Re-cap

Course: Supply Chain ManagementCourse tutor: Muhammad Hassan Iqbal

Lets ConnectNameEducational BackgroundExperience (Yes/No/Where)Purpose of Taking SCM

Supply Chain Management Concepts Its a world of Global, Complex, Interdependent Chains

Japan earthquake8.9 magnitude, resulting Tsunami 2011People concern raised initiallyWe all are connected..Quake disrupts key supply chains WSJMultinationals warned over Japanese supplies FTDisaster Puts Kink in world SC - LAT

Impacts..Semiconductor factories had their operations affected component shortages, price increasesDisruptions of transportation of finished goods to airports or ports as well as the movement of employees and supplies to production plantsGM, Sony Ericsson & Volkswagen warned in production disruptions and components shortages in medium term.

Conclusion..Actions in one part of the world whether planned, unplanned, human induced or naturally occurring, seem to affect us

HENCE !

Conclusion..

WE ALL ARE CONNECTED VIA CHAIN OF ACTIVITIES WHICH LEADS TO!

Factors affecting these chainsGlobal expansionIncreased project complexity and scopeGreater market Volatility.

What is supply chain?

SC DefinedA global network used to deliver products and services through engineered flow of information, physical delivery and cash.

Global Network ?Deliver products and services ?Engineered flow ?

Basic Supply chainSupplier Manufacturer customer

Basic Supply chain model

Basic Flows In SCInformationcashproductReturn

Basic supply chain flows

Supply Chain Management Defined..There are several definitions of Supply Chain Management available in books and journals. A few of them are as follows According to Jones and Riley SCM focuses on the logistics of supply from the supplier end till it reaches the end user (Jones and Riley, 1985).

Supply Chain Management Defined..In another definition, supply chain management is defined as theInter relatedness and conjuncture of a number of elements that contribute to production, stock, timely delivery of items etc. along the supply chain that lead to its effectiveness and satisfies the ultimate user (Hugos, 2006).

Supply chain by Sunil ChopraA supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and supplier but also transporters, warehouses, retailers and customer themselves. Within each organization, such as a manufacturer, the supply chain includes all functions involved in receiving and filling a customer request.

ExampleSupply Chain cannot work without information flow. Now lets discuss how this works.

Fat SupplierSoap Noodle manufacturerTimber companyPackages/Saima PackagesReckitt BenckiserWarehousesRetailersCustomers

Reckitt BenckiserQuality InspectionManufacturing/Co packersFinanceMarketing and SalesProcurementWarehousing

PURPOSE OF SUPPLY CHAIN..The primary purpose for the existence of any supply chain is to satisfy the customers need while at the same time generating profits for itself. Supply Chain activities begin with a customer order and end when a customer has paid for his or her purchase. The term supply chain makes an image in your mind of product or supply moving from suppliers to manufacturers to distributors to retailers to customers along a chain. It is very important to visualize information, funds and product flows along both the directions of a supply chain

Stages in Supply ChainComponent/Raw material suppliersManufacturersWholesalers/DistributorsRetailersCustomers

Supply Chain StagesSupplierSupplierSupplierManufacturerDistributorRetailerCustomerManufacturerDistributorRetailerCustomerManufacturerDistributorRetailerCustomer

The Objective of a Supply ChainThe objective of every supply chain is to maximize the overall value generated. The value a supply chain generates is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customers request. For most commercial supply chains, value will be strongly correlated with supply chain profitability, the difference between the revenue generated from the customer and the overall cost across the supply chain.

The objective of a supply chainProfit=Revenue Generated-Cost incurred to make the product available for the customer

What the f*** is this..!

Decision Phases in a Supply ChainSuccessful supply chain management requires many decisions relating to the flow of information, product and funds. These decisions fall into three phases or categories which are Supply Chain Strategy or designSupply Chain PlanningSupply Chain Operation

Supply Chain Strategy or DesignDuring this phase a company decides how to structure the supply chain. This strategy and design will be made taking into account the market conditions over the next few years.As a part of this strategy it will include the company locations, capacities of production, warehousing facilities, the products to be manufactured or stored at various locations.

