(3rd Edition)
Chapter 1
Understanding the Supply Chain
Profit 4% Profit
Logistics
Cost
Logistics Cost 21%
Marketing
Cost
Manufacturing
Manufacturing Cost 48% Cost
Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)
Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
Information
Product
Customer
Funds
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
© 2007 Pearson Education 1-21
Cycle View of a Supply Chain
Each cycle occurs at the interface between two successive
stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Figure 1.3
Cycle view clearly defines processes involved and the
owners of each process. Specifies the roles and
responsibilities of each member and the desired outcome
of each process.
© 2007 Pearson Education 1-22
Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles
Customer
Order Arrives
Chapter 2
Supply Chain Performance:
Achieving Strategic Fit and Scope
New Marketing
Product and Operations Distribution Service
Development Sales
High
Low
Cost
High Low
© 2007 Pearson Education 2-18
Step 3: Achieving Strategic Fit
Step is to ensure that what the supply chain does well
is consistent with target customer’s needs
Fig. 2.5: Uncertainty/Responsiveness map
Fig. 2.6: Zone of strategic fit
Examples: Dell, Barilla
Responsiveness
spectrum
Efficient
supply chain
Chapter 3
Supply Chain Drivers and Obstacles
Supply C hain
Strategy
E fficiency R esponsiveness
Supply chain structure
Logistical Drivers
Chapter 4
Designing the Distribution
Network in a Supply Chain
Number of
Facilities
Response Time
© 2004 Prentice-Hall, Inc. 4-6
The Cost-Response Time Frontier
Local FG
Hi
Mix
Regional FG
Local WIP
Cost Central FG
Central WIP
Inventory
Costs
Number of facilities
Transportation
Costs
Number of facilities
Facility
Costs
Number of facilities
Facilities
Inventory
Transportation
Number of Facilities
© 2004 Prentice-Hall, Inc. 4-11
Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Response Time
Number of Facilities
© 2004 Prentice-Hall, Inc. 4-12
Design Options for a
Distribution Network
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-
Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer
Pickup
Retail Storage with Consumer Pickup
Selecting a Distribution Network Design
Manufacturer
Retailer
Customers
Product Flow
Information Flow
Customers
Product Flow
Information Flow
Factories
Warehouse Storage by
Distributor/Retailer
Customers
Product Flow
Information Flow
© 2004 Prentice-Hall, Inc. 4-16
Distributor Storage with
Last Mile Delivery (Fig. 4.9)
Factories
Distributor/Retailer
Warehouse
Customers
Product Flow
Information Flow
© 2004 Prentice-Hall, Inc. 4-17
Manufacturer or Distributor Storage
with Customer Pickup (Fig. 4.10)
Factories
Pickup Sites
Customers
Customer Flow
Product Flow
© 2004 Prentice-Hall, Inc. Information Flow 4-18
Comparative Performance of Delivery
BES
T Network Designs (Table 4.7)
Retail Storage Manufacturer Manufacturer Distributor Storage Distributor Manufacturer
with Customer Storage with Direct Storage with In- with Package storage with last storage with pickup
