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Week 1 Introduction to supply chain management (incl.

Learning objectives
1. How SCM contributes value within an organization
2. Understanding the Supply Chain Levers and their correlation ship to the
bottom line: The Analytical Fundamentals
3. Understanding the key issues and challenges of an
International Supply Chain
4. Classify the supply chain macro processes in a firm

What is supply chain management?

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

SCM takes into consideration every facility that has an impact on

cost and plays a role in make the product conform to customer
requirements: from supplier and manufacturing facilities trough
warehouses and distribution centers to retailers and stores.
The objective of SCM is to be efficient and cost-effective across the
entire system: total system wide costs, from transportation and
distribution to inventories of raw materials, work in process, and
finished goods, are to be minimized.
Because SCM revolves around efficient integration of suppliers,
manufacturers, warehouses, and stores, it encompasses the firms
activities at many levels, from strategic level trough tactical to the
operational level.

Definition of SCM is similar to the definition of logistic management

(Council of Logistic Management:) The process of planning, implementing
and controlling the efficient, cost effective flow and storage of rawmaterials, in-process inventory, finished goods, and related information
from point-of-origin to point-of-consumption for the purpose of conforming
to customer requirements

What makes SCM difficult?

1. It is challenging to design and operate a supply chain so that total
system wide costs are minimized, and system wide service levels
are maintained.

Global optimization is the process of finding the best system wide

2. Uncertainty is inherent in every supply chain: customer demand can
never be forecast exactly, trail times will never be certain and
machines and vehicles will break down.
Supply chain need to be designed to eliminate as much uncertainty
as possible and to deal effectively with the uncertainty that remains.
The development chain: is the set of activities and processes associated
with new product
introduction. It includes the product design phase, the associated
capabilities and knowledge that need to be developed internally, sourcing
decisions and production plans.
A variety of factors makes finding the best system wide, or globally
optimal integrated solution so difficult:
The supply chain is a complex network of facilities dispersed over a
large geography and in many cases, all over the globe.
Different facilities in the supply chain frequently have different,
conflicting objectives. Suppliers goals can be in direct conflict with
the manufactures desire for flexibility.
The supply chain is a dynamic system that involves over time.
System variations over time are also an important consideration.
e.g. time-varying demand and cost parameters make it difficult to
determine the most effective supply chain strategy.
Global optimization is made difficult because supply chains need to be
designed for, and operated in uncertain environments, thus creating
sometimes enormous risks to the organization? WHY?
1. Matching supply and demands is a major challenge
e.g. Boing Aircraft announced a write-down of $2,6 billion, due to
raw material shortages, internal and supplier parts shortages and
productivity inefficiencies
2. Inventory and back-orders levels fluctuate considerable
across the supply chain
3. Forecasting doesnt solve the problem
Forecast are always wrong[] it is impossible to predicts precise
demand for a specific item
4. Demand is not the only source of uncertainty
Delivery lead times, manufacturing yields, transportation time etc.
5. Recent trends such as lean manufacturing outsourcing, and
offshoring that focus on cost reduction increase risks
An important building block in effective supply chain strategies is strategic
partnerships between suppliers and buyers, partnerships that can help
both parties reduce their costs. At

the same time, many supply chain partners engage in information sharing
so that manufactures are able to use retailers up to date sales data to
better predict demand and
reduce lead times.
A number of approaches have been applied by industry to manage risk in
their supply chains:
Building redundancy into the supply chain so that if one portion fails,
the supply chain can still satisfy demand.
Using information to better sense and respond to disruptive events
Incorporating flexibility into supply contracts to better match supply
and demand
Improving supply chain processes by including risk assessment
Q: If firms have improved supply chain performance by focusing on
strategic partnering, using information sharing and technology, or by
applying risk mitigation strategies, what inhibits other firms from adopting
the same techniques to improve their supply chain performance?
1. The ability to match supply chain strategies with product
characteristics. There is a difference in fast clock speed products and
slow clock speed products.
2. The ability to replace traditional supply chain strategies, in which
each facility or party in the chain makes decisions with little regard
to their impact on other supply chain partners, by those that yield a
globally optimized supply chain.
3. The ability to effectively manage uncertainty and risk.

Key Issues in supply chain management (Called supply chain

decisions lecture 1 slide #21)

Strategic level: deals with decisions that have along-lasting effect

on the firm.
o Location and capacity of production/storage facilities
o Investment in Information System
o Modes of transportation
o Service Level Decisions

Tactical level: includes decisions that are frequently updated.

o Inventory build ups
o Back up plans for stock-out
o Short time planning

Operational level: refers to day-to-day decisions

o Individual Order Processing
o Invoice Generation

Discussion of key issues, questions and tradeoffs associated with different

decisions check p.12-15

Supply Chain Macro Processes

Supply chain processes discussed in the two views can be classified into
1. Customer Relationship Management (CRM): all processes
at the interface between the firm and its customers.
2. Internal Supply Chain Management (ISCM): all processes
that are internal to the firm.
3. Supplier Relationship Management (SRM): all processes
at the interface between the firm and its suppliers.

