9

• Deere & Company (brand name John Deere) is famed for the manufacture and supply of
machinery used in agriculture, construction, and forestry, as well as diesel engines and lawn
care equipment.
• Supply Chain Cost Reduction Challenges: Deere and Company has a diverse product
range, which includes a mix of heavy machinery for the consumer market, and industrial
equipment, which is made to order. Retail activity is extremely seasonal, with the majority of
sales occurring between March and July. The company was replenishing dealers’ inventory
weekly, using direct shipment and cross-docking operations from source warehouses
located near Deere & Company’s manufacturing facilities. This operation was proving too
costly and too slow, so the company launched an initiative to achieve a 10% supply chain
cost reduction within four years.
• The Path to Cost Reduction: The company undertook a supply chain network-
redesign program, resulting in the commissioning of intermediate “merge centers” and
optimization of cross-dock terminal locations.
• Deere & Company also began consolidating shipments and using break-bulk terminals
during the seasonal peak. The company also increased its use of third-party logistics
providers and effectively created a network that could be optimized tactically at any given
point in time.
• Supply Chain Cost Management Results: Deere & Company’s supply chain cost-
management achievements included an inventory decrease of $1 billion, a significant
reduction in customer delivery lead times (from ten days to five or less) and annual
transportation cost savings of around 5%.
10
11
• Deere & Company (brand name John Deere) is famed for the manufacture and supply of
machinery used in agriculture, construction, and forestry, as well as diesel engines and lawn
care equipment.
• Supply Chain Cost Reduction Challenges: Deere and Company has a diverse product
range, which includes a mix of heavy machinery for the consumer market, and industrial
equipment, which is made to order. Retail activity is extremely seasonal, with the majority
of sales occurring between March and July. The company was replenishing dealers’
inventory weekly, using direct shipment and cross-docking operations from source
warehouses located near Deere & Company’s manufacturing facilities. This operation
was proving too costly and too slow, so the company launched an initiative to achieve a 10%
supply chain cost reduction within four years.
• The Path to Cost Reduction: The company undertook a supply chain network-
redesign program, resulting in the commissioning of intermediate “merge centers” and
optimization of cross-dock terminal locations.
• Deere & Company also began consolidating shipments and using break-bulk terminals
during the seasonal peak. The company also increased its use of third-party logistics
providers and effectively created a network that could be optimized tactically at any given
point in time.
• Supply Chain Cost Management Results: Deere & Company’s supply chain cost-
management achievements included an inventory decrease of $1 billion, a significant
reduction in customer delivery lead times (from ten days to five or less) and annual
transportation cost savings of around 5%.
12
• One of the world’s largest manufacturers of computer chips, needed to reduce supply chain
expenditure significantly after bringing its low-cost “Atom” chip to market. Supply chain costs of
around $5.50 per chip were bearable for units selling for $100, but the price of the new chip was a
fraction of that, at about $20.
• The Supply Chain Cost Reduction Challenge: Somehow, Intel had to reduce the supply chain
costs for the Atom chip, but had only one area of leverage—inventory. The chip had to work, so
Intel could make no service trade-offs. Intel had already whittled packaging down to a minimum,
and with a high value-to-weight ratio, the chips’ distribution costs could not be pared down any
further.
• The only option was to try to reduce levels of inventory, which, up to that point, had been kept
very high to support a nine-week order cycle. The only way Intel could find to make supply chain
cost reductions was to bring this cycle time down and therefore reduce inventory.
• The Path to Cost Reduction: Intel decided to try what was considered an unlikely supply chain
strategy for the semiconductor industry: make to order. The company began with a pilot operation
using a manufacturer in Malaysia. Through a process of iteration, they gradually sought out and
eliminated supply chain inefficiencies to reduce order cycle time incrementally. Further
improvement initiatives included:
• Cutting the chip assembly test window from a five-day schedule, to a bi-weekly, 2-day-long process
• Introducing a formal S&OP planning process
• Moving to a vendor-managed inventory model wherever it was possible to do so
• Supply Chain Cost Management Results: Through its incremental approach to cycle time
improvement, Intel eventually drove the order cycle time for the Atom chip down from nine weeks to
just two. As a result, the company achieved a supply chain cost reduction of more than $4 per unit
for the $20 Atom chip—a far more palatable rate than the original figure of $5.50.
13
 Introduction – Basic Concepts

• Why Supply Chain Management?

• The Importance of the Supply Chain
–Changing customer
–Globalization
–Interdependence
–Proliferation in product lines
–Shorter product life cycles
–Higher level of outsourcing
–Shift in power structure in the chain
14
15
Enrollment code: c97c8e

Enrollment ends on Jan 12, 2024 at 07.00 pm

16
 Globalisation

“Princess Diana's death is a perfect example of globalization.

She was an English Princess educated in England and
Switzerland who was apparently with an Egyptian boyfriend,
crashes in a French tunnel, driving a German car with a
Dutch engine, driven by a Belgian who was high on Scottish
whiskey, followed closely by Italian Paparazzi, on Japanese
motorcycles, treated by an American doctor, using Brazilian
medicines!
And this is heard by an Indian in America from an Indian
Politician addressing the Harvard Students on Youtube !
And you are reading this on one of your Apple / Android phone
that use microchips manufactured in Taiwan, shipped to China
on a Bangladeshi Ship captained by Vietnamese
17
 Introduction – Basic Concepts

• Why Supply Chain Management?

• The Importance of the Supply Chain
–Changing customer
–Globalization
–Interdependence
–Proliferation in product lines
–Shorter product life cycles
–Higher level of outsourcing
–Shift in power structure in the chain
18
Why Supply Chain?

3 Factories 3 Factories

12 Routes 7 Routes Wholesaler

19

4 Retailers 4 Retailers
Case of Hindustan Unilever (HUL)

20
Fundamentals of Logistics and Supply Chain Management

• Every organisation delivers products to its customers.

• These products are described as either goods or services.
• Manufacturers like Samsung or Sony make tangible goods, while BSNL or Jio
provide intangible services.
• Both goods and services – Automobile

• Operations that create and deliver the products.

• These operations take a variety of inputs and convert
them into desired outputs.

21
 The Context of Logistics - Introduction - Definitions

• LOGISTICS is the function responsible for the flow of materials

from suppliers into an organisation, through operations within
the organisation, and then out to customers

22
 The Context of Logistics - Introduction - Definitions

• Moving materials into the organisation from suppliers is called inbound

or inward logistics;
• Moving materials out to customers is outbound or outward logistics;
• Moving materials within the organisation is materials management.

23
 The Context of Logistics - Introduction - Definitions

• MATERIALS are all the things that an organisation moves to create its
products. These materials can be both tangible (such as raw
materials) and intangible (such as information)

24
 The Supply Chain
• A supply chain consists of all parties involved, directly or indirectly, in fulfilling a
customer request.
• The supply chain also includes transporters, warehouses, retailers, and even
customers themselves.
• Within each organization, such as a manufacturer, the supply chain includes all
functions involved in receiving and filling a customer request. These functions
include, but are not limited to, new product development, marketing, operations,
distribution, finance, and customer service

Supplier Manufacturer Distributor Retailer Customer

25
26
A supply chain network

27
 The Supply Chain
• Upstream and Downstream.
• The upstream activities are divided into tiers of
suppliers.
• A supplier that sends materials directly to the
operations - first tier supplier;
• One that send materials to a first tier supplier is a
second tier supplier;
• one that sends materials to a second tier supplier
is a third tier supplier,
• and so on back to the original sources.

• Customers are also divided into tiers.

• One that gets a product directly from the operations
is a first tier customer;
• one that gets a product from a first tier customer is
a second tier customer;
• one that get a product from a second tier customer
is a third tier customer,
• and so on to final customerscoming

28
 The Supply Chain
• Upstream and Downstream.
• The upstream activities are divided into
tiers of suppliers.
• A supplier that sends materials directly to
the operations - first tier supplier;
• One that send materials to a first tier
supplier is a second tier supplier;
• one that sends materials to a second tier
supplier is a third tier supplier,
• and so on back to the original sources.

• Customers are also divided into tiers.

• One that gets a product directly from the
operations is a first tier customer;
• one that gets a product from a first tier
customer is a second tier customer;
• one that get a product from a second tier
customer is a third tier customer,
• and so on to final customerscoming

29
Structure of the supply chain

30
 Dream of a Chief executive

“Our aim is always to arrange the material and machinery and to

simplify the operations so that practically no orders are necessary. Our
finished inventory is in transit. So is most of our raw material inventory.
Our production cycle is about eighty-one hours from the mine to the
finished machine (automobile) in the freight car.”
Henry Ford

31
Historical perspective - Evolution of Supply
Chain Management
• Three major revolutions
• First revolution – 1910-1920

• Second revolution – 1960-1970

• Third revolution – 1995-2000

32
 Historical perspective - Evolution of Supply Chain
Management
• First revolution – 1910-1920: Vertical Integrated Firms Offering Low
Variety of Products
• The Ford Motor Company - managed to build a tightly integrated chain.
• The Ford Motor Company owned every part of the chain - journey from the
iron ore mine to the finished automobile in 81 hours.
• The Ford supply chain would offer any colour, as long as it was black; and
any model, as long as it was Model T.
• Ford innovated and managed to build a highly efficient, but inflexible
supply chain that could not handle a wide product variety
• Can it be sustainable in the long run?
• General Motors, understood the demands of the market place and offered a
wider variety in terms of automobile models and colours.
• Issues with the product variety?

33
 Historical perspective - Evolution of Supply Chain
Management
• Second revolution – 1960-1970: Tightly Integrated Supply Chains
Offering Wide Variety of Products
• Manufacturing industry saw many changes, including a trend towards a wide
product variety
• Firms had to restructure their supply chains to be flexible and efficient
• Wider product variety without holding too much inventory
• Toyota Motor Company came up with ideas that allowed the final assembly
and manufacturing of key components to be done in-house
• Components was sourced from a large number of suppliers - Keiretsu
system
• Toyota Motor Company had long-term relationships with all the suppliers -
located very close to the Toyota assembly plants
• Combination of low set-up times and long-term relationships with suppliers
• The principles followed by Toyota are more popularly known as lean
production systems.

34
 Historical perspective - Evolution of Supply Chain
Management
• Third revolution – 1995-2000: Virtually Integrated Global Supply
Networks Offering Customized Products and Services
• Information technology is evolving faster than enterprises
• IT-enabled model emerged and begin to apply it to all industries
• Dell computers, Apple Inc., and Bharti Airtel
• Dell computers allows customers to configure their own laptops
• Apple offers personal digital devices to its customers and iPod is a
classic example - personalized user experience
• Bharti Airtel services like My Airtel - unique personalized experience

35
Enrollment code: c97c8e

Enrollment ends on Jan 12, 2024 at 07.00 pm

36
37
 Decision phases in a supply chain

• Supply chain strategy or design

• Supply chain planning
• Supply chain operation

38
 Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and what processes
each stage will perform
• Strategic supply chain decisions (for years)
– SC Configuration
– Locations and capacities of facilities – resource allocation
– What activities should be carried out by the firm and what should be
outsourced?
– How to select entities/partners to perform outsourced activities?
– What should be the nature of the relationship with those entities?
• relationship be transactional in nature or should it be a long-term partnership
– Modes of transportation
– Information systems
• Supply chain design decisions are long-term and expensive to reverse
– must take into account market uncertainty

39
 Supply Chain Planning

• Short-term operations – Three months to a year

• With reference to the supply configuration from previous phase
– Starts with a forecast of demand in the coming year
– Procurement planning and control
– Which market will be supplied from which location
– Subcontracting?
– Inventory policies
– Timing of marketing and price promotions
– Distribution planning and control - Transportation management
– Customer order processing
• Must consider in planning decisions demand uncertainty, exchange
rates, competition over the time horizon

40
 Supply Chain Operation

• Time horizon is weekly or daily

• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies are determined
• Goal is to implement the operating policies as effectively as possible
• Allocate orders to inventory or production, set order due dates, generate
pick lists at a warehouse, allocate an order to a particular shipment, set
delivery schedules, place replenishment orders
• Much less uncertainty (short time horizon)

41
41
 Supply Chain Operation

• Time horizon is weekly or daily

• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies are determined
• Goal is to implement the operating policies as effectively as possible
• Allocate orders to inventory or production, set order due dates, generate
pick lists at a warehouse, allocate an order to a particular shipment, set
delivery schedules, place replenishment orders
• Much less uncertainty (short time horizon)

42
 Process views of the supply chain

•Cycle view of Supply Chain processes

•Push/pull view of Supply Chain processes

43
 Process views of the supply chain

• Cycle view: processes in a supply chain are divided into a series of

cycles, each performed at the interfaces between two successive
supply chain stages
• Push/pull view: processes in a supply chain are divided into two
categories depending on whether they are executed in response to
a customer order (pull) or in anticipation of a customer order
(push)

