Production and Operations Management Systems - PowerPoint PPT Presentation


PPT – Production and Operations Management Systems PowerPoint presentation | free to download - id: 6ba1cd-YmYwO


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation

Production and Operations Management Systems


Production and Operations Management Systems Chapter 9: Supply Chain Management Sushil K. Gupta Martin K. Starr 2014 * – PowerPoint PPT presentation

Number of Views:528
Avg rating:3.0/5.0
Slides: 58
Provided by: Sushil9
Learn more at:


Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Production and Operations Management Systems

Production and Operations Management Systems
  • Chapter 9 Supply Chain Management
  • Sushil K. Gupta
  • Martin K. Starr
  • 2014

After reading this chapter, you should be able to
  • Define supply chain capacity and explain how it
    is measured.
  • Identify upstream and downstream partners for a
    chosen product
  • Identify activities of acquisition chain
  • Discuss the importance of the purchasing function
  • Explain the role of purchasing agents
  • Highlight the importance of ethics in purchasing
  • Describe the process of receiving, inspection and
  • Describe the use of bids in purchasing
  • Identify steps for supplier certification

After reading this chapter, you should be able to
  • Discuss systems issues in global sourcing
  • Explain how distribution chains involve many
  • Discuss the role of e-business
  • Identify Competition, Conflict, Collaboration and
    Coordination (C4) issues
  • Discuss the importance of Radio Frequency
    Identification (RFID)
  • Explain how logistics and distribution planning
    can minimize costs
  • Make coordinated forecasting and inventory
  • Describe the bullwhip effect and its implications
    for supply chains.

  • The primary focus in supply chain management is
    managing the movement of material.
  • Raw material and component parts flow from
    suppliers to manufacturer and are converted into
    finished products.
  • Finished goods are then transported to the final
    consumer through several intermediate
  • A service supply chain may not involve the
    movement of materials but involves the design of
    interlinked operations.
  • Example, the linkages between travel agents,
    airlines, hotels and cruise lines to provide an
    overall pleasurable experience to the clients
    going on a cruise forms the supply chain.

Wine Supply Chain
  • Grape Grower
  • Wine Producer
  • Bulk Distributor
  • Transit Cellar
  • Filler / Packer
  • Finished Goods Distributor
  • Retailer
  • Source Wine Supply Chain Traceability, GS1
    Application Guide (http//

Tourism Supply Chain (TSC)
  • Tourists and tour operators are the customers.
  • The retailers are travel agents and travel
  • Other partners include resorts, hotels, airlines
    and cruise ships, etc.
  • Zhang, X., Song, H., Huang, G.Q., (2009).
    Tourism supply chain management A new research
    agenda. Tourism Management, 30, 345-358

Top Performing Supply Chains
  • The top-performing supply chains possess three
    very different qualities.
  • Great supply chains are agile. They react
    speedily to sudden changes in demand or supply.
  • They adapt over time as market structures and
    strategies evolve.
  • They align the interests of all the firms in the
    supply network.
  • Only supply chains that are agile, adaptable, and
    aligned provide companies with sustainable
    competitive advantage.
  • Lee, Hau, L., The Triple-A Supply Chain,
    Harvard Business Review, October, 2004, Page

Framework to Match Demand and Supply Uncertainties
  • Lee, Hau L.,has integrated product uncertainty
    with supply uncertainty and has proposed a two
    dimensional matrix for designing supply chains.
  • He has categorized supply chains as
  • Efficient
  • Responsive
  • Risk hedging
  • Agile
  • Lee, Hau L., Aligning Supply Chain Strategies
    with Product Uncertainties, California Management
    Review, Volume 44, Number 3, Spring 2002, pages

