Supply Chain Management Lets Take Four Products

Introduction
 Apples
Let’s Discuss about their
 Zinc/ Copper Supply Chain

 Laptop Assembly

 Footballs

What is a Supply Chain? Supply Chain Management

 Introduction
 The objective of a supply chain
 Supply Chains Supply Chain Processes

 All facilities, functions, and activities associated with

flow and transformation of goods and services from raw
materials to customer, as well as the associated
information flows
 An integrated group of processes to “source,” “make,”
and “deliver” products
 All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)

A Generic Supply Chain

Sources: Regional Field Customers,
plants Warehouses: Warehouses: demand
vendors stocking stocking centers
ports points points sinks

Supply

Inventory

Purchase Inventory
Supply Chain Illustration Transportation
 Traditional View: Logistics in the
Manufacturing Firm Logistics V/s Supply Chain Management

Profit 4% Profit
Logistics
Cost
Logistics Cost 21%
Marketing
Key message here is that logistics
Cost

Marketing Cost 27%

costs are a significant fraction of the
total48%
Manufacturing Cost value of a product.
Manufacturing
Cost

The problem here is that this a purely cost based view of the supply chain and
drives a firm to simply reducing logistics costs. This is an incomplete picture.

Logistics is the flow's management of products, services and information
from the origin point (suppliers) to the end (final customer). It involves
the management of four basic sub-systems: supply, production support,
distribution and returns.
Nowadays, the logistics needs to be totally integrated, with intense
information sharing among its sub-systems to achieve its mission,
which is: delivery the right product, with appropriate quality, at minimal
cost, in the right place, satisfying the customers.
SCM is a broader concept, it involves the logistics management of the
processes carried out within all members in supply chain and also, the
relationships management with suppliers, logistics providers, clients
and final customers, aiming partnerships or strategic alliances, in order to
enable the intense information sharing and also resources (physical,
monetary, knowledge) sharing.
Nowadays the companies do not compete with other companies, but
one supply chain competes with other supply chains. So, the
companies involved in a specific supply chain are managed as a single
entity, not as separated ones.
 Supply Chain Management: The
Magnitude in the Traditional View
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:
The True Magnitude
Compaq estimates it lost $.5 billion to $1 billion in sales in a particular
year because laptops were not available when and where needed
When the 1 gig processor was introduced by AMD, the price of the 800
mb processor dropped by 30%
P&G estimates it saved retail customers $65 million by collaboration
resulting in a better match of supply and demand

Supply Chain
Supply Chain Management (SCM) Uncertainty and Inventory
Managing flow of information through supply chain in order to One goal in SCM: Factors that contribute to
attain the level of synchronization that will make it more – respond to uncertainty in uncertainty
responsive to customer needs while lowering costs customer demand without – inaccurate demand forecasting
Keys to effective SCM creating costly excess – long variable lead times
inventory
– information – late deliveries
– communication
Negative effects of – incomplete shipments
uncertainty
– cooperation – product changes
– lateness
– trust – batch ordering
– incomplete orders
– price fluctuations and discounts
Inventory – inflated orders
– insurance against supply chain
uncertainty
 A picture is better than 1000 words!
Bullwhip Effect
Occurs when slight demand variability is magnified as information - A supply chain consists of

moves back upstream Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

- achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits

Supply
Chain
for
Denim
Jeans

Supply Chain Management

 Detergent supply chain:

P&G or other Third Albertson’s Customer wants

Supply manufacturer party DC Supermarket detergent

Chain
for Plastic cup XYZ Co.
Chemical
manufacturer
Denim Producer Packaging
(e.g. Oil Company)
Jeans
(cont.) Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)

Flows in a Supply Chain The Objective of a Supply Chain

Maximize overall value created
Information
Supply chain value: difference between what the final product is worth to
the customer and the effort the supply chain expends in filling the
Product customer’s request
Customer Value is correlated to supply chain profitability (difference between
Funds revenue generated from the customer and the overall cost across the
supply chain)
 The Objective of a Supply Chain The Objective of a Supply Chain
Example: Dell receives $2000 from a customer for a computer (revenue)
Supply chain incurs costs (information, storage, transportation,
components, assembly, etc.)
Difference between $2000 and the sum of all of these costs is the supply
chain profit
Supply chain profitability is total profit to be shared across all stages of
the supply chain
Supply chain success should be measured by total supply chain
• Sources of supply chain cost: flows of information, products, or funds profitability, not profits at an individual stage
between stages of the supply chain
• Supply chain management is the management of flows between and
among supply chain stages to maximize total supply chain profitability

Order variability in supply chains . Bullwhip effect in supply chains.

Decision Phases of a Supply Chain

Supply chain strategy or design
Supply chain planning
Supply chain operation

Ideal amplification in supply chains

 Supply Chain Strategy or Design Supply Chain Planning
Decisions about the structure of the supply chain and what processes each Definition of a set of policies that govern short-term operations
stage will perform Fixed by the supply configuration from previous phase
Strategic supply chain decisions
Starts with a forecast of demand in the coming year
– 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 Supply Chain Operation

Planning decisions: Time horizon is weekly or daily
– Which markets will be supplied from which locations Decisions regarding individual customer orders
– Planned buildup of inventories Supply chain configuration is fixed and operating policies are determined
– Subcontracting, backup locations Goal is to implement the operating policies as effectively as possible
– Inventory policies Allocate orders to inventory or production, set order due dates, generate
– Timing and size of market promotions pick lists at a warehouse, allocate an order to a particular shipment, set
Must consider in planning decisions demand uncertainty, exchange rates, delivery schedules, place replenishment orders
competition over the time horizon Much less uncertainty (short time horizon)

Process View of a Supply Chain
Cycle view: processes in a supply chain are divided into a series of
cycles, each performed at the interfaces between two successive supply
chain stages
Push/Pull view: processes in a supply chain are divided into two
categories depending on whether they are executed in response to a
customer order (pull) or in anticipation of a customer order (push)
Cyclic View of Supply Chains
• The supply chain is a series of interconnected cycles with each
cycle at the interface of two successive stages in the supply
chain.
• Each cycle involves the customer stage placing an order and
receiving it after it has been supplied by the supplier stage.
• One difference is in size of order. Second difference is in
predictability of orders - orders in the procurement cycle are
predictable once manufacturing planning has been done.
• It is a transaction level view and clearly defines each process
and its owner.

Cyclic View of a Supply Chain

Cycle View of
Supply Chains  A cycle view of supply chain defines the process and owners of each
Any cycle
process. It specifies the role/ responsibilities and desired outcome of each
0. Customer arrival
Cycle view clearly process
defines processes 1. Customer triggers an order
involved and the owners 2. Supplier fulfils the order
of each process.
3. Customer receives the Supplier markets  Buyer Places order  Supplier receives order
Specifies the roles and
responsibilities of each order and pays  Supplier supplies the order Buyer receives the order Buyer
member and the desired returns reverse order
outcome of each
process. (reverse supply chain/ closed loop supply chain)
 Assignment
Reading And Research Assignment: Read About SCOR Model. Visit
Supply Chain Council website for the same.

 Divide into four groups and submit the SOURCE MAKE

DELIVER Model for: 1th Group: Explain about SCOR Model; 2st group:
Made to Stock Company; 3rd group Made to Order, 4td group Assemble
to order and Engineer to order scenario. Pick any product of your choice
and develop SCOR model for all four scenario’s.

Push vs Pull System

What instigates the movement of the work in the system?

