Week 2: SCDrivers & DNDesign

Lecture 1: Supply Chain Drivers

Strategic fit: balance btw responsiveness and efficiency.

• SC structure should deal w implied demand uncertainty.

• Examine logistical and cross-functional drivers of supply chain performance: Facilities,
Inventory, Transportation, Information, Sourcing, Pricing.

Drivers of SC Performance: their goal is to increase supply chain surplus, using logistical
and cross-functional drivers (NOT independent, they interact).

Example: IKEA

• The goal: to deliver a low price and acceptable quality. Modular design and unassembled
furniture (Low component variety) Stable replenishment orders, Low-cost transportation.
• By reducing the packaging size of Ektorp sofa by 50% Annual saving of 1.2m Euro.

Example: Walmart, reliable, low-cost retailer for a wide range of mass-consumption items.

• This strategy dictates efficiency and responsiveness.

• Cross-docking, Low level of inventory at warehouse; more efficient than responsive.
• Higher cost of transportation (own fleet); more responsive. One DC feeds a group of stores
(facility).
• Information technology; high investment, supports responsiveness. Efficient sources with
large orders from Walmart; economies of scale. Keep the prices as low as possible.
•

Facilities: physical locations in the SC network where product is stored, assembled or

fabricated. Ex: production sites and storage sites.

• Role in the Supply Chain: Direct influence on the level of responsiveness. More facilities, less
transportation cost but more facilities and inventory cost.
• Components of Facilities Decisions: they decide on the following matters:
o Flexible capacity can be used for many types of products but is often less efficient or
dedicated capacity. This can be used for only a limited number of products but is
more efficient.
o A product-focused facility performs all functions (e.g., fabrication and assembly)
needed for producing a single type of product or a functional-focused facility. A
functional-focused facility performs a given set of functions (e.g., fabrication or
assembly) on many types of products.
o At cross-docking facilities, inbound trucks from suppliers are unloaded; the product is
broken into smaller lots and is quickly loaded onto store-bound trucks. For storage
facilities, firms must decide on the products to be stored at each facility.
 • Location: A basic trade-off when deciding on the location is whether to centralize to gain
economies of scale or to decentralize to become more responsive by being closer to the
customer.
• Capacity A large amount of excess capacity allows the facility to respond to wide swings in
the demands placed on it. Excess capacity, however, costs money and therefore can
decrease efficiency.
• Facility related metrics: Facility-related decisions affect both the financial performance (e.g.,
price, selling) of the firm and the supply chain’s responsiveness to customers.

Example: Toyota and Honda (facility in every major market), IKEA vs Seven-Eleven Japan.

• In 2014/2015, De Bijenkorf closed branches in Arnhem, Groningen, Enschade, Breda, and Den
Bosch. Bc these where luxury products that were not consumed in the area. Expensive to keep
up.
• In 2020, Amazon will open its second fulfillment center in the Madrid region in early fall.
• Honda (flexible, producing SUVs and cars on the same line).

Inventory: All raw materials, work in process, and finished goods within a supply chain.

• Role in the Supply Chain: match the supply and demand, roducing in large quantities to fulfill
the future demand, increases responsiveness, little’s law, I = DT, D: throughput, T: material
flow time, I: inventory.
• Components of Inventory Decisions: Cycle inventory, Safety inventory, Seasonal inventory,
Level of product availability, Inventory-related metrics (Average inventory, inventory turns,
...)Example: Amazon (best-selling books vs slow-moving books).
o Cycle inventory is the average amount of inventory used to satisfy demand between
receipts of supplier shipments. The size is a result of the production, transportation,
or purchase of material in large lots.
o Safety inventory is inventory held in case demand exceeds expectation; it is held to
counter uncertainty. If the world were perfectly predictable, only cycle inventory
would be needed.
o Seasonal inventory is built up to counter predictable seasonal variability in demand.
Companies using seasonal inventory build up inventory in periods of low demand
and store it for periods of high demand, when they will not have the capacity to
produce all that is demanded.
o Level of product availability is the fraction of demand that is served on time from
product held in inventory. A basic trade-off is made between the cost of inventory to
increase product availability and the loss from not serving customers on time.
o Inventory-related decisions affect the cost of goods sold, the C2C cycle, the assets
held by the supply chain, and its responsiveness to customers. A manager should
track inventory-related metrics that influence supply chain performance.
• Inventory has a significant impact on the material flow time in a supply chain. Material flow
time is the time that elapses between the point at which material enters the supply chain to
the point at which it exits. For a supply chain, throughput is the rate at which sales occur.
These three elements can be combined using little’s law as follows: I = DT —> i:
inventory, t: flow time, d: throughput.

