Integrated Supply Chains and Logistics

Management of Digital Enterprise

An introduction to Supply Chain

Management. Definitions.

Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Course objectives
• Definition of the Supply Chain (SC) concept and models, supply chain management and
design (network design, network and operational planning), strategic decisions, activity
interdependency

• Supply chain functions: purchasing, move, production, stock, distribution

• Logistics (inventory and warehousing, transportation)

• Metrics for measuring SC performance, operational and financial evaluation, forecasting

• Planning and scheduling processes (which synchronize the orders with manufacturing and
distribution)

• IT in SC

• Support and decisional systems for advanced management of SCs

(barcodes and RFID)
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 Course description
• Integrated Supply Chain and Logistics is a program of study concerned with the efficient and timely flow of materials,
products, and information within and among organizations. A supply chain is a network of organizations that cooperate to
optimize the flow of materials between the original supplier and the end user (client), resulting in a rapid and cost -efficient
flow of materials. Nowadays the material flows cannot function in an optimum manner, or they are not even possible at all
without an associated informational flow. In this framework, the course also tackles the informational integration of
enterprises participating in a supply chain. Supply chain management (SCM) encompasses the planning and management
of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service
providers, and customers. In essence, SCM integrates supply and demand management within and across companies. It
includes all the logistics management activities noted above, as well as manufacturing operations, and it drives coordination
of processes and activities with and across marketing, sales, product design, finance and information technology.

• The course discusses the issues and the methods for ensuring efficiency and just-in-time deployment for the materials flow,
products, and information’s inside of an organization and between organizations. Operations management contain planning,
control and implementation of processes used for input transformation (materials, information) in goods and services.
Integrated Supply Chain and Logistics courses present business processes integration between organizations, identifying
and handling material sources and suppliers, manufacturing and process control, and delivery to the end user.

• Operations management is hereby presented and learned in the context and in the framework of inter-organization supply
chain systems. The Integrated Supply Chain and Logistics course train students for professional career in productive
(fabrication), distribution, logistic and service consultancy companies (enterprises). The discipline curriculum assures the
theoretical / conceptual base and analytic methods required for taking correct operational and strategic decisions in
business.

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 Presentations

Integrated Supply Chains and Logistics

1. An introduction to Supply Chain Management.
2. Definitions. Modeling at strategic level.
3. Supply chain operations: Planning.
4. Supply chain operations: Procurement.
5. Supply chain operations: Making.
6. Supply chain operations: Deliver.
7. Closed loop supply chain: returns management.
8. Supply chain operations: Enable.
9. Measuring supply chain performance. Operational evaluation.
10. Measuring supply chain performance. Financial evaluation.
11. Information technology in supply chain management
12. E-Business and Supply Chain Integration
13. RFID for industrial usage
14. RFID in supply chain management
15. Logistics
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 Practical sessions & projects
Laboratory
1. Sales forecasting using spreadsheets
2. Network design using spreadsheets and constraint programming (DC and facility location (X3))
3. Aggregate production planning using the constraint programming technique (Excel, ILOG CPLEX)
4. Warehouse and Stock Management using spreadsheets (determining Economical Order Quantity, optimizing
orders)

Projects/ Optional homework:

1. Delivery optimization
2. Sales forecasting using machine learning
3. Manufacturing Management (Planning and Scheduling) using constraint programming
4. Knapsack problem for the distribution process of a supply chain

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 Grading

• 50% final exam + 50% semester activity

• Semester activity – 50 pct (50 on time, 30 late) –
MOODLE assignment
• Optional homework – 20 pct (if late laboratory
activity)
• Student research session – 10 pct

• https://acs.pub.ro/studenti/regulamente/

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 References
• Sunil Chopra, Peter Mendil, Supply chain management. Strategy,
planning, and operation. Fourth edition, 2010, ISBN 13: 978-0-13-
609451-7

• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd edition,

2010,McGraw Hill International Edition

• Hugos M., Essentials of Supply Chain Management, John Wiley and

Sons, Inc., 2006

• Supply Chain Operations Reference Model, Revision 12, APICS/Supply

Chain Council, 2014

• (Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les chaines

d’approvisionnement. Conception, contrôle et outils, 2003)

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 SCOR preview
• Endorsed by Supply Chain Council (SCC)
• SCC merged with American Production and Inventory Control Society (APICS) in 2014, now ASCM
(Association for Supply Chain Management)
• Revision 14, 2022
– Model introduction in 1996
– Developed to describe the business activities associated with all phases of satisfying a customer's demand
• Characteristics: standard/generic cross-industry diagnostic tool for supply chain management
• Is designed to support supply chain analysis at multiple levels (see next slide)
• Addresses: all customer interactions (order entry through paid invoice), all physical material
transactions (supplier's supplier to customer's customer, including equipment, supplies, spare
parts, bulk product, software, etc.) and all market interactions (from the understanding of aggregate demand
to the fulfillment of each order -> GENERIC, industry neutral
• Does not address: sales and marketing (demand generation), product development, research and
development, and some elements of post-delivery customer support -> SPECIFIC, how a particular
organization should conduct its business or tailor its systems/information flow
• Components:
1. Performance: Standard metrics to describe process performance and define strategic goals (course second
objective)
2. Processes: Standard descriptions of management processes and process relationships (course first objective)
3. Practices: Management practices that produce significant better process performance
4. People/skills: Standard definitions for skills required to perform supply chain
processes.
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 Chapter 1
Definition of a supply chain

Content:

• Introduction / General description

• Dominant partners classification

• Supply chain functions

• Loss and benefit sharing (sharing process)

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 Introduction

Fig.1 – Abstract Model of a Manufacturing System (adapted ISCL (MDE)

from (Leitao,2004)) – value chain
10
 Introduction
Clients • Manufacturing process model
Orders

GUI for order collection

and product definition
Product presentation
and creation of new
• Supply chain is one concept
products associated to distributed
Client orders Propose new Product &
with due dates delivery date Process KB manufacturing, which deals with
Read operation the management of materials,

Delivery
Global production list for desired
scheduler (objective:
production planning and
products information and financial flows in
resource allocation) a network, consisting of suppliers,
Planned and
scheduled orders manufacturers, distributors and
customers. The goal of supply-
Real-time feedback on

Active production entities

(objective: control of Finished chain management is to have the
system load

production execution and products

real-time rescheduling) right product in the right place, at
Adjust resource
Informational Physical weights according to the right price, at the right time, and
production needs
services services
in the right condition (Harrison,
FMS: product transport 1992).
and processing

Raw Part
materials supply
Fig.2 – The lifecycle of a client ISCL (MDE)
11 order (Borangiu et al.,2010)
 Introduction

Flexible Manufacturing System; ON DEMAND concept

extended through:

– Efficient usage, at request, of the hardware resources, by

activating them when needed;

– Assuring the global system fault tolerance in case of power,

controller and workstation breakdown;

– Assuring flexibility in resource, tools and associated programs

operation.

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 General description

• anticipatory business model (MTS)

• responsive business model (MTO)

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 General description
• Value chain
– A set of activities that a firm performs in order to deliver a valuable product or service for the market;
• Supply chain (SC)
– Macro: stepwise transformation from raw material to end products and their distribution and selling to the customer
– Micro: single company perspective: cooperation with its supplier and customer by the creation of value
– Definition: A network of organizations (value chains) that cooperate in order to optimize the flow of materials between the
original supplier and the end user, resulting in a rapid and cost efficient flow of materials (Chauhan, 2003). A supply chain
is a compound of activities, which contains planning-, coordination- and controlling-tasks. These activities are
subordinated to the goal to produce the end product.
• Supply chain management (SCM)
– SCM encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and
all logistics management activities. It also includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers, and customers. In essence, SCM integrates supply and demand
management within and across companies. It includes all of the logistics management activities noted above, as well
as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales,
product design, finance and information technology (Council of Supply Chain Management Professionals);
• Logistics
– Logistics is the work required to move and geographically position inventory. It is a subset of and occurs within the broader
framework of a supply chain, adding value by timing and positioning inventory (Bowersox et al., 2010)

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 General description
VISA
®

Material Flow Credit Flow

Supplier Manufacturing Retailer Consumer

Supplier Wholesaler Retailer

Order Cash
Schedules
Flow Flow

Fig.3 – Simple view of the supply chain and adjacent flows ISCL (MDE)
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 General description
Departments
Projects

…
Fig.4 – Supply chain management – a ISCL (MDE)
16 project/departments approach
 General description

Holonic Supply Chain Management

Problem: complexity, assurance of emergent/coherent behavior
Every SCOR model process is modeled as a holon
- Static model
- Dynamical model (timely coopeation)

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 General description

Holonic Supply Chain Management

Dynamical model (interactions/negotiations)
- Short-term negotiations
- Depicted in the previous slide, assure day-to-day operations
- Long-term negotiations
- Objective: SC stability

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 General description

Partnership – Definition

A partnership is a tailored business relationship based on

mutual trust, openness, shared risk and shared rewards
(sharing process) that results in business performance
greater than would be achieved by two firms working
together in the absence of partnership.

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 General description

Drivers Facilitators
Decision to Supportive
Compelling create or adjust environmental
reasons to relationship factors that enhance
partner partnership growth

Components
Drivers set Joint activities and processes
expectations that build and sustain the
of outcomes partnership
Feedback to:
l Components
l Drivers
Outcomes l Facilitators
The extent to which
performance meets
expectations
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(http://scm-institute.org/relationship-based-business-model/partnerships-in-the-supply-chain/)
 General description

Global Supply-Chain Issues

Supply chains in a global environment must be:

– Flexible enough to react to sudden changes in parts availability,

distribution, or shipping channels, import duties, and currency rates;

– Able to use the latest computer and communication technologies to

schedule and manage the shipment of parts in and finished products out;

– Staffed with local specialists to handle duties, trade, freight, customs and
political issues.
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 General description
Key Business Processes of SCM
❑ Customer Relationship Management – provides the structure for how relationships with customers are developed and
maintained, including the Professional Service Automation (PSA) between the firm and its customers.

❑ Customer Service Management – provides the firm’s face to the customer, including management of the PSAs, and provides
a single source of customer information.

❑ Demand Management – provides the structure for balancing the customers’ requirements with supply chain capabilities.

❑ Order Fulfillment – includes all activities necessary to define customer requirements, design the logistics network, and fill
customer orders.

❑ Manufacturing Flow Management – includes all activities necessary to move products through the plants, to obtain and
manage manufacturing flexibility in the supply chain.

❑ Supplier Relationship Management – provides the structure for how relationships with suppliers are developed and
maintained, including the PSAs between the firm and its suppliers.

❑ Product Development and Commercialization – provides the structure for developing and bringing to market new products
jointly with customers and suppliers.

❑ Returns Management – includes all activities related to returns, reverse logistics, gatekeeping and avoidance.

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 General description

• Integration. Why Integrate?

Because…
❑ companies tend to focus on their core competencies,
❑ there might be potential for competitive advantages,
❑ competitors might already be working on it,
❑ it should bring more stability to the relationship,
❑ it should bring improvements to customer service, profits, costs,
❑ technology is driving businesses in that direction,
❑ the world is becoming more global and business practices are changing,
❑ when these systems have been implemented they become an intangible asset.

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General description
Tier 3 to Tier 3 to
Initial Tier 2 Tier 1 Tier 1 Tier 2 Consumers/
suppliers Suppliers Suppliers Customers Customers End-customers

1 1

2 2

Consumers/End-customers
n n
1 1
1
Initial Suppliers

2
n 2

1
3 1
2 3
1 n
3 n
n 1
n n
2
1 1
n
n
n

Managed Process Links Focal Company

Monitor Process Links
Members of the Focal Company’s Supply Chain
Not-Managed Process Links
Non-Member Process Links ISCL (MDE)
Non-members of the Focal Company’s Supply Chain

24 Fig.6 – Types of Inter-Company Business Process Links

(Lambert, 1998)
 Synthesis

• Supply chain definition:

– A network of organizations that cooperate in order to optimize the flow of
materials between the original supplier and the end user (client),
resulting in a rapid and cost efficient flow of materials (Chauhan, 2003).

• Supply chain view = project view which flows through different

departments

• Two flows in the SCM – upstream-> downstream (materials),

downstream->upstream (information)

• SCM <> logistics

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 Dominant partners
• Definition
– A partner that acts to maximize its profit rather than the profit of
the system as a whole (chain management);

• Why is a partner dominant

– Client proximity:
• It knows what the client wants (type, quantity, price);
• It possesses the distribution means to provide the client the
product in the best conditions;
– High competence:
• It possesses advanced technological means and the resources
to implement the technology
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 Dominant partners

• Classification
– Dominant partner = f(SC type)
– If client from mass population then the distributor is dominant
(ex.: agriculture) Fig.7 – Supplier-distributor-client chain
– If custom orders then
the supplier is dominant
(ex.: PC manufacturing)
– If manufactrurer has high
technology then it is the
dominant partner, but the
supplier is still important ISCL (MDE)
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 Dominant partners

• Examples
– Benetton, IBM, franchise systems, automobile industry over the dealers

• Evolution to the dominance situation

– Subcontracting can lead to dominating partners if the product/service
requires high-tech knowledge or its value in the final product is important

• Disadvantages
– Once established it excludes a healthy operation of the SC by
annihilating the partners creativity and leading to conflicts when
constraints are to strong

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 Supply chain functions

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Fig.8 – Supply chain strategic level
29
 Supply chain functions

The purchasing functionality objectives are to acquire the raw materials and the components
that enter the realization phase of a product, help identify the products and services that can
be best obtained externally and Develop, evaluate, and determine the best supplier, price,
and delivery for those products and services. Important purchasing aspects: product quality
and the capacity of the supplier to adapt.
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Fig.8 – Supply chain strategic level
30
 Supply chain functions

The production/manufacturing functionality transforms the

raw materials into finished products.

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Fig.8 – Supply chain strategic level
31
 Supply chain functions

The transport functionality realizes the continuity and fluidity of

the physical flows in a SC at a global level.

