Supply Chain Management

Supply Chain Management
Zied BABAI
Kedge Business School
mohamed-zied.babai@kedgebs.com
mohamed.babai@graduates.centraliens.net
Borj Cedria, Novembre 2016
Outline
1 Overview on Supply Chain Management
2 Supply Chain Design
3 Supply Chain Planning
4 Supply Chain Flow Management
5 SCOR & Supply Chain Performance
-2-
Outline
-3-
Concept of Supply Chain
Procurement Production Distribution
Stores
Warehouses
Stocking / Order preparation
Co-packing / Co-manufacturing
Plants, Factories
Production / Manufacturing / Assembly
components, semi-finished products, finished products
-4-
Third-party providers in Supply Chains
Third Party Logistics Providers (3PL): Transportation Activities
End
Manufacturer Retailer customer
Suppliers Suppliers Third Party Logistics Providers (3PL):
(Tier 2) (Tier 1) Warehousing Activities
Contract Manufacturers:
Manufacturing Activities
-5-
Various flows in Supply Chains
Material Flow
Suppliers
Suppliers
End
Manufacturer (OEM) Distributor/Retailer customer
Information Flow
Financial Flow
-6-
SC decisions and temporal horizons

Supply chain design
Sourcing and Structure, focus Structure, focus
Long term
contract setting and design of and design of the
with suppliers the factory network distribution network
Supply chain planning (Sales and Operations Planning)
Adjustment/ Adjustment/ Adjustment/
Mid term
reservation of reservation of reservation of
suppliers capacity production capacity distribution capacity
Production Planning and Flow management

Short term Procurement flow Production flow Distribution flow
management management management
Detailed management of physical flows

Very Order picking and
Transportation Production
short term transportation
management scheduling 7
management
-7-
Importance of Supply Chain Decisions
Wal-Mart, $1 billion sales in 1980 to $408 billion in 2010
Seven-Eleven Japan, 1 billion sales in 1974 to 3 trillion in 2009
Webvan folded in two years
Borders, $4 billion in 2004 to $2.8 billion in 2009
Dell, $56 billion in 2006, adopted new supply chain strategies
-8-
Supply Chain Objective and Performance
Efficiency-Responsiveness frontier
-9-
Overall trade-off: Responsiveness versus Efficiency
Facilities
Cost of the number, location, capacity, and type of facilities (efficiency) and the level of
responsiveness
Increasing the number of facilities increases facility and inventory costs but decreases
transportation costs and reduces response time
Increasing the flexibility or capacity of a facility increases facility costs but decreases
inventory costs and response time
Transportation
The cost of transporting a given product (efficiency) and the speed with which that
product is transported (responsiveness)
Using fast modes of transport raises responsiveness and transportation cost but lowers
the inventory holding cost
Inventory
Increasing inventory generally makes the supply chain more responsive
A higher level of inventory facilitates a reduction in production and transportation costs
because of improved economies of scale
Inventory holding costs increase
- 10 -
Process View of a Supply Chain
Cycle View: processes in a supply chain are divided into a series

of cycles, each performed at the interfaces between two
successive supply chain stages
Push/Pull View: processes in a supply chain are divided into two

categories depending on whether they are executed in response to
a customer order (pull) or in anticipation of a customer order
(push)
- 11 -
Cycle View of Supply Chain Processes
- 12 -
Push/Pull View of Supply Chain Processes
Supply chain processes fall into one of two categories depending on
the timing of their execution relative to customer demand
Pull: execution is initiated in response to a customer order (reactive)
Push: execution is initiated in anticipation of customer orders
(speculative)
Push/pull boundary separates push processes from pull processes
- 13 -
Push/Pull View of Supply Chain Processes
Useful in considering strategic decisions relating to supply chain
design more global view of how supply chain processes relate to
customer orders
Can combine the push/pull and cycle views
Dell
The relative proportion of push and pull processes can have an

impact on supply chain performance
- 14 -
Examples of Supply Chains
Zara
Toyota
Gateway and Apple
W.W. Grainger and McMaster-Carr
Amazon
- 15 -
Outline
1 Overview
3 Operations and Supply Chain Planning
- 16 -
Decisions for the Supply Chain Design
Factories :
Specialisation degree and number of the factories (one product, family of products, all
products)
Factorys location and layout
Production capacity of the factory
Distribution Network
Network structure (Levels number)
Specialisation degree of the warehouses (family of products, all products, etc.)
Warehouse vs. Cross Docking hub
Warehouse/Cross Dock location
Transportation modes:
Road, rail, air, sea
Multimodal
etc
- 17 -
Supply Chain Design: Distribution Network
Factory Distribution Network
?
Customer
Factory
- 18 -
Distribution Systems
Direct Delivery Factories - Retailers
Distribution via Distributor/retailer Warehouses
Distribution via Cross Docking
Distribution with Muti-Pick / Multi-Drop
Distribution via internet
- 19 -
Direct Delivery Factories - Retailers
Stores
Factories
Supplier 1 Retailer 1
Stores
Factories
Supplier N Retailer P
- 20 -
Distribution via Supplier Warehouse
Stores
Factories
Warehouses
Stores
Factories
Warehouses
- 21 -
Distribution via Distributor/retailer Warehouse
Stores
Factories
Warehouses
Stores
Factories
Warehouses
- 22 -
Distribution via Supplier and retailer Warehouse
Stores
Factories
Warehouses Warehouses
Stores
Factories
- 23 -
Distribution via Cross Docks
Stores
Factories
Warehouses Cross-Docking Hub
Stores
Factories
Warehouses Cross-Docking Hub
- 24 -
Cross-Docking
Popularized by Wal-Mart
Warehouses function as inventory coordination points rather than as

inventory storage points.
Goods arriving at warehouses from the manufacturer:
are transferred to vehicles serving the retailers
are delivered to the retailers as rapidly as possible.
Goods spend very little time in storage at the warehouse
Often less than 12 hours
Limits inventory costs and decreases lead times
- 25 -
Issues with Cross-Docking
Require a significant start-up investment and are very difficult to
manage
Supply chain partners must be linked with advanced information

systems for coordination
A fast and responsive transportation system is necessary
Forecasts are critical, necessitating the sharing of information.
Effective only for large distribution systems
Sufficient volume every day to allow shipments of fully loaded trucks

from the suppliers to the warehouses.
Sufficient demand at retail outlets to receive full truckload quantities
- 26 -
Distribution with Multi-Pick
Stores
Factories
Stores
Factories
- 27 -
Distribution with Multi-Drop
Stores
Factories
Stores
Factories
- 28 -
Distribution with Multi-Pick and Multi-Drop
Stores
Factories
Stores
Factories
- 29 -
Distribution via Internet
Stores
Factories
Stores
Factories
- 30 -
Distribution Via Internet and dedicated warehouse
Warehouses
Factories Stores
Warehouses
Supplier 1
Dedicated
Local Warehouse
Factories Retailer 1
Warehouses
Supplier N
- 31 -
Case study Produlact
- 32 -
Outline
3.1 Demand Forecasting
3.2 S&OP and MPS

- 33 -
Outline
1 Overview
3 Operations and Supply Chain Planning
3.3 Supply and Demand Planning (S&OP and MPS)
4 Supply Chin Flow Management

- 34 -
Types of Forecast
Two distinctive types:
Optimistic
Pessimistic
- 35 -
Optimistic Forecast
Company estimates sales of
6 million product units
for a particular year, but only sells
4.5 million.
What effect may this have on the business ?

Excessive inventory of finished product
Associated high storage costs
Inventory becomes obsolescent
Plant capacity is used unnecessarily
Finished product must be sold at a loss
- 36 -
Pessimistic Forecast
Company estimates that it will sell
6 million of its product units
for a particular year
Orders are received for 7.5 million.
What effect may this have on the business?

