Scim 2021 Bkel3

8/15/2021
Lecture Notes on SCIM
SUPPLY-CHAIN
INVENTORY MANAGEMENT
ME 4025
Nguyễn Như Phong

nnphong@hcmut.edu.vn ; www.isem.edu.vn
Kỹ thuật Hệ thống Công nghiệp
ĐH BÁCH KHOA – ĐHQG TPHCM
(Tài liệu giảng dạy cho LOG)
2021
OBJECTIVE
n Offer integrated knowledge in SCIM

n to understand basic knowledge of SCM
n to understand Inventory Management in a SC
n to apply Supply Chain Planning
Nguyeãn Nhö Phong
LEARNING OUTCOMES
LO 01. Know basic knowledge in Supply Chain
LO 02. Understand Logistics Networks
LO 03. Understand Inventory Management in SC
LO 04. Understand Value Of Information in SC
LO 05. Understand SC Integration
LO 06. Understand Strategic Alliances
LO 07. Apply Distribution Planning
LO 08. Apply Warehouse Planning
LO 09. Apply soft skills
Nguyeãn Nhö Phong
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OUTLINES
1. Supply Chain
2. Logistic Network
3. Inventory management in SC
4. The Value Of Information
5. Supply Chain Integration
6. Strategic Alliances
7. Distribution Planning
8. Warehouse Planning
Nguyeãn Nhö Phong
MATERIALS REFERENCE
1. Nguyễn Như Phong. Lecture notes on SCIM . http://e-
learning.hcmut.edu.vn/ ; www4.hcmut.edu.vn/~nnphong.
2. David Simchi Levi, Philip Kaminsky, Edit Simchi Levi. Designing
and managing the supply chain. 2nd edition. McGraw-Hill Irwin.
3. ebooks: Quản lý chuỗi cung ứng. Smashwords.
Nguyeãn Nhö Phong
REFERENCE MATERIALS
Nguyeãn Nhö Phong
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Schedule
n Main class (45 h):
n Theory
n Group Assignments
n Final Exam
n Sub class (15 h):
n Group Homework
n Utilities
 16-18 Groups
Nguyeãn Nhö Phong
Schedule
W Contents LO W Contents
1 Supply Chain 01 1 Supply Chain
2 Logistic Network 02 2 Logistic Network
3 Inventory 03
Management 3 Inventory Management
4,5 Assignment 1 08 4 Inventory Management in SC
6 Inventory 04
Management in SC 5,6 Assignment 1 - SC & LN, SCIM
7 VOI 06 7 VOI
8 SC Integration 02 8 SC Integration
9, 10 Assignment 2 08 9 Strategic Alliances
11 Strategic Alliances 02, 03,04
Distribution Planning 10 Distribution Planning,
12 07 Warehouse Planning
13 Warehouse Planning 05 11, 12 Assignment 2 - SCI, SA, DP, WP
14, 15 Assignment 3 08
- Final Exam
- Final Exam 01-08
Nguyeãn Nhö Phong
Course Evaluation
n C1: Assignment 01 20%
n C2:30%
n Assignment 02 15%
n Assignment 03 15%
n C3:50%
n GHW 10%
n Final Exam 40%
n Revised Course Evaluation
n C3:
n GHW 10%
n Final Exam 40%
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Course Evaluation
n Rules of final exam: FE Score < 3
n Rules of absentee
n Absentee >= 20% Examination prohibited
n A >= 3: Final Exam Score = 0 < 3
n A < 3: Minus per each
n Research
n Course Bonus (+1) & Thesis Advisee Priority
n Paper / Project
n Topics – DSS Software
n Attitude assessment
n Plus & minus
Nguyeãn Nhö Phong
TEACHING METHODS
1. Lecturing
2. Group Homework
3. Utilities
4. Assignment
5. Case Study
6. Clips
7. Games
Nguyeãn Nhö Phong
LEARNING STRATEGIES
n Full class time participation
n Active learning
n Group working to do
n homework
n assignments
n utilities
Nguyeãn Nhö Phong
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Lecture notes on SCIM
SCIM 01
SUPPLY CHAIN
Nguyễn Như Phong

2021
SUPPLY CHAIN
n SC history
n SC
n SCM
n Why SCM
n SCM challenges
n Key issues in SCM
n Warehouse in SC
n Material flow
n Units of handling
Friday, April 11, 2003 Nguyen Nhu Phong
History
n 1905 – Baker – Logistics
n 1940s – WWII – Logistics in armies
n 1970 – Logistic s in business
n 1980 – Integrated Logistics
n 1990 – SCM
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SC
n Logistics network
SC
n Facilities
n Suppliers
n Manufacturers
n Warehouses / Distributors
n Retailers / Customers
n Flow
n Raw materials
n WIP
n Finished products
SC
n In a SC
n Raw materials procured
n Items
n Produced at factories
n Shipped to
n warehouse for intermediate storage
n retailers / customers.
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SC Costs
n Material costs
n Transportation costs
n Manufacturing costs
n Inventory costs
SCM
n A set of approaches utilized to efficiently integrate
n suppliers, manufacturers, warehouses, stores
n Merchandise produced, distributed

n Right time,
n Right location,
n Right quantities
n To
n Minimize system-wide cost
n Satisfy service level requirement.
SCM
n Logistics management (The council of LM )

n The process of planning, implementing, controlling
n the efficient, cost-effective flow & storage of
n RM, WIP, FG.
n related info.
n from point-of-origin
n to point-of-consumption
n purpose of conforming to customer requirements.
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SCM Objectives
n 2 objectives – to improve
n Service level
n Inventory level
n Traditional inventory theory –
n Not achieved at the same time.
n Innovative approaches – improve both
n Info. & communication technologies
n SC strategies
SCM observations
n Consideration of
n every related facilities
nSupplier
nManufacturer
n Warehouses
n Distribution centers
n Retailers
n Stores
n impact on cost
n roles in making product conform 2 C requirement
SCM observations
n Efficient & cost effective across the entire system
n Min - Total system-wide cost
n Transportation
n Distribution
n Inventories
n System approach 2 SCM
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SCM observations
n Efficient integration of SC facilities
n encompass the firm’s activities
n at many levels
n Strategic
n Tactical
n Operational
Why SCM
n Fierce competition in global market
n Introduction of products w ith shorter life cycles
n The heightened expectation of customers
n Continuing advances in
nCommunication & transportation technologies
 Continuous evolution of SC & SCM
Why SCM
n 1980s
n New technologies, strategies
n JIT, Kanban, Lean manufacturing , TQM,…
n To reduce cost, better compete in different markets
n Effective SCM
n next step to increase profit & market share
n The only way to significantly
n Reduce cost
n Improve service level
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Why SCM
n Wasteful practices in SC –
n unnecessary cost components due to
n Redundant stocks
n In efficient transportation strategies
n Substantially increase revenue / decrease costs
n through effective SCM
Why SCM
n Eg.
n 1997 – American companies
n 892 B$ – 10% GNP – Supply related activities
n Grocery industry –
n save 10% operating cost by effective SC strategies.
n Many opportunity to cut costs in the SC
n Box of cereal – > 3m : factory  supermarket
n New car – 15d : factory  dealer
SCM challenges
n What ?
n inhibits firms from adopting techniques
n to improve their SC performance
n SCM challenges
n Global optimization
n Uncertainty
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Global optimization
n The process of
n finding the best systemwide strategy
n Design & operate a SC
n minimize the total systemwide costs
n maintain systemwide service levels
n Difficult to determine
n the most effective SCM strategy
Global optimization
n SC - a complex network
n facilities dispersed over a large geography
n over the globe.
n Different facilities – different, conflicting objectives
n Suppliers >< manufacturers
n Manufacturers >< distributors
n Distributors >< retailers
National Semiconductor case

n Semiconductor industry
n Competitors: Motorolar, Intel Cor.
n One of the world’s largest chipmaker
n 4 wafer fabrication facilities (3-US, 1-GB)
n Test & assembly sites in Malaysia & Singapore
n Hundreds of manufacturing facilities all over the world.
n Customers: Compaq, Ford, IBM, Siemens, ...
n Lead time
n 45d for 95% of C
n 90d for 5% of C
n 12 airline carriers, 20,000 different routes
n No C. know in advance the lead time.
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Global optimization
n SC – a dynamic system
n Evolve overtime
n C demand
n S capabilities
n SC relationships
n System variations over time
n demand & cost parameter varying due to
n seasonal fluctuation, trends
n advertising & promotion
n competitors' pricing strategies
n difficult 2 determine the most effective SC strategy
Uncertainty
n Uncertainty inherent in every SC
n suply interuption
n customer demand
n travel times
n machines & vehicles breakdown
n SC designed to
n eliminate as much uncertainty as possible
n deal effectively with the remain.
Uncertain Environment
n Contributing factors
n Matching suply & demand
n Inventory & backorder levels
n Forecasting
n Other sources of uncertainty
n No clear understanding of all the issues
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Matching supply & demand cases

n Boeing Aircraft
n A write-down of 2.6 B$ in Oct97
n Due to
n Raw material, internal & supplier parts shortages,
n productivity inefficiencies, …
n IBM
n Sell out New Aptiva PC
n Shortage cost millions in potential revenue
n Advance commitment of production level
n Month before demand realized,
n Imply huge financial & supply risks
Inventory & backorder levels

n fluctuate considerably across the SC .
n even when C demand not vary greatly
n BE
n distributor order variation
n far more than retailer demand
Forecasting
n not solve the problem
n Forecasts -
n always wrong
n impossible 2 predict the precise demand
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Other sources of uncertainty

n Delivery lead times
n Manufacturing yields
n Transportation time
n Component availability
n Disaters
n tremendous impact
n as SC larger & more geographiclly diverse
Uncertainty Cases
n Dell SC
n Sep 1999 massive earthquake in Taiwan
n 80% power losts
n component supply impacted
n US apparel SC
n Jan 26 earthquake in Indian
n fabric shipment delayed
No clear understanding of all the issues

n Eg. High-tech industries
n PLC becoming shorter & shorter eg . few months
n Only 1 order / production opportunity
n No history data available to accurately predict demand.
n Significant price declines – common
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Managing Uncertainty
n Made global optimization even more difficult
n Managing uncertaity
n minimize its effects
n identify strategies to maintain/increase service level
Key issues in SCM

n Strategic level
n Tactical level
n Operational level
Key issues in SCM

n Strategic level
n Long-lasting effect
n Eg.
n no. location, capacity of W , M.
n flow of material through logistics network
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Key issues in SCM

n Tactical level
n Typically updated anywhere
n bw. once every quarter – year.
n Eg.
n purchasing & production decisions,
n I. policies,
n transportation strategies ,
n C-visited frequency .
Key issues in SCM

n Operational level
n Day-to-day decisions
n Eg.
n scheduling,
n lead-time quotation,
n routing,
n truck loading.
Key issues in SCM

1. Distribution network
2. Inventory control
3. Supply Contracts
4. Distribution strategies
5. SC Integration
6. Strategic Partnering
7. Purchasing & Outsourcing Strategies
8. Product design
9. IT & DSS
10. Customer Value
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Distribution network
n Reorganize distribution network
n Select a set of W location & capacities
n Due to
n changing demand patterns
n termination of warehouse leasing contract
n change in plant production level
n new flow pattern of goods
n Objectives of total costs & service level
National Semiconductor Cases
n National Semiconductor Case

n Distribution cost reduces 2.5%
n Delivery time decreased 47%
n Sales increased 34%
n By Centralized Housing
n Closing 6 warehouses
n Air-freighting microchips to C. fr . new MDC.
n What are the correct trade-offs bw .
n inventory cost &
n transportation cost ?
Inventory control
n Retailer Inventory
n Why - uncertainty in suppy & demand
n Inventory planning - when & how much 2 order
n ?
n reduction of uncertainty
n impact of forecast
n inventory turnover ratio used
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A Korean Manufacturer case

n Electrical products
n SL = 70%
n Inventory
n Mostly not in demand
n keep pilling up
n ITR ~ 4 < 9 = ITR wc
 New strategies
n SL  99%
n Significantly decrease IL&C
Supply Contracts
n Each party in traditional SC
n own profit
n little regard 2 impact on partners
n Supply Contracts bw. suppliers & buyers
n pricing, discount, time, quality, returns, ...
n optimize the entire SC performance ?
Distribution strategies
n Distribution strategies
n Direct shipping
n Warehousing
n Cross-docking
n Attribute
n Risk pooling
n Hoding cost & Transportion cost
n Allocation
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Home Depot Inc. Cases

n move over 85% of merchandise
n directly from S. 2 stores
n high volume of goods
n moves through stores
n shipped in FTL
n reduce IHC & TC
Wal-Mart Cases
n Wal-Mart Cases
n 1979 –
n Kmart leading in retail industry
n 1891 stores, average revenues / store $7.25M
n Wal-Mart : 229 stores, average revenues / store ~ half
n Today Wal-Mart - largest & highest profit retailer
n How ?
n Relentless focus on satisfying CNs
n Goal –
n To provide C. where & when they want
n Cost structure – competitive pricing
Wal-Mart Cases
n Cross Docking
n Logistics techniques –
n Traditional distribution – I. kept at the W
n Direct shipping – Goods directly distributed fr . S to R.
n Cross docking
n Goods
n continuously delivered to W.
n wt. ever sitting in inv
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SC Integration
n How SC Integration achieved successfully?

n Information sharing
n Operational planning
n SC strategies
n Push SC
n Pull SC
n Hybrid SC
Strategic Partnering
n What type of partnership implemented?
n Strategic Alliances
n Third-Party Logistics3PL
n Retailer Supplier Partnerships
n Distribution Integration
Procter & Gamble Cases

n American multinational consumer goods corporation
n Strategic Partnerships
n Saved $65M in 18m
n Strategic Partnerships S – M :
n Working closely together
n Jointly creating business plans
n to eliminate the source wasteful practices across the SC.
 ?
n What types of business plans & partnerships
n best reduce cost & improve SL?
n Which appropriate 4 the particular situation ?
n Incentive & performance measure ?
n Benefits sharing ?
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Purchasing & Outsourcing Strategies

n SC strategy
n coordinating activities in SC
n deciding what 2 make & what 2 buy
n Outsourcing
n risk ? minimize ?
n ensure timely supply ?
n Procument strategies - impact of internet?
Product design
n Effective design - critical roles in SC
n reduce inventory holding cost, transportation cost
n reduce manufacturing lead time
n Redesign product
n often expensive
n reduce logistics costs & SC lead times
n Leverage PD 2 compensate 4 demand uncertainty ?
n Role of SCM in mass customization?
IT & DSS
n IT & DSS
n critical enabler of effective SCM
n achieve competitive advantage in the market
n Data collection, analysis, transfer
n Advanced IS
n Decision making
n What?
n impact of internet? role of e-commerce?
n infrastructure required?
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Nabisco case
n Deliver 500 types of cookies & >10000 candies
n 80000 buyers
n transportation expenses > 200 M$/y
n LTL
n Advanced IS
n share trucks & warehouse space w. 25 others
n 8000-orders test
n reduce inventory costs by 4.8 M$
n save 78K$ shipping costs
Customer value
n CV -
n measure of a comp contribution 2 its customer
n based on entire range of products offering
n What determines CV? How 2 measure?
n How SCM contribute 2 CV?
n How CV trends affect SCM?
WAREHOUSE
n The points in the supply chain
n where product pauses,
n briefly touched.
n Consumes
n both space & time
n expense.
2017 Nguyeãn Nhö Phong
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Warehouse
n Why?
n To better match supply with customer demand
n To consolidate product
n to reduce transportation costs
n to provide customer service.
Warehouse types
n Many types of warehouses in the SC
n A retail distribution center
n A service parts distribution center
n A catalog fulfillment / e-commerce DC.
n A 3PL warehouse
n A perishables warehouse
n A systematic way
n The selection of equipment
n The organization of material flow
Warehouse types
n Largely determined by
n Inventory characteristics
n Throughput and service requirements.
n The footprint of the building.
n The capital cost of equipment.
n The cost of labor.
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MATERIAL FLOW
n The most fundamental idea
n to manage SC resources
n Lay the foundations for warehouse analysis.

n In SC, warehouses
n represent storage tanks along the pipeline.
Material flow
n Fluid flow
n faster in the narrower segments of pipe
n than in the wider segments.
n The flow of product
n The wider segments of pipe
n parts of the SC with large amounts of inventory .
n On average, an item will move
n more slowly through the region with large inventory
n than through a region with little inventory.
Material flow
n Guidelines to SC design & operation
n Keep the product moving
n avoid starts & stops,
n extra handling & additional space requirements.
n Avoid impeding smooth flow.
n Identify and resolve bottlenecks to flow.
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Material flow
n The movement to JIT logistics
n equivalent to reducing the diameter of the pipe
n product flows more quickly
n flow time & in-transit inventory reduced
UNITS OF HANDING
n Sku
n A stock keeping unit
n The smallest physical unit of a product
n tracked by an organization.
n The final customer use a still smaller unit

n The SC
n never handles the product at that tiny scale.
Units of handling
n A product
n generally handled in smaller units
n as it moves down the supply chain.
n Upstream in the SC
n product generally flows in larger units, eg. Pallets
n successively broken down into smaller units
n as it moves downstream
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Units of handling
Units of handling
n A product
n move out of the factory to RDCs in pallet-loads
n then to local warehouses in cases
n finally to retail stores in inner-packs / pieces
n the smallest units offered to the consumer.
n The fluid model
n most accurate downstream,
n where smaller units are moved.
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Lecture Notes on SCIM
SCIM 02
LOGISTICS NETWORK
Nguyễn Như Phong

