SCM G Online Study Guide SP5 - 2016 Final

Study Guide – Internal – SP5 - 2016
MFET 5043 (ID: 101161)
SUPPLY CHAIN MANAGEMENT G
MLK/P2-04 Mondays 12:10am – 03:00pm
Course Coordinator: Dr Yousef Amer

CONTENTS
Introduction
Course overview
Learning resources
Assessment
Feedback
Course schedule
Study Guide
INTRODUCTION
Welcome
Welcome to the course Supply Chain management. This course introduces you to the major tools
in a supply chain system and its various key components, and to how they should be analyzed and
designed in ways which produce the most desirable overall system performance.
The aim of this course is to provide you with knowledge of the supply chain and the activities in that
system. On completion of this subject, you should be able to understand the various activities
involved in a supply chain, the importance of a supply chain to the overall performance of a company,
the various factors that have an influence on the performance of a supply chain, and you should be
able to analyze supply chain networks.
Dr Yousef Amer
Course Coordinator
Location: Mawson Lakes Campus, J2-20

Email: yousef.amer@unisa.edu.au
Telephone: (08) 8302 3006
Course Coordinator homepage:
http://www.unisanet.unisa.edu.au/staff/Homepage.asp?Name=yousef.amer
Information regarding this course is available through myUniSA:

http://www.unisa.edu.au/myUniSA/
School contact details
University of South Australia
Mawson Lakes Campus
Mawson Lakes SA 5095
Telephone: (08) 8302 3007
Fax: (08) 8302 3380
Email: yousef.amer@unisa.edu.au
Dr Yousef Amer - School of Engineering 2 of 123 University of South Australia

COURSE OVERVIEW
Prerequisite(s)/ Assumed knowledge

Nil
Course objectives
The aim of this course is to provide the students with the concepts of the major issues of supply
chain structure and the strategies for the planning, analysis, design and development of supply chain
systems. On completion of this course, students should be able to:
1. Describe the different levels of supply chain activities and assess their strengths and
weaknesses
2. Utilise a systematic framework for analysing the behaviour of supply chain networks
3. Recognise the Supply Chain Management principles utilised in an organisation
4. Describe the impact of supply chain decisions on a firm’s performance and identify decisions
of planning process as well as tools that can be used for planning supply chain systems
5. Recommend procedures to Supply Chain Management processes to improve
competitiveness of an organisation
Course Objectives Graduate Qualities being developed though the course

GQ1 GQ2 GQ3 GQ4 GQ5 GQ6 GQ7
Objective 1 X
Objective 2 X
Objective 3 X
Objective 4 X X
Objective 5 X X
Graduate Qualities
A graduate of UniSA:
1. operates effectively with and upon a body of knowledge of sufficient depth to begin
professional practice
2. is prepared for lifelong learning in pursuit of personal development and excellence in

professional practice
3. is an effective problem solver, capable of applying logical, critical and creative thinking to
a range of problems
4. can work both autonomously and collaboratively as a professional
5. is committed to ethical action and social responsibility as a professional and citizen
6. communicates effectively in professional practice and as a member of the community
7. demonstrates international perspectives as a professional and as a citizen.
Course content
Supply chain concept, definition, elements and roles of supply chain management, strategic fit of the
supply chain and competitive advantage, supply chain performance, methodologies for supply chain
management strategy formulation, types of distribution network, distribution network design, demand
forecast and planning for the supply chain, inventory management, and inventory replenishment
techniques.

Teaching and learning arrangements
This course will be delivered through:
Lectures (online) 7 wks x 2 hours
Tutorials 4 wks x 2 hour
Practical session 3 hour session
Online quizzes 1 hour per week
Self-directed study and group work 13 wk x 8 hours
Unit value of course: 4.5 units
LEARNING RESOURCES
Text(s)
You will need continual access to the following text(s) in order to complete this course. The library
may hold only one copy of the nominated text books and therefore you will need to acquire the
book(s).
 Chopra, S, and Meindl, P. 2016, Supply Chain Management: Strategy, Planning, and
Operation, 6th Edition, Pearson Prentice-Hall Publishers
Materials to be accessed online

Course homepage and myUniSA
http://programs.unisa.edu.au/public/pcms/Course.aspx?pageid=101161&y=2016
http://www.unisa.edu.au/myUniSA/
Extra course information

The Extra course information booklet provides important information relevant to the study of all
your courses. This can be accessed at: http://www.unisa.edu.au/ltu/staff/practice/materials/course-
information/extra.asp from the course homepage and myUniSA.
Other resources
Recommended references
 Michael H. Hugos, “Essentials of Supply Chain Management”, John Wiley & Sons 2003.
 John Meredith Smith, “Logistics and the out-bound supply chain: an introduction for
engineers”, Penton Publisher, 2002.
 David Simchi-Levi, Philip Kaminsky and Edith Simchi-Levi, “Designing and Managing the
Supply Chain: Concepts, Strategies and Case Studies”, McGraw-Hill Publishers, third edition
2008
 Law, A.M. and Kelton, W.D., Simulation Modelling and Analysis”, McGraw-Hill, 1982.
 Charles C. Poirier, “Advanced Supply Chain Management: How to Build a Sustained
Competitive Advantage”, Berrett-Koehler Publisher, 1999.
 Other texts and journals as required
Useful websites
 UniSA Library: http://www.library.unisa.edu.au/

 EBSCOhost electronic journal:
http://search.library.unisa.edu.au/record/UNISA_ALMA6178787470001831
 Emerald Management Xtra
http://search.library.unisa.edu.au/record/UNISA_ALMA6187637020001831
 Science Direct online journal:
http://search.library.unisa.edu.au/?atozdb=0&tid=Science
ASSESSMENT
Assessment summary
Form of assessment Weighting Due date Graduate
Quality/Qualities
being assessed
1. Continuous formative assessment

By end of week 6
 Minor Assignment (10%) &
25% See course calendar 1, 3
 3 online Activities (5%) &
for details
 Online quizzes and tutorial (10%)
2. Major Group Assignment 25% By end week 11 1, 3
To be announced
3. Examination 50% 1, 3
online
Note: using Simprocess software is not part of the assessment criteria, and it is not
mandatory that you use it in your work for this course. However applying this powerful
software as a tool in SCM will aid you to refine your design. For example, you can pick
any stress point, identify any bottleneck and examine the “as is” and “to be” state of your
design.
Assessment details
Details of assessment submission and return are listed under each assessment task. Assessment
tasks will be returned to you within two to three weeks of submission.
This course is shared between UniSA and the Australian National University. The Assessment Policy
of your host University applies to your progress.
Assessments
Assessment 1 Continuous Assessment (25%)
This consists of 3 components:
1. Submitting the Minor Assignment via Learnonline (by the end of Week 6)
2. Participating in three online activities as outlined in the Learnonline course site (Weeks
1, 3 and 5)
3. Participating in Online quizzes and tutorials
This assessment relates to Graduate Qualities 1 and 3.

Minor Assignment
Submit the solutions/ answers to the following Topic activities (by the end of Week 6):
 Topic 1: SAQs 1 and 7
 Topic 2: SAQs 3 and 5
 Topic 3: SAQs 1, 2 and 5
 Topic 4: SAQs 4 and Problem 2
Online activities
Students are required to undertake three online activities, in the form of online discussions. Postings
should be no longer than 250 words. Students are encouraged to create a dialogue amongst each
other and keep the discussion thread related to the course learning. The discussion boards will be
moderated by the course coordinators.
Discussion Questions
Some students may find it difficult to tackle concept questions (or descriptive questions). The
following hints may be useful. Read the question carefully, and identify the key words in the question.
This will help you to understand clearly what being asked and what the expected answers are.
Prepare a framework for your answer before start writing. This can be done by preparing a list of dot
points for each key word that you have identified. Remember to use headings, sub-headings and
paragraphs in your answer. The list of dot points may be used as headings/ sub-headings.
Problem Solving Questions

Although problem-solving questions may seem easy to some engineering students, it is important
that you present your work clearly. Remember to present your work in a logical sequence with
explanation, not just a list of equations and numbers. You may find it useful to understand clearly
what being asked, and work backward from there to identify the necessary equations and data
needed.
Refer also to Extra course information at:

http://www.unisa.edu.au/ltu/staff/practice/materials/course-information/extra.asp
Anticipated return date for all Assessment 1 tasks will be after 2/3 weeks of the due date
Feedback on this assessment will be provided online or on the Feedback form, a copy of which is
included at the back of this booklet.
Assessment 2—Major Group Assignment

This assessment relates to Graduate Qualities 1 and 3.
This Major Group assignment consists of both Topic Short Answer Questions & problem solving
questions and a case study. The group work will be undertaken via various collaborative platforms
(such as online Group Discussion Boards, chat rooms, virtual classrooms, and face-to-face
meetings). The written group report, to be submitted by a nominated member of the group on the
groups’ behalf via Learnonline by the end of week 11.
Each student must also individually submit a peer assessment form via Learnonline
Students must use a recognised referencing style, which is to be used consistently throughout the
written report.
Feedback on this assessment will be provided online or on the Feedback form, a copy of which is
included at the back of this booklet.
Exam/Test
The exam/test will assess all topics in the course.
The duration of the exam/test will be three hours.
Past exam papers may be obtained from the Learnonline course site/appendix 3 - study guide.
Students are required to pass the exam in order to pass this course.

Students with disabilities or medical conditions
Students with disabilities may be entitled to a variation or modification to standard assessment
arrangements. Information for students with disabilities is available at:
http://www.unisa.edu.au/Student-Life/Support-services/Disability-Services/
Variations to assessment tasks

Students may request a variation to assessment methods, tasks and timelines based on medical,
compassionate or religious observance grounds, or community services. Such variations must be
requested within the first two weeks of the course (or equivalent for accelerated or intensive
teaching). Alternative arrangements due to unexpected circumstances should be discussed with the
Course Coordinator as soon as possible. More information about variation to assessment may be
found by consulting the relevant policy: http://www.unisa.edu.au/policies/manual/default.asp
Academic integrity
The university aims to foster and preserve the scholarly values of inquiry, experimentation, critical
appraisal and integrity, and to foster these values in its students. Academic Integrity is a term used
at university to describe honest behaviour as it relates to all academic work (for example papers
written by staff, student assignments, conduct in exams, etc) and is the foundation of university
life. One of the main principles is respecting other people’s ideas and not claiming them as your
own. Anyone found to have used another person’s ideas without proper acknowledgement is guilty
of Academic Misconduct and the University considers this to be a serious matter.
The University of South Australia wants its students to display academic integrity so that its degrees
are earned honestly and are trusted and valued by its students and their employers. To ensure this
happens and that students adhere to high standards of academic integrity and honesty at all times,
the University has policies and procedures in place to promote academic integrity and manage
academic misconduct for all students.
More information about Academic Integrity and what constitutes academic misconduct
can be found in Section 9 of the Assessment policies and procedures manual at:
http://www.unisa.edu.au/policies/manual/ or on the Learning & Teaching Unit
website at: http://www.unisa.edu.au/ltu/students/study/integrity.asp or on the
academic integrity at: http://w3.unisa.edu.au/academicdevelopment/assessment/integrity.asp
Submission and return of Assessment tasks

See above under Assessment details.
Refer also to Extra course information at:

http://www.unisa.edu.au/ltu/staff/practice/materials/course-information/extra.asp
Note: information on submission and return of assessment tasks in Extra course information is
very important. Please read it before submitting assessments.
Evaluation of the course

This course will employ both formative and end-of-course evaluation processes. Formative
evaluation will be conducted in Week 4 using the feedback form outlined below. Standard university
evaluation processes will be implemented via a Course Evaluation Instruction in Week 14. However,
because this course is a shared course offered by both ANU and UniSA, the evaluation instrument
will be adjusted to reflect alignment with both universities. A teaching evaluation using the Student
Evaluation of Teaching instrument may also be conducted.

Feedback form
Feedback on assignments will be delivered via the following format.
ASSESSMENT FEEDBACK
KEY COMPONENTS OF THIS ASSIGNMENT COMMENT BY MARKER
RELEVANCE OF WORK TO QUESTIONS/PROBELMS
QUALITY OF CONTENTS
QUALITY OF STRUCTURE AND PRESENTATION
SUMMARY COMMENT
THE GRADUATE QUALITIES BEING ASSESSED BY THIS ASSIGNMENT ARE INDICATED BY AN X:
GQ1: OPERATE EFFECTIVELY WITH AND UPON A BODY OF GQ5: ARE COMMITTED TO ETHICAL ACTION AND
KNOWLEDGE SOCIAL RESPONSIBILITY
GQ2: ARE PREPARED FOR LIFELONG LEARNING GQ6: COMMUNICATE EFFECTIVELY
GQ3: ARE EFFECTIVE PROBLEM SOLVERS GQ7: DEMONSTRATE AN INTERNATIONAL

PERSPECTIVE
GQ4:CAN WORK BOTH AUTONOMOUSLY AND

COLLABORATIVELY
ASSIGNMENT GRADE/MARK

MFET 5043 COURSE CALENDAR – STUDY PERIOD 5, 2016
Study Period 5 Topic Assessment – Due by

Introductory meeting @ H1-42 (11:10-02:00pm)
week 1 25 July
Online activity 1- (31/07/16)
Topic 1 01/08/16 – Session 1 Practical @ J2-17 (12:10-

week 2 01 August 03:00pm) All students
Online Topic 1 quiz - (12-13/08/16)

week 3 08 August Topic 2
Online activity 2 - (14/08/16)

week 4 15 August Topic 3 15/08/16 - Session 2 Practical @ J2-17 (12:10-
03:00pm) Only Group 1,2,3 and 4

week 5 22 August Topic 4 Online activity 3 - (28/08/16)
Tutorial @ P2 - 04 (Topic 1 & 2)

week 6 29 August Topic 5 Minor assignment - (04/09/16)
Tutorial @ P2 - 04 (Topic 3 & 4)

week 7 05 Sept Topic 6 05/09/16 - Session 2 Practical @ J2-17 (12:10-
03:00pm) (repeat of 15/08/16 session) Only
Group 5,6,7 and 8
12 Sept Online Topic 6 quiz - (16-17/9/16)

week 8 12/09/16 - Session 3 Practical @ J2-17 (12:10-
03:00pm) Only Group 1,2,3 and 4
19 Sept Mid-break
26 Sept Mid-break
week 9 03 Oct Topic 7
10 Oct Online Topic 7 quiz - (14-15/10/16)

week 10
Tutorial @ P2 - 04 (Topic 5, 6 & 7)
17/10/16 - Session 3 Practical @ J2-17 (12:10-

week 11 17 Oct 03:00pm) (repeat of 12/09/16 session) Only
Group 5,6,7 and 8
Major assignment (also submit your Peer

week 12 24 Oct
assessment form) 30th October 23:00pm
week 13 31 Oct
07 Nov swot-vac
Exam weeks Examination
Note: Always make a habit to check the lecturer’s notice board and discussion board for new posting & amendments.
STUDY GUIDE
Contents
How to use this study guide
Topic 1: Analysing Supply Chain Frameworks and Metrics
Topic 2: Supply Chains Strategy and Performance
Topic 3: Designing the Supply Chain: Distribution Network Configurations
Topic 4: Designing the Supply Chain: Network Design
Topic 5: Planning: Demand Forecasting in a Supply Chain
Topic 6: Aggregate Planning in a Supply Chain
Topic 7: Managing Inventories in a Supply Chain
APPENDIX 1: Major Group Assignment
APPENDIX 2: List of Equations
APPENDIX 3: Sample of examination Paper
APPENDIX 4: Peer Assessment Form
Appendix 5: Simulation Exercise

How to use this study guide
This study guide outlines the main points of the subject to assist you in your reading. They
are not lecture notes. Students are expected to complete the required readings listed in each topic.
At the end of each topic, students should attempt all the tutorial questions and problems provided to
evaluate their understanding.
This study guide has been designed to assist you in studying this course. The study guide clearly
defines the number of topics covered by the course, the objective(s) of each topic, specific text and
reference materials for each topic, the amount of work you have to do for each topic, and the
sequence of study. The guide gives you a clear idea of the contents of the course and the amount
of work you are expected to do to achieve the course’s objectives. It is NOT meant to be a complete
set of ‘lecture’ notes for the course. To study this course, you need not only this study guide, but also
the resources listed in the section “Texts and references”.
The layout of each topic in this the study guide is as follows:
 Aims of the topic: This outlines the general concepts and techniques to be covered.
 Reading list: This gives you the details of the relevant texts that you have to study for the
topic.
 Key terms: Important words and concepts from your reading and your study notes, which
you should understand are listed.
 Topic notes: This provides the main content of each topic, which will assist you in your
reading.
 Topic activities: This section gives you activities that you should attempt in order to evaluate
your learning and to prepare for examination.
The following is a suggested sequence of study for each topic:
1. Reading: You should read the study guide and any recommended texts. As the contents of each
topic may not follow the text 100%, it is important that you read the Study Guide first to
identify the key points in each topic before reading the text. At this stage of a first reading,
you may not be able to understand all the texts but the reading will give you a general idea about
the topic. This reading also assists you in identifying any difficulties or problems that you may
have, so you can discuss these difficulties online with the other students and the course
coordinator via the discussion board. It is also a good idea to have a look at the activities for the
topic so you know you what you are required to do at the end of the topic.
2. Detailed study: Once the reading for each topic has been done, students can go through each
topic in detail at their own pace provided that they finish the topic at the end of the allocated time
slot. This involves a detailed study of all the recommended texts and any associated coursework
requirements. To evaluate your study, it is important that you attempt all the activities and quizzes
for each topic. Students are encouraged to use the discussion board for clarification of issues.