Results in inadequate stock and lost orders
Insufficient raw material stops production
Excessive costs due to subcontracting
Excessive costs due to overtime
Excessive costs from the hire of part time labour
Poor customer relationships, loses orders
- 37 -
Forecasting is the basis of the demand planning process not
the sales planning process
Forecasting
Demand Planning Supply Constraints

Expresses the various constraints
Estimates of the demand
given by the supply chain
under various scenarios
(available inventory, available capacity
but without supply constraints
at all levels including suppliers)
Sales Planning
Estimates of the demand
under various scenarios
taking into account supply constraints
- 38 -
Various forecasting approaches
Forecasting
approaches
Qualitative Quantitative
approaches approaches
Expert External Extrapolation Causal

judgment surveys methods methods
Rely on the Analyze the Link the variable to be

expertise of Rely on external historical data series forecasted to one or
various customer/consumer to discover its more explanatory
internal/external surveys to estimate pattern variables whose values
experts to estimate future demand of and extrapolate it are known or easier to
future demand of products into the future forecast
products (time series analysis) (regression analysis)
- 39 -
Qualitative Methods : Advantages & drawbacks
Advantages :
Take into account intangible factors
Used when there is little demand information
(launching a new product, new market, etc.)
Drawbacks :
Long delay of the process
Bias/subjectivity
High cost (ex. Experts consulting)
Not enough precision
Mainly used for long and mid term forecasting

- 40 -
Practical forecasting process
For mid term and short term decisions, most companies use a forecasting approach that
relies on quantitative methods (mainly extrapolation methods) adjusted by knowledge of
marketing/sales
Quantitative Qualitative
approaches approaches
Extrapolation Causal Expert

methods methods judgment
Marketing/Sales
- 41 -
When to use extrapolation and causal methods
Situation where future Yes

demand has strong Use extrapolation methods
enough similarity with
historical data
No
Situation where the variable to be Yes

forecasted has a strong enough link with Use causal methods
one or more variables whose future values
are known or easier to forecast
No
Rely on qualitative methods
- 42 -
Identification of patterns: notion of trend
Issue: is there any trend (increase or decrease) pattern that is

consistent throughout time?
trend
- 43 -
Identification of patterns: notion of seasonality
Issue: is there any pattern that consistently repeats throughout

time?
cycle cycle
Seasonality patterns
and/or and/or
At year level At week level At day level
- 44 -
Yearly seasonality: due to products nature
Illustration of yearly seasonality on a month by month basis
Seasonality factors 48%: Relative weight of

December month in the year
(toys type products)
20%: Relative weight of
July month in the year
(ice creams type
products)
- 45 -
Weekly seasonality: due to customers' behavior
Seasonality factors
- 46 -
Illustration of weekly seasonality at Orange stores in Romania
Seasonality factors
These seasonality factors are country specific. In UK for

instance, Monday is the highest selling day
- 47 -
Daily seasonality: due to customers behavior
Seasonality factors
- 48 -
Outline
3.2 Supply and Demand Planning (S&OP and MPS)
- 52 -
Operations and Supply Chain Planning: Why
- 53 -
Decision Levels & Horizons in the Supply Chain
Supply chain design
Sourcing and Structure, focus Structure, focus
Long term
contract setting and design of and design of the
with suppliers the factory networkdistribution network
Supply chain planning (Sales and Operations Planning)
Adjustment/ Adjustment/ Adjustment/
Mid term
reservation of reservation of reservation of
suppliers capacityproduction capacitydistribution capacity
Production Planning and Flow management
Short term Procurement flow Production flow Distribution flow
management management management
Detailed management of physical flows

Very Order picking and
Transportation Production
short term transportation
management scheduling 54
management
- 54 -
54
The Sales & Operations Plan - The Master Production Schedule
Mid term plan (S&OP) Balance of the charge and capacity (Aggregate
planning (planning by family of products)
Short term plan (MPS) Taking into accounts the inventory and capacity
constraints
Available
inventories
Mid-term planning: Master

Disaggregation
Sales & Operations Plan Production
(S&OP)
by product
Schedule (MPS)
Production
constraints
- 55 -
Part of an S&OP process
An S&OP process is driven by a baseline demand forecast
- 56 -
The S&OP and the MPS
How to satisfy the demand given by the S&OP if the capacity constraint
does not allow that?
S&OP
Capacity
Periods
S&OP S&OP Anticipating stocks
Capacity Capacity
Periods Periods
Overtime working Anticipating stocks
Sub-contracting
- 57 -
Levers for Planning
- Variation the number - Reducing/Increasing prices

of employees - Promotions
- Overtime working - Delaying launch of new products
- Outsourcing
Action on Action on
the the
capacity demand
Action on Action on
the the
inventory allocation
- Using an - Splitting the demand

anticipation stock between different
production sites
- 58 -
S&OP: (2 product families A and B)

1
1 4 B1
3 A1
Month 1 2 3 1
Product A 240 300 360 Product A Product B 2 B2
Product B 240 320 160 2 A2 1
B3
3 4
Disaggregated Plan: (5 products)
Week Ratio 1 2 3 4 5 6 7 8 9 10 11 12
Product A1 1/3 20 20 20 20 25 25 25 25 30 30 30 30
Product A2 2/3 40 40 40 40 50 50 50 50 60 60 60 60
Product B1 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Product B2 1/2 30 30 30 30 40 40 40 40 20 20 20 20
Product B3 1/4 15 15 15 15 20 20 20 20 10 10 10 10
- 59 -
Disaggregated Plan: (5 products)
Week Ratio 1 2 3 4 5 6 7 8 9 10 11 12
Product A1 1/3 20 20 20 20 25 25 25 25 30 30 30 30
Product A2 2/3 40 40 40 40 50 50 50 50 60 60 60 60
Product B1 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Product B2 1/2 30 30 30 30 40 40 40 40 20 20 20 20
Product B3 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Illustration : Capacity constraint of 50 products per week
Week Ratio 1 2 3 4 5 6 7 8 9 10 11 12
Product A1 1/3 20 20 20 20 25 25 25 25 30 30 30 30
Product A2 2/3 50 50 50 50 50 50 50 50 50 50 50 50
Product B1 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Product B2 1/2 30 30 30 30 40 40 40 40 20 20 20 20
Product B3 1/4 15 15 15 15 20 20 20 20 10 10 10 10
- 60 -
Case Study: C&C Company
- 61 -
Mini-Case: Production Planning Optimisation
SilComputer Example: SilComputer needs to meet the demand of its
largest corporate and educational customers for notebook computers
over the next four quarters (before its current model becomes obsolete).
SilComputer currently has 5000 notebook computers in inventory.

Expected demand over the next four quarters for its notebook is 7000;
15000; 10000 and 8000.
SilComputer has sufficient capacity and material to produce up to 10000

computers in each quarter at a cost of $2000 per notebook.
By using overtime, up to an additional 2500 computers can be produced

at a cost of $2050 each. Computers produced in a quarter can be used
either to meet that quarter's demand, or be held in inventory for use later.
Each computer in inventory is charged $100 as carrying costs.
How should SilComputer meet its demand for notebooks at minimum

cost?
- 62 -
Production Planning solution using Linear Programming
Decisions: how many of each computer to produce in each period at
regular time, how many to produce at overtime, and how much inventory
to carry in each period.
Let's denote our time periods t = 1; 2; 3; 4. Let xt be the number of

notebooks produced in period t at regular time;
Let yt be the number of notebooks produced in period t at overtime;

