➢ Chua Geoffrey Bryan Ang

➢ Division of ITOM, NBS, NTU

➢ S3-B2A-04, 50 Nanyang Avenue,
S639798
➢ +65 6790 6140
➢ gbachua@ntu.edu.sg

BC2408 Week 1 2
 ➢ Wal-Mart, $1 billion sales in 1980 to $420 billion in 2020

➢ Borders, $4 billion in 2004 to $2.8 billion in 2009

➢ Redmart became one of first unicorns in Singapore

➢ Optimal Dynamics raises $18.4M Series A round to build the

decision layer of logistics and supply chain management

➢ Orbital Insight has raised $128.7M up to Series D round to monitor

what happens on earth for sustainable supply chains

RE6003 Class 1 3
 All stages involved,
directly or indirectly, in
fulfilling a customer
request.

➢ Includes raw material suppliers, component

manufacturers, product manufacturers,
transporters, warehouses, wholesalers and
distributors, retailers, and customers

➢ Within each company, the supply chain includes

all functions involved in fulfilling a customer
request (product development, marketing,
operations, distribution, finance, customer
BC2408 Week 1
service) 4
 ➢ Customer is an integral part of the
supply chain

➢ Includes movement or flow of

material, funds and information

➢ May be more accurate to use the

term“supply network”or“supply
web”

➢ Typical supply chain stages:

customers, retailers, distributors,
manufacturers, suppliers

➢ Some stages may not be present in

all supply chains (e.g., no retailer or
distributor for Dell)

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BC2408 Week 1 6
BC2408 Week 1 7
Example: Electronics Supply Chain

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BC2408 Week 1 9
 ➢ Provide an understanding and appreciation of
➢ key challenges in SCM
➢ key drivers of SC performance
➢ Expose students to techniques and strategies
used
➢ to optimize SC decisions
➢ to anticipate or explain SC phenomena

BC2408 Week 1 10
 ➢ Main Textbook:
➢ Chopra and Meindl, Supply Chain
Management: Strategy, Planning and
Operation, 6th Edition, 2016, Pearson, ISBN
9781292093567.

➢ Additional Material:
➢ 4 Case Studies
➢ 2 Supplementary Textbooks

BC2408 Week 1 11
 ➢ Individual
➢ Class participation ( 20% )
➢ Individual Assignments ( 15% )
➢ Quizzes ( 30% )

➢ Team (of 4-5 people)

➢ Group Assignments ( 10% )
➢ Project ( 25% )

BC2408 Week 1 12
 ➢ Option 1: Identify an organization with a supply chain
problem
➢ Analyze the strengths and weaknesses of current practice
➢ Recommend supply chain improvement

➢ Option 2: Propose a supply chain business model

innovation
➢ Discuss how new model addresses an important market
gap
➢ Explore how to implement the proposed model

BC2408 Week 1 13
 Supply chain management is a set of
approaches utilized to efficiently
integrate suppliers, manufacturers,
warehouses, and stores, so that
merchandise is produced and distributed
at the right quantities, to the right
locations, and at the right time, in order to
minimize system wide costs while
satisfying service level requirements.

- David Simchi-Levi, MIT

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 ➢ Maximize overall value created

Supply Chain Surplus

= Customer Value – Supply Chain Cost

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 ➢ Example: a customer purchases a wireless router
from Harvey Norman for $100 (revenue)

➢ Supply chain incurs costs (information, storage,

transportation, components, assembly, etc.)

➢ Difference between $100 and the sum of all of

these costs is the supply chain profit

➢ Supply chain profitability is total profit to be

shared across all stages of the supply chain

➢ Success should be measured by total supply

chain profitability, not profits at an individual
stage

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 ➢ Complexity
• Every facility that impacts costs need to be considered
• Efficiency and cost-effectiveness throughout the system is
required; system level approach
• Multiple levels of activities: Strategic, Tactical, Operational

➢ Fragmentation of ownership
• Facility owners have conflicting objectives

➢ Inherent presence of uncertainty and risk

➢ Dynamic and fast changing environments

➢ Supply chain strategy linked to the Development Chain

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 ➢ U.S. companies spend more than $1 trillion in
supply-related activities (10-15% of Gross
Domestic Product)
➢ Transportation 58%
➢ Inventory 38%
➢ Management 4%

➢ The grocery industry could save $30 billion

(10% of operating cost) by using effective
logistics strategies

➢ A typical box of cereal spends 104 days getting

from factory to supermarket.

➢ A typical new car spends 15 days traveling from

the factory to the dealership.
BC2408 Week 1 18
 National Semiconductors
• Production:
– Produces chips in six different locations: four in the US, one in
Britain and one in Israel
– Chips are shipped to seven assembly locations in Southeast
Asia.
• Distribution
– The final product is shipped to hundreds of facilities all over
the world
– 20,000 different routes
– 12 different airlines are involved
– 95% of the products are delivered within 45 days
– 5% are delivered within 90 days.

