Introduction To Supply Chain Management (15 Files Merged)

Introduction to supply chain
management
Dr. Chiranjit Das
IIM Bodh Gaya
SCM
Supply Chain Management: A Pictorial Representation
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Copyright © 2016 Pearson India Education Services Pvt. Ltd

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VENDOR INBOUND INTERFACILITY DISTRIBUTION OUTBOUND

PLANTS CUSTOMERS
TRANSPORTATION TRANSPORTATION CENTERS TRANSPORTATION
Supply Chain Management-Text and Cases, 2nd Edition Author: Janat Shah
Successful Supply Chain Organizations-
• Proctor and Gamble (P&G)-
• Seven Eleven Japan (SEJ)- Inventory replenishment, Product availability, hourly

real time sales analysis. Information system, agile logistics, low operational cost,
less inventories, short cycle time, high customer service.
• Dell Computers- Real time information and efficient supply chain.
• Zara- Responsive- Design, Manufacturing, Distribution, and Retailing.
• Walmart- Inventory turn-over ratio of 9.9 compared to industry average of

5.5.Hub and Spoke transportation.
What is Supply Chain Management?
• Council of Supply chain management professional (CSCMP) defined-
“Planning and management of all activities involved in sourcing and

procurement, conversion, and all logistics management activities. It
also includes coordination and collaboration with channel partners
which can be suppliers, intermediaries, third party service provider and
customer. In essence Supply Chain Management supply and demand
management within and across companies”
Flows in a Supply Chain
Figure 1-2 The Three Flows in a Supply Chain
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Flows in a supply chain
Different types of supply chain
Distributed Supply chain
• Example- Pharmaceutical,
Consumer goods, Retailers
Assembly network
• Automobile, Cellular Phone,

Personal computer
Important decisions
Importance of Supply Chain Decisions
• Wal-Mart, $1 billion sales in 1980 to $482 billion in 2016

• Seven-Eleven Japan, ¥1 billion sales in 1974 to ¥2.7
trillion in 2016
• Webvan folded in two years
• Borders, $4 billion in 2004, declared bankruptcy in 2010
• Dell, $56 billion in 2006, adopted new supply chain
strategies
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 take into
account market uncertainty
Supply Chain Planning (1 of 2)
• 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 (2 of 2)
• 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 (1 of 2)
Figure 1-3 Supply Chain Process Cycles

Cycle View of Supply Chain Processes (2 of 2)
Figure 1-4 Subprocesses in Each Supply Chain Process Cycle

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
Figure 1-5 Push/Pull View of Supply
Chains
Push/Pull View – L.L. Bean
Figure 1-6 Push/Pull Processes for the L.L. Bean Supply Chain
Push/Pull View – Ethan Allen
Figure 1-7 Push/Pull Processes for Ethan Allen Supply Chain for
Customized Furniture
Supply Chain Key Decisions
Supply chain network structure
• Identifying supply chain members: Primary and Supportive
• Structural dimension of the network: Horizontal structure and vertical structure
Supply Chain Business Processes
• Customer relationship management

• Customer service management
• Demand management
• Order fulfilment
• Manufacturing flow management
• Procurement
• Product development and commercialization
• Returns.
Types of Business Process Links
The Management Components of SCM
• Planning and control;

• Work structure;
• Organization structure;
• Product flow facility structure;
• Information flow facility structure;
• Management methods;
• Power and leadership structure;
• Risk and reward structure;
• Culture and attitude.
Fundamental of
supply chain
Figure 1-8 Supply Chain Macro Processes
The Marico Supply Chain

Examples of Supply Chains
• Gateway and Apple

• Zara
• W.W. Grainger and McMaster-Carr
• Toyota
• Amazon
• Macy's
Links
• https://www.youtube.com/watch?v=DvEh04LNJ_I&list=PLpikkK86WFUx7YX4c46QOap8UKCbXP76d&index=8
• https://www.youtube.com/watch?v=XaHJzLZJQj4
Drivers of Supply Dr. Chiranjit Das
Assistant Professor
Chain Management IIM Bodh Gaya

Framework for Supply Chain Decisions (1 of 2)
Figure 3-1 Supply Chain Decision-Making Frame work

