Pre Slides (01) - (07) Supply Chain Ia

SUPPLY CHAIN SYSTEMS
Indra Almahdy
Indra Almahdy
Industrial Engineering
Acknowledgment
• B
Bowersox, Closs, and Cooper. (2008). Supply Chain Logistics
Cl dC (2008) S l Ch i L i ti
Management, 3e. The McGraw‐Hill Companies, Inc.
• Chopra, Meindl, (2006) ”Supply Chain Management: Strategy,
Planning and Operation” Prentice Hall, New Jersey.
• Stock, Lambert. (2009).”Strategic Logistics Management”, Mc.Graw
( ) g g g
Hill, New York.
• Christopher, M., (1998), “Logistics and Supply Chain Management.
Strategies for Reducing Cost and Improving Service”,
g f g p g , Financial Times
Pitman Publishing, London
• Levitt, T. (1983), “The Globalisation of Markets”, Harvard Business
Review May/Jun.
y/
• Douglas, S., & Wind, Y., (1987), “The Myth of Globalisation”,
Columbia Journal of World Business, Winter.
2
[01] [02] Basic Concept to SC
Indra Almahdy
Indra Almahdy
CURRENT SUPPLY CHAIN
Generalized Supply Chain Model
pp y
Relationship Management
Information, Product, Service, Financial and Knowledge Flows

SUPPLIER E
M NETWORK N
A INTEGRATED D
ENTERPRISE DISTRIBUTIVE
T NETWORK
E C
R Procurement Distribution
O
I N
A S
L U
S Manufacturing
M
E
R
S
Capacity, Information, Core Competencies, Capital and Human Resources

Supply Chain Logistics Management, First
Edition. Bowersox, Closs, and Cooper.
Copyright© 2002 by The McGraw‐Hill
Companies, Inc. All rights reserved.
Successful Supply Chain Strategies
Successful Supply Chain Strategies
A recent Andersen Consulting study revealed six different, but equally successful,
supply
pp y chain strategies.
g
 Market Saturation Driven: Focusing on generating high profit margins, through

strong brands and ubiquitous marketing and distribution.
 Operationally Agile: Configuring assets and operations to react nimbly to

emerging consumer trends along lines of product category or geographic region.
 Freshness Oriented: Concentrating on earning a premium by providing the

consumer with product that is fresher than competitive offerings.
 Consumer Customizer: Using mass customization to build and maintain close

relationships with end-consumers through direct sales
sales.
 Logistics Optimizer: Emphasizing a balance of supply chain efficiency and

effectiveness.
 Trade Focused: Prioritizing "low price, best value" for the consumer (as with
the logistics optimizer strategy but focusing less on brand than on dedicated
service to trade customers).
Source: Supply Chain Management Review, March/ April 2000, p. 29.
Anticipatory Business Model
Anticipatory Business Model
BUY
COMPONENTS
FORECAST MANUFACTURER WAREHOUSE SELL DELIVER
AND
MATERIALS
Response based Business Model
Response‐based Business Model
BUY
COMPONENTS
SELL MANUFACTURER DELIVER
AND
MATERIALS
LEAN LOGISTICS
United States Logistics Costs
United States Logistics Costs
100 1980
0900  GDP $2.88 trillion
800
 Logistics Cost $451 billion
 15.7% of GDP
15 7% f GDP
700
 Trans. Cost $214 billion
$ billion
600
$ Billions
 47.5 % of Logistics Cost
500
$
400 1999
300  GDP $9.26 trillion
200  Logistics Cost $921 billion
100  9.9% of GDP
0  Trans. Cost $554 billion
Trans. Cost $554 billion
1980 Year 1999  60.2 % of Logistics Cost
Logistics Transportation
Source: Robert V. Delaney, 11th Annual “State Of Logistics Report” © June 5, 2000
Integrated Logistics
Integrated Logistics
Order
Processing
Facility
Inventory
Network
Warehousing
Material Handling
Material Handling Transportation
Packaging
Logistical Integration
Logistical Integration
Inventory Flow
Enterprise
Market Manufacturing
Customers Procurement Suppliers
Distribution Support
pp
Information Flow
Market Distribution
Operating Concerns
Market Distribution:
Activities related to providing customer service. Requires performing
order receipt and processing, deploying inventories, storage and
handling, and outbound transportation within a supply chain.
Includes the responsibility to coordinate with marketing planning in
such areas as pricing, promotional support, customer service levels,
delivery standards, handling return merchandise, and life‐cycle
support. The primary market distribution objective is to assist in
support. The primary market distribution objective is to assist in
revenue generation by providing strategically desired customer
service levels at the lowest total cost.
Manufacturing Support
Operating Concerns
Manufacturing Support:
Activities related to planning, scheduling, and supporting
manufacturing operations. Requires master schedule planning and
performing work‐in‐process storage, handling, transportation, and
time phasing of components. Includes the responsibility for storage
of inventory at manufacturing sites and maximum flexibility in the
coordination of geographic and final assemblies postponement
between manufacturing and market distribution operations.
between manufacturing and market distribution operations.
Procurement
Operating Concerns
Procurement:
Activities related to obtaining products and materials from outside
suppliers. Requires performing resource planning, supply sourcing,
negotiation, order placement, inbound transportation, receiving and
inspection, storage and handling, and quality assurance. Includes the
responsibility to coordinate with suppliers in such areas as
scheduling, supply continuity, hedging, and speculation, as well as
research leading to new sources or programs. The primary
research leading to new sources or programs. The primary
procurement objective is to support manufacturing or resale
organizations by providing timely purchasing at the lowest total cost.
Logistics Information Requirements
Logistics Information Requirements
PLANNING ‐ COORDINATION
Strategic Capacity Logistics Manufacturing Procurement

