Week 01 Intro To SC

Basic Models in Supply Chain Management 1

Introduction to Supply Chain
Manufacturers, Suppliers, Transporters, Warehouses, Retailers, and Customers
STORE
Distributor /
Sourc Supplie Producer Warehouse Retailer
e r
STORE
Distributor /
Source Supplier Warehouse Retailer
A Supply Chain - or more accurate - supply network or supply web- is

a network of Flows and Storage Points of Physical Goods. Customer

What Is a Supply Chain?
 All functions involved in receiving and fulfilling a customer request (new product
development, marketing, operations, distribution, finance, customer service).
 All function include flow: Products and Material, Information, and funds in both
directions.
Information
Product
Funds
 Theobjective is to Maximize net value generated

Supply Chain Surplus = Customer Value − Supply Chain Cost
Customer Surplus = Value to the Customer – Price

Supply Chains Aim to Match Product Supply and Customer Demand…
SUPPLY
DEMAND
DSO 581 Supply Chain Management

Doing Right Things, Doing Things Right
…and deliver
the right
product…
…to the right

place…
…at the right

time…
…in the right

quantity
DSO 581 Supply Chain Management

Overall Goal: Matching Supply and Demand
Why matching supply and demand is difficult?

Why Matching Supply and Demand is Difficult
2 7 6
9 5 1
4 3 8
Introduction to Variability
Parts of the slides of this lectures were prepared

over my teaching lifetime based on the material
that I have learned from the following book
Ardavan Asef-Vaziri
Introduction to Variability
Suppose you had a child today. In the evening, a friend comes to visit you. She offers a
gift of either (i) $100, or (ii) buying your child an offer from the Piggy Bank matured in
60 years.
Every day, the Piggy-Bank deposits $100 in the account at 6AM and withdraws it at
6PM. An interest of 6% annually compounded daily is added to the account based on the
account balance at midnight.
1. Which alternative do you chose.
2. What if the Piggy-Bank changes the policy. They deposit $100 in the account at 6AM
every morning (including weekends). Every evening (including weekends) at 6PM an
unbiased coin is flipped. If head they take out $200, otherwise they deposit $200. To
make the problem simple, suppose your acceptable rate of return (shadow price or the
opportunity cost) is 0.

Introduction to Variability – B~(0 or 200)- Piggy Bank
Out (if exist) Balance Average Average = 4095; NFV = 135096
0 Average Balance 4095 The Lecture for Piggy Bank an d One Station Production is posted at
Right-click to open the Excel file

00 200 0 4095.36 Interest Rate 6.00% $32.99 https://youtu.be/Mox8JnpcmI0
00 0 100 4095.36 Days 10000
00 200 0 4095.36 FV $135,096
00
00
00
0
200
0
100
0
100
4095.36
4095.36
4095.36
Average = 4095; NFV = 135096
Variability-Introduction.xlsx
00
00
00
0
200
200
200
100
0
4095.36
4095.36
4095.36
14000
There are several Scenarios
00
00
0
200
100
0
4095.36
4095.36
12000
1. Uniform Bank
00 0 100 4095.36
2. Uniform Production
10000
00 0 200 4095.36
00 0 300 4095.36
3. Normal Bank
00 0 400 4095.36 8000
00 0 500 4095.36
00 200 400 4095.36
4. Uniform Bank Several Curves

00 0 500 4095.36 6000
00 0 600 4095.36
00 200 500 4095.36
4000
00 0 600 4095.36
00 0 700 4095.36
00 0 800 4095.36
2000
00 0 900 4095.36
00 0 8600 4095.36
00 200 8500 4095.36 0
00 200 8400 4095.36
1046
1255
1464
1673
1882
2091
2300
2509
2718
2927
3136
3345
3554
3763
3972
4181
4390
4599
4808
5017
5226
5435
5644
5853
6062
6271
6480
6689
6898
7107
7316
7525
7734
7943
8152
8361
8570
8779
8988
9197
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00 200 8300 4095.36

00 200 8200 4095.36
e you had a child today. A friend comes to visit you.

ers a gift of either (i) a $100, or (ii) buying your child an offer from the Piggy Bank matured in 60 years .
ay, the Piggy-Bank deposits $100 in the account at 6AM and withdraw it at 6PM.
rest of 6% annually compounded daily is added to the account based on the account balance at midnight.
h alternative do you chose.
if the Piggy-Bank changes the policy.
eposits $100 in the account at 6AM every morning (including weekends).
evening (including weekends) at 6PM an unbiased coin is flipped. If head they take out $200, otherwise they deposit $200.
ke the problem simple, suppose your acceptable rate of return (shadow price or the opportunity cost) is 0.

