Supply Chain Management: Arun Arora

BA ZG621/MM ZG621/MBA ZG621 /POM ZG621
Supply Chain Management

Lecture-CS 3 09th February, 2020 (Sunday)
BITS Pilani
Pilani Campus Arun Arora
Content Structure
Today’s Lecture
Lecture No Topic Chapter No.
CS-1 Understanding the supply chain 1
CS-2 Understanding the supply chain 1
CS-2 Supply chain performance: Achieving strategic fit and scope 2
CS-3 Supply chain drivers and metrics 3
CS-4 Designing distribution networks and applications to online sales 4
CS-4 Network design in the supply chain 5
CS-5 Designing global supply chain networks 6
CS-5 Demand forecasting in a supply chain 7
CS-6 Aggregate planning in supply chain 8
CS-6 Sales and operations planning 9
CS-7 Managing Economics of Scale in a Supply Chain: Cycle inventory 11
CS-8 Managing uncertainty in a supply chain: Safety inventory 12
CS-8 Determining Optimum level of Product availability 13
CS-9 Transportation in a supply chain 14
CS-10 Sourcing decisions in a supply chain 15
CS-11 Pricing and revenue management in a supply chain 16
CS-11 Coordination in supply Chain 10
BA ZG621/ MM ZG621/ MBA ZG621 /POM ZG621/ QM ZG621, SCM -09/02/2020 . Lecture -3 BITS Pilani, Pilani Campus
Topics
 Drivers of supply chain performance.
 Role of each driver in

 the supply chain strategy, and
 the competitive strategy.
 Key metrics of each driver.
Learning Objectives
3.1 Identify the major drivers of supply chain performance.

3.2 Role of facilities on supply chain performance.
3.3 Role of inventory on supply chain performance.
3.4 Role of transportation on supply chain performance.
3.5 Role of information on supply chain performance.
3.6 Role of sourcing on supply chain performance.
3.7 Role of pricing on supply chain performance.
BITS Pilani
Pilani Campus
Drivers of Supply Chain performance

Measuring Supply Chain performance
Measuring
Performance
Financial Operational
Operational performance measurement
Drivers of Supply Chain performance
• Physical locations where the product is stored
Facilities (warehouses), assembled or fabricated (factories), or
sold (retailers).
Inventory • Raw materials, work in process, and finished

goods.
Transportatio • . Moving the goods or inventory from one facility to

n another Logistical
• Data and analysis concerning the facilities, inventory, Cross-

Information transportation, costs, prices, and customers. functional
• Who will perform a particular supply chain activity-
Sourcing production, assembly, storage, sales, etc. (suppliers,
warehouse companies, transport companies, retailers).
Pricing • How much a firm will charge for the goods and services .
Framework for Supply Chain Decisions
Logistical
Cross-functional
-Interactions determine overall supply chain

performance
Summary of Learning Objective 1
 The major drivers of supply chain performance are facilities,

inventory, transportation, information, sourcing, and pricing.
 Each driver affects the balance between responsiveness and
efficiency and the resulting strategic fit.
 Thus, it is important for supply chain designers to structure the
six drivers appropriately to achieve strategic fit.
BITS Pilani
Pilani Campus
Role of Facilities in the supply chain strategy

and the competitive strategy
Facilities
 Where goods are physically

produced, assembled, stored or
sold
Petroleum
 Production-Refineries
 Storage- At seaports, outskirts of cities
 Sale - Petrol pumps
Automobiles
Toyota plants worldwide
 Production and assembly plants-
factories
 Storage – warehouses, factories
 Sale - dealers
Facilities
Role in the supply chain

– Production sites and storage sites
– Increase responsiveness by increasing the number of
facilities, making them more flexible, or increasing
capacity
- Role in the competitive strategy
 Economies of scale (efficiency priority)
 larger number of smaller facilities (responsiveness priority)
Facilities
-Tradeoffs between facility, inventory, and
transportation costs
 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 but decreases inventory costs and response time
Components of Facilities decisions
 Location and number of facilities

