SCM Merged

What is vital for business success?
Developing Business Process

Or
Technology
Or
Business Process & Technology
Apple has a significant Chinese customer base, and nearly all of its critical
manufacturing and assembly partners are based there. Trump’s ban might not
only force Apple to remove WeChat from its App Store — which would destroy
Apple’s Chinese smartphone business — it could existentially change how
Apple is able to build and sell new products in the future.
https://cleantechnica.com/2020/08/09/apple-plans-to-go-100-carbon-neutral-including-
supply-chain-by-2030/
Apple’s 10-Year Climate Roadmap

1. Recycling (recover key materials such as rare earth magnets and tungsten)
2. Energy Efficiency
3. Renewable Energy (70% suppliers committed)
4. Materials (carbon free aluminium smelting process)
5. Carbon Removal (Restoration and protection of forest)
https://www.foodnavigator.com/Article/2020/07/16/Unilever-procurement-chief-talks-
climate-crisis-The-world-s-food-system-needs-to-change
What kind of decision did you observe?
• Globalization vs localization
• Impact of Government policy on SC decisions
• Frequent Introduction of innovative products and
increase in variety
• Fight against climate change & Stress on sustainability
• Network expansion
(supplier/manufacturing/warehousing etc.) – either
setting up new facility or acquisition
• Hugh investment in e-commerce & emergence of last
mile delivery
• Importance of customer in supply chain
What other decision did you observe?
• Sourcing challenges (how to reduce cost for customer)
• Government Regulatory norm to enter new markets
(should I enter or not?)
• Stakeholders can impact supply chain (in addition to
shareholder)
• Role of product recalls & closed loop supply chain –
does it make sense
• Raw material sourcing from global market
Supply-Demand Gap for Selected
Food Item
•Emerging Food deficit is a matter of grave concern……

•Huge dependency in veg oils & Pulses on imports
Low Yield……
An real Case: Potato Supply Chain
INDIA is the third-biggest producer of potatoes in the world. The
humble spud finds itself stuffed into flatbread, encrusted in cumin
seeds or tucked into pancakes. But the truckloads of large, oblong
potatoes that arrive at the McCain Foods plant in the Mehsana
district of Gujarat face a more exacting ordeal. Ferried by a
conveyor belt and propelled by water, they are sized, steam-peeled,
sliced, diced, blanched, dried, fried (for precisely 42 seconds in
vegetable oil at 199ºC), chilled, frozen, bagged and then boxed.
The 15kg boxes of fries that emerge at the other end of this pipeline
supply the growing chain of McDonald's restaurants in India.
When McDonald's first entered India in 1996, the food-processing
industry was confined largely to ice cream and ketchup. Even
importing frozen fries was complicated by the fact that such an
exotic item did not appear on India's schedule of tariffs and quotas.
It took McDonald's roughly six years and $100m to weld a reliable
supply chain together.
An real Case: Potato Supply Chain
• For fries, that supply chain begins with 2,000 acres of potato fields
in Gujarat, cultivated by 400 farmers under contract with
McCain Foods. These cultivators belong to a profession which still
employs about half of India's workforce. In Gujarat, agriculture
is growing almost as quickly as the rest of the Indian economy.
But elsewhere, agriculture is said to be in crisis. The average size
of farmers' landholdings is only about 1.3 hectares. If their fields
are irrigated at all, they are flooded wastefully, with water flowing
down furrows on either side of the crop, taking valuable nitrogen
with it. India produces more tractors than any other country, but
many farmers still use bullocks instead. They sell their produce at
controlled prices in government mandis: marketplaces regulated
by the state with the aim of protecting farmers from exploitation
by unscrupulous traders.
What is Future of Food Processing
Industry In India ????
• India ranks first in the world in cereal and milk
production and second in fruits & vegetables and in five
producers of groundnut, rice, wheat, tea, coffee, sugar,
spices & oil seeds.
• Even with an industry size of US $ 70 billion, we process
less than 2%.
• The industry has about 1.6 mn direct employees and
accounts for about 13% of the country’s exports and
6%of the industry investment.
What other decision did you observe?
• How to enhance efficiency and productivity? – in
addition can it enhance sustainability
• Can we use strength of localization to our advantage?
Will this reduce time and cost to market making me
more competitive? Will this enhance agility?
– What supply chain decision? Manging source, developing
infrastructure, supporting technology investment etc.
– Has mandi system going to change now with one nation one
mandi?
• Future of food processing industry.
MAY ALSO NEED TO CHANGE THE WAY WE
THINK ABOUT THE BUSINESS??
Do we need to Be Dynamic/ Creative
https://yourstory.com/2019/10/ninjacart-thirukumaran-ecommerce-b2b-startup-agritech
Building Ninjacart was inventing the wheel for fresh produce ecommerce,
says Co-founder Thirukumaran Nagarajan (IIMK Alumni)
https://www.youtube.com/watch?v=J4UfGR-4E6M
https://www.youtube.com/watch?v=8JxUU0RnvYQ
https://www.youtube.com/watch?v=7BTq1rikv0E
Views on Supply Chain
• View 1: an integrated process where raw materials are
transformed into final products then delivered to customers.
• View 2: a system whose constituent parts include material
supplies, production facilities, distribution services and
customer linked together by feed forward flow of materials and
feed back flow of information.

• View 3: a complex, dynamic network or system of

interconnected and interdependent individuals, groups,
companies, organizations, and relationships whose goal is to
satisfy and add value to their particular customer.
• View 4: a process of strategically managing the movement
and storage of materials, parts, and finished inventory from
suppliers through the firm and on to the customers or an
integrating process based on flawless delivery of basic and
customized services.
• View 5: an integrating process, used to build

competitive position, based on the delivery to
customers of basic and unexpected services.
Changing Basis of Competition
Basis of Competition
Manufacturing company A
Yesterday versus
Manufacturing company B
Manufacturing company A and it’s supply chain
Then versus
Manufacturing company B and it’s supply chain
Moving to
Today Digital Supply Chain A Vs Digital Supply chain
B
Importance of Supply Chain Management
Frequent Supply Low order

shortages Inefficient fill rates
logistics
Tier 1 Manufacturer Distributor Retailer Customer High
Supplier stockouts
Glitch-Wrong Ineffective
High inventories High landed
Material, Machine is promotion
through the chain costs to the shelf
Down – effect
snowballs
 Eliminating inefficiencies in supply chains can save millions of $.

Important points for Supply Chain Success
• Minimizing supply chain costs while keeping a

reasonable service level customer satisfaction/ quality/
on time delivery, etc.
 Supply chain success should be measured by total

supply chain profitability, not profits at an individual
stage i.e. global optimization
Important points for Supply Chain Success
 Supply chain profitability is total profit to be shared

across all stages of the supply chain
 Customer is the Sources of supply chain revenue:

Concentrate on satisfaction
 Efficient flow of information

Another Challenge : Satisfying
Customer
Long
Lead Time
Responsiveness
Short
VARIETY Changing Customer PRICE

How to Do?
Preferences
High Low
Low How to Do? High

Contributors to Implied Demand
Uncertainty
Commodities Customized products

Detergent High Fashion Clothing
Price Customer Need Responsiveness

Low Implied Demand Uncertainty High
Short lead times, product variety,

distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
Why Is Uncertainty Hard
to Deal With?
 Matching supply and demand is difficult.
 Forecasting doesn’t solve the problem.
 Inventory and back-order levels typically fluctuate widely
across the supply chain.
 Demand is not the only source of uncertainty, Other
sources are:
 Delivery Lead times
 Manufacturing Yields
 Transportation times
 Natural Disasters
 Component Availability
Key Issues in
Supply Chain Management
Key Issues in Supply Chain Management
Issues are according to the time horizon:
 Strategic – Long-time effect on firm

 Number, location and capacity of warehouses and
manufacturing units.
 Tactical - Medium range i.e. 4-12 months.

 Purchasing and production decision, inventory policies,
transportation strategies etc.
 Operational – Day-to-day decisions.

 Scheduling, routing etc.
Key Issues in Supply Chain Management
 Distribution Network Configuration:
 Changing demand patterns, termination of leasing contract
 Selection of new suppliers, new flow pattern of goods/ information
 Inventory control: when and how much to stock & order

 Distribution Strategies: centralized vs decentralized, impact of service level, mode of dist.
 Production sourcing & Supply Contracts:
 Production vs sourcing decision (production vs transportation cost)
 Pricing and volume discounts, delivery lead time, quality etc.
 Revenue sharing contracts etc.
 Integration and Strategic Partnerships: how to integrate & what information to share
 Procurement Strategies and Outsourcing
 Product Design
 Information Technology
 Customer value
 Sustainability
SEVEN PRINCIPLES OF
SUPPLY CHAIN MANAGEMENT
Industry View on SCM
By
Anderson Consulting
Seven Principles of SCM
1. Group Customers by needs:

– What is needed
– When it is needed
– How much of it is needed.
Effective supply chain management groups customers

by distinct service needs--regardless of industry--and
then tailors services to those particular segments.
2. Customize the logistics network :
– Product distribution is as important as product
creation.
In designing their logistics network, companies need to focus

on the service requirements and profit potential of the
customer segments identified.
3. Listen to signals of market demand and plan
accordingly.
Sales and operations planners must monitor the entire
supply chain to detect early warning signals of changing
customer demand and needs. This demand-driven
approach leads to more consistent forecasts and optimal
resource allocation.
-- Aggregate demand
-- Streamline the information pipeline
-- Streamline the distribution pipeline
4. Differentiate the product closer to the customer.

– Postponement
– Assemble-to-order
Companies today no longer can afford to stockpile inventory to

compensate for possible forecasting errors. Instead, they need to
postpone product differentiation in the manufacturing process
closer to actual consumer demand. This strategy allows the
supply chain to respond quickly and cost-effectively to changes in
customer needs.
5. Strategically manage the sources of supply
By working closely with their key suppliers to reduce the
overall costs of owning materials and services, supply chain
managers maximize profit margins both for themselves and
their suppliers..
6. Develop a supply chain-wide technology strategy
As one of the cornerstones of successful supply chain
management, information technology must be able to
support multiple levels of decision making. It also should
afford a clear view and ability to measure the flow of
products, services, and information

7. Adopt channel-spanning performance measures
Excellent supply chain performance measurement systems

do more than just monitor internal functions. They apply
performance criteria to every link in the supply chain -
criteria that embrace both service and financial metrics,
including as each account's true profitability
Relationship between Supply chain
Principles and Financial outcomes
7 Principles Revenue Asset Cost

Growth Utilization Reduction
Segment customers based on needs HIGH Medium
Customize logistics network
Listen to market signal and plan

accordingly
Differentiate product closer to customer
Source Strategically
Develop SC technology strategy
Adopt channel spanning measures

Organizational Paradigms
Paradigm Shift Leading to Skills Required

From functions to Integral management of Cross-functional management
process material and information flow and planning skills
From products to Focus on markets and the Customer segmentation

customers creation of customer value
From revenue to Focus on the key performance Understanding of the time

performance drivers of profit based performance indicators
From inventory to Demand based replenishment Information management

performance and quick response systems
From transactions to Supply chain partnerships Relationship management

relationships
The Development Chain
The enterprise development and supply chain

Gartner Supply Chain Top 25 : 2018
Key Findings
• Digitalization of Supply Chain: a massive shift in companies creating

digital connections within and across their supply chain operations. It
provides agile support for existing products, reduce time to market for new
ones. Some of the most disruptive and impactful technologies include
solutions combining Internet of Things, cloud computing and advanced
analytics, simulation and optimization capabilities.
• Adaptive Organizations and Capabilities: ability of companies to be
more adaptive to changes in their value chains. More specifically, leaders
are creating adaptive organizations and capabilities to survive and win
independent of future supply-related constraints or customer needs.
Developing capabilities to be combined into "plug-and-play" segments, such
as make-to-stock, configure-to-order or engineer-to-order allowing them to
more quickly and flexibly support different business needs and outcomes,.
Gartner Supply Chain Top 25 : 2018
Key Findings
• Developing and Fostering Healthy Ecosystems: supply chain success
depends on the health and well-being of the critical ecosystems within and
around them. The people aspect of supply chain ecosystems applies to
relationships with suppliers, partners, employees and customers along
the value chain. Leading supply chains focus as much on ethical
sourcing and supporting customer well-being, as they do on talent
acquisition and development. Environmental sustainability is another
priority for top supply chain organizations that set ambitious stewardship
goals in the areas of emissions, water and other natural resources.
• Aligning supply chains to serve local and regional markets
• Strengthening risk management processes through enhanced visibility

WHAT IS RIGHT SUPPLY
CHAIN FOR YOUR PRODUCT
Devising an effective Supply Chain Strategy
Step 1: Consider the nature of demand for the products
FUNCTIONAL DEMAND INNOVATIVE DEMAND
Depends on:
– Product Life Cycle (PLC),
– Demand Predictability
– Product Variety
– Market standards for lead time
– Service level
Physical Function For Functional Product
• The predictable demand makes market

mediation easy as nearly perfect match of
supply and demand is achieved.
• Focus on minimizing physical cost, given
price sensitivity of most functional
products.
Made-to-stock environment
Efficient SC to Market
Product
PUSH Functional
characteristics
• Stable, predictable products
demand & life Retail products,
Inventory
cycle time Food cans, beer,
• Low level of of
drinks, Pasta,
demand Finished
baby diapers
uncertainty goods
• Low margin Etc…
All production and distribution decisions

are made on long-term forecasts
• Forecast are always wrong,
• The longer the forecast horizon, the worst the forecast
• Aggregate forecast are more accurate. (risk-pooling
concept.)
Made-to-Order environment
Responsive SC to Market
Product Innovative
Characteristics PULL Products
•Unpredictable All sorts of

demand Inventory of industries : High
•Short life cycle time Parts & tech industries
•Great variety assemble on Computer (Dell),
•High margins order Fashion
..etc …
Decisions based on Accurate Customers Demand
Ensure that the variety of products reaching the market

place matches what customers want to buy
Functional vs Innovative Products:
Differences in Demand
Aspects of Demand Functional Innovative
(Predictable demand) (Unpredictable demand)
PLC More than 2 years 3-12 months
Contribution margin 5-20% 20-60%
Product variety Low (10-20 per High (often millions of
category) variants per category)
Forecast error margin at the 10% 40-100%
time production is committed
Average Stock out rate 1-2% 10-40%
Ave. forced end of season 0% 10-25%
markdown as % of full price
Lead-time required for made 6-12 months 1-14 days
to order products
Contribution margin = (price – variable cost)/ price
Physically Efficient Vs
Market Responsive Supply Chain
Physically Efficient Market Responsive Process
Process
Primary Purpose Supply predictable Respond quickly to unpredictable
demand at the lowest demand in order to
possible cost • minimize stock outs,
• forced markdowns and
• obsolete inventory
Manufacturing Maintain high average Deploy excess buffer capacity
Focus utilization rate
Inventory Generate high turns Deploy significant buffer stocks of
Strategy and minimize inventory parts or finished goods
throughout the chain
Physically Efficient Vs
Market Responsive Supply Chain
Physically Efficient Process Market Responsive Process
Lead-time Focus Shorten lead time as long as it Invest aggressively in ways to

does not increase cost reduce lead time
Approach to Select Primarily for cost and Select primarily for speed
choosing suppliers quality and flexibility
Product-design Maximize Performance and Use modular design in order

Strategy minimize cost to postpone product
differentiation as long as
possible.
What Strategy for your products?
– Is your product functional or innovative?
– Should your SC be physically efficient or responsive to
the market or differentiation?
– Where in the SC to position inventory and available
production capacity in order to hedge against
uncertain demand?
GAME-CHANGING TRENDS EVOLUTION
The Gartner 2020 Supply Chain Report
2020 Supply Chain Leadership Trends
Clearly define and communicate your supply chain’s

broader purpose in the world to inspire customers,
employees and partners to act ethically and
sustainably in support of the global community.
Position your organization to be a disruptor by
infusing agility into existing capabilities or acquiring
startups offering the expertise and DNA necessary to
compete in new or reinvented markets.
Create a digital orchestration culture in your
organization by investing in rapid and open
innovation that is sourced from both internal talent
and external partners with specialized skills and
technologies.
The Gartner Supply Chain Top 25 for 2020
1. Transition from Sales and Operations Planning (S&OP) to
Integrated Business Planning
2. Move Towards More Real-Time Planning Environments
• Procter & Gamble often now reschedules factory product lines multiple
times per day based on new data from so-called “demand sensing”
capabilities. This trend will enable companies to be a lot more responsive
and agile in reacting to changes in supply or demand conditions
• Increasing Task Automation
– supply chain planners will become more true business managers and
internal collaborators than detailed number crunchers, as the software
takes on more of the work.
• Marriage of Planning and Analytics

– Advanced Analytics provide information that can be used to improve total
supply chain performance and enable a platform for collaboration across
the supply chain and the business
THANK YOU
Logistics Network
Configuration
Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points
The picture can't be display ed.
Supply
Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
The Logistics Network
The Logistics Network consists of:
• Facilities:
Vendors, Manufacturing Centers, Warehouse/
Distribution Centers, and Customers
• Raw materials and finished products that flow

between the facilities.
Why Network Planning?
• Find the right balance between inventory, transportation

and manufacturing costs,
• Match supply and demand under uncertainty by

positioning and managing inventory effectively,
• Utilize resources effectively by sourcing products from

the most appropriate manufacturing facility
Logistics Design Decisions
• Determine the appropriate number of warehouses
• Determine the location of each warehouse
• Determine the size of each warehouse
• Determine optimal sourcing strategy: Which plant/vendor

should produce which product
• Determine best distribution channels: Which warehouses

should service which customers
• Allocate space for products in each warehouse

Objective of Logistics Management
Design or configure the logistics network

so as to minimize annual system-wide
cost subject to a variety of service level
requirements.
Three Hierarchical Steps
• Network design
• Number, locations and size of manufacturing plants and warehouses
• Assignment of retail outlets to warehouses
• Major sourcing decisions
• Typical planning horizon is a few years.
• Inventory positioning:
• Identifying stocking points
• Selecting facilities that will produce to stock and thus keep inventory
• Facilities that will produce to order and hence keep no inventory
• Related to the inventory management strategies
• Resource allocation:
• Determine whether production & packaging of different products is
done at the right facility
• What should be the plants sourcing strategies?
• How much capacity each plant should have to meet seasonal
demand?
Factors influencing network design
• Strategic factors
• Cost leadership
• Responsiveness/variety
• Technological factors
• Macroeconomic factors
• Tariffs and taxes
• Exchange rate and demand risk
• Political factors
• Infrastructure factors
• Competitive factors
Factors influencing network design
• Logistics and facility costs
• Inventory costs
• Transportation costs
– Inbound versus outbound
– External versus internal fleet
– Truckload (TL) versus less than truckload (LTL)
• Facility costs
– Setup
– Operating costs
Network Design: Key Issues
The objective is to balance service level against:
• Production & purchasing costs
• Inventory carrying costs
• Facility costs (handling and fixed costs)
• Transportation costs
That is, we would like to find a minimal-annual-cost

configuration of the distribution network that
satisfies product demands at specified customer
service levels.
Increase in number of Warehouse
leads to?????????
• Improvement in service level due to reduction in
travel time.
• Increase in inventory cost
• Increase in overhead and setup cost
• Increase in inbound transportation cost
• Reduction in outbound transportation cost
PROPER BALANCE REQUIRED

