As Per Revised Syllabus of Leading Universities in India Including Dr. APJ Abdul Kalam Technological University, Kerala. V. Anandaraj, M.E., (Ph.D.

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1 Supply Chain & Logistics Management For B.E /B.Tech Mechanical Engineering Students As Per Revised Syllabus of Leading Universities in India Including Dr. APJ Abdul Kalam Technological University, Kerala V. Anandaraj, M.E., (Ph.D.,) Supply Chain Consultant S. Kumaran Ishanka Saikia Reviewed By Dr. S. Ramachandran, M.E., Ph.D., (Near All India Radio) 80, Karneeshwarar Koil Street, Mylapore, Chennai Ph.: ,

2 th First Edition : 9 August 2018 ISBN: / Cell: ,

3 Course Plan Module Contents Hours I II III IV General Features of Supply Chains: Supply Chains Structures, Decision Phases, Performance Drivers and Measures, Metrics. Achieving Strategic Fit and its Obstacles. Planning Demand & Supply: Planning demand and supply in supply chains Forecasting techniques for supply chains, Seasonal Forecasting Models, Measure of Forecast errors. FIRST INTERNAL EXAM Aggregate Planning: Aggregate Planning Strategies, Aggregate Planning models Quantitative Examples. Network Design, Locations and Layouts: Network design in Uncertain Environment, Facility Location and Layout decisions. Multi-echelon Inventory Systems: Inventory Planning Decisions Estimate of Cycle Inventory, Discounting Models, Multi-item Inventory models, Determination of Safety Inventory, Impact of Supply Uncertainty, Multi-echelon Inventory models, Quantitative Examples. Bullwhip effect. End-Sem. Exam. Marks 7 15% 7 15% 7 15% 7 15%

4 V VI SECOND INTERNAL Logistics Management: 3PL, 4PL, Design Options for Transportation Network. Routing, Scheduling and Sequencing in Transportation, Vehicle Routing Problems. Quantitative Examples. Reverse Logistics: Reverse logistics and Closed Loop Supply Chains. Advanced Logistics Decision Models: Bin Packing Problems, Fixed Charge Problems, Knapsack Problems, Multi-stage transportation problems. 7 20% 7 20%

5 Contents C1 Table of Contents 1. General Features of Supply Chains 1.1 Supply Chains Objectives of Supply Chain Management Decision Phases (i) Supply chain strategy: (ii) Supply chain planning: (iii) Supply chain operation: Drivers of Supply Chain Performance Facilities Components of facilities decision Facility related metrices Inventory Components of Inventory Decisions (i) Cycle inventory: (ii) Safety inventory (iii) Seasonal inventory (iv) Level of Product availability Inventory Related Metrics Transportation Components of Transportation Decisions Transportation-Related Metrics Information Components of information decisions Information related metrics Sourcing Components of sourcing decisions Sourcing related metrics Pricing Components of Pricing Decisions Pricing related metrics

6 C2 Supply Chains and Logistics Management Performance Measures Quantitative measures Achieving Strategic Fit Planning Demand and Supply and Forecasting 2.1 Introduction Demand Planning Supply Planning Forecasting Role of forecasting in supply chain Characteristics of Forecasts Components of Forecasting Forecasting Techniques (Methods) Time-Series Forecasting Methods Static time series Forecasting Methods Estimating Level and Trend Seasonal Forecasting Model Trend And Seasonality Corrected Exponential Smoothing (Winter s Model) Demand Forecasting Techniques In Simple Words Types of demand forecasting Forecasting methods Demand forecasting for new products Criteria for a Good Forecasting method Measures of Forecast Errors Mean Squared Error (MSE) Mean Absolute Deviation Mean Absolute Percentage Error (MAPE) Bias Tracking Signal (TS)

7 Contents C3 3. Aggregate Planning, Network Design, Locations and Layout 3.1 Aggregate Planning Aggregate Planning Strategies Aggregate Planning Models Graphical Approach Tabular Method Linear programming model Transportation problem Network Design Role of Network Design in the Supply Chain Facility Location Importance of facility location Procedures in facility locations Facilities Layout Design Types of Layout Product layout Process layout Cellular type layout Multi-Echelon Inventory Systems 4.1 Multi-echelon Inventory Systems Inventory Planning Decision Estimate of Cycle Inventory Costs associated with Inventory Purchase cost (or) Production cost Capital Cost Ordering Cost Inventory Carrying Costs (or) Holding costs Storage Cost: (Stock out cost) Re-order Quantity Terminology in inventory control