2021
The Bis corporation

Case
n Produce & distribute soft drinks
n 2 M plants in Atlanta & Denver
n 120,000 retailers / stores
n 3 W in Chicago, Dallas, Sacramento
n The gross margin ~ 20%
n Value of each SKU – $1000
11 April 2003 Nguyen Nhu Phong
The Bis corporation

Case
n Distribution steps
n Produce & store at the MPs
n Pick, load & ship to a W/DC
n Unload & store at the W
n Pick, load & deliver to stores
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Logistic Network
n Logistic Network
n Data Collection
n Model & data validation
n Solution Techniques
Logistics network
n Facilities
n Suppliers,
n warehouses,
n distribution centers,
n retail outlets
n Flows
n Raw materials,
n WIP,
n finished products
Logistics network
n Issues
n Model for logistics networks
n development & validation
n How aggregating C. & P. affects the model ?
n How many?
n Where to locate ?
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Logistics network
n Issues
n Product allocation:
n Plants –
n To expand production capacity
n Whether ?
n When ?
n Where ?
Network configuration
n Strategic decisions
n W. number, location, size ?
n Allocation space for P.s ?
n Which products customers
n receive fr. each W. ?
n Assumption
n plants, retailers –
n not be changed.
n Design / reconfigure LN.
n Objectives: min. annual system-wide cost
n Production & purchasing
n Inventory holding
n Facility (storage, handling, fixed)
n Transportation
n St.
n a variety of service level requirements
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n Trade – off : Increasing the no. W.
n SL. improvement
n SS. increasing  I. cost increasing
n Overhead & setup cost increasing
n Outbound transportation cost reducing
n Inbound transportation cost increasing
n Balance
n Cost of opening new W.
n Advantages of being close to C.
n W. location decision
n crucial determinant
n whether SC an efficient channel for product distribution
Data Collection
n Data collection
n Data aggregation
n Transportation rate
n Mileage estimation
n Warehouse costs, capacities, locations
n SL requirements
n Future demand
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Data Collection
n DC problem – large amount of data
n Locations of C, R, W, D, M, S.
n All products: volumes, transport modes
n Shipment sizes, frequencies for C. delivery
n Annual demand – each P., by C.
n Transportation rate by mode
n W. costs
n Order processing costs
n C. service requirements & goals
Data aggregation
n Overwhelming amount of data
n Soft drink distribution systems
n eg. 120,000 accounts / customers
n Retail logistics network. eg. Wal-Mart
n x00,000 products
Data aggregation
n Data aggregation criteria
n Customer groups
n Product groups
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Data aggregation
n Customer groups
n C zone
n Clustering – grid network
n located in close proximity to each other
n 5/3 digits of zip code
n C class – according to
n SL or
n frequency of delivery
Data aggregation
n Product groups
n Distribution pattern
n Same source
n Same customer
n Product type
Data aggregation
n Impact on model’s effectiveness
n Forecast demand
n significantly more accurate at the aggregate level
n Estimation of total transportation cost
n 150-200 points
n no more than 1% error
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Data aggregation
n Guidelines
n 150-200 demand points
n Equal amount of demand zone
n Aggregated points at the center of the zone
n 20-50 product groups.
Data aggregation
Impact on varibillity
1992 1993 1994 1995 1996 1997 1998 AD SD COV

C1 22346 28549 19567 25457 31986 21897 19854 24237 4658 0.192
C2 17835 21765 19875 24346 22876 14653 2987 20905 3427 0.173
T 40181 50314 39442 49803 54862 36550 44841 45142 6757 0.150
Transportation cost
n To estimate transportation cost
n Transportation rates almost linear
n w. distance
n not w. volume
n Associated with
n internal fleet
n external fleet
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Transportation cost
n Internal fleet - t o estimate cost/mile/SKU
n Annual cost per truck
n Annual mileage per truck
n Annual amount delivered
n Truck ‘s effective capacity
Transportation cost
n External fleet - 2 modes of transportation
n Truck load – TL
n Less than truckload – LTL
Transportation cost
n Truck load – TL
n Zone-2-zone table cost
C = c*D ,
n c: cost/m/TL bw . any 2 zones
n D: distance
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Transportation cost
n Less than truckload – LTL
n Cost not linnear with distance
n Types
n Class - standard rates
n Exception
n Commodity
n Database files incorporated into DSS
Transportation cost
n Class - standard rates
n classification on classes
n based on product density, difficulty on handlling, ...
n Exception
n less expensive rates
n Commodity
n commodity-specific rates
Mileage estimation
n Transportation cost –
n function of distance
n Distance
n Exact distance – advanced GIS
n Estimated distance
n Street network
n Straight-line
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Mileage estimation
n Straight-line distance
Dab=69*SQRT[(lon a-lonb)2+(lat a-latb)2]
n Underestimate the actual –
n to correct
Dab * 
n  : circuity factor
n  = 1.3 – metropolitan
n  = 1.14 – continental
Mileage estimation
Ex:
a - Chicago,
b – Boston
 lona = -87.65 0 lonb= -71.06 0
lata = 41.25 0 latb = 42.36 0
 Dab,sl = 855 m
= 1.14
 Dab = 974 m ~ 965 m = D rel
Warehouse costs
n W. costs
n Handling costs
n Fixed costs
n Storage costs
n Handling costs
n Labor & utility cost
n Proportional to AF - annual flow through W.
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Warehouse costs
n Fixed costs
n Not proportional to the amount of material flow
n Proportional to the W. size in a nonlinear way.
n Eg.
n sq.ft < 20000  $ 800,000
n sq.ft 20,000 – 60,000  $1,200,000
n sq.ft 60,000 – 100,000  $1,500,000
Warehouse costs
n Storage costs
n Inventory holding cost
n Proportional to AIL - Average Inventory Level .
n AIL
n Inventory turnover ratio
 = ITR = AS / AIL
AS = AF
n Average Inventory Level
AIL = AS / 
Warehouse capacities
n To calculate the fixed cost.
n How
n to estimate the actual WC required,
n given the specific annual flow AF.
n The required storage space – RSS
n Assuming a regular shipment & delivery schedule
RSS = 2*AIL
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n Factor
n to allow space for
n Access & handling
n Aisle, picking, sorting, processing facilities, AGVs ,
…
n Typical, f=3
EX:
AF=1000u, =10, 10sf/u
 AIL = 1000/10 = 100 (u)
 RSS = 100*10*3 = 3000 (sf)
Potential W. locations
n To effectively identify
n the potential locations for W.
n Conditions
n Geographical and infrastructure conditions
n Natural resources & labor availability
n Local industry & tax regulations
n Public interest
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SL requirements
n Various ways to define SL.
n Max distance bw . C & W
n Reasonable service time
n The proportion of C.
n whose distance to W.
n no more than a given distance
n C harder to satisfy the same service level as others
n Eg. 95% of C.s situated within 200m of the W.
Future demand
n Distribution network design
n Strategic level
n Long-lasting effect
n No, location, size of W: impact for 3 – 5 years
Future demand
n Changes in C demand
n over the next few years taken into account.
n Scenario-based approach
n incorporating NPV calculations
n Various scenarios
n variety of future demand patterns
n Model to determine the best distribution strategy.
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Model & data validation

n How to ensure
n the data & model accurately reflect the problem.
n Reconstructing the existing network configuration
n using the model & collected data
n Comparing the output to the existing data

n Valuable output
n Include all costs
n warehousing, inventory, production, transportation.
n Compare to the accounting data
n Identify
n errors in the data,
n problematic assumptions,
n modeling flaws, …

n Model validation
n Not only help calibrate parameters
n But also suggest potential improvements
n in the utilization of the existing network.
n Eg. Transportation cost underestimated
 effective truck capacity only 30% physical capacity
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n What if questions
n To
n make small changes in the network configuration
n see impact on costs & SL.
n Eg.
n Closing an existing W.
n Changing the flow of material
n Good intuition  more easily identify model errors
n Validation helps make the connection bw .

n Current operations
n Possible improvements after optimization
Solution Techniques
n Data collected, tabulated, verified

 optimize the network configuration
n Solution Techniques
n Mathematical models
n Simulation models
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Solution Techniques
n Mathematical techniques
n Exact algorithms  optimal solutions
n Heuristic algorithms  good solutions
n Simulation models
n a mechanism
n to evaluate specified design alternatives
Geoffrion & Van Roy problem

n Single product
n 2 plants: P1 & P2
n Annual capacity: AC2 = 60,000 u
n Same production cost
n 2 warehouse W1, W2
n Identical handling cost
n 3 market areas C1, C2, C3

n Demands D1 = 50,000; D2=100,000; D3=50,000

n Distribution cost /u
p1 p2 c1 c2 c3
w1 0 4 3 4 5
w2 5 2 2 1 2
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n To find the effective distribution strategy
n product flows
n Min total distribution cost

n St.
n Capacity constraint
n Satisfy market demands
P1 P2 C1 C2 C3
W1 0 4 3 4 5
Heuristics model 1 W2 5 2 2 1 2
n For each market cheapest W to source demand

n C1, C2, C3  W2
n W2  P2 : 60,000
 P1 : 140,000
TC = 2*50,000+1*100,000+2*50,000
+ 2*60,000+5*140,000
= 1,120,000
P1 P2 C1 C2 C3
W1 0 4 3 4 5
n For each market , choose W

n consider in&outbound transportation costs
n C1  W1
n P1W1C1: 3
n P2W1C1: 7
n P1W2C1: 7
n P2W2C1: 4
n C2  W2
n C3  W2
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P1 P2 C1 C2 C3
W1 0 4 3 4 5
n W deliver
n W1  50,000
n W2  150,000
n Best inbound flow
n P1  W1 : 50,000
n P2  W2 :60,000
n P1 W2 :90,000
n TC = … = 920,000
C P1 P2 C1 C2 C3
W1 0 4 3 4 5
Optimization models W2 5 2 2 1 2
n Variables
n Inbound flows: Xij : Pi  Wj
n Outbound flows: Yjk : Wj  Ck
n Models
n Min 0X11+5X12+…+2Y23
n St:
n X21+X22<=60,000
n X11+X21=Y11+Y12+Y13
n X12+X22=Y21+Y22+Y23
n Y11+Y21=50,000
n Y12+Y22=100,000
n Y31+Y32=50,000
n Xij, Yjk >=0
Optimization models
n Optimal distribution strategy

n TC=740,000
1000 P1 P2 C1 C2 C3
W1 140 50 40 50
W2 60 60
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Simulation models
n Math. Models
n Static models
n Not take into account changes over time
n Optimum / good solution
n Sim models
n Dynamic
n Capable of characterizing sys. per.
n for a given design provided by users
n Not an optimization tools
Simulation models
n Sim. models –
n allow to perform microlevel analysis
n Individual ordering pattern
n Specific inventory & production policies
n Daily distribution strategies
n Inventory movement inside the W
Simulation models
n SMs only model a prespecified design
n Eg. given network  help estimate cost
n Different configuration  rerun
n SM
n Incorporate micro info.
n Enormous computational time
n Very few alternatives
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Simulation models
n Hax & Candea approach
n Optimization model
n generate a no. least cost solutions at the macro level
n the most important cost component
n taken into account

n Simulation model
n evaluate the generated solutions at the micro level
DSS
n Flexibility - ability 2 incorporate
n a large set of preexisting network characteristics
n Spectrum of design options
n reoptimization of existing network
n incorporate
n Service level requirement
n Expansioin of existing warehouses
n Flow patterns
n W2W flow
DSS
n System robustness
n no reduction in effectiveness
n solution quality- independent of
n specific environment
n data variability
n particular setting
n System running time - reasonable
n depend on
n No. Customers, Products, Suppliers, Warehouses, ...
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SCIM 03
IN SUPPLY CHAIN
Nguyễn Như Phong

2021
Inventory management
in SC
n Inventory management
n A single warehouse inventory
n Risk pooling
n Supply chain inventory
n Forecast
n Managing inventory in SC
n Quite difficult
n Coordination of
n inventory decisions
n transportation policies
n Significant impact on
n The CSL
n SC systemwide cost
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n Inventory control mechanism - ICM
n SC
n S-M-W/D-C
n Inventory:
n RM -
n WIP –
n FG
 Each – own I control mechanism
n ICMs
n Difficult to determine
n Efficient strategies
n in production, distribution, I control
n to reduce SC & improve SL
n Take into account
n the interactions of various levels in the SC.
n Horizotal: S-M-D-C
n Vertical: Stragic – Tactical - Operational
GM case
n 1884 largest production & distribution net.
n 20,000 S.plants
n 133 part plants,
n 31 assembly plants
n 11,000 dealers
n Freight transportation cost 4.1B$
n w. 60% material shipment
n Inventory 7.4B$, 70%WIP, 30%FP
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GM case
n Decision tool to reduce combined cost of I&T
n Adjustment of
n Shipment sizes (I policy)
n Routes (T strategy)
n Cost reduced 26% annually
n Why hold inventory ?
n Demand uncertainty
n Product life cycle time
n Competeing products
n Supply uncertainty
n Quantity, quality
n Cost, time
n Delivery LT
n Transprotation economy of scale
n Inv. management
n Effectively – difficult
n 2 important issues
n Demand forcasting
n Order quantity calculation
n Relationship bw.
n forecast demand &
n optimal order quatity ?
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A SINGLE WAREHOUSE
INVENTORY
n A single warehouse inventory
n EOQ
n Initial inventory
n Supply contracts
n Multiple order
n Fixed order costs
n Variable lead time
A single warehouse inventory

n Key factors affecting I policy
n C demand
n Replenishment lead time
n No. different products
n Length of planning horizon
n Costs
n SL requirement
A single warehouse inventory

n Costs
n Order cost
n Cost of the product
n Transportation cost
n Holding / carrying cost
n Taxes, insurance, maintenace
n Obsolescence, opportunity,…
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EOQ
n Min TC = OC + HC
Q* =SQRT (2KD/h)
n Q - order quantity
n K – order cost ($/o)
n fixed cost (setup cost)
n h – holding cost ($/u.d)

n carring cost
n D – demand rate (u/d)
TV distributor case
n K=$4500
n D = 44.58 u/w
n P=$250,
n F =18%
→ Q* = 679
Demand uncertainty
n EOQ
n ignores demand uncertainty & forecasting
n Forecast principles
n The forecast - always wrong
n difficut to match supply & demand
n The longer the horizon, the worse the forecast
n Aggregate forecasts - more accurate
n risk pooling
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Swimsuit case
D P
n Probabilistic forcast of the demand *1000
n Average demand 13000 8 .11
n The fixed production cost 100,000$
10 .11
n The variable production cost 80$/u
12 .28
n Selling price 125$/u
14 .22
n Salvage value 20$/u
16 .18
? Order quantity to max average profit
18 .10
Swimsuit case
n Q = 10000, D P
n D=12000  AP = 350,000$
n D=8000  AP = 140,000$ 8000 .11
 E(AP) 10000 .11
n Max E(AP) 12000 .28
 Q* =12000 14000 .22
n The optimal order quantity – Q * 16000 .18
n Not necessary equal to Da
18000 .10
n Depend on relationship bw.
n Marginal profit
n Marginal cost
Demand uncertainty
n The optimal order quantity

n not necessary equal to forecast/average demand
n The fixed cost
n no impact on production quantity
n only on the decision whether 2 produce or not
n As Q increases,
n AP increase to AP * then decreasess
n Probability of large lost & gain increase
n Risk/reward trade-off
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Initial inventory
n Initial inventory I 0
n Should the M start production
n If not
n no more than I 0 sold
n no addtional fixed cost incurred
n If so, how many ?
Swimsuit case
D P
*1000
n I0 = 5000  produce up to 12000
n I0 = 10000  no need 2 produce 8 .11
n Max AP 10 .11
12 .28
n I0* < 8500  produce up to 12000
14 .22
n I0* > 8500  no need 2 produce 16 .18
18 .10
(s-S) policy
n Inventory policy to mana ge inventory

n Min-max policy
n Whenever the inventory below s,
n Order / produce the inventory to level S
n s – reorder point
n S – order-up-to-level
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(s-S) policy
n The difference S-s
n driven by fixed costs
n associated w.
n Ordering, Manufacturing or
n Transportation.
Supply Contracts
n So far assumption –
n adequate supply of RM
n on time & exact quantity
n Customers & Suppliers agree on suply contracts

