understanding SCM.pdf

PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
to accompany
Chopra and Meindl
Understanding the
Supply Chain

What is a Supply Chain?
• All stages involved, directly or indirectly, in fulfilling a
customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)
Chopra and Meindl, Supply Chain Management, 6th Edition

• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to
manufacturers to distributors and information,
funds, and products in both directions
• May be more accurate to use the term “supply
network” or “supply web”
• Typical supply chain stages: customers, retailers,
wholesalers/distributors, manufacturers,
component/raw material suppliers
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)

FIGURE 1-1

The Objective of a Supply Chain
• Customer the only source of revenue
• Sources of cost include flows of information,
products, or funds between stages of the
supply chain
• Effective supply chain management is the
management of supply chain assets and
product, information, and fund flows to grow
the total supply chain surplus
© Chopra and Meindl, Supply Chain Management, 6th Edition

Decision Phases in a Supply Chain
1. Supply chain strategy or design
How to structure the supply chain over the next
several years
2. Supply chain planning
Decisions over the next quarter or year
3. Supply chain operation
Daily or weekly operational decisions

Supply Chain Strategy or Design
• Decisions about the configuration of the supply chain,
allocation of resources, and what processes each
stage will perform
• Strategic supply chain decisions
– Outsource supply chain functions
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must consider market
uncertainty

Supply Chain Planning
• Definition of a set of policies that govern
short-term operations
• Fixed by the supply configuration from
strategic phase
• Goal is to maximize supply chain surplus given
established constraints
• Starts with a forecast of demand in the
coming year

Supply Chain Planning
• Planning decisions:
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting
– Inventory policies
– Timing and size of market promotions
• Must consider demand uncertainty, exchange rates,
competition over the time horizon in planning
decisions

Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and planning
policies are defined
• Goal is to handle incoming customer orders as
effectively as possible
• Allocate orders to inventory or production, set order
due dates, generate pick lists at a warehouse, allocate
an order to a particular shipment, set delivery
schedules, place replenishment orders
• Much less uncertainty (short time horizon)

Process Views of a Supply Chain
1. Cycle View: The processes in a supply chain are
divided into a series of cycles, each performed at
the interface between two successive stages of the
supply chain.
2. Push/Pull View: The processes in a supply chain are
divided into two categories, depending on whether
they are executed in response to a customer order
or in anticipation of customer orders. Pull processes
are initiated by a customer order, whereas push
processes are initiated and performed in
anticipation of customer orders.

Cycle View of Supply Chain Processes

Push/Pull View of Supply Chains
FIGURE 1-5

Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two categories
depending on the timing of their execution relative
to customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes from
pull processes

Push/Pull View – L.L. Bean

to accompany
Chopra and Meindl
to accompany
Chopra and Meindl
Supply Chain Drivers
and Metrics

Drivers of Supply Chain Performance
1. Facilities
– The physical locations in the supply chain
network where product is stored, assembled,
or fabricated
2. Inventory
– All raw materials, work in process, and finished
goods within a supply chain
3. Transportation
– Moving inventory from point to point in the
supply chain

Drivers of Supply Chain Performance
4. Information
– Data and analysis concerning facilities,
inventory, transportation, costs, prices, and
customers throughout the supply chain
5. Sourcing
– Who will perform a particular supply chain
activity
6. Pricing
– How much a firm will charge for the goods and
services that it makes available in the supply
chain

Facilities
• Role in the supply chain
– Increase responsiveness by increasing the number of
facilities, making them more flexible, or increasing
capacity
– Tradeoffs between facility, inventory, and
transportation costs
• Increasing number of facilities increases facility and
inventory costs, decreases transportation costs and reduces
response time
• Increasing the flexibility or capacity of a facility increases
facility costs but decreases inventory costs and response
time

Facilities
• Components of facilities decisions
– Role
• Flexible, dedicated, or a combination of the two
• Product focus or a functional focus
– Location
• Where a company will locate its facilities
• Centralize for economies of scale, decentralize for
responsiveness
• Consider macroeconomic factors, quality of workers,
cost of workers and facility, availability of
infrastructure, proximity to customers, location of
other facilities, tax effects

Facilities
- Capacity
• A facility’s capacity to perform its intended function or functions
• Excess capacity – responsive, costly
• Little excess capacity – more efficient, less responsive
- Facility-related metrics
• Capacity
• Utilization
• Processing/setup/down/idle time
• Production cost per unit
• Quality losses
• Theoretical flow/cycle time of production
• Actual average flow/cycle time
• Flow time efficiency
• Product variety
• Volume contribution of top 20 percent SKU's and customers
• Average production batch size
• Production service level

Inventory
• Role in the Supply Chain
– Mismatch between supply and
demand
– Reduce costs
– Improve product availability
– Affects assets, costs,
responsiveness, material flow
time

Inventory
• Overall trade-off
– Increasing inventory generally makes the
supply chain more responsive
– A higher level of inventory facilitates a
reduction in production and transportation
costs because of improved economies of
scale
– Inventory holding costs increase

Inventory
– Material flow time: the time that elapses
between the point at which material enters the
supply chain to the point at which it exits
– Throughput: the rate at which sales occur
– Little’s law
I = DT
where
I = Inventory, D = throughput, T = Flow time

Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy
demand between supplier shipments
– Function of lot size decisions
• Safety inventory
– Inventory held in case demand exceeds
expectations
– Costs of carrying too much inventory versus cost
of losing sales

• Seasonal inventory
– Inventory built up to counter predictable
variability in demand
– Cost of carrying additional inventory versus cost of
flexible production
• Level of product availability
– The fraction of demand that is served on time
from product held in inventory
– Trade off between customer service and cost

• Inventory-related metrics
– C2C cycle time
– Average inventory
– Inventory turns
– Products with more than a specified number of
days of inventory
– Average replenishment batch size
– Average safety inventory
– Seasonal inventory
– Fill rate
– Fraction of time out of stock
– Obsolete inventory

Transportation
– Moves the product between stages in the supply
chain
– Affects responsiveness and efficiency
– Faster transportation allows greater
responsiveness but lower efficiency
– Also affects inventory and facilities
– Allows a firm to adjust the location of its facilities
and inventory to find the right balance between
responsiveness and efficiency

Transportation
• Components of Transportation Decisions
– Design of transportation network
• Modes, locations, and routes
• Direct or with intermediate consolidation points
• One or multiple supply or demand points in a single
run

Transportation
• Components of Transportation Decisions
– Choice of transportation mode
• Air, truck, rail, sea, and pipeline
• Information goods via the Internet
• Different speed, size of shipments, cost of shipping,
and flexibility

Transportation
– Transportation-related metrics
• Average inbound transportation cost
• Average income shipment size
• Average inbound transportation cost per shipment
• Average outbound transportation cost
• Average outbound shipment size
• Average outbound transportation cost per shipment
• Fraction transported by mode

Transportation
• Overall trade-off: Responsiveness versus
efficiency
– The cost of transporting a given product
(efficiency) and the speed with which that product
is transported (responsiveness)
– Using fast modes of transport raises
responsiveness and transportation cost but lowers
the inventory holding cost

Information
– Improve the utilization of supply chain assets
and the coordination of supply chain flows to
increase responsiveness and reduce cost
– Information is a key driver that can be used to
provide higher responsiveness while
simultaneously improving efficiency

Information
• Role in the Competitive Strategy
– Improves visibility of transactions and
coordination of decisions across the supply chain
– Right information can help a supply chain better
meet customer needs at lower cost
– Share the minimum amount of information
required to achieve coordination

Components of Information Decisions
• Information-related metrics
– Forecast horizon
– Frequency of update
– Forecast error
– Seasonal factors
– Variance from plan
– Ratio of demand variability to order variability

Sourcing
– Set of business processes required to purchase
goods and services
– Will tasks be performed by a source internal to the
company or a third party

Sourcing
• Role in the Competitive Strategy
– Sourcing decisions are crucial because they
affect the level of efficiency and
responsiveness in a supply chain
– Outsource to responsive third parties if it is
too expensive to develop their own
– Keep responsive process in-house to maintain
control

Components of Sourcing Decisions
• Supplier selection
– Number of suppliers, criteria for evaluation
and selection
• Procurement
– Obtain goods and service within a supply
chain