Finally, let it be the inventory at the end of period t;
Look at the each quarter: how are these variables restricted and related?
- 63 -
Production Planning solution using Linear Programming
Now, anything that starts as inventory or is produced in the period must
either be used to meet demand or ends up as inventory at the end of period 1.
This means:
5000 x1 y1 7000 i1
For period 2, in addition to the upper bounds, we get the constraint
i1 x2 y2 15000 i2
For period 3, we get
i2 x3 y3 10000 i3
and for period 4 (assuming no inventory at the end):
i3 x4 y4 8000
For each quarter i, we clearly need:
x1 , x2 , x3 , x4 10000 & y1 , y2 , y3 , y4 2500
Our objective cost to minimize over the four quarters is:
2000x1 2000x2 2000x3 2000x4 2050y1 2050y2 2050y3 2050y4
Minimize
100i1 100i2 100i3
- 64 -
Production Planning Optimal Solution using Excel Solver
The optimal solution is:
x1 4500
x2 10000
Production with
regular time x3 10000
x4 8000
y1 0
y 2 2500
Production with
overtime y3 0
y4 0
i1 2500
Stock i2 0
i3 0
which gives the total cost: $70375000
- 65 -
Outline
- 66 -
Outline
4.1 Flow Management Approaches
4.2 BeerGame
4.3 Material Requirements Planning (MRP)
4.4 Inventory Management
- 67 -
Pharmacy case
You are pharmacist:

how would you manage the flow of
products?
- 68 -
Pharmacy case
You are pharmacist:
how would you manage the flow of
products?
?
1. What are the possible orders placed by
the pharmacist to the supplier?
2. What are the constraints for each one?
What kind of demand a

customer may have ?
- 69 -
Flow Management based on Inventory consumption
Inventory
consumption
Typical shape of demand

Principle: the activities (manufacturing, assembly,
transportation,) are managed based on inventory Make To Stock (MTS)
consumption in the finished goods inventory
Pharmacy case illustration:
Note however that a
Prescription and non prescription
stable demand may
drugs with fairly stable demand
incur variability
volumes over time
- 70 -
Flow Management based on forecasts
Forecasts

transportation,) are managed based on future Make To Stock (MTS)
requirements given by forecasts

Prescription and non prescription drugs whose demand can
fluctuate from low to high at different periods of time
- 71 -
Flow Management based on firms order
Firm
orders

transportation,) are managed based on future Make To Order (MTO)
requirements given by firm orders

Prescription drugs with
very specific demand
- 72 -
Amazon.com
A supply chain and a success story

The best sellers supply chain
- 73 -
Alternative strategies to respond customers demand
Manufacturer (OEM)
MTO (Make-To-Order)
Products are manufactured in response to firm orders
MTS (Make-To-Stock)
Products are manufactured in anticipation of future
demands
- 74 -
Alternative strategies to respond customers demand
Reactivity Risks/Costs
MTO (Make-To-Order) MTO (Make-To-Order)

Low reactivity Low risk/cost
Long customer lead time
MTS (Make-To-Stock)
Risks of having non-sold
MTS (Make-To-Stock) products or discounted
products
High reactivity
Zero customer lead time Inventory costs pertaining
to products that have not
yet been sold
High variety products (customized products) = MTO (Make-To-Order)

Low variety products (standardized products) = MTS (Make-To-Stock)
- 75 -
Various Flow Management approaches
Make
To Firms MRP TYPE
Order orders METHODS
(MTO)
- 76 -
Various Flow Management approaches
Standard
inventory
management
methods
Inventory
Consumption
Kanban type
Make methods
To
Stock
Forecast based
(MTS) inventory
management
methods
Demand
Forecasts
MRP type
methods
- 77 -
Combining MTO and MTS strategies
Decoupling
Product point
variety
Production
MTS MTO stage
Combined MTS/MTO strategy is very efficient if product differentiation

occurs at final production stages
This can be achieved through delayed product differentiation strategies
During product design (product modularity, component
commonalities,)
During manufacturing process design and industrialization
- 78 -
Strategic issue: where to locate the decoupling point?
Location of the
decoupling point
upstream of
important product
Criteria differentiation steps
based on
product
variety
Criteria
based on Criteria
the strategy based on
of the value added
company
Location of the Location of the
decoupling point in decoupling point
order to achieve a upstream of activities
given reactivity to the with high value added
customers
- 79 -
MTS/MTO Strategy at the Whole Supply Chain Level
??? ???
Decoupling
point
End
Manufacturer (OEM) Distributor/Retailer customer
Suppliers Suppliers
(Tier 2) (Tier 1)
MTS MTO
- 80 -
Automotive Supply Chain: Original Flow Organization
Suppliers
Car Manufacturer
MTS MTO
- 81 -
Automotive Supply Chain: Local Suppliers
Advanced Flow Organization

Regional Suppliers
Synchronous
Coordinated Flows
Flows
Remote Advanced
Suppliers Stock
Car Manufacturer
MTS MTO
- 82 -
Various financial stakes in Flow Management
Production
costs
Purchasing Transportation
cost cost
Inventory Shortage
holding cost cost
- 83 -
The cost of holding an inventory consists of three parts
The financial cost:
Pertaining to the financial investment of the products which are in stock
(opportunity cost)
The physical storage cost:
Pertaining to the physical aspect of the storage of products (stocking,
handling, administration, insurance, spoilage,)
The obsolescence cost:
Pertaining to the loss of value of products in stock due to obsolescence
or perishability
Obsolescence in case of short life cycle products, e.g. electronic components in the semi
conductor industry
Perishability in case of short life time products, e.g. dairy products in the food industry
- 84 -
Inventory holding (or carrying) costs
- 85 -
Illustration of inventory holding costs
Inventory level
6
5 h: inventory cost rate

(expressed in $ per
4 unit of product per unit
of time)
3
5(3/12)h
2 4(2/12)h
3(3/12)h
1
1(4/12)h Months
0
J F M A M J J A S O N D
Inventory cost = (4(2/12)+1(4/12)+5(3/12)+3(3/12))*h = 3*h
Average inventory = (4*2 + 1*4 + 5*3 + 3*3)/12 = 3
Inventory cost = h * average inventory
- 86 -
Detailed analysis of inventory holding costs (1)
Detailed cost model (item per item, stock per stock)
h = hfin + hphy + hobs
hfin : financial inventory cost rate

hphy : physical inventory cost rate
hobs : obsolescence inventory cost rate
- 87 -
Detailed analysis of inventory holding costs (2)
h = hfin + hphy + hobs
hfin : financial inventory cost rate (expressed in $ per unit of

product per unit of time)
hfin = rfinC
C corresponds to the value of the product
rfin is provided by the CFO (chief finance officer). Can be taken as equal to
the WACC (weighted average cost of capital)
It can be determined by a cost analysis pertaining to the obsolescence for
this product
- 88 -
Shortage costs
a demand that
cannot be satisfied
immediately is
Backlog backordered and will
case be satisfied later (as
soon as products
are available again)
Two
situations
a demand that
Lost sale cannot be satisfied
case immediately is lost
- 89 -
Shortage costs
Backlog
case
External Internal Internal
Customer Customer Customer
(other B.U.) (same B.U.)
Cash flow impact Internal costs
Mostly
Penalty costs (in B2B similar to (production costs,
context) external transportation costs)
Additional costs customer Additional costs if it
(express delivery situation eventually impacts an
costs, litigation external customer are
costs,...) mostly similar to
external customer
Loss of goodwill situation
(implicit cost)
- 90 -
Shortage costs
Lost sale
case
Product oriented Service oriented

companies companies
Lack of margin due to Lack of margin due to

not selling the product not selling the service
requiring the product
Penalty costs (in B2B
context) Penalty costs (in B2B
context)
Loss of goodwill
(implicit cost) Loss of goodwill
(implicit cost)
- 91 -
Transportation costs
Distance
Load
Transportation cost depends on both the distance and the load

