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Summary supply chain management
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- Vrije Universiteit Amsterdam (VU)
summary of the course supply chain management in the MSc Transport and supply chain management
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Summary Supply Chain ManagementBy Pepijn Paans
Student 2016 – 2017
MSc Transport & Supply Chain Management
FACEBOOK: https://www.facebook.com/pepijn.paans
LINKEDIN: https://www.linkedin.com/in/pepijn-paans-6b828a80
EMAIL: Pepijn_paans@live.nl
,SL Chapter 1
The supply chain or logistics network consists of:
- Suppliers
- Manufacturing centres
- Warehouses
- Distribution centres
- Retail outlets
Supply chain management is:
“ A set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses
and stores, so that merchandise is produced and distributed at the right quantities, to the
right locations, and at the right time, in order to minimize system-wide costs while satisfying
service level requirements.”
- Supply chain management takes into consideration every facility that has an impact
on costs and plays a role in making the product conform the customer requirements
- The objective of supply chain management is to be efficient and cost-effective across
the entire system. Total costs are to be minimised.
Difficulty of supply chains:
- Supply chains cannot be determined in isolation, but are affected by for example the
development chain of a new product.
- Minimising system wide costs, while maintaining system wide service levels is
challenging. Finding the best system wide strategy is called global optimization
- Uncertainty and risk are inherent in every supply chain.
The development chain is the set of activities and processes associated with new product
introduction.
The development chain and the supply chain will intersect at the production point of the
newly introduced product.
Different parts of these chains are often managed by different VPs and this might cause
misalignment of product design and supply chain strategies when not carefully addressed.
What makes it hard to find the best globally optimal solution for a supply chain?
- The supply chain is a complex network; it can stretch out all over the world.
- Different facilities in the supply chain frequently have different, conflicting
objectives. For example, suppliers want manufacturers to purchase large quantities
in stable volumes, while manufacturers need to be flexible to their customers’ needs.
- The supply chain is a dynamic system. Customer demand and supplier capabilities
change. Customer power might increase and increase pressure on suppliers and
manufacturers.
, - The system variates over time. Demand and cost parameters vary over time due to
impact of seasonal fluctuations, trends, advertising, competitor’s pricing etc. This
makes it hard to determine the most cost effective supply chain strategy
Managing uncertainty and risk.
Uncertain environments make it even harder to globally optimise a supply chain.
- Matching supply and demand is a major challenge. A manufacturer needs to commit
to a specific production level before the demand is realized and known for a fact.
- Inventory and back-order levels fluctuate considerably across the supply chain
- Forecasting does not solve the problem: it is impossible to predict the exact demand
- Demand is not the only source of uncertainty, also delivery lead times, transport
times and components availability for example.
- Trends such as lean manufacturing, outsourcing and offshoring that focus on cost
reduction increase risk. Natural and manmade disasters, strikes, weather can greatly
impact the supply chain.
Important to effective supply chains are strategic partnerships between suppliers and
buyers.
Also information sharing between supply chain partners helps to better predict demand and
reduce lead times. Moreover, it allows manufacturers to control the variability in the supply
chain.
In the 90s firms started outsourcing parts of the company from the procurement to
production and manufacturing, in order to reduce costs and increase profits.
Successful firms need three critical abilities:
1. The ability to match supply chain strategies with product characteristics (fast
clock speed products vs. slow clock speed products)
2. The ability to replace traditional supply chain strategies by those that yield a
globally optimised supply chain
3. The ability to effectively manage uncertainty and risk
Supply chain management levels
- Strategic level: decisions impacting the firm on the long term. Such as product
design, outsourcing, supplier selection, location and capacity of warehouses etc.
- Tactical level: decisions that are updated typically anywhere between once every
quarter and once every year. Such as purchasing and production decisions, inventory
policies,
- Operational level: day-to-day decisions, such as scheduling, routing, truck loading
RW Chapter 3: Inventory management methods and models
Inventory management boils down to two questions:
, 1. When do we (re-)order
2. How much do we (re-)order
When demand is independent, it is driven by external forces outside of the firm.
In case internal management decisions drive demand, it is said to be dependent demand.
Whether a product or item is an independent or dependent demand item only makes sense
in a given context. For example, for companies that assemble a phone the screen is a
dependent demand item (it depends on the production schedule for phones). The phone
itself however, is an independent demand item in case the same firm also sells the phone to
customers.
Stationary demand remains stable over a planning horizon while non-stationary might vary
and is uncertain over a period of time.
Stationary demand approaches with regard to supply chain management tend to map to pull
systems, whereas the non-stationary approaches map to push systems.
Pull systems react to actual demand and execute replenishments in response to this
demand. Push systems drive replenishments from the schedule of projected future
demands, which will vary over time.
Perpetual demand is where the demand for the item is continuous at a stationary rate per
unit time, infinitely into the future.
Two critical tasks are describing demand and assessing relevant costs
ABC analysis separates inventory into three categories. A items are the most important
items and require the most attention. B items are less important but still require a moderate
level of attention and C items requires the least attention. Usually the item sales revenue or
item cost of goods sold are used as the measure of interest.
The underlying idea is the Pareto principle (20/80). This rule does not always hold, however
it is assumed that about 50% of the items are categorized as C items, 30% as B and 20% as A.
ABC analysis is the most common basis for item classification based on sales activity
(demand).
The Newsvendor problem.
Because demand in the newsvendor problem is uncertain and concentrated into a point e.g.
the time to order newspapers and receive them is longer than the selling period of 1 day.
For these two reasons it is necessary to describe a probability distribution.
Next to the demand we need to describe the relevant costs such as: cost of the item, failing
to fulfil demand, post-selling-period value of the item.
, We need to balance the costs of having too little inventory with the cost of having too much
inventory, the typical inventory decision problem.
We sell a paper for price P, purchase each paper for cost C and the paper has an end of
season salvage value of S
So:
The cost of missing a sale = P – C
The cost of excess units at the end of the selling season = C – S
The optimal order quantity maximizes expect profit, given by:
2 1
𝐸 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑝 − 𝑐 𝐷 − 𝑐 − 𝑠 𝑄 − 𝐷 𝑓 𝐷 𝑑𝐷 + 𝑄 𝑝 − 𝑐 𝑓 𝐷 𝑑𝐷
3 2
To find out our optimal order quantity, we can either minimize this formula, but we can also
conduct a marginal analysis: what are the benefits and risks of ordering another unit?
This is more intuitive and gives more insight into the formula.
We start with Q=1 and continue to order more units, until that action is no longer profitable.
This is where the net difference between the expected cost of ordering another unit (the
cost of overstocking) and the expected cost of not ordering another unit (the cost of
understocking) is zero.
This gives an optimal order quantity of:
𝐶𝑢
𝑄 = 𝐹 56
𝐶𝑢 + 𝐶𝑜
The ratio in the brackets is called the critical ratio.
Service measures in inventory models
Let us denote 𝛼 as the in in-stock probability, or the probability of not stocking out. Also we
denote 𝛽 as the fill rate: the percentage of overall demand that we are able to fulfil.
Extend, we can say that 𝛼(𝑄) is the in-stock probability given that Q units are ordered, and
𝛽(𝑄) the fill rate if Q units are ordered.
𝐶𝑢
𝛼 𝑄 = 𝐶𝑟𝑖𝑡𝑖𝑐𝑎𝑙 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢 + 𝐶𝑜
𝐷−𝑆
𝛽=
𝐷
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