 Closeness to customers, raw materials, other facilities and
infrastructure , centralization (efficiency) vs. decentralization
(responsiveness)
 Capacity (Flexibility vs efficiency )
 Capacity
 Rigid or Flexible- product mix
 Operations methodology
 Product or Process focussed; Warehousing: Storage or cross
docking
Facilities
• Components of facilities decisions

– Capability
 Flexible, dedicated, or a combination of the two
 Product focus or a functional focus
– Location
 Where a company will locate its facilities
 Centralize for economies of scale, decentralize for
responsiveness
 Consider macroeconomic factors, quality of workers, cost of
workers and facility, availability of infrastructure, proximity
to customers, location of other facilities, tax effects
Facilities
– Capacity
 A facility’s capacity to perform its intended function or
functions
 Excess capacity – responsive, costly
 Little excess capacity – more efficient, less responsive
– Demand Allocation
 Markets each facility will serve
 Revisited as conditions change
Facilities
Facility-Related Metrics
 Capacity
 Utilization
 Processing/setup/down/idle time
 Quality losses
 Production cost per unit
 Theoretical flow/cycle time of production
 Actual average flow/cycle time
 Product variety
 Average production batch size
 Production service level
Trade-off: Responsiveness and
Efficiency
Larger number Higher Lower

Higher cost
of facilities means investments efficiency
Distances are shorter
Transportation times
are shorter
More responsive
The major facility related decisions include identifying the

number of facilities, the extent of flexibility, the level of capacity,
and the markets served by each facility.
Increasing the number of facilities, their flexibility, or their
excess capacity increases responsiveness but hurts efficiency.
BITS Pilani
Pilani Campus
Role of Inventory in the supply chain strategy

and the competitive strategy
Inventory
Supply Sales
Types of Inventory
 Raw materials
 Work-In-Progress (WIP)
 Finished goods
Finished goods
 Spare parts inventory
 Pipeline inventory
Mismatch between supply and demand changes inventory

 Supply > Sales Inventory up
 Supply < Sales Inventory down
 Supply = Sales No change in inventory
Inventory
Role in the Supply Chain

– Mismatch between supply and demand
• Supply > Sales Inventory up
• Supply < Sales Inventory down
• Supply = Sales No change in inventory
– Exploit economies of scale
– Reduce costs
– Improve product availability
 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 are almost always necessary.
Inventory
Overall Trade-Off
– 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
Little’s law/formula
throughput rate, 100 units/day
I=D*T
I - inventory (units)
D - throughput rate (units/week) 5,000 units T = 5,000/100
= 50 days
T - flow time (weeks)
Inventory and throughput rate (sales rate) affect flow time.
 Little’s formula resembles the formula,

Distance (km) = Speed (km/hr) * Time (hr)
Components of Inventory Decisions
Cycle Inventory
– Average amount of inventory used to satisfy demand between
supplier shipments
– Function of lot size decisions
– Cost of ordering(production) and cost of holding inventory
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
• Level of Product Availability
– The fraction of demand that is served on time from product
held in inventory
– Trade off between customer service and cost
Components of Inventory decisions
• Cycle inventory
 Due to mismatch between batch size of
procurement, production, shipment
• Safety inventory
 To deal with uncertainty in sales and supply
• Seasonal inventory
 Results from natural mismatch in supply and sales
• Sourcing
 Location and capacity of vendors’ facilities
Trade-off: Responsiveness and Efficiency
Higher
Higher inventory Lower
working Higher costs
means capital
efficiency
Fewer stock-outs
Higher availability
More responsive
• Inventory-Related Metrics
– C2C cycle time
– Average inventory
– Inventory turns
– Products with more than a specified number of days of
inventory
– Average replenishment batch size
– Average safety inventory
– Seasonal inventory
– Fill rate
– Fraction of time out of stock
– Obsolete inventory
Summary of Learning Objective
 The major inventory related decisions include identifying the

batch size, the safety inventory, the seasonal inventory, and the
level of product availability.
 Increasing the safety inventory and level of product

availability increases responsiveness but hurts efficiency.
 Increasing the batch size and seasonal inventory increases

holding costs but may decrease production, transportation, and
purchasing costs.
BITS Pilani
Pilani Campus
Role of Transportation in the supply chain

strategy and the competitive strategy
Components of Transportation decisions
 Design of transportation network
 Choice of transportation mode
Transportation
• Role in the Supply Chain