The Future of Supply Chain
Network Design
• The companies that implement best practices
expand data collection warehouses to include the
key activity-based operations and cost data that are
used in their strategic and tactical network
optimization analyses.
• The data is kept relevant and current through the use
of systematic data management tools, so that it is
instantly available for timely what-if scenarios.
– Short-term: How do we respond to unexpected events like
strikes, weather disruptions, major capacity losses, etc.?
– Mid-term: How do we evaluate new sales opportunities for
large additional volumes and how will these impact our
ability to deliver across the supply chain?
– Long-term: How do we evaluate new merger and acquisition
opportunities? How do we plan for capacity expansions?
• Advances in network design modelling, optimization, and
game theory have recently opened the door to a broader
analysis that focuses on the collective supply chains of all
competitors in a marketplace.
• These tools can be used to discover and predict which

customer/product/price point combinations will maximize
profit. There are three key steps required to accomplish
this goal:
– Understand the total delivered cost to each customer
– Estimate competitor costs for supplying to a shared set of

customers
– Use cutting edge optimization technology to model the competitive

market
Network Design Tools:
Major Components
• Mapping
 Mapping allows you to visualize your supply chain and solutions
 Mapping the solutions allows you to better understand different

scenarios
 Color coding, sizing, and utilization indicators allow for further

analysis
• Data
 Data specifies the costs of your supply chain
 The baseline cost data should match your accounting data
 The output data allows you to quantify changes to the supply chain
• Engine
 Optimization Techniques
Mapping Allows You to Visualize Your
Supply Chain
Displaying the Solutions Allows you To
Compare Scenarios
Data for Network Design
1. A listing of all products
2. Location of customers, retailers, existing warehouses and

distribution centers, manufacturing facilities, and suppliers.
3. Demand for each product by customer location
4. Transportation rates by modes
5. Warehousing costs
6. Shipment sizes by product
7. Order patterns by frequency, size, season, content
8. Order processing costs
9. Customer service goals

Aggregating Customers
Customers located in close proximity are

aggregated using a grid network or clustering
techniques. All customers within a single cell or a
single cluster are replaced by a single customer
located at the centroid of the cell or cluster or
customer zone.
Based on:
• Distribution Pattern - Ex. Same source to same customer’s
• Product type
Why Aggregate?
• The cost of obtaining and processing data

• The form in which data is available
• The size of the resulting location model
• The accuracy of forecast demand
Avoid over aggregation so as to prevent loss of accuracy

Recommended Approach
• Make sure each zone has an equal amount of total

demand
• Place the aggregated point at the center of the
zone
Example: Customer Aggregation
• Considering transportation costs only
• Customer data
• Original Data had 18,000 customers Aggregated
Data had 800 customer zones
• Total demand was the same in both cases

Comparing Output
Total Cost:$5,796,000 Total Cost:$5,793,000

Total Customers: 18,000 Total Customers: 800
Cost Difference < 0.05%

Product Grouping
Companies may have hundreds to thousands of
individual items in their production line

– Variations in product models and style
– Same products are packaged in many sizes
Collecting all data and analyzing it is impractical for
so many product groups

A Strategy for Product Aggregation
Place all SKU’s into a source-group

– A source group is a group of SKU’s all sourced from the
same place(s)
Within each of the source-groups, aggregate the
SKU’s by similar logistics characteristics

– Weight
– Volume
– Holding Cost
Product Aggregation
Three Different Product Categories
• High variability - low volume products
• Low variability - high volume products, and
• Low variability - low volume products.

Supply Chain Strategy Different for the
Different Categories
• High variability low volume products
• Inventory risk is the main challenge so position them mainly at
the primary warehouses
 demand from many retail outlets can be aggregated reducing inventory costs.
• Low variability high volume products

• Position close to the retail outlets at the secondary warehouses
• Ship fully loaded trucks as close as possible to the customers

reducing transportation costs.
• Low variability low volume products

• Require more analysis since other characteristics are important,
such as profit margins, etc.
Number of facilities
Required No. of Facilities
Inventory Costs
Desired Response Time Number of Facilities
Transportation Costs
Facility Costs
Number of Facilities Number of Facilities

Minimize the cost of your logistics network
without compromising service levels
$90 Optimal
$80
Number
of Warehouses
$70
Cost (millions $)
$60
Total Cost
$50 Transportation Cost
$40 Fixed Cost
Inventory Cost
$30
$20
$10
$-
0 2 4 6 8 10
Number of Warehouses
Number of facilities
Response time
Total Logistics Costs
Number of Facilities
Industry Benchmarks:
Number of Distribution Centers
Pharmaceuticals Food Companies Chemicals
Avg.
No. of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or - Service very important
easy to ship express) - Outbound transportation
- Inventory expensive expensive relative to inbound
relative to transportation
Sources: CLM 1999, Herbert W. Davis & Co; LogicTools
A Typical Network Design Model
• Several products are produced at several plants.
• Each plant has a known production capacity.
• There is a known demand for each product at each
customer zone.
• The demand is satisfied by shipping the products
via regional distribution centers.
• There may be an upper bound on total throughput
at each distribution center.

A Typical Location Model
• There may be an upper bound on the distance

between a distribution center and a market area
served by it
• A set of potential location sites for the new facilities
was identified
• Costs:
• Set-up costs
• Transportation cost is proportional to the distance
• Storage and handling costs
• Production/supply costs
Solution Techniques
• Mathematical optimization techniques:

– Heuristics: find “good” solutions, not necessarily optimal
– Exact algorithms: find optimal solutions
• Simulation models: provide a mechanism to evaluate

specified design alternatives created by the designer.
Modeling Approaches: Simulation Models
• Based on developing a model of a real system and
conducting experiments with this model.
• In location theory, a firm can test the effect of various
locations on costs and profitability.
• Does not guarantee an optimum solution but evaluates
through the iterative process.

Modeling Approaches: Heuristic Models
• Based upon developing a model that can provide a good
approximation to the least-cost location in a complex
decision problem.
• Can reduce a problem to a manageable size.
• This approach can be as sophisticated as mathematical
optimization approaches.
OR models for facility decisions
• Facility location model: minimize transportation and facility costs
• Vehicle routing: minimize transportation and vehicle costs
• Location-routing: combination of facility location and vehicle routing
• Location-inventory: minimize transportation, facility and inventory
holding costs
• Inventory-routing: minimize transportation, vehicle and inventory costs

10-step logistics network design process
(by Frazelle)
1. Assess/evaluate current network.
2. Design and populate network optimization database.
3. Create network design alternatives, such as more or fewer hierarchies, multi-
commodity flows, pooling opportunities, merge-in-transit, direct shipping,
cross docking, and supply-flow optimization concepts.
4. Develop network optimization model.
5. Choose network optimization tool and validate model
6. Implement network model in chosen tool.
7. Evaluate alternative network designs.
8. “Practicalize” recommended network structure.
9. Compute reconfiguration cost.
10. Make go/no-go decision.

SUMMARY
Network Planning Characteristics
Network Design Inventory Positioning Resource Allocation

and Management
Decision focus Infrastructure Safety stock Production Distribution
Planning Horizon Years Months Months
Aggregation Level Family Item Classes
Frequency Yearly Monthly/Weekly Monthly/Weekly
ROI High Medium Medium
Implementation Very Short Short Short
Users Very Few Few Few

THANK YOU
Is this important?
Is it sufficient in competitive Market?
Accurate Response
Technique that allows companies to
match Supply and Demand in a
uncertain environment
Lets Discuss Sports Obermeyer Case

What makes it difficult for Sport
Obermeyer to manage its supply chain?
 Long lead times  high inventory

– Global supply chain (distance / time)
 Early commitment
 Large lot size
 Short life cycle
 Uncertain demand
– Perishable product: one season
– Historic data useless
– Late demand signal
 Limited capacity
Questions to Discuss?
 Is this a New vendor problem? Why/Why not?

 Will your answer change if all ten styles in the sample are expected to
be made in Hong Kong only OR China only?
 What impact does it have on decision making when you have choice of
multiple supply source i.e. China and Hongkong?
 How many units of each style Obermeyer should order during the
initial phase of production? How do I decide?
 How Should We Measure Risk?
What operational changes would you recommend
to Wally to improve performance (and lower risk)?
 Reduce lead times

• Computerize processes
• Reduce minimum production lot-sizes
• Do not commit initial production orders to unproven
factory (rework/ramp-up)
• Look for subcontractors who can delivery at a faster
rate to fill in gaps
• Use standardized products
If Wally wants to improve his ability to produce what the
market wants, which constraints should he address?
 U.S. government import quotas

 Long lead times…reduce
– Materials & products
 Large minimum order quantities
 Short product life cycle (1 year)
 Long planning cycle (2 years)…reduce
 Early ordering commitment (without actual demand
data)…reduce
 Limited capacity
What operational changes would you recommend
to Wally to improve performance (and lower risk)?
 Would that depend on the following input?

Stock out / markdown cost as % of sales
Stock out / markdown cost as % of sales
Minimum order quantity Reactive Capacity (% of sales)

Increasing Reactive Capacity: HOW?
 Increase total capacity.. How?

– Increase the number of working hours. What are the dangers of
this approach?
– Use more subcontractor capacity during the peak season. How
does this impact in-house capacity?
 Decrease lead time (manufacturing and raw material)
– How?
 Obtain market information earlier.
– How?
Increasing Reactive Capacity
What recommendations would you
make to Wally?
 Develop improved forecasting technique: Collect/use

POS data
 Seek out partnerships to facilitate shorter lead times
for raw materials
 Work on better integration of supply chain: Try to
reduce the number of vendors for greige fabric and
other materials like zipper
 Work with Chinese facilities to reduce minimum
orders and improve worker skills
Obermeyer’s Actual Response
 Operational Changes to reduce lead time:

– Introduced Computerized information sharing systems for order processing and computing raw
material requirements
– Pre-positioned raw materials in Far East (reducing lead time)
– Used air freight as delivery due dates approached
 Early Write Program:
– Invited 25 largest retail customers (with 20% of their business) to Aspen for sneak preview of
upcoming line in order to solicit early orders
 Used aggregation (and postponement) strategy:
– Kept raw materials & production capacity undifferentiated as long as possible (Postponement)
– Booked production capacity well in advance without specifying exact styles until later
(assumed risk of supplying raw materials to factories)
– Encouraged designers to use same types of raw materials
 Reduced communication delay/gap by Merging design and production
departments
Did it pay off?
Obermeyer Results
Decision Making Scenario
(Supply Vs Demand under uncertainty)
 Speculative
– Predictable demand
– Low-risk products
Risk Based Production Sequencing
 Reactive
– Unpredictable demand
– High-risk products
Risk Based Production Sequencing
• Produce the least risky items during the first production

period using speculative production capacity. That is
capacity employed prior to observing additional indicators of
market demand.
• After observing retailer demand at a later period, decision

should be based on updated demand forecasts for the
remaining units and produce those with the greatest expected
return during the second production period using reactive
production capacity.
Accurate Response Approach
 Get as much as early market signals as you possibly can
 Slash order processing time through computerized

ordering/processing system
 Reduce manufacturing lead time by pre-positioning raw

material and components
 Utilize air freight, especially in the unpredictable demand during

the reactive period (Always consider cost benefit analysis)
Are we taking decision in risk/ uncertainty?
What are various Measure of Risk?

 Mean of forecast
 Standard Deviation of forecast
 Range of forecast
 Forecasting error
 Coefficient of Variance etc.
Which is a good measure of risk?

Why Inaccuracies in Forecast
 Increasing product variety

– Leads to higher forecast errors
 Shorter product life cycle

– Less demand history to base forecast
 Longer supply chains

– Could imply production commitments have to be
made earlier
Difficulty in matching supply with demand
 No problem if we had perfect forecasts or perfect

response, i.e we could make everything to order 
this does not happen
 Scenarios at most companies:

– “Reactive Capacity” decreases with time
– Forecast improves with time
Options: Forecast better, plan better, or “react to

demand signals better.
Ingredients of Accurate Response
 Flexible manufacturing and logistic systems

 Reduced cycle time
 Be more resourceful in using demand
indicators to improve forecast
 Institute a system of tracking forecast errors
Ways to increase reactive capacity
 Reduce lead time

– Transportation: use of air freight
– Factory throughput: cellular/flexible manufacturing
– Material: hold raw material inventory
– Use Updated Technology innovation like IR4.0
 Can we reduce variety

– using Aggregation and risk pooling strategy
 Obtain market information earlier

– Use information technology
– Identify demand indicators
Demand Based Service Strategy or
Hybrid Supply Chain Strategies
VALUE OF INFORMATION
-BULLWHIP EFFECT-
Value of Information
 “In modern supply chains, information replaces
inventory” (True or False Why?)
 Information
 Helps reduce variability
 Helps improve forecasts
 Enables coordination of systems and strategies
 Improves customer service
 Facilitates lead time reductions
 Enables firms to react more quickly to changing
market conditions.
The Bullwhip Effect
and its Impact on the Supply Chain
 Consider the order pattern of a color television

model sold by a large electronics manufacturer to
one of its accounts, a national retailer.
Fig 1. Order
Stream
The Bullwhip Effect
Fig 2. Point-of-sales
Data-Original
Figure 3. POS Data

After Removing
Promotions
The Bullwhip Effect
Figure 4. POS Data After Removing Promotion & Trend

Higher Variability in Orders Placed by
Computer Retailer to Manufacturer Than
Actual Sales
Increasing Variability of Orders Up the Supply Chain
We Conclude ….
 Ordervariability is amplified up
the supply chain; upstream
echelons face higher variability.
Consequences….
 Increased safety stock
 Reduced service level
 Inefficient allocation of resources
 Increased transportation costs
 Excess inventories
 Problems with quality
 Increased raw material costs
 Overtime expenses
 Lengthened leadtime
 Lost sales
Cause of BW:
1.Demand Forecasting
 One day, the manager of a retailer observed a larger
demand (sales) than expected.
 He increased the inventory level because he expected more

demand in the future (forecasting).
 The manager of his wholesaler observed more demand

(some of which are not actual demand) than usual and
increased his inventory.
 This caused more (non-real) demand to his maker; the

manager of the maker increased his inventory, and so on.
This is the basic reason of the bull whip effect.
Cause of BW:
２．Lead time
 With longer lead times, a small change in the

estimate of demand variability implies a
significant change in safety stock, reorder level,
and thus in order quantities.
 Thus a longer lead time leads to an increase in

variability and the bull whip effect.
Cause of BW:
３．Order Batching
 When using a min-max inventory policy, then
the wholesaler will observe a large order,
followed by several periods of no orders,
followed by another large order, and so on.
 The wholesaler sees a distorted and highly

variable pattern of orders.
 Thus, batch ordering increases the bull whip

effect.
 Takes care of promotional aspects also.

Cause of BW:
Variability of Price/Forward Buying
 Retailers (or wholesalers or makers) offer

promotions and discounts at certain times or
for certain quantities.
 Retailers (or customers) often attempt to stock

up when prices are lower.
 It increases the variability of demands and the

bull whip effect.
Cause of BW:
５． Rationing & Shortage Gaming
 When retailers suspect that a product will be in

short supply, and therefore anticipate receiving
supply proportional to the amount ordered
(supply allocation).
 When the period of shortage is over, the retailer

goes back to its standard orders, leading to all
kinds of distortions and variations
Supply Chain in Equilibrium
Customer demand forecast = 10 units
Information
Products & Products & Products &

Suppliers Services Producers Services Distributors Services Retailers
10 Units 10 Units 10 Units
Cash
 Retailers are selling product at a constant rate
and price. Firms along the supply chain are able
to set their inventory to meet demand.
Key: = Inventory Levels

Supply Chain Disrupted
Customer Demand forecast = 20 units
Information Flow
Suppliers
Producers
Products & Products & Distributors Products &
Services Services Services Retailers
Cash Flow
 As demand increases, the distributor decides to accommodate

the forecasted demand and increase inventory to buffer against
unforeseen problems in demand. Each step along the supply
chain increases their inventory (double in this example) to
accommodate demand fluctuations. The top of the supply chain
receives the harshest impact of the whip effect.
Key: Inventory Levels =
Consider a simple supply chain…
 Single retailer, single manufacturer.

 Retailer observes customer demand, Dt.
 Retailer orders qt from manufacturer.
qt
Dt Retailer Manufacturer
L
Quantifying the Bullwhip Effect
 Suppose a P period moving average is used.
 If the variance of the customer demand seen by the retailer

is Var(D), then the variance of the orders placed by that
retailer to the manufacturer, Var(Q), relative to the variance
of customer demand satisfies:
2
Var (q) 2L 2L
≥ 1+ + 2
Var ( D) P P
Var(q)/Var(D): For Various Lead Times
A lower bound on the increase in variability given as a

function of p
14
L=5
12
10
8 L=3
6
4 L=1
L=1
2
0 P
0 5 10 15 20 25 30
 Figure shows the lower bound on the increase in
variability as a function of p for various values of the
lead time,L. When p is large, and L is small, the
bullwhip effect due to forecasting error is negligible.
 The bullwhip effect is magnified as we increase the

lead time and decrease p.
 Assume p=5, L=1 Var (q) 2 L 2 L2

≥ 1 + + 2 ≥ 1.4
Var ( D) P P
 The variance of the orders placed by the retailer to

the manufacturer will be at least 40 percent larger
than the variance of the customer demand.
Multi stage SC systems
External Demand
Retailer
Order lead time Delivery lead time
Wholesaler
Distributor
Factory
Production lead time

Multi-Stage Supply Chains
 Consider a multi-stage supply chain:

 Stage i places order qi to stage i+1.
 Li is lead time between stage i and i+1.
qo=D q1
Retailer Manufacturer q2 Supplier
Stage 1 L1 Stage 2 Stage 3
L2
SC with centralized Demand Information
 Centralized: each stage bases orders on retailer’s forecast

demand.
 The retailer observes customer demand, forecasts the mean

demand using a moving average with p demand
observations, finds his target inventory level based on the
forecast mean demand, and places an order to the
wholesaler.
 The wholesaler receives order along with the retailer’s

forecast mean demand, uses this forecast to determine his
target inventory level, and place an order to the distributor.
 Similarly, the distributor
 places order to the factory.