(expressed in number of products, cases, pallets,...)
- 92 -
Transportation costs based on quantity (for a given distance)
A(Q)
slope AV
AF
Q
number of products
(or cases, pallets,)
Reasonable assumption : transportation cost = fixed cost + variable cost
(proportional to quantity)
AF : transportation fixed cost (whatever the quantity is)
AV : variable transportation cost (cost per unit of load)
Transportation cost : A(Q) = AF+AVQ
- 93 -
Purchasing costs
Two situations:
Purchasing cost is independent of the quantity ordered
Purchasing cost does depend on the quantity ordered
There is an incentive to buy in large quantities
- 94 -
Outline
4.1 Flow Management Approaches and Stakes
4.2 BeerGame
- 95 -
The traditional Beergame
Forrester & John Sterman developed a table game called BeerGame at MIT.
Supply Chain simulation including a factory, distribution center, wholesaler

and retailer.
Each player takes charge as one of the centers in the supply chain.
Classical board game
- 96 -
The traditional Beergame (cont.)
Each player should:
Order products from the supplier
Send products to the client
Objective: to efficiently answer clients demand while minimizing

inventory and stock-out costs.
- 97 -
Considered Supply Chain
Information flow: product demand
Factory Distributor Wholesaler Retailer Customer
Material flow: product shipping
- 98 -
Supply chain major costs (not all considered in this game)
Factory:
Raw material acquisition cost (from supplier)
Production cost
Distributor, wholesaler, retailer
Transportation cost: Product shipment to client
Fixed cost: a cost related to the facility operation
Inventory holding cost: keeping products (till an order arrives)
Inventory backordering cost : a penalty in case of delayed shipments
- 99 -
Supply chain considered costs (cont.)
Inventory holding (carrying) cost
Backordering cost
- 100 -
This version of the Beergame
Upgraded version of the classical table game offering larger functionalities.
Developed at Houston University (USA) by Arunachalam Narayanan.
- 101 -
Steps to connect to the Beergame
Link to the game: http://scgames.bauer.uh.edu
Click on: you want to play the game
Institution Name: BordeauxManagementSchool
Click on the link on the right hand side of the institution name.
- 102 -
Steps to play the Beergame
When a player clicks on the link to play the game, he would see the entire list
of groups registered to play this game. The player would be directed to click
on his group (e.g. 465-Spring06), which would direct him to the list of games.
Each player would be assigned to a position in a game.
When the player clicks on the game button, he would see a snapshot of the
supply chain as shown below,
As soon as a player clicks on his position, he/she would be asked to login

using the password given to thim/her.
After validating the login, the player is transferred to his/her game screen.
- 103 -
This version of the Beergame (example screen of retailer)
The player just has to decide how much to order from his upstream partner.- 104 -
The Bullwhip Effect
Consumer Sale Retailers order to
Manufacturer
Order Order
Quantity Quantity
Time Time
Manufacturers order Supplier order to Raw

to Supplier Material Producer
Order Order
Quantity Quantity
Time
Time
Lee et al, 1997)
- 105 -
Some Examples
INDUSTRY AMPLIFICATION IN CASE STUDY

VARIABILITY
Automobile Sales in the Sales 20% Fine (1998)
USA (1961 1991) Orders to component
supplier 60% - 80%
USA Oil Production (1950 Oil and Gas drilling activities Sterman (2006)
2005) three times the production
Readymade Pasteurised Amplification of 1.78 in the Fransoo and Wouters

Meal coefficient of variation to (2000)
suppliers
Tesco 1.85 from replenishment Disney (2007)
system to distribution
system
Complex Mechanical Sales 70-150 McCullen and Towill (2002)
Systems Manufacturer Production 20-270
- 106 -
Bullwhip Effect - Causes
Demand Rationing &

Signalling Shortage
Process Batch Ordering
Gaming
Bullwhip
Effect
Price Lead Time Various Other

Fluctuations Factors
- 107 -
Reducing the Bullwhip Effect
Information Sharing
Reduction
of Bullwhip
Channel Alignment Effect
Operational Efficiency
- 108 -
What are the other real world issues that could cause additional
difficulties? (I)
For the factory:
Shortage in raw materials
Capacity constraint
Multi-product environment
Sharing capacity between products
Lot sizing issues (incentive to group production orders)
For the warehouses:

Constraint on the storage capacity of the warehouse
For the transportation:

Constraint on trucks capacity
Incentive to group orders to reduce transportation costs (possibly to order only full
trucks)
- 109 -
What are the other real world issues that could cause
additional difficulties? (II)
Variability in delays associated with flows:
Information flow
Physical flow
Production
Transportation
Inventory data inaccuracy

Discrepancy between physical inventory and information system inventory values
Product quality issues
Product life time issues (obsolescence, perishability)
Customers behavior in case of shortage situations:

In the short term, loss sales instead of backlogged demands
In the long term, lack of goodwill of customers and loss of market share
Price fluctuations (promotions, etc..)

- 110 -
What are the other real world issues that could cause
additional difficulties? (III)
More than one customer for each actor
How to split available products when the total demand is higher than the available inventory?
Rationing and shortage gaming
Primary Secondary
Store
WH WH
Primary Secondary
Factory Store
WH WH
Primary Secondary
WH Store
WH
- 111 -
Outline
3.1 BeerGame
- 112 -
MRP uses advance demand information given by the MPS
Firm orders (customer orders)

Example: number of products of each type ordered for each week
Demand forecast
Example: forecast of the need in terms of number of products of each type for each
week
Obtained from :
Internal forecasting process (causal methods, statistical extrapolative methods, etc..)
Information on customers expected orders (market behavior, questionnaires, etc..)
No advance information on demands

Only information: consumption of the products in stock in real time
- 113 -
The Master Production Schedule (MPS)
The Master Production Schedule (MPS) prescribes the quantities to produce
in each period and for each type of products
Example of a MPS pertaining to 3 products and with a 10 weeks horizon

Firm zone: first 4 weeks
Forecast zone: next 6 weeks
Week 1 2 3 4 5 6 7 8 9 10
Product A 100 180 140 110 120 120 180 80 110 160
Product B 80 90 70 40 80 90 120 90 100 110
Product C 340 360 320 280 340 360 260 280 250 210
Firm zone Forecast zone
- 114 -
Objectives of the MRP Method
By knowing the Master Production Schedule, the MRP method determines:

For each product (purchased component, intermediate component, or finished product)
The time periods and the quantities ( How much and When ) of
Production orders (production or assembling) in the different production stages
Replenishment orders
The objective is to satisfy the Master Production Schedule while minimising

the costs
- 115 -
Principle of the MRP Method
Dependence of the requirements for components on the requirements for

finished products :
The requirement (quantity) for a component comes from the sum of the requirements
for the components that use this component
Concept of dependant demands
Consideration of the Bill of Materials
Consideration of the production lead-times (or replenishment lead-times)

when determining the ordering time periods
The lead-times are generally assumed to be constant
- 116 -
Bill Of Material (BOM)
The bill of material describes :

The different components (products) required in the different production steps of a
product
The structure of the production process for any product
The required quantities of components necessary to produce one unit of a component

in an upper level (coefficient of utilisation)
The bill of material shows :

The components purchased from an external supplier
The components produced inside the system (from the purchased components)
- 117 -
Illustration of a Bill Of Material
Coefficient
of utilisation
3 A Level 0
Lead-time (4) (2) (1)

Offsetting
2 B 4 C 2 D Level 1
(1) (1) (2) (6)
3 E 3 F 1 G 5 H Level 2
(1) (2) (1) (1)
2 I 4 J 1 K 3 L Level 3
(1) (1) (1)
6 M 2 N 2 O Level 4
- 118 -
Requirements computation for a component : Illustration
Two finished products A1 and A2 both use the component J
A1 A2
(4) (1)
(4)
B J
(1) (6)
E
(2) (2)
J J
To produce 20 products of A1 and 10 products of A2, one needs :
20 (4x1x2) + 10 (1x6x2 + 4) = 320 units of the component J
- 119 -
Material Requirements Planning: Illustration
Three stages system 2 A1
Bill of Material:
(1) (2)
Independent demand: 2 end products A1 et A2
1 B1 3 C
Dependant demand: 4 components B1, B2, C et D
(1)
Advance information on demand for end products
1 D
1 1 B1
2 A2
D B2
Fab 1 Fab 2 2 A1 (4) (1)
A2 1 B2 3 C
3
Ass
C (1)
Fab 3 1 D
- 120 -
Material Requirements Planning: Example (10 units for A1 in day 6)
Demand for 10A1 d6
Offset L=2
Production of 10A1 d4
Coefficient = 1 Coefficient = 2
Demand for 10B1 d4 Demand for 20C d4

