Lecture No 5

Supply Chain Driver

08/28/10 Lokesh Vijayvargy, JIM, Jaipur 1

 What is the key of success?

Communication
Collaboration
Coordination

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 Drivers of Supply Chain
Performance
Facilities
places where inventory is stored, assembled, or fabricated
production sites and storage sites
Inventory
raw materials, WIP, finished goods within a supply chain
inventory policies
Transportation
moving inventory from point to point in a supply chain
combinations of transportation modes and routes
Information
data and analysis regarding inventory, transportation, facilities throughout the supply
chain
potentially the biggest driver of supply chain performance
Sourcing
functions a firm performs and functions that are outsourced
Pricing
Price associated with goods and services provided by a firm to the supply chain

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 A Framework for
Structuring Drivers
Competitive Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

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 Facilities
Role in the supply chain
the “where” of the supply chain
manufacturing or storage (warehouses)
Role in the competitive strategy
economies of scale (efficiency priority)
larger number of smaller facilities
(responsiveness priority)
Components of facilities decisions

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 Components of Facilities
Decisions
Location
centralization (efficiency) vs. decentralization
(responsiveness)
other factors to consider (e.g., proximity to customers)
Capacity (flexibility versus efficiency)
Manufacturing methodology (product focused versus
process focused)
Warehousing methodology (SKU storage, job lot storage,
cross-docking)
Overall trade-off: Responsiveness versus efficiency

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Inventory: Role in the Supply Chain
Inventory exists because of a mismatch between
supply and demand
Source of cost and influence on responsiveness
Impact on
material flow time: time elapsed between when
material enters the supply chain to when it exits the
supply chain
throughput
rate at which sales to end consumers occur
I = RT (Little’s Law)
I = inventory; R = throughput; T = flow time
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Inventory: Role in Competitive
Strategy

If responsiveness is a strategic competitive

priority, a firm can locate larger amounts of
inventory closer to customers
If cost is more important, inventory can be
reduced to make the firm more efficient

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Components of Inventory Decisions
Cycle inventory
Average amount of inventory used to satisfy demand between
shipments
Depends on lot size
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
Overall trade-off: Responsiveness versus efficiency
more inventory: greater responsiveness but greater cost
less inventory: lower cost but lower responsiveness

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 Transportation: Role in
the Supply Chain
Moves the product between stages in the
supply chain
Impact on responsiveness and efficiency
Faster transportation allows greater
responsiveness but lower efficiency
Also affects inventory and facilities

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 Transportation:
Role in the Competitive Strategy
If responsiveness is a strategic competitive
priority, then faster transportation modes can
provide greater responsiveness to customers who
are willing to pay for it
Can also use slower transportation modes for
customers whose priority is price (cost)
Can also consider both inventory and
transportation to find the right balance
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 Components of
Transportation Decisions
Mode of transportation:
air, truck, rail, ship, pipeline, electronic
transportation
vary in cost, speed, size of shipment, flexibility
Route and network selection
route: path along which a product is shipped
network: collection of locations and routes
In-house or outsource

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 Information: Role in
the Supply Chain
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

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 Information:
Role in the Competitive Strategy

Allows supply chain to become more

efficient and more responsive at the same
time (reduces the need for a trade-off)
Information technology

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 Components of Information
Decisions
Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies
EDI
Internet
ERP systems
Supply Chain Management software

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 Sourcing: Role in
the Supply Chain
Set of business processes required to
purchase goods and services in a supply
chain
Supplier selection, single vs. multiple
suppliers, contract negotiation

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 Sourcing:
Role in the Competitive Strategy
Sourcing decisions are crucial because they
affect the level of efficiency and responsiveness
in a supply chain
In-house vs. outsource decisions- improving
efficiency and responsiveness

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 Components of Sourcing
Decisions
In-house versus outsource decisions
Supplier evaluation and selection
Procurement process
Overall trade-off: Increase the supply chain
profits

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 Pricing: Role in
the Supply Chain

Pricing determines the amount to charge

customers in a supply chain
Pricing strategies can be used to match
demand and supply

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 Components of Pricing
Decisions
Pricing and economies of scale
Everyday low pricing versus high-low
pricing
Fixed price versus menu pricing
Overall trade-off: Increase the firm profits

