Supply Chain Management:

Overview

S K Bishwal
OBJECTIVE OF THIS COURSE
• Define the terms & concepts

• Identify factors that contributes to effective SCM

• How SCM can affect corporate performance

PARTNERSHIP

RETAILER CUSTOMER
BASIC SUPPLY CHAIN

SUPPLIER FACTORY CUSTOMER

SUPPLY CHAIN
• “A set of 3 or more entities {involved in producing value
(product/services) in the hands of the ultimate customer} directly
linked by one or more of the upstream and downstream flows of
products, services, funds and information from a source to a
customer”.
 SUPPLY CHAIN

RM Supplier

Component
Supplier

RM MANUFACTURER DISTRIBUTER RETAILER CUSTOMER

Supplier

Component
Supplier

RM
Supplier
ULTIMATE SUPPLY CHAIN

3PL SERVICE PROVIDER

SUPPLIER SUPPLIER
STAGE1 STAGE2 FACTORY C&F DISTRIBUTER WHOLE SELLER RETAILER

MARKET
FINANCIERS RESEARCH
ULTIMATE SUPPLY CHAIN

3PL SERVICE PROVIDER

SUPPLIER SUPPLIER
STAGE1 STAGE2 FACTORY C&F DISTRIBUTER WHOLE SELLER ↔ RETAILER CUSTOMER

MARKET
FINANCIERS RESEARCH
TRADITIONAL OPERATIONS
CUSTOMER
• Role
• Customer Value :
- Price
- Responsiveness :
- Quality
- Availability
ULTIMATE SUPPLY CHAIN

3PL SERVICE PROVIDER

SUPPLIER SUPPLIER
STAGE1 STAGE2 FACTORY C&F DISTRIBUTER WHOLE SELLER ↔ RETAILER CUSTOMER

MARKET
FINANCIERS RESEARCH
 SUPPLY CHAIN
• Agri sector

• FMCG
SUPPLY CHAIN
• Supply chains exists

• How it is managed is important

TRADITIONAL SCM
• Member relationship
• Objectives of each member
• Is it optimal ?
LOGISTICS
• “Logistics is that part of the supply chain process that plans,
implements and controls the efficient flow and storage of goods,
services, and related information from the point of origin to the point
of consumption in order to meet customer’s requirement”
- Council of Logistics Management 1998
Logistics Management
Integrated Logistics Management

Source: Center for Supply Chain Research, Penn State University.

17
 SCM
WHY & HOW SCM
SUPPLY CHAIN PROFIT

SUPPLY CHAIN PROFIT = 𝑇𝑂𝑇𝐴𝐿 𝑅𝐸𝑉𝐸𝑁𝑈𝐸 −(𝐶𝑠+𝐶𝑚+𝐶𝑑+𝐶𝑟)

CURRENT SUPPLY CHAIN PROFI= 𝑅𝑠 −𝐶𝑠 + 𝑅𝑚−𝐶𝑚 + 𝑅𝑑 −𝐶𝑑 +(𝑅𝑟−𝐶𝑟)

What’s New?
•Global competition
•Shorter product life cycle
•New, low-cost distribution channels
•More powerful well-informed customers
•Technology
CREATING VALUE

“ Historically, what goes on between companies ( in a supply chain ) is

aimed at how the pie will be divided among them. Nobody is focused
on how to make the pie bigger. The purpose of SCM is for companies
to work together to increase the size of the pie.”
RETAILER
DEMAND =( 360000-60000*p)

RETAILER
COST 4

PRICE 5

DEMAND 60000

PROFIT 60000
MANUFACTURER

DEMAND =( 360000-60000*p)

COST 2

PRICE 4

DEMAND 60000

PROFIT 120000
 DEMAND =( 360000-60000*p)

MANUFACTURER RETAILER SC

COST 2 3.25

PRICE 3.25 4

DEMAND 120000 120000

PROFIT 150000 90000 240000

WHY SCM
• “Looking across the supply chain is a win-win for all players in the
system . Typically, there is a lot of non-value added, a lot redundancy,
a lot of costs that do not necessarily need to be there. So when we
focused on the right things, we reduced costs for everyone in the
supply chain.”
SCOPE
• Compaq estimates it lost $.5 billion to $1 billion in sales in 1995
because laptops were not available when and where needed
• Laura Ashley turns its inventory 10 times a year, five times faster than
3 years ago

• 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
SUPPLY CHAIN MANAGEMENT
Supply Chain Management encompasses every effort
involved in producing and delivering a final product
or service, from the supplier’s supplier to the
customer’s customer. Supply Chain Management
includes managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry and
order management, distribution across all channels,
and delivery to the customer.
The Supply Chain Council, U.S.A.
SUPPLY CHAIN MANAGEMENT
• “The systemic strategic coordination of the traditional business
functions within a particular company and across businesses within
the supply chain, for the purpose of improving the long-term
performance of the individual companies and the supply chain as a
whole”
SUPPLY CHAIN MANAGEMENT
• Flow of Materials & products

• Management Philosophy

• Management Process

• Global Optimization
SCM AS A PHILOSOPHY
• View the channel as a whole to manage the flow from first supplier to
the ultimate customer
• Synchronize & converge intrafirm & interfirm operational strategies &
capabilities in to a unified whole
• Customer focus ( Ultimate customer) “to create unique &
individualized sources of customer value”
• Collaborative management
WHY NOT A MONOLITH
• Globalization
• Economies of scale
• Increased performance-based competition
• Rapidly changing technology
• Economic conditions
SCM AS A MANAGEMENT PROCESS
• Process of managing
- Relationships
- Materials flow
- Flow of funds
- Information flow
• Delivers
- Enhanced customer service
- Economic value
MANAGEMENT ACTIVITIES
• Integrated behavior
• Sharing information
• Sharing risks & rewards
• Cooperation : Similar coordinated activities
• Same goal & same focus of serving customers
• Integration of processes
• Build & maintain long term relationships
SUPPLY CHAIN ORIENTATION
• “Recognition by a company of the systemic and strategic implications
of the activities and processes involved in managing the various flows
in a supply chain.”
SUPPLY CHAIN ORIENTATION
• A management philosophy.
- Whole chain as a single entity

• Recognition of implications of processes/activities .