44
Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 Cycle View of a Supply Chain

• Each cycle occurs at the interface between two successive stages

–Customer order cycle (customer-retailer)
–Replenishment cycle (retailer-distributor)
–Manufacturing cycle (distributor-manufacturer)
–Procurement cycle (manufacturer-supplier)
• Cycle view clearly defines processes involved and the owners
of each process.
• Specifies the roles and responsibilities of each member and the
desired outcome of each process.
Cycle View of a Supply Chain
 Push/Pull View of Supply Chain
Processes
• Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes
from pull processes
 Push/Pull View of Supply Chains

Procurement, Customer Order

Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
50
Customer penetration point

51
Types of Supply Chains based on CPP

52
 Push/Pull View of Supply Chains

Procurement, Customer Order

Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
 Push/Pull View of Supply Chain
Processes
• Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes
from pull processes
55
56
57
1. Ankleshwar (Gujarat),
2. Sarigam (Gujarat)
3. Patancheru (Telangana),
4. Kasna (Uttar Pradesh),
5. Sriperumbudur (Tamil Nadu),
6. Rohtak (Haryana),
7. Khandala (Maharashtra),
8. Taloja (Maharashtra),
9. Mysuru (Karnataka),
10. Visakhapatam (Andhra Pradesh)

58
What are the supply chain challenges that you face?
G M at Decorative Paint Business Unit: Increasingly our customers
have become more demanding and as a result we are constantly
expected to improve service levels.
• Further, we add 80–100 new SKUs every year.
• These new SKUs are more complex products requiring new
materials and complex manufacturing processes but usually
have lower volumes compared to our existing product lines.
59
• It is expected that our business should not only service a
larger number of SKUs at higher service levels but also
reduce costs related to the supply chain. So, unlike most
other businesses, where chains have to be either efficient or
responsive, we are expected to be responsive as well as efficient.
How to manage this stretch is the most important challenge for
supply chain managers at Asian Paints.
60
61
Supply Chain Macro Processes in a Firm
• Supply chain processes discussed in the two views can be classified into:

–Customer Relationship Management (CRM)

–Internal Supply Chain Management (ISCM)
–Supplier Relationship Management (SRM)
63
Enablers of supply chain performance

64
 Enablers of supply chain performance

 Improvement in Communication and IT

– Industrial Internet of Things - offers real-time and accurate monitoring of
production conditions
– AI and Advanced Analytics - a game-changer in manufacturing
– Robotic Automation - for more agile supply chain management - tied directly to
inventory, order fulfillment, shipping

65
 Agile Supply Chain

"Ability of the supply chain to anticipate and adapt to the

changing international business situations quickly through
product, process and people"

66
Agile Supply Chain

Back

Source:
67
 Third Party Logistics providers

A 3PL (third-party logistics) provider

offers outsourced logistics services,
which encompass anything that involves
management of one or more facets of
procurement and fulfillment activities.

68
 Third Party Logistics providers

The following activities are outsourced to a

TPL:

• Transportation
• Warehousing
• Packaging
• Materials procurement
• Inventory management
• Customs brokerage
• Freight audit
• Order receiving and processing
• Shipment tracking

69
 Enablers of supply chain performance

 Improvement in Communication and IT

– Industrial Internet of Things - offers real-time and accurate monitoring of
production conditions
– AI and Advanced Analytics - a game-changer in manufacturing
– Robotic Automation - for more agile supply chain management - tied directly to
inventory, order fulfillment, shipping

 Emergence of Third-party Logistics Providers

 Enhanced Inter-firm Coordination Capabilities

70
71
Challenges in maintaining the supply chain in
India

Taxation structure drives location decisions

Case of pharmaceutical industry
Special economic zones offer taxation benefits

72
 Special Economic Zones

 The main objectives of the SEZ Scheme is generation of

 additional economic activity,
 promotion of exports of goods and services,
 promotion of investment from domestic and foreign sources,
 creation of employment opportunities along with the
 development of infrastructure facilities.

All laws of India are applicable in SEZs unless specifically exempted

as per the SEZ Act/ Rules.

73
 Special Economic Zones - Benefits
The government offers many incentives for companies and businesses Back
established in SEZ such as
• Duty-free import or domestic procurement of goods for developing,
operating and maintaining units.
• 100% Income tax exemption on export income for SEZ units under the
Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of
the ploughed back export profit for next 5 years.
• Units are exempted from Minimum Alternate Tax (MAT).
• They are exempted from GST and supplies to SEZs are zero-rated under
the IGST Act, 2017.
• There is no need for a license for import.
• In the manufacturing sector, barring a few segments, 100% FDI is allowed.
• Many SEZs offer developed plots and ready-to-use space.

74
 LEADS Report 2022

Back

75
 LEADS Report 2022

Back

76
STC WA 77
 Challenges in maintaining the supply chain in
India

 Taxation structure drives location decisions

 Case of pharmaceutical industry
 Special economic zones offer taxation benefits
 Poor State of Logistics Infrastructure
 Transportation and the warehousing industry in the unorganized sector.
 About 90 per cent of the trucks belong to owners with less than five
trucks
 Modernizing warehouse management

78
Challenges for the Indian FMCG Supply Chain

Managing Availability in the Complex Distribution Set Up –

HUL
Working with Smaller Pack Sizes
Dealing with Counterfeit Goods
Opportunistic Games Played by the Distribution Channel
Emergence of Third-party Logistics Provider
Emergence of Organized (Modern ) Retail

79
HUL – Project Shakti

80
Case of Hindustan Unilever (HUL)

81
Challenges for the Indian FMCG Supply Chain

Managing Availability in the Complex Distribution Set Up

Working with Smaller Pack Sizes
Dealing with Counterfeit Goods
Opportunistic Games Played by the Distribution Channel
Emergence of Third-party Logistics Provider
Emergence of Organized (Modern ) Retail

82
 Supply chain drivers

Three logistical drivers

Facilities
Inventory
Transportation
Three cross-functional drivers
Information
Sourcing
Pricing
83
 Supply chain drivers

Facilities
Two major types of facilities are production sites and storage sites.
Decisions regarding the role, location, capacity, and flexibility of facilities
have a significant impact on the supply chain’s performance
In 2013, Amazon increased the number of warehousing facilities located
close to customers to improve its responsiveness.
In contrast, Best Buy tried to improve its efficiency in 2013 by shutting
down retail facilities

84
 Supply chain drivers

Inventory
Raw materials, work in process, and finished goods
More responsive by stocking large amounts of inventory and satisfying
customer demand from stock even though the high inventory levels
reduce efficiency

Transportation
Moving inventory from point to point in the supply chain
Transportation choices have a large impact on supply chain
responsiveness and efficiency

85
86
 Supply chain drivers
 Three cross-functional drivers
 Information
Data and analysis concerning facilities, inventory, transportation, costs,
prices, and customers throughout the supply chain
Information is potentially the biggest driver of performance in the supply
chain because it directly affects each of the other drivers.
 Sourcing
Sourcing decisions affect both the responsiveness and efficiency of a
supply chain
High-cost locations very responsive while keeping its facilities in low-
cost countries efficient.
 Pricing
Pricing affects the behavior of the buyer of the good or service
87
Framework for structuring drivers

88
 Coffee Supply Chain

• The world’s best shade-grown ’mild’ coffees

• Indian coffee is the most extraordinary of beverages.
• India is the only country that grows all of its coffee under shade.
Typically mild and not too acidic, these coffees possess an exotic full-
bodied taste and a fine aroma.
• Indian coffee has a unique historic flavour too!
• It all began with a long journey around four hundred years ago...
• Saint Bababudan brought seven magical beans from distant Yemen
and planted them in the Chandragiri hills of Karnataka.
• India has consistently produced and exported a remarkable variety of
high-quality coffees for over one hundred and fifty years!

89
Coffee Supply Chain

90
Coffee Supply Chain

• The plantations in the south are the

cradle of Indian coffee. They include the
Bababudangiris in Karnataka, known as
the birthplace of coffee in India.
• The Eastern Ghats and the North Eastern
states are newly developed areas of
coffee.

91
Coffee Supply Chain

Source: [Link]
92
Coffee Supply Chain

Source: [Link]
93
 Coffee Supply Chain Growing
• For coffee, the chain is often complex, and • Growing Coffee grows best in a warm,
varies in different countries but typically humid climate with a relatively stable
includes: temperature of about 27ºC all year
round.
– Growers
• The world’s coffee plantations are
– Intermediaries
therefore found in the so-called coffee-
– Processors belt that straddles the equator between
– Government Agencies the tropics of Cancer and Capricorn
– Exporters
– Dealers/Brokers 94

– Roasters
– Retailers
 Coffee Supply Chain
–Coffee from the tree goes through a series of processes to end up
with the saleable product - the green coffee bean
1. Picking
2. Drying and hulling
3. Sorting, grading and packing
4. Bulking
5. Blending 95

6. Roasting
Coffee Supply Chain

96
97
Supply Chain Strategy

98
What is Strategy?

99
Competitive Strategy: Examples
• Provide high availability of a variety of products
of reasonable quality at low prices
• Most products sold are commonplace and can be
purchased elsewhere
• A low price and product availability – EDLP
strategy

• Maintenance, repair, and operations (MRO)

products
• Offers more than 500,000 products through both a
catalog and a website
• Provide the customer with convenience,
availability, and responsiveness
Competitive Strategy: Examples
• Variety of diamonds available from its website
and its margins are significantly lower
• Responsive transportation with FedEx - free
shipping for overnight delivery - centralize its
inventory of diamonds
• Customers, have to wait to get their jewelry
(Blue Nile does provide a 30-day return period,
though).
• Marketing strategy was to offer a credit plan of
“a penny down and a dollar a week”
• A customer can walk into the retail store, be
helped by a salesperson, and leave immediately
with a diamond ring
• The variety available is limited
 The Value Chain
• The relationship between competitive and functional
strategies

• To execute a company’s competitive strategy, all these

functions play a role, and each must develop its own
strategy
 Supply Chain Strategy - Some Functional Strategies

• Product development strategy

–specifies the portfolio of new products that a company will try to
develop.
–whether the development effort will be made internally or outsourced
• Marketing and sales strategy
–specifies how the market will be segmented and how the product will
be positioned, priced, and promoted
 Supply Chain Strategy
 Determines the nature of procurement of raw materials,
transportation of materials to and from the company, manufacture
of the product or operation to provide the service, and distribution
of the product to the customer, along with any follow-up service
 Whether these processes will be performed in-house or outsourced
 Plan or approach that a company develops to manage and
optimize the flow of goods and services from the source to the
end customer.
 Involves a coordinated effort to align the activities of all parties
involved in the supply chain process.
 Includes suppliers, manufacturers, distributors, and retailers, to
ensure the supply chain operates efficiently.
 Supply Chain Strategy
• An effective Supply Chain Strategy
– should be aligned with the overall business
strategy of the company and
– factors considered are market trends, customer
preferences, and competitive environment
• Should ensure that its supply chain provides
superior value to the end customer in an
efficient manner.
 Types of Supply Chain Strategies

Cost Leadership Agile Strategies Lean Strategies Green Strategies Collaborative

• aims to lower • focuses on being • By reducing inventory, • aims to minimize the • For benefits of all
expenses along the adjustable and simplifying processes, environmental impact stakeholders, focuses
entire supply chain, responsive to changing and enhancing of the supply chain, on close collaboration
often by using market conditions, communication often by using between
economies of scale, consumer demands, throughout the supply sustainable materials, manufacturers,
reducing waste, and and supply disruptions. chain operations, aim reducing waste, and suppliers, and
negotiating prices with • includes establishing a to minimize waste and optimizing customers.
suppliers. network of partners improve efficiency. transportation and • involves sharing
and suppliers that can distribution. information,
respond quickly to coordinating planning,
changes in supply or and the production of
demand. new goods and
services.
 Importance of Supply Chain Strategy

Cost Reduction

Improved Customer Satisfaction

Competitive Advantage

Risk Management

Innovation
 Supply Chain Strategy Example

Source: [Link]
 Apple : Challenges
• There are many challenges to overcome, for example;
–The global economy could affect the Company.
–Some re-sellers may also distribute products from competing
manufacturers.
–Inventories can become obsolete or exceed anticipated demand.
–Some components are currently obtained from single or limited
sources.
–Some custom components are not common to the rest of the
industries.
–Ability to obtain components in sufficient quantities is important.
–Supply chain disruption such as natural and man-made disasters can
be serious.
–The company depends on logistical services provided by outsourcing
partners.
–The company also relies on its partners to adhere to the supplier
code of conduct. 109
110
Supply Chain Strategy: More Examples
• Collaboration with suppliers and the use of
technology to reduce costs
• Extensive network of suppliers and logistics
partners to ensure that products and services are
delivered quickly and efficiently to stores.