Role of drivers on supply chain performance
Facilities: The physical locations in the supply chain network where product is stored,
assembled, or fabricated
Inventory : All raw materials, work in process, and finished goods within a supply chain
Transportation :Moving inventory from point to point in the supply chain
Information :Data and analysis concerning facilities, inventory, transportation, costs, prices,
and customers throughout the supply chain
Sourcing: Who will perform a particular supply chain activity
Pricing: How much a firm will charge for the goods and services that it makes available in
the supply chain
Facilities
• Tradeoffs between facility, inventory, and transportation costs
 Increasing number of facilities increases facility and inventory costs,

decreases 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
• Capability
 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
• Demand Allocation
 Markets each facility will serve

 Revisited as conditions change
Facilities
• Facility-Related Metrics
 Capacity
 Utilization
 Processing/setup/down/idle time
 Quality losses
 Production cost per unit
 Theoretical flow/cycle time of production
 Actual average flow/cycle time
Inventory
• Role in the Supply Chain
• Mismatch between supply and demand
• Exploit economies of scale
• 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 transportation costs

because of improved economies of scale
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 and product availability

Components of Inventory Decisions
• Average safety inventory
• Seasonal inventory
• Fill rate
• Fraction of time out of stock

Transportation
• Moves inventory between stages in the supply chain
• Affects responsiveness and efficiency
• Faster transportation allows greater responsiveness but lower

efficiency
• Allows a firm to adjust the location of its facilities and inventory to find
the right balance between responsiveness and efficiency
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
 Choice of transportation mode

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
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
• 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
Components of Information Decisions
• Demand Planning
• Best estimate of future demand
• Include estimation of forecast error
• Coordination and Information Sharing

• Supply chain coordination, all stages of a supply chain work toward
the objective of maximizing total supply chain profitability based on
shared information
• Sales and Operations Planning (S&OP)
• The process of creating an overall supply plan (production and
inventories) to meet the anticipated level of demand (sales)
Components of Information Decisions
• Information-Related Metrics
• Forecast horizon
• Frequency of update
• Forecast error
• 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
• Should increase the size of the total surplus to be shared across the
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
• In-House or Outsource
• Perform a task in-house or outsource it to a third party
• Outsource if it raises the supply chain surplus more than the firm can
on its own
• Keep function in-house if the third party cannot increase the supply
chain surplus or if the outsourcing risk is significant
• Supplier Selection
• Number of suppliers, criteria for evaluation and selection
• Procurement
• Obtain goods and service within a supply chain
• Goal is to decrease total cost of ownership and increase supply chain
surplus
Components of Sourcing Decisions
• Sourcing-Related Metrics
• Days payable outstanding

• Average purchase price
• Average purchase quantity
• Supply quality
• Supply lead time
• Percentage 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

Components of Pricing Decisions
• Pricing and Economies of Scale
• Everyday Low Pricing Versus High-Low Pricing
• Fixed Price Versus Menu Pricing

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
Supply Chain Dr. Chiranjit Das
Assistant Professor
Strategy IIM Bodh Gaya

The Value
Chain
Is your
product
functional or
innovative?
How Is Strategic Fit Achieved?
1. Understanding the customer and supply chain uncertainty

2. Understanding the supply chain capabilities
3. Achieving strategic fit
Step 1: Understanding the Customer and
Supply Chain Uncertainty (1 of 2)
• Quantity of product needed in each lot

• Response time customers are willing to tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product
Step 1: Understanding the Customer and
Supply Chain Uncertainty (2 of 2)
• Demand uncertainty – uncertainty of customer demand

for a product
• Implied demand uncertainty – resulting uncertainty for

only the portion of the demand that the supply chain
plans to satisfy based on the attributes the customer
desires
Customer Needs and Implied Demand
Uncertainty
Customer Need Causes Implied Demand Uncertainty to …

Range of quantity required increases Increase because a wider range of the quantity required
implies greater variance in demand
Lead time decreases Increase because there is less time in which to react to
orders
Variety of products required increases Increase because demand per product becomes less
predictable
Required service level increases Increase because the firm now has to handle unusual
surges in demand
Rate of innovation increases Increase because new products tend to have more
uncertain demand
Number of channels through which Increase because the total customer demand per channel
product may be acquired increases becomes less predictable
Implied Uncertainty and Other Attributes
• Products with uncertain demand are often less mature and have less
direct competition. As a result, margins tend to be high.
• Forecasting is more accurate when demand has less uncertainty.
• Increased implied demand uncertainty leads to increased difficulty in

matching supply with demand. For a given product, this dynamic can
lead to either a stockout or an oversupply situation.
• Markdowns are high for products with greater implied demand

uncertainty because oversupply often results.
Implied Uncertainty and Other Attributes
Blank Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High
Average forecast error 10% 40% to 100%
Average stockout rate 1% to 2% 10% to 40%
Average forced season-end markdown 0% 10% to 25%

Impact of Supply Source Capability
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 Uncertainty (Demand and Supply)
Spectrum
Step 2: Understanding Supply Chain
Capabilities (1 of 2)
• How does the firm best meet demand?

