Supply Chain Management Part I Supply chain management is the combination of art and science that goes into improving the way a company finds the raw.

Supply Chain ManagementPart I

Supply chain management is the combination of art and science that goes into improving the way a company finds the raw components it needs to make a product or service, manufactures that product or service and delivers it to customers.

Supply Chain

• The entire network related to the activities of a firm that links suppliers, factories, warehouses, stores, and customers.

• It requires management of goods, money, and information among all relevant players.

• Traditionally, particularly in the military, referred to as logistics except there is more of a system and integrated view of the process

Traditional Military Logistics Functions

• Procurement – obtaining goods and services from suppliers and contractors

• Supply – storing and managing the flow of inventory among base supply points and depots

• Maintenance – base and depot level restoration of repairable components

• Transportation – the movement of inventory among suppliers, depots, and bases

What is Supply Chain Management?

Supply Chain management deals with the control of materials, information, and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers (Stanford Supply Chain Forum Website).

I look at supply chain management as a continuously evolving management philosophy that seeks to unify the

collective productive competencies and resources of business functions found both within the enterprise and outside the firm's allied business partners located along intersecting supply channels into a highly competitive,

customer-enriching supply system focused on developing innovative solutions and synchronizing the flow of marketplace products, services, and information to

create unique, individualized sources of customer value! … And it has certainly improved my business.

A Postulate

• Manufacturing has become relatively efficient– Therefore fewer opportunities to trim costs– However significant opportunities still exist for

cutting costs in the supply chain.

A Supply Chain Visualization

raw material

suppliers

manufacturing

warehousing

retail store

customer

information flow

Financial flow

The Ripple Effect

• Actions by one member of the chain can influence the profitability of other members

• Compete against other supply chains rather than other firms

The Variability Curse

• Constant demands will still generate high variability for manufacturer– trade promotions, volume discounts, long lead times,

sales incentives, economic order quantities (batch ordering), over reaction to shortages, etc.

– variability increases from consumer retail store distribution center warehouse factory supplier.

• Cost of variability can be high– inefficient use of production and warehouse resources– high transportation costs– high inventory costs

Five Basic Components to Manage 1. Planning - a strategy for managing all the resources that go toward

meeting customer demand for a product or service. – includes metrics to monitor the supply chain so that it is efficient, costs

less and delivers high quality and value to customers. 2. Sourcing - select suppliers that will deliver the goods and services

– Develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving vendor relationships.

– Manage goods & services received from suppliers: receiving shipments, inspection, transferring to production facilities & authorizing supplier payments.

3. Making -the manufacturing step. – Schedule the activities necessary for production, testing, packaging and

preparation for delivery. – The most metric-intensive portion of the supply chain measuring quality

levels, production output, and worker productivity. 4. Delivering - the "logistics."

– Coordinate the receipt of customer orders, develop a network of warehouses, pick carriers to get products to customers, and set up an invoicing system.

5. Returning - the problem part of the supply chain. – Create a network for receiving defective and excess products back from

customers & supporting customers having product problems.

Supply Chain Efficiency

Collaboration

Product Postponement

Design for Logistics

Supply Chain Collaboration

• P&G hooked up to Wal-Mart's distribution centers. • When P&G's products run low at the distribution

centers, the system sends an automatic alert to P&G to ship more products. – In some cases, the system connects to the individual

Wal-Mart store. – It lets P&G monitor the shelves through real-time

satellite link-ups that send messages to the factory whenever a P&G item swoops past a scanner at the register.

More supply chain collaboration

• With this kind of minute-to-minute information, P&G knows when to make, ship and display more products at the Wal-Mart stores.

• No need to keep products piled up in warehouses awaiting Wal-Mart's call.

• Invoicing and payments happen automatically too.

• The system saves P&G so much in time, reduced inventory and lower order-processing costs that it can afford to give Wal-Mart "low, everyday prices" without putting itself out of business.

Postponement in Supply Chains

• Several companies have been able to cut costs and improve service by postponing the final configuration of the product until the latest possible point in the supply chain. Examples: – Bennetton producing “grey stock” wool clothing– Hewlett Packard printer configuration– Postponement of final programming of semiconductor

devices– Assemble to order rather than assemble to stock (Dell

Computer)

Design for Logistics

• Many firms now consider SCM issues in the design phase of product development. (This has been referred to DFL or Design for Logistics).

• One example is IKEA whose furniture comes in simple to assemble kits that allows them to store the furniture in the same warehouse-like locations where they are displayed and sold.

Efficient Design of the Supplier Base

• Part of streamlining the supply chain is reducing the number and variety of suppliers.

• Another example: In the mid 1980’s Xerox trimmed its number of suppliers from 5,000 to 400. Overseas suppliers were chosen based on cost, and local suppliers were chosen based on delivery speed.

Dell Designs the Ultimate Supply Chain

Dell Computer has been one of the most successful PC retailers. Why? To solve the problem of inventory becoming obsolete, Dell’s solution:

Don’t keep any inventory! - All PC’s are made to order and parts shipped directly from manufacturers when possible. Compare to the experience of Compaq Corporation. (initial success selling through low cost retail warehouses, but did not garner web-based sales).