Components of Sourcing Decisions
• Sourcing-related metrics
– Days payable outstanding
– Average purchase price
– Range of purchase price
– Average purchase quantity
– Supply quality
– Supply lead time
– Fraction of on-time deliveries
– Supplier reliability

Pricing
– Pricing determines the amount to charge
customers for goods and services
– Affects the supply chain level of responsiveness
required and the demand profile the supply
chain attempts to serve
– Pricing strategies can be used to match demand
and supply
– Objective should be to increase firm profit

Components of Pricing Decisions
• Pricing and economies of scale
– The provider of the activity must decide how to
price it appropriately to reflect economies of
scale
• Everyday low pricing versus high-low
pricing
– Different pricing strategies lead to different
demand profiles that the supply chain must
serve

• Fixed price versus menu pricing
– If marginal supply chain costs or the value to
the customer vary significantly along some
attribute, it is often effective to have a pricing
menu
– Can lead to customer behavior that has a
negative impact on profits

• Pricing-related metrics
– Profit margin
– Days sales outstanding
– Incremental fixed cost per order
– Incremental variable cost per unit
– Average sale price
– Average order size
– Range of sale price
– Range of periodic sales

to accompany
Chopra and Meindl
to accompany
Chopra and Meindl
Designing Distribution Networks
and Applications to Online Sales

Factors Influencing
Distribution Network Design
• Elements of customer service
influenced by network structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Time to market
– Order visibility
– Returnability

Factors Influencing
Distribution Network Design
• Supply chain costs affected by network
structure:
– Inventories
– Transportation
– Facilities and handling
– Information

Design Options for a
Distribution Network
• Distribution network choices from the
manufacturer to the end consumer
• Two key decisions
1. Will product be delivered to the customer
location or picked up from a prearranged site?
2. Will product flow through an intermediary (or
intermediate location)?

Design Options for a
Distribution Network
• One of six designs may be used
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and
in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer
pickup
6. Retail storage with customer pickup

Manufacturer Storage with
Direct Shipping

Manufacturer Storage with Direct
Shipping Network
Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of
aggregation are highest for low-demand, high-value
items. Benefits are large if product customization can be
postponed at the manufacturer.
Transportation Higher transportation costs because of increased
distance and disaggregate shipping.
Facilities and handling Lower facility costs because of aggregation. Some saving
on handling costs if manufacturer can manage small
shipments or ship from production line.
Information Significant investment in information infrastructure to
integrate manufacturer and retailer.

Manufacturer Storage with Direct
Shipping Network
Service Factor Performance
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time
may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from several
manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is produced.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.
TABLE 4-1 continued

In-Transit Merge Network
FIGURE 4-7

In-Transit Merge
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-
shipping.
Facilities and handling Handling costs higher than drop-shipping at
carrier; receiving costs lower at customer.
Information Investment is somewhat higher than for drop-
shipping.

In-Transit Merge
Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer experience Better than drop-shipping because only a single delivery
is received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
TABLE 4-2 continued

Distributor Storage with
Carrier Delivery
FIGURE 4-8

Carrier Delivery
Inventory Higher than manufacturer storage. Difference is
not large for faster moving items but can be large
for very slow-moving items.
Transportation Lower than manufacturer storage. Reduction is
highest for faster moving items.
Facilities and handling Somewhat higher than manufacturer storage. The
difference can be large for very slow-moving
items.
Information Simpler infrastructure compared to manufacturer
storage.

Carrier Delivery
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.

Last Mile Delivery

Last Mile Delivery
Inventory Higher than distributor storage with package
carrier delivery.
Transportation Very high cost given minimal scale economies.
Higher than any other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or
distributor storage with package carrier delivery,
but lower than a chain of retail stores.
Information Similar to distributor storage with package carrier
delivery.

Last Mile Delivery
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package
carrier delivery but larger than retail stores.
Product availability More expensive to provide availability than any other
option except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly higher than distributor storage with package
carrier delivery.
Order visibility Less of an issue and easier to implement than
manufacturer storage or distributor storage with package
carrier delivery.
Returnability Easier to implement than other previous options. Harder
and more expensive than a retail network.

Manufacturer or Distributor Storage
with Customer Pickup

Inventory Can match any other option, depending on the location
of inventory.
Transportation Lower than the use of package carriers, especially if
using an existing delivery network.
Facilities and
handling
Facility costs can be high if new facilities have to be built.
Costs are lower if existing facilities are used. The
increase in handling cost at the pickup site can be
significant.
Information Significant investment in infrastructure required.

Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day delivery possible for items
stored locally at pickup site.
Product variety Similar to other manufacturer or distributor storage
options.
Product availability Similar to other manufacturer or distributor storage
options.
Customer experience Lower than other options because of the lack of home
delivery. Experience is sensitive to capability of pickup
location.
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle
returns.
TABLE 4-5 continued

Retail Storage with Customer Pickup
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in
handling cost at the pickup site can be significant
for online and phone orders.
Information Some investment in infrastructure required for
online and phone orders.

Retail Storage with Customer Pickup
Response time Same-day (immediate) pickup possible for items stored
locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or
negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for
online and phone orders.
Returnability Easier than other options because retail store can provide
a substitute.

Supply Chain Logistic
Networks
Chapter 13

What is a Facility Location?
Facility Location: The process of determining geographic
sites for a firm’s operations.
Distribution center (DC): A warehouse or stocking
point where goods are stored for subsequent distribution
to manufacturers, wholesalers, retailers, and customers.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition

Factors Affecting Location Decisions
1. The Factor Must Be Sensitive to Location
2. The Factor Must Have a High impact on the
Company’s Ability to Meet Its Goals

• Dominant Factors in Manufacturing
– Favorable Labor Climate
– Proximity to Markets
– Impact on Environment
– Quality of Life
– Proximity to Suppliers and Resources
– Proximity to the Parent Company’s Facilities
– Utilities, Taxes, and Real Estate Costs
– Other Factors

• Dominant Factors in Services
– Proximity to Customers
– Transportation Costs and Proximity to Markets
– Location of Competitors
– Site-Specific Factors

Load-Distance Method
• Load-Distance Method
– A mathematical model used to evaluate
locations based on proximity factors
• Euclidean distance
– The straight-line distance, or shortest possible path,
between two points
• Rectilinear distance
– The distance between two points with a series of 90-
degree turns, as along city blocks

Application 13.1
What is the distance between (20, 10) and (80, 60)?
Euclidean distance:
dAB = (xA – xB)2 + (yA – yB)2 = (20 – 80)2 + (10 – 60)2 = 78.1
Rectilinear distance:
dAB = |xA – xB| + |yA – yB| = |20 – 80| + |10 – 60| = 110

Load-Distance Method
• Calculating a load-distance score
– Varies by industry
– Use the actual distance to calculate ld score
– Use rectangular or Euclidean distances
– Find one acceptable facility location that
minimizes the ld score
• Formula for the ld score
ld =  lidi
i

Application 13.2
Management is investigating which location would be best to position
its new plant relative to two suppliers (located in Cleveland and
Toledo) and three market areas (represented by Cincinnati, Dayton,
and Lima). Management has limited the search for this plant to those
five locations. The following information has been collected. Which is
best, assuming rectilinear distance?
Location x,y coordinates Trips/year
Cincinnati (11,6) 15
Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40

Application 13.2
Location
x,y
coordinates
Trips/year
Cincinnati (11,6) 15
Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40
15(9) + 20(0) + 30(10) + 25(5) + 40(9) = 920
15(9) + 20(10) + 30(0) + 25(5) + 40(5) = 660
15(8) + 20(5) + 30(5) + 25(0) + 40(8) = 690
15(4) + 20(9) + 30(5) + 25(8) + 40(0) = 590
15(0) + 20(9) + 30(9) + 25(8) + 40(4) = 810
Cincinnati =
Dayton =
Cleveland =
Toledo =
Lima =

Center of Gravity
• Center of Gravity
– A good starting point to evaluate locations in
the target area using the load-distance model.
– Find x coordinate, x*, by multiplying each point’s x
coordinate by its load (lt), summing these products
li xi, and dividing by li
– The center of gravity’s y coordinate y* found the
same way
x* =
li xi
li
i
i
y* =
li yi
li
i
i