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Fig.8 – Supply chain strategic level
32
 Supply chain functions

Its objective is to make the product/service available on the

market. It is the only function that realizes an income, thus it is
very important to a project. It is usually accompanied by
maintenance, formation and documentation, activities which are
planned at the SC design stage.
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Fig.8 – Supply chain strategic level
33
 Closed loop Supply Chain

• Product Recovery Process = management of product

recovery process + related supply chain

Fig.9 – Closed loop Supply Chain (National Seminar on ISCL (MDE)

REMANUFACTURING, New Delhi, 2009)
34
 Closed loop Supply Chain

Unique characteristics of Closed loop Supply Chain

management (National Seminar on REMANUFACTURING, New Delhi, 2009)

• Uncertainty in timing and quantity of returns (used products)

• Need for balancing demands with returns
• Uncertainty in materials recovered from returned items
• Requirements for a reverse logistics network
• Disassembly operation
• Materials matching problems
• Stochastic and highly variable processing time

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 Closed loop Supply Chain

Key management decision areas in closed loop supply chain

• Returns Acquisition Management

• Reverse Logistics Management
• Remanufacturing Management
• Inventory Management
• Sales and Marketing

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 Synthesis

• Definition of the dominant partner

• Supply chain strategic functions and characteristics

• The need for an integrated informational system

• Reverse supply chain

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 References
• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les chaines
d’approvisionnement. Conception, contrôle et outils, 2003

• Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management:
Implementation Issues and Research Opportunities,” The International Journal of
Logistics Management, Vol. 9, No. 2, 1998, p. 7

• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd edition, 2010,McGraw Hill
International Edition

• Hugos M., Essentials of Supply Chain Management, John Wiley and Sons, Inc., 2006

• Leitao, P, 2004, An Agile and Adaptive Holonic Architecture for Manufacturing Control,
PhD. Thesis
• Donald Waters, Logistics.An Introduction to Supply Chain
Management, 2003
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Integrated Supply Chains and Logistics

Management of Digital Enterprise

Strategic activities

Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Chapter 2

Supply chain structure at strategic level

Content:

• Supply chain structuring at strategic level

• Strategic level objectives and decisions (Designing and extending a supply chain)

• Decisions interdependence. Quantifiable and unquantifiable decisions

• Supply chain drivers (design) and operations

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 Supply chain structuring at strategic level

• Supply chain (SC) = project that assembles the competencies of all partners
(product or service)

• SC objectives: minimize realization the time and the costs through collaboration
between various departments

• Important things to take into account when designing a SC:

– Careful analyze the dependencies between the different functionalities in
order to offer a balanced system (capacities and extension)
– Implement a sharing process (risks and benefits)
– Allocate proper resources to the project
– Actuate the important SC drivers (what makes a supply chain do its day-to-
day activity/operational level)

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 Supply chain structuring at strategic level

Fig.1 – Supply chain strategic level (Chauhan et al., 2003)

Obs:
1. Structure=f(activity domain)
2. Product design – part of production/make compartment [Hugos, 2006]
3. SC plan
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 Supply chain structuring at strategic level

• Acquisition (of raw materials, components, resources and

services)

• Long term objectives:

– Select serious and quality suppliers
– Select suppliers capable of reacting to unexpected situations
– Select suppliers ready to adapt in order to respond to SC
technological improvements
– Select suppliers interested in optimizing the SC objectives (cost)
– Form durable relations with suppliers
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 Supply chain structuring at strategic level

• Transport (of materials and personnel between the components of the

SC)

• Long term objectives:

– Coordinate transports between different origins and destinations of a SC
– Define the best way to transport for each partner
– Define the best packaging of materials which is a compromise between:
• The production facility of the supplier
• The desired stock type and dimension/capacity
• The fabrication constraints
– Ensure the availability of the best informational and communication
software which permits the best transport planning
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 Supply chain structuring at strategic level

• Production (composed of the activities in charge with raw

materials transformation, organization, packaging and
personnel formation)

• Long term objectives:

– Constant improvement of production processes to align the
evolution of the system with the strategic decisions
– Establish a research and development functionality whose scope
is to produce what the market wants
– Establish a quality assurance process
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 Supply chain structuring at strategic level

• Storage (of finished products, work in progress, raw

materials)

• Long term objectives / Questions to be considered:

– Where to store and at what capacity ?
– What storage type and what automation technique to use ?
– What is the dimension of the security stocks for each product and
how to adapt it to a constantly evolving production ?
– How to proceed in order that storage doesn’t induce more costs ?
– How to minimize storage and clearance times ?
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 Supply chain structuring at strategic level

• Distribution (all the commercial activities)

• Long term objectives:

– Choose the target customers (niche market)
– Define promotion campaigns
• What media to choose for promotion ?
• How to pay for promotion ?
• How to divide the costs between products ?
– Anticipate the evolution of the clients demands and specify the most effective
response manner
– Create a better image and define a commercial behavior that will offer an
advantage over the competitors
– Define how resources will be allocated to each distribution mode
– Decide to make partnerships (with mass distribution or
with similar producers)
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 Supply chain structuring at strategic level

supplier supplier supplier

• Example
• SC structure = f(activity domain) Purchasing Transport
Platform
Acquisition

 Furniture enterprise, Warehouse Warehouse Warehouse Warehouse

assembly domain Storage

 Components: Management
◼ The enterprise and the Distribution

associated suppliers Production

Workshop Workshop Workshop Workshop

◼ The enterprise: distribution
and assembling (for
collections) Transport Delivery Internal
transport
Purchasing
negotinations
Information related
to management

Fig.2 – Furniture supply chain

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 Strategic level decisions

• Acquisition decisions:
– Supplier related decisions
• Reduce supply time (time between the request and the supply of materials)
• Increase components / raw materials quality
• Increase the demanded supply stock => increase the suppliers stock
• Request of new components / raw materials
• Substitute suppliers
– Product quality related decisions
• Improve the quality control process for the supplies
• Introduce new quality control processes for new components / raw materials
• Improve resources (software and material) for quality
control
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 Strategic level decisions

• Acquisition decisions (2):

– Personnel related decisions
• Train personnel for quality control of components / raw
materials
• Train personnel for negotiations with suppliers
• Hire / fire personnel
– Communication and data processing related decisions
• Improve software applications and hardware platforms
• Improve communication and data processing processes

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 Strategic level decisions

• Transport decisions:
– Transport inside the SC
• Increase capacity
• Upgrade transporting resources
• Train personnel
– Transport for distribution
• Increase capacity
• Change the distribution type / Change transport resources
– Decisions concerning transport personnel
• Hire / fire transport personnel
• Form new ways to communicate

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 Strategic level decisions

• Production decisions:
– Change production type
• Launch a new product / line of products
• Change the characteristics of a product / line of products
– Change production size (increase / decrease monthly quantity)
– Decisions concerning the shop floor
• Reorganize the structure
– Modify production method
• Call for externalization
• Reduce the production cycle
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 Strategic level decisions

• Production decisions (2):

– Resource improvement
• Automate tasks
• Improve the communication system
• Improve quality control process
– Decisions concerning production personnel
• Hire / fire production personnel
• Train personnel

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 Strategic level decisions
• Storage decisions:
– Concerning storage resources:
• Reorganize the location of the storage resources
• Improve the storage system (through maintaining quality and by facilitating
the storage process)
– Concerning handling resources
• Add new handling resources
• Improve personnel security
• Train quality personnel
– Concerning communication:
• Improve the communication system
– Decisions concerning personnel involved in the storage process
• Hire / fire personnel involved in the storage process
• Train personnel ISCL (MDE)
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 Strategic level decisions

• Distribution decisions:
– Concerning delivery
• Reduce delivery times
• Increase the delivery quality
• Change the delivery mode
– Concerning the market
• Define a new target market
• Promote a new product
• Relaunch an advertising campaign for an existing product
– Decisions concerning personnel involved in the distribution process
• Hire / fire distribution personnel
• Train personnel
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 Decisions interdependence
Purchasing Transport
- Substitute suppliers - Increase transport capacity
General information - Request of new components / raw - Change transport resources
• Example: launch a new product materials - Hire personnel
- Improve the quality control process for - Train personnel
decision the supplies - Upgrade transporting resources
• Scope: analyze the - Improve communication and data - Increase transport capacity
dependencies between the processing processes
- Reduce supply time
strategic activities
- Increase components / raw materials
• Obs.: do not forget quality Distribute
dependencies - Change the delivery mode
• Obs.: all decisions have a price - Promote a new product
Production
- Reduce delivery times
• Obs.: a decision is characterized - Launch a new product
- Increase the delivery quality
- Reorganize shop floor structure
by a value assigned to a variable - Call for externalization
• Obs.: a decision has an - Change the characteristics of a
associated cost (implementation product
and maintenance) Store
- Hire personnel
• Obs.: some decisions are - Reorganize the location of the
Command
quantifiable, others non storage resources
quantifiable - Improve the storage system
Interdependence between the
- Add new handling resources
• Obs.: between quantifiable activities when launching a new
decisions there can be product
mathematical relation Fig.3 – Decisions dependent of ISCL (MDE)
launching a new product
18
 Evolution of supply chain
• In the fast-moving markets of our present economy a Fig.4 – Old supply chain versus new
company usually will focus on what it considers to be its
core competencies in supply chain management and
outsource the rest.
• Each organization tries to maximize its performance in
dealing with these drivers (see associated Fig 6, slide
21) through a combination of outsourcing, partnering
and in-house expertise.
• Virtual enterprise concept: “…a strategic alliance
amongst non-competing companies who share forces –
using mostly ICT – for the accomplishment of a specific
goal without losing their autonomy – except for the
undertakings set forth in the VE agreement – and with
the aim of avoiding the formation of a new legal entity”
(Maurizio Raffaini, 2001).

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 Aligning SC with business strategy

• Extended SC participants
– Producers, distributors,
retailers, customers,
service providers
Fig.5 – Extended
supply chain structure

• Aligning supply chain with business strategy

– Depending on the needs of its customers, a company’s SC must deliver the appropriate mix of
responsiveness and efficiency.
– There are three steps to use in aligning the supply chain with the business strategy.
• understand the markets that the company serves.
• define the core competencies of your company and the role the company can or could play in
serving its markets.
• develop the needed SC capabilities to support the roles your company has chosen.

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 Supply chain drivers

• Companies in any supply chain must take decisions

individually and collectively regarding their actions in:
◼ Production – What product?
What quantity?
◼ Inventory – What? How much at
each stage ?
◼ Location – Where to locate
facilities?
◼ Transportation – How to move?
(Logistics)
◼ Information – How much data
should be collected and how
much information should be
shared?
Fig.6 – Major supply chain drivers [Hugos, 2006]

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 Supply chain structuring at strategic level
(extension)

Activities:
Planning, Procurement, Manufacturing,
Order Management, Logistics, Returns,
and Retail; Product and Service Design
including Design Planning, Research,
Prototyping, Integration, Launch and
Revision, and Sales including CRM,
Service Support, Sales, and Contract
Management

Fig.7 – Supply chain simplified SCOR model [Hugos,

2006] ISCL (MDE)
22 Supply-chain operations reference-model
(www.supply-chain.org)
 Synthesis

• SC strategic activities
• Objectives of SC strategic activities
• Possible decisions per SC strategic activity
• Interdependence between SC strategic activities
• Quantifiable and non quantifiable decisions
• SC evolution
• SC drivers
• SCOR model

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 References

• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les

chaines d’approvisionnement. Conception, contrôle et outils,
2003

• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd

edition, 2010,McGraw Hill International Edition

• Hugos M., Essentials of Supply Chain Management, John Wiley

and Sons, Inc., 2006

• www.supply-chain.org

ISCL (MDE)
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 Integrated Supply Chains and Logistics

Management of Digital Enterprise

Supply chain operations: Planning.

Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Chapter 3
Supply chain operations: Planning

Content:

• Introduction
• Demand Forecasting
– Forecasting Methods
• Aggregate Planning
• Product Pricing
• Inventory Management

ISCL (MDE)
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 Introduction

ISCL (MDE)
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 Demand Forecasting

Predicting the future operations

Major forecast variables:

1. Demand
2. Supply
3. Product Characteristics
4. Competitive Environment

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 Forecasting Methods
There are four basic methods to use when doing forecasts. Most forecasts are done
using various combinations of these four methods:

Qualitative
• person’s intuition or subjective opinions
Causal
• assume that demand is strongly related to particular environmental or market
factors
Time Series
• most common form of forecasting
• based on the assumption that historical patterns of demand are a good indicator of
future demand
Simulation
• combinations of causal and time series methods to imitate the behaviour of
consumers under different circumstances

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 Forecasting Methods
Forecasts are always inaccurate and should include both the expected value of the
forecast and a measure of the forecast error.
In general, the farther up the supply chain a company is (or the farther it is from the
consumer), the greater is the distortion of information it receives.

The following basic approach helps an organization perform effective forecasting:

1. Understand the objective of forecasting
2. Integrate demand planning and forecasting throughout the supply chain
3. Understand and identify customer segments
4. Determine the appropriate forecasting technique
5. Establish performance and error measures for the forecast

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 Forecasting Methods
Time series forecasting methods
With any forecasting method, there is always a random element that cannot be
explained by historical patterns. Therefore, any observed demand can be broken down
into a systematic and a random component:

Observed demand (O) = systematic component (S) + random component (R)

The goal of any forecasting method is to predict the systematic component of the
demand and estimate the random component. In its most general form, the systematic
component of demand data contains a level, a trend, and a seasonal factor. The
equation for calculating the systematic component may take a variety of forms, as
shown below:
Multiplicative: systematic component = level X trend X seasonal factor
Additive: systematic component = level + trend + seasonal factor
Mixed: systematic component = (level +trend) X seasonal factor

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 Forecasting Methods
Static methods
Systematic component = (level +trend) X seasonal factor
A similar approach can be applied for other formats as well. The following notations will
be further used:
• L = estimate of level at t=0 (the depersonalized demand estimate during Period t=0)
• T = estimate of trend (increase or decrease in demand per period)
• St = estimate of seasonal factor for sample t in the current period
• Dt = actual demand in Period t
• Ft = forecast of demand for Period t
In a static forecasting method, the forecast in Period t for demand in Period t+l is given
as:
Ft+l=[L+(t+l)T]St+l
The following two steps are necessary to making this estimation:
1. Deseasonalize demand and run linear regression to estimate level and trend
2. Estimate seasonal factors

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 Forecasting Methods
Adaptive forecasting
In adaptive forecasting, the estimates of level, trend, and seasonality are updated after
each demand observation.
The following notations will be further used:
• Lt = estimate of level at the end of Period t
• Tt = estimate of trend at the end of Period t
• St = estimate of seasonal factor for Period t
• Ft = forecast of demand for Period t (made in Period t-1 or earlier)
• Dt = actual demand in Period t
• Ft = forecast of demand for Period t

Several types of methods can be used for the adaptive forecast, for all of the Period t+l
in period t being given as:
Ft+l = (Lt + lTt)St+l

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 Forecasting Methods
Adaptive forecasting

The four steps in the adaptive forecasting framework are as follows:

1. Initialize: compute initial estimates for level, trend and seasonal factor
2. Forecast: forecast with data from t the demand in t+1
3. Estimate error: Et+1=Ft+1-Dt+1
4. Modify estimates (e.g.: demand lower than forecast => estimates are revised
downward)

The revised estimates in Period t+1 are then used to make a forecast for Period t+2, and
Steps 2, 3 and 4 are repeated until all historical data up to Period n have been
covered. The estimates at Period n are then used to forecast future demand.

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 Forecasting Methods
Adaptive forecasting

Moving average
This method is used when the demand has no observable trend or seasonality. In this
case:

Systematic component of demand = level

In this method, the level in Period t is established as the average demand over the most
recent N periods. This represents an N-period moving average and is evaluated as
follows:

Lt = (Dt + Dt-1 + … + Dt-N+1)/N

To compute the new moving average the latest observation is added and the oldest one
dropped.
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 Forecasting Methods
Adaptive forecasting

Simple exponential smoothing

The method applies in the same conditions as the moving average. The initial estimate
of level, L0, is taken to be the average of all historical data because demand has been
assumed to have no observable trend or seasonality. Given the demand data for Periods
n
1 through n the following applies: L = 1 D
0
n 
i =1
i

The current forecast for all future periods is equal to the current estimate of level and is
given as Ft+1 = Lt and Ft+n = Lt
After observing the demand, Dt+1, for Period t+1, the estimate of level is revised as
follows: Lt+1 = αDt+1 + (1-α)Lt= Lt + α(Dt+1 -Lt)
Where α is a smoothing constant for the level, 0<α<1. Using the previous equation the
level in a given period can be expressed as a function of the current demand and the
level in the previous period:
t −1
Lt +1 =  (1 −  )n Dt +1− n + (1 −  )t D1
n =0 ISCL (MDE)
12
 Forecasting Methods
Forecast error
Finally, forecasts are always wrong to a greater or lesser degree. There are no perfect
forecasts and businesses need to assign some expected degree of error to every
forecast. An accurate forecast may have a degree of error that is ±5%. A more
speculative forecast may have ±20% degree of error. It is important to know the
degree of error because a business must have contingency plans to cover those
outcomes.
As mentioned earlier, every instance of demand forecast has a random component. A
good forecasting method should capture the systematic component of demand but
not the random component. The random component manifests itself in the form of the
forecast error. Forecast errors contain valuable information and must be analysed
carefully for two reasons:
1. Managers use error analysis to determine weather the current forecasting method is
predicting the systematic component of demand accurately.
2. All contingency plans must account for error forecast.