In Push systems, work release is based on downstream demand forecasts

– Keeps inventory to meet actual demand
– Acts proactively
» e.g. Making generic job application resumes today

In Pull systems, work release is based on actual demand or the actual
status of the downstream customers
– May cause long delivery lead times
– Acts reactively
» e.g. Making a specific resume for a company after talking to the recruiter
 Push/Pull View of
Push/Pull View of Supply Chains Supply Chain Processes
Procurement, Customer Order Supply chain processes fall into one of two categories
Manufacturing and Cycle
Replenishment cycles depending on the timing of their execution relative to customer
demand
Pull: execution is initiated in response to a customer order
(reactive)
PUSH PROCESSES PULL PROCESSES
Push: execution is initiated in anticipation of customer orders
(speculative)
Customer Push/pull boundary separates push processes from pull
Order Arrives processes
Push-Pull boundary

Push/Pull Boundaries In A Supply Chain. Push/Pull View of

Supply Chain Processes
 Supply chain processes fall into push or pull depending on the times of execution and
customer demand. In the pull situation, execution is initiated in response to a customer order. Useful in considering strategic decisions relating to supply chain design –
 The push/pull boundary separates push processes from pull processes. more global view of how supply chain processes relate to customer orders
Can combine the push/pull and cycle views
– Dell
The relative proportion of push and pull processes can have an impact on
supply chain performance
 What is Supply Chain Management? What is Supply Chain Management?

Managing supply chain flows and assets, to maximize supply chain Managing supply chain flows and assets, to maximize supply chain
surplus surplus

What is supply chain surplus? What is supply chain surplus?

Supply chain surplus = Customer Value - Supply Chain Cost

SYSTEMS PERSPECTIVE OF SCM

 Difficulties/ Challenges
Metrics- How to measure a system?
– Trade-off of Breath/ Length v/s Validity of metrics-importance of metrics to each
player in supply chain as you do not own the complete supply chain!!
– Outcome Based Logistics- Perfect order, Perfect Shelf-depends on what is your
product/ service you deliver
Politics and Power of Players- Who’ll wins?
– Local grocery shops V/s Mega-Stores- who is imp for suppliers?
– Mega Retailers vs. Mega CPG Manufactures- who will have more clout?
Visibility- What and how quickly to be seen?
– Data are stored separately
– All parties do not have equal access to data
– Massive data ≠ Shared & accessible information

Difficulties/ Challenges
Uncertainty Supply Chain…….
– Variable Demand of product (shorter PLC)
– Variable Manufacturing yield SPAN THE GLOBE AND CANNOT BE MANAGED AS
– Unreliable sourcing of raw material AN ISOLATED FUCNTION: IT’S A BRIDGE AS WELL
– Inconsistent transit lead times AS A SHOCK ABSORBER
Increased complexity- gets harder!!
– Exploding number of SKU’s
– Higher and divergent customer demands  Critical to any organization’s operations, and
– New & merging channels (Omni-Channel-variety of ordering/ payment modes!!) Connect functions, divisions, and business units within a firm as
Global operations- Doesn’t get easy!! well as across firms.
– Most firms source & sell across globe
– Multiple regions, time zones, languages, & cultures
 Fitting the SC to the customer or vice versa?

Understand the customer Wishes

Understand the Capabilities of your SC

Match the Wishes with the Capabilities

Challenge: How to meet extensive Wishes with limited Capabilities?

Achieving Strategic Fit How is Strategic Fit Achieved?

Strategic fit: Step 1: Understanding the customer and supply chain uncertainty
– Consistency between customer priorities of competitive strategy and supply chain Step 2: Understanding the supply chain
capabilities specified by the supply chain strategy Step 3: Achieving strategic fit
– Competitive and supply chain strategies have the same 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
Example of strategic fit -- Dell
 Understanding the Customer and Understanding the Customer and
Supply Chain Uncertainty Supply Chain Uncertainty
Identify the needs of the customer segment being served Overall attribute of customer demand
Quantity of product needed in each lot Demand uncertainty: uncertainty of customer demand for a product
Response time customers will tolerate Implied demand uncertainty: resulting uncertainty for the supply chain
Variety of products needed given the portion of the demand the supply chain must handle and
Service level required attributes the customer desires
Price of the product
Desired rate of innovation in the product

Achieving Strategic Fit:

Understanding the Customer and
Consistent SCM and Competitive
Supply Chain Uncertainty
strategies
Implied demand uncertainty also related to customer needs and product Fit SC to the customer
attributes
Understanding the Customer
– Range of demand/ quantity, pizza hut stable
First step to strategic fit is to understand customers by mapping their – Production lot size, seasonal products
Implied (Demand)
demand on the implied uncertainty spectrum – Response time, organ transplantation
Uncertainty for SC
– Service level/ channels , product availability
Implied trouble
– Product variety
for SC
– Innovation
– Accommodating poor quality
 Impact of Customer Needs on Implied Contributors to Implied Demand
Demand Uncertainty Uncertainty
Customer Need Causes implied demand uncertainty to
increase because …
Commodities Customized products
Range of quantity required increases Wider range of quantity required implies Detergent High Fashion Clothing
greater variance in demand Long lead time steel Emergency steel,
Lead time decreases Less time to react to orders for maintenance/replacement

Variety of products required increases Demand per product becomes more Efficiency Customer Need Responsiveness
disaggregated Low
Implied Demand Uncertainty High
Number of channels through which product Total customer demand is now disaggregated
Short lead times, product variety,
may be acquired increases over more channels
distribution channel variety, high rate of innovation and
Rate of innovation increases New products tend to have more uncertain high customer service levels all increase
demand the Implied Demand Uncertainty
Required service level increases Firm now has to handle unusual surges in Reading Assignment: Efficient v/s Responsive SC
demand

Step 2: Understanding the

Levels of Implied Demand Uncertainty Supply Chain
How does the firm best meet demand?
Dimension describing the supply chain is supply chain responsiveness
Supply chain responsiveness -- ability to
– respond to wide ranges of quantities demanded: capacity
– meet short lead times
– handle a large variety of products
– build highly innovative products
The Implied Uncertainty: Supply & Demand – meet a very high service level ??
– Handle supply uncertainty
Frequent breakdowns; unpredictable & low yield; poor quality; limited &
inflexible supply chain capacity; evolving production process (factors of
supply source capability) all lead to increased supply uncertainty.
 Step 2: Understanding the Understanding the Supply Chain: Cost-
Supply Chain Responsiveness Efficient Frontier
Responsiveness
There is a cost to achieving responsiveness
Supply chain efficiency: cost of making and delivering the product to the High
customer
Increasing responsiveness results in higher costs that lowers efficiency
Second step to achieving strategic fit is to map the supply chain on the
responsiveness spectrum

Low
Cost
High Low

Responsiveness Spectrum Step 3: Achieving Strategic Fit

Step is to ensure that what the supply chain does well is consistent with
target customer’s needs
Highly Somewhat Somewhat Highly All functions in the value chain must support the competitive strategy to
efficient efficient responsive responsive
achieve strategic fit
Two key points
Integrated An Apparel Most FedEx
steel mill Company automotive – there is no right supply chain strategy independent of competitive strategy
production – there is a right supply chain strategy for a given competitive strategy- consider
case by case basis

GIVE SOME MORE EXAMPLES !!!