8 C4 Supply Chains and Logistics Management Economic Order Quantity (EOQ) Safety Stock Inventory models-types of inventory systems Inventory models - Estimate of cycle inventory Fixed Order Quantity Models: (Perpetual inventory system - Q - system) Parameters for Q - Model Advantages of Q model Disadvantages Two Bin System - Application of Q Model Fixed Period Model - P Model - Periodic Review System Parameters for P model Comparison between Q model and P model Selective Control of Inventory Types of classification for selective control of inventory Effect of Demand on Inventory ABC Analysis Steps in ABC analysis Advantages of ABC analysis Limitations of ABC analysis Purpose of ABC analysis Other Important Selective Inventory Controls Discounting Models All Unit Quantity discount Marginal Unity Quantity Discounts Multiple Items Inventory Models Multiple item inventory (constraint on total number of orders)

9 Contents C Multiple items inventory (Constraint on Inventory value) Multiple items inventory (Constraint on Space) Multiple Items Inventory and Multiple Constraints Saving Part of Ordering Cost by Joint Ordering Unequal number of orders and Joint Ordering Determination Of Safety Inventory Measuring Demand Uncertainty Evaluating demand distribution over L periods Measure product availability Product fill rate (fr): Order fill rate: Cycle Service Level (CSL) Replenishment Policies Evaluating safety inventory given a replenishment policy Evaluate Cycle Service Level (CSL) given a replenishment policy Evaluate fill rate for a given replenishment policy Evaluating safety inventory for given desired cycle service level Evaluating required safety inventory given desired fill rate Impact of desired product availability and uncertainty on safety inventory Impact of Supply Uncertainty on Safety Inventory Managing Multi Echelon Cycle Inventory

10 C6 Supply Chains and Logistics Management Logistics Management 5.1 Logistics Management Third Party Logistics (3pl) Role of 3PL Benefits of 3PL Types of 3PL Providers Fourth Party Logistics - 4PL Functions provided by a 4PL company Benefits of 4PL Design Options for a Transportation Network Direct Shipment Network Direct Shipping with Milk runs All Shipments via Distribution centre (DC) Shipping via DC using Milk Runs Tailored Network Advantages Routing, Scheduling and Sequencing in Transportation Routing Scheduling Sequencing Problems of route scheduling Vehicle Routing Problems (VRP) Savings Matrix Method Identify the Distance Matrix Identify the Savings Matrix Assign Customers to Vehicles or Routes Sequence Customers within Routes Route Sequencing Procedures Farthest Insert Nearest Insert Nearest Neighbour

11 Contents C Sweep Route Improvement Procedures OPT OPT Formulation of the Vehicle Routing Problem (VRP) Reverse Logistics and Advanced Logistics Decision Models 6.1 Reverse Logistics Definition Reasons for Reverse Logistics Benefits of Reverse logistics Elements of reverse logistics Reverse logistics processes in action Closed Loop Supply Chain Closed Loop Supply Chain or (Reverse Supply Chain) Reverse Logistics in Industries Advanced Logistics Decision Models Bin Packing problems Heuristic Algorithm Fixed charge problems - location allocation problem Knapsack problem - truck allocation problem Branch and Bound Algorithm Multistage transportation problems Transportation solution Cross Docking

12 Module I General Features of Supply Chains General Features of Supply Chains: Supply Chains Structures, Decision Phases, Performance Drivers and Measures, Metrics. Achieving Strategic Fit and its Obstacles. 1.1 SUPPLY CHAINS A supply chain is a system of organizations, people, activities, information and resources involved in moving a product (or) service from supplier to customer. It involves the transformation of natural resources, raw materials and component into a finished product that is delivered to the end customer. Supply chain management can be defined as the management of flow of products and services, which begins from the origin of products and ends at the products consumption. Supplier Manufacturer Distributor Retailer Customers Fig. 1.1 Block Diag ram of Supply Chain As shown in Fig. 1.1, supply chain may involve a variety of stages, including the following. (i) Customers (ii) Retailers (iii) Distributors (or) Wholesalers (iv) Manufacturers (v) Raw material suppliers