Offset L=1 Offset L=3
Production of 10B1 d3 Production of 20C d1
Coefficient = 1
Demand for 10D d3

OIffset L=1
Production of 10D d2
- 121 -
Illustration of the MRP approach:
Example of a MPS with 10 products A1 and 20 products A2 required in day 6
Demand for 10A1 d6 Demand for 20A2 d6
offsetting L=2 offsetting L=2

Production of 10A1 d4 Production of 20A2 d4
Coefficient 1 Coefficient 2
Demand for 10B1 d4 Demand for 80B2 d4 Demand for 40C d4
offsetting L=1 offsetting L=1 offsetting L=3
Production of 10B1 d3 Production of 80B2 d3 Production of 40C d1
Demand for 90D d3

offsetting L=1
Production of 90D d2
- 122 -
Illustration using MRP Tables: Terminology
For each product (purchased component, intermediate component, or

finished product) and at each time period, the following quantities should
be specified :
Gross Requirements Total Demand (at the beginning of the period)
Scheduled Receipts Quantity already ordered and that will be available (at
the beginning of the period)
Projected On Hand Quantity projected to be available (at the end of the
Inventory period)
Net Requirements Quantity effectively required (at the beginning of the
period)
Planned Order Receipts Quantity to have (at the beginning of the period)
Planned Order Releases Quantity to order (at the beginning of the period)
- 123 -
MRP Procedure
The MRP method enables to determine the required quantity for each
component at each time period by using the following procedure :
1. Planned Order Releases for each component are computed by using the Gross
Requirements of this component
2. The Gross Requirements for each component are obtained by using the Planned
Order Releases of all the components in the upper level that uses this component
Case of a finished product: Gross Requirements are specified by the

Master Production Schedule
- 124 -
MRP Procedure: Example
Lead-time = 2
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 60 70 260 67 90 180 40 200 65 110 10
Scheduled Receipts 15
On Hand Inventory 20
Net requirements
Planned Order Receipts
Planned Order Releases
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
On Hand Inventory 20 35 0 0 0 0 0 0 0 0 0 0 0
Net requirements 0 25 70 260 67 90 180 40 200 65 110 10
Planned Order Receipts 0 25 70 260 67 90 180 40 200 65 110 10
Planned Order Releases 25 70 260 67 90 180 40 200 65 110 10 0 0
- 125 -
Illustration with MRP Tables : Example
The table below gives the gross requirements for the finished products A1 and
A2 over an horizon composed of 12 periods
1 2 3 4 5 6 7 8 9 10 11 12
A1 0 0 0 0 0 120 65 220 10 0 150 60
A2 0 0 0 0 0 90 180 40 200 65 110 10
Initial stocks and scheduled receipts for each entity are given below :
Initial Stock Scheduled Receipts
0 1 2
A1 15 A1 30 20
A2 20 A2 15 0
C 25 C 40
- 126 -
Illustration with MRP Tables (cont.)
Requirements for product A1 :
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Scheduled Receipts 30 20
Net requirements

Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Net requirements
- 127 -
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Scheduled Receipts 30 20
Planned Order Releases 0 0 0 55 65 220 10 0 150 60 0 0

Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
- 128 -
Requirements for product B1 :
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
On Hand Inventory 0
Requirements for product B2 :

Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
On Hand Inventory 0
- 129 -
Planned order releases for product A1

Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Planned order releases for product A2

Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
( 2)
Requirements for the component C ( 1)
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
. . . . . .
Net Requirements 0 0 0 100 310 480 220 65 410 130 0 0
Planned Order Receipts 100 310 480 220 65 410 130 0 0
- 130 -
Issues to take into account (constraints and uncertainties)
Randomness in the production process (or replenishment process)

Unreliability of production lead-times :
Machines/equipments breakdown
Workers unavailability
Unreliability of replenishment lead-times (transportation problems)
Non-quality
Forecasting unreliability
Quantities and due dates
Production capacity constraints
Setup constraints (Reconfiguration)

Setup Time and/or Cost
- 131 -
Issues to take into account (constraints and uncertainties)
Randomness in the production process (or replenishment process)

Unreliability of production lead-times :
Machines/equipments breakdown
Workers unavailability
Unreliability of replenishment lead-times (transportation problems)
Non-quality
Quantities and due dates
Production capacity constraints
Setup constraints (Reconfiguration)

- 132 -
How to tackle these issues in MRP ?
Non-quality
Safety stock
Forecasting unreliability Safety quantities
Quantities requirements
Randomness in the production process
Randomness in the replenishment process

Safety lead-times
Due dates
Production capacity constraints Capacity Requirements Planning
Setup constraints
Lot Sizing
- 133 -
Coordination of distribution flows with MRP :
The DRP (Distribution Requirements Planning)
Offsetting 3 days
Offsetting 4 days
Requir.
LT 3 days
Offsetting 1 jour
Requirements
Requirements
Requirements
LT 4 days
Primary LT 1 day
Warehouse
Requir.
LT 1 day
LT 2 days
Offsetting 1 day
Secondary
warehouse
Offsetting 2 Local
days warehouses
- 134 -
MRP II (Manufacturing Resource Planning)
Considers several planning levels:

Mid term Planning: S&OP
Short term planning and flow management: MPS, MRP, CRP
Very Short term planning : Scheduling
Takes into account the production capacity constraint (CRP module)

when computing the requirements and adjusts the net requirements if
needed
Includes other functions within a company (finance, accountancy,

marketing, etc.)
- 135 -
Boundaries of MRP II (Manufacturing Resource Planning)
Mid term Planning S&OP

Finance
MPS
Marketing
Short term
planning and flow MRP
management
CRP Accountancy
.
. MRP II
Scheduling
.
- 136 -
Evolution of MRP (Software: CRP, CAPM, MRP II, ERP, APS, etc.)
1970s: MRP Software (Material Requirements Planning)
Beginning of 1980s: CRP Software (Capacity Requirements Planning)
1980s: CAPM Software (Computer-Aided Production Management)
End of 1980s: MRP II Software (Manufacturing Resource Planning)
1990s: ERP Software (Enterprise Resource Planning)
End of 1990s: APS Software (Advanced Planning Systems)
2000s: e-business, Supply chain integration Software, etc.
- 137 -
Commercial ERPs and APS (2004 report)
Other
- 138 -
Outline
3.1 BeerGame
- 139 -
What is inventory management?
Inventory Management is:
An approach to manage the product flow in a

supply chain, to achieve the required level of
service at an acceptable cost
- 140 -
Functions of Inventory
Evidence : inventories are expensive
Issue: are inventories useful or not ?
Statement:
either an inventory has a function and therefore a justification
or it has no function in which case it should be removed (zero

stock)
- 141 -
Why do firms have inventory?
To provide a selection of goods for anticipated

customer demand
To separate the firm from fluctuation of the demand
To decouple various parts of the production process
To take advantage of quantity discounts

(Economy of scale)
To hedge against inflation
- 142 -
Inventories: 4 aggregate categories (1/5)
Raw Material (RM)

inventories:
Needed for production

of goods & services
- 143 -
Work-In-Progress (WIP)
inventories:
Consisting of items
such as components or
assemblies considered
to be input to the
transformation
processes of the firm
- 144 -
Maintenance/Repair/
Operating (MRO)
inventories:
Consisting of spare
parts and items
necessary to keep
machinery and
processes
productive
- 145 -
Finished goods (FG)

inventories:
Are the products items

sold to the firms
consumers
- 146 -
Supplier
Manufacturing Plant
Raw
Materials
Raw Work-In Finished

Materials Progress Goods
Retailer Distribution
Center
- 147 -
Inventory System
Ordered
Quantity
Stock RM Stock FG
System Demand
Lead-time
Issues and decisions:
Is it important to keep a product in stock ?
If yes, how much to keep in stock ?
How to control the stock ?