 Achieving Strategic Fit Shown on the
Step 3: Achieving Strategic Fit Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiveness
spectrum

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum

Comparison of Efficient and

Responsive Supply Chains
Primary goal
Product design strategy
Pricing strategy
Mfg strategy
Inventory strategy
Lead time strategy
Supplier selection strategy
Transportation strategy
Other Issues Affecting Strategic Fit
Efficient Responsive
Multiple products and customer segments
Lowest cost Quick response
Product life cycle
Min product cost Modularity to allow
postponement Globalization & Competitive changes over time
Lower margins Higher margins
High utilization Capacity flexibility
Minimize inventory Buffer inventory
Reduce but not at expense Aggressively reduce even
of greater cost if costs are significant
Cost and low quality Speed, flexibility, quality
Greater reliance on low Greater reliance on
cost modes responsive (fast) modes
 Multiple Products and Customer Segments
Firms sell different products to different customer segments (with
different implied demand uncertainty)
The supply chain has to be able to balance efficiency and responsiveness
given its portfolio of products and customer segments
Two approaches:
– Different supply chains
– Tailor supply chain to best meet the needs of each product’s demand:
» High responsiveness: separate shipping mode/ separate line (responsive line of
production)
» High efficiency: unit load concept/ efficient production mode
Product Life Cycle
The demand characteristics of a product and the needs of a customer
segment change as a product goes through its life cycle
Supply chain strategy must evolve throughout the life cycle
Early: uncertain demand, high margins (time is important), product
availability is most important, cost is secondary
Late: predictable demand, lower margins, price is important
As the product goes through the life cycle, the supply chain
changes from one emphasizing responsiveness to one emphasizing
efficiency

Different Scopes of Strategic Fit Across a

Expanding Strategic Scope Supply Chain
Scope of strategic fit
– The functions and stages within a supply chain that devise an integrated strategy
with a shared objective
– One extreme: each function at each stage develops its own strategy
– Other extreme: all functions in all stages devise a strategy jointly
Five categories:
– Intracompany intraoperation scope: Minimum Local Cost View
– Intracompany intrafunctional scope: Minimize Functional Cost
– Intracompany interfunctional scope: Maximize Company profit
– Intercompany interfunctional scope: Maximize Supply Chain Surplus
 Obstacles to Achieving
Maximize SCM Surplus Strategic Fit
Speed a key driver of SCM success is hindered due to boundaries Increasing variety of products
between various stages of SCM Decreasing product life cycles
Leads to enhanced inventory cost at various places due to no synergy of Increasingly demanding customers
demand management Fragmentation of supply chain ownership
Globalization
Hence intercompany interfunctional scope of SCM is needed for have Difficulty executing new strategies
maximum SCM surplus.
Each stage need to share their demand information with other players in
specific SC leading to increased size of the pie as well as SC surplus.

Drivers of Supply Chain Performance Drivers of Supply Chain Performance

Facilities
– places where inventory is stored, assembled, or fabricated
– Role; location; capacity, flexibility
– production sites and storage sites
Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
 Information
– data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– potentially the biggest driver of supply chain performance
 Sourcing
– Responsibility of production; storage; transportation or MIS
– functions a firm performs and functions that are outsourced
 Pricing
– Price associated with goods and services provided by a firm to the supply chain
– Responsive Prices v/s Efficient Prices
 A Framework for Considerations for Supply Chain Drivers-
Structuring Drivers Important

WAL-MART Facilities
Efficiency v/s Responsiveness Role in the supply chain
Efficient – the “where” of the supply chain
– Inventory: cross docking; well planned DC; – manufacturing or storage (warehouses)
– Transportation Role in the competitive strategy
– Location: centrally Located DC’s – economies of scale (efficiency priority)
– Sourcing: Large orders; economies of scale – larger number of smaller facilities (responsiveness priority)
Responsiveness: Components of facilities decisions
– Information
– Cross Docking
No drastic price fluctuations hence demand is stable.
 Components of Facilities Decisions
Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
Capacity (flexibility (variety) versus efficiency (dedicated))
Manufacturing methodology (product focused versus process focused)
Warehousing methodology (SKU storage, job lot storage, cross-docking)
Overall trade-off: Responsiveness versus efficiency
Inventory: Role in the Supply Chain
Inventory exists because of a mismatch between supply and demand-
Intentional- economies of scale/ anticipation/ economical
Source of cost and influence on responsiveness- might be good in some
cases but might lead to obsolescence/ change of customer preference
leading to markdown. Being lean is good but might lead to lost sales but
good in case of changing market demand.
Inventory: Role in the Supply Chain
Inventory exists because of a mismatch between supply and demand
Source of cost and influence on responsiveness
Impact on
– material flow time: time elapsed between when material enters the supply chain to
when it exits the supply chain
– Throughput: rate at which sales to end consumers occur
» I = DT (Little’s Law)
» I = inventory; D = throughput; T = flow time
» Inventory and throughput flow time are “synonymous” in a supply chain as throughput is
determined as per customers demand.
Inventory: Role in Competitive Strategy
If responsiveness is a strategic competitive priority, a firm can locate
larger amounts of inventory closer to customers
If cost is more important, inventory can be reduced to make the firm more
efficient
Trade-off
 Transportation: Role in
Components of Inventory Decisions the Supply Chain
 Cycle inventory Moves the product between stages in the supply chain
– Average amount of inventory used to satisfy demand between shipments
Impact on responsiveness and efficiency
– Depends on lot size/ economies of scale!! Holding v/s ordering cost!!
 Safety inventory Faster transportation allows greater responsiveness but lower efficiency
– inventory held in case demand exceeds expectations Also affects inventory and facilities
– 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
 Level of product availability
 Overall trade-off: Responsiveness versus efficiency

Transportation: Components of
Role in the Competitive Strategy Transportation Decisions
If responsiveness is a strategic competitive priority, then faster Mode of transportation:
transportation modes can provide greater responsiveness to customers – air, truck, rail, ship, pipeline, electronic transportation
who are willing to pay for it – vary in cost, speed, size of shipment, flexibility
Can also use slower transportation modes for customers whose priority is Route and network selection
price (cost) – route: path along which a product is shipped
Can also consider both inventory and transportation to find the right – network: collection of locations and routes
balance In-house or outsource
Overall trade-off: Responsiveness versus efficiency
 Information: Role in Information:
the Supply Chain Role in the Competitive Strategy
The connection between the various stages in the supply chain – allows Allows supply chain to become more efficient and more responsive at the
coordination between stages same time (reduces the need for a trade-off) HOW?? Better information
Crucial to daily operation of each stage in a supply chain – e.g., flow, meeting customer needs at lesser costs saving at all points of the
production scheduling, inventory levels supply chain, better visibility of transactions.
Use of Information technology- EVPI!!
What information is most valuable?