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 Functional Domain of a SC
Manager
Forecasting demand: by using forecasting technique
Selecting suppliers: by goal programming, Decision
matrix, AHP, ANP and etc.
Ordering materials: Centralized versus decentralized,
MRP
Inventory control: ABC analysis, XYZ analysis, FSN
Shipping & delivery: depend on lead time and customer
Information management
Quality management
Customer service
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 Designing the
Distribution Network in a
Supply Chain

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 Outline
The Role of Distribution in the Supply Chain
Factors Influencing Distribution Network
Design
Design Options for a Distribution Network
E-Business and the Distribution Network

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 The Role of Distribution
in the Supply Chain
Distribution: the steps taken to move and store a
product from the supplier stage to the customer stage in
a supply chain
Distribution directly affects cost and the customer
experience and therefore drives profitability
Choice of distribution network can achieve supply
chain objectives from low cost to high responsiveness
Example For good Distribution Network: Dell, Wal-
Mart, Seven- Eleven, Shopper Stop, Amul, Hero honda,
etc.

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 Factors Influencing
Distribution Network
Design

Distribution network design options

must therefore be compared according
to their impact on customer service and
the cost to provide this level of service

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 Distribution Network
Design
Elements of customer service influenced by network
structure:
Response time
Product variety
Product availability
Customer experience
Order visibility
Supply chain costs affected by network structure:
Inventories
Transportation
Facilities and handling
Information

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 Service and Number of
Facilities
Number of
Facilities

Response Time
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 Inventory Costs and
Number
of Facilities
Inventory
Costs

Number of facilities

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 Transportation Costs and
Number of Facilities
Transportation
Costs

Number of facilities

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 Facility Costs and Number
of Facilities
Facility
Costs

Number of facilities

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 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
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Variation in Logistics Costs and Response
Time with Number of Facilities
Response Time

Total Logistics Costs

Number of Facilities
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Design Options for a Distribution Network
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and
In-Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with
Consumer Pickup
Retail Storage with Consumer Pickup
Selecting a Distribution Network Design
4-33
08/28/10 Lokesh Vijayvargy, JIM, Jaipur
Manufacturer Storage with
Direct Shipping
Manufacturer

Retailer

Customers

Product Flow
Information Flow

4-34
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 In-Transit Merge Network
Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow

4-35
08/28/10 Lokesh Vijayvargy, JIM, Jaipur
 Distributor Storage with
Carrier Delivery
Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
4-36
08/28/10 Lokesh Vijayvargy, JIM, Jaipur
 Distributor Storage with
Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
4-37
08/28/10 Lokesh Vijayvargy, JIM, Jaipur
 Manufacturer or Distributor
Storage with Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
08/28/10 Lokesh Vijayvargy, JIM, Jaipur Information Flow 38
 Summary of all network
When designing the delivery network we should account for
product and market characteristics.
High demand products will have transportation cost play a
significant role. Use network with good transportation cost (retail
stores)
Very low demand products will have inventory play a
significant role. Use network with low inventory costs (direct
shipping)
Many product sources: transportation + information plays a role.
Distributor storage with package carrier
Few product sources but high customization: manufacturer
storage with merge in transit
High product variety: inventory cost will be significant. Use
distributor storage
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 E-Business and the
Distribution Network
Impact of E-Business on Customer
Service
Impact of E-Business on Cost
Using E-Business: Dell, Amazon,
Peapod, Grainger

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 Complexity of Network
Design Problems
Location problems are, in general, very
difficult problems.
The complexity increases with
the number of customers,
the number of products,
the number of potential locations for
warehouses, and
the number of warehouses located.

Lokesh Vijayvargy, JIM, Jaipur 41

 Solution Techniques
Mathematical optimization techniques:
Exact algorithms: find optimal solutions
Heuristics: find “good” solutions, not necessarily
optimal
Simulation models: provide a mechanism to
evaluate specified design alternatives created
by the designer.