n Pricing & volume discounts
n Min & max purchase quantities
n Delivery LT
n Material Quality
n Return policies
Supply Contracts
n Local optimization
n Risk sharing
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Local optimization
n Sequential SC
n Retailers make the decision 2 optimize own profit
n Manufacturers react 2 the dicision
n Retailers
n risk of having more inventory than sales
n huge finacial risk - order only some amount.
n Manufacturers
n no risk
n like R. order as much as possible
S case
D P
n Same demand pattern *1000
n The retailer 8 .11
n P = 80$/u, S = 125$/u, SV = 20$/u 10 .11
n Q* =12000  AP = 470,700$ 12 .28
14 .22
n The manufacturer 16 .18
n FC = 100,000$, VC = 35$/u 18 .10
n Q=12000  MP = 440,000$
n SCP = 910,700$
Risk sharing
n Risk sharing
n M. willing to share some risk with R.
n R. order more
n increase profit for both
n Supply contracts
n Buy back contracts
n Revenue sharing contracts
n Quantity flexibility contracts
n Sales rebate contracts
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Buy back contracts

n The seller agrees
n to buy back unsold goods
n for some agreed-upon price
n M. share some of the risk from R.
n motivate R. to increase the order quantity
n M. able to sell more at full price
n if demand turns out to be larger
S case
n The manufacturer
n buy unsold from R. for 5 5$/u
n Q=14000
 MP = 471,900 > 440,000 $
n The retailer
n P = 80$/u, S = 125$/u, SV = 55$/u
n Q* =14000 >12000
 AP = 513,800 > 470,700 $
n SCP = 985,700 > 910,700$
Revenue sharing contracts

n Buyers
n order less because of high wholesale price WP
n convince the sellers 2 reduce WP.
n decrease seller profit
n if unable 2 sell more
n incentive 2 order more
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Revenue sharing contracts

n Buyers
n shares some of its revenue w ith the sellers,
n in return 4 a discount on the wholesale price
n Carefully select
n the wholesale price
n the level of revenue sharing
S case
n Same demand pattern
n The retailer
n P = 60 < 80 $/u, S = 125 $/u, SV = 20 $/u
n share 15% of production revenue
n Q* =14000 >12000  AP = 504,325 > 470,700$
n The manufacturer
n FC = 100,000$, VC = 35$/u
n Q=14000 >12000  MP =471,900 > 440,000$
n SCP = 976,225 > 985,700$
Quantity Flexibility Contracts
n The supplier
n provide full refund for returned /unsold items
n as long as the no. returns
n no more than a certain quantity
n Buy-back contracts
n partial refund for all returned items
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Sales rebate contracts
n Direct incentive 2 the retailer 2 increase sales

n by means of rebate paid by the supplier
n for any item sold above a certain quantity
Global optimization
n Risk sharing contract
n the most profit in SC - hope 2 achieve?
n Global optimization through SC
n What if
n unbiased DM
n allowed 2 identify the best strategy 4 entire SC
n SC partners as in the same organization
n money transfer bw. parties ignored
S case
n Only interest in external cost & revenue
n Relevant data
n S = 125$/u, SV = 20$/u, VC = 35$/u
n Marginal loss: 35-20 = 15 ( $)
n Marginal profit: 125-35 = 90 ( $)
n MP>>ML
n Q =16000  AP = 1,014,500$
n A mechanism 2 allocate SC profit bw the partners ?
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Global optimization
n SC profit maximized
n no each partner optimizes its own profit
n Supply contract
n no unbiased DM
n allow S & C 2 share the risk & the potential benefit
n carefully choose buy-back & whole prices
S case
n The manufacturer - retailer supply contract
n inncrease buy-back price to 65 $/u
n decrease the wholesale price to 75 $/u
n Q =16000
n SCP = 1,014,500 $
Global optimization
n Main drawback
n not provide mechanism
n 2 allocate SC profit bw. the partners
n only provide info. on the best set of actions
n taken by the SC 2 improve profit
n Supply contracts
n allocate the profit among SC members
n no partner can improve his profit
n by deviating from the optimal set of actions
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MULTIPLE ORDERING
n Ordering products
n repeatly at anytine during the year
n Eg. distributor of TV sets.
n Distributors face
n Fixed Supply Lead time
Multiple ordering
n Distributors hold inventory to
n satisy lead time demand M
n protect again demand uncertainty
n balance annual costs
n Inventory holding
n Fixed order
n 2 types of policies
n Continuous review policy
n Periodic review policy
Continuous review policy
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n Invetory reviewed every day
n decision made about whether & how much to order
n Assumptions
n Daily demand D ~ normal distribution
n Inventory reviewed every day
n Lost order
n Specified Service Level
n probability of not stocking out during lead time

% z
n Paremeters
n D ~ ND (,) 90 1.29
n Fixed cost [K] = $/o 91 1.34
n Holding cost [h] = $/u.d 92 1.41
93 1.48
n Lead time [L] = d
94 1.56
n : Service Level 95 1.65
n z: Safety factors 96 1.75
97 1.88
98 2.05
99 2.33

n Inventory position – IP
n Inventory at the warehouse
n plus items ordered, not yet arrived
n minus items backordered
n An effective inventory policy (s,S)
n s - Reorder point:
n S - Order-up-to level
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n Lead time demand M ~ D(M , M )
n Reorder point
s = M + SS
M =M = *L,
SS = zM,
M = *L, z  
n Order-up-to level
S=Q+s
Q=SQRT(2K* /h)
TV distributor case
n L = 2t m sales n  = 44.58 u/w
n  = 97% n  = 32.08 u/w
9 200
n K=$4500 n M = 89.16 u
10 152
n P=$250, n SS = 86.2 u
11 100
n F =18% n s = 176 u
12 221
n Q = 679 u
1 287
n S = 765 u
2 176
… …
8 156
Continuous Review Policy

n Variable lead time
n L ~ ND (L,L) , D ~ ND (D,L)
n M = D*L
n M= D * L
n M= (LD2 + DL2)
n (s,S)
n s = M + zM
n S=Q+s
n z 
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Periodic Review Policy

n Inventory level reviewed periodically
n at regular interval r, eg. month, week
n appropriate quantity ordered
n Fixed costs
n sunk cost, hence ignored
n used 2 determine the review interval

n Inventory policy
n characterized by base-stock level
n the target inventory level
n raise the inventory position
n 2 the base-stock level
n Current order enough 2 cover N
n the demand during a period of (r+L)
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n Paremeters
n D ~ ND (,)
n N ~ D(N , N )
n Periodic interval r
n Lead time [L] = d
n : Service Level
n z: Safety factors
n E: base-stock level
E = N + SS
N = *(r+L)
SS = zN,
N = *(r+L),
z
AIL = r*/2 + SS
TV distributor case
n r=3w m sales
n L = 2w
9 200
n  = 97%
 = 44.58 u/w 10 152
 = 32.08 u/w 11 100
N = 44.58*5 = 222.9 12 221
SS = 1.9*32.08*5=136.3 1 287
E = 223+136=359 2 176
AIL=203.17 … …
n=203.17/44.58 =4.5 (w) 8 156
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RISK POOLING
n Demand aggregation accross locations
n Demand variability reduced
n either standard deviation

n or coefficient of variation
n high demand from one customer
n offset by low demand from another
n Allow to reduce
n SS
n average inventory AI
Risk pooling
n 3 critical points
n Centralizing inventory reduces both SS & AI
n The higher the COV,
n the greater the benefit fr om RP.
n The benefits from RP depend on the behavior of
n demand fr. one market relative to fr. the other
n the more positive correlated the smaller the benefit
ACME case
n Produce & distribute electronic equipment in USNE
n 2 market, 2 warehouse: Paramus & Newton
n 1 M in Chicago
n SL = 97%
n 1500 products, 10,000 accounts
n 7y-old logistics & distribution network
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ACME case
n CEO alternative:
n Replace the 2 Ws w. single W located bw. P & N
n Same SL
n 2W: close to C, decreasing L T

n 1W
n Same SL w. much lower inventory
n Same inventory w. higher SL
n Why
n No retailers go up
n A higher than average demand
n offset by a lower than average demand
ACME case
n Inventory reduce - How much ?
n To centralized dist. sys.
n Same SL
n ACME case
n 2 products A & B
n K =$60/o
n h = $.27/u.w
n W-C transportation cost
n 2W: $1.05/u
n 1W: $1.1/u
ACME case
W 1 2 3 4 5 6 7 8
A-M 33 45 37 38 55 30 18 58
A-N 46 35 41 40 26 48 18 55
TL 79 80 78 78 81 78 36 113
B-M 0 2 3 0 0 1 3 0
B-N 2 4 0 0 3 1 0 0
TL 2 6 3 0 3 2 3 0
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ACME case
Historical data
Statistics Product   COV=/
M A 39.3 13.2 0.34
M B 1.125 1.36 1.21
N A 38.6 12 .31
N B 1.25 1.58 1.26
TL A 77.9 20.71 .27
TL B 2.375 1.9 .81
ACME case
Inventory level
Prod M SS s Q S
M A 39.3 25.08 65 132 158
M B 1.125 2.58 4 25 26
N A 38.6 22.8 62 131 154
N B 1.25 3 5 24 27
CT A 77.9 39.35 118 186 226
CT B 2.375 3.61 6 33 37
Centralized – decentralized systems
Trade off Decentralized Centralized

systems systems
SS - Decrease
SL - Higher
Overhead Cost Much greater -
Customer LT Much lower -
Transportation Outbound Inbound
Cost decrease decrease
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SC INVENTORY MANAGEMENT
n Single facility
n managing inventory to min. own cost
n Multiple facility
n each party - max its own profit
SC inventory management
n SC objective –
n manage inventory
n 2 reduce the systemwide cost
n Consider
n The interaction of the various facilities
n The impact of the inteaction
n on the inventory policy of each facilities
n A single W multi R system
n distribution system w ith 1 W & some Rs
n Assumptions
n Single DM to min SC
n Inventory info available
n An effective way –
n echelon inventory
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n In DS, each stage/level – an echelon
n Echelon inventory
n base of inventory policies
n an effective way to manage sys.
n extended in natural way
n to manage more complex SCs.
n Echelon inventory EI
EI = OH + DSI
n OH -inventory onhand
n DSI - all down stream inventory.
n inventory in transit
n inventory in stock
n Echelon inventory position EIP
EIP = EI + OI - BO
n OI - items ordered but not yet arrived.
n BO - all items backordered
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n Echelon approach
n Individual R – managed by (s,S) policy
n W ordering decisions based on EI position
s = *L + z**L
n L – echelon lead time : L = L 1+ L2
n L1- S-W lead time
n L2 - W-R lead time
n  - average of aggregate demand
n  - sd. of aggregate demand
TV distributor case
n I policy 4 warehouse m AD
n Aggregate R demand AD
n L = 2w 9 200
Ensure EIP = 176 or 4w supply 10 152
n Retailer 11 100
n  = 11.6 u/w 12 221
n  = 4.5 u/w
1 287
n L2= 1w
2 176
n  = 97%
s=20 … …
8 156
Effective inventory reduction strategies

1. Periodic inventory review policy
2. Tight management of usage rates, LT & SS
3. Reduce SS level
4. Introduce / enhance cycle counting practice
5. ABC approach
6. Shift more inventory or inventory ownership 2 suppliers
7. Quantitatives approaches
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1. Periodic inventory review policy
n identify slow-moving & obsolete items
n continuous reduce I level
2. Tight management of usage rates, LT & SS
n I kept at the appropriate level
3. Reduce SS level
n focusing on LT reduction

1. Introduce / enhance cycle counting practice
n annual / monthly / daily
2. ABC approach
n A - 20 - 80%
n B - 15 - 15%
n C - 65 - 5%
3. Shift more inventory or inventory ownership 2 suppliers
4. Quantitatives approaches
n focus on the right balance bw. holding & odering costs

n Reduce I level - Increase ITR = AS/AIL
Industry UQ M LQ
Electronic components 8.1 4.9 3.3
Electronic computers 22.7 7 2.7
Household equipment 6.3 3.9 2.5
Paper mills 11.7 8 5.5
Industrial chemicals 14.1 6.4 4.2
Bakery products 30.9 23 12.6
Books 7.2 2.8 1.5
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FORECASTING
n Why forecast
n Rules of forecast
n Forecasting tools & methods
n Forecasting technique selection
Why forecasting
n Best possible use of forecast

n correctly managing inventory
n inventory decision making
n Decisions - whether to
n enter a particular market
n expand production capacity
n implement a given promotional plan
Rules of forecast
n The forecast always wrong

n The longer the horizon, the worse the forecast
n Aggregate forecast - more accurate
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Forecasting tools & methods
n Jugemental methods
n collection of expert opinions
n Market research methods
n qualitative studies of consumer behavior
n Time series methods
n future performane extrapolated from past per.
n Causual methods
n based on system variables
Jugemental methods
n Assemble the opinions of experts
n in systematic way
n Sales force compisite
n Panels of experts
n Delphi method
Market research methods

n Market testing
n focus group pf potential customers
n assembled & tested products response
n response extrapolated
n Market survey
n gathering data from potential customers
n through interviews, surveys.
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Time series methods

n Use variety of pass data to estimate future data
n Methods
n Moving averate
n Exponentially smoothing
n Regression analysis & Holt' method
n for data with trends
n Winter's method
n exponential smoothing with trends & seasonality
Causual methods
n Based on data other than the data being predicted
n Funtion of some other pieces of data
Forecasting technique selection

n What is the purpose of forecast?
n How is it to be used?
n What are the dynamics of the system?
n How important is the past in estimating the future?
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SCIM 04
THE VALUE OF INFORMATION
Nguyễn Như Phong

2021

n The Value of Information
n The Bullwhip effect
n Quantifying the BE
n Centralized information
n Methods for coping w. BE
n SC design with information
n SC design for conflicting goals

n The increase in variability in SC
n Cause
n Servere operational inefficiencies
n Cost penalties
n Variability in aggregate demand quite small
n orders placed by distributors have a huge variety
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The Value of Information

n Traditional SC
n distributors placed orders
n manufacturers try to satisfy the orders
n VMI - Vendor Managed Inventory
n JIT distribution strategy
n specify the appropriate delivery quantities
n more effectively meet customers' need
n more evenly distribute the workload
n on manufacturing & logistics systems.

n What reasons for the increase variability in SC
n How to cope w ith the increase in variability
n What impact of transfering demand info across SC
n Can VMI solved the operational problems in SC?
n How 2 meet
n conflicting goals of different partner s & facilities?

n Informative Age
n Databases, EDI, DSS,
n Internet, Intranet, Web services, ..
n The value of using IT
n The potential availibility more & more info in SC
n The implication on the effective SC M.
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n In modern SC, the info. replaces inventory

n Enormous implication of abundant available info.
n Cs need products not just info.
n Info changes the way
n SC effectively managed
n Lowered inventory
n How info. affects the design & operation of SC?
n much more efficiently & effectively

n Accurate info
n about inv. level, orders, production, delivery status
n opportunities to improve SC design & mana.
n makes
n the managers more effective
n The SC design & mana. more complicated
n many more issues considered

n Abundant info. helps & enables
n Reduce variability
n Better forecasts
n Coordination of manufacturing & distribution
n Better serve customers
n Retailers react & adapt more quickly
n Leadtime reductions
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THE BULLWHIP EFFECT
THE BULLWHIP EFFECT

n C demand not vary much,
n inv. & backorder levels
n fluctuate considerably across SC.
n BE –
n increase in variability
n as travelling up in the SC.
The Bullwhip effect

n 4-stage SC : R – W – D – M
n R observes C demand, places orders to W
n Place order : R – W, W – D, D – M  order LT
n Deliver prod: M – D – W – R  delivery LT
n X forecast the demand of Y: X-Y
n R – C, W – R , D – W , M – D
n Variability in orders : C < R < W < D < M
n SS & capacity to meet same SL : R < W < D < M
n IL & costs : R < W < D < M
78
8/15/2021
The Bullwhip effect

n Identify techniques & tools
n to control BE
n to control the increase in varibility in SC
n Main factors contributing to BE
n Demand forecasting
n Leadtime
n Batch ordering
n Price fluctuation
n Inflated orders
Demand forecasting
n Concerning inventory control strategies
n eg. s-S
n reorder point s
n average LT demand
n SS
n forecast technique used 2 estimate
n demand average
n demand variability
n s, S
Leadtime
n Increase in LT
n magnify increase in variability
n Longer LT
n significant change in
n SS & reorder point
n order quantity
79
8/15/2021
Batch ordering
n Large order
n follow by no order
n then large orders, ...
n Distorted & highly variable pattern orders
Price fluctuation
n Retailers
n attempt 2 stock up
n when prices - lower
n Accentuated by the prevailing practice
n offering promotion
n discount at certain time / for certain quantities
Inflated orders
n Placed during shortage periods
n Suspect that a product in short supply
n Anticipating receiving supply
n proportional 2 the amount ordered
n Shortage period over - back 2 standard orders
n Distortion & variation in demand estimates
80
8/15/2021
QUANTIFYING THE BE
n To better understand & control the BE

n To demonstrate
n the magnitude of the var iability increase
n at every stage
n To show the relationship bw.
n The forecasting technique & LT
n The increase in variability
Quantifying the BE
n 2 – stage SC : C – R – M
n R – (s, S) inventory policy
s = L + zL
n Moving average forecasting w. p periods
t = (D t-p+…+D t) / p
t2 = [(D t-p- t )2+…+(D t- t )2)] / (p-1)
Quantifying the BE
BEF = V(Q) / V(D)  1 + 2L/p + 2L 2/p2
V(Q): the variance of the orders placed by R to M
V(D): the variance of the customer demand seen by R
 p large, L small : BE due to forecasting error negligible
Eg. p=5, L=1  BEF  1.4

p=10, L=1  BEF  1.2
81
8/15/2021
CENTRALIZED INFORMATION
n Centralized demand info
n One of the most frequent suggestions for reducing BE
n To provide each stage
n w. complete info on the actual C demand.
n Each stage of SC
n Use the actual C demand data
n to create more accurtate forecasts
n Rather than relying on the order

n received fr. previous stage.
n Value of sharing CDI

n SC w. centralized DI
n SC w. decentralized DI
Centralized demand information
n Each stage
n Receive the R ‘s forecast mean demand
n Follow and order-up-to-inventory policy
n Same
n Demand info
n Forecasting technique
n Inventory policy
11 April 2003
82
8/15/2021
n The variance of the orders placed by k th stage