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 Forecasting Methods
The forecast error for Period t is given by Et, where the following holds Et = Ft – Dt

Measurements for forecast error:

1. Mean squared error (MSE)

2. Absolute deviation
At = |Et| (|value-average|)
3. Mean absolute deviation (MAD). The MAD can be used to estimate the standard
deviation of a random component assuming that the random component is
distributed normally. In this case the standard deviation of the random component is
σ=1.25*MAD

4. Mean absolute percentage error (MAPE)

5. Bias (used to determine weather a forecast method constantly over- or

underestimates demand)
6. Tracking signal
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 Aggregate Planning
• Once demand forecasts have been created, the next step is to create a plan for the
company to meet the expected demand. This is called aggregate planning and its
purpose is to satisfy demand in a way that maximizes profit for the company. The
planning is done at the aggregate level and not at the level of individual stock keeping
units (SKUs).

• next 3 to 18 months

• The aggregate plan becomes the framework within which short-term decisions are
taken about production, inventory and distribution. Production decisions involve
setting parameters such as the rate of production and the amount of production
capacity to use, the size of the workforce, and how much overtime and subcontracting
to use. Inventory decisions include how much demand will be met immediately by
inventory on hand and how much demand can be satisfied later and turned into
backlogged orders. Distribution decisions define how and when products will be
moved from the place of production to the place where
it will be used or purchased by customers.
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 Aggregate Planning
There are three basic approaches to take in creating the aggregate plan. They involve
trade-offs among three variables. Those variables are:
1. amount of production capacity;
2. the level of utilization of the production capacity;
3. the amount of inventory to carry.

In actual practice, most companies create aggregate plans that are a combination of
these three approaches
1. Use production capacity to match demand
2. Utilize varying levels of total capacity to match demand
3. Use inventory and backlogs to match demand

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 Product Pricing
Companies and entire supply chains can influence demand over time by using price.

Depending on how price is used, it will tend to either maximize revenue or gross
profit.

Typically marketing and sales people want to make pricing decisions that will stimulate
demand during peak seasons.

The aim here is to maximize total revenue.

Often financial or production people want to make pricing decisions that stimulate
demand during low periods. Their aim is to maximize gross profit in peak demand
periods and generate revenue to cover costs during low demand periods.

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 Product Pricing
Relationship of Cost Structure to Pricing
The question for each company to ask is,
“Is it better to do price promotion during
peak periods to increase revenue or during
low periods to cover costs?”. The answer
depends on the company’s cost
structure. If a company has flexibility to
vary the size of its workforce and productive
capacity and the cost of carrying inventory
is high, then it is best to create more
demand in peak seasons. If there is less
flexibility to vary workforce and capacity
and if cost to carry inventory is low, it is best
to create demand in low periods.

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 Inventory Management

Inventory management is a set of techniques that are used to manage the inventory
levels within different companies in a supply chain.

The aim is to reduce the cost of inventory as much as possible while still maintaining the
service levels that customers require.

Inventory management takes its major inputs from the demand forecasts for products
and the prices of products. With these two inputs, inventory management is an ongoing
process of balancing product inventory levels to meet demand and exploiting economies
of scale to get the best product prices.

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 Inventory Management
There are three kinds of inventory: cycle, seasonal and safety inventory. Cycle
inventory and seasonal inventory are both influenced by economy of scale
considerations. The cost structure of the companies in any supply chain will
suggest certain levels of inventory based on production costs and inventory
carrying cost. Safety inventory is influenced by the predictability of product
demand. The less predictable product demand is the higher the level of safety
inventory is required to cover unexpected swings in demand.

The inventory management operation in a company or an entire supply chain is

composed of a blend of activities related to managing the three different types of
inventory. Each type of inventory has its own specific challenges, and the mix of
these challenges will vary from one company to another and from one supply
chain to another.

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 Inventory Management
Cycle Inventory
Cycle inventory is the inventory required to meet product demand over the time
period between placing orders for the product. Cycle inventory exists because
economies of scale make it desirable to make fewer orders of large quantities of a
product rather than continuous orders of small product quantity. The final customer
of a product may actually use a product in continuous small amounts throughout
the year, but the distributor and the manufacturer of that product may find it more
cost efficient to produce and stock the product in large batches that do not match
the usage pattern.

Cycle inventory is the buildup of inventory in the supply chain due to the fact that
production and stocking of inventory is done in lot sizes that are larger than the
ongoing demand for the product.

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 Inventory Management
Cycle Inventory
Economic Order Quantity
Given the cost structure of a company, there is an order quantity that is the most
cost effective amount to purchase at a time. This is called the economic order
quantity (EOQ) and it is calculated as: 2U O
EOQ =
where: hC

U = annual usage rate

O = ordering cost
C = cost per unit
h = holding cost per year as a percentage of unit cost
If a certain inventory item has a high usage rate and it is expensive,
the EOQ formula recommends a low order quantity which results in
more orders per year but less money invested in each order. If another
inventory item has a low usage rate and it is inexpensive, the EOQ
formula recommends a high order quantity. This means fewer orders
per year but since the unit cost is low, it still results in the most
efficient amount of money to invest in that item.
ISCL (MDE)
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 Inventory Management

Seasonal Inventory

Seasonal inventory appears when a company or a supply chain with a fixed

amount of productive capacity decides to produce and stockpile products in
anticipation of future demand. If future demand is going to exceed productive
capacity, then the answer is to produce products in times of low demand that can
be put into inventory to meet the high demand in the future.

ISCL (MDE)
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 Inventory Management
Safety Inventory

Safety inventory is necessary to compensate for the uncertainty that exists in a

supply chain. Retailers and distributors do not want to run out of inventory in the
face of unexpected customer demand or unexpected delay in receiving
replenishment orders so they keep safety stock on hand. As a rule, the higher the
level of uncertainty, the higher the level of safety stock that is required.

Safety inventory for an item can be defined as the amount of inventory on

hand for an item when the next replenishment EOQ lot arrives. This means
that the safety stock is inventory that does not turn over. In effect, it becomes a
fixed asset and it drives up the cost of carrying inventory. Companies need to find
a balance between their desire to carry a wide range of products and offer high
availability on all of them and their conflicting desire to keep the cost of inventory
as low as possible. That balance is reflected quite literally in the amount of safety
stock that a company carries.
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 Key Points to Remember about Inventory
Management

ISCL (MDE)
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 Conclusion

•Demand Forecasting, forecasting

Methods
•Aggregate Planning
•Product Pricing
•Inventory Management
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 Practice

• Demand forecasting (time series)

• Aggregate production planning a.o.

• Computing EOQ and analyzing how

price depends upon EOQ
ISCL (MDE)
27
 References
• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd edition, 2010,
McGraw Hill International Edition
• Hugos M., Essentials of Supply Chain Management, John Wiley and Sons, Inc., 2006
• www.supply-chain.org
• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les chaines
d’approvisionnement. Conception, contrôle et outils, 2003
• Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain
Management: Implementation Issues and Research Opportunities,” The International
Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 7
• http://thepartnershipmodel.com/The-Partnership-Model.htm
• Goldratt, Eliyahu M., 1984, The Goal, Great Barrington, MA: The North River Press
Publishing Corporation
• Sunil Chopra, Peter Mendil, Supply chain management. Strategy, planning, and
operation. Fourth edition, 2010, ISBN 13: 978-0-13-609451-7

ISCL (MDE)
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 Supply Chain Management

Management of Digital Enterprise

Supply chain operations: Source.

Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Chapter 4
Supply chain operations: Source

Content:

• Introduction to procurement
• Procurement perspectives and strategies
• Credit and Collections
• E-Commerce and Procurement

SCM 2023
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 Procurement
Every organization, whether it is a manufacturer, wholesaler, or retailer,
buys materials, services, and supplies from outside suppliers to
support its operations. Historically, the process of acquiring these
needed inputs has been considered somewhat of a nuisance, at
least as compared to other activities within the firm. Purchasing was
regarded as a clerical or low-level managerial activity charged with
responsibility to execute and process orders initiated elsewhere in
the organization. The role of purchasing was to obtain the desired
resource at the lowest possible purchase price from a supplier.
This traditional view of purchasing has changed substantially in the
past two decades. The modern focus of supply chain management
is on the relationships between buyers and sellers and has
elevated purchasing to a higher, strategic level activity. This strategic
role is differentiated from the traditional role through the usage of the
term procurement, although in practice many people use the terms
purchasing and procurement interchangeably.
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 Procurement

Traditionally, the main activities of a purchasing manager were to make

potential suppliers fight over the lowest price and then buy products from the
lowest cost supplier that could be found. That is still an important activity, but
there are other activities that are becoming equally important. Because of this
the purchasing activity is now seen as part of a broader function called
procurement. The procurement function can be broken into five main activity
categories:

1. Purchasing
2. Consumption Management
3. Vendor Selection
4. Contract Negotiation
5. Contract Management

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 Procurement
Purchasing
These activities are the routine activities related to issuing purchase orders
for needed products. There are two types of products that a company buys; 1)
direct or strategic materials that are needed to produce the products that the
company sells to its customers; and 2) indirect or MRO (maintenance, repair,
and operations) products that a company consumes as part of daily
operations.
The mechanics of purchasing for both types of products are largely the same.
Purchasing decisions are made, purchase orders are issued, vendors are
contacted, and orders are placed. There is a lot of data communicated in
this process between the buyer and the supplier – items and quantities
ordered, prices, delivery dates, delivery addresses, billing addresses, and
payment terms. One of the greatest challenges of the purchasing activity is to
see to it that this data communication happens in a timely manner and
without error. Much of this activity is very predictable and follows well defined
routines.
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 Procurement
Consumption Management
Effective procurement begins with an understanding of how much of what
categories of products are being bought across the entire company as well as
by each operating unit. There must be an understanding of how much of what
kinds of products are bought from whom and at what prices.
Expected levels of consumption for different products at the various locations
of a company should be set and then compared against actual
consumption on a regular basis. When consumption is significantly above or
below expectations, this should be brought to the attention of the appropriate
parties so possible causes can be investigated and appropriate actions taken.

Consumption above expectations is either a problem to be corrected or it

reflects inaccurate expectations that need to be reset. Consumption below
expectations may point to an opportunity that should be exploited or it also
may simply reflect inaccurate expectations to begin with.

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 Procurement
Vendor Selection
There must be an ongoing process to define the procurement capabilities
needed to support the company’s business plan and its operating model. This
definition will provide insight into the relative importance of vendor capabilities.
The value of these capabilities has to be considered in addition to simply the
price of a vendor’s product. The value of product quality, service levels, just
in time delivery, and technical support can only be estimated in light of what
is called for by the business plan and the company’s operating model.
Once there is an understanding of the current purchasing situation and an
appreciation of what a company needs to support its business plan and
operating model, a search can be made for suppliers who have both the
products and the service capabilities needed. As a general rule, a company
seeks to narrow down the number of suppliers it does business with.
This way it can leverage its purchasing power with a few suppliers and get
better prices in return for purchasing higher volumes of product.

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 Procurement
Contract Negotiation
As particular business needs arise, contracts must be negotiated with
individual vendors on the preferred vendor list. This is where the specific items,
prices, and service levels are worked out. The simplest negotiations are for
contracts to purchase indirect products where suppliers are selected on the
basis of lowest price. The most complex negotiations are for contracts to
purchase direct materials that must meet exacting quality requirements and
where high service levels and technical support are needed.
Increasingly, though, even negotiations for the purchase of indirect items such
as office supplies and janitorial products are becoming more complicated
because they fall within a company’s overall business plan to gain greater
efficiencies in purchasing and inventory management.

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 Procurement
Contract Management
Once contracts are in place, vendor performance against these contracts
must be measured and managed. Because companies are narrowing down
their base of suppliers, the performance of each supplier that is chosen
becomes more important. A particular supplier may be the only source of a
whole category of products that a company needs and if it is not meeting
its contractual obligations, the activities that depend on those products will
suffer.
A company needs the ability to track the performance of its suppliers and
hold them accountable to meet the service levels they agreed to in their
contract. Just as with consumption management, people in a company need
to routinely collect data about the performance of suppliers. Any supplier that
consistently falls below requirements should be made aware of their
shortcomings and asked to correct them.

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 Procurement perspectives

The evolving focus on procurement as a key capability in organizations

has stimulated a new perspective regarding its role in supply chain
management.

Emphasis has shifted from the traditional transaction-focused

negotiation with suppliers to ensuring that the firm is well positioned
to implement its manufacturing and marketing strategies with
support from its supply base.

Considerable focus is placed on ensuring continuous supply, inventory

minimization, quality improvement, supplier development, and
lowest total cost of ownership => supplier integration

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 Procurement perspectives
Continuous Supply
Stockouts of raw materials or component parts can shut down a
production plant and result in extreme cost to an organization.
Downtime due to production stoppage increases operating costs and
results in an inability to provide finished goods for delivery to customers.
Thus, one of the core objectives of procurement is to ensure that a
continuous supply of materials, parts, and components is available for
use.

Minimize Inventory Investment

One goal of modern procurement is to maintain supply continuity with
the minimum inventory investment possible. This requires balancing the
costs of carrying excessive materials against the possibility of a
production stoppage.

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 Procurement perspectives
Quality Improvement
Procurement can play a critical role in the quality of an organization's
products. The quality of finished goods and services is obviously dependent
upon the quality of the materials and parts used in producing those items. If
poor-quality components and materials are used, then the final product will
not meet customer quality standards.

Supplier Development (choosing suppliers)

Successful procurement depends on locating or developing suppliers,
analyzing their capabilities, and selecting and working with those suppliers to
achieve continuous improvement. Developing good supply relationships with
firms that are committed to the buying organization's success is critical in
supplier development.

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 Procurement perspectives
Lowest Total Cost of Ownership
Ultimately, the difference in perspective between traditional purchasing
practice and contemporary procurement strategy can be summarized as a
focus on Total Cost of Ownership (TCO) instead of a focus on purchase price.
Procurement professionals recognize that although the purchase price of a
material or item remains very important, it is only one part of the total cost
equation in their organization. Service costs and life cycle costs must also be
considered.

Purchase Price and Discounts

Whether established through competitive bidding, buyer-seller negotiation, or
simply from a seller's published price schedule, the purchase price of an
item is obviously a concern in procurement. No one wants to pay a higher
price than necessary. Related to the price quote is normally a schedule of one
or more possible discounts that the buyer may receive.

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 Procurement perspectives
Service Pricing and Debundling
Sellers typically offer a number of standard services that must be
considered in procurement. Additionally, a wide variety of value added
services must be evaluated as organizations attempt to find the lowest TCO.
Many of these services involve logistical operations and the logistical
interface between buyers and sellers.

Life Cycle Costs

The final aspect of lowest TCO includes numerous elements known as life
cycle costs. The total cost of materials, items, or other inputs extends
beyond the purchase price and elements of value-added service to include
the lifetime costs of such items. Some of these costs are incurred before
actual receipt of the items, others are incurred while the item is being
used, and some occur long after the buyer has actually used the item.

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 Procurement strategies
Effective procurement strategy to support supply chain management concepts requires a
much closer working relationship between buyers and sellers than was traditionally
practiced. Specially, three strategies have emerged:

Volume consolidation – Reducing total number of suppliers while minimizing risk

Supplier Operational Integration – Building partnerships, Sharing information and

knowledge, Identifying linked processes and shared opportunities for improvement

Value Management – Involving the supplier early in product design, Reducing complexity

Each of these strategies requires an increasing degree of interaction between supply chain
partners; thus, they may not be considered as distinct and separate but rather as
evolutionary stages of development.