Supply Chain PlanningSupply Chain Planning is done based on the strategy and design which has been implemented. It acts as a guideline for supply chain planning. The planning stage is initiated with a forecast for the coming years of demand in different markets. Planning includes 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 the market promotions. Planning establishes parameters within which a supply chain will function over a specified period of time. In the planning stage companies must include uncertainty in demand, exchange rates and any practice which they think will enhance performance in order to reduce inaccurate forecasts.The time horizon for supply chain planning would be considered from a quarter to a year

Supply Chain OperationsThe time horizon for supply chain operations is weekly or daily and during this phase companies make decisions regarding individual customer orders. At the operational level, supply chain configuration is considered fixed and planning policies are already defined. The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During this phase, firms allocate inventory or production to individual orders, set a date that an order is to be filled, generate pick lists at warehouses.Operational decisions are made in short term, there is less uncertainty about demand information. The main KPI for supply chain operations is to exploit the reduction of uncertainties and optimize performance.

Process View of a Supply ChainA supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. There are two different ways to view the processes performed in a supply chain:Cycle view: The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain.Push/pull view: The process in a supply chain are divided into two categories depending on whether they are executed in response to a customer order in anticipation of customer orders. Pull processes are initiated by a customer order whereas push processes are initiated and performed in anticipation of customer orders.

Cyclic View of Supply Chain ProcessesAll supply chain processes can be broken down into the following four process cyclesCustomer order cycleReplenishment order cycleManufacturing cycleProcurement cycle

Customer Order CycleThe customer order cycle occurs at the customer/retailer interface and includes all processes directly involved in receiving and filling the customers order. Typically, the customer initiates this cycle at a retailer site and the cycle primarily involves filling customer demand. This retailers interaction with customer starts which the customer arrives or contact is initiated and ends when the customer receives the order.

Customer order cycleCustomer arrivalCustomer order entryCustomer order fulfillmentCustomer order receiving

Replenishment CycleThe replenishment cycle occurs at the retailer/distributor interface and includes all processes involved replenishing retailer inventory. It is initiated when a retailer places an order to replenish inventories to meet future demand.The replenishment cycle is similar to the customer order cycle except that the retailer is now the customer. The objective of the replenishment cycle is to replenish inventories at the retailer at minimum cost while providing high product availability.

Replenishment CycleRetail order triggerRetail order entryRetail order fulfillmentRetail order receiving

Manufacturing CycleThe manufacturing typically occurs at the distributor/manufacturer,or(retailer/manufacturer) interface and includes all processes involved in replenishing a distributor (or retailer) inventory. The manufacturing cycle is triggered by customer orders, replenishment orders from a retailer or distributor or by the forecast of customer demand and current product availability in the manufacturers finished goods warehouse.

Manufacturing CycleThe processes involved in the manufacturing cycle are as follows:Order arrival from the finished goods warehouse, distributor, retailer or customerProduction schedulingManufacturing and shippingReceiving at the distributor, retailer or customer.

Procurement CycleThe procurement cycle occurs at the manufacturer/supplier interface and includes all processes necessary to ensure that materials are available for manufacturing to occur according to schedule. During the procurement cycle, the manufacturer orders components from the suppliers that replenish the component inventories. The relationship is quite similar to that between a distributor and manufacturer with one significant difference. Whereas the distributor orders are triggered by uncertain customer demand, component orders can be determined precisely once the manufacturer has decided what the production schedule will be.

Procurement CycleTherefore it is important for the supplier to be linked with the manufacturers production schedule. Of course if a suppliers lead times are long, the supplier had to produce to forecast because the manufacturers production schedule may not be fixed that far in advance.