• Supply chain responsiveness is the 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 high service level
• Handle supply uncertainty
Step 2: Understanding Supply Chain
Capabilities (2 of 2)
• Supply chain efficiency is the inverse to the cost of making

and delivering the product to the customer
• The cost-responsiveness efficient frontier curve shows the

lowest possible cost for a given level of responsiveness
Cost-Responsiveness Efficient Frontier
Responsiveness Spectrum
Step 3: Achieving Strategic Fit
• Ensure that the degree of supply chain responsiveness is consistent

with the implied uncertainty
• Assign roles to different stages of the supply chain that ensure the
appropriate level of responsiveness
• Ensure that all functions maintain consistent strategies that support

the competitive strategy
Zone of Strategic Fit
Efficient and Responsive Supply Chains
Blank Efficient Supply Chains Responsive Supply Chains
Primary goal Supply demand at the lowest cost Respond quickly to demand
Maximize performance at a minimum Create modularity to allow postponement of

Product design strategy
product cost product differentiation
Lower margins because price is a prime Higher margins because price is not a prime
Pricing strategy
customer driver customer driver
Maintain capacity flexibility to buffer against

Manufacturing strategy Lower costs through high utilization
demand/supply uncertainty
Maintain buffer inventory to deal with

Inventory strategy Minimize inventory to lower cost
demand/supply uncertainty
Lead-time strategy Reduce, but not at the expense of costs Reduce aggressively, even if the costs are significant
Select based on speed, flexibility, reliability, and

Supplier strategy Select based on cost and quality
quality
Managing Supply Chain
Inventory
Dr. Chiranjit Das
IIM Bodh Gaya
Role of Cycle Inventory in a
Supply Chain (2 of 8)
lot size Q
Cycle inventory  
2 2
average inventory
Average flow time 
average flow rate
Average flow time

cycle inventory Q
resulting from cycle  
demand 2D
inventory
Role of Cycle Inventory in a
Supply Chain (4 of 8)
• Lower cycle inventory
• Decreases vulnerability to demand changes
• Lowers working capital requirements
• Lowers inventory holding costs
• Cycle inventory is held to
• Take advantage of economies of scale
• Reduce costs in the supply chain
Lot Sizing for a Single Product (2 of 3)
Figure 11-2 Effect of Lot Size on Costs at Best Buy

Multiple Products Ordered and Delivered
Independently (2 of 2)
Table 11-1 Lot Sizes and Costs for Independent Ordering
Blank Litepro Medpro Heavypro

Demand per year 12,000 1,200 120
Fixed cost/order $5,000 $5,000 $5,000
Optimal order size 1,095 346 110
Cycle inventory 548 173 55
Annual holding cost $54,772 $17,321 $5,477
Order frequency 11.0
11.0 year
per year 3.53.5
per year
year 1.1 1.1 year
per year
Annual ordering cost $54,772 $17,321 $5,477
Average flow time 2.4 weeks 7.5 weeks 23.7 weeks
Annual cost $109,544 $34,642 $10,954
Total annual cost = $155,140

Lots Ordered and Delivered Jointly
S *  S  sL  sM  sH Annual order cost = S * n
DL hCL DM hCM DH hCH

Annual holding cost   
2n 2n 2n
DL hCL DM hCM DH hCH

Total annual cost    S*n
2n 2n 2n

k
DL hCL  DM hCM  DH hCH Di hCi
n*  n*  i 1
2S * 2S *
Products Ordered and Delivered
Jointly (1 of 2)
S *  S  s A  sB  sC  $7,000 per order
12,000  100  1,200  100  120  100

n*   9.75
2  7,000
Annual order cost  9.75  7,000  $68,250
Annual ordering
and holding cost = $61,512 + $6,151 + $615 + $68,250
= $136,528
Products Ordered and Delivered
Jointly (2 of 2)
Table 11-2 Lot Sizes and Costs for Joint Ordering at Best Buy
Blank Litepro Medpro Heavypro