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

Example 13.1
What is the center of gravity
for the electric utilities'
supplier?
Customer
Location3
Tons Shipped x, y Coordinates
Fort Wayne, IN 92,000 (8, 12)
Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)
Akron, OH 227,000 (13, 11)
Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)
The center of gravity is calculated as shown below:
x* = =
li xi
li
i
i
li =
i
li xi =
i
5 + 92 + 70 + 35 + 9 + 227 + 16 + 153 = 607
5(7) + 92(8) + 70(11) + 35(11) + 9(12) + 227(13)
+ 16(14) + 153(15) = 7,504
= 12.4
7,504
607

Example 13.1
x* = =
li yi
li
i
i
li yi =
i
5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11)
+ 16(10) + 153(5) = 5,572
= 9.2
5,572
607
What is the center of gravity
for the electric utilities'
supplier?
Customer
Location
Tons
Shipped
x, y
Coordinates
Fort Wayne, IN 92,000 (8, 12)
Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)
Akron, OH 227,000 (13, 11)
Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)

Example 13.1
The resulting load-distance score is
ld =  lidi =
i
5(5.4 + 3.8) + 92(4.4 + 2.8) + 70(1.4 + 0.8) + 35(1.4
+ 2.2) + 90(0.4 + 5.2) + 227(0.6 + 1.8) + 16(1.6 +
0.8) + 153(2.6 + 4.2)
= 2,662.4
where di = |xi – x*| + |yi – y*|
Using rectilinear distance,
what is the resulting load–
distance score for this
location?
Customer
Location
Tons
Shipped
x, y
Coordinates
Fort Wayne, IN 92,000 (8, 12)
Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)
Akron, OH 227,000 (13, 11)
Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)

Application 13.3
A firm wishes to find a central location for its service. Business forecasts
indicate travel from the central location to New York City on 20
occasions per year. Similarly, there will be 15 trips to Boston, and 30
trips to New Orleans. The x, y-coordinates are (11.0, 8.5) for New York,
(12.0, 9.5) for Boston, and (4.0, 1.5) for New Orleans. What is the
center of gravity of the three demand points?
x* = =
li xi
li
i
i
y* = =
li yi
li
i
i
[(20  11) + (15  12) + (30  4)]
(20 + 15 + 30)
= 8.0
[(20  8.5) + (15  9.5) + (30  1.5)]
(20 + 15 + 30)
= 5.5

Break-Even Analysis
• Compare location alternatives based on
quantitative factors expressed in total costs
1. Determine the variable costs and fixed costs for
each site
2. Plot total cost lines
3. Identify the approximate ranges for which each
location has lowest cost
4. Solve algebraically for break-even points over
the relevant ranges

Example 13.2
An operations manager narrowed the search for a new facility
location to four communities. The annual fixed costs (land,
property taxes, insurance, equipment, and buildings) and the
variable costs (labor, materials, transportation, and variable
overhead) are as follows:
Community Fixed Costs per Year Variable Costs per Unit
A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

Example 13.2
$62(20,000) = $1,240,000 $1,390,000
Community Fixed Costs
Variable Costs
(Cost per Unit)(No. of Units)
Total Cost
(Fixed + Variable)
A $150,000
B $300,000
C $500,000
D $600,000
$38(20,000) = $760,000 $1,060,000
$24(20,000) = $480,000 $980,000
$30(20,000) = $600,000 $1,200,000
To plot a community’s total cost line, let us first compute the
total cost for two output levels: Q = 0 and Q = 20,000 units
per year. For the Q = 0 level, the total cost is simply the fixed
costs. For the Q = 20,000 level, the total cost (fixed plus
variable costs) is as follows:

A best B best C best
Example 13.2
The figure shows the
graph of the total cost
lines.
| | | | | | | | | | | |
0 2 4 6 8 10 12 14 16 18 20 22
1,600 –
1,400 –
1,200 –
1,000 –
800 –
600 –
400 –
200 –
–
Annual
cost
(thousands
of
dollars
)
Q (thousands of units)
A
B
C
D
6.25 14.3
Break-even
point
Break-even
point
(20, 980)
(20, 1,390)
(20, 1,200)
(20, 1,060)
• A is best for low volumes
• B for intermediate volumes
• C for high volumes.
• We should no longer
consider community D,
because both its fixed and
its variable costs are higher
than community C’s.

Example 13.2
(A) (B)
$150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units
The break-even quantity between B and C lies at the end of
the range over which B is best and the beginning of the final
range where C is best.
(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units
The break-even quantity between A and B lies at the end of
the first range, where A is best, and the beginning of the
second range, where B is best.

By chance, the Atlantic City Community Chest has to close
temporarily for general repairs. They are considering four
temporary office locations:
Application 13.4
Property Address Move-in Costs Monthly Rent
Boardwalk $400 $50
Marvin Gardens $280 $24
St. Charles Place $360 $10
Baltic Avenue $60 $60
Use the graph on the next slide to determine for what length of
lease each location would be favored?
Hint: In this problem, lease length is analogous to volume.

Application 13.4
| | | | | | | | |
0 1 2 3 4 5 6 7 8
Months →
Total
Cost
→
500 –
–
400 –
–
300 –
–
200 –
–
100 –
–
–
Boardwalk
St Charles Place
Marvin
Gardens
Baltic Avenue
Fs + csQ = FB + cBQ
Q =
FB – Fs
cs – cB
= = 6 months
– 300
– 50
=
$60 – $360
$10 – $60
The short answer: Baltic
Avenue if 6 months or less,
St. Charles Place if longer

Transportation Method
• Transportation method for location problems
– A quantitative approach that can help solve multiple-facility
location problems
• Setting Up the Initial Tableau
1. Create a row for each plant (existing or new) and a column for
each warehouse
2. Add a column for plant capacities and a row for warehouse
demands and insert their specific numerical values
3. Each cell not in the requirements row or capacity column
represents a shipping route from a plant to a warehouse. Insert
the unit costs in the upper right-hand corner of each of these cells.
• The sum of the shipments in a row must equal the corresponding
plant’s capacity and the sum of shipments in a column must equal
the corresponding warehouse’s demand.

Transportation Method
Plant
Warehouse
Capacity
San Antonio, TX
(1)
Hot Spring, AR
(2)
Sioux Falls, SD
(3)
Phoenix
5.00 6.00 5.40
400
Atlanta
7.00 4.60 6.60
500
Requirements 200 400 300
900
900
•Finding a solution
–The goal is to find the least-cost allocation pattern that satisfies all
demands and exhausts all capacities.

Example 13.3
The optimal solution for the Sunbelt Pool Company, found
with POM for Windows, is shown below and displays the data
inputs, with the cells showing the unit costs, the bottom row
showing the demands, and the last column showing the
supply capacities.
Figure 13.5a

Example 13.3
Below shows how the existing network of plants supplies the three warehouses to
minimize costs for a total of $4,580.
All warehouse demand is satisfied:
• Warehouse 1 in San Antonio is fully supplied by Phoenix
• Warehouse 2 in Hot Springs is fully supplied by Atlanta.
• Warehouse 3 in Sioux Falls receives 200 units from Phoenix and 100 units from Atlanta, satisfying
its 300-unit demand.
The total optimal cost reported in the upper-left corner of the previous table is
$4,580, or 200($5.00) + 200($5.40) + 400($4.60) + 100($6.60) = $4,580.

