Strategic Supply Chain & Logistics Management Seminar

I.
Supply Chain Strategies &

Organizing for Improvements
SC Strategy
Two-Day Seminar
Strategic Supply Chain & Logistics Management
Nallan C. Suresh, Ph.D.

UB Distinguished Professor & Chairman
Dept. of Operations Management & Strategy
School of Management
& Associate Director,
Institute for Sustainable Transportation & Logistics
State University of New York, Buffalo, NY, USA
E-mail: ncsuresh@buffalo.edu
www.buffalo.edu/~ncsuresh
Muscat, Oman, January 15 &16, 2014

SC Strategy
How Did We Get Here?
1750s- The Industrial Revolution: Division of labor &
Concept of interchangeable parts
1800s- Larger, more complex factories;
stage set for production explosion of 20th century
Scientific management, Industrial Engineering
1900s- Assembly lines and mass production
1930s- Human Factors, Quality movement
1940s- Operations Research
1950s- Cellular manufacturing
1950s- IT Revolution
1950s- Factory Automation: NC, CNC, FMC, FMS, Robotics
1960s- MRP, MRP II, JIT, OPT..
1980s- Supply Chain Management, Inter-org. IS (EDI)
1990s- Reengineering, Internet, E-commerce
SC Strategy
Traditional View: The Single Firm

Customers
Inbound
Logistics ERP / MRP
RM Parts Production FP
Assembly
WIP
FG
Bought-out Parts Outbound
Logistics
Suppliers Indirect
Materials (MROs)
The R’s: right product, right place, right time, right quality, right cost
Within-firm improvement strategies: MRP, Lean, TQM, Six Sigma, ERP,..
SC Strategy
The Supply Chain Era
Supplier Customer
Distributor
Supplier Firm Customer
Supplier Firm Distributor Customer

Distributor
Customer
Supplier
Material Flows, Credit Customer
Returns, Recycling, Remanufacturing, Cash
Information Flows
Within-firm => Inter-firm improvement strategies

Inter-functional => Inter-organizational collaboration & integration
to eliminate delays, disconnects, inventories & inefficiency.
SC Strategy
Logistics: Our Definition

Logistics Management is that part of Supply
Chain Management that plans, implements, and
controls the efficient, effective forward and
reverse flow and storage of goods, services and
related information between the point of origin
and the point of consumption in order to meet
customers' requirements.
- Council of Supply Chain Management Professionals (CSCMP)
www.cscmp.org
SC Strategy
Our Definition of SCM
SCM is the integration of key business

processes from end user through original
suppliers that provides products, services,
and information that add value for
customers and other stakeholders
– Global Supply Chain Forum (GSCF)
SC Strategy
Numerous sources of uncertainty & inefficiency:

wrong forecasts canceled orders
late deliveries miscommunication
poor quality price uncertainties
machine breakdowns speculation
worker absenteeism licensing, freight forwarding
unexpected holidays delays
red tape, corruption
The basic idea in supply chains is to minimize:

Costs for everyone, including the customer,
Disconnects, delays, inventories, missed shipments, poor
customer service, etc. in the supply chain
Through better inter-organizational communication & coordination

SC Strategy
Supply Chain Strategy &
Form Steering
Map Current Identify Key
Committee &
Supply Chain SC Members
Joint Strategies
Realign Core Seek Synergistic

Competencies Fit & Barriers to
Entry
Organize for
Improvements in
Various Areas
SC Strategy
Supply Chain Mapping

Identify primary SC members:
 Considering the total network may be too
complex, unmanageable, and unnecessary
 Which members are critical, from the
vantage point of the focal firm, to satisfying
end customers?
Identify primary and supporting members:
 Primary members: all autonomous firms / SBUs which
actually perform the operational and/or managerial activities
in the processes designed to produce a specific output for a
particular customer or market
 Supporting members: firms which simply provide resources,
knowledge, utilities, assets, etc. for primary members
SC Strategy
A given firm may be a primary member for one
process, but a supporting member for another
 System boundaries:
Point of origin: the left boundary where no more
primary suppliers exist;
Point of consumption: the right boundary where
no further value is added, and the product /
service is consumed.
SC Strategy
Supply Chain Structure
 Horizontalstructure: number of tiers

along the supply chain
 Verticalstructure: number of parties
in each tier
 Horizontalposition of the focal
company: at the beginning, middle or
end of the chain?
 SCinitiatives such as single sourcing,
outsourcing, etc. change the SC
structure
SC Strategy
Types of Process Links
Prioritize the links (relationships: 80-20 rule):
1. Managed process link: focal firm typically integrates
this process with another firm
2. Monitored process link: focal firm simply monitors
or audits how the link is integrated and managed
3. Not-managed process link: not critical: focal firm
does not even monitor this link; focal firm trusts other
firms to do well on this link
4. Non-member process link: link between members of
the focal firm’s SC with non-members of the SC (e.g.,
link between a supplier who also supplies to a
competing SC (non-member); cannot be ignored.
SC Strategy
What business process governs the link?
• Procurement process
• Customer relationship management
• Demand management
• Order fulfillment
• Manufacturing flow management
• New product & process development (NPDP)
• Reverse logistics process, etc.
SC Strategy
SCM: The Basic Strategies
 A supply chain strategy can be aimed primarily

at providing
Low cost goods / services, or
Responsiveness, or
Differentiated products
 All elements and decisions in a supply chain

should be consistent with the overall SC
strategy:
new product design, physical configuration (plant,
supplier, warehouse location), supplier selection,
process characteristics, etc.
SC Strategy
Porter’s Five Forces Model:

Threat of New
Products,
Substitutes
Suppliers’ Competition Among Buyers’

Bargaining Power Existing Firms Bargaining Power
Barriers to entry
Threat of New
Entrants
Porter’s Value Chain Diagram

SC Strategy
Strategy & Fit
 Strategyis about being different: deliberately
choosing a different set of activities to deliver
unique value; Operational effectiveness (lean, six-
sigma, ERP, etc.) is not strategy (Porter, 2001).
 Every thing matters, not just core competencies
 All activities must “fit” well in the value chain
 Good overall fit => sustainable competitive
advantage & barriers to entry
SC Strategy
Activity Mapping (e.g.): Southwest Airlines
(Source: Porter, 1998) SC Strategy

Using Internet & E-commerce Judiciously in SC
Customer
Distributor

Distributor
Customer
Supplier
Customer
B2B B2C C2C
SC Strategy
Supply Chains:
From Inter-functional
To Inter-organizational
Integration
SC Strategy
Phase I: Inter-functional Integration
Traditional
Silos, Disconnects & handoffs
Departmental parochialism
DEPT DEPT DEPT Slow progress of work: non-
2 3 value adding times for
1 move, wait, information
gathering, clarification, etc.
Customer is far away->
customer orientation
confined to marketing
Re-engineered
Value Chain
Process: Cross-
Functional Team
SC Strategy
Phase II: Inter-organizational Integration

 Common goals for the supply chain: cost and service
improvements sought jointly
 New performance metrics to avoid sub-optimization
 A culture of partnerships, collaboration, trust,
transparency & information sharing with key
members
 A meta-organization (steering committee) for SC
 Standardization of systems & procedures in the chain:
IT, quality, material bar codes, RFID, etc.
 Conflicts possible, if one firm benefits more or less
 Benefits for entire supply chain, end customer, and big
picture must be stressed at such times
SC Strategy
Supply Chain Map
Supplier Customer
Supplier Firm Distributor Retailer Customer
Retailer
Distributor Retailer
Supplier Customer
• Scoping: high-impact Points of vulnerability &

areas; 80-20 rule potential supply disruption
• Organizing
Sustainability:
• Redesigning Minimum carbon
• Implementation footprint
SC Strategy

SC Steering Committee
Inter- Physical Business IS & IT

Organizational Reconfiguration Processes Integration
Teams
Suppliers Manufacturers Distributors Retailers
NPDP NPDP NPDP NPDP

Inter-
Functional Purchasing Purchasing Purchasing Purchasing
Teams
Operations Operations Operations Operations
Marketing Marketing Marketing Marketing
(Source: Braunscheidel & Suresh, 2004) SC Strategy

Inter-organizational Integration
1. Scoping: Identifying good process to redesign
 High-impact process to enhance SC performance
 Selecting a good partner who has strong interest;
one who is experienced with process redesign;
fast decision maker, has collaborative culture;
has good IT infrastructure, etc.
2. Organizing:
 Steering committee:
Executives from member firms; define each firm’s
investment, roles, share of benefits, procedures for resolving
disputes, establish performance goals & metrics
 Design teams:
6 – 12 members committed full-time to the project;
members from both firms included; experts in process
redesign, and change management. Select right people.
SC Strategy
Inter-organizational Integration (cont’d)
3. Redesigning:
 Design the new, integrated process in a way that fulfills SC
performance goals: final customer always comes first; avoid
duplications; work done by the person in the best position to
perform; a single process, based on one common data
base; Design in such a way that both firms benefit, etc.
4. Implementing:
 Roll out new process in clearly defined stages, focus on
achieving benefits early, maintaining momentum
 Communicate tirelessly: articulate rationale, define and
manage expectations, involve everyone, make everyone an
important member, etc. Good project management.
SC Strategy
II. Global Trends in
Supply Chain Restructuring
SC Strategy
Rethink Products, Processes &

Supply Chain Networks
Well-designed package of [ Products & Services ] is
always an important order-winner
The cost, quality, producibility, maintainability,

serviceability, etc. of product are all determined at
the Design stage itself
Process and Global Logistics issues must be

considered at the Design stage itself.
Design is an on-going, full-time activity, which

should be proactive, seeking “first-mover
advantages”
Product-Process Design
First-mover Advantages
Price
Later Entrant’s Cost
1st Mover’s Cost
Period of Exclusivity
For First Mover
Expectations from NPDP