Sourcing: Role in
Components of Information Decisions the Supply Chain
Push (MRP) versus pull (demand information transmitted quickly Set of business processes required to purchase goods and services in a
throughout the supply chain) supply chain
Coordination and information sharing Supplier selection, single vs. multiple suppliers, contract negotiation
Forecasting and aggregate planning 3PL; Distribution; Sourcing (Manufacturing; complete/ partial) from
Enabling technologies other countries/ sources!
– EDI: Electronic Data Interchange SEARCH FOR YOUR CORE COMPETENCY!!
– Internet
– ERP systems
– Supply Chain Management software
– RFID: Radio Frequency Identification
Overall trade-off: Responsiveness versus efficiency
 Sourcing:
Role in the Competitive Strategy Components of Sourcing Decisions
Sourcing decisions are crucial because they affect the level of efficiency In-house versus outsource decisions
and responsiveness in a supply chain Supplier evaluation and selection
In-house vs. outsource decisions- improving efficiency and Procurement process
responsiveness Overall trade-off: Increase the supply chain profits

Make or Buy Decisions

WHY????
– Capacity not free

Make –
–
Demand is variable
Cheaper to buy
– R & D costs
Or – No experience or expertise

Buy????
 The following factors generally influence
Make or Buy Decisions make-or-buy decisions
Costs  Relative economics  Overall degree of technical, cost and schedule
 In-house capacity currently available risk
Capacity  Confidentiality of the process
 The need for control or secrecy
Quality  Advantages of access to supplier knowledge  What will be the contractor's entire
Speed and skill responsibility?
 An opportunity to maintenance a robust  Urgency of the deliverables
Reliability: Delivery and Quality supplier  Contractors' capacity to perform
Expertise  The relative risks involved  And/or extent of subcontracting
 Capital investment versus expense for tax  How long have we got for execution?
purposes  Affects the pace of the work
 Degree of scope definition available  Extent of price competition
 Affects uncertainty and risk  Contractors' accounting system
 Type or complexity of the requirements

Strategic Decisions
Number of manufacturing facilities: Automobiles v/s Petrochemicals?
Centralized v/s Decentralized: Unit Cost of Product!!
Pricing: Role in
the Supply Chain
Pricing determines the amount to charge customers in a supply chain
Pricing strategies can be used to match demand and supply

Economies of Scale v/s Economies of Scope

Service level v/s Cost of inventory

Inbound transportation v/s outbound transportation costs!!

 Pricing:
Role in the Competitive Strategy Components of Pricing Decisions
Firms can utilize optimal pricing strategies to improve efficiency and Pricing and economies of scale
responsiveness – Changeover
Low price and low product availability; vary prices by response times – Load size
– Quantity discounts
Everyday low pricing versus high-low pricing
Big Bazar/ Wal-Mart v/s Movie tickets
Fixed price versus menu pricing
Overall trade-off: Increase the firm profits

For Reading Assignment

Metrics related to each SC Driver.

Designing Distribution Networks and
Applications to E-Business
DISTRIBUTION
NAME SOME TYPES!!!
Semester Assignment
Identify an organization of your choice and prepare the Supply Chain
process of that organization. SCA methods/ techniques used by the
organization should be discussed.
The pre and post application of SCA can be added.
Brief about the organization
A case about the organization with some data to support the study.
DISTRIBUTION
NAME SOME TYPES!!!
– Wal-Mart
– Dell
– HP
– Direct to Customer –P&G
– Storage/ warehouse/ distributors
– Channels
– E-distribution –No intermediaries
 The Role of Distribution Factors Influencing
in the Supply Chain Distribution Network Design
 Evaluation on two basis:
Distribution: the steps taken to move and store a product from the – Customer needs that are met
supplier stage to the customer stage in a supply chain – Cost of meeting customer needs
 Elements of customer service influenced by network structure:
Distribution directly affects cost and the customer experience and – Response time
therefore drives profitability – Product variety
– Product availability
Choice of distribution network can achieve supply chain objectives from – Customer experience: core as well as add ones like ambience, response……
– Time to market
low cost to high responsiveness – Order visibility
Examples: Wal-Mart, Dell, Proctor & Gamble (direct/ distributor both), – Returnability
 Supply chain costs affected by network structure:
Grainger (fast moving/ slow moving are separated) – Inventories
– Transportation
– Facilities and handling
– Information

Inventory Costs and Number

Service and Number of Facilities of Facilities

Number of Inventory
Facilities Costs

Number of facilities
Response Time
 Transportation Costs and Facility Costs and Number
Number of Facilities of Facilities

Transportation Facility
Costs Costs

• Inbound
Transportation
Cost
• Outbound
Transportation
Costs-normally
higher than
inbou
Number of facilities Number of facilities

Variation in Logistics Costs and Response Design Options for a

Time with Number of Facilities
Response Time
Total Logistics Costs=
Sum of inventory, transportation
and facility cost
Distribution Network
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Customer Pickup
Retail Storage with Customer Pickup

Selecting a Distribution Network Design

Number of Facilities
 Manufacturer Storage with
Direct Shipping
Centralization case, High outbound transportation cost;
low demand with unpredictable demand, high value
items. Hence customer ready to wait and accept partial
shipment. More customization; build to order, Low
inventory costs (only in case of aggregation); Need
for retailer only for order collection; More variety/
choices available.
Manufacturer Storage with Direct
Shipping In-Transit Merge Network
Retailer
Merge combines orders from different suppliers;
customer receives a single delivery, in transit merge
reduces the cost relative to drop shipping.
Too many sources creates confusion.
Low/ medium demand &High value, customization
postponed; high uncertainty items, increased
coordination
Performance Characteristics
 Elements of customer service influenced by network structure:
Manufacturer – Response time: Long response time
– Product variety: Higher variety
– Product availability: Higher level of availability
Retailer – Customer experience: Good if single shipment from single manufacturer
– Time to market: fast as product available just after production
Drop Shipping
– Order visibility: More difficult
– Returnability: Expensive and difficult
Customers
 Supply chain costs affected by network structure:
– Inventories: Lower cost (aggregation)
Product Flow – Transportation: Higher cost (distance and disaggregation)
– Facilities and handling: Lower facility costs
Information Flow
– Information: More investment
Performance Characteristics
Factories  Elements of customer service influenced by network structure:
– Response time: Marginally higher than drop shipping
– Product variety: Similar to drop shipping.
– Product availability: Similar to drop shipping.
In-Transit Merge by – Customer experience: Better than drop shipping as only single delivery
Carrier:
Response time little higher than – Time to market: Similar to drop shipping
direct shipping – Order visibility: Similar to drop shipping.
– Return-ability: Expensive and difficult
Customers  Supply chain costs affected by network structure:
– Inventories: Similar as drop shipping Lower cost (aggregation)
– Transportation: Somewhat lower
Product Flow
– Facilities and handling: Handling costs are higher
Information Flow
– Information: More investment than drop shopping
Suitable only in case of few suppliers giving higher demand to carrier
 Distributor Storage with
Carrier Delivery Performance Characteristics
 Elements of customer service influenced by network structure:
Factories – Response time: Faster than manufacture storage
– Product variety: Lower than manu. storg
– Product availability: Higher cost for same level of availability
Warehouse Storage by – Customer experience: Better
Distributor/Retailer – Time to market: Higher than manu. storg
– Order visibility: Easier
– Return-ability: Easier
 Supply chain costs affected by network structure:
Customers – Inventories: Higher
Higher inventory at distributor but lesser than retail network;
Transportation Cost Saving; Product Flow – Transportation: Lower
Medium to fast moving items Information Flow – Facilities and handling: Somewhat higher
Outbound orders to a single customer can be bundled together
Real time visibility between customer and warehouse needed – Information: Simper than manu. Storg.
Response time better due to nearness to customer;
easy aggregation

