Lecture 5 JIM

8/9/2019 Lecture 5 JIM

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Lecture No 5

Supply Chain Driver

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



What is the key of success?

CommunicationCollaboration

Coordination




Drivers of Supply Chain

PerformanceFacilities

places where inventory is stored, assembled, or fabricated

production sites and storage sites

Inventory

raw materials, WIP, finished goods within a supply chain

inventory policies

Transportationmoving inventory from point to point in a supply chain

combinations of transportation modes and routes

Information

data and analysis regarding inventory, transportation, facilities throughout the supplychain

potentially the biggest driver of supply chain performanceSourcing

functions a firm performs and functions that are outsourced

Pricing

Price associated with goods and services provided by a firm to the supply chain




A Framework forStructuring Drivers

Competitive Strategy

Supply Chain

Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers






Components of FacilitiesDecisions

Locationcentralization (efficiency) vs. decentralization

(responsiveness)

other factors to consider (e.g., proximity to customers)

Capacity (flexibility versus efficiency)

Manufacturing methodology (product focused versus

process focused)

Warehousing methodology (SKU storage, job lot storage,cross-docking)

Overall trade-off: Responsiveness versus efficiency




Inventory: Role in the Supply Chain

Inventory exists because of a mismatch betweensupply and demand

Source of cost and influence on responsiveness

Impact onmaterial flow time: time elapsed between when

material enters the supply chain to when it exits the

supply chain

throughputrate at which sales to end consumers occur

I = RT (Little’s Law)

I = inventory; R = throughput; T = flow time




Inventory: Role in Competitive

Strategy

If responsiveness is a strategic competitive

priority, a firm can locate larger amounts of inventory closer to customers

If cost is more important, inventory can be

reduced to make the firm more efficient




Components of Inventory DecisionsCycle inventory

Average amount of inventory used to satisfy demand between

shipments

Depends on lot size

Safety inventory

inventory held in case demand exceeds expectations

costs of carrying too much inventory versus cost of losing sales

Seasonal inventory

inventory built up to counter predictable variability in demand

cost of carrying additional inventory versus cost of flexible production

Overall trade-off: Responsiveness versus efficiency

more inventory: greater responsiveness but greater cost

less inventory: lower cost but lower responsiveness




Transportation: Role in

the Supply Chain

Moves the product between stages in the

supply chain

Impact on responsiveness and efficiency

Faster transportation allows greater

responsiveness but lower efficiency

Also affects inventory and facilities




Transportation:

Role in the Competitive Strategy

If responsiveness is a strategic competitive

priority, then faster transportation modes can

provide greater responsiveness to customers whoare willing to pay for it

Can also use slower transportation modes for

customers whose priority is price (cost)Can also consider both inventory and

transportation to find the right balance




Components of

Transportation DecisionsMode of transportation:

air, truck, rail, ship, pipeline, electronic

transportation

vary in cost, speed, size of shipment, flexibility

Route and network selection

route: path along which a product is shipped

network: collection of locations and routes

In-house or outsource




Information: Role in

the Supply Chain

The connection between the various stages

in the supply chain – allows coordination

between stages

Crucial to daily operation of each stage in a

supply chain – e.g., production scheduling,

inventory levels




Information:


Allows supply chain to become more

efficient and more responsive at the sametime (reduces the need for a trade-off)

Information technology




Components of Information

DecisionsPush (MRP) versus pull (demand information

transmitted quickly throughout the supply chain)

Coordination and information sharing

Forecasting and aggregate planning

Enabling technologies

EDI

Internet

ERP systems

Supply Chain Management software




Sourcing: Role in

the Supply ChainSet of business processes required to

purchase goods and services in a supply

chain

Supplier selection, single vs. multiple

suppliers, contract negotiation




Sourcing:


