Term II: Supply Chain Management (SCM)
Session 1: Introduction to Supply Chain Management
Rohit Gupta
Operations Management Area
Email: [email protected]
Evaluation Scheme
Components Weightage
End-Term Exam 40 %
Quizzes 10 %
Project/Assignments 30 %
Class Participation/Case
20 %
study
What is a Supply Chain?
All stages involved, directly or indirectly, in fulfilling a customer request
Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers
Within each company, the supply chain includes all functions involved in fulfilling a
customer request (product development, marketing, operations, distribution, finance,
customer service)
Customer is a prime mover or key enabler of a supply chain
Includes movement of products from suppliers to manufacturers to distributors, but also
includes movement of information, funds, and products in both directions
Probably more accurate to use the term “supply network” or “supply web”
Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers
All stages may not be present in all supply chains
Importance of Supply Chain Management
Improve Customer Services
Customers expect to receive the correct product mix and quantity to be delivered on time.
Products need to be on hand in the right location.
Follow up support after a sale must be done quickly.
Reduce Operating Costs
Decrease in Purchasing Cost
Decrease in Production Cost
Decrease in Total Supply Chain Cost
Improve Financial Position
Insert Profit Leverage
Decrease Fixed Assets
Increases Cash Flow
Benefits of effective supply chain management
Better collaboration
Improved quality control
Higher efficiency rate
Keeping up with demand
Shipping optimization
Reduced overhead costs
Improved risk mitigation
Improved cash flow
Flows in a Supply Chain
Information
Product
Customer
Funds
Upstream and Downstream Movement
Upstream
Downstream
Pre- Manuf.
Suppliers Warehouses Customers
assembly Plants
Amul Supply Chain
VCS: Village Cooperative Societies; GCMMF: Gujarat Co-operative Milk Marketing Federation Ltd.
The Objective of a Supply Chain
Maximize overall value created
Supply Chain Surplus = Customer Value – Supply Chain Cost
Example: a customer purchases a wireless router from Amazon for $60 (revenue)
Supply chain incurs costs (information, storage, transportation, etc.)
Difference between $60 and the sum of all of these costs is the supply chain profit
Supply chain profitability is total profit to be shared across all stages of the supply chain
Success should be measured by total supply chain profitability, not profits at an individual stage
Customer the only source of revenue
Sources of cost include flows of information, products, or funds between stages of the supply
chain
Effective supply chain management is the management of flows between and among supply
chain stages to maximize total supply chain surplus
Decision Phases of a Supply Chain
Supply chain strategy or design
How to structure the supply chain over the next several years
Supply chain planning
Decisions over the next quarter or year
Supply chain operation
Daily or weekly operational decisions
Supply Chain Strategy or Design
Decisions about the structure of the supply chain and what processes each stage will perform
Strategic supply chain decisions
Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems
Supply chain design must support strategic objectives
Supply chain design decisions are long-term and expensive to reverse – must take into account
market uncertainty
Supply Chain Planning
Definition of a set of policies that govern short-term operations
Fixed by the supply configuration from previous phase
Starts with a forecast of demand in the coming year
Planning decisions:
Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting, backup locations
Inventory policies
Timing and size of market promotions
Must consider in planning decisions demand uncertainty, exchange rates,
competition over the time horizon
Supply Chain Operation
Time horizon is weekly or daily
Decisions regarding individual customer orders
Supply chain configuration is fixed and operating policies are determined
Goal is to implement the operating policies as effectively as possible
Allocate orders to inventory or production, set order due dates, generate pick
lists at a warehouse, allocate an order to a particular shipment, set delivery
schedules, place replenishment orders
Much less uncertainty (short time horizon)
Process views of a Supply Chain
Cycle View: processes in a supply chain are divided into a series of
cycles, each performed at the interfaces between two successive supply
chain stages.
Push/Pull View: processes in a supply chain are divided into two
categories depending on whether they are executed in response to a
customer order (pull) or in anticipation of a customer order (push)
Cycle View of Supply Chain Processes
It defines the processes involved and the owners of each
process.
Process in a supply chain is divided into a series of
cycles and these cycles are performed at the interface
between two successive stages of a supply chain.
All Supply chain Processes can be broken down into the
following four process cycles:
Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
A cycle view of the supply chain is very useful when
considering operational decisions. It clearly specifies the
roles and responsibilities of each member of the supply
chain. It helps the designer to consider the infrastructure
required to support the processes.