Pickup Shipping Transit Merge Carrier Delivery mile delivery
Response Time 1 4 4 3 2 4
Product Variety
4 1 1 2 3 1
Product Availability 2 3
4 1 1 1
Customer Experience
1 to 5 4 3 2 1 5
Order Visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility role
Facility location
Capacity allocation
Market and supply allocation
Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs
Local FG
Hi
Mix
Regional FG
Local WIP
Cost Central FG
Central WIP
Number of Facilities
Customer
DC
Customer
DC
Customer
DC
Customer
DC
Customer
DC
Inventory
Facility costs
Costs
Transportation
Number of facilities
Percent Service
Level Within
Promised Time
Facilities
Inventory
Transportation
Labor
Number of Facilities
© 2007 Pearson Education 5-13
A Framework for
Global Site Location
Competitive STRATEGY GLOBAL COMPETITION
PHASE I
Supply Chain
INTERNAL CONSTRAINTS Strategy
Capital, growth strategy, TARIFFS AND TAX
existing network INCENTIVES
PHASE III
Desirable Sites AVAILABLE
INFRASTRUCTURE
PRODUCTION METHODS
Skill needs, response time
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
Store 3
– dn : Distance to delivery x= n =1 n
D nF
k
location n
∑ d
n
ny F
location n
∑ D k
n n
y= n =1 d n
D nF
k
Min ∑ d nDnF n ∑ dn =1
n
∑x
i =1
ij
= D j
, j = 1,..., m
xij = Quantity shipped from m
x ij
≥0
∑ x ≤ K y , i = 1,..., n
j =1
ij i i
∑ y ≤ k ; y ∈{0,1}
i =1
i i
∑ D j x ≤ K y , i = 1,..., n
j =1
ij i i
xij , y ∈{0,1}i
Chapter 6
Network Design in an
Uncertain Environment
where
C 0 , C1 ,..., CT is a stream of cash flows over T periods
NPV = the net present va lue of this stream of cash flows
k = rate of return
The NPV of signing the lease is $54,711 higher; therefore, the manager
decides to sign the lease
However, uncertainty in demand and costs may cause the manager to
rethink his decision
D=80 D=96
p=$1.32 p=$0.97
0.25 D=64
p=$1.45
D=80
p=$1.08 D=64
p=$1.19
D=64
p=$0.97
© 2007 Pearson Education 6-18
Trips Logistics Example
Analyze the option of not signing a lease and
obtaining all warehouse space from the spot market
– Start with Period 2 and calculate the profit at each node
– For D=144, p=$1.45, in Period 2:
C(D=144, p=1.45,2) = 144,000x1.45 = $208,800
P(D=144, p =1.45,2) = 144,000x1.22 –
C(D=144,p=1.45,2) = 175,680-208,800
= -$33,120
Profit for other nodes are evaluated in a similar
fashion (shown in Table 6.1)
© 2007 Pearson Education 6-19
Trips Logistics Example
Expected profit at each node in Period 1 is the profit
during Period 1 plus the present value of the expected
profit in Period 2
Expected profit EP(D=, p=,1) at a node is the
expected profit over all four nodes in Period 2 that
may result from this node
PVEP(D=,p=,1) is the present value of this expected
profit and P(D=,p=,1), and the total expected profit, is
the sum of the profit in Period 1 and the present value
of the expected profit in Period 2
» P(D=100,p=1.2,0)=100000x1.22- (100000x1)+16364=38362
» NPV(lease)=38364
Mexico Mexico
Plants Markets
100,000
100,000 Profit (flexible) =
U.S. U.S.