Objectives Constraints Requirements Requirements Requirements
Inventory
Deployment
Forecasting
Inventory
Management
Order Order Distribution Transportation

Procurement
Processing Assignment Operations and Shipping
OPERATIONS
Echeloned Structured Logistics
INFORMATION FLOWS
Industrial
Wholesaler or
Distribution or
Supplier Manufacturer Distribution Retailer Customer
Consolidation
Center
Warehouse
INFORMATION FLOWS
Industrial
Wholesaler or
Distribution or
Consolidation
Center
Warehouse
Support for
Direct Delivery
Flexible Echeloned Structured Logistics
Flexible Echeloned Structured Logistics
INFORMATION FLOWS
Flow Through Flow Through
Service Supplier Arrangements Service Supplier Arrangements
Industrial
Wholesaler or
Distribution or
Consolidation
Center
Warehouse
Support for
Direct Delivery
Logistical Performance Cycles
Logistical Performance Cycles
Material
Source
Purchasing
Cycle
Lead Supplier
(Tier 1)
Manufacturing
Manufacturing Support
Plant Cycle
Node
Distributors
Transportation
Physical Links
Distribution
Communication
Cycle Links
Customer
Multi Echeloned Flexible Network
Multi‐Echeloned Flexible Network
1 2 3
Material Material Material

Source Source Source
Manufacturing Manufacturing Manufacturing

Plant Plant Plant
Plant Plant Plant

Warehouse Warehouse Warehouse
Distribution Distribution Distribution

Warehouse Warehouse Warehouse
Customer Customer Customer
Basic Market Distribution
Performance‐Cycle Activities
Order Order Customer

Processing Transmission Order
Order Order Customer

Selection Transportation Delivery
Procurement Cycle Activities
Procurement‐Cycle Activities
Order Placement
Sourcing
and Expediting
Supplier
Receiving Transportation
Performance Cycle Uncertainty
Performance‐Cycle Uncertainty
Total Performance Cycle
5 10 40
Customer
Delivery Time Range ‐ Days Order
Transmission
1/2 1 3
Time Range ‐ Days 1/2 1 3
Time Range ‐ Days
Order
d
Transportation Order
Processing
2 4 10
Time Range ‐ Days Order
O d
Selection 1 2 4
Time Range ‐ Days
1 2 20
Time Range ‐ Days
Logistics Operations Planning
Indra Almahdy
Indra Almahdy
Acknowledgment
• B
( ) g g g
Hill, New York.
Review May/Jun.
y/
2
DESIGN PROCESS AND TECHNIQUES
LOGISTICAL REDESIGN PROCESS
Feasibility
Assessment
Phase I
Project
Planning
Assumptions and
Data Collection
Phase II
Analysis
ys s
Development of
R
Recommendations
d ti
Phase III
Implementations
Supply Chain Logistics
Management, First Edition ,
Bowersox, Closs, and Cooper
Copyright© 2002 by The
McGraw‐Hill Companies, Inc.
Phase I: Problem Definition and Planning
Feasibility  Situational Analysis