A Systematic Location
Selection Process
Step 1: Identify the important location factors and
categorize them as dominant or secondary
Step 2: Consider alternative regions; then narrow to
alternative communities and finally specific sites
Step 3: Collect data on the alternatives
Step 4: Analyze the data collected, beginning with the
quantitative factors
Step 5: Bring the qualitative factors pertaining to each site
into the evaluation

0.9
1.6
1.8
1.6
5.9
Management is considering three potential locations for a new
cookie factory. They have assigned scores shown below to the
relevant factors on a 0 to 10 basis (10 is best). Using the preference
matrix, which location would be preferred?
Application 13.5
0.5
1.8
3.0
1.2
6.5
0.8
0.8
2.4
2.8
6.8
Location
Factor
Weight
The
Neighborhood
Sesame
Street
Ronald’s
Playhouse
Material Supply 0.1 5 9 8
Quality of Life 0.2 9 8 4
Mild Climate 0.3 10 6 8
Labor Skills 0.4 3 4 7

Solved Problem 1
The new Health-Watch facility is targeted to serve seven census tracts
in Erie, Pennsylvania, whose latitudes and longitudes are shown
below. Customers will travel from the seven census-tract centers to
the new facility when they need health care. What is the target area’s
center of gravity for the Health-Watch medical facility?
LOCATION DATA AND CALCULATIONS FOR HEALTH WATCH
Census Tract Population Latitude Longitude
Population 
Latitude
Population 
Longitude
15 2,711 42.134 –80.041 114,225.27 –216,991.15
16 4,161 42.129 –80.023 175,298.77 –332,975.70
17 2,988 42.122 –80.055 125,860.54 –239,204.34
25 2,512 42.112 –80.066 105,785.34 –201,125.79
26 4,342 42.117 –80.052 182,872.01 –347,585.78
27 6,687 42.116 –80.023 281,629.69 –535,113.80
28 6,789 42.107 –80.051 285,864.42 –543,466.24
Total 30,190 1,271,536.04 –2,416.462.80
Table 13.1

Solved Problem 1
Next, we solve for the center of gravity x* and y*. Because the
coordinates are given as longitude and latitude, x* is the longitude
and y* is the latitude for the center of gravity.
x* = = 42.1178
1,271,536.05
30,190
y* = = – 80.0418
– 2,416,462.81
30,190
The center of gravity is (42.12 North, 80.04 West), and is
shown on the map to be fairly central to the target area.

The operations manager for Mile-High Lemonade narrowed the
search for a new facility location to seven communities. Annual
fixed costs (land, property taxes, insurance, equipment, and
buildings) and variable costs (labor, materials, transportation, and
variable overhead) are shown in the following table.
Solved Problem 2
a. Which of the communities can be eliminated from further
consideration because they are dominated (both variable and
fixed costs are higher) by another community?
b. Plot the total cost curves for all remaining communities on a
single graph. Identify on the graph the approximate range over
which each community provides the lowest cost.
c. Using break-even analysis, calculate the break-even quantities
to determine the range over which each community provides
the lowest cost.

Solved Problem 2
FIXED AND VARIABLE COSTS FOR MILE-HIGH LEMONADE
Community Fixed Costs per Year Variable Costs per Barrel
Aurora $1,600,000 $17.00
Boulder $2,000,000 $12.00
Colorado Springs $1,500,000 $16.00
Denver $3,000,000 $10.00
Englewood $1,800,000 $15.00
Fort Collins $1,200,000 $15.00
Golden $1,700,000 $14.00
Table 13.2

Solved Problem 2
Location
costs
(in
millions
of
dollars)
Barrels of lemonade per year (in hundred thousands)
10 –
8 –
6 –
4 –
2 –
–
| | | | | | |
0 1 2 3 4 5 6
Fort Collins Boulder Denver
Golden
Break-even
point
Break-even
point
2.67
Figure 13.10

Solved Problem 2
a. Aurora and Colorado Springs are dominated by Fort
Collins, because both fixed and variable costs are higher
for those communities than for Fort Collins. Englewood is
dominated by Golden.
b. Fort Collins is best for low volumes, Boulder for
intermediate volumes, and Denver for high volumes.
Although Golden is not dominated by any community, it is
the second or third choice over the entire range. Golden
does not become the lowest-cost choice at any volume.

Solved Problem 2
c. The break-even point between Fort Collins and Boulder is
$1,200,000 + $15Q =$2,000,000 + $12Q
Q = 266,667 barrels per year
The break-even point between Denver and Boulder is
$3,000,000 + $10Q =$2,000,000 + $12Q
Q = 500,000 barrels per year

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

Source
Destination
Capacity
Worchester Rochester Dorchester
Battle Creek
$4.37 $4.25 $4.89
12,000
Cherry Creek
$4.00 $5.00 $5.27
10,000
Dee Creek
$4.13 $4.50 $3.75
18,000
Demand 6,000 22,000 12,000 40,000
12,000
6,000 4,000
6,000 12,000
Solved Problem 3
Figure 13.11

Solved Problem 3
The total cost is $167,000
Ship 12,000 units from Battle Creek
to Rochester @ $4.25
Cost = $51,000
Ship 6,000 units from Cherry Creek
to Worchester @ $4.00
Cost = $24,000
Ship 4,000 units from Cherry Creek
Cost = $20,000
Ship 6,000 units from Dee Creek
Cost = $27,000
Ship 12,000 units from Dee Creek
to Dorchester @ $3.75
Cost = $45,000
Total = $167,000

to accompany
Chopra and Meindl
to accompany
Chopra and Meindl
Network Design in the
Supply Chain

The Role of Network Design
• Facility role
– What role, what processes?
• Facility location
– Where should facilities be located?
• Capacity allocation
– How much capacity at each facility?
• Market and supply allocation
– What markets? Which supply sources?

Models for Facility Location and
Capacity Allocation
• Maximize the overall profitability of the supply
chain network while providing customers with
the appropriate responsiveness
• Many trade-offs during network design
• Network design models used
– to decide on locations and capacities
– to assign current demand to facilities and identify
transportation lanes

Models for Facility Location and
Capacity Allocation
• Important information
– Location of supply sources and markets
– Location of potential facility sites
– Demand forecast by market
– Facility, labor, and material costs by site
– Transportation costs between each pair of sites
– Inventory costs by site and as a function of quantity
– Sale price of product in different regions
– Taxes and tariffs
– Desired response time and other service factors

Network Optimization Models
FIGURE 5-3

Capacitated Plant Location Model
= number of potential plant locations/capacity
n
m
Dj
Ki
fi
cij
= number of markets or demand points
= annual demand from market j
= potential capacity of plant i
= annualized fixed cost of keeping plant i open
= cost of producing and shipping one unit from plant i to market j (cost
includes production, inventory, transportation, and tariffs)
yi
xij = quantity shipped from
plant i to market j
= 1 if plant i is open, 0 otherwise
Min fi
yi
+
i=1
n
å cij
xij
j=1
m
å
i=1
n
å
subject to
xij
= Dj
for j =1,...,m
i=1
n
å
xij
j=1
m
å = Ki
yi
for i =1,...,n
yi
Î 0,1
{ } for i =1,...,n,x ij
³ 0

• Constraints

Phase III: Gravity Location Models
xn, yn: coordinate location of either a market or supply source n
Fn: cost of shipping one unit for one mile between the facility and
either market or supply source n
Dn: quantity to be shipped between facility and market or supply
source n
(x, y) is the location selected for the facility, the distance dn between the
facility at location (x, y) and the supply source or market n is given by
dn
= x – xn
( )
2
+ y – yn
( )
2

Gravity Location Model
Sources/Markets
Transportation
Cost $/Ton Mile (Fn)
Quantity in
Tons (Dn)
Coordinates
xn yn
Supply sources
Buffalo 0.90 500 700 1,200
Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Markets
Atlanta 1.50 225 600 500
Boston 1.50 150 1,050 1,200
Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975
New York 1.50 300 1,000 1,080
Total transportation cost TC = dn
Dn
Fn
n=1
k
å

Gravity Location Model

• Merge the companies
• Solve using location-specific costs
yi = 1 if factory i is open, 0 otherwise
xij = quantity shipped from factory i to market j
Min fi
yi
+
i=1
n
å cij
xij
j=1
m
å
i=1
n
å

FIGURE 5-12

Capacitated Model With
Single Sourcing
• Market supplied by only one factory
• Modify decision variables
yi = 1 if factory i is open, 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise
Min fi
yi
+ Dj
cij
xij
j=1
m
å
i=1
n
å
i=1
n
å
subject to
xij =1 for j =1,...,m
i=1
n
å
Djxij £ Ki yi
j=1
m
å for i =1,...,n
xij, yi Î 0,1
{ }

Capacitated Model With
Single Sourcing
• Optimal network configuration with single
sourcing
Open/
Closed Atlanta Boston Chicago Denver Omaha Portland
Baltimore Closed 0 0 0 0 0 0
Cheyenne Closed 0 0 0 0 0 0
Salt Lake Open 0 0 0 6 0 11
Memphis Open 10 8 0 0 0 0
Wichita Open 0 0 14 0 7 0
TABLE 5-4