Push/Pull view of Supply Chain ProcessAll processes in a supply chain fall into one of the two categories depending on the timing of their execution relative to end customer demand. With pull processes, execution is initiated in response to a customer order. With push process execution is initiated in anticipation of customer orders. Therefore at the time of execution of a pull process, customer demand is known with certainty whereas at the time of execution of a push process, demand is not known and must be forecast.

Push/Pull view of Supply Chain ProcessPull process may also be referred to as a reactive process because they react to customer demand. Push processes may also be referred to as a speculative process because they respond to a speculated demand.

Chapter 3 Supply Chain Drivers and Obstacles

Drivers of Supply Chain PerformanceA framework for structuring driversFacilitiesInventoryTransportationInformationSourcingPricing

Drivers of Supply Chain PerformanceWe discussed the importance of responsiveness and efficiency in supply chain for an organisation to meet its competitive edge.However to understand the supply chain performance of an organisation we must examine the four drivers of supply chain performance which are:- FacilitiesInventoryTransportation &Information

FacilitiesFacilities are the places in the supply chain network where product is stored, assembled or fabricated. The two major types of facilities are production sites and storage sites.Whatever the function of the facility, decision regarding location, capacity and flexibility of facilities have a significant impact on the supply chains performance.However the design or the operations of your facility highly depend whether you as an organisation want to be highly responsive or efficient.

InventoryInventory is all raw materials, work in process and finished goods within a supply chain. Inventory is an important supply chain driver because changing inventory policies can dramatically alter the supply chains efficiency and responsiveness.

A clothing retailer can make itself more responsive by stocking large amounts inventory. With large inventory, the likelihood is high that the retailer can immediately satisfy the customer demand with clothes from its floor. A large inventory however will increase the retailers cost, thereby making it less efficient. However reducing the inventory will make the retailer more efficient but will hurt the retailers responsiveness.

TransportationTransportation is moving inventory from one point to another in the supply chain. Transportation can take the form of many combinations of modes and routes, each with its own performance characteristics.Transportation choices have a large impact on supply chain responsiveness and efficiency.

ExampleA mail order catalog company can use a faster mode of transportation like FedEX to ship products thus making their supply chain more responsive but also less efficient given the high costs associated with FedEX. Or the company can use cheaper ground transportation to ship the product, making the supply chain efficient but limiting its responsiveness.

InformationInformation consists of data and analysis concerning facilities, inventory, transportation and customers throughout the supply chain. Information is the potentially the biggest driver of performance in supply chain as it directly affects each of the other drivers. Information presents management with the opportunity to make supply chain more responsive and efficient.

A Framework for structuring drivers

The goal of a supply chain strategy is to strike the balance between responsiveness and efficiency that results in a strategic fit with the competitive strategy. To reach this goal a company uses the four supply chain drivers discussed earlier.

Procurement and Inventory Management

Evolvement of Procurement and Supply ManagementPurchasing has long been considered one of the basic functions common to all organisations. Unfortunately, since senior managements interests historically have focused on marketing, R&D, finance and operations, purchasing was, all too frequently, subordinate to these familiar functions

Evolution of procurementDuring the 1960s and 1970s, purchasing and materials management frequently used manual kardex systems to manage inventory and prevention of line shutdowns. A tertiary issue was the management of inventory

Evolution of procurementBy the end of the decade of the 1970s, the marketplace had become more international, from both marketing and a supply point of view. Computers began to help in the management of inventory. With the impacts, such as oil crisis, increased automation, outsourcing, etc. material costs increased as a percentage of the cost of goods sold.

Evolution of procurementThese transitions brought significant changes in the purchasing responsibilities. Purchasing and materials management began taking on a more important role within manufacturing, institutions, service firms and government. Increased emphasis was placed on the control of inventory.

Evolution of procurementDuring the early 1980s many organisations became profitable largely through much more careful management of their inventories. Computer-generated material requirements plan (MRP) and improved supplier discipline including just-in-time inventory allowed customers to reduce their inventories significantly.