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 Credit and Collections

The supply chains that a company participates in are often selected on the
basis of credit decisions. Much of the trust and cooperation that is possible
between companies who do business together is based upon good credit
ratings and timely payments of invoices. Credit decisions affect who a
company will sell to and also the terms of the sale. The credit and collections
function can be broken into three main categories of activity:
1. Set Credit Policy
2. Implement Credit and Collections Practices
3. Manage Credit Risk

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 Credit and Collections
Set Credit Policy
Credit policy is set by senior managers in a company such as the controller,
chief financial officer, treasurer, and chief executive officer. The first step in
this process is to review the performance of the company’s receivables.
Every company has defined a set of measurements that they use to analyze
their receivables, such as: days sales outstanding (DSO); percent of
receivables past customer payment terms; and bad debt write-off amount as
percent of sales.
Once management has an understanding of the company’s receivables
situation and the trends affecting that situation, they can take the next step
which is to set or change risk acceptance criteria to respond to the state of
the company’s receivables. These criteria should change over time as
economic and market conditions evolve. These criteria define the kinds of
credit risks that the company will take with different kinds of customers and
the payment terms that will be offered.

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 Credit and Collections
Implement Credit and Collections Practices
These activities involve putting in place and operating the procedures that will
carry out and enforce the credit policies of the company. The first major activity
in this category is to work with the company sales people to approve sales
to specific customers. As noted earlier, making a sale is like making a loan
for the amount of the sale. Customers often buy from a company because that
company extends them larger lines of credit and longer payment terms than its
competitors. Credit analysis goes a long way to assure that this loan is only
made to customers who will pay it off promptly as called for by the terms of the
sale.
The third major activity that is performed is collections. This is a process that
starts with the ongoing maintenance of each customer’s accounts payable
status. Customers that have past due accounts are contacted and payments
are requested. Sometimes new payment terms and schedules are negotiated.

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 Credit and Collections
Manage Credit Risk
The credit function works to help the company take intelligent risks that
support its business plan. What may be a bad credit decision from one
perspective may be a good business decision from another perspective. If a
company wants to gain market share in a certain area it may make credit
decisions that help it to do so. Credit people work with other people in the
business to find innovative ways to lower the risk of selling to new kinds of
customers.
Managing risk can be accomplished by creating credit programs that are
tailored to the needs of customers in certain market segments such as high
technology companies, start-up companies, construction contractors, or
customers in foreign countries. Payment terms that are attractive to customers
in these market segments can be devised. Credit risks can be lowered by the
use of credit insurance, liens on customer assets, and government loan
guarantees for exports.

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 E-Commerce and Procurement

The explosion in technology and information systems is having a major impact

on the procurement activity of many major organizations. Much of the actual
day-to-day work in procurement has traditionally been accomplished manually
with significant amounts of paperwork, resulting in slow processes subject to
considerable human error. Applying technology to procurement has
considerable potential to speed the process, reduce errors, and lower cost
related to acquisition (optimization).

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 E-Commerce and Procurement
Basic Electronic Procurement

Probably the most prevalent use of electronic commerce in procurement is

Electronic Data Interchange (EDI). EDI, as the term implies, is simply the
electronic transmission of data between a firm and its supplier. This allows two
or more companies to obtain and provide much more timely and accurate
information. There are many types of data being transmitted directly, including
purchase requisitions, purchase orders, purchase order acknowledgment,
order status, and tracking and tracing information. The explosion in EDI usage
during the late 1990s was a direct recognition of its benefits, including
standardization of data, more accurate information, more timely
information, shortening of lead times with associated reductions in
inventories, and reduced TCOs.

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 E-Commerce and Procurement
The Internet and B2B Procurement

One advantage of the Internet relative to traditional EDI is that it overcomes

some of the technical issues of compatibility of computer systems, which is
required in EDl. The Internet itself provides capability for buyers and sellers to
exchange files and information easily.

While numerous benefits are envisioned for trading exchanges and buying
exchanges, there is a potential downside. Many suppliers fear that the
exchanges will become a mechanism that ultimately will return
procurement to focus strictly on purchase price. If buyers post their
requirements and needs on the Web primarily for the purpose of soliciting bids
from alternative suppliers, or use the technology to have suppliers enter into
an auctioning process, it is feared that many of the advances in supplier
integration and value management will suffer. The future will show whether the
result will be positive or negative.
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 Conclusion

• Procurement vs Purchasing
• Procurement stages, perspectives
and strategies
•E-Commerce in the framework of
Procurement

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 References
• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd edition, 2010, McGraw Hill
International Edition
• Hugos M., Essentials of Supply Chain Management, John Wiley and Sons, Inc., 2006
• www.supply-chain.org
• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les chaines
d’approvisionnement. Conception, contrôle et outils, 2003
• Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management:
Implementation Issues and Research Opportunities,” The International Journal of Logistics
Management, Vol. 9, No. 2, 1998, p. 7
• http://thepartnershipmodel.com/The-Partnership-Model.htm
• Goldratt, Eliyahu M., 1984, The Goal, Great Barrington, MA: The North River Press
Publishing Corporation
• Sunil Chopra, Peter Mendil, Supply chain management. Strategy, planning, and operation.
Fourth edition, 2010, ISBN 13: 978-0-13-609451-7

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 Supply Chain Management

Management of Digital Enterprise

Supply chain operations: Making

Silviu RAILEANU
Universitatea Politehnica din Bucureşti
Spring
 Chapter 5
Supply chain operations: Making

Content:

• Introduction to manufacturing/making process

• Types of making processes
• Lean manufacturing

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 Making
The process of adding value to products through mixing, separating, forming, machining,
and chemical processes.

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 Making
Product Design
Product designs and selections of the components needed to build
these products are based on the technology available and product
performance requirements. Until recently, little thought was given to
how the design of a product and the selection of its components affect
the supply chain required to make the product. Yet these costs can
become 50 percent or more of the product’s cost.
When considering product design from a supply chain perspective the
aim is to design products with fewer parts, simple designs, and
modular construction from generic sub-assemblies. This way the
parts can be obtained from a small group of preferred suppliers.
Inventory can be kept in the form of generic sub-assemblies at
appropriate locations in the supply chain. There will not be the need to
hold large finished goods inventories because customer demand can be
met quickly by assembling final products from generic sub-assemblies
as customer orders arrive.
Product design = f(procurement, manufacturing type) SCM (2023)
4
 Making
Production Planning
Production planning allocates available capacity (equipment, labor, and
facilities) to the work that needs to be done. The goal is to use available
capacity in the most efficient and profitable manner. The production
planning operation is a process of finding the right balance between
several competing objectives:
• High utilization rates – This often means long production runs and
centralized manufacturing and distribution centers. The idea is to
generate and benefit from economies of scale.
• Low inventory levels – This usually means short production runs and
just-in-time delivery of raw materials. The idea is to minimize the
assets and cash tied up in inventory.
• High levels of customer service – Often requires high levels of
inventory or many short production runs. The aim is to provide the
customer with quick delivery of products and not to run out of stock
in any product.
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 Making

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 Making
Production Scheduling
Planning VS scheduling (Bartak)

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 Making
Example (1)

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 Making
Product “run out time”
The first step in planning a multi-product production facility is to
determine the economic lot size for the production runs of each product.
This is a calculation much like the EOQ (economic order quantity)
calculation used in the inventory control process.
Once production quantities have been determined, the second step is
to set the right sequence of production runs for each product. The
basic rule is that if inventory for a certain product is low relative to its
expected demand, then production of this product should be scheduled
ahead of other products that have higher levels of inventory relative to
their expected demand. A common technique is to schedule production
runs based on the concept of a product’s “run out time”. The run out
time is the number of days or weeks it would take to deplete the product
inventory on hand given its expected demand. The run out time
calculation for a product is expressed as R = P / D, where: R = run out
time, P = number of units of product, on hand,
D = product demand in units for a day or week SCM (2023)
9
 Making
Facility Management
All facility management decisions happen within the constraints set by
decisions about facility locations. Location is one of the five supply
chain drivers discussed in Introduction (Chapter 2). It is usually quite
expensive to shut down a facility or to build a new one so companies
live with the consequences of decisions they make about where to
locate their facilities. Ongoing facility management takes location as a
given and focuses on how best to use the capacity available. This
involves making decisions in three areas:
1. The role each facility will play
2. How capacity is allocated in each facility
3. The allocation of suppliers and markets to each facility
Demo – laboratory 4: dimensioning the production facilities and
allocate them to markets

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 Making
Example (2)

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 Making
Example (3)

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 Making
Demand and Supply Uncertainty
Making (or manufacturing) complexity, in a stable supply process,
tends to be low or manageable thus, the manufacturing process
normally is highly automated, and long-term contracts are in place.
On the contrary, manufacturing in an evolving supply process
requires a lot of fine-tuning and is often subject to breakdowns and
uncertain yields. Therefore, the supply base may not be reliable, as the
suppliers themselves are going through process innovation.
Consequently, the production planner of a company has to be aware of
which type of products his company has, in order to be able to
adequately create a production schedule.

Examples => following table.

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 Making
SC types as a function of supply and demand uncertainty

Demand uncertainty
Low (functional products) High (innovative products)
Supply uncertainty

Low (stable Grocery, basic apparel, Fashion apparel, computers,

process) food, oil, gas, a.o. popular music
Efficient Supply Chain Responsive Supply Chain
High Hydroelectric power Telecom, high-end
(Evolving computers, semiconductors
process) Risk exposed Supply Agile Supply Chain
Chain

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 Making
Demand Uncertainty
Four types of supply chain strategies as can be seen in the chart above:

Efficient supply chains – Are supply chains that utilize strategies aimed at
creating the highest cost efficiency. For such efficiencies to be achieved,
non-value-added activities, should be eliminated, scale economies should be
pursued, optimization techniques should be deployed to get the best capacity
utilization in production and distribution, etc. In this case it’s normally used
Make-to-Stock production.

Responsive supply chains – Are supply chains that utilize strategies aimed at
being responsive and flexible to the changing and diverse needs of the
costumers. To be responsive, companies use Make-to-Order or Assemble-to-
Order and mass customization processes as a means to meet the specific
requirement of costumers.

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 Making
Demand Uncertainty (cont)

Risk exposed Supply Chains – These are supply chains that utilize strategies aimed at
pooling and sharing resources so that the risks in supply disruption can also be shared. It is
therefore a risk-hedging strategy. A single entity in a supply chain can be vulnerable to supply
disruptions, but if there is more than one supply source or if alternative supply resources are
available, then the risk of disruption would be reduced.

Agile Supply Chains – These are supply chains that utilize strategies aimed at being
responsive and flexible to customer needs, while the risks of supply shortages or
disruptions are covered by pooling inventory or other capacity resources. These supply
chains essentially have strategies in place that combine the strengths of “hedged” and
“responsive” supply chains. They are agile because they have the capability to be responsive
to the changing, diverse, and unpredictable demands of customers on the front end, while
minimizing the back-end risks of supply disruptions.

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 Types of making processes
Make – to – Stock (MTS)
In this strategy, the company produces standardized items (shelf production) for
stock-based sales forecast. On a common way the natural order of the main
business processes, as shown below. As we can see in the scheme provided
first of all we have to forecast the demand, followed by planning the production,
production, sell and finally deliver to the costumer.

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 Types of making processes
Make – to – order (MTO)
In this strategy, usually, production is only performed after selling the product,
i.e., it produces by confirmed orders. It means that the process of business "sell"
comes before "produce." The natural order of key processes of business in this
strategy, as shown below, to sell, plan production, produce and deliver. This
strategy produces the operation according to customer specifications, i.e., has a
high degree of customization, so the production process must be flexible to
accommodate the variety.

There are various models for Make To Order SCM (2023)

18
 Types of making processes
Assembly – to – order (ATO)
In this strategy, the product components are produced and stocked before the
product itself. This components production takes into consideration a forecast.
When a production order is received it consequently leads to the conclusion of
the production process, using the components produced previously. One of the
main advantages of this strategy is that enables companies to reduce the lead
time of response and delivery of orders, i.e., in this strategy the organizations
produce to stock some of the most important components, thus being able to
produce quickly a big diversity of products.

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 Types of making processes
Engineer – to – Order (ETO)
This strategy is for companies whose main business is focused on producing
goods and services from a 'purchase order', ie, production is oriented to the
customer's request. In these cases the complexity of the final product can
generate a combination of logistics, machine setup and resource allocation. The
products tend to be highly custom ("one of a kind") and the level of interaction
with customers is generally quite extensive.
The Engineer-To-Order includes several other basic modules and ERP
applications, thereby enabling the tracking of costs, materials and activities,
without losing control of the profitability of the project.

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 Types of making processes
Engineer-to-Order
Additionally, the ETO is fully integrated
with supply chain applications for
efficient execution of projects, in addition
to having appropriate functions and
practices of project management
strategies more widespread. The system
provides information and mechanisms to
guide projects through the four stages
commonly associated with projects:
• Project Initiation Phase
• Planning phase of the project
• Implementation Phase of the project
• Stage of project closure
The following diagram represents the
different stages that an ETO project
normally passes by.

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 Lean manufacturing
Lean Manufacturing
In the past, mass production was the method that a majority of manufacturers
used to make the most money by running at the highest machine efficiency. This
involved expensive equipment, a large amount of money tied up in work in
process (WIP), and excess finished goods inventory (Sanchez & Nagi, 2001).
The ways of the world are changing. Due to rising global competition and rising
customer demands, operations no longer wish to have inflexible plants with
excess inventory on hand. In order to stay competitive, companies are now
trying to adopt manufacturing principles in which lead times and cycle times are
shortened, quality levels are increased and excess inventory and other waste is
decreased. These are the principles of lean manufacturing, and the resulting
benefits enable many industries to become more competitive by better satisfying
their customers, an essential component in today’s global economy.

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 Lean manufacturing
Besides the implementation of tools and techniques, lean manufacturing
involves an adaptation at all levels of the company’s workforce to the lean
philosophy. Lean must involve a culture change and a new way of thinking, often
referred to as lean thinking (Womack & Jones, 2003, The Machine That
Changed the World). The five principles of “lean thinking”:

1. Specify Value;
2. Identify Value Stream (chain);
3. Make Value* Flow;
4. Let Customers Pull; and
5. Pursue Perfection (Womack & Jones, 2003).

* "value" = any action or process that a customer would be willing to pay for

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 Lean manufacturing
Many different terms, such as agile or flow, are used synonymously with lean; however, they are all
quite different. In order to become lean, various tools and techniques must be implemented in addition to
the adoption of the lean philosophy.

Agile
Often “agile” manufacturing is considered quite similar to lean manufacturing; however Sanchez and
Nagi (2001) claim that agile manufacturing is an overall strategy and lean manufacturing is a
collection of operational techniques (principles). Agile is used with constant change in an
unpredictable environment and relies on resources from other operations, while lean relies on current
resources (Sanchez & Nagi, 2001).

Agile manufacturing is a term applied to an organization that has created the processes, tools, and
training to enable it to respond quickly to customer needs and market changes while still controlling
costs and quality.

Push and pull

Kanban
Just in time

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 Lean manufacturing
Push vs. Pull
Lean manufacturing uses the techniques of “pull” rather than “push.” Pull is a
way of moving inventory through the factory by signaling to a previous stage that
replenishment materials are needed to make the next product (Womack & Jones,
2003). The signal in pull systems are kanban. In pull environments, less
inventory is held but sometimes customer service suffers if the lead times are too
long (Beamon & Bermudo, 2000). Push manufacturing systems make the
products whether or not there is a need for them and are generally based on
forecasting. This often causes a back-up in inventory at the particularly slower
stages of the manufacturing process; however, customer service increases due
to the abundance of available finished goods (Myers, 2005; Beamon & Bermudo,
2000; Russell & Taylor, 2003).

