CH 6

Definitions
IE 505
Production Planning and Control
Supply Chain Management deals with the

management of materials, information and financial
flows in a network consisting of suppliers,
manufacturers, distributors, and customers
SCM is a set of approaches utilized to efficiently

integrate suppliers, manufacturers, warehouses, and
stores, so that merchandize is produced and
distributed at the right quantity, to the right locations,
at the right time, in order to minimize systemwide
costs while satisfying service level requirements
-- Stanford SC Forum/ Dr. Hau Lee
Supply Chain Management

Dr. Rakesh Nagi
Department of Industrial Engineering
University at Buffalo (SUNY)
Rakesh Nagi
UB, Industrial Engineering
-- Dr. Simchi-Levi et al. (1999)
Rakesh Nagi
Definitions
Call it distribution or logistics or SCM It is the

sinuous, gritty, and cumbersome process by which
companies move material, parts, and products to
customers. .
Structured business approach to balance,

synchronize, and synergize all internal and external
resources and assets. -- CAM-I
An integrative approach for planning and controlling
the total flow through a distribution channel from
suppliers to end users. -- Ashraf Alam
-- Fortune Magazine/Henkoff (1994)
-- Ross (1998)
Includes service organizations in addition to manufacturing
Rakesh Nagi
The Supply Chain Umbrella
Objectives of this Chapter
Rakesh Nagi
Definitions
SCM is a continuously evolving management

philosophy that seeks to unify the collective
productive competencies and resources of a
business function found both within the enterprise
and outside the firms allied business partners
located along intersecting supply channels into a
highly competitive, customer-enriching supply system
focused on developing innovative solutions and
synchronizing the flow of marketplace products,
services, and information to create unique,
individualized sources of customer value
Rakesh Nagi
Provide an appreciation for the most

important issues encountered in managing
complex supply chains.
Present a sampling of the types of
mathematical models used in SCM analysis
Reading Assignment: Snapshot Application pf
Wal-Mart, p. 307
Rakesh Nagi
Transportation Problem
Special case of Min Cost Flow Problem

Shipping and Distribution Applications
From plants to warehouses or warehouses to
retailers, respectively
Let there be m plants with known supplies (Si
corresponding to supply point i)
And n warehouses with know demands (Dj
corresponding to demand point j)
Identify flows at min cost to satisfy demand from
given supply (cij is unit shipping cost point i)
Rakesh Nagi
Minimize
ij ij
i =1 j =1
S.t.
m
ij
Si
for
i = 1,2,
ij
Di
for
j = 1,2,
j =1
x
i =1
xij 0
n
for all i, j
Rakesh Nagi
Transportation Network
cij
S1
D1
For the model to possess a feasible solution,

total supply should be at least as large as
total demand
m
n
Si D j
i =1
j =1
S2
D2
S3
Plants
Rakesh Nagi
It is convenient to assume equality by adding

a dummy destination with remaining supply
Warehouses
Rakesh Nagi
10
Standard Simplex
Simplex solution to an LP problem has at

most k positive variables, where k is the
number of independent constraints
Convince yourself that there are M+n-1
independent constraints in the transportation
problem
Also note that a key result in network theory
is that at least one optimal solution to the TP
has integer-valued xij provided Si and Dj are
integers.
Rakesh Nagi
11
Step 1: Select a set of m+n-1 routes that

provide an initial basic feasible solution
Step 2: Check whether the solution is
improved by introducing a non basic variable.
If so, go to Step 3; otherwise, Stop.
Step 3: Determine which routes leave the
basis when the variable that you selected in
Step 2 enters.
Step 4: Adjust the flows of the other basic
routes. Return to Step 2.
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12
Initial Solution
Initial Solution
Northwest corner rule
Algorithm: Begin by selecting X11 (that is, start in the northwest corner
of the transportation simplex tableau). Thereafter, if Xij was the last
basic variable selected, then next select Xi,j+1 (that is, move one column
to the right) if source i has any supply remaining. Otherwise, next select
Xi+1,j (that is, move one row down).
1
8
3
10
2
6
4
9
35/0
12
13
10
20
14
20
50/40/20/0
16
5
10
C
Demand
ui
Supply
35
Northwest corner rule: Example
45/10/0
20/0
30 40/30/0
30/10/0
Rakesh Nagi
10M
30/0
Initial Solution
Minimum Matrix Method
Algorithm: Find the minimum Cij and assign to Xij the higher of Si or Dj.
Reduce the demand and supply (Si- Xij; Dj- Xij). Repeat until done. Note
that the last arcs chosen could be very expensive.
1
8
2
6
12
13
16
Vogels Approximation
Method
Algorithm: For each row and column