According to Kaufmann, 2002The evolvement of Procurement can be categorised asChildhood and GrowthDominant Function (1946 late 1960s)Corporate Hygiene Factor (late 1960 early 1980s)Source of Competitive Advantages (early 1980s mid 1990s)Take-over Candidate in the Network Era (mid 1990s present)

Childhood and Growth (until and including World War 2)During this period, early publications showed interests in purchasing, though purchasing was generally not recognized as being critical to a firm

Dominant Function (1946 late 1960s)During this period, while there were some remarkable contributions made in the academic lecture, practice did not focus the same level of attention to purchasing

Corporate Hygiene Factor (late 1960 early 1980s)Purchasing gained some recognition but it was narrowly restricted to an operational role of fulfilling the needs and the requirements of the internal customers.However there were Academic milestones during this period which were Ammer:Materials Management and Armold: Supply Management: work on strategic supply management

Source of Competitive Advantages (early 1980s mid 1990s)During this period, experience had especially grown in the automotive industry in terms of implementing sourcing strategies such as just in time deliveries, single vs. multiple sourcing.

Take-over Candidate in the Network Era (mid 1990s present)With core-competence-with-outsourcing strategy, firms have not only to optimize the flow of material, money and information betweens, but also to take a total system perspective in order to reach peak performance of supply chains from the source of raw material to the final customer.

Everyone is an Inventory Manager - Somehow

Each of us stocksFoodPaperDomestic itemsClothesCigarettes

We all know shortages and emergency purchases in case of e.g.Nothing to smokeNothing to drink or eat

And we know the cost of to much stock e.g.When we clean our refrigerator

What is inventory management?Every inventory decouples two processes, the supply process and the demand processSupply ProcessDemand ProcessInventorySupplyThe core of inventory management is the use of information and inventory in order to synchronize supply with demandEffective and Efficient !!!

Objectives of Inventory ManagementInventory is a very expensive asset that can be replaced with a less expensive asset called information.In order to do this, the information must be timely, accurate, reliable and consistent.When this happens, you can carry less inventory reduce cost and get products to the customers faster

High stock levelIncreases deliver Availability

(in general, but)Low stock leveldecreases costs

(in general, but)So, retailers, wholesalers, manufacturing, hospitals and even banks are faced with balancing these objectives.The objectives influence each other!

Things to look at when procuringLegal FactorsTechnological FactorsIndustrial Standards

Legal FactorsDifferent countries and regions conduct different laws and regulations on firms. The main areas of concern in legal factors can be identified, before conducting procurement strategies and practice:Company law and other laws governing the operation of public sector organisationsHealth and safety legislationLaw of carriage and transport

Technological FactorsAre you technologically sound to procure and store a certain item which you are procuring?Advances in technology have opened up new opportunities in the field of storage, transport and distribution, and exploration of these innovations has contributed to improved performance in supply operations. Thus opportunities for improved supply chain performance in this field need to be carefully monitored.

Industrial StandardsTo complete the account of the environment factors to procurement, attention will now turn to the brief identification of the industrial standard factors. Mandatory compliance under a variety of industrial(automotive, chemicals, retail, etc.), environmental, health, safety and customer right protection laws etc. international standards like ISO 9001,9002 etc. and company standards like QS-9000 systems and procedures have posed a tough challenge to procurement managers to reshape procurement strategies.

What is Inventory Management?Inventory is a very expensive asset that can be replaced with a less expensive asset called information. In order to do this the information must be timely, accurate, reliable and consistent. When this happens you can carry less inventory, reduce cost and get products to customers faster.Every inventory decouples two processes, the supply process and the demand process. The core of Inventory Management is the effective and efficient use of information and inventory inorder to synchronize supply with demand

Objectives of Inventory ManagementThe objectives of inventory management include three aspectsCosts: stock costs, transport/handling costs and control costs.Quality: product quality and service quality as well.Time: delivery time and delivery flexibilityThe objectives influence each other, so these objectives should be balanced:High Stock level increased deliver availabilityLow Stock level decreases cost.