Assessment  Supporting Logic Development
 Cost-Benefit Estimate
 Statement of Objectives
Project  Statement of Constraints
Planning  M easurement Standards
 Analysis Technique
 Project W orkplan
Feasibility Assessment
• Situation Analysis
– Internal assessment
– External assessment
– Technology assessment
• Supporting logic development
– Opportunity assessment
– Factual assessment of current procedures and practices
– Identify potential alternatives
• Definition of current operations
• Identify likely alternatives
• Creative alternatives
l
• Cost‐Benefit estimate
– Service
– Cost reduction
– Cost prevention
– Competitive
Project Planning
Statement of Objectives
• Inventory availability
• Desired delivery within x hours
• Minimize shipments from alternative sources
• Fill orders without backorders
• Maximum hold time for backorders
Maximum hold time for backorders
• Provide high volume customers with minimum
performance standards
performance standards
• Offer distribution within mileage radius
• Minimize transportation cost
Minimize transportation cost
Project Planning
Statement of Constraints
• Facility constraints
• Alliance constraints
• Resource constraints
Resource constraints
• System constraints
• Ch
Channel constraints
l t i t
Project Planning
Analysis Techniques
• Ad‐Hoc techniques
– Profitability
– Inventory
– Lane
• Network analysis
N t k l i
– Graphical
– Optimization
O ti i ti
– Heuristic or simulation
• Simulation
• Transportation
Improving Profitability and
Competitiveness in the Supply Chain
• Strategic Network Design
St t i N t kD i
– Pick the optimal number, location, and size of warehouses
– Optimize the trade‐offs between number of facilities and service levels
– Optimize the trade‐offs between transportation and warehousing costs
– Determine optimal sourcing strategy
– Determine best distribution channels
• Tactical Planning
– Develop an optimal supply chain plan for the next 3‐12 months
• Optimize the trade‐offs between production, inventory and warehousing
• Identify potential supply chain bottlenecks early to avoid disruptions and costs
– Share supply chain plan with geographically dispersed managers
• Share supply chain production plan with each of the plant mangers
• Provide warehouse managers with shipping and storage requirements
Typical Tactical/Operational Issues
Typical Tactical/Operational Issues
• Inventory/customer service trade‐offs
• Production/distribution coordination
• Inventory/forecasting management
Inventory/forecasting management
• Transportation consolidation
• R ti
Routing and scheduling
d h d li
Project Plan
Project Workplan
• Schedule
• Resource requirements
– Personnel
– Data collection and analysis
– Analysis tools
Analysis tools
• Meeting schedules
Phase II: Data Collection and Analysis
 Define Analysis Approach and

 Obtain Technique
Assumptions
A ti
 Define and Review Assumptions
and  Identify Data Sources
Data Collection  Collect Data
 Collect Validation Data

 Define Analysis Questions
 Complete and Validate Baseline
Analysis
y  Analysis
 Complete Alternative Analysis
 Complete Sensitivity Analysis
Assumptions and Data Collection
• Define analysis approach and obtain technique
• Define and review assumptions
• Identify data sources
Identify data sources
• Collect data
• C ll t lid ti d t
Collect validation data
Logistics Analysis Methodologies
Logistics Analysis Methodologies
• Analytical
• Optimization
• Heuristics
• Simulation
Analytical Methodology
Analytical Methodology
• Using standard numerical/statistical methods, such as
those available through spreadsheets or statistical
h l bl h h h l
software to evaluate each logistical alternative
• Examples
– Determine the inventory/service trade‐offs using safety stock and fill
rate formulae
rate formulae
– Determine the order cycle time that currently would be required to
deliver 95% of customer orders
– Determine the transportation dollar benefits for consolidating LTL
orders into TL orders
Optimization
• Determine the best answer to problems where objective
functions and constraints can be expressed in
functions and constraints can be expressed in
mathematical terms
• Appropriate for applications involving sweeping changes
Appropriate for applications involving sweeping changes
to the logistics systems
• Limitations include computing time/capacity and utility
Limitations include computing time/capacity and utility
of generalized mathematical expressions
• Example
p
– Determine the best location for distribution facilities subject to
meeting supply, demand, and delivery time constraints
Heuristics
• Using “rules of thumb” to direct the analytical process
toward the best solution
• Appropriate for both large scale optimization and
simulation models
• Advantages include speed and understanding compared
to optimization techniques
• Limitation is that “optimal” solution may not be found
• Example
– Locate distribution centers only where demand exceeds a given
threashold
Benefits of Heuristics
Benefits of Heuristics
• Exploit the experience of management and
analysts
l
– Warehouses should be located near centers of greatest
demand
– TL shipments should be made to consumers directly from
manufacturing locations
manufacturing locations
– Only warehouse those items with a substantial differential
between inbound and outbound transportation costs
– The next warehouse to add to a distribution system is the
one that shows the greatest cost savings
Simulation
• Conducting experiments using a precise representation
of a real system to understand its behavior or to evaluate
f l b h l
strategies for its operation (“What if” analysis)
• Appropriate when:
– Studying impact of change to a limited number of variables
– A more exact representation of the process is needed
A t t ti f th i d d
– Customer order/stock keeping unit level of detail is needed
Optimization ?
Business Optimization
S l
Solver Simulator
• LP/MILP/GA etc. t searchh • Mathematical/Heuristics