Information Transfer

Electronic Data InterchangeVendor Management Inventory

The Bullwhip EffectBusiness to Business

Electronic Data Interchange (EDI)

• Transmission of documents electronically in a predetermined format from company to company. (Not web based.)

• The formats are complex and expensive. It appears to be on the decline as web-based systems grow.– offer discounts to those that transact business over

internet• Requires cooperation and coordination among

all the players

Vendor Managed Inventory

• Barilla SpA. Italian pasta producer. Pioneered the use of VMI (Vendor Managed Inventory). They obtained sales data directly from distributors and decide on delivery sizes based on that information (as opposed to allowing distributors to independently decide on order sizes).

The Bullwhip Effect• First noticed by P&G executives examining the order patterns for

Pampers disposable diapers. They noticed that order variation increased dramatically as one moved from retailers to distributors to the factory. (See next slide.) The causes are not completely understood but have to do with batching of orders and building in safety stock at each level. Problem: increases the difficulty of planning at the factory level.

• Causes– demand forecasting updates– batch orders– price fluctuations– shortage gaming

• Cures– information sharing through EDI– channel alignment through multi-echelon inventory models– price stabilization using value rather than promotional pricing– discourage shortage gaming by allocating on sales not orders

Example of the Bullwhip Effect in Supply Chains

The Explosive Growth of E-tailing

• E-tailing: Direct to customer sales on the web. Perhaps best known e-tailer is Amazon.com, originally a web-based discount book seller. Today, sells wide range of products. The so called “dot com” stocks fueled large gains in the NASDAQ in 1999 to be followed by a major decline since April, 2000. Today, many traditional “bricks and mortar” retailers also offer sales over the web, often at lower prices.

B2B Supply Chain Management

• B2B (business to business) supply chain management:. While not as visible and “sexy” as E-tailing, it appears that B2B supply chain management is the true growth industry. A search on Yahoo yielded over 80 matches for supply chain software providers. Some of the major players in this market segment include:

• Agile Software based in Silicon Valley.• i2 Technologies based in Dallas.• Ariba based in Silicon Valley

Global Concerns in SCM

• Moving manufacturing offshore to save direct costs complicates and adds expense to supply chain operations, due to:– increased inventory in the pipeline– Infrastructure problems– Political problems– Dealing with fluctuating exchange rates– Obtaining skilled labor

Trends in Supply Chain Management

• Outsourcing of the logistics function – example: Saturn outsourced their logistics to Ryder

Trucks. – Outsourcing of manufacturing is a major trend these

days.

• Moving towards more web based transactions systems

• Improving the information flows along the entire chain.

Inventory Implications

Factory

CentralWarehouse

RegionalWarehouses

RegionalWarehouses

RegionalWarehouses

RetailOutlets

RetailOutlets

RetailOutlets

RetailOutlets

RetailOutlets

customers

Multi-echelon Lateral re-supplyIndentured parts(Dependent demand)

End Item

Components Components

Parts Parts Parts Parts

Analytical Methods

• The transportation problem and more general network formulations for describing flow of goods in a complex system

• Inventory management and demand forecasting models such as those discussed in this course

• Analytical methods for determining delivery routes for product distribution.

A Micro Supply Chain

Vehicle Routing– determine the optimal delivery sequence of a

single truck to n customers– same as the classical traveling salesman

problem– for n customers, there are n! possible routes

• for small n, enumerate and cost all routes• for large n, use heuristic algorithm (np hard)

– problem increases in difficulty for multiple trucks

30

The single truck problemA truck is located in City A and must deliver to each of n customers returning to city A. What route will minimize the total distance driven?

2

5

5

3 4

6

7

8

11A

BC

D

E

F

G

(n-1)! possible routes.

6! = 720

A From-to Matrix

From / To

City A City B City C City D

City A 25 30 12

City B 25 17 23

City C 30 17 37

City D 12 23 37

distances in miles

32

the formulation

1

1 1

1

1

1

0

min

1

1

ij

n n

ij ijj i

i j

n

ijii j

n

ijjj i

if travel from city i to city jlet x

otherwise

z c x

st

x

x

for each j – must enter each city exactly once

for each i – must leave each city exactly once

33

Oh! The sub-tour problem.

A

BC

D

E

F

G

eliminate 3-city subtours:xij + xjk + xki 2

eliminate 2-city subtours:xij + xji 1

Sizing the problem

• For a 10-city tour there are– 10 x 10 – 10 = 90 binary variables

– 20 constraints to enter and leave each city exactly once

– C(10,5) = 252 – 5 city tour constraints (5,5)

– C(10,4) = 210 – 4 city tour constraints (4,6), (4,4,2), etc.

– C(10,3) = 120 – 3 city tour constraints (3,7), (3,3,2,2) etc.

– C(10,2) = 45 – 2 city tour constraints (2,8), (2,2,2,2,2)• Any others required?

– Total constraints = 647

– 290 = 1.23794 x 1027 potential solutions

A Real Example Problem

The Commissioner of baseball must deliver new baseballs to all the national league ballparks. Delivery will start and end in Cincinnati where the All American Baseball Plant is located. What route should the delivery truck follow in order to minimize total distance?

