Contents

History Of SCM (Session 1) 3

Meaning Of SCM 3
THE OBJECTIVE OF A SUPPLY CHAIN 4
Supply Chain Structure 4
Decision Phases in a supply Chain (Session 2) 5
Process view of a Supply Chain 5
Cycle View of Supply Chain Processes 6
Push/Pull View of Supply Chain Processes 6
Competitive and Supply Chain Strategies 7
ACHIEVING STRATEGIC FIT (Session 3) 8
CUSTOMER AND SUPPLY CHAIN UNCERTAINTY 8
UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES 8
DRIVERS OF SUPPLY CHAIN PERFORMANCE 9
OBSTACLES IN SUPPLY CHAIN PERFORMANCE 10
Transportations, Facility decisions and Network design in supply chain 11
The Role of Transportation (Session 4) 11
MODES OF TRANSPORTATION 11
Air Transportation (Session 5) 12
Package Carriers 12
Truck 12
Rail 13
Water 13
Pipeline 13
Intermodal 14
Design Options for Transportation Network 14
Direct Shipment Network to Single Destination 14
Direct Shipping with Milk Runs (Session 6) 15
All Shipments via Intermediate Distribution Center with Storage 15
All Shipments via Intermediate Transit Point with Cross-Docking 15
TRADE-OFFS IN TRANSPORTATION DESIGN 16
 Transportation and Inventory Cost Trade-Off 16
Transportation and Inventory Cost Trade-Off 16
Trade-off Between Transportation Cost and Customer Responsiveness 16
TAILORED TRANSPORTATION 17
RISK MANAGEMENT IN TRANSPORTATION 17
Routing and Scheduling in Transportation 17
Classification of Routing and Scheduling Problems 17
Inventory Management and Risk Pooling 18
Introduction (Session 7) 18
Reason for Inventory 18
Types of Inventory 18
Inventory Costs 19
Independent vs Dependent Demand 19
Single Warehouse Inventory 19
The Economic Lot Size Model (Session 8) 19
Lot Sizing of Process Batches 20
The Effect of Demand Uncertainty (Session 9) 22
The Value of Information 25
What is Bullwhip Effect? (Session10) 25

Supply Chain Management

Reference book - Supply Chain Management - Sunil Chopra and Peter- Prentice Hall – 2006
Designing and Managing the Supply Chain David Simchi-Levi, Philip Kaminsky and Edith Simchi-Levi, Tata
McGraw Hill. 2004

History Of SCM (Session 1)

Meaning Of SCM
Definition by the APICS Dictionary, when it defines SCM as the “design, planning,
execution, control, and monitoring of supply chain activities with the objective of creating net
value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing
supply with demand and measuring performance globally.”

Supply chain management is expected to handle all the movement and storage of raw
materials, work-in-progress inventory, and finished goods from point-of origin to
point-of-consumption. Supply Chain Management is primarily concerned with the efficient
integration of suppliers, factories, warehouses and stores so that merchandise is produced and
distributed in the right quantities, to the right locations and at the right time, and so as to
minimize total system cost subject to satisfying service requirements.

THE OBJECTIVE OF A SUPPLY CHAIN

Efficient supply chain management would work to improve the tangible business benefits.
The main characteristic of an effective supply chain would be measured by the revenue
growth. The effectiveness could also measure by the amount on cost reduction achieved by
the company by maximizing the usage of all related assets. The revenue growth would result
in overall increase in the value generated to customers which is known as supply chain
surplus. Supply chain surplus is the difference between what cost paid by the customer and
the expenses on the supply chain what company incurs in meeting the customer’s request.

Supply Chain Surplus = Customer Value – Supply Chain Cost

Examples of a Service supply chain (Amazon or Zomato, Apollo hospital), Product supply
chain (Tata motors)

Supply Chain Structure

Decision Phases in a supply Chain (Session 2)

(Example case to explain Strategy, Planning and operation -
https://stories.flipkart.com/100-electric-mobility-by-2030-flipkart-drives-towards-sustainabili
ty-with-ev100/ )
The success of any supply chain management depends on the choices relating to the flow of
information, product, and funds. Each choice and related decision should be made to create
value to the customer. These decisions fall into below three categories, depending on the
frequency of each decision and effectivity of the decision.