Topic 1: Analysing Supply Chain Frameworks and Metrics
Aims
 To introduce you to supply chain management concepts and a strategic framework to analyse
supply chains.
Recommended Readings
 Relevant sections in chapter 1 and 3
Key Terms/ Concepts:

 Process view of a supply chain, which includes: cycle view & push/pull view
 Decision phases in the supply chain: strategy & design, planning, and operations
 Decision-making framework
 Supply chain drivers: which are the (1) logistical drivers (facilities, inventories,
transportation) and (2) cross-functional drivers (information, sourcing, pricing)
1. Supply Chain
 A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer
request.
 The supply chain not only includes the manufacturer and suppliers, but also transporters,
warehouses, retailers, and customers themselves.
 The supply chain includes all functions involved in receiving and filling a customer request
within each element of the chain (such as manufacturer stage).
 These functions include, but are not limited to, new product development, marketing,
operations, distribution, finance, and customer service.
Figure 1.1 Stages of an Ice Cream Supply Chain
 A typical supply chain may involve a variety of stages, including the following:
 Component/Raw material suppliers
 Manufacturers
 Wholesalers/Distributors
 Retailers
 Customers

 The objective of every supply chain is to maximize the overall value generated.
 The value a supply chain generates is the difference between what the final product is worth
to the customer and the effort the supply chain expands in filling the customer’s order.
 Therefore, for any supply chain, there is only one source of revenue - and that is the
customer.
 For most commercial supply chains, value will be strongly correlated with supply chain
profitability (also known as supply chain surplus).
 Supply chain profitability is the difference between the revenue generated from the customer
and the overall cost across the supply chain.
 Supply chain management is the management of flows between and among supply chain
stages to maximize total supply chain profitability.
2. Processes View of a Supply Chain
 A supply chain is a sequence of processes and flows that take place between different stages
and combine to fill a customer need for a product.
 There are two different ways to view the processes involved in a supply chain:
1. Cycle view
2. Push/ pull view
2.1 Cycle View

 The processes are divided into a series of cycles, which are performed at the
interfaces between two successive supply chain stages:
o Customer order cycle
o Replenishment cycle
o Manufacturing cycle
o Procurement cycle
2.2 Push/ Pull View

 The processes are divided into two categories depending on how they are
executed:
a. Pull: the processes are initiated in response to a customer order.
b. Push: the processes are initiated in anticipation of customer demand
based on forecast.
 Push vs. pull refers to the methodology used to trigger a process in the supply
chain e.g. Replenishment cycle or Manufacturing cycle.
3. Decision Phases in a Supply Chain
 Successful supply chain management requires many decisions relating to the flow of
information, products and funds, depending on the frequency of each decision and the time
frame over which a decision phase has an impact.
 The development and operations of a supply chain may be divided into three categories or
phases:
1) Supply Chain Strategy and Design
2) Supply Chain Planning
3) Supply Chain Operation

3.1 Supply Chain Strategy and Design
o During this phase, a company decides how to structure the supply chain over the next
several years.
o It decides what the chain’s configuration should be, how resources will be allocated,
and what process each stage will perform.
o An organisation must ensure that the supply chain design and configuration supports
its strategic objectives and that it increases the supply chain profitability.
o Strategic decisions to be made by the company include:
 Whether to perform a supply chain function in-house or outsource
 The location and the capacities of production and warehousing facilities
 What product is to be made or stored at various locations
 The modes of transportation to be made available along different shipping
legs
 The type of information system to be used
3.2 Supply Chain Planning

o In this phase, the supply chain’s configuration (which has been determined in the
strategic phase) is already fixed.
o This configuration establishes constraints within which planning must be done.
o For decisions made during this phase, the time frame considered is a quarter to a
year.
o Companies start the planning phase with a forecast for the coming year of demand in
different markets.
o Planning includes decisions regarding:
 Location and market identification
 Demand forecasting & aggregate planning
 Subcontracting and/or backup locations
 Inventory policies to be followed
 Timing and size of marketing promotions
3.3 Supply Chain Operation

o During this phase, companies make decisions regarding individual customer orders.
o At the operational level, supply chain configuration is considered fixed and planning
policies are already defined.
o The time horizon here is weekly or daily.
o The goal of supply chain operation is to handle incoming customer orders in the best
possible manner.
o During this phase, organisations need to:
 Allocate orders to inventory or production
 Set order due dates
 Generate warehouse pick lists
 Allocate shipments
 Set delivery schedules
 Place replenishment orders under the weekly or daily time horizon

4. Supply Chain Decision Making Framework
 The decision-making framework provides a process for the development of a supply chain
strategy and a supply chain structure.
 The framework consists of:
1. decisions with regards to supply chain strategy, which must fit in with the company
competitive strategy
2. decisions regarding logistical and cross-functional drivers.
 A visual respresentation of the framework for supply chain decision-making is shown in figure
1.2 below.
Figure 1.2 Supply Chain Decision-Making Framework
4.1 Supply Chain Strategy

 The company’s competitive strategy needs to fit strategically with the supply chain strategy.
 As you can see on the figure above, the goal of a supply chain strategy is to strike the balance
between responsiveness and efficiency that fits with the competitive strategy.
 To reach this goal, the supply chain strategy dictates and maximises the supply chain profits,
by using the right combination of the three logistical and three cross-functional drivers
outlines below.
4.2 Supply Chain Structure

 The supply chain structure consists of:
o 3 Logistical drivers
- Facilities
- Inventory
- Transportation
o 3 Cross-functional drivers
- Information
- Sourcing
- Pricing

4.3 Drivers of Supply Chain Performance
Facilities are the actual physical locations in the supply chain network where products are stored,
assembled, or fabricated. The two major types of facilities are (1) production sites and (2) storage
sites.
 Critical decisions include:
 Role
 Location
 Capacity
Inventory covers all raw materials, work-in-process (work-in-progress), and finished goods within a
supply chain. Changing inventory policies can directly affect the efficiency and responsiveness of a
supply chain.
 Cycle inventory (how many items per order and when to place an order)
 Safety inventory
 Seasonal inventory
 Level of product availability
Transportation involves moving inventory from point to point in the supply chain, which can take
the form of modes and routes. Right choices of transportation have a large impact on supply chain
responsiveness and efficiency.
 Design of transportation network
 Choice of transportation mode
Information consists of data and analysis concerning facilities, inventory, transportation, costs,
prices, and customers throughout the supply chain. Information is potentially the biggest driver of
performance in the supply chain because it directly affects each of the other drivers in making the
supply chain more responsive and more efficient.
 Push vs. pull
 Coordination and information sharing
Sourcing is the choice of who will perform a particular supply chain activity such as production,
storage, transportation, or the management of information.
 In-house or outsourcing
 Supplier selection
 Procurement
Pricing determines how much a firm will charge for goods and services that it makes available in
the supply chain. Pricing affects the decision of the buyer of the goods or services, thereby affecting
the supply chain performance.
 Pricing and economies of scale
 Everyday low pricing vs. high-low pricing
Importance of supply chain decisions: Supply chain design, planning, and operation decisions
play a significant role in the success or failure of a company.

Exercises
Multiple Choice Questions
1. Supply chain profitability is

a. not correlated to the value generated by the various stages of the supply chain.
b. the total profit to be shared across all supply chain stages.
c. the difference between the revenue generated from the customer and the overall cost
across the supply chain.
d. the total revenue generated by the distributor stage of the supply chain.
e. b and c only
2. The cycle view of a supply chain holds that

a. the processes in a supply chain are divided into 2 categories.
b. the processes in a supply chain are divided into a series of activities performed at the
interface between successive stages.
c. all processes in a supply chain are initiated in response to a customer order.
d. all processes in a supply chain are performed in anticipation of customer orders.
e. None of the above is true.
3. Which of the following is not a cycle in the supply chain cycle view?
a. Analysis cycle
b. Customer order cycle
c. Replenishment cycle
d. Manufacturing cycle
e. Procurement cycle
4. The decision phases in a supply chain include

a. production scheduling.
b. customer relationship management.
c. supply chain operation.
d. supply chain orientation.
e. all of the above
5. The push/pull view of a supply chain holds that

a. the processes in a supply chain are divided into a series of activities performed at the
interface between successive stages.
b. all processes in a supply chain are initiated in response to a customer order.
c. all response in a supply chain are performed in anticipation of customer orders.
d. the processes in a supply chain are divided into 2 categories depending on whether
they are initiated in response to or in anticipation of customer orders.
6. The cycle view of the supply chain is useful when considering operational decisions,
because
a. it categorizes processes based on whether they are initiated in response to or in
anticipation of customer orders.
b. it specifies the roles and responsibilities of each member of the supply chain.
c. processes are identified as either reactive or speculative.
d. it focuses on processes that are external to the firm.
e. it focuses on processes that are internal to the firm.

7. Which of the following is not an accurate statement about push processes?
a. May also be referred to as speculative processes.
b. Execution is initiated in anticipation of customer orders.
c. At the time of execution, demand must be forecast.
d. May also be referred to as reactive processes.
e. All of the above are accurate.
Short Answer Questions
1. Explain the 3 decision phases (categories) that must be made in a successful supply chain.
2. Describe the cycle view of the processes within a supply chain.
3. Explain the push/pull view of the processes within a supply chain.
4. Consider the purchase of a can of soda at a convenience store. Describe the various stages
in the supply chain and the different flows involved.
5. What are some strategic, planning, and operational decisions that must be made by an
apparel retailer?
6. Consider the supply chain involved when a customer purchases a book at a bookstore.
Identify the cycles in this supply chain and the location of the push/ pull boundary.
7. In what way do supply chain flows affect the success or failure of a firm like Amazon? List
two supply chain decisions that have a significant impact on supply chain profitability.

Topic 2: Supply Chains Strategy and Performance
Aims
 Explain what competitive and supply chain strategies are
 Describe how a company achieves strategic fit between its supply chain strategy and its
competitive strategy
 Chapter 2
Key Terms/Concepts:
 Strategic fit between competitive strategies and supply chain strategies
 Understanding the supply chain: uncertainty in supply and demand, responsiveness,
cost efficiency
 Supply chain uncertainty, implied uncertainty spectrum in terms of demand and
supply
 Supply chain responsiveness vs. efficiency
 Scope of strategic fit across the supply chain
1. Competitiveness and Supply Chain Strategies
 A company’s competitive strategy defines the set of customer needs that it seeks to satisfy
through its products and services – relative to its competitors.
 Factors that contribute to a competitive strategy can include:
 Level of quality
 Price
 Standard product or customisation
 Delivery time
 Customer support
 Once a competitive strategy has been developed, it is necessary to ensure a strategic fit
between the competitive strategy and the supply chain strategy.
 Supply chain strategy determines the nature of:
 Procurement of raw materials
 Transportation of materials to and from the company
 Service functions such as manufacturing and operations
 Distribution of the product to the customer
2. Achieving Strategic Fit
 The 3 basic steps to achieve strategic fit are:

1) Understanding the customer and supply chain uncertainty
2) Understanding the supply chain capabilities
3) Achieving strategic fit
2.1 Understanding the Customer and Supply Chain Uncertainty

 To understand the customer, a company must identify the customer needs: for example,
the desired cost and service level requirements, and the uncertainties the supply chain
faces in satisfying these needs.
 Customers need may vary along several attributes:
o The quantity of the product needed in each lot
o The response time that customers are willing to tolerate
o The variety of product needed
o The service level required
o The price of the product
o The desired rate of information for the product
 The implied uncertainty depends on two factors:
o Customers’ needs
o Supply uncertainty
 The impact of customer needs (competitive strategy) on implied demand uncertainty is
shown on table 2.1.
Table 2.1 Impact of customer needs on implied demand uncertainty

Customer Need Effect on Implied Demand Uncertainty
If the range of quantity the implied demand uncertainty increases, because
required increases, then … a wider range of the quantity required implies greater
variance in demand
If the lead time decreases, the implied demand uncertainty increases, because
then … there is less time in which to react to orders
If there is an increase in the the implied demand uncertainty increases, because
variety of products required, demand per product becomes more disaggregate
then
If the number of channels the implied demand uncertainty increases, because
through which the product the total customer demand is now disaggregated
maybe acquired increases, over more channels
then
If the rate of innovation the implied demand uncertainty increases, because
increases, then new products tend to have more uncertain demand
If the required service level the implied demand uncertainty increases, because
increases, then … the firm now has to handle unusual surges in
demand
 If the supply is unreliable (lack of capacity, quality problems, breakdowns, etc) this will also
increase the level of implied uncertainty.
 We can create a spectrum of uncertainty by combining the demand and supply uncertainty
as shown on figure 2.1.
Figure 2.1 The Implied Uncertainty (Demand and Supply) Spectrum

2.2 Understanding the Supply Chain Capabilities
 After understanding the uncertainty that the company faces, to effectively manage a
supply chain, a firm must understand how it can best meet demand in an uncertain
environment.
 Understanding the supply chain capabilities is important for a company, so that it can
understand what its supply chain is designed to do well, because each type of supply
chain is designed to perform different tasks depending on the uncertainties.
 Creating strategic fit is all about creating a supply chain strategy that best meets the
demand a company has targeted (given the uncertainty it faces).
 Supply chain performance can be determined by its:
o Responsiveness: comes at a high cost (low efficiency)
o Cost efficiency: comes at low responsiveness
 The responsiveness of a supply chain depends on the supply chain’s ability to do the
following:
o Respond to wide ranges of quantities demanded
o Meet short lead times
o Handle a large variety of products
o Build highly innovative products
o Meet a very high service level
o Handle supply uncertainty
 Responsiveness, however, comes at a cost. For instance:
o Supply chain efficiency is based on the cost of making and delivering a product
to the customer.
o For every strategic choice to increase responsiveness, there are additional costs
that lower efficiency.
o To respond to a wider range of quantities, capacity must be increased, and this
leads to a cost increase.
The relationship between responsiveness and cost is shown below:
Figure 2.2 Cost-Responsiveness Efficient Frontier

The responsiveness spectrum is shown below:
Figure 2.3 The Responsiveness Spectrum
2.3 Achieving Strategic Fit

 From the preceding discussion, it follows that to achieve strategic fit, the company must
match its level of responsiveness to the level of implied uncertainty it is working with.
 The goal is to achieve strategic fit through aiming for:
o high responsiveness for supply chains which have greater implied uncertainty,
while
o less responsiveness or efficiency for supply chains that have low implied
uncertainty.
 Therefore, the greater the implied uncertainty, the more responsive the supply chain
should be.
 If the implied uncertainty from customers and supply sources increases, it is best served
by increasing responsiveness from the supply chain.
 This relationship is represented by the “zone of strategic fit” illustrated in figure 2.4 below.
 For a high level of performance, companies should move their competitive strategy (and
resulting implied uncertainty) and supply chain strategy (and resulting responsiveness)
toward the zone of strategic fit.
Figure 2.4 Finding the Zone of Strategic Fit

3. Other Issues Affecting Strategic Fit
3.1 Changes
 To achieve strategic fit, a firm must tailor its supply chain to best meet the needs of
different customer segments.
 To retain strategic fit, the supply chain strategy must be adjusted over the life cycle of a
product and should also be adjusted if the competitive landscape changes.
For example, at the early stages of a product life cycle, the product will have:
 uncertain demand
 high margins (because time is important)
 product availability as a critical factor
 cost as a second priority
While at late stages, the product will have
 predictable demand
 lower margins
 price as priority
3.2 Strategic Scope

 A key issue relating to strategic fit is the scope, in terms of supply chain stages, across
which the strategic fit applies.
 Scope of strategic fit refers to the functions and stages that devise an integrated strategy
with a shared objective.
 The inter-company scope of strategic fit is essential today because the competitive
playing field has shifted from company versus company to supply chain versus supply
chain.
 A company’s partners in the supply chain may well determine the company’s success,
because the company is intimately tied to its supply chain.
3.3 Competitive Pressures to Achieving Strategic Fit

 Increasing variety of products
 Decreasing product life cycle
 Increasingly demanding customers
 Fragmentation of supply chain ownership

Exercises
1. A company’s competitive strategy

a. defines the set of customer needs that it seeks to satisfy through its products and
services.
b. specifies the portfolio of new products that it will try to develop.
c. specifies how the market will be segmented and how the product will be positioned,
priced, and promoted.
d. determines the nature of procurement and transportation of materials as well as
manufacture and distribution of the product.
e. determines how it will obtain and maintain the appropriate set of skills and abilities to
meet customer needs.
2. A supply chain strategy includes

a. supplier strategy.
b. operations strategy.
c. logistics strategy.
d. all of the above
e. none of the above
3. A supply chain strategy involves decisions regarding all of the following except
a. inventory.
b. transportation.
c. new product development.
d. operating facilities.
e. information flows.
4. Which of the following is not a basic step to achieving strategic fit?

a. Achieving strategic fit.
b. Understanding the supply chain capabilities.
c. Determining the response time that customers are willing to tolerate.
d. Understanding the customer and supply uncertainty.
5. The uncertainty that exists due to the portion of demand that the supply chain is required to
meet is the
a. rate of strategic uncertainty.
b. demand uncertainty.
c. implied demand uncertainty.
d. average forecast error.
6. Which of the following customer needs will cause implied uncertainty of demand to increase?
a. Range of quantity required increases
b. Lead time decreases
c. Variety of products required increases
d. Required service level increases
e. all of the above

7. Which of the following is not a supply chain capability that will impact supply uncertainty?
a. Evolving production process
b. Inflexible supply capacity
c. Limited supply capacity
d. Product margin
e. Unpredictable and low yields
8. The first step in achieving strategic fit between competitive and supply chain strategies is to
a. understand the supply chain and map it on the responsiveness spectrum.
b. understand customers and supply chain uncertainty.
c. match supply chain responsiveness with the implied uncertainty of demand.
d. ensure that all functional strategies within the supply chain support the supply chain’s
level of responsiveness.
9. The cost of making and delivering a product to the customer is referred to as

a. supply chain responsiveness.
b. supply chain efficiency.
c. cost-responsiveness efficient frontier.
d. implied uncertainty.
10. The curve that shows the lowest possible cost for a given level of responsiveness is referred
to as the
a. supply chain responsiveness curve.
b. supply chain efficiency curve.
c. cost-responsiveness efficient frontier.
d. responsiveness spectrum.
11. The relationship where increasing implied uncertainty from customers and supply sources is
best served by increasing responsiveness from the supply chain is known as the
a. implied uncertainty spectrum.
b. responsiveness spectrum.
c. uncertainty/responsiveness map.
d. zone of strategic fit.
12. To achieve complete strategic fit, a firm must

a. consider all functional strategies within the value chain.
b. ensure that all functions in the value chain have consistent strategies that support the
competitive strategy.
c. ensure that all sub-strategies within the supply chain such as manufacturing, inventory,
and purchasing be consistent with the supply chain’s level of responsiveness.
d. all of the above
13. The drive for strategic fit should come from

a. the supply chain manager.
b. the strategic planning department.
c. the highest levels of the organization, such as the CEO.
d. middle management.
e. sales and marketing.