remaining under consideration,
calculate its difference, which is
defined as the arithmetic difference
between the smallest and next-tothe-smallest unit cost Cij still
remaining in that row or column. (If
two unit costs tie for being the
smallest remaining in a row or
column, then the difference is 0.) In
that row or column having the largest
difference, select the variable having
the smallest remaining unit cost.
(Ties for the largest difference, or for
the smallest remaining unit cost, may
be broken arbitrarily.)
Supply
7
20
50/20/0
5
1 30 40/10/0
10
45/30/0
35/15/0
30
14
C
Demand
4
9
20
9
B
3
10
15
20/0
30/10/0
30/0
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Z=2,460
16
Rakesh Nagi
15
Initial Solution
Initial Solution
Vogels approximation method

1
8
2
6
3
10
4
9
Supply
35
12
13
14
16
50
C
Demand
Col Diff
4
30 40/10
45
20
30
30/0
1
8
2
6
3
10
4
9
Supply
35
12
13
14
16
50
C
Demand
Col Diff
10
45
1
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30 40/10/0
20/10
3
30
30/0
17
2
6
3
10
4
9
13
10
9
12
Supply
Row Diff
2
35/25
3
50
14
C
Demand
Col Diff
16
10
45
1
30 40/10/0
20/10/0
30
1
8
Row Diff
2
Vogels approximation method

1
8
Row Diff
2
A
9
14
Initial Solution
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13
2
6
3
10
10
12
B
C
Demand
Col Diff
4
9
25
13
16
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20/10/0
50/0
5
10
45/0
1
Row Diff
5
9
Supply
35/25/0
45
14
30/0
30 40/10/0
30/0
30/0
18
Initial Solution
For ABC-> 1234 example
Northwest corner rule
Minimum Matrix Method
Vogels Approximation
Initial Solution
$1,180
$1,080
$1,020
Rakesh Nagi
Russell's approximation method
Algorithm: For each source row i remaining under consideration,

determine its ui which is the largest unit cost Cij still remaining in that
row. For each destination column j remaining under consideration,
determine its vj which is the largest unit cost Cij still remaining in that
column. For each variable Xij not previously selected in these rows and
columns, calculate ij = Cij - ui vj. Select the variable having the largest
(in absolute terms) negative value of ij (Ties may be broken arbitrarily.)
Dual Linear Program is

m
n
Maximize
S i vi + D j w j
i =1
j =1
S.t. v + w C
for all i = 1,2, m
i
vi
j = 1,2,
ij
where vi , w j
20
Format for Transportation

Simplex
Step 2: Optimality Test
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19
n
are unrestrict ed in sign
wj
Theorem of complementary slackness gives:

C ij = vi + w j Cij 0 if
xij = 0
C ij = vi + w j Cij = 0 if
xij > 0
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21
Example
Example
1
2
2
3
3
11
4
7
Supply
1
5
15
1
2
A
2
3
3
11
4
7
1
5
8
1
7
15
4
5
Supply
6
1
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9
3
Initial Basic Feasible Solution using Vogels Approximation = 112
C
Demand
10
C
Demand
vi+wj - Cij
10
9
3
3
2
2
23
Finding vi and wj
Set vA = 0 arbitrarily to determine all other
duals
vA + w2 - 6 = 0; so w2 = 6
vC + w2 - 9 = 0; so vC = 3
vC + w4 - 5 = 0; so w4 = 2
vA + w3 - 10 = 0; so w3 = 0
vC + w1 - 9 = 0; so w1 = 6, etc.
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24
Example
Step 3: Identify incoming variable (A2)

1
2
2
3
0
1
6
-4
8
-1
1
15
-5
0
6
0
5
0
12
1
2
A
1
2
6-z
1
2
3
z
0
4
7
8
1+z
C
Demand
15
3
3
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2
3
4+z
0
1-z
8
B
5
4
7
1
2
15
2
3
1
10
8
6
7
C
Demand
15
10
C
Demand
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27
2
3
0
5
0
4
7
3
11
Supply
1
6
B
5
8
7
7
15
-1
-5
0
6
9
0
12
5
0
8
6+z
7
4
7
3
11
z
6
6
1
1
15
0
5
Supply
1
9
2-z
3
2
2
10
28
MRP logic to manage distribution systems (Martin, 1990).