Designs which
 Precisely match customer needs

 Meet customer needs in simple, cost-effective
manner
 But which preserve barriers to entry (strive for
inimitable designs and processes)!
 Fast time-to-market, low development costs!
 Robust designs, with minimal revisions
Standardization:
A major Source of Productivity
 Design & Process Planning: lead times & cost reduced
 Production & Assembly: higher volumes
increase in productivity and quality; prospects for
automation; less training costs; less changeover times,
productive capacity increased, etc.
 Purchasing: Lower material costs; lower purchase
costs; lower lead times
 Materials Storage: fewer parts / Stock Keeping Units
(SKUs) in inventory
 Quality: Fewer defects
 Customer Service and delivery improved
Downside of standardization = limited customer
appeal
Line Breadth & Fit in Product Line
Too narrow =>

loss of competitive position
loss of distributor and sales force support
Too broad =>
Variety: less volumes => less economies of scale
Increase in SKUs, inventories
Changeover costs increased, waste of capacity,
inventory cost increase
Distribution and material costs increase
Confusion in product offering
DFM => DFMA => DFS => DFE => DFL
Design For Manufacture (DFM)
 Design for easy & economical production
 Consider manufacturability early
 Identify easy-to-manufacture design characteristics
 Use easy to fabricate & assemble components
Design for Manufacture & Assembly (DFMA)

Design for Service (DFS)
Design for Environment (DFE)
Design for Logistics or Supply Chain (DFL)
Business &
Traditional Process
Marketing Strategy
R&D
CUSTOMERS MARKETING
ENGINEERING
DESIGN
Prototypes Drawings
Bills of material,
assembly charts
Make/Buy Decisions
PRODUCTION / Process Plans PROCESS
OPERATIONS PLANNING
(MFG. ENGG)
Make/Buy Decisions
VENDORS PURCHASING
Vendor
Development Product-Process Design
Phase I: Concurrent Engineering:
Inter-functional integration
Traditional
MARKETING DESIGN
PROCESS
PLANNING
Concurrent
Cross-functional
team
Reduction in Time-To-Market
Silo Approach
...
Lead Time
Concurrent Approach Defects caught early, and

much less expensively
Greater Producibility
... Developmental lead times
and cost reduced
Less Resistance to design
Lead Time changes
Phase II: Inter-organizational
Integration in NPDP
Target Costing:
Design driven by global cost targets (= China costs!)
Design for Logistics:
Global Logistics issues considered at Design stage
itself.
Redesign of products & processes: form and logistics
postponement: Delayed Differentiation
Pre-sourcing:
Early involvement of suppliers & distributors in design
Mass customization initiatives
Inter-organizational integration: Cross-enterprise &
cross-functional teams
Traditional Make /Buy

Decisions
Drawings, Vendor
Bill of material Process Plans
Marketing Development
Specs
Process
Design Purchasing Vendors
Planning
The New Way

Early Involvement of Purchasing + Pre-sourcing
Pre-selected
Expanded Vendors,
Concurrent Distributors,
Engineering Retailers
Team
External Product Development Strategies
External Development Strategies
Alliances
Joint Ventures
Purchase Technology / Expertise by Acquiring Developer
Internal Development Strategies
Migrations of Existing Products
Enhancement to Existing Products
New Internally Developed Products
Internal ----------------------Cost of Product Development --------------------- Shared

Lengthy --------------------Speed of Product Development---------------Rapid and/or
Existing
High ------------------------- Risk of Product Development ----------------------- Shared
Design For Logistics (DFL)

 Principle of Postponement:
Do the common & generic things first, and
differentiating / customizing things in the end
 Form & Logistics postponement (time & place

postponement)
 Modularity in products and processes and its

impact on SCM reconfiguration
Redesign for Logistics: Case of the
Japanese Cubic Watermelon
Customization Approaches
:
(Source: Lampel & Mintzberg 1996) Product-Process Design
Mass Customization:
Customization Without Cost Premium
Industry Restructuring Based on

Postponement Principles
• Form Postponement
• Logistics Postponement
 Time & Place Postponement
• Capacity Postponement
• Purchasing Postponement
Physical Network
Form Postponement
 Rearrange bills of material so that
differentiating (customizing) elements are
postponed to last stage of assembly.
 Permits central inventories and economies
of scale for early-stage items, which are less
subject to forecast errors
 Differentiating elements performed later,
when mix forecasts become more accurate.
Physical Network
Expanded View of Bill of Material

Reorganize BOMs into generic
components & differentiators (at
high level)
Packaged
Hand-vac
Service Upholstery Crevice Dusting

Hand-vac Package
Components tool tool tool
Forward Screw & Rear

Include housing lock washer housing
Service assembly assembly assembly
Components
Physical Network
Industry Restructuring
(Some Examples)
 Pharmaceuticals: global production of bulk

chemicals + local fill-and-finish plants in numerous
countries
 HP printers: two approaches
 Benetton model
 Paint manufacture & sale (postponement + mass
customization)
 Auto Industry: platform architecture + delayed
differentiation
Physical Network
HP: Channel Assembly Approach

HP DeskJet Printer:
Before: customized the printer at the factory in Singapore for
Asian and European markets; differentiated as soon as
production began
After: a country-specific external power supply: distribution

centers purchased the materials and assembled at the site;
manufacturing costs went up slightly, but total manufacturing,
stocking and shipping costs reduced by 25%.
 This is known as channel assembly: The final

assembly, based on option-specific customer requests,
are done within distribution centers. A new role for
warehouses and 3PL providers
Physical Network
HP: Universal Product Approach
 LaserJet Printer:
Before: dedicated power supply (110v or
220 volts) for US or European markets;
differentiated as soon as production began
in Japan
After: a universal (standardized) power
supply developed; flexibility in shipments
from US, Europe, Japan, depending on
demand; total manufacturing, stocking
and shipping costs reduced by 5%.
Physical Network
Postponement at
Eaton: Cutler-Hammer
Before:
All 3500 industrial circuit breakers were made
at Arecibo, Puerto Rico, shipped to Jacksonville,
FL, and trucked to warehouse in Duncan, SC.
High inventory levels at both facilities
Same-day service rate averaged around 90%
Now:
• 50 generic styles made at Puerto Rico, bar coded & shipped-trucked to SC
• Final assembly done at Duncan, SC after orders are received
• Build instructions downloaded for that style based on bar code in Duncan, SC
• Shipping costs reduced, better containerization reduced damage levels, etc.
• Inventories reduced significantly at both locations
• Same-day service level increased to 98% Physical Network
Benetton & Other Models
 Benetton: Fresh look at the processing steps and
radical re-sequence to postpone the
differentiating step closer to selling time
Before: to make a red sweater, start with a red
fabric, cut, sew, etc to make a red sweater;
After: start with uncolored fabrics, make white
sweaters for all colors, and coloring is the last
step, when mix forecast most accurate
 Auto Industry: Platform architecture, delayed
differentiation: e.g., moon roof in a car, etc.
 Paint Industry Restructure
Physical Network
The Physical Network
 Factories:
Heavy manufacturing plants (auto plants,
steel mills, chemical plants); Light industry
manufacturing plants (small components
manufacturing, assembly)
 Warehouse & distribution centers
Changing roles
 Retail & service outlets; order entry and
fulfillment points
 Supply sources
Physical Network
Redesign of Physical Network
 Facilities & primary focus for each facility?
 Facility location: consistent with overall strategy?
 Capacity allocation:
economies of scale + <agility & responsiveness>?
 Sufficient economies of scope?
 Market & supply sources: which market do they
serve? where are the supply sources?
 Exploit duties & tariffs, & exchange rates?
 Exploit form & logistics postponement?
 Consistent with overall strategy of low cost /
responsiveness / innovation, etc.? Physical Network
Reconfiguration of Global
Manufacturing & Supply Chains
Non-Reactive Reactive Global

Systems Systems Markets
More stable production Flexible & agile systems for items

configurations for generic with high demand uncertainty;
items: items with stable, Responsiveness, customization,
consolidated demand, plus economies of scope logic; Based
minimum runs of items with on analysis of SKU-product-
high uncertainty process matrix, & demand
uncertainty.
Physical Network
Supply Networks:
Global Sourcing, Yet Greater Proximity
Supplier Involvement in Assembly
Assembly tasks performed within OEM
Modular Devolution of assembly tasks:

Consortia locate near OEMs
System
Suppliers Pressure for JIT deliveries
Local
Suppliers
Dispersed Remote
Suppliers Suppliers
Physical Network
Distance from Assembly Plant
Types of Plant Focus

 Product Focus Plant: Produces a product (line) in
entirety for distribution within a firm’s entire
domestic or global market region
 Market Focus Plant: Produces most or all product

lines, for distribution to specific geographic region
 Process Focused Plant: Segments of production

process are assigned to separate plants (e.g.,
feeder plants -> assembly plants)
 General Purpose Plant (Wide variety, low-volume

plant;with no focus; strive for economies of scope)
Physical Network
Global Location Factors
 Government stability  Number and proximity of

 Government regulations suppliers
 Political & economic systems  Transportation & distribution
 Economic stability & growth system
 Exchange rates  Labor cost & education
 Culture  Available technology
 Climate  Commercial travel
 Export import regulations  Technical expertise
 Duties & tariffs  Cross-border trade regulations
 Raw material availability  Group trade agreements
 Intellectual property rights (IPR)
Physical Network
Global Location Factors (cont’d)
 Labor (availability,  Incentive packages

education, cost & unions)  Governmental regulations
 Proximity of customers  Environmental regulations
 Number of customers  Raw material availability
 Construction/leasing costs  Commercial travel
 Land costs  Climate
 Modes and quality of  Infrastructure
transportation  Quality of life
 Transportation costs
Physical Network
Site Location Factors
 Customer base  Zoning restrictions
 Construction/leasing  Traffic
cost  Safety/security
 Land cost  Competition
 Site size  Area business
 Transportation climate
 Utilities  Income level
Location Incentives:
Tax credits, Relaxed government regulation, Job training,
Infrastructure improvement, etc.
Physical Network
How much capacity to install?
Bureaucracy
Non-value added
activities
Strategic inertia, etc.
Econ. of scale Diseconomies of scale
Economies of scale: plants of the right size, to ensure

globally competitive costs + agility & responsiveness
Avoiding diseconomies of scale
Physical Network
Economies of Scope
 Should be systematically applied, especially
for market-focus plants
 Rooted in group technology principles
 Flexible technology that can produce a
variety of parts on the same setup
 Flexible, cross-trained staff, etc.
Physical Network
Six Types of Foreign Factories