13 1.2 Supply Chains and Logistics Management OBJECTIVES OF SUPPLY CHAIN MANAGEMENT Every firm makes great effort to match supply with demand in a timely fashion with the most efficient use of resources. Some of the important objectives of supply chain management are as follows: (i) (ii) Supply chain partners work collaboratively at different levels to maximize resource productivity, construct standardized process, minimize inventory levels and remove duplicate efforts. Minimization of supply chain expenses is very important, especially when there are economic uncertainties in companies regarding their wish to conserve capital. (iii) To manufacture cost efficient and cheap product without compromising the quality. (iv) Increased expectations of clients for higher product variety, customized goods, off season availability of inventory and rapid fulfillment at a cost comparable to in-store offerings should be matched. (v) To meet customer expectations, distributors need to leverage inventory as shared source and utilize the distributed order management technology to complete orders from the optimal node in supply chain. 1.3 DECISION PHASES Decision phases can be defined as the different stages involved in supply chain management for taking an action or decision related to the flow of information, products and funds. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame during which a decision phase has an impact. These phases are as follows:

14 General Features of Supply Chains 1.3 (i) Supply chain strategy: In this phase, a company decides how to structure the supply chain over the next several years. In this phase several decisions are made such as what the chain s configuration will be, how resources will be allocated and what processes each stage will perform etc. In this phase, all the strategic decisions are taken by the higher authority or senior management. Some of the other decision include deciding manufacturing material, factory location (which should be easy for transporters to load material and to dispatch at their mentioned location), location of warehouses (for the storage of completed products). (ii) Supply chain planning: Supply chain plannings are made according to the demand and supply view. A market research is very important to understand customers demands and expectations. The goal of planning is to maximize the supply chain surplus that can be generated over the planning horizon given the constraints establish during the strategic phase. In this phase, the decisions of planning include making decisions regarding which markets will be supplied from which locations, the sub contracting of manufacturing, the inventory policies to be followed, and the timing and size of marketing and price promotions. In this planning phase, companies should include uncertainty in demand, exchange rates and competition over this time horizon in their decisions.

15 1.4 Supply Chains and Logistics Management - (iii) Supply chain operation: This is the third and last decision phase which consists of various functional decisions that are to be made within a short period of time. In this phase, companies make decisions regarding individual customer orders. The main objective of supply chain operations is to handle incoming customer orders in the best possible manner. Some of the operational decision taken in the phase are: Firms allocate inventory (or) production to individual orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules for trucks and place replenishment orders. The strategy, planning and operation of supply chain have a strong impact on a overall success and profitability of an organization. 1.4 DRIVERS OF SUPPLY CHAIN PERFORMANCE In order to understand how a company can improve supply chain performance in terms of responsiveness and efficiency, it is important to examine the logistical and cross functional drivers of supply chain performances such as facility, inventory, transportation, information, sourcing, and pricing. These drivers interact to determine the supply chain s performance in terms of responsiveness and efficiency. These drivers also impact the financial measures. The main objective is to structure the drivers to achieve the desired level of responsiveness at the lowest possible cost, thus maximizing the supply chain surplus and the company s financial performance.

16 General Features of Supply Chains 1.5 Efficiency Responsiveness Supply Chain Structure Inventory Transportation Facilities Information Sourcing Pricing Drivers Fig. 1.2 Drivers of Supply Chain Performance All these drivers are discussed briefly as follows: Facilities These are the actual physical locations in supply chain network, where product is stored, assembled, or fabricated. There are two major types of facilities and they are production sites and storage sites. Facilities are a key driver of supply chain performance in terms of responsiveness as well as efficiency. As an example, a company can gain economics of scale, when a product is manufactured or stored in only one location, this centralization increases the efficiency Components of facilities decision There are certain components of facilities decisions, which a company must analyze. (i) Role: A firm should decide whether production facilities will be flexible, dedicated or a combination of two.

17 1.6 Supply Chains and Logistics Management - Flexible capacity can be used for many type of products but is often less efficient. On the other hand, dedicated capacity can be used for only a limited number of products but is more efficient. For a company, it is also essential to decide whether to design a facility with a product focus or a functional focus. A functional focused facility performs a given set of functions such as fabrication or assembly on many types of products, where as, a product focused facility performs all functions needed for producing a single type product. (ii) Location: Deciding the location of facilities in a company constitutes a large part of the design of a supply chain. A basic trade off here is whether to centralize in order to gain economies of scale or to decentralize to become more respensive by being closer to the customer. A company should also consider a host of issues related to the various characteristics of the local area in which the facility is situated. (iii) Capacity: A company should also determine a facility s capacity to perform its intended functions. Excess capacity costs money and therefore can decrease efficiency Facility related metrices Facility related decisions impact both the financial performance of the firm and the supply chain s responsiveness to customers. There are certain facility related metrices that influence the supply chain performance. Thus, a manager should track these facility related metrices. (i) Capacity: It measures the maximum amount, a facility can process.

