NPTEL Lecture series

Management Science II Dr.T.T.Narendran

Indian Institute of Technology Madras

MODULE 3 Historical Background

• Inventory lot-sizing models

• Time-series forecasting

• Production Planning & Control

• Purchasing

• Sales & Distribution

All these functions have existed for a century !

• THE TRANSITION (1970 – 1995)

• Inventory models came under attack (70’s)

• Enter MRP � MRP II � ERP

• And from Japan, JIT, TQM, Kaizen, etc.

What Happened Thereafter?

• Need for better coordination /integration of functions

• Shorter time to manufacture

• Globalization

• Emergence of IT

• Led to the evolution of



Evolution

What Is Supply Chain ?



Or………., Is It This ?

Supply Chain Management Is a total systems approach to managing the entire flow of information,

materials and services from raw material suppliers through factories,

distribution centers and ware houses to the customer.

Distribution Centers Warehouses Customers Plants Suppliers



Overview Of Supply Chain

Distributor

s

Factories/

Plants Supplier

Customers



Supply Chain Types

External Supply Chain

• Involving other companies.

Internal Supply Chain

• Involving functions / departments /

• business units within the organisation.

SUPPLIERS

DISTRIBUTORS/ WAREHOUSES

CUSTOMERS

THIRD PARTY LOGISTICS

Supply /Inbound Logistics Production Distribution/Outbound logistics

Information Flow

Product Flow

Money Flow Services Flow

MANUFACTURERS



Scm Functional Decisions

1. Procurement (Purchasing) decisions

• Supplier selection

• Sourcing / purchasing

• Vendor Managed Inventories

Objectives Of Purchasing

• Provide uninterrupted flow of materials

• Buy competitively and wisely

• Minimize inventory holding costs

Decisions

Functional Temporal

• Strategic

• Tactical

• Operational

• Procurement

• Production

• Logistics



• Source development

• To develop good vendor relationships

• Achieve maximum integration with other departments

• Train purchase personnel

• To develop policies and procedures to achieve objectives (1-7)

Purchasing Must Provide Material Of

Right Source

Right Price

Right Quantity

Right time

Right Quality

from the

at the

of the

at the

of the



Right Quality

• Involves many factors:

• Price, installation cost, maintenance cost, life expectancy, market availability, workability and attitude of users

• Must balance three major considerations

How to determine ? How to define ? How to control ?

Describe such that vendor understands

Engineering Versus Economic

Right Source

• Influences the other 4 “Rights”

• Supplier goodwill

• Supplier identification (yellow pages), evaluation / rating and selection

• Buyer Seller relationships and ethics

• Factors to be considered include Quality, cost, delivery, credit terms distance etc

• In periods of stability, prosperity, recession



Right Price

Methods Contracts Discounts

Right Quantity

• Inventory Control – traditional approach

• Material Requirement Planning (MRP)

• Just In Time (JIT) and Zero Inventory

Right Time

Timing Policies:

• Purchase according to current requirements (1 to 3 Months)

• Purchase according to market conditions

Perfect competition Imperfect competition Monopoly

Analyze price lists Competitive bidding Negotiation

Fixed price Cost type

Quantity, seasonal, cash



• Hand-to-mouth buying

• Forward buying (3 to 12 months)

• Speculative buying

• Depends on lead times

• Decides “When to order”

• JIT concepts

Scm Functional Decisions 2. Production decisions

• Process Design

• Manpower management

• Quality

• Inventory management

• Capacity planning and scheduling



Scm Functional Decisions 3. Logistics decisions

What is Logistics ?

Production Decisions QUALITY

•Managing quality

•Quality Control and Improvement

MANPOWER MANAGEMENT

•Managing Workforce

•Job Design

•Performance Measurement & Improvement

PROCESS DESIGN

•Process Selection

•Service Operations Design

•Choice of Technology

•Process Flow Analysis

•Layout of Facilities

INVENTORY MANAGEMENT

•Independent Demand

•Materials Requirement Planning

•Just-in-time

CAPACITY PLANNING AND SCHEDULING

•Forecasting

•Aggregate Planning

•Scheduling Operations

•Project Planning



Scm Functional Decisions

• Logistics decisions

• Materials Management Decisions (Inbound)

• Sales forecasting

• Order processing

• Inbound transportation

• Physical Distribution Decisions (Outbound)

• Configuration of distribution facilities

• Location of facilities

• Mode of transport

• Vehicle routing



Physical Distribution Decisions

• When to deliver the products

• Where to deliver the products

• How to deliver the products at a reasonable cost.