Demand per year (D) 12,000 1,200 120
Order frequency (n∗) 9.75
9.75 peryear
year 9.75
9.75 peryear
year 9.75peryear
9.75 year
Optimal order size (D/n∗) 1,230 123 12.3
Cycle inventory 615 61.5 6.15
Annual holding cost $61,512 $6,151 $615
Average flow time 2.67 weeks 2.67 weeks 2.67 weeks
Managing Multiechelon Cycle Inventory (2 of 2)
Figure 11-6 Inventory Profile at Retailer and Manufacturer with No Synchronization

Integer Replenishment Policy (3 of 4)
Figure 11-7 Illustration of an Integer Replenishment Policy

Integer Replenishment Policy (4 of 4)
Figure 11-8 A Multiechelon Distribution Supply Chain

Distribution Strategy
Dr. Chiranjit Das
IIM Bodh Gaya
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.

In-Transit Merge Network
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 Better than drop-shipping because only a single delivery is
experience received.
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
Distributor Storage with Carrier
Delivery
Distributor Storage with 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 Somewhat higher than manufacturer storage. The
handling difference can be large for very-slow-moving items.
Information Simpler infrastructure compared to manufacturer
storage.
Distributor Storage with 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 Better than manufacturer storage with drop-shipping.
experience
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
Distributor Storage with 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.

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 longer 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
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.
Customer Pickup (2 of 2)

Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day pickup is possible for items stored
at regional DC.
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 or distributor storage options.

Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.
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.

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 Related to whether shopping is viewed as a positive or
experience 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.
Comparative Performance of Delivery Network Designs
Blank Retail Manufacturer Manufacturer Distributor Distributor Manufacturer/

Storage with Storage Storage with Storage with Storage with Distributor
Customer with Direct In-Transit Package Last-Mile Storage with
Pickup Shipping Merge Carrier Delivery Customer
Delivery Pickup
Response 1 4 4 3 2 4
time
Product 4 1 1 2 3 1
variety
Product 4 1 1 2 3 1
availability
Comparative Performance of Delivery Network
Designs
Delivery Pickup
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility and 6 1 2 3 4 5
handling
Information 1 4 4 3 2 5
Key: 1 corresponds to the best performance and 6 to the worst performance.

Delivery Networks for Different Product/ Customer
Characteristics
Delivery Pickup
High-demand +2 −2 −1 0 +1 −1
product
Medium-demand +1 −1 0 +1 0 0
product
Low-demand −1 +1 0 +1 −1 +1
Product
Delivery Networks for Different Product/ Customer
Characteristics
Delivery Pickup
Very-low-demand −2 +2 +1 0 −2 +1
product
High product value −1 +2 +1 +1 0 +2
Quick desired response +2 -2 −2 −1 +1 -2
High product variety −1 +2 0 +1 0 +2
Low customer effort −2 +1 +2 +2 +2 −1
Key: +2 = very suitable; +1 = somewhat suitable; 0 = neutral; −1 = somewhat unsuitable; −2 = very unsuitable.
Alternatives in Omni-Channel Retailing
Performance of Channels
• Response time to customers
• Picking up physical products faster than other channels
• Online channel may be fastest for information goods
• Product variety
• Easier to offer larger selection remotely
• Product availability
• Aggregating inventory improves product availability
• Customer experience
• Channels have complementarity strengths
• Faster time to market
• Online/showrooms are quicker than retailing
• Order Visibility
• Critical for showrooms or online
• Automatic in retail
• Returnability
• Easier with physical locations
• Proportion of returns likely to be higher when
information exchange is remote
• Direct Sales to Customers
• Manufacturers can use remote information exchange
for direct access to customers
• Efficient Funds Transfer
• Internet and smartphones
Performance of Channels in Terms of Cost
• Inventory
• Lower inventory levels if customers will wait
• Postpone variety until after the customer order is received
• Facilities
• Costs related to the physical facilities in a network
• Costs associated with the operations in these facilities
Performance of Channels in Terms of Cost
• Transportation
• Lower cost of “transporting” information goods in digital form
• For nondigital, aggregating inventories increases outbound
transportation
• Information
• Investment higher for channels that provide information remotely
Relative Costs for Omni-Channel Alternatives
Blank Traditional Showrooms + Online Online