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 Lean manufacturing
Push vs. Pull

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 Lean manufacturing
JIT
Just-in-time (JIT) is a concept that requires using a pull system where a part is not
manufactured until a preceding operation calls for it. It means to have the right
product in the right place at the right time (Standard & Davis, 1999). The term was
created by Kiichiro Toyoda, the first president of the Toyota Motor Company and the
system was implemented by Taiichi Ohno (Kanban Just-in-Time at Toyota:
Management Begins at the Workplace, 1989; Womack & Jones, 2003; Gross &
McInnis, 2003). With JIT, no excess inventory is produced and the optimal
results are achieved in a continuous flow layout because parts in a preceding
or upstream process are made right before they are needed and in the correct
quantity by the succeeding or downstream process (Detty & Yingling, 2000;
Langenwalter, 2000; Standard & Davis, 1999; Womack & Jones, 2003). The benefits
of JIT are shortened lead time, reduced operations other than processing,
reduced inventory and WIP, balanced processes, and clearly defined problems
(Kanban Just-in-Time at Toyota: Management Begins at the Workplace, 1989;
Standard & Davis, 1999; Gross & McInnis, 2003).

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 Lean manufacturing
Kanban (signboard in Japanese)

• Kanban are pull production control strategies created by the Japanese. They
are used to schedule production processes and are what some call demand
scheduling due to the fact that the operators produce products based on
actual usage, not on a forecast (Gross & McInnis, 2003). Kanban can be in
the form of a card, ticket or some other type of physical or electronic
identifying signal that is attached to a group of parts or products. This signal
generates the pull of that part by signaling the production and delivery in
preceding processes (Detty & Yingling, 2000; Gross & McInnis, 2003;
Womack & Jones, 2003).

• a scheduling system for lean manufacturing and just-in-time manufacturing

(JIT). Kanban is an inventory-control system to control the supply chain.

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 Conclusion

•Product design

•SC types as a function of demand and supply

uncertainty

•Types of making processes

•Lean manufacturing

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 References
• Bowersox D.J. et al., Supply Chain Logistics Management,
3rd edition, 2010, McGraw Hill International Edition
• Hugos M., Essentials of Supply Chain Management, John
Wiley and Sons, Inc., 2006
• Sunil Chopra, Peter Mendil, Supply chain management.
Strategy, planning, and operation. Fourth edition, 2010, ISBN
13: 978-0-13-609451-7
• Hau L. Lee, Aligning Supply Chain Strategies With Product
Uncertainties, California management review (Impact Factor:
1.67). 04/2002; 44(3):105-119. DOI: 10.2307/41166135

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 Supply Chain Management

Supply chain operations: Deliver

Silviu RAILEANU
Universitatea Politehnica din Bucureşti
 Chapter 6
Supply chain operations: Deliver

Content:

• Introduction (deliver process and order management)

• Delivery scheduling

• Types of deliveries

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 Delivery
Order management is the process of
passing order information from
customers back through the supply
chain from retailers to distributors to
service providers and producers. This
process also includes passing
information about order delivery
dates, product substitutions, and
back orders forward through the
supply chain to customers. This
process has long relied on the use of
the telephone and paper documents
such as purchase orders, sales orders,
change orders, pick tickets, packing Fig.1 – SCOR model
lists, and invoices.

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 Delivery
Order management
In the last years supply chains have become noticeably more complex
than they previously were. Companies now deal with multiple tiers of
suppliers, outsourced service providers, and distribution channel
partners. This complexity has evolved in response to changes in the
way products are sold, increased customer service expectations,
and the need to respond quickly to new market demands.
The traditional order management process has longer lead and lag
times built into it due to the slow movement of data back and forth
(&materials) in the supply chain. This slow movement of data works well
enough in some simple supply chains, but in complex supply chains
faster and more accurate movement of data is necessary to achieve the
responsiveness and efficiency that is needed. Modern order
management focuses on techniques to enable faster and more
accurate movement of order related data.

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 Delivery
Order management
Order management / marketing and sales functions (CRM)
Basic OM principles (informational integration):
• Enter the order data once and only once – Capture the data electronically as
close to its original source as possible and do not manually reenter the data as it
moves through the supply chain. It is usually best if the customers themselves
enter their orders into an order entry system. This system should then transfer the
relevant order data to other systems and supply chain participants as needed for
creation of purchase orders, pick tickets, invoices, and so on.

• Automate the order handling – Manual intervention should be minimized for the
routing and filling of routine orders. Computer systems should send needed data to
the appropriate locations to fulfill routine orders. Exception handling should identify
orders with problems that require people to get involved to fix them.

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 Delivery
Order management
• Make order status visible to customers and service agents – Let customers
track their orders through all the stages from entry of the order to delivery of the
products. Customers should be able to see order status on demand without
having to enlist the assistance of other people. When an order runs into problems,
bring the order to the attention of service agents who can resolve the problems.

• Integrate order management systems with other related systems to maintain

data integrity – Order entry systems need product descriptive data and product
prices to guide the customer in making their choices. The systems that maintain
this product data should communicate with order management systems. Order
data is needed by other systems to update inventory status, calculate delivery
schedules, and generate invoices. Order data should automatically flow into these
systems in an accurate and timely manner.

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 Delivery scheduling
The delivery scheduling operation is strongly affected by the decisions made concerning
the modes of transportation that will be used. The delivery scheduling process works
within the constraints set by transportation decisions. For most modes of transportation
there are two types of delivery methods: direct deliveries and milk run deliveries.
Direct Deliveries
Direct deliveries are deliveries made from one originating location to one receiving
location. With this method of delivery the routing is simply a matter of selecting the
shortest path between the two locations (Dijkstra). Scheduling this type of delivery
involves decisions about the quantity to deliver and the frequency of deliveries to each
location. The advantages of this delivery method are found in the simplicity of operations
and delivery coordination. Since this method moves products directly from the location
where they are made or stored in inventory to a location where the products will be used,
it eliminates any intermediate operations that combine different smaller shipments into a
single, combined larger shipment.
Direct deliveries are efficient if the receiving location generates economic order quantities
(EOQs) that are the same size as the shipment quantities needed to make best use of the
transportation mode being used.

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 Delivery scheduling
Milk Run Deliveries
Milk run deliveries are deliveries that are routed to either bring products from a single
originating location to multiple receiving locations (Travelling Salesman Problem &
Knapsack problem) or deliveries that bring products from multiple originating locations to a
single receiving location. Scheduling milk run deliveries is a much more complex task than
scheduling direct deliveries. Decisions must be made about delivery quantities of different
products, about the frequency of deliveries, and most importantly about the routing and
sequencing of pickups and deliveries.

The advantages of this method of delivery are in the fact that more efficient use can be
made of the mode of transportation used and the cost of receiving deliveries is
lower because receiving locations get fewer and larger deliveries. If the EOQs of
different products needed by a receiving location are less than truck load (LTL) amounts,
milk run deliveries allow orders for different products to be combined until the resulting
quantity equals a truck load or TL amount. If there are many receiving locations that each
need smaller amounts of products, they can all be served by a single truck that starts its
delivery route with a TL amount of products.

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 Delivery scheduling
Milk Run Deliveries

Strong influence

Travelling Salesman Problem

Solutions:
- Try all permutation O(n!) – impractical for n>20
Knapsack problem - Branch and bound n:40-60
Solution: CP/CSP - LP/CP
- Breaking the problem into smaller problems
- High computation time, same input data => reuse
existing solutions

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 Delivery scheduling
Delivery Sources

Deliveries can be made to customers from two sources:

• Single product locations
• Distribution centers (cross docking / no warehousing)

Single product locations are facilities such as factories or warehouses where

a single product or a narrow range of related items are available for shipment.
These facilities are appropriate when there is a predictable and high level of
demand for the products they offer and where shipments will be made only to
customer locations that can receive the products in large, bulk amounts. They
offer great economies of scale when used effectively.

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 Delivery scheduling
Distribution centers are facilities where bulk shipments of products arrive from single
product locations. When suppliers are located a long distance away from customers, the
use of a distribution center provides for economies of scale in long-distance
transportation to bring large amounts of products to a location close to the final
customers.
The distribution center may warehouse inventory for future shipment or it may be used
primarily for crossdocking. Crossdocking is a technique pioneered by Wal-Mart where
truckload shipments of single products arrive and are unloaded. At the same time these
trucks are being unloaded, their bulk shipments are being broken down into smaller lots
and combined with small lots of other products and loaded right back onto other trucks.
These trucks then deliver the products to their final locations.
Distribution centers that use crossdocking provide several benefits. The first is that
product flows faster in the supply chain since little inventory is held in storage. The
second is that there is less handling expense since product does not have to be put
away and then retrieved later from storage. The benefits of crossdocking can be
realized when there are large predictable product volumes and when economies of
scale can be applied on both the inbound and outbound transportation.

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 Types of deliveries
Designing options for a distribution network (*)
In this section a distribution network from the manufacturer to the end client is
discussed in a generic manner so the problem can be extended to any other pair
of stages, such as supplier to manufacturer or even a service company serving
its customers through a distribution network. Managers must take two key
decisions when designing a distribution network:
• Will the product be delivered to customer location or picked up from a
preordained site?
• Will the product flow through an intermediary location?

Possibilities
• Manufacturer storage with direct shipping
• Manufacturer storage with direct shipping and in-transit merge
• Distributor storage with package carrier delivery
• Distributor storage with last-mile delivery
• Manufacturer/distributor storage with customer pickup
• Retail storage with customer pickup

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* Chopra & Mendil, 2010, Chapter 4, Designing distribution networks and applications to e-Business
 Deliver
Performance characteristics based on cost factor
– Inventory = lower costs because of aggregation. Benefits of aggregation are
highest for low-demand, high-value items. Benefits are very large if product
customization can be postponed at the manufacturer
– Transportation = higher transportation Manufacturers
costs because of increased distance
and disaggregate shipping
– Facilities and handling = lower Retailer

facility costs because aggregation.

Some saving on handling costs if
Customers
manufacturer can manage small
shipments or ship from production line Product flow
– Information = significant investment Information flow
Fig.2 – Manufacturer storage with direct
in information infrastructure to integrate shipping [Chopra et al., 2010]
manufacturer and retailer
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 Deliver
Performance characteristics based on service factor
– Response time = long response time because of increased distance and two stages
for order processing. Response time may vary by product, thus complicating receiving
– Product variety = easy to provide a very high level of variability
– Product availability = easy to provide a high level of product availability because of
aggregation at manufacturer Manufacturers
– Customer experience = good in
terms of home delivery but can suffer if
order from several manufacturers is Retailer

sent as partial shipments

– Time to market = fast, with product
available as soon as first unit is Customers
produced
– Order visibility = more difficult but Product flow
Information flow
also more important from a customer
service perspective Fig.2 – Manufacturer storage with direct shipping
[Chopra et al., 2010]
– Returnability = expensive and difficult to
implement
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 Deliver
Performance characteristics based on cost factor
– Inventory = similar to drop-shipping
– Transportation = lower than drop-shipping
– Facilities and handling = handling costs higher than drop-shipping at carrier;
receiving costs lower at customer
Factories
– Information = higher than
drop-shipping (need for coordination)
Retailer In-Transit Merge by Carrier

 Performance characteristics based on service

factor
◼ Product variety, product availability, time to Customers
market, order visibility, returnability = similar
to drop-shipping Product flow

◼ Response time = higher than drop-shipping Information flow

◼ Customer experience = better (one delivery Fig.3 – Manufacturer storage with direct shipping
to be received) and in-transit merge [Chopra et al., 2010]
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 Deliver
Profitable for fast moving goods
Performance characteristics based on cost factor
– Inventory = higher then manufacturer storage
– Transportation = lower than manufacturer storage
– Facilities and handling = higher then manufacturer storage
– Information = simpler Factories

then manufacturer storage

Warehouse Storage by Distributor/Retailer

Performance characteristics based on service factor

◼ Response time = good
Customers
◼ Product variety = low
◼ Product availability = costs a lot Product flow
◼ Customer experience = good Information flow

◼ Time to market = high Fig.4 – Distributor storage with package carrier

◼ Order visibility and returnability = good delivery [Chopra et al., 2010]
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16
 Deliver
Performance characteristics based on cost factor (Distributor storage
with last mile delivery)
– Inventory = higher then distributor storage
– Transportation = higher due to the minimal scale economies
– Facilities and handling = higher then manufacturer and distributor
(package) storage Factories

– Information = similar to
previous Distributor/Retailer Warehouse

Performance characteristics based on service factor

◼ Response time = very quick Customers
◼ Product variety = less then distributors storage Product flow
◼ Product availability = expensive to provide Information flow
◼ Customer experience = good for bulky items Fig.5 – Distributor storage with last-mile delivery
◼ Time to market = higher then previous [Chopra et al., 2010]
◼ Order visibility and returnability = easy to
implement, harder and more expensive then SCM
17 retailer
 Deliver

Performance characteristics based on cost factor

(Manufacturer/distributor storage with customer pickup)
– Inventory = depending on Factories

the location
– Transportation = lower then Retailer Cross-Dock DC

package carriers
– Facilities and handling = higher Customers

if new facilities have to be built

– Information = significant Product flow
Information flow
investment required Customer Flow flow
Fig.6 – Manufacturer or distributor storage with
customer pickup [Chopra et al., 2010]
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18
 Deliver

Retail storage with customer pickup

• often viewed as the most traditional type of supply chain

• inventory is stored locally at the retail store

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19
 Selecting a distribution network design
A network distribution designer needs to consider product characteristics as well as network
requirements when deciding the appropriate delivery method. The various networks considered
earlier have strengths and weaknesses. In the following tables the various delivery networks
are ranked relative to each other along different performance dimensions, 1 being associated
with the best choice.

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20
Selecting a distribution network design
Only niche companies end up using only a single distribution channel. Most
companies are best served by a combination of delivery networks. The best
combination being used depends on product characteristics as well as strategic
position that the firm is targeting. The suitability of each delivery design is shown
in the following table.

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21
 Conclusion
• Order management in the context of supply
chain management

• Types of deliveries

• Delivery scheduling

• Selection of a delivery/distribution network

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22
 References
• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd edition,
2010, McGraw Hill International Edition

• Hugos M., Essentials of Supply Chain Management, John Wiley and Sons,
Inc., 2006

• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les chaines

d’approvisionnement. Conception, contrôle et outils, 2003

• Sunil Chopra, Peter Mendil, Supply chain management. Strategy, planning,

and operation. Fourth edition, 2010, ISBN 13: 978-0-13-609451-7

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23
 Supply Chain Management

Closed loop supply chain: returns

management

Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Chapter 7

Closed loop supply chain: returns management

Content:

• Closed-Loop Supply Chain Management – types of material reuse

• Reverse logistic activities
• Advantages and needs of reverse logistics
• Closed loop supply chain issues

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2
 Introduction

VS

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3
Closed-Loop Supply Chain Management

Closed-Loop Supply Chain Management includes processes and

operations that can not be found in conventional supply chain
management.
Krikke et al. (2004): closed-loop supply chain = forward + reverse
chain (material flows)

Guide and Van Wassenhove (2003): product acquisition, reverse

logistics, test, sort, disposition, refurbish as well as distribution and
marketing.

Conclusion: variety of theoretical considerations for conventional

supply chain management, but still a lack of theory for closed-loop
supply chain management, particularly with regard to the additional
elements that the reverse supply chain incorporates.

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4
Closed-Loop Supply Chain Management

Returns
There are essentially three types of returns in
closed-loop supply chains:

Consumer returns: there returns are primarily

a consequence of liberal return to policies
by powerful retailers, and they are more
prevalent in North America.

End-of-use returns: products have been fully used

by the customer, and as a result, they are typically
one technological generation behind current new products.

End-of-life returns: these returns leave reached the end of their useful life, and, for the most
part, their appropriate disposition decisions are landfilling, incineration, or recycling.