Key performances indicators (KPI) of a Supply Chain

Factors Shaping SCM

1. Consumer Demands: Responsiveness & Customization
2. Globalization: Emerging Economies like India, China, South
America; reduction in inter-nation income gap; new markets
3. Competition: Tough competition will spur supply chain innovation;
Big- Small will change to Slow -Fast(Agile); Profit zone will be
widened due to internet and small start ups can be big competitors
4. Information & Communication: Growth of Internet; Data
Explosion and powerful modeling tools & techniques for analysis;
knowledge management
5. Govt. Regulations: WTO; Trade and customs barriers to global
6. Environment factors like re-cycling, waste minimization, ecoefficiency will drive chain design

week 2 Supply Chain strategy (incl. CH6)

Supply chain strategies

Value Chain Strategies

Product Development
Specifies portfolio of new products
Marketing & Sales Strategy
Market segmentation, product positioning, pricing and
Supply Chain Strategy
Procurement, inbound logistics, manufacture/ operations,
distribution and follow up service
Value Chain ensures close relationship between Functional strategies
Competitive (business) Strategy
= Set of customer needs, a firm seeks to satisfy trough its products and
Delivery response, reliability


In Chapter 1, we observed that supply chain management revolves around

efficient integration of suppliers, manufacturers, warehouses and stores.
The challenge in supply chain integration is to coordinate activities across
the supply chain so that the enterprise can improve performance: reduce
cots, increase service level, reduce bullwhip effect, better utilize resources,
and effectively respond to changes in the market place.
A fully effective supply chain requires the integration of the front end of
the supply chain,
Customer demand, with the back end of the supply chain, the production
and manufacturing
Front end customer demand
Back end production and manufacturing

Push-Based supply chain

Push-based supply chain production and distribution decisions are
based on long-term forecasts.
Manufacturer based forecasts on orders received from retailers
warehouses. Therefore, it takes much longer for push-based supply
chain to react to the changing marketplace. Which leads to
o Inability to meet changing demand patterns
o Obsolescence of supply chain inventor as demand for certain
products disappear
Variability of orders received from retailers and warehouses is much larger
tan the variability in customer demand to the bullwhip effect.
Increase in variability leads to
Excessive inventories due to the need for large safety stock
Larger and more variable production batches
Unacceptable service levels
Product obsolescence (= undesirable/useless)
Bullwhip effect lead to inefficient resource utilization, because planning
and managing are much more difficult.

Pull-Based Supply Chain

Pull-Based Supply Chain production and distribution are demand driven
so that they are coordinated with true customer demand rather than
forecast demand.
In a pure pull system, the firm does not hold any inventory and only
responds to specific orders.
Pull systems are attractive because they lead to

A decrease in lead times achieved trough the ability to better

anticipate incoming orders from retailers
Decrease in inventory at the retailers since inventory levels at these
facilities increase with lead times
Decrease in variability in the system and faced by manufacturers,
due to lead-time reduction
Decreased inventory at the manufacturer due to reduction in

Pros and Cons of Pull-based Supply chain

In a pull-based supply chain, we typically see a significant reduction in
system inventory level, enhanced ability to manage resources and a
reduction in systems costs when compared with push-based system
Pull-based systems are difficult to implement when lead times are so long
that it is impractical to react to demand information. It is also more
difficult to take advantage of economies of scale in manufacturing and
transportation since systems are not planned ahead in time

Push-Pull Strategy

In a push-pull strategy some stages of the supply chain are operated in

push-based, while remaining stages employ a pull-bases strategy.
Push strategy is applied to that portion of the SC where demand
uncertainty is small
Push strategy is applied to the portion of SC time line where uncertainty
is high.
Push-pull boundary is the interface between push-based stages and the
pull-based stages.
The push-pull boundary is located somewhere along the SC time line and
indicates the point in time when the firms switches from managing the SC
using push strategy, to managing it using a pull=strategy.

Supply chain time line the time that elapses between the procurement
of raw material (=beginning of time line), and the delivery of order to the
customer (=end of time line)
Postponement/Delayed differentiation in product design: Firms
designs the product and manufacturing process so that decisions about
which specific product is being manufactured can be delayed as long as
possible. (e.g. DELL locates the push-pull boundary at the assembly point)

Make a part of the product to stock generic product

The point where differentiation has to be introduced is the push-pull
Based on extent of customization, the position of the boundary on
the timeline is decided

Manufacturing process starts by producing a generic product, which is

differentiated to as specific end-product when demand is revealed.

