, REVERSE AUCTIONS, FIXED PRICE, BID/ASK
– Collaboration between buyer and seller essential
– Convergence between B2B and Supply Chain
What do you see? Teams – come up with three major trends - present
Supply Chain 270#

271. SUPPLY CHAIN INFORMATION
TECHNOLOGY IN PRACTICE
• SELECT AN IT SYSTEM THAT ADDRESSES THE
COMPANY’S KEY SUCCESS FACTORS
– COMPUTERS – INVENTORY LEVEL,
– OIL REFINERY - UTILIZATION
• ALIGN LEVEL OF SOPHISTICATION WITH NEED
FOR SOPHISTICATION - KISS
• USE IT SYSTEMS TO SUPPORT DECISION MAKING,
NOT TO MAKE DECISIONS
• THINK ABOUT THE FUTURE
– WEB-BASED APPLICATIONS
– FLEXIBILITY OF SYSTEMS TO ACCOMMODATE CHANGE
Supply Chain 271#

272. Which E-Business is Right for Your Supply Chain?
What is different about e-commerce?
What are some potential opportunities in a supply chain?
Implications of e-business in different industries
Supply Chain 272#

273. Applying the Framework to e-commerce:What is e-commerce?
• Commerce transacted over the Internet
– Is product information displayed on the Internet?
– Is negotiation over the Internet? EBay
– Is the order placed over the Internet? Amazon
– Is the order tracked over the Internet?
– Is the order fulfilled over the Internet?
– Is payment transacted over the Internet?
• Information publicly available, no dedicated connection
required
• B to C and B to B
• Expected to reduce prices, increase productivity, lower
labor costs
Supply Chain 273#

274. Existing Channels for Business
• Product information
– Physical stores, EDI, catalogs, face to face, …
• Negotiation
– Face to face, phone, fax, sealed bids, …
• Order placement
– Physical store, EDI, phone, fax, face to face, …
• Order tracking
– EDI, phone, fax, …
• Order fulfillment
– Customer pick up, physical delivery
Supply Chain 274#

275. Potential Revenue Opportunities from E-Business
• Direct sales to customers
• 24 hour access for order placement
• Accessibility to all customers
• Information aggregation
• Personalization and Customization of Information
• Information sharing in supply chain
• Flexibility on pricing and promotion
• Price and service discrimination
• Faster time to market
• Efficient funds transfer - reduce working capital
• Disadvantage: Takes longer to deliver, transport costs and shipping time
Supply Chain 275#

276. Potential Cost Opportunities from E-Business
• Direct customer contact for manufacturers (no handoffs)
• Coordination in the supply chain
• Customer participation
• Postpone product differentiation to after order is placed
• Downloadable product
• Reduce product handling with shorter supply chain
• Reduce facility and processing costs
• Geographical centralization and resulting reduction in inventories
• Improving supply chain coordination thru information sharing
Supply Chain 276#

277. POTENTIAL COST DISADVANTAGES
• INCREASED TRANSPORTATION COSTS
– INVENTORY AGGREGRATION
– SMALLER, MORE FREQUENT ORDERS
• INCREASED HANDLING COSTS
– COMPANY HAS TO PICK, PACK AND SHIP
• LARGE INITIAL INVESTMENT in INFORMATION
INFRASTRUCTURE
– PROGRAMMING
– WEB SERVERS
• SECURITY ?? CASH AND PRODUCT
Supply Chain 277#

278. Basic evaluation framework
• How does going on line impact revenues?
• How does going on line impact costs?
– Facility (site + personnel)
– Inventory
– Transportation
– Information
• Should the e-commerce channel position itself for
efficiency or responsiveness?
• Who in the supply chain can extract most value?
• Is the value to existing players or new entrants?
Supply Chain 278#

279. The Computer Industry: Dell on-line
Customer Order and
Manufacturing Cycle
Customer Order and
Procurement cycle Manufacturing Cycle
Procurement Cycle
PUSH PROCESSES PULL PROCESSES
Customer
Order Arrives
Dell Supply Chain Cycles
Supply Chain 279#