• Each member affects performance of the chain
Willingness to address

Trust
Commitment
Interdependence
Organizational compatibility

Key Processes
Top management support
Leadership
SUPPLY CHAIN INTEGRATION
STAGE 1
• Fragmented operations within the company
• Inventory at every stage
• Independent (incompatible) control systems
• Functional segregation
TRADITIONAL MANAGEMENT
SUPPLY CHAIN INTEGRATION
STAGE 2
• Focus on internal integration
• Shift to Overall cost reduction from department wise performance
• Buffer inventory
• Internal trade offs
• Reactive customer service
SUPPLY CHAIN INTEGRATION
STAGE 3
• Complete internal integration
• Full visibility from purchasing to distribution
• Extended use of information management
SUPPLY CHAIN INTEGRATION
STAGE 4
• Extend scope of integration outside the company

• Include suppliers & customers

SCM ANTECEDENTS & CONSEQUENCES

Supply Chain Orientation Supply Chain Management Consequences

Systemic View Three or more companies with SCO Improved customer Value
Strategic view Information sharing Improved profitability
Shared risks & rewards Differential advantage
Cooperation
Antecedents Similar customer service goals & focus
Integration of key processes
Willingness to address Long term relationships
Trust Interfunctional coordination
Commitment
Interdependence
Organizational compatability
Key Processes
Top management support
Leader
SUMMARY
• Components in supply chain must have SC orientation
• Members in a supply chain represent sequential value adding steps to
serve the ultimate customer
• Think of supply chain as a single value system .
SCOPE
• Functional : Traditional functions to be included or excluded

• Organizational : Inter company relationship

FUNCTIONAL SCOPE
• All traditional functions
• Logistics
• Manufacturing
• Marketing
• Product Development
•R&D
• Information Gathering
ORGANIZATIONAL SCOPE
• All the member companies in SC work as one entity.
• Share information, risks, rewards
• Network is the new organization structure
- A confederation
- Guided from a hub
-Development & management of alliance
- Technology & finance
- Core competencies, Strategies, Information &
customer
• Competition is Supply chain vs. SC
 SCM
DRIVERS & DECISION PHASES
DRIVERS OF PERFORMANCE
• Facilities :
• Inventory :
• Transportation

• Information
DRIVERS
Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

FACILITIES
• Manufacturing

• Storage
FACILITIES
• “Where”
• Flexibility / Dedicated
• Location( Centralized vs. Near the customer)
• Capacity
• Operation methodology
• Warehousing methodology :
-SKU
-Job lot storage
- Cross-docking
INVENTORY
• Mismatch between supply & demand
• Enables economies of scale
• Ensures responsiveness
• Material Flow time (T)
• Throughput : Rate of Sale (D)
• Inventory I = T * D
TRANSPORTATION
• Affects Inventory
• Affects Location
• Mode : Air, Road, Rail, Ship, Pipeline,
e-transfer .

• Route / Network
• In house / Outsource
TRANSPORT SERVICE PROVIDERS
• TRUCKERS

• RAILWAYS,

• SHIPPING,

• AIR CARGO / AIR FREIGHT COMPANIES,

• MULTI MODAL TRANSPORT PROVIDERS,

• CONTAINERS

• PACKAGE COURIERS
 TRANSPORTATION
• Speed

• Reliability

• Flexibility

• Cost
RELATIVE MERITS
RAIL ROAD WATER AIR PIPELINE

Door Sometimes Always Sometimes No Sometimes

Cost Low High Very low Very high Very low

Speed Slow Fast Very slow Very fast Slow

Reliability Medium Medium Low Very high Very high

Packaging needs High High High High None

Flexibility Low High Low Very low Very low

ROAD TRANSPORT

• LARGEST PROVIDER OF TRANSPORTATION OF GOODS TODAY.

• HIGHLY FRAGMENTED INDUSTRY

• POOR ROAD CONDITIONS

• LOW SERVICE LEVELS

• INTENSE COMPETITION

• HIGH OPERATING COSTS

• FALLING MARGINS
EMERGING TRENDS
.

• NATIONAL HIGHWAY DEVELOPMENT PROGRAMMES (NHDP)

• A. GOLDEN QUADRILATERAL PROJECT BETWEEN 4 METROS,

• B. NORTH - SOUTH

• EAST - WEST CORRIDORS ,

EMERGING TRENDS
•

• SHIFT TOWARDS MHCV ‘S FROM LCV’S - HEAVY DUTY VOLVO,

• CONSOLIDATION

• TRACING / TRACKING FACILITIES

• VALUE ADDED SERVICES

• 3 PL SERVICES

• KEY PLAYERS
RAIL TRANSPORT

GOVT.MONOPOLY
2ND LARGEST NETWORK IN THE WORLD
EXTENSIVE NETWORK
BUILT- IN INEFFICIENCIES
MINIMUM BULK LOT REQD.
NEED FOR SUPPORT FACILITIES - EQUIPMENTS, LOADING/UNLOADING, DELIVERY
USEFUL FOR BULK
 TIME INSENSITIVE CARGO
RAIL TRANSPORT EMERGING TRENDS
• CHANGE IN APPROACH - e.g. INTRODUCTION OF NEW FREIGHT
TRAINS
• EMERGENCE OF MULTI MODAL FACILITIES e.g. CONCOR EXPERIENCE
• LINKAGE WITH INDUSTRIES ETC.
• FREIGHT CORRIDOR
AIR TRANSPORT

• AIR CARGO
• EXPRESS
• COURIER
• DOCUMENTS

• LOW SHARE IN INDIA’S LOGISTICS SCENE, STILL LIMITED IN SCOPE

• FACTORS FOR GROWTH ARE :

• REDUCTION OF FARES AS COSTS DECLINE

• IMPROVEMENT IN SERVICE OFFERINGS / NEW ROUTES / INCREASED FREQUENCIES
• INCREASE IN GLOBALISATION AND TRADE
• INFRASTRUCTURE AND FACILITIES AT INDIAN AIRPORTS
 SHIPPING

GLOBALLY, SHIPPING MOVES 95% OF INTERNATIONAL TRADE

• INDIA’S SHARE IS MINISCULE

• INDIA HAS DIVERSIFIED MERCHANT FLEET OF

• TANKERS
• BULK CARRIERS
• CONTAINER SHIPS
• SPECIFIED MULTIPURPOSE VESSELS & OFFSHORE SUPPLY VESSELS
SHIPPING : INDUSTRY TRENDS

• FALLING FREIGHT RATES

• GROWTH IN CONTAINER TRAFFIC
• FEEDER SERVICES FROM HUB POINTS
• SCOPE OF COASTAL AND INLAND SHIPPING IN INDIA
• MULTIMODAL LOGISTICS
• BETTER SERVICE DEMANDS
PORTS IN INDIA

• - ABOUT 12 MAJOR PORTS

• - LOW EFFICIENCY
• - HIGH TURN AROUND TIME
• - HIGH COST STRUCTURE
• - CUSTOMS BOTTLENECKS
• - POOR INFRASTRUCTURE
PORTS : EMERGING TRENDS

• - NEW PORTS .