Distributor Storage with

Last Mile Delivery Performance Characteristics
Factories  Elements of customer service influenced by network structure:
– Response time: Fast/ quick
– Product variety: lesser
– Product availability: expensive
Distributor/Retailer
– Customer experience: Good
Warehouse: (Auto spare
parts stores/ dealers) – Time to market: Slightly higher
– Order visibility: easier
Customers – Return-ability: easier
 Supply chain costs affected by network structure:
Delivery at customers home; needs more outlets/ – Inventories: Higher than distributor storage
warehouses as delivery place needs to be nearer to Product Flow
customers place; requires higher inventory; – Transportation: Very high due to minimal scale economy
Used for fast moving products, with disaggregation Information Flow – Facilities and handling: Higher
not leading to significant increase in cost.
Cost might be lesser for dense populated demand – Information: Similar to distributor storage
zones. Suitable for bulk purchase.
 Manufacturer or Distributor Storage with
Customer Pickup
Cross Dock DC
Retailer
Transportation costs are lesser that package
carrier, aggregation for each pick site possible,
processing costs are higher, better for fast
moving items
Performance Characteristics
Factories  Elements of customer service influenced by network structure:
– Response time: Similar to package delivery, same day possible
– Product variety: Similar to previous
– Product availability: similar
– Customer experience: Lower then prior due to lack of home delivery
– Time to market: same as manu. storage
– Order visibility: Difficult
– Return-ability: Easier
Pickup Sites  Supply chain costs affected by network structure:
– Inventories: Can match any option
Customers – Transportation: Lower
– Facilities and handling: If new facilities made higher cost if existing used cost lower. Handling cost
Customer Flow higher
Product Flow
– Information: more investment
Information Flow

Comparative Performance of Delivery

Retail store with customer pick up Network Designs
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
 Elements of customer service influenced by network structure: with Customer
Pickup
Storage with Direct
Shipping
Storage with In-
Transit Merge
with Package
Carrier Delivery
storage with last
mile delivery
storage with pickup

– Response time: Immediate/ same day pickup possible Response Time 1 4 4 3 2 4

– Product variety: lowest
Product Variety
– Product availability: expensive 4 1 1 2 3 1
Product Availability/
– Customer experience: customer dependent Time to Market 4 1 1 2 3 1
– Time to market: Highest amongst all Customer Experience Varies from
4 3 2 1 5
1-5
– Order visibility: Trivial for instore but important for online 5
Order Visibility 1 4 3 2 6
– Return-ability: Easier
Returnability 1 5 5 4 3 2
 Supply chain costs affected by network structure:
– Inventories: Highest Inventory 4 1 1 2 3 1
– Transportation: Lowest Transportation 1 4 3 2 5 1
– Facilities and handling: Higher than other options. Handling cost higher
Facility & Handling 6 1 2 3 4 5
– Information: some investment for online and phone orders
Information 1 4 4 3 2 5
1 the strongest and 6 the weakest
 Performance of Delivery Networks for Different
Product/Customer Characteristics E-Business and the Distribution Network
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor storage Manufacturer
with Storage with Storage with In- with Package Carrier with last mile delivery storage with
Customer
Pickup
Direct Shipping Transit Merge Delivery pickup
Impact of E-Business on Customer Service
High demand product
+2 -2 -1 0 +1 -1 Impact of E-Business on Cost
Medium demand product
+1 -1 0 +1 0 0
Low demand product
-1 +1 0 +1 -1 +1
Very low demand product
-2 +2 +1 0 -2 +1
Many product sources
+1 -1 -1 +2 +1 0
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

+2 most suitable; +1 somewhat suitable; 0- Neutral; -1: somewhat unsuitable; -2: very unsuitable

Impact of E-Business on Customer Service Impact of E-Business on Cost

Response time: High for manufactured products/ Low for information goods Inventory
Product variety: High
Product Availability: Improved
Facilities
Customer experience- product visualization after customization; increased now Transportation
due to AI; ML Information
Time to market
Order Visibility
Returnability-increased reverse flow
Direct Sales to Customers-increased revenue!!
Flexible Pricing, Product Portfolio, and Promotions
Efficient Funds Transfer
 Reading Assignment Distribution Networks in Practice
DELL-PC Industry The ownership structure of the distribution network can have as big as an
impact as the type of distribution network
AMAZON-BOOKS The choice of a distribution network has very long-term consequences
Consider whether an exclusive distribution strategy is advantageous
PEAPOD-GROCERIES Product, price, commoditization, and criticality have an impact on the
type of distribution system preferred by customers
NETFLIX

Network Design Decisions The Cost-Response Time Frontier

Facility role
Facility location High Local FG
Mix

Capacity allocation Regional FG

Local WIP
Market and supply allocation Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time High
 Cost Buildup as a Function of Facilities
Framework for Network Design Decisions
Total Costs
Phase I – Supply Chain Strategy
Phase II – Regional Facility Configuration
Cost of Operations

Percent Service
Level Within Phase III – Desirable Sites
Promised Time
Phase IV – Location Choices
Facilities
Inventory
Transportation
Labor

Number of Facilities

Some factors influencing the location of sites

Market Requirements
Suitability of Site: Manufacturing/ Service
Resource Required
costs service level
Land and
facilities
Suitability Image of the location: Important for Services
of site
investment

OPERATIONS
RESOURCES
Location of
sites
MARKET
REQUIREMENTS
Service Level:
– Type of service: Emergency; High contact/ Low contact facility
Resource Image of – Speed; Dependability: Customer/ Supplier
availability location

Community
factors
 Operations Requirements Factors in Heavy Manufacturing Location
Land and facilities investment:  Construction costs
– Infrastructure support needed  Land costs
Resource Costs:  Raw material and finished goods shipment modes
– Labour  Proximity to raw materials
– Energy
 Utilities
– Transportation
 Labor availability
Community Factors: social, political and economic environment

Factors in Light Industry Location Factors in Retail Location

Transportation costs  Proximity to customers
Proximity to markets  Location is everything
Frequency of delivery required by customer
Land costs
Easily accessible geographic region
Education and training capabilities
 A Framework for Locational
Network Design Decisions Break-Even Analysis
Competitive STRATEGY
PHASE I
GLOBAL COMPETITION
 Method of cost-volume analysis used for industrial locations
Supply Chain
INTERNAL CONSTRAINTS
Capital, growth strategy,
Strategy TARIFFS AND TAX  Three steps in the method
INCENTIVES
existing network
1.Determine fixed and variable costs for each location
PRODUCTION TECHNOLOGIES REGIONAL DEMAND
Cost, economies of Scale/Scope
impact, support required, flexibility
PHASE II
Regional Facility
Size, growth, homogeneity,
local specifications
2.Plot the cost for each location
COMPETITIVE
Configuration
POLITICAL, EXCHANGE
3.Select location with lowest total cost for expected production
ENVIRONMENT
RATE AND DEMAND RISK volume
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time

FACTOR COSTS PHASE IV LOGISTICS COSTS

Labor, materials, site specific Location Choices Transport, inventory, coordination

Locational Break-Even Analysis Example Locational Break-Even Analysis

Example
A company as to make a choice between three locations with the –
fixed costs and variable costs as given in the table below. The $180,000 –
–
company plans to sell the produce at $120 per unit. Find the best $160,000 –
$150,000 –
location for the unit, if the expected demand for the product is 2000 –
units. Fixed Variable Total
$130,000 –
–

Annual cost
$110,000 –
City Cost Cost Cost –
–
Akron $30,000 $75 $180,000 $80,000 –
–
Bowling Green $60,000 $45 $150,000 $60,000 –
–
Chicago $110,000 $25 $160,000 $30,000 –
–
Akron
Bowling Green
Chicago
lowest lowest cost
– lowest cost
cost
$10,000 –
Total Cost = Fixed Cost + (Variable Cost x Volume) |
–
| | | | | |

0 500 1,000 1,500 2,000 2,500 3,000

Volume
 Center-of-Gravity Technique Grid-Map Coordinates
 Locate facility at center of geographic area y n n
 xiWi  yiWi
 Based on weight and distance traveled establish grid-map of area 2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
 Identify coordinates and weights shipped for each location
 Wi  Wi
i=1 i=1
1 (x1, y1), W1
y1
where,
x, y = coordinates of new facility at
3 (x3, y3), W3 center of gravity
y3 xi, yi = coordinates of existing facility i
Wi = annual weight shipped from
facility i

x1 x2 x3 x

Load-Distance Technique Load-Distance Calculations

Compute (Load x Distance) for each site n
Choose site with lowest (Load x Distance) LD = ld i i