Reasons for Holding InventoryFormulation of an inventory requires an understanding of the role of inventory in manufacturing and marketing. Inventory severs five purposes within the firm:It enables firm to achieve economics of scaleIt balances supply and demandIt provides protection from uncertainties in demand order cycleIt acts as a buffer between critical interfaces within the supply chain

Economics of scaleInventory is required if a firm is to realize economics of scale in purchasing, transportation and manufacturing. For example, raw material inventory is necessary if the manufacturer is to take advantage of the per-unit price reductions associated with volume purchases. The reasons for holding finished goods inventory are similar to reason for holding raw material.Transportation economies are possible with large volume shipments, in order to take advantage of these economical rates.

Balancing supply and demandSeasonal supply and/or demand may make it necessary for a firm to hold inventory. In case of building chocolates, the seasonal inventories may be stored in a freezer. This may be done because the raw material would be available only at certain times during the year. Doing this would make it necessary to manufacture finished products in excess of current demand and hold them in inventory, unless raw material can be purchased from parts of the world with different seasons

Cost Drivers in the Supply ChainSupply Chain Management can be defined as a distribution channel of information and material from the customers customer to the suppliers supplier. Throughout this distribution channel, there is a lot of cost involved which supply chain management focuses on decreasing.

According to a definition of Supply Chain Management it focuses on adding value to a certain product while at the same time decreasing the cost.

For Example if an automotive industry requires steel plates for fabrication purposes, it will place an order with the steel mill but one should keep in mind that there is a cost linked with the transportation of the steel plates. Keeping this in mind, the automotive industry with the steel scrap collected over a certain period of time should be transported to the steel mill on the same vehicle which had come with the order of steel plates as the steel mill is always in need of steel scrap for the production of steel. This would not only decrease the cost of transportation for the steel mill but also reduce the actual cost of the steel plates as there is a selling of the scrap at the same time. This reduction in cost would affect the cost involved for both the organizations and help in a good supplier relationship.

Looking at the example according to Supply Chain Management this would be decreasing the cost with the help of maintaining the cost drivers.

In this competitive market where there are certain suppliers offering a better deal than other suppliers in order to take over the market share and there is more and more demand from the customer, not only do the costs need to be taken out but at the same time measures should be taken to improve the operating efficiency of the organization although because of the competition and shorter product life cycles, this is becoming difficult. [1]

According to a journal, there are many companies in South Africa who have not understood or identified the costs associated in their Supply Chains and because of this the supply chain of several organizations in South Africa have been affected. This affect to the supply chain would not only affect the financial side of the organizations but would make it difficult for the organizations to strive in this competitive world. So, in order to deal with this problem, these organizations should recognize the costs associated within the Supply Chain and also maintain it to survive in the market. [1]

Hewlett-Packard has understood the affect of cost in the Supply Chain, so in order to improve their operating performance and to increase their levels of customer satisfaction they are focusing on managing the cost in the Supply Chain. [2]

The activities of supply chain management which include plan, make, source and deliver are the activities which have costs associated with. There are costs for Planning, making, sourcing and delivering.Today efforts are being put in to manage the costs associated with the activities mentioned above in order to save on money and increase the overall performance of the organizations.

At Hino-Pak a Pakistani, Automotive Manufacturer and Assembler conducted a study at their assembling unit to identify the time required for a skilled labor to do a welding job so that they could cut down on the overtimes to reduce cost. Therefore, a Time Study was conducted and the time required for a skilled labor to do the welding job was calculated and on the basis of this the overtimes were cut. This time study not only helped the organization to decrease the cost in the supply chain but also contributed to the overall operating performance by increasing the efficiency.