    Demand Uncertainty Demand Uncertainty
    Low (Functional Products) High (Innovative Products)
Supply Uncertainty Low (Stable Process) Efficient supply chains Responsive supply chains
Supply Uncertainty High (Evolving Process) Risk hedging supply chains Agile supply chains
Product Characteristics Influence Supply Chains
  • Product characteristics are important in
    designing a supply chain.
  • According to Fisherthese characteristics
  • Product life cycle
  • Demand predictability
  • Product variety
  • Market standards for lead times and service
  • Based on demand patterns products fall into one
    of two categories
  • Functional (e.g. food and gas predictable and
    stable demand, long product life cycles)
  • Innovative (e.g. fashion apparel and personal
  • Ideal supply-chain strategy
  • More efficient for functional products
  • More responsive for innovative products
  • Fisher, Marshall, L., What Is the Right Supply
    Chain for Your Product?, Harvard Business Review,
    March-April, 1997, Page 105-116.

Phases of a Supply Chain
  • Competition, conflict, collaboration and
    coordination (C4 ) issues span across all stages
    of a supply chain.
  • Design of supply chains, therefore, involves not
    only minimizing the cost of moving material but
    also managing the intricate behavioral
    relationships among supply chain partners.
  • Supply chain management consists of three
    distinct phases
  • Acquisition Chain purchasing of materials
  • Transformation Process - production of goods
  • Distribution Chain distribution of finished
  • See, Gupta, Sushil, Christos Koulamas and George
    J. Kyparisis, E-Business A Review of Research
    Published in Production and Operations Management
    (1992-2008), Production and Operations
    Management, Volume 18, Issue 6, November
    December 2009, page 604-620.

Phases of a Supply Chain (continued)
  • In this presentation we will focus on
  • Acquisition chain
  • The functions and activities in the acquisition
    chain end at the OEM. Suppliers to the OEM are
    called first tier suppliers second tier supplies
    to first tier third tier to second, and so
  • Distribution chain
  • The functions and activities in the distribution
    chain start from the OEM manufacturer and end
    with the final consumer.
  • There are some functions that are common to both
  • On the other hand there are functions that are
    unique to each phase.
  • OEM original equipment manufacturer.

Acquisition Chain Management (ACM)
  • Acquisition chain represents all partners that
    are linked to provide raw materials, component
    parts, and special services to a manufacturing
  • Materials management (MM) is the bulk of
    acquisition chain activities.
  • The main classes of materials that have to be
    purchased and managed include raw materials,
    component parts and subassemblies.
  • Finished product can be also be procured as part
    of the overall make or buy strategy of a company.
  • Two systems measuresturnover (T) and days
    of inventory(DOI)are very helpful for
    monitoring how well purchasing and inventory
    managers do their job.
  • Acquisition Chain Management (ACM) connects the
    external sourcing of supplies to the internal
  • Traditionally this topic is known as purchasing
    and materials management.

Systems Perspective of Materials Management for
Incoming Stock
  • Some companies have external control over
    shipments of finished goods to distributors and
    customers as part of MM.
  • Other companies limit MM to the regulation and
    use of incoming stock.
  • Figure on RHS shows the functions that must be

Functions of Purchasing
  • Ordering the right quantity of materials meeting
    all quality standards at the best possible
  • Receiving materials.
  • Inspecting the incoming goods.
  • Selection of suppliers and vendors.
  • Develop stable relationships with
  • Keep track of engineering design changes (EDCs)
    that may affect material requirements.
  • Purchasing must be adept at coordinating the
    materials that are needed for start-ups.
  • The purchasing function is primarily concerned
    with managing vendors and suppliers.
  • The distinction between vendors and suppliers is
    a matter of local usage.

Changing Role of Purchasing
  • The traditional role of purchasing agents (PAs)
    has been to bring the organization the needed
  • The role is changing and becoming more
    integrated within the organization.
  • The purchasing department in the twenty-first
    century also functions as an information-gathering
  • Purchasing is expected to be on top of new
    materials, new suppliers, new distribution
    channels, new prices, new technology and new
    processes that produce quality levels previously
    not attainable.
  • The role now requires and is based on having a
    wide and informed net of important information.
  • Up-to-date purchasing departments have a global
    reach via satellites and telecommunications
    capabilities that constantly expand horizons.