Distance can be actual or straight-line i=1

where,
LD = load-distance value
li = load expressed as a weight, number of trips or units
being shipped from proposed site and location i
di = distance between proposed site and location i
di (straight line) = √ (xi - x)2 + (yi - y)2

where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility
di (rectilinear distance) = (xi – x) + (yi – y)
 Gravity Methods for Location Gravity Methods for Location
Ton Mile-Center Solution 1. For each supply source or market n; evaluate dn as defined in the
– x,y: Warehouse Coordinates previous equation
– xn, yn : Coordinates of delivery 2. Obtain a new location (x’, y’) for the facility, where the values are
location n
obtained as per previous equation.
– dn : Distance to delivery
location n 3. If the new location (x’, y’) is almost the same as (x, y) stop. Otherwise,
– Dn : Annual tonnage to delivery set (x, y) = (x’, y’) and go to step 1.
location n
– Fn : Cost of shipping one unit
per mile/ km
Min

 The Burger Doodle restaurant chain purchases ingredients from four different food Center-of-Gravity Technique: Example (cont.)
suppliers. The company wants to construct a new central distribution centre to process and
package the ingredients before shipping them to their various restaurants. The supplies
transport ingredient items in 40-foot truck trailers, each with a capacity of 38,000 lb. The n
locations of four suppliers A, B, C and D and the annual number of trailer loads that will be  xW
i i
transported to the distribution centre are shown in the following table: i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
x= = 75 + 105 + 135 + 60 = 238
n
 W
i
i=1
A B C D

X – coordinate 200 100 250 500 n

 yW
Y – coordinate 200 500 600 300 i i
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
Annual no. of trailer loads 75 105 135 60 y= = 75 + 105 + 135 + 60 = 444
n
that will be transported  W
i
i=1

» Using centre of gravity method, determine a possible location for the distribution
centre
Center-of-Gravity Technique: Example (cont.) Load-Distance Technique
y A B C D Compute (Load x Distance) for each site
700 x 200 100 250 500 Choose site with lowest (Load x Distance)
C y 200 500 600 300
600
B
(135) Wt 75 105 135 60 Distance can be actual or straight-line
500 (105)
Center of gravity (238, 444)
400
Miles

D
300 (60)
A
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles

Load-Distance Calculations The management of Burger doodle was not convinced with
location obtained in Part (a). Hence they further analysed and
n identified three new sites. Now, they want to evaluate these three
LD = ld i i different sites it has identified for its new distribution centre
relative to the four suppliers A,B,C and D mentioned above. The
i=1
where, coordinates of the new sites under consideration are as follows
LD = load-distance value
Site 1 Site 2 Site 3
li = load expressed as a weight, number of trips or units
being shipped from proposed site and location i
di = distance between proposed site and location i X - coordinate 360 420 250
di (straight line) = √ (xi - x)2 + (yi - y)2
Y – coordinate 180 450 400
where,
(x,y) = coordinates of proposed site
(xi , yi) = coordinates of existing facility
di (rectilinear distance) = (xi – x) + (yi – y)
 LOAD-DISTANCE: EXAMPLE LOAD-DISTANCE: EXAMPLE
Potential Sites Suppliers Potential Sites Suppliers
Site X Y A B C D Site X Y A B C D
1 360 180 X 200 100 250 500 1 360 180 X 200 100 250 500
2 420 450 Y 200 500 600 300 2 420 450 Y 200 500 600 300
3 250 400 Wt 75 105 135 60 3 250 400 Wt 75 105 135 60

Compute distance from each site to each supplier

Site 1 dA = (xA - x1)2 + (yA - y1)2 = (200-360)2 + (200-180)2 = 161.2

dB = (xB - x1)2 + (yB - y1)2 = (100-360)2 + (500-180)2 = 412.3

dC = 434.2 dD = 184.4

Load-Distance: Example (cont.)

Site 2 dA = 333 dB = 323.9 dC = 226.7 dD = 170 A manufacturer of a certain industrial component is interested in locating a new
facility in a target market and would like to know the most appropriate place in the
Site 3 dA = 206.2 dB = 180.3 dC = 200 dD = 269.3
target market. There are four supply points: A, B, C and D in the locality that will
Compute load-distance provide key inputs to the new facility, which are located at the following coordinates:
(125, 550), (350, 400), (450, 125) and (700, 300) respectively. Similarly, the annual
n supply from these four points to the proposed facility is 200, 450, 175 and 150
LD =  ld i i
respectively.
Show them in a two dimensional grid and identify the location based on the centre of
gravity method. Unfortunately, the location identified from the above method is not
i=1
feasible. Hence to locate the new facility, the manufacturer has identified four
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063 possible alternative locations: 1, 2, 3, and 4. the coordinates for them are (300, 500),
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,789
(200, 500), (500, 350) and (400, 200) respectively. Represent the whole in a two-
dimensional grid and identify the best location for the proposed new facility using a
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555* suitable location decision method. Make necessary assumptions and highlight the same
* Choose site 3
 Coordinate
Sources/ $/Ton Mile Tons s
Markets Fn Dn xn yn
Buffalo 0.90 500 700 1200
Sources Memphis 0.95 300 250 600
St. Louis 0.85 700 225 825
Atlanta 1.50 225 600 500
Boston 1.50 150 1050 1200
Markets Jacksonville 1.50 250 800 300
Philadelphia 1.50 175 925 975
New York 1.50 300 1000 1080

Demand Allocation Model Locating Multiple Facilities

 Which market is served by 1. Find the desired number of locations and arbitrarily select an initial set
which plant?
 Which supply sources are from those available
used by a plant? 2. Assign each customer to its nearest facility
xij = Quantity shipped from
plant site i to customer j 3. Calculate the total cost, which is the sum of weights moved multiplied
n= number of factory locations by distances through which they are moved
m= number of market or
demand points 4. If the solution is not acceptable, change one of the locations and repeat
Dj=Annual demand from market the process from step 2, otherwise continue with step 5
j
5. Calculate the capacity needed by each facility and stop
Ki=capacity of factory I
Cij=cost of producing and
shipping one unit from
factory I to market j
 Eight areas are to be served by two depots. Limited access
means that only four areas are suitable for depot. The distances
between areas W(i) are given in the table. The company is Single Median Problem
willing to pay upto 800 units for distribution, with the
conditions that no depot should meet a total demand of more Calculate the minimum distance between nodes and put these in a
than 90 units. Find a suitable combination of two depot distance matrix
location.
Multiply each column, i, of this matrix by the demand in the town i.
Area A B C D Wi
A 0 6 20 7 10
Add all the terms in each row
B 6 0 12 15 20 The single median is identified by the row with the smallest sum.
C 20 12 0 4 15
D 7 15 4 0 30
E 12 8 10 11 5
F 22 12 17 27 25
G 30 24 32 6 10
H 6 5 9 11 20