1. Supply Chain Strategy or Design

2. Supply Chain Planning
3. Supply Chain Operation

Supply chain strategic decisions would be made for the long term by the supply chain
companies. These strategic decisions include whether to outsource supply chain or not,
investment decisions on improving capability and capacities of warehousing facilities, the
decisions on transportation modes to be used and extent of information system utilization in
supply chain function to keep the process updated. These decisions take in to account the
anticipated uncertainty in market conditions over the next few years.

Planning decisions are made would be effective for a quarter to a year. The planning
decisions aims to maximize the value to the customer keeping in mind the strategic plans.
Planning decisions includes the setting up the warehouse and distribution centres for a
specific geographical market, the inventory related decisions.

The supply chain operation decisions would be taken about weekly or daily activities of
supply chain like fulfilling individual customer orders in best possible way. This is achieved
by allocating appropriate inventory to customer orders as per the fulfilment dates,
warehouse management, deciding a particular shipping mode as per the customer order etc.
All activities aimed to reduce the uncertainty and enhance the performance.

Process view of a Supply Chain

Since supply chain is a sequence of processes which can be viewed in two ways to
understand the steps performed in a supply chain.

1. Cycle View: The processes in a supply chain are divided into a successive cycle. Each
cycle is performed at the interface of the next successive stage of a supply chain.

2. Push/Pull View: The processes in a supply chain are divided into two stages either as a
response to a customer order or in anticipation of customer orders. Pull processes are initiated
by a customer order and push processes are initiated in anticipation of customer orders.

Cycle View of Supply Chain Processes

all supply chain processes can be broken down into the following four process cycles

● Customer order cycle

 ● Replenishment cycle
● Manufacturing cycle
● Procurement cycle

For example, an automobile supply chain in which a retailer stocks finished vehicle
inventories and places replenishment orders with a distributor is likely to have all four cycles
separated.

A retail supply chain like Grofers or a computer manufacturer like DELL, in contrast,
bypasses the retailer and distributor when it sells directly to customers.

Supply Chain Process Cycles

Push/Pull View of Supply Chain Processes

The processes in a supply are divided in two categories. In pull processes, the supply chain
steps are initiated after receiving a customer order. This would be a reactive process.

Whereas in push processes, the supply chain steps are initiated expecting a customer order.
The expectation of demand would be based on a forecasting process.
Competitive and Supply Chain Strategies
A company’s competitive strategy defines, relative to its competitors, the set of customer
needs that it seeks to satisfy through its products and services.

1. Wal-Mart, D-Mart
2. McMaster-Carr, Alibaba
3. Bluestone, Tanishq & Caratlane

Supply chain strategy includes a specification of the broad structure of the supply chain
which elaborates “supplier strategy,” “operations strategy,” and “logistics strategy.” It also
includes strategic decisions regarding inventory, transportation, operating facilities, and
information flows.
ACHIEVING STRATEGIC FIT (Session 3)
Refer to the examples from Session 1 - Examples of a Service supply chain (Amazon or
Zomato, Apollo hospital), Product supply chain (Tata motors)

Strategic fit means the alignment of a supply chain strategies of a company with competitive
strategies. Both should work for customer delight. Thus, to fulfil customer expectation
achieving a strategic fit is a necessity. Strategic fit would be the consistency between
customer priorities of competitive strategy and supply chain capabilities specified by the
supply chain strategy.

Strategic fit is achieved by structuring the processes of different functions in a company to

execute the overall strategy of a company. These processes at each stage must be aligned to
support the supply chain strategy of the company. Achieving strategic fit would be to
understand what is the right supply chain for the company’s product? Would it be a
responsive supply chain or a cost-effective supply chain or to address implied demand
uncertainty.

CUSTOMER AND SUPPLY CHAIN UNCERTAINTY

Understanding the customer and supply chain uncertainty is important to achieve strategic fit.
Understanding customer (demand) uncertainty is the first step. The demand varies along
certain attributes like quantity in each lot, response time, variety of products needed, service,
price, innovation, etc –

Implied demand uncertainty is the demand uncertainty due to the portion of demand that the
supply chain is targeting, and not the entire demand or customer need. This causes implied
demand uncertainty. When the range of quantity a supply chain could handle increase, there
will be an increase response time and vice versa. Another way of looking are implied demand
uncertainty would be when multiple supply chains supplying the same product in a specific
market. Multiple supply chains exist to satisfy variety of demands attributes of a customer
base. A restaurant supplying food product, say food is supplied 24 hours from a limited menu
versus a firm that supplies food during day hours from a bigger menu.