18 General Features of Supply Chains 1.7 (ii) Utilisation: It measures the fraction of capacity that is currently being used in the facility. It affects both the unit cost of processing as well as associated delays. (iii) Processing/setup/down/idle time: It measures the fraction of time that the facility was processing units, being set up to process units, unavailable because it was down, or idle because it had no units to process. (iv) Production cost per unit: It measures the average cost to produce a unit of output. These costs can be also measured per case, per pound depending upon the product. (v) Quality losses: It measures the fraction of production lost due to defects. Quality losses impact both financial performance as well as responsiveness. (vi) Theoretical flow per cycle time of production: It measures the time required to process a unit if there are absolutely no delays at any stage. (vii) Actual average flow per cycle time: It measures the average actual time taken for all units processed over a specified duration such as a week or month. (viii) Flow time efficiency: It can be defined as the ratio of the theoretical flow time to the actual average flow time. (ix) Product variety: It measures the number of products or product families processed in a facility. (x) Average production batch size: It measures the average amount of period in each production batch. (xi) Production service level: It measures the fraction of production orders completed on time and in full.

19 1.8 Supply Chains and Logistics Management Inventory It includes all raw materials, work in process, and finished goods within a supply chain. Inventory exists in the supply chain because of a mismatch between demand and supply. At some companies, where it is economical to manufacture in large lots and then stored for future sales (such as steel manufacturer), this mismatch is intentional. An important benefit of having inventory is any kind of increase in demand can be satisfied by having the product ready and available when the customers want it. Another advantage of having inventory is to reduce cost by exploiting economics of scale that may exist during production and distribution. Inventory also has a significant impact on the material flow time in supply chain. Material flow time can be defined as the time that elapses between the point at which material enters the supply chain to the point at which it exits. For a supply chain, throughput can be defined as the rate at which sales occur. If inventory is represented by I, throughput by D and flow time by T, then these three can be related by using Little s law as follows. I DT Components of Inventory Decisions These are the major inventory-related decisions that supply chain managers must make to effectively create more responsive and more efficient supply chain.

20 General Features of Supply Chains 1.9 (i) Cycle inventory: Cycle inventory is defined as the average amount of inventory used to satisfy demand between receipts of supplier shipments. A company produces or purchases in large lots in order to exploit economics of scale in the production, transportation or purchasing process. But, increasing in lot size also increases the carrying costs. (ii) Safety inventory In case when demand exceeds expectation, it is the inventory held to counter uncertainty to avoid shortage in products. Since, demand is not constant in all the time and may exceeds the expectations, companies hold safety inventory to satisfy the unexpected high demand. (iii) Seasonal inventory Seasonal inventory is build up to counter predictable seasonal variability in demand. Generally, companies by using seasonal inventory, build up inventory in the period of low demand and store it for seasons when the demand will be at peak. It is also called as anticipation inventory. (iv) Level of Product availability It is the fraction of demand that is served on time from product held in inventory. A high level of product availability provides a high level of responsiveness, but due to much inventory held, the inventory handling cost also increases.

21 1.10 Supply Chains and Logistics Management - On the other hand, a low level of product availability lowers the inventory holding cost but results in a higher fraction of customers who are not served on time Inventory Related Metrics A manager should track the following inventory related metrics which may influence supply chain performance. (i) Cash-to-cash cycle time: It is a high level metric that includes inventories, account payable and receivables. (ii) Average inventory: It measures the average amount of inventory carried by a company. It is measured in units, days of demand and financial value. (iii) Product with more than a specified number of days in inventory: This identifies the products for which the firm is carrying a high value of inventory. (iv) Average replenishment batch size: It measures the average amount in each replenishment order. (v) Average safety inventory: It measures the average amount of inventory left, when a replenishment order arrives. (vi) Fill rate: It measures the fraction of orders (or) demand met on time from inventory. (vii) Fraction of time out of stock: It measures the fraction of time that a particular Stock Keeping Unit (SKU) had zero inventory. (viii) Obsolete inventory: It measures the fraction of inventory older than a specified obsolescene date.

22 General Features of Supply Chains Transportation It involves in moving inventory from point to point in the supply chain. The choices in transportation have a large impact on supply chain responsiveness and efficiency. Faster transportation allows a supply chain to be more responsive but reduces the supply chain efficiency. The type of transportation a company uses also affects the inventory and facility locations in the supply chain. Transportation allows a firm to adjust the location of its facilities and inventory to find the right balance between responsiveness and efficiency. A firm selling high value items may use rapid transportation to be responsive while centralizing its facilities and inventory to lower cost. On the other hand a firm selling low value, high-demand items may carry a fair amount of inventory close to the customer but then use low cost transportation such as sea, rail etc to replenish this inventory from plants located in low cost countries Components of Transportation Decisions There are some components of transportation, that a company must analyze when designing and opening a supply chain. (i) Design of transportation network The transportation network is the collection of modes of transportation, locations and route along which product can be shipped. A company should decide whether transportation from a supply source will be direct to the demand point or will go through intermediate consolidation points.