Changing Role of Purchasing (continued)
  • Sourcing (generic name for purchasing) has become
    a global systems term.
  • Purchasing departments must be responsive to the
    marketing strategies of the various suppliers
    from whom they obtain required materials.
  • The price-tag approach (push suppliers on price)
    has been thrown out in favor of a long-term
    relationship with special trusted suppliers.
  • Make or buy decisions by P/OM are influenced by
    the information that purchasing can provide.
  • The decisions often depend on the terms to buy,
    including price, quality, delivery, and
    innovations, among other considerations, which
    purchasing learns about and communicates to the
    P/OM team.

Purchasing Agents
  • Purchasing Agents (PAs) are responsible for
    carrying out functions of purchasing.
  • When the purchasing process is technical, the
    purchasing agent may be an engineer or a person
    who has worked with the production department.
  • It is important that PAs document the history of
    purchasing including what the costs were, who the
    major suppliers were, what discounts were
    obtained, what quality levels were achieved, and
    delivery periods for specific items.
  • The skills and experience of purchasing agents
    are not readily transferable between different
  • They may vary between companies even in the same

Purchasing Agents (continued)
  • Differentiation exists by types of materials,
    buying and shipping terms, and supplier
    purchasing traditions.
  • Purchasing agents (PAs) make buying decisions
    that involve enormous amounts of money. Ethics of
    PAs are very important for any company.
  • The fact that suppliers influence purchasing
    decisions through gifts is not considered illegal
    or unethical in some places in the world.
  • Cultural and legal factors can play major roles
    in determining PAs success in global sourcing.

Receiving, Inspection and Storage
  • Receiving and Shipping docks (often at the same
    location) have to be properly designed for these
  • After unloading supplies, there is usually an
    assigned area to store them.
  • Cross-docking may be used to transfer goods from
    incoming trucks at the receiving dock to outgoing
    trucks at the shipping dock.
  • Designs of such facilities differ depending upon
  • Types of supplies unloaded.
  • What the supplies are unloaded from (trucks,
    freight cars, hopper cars, ships, planes, etc.).
  • Where they are unloaded and to where they go.
  • Smart warehouses that use bar codes and RFID
    permit optimal use of storage space and minimal
    time for retrieval.

Requiring Bids Before Purchase
  • Bidding is a process by which the buyer requests
    competing companies (suppliers) to specify
  • Prices
  • Delivery dates
  • Quality specifications
  • Other checks and assurances
  • Bids can be requested where the price is fixed
    and the creativity and quality of the solution is
    at stake.
  • Advertising agencies bid for accounts that have a
    set budget.
  • Consulting organizations work under specific
    budget allocations.
  • Bid requests (requests for proposal RFP) state
    specifically all of the conditions that must be

Requiring Bids Before Purchase (continued)
  • The main focus in bidding cases is to satisfy a
    constituency that purchases made under its watch
    have been made at the lowest reasonable cost.
  • Many companies use bids to provide assurance that
    purchasing decisions are not influenced by gifts
    (graft) of any kind.
  • Bidding is a useful protection when suspicion
    exists that special purchasing deals are being
    made between suppliers and company personnel.
  • Many industries, particularly governmental
    agencies, are legally required to use bidding
    procedures for buying items that cost more than a
    given (relatively expensive) amount.
  • With trust and transparency, the need for bidding
    (in the first place) is diminished.

