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)
WHAT IS A SUPPLY CHAIN?
Customer is an integral part of the supply chain
Includes movement of products from suppliers to
manufacturers to distributors, but also includes
movement of information, funds, and products in both
directions
Probably more accurate to use the term “supply network”
or “supply web”
Typical supply chain stages: customers, retailers,
distributors, manufacturers.
All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
FLOWS IN A SUPPLY CHAIN

Information

Product
Customer
Funds
THE OBJECTIVE OF A SUPPLY CHAIN
Maximize overall value created
Supply chain value: difference between what the final
product is worth to the customer and the effort the supply
chain expends in filling the customer’s request
Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply chain)
THE OBJECTIVE OF A SUPPLY CHAIN
Example: Dell receives $2000 from a customer for a
computer (revenue)
Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
Difference between $2000 and the sum of all of these
costs is the supply chain profit
Supply chain profitability is total profit to be shared
across all stages of the supply chain
Supply chain success should be measured by total supply
chain profitability, not profits at an individual stage
THE OBJECTIVE OF A SUPPLY CHAIN
Sources of supply chain revenue: the customer
Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain
Supply chain management is the management of flows
between and among supply chain stages to maximize
total supply chain profitability
DECISION PHASES OF A SUPPLY CHAIN
Supply chain strategy or design
Supply chain planning
Supply chain operation
SUPPLY CHAIN STRATEGY OR DESIGN
Decisions about the structure of the supply chain and what
processes each stage will perform
Strategic supply chain decisions
⚫ 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 take into account market uncertainty
 Supply Chain Strategy or Design –
Decides what the chain’s configuration will be, how resources will be
allocated and what processes each stage will perform. Strategic
decisions made by companies include whether to outsource or perform a
supply chain function in-house, the location and capacities of production
and warehousing facilities, the products to be manufactured or stored at
various locations, the modes of transportation to be made available
along different shipping legs and the type of information system to be
utilized. Cisco’s decisions regarding its choice of supply sources for
components, contract manufacturers for manufacturing and the location
and capacity of its warehouses are all supply chain design or strategic
decisions.
SUPPLY CHAIN PLANNING
Definition of a set of policies that govern short-term
operations
Fixed by the supply configuration from previous phase
Starts with a forecast of demand in the coming year

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

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Supply Chain Planning – The goal of planning is
to maximize the supply chain surplus that can be
generated over the planning horizon given the
constraints established during the strategic or
design phase. Planning includes making decisions
regarding which markets will be supplied from
which locations, the subcontracting of
manufacturing, the inventory policies to be followed
and the timing and size of marketing and price
promotions. Dell’s decisions regarding markets
supplied by a production facility and target
production quantities at each location are classified
as planning decisions
SUPPLY CHAIN OPERATION
Time horizon is weekly or daily
Decisions regarding individual customer orders
Supply chain configuration is fixed and operating policies are
determined
Goal is to implement the operating policies 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 VIEW OF A SUPPLY CHAIN
Cycle view: processes in a supply chain are divided into
a series of cycles, each performed at the interfaces
between two successive supply chain stages
Push/pull view: processes in a supply chain are divided
into two categories depending on whether they are
executed in response to a customer order (pull) or in
anticipation of a customer order (push)
CYCLE VIEW OF SUPPLY CHAINS
Custome
Customer Order
r
Cycle
Retaile
Replenishment r
Cycle
Distributor

Manufacturing
Cycle
Manufacturer
Procurement Cycle
Supplie
r
CYCLE VIEW OF A SUPPLY CHAIN
Each cycle occurs at the interface between two successive
stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Cycle view clearly defines processes involved and the
owners of each process. Specifies the roles and
responsibilities of each member and the desired outcome
of each process.
PUSH/PULL VIEW OF SUPPLY CHAINS
Procurement Customer
M
, anufacturing Cycle
Order
Replenishment
and
cycles