23 1.12 Supply Chains and Logistics Management - (ii) Choice of transportation mode: Mode of transportation means the manner in which a product is moved from one location to another in the supply chain network. A company choose among air, truck, rail, sea and pipeline as modes of transportation for products. Now-a-days, information goods can also be sent via internet Transportation-Related Metrics A manager should track the following transportation related metrics that influence supply chain performance. (i) Average inbound transportation cost It measures the cost of bringing product into a facility as a percentage of sales or cost of goods sold (COGS). It is not easy to measure this in cost per unit brought in. The inbound transportation cost is generally included in COGS and it is useful to separate this cost by suppliers. (ii) Average incoming shipment size It measures the average transportation cost of each incoming shipment at a facility. (iii) Average inbound transportation cost per shipment It measures the average transportation cost of each delivery. This metric not only measures the incoming shipment size but also identifies the opportunities for greater economics of scale in inbound transportation. (iv) Average outbound transportation cost It measures the cost of sending product out of a facility to the customer. This cost is often measured as a percentage of sales.

24 General Features of Supply Chains 1.13 (v) Average outbound shipment size It measures the average number of units or dollars on each outbound shipment at a facility. (vi) Average outbound transportation cost per shipment It measures the average transportation cost of each outgoing delivery. This metric not only measures the outgoing shipment size, but also identifies opportunities for greater economics of scale in outbound transportation. (vii) Fraction transported by mode It measures the fraction of transportation using each mode of transportation. By using this metric, it can be identified that which modes of transportation are overused or under-utilized Information It consists of data and analysis concerning facilities, inventory, transportation, cost, prices and customer throughout the supply chain. Information is potentially the biggest driver of performance in the supply chain because it affects each of the other drivers directly. Good information can improve the utilization of supply chain assets and the coordination of supply chain flows to increase responsiveness and reduce costs. Also, right information can help a supply chain better meet customer needs at lower cost. Proper investment in information technology improves visibility of transactions and co-ordination of decisions across the supply chain.

25 1.14 Supply Chains and Logistics Management Components of information decisions There are several components of information that a company must analyze to increase efficiency and improve responsiveness within its supply chain. (i) Push versus pull: While designing a process of the supply chain, managers must determine whether this process is part of the push or pull phase in the chain. Different types of systems require different types of information. Push systems start with forecasts that are used to build the master production schedule and roll it back creating schedules for suppliers with part types, quantity and delivery dates. On the other hand, pull systems require information on actual demand to be transmitted extremely quick throughout the entire chain so that production and distribution of products can reflect the actual demand accurately. (ii) Co-ordination and information sharing: Supply chain coordination occurs when all stages of a supply chain work towards the goal of maximizing total supply chain profitability based on shared information. Co-ordination among different stages in a supply chain requires each stage to share appropriate information with other stages. Lack of coordination can lead to a significant loss of supply chain surplus. (iii) Sales and operations planning: It is the process of creating an overall supply plan to meet the anticipated level of demand.

26 General Features of Supply Chains 1.15 The sales and operation process starts with sales and marketing communicating their needs to the supply chain which in turn communicates to sales and marketing whether the needs can be met and at what cost. Its main objective is to come up with an agreement upon sales, production and inventory plan that can be used to plan supply chain needs and project revenues and profits. (iv) Enabling Technologies: There are several technologies exist to share and analyze information in the supply chain. Managers will decide which technologies to use and how to integrate them into their supply chain. Some of these technologies are Electronic Data Interchange (EDI), Enterprise Resource Planning (ERP), Radio frequency identification etc Information related metrics A manager should track some information related metrics that can influence on the performance in supply chain. (i) Forecast horizon: It identifies how far in advance of the actual event a forecast is made. The forecast horizon must be greater than or equal to the lead time of the decision that is driven by the forecast. (ii) Frequency of update: It identifies how frequently than a decision will be revisited, so that large changes can be identified and corrective action can be taken. (iii) Forecast error: This is the difference between the forecast and actual demand. (iv) Seasonal factor: It measures the extent to which the average demand in a season is above or below the average in the year.