When should we order ?
When should we start the production ?
How much should be ordered ?
- 148 -
Importance of the item
ABC Classification System (Pareto rule)

Classification based on the relationship between annual demand volumes and the
number of managed items
High
A
Annual
demand B
volumes
Low
C
Few Many
Number of Items
Other criteria can be used to classify items
Demand rate, demand frequency, etc.
Classified products are hence allocated in storage areas based on their rotation rate
Different inventory management systems to different classes of products
- 149 -
ABC analysis method
How to manage each class?

More attention to A items: Proper inventory management system
Less attention to C items: simple inventory rules (e.g. spare parts)
Example of calculation based on the demand rate
Calculation Method :
1/ Rank the products in a decreasing order of the demand rate
2/ Calculate the sum of the demand rates for the whole sample
3/ Calculate the individual % of each product = (demand rate of the product /
sum of demand rates)*100
4/ Calculate the cumulated % of each product
5/ Report the results on a graphic
6/ Identify the ABC classes
A : up to 80%
B : up to 95%
C : from 95%
- 150 -
Analyse ABC [Paretto] - Example
We consider the following sample. For each product we Sample

Example
show the demand rate for a given period. Product

Demand
rate
Based on this sample, present the ABC classification 1 15
table [as explained in the previous slide] 2 45
3 156
4 34
Demand Cumulated 5 59
Products in % Class
rate demand rate 6 9
9 221 221 29,9% A 7 12
10 165 386 52,2% A 8 23
3 156 542 73,3% A 9 221
5 59 601 81,3% B 10 165
2 45 646 87,4% B
4 34 680 92,0% B
8 23 703 95,1% C
1 15 718 97,2% C
7 12 730 98,8% C
6 9 739 100,0% C
- 151 -
ABC graphic
800
700 718 730 739

680 703
600 646
601
Cumulative
demand rate
500 542
400
386
300
200
100
221
A B C
0
9 10 3 5 2 4 8 1 7 6
Products
- 152 -
Example of warehouse organisation using the ABC Analysis
50 m 60 m 70 m 80 m
Zone C
30 m 40 m 50 m 60 m
Zone A
Inbays/
Outbays 30 m 40 m 50 m 60 m
Zone B
30 m 40 m 50 m 60 m
50 m 60 m 70 m 80 m
- 153 -
Characteristics of Inventory Systems
Review time
Continuous Review vs. Periodic Review
Continuous review: System that keeps track of removals from inventory continuously, thus
monitoring current levels of each item (e.g.: supermarket shelf inventories)
Periodic review: Physical count of items made at periodic intervals (e.g. soda machine)
Advantages and drawbacks ?
How the system reacts to excess demand ?
Either backordered or demand is lost

Backordered demand: Demand satisfied as soon as the stock is available
Lost demand: customer demand order can not be satisfied and the demand is lost
Partial backordering might be possible

A part of the demand is satisfied directly from the stock and the remaining part is satisfied as
soon as stock is available (negotiated contracts)
- 154 -
Stock evolution and review policy: illustration
Exemple 1
Single product inventory system
Monthly demand
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
30 30 10 30 40 40 10 0 30 30 20 20
Replenishment at the beginning of the month and zero lead-time
The inventory at the end of previous year is in shortage of 10 units,
Demands are backordered if they can not be satisfied directly from the stock
Two inventory policies are proposed :

Policy 1 : Quarterly replenishment of 75 units
Policy 2 : Bi-monthly replenishment of 50 units.
- 155 -
Complete the following table with the stock evolution :
Policy 1 Policy 2
Monthly
Initial stock Stock at Initial stock Stock at the
demand
Replenish. (after the end of Replenish. (after end of the
replenishment) the month replenishment) month
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sept
Oct
Nov
Dec
- 156 -
Stock evolution calculations:

Policy 1 Policy 2
Monthly
Initial stock Stock at the Initial stock Stock at the
demand
Replenish. (after end of the Replenish. (after end of the
replenishment) month replenishment) month
Jan 30 75 65 35 50 40 10
Feb 30 35 5 10 -20
Mar 10 5 -5 50 30 20
Apr 30 75 70 40 20 -10
May 40 40 0 50 40 0
Jun 40 0 -40 0 -40
July 10 75 35 25 50 10 0
Aug 0 25 25 0 0
Sept 30 25 -5 50 50 20
Oct 30 75 70 40 20 -10
Nov 20 40 20 50 40 20
Dec 20 20 0 20 0
- 157 -
Stock evolution: continuous review
The policy 3 consists in a continuous review with a reorder point equal to 30 (the
orders are launched only if the physical stock at the end of the month is strictly less
than 30). The ordered quantity is equal to 50.
Policy 3
Monthly
demand Initial stock Stock at the
Replenish. (after end of the
replenishment) month
Jan 30 50
Feb 30
Mar 10
Apr 30
May 40
Jun 40
Jul 10
Aug 0
Sept 30
Oct 30
Nov 20
Dec 20
- 158 -
Stock evolution: continuous review (cont.)
The stock evolution is as follows:
Policy 3
Monthly
Initial stock Stock at the
demand
Replenish. (after end of the
replenishment) month
Jan 30 50 20
Feb 30 50 70 40
Mar 10 40 30
Apr 30 30 0
May 40 50 50 10
Jun 40 50 60 20
Jul 10 50 70 60
Aug 0 60 60
Sept 30 60 30
Oct 30 30 0
Nov 20 50 50 30
Dec 20 30 10
- 159 -
Inventory performance measures
Inventory costs, more will come

Period Order Stock-out
Customer service levels 1 180 0
Cycle Service Level (CSL) 2 75 0
Probability of non stock-out (Frequency of non 3 235 45

stock-out occasions) 4 140 0
5 180 0
Fill rate (FR)
6 200 10
Proportion of demands satisfied directly from the
stock 7 150 0
8 90 0
9 160 0
Example: 10 40 0
CSL = 8 / 10 = 80 % Total 1450 55
FR = (1450-55)/1450 = 96,21 %
- 160 -
Inventory Costs
Holding cost
The sum of all costs that are proportional to the amount of inventory on hand at any time
The opportunity cost of money invested
The expenses incurred (warehousing, handling, deterioration, theft, insurance, taxes etc.)
Ordering or set-up cost