14. The important points to remember about achieving strategic fit are
a. there is one best supply chain strategy for all competitive strategies.
b. there is no right supply chain strategy independent of the competitive strategy.
c. there is a right supply chain strategy for a given competitive strategy.
d. all of the above
e. b and c only
15. The preferable supply chain strategy for a firm that sells multiple products and serves
customer segments with very different needs is to
a. set up independent supply chains for each different product or customer segment.
b. set up a supply chain that meets the needs of the highest volume product or customer
segment.
c. tailor the supply chain to best meet the needs of each product’s demand.
d. set up a supply chain that meets the needs of the customer segment with the highest
implied uncertainty.
e. set up a supply chain that meets the needs of product with the highest implied
uncertainty.
16. Which of the following is not a major driver of supply chain performance?
a. Customers
b. Facilities
c. Inventory
d. Transportation
e. Information
17. The two major types of facilities are

a. distribution sites and storage sites.
b. production sites and distribution sites.
c. production sites and storage sites.
d. retail sites and distribution sites.
e. distribution sites and inventory sites.
18. Which component of the supply chain decision-making framework would be established first?
a. Customer strategy
b. Supply chain strategy
c. Supply chain structure
d. Competitive strategy
e. Replenishment strategy
19. Which of the following is not a component of facilities decisions?

a. Location
b. Capacity
c. Operations methodology
d. Warehousing methodology
e. All of the above are components of facilities decisions.
20. Which of the following is not an issue companies need to consider in facility location
decisions?
a. quality of workers
b. product development
c. proximity to customers and the rest of the network
d. cost of facility
e. tax effects

1. List and explain the three basic steps to achieving strategic fit.
2. List the attributes/ factors along which customer demand from different market segments may
vary.
3. List and discuss the abilities/factors that should be considered in supply chain
responsiveness.
4. Explain the scope of strategic fit.
5. Consider a high-end department store:

1. How would you characterize its competitive strategy?
2. What are the store’s likely characteristics in terms of customer and supply chain
uncertainty?
3. Where would you place the demand faced by the store on the implied demand
uncertainty spectrum? Why?
4. What level of responsiveness would be most appropriate its supply chain?
5. What should the supply chain be able to do particularly well?
6. Consider a discount department store:

1. How would you characterize its competitive strategy?
2. What are the store’s likely characteristics in terms of customer and supply chain
uncertainty?
3. Where would you place the demand faced by the store on the implied demand
uncertainty spectrum? Why?
4. What level of responsiveness would be most appropriate its supply chain?

Topic 3: Designing Supply Chain: Distribution Network Configuration
Aims
 Identify the key factors to be considered when designing the distribution network
 Discuss the strengths and weaknesses of various distribution options.
 Chapter 4
Key Terms/ Concepts:

 Role of distribution in the Supply Chain
 Distribution network design:
o Distribution network configuration
o Location-allocation considerations
o Transportation modes
 Factors influencing distribution network design: responsiveness vs. supply costs
(facility cost, inventory cost, transportation cost, etc)
 Design options and characteristics of a distribution network:
o Manufacturer storage with direct shipping
o Distributors storage with carrier delivery
o Manufacturer/distributors storage with customer pickup
o Retail storage with customer pickup
1. The Role of Distribution in the Supply Chain
 Distribution refers to the steps taken to move and store a product from the supplier stage to
a customer stage in the supply chain.
 Distribution occurs between every pair of stages in the supply chain.
 Raw materials and components are moved from suppliers to manufacturers, whereas
finished products are moved from the manufacturer to the end consumer.
 Distribution is a key driver of the overall profitability of a firm, because it directly impacts both
the supply chain cost and the customer experience.
 Distribution choices affects supply chain objectives from low cost to high responsiveness.
2. Factors influencing network design
 Distribution network design involves:

o Selection of distribution network configuration (covered in this topic)
o Selection of the number and location of facilities, allocation of facilities to customer
segments, transportation modes, etc. (covered in next topic)
 The performance of a distribution network can be evaluated along two dimensions:
o Customer needs that are met – responsiveness
o Cost of meeting customer needs - cost of supply drivers
 The choice of network design affects the following supply costs:
 Inventory
 Transportation
 Facilities and handling Information

Some general relationships between these factors are shown below:
Inventory
Costs
Number of Facilities
Figure 3.1 Relationship Between Number of Facilities and Inventory Costs
Required
Number of
Facilities
Desired
Response
Time
Figure 3.2 Relationship Between Desired Response Time and Number of Facilities
Transportation
Cost
Figure 3.3 Relationship Between Number of Facilities and Transportation Cost

Facility
Costs
Figure 3.4 Relationship between Number of Facilities and Facility Costs
Response Time
Total Logistics Cost
Figure 3.5 Variation in Logistics Cost and Response Time with Number of Facilities
3. Distribution Network Configurations
 Distribution network can be classified into 4 basic configurations:

1) Manufacturer storage with direct shipping
2) Distributor storage with carrier delivery
3) Manufacturer/distributors storage with customer pickup at pick-up points
4) Retail storage with customer pickup at retail stores
*These are the basic distribution networks but many companies may also use a hybrid
distribution network.
3.1 Manufacturer Storage with Direct Shipping

 In this option, customers place orders with retailers (where the information flow started)
who then pass the orders to the manufacturer.
 Product is shipped directly from the manufacturer to the end customer, bypassing the
retailer (who only takes the order and initiates the delivery request).

 This option is also referred to as drop-shipping with product delivered directly from the
manufacturer to the customer location.
 The biggest advantage of this option is its ability to centralise inventories at the
manufacturer, where the manufacturer can take advantage of aggregating all the
demands across all retailers.
 Due to advantages over aggregation and ability to postpone production, the following are
the strengths:
 Low inventory cost
 Low facility cost
 High level of variety
 High level of product availability
 Good customer experience
 Fast time to market
 Due to increased distance, two stages for order processing, and disaggregated outbound
shipping, the following are the weaknesses:
 High transportation cost
 Significant investment in information infrastructure required
 Slow response time
 Difficulty in tracking orders
 Difficulty in handling returns
3.2 Distributors Storage with Carrier Delivery

 Under this option, customers place orders with retailers who then pass the orders to the
distributors.
 Inventory is not held by manufacturers at the factories, but is held by retailer/distributors
in intermediate warehouses.
 Carriers are used to transport products from the distributors to the final customers.
 Distributor/retailer requires relatively higher inventory level than the manufacturer, due to
lower level of aggregation of demand uncertainty done by a distributor or retailer.
 Strengths:
 Low transportation cost
 Less complex information infrastructure
 Fast response time
 Good customer experience
 Ease in tracking orders
 Ease in handling returns
 Weaknesses:
 High inventory cost
 High facility cost
 Low level of variety
 Low level of product availability due to cost

3.3 Manufacturer/Distributors Storage with Customer Pickup
 Under this approach, customers place orders with retailers who then pass the orders to
the factories.
 Factories aggregate delivery to a cross-dock distribution point, which allocates the
delivery to pick-up points.
 Inventory is stored at the manufacturer or distributor warehouse, and products are
distributed to designated pickup points for the customers to collect.
 Orders are shipped from the storage site to the pickup points as needed.
 Strengths:
 Low inventory cost
 High level of variety
 High level of product availability
 Weaknesses:
 Significant investment in information infrastructure required
 Low customer experience
 Difficulty in tracking orders
3.4 Retail Storage with Customer Pickup

 In this option, inventory is stored locally at retail stores.
 A good example is a supermarket store like Woolworths.
 Customers walk into the retail store or place an order online or on the phone for pickup
at the retail store.
 Strengths:
 Weaknesses:
 High inventory cost
 Investment in information infrastructure required
 Low product variety
 Low product availability

4. Selecting a Distribution Network Configuration
 A network designer needs to consider product characteristics, company’s strategic position,

as well as network requirements when deciding on the appropriate distribution network.
 Most companies are best served by a combination of delivery network configurations.
 The strengths and weaknesses of the various network designs discussed earlier on this
lecture must also be considered in design process.
 Only niche companies will end up using a single distribution network.
 Most companies are best served by a combination of delivery network configurations
 The combination used will depend on product characteristics as well as strategic position that
the firm is targeting.
 In table 3.1, the various delivery networks are ranked relative to each other along different
performance dimensions.
 The suitability of different delivery designs (from a supply chain perspective) in various
situations is shown in Table 3.2.
Table 3.1 Comparative Performance of Delivery Network Configurations

Note: 1 is the best performance and 6 is the worst.
Manufacturer Distributor storage Manufacturer
Retail storage with
Performance storage with with carrier storage with
customer pickup
pickup delivery direct shipping
Response time 1 4 3 4
Product availability 4 1 2 1
Order visibility 1 5 3 5
Returnability 1 2 4 5
Inventory cost 4 1 2 1
Transport cost 1 1 2 4
Facility & handling
5 5 3 1
cost
Information system
1 5 3 4
cost
Product variety 4 1 2 1
Customer
5 5 2 4
experience

Table 2. Performance of Delivery Networks for Different Product/Customer Characteristics
Note: (+2:Very suitable); (+1:Somewhat suitable); (0: Neutral); (-1:Somewhat unsuitable); (-2: Very
unsuitable)
Distributor Manufacturer
Retail storage with Manufacturer
storage with storage with direct
Performance customer pickup storage with pickup
carrier delivery shipping
High-demand product 2 -1 0 -2
Medium-demand
1 0 1 -1
product
Low- demand product -1 1 1 1
Very- low- demand
-2 1 0 2
Product
Many product sources 1 0 2 -1
High product value -1 1 1 2
Quick desired
2 -2 -1 -2
response
High product variety -1 2 1 2
Low customer effort -2 -1 2 1

Exercises
1. The choice of the distribution network can be used to achieve supply chain objectives such
as
a. low cost.
b. high responsiveness.
c. high cost.
d. high responsibility.
e. a and b only
2. On which dimensions should the performance of a distribution network be evaluated at the

highest level?
a. Profitability of individual supply chain components
b. Efficiency of overall supply chain network
c. Customer needs that are met
d. Cost of meeting customer needs
e. c and d only
3. The ease with which the customer can place and receive their order as well as other aspects
of value that the sales staff provides is
a. customer experience.
b. order visibility.
c. product availability.
d. response time.
e. returnability.
4. Outbound transportation costs per unit tend to be

a. about the same as inbound costs.
b. higher than inbound costs.
c. lower than inbound costs.
d. neither higher or lower than inbound costs.
5. As the number of facilities in a supply chain increases

a. the inventory and resulting inventory costs also increase.
b. the inventory and resulting inventory costs decrease.
c. the inventory increases and resulting inventory costs decrease.
d. the inventory decreases and resulting inventory costs increase.
e. the inventory and resulting inventory costs remain the same.
6. As the number of facilities in a supply chain increases, total transportation cost

a. decreases.
b. remains the same.
c. increases.
d. increases to a point and then decreases.
e. decreases to a point and then increases.
7. Total logistics costs for a supply chain network are a sum of

a. inventory and facility costs.
b. inventory, facility, and distributor costs.
c. facility, transportation, and distributor costs.
d. inventory, transportation, and facility costs.

8. Which of the following is not a distinct distribution network design that may be used to move
products from factory to customer?
a. Manufacturer storage with direct shipping
b. Manufacturer storage with distributor pickup
c. Distributor storage with package carrier delivery
d. Distributor storage with last mile delivery
e. Manufacturer/distributor storage with customer pickup
9. Advantages of manufacturer storage with direct shipping include

a. the ability to reduce cost of inventory by centralizing inventories at the manufacturer.
b. offering the manufacturer the opportunity to postpone customization until after the
customer order has been placed.
c. supply chains save on the fixed cost of facilities, because the need for other warehousing
space in the supply chain has been eliminated.
d. providing a good customer experience in the form of delivery to the customer location.
e. all of the above
10. Which of the following is an advantage of manufacturer storage with direct shipping?
a. Transportation costs are low because the average outbound distance to the end
consumer is small and package carriers are used to shipping the product.
b. Supply chains save on the fixed cost of facilities, because the need for other warehousing
c. Response times tend to be small because the order has to be transmitted from the
retailer to the manufacturer.
d. Order tracking is easy to implement because of the complete integration of information
systems at both the retailer and the manufacturer.
e. The handling of returns is likely to be simple and inexpensive, improving customer
satisfaction.
11. The main advantage of in-transit merge over drop-shipping is

a. the ability to reduce cost of inventory by centralizing inventories at the manufacturer.
b. supply chains save on the fixed cost of facilities, because the need for other warehousing
c. somewhat lower transportation cost and improved customer experience.
d. order tracking is easy to implement because of the complete integration of information
systems at both the retailer and the manufacturer.
e. the handling of returns is likely to be simple and inexpensive, improving customer
satisfaction.
12. Which distribution network design is being used when the distributor/retailer delivers the
product to the customer’s home instead of using a package carrier?
a. Manufacturer storage with direct shipping
b. Manufacturer/distributor storage with customer pickup
c. Distributor storage with package carrier delivery
d. Distributor storage with last mile delivery
e. Retail storage with customer pickup
13. Which of the following is a disadvantage of distributor storage with last mile delivery?
a. Transportation cost is higher than any other distribution option.
b. Information cost is similar to distributor storage with package carrier delivery.
c. Customer experience is very good, particularly for bulky items.
d. Returnability is easier to implement than other options.
e. Order traceability is less of an issue and easier to implement than manufacturer storage
or distributor storage with package carrier delivery.

14. Which of the following is a disadvantage of manufacturer/distributor storage with customer
pickup?
a. Customer experience is lower than other options because of the lack of home delivery.
b. Response time is similar to package carrier delivery with manufacturer or distributor
storage.
c. Returnability is somewhat easier given that pickup location can handle returns.
d. Product availability is similar to other manufacturer or distributor storage options.
e. Facilities costs are lower if existing facilities are used.
15. Distributors add value to a supply chain between a supply stage and a customer stage
a. if there is a small number of customers requiring a large amount of product.
b. if there is a large number of customers requiring a large amount of product.
c. if there are many small players at the customer stage, each requiring a small amount of
the product at a time.
d. if there are a few large players at the customer stage, each requiring a large amount of
the product at a time.
e. Distributors do not add value to a supply chain.
1. Explain the measures of customer service that are influenced by the structure of the
2. Explain how the design of a distribution network affects the cost of the four supply chain
drivers.
3. Explain the following distribution network designs that may be used to move products from
factory to customer: manufacturer storage with direct shipping, distributor storage with carrier
delivery, manufacturer/ distributor storage with customer pickup, and retail storage with
customer pickup.
4. Explain how distributors add value to a supply chain and improve its performance.
5. A distributor has heard that one of the major manufacturers it buys from is considering going
direct to the consumer. What can the distributor do about this? What advantages can they
offer the manufacturer that the manufacturer is unlikely to be able to reproduce?
6. What types of distribution networks are typically best suited for commodity items?
7. What types of networks are best suited to highly differentiated products (high value but low
volume)?