27 1.16 Supply Chains and Logistics Management - (v) Variance from plan: It identifies the difference between the planned production and the actual production value. (vi) Ratio of demand variability to order variability: It measures the standard deviation on incoming demand and supply orders placed Sourcing Sourcing can be defined as the set of business processes required to purchase goods and services. A manager must first decide whether each task will be performed by a responsive or efficient source and then whether the source will be internal to the company or a third party. In other words, sourcing is the choice of who will perform a particular supply chain activity such as production, transportation, storage or the management of information. Sourcing decisions are crucial because they affect the level of efficiency and responsiveness the supply chain can achieve Components of sourcing decisions Some of the components of sourcing decisions are discussed as follows: (i) In house or outsource: One of the most sourcing decision for a firm is whether to perform a task in-house or outsource it to a third party. Within a task (such as transportation), a manager must decide whether to outsource all of it, outsource only the responsive component or outsource only the efficient component. If the growth in total supply chain surplus is significant with little additional risk, then it is always better to outsource. (ii) Supplier selection: Managers must decide the number of suppliers they will have for a particular activity.

28 General Features of Supply Chains 1.17 After that, the managers must identify the criteria along which suppliers will be evaluated and how they will be selected. (iii) Procurement: It is the process of obtaining goods and services within a supply chain. A manager must structure procurement with an aim of increasing supply chain surplus Sourcing related metrics Sourcing decisions directly impact the cost of goods sold and accounts payable. Also, the performance of source impacts on quality, inventories and inbound transportation costs. Thus it is necessary for managers to track the sourcing related metrics that influence supply chain performance. (i) Days payable outstanding: It measures the number of days between when a supplier performed a supply chain task and when it was paid. (ii) Average purchase price: It measures the average price at which a good or service was purchased during the year. This average price should be weighted by the quantity purchased at each price. (iii) Range of purchase price: It is the measure of fluctuation in purchase price during a specified period. (iv) Average purchase quantity: It measures the average amount purchased per order. The main objective is to identify whether a sufficient level of aggregation is occurring across locations when placing an order. (v) Supply quality: It measures the quality of supplied products. (vi) Supply lead time: It measures the average time between when an order is placed and when the product arrives.

29 1.18 Supply Chains and Logistics Management - (vii) Fraction of on-time delivery: It measures the fraction of deliveries from the supplier that were on time. (viii) Supplier reliability: It measures the variability of the supplier s lead time as well as the delivered quantity relative to plan Pricing Pricing determines how much a firm will charge for the goods and services that it makes available in the supply chain. Pricing affects the customers and their expectations, which directly affects the supply chain in terms of level of responsiveness required and the demand profile that the supply chain attempts to serve. In case, when the supply chain is not flexible, pricing can be also used as a lever to match supply and demand Components of Pricing Decisions Some of the key components of pricing decisions that affect supply chain performance are as follows. (i) Pricing and economies of scale: Most supply chain activities display economies of scale. Changeovers make small production runs more expensive per unit as compared to large production runs. (ii) Everyday low pricing versus high-low pricing: Let us consider a firm which practices everyday low pricing at its warehouse stores, keeping prices steady over time. This firm will go to the extent of not offering any discount on damaged products to ensure its everyday low pricing strategy. On the other hand, most supermarkets practice high-low pricing and offer steep discounts on a subset of their product every week.

30 General Features of Supply Chains 1.19 (iii) Fixed price versus menu pricing: A firm should decide whether it will charge a fixed price for its supply chain activities or have a menu with prices that vary with some other attribute (such as the response time or location of delivery). In case, where the marginal supply chain costs or the value to the customer vary significantly along some attribute, then it is effective to have a pricing menu Pricing related metrics A manager should track the following pricing related metrics that can affect the supply chain. (i) Profit margin: It measures profit as a percentage of revenue. (ii) Days sales outstanding: It measures the average time between when a sale is made and when the cash is collected. (iii) Incremental fixed cost per unit: It measures the incremental costs that vary with the size of order. (iv) Average sale price: It measures the average price at which a supply chain activity was performed in a given period. This average can be obtained by weighing the price with the quantity sold (v) Average order size: It measures the average quantity per order. (vi) Range of sale price: It measures the maximum and the minimum of sale price per unit over a specified time horizon. (vii) Range of periodic sale: It measures the maximum and minimum of the quantity sold per period during a specified time horizon.