Identifying the Appropriate Supply chain strategy

Higher demand uncertainty leads to a preference for managing the

supply chain based on realized demand: Pull strategy
Small demand uncertainty leads to managing SC based on long-term
forecast: Push strategy
The higher the importance of economies of scale in reducing cost,
the greater the value of aggregating demand, the greater the
importance of SC based on long-term forecast Push
When economies of scale are not important, aggregation does not
reduces cost Pull

Production strategy
Distribution strategy

The impact of lead time

The longer the time the more important it is to implement a push-based

Box A: represents products with short lead time and high uncertainty e.g.
PCs Pull Strategy
Box B: represents items with long lead-time and low demand uncertainty
e.g. groceries Push Strategy
Box C: includes products with short supply lead time and highly
predictable demand e.g. groceries with short life cycle such as bread and
dairy products.
Box D: Long lead times and demand is not predictable (inventory is

Demand Driven Strategies

Intergrading demand information into supply chain planning process is
generated by applying two different processes:

Demand Forecast: Process in which historical demand data are

used to develop long-term estimates of expected demand.
Demand Shaping: Process in which the firm determines the impact
of various marketing plans such as promotion, pricing, rebated, new
product introduction and product withdrawal on demand forecast.


Forecast error is an estimate of the accuracy of the forecast; measured
according to its standard deviation
High demand forecast error has a detrimental impact on supply chain
performance, resulting in lost sales obsolete inventory and inefficient
utilization of resources.

The firm can employ supply chain strategies to increase forecast accuracy
and decrease forecast error:
Select the push-pull boundary so that demand is aggregated over
one or more of the following dimensions: demand is aggregated
across products, demand is aggregated across geography and
demand is aggregated across time. Principle 1
Use market analysis and demographic and economic trends to
improve forecast accuracy.
Determine the optimal assortment of products by store so as to
reduce the number of SKUs competing in the same market.
Incorporate collaborative planning and forecasting processes with
your customers so as to achieve a better understanding of market
demand, impact of promotions, pricing events and advertising.

7 principles
1. Need Based segmentation:
Segment customers based on the
service needs of distinct groups
and adapt the supply chain to
serve these segments profitable.
Traditional Segmentation Approach
- industry, product, trade channel or
- one size fits all approach
- not aware of the relative value
customer places on the service offerings
- Tools used include surveys, interviews
and industry research
Need Based Segmentation
- Segment customers based on their
particular needs
- Develop a portfolio of services tailored to various segments
- Goal is to find the degree of segmentation and need to maximize
2. Customize the logistic network to the service requirements
and profitability of customer segments
Move away from the conventional monolithic approach to logistic
network design
Develop Logistics (delivery response) as a differentiator
Flexible logistics network
Use modern methods like

o third party logistics

o industry wide optimization
o real time decision support
o time sensitive approach
(using GPS) to manage
3. Listen to market signals and
align demand planning
accordingly across the supply
chain, ensuring constituent
forecast and optimal
resource allocation.
Forecasting by multiple
intermediary units on a self
centered independent manner
bull whip effect (beer
create huge intermediary
create unevenness in production

Cross functional planning process using PoS (point of sales) data

available throughout the supply chain
Collaborative Forecasting

Increases: Manufacturing Cost, Inventory Cost, Lead Time Transportation

Decreases: Level of product availability, profitability
4. Differentiate product closer to the customer and speed
conversion across the supply chain.

Is Lead time of production fixed? Not always!

How can we achieve responsiveness in mass
Power of postponement
o pushing the differentiating point closer to consumption
o production
o packaging
o Modular designs
o Designs for assembly
o Flexible product structure

Explanation slide and exhibit

Manufacturers have
traditionally based
production goals on
projections of the
demand for finished
goods and have
stockpiled inventory
to offset forecasting
errors. These
manufacturers tend
to view lead times in
the system as fixed,
with only a finite
window of time in
which to convert
materials into
products that meet
great potential
remains in less traditional strategies such as mass customization. For
example, manufacturers striving to meet individual customer needs
efficiently through strategies such as mass customization are discovering
the value of postponement.
delaying product differentiation to the last possible moment and thus
overcoming the problem.
The hardware manufacturer in Exhibit 3 solved problem by determining
the point at which a standard bracket turned into multiple SKUs (stock
keeping unit). This point came when the bracket had to be packaged 16
ways to meet particular customer requirements. The manufacturer further
concluded that overall demand for these brackets is relatively stable and
easy to forecast, while demand for the 16 SKUs is much more volatile. The
solution: make brackets in the factory but package them at the
distribution center, within the customer order cycle. This strategy
improved asset utilization by cutting inventory levels by more than 50
percent. Realizing that time really is money, many manufacturers are
questioning the conventional wisdom that lead times in the supply chain
are fixed. They are strengthening their ability to react to market signals by
compressing lead times along the supply chain, speeding the conversion
from raw materials to finished products tailored to customer
requirements. This
5. Manage sources of supply strategically to reduce the total
cost of owning materials and services.