(cont’)
 In this centralized SC, each stage of the
SC receives the retailer’s forecast mean
demand and follows and order-up-to
inventory policy based on this mean
demand.
 The variance of the orders placed by the

kth stage of the SC, Var(Qk), relative to the
variance of the customer demand, Var(D),
is just:
2
k
 k

k 2∑ Li 2 ∑ Li 
Var (q )
≥ 1+ i =1
+  i =1 
2
Var ( D) P P
(cont’)
 For example, if the lead time from the retailer

to the wholesaler is two periods, then L1=2.
Similarly, if the lead time from the wholesaler
to the distributor is two periods, then L2=2,
and if the lead time from the distributor to the
factory is also two periods, then L3=2.
 The total lead time from the retailer to the
factory is L1+L2+L3=6
 This expression for the variance of the orders
placed by the kth stage is very similar to the
expression in the previous section, with the
single stage lead time.
Decentralized Demand information
 Decentralized: each stage bases orders on

previous stage’s demand.
 The retailer does not make its forecast mean
demand available to the remainder of the SC.
Instead, the wholesaler must estimate the mean
The variance increases
demand based on the orders received from the
multiplicatively
retailer. at each
stage of the SC.
 The variance of the orders placed by the kth
stage of the SC, Var(Qk),relative to the variance
of the customer demand, Var(D) satisfies:
Var (q )k
 k
2 Li 2 Li 
2
≥ ∏ 1 + + 2 
Var ( D) i =1  P P 
Multi-Stage
Systems:Var(qk)/Var(D)
Increase in variability for centralized
and decentralized system
30
25 Dec, k=5
20
15
10 Cen, k=5
Dec, k=3
5 Cen, k=3
k=1
0
0 5 10 15 20 25
Effect of Information Sharing
 It is now clear that by sharing demand information with
each stage of the SC, we can significantly reduce the
bullwhip effect.
 When demand information is centralized, each stage of

the SC can use the actual customer demand data to
estimate the average demand.
 When demand information is not shared, each stage

must use the orders placed by the previous stage to
estimate the average demand. These orders are more
variable than the actual customer demand data, thus, the
forecasts created using these orders are more variable,
leading to more variable orders.
The Bullwhip Effect:
Managerial Insights
 Exists, in part, due to the retailer’s need to
estimate the mean and variance of demand.
 The increase in variability is an increasing

function of the lead time.
 Centralized demand information can

significantly reduce the bullwhip effect, but will
not eliminate it.
Coping with the BW Effect
１．Demand uncertainty
 Adjust the forecasting parameters, e.g., larger p for the

moving average method.
 Centralizing demand information; by providing each stage

of the supply chain with complete information on actual
customer demand (POS: Point-Of-Sales data）
 Continuous replenishment
 VMI （Vender Managed Inventory: VMI）

２．Lead time
 Lead time reduction
 Information lead time can be reduced using EDI

（Electric Data Interchange） or CAO（Computer
Assisted Ordering）
 Cross docking
Coping with the BW
３．Order Batching
 Reduction of fixed ordering cost using EDI and

CAO
 3PL（Third Party Logistics）
 VMI
 Shipping in LTL sizes by combining shipments

The VMI Partnership
 The supplier—usually the manufacturer but sometimes a
reseller or distributor—makes the main inventory
replenishment decisions for the consuming organization.
 The supplier monitors the buyer’s inventory levels (physically
or via electronic messaging) and makes periodic resupply
decisions regarding order quantities, shipping, and timing.
 Transactions customarily initiated by the buyer (like purchase
orders) are initiated by the supplier instead.
 The purchase order acknowledgment from the supplier may
be the first indication that a transaction is taking place; an
advance shipping notice informs the buyer of materials in
transit.
The
manufacturer is
responsible for
both its own
inventory and
the inventory
stored at is
customers’
distribution
centers.
４． Variability of Price
 Stabilize pricing
 Eliminate promotions (EDLP)
 Limit quantity purchased during a promotion
５． Rationing & Shortage Gaming
 Allocate the lacking demand due to sales volume

and/or market share instead of order volume.
（General Motors，Saturn, Hewlett-Packard）
 Share the inventory and production information

of makers with retailers and wholesalers.
（Hewlett-Packard，Motorola）
Reducing BW effect in your firm
 Are prices in your supply chain stable?
 Is information between firms along the
supply chain accurate and timely?
 Is sales being forecasted on projected data?
 Are you forecasting sales using data from
EDI or Point of Sale computer systems.
 Are incentives for sales representatives along
the supply chain at minimum?
 Are orders being placed in small increments?
 Are batch orders reduced to minimum levels?
Reducing BW effect in your firm
If you answered no to any of the

previous questions regarding your firm
and the bullwhip effect, then you may
have an opportunity to reduce costs to
your individual firm.
Information for Effective Forecasts
 Pricing, promotion, new products

 Different parties have this information
 Retailers may set pricing or promotion without
telling distributor
 Distributor/Manufacturer might have new
product or availability information
Collaborative Forecasting addresses these issues.

Information for Coordination of
Systems
 Information is required to move from local to

global optimization
 Questions:
 Who will optimize?
 How will savings be split?
 Information is needed :
 Production status and costs
 Transportation availability and costs
 Inventory information
 Capacity information
 Demand information
Locating Desired Products
 How can demand be met if products are

not in inventory?
 Locating products at other stores
 What about at other dealers?
 What level of customer service will be
perceived?
Lead-Time Reduction
 Why?
 Customer orders are filled quickly
 Bullwhip effect is reduced
 Forecasts are more accurate
 Inventory levels are reduced
 How?
 EDI
 POS data leading to anticipating incoming orders.
Information to Address Conflicts
 Lot Size – Inventory:

 Advanced manufacturing systems
 POS data for advance warnings
 Inventory -- Transportation:
 Lead time reduction for batching
 Information systems for combining shipments
 Cross docking
 Advanced DSS
 Lead Time – Transportation:
 Lower transportation costs
 Improved forecasting
 Lower order lead times
 Product Variety – Inventory:
 Delayed differentiation
 Cost – Customer Service:
 Transshipment
THANK YOU
Supply Chain Strategy
 Various supply chain strategies
 Push strategies
 Pull strategies
 Push-pull systems
 Matching products/industries with supply chain
strategies
 Impact of the Internet on supply chain integration
 Effective distribution strategies
 Direct shipment
 Warehousing
 Cross-docking
Push Strategies
 Production decisions based on long-term forecasts

 Ordering decisions based on inventory & forecasts
 What are the problems with push strategies?
 Inability to meet changing demand patterns
 Obsolescence
 The bullwhip effect:
 Excessive inventory
 Excessive production variability
 Poor service levels
 Hard to predict production capacity or transportation
capacity hence inefficient system
Pull Strategies
 Production is demand driven

 Production and distribution coordinated with true
customer demand
 Firms respond to specific orders
 Pull Strategies result in:
 Decreased inventory levels at retailers and manufacturers
 Decreased system variability
 Better response to changing markets
 But:
 Harder to leverage economies of scale
 Doesn’t work in all cases
Push-Pull Supply Chains
The Supply Chain Time Line
Suppliers Customers
PUSH STRATEGY PULL STRATEGY
Low Uncertainty High Uncertainty

Long lead times Short lead times
Push-Pull Boundary
Push-pull systems
 A shift from a Push System...

 Production decisions are based on forecast
 …to a Push-Pull System

 Initial portion of the supply chain is replenished based on
long-term forecasts
 For example, parts inventory may be replenished
based on forecasts
 Final supply chain stages based on actual customer
demand.
 For example, assembly may based on actual orders.
Consider Two PC Manufacturers:
 Build to Stock  Build to order

 Forecast demand  Forecast demand
 Buys components  Buys components
 Assembles computers  Observes demand
 Observes demand and  Assembles computers
meets demand if  Meets demand
possible.
 A push-pull system
 A traditional push
system
Push-Pull Strategies
 The push-pull system takes advantage of the rules

of forecasting:
 Forecasts are always wrong
 The longer the forecast horizon the worse the forecast
 Aggregate forecasts are more accurate
 Risk Pooling impact

Characteristics and Skills
Raw
Material Customers
Push Pull
Low Uncertainty High Uncertainty
Long Lead Times Short Cycle

Times
Cost Minimization
Service Level
Resource
Allocation/utilization Responsiveness
What is the Best Strategy?
Demand
uncertainty
(C.V.)
Pull H
I II
IV III
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Locating the Push-Pull Boundary
 The push section requires:

 Supply chain planning
 Long term strategies
 The pull section requires:

 Order fulfillment processes
 Customer relationship management
 Buffer inventory at the boundaries:

 The output of the tactical planning process
 The input to the order fulfillment process.
Postponement Strategy in Build-to-
Order (BTO) Model in Dell
Pull-based strategy
De-coupling point
production
part supplier OEM center logistics customers
form manufacturing assembly packaging & logistics

Demand-driven strategies
 Demand forecast: Using historical data to develop long-term estimates of

expected demand
 Demand shaping: Determining the impact various marketing plans such as
promotions, pricing discounts, rebates, new product introductions and product
withdrawal on demand forecasts
 Inaccuracy of the forecast has a detrimental impact on supply chain
performance: lost sales, obsolete inventory, inefficient resource utilization
 Employing supply chain strategies to reduce the impacts of forecast
inaccuracy
 Select the push-pull boundary so that the demand is aggregated over different
dimensions: products, geography, time
 Use market analysis and demographic and economic trends to improve forecast
 Determine the optimal assortment of products by store to reduce the impact of
competing SKUs in the same market
 Incorporate collaborative planning and forecasting processes with customers to better
understand market demand, impact of promotions, pricing and advertising
What does internet change for a SC?
 Enables a whole new business model.

 Online purchasing, direct shipping, auctioning, secondary markets
 Improves or enables integration between different parties of

the supply chain
 Enables information sharing
 Enables collaboration
 Reduces lead time

 Reduction in order processing times
 Improves product availability

Impact of internet
 E-business: a collection of business models and processes
motivated by Internet technology and focusing on
improvement of extended enterprise performance
 Business-to-consumer (B2C): “direct to customer”, retail activities over
the internet
 Business-to-business (B2B): business conducted over the internet
between businesses
E-business Opportunities:
 Reduce Facility Costs

 Eliminate retail/distributor sites
 Reduce Inventory Costs

 Apply the risk-pooling concept
 Centralized stocking
 Postponement of product differentiation
 Use Dynamic Pricing Strategies to Improve Supply

Chain Performance
E-business Opportunities:
 Supply Chain Visibility

 Reduction in the Bullwhip Effect
 Reduction in Inventory
 Improved service level
 Better utilization of Resources
 Improve supply chain performance

 Provide key performance measures
 Identify and alert when violations occur
 Allow planning based on global supply chain data
Distribution Strategies
 Direct Shipping: items are shipped directly from

the supplier to the retail stores without going
through distribution centers.
 Lead times reduced
 “smaller trucks”
 no risk pooling effects
 Warehousing: warehouses keep stock and provide
customers with items as required.
 Cross-docking: items are distributed continuously
from suppliers through warehouses to customers.
Items rarely kept for more than 10 to 15 hours
Direct Shipment Distribution Strategies
 Advantages:
 Retailer avoids the expenses of operating a distribution center
 Lead times are reduced.
 Disadvantages:
 Risk-pooling effects are negated
 Manufacturer and distributor transportation costs increase
 Commonly used scenarios:
 Retail store requires fully loaded trucks
 Often mandated by powerful retailers
 Lead time is critical.
 Prevalent in the grocery industry: lead times are critical because of
perishable goods.
Intermediate Inventory Storage
Point Strategies
Based on length of time inventory is stored at
warehouses/distribution centers 3 different strategies:
1. Traditional warehousing strategy
 distribution centers and warehouses hold stock inventory & provide
their downstream customers with inventory as needed.
2. Cross-docking strategy:
 Warehouses/distribution centers serve as transfer points for inventory
 no inventory is held at these transfer points.
3. Centralized pooling and transshipment strategies:

may be useful when there is a large variety of different products
Issues in Traditional Warehousing
 Inventory management and risk pooling key factors

 Other factors also play a significant role
 Centralized vs Decentralized Management
 Central vs Local Facilities
Centralized vs Decentralized Management
 Decentralized system (Leads to local optimization).

 Each facility identifies its most effective strategy without
considering the impact on the other facilities in the supply chain.
 Centralized system (leads to global optimization).
 decisions are made at central location for entire supply chain.
 Typical objective: minimize the total cost of the system subject
to satisfying some service-level requirements.
 Allow use of coordinated strategies
 If system cannot be centralized
 often helpful to form partnerships to approach the advantages of
a centralized system.
Central vs. Local Facilities
 Factors affecting the decision:

 Safety stock. Lower safety stock levels with centralized facilities
 Overhead. Lower total overhead cost with centralized facilities
 Economies of scale. Greater economies of scale with centralized facilities
 Lead time. Lead time to market reduced with local facilities
 Service level: Utilization of risk pooling better with centralized, whereas,

Shipping times better with local
 Transportation costs: Costs between production facilities & warehouses

higher with local, whereas, Costs from warehouses to retailers lesser with
local
Cross Docking
 In 1979
 Kmart had 1891 stores and average revenues per store of $7.25 million.
Kmart was the king of the retail industry.
 Wal-Mart was a small niche retailer in the South with only 229 stores and
average revenues under $3.5 million
 10 Years later
 Wal-Mart had
 highest sales per square foot of any discount retailer
 highest inventory turnover of any discount retailer
 Highest operating profit of any discount retailer.
 Today Wal-Mart is largest & highest profit retailer in the world
 Kmart ????
What accounts for Wal-Mart’s
remarkable success?
 This was achieved by way company replenished inventory the

centerpiece of its strategy.
 Wal-Mart employed a logistics technique known as cross-

docking
 goods are continuously delivered to warehouses where they are
dispatched to stores without ever sitting in inventory.
 This strategy reduced Wal-Mart’s cost of sales significantly and

made it possible to offer everyday low prices to their customers.
Characteristics of Cross-Docking:
 Goods spend at most 12-15 hours in the warehouse,
 lowers inventory handling costs,
 Wal-Mart delivers about 85% of its goods through its cross
docking facility, compared to about 50% for Kmart,
 Stores trigger orders for products.

Issues with Cross-Docking
 Require a significant start-up investment and are very difficult

to manage
 Supply chain partners must be linked with advanced

information systems for coordination
 A fast and responsive transportation system is necessary
 Forecasts are critical, necessitating the sharing of information.
 Effective only for large distribution systems

 Sufficient volume every day to allow shipments of fully loaded trucks from
the suppliers to the warehouses.
 Sufficient demand at retail outlets to receive full truckload quantities

Inventory Pooling: Example
 Two retailers face random demand for a single product.
 No differences between the retailers
 Compare two systems

 centralized pooled system,
 retailers together operate a joint inventory facility
 take items out of the pooled inventory to meet demand.
 decentralized system
 each retailer individually orders from the manufacturer to meet

demand
 In both systems, inventory is owned by the retailers

Transshipment
 Shipment of items between different facilities at the same level
in the supply chain to meet some immediate need
 Occurs mostly at the retail level
 Takes advantage of Risk Pooling
 Can be achieved:
 with advanced information systems
 Shipping costs are reasonable
 Retailers have same owner

Which Distribution Strategy to Adopt?
 Different approaches for different products
 Factors:
 Customer demand and location
 Service level
 Costs => transportation & inventory costs
 Demand Variability
Strategy Direct Cross Inventory at

Attribute Shipment Docking Warehouses
Risk Take
Pooling Advantage
Transportation Reduced Reduced
Costs Inbound Costs Inbound Costs
Holding No Warehouse No Holding
Costs Costs Costs
Demand Delayed Delayed
Variability Allocation Allocation
THANKYOU
8/27/2020 Unboxed - How Mumbai’s Dabbawallas and Flipkart make customers smile
HOME (HTTPS://STORIES.FLIPKART.COM/) 
INNOVATION (HTTPS://STORIES.FLIPKART.COM/CATEGORY/INNOVATION/) 
UNBOXED – HOW MUMBAI’S DABBAWALLAS & FLIPKART MAKE CUSTOMERS SMILE
UNBOXED – HOW MUMBAI’ S

D A B B AWA L L A S & F L I P K A R T
MAKE CUSTOMERS SMILE
ELITA ALMEIDA (HTTPS://STORIES.FLIPKART.COM/AUTHOR/ELITA/) JUNE 30, 2017
Will modern e-commerce wipe out Mumbai’s Dabbawallas? Diving deep into the two-year-
old partnership between Flipkart and this esteemed Mumbai institution, we pondered this
question and unearthed a different story — one of challenge, triumph and deep customer-
focused innovation
 28    

https://stories.flipkart.com/mumbai-dabbawallas-flipkart/ 1/14
n 2015, Flipkart entered into an agreement with Mumbai’s iconic Dabbawallas to

I fortify its last-mile delivery capabilities. Deemed an institution for over a century,
Mumbai’s Dabbawallas have inspired awe and respect, and spurred scholarly
industry research for the clockwork, error-free ef ciency of their complex lunchbox delivery
system that is over a century old. The Dabbawallas’ operations are founded on a combination of
street-smart expertise and a tacit knowledge of Mumbai’s inner-city addresses, which pose a
challenge even to modern, tech-capable logistics providers. Two years down, when Flipkart
Stories sent a writer to check on the health of this ambitious partnership, the prognosis was
more than encouraging. More comforting is the knowledge that even as well-funded, tech-savvy
last-mile logistics players mushroom in urban areas, the vast, deep expertise of the Dabbawallas
is not going to be lost to time, or trampled by the march of information technology and arti cial
intelligence. Instead, as Flipkart’s partnership with the Dabbawallas demonstrates, their talents
will supplement and complement high-tech innovation in e-commerce.
The Chhatrapati Shivaji Terminus, heart of Mumbai’s suburban railway system, is the core of the delivery route followed by
Mumbai’s Dabbawallas
ombay. Bombai. Mumbai. The city has survived more than just changes to its name,
B and this includes its now invisible seven islands. The quintessential city of dreams
and lights; that mirage of a fertile ground where dreams can be cultivated and
harvested, derives its name from Mumbadevi — the patron-goddess of the indigenous residents
of the city, viz. the Kolis, Agris and the Somvanshi Kshatriya communities. Each of its multiple

names, however, alludes to just one thing: this is the city that never sleeps. Home to an
estimated population of over 20 million (which is the total population of Sri Lanka), the city has
come to mean many things for many people.
Contrary to popular lore, however, there are no leaping unicorns, rainbows, or pots of gold. But
what makes Mumbai unique is that it is governed by time. Time is currency. And time – not
kilometers – is also the measure for distance. It is, therefore, safe to assume that time is the sole
metric the city seems to understand and therefore obeys. Residents are known to set their
morning alarms clocks to sync with the local train they will later catch to get to work. The
Mumbai locals — the suburban railway lines — are the lifeline of the city, lending connectivity
along its north-south corridor and spreading to over 465 kilometers. The oldest railway system in
Asia and a by-product of the rst railway built by the British that plied between Thane and the
present-day Chhatrapati Shivaji Terminus (CST) in 1853, the suburban railway network today
comprises four distinct lines: Central, Harbor, Trans-Harbor and Western Lines.
And gliding peacefully through the hordes who shove and get shoved in and out of this
indispensable lifeline are the Dabbawallas. Founded in 1890, the Dabbawallas have been in the
profession of transporting lunch boxes (dabbas) with absolute precision for about 130 years now.
Over the course of time and, just like the city itself, they have endured calamities both natural
and man-made, including riots, monsoon oods, and terrorist attacks, making them renowned
for embodying the soul of the city — its gritty resilience.
Mumbai’s Dabbawallas are estimated to manage the delivery of about 150,000 lunchboxes from
homes to of ces and then return them to the place of origin (making that approximately
300,000 transactions each day over a period of 4-6 hours, six days a week) with almost zero-error
rate. This is a feat truly commendable for a group that is predominantly semi-literate and
manages its operations without any reliance on modern technology. Not surprisingly, in 2001,
Forbes identi ed the Mumbai Dabbawallas as a Six Sigma organization

(https://www.forbes.com/sites/karlmoore/2011/05/24/the-best-way-to-innovation-an-important-
lesson-from-india/#72716e1e2861).
It was their rare combination of expertise, ef ciency and trust that propelled Flipkart to consider
an alliance with the Dabbawallas. In April 2015, the partnership became of cial. It seemed like a
win-win innovation. Flipkart was looking at improving its last-mile delivery ef ciency to its
customers. For the Dabbawallas, this was an opportunity to extend their existing skill sets in
another sector under the aegis of the most reputed brand in Indian e-commerce, while fending
off attrition through competing last-mile delivery services that have mushroomed in the latter
part of the last decade. Two years is a signi cant enough measure of time to gauge the health of
this win-win proposition.