The supply chain uncertainty is also strongly affected by the life-cycle of the product. The
new products in market have higher supply uncertainty because designs and production
processes are still evolving whereas the products existing in market have less supply
uncertainty.

UNDERSTANDING THE SUPPLY CHAIN CAPABILITIES

Next question to be answered would be how does the enterprises handle the demand
uncertainty? Few companies respond to customer demand by having a responsive supply
chains which gives the companies the following capabilities:

● Meet the demand across product varieties

● Reduction in lead time
● Innovation to bring unique products in to market
 ● To handle demand uncertainty with improved service levels

It implies that a responsive supply chain can effectively addresses the implied uncertainty in
demand.

DRIVERS OF SUPPLY CHAIN PERFORMANCE

The strategic fit requires a balance between responsiveness and efficiency which in turn
expected to support the company’s competitive strategy.

1. Facilities that supports the supply chain.

This driver determines the type of supply chain company wants to operate. The supply
chain can be made very responsive by building warehouse or factories that have
excess capacity and use flexible techniques to produce and store a wide range of
items. To be even more responsive, the company could have their warehouse or
production facilities in many smaller capacities that are close to major groups of
customers so that delivery times would be shorter.
If efficiency was the mail goal of the supply chain, then a company can build
warehouse or factories with limited excess capacity and have those warehouse or
factories optimized for producing a specified range of items. Further efficiency can
also be gained by centralizing warehouse and production capabilities in a large central
plant to get better economies of scale, even though delivery times might be longer.
2. Inventory policies to meet supply chain’s efficiency and responsiveness
Responsiveness would be the result of having high levels of inventory for a wide
range of products. Responsiveness could be improved further by inventorying the
products at many locations close to customers and available to them instantly.
Efficiency can be achieved by in reducing inventory levels of the items that do not
have frequent demand.
3. Transportation choices
Responsiveness can be achieved by a transportation mode that is fast and flexible
such as trucks and airplanes. The responsiveness directly varies with cost spent on
achieving responsiveness. Amazon and Flipkart in India is expanding and operating
their own transportation services as it is a high volume market and responsiveness
could be a differentiator for customer retention.
4. Information
Supply chain service providers are heavily dependent on information exchange to add
value for customers and other stakeholders. Information would be critical to supply
chain performance as it provides the basis on which supply chain process optimization
happens. Processed information would be the basis for efficient decision making for
the supply chain managers. Information would be the basis for what customers want,
how much inventory would be stored, and for routing optimization for distribution
and delivery.
5. Sourcing
 Sourcing would be the decision to involve an other service providers to optimize
supply chain processes. For a supply chain function, the most significant decision
would be to decide whether outsource the function or perform it in-house.
6. Pricing
Pricing regulates the amount to charge customers in a supply chain. Pricing strategies
always varies based on demand and supply. Many companies use pricing strategies to
decide to be an efficient or responsive supply chain, as per choice of the customer.

OBSTACLES IN SUPPLY CHAIN PERFORMANCE

1. Increase in variety of products and ease of availability

Increased variety of products and their ease of availability had raised the uncertainty
in supply chain performance. As a result of this uncertainty supply chains are
suffering from increased cost and decreased responsiveness

2. Decreasing product life cycles

Customers are demanding new and improved products with reduced cost, thus forcing
the companies come up with new products in to market frequently. This makes the job
supply chain more difficult as supply chain must continually adjust to new product
delivery requirements in addition to coping with these product’s demand uncertainty

3. Expectations from demanding customers

Customers are demanding new and improved products with reduced cost, thus forcing
the companies come up with new products in to market frequently. Also the customers
are demanding faster delivery rates, improved quality and better performing products
for the same price they paid for the similar products in past. This means that supply
chain must provide better performance than the previous time just to stay in business,
with out adding any extra cost.

4. Outsourcing supply chain processes

Recently supply chain firms have started outsourcing part the supply chain processes
to optimize cost. As a result there are more players in supply chain processes for
providing services, making the entire process complicated to coordinate.