280. Potential opportunities exploited by Dell
• Revenue opportunities
– 24 hour access for order placement
– Direct sales
– Providing customization and large selection information
– Flexibility on pricing and promotion
– Faster time to market
– Efficient funds transfer –Negative working capital
• Revenue negatives
– Longer response time than store and no help with selection
Supply Chain 280#

281. Potential opportunities exploited by Dell
• Cost opportunities
– Geographical Centralization and reduced inventories (aggregated)
– Reduce facility costs – no physical distribution or retail
– Direct sales eliminating intermediary
– Customer participation: Call center & catalog costs
– Information sharing in supply chain
– Postpone product differentiation to after order is placed using
product platforms and common components
• Outbound transportation costs increase
Supply Chain 281#

282. Opportunities
• Significant, but must be combined with component
commonality, and build to order. Must move product
customization to pull phase of supply chain and hold
inventories as common components during the push phase
• Opportunity most significant for new, hard to forecast
products
• Complements strength of existing retail channels
Supply Chain 282#

283. Retailing: Amazon.com
Customer Customer
Pull Pull
Amazon Retail Store
Distributor Warehouse (?)
Publisher Publisher
Amazon Supply Chain Bookstore Supply Chain
Supply Chain 283#

284. Potential opportunities exploited by Amazon
• Revenue opportunities
– 24 hour access for order placement
– Providing large selection and other information
– Attract customers who do not want to go to store
– Flexibility on pricing
– Efficient funds transfer
• Revenue negatives
– Intermediary (distributor) reduces margin
– Longer response time than bookstore
– Cannot browse
Supply Chain 284#

285. Potential opportunities exploited by Amazon
• Cost opportunities
– Geographical centralization and reduced inventories: Most
effective for low volume, hard to forecast books, least effective for
high volume best sellers
– Reduce facility costs
• Cost increases
– Outbound transportation costs increase
– Handling cost increase
Supply Chain 285#

286. Opportunities
• Going on-line, by itself, offers lower cost advantages (may
be some disadvantages) than in Dell model given current
form of books
• Cost and availability advantages are more significant for
low volume books
• On-line channel has significant cost benefit if books are
downloadable
Supply Chain 286#

287. How should bookstore chains react?
• An on line channel allows it to match Amazon’s revenue
advantages
• Use a hybrid approach in stocking and pricing
– High volume books for local storage
– Low volume books for browsing and purchase on line
– Pricing varies by delivery and pick up option
Supply Chain 287#

288. Grocery on-line
Customer Customer
Supermarket
Online Grocer
Warehouse (?)
Manufacturer Suppliers
On-Line Supply Chain Supermarket Supply Chain
Ex. Fresh Direct (NY)
Supply Chain 288#

289. Key Messages
• Some supply chains are better suited to exploit the cost
benefits of going on-line
– Ability to increase processes in pull phase
– Ability to delay product differentiation
– Big inventory benefit from geographical centralization
– Significant facility cost reduction on centralization
– Transport to customer is a small fraction of product cost
All are achieved if product is downloadable
Supply Chain 289#

290. B2B: Free Markets
• The worldwide market for direct materials procurement is
approximately $5 trillion, with the U.S. segment at approximately $1
trillion
Morgan Stanley Dean Witter Internet Industry Research
FreeMarkets is a B2B Internet company that creates online
auctions for procurers of direct materials
• MSDW Claim: FreeMarkets’ clients typically achieve
savings of 2% to 25%
Supply Chain 290#

291. B2B: Matching Base Demand and Capacity
• Potential opportunities
– Ability to reach more bidders and get lower unit price
– E Bay and Price Line (price set by customer)
• Key questions
– What does it do to total cost of material?
– How many bidders do you need to achieve this?
– How does this impact cooperative relationships within supply
chain?
– Does intermediary provide any value?
Supply Chain 291#

292. B2B: Matching Demand Shortage and Surplus
Capacity
• Potential opportunities
– Ability to aggregate and display all available surplus capacity
– Better match of surplus capacity and unmet demand
Best provided by an intermediary
• Key issue
– Total cost (product + transportation + …) must be accounted for in
the auction
Supply Chain 292#