Requiring Bids Before Purchase (continued)
  • Costs of purchasing are likely to decrease by
    inviting more companies to participate in the
    bidding process.
  • However, a low bidder may not produce quality
  • With a large number of bidders, qualified
    suppliers may leave the bidding process leaving
    the field open to less qualified companies.
  • Oligopolies (where the market is dominated by
    only a few vendors) can present serious
    restrictive trade practices. Cartels exist (such
    as OPEC) which have formal agreements between
    producers for collusion concerning volume of
    production and prices.
  • Managing bidding can be a costly process because
    it requires
  • Evaluation of vendors on multiple criteria
    (lowest costs, consistent quality, engineering
    design capability, fastest delivery, vendor
    reliability, etc.).
  • Cost of reviewing each companys bid which can be
    time-consuming and expensive.

E-auctions and Bidding Models
  • Use of the Internet for auctions (e-auctions) is
  • E-auctions have become popular for both forward
    and reverse auctions.
  • Forward Auctions Several buyers and one seller.
  • Reverse Auctions Several sellers and one buyer
    (the purchasing scenario).
  • E-auctions can be used for consumer-to-consumer
    (C2C) and business-to consumer (B2C) auctions
    through commercial vendors like eBay and Yahoo!
  • e-commerce vendors (such as FreeMarkets) focus on
    business-to-business (B2B) and e-procurement
  • Bidding models rely on probabilistic analyses.
  • See, Gupta, Sushil, Christos Koulamas and George
    J. Kyparisis, E-Business A Review of Research
    Published in Production and Operations Management
    (1992-2008), Production and Operations
    Management, Volume 18, Issue 6, November
    December 2009, page 604-620.

Certification of Suppliers
  • Suppliers organizations need to be certified to
    assure conformance with standards.
  • Certification may be required before a supplier
    is allowed to participate in a bidding contest.
  • Certification is expensive. It is time-consuming
    so focus on A-type items.
  • Certification helps in developing long-term
    relationships with suppliers.
  • Potential suppliers are advised how to upgrade
    those capabilities on which they are rated as
  • A comprehensive dynamic systems plan alters
    conditions for certification overtime in line
    with the companys strategies.
  • The buyers materials management information
    system (MMIS) has to be able to handle many
    suppliers and potential suppliers for hundreds
    and even thousands of A-type items.

Certification of Suppliers (continued)
  • Rating procedures include formal evaluations of
    price, quality, delivery time, and the ability to
    improve all three, and more.
  • Scoring Models are very useful to evaluate and
    certify a group of vendors.
  • Accepted suppliers are regularly reviewed to make
    certain that they maintain their winning

Global Sourcing
  • Trent and Monczka distinguish between
    international purchasing and global sourcing and
    identify seven features that characterize
    organizations which are effective in global
  • International purchasing involves a commercial
    transaction between a buyer and a supplier
    located in different countries.
  • Global sourcing, on the other hand, involves
    integrating and coordinating common items,
    materials, processes, technologies, designs and
    suppliers across worldwide buying, design and
    operating locations.
  • Trent, Robert J. and Robert M. Monzcka, Achieving
    Excellence in Global Sourcing, Sloan Management
    Review, Fall 2005.  

Global Sourcing (continued)
  • Seven features of organizations which are
    effective in global sourcing
  • Executive commitment to global sourcing
  • Rigorous and well-defined processes
  • Availability of needed resources
  • Integration through information technology
  • Supportive organizational design
  • Structured approaches to communication
  • Methodologies for measuring savings

Global Sourcing (continued)
  • Procurement decisions in the era of globalization
    are no longer based entirely on an understanding
    of direct purchase costs or on easily observable
    transaction costs, such as transport expenses and
    import duties, but on many other types of
    transaction costs as well, including those
    related to cultural, institutional and political
  • An over dependency on first-tier suppliers is
    dangerous for OEMs (original equipment
    manufacturers). It weakens their control over
    costs, reduces their ability to stay on top of
    technology developments and shifts in demand, and
    makes it difficult to ensure that their suppliers
    are operating in a socially and environmentally
    sustainable fashion.
  • Butter, Frank A.G. den and Kess A. Linse,
    Rethinking Procurement in the Era of
    Globalization, Sloan Management Review, Fall
  • Choi, Thomas, and Tom Linton, Dont Let Your
    Supply Chain Control Your Business, Harvard
    Business Review, December 2011, pages 112-117.