Locating Plants and Warehouses
Simultaneously
FIGURE 5-13

Simultaneously
• Model inputs
m = number of markets or demand points
n = number of potential factory locations
l = number of suppliers
t = number of potential warehouse locations
Dj = annual demand from customer j
Ki = potential capacity of factory at site i
Sh = supply capacity at supplier h
We = potential warehouse capacity at site e
Fi = fixed cost of locating a plant at site i
fe = fixed cost of locating a warehouse at site e
chi = cost of shipping one unit from supply source h to factory i
cie = cost of producing and shipping one unit from factory i to warehouse e
cej = cost of shipping one unit from warehouse e to customer j

Simultaneously
• Goal is to identify plant and warehouse locations and
quantities shipped that minimize the total fixed and
variable costs
yi = 1 if factory is located at site i, 0 otherwise
ye = 1 if warehouse is located at site e, 0 otherwise
xej = quantity shipped from warehouse e to market j
xie = quantity shipped from factory at site i to warehouse e
xhi = quantity shipped from supplier h to factory at site i
Min Fi yi + feye + chi xhi
i=1
n
å + ciexie +
e=1
t
å
i=1
n
å cej xej
j=1
m
å
e=1
t
å
h=1
l
å
e=1
t
å
i=1
n
å

Simultaneously
subject to
xhi
£ Sh
for h =1,...,l
i=1
n
å
xhi
– xie
e=1
t
å ³ 0 for i = 1,...,n
h=1
l
å
xie
£ Ki
yi
for i =1,...,n
e=1
t
å
xie
– xej
j=1
m
å ³ 0 for e =1,...,t
i=1
n
å
xej
£We
ye
for e =1,...,t
j=1
m
å
xej
= Dj
for j =1,...,m
e=1
t
å
yi
, ye
Î 0,1
{ },xej
,xie
,xhi
³ 0

Accounting for Taxes, Tariffs, and
Customer Requirements
• A supply chain network should maximize profits after
tariffs and taxes while meeting customer service
requirements
• Modified objective and constraint
Max rj
xij
– Fi
yi
– cij
xij
j=1
m
å
i=1
n
å
i=1
n
å
i=1
n
å
j=1
m
å
xij
£ Dj
for j =1,...,m
i=1
n
å

Supply Chain
Integration
Chapter 14

Supply Chain Integration
Upstream
Tier 3 Tier 2 Tier 1
Downstream
Information flows
Cash flows
Tomato
suppliers
Tomato
paste
factories
Tomato
grading
stations
Retail
sales
Consumers
Ketchup
factory
Supply Chain Integration: The effective coordination of
supply chain processes though the seamless flow of information
up and down the supply chain.

Supply Chain Disruptions
• External Causes
– Environmental Disruptions
– Supply Chain Complexity
– Loss of Major Accounts
– Loss of Supply
– Customer-Induced Volume
Changes
– Service and Product Mix
Changes
– Late Deliveries
– Underfilled Shipments
• Internal Causes
– Internally Generated
Shortages
– Quality Failures
– Poor Supply Chain Visibility
– Engineering Changes
– Order Batching
– New Service or Production
Introductions
– Service or Product
Promotions
– Information Errors

Supply Chain Dynamics
9,000
7,000
5,000
3,000
0
Order
quantity
Month of April
Day 1 Day 30 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30
Consumers’
daily
demands
Retailers’
daily orders
to
manufacturer
Manufacturer’s
weekly orders
to package
supplier
Package
supplier’s weekly
orders to
cardboard
supplier
Bullwhip Effect: The phenomenon in supply chains whereby ordering
patterns experience increasing variance as you proceed upstream in the
chain.

Integrated Supply Chains
• External Supply Chain Linkages
First-Tier Supplier Service/Product Provider
Support Processes
External
Suppliers
Support Processes
Supplier
relationship
process
New service/
product
development
process
Order
fulfillment
process
Business-
to-business
(B2B)
customer
relationship
process
External
Consumers
Supplier
relationship
process
New service/
product
development
process
Order
fulfillment
process
Business-
to-business
(B2B)
customer
relationship
process
Business-
to-business
(B2B)
customer
relationship
process
Business-to-
consumer
(B2C)
customer
relationship
process
Figure 14.3

Supplier Relationship Process
• Supplier selection
– Material costs
• Annual material costs = pD
– Freight costs
– Inventory costs
• Cycle inventory = Q/2
• Pipeline inventory = L
• Annual inventory costs = (Q/2 + L) H
– Administrative costs
– Total Annual Cost =
pD + Freight costs + (Q/2 + L) H + administrative costs.

Example 14.1
Compton Electronics manufactures laptops for major
computer manufacturers. A key element of the laptop is
the keyboard. Compton has identified three potential
suppliers for the keyboard, each located in a different part
of the world. Important cost considerations are the price
per keyboard, freight costs, inventory costs, and contract
administrative costs. The annual requirements for the
keyboard are 300,000 units. Assume Compton has 250
business days a year. Managers have acquired the following
data for each supplier.
Which supplier provides the lowest annual total cost to
Compton?

Example 14.1
Annual Freight Costs
Shipping Quantity (units/shipment)
Supplier 10,000 20,000 30,000
Belfast $380,000 $260,000 $237,000
Hong Kong $615,000 $547,000 $470,000
Shreveport $285,000 $240,000 $200,000
Keyboard Costs and Shipping Lead Times
Supplier Price/Unit
Annual Inventory
Carrying Cost/Unit
Shipping Lead
Time (days)
Administrative
Costs
Belfast $100 $20.00 15 $180,000
Hong Kong $96 $19.20 25 $300,000
Shreveport $99 $19.80 5 $150,000

Example 14.1
The average requirements per day are:
Total Annual Cost =
pD + Freight costs + (Q/2 + dL)H +
Administrative costs
d = 300,000/250 = 1,200 keyboards

Example 14.1
BELFAST: Q = 10,000 units.
Material costs = pD =
Freight costs = $380,000
Administrative costs = $180,000
Total Annual Cost =
= (10,000 units/2
+ 1200 units/day(15 days))$20/unit/year
= $460,000
= $31,020,000
$30,000,000 + $380,000
+ $460,000 + $180,000
= $30,000,000
($100/unit)(300,000 units)
Inventory costs = (cycle inventory + pipeline inventory)H
= (Q/2 + L)H

The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Example 14.1
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast
Hong Kong
Shreveport

The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Example 14.1
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast
Hong Kong
Shreveport
$31,020,000 $31,000,000 $31,077,000
$30,352,800 $30,406,800 $30,465,800
$30,387,000 $30,415,000 $30,434,000

Green Purchasing
• Green purchasing – The process of identifying,
assessing, and managing the flow of
environmental waste and finding ways to
reduce it and minimize its impact on the
environment.
– Choose environmentally conscious suppliers.
– Use and substantiate claims such as green,
biodegradable, natural, and recycled.
– Use sustainability as criteria for certification.

Example 14.2
The management of Compton Electronics has done a total cost
analysis for three international suppliers of keyboards (see Example
14.1). Compton also considers on-time delivery, consistent quality, and
environmental stewardship in its selection process. Each criterion is
given a weight (total of 100 points), and each supplier is given a score
(1 = poor, 10 = excellent) on each criterion. The data are shown in the
following table.
Score
Criterion Weight Belfast Hong Kong Shreveport
Total Cost 25 5 8 9
On-Time
Delivery
30 9 6 7
Consistent
Quality
30 8 9 6
Environment 15 9 6 8

Example 14.2
Belfast = (25  5) + (30  9) + (30  8) + (15  9) = 770
Hong Kong = (25  8) + (30  6) + (30  9) + (15  6) = 740
Shreveport = (25  9) + (30  7) + (30  6) + (15  8) = 735
Preferred
For example, the Belfast weighted score is:
The weighted score for each supplier is calculated by
multiplying the weight by the score for each criterion
and arriving at a total.