V(Q k) / V(D)  1 + 2L (k)/p + 2(L (k) 2/p2
L(k)= 1k-1Li : total LT to the k th stage
Li : LT fr. stage i to stage i+1
Eg: L 1 : R-W, L 2: W-D, L 3: D-M
 L(4) = L 1+ L2 + L 3
n The variance of the orders placed by a given stage

n Increasing function of
n the total LT bw. that stage and R
n Becoming larger as moving up the SC
Decentralized demand information
n R‘s forecast mean demand

n not available to the remainders
n Same
n Inventory policy
n But different in demand info
83
8/15/2021
n The variance of the orders placed by kth stage

V(Q k) / V(D)  1k-1 [1 + 2L i/p + 2L i2/p2]
n Increase multiplicative at each stage of the SC
n Become larger as moving up the SC
Value of centralized information
n How much the variability grows in SC

n Aditively in the total LT for CSC
n Multiplicatively in the total LT for DSC
n CDI
n Sharing demand info.
n Significantly reduce the BE
n Not eliminate the BE
METHODS FOR COPING WITH BE
n Reducing uncertainty
n Reducing variability
n LT reduction
n Strategic partnership
84
8/15/2021
Methods for coping w. BE
n By centralized demand info.
n Each stage
n same demand data,
n same forecasting method ,
n same ordering policy
n Variability inherence in the C demand process
n By eg. Every low pricing strategy

n LT reduction
n Order LT to produce & ship the item
 cross docking
n Info LT to process an order
 Electronic data interchange – EDI
85
8/15/2021

n Change the way info shared, inventory managed
n VMI – vendor managed inv.
n M manages the inv. at the R outlet
n Determine itself How much inventory
n to keep onhand
n To ship to R in each period
n Not rely on the R order  avoiding the BE entirely
n CDI –
n dramatically reduce the variability
n seen by the upstream stages
SC DESIGN WITH INFO
n Effective forecast
n Coordination of systems
n Locating desired products
n LT reduction
n Integrating the SC
Effective forecasts
n Using info to improve SC performance
n Info. lead to more effective forecast
n Prediction of future demand
n the more factors – the more accurate
n R forecast
nPrevious sales
nOther factors : pricing, promotion, release of new products
 Some controlled by W, D, M, Competitors
n D & M forecasts influenced by factors under R control
86
8/15/2021
Effective forecasts
n Cooperating forecasting systems
n Sophisticated info sys
n enable iterative forecasting process
n All of the participants
nCollaborate to arive at an agreed upon forecast.
nShare & use the same forecasting tool
 Decrease BE
Coordination of systems
n Many systems within SC
 series of complex trade – off
n M : setup & operating cost– inventory cost
n IL: holding, setup cost – SL
n D : inventory cost – transportation cost
n Ownership
n Common owner – overall cost reduced
n No common owner –
n some kind of coordination to operate effectively
n To reduce overall sys cost
n How savings shared among the sys owners
87
8/15/2021
n Info must be available to coordinate
n Knowledge of production status & costs
n Transportation availibility & quantity discount
n Inventory costs, levels
n Capacities & C demand.
Locating desired products
n More than one way to meet C demand

n MTS – meeting C demand fr. R inventory
n Locate & deliver goods
n as effective as having them in stock
n R stock out
n Search database & promise
n to have items delivered to C within 24 h
n Competitor willing to transfer the item ?
Lead time reduction

n Lead time reduction leads to
n Ability to quickly fill the C orders
n Reduction in BE
n More accurate forecast
n Reduction in finished goods inventory levels
88
8/15/2021
Lead time reduction

n Reason why
n Firms search for shorter LT suppliers
n C: Criterion for vendor selection
n How
n Effective info sys, eg. EDI
n Tranfering POS data fr. R to its S.
Integrating the SC
n Info enable to integrate stages in SC
n The managers of different stages
n have conflicting goals
 neccessitate the integration
n Using the available info
n can reduce the cost of the system
n while accounting for conflicting goals
SC DESIGN FOR CONFLICTING GOALS
n Conflicting objectives in the SC

n Designing the SC for conflicting goals
89
8/15/2021
Conflicting objectives in the SC

n Raw material Suppliers
n Stable volume requirements
n w. little variation in the mix
n Flexible delivery time
n Large volume demand
n Manufacturers – Demand pattern
n known far into the future
n Little variability

n Materials & warehousing & outbound logistics
n Minimizing transportation costs, inventory levels
n Quickly replenishing stock
n Retailers
n Short order leadtimes
n Efficient & accurate order delivery
n Customer
n Demand in-stock inventory
n Enormous variety & low price
Designing the SC for conflicting goals

n In the past,
n For some goals to be met,
n the others had to be sacrificed.
n The SC viewed as a set of trade-offs
n Large amout of info available
n SC come closer to meeting all of conflicting goals
n Some trade-offs – may not be trade-offs at all.
90
8/15/2021

n Modern SC
n Use of advanced IT & creative network design
n Trade-offs – elimination / reduced impact
n The lot size – inventory trade-off
n The inventory – transportation cost
n The leadtime – transportation cost
n The product variety – inventory
n The cost – customer service
The lot size – inventory trade-off

n M – large lot size  high inventory
n R/D:
n short delivery LT, wide product variety
n Manufacturing revolution
n 1980 -
n Eg. Set up time reduction, Kanban, CONWIP
n Switching to MSs w. smaller lot size
n Make M meet R/D needs
n to response rapidly to C needs

n Info available
n ensure M has as much time as possible
n to react to the need of downstream SC members
n D/R observe M status & inv.
n to quote LT to C more accurately
n D/R understanding of & confidence in M’s ability
n to reduce inventory
91
8/15/2021
The inventory – transportation cost trade-off

n Carrying / operating full truck load –
n minimize transportation costs.
n Demand –
n far less than a single truck load
 higher inventory costs

n Advanced IT to reduce the effect
n Production control sys
n to produce items as late as pos to ensure full TL
n Distribution control sys
n combine shipment of different products
n fr. warehouse to store to fill truck.
n Cross –docking
n combine shipments fr. different M onto one truck
n DSS
n find the appropriate balance bw. transp. & inv costs
The leadtime – transportation cost trade-off

n Total LT
n processing orders, procuring & manufacturing &
n transproting items,
n lowest when large quantity transported
n LT reduced
n if items transported immediately
n after manufactured / arrive fr. S.
92
8/15/2021

n Trade-off bw.
n Holding items to reduce TC
n Shipping items immediately to reduce LT
n Info used to reduced the effect.
n TC controlled reducing the need to hold items
n Improved forecasting techniques & IS reduce LT
The product variety – inventory trade-off

n Product variety –
n greatly increase the complexity of SC
n M
n PV  M cost increase, M efficiency decrease
n D
n PV  increase transportation & warehousing costs
n Difficult to forcast demands
 higher inventory level to maintain the same SL

n Delay defferentiation
n to support the required PV efficiently
n Generic product
n shipped as far as pos sible down the SC
n before variety added
n Single product received in the DC
n Modified / customized
n according to C demand as seen by W
93
8/15/2021

n Risk pooling
n Genneric product
 aggregated C demand across all product
n More accurate demand forecast
 much smaller variety  reduced SS.
The cost – customer service trade-off

n Reducing inventories, M costs, T costs
n at expense of C service.
n The level of C service can be maintained
n while decreasing costs
n by using info. & appropriate SC design

n Advanced SCM techniques & IS
n Give C a kind of service never been realize before
n Mass customization
n Delivering highly personalized goods & services
n At resonable prices
n At high volume
94
8/15/2021
SCIM 04
Nguyễn Như Phong

2021

n The Value of Information
n The Bullwhip effect
n Quantifying the BE
n Centralized information
n Methods for coping w. BE
n SC design with information
n SC design for conflicting goals

n The increase in variability in SC
n Cause
n Servere operational inefficiencies
n Cost penalties
n Variability in aggregate demand quite small
n orders placed by distributors have a huge variety
95
8/15/2021

n Traditional SC
n distributors placed orders
n manufacturers try to satisfy the orders
n VMI - Vendor Managed Inventory
n JIT distribution strategy
n specify the appropriate delivery quantities
n more effectively meet customers' need
n more evenly distribute the workload
n on manufacturing & logistics systems.

n What reasons for the increase variability in SC
n How to cope w ith the increase in variability
n What impact of transfering demand info across SC
n Can VMI solved the operational problems in SC?
n How 2 meet
n conflicting goals of different partner s & facilities?

n Informative Age
n Databases, EDI, DSS,
n Internet, Intranet, Web services, ..
n The value of using IT
n The potential availibility more & more info in SC
n The implication on the effective SC M.
96
8/15/2021
n In modern SC, the info. replaces inventory

n Enormous implication of abundant available info.
n Cs need products not just info.
n Info changes the way
n SC effectively managed
n Lowered inventory
n How info. affects the design & operation of SC?
n much more efficiently & effectively

n Accurate info
n about inv. level, orders, production, delivery status
n opportunities to improve SC design & mana.
n makes
n the managers more effective
n The SC design & mana. more complicated
n many more issues considered

n Abundant info. helps & enables
n Reduce variability
n Better forecasts
n Coordination of manufacturing & distribution
n Better serve customers
n Retailers react & adapt more quickly
n Leadtime reductions
97
8/15/2021
THE BULLWHIP EFFECT
THE BULLWHIP EFFECT

n C demand not vary much,
n inv. & backorder levels
n fluctuate considerably across SC.
n BE –
n as travelling up in the SC.
The Bullwhip effect

n 4-stage SC : R – W – D – M
n R observes C demand, places orders to W
n Place order : R – W, W – D, D – M  order LT
n Deliver prod: M – D – W – R  delivery LT
n X forecast the demand of Y: X-Y
n R – C, W – R , D – W , M – D
n Variability in orders : C < R < W < D < M
n SS & capacity to meet same SL : R < W < D < M
n IL & costs : R < W < D < M
98
8/15/2021
The Bullwhip effect

n Identify techniques & tools
n to control BE
n to control the increase in varibility in SC
n Main factors contributing to BE
n Demand forecasting
n Leadtime
n Batch ordering
n Price fluctuation
n Inflated orders
Demand forecasting
n Concerning inventory control strategies
n eg. s-S
n reorder point s
n average LT demand
n SS
n forecast technique used 2 estimate
n demand average
n demand variability
n s, S
Leadtime
n Increase in LT
n magnify increase in variability
n Longer LT
n significant change in
n SS & reorder point
n order quantity
99
8/15/2021
Batch ordering
n Large order
n follow by no order
n then large orders, ...
n Distorted & highly variable pattern orders
Price fluctuation
n Retailers
n attempt 2 stock up
n when prices - lower
n Accentuated by the prevailing practice
n offering promotion
n discount at certain time / for certain quantities
Inflated orders
n Placed during shortage periods
n Suspect that a product in short supply
n Anticipating receiving supply
n proportional 2 the amount ordered
n Shortage period over - back 2 standard orders
n Distortion & variation in demand estimates
100
8/15/2021
QUANTIFYING THE BE
n To better understand & control the BE

n To demonstrate
n the magnitude of the var iability increase
n at every stage
n To show the relationship bw.
n The forecasting technique & LT
Quantifying the BE
n 2 – stage SC : C – R – M
n R – (s, S) inventory policy
s = L + zL
n Moving average forecasting w. p periods
t = (D t-p+…+D t) / p
t2 = [(D t-p- t )2+…+(D t- t )2)] / (p-1)
Quantifying the BE
BEF = V(Q) / V(D)  1 + 2L/p + 2L 2/p2
V(Q): the variance of the orders placed by R to M
V(D): the variance of the customer demand seen by R
 p large, L small : BE due to forecasting error negligible
Eg. p=5, L=1  BEF  1.4

p=10, L=1  BEF  1.2
101
8/15/2021
n Centralized demand info
n One of the most frequent suggestions for reducing BE
n To provide each stage
n w. complete info on the actual C demand.
n Each stage of SC
n Use the actual C demand data
n to create more accurtate forecasts
n Rather than relying on the order

n received fr. previous stage.
n Value of sharing CDI

n SC w. centralized DI
n SC w. decentralized DI
n Each stage
n Receive the R ‘s forecast mean demand
n Follow and order-up-to-inventory policy
n Same
n Demand info
n Inventory policy
11 April 2003
102
8/15/2021
n The variance of the orders placed by k th stage

V(Q k) / V(D)  1 + 2L (k)/p + 2(L (k) 2/p2
L(k)= 1k-1Li : total LT to the k th stage
Eg: L 1 : R-W, L 2: W-D, L 3: D-M
 L(4) = L 1+ L2 + L 3

n Increasing function of
n the total LT bw. that stage and R
n Becoming larger as moving up the SC
n R‘s forecast mean demand

n not available to the remainders
n Same
n Inventory policy
n But different in demand info
103
8/15/2021
n The variance of the orders placed by kth stage

V(Q k) / V(D)  1k-1 [1 + 2L i/p + 2L i2/p2]
n Increase multiplicative at each stage of the SC
n Become larger as moving up the SC
Value of centralized information
n How much the variability grows in SC

n Aditively in the total LT for CSC
n Multiplicatively in the total LT for DSC
n CDI
n Sharing demand info.
n Significantly reduce the BE
n Not eliminate the BE
METHODS FOR COPING WITH BE
n LT reduction
104
8/15/2021
n By centralized demand info.
n Each stage
n same demand data,
n same forecasting method ,
n same ordering policy
n Variability inherence in the C demand process
n By eg. Every low pricing strategy

n LT reduction
n Order LT to produce & ship the item
 cross docking
n Info LT to process an order
 Electronic data interchange – EDI
105
8/15/2021

n Change the way info shared, inventory managed
n VMI – vendor managed inv.
n M manages the inv. at the R outlet
n Determine itself How much inventory
n to keep onhand
n To ship to R in each period
n Not rely on the R order  avoiding the BE entirely
n CDI –
n dramatically reduce the variability
n seen by the upstream stages
SC DESIGN WITH INFO
n Effective forecast
n Coordination of systems
n Locating desired products
n LT reduction
n Integrating the SC
Effective forecasts
n Using info to improve SC performance
n Info. lead to more effective forecast
n Prediction of future demand
n the more factors – the more accurate
n R forecast
nPrevious sales
nOther factors : pricing, promotion, release of new products
 Some controlled by W, D, M, Competitors
n D & M forecasts influenced by factors under R control
106
8/15/2021
Effective forecasts
n Cooperating forecasting systems
n Sophisticated info sys
n enable iterative forecasting process
n All of the participants
nCollaborate to arive at an agreed upon forecast.
nShare & use the same forecasting tool
 Decrease BE
n Many systems within SC
 series of complex trade – off
n M : setup & operating cost– inventory cost
n IL: holding, setup cost – SL
n D : inventory cost – transportation cost
n Ownership
n Common owner – overall cost reduced
n No common owner –
n some kind of coordination to operate effectively
n To reduce overall sys cost
n How savings shared among the sys owners
107
8/15/2021
n Info must be available to coordinate
n Knowledge of production status & costs
n Transportation availibility & quantity discount
n Inventory costs, levels
n Capacities & C demand.
Locating desired products
n More than one way to meet C demand

n MTS – meeting C demand fr. R inventory
n Locate & deliver goods
n as effective as having them in stock
n R stock out
n Search database & promise
n to have items delivered to C within 24 h
n Competitor willing to transfer the item ?
Lead time reduction

n Lead time reduction leads to
n Ability to quickly fill the C orders
n Reduction in BE
n More accurate forecast
n Reduction in finished goods inventory levels
108
8/15/2021
Lead time reduction