Global Sourcing (continued)
  • A manufacturer may be in a difficult situation if
    its contract manufacturer (CM) becomes its
  • To avoid such a situation, the OEM should do the
  • Modesty about revealing ones secrets.
  • Caution about whom one consorts with.
  • A judicious degree of intimacy, loyalty, and
    generosity toward ones partners and customers.
  • Use surplus intellectual property to enter
    markets beyond those for their core products.
  • Ironically, CMs barrier-breaking abilities can
    offer OEMs access to new marketsand sometimes a
    way out of the dilemma.
  • Arruñada, Benito and Xosé H. Vázquez, When Your
    Contract Manufacturer Becomes Your Competitor,
    Harvard Business Review, Sept 2006

Distribution Chain
  • The distribution chain starts once an item has
    been manufactured.
  • The objective is to deliver the product to the
    consumer at the right time and at minimum cost.
  • Note The terms distribution chain and supply
    chain are used interchangeably from this point

Decisions in a Supply Chain
  • The distribution chain shown below consists of a
    manufacturer, distributor(s), wholesaler(s) and
  • A partner to the right is called a downstream
  • A partner to the left is called an upstream
  • Thus, retailer is a downstream partner of
    wholesaler and distributor is an upstream
  • Materials flow downstream and orders flow
    upstream. Information flows in both directions.
  • Note Materials may flow upstream as in a reverse
    supply chain.

Decisions in a Supply Chain (continued)
  • Distribution Channel
  • Ship the product directly to the retailer or have
    intermediate partners like wholesalers and
  • Use of e-channels.
  • Mixed channels
  • Number of wholesalers, distributors and
  • Location Decisions
  • Location of the manufacturing plant or multiple
  • Locations of the supply chain partners.
  • In a supply chain the relative location of
    partners is important because that establishes
    the distribution network and affects the cost of
    goods transported.

Decisions in a Supply Chain (continued)
  • Mode of Transportation
  • Trucks, trains, airplanes, or ships etc.
  • The choice depends on the product and the cost of
    transportation. For example, perishable products
    like fresh food items may have to be transported
    by air. Refrigerated trucking is another popular
  • Extent of Vertical Integration
  • A manufacturing company is considered more
    vertically integrated if it owns the
  • A company that owns trucks is more vertically
    integrated as compared to the one that uses a
    trucking company.
  • The network for the flow of goods has to be

Decisions in a Supply Chain (continued)
  • We shall study the distribution chain under the
    following topics
  • E-Business
  • Logistics
  • Forecasting and Inventory

  • E-business is a multi-dimensional discipline that
  • Application of technology.
  • Study of customers attitudes, expectations, and
  • Identification of internal organizational
  • Study of the relationships among partners in the
    supply chain,
  • Development of collaborative strategies and
    coordination mechanisms.
  • Development of analytical models.
  • Web-based functions span across
  • Product design
  • E-auction and procurement
  • Vendor development
  • Customer relations management
  • Logistics and distribution, and pricing.
  • For a detailed discussion of e-business
    developments that are presented in this section,
    see Gupta, Sushil, Christos Koulamas and George
    J. Kyparisis, E-Business A Review of Research
    Published in Production and Operations Management
    (1992-2008), Production and Operations
    Management, Volume 18, Issue 6, November
    December 2009, page 604-620