Retail Home Information + Home Information +
Delivery Delivery Pickup
Inventory High Low - Medium Low Low - Medium
Facilities High Medium Low Low - Medium
Transportation by Low High High Medium
retailer
Transportation High High Low Medium
by customer
Information Low High High High
Bullwhip effect
Dr. Chiranjit Das
Indian Institute of Management Bodh Gaya
Distortion of demand from
the downstream supply chain
to the upstream supply
Definition chain.
of Bullwhip
Variability of demand are
effect high in the upstream supply
chain.
Inefficiency in the supply chain
Irregular production plan
Excessive inventory investment
Poor customer services
Implications Lost revenues
Misguided capacity plan
Ineffective transportation
Miss production schedules
• Proctor and Gambles (P&G) faced high
variability of demand from retailers to the
suppliers (3M) for one of their best-selling
products Pampers.
• HP faces the same issues for their printers.
Examples
• Pharmaceutical company Eli Lilly, and Bristol
Mayers.
• Demand forecast updating
Causes of • Order Batching
bullwhip • Price fluctuation
effect • Rationing and shortage game
How to • Avoid multiple demand forecast updates
counteract • Break order batches
bullwhip • Stabilize Prices
• Eliminate gaming in a shortage situation
effect
Forecasting
Dr. Chiranjit Das
Components and Methods
1. Qualitative
• Primarily subjective
• Rely on judgment
2. Time Series
• Use historical demand only
• Best with stable demand
3. Causal
• Relationship between demand and some other factor
4. Simulation
• Imitate consumer choices that give rise to demand
Moving Average
• Used when demand has no observable trend or seasonality
Systematic component of demand = level
• The level in period t is the average demand over the last N periods
(Dt  Dt 1  …  Dt – N +1 )
Lt 
N
Ft 1  Lt and Ft  n  Lt
After observing the demand for period t + 1, revise the estimates
(Dt +1  Dt  …  Dt N  2 )
Lt +1  , Ft  2  Lt +1
N
Moving Average Example
(D4  D3  D2  D1 )
L4 
4

122  114  127  120 
 120.75
4
• Forecast demand for Period 5
F5 = L4 = 120.75 gallons
• Error if demand in Period 5 = 125 gallons
E5 = F5 – D5 = 120.75 – 125 = – 4.25
– Revised demand
(D5  D4  D3  D2 )
L5 
4

125  122  114  127   122
4
Simple Exponential Smoothing
Lt 1   Dt 1  (1 –  )Lt Revised forecast using

smoothing constant (0
< α < 1)
Trend-Corrected Exponential Smoothing
(Holt’s Model)
• Ft+1 = Lt + Tt
Lt 1   Dt 1  1 α   Lt  Tt 
Tt +1    Lt 1  Lt   1  Tt
Trend- and Seasonality-Corrected
Exponential Smoothing (Winter’s Model)
Systematic component = (level + trend) × seasonal factor
Ft +1  (Lt  Tt )St +1 and Ft +l  (Lt  lTt )St +l
D 
Lt +1    t 1   1     Lt  Tt 
 St 1  α = smoothing constant for level
Tt +1    Lt 1  Lt   1  Tt β = smoothing constant for trend
 Dt 1  γ = smoothing constant for seasonal factor
St + p+1      1    St 1
 Lt 1 
Time Series Model
Forecasting Method Applicability

Moving average No trend or seasonality
Simple exponential smoothing No trend or seasonality
Holt’s model Trend but no seasonality
Winter’s model Trend and seasonality
Measures of Forecast Error
Et  Ft – Dt
1 n 2 n
MSEn   Et
Et
n t 1 
t 1 Dt
100
MAPEn 
n
1 n
At  Et MADn   At n
n t 1
biasn   Et
t 1
  1.25MAD
biast
TSt
MADt
Managing Uncertainty of
Supply Chain
Dr. Chiranjit Das
Factors THE DESIRED LEVEL OF THE UNCERTAINTY OF
Affecting PRODUCT AVAILABILITY DEMAND
the Level of
Safety
Inventory
THE UNCERTAINTY OF INVENTORY
SUPPLY REPLENISHMENT
POLICIES
1. Product fill rate (fr)
• Fraction of product demand satisfied from
product in inventory
2. Order fill rate
Measuring • Fraction of orders filled from available
inventory
Product 3. Cycle service level (C S L)
Availability • Fraction of replenishment cycles that end
with
all customer demand being met
• Replenishment cycle – the interval
between two successive replenishment
deliveries
Determining the Appropriate Level
of Safety Inventory (7 of 8)
DL  ss  F –1(CSL,DL ,σ L )  NORMINV (CSL,DL ,σ L )
or
ss  F –1(CSL,DL ,σ L ) – DL  NORMINV (CSL,DL ,σ L ) – DL
ss  FS–1(CSL )   L  FS–1(CSL )  L D
 NORMSINV (CSL )  L D
Determining the Appropriate Level
of Safety Inventory (8 of 8)
D 2,500 / week,  D  500,CSL  0.9, L  2 weeks
DL  DL  2  2,500  5,000
 L  L D  2  500  707
ss  Fs–1 (CSL )   L  NORMSINV (CSL )   L