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BC2408 Week 1 20
 Globally Dispersed Manufacturing

An Illustration: How Li & Fung Limited Might Make a Dress

Product Design QC & Shipping

[Hong Kong] [Hong Kong]

Yarn Spinning Weaving Stitching

[Korea] [Taiwan] [Indonesia]

Zippers+…
[Japan+…]

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 ➢ Geographically dispersed complex network
➢ Conflicting objectives of different facilities
➢ Dynamic system
➢ Variations over time
➢ Matching demand-supply difficult
➢ Different levels of inventory and backorders
➢ Recent developments have increased risks
➢ Lean production/Off-shoring/Outsourcing

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 REASONS
Raw material shortages
Internal and supplier parts shortages
Productivity inefficiencies
Sales and earnings shortfall
Larger than anticipated inventories
Stiff competition
General slowdown in the PC market
Higher than expected orders for new
products over existing products
EXAMPLES
Boeing Aircraft’s inventory write-down of
$2.6 billion
Sales at U.S. Surgical Corporation declined
25 percent, resulting in a loss of $22 million
Intel reported a 38 percent decline in
quarterly profit
EMC Corp. missed its revenue guidance of
$2.66 billion for the second quarter of 2006
by around $100 million
 ➢ Forecasting is not a solution
➢ Demand is not the only source of uncertainty
➢ Recent trends make things more uncertain
➢ Lean manufacturing
➢ Outsourcing
➢ Off-shoring

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 ➢ August 2005 – Hurricane Katrina
➢ P&G coffee supplies from sites around New
Orleans
➢ Six month impact

➢ 2002 West Coast port strike

➢ Losses of $1B/day
➢ Store stock-outs, factory shutdowns

➢ 1999 Taiwan earthquake

➢ Supply interruptions of HP, Dell

➢ 2001 India (Gujarat state) earthquake

➢ Supply interruptions for apparel
manufacturers

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 ➢ Set of activities and processes associated with
new product introduction. Includes:
➢ product design phase
➢ associated capabilities and knowledge
➢ sourcing decisions
➢ production plans

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BC2408 Week 1 27
 Strategic Fit
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 ➢ Strategic fit – competitive and
supply chain strategies have
aligned goals

➢ A company may fail because of

a lack of strategic fit or because
its processes and resources do
not provide the capabilities to
execute the desired strategy

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 Understanding
the customer and
supply chain
uncertainty

Understanding
the supply chain

Achieving
strategic fit

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 ➢ 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

BC2408 Week 1 31
 ➢ 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
attributes the customer desires

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 Customer Need
Range of quantity required increases
Lead time decreases
Variety of products required
increases
Number of channels through which
product may be acquired increases
Rate of innovation increases
Required service level increases
BC2408 Week 1
Causes Implied Demand Uncertainty to …
Increase because a wider range of the quantity required
implies greater variance in demand
Increase because there is less time in which to react to
orders
Increase because demand per product becomes more
disaggregate
Increase because the total customer demand is now
disaggregated over more channels
Increase because new products tend to have more
uncertain demand
Increase because the firm now has to handle unusual
surges in demand
33
 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 0% 10% to 25%
markdown

BC2408 Week 1 34
 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

BC2408 Week 1 35
BC2408 Week 1 36
 ➢ 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 very high service level

BC2408 Week 1 37
 ➢ Responsiveness comes at a
cost
➢ 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

BC2408 Week 1 38
BC2408 Week 1 39
 ➢ 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

BC2408 Week 1 40
 IKEA

England
Inc
BC2408 Week 1 41
 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 with
Inventory strategy Minimize inventory to lower cost
demand/supply uncertainty

Reduce aggressively, even if the costs

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

Select based on speed, flexibility,

Supplier strategy Select based on cost and quality
reliability, and quality

Adapted from Marshall L. Fisher, “What is the Right Supply Chain for Your Product?” Harvard Business Review

BC2408 Week 1 42
 ➢ Achieve strategic fit while serving many
customer segments with a variety of products
across multiple channels

➢ Requires sharing some links in the supply chain

with some products, while having separate
operations for other links

BC2408 Week 1 43
 ➢ Beginning stages
1. Demand is very uncertain, and
supply may be unpredictable
2. Margins are often high, and time
is crucial to gaining sales
3. Product availability is crucial to
capturing the market
4. Cost is often a secondary
consideration
BC2408 Week 1 44
 ➢ Later stages
1. Demand has become more certain,
and supply is predictable
2. Margins are lower as a result of an
increase in competitive pressure
3. Price becomes a significant factor
in customer choice