n Reason why
n Firms search for shorter LT suppliers
n C: Criterion for vendor selection
n How
n Effective info sys, eg. EDI
n Tranfering POS data fr. R to its S.
Integrating the SC
n Info enable to integrate stages in SC
n The managers of different stages
n have conflicting goals
 neccessitate the integration
n Using the available info
n can reduce the cost of the system
n while accounting for conflicting goals
SC DESIGN FOR CONFLICTING GOALS
n Conflicting objectives in the SC

n Designing the SC for conflicting goals
109
8/15/2021

n Raw material Suppliers
n Stable volume requirements
n w. little variation in the mix
n Flexible delivery time
n Large volume demand
n Manufacturers – Demand pattern
n known far into the future
n Little variability

n Materials & warehousing & outbound logistics
n Minimizing transportation costs, inventory levels
n Quickly replenishing stock
n Retailers
n Short order leadtimes
n Efficient & accurate order delivery
n Customer
n Demand in-stock inventory
n Enormous variety & low price

n In the past,
n For some goals to be met,
n the others had to be sacrificed.
n The SC viewed as a set of trade-offs
n Large amout of info available
n SC come closer to meeting all of conflicting goals
n Some trade-offs – may not be trade-offs at all.
110
8/15/2021

n Modern SC
n Use of advanced IT & creative network design
n Trade-offs – elimination / reduced impact
n The lot size – inventory trade-off
n The inventory – transportation cost
n The leadtime – transportation cost
n The product variety – inventory
n The cost – customer service

n M – large lot size  high inventory
n R/D:
n short delivery LT, wide product variety
n Manufacturing revolution
n 1980 -
n Eg. Set up time reduction, Kanban, CONWIP
n Switching to MSs w. smaller lot size
n Make M meet R/D needs
n to response rapidly to C needs

n Info available
n ensure M has as much time as possible
n to react to the need of downstream SC members
n D/R observe M status & inv.
n to quote LT to C more accurately
n D/R understanding of & confidence in M’s ability
n to reduce inventory
111
8/15/2021

n Carrying / operating full truck load –
n minimize transportation costs.
n Demand –
n far less than a single truck load
 higher inventory costs

n Advanced IT to reduce the effect
n Production control sys
n to produce items as late as pos to ensure full TL
n Distribution control sys
n combine shipment of different products
n fr. warehouse to store to fill truck.
n Cross –docking
n combine shipments fr. different M onto one truck
n DSS
n find the appropriate balance bw. transp. & inv costs

n Total LT
n processing orders, procuring & manufacturing &
n transproting items,
n lowest when large quantity transported
n LT reduced
n if items transported immediately
n after manufactured / arrive fr. S.
112
8/15/2021

n Trade-off bw.
n Holding items to reduce TC
n Shipping items immediately to reduce LT
n Info used to reduced the effect.
n TC controlled reducing the need to hold items
n Improved forecasting techniques & IS reduce LT

n Product variety –
n greatly increase the complexity of SC
n M
n PV  M cost increase, M efficiency decrease
n D
n PV  increase transportation & warehousing costs
n Difficult to forcast demands
 higher inventory level to maintain the same SL

n Delay defferentiation
n to support the required PV efficiently
n Generic product
n shipped as far as pos sible down the SC
n before variety added
n Single product received in the DC
n Modified / customized
n according to C demand as seen by W
113
8/15/2021

n Risk pooling
n Genneric product
 aggregated C demand across all product
n More accurate demand forecast
 much smaller variety  reduced SS.

n Reducing inventories, M costs, T costs
n at expense of C service.
n The level of C service can be maintained
n while decreasing costs
n by using info. & appropriate SC design

n Advanced SCM techniques & IS
n Give C a kind of service never been realize before
n Mass customization
n Delivering highly personalized goods & services
n At resonable prices
n At high volume
114
8/15/2021
SCIM 05
SUPLY CHAIN INTEGRATION
Nguyễn Như Phong

(Tài liệu giảng dạy cho ISE)
2021
SUPLY CHAIN INTEGRATION

n SC Integration
n SC Strategies
n Identifying SC strategies
n Implementing SC strategies
n Demand Driven Strategies
n The Internet Impacts
n Centralized vs Decentralized Control
n Cetral vs Local Facilities
Nguyễn Như Phong
11 April 2003
SC INTEGRATION
n SCI
n effective integration of
n Suppliers - Manufacturers - Warehouses - Stores
n coordinate activities accross the SC
n improve performance
n reduce costs
n increase SL
n reduce BE
n effectively respond 2 market changes
Nguyễn Như Phong
11 April 2003
115
8/15/2021
SC Integration
n Integrating
n front-end - customer demand
n back-end - production & manufacturing
n Information - play an important role
n SC designed 2 make info. available
n SC strategies designed
n 2 take the advantage of available info.
n expensive networks designed
n 2 compensate 4 the lack of info.
Nguyễn Như Phong
11 April 2003
SC STRATEGIES
n Traditional SC strategies
n Push-based SC
n Pull-based SC
n Mordern SC strategies
n Stem fr. the M revolution of the 1980s
n Hybrid approach
n Push-Pull SC
Nguyễn Như Phong

11 April 2003
Push-based SC
n Production & distribution decisions

n based on longterm forecasts
n M–
n use R orders to forecast C demand
n take much longer 2 react 2 the changing
marketplace
n The inability to meet changing demand patterns
n The obsolescence of SC inv entory
Nguyễn Như Phong

11 April 2003
116
8/15/2021
Push-based SC
n BE – variability increase
n Excessive inventory
n Large & more variable production batches
n Unacceptable SLs
n Product obsolescence
Nguyễn Như Phong

11 April 2003
Push-based SC
n Inefficient resource utilization
n Planning much more difficult –
n Peak / average demand ?
n Not clear how to
n Determine production capacity
n Plan transportation capacity
Nguyễn Như Phong

11 April 2003
Push-based SC
n Disadvantages
n Increased transp ortation costs
n High inventory levels
n High M costs
n emergency production changeovers
Nguyễn Như Phong

11 April 2003
117
8/15/2021
Pull-based SC
n Production & distribution
n Demand driven
n Coordinate w. actual C D rather than a forecast
n Pull-based SC
n use fast info flow mechanism
n to transfer CD info to M
n eg. POS data
Nguyễn Như Phong

11 April 2003
Pull-based SC
n Advantages
n Better anticipate incoming orders
n LT decrease
n System variability decrease
n R inventory decrease
n M inventory decrease
→ Significant reduction in sys inv level

n Enhanced ability to manage resources
n Reduction in sys costs
Nguyễn Như Phong

11 April 2003
Pull-based SC
Ex.
An apparel manufacturer changed 2 Pull based SC
n Retailers
n order about once a month

n transfer POS data daily/weekly
n Manufacturer
n continuously adjust production quantities
n according 2 true C. demand
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Pull - based SC
n Disadvantage
n Difficult to implement
n Long LT
n Impractical to react to demand info
n More difficult to take the advantage of
n economies of scale in manu & trasportation
n Sys not planned far ahead in time
Nguyễn Như Phong

11 April 2003
Hybrid SC
n Hybrid SC - push-pull strategy
n Pushed based strategy
n Appropriate for part of the SC . eg. the initial stages
n Pulled based strategy
n Appropriate for the rest . eg. the final stages
n The stage interface - the push-pull boundary.
Nguyễn Như Phong

11 April 2003
Hybrid SC
n The PP boundary
n located somewhere in the SC time line.
n the beginning - the procurement of RM from S.
n the end - the delivery of an order 2 the C
n switch from using push to using pull strategy.
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PC manufacturer case
n Push system
n build to stock
n made all production & distribution based on forecast
n Push-Pull
n M build 2 order
n component inventory managed based on forecast
n final assembly respond 2 a specific C order
n PP boundary - at the beginning of FA.
Nguyễn Như Phong

11 April 2003
PC manufacturer case
n Aggregate Component demand
n accurate forecast
n smaller demand uncertainty
n safety stock reduction
Nguyễn Như Phong

11 April 2003
Hybrid SC
n Postponement - Delay differentiation strategy
n which specific product manufactured
n delayed as long as pos.
n Producing generic/family product
n defferentiated 2 a specific product
n when demand revealed
n PP boundary - the time of differentiation
n generic/family product - push
n specific product - pull
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IDENTIFYING SC STRATEGIES
n The appropriate SC strategies for a product?
n Factors
n uncertainty in customer demand
n economies of scale
n either in production or distribution
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11 April 2003
Identifying SC strategies
n hight -
n based on realize demand -
n pull strategy
n low -
n based on long-term forecast -
n push strategy.
Nguyễn Như Phong

11 April 2003
Identifying SC strategies
n Economies of scale
n important
n reducing cost - great value of aggregate demand
n long-term forecast - push strategy.
n not important
n aggregation not reduce cost
n pull strategy
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Hight demand uncertainty

Low EOS importance
n Pull-based SC strategy
n Eg. Computer industry (assembly & distribution)
n Demand unstable - pull
n EOS not important - pull
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11 April 2003
Low demand uncertainty

High EOS importance
n Push-based SC strategy
n Eg. Grocery industry: beer, pasta, ...
n demand quite stable
n reduce transportation cost
n critical 4 controlling SC cost
n managing inventory based on longterm forecast
n not increase inventory holding costs
n delivery costs reduced by leveraging EOS.
Nguyễn Như Phong

11 April 2003
Low demand uncertainty

Low EOS importance
n Push-Pull SC strategy
n Eg. Books & CD industry
n Low demand uncertainty - push
n Low EOS importance - pull
n high volume/fast moving products
n more careful analysis required
n depend on specific costs & uncertainty
n traditional push may appropriate
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High demand uncertainty

High EOS importance
n Eg. Furnirure, automobile industries
n large product families - h igh demand uncertainty
n bulky products - high delivert cost - important EOS
n distinguish bw. production & distribution strategies
n production strategies - pull
n production based on longterm forecast - impossible

n not keep inventory
n distribution strategies - push
n delivery according 2 fixed schedule
n EOS 2 reduce transportation costs
Nguyễn Như Phong

11 April 2003
IMPLEMENTING PP STRATEGIES
n Appropriate level of pull & push 4 different prod.s
n Affected factors
n product complexity
n manufacturing LT
n supplier-manufacturer relationship
n Location of PP boundary
n Dell - at the assembly point
n Furniture - at the production point
Nguyễn Như Phong

11 April 2003
Implementing a PP strategy
n Push portion
n small uncertainty - SL not an issue
n long LT & complex SC structure
n focus on cost mimimization
n inventory, transportation, production costs
n better utilizing resourses
n SC planning process used
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n Pull portion
n high uncertainty, simple structure, short LT
n focus on SL
n deploying flexible & resposive SC
n order fullfillment process applied
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11 April 2003
n Push & pull portions
n interact only at the boundary
n need 2 coordinate the strategies
n typically through buffer inventory
n output of the planning process in push portion
n input 2 the fulfillment process in pull portion
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11 April 2003
n Forecast demand
n the inteface bw. push & pull portion
n based on data from pull portion
n used to
n drive planning process
n determine buffer inventory.
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Push Pull
Objectives Min Cost Max SL
Complexity High Low
LT Long Short
Focus Resource allocation Resposiveness
Process SC planning Order fulfillment
Nguyễn Như Phong

11 April 2003
GM case
n Automobile industry
n long transportation LTs
n PP strategy
n Inventory maintained in Orlando RDC .
n based on longterm forecast
n delivered 2 dealers based on realized demand
n PP boundery located at RDC
11 April 2003 Nguyeãn Nhö Phong
GM case
n Failure due to
n RDC shift I costs from dealers 2 GM
n allow dealers 2 reduce I level
n No difference bw. small & large dealers
n large dealers not interested in the arrangement
n PP > MTO strategy
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DEMAND DRIVEN STRATEGIES

n Integrating demand info
n into the SC planning process
n Processes generate demand info
n Demand forecast
n longterm estimates of expected demand
n Demand shaping
n impact of marketing plans on demand forecast
Nguyễn Như Phong

11 April 2003
Demand driven strategies

n Forecast error / accuracy
n forecast not completely accurate
n detrimental impact on SC performance
n lost sales
n obsolete inventory
n inefficient resourse utilization
n SC strategies increase forecast accuracy?
Nguyễn Như Phong

11 April 2003

n Approaches
n Select the boundary 2 aggregate demand
n accross products, geography, time
n Use market analysis, demographic-economic trend
n Determine the optimum product assortment
n by store
n reduce SKU number competing in the same market
n Incorporate collaborative processes with customers
n planning & forecasting
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n Demand planning process
n demand forecast by SKU by location
n Supply demand management
n the SC can support the forecast
n match supply - demand
n identify the strategy
n min SC costs
n max SC profits
Nguyễn Như Phong

11 April 2003

n Iterative processes used 2 identify
n marketing budget, supply & distribution resources
n the impact of
n demand deviation
n LT change
n competitor promotional activities
Nguyễn Như Phong

11 April 2003
Campbell's Soup's case
n Winter promotion 4 chicken noodle soup

n Seasonal spike demand
n require preparing & storing chicken & ingredients
n Promotion
n production start early & use overtime capacity
n Costs of excess production & inventory
n far exceed the promotion revenue.
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THE INTERNET IMPACTS

n Internet
n tremendous influence
n changes happening rapidly
n Dirrect business models
n enable customers order products over the internet
n companies sell prod. wo. relying in distributors
Nguyễn Như Phong

11 April 2003
The Internet Impact

n E-business
n a collection of business models & process
n motivated by I technology
n focusing on
n improvement of extended E. performance
n E-commerce
n ability 2 perform major commerce transaction
n electronically
Nguyễn Như Phong

11 April 2003
The Internet Impact

n E-commerce a part e-business
n Internet technology
n the force behind the business change
n E-business focus
n extended enterprise
n intra-organzational B2C, B2B transactions
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The Internet Impact

n B2C
n business directly 2 customers
n especially retail activities over the internet
n B2B
n business conduted over the internet
n predominantly bw. businesses
n exchange & colaboration w. suppliers & vendors
n achieve common goals
Nguyễn Như Phong

11 April 2003
The Internet Impact

n Internet impact on SC performance
n help move away from traditional push strategy
n toward a pull strategy
n end up with push-pull strategy
Nguyễn Như Phong

11 April 2003
The Internet Impact

n B2B e-commerce
n predict 2 increase
n promise convenience & cost reduction
n e-business expectation
n many SC problems resolved
n by using new technology & business models
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The Internet Impact

n E-business strategies supposed to
n reduce cost, increase SL
n increase flexibility & profits
n In reality
n expectations frequently gone unmet
n many new e-business not successful
Nguyễn Như Phong

11 April 2003
The Internet Impact

n Some company
n successful in developing new business model
n use the internet as the driver of business change
n increase profits & capture a sizeble market share
n Why ?
n some cases - new business models fail
n other cases - incredibly successful
Nguyễn Như Phong

11 April 2003
Shaw Furniture Gallery case

n living.com purchased SFG
n access 2 the top-line furniture manufacturer
n investment of 70M$
n a spot as the exclusive Amazon.com furniture link
n declared bankruptcy
n investment in a new IS not function correctly
n switch 2 a carrier
n no experience with furniture delivery
n a stunning 30% return rate
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Dell Computers case

n use Internet 2 develop effective business model
n Outperformed the competition
n 3000% shareholder growth over 8-year period
n Competition in PC industry based on price & SL
n Dell decision
n only produce 2 order - no FG inventory
n sell computers
n built from components produced by others
n relived the firm of R&D
GHW
n The Internet Impact on
n The Grocery Industry
n The Book Industry
n The Retail Industry
n Transportation & Fulfillment
CENTRALIZED - DECENTRALIZE
CONTROL
n Centralized Sys
n Decisions made at a central location 4 entire SC
n Objective – min total cost
n St satisfy some SL requirement
n Decentralized Sys
n Each facility
n identifies its most effective stategy
n wo. considering the impact on the others
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Centralized Control
n Ownership
n Single entity
n Different organizations
 Savings allocated
n at least as effective as a decentralized sys.
Nguyễn Như Phong

11 April 2003
Centralized Control
n Advanced IS
n all facilities access same data
n single point of contact
n info accessed from anywhere
n same no matter what mode or who
n Allow
n The sharing info
n reduce the BE & improve forecast
n The use of coordinated strategies
n reduce SC & improve SL
Nguyễn Như Phong

11 April 2003
Decentralized Control
n Local optimization
n As most as effective as centralized sys
n Can not centralized naturally
n different owners, different objectives
n form partnership to take the advantage of CS.
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CENTRAL VS LOCAL FACILITIES

n Whether to use
n centralized / local
n production & warehousing facilities ?
n Considerations
n SS
n Overhead
n LT
n Service
Nguyễn Như Phong
11 April 2003
Central – Local Facilities

n SS
n consolidate Ws - advantage of RP.
n the more centralized - the lower SS level
n Overhead
n few large central W -
n lower total overhead cost
Nguyễn Như Phong