 NORMSINV( 0.90)  707  906
Evaluating Fill Rate Given a
Reorder Point (1 of 4)
• Expected shortage per replenishment cycle (ESC) is
the average units of demand that are not satisfied from
inventory in stock per replenishment cycle
• Product fill rate
ESC (Q – ESC )
fr  1 – 
Q Q
Evaluating Fill Rate Given a Reorder
Point (2 of 4)

ESC   ( x – ROP )f ( x )dx
x ROP
  ss    ss 
ESC  –ss 1 – Fs      Lfs  
   L   L 
ESC  ss[1 – NORMDIST (ss / L ,0,1,1)]

 L NORMDIST (ss / L ,0,1,0)
Evaluating Fill Rate Given a
Reorder Point (3 of 4)
Lot size, Q = 10,000
Average demand during lead time, DL =5,000
Standard deviation of demand during lead time,
s L
= 707
Safety inventory, ss = ROP − DL = 6,000−5,000 = 1,000
ESC  –1,000[1 – NORMDIST (1,000 707,0,1,1)]

 707 NORMDIST (1,000 707,0,1,0)  25
fr  (Q  ESC) Q  110,000 – 252 10,000  0.9975

Evaluating Fill Rate Given a Reorder
Point (4 of 4)
Figure 12-2 Excel Solution of Example 12-4

Evaluating Safety Inventory Given
Desired Fill Rate (1 of 4)
• Expected shortage per replenishment cycle is
ESC = (1 − fr)Q
• No equation for ss
• Try values or use GOALSEEK in Excel
Evaluating Safety Inventory Given Desired
Fill Rate (2 of 4)
Desired fill rate, fr = 0.975
Lot size, Q = 10,000 boxes
Standard deviation of ddlt, L  2  500  707
ESC = (1−fr)Q = (1 − 0.975)10,000 = 250

Evaluating Safety Inventory Given
Desired Fill Rate (3 of 4)
  ss    ss 
ESC  250  ss 1 – Fs      L fs  
   L   L 
  ss    ss 
 – ss 1 – Fs    707fs  
  707   707 
250  – ss 1 – NORMDIST  ss 707,0,1,1 

 707NORMDIST (ss 707,0,1,0)
• Use GOALSEEK to find safety inventory ss = 67 boxes

Evaluating Safety Inventory Given Desired Fill
Rate (4 of 4)
Figure 12-3 Spreadsheet to Solve for ss Using GOALSEEK

Impact of Desired Product Availability,
Lead Time, and Demand Uncertainty
• As desired product availability goes up the required
safety inventory increases
Table 12- Required Safety Inventory for Different Values of Fill Rate
Fill Rate Safety Inventory

97.5% 67
98.0% 183
98.5% 321
99.0% 499
99.5% 767
Impact of Desired Product Availability and
Uncertainty
• Goal is to reduce the level of safety inventory required in
a way that does not adversely affect product availability
1. Reduce the supplier lead time L

2. Reduce the underlying uncertainty of demand
(represented by σD )
Benefits of Reducing Lead Time
and Demand Uncertainty
D = 2,500/week σD, CSL = 0.95
ss  NORMSINV (CSL )  L D
 NORMSINV (.95)  9  800  3,948
• If lead time is reduced to one week
ss  NORMSINV (.95)  1  800  1,316
• If standard deviation is reduced to 400
ss  NORMSINV (.95)  9  400  1,974

Impact of Lead Time Uncertainty
on Safety Inventory (1 of 3)
Average demand per period, D = 2,500
Standard deviation of demand per period, σD = 500
Average lead time for replenishment, L = 7 days

Standard deviation of lead time, sL = 7 days
Mean ddlt, DL = DL = 2,500 × 7 = 17,500
Standard deviation of ddlt  L  L D2  D 2sL2

 7  5002  2,5002  72
 17,500
Impact of Lead Time Uncertainty
on Safety Inventory (2 of 3)
• Required safety inventory
ss  FS–1(CSL )   L  NORMSINV (CSL )   L