Fixed costs associated with a replenishment
For a retailer: ordering cost
For a manufacturer: production setup cost (example: Saint-Gobain Glass, Renault)
Penalty cost
Cost of having an item out-of-stock when it is Demanded
In case of backorders, there is a cost of special handling of the backordered item.
In case a substitute part is used, there may be a cost of customer goodwill loss or opportunity
loss
- 161 -
Inventory holding cost calculation: example
Example
Initial Stock si = 100 units
Final Stock sf = 20 units
Holding unit cost cs = 0,15/unit.day
Calculate the holding cost over a period of 30 days in the following cases:
Demand occurring at the beginning of the period
Demand occurring at the end of the period
Demand occurring continuously and uniformly over the period
- 162 -
Inventory holding cost calculation: example
Demand occurring at the beginning of the period
Cs = 20 * 0.15 * 30 = 90
Demand occurring at the end of the period
Cs = 100 * 0.15 * 30 = 450
Demand occurring continuously and uniformly over the period
Cs = (100+20)/2 * 0.15 * 30 = 270
- 163 -
Total inventory cost calculation
Total inventory cost: Ct
Holding cost : Cs
Ordering cost : Ca
Shortage cost : Cr
Ct = Cs + Ca + Cr
where
Cs = unit holding cost (cs) x average stock x stocking period
Ca = unit ordering cost x number or orders.
Cr = unit shortage cost x average shortage quantity x shortage period
- 164 -
Total inventory cost calculation: illustration
Consider again the example 1 (slide 80) and calculate the total inventory
cost of each replenishment policy knowing that:
Holding unit cost cs = 0,15 / unit.month
Shortage unit cost = 2 / unit.month
Ordering cost = 12 / order
We assume that the demand occurs continuously and uniformly over every
month
What is the best replenishment policy?
- 165 -
Policy 1 Policy 2
Monthly
Initial stock Stock at the Initial stock Stock at the
demand
Replenish. (after end of the Replenish. (after end of the
replenishment) month replenishment) month
Jan 30 75 65 35 50 40 10
Feb 30 35 5 10 -20
Mar 10 5 -5 50 30 20
Apr 30 75 70 40 20 -10
May 40 40 0 50 40 0
Jun 40 0 -40 0 -40
July 10 75 35 25 50 10 0
Aug 0 25 25 0 0
Sept 30 25 -5 50 50 20
Oct 30 75 70 40 20 -10
Nov 20 40 20 50 40 20
Dec 20 20 0 20 0
- 166 -
Example of calculations (in September):
25 Holding cost = Average stock * unit cost
= ((25+0)/2) * 0,15 * (25/30)

5 days
0
25 days t = 1.56
-5
Shortage cost = Average shortage * unit cost
1 month = 30 days
= ((5+0)/2) * 2 * (5/30)
= 0.83
- 167 -
Policy 1 Policy 2
Cs Ca Cr Cs Ca Cr
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sept
Oct
Nov
Dec
Total
- 168 -
Policy 1 Policy 2
Cs Ca Cr Cs Ca Cr
Jan 7.5 12 3.75 12
Feb 3 0.25 13.33
Mar 0.18 2.5 3.75 12
Apr 8.25 12 1 3.33
May 3 3 12
Jun 0 40 0 40
July 4.5 12 0.75 12
Aug 3.75 0
Sept 1.5 0.833 5.25 12
Oct 8.25 12 1 3.33
Nov 4.5 4.5 12
Dec 1.5 1.5
Total 45.93 48 43.5 24.75 72 60
Total
137,33 156,75
- 169 -
Inventory sizing
High Or Low
Inventories?
- 170 -
Pressures for small inventories
Cost of Capital
Weighted Average
Cost of Capital
(WACC)
The WACC is the

minimum return that a
company must earn on
an existing asset base
to satisfy its creditors,
owners, and other
providers of capital, or
they will invest
elsewhere
- 171 -
Storage & handling

costs
Inventory
requires space
(to be bought
or to be rented)
Inventory
should be
moved onto &
out of storage
- 172 -
Are depending on
Insurance Costs the level of the
end-of-year
inventory
Taxes
Pilferage or theft from customers or

employees
Obsolescence, when inventory
cannot be used or sold at its full Shrinkage
value
Deterioration, physical spoilage or
damage due to material handling
- 173 -
Pressures for large inventories
Customer Service
Inventory may
speed delivery and
improve the firms
on-time delivery.
High inventory may
reduce the
potential for
stockouts and
backorders
- 174 -
Ordering cost
Each time a firm

places a new order,
it incurs an ordering
cost (covers the
cost of the
purchasing agent
who decides how
much to order and
to whom + the time
spent on paperwork,
follow-up and
reception)
- 175 -
Setup cost
Changing over a
machine or
workspace to
produce a different
item represents a
setup cost
(This cost represents
a pressure to work
on big batches)
- 176 -
More inventory may

increase the
productivity and the
facility utilization
By reducing setup
cost,
Labor or By reducing the
equipment chance of
utilization rescheduling the
processes
By improving the
resource
utilization
- 177 -
Transportation cost
Outbound or
inbound
transportation cost
may be reduced by
increasing
inventory levels
(It allows more full-
carload shipments )
- 178 -
Payment to
suppliers
A firm can take

advantage of
quantity discounts
from suppliers. It
may also anticipate
prices increase by
ordering more.
- 179 -
Inventory Management : Economic Order Quantity
Inventory Holding cost: H / year / product unit

Inventory Ordering cost: S / order
Total cost:
Annual Annual
Total cost = holding + ordering
cost cost
Q + D S
TC = H
2 Q
Using calculus, we take the derivative of the total cost function and set
the derivative (slope) equal to zero and solve for Q.
2DS 2 * Demand rate * Unit Ordering Cost

QOPT = =
H Unit Holding Cost
- 180 -
Characteristics of an Inventory Management policy
When ?
Fixed review Reorder point

Stock period Stock
T T T
r
time time
Ordering dates Ordering date
How much ?
- Fixed quantity Q
- Order-Up-To-Level S
- 181 -
Four Policies for managing Inventories
How Much
Fixed quantity: Order-Up-To:
Q S
When
Periodically: (T,Q) (T,S)
T
Continuous: (r,Q) (r,S)
r
(T,Q) : Periodic review system with fixed quantity
(T,S) : Periodic review system with order-up-to-level
(r,Q) : Continuous review system with reorder point and fixed quantity
(r,S) : Continuous review system with reorder point and order-up-to-

level (also known as mini-maxi system)
- 182 -
Role of Parameters and Notion of
Safety Stock
- 183 -
Reorder point
Reorder point without safety stock
d = Daily demand
L = Order lead time
Reorder point = ROP = d x L
Annual demand for notebook

binders at Meyers Stationery
Shop is 10,000 unists. Brad
Meyer operates his business 300
days per year and finds that
deliveries from his suppliers
generally take 5 working days.
Calculate the reorder point for d = 10,000/300 = 33.3 units per day
the notebook binders. L = 5 days
ROP = 33,3 x 5 = 166.7 units

- 184 -
Reorder point with safety stock
Reorder point with safety stock
d = Daily demand
L = Order lead time
ss = Safety stock
Reorder point = ROP = (d x L) + ss
- 185 -
Continuous Review Reorder Point Policy
Average demand during lead time:
Safety stock:
z STD L
Reorder Level, R:
L AVG z STD L
- 187 -
Service Level & Safety Factor, z
Service 90% 91% 92% 93% 94% 95% 96% 97% 98% 99% 99.9%
Level
z 1.29 1.34 1.41 1.48 1.56 1.65 1.75 1.88 2.05 2.33 3.08
z is chosen from statistical tables to ensure

that the probability of stockouts during lead time is exactly 1 -
- 188 -
Continuous Review Policy: Example
Month Sept Oct Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug
Sales 200 152 100 221 287 176 151 198 246 309 98 156
Average monthly demand = 191.17

Standard deviation of monthly demand = 66.53
Average weekly demand = Average Monthly Demand/4.3

Standard deviation of weekly demand = Monthly standard deviation/4.3
Parameter Average weekly Standard Average Safety Reorder

demand deviation of demand stock point
weekly during lead
demand time
Value 44.58 32.08 89.16 86.20 176
- 189 -
Periodic Review Reorder Point Policy
Review period:
Average demand during lead time:
Safety stock:
Reorder Level, R:
- 190 -
Safety stock based on demand histogram
Demand Histogram
20
Nb of observations
18
16
14
12
10
8
6
4
2
0
Demand
- 191 -
Reorder point calculation based on demand probabilities
Probability distribution of the
0,3 cumulative demand during
lead-time Probability of 95% for
having a demand 28
0,25
0,2
0,15 Probability of 5% for having

a demand 28
0,1
0,05
0
20-6 21
-5 22
-4 23
-3 24
-2 25-1 260 271 28
2 3 Maximal 6 for a service
4 5demand
Level of 95%: Reorder point
- 192 -
Reorder point calculation based on demand probabilities
1,2
Target service level
1
1
0.95
0,8 Cumulative probability

distribution
0,6
0,4
0,2 Corresponding maximal

Demand: Reorder point
0
20 21 22 23 24 25 26 27 28 29 30 31 32
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
- 193 -
Outline
- 194 -
Supply Chain Operations
Reference model (SCOR)
- 195 -
Structure of the SCOR Reference Sourcebook
The SCOR reference sourcebook consists of four main sections:
Standard metrics to describe process performance