Distances between parks in miles

ATL CHI CIN HOU LA MON NY PHI PIT STL SD SFATL 702 454 842 2396 1196 864 772 714 554 2363 2679CHI 702 324 1093 2136 764 845 764 459 294 2184 2187CIN 454 324 1137 2180 798 664 572 284 338 2228 2463HOU 842 1093 1137 1616 1857 1706 1614 1421 799 1521 2021LA 2396 2136 2180 1616 2900 2844 2752 2464 1842 95 405MON 1196 764 798 1857 2900 396 424 514 1058 2948 2951NYK 864 845 664 1706 2844 396 92 386 1002 2892 3032 PHI 772 764 572 1614 2752 424 92 305 910 2800 2951PIT 714 459 284 1421 2464 514 386 305 622 2512 2646STL 554 294 338 799 1842 1058 1002 910 622 1890 2125SD 2363 2184 2228 1521 95 2948 2892 2800 2512 1890 500SF 2679 2187 2463 2021 405 2951 3032 2951 2646 2125 500

Heuristics -algorithm development

Heuristic: A procedure for solving problems by an intuitiveapproach in which the structure of the problem can be interpretedand exploited intelligently to obtain a reasonable solution.

Nearest Neighbor Heuristic – a greedy heuristic algorithm

ATL CHI CIN HOU LA MON NY PHI PIT STL SD SFATL 702 454 842 2396 1196 864 772 714 554 2363 2679CHI 702 324 1093 2136 764 845 764 459 294 2184 2187CIN 454 324 1137 2180 798 664 572 284 338 2228 2463HOU 842 1093 1137 1616 1857 1706 1614 1421 799 1521 2021LA 2396 2136 2180 1616 2900 2844 2752 2464 1842 95 405MON 1196 764 798 1857 2900 396 424 514 1058 2948 2951NYK 864 845 664 1706 2844 396 92 386 1002 2892 3032 PHI 772 764 572 1614 2752 424 92 305 910 2800 2951PIT 714 459 284 1421 2464 514 386 305 622 2512 2646STL 554 294 338 799 1842 1058 1002 910 622 1890 2125SD 2363 2184 2228 1521 95 2948 2892 2800 2512 1890 500SF 2679 2187 2463 2021 405 2951 3032 2951 2646 2125 500

LAX

SNF

CIN

MON

SND

ATL

HOU

CHI PITSTL

PHI

NYK

DISTANCE = 8015 MILES

LAX

SNF

CIN

MON

SND

ATL

HOU

CHI PITSTL

PHI

NYK

DISTANCE = 8015 MILES

X

X

OPTIMUM= 7577 MILES

The n-truck problem

• Let c0j = cost of one trip from the depot to customer j• cij = cost of trip from customer i to customer j (assume cij

= cji)• If separate vehicle assigned to each customer then cost

is given by:

• If go from depot to i to j then back to depot, the saving would be found from:

1

2n

ojj

c

0 0ij i j ijs c c c

The Algorithm

• Compute sij for all possible customer pairs

• Rank the sij in decreasing order

• Consider each of the links in descending order of savings and include link (i,j) in a route if it is feasible– if infeasible, go to the next link

• Once the list is exhausted, eliminate those on the current route and begin a new route

Example 6.4

• Whole Grains delivers bread to 5 customers each morning

• goal is to meet delivery requirements at minimum delivery costs

• capacity of 300 loaves on delivery trucks

customer requirements (loaves)1 852 1623 264 1405 110

Delivery Costs in Miles

customer 0 (plant) 1 2 3 4 5

0 (plant) 35.5 30.4 22.4 7.1 22.4

1 10.0 11.2 26.9 20.6

2 11.2 25.0 25.0

3 15.8 14.1

4 15.8

The Algorithm in Action

compute savingss12 = c01 + c02 – c12 = 33.5 + 30.4 – 10 = 53.9

s13 = c01 + c03 – c13 = 33.5 + 220.4 – 11.2 = 44.7

s14 = 13.7 s34 = 13.7

s15 = 35.3 s35 = 30.7

s23 = 41.6 s45 = 13.7

s24 = 12.5

s25 = 27.8

rank: (1,2), (1,3), (2,3), (1,5), (3,5), (2,5), (1,4), (3,4), (4,5), (2,4)

The Algorithm Continues in Action

• Try assigning customer 1 and 2 to the same truck– 85 + 162 = 247 loaves < 300, okay

• Try assigning customer 3 to the same truck– 247 + 26 = 273 < 300, okay

• Try assigning customer 5 to the same truck– 273 + 110 > 300, not okay

• Try assigning customer 4 to the same truck– 273 + 140 > 300, not okay

• Start a new route with customer 4 and 5– 140 + 110 = 250 < 300, okay

Other Considerations

• Frequency requirements• Time windows• Time-dependent travel time• Multiple constraints

– weight and volume of trucks

• Varying truck sizes and costs• Split deliveries• Uncertainty – random processes

The End of the Supply Chain

The bottom line:The supply chain locks in money!

Goods and services flowingthrough the supply pipeline