Inventory

Inventory turnover ratio,

Obsolescence, Locked up capital,

Uncertain lead

times and

Warehousing & Packaging

Housekeeping,

Packaging costs,

Transportation

Rail,

Truck, Air,

Water and

Components of Logistics

Facility Structure

Warehouses, Factories,

Processing Centres,

Distribution

Centres,

Communications

& IT Technology base,

Trained manpower,

Good



TYPICAL CHANNELS OF DISTRIBUTION

PRODUCER

CONSUMER

DISTRIBUTION

ANUFACTURER ONSUMER

ETAILER

GENT



Physical Distribution Objectives Distribution Channel Functions

Physical Distribution: Vehicle Routing Decisions Role Of Information Technology In Scm IOIS – Inter-organizational Information System

• EDI: Electronic Data Interchange

• ERP: Enterprise Resource Planning

Physical

distribution

Communication & transaction

Facilitating

Storage

Breaking

Bulk



• Barcode System

• Identifying products, services, assets and locations throughout the world

• Data Mining and Warehouse (Database)

• Intranet ( within companies)

• Extranet (between partners)

• Internet (WWW – World Wide Web)

• Decision Support System

Supply Chain Optimization

Optimization is used to improve a company’s supply chain performance in variety of areas

• Lower Supply Co sts

• Higher Profit Margins

• Increased Manufacturing Throughput

• Better Return on Assets



Scope Of Supply Chain Modeling Three Levels Of Decision Hierarchy

� Location-allocation decisions � Demand planning � Distribution channel planning � Strategic alliances

� Inventory control � Production / distribution coordination � Order/freight consolidation

� Vehicle routing/scheduling � Workforce scheduling

Strategic

Tactical

Operational

� Outsourcing � Supplier selection � Information technology selection � Pricing � Network restructuring

� Material handling � Equipment selection � Layout design

� Record keeping � Packaging



Modeling Approaches To Scm

Network Design

MIP Optimiza

tion

Optimal

Control

Dynamic Programmi

ng

WMS ERP GIS

Supply Chain Modeling

Deterministic Stochastic Hybrid Heuristic IT Driven Simulation

WMS – Warehouse Management System ERP – Enterprise Resource Planning GIS – Geographic Information System



Deterministic Models

Assumption:

Model parameters are known with certainty.

(i) Network Models.

• Determine location of production, stocking, and sourcing facilities, and channels through which the products flow.

(ii) Mixed-Integer Programming (MIP) Models.

Includes models for

• vehicle routing and scheduling,

• facility location and sizing,

• shipment routing and scheduling,

• freight consolidation and

• selection of the mode of transportation.

np-complete - not amenable to optimization.

Stochastic Programming

• Some of the variables are not deterministic.

• Such models are appropriate

• When data evolve over time and decisions need to be made prior to observing the entire data stream.



Robust Optimization Models

Uncertainty about problem data is treated as unknown-but-bounded.

Intervals of confidence for the data are considered.

Heuristic Models

• Intelligent approach that attempts to find good solutions.

• Empirical approached problem solving

• Thumb Rule

• Quick and Effective

• No guarantee of optimum

• Adequate for real life

Simulation Models

• Both strategic & operational elements.

• Evaluate alternative policies or decisions.

• Dynamic nature of supply chains.

Hybrid Models • Both deterministic & stochastic models.

• Inventory-theoretic & simulation models.

• Deal with both certainty and uncertainty.



Hybrid Models

• Both deterministic & stochastic models.

• Inventory-theoretic & simulation models.

• Deal with both certainty and uncertainty.

It Driven Models

• Warehouse management system (WMS)

• Transportation management systems (TMS)

• Integrated transportation tracking,

• Collaborative planning and forecasting

• replenishment (CPFR),

• Material requirement planning (MRP),

• Distribution resource planning (DRP),

• Enterprise resource planning (ERP), and

• Geographic information systems (GIS).



Requirements For Effective Scm Information Handling

• Lightness of data transferring – only essential information (not GIGO !)

• Transparency and speed of information

MODELS FOR VEHICLE ROUTING

Improvement

(2-opt, 3-opt)

Route-First,

Cluster-Second Cluster-First

Route-Second

Savings

Procedure

Insertion

Procedure

Genetic

Algorithms

Simulated

Annealing

Neural

Network Ant

Colony

Simulation Based

Approach

Intuitive Based

Approach

Lagrangean

Relaxation

Branch & Bound

Dynamic

Programming

Preference Based

Approach

Tabu

Search

Graphics

Capability

Particle

Swarm

Mathematical

Programming



• Accurate

• Timely access

• Defining the right amount of information for each level

Information Handling (Contd.)

• Information to right people To ensure that information reached the recipi

• ent

• To prevent and control data seepage



Implementation

Co-operation, not Competition : Focus on jointly solving problems, not looking for someone to blame.



It Difficulty



Trade-off between Accessibility and Security

On the Internet, nobody knows you’re a dog



Scm – Overall Drawbacks

Problem Solution Benefits Possible Drawbacks

Large inventories

Smaller, more frequent deliveries

Reduced holding costs

Traffic congestion Other costs

Long lead times to

manufacture, to procure

Delayed differentiation

No transfer of load (point to point)

Quick response May not be feasible Lack of functional integration

Large number of parts

Modular Fewer parts Simpler ordering

Less variety

Quality cost Outsourcing Reduced cost, higher quality

Loss of control

Variation in demand, MPS, etc.

Shorter lead times, better forecasts

Able to match supply and

demand

Less variety

The Future Of Scm

• Soft issues

• Multi-objective formulations

• Dynamic decision rules



Design of model-based Decision Support System Shall we dream of an IT-driven, Customer-friendly, People-sensitive Supply Chain Management System ? WHERE DOES SCM STAND TODAY ? Fragmented ! Production managers don't know enough IT

IT professionals don't know enough Operations Management



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