FLIPKART’S QUEST FOR ALTERNATE DELIVERY MODELS
Flipkart’s zonal of ce, located outside of Mumbai’s Vidyavihar railway station, is not only home to
some of the city’s notable colleges but is also a fast-emerging commercial hub, with malls and
high-rises dotting the skyline of this erstwhile sleepy corner of the city.
Inside the zonal of ce, the air-conditioned environs are a welcome respite from the dreary
humidity outdoors. The air was abuzz with executives entering and exiting conference rooms.
Somewhere within the con nes of those walls, a printer was ejecting reams — a sound
distinguishable despite the murmurs in the room. The sharp scent of varnish wafting through
the premises was a tell-tale sign of some recent modi cations.
While clarifying requests for refreshments with the in-house pantry staff, Krishnendu Pal
disclosed, “Our entire of ce moved from Andheri to Vidyavihar only a couple of months ago. The
Metro line has ensured the commute is still an easier one.” Krishnendu is the senior manager at
Flipkart for customer and seller experience, as well as for alternate delivery models.
Silently nodding and seated alongside Krishnendu in the conference room was a man in
trademark Dabbawalla attire: A crisp white shirt and pants with a Gandhi cap. This was Bhagaji
Sabhaji Roundhal.
“Bhagaji is my go-to man and our point of contact whenever we are taking decisions about the
partnership,” said Krishnendu by way of introduction.

The 32-year-old soft-spoken secretary of the Mumbai Jeevan Dabbe Vahatuk, a Dabbawalla
union that has signed this partnership with Flipkart, talks about his start in 2002, saying, “I have
been in the business of delivering lunchboxes for the past 15 years.” Attributing his grandfather
for being instrumental in bringing him to Mumbai and inspiring him to become a Dabbawalla,
Bhagaji admits, “Given my then prevailing situation, I was not able to complete my education. I
have not passed the eighth standard and I had no interest in working on the elds in my village
alongside my parents.”
In 1989, Bhagaji accompanied his grandfather to Mumbai for the very rst time. “We had a
mutual understanding that I would study as well as work in the city,” he recollects. “My
grandfather used to deliver lunchboxes and I discovered that through him I found my calling.
For me it was about emulating my grandfather who would load the lunchboxes on his bicycle
and get on with his deliveries day after day.”
It wasn’t until 2002 that Bhagaji began to deliver lunchboxes himself. “When I started out, it was
just me, but over a period of time I grew a team of about 50 Dabbawallas and we gradually
expanded our customer base to the West and East sides of the railway line and then to other
railways stations around our area of operations. In my 15 years within this profession, I have spent
only the rst two years delivering lunchboxes. Within a very short span of time, I assumed the
roles of a manager rst, and then, the treasurer within our Dabbawalla union. As a manager, I
had to administer how many Dabbawallas were assigned to a particular locality and within them
to which speci c households.” he reminisces.
Validating Krishnendu’s comment earlier in our conversation, it was now becoming apparent
how it was Bhagaji’s perseverance and diligence during his formative years that would see him
assume an important role in fostering the partnership with Flipkart.

MUMBAI’S DABBAWALLAS — THE MEN IN WHITE
So what was the catalyst for the e-commerce giant joining forces with the men in white?
“We wanted to explore alternate delivery models to manage Flipkart’s peak load and decided to
on-board a few Dabbawallas in 2015,” says Krishnendu. “In addition to the Flipkart delivery
executives, the Dabbawallas started out as being a exible manpower resource within our
delivery ecosystem.”
It is an odd kind of alliance, should you choose to look at it dispassionately. One partner was high
on technology and processes, the other was almost Luddite in its approach. One ran on a strong
understanding of customer behavior founded on data; the other was powered by an amalgam
of street skills and deep tacit knowledge.
“We were banking on their collective experience of excellence in delivery as well as in
maintaining customer relationships while delivering lunchboxes from households to of ces in

localities not very different from the ones to which Flipkart had been delivering its shipments.
What helped is that their approach was in alignment with the company’s vision of delivering a
‘wow experience’ to the customer,” adds Krishnendu, explaining why these men in white were
considered potential partners.
But was it really as easy as deploying Dabbawallas overnight to deliver Flipkart packages?
Krishnendu sheds light on what the rst couple of months looked like. In the rst phase, about
four or ve Dabbawallas, including Bhagaji, were trained on the Flipkart standard operating 
procedures (SOPs), such as:
The shipment at the hub

Sorting the shipment based on the pin-codes and the areas within it
Understanding how these shipments would be assigned to them
A sample of how these would appear on their run-sheet
Updates that they would be required to input after the delivery has been made
Instructions on the next steps if the shipment isn’t delivered
While the Flipkart partnership with the Dabbawallas was geared towards leveraging Flipkart’s
strengths in terms of logistical precision and strong customer relationships, the back-end in
terms of cash collection continued to be managed by eKart Logistics. In other words, during this
phase, the Dabbawallas only managed prepaid deliveries and not cash-on-delivery (COD)
shipments.
Besides building their knowledge on the SOPs through classroom training modules delivered
over two intensive days, the Dabbawallas were also trained on Flipkart’s protocol to include its
zero-tolerance policy on managing customer escalations, the do’s and don’ts for managing
customer interactions, and behaving with customers — since they were going to be client-
facing. Additionally, the Dabbawallas were also sent for an on- eld observation-based training
with the Flipkart delivery executives (https://stories. ipkart.com/ganapathy-poojari-ekart/) as part
of their week-long training.
Bhagaji Sabhaji Roundhal, Secretary of the Mumbai Jeevan Dabbe Vahatuk, in traditional attire
THE MAKING OF A PARTNERSHIP


Bhagaji maintains that despite the training, one challenge persisted: The lack of ownership.
“Until there was someone to take proactive initiative on behalf of the Dabbawallas, very little
seemed to transpire from this partnership,” he said. “This is when I decided to step it up and be
that conduit who would represent the Dabbawallas to Flipkart and in turn communicate to the
Dabbawallas the requirements of Flipkart, and help with getting things done.” It still seemed a
little too easy to be representative of the whole picture. So, at Krishnendu’s behest, a visit was
arranged to the Mira Road hub in northern Mumbai. Since we visited during the holy month of
Ramzan, the streets of this predominantly Muslim locality were unusually empty at 9:30 AM.
However, inside the hub, shipments were being sorted and labelled by Flipkart executives
gearing up to make the day’s deliveries.
Yogesh Naik, Flipkart’s assistant manager for customer experience (west zone), says that on
average, the number of deliveries range between 35-40 per day and this number varies
depending on the route and localities assigned to the Dabbawallas. Yogesh introduced Rajesh,
one of the earliest Dabbawallas from the pilot roll-out who currently delivers Flipkart shipments
in and around Mira Road.
“I live in Dahisar and my day starts around 7-7:30 in the morning, and when I joined the
partnership in 2015, I used to use the run-sheet,” says Rajesh, who has been a Dabbawalla for 12
years. Run-sheets, Krishnendu explains, are paper-based systems created to track deliveries,
since the Dabbawallas are semi-literate. These run-sheets, he explains, were implemented
during the pilot roll-out when 2-3 Dabbawallas from across 10-12 hubs within Mumbai and Navi
Mumbai were identi ed. The Dabbawallas would make a tick-mark and/or notes on the run-
sheets, these would then be interpreted by a third person prior to updating the information in a
centralized database. This made the process not only time-consuming but also highly error-
prone.
Rajesh, who has studied up to Class 10 and has a working familiarity with English, adds, “A few
months after I began, I received another level of training and was provided with a mobile
handset. Ever since, I’ve been updating the status of deliveries directly into the system, and
whenever I face any dif culties I am assisted by the team here. Writing down the status and
making notes on the run-sheet used to be a two-step process that would add an extra hour of
work. It is a lot faster now.”
Training, it would seem, has helped the Dabbawallas become comfortable with both technology
as well as the English language. Many of them have now been able to brush up on their uency
in the language and can now read addresses on the packages, communicate with customers,
and update information on the mobile apps with relative ease. 

The man at the helm – Krishnendu Pal, Senior Manager at Flipkart for customer experience and alternate delivery models
WHY CUSTOMERS GAVE THE DABBAWALLAS A THUMBS-UP
There were other hurdles to overcome. “Managing deliveries while the Dabbawallas were
engaged on a part-time basis did throw up a couple of challenges for us,” says Krishnendu. “The
packages get scanned in the morning and customers receive an SMS alert that their shipment is
out for delivery. However, because the Dabbawallas were working for us on a part-time basis, the
delivery would not happen until later in the evening after they had collected and delivered their
lunchboxes. Sometimes, customers would get upset. But with the transition of about 80% of
Dabbawallas to a full-time model, these issues have been mitigated.”
Rajesh, who is still employed on a part-time basis into the partnership, has received above-
average performance scores. A beaming Yogesh shared the news that Rajesh has a Customer
Satisfaction Score (CSAT) of 94% and an Undelivered Bad score (UDBad) of 0.5% — which is
exceptionally phenomenal in this line of work. According to Yogesh, the expected CSAT score is
85% and above whereas UDBad score is 6% and below. The CSAT score is a percentage score
derived from the difference between good responses and bad responses provided by customers
after receipt of the delivery. The UDBad score is derived from undelivered shipments that the
Flipkart executive or Dabbawalla did not deliver.
The nal nod of approval underscoring Rajesh’s performance comes from the customers
themselves. Ramesh Mohanty, a customer who received delivery from him, attested over a
telephonic conversation: “He was punctual and very friendly in his approach. He called to alert

me that he was on his way and he even waited for me to return to my address – which does not
typically happen. So I was grateful that he waited back.”
Chiming in, Simi Pinkesh Makwana, another customer, said, “I have been buying a variety of
products from Flipkart through the mobile app for some time now. Compared to the previous
deliveries, this time there was a man with a topi who came with the package. He handed me the
delivery and made me sign on the handheld device and then he left.” In a similar vein, Flipkart
customer Prabhu Das quipped: “I received an SMS alert in the morning and by 10:30 the delivery
had already happened. It was a smooth process overall.”
According to Bhagaji, “For us as Dabbawallas, our work has remained more or less similar to how
it was when we were delivering lunchboxes. We arrive at their doorstep and introduce ourselves
as coming from Flipkart, and hand over their package to them while completing the formalities
before taking their leave.”
Krishnendu maintains that in terms of performance the Dabbawallas have been on par with the
Flipkart Delivery Executives (popularly known as Wishmasters
(https://stories. ipkart.com/ ipkart-wishmasters/)) and, in a few cases, have outperformed them.
Evidently, the learning has been immense for both partners. And with new learning have come
tweaks and modi cations to processes, to make them seamless.
“We have transitioned completely from a paper-based to a mobile-based tracking system,

except in the case of new joinees or in the event of a malfunctioning phone,” says Krishnendu.
“During the pilot phase, all the Dabbawallas involved in the project worked on a part-time basis
with Flipkart – in that, they would deliver and collect lunchboxes during the day and head to the
Flipkart hubs in the late afternoon or early evening for shipments scheduled between 4 PM – 7
PM. Currently, though, 95% of the Dabbawallas are a part of this partnership on a full-time
basis.”
Elaborating on the expansion in the roles that the Dabbawallas now essay, Krishnendu adds, “In
addition to the prepaid deliveries, at present, the Dabbawallas also manage COD shipments,
returns (https://stories. ipkart.com/ ipkart-product-returns/), and product exchange
(https://stories. ipkart.com/ ipkart-exchange-policy-easy/). This increase in the scope of work

attests to their proven capabilities and skills.”
In keeping with these modi cations, the current training content has been augmented to
include the mobile-based tracking system. Newer SOPs have been designed to factor in
changes to payment modalities such as the option of customers being able to pay through
PhonePe (https://stories. ipkart.com/phonepe-app- ipkart/) or digital apps while opting for COD
payments (https://stories. ipkart.com/imps-cash-on-delivery-returns/).

The Mira Road squad – (L to R) Yogesh Naik, Rajesh, Jiyut Chaubey and Gurudas
FLIPKART AND DABBAWALLAS — THE ROAD AHEAD
In 2016, operations were extended to Pune. Currently, 60 Dabbawallas across 23 hubs in Mumbai
(including Navi Mumbai and Thane) and 19 in Pune are a part of the partnership. According to
Krishnendu, recruiting Dabbawallas into the partnership model is based on requirements as
they arise. Manpower calculations are made bearing in mind sale dates and the hike in the
number of deliveries, and these are then communicated to Bhagaji who assists in enabling
smooth deployments.
“The Dabbawallas who are interested in becoming a part of the partnership sign up of their own
accord,” says Bhagaji. “No one decides on their behalf.”
For the Dabbawallas this partnership is the rst of its kind as they had not engaged with
another partner before this. According to Bhagaji, there is a trust factor in the partnership as well
as the devotion and belief in the local deity Vitthal Rakhumai that things will work out.
“It has been a smooth experience for us,” Krishnendu adds. “Looking forward, we want to
expand, and hopefully the Dabbawalla network will also expand and be leveraged in cities like
Nashik, Aurangabad, Kolhapur, Satara, Nagpur and even Goa. We want to be able to replicate the
model as we continue to grow our reach.”
“The pride of Mumbai, the Dabbawalas have a historical relevance in eKart,” says Pawan
Raghuveer, Director – City Logistics Design at Flipkart, summarizing the success of the
partnership. “They were the among our rst service contract partners and have set the tone on

the ex model of operations in the last mile.”
What began as a runner service to deliver lunchboxes for British administrators from their
homes to their of ces has stood the test of time. Like so many other colonial vestiges, including
the English language and the railway system, the Dabbawallas have ourished and transformed
into an institution. In 2017, though under threat from changing customer habits, food delivery
apps, and technology-savvy last-mile delivery startups, the Dabbawallas are anything but
redundant. With Flipkart, a small section of Mumbai’s Dabbawallas have found a new calling.
And the call is growing louder and stronger for this powerful human network to expand, endure
and continue to delight customers as it has done for more than a century.
Elita Almeida is an avid traveller and blogger (https://nomadicthunker.blogspot.in/) who, when

not writing stories from the road, is busy encouraging people to explore their own stories
through the expressive writing workshops she facilitates.
Thanks to Flipsters Pawan Raghuveer, Pavan K Jayanti, Tarun Jain, Krishnendu Pal, Saurabh
Jain and Sarthak Patnaik for facilitating this story.
Photographs by Elita Almeida
Illustrations by Sadhna Prasad
(https://www.flipkart.com/)
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Smart Contract Leverage Blockchain to Streamline Processes
Supply (physical) Contracts

https://www.capgemini.com/2019/01/will-blockchain-enable-lead-to-digital-nirvana-for-financial-supply-chain-management/
Needs for such contracts?
• Significant level of outsourcing
• More outsourcing has meant

– Search for lower cost manufacturers
– Development of design and manufacturing expertise by
suppliers
– Procurement function is also being outsourced
• OEMs have to get into contracts with suppliers

– For both strategic and non-strategic components
The Pie
• How is the pie allocated?

Supply Contracts Elements
• Pricing and volume discounts.
• Minimum and maximum purchase quantities.
• Delivery lead times.
• Product or material quality.
• Product return policies.

2-Stage Sequential Supply Chain
A buyer and a supplier.
• Buyer’s activities:
– generating a forecast
– determining how many units to order from the supplier
– placing an order to the supplier so as to optimize his own profit
– Purchase based on forecast of customer demand
• Supplier’s activities:
– reacting to the order placed by the buyer.
– Make-To-Order (MTO) policy / Make-To-Stock Policy

Contracts for
Make-to-Order Supply Chains
Costs involved in 2 stage SC
• Manufacturer sells price per unit (C): $80 = Input cost to retailer
• Selling price per unit (S) by retailer: $125
• Salvage value per unit (V): $20
• Fixed production cost (F): $100,000
• Q is production quantity, D: demand
• Profit = Revenue - Variable Cost - Fixed Cost + Salvage

Supply Contracts
Fixed Production Cost =$100,000
Variable Production Cost=$35

Manufacturer sells at =$80
Selling Price=$125
Salvage Value=$20
Manufacturer Distributor Retail DC
Who takes the risk?