Traditional approach - creating competition among suppliers

New approach gain sharing is rewarding everyone in the SC who

contributes to the greater profitability
Supplier is an external entity: generally inflexible
Collaborative view of suppliers & reward schemes
Indexed pricing

While manufacturers should place high demands on suppliers, they should

also realize that partners must share the goal of reducing costs across the
supply chain in order to lower prices in the marketplace and enhance

6. Develop a supply chain-wide technology strategy that

supports multiple levels of decision making and gives a clear
view of the flow of products, services and information
Features of Technology solutions:
Short term:
handle day to day transactions, ecommerce
align supply and demand by sharing
information on orders and daily
Facilitate planning and decision support
support demand &shipment planning
and master production scheduling to
allocate resources efficiently
Long term:
Support strategic planning; what-if
integrated network model than spans SC network
Despite making huge investments in technology, few companies are
acquiring this full complement of capabilities. Enterprise wide systems
remain enterprise-bound, unable to share across the supply chain the
information that channel partners must have to achieve mutual success.
Obstacles to supply chain success:
Multiple owners / incentives in a supply chain
Increasing product variety / shrinking life cycles / customer
7. Adopt channel-spanning performance measures to gauge
collective success in reaching the end-user effectively and

Strategic Scope



operation: Minimize local cost

functional: Minimize Functional cost
functional: Maximize company profit
functional: Maximize supply Chain Profit

Week 3 Supply Chain strategy (incl. CH5)

Information changes the way supply chains can and should be effectively
managed and
these changes may lead to, among other things, lower inventory. We show
that by
effectively harnessing the information now available, one can design and
operate the supply
chain much more efficiently and effectively than ever before. It should be
apparent to the
reader that having accurate information about inventory levels, orders,
production and
delivery status throughout the supply chain should not make the
managers of a supply chain
less effective than if this information were not available
Helps reduce variability in the SC
Helps supplier make better forecast, accounting for promotions and
market changes
Enables the coordination of manufacturing and distribution systems
and strategies
Enables retailers to better serve their customers by offering tools for
locating desired items.
Enables retailers to react and adapt to supply problems more rapidly

Enables lead time reductions

The bullwhip effect

Bullwhip effect: The increase in variability
as we travel up in the supply chain.
Example p. 155.
Wholesalers receives order from retailers
and places order to his supplier (the
distributor). To determine order quantities,
the wholesaler must forecast the retailers
Variability in orders placed by retailer is significantly higher than
variability in customer demand, the wholesaler is forced to carry more
safety stock than retailer or else to maintain higher capacity than the
retailer in order to meet the same service level as the retailer.
Main factors contributing to the increase in variability in the supply chain

Demand forecasting
Lead time
Batch ordering
Price fluctuation
Inflated orders

Methods for coping with the Bullwhip Effect

1. Reducing uncertainty
by centralizing demand information. Note, however, that even if
each stage uses the same demand data, each may still employ
different forecasting methods and different buying practices, both of
which may contribute to the bullwhip effect.
2. Reducing variability
the bullwhip can be diminished by reducing the variability inherent
in the customer demand process. For example, if we can reduce the
variability of the customer demand seen by the retailer, then even if
the bullwhip effect occurs, the variability of the demand seen by the
wholesaler also will be reduced. We can reduce the variability of
customer demand through for
example, the use of an
everyday low pricing strategy.
When a retailer uses EDLP, it
offers a product at a single
consistent price, rather than
offering a regular price with
periodic price promotions

3. Lead-time reduction
the results presented in the previous subsections clearly indicate
that lead times serve to magnify the increase in variability due to
demand forecasting. Lead time reduction can significantly reduce
the bullwhip effect throughout a supply chain. Lead times typically
include two components: order lead times and information lead
4. Strategic partnerships
strategic partnerships change the way information is shared and
inventory is managed within a supply chain, possibly eliminating the
impact of the bullwhip effect.
Bullwhip effect can be reducing the bullwhip effect. When demand
information is centralized, each stage of the supply chain can use the data
to estimate the demand.
When demand information is not shared each stage must use the orders
placed by the previous stage to estimate the average demand.
Bullwhip never goes away.
Lead time reduction leads to
1. The ability to quickly fill customers order that cant be filled from
2. Reduction in the bullwhip effect
3. More accurate forecasts due to a decreased forecast horizon
4. Reduction in finished goods inventory levels; One can stock raw
materials and packaging materials inventories to reduces finished
good cycle time.


Sales and Operation Planning = S&OP an integrated business

management process.

S&OP is not just a set of tools and processes; it sets the behavior for a

Week 4 Procurement and outsourcing strategy (incl.

