1. Supply Chain Management
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Supply Chain Management
Lecture 6
Chapter 1

2. Outline Today Next week Homework 1 due Chapter 4
SYST 4050 Slides
Outline
Today
Homework 1 due
Chapter 4
Introduction to Excel Solver?
Next week
Chapter 5
Chapter 1

3. Designing a Supply Chain Network
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Designing a Supply Chain Network
In designing a supply chain, we need to consider how all supply chain drivers should be used together to support the competitive strategy of a company and maximize supply chain profits
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Chapter 1

4. Factors Influencing Distribution Network Design
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Factors Influencing Distribution Network Design
Performance of a distribution network should be evaluated along two dimensions
Customer needs that are met (customer service)
Response time (Time it takes for a customer to receive an order)
Product variety (Number of different products that are offered)
Product availability (Probability of having a product in stock)
Customer experience (Ease of placing and receiving orders)
Order visibility (Ability of customers to track their orders)
Returnability (Ease of returning unsatisfactory merchandise)
Cost of meeting customer needs (supply chain cost)
Inventory (All raw materials, WIP, and finished goods)
Transportation (Moving inventory from point to point)
Facility & handling (Locations where product is stored, assembled, or fabricated)
Information (Data and analysis of all drivers in a supply chain)
Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service
Chapter 1

5. Design Options For a Distribution Network
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Design Options For a Distribution Network
Two key decisions when designing a distribution network
Will the product be delivered to the customer location or picked up from a preordained site?
Will product flow through an intermediary?
Chapter 1

6. Retail Storage with Customer Pickup
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Retail Storage with Customer Pickup
Example: Retail stores such as Wal-Mart and JCPenney
Customers pick up product from retailers
Low transportation cost
High facility cost
Relative easy returnability
Increased inventory cost
No order tracking necessary
If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer
Effective for fast moving items
Retailer
Consumers
Distributor
Warehouse
Manufacturers
Chapter 1

7. Manufacturer Storage with Direct Shipping (Drop Shipping)
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Manufacturer Storage with Direct Shipping (Drop Shipping)
Example: eBags
Products are shipped directly to the consumer from the manufacturer
Retailer is an information collector:
Passes orders to the manufacturers
It does not hold product inventory
Inventory is centralized at manufacturer
Drop shipping offers the manufacturer the opportunity to postpone customization
Effective for high value, large variety, low demand products
High transportation cost
Retailer
Manufacturers
Consumers
This model is also referred to as drop-shipping. Retailers carries no inventory. All inventory is at the manufacturer’s site. This is eBags model, which takes orders and arranges for the manufacturer’s to ship directly to the customers. Transportation cost is high because the average outbound distance to the end customer is large. Package carriers are used and are more expensive than TL or LTL. A good information infrastructure is needed. Response time tends to be large.
eBags
Nordstrom.com (for slow moving footwear)
W.W. Grainer (for slow moving items)
Chapter 1

8. Manufacturer Storage with Direct Shipping and In-Transit Merge
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Manufacturer Storage with Direct Shipping and In-Transit Merge
Example:
Furniture retailers merge couches and coffee tables produced by different manufacturers
Dell merges a Dell PC with a Sony flat screen
Shipments from multiple manufactures are merged before making a single delivery to the consumer
Shipments to Mergers are larger so economies of scale is achieved
Mergers increase facility costs
Response time may go up
Retailer
Mergers
Consumers
Manufacturers
Chapter 1

9. Distributor Storage with Carrier Delivery
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Distributor Storage with Carrier Delivery
Example: Amazon
Inventory is held at a warehouse which ships to customer by carriers
With respect to direct shipping
Inventory aggregation is less
Higher inventory costs
Facility costs are higher
Less information to track
Warehouses are physically closer to consumers which leads to
Faster response time
Lower transportation cost
Not effective for slow moving items
Distributor
Warehouse
Manufacturers
Consumers
Chapter 1

10. Distributor Storage with Last Mile Delivery
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Distributor Storage with Last Mile Delivery
Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress
Warehouse delivers to customers instead of carrier
Warehouses are located closer to consumers
Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale
Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher.
Products must be flowing fast to justify the infrastructure
Processing cost are high
Distributor
Warehouse
Manufacturers
Consumers
Chapter 1