Example: Amazon holds on average 100,000 units in stock, sells 1,000 units per day.

• According to Little’s law an item spends 100,000/1,000=100 days on average in inventory.

Transportation: moving inventory from point to point in the supply chain, affects
responsiveness and efficiency.

• Role in the Supply Chain: Moves products between stages, Faster transportation, higher cost
but also higher level of responsiveness.
• Components of Transportation Decisions:
o Design of transportation network is the collection of transportation modes,
locations, and routes along which product can be shipped. Design decisions also
include whether or not multiple supply or demand points will be included in a single
run.
o Choice of transportation mode is the manner in which a product is moved from one
location in the supply chain network to another. Each transportation method has
different characteristics with respect to the speed, size of shipments, cost of
shipping, and flexibility that lead companies to choose one particular mode over the
others.
o Transportation-related metrics: (Average inbound/outbound transportation cost,
average inbound/outbound shipment size) Inbound transportation decisions affect
the cost of goods sold, whereas outbound transportation costs are part of the selling,
general, and administrative expenses.

Example: Blue Nile uses FedEx.

Information: data analysis concerning facilities, inventory, transportation, costs, prices, and
customers throughout the supply chain.

• Role in the Supply Chain: To increase responsiveness and reduce costs; Walmart and cross-
docking, airlines and discounted seats.
• Components off information Decisions: Demand planning, Coordination and information
sharing, Sales and operations planning, Information-related metrics (Forecast horizon,
frequency of updates, forecast error, ...)
• Push versus Pull: Push systems start with forecasts that are used to build the production
schedule and roll it back, creating schedules for suppliers with part types, quantities, and
delivery dates. Pull systems require information on actual demand to be transmitted
extremely quickly throughout the entire chain so production and distribution of products can
reflect the real demand accurately.
• Coordination and information sharing: Supply chain coordination occurs when all stages of a
supply chain work toward the objective of maximizing total supply chain profitability based
on shared information. Lack of coordination can result in a significant loss of supply chain
surplus.
• Sales and operations planning (S&OP): The process of creating an overall supply plan
(production & inventories) to meet the anticipated level of demand. The S&OP process starts
with sales and marketing communicating their needs to the supply chain, which, in turn,
communicates to sales and marketing whether the needs can be met, and at what cost.
• Enabling technologies: Many technologies exist to share and analyze information in the
supply chain. Managers must decide which technologies to use and how to integrate them
into their supply chainExample: Airlines and discounted seats.

Example: DHL (140,000 destinations in more than 220 countries) Centralised integrated
system (previously it was decentralised), 40% reduction in infrastructure.
Sourcing: is the choice of who will perform a particular supply chain activity, such as
production, storage, transportation, or the management of information.

• Role in the Supply Chain: To purchase goods and services, Responsive or efficient source,
Internal source or third party.
• Components of Sourcing Decisions:
o In-house or outsource: Most significant sourcing decision for a firm is whether to
perform a task in- house or outsource it to a third party.
o Supplier selection: Managers must decide on the number of suppliers they will have
for a particular activity. They must then identify the criteria along which suppliers will
be evaluated and how they will be selected.
o Procurement: The process of obtaining goods and services within a supply chain.
o Sourcing-related metrics: (days payable outstanding, average purchase price...)
Sourcing decisions have a direct impact on the cost of goods sold and accounts
payable. The performance of the source also affects quality, inventories, and
inbound transportation costs.

Example: Zara, Boeing 787.

• Was planned to take-off in 2008, First commercial flight in 2011, 56 airlines were
disappointed (total order of $144 billion).
• The mistake: outsourcing engineering and construction before the product was fully designed.
$2 billion cost.

Pricing: determines how much a firm will charge for the goods and services that it makes
available in the SC.