CH 9, 11 and 4)
Outsourcing Benefits and risks
1. Economies of scale. Important objective in outsourcing is to
reduce manufacturing costs through the aggregation of orders from
many different buyers.
2. Risk pooling. Risk pooling suggests that demand variability is
reduced if one aggregates demand across locations because as
demand is aggregated across different locations, it becomes more
likely that high demand from one customer will be offset by low
demand from another. This reduction in variability allows a decrease
in safety stock and therefore reduces average inventory.
o Outsourcing allows buyers to transfer demand uncertainty to
the CEM. CEM aggregate demand fro many buying companies
and reduce uncertainty through the risk-pooling effect.
3. Reduce capital investment Capital investment transferred to
suppliers and shared between customers
4. Focus on core competency Allocate resources to what you can do
e.g. Nike focuses on innovation, marketing, distribution and sales
NOT on manufacturing.

5. Increased flexibility
o Ability to better react to changes in customer demand
o Suppliers knowledge to accelerate NPI (new product
o Access to new technologies and innovation
High tech where technologies change very frequently
Fashion where products have a short life-cycle
1. Loss of competitive knowledge it may open u opportunities
for competitors and implies that companies lose their ability to
introduce new designs.
Outsourcing critical components to suppliers may open up
opportunities for competitors
New designs based on suppliers agenda rather than your own.
Outsourcing to too many suppliers may prevent the development of
new insights, innovations, and solutions that typically require crossfunctional teamwork
1. Conflicting objectives increased flexibility is a key objective when
buyers outsource the manufacturing.
Demand Issues
In a good economy demand is high, and in a slow economy
demand is significantly low. This could lead to losses due to
contractual obligations with suppliers
Product design issues
Buyers insist on flexibility: Solve design problems as fast as
Suppliers focus on cost reduction: Prefers slow responsiveness
to design changes

Framework for BUY/MAKE decisions

Reasons for outsourcing:
- Dependency on capacity. Firm has the knowledge and skills required
to produce the component but for various reasons decides to outsource.
- Dependency on knowledge. Company does not have the people skills,
and knowledge required to produce the component and outsources in
order to have access to these
Toyota seems to vary its outsourcing practice depending on the strategic
role of the components and subsystems


Dependency on
knowledge and


Outsourcing is risky


Outsourcing is very

Independent for
dependent for
Outsourcing is an
Outsourcing is an

Independent for
knowledge and
Opportunity to reduce
cost through
Keep production

A Framework for Make/Buy Decisions

Modular product (can be made by different components e.g.
personal computer)
Components are independent of each other.
Components are interchangeable.
A component can be designed or upgraded with little or no regard to
other component.
Customer preference determines the product configuration.
Integral product... (product made up from component whose
functionalities are tightly
related e.g. airplane)
Not made from off-the-shelf components
Are evaluated based on system performance, not based on
component performance
Components in integral products perform multiple functions
For modular products, capturing knowledge is important, whereas having
in-house production capacity is less critical if firm has the knowledge,
outsourcing the manufacturing process provides an opportunity to reduce

Make/Buy decision at component level (Fisher)

How should a firm determine whether a specific component should be
outsourced or made internally?


Customer importance
How important is the component to the customer?
What is the impact of the component on customers experience?
Does the component affect the customers choice?
Component clock speeds
How fast does the components technology change relative to other
components in the system?
3. Competitive position

Does the firm have a competitive advantage producing the

component themselves?
4. Capable supplier
How many capable suppliers exist?
5. Architecture
How modular or integral is the element to the overall architecture of
the system?

Procurement strategies

Kraljics Matrix

Firms strategy should depend on two dimensions:

1. Profit impact (the volume purchased, percentage of total purchased
cost, or impact on product quality or business growth)
2. Supply risk (availability, numbers of suppliers, competitive demand
make-or-but opportunities, and storage risks and substitution
Strategic items - items that have the highest impact on consumer
experience and their price is a large portion of the system cost.
e.g. Car engines
Mostly have single supplier so Form partnerships
Leverage items High impact on profit but low supply risk.
Many suppliers focus on cost reduction, by forcing competition between
Bottleneck High supply risk, low profit-impact.
These components do not contribute a large portion of the production
cost, but their supply is risky. High supplier power. ensure supply
Noncritical items Simplify and automate the procurement process e.g.
authorized employees order directly without going through a formal
requisition and approval process.

Sourcing strategies for components (and NOT finished goods)

Fisher emphasizes the demand side while Kraljic emphasizes supply side.


forecast accuracy
supply risk
financial impact
clock speed

Component forecast accuracy is not necessarily the same as the finished

product forecast accuracy.