Stores
What would the manufacturer like?
Consider the following case
• A company designs, produces, and sells summer fashion

items such as swimsuits.
• The company has to commit itself six months before summer
to specific production quantities for all its products
– predicting demand for each product.
• The trade-offs are clear: overestimating customer demand
will result in unsold inventory while underestimating
customer demand will lead to inventory stockouts and
loss of potential customers.
Demand forecast
nThe30%
marketing department28% uses historical data from the last
five years,
25% current economic conditions, and other factors to
construct a probabilistic forecast of22%
the demand.
20% 18%
15%
11% 11% 10%
10%
5%
0%
8000 10000 12000 14000 16000 18000
Unit sales
forecast averages about 13,100

Scenario of excess inventory and stock out
• Scenario One: (assuming no opportunity cost lost)

– Suppose you make 12,000 jackets and demand ends up
being 13,000 jackets.
– Profit = 125(12,000) - 80(12,000) - 100,000 = $440,000
• Scenario Two:
– Suppose you make 12,000 jackets and demand ends up
being 11,000 jackets.
– Profit = 125(11,000) - 80(12,000) - 100,000 + 20(1000) =
$ 335,000
Questions to respond?
• Find order quantity that maximizes

weighted average profit?
• Will this quantity be less than, equal to, or

greater than average demand?
How much to Make?
• Should I consider Marginal cost or marginal profit

– if stock out (under estimate demand) then loss
incurred is 125-80 = 45
– if over stock (over estimate demand) cost is 80-20
= 60
• So we will make less than average

Distributor Expected Profit
(in single period)
Expected Profit
$400,000
$300,000
Profit
$200,000
$100,000
$0
8000 12000 16000 20000
Order Quantity
If Quantity ordered is 12000

Profit = (0.78)*12000*125+ 0.11*8000*125+ 0.11*10000*125-80*12000-100000+4000*0.11*20+2000*0.11*20
= 370700
Note: Opportunity cost of loosing customer not captured

Distributor Expected Profit
(in long run)
Expected Profit
500000
400000
300000
200000
100000
0
6000 8000 10000 12000 14000 16000 18000 20000
Order Quantity
If Quantity ordered is 12000

Profit = (0.78)*12000*125+ 0.11*8000*125+ 0.11*10000*125-80*12000+4000*0.11*20+2000*0.11*20
= 470700
Important Observations
• Tradeoff between ordering enough to meet demand

and ordering too much
• Several quantities have the same average profit
• Average profit does not tell the whole story
• 9000 and 16000 units lead to about the same average
profit, so which do we prefer?
Can such scenarios be possible?
Expected Profit
$400,000
$300,000
Profit
$200,000
$100,000
$0
8000 12000 16000 20000
Order Quantity
• How much should I make?

• How to decide?
What should we do?
• But Need to understand risk associated with certain

decisions.
• A frequency histogram provides information about
potential profit for the two given production
quantities, 9,000 units and 16,000 units. The
possible risk and possible reward increases as we
increase the production size.
Probability of Outcomes
100% 0.89 Q =9000
90%
80% Q =16000
70%
Probability
60%
50%
40%
0.28 0.28
30% 0.22
20% 0 . 11 0 . 11 0 . 11
10% 0 0 0 0 0 0 0 0 0 0 0 0
0%
0
-300000
-200000
-100000
100000
200000
300000
400000
500000
600000
Profit
Key Points/ Learning
• The optimal order quantity is not necessarily equal to

average forecast demand
• As order quantity increases, average profit first increases
and then decreases
• As production quantity increases, risk increases. In other
words, the probability of large gains and of large losses
increases
Supply Contracts
• Retailer optimal order quantity is 12,000 units
• Retailer expected profit is $470,000
• Manufacturer profit is $440,000
• Supply Chain Profit is $910,000
Is there anything that the retailer & manufacturer
can do to increase the profit of both?

Supply Contracts

Selling Price=$125
Salvage Value=$20
Stores
Here, the retailer takes all the risk and the manufacturer takes zero risk.
Hence, the retailer has to be very conservative with the amount he orders.
If the retailer can transfer some of the risk to the manufacturer, the retailer
may be willing to increase his order quantity and thus increase both his profit
and the manufacturer profit
Supply Contracts

Selling Price=$125
Salvage Value=$20
Here, the retailer takes all the risk and the manufacturer takes zeroStores
risk.
Hence, the retailer has to be very conservative with the amount he orders.
RISK SHARING
If the retailer can transfer some of the risk to the manufacturer, the retailer
may be willing to increase his order quantity and thus increase both his profit
and the manufacturer profit
Risk Sharing
• In the sequential supply chain:
– Buyer assumes all of the risk of having more inventory than sales
– Buyer limits his order quantity because of the huge financial risk.
– Supplier takes no risk.
– Supplier would like the buyer to order as much as possible
– Since the buyer limits his order quantity, there is a significant increase in the
likelihood of out of stock.
• If the supplier shares some of the risk with the buyer
– it may be profitable for buyer to order more
– reducing out of stock probability
– increasing profit for both the supplier and the buyer.
• Supply contracts enable this risk sharing

Buy-Back Contract
• Seller agrees to buy back unsold goods from the buyer for some
agreed-upon price.
• Buyer has incentive to order more
• Supplier’s risk clearly increases.
• Increase in buyer’s order quantity
– Decreases the likelihood of out of stock
– Compensates the supplier for the higher risk
• Disadvantage:
– buyback contract results in surplus inventory that must be disposed of, which
increases supply chain costs
– Can also increase information distortion through the supply chain because the
supply chain reacts to retail orders, not actual customer demand
Most effective for products with low variable cost such

as music, software, books, magazines, and newspapers
Retailer Profit
(Buy Back=$55)
600,000
500,000
$513,800
Retailer Profit
400,000
300,000
200,000
100,000
0
00
00
00
00
0
00
00
00
00
00
00
00
00
00
60
70
80
90
10
11
12
13
14
15
16
17
18
Order Quantity
Manufacturer Profit
(Buy Back=$55)
600,000
$471,900
Manufacturer Profit
500,000
400,000
300,000
200,000
100,000
0
00
00
00
00
0
00
00
00
00
00
00
00
00
00
60
70
80
90
10
11
12
13
14
15
16
17
18
Production Quantity
Supply Contracts

Manufacturer sells at =????
Selling Price=$125
Salvage Value=$20
Stores
What does retailer price drive?

How can manufacturer benefit from lower price?
Revenue Sharing Contract
• Buyer shares some of its revenue with the supplier

– in return for a discount on the wholesale price.
• Decreases the cost per unit charged to the retailer,
which effectively decreases the cost of overstocking
• Can result in supply chain information distortion,
however, just as in the case of buyback contracts

Retailer Profit
(Distributor Price $70 &15% product revenue to manu.)
600,000
$504,325
500,000
Retailer Profit
400,000
300,000
200,000
100,000
0
00
00
00
00
0
00
00
00
00
00
00
00
00
00
60
70
80
90
10
11
12
13
14
15
16
17
18
Order Quantity
Manufacturer Profit
(Distributor Price $70 &15% product revenue to manu.)
700,000
600,000
Manufacturer Profit
500,000 $481,375
400,000
300,000
200,000
100,000
0
00
00
00
00
0
00
00
00
00
00
00
00
00
00
60
70
80
90
10
11
12
13
14
15
16
17
18
Production Quantity
Supply Contracts
Strategy Retailer Manufacturer Total

Sequential Optimization 470,700 440,000 910,700
Buyback 513,800 471,900 985,700
Revenue Sharing 504,325 481,375 985,700
Implementation Drawbacks of
Supply Contracts
• Buy-back contracts
– Require suppliers to have an effective reverse logistics
system and may increase logistics costs.
– Retailers have an incentive to push the products not
under the buy back contract (even of competitors for
multibrand retailer).
• Retailer’s risk is much higher for the products not under
the buy back contract.
• Revenue sharing contracts
– Require suppliers to monitor the buyer’s revenue and
thus increases administrative cost.
– Buyers have an incentive to push competing products
with higher profit margins.
• Similar products from competing suppliers with whom the
buyer has no revenue sharing agreement.
Other Types of Contracts
• Quantity-Flexibility Contracts
– Manufacturer provides full refund for returned (unsold)
items as long as the number of returns is no larger than a
certain quantity.
– Allows the buyer to modify the order (within limits) as
demand visibility increases closer to the point of sale
• Sales Rebate Contracts

– Provides a direct incentive to the retailer to increase sales
by means of a rebate paid by the supplier for any item sold
above a certain quantity.
Lower levels of information distortion than either buyback

contracts or revenue sharing contracts
Supply Chain Profit
What is the maximum profit that the supply chain can achieve? i.e When we
have global optimization
1,200,000
$1,014,500
Supply Chain Profit
1,000,000
800,000
600,000
400,000
200,000
0
00
00
00
00
0
00
00
00
00
00
00
00
00
00
60
70
80
90
10
11
12
13
14
15
16
17
18
Production Quantity
Supply Contracts
Strategy Retailer Manufacturer Total

Sequential Optimization 470,700 440,000 910,700
Buyback 513,800 471,900 985,700
Revenue Sharing 504,325 481,375 985,700
Global Optimization 1,014,500
Global Optimization & Supply Contracts
-Reality-
• Carefully designed supply contracts can achieve as much as
global optimization
• Unbiased decision maker unrealistic
– Requires the firm to surrender decision-making power to an
unbiased decision maker
• Global optimization does not provide a mechanism to allocate
supply chain profit between the partners.
– Supply contracts allocate this profit among supply chain members.
Key Insights
• Effective supply contracts allow supply chain partners to
replace sequential optimization by global
optimization
• Buy Back and Revenue Sharing contracts achieve this
objective through risk sharing

Contracts for
Make-to-Stock Supply Chains
Pay-Back Contract
• Retailer / Buyer agrees to pay some agreed-upon price
for any unit produced by the manufacturer but not
purchased.
• Manufacturer incentive to produce more units
• Buyer’s risk clearly increases.
• Increase in production quantities at manufacturer has
to compensate the retailer for the increase in his risk.
Cost-Sharing Contract
• Retailer / Buyer shares some of the production cost with

the manufacturer, in return for a discount on the
wholesale price.
• Reduces effective production cost for the manufacturer

– Incentive to produce more units
Implementation Issues
• Cost-sharing contract requires manufacturer to

share production cost information with downstream
player
Contracts with Asymmetric Information
• Implicit assumption so far: Buyer and supplier share

the same forecast
– Thus reducing bullwhip Effect
• Inflated forecasts from buyers a reality
• How to design contracts such that the information

shared is credible?
Two Possible Contracts
• Capacity Reservation Contract
– Buyer pays to reserve a certain level of capacity at the
supplier
– A menu of prices for different capacity reservations
provided by supplier
– Buyer signals true forecast by reserving a specific capacity
level
• Advance Purchase Contract
– Supplier charges special price before building capacity
– When demand is realized, price charged is different
– Buyer’s commitment to paying the special price reveals the
buyer’s true forecast
Contracts for Non-Strategic Components
• Variety of suppliers
• Market conditions dictate price
• Buyers need to be able to choose suppliers and
change them as needed
• Recent trend towards more flexible contracts
– Buyers has option of buying later at a different
price than current
Flexible or Option Contracts
• Buyer pre-pays a relatively small fraction of the
product price up-front
• Supplier commits to reserve capacity up to a certain
level.
• Initial payment is the reservation price or premium.
• If buyer does not exercise option, the initial payment
is lost.
• Buyer can purchase any amount of supply up to the
option level by:
– paying an additional price (execution price or exercise
price)
– agreed to at the time the contract is signed
– Total price (reservation plus execution price) typically
higher than the unit price in a long-term contract.
Flexible or Option Contracts
• Provide buyer with flexibility to adjust order
quantities depending on realized demand
• Reduces buyer’s inventory risks.
• Shifts risks from buyer to supplier
– Supplier is now exposed to customer demand uncertainty.
• Flexibility contracts
– Related strategy to share risks between suppliers and
buyers
– A fixed amount of supply is determined when the contract is
signed
– Amount to be delivered (and paid for) can differ by no more
than a given percentage determined upon signing the
contract.
Spot Purchase
• Buyers look for additional supply in the open market.
• May use independent e-markets or private e-markets

to select suppliers.
• Focus:
– Using the marketplace to find new suppliers
– Forcing competition to reduce product price.

Portfolio Contracts
• Portfolio approach to supply contracts

• Buyer signs multiple contracts at the same time
– optimize expected profit
– reduce risk.
• Contracts
– differ in price and level of flexibility
– hedge against inventory, shortage and spot price risk.
– Meaningful for commodity products

• a large pool of suppliers
• each with a different type of contract.
Risk Trade-Off in Portfolio Contracts
• If demand is much higher than anticipated
– Base commitment level + option level < Demand,
– Firm must use spot market for additional supply.
– Typically the worst time to buy in the spot market
• Prices are high due to shortages.
• Buyer can select a trade-off level between price risk, shortage
risk, and inventory risk by carefully selecting the level of long-
term commitment and the option level.
– For the same option level, the higher the initial contract
commitment, the smaller the price risk but the higher the inventory
risk taken by the buyer.
– The smaller the level of the base commitment, the higher the price
and shortage risks due to the likelihood of using the spot market.
– For the same level of base commitment, the higher the option level,
the higher the risk assumed by the supplier since the buyer may
exercise only a small fraction of the option level.
Risk Trade-Off in Portfolio Contracts
Low High
Base commitment level

Inventory risk
High N/A*
Option level (supplier)
Price and shortage Inventory risk
Low
risks (buyer) (buyer)
*For a given situation, either the option level or the base
commitment level may be high, but not both.
Design Collaboration
• 50-70 percent of spending at a manufacturer is through

procurement
• 80 percent of the cost of a purchased part is fixed in the
design phase
• Design collaboration with suppliers can result in reduced
cost, improved quality, and decreased time to market
• Important to employ design for logistics, design for
manufacturability
• Manufacturers must become effective design
coordinators throughout the supply chain
THANYOU
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The procurement process
Article · February 2013
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The procurement
process
Refining inputs for Kraljic matrix yields objective
purchasing portfolios and strategies
BY STEPHAN M. WAGNER, SIDHARTHA S. PADHI AND
CHRISTOPH BODE
34 Industrial Engineer
The global sourcing landscape and leverage across business units. are not independent, the interdepen-
constantly produces new challenges, The earliest and arguably most prom- dency and relative distinction between
risks and opportunities, which makes inent of these models was proposed the commodities and suppliers is
purchasing and supply management by Peter Kraljic in 1983 in Harvard important when assigning purchasing
increasingly complex. To ensure long- Business Review. The Kraljic portfolio strategies; however, this is not explained
term availability of critical items at matrix (KPM) works to match external adequately in present texts about KPM.
competitive costs, organizations require resources provided by suppliers with To address these issues, this article
a well-developed purchasing strat- the internal needs of the buying firm. provides a toolkit to help managers
egy based on a systematic analysis. For practitioners, Kraljic’s approach has place their purchase range in the KPM
During the last two decades, most of proved to be an effective tool for discuss- and provides clues on how they can
the attention has focused on developing, visualizing and illustrating the move items within the model. Specifi-
ing appropriate purchasing strategies possibilities of differentiated purchas- cally, we propose a multiattribute
that consider buyer-supplier relation- ing and supplier strategies. Arguably, decision making approach that assigns
ship characteristics, interdependencies, Kraljic’s approach represents the importance weights to different supply
strategy-based planning and product- most important single diagnostic and risk and profit impact factors. We
based classifications. Procurement prescriptive tool available to purchasing then employ a multidimensional scal-
scholars and practitioners realized that a organizations, and the KPM framework ing (MDS) approach that locates the
one-size-fits-all strategy does not exist. facilitates internal coordination and purchased items in the appropriate
Successful supply management needs places emphasis on cross-functional quadrant of the KPM. A case exam-
to address different purchased items teamwork to improve the internal coor- ple of an automotive manufacturer is
and buyer-supplier relationships with dination within business units. presented to demonstrate this approach.
different purchasing strategies because However, while the KPM has influ-
the corresponding issues and challenges enced professional purchasing and Analyzing portfolios:
may differ significantly. For this reason, received ample support, it has received An overview
procurement experts in corporate a fair degree of criticism. Portfolio models typically begin by
practice proposed and implemented First, selecting the critical dimen- classifying products or buyer-supplier
numerous purchasing portfolio models sions, such as supply risk and profit relationships while considering interde-
to classify items and derive effective impact, is challenging, and the factors pendencies among the same. Portfolios
purchasing strategies. that determine the dimensions of the are then the basis for strategic plan-
For example, Akzo Nobel Decora- KPM are difficult to obtain. Further, ning. In practice, companies develop
tive Coating, which had €15.70 billion giving weights to these dimensions is a purchasing portfolios based on formal,
in revenues in 2011 ($20.86 billion), difficult task. Positioning of the items in documented systems, personal judg-
benefited from using a purchasing the portfolio matrix by the purchasing ment and group meetings. Assigning
portfolio approach for procuring raw managers is subjective and makes the an appropriate purchasing strategy is an
materials. Hewlett Packard ($127.24 portfolio models imprecise or even arbi- important but complex task because the
billion in revenues in 2011) success- trary. The KPM also faces demarcation buyer-supplier relationships are differ-
fully implemented a purchasing problems with respect to its dimensions ent for different commodities.
portfolio approach to identify strate- because the commodities are catego- Kraljic’s initial portfolio model was
gic and noncritical commodities for rized subjectively using dichotomous based on determining the characteristics
its daily procurement of nontangible variables (“low” and “high”) for both of the buyer-supplier relationship and
services. Delta Airlines ($35.11 billion supply risk and profit impact. KPM assigning proper strategies to commod-
in revenues in 2011) used a simi- does not consider involving suppliers ities. He suggested that all commodities
lar approach for direct and indirect when assigning different purchasing and all buyer-supplier relationships are
procurement of items. Likewise, DSM, strategies to commodities and does not not to be managed in the same way. The
which had €9.19 billion in revenues in provide a finer relative classification of KPM aims to develop different purchas-
2011 ($12.21 billion), used a portfolio commodities inside the matrix. And ing and supplier strategies by classifying
approach on the corporate level of the last, since the commodities a company commodities on two dimensions: profit
company, a strategy aimed at synergy procures are interrelated and suppliers impact and supply risk (low and high).
February 2013 35
the procurement process
First, supply risk can be defined broadly
using three factors:
kraljic’s portfolio matrix
Figure 1. Each of the four categories of commodities in the KPM requires a different
approach to suppliers.
1. Market risk: Availability of potential
suppliers for the commodities, type High
Leverage items Strategic items
of market (monopoly or oligopoly
• Standard, substitutable • Strategically important
condition) and entry barrier to the
market • Alternate suppliers • Substitution difficult
2. Performance risk: Supplier’s quality- • High volume or cost • No alternate suppliers
Profit
and performance-related issues, impact
which can include things like the Noncritical items Bottleneck items
supplier’s access to new technology
• Standard, substitutable • Substitution difficult
or the supplier’s pace at adopting new
technology • Alternate suppliers • Monopolistic market
3. Complexity risk: Associated problems • Low volume or cost • Critical items
with standardization of the product
Low Supply risk High
or service. Specification of the prod-
ucts or services is critical.
egy. This minimizes the supply risk and exchange and uncertainty associated
Second, profit impact can be defined as: makes the most out of buying power to with the exchange of resources between
enhance the organization’s purchasing buyer and supplier as the core dimen-
1. Impact on profitability: This factor performance and yield. sions of a transaction. In addition,
seeks to address the typical profit The KPM is arguably the most widely three sets of relationships – customer
yielded on the purchase of each used framework in industry today. For (existing and potential), supplier
commodity. example, comprehensive survey data (existing and potential) and indirect
2. Importance of purchase: This factor among Dutch purchasing professionals (e.g., company, firms, organizations,
seeks to address the importance or need have verified the credibility of his model. competitors, suppliers’ suppliers and
of the purchase of each commodity. However, since Kraljic proposed his regulatory bodies) – were identified
3. Value of purchase: This addresses the portfolio model, more advanced models within a network, which recommends
tangible and intangible costs attached have been suggested under various that firms should identify organiza-
to or the value obtained from the frameworks. For example, considering tions that are using each of the three
purchase of each commodity. the interdependency between the buying or a combination of the three portfo-
company and suppliers, transaction- lios of relationships and position the
These observations result in a two- based business relationships depend on organizations within the portfolio of
by-two matrix that has four categories: the attractiveness of the offer made by relationships.
bottleneck, noncritical, leverage and both sides. This leads to the second type Another suggestion advocated
strategic commodities, as shown in of approach, tri-partitioning business procuring industrial products by
Figure 1. processes to the product-classification following the industrial network
Each of the four categories requires a process of industrial projects. The next portfolio approach. Subsequently, stra-
distinctive approach toward suppliers. approach is applying contingency- tegic supplier portfolio perspectives
By plotting the buying strengths against inspired frameworks to model the considering risks, trade-offs and inter-
the strengths of the supply market, relationships among product, internal dependencies of relationships between
three basic power positions are identi- cooperation and inter-organizational the firm and its suppliers were devel-
fied and associated with three different relations. oped. Recently, a stakeholder-based
supplier strategies: balance, exploit and Then the inter-firm relationship model was designed that considered
diversify. The general idea of Kraljic’s emerged. It considers the transaction three organizational elements: policies
model is to classify the commodities cost analysis approach, which is based on (P), organization (O) and processes (P).
by their preferred procurement strat- asset specificity, frequency of economic These three “POP” elements help trans-
the right flow
Figure 2. Procurement experts can use this chart to develop objective ratings for commodities before placing them in the KPM.
late the selected organizational strategy predominantly on a process of discuss- of these are qualitative and need to be
into an appropriate supplier strategy ing and analyzing. Reaching consensus assessed subjectively by the procure-
and clarify the idealized mix of suppli- is critical when choosing what weights ment experts based on their own
ers in terms of portfolio archetypes. to assign to the factors and ultimately experience. Such subjective judgment
for positioning commodities in the invariably makes the assessment impre-
The proposed approach KPM. Insightful discussions about cise, sometimes conveying multiplicity
The above-mentioned purchasing purchasing issues are considered the of meaning. The imprecise nature can be
portfolio models are based on buyer- most critical part of strategy develop- captured through a conventional ordi-
supplier relationships and consider ment with the help of the KPM. The nal scale to measure them and precisely
interdependency of relationship and likelihood that experts will have differ- determine their importance. A 10-point
strategy-based planning, but using ent opinions is quite obvious. Therefore, scale can capture high variation in the
product-based classifications to assign reaching consensus is a major issue data. What follows demonstrates the
a suitable purchasing strategy has not when assigning a commodity in the use of such an approach for mapping
been addressed properly. The time has KPM. automotive components in the KPM.
come to give managers a simple tool to Mapping commodities depends on Specifically, the approach proposed
assess their own purchasing strategies. various factors of supply risk and profit by two of the authors, Padhi and
The consensus method is based impact. As stated earlier, quite a few Wagner, along with V. Aggarwal in the
February 2013 37
the procurement process
March 2012 Journal of Purchasing & Supply
Management, combines multiattribute
what’s the score
Figure 3. The normalized preference scores of 10 procurement experts regarding supply
decision making and MDS techniques risk and profit impact.
to determine the importance weights of
the supply risk and profit impact factors Supply risk Preference score
to position the automotive components How much preference do you give to market risk while purchasing products/services 44.3%
in the KPM. The approach consists of for your organization?
six steps shown in Figure 2. How much for performance risk? 21%
How much for complexity risk? 34.7%
Weighing risks and impact Profit impact Preference score
To test the proposed methodology, the How much preference do you give to impact on profitability while purchasing 23.5%
products/services for your organization?
researchers applied it to an automotive
original equipment manufacturer that How much for criticality of purchase? 31.8%
procures more than 2,050 different How much for value/cost of purchase? 44.7%
product items and services to carry out