PUSH PULL
PROCESSES PROCESSES

Customer
Order
Arrives
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 OF
SUPPLY CHAIN PROCESSES
Useful in considering strategic decisions relating to
supply chain design – more global view of how supply
chain processes relate to customer orders
Can combine the push/pull and cycle views
The relative proportion of push and pull processes can
have an impact on supply chain performance
SUPPLY CHAIN MACRO PROCESSES IN A FIRM
Supply chain processes discussed in the two views can
be classified into :
⚫ Customer Relationship Management (CRM)
⚫ Internal Supply Chain Management (ISCM)
⚫ Supplier Relationship Management (SRM)
Integration among the above three macro processes is
critical for effective and successful supply chain
management
COMPONENTS OF INVENTORY DECISIONS
Cycle inventory
⚫ Average amount of inventory used to satisfy demand between
shipments
⚫ Depends on lot size
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
Overall trade-off: Responsiveness versus efficiency
⚫ more inventory: greater responsiveness but greater cost
⚫ less inventory: lower cost but lower responsiveness
NETWORK DESIGN DECISIONS
Facility role:what role each facility play? What
processes are performed at each facility?
Facility location: where should facilities be located?
Capacity allocation: how much capacity should be
allocated to each facility?
Market and supply allocation: what markets should
each facility serve? which supply sources should
feed each facility?
Ideal Examples : Toyota.
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS FOR PRODUCTION

Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS
Strategic
Firms that focus on cost leadership tend to find the
lowest cost location for their manufacturing facilities,
even if it means locating very far.
Firms that focus on responsiveness tend to locate
facilities closer to the market and may select a high cost
location if it allows to react quickly.
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS
Strategic :
Offshoure facility: low cost facility for export production:
facility serves as low cost facility for the market situated outside the
country where the facility is situated e.g. low labor, low cost of
production, waiver of export tariffs
Source facility: low cost facility for global production: facility for
primary source of product , should be low cost , well developed
infrastructure, skilled workforce
Server facility: regional production facility: to supply the market
where it is situated in order to overcome the tax barriers , content
requirement, high logistics cost. E.g. maruti suzuki
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS
Contributor facility :regional facility with development skills:
facility that play part in process improvement, product
customization, product development and modification e.g. maruti
developing new models . Hinopak motors developing new models
Outpost facility: facility built to gain local skill: facility built to
gain access to local skill of knowledge to carry out the processes
effectively.
Lead Facility: facility that leads in developments and process
technology: Facility that produces new products processes, and
technologies for the entire network.
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS
Technological factors
If economies of scale is to be achieved: fewer high
capacity locations are effective e.g. computer chips, as it
requires large investments

If facility require lower fixed cost many local facilities

are preferred . E.g. bottle plant.

Example: Can COCA COLA be an example ???

FACTORS INFLUENCING
NETWORK DESIGN DECISIONS
Macro economic factors: includes tax, tariffs, exchange
rates and other economic factors

Tariffs and tax incentives:

Tariffs duties when product is moved across international state or
city boundaries.
Exchange rates and demand risk:
Dollar exchange rates and demand flexibility in manufacturing
plant
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS
Political factors: political stability of the country , state or city.

Infrastructure Factors: roads, terminals , sites, labors

availability, proximity to airports seaports, highways, local utilities

Competitive Factor:
Positive Externalities between firms: local malls
Locating to split the market
Customer response time and local presence
FACTORS INFLUENCING
NETWORK DESIGN DECISIONS
Logistics and facility cost:
A FRAMEWORK FOR
GLOBAL SITE LOCATION
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES

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
A FRAMEWORK FOR
GLOBAL SITE LOCATION
Phase 1: define a supply chain strategy/ design
Phase 2 :define the regional facility configuration
Phase 3 :select a set of desirable potential sites
Phase 4: location choices:
ROLE OF AGGREGATE PLANNING
IN A SUPPLY CHAIN