11. Manufacturer or Distributor Storage With Customer Pickup
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Manufacturer or Distributor Storage With Customer Pickup
Example: 7dream.com
Customers come to pick up sites (warehouse, retailer) to get the products
If consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costs
Order 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 required
Increased handling cost
Distributor
Warehouse
Manufacturers
Consumers
Chapter 1

12. Comparing Distribution Networks
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Comparing Distribution Networks
1 = strongest performance
6 = weakest performance
Chapter 1

13. Design Options For a Distribution Network
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Design Options For a Distribution Network
Retail Storage with Consumer Pickup
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer Pickup
Chapter 1

14. Design Options For a Distribution Network
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Design Options For a Distribution Network
Retailer
Consumers
Distributor
Warehouse
Manufacturers
Retailer
Manufacturers
Consumers
Retailer
Mergers
Consumers
Manufacturers
Distributor
Warehouse
Manufacturers
Consumers
Distributor
Warehouse
Manufacturers
Consumers
Distributor
Warehouse
Manufacturers
Consumers
Chapter 1

15. From brick-and-mortar to click-and-mortar
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From brick-and-mortar to click-and-mortar
What has been the impact of e-business on supply chain cost?
What has been the impact of e-business on customer service?
In the future, do you see the number of distributors decreasing, increasing, or staying about the same?
Impact of e-business on customer service
Response time to customers
Longer for products that cannot be downloaded
Product variety
Easier to provide a larger product variety
Product availability
Aggregation of inventory allows for improved availability
Customer experience
Much broader reach
Time to market
Easier to introduce new products quickly
Returnability
Cost of reverse flows increases
Impact of e-business on supply chain cost
Inventory
An e-business requires less inventory due to aggregation
Postponement can lower inventory cost
Facilities
An e-business requires less facilities because of centralizing operations
Reduced handling costs because fewer intermediaries are used
Transportation
Apart from digital products an e-business tends to have higher transportation cost (across the entire supply chain)
Information
Significant information infrastructure is needed
Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle?
Why should an e-business such as Amazon.com build more warehouses as its sales volume grows?
Chapter 1

16. Dell: Network Design (Europe)
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Dell: Network Design (Europe)
A successful distribution network satisfies customer needs at the lowest possible cost
Chapter 1

17. SYST 4050 Slides
Dell: Network Design
As Cannon noted, the Dell build-to-order and “do it all ourselves” model served the company well for almost 20 years, but “the environment has changed.”
Just a few years ago, Dell was positioned as the supply chain place where most of us needed to be: almost no finished goods or parts inventory; negative cash-to-cash cycle (paid by customers before paying suppliers); “have it your way” flexibility/the epitome of mass customization; sophisticated demand management techniques to drive buyers to what was most profitable or available in terms of PC configurations; cut out the middleman.
Now, it appears, Dell itself doesn’t want to be there.
“Our supply chain needs to change dramatically,” Cannon said.
Chapter 1

18. SYST 4050 Slides
Dell: Network Design
Dell’s approach added a lot of complexity – and cost. He said, for example, that for many models, there were as many as 500,000 configuration options.
Why do that? “Because we could,” Cannon said. “We had a very flexible supply chain that allowed us to offer that level of configuration choice.”
That approach, in turn actually led to higher product costs in many cases. Here’s how. Base/entry models had to be built in a way that permitted all these add-ons to much higher end models. So, if/when customers configured their way up to a high-end unit, Dell made good money. But if a customer stayed with a basic offering, the company lost margin because the base unit versus the competition had extra costs to support the potential of high-end add-ons.
Chapter 1

19. Dell to Migrate Manufacturing Operations from Ireland to Poland
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Dell: Network Design
Dell has said it believes it can save $3 billion annually from various measures, and Cannon said most of that will come out of these changes to the supply chain over the next 2-3 years. It had sales of $61 billion last year, so that’s about a 5% reduction in total costs.
Dell to Migrate Manufacturing Operations from Ireland to Poland
Chapter 1