Topic 4: Designing Supply Chain: Network Design
Aims
 Identify factors influencing supply chain network design decisions.
 Develop a framework for making network design decisions.
 Use optimization for facility location and capacity allocation decisions.
 Chapter 5
Key Terms/ Concepts

 Classifications of network design decisions
 Factors influencing network design decisions: strategic, technological, macro-
economic, competitive environment, and costs
 Four-step framework for network design decisions
 Models for network analysis and evaluation, mathematic models, multi-attribute
models and simulation models
1. The Role of Network Design in a Supply Chain
 Supply chain network design decisions are classified as follows:

1) Facility role, which answers the following questions:
 What role should each facility play?
 What processes are performed at each facility?
2) Facility location, which answers the question:
 Where should facilities be located?
3) Capacity allocation, which answers the question:
 How much capacity should be allocated to each facility?
4) Market and supply allocation, which answers the following questions:
 What markets should each facility serve?
 Which supply should feed each facility?
 In making supply chain network design decisions, you need to consider the following points
for each facility:
 facility role
 location of manufacturing, storage, or transportation-related facilities
 the allocation of capacity and markets to each facility
 The network design decisions determine the supply chain’s configuration and set limitations
in which other supply chain drivers can be used to reduce the supply chain’s cost or improve
its responsiveness.
2. Factors Influencing Network Design Decisions
 Network design decisions are influenced by the following factors:

1. Strategic factors: competitive strategy (strategic fit), global competition, internal
constraints.
2. Technological factors: facility costs, economy of scale, available infrastructure,
available technology.

3. Macroeconomic factors: tariffs and tax incentives, regional demands, risks (political,
exchange rate, demand fluctuation risk).
4. Competitive environment: level of competition.
5. Costs: factor costs (labour, materials, land, etc) and logistic costs (transport, etc)
3. A Framework for Network Design Decisions
 Phase I – Define a supply chain strategy

 competitive strategy, internal constraints
 Phase II – Define regional facilities and distribution network configuration
 locations, roles and capacities of facilities
 Phase III –Select desirable sites
 no. of location, capacity, transport
 Phase IV – Select exact location and detailed design
A framework for network design decisions is shown below:
Figure 4.1 Framework for Network Design Decisions

4. Models for Network Analysis and Evaluation
 There are many models for network analysis and evaluation. These models may be grouped
into 3 categories:
o Mathematical models
o Multi-attribute models, and
o Simulation models
4.1 Mathematical Models

 Mathematical Models are complex, because their formulation requires expertise.
 These models use quantitative approaches to problem solving.
 Their limitation is that they optimise only one attribute, and therefore are only suitable for
simple problems.
 There are many mathematical models available, but in this lecture, we will closely deal
with the following approaches:
 Location Selection Models:
 Transportation Cost Model (CVD method)
 The Center of Gravity Method
 Location Cost-Volume Analysis
4.2 Multi-Attribute Models

 Multi-attribute models are somehow one of the easiest and most used approaches in
comparing several alternatives given several preference criteria.
 These models deal with both quantitative and qualitative information, based on the
experiences and/or preferences of the group evaluating the alternatives.
 The relative importance of several attributes such as cost, flexibility, and other
preferences are considered.
 In this lecture, we will closely deal with the multi-attribute model using the weighted
evaluation method.
4.3 Simulation Models

 Simulation models are the most complex, since expertise is needed in building and
validating these models.
 Models vary from company to company, depending on their system approach and design.
 But simulation can handle complex network design evaluation and run different scenarios
that help companies to deal with “what if” questions.
 There are many simulation software packages available.
4.1.1 Location Selection Models

4.1.1.1 Transportation Cost Model: Cost-Volume-Distance (CVD)
 In the CVD model, the desirability of closeness is based on the total cost of moving materials.
The objective is to minimise the total cost of transportation.
 This model is based on distribution costs, supply costs, or both.

Procedure:
1) Collect data: average number of trips in terms of volume required
between departments over a period of time (should be long enough for
the data to be representative).
2) Collect average cost per unit distance between departments (e.g.
$/ton/km).
3) Use “CVD” formula to minimize transportation costs
The objective is to minimize the total transportation cost (TC):

n n
TC    Cij Vij  Dij
Minimize i1 j 1
Cij – cost of moving 1 item between departments i and j per unit distance;
Vij - volume between i and j over a period of time;
 between i and j
Dij – distance
 Example: Let’s say that as a manager, you were challenged to select the best location for
your warehouse between Adelaide and Sydney given following customer site demands:
Distance Volume Rate

Location Customer Site
(kms) (tons) ($/ton/km)
A 30 2 1,000
Adelaide B 22 4 1,200
C 9 5 1,000
A 25 2 1,000
Sydney B 26 4 1,300
C 7 5 1,000
Solution:
n n
Minimize TC    Cij Vij  Dij
i1 j 1
TCAdelaide = ($1,000/ton/km × 2tons × 30kms) + (1,200×4×22) + (1,0000×5×9)

= $210,600
 = ($1,000/ton/km × 2tons × 25kms) + (1,300×4×26) + (1,0000×5×7)
TCSydney
= $220,200
Based on the total transportation cost (minimise), Adelaide has lower cost.
4.1.1.2 The Centre of Gravity Method (COG)

 This method is used to determine the location of a distribution centre by minimizing
distribution costs (location selection model).
 The relative coordinates of the distribution points are placed on a map and the location of the
distribution point should be at the centre of gravity of the coordinates.

Procedure:
1) Map the location: identify the coordinate axes (x-axis and y-axis) of all the
locations being evaluated on a map
2) Collect the demand requirements of all the locations over a period of time
(e.g. units/month)
3) Use “COG” formula to identify the centre of gravity location that minimises
distribution cost
Where the x and y coordinates of the centre of gravity are given by:
x=
 (Di  Xi)
 Di where
Di – demand at each location;
Xi – x-coordinate of each location;
 y=
 (Di  Yi) Yi – y-coordinate of each location
 Di
x = sum (demand at each location * x-coordinate of each location) / sum (all demands)
y =sum (demand at each location * y-coordinate of each location) / sum (all demands
 Example: This time, as a manager you are assigned to find the best location for the company
to build your centralised warehouse, given the ff. demand rates:
Demand
Retail Outlet x-coordinate y-coordinate
(units/year)
Adelaide 40,000 3 6
Melbourne 20,000 1 4
Canberra 10,000 3 2
Solution:
From the given table, the centralised warehouse should be able to serve the three retail
outlets at a minimum distance travel. Given their annual demand and coordinates, you can
use the COG formula to identify the center of gravity for your warehouse.
x=
 (Di  Xi)
 Di
where
 y=
 (Di  Yi) Yi – y-coordinate of each location
 Di


Total Demand = 70,000
40,000  3  20,000  110,000  3

X(warehouse) =  2.43
70,000
40,000  6  20,000  4 10,000  2

Y(warehouse)
 =  4.86
70,000
The warehouse, which serves the 3 outlets, should be located at location (2.43, 4.86)

4.1.1.3 Location Cost-Volume Analysis

 This technique will indicate when a particular location is superior for a particular volume level
by analysing the mix of fixed and variable costs.
 Some costs will be fixed (such as the costs of building the facility), while others will vary with
the location (such as the level of demand).
 In this method, we will use the breakeven analysis approach in order to identify the point at
which one alternative becomes superior to another, where:
Total cost = fixed cost (FC) + variable cost (VC) × output (n)
TC(n) = (FC) + (VC)(n)
Breakeven Analysis (n) comparing two alternatives:
TC (alterntive1) = TC (alterntive2)
FC + nVC (alterntive1) = FC’ + nVC’ (alterntive2)
Fc' Fc
Breakeven (n) = n
Vc  Vc'
where:
FC – 
fixed cost (Alternative A);
VC – variable cost (Alternative A);
FC’ – fixed cost (Alternative B);
VC’ – variable cost (Alternative B)

 Example, as a manager you are to determine which of the given facility location option is
better for an annual production of 100,000 units.
Location A Location B
Variable costs ($ per unit) 1.75 1.25
Annualized fixed costs ($) 200,000 240,000
Solution:
Let n = annual production (output)
Annual cost (A) = (1.75 × n) + 200,000
Annual cost (B) = (1.25 × n) + 240,000
Breakeven (cost of A = cost of B):
FC + nVC (Location A) = FC’ + nVC’ (Location B)

(1.75 × n) + 200,000 = (1.25 × n) + 240,000
Fc'Fc 240,000  200,000 40,000

n    80,000units
Vc  Vc' 1.75 1.25 0.50
Breakeven is 80,000 units
 So, if n
= 100,000 units, then location B has lower costs
If annual production is less than 80,000 units then location A has lower costs.
4.2.1 Multi-Attribute Model

 This section introduces you to decision analysis techniques, which take several criteria into
consideration (multi-attributes)
 In many cases, the evaluation criteria may have to include different parameters such as:
 Performance
 Operability
 Effectiveness
 Design characteristics
 Schedule and
 Cost.
Procedure:
1) Identify alternatives
2) Select attributes for evaluation (e.g. logistics attributes and other
attributes such as flexibility, facility location, cost, etc.)
3) Estimate attribute weights
4) Evaluate alternatives against attributes and choose the best alternative
(e.g. Weighted Evaluation Method)
 Weighted Evaluation Method:
1. Estimate attribute weights- Rank reciprocal weights
2. Give each alternative a score against each attribute
3. Calculate weighted evaluation for each attribute:
4. Calculate the total score for each alternative
Estimating attribute weights:
1. Rank all attributes
2. Use appropriate technique to calculate attribute weights (e.g. Rank reciprocal
weights):
Attribute Weight = (1/Ranking)/ (sum of all the inverses of ranking)
 Calculating for weighted evaluation for each attribute would be:
Weighted evaluation = (attribute weight × score)/10
 Example: your team was assigned to compare 2 alternatives: Location X and Location Y for
your project. Given the attributes and weights, your group needs to choose the better
location:
Attribute Ranking 1/Ranking Attribute

Weight
A 1 1 44
(=1100% / 2.28)
B 2 0.5 22
Evaluation of alternatives against attributes:
C 3
Using weighted evaluation of alternatives technique:
0.33 14
 D alternative a4score (out of 10)0.25
Give each against each attribute 1
 E weighted evaluation
Calculate 5 for each 0.20
attribute = (attribute weight x score)/10

9
Calculate the total score for each alternative by summation
Total = 2.28
Weighted evaluation = (attribute weight × score)/10
Attribute Score Weighted Evaluation

Attribute
weight
Loc X Loc Y Loc X Loc Y
A 44 6 7 26.4 30.8
B 22 7.5 9 16.5 19.8
C 14 10 7.5 14 10.5
D 11 8 6 8.8 6.6
E 9 8 6 7.2 5.4
 72.9 73.1
Location Y is the preferred option.

Note that there are other multi-attribute techniques such as Analytic Hierarchy Process (AHP).

5. Simulation Model
 Simulation is the imitation of a real-world process or system over time.

 Simulation involves the generation of an artificial history of the system and the observation
of that artificial history to draw inferences concerning the operating characteristics of the real
system being represented.
 Simulation as a problem-solving methodology can be utilised for the solution of many real
world problems.
 Simulation is used to describe and analyse the behaviour of a system (real or conceptual)
and answers “what if” questions about the real system.
Model
 A simplified representation of an actual system
 Contains enough information to answer the question for which it was built
Event
 An occurrence that changes state of a system
Types of model
 Mathematical: considers the system through the use of formulas, which requires
“solving” the model
 Discrete-event: time-based and are “run” not solved
Simulation software
 There are many simulation software packages available
Advantages of Simulation
 Making correct choices – simulation allows the testing of every aspect of a proposed
change or additions without committing resources to their acquisition.
 Compressing and expanding time – simulation allows to speed up or slow down
phenomena to thoroughly investigate them.
 Understanding “Why” – the simulation allows reconstructing the scene and conducting
microscopic examination of the system.
 Identifying constraints – bottlenecks are an effect rather than a cause. By simulation their
cause can be discovered and corrected.
 Exploring possibilities, diagnosing problems, preparing for change, etc.
Disadvantages of Simulation
 Model building requires special training
 Simulation results may be difficult to interpret
 Simulation modeling and analysis can be time-consuming and expensive.

Exercises
1. Supply chain network design decisions classified as facility role are concerned with
a. what processes are performed at each facility.
b. where facilities should be located.
c. how much capacity should be allocated to each facility.
d. what markets each facility should serve and which supply sources should feed each
facility.
2. Decisions concerning the role of each facility are significant because

a. they determine the amount of flexibility the supply chain has in demanding change.
b. they determine the amount of flexibility the supply chain has in changing the way it meets
demand.
c. they determine the amount of capacity the supply chain has in changing the way it meets
demand.
d. they determine the amount of inventory the supply chain has in demanding change.
3. Capacity allocation decisions have a significant impact on supply chain performance because
a. capacity decisions tend to be permanent.
b. capacity decisions tend to be changed frequently.
c. capacity decisions do not tend to stay in place for several years.
d. capacity decisions tend to stay in place for several years.
4. Allocating too much capacity to a location results in

a. permanent damage.
b. poor utilization, and as a result, higher costs.
c. high utilization, and as a result, higher costs.
d. poor utilization, and as a result, lower costs.
e. high utilization, and as a result, lower costs.
5. Allocating too little capacity results in

a. temporary damage.
b. good responsiveness if demand is not satisfied or low cost if demand is filled from a
distant facility.
c. good responsiveness if demand is not satisfied or high cost if demand is filled from a
distant facility.
d. poor responsiveness if demand is not satisfied or low cost if demand is filled from a
distant facility.
e. poor responsiveness if demand is not satisfied or high cost if demand is filled from a
distant facility.
6. Network design decisions have a significant impact on performance because they

a. determine the supply chain configuration.
b. determine the supply chain conflagration.
c. set constraints within which inventory, transportation, and information can be used to
either decrease supply chain cost or increase responsiveness.
d. set constraints within which inventory, transportation, and information can be used to
either increase supply chain cost or decrease responsiveness.
e. a and c only

7. Firms focusing on cost leadership tend to
a. locate facilities close to the market they serve.
b. locate facilities very far from the market they serve.
c. find the lowest cost location for their manufacturing facilities.
d. select a high-cost location to be able to react quickly.
8. Firms focusing on responsiveness tend to

a. locate facilities close to the market they serve.
b. locate facilities very far from the market they serve.
c. find the lowest cost location for their manufacturing facilities.
d. select a high-cost location to be able to react slowly.
9. If facilities have lower fixed costs,

a. a few high-capacity facilities are preferred because this helps lower transportation costs.
b. a few local facilities are preferred because this helps lower transportation costs.
c. many high-capacity facilities are preferred because this helps lower transportation costs.
d. many local facilities are preferred because this helps lower transportation costs.
e. one central facility is preferred because this helps lower transportation costs.
10. If the production technology is very inflexible and product requirements vary from one country
to another, a firm has to set up
a. local facilities to serve the market in each country.
b. a few high-capacity facilities to serve the market in each country.
c. many local facilities because this helps lower transportation costs.
d. a few high-capacity facilities because this helps lower transportation costs.
e. many high-capacity facilities because this helps lower transportation costs.
11. If the technology is flexible,

a. it becomes more difficult to consolidate manufacturing in a few large facilities.
b. it becomes more difficult to distribute manufacturing in many local facilities.
c. it becomes easier to consolidate manufacturing in a few large facilities.
d. it becomes easier to consolidate manufacturing in many local facilities.
e. the firm should have one central facility.
12. If a country has very high tariffs,

a. companies either do not serve the local market or set up manufacturing plants within the
country to save on duties.
b. companies do not serve the local market.
c. companies set up manufacturing plants within the country to save on duties.
d. companies will not serve the local market or set up manufacturing plants within the
country to save on duties.
e. companies will serve the local market by setting up regional manufacturing plants.
13. Which of the following is not a phase in the design of a global supply chain network?
a. Define a supply chain strategy.
b. Define the regional facility configuration.
c. Select desirable sites.
d. Location choices.
e. Implement supply chain strategy

14. The objective of the first phase of network design is to
a. maximize total profits, taking into account the expected margin and demand in each
market.
b. select a precise location and capacity allocation for each facility.
c. select a set of desirable sites within each region where facilities are to be located.
d. identify regions where facilities will be located, their potential roles, and their approximate
capacity.
e. specify what capabilities the supply chain network must have to support a firm’s
competitive strategy.
15. It is very important that long-term consequences be thought through when making facility
decisions, because
a. network designers can use this fact to influence the role of the new facility and the focus
of people working there.
b. facilities last a long time and have an enduring impact on a firm’s performance.
c. it is astounding how often tax incentives drive the choice of location.
d. the location of a facility has a significant impact on the extent and form of communication
that develops in the supply chain network.
e. the quality of life at selected facility locations has a significant impact on performance.
1. Explain how supply chain network design decisions are classified.