Capacity has a cost, lead times are greater than zero

Aggregate planning:
⚫ process by which a company determines levels of capacity, production,
subcontracting, inventory, stockouts, and pricing over a specified time
horizon
⚫ goal is to maximize profit
⚫ decisions made at a product family (not SKU) level
⚫ time frame of 3 to 18 months
⚫ how can a firm best use the facilities it has?
ROLE OF AGGREGATE PLANNING
IN A SUPPLY CHAIN

Specify operational parameters over the time horizon:

⚫ production rate
⚫ workforce
⚫ overtime
⚫ machine capacity level
⚫ subcontracting
⚫ backlog
⚫ inventory on hand
All supply chain stages should work together on an aggregate
plan that will optimize supply chain performance
THE AGGREGATE PLANNING PROBLEM
Given the demand forecast for each period in the planning
horizon, determine the production level, inventory level, and the
capacity level for each period that maximizes the firm’s (supply
chain’s) profit over the planning horizon
Specify the planning horizon (typically 3-18 months)
Specify the duration of each period
Specify key information required to develop an aggregate plan
INFORMATION NEEDED FOR
AN AGGREGATE PLAN
Demand forecast in each period
Production costs
⚫ labor costs, regular time ($/hr) and overtime ($/hr)
⚫ subcontracting costs ($/hr or $/unit)
⚫ cost of changing capacity: hiring or layoff ($/worker) and cost of adding or
reducing machine capacity ($/machine)
Labor/machine hours required per unit
Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints: limits on overtime, layoffs, capital available, stockouts
and backlogs
OUTPUTS OF AGGREGATE PLAN
Production quantity from regular time, overtime, and
subcontracted time: used to determine number of workers and
supplier purchase levels
Inventory held: used to determine how much warehouse space and
working capital is needed
Backlog/stockout quantity: used to determine what customer
service levels will be
Machine capacity increase/decrease: used to determine if new
production equipment needs to be purchased
A poor aggregate plan can result in lost sales, lost profits, excess
inventory, or excess capacity
AGGREGATE PLANNING STRATEGIES
Trade-off between capacity, inventory, backlog/lost sales
Chase strategy – using capacity as the lever
Time flexibility from workforce or capacity strategy –
using utilization as the lever
Level strategy – using inventory as the lever
Mixed strategy – a combination of one or more of the first
three strategies
CHASE STRATEGY
Production rate is synchronized with demand by varying
machine capacity or hiring and laying off workers as the
demand rate varies
However, in practice, it is often difficult to vary capacity and
workforce on short notice
Expensive if cost of varying capacity is high
Negative effect on workforce morale
Results in low levels of inventory
Should be used when inventory holding costs are high and costs
of changing capacity are low
TIME FLEXIBILITY STRATEGY
Can be used if there is excess machine capacity
Workforce is kept stable, but the number of hours worked is
varied over time to synchronize production and demand
Can use overtime or a flexible work schedule
Requires flexible workforce, but avoids morale problems of the
chase strategy
Low levels of inventory, lower utilization
Should be used when inventory holding costs are high and
capacity is relatively inexpensive
LEVEL STRATEGY
Maintain stable machine capacity and workforce levels with a
constant output rate
Shortages and surpluses result in fluctuations in inventory levels
over time
Inventories that are built up in anticipation of future demand or
backlogs are carried over from high to low demand periods
Better for worker morale
Large inventories and backlogs may accumulate
Should be used when inventory holding and backlog costs are
relatively low
FUNDAMENTAL TRADEOFFS IN AGGREGATE
PLANNING
Capacity (regular time, overtime, subcontract)
Inventory
Backlog / lost sales

Basic Strategies
Chase strategy
Time flexibility from workforce or capacity
Level strategy
AGGREGATE PLANNING IN PRACTICE
Think beyond the enterprise to the entire supply chain
Make plans flexible because forecasts are always wrong
Rerun the aggregate plan as new information emerges
Use aggregate planning as capacity utilization increases
How do we rerun the aggregate plan ? Any example???