Introduction to Variability – Uniform (1,5) Demand and Supply
Out (if exist) Balance Average In&Out U~1,5 Average In The Lecture
Waiting for Piggy
Line = 96.4 Bank an d One Station Production is posted at
0 Average Balance 96.4000 https://youtu.be/Mox8JnpcmI0
5 4 1 96.3997 Interest Rate 6.00% $0.00
5 4 2 96.3997 Days 10000
5 1 6 96.3997 Average In Waiting Line = 96.4
4 4 6 96.3997
300
3 2 7 96.3997
4 3 8 96.3997
3 3 8 96.3997
250
4 3 9 96.3997
4 4 9 96.3997
3 3 9 96.3997
5 1 13 96.3997200
5 5 13 96.3997
4 2 15 96.3997
3 4 14 96.3997150
4 2 16 96.3997
1 1 16 96.3997
5 3 18 96.3997100
2 3 17 96.3997
1 2 16 96.3997
3 1 18 96.3997
50
4 4 18 96.3997
4 2 20 96.3997
4 4 20 96.3997
5 1 24 96.3997 0
1
206
411
616
821
1026
1231
1436
1641
1846
2051
2256
2461
2666
2871
3076
3281
3486
3691
3896
4101
4306
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4716
4921
5126
5331
5536
5741
5946
6151
6356
6561
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6971
7176
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7586
7791
7996
8201
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8611
8816
9021
9226
9431
9636
9841
2 2 32 96.3997
1 5 28 96.3997
5 5 28 96.3997 Demand Average 3, U~(1,5)
5 4 29 96.3997 Supply Average 3, U~(1,5)
2 1 30 96.3997 How much oin average you can produce

Variability, Utilization, and Capacity
Ardavan Asef-Vaziri
Two stations, Demand Can Wait, Capacity is perishable
Demand Left in Front of Sta-1 Capacity of Sta-1Production of Station-1Left in front of Sta-2 Capacity of Sta-2Production of final Product
0 0
1 5 2 3 3 0 6 3
2 9 7 4 4 2 2 2
3 2 5 4 4 0 8 6
4 7 3 9 9 2 7 7
5 5 7 1 1 0 6 3
6 8 7 8 8 5 3 3
7 1 6 I= 99.82,2 R= 4.83, T= 20.67 2 3 4 4
8 2 140 7 1 1 0 8 4
9 8 120 6 9 9 4 5 5
10 1 0 7 7 2 9 9
100
11 8 4 4 4 1 5 5
12 2 80 5 1 1 0 3 2
13 4 60 6 3 3 0 7 3
14 4 40 6 4 4 0 6 4
15 6 11 1 1 0 6 1
20
16 3 6 8 8 2 6 6
994 8 0 7 8 8 88 4 4
0 200 400 600 800 1000 1200
995 4 -20 6 5 5 86 7 7
996 3 8 1 1 83 4 4
Left in Front of Sta-1 Left in front of Sta-2
997 3 5 6 6 83 6 6
998 1 0 6 6 86 3 3
999 1 0 8 1 83 4 4
1000 8 0 8 8 83 8 8
Production/Capacity= 0.991 Production/Capacity 0.989
IncomingDemand/Capacity= 0.991 IncomingDemand/Capacity= 1.006
ProductionOfSta-1/CapacityOfSta-2= 1.006
Demand Left in Front of Sta-1 Capacity of Sta-1Production of Station-1Left in front of Sta-2 Capacity of Sta-2Production of final Product
Mean 4.91 37.79 4.95 4.91 62.04 4.88 4.83
Standard Deviation 2.61 23.70 2.63 2.63 31.88 2.57 2.57
C.V. 0.53 0.63 0.53 0.54 0.51 0.53 0.53