• - IMPROVED FACILITIES

• - PRIVATE PARTICIPATION
INFORMATION
• Main factor for performance of other 3 drivers
• Push / Pull
• Coordination & information sharing
• Forecasting & aggregate planning
• Pricing : Demand & availability
• Revenue Management : differential pricing
ENABLING TECHNOLOGIES
• EDI

• Internet

• ERP

• SCM
DECISION PHASES

• Strategy
• Planning
• Operations
Strategic decision :Supply Chain 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 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
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
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)
Supply Chain
Management:
PROCESSES
S K Bishwal
Process Cycles of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
Customer order cycle

• Customer arrival
• Customer order entry
• Customer order fulfillment
• Customer order receiving
Replenishment cycle

• Retail order trigger

• Retail order entry
• Retail order fulfillment
• Retail order receiving
Manufacturing cycle

• Order arrival from the distributor,

retailer, or customer
• Production scheduling
• Manufacturing and shipping
• Receiving at the distributor,
retailer, or customer
Push/Pull View of
Supply Chains

• Pull processes: execution is

initiated in response to a
customer order
• Push processes: execution is
initiated in anticipation of
customer orders
MACRO PROCESSES
• Customer Relations Management

• Internal Supply Chain Management

• Supplier Relationship Management

CRM
• Market

• Sell

• Call centre

• Order Management
ISCM
• Strategic Planning
• Demand Planning
• Production planning & Scheduling
• Supply Planning
• Field Service
SRM
• Source
• Negotiation
• Purchase
• Design Collaboration
• Supply collaboration
SUPPLY CHAIN
MANAGEMENT
SUPPLY CHAIN STRATEGIES & DESIGN
Strategy
Corporate Mission
Assessment Distinctive
of Universal Corporate/Business/ Competencies
Business Competitive Strategy or
Conditions Weaknesses
Competitive Priorities

Supply Chain Strategy

COMPETITIVE STRATEGY
• Set of customer needs a firm seeks to satisfy through its products and
services in order to gain competitive advantage

- A set of needs not addressed by the competitors

- Customer segmentation

• Competitive strategy targets one or more customer segments to satisfy

their unfulfilled needs.
COMPETETIVE PRIORITIES
• Low cost
• Delivery speed
• Performance / Quality
• Services
• Varities / Flexibility
DRIVERS
Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

SUPPLY CHAIN STRATEGY
• Broad structure of the chain
• Product development strategy
• Supplier strategy
• Operations strategy
• Marketing and sales strategy
• Logistics strategy
• Information flow
• All functional strategies must support one another and the
competitive strategy
Supply Chain Strategies
• Product development strategy specifies the portfolio of
new products that the company will try to develop
• Marketing and sales strategy specifies how the market
will be segmented and product positioned, priced, and
promoted
STRTEGIC FIT
• The competitive strategy & functional strategies must be aligned

• Consistency and support between

- Competitive strategy,
- Supply chain strategy,
-Other Functional strategies

• The design of the supply chain & role of each member must support the supply chain
strategy.
SUPPLY CHAIN DESIGN
• Broad structure of the chain
• Members to be integrated
• Roll of each member in the chain
Achieving Strategic Fit
1. The design of the overall supply chain and the
role of each stage must be aligned to support
the supply chain strategy.
2. Each functional strategy must support other
functional strategies and help a firm reach its
competitive strategy goal.
3. The different functions in a member company
must appropriately structure their processes
and resources to be able to execute these
strategies successfully.
STRTEGIC FIT
• Lack of strategic fit due to
- Supply chain design
- Processes & resources do not support a fit
- Conflict in goals(Target different priorities)
ACHIEVE STRATEGIC FIT
• Understanding the customer needs & supply uncertainty

• Understanding the supply chain capabilities

• Achieving strategic fit

 CUSTOMER NEEDS

• Needs of the customer segment being served varies in the following

attributes
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
 DEMAND UNCERTAINTY

• Overall attribute of customer demand

• Demand uncertainty: uncertainty of customer demand for a product
• Implied demand uncertainty: resulting uncertainty for the supply
chain given the portion of the demand the supply chain must handle
and the attributes that the customer desires
IMPLIED DEMAND UNCERTAINTY
Customer Need
Range of quantity increases
Lead time decreases
Variety of products required
increases
Number of channels increases
Rate of innovation increases
Required service level increases
Implied demand uncertainty
increases because
Greater variance in demand
Less time to react to orders
Demand per product becomes
more disaggregated
Total customer demand is now
disaggregated over more channels
New products tend to have more
uncertain demand
Handle unusual surges in demand
LOW IMPLIED DEMAND UNCERTAINITY
• Accurate demand forecast
• Low stock outs
• Low obsolete inventory
• Low margin
HIGH IMPLIED DEMAND UNCERTAINITY

• Inaccurate demand forecast

• High stock out

• High cost of obsolescence

• High margin
Supply Uncertainty
Supply Source Capability Causes Supply Uncertainty to...
Frequent breakdowns Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase
IMPLIED DEMAND UNCERTAINTY SPECTRUM
Predictable Predictable supply and uncertain Highly uncertain
supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device
STRATEGIC FIT

The first step in achieving strategic fit

between competitive and supply
chain strategies is to understand
customers demand & supply
uncertainty. Uncertainty from the
customer and the supply can be
combined and mapped on the implied
uncertainty spectrum.
STRATEGIC FIT

The second step in achieving strategic

fit between competitive and supply
chain strategies is to understand the
supply chain and map it on the
efficiency responsiveness spectrum.
SUPPLY CHAIN CAPABILITIES
• The supply chain is expected to meet demand in this environment
• Efficient Supply chain
• Responsive supply chain

• Supply chain responsiveness -- ability to

• respond to wide ranges of quantities demanded
• meet short lead times
• handle a large variety of products
• build highly innovative products
• meet a very high service level
• Handle supply uncertainty
RESPONSIVENESS SPECTRUM

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Standardized Most Dell/

steel mill - apparel automotive Seasonal
No production garments
variety/flexi
bility
SUPPLY CHAIN CAPABILITIES
• Supply chain efficiency is the inverse to the cost
of making and delivering the product to the
customer
• Responsiveness comes at a cost
• The cost-responsiveness efficient frontier curve
shows the lowest possible cost for a given level
of responsiveness
Efficient and Responsive Supply Chains
Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand

Create modularity to allow

Product design Maximize performance at a minimum
postponement of product
strategy product cost
differentiation
Lower margins because price is a Higher margins because price is not a
Pricing strategy
prime customer driver prime customer driver
Manufacturing Maintain capacity flexibility to buffer
Lower costs through high utilization
strategy against demand/supply uncertainty
Maintain buffer inventory to deal
Inventory strategy Minimize inventory to lower cost
with demand/supply uncertainty

Lead-time Reduce, but not at the expense of Reduce aggressively, even if the costs
strategy costs are significant

Select based on speed, flexibility,

Supplier strategy Select based on cost and quality
reliability, and quality
COST-RESPONSIVENESS
Responsiveness

High

Low
Efficiency
High Low
STRATEGIC FIT
• High implied uncertainty - High responsiveness

• Low implied uncertainty - Efficiency

• No right supply chain strategy independent of competitive strategy

• Right supply chain strategy for a given competitive strategy
SALT
• Stable customer demand
• No variety, no innovation
• Low implied uncertainty
• No supply uncertainty
• Efficient supply chain
DELL
• Customized PC : variety
• Delivery within days
• Innovation
• High demand uncertainty
• Supply uncertainty for new components

• Responsive supply chain

 STRATEGIC FIT
Responsive
supply chain

Responsiveness
spectrum

Efficient supply
chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
Roles and Allocations
STRATEGIC FIT