based solve. execution based run.
• Conditions of certainty • Process flow and logic
with some probability • Conditions of uncertainty,
• Execution of a calculation randomness and variability
• Ideal (single) answer to • Execution of a process
the formulated problem.
problem • Realistic ((95%)) answer to
the modeled problem.
Each technique
q is p
particularly
y strong
g at solving
g different types
yp of
problems, and therefore
should not be seen as competing
Define Analysis Approach and
Define Analysis Approach and
Technique
q
• Heuristic (Spatial)
• Optimization (Spatial, Temporal)
Optimization (Spatial Temporal)
• Simulation (Temporal)
Range of Planning Requirements
Range of Planning Requirements
• Network optimization
• Supply chain dynamics
• Demand planning
Demand planning
• Supply planning
• T
Transportation planning
t ti l i
Network Optimization
Network Optimization
• Determine the appropriate network of the supply
chain by addressing strategic questions such as the
following:
– Where should plants and DCs be located?
– Which plants or DCs should be shut down?
– Which market areas should be served by each DC?
Which market areas should be served by each DC?
– Which DCs should stock each product?
– Which vendors should be used for long‐term contracts?
g
Total Cost Analysis Approach
Total Cost Analysis Approach
Expense
Components
Handling
+
Inbound Transport
+
DC Handling
+
Inventory
+
Customer Transport
Dealers
l
____________
Total Cost
Location Problem Types
Location Problem Types
• Plant vs. distribution center location
• Static vs. dynamic time horizon
• Stochastic vs. deterministic data
Stochastic vs. deterministic data
• Single vs. multiple products
• C ti
Continuous vs. discrete approaches
di t h
• Spatial vs. temporal dimensions
• Profit vs. cost optimization
Operating Policies
Operating Policies
• Products “bundled” for sourcing. All LTL and UPS
shipments are sourced from a common DC based on
the lowest inbound + outbound transportation cost
the lowest inbound + outbound transportation cost.
Premium shipments have a different source.
• Supplier locations held constant.
Supplier locations held constant
• Market assignments for all DCs are based on
minimizing combined inbound and outbound
minimizing combined inbound and outbound
transportation.
• Location impact of inventory is projected using the
“square root of N” rule with a 20% annual inventory
carrying cost
Supply Chain Dynamics
Supply Chain Dynamics
• Exploring the relationship and operating
dynamics between supply chain operations
and partners. Specific questions include:
– What are the relevant trade‐offs between service
objectives, uncertainty, and inventory level?
– How does forecast, demand, and lead time uncertainty
H d f t d d d l d ti t i t
impact supply chain inventory and performance?
Analysis
Complete Sensitivity Analysis
• Determine responsiveness to changes
– Demand
– Transport cost
– Competitive/environmental issues
– Costs
• Test sensitivity
• Assess probability and identify best options
Assess probability and identify best options
Develop Recommendations
Develop Recommendations
• Identify best alternative
• Perform cost benefit evaluation
Perform cost‐benefit evaluation
• Develop risk appraisal
• Develop presentation
Phase III: Recommendations and Implementation
Development  Identify Best Alternative

of  Evaluate Cost-Benefit Data
Recommendations  Develop Risk Appraisal
 Develop Presentation
 Define Implementation Plan