In general, disposition decision for product include:

Landfiling, Incineration, Recycling, Resale(as-is),
Internal Reuse, Remanufacturing
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5
Closed-Loop Supply Chain Management

There are two main types of recovery:

- remanufacturing (product/part recovery)
- recycling (material recovery).

- energy recovery via incineration could be considered as a third type.

Combinations of different recovery types are also possible. It is often not easy
to decide what the best product recovery strategy is.

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6
Closed-Loop Supply Chain Management

Remanufacturing
- the process of disassembly and recovery at the module level and, eventually, at
the component level.
- it requires the repair or replacement of worn out or obsolete components and
modules. Parts subject to degradation affecting the performance or the expected
life of the whole are replaced. (E.g.: a professional automotive electronics
remanufacturing flow).

Remanufacturing differs from other recovery processes in its completeness: a

remanufactured machine should match the same customer expectation as
new machines.
Some authors distinguish remanufacturing from refurbishing. For example,
Hauser and Lund define remanufacturing as an extensive process of restoring
used products to “like-new” condition, which includes disassembly, cleaning,
replacing worn-out parts with new ones, reworking some parts, and reassembly.
Refurbishing would then be classified as “light” remanufacturing.

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7
Closed-Loop Supply Chain Management

Remanufacturing without identity loss

With this method, a current machine is built on the initial design, receiving all
of the enhancements, expected life and warranty of a new machine. The
physical structure (the chassis or frame) is inspected for soundness. The whole
product is refurbished and critical modules are overhauled, upgraded or
replaced. If there are defects in the original design, they are eliminated. This is
the case for customized remanufacturing of machine tools, airplanes,
computer mainframes, large medical equipment and other capital goods.
Because of its uniqueness, this product recovery is characterized as a project.

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8
Closed-Loop Supply Chain Management

Repetitive remanufacturing without identity loss

In this method, there is the additional challenge of scheduling the sequence of

dependent processes and identifying the location of inventory buffers.
There is a fine line between repetitive remanufacturing without loss of identity
and product overhaul/revision. Again, the critical difference is that
remanufacturing is a complete process. The final output has a like-new
appearance and is covered by a warranty comparable to that of a new product.

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9
Closed-Loop Supply Chain Management

Remanufacturing with loss of original product identity

With this method, used goods are disassembled into predetermined components
repaired and stocked, ready to be reassembled into a remanufactured product.

This is the case when remanufacturing automobile components, photocopiers,

toner cartridges, furniture, ready-to-use cameras and personal computers. Once
the product is disassembled and the parts are recovered, the process concludes
with an operation not too different from original manufacturing. Disassembled
parts are inventoried, just like purchased parts and made available for final
assembly.
Remanufacturing with loss of original product identity encompasses some
unique challenges in inventory management and disassembly sequence
development. Some of the open questions relate to the commonality of parts
in products of different generations, the uncertainty in the supply of used
products, and their relationship with production planning.

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10
Closed-Loop Supply Chain Management

Rebuilding

-old name for remanufacturing

-widely used by automotive industry.

-Example: a steam locomotive may be rebuilt with a new boiler or a diesel

locomotive may be rebuilt with a new engine. This saves money (by reusing
the frame, and some other components, which still have years of useful life)
and allows the incorporation of improved technology: a new diesel engine
may have lower fuel consumption, reduced exhaust emissions and better
reliability.

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11
Closed-Loop Supply Chain Management

Scraping or Recycling occurs for products

Scraping or Recycling occurs for products with limited or no value remaining,

so mostly for end-of-life and in some cases end-of-use returns. For end-of-life
returns, an example where recycling returns occurs is for a product with no value
remaining due to technological obsolescence such as very old personal
computers; these products are shredded and materials are separated and then
recovered.

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12
 Reverse logistics

Traditionally, supply chain models are based on

unidirectional logistics in the value chain. Some of
these models might even consider the reaction loop
in a secondary value chain. Most systems are set up
for outward logistics, and dealing with a reverse
product stream can become a difficult and costly
process. Given this problem, it is necessary to view
also reverse streams as integral part of the
supply chain mainly where a physical transport
of goods occurs.

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13
 Reverse logistics
Reverse logistics activities include:
• processing returned merchandise for reasons such as damage, seasonal,
restock, salvage, recall or excess inventory
• recycling packaging materials and reusing containers
• reconditioning, remanufacturing and refurbishing products
• obsolete equipment disposition
• hazardous material programmes
• asset recovery

A modern returns management can cover the following different tasks:

• Minimising or even eliminating returns
• Handling return procedures
• Redistribution of goods

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14
Advantages and needs of reverse logistics

Forces influencing the increase in need for reverse logistics activities:

• The green forces such as legislation and consumer awareness and concern.
Frequently, due to legislation, the original manufacturer is now responsible for
final disposal of the product. The increasing value of return products
increases the need for safe return from the field.
• Increased number of customer goods returned for credit as a result of
increased demand for customer service and satisfaction. Large retail chains
usually have an agreement with suppliers allowing them to return goods.
While originally intended to cover failed products, it has expanded to cover
perfect goods that simply have not sold. From the consumer perspective, the
buyer may return a good simply because they have decided not to keep it.
• Shortened product life cycles. As products become obsolete more quickly the
possibility and potential for returns increases.
• The drive to reduce costs. Firms are striving to reuse potentially good items
through reuse, recycling or secondary usage.

15
Needs SCM
Advantages and needs of reverse logistics

• Increase in e-commerce sales. The massive increase of sales made via the
Internet is conducive to increased returns as consumers buy merchandise
"sight unseen" only to be disillusioned or dissatisfied with their purchase.
• Increased demand for repairs, remanufacturing, upgrades, or recalibration.
• Potentially valuable products that are no longer viewed as such by the current
user. Consumers may purchase a new TV or washer/dryer even though the
one they own still has a useful life.
• Increased use of returnable or reusable containers.
• Warranty returns. For many items with warranties, the good is first returned
and then its disposition determined.
• Rental returns. The proliferation of rental businesses ensures the return of
used but still valuable furniture and appliances.
• Product recalls. Products may be recalled by the manufacturer due to
potential failure in the field or safety concerns.

16
Needs SCM
Advantages and needs of reverse logistics

Closed loop systems allow firms to track the product and its failure and repair
experience, thereby revealing how to cost-effectively service and support field service.
Also, the close control and rapid recovery provided by a closed loop system
allows minimum inventory for field support. Inventory value is maximized through
(Blumberg):

• Rapid returns to the manufacturer for reuse.

• Ability to obtain raw materials from products, parts, and subassemblies with value
to secondary markets.
• Controlled recycling or disposition within environmental and other legal
requirements.
• Ability to efficiently process returns back into the original direct supply chain.
• Reducing inventory often produces significant additional efficiencies and results to
the firm including:
• Simplifying processes of retail and whole-sale return, reducing labour cost.
• Reducing undesirable shrinkage and damage from returns.

17 Advantages SCM
Advantages and needs of reverse logistics

• Improving the database and visibility of products throughout their life

cycle.
• Reducing disposition cycle times, thereby, increasing cash flow.

• Strategic value of closed loop reverse logistics management operations

will have a very positive effect in terms of (Blumberg):
• Reducing cost of returns.
• Increasing the value of the salvage merchandise.
• Capturing vital information and reliability, maintainability, and
dependability of products supported.
• Reducing transportation and warehousing expenses and time including
the partial or full elimination of small package shipments.
• Automating and fully controlling the total returns process.

18 Advantages SCM
Advantages and needs of reverse logistics

Closed loop supply chains with remanufacturing present the following

complication characteristics with respect to forward chains:

• The input to the remanufacturing process – product returns – is uncertain in

quality, quantity and the timing of arrival. The network for collecting returns
may be different than the forward distribution network.
• Return with different quality grades have different remanufacturing processing
times, costs and capacity usage. Some return are found to be unfit for
remanufacturing, and they must be scrapped or recycled. Alternatively, the
firm can also savage returns from spare parts.
• Consumers generally view remanufactured product as imperfect substitutes
for new products, so they need to be priced accordingly.

Disadvantages/
19 things to consider SCM
Advantages and needs of reverse logistics

Based on a literature review [Guide 2000], the following characteristics for

planning and controlling a supply chain with remanufacturing of external returns:

1. The requirement for a reverse logistics network

2. The uncertain timing and quality of cores
3. The disassembly of cores
4. The uncertainly in materials recovered from cores
5. The problems of stochastic routings for materials and highly variable
processing times.
6. The complication of material matching restrictions
7. The need to balance returns of cores with demands for remanufactured
products.

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20
Strategic Closed-Loop Supply Chain Management

Sustainable Supply Chain Management

The fact that manufacturers have to rethink their supply chain in order to ensure
the future of their business has been recognized at least since 1972 and the
publication of a Club of Rome’s report entitled “The limits to growth” (Meadows
et al., 1972). The availability of non-renewable resources such as metals or
oil is critical for Original Equipment Manufacturers (OEMs) which, generally
speaking, need these resources to produce goods. Since OEMs base their
business on product selling, the long-term availability of these resources is
required for the profit creation to continue. By now, the profit-maximization
objective stands in contradiction with the objective of resource
conservation.

Types of sustainability
- Economical (financial independence &profit)
- Environmental (do not damage/affect the environment)
- Social (well being of citizens)

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21
Strategic Closed-Loop Supply Chain Management

There is also the possibility for some goods/products to reuse their materials when they
arrive at the end of their lifecycle and become obsolete. Some types of obsolescence are
presented below:

Psychological obsolescence. A product might become worthless because of fashion

effects, although it still works perfectly.

Qualitative obsolescence linked to the situation where a product wears out and stops
servicing. Owners’ needs can then be satisfied only through a replacement buy.

Functional obsolescence. Consequently to a modification of customers’ needs, a current

product may not provide enough utility anymore, either because of lacking functionality or
inferior performance. Thus, customers will have to buy new goods in order to close the gap
between the utility obtained from their current equipment and the utility provided by up-to-
date product releases.

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22
Strategic Closed-Loop Supply Chain Management

Despite the necessity of resource reintegration, closed-loop supply chains, i.e. supply
chains simultaneously carrying both forward and reverse flows, are very seldom run by
OEMs. Nevertheless, strategically issues in the near future will drive the structure of a
classic supply chain towards a closed loop supply chain. In doing so, managers have to ask
themselves the following questions:
Does a closed-loop supply chain fit with our corporate strategy?
Is it profitable to run a closed-loop supply chain?
1. When is it worthwhile for an OEM to recycle on its own? Does the legislation provide
enough incentives to do so?
2. How important is the cannibalization effect between new and recovered products after
the introduction of a refurbishing program? Is it profitable to refurbish despite this
cannibalization effect?
3. How should (financial & legistaltive) incentives be aligned within the organization to
ensure that a sales division supports the reuse or remanufacturing of its products?
When should manufacturers destroy their reclaimed products instead of refurbishing
them?
1. Which products should be reintegrated?
2. Which level of reintegration is profit-maximizing?
3. Where the recovery activities should be performed?
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23
Strategic Closed-Loop Supply Chain Management

To summarize, a comprehensive closed-loop should be developed with respect to the

following aspects:

• The mathematical framework should encompass costs and revenues simultaneously to

enable realistic return on investment computations.

• The interdependencies between the three core recovery paths have to be accurately
depicted because an increase of the reuse flow reduces in the short-term the quantity of
products available for remanufacturing and recycling. Furthermore, reintegrated products
may compete directly against new products in the lower segments. However, the
cannibalization danger might be balanced by the fact that cheaper offers may generate
additional demand.

• The asset recovery probability depends on sequentially linked key factors such as return
probability, technological reintegration alternatives, functional state of a product and the
demand segmentation

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24
 Conclusion
• Closed-Loop Supply Chain Management
• Reverse logistic
• Advantages and needs of reverse
logistics
• Reverse supply chain issues
• Strategic Closed-Loop Supply Chain
Management

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25
 References
• Bowersox D.J. et al., Supply Chain Logistics Management,
3rd edition, 2010, McGraw Hill International Edition

• Hugos M., Essentials of Supply Chain Management, John

Wiley and Sons, Inc., 2006

• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth,

Les chaines d’approvisionnement. Conception, contrôle et
outils, 2003

• Sunil Chopra, Peter Mendil, Supply chain management.

Strategy, planning, and operation. Fourth edition, 2010, ISBN
13: 978-0-13-609451-7

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26
 Supply Chain Management

Supply chain operations: Enable

Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Chapter 8
Supply chain operations: Enable

Content:

• SCOR review
• Enable process description
• Components
• Metrics (first level)

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2
 Enable process

• Enable represents all the processes associated with

establishing, maintaining and monitoring of the elements
(information, relationships, resources, assets, business rules,
compliance and contracts) required to operate the supply chain.
Enable processes support the realization and governance of
the planning and execution processes of supply chains.
• Enable processes interact with processes in other domains (for
example: Financial processes, HR (Human Resource)
processes, I(C)T (Information, Communication & Technology)
processes, facilities management processes, product & portfolio
management processes, product and process design processes
and sales and support processes).
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3
 SCOR review

• Endorsed by Supply Chain Council (SCC)

• SCC merged with American Production and Inventory Control Society (APICS) in 2014 => now APICS
• Revision 11, October 2012
– Thirteenth revision since the model's introduction in 1996
– Developed to describe the business activities associated with all phases of satisfying a customer's demand
• Characteristics: standard/generic cross-industry diagnostic tool for supply chain management
• Is designed to support supply chain analysis at multiple levels (see next slide)
• Addresses: all customer interactions (order entry through paid invoice), all physical material
transactions (supplier's supplier to customer's customer, including equipment, supplies, spare
parts, bulk product, software, etc.) and all market interactions (from the understanding of aggregate demand
to the fulfillment of each order -> GENERIC, industry neutral
• Does not address: sales and marketing (demand generation), product development, research and
development, and some elements of post-delivery customer support -> SPECIFIC, how a particular
organization should conduct its business or tailor its systems/information flow
• Components:
1. Performance: Standard metrics to describe process performance and define strategic goals (course second
objective)
2. Processes: Standard descriptions of management processes and process relationships (course first objective)
3. Practices: Management practices that produce significant better process performance
4. People/skills: Standard definitions for skills required to perform supply chain
processes. SCM
4
 SCOR review

(cont)
• Performance
– Consists of two types of elements:
• Performance Attributes (evaluate strategy: attributes are used to set
strategic directions (they cannot be measured) ex.: 'Advanced
performance for Agility' )
– Reliability (perform tasks), Responsiveness (the speed at which tasks are
performed), Agility (adapt to influences), Costs (labor, material, management &
transport), Assets (efficient utilization)

and

• Metrics (measure the ability of a supply chain to achieve these strategic

attributes, ex.: operational & financial).

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5
 SCOR review

(cont)
• Processes
– a unique activity performed to meet pre-defined
outcomes
– primary objective of a SC is to fulfill customer
orders
– 6 major level 1 processes (Plan, …)
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6
 SCOR review

(cont)
• Plan
– The Plan processes describe the activities associated with developing plans to operate the supply
chain. The Plan processes include the gathering of requirements, gathering of information on available
resources, balancing requirements and resources to determine planned capabilities and gaps in
demand or resources and identify actions to correct these gaps.
• Source
– The Source processes describe the ordering (or scheduling of deliveries) and receipt of goods and
services. The Source process embodies the issuance of purchase orders or scheduling deliveries,
receiving, validation and storage of goods and accepting the invoice from the supplier.
• Make
– The Make processes describe the activities associated with the conversion of materials or creation of
the content for services. Conversion of materials is used rather than ‘production’ or ‘manufacturing’ as
Make represents all types of material conversions: Assembly, Chemical processing, Maintenance,
Repair, Overhaul, Recycling, Refurbishment, Remanufacturing and other common names for material
conversion processes. As a general guideline: These processes are recognized by the fact that 1 or
more item numbers go in and 1 or more different item numbers come out of this process.