Match supply chain responsiveness

with the implied uncertainty from
demand and supply. The supply chain
design and all functional strategies
within the firm must also support the
supply chain’s level of
responsiveness.
Changes Over Product Life Cycle
• Beginning stages
1. Demand is very uncertain, and supply may be unpredictable
2. Margins are often not very high, and time is crucial to gaining sales
3. Product availability is crucial to capturing the market
4. Cost is often a secondary consideration
Changes Over Product Life Cycle
• Maturity Stage
• Demand has become more certain, and
supply is predictable
1. Margins are lower as a result of an increase in
competitive pressure
2. Price becomes a significant factor in customer
choice
Expanding Strategic Scope
• Intraoperation Scope: Minimize Local Cost View
• Each stage of the supply chain devises strategy independently
• Intrafunctional Scope: Minimizing Total Functional Cost
• Firms align all operations within a function
• Interfunctional Scope: Maximize Company Profit
• Functional strategies are developed to align with one another and the
competitive strategy
Expanding Strategic Scope
• Intercompany Scope: Maximize Supply Chain Surplus
• Supplier and customer work together and share information to reduce total
cost and increase supply chain surplus
AGILE SUPPLY CHAIN
• Agile intercompany scope – a firm’s ability to achieve strategic fit
when partnering with supply chain stages that change over time
SUPPLY CHAIN
MANAGEMENT
NETWORK DESIGN
 Distribution
in the Supply Chain
• Distribution: Move and store a product from the supplier stage to
the customer stage
• Distribution directly affects cost and the customer experience and
therefore drives profitability
• Choice of distribution network can achieve supply chain objectives
from low cost to high responsiveness
FACTORS TO BE CONSIDERED FOR NET
WORRK DESIGN

• Customer needs to be met : Service Factor

• Cost of meeting customer needs : Cost Factor

OBJECTIVE (SERVICE FACTOR)
• Product availability
• Response time
• Product variety
• Customer experience
• Order visibility
• Returnability
OBJECTIVE (COST FACTOR)
• Facilities

• Inventory

• Transportation

• Information
Response Time vs Number of Facilities
Inventory Costs vs Number of Facilities
Transportation Costs vs Number of
Facilities
Facilities Costs and Number of Facilities
 Total Costs Vs
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
 Total Costs and Response Time Vs
Number of Facilities
Response Time

Total Logistics Costs

Number of Facilities
Design Options for a Distribution Network

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
TYPES OF NETWORK
Manufacturer Storage & direct shipping

FACTORY CUSTOMER
 Manufacturer Storage & direct shipping

• No distributor/retailer
• Customer to pass on information
• Inventory centralized
• High level of product availability
• High value, low & unpredictable demand items
• Store components & customize
• Out bound transportation cost increases
TYPES OF NETWORK
Manufacturer Storage & direct shipping
• Low inventory cost
• Higher transportation cost
• Because of aggregation low cost of facility
• Response time is high
• Large no of varieties can be handled
• Cost of product return high
MERGE IN-TRANSIT

FACTORY CUSTOMER
MERGE

FACTORY CUSTOMER

FACTORY CUSTOMER
MERGE IN-TRANSIT
• Extra cost of merge centre facility
• Transport cost is slightly less
• Better customer experience since all items are received together
• Higher investment in information technology
STORAGE AT DISTRIBUTOR

FACTORY CUSTOMER

FACTORY DISTRIBUTOR
CUSTOMER

FACTORY
CUSTOMER
STORAGE AT DISTRIBUTOR
• High inventory
• Suitable for products having high demand
• Less transportation cost due economy of scale
• Higher facilities cost
• Less investment in information
• Better response time
• Better customer experience
• Better visibility of orders
• Easier returnability
RETAIL STORAGE
• High inventory cost
• Low transportation cost
• Higher cost of facilities
• Fast response time
• Low product variety
• Good customer experience
• Easier returnability
• Order visibility is not an issue
HYBRID NETWORK
• Tailored to match product characteristic & customer preference
• Fast moving & emergency items – Retail (local storage)
• Slower moving items stored at central docking centers
• Very slowmoving items are stored at the manufacturer
CONVENTIONAL NETWORK

Conventional Network
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC

Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
NETWORK DESIGN
• No of facilities (warehouses, factories)
• Location
• Size
• Storage : Allocating space for products
• Sourcing
• Allocating customers
• Revisit design decisions after market changes, mergers, or factor cost
changes
SUPPLY CHAIN NETWORK
OBJECTIVE FUNCTION
• Maximize the overall profitability of the supply chain network while
providing customers with the appropriate responsiveness
Network Design Model
• Several products are produced at several plants.
• Each plant has a known production capacity.
• There is a known demand for each product at each customer zone.
• The demand is satisfied by shipping the products via regional
distribution centers.
• There may be an upper bound on total throughput at each
distribution center.
Location Model
• There may be an upper bound on the distance between a distribution
center and a market area served by it
• A set of potential location sites for the new facilities to be identified
• Costs:
• Set-up costs (Facilities)
• Transportation cost is proportional to the distance
• Storage and handling costs
• Production/supply costs
Data for Network Design

1. A listing of all products

2. Location of customers, stocking points and sources
3. Demand for each product by customer location
4. Transportation rates
5. Warehousing costs
6. Shipment sizes by product
7. Order patterns by frequency, size, season, content
8. Order processing costs
9. Customer service goals
DATA AGGREGATION
• Customer : Clustering
• Products :
- Product type
- Distribution pattern :
: Same source & customers
: Weight & volume
CUSTOMER AGGREGATION
• Use at least 300 aggregated points
• Make sure each zone has an equal amount of total demand
• Place the aggregated point at the center of the zone

• In this case, the error is typically no more than 1%

Product Aggregation
• Place all SKU’s into a source-group
• A source group is a group of SKU’s all sourced from the same place(s)
• Within each of the source-groups, aggregate the SKU’s by similar
logistics characteristics
• Weight
• Volume
• Holding Cost
SOLUTION TECHNIQUES
• Mapping
• CG Method
• Mathematical modeling
- For optimal solution
- Heuristic
• Simulation
Network Design Tools

• Mapping
• Mapping enables visualization
• Mapping the solutions allows to better understand different scenarios
• Color coding, sizing, and utilization indicators allow for further analysis
CG Location Method
xn , yn : coordinate location of either a market or supply
source n
Fn : cost of shipping one unit for one km 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

( ) ( )
2 2
d n = x – xn + y – y n
OBJECTIVE

• Minimize
k

Total transportation cost TC = å d n Dn Fn

n=1
Gravity Location Model
1. For each supply source or market n, evaluate dn
2. Obtain a new location (x’, y’) for the facility, where
k k
Dn Fn xn Dn Fn yn
å d å d
x¢ = n=1
k
n
and y¢ = n=1
k
n

Dn Fn Dn Fn
å d å d
n=1 n n=1 n
LP MODEL
Minimize total cost = Xij * Cij + Yjk * Cjk

Ij jk

Subject to Xij => 0

Yjk => 0

Xij <= BOL for existing factories and unlimited for new factories

Yjk <= Demand in Customer k

Xij = Yjk

i k

Unit cost of distribution

from factory i to depot j = Cij
Unit cost of distribution
from depot j to
customer k Cjk