BC2408 Week 1 45
BC2408 Week 1 46
 ➢ From a shareholder perspective, return on equity
(ROE) is the main summary measure of a firm’s
performance

Net Income
ROE =
Average Shareholder Equity

BC2408 Week 1 47
 ➢ Return on assets (ROA) measures the return earned on
each dollar invested by the firm in assets

Earnings before interest

ROA =
Average Total Assets

Net Income + éëInterest expense ´ (1– tax rate)ùû

=
Average Total Assets

BC2408 Week 1 48
 ➢ An important ratio that defines financial leverage is
accounts payable turnover (APT)
Cost of goods sold
APT =
Accounts Payable
➢ Similarly, we have accounts receivables turnover (ART)
and inventory turnover (INVT)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
𝐴𝑅𝑇 =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

𝐼𝑁𝑉𝑇 =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

BC2408 Week 1 49
 ➢ ROA can be written as the product of two ratios – profit
margin and asset turnover

Earnings before interest

ROA = (Profit Margin)
Sales Revenue
Sales Revenue
´ (Asset Turnover)
Total Assets

BC2408 Week 1 50
 ➢ Cash-to-cash (C2C) cycle roughly measures the
average amount time from when cash enters the
process as cost to when it returns as collected
revenue

C2C = – days payable (1/APT)

+ days in inventory (1/INVT)
+ days receivable (1/ART)

BC2408 Week 1 51
BC2408 Week 1 52
BC2408 Week 1 53
 • 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

BC2408 Week 1 55
 • 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

BC2408 Week 1 56
BC2408 Week 1 57
 ➢ Role in the supply chain
➢ The “where” of the supply chain
➢ Manufacturing or storage (warehouses)

➢ Role in the competitive strategy

➢ Economies of scale (efficiency priority)
➢ Larger number of smaller facilities (responsiveness
priority)

BC2408 Week 1 58
 • Components of facilities decisions

– Role
• Flexible, dedicated, or a combination of the two
• Product focus or a functional focus

– Location
• Where a company will locate its facilities
• Centralize/decentralize, macroeconomic factors,
quality of workers, cost of workers and facility,
availability of infrastructure, proximity to customers,
location of other facilities, tax effects

BC2408 Week 1 59
 ➢ Components of facilities decisions

➢ Capacity
➢ A facility’s capacity to perform its intended function or
functions
➢ Excess capacity – responsive, costly
➢ Little excess capacity – more efficient, less responsive

BC2408 Week 1 60
 ➢ Components of facilities decisions

➢ Facility-related metrics
➢ Capacity
➢ Utilization
➢ Processing/setup/down/idle time
➢ Production cost per unit
➢ Quality losses
➢ Theoretical flow/cycle time of production
➢ Actual average flow/cycle time

BC2408 Week 1 61
 • Overall trade-off: Responsiveness versus
efficiency

– Cost of the number, location, capacity, and type of

facilities (efficiency)
– Level of responsiveness
– Increasing number of facilities increases facility and
inventory costs, decreases transportation costs and
reduces response time
– Increasing the flexibility or capacity of a facility
increases facility costs, decreases inventory costs and
response time

BC2408 Week 1 62
 ➢ Role in the Supply Chain
➢ Mismatch between supply and demand
➢ Satisfy demand
➢ Exploit economies of scale
➢ Impacts assets, costs, responsiveness, material flow time

BC2408 Week 1 63
 ➢ Role in Competitive Strategy
➢ Form, location, and quantity of inventory allow a
supply chain to range from being very low cost to
very responsive
➢ Objective is to have right form, location, and
quantity of inventory that provides the right level of
responsiveness at the lowest possible cost

BC2408 Week 1 64
 ➢ Cycle inventory
➢ Average amount of inventory used to satisfy demand
between shipments
➢ Function of lot size decisions
➢ Safety inventory
➢ Inventory held in case demand exceeds expectations
➢ Costs of carrying too much inventory versus cost of
losing sales
➢ Seasonal inventory
➢ Inventory built up to counter predictable variability in
demand
➢ Cost of carrying additional inventory versus cost of
flexible production
BC2408 Week 1 65
 ➢ Inventory-related metrics
➢ Cash-to-cash cycle time
➢ Average inventory
➢ Inventory turns
➢ Products with more than a specified number of
days of inventory
➢ Average replenishment batch size

BC2408 Week 1 66
 ➢ Inventory-related metrics
➢ Average safety inventory
➢ Seasonal inventory
➢ Fill rate - the fraction of demand that is served on
time from product held in inventory
➢ Fraction of time out of stock
➢ Obsolete inventory