Changes in Volume and Variety
DSO 581- Design for SCM, Professor Greys Socic

A More Complex Manufacturing Eco-System
New products High variety of

rapidly introduced products
Long production Increasing storage

lead times and transportation 17
costs
Growth in product variety can be observed
across different industries
# of Automobile Lines Sold in U.S.
1971: 41
1992: 65
2011: >30 different manufacturers

…
Total Sales Per Model
1950’s Chevy Impala – 1.5 million units

2000 Honda Accord < 0.5 million units
2007 Toyota nameplate avg (e.g. Camry LE) – 70,000 units
2007 GM nameplate avg – 54,000 units
DSO 581 Design for SCM 18
US Car Sales by Manufacturing Company 2020
2020 Cars Sold Un its 2020 Cars Sold Un its Rank Model 2020
Ford 1,929,195 Dodge 267,326 1 Ford F-Series 787,422
2 Chevrolet Silverado 586,675
Toyota 1,837,898 Audi 186,625
3 Ram Pickup 563,676
Chevrolet 1,730,033 Buick 162,749
4 Toyota RAV4 430,387
Honda 1,199,805 Acura 136,982
5 Honda CR-V 333,502
Nissan 837,762 Cadillac 129,495 6 Toyota Camry 294,348
Jeep 795,306 Chrysler 110,285 7 Chevrolet Equinox 270,994
Ram 624,637 Volvo 110,130 8 Honda Civic 261,225
Hyundai 619,925 Lincoln 105,405 9 GMC Sierra 253,016
Subaru 611,938 Mitsubishi 87,386 10 Toyota Tacoma 238,806
Kia 586,005 Land Rover 80,033 11 Nissan Rogue 227,935
GMC 515,313 Infiniti 79,503 12 Ford Explorer 226,217
Volkswagen 355,684 Porsche 57,286 13 Toyota Corolla 217,712
14 Toyota Highlander 212,276
Mercedes-Benz 324,708 Mini 28,047
15 Jeep Grand Cherokee 209,786
Tesla 292,902 Jaguar 21,786
16 Jeep Wrangler 201,311
BMW 280,297 Alfa Romeo 18,585
17 Honda Accord 199,458
Mazda 279,076 Genesis 16,384 18 Ford Escape 178,496
Lexus 275,042 Fiat 4,304 14697837 19 Subaru Forester 176,996
20 Subaru Outback Wagon 153,294
DSO 581

What are the problems posed by high variety
and How Do We Address Them?
Design for SCM uses product and process design, which are key cost drivers of
product cost, to address supply chain costs. Some examples are:
• Product • Modular design • Network

substitution • Mass strategies
• Economic customization • Distribution
packaging and • Postponement strategies
transportation • Pull systems
Design Manufacturing Logistics

Even with limited variety in each product component, the number of final
configurations can be large; e.g., HP workstation
Subassembly Number of
options
I/O card 2
Motherboard 4
Graphic card 6
HDD 5
CD 3
Memory 4
Total 2,880

Modular design subdivides a system into smaller parts
(modules) that can be independently created and then used in
different systems.

Design for economic packaging and transportation can
help in cost reduction and better resource utilization
Design products so that Design products to

they can be efficiently efficiently utilize retail
packed, shipped and space
stored

Examples of design for economic
packaging and transportation
Ikea Rubbermaid
• 260 stores in over 30 countries • Clear Classic food containers -
• Large stores, centralized designed to fit 14x14” Wal-Mart
manufacturing, compactly and shelves
efficiently packed products

Product Substitution
Product substitution can help in
significantly reducing the amount
of safety stock
+ =
 Manufacturer-driven substitution
o Lower value product is replaced by a better one.
o Price difference
o Negative or positive correlation
 Customer-driven substitution
o Instead on one size gets a different size

Mass customization implies making personalized
products on a large scale

Making personalized products on a large scale
implies multiple issues
How should/do companies

implement mass
What are the biggest
customization without
challenges in implementation
suffering the negative
of mass customization?
effects of increased product
variety and variability?