SCM
7
 SCOR review

(cont)
• Deliver
– The Deliver processes describe the activities associated with the creation, maintenance and fulfillment
of customer orders. The Deliver process embodies the receipt, validation and creation of customer
orders, scheduling order delivery, pick, pack and shipment and invoicing the customer.
• Return
– The Return processes describe the activities associated with the reverse flow of goods. The Return
process embodies the identification of the need to return, the disposition decision making, the
scheduling of the return and the shipment and receipt of the returned goods. Repair, recycling,
refurbishment and remanufacturing processes are not described using Return process elements. (See
Make).
• Enable
– The Enable processes describe the associated with the management of the supply chain. Enable
processes include management of business rules, performance management, data management,
resource management, facilities management, contract management, supply chain network
management, managing regulatory compliance and risk management.
• For each level-1 process 3 or more differentiating level-2 process categorizations exist. Each
level-2 process contains level-3 process elements (ex.: see below)
• Some processes contain duplicates (ex.: sD1.13, sD1.14, sD2.13)
SCM
8
 SCOR review

(cont)
• Practices
– Emerging practices
– Best practices
• Current: Not emerging, not outmoded.
• Structured: Feature a clearly stated goal, scope, process, and procedure.
• Proven: Demonstrated in a working environment, and linked to key metrics.
• Repeatable: Proven in multiple organizations and industries.
– Standard practices
– Declining practices
• People
– People section are Skills, Experiences, Aptitudes and Trainings
– Competency (ex.: expert)
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9
SCOR’s hierarchical process model

SCM
10
 SCOR Hierarchy

SCM
11
 SCOR Process Codification

• SCOR processes have unique identifiers:

1. One capital only are level 1 processes: P, S, M, D, and R (5 in total)
2. A capital plus a number are level 2: P1, S2, M3, D2, D4 (15 in total)
Two groups of exceptions for level 2:
• Enable: EP, ES, EM, ED and ER (5 in total) and
• Return: SR1, DR1, SR2, DR2, SR3, DR3 (6 in total)
3. A capital plus a number, a period and a number are level 3 processes:
P1.1, P1.2, S2.1, M1.5, D3.12 (111 processes in total)
Two groups of exceptions for level 3:
• Enable: EP.1, ES.3, EM.4, ED.8, ER.1 (47 in total)
• Return: SR1.1, DR1.3, SR2.2, DR2.4, SR3.5, DR3.1 (27 in total)
• X = level 1, Xn = level 2, Xn.m = level 3
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12
 Level 3 activities of the SCOR
model
• Planning: A process that aligns expected resources to meet expected demand requirements.
– Balance aggregated demand and supply
– Consider consistent planning horizon
– (Generally) occur at regular, periodic intervals
• Execution: A process triggered by planned or actual demand that changes the state of material goods.
– Scheduling/sequencing
– Transforming product
– Moving product to the next process
• Enable: A process that prepares, maintains, or manages information or relationships on which
planning and execution processes rely (difference PLAN <> ENABLE)
• Enable processes: Enable is now a level-1 process, level-3 processes are no longer process
categorizations, but at the same level of detail as Plan, Source, Make, Deliver and Return
processes.

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13
Enable process (SCOR evolution)

SCOR version>6 !NEW!

Four Categories of Supply Chain

Operations, part of SCOR
(Hugos, 2003) SCOR version 11
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14
Enable process (SCOR evolution)

Current SCOR model (version 11)

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15
Enable process (SCOR evolution)

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16
 Enable process (SCOR evolution)

!NEW!
The level-3 enabling processes contained many duplicates, yet the level of detail provided was
higher then level-3 processes elsewhere in the framework. With the new SCOR 11 level-3
processes practitioners can now use the enabling processes the same way as other level-3
process. By introducing a level-1 process SCOR now also recognizes the importance of these
enabling processes.

Components: Processes, Metrics, Practices, People (human force training) – new

SCOR components categories
Execution processes: source, make, deliver
Control processes: plan, enable
Reverse processes: return (source return, deliver return) SCM
17
 Hierarchy of the enable process

• sE1 Manage Supply Chain Business Rules

• sE2 Manage Performance
• sE3 Manage Data and Information
• sE4 Manage Supply Chain Human Resources
• sE5 Manage Supply Chain Assets
• sE6 Manage Supply Chain Contracts
• sE7 Manage Supply Chain Network
• sE8 Manage Regulatory Compliance
• sE9 Manage Supply Chain Risk

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18
Hierarchy of the enable process

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19
 Manage Supply Chain Business
Rules
The process of establishing, documenting, communicating and
publishing supply chain business rules. A business rule is a
statement or parameter that defines or constrains some aspect of
the business and is generally used in decision making. Business
rules are intended to influence the outcomes of operating the
supply chain. Business rules can apply to people, processes,
corporate behavior and computing systems in an organization, and
are put in place to help the organization achieve its goals.
Manage Business Rules generally does not develop policies, it
translates policies into business rules applied to supply chain
processes.

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20
 Manage Performance

The process of reporting performance, identifying gaps in

performance, performing root cause analysis, and developing
and launching corrective actions to close gaps in
performance. This process describes all versions of
managing supply chain performance.
Example processes:
• Inventory Cycle Counting
• Production and process quality improvement programs
• Inventory reduction projects
• Order cycle time reduction efforts
• Supplier performance assessments

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21
 Manage Data and Information

The process of collecting, maintaining and publishing data

and information required to plan, operate, measure and
manage the supply chain. Activities include adding, changing
and deleting (archiving) information, maintaining user access
(grant, revoke) and maintaining availability of the information
(activate/deactivate).

Examples of data elements:

Customer information, Supplier information, Product/service
information, Network information, Process configuration
information

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22
 Manage Supply Chain Human
Resources
The process of developing, governing and maintaining an
organization of permanent, temporary and outsourced staff,
with the right qualifications, in support of the business objects
and supply chain goals. This includes identifying required and
available skills in the organization, determining gaps in skills
and competency levels, identifying training needs, resource
gaps and excess resources.
Note: This is a planning process to ensure staff (capacity) is
available at the right levels. The actual training, hiring and
redeployment is not part of this process as those are HR
processes.

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23
 Manage Supply Chain Assets

The process of scheduling, maintaining and dispositioning of

supply chain assets that operate supply chain processes.
This includes repair, alteration, calibration and other
miscellaneous items to maintain production capabilities.

SCM
24
 Manage Supply Chain Contracts

The management and communication of contractual

agreements in support of business objectives and supply
chain goals. This includes all contractual agreements related
to supply chain operations, including: material acquisitions,
contracts for services such as maintenance, temporary staff,
IT services, transportation and lease of buildings and
equipment, contract manufacturing, logistics service
providers and customer contracts.

SCM
25
 Manage Supply Chain Network

The process of developing, governing and maintaining a

network of supply chain assets (locations, plants, buildings,
equipment, people and processes) that support the planning,
sourcing, making, delivery and returning of products and
services in support of the business objectives and supply
chain goals.

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26
 Manage Regulatory Compliance

The process of identifying, collecting, assessing and integrating

regulatory compliance requirements in standard supply chain processes,
policies and business rules.
Regulatory Compliance is the term generally used to describe the policies
and processes which organizations have in place to ensure that they
comply with laws, rules and regulations put in place by external bodies
(government) which control activity in a given jurisdiction. A key
component of Regulatory Compliance is establishing policies, business
rules and processes to ensure legislative and regulatory compliance
requirements are met. This includes ensuring personnel are aware of and
take steps to comply with relevant laws and regulations and data or
records retention used for compliance validation

SCM
27
 Manage Supply Chain Risk

The process of identification and assessment of potential

disruptions (risks) in the supply chain and developing a plan
to mitigate these threats to operating the supply chain.
Supply chain risks include: disruptions in demand, supply,
environment, labor, financial disruptions, fraud, theft and
mismanagement, terrorism and cyber attacks.

Risk mitigation strategies include avoiding the risk, reducing

the impact or probability of the risk, transferring the risk to
another party and accepting part of the risk.

SCM
28
 Metrics of the enable process

• From the metrics associated to SCOR 11 model the following are

associated to Enable process
– Total Cost to Serve
– Planning Cost
– Sourcing Cost
– Material Landed Cost
– Production Cost
– Order Management Cost
– Fulfillment Cost
– Returns Cost

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29
 Synthesis

• Evolution of SCOR model

• Structure of the SCOR 11 model
• Codification of processes and subprocesses

SCM
30
 References
• Supply Chain Operations, Reference Model, Revision 11.0, 2012
• SCOR Framework, Introducing all elements of the Supply Chain
reference model: Standard processes, metrics and best practices,
Supply Chain Council, 2008

SCM
31
 Supply Chain Management

Measuring supply chain

performance. Operational
evaluation.
Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Chapter 9

Measuring supply chain performance. Operational evaluation.

Content:

• Operational evaluation
• A useful model of markets and their supply chains
• Operational evaluation based on market considerations
• Overall supply chain operation metrics

SCM
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 Introduction

Creating competitive advantage through high-performance supply chain

logistics requires an integrated measurement system. The old adage,
“If you don't measure it, you can't manage it”, holds true for the
operation of a supply chain. For this reason, a framework for
performance/operational and financial/economic assessment must
be established. To get the performance desired from supply chains
requires a company to monitor and control its operations on a daily
basis.

Monitoring is accomplished by the establishment of appropriate

metrics to track system performance for reporting to management.

Controlling is accomplished by having appropriate standards of

performance relative to the established metrics to indicate when the
logistics system requires modification or attention.

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 Operational evaluation

The scope of computing SC metrics is to achieve a strategic fit (Chopra

and Mendil, 2010) through a balance between responsiveness and
efficiency (the two can be improved separately, but given an amount of
money to invest in a SC a balance between the two must be set).
Based on the desired mix between responsiveness and efficiency
different SC metrics had been defined to measure the associated SC
drivers:
1. SC drivers (Hugos): transportation, location, inventory,
make/manufacturing, information. Hence, Hugos proposed four
categories to measure the two desired requirements: customer service,
internal efficiency, demand flexibility, product development
2. Objective (Mendil): logistical (facilities/location, inventory,
transportation), cross functional (information, sourcing, pricing). Hence,
Mendil proposed SC metrics in accordance with the drivers of SC (a set
of metrics for each driver).

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 Operational evaluation based on market
considerations
• Customer Service
– Measures the ability of the supply chain to meet the expectations of its customers.
– Depending on the type of market being served, the customers in that market will have
different expectations for customer service.

• Internal Efficiency
– The ability of a company/supply chain to operate in such a way as to generate an
appropriate level of profitability.

• Demand Flexibility
– Measures the ability to respond to uncertainty in levels of product demand.

• Product Development
– Measures the ability to develop and deliver new products in a timely manner.
– Necessary when serving developing markets.

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 Operational evaluation based on market
considerations
• To identify the performance that a Mature Steady

Supply
Supply exceeds demand Establish market, supply and
supply chain should deliver, the market demand are balanced
Opportunities lie in coordinating
being served must be evaluated with supply chain partners to Opportunities lie in each company
(supply, demand) provide a wide range of products to fine tuning and optimizing their
the market and accommodate wide internal operations to get maximum
fluctuations in product demand efficiency and best overall supply
while maintaining levels of high chain profitability.
• Characteristics that describe supply customer service.

chain performance: responsiveness and Developing Growth

New market and products, Demand exceeds supply
efficiency supply and demand
Opportunities lie in building market
Opportunities lie in partnering with share and recognition through
• More precisely, SC characteristics imply other companies in the supply working with supply chain partners
to provide high levels of customer
chain to gather intelligence about
the following(*) market performance what the market wants and build service as measured by order fill
and deliver products that will be rate and on-time delivery
categories attractive to the market.
– Customer Service
– Internal Efficiency Fig.1 – A market is characterized Demand
by its combination of supply and
– Demand Flexibility
demand.
– Product Development
*open list SCM
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 Operational evaluation based on market
considerations
• Framework for Performance Measurement
– Describes the mix of performance required from
companies and supply chains that serve the four
different market quadrants.

• Developing markets require their supply chains to excel

in product development and customer service.

• Growth markets require very high levels of customer

service particularly as measured by order fill rates and on-
time delivery.

Fig.2 – Mix of performance

• Steady markets require internal efficiency as well as an
even broader scope of customer service. for standard markets

• Mature markets require all the internal efficiency and

customer service called for by steady markets. They also
require the highest levels of demand flexibility.

– Profitability = deliver the performance called for by

market
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 Operational evaluation based on market
considerations
• Customer Service Metrics
– “service relates to the ability to anticipate, capture and fulfill customer demand with personalized
products and on-time delivery” (Hausman, Warren H., 2000, “Supply Chain Performance
Metrics,” Management Science & Engineering Department, Stanford University).
– Metrics for a build to stock situation (demand: complete order to be filled immediately):
• Complete Order Fill Rate and Order Line Item Fill Rate
• On-Time Delivery Rate
• Value of Total Backorders and Number of Backorders
• Frequency and Duration of Backorders
• Line Item Return Rate
– Metrics for a build to order situation (demand: track both the quoted customer response time
and the on-time completion rate.):
• Quoted Customer Response Time and On-Time Completion Rate
• On-Time Delivery Rate
• Value of Late Orders and Number of Late Orders
• Frequency and Duration of Late Orders
• Number of Warranty Returns and Repairs SCM
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 Operational evaluation based on market
considerations
• Internal Efficiency Metrics

– The ability of a company or a supply chain to use their assets (plant, equipment, inventory, and cash) as
profitably as possible
– Measures of internal efficiency:
• Inventory value
– Measured both at a point in time and also as an average over time.
– Reduce inventory while still delivering high levels of customer service
– Match inventory availability (supply) with sales (demand) and not have excess inventory left over
• Inventory turns
– Measure the profitability of inventory by tracking the speed with which it is sold or turned over during the course of a
year.
– Turns = Annual Cost of Sales / Annual Average Inventory Value
• Return on sales
– Measure of how well an operation is being run
– Return on Sales = Earnings before Interest & Tax / Sales
• Cash-to-cash cycle time
– Time it takes from when a company pays its suppliers for materials to when it gets paid by its customers.
– Cash-to-Cash Cycle Time = Inventory Days of Supply + Days Sales Outstanding – Average Payment Period on
Purchases

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 Operational evaluation based on market
considerations
• Demand Flexibility Metrics
– Company’s ability to be responsive to new demands in the quantity and
range of products and to act quickly.
– Need for capabilities in order to cope with uncertainty:
• Activity Cycle Time
– Amount of time it takes (for an individual company or an entire SC) to perform a
supply chain activity
• Upside Flexibility
– Ability of a company or supply chain to respond quickly to additional order volume
for the products they carry.
• Outside Flexibility
– Ability to quickly provide the customer with additional products outside the bundle
of products normally provided.

