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306 Scm Unit III

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Supply Chain Management

SCM - 306

LSM-306 Supply Chain Management

Master of Business Administration (Logistics & Supply Chain Managemen Management) t)

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

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Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

  I I  I   I  T   N   U

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Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Why Network Planning?    t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i   a  s    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t    6  s



Find the right balance manufacturing costs,

between

inventory,

transportation

and



Match supply and demand under uncertainty by positioning and managing inventory effectively, effectively,



Utilize resources effectively by sourcing products from the most appropriate manufacturing facility

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Three Hierarchical Steps

   t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i   a  s    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t    6  s



Network design    



Inventory positioning:    



Number, locations and size of manufacturing plants and warehouses Assignment of retail outlets to warehouses Major sourcing decisions Typical planning horizon is a few years. Identifying stocking points Selecting facilities that will produce to stock and thus keep inventory Facilities that will produce to order and hence keep no inventory Related to the inventory management strategies

Resource allocation: 

Determine whether production and packaging packaging of different products products is done at the right facility

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Network Design    t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i   a  s    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t    6  s



Physical configuration configuration and infrastructure infrastructure of the supply chain.



A strategic decision with long-lasting effects on the firm.



Decisions relating to plant and warehouse location as well as distribution and sourcing

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Reevaluation of Infrastructure

   t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i   a  s    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t    6  s





Changes in: 

demand patterns



product mix



production processes



sourcing strategies



cost of running facilities.

Mergers and acquisitions may mandate the integration of different logistics

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Key Strategic Decisions    t   n   e  g   m   n

Determin Determining ing th

priate priate number number of facili facilities ties such as as plants plants and

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Objective and Trade-Offs    t   n   e  g   m   n



Objective: Objective: Design Design or reconfigure reconfigure the logistics logistics network network in order to minimize annual systemsystemwide cost subject to a variety of  service level requirements

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Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Data Collection    t   n   e  g   m   n



Locations

of

customers,

retailers,

existing

warehouses

and

distribution

centers,

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Data Aggregation    t   n   e  g   m   n



Customer Zone 

Aggregate using a grid network network or other clustering clustering technique for those in close proximity. proximity.

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Replacing Original Detailed Data with Aggregated Data

   t   n   e  g   m   n



Technology exists exists to solve the logistics logistics network network design problem problem with the

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Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Number of Warehouses $90 $80

   t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t   s    6    i    0   g

   )    $   s   n   o    i    l    l    i   m    (    t   s   o    C

$70

Optimal Number of Warehouses

$60 $50 $40 $30 $20 $10

Total Cost Transportation Transportation Cost Cos t Fixed Cost Inventory Cost

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Industry Benchmarks: Number of Distribution Centers    t   n Pharmaceuticals   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m Avg.   e    C    t   y    l  s   y # of    p    S   p  s 3   u   c WH    i    S    t   s    6    i    0   g

Food Companies

14

Chemicals

25

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Model Validation    t   n   e  g    m   n     i   e   g  r   a  e    n  e   n   a    i   g    M   n   n    E    i  s   a    h  m    e    C    t   y    l  s   y   p    S   p  s   u   c     i    S    t   s    6    i    0   g

Reconstruct the existing network configuration using the model a nd collected data Compare the output of the model to existing data Compare to the company ’s accounting information  Often the best way to identify errors in the data, problematic assumptions, modeling flaws. Make local local or small small changes changes in the network network configura configuration tion to see see how the system system estimates impact on costs and service levels.  Positing a variety of what-if questions. Answer the following questions:  Does the model make sense?

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Solution Techniques    t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t   s    6    i    0   g



Mathematical optimization techniques: 1. Exact algorithms: find optimal solutions 2. Heuristics: find “good” solutions, not necessarily optimal



Simulation models: provide a mechanism to evaluate specified design alternatives created by the designer.

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Example    t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t   s    6    i    0   g



Single product



Two plants p1 and p2 

Plant p2 has an annual capacity of 60,000 units.



The two plants have the same production costs.



There are two warehouses w1 and w2 with identical warehouse handling costs.



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

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Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Unit Distribution Costs    t   n   e  g   m   e  n

Facility warehouse

 p1

 p2

 c1

 c2

 c3

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Heuristic #1: Choose the Cheapest Warehouse to Source Demand

   t   n   e  g   m   e  n

D = 50,000

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Heuristic #2: Choose the warehouse warehouse where the total delivery costs to and from the warehouse are the lowest [Consider inbound and outbound distribution costs]

   t   n   e  g   m   e  n

$0

D = 50,000

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Heuristic #2: Choose the warehouse warehouse where the total delivery costs to and and from the warehouse are the lowest [Consider inbound and outbound distribution costs]    t   n   e  g   m   e  n

$0 x 50,000

D = 50,000

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The Optimization Model

   t   n   e  g   m   e  n

The problem described earlier can be framed as the following linear programming problem. Let

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Problems with Local Optimization

   t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t   s    6    i    0   g





Prevalent strategy for many companies: 

try to keep as much inventory close to t o the customers



hold some inventory at every location



hold as much raw material as possible.

This typically yields leads to: 

Low inventory turns



Inconsistent service levels across locations and products, and



The need to expedite shipments, with resulting increased transpo rtation costs

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Integrating Inventory Positioning and Network Design

   t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t   s    6    i    0   g



Consider a two-tier supply chain  



Items shipped from manufacturing facilities to primary warehouses From there, they are shipped to secondary warehouses and and finally to retail outlets

How to optimally position inventory in the supply chain?  

Should every SKU be positioned both at at the primary and secondary secondary warehouses?, OR Some SKU be positioned positioned only at the primary while others only at the secondary?

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Integrating Inventory Positioning and Network Design

   t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t   s    6    i    0   g

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Three Different Product Categories    t   n   e  g   m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n   n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s   u   c    i    S    t   s    6    i    0   g



High variabil variability ity - low volume volume product productss



Low variabili variability ty - high volume volume products products,, and and



Low variabili variability ty - low volume volume produc products. ts.

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Supply Chain Strategy Different for the Different Categories

   t   n   e  g    m   n    i   e   g  r   a  e   n  e   n   a    i   g    M   n    n    E    i  s   a    h  m   e    C    t   y    l  s   y   p    S   p  s    u   c    i    S    t   s    6    i    0   g

High variability low volume products  

Inventory risk the main challenge for Position them mainly at the primary warehouses 

demand from many retail retail outlets can be aggregated aggregated reducing inventory costs.

Low variability high volume products  

Position close to the retail outlets at the secondary warehouses Ship fully loaded tracks as close as possible to the customers reducing transportation costs.

Low variability low volume products 

Require more analysis since other characteristics are important, such as profit margins, etc.

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GITAM INSTITUTE OF INTERNATIONAL BUSINESS

Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Resource Allocation

   t   n   e  g   m   e  n



Supply chain master planning

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Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Global Optimization and DSS FACTORS TO CONSIDER

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  

Facility locations: plants, distribution centers and demand points Transportation resources including internal fleet and common carriers Products and product information

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Professor P.R.S SARMA M.B. M.B.A A & Ph.D.- IITD

Focus of the Output

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Sourcing Strategies: 

where should each product be produced during the planning horizon, OR

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The Extended Supply Chain: From Manufacturing to Order Fulfillment

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Questions to Ask During the Planning Process

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Will leased warehouse space alleviate capacity problems?

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