Value proposition of e-Procurement
For Buyers
Serving as an intermediary between buyers and suppliers
Identifying saving opportunities
Increasing the number of suppliers involved in the bidding event
Identifying, qualifying, and supporting suppliers.
Conduction the bidding event
For Supplier
Relative small suppliers could expand their market horizon
Allows suppliers to access spot markets. Advantageous in:
o Fragmented market
o Reducing marketing & sales costs
o Increasing ability to compete on price
Allows suppliers to better utilize their available capacities and

Evolution of the e-Markets

Value added public e-markets
Have expanded value proposition by offering additional services:
Inventory management
Supply chain planning
Financial services
Private e-markets
Many companies have stablished their own private e-markets such as:
Reverse auctions
BP verhaal Inger.
Consortia(=Group) based e-markets
Established by a number of companies with the same industry
Provides suppliers with a standard system that supports all the
consortias buyers
Objective: to aggregate activities and use the buying power of
consortia members to private suppliers with a standard system that
supports all the consortias buyers and hence allows supplier to
reduce cost and become more efficient.
Content-based e-markets
Includes two types of market: MRO maintenance repair and operations &
industry specific products
Focus on content achieved by:
Integrating catalogs from many industrial suppliers
Unify suppliers catalogs (to increase efficiencies)
Provide effective tools for searching and comparing supplies
e.g. Aspect Development (now part of i2) offers electronics parts catalogs
that integrate with CAD systems.

The Spectrum of Supplier integration

Steps from least to most supplier responsibility
1. None.
Supplier is not involved in design.
Materials/subassemblies supplied as per customer
2. White Box.

Informal level of integration

Buyer consults with the supplier informally when designing
products and specifications


Grey box.
Formal supplier integration
Collaborative teams between buyers and suppliers engineers
Joint development

4. Black box.
Buyer gives the supplier a set of interface requirements
Supplier independently designs and develops the required

Supply Contracts Ch. 4

Strategic compound of a Supply contract
Pricing and volume discounts
Minimum and maximum purchase quantities
Delivery lead times.
Product or material quality
Product return policies
e.g. Internship Suck UK bottle lights for Drink company
Contracts enable risk sharing
Global optimization; supply chain profit is maximized. Difficulty; requires
the firm to surrender decision-maker power to an unbiased decision maker.
Supply contacts help firms achieve global optimization, without the need
for an unbiased decision maker, by allowing buyers and suppliers to share
the risk and the potential benefit. Carefully designed supply contracts
achieve the exact same profit as global optimization.
Limitations to supply contract
Buy-back; Requires the supplier to have an effective reverse
logistic system and may increase its logistic cost. When retailers sell
competing products, some under buy-back contract while others are
not, buyers have an incentive to push the products not under the
Revenue-sharing; Requires the supplier to monitor the buyers
revenue thus increases administrative costs

Types of Supply contracts

Week 5 Inventory Management in the Supply Chain

(incl. CH 2)
The goal of effective inventory management in the supply chain is to have
the correct inventory at the right place at the right time to minimize
system cost while satisfying customer service requirements.
Types of inventory
Raw material inventory.
Work-in-process inventory (WIP)
Finished product inventory

Inventory is held due to

1. Unexpected changes in customer demand.
Short life-cycle of products
Many competing products in market place
2. The presence in many situations of a significant uncertainty
3. Lead times.

4. Economies of scale offered by transportation companies.

This encourages firms to transport large quantities of items,
and therefore hold large inventories. Discounts
Inventory policy set of techniques used to determine how to manage
Supply Chain Factors in Inventory Policy
Estimation of customer demand
Replenishment lead time
The number of different products being considered
The length of the planning horizon
Costs Order cost:
o Product cost
o Transportation cost
Inventory holding cost, or inventory carrying cost:
o State taxes, property taxes, and insurance on inventories
o Maintenance costs
o Obsolescence cost
o Opportunity costs
Service level requirements
Single stage inventory control
Single supply chain stage
Variety of techniques
o Economic Lot size model
o Demand Uncertainty
o Single Period Models
o Initial Inventory
o Multiple Order Opportunities
o Continuous Review Policy
o Variable Lead Times
o Periodic Review Policy
o Service Level Optimization

Economic Lot Size Model

Economic lot size model illustrates the trade-offs between ordering and
storage costs. Consider a warehouse facing constant demand for a single
item. The warehouse order from the supplier, who is assumed to have an
unlimited quantity of the product.
Zero inventory ordering property; in an optimal policy for this model.
Orders should be received at the warehouse precisely when the inventory
level drops to zero.
To find the optimal ordering policy in the economic lot size model, we
consider the inventory level as a function of time. saw toothed inventory

pattern (see model). We refer to the time between two successive

replenishments as a cycle time.

Single Period Models

Using historical data, the firm can identify the variety of demand scenarios
and determine the likelihood or probability that each of these scenarios
will occur. Given a specific inventory policy, the firm can determine the
profit associated with a particular scenario.

Optimal order quantity is not necessarily to equal to forecast or

average demand.
o Optimal quantity depends on the relationship between
marginal profit achieved from selling an additional unit and
marginal cost.
As order quantity increases, average profit increases until the
production quantity reaches a certain value.
As we increase production quantity, probability of large losses
always increases. And probability of large gains also increases
Risk/reward trade-off.