5. Globalization

Globalization has opened up the supply chains to reap the benefits reaching out the
supply chain players beyond borders. Sourcing from a global base of suppliers would
offer better and cheaper goods which in turn making coordination much more
difficult. Removal of trade barrier has resulted in increased competition due to
involvement of global companies

6. Difficulty executing new strategies

The ongoing digital revolution has brought lot more challenges in technological front.
This industrial revolution would be demanding the supply chain companies to come
up with new strategies to embrace new technologies.
 Transportations, Facility decisions and Network design in supply
chain

The Role of Transportation (Session 4)

(refer - http://www.iimmmumbai.org/index.php/knowledge-center/article/role-of-supply-chain-for-india-vision2020)

Transportation refers to the movement of product from one location to another as it makes its
way from the beginning of a supply chain to the customer.

Transportation is an important supply chain driver because products are rarely produced and
consumed in the same location. Transportation is a significant component of the costs
incurred by most supply chains.

✔ The Economies of the Asian region are growing at fast pace in the global economies.
✔ Asia has three big economies - China, Japan & India.
✔ Asia’s share in the world GDP exceeds that of European Union & the US.
✔ The fastest growing economies of the world, China & India contributed 73% to the
Asian growth and 38% to the World GDP growth.

India 2020 is of a country with a well-developed network of roads and railways and adequate
capacity to handle the growth in demand for transport.

The Role of Transportation in Supply Chain

The shipper would be the part of any supply chain who requires the movement of the product
between two points. The carrier would be the part of any supply chain who moves or
transports the product.

To understand the role of transportation in a supply chain, it is essential to consider the

perspectives of shipper and the carrier. A carrier makes investment decisions regarding the
transportation means (locomotives, trucks, etc.) and then makes all his operating decisions to
maximize the profit from these assets. A shipper, on the other hand uses these transportation
means to minimize the total cost (transportation, inventory, information, sourcing, and
facility) while providing an appropriate level of responsiveness to the end customer. Consider
the examples of Amazon Prime example, Bluedart vs Indian Postal Services example – to
understand the role of transportation in Supply Chain

Seven-Eleven (Japan) Case discussion,

MODES OF TRANSPORTATION
Supply chains use a combination of the following modes of transportation:

1. Air
2. Package carriers
3. Truck
 4. Rail
5. Water
6. Pipeline
7. Intermodal

The effectiveness of any mode of transport is affected investments and operating costs by the
carrier with the available infrastructure and transportation policies.

Air Transportation (Session 5)

Major airlines carry both passenger and cargo. Airlines have three cost components:

Air carriers offer a fast and fairly expensive mode of transportation for cargo. Small,
high-value items or time-sensitive emergency shipments that have to travel a long distance
are best suited for air transport.

Package Carriers
Package carriers are transportation companies such as FedEx, UPS, and the Indian Postal
Service,

Package carriers are the preferred mode of transport for online businesses such as Amazon
and Dell, that send small packages to customers. With the growth in online sales, the use of
package carriers has increased significantly over the past few years. Package carriers seek out
smaller and more time-sensitive shipments than air cargo carriers, especially when tracking
and other value-added services are important to the shipper.

Key issues in this industry include the location and capacity of transfer points and
information capability to facilitate and track package flow. For the final delivery to a
customer, an important consideration is the scheduling and routing of the delivery trucks.

This Photo by Unknown Author is licensed under CC BY-SA

Truck
In most of the world, trucks carry a significant fraction of the goods moved. The trucking
industry consists of two major segments—truckload (TL) or less than truckload (LTL).

Trucking is more expensive than rail but offers the advantage of door-to-door shipment and a
shorter delivery time. It also has the advantage of requiring no transfer between pickup and
delivery. TL operations have relatively low fixed costs, and owning a few trucks is often
sufficient to enter the business. The challenge in the TL business is that most markets have an
imbalance of inbound and outbound flows.
Rail
Indian Railway's carried 1,108 billion tonnes of freight annually, as of 2017. Rail carriers
incur a high fixed cost in terms of tracks, locomotives, cars, and yards. The price structure
and the heavy load capability make rail an ideal mode for carrying large, heavy, or
high-density products over long distances. Transportation time by rail, however, can be long.
Rail is thus ideal for heavy, low-value shipments that are not time sensitive

The East Coast Railway (ECoR) conducted an experiment with 2-Km-Long 'Python Rake'
Train In Odisha – which contained 147 Wagons & 4 Engines.