The Cost and Cost Driver in Supply Chain Management

We have been talking since the beginning of our lecture that there is a lot of cost involved in the Supply Chain but the question which arises now is that Why is there a cost in the Supply Chain? and if there is a cost , Why does the cost increase?. This cost is present in the supply chain because of a number of factors. These factors if affected can cause the cost to grow. These factors are known as cost drivers.

There are many costs in the Supply Chain; a few of them are as follows

Transportation Costs

Quality Costs

Warehousing Costs

Planning Costs

Manufacturing Costs

Costs for Acquiring new Technology

And Many more

All of these Costs have a driving force associated with them and if the driving forces are affected they will cause the costs to go up, hence giving a negative impact on the Supply Chain.

Transportation Cost:

For instance, the cost driver of the transportation cost would be to choose from the mode of transport which is to be used. If a certain product has to be transported by road, it would be less costly however if that product was urgently needed and had to be transported via air, it would cause the cost to go up.An incident took place at Toyota Motor Manufacturing (UK) Ltd. in Derby which caused the cost in the supply chain to go up. As everyone knows about Toyota following Just-In-Time, their supply of raw material comes in when it is needed. The Supply was coming in and suddenly the motorways got clogged up and hence blocking the only mode of transportation used by Toyota which is by road. Due to this, a big problem rose up at Toyota because they were short of raw material. They started to get their raw material via air, with the help of a helicopter which increased their cost very high. They had to stop the assembly eventually because it was becoming very expensive for them. This also probably affected the other costs as they had also increased simultaneously because of this delay.

Quality Costs

The Costs in Quality are related to the Quality of the end product and the cost drivers for increasing the quality costs would be probably poor quality raw material and in order to deal with this something like supplier development should be taken into consideration.Break Downs of Machines or Faulty Machines could also be cost drivers for increasing the Quality Costs therefore preventive maintenance could be taken into consideration for this.

Warehousing Costs

Warehousing Costs are related with the Inventory being kept in the warehouse. The more inventories there are the more warehousing costs there is.Andre Khler a visiting faculty and a tutor for the Procurement and Inventory Management Module at the Warwick Manufacturing Group at the University of Warwick, refers to a warehouse as an empty cupboard. He says that if your cupboard is full, you will buy a bigger cupboard and eventually that will also become full because one will keep on stuffing clothes in the cupboard. So, according to him the bigger the warehouse, the more warehousing cost attached to it.

So if we try to cut down on warehousing costs we can do it. There are techniques available today which are helping in cutting down the warehousing cost. One technique available to reduce the Warehousing Cost can be Vendor managed Inventory but one is just shifting the cost from his responsibility to the supplier.The cost driver for the increase in warehousing cost would be because of poor forecast and hence there is more material stacked up in the warehouse. Late Deliveries to the customer would result in more finished goods to be stocked in the warehouse which can be because of many reasons for example in places where there are transport strikes and all.

Planning Costs

Planning costs can go high if a certain event is planned and it does not come out the way it was planned. In the same way there can be many other drivers which can cause a direct affect on the planning costs. A Planning Software which does not work or stops working properly could cause the planning cost to go up.Implementation of Planning Softwares like ERP does cause planning costs to be high in the early stages of its implementation.

Manufacturing Costs

In a Manufacturing Organization, there are a lot of drivers which can cause the manufacturing costs to go up. A few of the manufacturing cost drivers would be break-down of machines, unskilled labor, power break downs in places like India and Pakistan and many more.

Cost of Acquiring New Technology

An organization which is acquiring a new technology might have a lot of cost drivers which would affect the cost of acquiring that technology. This would be for example because of the resistance to the change from the employees due to which the employees would have to be trained.