Performance
and define strategic goals
Standard descriptions of management processes

Processes
and process relationships
Management practices that produce significant

Practices better process performance
Standard definitions for skills required to perform

People
supply chain processes
- 196 -
SCOR Performance Attributes
Attribute Strategy
Reliability Consistently getting the orders right, product meets
(RL) quality requirements
Customer
Responsiveness (RS) The consistent speed of providing products/ services to

customers
Agility The ability to respond to changes in the market

(AG) (external influences)
Cost The cost associated with managing and operating the

Internal
(CO) supply chain
Assets The effectiveness in managing the supply chains

(AM) assets in support of fulfillment
- 197 -
Anatomy of SCOR Processes
Plan
Customer processes
Supplier processes
Sourc
Make Deliver
e
Return
Enable
Process, arrow indicates material flow direction
Process, no material flow
Information, goods, financial flow
- 198 -
SCOR Processes and the Supply Chain
Plan
Plan Plan
Deliver Source Deliver Source Deliver Source

Make Source Make Deliver Make
Return Return Return Return Return Return
Enabl Enabl
Suppliers e Return Return e Customers
Supplier Enable Customer
supplier Internal or external Internal or external customers
Your organization
The integrated process of plan, source, make, deliver,

return, and enable spanning from the suppliers supplier
to the customers customer
- 199 -
Levers for supply chain
performance
- 200 -
Forms of Supplier/Customer Relationships
Who makes the

Who owns
replenishment
the stock?
decision?
Supplier Customer
Who bears the Who bears the

transportation costs? warehouse costs?
- 201 -
Forms of Supplier/Customer Relationships
Who makes the

Customer Who owns Customer
replenishment
the stock?
decision?
Customer
Supplier

Customer
Supplier Customer
- 202 -
Consigned Inventory
Who makes the

Who owns Supplier
Supplier replenishment
the stock?
decision?
Supplier Customer
Who bears the Who bears the Customer

Supplier transportation costs? warehouse costs?
Supplier
- 203 -
Vendor Management Inventory : New ordering process
Traditional ordering process
Orders driven by customer on the basis

of its own forecasts
Delivery by the supplier

Supplier Retailer
Vendor Management Inventory
Data sharing
Supplier Automatic procurement by supplier Retailer

according to customers inventory
level and sales forecasts
- 204 -
Benefits/Risks of VMI (Vendor Management Inventory)
VMI or CMI?
Objectives Reduction of inventory

Stockout limitation
Partners Logistics ressources
adapted to real needs
Co-Management Inventory (CMI)

2 kind of softwares
Vendor Management Inventory (VMI)
- 205 -
Vendor Management Inventory
Better transportation optimization

Better management of shortage situation
Access to information regarding the
downstream part of the supply chain
Manufacturer
Manufacturer will not have access

to all information (information
regarding a competitors promotion)
Retailer
- 206 -
VMI or CMI ?
Vendor-Management Inventory (VMI)

Data sharing
1
Order proposal elaborated by
supplier
2
Supplier Procurement by supplier Retailer
Co-Management Inventory (CMI)

Data sharing
1 Order proposal elaborated by

supplier
2
Order validation by customer
Supplier (with or without correction) Retailer
3
Procurement by supplier
- 207 -
Vendor Management Inventory / Co-Management Inventory
Who makes the Who owns

replenishment the stock?
Customer
Supplier decision?
Customer
Supplier
Supplier Customer
- 208 -
Centralized inventory/flow management
Order Local order

decisions
Decentralized
flow
management Shipments
Each store
decides when
and how much to
order Order
Inventory level
Centralized
flow
management Shipments
A central team
decides when
and how much to
ship to each
store
Global replenishment decisions

- 209 -
Benefits of centralized inventory/flow management
Better skills of the flow management team

Better transportation optimization
Better management of shortage situation
Central
Warehouse
End
stores Customers
- 210 -
Collaborating with suppliers or customers may provide higher global
performance
Supplier Customer
CPFR (Collaborative Planning, Forecasting and Replenishment)
Sharing warehouses inventory levels, stores

inventory levels, POS (Point Of Sales) data,
Collaborative forecasting
Collaborative flow management (VMI,...)
Collaborative promotion management
- 211 -
Collaborating with suppliers or customers may provide higher global
performance
Real time comparison of
both forecasts to reach
consensus.
Supplier
Process synchronization of
supplier (Production plan,
3 Transport plan, Purchasing
plan) and retailer (promotion
plan)
Retailer
Web
1 Server
The supplier transfers its sales
forecasts (including promotions).
2
The retailer gives its sales
forecasts (including
promotions and
merchandising).
- 212 -

Supply Chain Management - ENSTAB

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Supply Chain Management - ENSTAB

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1 Overview on Supply Chain Management

2 Supply Chain Design

3 Supply Chain Planning

4 Supply Chain Flow Management

5 SCOR & Supply Chain Performance

1 Overview on Supply Chain Management

2 Supply Chain Design

3 Supply Chain Planning

4 Supply Chain Flow Management

5 SCOR & Supply Chain Performance

Procurement Production Distribution

Third Party Logistics Providers (3PL): Transportation Activities

Procurement Production Distribution

Production Planning and Flow management

Detailed management of physical flows

Wal-Mart, $1 billion sales in 1980 to $408 billion in 2010

Seven-Eleven Japan, 1 billion sales in 1974 to 3 trillion in 2009

Webvan folded in two years

Borders, $4 billion in 2004 to $2.8 billion in 2009

Dell, $56 billion in 2006, adopted new supply chain strategies

Cycle View: processes in a supply chain are divided into a series

Push/Pull View: processes in a supply chain are divided into two

Can combine the push/pull and cycle views

The relative proportion of push and pull processes can have an

Gateway and Apple

W.W. Grainger and McMaster-Carr

2 Supply Chain Design

3 Operations and Supply Chain Planning

4 Supply Chain Flow Management

5 SCOR & Supply Chain Performance

Factory Distribution Network

Direct Delivery Factories - Retailers

Distribution via Distributor/retailer Warehouses

Distribution via Cross Docking

Distribution with Muti-Pick / Multi-Drop

Distribution via internet

Warehouses Cross-Docking Hub

Warehouses Cross-Docking Hub

Warehouses function as inventory coordination points rather than as

Goods arriving at warehouses from the manufacturer:

are transferred to vehicles serving the retailers

are delivered to the retailers as rapidly as possible.

Goods spend very little time in storage at the warehouse

Often less than 12 hours

Limits inventory costs and decreases lead times

Supply chain partners must be linked with advanced information

A fast and responsive transportation system is necessary

Forecasts are critical, necessitating the sharing of information.

Effective only for large distribution systems

Sufficient volume every day to allow shipments of fully loaded trucks

Sufficient demand at retail outlets to receive full truckload quantities

1 Overview on Supply Chain Management

2 Supply Chain Design

3 Supply Chain Planning

3.1 Demand Forecasting

3.2 S&OP and MPS

4 Supply Chain Flow Management

5 SCOR & Supply Chain Performance

2 Supply Chain Design

3 Operations and Supply Chain Planning

3.2 Demand Forecasting

3.3 Supply and Demand Planning (S&OP and MPS)

Inventory cost = (4(2/12)+1(4/12)+5(3/12)+3(3/12))h = 3h