2. Describe the factors that influence supply chain network design decisions.
3. Describe the four phases in the framework for network design decisions.
4. Consider a firm like Dell with very few production facilities worldwide. List the pros and cons
of this approach and why it may or may not be suitable for the computer industry.
5. Consider a firm like Ford with over 150 facilities worldwide. List the pros and cons of this
approach and why it may or may not be suitable for the automobile industry.
Problems
1. A manufacturing organization is looking at the following two locations:
Birmingham Manchester
Variable costs $14/unit $16/unit
Annual fixed costs $12000 000 $15 000 000
Initial fixed cost $165000 000 $145 000 000
a. Draw a cost-volume graph for both locations over a 10-year period at a volume of
750,000 units per year.
b. Which location has the lowest cost at the end of the 10-year period?
c. At what volume do these locations have equal costs?
2. A company has decided to relocate from three separate facilities: plant A, plant B, and plant
C to a new facility: plant D. using the centre of gravity method determine the best location for
plant D to serve its customers using the facility locations and yearly demand shown below.
Facility Location coordinates Demand (per year)

A (175,280) 6000
B (50,200) 8200
C (150,75) 7000

3. The following table lists the weightings representing the relative importance of factors for the
location of a retail site. Four potential sites have been a score out of 100 for each factor:
Site
Factor Weight A B C D
Construction cost 0.1 90 60 80 70
Operating cost 0.1 90 80 90 85
Population density 0.4 70 90 80 75
Convenient access 0.2 75 80 90 90
Ranking area 0.2 60 70 85 75
Rank the four sites in order of their total weighted points score for suitability for the proposed
location.
4. A retail chain has four major stores in the East Midlands area, which have the following
monthly demand rates.
Store location Monthly demand (units)
Derby 2000
Nottingham 1000
Leicester 1000
Sheffield 2000
The following map shows the relative coordinates of the four outlets:
The organization has decided to find a ‘central’ location in which build a warehouse. Find the
coordinates of the centre that will minimize distribution costs.

Topic 5: Demand Forecasting in a Supply Chain
Aims
 Understand the role of forecasting for both an enterprise and a supply chain.
 Identify the components of a demand forecast.
 Forecast demand in a supply chain given historical demand data using time series
methodologies
 Analyse demand forecasts to estimate forecast error.
 Chapter 7
Key Terms/ Concepts

 The roles and characteristics of forecast in a supply chain:
 Demand forecasting: capacity planning
 Forecasting methods:
 Qualitative methods
 Causal
 Time Series methods (quantitative)
 Simple Moving Average
 Simple Linear Regression
 Seasonal Adjustments
 Measures of Forecast errors: such as Mean Absolute Deviation (MAD), Mean Square
Error (MSE) and Mean Absolute Percentage Error (MAPE)
1. The Role of Forecasting in a Supply Chain
 The forecast of demand forms the basis for all strategic and planning decisions in a supply
chain.
 Let us consider the push/pull view of the supply chain discussed on topic 1. Throughout the
supply chain, all push processes are performed in anticipation of customer demand, while all
pull processes are performed in response to customer demand.
 For the push process, a manager must plan the level of production, while for the pull process,
a manager must plan the level of available capacity and inventory.
 In both instances, the first step a manager must take is to forecast what customer demand
will be.
 Here are some of the decisions that utilize forecasts and can be enhanced through
collaborative forecasting among supply chain partners:
 Production: scheduling, inventory, aggregate planning
 Marketing: sales force allocation, promotions, new production introduction
 Finance: plant/equipment investment, budgetary planning
 Personnel: workforce planning, hiring, layoffs
 All of these decisions are interrelated.
2. Characteristics of Forecast
 If forecasts are always wrong, the firm should include expected value and measure of error.
 Long-term forecasts are less accurate than short-term forecasts
o Forecast horizon is important
 Aggregate forecasts are more accurate than disaggregate forecasts

3. Basic Approaches to Demand Forecasting
 Forecasting may include:

 Technological forecasts
 Economic forecasts
 Demand forecasts
 The basic approach in performing effective forecasting is as follows:
1) Understand the objective of the forecasting
2) Integrate demand planning and forecasting throughout the supply chain
3) Understand and identify customer segments
4) Identify major factors that influence the demand forecast, e.g. Technological,
economic trend, seasonal fluctuations, past demand, competitors
5) Determine the appropriate forecasting technique
6) Establish performance and error measures for the forecast
 Consider factors such as:
 Past demand
 Lead time of product
 Planned advertising and marketing efforts
 State of the economy
 Planned price discounts
 Actions competitors have taken
 There are many forecasting methods, including:
 Qualitative methods
 Causal
 Time series methods
4. Qualitative Methods
 Qualitative forecasting methods are primarily subjective and rely on human judgment.
 They are most appropriate when there is little historical data available or when experts have
market intelligence that is critical in making the forecast.
 Such methods may be necessary to forecast demand several years into the future in a new
industry.
 Some qualitative methods include:
 Field sales force – this represents a direct point of contact that provides information
with regards to the anticipating future consumer expectations, which other people
may not have.
 Jury of executives – this is the most common type of forecasting method for the
long-term strategic planning process.
 Delphi method – this involves gathering of consensus forecast information about
future consumer expectations from the experts.
 Qualitative methods are usually suitable for medium to long-term forecasting such as
technological or economic forecasts

5. Causal Methods
 These methods assume that the demand forecast is highly correlated with certain factors in
the environment, such as economy, interest rates, etc.
 Causal forecasting methods find correlation between demand and environmental factors,
and use these correlations in forecasting future demand.
6. Quantitative Methods (Time Series)
 Time Series
 use historical demand only.
 based on the assumption that past demand history is a good indicator of future
demand.
 most appropriate when the basic demand pattern does not vary significantly.
 We will focus on the following techniques:
 Simple moving average: smooth the random fluctuations
 Simple linear regression: identify trend
 Seasonal index: account for seasonal fluctuations
6.1 Simple Moving Average (SMA)

 A simple moving average (SMA) is a method of computing the mean of a specified
number of the most recent data values in a series in order to smooth out random
fluctuations.
 Moving averages are computed for specific periods.
 These may be within three months to six months, depending on the extent by which
the forecast would like to smooth the demand data.
 The longer the moving average period, the smoother the demand data will be.
The formula for computing SMA is:
n
D i
i(t 1n )
SMAt+1 =
n
where:
SMAt+1 = simple moving average at the end of a period t, which

typically will be used as a forecast for next period (t +1)
Di = actual demand in period i
n = number of periods in the moving average
6.2 Simple Linear Regression

 Simple regression determines the equation for a straight line that passes through a
set of points so that the sum of the squared distances from the points to the linear
line will be the minimum amount for any straight line that could be drawn through the
points.
 That is, it determines the “least-squares line,” or the line with the minimum squared
error.

 The trend equation has the form:
y = a + bx
where:
 y is the demand forecast for the time period x;
 The slope of line b and the intercept a, can be found by using least squares
formulas:
 xy  n x y
a  y  bx b
x  nx
2 2
or
  y  b x n xy   x  y
a  b
n n  x 2  ( x ) 2
where:
x 
= the mean of the x values
y = the mean of the y values
n = number of periods
y = actual values of dependent variable
x = actual values of independent variable
6.3 Seasonal Index

 Seasonal adjustments are focused by computing the average ratio of actual demand
to the trend value for each period of interest.
 Such a ratio is referred to as a seasonal index.
Seasonal Index Formula:
Di
Si 
Fi
where:
Si = seasonal index of a period i
Di = actual demand of a period i
Fi = trend value of a period i, which is typically from linear trend
Applying the three techniques: (1) Simple moving average, (2) Simple linear regression,
and (3) Seasonable index, see next page for an example of time series problem:

A company’s quarterly demand figures for the past 2 years are given below:
Year 1 Year 2
Quarter Demand Quarter Demand
1 26,209 1 25,390
2 21,402 2 19,064
3 18,677 3 18,173
4 24,681 4 23,866
You are asked to:
1. Deseasonalize the data using four-quarter moving average
2. Compute a linear regression equation for the trend in demand using centre of period
from 2.5 to 6.5
3. Compute the average seasonal index for each of the four quarters
4. Using the trend and seasonal indices you have developed a forecast for the demand
in each of the quarters of the following year
Solution:
1) Deseasonalizing the data using four-quarter moving average:
The first year’s moving average would be centred between the second quarter and the
third quarter, that is, at the x-coordinate of 2.5. The x-coordinate for the next moving
average will be 3.5, etc.
The four-quarter moving averages and the corresponding x-coordinates are shown in the
following table:
D
n
D i i1
i
Actual Demand i1

n
Sum of 4 4-quarter moving x-
Quarters average coordinate
Year 1- Q1 26,209
Year 1- Q2 
21,402 
Year 1- Q3 18,677
Year 1- Q4 24,681
Year 2- Q1 25,390 90,969 22,742.25 2.5
Year 2- Q2 19,064 90,150 22,537.50 3.5
Year 2- Q3 18,173 87,812 21,953.00 4.5
Year 2- Q4 23,866 87,308 21,827.00 5.5
Year 3- Q1 86,493 21,623.25 6.5
4
D i
26,209  21,402 18,677  24681
SMA4  i1
  22,742.25 demand for next
4 4 quarter at 2.5 (x)
 Yousef Amer - School

Dr  of Engineering 55 of 123 University of South Australia
2) Computing the linear regression equation for the trend in demand, using centre of period
from 2.5 to 6.5:
4-quarter moving
Period
averages
2
n y x xy x
1 22,742.25 2.5 56855.63 6.25
2 22,537.50 3.5 78881.25 12.25
3 21,953.00 4.5 98788.50 20.25
4 21,827.00 5.5 120048.50 30.25
5 21,623.25 6.5 140551.13 42.25
110,683.00 22.50 495,125.00 111.25
n 5
x
22.5
 4.5
b
 xy  n x y  495,125  54.522,136.60  294.85
5
x  nx 111.25  54.5
2 2 2

110,683
Linear y  5
 22,136.60
regression equation: a  y  bx  22,136.60  (294.85)(4.5)  23,463.425

 y  23,463.425  294.85(x)


3) Computing the average seasonal index for each of the four quarters:
The time period at which actual demand occurs corresponds to periods 1, 2, 3, 4, etc.,
on the time scale. Using the values for (x), we can determine the trend value at each of
these times, so that we can compute seasonal relatives or seasonal indices for a
multiplicative model:
Di
Si  Average Si
Fi = yi = 23,463.425 - 294.85(x) Fi per quarter
Actual Seasonal Index

Year Q Period (x) Forecast (Fi) YEAR 3
Demand (Di) (Si)
1 1 23,168.58 
26,209 1.131
1.143 Q1
2 2 22,873.73 21,402 0.936
1
3 3 22,578.88 18,677 0.827
0.907 Q2
4 4 22,284.03 24,681 1.108
1 5 21,989.18 25,390 1.155
0.838 Q3
2 6 21,694.33 19,064 0.879
2
3 7 21,399.48 18,173 0.849
1.119 Q4
4 8 21,104.63 23,866 1.131
Computation for forecast:
Forecast (Fi) = yi = 23,463.425 - 294.85(x)

F1 = 23,463.425 - 294.85(1) =23,168.58
F2 = 23,463.425 - 294.85(2) =22,873.73
F3 = 23,463.425 - 294.85(3) =22,578.88
F4= 23,463.425 - 294.85(4) =22,284.03

F5 = 23,463.425 - 294.85(5) =21,989.18
F6 = 23,463.425 - 294.85(6) =21,694.33
F7 = 23,463.425 - 294.85(7) =21,399.48
F8 = 23,463.425 - 294.85(8) =21,104.63
Computation for average seasonal:
The seasonal index in the first quarter of year 1 is 1.131, and the seasonal index of the first
quarter of year 2 is 1.155. Thus the average index for the first quarter over the 2 years period
is 1.143.
1.1311.155 0.827  0.849

S(Q1)   1.143 S(Q 3)   0.838
2 2
0.936  0.879 1.108 1.131

S(Q 2)   0.908 S(Q 4 )   1.120
2 2
 
4) Developing a forecast for the demand in each of the quarters of the following year using
 
linear regression trend and seasonal indices:
Fi = yi = 23,463.425 - 294.85(x)
Year Quarter Period (x) Forecast (Fi)

1 1 23168.58
2 2 22873.73
1
3 3 22578.88
4 4 22284.03
1 5 21989.18
2 6 21694.33
2 3 7 21399.48
Average
Demand
4 8 21104.63 seasonal index
per quarter Forecast
1 9 20,809.78 1.143 23,786
2 10 20,514.93 0.908 18,628
3
3 11 20,220.08 0.838 16,945
4 12 19,925.23 1.120 22,317
Computation for forecast:
Forecast (Fi) = yi = 23,463.425 - 294.85(x)

F9 = 23,463.425 - 294.85(9) =20,809.78
F10 = 23,463.425 - 294.85(10) =20,514.93
F11 = 23,463.425 - 294.85(11) =20,220.08
F12= 23,463.425 - 294.85(12) =19,925.23
The trend value for the 1st quarter of year 3 using the regression equation (y= 23,463.425 -
294.85(x) with x= 9, i.e. period 9) is 20,809.78. This is then multiplied by the average
seasonal index of 1.143 to give the forecast for the 1st quarter of year 3, which is 23,786.
The same procedure can be done for other quarters.

7. Measures of Forecast Accuracy
 Demand is influenced by many factors

 It is unrealistic to expect a demand forecast to be exactly right every time
 Forecast error (error deviation)
o the difference between the forecast value and the actual demand
 Measures of forecast error:
o Mean Absolute Deviation (MAD)
o Mean Square Error (MSE)
o Mean Absolute Percentage Error (MAPE)
7.1 Mean Absolute Deviation (MAD)

 A common measure of forecast error that is fairly easy to compute.
 The average absolute of the difference of the actual and forecast demand:
D i  Fi
MAD  i 1
n
where:
Fi = forecast demand in period i
= absolute value
* The smaller the MAD, the more accurate the forecast
7.2 Mean Square Error (MSE)

 A method of measuring errors that penalizes large errors more than small errors is
sometimes desired.
 The average squared of the difference of the actual and forecast demand:
n
D  F 
2
i i
MSE  i1
n 1
where:
Fi = forecast demand in period i

7.3 Mean Absolute Percentage Error (MAPE)

 Measures the absolute error as a percentage of demand.
 It eliminates the difficulty of analysing the accuracy of demand and forecast value, as
MAD does.
n
D F i i
MAPE  i 1
* 100%
D i
where:
Fi = forecast demand in period i
= absolute value
*The lower the % deviation, the more accurate the forecast
Example- Computing for MAD and MAPE:
Demand Forecast Deviation Squared Deviation Absolute Deviation

n 2
Di Fi (Di-Fi) (Di-Fi) | Di-Fi |
1 120 125 -5 25 5
2 130 125 5 25 5
3 110 125 -15 225 15
4 140 125 15 225 15
5 110 125 -15 225 15
6 130 125 5 25 5
6 6
 D  740
i D  F  i i
2
 750 D F i i  60
i1 i1
 Computation: 

n n
 Di  Fi D  F 
2
i i
60 750
MAD  i1
  10 MSE  i1
  150
n 6 n 1 5

D F i i 60
MAPE  i1
 100%   100%  8.11%
D i
740


Exercises
1. For push processes, a manager must forecast what customer demand will be in order to
a. plan the service level.
b. plan the level of available capacity and inventory.
c. plan the level of productivity.
d. plan the level of production.
2. For pull processes, a manager must forecast what customer demand will be in order to
a. plan the service level.
b. plan the level of available capacity and inventory.
c. plan the level of productivity.
d. plan the level of production.
3. The result of each stage in the supply chain making its own separate forecast is
a. an accurate forecast.
b. a more accurate forecast.
c. a match between supply and demand.
d. a mismatch between supply and demand.
4. The resulting accuracy of a collaborative forecast enables supply chains to be

a. more responsive but less efficient in serving their customers.
b. both more responsive and more efficient in serving their customers.
c. less responsive but less efficient in serving their customers.
d. both less responsive and less efficient in serving their customers.
5. In general, the further up the supply chain a company is (or the further they are from the
consumer),
a. the greater the distortion of information they receive.
b. the smaller the distortion of information they receive.
c. the information they receive is more accurate.
d. the information they receive is more useful.
6. Forecasting methods that are primarily subjective and rely on human judgment are known as
a. qualitative forecasting methods.
b. time series forecasting methods.
c. causal forecasting methods.
d. simulation forecasting methods.
7. Time series forecasting methods are most appropriate when

a. there is little historical data available.
b. the basic demand pattern varies significantly from one year to the next.
c. the basic demand pattern does not vary significantly from one year to the next.
d. experts have critical market intelligence.
e. forecasting demand several years into the future.