its normal operational responsibilities
and manufacture cars. Based on this
company’s total cost of purchases in parts and service
2010, 19 items were selected for this Figure 4: Performance score of selected commodities
analysis. The 19 items account for 80
percent of annual purchase value.
Following steps one through three of
the flow chart shown in Figure 2 deter-
mines the normalized preference scores
of the supply risk and profit impact
factors. Ten procurement experts were
asked to rate the factors on a 10-point
rating scale anchored at one (very
low) and 10 (extremely high). Figure 3
provides an overview of the normalized
preference scores the 10 experts gave for
the right quadrants
Figure 5. The proposed process maps automotive items into different quadrants of
supply risk and profit impact. Kraljic’s portfolio matrix.
Next, following steps four through
five of the flow chart in Figure 2 deter- High
Leverage Strategic
1 4
mines the performance score of the • Carburetor • Fuel supply system
supply risk and profit impact factors for • Breaking system • Engine components
• Engine cooling system • Antipollution kit
19 selected automotive components. Ten • Steering system • Ignition system
of the company’s procurement experts • Switches • Gear box
were asked to rate the items on a 1-to-10 • Charging system • Transmission system
Profit
scale on supply risk and profit impact impact
factors. Figure 4 gives the performance Noncritical Bottleneck
2 3
scores of a few selected commodities. • Audio/video devices • Electronic sensors
With the preference and perfor- • Gauges and meters
• Windscreen and glasses
mance scores of the supply risk and • Car seat and interior
profit impact factors, step six of the • Battery
flow chart uses MDS to obtain an over- • Wheels and tire parts
all visual positioning of the 19 selected
items since the six factors (three each Low Supply risk High
of supply risk and profit impact) the second quadrant. proposed approach reduces the dimen-
are now classified into two dimen- Finally, we are left with the first quad- sions to supply risk and profit impact.
sions of the KPM. Next, the Euclidean rant of the KPM, which contains items It also gives a clear representation of
distance matrix (reflecting the pair-wise that have a low supply risk and a high what dimensions are used to map the
perceived preference similarity) of the profit impact: carburetor, breaking commodities into the KPM’s four quad-
19 items is computed based on the two system, engine cooling system, steering rants.
characteristics that will serve as the data system, switches and charging system. Supply risk and profit impact factors
input for MDS. After the matrix was filled, the frame- are dynamic, so management can inves-
Providing this data as input to MDS work was validated twice: through tigate any new factors that significantly
(which is implemented in many general interviews with the experts and through contribute to both dimensions of the
purpose statistical software packages, a questionnaire analysis. Wherever KPM while mapping the commodities
e.g., SPSS, STATA, R), the result reveals necessary, manual adjustments were using the suggested framework. Involv-
an acceptable output at the 0.01 level of made. As mentioned earlier, in-depth ing suppliers in the survey for classifying
significance (p < 0.01) in a two-dimen- discussions on the positions in the commodities also can be explored. d
sional space. The positioning of the 19 matrix are considered the most impor-
items in a two-dimensional coordinate tant phase of the analysis. Strategic Stephan M. Wagner holds the Kuehne
system of the KPM is shown in Figure 5. discussions provide deeper insights and Foundation-sponsored Chair of Logistics
The MDS-output matrix indicates might lead to consensus-based deci- Management at ETH Zurich and is direc-
that the 19 items form three distinct sions. The experts and respondents said tor of the executive MBA in supply chain
clusters in different quadrants. The the Kraljic framework, to a large extent, management program. He obtained a Ph.D.
preference distance among items like facilitated these important discussions. and habilitation degree from the University
fuel supply system, engine components, of St. Gallen. He worked for almost 10 years
anti-pollution kit, ignition system, gear Objectivity over subjectivity in consulting and industry and now teaches
box and transmission system, based on The KPM has gained increasing recog- and conducts research in the areas of supply
the two aspects of evaluation criteria, is nition by purchasing professionals, chain management, purchasing and supply
very short (i.e., they are very similar). especially in North America and in management, logistics and transportation
In other words, if one takes “supply Europe. However, historically, position- management, and the management of logistics
risk” and “profit impact” into account ing commodities in the KPM has been service firms.
together, they are perceived to be the based mainly on the subjective judg-
manufacturer’s strategic items due to the ments of decision makers. This approach Sidhartha S. Padhi is a postdoctoral researcher
high supply risk from the supplier side lacks analytical rigor and could lead to at the Chair of Logistics Management at ETH
and their high profit impact. Thus, they erroneous outcomes, which adversely Zurich. He obtained his Ph.D. from the Indian
are positioned in the fourth quadrant of affects purchasing strategies. Institute of Technology. His interests are in the
the KPM. However, the decision makers The multiattribute decision making areas of operations and supply chain manage-
suggested that electronic sensors, while approach presented here determines ment, decision sciences, and purchasing and
close to the previous items, have a lower appropriate weights for the supply supply management.
profit impact. This shifts that item to risk, profit impact factors and perfor-
the third quadrant, which represents the mance scores of the commodities. The Christoph Bode is a postdoctoral researcher at
bottleneck items. proposed approach has important the Chair of Logistics Management at ETH
The preference distance among managerial significance as it improves Zurich. He received his Ph.D. from WHU-
audio/video devices, gauges and meters, upon the quality and confidence of Otto Beisheim School of Management. His
windscreen and glasses, car seat and managerial judgment. research focuses on supply chain management,
interior, battery and wheels and tire The proposed approach’s major supply chain risk, buyer-supplier relationships,
parts, based on the two aspects of evalu- advantage over subjectively position- as well as innovation and entrepreneurship in
ation criteria, also is very short (i.e., they ing commodities is that it gives a clear a supply chain context.
are very similar). With low “supply risk” snapshot of the commodities to be
and “profit impact,” they are classified bought using a particular group of
as noncritical items and positioned in purchasing strategies. Moreover, the
February 2013 39
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Supplier management: From managing the
supplier base to supplier integration
Supply Chain Management Course

SCM (Course)
Module 2
Prof. Dr. Sidhartha S. Padhi

QMOM Area, IIM Kozhikode
Kerala, India
Content
1. Buyer-supplier relationships
2. Supplier management – Overview
3. Planning
4. Management of the supplier base
5. Supplier development
6. Supplier integration
7. Control
1. Buyer-supplier relationships
Relationship types – The two ends in a continuum
Buyer-supplier relationship
Michael E. Porter (1985): A firm's W. Edwards Deming (1986): The optimal

purchasing costs can be minimized by situation is determined by the quality of
instilling competition in the supply base the input material and can be achieved
and sourcing from multiple suppliers. through close and long-lasting buyer-
supplier relationships.
◼ Discrete ◼ Relational
◼ Market-based ◼ Partnership-like
◼ Opportunistic ◼ Cooperative
◼ Arm's-length ◼ Collaborative
◼ Transactional
Attributes of discrete and relational exchanges –
Lessons from relational contracting theory
Attribute Discrete (market) exchange Relational exchange
Chronological ▪ Defined beginning ▪ Beginning can be traced back to earlier
aspects of exchange ▪ Short term agreements
▪ Sudden end ▪ Long term
▪ Reflects a continuous process
Expectations of the ▪ Conflicts of interest/goals are ▪ Conflicts of interest expected
relationship expected ▪ Future problems are overcome by trust
▪ Immediate settlement ("cash and joint commitment
payment")
▪ No problems expected in future
Communication ▪ Minimal personal relations ▪ Both formal and informal
▪ Ritual-like communication communication used
predominates
Cooperation ▪ No joint efforts ▪ Joint efforts, at both the planning and
implementation stage
▪ Modifications endemic over time
Division of burden ▪ Sharp distinction between parties ▪ Burden and benefits likely to be shared
and benefit ▪ Each party has its own, strictly ▪ Division of benefits and burdens likely
defined obligations to vary over time
Source: Macneil (1978, 1980), Wagner/Boutellier (2002)

Numerous attributes determine the type of
relationship
Partnership
Opportunism Lieferant Abnehmer

Lieferant
2 4 1 Abnehmer
2 4
Lieferant
2 4
3 1 Abnehmer
2 43
Lieferant
2 34 1 Abnehmer
2 43
Lieferant 4 5 3 1 Abnehmer 43 5
2 3 2
Supplier
2 45
3 1 Customer
2 43 5
5 6 5
4 2 43
2 3 6 2
5 1 5
3 6 3
5 5
7 6 7
6
8
Numerous factors influence a buyer-supplier
relationship (1) Backup
Factor Attribute Degree of Degree to which

Opportunism ――――――――――> Partnership influence can be influenced
1. Characteristics of the exchange object
a. Significance uncritical; critical strong weak
b. Buying class identical repurchase; modified repurchase; new purchase average weak
c. Buying frequency one-off; infrequent; regular average weak
d. Degree of standardization standardized; customer-specific average average
e. Product complexity low; high average average
f. Requirements of the product basic-; key-; pace making requirement weak average
2. Interaction strategies and behavior
a. Interaction strategies control; competition; co-operation strong strong
b. Exchange of information low; intensive strong strong
c. Degree of standards low; high strong average
d. Degree of inter-organizational trust low; high strong average
e. Degree of opportunistic behavior low; high strong average
f. Conflict behavior destructive; constructive strong strong
3. Interaction structures
a. Contract type abstract; relational strong strong
b. Frequency of contact infrequent; frequent average strong
c. Duration of relationship short; long average strong
d. Confidence in unlimited duration low; high average average
e. Degree of uncertainty low; high average average
f. Communication structure serial; parallel average strong
g. Communication channels written; telephone; electronically; meetings average strong
4. Intra-organizational factors
a. Scope and extent of specific investments low; high strong strong
b. Formation of the organization (e.g. buying preference for opportunism; preference for collaboration average average
center)
c. Interfaces of the supply-chain process sequential; parallel; iterative average strong
d. Intra-organizational relationships competitive; co-operative weak average
e. Support from relationship promoters not available; intensive strong weak
f. Sourcing strategy multiple; dual; single average strong
Source: Wagner (2002)

Numerous factors influence a buyer-supplier
relationship (2) Backup
Factor Attribute Degree of influence Degree to which

Opportunism ――――――――> Partnership can be influenced
5. Propensity of the company
a. Strategic propensity weakly pronounced; strongly pronounced average average
b. Risk-taking propensity afraid to take risks; happy to take risks strong average
c. Relationship propensity weakly pronounced; strongly pronounced strong average
6. Personal factors
a. Capabilities of the employees inwards oriented; outwards oriented strong average
b. Employees‘ ability to handle risks risk avoidance; risk management average average
c. Ethical position of the employees weak; strong average weak
d. Available resources for employees limited; extensive weak average
e. Inter-personal contacts uncontrolled; controlled strong average
f. Inter-personal trust low; high strong weak
7. Characteristics of the industry
a. Bargaining powers of customers weak; strong strong weak
b. Bargaining powers of suppliers weak; strong strong weak
c. Competition between companies strong; weak average weak
d. Risk of new competitors low; high average weak
e. Danger of substitute products low; high average weak
8. Environmental factors
a. Speed of change and ability to low; high average weak
predict technological changes
b. Legal framework deregulated; regulated strong weak
c. Degree of uncertainty of the low; high strong weak
supply market
d. Resource availability (financial, low; high average weak
material, HR)
e. Country risk low; high average weak

Partnership
Supplier partnerships – often considered as ("Deming")
beneficial for the buying firm Examples
◼ "A partnership is a tailored business relationship based on mutual trust, openness,

shared risk and shared rewards that results in business performance greater than
would be achieved by two firms working together in the absence of partnership."
(Keely L. Croxton, Ohio State University)
◼ "Supplier partnerships involve a mutual commitment, extended time, working

together, mutual benefit, sharing information and the risks and rewards."
(Institute for Supply Management)
◼ "Supply, sourcing, and purchasing professionals in companies nationwide believe

strongly that more and stronger supplier partnerships are critical to achieving
competitive corporate performance." (Purchasing Magazine)
Key ingredients of supplier partnerships (1)
◼ Building trust
– Partners are more willing to work together, find compromise solutions to problems,
work toward achieving long-term benefits for both parties
◼ Shared vision and objectives
– Move beyond tactical issues, toward more strategic path
◼ Personal relationships
– People make things happen
– Can this lead to moral/ethical problems?
◼ Mutual benefits and needs
– Should result in a win-win
– An alliance is like a marriage
Key ingredients of supplier partnerships (2)
◼ Commitment and top management support

– Partnerships are more successful when top executives actively support the
partnership
– Since mutual strategy development is a characteristic, this makes sense
◼ Change management
– Change comes with the formation of new partnerships.
– How bills are paid, performance is measured, strategies are communicated
◼ Information sharing and lines of communication
– Should facilitate free flow of information
– Confidentiality also considered.
◼ Relationship capabilities
– Partners must have the right technology, cost, quality, and delivery capabilities
Experience curve effects with traditional American
and Japanese approaches
Profile of American suppliers Profile of Japanese suppliers

(opportunistic relationship) (partnership-like relationship)
Probability of securing Probability of securing

contract again after model contract again after model
change: 69% change: 92%
Unit Unit
costs costs
Average utilization Average utilization
of manufacturing capacities: 77% of manufacturing capacities : 88%
0 1 2 3 4 5 6 7 8 9 10 years 0 1 2 3 4 5 6 7 8 9 10 years
Model Model Model Model
change change change change
Source: Dyer/Ouchi (1993)

Less R&D for GM, Ford and Chrysler
Annual change in R&D investments of suppliers

GM Ford Chrysler Nissan Honda Toyota
1.00
0.80
0.45
0.60
0.33
0.32
0.30
0.30
0.28
0.28
0.26
0.40
0.21
0.20
0.17
0.15
0.12
0.06
0.20
0.04
0.04
0.00
-0.01
-0.20
-0.21
-0.40 -0.24
-0.33
-0.34
-0.36
-0.38
-0.39
-0.39
-0.39
-0.40
-0.41
-0.42
-0.44
-0.47
-0.48
-0.49
-0.51
-0.60
-0.55
-0.57
-0.80
-1.00
2003 2004 2005 2006 2007 2008
n= 308 suppliers
Source: Planning Perspectives, Inc. (2009)

Opportunism
("Porter")
Automotive suppliers face harsh conditions
"Very important" or "extremely important" challenges Market conditions for

affecting automotive suppliers in 2017 [% of respondents] suppliers 2017 vs. 2016
Pressure from OEMs to