Lokesh Vijayvargy, JIM, Jaipur 42

Case Study

Lokesh Vijayvargy, JIM, Jaipur 43

 Heuristics and
the Need for Exact Algorithms
Single product
Two plants p1 and p2
Plant P1 has an annual capacity of 140,000 units.
Plant p2 has an annual capacity of 60,000 units.
The two plants have the same production costs.
There are two warehouses w1 and w2 with identical
warehouse handling costs.
There are three markets areas c1,c2 and c3 with
demands of 50,000, 100,000 and 50,000,
respectively.

Lokesh Vijayvargy, JIM, Jaipur 44

 Heuristics and
the Need for Exact Algorithms

Table 1
Distribution costs per unit
Facility P1 P2 C1 C2 C3
Warehouse
W1 0 4 3 4 5
W2 5 2 2 1 2

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 Why Optimization
Matters?
$0
$3 D = 50,000
Cap = 140,000
$4

$5
$5 D = 100,000
$4 $2

$2 $1
Cap = 60,000
$2
D = 50,000

Production costs are the same, warehousing costs are the same
 Traditional Approach #1:
Assign each market to closet WH. Then
assign each plant based on cost.

D = 50,000
Cap = 200,000

$5 x 140,000 D = 100,000
$2 x 50,000

$2 x 60,000 $1 x 100,000
Cap = 60,000
$2 x 50,000
D = 50,000

Total Costs = $1,120,000

 Traditional Approach #2:
Assign each market based on total landed
cost

$0
$3 D = 50,000
Cap = 140,000 P1 to WH1
P1 to WH2
$3
$7
$4 P2 to WH1 $7
P2 to WH 2 $4
$5
$5 D = 100,000
$2 P1 to WH1 $4
$4 P1 to WH2 $6
$1 P2 to WH1 $8
$2 P2 to WH 2 $3
Cap = 60,000
$2
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4
 Traditional Approach #2:
Assign each market based on total landed
cost

$0
$3 D = 50,000
Cap = 140,000 P1 to WH1
P1 to WH2
$3
$7
$4 P2 to WH1 $7
P2 to WH 2 $4
$5
$5 D = 100,000
$2 P1 to WH1 $4
$4 P1 to WH2 $6
$1 P2 to WH1 $8
$2 P2 to WH 2 $3
Cap = 60,000
$2
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4

Market #1 is served by WH1, Markets 2 and 3

are served by WH2
 Traditional Approach #2:
Assign each market based on total landed
cost

$0 x 50,000
$3 x 50,000 D = 50,000
Cap = 140,000 P1 to WH1
P1 to WH2
$3
$7
P2 to WH1 $7
P2 to WH 2 $4

$5 x 90,000 D = 100,000
P1 to WH1 $4
P1 to WH2 $6
$1 x 100,000 P2 to WH1 $8
$2 x 60,000 P2 to WH 2 $3
Cap = 60,000
$2 x 50,000
D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4

Total Cost = $920,000

 What is the LP?
Let :
x pw
ij = the flow from plant i to warehouse j

jk = the flow from warehouse j to market k

x wm
 What is the LP?
min : 0 x1p,w
1 +5 x pw
1, 2 +4 x pw
2 ,1 +2 x pw
2, 2 +3 x wm
1,1 +4 x wm
1, 2

+5 x1w,m
3 +2 x wm
2 ,1 +2 x wm
2,3

s.t.
x2p,w1 +x2p,w2 ≤60 ,000
x1p,w
1 +x pw
2 ,1 =x wm
1,1 +x wm
1, 2 +x wm
1, 3

x1p,w2 +x2p,w2 =x2w,m1 +x2w,m2 +x2w,m3

1 +x2 ,1 =50 ,000
x1w,m wm

x1w,m
2 +x 2 , 2 =100 ,000
wm

x1w,m
3 +x 2 , 2 =50 ,000
wm

All flows non - negative

The Optimal Strategy
Table 2
Distribution strategy
Facility P1 P2 C1 C2 C3
Warehouse
W1 140000 0 50000 40000 50000
W2 0 60000 0 60000 0

The total cost for the optimal strategy is 740,000.

Lokesh Vijayvargy, JIM, Jaipur 53

 Optimal Network

$0*1,40,000 $3*50,000
D = 50,000
Cap = 140,000
$4*40,000

$5*50,000 D = 100,000
$1*60,000

$2*60,000
Cap = 60,000
D = 50,000