31 1.20 Supply Chains and Logistics Management PERFORMANCE MEASURES Supply chain performance measure is defined as an approach to judge the performance of supply chain system. Supply chain performance measures can be classified into two categories. (i) Qualitative measures and (ii) Quantitative measures Here, we discuss the quantitative measures only Quantitative measures Although the measurements taken for measuring the performance may be somewhat similar to each other, but the objective behind each segment is very different from each other. Quantitative measures is the assessments used to measure the performance and compare or track the performance or products. Quantitative measures can be further divided into two types: (i) Non-financial measures (ii) Financial measures. (i) Non financial measures: The metrics of non financial measures comprise cycle time, customer service level, inventory levels, resource utilization ability to perform flexibility and quality. (ii) Financial Measures: The measures taken for gauging different fixed and operational costs related to a supply chain are considered as the financial measures. The main objective here is to maximize the revenue by maintaining low supply chain costs.

32 General Features of Supply Chains 1.21 There is a rise in prices because of the inventories, transportation, facilities, operations, technology, materials and labour. Generally, the financial performance of a supply chain is evaluated by considering the following items. 1. Revenue from goods sold. 2. Inventory holding cost. 3. Transportation cost. 4. Cost of raw materials. 5. Cost of expired perishable goods. 6. Activity based cost such as material handling, manufacturing, assembling rates etc. 7. Penalties for incorrectly filled or late orders delivered to customers. 8. Credits for incorrectly filled or late deliveries from suppliers. 9. Cost of goods returned by customers. 10. Credits for goods returned to suppliers. 1.6 ACHIEVING STRATEGIC FIT Strategic fit 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. It requires that both the competitive and supply chain strategies of a company have the same goals. For a company to achieve strategic fit, it must attain the following: (i) The different functions in a company must appropriately structure their processes and resources to be able to execute these strategies successfully.

33 1.22 Supply Chains and Logistics Management - (ii) The design of the overall supply chain and the role of each stage must be aligned to support the supply chain strategy. (iii) The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm to reach its competitive strategy goal. A company may fail due to several reasons such as lack of strategic fit or due to its overall supply chain design, processes and resources do not provide the capabilities to support the desired strategic fit How is strategic fit achieved? To achieve strategic fit, a company must ensure that its supply chain capabilities support its ability to satisfy the needs of the targeted customer segments. There are three basic steps to achieve this strategic fit and these are as follows: (i) (ii) To understand the customer and supply chain uncertainty. To understand the supply chain capabilities. (iii) To achieve strategic fits. These steps are discussed in detail. (i) To understand the customer and supply chain uncertainty At first it is necessary for a company to understand the customer need for each targeted segment and the uncertainty these needs impose on the supply chain. These needs help the company to define the desired cost and service requirements. The supply chain uncertainty helps the company to identify the extent of the unpredictability of demand, disruption and delay that the supply chain must be prepared for.

34 General Features of Supply Chains 1.23 A company must identify the needs of the customer segment being served in order to understand the customers. In general, customer demand from different segments varies along several attributes as follows: (a) (b) (c) (d) (e) (f) The quantity of the product needed in each lot. The response time that customers are willing to tolerate. The service level required. The variety of product needed. The desired rate of innovation in the product. The price of the product. In a company, demand uncertainty reflects the uncertainty of customer demand for a product. But implied demand uncertainty is different from demand certainty. Implied demand uncertainty is the resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy based on the attributes the customer desires. When a supply chain raises its level of service, it must be able to meet a higher percentage of actual demand. Due to this, raising the service level in supply chain increases the implied demand uncertainty even though the product s underlying demand uncertainty does not change. Supply uncertainty is strongly affected by the life cycle position of the product. The products that are introduced newly have higher supply uncertainty because the design and production processes for the product is still evolving.

35 1.24 Supply Chains and Logistics Management - (ii) To understand the supply chain capabilities Once the uncertainty that a company may face is understood, the next step is to identify various possible ways to meet the best customer demand in that uncertain environment. Supply chain responsiveness includes a supply chains ability to do the following: (i) Meet short lead times. (ii) Handle a large variety of products. (iii) Meet a high service level. (iv) Handle supply uncertainty. (v) Respond to wide ranges of quantities demanded (vi) Build highly innovative products. The more of these above abilities a supply chain has, the more responsive it is. Responsiveness Hig h Low High Low Cost Fig. 1.3 Cost - Responsiveness Efficient Frontier