• Aims at speed and efficiency, with a particular

priority on same-day or next-day deliveries.
• Amazon uses advanced logistics technology
and a network of fulfillment centers to ensure that
products are delivered quickly and efficiently to
customers.
Supply Chain Strategy: More Examples
• Focused on Lean Supply Chain Strategy, which
emphasizes reducing waste and optimizing
efficiency by implementing just-in-time delivery
and inventory management
• Enabled Toyota to maintain high levels of quality
and reduce costs.

• Based on creating a highly efficient and

responsive system that delivers its products to
customers around the world
• Relies on a vast network of suppliers, distributors,
and retailers to ensure that its products are always
available in the right place at the right time.
 Customer Service and Cost Trade-offs

• To understand the relationship between the supply chain

strategy and the business strategy, we need to understand
cost versus service trade-offs in business.

113
 Customer Service and Cost Trade-offs

(a) Revenue impact of service level (b) Profit impact of service level
114
 Dimensions of Customer Service
Order delivery lead Product variety
time Higher product variety
Shorter lead time

Customer
Service
Responsiveness Delivery reliability
Higher responsiveness
Higher reliability
 Order Delivery Lead Time

• Order delivery time is the time taken by the supply

chain to complete all the activities from order to
delivery.

Interaction between supply chain lead time and delivery lead time
 Supply Chain Responsiveness
• The firm’s ability to handle the uncertainty of market demand
• Based on the nature of demand uncertainty, products can be
classified as functional products or innovative products
Functional Innovative
Aspects of demand
(predictable demand) (unpredictable demand)
Product life cycle More than 2 years 3 months to 1 year
Contribution margin (% of sales
5–20% 20–60%
price)
Low (10–20 variants High (often thousands of
Product variety
per category) variants per category)
Likely forecast error 5–20% 40–100%
Average stock-out rate 1–2% 10–40%
End-of-season markdown 0% 10–30%
Supply Chain Responsiveness

Functional Innovative
products products

Efficient
Match Mismatch
supply chain

Responsive
Mismatch Match
supply chain
 Delivery Reliability

• Captures the degree to which a firm is able to service its

customers within the promised delivery time.
• Measures the fraction of customer demand that is
satisfied within the promised delivery lead time.
 Product Variety
• “Variety explosion” in the past couple of years
• Higher product variety offers greater choices to the
customer
• Higher variety would lead to greater complexity
• 99-Colour Campaign by TVS Motors
 Strategic Fit
• A concept used in strategic management
• Describes the degree to which a company's
strategies, objectives, and capabilities correspond
with and support one another
• The process of aligning a firm's resources,
capabilities and competencies with its business
strategies, objectives and the external environment
• A measure of the degree to which an organization’s
activities support its overall strategy

121
 Achieving Strategic Fit

• Strategic fit – competitive and supply chain strategies

have aligned goals
• It refers to consistency between the customer
priorities that the competitive strategy hopes to
satisfy and the supply chain capabilities that the
supply chain strategy aims to build.
• A company may fail because of a lack of strategic fit
or because its processes and resources do not
provide the capabilities to execute the desired
strategy

122
 How is Strategic Fit Achieved?
•Understanding the customer and supply chain
uncertainty
• The customer needs for each targeted segment and the
uncertainty these needs impose on the supply chain
• These needs help the company define the desired cost and
service requirements
• The supply chain uncertainty helps the company identify the
extent of the unpredictability of demand and supply that the
supply chain must be prepared for
•Understanding the supply chain capabilities
• Each of the supply chains is designed to perform different
tasks
•Achieving strategic fit
• If a mismatch exists between what the supply chain does and the
customer needs, either restructure the supply chain or alter
competitive strategy
123
124
Step 1: Understanding the Customer and Supply Chain
Uncertainty

• Understand the customer, identify the needs of the

customer segment being served
• Attributes of customer demand:
• Quantity of product needed in each lot

• Response time customers will tolerate

• Variety of products needed

• Service level required

• Price of the product

• Desired rate of innovation in the product

125
 Step 1: Understanding the Customer and Supply Chain
Uncertainty
• Demand uncertainty – uncertainty of customer
demand for a product
• Implied demand uncertainty – resulting uncertainty for
the supply chain given the portion of the demand the
supply chain must handle and attributes the customer
desires
• As each individual customer need contributes to the
implied demand uncertainty, we can use implied
demand uncertainty as a common metric with which
to distinguish different types of demand.
126
Customer Needs and Implied Demand Uncertainty
Customer Need Causes Implied Demand Uncertainty to . . .
Range of quantity required Increase because a wider range of the quantity
increases required implies greater variance in demand.
Lead time decreases Increase because there is less time in which to
react to orders.
Variety of products required Increase because demand per product becomes
increases less predictable.
Number of channels through which Increase because customer demand per channel
product may be acquired increases becomes less predictable.
Rate of innovation increases Increase because new products tend to have more
uncertain demand.
Required service level increases Increase because the firm now has to handle
unusual surges in demand.

127
Implied Uncertainty and Other Attributes

Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High
Average forecast error 10% 40% to 100%
Average stock out rate 1% to 2% 10% to 40%
Average forced season-
0% 10% to 25%
end markdown

128
Impact of Supply Source Capability
Supply Source Capability Causes Supply Uncertainty to...
Frequent breakdowns Increase
Unpredictable and low yields Increase
Poor quality Increase
Limited supply capacity Increase
Inflexible supply capacity Increase
Evolving production process Increase

129
Levels of Implied Demand Uncertainty

130
Step 2: Understanding Supply Chain Capabilities

• How does the firm best meet demand?

• Supply chain responsiveness is the ability to
• Respond to wide ranges of quantities demanded

• Meet short lead times

• Handle a large variety of products

• Build highly innovative products

• Meet a very high service level

131
Step 2: Understanding Supply Chain Capabilities

• Responsiveness comes at a cost

• Supply chain efficiency is the inverse to the

cost of making and delivering the product to

the customer
• The cost-responsiveness efficient frontier

curve shows the lowest possible cost for a

given level of responsiveness

132
Cost-Responsiveness Efficient Frontier

133
Step 3: Achieving Strategic Fit

• Ensure that the degree of supply chain

responsiveness is consistent with the implied
uncertainty
• Assign roles to different stages of the supply chain
that ensure the appropriate level of responsiveness
• Ensure that all functions maintain consistent
strategies that support the competitive strategy

134
Zone of Strategic Fit

135
Roles and Allocations

136
Efficient and Responsive Supply Chains

Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand
Create modularity to allow
Product design Maximize performance at a
postponement of product
strategy minimum product cost
differentiation
Lower margins because price is a Higher margins because price is
Pricing strategy
prime customer driver not a prime customer driver
Maintain capacity flexibility to
Manufacturing Lower costs through high
buffer against demand/supply
strategy utilization
uncertainty
Inventory Maintain buffer inventory to deal
Minimize inventory to lower cost
strategy with demand/supply uncertainty
Lead-time Reduce, but not at the expense of Reduce aggressively, even if the
strategy costs costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality

137
 What is Supply Chain Lead Time?

• Supply chain lead time is the amount of time it takes to

move a product from one part of the supply chain to the
next -- from a supplier to the customer
• No buyer and supplier would want long lead times since it
results in stock-outs, operational inefficiencies and wastage
• It can also impact customer satisfaction if your products take
a long time to reach them – look for an alternative
• Lead time includes the time it takes to:
–Source the product
–Purchase necessary components, assemble the product, and
transport the product, and
–Deliver the product to the customer

138
2
Efficient and Responsive Supply Chains

Efficient Supply Chains Responsive Supply Chains

Primary goal Supply demand at the lowest cost Respond quickly to demand
Create modularity to allow
Product design Maximize performance at a
postponement of product
strategy minimum product cost
differentiation
Lower margins because price is a Higher margins because price is
Pricing strategy
prime customer driver not a prime customer driver
Maintain capacity flexibility to
Manufacturing Lower costs through high
buffer against demand/supply
strategy utilization
uncertainty
Inventory Maintain buffer inventory to deal
Minimize inventory to lower cost
strategy with demand/supply uncertainty
Lead-time Reduce, but not at the expense of Reduce aggressively, even if the
strategy costs costs are significant
Select based on speed, flexibility,
Supplier strategy Select based on cost and quality
reliability, and quality

3
 What is Supply Chain Lead Time?

• the amount of time it takes to move a product from one

part of the supply chain to the next -- from a supplier to the
customer
• No buyer and supplier would want long lead times
– results in stock-outs, operational inefficiencies and wastage
• It can also impact customer satisfaction if your products take
a long time to reach them – look for an alternative
• Lead time includes the time it takes to:
–Source the raw materials
–Purchase necessary components, assemble the product, and
transport the product, and
–Deliver the product to the customer

4
What Causes Longer Lead Times?

5
 What Causes Longer Lead Times?

• Raw materials shortages: Material shortages can be caused by supplier

issues, natural disasters, extreme weather and other events
• Lack of skilled labour availability
• Product complexity: Products made up of many components or
materials require more time for production
• Customer demand: Lead times are manageable when demand is low. But
when demand explodes, there is a backlog, putting pressure on lead time
• Production efficiency: If production processes are inefficient, it can lead
to delays in the delivery of goods and services
• Location of supplier: Lead time will be high if the supplier and the buyer
are located in different regions
• Number of suppliers: When multiple suppliers are involved in the supply
chain, each must complete a part of the process before the product can be
delivered. This leads to delays
• Poor Transportation Infrastructure
6
What are Some Strategies to Reduce Lead Time?

7
 What are Some Strategies to Reduce Lead Time?
• Re-visit production process: Identify and eliminate inefficiencies in production
through value-stream mapping. This will help you identify activities that don’t add
value. Also check if these activities can be eliminated
• Maintain optimum inventory: Keeping the right amount of inventory on hand
can reduce lead time. Don’t order raw materials in bulk. Instead, order more
frequently in smaller batches
• Automate the process: Leverage technology to automate processes such as
order processing, inventory management, and product delivery. Automation can
reduce lead time and errors and increase efficiency.
• Explore nearshoring: Assess the feasibility of sourcing from local suppliers
• Strengthen supplier relationships: Work closely with your suppliers and
encourage them to deliver components and materials on time. Offer them
incentives for meeting the agreed delivery timelines.
• Reduce product complexity: This will make it easier to manufacture the
product. For example, look at reducing the number of components used in the
production process. Adopt component commonality.
• Simplify the supply chain: Streamlining the supply chain can lower lead time.
This can be achieved by cutting down the number of steps in running a supply
chain and by improving coordination between suppliers and buyers.
8
9
10

Beyond peer and Gartner opinion, the

rankings are based on scores on key
attributes such as ESG, three-year weight
return on physical assets (ROPA), and
revenue growth and inventory turns
11
12
Supply Chain Performance
Measures

13
 Supply Chain Operations Reference (SCOR)
Model
• The Supply-Chain Council
–an independent, non-profit, global corporation
–interested in getting the industry to standardize SC
terms for a meaningful supply chain benchmarking
• The Supply Chain Operations Reference (SCOR)
model
–the industry standard for supply chain management.
• Several supply chain software vendors have
adopted the SCOR performance measures in their
performance management module.

14
 Supply Chain Operations Reference (SCOR)
Model
• SCOR is a part of the American Production and Inventory
Control Society (APICS) body of knowledge used to foster the
advancement of end-to-end supply chain management.
• SCC + APICS = Association for Supply Chain Management
(ASCM)
• APICS Frameworks:
– Product Life Cycle Operations Reference model (PLCOR)
– Customer Chain Operations Reference model (CCOR)
– Design Chain Operations Reference model (DCOR)
– Managing for Supply Chain Performance (M4SC).

15
Supply Chain Operations Reference (SCOR)
Model

16
 SCOR Model
• SCOR recognizes six major processes:
Plan
• Processes include determining resources, requirements, and the chain of communication for
a process to ensure it aligns with business goals. This includes developing best practices for
supply chain efficiency
Source
• Processes involve obtaining goods and services to meet planned or actual market demand

Make
• Processes that take finished products and make them market-ready to meet planned or
actual demand. It defines when orders need to be made to order, made to stock, or
engineered to order and includes production management and bill of materials, as well as all
necessary equipment and facilities

17
 SCOR Model
• SCOR recognizes six major processes: (Contd…)
Delivery
• Processes involved in delivering finished products and services to meet either
planned or actual demand, including order, transportation, and distribution
management
Return
• Processes are involved with returning or receiving returned products, either from
customers or suppliers. This includes post-delivery customer support processes
Enable
• Processes associated with SCM such as business rules, facilities performance, data
resources, contracts, compliance, and risk management

18
 SCOR Model

• As per the SCOR model, supply chain performance

measures fall under the following five broad
categories:
Assets (Asset
Cost Management
Efficiency)

Reliability Responsiveness Agility

19
 SCOR Model

• The SCOR model develops 10 performance measures.