10 Set Covering Algorithm

6
8 1. Calculate the minimum distance between nodes and put these in a distance matrix
6
2. create a coverage matrix. This is made up of zeros and ones with
1. Element=1 if the distance is less than the specified maximum
5 20 2. Element=0 if the the distance is more than the specified maximum
10
1 4 6
4 3. If there is one column with all zeros, stop. No feasible solution exists and the maximum allowed
distance must be increased or more potential locations added.
15
4. If any column has only a single “1” the row containing this “1” must receive a facility. Add the row to
3
2 the list of facilities and then eliminate the row and all column with “1” in this row from the matrix.
5. If any row is dominated by another (i.e. the entry is always ≤ the entries in another row) remove the
3 dominated row.
5 4 6. If any column dominates another column(i.e. the entry is always ≥ the entries in another column)
remove the dominating column.
10 7. Repeat step 4-6 until
30 2
3 5 1.
2.
The coverage becomes complete-optimal solution is found
No rows or columns are eliminated during a pass-obtain a solution by inspection.
 Models for Facility Location and Capacity
 The following table shows a matrix of travel times between Allocation
possible locations for ambulance stations and areas in the city.
Government policy suggests that ambulance stations must be at Phase II
most 30 minutes away from all population areas. Find the best – Capacitated Plant location model
location for achieving this: Phase III
– Gravity location models
Areas
A B C D E F G
possible locations

V 5 11 20 33 27 36 33
W 33 35 17 10 53 41 18
X 18 39 41 12 33 22 37
Y 13 6 43 25 38 33 20
Z 35 47 41 44 15 51 43

Network Optimization Models Plant Location with Multiple Sourcing

yi = 1 if plant is located at site i,
Allocating demand to production facilities 0 otherwise
Locating facilities and allocating capacity xij = Quantity shipped from
plant site i to customer j
n= number of factory locations
Key Costs:
m= number of market or
demand points (5.1)
• Fixed facility cost Dj=Annual demand from market
• Transportation cost j
• Production cost Ki=capacity of factory i (5.2)
• Inventory cost Cij=cost of producing and
• Coordination cost shipping one unit from
factory i to market j (5.3)
Which plants to establish? How to configure the network? fi = annualized fixed cost of
keeping plant “i”open
 Cost and Demand Data Excel Spreadsheet Area for Decision Variables

Constraints and Objective Function Capacitated Plant Location Model

 Invoking Solver
Some alternative scenarios to try

1. What if a plant must be built in Europe? In this case add the

constraint I16 ≥ 1 in Solver and rerun.
2. What if plants must be built in every market? In this case, we need to add
constraints I14:18 ≥ 1 in Solver and rerun.

Global Location Factors Regional Location Factors

 Raw material availability  Government stability Labor (availability, education, Modes and quality of
 Number and proximity of suppliers  Government regulations cost, and unions) transportation
 Transportation and distribution  Political and economic
system Proximity of customers Transportation costs
systems
 Labor cost and education Number of customers Community
 Economic stability and
 Available technology growth government Local
 Commercial travel
Construction/leasing costs
 Exchange rates Land cost business regulations
 Technical expertise
 Cross-border trade regulations  Culture Government services
 Group trade agreements  Climate (e.g., Chamber of
 Export import Commerce)
regulations, duties and
tariffs
 Regional Location Factors (cont.) Location Incentives
Business climate Infrastructure (e.g.,  Tax credits
Community services roads, water, sewers)  Relaxed government regulation
Incentive packages Quality of life
 Job training
Government regulations Taxes
 Infrastructure improvement
Environmental regulations Availability of sites
Financial services  Money
Raw material availability
Commercial travel Community
Climate inducements
Proximity of
suppliers
Education system

Plant Location with Multiple Sourcing

or Capacitated Plant Location Model
yi = 1 if plant is located at site i,
0 otherwise
xij = Quantity shipped from
plant site i to customer j Transportation in a Supply Chain
n= number of factory locations
m= number of market or
demand points (5.1)
Dj=Annual demand from market
j
Ki=capacity of factory i (5.2)
Cij=cost of producing and
shipping one unit from
factory i to market j (5.3)
fi = annualized fixed cost of
keeping plant “i”open
 Factors Affecting
Transportation Decisions Transportation Management
Carrier (party that moves or transports the product) Transportation happens to be the most fundamental part of logistic
– Vehicle-related cost management. Transport costs include all costs associated with movement
– Fixed operating cost of products from one location to another.
– Trip-related cost The average transport costs ranges from 5% to 6% of the recommended
Shipper (party that requires the movement of the product between two retail price of the product.
points in the supply chain)
– Transportation cost Transportation is the movement of products, materials and services from
– Inventory cost one area to another, both inbound and outbound.
– Facility cost

Transportation Management Modes of Transportation - Global Supply Chain

 Road (Trucks – Truck Load & Less than Truck Load)
1. Mode of transports
 Rail
2. Method of selection
3. Transportation costs  Air
4. Fleet sizing and configuration
 Package Carriers
5. Routing and scheduling
 Water

 Pipeline
 Road – TL & LTL
Road – TL & LTL You can either use your own vehicles, or a carrier. If you operate your own
vehicles, you will need to consider licenses, fuel costs, regulations, driver training
Road transport can be the most flexible option for your international business, and tax.
especially within the EU. The motorway network is good and crossing national
 Truckload shipping:
borders is usually quick and efficient.
– large amounts of homogeneous cargo; minimizes travel time
 Advantages: – Fill an entire semi-trailer or intermodal container;
– relatively low cost – Lower fixed cost; Economies of scale viz a viz distance travelled
– extensive road networks – A truckload carrier is a trucking company that generally contracts an entire trailer-load to a
single customer
– Schedule & track
– consignments can be secure and private  Less than truckload (LTL) shipping:
– The transportation of relatively small freight; consolidation is the key
– Door to door delivery
– The alternatives to LTL carriers are parcel carriers or full truckload carriers.
 Disadvantages: – Parcel carriers usually handle small packages and freight that can be broken down into units
– Long distances overland can take more time less than 150 pounds (68 kg)

– Traffic delays and breakdowns  Different types of carrier, include:

– Couriers
– Risk of goods being damaged
– Hauliers
– Toll charges are high in some countries
– Freight forwarders
– Different road and traffic regulations

Rails
Rails
Rail transport is a cost-effective and efficient way to move your
goods. These are the conditions under which rail transport is undertaken,
 Advantages: including:
1) Fuel Efficiency
2) Manpower efficiency
 Classification of dangerous goods
3) Land-use efficiency  Dangerous goods lists and any special provisions or exemptions
4) Speed
5) Safety  Testing and use of packaging, intermediate bulk containers, large packaging
and tanks
• Disadvantages:
1) Cost & Maintenance
 Procedures relating to the consignment
2) Inconvenience  Conditions concerning the conditions of carriage, loading, unloading and
3) Inflexible handling
4) Expensive than road transport (total)
5) Mechanical failure or Industrial an disrupt services
6) Adding to costs and affecting delivery schedules
 Air Water
Air transport offers numerous advantages for international trade,
depending on the requirements of the organization. If your business needs to transport large quantities but there is no
pressure to deliver quickly, shipping by sea may be suitable.
 Advantages:
– Speed and Frequency  Advantages:
– Less Packing Required – Ship can carry large volumes at low costs
– Shipping containers can also be used for further
– High levels of security for sensitive items transportation by road or rail
– Wide range of goods – Dominant in global trade (autos, grain, apparel,
etc.)
 Disadvantages:  Disadvantages:
– Air transport can involve higher costs than other options, and is not suitable for – Limited to certain geographic areas
all goods – Routes and timetables are usually inflexible
– Flights are subject to delay or cancellation – Tracking your goods’ progress is difficult
– Pay Taxes at each airport you use – To pay port duties and taxes
– Further transportation overland
– Fuel and currency surcharges will be added to freight costs
– Basic freight rates are subject to fuel and
– Further transportation may be needed currency surcharges