36 General Features of Supply Chains 1.25 For a supply chain, to respond to a wider range of quantities demanded, capacity must be increased which increases costs. The curve in Fig.1.3 shows the lowest possible cost for a given level of responsiveness. Not every firm is able to operate on the efficient frontier, which represents the cost responsiveness performance of the best supply chain. A firm, which is not on the efficient frontier can improve both its responsiveness and its cost performance by moving toward the efficient frontier. On the other hand, a firm on the efficient frontier can improve its responsiveness only by increasing cost and becoming less efficient. Thus, such firms that are on efficient frontier must make a trade-off between efficiency and responsiveness. (iii) To achieve strategic fit After understanding the supply chain position on the responsiveness spectrum and mapping the level of implied uncertainty, the third and final step is to ensure that the degree of supply chain responsiveness is consistent with the implied uncertainty. The main objective is to target high responsiveness for a supply chain facing high implied uncertainty and efficiency for a supply chain facing low implied uncertainty. Increasing implied uncertainty from customers and supply sources is best served by increasing responsiveness from the supply chain. This relationship can be represented by the zone of strategic fit as shown in Fig.1.4 For a high level of performance, a company should move its competitive strategy and supply chain strategy toward the zone of strategic fit.

37 1.26 Supply Chains and Logistics Management - Responsive Supply Chian Responsiveness Spectrum Zone of S trategic F it Efficient Supply Chain Certain Demand Implied Uncertainty Spectrum Uncertain Demand Fig. 1.4 Finding the Zone of Strategic Fit The next step in achieving strategic fit is to assign roles to various stages of the supply chain, which ensure the appropriate level of responsiveness. Making one stage more responsive allows other stages to focus on becoming more efficient. The best combination of roles depends on the efficiency and flexibility available at each stage. The idea of achieving a given level of responsiveness by assigning different roles and levels of uncertainty to different stages of the supply chain is illustrated in Fig.1.5 Fig. 1.5 shows two supply chains that face the same implied uncertainty but achieve the desired level of responsiveness with different allocations of uncertainty and responsiveness across the supply chain. The first supply chain has a very responsive retailer who absorbs most of the uncertainty, allowing the manufacturer and supplier to be efficient on the other hand.

38 General Features of Supply Chains 1.27 Supplier absorbs the least implied uncertainty and must be very efficient Manufacturer absorbs less implied uncertainty and must be somewhat efficient Supplier Manufacturer Retailer Retailer absorbs most of the implied uncertainty and must be very responsive Supply Chain I Extent of Implied Uncertainty for the Supply Chain Supplier Supplier absorbs the less implied uncertainty and must be somewhat efficient Manufacturer Manufacturer absorbs most of the implied uncertainty and must be very responsive Retailer Retailer absorbs the least implied uncertainty and must be very efficient Supply Chain II Fig. 1.5 Different Roles and Allocations of Implied Uncertainty for a Given Level of Supply Chain Responsiveness The second supply chain has a very responsive manufacturer who absorbs most of the uncertainty, thereby allowing the other stages to focus on efficiency.

39 Index I1 A A-Class items 4.23 ABC Analysis 4.23 Aggregate Planning Strategies3.6 Aggregate Planning Models 3.8 Aggregate Planning 3.1 All Shipments via Distribution centre (DC) 5.14 Average Inventory 4.18 B B-Class items 4.24 Benefits of 3PL 5.5 Bias 2.28 Bin Packing problems 6.9 Bull whip effect C C-Class items 4.24 Capital Cost 4.3 Cellular type layout 3.48 Closed Loop Supply Chain 6.6 Comparison between Q model and P model 4.20 Continuous review 4.83 Cross Docking 6.29 Cycle Service Level (CSL) 4.82 Cycle inventory: 1.9 D Decision Phases 1.2 Demand Planning 2.2 Design Options for a Transportation Network 5.12 Determination Of Safety Inventory4.80 Direct Shipping with Milk runs5.13 Direct Shipment Network 5.12 INDEX Discounting Models 4.28 E Economic Order Quantity (EOQ)4.6 EOQ model 4.71 F Facilities Layout Design 3.44 Facility Location 3.30 Fixed location layout 3.47 Fixed charge problems - location allocation problem 6.12 Forecasting methods 2.18 Forecasting Techniques (Methods)2.5 Forecasting 2.3 Fourth Party Logistics - 4PL5.7 G Graphical Approach 3.8 I Impact of Supply Uncertainty on Safety Inventory 4.94 Information1.13 Inventory Planning Decision 4.2 Inventory 1.8 Inventory Carrying Costs (or) Holding costs 4.5 K Knapsack problem - truck allocation problem 6.19 L Linear programming model 3.14 Logistics Management 5.1 M Managing Multi Echelon Cycle Inventory 4.97