• The Supply-Chain Council refers to measures related to
–costs and assets -> internal-facing measures
–reliability, responsiveness, and agility -> customer-facing
measures
• Customer-facing measures :- delivery- and response-related
measures
• Internal-facing measures :- related to the profitability of the
firm
• SCOR measures do not capture measures related to product
variety.
–Thus, they are not comprehensive.

20
 SCOR Supply Chain Performance Metrics

SCOR Model Supply chain Customer facing Internal facing

metrics Reliability Responsiveness Agility Cost Assets
Perfect order fulfillment ●
Order fulfilment cycle time ●
Upside flexibility ●
Upside adaptability ●
Downside adaptability ●
Overall value-at-risk ●
Total cost to serve ●
Cash-to-cash cycle time ●
Return on fixed assets ●
Return on working capital ●

Source: Shah, J., 2016, Supply Chain Management: Text and Cases, Pearson India, Delhi.
21
 SCOR Supply Chain Performance Metrics
• Perfect order fulfillment = (Total number of perfect orders) /
(Total number of orders)
• Perfect means: Correct item | Quantities match the order |
Delivery meets committed date | Documentation is accurate and
complete | Product is not damaged and performs as per
specifications
• Order fulfillment cycle time = (Actual Cycle Time for all orders)
/ (Total number of orders)
• Upside flexibility = The number of days required to achieve an
unplanned, sustainable 20% increase in quantities delivered
• Upside adaptability = The maximum percentage increase in
quantity delivered that can be achieved within 30 days
• Downside adaptability = The reduction in quantities ordered at
30 days prior to deliver that can be achieved with no inventory or
cost penalties.
22
 Financial Measures of Performance

• From a shareholder perspective, return on equity (ROE) is the

main summary measure of a firm’s performance
Net Income
ROE =
Average Shareholder Equity
• Return on assets (ROA) measures the return earned on each
amount invested by the firm in assets

Earnings before interest and taxes

ROA =
Average Total Assets

Net Income + [Interest expense + Income taxes ) ]

=
Average Total Assets
23
24
 Financial Measures of Performance

• Determine the RoE and RoA for Amazon and Nordstrom Inc
using the financial data provided for the year 2013.
• RoE Amazon = 274/9,746 = 2.811 percent
• RoE Nordstrom = 613/1,913 = 32.04 percent
• RoA Amazon = [274 + 141 +161]/40,159 = 1.434 percent
• RoA Nordstrom = [613 + 160 +450]/8,089 = 15.12 percent.
• The difference between ROE and ROA is referred to as return
on financial leverage (ROFL).

25
 Financial Measures of Performance

• An important ratio that defines financial leverage is

accounts payable turnover (APT)
Cost of goods sold
APT =
Accounts Payable

• ROA can be written as the product of two ratios –

profit margin and asset turnover
Earningsbefore interest and taxes
ROA = (= Profit Margin)
Sales Revenue
Sales Revenue
× (= Asset Turnover)
Total Assets
26
 Financial Measures of Performance

• Cash-to-cash (C2C) cycle roughly measures the average

amount time from when cash enters the process as cost to
when it returns as collected revenue

C2C = – days payable (1/APT)

+ days in inventory (1/INVT)
+ days receivable (1/ART)

27
 Benchmarking Supply Chain Performance Using
Financial Data

• Three performance measures

Calculated by adding up the days of inventory for raw materials, work in
progress and finished goods.
Total length of the chain
The firm that has the minimum total length of the chain is said to have the
best performance.

Supply chain
inefficiency ratio Measures the relative efficiency of internal supply chain management.
The ratio will be low for the firms with better performance.
The analysis of firms on this metric will also be based on the levels of
Supply chain working inventory, accounts receivable and accounts payable.
capital productivity Firms with efficient supply chains will usually have high supply chain
working capital productivity.

28
 Important terms
Terms from the income
Terms from the balance
and expenditure Symbol Symbol
sheet
statement
Cost of raw materials* CRM Inventories (inclusive of raw
Cost of production* CP materials, semi-finished
goods and finished goods) INV
Cost of distribution* DC
Raw materials inventory RM
Cost of sales* CS
Net sales* NS Semi-finished goods
inventory SFG
Finished goods inventory FG
Account receivables AR
(excluding loans and
advances)
Account payables AP
29
Calculating the Length of Various Stages of the Chain

• Days of raw material (DRM) = (RM/CRM) × 365

• Days of work in process (DWIP) = (SFG/CP) × 365

• Days of finished goods (DFG) = (FG/CS) × 365

• Total length of chain in days = DRM + DWIP +

DFG

30
 Important terms
Terms from the income
Terms from the balance
and expenditure Symbol Symbol
sheet
statement
Cost of raw materials* CRM Inventories (inclusive of raw
Cost of production* CP materials, semi-finished
goods and finished goods) INV
Cost of distribution* DC
Raw materials inventory RM
Cost of sales* CS
Net sales* NS Semi-finished goods
inventory SFG
Finished goods inventory FG
Account receivables AR
(excluding loans and
advances)
Account payables AP
31
Evaluating the Efficiency of Supply Chain Management

• Supply chain management costs (SCC) = DC +

INV × ICC

• Supply chain inefficiency ratio (SCI) = SCC/NS

Where
ICC is the inventory carrying cost and
32
 Supply Chain Working Capital Productivity

• Supply chain working capital (SWC) = INV

+ AR − AP

• Supply chain working capital productivity

(SWCP) = NS/SWC

33
 Linking Supply Chain and Business Performance

• Not all supply chain measures, are of equal

importance.
• Any supply chain initiative that results in an
improvement in some aspect of supply chain
performance must ultimately get translated into
improved business performance.
• In the final analysis, each firm is primarily
interested in improving its return on assets
(ROA) 34
 Dupont Model

• The strategic profit model, also known as the

Dupont model, is a popular and comprehensive
model that captures the benefits of supply chain
initiatives on business performance.
• Competing supply chain initiatives can be
compared and prioritized using this model.

35
Dupont Model

36
39
 Inventory Management
• Every participant in a supply chain, prefers to reduce
inventories and yet maintain customer service
–Why?
–Not to lose customers due to the non-availability of goods
• Huge inventories are a drain on resources, as it
blocks money and increases cost of operations – idle
resources
• Zero inventory was a very popular term in business
literature, but zero inventory translates into zero
business.
40
 Types of Inventory
• Categorization of inventory helps managers to
view inventories as being controllable
• Six main categories of inventories:
–cycle stock
–safety stock
–pipeline stock
–decoupling stock
–anticipation inventory and
–dead stock.
41
 Types of Inventory
• Cycle Inventory
–Lot or batch size is the quantity that a stage of a
supply chain either produces or purchases at a time
–Cycle inventory is the average inventory in a supply
chain due to either production or purchases in lot sizes
that are larger than those demanded by the customer
• Safety Stock
–Maintained as a safeguard against uncertainties of
demand and supply
–Customer demand is difficult to control but safety
stock can help to some extent
42
 Types of Inventory
• Pipeline Inventory
–Consists of materials actually being worked on (work-in-process
inventory) or being moved from one location to another in the chain
(in-transit inventory)
–The product of the process time or transport time and the usage rate.
–Affected by choosing alternative modes of production or transportation.
• Dead Stock
–That part of the non-moving inventory that is unlikely to be of any
further use in supply chain operations or markets
–Includes items that have become obsolete because of changes in
customer taste, design or production processes

43
 Types of Inventory
• Decoupling Stocks
–Supply chain is usually divided into various decision-making units
–Provides the flexibility needed by each decision-making unit to manage
its operations independently and to optimize its performance
• Anticipation Inventory
–stock accumulated in advance of an expected peak in sales or that which
takes care of some special event that does not occur on a regular basis
• Seasonal Stock
• When the requirements of an item varies with time it may be
economical for the firm to build inventory during the low-demand
season to take care of peak-season demand.
• Speculation Stock
• Meant to be a preventive measure against an event that may never
happen
44
45
 Inventory related costs
• Three general classes of costs:
–Ordering costs
–Carrying cost and
–Stock-out costs
• These costs are in conflict with each other
• To minimize the total inventory cost of the system, minimize
ordering cost plus inventory cost plus stockout cost.

46
 Inventory related costs
• Ordering Costs
–Includes all fixed costs (independent of the size of the order)
associated with placing an order
–The main components are:
• Administration costs involved in placing the order. Cost of people |
stationery | communication | follow-up | Electronic ordering can reduce this
component of cost
• Transportation cost. A fixed transportation cost is often incurred regardless
of the size of the order
• Receiving cost. The cost incurred on account of the administrative work that
has to be undertaken on receiving the order. For example, at the time of
receipt, the receiver will have to prepare the goods receipt note, update
inventory records, and make necessary checks against the respective
purchase order – inspection costs | re-work & rejects costs
47
 Inventory related costs
• Inventory-carrying Costs
– The actual and opportunity costs that are incurred because of holding
inventory.
– The main components are:
• Financing cost. The inventory represents the assets and the working
capital of a firm and represents a major part of cost of carrying. This is
directly proportional to the value of the item. Cost of capital
• Storage and handling cost. Charges that the company incurs because
of storage of inventory, and it will be a function of the size of the item and
not the value. Not relevant while calculating pipeline inventory. Cost of
people | space | power – special facilities |
• Inventory risk. Cost associated with deterioration, obsolescence,
shrinkage, theft or damage. This will depend on the nature of the item.
Cost of pilferage | obsolescence

48
 Inventory related costs
• Stock-out Costs
–Captures the economical consequences of running out of stock.
–Incurred when an order cannot be filled from the inventory.
–There are two possible scenarios:
• Customer is willing to wait and items are backordered (firm incurs
backorder cost)
• Customer is not willing to wait and hence, order is lost (firm incurs
lost sales cost).
–In lost sales, the cost incurred is the opportunity of making profit.
–May affect the goodwill of the firm, and hence, the future sales.
–Backorder results in additional administrative costs and may involve an
additional transportation and handling cost.

49
 Role of Cycle Inventory in a Supply Chain
• Primary role of cycle inventory is to allow different stages to
purchase product in lot sizes
– that minimize the sum of material, ordering, and holding costs
• Ideally, cycle inventory decisions should consider costs across the
entire supply chain
• In practice, each stage generally makes its own supply chain decisions
– Increases total cycle inventory and total costs in the supply chain
• Economies of scale to be exploited in three typical situations
–A fixed cost is incurred each time an order is placed or produced
–The supplier offers price discounts based on the quantity purchased
per lot
–The supplier offers short-term price discounts or holds trade
promotions
 Role of Cycle Inventory in a Supply Chain

• Two critical decisions—how much to order and

when to order.
• Consider an example:
–Average daily demand of 100 units
–Operates for 300 days a year
–No uncertainties in demand
–A very reliable supplier.
–Consider two ordering methods:
•Procure 100 units every day from supplier.
•Order once a year for the entire annual demand of 30,000.
 Role of Cycle Inventory in a Supply Chain

• Lower cycle inventory has

–Shorter average flow time
–Lower working capital requirements
–Lower inventory holding costs
• Cycle inventory is held to
–Take advantage of economies of scale
–Reduce costs in the supply chain
 Cycle Inventory Model
• Inventory Profile
 Notations used
• D = annual demand of item
• d = daily demand
• Co = fixed cost of order (cost of set-up in manufacturing
environment)
• C = cost per unit of item
• i = inventory-carrying cost fraction
• Cc = inventory-carrying costs per unit per year = C × i
• Q = order size

54
Cycle Inventory Model

55
 Cycle Inventory Model
• Optimal order quantity will be at a point
where the total inventory-related cost will
be lowest at a point given by Q*.
• This is also known as EOQ, that is,
economic order quantity:
• Optimal order quantity = Q* =
• Optimal order quantity = Q* =
56
 Cycle Inventory Model
lot size Q
Cycle inventory = =
2 2

average inventory
Average flow time =
average flow rate

Average flow time

cycle inventory Q
resulting from cycle = =
inventory demand 2D
58
 Cycle Inventory Model
• Inventory Profile

Cycle time
 Cycle Inventory Model
• Also need to specify when should an order be
placed.
• Let us assume that there is a lead time of L
days to receive the items.
• During this lead-time period, a demand faced
by the retailer = L × d.
• So the order should be placed when stock
reaches the level L × d and this point is the
reorder point R.
60
Cycle Inventory Model

61
 Square root law of inventory
• The Square Root Law states that total inventory stock
can be approximated by multiplying the total inventory by
the square root of the number of future warehouse
locations divided by the current number.

• X2 = (X1) × √ (n2/n1)
• n1 = number of existing facilities
n2 = number of future facilities
X1 = existing inventory
X2 = future inventory
62
 Problem 1
• Estimate the average flow time for a lot size of
1200 pairs of jeans and daily demand of 60
pairs.