 NORMSINV (0.90)  17,500
 22,491 tablets
Impact of Aggregation on Safety
Inventory (5 of 5)
Figure 12-4 Square-Root Law

Trade-Offs of Physical
Centralization (1 of 2)
• Use four regional or one national distribution center
D  1,000 week, D  300, L  4 weeks, CSL  0.95

• Four regional centers
Total required
safety inventory, ss  4  Fs1 (CSL )  L   D
 4  NORMSINV  0.95   4  300  3,948

Trade-Offs of Physical Centralization (2 of 2)
• One national distribution center,  = 0
Standard deviation
of weekly demand,  DC  4  300  600
ss  Fs1  0.95   L   DC
 NORMSINV  0.95   4  600  1,974
Decrease in holding costs  (3,948  1,974)  $1,100  0.2

 $394,765
Decrease in facility costs  $150,000
Increase in transportation  52  1,000  (13  10)
 $624,000
Information Centralization
• Online systems that allow customers or stores to locate stock
• Improves product availability without adding to inventories
• Reduces the amount of safety inventory
Specialization (1 of 2)
• Inventory is carried at multiple locations
• Should all products should be stocked at every location?
• Required level of safety inventory
• Affected by coefficient of variation of demand
• Low demand, slow-moving items, typically have a high coefficient of
variation
• High demand, fast-moving items, typically have a low coefficient of
variation
Impact of Coefficient of Variation
on Value of Aggregation (1 of 2)
Table 12-4 Value of Aggregation at W.W. Grainger
Blank Motors Cleaner
Inventory is stocked in each store Blank Blank
Mean weekly demand per store 20 1,000
Standard deviation 40 100
Coefficient of variation 2.0 0.1
Safety inventory per store 132 329
Total safety inventory 211,200 526,400
Value of safety inventory $105,600,000 $15,792,000
Inventory is aggregated at the DC Blank Blank
Mean weekly aggregate demand 32,000 1,600,000
Standard deviation of aggregate demand 1,600 4,000
Coefficient of variation 0.05 0.0025
Aggregate safety inventory 5,264 13,159
Value of safety inventory $2,632,000 $394,770
Impact of Coefficient of Variation on Value of
Aggregation (2 of 2)
Table 12-4 [Continued]
Blank Motors Cleaner

Savings Blank Blank
Total inventory saving on aggregation $102,968,000 $15,397,230
Total holding cost saving on aggregation $25,742,000 $3,849,308
Holding cost saving per unit sold $15.47 $0.046
Savings as a percentage of product cost 3.09% 0.15%
Postponement (1 of 2)
• 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 (2 of 2)
Figure 12-6 Supply Chain Flows without and with Postponement

Value of Postponement
100 different paint colors, D = 30/week, D = 10, L = 2 weeks,
CSL = 0.95
Total required
safety inventory, ss  100  Fs1 CSL   L   D
 100  NORMSINV  0.95   2  10  2,326
Standard deviation of base paint weekly demand,
 DC  100  10  100
ss  Fs1 CSL   L   CD  NORMSINV (0.95)  2  100  233
Managerial Levers to Reduce
Safety Inventory
• Reduction of supply uncertainty
• Sharing information
• Coordinated demand
• Reduction of lead times
• Delays contribute more to lead time than production
and transportation time
• Reduction of demand uncertainty
• Reduce information distortion through sharing
• Aggregate demand
Strategic Sourcing
Dr. Chiranjit Das
Strategic
sourcing
Supply Chain
Contract
Dr. Chiranjit Das
Revenue sharing contract
Wholesale price, and Revenue
Optimal Order quantity, qc: Optimal supply
chain profit; qo: Optimal retailer profit
Buyback Contract
Retailer decisions with buyback policy
Expected profit
at Buyback
policy
Quantity discount models
Optimal Ordering quantity under quantity discount
Optimal total supply chain profit under quantity discount