Water
Water transport takes place via the inland waterway system or coastal waters. Water transport
is ideally suited for carrying large loads at low cost. water transport is used primarily for the
movement of large bulk commodity shipments and is the cheapest mode for carrying such
loads. The Inland Waterways Authority of India (IWAI) came into existence on 27th October
1986 for development and regulation of inland waterways for shipping and navigation.

India has about 14,500 km of navigable waterways which comprise of rivers, canals,
backwaters, creeks, etc. About 55 million tons of cargo is being moved annually by Inland
Water Transport (IWT),

The Government of India is working to develop inland waterways as an alternative mode of

transport in the country, which is cleaner and cheaper than both road and rail transport.

Pipeline
Pipeline is used primarily for the transport of crude petroleum, refined petroleum products,
and natural gas. A significant initial fixed cost is incurred in setting up the pipeline and
related infrastructure that does not vary significantly with the diameter of the pipeline.
Pipeline operations are typically optimized at about 80 to 90 percent of pipeline capacity.
Given the nature of the costs, pipelines are best suited when relatively stable and large flows
are required.
The data from 2014 gives a total of 2,175,000 miles (3,500,000 km) of pipeline in 120
countries of the world

Intermodal
Intermodal transportation is the use of more than one mode of transport to move a shipment
to its destination. A variety of intermodal combinations are possible, with the most common
being truck/rail.

Intermodal traffic has grown considerably with the increased use of containers for shipping
and the rise of global trade. Containers are easy to transfer from one mode to another, and
their use facilitates intermodal transportation. Containerized freight often uses truck/
water/rail combinations, particularly for global freight. For global trade, intermodal is often
the only option because factories and markets may not be next to ports

Design Options for Transportation Network

The design of a transportation - regarding scheduling, network affects the performance of a
supply chain and routing are made.

1. Should transportation be direct or through an intermediate site?

2. Should the intermediate site stock product or only serve as a cross-docking location?
3. Should each delivery route supply a single destination or multiple destinations (milk
run)?

Based on the answers to these questions, the supply chain ends up with a variety of
transportation networks.

Direct Shipment Network to Single Destination

With the direct shipment network to a single destination option, the buyer structures the
transportation network so that all shipments come directly from each supplier to each buyer
location, as shown in Fig.
The major advantage of a direct shipment transportation network is the elimination of
intermediate warehouses and its simplicity of operation and coordination

Direct Shipping with Milk Runs (Session 6)

A milk run is a route on which a truck either delivers product from a single supplier to
multiple retailers or goes from multiple suppliers to a single buyer location, as shown in Fig.

Direct shipping provides the benefit of eliminating intermediate warehouses, whereas milk
runs lower transportation cost by consolidating shipments to multiple locations on a single
truck.

All Shipments via Intermediate Distribution Center with Storage

Under this option, product is shipped from suppliers to a central distribution center where it is
stored until needed by buyers when it is shipped to each buyer location, as shown in Fig.
Storing product at an intermediate location is justified if transportation economies require
large shipments on the inbound side or shipments on the outbound side cannot be
coordinated.

All Shipments via Intermediate Transit Point with Cross-Docking

Suppliers send their shipments to an intermediate transfer point where goods are
cross-docked and sent to buyer locations without storing them. The product flow is similar to
that shown in previous figure except that there is no storage at the intermediate facility.
Shipping via DC Using Milk Runs

milk runs can be used from a DC if lot sizes to be delivered to each buyer location are small.
Milk runs reduce outbound transportation costs by consolidating small shipments.

Tailored Network

The tailored network option is a suitable combination of previous options that reduces the
cost and improves responsiveness of the supply chain. Here transportation uses a combination
of cross-docking, milk runs, and TL and LTL carriers, along with package carriers in some
cases.

TRADE-OFFS IN TRANSPORTATION DESIGN

All transportation decisions made by shippers in a supply chain network need to take into
account their impact on inventory costs, facility and processing costs, the cost of coordinating
operations, and the level of responsiveness provided to customers.