E-Business System Design
  • P/OM can make significant contributions to the
    profitability of the Internet- based businesses
  • A user-friendly web interface that improves
    customer satisfaction includes
  • System flexibility
  • Quality of service
  • Product attributes
  • Perceived ease of using the e-business systems
  • Customer characteristics, especially with
    heterogeneous customers, need to be considered in
    the design of e-business systems.
  • E-process adoption is easier if the internal
    organizational environment supports the e-process
    and the e-process leads to improved
    organizational performance.
  • Starr, M. 2003. Application of POM to
    e-business B2C e-shopping. International Journal
    of Operations and Production Management 23(1)

Competition, Conflict, Collaboration and
Coordination (C4)
  • Suppliers compete to win the manufacturers
    supply orders.
  • Retailers compete among themselves for increasing
    their market share.
  • Manufacturers compete with their own retailers by
    opening parallel Internet channels a case of
    mixed channels supply chain.
  • Some of the strategies to reduce conflict
  • Revisions in the wholesale prices.
  • Diversion of customers to the direct channel by
    the reseller for a commission.
  • Fulfilling the demand only through the reseller. 
  • The retailer adds other features and value to
    differentiate his/her product.
  • The manufacturer makes a side payment to the
    retailer to reduce conflict.
  • Competition results in conflict which in turn
    leads competing entities to collaborate and
    coordinate to arrive at a win-win situation for

Radio Frequency Identification (RFID)
  • Radio frequency identification (RFID) is an
    enabling technology for real time data
  • RFID uses wireless non-contact radio-frequency
    electromagnetic fields for data transfer, to
    automatically identify and track tags attached to
    objects (http//
  • RFID tracks the movement and flow of items in a
    supply chain and provides visibility to managers
    about the location and condition of the tracked
  • The real time information is valuable because it
    helps to increase asset utilization and to
    minimize inventory and logistics related costs.
  • RFID also minimizes delays in information
    transmission leading to improved information
    sharing among the partners in a supply chain.
  • The design of RFID systems is critical because
    installing RFID technology infrastructure entails
    a large initial investment and significant
    potential risks in technology adoption.

Business Value of RFID
  • The business value of RFID comes from the
    visibility it provides to managers about the
    items tracked.
  • It emanates from labor cost savings, shrinkage
    reduction and inventory visibility.
  • RFID has an impact on reducing information
  •  The stages in the evolution of RFID business
    value include (see Dutta et al.)
  • Technology deployment and integration,
  • Integration with business processes,
  • Development of new business architectures for
    employees, policies and organizational
  • Three dimensions for an RFID value proposition
  • RFID technology
  • Quantification of the RFID business value
  • Incentives for RFID adoption and implementation.
  • Dutta, A., H. L. Lee, S. Whang. 2007. RFID and
    operations management technology, value, and
    incentives. Production and Operations Management
    16(5) 646-655.

Business Value of RFID (continued)
  • Examples
  • Amini et al. used RFID to track trauma patients
    in a hospital.
  • RFID improved the tracking of patients time from
    about 25 to 80 in the trauma center where
    patients spent about ten to twelve hours for
    their treatment.
  • RFID technologys ability to collect data in a
    passive manner avoids interference with medical
  • RFID-based simulation models help in analyzing
    healthcare processes more thoroughly based on the
    data collected for process cycle time, patient
    throughput rate, and equipment and personnel
  • Amini, M., R. F. Otondo, B. D. Janz, M. G.
    Pitts. 2007. Simulation modeling and analysis A
    collateral application and exposition of RFID
    technology. Production and Operations
    Management 16(5) 586-598.

Business Value of RFID (continued)
  • Example
  • Delen et al. establish the business value of
    RFID for a retailer by analyzing the movement of
    RFID-tagged cases between distribution centers
    and retail stores.
  • The analysis provides insights about the
    distribution of lead times among different
    products and different combinations of
    distribution centers and retail stores.
  • The RFID-generated information also helps in
    tracking recalls, delivering products to the
    stores as per schedule, and in studying the
    backroom process that involves moving the
    products to the sales floor.
  • In addition to providing immediate visibility,
    RFID data utilization leads to gains due to
    limited process changes first and then to the
    major modifications in the logistics system.
  • Delen, D., B. C. Hardgrave, R. Sharda. 2007.
    RFID for better supply-chain management through
    enhanced information visibility. Production and
    Operations Management 16(5) 613-624.