91%
reduce price
Easier
Raw material price rise
71% 3%
Same
51% 24%
improve quality
Shift in demand towards low
49%
tech and low cost parts
Weak production volumes in Harder
49%
North America
73%
42%
increase level of innovation
Weak production volumes in
37%
Europe
Weak production volumes in
17%
Asia
N = 100 suppliers
Source: Rothschild/Roland Berger Strategy

Consultants (2017)
Cost reductions demanded 2019 by automotive
OEMs and realized
Average demanded price reductions from automotive OEMs
8%
Average realized price reductions 7.0%

7%
6% 5.6%
5%
4.3% 4.2%
4.0%
4% 3.8%
3% 2.7% 2.7%
2.3% 2.4%
2.0%
2%
1.5%
1%
0%
Average VW Audi Daimler BMW Opel
Supplier relationship management – Differentiated
buyer-supplier relationships
◼ "Supplier relationship management is the overarching objective of developing the
most appropriate relationship level with each individual supplier." (US Defense
Logistics Agency)
◼ Both, arm's-length and partnership-like relationships must be considered
◼ Desired relationship can be derived from purchasing and supply strategies and
purchasing portfolios
Level of interdependence in buyer-supplier
relationships
Supplier High level of

High relatively powerful interdependence
Buyer's
dependence
Low level of Buyer

Low interdependence relatively powerful
Low High
Supplier's dependence
Source: Kumar (1996)

Level of specific investments in buyer-supplier
relationships
N = 447 components (suppliers)
Source: Bensaou (1999)

Only a few suppliers can be treated as partners
or even strategic partners
Resource requirement in the management of supplier relationships
Resource
requirement
Low
High
P: (Strategic) partnerships
O: Opportunism
Very high
P O
Number of suppliers
5% 15% 80%
Daimler differentiates between four types of
supplier relationships Example
Transaction Co-ordination Co-operation Alliance

(market-based (selective (selective (strategic
competition) competition) partnership) partnership)
Basis of the Development of

Data Exchange of information Transfer of knowledge
relationship specialist expertise
Duration of the Transaction Contract Beyond lifecycle of

Lifecycle
relationship (short-term) (e.g. annual) a model series
Limited integration Integration of Integration of

Extent of of suppliers in suppliers in departments, joint
joint No supplier integration product development, product development, concepts and product
commitments conducted along joint determination development, investment
defined interfaces of interfaces in joint facilities
Examples Pencils Pressed parts Exhaust systems Fuel cells
Opportunistic types Partnership types

Value generation and value sharing of buyer-
supplier relationships
◼ The overall goal of these relationships is to create in sum a higher value than each
partner could create on its own
◼ In this context, the notion of the "value pie" that can be enlarged through collaborative
actions has been used
◼ An inevitable question in the collaborative relationship is how the expanded value pie
is shared among the involved companies
?
?
Supplier
Supplier
Buyer
Buyer
Theoretical background
◼ Equity theory as theoretical basis (Adams 1963; Walster, Walster & Berscheid 1978)
– Attempts to explain relational satisfaction in terms of perceptions of fair/unfair
distributions of resources within interpersonal relationships
– An individual will consider that he is treated fairly if he perceives the ratio of his
inputs to his outcomes to be equivalent to those around him
◼ Global measure of (in)equity applied to buyer-supplier context:
Outcome buyer Outcome supplier

−
Input buyer Input supplier
<0 negative inequity (from the buyer's perspective)

=0 equity
>0 positive inequity (from the buyer's perspective)
Buyer-supplier relationship must be managed
along the relationship life-cycle
Strength of
relationship Rejuvenate
Divest
Maturity
Growth
Embryonic
Decline
Time
2. Supplier management – Overview
Supplier management – active structuring of
supplier relationships and portfolios
Basic modules of supplier management (static view)
Supplier Supplier
integration development
Supplier
relationships
Supplier
portfolios
Management
of the supplier
base
It should include planning, implementation and
control phases
Supplier management process (dynamic view)
External changes
Implementation
Planning Management of the supplier base
(Supplier Control
strategies) Supplier development
Supplier integration
Internal changes
Management process
3. Planning (1)
The purchasing portfolio and sourcing strategy are
starting points for planning
Actual Actual
• Purchasing portfolio • Supply market • Supplier relationship

– Material groups – Market development – Arm's length
– Volumes – Price trend – Partnership-like
– Technologies – Supplier structure
• Performance of the
– Strategic significance – Customer structure
supplier
• Sourcing strategy • Supplier structure – Costs
– Part, module, system – Number of suppliers – Quality
– Individual, collective – Regional distribution – Logistics
– Single, dual, multiple – Supplier mix – Technology
– Local, global
• Targets and activities • Targets and activities
– On stock, JIT
Target Target
Supplier
Supplier
strategies for
strategies for the
individual supplier
total base
relationships
Purchasing product portfolio and norm strategies
High Leverage products Strategic products

◼Alternative sources of supply ◼Critical for product's cost price
available ◼Dependence on supplier
◼Substitution possible
Competitive bidding Performance based

Purchasing's
partnership
impact on
the bottom Routine products Bottleneck products
line ◼Large product variety ◼Monopolistic market
◼High logistics complexity ◼Large entry barriers
◼Labor intensive
Category management Secure supply

Low and e-procurement

Potential purchasing approaches
High Leverage products Strategic products

◼ Utilize synergies within the group ◼ Long-term partnerships
◼ Optimize costs, conditions ◼ Single sourcing with key suppliers
◼ Consolidate volume ◼ Joint development
◼ International procurement ◼ Integrated processes
◼ Framework agreements ◼ Supplier management
Purchasing's ◼ Collaboration agreements
impact on
the bottom Routine products Bottleneck products
line ◼ Simplification of processes ◼ Value analysis and standardization
◼ Single sourcing ◼ Identify alternative suppliers
◼ Supplier reduction (procurement marketing)
◼ Defined ranges, utilize ◼ Establish alternative suppliers
standardization within the firm (supplier development)
Low
Supply Risk
(1) Market Risk: Availability of potential suppliers for the

commodities, type of market (Monopoly or Oligopoly condition),
and entry barrier to the market;
(2) Performance Risk: Supplier’s quality and performance related

issues. Access to new technology by the supplier i.e., adoption
pace of the new technology by the supplier;
(3) Complexity Risk: Associated Problems with standardization of the

product or service (specification of the products or services are
critical).
Profit impact
◼ (1) Impact on profitability: This factor seeks to address the typical profit
yielded by the department on purchase of each commodity;
◼ (2) Importance of purchase: This factor seeks to address the importance or

need of purchase of each commodity by the department;
◼ (3) Value/cost of purchase: This addresses the tangible and intangible costs
attached to or the value obtained from purchase of each commodity.
Supply risk Importance score on a
scale of 1—10
How much Importance do you give to market risk while purchasing of
products/services for your organization
How much Importance do you give to performance risk while purchasing of
How much Importance do you give to complexity risk while purchasing of
Profit impact Importance score on a
scale of 1—10
How much Importance do you give to impact on profitability while
purchasing of products/services for your organization
How much Importance do you give to importance of purchase while
How much Importance do you give to cost of the product/service while
Procurement strategies
I IV
Leverage works and services Strategic works and services
• Tender /RFQ • Strategic alliance

• Target pricing
• Closed relationship
• Negotiation with preferred
supplier/contractor • Early supplier involvement
• Collaborative work
Profit
II III
Non-critical works and services Bottleneck works and services
impact
• Purchase through rate contracts • Request for proposal from specific

supplier/contractor
• Spot purchasing
• Umbrella agreement with specific
• Purchase from an Exclusive List of Store supplier
Items
• Reverse auctioning
Supply risk
Mapping of works and services in different quadrant
of KPM
High
I IV
Leverage works and services Strategic works and services
• Road works • Pipeline project

o Village/District roads • Dam work
o State/National highways • Canal work
• House/Building construction • Bridges
Profit impact
• Drainage works • Consultancy services

II • RCC work III • Environmental work
• Water storage and supply • Express highways
impact
Non-critical works and services Bottleneck works and services
• Painting works • Excavation

• Warehousing
Low • Civil repair & maintenance works
• Sanitary work
• Shed construction
Low • Fencing/Wall work Supply risk
High
Questions a buyer can answer with support of the
purchasing portfolio Backup
◼ Does the present purchasing strategy support our business strategy and does it meet
our long term requirements?
◼ What is the balance of power between our company and our major suppliers?
◼ Are the strategic products and services sourced from the best-in-class suppliers?
◼ What percentage of our purchasing requirements is covered by contracts?
◼ To what extent are internal operations benchmarked against specialist suppliers?
◼ What opportunities exist for collaboration with suppliers with product development,
quality improvement, lead time reduction?
Benefits of the portfolio method
Backup
◼ Differentiated representation of the purchasing situation from a strategic point of

view
◼ Creates an overview of the situation as a whole
◼ Provides information for practicable strategies (standard strategies, norm
strategies)
◼ Encourages active analysis of internal and external factors
◼ Forces the establishment of priorities
◼ Serves as communication tool
Risks and requirements of the portfolio method
◼ Risks
– Portfolios are no replacement for entrepreneurial decisions
– Strategies cannot be derived mechanically from the portfolios (standard
strategies)
– Portfolio representations are never 100% accurate (subjectivity of axis labels)
◼ Requirements
– Portfolios have to be drawn up by a team
– Uniform portfolio criteria have to be developed and specified
– Uniform portfolio standards have to be developed and specified
– Documentation should be clear and easily comprehensible
Kärcher differentiates between three supplier
strategies Example
Supplier strategy Characteristics Development of sales volume
Forwards ▪ New products

▪ Simultaneous engineering
strategy ▪ Global player development
▪ Introduction of technology
▪ Long-term contracts
▪ Strategic suppliers
▪ Ratio projects with price red. over validity period
▪ "Future supplier"
▪ No in-house manufacture planned
Improvement ▪ Further opportunities / trial

▪ Do not continue to develop purchasing volume Option
strategy ▪ Ratio projects
"Stagnation"
▪ Possible in-house manufacture planned
▪ Checking alternative suppliers and analysis of Option
savings potential with transfer
Exit strategy ▪ Place no new projects with suppliers

▪ No requests
▪ Maintain price level
▪ Transfer scope to in-house manufacture or to other
suppliers
▪ Suppliers < INR 25,50,000 purchasing volume
2-3 years
▪ Ensure spare parts supply
4. Management of the supplier base (2)
Focal company and its supplier base
◼ xxx
Focal firm
Buyer-supplier relationships
and sourcing strategies
Supplier base
Supplier–supplier relationships
The sourcing strategy influences the structure of
the supplier base: Single, multiple, tiered sourcing
B B B
S1
S1 S1 S2 S3
S2 S3
Types of supplier–supplier relationships
Competitive supplier–supplier model
Buying firm
Supplier A Supplier B
Cooperative supplier–supplier model Co-opetitive supplier–supplier model
Buying firm Buying firm
Supplier A Supplier B Supplier A Supplier B
Source: Choi et al., 2002

There are numerous activities firms can pursue to
mange their supplier base
Activities for managing the supplier base
Planning (supplier ▪ Establishing supplier portfolios
strategy) ▪ Establishing supplier strategies
▪ Segmentation of the supplier portfolio
Implementation ▪ Optimization of number of suppliers
▪ Supplier evaluation and selection
▪ Supplier assessment
▪ Supplier audits
▪ Supplier surveys
▪ Key supplier management
▪ Supplier relationship responsibility
▪ Top-management involvement
▪ Supplier communication
▪ Supplier days
▪ Supplier awards
Supplier reduction and segmentation of the
supplier portfolio – Pareto analysis
Purchasing Number of
volume suppliers
500
Elimination
400
300 (1.)
200 (2.)
Focusing
100
A B C Optimum
Suppliers 0 Number
1000 3000 5000 7000 9000 of parts
Siemens announced to eliminate 74,000 suppliers
Example
◼ Barbara Kux took charge of procurement at Siemens in Fall 2008

◼ Siemens procurement
– €42 billion worldwide procurement spend
– 370,000 suppliers
– Siemens recognizes the criticality of procurement for the firm's overall efficiency
and profitability
◼ On March 31, 2009 Siemens announced to eliminate 74,000 suppliers from their
supplier base in 2009 (20% supply base reduction)
Classification of suppliers into 5 categories at
Mercedes-Benz Example
Supplier evaluation and assessment – Both aim to
determine supplier performance
◼ Supplier evaluation (with subsequent supplier selection)
– In the supplier selection process, suppliers are evaluated based on expected
performance
– Data/information reported from supplier
– Evaluation of expected performance
◼ Supplier assessment (supplier monitoring)

– Deliveries have been received
– Buying firm has made first-hand experience
– Often times objective data from IT systems are combined with subjective
evaluation of supplier performance
The supplier evaluation/assessment approach
Step 1 Identify key supplier evaluation categories
Step 2 Weight each evaluation category
Step 3 Identify and weigh subcategories
Step 4 Define scoring system for categories and subcategories
Step 5 Evaluate supplier directly
Step 6 Review results and make selection decision
Step 7 Review supplier performance continuously

"Typical" supplier evaluation and supplier
assessment criteria
◼ Cost
◼ Quality
◼ Logistics/delivery
◼ Technology/innovation
◼ Supplier firm
– Financial situation
– Management
◼ Sustainability
Siemens assesses and classifies suppliers on the
basis of 16 criteria Example
Supplier assessment and classification
Assessment:
Categories Marketing Business-

Quality Logistics Technology
(Level 1) (prices/costs) specific aspects
Company data Quality/assurance Tech. assessment

Logistics system
of the suppliers system with regard to present
Quality/assurance Established logistics Tech. assessment

View of total costs
Criteria agreements performance with regard to future
(Level 2) Reduction in Quality of products Environmental Collaboration with
suppliers and costs supplied management current projects
Co-operation Co-operation Co-operation Co-operation

and service and service and service and service
Adjustment to
Sub-criteria Sub-criteria that are defined in acc. with specific business business-specific
(Level 3) and assessed on cross-functional basis requirements
Classification: 90-100 points Preferred 50-69 points Restricted
70-89 points Accepted < 50 points De-sourced

Supplier satisfaction integral to the business
model Example
Sourcing Industry Group (SIG) Supplier Survey
Example
Technical, quality and cost reduction Average SIG

1. Quality initiatives
2. Response to cost reduction ideas
(1: poor; 6: excellent)
3. Identification of cost drivers More openness to
4. Documentation and specifications 1 "listen to suppliers"
19 6 2
5. Early supplier involvement
18 5 3
Supplier selection and development
6. Purchasing professionalism 4
7. Adherence to policies, procedures, 17 4 Just starting
ethics 3 at SIG
8. Negotiation process
16 2
Supplier partnership 5
1
9. Schedule sharing
10. Business growth potential
11. Improved performance 15 6
12. Communications and feedback
13. Preferred status
14. Purchasing commitment to partnership 14 7
15. Engineering commitment to partnership
16. Payment terms
Summary 13 8
17. Overall rating
12 9
18. Recent trend
11 10
19. Business continuation
5. Supplier development (3)
Problems with suppliers can cause serious harm
to companies
Incoming parts defects
Delays in delivery
Excessively high material costs ◼ Supply chain disruption

◼ Cost problems
Supplier bankruptcy
◼ Production outages
Dependence on single source ◼ Outdated technology
Long lead times ◼ Unsatisfied customers
◼ Eroding profit
Bad service performance
◼ …
…
Deficient suppliers: alternative approaches
Buying firm is faced with

problem/deficient supplier
◼ Availability of alternative sources

1 Switch ◼ Switching costs
◼ Substantial investment
2 Acquire ◼ High risk
◼ Concentration on core business
◼ Sometimes the only viable option

3 Develop/support ◼ Lower investment
◼ Lower risk
Supplier development as solution to supplier
problems at Daimler Example
Supplier "Problem-
problems solving"
possibilities Supplier
development
Costs
Adoption of
supplier Preventive
Quality
Change of Reactive
Logistics
supplier
Implementation
Cost-oriented
Technology
Supplier Innovative
support
etc.
Source: Wagner/ten Hoevel (2003)

Strategic supplier development – continuous
supplier improvement
Reactive supplier development Strategic supplier development
Performance Performance
index index
New
"Fire level "Continuous
fighting" improvement"
Agreed
performance
level Agreed
performance
Initial improvement
performance
Fall
Time Time
It is important to distinguish direct and indirect
measures of supplier development
Indirect supplier development Direct supplier development
◼ No or limited commitment of ◼ Dedication of human and/or

resources to specific supplier capital resources to specific
◼ No active involvement in the supplier
supplier’s operation influences … ◼ Active role in improvement
◼ Examples: process
– Supplier evaluation and ◼ Examples:

monitoring … influences – Transfer of know-how
– Promise of future – Education and training
business – On-site consultation
– Increase performance – Temporary personnel
– Instill competition transfer
Cost reduction through direct supplier
development Example
Cable for an antilock brake system (ABS)
Prior to the project After the project
The guiding of the sheathed cable to Omission of the cable connector

the wiring harness and connection through extension of the sheathed
through injection-molded cable cable to the control unit
connector
Cost oriented supplier Savings: EUR 88.862 p.a.

development
Source: Wagner/ten Hoevel (2008)

"Marriage broker" of standard and Chinese
suppliers at Audi Example
Standard suppliers Chinese suppliers
Audi as
A X
"marriage broker"
 50% of volume
B Y
C Z
Audi  50% of volume First Automobile

(Germany) Works (FAW)
▪ Alternative source (China)
▪ Audi as "best system supplier" for Audi parts
6. Supplier integration (4)
Three years before SOP, the key suppliers are
established and integrated in R&D Example
Management of Supplier integration Supplier integration

supplier base (before start series prod.) (after start series prod.)
approx. 800 50 to 100

suppliers key suppliers
SOP-5 SOP-3 SOP Foremost objectives:

" Advancement through technology "
and
"brand identity"
▪ Allocation of systems to suppliers
▪ Implementation and control at suppliers
▪ SE teams establish milestones
Global and Project control/ Production

forward sourcing preparation for series use readiness
"Virtual Innovation Agency" at BMW
Example
◼ The "Virtual Innovation Agency" (VIA) offers suppliers with innovative ideas and
technologies a direct platform to communicate with BMW
◼ Market scouting and idea generation through the VIA
– Detailed technical description of a proposal
– Development stage of an innovation (e.g., model, prototype)
– Protection of the innovation (e.g., patent number, patent application, other
protection)
– Critical assessment of the strengths and weaknesses of a proposed innovation
(e.g., potential costs/savings, competitive situation, risks, market assessment)
◼ Submission of an innovation can be the starting point for a collaboration with BMW
Innovation and productivity suppliers at Siemens
Example
1
Technologies/ideas Innovation
suppliers "Start ups, spin offs"
2
Solutions Innovation suppliers
+
Productivity suppliers
3
Products Productivity suppliers "Established firms"