 Schedule Implementation
Implementations
 Define Acceptance Criteria
 Implement
Recommendations
• Identify best alternatives
• Cost/best evaluation
Cost/best evaluation
• Risk appraisal
• Develop report and presentation
Implementation
• Define implementation plan
• Schedule implementation
Schedule implementation
• Define acceptance criteria
• Implement
Objectives
• Understand & assess the macro environment.
• Analyse & understand the internal
Analyse & understand the internal
capabilities.
• Combines these to set objectives in
C bi h bj i i
consultation & with the support of major
elements of the organisation
The Resource Environment
The Value Chain Michael Porter (1985)
Firm’s Infrastructure
Secondary Human Resource Management
Activities Technology Development
Procurement
Outbound
Inbound Operations Marketing Service
Logistics
Logistics & Sales
Primary Activities
Overview
External Factors Organisational
•Social Strategic Plan
•Ecological
•Political
•Technological
•Economic
Marketing
Manufacturing
Physical Distribution Finance
Adapted from Capacito, W., &
Ad t df C it W &
Rosenfield, D.B., (1984), Logistics
“Analytical Tools for Strategic
Planning”, 15(3), pp47‐61,
Council of Logistics Functional Strategic Plans
Management USA.
38
Key Issues in Logistics Planning
Key Issues in Logistics Planning
• Customer Service:
– Demand for improved service, quality a major element
in competitive advantage
• Logistics costs:
– Physical distribution, up to 30% of sales value
• External pressures
– Regulatory change pressures, competitive pressures of
globalisation
l b li ti
• Trade offs:
– Response to change requires complex adjustment.
R t h i l dj t t
• Organisational conflicts:
– Often no clear responsibility for logistics
Of l ibili f l i i
39
Logistics Operation Planning
g p g
Goals & strategies
Quality of Individual
Quality of Individual
link of logistics system
Customer service requirements
1.
1 Facility location
Facility location
2. Operations strategy
3. Inventory systems
4
4. Information systems
Information systems Integrating logistics planning
5. Material handling
6. Traffic & transportation
7. Planning & control
Planning & control Design of integrated logistics
Design of integrated logistics
8. Organisation system
Overall performance
Adapted from Capacito, W., & Rosenfield,
p p , , ,
D.B., (1984), “Analytical Tools for Strategic
Planning”, 15(3), pp47‐61, Council of
Logistics Management USA. 40
Pressures Influencing System
Pressures Influencing System
New customer
New customer Changing costs
Changing costs
Service requirements
Pressure for
financial
Logistics performance
Regulatory
System
change
Constantly improving
C t tl i i Pressure to
P t
IT availability reduce inventory
Requirement for
Requirement for
Adapted from Capacito, W., & Rosenfield,
D.B., (1984), “Analytical Tools for Strategic innovation and efficiency
Planning”, 15(3), pp47‐61, Council of 41
Logistics Management USA.
Conflicts of Interest
Sales & High revenue through:
Marketing High
High levels of
levels of
Higher
Customer
Customer
availability Service
Lower
Rapid introduction
of new products
Cost effective production:
Production
More Disrupting
High constant capacity
utilisation factors in
Fewer production
Longer production runs,
Fewer set up costs
g g
Tight budgets for: Higher
Finance
& Control Stocks Stocks
Lower
Cost
Adapted from Capacito, W., & Rosenfield, D.B., (1984), “Analytical Tools for Strategic Planning”, 15(3), pp47‐61, Council of Logistics Management USA.42
Analytical Methods
Analytical Methods
• Decisions support systems
pp y
– Advantage of quick analysis, & can incorporate
the complex trade offs.
p
• Logistics cost analysis by:
– Channel, Product, type of customer, geographic
Channel Product type of customer geographic
area, logistics function, etc.
• Use of simulations:
Use of simulations:
– What if simulations, (I.think)
– Optimisation
43
Shapiro Grid framework
Breadth of product line
Cost Service Curves Narrow Broad
Decentralised
D li d
Logistics Inventory
costs
Service costs Centralised
or Delivery Time, etc Inventory
• Elbows create concentration
• away from elbow large increases in
delivery time and only moderate • Service consists of a range
decrease in costs
• Straight steep curves variation and
of dimensions
niches • A basis for competitor
• more room for differentiators
comparison on two
dimensions
44
References
• Capacito, W., & Rosenfield, D.B., (1984), “Analytical Tools for Strategic
f ld ( ) “ l l l f
Planning”, 15(3), pp47‐61, Council of Logistics Management USA.
• Christopher, M., (1995), “Logistics the Strategic Issues”,
p , ,( ), g g , Chapman Hall,
p ,
London.
• Aitken, J., “Supply Chain Integration within the Context of a Supplier
Association”, Cranfield University PHD Thesis, 1998. Cited in Christopher,
Association Cranfield University PHD Thesis 1998 Cited in Christopher
M., (1998), “Logistics and Supply Chain Management. Strategies for
Reducing Cost and Improving Service”, Financial Times Pitman Publishing,
L d
London.
45
GLOBAL
The Globalisation of Markets.
Levitt, T. (1983).
• Advances in Technology Driving the world

g g commonality.
to a converging y
– Proletarianisation of:
• Communication,
Communication transport
transport, travel
• Global corporations which operate with
resolute
l t consistency
i t att low
l relative
l ti costt
using the entire world as a single market.
47
Trade Offs in Global Logistics
Transport
Costs Source to User
Inventory
Material
Production
Localised Global
• Important to recognise trade offs.