Adoption and Implementation of RFID
  • Ngai et al. present a case study of the design,
    development and implementation of an RFID-based
    traceability system.
  • The critical success factors for RFID
    implementation include
  • High organizational motivation,
  • Implementation process efficiency,
  • Effective cost control,
  • RFID skills and knowledge transfer.
  • Several deployment issues that impede RFID
    implementation include
  • Lack of in-house RFID expertise
  • Inadequate technology support from local RFID
  • Existence of different sets of industry standards
  • Unreliable hardware performance
  • Underdeveloped RFID middleware.
  • Ngai, E.W.T., T.C.E. Cheng, K.-H. Lai, P.Y.F.
    Chai, Y.S. Choi, R.K.Y. Sin. 2007. Development of
    an RFID-based traceability system Experiences
    and lessons learned from an aircraft engineering
    company. Production and Operations Management
    16(5) 554-568.

Adoption and Implementation of RFID (continued)
  • Overall, the study reports that the RFID-based
    traceability system has resulted in
  • improved lead times
  • competitive differentiation
  • savings from reusing RFID tags
  • breakthrough productivity by automation
  • reduction of human errors in handling the
    repairable parts
  • improved inventory management
  • reduced manpower and manual data recording
  • real time monitoring and access to detailed
  • reduction of repairable parts loss
  • improved customer relationships
  • The return on investment, the business value, and
    the selection of partners are important
    considerations at the strategic level in RFID
    investment projects

  • Logistics systems outline the distribution
  • The example of Rukna Auto Parts company
    illustrates how distribution strategies are
  • The table below shows the following for Rukna
    Auto Parts Company
  • Capacity of each plant (3 plants).
  • Demand at each distributor (4 distributors).
  • The cost of transportation per unit from each
    plant to each distributor.

    Distributors Distributors Distributors Distributors  
    MKG, Inc. ASN, Inc. GMZ, Inc. AKLA, Inc. Capacity
Plants Miami 1.00 3.00 3.50 1.50 20,000
Plants Tempe 5.00 1.75 2.25 4.00 40,000
Plants Columbus 2.50 2.50 1.00 3.00 30,000
  Demand 25,000 13,500 16,800 34,700  
The totals of supply (90,000) and demand (90,000)
match. In a more general and complex problem the
supply and demand may not match.
Logistics Solution of Rukna Auto Parts
Rukna wants to know the number of units to be
shipped from each plant to each distributor to
minimize the cost of transportation
(distribution). The best solution to this
problem is given in the figure on RHS. The
total transportation cost (minimum for this
problem) is given in cell G22 (203,525). .
Logistics Solution of Rukna Auto Parts
  • Cells C4 through F6 (highlighted cells) give the
    number of units shipped from a plant to a
  • For example, cell C6 gives the number of units
    shipped from Columbus to MKG (13,200 units).
  • All costs are given in cells C13 to F15.
  • For example, cell C15 (2.50) gives the shipping
    cost per unit from Columbus to MKG.
  • The total transportation costs for each
    combination of the plant and distributor are
    given in cells C19 to F21.
  • The values in these cells (C19 to F21) are
    obtained by multiplying the number of units
    shipped by the shipping cost per unit in the
    respective cells for each combination of the
    plant and distributor.
  • For example value in cell C21 ( 33,000) is
    obtained by multiplying the value in cell C6
    (13,200) and C15 (2.50).
  • The transportation method of linear programming
    has been used to solve this problem.

