Business Mantras

Supply Chain Management

 Structure Followed
• What is Supply chain?
• Objective of a supply chain
• Supply Chain Management
• Bull Whip effect
• Drivers of Supply chain performance
• Inventory policies
• Types of Distribution networks
 What is Supply chain?

Supplier Manufacturer Distributor Retailer Customer

• Consists of all parties involved,

directly or indirectly, in fulfilling a
customer request
 Is supply chain so simple?

Supplier Manufacturer Distributor Retailer Customer

Supplier Manufacturer Distributor Retailer Customer

Supplier Manufacturer Distributor Retailer Customer

Upstream Downstream
 Process View
Customer
Customer
Order Cycle Pull

Retailer
Replenishment
Cycle

Distributor

Manufacturing
Cycle
Manufacturer Push

Procurement
Cycle
Supplier
 Objective of a Supply Chain
• Maximise overall profit
• Profit
– Revenue generated from customer - costs
incurred along the entire chain
(e.g. manufacturing / storing / distributing the
product)
• When is Supply chain effective?
– Manage Product, Information and Fund flow
 Why not max. individual
profitability?
Buy Back

Manufacturer Manufacturer
No risk Cost = Rs. 1 Cost = Rs. 1
Buy Back
Profit Rs. 4000 Sharing Profit Rs. 5520 at Rs. 3
Retailer Retailer
Cost = Rs. 5
of Cost = Rs. 5
Bears Q = 1000 Q = 1200
All risk risks
Profit Rs. 4000 Profit Rs. 5160
Customer Customer
Cost = Rs. 10 Cost = Rs. 10
Demand = 900 Demand = 1080
 So, what is SCM?
• Objective is to be able to have the right products
in the right quantities (at the right place) at the
right moment at minimal cost.
 Bull Whip Effect

• Each organisation seek to solve the problem

from its own perspective
– Small changes in consumer demand result in
large variations in orders placed upstream
• Dramatic order size variation
• Amplification of order size variation as one
moves up the supply chain
Delay 2 weeks Delay 2 weeks Delay 2 weeks

Supplier Manufacturer Distributor Retailer Customer

Orders 40 Orders 25 Orders 15 Buys 10

 Causes
• Little or no communication between supply
chain partners.
• Delay times between order processing,
demand, and receipt of products.
• Over reacting to the backlog orders.
• Inaccurate demand forecasts.
• http://www.supplychainonline.com/previews/SC
Drivers of Supply Chain Performance
• Facilities
– Production/Storage Sites
• Responsiveness Vs Efficiency
 Drivers of Supply Chain Performance

• Inventory
– Raw materials
– WIP
– Finished Goods
– Responsiveness Vs Efficiency
• Sourcing
– Outsourcing
• Transportation
 Transportation Total
costs

Cost
Transport
costs

Inventory
costs

Rail Air
 Inventory
• Where do we hold inventory?
– Suppliers and manufacturers
– warehouses and distribution centers
– retailers
• Types of Inventory
– raw materials
– WIP
– finished goods
• Why do we hold inventory?
– Uncertainty in supply and demand
– Lead Time
– Avoid stock outs (customer goodwill)
 Terms Involved
• Inventory lot size
• Replenishment Lead time
• Stock out
• Reorder Point
• Safety stock
 Relevant Costs in an Inventory
System
• Procurement costs
– Ordering cost (appx. administrative, inspection,
transportation etc.)
• Holding costs
– Maintenance and Handling
– Taxes
– Obsolescence
• Stock-outs costs
– Lost sales (Customer goodwill)
– Backorders
 The Inventory Cycle

Profile of Inventory Level Over Time

Q Demand
rate Constant
Demand
Quantity
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time
 Decisions
• When to order
• How much to order
• Types of System
– Continuous Review
– Periodic Review
 EOQ: A View of Inventory

Note:
• No Stockouts
• Order when no inventory
• Order Size determines policy
Inventory

Order
Size

Time
 EOQ - Cost Minimization Goal
The Total-Cost Curve is U-Shaped
Annual Cost

Holding Costs

Ordering Costs

Order Quantity
QO (optimal order quantity)
or EOQ (Q)
 EOQ: Important Observations
• Tradeoff between set-up costs and holding
costs when determining order quantity.

• Total Cost is not particularly sensitive to the

optimal order quantity
Order Quantity 50% 80% 90% 100% 110% 120% 150% 200%
Cost Increase 125% 103% 101% 100% 101% 102% 108% 125%
 Types of System –
Continuous Review
• Continuously monitored
– R – Reorder point, L – Lead time
– Q – Order quantity
• Time b/w orders vary but Q is fixed
 Periodic Review
• Monitored at periodic intervals of length “r”
• Quantity set as the amount consumed
during this interval
• Time b/w orders fixed
 Distribution
• Steps taken to move and store a product
from supplier to customer
• Design Options
– Manufacturer storage with direct shipping
– Manufacturer storage with direct shipping and
in-transit merge
– Distributor storage with package carrier
delivery
 Manufacturer storage with direct
shipping

Manufacturer

Retailer

Customers

• Drop Shipping
 Manufacturer storage with direct
shipping and in-transit merge

Manufacturer

Retailer In-transit Merge by carriers

Customers
Distributor storage with carrier
delivery

Manufacturer

Warehouse Storage by
Distributor/Retailer

Customers
 To Summarize
• Components of supply chain (SC)
• Objective of SC is to max. profit
• Bull whip effect
• Facilities decisions
• Inventory policies
• Distribution networks
 Information Sources
• Wikipedia.com
• mit.edu .. Open Courseware
• http://www.supplychainseminars.com/online.html
• The Goal
– Eliyahu M. Goldratt
• Kelkar library
– POM/SCM
• THE NEW BCLUB WEBSITE
– http://students.iitk.ac.in/bclub/
Thank You