Relationship Between Optimal Quantity and Average Demand

> Compare marginal profit of selling an additional unit and marginal cost
of not selling an additional unit.
Marginal profit/unit = Selling Price - Variable Ordering (or, Production)
Marginal cost/unit = Variable Ordering (or, Production) Cost - Salvage
If Marginal Profit > Marginal Cost => Optimal Quantity > Average Demand
If Marginal Profit < Marginal Cost => Optimal Quantity < Average Demand

Multiple Order Opportunities

Reasons why distributor holds inventory:
1. To satisfy demand occurring during lead time
2. To protect against uncertainty in demand
3. To balance annual inventory holding costs and annual fixed order
Continuous review policy
Inventory is reviewed continuously
Order is placed at reorder point
Periodic review policy
Inventory level is reviews at regular intervals
Quantity is ordered after each review
Appropriate for systems where it is impossible to frequently review
inventory and place orders if necessary
o Long intervals (weekly, monthly)
o Short intervals (daily)

Base stock level.

r = length of review period

L = Lead-time
AVG = Average
STD = Standard deviation
Risk pooling tool to address variability in the supply chain
Suggests that demand variability is reduced if on aggregates
demand across locations
True, it becomes more likely that high demand from one customer
will be offset (=balanced) by low demand from another customer.
Reduction in variability allows a decrease in safety stock and
therefore reduces average inventory.

Centralized vs Decentralized systems

Safety stock. Moves firms from decentralized to centralized system
Service level. higher service level for the same inventory investment
with centralization
Overhead costs. These costs are higher in decentralized systems
because there are fewer economies of scale.
Customer lead time. Warehouses are much closer to the customers in a
decentralized system, response time is much shorter.
Transportation costs. This is not clear, consider inbound and outbound

Managing Inventory in the supply chain

Assume that
1. Inventory decisions are made by a
single maker whose objective is to
minimize system wide cost.
2. The decision maker has access to
inventory information at each of the
retailers at the warehouse.
Echelon (=level) inventory
- Each stage or level (i.e. warehouse,
retailer) often is referred to as an
- The echelon inventory at any stage
or level of the system is equal to the
inventory on hand at the echelon,
plus al downstream inventory.
KPI Key performance indicator.
ABC approach. Items are classified in A: highest sales 20%, B: middle
sales 15%, C: low revenue items, value nor more than 5% of sales.

Cycle stock vs Safety stock

Cycle Stock
This stock keeps the supply chain moving and represents;
production / shipment quantities
It can be reduced by producing / ordering more frequently and
therefore in smaller quantities
Economies-of-scale opportunities (e.g. production lot size /
Safety Stock
Buffers against unforeseen supply and demand uncertainties:
Demand variation
Lead time fluctuations

Production reliability
Acceptable risk is defined by safety factor / service level.

Week 6 Network Design (incl. CH 3,7,8)

Physical supply chain consists of suppliers, plants, warehouses,
distribution centers and retail outlets as well as raw materials, work-inprocess inventory and finished products that flow between facilities.


Warehouse function as inventory coordination point rather than as

inventory storage points.
Goods arriving at warehouse from manufacturer
o Are transferred to vehicle serving the retailers
o Are delivered tot he retailers ASAP
Goods spend very little time in storage at the warehouse
o Often les than 12h
Limits inventory cost and decreases lead times.

Challenges with Cross-Docking

Require a significant start-up investment and are very difficult to
Supply chain partners must be linked with advanced information
systems for coordination
A fast and responsive transportation system is necessary
Forecasts are critical, necessitating the sharing of information.
Effective only for large distribution systems

Different approaches for different products factors:

Customer demand and location
Service level
Costs transportation & inventory costs
Demand Variability




Risk pooling

Take advantage

Holding costs


Inventory at

Reduced inbound
No warehouse

Reduced inbound

No holding costs



Network planning Process by which the firm structures and manages the
supply chain in order to

Find the right balance between inventory transportation and

manufacturing cost
Match supply and demand under uncertainty by position and
managing inventory effectively
Utilize resources effectively by sourcing products from the most
appropriate manufacturing facility.

3 processes of network design:

1. Network design decisions on the number, location and size of
manufacturing plants and warehouses.
2. Inventory positioning identifying stocking points & selecting
facilities that will produce to stock and keep inventory.
3. Resource allocation objective is to determine whether production
and packaging of different products is done at the right facility

Network design
Number, locations and size of manufacturing plants and warehouses
Assignment of retail outlets to warehouses
Major sourcing decisions
Typical planning horizon is a few years.