High Lead
Site Competence
Source Contributor
Low Off-shore Outpost Server
Low Cost Access to Skills & Proximity to

Production Knowledge Market
Primary Reason for the Factory

Physical Network
Source: Ferdows (1998)
Logistics Postponement
Avoiding excessive decentralization, and storing
finished goods at a more limited number of
locations in anticipation of customer orders.
Logistics postponement encompasses:
Place postponement and Time postponement:
shipping products to order
Also known as “Warehouse Risk Pooling”:
Consolidating inventories reduces inventories +
reduces stock-outs (improves one aspect of
service level). Other effects (like transportation
costs) should also be considered.
Physical Network
Physical Distribution System:

Pros of decentralized system
Warehouse 1
Central Warehouse 2
Plant Plant
Warehouse Warehouse 3
Centralized System
Warehouse n
Decentralized System
 higher service level
 closer to customer
 local presence may stimulate sales
 better market information
Physical Network
Cons of Decentralized Structure
 Inventories increase
cycle stock increases (Square Root Law of
Distribution): inventory level is
proportional to  (no. of warehouses). So,
in a 4-warehouse system, inventories are
double that of a centralized system.
safety stocks are also higher due to
spreading the inventory, and increase in
stock-out probability
 Higher overheads, administrative expenses
 Need for better coordination and control
Physical Network
Physical Network:
Compress Overall Lead Times
 Reduce Product Development, Procurement,
Production & shipment lead times
 Maximize concurrency in and among:
product development
sourcing (procurement)
production
shipments and delivery to retailers
In summary, the total physical network
should support overall SC strategy of:
< low cost / responsiveness / .. >
Physical Network
Key Advantage for Asian & Middle
Eastern Countries: Exchange Rate
Differential with US$
 The yuan is kept pegged to the US $

 Kept undervalued by about 40%? Makes
Chinese exports very cheap
 Other Asian currencies, such as Indian
Rupee are free-floating currencies,
trading at around Rs. 60-62 to one US $
Physical Network
Global Supply Chains:

(e.g.) China - US Supply Chain
constant exchange
rate with $
China USA
Low labor costs Low prices for consumers

Tax incentives High standard of living, etc.
Constant exchange rates but
“Cooperative” labor sector
Contract-based management Loss of jobs
Single party machinery Erosion of manufacturing base
Good infrastructure Loss of technology base
FDI-friendly business climate Mounting
Physicaldeficit
Network
V. Design of Supply Chain
Networks
SC Strategy
Supply Chain Network Design

Maximize Customer Service Level:
Response time
Product variety offered
Product availability
Customer experience
Order visibility
Returnability
Minimize Costs to Provide Service:
Inventories
Transportation
Facilities and handling
Information Systems
Network Optimization Models
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC
Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
Network Optimization Models
Allocating demand to production facilities

Locating facilities and allocating capacity
Key Costs:
• Fixed facility cost

• Transportation cost
• Production cost
• Inventory cost
• Coordination cost
Which plants to establish? How to configure the network?

Demand Allocation:
Transportation Model
Which market is served

by which plant?
Which supply sources
are used by a plant?
xij = Quantity shipped from
plant site i to customer j
Demand Allocation via Transportation Model

4
Des Moines (275) Chicago (200)
5 12
7
Omaha (175) Cincinnati (300)
11
11
6 10
Kansas City (150) St. Louis (100)
8
Plant Location with Multiple Sourcing:
Capacitated Location Problem
 yi = 1 if plant is located at
site i, 0 otherwise
 xij = Quantity shipped from
plant site i to customer j
 Dj = Annual demand for
market j, j = 1 to m
 Ki = capacity of plant I
 fi = annual fixed costs
 cij = cost of producing &
shipping one unit from i to j
Example: Sun Oil Corp.

Capacitated Location Problem
Inputs - Costs, Capacities,
Demands
Demand Region
Production and Transportation Cost per
1,000,000 Units Fixed Low Fixed High
Supply N. S. Cost Capaci Cost Capaci

Region America America Europe Asia Africa ($) ty ($) ty
N. America 81 92 101 130 115 6,000 10 9,000 20
S. America 117 77 108 98 100 4,500 10 6,750 20
Europe 102 105 95 119 111 6,500 10 9,750 20
Asia 115 125 90 59 74 4,100 10 6,150 20
Africa 142 100 103 105 71 4,000 10 6,000 20

Demand 12 8 14 16 7
Solver Example Spreadsheet
for Sun Oil Corp Problem
Telecom One & High Optic example

Telecom One & High Optic Example
Demand City
Production & Transportation Cost per 1000 Units Fixed Capa‐
Supply City Atlanta Boston Chicago Denver Omaha Portland Cost ($) city
Baltimore 1,675 400 685 1,630 1,160 2,800 7,650 18
Memphis 380 1,355 543 1,045 665 2,321 4,100 22
Wichita 922 1,646 700 508 311 1,797 2,200 31
Cheyenne 1,460 1,940 970 100 495 1,200 3,500 24
Salt Lake 1,925 2,400 1,425 500 950 800 5,000 27
Demand 10 8 14 6 7 11
Yellow regions are High Optic (west coast)

& the others are Telecom One (east coast)
Separate Optimum Solutions

Demand City
Production & Transportation Cost per 1000 Units
Supply City Atlanta Boston Chicago Denver Omaha Portland
Baltimore 0 8 2
Memphis 10 0 12
Wichita 0 0 0
Salt Lake 0 0 11
Cheyenne 6 7 0
Costs for Telecom One = 28, 836, 000

Costs for High Optic = 21, 365, 000
Total for both firms = 50, 201, 000
See separate solver solutions for each firm
If both firms merged, total costs
will only be $ 47,401,000
= a savings of about $3 million /
month, as shown in the combined
Excel solver
Plant Location with Single Sourcing

yi = 1 if plant is located
at site i, 0 otherwise
xij = 1 if market j is
supplied by factory i, 0
otherwise
Plant Location with Multiple Sourcing:
yi = 1 if plant is located

at site i, 0 otherwise
xij = Quantity shipped
from plant site i to
customer j
Dj= Annual demand for
market j, j = 1 to m
Ki = capacity of plant i
Sportstuff.com example
BioPharma example
Case: SportStuff.com
(Adapted from: Chopra & Meindl, 2003)

In December 2000, Sanjay Gupta and his management team were busy evaluating the
performance at SportStuff.com over the last year. Demand had grown by 80 percent over the
year. The venture capita lists supporting the company were very pleased with the growth in
sales and revenue. Sanjay and his team, however, could clearly see that costs would grow
faster than revenues if demand continued to grow and the supply chain network was not
redesigned. The y decided to analyze the performance of the current network in order to
redesign for the rapid growth anticipated for next three years.
SPORTSTUFF.COM
Sanjay Gupta founded SportStuff.com in 1996 with a mission of supplying parents with more
affordable sports equipment for their children. Parents complained about having to discard
expensive skates, skis, jackets, and shoes because children outgrew them rapidly. Sanjay's
initial plan was for the company to purchase used equipment and jackets from families and
any surplus equipment from manufacturers and retailers and sell these over the Internet. The
idea was very well received in the marketplace, demand grew rapidly, and by the end of 1996
the company had sales of $0.8 million. By this time a variety of new and used products were
sold and the company received significant venture capital support.
In June 1996, Sanjay leased part of a ware house in the outskirts of St. Louis to
manage the large amount of product being sold. Suppliers sent their product to the
warehouse. Customer orders were packed and shipped by UPS from there. As demand grew,
SportStuff.com leased more space within the warehouse. By 1999, SportStuff.com leased the
entire warehouse and orders were shipped to customers all over the United States.
Management divided the United States into six customer zones for planning purposes.
Demand from each customer zone in 1999 was as shown in Table 1. Sanjay estimated that the
next three years would see a growth rate of about 80 percent per year, after which demand
would level off.
Table 1. Regional Demand in 1999

Zone Demand in 1999 Zone Demand in 1999
Northwest 320,000 Lower Midwest 220,000
Southwest 200,000 Northeast 350,000
Upper Midwest 160,000 Southeast 175,000
THE NETWORK OPTIONS

Sanjay and his management team could see that they needed more warehouse space to cope
with the anticipated growth. One option was to lease more warehouse space in St. Louis
itself. Other options included leasing warehouses all over the country. Leasing a warehouse
involved fixed costs based on the size of the warehouse and variable costs that varied with the
quantity shipped through the warehouse. Four potential locations for warehouses were
identified in Denver, Seattle, Atlanta, and Philadelphia. Warehouses leased could be either
small (about 100,000 sq. ft.) or large (200,000 sq. ft.). Small warehouses could handle a flow
of up to 2 million units per year whereas large warehouses could handle a flow of up to 4
million units per year. The current warehouse in St. Louis was small. The fixed and variable
costs of small and large warehouses in different locations are shown in Table 2.
Sanjay estimated that the inventory holding costs at a warehouse (excluding
warehouse expense) was about $600 √ F , where F is the number of units flowing through the
warehouse per year. Thus, a warehouse handling 1,000,000 units per year incurred an
inventory holding cost of $600,000 in the course of the year.
Table 2 . Fixed and Variable Costs