• Key to recognise the service needs of
the market
48
Globalisation in Supply Chains
pp y
• Liberalisation effect of WTO, etc.
,
– No longer have to set up in target country, instead
can concentrate on developing economies of
p g
scale.
– Emergence of new manufacturing economies has
g g
resulted in increased competition and oversupply.
– Companies will have to find new ways of
p y
remaining competitive by lowering costs in other
ways.
• Supply chain efficiency will become even more
p
important
49
The Myth of Globalisation.
S
Susan Douglas & Yoram Wind.
D l &Y Wi d
• Attacks Levitt's view of global standardisation as naive and over
simplistic Homogenisation not a clear & universal trend.
simplistic. Homogenisation not a clear & universal trend
• Contra Evidence of • The myth of economies
homogenisation: of scale:
of scale:
– Food firms adapt to national – Technical developments lowering
characteristics. scale requirements.
– Growth of intra‐country segmentation:
h f – cost of production often only small
f d f l ll
– growing demand for differentiated part of total costs.
products.
50
Global Manufacture & Supply
pp y
• Focussed factories:
– Economies of scale, one factory for the world?
– May overlook crucial logistics trade offs:
y g
• Transport costs & delivery times.
• Requirement for local packaging
• Centralised Inventories:
– Centralising Inventory = less total inventory.
Centralising Inventory = less total inventory
Square root rule
q 25 to 4 5:2 i e 60% reduction
5:2 i.e. 60% reduction
Christopher, M., (1998),
– However may overlook benefit of local to
customer
51
Postponement & Localisation
Postponement & Localisation
• Localisation:
– Even in relatively homogeneous markets like
Europe their can be considerable variety of
Europe their can be considerable variety of
local taste. This may be better catered for in a
local assembly operation.
local assembly operation.
• Postponement:
– Design products using simple common
platforms, using common components.
Assembly does not take place until required.
52
Customer Service Explosion
Customer Service Explosion
• Increasing perception that there is little
p
technical difference between products.
• Service crucial source of differentiation and
competitive advantage
competitive advantage.
– Requirements:
• Closely integrated marketing, manufacturing and
supply strategies
• Logistics of service delivery crucial!
53
Strategic Lead time Management
Strategic Lead time Management
• Product and technology life cycles getting
d d h l lif l i
shorter.
• Requirements for success:
– Ability to innovate.
Ability to innovate.
– Ability to bring new products to market.
• Logistical Lead time becomes crucial.
Logistical Lead time becomes crucial
– Time from sourcing and procurement though to
recovery of investment by selling
recovery of investment by selling
54
Organisational Integration
• Recognition of the importance of taking a systems
view of business.
– Difficulty of achieving integration in functionally fixated
organisations.
• Move towards a requirement for generalists
– Integration of all the different aspects of the organisation.
– Philosophy of integration beyond the confines of the
p y g y
organisation.
• Supply Chain Management.
pp y g
– Requires that all the players in the value system work
together.
55
Throughput Management
Throughput Management
• The process of linking manufacturing and
p
procurement to the needs of the market.
• Requirement for reducing the length of the
supply chain pipeline!
supply chain pipeline!
• Target:
– Lower cost, higher quality, greater variety, more
flexibility, faster response times.
y, p
56
Globalisation
• Move
Move to commodity markets and component
to commodity markets and component
specialisation:
– firms shop freely amongst the nations of the world
firms shop freely amongst the nations of the world
• Singer Sewing machines: Shells from US, motors from
Brazil, drive shafts from Italy, machine assembled in
, y,
Taiwan
– Increasing need for local customisation
• Washing machines: Germans want fast spin & Italians
slow, British front loaders, French top loaders, etc
– Challenge how to achieve benefit of
standardisation at the same time?
57
[05] [06] [07] Inventory
Indra Almahdy
Acknowledgment
• B
( ) g g g
Hill, New York.
Review May/Jun.
y/
2
Focusing on Inventory
Focusing on Inventory
• Sales = $100,000
• Average inventory = $50,000
Average inventory $50,000
• Range of inventory ($30,000 ‐ 70,000)
• Annual turns = 2.00
• Days of supply = 180
Days of supply = 180
“Peeling
Peeling the Inventory Onion
the Inventory Onion”
Inv. Comp. Inventory Days Rationale
Cycle 20,000 72 Cycle time range of