• Role in the Supply Chain: How much to charge the customer, Influences the customer
expectation, Could be used to match supply and demand Example: Amazon (different
shipping services).
• Components of Pricing Decisions: Pricing and economies of scale, Every day low pricing vs
high-low pricing, Fixed price vs menu pricing, Source-related metrics (profit margins, days
sales outstanding, ...)
o Pricing and economies of scale: Most supply chain activities display economies of
scale. The provider of the supply chain activity must decide how to price it
appropriately to reflect these economies of scale.
o Everyday low Pricing versus high-low Pricing: The two pricing strategies lead to
different demand profiles that the supply chain must serve.
o Fixed Price versus Menu Pricing: A firm must decide whether it will charge a fixed
price for its supply chain activities or have a menu with prices that vary. If marginal
supply chain costs or the value to the customer vary significantly along some
attribute, it is often effective to have a pricing menu.
o Pricing-related Metrics: Pricing directly affects revenues but can also affect
production costs and inventories, depending on its impact on consumer demand.

Guest Lecture: SC Planning

Peter Csontos SIOP Manager (sales inventory operations manager) EMEA. Boston
Scientific. SC Planning.

How to calculate risks? Shock exposure (what u cant control) X vulnerability (what u can
control) = Risk in SC.

• What you can control: demand planning and inventory, supplier network structure
transportation and logistics bottlenecks.
• The role: ensure realistic sales forecast thus the right mic of inventory available at the right
time to support sales.
• By controlling the inventory levels, we reduce the working capital, limit the risk of
obsolescence and back orders.

Why hold inventory? Economics of scale (fix costs of ordering/ manufacturing, quantity
discounts), offsetting uncertainty (info uncertainty, supply/demand uncertainty), seasonal
variability, strategic inventory (life saving product, bridge stock).

Conflicting goals (he has to make sure there is not too much or too like on the inventory).

• Sales and marketing: they wanna serve as wide customer basis as possible.
• Production: they wanna produce of the same as much as possible to eventually reduce cost
and become efficient.
• Purchasing: sign contract and negotiate lower price, remove uncertainty. Buy larger volume
for discount.
• Finance: make sure there is a working capital.
• Distribution/ warehousing: store as much as possible bc they are measured by cost per
volume.

Optimum inventory: consider lead time for replenishment. Always have safety stock to
cover for demand fluctuations.

First phase: build inventory (buffer against demand variability…), request longer term
payments (AP), negotiate shortest payment terms (AR).

Second phase: supply disruptions (establish short communications lines w key stakeholders,
proactively map out your global sc vulnerabilities) , volatile demand on the market
(shortening the forecasting cycle, leverage quick =market intelligence, make resource
allocation quickly), different geographies (apply learnings from one country to the other,
decentralize inventory).

Third phase: resiliency (supplier diversification, network design, portfolio design),

automation (manufacturing distribution, demand planning), risk management (tier 2+
suppliers, demand or indoor sharing, inventory), agility (flexible orders, faster planning
cycles, shorter lead times).

Lecture 2: DNDesign
 1. Distribution Network Design

Distribution: the steps taken to move and store a product from the supplier stage to the
customer stage in a supply chain. It can be raw materials moved from supplier to
manufacturer or finished products moved from manufacturer to the end customer.

• A key driver of the overall profitability of a firm, It affects both the SC cost and customer
value. Ex: Cement industry (India): Distribution cost is about 30% of production and sale; The
apparel retail industry: Distribution affects about 35% of the revenue.
• Choice of distribution network can achieve supply chain objectives from low cost to high
responsiveness. Ex: Walmart and Seven-Eleven Japan, smart distribution = success.
• Two phases of designing a distribution network: visualizing the broad network (number of
stages and their role) and speci7fying the details (location, capability, capacity, demand
allocation).

Examples: P&G, Dell vs HP, Gateway vs Apple.

• P&G: direct distribution to large supermarkets, extra stage when distributing to small players.
• Dell (direct delivery to customer) vs HP (sale through retailers).
• Gateway (direct delivery to customer from factory) vs Apple (sale through retailers).
• Bol.com to open a new fulfillment center in September 2017 Lidl to lease a new warehouse in
Breda starting in 2019.

Example: M&S to shake-up clothing supply chain with new centre (Reuters, January 17,
2018).