1. Transportation and inventory cost trade-off

2. Transportation cost and customer responsiveness trade-off

Transportation and Inventory Cost Trade-Off

The trade-off between transportation and inventory costs is significant when designing a
supply chain network. Two fundamental supply chain decisions involving this trade-off are

✔ Choice of transportation mode

✔ Inventory aggregation

CHOICE OF TRANSPORTATION MODE - Selecting a transportation mode is both a

planning and an operational decision in a supply chain. Faster modes of transportation are
preferred for products with a high value-to-weight ratio (mobiles) for which reducing
inventories is important, whereas cheaper modes are preferred for products with a small
value-to-weight ratio (furniture) for which reducing transportation cost is important..

Transportation and Inventory Cost Trade-Off

INVENTORY AGGREGATION (Amazon same day delivery if ordered before given time)
helps firms can significantly reduce the safety inventory they require by physically
aggregating inventories in one location. Most online businesses use this technique to gain
advantage over firms with facilities in many locations.

Trade-off Between Transportation Cost and Customer Responsiveness

The transportation cost a supply chain incurs is closely linked to the degree of responsiveness
the supply chain aims to provide to customers. If the responsiveness can find a balance
between grouping orders for a time period before shipping them out, the supply chain would
be able to take advantage of economies of scale with a lower transportation cost because of
bigger grouped shipments. This concept of combining orders across time is known as
Temporal aggregation.
TAILORED TRANSPORTATION
Tailored transportation is the use of different transportation modes based on customer
requirement and product characteristics. Most firms sell a variety of products and serve many
different customer segments.
1. Transportation cost based on total route distance
2. Delivery cost based on number of deliveries

RISK MANAGEMENT IN TRANSPORTATION

There are three main types of risk during transporting a shipment between two nodes:

1. The risk of shipping getting delayed

2. The risk of external forces
3. The risk of hazardous material

It is important to identify the causes of risk and their consequences and plan suitable
mitigation strategies.

Routing and Scheduling in Transportation

The supply chain routing and scheduling of deliveries poses important challenge during
planning. With a set of customer orders and respective routes, the plan aims to, route and
schedule the deliveries with minimum costs with shortest route.

Classification of Routing and Scheduling Problems

Traveling Salesman Problem (TSP) Given a set of cities and distance between every pair of
cities, the problem is to find the shortest possible route. Traveller visits every city exactly
once and returns to the starting point.

TSP has several applications such as - vehicle routing problems, logistics, planning and
scheduling

Multiple Traveling Salesman Problem is an extension of the TSP used when a fleet of
vehicles have to be routed from a single depot.

Vehicle Routing Problem (VRP) is a MTSP with capacity restriction of the multiple vehicles
coupled with varying demands at each node.
 Inventory Management and Risk Pooling
Introduction (Session 7)
Inventory Management is a method for planning and controlling inventory from the raw
material stage to finished goods inventory and till it reaches customer. Different inventories
includes:

1. Outbound Inventory
2. Inbound Inventory
3. Physical inventory
4. POS
5. Returns
6. Return to vendor (RTV)

Two fundamental questions that inventory management trying to address is - How much to
order and when to order

Reason for Inventory

Any enterprise use inventory to improve supply-demand management and to reduce overall
costs. Inventories also help companies handle demand and lead time uncertainties.

By keeping inventory companies:

✔ improve customer service

✔ encourage production economies
✔ act as a protection against prices changes
✔ provides safety during emergencies

Types of Inventory
There are three types of inventories:

1. raw material inventory

2. works-in-progress inventory
3. finished goods inventory

Cycle Inventory – inventories for satisfying predicted demand between replenishments

In-transit / pipeline Inventory– items that are on the way from one location to another.

Safety or buffer Inventory – held in addition to cycle stock to address uncertainty in demand
or lead time.

Seasonal Inventory – inventory kept to mee the demand during seasonal period begins or
ends

Dead stock - obsolete products, demand season ended, etc).

Demand information, would be the basis to determine quantity of raw material and
work-in-progress inventory are required to produce the finished product.