– Moves inventory between stages in the supply chain
– Affects responsiveness and efficiency
– Faster transportation allows greater responsiveness but lower
efficiency
– Also affects inventory and facilities
– Allows a firm to adjust the location of its facilities and
inventory to find the right balance between responsiveness
and efficiency
Transportation
• 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
Transportation
• Choice of transportation mode

 Air, truck, rail, sea, and pipeline
 Different speed, size of shipments, cost of shipping, and
flexibility
Transportation
– Transportation-Related Metrics
 Average inbound transportation cost
 Average income shipment size
 Average inbound transportation cost per shipment
 Average outbound transportation cost
 Average outbound shipment size
 Average outbound transportation cost per shipment
 Fraction transported by mode
Transportation
• 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
Transportation
Faster Transport Lower

Higher costs
means efficiency
Faster delivery
More responsive
Summary of Learning Objective
 The major transportation related decisions include designing

the transportation network and selecting the transportation
mode.
 Faster modes of transport are more expensive but can improve

responsiveness while helping decrease inventory and facility
costs.
Trade-off: Responsiveness and Efficiency
Faster Transport Lower

Higher costs
means efficiency
Faster delivery
More responsive
BITS Pilani
Pilani Campus
Role of Cross-functional drivers in the supply

chain strategy and the competitive strategy
Supply chain driver-Information
 Information is produced on:

 Order status
 Inventory status- plants, warehouses
 Production plans
 Capacities- machines, plants, warehouses
 Information is required for production scheduling, vehicle

routing, placing orders, making shipments, changing
capacities (outsourcing/part-time hiring)
 The connection between the various stages in the supply

chain – allows coordination between stages.
 Crucial to daily operation of each stage in a supply chain –

e.g., production scheduling, inventory levels.
 More Timely Information reduces variations and forecast

errors.
 Reduces the Bullwhip effect.
 Allows supply chain to become more efficient and more

responsive at the same time (reduces the need for a trade-
off).
Components of Information Decisions

 Push vs Pull
 Push: made to stock - MRP
 Pull: made to order - demand chain information in
supply chain
 Coordination and Information sharing
 Enabling technologies- ERP, SCM software, RFID,EDI ,Internet
 Sales and Operations Planning
 Forecasting and aggregate planning
 Pricing and Revenue management
Information

– Improve the utilization of supply chain assets and the
coordination of supply chain flows to increase responsiveness
and reduce cost
– Information is a key driver that can be used to provide higher
responsiveness while simultaneously improving efficiency
Information
• Role in the Competitive Strategy

– Improves visibility of transactions and coordination of
decisions across the supply chain
– Right information can help a supply chain better meet
customer needs at lower cost
– More information increases complexity and cost of both
infrastructure and analysis exponentially while marginal
value diminishes
– Share the minimum amount of information required to
achieve coordination
• Demand Planning
– Best estimate of future demand
– Include estimation of forecast error
• Coordination and Information Sharing
– Supply chain coordination, all stages of a supply chain
work toward the objective of maximizing total supply chain
profitability based on shared information
– Critical for success
• Sales and Operations Planning

– The process of creating an overall supply plan (production
and inventories) to meet the anticipated level of demand
(sales)
– Can be used to plan supply chain needs and project revenues
and profits
• Information-Related Metrics
– Forecast horizon
– Frequency of update
– Forecast error
– Variance from plan
– Ratio of demand variability to order variability
 The major information related decisions include coming up

with a demand plan as well as a sales & operations plan that
optimally matches supply and demand.
 It is important that information is shared across the supply
chain to ensure that plans at different stages are coordinated.
 Key information-related metrics are forecast horizon, forecast
error, variance from plan, and ratio of demand variability to
order variability.
Sourcing