20. Example: Dell Network Design Decision
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Example: Dell Network Design Decision
$31
$19
$23
Chapter 1

21. Example: Dell Network Design Decision
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Example: Dell Network Design Decision
Chapter 1

22. What is an Optimization Problem
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What is an Optimization Problem
Generally, an optimization problem seeks a solution where decisions need to be made in a constrained or limited resource environment
Most supply chain optimization problems require matching demand and supply when one, the other, or both may be limited
An optimization problem comprises three major components
Decision variables
Constraints
Objective
Chapter 1

23. Introduction to Excel Solver
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Introduction to Excel Solver
Installing Excel Solver
Goto Tools > Add-ins…
Select “Solver Add-in” and press OK
Opening Excel Solver
Goto Tools > Solver
Chapter 1

24. Example: Profit Maximization Problem
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Example: Profit Maximization Problem
The Windsor Glass Company is planning to launch two new products.
8 feet glass door with aluminum framing
4x6 feet window with wood framing
Management of the company wants to determine what mixture of both products would be most profitable
Chapter 1

25. Example: Profit Maximization Problem
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Example: Profit Maximization Problem
8 Feet Aluminum Frame Doors
4x6 Wood Frame Windows
Windsor Glass Company
Plant 1 (Aluminum frames)
1 hour
Plant 3
(Glass and assembly)
Profits
Excess cap. 4 hours
3 hours
$3,000
Plant 2 (Wood frames)
2 hours
$5,000
Excess cap. 18 hours
2 hours
Excess cap. 12 hours
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26. Windsor Glass Company Model
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Windsor Glass Company Model
Inputs
Decision variables
X1 number of batches of doors produced
X2 number of batches of windows produced
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27. Windsor Glass Company Model
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Windsor Glass Company Model
Objective function
Maximize 3000 X X2
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28. Windsor Glass Company Model
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Windsor Glass Company Model
Constraints
Hours available in Plant 1 X1  4
Hours available in Plant 2 2 X2  12
Hours available in Plant 3 3 X1 + 2 X2  18
Nonnegative production quantities X1  0, X2  0
Chapter 1

29. Windsor Glass Company Model
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Windsor Glass Company Model
Decision variables
X1 number of batches of doors produced
X2 number of batches of windows produced
Objective function
Maximize 3000 X X2
Constraints
X1 <= 4 (Available hours Plant 1)
2 X2 <= 12 (Available hours Plant 2)
3 X1 + 2 X2 <= 18 (Available hours Plant 3)
X1, X2 >= 0 (nonnegativity)
Chapter 1

30. Windsor Glass Company Model
SYST 4050 Slides
Windsor Glass Company Model
Objective function
Maximize 3000 X X2
Chapter 1

31. Windsor Glass Company Model
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Windsor Glass Company Model
Constraints
0 <= 4 - X1 (Available hours Plant 1)
0 <= X2 (Available hours Plant 2)
0 <= X1 - 2 X2 (Available hours Plant 3)
X1, X2 >= 0 (nonnegativity)
Constraints
X1 <= 4 (Available hours Plant 1)
2 X2 <= 12 (Available hours Plant 2)
3 X1 + 2 X2 <= 18 (Available hours Plant 3)
X1, X2 >= 0 (nonnegativity)
Chapter 1

32. Windsor Glass Company Model
SYST 4050 Slides
Windsor Glass Company Model
Decision variables
X1 number of batches of doors produced
X2 number of batches of windows produced
Objective function
Maximize 3000 X X2
Constraints
0 <= 4 - X1 (Available hours Plant 1)
0 <= X2 (Available hours Plant 2)
0 <= X1 - 2 X2 (Available hours Plant 3)
X1, X2 >= 0 (nonnegativity)
Chapter 1

33. Windsor Glass Company Model using Excel Solver
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Windsor Glass Company Model using Excel Solver
Objective function
Decision variables
Constraints
Chapter 1

34. Windsor Glass Company Model using Excel
SYST 4050 Slides
Windsor Glass Company Model using Excel
Chapter 1