Postponement implies delaying differentiation of products in the
same family as late as possible
Enables the use of Enables the delay of

aggregate forecasts detailed forecasts
May require new

Reduces scrapped or processes or product
obsolete inventory, design with
increases customer associated cost
service
Example of process postponement - Benetton
A world leader in Massive volume, Many small stores

knitwear many stores with limited
storage

Benetton Supply Cycle
March March- July 2018 August- January

2018 July 2018 • Production December 2019
• Final • Store starts 2018 • Primary
designs for owners based on • Store collection
a collection place first 10% of hit stores
orders adjust
orders orders
(colors)

Benetton - Old and New Manufacturing
Process
Spin or Purchase Yarn Spin or Purchase Yarn
Dye Yarn Manufacture Garment Parts
Finish Yarn Join Parts
Dye Garment This step is

Manufacture Garment Parts
postponed
Join Parts Finish Garment

7 principles of supply chain management
Seven Principles of Supply Chain Management
The 7 pioneer principles of supply chain management that stand rewarding to any
mainframe, even today, and surely for many more decades to come are:
 Segment customers based on service needs.
 Customize the logistics network.
 Listen to signals of market demand and plan accordingly.
 Differentiate product closer to the customer.
 Source strategically.
 Develop a supply chain-wide technology strategy.
 Adopt channel-spanning performance measures.

1. Segment customers based on service need and adapt SC to serve these customers profitably
Segmenting customers by their needs equips a company to develop a portfolio of
services tailored to each segment. The company should apply a cross-functional
process to develop packages that combine the services that (i) are valued by all
customers (ii) have the greatest value to particular segments.
All the segments of a market shown on the next page (i) value consistent delivery.
But (ii) those in the lower left quadrant have little interest in the advanced supply
chain management programs, such as customized packaging and advance
shipment notification, that appeal greatly to those in the upper right quadrant.
The 1st principle suggests that for better efficiency of the supply chain management
the customers should be grouped on the basis of their service needs like same day
delivery, one week delivery, etc.

“innovators” include an industrial

distributor (Grainger), a do-it-
yourself retailer (Home Depot),
and a mass merchant (Wal-Mart).
The goal is to find the degree of

segmentation and variation needed
to maximize profitability.

The service packages must turn a profit. Many companies lack adequate financial
understanding of their customers’ and their own costs to estimate the profit gained
through offering a tailored service.
We need to understand customer needs and align the service we provide for
differentiation. Matching our service with their needs will translate into revenues
through increases in volume and/or price.
Companies must analyze the profitability of segments, plus the costs and benefits of
alternate service packages, to ensure the most profitable allocation of resources.

2. Customize logistics network to service requirements of segments
Companies have traditionally taken a monolithic approach to logistics network design
in organizing their inventory, warehouse, and transportation activities. For some, the
logistics network has been designed to meet the average service requirements of all
customers; for others, to satisfy the toughest requirements of a single customer segment.
In many industries, tailoring distribution network to meet individual logistics
requirements is a greater source of differentiation than the actual (largely
undifferentiated) products.
A multi-level logistics network with three full-stocking distribution centers (for those
expecting low cost) and 46 quick-response cross-docks (for those expecting short
response) where developed by a company to match the logistics network to segments.
2. Customize logistics network to service requirements of segments
Customization is the key to providing the best service experience. Once customers are
segmented as per their service needs, tailor made supply chain networks must be
designed to meet separate customer segments. Many business houses run into the
mistake of using a median technique of supply chain to reach out to all customers.
However, the 2nd principle strongly holds that separate, distinct and customized logistics
networks must be implemented for different segments of customers like different modes
of transport, diverse delivery type, etc.


3. Align demand planning and resource allocation to market signals
Multiple departments independently creating forecasts for the same products—all using
their own assumptions, measures, and level of detail.
Many consult the marketplace and major suppliers only informally. The functional
orientation of many companies has just made things worse. Self-centered forecasting –
purchasing, manufacturing, marketing - is incompatible with excellent supply chain
management.
A cross-functional planning process may initially lead to drop in sales since the excess
inventory need to be consumed by the marketplace. But gradually, the company enjoys
lower inventory and warehousing costs and much greater ability to maintain price levels
and limit discounting.
The best sales and operations planning (S&OP) recognizes all functional groups, and
involves every link of the supply chain in developing forecasts collaboratively and
maintaining the required capacities.

3. Align demand planning and resource allocation to market signals
Principle 3: Listen to signals of market demand and plan accordingly ensuring steady
forecasting and optimum resource allocation.
The 3rd principle focuses on cumulative forecasting. A single business involves many
departments like production, warehousing, sales, etc. It is of utmost necessity that
forecasting of market demand must be done at a cross functional level and not at an
individual department level alone. Each department must plan towards a common
operational goal for minimizing costs, cutting down inventory levels and maximizing
profits.