293. Key Messages
• Significant B2B opportunity to use Internet to reduce cost
and improve efficiency of existing processes
• Significant B2B opportunity to improve collaboration
within existing supply chains
• Auction opportunity for B2B is primarily for matching
demand shortage with surplus capacity, not for base load
Supply Chain 293#

294. USING E-BUSINESS TO CREATE MARKETS
• INTERNET EXCHANGES, MARKETPLACES or PORTALS –
– ELECTRONIC MARKETPLACES AND COMMUNITIES OF INTEREST,
WHERE COMPANIES/INDIVIDUALS CAN OBTAIN INFORMATION
AND BUY AND SELL PRODUCTS. CAN AGGREGRATE DEMAND AND
SUPPLY
– BUYERS CAN USE EXCHANGES BY:
• USING THIRD PARTY TO FACILITATE TRANSACTIONS
• CONDUCTING AUCTIONS BETWEEN MANY BUYERS AND SELLERS
– ADVANTAGES FOR BUYERS:
• REDUCE TRANSACTION COSTS, IMPROVE PERFORMANCE AND
COLLOBORATIVE PLANNING WITHIN THE SUPPLY CHAIN
• OFFER BUYERs ABILITY TO SEARCH ACROSS MULTIPLE SUPPLIERS
• DOWNWARD PRESSURE ON SELLING PRICES
– ADVANTAGES FOR SELLERS:
• REDUCE REPLENISHMENT LEAD TIME AND BETTER SUPPLY DEMAND
MATCH THROUGH IMPROVED COORDINATION
• USEFUL IN SELLING SURPLUS INVENTOY & CAPACITY
Supply Chain 294#

295. SETTING UP E-BUSINESS IN PRACTICE
• INTEGRATE THE INTERNET WITH THE EXISTING PHYSICAL NETWORK –
CLICKS AND MORTAR
– SUCCESS CLOSELY LINKED TO DISTRIBUTION CAPABILITIES OF EXISTING
SUPPLY CHAIN NETWORK
• DEVISE SHIPPING STRATEGIES THAT REFLECT COSTS
– MUST INCLUDE SIZE AND WEIGHT CONSIDERATIONS
• OPTIMIZE E-BUSINESS LOGISTICS TO HANDLE PACKAGES NOT PALLETS
– NEED TO CONSOLIDATE OR BUNDLE, WITH OTHER SUPPLIERS
• DESIGN THE E-BUSINESS SUPPLY CHAIN TO HANDLE RETURNS
EFFICIENTLY
– LIKELY TO BE INCREASED RETURNS – IDEALLY TO ONE LOCATION
• KEEP CUSTOMERS INFORMED THROUGHOUT THE ORDER FULFILLMENT
CYCLE
– STATUS ON LINE
END
Supply Chain 295#

296. FINAL EXAM
Supply Chain 296#

297. Factory Cash-To-Cash Cycle Time
1. Arrange the trading partner
nodes from supplier to customer.
2. Start with a negative number to SUPPLIER
represent the time a factory
FACTORY
has to pay a supplier’s invoice.
WHOLESALE
3. Work in a complete, closed loop. RETAIL
CUSTOMER
4. Add the incremental time(s) to
send the factory invoice down the
chain to the next paying trading partner.
5. Add the incremental time(s) for
each node to send the payment back
up the chain to the factory.
6. Sum the negative time of step #2 with
the positive loop time of step #4, #5.
Supply Chain 297#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

298. Continuously Stocked Items: Optimal Safety
Inventory Levels (Eq 11.6)
For each order cycle
– Benefit of increasing safety stock by one unit =
(1-CSL)Cu
– Cost of increasing safety stock by one unit = HQ */R
where
– CSL = probability of not stocking out in a cycle with current
level of safety stock = Cycle Service Level
– H = cost of holding one unit for one year
– R = Annual demand
– Q* = Economic order quantity
Supply Chain 298#