Zone Small Warehouse Large Warehouse
Location Fixed Cost Variable Cost Fixed Cost Variable Cost
Seattle $300,000 / year $ 0.20 /unit $500,000 / year $ 0.20 /unit
Denver $250,000 / year $ 0.20 /unit $420,000 / year $ 0.20 /unit
St. Louis $220,000 / year $ 0.20 /unit $375,000 / year $ 0.20 /unit
Atlanta $220,000 / year $ 0.20 /unit $375,000 / year $ 0.20 /unit
Philadelphia $240,000 / year $ 0.20 /unit $400,000 / year $ 0.20 /unit
Table 3. UPS Charges per shipment of four units
Location North- South- Upper Lower North - South -

west west Midwest Midwest east east
Seattle $ 2.00 $ 2.50 $ 3.50 $ 4.00 $ 5.00 $ 5.50
Denver $ 2.50 $ 2.50 $ 2.50 $ 3.00 $ 4.00 $ 4.50
St. Louis $ 3.50 $ 3.50 $ 2.50 $ 2.50 $ 3.00 $ 3.50
Atlanta $ 4.00 $ 4.00 $ 3.00 $ 2.50 $ 3.00 $ 2.50
Philadelphia $ 4.50 $ 5.00 $ 3.00 $ 3.50 $ 2.50 $ 4.00
SportStuff.com charged a flat fee of $3 per shipment sent to a customer. An average

customer order contained four units. SportStuff.com in turn contracted with UPS to handle all
its outbound shipments. UPS charges were based on both the origin and the destination of the
shipment and are shown in Table 3. Management estimated that inbound transportation costs
for shipments from suppliers were likely to remain unchanged, no matter what the warehouse
configuration selected.
Questions
1. What cost does SportStuff.com incur if all warehouses leased are in St. Louis ?
2. What SC network configuration do you recommend for SportStuff.com ?
,,"';.,.
CASE
~
STUDY
--
BIOPHARMA,INC. 1
In 2005, Phillip (Phil) Landgraf faced several glaring of production, can be assigned to either chemical as long
problems in the financial performance of his company, as the plant is capable of producing both. BioPharma
BioPharma, Inc. The firm had experienced a steep decline has forecast that its sales for the two chemicals are likely
in profits and very high costs at its plants in Germany and to be stable for all parts of the world, except for Asia
Japan. Landgraf, the company's president for worldwide without Japan, where sales are expected to grow by 10
operations, knew that demand for the company's prod percent annually for each of the next five years before
ucts was stable across the globe. As a result, the surplus stabilizing.
capacity in his global production network looked like a The Japanese plant is a technology leader within the
luxury he could no longer afford. BioPharma network in terms of its ability to handle regu
Any improvement in financial performance was latory and environmental issues. Some developments in
dependent on having the most efficient network in place, the Japanese plant had been transferred to other plants in
because revenues were unlikely to grow. Cutting costs the network. The German plant is a leader in terms of its
was thus a top priority for the coming year. To help design production ability. The plant has routinely had the highest
a more cost-effective network, Landgraf assigned a task yields within the global network. The Brazilian, Indian,
force to recommend a course of action. and Mexican plants have somewhat outdated technology
and are in need of an update.
BACKGROUND
BioPharma, Inc., is a global manufacturer of bulk chemi CURRENT PLANT COSTS
cals used in the pharmaceutical industry. The company AT BIOPHARMA
holds patents on two chemicals that are called Highcal After considerable debate, the task force identified the
and Relax internally. These bulk chemicals are used inter cost structure at each plant in 2005 as shown in Table
nally by the company's pharmaceutical division, and are 6-20. Each plant incurs an annual fixed cost that is inde
also sold to other drug manufacturers. There are distinc pendent of the level of production in the plant. The fixed
tions in the precise chemical specifications to be met in cost includes depreciation, utilities, and the salaries and
different parts of the world. All plants, however, are cur fringe benefits of employees involved in general manage
rently set up to be able to produce both chemicals for any ment, scheduling, expediting, accounting, maintenance,
part of the world. and so forth. Each plant that is capable of producing
For 2005, sales of each product by region and the pro either Highcal or Relax also incurs a product-related
duction and capacity at each plant are shown in Table 6-19. fixed cost that is independent of the quantity of each
The plant capacity, measured in millions of kilograms chemical produced. The product-related fixed cost includes
Highcal Relax
2005 2005 2005 2005
Region Plant Capacity Sales Production Sales Production
Latin America Brazil 18.0 7.0 11.0 7.0 7.0
Europe Germany 45.0 15.0 15.0 12.0 0.0
Asia w/o Japan India 18.0 5.0 10.0 3.0 8.0
Japan Japan 10.0 7.0 2.0 8.0 0.0
Mexico Mexico 30.0 3.0 12.0 3.0 18.0
U.S. U.S. 22:0 18.0 5.0 17.0 17.0
IThis case was inspired by Applichem (Aj, Harvard Business School Case 9-685-051, 1985.
Plant
Plant
Fixed Cost
(million $)
Highcal
Fixed Cost
(million $)
Relax
Fixed Cost
(million $)
Raw Material
($/kg)
Highcal
Production
cost ($/kg)
Raw Material
($/kg)
Relax
Production
cost ($/kg)
-
Brazil 20.0 5.0 5.0 3.6 5.1 4.6 6.6
Germany 45.0 13.0 14.0 3.9 7.0 5.0 8.5
India 18.0 4.0 4.0 3.6 4.5 4.5 6.0
Japan 17.0 6.0 6.0 3.9 7.5 5.1 9.0
Mexico 30.0 6.0 6.0 3.6 5.0 4.6 6.5
u.s. 21.0 5.0 5.0 3.6 5.0 4.5 6.5
depreciation of equipment specific to a chemical and BioPharma transports the chemicals in specialized
other fixed costs mentioned that are specific to a chemi containers by sea and in specialized trucks on land. The
cal. If a plant maintains the capability to produce a partic transportation costs between plants and markets are as
ular chemical, it incurs the corresponding product-related shown in Table 6-21. Historical exchange rates are shown
fixed cost even if the chemical is not produced at the in Table 6-22 and the regional import duties in Table 6-23.
plant. Given regional trade alliances, import duties in reality
The variable production cost of each chemical con vary based on the origin of the chemical. For simplicity's
sists of two components: raw materials and production sake, however, the task force has assumed that the duties
costs. The variable production cost is incurred in propor are driven only by the destination. Local production
tion to the quantity of chemical produced and includes within each region is assumed to result in no import duty.
direct labor and scrap. The plants themselves can handle Thus, production from Brazil, Germany, and India can be
varying levels of production. In fact, they can also be sent to Latin America, Europe, and the rest of Asia with
idled for the year, in which case they incur only the fixed out Japan, respectively, without incurring any import
cost, none of the variable cost. duties. Duties apply only to the raw material, production,
Latin Asia w/o

From/To America Europe Japan Japan Mexico U.S.
Brazil 0.20 0.45 0.50 0.50 0.40 0.45
Germany 0.45 0.20 0.35 0.40 0.30 0.30
India 0.50 0.35 0.20 0.30 0.50 0.45
Japan 0.50 0.40 0.30 0.10 0.45 0.45
Mexico 0.40 0.30 0.50 0.45 0.20 0.25
U.S. 0.45 0.30 0.45 0.45 0.25 0.20
Brazilian Indian Japanese Mexican U.S.

Real Euro Rupee Yen Peso Dollar
2005 2.70 0.74 43.47 103.11 11.21 1.00
2004 2.90 0.80 45.60 107.00 11.22 1.00
2003 3.50 0.96 48.00 119.25 10.38 1.00
2002 2.30 1.11 48.27 131.76 9.12 1.00
2001 1.95 1.06 46.75 114.73 9.72 1.00
2000 1.81 0.99 43.55 102.33 9.48 1.00
VI. Supply Chain Game
SC Strategy
A Supply Chain Simulation

Game
 Nallan C. Suresh
1
Retailer
Game Setup 1
Factory DC Retailer
WO PO PO 2
Retailer
3
Transit Transit
Area Area Transit
Area Instructor
generates
daily
demand
Row 6 Row 5 Row 4 Row 3 Row 2 Row 1
WO = Work Order; PO = Purchase Order
We play a traditional, un-coordinated supply chain: no one talks to each

other: interactions entirely thru document and chip transfers
Step 1: Instructor Announces New day: Retailer

Material Inflow & Stock Update 1
Day 23!
PO
PO
PO
Factory DC Retailer
WO PO 2
Retailer
3
Factory, DC & Retailers: Move chips from Upstream into Stock

Note down Inflow and Available Beg. Inventory in the Form
(Factory: collect chips from Coordinator and place into upstream
transit, based on earlier Work Order)
2
Step 2: Meet Today’s Demand Retailer
1
PO
PO
PO
Factory DC Retailer
PO 2
Retailer
3
Factory & DC: Demand = All Pending Purchase Orders : move chips to
downstream transit area; Discard fulfilled POs; keep unfulfilled POs as
Backorders (partial shipments also possible)
Retailers: Demand = Random number generated by Instructor; hand over chips to
instructor; unfulfilled demand = lost sales
Everyone: Update Shipments / Demand, Endg. Inventory & Backorder / Lost sale,
if any, on the Form
Step 3: Check Endg. Inventory &

Place New Purchase/Work Orders, Retailer
if Needed 1
PO
PO
PO
Factory DC Retailer
WO PO 2
Retailer
3
Check your Ending Inventory and qty on order (pipeline)

Place new PO/WO, if needed, and place it before upstream firm;
note down this quantity in the last column of the Form
Note: Upstream firm acts on it next day as Step 2 (and you might
receive material day after: Lead time >= 2 days).
3
Summary of Simultaneous Daily Steps for Each Player
Retailers
Step 1: Move chips from Upstream pipeline into Stock (the DC would have placed the chips in
the pipeline the previous day). Note down Inflow and Beg. Available stock in form.
Step 2: Meet demand generated by Instructor: Move chips from Stock one step downstream.
If Beg. Available stock is not enough, it leads to lost sale (no backorder for Retailer)
Step 3: Place PO on DC, if necessary, based on ending & pipeline stock. The DC will act on this
the next day (do not hand this to DC; just place this before DC in a FIFO stack)
DC
Step 1: Move chips from Upstream pipeline into Stock (Factory would have placed the chips in
pipeline the previous day). Note down Inflow and Beg. Available stock.
Step 2: Meet Retailer demands: move chips for all the pending POs, placed by the retailers on
prior day(s). DC does not look at / talk to Retailers. It merely acts on the POs.
Step 3: Place order on Factory, if necessary, based on ending & pipeline stock. Factory will look
at it next day.
Factory
Step 1: Move chips from Upstream pipeline into Stock. Note down Inflow into Stock and Beg.
Available stock. Also move chips from Recycle Bin into pipeline based on Work Order
placed by itself the previous day. Throw away this WO.
Step 2: Meet DC demand: Move chips from Stock downstream, for POs placed by DC on prior
days
Step 3: Place a self- Work Order, if necessary, based on ending stock. The Factory will act on
this the next day.
Retailer Daily Operation