Sourcing decisions are crucial because they

affect the level of efficiency and responsiveness

in a supply chain

In-house vs. outsource decisions- improving

efficiency and responsiveness




Components of Sourcing

DecisionsIn-house versus outsource decisions

Supplier evaluation and selection

Procurement process

Overall trade-off: Increase the supply chain

profits




Pricing: Role in

the Supply Chain

Pricing determines the amount to charge

customers in a supply chain

Pricing strategies can be used to match

demand and supply




Components of Pricing

Decisions

Pricing and economies of scale

Everyday low pricing versus high-low

pricing

Fixed price versus menu pricing

Overall trade-off: Increase the firm profits




Functional Domain of a SC

Manager

Forecasting demand: by using forecasting technique

Selecting suppliers: by goal programming, Decision

matrix, AHP, ANP and etc.Ordering materials: Centralized versus decentralized,

MRP

Inventory control: ABC analysis, XYZ analysis, FSN

Shipping & delivery: depend on lead time and customer Information management

Quality management

Customer service08/28/10 21Lokesh Vijayvargy, JIM, Jaipur



Designing the

Distribution Network in aSupply Chain




Outline

The Role of Distribution in the Supply Chain

Factors Influencing Distribution Network

Design

Design Options for a Distribution Network E-Business and the Distribution Network




ac ors n uenc ng



ac ors n uenc ngDistribution Network

Design

Distribution network design options

must therefore be compared accordingto their impact on customer service andthe cost to provide this level of service

25Lokesh Vijayvargy, JIM, Jaipur 08/28/10

Di t ib ti N t k



Distribution NetworkDesign

Elements of customer service influenced by networkstructure:

Response time

Product variety

Product availabilityCustomer experience

Order visibility

Supply chain costs affected by network structure:

Inventories

Transportation

Facilities and handling

Information

26Lokesh Vijayvargy, JIM, Jaipur 08/28/10



Service and Number of

Facilities Number of

Facilities

Response Time


Inventory osts an



Inventory osts anNumber

of FacilitiesInventory

Costs

Number of facilities




Transportation Costs and

Number of FacilitiesTransportation

Costs





Facility Costs and Number

of FacilitiesFacility

Costs





TransportationTransportation

Total Costs Related to

Number of Facilities

TotalC

osts

TotalC

osts

Number of FacilitiesNumber of Facilities

InventoryInventory

FacilitiesFacilities

Total CostsTotal Costs




Response TimeResponse Time

Variation in Logistics Costs and Response

Time with Number of Facilities

Number of FacilitiesNumber of Facilities

Total Logistics CostsTotal Logistics Costs




4-33

Design Options for a Distribution Network

Manufacturer Storage with Direct ShippingManufacturer Storage with Direct Shipping and

In-Transit Merge

Distributor Storage with Carrier DeliveryDistributor Storage with Last Mile Delivery

Manufacturer or Distributor Storage with

Consumer PickupRetail Storage with Consumer Pickup

Selecting a Distribution Network Design

Lokesh Vijayvargy, JIM, Jaipur 08/28/10

M f t St ith



4-34

Manufacturer Storage withDirect Shipping

Manufacturer

Retailer

Customers

Product Flow

Information Flow




4-35

In-Transit Merge Network

Factories

Retailer

Product Flow

Information Flow

In-Transit Merge byCarrier

Customers


Di t ib t St ith



4-36

Distributor Storage withCarrier Delivery

Factories

Customers

Product Flow

Information Flow

Warehouse Storage by

Distributor/Retailer


Di t ib t St ith



4-37

Distributor Storage withLast Mile Delivery

Factories

Customers

Product Flow

Information Flow

Distributor/Retailer

Warehouse


M f t Di t ib t



Manufacturer or DistributorStorage with Customer Pickup

Factories

Retailer

Pickup Sites

Product FlowInformation Flow

Cross Dock DC

Customer Flow

Customers




Summary of all networkWhen designing the delivery network we should account for

product and market characteristics.High demand products will have transportation cost play a

significant role. Use network with good transportation cost (retail

stores)

Very low demand products will have inventory play asignificant role. Use network with low inventory costs (direct

shipping)

Many product sources: transportation + information plays a role.

Distributor storage with package carrier Few product sources but high customization: manufacturer

storage with merge in transit

High product variety: inventory cost will be significant. Use

distributor storage Lokesh Vijayvargy, JIM, Jaipur 3908/28/10



E-Business and the

Distribution NetworkImpact of E-Business on CustomerService

Impact of E-Business on Cost

Using E-Business: Dell, Amazon,Peapod, Grainger


C l i f N k



Complexity of NetworkDesign Problems

Location problems are, in general, verydifficult problems.