Advantage over ROP systems is that it can deal with changing
demand patterns
However it ignores uncertainty
9
1
3
1
1
C
Demand
v_I
-1
Distribution Resource
Planning (DRP)
Step 4: Adjust the flows find new basis (cost = 100)

1
2
15
Example
26
1
0
-2
3
2
3
5
2
2
1
6
1
2
1-z
1
9
2
3
Rakesh Nagi
Identify which variable leaves (A1)
Supply
0
5
0
6
4
7
3
11
-3
0
2
C
w_j
-5
9
0
12
0
0
5
2
2
4
7
3
11
2
3
-5
9
3
15
-2
3
0
1
1
3
1
2
6
v_I
-1
Step 3: Identify incoming variable (A3)
Supply
z
3-z
10
Example
3
11
5+z
C
Demand
Rakesh Nagi
Step 3: Identify which variable leaves (B2)

1
2
2-z
1
0
2
C
w_j
25
2
2
4
7
3
11
Example
9
3
3
-2
5
10
15
2
3
2
2
Supply
0
5
4-z
7
8
5
7
1
2
Step 3: Identify incoming variable (B3)
Supply
A
4
7
6
1
C
Demand
3
11
4
3
11
2
3
2
Identify which variable leaves (C2)
v_I
0
2
C
w_j
4
7
3
11
Example
2
2
10
Step 3: Test for optimality again

1
2
2
3
-1
1
B
0
-5
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0
6
-2
8
0
1
C
w_j
4
7
3
11
0
-5
0
5
1
0
15
-1
3
v_I
-2
9
0
11
29
Rakesh Nagi
30
Delivery Routes in Supply

Chains
Practical Issues in Vehicle

Scheduling
Vehicle Scheduling Problems are of two

types
1.
2.
3.
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31
Arc-based (e.g., snow removal, garbage

collection)
Node-based (e.g., collection and distribution)
Schrage (1981) list these features:

Frequency Requirements (e.g., daily)
Time Windows
Time dependent travel times
Practical Issues in Vehicle

Scheduling
4.
5.
6.
7.
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32
Designing Products for

Supply Chain Efficiency
Multidimensional capacity constraints

(weight/volume)
Vehicle types (different capacities and costs)
Split deliveries (more than 1 vehicle to a
customer)
Uncertainty (e.g., traffic conditions, weather,
vehicle breakdowns)
Historically Product Design has been throw

over the wall to manufacturing.
In recent past we have
Now
Design For Manufacturing (DFM)

Concurrent Engineering
Design for Logistics (DFL)

Three-dimensional concurrent engineering (3-
DCE): Products, Processes, and Supply Chains
Rakesh Nagi
33
Rakesh Nagi
Designing Products for

Supply Chain Efficiency
Product design for efficient transportation and shipment

Delayed differentiation (Postponement of final product
configuration)
Benetton: Dyeing sweaters after knitting (gray stock)

HP: Localization of printers (correct power supply + plug) can
be done at DC rather than factories
Additional issues
The configuration of the supplier base

Outsourcing arrangement (3PL)
Channels of distribution (DCs, 3P wholesalers, licensing, or
direct selling)
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34
Role of Information in SCM
How logistics considerations enter design
35
The Case of Pasta Barilla (Harvard B School)

Barilla is an Italian manufacturer of pasta
In late 1980s the head of logistics tried to introduce a
new distribution approach JITD
The idea was to get the distributor sales #s and Barilla
would decide when and how large should the deliveries
be.
At that time distributors would independently place
weekly orders based on std reorder point methods.
This would cause large swings in demand for Barillas
factories due to the Bullwhip Effect
The change was met with great resistance but adopted
Rakesh Nagi
36

Bullwhip Effect
The Case of Pasta Barilla (cont.)