63
 Problem 2

• MR stores is planning to increase its services. It

currently has 12 depots with aggregate stock
valued at 12 million and plans to expand to 16
depots. With a carrying cost of 20 per cent of
value a year, what is the likely cost of this
change?

X2=13.856 million
Increase in cost = 0.3712 million

64
 Problem 3

• A trading company buys 6000 units of an item

every year with a unit cost of ₹30. Its costs
₹125 to process an order and arrange delivery,
while the interest and storage costs amount to
₹6 per year for each unit held. State the best
ordering policy for the item.

65
66
 Problem 4
XYZ fresh sells a product at the rate of 100
a week. Their team has calculated an EOQ
of 250 units. What is the best ordering
policy if lead time is: (a) one week?
(b) two weeks?
(c) three weeks?

67
Longer lead times

68
 Problem 5
Demand for an item is steady at 1,200 units
a year with an ordering costs of ₹16 and
holding cost of ₹0.24/unit/year. Describe an
appropriate ordering policy if the lead time
is constant at (a) three months (b) nine
months and (c) 18 months?

69
 Problem 6
A local distributor for a national tyre company expects
to sell approximately 9600 steel-belted radial tyres of a
certain size and tread design next year. Annual
carrying cost is ₹16 per unit and ordering cost is ₹75
per order. The distributor operates 288 days a year.
Estimate the EOQ. How many times per year would
the store reorder, if EOQ is ordered? What is the
length of an order cycle? Calculate the total cost.

70
 Problem 7
Demand for the Deskpro computer model at Best Buy
is 1000 units per month. Best Buy incurs a fixed order
placement, transportation and receiving costs of ₹4000
each time an order is placed. Each unit costs ₹500 and
the retailer has a holding cost of 20%. Estimate the
number of PCs that the store manager should order in
each replenishment lot. Determine the average flow
time for the product. Calculate the annual holding cost
and annual ordering cost.

71
73
 Problem 8
The store manager would like to reduce the optimal lot
size to 200. For this change to happen, how much the
ordering cost per lot be reduced?

74
 Problem 9
The XYZ toy company is reviewing its inventory levels.
The related information is that the company had sold
goods of worth ₹81,50,000 in the past year. The
company holds an average inventory of ₹14,30,000.
Calculate the number of inventory turns and total
inventory days.
Cost of Goods
Number of Inventory turns =
Average Inventory

75
 Problem 10
Tuxedos Corp. ended the previous year with an
average collection period of 32 days. The firm’s annual
sales for the year were ₹32 million. What is the year
end balance in accounts receivable?

Days of Sales outstanding = 32 days

Accounts Receivable
DSO = × 365
Annual Sales

76
 Ordering Multiple Products independently

• Best Buy sells three models of computers, the Litepro, the

Medpro, and the Heavypro. Annual demands for the three
products are DL = 12,000 for the Litepro, DM = 1,200 units for
the Medpro, and DH = 120 units for the Heavypro. Each
model costs Best Buy $500. A fixed transportation cost of
$4,000 is incurred each time an order is delivered. For each
model ordered and delivered on the same truck, an additional
fixed ordering cost of $1,000 per model is incurred for
receiving and storage. Best Buy incurs a holding cost of 20
percent.
a) Evaluate the lot sizes that the Best Buy manager should
order if lots for each product are ordered and delivered
independently. Also evaluate the annual cost of such a
policy
77
 Ordering Multiple Products independently
Litepro Medpro Heavypro
Demand per year 12000 1200 120
Fixed cost per year 5000 5000 5000
Q* 1095.445 346.410 109.544
CI 547.7225 173.205 54.77
n 10.95 3.46 1.095
Annual Ordering 54772.26 17320.51 5477.23
cost
Annual Handling 54772.26 17320.51 5477.23
cost
Average Flow Tim 2.373 7.51 23.734
Total Cost 1,55,139.97

78
Ordering Multiple Products independently

79
80
 Ordering Multiple Products independently
Litepro Medpro Heavypro
Demand per year 12000 1200 120
Fixed cost per year 5000 5000 5000
Q* 1095.445 346.410 109.544
CI 547.7225 173.205 54.77
n 10.95 3.46 1.095
Annual Ordering 54772.26 17320.51 5477.23
cost
Annual Handling 54772.26 17320.51 5477.23
cost
Average Flow Tim 2.373 7.51 23.734
Total Cost 1,55,139.97

81
 Ordering Multiple Products independently

Litepro Medpro Heavypro

Demand per year 12000 1200 120
Unit Cost 500 500 500
Fixed cost per year 5000 5000 5000
Q* 1095.445 346.410 109.544
Q* rounded off 1096 347 110
CI 548 173.5 55
n 10.948 3.458 1.090
n rounded off 11 4 2
Annual Ordering cost 55000 20000 10000
Annual Handling cost 54800 17350 5500
Average Flow Tim 2.375 7.518 23.833
Total Cost 162650
82
 Aggregating Multiple Products in a Single Order

• Best Buy sells three models of computers, the Litepro, the

Medpro, and the Heavypro. Annual demands for the three
products are DL = 12,000 for the Litepro, DM = 1,200 units for
the Medpro, and DH = 120 units for the Heavypro. Each
model costs Best Buy $500. A fixed transportation cost of
$4,000 is incurred each time an order is delivered. For each
model ordered and delivered on the same truck, an additional
fixed ordering cost of $1,000 per model is incurred for
receiving and storage. Best Buy incurs a holding cost of 20
percent.
a) Determine the optimal number of orders, if the Best Buy
manager aggregates the order and places it together for a
single delivery. Evaluate the annual total cost.

83
 Aggregating Multiple Products in a Single Order

T
Total Ordering cost, S = S + s L + sM + sH
Annual Ordering cost = S T × n
DL hC L DM hCM DH hC H
Total cost, TC = + + + ST n
2n 2n 2n
d (TC ) T DL hC L DM hCM DH hC H
= 0; S = 2 + 2 +
dn 2n 2n 2n 2
DL hC L + DM hCM + DH hC H
n* =
2S T
84
 Aggregating Multiple Products – Tailored aggregation

• Best Buy sells three models of computers, the Litepro, the

Medpro, and the Heavypro. Annual demands for the three
products are DL = 12,000 for the Litepro, DM = 1,200 units for
the Medpro, and DH = 120 units for the Heavypro. Each
model costs Best Buy $500. A fixed transportation cost of
$4,000 is incurred each time an order is delivered. For each
model ordered and delivered on the same truck, an additional
fixed ordering cost of $1,000 per model is incurred for
receiving and storage. Best Buy incurs a holding cost of 20
percent.
a) Develop an ordering plan, if the Best Buy manager plans
a tailored aggregation. Evaluate the annual total cost.

85
 Aggregating Multiple Products in a Single Order
Step 1 : Identify the most frequently ordered product (i.e., i* ), ordered independently
Di hCi
ni =
2( S + si )
Step 2 : For all products i ≠ i* , evaluate the ordering frequency
Di hCi
ni =
2( si )
Step 3 : Evaluate the frequency of product i relative
to the most frequently ordered product i*
ni
mi =
ni
86
 Aggregating Multiple Products in a Single Order

Step 4 : Recalculate the number of times ordered for the most frequently
ordered product
p
∑ Di hCi mi
i =1
n= p s
2( S + ∑ i )
i =1mi

87
 Ordering Multiple Products independently

Litepro Medpro Heavypro

Demand per year 12000 1200 120
Unit Cost 500 500 500
Fixed cost per year 5000 5000 5000
Q* 1095.45 346.41 109.54
CI 547.72 173.21 54.77
n 10.95 3.46 1.10
Annual Ordering cost 54772.26 17320.51 5477.23
Annual Handling cost 54772.26 17320.51 5477.23
Average Flow Time
2.373 7.506 23.735
(weeks)
Total Cost 155139.98
88
 Aggregating Multiple Products in a Single Order
Litepro Medpro Heavypro
Demand per year 12000 1200 120
Unit Cost 500 500 500
Fixed cost per year 7000
Q 1230.25 123.02 12.30
CI 615.12 61.51 6.15
n* 9.75
Annual Ordering cost 68278.84
Annual Handling cost 61512.47 6151.25 615.12
Average Flow Time
2.67 2.67 2.67
(weeks)
Total Cost 136557.68 89
Aggregating Multiple Products – Tailored aggregation
Litepro Medpro Heavypro
Demand per year 12000 1200 120
Unit Cost 500 500 500
Fixed cost per year
Q 1046.21 209.42 52.40
CI 523.10 104.71 26.20
Order frequency 11.47 5.73 2.29
Annual Ordering cost 65370.00
Annual Handling cost 52310.37 10471.20 2620.09
Average Flow Time
2.27 4.54 11.35
(weeks)
Total Cost 130771.67
90
 Safety inventory

• Safety inventory is inventory carried to satisfy demand that exceeds the

amount forecast. Safety inventory is required because demand is uncertain,
and a product shortage may result if actual demand exceeds the forecast
demand.

91
 Measuring Product Availability

• Product availability reflects a firm’s ability to fill a customer order out of available
inventory
• A stock-out results if a customer order arrives when product is not available.
• There are several ways to measure product availability:
• Product fill rate (fr) is the fraction of product demand that is satisfied from
product in inventory
– Fill rate should be measured over specified amounts of demand rather than
over time. Thus, it is more appropriate to measure fill rate over every million
units of demand rather than every month.
• Order fill rate is the fraction of orders that are filled from available inventory.
– Order fill rate should also be measured over a specified number of orders
rather than over time.
– In a multiproduct scenario, an order is filled from inventory only if all products
in the order can be supplied from the available inventory
92
 Measuring Product Availability

• Cycle service level (CSL) is the fraction of replenishment cycles that end with
all the customer demand being met
– A replenishment cycle is the interval between two successive replenishment
deliveries.
– The CSL is equal to the probability of not having a stock-out in a replenishment
cycle. CSL should be measured over a specified number of replenishment
cycle

93
 Replenishment Policies

• A replenishment policy consists of decisions regarding when to reorder and how

much to reorder. These decisions determine the cycle and safety inventories
along with the fill rate fr and the cycle service level CSL.
• Replenishment policies may take any of several forms.
• Two common types:
1. Continuous review: Inventory is continuously tracked, and an order for a lot
size Q is placed when the inventory declines to the reorder point (ROP)
2. Periodic review: Inventory status is checked at regular periodic intervals, and
an order is placed to raise the inventory level to a specified threshold.

94
95
 Determining the Appropriate Level of Safety Inventory

• Evaluating Safety Inventory Given a Replenishment Policy

• Assume that weekly demand for phones at B&M Office Supplies is
normally distributed, with a mean of 2,500 and a standard deviation
of 500. The manufacturer takes two weeks to fill an order placed by
the B&M manager. The store manager currently orders 10,000
phones when the inventory on hand drops to 6,000. Evaluate the
safety inventory and the average inventory carried by B&M. Also
evaluate the average time a phone spends at B&M

96
 Safety inventory

• Safety inventory is inventory carried to satisfy demand that exceeds the

amount forecast. Safety inventory is required because demand is uncertain,
and a product shortage may result if actual demand exceeds the forecast
demand.

97
 Determining the Appropriate Level of Safety Inventory
• Evaluating Safety Inventory Given a Replenishment Policy
• Assume that weekly demand for phones at B&M Office Supplies is
normally distributed, with a mean of 2,500 and a standard deviation
of 500. The manufacturer takes two weeks to fill an order placed by
the B&M manager. The store manager currently orders 10,000
phones when the inventory on hand drops to 6,000. Evaluate the
safety inventory and the average inventory carried by B&M. Also
evaluate the average time a phone spends at B&M

98
 Determining the Appropriate Level of Safety Inventory

• Evaluating Cycle Service Level Given a Replenishment Policy

• Weekly demand for phones at B&M is normally distributed, with a mean
of 2,500 and a standard deviation of 500. The replenishment lead
time is two weeks. Assume that the demand is independent from one
week to the next. Evaluate the CSL resulting from a policy of ordering
10,000 phones when there are 6,000 phones in inventory.

99
101
 Determining the Appropriate Level of Safety Inventory

• Evaluating Safety Inventory Given a Desired Cycle Service Level

• Weekly demand for Legos at a Walmart store is normally distributed,
with a mean of 2,500 boxes and a standard deviation of 500. The
replenishment lead time is two weeks. Assuming a continuous-
review replenishment policy, evaluate the safety inventory that the
store should carry to achieve a CSL of 90 percent.