Supplier Relationship Process
Design collaboration
• Early supplier involvement
• Presourcing
• Value analysis
Negotiation
• Competitive orientation
• Cooperative orientation
Buying
• Electronic Data Interchange
• Catalog Hubs
• Exchanges
• Auctions
• Locus of Control
Information Exchange
• Radio Frequency Identification (RFID)
• Vendor-Managed Inventories (VMI)

Order Fulfillment Process
• Customer Demand Planning
• Supply Planning
• Production
• Logistics
– Ownership
– Facility location
– Mode selection
– Capacity level
– Cross-docking

Example 14.3
Tower Distributors provides logistical services to local
manufacturers. Tower picks up products from the manufacturers,
takes them to its distribution center, and then assembles
shipments to retailers in the region. Tower needs to build a new
distribution center; consequently, it needs to make a decision on
how many trucks to have. The monthly amortized capital cost of
ownership is $2,100 per truck. Operating variable costs are $1 per
mile for each truck owned by Tower. If capacity is exceeded in any
month, Tower can rent trucks at $2 per mile. Each truck Tower
owns can be used 10,000 miles per month. The requirements for
the trucks, however, are uncertain. Managers have estimated the
following probabilities for several possible demand levels and
corresponding fleet sizes.

Example 14.3
If Tower Distributors wants to minimize the expected
cost of operations, how many trucks should it have?
Requirements
(miles/month)
100,000 150,000 200,000 250,000
Fleet Size (trucks) 10 15 20 25
Probability 0.2 0.3 0.4 0.1

Example 4.3
C = monthly capital cost of ownership
+ variable operating cost per month + rental costs if needed
C(100,000 miles/month) =
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles) = $121,000
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(150,000 miles – 100,000 miles)
= $221,000
+ ($1/mile)(100,000 miles)
= $321,000
+ ($1/mile)(100,000 miles)
= $421,000

Example 14.3
Next, calculate the expected value for the 10 truck fleet size
alternative as follows:
Expected Value (10 trucks) =
Using similar logic, we can calculate the expected costs for each of the
other fleet-size options:
0.2($121,000) + 0.3($221,000)
+ 0.4($321,000) + 0.1($421,000) = $261,000
0.2($131,500) + 0.3($181,500)
+ 0.4($281,500) + 0.1($381,000) = $231,500
0.2($142,000) + 0.3($192,000)
+ 0.4($242,000) + 0.1($342,000) = $217,000
0.2($152,500) + 0.3($202,500)
+ 0.4($252,500) + 0.1($302,500) = $222,500
The preferred option is 20 trucks.

The Customer Relationship Process
• Marketing
– Business-to-Consumer Systems
– Business-to-Business Systems
• Order Placement
– Cost Reduction
– Revenue Flow Increase
– Global Access
– Pricing Flexibility
• Customer Service

Supply Chain Risk Management
• Supply Chain Risk Management
– The practice of managing the risk of any factor or
event that can materially disrupt a supply chain,
whether within a single firm or across multiple
firms.

• Operational Risks – Threats to the effective flow of
materials, services, and products in a supply chain
– Strategic Alignment
– Upstream/Downstream Supply Chain Integration
– Visibility
– Flexibility and Redundancy
– Short Replenishment Lead Times
– Small Order Lot Sizes
– Rationing Short Supplies
– Everyday low pricing (EDLP)
– Cooperation and Trustworthiness

• Financial Risks – Threats to the financial flows in
a supply chain, such as prices, costs, and profits.
– Low Cost Hopping
– Hedging
• Production Shifting
• Futures Contract

• Security Risks - Threats to a supply chain that could
potentially damage stakeholders, facilities, or
operations.
– Access Control
– Physical Security
– Shipping and Receiving
– Transportation Service Provider
– ISO 28000

Performance Measures
Customer Relationship Order Fulfillment Supplier Relationship
 Percent of orders taken
accurately
 Time to complete the
order placement process
 Customer satisfaction
with the order
placement process
 Customer’s evaluation of
firm’s environmental
stewardship
 Percent of business lost
because of supply chain
disruptions
 Percent of incomplete
orders shipped
 Percent of orders shipped
on-time
 Time to fulfill the order
 Percent of botched services
or returned items
 Cost to produce the service
or item
 Customer satisfaction with
the order fulfillment process
 Inventory levels of work-in-
process and finished goods
 Amount of greenhouse
gasses emitted into the air
 Number of security
breaches
 Percent of suppliers’
deliveries on-time
 Suppliers’ lead times
 Percent defects in services
and purchased materials
 Cost of services and
purchased materials
 Inventory levels of
supplies and purchased
components
 Evaluation of suppliers’
collaboration on
streamlining and waste
conversion
 Amount of transfer of
environmental
technologies to suppliers

Solved Problem 1
Eagle Electric Repair is a repair facility for several major electronic
appliance manufactures. Eagle wants to find a low-cost supplier for
an electric relay switch used in many appliances. The annual
requirements for the relay switch (D) are 100,000 units. Eagle
operates 250 days a year. The following data are available for two
suppliers. Kramer and Sunrise, for the part:
Freight Costs
Shipping Quantity (Q)
Supplier 2,000 10,000
Price/Unit
(p)
Carrying
Cost/Unit
(H)
Lead
Time
(L)(days)
Administrative
Costs
Kramer $30,000 $20,000 $5.00 $1.00 5 $10,000
Sunrise $28,000 $18,000 $4.90 $0.98 9 $11,000

Solved Problem 1
The daily requirements for the relay switch are:
100,000/250 = 400 units
d =
We must calculate the total annual costs
for each alternative:
Total annual cost = Material costs + Freight costs
+ Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL) H +
Administrative costs

Solved Problem 1
Kramer
Q = 2,000:
Q = 10,000:
The analysis reveals that using Sunrise and a shipping quantity
of 10,000 units will yield the lowest annual total costs.
Sunrise
Q = 2,000:
Q = 10,000:
($5.00)(100,000) + $30,000 + (2,000/2 + 400(5))($1) + $10,000
= $543,000
($5.00)(100,000) + $20,000 + (10,000/2 + 400(5))($1) + $10,000
= $537,000
($4.90)(100,000) + $28,000 + (2,000/2 + 400(9))($0.98) + $11,000
= $533,508
(4.90)(100,000) + $18,000 + (10,000/2 + 400(9))($0.98) + $11,000
= $527,428

Solved Problem 2
Schneider Logistics Company has built a new warehouse in Columbus,
Ohio, to facilitate the consolidation of freight shipments to customers
in the region. How many teams of dock workers should he hire to
handle the cross docking operations and the other warehouse
activities? Each team costs $5,000 a week in wages and overhead.
Extra capacity can be subcontracted at a cost of $8,000 a team per
week. Each team can satisfy 200 labor hours of work a week.
Management has estimated the following probabilities for the
requirements:
Requirements (hours/wk) 200 400 600
Number of teams 1 2 3
Probability 0.20 0.50 0.30
How many teams should Schneider hire?

Solved Problem 2
We use the expected value decision rule by first computing the
cost for each option for each possible level of requirements and
then using the probabilities to determine the expected value for
each option. The option with the lowest expected cost is the
one Schneider will implement. We demonstrate the approach
using the “one team” in-house option.
One Team In-House
C(200) =
C(400) =
C(600) =
Expected Value =
0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800
$5,000 + $8,000 + $8,000 = $21,000
$5,000 + $8,000 = $13,000
$5,000

Solved Problem 2
A table of the complete results is below.
Based on the expected value decision rule,
Schneider should employ two teams at the warehouse.
$5,000 $13,000 $21,000 $13,800
$10,000 $10,000 $18,000 $12,400
$15,000 $15,000 $15,000 $15,000
Weekly Labor Requirements
In-House 200 hrs 400 hrs 600 hrs Expected Value
One team
Two teams
Three teams

to accompany
Chopra and Meindl
to accompany
Chopra and Meindl
Coordination in a
Supply Chain

Obstacles to Coordination
in a Supply Chain
• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles

Incentive Obstacles
• Occur when incentives offered to different
stages or participants in a supply chain lead
to actions that increase variability and
reduce total supply chain profits
– Local optimization within functions or stages of
a supply chain
– Sales force incentives

Information Processing Obstacles
• When demand information is distorted as it
moves between different stages of the supply
chain, leading to increased variability in orders
within the supply chain
–Forecasting based on orders and not customer demand
–Lack of information sharing

Operational Obstacles
• Occur when placing and filling orders lead
to an increase in variability
– Ordering in large lots
– Large replenishment lead times
– Rationing and shortage gaming

Operational Obstacles
FIGURE 10-2

Pricing Obstacles
• When pricing policies for a product lead to
an increase in variability of orders placed
– Lot-size based quantity decisions
– Price fluctuations