Quantity from factory i

to depot j = Xij

Quantity from depot j

to customer k = Yjk
OBJECTIVE FUNCTION
Optimize total cost = Xij * Mci

Unit cost of
manufacturing in
Factory i = MCi = MCAi + MCRMi + MCVi
SUPPLY CHAIN
MANAGEMENT
DEMAND MANAGEMENT
ACCURATE FORECAST
“If supply chain management begins with a forecast that is
substantially in error in terms of timing or quantity , the ramification
will be felt throughout the entire process. The consequences are
many : manufacturing will have to adjust and run at less capacity or
work overtime to meet customer demand:
logistic expenses will be less than optimal: product will be at the
wrong place at the wrong time , impacting customer service”
TRADITIONAL CHANNEL

SUPPLIER MANUFACTURER DISTRIBUTER RETAILER CUSTOMER

DEMAND 1000

FORECAST ERROR 10%

DEMAND MANAGEMENT
• One point of independent demand
- End customer
- B2C
- B2B
• Derived demand :
- Order fulfillment & purchase policy
- Inventory policy
FACTORS AFFECTING DEMAND

Past demand
Lead time of product replenishment
Planned advertising or marketing efforts
Planned price discounts
State of the economy
Actions that competitors have taken
FORECAST
• Sales forecast : Based on estimated demand

• Order forecast :
- Time phasing
- Inventory levels
TRADITIONAL RELATIONSHIP

SUPPLY MANUFACTURE RETAIL

SMFP MFMP RFMP

Supply Planning & Mfg Planning & Retailer Planning &

Operations Operations Operations

ORDER
TRATIDIONAL CHANELL RELATIONSHIP
• Each member is focused on its own operations
• Provides no cross-company demand / forecast information
• Order received triggers forecasting process
• Each channel uses different forecasting methodology & inventory
policy
• Greater variability & poor supply chain performance
• Order variability will be a multiplicative function at each stage
The Dynamics of the Supply Chain
Order Size

Customer
Demand

Retailer Orders
Distributor Orders

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
The Dynamics of the Supply Chain
Order Size

Customer
Demand

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
EXTENT OF VARIABILITY

𝑉𝑎𝑟 𝑄 2𝐿 2𝐿2
≥ 1+ + 2
𝑉𝑎𝑟 𝐷 𝑛 𝑛

• L is lead time
• n is no of past periods in moving average method
EXTENT OF VARIABILITY

𝑘
𝑘
𝑉𝑎𝑟 𝑄 2𝐿𝑖 2𝐿𝑖 2
≥ 1+ + 2
𝑉𝑎𝑟 𝐷 𝑛 𝑛
𝑖=1
What are the Causes
• Demand Forecast: Inventory management
• Long lead times
• Lack of Visibility to demand information
• Promotional sales
• Volume and Transportation discounts
• Batching
• Inflated orders
Consequences
• Increased safety stock

• Reduced service level

• Uneven capacity utilization
• Inefficient allocation of resources

• Increased transportation costs

FORECASTING MANAGEMENT PERFORMANCE
• “Forecast users’ perception of forecast accuracy & credibility, as well
as their application of forecast without modifications”
• In SCFMP model users include other companies in the supply chain
FORECAST
• Sales forecast : Based on estimated demand

• Order forecast :
- Time phasing
- Inventory levels
SHARED DEMAND/FORECAST

SUPPLY MANUFACTURE RETAIL

SCFMP SCFMP

SMFP MFMP RFMP

Supply Planning & Mfg Planning & Retailer Planning &

Operations Operations Operations

ORDER
SHARED DEMAND/FORECAST
• Forecast at retail level is shared with all members
• Centralized demand information
• Assumed that all members will use the same forecasting approach,
inventory policy
• Order variability will still increase : as an additive function
EXTENT OF VARIABILITY WITH CENTRALISED DEMAND
INFORMATION

𝑘 𝑘 2
𝑘
𝑉𝑎𝑟𝑄
≥1+( 2𝐿𝑖)/𝑛 + 2 𝐿𝑖 /𝑛2
𝑉𝑎𝑟 𝐷
𝑖=1 𝑖=1
COLLABORATIVE FORECASTING

SUPPLY MANUFACTURE RETAIL

SCFMP SCFMP

SMFP MFMP RFMP

ORDER

SUPPLY INFORMATION
SUMMARY CPFR
• Retailer creates initial forecast using POS data, causal information &
planned events
• Exception criteria developed jointly by the companies
• Identify forecasts that need further attention
• Resolve such items & update forecasts
• Consensus on final sales forecast
COLLABORATIVE FORECASTING
• Communication both ways
• From retailer :
- Demand forecast, promotions, Significant customer demand,
changes in network structure
• From supplier :
-supply constraints, promotions
• Collaborative Planning, forecasting & replenishment
CPFR
• Develop front – end agreement
• Create joint business plan
• Create sales forecasts
• Identify exceptions for sales forecast
• Resolve/Collaborate on exception items
• Create the order forecast
• Identify exceptions on order forecast
• Resolve/Collaborate on exception items
• Generate orders
Why CPFR?

· Reduce variance between your Supply and your

customers Demand through jointly derived plans.

· Increase Revenue.

· Competitive Advantage: Win with your partner

mentality.

· More accurate collaborative plans equates to more

accurate/automatic execution transactions.
Heineken, USA
• Challenge: New business process, connecting
450 distributors, Heineken USA, and Heineken
breweries
• May 1996: Contract signed
• July 1996: Implemented Logility Value Chain
Solutions at corporate
• November 1996: Pilot distributors live with
Demand and Supply Chain Voyager
• December 1998: 100% participation
AFTER IMPLEMENTATION
• Focus on entire supply chain
• 4 week reduction in lead time
• Fresher product on shelf
• Heineken Sales focused on trade cultivation
 Supply Chain
Management:
INVENTORY
MANAGEMENT IN SUPPLY
CHAIN
S K Bishwal
INVENTORY
• Dominant cost
• Each member carries inventory in various forms & follows its own
inventory management policy
• Ordering cost
• Inventory holding cost
• Service level requirement
Inventory
• Where do we hold inventory?
• Suppliers and manufacturers
• warehouses and distribution centers
• retailers
• Types of Inventor
• WIP
• raw materials
• finished goods
• Why do we hold inventory?
• Economies of scale
• Uncertainty in supply and demand
• Lead Time, Capacity limitations
• Goals:
Reduce Cost, Improve Service
INVENTORY : OBJECTIVE
• Cost : Efficiency

• Responsiveness : Availability
Cost Structure
• Order costs
• Fixed (Transportation)
• Holding Costs
• Insurance
• Maintenance and Handling
• Taxes
• Opportunity Costs
• Obsolescence
TOTAL COST OF MATERIAL
• TCM = Q*C+ORDERING COST+INVENTORY HOLDING COST

• Inventory holding cost

• For Q model = 𝑄 ÷ 2 + 𝑅𝑂𝑃 × ℎ × 𝐶
• For P model = 𝐴𝑣𝐺𝑄 ÷ 2 + 𝑆𝑆 × ℎ × 𝐶
Cycle Inventory