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 Operational evaluation based on market
considerations

• Product Development Metrics

– A supply chain must keep pace with the market it serves or it will be
replaced.
– Measures a company or a supply chain’s ability to design, build, and
deliver new products to serve their markets as those markets evolve over
time.
– The ability to keep pace with an evolving market can be measured by
metrics such as:
• Percentage of total products sold that were introduced in the last year
• Percentage of total sales from products introduced in the last year
• Cycle time to develop and deliver a new product
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 Overall supply chain operation
metrics
• Logistics
• Facilities
• Inventory
• Transportation
• Cross functional
• Information
• Sourcing
• Pricing
ISCL (MDE)
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 Overall supply chain operation
metrics
• Facilities (Logistics)
– Capacity measures the maximum amount a facility can process.
– Utilization measures the fraction of capacity that is currently being used in the facility. Utilization affects both
cost of unit processing and the associated delays. Unit costs tend to decline and delays increase with increasing
utilization.
– Production cost per unit measures the average cost to produce a unit of output.
– Theoretical flow/cycle time of production measures the time required to process a unit if there are absolutely
no delays at any stage.
– Actual average flow/cycle time measures the average actual time taken for all units processed over a specified
duration (week/month). The actual average flow/cycle time includes the theoretical time and delays. This metric
should be used when setting dates for orders.
– Flow time efficiency is the ratio of the of the theoretical flow time to the actual average flow time. Low values
indicate that a large fraction of time is spent waiting.
– Product variety measures the number of products/product families processed inside a facility. Processing costs
and flow times are likely to rise with product variety.
– Volume contribution of the top 20% SKU and customers (Pareto principle). Important in order to know that
the facility is well focused.
– Processing/setup/down/idle time – obvious, isn’t it ☺
– Quality losses measure the fraction of production loss due to defects.
– Average production batch size. Large batches decrease production cost but increases inventories in the SC.
– Production service level measures the fraction of production orders
completed on time and in full. ISCL (MDE)
13
 Overall supply chain operation
metrics
• Inventory (Logistics)
– Cash-to-cash cycle time is a high-level metric that includes inventories, account payable and receivables.
This is the time it takes from when a company pays its suppliers for materials to when it gets paid by its
customers.
– Average inventory.
– Inventory turns measures the number of times the inventory turns over in a year. It is the ratio of average
inventory to either the cost of goods sold or sales.
– Products with more than a specified number of days of inventory identifies the products for which the
firm is carrying a high level of inventory. This metric can be used to identify products that are oversupply or
identify reasons that justify the high inventory, such as price discounts, or being a very slow mover.
– Average replenishment batch size measures the average amount in each replenishment order. This
metric is computed by SKU in terms of both units and days of demand.
– Average safety inventory on hand when a replenishment order arrives.
– Seasonal inventory measures the amount of both cycle and safety inventory that is purchased solely due to
changes in demand.
– Fill rate measures the fraction of orders/demand that were met on time from inventory. Fill rate should not
be averaged over time but over a specified number of units of demand.
– Fraction of time out of stock measures the fraction of time that a particular SKU had zero inventory. This
fraction can be used to estimate demand during stock out period.
– Obsolete inventory measures the fraction of inventory older than a
specified obsolescence date.
ISCL (MDE)
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 Overall supply chain operation
metrics
• Transportation (Logistics)
– Average transportation inbound cost typically measures the cost of bringing product
into a facility as a percentage of sales or costs of goods sold.
– Average income shipment size.
– Average inbound transportation cost per shipment measures the average
transportation cost of each incoming delivery. Along with the incoming shipment size, this
metric identifies opportunities for greater economies of scale in inbound transportation.
– Average outbound transportation cost per shipment measures the average
transportation cost of each outgoing delivery.
– Average outbound transportation cost measures the cost of sending the product into a
facility to the customer.
– Average outbound shipment size measures the average number of units or dollars on
each outbound shipment at a facility.
– Fraction transport by mode measures the fraction of transportation (in units or dollars)
using each mode of transportation. This metric can be used to estimate if certain modes
are overused or underutilized.

ISCL (MDE)
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 Overall supply chain operation
metrics
• Information (Cross functional)
– Forecast horizon identifies how far in advance of the actual event a forecast is made.
The forecast horizon must be equal to the lead time of the decision that is driven by
the forecast.
– Frequency of update identifies how frequently each forecast is updated. The forecast
should be updated somewhat more frequently than a decision will be revised, so that
large changes can be flagged and corrective action taken.
– Forecast error measures the difference between the forecast and actual demand.
The forecast error is a measure of uncertainty and drives all responses to uncertainty
such as safety inventory or excess inventory.
– Seasonal factors measure the extent to which the average demand in a season is
above or below the average in a year.
– Variance from plan identifies the difference between the planned
production/inventories and the actual values. These variances can be used to raise
flags that identify shortages and surpluses.
– Ratio of demand variability to order variability measures the standard deviation of
incoming demand and supply orders placed.

ISCL (MDE)
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 Overall supply chain operation
metrics
• Sourcing (Cross functional)
– Sourcing is the set of businesses required to purchase goods and services.
Managers must first decide which tasks will be outsourced and those that will be
performed within the firm.
– A manager must track the following sourcing-related metrics that influence SC
performance:
– Days payable outsourcing measures the number of days between when a supplier performed a SC
task and when it was paid.
– Average purchase price measures the average price at which a good or service was purchased
during the year. The average price should be weighted by the quantity purchased at each price.
– Range of purchase price measures the fluctuation in purchase price during a specified period. The
goal is to identify if the quantity purchased correlated with price.
– Average purchase quantity measures the average amount purchased per order. The goal is to
identify whether a sufficient level of aggregation is occurring across locations when placing an order.
– Fraction of on-time deliveries measures the fractions of deliveries from supplier that were on time.
– Supply quality and lead time, supplier reliability.

ISCL (MDE)
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 Overall supply chain operation
metrics
• Pricing (Cross functional)
– Profit margin measures profit as a percentage of the revenue. A firm needs to examine a wide variety of
profit margins metrics to optimize its pricing, including dimensions such as type of margin (gross, net, etc.)
scope (SKU, product line, division, firm), customer type, and others.
– Days sales outstanding measures the average time between when a sale is made and when cash is
collected.
– Incremental fixed cost per order measures the incremental costs that are independent of the size of the
order. These include changeover costs at a manufacturing plant or order processing or transportation costs
that are incurred independent of shipment size at a mail-order firm.
– Incremental variable cost per unit measures the incremental costs that vary with the size of the order.
These include picking costs at a mail-order firm or variable production costs at a manufacturing plant.
– Average sales price measures the average price at which a SC activity was performed in a given period.
The average should be obtained by weighting the price with the quantity sold at that price.
– Average order size measures the average quantity per order. The average sale price, order size,
incremental fixed cost per order, and incremental variable cost per unit help estimate the contribution from
performing the supply chain activity.
– Range of sale price measures the maximum and minimum of sale price per unit over a specified time
horizon.
– Range of periodic sales measures the maximum and minimum of the quantity sold per period
(day/week/month) during a specific time horizon. The goal is to understand any correlation between sales
and price and any potential opportunity to shift sales by changing price over time.

ISCL (MDE)
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 Overall supply chain operation
metrics
• The three level of details (SCOR):
– “Level 1” data. This data is summarized by major business units and for the
company as a whole. Strategic data also consists of data from outside the company
such as market sizes and growth rates, demographics, and economic indicators,
inflation rates, and interest rates. There should also be benchmark data from
industry trade associations and studies that show the operating standards and
financial performance levels that are standard for companies in the markets being
served.
– Tactical data consists of actual, plan, and historical numbers in the four performance
categories displayed at the branch office level of detail. This data also includes the
performance metrics labeled “Level 2” in the SCOR model. These metrics monitor the
plan, source, make, and deliver operations that every company in a supply chain
must perform.
– Operational data consists of the measures labeled “Level 3” in the SCOR model.
These measurements help people who are charged with getting a job done to
understand what is happening and to find ways to make improvements where
needed to meet the performance targets that have been set. The SCOR model
refers to these measurements as diagnostic measures.
ISCL (MDE)
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 Overall supply chain operation
metrics

ISCL (MDE)
20
 Conclusion

• SC – efficient at commercial level and able to produce quality products at

low prices
 Necessity define measurable criteria to measure the efficiency and the
capability to produce at low prices

• Market types and characteristics

• Overall metrics and market based metrics

• Compare criteria with past values and/or with the values of the
concurrence

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 References
• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd
edition, 2010,McGraw Hill International Edition

• Hugos M., Essentials of Supply Chain Management, John Wiley and

Sons, Inc., 2006

• Sunil Chopra, Peter Mendil, Supply Chain Management. Strategy,

Planning and Operation, 2010, Fourth Edition

• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les

chaines d’approvisionnement. Conception, contrôle et outils, 2003

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 Supply Chain Management

Measuring supply chain

performance. Financial evaluation.
Silviu RAILEANU
University Politehnica of Bucharest
Spring
 Chapter 10

Measuring supply chain performance. Financial evaluation.

Content:

• Introduction
• Incremental costs
• Economical evaluation at strategic level
– General principle
– Incremental investment costs
– Financial evaluation of the project
• Objectives at tactical level
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 Introduction

• SC evaluation @ strategic level

• Supply chain macro activities: acquisition, transport, production, storage, distribution

• Financial VS economic

• Financial evaluation links costs and benefits to:

– Projects – analyze the project we want to develop

• Rule: evaluate incremental costs

• Incremental cost: additional cost we have to pay in order to lunch a new project with the resources we
do (or do not) dispose

• Retained criteria must be significant and their impact must be controllable

• The target problem involves a multi-criteria decision, several of the composing criteria being
interdependent and even opposing
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 Incremental costs

• Additional costs that should be engaged

• In a SC we have objectives (…) and decisions (…)

• Scope of enumerating possible decisions:

– a primary decision can imply several secondary decisions
– analyze the dependencies between the strategic activities
– do not forget some dependencies in order to arrive at a coherent implementation of the initial decision

• Decisions
– have an associated cost (implementation and maintenance)
– are characterized by a variable which usually has associated a value

• Quantifiable decision – a value can be attributed to the associated variable

• Unquantifiable decision – the value that should be associated isn’t

obvious SCM
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 Incremental costs

• Quantifiable decision

– Objectives:
• Express the primary variable as a function of the produced
quantity; income = f(produced quantity) => economic evaluation
• If the primary variable is not a function of the produced quantity =>
indicate the link between the value of the attached variable and
the produced quantity
• Ex.: produced quantity = f(personnel), sold quantity = f(limit the
maximum waste)

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 Incremental costs

• Unquantifiable decisions

– the value that should be associated to the primary decision isn’t obvious

– example of objectives for unquantifiable decisions: increase the market

share / sales, upgrade the communication system, reorganize the shop-
floor, change distribution type, etc

– the designer must express his decision in terms of sales growth

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 Economical evaluation of projects

• Profit = f(sold products) = income – expenses

– Maximize profit through computations of functions that model the

influence of the quantity of products sold to the profit

– Search for values that allow to establish the parameters of the

chosen function

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 Economical evaluation of projects

• Financial indicators :
– Operating Efficiency
• Return on Sales – Earnings as a percentage of sales (“It tells you if a company is
operating within its means. If this number is going up year to year that means the
company is getting more efficient. If the number is going down or becomes
negative, that tells you the company is spending more than it is bringing in”.)
• Return on Shareholder Equity – Earnings as a percentage of shareholder equity
– Resiliency (ability to recover quickly)
• Debt to Net Worth – Total debt divided by net worth (measures a company’s
ability to borrow money and also how well the owners are leveraging their equity)
• Interest Coverage – Earnings divided by interest expense (how much additional
money a company can borrow)

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 Economical evaluation of projects

• How it works:
– The SC designer takes a decision (primary decision), the project inside the SC

– The primary decision implies several secondary decisions

– Each decision has a cost (investment and operating)

– Objective: compute the profit as a function of the products sold in order to

optimize the operating mode of a SC (compute the optimum quantity to produce)
• Case 1: at least one decision can be directly linked to the produced quantity
• Case 2: no decision can be directly linked to the produced quantity

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 Economical evaluation of projects

• Case 1 (at least one decision can be directly linked to the produced quantity)

– Investment costs = f(produced quantity), [CI_var_k(v), k=1,2,…,ni, v = quantity of sold products]

• CI(v) = ∑CI_var_k(v), k=1,2,…,ni

– Investment costs = constant, [CI_ct_k, k=1,2,…,mi]

• HI = ∑CI_ct_k, k=1,2,…,mi

– Operating costs = f(produced quantity), [CO_var_k(v), k=1,2,…,no, v = quantity of sold

products]
• CO(v) = ∑CO_var_k(v), k=1,2,…,no

– Operating costs = constant, [CO_ct_k, k=1,2,…,mo]

• HO = ∑CI_ct_k, k=1,2,…,mo

– All operating costs are computed over a period of time (monthly SCM
10 or yearly)
 Economic evaluation of projects

• Case 1 (at least one decision can be directly linked to

the produced quantity) (1)

• Total cost of investment

– INV(v) = CI(v) + HI

• Total cost of operation

– OP(v) = CO(v) + CI

• Income over a fixed period

– B(v)
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 Economic evaluation of projects

• Size of the considered interval – n (we are at the end of this interval)
• Actualization rate – α
• Depreciation rate of resources – β

• Total cost of investment at the end of the n-th period:

– TINV = INV(v) + INV(v) α, for n=1 considering only the actualization rate
– TINV = (INV(v) + INV(v) α) + (INV(v) + INV(v) α) α, for n=2 considering only the actualization rate
– … (induction considering also the depreciation rate of resources)
– TINV = INV(v) ((1+α)n - (1- β)n)

• Total cost of operations at the end of the nth period:

– TOP = OP(v) + OP(v) α, for n=1
– … (induction)
– TOP= OP(v) ∑(1+α)n-t , t=0,…,n-1, = OP(v) (1+α) [(1+α)n -1] α-1

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 Economic evaluation of projects

• Total income
– TIN(v) = B(v) [(1+α)n -1] α-1

• Profit = Income – Costs = f(sold/manufactured products over a fixed period)

• Exercise
– Given:
• INV(v) = 30.000 + 0.05v
• OP(v) = 300 + 0.54v
• B(v) = 1.65v
• α = 0.05, β=0.01
– Compute:
• The profit for nr_products over an interval of 12 periods (nr_products=1800, 1850, 1900, …, 2200)
and choose the parameters that give the maximum profit at the end of the interval

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 Synthesis

• General principle for the economical evaluation

of a project – incremental costs

• How the SC is evaluated from the economical

point of view (investment and operating costs
as a function of the manufactured/sold
products)

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 Synthesis

• SC – efficient at commercial level and able to produce quality products at low

prices
 Necessity define measurable criteria to measure the efficiency and the capability to
produce at low prices

• Compare criteria with past values and/or with the values of the concurrence

• Numbers, not qualifiers (Ex.: the success of a marketing campaign is measured

through the increase of sales)

• The criteria must be significant and the ones acting upon them must master the
negative effects upon other criteria (Ex.: minimize transport time and minimize
the interval of time between the arrival of an order and the
collection of the money) SCM
15
 Objectives at tactical level in a supply chain

• Tactical objectives for satisfying the client:

– Minimize the interval of time between the arrival of an order and the collection of the
money
– Increase the visibility of the SC for each partner
– Improving demand visibility for each partner
– Improve quality
– Reduce costs
– Improve services

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 Objectives at tactical level

• Minimize the interval of time between the arrival of an order and the collection of the
money
– It covers the entire production process
– Must not be confused with minimizing production cycle
– Composed of:
• The supply time
• The time needed to do the quality check for the received products
• The time for preparing the raw materials and components
• Fabrication time and product quality control
• Packaging time
• Storage time
• Transport to the distributor and storage at his place
• Transport to the client
• Money collection
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 Synthesis

• The objectives of a SC are client satisfaction and competitiveness

– Minimize the interval of time between the arrival of an order and the collection of
the money
– Minimize WIP at global (and local) level
– Increase the visibility of the SC for each partner (communication)
– Improving demand visibility for each partner
– Improve quality
– Reduce costs
– Improve services
– Hire competent labor, continuously train and motivate them

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 References
• Bowersox D.J. et al., Supply Chain Logistics Management, 3rd
edition, 2010,McGraw Hill International Edition

• Hugos M., Essentials of Supply Chain Management, John Wiley and

Sons, Inc., 2006

• Sunil Chopra, Peter Mendil, Supply Chain Management. Strategy,

Planning and Operation, 2010, Fourth Edition

• Satyaveer Singh Chauhan, Cyril Duron, Jean-Marie Proth, Les

chaines d’approvisionnement. Conception, contrôle et outils, 2003

SCM
19