Pricing Obstacles
FIGURE 10-3

Behavioral Obstacles
• Problems in learning within organizations that
contribute to information distortion
1. Each stage of the supply chain views its actions locally and
is unable to see the impact of its actions on other stages
2. Different stages of the supply chain react to the current
local situation rather than trying to identify the root
causes
3. Different stages of the supply chain blame one another
for the fluctuations
4. No stage of the supply chain learns from its actions over
time
5. A lack of trust among supply chain partners causes them
to be opportunistic at the expense of overall supply chain
performance

Supply Chain
Sustainability
Chapter 15

What is Sustainability?
Sustainability: A characteristic of processes that
are meeting humanity’s needs without harming
future generations.
• Sustainability Challenges:
– Environmental protection
– Productivity improvement
– Risk minimization
– Innovation

The Three Elements of
Supply Chain Sustainability
• Financial Responsibility
• Environmental Responsibility
- Reverse Logistics
- Efficiency
• Social Responsibility
- Disaster Relief Supply Chains
- Ethics

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

Reverse Logistics
• Financial Implications
–Fee
–Deposit fee
–Take back
–Trade-in
–Community programs

Transportation Distance
• Route Planning
– Shortest route problem
• Find the shortest distance between two
cities in a network or map.
– Traveling salesman problem
• Find the shortest possible route that visits
each city exactly once and returns to the
starting city.

Nearest Neighbor Heuristic
• Steps
1. Start with the city that is designated as the central
location. Call this city the start city. Place all other cites
in an unvisited set.
2. Choose the city in the unvisited set that is closest to
the start city. Remove that city from the unvisited set.
3. Repeat the procedure with the latest visited city as the
start city.
4. Conclude when all cities have been visited, and return
back to the central location.
5. Compute the total distance traveled along the selected
route.

Four-City Traveling Salesman Problem
Central
Hub
A
C
B
130
90
85
80
100
120
Figure 15.3

Example 15.1
Hillary and Adams, Inc. is a privately-owned firm located in
Atlanta that serves as the regional distributor of natural food
products for Georgia, Kentucky, North Carolina, South Carolina,
and Tennessee. Every week, a truck leaves the large distribution
center in Atlanta to stock local warehouses located in Charlotte,
NC, Charleston, SC, Columbia, SC, Knoxville, TN, Lexington KY,
and Raleigh, NC. The truck visits each local warehouse only once,
and returns to Atlanta after all the deliveries have been
completed. John Jensen is worried about the rising fuel costs and
is interested in finding a route that would minimize the distance
traveled by truck. Use the Nearest Neighbor heuristic to identify
a route for the truck and compute the total distance traveled.

Example 15.1
From/To Atlanta Charleston Charlotte Columbia Knoxville Lexington Raleigh
Atlanta 0 319 244 225 214 375 435
Charleston 319 0 209 116 373 540 279
Charlotte 244 209 0 93 231 398 169
Columbia 225 116 93 0 264 430 225
Knoxville 214 373 231 264 0 170 351
Lexington 375 540 398 430 170 0 498
Raleigh 435 279 169 225 351 498 0
The distance between any two cities in miles is given below:

Example 15.1
• Step 1
– Start with Atlanta and place all other cities in the
unvisited set.
• Charleston, Charlotte, Columbia, Knoxville, Lexington,
Raleigh
• Step 2
– Select the closest city to Atlanta in the unvisited set,
which is Knoxville.
– Remove Knoxville from the unvisited set.
– The partial route is now Atlanta-Knoxville which is:
• 214 miles

Example 15.1
• Step 3
– Scan the unvisited set for the city closest to Knoxville,
which is Lexington.
– Remove Lexington from the unvisited set.
– The partial route is now Atlanta-Knoxville-Lexington
which is:
• 214 + 170 = 384 miles
• Step 4
– Repeat this procedure until all cities have been
removed from the unvisited set.
– Connect the last city to Atlanta to finish the route.

Example 15.1
• Step 5 - Compute the total
distance traveled along the
selected route
• Using Nearest Neighbor
– Atlanta
– Knoxville
– Lexington
– Charlotte
– Columbia
– Charleston
– Raleigh
– Atlanta
Total distance
starting with
Atlanta
214 + 170+ 398 +
93 + 116 + 279 +
435 = 1,705 miles

Example 15.1
• Use the Nearest Neighbor heuristic again to
see if a better solution exists:
Charleston – Columbia – Charlotte – Raleigh –
Knoxville – Lexington – Atlanta – Charleston
116 + 93 + 169 + 351 + 170 + 375 + 319 =
1,593 miles

Example 15.1
Charlotte – Columbia – Charleston – Raleigh –
Knoxville – Lexington – Atlanta – Charlotte
93 + 116 + 279 + 351 + 170 + 375 + 244 =
1628 miles
Columbia – Charlotte – Raleigh – Charleston –
Atlanta – Knoxville – Lexington – Columbia
93 + 169 + 279 + 319 + 214 + 170 + 430 =
1674 miles

Example 15.1
Knoxville – Lexington – Atlanta – Columbia –
Charlotte – Raleigh – Charleston – Knoxville
170 + 375 + 225 + 93 + 169 + 279 + 373 =
1684 miles
Lexington – Knoxville – Atlanta – Columbia –
Charlotte – Raleigh – Charleston – Lexington
170 + 214 + 225 + 93 + 169 + 279 + 540 =
1690 miles

Example 15.1
Raleigh – Charlotte – Columbia – Charleston –
Atlanta – Knoxville – Lexington – Raleigh
169 + 93 + 116 + 319 + 214 + 170 + 498 =
1579 miles
Of the 7 routes , the best one starts with Raleigh
for a travel distance of 1579 miles.

Freight Density
• Freight rates are based on the following
factors:
1. The freight density
2. The shipment’s weight
3. The distance the shipment is moving
4. The commodity’s susceptibility to damage
5. The value of the commodity
6. The commodity’s loadability and handling
characteristics.

Calculating Break-Even weight
• To determine the break-even weight between two
adjacent weight breaks we define the following
variables:
x = break-even weight
A = lower weight bracket
B = next highest weight bracket
C = freight rate relative to A
D = freight rate relative to B
Break-even weight: x = (BD)/C

Weight Breaks and Freight Class
($/cwt)
Class < 500 (lbs) 500 (lbs) 1,000 (lbs) 2,000 (lbs) 5,000 (lbs)
10,000
(lbs)
> 20,000
(lbs)
50.00 34.40 28.32 24.25 23.04 17.58 15.74 10.47
55.00 36.94 30.50 26.12 24.82 18.93 17.41 11.58
60.00 39.59 32.69 27.99 26.60 20.29 19.08 12.69
65.00 41.94 34.64 29.66 28.18 21.49 20.27 13.48
70.00 44.64 36.86 31.56 29.99 22.88 21.94 14.59
77.50 48.10 39.72 34.01 32.32 24.65 23.85 15.86
85.00 51.90 42.86 36.70 34.87 26.60 26.24 17.45
92.50 55.89 46.15 39.52 37.56 28.64 28.38 18.87
100.00 60.27 49.77 42.61 40.50 30.89 30.77 20.46
Table 15.2

Example 15.2
One of the products produced by Kitchen Tidy is Squeaky Kleen,
a tile cleaner used by restaurants and hospitals. Squeaky Kleen
comes in 5-gallon containers, each weighing 48 lbs. Currently
Kitchen Tidy ships four pallets of 25 units each week to a
distribution center. The freight classification for this commodity
is 100. In an effort to be environmental responsible, Kitchen Tidy
asked their product engineers to evaluate a plan to convert
Squeaky Kleen into a concentrated liquid by removing some
water from the product which would allow the engineers to
design a smaller container so 50 units can be loaded on each
pallet. Each container would weigh only 42 pounds. This would
reduce the freight density and the freight class to 92.5. What
would the savings in freight costs be with the new product
design?