299. Optimal Safety Inventory Levels (Ex 9.3)
CSL = 1-(HQ*/CuR)
R = 100 gallons/week; σ R= 20; H = $0.6/gal./year
L = 2 weeks; Q = 400; ROP = 300.
What is the imputed cost of stocking out?
Supply Chain 299#

300. Postponement Adds Value Within Logistics
By Trading Information For Inventory
“Postponement is delaying product differentiation until the customer demand
is known.” Corey Billington, Hewlett-Packard Strategic Planning and Modeling
FGI Orders
Without Postponement: None
Trading Trading Trading
Partner Partner Partner
With Postponement:
FGI Orders
Trading Trading Postponement
Partner Partner None
Design for generic production Postpone to an actual order
Supply Chain 300#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

301. Customer Order-To-Delivery Cycle Time
1. Arrange the trading partner nodes
from customer to supplier.
2. Work in a complete, closed loop. Customer Order-To-Delivery
Cycle Time
3. Add the incremental time(s) to send CUSTOMER
the order from the customer to the
first node with product inventory. RETAIL
WHOLESALE
4. Add the incremental time to pick
FACTORY
the product from inventory.
SUPPLIER
5. Add the incremental time(s) to
transport the product to the customer.
Supply Chain 301#
C 1999. William T. Walker, CFPIM, CIRM with the APICS Educational & Research Foundation. All Rights Reserved.

302. Amazon vs Barnes and Noble
• The effect of Barnes and noble Responsive supply chain strategies today, the
company is enhancing its original system by transitioning the back-end
services fulfillment systems to an on-line, real-time, Microsoft BackOffice-
based shipping, order management, and financial reporting system called
PRISM—or Pod Receiving and Integrated Shipping Management System.
PRISM allows Barnes and Noble to ship products much faster and deliver
higher service levels to customers
Amazon is going to become a market leader because of its early start in Web
enabled low-cost access to an infinite number of customers. Treating every
customer the same, with limited choice of access, is an unwise Barnes and
Noble approach. Amazon has several advantages over Barnes and Noble,
which could provide significant competitive leverage, such as:
•Real-time customer information and transaction data,
•Direct customer "dialog" opportunities, and
•Low-cost channel operations
Supply Chain 302#

303. Amazon vs Barnes and Noble
• Both have some unpredictable demand and some predictable demand. Yes
basically Amazon is efficient and B&N responsive (to a point). Both try and
influence demand by suggesting (and discounting) what they have stock in and
want purchased. Amazon stocks what it presumes or knows will be best sellers
I see the future bringing down the price of books further (particularly text
books) by even more outsourcing. I also see inventory in supply chain
reducing by print on demand, especially for books not commonly popular.
There will also be a lot more on line books, and condensed books, that one can
read or review
The key question is how will Amazon compete with a Chinese or Indian on
line supplier with similar products. I do not think it can compete. I see
Amazon partnering with a major Chinese and/or Indian company.
As for Barnes and Noble, they have to also move more to print on demand and
outsource more (they are already doing a lot of that). They provide a social
function that they are emphasizing, so there will be some need for them, but
not as a major book supplier
Supply Chain 303#

304. Amazon
• The company’s management has started to expand the business geographically, as well
as into new product areas. Amazon now has a U.K. subsidiary, headquartered in Slough,
west of London, employing around 500 people — Amazon.co.uk — as well as a slightly
smaller German one, Amazon.de, headquartered in Regensburg, Germany. It resoled in
increasing the overall sales of the company. Amazon is currently achieving a run rate of
$280m a year.
Amazon.co.uk started offering same-day delivery, at least within London... So, provided
that customers order within a given time window, they are offered the option of same
day delivery as a free upgrade. It resulted in better and efficient customer service than
any other online stores.
Identifying desirable global locations for new distribution centers is one use Amazon
will make of new supply-chain software from Manugistics of Rockville, Md. It would
install Manugistics’ NetWORKS solutions to support its global expansion and
operational improvement initiatives. It will use NetWORKS Strategy to model fixed and
variable network costs, taking into consideration such factors as varying transportation
and supplier lead times, and global constraints such as tariffs and taxes. The model will
then be used to design an optimal global network
Supply Chain 304#