7. Control (5)
An increasing number of management accounting
practices has been proposed
2010
Relationship controlling
SCOR
1950 Value chain analysis Purchasing balanced scorecards
Process benchmarking Supplier value added
ABC analysis
Target costing Supplier surveys
Supplier evaluation
Supply chain costing Supply chain map
Portfolio analysis Open book
Supply chain ratios
Price benchmarking Supplier balanced scorecard
Total cost of ownership
Supplier audits Supply chain valuation
Activity based costing
Supply chain balanced scorecard
Supply chain benchmarking
Supplier lifetime value
Risk map
Practices related to supplier management
Supplier evaluation 4.12*
Supplier audits 2.98
Supplier surveys 2.55
Open book 2.47*
Supplier value added/

1.60
supplier lifetime value
Supplier balanced scorecard 1.54
1 2 3 4 5
(never) (seldom) (occasionally) (usually) (always)
Incidence of usage
* Used more intensively by "High performers"
Contracts
◼ In a typical supply contract, the buyer and supplier will agree on:
◼ Pricing and volume discount
◼ Minimum and maximum purchase quantity
◼ Delivery lead time
◼ Product quality
◼ Product return policy
Supply Contract
◼ Buy-back contracts:
– The seller agrees to buy back unsold goods from the buyer for
some agreed-upon price higher than the salvage value.
◼ Revenue-sharing contracts
– The buyer shares some of its revenue with the seller, in return for a
discount on the wholesale price.
◼ Quality-flexibility contracts (full refund for unsold items)
– This contract gives full refund for a portion of the returned item,
whereas a buy-back contract provides partial refund for all returned
items.
◼ Sales rebate contract
– This contracts provide a direct incentive to the retailer to increase
sales by means of a rebate paid by the supplier for any item sold
above a certain quantity.
Public Procurement framework in India
Thank You!
Coordinated Product
and
Supply Chain Design
Design for Logistics (DFL)
 Product and process design that help to
control logistics costs and increase service
levels
 Economic packaging and transportation
 Concurrent and parallel processing (modular)
 Standardization
Economic Transportation & Storage
 Design products so that they can be efficiently packed
& stored
 Design packaging so that products can be consolidated
at cross docking points
 Design products to efficiently utilize retail space
 Cheaper to transport:
 redesign for less storage space, stack easily, ship in bulk

Concurrent/Parallel Processing
 Achieved by redesigning products so that several
manufacturing steps can take place in parallel
 Objective is to minimize lead times
 Modularity/Decoupling is key to implementation
 Enables different inventory levels for different parts

Modularity in Product & Process
 Modular Product:
 Can be made by appropriately combining the different modules
 It entails providing customers a number of options for each
module
 Modular Process:
 Each product undergo a discrete set of operations making it
possible to store inventory in semi-finished form
 Products differ from each other in terms of the subset of
operations that are performed on them
Modular products are not always made from modular processes

Modular Product Design Benefits
 Maximized the no. of standard components

 Production can be separate
 Diagnosis of faults/quality becomes easy
Flow Manufacturing
-process modularization-
 Process postponement (modular process design)
E.g., paint manufacturer – Key is separating production of paint &
mixing of pigment & paint
E.g., fashion industry: key is splitting production into body measurement
process and cut-and-sew process
 Process Re-sequencing
E.g., Benetton: Knitting first and then dyeing
 Process Standardization
Standard process at the beginning and postponing the differentiation
process
E.g. HP case
Standardization
Aggregate demand information is more reliable

 We can have better forecasts for a product family (rather
than a specific product or style)
 How to make use of aggregate data ?
 Designing the product and manufacturing processes so that
decisions about which specific product is being
manufactured (differentiation) can be delayed until after
manufacturing is under way
Swaminathan’s Four Approaches
to Standardization
 Part standardization
 Process standardization
 Product standardization
 Procurement standardization
Part Standardization
 Common parts used across many products.
 Common parts reduce:
 inventories due to risk pooling
 costs due to economies of scale
 Excessive part commonality can reduce product

differentiation
 May be necessary to redesign product lines or families to
achieve commonality
Process Standardization
 Standardize as much of the process as possible for
different products
 Customizing the products as late as possible
 Starts by making a generic or family product

CASE: Benetton Background
 A world leader in knitwear
 Massive volume, many stores
 Logistics
 Large, flexible production network
 Many independent subcontractors
 Subcontractors responsible for product movement
 Retailers
 Many, small stores with limited storage
CASE: Benetton Supply Cycle
 Primary collection in stores in January
 Final designs in March of previous year
 Store owners place firm orders through July
 Production starts in July based on first 10% of orders
 August - December stores adjust orders (colors)
 80%-90% of items in store for January sales
 Mini collection based on customer requests designed in
January for Spring sales
 To refill hot selling items
 Late orders as items sell out
 Delivery promised in less than five weeks
CASE: Benetton Flexibility
 Business goals
 Increase sales of fashion items
 Continue to expand sales network
 Minimize costs
 Flexibility important in achieving these goals

 Hard to predict what items, colors, etc. will sell
 Customers make requests once items are in stores
 Small stores may need frequent replenishments
CASE:
It Is Hard to Be Flexible When...
 Lead times are long
 Retailers are committed to purchasing early orders
 Purchasing plans for raw materials are based upon
extrapolating from 10% of the orders

CASE: Benetton
Old Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
CASE: Benetton
New Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment This step is postponed
Finish Garment
CASE: Benetton Postponement
 Why the change?
 The change enables Benetton to start manufacturing just before
color choices are made
 What does the change result in?

 Delayed forecasts of specific colors
 Still use aggregate forecasts to start manufacturing early
 React to customer demand and suggestions
 Issues with postponement

 Costs are 10% higher for manufacturing
 New processes had to be developed
 New equipment had to be purchased
Product Standardization
 Downward Substitution
 Produce only a subset of products (because
producing each one incurs high setup cost)
 Guide customers to existing products
 Substitute products with higher feature set for those
with lower feature set
 Which products to offer, how much to keep, how to
optimally substitute ?
Procurement Standardization
 Consider a large semiconductor manufacturer
 The wafer fabrication facility produces highly customized
integrated circuits
 Processing equipment that manufactures these wafers are
very expensive with long lead time and are made to order
 Although there is a degree of variety at the final product
level, each wafer has to undergo a common set of
operations
 The firm reduces risk of investing in the wrong equipment
by pooling demand across a variety of products
Operational Strategies for
Standardization
Selecting Standardization Strategy
 Process & Product are modular  process standardization :
will help to maximize effective forecast accuracy and minimize
inventory costs.
 Product is modular, but Process is not  part standardization:

it is not possible to delay differentiation.
 Process is modular but Product is notprocurement

standization : may decrease equipment expenses.
 Neither Process nor Product is modularproduct

standardization
Important Considerations
 Changes suggested in the strategies may be too expensive
to implement
 Redesign related costs should be incurred at the beginning of the
product life cycle
 Benefits cannot be quantified in many cases:
 increased flexibility, more efficient customer service, decreased
market response times

Important Considerations
 Re-sequencing causes:
 level of inventory in many cases to go down
 per unit value of inventory being held will be higher
 Tariffs and duties are lower for semi-finished or non-
configured goods than for final products

 Completing the manufacturing process in a local distribution
center may help to lower costs associated with tariffs and duties.
Mass Customization :
The Power of
Postponment
A Company’s Dilemma
Highly customized Order fulfillment as
products and services quickly as possible
A Company’s Dilemma
Highly customized
Mass Order fulfillment as
Customization
products and services quickly as possible
Mass Customization
 Evolved from the two prevailing manufacturing
paradigms of the 20th century
 Craft production and mass production.
 Mass production
 efficient production of a large quantity of a small variety of
goods
 High priority on automating and measuring tasks
 Mechanistic organizations with rigid controls
 Craft production
 involves highly skilled and flexible workers
 Often craftsmen
 Organic organizations which are flexible and changing
Absence of Trade-Offs
 Two types meant inherent trade-offs
 Low-cost, low-variety strategy may be appropriate for some products
 For others, a higher-cost, higher-variety, more adaptable strategy was more
effective
 Development of mass customization implies it is not always
necessary to make this trade-off
 Mass customization
 delivery of a wide variety of customized goods or services quickly and
efficiently at low cost
 captures many of the advantages of both the mass production and craft
production systems
 not appropriate for all products
 gives firms important competitive advantages
 helps to drive new business models
Factors determining value of
standardized products
1. Uncertainty in product demand across various
markets
2. Lead time to replenish it’s stocks of parts
3. Length of product’s life cycle
4. Cost of shipping the finished product
1. As uncertainty, lead time, & inventory and stock-out
costs increase, so do benefits of standardization
2. Shorter life cycles increase uncertainty & thus benefits
of standardization
Making Mass Customization Work
 Highly skilled and autonomous workers,

processes, and modular units
 Managers can coordinate and reconfigure

these modules to meet specific customer
requests and demands
Key Attributes: Mass Customization
 Instantaneous
 Modules & processes must be linked together very quickly
 Allows rapid response to various customer demands.
 Efficient (cost)
 Linkages must add little if any cost to the processes
 Allows mass customization to be a low-cost alternative.
 Seamless
 Linkages and individual modules should be invisible to the customer
 Independent modules
 Manufacturing process design should have independent modules to rearrange
for supporting different distribution network.
 Frictionless
 Collections of modules must be formed with little overhead.
 Communication must work instantly
Supplier Integration into New
Product Development
 Traditionally suppliers have been selected after design
of product or components
 However, firms often realize tremendous benefits from
involving suppliers in the design process.
 Benefits include:
 a decline in purchased material costs
 an increase in purchased material quality
 a decline in development time and cost
 an increase in final product technology levels.
Keys to Supplier Integration
 Making the relationship a success:
 Select suppliers and build relationships with them
 Align objectives with selected suppliers
 Which suppliers can be integrated?

 Capability to participate in the design process
 Willingness to participate in the design process
 Ability to reach agreements on intellectual property and confidentiality issues.
 Ability to commit sufficient personnel and time to the process.
 Co-locating personnel if appropriate
 Sufficient resources to commit to the supplier integration process.
Back to the HP Case
 HP management considered postponement as an option
 Ship “unlocalized” printers to European DC and localize them after
observing the local demand
 At 98% service level, safety stock dropped from 3.8 weeks supply to
2.6 weeks supply on the average

 Annual savings around $800,000
 Value of inventory in transit (and hence insurance costs) goes down
 Some of the localization material can be locally sourced (cheaper)
 European DC had to be modified to facilitate localization. Printer
needed to be redesigned.
 All Vancouver products now DC-localizable (postponement). One of
the best of such practices.

THANKYOU
Factors Affecting Component Level Outsourcing
Decision and supplier relationship
• Customer Importance (Value to customers)
– How important is the component to the customer?
– What is the impact of the component on customer experience?
– Does the component affect customer choice?
• Component Clockspeed (Technology, Industry, Product)
– How fast does the component’s technology change relative to other
components in the system?
• Competitive Position
– Does the firm have a competitive advantage producing this
component?
• Capable Suppliers
– How many capable suppliers exist?
• Architecture
– How modular or integral is this element to the overall architecture of
the system?
https://www.scmworld.com/general-motors-turbocharged-supplier-relations/
How General Motors Has Turbocharged its Supplier Relations?

By Geraint John May 26, 2017, Power of the Profession
What did GM do?
• Action #1 – Get suppliers involved earlier.
• Action #2 – Make supplier performance more
transparent.
• Action #3 – Give suppliers a chance to rate GM.
• Action #4 – Appoint an executive champion (to
resolve any problems).
• Action #5 – Recognize and reward supplier
excellence.
SRM’s core complimentary processes
Objective: Alignment within the
Process of categorising suppliers: defined organization and setup of internal
set of criteria to identify strategic suppliers governance process with clearly assigned
ownership of supplier relationship
Involves: sharing of plans and jointly defining initiative

that create long term value for both like innovation,
new market penetration, product development, M&A Involves: setup & continuous
and joint venture to expand capabilities. tracking of key mutually agreed KPI
https://www.scmworld.com/general-motors-turbocharged-supplier-relations/
How General Motors Has Turbocharged its Supplier Relations

By Geraint John May 26, 2017, Power of the Profession
Automotive procurement organizations have been managing their suppliers in a systematic way for
longer than their peers in most other industries. Companies like Toyota and Honda are regarded as
among the very best in the world in terms of driving continuous improvement and forging close
relationships with their most critical supply partners.
But the industry as a whole also has an inconsistent history in recent decades, often lurching from
collaborative ties to aggressive cost cutting as vehicle sales and profit margins ebbed and flowed with
the business tides.
Perhaps no automaker illustrates these swings better than General Motors, the former number one
producer that is currently scaling back its global operations, most recently with the sale of its European
arm.
GM is still infamous within the auto industry and beyond for the slash-and-burn tactics of its former
purchasing chief José Ignacio Lopez in the 1990s. Lopez lopped more than $1 billion off GM’s cost
base in just one year, but left a legacy of bitterness and mistrust in its supply base that the company is
still trying to repair.
Changing Fortunes
The publication last week of the 2017 OEM-Supplier Working Relations Index (WRI), an annual
barometer of the U.S. auto industry, showed that GM’s latest efforts to build better relationships with
its key suppliers are on the right track.
GM’s score in the survey of more than 650 supplier representatives shot up for the second year in a
row, rising 16% to an index of 290 (out of a possible 500) and putting it in third place behind Toyota
and Honda (see chart). This was on the back of a 12% rise in 2015-16.
GM’s Ups and Downs

What explains this dramatic improvement in how suppliers view their business dealings with GM? The
short answer is that it’s no accident. And, as a result, it offers a useful guide to other procurement
organizations seeking to build more collaborative and value-creating relationships with their own
suppliers.
Five Actions That Have Elevated GM
GM’s latest rise in the WRI ranking started with the appointment of Steve Kiefer as its SVP of Global
Purchasing & Supply Chain in 2014. Kiefer pledged publicly to improve the firm’s supplier relations
– a necessary first move for any CPO serious about a shift in strategy.
But Kiefer hasn’t just talked a good game. As an excellent article by Bob Trebilcock in the latest issue
of Supply Chain Management Review explains, he’s taken a series of concrete steps under the banner
of Strategic Supplier Engagement (SSE) designed to change the dynamic with GM’s 50 most critical
suppliers.
Action #1 – Get suppliers involved earlier. GM synchronized its purchasing and engineering
functions to coordinate supplier interactions and bring them in early in the product development
process in order to contain costs more effectively.
Action #2 – Make supplier performance more transparent. GM introduced new scorecards with 1-
5 ratings on metrics covering both business performance (quality, launch, material cost and supply
chain) and cultural performance (total enterprise cost, transparency, communication and
responsiveness, and innovation/engineering). Scores are relayed to suppliers on a regular basis.
Action #3 – Give suppliers a chance to rate GM. The WRI gives supplier personnel the opportunity
to rate GM in 14 categories. However, because the survey is anonymous, it provides limited scope to
drive improvement actions. So GM has introduced SSE 360⁰, a feedback survey that enables suppliers
to rate GM on the same four cultural performance indicators that it uses to score them.
Action #4 – Appoint an executive champion. Bosch, LG Electronics and other strategic suppliers are
assigned a GM sponsor. This individual acts as a single point of contact across different commodity
areas, reviews performance and business opportunities with their supplier counterpart, and helps to
resolve any problems.
Action #5 – Recognize and reward supplier excellence. Two new awards celebrate the contribution
of suppliers that go above and beyond the call of duty in how they serve GM, and bring cutting-edge
innovation such as advances in battery technology.
Driving Competitive Success
Practices such as these, along with others in SCM World’s framework (below), build trust between
GM and its key suppliers and position it as a “customer of choice” – a vital source of competitive
advantage at a time o*f rapid technological advances in the auto industry.
Customer of Choice Practices and Behaviors
The SSE initiative has paid off for GM so far, according to SCMR, with eight consecutive quarters of
improving margins, while 80% of its top 50 suppliers have won more business from the company.
That’s in line with a previous analysis of WRI data by Dr. John Henke, which demonstrated that the
stronger the relations, the greater the cost savings suppliers generate and the more profit per vehicle
they contribute.
However, GM has been here before. When I interviewed former CPO Bo Andersson in 2007 he
presented a similar vision to Kiefer’s, and for the next five years supplier relations steadily improved.
But then GM reverted to type and its standing declined again.
The challenge for Kiefer and his executive team this time around is to truly ingrain a more progressive
way of doing business with suppliers into the company’s operating model.
GM’s survival as a top-tier auto maker depends on it.

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What is vital for business success?

Developing Business Process

Apple’s 10-Year Climate Roadmap

•Emerging Food deficit is a matter of grave concern……

• View 1: an integrated process where raw materials are

transformed into final products then delivered to customers.

• View 2: a system whose constituent parts include material

supplies, production facilities, distribution services and

customer linked together by feed forward flow of materials and

feed back flow of information.

• View 3: a complex, dynamic network or system of

• View 5: an integrating process, used to build

Frequent Supply Low order

 Eliminating inefficiencies in supply chains can save millions of $.

• Minimizing supply chain costs while keeping a

 Supply chain success should be measured by total

 Supply chain profitability is total profit to be shared

 Customer is the Sources of supply chain revenue:

 Efficient flow of information

VARIETY Changing Customer PRICE

Low How to Do? High

Commodities Customized products

Price Customer Need Responsiveness

Short lead times, product variety,

Issues are according to the time horizon:

 Strategic – Long-time effect on firm

 Tactical - Medium range i.e. 4-12 months.

 Operational – Day-to-day decisions.

 Inventory control: when and how much to stock & order

1. Group Customers by needs:

Effective supply chain management groups customers

In designing their logistics network, companies need to focus

4. Differentiate the product closer to the customer.

Companies today no longer can afford to stockpile inventory to

5. Strategically manage the sources of supply

By working closely with their key suppliers to reduce the

overall costs of owning materials and services, supply chain

managers maximize profit margins both for themselves and

6. Develop a supply chain-wide technology strategy

As one of the cornerstones of successful supply chain

management, information technology must be able to

support multiple levels of decision making. It also should

afford a clear view and ability to measure the flow of

products, services, and information

7. Adopt channel-spanning performance measures

Excellent supply chain performance measurement systems

7 Principles Revenue Asset Cost

Customize logistics network

Listen to market signal and plan

Develop SC technology strategy

Adopt channel spanning measures

Paradigm Shift Leading to Skills Required

From products to Focus on markets and the Customer segmentation

From revenue to Focus on the key performance Understanding of the time

From inventory to Demand based replenishment Information management

From transactions to Supply chain partnerships Relationship management

The enterprise development and supply chain

• Digitalization of Supply Chain: a massive shift in companies creating

• Aligning supply chains to serve local and regional markets

• Strengthening risk management processes through enhanced visibility

Step 1: Consider the nature of demand for the products

FUNCTIONAL DEMAND INNOVATIVE DEMAND

• The predictable demand makes market

All production and distribution decisions