Inventory positioning:
Identifying stocking points
Selecting facilities that will produce to stock and thus keep inventory
Facilities that will produce to order and hence keep no inventory
Related to the inventory management strategies
4. Resource allocation:
Determine whether production and packaging of different products is
done at the right facility
What should be the plants sourcing strategies?
How much capacity each plant should have to meet seasonal
Warehouse costs
Handling costs (straight forward to calculate)
Labor and utility costs
Proportional to annual flow through the warehouse.
Fixed costs (difficult to calculate)
All cost components not proportional to the amount of flow
Typically, proportional to warehouse size (capacity) but in a
nonlinear way.
Storage costs (difficult to calculate)
Inventory holding costs
Proportional to average positive inventory levels
Warehouse capacity

Estimation of actual space required

Average inventory level =
Annual flow through warehouse/Inventory turnover ratio
Space requirement for item = 2*Average Inventory Level
Multiply by factor to account for
access and handling
picking, sorting and processing facilities
Typical factor value = 3

3rd Party Logistics

A Third Party Logistics (3PL) an outside company who is entrusted to
perform all or part of a companys material management and/or product
distribution functions (including warehousing)
Strategic partnership, long-term commitment, multi-function
arrangement, process integration, large range of 3PL companies, prevalent
usage with larger companies
Focus on Core Strengths
o Allows a company to focus on its core competencies
o Logistics expertise left to the logistics experts
Provides Technological Flexibility
o Technology advances adopted by better 3PL providers
o Adoption possible by 3PLs in a quicker, more cost-effective
o 3PLs may have the capability to meet the needs of a firms
potential customers
Provides Other Flexibilities
o Flexibility in geographic locations.
o Flexibility in service offerings
o Flexibility in resource and workforce size

Know your own costs

o Compare with the cost of using an outsourcing firm.
o Use activity-based costing techniques
Customer orientation of the 3PL
o Ability of provider to understand the needs of the hiring firm
and to adapt its services to the special requirements of that
o Reliability.

o Flexibility of the provider

3 PL Issues Specialization of the 3PL
Consider firms whose roots lie in the particular re of the logistics that
is most relevant to the logistic requirements in question.
Firms may have even more specialized requirements
Firm can us one of its trusted core carriers as its third-party logistics
Asset-owning vs non-asset-owning 3PL
Asset owning companies have significant size, access to human resources,
a large customer base, economies of scope & scale, a large customer base
etc. Long decision-making cycle.
Non asset owning companies may be more flexible and able to tailor
services and have the freedom tom mic and match providers. May have
lower costs.
Managing the Unknown-Unknown?
Invest in redundancy
Increase velocity (=speed) in sensing and responding
Create an adaptive chain community
Respond to unforeseen events
Careful analysis of supply chain trade-offs
o Bijenkorf shut down stored for cost reduction but is
still able to satisfy the Dutch market. (plant = filial)
The most difficult risk management method to implement effectively.
Requires all supply chain elements to share the same culture, work
towards the same objectives and benefit from financial gains.
Need a community of supply chain partners that morph and
reorganize to better react to sudden crisis

Quality defined and measured in various ways. The moto remains

improving the yield of the manufacturing process and customer
Ethical KPI
The focus on how companies operate and balance the profits with
people and planet is under increasing scrutiny. Supply Chain is
responsible and accountable for most of the Ethical KPIs under a
companys CSR agenda.
KPIs include Carbon Footprint, Recyclability of waste and
packaging material, Water consumption, Labor conditions within
supplier locations etc.
SIPOC stands for

Week 7

Information technology (IT) an important enabler of effective

supply chain management
Typically spans the entire enterprise and beyond,
encompassing suppliers on one end and customers on the
Includes systems that are:
internal to an individual company
external which facilitate information transfer between
various companies and individuals
HOW do we know how good a supply chain is working and
where are improvements needed?
KPIs and SCOR Model are objective ways
How mature are the business processes and the information
technology employed by the company
Much more difficult because of variations across

Four categories of business processes

Many independent processes.
Organized functionally with no or low degree of
Supply chain planning typically done for each site
independently of other sites
Integration of some functional information.
Common forecasts applied throughout the organization.
Decisions made through the integration of key
functional areas
Cross-functionally organized
Involves key suppliers and customers in decision
making processes
Sophisticated processes that involve all affected
internal organizations
Collaboration links trading partners and enables them
to operate as one virtual corporation
Collaboration across the entire supply chain
Common business objectives/extensive knowledge of
the suppliers and customers business environments
Four categories of IT systems:
Level I

Batch processes, independent systems and redundant

data across the organization.
Focus on spreadsheet and manual manipulation of data
for decision making.
Level II
Shared data across the supply chain.
Decisions made using planning tools
Level III:
Complete visibility of internal data
Key suppliers and customers have access to some of
this data
Processes are also shared across the supply chain
Level IV
Data and processes are shared internally and

Companies with mature business processes have lower inventory
Improvements in certain areas demand IT investments
Best-in-class companies with mature processes achieve superior
financial performance
Investing only in IT infrastructure leads to significant inefficiencies
Priority in IT investments depends on your objectives

Box A
Immature business processes and IT systems.
Below average business performance.

Box B
mature business processes and immature systems.
Perform significantly better than those who did not
invest in either processes or systems, but they leave a
lot on the table.
Box C
mature systems and processes.
Enjoy significant improvements in operational
Box D
mature IT systems but not processes.
Performance even worse than those with immature
systems and processes.
IT infrastructure typically requires significant
investment accompanied by expensive support staff.
IT provides only information