PO to DC
Retailer Demand = 12 1. Move chips from upstream pipeline into
15 Stock. Note Inflow & update Avail. Stock
2. Check & enter today’s demand. Move
Chips Chips demand fulfilled chips to Recycle bin.
Note Endg. Inventory & stock-out
upstream = 5 downstream = 12
3. Place Purchase Order on DC if you want,
and place it on central pile before DC
Retailer Form
Day inflow Avail. Today’s Endg. Stock- Order
Stock Demand Invent. out Placed
7 10 0
8 5 15 12 3 0 15
Stock-out = lost sales; cannot be carried over

Endg. Inventory & stock-out: one of them will be zero
4
R-PO-3 R-PO-1 DC Operation
PO to Fac
10 (bo) 1. Move chips from upstream. Note Inflow and
60 15 update Available Stock
R-PO-2 2. Check Demand: all POs from Retailers!
DC
20 Allocate & ship, on a FIFO basis, move chips
to pipeline before each retailer
Chips Update Endg. Inventory & back orders
Chips to downstream
upstream = 40 3. Place Purchase Order, if necessary, on the
= 10, 15, 15
factory
DC Form
Day Inflow Avail. Total Endg. Back Order
Stock Shipped Invent. Ordered Placed
7 0 10
8 40 40 40 0 5 60
Back orders are not lost sales; can be carried over FIFO Shipments: 10 to meet
store 3 PO (backorder), 15 for
Endg. Inventory & back orders: one of them will be zero
store 1 PO, and a partial 15
for store 2 PO
DCPO Factory Operation

10 (bo) DCPO 1. Find any factory work order? If yes, move
chips from Recycle bin into stock & note
FWO 50 Inflow & Avail. Stock
80 2. Check Demand: all POs from DC . Allocate &

Factory move chips, on a FIFO basis. Update Endg.
Inventory & backorders
FWO Chips to 3. Place Factory Work Order (FWO) on left
downstream= 40
40
Factory Form
Day Inflow Avail. Shipped Endg. Back Order
Stock Invent. Ordered Placed
7 0 10
8 40 40 40 0 20 80
Back orders are not lost sales; can be carried over FIFO Shipments: 10 to
Endg. Inventory & back orders: one of them will be zero meet earlier PO, 30
towards current demand
5
• Participants will be divided into 2 or 3 such supply
chains (SCs)
• Each SC has 5 firms (three retailers, one DC, one factory;

each firm can be operated by one or two players).
• One SC will play the role of a “benchmark SC”. See game

parameters for benchmark SC in next slide.
• The instructor may change the parameters for other SCs:

one SC may have half the demand volatility (instructor
will generate different random demands for this SC);
Another SC may have different inventory holding /
shortage cost, etc. with respect to benchmark SC
• The Game is played for 35 days, and the data is entered

into the Game spreadsheet and analyzed later
Game Parameters for Benchmark SC

Factory DC Retailers
Backorders + Backorders + Uniform random

Demand =
Pending POs Pending POs (0 to 12) or (3 to 9)
Unfulfilled Carried over as Carried over as = lost sales;

Demand backorders backorders can’t carry over
Cost of
$ 2 / unit $ 2 / unit $ 5 / unit
Unfulfilled
backorder cost backorder cost Lost sales
Demand
Order (Setup)
$100 / WO $ 25 / PO $ 25 / PO
Cost
No Min / Max. No Min / Max

25 to 100
Order Quantity Order Qty Order Qty
(multiples of 5)
(multiples of 5) (multiples of 5)
Inventory Holding
$1 /unit/ day $1.50 /unit/ day $2.00 /unit/ day
Cost
Beg. Inventory 75 50 25
6
• Analyze & compare the results of all SCs with
respect to benchmark SC.
• Discuss:
– Bullwhip effects & cost characteristics in all SCs
– How can end-customer service be improved?
– How can overall supply chain costs be lowered?
• Work out a new SC coordination / information
sharing strategy and play the game again, if
time permits. This time, feel free to talk,
exchange info, maintain visibility upstream &
downstream & collaborate (but not collude).
• Was there any:
– Improvement in end-customer service level?
– Reduction in overall supply chain costs?
7
VII. Collaborative Forecasting &
Inventory Management
SC Strategy
Importance of Forecasting
Affects all upstream decisions in the supply chain
Forecast errors are expensive:
Overestimation of demand =>
markdowns, excess commitment of resources,
inventories of unwanted items, discounted sales
Underestimation of demand =>
stock-outs, opportunity costs: lost sales, goodwill,
image, market share, loss of revenue now & future
Forecasting provides extra lead time to:
 React to new situations: Less surprises
 Make optimal and proactive decisions
Collaborative Forecasting & Operations

Traditional: Firm-level, Independent
Forecasting & Operations Planning
Firm Firm
APP Forecasts APP Forecasts
MRP Orders MRP Orders
Purchasing Production Purchasing Production
Traditional Forecasting Methods

Management judgment, expert
Qualitative opinion, sales force composites,
Delphi, Astrology & other methods
Time Series:
X-axis = Time
•Simple and Wtd. Moving Average
•Exponential Smoothing
•Exp. Smoothing Adjusted for Trend
•Trend-Seasonality Regression
Quantitative •Other models
Causal Regression
Indep. variables = causal variables
Forecasting in Supply Chain Era
Inter-organizational & collaborative:

-Involvement of distributors in forecasting
-updating forecasts with initial orders
-early information sharing with suppliers,
etc.
Advances in IT
Point of sale (POS) scanner technologies,
Information sharing technology among firms,
common demand data bases, Extranets, etc.
=> Greater visibility upstream & downstream !
Garment Industry:
Quick Response Movement
 Variety: garment, gender, type, style, color, size =>
numerous SKUs !
 Intrinsic nature of the fashion industry
 Long product development lead time: accuracy of
forecasts greater when closer to the selling season
 More intense competition, etc.
Forecasting problems !
Have to commit production a year ahead

Long, globally extended supply chains
Quick-response initiative was developed

New Use of Forecasting Committees
 Each member of the buying committee makes

independent forecast
 Items with less variance among members => more
accurate forecasts (predictable items)
 Items with high variance among members =>
unpredictable items
 Disagreement preserved; Consensus not enforced
Capacity Postponement
Partition production capacity into:
 Non-reactive capacity: used for:
items with more accurate forecasts
initial, minimum amounts of unpredictable items
 Reactive capacity: used for:
unpredictable styles
second runs of production based on unfolding demand
 Update initial forecasts with early demand

information using POS technology
 More costly styles carry greater risk: reactive
capacity greatly reduces costs
Reconfiguration of Global
Manufacturing & Supply Chains
Non-Reactive Reactive Capacity Global

Capacity Systems Systems Markets
More stable production Flexible & agile systems for

configurations for items with high demand
generic items: items uncertainty; Responsiveness,
with stable, customization, economies of
consolidated demand, scope logic; Based on
plus minimum runs of analysis of SKU-product-
items with high process matrix, & demand
uncertainty uncertainty.
Exploit Demand Aggregation Principle

Product line forecasts more accurate than SKU
forecasts
Annual forecasts more accurate than weekly
forecasts
Central DC forecasts more accurate than local retail
outlets’ forecasts…. Why?
Top-down Bottom-up
$ forecast Final
$
Forecas
Product Line t
A B C forecast
Items / SKUs SKU-level Sales reps’

forecast adjustments
Why do Forecasts Always Seem to be Wrong?
Demand < q, Forecast Provided
Loss from unsold inventory by Marketing
Cost of over-stocking = c-s
Expected Demand q
Demand > q
Shortage, loss of revenue
Capacity commitments &
Cost of under-stocking = p-c
backup options to ensure
>50% service level
Setting Production/Order Quantity:

The Newsvendor Problem
Demand > q; Can sell only q
Demand <= q; Can sell only d
Cost of under-stocking
Cost of over-stocking = CFR (c-s)
= (1-CFR) (p-c)
CFR
Exp.
Demand
q*
Balancing the two costs => CFR (c-s) = (1-CFR) (p-c)

1. Compute: CFR = [ (p - c) / ( p - s) ]
2. Compute: q* = NORMINV (CFR, Exp. Demand, Std. Dev.)

Collaborative Planning, Forecasting
and Replenishment (CPFR) Systems
 Initiated by Voluntary Inter-industry Commerce
Standards (VICS) Association: www.vics.org
 Mission: to create collaborative relationships
between buyers & sellers through co-managed
processes and shared information.
 Partners share plans for future events.
 Working on issues before they occur, partners have
time to react: suppliers can build inventory in
advance of promotional orders and carry less safety
stock at other times, etc.
CPFR: The Precursors

 QR pioneered in textile and garment industry:
Kurt Salmon Associates
 Efficient Consumer Response (ECR) pioneered
by Wal-Mart
 Category Management (CM)
 Vendor Managed Inventory (VMI)
 CPFR is now viewed as second generation ECR
(Details on CPFR taken from: Seifert, 2004; and www.cpfr.org)

Wal-Mart-Warner Lambert Pilot
 Both independently forecasted demand, six months
in advance; the forecasts were by store, week, SKU
 The forecasts were shared and discrepancies
resolved; shared on paper at first, and later by
electronic exchange of spreadsheets
 Before: Wal-Mart placed orders 9 days in advance;
 After pilot: Wal-Mart placed orders 6 weeks in
advance, to match Lambert's 6-week lead time.
 Warner-Lambert: became a make-to-order situation,
with big reduction in finished goods inventories
 Wal-Mart: in-stock position went up from 85% to 98%;
sales increased by $8.5 million; inventories reduced
25% Collaborative Forecasting & Operations
CPFR – Process Overview