• M&S is going to open a new logistics centre in 2019, in Welham Green, to make their supply
chain faster with lower cost, It will serve 150 M&S stores, will be operated by a third-party
logistics supplier.
• In the current setting, M&S moves the items more than once to reach stores. M&S to close
distribution center, putting 450 workers at risk (The Guardian, April 17, 2018). M&S has now
closed 47 shops out of the 100 it plans to shut by 2022 (BBC, May 3, 2019).

Examples: Giant, Walmart, Kellogg.

• Giant announced in 2018 to open a new DC in Lelystad, 13.5m Euros, fast-growing demand
for e-bikes.
• Walmart to open a new DC in Alabama (June, 2018), 135m Dollars, To supply DCs that all in
all feed 800 stores.
• Kellogg to close nearly 39 DCs, Eliminate 1,000 Jobs (June, 2017) • Decrease sales since 2013,
will save 425m to 475m Dollars in 2018, 600m to 700m Dollars in 2019.

Performance of a distribution network (how to evaluate?): Value provided to the customer,

Cost of meeting customer needs.

• Distribution network structure has an influence on the following elements of customer value:
response time, product variety, product availability, customer experience, time to market,
order visibility, returnability.
• Does a customer always want highest level of performance along all these dimensions?
 • Purchasing a book from: Amazon (product variety), Barnes & Noble stores (response time).
There is always trade-off between the dimensions of customer value.
• Changing the distribution network design mainly affects the following supply chain costs:
Inventories, Transportation, Facilities and handling, Information. (These are the supply chain
drivers.)

Factors influencing distribution network designing

• Number of facilities and inventory cost. The inventory level and its cost increase when the
number of facilities increases in a supply chain. Firms try to consolidate their facilities to
fewer number. With a fewer numbers of facility Amazon turns inventory twice as frequently
as Barnes & Noble.
• Number of facility and transportation: inbound and outbound transportation costs.
• Number of facilities and facility cost. Facility costs decrease as the number of facilities is
reduced: Fixed cost due to installing facility, Economies of scale with fewer facilities.
• Total logistics costs are the sum of inventory, transportation and facility costs.

Design options for a distribution network: one of these designs must be used:

1. Manufacturer storage w direct shipping.

• Advantages: the retailer carries no inventory, manufacturer can postpone customization.

Centralizing inventory at manufacturer.
• Issue: ownership structure.
• Drop-shipping is the best option for high-value, low-demand items with unpredictable
demand. Ex: Nordstrom drop-ships low-demand shoes. Information flows from the
customer, via the retailer, to the manufacturer.
• Performance characteristics.

2. Manufacturer storage w direct shipping & in transit merge.

• In transit Merge Network: under direct shipping, a costumer may receive Dell PC and Sony
monitor in different deliveries. In transit merge combines pieces of the order coming from
locations so that the costumer gets a single delivery.
• Advantages: same as before, but improved costumer experience, save on transportation.
Good for high value/medium to lo demand items. Limited number of manufacturer.
• Drawbacks: more handling, maybe longer response time. Too many sources, in transit merge
will be difficult to coordinate.

3. Distributor storage with carrier delivery:

• inventory is not held by manufacturers at the factories but in intermediate warehouses.

• Advantages: shorter lead time to costumer, better costumer experience, lower
transportation costs compared to drop shipping.
• Drawbacks: higher facility cost than manufacturer storage, space limitation (example amazon
for faster moving items).
4. Distributor storage with last mile delivery:

• last mile delivery refers tot he distributor retailer delivering the product to the customer’s
home instead of using a package carrier.
• Advantages: faster response time. Good for bulky products, customer is willing to pay for
home delivery (example, AH and Tesco).
• Drawbacks: it needs warehouses to be much closer to customer, higher transportations
costs.

5. Manufacturer/ distributor storage with customer pickup:

• Inventory stored at Warehouse, costumers travel to designated points to receive goods.

• Advantages: does not require costumer to be at home for delivery, savings in transportation
costs, fairly good returnability.
• Drawbacks: higher facility costs, maybe need to use external sited, more handling, possible
loss of convenience to customer.
• Example: trainer (B2B) Walmart’s initiative “site to store”, IKEA in Amsterdam.

6. Retail storage with customer pick up:

• the most traditional type of supply chain, costumers pick up goods at retail points, which
store a variety of products.
• Advantages: traditional replenishment allow for higher utilization and lower transport costs,
better infrastructure for returns.
• Drawbacks: requires much more inventory. Example: groceries, fashion, etc.