Supply Chain Management

Lecture-13 6 Oct 2018, Saturday

BITS Pilani Sandeep Kayastha, at Hyderabad
Pilani Campus
Today’s lecture

Chapter No Topic Lecture Date(s)

1 Understanding the supply chain 21 Jul, 28 Jul
2 Supply chain performance: Achieving strategic fit and scope 28 Jul, 4 Aug
3 Supply chain drivers and metrics 4 Aug, 11 Aug
4 Designing distribution networks and applications to online sales 11 Aug, 18 Aug
5 Network design in the supply chain 18 Aug, 1 Sep, 8 Sep
SCM in Practice-1 25 Aug
6 Designing global supply chain networks 8 Sep, 9 Sep
7 Demand forecasting in a supply chain 15 Sept, 16 Sept
10 Coordination in a supply chain 22 Sept, 6 Oct
11 Managing Economics of Scale in a Supply Chain: Cycle inventory 6 Oct
12 Managing uncertainty in a supply chain: Safety inventory
14 Transportation in a supply chain
15 Sourcing decisions in a supply chain
16 Pricing and revenue management in a supply chain
17 Sustainability and the Supply Chain

BITS Pilani, Pilani Campus

Flipped Mode delivery

Delivery of this course is in the Flipped Mode

 Video Lecture and PPTs used in pre-recorded lectures are available on

Taxila, at CW-SCM.

3
BITS Pilani, Pilani Campus
 Supply Chain Management

Chapter 10: Coordination in a supply chain

BITS Pilani
Pilani | Dubai | Goa | Hyderabad
Topics
 The Bullwhip Effect

 Causes of Bullwhip Effect

 Obstacles to Coordination in a Supply Chain

 Achieving Coordination in a Supply Chain

Supply Chain Management 5 BITS-Pilani

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

The Bullwhip Effect

Supply Chain Management 6 BITS-Pilani

Orders in the Supply Chain-2

Manufacturer Wholesaler Retailer Customer

1 2
4 3 2 1
Sales at
retail
stores

time

3 4

The 4 graphs show-

 Average order size are same
 Variation in orders increases from
right (retailer) to left (manufacturer)

BITS Pilani, Pilani Campus

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Obstacles to Coordination in a Supply Chain

Obstacles to Coordination in a Supply Chain
 Incentive obstacles

 Information processing obstacles

 Operational obstacles

 Pricing obstacles

 Behavioral obstacles

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Obstacles-1

 Incentive obstacles
 Incentives of participants are in conflict
 Participants maximize own benefits
 Sales force incentives

 Information Processing obstacles

 Forecasting based on orders, not customer demand
 Delayed/incomplete/wrong information sharing

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Obstacles-2

 Operational obstacles
 Ordering in large lots
 Large replenishment lead times
 Rationing and shortage gaming

 Pricing obstacles
 Lot-size based quantity decisions
 Price fluctuations

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Obstacles-3

Behavioral obstacles

 Each stage of the supply chain views its actions

locally and is unable to see the impact of its actions
on other stages.

 Different stages of the supply chain blame one

another for the fluctuations and fail to attack the root
causes.

BITS Pilani, Pilani Campus

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Achieving Coordination in a Supply Chain

Supply Chain Management 13 BITS-Pilani

Achieving coordination

1. Aligning goals and incentives

2. Improving information accuracy

3. Improving operational performance

4. Designing pricing strategies to stabilize orders

5. Building strategic partnerships and trust

BITS Pilani, Pilani Campus

Aligning Goals and Incentives

 Align goals and incentives so that every participant

works to maximize total supply chain profits

 Salesforce incentives from sell-in (to the retailer) to

sell-through (by the retailer)

 Pricing for coordination- buyback, profit sharing

(Chapter-15)

BITS Pilani, Pilani Campus

Improving Information Visibility and Accuracy
 Share Point-Of-Sale (POS) data

 Implement collaborative forecasting and planning

 Design single-stage control of replenishment

 Continuous Replenishment Programs (CRP)
 Vendor Managed Inventory (VMI)

BITS Pilani, Pilani Campus

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Achieving Coordination in a Supply Chain

Improving Operational Performance

 Reducing replenishment lead time

 Reducing lot sizes

 Rationing based on past sales and sharing information to

limit gaming

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Designing Pricing Strategies to Stabilize Orders
 Encourage retailers to order in smaller lots and reduce
forward buying

 Move from lot size-based to volume-based quantity

discounts

 Stabilize pricing

 Build strategic partnerships and trust

BITS Pilani, Pilani Campus

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Achieving Coordination in a Supply Chain

Collaborative Planning, Forecasting, and
Replenishment (CPFR)
 Sellers and buyers in a supply chain may collaborate for-
 Strategy and planning
 Demand and supply management
 Execution
 Analysis

 Retail event collaboration

 Distribution Centre (DC) replenishment collaboration
 Store replenishment collaboration
 Collaborative assortment collaboration

BITS Pilani, Pilani Campus

 Supply Chain Management
Chapter 11: Managing Economies of Scale in a
Supply Chain: Cycle Inventory

BITS Pilani Sandeep Kayastha,

Pilani | Dubai | Goa | Hyderabad BITS Pilani
Topics

 Basics of Inventory

 Cycle Inventory

 Economic Order Quantity (EOQ)

 How much to order?

 EOQ Formula

 EOQ Example

Supply Chain Management 23 BITS-Pilani

 BITS Pilani
Pilani Campus

Basics of Inventory
Inventory-1

Inflow > Outflow, inventory goes up

Inflow < Outflow, inventory comes down
Inflow = Outflow, no change in inventory

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Inventory-2

Types of inventory
• Raw materials – not yet entered into the production process
• Work-in-Progress (WIP) – not yet finished
• Finished goods – not yet sold

Purpose of maintaining inventory

• To reduce changeover/ordering/transport/purchase costs
• To avoid stock-out due to uncertainty in inflow and outflow

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Receipts and Sales pattern of a Retailer

Receipts,
Q

Retailer’s
Inventory
Sales

Receipts- Large lot size, few deliveries (3-4 times in a month)

Sales- Small lot size, everyday sales (30 times in a month)

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 BITS Pilani
Pilani Campus

Cycle Inventory
 Cycle Inventory

Receipts

Sales

Cycle inventory- Average inventory

due to either production or Inventory
purchases in lot sizes that are larger
than those demanded by the
customer.

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Inventory Metrics

Lot size = Q

lot size Q
Cycle inventory = =
2 2

average inventory cycle inventory Q

Average flow time =  
average flow rate demand 2D

Lower cycle inventory has

 Shorter average flow time
 Lower working capital requirements
 Lower inventory holding costs

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 BITS Pilani
Pilani Campus

Economic Order Quantity (EOQ)

 BITS Pilani
Pilani Campus

How much to Order?

 How much to order, Q?: Demand, D pattern is same

Order Order
Quantity, Q Quantity, Q

Sales Sales
rate, D rate, D

Inventory Inventory

Small order size Large order size

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Components of ordering and holding costs

Ordering cost
 Buyer time- people in purchase department
 Cost of transportation, receiving, inspection, testing, data entry, payment,
etc.

Inventory holding cost

 Holding cost
 Obsolescence cost, occupancy cost, theft, security, damage, tax,
insurance

BITS Pilani, Pilani Campus