BC2408 Week 1 67
 ➢ Overall trade-off: Responsiveness versus
efficiency
➢ Increasing inventory generally makes the supply
chain more responsive
➢ A higher level of inventory facilitates a reduction
in production and transportation costs because of
improved economies of scale
➢ Inventory holding costs increase

BC2408 Week 1 68
 ➢ Role in the Supply Chain
➢ Moves the product between
stages in the supply chain
➢ Impact on responsiveness and
efficiency
➢ Faster transportation allows
greater responsiveness but
lower efficiency
➢ Also affects inventory and
facilities

BC2408 Week 1 69
 ➢ Role in the Competitive Strategy
➢ 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

BC2408 Week 1 70
 ➢ Choice of transportation mode
➢ Air, truck, rail, sea, and pipeline
➢ Information goods via the Internet
➢ Different speed, size of shipments, cost of shipping, and
flexibility

BC2408 Week 1 71
 ➢ 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

BC2408 Week 1 72
 ➢ Overall trade-off: Responsiveness versus
efficiency
➢ The cost of transporting a given product (efficiency)
and the speed with which that product is transported
(responsiveness)
➢ Using fast modes of transport raises responsiveness
and transportation cost but lowers the inventory
holding cost

BC2408 Week 1 73
 ➢ Role in the Supply Chain
➢ 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

BC2408 Week 1 74
 ➢ Role in the Competitive Strategy
➢ Right information can help a supply chain better
meet customer needs at lower cost
➢ Improves visibility of transactions and coordination
of decisions across the supply chain
➢ Share the minimum amount of information required
to achieve coordination

BC2408 Week 1 75
 ➢ Enabling technologies
1. Electronic data interchange (EDI)
2. The Internet
3. Enterprise resource planning (ERP) systems
4. Supply chain management (SCM) software
5. Radio frequency identification (RFID)

BC2408 Week 1 76
 ➢ Information-related metrics
➢ Forecast horizon
➢ Frequency update
➢ Forecast error
➢ Seasonal factors
➢ Variance from plan
➢ Ratio of demand variability to order variability

BC2408 Week 1 77
 • Overall trade-off: Complexity versus value
– Good information helps a firm improve both
efficiency and responsiveness
– More information is not always better
– More information increases complexity and cost of
both infrastructure and analysis exponentially while
marginal value diminishes
– Evaluate the minimum information required to
accomplish the desired objectives

BC2408 Week 1 78
 ➢ Role in the Supply Chain
➢ 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
Pooh sourcing for honey
➢ Globalization creates many
more sourcing options with
both considerable opportunity
and potential risk

BC2408 Week 1 79
 ➢ Role in the Competitive Strategy
➢ Sourcing decisions are crucial because they affect
the level of efficiency and responsiveness in a
supply chain
➢ Outsource to responsive third parties if it is too
expensive to develop their own
➢ Keep responsive process in-house to maintain
control

BC2408 Week 1 80
 ➢ In-house or outsource
➢ Perform a task in-house or outsource it to a third party
➢ Supplier selection
➢ Number of suppliers, evaluation and selection criteria,
direct negotiations or auction
➢ Procurement
➢ The supplier sends product in response to customer
orders

BC2408 Week 1 81
 ➢ Sourcing-related metrics
➢ Days payable outstanding
➢ Average purchase price
➢ Range of purchase price
➢ Average purchase quantity
➢ Supply quality
➢ Supply lead time
➢ Fraction of on-time deliveries
➢ Supplier reliability

BC2408 Week 1 82
 • Overall trade-off: Increase the supply chain
surplus
– Increase the size of the total surplus to be shared across
the supply chain
– Impact of sourcing on sales, service, production costs,
inventory costs, transportation costs, and information cost
– 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

BC2408 Week 1 83
 ➢ Role in the Supply Chain
➢ 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

BC2408 Week 1 84
 ➢ Role in the Competitive Strategy
➢ Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness
➢ Pricing strategies vary to meet different customer
responsiveness requirements

BC2408 Week 1 85
 ➢ Pricing and economies of scale
➢ The provider of the activity must decide how to price it
appropriately to reflect these economies of scale

➢ Everyday low pricing versus high-low pricing

➢ Different pricing strategies lead to different demand
profiles that the supply chain must serve

➢ Fixed price versus menu pricing

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

BC2408 Week 1 86
 ➢ 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

BC2408 Week 1 87
 • Overall trade-off: Increase firm profits
– Understand the cost structure of performing a supply
chain activity and the value this activity brings to the
supply chain
– Strategy may support efficiency in the supply chain,
lower supply chain costs, defend market share, or steal
market share
– Differential pricing may be used to attract customers with
varying needs
– Strategy should help either increase revenues or shrink
costs or preferably both

BC2408 Week 1 88