8. Which forecasting methods are the simplest to implement and can serve as a good starting
point for a demand forecast?
a. qualitative forecasting methods
b. time series forecasting methods
c. causal forecasting methods
d. simulation forecasting methods
9. Managers perform a thorough error analysis on a forecast for which of the following key
reasons?
a. To establish a closely linked systematic forecasting method to accurately predict the
level season component of demand.
b. To determine whether the current forecasting method is accurately predicting the
systematic component of demand.
c. In order to develop contingency plans that account for forecast error.
d. all of the above
e. b and c only
1. Explain the role of forecasting in a supply chain.

2. Explain the following types of forecasting methods and their applications: qualitative,
quantitative (time series), and causal.
3. Explain the basic, six-step approach to help an organization perform effective forecasting.
4. What role does forecasting play in the supply chain of a build-to-order manufacturer such as
Dell?
5. How could Dell use collaborative forecasting with its’ suppliers to improve its supply chain?
6. What role does forecasting play in the supply chain of a mail order firm?
Problems
1. Given below are 2 years of quarterly data on demand for a particular model of electric blender
at a mail-order warehouse.
Quarter Year 1 Year 2

1 916 902
2 822 794
3 840 818
4 928 902
a) Deseasonalize the data with four-quarters moving average (for centre of data from 2.5
to 6.5), and compute a regression equation for the trend in demand
b) Compute the average seasonal index for each of the four quarters of a year using data
from previous 2 years
c) Using the trend and seasonal indices you have developed, compute a forecast for the
demand in each of the quarters of the following year.

2. Here are 2 years’ worth of monthly demand data for fleece jackets at a large sporting goods
store:
Month of Year 1 Year 2

January 115 127
February 116 131
March 79 83
April 65 67
May 39 39
June 16 19
July 15 15
August 13 13
September 29 29
October 58 58
November 89 89
December 97 97
a) Calculate the 3-month moving averages for the data.

b) Calculate the 6-month moving averages for the data.
c) Which seems to be more stable? Why?
3. A Midwest distributor has handled a particular brand of two-cycle motor oil for the past 5
years. The demand data for the product during those years are given below.
Year Demand
1 428
2 632
3 741
4 779
5 842
a) Plot the data. Should the first year’s data be included in computing a linear regression
model to estimate the trend in annual demand? Give a reason to support your answer.
b) Calculate a linear regression equation for annual demand based on the data you
concluded in part a to be most appropriate.
c) Use your equation to estimate demand for years 6, 7 and 8.
4. Here is a series of weekly demand data, covering 8 weeks that the Forever Young Cosmetic
Company collected on one of its products and forecasts for the corresponding weeks, made
by forecast model 1, which the cosmetic company is testing.
Week Demand Forecast

1 218 240
2 275 245
3 244 250
4 262 255
5 271 260
6 273 265
7 261 270
8 236 275
a) Compute the mean absolute deviation based on all 8 weeks of data.

b) Compute the mean squared error based on these 8 weeks of data.

5. The Forever Young Cosmetic Company used forecast model 2 to forecast demand for a
different product. Eight weeks of actual data and forecast data are shown below.
Week Demand Forecast

1 136 150
2 151 160
3 185 165
4 144 150
5 127 150
6 183 160
7 172 165
8 158 160
a) Calculate the MAD based on these 8 weeks of data.

b) Calculate the MSE based on these 8 weeks of data.
6. On the basis of the mean absolute percentage error, does it appear that the forecast model
in Problem 4 or the model in Problem 5 does a better job of forecasting? If you worked the
two previous problems, discuss the MADs for the two forecast models.
7. Given below are 2 years of quarterly demand data for a particular model of personal
computer from a local computer store.

1 40 44
2 46 57
3 39 43
4 42 45
to 6.5), and compute a linear regression equation for the trend in demand
b) Compute the average seasonal index for each of the four quarter of a year.
8. Here are 2 years of quarterly data on demand for cement from a retailer.

1 218 257
2 119 110
3 138 156
4 199 201
to 6.5), and compute a regression equation for the trend in demand
b) Compute the average seasonal index for each of the four quarters of a year.

Answers to problems
1. The regression equation y= 891.875 - 5.75(x). The demand forecast for year 3 quarters 1 to
4: 872.890, 775.967, 795.894, 878.17
2. The 6-month average is more stable because it contains more previous levels along with the
current demand level
3. The first year is not in line with the trend, perhaps because start-up sales are often difficult to
achieve. The equation using data from year 2 to year 5 is y = 513.7 + 66.80(x). Estimated
for year 6 is 914.50 and year 7 is 981.30
4. MAD= 16.50, MSE= 465.14
5. MAD= 13.0, MSE= 260.57
6. MAPE for Tut. 4 = 6.638, MAPE for Tut. 5 = 8.406
7. The moving averages from 2.5 to 6.5 are 41.75, 42.75, 45.50, 46.50, 47.25, and the
regression equation is y= 38.1125 + 1.475(x). The average seasonal index for year 3,
quarters 1 to 4 is 0.989, 1.167, 0.902 and 0.928 respectively. The demand forecast for quarter
1 to 4 of year 3 is 50.82, 61.69, 49.01 and 51.79 respectively.
8. The regression equation y= 164.588 + 2.727(x). The demand forecast for year 3, quarters 1
to 4: 259.56, 125.46, 160.32, 218.20

Topic 6: Aggregate Planning in a Supply Chain
Aims
 Identify the type of decisions that are best solved by aggregate planning.
 Understand the importance of aggregate planning as a supply chain activity.
 Describe the kind of information needed to produce an aggregate plan.
 Explain the basic trade-offs a manager makes when producing an aggregate plan.
 Chapter 8
Key Terms/ Concepts

 The roles of aggregate planning in a supply chain: Planning the required capacity
(at an aggregate level) to meet demand forecasts.
 The aggregate planning problem: determine the production level, inventory level,
and the capacity level to meet demand forecasts at a minimum cost.
 Aggregate planning tools: mathematical models, trial & error method
 Aggregate planning strategies:
 Chase strategy,
 Time flexibility,
 Level (pure inventory) strategy
 Mixed strategy
1. The Role of Aggregate Planning in a Supply Chain
 Aggregate planning is a process by which a company determines levels of capacity,

production, subcontracting, inventory, stockouts, and even pricing over specified time
horizon.
 The goal of aggregate planning is to satisfy demand in a way that maximizes profit.
 Traditionally, much of aggregate planning is focused within an enterprise and may not always
be seen as a part of supply chain management.
 Aggregate planning however, is an important supply chain issue because, to be effective, it
requires inputs from throughout the supply chain and its results have a tremendous impact
on the supply chain plan.
 As we saw in the chapter on forecasting, collaborative forecasts are created by multiple
supply chain enterprises and an important input for aggregate planning.
 The aggregate planner’s main objective is to identify the following operational parameters
over the specified time horizon:
 Production rate: the number of units completed per unit time (such as per week or
per month).
 Workforce: the number of workers/units of capacity needed for production.
 Overtime: the amount of overtime production planned.
 Machine capacity level: the number of units of machine capacity needed for
production.
 Subcontracting: the subcontracted capacity required over the planning horizon.
 Backlog: demand not satisfied in the period in which it arises but carried over to
future periods.
 Inventory on hand: the planned inventory carried over the various periods in the
planning horizon.

2. The Aggregate Planning Problem
 We can formally state the aggregate planning problem as follows:

o Given the demand forecast, the following should optimise the supply chain
profitability over the planning horizon:
 production level
 inventory level
 capacity level
o Specify the following:
 planning horizon (typically 3-18 months)
 the duration of each period
 key information required to develop an aggregate plan
 An aggregate planner requires the following information:
o Demand forecast Ft for each period t in the planning horizon that extends over T
periods
o Production costs
o Labour costs, regular time ($/hour)
 Cost of subcontracting production ($/units or $/hour)
 Cost of changing capacity; specifically, cost of hiring/laying off workforce
($/worker) and cost of adding or reducing machine capacity ($/machine)
o Labour/ machine hours required per unit
o Inventory holding cost ($/units/period)
o Stockout or backlog cost ($/units/period)
o Constraints
 Limits on overtime
 Limits on layoffs
 Limits on capital available
 Limits on stockout and backlogs
 Constraints from suppliers to the enterprise
 This information is used to create an aggregate plan that in turn helps a company make the
following determinations (output of aggregate plan):
o Production quantity from regular time, and subcontracted time: used to determine
number of workers and supplier purchase levels.
o Inventory held: used to determine how much warehouse space and working capital
is needed.
o Backlog/stockout quantity: used to determine what the customer service level will be.
o Workforce hired/laid off: used to determine any labour issues that will be encountered.
o Machine capacity increase/ decrease: used to determine if new production equipment
needs to be purchased or idled.
 A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess
capacity.

3. Aggregate Planning Tools
 Mathematical models
o Linear programming: often suitable only for small-scale problems
 Trial and error method
o This is the most widely used method in aggregate planning.
o It evaluates the cost of alternative ways of using resources to provide the necessary
production capacity.
o It is relatively easy to understand and use (does not involve elaborate mathematics
to develop the best plan).
o It involves tedious repetition of simple calculations to evaluate the cost of alternative
plans.
o It is helpful to develop a table to display these calculations.
4. Aggregate Planning Strategy
 There are essentially three distinct aggregate planning strategies for achieving balance
between costs.
o These strategies involve trade-offs between capital investments, workforce size, work
hours, inventory, and backlogs/lost sales.
 Most strategies that a planner actually uses are a combination of these three and are referred
to as mixed strategies. The 3 basic strategies are:
1. Chase strategy: uses capacity as the lever
2. Time flexibility: uses utilization as the lever
3. Level strategy: uses inventory as the lever
 Most strategies that a planner actually uses are a combination of these three and are referred
to as mixed strategies.
3.1 Chase strategy – using capacity as the lever

 With this strategy, the production rate is synchronized with the demand rate by
varying machine capacity or hiring and laying-off employees as the demand rate
varies.
 In practice, achieving this synchronization can be very problematic because of the
difficulty in varying capacity and workforce on short notice.
 Should be used when inventory holding costs are high and costs of changing capacity
are low.
Example: Given the following information:

Current Inventory = 200 items
Current workers = 30
Holding/Inventory cost = $1.10 /quarter/unit
Hiring/sacking rate/person = $10
Safety Inventory = 100 items
1 worker can produce 10 items per quarter
Forecast: 200, 400, 200, 300 for each quarter
You are asked to compute for the cost of Chase Strategy.

Solution:
Beg. Inventory
No. of
(end. inventory End. Inventory/
Quarter (q) Demand Production Workers Sack Hire
of previous Safety Stock
Needed
quarter)
200 30
1 200 200 100 100 10 20 -
2 400 100 400 100 40 - 30
3 200 100 200 100 20 20 -
4 300 100 300 100 30 - 10
production
*Initial ending inventory of 200 and 30 workers # employee 
are based on the previous quarter, as given in the workforce(capacity )
problem.
100 items

10 item /quarter

Computation for the total cost:  10 employee
Cost of hiring/sacking = $10* (20+20+30+10) = $800
Inventory cost = safety stock * holding cost/unit 

= 100 items * 4 q * $1.10/q/unit = $440
Total cost = cost of hiring + cost of sacking + inventory cost

= $1,240 (excluding labour & mat costs)
3.2 Time flexibility strategy – using utilization as the lever

 This strategy may be used if there is excess machine capacity.
 In this strategy, the workforce is kept stable but the number of hours worked is varied
over time to synchronize production with demand (overtime work).
 Should be used when inventory holding costs are high and capacity is relatively
inexpensive.
3.3 Level strategy – using inventory as the lever

 In this strategy, a stable machine capacity and workforce maintained with a constant
production rate.
 Here production is not synchronized with demand but built-up in inventory during low
demand periods is used to meet the high demand periods.
 Shortages and surpluses result in fluctuations in inventory levels over time
 Backlogs are carried over from high to low demand periods.
 Should be used when inventory holding and backlog costs are relatively low.
Example: Given the following information:
Current Inventory = 200 items

Current workers = 30

Holding/Inventory cost = $1.10 /quarter/unit
Hiring/sacking rate/person = $10
1 worker can produce 10 items per quarter
Forecast: 200, 400, 200, 300 for each quarter
Solution:
Production
No. of Employee
Quarter Demand (average of total End Inventory Sack Hire
Needed
demand)
200 30
1 200 275 275 28 2 -
2 400 275 150 28 - -
3 200 275 225 28 - -
4 300 275 200 28 - -
*Initial ending inventory of 200 and 30 workers

production
are based on the previous quarter, as given in the # employee 
problem. workforce(capacity )
275 items

10 item /quarter

Computation for the total cost:  28 employee
Cost of sacking = $10* 2 = $20
Inv cost = total ending inventory * holding cost/unit 

= 850 items * $1.10/quarter/unit = $935
Total cost = cost of hiring + cost of sacking + inventory cost

= $955 (excluding labour & mat costs)

Exercises
1. Aggregate planning, to be effective, requires inputs from

a. all customers.
b. all departments.
c. all suppliers.
d. throughout the supply chain.
e. throughout the company.
2. Much of aggregate planning has traditionally been focused

a. on short-term production scheduling.
b. on customer relationship management.
c. within an enterprise.
d. beyond enterprise boundaries.
e. all of the above
3. Which of the following are not operational parameters the aggregate planner
is concerned with?
a. production rate
b. workforce
c. overtime
d. backorders
e. inventory on hand
4. The aggregate plan

a. serves as a broad blueprint for operations.
b. establishes the parameters within which short-term production and distribution
decisions are made.
c. allows the supply chain to alter capacity allocations and change supply contracts.
d. all of the above
e. b and c only
5. Aggregate planning is concerned with determining

a. the production level, sales level, and capacity for each period.
b. the demand level, inventory level, and capacity for each period.
c. the production level, inventory level, and capacity for each period.
d. the production level, staffing level, and capacity for each period.
6. The planning horizon is

a. the time period over which the aggregate plan is to produce a solution.
b. the duration of each time period in the aggregate plan.
c. the length of time required to produce the aggregate plan.
d. the solution to the aggregate plan.
7. To create an aggregate plan, a company must specify

a. the planning horizon for the plan.
b. the duration of each period within the planning horizon.
c. key information required.
d. all of the above
e. a and b only

8. Which of the following is not information needed by the aggregate planner?
a. demand forecast for each period in the planning horizon
b. production costs
c. labor costs
d. cost of subcontracting production
e. cost of changing the demand forecast
9. The strategy where the production rate is synchronized with the demand rate
by varying machine capacity or hiring and laying off employees as the demand
rate varies is the
a. adjustable strategy.
b. chase strategy.
c. level strategy.
d. mixed strategy.
e. time flexible strategy.
10. How frequently should the aggregate plan be rerun?

a. weekly
b. monthly
c. every 3 to 8 months
d. as inputs to the aggregate plan change
e. never
1. Discuss the primary objective and operational parameters of aggregate planning.

2. Discuss the information required for aggregate planning.
3. Explain the basic strategies that an aggregate planner has available to balance the
various costs and meet demand.
4. How does the availability of subcontracting impact the aggregate planning problem.
5. If a company currently employs the chase strategy and the cost of training increases
dramatically, how might this change their aggregate planning strategy?
Problems
Part 1: The following information relates to a company’s aggregate production planning

activities:
Quarter Demand Forecast
1 75,000
2 100,000
3 75,000
4 125,000
Beginning Workforce = 35 workers

Production per Employee = 1,250 units per quarter
Hiring Cost = $500 per worker
Firing Cost = $1,000 per worker
Inventory Carrying Cost = $20 per unit per quarter
1. If a chase demand strategy is used then the number of workers hired at the start of quarter 2
would be
a. 10
b. 20
c. 35
d. 80

2. If a chase demand strategy is used then the total firing cost for the plan would be
a. $10,000
b. $15,000
c. $20,000
d. $25,000
3. If a level production strategy is used then the required quarterly output would be
a. 75,000
b. 87,350
c. 93,750
d. 125,000
4. If a level production strategy is used then the number of workers required for the plan would be
a. 35
b. 75
c. 100
d. 125
5. If a level production strategy is used then the inventory at the end of quarter 3 would be
a. 18,750
b. 12,500
c. 25,650
d. 31,250
6. If a level production strategy is used then the cost of the level production plan (inventory costs
plus hiring and firing costs) would be
a. $20,000
b. $645,000
c. $1,250,000
d. $1,270,000
Part 2:
1) A manufacturing company has a seasonal demand pattern with the forecast demand for each
month next year equal to 1,300, 1,000, 800, 700, 700, 700, 800, 900, 1,000, 1,200, 1,400, and
1,500 units, respectively. The company plans to end the current year with about 800 units in
inventory. The company requires a minimum of 500 units in inventory for safety stock and work
in process. It costs $1.10 per month to hold a unit in inventory.
The company will end the current year with 40 employees, and it costs $400 to hire and $600 to
lay off an employee. It takes an employee 5 hours to make a product, and the company operates
160 hours per month.
a) Compute the cost of a chase strategy, in which the number of employees is changed so
the monthly production rate is made equal to the monthly demand rate.
b) Compute the cost of a pure inventory strategy, with the work force and production rate
held constant at the average demand rate and the variation in demand rate accounted for
by accumulating and depleting inventory.
c) Which strategy is more cost-efficient?
2) A manufacturing company has a seasonal demand pattern with the forecast demand for each
month next year equal to 1,300, 1,000, 800, 700, 700, 700, 800, 900, 1,000, 1,200, 1,400, and
1,500 units, respectively. The company plans to end the current year with about 800 units in
inventory. The company requires a minimum of 500 units in inventory for safety stock and work
in process. It costs $1.40 per month to hold a unit in inventory.