The complexity increases with

the number of customers,the number of products,

the number of potential locations forwarehouses, and

the number of warehouses located.

41Lokesh Vijayvargy, JIM, Jaipur



Solution Techniques

Mathematical optimization techniques:

Exact algorithms: find optimal solutions

Heuristics: find “good” solutions, not necessarilyoptimal

Simulation models: provide a mechanism toevaluate specified design alternatives createdby the designer.




Case Study

Lokesh Vijayvargy, JIM, Jaipur 43

H i i d



Heuristics andthe Need for Exact Algorithms

Single product

Two plants p1 and p2

Plant P1 has an annual capacity of 140,000 units.

Plant p2 has an annual capacity of 60,000 units.The two plants have the same production costs.

There are two warehouses w1 and w2 with identicalwarehouse handling costs.

There are three markets areas c1,c2 and c3 withdemands of 50,000, 100,000 and 50,000,respectively.




Heuristics and

the Need for Exact Algorithms

Table 1

Distribution costs per unit

FacilityWarehouse

P1 P2 C1 C2 C3

W1W2

05

42

32

41

52




Why Optimization

Matters?

D = 50,000

D = 100,000

D = 50,000

Cap = 60,000

Cap = 140,000

$4

$5

$2

$3

$4

$5

$2

$1

$2

Production costs are the same, warehousing costs are the same

$0

T diti l A h #1



Traditional Approach #1:Assign each market to closet WH. Then

assign each plant based on cost.

D = 50,000

D = 100,000

D = 50,000

Cap = 60,000

Cap = 200,000

$5 x 140,000

$2 x 60,000

$2 x 50,000

$1 x 100,000

$2 x 50,000

Total Costs = $1,120,000

T diti l A h #2



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

cost

D = 50,000

D = 100,000

D = 50,000

Cap = 60,000

Cap = 140,000

$4

$5

$2

$3

$4

$5

$2

$1

$2

$0

P1 to WH1 $3

P1 to WH2 $7P2 to WH1 $7P2 to WH 2 $4

P1 to WH1 $4P1 to WH2 $6P2 to WH1 $8P2 to WH 2 $3


T diti l A h #2




cost

D = 50,000

D = 100,000

D = 50,000

Cap = 60,000

Cap = 140,000

$4

$5

$2

$3

$4

$5

$2

$1

$2

$0

P1 to WH1 $3

P1 to WH2 $7P2 to WH1 $7P2 to WH 2 $4



Market #1 is served by WH1, Markets 2 and 3are served by WH2

T di i l A h 2




cost

D = 50,000

D = 100,000

D = 50,000

Cap = 60,000

Cap = 140,000

$5 x 90,000

$2 x 60,000

$3 x 50,000

$1 x 100,000

$2 x 50,000

$0 x 50,000




Total Cost = $920,000



What is the LP?

k j x

ji x

wm

jk

pwij

markettowarehousefromflowthe

warehouseto plantfromflowthe

:Let

=

=



What is the LP?

negative-nonflowsAll

000,50

000,100

000,50

000,60

s.t.

225

432450:min

2,23,1

2,22,1

1,21,1

3,22,21,22,22,1

3,12,11,11,21,1

2,21,2

3,21,23,1

2,11,12,21,22,11,1

=+

=+

=+

++=+

++=+

≤+

+++

+++++

wmwm

wmwm

wmwm

wmwmwm pw pw

wmwmwm pw pw

pw pw

wmwmwm

wmwm pw pw pw pw

x x

x x

x x

x x x x x

x x x x x

x x

x x x

x x x x x x



The Optimal Strategy

Table 2

Distribution strategyFacility

Warehouse

P1 P2 C1 C2 C3

W1

W2

140000

0

0

60000

50000

0

40000

60000

50000

0

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




Optimal Network

D = 50,000

D = 100,000

D = 50,000

Cap = 60,000

Cap = 140,000

$2*60,000

$3*50,000

$4*40,000

$5*50,000$1*60,000

$0*1,40,000

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Lecture 5 JIM