• Lot, or batch size: quantity that a supply

chain stage either produces or orders at a
given time
• Cycle inventory:
• Q = lot or batch size of an order
• D = demand per unit time
Cycle inventory = Q/2
• Average flow time = Avg inventory / Avg
flow rate
• Average flow time from cycle
inventory=Q/(2D)
• Economies of scale
 Inventory Turnover
• Inventory turnover ratio =
annual sales/avg. inventory level
SCM INVENTORY
BUYER SELLER

DEMAND/YEAR 120000

ORDERING COST 100 250

HOLDING COST 20% 20%

UNIT PRICE 3 2

EOQ

TOTAL COST 0
SCM INVENTORY
BUYER SELLER

DEMAND/YEAR 120000

ORDERING COST 100 250

HOLDING COST 20% 20%

UNIT PRICE 3 2

EOQ 6325

TOTAL COST 3795.00 6008 9803

SCM INVENTORY
ORDERING COST 100 250 350

HOLDING COST 20% 20% 20%

UNIT PRICE 3 2 5

EOQ 6325 9165

TOTAL COST 3795 6008 9803 9165

4059 5106 9165

SUPPLY CHAIN (DISTRIBUTION)
ECHELON INVENTORY

Manufacturer

Distributer

Retailers
RETAILER – SUPPLIER INVENTORY MANAGEMENT
• Quick Response

• Continuous Replenishment

• Advanced Continuous Replenishment

• Vendor Managed Inventory

QUICK RESPONSE

• Vendors receive POS data from retailers and use this information to
synchronize production and inventory activities .
• The retailer still prepares individual orders. The POS data is used by the
supplier to improve forecasting and scheduling and to reduce lead time.
• Example: Milliken and Company: The lead time from order receipt at
Milliken’s textile plants to final clothing receipt at several of the department
stores involved was reduced from eighteen weeks down to three weeks.
CONTINUOUS REPLENISHMENT

- Vendors receive POS data and use it to prepare shipments at

previously agreed upon intervals to maintain agreed to levels of
inventory.
ADVANCED CONTINUOUS REPLENISHMENTS

-Suppliers may gradually decrease inventory levels at the retailer’s

store or distribution center as long as service levels are met.
Inventory levels are thus continuously improved in a structured way.
- Seasonal demand, promotions
VMI:JITD
- Supplier decides the inventory level/ policies
- Initially both jointly monitor
- Ultimately the retail does not monitor
• VMI Projects at Dillard Department Stores, J.C. Penney have shown sales
increases of 20 to 25 percent, and 30 percent inventory turnover
improvements.
• P&G at Wallmart
TYPES OF SP

Criteria Decision Inventory New Skills

Types Maker Ownership Employed by
vendors
Quick Retailer Retailer Forecasting
Response Skills
Continuous Contractually Either Forecasting &
Replenish Agreed to Party Inventory
ment Levels Control
Advanced Contractually Either Forecasting &
Continuous agreed to & Party Inventory
Replenish Continuously Control
ment Improved
Levels
VMI Vendor Either Retail
Party Management
Requirements for Effective SP
• Advanced information systems: Advanced systems / bar coding, RFID
- Avoid delay & errors in data entry &processing
• Top management commitment
• Information must be shared (confidential)
• Power and responsibility within an organization might change (for example,
contact with customers switches from sales and marketing to logistics)
• Mutual trust
• Information sharing
• Management of the entire supply chain
Important SP Issues
• Inventory ownership:
• Retailer owns inventory
• Supplier owns the goods until they are sold (consignment)
• Why would a firm do this?
• Performance measures: Fill rate, inventory level, inventory turns
Important SP Issues
• Confidentiality
• Communication and cooperation
• When First Brands started partnering with Kmart, Kmart often claimed that its
supplier was not living up to its agreement to keep two weeks of inventory at
all times. It turned out that this was due to the fact that the two companies
employed different forecasting methods.
Steps in SP Implementation
• Contractual negotiations
• Ownership
• Credit terms
• Ordering decisions
• Performance measures
• Develop or integrate information systems
• Develop effective forecasting techniques
• Develop a tactical decision support tool to assist in coordinating
inventory management and transportation policies
Advantages of SP
• Fully utilize system knowledge
• Decrease required inventory levels
• Improve service levels
• Decrease work duplication
• Improve forecasts
Examples of SP Successes and Failures
• Western Publishing-Golden Books:
• Western Publishing is using VMI for its Golden Books line of children’s books at several
retailers.
• POS data automatically triggers re-orders when inventory falls below a reorder point.
• This inventory is delivered either to a distribution center, or in many cases, directly to the
store.
• Ownership of the books shifts to the retailer once deliveries have been made.
• In the case of Toys R Us, the company has even managed the entire book section for the
retailer, including inventory from suppliers other than Western Publishing.
• Extra sales, increased costs to Western
Examples of SP Successes and Failures
• VF Corporation’s Market Response System:
• The VF Corporation, which has many well known brand names (including
Wrangler, Lee, Girbaud, and many others), began its VMI program in 1989.
• Currently, about 40 percent of its production is handled using some type of
automatic replenishment scheme.
• This is particularly notable because the program encompasses 350 different
retailers, 40,000 store locations, and more than 15 million replenishment
levels.
• VF’s program is considered one of the most successful in the apparel industry.
Examples of SP Successes and Failures
• Spartan Stores
• Spartan Stores, a grocery chain, shut down its VMI effort about one year after
its inception.
• One problem was that buyers were not spending any less time on reorders
than they did before
• This was because they didn’t trust the suppliers enough to be able to stop
carefully monitoring the inventories and deliveries of the VMI items, and
intervening at the slightest hint of trouble.
Examples of SP Successes and Failures
• Spartan Stores (continued)
• Suppliers didn’t do much to allay these fears. The problems were not with the
suppliers’ forecasts; instead, they were due to the suppliers’ inability to deal
with promotions, which are a key part of the grocery business.
• Since they were unable to appropriately account for promotions, delivery
levels were often unacceptably low during these periods of peak demand.
DISTRIBUTOR INTEGRATION
• Manufacturer to provide product on time
• Distributor to provide customer info
• Common inventory across the distributor network
- Lowers inventory cost
- Improves stock out situations
• Pool of technical personnel : each distributor having one capability
 DISTRIBUTOR INTEGRATION

• Parts are shared across the distributor network

• Specialized service requests are steered to appropriate dealers or distributors.
• What is required?
• Trust
• Pledges
• Guarantees from the manufacturer
• Advanced information systems
• Disadvantages
• Disincentives for dealers – are they giving away competitive advantages?
• Skills and responsibilities are taken from some dealers/distributors.
• Examples - Caterpillar, Okuma
 Supply Chain
Management:
CENTRALIZED INVENTORY
S K Bishwal
CENTRALIZED INVENTORY
• Consider these two systems:
Warehouse One Market One
Supplier
Warehouse Two Market Two

Market One
Supplier Warehouse

Market Two
CENTRALIZED INVENTORY
• For the same service level, which system will require more inventory?
Why?
• For the same total inventory level, which system will have better
service? Why?
• What are the factors that affect these answers?
CENTRALIZED INVENTORY
• Compare the two systems:
• two products
• maintain 97% service level
• Rs 60 ordering cost
• Rs 0.27 weekly holding cost
• Rs1.05 transportation cost per unit in decentralized system, Rs1.10 in
centralized system
• 1 week lead time
CENTRALIZED INVENTORY