4. Differentiate product closer to customer and reduce “variety” within SC without compromising customer needs
Early differentiation and proliferation of packaging requirements, may lead to

exponential growth in the number of SKUs (stock keeping units). You may experience
backorder one retailer on an item that is identical to an in-stock item, except for its
packaging. Great potential remains in delayed differentiation and postponement for
mass customization.
Mass Customization is the offspring of (i) Postponement (ii) Cross Training, and (iii)
Characteristics of forecasting.
The aggregate demand is relatively stable, while demand for the SKUs is volatile.
Forecasting of aggregate demand is more accurate than forecasting for individual items.
Postpone differentiations as much as you can, at the distribution center, within the
customer order cycle. It improves asset utilization and inventory levels.
The key to just-in-time product differentiation is to locate the leverage point in the
manufacturing process where the product is unalterably configured to meet a single
requirement.
Assess options such a postponement, modularized design, or modification of

manufacturing processes, and cross training of the workforce to increase flexibility.
Can the leverage point be pushed closer to actual demand to maximize the
manufacturer’s flexibility in responding to emerging customer demand?
This approach enhances their flexibility to

make product configuration decisions much
closer to the moment demand occurs.
Manufacturers are questioning the conventional
wisdom that lead times in the supply chain are
fixed. They are strengthening their ability to react
to market signals by compressing lead times
along the supply chain, speeding the conversion
from raw materials to finished products tailored
to customer requirements.
The 4th principle stresses on having different variants of the product for different
segments of the customers. The basis of product differentiation must be the customer
needs. There must be provisions for differentiation of the products as one single
standard product cannot fulfil the demands and needs of all customers. There must be a
flexibility to modify, alter, redesign the product and also make it readily available to the
end customer on time. The redesigned products or parts of the product must be readily
available within a shorter lead time. To achieve this, the flexibility to modify the product
must be as near to the end of the production as possible.

5. Manage supply sources strategically to reduce total cost of owning materials and services

5. Manage supply sources strategically to reduce total cost of owning materials and services
Manufacturers have traditionally looked for low prices not for warm relationships with
suppliers. Instead of looking for as many as suppliers fighting for their piece of the pie, a
supply chain management requires a more enlightened mindset—our supplier’s costs
are in effect our costs.
While manufacturers should place high demands on suppliers, they should also realize
that partners must share the goal of reducing costs across the supply chain to lower
prices and enhance margins. The logical extension of this thinking is gain-sharing
arrangements to reward everyone who contributes to the greater profitability.
Outsourcing a part or all of the operations must be done strategically. The 5th principle
suggests that having multiple players when it comes to sourcing is the key to maintain a
competitive environment and receive the best quote on the services. Every business
should be smart enough to realize that suppliers costs are indirectly the cost of the
company. The goal of cost reduction should be shared by the channel partners to lower
market prices and enhance the profit margin.
6. Use technology to make supply chain flows transparent
Principle 6 is nothing but the IOT (Internet of Things). Even powerful and well
established businesses can benefit from the use of advanced technologies. However, the
use of advanced and complex information system is not the real solution to achieve
reengineered business process. The information system in use must be such that it not
only captures the data pertaining to the supply chain management process but also
translates them into actionable and useful insights. These insights must help the business
to better their practices and operations on a real time basis.
A detailed report with all the information that flows in and out of the business but
provides no real output is not desirable by any business manager. Internet applications
and advanced systems should make the process easier and speed up the supply chain
management process by reducing time, effort and cost through automated electronic
transactions, invoices and payment records.

7. Develop and implement channel-spanning performance metrics
The 7th and the last principle in this context focuses on performance measurement. No
business can determine their success or identify new opportunities for betterment until
and unless their performance is regularly monitored and measured. Every supply chain
management also needs to have its own assessment card highlighting the achievement of
its goals and targets. This allows the process to showcase the areas of expertise and also
identify scope for further utilization of these expertise to the overall advancement of the
supply chain management process.


