Professional Documents
Culture Documents
Week Activity
Week Activity
Week Activity
Assistant Professor
Dr. Soohoon Park
Chonnam National University
Department of Business Administration
Major Issues in Supply Chain
Link between OM and SCM
upstream downstream
Material flow
Cash flow
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Link between OM and SCM
Internal External
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Supply Chain Operations Reference (SCOR) Model -
“Value Chain”
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SCM – Key Issues (source: Simchi-Levi, 2009)
ISSUE CONSIDERATIONS
• Warehouse locations and capacities
Network Planning • Plant locations and production levels
• Transportation flows between facilities to minimize cost and time
• How should inventory be managed?
Inventory Control
• Why does inventory fluctuate and what strategies minimize this?
• Impact of volume discount and revenue sharing
Supply Contracts
• Pricing strategies to reduce order-shipment variability
• Selection of distribution strategies (e.g., direct ship vs. cross-docking)
Distribution Strategies • How many cross-dock points are needed?
• Cost/Benefits of different strategies
• How can integration with partners be achieved?
• What level of integration is best?
Integration and Strategic Partnering
• What information and processes can be shared?
• What partnerships should be implemented and in which situations?
• What are our core supply chain capabilities and which are not?
Outsourcing & Procurement Strategies • Does our product design mandate different outsourcing approaches?
• Risk management
• How are inventory holding and transportation costs affected by product design?
Product Design • How does product design enable mass customization?
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Supply Chain Process Measures
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Type of Inventory in the Supply Chain
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What is inventory and inventory management?
❑ Examples
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What is inventory and inventory management?
▪ (Average) Flow rate: 11 patients per day (i.e., 1 patient per hour)
▪ (Average) Flow time: 2.076 hours
▪ (Average) Inventory: 2.076 patients (can be obtained if you calculate inventory at every moment
in time throughout the day!)
❑ What is the relationship between the three? Any other way to easily calculate
inventory level?
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What is inventory and inventory management?
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What is inventory and inventory management?
❑ Inventory
▪ Narrow view: Physical units within a process that are used for the production of goods or the
delivery of services—for example, gallons of milk at a dairy, syringes in a hospital, tons of coal at
a steel plant, etc.
❑ Inventory Management
▪ Definition: The planning and controlling of inventories to meet the demand while minimizing the
associated costs. To be more specific, the practice of deciding on the quantity, location, and type
of inventory in a process
▪ Objective: To have the right product in the right place at the right time so that the firm can
maximize its profit
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What is inventory and inventory management?
❑ Using RFID tags could be an effective solution to deal with data accuracyTon and Raman (2010)
▪ https://www.youtube.com/watch?v=i5dQxNA6TRM
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What is inventory and inventory management?
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What is inventory and inventory management?
❑ Classification of inventory
https://www.youtube.com/watch?v=UUZetKIR55Y
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Reasons for holding inventory
❑ Flow time
▪ It takes time to create products and to move them from where they are made to where they are
needed
▪ Think about Little’s law!
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Reasons for holding inventory
❑ Seasonality
▪ Create inventory when it is combined with rigid capacity
▪ Production smoothing strategy: a strategy for scheduling production such that the rate of output
remains relatively stable over time even though demand varies predictably over the same period.
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Reasons for holding inventory
❑ Batching
▪ In many instances, it is economical to process several flow units collectively at a given moment in
time to take advantage of scale economies in operations (cycle inventory)
▪ More specifically, caused by setup time and other types of fixed cost to initiate the process (e.g.,
ordering cost)
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Reasons for holding inventory
❑ Buffers
▪ Inventory between process steps can serve as buffers
• Allows management to operate steps independently from each other
• Can absorb variations in flow rates by acting as a source of supply for a downstream process step, even
if the previous operation itself might not be able to create this supply at the given moment in time
https://www.researchgate.net/figure/Structure-of-production-line-with-buffers_fig2_323210012
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Reasons for holding inventory
❑ Stochastic demand
▪ Different from predictable variation in demand
▪ Especially significant problem in retailing environments or at the finished goods level of
manufacturers
▪ Inventory can be seen as a way to hedge against the underlying demand uncertainty (safety
inventory)
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Reasons for holding inventory
❑ Price
▪ Respond to the (expected) change in the value of their inventory
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How to measure inventory?
❑ Intuitive measures
▪ In terms of flow units (The “ I ” in I = R x T):
• Number of wetsuits, patients, tons of wheat, semiconductor chips, etc.
• Useful when the focus is on one particular flow unit.
▪ In terms of dollars:
• The $ value of inventory (intuitive measure of a firm’s total inventory)
❑ Still, not really possible to know whether a certain amount of inventory is small
amount or a large amount…
▪ Think about start-up vs. well-established firm
▪ What about the measurement with time?
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How to measure inventory?
❑ In terms of days-of-supply:
▪ The average number of days a unit spends in the system
• Put differently, the number of days inventory would last at the average flow rate if no replenishments
arrive
• Corresponds to the “T” (Flow time) = I/R from Little’s law (I = R x T)
❑ Example
▪ Let’s say $65,000 in inventory would be depleted in 65 days
▪ Flow rate must be $1000/day from the Little’s law (65,000=1000*65)
▪ Instead of a unit, 1$ can be used…
T = 65days
R = $1000/day
I = $65,000
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How to measure inventory?
❑ In terms of turns:
▪ The number of times the average amount of inventory exits the system.
▪ A financial and operational metric used to measure how efficiently a company manages its
inventory or stock of goods.
▪ How quickly a company is able to sell and replace its inventory within a specific period.
▪ Inventory Turns = 1 / T = R / I
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How to measure inventory?
Note: Some companies use the term “Cost of sales” to mean COGS
❑ Inventory
▪ Reflecting inventory value on the financial statements at the end of fiscal year.
▪ We can’t be sure about what its average inventory was throughout the year, but we can take this
snapshot of its inventory as an estimate for its average inventory
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How to measure inventory?
Note: Some companies use the term “Cost of sales” to mean COGS
❑ Using them, we can calculate days-of-supply (and inventory turn) using the Little’s
law
▪ Days-of-supply: inventory/flow rate = ($3,036 million)/(11,359 million/year) = 97 days. This
suggest that 97 days to translate a dollar investment into a dollar investment of revenues
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Inventory Turns and Inventory Costs
❑ Using physical units as flow units is probably the most intuitive way to measure inventory.
❑ Working with physical units is not necessarily the best method for obtaining an aggregate
measure of inventory across different products. In such applications, inventory is often
measured in some monetary unit.
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