1. Develop Front-End Agreement
2. Create Joint Business Plan
3. Create Sales Forecast
4. Identify Exceptions to Sales Forecast
5. Resolve / Collaborate on Exception
Items
6. Create Order Forecast
7. Identify Exceptions to Order Forecast
8. Resolve / Collaborate on Exception
Items
9. Order Generation
CPFR: I see it this way…
APICS Terminology
Demand Time Fence Planning Time Fence
Orders Firm Planned Orders

Forecasts/ Planned
Orders Orders
Order
Firm Orders Sales Forecasts
Forecasts
CPFR Terminology
Frozen Slushy Fluid

Now
Time - >

The CPFR Roadmap

Evaluate Current State
 Where does your company stand today?
Does your company have a culture that values
cooperation and communication between its
departments and with its trading partners?
Has your company implemented industry best
practices?
Is using IT to solve business challenges a company
priority?
 Develop Your Company’s CPFR Vision
 Are Your Trading Partners Ready for CPFR?
 Develop a Business Case to take to Partners
Check list: Your Partners Ready for CPFR?
 Can your trading partner relationships be
characterized as open and trusting?
 Do you and your trading partner have
complementary strengths and weaknesses?
 Does your trading partner have the appropriate
commitment and resources required to make
CPFR successful?
 Does your trading partner have experience with
CPFR with another partner?
 Can your trading partner quantify the potential
internal and external benefits?
Collaborative Inventory Management:

Value Stream View
COGS
Suppliers
Parts Production Assembly
WIP
RM FP FG
Bought-out parts
RM = Raw Materials
WIP = Work In Process (Semi-finished Parts)
FP = Finished Parts (this is also WIP)
FG = Finished Goods
Targets for Inventory Turnover Ratio =

Cost of Goods Sold / Avg. Total Inventory
Inventory Targets In The Supply Chain
Supplier Customer
Retailer
Supplier Customer
Root Cause Analysis:

(e.g.) Raw Materials
 Finite lead times; Erratic lead times

 Far-away suppliers
 More economical to order in large
batches => creates inventory
 Supply-side uncertainties
 Volume discounts => inventories
 Speculative purchases: when prices are
going up, potential supply problems, etc.

Types of Materials
DIRECT MATERIALS INDIRECT

MATERIALS
Final assemblies peripheral items
Independent
Sub-assemblies Demand
Components (finished parts)
Semi-finished parts
Raw materials Dependent
Demand
Right Techniques To Use
Independent Demand Dependent Demand

Fixed Order Quantity Models
Fixed Order Period Models MRP
ABC (Pareto or 80-20) Analysis

Just-In-Time (Lean) Systems
ABC (Pareto) Analysis
In any system, a few items contribute

the most: vital few & trivial majority:
“80-20 Rule”
80%
20%
Value
Items
80% 20%
FIXED QUANTITY MODELS:

Reorder Point & Safety Stock
EOQ= SQRT (2DS/C)

or through other models
Q
R
LT * Demand rate
SS
Z  DDLT
LT
0
R = Re-order Point; SS= Safety stock

Q = order quantity; LT = Lead Collaborative
Time Forecasting & Operations
FIXED QUANTITY MODELS:
Reorder Point & safety Stock
Expected Demand Reorder Point
During LT
SS
Q DDLT R
R R = DDLT +SS
SS
LT
0
R = Re-order Point; SS= Safety stock
Q = order quantity; LT = Lead Time
FIXED PERIOD MODELS

Order quantity varies
max
Avg. Cycle Stock =

Q’ Demand Rate *
Re-order Period /2
min
SS
Safety Stock = Z *  during (Re-order period + Lead time)
Review Period
Continuous Replenishment Systems (CRP)
 Pioneered by Proctor & Gamble; May be

implemented with VMI
 IBM: solution provider for CRP service: EDI
connections, software, training, data processing
and automated replenishment orders
 P&G’s customer service reps use CRP to monitor
movement of materials at retailers’ DCs
 Every day replenishments handled by the
software
 More forecasting accuracy at DC level
Distribution Requirements Planning (DRP)
 DRP applies MRP logic to distribution

inventories.
 Integrates <distribution systems> with
<Production Planning & Control>.
 Helps maintain inventories in warehouses
by improving links between market and
manufacturing activities.
 DRP can yield significant logistics savings
thru improved transportation & delivery
Positioning the Inventories &
Exploiting the Square Root Law
Warehouse 1
Warehouse 2
Plant
Warehouse 3
Warehouse n
 higher service level
 closer to customer
 local presence may stimulate sales
 better market information
Cons of decentralized structure

 Inventories increase !
cycle stock increases by square root law i.e.,
inventory level is proportional to the square
root of the number of warehouses (n); e.g.,
in a 4-warehouse system, inventories are
double that of a centralized system
safety stocks are also higher due to spreading
the inventory, and increase in stock-out
probability
 Higher overheads, administrative expenses
 Need for better coordination and control
ERPs: Still Constrained by Single-firm Perspective
RM Parts Production FP
Assembly
WIP
FG
Bought-out Parts
Suppliers Customers
Demand
Management
Purchasing ERP MPS <= APP
Bullwhip Effect:
Increasing demand variability as we go upstream
Supplier Customer
Customer
Supplier Firm
Distributor Customer
Causes inefficiencies: excess inventory, poor service, lost customers

and revenues, disruptive capacity plans, production schedules, and
ineffective transportation, etc,
Countering Bullwhip Effects
 Information sharing, channel alignment

 Avoid multiple demand forecasts: enhance
visibility and information sharing
 Decrease order batch sizes in production and
transportation; more possibilities to do this
now
 Stabilize prices: every-day-low-price (EDLP)
 Reduce gaming & speculation through
transparency
Inter-organizational Production Planning

Advanced Planning Systems (APS)
 Demand Planning – Sophisticated forecasting to

analyze customer buying patterns
 Supply Planning – Synchronizes operations of
manufacturers, suppliers, and logistics service
providers through information exchange.
 Demand fulfillment –more accurate estimates of
order fulfillment dates; order promise, backlog
management, and order fulfillment
 Based on greater extranet visibility upstream
and downstream and newer optimization tools.

Case: Managing Inventories at ALKO
(Adapted from Chopra & Meindl, 2003)
ALKO started in 1943 in a garage workshop set up by John Williams at his Cleveland home.
John had always enjoyed tinkering and in February 1948, he obtained a patent for one of his
designs for fighting fixtures. He decided to produce it in his workshop and tried marketing it
in the Cleveland area. The product sold well and by 1957 ALKO had grown to a $3 million
company. Its lighting fixtures were well known for their outstanding quality. By then, it sold
a total of five products.
In 1963 John took the company public. Since then ALKO has been very successful
and the company has started distributing its products nationwide. As competition intensified
in the 1980s, ALKO started introducing many new lighting fixture designs. The company's
profitability, however, started to worsen despite the fact that ALKO had taken great care to
ensure that product quality did not suffer. The problem was that margins started to shrink as
competition in the market intensified. At this point the board decided that a complete
reorganization was needed, starting at the top. Gary Fisher was then hired to reorganize and
restructure the company.
When Fisher arrived in 1999, he found a company teetering on the e dge. He spent the
first few months trying to understand the company business and the way it was structured.
Fisher realized that the key was in the operating performance. Although the company had
always been outstanding at developing and producing new products, they had historically
ignored their distribution system. The feeling within the company was that once you make a
good product, the rest takes care of itself. Fisher set up a task force to review the company's
cur-rent distribution system and come up with recommendations.
THE CURRENT DISTRIBUTION SYSTEM

The task force noted that ALKO had 100 products in its 1999 line. All production occurred at
three facilities located in the Cleveland area. For sales purposes, the continental United States
was divided into five regions, as shown in the Figure below. A DC owned by ALKO operated
in each of these regions. Customers placed orders with the DCs, which tried to supply them
from product in inventory. As the inventory for any product diminished, the DC in turn
ordered from the plants. The plants scheduled production based on DC orders. Orders were
trans- ported from plants to the DCs in TL quantities because order sizes tended to be large.
On the other hand, shipments from the DC to the customer were LTL. ALKO used a third-
party trucking company for both transportation legs. In 1999 TL costs from the plants to DCs
averaged $0.09 per unit. LTL shipping costs from a DC to a customer averaged $0.10 per
unit. On average, five days were necessary between the time a DC placed an order with a
plant and the time the order was delivered from the plant.
The policy in 1999 was to stock each item in every DC. A detailed study of the
product line had shown that there were three basic categories of products in terms of the
volume of sales. They were categorized as types High, Medium, and Low. Demand data for a
representative product in each category is shown in Table 1. Products 1, 3, and 7 are
representative of High, Medium, and Low products, respectively. Of the 100 products that
ALKO sold, 10 were of type High, 20 of type Medium, and 70 of type Low. Each of their
demands was identical to those of the representative products 1, 3, and 7, respectively.
The task force identified that plant capacities allowed any reasonable order to be
produced in one day. Thus, a plant shipped out an order one day after receiving it. After
another four days in transit, the order reached the DC. The DCs ordered using a periodic
review policy with a reorder interval of six days. The holding cost incurred was $0.15 per
unit per day whether the unit was in transit or in storage. All DCs carried safety inventories to
ensure a CSL of 95 percent.
Region 1 Region 2 Region 3 Region 4 Region 5

Part 1 Mean 35.48 22.61 17.66 11.81 3.36
Part 1 SD 6.98 6.48 5.26 3.48 4.49
Part 3 Mean 2.48 4.15 6.15 6.16 7.49
Part 3 SD 3.16 6.20 6.39 6.76 3.56
Part 7 Mean 0.48 0.73 0.80 1.94 2.54
Part 7 SD 1.98 1.42 2.39 3.76 3.98
ALTERNATIVE DISTRIBUTION SYSTEMS