Principles of Lean and Theory of
Constraints
Parts of the slides of this lectures were prepared

over my teaching lifetime based on the material
that I have learned from the following book
Ardavan Asef-Vaziri
Lean Supply Chain Principle 1 https://youtu.be/jnvtTtiwvHw
 Improving the performance of every subsystem in isolation will not improve
system performance. Improvement in subsystem performance must be gauged
gauged only through
only through theiron
their impact impact on whole
the whole system.
system.
only through their impact on whole system.

Lean Supply Chain Principle 2
 Focus on improving the performance of the lean supply chain – but do not
ignore the supply chains business eco-system.

 Time lost at a bottleneck resource results in a loss of output for the whole
enterprise (entire supply chain). Time saved at a non-bottleneck resource is a
mirage.

 Decisions should be based on a throughput world perspective. While
enterprise should try to increase throughput, decrease investments, and
decrease operating expenses, the focus must be on improving the throughput.

 Focus on customer needs and process considerations when designing the
product. Enterprises can gain tremendous competitive advantage through best-
in class practices that cut across industries.

 Maximize external variety with minimal internal variety. It is desirable to
maintain inventories in an undifferentiated form for as long as it is
economically feasible to do so.

 The role of operations strategy is to provide the enterprise with the ability to
cope with changing customer preferences. Products and processes should be
designed to promote strategic flexibility.

 Buffer the variation in demand with capacity, not inventory.

 Develop partnerships and alliances with members of the supply chain
strategically, with the goal of delivering goods and services as quickly and
efficiently as possible.

 Formulate supply chain performance metrics that focus on improving
throughput.

 Use forecasts to plan and pull to execute. A system that reacts to pull signals
will have less variation than a comparable system that adopts a push mode of
operation.

 Reduce variation in the system. Reduced variation allows the supply chain to
operate with higher throughput, lower investment, and lower operating
expense.

 Focus on bottleneck resources because they control the flow. Synchronize flow
by first scheduling the bottleneck resources on the most productive products;
and then schedule non-bottleneck resources to support the bottleneck
resources.

 Do not focus on balancing capacities. Focus on synchronizing the flow.

 Focus on project completion times rather than task completion times. To ensure
timely project completions, buffer the project, not the task.

 To reduce bad multitasking, let the bottleneck resource pace the release of
project into the system.

Week 01 Intro To SC

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Basic Models in Supply Chain Management 1

Basic Models in Supply Chain Management 2

A Supply Chain - or more accurate - supply network or supply web- is

Basic Models in Supply Chain Management 3

 Theobjective is to Maximize net value generated

Basic Models in Supply Chain Management 4

DSO 581 Supply Chain Management

Basic Models in Supply Chain Management 5

…to the right

…at the right

…in the right

Basic Models in Supply Chain Management 6

Basic Models in Supply Chain Management 7

Parts of the slides of this lectures were prepared

Basic Models in Supply Chain Management 10

Right-click to open the Excel file

4. Uniform Bank Several Curves

00 200 8300 4095.36

e you had a child today. A friend comes to visit you.

Basic Models in Supply Chain Management 11

Basic Models in Supply Chain Management 12

Basic Models in Supply Chain Management 15

DSO 581- Design for SCM, Professor Greys Socic

New products High variety of

Long production Increasing storage

2011: >30 different manufacturers

Total Sales Per Model

1950’s Chevy Impala – 1.5 million units

Basic Models in Supply Chain Management 19

• Product • Modular design • Network

Design Manufacturing Logistics

DSO 581 Design for SCM 20

DSO 581 Design for SCM 21

DSO 581 Design for SCM 22

Design products so that Design products to

DSO 581 Design for SCM 23

DSO 581 Design for SCM 24

DSO 581 Design for SCM 25

DSO 581 Design for SCM 26

How should/do companies

DSO 581 Design for SCM 27

Enables the use of Enables the delay of

May require new

A world leader in Massive volume, Many small stores

DSO 581 Design for SCM 29

March March- July 2018 August- January

DSO 581 Design for SCM 30

Dye Yarn Manufacture Garment Parts

Finish Yarn Join Parts

Dye Garment This step is

Join Parts Finish Garment

DSO 581 Design for SCM 32

Basic Models in Supply Chain Management 34

Basic Models in Supply Chain Management 35

“innovators” include an industrial

The goal is to find the degree of

Basic Models in Supply Chain Management 36

Basic Models in Supply Chain Management 37

Basic Models in Supply Chain Management 39