$40,000
I Transit
In T it 5000
5,000 18 Transit
T it delay
dl
Obsolescence/ 10,000 36 Obsolete and

Damage damaged goods
Speculative 5,000 18 Forward buy for
discount
Safety stock 10,000 36 To meet service
rqmnts.
Product Positioning Decision Factors
Product Positioning Decision Factors
• Accurate assessment of inventory value
• Assignment of responsibility for inventory
Assignment of responsibility for inventory
carrying costs
– Opportunity cost (15%)
O t it t (15%)
– Taxes and insurance(1%)
– Pilferage and obsolescence (1%)
– Storage (2%)
Storage (2%)
Perspectives on Product Positioning
Perspectives on Product Positioning
• Provide for uncertainty ‐ Inventory
g
management
• Reduce demand uncertainty
• Reduce cycle uncertainty
R d l i
Provide for Uncertainty
Inventory Management
• Manage
– Where to stock?
– When to order?
– How much to order?
How much to order?
• Control
– Accountability
– Accuracy
Inventory Cycle for Typical Product
2
mont Average Inventory
hs
1.5 months
1.5
mont
hs
10
1.0 Safety Stock
month
s
1 2
Elements Influencing Average Inventory
Elements Influencing Average Inventory
• Average = OQ/2 + SS + IT
• Where:
– Average = average inventory level
– OQ = average replenishment order quantity
OQ l ih d i
– SS = average safety stock level
– IT = average in‐transit inventory
Reorder Point and Safety Stock
y
When to order
• ROP = LT * DD + SS
• Where:
– ROP = reorder point
– LT = replenishment lead time
LT l ih l d i
– DD = average daily demand
– SS = safety stock
2
mont Average Inventory
hs
1.5 months
1.5
mont
hs
10
1.0 Safety Stock
month
s
1 2
Factors Influencing Safety Stock
Requirements
Demand
Lead
time
Service f(k) * C
Level 
 Forecast
(SL) O
 Q
Replenishme
nt cycle
Transport
mode
Determining Safety Stock
Determining Safety Stock
• f(k) = (1 ‐ SL) * (OQ/C)
• Where:
– f(k) = Normal loss integral for safety factor k
– SL = desired service level in percent unit fill rate
SL d i d i l li i fill
– OQ = order quantity
– C = standard deviation of lead time demand
Example Safety Stock Calculation
Example Safety Stock Calculation
• Key parameters
– SL = 99 percent availability
p y
– DD = 5 units/day, DD = 2.54
LT 10 days LT = 2
– LT = 10 days,  2
– OQ = 300 units
Combining Demand and Lead
Time Uncertainty
+
Lead Time Demand
LT = 10 = DD = 5
LT = 2.00 DD = 2.54
Average LTD (Lead time demand) = LT * DD = 50

Combined Uncertainty
Combined Uncertainty
C = LT * DD2 + DD2 * LT2
 =
= * 2 542 + 5
10 * 2.54
10 + 52 * 2.00
* 2 002
C
C = 12.83 (rounded to 13)
Table of Normal Loss Integral
Table of Normal Loss Integral
k f(k) k f(k) k f(k)
0.0 0.3989 0.7 0.1428 1.4 0.0366
0.1 0.3509 0.8 0.1202 1.5 0.0293
02
0.2 0 3068
0.3068 09
0.9 0 1004
0.1004 16
1.6 0 0232
0.0232
0.3 0.2667 1.0 0.0833 1.7 0.0142
0.4 0.2304 1.1 0.0686 1.8 0.0110
0.5 0.1977 1.2 0.0561 1.9 0.0084
0.6 0.1686 1.3 0.0455 2.0 0.0074
Calculating Safety Stock k factor
Calculating Safety Stock k factor
f(k) = (1 ‐
f(k) ( SL) * (OQ/
) * ( / C)
f(k) = (1.0 ‐
( ) ( .99) * (300/13)
) ( )
= 0.2308
f(k) = 0 2308 ==> k =0 4
f(k) = 0.2308 ==> k =0.4
SS = k * C
= 0.4 * 13
= 5.2 units (Round to 6)
5 2 units (Round to 6)
ROP = DD * LT + SS = 50 + 6 = 56
Inventory Management Policy
Allowing for Uncertainty
• When inventory‐on‐hand plus on‐order is less
q
than or equal to 56, order 300
Impact of Changes in Uncertainty Level
Impact of Changes in Uncertainty Level
Demand Leadtime
12.8335
1 12.83
1.5 15.66 17.01
2 18.92 21.55
30 22.43
2.5 26.26
3 26.09 31.06
d D e viatio n
25
Demand
Leadtime
20
C o m b in ed S tan d a rd
15
10
0
1 1.5 2 2.5 3
Multiples of Standard Deviation
Impact of Order Quantity on Safety
Stock
Order k Safety Average
Quantity Stock Inventory
300 0.40 5.2 155
200 0.65 8.4 108
100 1.05 13.6 64