$1,075,055
Profit (dedicated) =
Mexico Mexico $649,360
6,000
50,000
© 2007 Pearson Education 6-34
Facility Decision at AM Tires
Chapter 7
Demand Forecasting
in a Supply Chain
50,000
40,000
30,000
20,000
10,000
0
,4
,3
,2
,1
,2
,4
,1
,4
,3
,2
,1
,3
99
99
99
99
00
98
98
98
98
97
97
97
50,000
40,000
30,000
20,000
10,000
0
,4
,3
,2
,1
,2
,4
,1
,4
,3
,2
,1
,3
99
99
99
99
00
98
98
98
98
97
97
97
Σ Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower integer
50000
40000
Demand
30000 Dt
20000 Dt-bar
10000
0
1 2 3 4 5 6 7 8 9 10 11 12
Period
Chapter 9
Planning Supply and Demand
in a Supply Chain: Managing
Predictable Variability
© 2007 Pearson Education 9-1
Outline
Responding to predictable variability in a supply chain
Managing supply
Managing demand
Implementing solutions to predictable variability in
practice
Chapter 15
Pricing and Revenue Management
in the Supply Chain
Chapter 10
Managing Economies of Scale in the
Supply Chain: Cycle Inventory
$3
$2.96
$2.92
q0 = 0, q1 = 5000, q2 = 10000
C0 = $3.00, C1 = $2.96, C2 = $2.92
D = 120000 units/year, S = $100/lot, h = 0.2
Forward buy = Qd - Q*
Qd =
Forward buy =
Chapter 11
Managing Uncertainty in the
Supply Chain: Safety Inventory
σ σD
time
σD:Standard deviation of L
= L
demand per period
ss = F S (CSL) ×σ L
−1
DL: Mean demand during lead
time
σL: Standard deviation of ROP = D L + ss
demand during lead time
CSL: Cycle service level CSL = F ( ROP, D L ,σ L )
ss: Safety inventory
ROP: Reorder point Average Inventory = Q/2 + ss
© 2007 Pearson Education 11-13
Example 11.1: Estimating Safety
Inventory (Continuous Review Policy)
D = 2,500/week; σD = 500
L = 2 weeks; Q = 10,000; ROP = 6,000
DL = DL = (2500)(2) = 5000
ss = ROP - RL = 6000 - 5000 = 1000
Cycle inventory = Q/2 = 10000/2 = 5000
Average Inventory = cycle inventory + ss = 5000 + 1000 = 6000
Average Flow Time = Avg inventory / throughput = 6000/2500 =
2.4 weeks
σ =σ L R
L = (500) 2 = 707
⎡ ⎛ ss ⎞⎤ ⎛ ss ⎞
250 = − ss ⎢1 − NORMSDIST ⎜⎜ ⎟⎟⎥ + σ L NORMDIST ⎜⎜ ,1,1,0 ⎟⎟
⎣ ⎝ σ L ⎠⎦ ⎝ σL ⎠
DL = DL
σ σ
2 2 2
L
= L D
+ D s L
© 2007 Pearson Education 11-23
Impact of Supply Uncertainty
D = 2,500/day; σD = 500
L = 7 days; Q = 10,000; CSL = 0.90; sL = 7 days
DL = DL = (2500)(7) = 17500
σ L
= L σ + 2
D sL
D
2 2
2 2
= (7) 500 + (2500) (7) = 17500
2
D = ∑D
C
i
i =1
n
σ ∑σ
C 2
D
= i
i =1
σ = Lσ D
C C
L
ss = F s (CSL) ×σ L
−1 C
Chapter 14
Sourcing Decisions in a Supply Chain
Low High
Value/Cost
© 2007 Pearson Education 13-18
Sourcing Planning and Analysis
A firm should periodically analyze its procurement
spending and supplier performance and use this
analysis as an input for future sourcing decisions
Procurement spending should be analyzed by part and
supplier to ensure appropriate economies of scale
Supplier performance analysis should be used to build
a portfolio of suppliers with complementary strengths
– Cheaper but lower performing suppliers should be used to
supply base demand
– Higher performing but more expensive suppliers should be
used to buffer against variation in demand and supply from
the other source
© 2007 Pearson Education 13-19
Making Sourcing
Decisions in Practice
Use multifunction teams
Ensure appropriate coordination across regions
and business units
Always evaluate the total cost of ownership
Build long-term relationships with key suppliers
Chapter 16
Information Technology
and the Supply Chain
Chapter 17
Coordination in the Supply Chain
Relatively Interdependence
High
Powerful Effective Relationship
Organization
Low Level of Relatively
Low Interdependence
Powerful
Low High
Partner’s Dependence
© 2007 Pearson Education 16-26
Creating Effective Contracts
Create contracts that encourage negotiation when
unplanned contingencies arise
It is impossible to define and plan for every
possible occurrence
Informal relationships and agreements can fill in
the “gaps” in contracts
Informal arrangements may eventually be
formalized in later contracts