11 April 2003

n realized if manufacturing consolidated
n much more expensive
n operate many small facilities
n LT 2 market reduced
n large no. Ws located closer 2 the market areas
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n Service
n centralized W enable RP
n more order met with a lower inventory level
n shipping time 2 the R - longer.
n directly related 2 the no. Ws used,
n if increases
n W inbound TCs increase
n W outbound TCs likely 2 fall
Nguyễn Như Phong

11 April 2003

n Effective D strategy
n Some products stored in a central facility
n Expensive w low demand
n Others kept in various local Ws
n Low cost – high demand
Nguyễn Như Phong

11 April 2003

n Centralized / local
n Not either-or decision
n Degrees of local & centralized opertion
n Advanced IS help maintain advantages . eg.
n Central W LT reduced
n Local W SS reduced
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SCIM 06
STRATEGIC ALLIANCES
Nguyễn Như Phong

nguyenphong.bksg@gmail.com ; www.isem.edu.vn
2021
STRATEGIC ALLIANCES
n Third-Party Logistics - 3PL
n Retailer-Supplier Partnerships - RSP
n Distribution Integration - DI
Nguyeãn Nhö Phong
STRATEGIC ALLIANCES
n Basic ways
n 2 complete logistics-related business functions
n Strategic Alliances - SA
n Frame work of SA
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Basic ways
2 complete logistics-related business functions
n Internal activities
n Acquisitions
n Arm's length transactions
Nguyễn Như Phong
Internal activities
n Perform activities
n using internal resources & expertise
n If
n availabe resources & expertise
n core-strength activities
Nguyễn Như Phong
Acquisitions
n Not have the expertise / specialized resouses
n Full control over the way the function performed
n Drawbacks
n difficult & expensive
n culture clashed
n effectiveness could be lost
n business could be lost
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Arm's length transactions

n Business trasactions 4 a specific item / service. eg.
n the delivery of a load of items
n the maintenance of a vehicle
n the design & installation of a software
n purchase / lease the item / service
n Effective & appropriate arrangement
n but goals & strategies - not match.
n Short-term arrangement fulfills a particular need
n not lead 2 a long-term strategic advantages
Nguyễn Như Phong
Strategic Alliances
n Business paradox - same time
n complex practices becoming essential
n neccesary resources becoming scare
n Not always be effective

n to perform all function in-house
n use other firms with special resources
Nguyễn Như Phong
Strategic Alliances
n Even if available resouces
n another firm in SC may be more suited
n 2 perform the function.
n the most appropriate
n combination of position, resource, expertise.
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Strategic Alliances
n Multifaceted, goal-oriented, long-term partnership
n between 2 companies
n both risks & rewards shared
n The problems of outright acquisition avoided
n mutual goals lead 2 resource commitment
Nguyễn Như Phong
Strategic Alliances
n Long-term benefits 4 both partners
n SC-related Strategic Alliances
n 3PL
n RSP
n DI
Nguyễn Như Phong
Frame work of SA
n Difficult strategic issues in SA selection
n Jordan Lewis
n Parnership for Profit
n effective general framework 4 analyzing SA
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Frame work of SA
n Appropriate SA address the following issues
n Adding value to products
n Improving market access
n Strenthening operations
n Adding technological strength
n Enhancing strategic growth
n Enhancing organizational skills
n Building financial strength
Nguyễn Như Phong
Frame work of SA
n Adding value to products
n increase the perceived value
n improve time 2 market, distribution/repair time
n complementary product line
n Improving market access
n better advertizing /
n increase access 2 new market chanel
n eg. complementary consumer product manufacturer
Nguyễn Như Phong
Frame work of SA
n Strenthening operations
n improve operations by lowering system costs & CT
n facilities used more efficiently & effectively
n eg. complementary seasonal products
n Adding technological strength
n technology shared
n difficult old-new technology transitions facilitated
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Frame work of SA
n Enhancing strategic growth
n new opportunities - high entry barriers
n pool expertise & resourses overcome barriers
n Enhancing organizational skills
n tremendous opportunity 4 organizational learning
n force 2 learn more & become more flexible
n Building financial strength
n Income increased
n administrative costs shared / even reduced
Nguyễn Như Phong
Frame work of SA
n Company core strengths / competencies
n specific talent
n differential the comp from its competitors
n advantages in customer eyes
n not weaken by the alliance
n resources diverted,
n technological / managerial strengths compromised
Nguyễn Như Phong
Frame work of SA
n Key difference with competitors not diminished
n key technology not shared
n entry barriers not reduced
n Core strengths determination
n important & difficult
n depend on business nature
n not necessary large-investment resources
n may be intangible, eg. management skills.
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IBM case
Outsoucing key business functions
n 1981 enter the PC market
n outsource almost all the major components
n microprocessors from Intel
n OS from Microsoft
n release PC 2 market within 15 m
n 1984
n replace Apple Computer as the No.1 PC supplier
n 1985 - 40% market share
Nguyễn Như Phong
IBM case
n Compaq
n enter the market by utilizing the same suppliers
n market leader in 1995 - 10%
n IBM
n tried 2 regain control by PS/2 with new OS/2
n not followed by others
n original arcitechture remained dominant
n market share <8%
Nguyễn Như Phong
THIRD-PARTY LOGISTICS - 3PL

n What is 3PL
n 3PL addvantages & disadvantages
n 3PL considerations
n 3PL implementation
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What is 3PL
n The use of an outside company
n perform all/part of the firm's functions
n material management
n product distribution
n More complex than traditional logistics suppliers
n provide trucking & warehousing
n transaction based
n sigle-function specific
Nguyễn Như Phong
What is 3PL
n Long-term commitments
n multiple functions / process management
n eg. 5y agreement
n 2 design, operate all inbound logistics
n 3PL providers
n all sizes & shapes
n manage many SC stages
n larger effort 2 develop small-company relationships
Nguyễn Như Phong
3PL addvantages
n Focus on core strengths
n Resource increasingly limited
n difficult 2 be an expert in every facet
n focus on particular area of experise
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3PL addvantages
n Provide flexibility in
n technology
n geographic location
n service offering
n resource & workforce size
Nguyễn Như Phong
3PL addvantages
n Technological flexibility
n Retailers
n have different changing delivery & IT requirements
n meeting the requirements essential 2 survival
n 3PL providers
n constantly update IT & equipment
n meet requirement quicker, more cost-effective
n allowing a firm
n meet customers's need & access 2 certain customers
Nguyễn Như Phong
3PL addvantages
n Flexibility in geographic location
n rapid replenishment require regional warehousing
n meet customer requirement
n wo. warehouse construction
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3PL addvantages
n Flexibility in service offering
n offer retail customer a much larger service variety
n volume
n low 2 the firm,
n but high 2 the 3PL provider
n Flexibility in resource & workforce size
n change fixed costs into variable costs
n react more quickly 2 changing business condition
Nguyễn Như Phong
Ryder Dedicated Logistics & GM partnership

n GM
n focus on automobile manufacturing
n order parts using EDI
n send info to RDL
n RDL
n manage GM logistics -
n deal with vendors - deliver parts 2 GM factory
n deliver vehicles 2 dealers
n use DSS 2 effectively plan routes 2 minimize TC
Nguyễn Như Phong
3PL disadvantages
n The loss of control
n inherent in outsourcing a particular function
n especially 4 outbound logistics
n If certain logistics activities
n within the core competencies
n eg. materials handling
n others not.
n eg. transportation
n employ 3PL providers 4 the others
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3PL considerations
n Contracts -
n major & complex business decisions
n Many considerations
n Know your own costs
n Customer orientation of the 3PL
n Specialization of the 3PL
n Asset-owning 3PL
Nguyễn Như Phong
3PL considerations
n Know your own costs
n compare with costs of using an outsourcing firm.
n Customer orientation of the 3PL
n intangible factors
n fit strategic plans
n customer orientation
n reliability
n flexibility - ability 2 react with the changing needs
Nguyễn Như Phong
3PL considerations
n Specialization of the 3PL
n roots lie in the particular logistics area
n most relevant 2 the logistics requirement
n eg.
n LTL carriers,
n warehousing,
n fleet routes
n transportion
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3PL considerations
n Asset-owning 3PL
n Asset-owning companies
n significant size, economy of scope & scape,
n system in place, ...
n bureaucratic, long DM cycles,
n Non-Asset-owning companies
n more flexible, able 2 tailor services,
n freedom 2 mix & match providers, low overhead, ...
n limited resources, lower bagaining power.
Nguyễn Như Phong
3PL implementation
n Partners selected
n agreements need 2 be reached
n approproate efforts made 2 initiate the relationship
Nguyễn Như Phong
3PL implementation
n Devote enough time 2 start-up considerations
n hiring comp. identify what it needs
n provide specific performance measures
n the provider consider & discuss the requirement
n Both parties
n commit 2 devoteing time & effort
n mutually benificial alliances
n shared risk & reward
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3PL implementation
n Effective communication
n hiring comp.
n managers communicate with employees
n on the same page, appropriate involved
n between the parties
n system communication
n system integration
Nguyễn Như Phong
3PL implementation
n Other issues
n Data confidentiality
n Performance measusre agreement
n Subcontractor criteria
n Arbitration issues
n Escape clause negotiation
n Method of ensuring performance goals met
Nguyễn Như Phong
RETAILER-SUPPLIER PARTNERSHIP RSP

n RSP
n RSP Requirements
n RSP Inventory Ownership
n RSP Implementation
n RSP Advantages & Disadvantages
n RSP Successes & Failures
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RSP
n Traditional R-S relationship
n Higher variation in demand 2 suppliers
n Suppliers - far better knowledge of LT & capacities
n Margin tighter & more important cus. satisfaction
n RS cooperative efforts
n 2 leverage the knowledge of both parties
n RSP
n Strategic Alliances between retailers & suppliers
Nguyễn Như Phong
RSP
n RSP strategies
n Information sharing
n help vendor plan more efficienty
n Consigment scheme
n Vendor completely manage & owns the inventory
n until the retailers sells it
Nguyễn Như Phong
RSP
n RSP types
n Quick response strategy
n Continuous replenisment
n Advanced continuous replenisment
n Vendor Managed Inventory - VMI
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Quick response strategy

n Suppliers
n receive POS data from retailers
n use the info 2 synchronize
n production & inventory activities with actual R sales
n improve forecasting & scheduling
n reduce LT
n Retailers
n prepare individual orders
Nguyễn Như Phong
Continuous Replenisment
n Rapid Replenishment
n Vendors
n receive POS data
n prepare shipments
n at previous agreed-upon intervals
n maintain specific inventory levels
Nguyễn Như Phong
Advanced Continuous Replenisment

n Vendors
n gradually reduce inventory
n as long as SL met
n Inventory levels continuously improvemed
n need not simple levels
n based on sophisticated models
n change the appropriate level
n based on seasonal demand, promotions, ...
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Vendor Managed Inventory - VMI

n Vendor Managed Replenishment - VMR
n Suppliers decide on
n appropriate inventory levels
n appropriate inventory policies
n Vendors suggestion approved by retailers initially
n Improvement of
n on-time deliveries
n inventory turns
Nguyễn Như Phong
RSP Types
DM Inventory Vendor Skills

Ownership
QR Retailer Retailer Forecasting
CR Contractrually agreed-to Either party Forecasting &
levels Inv. Control
ACR Contractrually agreed-to & Either party Forecasting &
continuously improved levels Inv. Control
VMI Vendor Either party Retail Mana.
Nguyễn Như Phong
Milliken Case
n Textile & chemical comp.
n work with clothing suppliers & major stores
n use POS data from stores
n synchronize ordering & manufacturing plans
n LT
n from order receipt at M textile plants
n to final clothing receipt at stores
n reduced from 18 to 3 weeks
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RSP Requirements
n Technology Requirements
n TM Requirements
n Trust Requirements
Nguyễn Như Phong
Technology Requirements
n The most important requirement
n Advanced IS on both parties
n EDI, or Internet-based private exchanges
n relay POS info 2 suppliers, delivery info 2 retailers
n cut down on transfer time & entry mistakes
n Bar coding & scanning
n essential 2 maintain data accuracy
n Inventory, production control & planning systems
n on-line, accurate, integrated
n take advantage of additional info available
Nguyễn Như Phong
TM Requirements
n Radically change the operating way
n TM commitment
n confidential info shared
n cost allocation considered
n power shifted within organization
n eg. Sales & Marketing - Logistics personnel
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Trust Requirements
n Certain level of trust
n QR
n Retailer confidental info served competitors?
n VMI Suppliers
n can manage the entire SC
n Retailer inventory?
n Significant inventory reduction
n additional available space not used 4 competitors
Nguyễn Như Phong
RSP Inventory Ownership

n Critical 2 the success of SA
n Original,
n R - own the goods, when goods received
n S - incentive 2 move as much inventory as allowed
n Consignment relationship
n S - own the goods, until sold
n more concerned with managing inventory
n keep inventory as low as posible
Nguyễn Như Phong

n Benefits
n lower inventory costs
n S - coordinate
n distribution & production
n further 2 several retailers
n reduce total cost - global optimization
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n Supply contracts negotiated
n share overall system savings
n Advanced SAs cover
n joint forecasting
n meshed planning cycles
n joint product development
Nguyễn Như Phong
Ace Case
n A retail hardware dealer co-op
n Consignment VMI scheme
n for lumber & building materials
n Ace
n maintain financial ownership of goods at retailer
n Retailer - custodial ownership
n responsible if product damaged / destroyed
n SL increased 92 > 96%
Nguyễn Như Phong
RSP Implementation
n Performance Measure Criteria agreed to
n Financial Measures
n Nonfinancial Measures
n POS accuracy,
n Inventory accuracy
n Shipment & delivery accuracy
n Lead times, customer fill rate.
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RSP Implementation
n Info shared
n Confidential issue
n A retailer deal with several suppliers
n within same product category
n category info 4 making forecasts & stocking
n relationship bw. stocking by several suppliers
Nguyễn Như Phong
RSP Implementation
n Communication & Cooperation
n work out some problems
n eg. Kmart claimed S not keep enough inventory
n the problem arose from different forecast methods
n eventually solved by direct communication
n S manufacturing techonology / capacity added
n commit 2 fast response 2 R emergencies & changes
Nguyễn Như Phong
RSP Implementation steps

1. Contractual terms of agreement negotiated
n ownership, credit term, ordering responsibilities
n performance measures, ...
2. Tasks executed
n Integrated IS developed
n Effective forecasting techniques developed
n Tactical DS tools developed
n coordinating inventory management
n coordinating transportation policies
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RSP Advantages
n S knowledge about order quantities 2 control BE
n QR - reduce LT
n VMI - completely control order quantity variability
n knowledge leveraged
n 2 reduce system costs, improve system SL.
n Vendors reduce forecast uncertainties
n better coordinate production & distribution
n reduce SS, storage, delivery costs
n increase SL
Nguyễn Như Phong
RSP Advantages
n Side benefits
n good opportunity 4 RS relationship reengineering.
n redundant order entry eliminated
n manual tasks automated
n unnecessary control tasks eliminated
Nguyễn Như Phong
RSP Disadvantages
n Expensive advanced technology
n Trust development > adversarial relationship
n More S responsibility > add personnel
n S expenses increased
n managerial resposibility & inventory shifted back
n decreased system inventory costs shared
n R float with EDI VMI
n R pay upon delivery, much sooner than usual float.
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Whitehall Robbins - Kmart Case

n WR - make drugs
n more accurate forecast
n take production issues when planning shipment
n supply weekly demand at an everyday low cost
n large order & preseason promotions eliminated
n returns greatly reduced
n IT increased
n seasonal items: 3 - >10
n nonseasonal items 12-15 >17-20
Nguyễn Như Phong
GHW
n RSP Successes & Failures Cases
n Western Publishing
n Wal-Mart
n VF corporation
n Spartan Store
Nguyễn Như Phong
DISTRIBUTION INTEGRATION - DI
n Manuafacturers
n treat distributors like partners
n appreciate VOD & end-user relationship
n provide necessary support
n develop new product, line based on D info
n Distributors
n have info wealth about customer needs & wants
n rely on manufacturers
n 2 supply nec. parts & expertise
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DI
n New challenges of C needs
n may be impossible 2 meet
n with traditional distribution
n IT rises 2 meet the challenges
n Distributors integrated
n inventory & expertise located at one distributors
n available 2 the orther
Nguyễn Như Phong
Caterpillar Cor Case

n Construction & mining equipment manufacturer
n Credit dealers with comp. success
n Dealers
n much close 2 C, respond rapidly 2 C needs
n arrange finacing when product purchased
n carefully monitor, repair, service the product
n create the comp. image
n give the comp a tremendous advantage
Nguyễn Như Phong
DI types
n Address inventory- related issues
n Traditional D increase inventory level
n meet unusual rush orders
n DI create large pool of inventory
n accross the entire distribution network
n lowering total inventory costs, raising SL
n each distributor
n check the inventories of others
n locate the needed parts
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DI types
n Risk pooling
n keep inventory earlier in SC
n Dealer
n exchange the parts under certain conditions
n IS
n allow distributors 2 review each others' inventory
n Integrated logistics systems
n allow parts 2 be delivered cheaply & efficiently
Nguyễn Như Phong
DI types
n Address service-related issues
n DI
n meet a C specialized technical service requests
n by steering the request 2 the best suited distributor
n Different distributors
n build expertise in different areas
n C specific request
n routed 2 the most experise distributor
Nguyễn Như Phong
Okuma Case
n Machine tools builder
n Each dealer
n carries a min no. machine tools & parts
n Tools & parts
n in stock some where in the system
n comp / distributor warehouses
Nguyễn Như Phong
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Okuma Case
n Okumalink
n each distributor allowed 2 check inventories
n communicate with others in finding a required part
n part found
n deliver quickly 2 the requesting dealer
n Plan 2 upgrade the system
n each distributor -
n full knowled of inventory held by all distributors
Nguyễn Như Phong
Okuma Case
n Inventory cost reduced
n Inventory shortage decreased
n lost sale decreased
n C satisfaction increased
Nguyễn Như Phong
DI issues
n Distributors
n skeptical of the reward of participating in sys.
n provide some expetise 2 less skill partners
n participating distributors
n forced 2 rely on others
n Certain resposibilities & areas of expertise
n taken away from certain distributors
n concentrate on certain distributors
n D feel nervous about loosing skills & abilities
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DI issues
n Establishing DI relationship
n require large commitment of resource & effort
n Distributors feel sure of longterm alliance
n built trust among participant
n Manufacturer
n provide pledges & guarantee
n ensure distributor commitment
Nguyễn Như Phong
Dunlop-Enerka Case
n Suppy conveyer belts
n Met maintenance & repair requirements
n by storing vast inventory at distributors
n Dunlocomm
n IS 2 reduce inventory
n monitor inventory at distributors
n When parts needed
n Ds use the system, order & arrange 4 delivery
Nguyễn Như Phong
Dunlop-Enerka Case
n DE
n ensure D participation
n guarantee 24-h delivery
n of each part 2 each distributor
n System Inventory
n dropped by 20%
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SCIM 07
DISTRIBUTION PLANNING
Nguyễn Như Phong