Example 15.2
• Current Product Design:
– Weekly shipment =
(Number of pallets)(units per pallet)(pounds per unit)
(4) * (25) * (48) = 4,800 pounds
– Break-even weight (Freight Class = 100)
(50) * (30.89) / (40.50) = 38.14 or 3,814 pounds
**The shipment qualifies for the lower freight rate**
– Total weekly shipping cost
(48) * (30.89) = $1,482.72

Example 15.2
• New Product Design:
– Weekly shipment =
(Number of pallets)(units per pallet)(pounds per
unit)
(2) * (50) * (42) = 4,200 pounds
– Break-even weight (Freight Class = 92.5)
(50) * (28.64) / (37.56) = 38.126 or 3,813 pounds
**The shipment qualifies for the lower freight rate**

Example 15.2
• New Product Design:
– Total weekly shipping cost
(42) * (28.64) = $1,202.88
– Savings =
$1,482 - $1,202.88 = $279.84 per week

Application 15.2
• Kayco Stamping in Ft. Worth, Texas ships sheet metal
components to a switch box assembly plant in
Waterford, Virginia. Each component weights
approximately 25 lbs and 50 components fit on a
standard pallet. A complete pallet ships as freight
class 92.5. Calculate the shipment cost for 3 and 13
pallets.

Application 15.2
• At 3 pallets or 150 pieces
– Shipping Weight
(150) * (25) = 3,750 pounds
(50) * (28.64) / (37.56) = 38.13 or 3,813 pounds
**The shipment does NOT qualify for the lower
freight rate**

Application 15.2
– Total shipping cost
(37.5) * (37.56) = $1,408.50
– The per-unit shipping charge
$1408.50/150 = $9.39

Application 15.2
– Shipping Weight
(650) * (25) = 16,250 pounds
(200) * (18.87) / (28.38) = 132.98 or
13,298 pounds
**The shipment qualifies for the lower freight
rate**

Application 15.2
– Total shipping cost
(162.5) * (18.87) = $3,066.38
– The per-unit shipping charge
$3,066.38/650 = $4.72

Transportation Mode
• Major Modes of Transportation
1. Air freight
2. Trucking
3. Shipping by Water
4. Rail
• Intermodal shipments

Transportation Mode
• Transportation Technology
–Relative drag
–Payload ratio
–Propulsion systems

Humanitarian Supply Chain Operations
Prepare
Disaster
Response Recovery
Forecasts and Early Warnings
Disaster – A serious disruption
of the functioning of society
causing widespread human,
material, or environmental
losses which exceed the ability
of the affected people to cope
using only its own resources.
– Human-related
– Natural

Managing Disaster Relief Operations
• Life Cycle of Disaster Relief
1. Brief needs assessment
2. Development of initial supply chains for
flexibility
3. Speedy distribution of supplies to the affected
regions based on forecasted needs
4. Increased structuring of the supply chain as time
progresses: receive supplies by fixed schedule or
on request
5. Dismantling/turning over of the supply chain to
local agencies.

Managing Disaster Relief Operations
• Supply Chain Management Challenges
– Design implications
– Command and control
– Cargo security
– Donor independence
– Change in work flow
– Local infrastructure
– High employee turnover
– Poor communication

to accompany
Chopra and Meindl
to accompany
Chopra and Meindl
Transportation in a
Supply Chain

The Role of Transportation
in a Supply Chain
• Movement of product from one location to
another
• Products rarely produced and consumed in the
same location
• Significant cost component
• Shipper requires the movement of the product
• Carrier moves or transports the product

Modes of Transportation and Their
Performance Characteristics
• Air
• Package carriers
• Truck
• Rail
• Water
• Pipeline
• Intermodal

Air
• Cost components
1. Fixed infrastructure and equipment
2. Labor and fuel
3. Variable depending on passenger/cargo
• Key issues
– Location/number of hubs
– Fleet assignment
– Maintenance schedules
– Crew scheduling
– Prices and availability

Package Carriers
• Small packages up to about 150 pounds
• Expensive
• Rapid and reliable delivery
• Small and time-sensitive shipments
• Provide other value-added services
• Consolidation of shipments a key factor

Truck
• Significant fraction of the goods moved
• Truckload (TL)
– Low fixed cost
– Imbalance between flows
• Less than truckload (LTL)
– Small lots
– Hub and spoke system
– May take longer than TL

Rail
• Move commodities over large distances
• High fixed costs in equipment and facilities
• Scheduled to maximize utilization
• Transportation time can be long

Water
• Limited to certain geographic areas
• Ocean, inland waterway system, coastal
waters
• Very large loads at very low cost
• Slowest
• Dominant in global trade
• Containers

Pipeline
• High fixed cost
• Primarily for crude petroleum, refined
petroleum products, natural gas
• Best for large and stable flows
• Pricing structure encourages use for
predicable component of demand

Intermodal
• Use of more than one mode of
transportation to move a shipment
• Grown considerably with increased use of
containers
• Key issue – exchange of information to
facilitate transfer between different modes

Selecting a Transportation Network
• Eight stores, four supply sources
• Truck capacity = 40,000 units
• Cost $1,000 per load, $100 per delivery
• Holding cost = $0.20/year

Annual sales = 960,000/store Direct shipping
Batch size shipped from each
supplier to each store = 40,000 units
Number of shipments/yr from
each supplier to each store = 960,000/40,000 = 24
Annual trucking cost
for direct network = 24 x 1,100 x 4 x 8 = $844,800
Average inventory at each
store for each product = 40,000/2 = 20,000 units
Annual inventory cost
for direct network = 20,000 x 0.2 x 4 x 8 = $128,000
Total annual cost of
direct network = $844,800 + $128,000 = $972,800

Annual sales = 960,000/store Milk runs
supplier to each store = 40,000/2 = 20,000 units
Transportation cost per shipment
per store (two stores/truck) = 1,000/2 + 100 = $600
for direct network = 48 x 600 x 4 x 8 = $921,600
direct network = $921,600 + $64,000 = $985,600

Annual sales = 120,000/store Direct shipping
supplier to each store = 40,000 units
for direct network = 3 x 1,100 x 4 x 8 = $105,600
direct network = $105,600 + $128,000 = $233,600

Annual sales = 120,000/store Milk runs
supplier to each store = 40,000/4 = 10,000 units
Transportation cost per shipment
per store (two stores/truck) = 1,000/4 + 100 = $350
for direct network = 12 x 350 x 4 x 8 = $134,400
direct network = $134,400 + $32,000 = $166,400

Trade-offs When Selecting
Transportation Mode

Transportation Mode
Demand = 120,000 motors, Cost = $120/motor,
Weight = 10 lbs/motor, Lot size = 3,000,
Safety stock = 50% ddlt
Carrier
Range of Quantity
Shipped (cwt) Shipping Cost ($/cwt)
AM Railroad 200+ 6.50
Northeast Trucking 100+ 7.50
Golden Freightways 50–150 8.00
Golden Freightways 150–250 6.00
Golden Freightways 250+ 4.00
TABLE 14-4

Transportation Mode
Cycle inventory = Q/2 = 2,000/2 = 1,000 motors
Safety inventory = L/2 days of demand
= (6/2)(120,000/365) = 986 motors
In-transit inventory = 120,000(5/365) = 1,644 motors
Total average inventory = 1,000 + 986 + 1,644
= 3,630 motors
Annual holding cost
using AM Rail = 3,630 x $30 = $108,900
Annual transportation
cost using AM Rail = 120,000 x 0.65 = $78,000
The total annual cost for
inventory and transportation
using AM Rail = $186,900

Transportation Mode
Alternative
Lot Size
(Motors)
Transpor-
tation
Cost
Cycle
Inventory
Safety
Inventory
In-Transit
Inventory
Inventory
Cost Total Cost
AM Rail 2,000 $78,000 1,000 986 1,644 $108,900 $186,900
Northeast 1,000 $90,000 500 658 986 $64,320 $154,320
Golden 500 $96,000 250 658 986 $56,820 $152,820
Golden 1,500 $96,000 750 658 986 $71,820 $167,820
Golden 2,500 $86,400 1,250 658 986 $86,820 $173,220
Golden 3,000 $80,000 1,500 658 986 $94,320 $174,320
Golden (old
proposal)
4,000 $72,000 2,000 658 986 $109,320 $181,320
Golden (new
proposal)
4,000 $67,000 2,000 658 986 $109,320 $176,820
TABLE 14-5

Inventory Aggregation
• Can significantly reduce safety inventories
• Transportation costs generally increase
• Use
– When inventory and facility costs form a large fraction
of a supply chain’s total costs
– For products with a large value-to-weight ratio
– For products with high demand uncertainty

Tradeoffs When
Aggregating Inventory

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