Inventory Costs
1. Inventory Carrying Costs – Includes capital cost, storage space cost, inventory service cost
and inventory risk
2. Order/ Setup Costs – costs associated with placing and receiving orders.
3. Shortage cost – The cost of not having product available when a customer demands or
needs it.
4. In-transit Inventory carrying Costs – Trade-off between higher cost of fast delivery versus
the cost of the product in transit.

Independent vs Dependent Demand

Independent Demand - The demand for item is independent of the demand for any other item
in inventory. Basically independent demand would be the demand for a finished product,
such as a mobile, a laptop, or a car

Dependent Demand - The demand for item is dependent upon the demand for some other
item in the inventory. Basically demand for component parts or subassemblies required to
produce the finished product. Example would be the tyres required to produce a specific
number of cars.

Single Warehouse Inventory

A warehouse is a huge commercial place which is used to store the goods.

The single warehouse used to store all types of inventory starting from raw materials,
work-in-progress goods and finished goods. Usually these types of ware houses located in
proximity to markets which enables a firm to be very responsive to customer demands.
Warehouse activities include - Receiving goods, Identifying the goods, Dispatching goods to
storage, holding goods, Picking goods, Marshalling the shipment, Dispatching the shipment,
Operate an information system.

The Economic Lot Size Model (Session 8)

Most companies try to find a balance between the ordered quantity and the order cost. This
order quantity is generally called lot or lot size. Economic Lot Size (ELS) is a method to
decide the lot quantity to make the total cost minimum by considering the balance between
ordering cost and inventory carrying cost, which are contradictory.

ELS is the quantity of material or units of a manufactured product that can be produced or
purchased within the lowest unit cost range. It is determined by integrating the volume
discount (unit cost decreases with increase in number of units ordered) with the associated
increasing unit cost due to the costs of handling, storage, insurance, interest, etc.
Costs associated with Lots

1. Setup costs:

2. Order cost: Cost of placing and receiving an order from a supplier

3. Holding cost:

✔ storage (rent, lease, mortgage, utilities, maintenance, etc.)

✔ tracking and monitoring of inventory
✔ Damage/theft
✔ interest on money to produce or procure the material
✔ opportunity costs on the money tied up in inventory

Lot Sizing of Process Batches

Lot-for-lot

✔ The size of the lot matches exactly to the amount required (ordered or forecasted)
during a particular time period.
✔ Expected to result in high setup or ordering costs
✔ Can be used to manage both independent or dependent inventory demands.

Example:
Total cost = Ordering cost (OC) + Carrying cost (CC)
OC = Rs 300/order
CC = Rs 4/unit/year = Rs 0.333 /unit/month

Inventory required/Month wise

Month 1 = 400 units

Month 2 = 600 units
Month 3 = 1000 units
Month 4 = 800 units
Month 5 =1200 units
Month 6 = 900 units

Total = 4900 units (adding inventory requirements for all months)

Total cost = 6*300 + (4900/2)*1/3 = Rs 2616.667

Period Order Quantity (Part Period Balancing)

✔ Part period balancing method tries to reduce the number of orders by combining
orders over a period of time. In this method the demand for the upcoming period also
combined with the current demand only if it would be economical to include them in
the current lot.
✔ This method starts with a predetermined order quantity and frequency and then arrives
at an optimized lot size by combining the demand of successive orders.
✔ Since we would be combining upcoming demand with the current lot itself, it results
in fewer orders being placed, but it results in additional inventory carrying cost.

Example:

Period (month) 1 2 3 4 5 6 7 8 9 10

Demand 10 15 12 16 15 12 18 14 22 16

Order cost = Rs 150. Carrying cost = Rs 2 per item per period (based on average)
Economic order quantity (Refer EOQ model from operations management)

✔ This method gives most economical lot size for a given demand period.
✔ This method helps to optimize sum of setup cost and holding costs

Assumptions for economic lot size models:

1. Demand for the product is constant at the rate of D items per day
2. Setup cost is fixed
3. Lead time (time from ordering to receipt) is constant or zero
4. Price per unit of product is constant.
5. Inventory holding cost is based on average inventory.
6. All demands for the product will be satisfied. (No backorders are allowed)
7. Initial inventory is zero
8. Planning horizon is long

The Effect of Demand Uncertainty (Session 9)

When a service provider could not predict the customer demand for its products or services
accurately the service provider is said to be suffering from effect of demand uncertainty. Due
to demand uncertainty mainly affects inventory ordering.