DEPOT PRODUCT DEMAND PER WEEK

1 2 3 4 5 6 7 8
X A 33 45 37 38 55 30 18 58
X B 0 2 3 0 0 1 3 0
Y A 46 35 41 40 26 48 18 55
Y B 2 4 0 0 3 1 0 0
CENTRALIZED INVENTORY
SERVICE LEVEL 97% : 1.88

DEPOT PRODUCT DEMAND PER WEEK AVG SD CV Q BUFFER RP AVG INV

1 2 3 4 5 6 7 8 DEMAND
X A 33 45 37 38 55 30 18 58 39 13.18 0.34 132 25 64 91
X B 0 2 3 0 0 1 3 0 1 1.36 1.21 22 3 4 14
Y A 46 35 41 40 26 48 18 55 39 12.05 0.31 131 23 61 88 179 26.27
Y B 2 4 0 0 3 1 0 0 1 1.58 1.26 24 3 4 15 28 30.29
TOTAL A 79 80 78 78 81 78 36 113 78 20.71 0.27 186 39 117 132
B 2 6 3 0 3 2 3 0 2 1.92 0.81 32 4 6 20
CENTRALIZE INVENTORY:
Important Observations
• Centralizing inventory control reduces both safety stock and average
inventory level for the same service level.
• This works best for
• High coefficient of variation, which increases required safety stock.
• Negatively correlated demand. Why?
Impact of Aggregation on Safety Stock
• How does aggregation affect forecast accuracy and
safety inventories

Di: Mean periodic demand in region i, i = 1, …, k

σi : Standard deviation of periodic demand in region i, i =, …, k
ρij: Correlation of periodic demand for regions i, j,
1 i  j  k
 Impact of Aggregation on Safety Stock
Total safety stock in k

decentralized option   FS–1 (CSL )  L   i

i=1

var  DC     i2  2 ij  i  j ;
k
DC   i 1 Di ;
k

i 1 i> j

 DC  var  DC 

DC  kD  DC  k 2  k  k – 1  2

Simplified to  DC  k D
Impact of Aggregation on Safety Inventory

Require safety inventory on aggregation

k
  FS–1(CSL )  L   DC
i 1

Holding – cost savings on aggregation per unit sold

FS–1 (CSL )  L  H  k C 
 C
   i –  D 
D  i 1 
Impact of Aggregation on Safety
Stock
• The safety inventory savings on aggregation increase with the
desired cycle service level CSL
• The safety inventory savings on aggregation increase with the
replenishment lead time L
• The safety inventory savings on aggregation increase with the
holding cost H
• The safety inventory savings on aggregation increase with the
coefficient of variation of demand
( D D )

The safety inventory savings on aggregation decrease as the

correlation coefficients increase
Disadvantages of aggregation
• Two possible disadvantages to aggregation

1. Increase in response time to customer order

2. Increase in transportation cost to customer
Supply Chain
Management:
SAFETY STOCK IN SCM
S K Bishwal
What is your experience?
Can you cite any experiences in which the lack of
appropriate inventory at a retail store has caused
you as the customer to be dissatisfied?
 Inventory Policy
Decisions
“Every management mistake ends up in inventory.”

Michael C. Bergerac
Former Chief Executive
Revlon, Inc.
SAFETY STOCK
• Average inventory = cycle inventory + safety
stock
• Role of safety stock :
• Raising the level of safety inventory; provides
higher levels of product availability and customer
service
• Raising the level of safety inventory also raises the
level of average inventory and therefore increases
holding costs / obsolescence cost
• Appropriate level of safety stock
• Improve product availability even after
reducing safety stock
 APPROPRIATE
LEVEL OF SAFETY INVENTORY

• Demand uncertainty (SD)

• Product availability
• Replenishment policies
REPLENISHMENT POLICIES
• Replenishment policy: decisions regarding
when to reorder and how much to reorder
• Continuous review: inventory is
continuously monitored, and an order of
size Q is placed when the inventory level
reaches the reorder point ROP
• Periodic review: inventory is checked at
regular (periodic) intervals and an order is
placed to raise the inventory to a specified
threshold (the “order-up-to” level)
 Reorder Point Control for a Single Item

Quantity on hand

Q
Place
order
Q
DDLT
ROP

Receive
order P
0
Stockout
LT LT
Time
PRODUCT AVAILABILITY
• Product availability: ability to fill a customer’s order
out of available inventory
• Stockout: a customer order arrives when product is
not available
• Product fill rate (fr): fraction of demand that is
satisfied from product in inventory
• Order fill rate: fraction of orders that are filled from
available inventory
• Cycle service level: fraction of replenishment cycles
that end with all customer demand met
• CSL= Prob(Demand during lead time <= ROP )
= NORMDIST(ROP, dL , ∂L, 1)
 Safety Stock Objectives

Customer Service
, Inventory Holding costs
i.e., Stock Availability

•Service objectives
-Setting stocking levels so that there is only a
specified probability of running out of stock
•Cost objectives
-Balancing conflicting costs to find the most
economical replenishment quantities and timing
DEMAND / SUPPLY UNCERTAINTY
• d: Average demand per period
• D: Standard deviation of demand per period
• CV
• L : Average lead time
• sL: Standard deviation of lead time

d L
 dL

   d
2 2 2
L
L D s L
CYCLE SERVICE LEVEL
D = 2,500/week; D = 500
L = 2 weeks; Q = 10,000; ROP = 6,000
CYCLE SERVICE LEVEL
D = 2,500/week; D = 500
L = 2 weeks; Q = 10,000; ROP = 6,000

 L D
L  (500 ) 2  707
Cycle service level, CSL = F(DL + ss, DL, L) =
= NORMDIST (DL + ss, DL, L) =
NORMDIST(6000,5000,707,1)
= 0.92
 SS for Discrete DDLT Distribution
One of Sharp Retailer’s inventory items is now being analyzed to
determine an appropriate level of safety stock. The manager wants
an 80% service level during lead time. The item’s historical DDLT is:
DDLT (units) Occurrences
3 8
4 6
5 4
6 2
SS for Discrete DDLT Distribution
•
Probability Probability of
DDLT (cases) of DDLT DDLT or Less

3 .4 .4
4 .3 .7
5 .2 .9
6 .1 1.0
To provide 80% service level, OP = 5 cases
INVENTORY CYCLE Q MODEL
FIXED PERIOD MODEL