102
104
 Determining the Appropriate Level of Safety Inventory

• Evaluating Fill Rate Given a Replenishment Policy

• Fill rate measures the proportion of customer demand that is
satisfied from available inventory
• It allows to estimate the fraction of demand that is turned into sales
• To evaluate the fill rate, it is important to understand the process by
which a stock-out occurs during a replenishment cycle
• A stock-out occurs if the demand during the lead time exceeds the ROP.
• We thus need to evaluate the average amount of demand in excess
of the ROP in each replenishment cycle
• The expected shortage per replenishment cycle (ESC) is the
average units of demand that are not satisfied from inventory in
stock per replenishment cycle.
105
Determining the Appropriate Level of Safety Inventory

• Evaluating Fill Rate Given a Replenishment Policy

106
Determining the Appropriate Level of Safety Inventory

• Evaluating Fill Rate Given a Replenishment Policy

107
Determining the Appropriate Level of Safety Inventory

• Evaluating Fill Rate Given a Replenishment Policy

108
Determining the Appropriate Level of Safety Inventory

• Evaluating Fill Rate Given a Replenishment Policy

109
 Determining the Appropriate Level of Safety Inventory

• Evaluating Fill Rate Given a Replenishment Policy

• The weekly demand for phones at B&M is normally distributed, with a
mean of 2,500 and a standard deviation of 500. The replenishment
lead time is two weeks. Assume that the demand is independent from
one week to the next. Evaluate the fill rate resulting from the policy of
ordering 10,000 phones when there are 6,000 phones in inventory

110
 Determining the Appropriate Level of Safety Inventory

• Evaluating Safety Inventory Given Desired Fill Rate

• Weekly demand for Legos at a Walmart store is normally distributed,
with a mean of 2,500 boxes and a standard deviation of 500. The
replenishment lead time is two weeks. The store manager currently
orders replenishment lots of 10,000 boxes from Lego. Assuming a
continuous-review replenishment policy, evaluate the safety inventory
the store should carry to achieve a fill rate of 97.5 percent.

111
112
 Course Syllabus

Module 1 (13 hours)

Introduction and a strategic view of supply chains:
decision phases in a supply chain, process views of
supply chain; enablers of supply chain performance;
supply chain performance in India: challenges in
maintaining supply chain in India; supply chain strategy
and performance measures, supply chain performance
measures, enhancing supply chain performance;
supply chain drivers, framework for structuring drivers.

113
 Course Syllabus

Module 2 (13 hours)

Introduction to inventory management: types of
inventory, inventory related costs; managing
inventories in a supply chain: single stage
inventory control, inventory control policies, impact
of service level on safety stock; transportation
strategy: distribution network design
options for a transportation network,
vehicle scheduling in transportation.
114
 Course Syllabus

Module 3 (13 hours)

Network design and operation decisions,
framework for network design decisions; facility
location and capacity allocation models: network
optimization models, capacitated plant location
models, gravity location models, network
operations model, model building using Excel
solver; innovations in supply chains; supply chain
coordination: Bullwhip effect, quantifying the
bullwhip effect, remedial strategies for coping with
the bullwhip effect.
115
 Impact of Desired Product Availability and Uncertainty
on Safety Inventory

• Key factors that affect the required level of safety inventory

– Desired level of product availability
– Uncertainty

116
 Impact of Desired Product Availability and Uncertainty
on Safety Inventory

• Key factors that affect the required level of safety inventory

– Desired level of product availability
– Uncertainty

Supply chain manager to be aware of the products that require

a high level of availability and hold high safety inventories only
for those products and not for all.

117
 Impact of Desired Product Availability and Uncertainty
on Safety Inventory

• Key factors that affect the required level of safety inventory

– Desired level of product availability
– Uncertainty

• Safety inventory is influenced by the standard deviation of demand during

the lead time
• The standard deviation of demand during the lead time is influenced by
the duration of the lead time L and the standard deviation of periodic
demand
• The relationship between safety inventory and standard deviation of demand
is linear
• Safety inventory is proportional to the square root of the lead time (if demand
is independent over time)

118
 Impact of Desired Product Availability and Uncertainty
on Safety Inventory

• Weekly demand for white shirts at a Target store is normally

distributed, with a mean of 2,500 and a standard deviation of
800. The replenishment lead time from the current supplier is
nine weeks. The store manager aims for a cycle service level
of 95 percent.
(a) What savings in safety inventory can the store expect if the
supplier reduces lead time to one week?
(b) What savings in safety inventory can the store expect if
reduced demand uncertainty results in a standard deviation of
demand of 400?

119
Impact of Supply Uncertainty on Safety Inventory

120
 Impact of Supply Uncertainty on Safety Inventory

• Daily demand for tablets at Amazon is normally distributed, with

a mean of 2,500 and a standard deviation of 500. The tablet
supplier takes an average of L = 7 days to replenish inventory
at Amazon. Amazon is targeting a CSL of 90 percent (providing
a fill rate close to 100 percent) for its tablet inventory. Evaluate
the safety inventory of tablets that Amazon must carry if the
standard deviation of the lead time is seven days. Amazon is
working with the supplier to reduce the standard deviation to
zero. Evaluate the reduction in safety inventory that Amazon can
expect as a result of this initiative.

121
122
 Role of Transportation
• Movement of product from one location to another
• Point of production to point of consumption
• Product moves between different stages in a supply
chain
• Why Transportation is required?
• Products rarely produced and consumed in the same location
• Shipper | Carrier | Infrastructure owner or provider |
Regulatory bodies
• Shipper requires the movement of the product
• Carrier moves or transports the product

123
 Transportation related to Inventory
• Transportation decisions cannot be in isolation.
• Facility, location, transportation and inventory management
are interrelated decisions
• Cycle Inventory - Because of the economies of scale -
produce and transport goods in batches
–Impact on transportation costs
• Safety Stock - as a safeguard against uncertainties of
demand and supply
–Transportation and supply uncertainties
• Pipeline Inventory – In-transit inventory - pipeline inventory
depends on mode of transport
124
 Role of Transportation
• Transportation affects both responsiveness and efficiency
• Significant cost component
• Faster transportation is more expensive but allows a supply
chain to be more responsive.
–the supply chain may carry lower inventories and have fewer
facilities.
• Appropriate choice of transportation allows a firm to adjust the
location of its facilities and inventory to find the right balance
between responsiveness and efficiency.

125
 Role of Transportation
• High-valued items - rapid transportation - responsive –
centralisation of facilities and inventory
–Eg. Pacemakers may use rapid transportation to be
responsive while centralising its facilities and inventory to
lower cost.
• Low-valued items - high demand items - a fair amount of
inventory close to the customer - use low-cost transportation
–Eg. Light bulbs - inventory close to the customer using low-
cost transportation such as sea, rail, and full trucks to
replenish this inventory from plants located in low-cost
countries.
126
 Role of Transportation
• Transportation provides a significant link between the various
stages in the supply chain.
• Transportation-related decisions significantly affect cost as
well as responsiveness of the supply chain.
• The key transportation decisions made by a firm are
–Selection of transportation strategy - designing the most
effective way of reaching products to geographically dispersed
markets from plants in a cost-effective way.
–Choice of transportation mode - most effective mode of
transport from among several feasible options.

127
128
 Vehicle Routing Problem

24 April 2024 ME3126D

129
 Vehicle Routing
• Find best vehicle route(s) to serve a set of orders from
customers.

• Best route may be

– minimum cost,
– minimum distance, or
– minimum travel time.

• Orders may be
– Delivery from depot to customer.
– Pickup at customer and return to depot.
– Pickup at one place and deliver to another place.

24 April 2024 ME3126D

130
 FACILITY
LOCATION
PHASE
Delhi Guwahati

Bhopal
Kolkata

Mumbai

WAREHOUSE
Chennai CUSTOMER

Kochi
24 April 2024 ME3126D
131
 CLOSED

24 April 2024 Warehouse Customer 132

ME3126D
 Vehicle Routing Phase

• A set of customers
and a central depot.
• A set of vehicles,
located at the depot.
• Design routes with
minimum cost for
visiting all
customers.

24 April 2024 133

ME3126D
 Model

• Nodes: physical locations

– Depot.
– Customers. 4
5
1
4
• Arcs or Links 6
depot 3
– Transportation links.
8
• Number on each arc 6 8 4
represents cost, distance,
or travel time.

24 April 2024 ME3126D

134
 Pure Pickup or Delivery

• Delivery: Load vehicle at depot. Design route to

deliver to many customers (destinations).

• Pickup: Design route to pickup orders from many

customers and deliver to depot.

• Examples:

depot
24 April 2024 ME3126D
135
 Pure Pickup or Delivery

depot

depot
Which route is best????

depot

24 April 2024 ME3126D

136
 TSP & VRP

• TSP: Travelling Salesman Problem

– One route can serve all orders.

• VRP: Vehicle Routing Problem

– More than one route is required to serve all orders.

VRP
TSP

depot
24 April 2024 ME3126D depot
137
 Classification of VRPs

Constant Variable Tour Length Time Constraints (Max

Constraint time & Specified
Windows)

Crew Constraint
Vehicle Operational
Capacity of
Related Constraints
Vehicles
Constraints
Deterministic /
Number of VRP Problem Stochastic
Static
Vehicles Features Symmetric /
Conditions
Asymmetric
Operations
Single Depot Type

Sequential

Multi Only Only Pick-up and

Depot Pick-up Delivery Delivery Simultaneous

24 April 2024 ME3126D 138

 General Constraints of VRP
• Maximum load not to exceed the capacity of the vehicle.

• A vehicle may operate on more than one route subject to an

upper limit on the total time spent.

• Each customer must be visited within a specific time interval,

known as time window.

• The problem may involve both deliveries to and collections from

customers. Deliveries and pick-ups may or may not have a
precedence constraint between them.

• Vehicles may have to operate within time windows.

ME3126D 139
 Objectives of VRPs

• Minimize the number of vehicles used

• Minimize the total distance traveled

• Minimize vehicle-kilometers

• Minimize total systems costs

ME3126D 140
 Vehicle Scheduling Problem

• The logistics manager has to decide on the problem of visiting n nodes from
the central depot using k vehicles.
• The firm has to assign all customers to one of the k vehicles and form a
sequence within a route.
• Solve as two sub-problems
1. Split the city into several smaller regions, each of which will be served by
one vehicle. This can be done by considering a customer first, assigning the
customer to a vehicle, and then assigning other nearby customers to the
same vehicle. So, this sub-problem will be called assigning customers to
vehicles.
2. Sequence customers served by the same vehicle.

ME3126D
141
142
Clarke and Wright algorithm - Savings algorithm

Heuristic approach called saving algorithm

ME3126D
143
 Savings Method
1. Select any city as the “depot” and call it city “0”.
- Start with separate one stop routes from depot to each customer.

2. Calculate all savings for joining two customers and

eliminating a trip back to the depot.
Sij = Ci0 + C0j - Cij

3. Order savings from largest to smallest.

4. Form route by linking customers according to savings.

- Do not break any links formed earlier.
- Stop when all customers are on the route.

ME3126D
144
 Savings Method Example

Given 5 customers and the costs (distances) between them.

2 3 j
1
cij 0 1 2 3 4
0 - 8 9 13 10
1 8 - 4 11 13
4 i 2 9 4 - 5 8
3 13 11 5 - 7
0 4 10 13 8 7 -

ME3126D
145
 Savings Method Example

Given 5 customers, select Conceptually form routes from

the lower left as the depot. the depot to each customer.

2 3
1 2 3
1

4
4

0 depot

ME3126D
146
 Savings Method: S12
Remove Add
Savings = S12 = C10+C02 - C12
3 = 8 + 9 - 4 = 13
1 2 3
1 2

4
4

depot
j
depot
cij 0 1 2 3 4
0 - 8 9 13 10
1 8 - 4 11 13
i 2 9 4 - 5 8
3 13 11 5 - 7
4 10 13 8 7 -
ME3126D
147
 Savings Method

S12 = C10 + C02 - C12 If problem is symmetric, then

sij = sji, so s21 = s12, s32 = s23,
Note: S21 = C20 + C01 - C21 etc.
so S12 = S21

2 3
1

If problem is asymmetric,
then all sij‘s must be calculated.
4

depot

ME3126D
148
 Savings Method: S13

S13 = C10+C03 -C13

= 8 + 13 - 11 = 10
3 j
1
cij 0 1 2 3 4
2
0 - 8 9 13 10
1 8 - 4 11 13
4 i 2 9 4 - 5 8
3 13 11 5 - 7
depot 4 10 13 8 7 -

ME3126D
149
 Savings Method: S14

S14 = C10+C04 -C14

= 8 + 10 - 13 = 5
3
j
1 2
cij 0 1 2 3 4
0 - 8 9 13 10
1 8 - 4 11 13
4 i 2 9 4 - 5 8
3 13 11 5 - 7
depot 4 10 13 8 7 -

ME3126D
150
 Savings Method: S23

S23 = C20+C03 -C23

= 9 + 13 - 5 = 17
3
j
1 2
cij 0 1 2 3 4
0 - 8 9 13 10
1 8 - 4 11 13
4 i 2 9 4 - 5 8
3 13 11 5 - 7
depot 4 10 13 8 7 -

ME3126D
151
 Savings Method: S24

S24 = C20+C04 -C24

= 9 + 10 - 8 = 11
3
j
1 2
cij 0 1 2 3 4
0 - 8 9 13 10
1 8 - 4 11 13
4 i 2 9 4 - 5 8
3 13 11 5 - 7
depot 4 10 13 8 7 -

ME3126D
152
 Savings Method: S34

S34 = C30+C04 -C34

= 13 + 10 - 7 = 16
3
j
1 2
cij 0 1 2 3 4
0 - 8 9 13 10
1 8 - 4 11 13
4 i 2 9 4 - 5 8
3 13 11 5 - 7
depot 4 10 13 8 7 -

ME3126D
153
 Savings Method

• Order savings from largest to smallest.