08/2021
DISTRIBUTION PLANNING
n Distribution Strategies
n Distribution strategies utilization
n Warehousing
n Cross-docking
DISTRIBUTION STRATEGIES
n SC portion
n begining with M & S
n continuing 2 Rs
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n Outbound distribution strategies

n Direct shipment
n Warehousing
n Cross-docking
Nguyễn Như Phong

11 April 2003
Direct Shipment
n Items shipped directly S – R

n without going through distribution center s
n By pass Ws & D centers
n M/S
n deliver goods directly to R
11 April 2003 Nguyễn Như Phong
Direct Shipment
n Advantages
n Avoid the expenses of operating DCs
n Reduced LT
n Disadvatages
n Negated RP effects
n Increased transp ortation costs
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Direct Shipment
n Common when
n Powerful R – require fully loaded trucks
n LT – critical
n M – no choice to keep business
n Prevalent in the grocery industry –
n critical LT,
n perishable goods
Nguyễn Như Phong

11 April 2003
JCPenney Case
n Sell general merchandize
n through nearly 1000 stores & millions of catalogs
n Flow of goods
n 200.000 items from >20.000 suppliers
n Product shipped directly 2 Penney's store

n Each store
n retain total accountability 4 sales, inventory, profit
n responsible 4 sales forecast & releasing orders
n Internal control & tracking system
n used 2 monitor the flow of materials
Nguyễn Như Phong
11 April 2003
Warehousing
n Classical strategy
n Warehouses
n keep stock
n provide customers w. required items
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Warehousing & Crossdocking
Cross Docking
n Items distributed continuously

n from Ss through Ws to Cs.
n Ws rarely keep items for more than 10 – 15 hs
n Wal-Mart strategy
n Ws
n Function as inventory coordinate point
n Rather than as inventory storage point
Nguyễn Như Phong

11 April 2003
Cross Docking
Nguyễn Như Phong

11 April 2003
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Cross Docking
n Goods arrive at W fr om M
n transfered to vehicle
n dedivered to R as rapidly as pos.
n spend very little time in storage - < 12 hs
Nguyễn Như Phong

11 April 2003
Cross Docking
n Advantages
n Limitted inv. cost
n Decreased LT by decreasing storage time
n Disavantages
n Significant start-up investment
n Very difficult to manage
n S – D – R linked w. advanced IS
n Fast & responsive transp. sys
n Forecasts - critical, necessitating info sharing
n Effective for only large distribution sys
Nguyễn Như Phong

11 April 2003
Wal-Mart Case
n The largest & highest profit retailer in the world
n Deliver 85% of goods utilizing cross-docking
n Satellite communication system
n send POS data 2 all vendors
n clear pictures of sale at all stores
n Dedicated fleet of 2000 trucks
n Store replennished twice a week
Nguyễn Như Phong

11 April 2003
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Wal-Mart Case
n Cross-docking
n enable WM 2 achieve EOS by purchasing FTL
n reduce the need of SS
n cut the cost of sales by 3% compared 2 average.
n large profit margins
Nguyễn Như Phong

11 April 2003
UTILIZATION
n Different approaches for different products
n What are the factors influencing D strategies
n C demand & location
n SL
n Costs
n Transhipment
Nguyễn Như Phong

11 April 2003
Distribution strategies utilization

n C demand & location
n Demand variability – huge impact on costs
n the larger the variability - the more SS
n RP – the more Ws, the more SS
n W not used 4 storage / no W  more SS required
n Effect mitigated by
n distribution strategies - better forecasts, smaller SS
n transhipment strategies
n Strategy accessment considers
n Lead time & volume requirement
n Capital invenstment
Nguyễn Như Phong
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Distribution strategies utilization

n Costs
n transportation & inventory costs
n Increasing lot sizes
n reduce delivery frequencys
n Reducing transportation costs
n Increasing inventory costs
Nguyễn Như Phong

11 April 2003
Distribution strategy - attribute

Strategy Direct Cross Warehouse
Attribute  Shipment Docking
RP Take
advantage
Transp. cost Reduced Reduced
inbound costs inbound costs
Holding cost No W costs No holding
costs
Allocation Made earlier Delayed Delayed
decision
Nguyễn Như Phong
11 April 2003
Transhipment
n Transhipment
n shipment of items bw. dif. facilities
n at the same level in the SC
n to meet some intemediate need
n The growth of
nRapid transportation options
nAdvanced IS
 Transhipment – an important option
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Transhipment
n R level transhipment
n allow the R meet C demand
n from the inventory of other Rs
n R must
n know what others have in inventory
n have rapid way 2 ship the item 2 the store / customer
n Advanced IS allow the R
n what other R have in stock
n facilitate rapid shipping bw. Rs
Nguyễn Như Phong

11 April 2003
Transhipment
n Same owner
n Appropriate IS  reasonable shipment costs
n Effectively take advantage of RP
n even if no central W.
Nguyễn Như Phong

11 April 2003
Transhipment
n Independently owned – operated Rs
n Avoid transhipment
n Distributor integration
n cooperate in various ways.
n including transhipment of needed goods.
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11 April 2003
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WAREHOUSING
n Warehousing Distribution Networks
n Pull-based Distribution Networks
n Push-based Distribution Networks
Warehousing Distribution Networks
Pull-based Distribution Networks

n Each distribution center
n decide what needed
n order own requirements from its source
n pulling inventory to itself
n draw stock from parent supply sources
n act independently of others in the network
n maintain an individual SS
n bottom-up system with one-way info flow
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Pull-based Distribution Networks

n Traditional Pull DN
n Fixed order size systems
n Fixed order inverval systems
n Mordern Pull
n Time-phased order point - TPOP
n DRP - Distribution Requirement Planning
n Demand forecast in LDCs
n LDCs send orders 2 RDCs
n RDCs send orders 2 MDC
TPOP
n NRt= Min [ 0 , (GR t + SS ) – ( SR t+ POH t-1) ]

n POC t = Q , NR t > 0
n POH t = POH t-1 + SR t + POC t - GR t
n POL t = POC t+ L
Friday, April 11, 2003 Nguyeãn Nhö Phong
TPOP
F = 30 ñv / t , Q = 100 , SS = 10 , LT = 2 t , SL = 80
T(t) 0 1 2 3 4 5 6 7 8
GR 30 30 30 30 30 30 30 30
SR
POH 80 50 20 90 60 30 100 70 40
NR 20 10
POC 100 100
POL 100 100
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DRP
TTPP SS Q LT Note
n DRP logic
n Forecast at LDC A 30 120 1 LDC
n TPOP
n LDC B 10 100 1 LDC
n RDC
n MDC C 5 70 2 LDC
D 0 400 3 MDC
DRP
T 0 1 2 3 4 5 6 7 8
A
GR 30 30 30 30 30 30 30 30
SR
POH 70 40 130 100 70 40 130 100 70
NR 20 20
POC 120 120
POL 120 120
DRP
T 0 1 2 3 4 5 6 7 8
B
GR 20 20 20 40 20 20 20 50
SR
POH 50 30 10 90 50 30 10 90 40
NR 20 20
POC 100 100
POL 100 100
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DRP
T 0 1 2 3 4 5 6 7 8
C
GR 40 15 20 30 10 5 30 10
SR 70
POH 15 45 30 10 50 40 35 5 65
NR 25 10
POC 70 70
POL 70 70
DRP
T 0 1 2 3 4 5 6 7 8
D
GR 120 170 0 0 120 170 0 0
SR
POH 300 180 10 10 10 290 120 120 120
NR 110
POC 400
POL 400
Push-based Distribution Networks

n MDC
n Determine the needs of each location
n send the requirements through network
n pushing inventory to local DC
n Top down systems
n 2-way info flow
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Push-based Distribution Networks

n FSAS (Fair Shared Allocation Systems)
n D - A, B, C
n OHD = 126
D (đv/t) DU
DC OH
1 2 3 4 5 (đv/ng)
A 10 20 20 20 20 20 4
B 30 50 50 50 50 50 10
C 14 30 30 30 30 30 6
Tổng 54 100 100 100 100 100 20
FSAS
n Runout peridod T = (126+54)/20 = 9 (d)
n Q = T*D - OH
DC Qi
A 9*4-10 = 26
B 9*10-30=60
C 9*6-14=40
CROSS-DOCKING
n Cross-docking
n Why crossdock?
n Operations
n Freight flow
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Cross-docking
Cross-docking
Cross-docking
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Cross-docking
Cross-docking
n Crossdocks
n high speed warehouses.
n Receiving
n Sorting – Staging
n Shipping
Cross-docking
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Cross-docking
n If an arriving item already requested by a customer
n no need to store it as anticipation inventory;
n instead, the item directly from receiving to shipping,
n without intermediate storage and retrieval.
n The item
n move much more quickly through the facility
n the most costly part of warehouse labor avoided.
Cross-docking
n In a high-volume crossdock
n the turnover times measured in hours.
n To support the velocity of movement, a crossdock
n nothing more than a slab of concrete
n with a roof and walls
n punctuated with doors for trailers.
n Freight pulled off arriving trailers,
n sorted and loaded onto departing trailers
n without intermediate storage.
Cross-docking
n Little / no storage
n provided in a crossdock
n items do not stay long enough
n Generally a lot of material-handling equipment,
n to move freight.
n Eg.
n forklifts
n pallet jacks,
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Cross-docking
n Labor
n frequently the main cost devoted to
n unloading incoming trailers,
n moving the freight
n to the appropriate outgoing trailers,
n loading.
n The issues within a crossdock
n those of material-handling & product flow
n rather than location & retrieval.
WHY CROSSDOCK?
n The biggest reason to have a cross-dock

n to reduce transportation costs.
n achieved by
n consolidating multiple shipments
n so that full truck loads can be sent.
Why crossdock?
m*n vs. m+n
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Why crossdock?
n Additional benefits include
n less inventory –
n all product flows right through.

n less labor –
n product not have to be put away & later retrieved.
Why crossdock?
OPERATIONS
n Most crossdocking freight terminals

n laid out as long, narrow warehouses
n with doors around the perimeter.
n A typical terminal with trailers
n parked at doors around the perimeter.
n Terminals range in size
n from fewer than 10 doors
n to more than 500 doors.
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Operations
n A typical high-volume crossdock,

n receives freight, sorts, and disgorges it.
n Each door devoted to
n either arriving trailers, unloaded, or
n departing trailers, loaded.
n Ideally, freight should flow
n directly across the dock
n rather than along its length.
Operations
n Inside a terminal,
n a variety of material handling methods
n used to transport freight.
n Forklifts & pallet jacks carry heavy / bulky items,

n Carts transport smaller items.
n Large terminals may have draglines,
n circulate carts
n around the inside perimeter of the dock.
Operations
n Two types of doors in a terminal
n Receiving / strip doors
n where full trailers parked
n to be unloaded,
n Shipping / stack doors
n where empty trailers put
n to collect freight for specific destinations.
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Operations
n Once established,
n the designations of these doors do not change,
n although the trailers parked at them will.
n A shipping door
n always receives freight for the same destination.
n A receiving door
n may be occupied by any incoming trailer,
n regardless of its origin / contents.
Operations
n Arriving trucks may deliver their trailers
n directly to an unoccupied receiving door
n if none available, place them in a queue.
n After the trailer
n backed into a receiving door,
n a worker unloads the freight.
Operations
n After unloading items of a shipment onto a cart,

n the worker
n walks to the destination trailer and
n loads the items into that trailer; or
n places the carton the dragline,
n if the terminal so equipped.
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Operations
n To handle pallet loads, the worker

n uses a pallet jack, or
n hails a forklift driver, or
n finds a forklift
n delivers the load himself,
n if union rules permit.
Operations
n After a trailer completely stripped, a driver
n replaces it with another incoming trailer
n from the queue of trailers
n waiting to be stripped.
n After an outgoing trailer filled, a driver
n replaces it with an empty trailer to be filled
n with freight for the same destination.
FREIGHT FLOW
n The patterns of freight flow within a terminal
n therefore the work
n determined by:
n Layout
n Geometry
n Material handling systems
n Freight mix
n Scheduling
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Freight flow
n Layout
n the specification of doors
n as either receiving or shipping doors
n the assignment of destinations
n to the shipping doors.
Freight flow
n Geometry
n The shape of a terminal
n determines
n the travel distances between doors
n the susceptibility to congestion.
n Eg. narrow docks
n tend to be more congested
n because workers have less room to manœuver.
Freight flow
n Material handling systems
n Pallet jacks
n slower than forklifts,
n but more available;
n Draglines
n reduce walking time,
n but can impede forklift travel.
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Freight flow
n Freight mix
n Terminals
n having a higher mix of pallet freight
n require more forklift travel than
n those receiving a majority of carton freight.
Freight flow
n Scheduling
n In real time,
n the dock supervisor
n determines freight flow patterns
n by assigning incoming trailers to receiving doors.
Freight flow
n Changing the geometry / material handling
systems
n expensive;
n Changing the freight mix
n a marketing decision
n with implications outside the terminal.
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Freight flow
n The two remaining ways
n to take work out of the system
n change the layout or
n change the scheduling
n inexpensive.
n The layout can be changed
n simply by changing the labels
n on the doors of the crossdock.
Freight flow
n Two kinds of doors on a typical crossdock
n Those reserved for outgoing trailers
n Eg. the “Miami trailer”
n Those reserved for incoming trailers.
Freight flow
n The outbound doors
n reserved for specific destinations
n departures scheduled to specific destinations,
n The incoming doors
n not so specific
n may be used by any in coming trailer
n the terminal not have full control over arrivals.
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SCIM 08
WAREHOUSE PLANNING
Nguyễn Như Phong

2021
Warehouse layout
Warehouse layout
n When product stored in convenient locations,
n easy to retrieve when requested by a customer.
n Depends on models of labor & space.
n simplest for pallets,
n becomes progressively harder to pin down
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WAREHOUSE LAYOUT
n Layout of a pallet-load area
n Layout of a carton-pick area
n Layout of a piece-pick area
LAYOUT OF A PALLET-LOAD AREA
LAYOUT OF A PALLET-LOAD AREA

n The simplest type of warehouse
n only a single, common “unit” of material
n handled at a time.
n The typical unit-load is a pallet.