The task force recommended that ALKO build a national distribution center (NDC) outside
Chicago. The task force recommended that ALKO close its five DCs and move all inventory
to the NDC. Warehouse capacity was measured in terms of the total number of units handled
per year (i.e., the warehouse capacity was given in terms of the demand supplied from the
warehouse). The cost of constructing a warehouse is shown in the Figure below. However,
ALKO expected to recover $50,000 for each warehouse that it closed. The CSL out of the
NDC would continue to be 95 percent.
Given that Chicago is close to Cleveland, inbound transportation cost from the plants
to the NDC would reduce to $0.05 per unit. Given increased average distance, however,
outbound transportation cost to customers from the NDC would increase to $0. 24 per unit.
Other possibilities the task force considered include building a national distribution
center while keeping the regional DCs open. In this case, some products would be stocked at
the regional DCs while others would be stocked at the NDC.
FISHER'S DECISION
Gary Fisher pondered the task force report. They had not detailed any of the numbers
supporting their decision. He decided to evaluate the numbers before making his decision.
1600000
1400000
1200000
1000000
$
800000
600000
400000
200000
0
0 200 400 600 800 1000 1200
Units (Thousands)
QUESTIONS
1. What is the annual inventory and distribution cost of the current distribution system?
2. What savings would result from following the task force recommendation and setting
up an NDC? Evaluate the savings as the correlation coefficient of demand in any pair of
regions varies from 0 to 0.5 to 1.0. Do you recommend setting up a NDC?
3. Suggest other options that Fisher should consider. Evaluate each option and
recommend a distribution system for ALKO that would be most profitable. How
dependent is your recommendation on the correlation coefficient of demand across
different regions?
XI. Strategic Sourcing &
E-Procurement
SC Strategy
Two Major Changes

1. Managerial Revolution: Strategic Sourcing
a) Elevation of Purchasing to a strategic
orientation
b) Sourcing strategies that are aligned with the
strategy of firm and supply chain
c) Supply base optimization; supplier relationship
management and selective strategic alliances
d) Early involvement of suppliers in product design
e) Better, cross-functional integration of
Purchasing with other functions.
Strategic Purchasing & E-procurement

Two Major Changes
2. Technological Revolution: E-procurement
a) Use of IT such as EDI, Internet, Intranet,

Extranets
b) Greater efficiency in ordering & transaction
processing, within the firm as well
c) Effective information sharing with others in
supply chain
d) Supports strategic, global sourcing.
Blanket Orders and

Stockless Purchasing
 Blanket orders: long-term purchase
commitment for items that are to be delivered
against short-term shipping requests
 Stockless Purchasing: supplier delivers
material directly to purchaser’s user
department or assembly line, rather than a
central stock room.

Purchasing Evolution
Traditional Purchasing department: maintains
0. User Buy high service level to user departments
Purchasing department does a good job,

1. Leveraged Buy
consolidating volumes internally and externally

2. Linked Buy through good purchase process integration with
key vendors through VMI, extranet connectivity..

through good engineering process integration
3. Value Buy with key vendors, involving them in product-
process design, joint cost reduction, value
analysis, quality improvement, ..
Purchasing: an integral part of the business

4. Integrated Sell through good integration with Marketing &
Sales, as in Category Management.
Supplier Partnerships
Many types of relationships are possible.
Two ends of the spectrum:
Information sharing: helps supplier plan more
efficiently
Consignment scheme: vendor completely owns
and manages the inventory until retailer sells it
(“postponed purchasing”)
Major initiatives: VMI, CRP, QR, CPFR
Elements of Strategic Sourcing
 Strategic segmentation
 Analyze the sourcing process i.e., sourcing
value chain for each category
 Based on total cost of ownership (TCO)
approach
 Develop sourcing strategy for each group
based on TCO and aligned with supply
chain goals
Total Cost of Ownership:

Based on the Big Picture
Purchase
Price
Reduce
purchase cost
Transportation Warehousing
Reduce
Minimize Inventory Purchasing
internal carrying costs
TCO Factory administration
company costs
yield
Reduce joint Damaged field Production

supplier/company/ R&D product capacity
customer costs Specifications
Expediting

Strategic Sourcing Sequence
 Define market  Develop Supplier  Identify, plan &

 Decompose spend  Analyze trend short list implement
 Prepare TCO competition  Prepare and send RFP improvement
 Analyze market  Analyze results Select opportunities:
provider data supplier - supplier & buyer
 Analyze buying power  Negotiate terms performance
 Analyze supplier  Prepare agreement - Monitor supply
bargaining power  Review with management market and
 Sign agreement demand
requirements
Determine Develop Select Supplier & Manage Supply

Analyze Analyze Supply Category
Business Negotiate Plan Transition Base &
Category Spend Markets Strategy
Requirements Agreement Stakeholders
 Develop communication
 Understand future  Identify options plan
requirements  Analyze cost benefit  Develop reporting &
 Review spend with  Review with compliance
customers management  Develop transition plan
 Identify buying points  Select category  Maintain market intelligence
 Understand characteristics strategy  Establish performance
 Rank/weight characteristics  Prepare negotiation accountability
 Validate & finalise strategy
requirements
Buy Segmentation: Kraljic matrix

• Large dollar amount spent High
Leverage Strategic
• Large percentage of spend • Use competitive advantage to • Ensure long-term availability
• Key to core business reduce total costs of supply
•Customer Value • Volume used as negotiation • Focus on relationship-building
•Functionality in Product tool and process integration with
• Time-sensitive
Business supplier
Impact
Noncritical Bottleneck
• Simplify and streamline • Reduce/eliminate risk and
purchasing process to achieve exposure to price
• Low dollars spent efficiency increases/supply disruption
• Small percentage of • Reduce number of suppliers • Secure existing sources of
and simplify order/ supply, search for substitutes,
spend
Low replenishment process etc.
• Not key to core business
• Not time-sensitive Low High
Complexity of Supply Market
• Many options • Few options

• High leverage • Low leverage
• Low technical complexity • High technical complexity

Sourcing Strategies
Exploit Buying Power Build Advantage
• Pool volume across business units • Rationalize/standardize specs

• Consolidate number of suppliers • Substitute materials
• Redistribute volume among suppliers • Apply product value analysis
• Combine volume from different • Examine life cycle costs
sourcing groups • Develop long-term contracts
Product
Volume
Specification
Concentration
Improvement
• Compare “total” costs
• Renegotiate prices • Reengineer joint processes
• Unbundle pricing • Share productivity gains
• Long-term contracts
Strategic • Integrate logistics
Best Price • Support supplier
•
•
Index pricing
Commodity hedging Evaluation Sourcing Joint Process
Improvement operations improvement
• Competitive bidding / • Long-term contracts
online auction
Relationship
Global
Restructuring
Sourcing
• Expand geographic supply base • Establish/develop key suppliers
• Develop new suppliers • Employ strategic alliances/partnering
• Profit from global supply/demand imbalances • Examine strategic make-versus-buy
• Capitalize on currency exchange • Develop integrated supply chain
• Take advantage of trade incentives • Establish joint ventures
Emergence of Zero-level Suppliers

Supplier
Involvement
in assembly Assembly tasks performed within OEM
Modular
Devolution of assembly tasks:
Consortia
locate near OEMs
System
Suppliers Pressure for JIT deliveries
Local
Suppliers
Dispersed Remote
Suppliers Suppliers
Distance from Assembly Plant

Vendor Managed Inventory (VMI)
 A streamlined approach to inventory and order-

fulfillment.
 The supplier owns the input inventory, and is
responsible for managing inventory of the
consumer, often in the consumer’s premises
 Supplier has access to information on
consumer’s inventory, production and sales
 A case of postponed purchasing, wherein the
vendor owns the inventory until the time of actual
use.
Traditional Procurement
EFT
A/c A/c
Receivable Payable
PO
Vendor Manufacturer
Marketing Purchasing
Check with Pending Pos

Quality inspection
Invoice + other
documents
Pending
POs

Vendor Managed Inventory
EFT
A/c A/c
Receivable Reverse PO Payable
Vendor Manufacturer
Marketing Purchasing
Demand forecasts, production &

assembly schedule
Impact of VMI
 Cuts overall costs
 Minimizes “double buffering” of inventory
 Eliminates paperwork
 Reduces administrative & ordering costs
 Cuts time for order fulfillment
 Competitive advantages for both parties in the SC
 Reduces selling-buying bureaucracy
 Reduces fixed ordering costs, reduces barriers to
frequent shipments, facilitates JIT shipments
 Counters the “bull-whip effect”

Catalog-based Vertical Direct Materials
Hubs Industry-specific
Exchanges
(Vortals)
The Firm
MRO hubs
Horizontal Indirect Materials
Hubs (MROs)
Horizontal
spot markets
E-procurement strategy should be part of strategic sourcing

Apply Kraljic matrix again for selective use of reverse auctions
Reverse Auctions
 Traditional: forward auction by seller;
price movements are upward
 Reverse: backward auction by buyer;
price movements are downward

Sellers’ Reasons for Participating
 Promise of increased business

 Better market information about competitors
prices (traditionally, very little is known at
RFQ time)
 Penetration of new markets, with flexible
pricing based on needs of the new market
 Less paperwork and low administrative
cycle time between bidding and award of
business
Buyers’ Reasons
 Reduced purchase prices
 Reduced administrative costs
 RFQ process: 1) write specs; 2) id of suppliers; 3)
qualify suppliers; 4) mail RFQs; 5) wait for
responses; 6) evaluate responses; 7) notify
selected supplier; 8) negotiate final terms. With
RA: steps 4 to 7 are much faster.
 Reduced inventory levels, faster replenishment
close to time of need

Potential Disadvantages for Sellers
 Purchase decision almost entirely based on

price Less loyalty, future business cannot
be expected
 Investments made cannot be recovered:
tooling, employee training, capital expenses
 Buyer may be using RA only as negotiation
ploy (buyer might have already identified
the supplier and uses RA only for arm twist
 Relentless downward price pressure
Potential Disadvantages for Buyers
 Buyer may end up destroying trust and

loyalty structure
 Suppliers may commit less resources due
to future order uncertainty
 Too few suppliers may respond to an RA
(that is happening increasingly)