Supply Chain Coordination
Dr. Chiranjit Das
Collaborative
working for joint
Identifying planning, joint
interdependent product Integration
supply chain development, (combining to an
mutual exchange
activities information and integral whole);
between supply integrated collaboration
chain members information (working jointly)
and devise systems, cross and cooperation
mechanisms for coordination on (joint operation)
several levels in the
manage those companies on the are the elements
interdependenci network, long term of coordination.
es. cooperation and fair
sharing of risks and
benefits
Source: Arshinder et al., 2011
Supply Chain
Network Design
DR. CHIRANJIT DAS
Strategic- the number, location and capacity of warehouses
and manufacturing plants, and the flow of material through
the logistics network.
Tactical- These include purchasing and production

decisions, inventory policies, and transportation
strategies including the frequency with which customers
are visited.
Operational- Scheduling, lead time quotations, routing,

and truck loading.
Network
Design DETERMINE THE
APPROPRIATE NUMBER
OF PLANTS AND
WAREHOUSES,
DETERMINE THE
LOCATION OF EACH
FACILITY,
DETERMINE THE SIZE OF
EACH FACILITY,
Models
ALLOCATE SPACE FOR DETERMINE WHICH
PRODUCTS IN EACH PRODUCTS CUSTOMERS
WAREHOUSE, AND WILL RECEIVE FROM
EACH WAREHOUSE AND
WHERE THE PRODUCTS
ARE MADE.
Cost Transportation
structure Fixed Cost
Purchasing cost
Inventory holding cost

Numerical Analysis of supply chain
network design
Supply chain
performance
management
Dr. Chiranjit Das
IIM Bodh Gaya
Supply chain resilience and
risk management
Dr. Chiranjit Das
What is supply chain resilience?
“The adaptive capability of the supply chain to prepare for unexpected events,
respond to disruptions, and recover from them by maintaining continuity of
operations at the desired level of connectedness and control over structure and
function”
“Resilience is defined as the ability of a system to return to its original state or a

more favourable condition, after being disturbed”
Example: Covid 19, Tsunami, Earthquake, Terror attack

Thank You
Supply chain system design
and data management
Dr. Chiranjit Das

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Introduction to supply chain

Copyright © 2016 Pearson India Education Services Pvt. Ltd

VENDOR INBOUND INTERFACILITY DISTRIBUTION OUTBOUND

• Seven Eleven Japan (SEJ)- Inventory replenishment, Product availability, hourly

• Dell Computers- Real time information and efficient supply chain.

• Zara- Responsive- Design, Manufacturing, Distribution, and Retailing.

• Walmart- Inventory turn-over ratio of 9.9 compared to industry average of

“Planning and management of all activities involved in sourcing and

Figure 1-2 The Three Flows in a Supply Chain

• Automobile, Cellular Phone,

• Wal-Mart, $1 billion sales in 1980 to $482 billion in 2016

1. Supply chain strategy or design

• Definition of a set of policies that govern short-term operations

Figure 1-3 Supply Chain Process Cycles

Figure 1-4 Subprocesses in Each Supply Chain Process Cycle

• Identifying supply chain members: Primary and Supportive

• Structural dimension of the network: Horizontal structure and vertical structure

• Customer relationship management

• Planning and control;

Copyright © 2016 Pearson India Education Services Pvt. Ltd

• Gateway and Apple

Chain Management IIM Bodh Gaya

Figure 3-1 Supply Chain Decision-Making Frame work

Transportation :Moving inventory from point to point in the supply chain

Sourcing: Who will perform a particular supply chain activity

• Tradeoffs between facility, inventory, and transportation costs

 Increasing number of facilities increases facility and inventory costs,

 Increasing the flexibility or capacity of a facility increases facility

 A facility’s capacity to perform its intended function or functions

 Markets each facility will serve

• Mismatch between supply and demand

• Exploit economies of scale

• Improve product availability

• Affects assets, costs, responsiveness, material flow time

• Increasing inventory generally makes the supply chain more

• A higher level of inventory facilitates a reduction transportation costs

• Average amount of inventory used to satisfy demand between supplier

• Inventory held in case demand exceeds expectations

• Seasonal Inventory and product availability

• Average safety inventory

• Fraction of time out of stock

• Moves inventory between stages in the supply chain

• Affects responsiveness and efficiency

• Faster transportation allows greater responsiveness but lower

• Design of transportation network

 Modes, locations, and routes

 Direct or with intermediate consolidation points

 One or multiple supply or demand points in a

 Choice of transportation mode

 Average inbound transportation cost

• Improve the utilization of supply chain assets and the coordination of

• Information is a key driver that can be used to provide higher

• Improves visibility of transactions and coordination of decisions across

• Coordination and Information Sharing

• Set of business processes required to purchase goods and services

• Days payable outstanding

• Pricing determines the amount to charge customers for goods and

• Affects the supply chain level of responsiveness required and the

• Pricing strategies can be used to match demand and supply

• Pricing and Economies of Scale

• Everyday Low Pricing Versus High-Low Pricing

• Fixed Price Versus Menu Pricing

Strategy IIM Bodh Gaya