– Set of business processes required to purchase goods and
services
– Will tasks be performed by a source internal to the company
or a third party
Sourcing
• 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
Supply chain driver- Sourcing
Components of Sourcing decisions
 In-house or outsource
 Supplier selection
 Procurement
Components of Sourcing Decisions
• In-House or Outsource
– Perform a task in-house or outsource it to a third party
– Outsource if it raises the supply chain surplus more than the
firm can on its own
– Keep function in-house if the third party cannot increase the
supply chain surplus or if the outsourcing risk is significant
• Supplier Selection
– Number of suppliers, criteria for evaluation and selection
• Procurement
– Obtain goods and service within a supply chain
– Goal is to decrease total cost of ownership and increase
supply chain surplus
• Sourcing-Related Metrics
– Days payable outstanding
– Average purchase price
– Range of purchase price
– Average purchase quantity
– Supply quality
– Supply lead time
– Percentage of on-time deliveries
– Supplier reliability
The major sourcing related decisions include deciding whether an

activity will be insourced or outsourced, identifying key factors
in supplier selection, and selecting the supplier port- folio.
Pricing

– Pricing determines the amount to charge customers for goods
and services
– Affects the supply chain level of responsiveness required and
the demand profile the supply chain attempts to serve
– Pricing strategies can be used to match demand and supply
– Objective should be to increase firm profit
Components of Pricing decisions
Components of Pricing decisions
 Pricing and economics of scale
 Everyday Low pricing vs. High-Low pricing
 Fixed price vs. Menu pricing
Components of Pricing Decisions
• Pricing and Economies of Scale

– The provider of the activity must decide how to price it
appropriately to reflect 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
• 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
The major pricing related decisions include deciding whether the

firm will offer quantity discounts, whether it will offer everyday
low pricing or prices that vary over time, and whether it will offer
a fixed price or a menu of prices that vary along some dimension
such as response time.
BITS Pilani
Pilani Campus
Supply chain Key metrics

Facility related metrics
Metric Example
Capacity 100 cars/day, 200 MT/month, 50K kg/week,

warehouse space 70K sft…
Utilisation 60%, 80%....
Processing/setup/down/idle time 80+10+7+3=100%
Production cost/unit 5 Rs/kg, 5 Rs/unit, 500 Rs/batch….
Quality losses 2%, 5%…
Theoretical flow or cycle time of production 24 minutes...
Actual average flow time or cycle time 28 minutes...
Flow time efficiency 24/26*100% (from above)
Product variety 4 models with 20 variants- cars, toothpastes
Volume contributed by top 20% SKUs and 20%, 50%, 80% …
customers
Average production batch size 500 parts, 200 kg, 1,000 litre …
Production service level 70%, 80%...
Inventory related metrics
Metric Example
Financial
Cash-to-cash cycle, days 60 days, 90 days…
Average inventory, Rs Rs 50 crores, 20 days of consumption…
Obsolete inventory, Rs Rs 5 crores…
Average safety inventory, Rs Rs 5 crores…
Seasonal inventory, Rs Rs 5 crores…
Operational
Inventory turns 3, 4… (Annual Sales, Rs/ Average inventory, Rs)
Products with specified no of days of inventory 5 products with more than 20 days of inventory…
Average replenishment batch size Full truckload, 70% truckload, 25K litre tanker…
Fill rate 95% of the orders were fulfilled from stocks…
Fraction of times out-of-stock 2% of the times when the product was demanded
but it was not available in the stock
Transportation related metrics
Metric Example
Operational
Average incoming and outbound shipment size 30% truckload of steel,
6 cars
Fraction transported by mode Truck 90%, Train 10%
Financial
Average inbound and outbound transport cost Rs 5 Cr & Rs 12 Cr
for a customer
Average inbound and outbound transportation Rs 20K and Rs 30K
cost per shipment
Information related metrics
Metric Example
Forecast horizon 2 months, 3 months…
Frequency of update 10 days, 15 days…
Forecast error 10%, 20%...
Seasonal factors 1.7, 3.0…
(average demand in the
season/average demand in a year)
Variance from plan 20%, 30%...
Ratio of demand variability 0.8, 1.0, 1.2...
to order variability
Sourcing related metrics
Metric Example
Financial
Days payable outstanding 20 days, 90 days…
Average purchase price Rs 30,000/tonne…
Range of purchase price Rs 10-35K/tonne…
Operational
Average purchase quantity 2,000 order, 5 MT/order…
Supply quality 95%...
Supply lead time 15 days…
Percentage of on-time deliveries 70%...
Supplier reliability 60%...
Pricing related metrics
Metric Example
Financial
Profit margin 7% of revenue...
Incremental fixed cost per order Rs 800…
Incremental variable cost per order Rs 1,000…
Average sales price Rs 40/packet…
Range of sale price Rs 30-90/packet…
Operational
Days sales outstanding 40 days…
Average order size 3,000 packets…
Range of periodic sales 20,000 to 50,000 packets/week…
Pricing related metrics
Metric Example
Financial
Profit margin 7% of revenue...
Incremental fixed cost per order Rs 800…
Incremental variable cost per order Rs 1,000…
Average sales price Rs 40/packet…
Range of sale price Rs 30-90/packet…
Operational
Days sales outstanding 40 days…
Average order size 3,000 packets…
Range of periodic sales 20,000 to 50,000 packets/week…
Obstacles to Achieving Strategic Fit
 Increasing variety of products
 Decreasing product life cycles
 Increasingly demanding customers
 Fragmentation of supply chain ownership
 Globalization
 Difficulty executing new strategies
Major Obstacles to Achieving Strategic Fit
• Multiple owners / incentives in a supply chain
Local optimization and lack of global fit
• Increasing product variety / shrinking life cycles /