Pipeline
Pipeline transport is the transportation of goods through a pipe. Liquids and
gases are transported in pipelines and any chemically stable substance can be sent
Pipeline
through a pipeline.
Uses of Pipeline:
 Advantages:
– They are ideally suited to transport the liquids
– Sewage, slurry, water
and gases. – Beer pipelines
– Pipelines can be laid through difficult terrains as – Transporting crude petroleum and refined petroleum product including fuels
well as under water.
– It involves very low energy consumption. – Oil, natural gas, and biofuels
– It needs very little maintenance. – Pneumatic tubes using compressed air can be used to transport solid capsules
– Pipelines arc safe, accident-free and
environmental friendly.
 Disadvantages: Types of Pipeline:
– It is not flexible, i.e., it can be used only for a – Gathering pipelines
few fixed points.
– Transportation pipelines
– Its capacity cannot be increased once it is laid.
– It is difficult to make security arrangements for – Distribution pipelines
pipelines.
– Underground pipelines cannot be easily repaired
and detection of leakage is also difficult.
 Intermodal
 Use of more than one mode of transportation for
move a shipment to its destination
 Most common example: rail/truck
 Also water/rail/truck or water/truck
 Grown considerably with increased use of
containers
 Increased global trade has also increased use of
intermodal transportation
 More convenient for shippers (one entity provides
the complete service)
 Key issue involves the exchange of information to
facilitate transfer between different transport modes
Package Carriers
 Companies like FedEx, UPS, USPS, that
carry small packages ranging from letters
to shipments of about 150 pounds
 Expensive
 Rapid and reliable delivery
 Small and time-sensitive shipments
 Preferred mode for e-businesses (e.g.,
Amazon, Dell, McMaster-Carr)
 Consolidation of shipments (especially
important for package carriers that use air
as a primary method of transport)

Selection of transport
Roles of transportation - Global Supply Chain
 International trade is becoming a bigger part of the world's economic activity.

 Any supply chains success is closely linked to the appropriate use of transportation.

 Supply chain also use responsive transportation to centralize inventories and operate
with fewer facilities
Factors (and Parties) Affecting Transportation
Decisions Design Options for a Transportation Network
 What do you want to distribute?  Direct shipping network
– Size and weight will affect the cost.

 How quickly does the product need to reach its  Direct shipping with milk runs
destination?
– This will affect which type of delivery service you use and the cost  All shipments via central DC
- sending goods by air is quicker but significantly more expensive
than by sea.
 Shipping via DC using milk runs
 Where do the goods need to go?
– For example, Europe has a large rail and inland waterway network,
but you may encounter problems if the destination is especially  Tailored network
remote.

Direct Shipment Network Direct Shipping with Milk Runs

Elimination of intermediate warehouses
Simple operation
Shipment decision is local
Decision on one shipment does not effect other shipments
Suitable when demand at buyers location is near
optimal replenishment lot sizes are close to TL
Single supplier to multiple retailers or multiple supplier to single retailers
It lowers the cost by consloidating shipments of multiple locations
Suitable when very frequent small deliveries are to be made on a regular
basis and either a set of suppliers or a set of retailers are in geographic
proximity
Toyotas JIT manufacturing system in Japan and US
 All Shipments via Central DC Shipping via DC using Milk Runs
Buyer divides locations by geographic region and a DC is built for each region When lot sizes to be delivered to each buyer are small
Supplier sends shipments to DC and buyer receives shipments from DC
DC stores inventory and also acts as an transfer location
Reduce outbound transp. cost by consolidating small shipments
It allows SC to have economies of scale for inbound side 7-11 , Japan crossdocks deliveries from its fresh food suppliers at its DCs
W.W. Grainger has its suppliers ship products to one of nine DCs which in turn and sends out milk runs to retail outlets
replenish their almost 400 branches
Cross Docking is suitable for products with large predictable demands and DCs
should be located at such a place that gives economies of scale in inbound and
outbound sides

Pros and Cons

Making Transportation Decisions in Practice
Network Structure Pros Cons
Direct shipping No intermediate warehouse High inv. Align transportation strategy with competitive strategy
Consider both in-house and outsourced transportation
Direct shipping with milk Lower transp. Cost for Inc. coordination
Design a transportation network that can handle e-commerce
runs small lots complexity
All shipments via central Lower inbound transp. cost Inc. inv. and handling cost Use technology to improve transportation performance
DC with inv. storage at DC Design flexibility into the transportation network
All shipments via central Very low inv, low transp Inc. coordination
DC with cross-dock cost complexity

Shipping via DC using milk Lower outbound transp. Further increase in

runs cost for small lots coordination complexity
 Trans. and Inv. Cost tradeoff:
Trade-offs in Transportation Design Choice of transportation mode
Transportation and inventory cost trade-off  Both planning & operational decision
– Choice of transportation mode  Cheaper transp. mode has long lead times and larger
minimum shipping requirements resulting in higher levels of
– Inventory aggregation inventory
Transportation cost and responsiveness trade-off  Vice versa is true

Inventory Aggregation: Inventory vs.

Choice of Transportation Mode Transportation Cost
A manager must account for inventory costs when selecting a mode of As a result of physical aggregation
transportation – Inventory costs decrease
A mode with higher transportation costs can be justified if it results in – Inbound transportation cost decreases
significantly lower inventories – Outbound transportation cost increases
Inventory aggregation decreases supply chain costs if the product has a
high value to weight ratio, high demand uncertainty, or customer orders
are large
Inventory aggregation may increase supply chain costs if the product has
a low value to weight ratio, low demand uncertainty, or customer orders
are small
 Trade-offs Between Transportation Cost and
Customer Responsiveness Trade Off
 Temporal aggregation is the process of combining orders
across time  All orders are shipped using LTL at transportation charge of $100+0.01x where x is
the number of pounds of material shipped on the truck. Currently the company ships
 Temporal aggregation reduces transportation cost because it
the material on the day it is received. Allowing for two days in transit, allows the
results in larger shipments and reduces variation in shipment
company to achieve response time of two days.
sizes
 The manager also wants to explore the customer response for four days response.
 However, temporal aggregation reduces customer
Identify the cost advantage of increasing the response time, IF ANY?
responsiveness
Conditions Favoring Aggregation/ Disaggregation
Aggregate Disaggregate
Transport Coat Low High
Demand Uncertainty High Low
Holding cost High Low
Customer Order size Large Small

Tailored Transportation Customer Density and distance

The use of different transportation networks and modes based on
customer and product characteristics
Factors affecting tailoring:
– Customer distance and density
– Customer size
– Product demand and value
 Demand and Value Role of IT in Transportation
The complexity of transportation decisions demands use of IT systems
IT software can assist in:
– Identification of optimal routes by minimizing costs subject to delivery constraints
– Optimal fleet utilization
– GPS applications

Making Transportation
Risk Management in Transportation Decisions in Practice
Three main risks to be considered in transportation are: Align transportation strategy with competitive strategy
– Risk that the shipment is delayed Consider both in-house and outsourced transportation
– Risk of disruptions
– Risk of hazardous material Design a transportation network that can handle
e-commerce
Risk mitigation strategies:
– Decrease the probability of disruptions Use technology to improve transportation performance
– Alternative routings Design flexibility into the transportation network
– In case of hazardous materials the use of modified containers, low-risk
transportation models, modification of physical and chemical properties can prove
to be effective
 Challenges
 Demographic trends
 Economic circumstances
 Connectivity of existing networks
 Environmental issues
 Existing transport infrastructure capacity
 Environmental issues
 Travel patterns and trip rates
 Air quality and noise pollution
 Socio-economic profile