n pallets mostly standardized & handled one-at-a time
n both space & labor requirements scale
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Layout of a pallet-load area

n A 3rd party transshipment warehouse
n receives, stores, & forwards pallets.
n a subcontractor to others for warehouse services.
n typically charges customers for each pallet handled
n rent for space occupied.
n Flow of unit-loads through a typical warehouse
n Receiving
n Pallet reserve
n Shipping
Layout of a pallet-load area

n Space
n Rack or stack?
n Lane depth
n Labor
n Reducing labor
n Location of receiving & shipping
n Aisle configuration
SPACE
n The 3rd party warehouse
n charge rent by the pallet-month.
n The warehouse
n naturally wants many pallet-positions per unit area.
n Achieve this in two ways
n vertical space
n deep lanes.
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RACK OR STACK ?
n Pallets can be stacked high
n allow many pallet positions per unit of floor space.
n Conversely, pallets
n unusually heavy / fragile / uneven top surfaces
n not be stacked very high
n The waste avoided by installing pallet rack,
n pallets maybe stored independently of each other.
Rack or stack ?
n How much pallet rack purchased?
n what should be stored therein?
n Each sku
n why stored in pallet rack rather than floor storage .
n Benefits of moving a sku from floor into rack
n reduce labor
n create additional pallet positions.
n help protect product from damage, eg. by forklifts.
n help provide a safer work environment
Rack or stack ?
n Each sku builds its economic argument by
n estimating the total savings
n represents the value of storing that sku in rack.
n Compare that the cost of pallet rack and decide,
n on a sku-by-sku basis,
n whether the pallet rack economically justified.
n Compare different rack configurations,
n repeat the process on each alternative
n choose the one of greatest value.
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LANE-DEPTH
n Lane-Depth
n Pallet position
n Honey combing.
n Optimal Lane-Depth
n Floor storage
n Pallet flow rack
Lane-Depth
n Aisles
n provide accessibility space, not storage
n not directly revenue-generating.
n Prefer to reduce aisle space
n to the minimum necessary
n to provide adequate accessibility.
n The aisles
n at least wide enough
n for a forklift to insert or extract a pallet.
Lane depth
n By storing product in lanes,
n additional pallet positions share the same aisle space
n so amortize that cost.
n Should lanes be four pallets deep? Six? Ten?
n effective utilization of space.
n Deeper lanes
n produce more pallet storage locations
n but they are of diminishing value.
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Lane depth
n Pallet position –
n the floor space required to hold a pallet.
n The floor space charged to a lane includes
n storage space, any gap between lanes,
n one-half the aisle width in front of the lane.
n Each lane requires aisle space at its head
n The total area charged to one lane -the sum of
n space devoted to storage
n space that provides accessibility.
Lane depth
n Let
n the lanes be k pallet positions deep.
n the aisle space of area a (pallet positions).
n The total area charged to one lane:
k + a/2.
Lane depth
n A lane dedicated entirely to a single sku
n avoid double handling pallets.
n Saves time but incurs a cost in space
n When the first pallet retrieved from a lane,
n position unoccupied but unavailable to other skus.
n The waste called honeycombing.
n Deeper lanes more susceptible to honeycombing;
n Shallow lanes use more space for accessibility.
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Optimal Lane-Depth
n To maximize space efficiency
n sku i stored in a lane of depth
n that minimizes floor space-time
n unoccupied but unavailable to other skus.
n Space efficient
n An easier way to compute a lane depth
Optimal Lane-Depth
n
Optimal Lane-Depth
n Floor storage
a qi
k* 
2n zi
n Pallet flow rack
a qi
k* 
n z
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Lane depth
Consider the following population of skus:
[Sku qi zi] = [A 50 3]; [B 40 4]; [C 36 2]
What is the optimal lane depth in floor storage

if aisles are 15 feet across (about 4.6 m) and
the pallets are 48 inches deep and 42 inches wide
(1.22 m by 1.07 m)?
Lane depth
LABOR
n Pallet arrived at the receiving dock, a forklift driver
n drive to a storage location,
n moves it to a trailer on the shipping dock.
n The warehouse
n pays its forklift drivers for person-hours
n bills customers for 2 handles for each pallet (in/out)
n wants many handles/person-hour.
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Labor
n Reducing labor
n Location of receiving & shipping
n Aisle configuration
REDUCING LABOR
n The movement of forklifts / unit-load equipment
n not add value if dead-heading
n To reduce labor
n Dual cycle operations
n to reduce deadheading
n Product placement
n to store product in convenient locations
DUAL CYCLE OPERATIONS

n To reduce deadheading by
n careful interleaving of put-aways & retrievals,
n But how can the forklift driver know

n what retrievals are nearby?
n The pairs of stows and retrievals

n chosen to reduce deadheading
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Dual-cycle operations
n Assume there is a task list consisting of
n stows i = 1,...,m
n retrievals j = 1,...,n.
n Let dij - the shortest distance
n between the location of stow i and
n the location of retrieval j.
n The shortest distances from each storage location
n to all the retrieval locations computed,
n by repeated use of the Shortest Path Algorithm .
n Knowing
n the layout of the warehouse
n the addresses of the storage locations.
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n The constraints
n every stow be paired with some retrieval,
n every retrieval be paired with some stow.
n A special type of linear program
n called an Assignment Problem
PRODUCT PLACEMENT
n Unanimous agreement in industry
n the “fastest-moving” skus
n stored in the most convenient locations.
n What is a “convenient” location?
n Each time a pallet stored at a particular location,
n the variable labor costs incurred
n Travel from receiving dock to location
n Travel from location to shipping dock.
n With each location i
n associated a labor cost incurred by its use.
Careful product placement

n
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n Distances di
n determined by the layout of the warehouse
n not easily changed.
n Frequencies of visit ni
n determined by customer orders
n our choices of what to store where.

n By storing the pallets carefully,
n ensure that
n the most frequently visited locations
n those of greatest convenience
n smallest total travel di
n thereby minimizing D
n Fast-moving skus
n Fast-moving pallets
Fast-moving skus
n For the labor cost of a location
n identify those skus
n generate the most frequent visits
n per storage location.
n In steady state, during a fixed interval of time
AV = NSP / NSR
n AV - average visits per storage location
n NSP - number of units shipped
n NSR - number of units in storage
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Fast-moving skus
n Eg.
n a sku
n received in order quantity 5 pallets
n sold 20 pallets last year
n about 20/5 = 4 visits per pallet location,
n more than a sku
n moved 100 pallets
n received in quantity 50.
n about 100/50 = 2 visits per pallet location,
Fast-moving skus
n To minimize labor costs:
n Rank all the available pallet positions
n from least cost c i to greatest cost.
n Rank all skus from most to least turns.
n Move down the list,
n assigning the pallets of the next fastest-turning skus
n to the next best locations available.
Fast-moving pallets
n Choose that particular pallet
n that will be leaving soonest
n to be stored in the best location.
n To minimize labor costs
n Rank all the pallet positions
n from least cost di to greatest cost.
n Rank all pallets
n from soonest departure to latest departure.
n Move down the list,
n assigning the next pallet to the next location.
n
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LOCATION OF RECEIVING & SHIPPING

n The layout of the warehouse
n determines the cost
n associated with each storage location.
n 2 configurations
n Flow-through configuration
n U-flow configuration
Flow-through configuration
Flow-through configuration
n All product
n flows from one side of the facility to the other.
n All the storage locations
n along one side of an aisle
n equally convenient.
n Many locations of equal convenience
n The most convenient
n on a line between shipping and receiving.
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U-flow configuration
n Both receiving & shipping on the same side
n product flows
n in & out the same side of the warehouse.
n The best storage locations,
n at the middle of the receiving & shipping dock,
n The least convenient locations,
n at the far top corners
AISLE CONFIGURATION
n Cross-aisles
n V aisles
n Angled aisles
Cross-aisles
n To reduce travel
n between storage & receiving/shipping,
n Generally preferable to orient aisles
n run parallel with the direction of material flow.
n Support movement between storage locations,
n shorter travel between storage locations.
n A cost of more floor space required
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V-aisles
Angled aisles
n Allow more direct travel
n between storage & a central location of R/S
n Travel times can be reduced by up to 20%
n by reorienting some aisles and
n including some angled cross-aisles.
n a fish bone layout
n The overall warehouse
n must be slightly larger to compensate
n for the space lost to the additional aisles
LAYOUT OF
A CARTON-PICK-FROM-PALLET AREA
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LAYOUT OF
n The handling unit carton / case not standardized
n Cartons
n typically stored on pallets
n restocking - a unit-load process,
n but picking - not,
n Create additional complexities
n in models of space & labor.
LAYOUT OF
n A particularly convenient region
n replenished from within the warehouse
n called a forward area / fast-pick area.
n Typical flow of cartons through a warehouse
n Receiving
n Pallet reserve
n Carton pick
n Unitizing
n Shipping
LAYOUT OF
n Layout for a forward area

n Storage policies.
n Active pick locations.
n Quantities to store forward
n Choosing skus for the forward-pick area
n Storing all of a sku forward
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LAYOUT FOR A FORWARD AREA

n A forward-pick area
n convenient to pick,
n limited space
 restocked from
elsewhere
Layout for a forward area

n Configurations
n picking from the ground floor
n picking from the flow rack
n The same organization

n a small number of locations convenient to pick
n restocked from a bulk area: reserve / overstock area
Picking from
the ground floor
n The most common forward pick area

n the ground floor of pallet rack.
n Popular skus may be
n picked from ground level and
n replenished by dropping overstock pallets from above.
n The forward area - the ground floor pallet locations
n The reserve area - includes all higher locations.
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Picking
from the flow rack
n Very high volume distribution of product

n conveyable,
n cartons picked from pallet flow rack to conveyor
n An order-picker walk up & down the aisle
n picking cartons,
n labeling them with destination
n placing them on the conveyor, taking them to shipping.
Picking
from the flow rack
n Cartons
n picked from pallet flow rack onto a conveyor.
n The flow rack replenished from behind.
n The forward area
n all pallet locations in the pallet flow rack
n The reserve area
n a separate area of the warehouse,
n perhaps with very high pallet rack
STORAGE POLICIES
n All locations in the forward area
n reserved locations
n to support rapid order-picking.
n typically a relatively small part
n All overstock locations shared storage.
n generally devoted to bulk storage
n much larger.
n ensures high space utilization .
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ACTIVE PICKS LOCATIONS

n At any time each sku has a single location
n from which to pick less-than-pallet quantities;
n that location
n remain within a single area,
n either forward or reserve.
n If a sku
n has pallets in both the forward & reserve areas,
n makes economic sense
n to pick full-pallet quantities from reserve
QUANTITIES TO STORE FORWARD

n Suppose a sku assigned to the forward area;
n how many pallets locations devoted to it?
n The “minimum practical number of locations”,
n determined by the need to avoid
n stockout
n congestion
Quantities to store forward

To avoid stock out, sku i must have at least 3 pallets forward
To avoid congestion it must occupy at least 2 locations.
Then if the forward pick area is the ground floor of 1-deep pallet rack,
holding one pallet of sku i per location, sku i would require at least:
li = max(3 pallets/1pallet per location , 2 locations)
li = 3 locations,
which, in this case, would hold three pallets.
If the forward pick area is 2-deep pallet flow rack, sku i would require at
least:
li = max(3 pallets/2 pallets per location , 2 locations)
li = 2 locations,
which would hold a total of four pallets.
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CHOOSING SKU
FOR THE FORWARD AREA
n What skus
n should be stored in the forward-pick area?
n Once decided to store a product in the pick area,
n giving it additional storage locations,
n beyond the minimum required,
n conveys no benefit
Choosing skus
for the forward area
Law of None, Min, or All
Any sku picked from pallets

should either not be in the fast-pick area at all;
or have the minimum practical number of locations;
or have all of its on-hand pallets in the forward-pick area.
Choosing skus for the forward area

n pi the number of picks for less-than-pallet quantities,
n di the number of pallets moved by such picks,
n Di the number of pallets moved by full-pallet picks.
n li the minimum number of locations
n ui the maximum number of forward locations. ( ui = ∞)
n N: The number of forward locations
n Variable xi ∈ {0,1}.
n The objective - minimize total labor costs
n Subject to the space constraint
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n

n
STORING ALL OF A SKU FORWARD

n ui known
n enough forward locations to hold all of sku i
If, storing all offers greater labor savings per pallet location
than if stored in the minimum amount,
Then if it will fit stored completely in the forward pick area.
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Storing all of a sku forward

n Allocating N forward pallet locations.
n define yi =1
n if the remaining pallets of sku i
n to be stored forward
n define zi =1
n if all of the pallets of that sku
n stored in the forward pick area
Storing all of a sku forward
PIECE-PICK LAYOUT
n Layout of Piece Pick Area
n Fast pick area
n Estimating restocks
n How much of each sku to store in the pick area?
n Which skus go into the pick area?
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Layout of
Piece Pick Area
n The first efficiencies
n to separate the storage & the picking activities.
n A separate picking area,
n a fast-pick / forward pick / primary pick area,
n a sub-region of the warehouse
n concentrates picks and orders
n within a small physical space.
Layout of Piece Pick Area

n Many benefits,
n reduced pick costs
n increased responsiveness to customer demand.
n A science to configuring the fast-pick area.
FAST-PICK AREA
n Many of the most popular skus
n stored there in relatively small amounts,
n Most picking
n accomplished within a relatively small area.
n Pickers do less unproductive travel
n The trade-off the fast-pick area
n require replenishment from bulk storage / reserve.
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Fast-pick areas
n The basic issues in the design of a fast-pick area
n Which skus to store in the fast-pick area?
n How much of each sku to store.
n If skus stored - in insufficient amounts,
n the cost of restocking them
n can outweigh any savings in pick costs.
n Initially answer the questions by a fluid model
ESTIMATING RESTOCKS
n Cost of restocking
n Number of restocks
n Fluid model
n The work to restock
Cost of restocking
n A fast-pick area
n maintained by restocking
n The cost of restocking a sku
n based mostly on the number of restocks required.
n The number of restocks
n estimated by a fluid model.
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Fluid model
n How often must we restock sku i?
n volume vi stored in the fast-pick area.
n rate of flow fi through the warehouse.
n an annual volume of fi of sku i picked
n restocks per year
Ri = fi /vi .
n Normalized to 1
n vi -the fraction of space allocated to sku i.
n fi be scaled accordingly.
The work to restock

n The work to restock
1. Travel between the pick & bulk areas
2. Travel within the bulk area to locate stock
3. Travel within the pick area to the locations restocked
4. Handling storage units
n Take the number of restocks
n as a measure of the cost
n of maintaining the forward pick area.
HOW MUCH OF SKU

2 STORE IN THE FAST-PICK AREA?
n Heuristic storage strategies
n The optimum storage strategy
n Comparison storage strategies
n Reorder points & safety stock
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Heuristic storage strategies

n EQS model
n Allocate the same amount of space to each sku.
vi = 1/n
Ri = nfi
n EQT model
n Store an equal time supply of each sku.
v i = fi /  fi
R i = K =  fi
THE OPTIMUM STORAGE STRATEGY
THE OPTIMUM STORAGE STRATEGY

n
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Numbers of restocks
Consider two skus with flows of 16 and 1 units/year respectively,
which are to share 1 unit of storage.
The different allocation strategies would result in the following:
sku A sku B Totals
flow 16 1
Equal Space allocations 1/2 1/2 1
Restocks 32 2 34
Equal Time allocations 16/17 1/17 1
Restocks 17 17 34
Optimum allocations 4/5 1/5 1
Restocks 20 5 25
The optimal allocation results in almost 30% fewer restocks.
WHICH SKU GO INTO THE FPA?

n Large / slow-moving skus
n better picked from the reserve area.
n allows the space devoted to more popular skus.
n Models
n Minimizing total labor cost
n Maximize the net benefit
n Minimum sensible storage
n Selecting skus to minimize labor
n Stocking to equalize space/ restocking frequencies
Minimizing total labor cost

n To better concentrate on the fast-pick area,
n assume the reserve sufficiently large
n Let
n c1: the cost-per-pick from the pick area
n c2: the cost-per-pick from reserve/some alternative
n xi=1- if sku i stored in & picked from the pick area
n 0- otherwise.
n pi: the number of picks
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Minimizing total labor cost

n
Maximize the net benefit

(pick savings less restock costs)
n

n
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Minimum sensible storage.
Stocking to EQS / EQT

n Stocking to equalize
n space
n restocking frequencies
n Sometimes business conditions require that
n the forward pick area
n stocked by EQS / EQT
n How can one minimize the total labor under
such a restriction?
214

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8/15/2021

Lecture Notes on SCIM

Nguyễn Như Phong

n Offer integrated knowledge in SCIM

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Nguyeãn Nhö Phong

Lecture notes on SCIM

Nguyễn Như Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

n Merchandise produced, distributed

n Satisfy service level requirement.

Friday, April 11, 2003 Nguyen Nhu Phong

n Logistics management (The council of LM )

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

n System approach 2 SCM

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

n Manufacturers >< distributors

n Distributors >< retailers

Friday, April 11, 2003 Nguyen Nhu Phong

National Semiconductor case

n machines & vehicles breakdown

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Matching supply & demand cases

Friday, April 11, 2003 Nguyen Nhu Phong

Inventory & backorder levels

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Other sources of uncertainty

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

No clear understanding of all the issues

Friday, April 11, 2003 Nguyen Nhu Phong

Friday, April 11, 2003 Nguyen Nhu Phong

Key issues in SCM

Friday, April 11, 2003 Nguyen Nhu Phong