• Inventory planning mainly depends on forecasted demand, made far in advance of the
selling season
• The companies/service providers are aware of demand uncertainty during the forecast.
Even then the companies/service providers are forced to proceed as though forecast truly
represents reality fearing the stock out situations.
• The other important aspect which leads to demand uncertainty would be the short product
life cycles and increase in product variety.

This demand uncertainty raises the level of safety inventory which increases product
availability but on the other hand level of safety inventory increases inventory holding costs.

For any supply chain planning of safety inventory is very critical which would help service
providers to answer:

✔ level of product availability to meet customer demand?

✔ Amount of safety inventory needed for the desired level of product availability?
✔ Consider other methods to improve product availability which helps to reduce safety
inventory?

Single Period Models

A single period inventory model would be used by many companies that order seasonal or
one-time items. There is only one chance to get the quantity right when ordering, as the
product has no value after the time it is needed. (Example – Ballot papers, Newspaper etc).
The company's aim would be to get the order right the first time to minimize the chance of
loss.

Multiple Order Opportunities

In this the process would always be having a fixed lead time for delivery after distributor
places an order. Distributor will hold the inventory, to address the random demand from the
retailer and the fixed lead time from manufacturer. The Inventory would become essential -

● To satisfy demand occurring during lead time

● To protect against uncertainty of demand
● To balance annual inventory holding costs and annual fixed order costs

Companies usually use any of the below methods to manage inventory effectively and the
distributor needs to decide when and how much to order.

● Continuous review policy

● Periodic review policy

In continuous review policy, would be monitored continuously usually using a computer

system. The order is placed when the existing inventory reaches reorder point. This type of
policy is most appropriate for retail shops.

In periodic review policy the inventory level is assessed at regular intervals and an
appropriate quantity is ordered after each review. Here we define two inventory levels s and
S. During each inventory review, if inventory position falls below s, order enough to raise the
inventory position to S.

The company decide the target inventory level called – base stock level, and each review
period the inventory position is reviewed and the company orders enough to raise the
inventory position to the base stock level.
Risk Pooling
One of the powerful tools used to address variability is the concept of risk pooling. Risk
pooling suggests that demand variability is reduced if a company aggregates demand across
locations.

As we aggregate demand across different locations, it becomes more likely that high demand
from one customer would be offset by low demand from another. This reduction ability
allows a decrease in safety stock and therefore reduces average inventory.

The idea behind risk pooling is to redesign the supply chain, the production process, or the
product to either reduce the uncertainty in inventory management. Companies usually employ
any of the pooling techniques to optimize the inventory and transportation costs - location
pooling, product pooling, lead time pooling, capacity pooling
 The Value of Information
What is Bullwhip Effect? (Session10)
The bullwhip effect would be a distribution channel phenomenon in which demand forecasts
yield supply chain inefficiencies. It refers to increasing swings in inventory in response to
shifts in consumer demand as one moves further up the supply chain. The concept first
appeared in Jay Forrester's Industrial Dynamics in 1961 and thus it is also known as the
Forrester effect. Variability of demand amplified as we move up the supply chain from the
retailer to the distributor to the manufacturer to the suppliers.

Due the bullwhip effect the supply chain suffers from :

● Increased inventory
● Overtime production and idle production scheduling
● Excessive or insufficient capacity
● Poor customer service due to unavailable products
● Expedited shipments

The below mentioned five areas of supply chain management contribute to increased demand
variability which would lead to bullwhip effect

● Forecasting (Forecast Updates)

● Lead Times
● Order Batching
● Price Fluctuations
● Inflated orders
Methods for Coping with Bullwhip Effect – Usually companies use below methods to reduce
the impact of bullwhip effect:

● Reduce uncertainty
● Reduce demand variability
● Reduce lead-times
● Establish strategic partnerships
● Information sharing
● Channel alignment
● Operational efficiencies.

Highest priority would be to reduce uncertainty. Usually to reduce uncertainty companies

share consumption data with upstream members, share point of sale (POS) data to distributors
and manufacturers, use electronic data interchange EDI and internet to share data.

Few supply chain companies employ any of the below methods to reduce uncertainty -
vendor managed inventory or continuous replenishment programs, direct sale techniques to
get downstream demand info.