customer fragmentation
Increasing implied uncertainty
Trade-offs within each driver are
summarized
in the table:
Driver More Responsive More Efficient
Facilities Multiple Plants Single Plant
Flexible Plants Dedicated Plant
Inventory Higher Inventory Lower Inventory
Transportation Higher Speed Lower Speed
Information Accurate Less Accurate
Real Time Transmission Batched Transmission
Sourcing Responsive supplier Efficient supplier
Pricing Differential Pricing Everyday Low Pricing
BITS Pilani
Pilani Campus
Next Lecture- Go through the pre-recorded Lecture
Chapter-4 Designing distribution network and application to online sale

Chapter-5 Network design in supply chain
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BA ZG621/MM ZG621/MBA ZG621 /POM ZG621

Supply Chain Management

 Drivers of supply chain performance.

 Role of each driver in

 Key metrics of each driver.

3.1 Identify the major drivers of supply chain performance.

Drivers of Supply Chain performance

Inventory • Raw materials, work in process, and finished

Transportatio • . Moving the goods or inventory from one facility to

• Data and analysis concerning the facilities, inventory, Cross-

-Interactions determine overall supply chain

 The major drivers of supply chain performance are facilities,

Role of Facilities in the supply chain strategy

 Where goods are physically

Role in the supply chain

 Location and number of facilities

• Components of facilities decisions

Larger number Higher Lower

Distances are shorter

The major facility related decisions include identifying the

Role of Inventory in the supply chain strategy

Mismatch between supply and demand changes inventory

Role in the Supply Chain

throughput rate, 100 units/day

Inventory and throughput rate (sales rate) affect flow time.

 Little’s formula resembles the formula,

 The major inventory related decisions include identifying the

 Increasing the safety inventory and level of product

 Increasing the batch size and seasonal inventory increases

Role of Transportation in the supply chain

 Design of transportation network

 Choice of transportation mode

• Role in the Supply Chain

• Components of Transportation Decisions

• Choice of transportation mode

• Overall Trade-off: Responsiveness Versus Efficiency

Faster Transport Lower

 The major transportation related decisions include designing

 Faster modes of transport are more expensive but can improve

Faster Transport Lower

Role of Cross-functional drivers in the supply

 Information is produced on:

 Information is required for production scheduling, vehicle

 The connection between the various stages in the supply

 Crucial to daily operation of each stage in a supply chain –

 More Timely Information reduces variations and forecast

 Reduces the Bullwhip effect.

 Allows supply chain to become more efficient and more

Components of Information Decisions

• Role in the Supply Chain

• Role in the Competitive Strategy

• Sales and Operations Planning

 The major information related decisions include coming up

• Role in the Supply Chain

• Role in the Competitive Strategy

Components of Sourcing decisions

The major sourcing related decisions include deciding whether an

• Role in the Supply Chain