S23 (= S23) = 17
S34 (= S43) = 16
S12 (= S21) = 13
S24 (= S42) = 11
S13 (= S31) = 10
S14 (= S41) = 5

ME3126D
154
 Savings Method

• Form route by linking customers according to

savings.

S23 Link 2 and 3.

S34
S12
S24
3
S13 1 2

S14

depot
ME3126D
155
Savings Method

• Form route by linking customers according to

savings.

S23 0-2-3-0
S34
S12
S24
3
S13 1 2

S14

depot

156
 Savings Method

• Form route by linking customers according to

savings.

S23 0-2-3-0
S34 Link 3 and 4.
S12 Do not break earlier links.
S24
3
S13 1 2

S14

depot
ME3126D
157
 Savings Method

• Form route by linking customers according to

savings.

S23 0-2-3-0
S34 0-2-3-4-0
S12
S24
3
S13 1 2

S14

depot
ME3126D
158
 Savings Method

• Form route by linking customers according to

savings.

S23 0-2-3-0
S34 0-2-3-4-0 Link 1 and 2.
S12 Do not break earlier links.
S24
3
S13 1 2

S14

depot
ME3126D
159
 Savings Method

• Form route by linking customers according to

savings.

S23 0-2-3-0
S34 0-2-3-4-0
S12 0-1-2-3-4-0 Done!
S24
3
S13 1 2

S14

depot
ME3126D
160
 Vehicle Scheduling Problem

• Assume that
–There are orders from 5 different customers
–There are 2 trucks each capable of carrying 200 units

ME3126D
161
Vehicle Routing Problem – Savings algorithm

ME3126D
162
Vehicle Routing Problem – Savings algorithm

ME3126D
163
Vehicle Routing Problem – Savings algorithm

ME3126D
164
 Vehicle Routing Problem – Savings algorithm

Route Design
Route 1: 0 - 5 - 2 – 0 Load= 4+2=6

ME3126D
165
Vehicle Routing Problem – Savings algorithm

ME3126D
166
 Vehicle Routing Problem – Savings algorithm

Route Design
Route 1: 0 – 6 - 5 - 2 – 0 Load= 3+4+2=9

ME3126D
167
Vehicle Routing Problem – Savings algorithm

ME3126D
168
Vehicle Routing Problem – Savings algorithm

ME3126D
169
 Vehicle Routing Problem – Savings algorithm

Route Design
Route 1: 0 – 6 - 5 - 2 – 10- 0 Load= 3+4+2+2=11

ME3126D
170
Vehicle Routing Problem – Savings algorithm

ME3126D
171
Vehicle Routing Problem – Savings algorithm

ME3126D
172
 Vehicle Routing Problem – Savings algorithm

Route Design
Route 1: 0 – 6 - 5 - 2 – 10- 0 Load= 3+4+2+2=11

Route 2: 0 – 9 – 3 - 0 Load= 4 + 3 = 7

ME3126D
173
Vehicle Routing Problem – Savings algorithm

ME3126D
174
Vehicle Routing Problem – Savings algorithm

ME3126D
175
 Vehicle Routing Problem – Savings algorithm

Route Design
Route 1: 0 – 6 - 5 - 2 – 10- 0 Load= 3+4+2+2=11

Route 2: 0 – 8 - 9 – 3 - 0 Load= 3 + 4 + 3 = 10

ME3126D
176
Vehicle Routing Problem – Savings algorithm

ME3126D
177
 Vehicle Routing Problem – Savings algorithm

Route Design
Route 1: 0 – 6 - 5 - 2 – 10- 0 Load= 3+4+2+2=11

Route 2: 0 – 8 - 9 – 3 - 0 Load= 3 + 4 + 3 = 10

Route 3: 0 – 7 - 4 – 1 - 0 Load= 4 + 4 +2 = 10

ME3126D
178
179
 Case discussion – Baroda Milk Supply Chain

• Vehicle Routing at Baroda Union

• Jagdish Patel looked at the cost figures for the last six months.
• The issue of milk prices paid to farmers.
• Neighbourhood unions like Kheda and Valsad were giving much better milk prices
to farmers
• To do something about transportation costs for milk procurement, as it was
the most significant part of the operating cost under the control of the
management.
• Jagdish felt that Baroda Union will not be in a position to reduce the transportation
costs unless they could come up with a more scientific way of designing
these routes.
• He was just wondering whether he could apply any of the ideas that he had
picked up when he recently attended an executive programme on logistics
management.

180
 Case discussion – Baroda Milk Supply Chain

• Baroda Co-operative Union was set up in late 1960s with the Anand
model
• As each village-level society would not have enough volume to justify
setting up a milk processing plant, all the village co-operative
societies in a district would form a union, which in turn would collect
milk from all societies and process it in a centralized processing plant
• Baroda Union had membership of 700 village-level co-operatives
spread all over the district
• These 700 societies were covered by 44 truck/tempo routes, wherein
milk was collected twice a day and 365 days in a year.
• Since these 700 societies were geographically spread out, the union
had faced a difficulty in getting milk in time from some of the far-flung
societies

181
 Case discussion – Baroda Milk Supply Chain

• Given the perishable nature of the product, it was important that the
time lag between milking and processing should not exceed seven
hours.
• So Baroda Union had set up one chilling centre at Bodeli so as to
take care of this problem of distances.

182
Milk Supply Chain
Regional Co-operative
Milk Producers Union

Dairy Plant

DCS – BMC:
DCS-BMC DCS-BMC
Dairy
Cooperative
DCS-BMC Society having
Bulk Milk Cooler

Anand pattern co-operative societies

Village milk pickup point

183
 Case discussion – Baroda Milk Supply Chain

• Given the perishable nature of the product, it was important that the time lag
between milking and processing should not exceed seven hours.
• So Baroda Union had set up one chilling centre at Bodeli so as to take care
of this problem of distances.
• Out of the 700 societies, about 180 societies were connected to the chilling
centre through 12 procurement routes.
• Milk procured from these societies would be brought to the chilling centre
where it would be kept in a chilled condition, and from there it would be sent to
a centralized processing centre via special tankers.
• The remaining 520 societies were directly connected to the processing
centre at Baroda through 32 truck/tempo routes.
• Each vehicle route would cover approximately 15 societies depending on
the total supply of milk and is given a specified schedule

184
 Case discussion – Baroda Milk Supply Chain

• The main concern was that because of its perishable nature, milk
must either get processed or kept in a chilled condition so as to
avoid curdling.
• If milk gets curdled, the Union could not use that milk in any productive
way.
• During the summer season about 5 per cent of the milk was received
in a curdled form.
• The main objective of the Union was to minimize total costs so that
members (farmers) would get the highest payment per litre of milk.
• Last year’s data showed that transportation costs in milk procurement
accounted for 17 per cent of costs

185
Case discussion – Baroda Milk Supply Chain

186
 Case discussion – Baroda Milk Supply Chain

• Milk was collected twice a day, once in the morning and once in the
evening.
• Societies that did not have any motorable approach roads delivered the
milk at some nearby point on the road or a nearby co-operative.
• Milk was collected in cans, which carried the name of the society for
identification.
• The cleaned and empty cans required for the morning procurement
were delivered while collecting the evening milk.
• Each can could hold 40 litres of milk. The milk collected had to be
delivered at the processing plant or chilling centre at specified hours.

187
 Case discussion – Baroda Milk Supply Chain

• The contractor was given a grace time of one hour to take care of
unforeseen circumstances on any particular day.
• If a contractor delayed delivery by more than an hour he had to pay a
penalty.
• The routes have to be designed such that the truck arrivals are
spaced out uniformly to avoid problems at the receiving dock.
• On reaching the processing centre or the chilling centre, the truck would
have to join a queue and would be taken to the receiving centre on
a first come first served basis.
• The truck would unload cans on the receiving dock.

188
 Case discussion – Baroda Milk Supply Chain

• At the receiving dock each can is weighed and a sample is collected to

check for milk curdling.
• Each truck took about 20–25 minutes at the receiving dock.
• If milk was found to be curdled, the respective cans were kept
separately.
• Good milk was emptied into a tank.
• Societies that supplied curdled milk were paid only nominal rates.
• If the milk got curdled because of delay on the part of the transport
contractor he would end up paying the differential charges to the
respective societies.
• Truck speed of 30 kilometres per hour

189
 Case discussion – Baroda Milk Supply Chain

• On an average a vehicle would spend about 5 minutes at each society

to take care of loading, unloading and other activities like document
transfer.
• Regarding vehicle capacity, assume that a typical tempo would be able
to accommodate about 100 cans.
• Now apply all the ideas that you had learnt during this course on
logistics to see if it would result in any substantial savings in
transportation costs.

190
Case discussion – Baroda Milk Supply Chain

191
Case discussion – Baroda Milk Supply Chain

192
Case discussion – Baroda Milk Supply Chain

193
Case discussion – Baroda Milk Supply Chain

194
Case discussion – Baroda Milk Supply Chain

195
Role of Network Design in the Supply Chain

1
Supply chain network design decisions
• Supply chain network design decisions include the assignment of facility
role; location of manufacturing, storage, or transportation-related
facilities; and the allocation of capacity and markets to each facility.
Supply chain network design decisions are classified as follows:
• 1. Facility role: What role should each facility play? What processes are
performed at each facility?
• 2. Facility location: Where should facilities be located?
• 3. Capacity allocation: How much capacity should be allocated to each
facility?
• 4. Market and supply allocation: What markets should each facility
serve? Which supply sources should feed each facility?

2
Supply chain network design decisions
• Facility location decisions - long-term impact on a supply
chain’s performance - it is expensive to shut down a facility or
move it to a different location.
• A good location decision can help a supply chain be responsive while
keeping its costs low.
• Capacity allocation can be altered more easily than
location, but capacity decisions do tend to stay in place for
several years.
• Allocating too much capacity - in poor utilization and, as a result, higher
costs.
• Allocating too little capacity - in poor responsiveness if demand is not
satisfied or high cost if demand is filled from a distant facility.

3
Supply chain network design decisions
• The allocation of supply sources and markets to facilities
has a significant impact on performance because
• affects total production, inventory, and transportation costs incurred by
the supply chain to satisfy customer demand.
• This decision should be reconsidered on a regular basis so
the allocation can be changed as production and transportation
costs, market conditions, or plant capacities change.
• The allocation of markets and supply sources can be changed
only if the facilities are flexible enough to serve different
markets and receive supply from different sources.
4
 Strategic Roles of Units in the Network
• The primary advantage for exploiting the plant, that is, market proximity, availability of
low-cost input factors, and availability of skills or know-how.
• ƒ
The degree of contribution of the plant to the company’s strategy, ranging from “low” for
factories that have as their sole role to get products produced, to “high” for factories
that do not only produce products, but are also important developers and
providers of know-how for the other plants in the network.
• Another way of defining this second dimension is by referring to the plant’s
competence, which may include, next to production, also process technical
maintenance, procurement, local logistics, production planning, product and process
development and improvement, development of suppliers, the supply of global
markets, and a global hub role for product and process knowledge. (Ferdows, 1997)
5
6
 Strategic Roles of Units in the Network
Ferdows framework
High

Source Lead Contributor

Strategic Role

Offshore Outpost Server

Low

Access to low resources Access to skills Access to markets

Strategic Reason for Plant 7

Framework for Network Design Decisions

8
10
Case of Toyota Motor Corporation
• A large number of its around 1,000 auxiliary organizations and members
are associated with the creation of autos, car parts, and business and
mechanical vehicles.
• Central command is in Toyota City, a modern city east of Nagoya, Japan
• In Malaysia, the one of chosen manufacturer is IQH (Integrated Quality
Hub) at Bukit Raja - also known as second important manufacturer hub
after Shah Alam hub.
• This manufacturer is more focus on Energy Efficient Vehicles (EEVs).
• It has an output of 50,000 units a year. Bukit Raja plant is considered as
one of most advanced car manufacturing plant in the world.
• It also used advanced technologies such as Solar Panel and Rainwater
Recycling Facilities present

11
Case of Toyota Motor Corporation
Factors influencing the decisions
• Macroeconomic factor
• What made Toyota interested to set up a manufacturing plant in
Malaysia was its opportunity of economic growth.
• In May 1964, the Malaysian government enacted a policy to encourage the
local assembly of vehicles and manufacturing of automotive components.
• The policy is the 1964 Malaysian Automotive Policy aimed to boost
national industrialization through the local assembly of vehicles and
manufacturing of automobile components.