The company will end the current year with 40 employees, and it costs $300 to hire and $400 to
lay off an employee. It takes an employee 5 hours to make a product, and the company operates
160 hours per month.
a) Compute the cost of a chase strategy, in which the number of employees is changed so
the monthly production rate is made equal to the monthly demand rate.
b) Compute the cost of a pure inventory strategy, with the work force and production rate
held constant at the average demand rate and the variation in demand rate accounted for
by accumulating and depleting inventory.
c) Which strategy is more cost-efficient?
Notes - Use the following rules in rounding off the number of employees for problems 7 and 8:
For Inventory strategy:
 Round up the number of employees
For chase strategy:
 If the decimal is 0.5 or more, round up, e.g. round 32.6 to 33
 If the decimal is less than 0.5, round down if the number of employees is decreasing, i.e.
lower than the previous period.
 If the decimal is less than 0.5, round up if the number of employees in increasing, i.e.
higher than the previous period.
Case Study
A company has the following demand forecast for the next year, expressed in six bimonthly (2-
month) periods:
Period Forecast Demand

(Standard U nits of
Work)
1 400
2 380
3 470
4 530
5 610
6 500
Question 1
a) Assume that an employee contributes 176 regular working hours each month and that each
unit requires 20 standard hours to produce. How many employees will be needed during the
peak demand of 610 units in period 5 if no overtime production is to be scheduled?
b) What will be the average labour cost for each unit if the company pays employees $6 per
hour and maintains for the entire year a sufficient staff to meet the peak demand without
overtime?
c) What percentage above the standard-hour cost is the company’s average labour cost per
unit in this year due to the company’s decision to maintain stable employment sufficient to
serve the peak demand period without overtime?
Question 2
If the company can use overtime up to a maximum of 25 percent of regular-time hours, and each
overtime hour costs $9. What is the average cost per unit produced during this year if the work force
is maintained at a level so that overtime can be used to the maximum during the peak period?
Question 3
The company wants to determine the cost of meeting the demand for its services through changes
in the number of employees and the use of overtime work. To keep from adding too many temporary
employees during the peak demand period, the company will use overtime equal to up to 25 percent

of the regular-time hours available. As soon as the company believes that 50 percent of a new
employee’s regular-time capacity could be utilized during the current period and the following period,
it will add an employee and will continue to hire up to the maximum employment level. Overtime will
be discontinued before employees are laid off during the decline in demand after the seasonal peak.
The company wants to end this year with 23 employees. It costs $400 to hire and $500 to lay off an
employee.
Overtime hours are compensated at $9 per hour. Assume that all changes in the employment level
occur at the end of a bimonthly period and that the company already has the desired number of
employees at the start of the year.
a. Find the employment level for each bimonthly period.

b. Find the total payroll-related costs for the year.
c. What cost per unit results from these payroll-related costs?
Question 4
If the company decides to use the level strategy, and it costs $3 per month ($6 per bimonthly period)
to hold an item in inventory: The company plans to maintain a constant production rate, begin and
end the year with the same inventory level, and absorb all demand fluctuation by accumulating and
depleting inventory. The number of employees will be set at a level so that no overtime will be
required. What will be the average cost per unit due to the cost of labour and the additional inventory
held during the year?
Answers to selected problems
Part 2:
Problem 1:
Chase strategy
Hiring and layoff cost = $20,800
Inventory cost = 500 items * $1.1 * 12 months = $6,600
Total cost = $27,400
Inventory strategy
Layoff cost = 8 layoffs * $600 = $4,800
Inventory cost = 15,000 unit months * $ 1.1 per unit per month = $16,500
Total cost = $21,300 per year
Problem 2: Chase $23,100, Inventory $24,200
Case Study:
Q.1: Average labour cost per unit is $153.47

Q2: Average labour cost per unit = $132.84
Q.3: Average labour cost per unit = $125.83
Q4: Average labour cost per unit = $124.07

Topic 7: Managing Inventories in a Supply Chain
Aims
 This topic introduces you to a number of techniques for managing independent-demand
inventory.
 Relevant sections of chapters 11 and 12 with emphasis on the following
sections:
o Inventory costs
o EOQ model
o Evaluating quantity discount opportunities
o Determining re-order levels
o Safety stock
Key Terms/ Concepts

 Inventory management
 Component costs of inventory
 Models for constant demand
 Economic order quantity
 Production quantity model
 Discounts model
 Models for fluctuating demand
 Discrete
 Continuous
1. Inventory Management
 The objective of inventory management is to ensure that stocks are available to meet
production or customer demand at a minimum cost.
 Issues in inventory management include: when to order and order quantity.
 To target the objective of inventory management, there are several inventory models that can
be considered: these are
o Economic Order Quantity (EOQ)
o Production Lot Size Model
o Price Break Order Quantity (Discounts)
o Probabilistic Models
2. Inventory costs
 Inventory costs consist of four components:

o Costs of invested funds in stock
 increases with increasing/ high inventory
o Costs of storage space
 increases with increasing/ high inventory
o Ordering costs: costs of ordering stock or setup
 decreases with large orders of stock, i.e. high inventory
o Shortage costs: costs of missed sales or delay
 decreases with high inventories

3. Constant Demand Models
3.1 Economic Order Quantity (EOQ)

 Is the optimal-quantity ordered when inventory decreases to the point of replenishing or
reordering.
 Is a formula used to determine the optimal order size that minimises the sum of carrying and
ordering costs.
 The model formula is derived under the following assumptions:

 Demand rate is known and constant over time
 Lead time in receiving orders is constant
 No quantity discounts
 Cost of order is the same regardless of ordered quantity
 Ordered quantity is received all at the same time
 Inventory order cycle:
Figure 7.1 Inventory Order Cycle
1. As shown on the figure 7.1, an order quantity, Q that is received will be used up after
a certain period of time at a constant rate.
2. The inventory level will decrease to a certain point, called the reorder point, ROP, at
which new order has to be placed.
3. The period of time between placing an order and order receipt is referred to as
delivery lead time.
4. Right at the moment when demand depletes the entire stock of inventory, the new
order would be received.
5. As a result, there will be no shortages.
6. This cycle is repeated continuously for the same order cycle and assumptions.
 Analysis of order cycle:

C = cost per item
RH = holding rate as a % of C
CH = holding cost per unit (C × RH)
Co = ordering cost per order
Q = order quantity
Q/2 = average inventory level
D = annual demand
Annual Holding Cost = item cost × holding rate × average stock
Q Q
 C  RH  or  CH 
2 2
Annual Ordering Cost = order cost × no. of orders per year
D
  CO 
Q
Total Annual Inventory Cost: Annual Holding Cost + Ordering Cost

Q D
 TC  C H  CO
2 Q
 Optimisation: EOQ Cost Model

Figure 7.2 EOQ Cost Model
 Optimization to find the order quantity Q at which the total cost, TC, is at a minimum
 Differentiate TC with respect to Q to find optimum Q, i.e. EOQ
 EOQ occurs at minimum total cost, where holding cost equals ordering cost.
2DCO 2DCO
EOQ  or 
CH (CRH )
 The total minimum cost considering the optimal order quantity (EOQ) can be determined by
substituting the economic order quantity (EOQ) to the ordered quantity (Q) into the total cost

equation.
QEOQ D
TCmin  C H  CO
2 QEOQ
where:
C = item cost D = annual demand
RH = holding rate as a (%) Co = ordering cost

CH = holding cost (C × RH) QEOQ = economic order quantity
Note: Students are expected to know how to derive EOQ

 Reorder Point (ROP)
o The level of inventory where a new order is placed
o Order must be made while there is enough stock in place to cover the demand during
lead time
Formula: ROP = d × LT
where:
d = demand rate per time period
LT = lead time
 Example: EOQ Problem
Let’s have an example, given the following data:
D = 500 items/yr. (10 items/wk ×50 weeks)

C = $10 per item
RH = 10% of item cost
Co = $10 per order
LT = 1 wk
You are asked to compute for EOQ, Total Cost minimum, and ROP.
Solution:
1) Calculation for Holding Cost:
CH = $10 × 0.10 = $1per item per yr.
2) Calculation for ROP:
ROP = d × LT = (500/50)(1) = 10 items
Therefore, re-order must be made when stock is down to 10 items
3) Calculation for EOQ and TC:
2DCO 2(500)($10)
EOQ    100items
CH $1
QEOQ D 100 500
TCmin  C H  CO  $1  $10  $100
2 QEOQ 2 100

Therefore, place an order for 100 items when stock is down to 10 items. This will
keep the annual inventory cost to a minimum at $100 per year.

3.1 Production Quantity Model or Economic Production Lot (EPL)
 Same as EOQ except when stocks are manufactured, this model is used to find the optimum
batch/lot size.
 EPL approach is almost similar to EOQ, but they differ in the equations for the average
inventory and annual inventory cost due to different inventory profile
 First, we define the two parameters unique to this model:

p = production rate, which is the rate at which the order is received over time
d = demand rate, which is the rate at which inventory is demanded
 Production time is influenced by production lot size and production, where production time is
the divisor of production lot size (Q) and production rate (p).
 The formula for maximum and average inventory equations was derived from equating the
slope of slope (production rate minus demand rate) multiplied by production time.
 Therefore maximum inventory for EPL is equal to the production lot size (Q) multiplied by
one minus demand rate over the production rate:
 d  Q  d 
Max. Inventory Level  Q1   Ave. Inventory Level  1  
 p  2  p 
Q  d 
Total Holding Cost  CH 1  
 2  p 

Q  d  D
Total Annual Inventory Cost = CH 1   CO
2  p  Q

Q  d  D
Economic Production Lot (EPL) =

CH 1   CO
2  p  Q
where:
Q = production lot size
Co = production setup cost per run
d = demand rate
p = production 
rate
Note: d & p should have the same unit. Students are expected to know how to derive
the equation.
 Example: EPL Problem
Let’s have an example, given the following data:

C = $10 per item
Co = $10 per setup
p = 20 items per week
You are asked to compute for EPL, Total Cost minimum, and Production Run.
Solution:
1) Calculate the Holding Cost:
CH = $10 × 0.10 = $1per item per yr.
2) Calculation for EPL and TC:
d= 10 items/week
2DCO 2(500)($10)
EPL    142items
 d   10 /week 
C H 1   $11  
 p   20 /week 
QEPL  d  D 142  10  500

TCmin  C H 1   CO  $1 1   $10  $70.71
 2  p  QEPL 2  20  142
Set up equipment to make a batch of 142 items when stock is down to zero (no buffer).
This will keep the annual inventory cost (holding and setup) to a minimum at $70.71
 per year.
3) Calculation for Production Run:
Production Run = EPL  p = 142  20 = 7.10 weeks per order
Therefore, the length of time to receive and order for this production set-up is 7.10
weeks per order
3.2 Quantity Discounts Model

 This model is used when discounts are given for large orders.
 The strategy is to use EOQ to take advantage of the lowest price.
 If not feasible to take advantage of the discounts because the EOQ is below the discount
limit, then use the total cost of inventory as a criterion to determine optimum order quantity.
 The model involves the use of trial and error procedure.
 The formula for total cost of inventory as a criterion to determine optimum order quantity is:
TC = annual holding cost + ordering cost + cost of items
Q D
TC  C H  CO  PD
2 Q
where: P = per unit price of the item
D = annual demand


Example: Using the same example from our EOQ model, but this time cost of item
varies from quantity orders:
o for every 120 items or more, the cost of item is $10
o for lower than 120 items, cost will be at $12.30 per item
Given:
Co = $10 per order
C = $10 per item >= 120 items
= $12.30 per item <120
Solution:
1. We need to calculate each EOQ and check if the EOQ is higher than the discount limit. If
yes, use the calculated EOQ.

Table 7.1 Solving for EOQ given the price break/quantity discounts:
Quantity Unit Cost ($) CH($)* EOQ (units) Feasibility
<120 12.30 1.23 91  Option 1
≥ 120 10 1 100  Option 2
*CH= 0.10 × unit cost

= 0.10 × 12.30 = 1.20
= 0.10 × 10.00 = 1.00
2DCO 2(500)($10)
EOQ    91 items
CH $1.23
2(500)($10)
  100 items
$1
 2. Table 7.1 shows that EOQ at option 1 is feasible since the optimum quantity computed is
within the range of order size of the seller. Option 2 is not feasible since EOQ computed
 the minimum order quantity set by the price break.
is less than
3. Since the EOQ is lower than the discount quantity rate, we ended up with two options
which should be evaluated using total cost for each option:
a. Place an order for 90 items (EOQ) and pay $12.30 per item, or
b. Place an order for 120 items (ignore the EOQ) and pay $10 per item
4. Looking at the total inventory cost of the two options, considering the cost of material, will
help us compare and decide which options is better in term of minimum total inventory
cost:
Option 1: Using the EOQ in evaluating total cost for quantity discount model:
QEOQ D 91 500
TCmin .  C H  CO  PD  $1.23  $10  $12.30  500  $6,260.91
2 QEOQ 2 91
 Option 2: Using 120 items (considering discount and ignoring EOQ) in

evaluating total cost for quantity discount model:
Q D 120 500
TCDiscount  C H  CO  PD  $1  $10  $10  500  $5,101.67
2 Q 2 120
So based on the computations, we have to place an order for 120 items and pay $10 per
item. Therefore choose the option of getting the discount and disregard the EOQ,
which will keep the total cost (including cost of items) to a minimum of $5,101.67
 per year.
4. Variable Demand Models
 Variable demand models deal with situations where both lead times and demand rates
fluctuate.
4.1 Rule of thumb

 One of the most used approaches in variable demand model is the rule of thumb.
 Rule of thumb uses experience to determine the suitable size for a buffer to cater fluctuations
in demand.
 Buffer or safety stock is an additional inventory on hand used as a hedge against stock out
during lead time.
Having this additional on hand inventory, the total annual inventory cost is determined
according to this formula:
TC = holding cost per unit × (ave. inventory + buffer) + ordering cost
Q  D
TC  C H   Buffer  CO
2  Q
 Example: Having the same example in EOQ problem, except that demand (D) fluctuates
between 8 and 12 items/week: to cater to the demand fluctuations, a buffer size of 2 items
is used. 
 This additional inventory would definitely impact out minimum cost.
2DCO 2(500)($10)
EOQ    100items
CH $1
Adding the buffer in our previous EOQ problem, the total cost at minimum this time is at $102.
QEOQ  D 100  500
 TCmin  C H   Buffer  CO  $1  2 $10  $102
 2  QEOQ  2  100
Therefore, having the optimal order size of 100 items, plus a buffer of 2 items will keep
the annual inventory cost to a minimum of $102/yr. Note that the buffer increases the
inventory cost per year from $100 (EOQ without buffer) to $102 (considering buffer).

4.2 Discrete Model

 Another example of variable demand model is the discrete model, which collects data used
as a basis for analysis.
 There are 2 approaches, which can be used to determine suitable buffer size (safety stock):
service approach and economic approach.
Example:
The following are the records of the number of items used per week for a period of 50 wks.
This is the same example of what we have in the EOQ model.
Demand Freq. Prob. Cumulative probability

(items pw) (no of wks) of stockout (CPS)
0 0 0 1.0
5 10 0.2 0.8
10 30 0.6 0.2
15 10 0.2 0
20 0 0 0
--------------------------------------
50 wks 1.0
Note that CPS is the sum of all probabilities below that quantity, e.g. the CPS at stock level
of 10 items is 0.2
Ave. demand = sum of all (no of items used * frequency)

= (5*10 + 10*30 + 15*10)/50 = 10 items
Interpreting the data using Service Approach:
 For 100% service level: place an order for 100 items when stock is down to 15 items
with no probability of stockout.
with 20% probability of stockout.
with 80% probability of stockout.
 Service level is probability that amount of inventory on hand is sufficient to meet demand
during lead time (probability stockout will not occur).
o Therefore the desired service level determines the timing of the order placement.
Economic Approach (minimize cost):
Total Cost is at a minimum when: CPS × N × CS = CH so, below is the formula in

determining cumulative probability of stockout:
CH D
CPSoptimum  N
N  CS EOQ
where: CS = Stockout Cost

 Using the same data as in the EOQ example:
D = 10 items * 50 wks = 500 items/year

Co = $10 per order
CH = $1 per item per year
Additional data is given with regards to the cost of stockout, CS at $1 per unit stock-out.
Solving for the number of order per year is given the formula: N is equal to 500, which is the
demand divided by the optimum quantity, which is our EOQ, 100. There are 5 orders per year
given the optimum order size of 100 items:
D 500 2DCO
N  5 EOQ   100items
EOQ 100 CH
The optimum cumulative probability of stockout (CPS) is determined by dividing the holding
cost of $1 to the product of the number of order of 5 and stockout cost of $1. CPS for this
 given example is 20%.