Graphical Illustration of Locational Impact of Inventory
Graphical Illustration of Locational Impact of Inventory
Total Inventory
Average
Safety Stock
Inventory
Cycle Stock
Stocking Locations
Distribution Resource Planning
• Example
• Benefits and risks
Benefits and risks
Benefits and Risks
• Benefits • Risks
– Reduced freight and – Requires good
inventory forecasting accuracy
– Improved coordination – Requires change to
with marketing
ith k ti planning mentality
l i t lit
– Decreased space – Subject to system
requirements “nervousness”
nervousness with
with
– Enhanced budgeting changing forecasts
capability
Stratified Product Positioning
Stratified Product Positioning
• Fine‐line (ABC) analysis
• Stratified management guidelines
Stratified management guidelines
Product Classification Analysis (ABC)
Product Classification Analysis (ABC)
Product Sales (000) Percent of Cumulatove Cumulatirve Category

Number Sales Sales Percent Products
Percent
1 45,000 30.0 30.0 5 A
2 35,000 23.3 53.3 10 A
3 25,000 16.7 70.0 15 A
4 15,000 10.0 80.0 20 A
5 8,000 5.3 85.3 25 B
6 5,000 3.3 88.7 30 B
7 4 000
4,000 27
2.7 91 3
91.3 35 B
8 3,000 2.0 93.3 40 B
9 2,000 1.3 94.7 45 B
10 1,000 0.7 95.3 50 B
11 1,000 0.7 96.0 55 C
12 1,000 0.7 96.7 60 C
20 250 0.2 100.00 100 C

Sample Integrated Strategy
Sample Integrated Strategy
SKU Service Forecast Review Inventory Stocking

Category Objective Period Mgt Policy
Promotional 100% CFAR Daily DRP Scheduled
A
A 99% Top down Daily DRP Full line
B 98% Bottom up Weekly DRP Select

Time series locations
C 90% Bottom
B tt up Weekly
W kl ROP C t li d
Centralized
Time Series
Conclusions
• Allow for uncertainty
All f i
– Inventory management and control
• Reduce demand uncertainty
Reduce demand uncertainty
– Forecasting
– DRP
– Simplification
– Demand management
– Postponement
• Reduce cycle uncertainty
– Exert more control over cycle times
– Supply chain management
– Variable assignment

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SUPPLY CHAIN SYSTEMS

Information, Product, Service, Financial and Knowledge Flows

Capacity, Information, Core Competencies, Capital and Human Resources

 Market Saturation Driven: Focusing on generating high profit margins, through

 Operationally Agile: Configuring assets and operations to react nimbly to

 Freshness Oriented: Concentrating on earning a premium by providing the

 Consumer Customizer: Using mass customization to build and maintain close

 Logistics Optimizer: Emphasizing a balance of supply chain efficiency and

Strategic Capacity Logistics Manufacturing Procurement

Order Order Distribution Transportation

Material Material Material

Manufacturing Manufacturing Manufacturing

Plant Plant Plant

Distribution Distribution Distribution

Customer Customer Customer

Order Order Customer

Order Order Customer

Feasibility  Situational Analysis

 Define Analysis Approach and

• LP/MILP/GA etc. t searchh • Mathematical/Heuristics

Development  Identify Best Alternative

 Define Implementation Plan

• Advances in Technology Driving the world

• Important to recognise trade offs.

Inv. Comp. Inventory Days Rationale

Cycle 20,000 72 Cycle time range of

Obsolescence/ 10,000 36 Obsolete and

Average LTD (Lead time demand) = LT * DD = 50

C = LT * DD2 + DD2 * LT2

200 0.65 8.4 108

100 1.05 13.6 64

Product Sales (000) Percent of Cumulatove Cumulatirve Category

20 250 0.2 100.00 100 C

SKU Service Forecast Review Inventory Stocking

A 99% Top down Daily DRP Full line

B 98% Bottom up Weekly DRP Select

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