12
Case of Toyota Motor Corporation
• Factors influencing the decisions – Macroeconomic contd…
• Initially in 1956, Toyota cars were imported into Malaysia as
complete-built up (CBU) vehicles.
• But, with the 1964 policy, the government reduced imports of CBU
vehicles by means of quota regulations and tariffs.
• Locally assembled vehicles incorporated with Malaysian manufactured
components would be granted reductions in import duties, making
them cheaper and more competitive as a result.
• Another perk of the policy are manufacturing licenses to both foreign
and local companies who were interested in setting up automobile
assembly plants in any Malaysian state.
• Thus government hoped to create more job opportunities and establish
a market for Malaysian-made parts such as tires, paints, batteries,
electrical cables, upholstery and other rubber-based goods
13
[Link]

14
Case of Toyota Motor Corporation
• Factors influencing the decisions – Logistics and Facility
Costs
• Bukit Raja was chosen for its strategic location – The location is very
important factor.
• Shah Alam plant was the first manufacturing plant for the Toyota and few
years later, Toyota has established new place for their second important
manufacturing plant located in Bukit Raja.
• The distance from Bukit Raja plant to Shah Alam plant just 8.4 km.
• The worker also has no issues of working in new plant as the distance is
not too far for them to travel.
• Other than that, they also can transfer their machines, spare part for
cars and needed items easily. It can reduce the cost of travelling since
they are not too far.
• Next, it also closes to West Port, Port Klang – a port very famous for
import and export activity and one of top busiest port in the world ranking.
15
Case of Toyota Motor Corporation
• Factors influencing the decisions – Logistics and Facility Costs

16
Case of Toyota Motor Corporation
• Factors influencing the decisions –
Technological
• Manufacturing technology serves as a strategic instrument for businesses to
adapt and respond to an increasingly unpredictable and complicated
business environment.
• Manufacturing technology is a collection of computer-based technologies
that includes computer-aided design, computer-aided manufacturing,
manufacturing resource planning, robotics, group technology, flexible
systems, automated material handling systems, computer numerically
controlled machine tools, and bar coding or other automated identification.

17
Case of Toyota Motor Corporation
• Factors influencing the decisions – Competitive
• Toyota is making use of the latest technology in their vehicles that will make
the drivers at ease while driving.

18
19
20
Network optimization
Models
THE CAPACITATED PLANT LOCATION MODEL
• Problem Statement
• A firm has n potential facility locations that can be opened and
operated to serve m markets.
• The goal of any supply chain is to design a network that minimizes
the expenses or cost incurred.
• For the sake of simplicity, however, it is assumed that all demand
must be met and taxes on earnings are ignored.
• The model thus focuses on minimizing the cost of serving the
customers demand
• The problem objective is to know which facility is to opened to
meet the demand at all market locations at minimum cost.
THE CAPACITATED PLANT LOCATION MODEL
• The model thus focuses on minimizing the cost of serving the
customers demand
• The solution must define the following decision variables:
• yi (binary variable)
• xij (Shipment quantity from plant i to market j

• yi = 1 if plant i is open, 0 otherwise

• The problem is then formulated as the following mixed integer
program:
THE CAPACITATED PLANT LOCATION MODEL
• Parameters for the problem:
Indices
i = facility nodes

j = market/customer zones

Notations
n = number of potential facility locations
m = number of markets/customer zones or demand points

Dj = demand for the planning period from market j

Capi = potential capacity of facility i

Cij = cost of producing and shipping one unit from plant i to market j
(cost includes production, inventory, transportation, and tariffs)
Fi = fixed cost of keeping plant i open for the planning period
THE CAPACITATED PLANT LOCATION MODEL – 1
(Without Fixed Cost)
Minimize :
n m
Total Cost, TC    Cij X ij
i 1 j 1
subject to the constraints
n
Demand Constraints,  X ij  D j for all j
i 1
m
Capacity Constraints (supply)  X ij  Capi for all i
j 1
X ij  0 (Non - negativity constraints)
THE CAPACITATED PLANT LOCATION MODEL – 2
Minimize : (With Fixed Cost)
n m n
Total Cost, TC    Cij X ij   FiYi
i 1 j 1 i 1
subject to the constraints
n
Demand Constraints,  X ij  D j for all j
i 1
m
Capacity Constraints (supply)  X ij  CapiYi for all i
j 1

 1, if facility is open
Yi  
0, if facility is closed
X ij  0 (Non - negativity constraints)
PROBLEM 1 (Class work)
Consider the case of a hypothetical company called Indian paints, a paint
manufacturing firm which has five manufacturing plants located at
Ahmedabad, Baddi, Hubli, Nagpur and Vishakhapatnam. The firm primarily
operates in six major markets. The geographical positioning of all plants
and markets is presented in Figure 1.

The marketing group prepares market estimates

every quarter and expects the supply chain to plan
its operations so that the firm can minimize the
total cost.
Keeping in view the capacity constraints of each
plant and the existing cost structure, the supply
chain group has to decide the volume of production
at each plant and allocation of market demands to
plants. The relevant data are as follows:
PROBLEM 1 (Class work)
Table 1 Plant data
Plant Capacity Fixed facility cost
Ahmedabad 350 78000
Baddi 400 42000
Hubli 450 36000
Nagpur 300 38000
Vishakapatnam 400 34000

Table 2 Market data

Market Bangalore Chennai Delhi Mumbai Lucknow Kolkata
Quarterly demand 165 135 280 200 125 155

Table 3 Cost matrix (i.e. cost of producing and transporting unit item from a plant to a market)
Market
Plant
Bangalore Chennai Delhi Mumbai Lucknow Kolkata
Ahmedabad 910 953 775 740 864 936
Baddi 1036 1083 622 853 741 830
Hubli 727 788 977 755 1022 976
Nagpur 790 785 808 742 773 860
Vishakapatnam 838 782 1003 892 978 878
 PROBLEM 1 (Class work)
Using the above data of a network design problem,
assuming the given demand allocation problem as a
linear programming problem, formulate a mathematical
model with an objective to minimize the cost in the
following scenarios:
a. without incorporating fixed cost for the facility

b. incorporating fixed cost for the facility

Also diagrammatically represent the solution obtained in

(a) and (b).
225
 Component commonality

• Dell is to manufacture 27 servers with three distinct components,

processor, memory, and hard drive. Under the disaggregate option, Dell
designs specific components for each server, resulting in 81 distinct
components (=3 × 27). Under the common-component option, Dell designs
servers such that three distinct processors, three distinct memory units, and
three distinct hard drives can be combined to create 27 servers. Each
component is thus used in nine servers. Assume the monthly demand for
each of the 27 servers is independent and normally distributed, with a
mean of 5,000 and a standard deviation of 3,000. The replenishment
lead time for each component is one month. Dell is targeting a CSL of 95
percent for component inventory.
(1) Evaluate the safety inventory requirements with and without the use of
component commonality.
(2) Determine the change in safety inventory requirements as the number of
finished products of which a component is a part varies from one to nine.
226
 Component commonality

• There are 27 servers with three distinct components, processor, memory, and
hard drive
• Two scenarios: (1) disaggregate option and (2) common-component option
• Monthly demand for each of the 27 servers is independent and normally
distributed, with a mean of 5,000 and a standard deviation of 3,000
• Replenishment lead time for each component is one month | CSL of 95
percent
• Disaggregate option
– Specific components for each server, resulting in 81 distinct components (=3 × 27)
Safety Inventory required for 1 component = Zcsl × σLTD
σLTD2 = L × σd2

σLTD = √ L × σd2 = √ 1 × 30002 = 1 × 3000

Safety Inventory required for 1 component = Zcsl × 3000

227
 Component commonality

• Disaggregate option
– Specific components for each server, resulting in 81 distinct components
(=3 × 27)
Safety Inventory required for 1 component = Zcsl × σLTD
σLTD2 = L × σd2

σLTD = √ L × σd2 = √ 1 × 30002 = 1 × 3000

Safety Inventory required for 1 component = Zcsl × 3000 = 1.645 × 3000 = 4935

Safety Inventory required for 81 components = 3,99,735 units

229
 Component commonality

• Common-component option
– Tree distinct processors, three distinct memory units, and three distinct
hard drives to create 27 servers
– Each component is used in nine servers
Safety Inventory required per common component = Zcsl × σCC-LTD
σCC_LTD2 = L × (no. of products with the component) × (σd) 2

σLTD = √ L × n × (σd)2 = √ ((1 × 9) × (3000)2) = 9000

Safety Inventory required per common component = Zcsl × 9000 = 1.645 ×

3000 = 14,805

Safety Inventory required for 9 products = 1,33,245 units

230
 Centralisation Vs decentralisation
• A company that currently has 16 regional stock points and has been serving its dealers
from the stock point that is closest. This firm wants to explore the possibility of
centralizing its stock holding. This will mean that stocks will be held only at one central
point and all the dealers will be served from this central point. Obviously, this is going to
increase the time that the firm will take to service dealers or customers. As this will result
in higher inventory at the dealer’s end, the firm will have to use a faster mode of transport
so as to provide more or less the same delivery time as in the decentralization case.
Since the firm cannot force dealers to hold higher inventory, it will have to work with a
faster and more expensive mode of transport to maintain the same service level. As a
result, the company will reduce inventory-related costs but will have to pay higher
transport cost. For simplicity, we assume that each region has similar demand distribution
with mean daily demand as 100 and standard deviation of demand being 30. Each of the
stock points (in both centralization and decentralization cases) gets served from the plant
and that takes a lead time of exactly 15 days. In the decentralization case, the average
transport cost was ₹1 per unit, and in centralization case, the transport cost will increase
by 10 per cent to ₹1.10 per unit.
• Let us assume the following relevant data for a stock point: Ordering cost is ₹256;
inventory-carrying cost per unit is ₹6; required service level is 97.7 per cent, and annual
demand is 30000.

231
 Centralisation Vs decentralisation
Decentralised Centralised

Annual demand 30,000 per point 4,80,000

Cycle stock Q/2 = √((2×256×30,000)/6)/2= Q/2 = √((2×256×4,80,000)/6)/2=
1600/2 = 800 6400/2 = 3200
Z value for the CSL of 97.7 1.99 1.99
Safety stock Zcsl σLTD Zcsl σLTD
= 1.99 × √ ((15) × (30)2)=232 per = 1.99 × √ ((15) × (16 × (30)2)
point = 924.8 = 925
Average Inv. 800 + 232 = 1032 3200 + 925 = 4125
Total = 1032 × 16 = 16512
Annual Inv. Carrying cost 16512 × 6 = 99,072 4125 × 6 = 24,750

Annual Ordering cost (30,000/1600) × 256 = 4800 (4,80,000/6400) × 256 = 19,200

Total = 4800 × 16 = 76,800
Increment in 4,80,000 × 0.1 = 48,000
Transportation cost
1,75,872 91,950
232
 Mode of transportation - Problem

• A global company that has decided to use India as its manufacturing base for
the supply of a product to the abroad markets. The company offers three types
of the same product: Model X, Model Y, and Model Z. All three types of
products offered by the firm are similar in size and shape. The only differences
are in the software and the components used. The three models of the product
cost Rs. 20,000, 15,000 and 10,000 per unit, respectively. If the firm decides
to use air as the mode of transport, it can fly the goods in smaller lots of 100
units, while shipping via sea requires a minimum shipment size of 400
units. The demand is stable at 100 units per week for each of the three
types of product. Transportation and customs clearance take one week if air
is used as the mode of transport; the same will take four weeks if sea is
used as the medium of transport. Freight by air will be Rs. 360 per unit while
freight by sea will be Rs. 90 per unit. The annual inventory-carrying cost for
the firm is 20 per cent of the cost of the item. The firm wants to decide on
the optimum mode of transport.
234
 Relations used

• Cycle-stock = 0.5 × Lot size of shipment

• Pipeline inventory = Lead time × Demand rate
• Total inventory = Cycle-stock + Pipeline inventory
• Annual inventory-carrying cost = Total Inventory x
Unit cost x Inv. Carrying cost fraction
• Annual transportation cost = Annual demand ×
Transport rate per unit
• Safety stock = Service factor × Standard deviation
of demand × √lead time
235
236
237
Mode of transportation

238