Another scenario could be that if the organization would have obsolete computers and would require latest computers because the technology or the software would on work on the latest computers.The Supply Chain costs and its cost drivers would be different for different organizations. When referring to interoperability where a lot of research is being done at the moment, there are different costs associated with it [3]

Designing the SC Network

Role of Distribution in SCDistribution refers to the steps taken to move and store a product from suppliers stage to customers stage in SCKey driver of overall profitability of firm because it affects both SC costs and customer experience directlyThe appropriate distribution network can be used to achieve a variety of SC objectives ranging from low cost to high responsiveness, as a result companies in same industry often use different distribution networks

ExamplesDell Directly to consumers (wait several days to get a PC)HP Distribute through resellers (consumer can walk in and get a PC from reseller any time)Unilever Directly to IMT / LMT but with an additional stage to GT.

Factors influencing distribution N/W designPerformance of DN should be evaluated on 2 dimensionsCustomer needs that are metCost of meeting customer needsThe customer needs that are met influence the companys revenues, which along with cost decide the profitability of the delivery network

Customer service componentsResponse time amount of time it takes for a customer to receive an orderProduct variety number of different product/configurations that are offered by the DNProduct availability probability of having a product in stock when a customer order arrivesCustomer experience includes the ease with which customer can place and receive orders as well as the extent to which this experience is customized

Customer service componentsTime to market time it takes to bring a new product to the marketOrder visibility ability of customer to track their orders from placement to deliveryReturnability ease with which a customer can return unsatisfactory merchandise and the ability of the N/W to handle such returns.

Firms that target customers who can tolerate a long response time require only a few locations that may be far from the customer. These companies can focus on increasing the capacity of each location In contrast, firms that target customers who value short response times need to locate facilities close to them Thus, a decrease in the response time customer desire increases the number of facilities required in the N/W

Relation with costsChanging the DN design affects the following SC costsInventoriesTransportationFacilities and handlingInformation

costsA decrease in response time customer desires increases the number of facilities required in a NWAs the number of facilities increase, the inventory and resulting inventory costs also increase.

Relationship BW response time and number of facilities

Relationship BW inventory costs and number of facilities

Transportation CostsInbound transportation costs are the costs incurred in bringing material into facilityOutbound transportation costs are the costs of sending material out of facilityOutbound transportation costs per unit tend to be higher than inbound costs because inbound lot sizes are typically largerIncreasing the number of warehouse locations decreases the outbound average distance to the customer and makes outbound transportation distance a smaller fraction of the total distance travelled by the productThus, as long as inbound transportation economies of scale are maintained, increasing the number of facilities decreases total transportation costs

Relationship BW Transportation costs and number of facilities

If the number of facilities increase to a point where inbound lot sizes are also very small and result in significant loss of economies of scale in inbound transportation, increasing the number of facilities increase total transportation costFacility cost decrease as the number of facilities is reducedTotal logistics costs are the sum of inventory, transportation and facility costs for a supply chain network. As the number of facilities increases total logistics cost first decrease and then increase. Each firm should have at least the number of facilities that minimize total logistics costs. As a firm wants to reduce the response time to its customers further, it may have to increase the number of facilities beyond a point that minimizes logistics costs. A firm should add facilities beyond the cost minimizing point only if its managers are confident that the increase in revenues because of better responsiveness is greater than the increase in costs because of the additional facilities

Relationship b/w Number of Facilities and Facility Cost

Design Options for a Distribution NWManufacturer storage with direct shippingProduct is shipped directly from the manufacturer to the end consumer, bypassing the retailer (who takes the order and initiates the delivery request). This option is also referred to as drop shipping with product delivered directly from the manufacturer to the customer. Best suited for large variety of low demand, high value items for which customers are willing to wait for delivery and accept partial shipment

Performance characteristics of direct shipping NWInventory : lower costs because of aggregation. Benefits of aggregation are highest for low demand, high value items.Transportation : higher transportation costs due to increased distance and disaggregate shippingFacilities and Handling : lower facility costs because of aggregation. Some saving on handling costs if manufacturer can manage small shipments or ship from production line.Information : significant investment on infrastructure to integrate manufacturer and retailer

Performance characteristics of direct shipping NWResponse Time : long around one or two weeks due to increased distance and two stages of order processing. Response time may vary with product, thus complicating receiving Product variety : easy to provide a high level of varietyProduct availability : easy to provide high product availability because of aggregation at manufacturer.