Cycle View of Supply Chain and information flow
A customer order cycle takes place when orders are processed, prepared, and shipped.
The replenishment cycle concerns the steps involved to re-supply outlets from
distribution centers and wholesalers.
The manufacturing cycle concerns the scheduling of production in light of the demand
from distributors.
The procurement cycle involves the scheduling of the components required in the
manufacturing of a good.
Push/Pull View of Supply Chains
Push/Pull View: processes in a supply chain are divided into two categories depending on
whether they are executed in response to a customer order (pull) or in anticipation of a
customer order (push)
Push/Pull View of Supply Chain Processes
Supply chain processes fall into one of two categories depending on
the timing of their execution relative to customer demand
Pull: execution is initiated in response to a customer order (reactive)
Push: execution is initiated in anticipation of customer orders
(speculative)
Push/pull boundary separates push processes from pull processes
Useful in considering strategic decisions relating to supply chain
design – more global view of how supply chain processes relate to
customer orders
Supply Chain Decisions based on SC structure
Decentralized Decision Making
w
Manufacturer (M) Retailer (R) q a bp
cm
Profit of Manufacturer 𝜋𝑀 = 𝑤 − 𝑐𝑚 ∗ 𝑞 = 𝑤 − 𝑐𝑚 ∗ 𝑎 − 𝑏𝑝
Profit of Retailer 𝜋𝑅 = 𝑝 − 𝑤 ∗ 𝑞 = 𝑝 − 𝑤 ∗ 𝑎 − 𝑏𝑝
Profit of Supply Chain 𝜋𝑆𝐶 = 𝜋𝑀 + 𝜋𝑅
Optimal Profit and SC parameters calculation
Assumption: Manufacturer is the Stackelberg leader in the SC and retailer is the follower.
Using the backward induction method to calculate optimal profit and SC parameters.
𝜕𝜋𝑅 𝑎 + 𝑤𝑏
=0 𝑝(𝑤) =
𝜕𝑝 2𝑏
𝑎 + 𝑤𝑏 𝑎 − 𝑤𝑏
𝑞 = 𝑎 − 𝑏𝑝 = 𝑎 − 𝑏 ∗ =
2𝑏 2
𝑎 − 𝑤𝑏
𝜋𝑀 = 𝑤 − 𝑐𝑚 ∗
2
𝜕𝜋𝑀 ∗
𝑎 + 𝑏𝑐𝑚
=0 𝑤 =
𝜕𝑤 2𝑏
Where, 𝑤 ∗ represents the optimal wholesale price per unit
1 1 𝑎 + 𝑏𝑐𝑚 𝑎 − 𝑏𝑐𝑚
𝑞 = 𝑎 − 𝑤𝑏 = 𝑎 − 𝑏 =
2 2 2𝑏 4
𝑎 − 𝑏𝑐𝑚 3𝑎 + 𝑏𝑐𝑚
∗
𝑞 = 𝑝∗ =
4 4𝑏
Where, 𝑞∗ and 𝑝∗ represents the optimal order quantity and retail price respectively
Putting the value of 𝑞∗ and 𝑤 ∗ in 2
manufacturer profit function, we get the ∗
𝑎 − 𝑏𝑐𝑚
∗ 𝜋𝑀 =
optimal profit of manufacturer (𝜋𝑀 ) 8𝑏
Putting the value of 𝑝∗ , 𝑤 ∗ , and 𝑞∗ in 2
∗
𝑎 − 𝑏𝑐𝑚
retailer profit function, we get the 𝜋𝑅 =
optimal profit of retailer (𝜋𝑅∗ ) 16𝑏
3 𝑎 − 𝑏𝑐𝑚 2
∗ ∗
Optimal Profit of SC 𝜋𝑆𝐶 𝜋𝑆𝐶 =
16𝑏
Centralized Decision Making
w
Manufacturer (M) Retailer (R) q a bp
cm
Profit of Supply Chain 𝜋𝑆𝐶 = 𝑝 − 𝑐𝑚 ∗ 𝑞 = 𝑝 − 𝑐𝑚 ∗ 𝑎 − 𝑏𝑝
Optimal Profit and SC parameters calculation
𝜕𝜋𝑆𝐶 ∗
𝑎 + 𝑏𝑐𝑚
=0 𝑝 =
𝜕𝑝 2𝑏
𝑎 − 𝑏𝑐𝑚
𝑞∗ =
2
𝑎 − 𝑏𝑐𝑚 2
∗
𝜋𝑆𝐶 =
4𝑏