L L L
T T
REORDER POINT

The ROP based on a normal

Distribution of lead time demand

Service level
Risk of
a stockout
Probability of
no stockout

ROP Quantity
Expected
demand Safety
stock
0 z z-scale
APPROPRIATE CSL
𝑄
𝐶𝑂𝑆𝑇 = 𝐶𝑆𝐿 𝐻 ×
𝐷
𝐵𝐸𝑁𝐸𝐹𝐼𝑇 = 1−𝐶𝑆𝐿 𝐶𝑢
𝑄
𝐶𝑆𝐿 𝐻 × = 1−𝐶𝑆𝐿 𝐶𝑢
𝐷
𝐷𝐶𝑢
𝐶𝑆𝐿 =
𝐻𝑄 +𝐷𝐶𝑢
ASSIGNMENT
LOT SIZE = 400
ROP = 300
Avg D/year 5200
SD of demand /week 20
UNIT COST = 3
h= 20%
Lead time L = 2 weeks
Selling Price 5
How much is the CSL
Is it appropriate
ASSIGNMENT
LOT SIZE = 400
ROP = 300 Avg D /week = 100
Avg D/year 5200
SD of demand /week20 ss= 100
UNIT COST = 3
Selling Price = 5 Z= 3.535534
h= 20%
Lead time L = 2 weeks CSL = 0.999797

How much is the CSL

Is it appropriate 0.454545
PRODUCT AVAILABILITY
• Product availability: ability to fill a customer’s order
out of available inventory
• Stockout: a customer order arrives when product is
not available
• Product fill rate (fr): fraction of demand that is
satisfied from product in inventory
• Order fill rate: fraction of orders that are filled from
available inventory
• Cycle service level: fraction of replenishment cycles
that end with all customer demand met
• CSL= Prob(Demand during lead time <= ROP )
= NORMDIST(ROP, dL , ∂L, 1)
FILL RATE
• Proportion of customer demand satisfied from stock
• Stockout occurs when the demand during lead time
exceeds the reorder point
• ESC is the expected shortage per replenishment
cycle (average demand in excess of reorder point in
each replenishment cycle)
• ss is the safety inventory
• Q is the order quantity
REORDER POINT

The ROP based on a normal

Distribution of lead time demand

Service level
Risk of
a stockout
Probability of
no stockout

ROP Quantity
Expected
demand Safety
stock
0 z z-scale
EXPECTED SHORTAGE PER CYCLE

∞
𝐸𝑆𝐶 = 𝑥−𝑅𝑂𝑃 𝑓 𝑥 𝑑𝑥
𝑥=𝑅𝑂𝑃
𝑠𝑠 𝑠𝑠
𝐸𝑆𝐶 = 𝜎𝐿 𝑓𝑠 − 𝑠𝑠 1− 𝐹𝑠
𝜎𝐿 𝜎𝐿
ESC

 ss   ss 
ESC   L * f    ss * {1  F  }
 L   L 
S  S 
ESC

ESC = 𝜎𝐿 ∗ NORMDIST(ss/𝜎𝐿 , 0, 1,1) –ss*{1-NORMDIST(ss/𝜎𝐿 , 0, 1, 0)}

FILL RATE

ESC
fr  1
Q
FILL RATE
ss = 1,000, Q = 10,000, L = 707, Fill Rate (fr) = ?
D = 2,500/week ; L = 2 weeks
FILL RATE
ss = 1,000, Q = 10,000, L = 707, Fill Rate (fr) = ?
ESC = -ss{1-NORMDIST(ss/L, 0, 1, 1)} +
L NORMDIST(ss/L, 0, 1, 0)
= -1,000{1-NORMDIST(1,000/707, 0, 1, 1)} +
707 NORMDIST(1,000/707, 0, 1, 0)
= 25.13

fr = (Q - ESC)/Q = (10,000 - 25.13)/10,000 =

0.9975
SAFETY INVENTORY FOR A GIVEN CSL
D = 2,500/week; D = 500
L = 2 weeks; Q = 10,000; CSL = 0.90
SAFETY INVENTORY FOR A GIVEN CSL
D = 2,500/week; D = 500
L = 2 weeks; Q = 10,000; CSL = 0.90
DL = 5000, L = 707 (from earlier example)

ss = FS-1(CSL)L = [NORMSINV(0.90)](707) = 906

ROP = DL + ss = 5000 + 906 = 5906

 SAFETY INVENTORY
GIVEN DESIRED FILL RATE
D = 2500, D = 500, Q = 10000 , L= 2 weeks
If desired fill rate is fr = 0.975, how much safety
inventory should be held?
 SAFETY INVENTORY
GIVEN DESIRED FILL RATE
D = 2500, D = 500, Q = 10000
If desired fill rate is fr = 0.975, how much safety
inventory should be held?
ESC = (1 - fr)Q = 250
  ss   ss 
ESC  250   ss 1  F S    σ L f S  
  σ L   σL 
250
𝑠𝑠 𝑠𝑠
= −𝑠𝑠 ∗ 1 − 𝑁𝑂𝑅𝑀𝑆𝐷𝐼𝑆𝑇 , 0,1,1 + ∗ 𝑁𝑂𝑅𝑀𝐷𝐼𝑆𝑇 , 0,1,0
𝐿
𝐿 𝐿
Evaluating Safety Inventory Given Fill Rate (for
different values of ss)
ESC= 250.049
ss= 66.5

SD= 707
SS Fs fs ESC fr
65 0.536626 0.39726 250.7434 97.49257
66.5 0.537469 0.397181 250.049 97.49951
70 0.54 0.40 248.43 97.52
100 0.56 0.39 234.87 97.65
150 0.58 0.39 213.38 97.87
200 0.61 0.38 193.26 98.07
250 0.64 0.37 174.50 98.25
300 0.66 0.36 157.07 98.43
350 0.69 0.35 140.93 98.59
400 0.71 0.34 126.03 98.74
450 0.74 0.33 112.33 98.88
500 0.76 0.31 99.79 99.00
550 0.78 0.29 88.34 99.12
600 0.80 0.28 77.94 99.22
650 0.82 0.26 68.52 99.31
700 0.84 0.24 60.02 99.40
707 0.84 0.24 58.90 99.41
750 0.86 0.23 52.39 99.48
Evaluating Safety Inventory Given Fill Rate (for
different values of ss)
ESC= 250.049
ss= 66.5

SD= 707
SS Fs fs ESC fr

70 0.54 0.40 248.43 97.52

100 0.56 0.39 234.87 97.65
150 0.58 0.39 213.38 97.87
200 0.61 0.38 193.26 98.07
250 0.64 0.37 174.50 98.25
300 0.66 0.36 157.07 98.43
350 0.69 0.35 140.93 98.59
400 0.71 0.34 126.03 98.74
450 0.74 0.33 112.33 98.88
500 0.76 0.31 99.79 99.00
 Impact of Required Product Availability
and Uncertainty on Safety Inventory
• Desired product availability (cycle service level
or fill rate) increases, required safety inventory
increases
• Demand uncertainty (L) increases, required
safety inventory increases
• Managerial levers to reduce safety inventory
without reducing product availability
• reduce supplier lead time, L (better relationships
with suppliers, Quick response)
• reduce uncertainty in demand, L (better forecasts,
better information collection and use)
 Postponement

• Delay product differentiation or customization until closer to the time the

product is sold
• Have common components in the supply chain for most of the push phase
• Move product differentiation as close to the pull phase of the supply chain as
possible
• Inventories in the supply chain are mostly aggregate
POSTPONEMENT
• Asian paints
• Reebok replica jersey for NFL
• Dell
• Benefit from reduction in inventory cost vs extra cost of Production