Forecasting and Inventory Decisions
  • Integrated decisions in forecasting and inventory
    are important for effective management of supply
    chain systems.
  • Bottlenecks may be created if information is not
    shared and the decisions are not coordinated.
  • Any one of the components in the supply chain
    (see figure below)can be a bottleneck.
  • Bottlenecks affect the entire supply chain.
  • Contingency planning for supply chain capacity
    crises must be done to avoid crippling damage.

Forecasting and Inventory Decisions
  • Integrated decisions in forecasting and inventory
    are important for effective management of supply
    chain systems.
  • Excessive inventories and shortages may result in
    supply chains if information is not shared and
    the decisions are not coordinated.
  • This may lead to amplified demand variability in
    a supply chain.
  • This phenomenon is called bullwhip effect. It
    means that the orders by a retailer to its
    wholesaler to replenish the stock are likely to
    fluctuate more than the demand at the retailer.
  • This phenomenon continues up the supply chain.

Bullwhip Effect
  • The bullwhip phenomenon was first identified by
    Proctor and Gamble (PG) for demand of diapers.
  • The major cause of the bull-whip effect is the
    lack of information about the actual demand by
    supply chain partners.
  • Each partner in the supply chain does its own
    demand forecasting and places replenishment
  • This leads to inconsistency if the entire supply
    chain system is not well coordinated.
  • An integrated forecasting system needs to be
  • Such a system requires a transparent information
    system, trust among supply chain partners, and
    ability to make and adjust forecasts at each
    level of the supply chain.
  • Collaborative forecasting has to be done on a
    periodic basis monthly, weekly etc.

The Better Beer Company Game
  • We study the operations of a supply chain system
    through the example of what is popularly known as
    the beer game.
  • The supply chain is depicted in the figure below.

The Better Beer Company Game (continued)
  • Forecasting and inventory decisions are made by
    the partners in the supply chain in this game.
  • Retailers, distributors, and producer
    (manufacturer) can order too much (beer) or too
    little (beer) when information about actual
    demand for the brand is delayed along the
    linkages of a supply chain.
  • The effects of ordering too much or too little as
    a result of information delays can be costly. The
    resulting imbalance of demand with existing
    capacity is important to understand.
  • The game shows how the performance of a linked
    system is tied to the adequacy and timeliness of
    forecasts about future demand.

The Better Beer Company Game (continued)
  • The tables and graphs in the next three slides
    show the data for simulations that reflect the
    effects of delays on supply chain decisions made
    by producers, wholesalers, retailers, suppliers,
    and customers.
  • These simulations are identified with the Better
    Beer Company whose product, called Woodstock, is
    at the heart of the simulation.

Retailers Ordering from Distributors
Begin week 1 with 12 cases of stock on-hand
(SOH). Supply at the start of the week is 4
cases, so net SOH is 16 cases. The demand is for
4 cases, so end of week 1 SOH is 12 cases. The
retailer orders 4 cases (see column Order
Quantity). Assume lead time to be 3 weeks.
Therefore, the 4 cases will be delivered at the
beginning of week 5. Continue to read table on
RHS in this fashion. Note that in weeks 10, 11,
and 12, the end SOH rose to 24 cases, double the
normal amount.
Note Demand is shown as a negative number
because demand depletes the inventory level.
Distributors Ordering from Producers
Week 1 begins with 64 cases of beer at the
distributor and end SOH is 64. Lead time is 4
weeks, so the order placed at the end of week 1
is received at the beginning of week 6. Continue
to read table on RHS in this fashion.
Note Demand is shown as a negative number
because demand depletes the inventory level.
Oscillations in Stock On-Hand (SOH)
  • Oscillations in the Distributors Stock On-Hand
  • Oscillations in the Retailers Stock On-Hand

SOH Curves of the Distributor and Retailer
  • The figure below compares the end stock on-hand
    (SOH) results for the retailer and the
    distributor. The effect had seemed enormous to
    the retailer. However, when the comparison is
    made with the distributor, the retailers swings
    were gentle. The effect is going to be even worse
    at the producers level.

  • Thank you