Performance characteristics of direct shipping NWCustomer experience : good in terms of home delivery but can suffer if order from several manufacturers is sent as partial shipmentsTime to market : fast, with the product available as soon as the first unit is producedOrders visibility : more difficult but more important from a customer service perspective

Performance characteristics of direct shipping NWReturnability : expensive and difficult to implement

Manufacturer storage with direct shipping and in-transit mergeUnlike pure drop shipping under which each order is sent directly from its manufacturer to the end customer, in transit merge combines pieces of the order coming from different locations so that the customer gets the single delivery.For example when a customer orders a PC from dell along with a sony monitor, the package carrier picks up the PC from dell factory and the monitor from the sony factory, it then merges the two together at a hub before making a single delivery to the customer.It is best suited for a low to medium demand, high value items the retailer is sourcing from a limited number of manufacturers.

Performance char Manufacturer storage with direct shipping and in-transit mergeInventory : similar to DSTransportation : lower than DSFacilities and handling : handling costs higher than DS at carrier, receiving costs lower at customerInformation : investment is higher than DSResponse time : Marginally higher than DSProduct Variety : similar to DSProduct availability : similar to DSCustomer experience : better than DS because a single order is receivedTime to market : similar to DSOrder visibility : similar to DSReturnability : similar to DS

Distributor storage with carrier deliveryUnder this option inventory is not held by manufacturers at the factories but is held by distributors/retailers in intermediate warehouses, and packaged carriers are used to transport products from the intermediate location to the final customer. It is well suited for medium to fast moving items. It also makes sense when customer want delivery faster than is offered by manufacturer storage but do not need it immediately.

ExampleAmazonInventory is held at a warehouse which ship to customers by carriers With respect to direct shipping, inventory aggregation is less, higher inventory costs, facility costs are higher, less information to trackWarehouses are physically close to customers which leads to, faster response time, lower transportation costsNot effective for slow moving items.

Distributor storage with last mile deliveryLast mile delivery refers to the distributor/retailer delivering the product to the customers home instead of using a packaged carrierIn areas with high labor costs, its very hard to justify distributor storage with last mile delivery on the basis of high efficiency and low margin. It can only be justified if there is a large enough customer segment willing to pay for this convenience. An effort should be made to couple last mile delivery with an existing distribution NW to exploit economies of scale and improve utilization.

ExampleMilk & grocery DeliveryWarehouse delivers to customer instead of carrierWarehouses are located closer to consumersTransportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scaleWarehouse may need to own a trucking fleet so the physical infrastructure costs are higher. Products must be flowing fast to justify the infrastructureProcessing cost are high

Manufacturer or distributor storage with customer pickupInventory is stored at the manufacturer or distributor warehouse but consumers place their orders online or on phone and then travel to designated pickup points to collect their merchandise, orders are shipped from the storage sites to pickup points as needed. Such a NW is likely to be most effective if existing locations such as coffee shops convenience stores or grocery stores are used as pickup sites, because this type of NW improves the economies from existing infrastructure.

Customers come to pick up sites (warehouse, retailer) to get the productsIf consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costsOrder tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located. Significant amount of information is requiredIncreased handling cost

Retail storage with customer pickupExample: Retail stores such as Wal-Mart Customers pick up product from retailersLow transportation costHigh facility costRelative easy returnabilityIncreased inventory costNo order tracking necessaryIf the product is available at the retailer, the consumer buys. Otherwise goes to another retailerEffective for fast moving items

Comparison 1=strongest performance6= weakest performance