Appropriate Conditions for RAs
1. Clearly state the commodity specs

2. Purchase lots must be large enough to justify
seller’s involvement (consolidate volumes by
including whole part families; standardize parts
and specs; leverage volumes across various
divisions of the fir, etc.)
3. Supply market conditions must exist ( sufficient
number of qualified suppliers; excess capacity
incentive, economies of scale incentive; elastic
prices)
4. Infrastructure: IT, employee training, etc.
Contracts to Improve
Overall Supply Chain Profits
 Double marginalization: buyer and seller make
independent decisions, instead of together =>
Actual SC profits << Potential SC profits
 Buyback or returns contracts
 Revenue sharing contracts
 Quantity flexible contracts
 Contracts to Coordinate Supply Chain Costs
 Contracts to Increase Agent Effort,
Performance Improvement
Returns Policy: Buyback Contracts
 Manufacturer specifies wholesale price and a
buyback price at which the retailer can return
unsold items at the end of the season
 Results in an increase in salvage value for
Retailer, inducing retailer to order larger qty
 Manufacturer is willing to take on some of the
cost of overstocking because the SC will end
up selling more on average
 Manufacturer profits and supply chain profits
can increase
Revenue Sharing Contracts

 Manufacturer charges Retailer a low
wholesale price and shares a fraction of the
revenue generated by the retailer
 The lower wholesale price decreases the
cost to the retailer in case of an overstock
 The retailer therefore increases the level of
product availability, which results in higher
profits for both the manufacturer and the
retailer
Quantity Flexible Contracts
 Allows Retailer to modify order (within

limits) as demand visibility increases closer
to the point of sale
 Better matching of supply and demand
 Increased overall SC profits if Manufacturer
has flexible capacity
 Lower levels of information distortion than
either buyback contracts or revenue sharing
contracts
Contracts to Coordinate SC Costs
 Differences in costs for Buyer & Supplier can

lead to higher total SC costs
 Example: Replenishment order size placed
by Buyer: Buyer’s EOQ does not take into
account Supplier’s costs.
 A quantity discount contract may encourage
Buyer to purchase a larger qty (which would
be lower costs for Supplier), which would
result in lower total SC costs
 But quantity discounts lead to information
distortion because of order batching
Contracts to Increase Agent Effort
 Often when an agent acts on behalf of a

principal, and the agent’s actions affect the
reward for the principal
 Example: A car dealer who sells cars of a
manufacturer, plus those of other makers
 Examples of contracts to increase agent
effort include two-part tariffs and threshold
contracts
 Threshold contracts increase information
distortion, however
Bulk and Spot Purchase

For the simple case where spot market price is
known but demand is uncertain:
cB = bulk rate
cS = spot market price
Q* = optimal amount of the asset to be purchased in
bulk
p* = probability that demand does not exceed Q*
Marginal cost of purchasing another unit in bulk is
cB. The expected marginal cost of not purchasing
another unit in bulk and then purchasing it in the
spot market is (1-p*)cS.

Bulk and Spot Purchase
If the optimal amount is purchased in bulk, the
marginal cost of the bulk purchase should
equal expected marginal cost of the spot
market purchase, or cB = (1-p*)cS
Solving for p*, p* = (cS – cB) / cS
If demand is normal with mean  and std. dev.
, optimal amount Q* to be purchased in bulk
is: Q* = F-1(p*,,) = NORMINV(p*,,)
Example
Bulk contract cost = cB = $10,000 per million
units
Spot market cost = cS = $12,500 per million
 = 10 million units;  = 4 million units
p* = (cS – cB) / cS = (12,500 – 10,000) / 12,500 =
0.2
Q* = NORMINV(0.2,10,4) = 6.63
Therefore should sign a long-term bulk contract
for 6.63 million units per month and purchase
any additional capacity on the spot market

XII. Continuous Improvement &
Sustainability
SC Strategy
Continuous Improvement
 Define and classify processes (standard
process classifications are being developed:
see for instance, the system of American
Productivity and Quality Center (APQC):
www.apqc.org)
 Identify core processes (“the vital few”)

 Develop Metrics
 Monitor
 Global Benchmark
 Analyze performance gaps
 Pursue process improvement
SC Continuous Improvement
Processes: Look For
 Overly complicated / unclear processes
 Production of defective outputs
 Unnecessary transportation / movements
 Need for inspections
 Queues, Inventories, Waiting times
 Duplicated effort, Unnecessary data
collection / recording
 Having to process / transport large lots to
pursue economies of scale, etc.
Supply Chain Performance Metrics

Develop Metrics jointly with partners via Steering
Committee
Customer Service Level:
Line Item Fill Rate, Perfect Order Percentage,
Lead Time, On-time Delivery, Stock-outs (hard to
measure), Delivery Consistency, Response Time
to Enquiries, RFQ lead time, Customer
Complaints, Sales Force Complaints, Overall
satisfaction, Price Competitiveness.
Cost Measures:
Total Cost, Cost per Unit at each stage, Cost /
Sales %, Inbound Fright, Outbound Freight,
Inventory Carrying Cost, Inventory Turnover
Ratio, Cost of Returned Goods, Cost of Damage,
Cost of Backorders, etc.
Supply Chain Performance Metrics
Quality Measures:
Defect Rates, Order Entry Accuracy, Billing
Errors, Number of Customer Returns, Picking
/ Shipping Accuracy
Productivity Measures:
Asset Management Measures: Inventory Turns,
ROI, ROA, Profitability of Partners in the
Chain, etc.
NPDP: Developmental Cost, Developmental
Lead Time, Innovativeness, Frequency of New
Product Introduction, etc.
Several Improvement
Philosophies
 Theory of constraints approach:

(www.goldratt.com)
 TQM, Six Sigma, Deming’s PDCA approach
 Supply-Chain Operations Reference Model
(SCOR): Supply Chain Council
 Value Stream Mapping (developed by Lean
Manufacturing group)
Process Mapping Tools
 IDEF (Integrated Definition System)
 Workflow management software
 Enterprise modelers
 Object oriented modeling, etc.
 Integrating material and information flows
and transformations, data bases, etc.
continues to be a challenge
 Keep mapping simple, transparent and easy

to use !
 Ensure buy-in and participation throughout!
SCOR
 Developed by Supply-Chain Council (SCC)
www.supply-chain.org
 These Process Reference Models integrate

concepts of BPR, benchmarking and process
measurement in a cross-functional, and cross-
enterprise framework
 Used to capture the “as is” state, and derive “to

be” state, quantify and benchmark performance
metrics, and characterize management practices
and software solutions that result in “best in class”
ns that result in “best in class” performance
SCOR (cont’d)
 SCOR is based on Five Distinct Management
Processes: Plan, Source, Make, Deliver, Return
Plan
Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source
Suppliers’ Supplier Customer Customer’s

Supplier Your Company Customer
(internal or (internal or
external) external)
SCOR (cont’d)
• Plan: Demand / Supply Planning & Management
• Source: Sourcing stocked, MTO, ETO Product
• Make: MTS, MTO, ETO production execution
• Deliver: Order, Warehouse, Transportation, and

Installation Management for stocked, MTO, ETO
product
• Return: Return of raw materials to supplier, receipt

of returns from customers for defective products,
excess products, etc.
Value Stream Mapping
• A visual tool or documenting current state
• Method for envisioning future states
• A means for ensuring participation and buy-in from

people in the value stream
• A cross-functional communication platform
Lean Enterprise Institute - www.lean.org

The Lean University - www.leanuniversity.com
Current State
Future State
Ensuring Sustainability
Supplier Customer
Retailer
Supplier Customer
• Scoping: high-impact Points of vulnerability &

areas; 80-20 rule potential supply disruption
• Organizing
Sustainability:
• Redesigning Minimum carbon
• Implementation footprint
SC Strategy
Thank You..
It was a pleasure getting to
know you.

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Supply Chain Strategies &

Nallan C. Suresh, Ph.D.

Muscat, Oman, January 15 &16, 2014

Traditional View: The Single Firm

Within-firm improvement strategies: MRP, Lean, TQM, Six Sigma, ERP,..

Supplier Firm Distributor Customer

Supplier Firm Customer

Within-firm => Inter-firm improvement strategies

Logistics: Our Definition

SCM is the integration of key business

Numerous sources of uncertainty & inefficiency:

The basic idea in supply chains is to minimize:

Through better inter-organizational communication & coordination

Realign Core Seek Synergistic

Supply Chain Mapping

Supply Chain Structure

 Horizontalstructure: number of tiers

What business process governs the link?

 A supply chain strategy can be aimed primarily

 All elements and decisions in a supply chain

Porter’s Five Forces Model:

Suppliers’ Competition Among Buyers’

Porter’s Value Chain Diagram

Activity Mapping (e.g.): Southwest Airlines

(Source: Porter, 1998) SC Strategy

Supplier Firm Distributor Customer

Supplier Firm Customer

B2B B2C C2C

Phase II: Inter-organizational Integration

• Scoping: high-impact Points of vulnerability &

Organizing for Improvements

Inter- Physical Business IS & IT

Suppliers Manufacturers Distributors Retailers

NPDP NPDP NPDP NPDP

Marketing Marketing Marketing Marketing

(Source: Braunscheidel & Suresh, 2004) SC Strategy

Inter-organizational Integration (cont’d)

Rethink Products, Processes &

The cost, quality, producibility, maintainability,

Process and Global Logistics issues must be

Design is an on-going, full-time activity, which

Later Entrant’s Cost

1st Mover’s Cost

Expectations from NPDP

 Precisely match customer needs

Line Breadth & Fit in Product Line

Too narrow =>

Design for Manufacture & Assembly (DFMA)

Concurrent Approach Defects caught early, and

Traditional Make /Buy

The New Way

Internal ----------------------Cost of Product Development --------------------- Shared

Design For Logistics (DFL)

 Form & Logistics postponement (time & place

 Modularity in products and processes and its

Industry Restructuring Based on

Expanded View of Bill of Material

Service Upholstery Crevice Dusting

Forward Screw & Rear

 Pharmaceuticals: global production of bulk

HP: Channel Assembly Approach