JITD system was implemented with striking
results
It was a win-win for Barilla and its distributors
This is known as Vendor Managed
Inventory or VMI today
Now, Proctor and Gamble has accepted VMI
for Wal-Mart, etc.
Rakesh Nagi
Industry and academics realized that the

orders placed by distributors had much more
variance than sales at retail stores.
P&G coined the term bullwhip effect
Where does it come from?
Demand Forecast updating

Order batching at stages causes spiky demands to
previous suppliers
Price fluctuations
Shortage gaming
37
Rakesh Nagi
Bullwhip Effect: Causes

Demand Forecast updating
38
Bullwhip Effect: Causes
Order Batching
We will see this in MRP systems too, order
batching (EOQ-type) translates a smooth demand

pattern into spiky demand at lower levels
Price fluctuations
Shortage gaming
forward buying due to attractive prices

When product is in short supply the manufacturer
places customers on allocation, so the customers

inflate demand to make up for expected shortfall.
Rakesh Nagi
39
Rakesh Nagi
Information Sharing
Channel Alignment
40
Multilevel Distribution
Systems
Bullwhip Effect: Elimination*
All parties share POS data (for forecasts also). Fortunately,

IT has helped EDI, for instance.
Reduction of fixed costs (ordering cost via EDI;
transportation costs by mixed product and LTL shipments or

outsourcing 3rd party logistics)
Price Stabilization
Discouragement of Shortage Gaming
Value-pricing rather than promotional pricing

Allocate based on past sales rather than orders.
* Lee, Padmanabhan, and Whang (1997)

Rakesh Nagi
41
Rakesh Nagi
42
Multilevel Distribution
Systems
Advantages of intermediate storage
Disadvantages
Reading Assignment 6.10 pp. 346-351 on

Designing the SC in a Global Environment
Risk pooling (aggregate demand has lower variation)

DCs can be designed to meet local needs
Economies of scale in storage and movement
Faster response time
May require more inventory
May increase total order lead times
Could result in higher cost of storage and movement
Could contribute to the bullwhip effect.
Rakesh Nagi
43

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Definitions

Supply Chain Management deals with the

SCM is a set of approaches utilized to efficiently

-- Stanford SC Forum/ Dr. Hau Lee

Supply Chain Management

UB, Industrial Engineering

-- Dr. Simchi-Levi et al. (1999)

Call it distribution or logistics or SCM It is the

Structured business approach to balance,

-- Fortune Magazine/Henkoff (1994)

The Supply Chain Umbrella

UB, Industrial Engineering

UB, Industrial Engineering

Objectives of this Chapter

SCM is a continuously evolving management

UB, Industrial Engineering

Provide an appreciation for the most

UB, Industrial Engineering

Special case of Min Cost Flow Problem

UB, Industrial Engineering

For the model to possess a feasible solution,

It is convenient to assume equality by adding

UB, Industrial Engineering

Simplex solution to an LP problem has at

UB, Industrial Engineering

Step 1: Select a set of m+n-1 routes that

UB, Industrial Engineering

Northwest corner rule

Northwest corner rule: Example

UB, Industrial Engineering

Algorithm: For each row and column

UB, Industrial Engineering

Vogels approximation method

UB, Industrial Engineering

Vogels approximation method

UB, Industrial Engineering

UB, Industrial Engineering

UB, Industrial Engineering

Russell's approximation method

Algorithm: For each source row i remaining under consideration,

Dual Linear Program is

Format for Transportation

Step 2: Optimality Test

UB, Industrial Engineering

are unrestrict ed in sign

Theorem of complementary slackness gives:

Initial Basic Feasible Solution using Vogels Approximation = 112

UB, Industrial Engineering

UB, Industrial Engineering

Step 3: Identify incoming variable (A2)

UB, Industrial Engineering

UB, Industrial Engineering

UB, Industrial Engineering

MRP logic to manage distribution systems (Martin, 1990).

Step 4: Adjust the flows find new basis (cost = 100)

Identify which variable leaves (A1)

Step 4: Adjust the flows find new basis (cost = 101)

UB, Industrial Engineering

Step 3: Identify incoming variable (A3)

Step 3: Identify which variable leaves (B2)

Step 3: Identify incoming variable (B3)

Identify which variable leaves (C2)

Step 4: Adjust the flows find new basis (cost = 104)