$1
CPSoptimum   0.20  20%
5  $1
Thus, under the optimal order size of 100 items, the optimum probability of stock-out
is 20%. This will keep the annual inventory cost at a minimum with a corresponding
 service level of 80%.
4.3 Normal Distribution Model

 Another approach in determining suitable buffer size or safety stock is normal distribution
model.
 If the demand pattern is observed to follow a normal distribution with a certain mean and
standard deviation, then the Reorder Point (ROP) or sometime called Reorder Level is given
by:
ROP = d×LT + Buffer (safety stock)
Buffer  Z  d  LT
d  standard deviation
 where:
d = demand rate per period
 LT = lead time
Figure 7.3 ROP with Buffer (Service Level)
From the figure 7.3, the shaded area is the service level, the probability to the left of reorder
point. The probability of stockout also refers to the CPS discussed in the previous slides.
 Example:
Given: Normal distribution pattern with a mean=10 items per week and standard deviation of
4.7. Using the same data as previous example:
EOQ = 100 items d = 10 items/week

CPS (optimum) = 0.2 LT = 1 week
we can calculate the ROP as follows:
ROP  dLT  Z  d  LT 10(1)  0.84  4.7  1 14items

Z = 0.84, from the table of normal distribution, the Z value that corresponds to a cumulative
probability of stock out of 0.2 (or service level of 0.8).
 Place an order for 100 items when stock is down to 14 items. This will keep the annual
inventory cost at a minimum with a corresponding service level of 80%.

Exercises
1. The average inventory in the supply chain due to either production or purchases in lot sizes
that are larger than those demanded by the customer is
a. annual inventory.
b. distribution inventory.
c. cycle inventory.
d. physical inventory.
e. b and c only
2. A graphical plot depicting the level of inventory over time is

a. an inventory graph.
b. a distribution inventory.
c. an inventory drawing.
d. an inventory profile.
e. an inventory picture.
3. Which of the following is not a cost that must be considered in any lot sizing decision?
a. Average price per unit purchased, $C/unit
b. Fixed ordering cost incurred per lot, $S/lot
c. Holding cost incurred per unit per year, $H/unit/year = hC
d. Manufacturing cost per unit, $M/unit
e. All of the above are costs to be considered.
4. Economies of scale in purchasing and ordering motivate a manager to

a. increase the lot size and cycle inventory.
b. decrease the lot size and cycle inventory.
c. eliminate inventory.
d. increase the lot size and reduce cycle inventory.
5. Which of the following would not be an example of a fixed ordering cost?

a. administrative cost incurred to place an order
b. trucking cost incurred to transport an order
c. labor cost incurred to receive an order
d. labor cost incurred to manufacture a part
6. Which of the following would not be included in holding cost?

a. cost of capital
b. cost of physically storing the inventory
c. cost of manufacturing
d. cost that results from the product becoming obsolete
7. Total ordering and holding costs

a. are relatively stable.
b. are relatively stable around the economic order quantity.
c. are relatively unstable around the economic order quantity.
d. are unstable.

8. Aggregating across products, retailers, or suppliers in a single order allows for
a. an increase in lot size for individual products.
b. an increase in customer demand.
c. a reduction in holding cost per unit.
d. a reduction in lot size for individual products.
e. a reduction in purchase price per unit.
9. A key to reducing cycle inventory is

a. the reduction of holding cost.
b. the reduction of manufacturing cost.
c. the reduction of lot size.
d. the reduction of warehouse space.
e. all of the above
10. A key to reducing lot size without increasing costs is to

a. reduce the holding cost associated with each lot.
b. reduce the fixed cost associated with each lot.
c. reduce the material cost associated with each lot.
d. reduce the manufacturing cost associated with each lot.
e. increase the holding cost associated with each lot.
11. Quantity discounts lead to

a. a significant buildup of cycle inventory in the supply chain.
b. a slight buildup of cycle inventory in the supply chain.
c. a decrease in cycle inventory in the supply chain.
d. minor fluctuations of cycle inventory in the supply chain.
e. a major drop in cycle inventory in the supply chain.
12. When the retailer decides to pass through some or all of the promotion to customers to spur
sales, the result is
a. a lowering of the price of the product for the end customer.
b. increased purchases and thus increased sales for the entire supply chain.
c. an increase in the amount of inventory held at the retailer.
d. all of the above
e. a and b only
13. Inventory carried for the purpose of satisfying demand that exceeds the amount forecasted
for a given period is
a. cycle inventory.
b. demand inventory.
c. safety inventory.
d. security inventory.
e. all of the above
14. The trade-off that a supply chain manager must consider when planning safety inventory is
a. increasing product availability versus increasing inventory holding costs.
b. decreasing product availability versus decreasing inventory holding costs.
c. increasing product availability versus raising the level of safety inventory.
d. decreasing product availability versus decreasing the level of safety inventory.

1. Discuss the role of cycle inventory in the supply chain.

2. Describe the impact of trade promotions on cycle inventory.
3. Consider a supermarket deciding on the size of its replenishment order from Procter
and Gamble. What costs should it take into account when making this decision?
4. Discuss how various costs for the supermarket change as it increases the lot size
ordered from Procter and Gamble.
5. As demand at the supermarket chain grows, how would you expect the cycle
inventory (average inventory) to change? Explain.
6. Derive the EOQ equation and state any assumptions used.
7. Discuss the role of safety inventory in the supply chain and the trade-offs involved.
8. Describe the two types of ordering policies and the impact each has on safety
inventory.
9. Explain the impact of supplier lead-time on safety inventory.
Problems
1) Extended Play Stereo, Inc., sells 750 Super Power amplifiers per year and expects sales to
continue at that rate. The holding cost is 22 percent of the unit cost per year, and the amplifiers
cost $180 each. The cost to process a purchase order is $15.
a. What is the EOQ?
b. How much will the company spend each year to order and hold Super Power amplifiers?
2) Suppose that Extended Play Stereo opens a second outlet but continues to use one central
purchasing location. The holding cost, order cost, and item cost remain the same as in problem
1, but the annual demand doubles to 1,500 units per year.
a. What will be the new EOQ? How much has it increased from the EOQ of problem 1?
b. How much will the company spend each year to order and hold this model of amplifier
with the higher level of demand?
c. Do economics of scale apply to inventory under some conditions?
3) Each year, the Black Hills Company purchases 22,000 of an item that costs $14 per unit. The
cost of placing an order is $8, and the cost to hold the item for 1 year is 24 percent of the unit
cost.
a. Determine the economic order quantity for the part.
b. Compute the average inventory level, assuming that the minimum inventory level is zero.
c. Determine the total annual ordering and holding costs for the item if the EOQ is used.
4) Suppose that the Black Hills Company described in problem 3 uses an order quantity of 350
units and maintains a minimum inventory, or safety stock, of 65 units.
a. Determine the average inventory level.
b. Determine the total annual ordering and holding costs for the item if the order quantity is
350 and the minimum inventory is 65 units.
c. Look at your figures in problem 3. How much of the difference in total cost is caused by
the change from the EOQ in problem 3 to the order quantity of 350?
5) Super Sports Shoes, Inc., sells a special shoestring at a uniform rate of 2,400 pairs per year.
The order cost is $10, and the holding cost is 20 percent of the unit cost. For less than 1,000
pairs, each pair of strings costs $0.22; from 1,000 to 1,499 pairs, each pair costs $0.20; and for
1,500 pairs or more, the cost is $0.18 per pair. What is the EOQ for this item?
6) Alien Auto Co. distributes parts for foreign cars in a large Midwestern city. Demand for a
particular size of oil filter has been uniform. The lead time to obtain the filters is 1 month, and
the average use rate is 500 per month. The lead-time use is normally distributed with a standard

deviation of 70 units. Order cost is $12, and holding cost is $0.30 a year per filter. The estimated
cost of a stockout is $10.
a. What is the EOQ?
b. How many orders per year will be placed at this EOQ?
c. What is the optimum probability of a stockout?
d. What is the optimum reorder level? Note: The Z value for for a service level of 99.65%
is 2.7?
e. How much will Alien Auto spend per year to hold inventory on this filter if it implements
the values you determined above?
Answers to problems
1) 24 units, $943.95 per year
2) EOQ = 34 units. Compared to tutorial 1, the EOQ has increased by 42% while the demand
has increased by 100%. Inventory cost = $1334.96 per year. The inventory cost went up by
only 41% while the demand was doubled. So there are economies of scale if the
transportation cost (not considered here) is not greater than the savings in ordering and
holding costs.
3) 324 units, 162 units, $1087.53
4) 240 units, annual inventory cost = ($3.36 * 240 units) + (22000/350)* $8 = $1309.26. This is
only $3.34 higher
5) EOQ (using $0.18)= 1155 units, not feasible, EOQ (using $0.20)= 1095 units, feasible, EOQ
(using $0.22)= 1044 units, not feasible. Total inventory cost including item costs for 1095
units per order and $0.20 per unit = $523.82. Total inventory cost including item costs for
1500 units per order and $0.18 per unit = $475. The company should order 1500 units per
order.
6) EOQ= 693 units, 9 (8.66) orders per year, Optimum probability of stockout = 0.0035 or
99.65% service level, RL= 689 units, $160.65 per year

APPENDIX 1: Major Group Assignment
This Group assignment consists of both Topic SAQs & problem solving questions and a case study
to be submitted by a nominated member of the group on the groups’ behalf via Learnonline by the
due date. The group work will be undertaken online via the Group’s Discussion Forum. Each student
must also individually submit a peer assessment form found online at the Group Assignment section.
Topic SAQs & Problem Solving Questions

 Topic 4: problems 3
 Topic 5: SAQ 1 and Problems 2 and 8
 Topic 6: SAQ 3 and Problem part 1 (MCQs 1-6)
 Topic 7: SAQs 3 and 9 and Problems 5 and 6.
Case Study: Delivery Strategy at MoonChem
John Moon was very concerned as he left the meeting at MoonChem, a manufacturer of specialty
chemicals. The year-end meeting had evaluated financial performance and discussed the fact that
the firm was achieving only two inventory turns a year. A more careful look revealed that over half
the inventory MoonChem owned was consignment inventory with its customers. This was very
surprising given that only 20 percent of its customers carried consignment inventory. John Moon was
Vice President of Supply Chain and thus responsible for inventory as well as transportation. He
decided to take a careful look at how consignment inventory was managed and come up with an
appropriate plan.
MOONCHEM OPERATIONS
MoonChem is a manufacturer of specialty chemicals used in a variety of industrial applications.

MoonChem has eight manufacturing plants and forty distribution centres. The plants manufacture
the base chemicals and the distribution centres mix them to produce hundreds of end-products that
fit customer specifications. In the specialty chemicals market, MoonChem has decided to
differentiate itself in the Southeast region by providing consignment inventory to its customers.
MoonChem would like to take this strategy national if it proves effective. MoonChem keeps the
chemicals required by each customer in the Southeast region on consignment at the customer’s
sites. Customers use the chemicals as needed and MoonChem ensures replenishment to ensure
that the customers do not run out of inventory. In most instances, consumption of chemicals by
customers is very stable. MoonChem is paid for the chemicals as they are used. Thus, all
consignment inventories belong to MoonChem.
DISTRIBUTION AT MOONCHEM
MoonChem currently uses Golden trucking, a full truckload carrier for all its shipments. Each truck
has a capacity of 40,000 kg and Golden charges a fixed rate given the origin and destination,
irrespective of the quantity shipped on the truck. Currently MoonChem sends full truckloads to each
customer to replenish their consignment inventory.

THE PARADISE PILOT STUDY
John decided to take a careful look at his distribution operations. He decided to focus on the Paradise
area of the Southeast region as a pilot study. The Paradise area is supplied from a distribution centre
in Heaven. A careful study of the Paradise area revealed two large customers, six medium-sized
customers, and twelve small customers. The annual consumption of each type of customer is as
shown in the table below. Golden currently charges $400 for each shipment from Heaven to Paradise
and MoonChem’s policy is to send a full truckload to each customer when replenishment of
consignment inventory is needed.
John checked with Golden to find out what it would take to include shipments for multiple customers
on a single load. Golden informed him that they would continue to charge $350 per truck and would
then add $50 for each drop-off that Golden was responsible for. Thus, if Golden carried a truck that
had to make one delivery, the total charge would be $400. However, if a truck had to make four
deliveries, the total charge would be $550.
Table 1: Customer Profile for MoonChem in the Paradise area

Consumption
Customer Type Number of Customers
(Kg per Month)
Small 12 1000
Medium 6 5000
Large 2 12000
Each kg of chemical in consignment cost MoonChem $1 and MoonChem had a holding cost of 25
percent per annum. John wanted to analyse different options for distribution available in the Paradise
area to decide on the optimal distribution policy. The detailed study of the Paradise area would
provide the blueprint for the distribution strategy that MoonChem planned to roll out nationally.
Questions
Question1
What is the current annual cost of MoonChem’s strategy of sending full truck-loads to each customer
in the Paradise region to replenish consignment inventory?
Question 2
Consider the following delivery options and evaluate the cost of each.
1. Deliver appropriately sized loads (EOQ) separately to each customer
2. Deliver to 6 small, 3 medium, and 1 large customer on each truck
3. Deliver with varying frequencies to each segment. This is similar to strategy 3 but small
customers will miss out every second delivery.
Question 3
What delivery option do you recommend for MoonChem?

Appendix 2: List of Equations
Transportation Cost Model
The objective is to minimize the total transportation cost (TC):
n n
Minimize TC   Cij Vij  Dij

i 1 j 1
Cij – cost of moving 1 item between departments i and j per unit distance;
Vij - volume between i and j over a period of time;
Dij – distance between i and j
x=  (D * X )
i i
y=  (D * Y )
i i
D i D i
where
Yi – y-coordinate of each location
x = sum (demand at each location * x-coordinate of each location) / sum (all demands)
y = sum (demand at each location * y-coordinate of each location) / sum (all demands
Rank reciprocal weights
Simple Moving Average (SMA)
The formula for computing SMA is:
SMAt+1 =
D i
i(t 1n )
n
where:
SMAt+1 = simple moving average at the end of a period t, which
typically will be used as a forecast for next period (t +1)
Di =actual demand in period i
n = number of periods in the moving average

Simple Linear Regression
The trend equation has the form:
y = a + bx
where:
 y is the demand forecast for the time period x;
 The slope of line b and the intercept a, can be found by using least squares formulas:
 xy  n x y
a  y  bx b
x  nx
2 2
or
 
 y  b x n xy   x  y
a b
n n  x 2  ( x ) 2
where:
x  the mean of the x 

values
y  the mean of the y values
y = actual values of dependent variable
x = actual values of independent variable
Seasonal Index (SI)
SI = Actual demand / Trend Value
Measures of Forecast Accuracy

n
D F i i
Mean Absolute Deviation (MAD) = MAD 

i 1
n
n
D  F 
2
i i
Mean Square Error (MSE) = MSE  i1

n 1
n
D F i i

Mean Absolute Percentage Error (MAPE) = MAPE  i 1
*100%
D i
where:
Di = actual demand in period t

Fi = forecast demand in period t
n = number of periods being used

Economic Order Quantity (EOQ)
2DCO 2DCO QEOQ D

EOQ  or  TCmin  C H  CO
CH (CRH ) 2 QEOQ
where:
C = item cost D = annual demand
 RH = holding rate as a (%)  Co = ordering cost
CH = holding cost (C × RH) QEOQ = economic order quantity
Q d  D
Economic Production Lot (EPL) = CH 1    Co
2  P Q
where:
Q = production lot size
Co = production setup cost per run
d = demand rate
p = production rate
Probabilistic Models
CH D
CPSoptimum  N
N  CS EOQ
where: CS = Stockout Cost

ROP = d×LT + Buffer (safety stock)
Buffer  Z *  d * LT
 d  Standard deviation
where:
d = demand rate per period
LT = lead time

Appendix 3: Sample of Examination Paper
UNIVERSITY OF SOUTH AUSTRALIA
SCHOOL OF ADVANCED MANUFACTURING AND MECHANICAL ENGINEERING
Sample
SUPPLY CHAIN MANAGEMENT G
TIME: THREE (3) HOURS

GENERAL INSTRUCTIONS TO CANDIDATES:
1. Reading time: 10 minutes.

2. Non English Speaking Background Students (NESB) students are allowed an extra 10
minutes per hour of writing time to complete their examination. Therefore, the duration
of the exam is 3hrs 40mins (including reading time).
3. Attempt ALL questions.
4. Calculators are allowed.
5. Marks allocated to each question are indicated in brackets.
6. Books and study materials are not allowed in the examination room.
7. A list of formulae is shown in Attachment 1 at the end of the paper.
------------------------------------------------------------------------------------------
QUESTION 1
1. Explain the three decision phases (categories) that must be made in a successful
supply chain.
2. Explain the push and pull view of the processes within a supply chain.
3. List and explain the three basic steps to achieving strategic fit.
4. List and discuss the attributes/ factors that should be considered in supply chain
responsiveness.
[20 marks]
QUESTION 2
1. Explain the measures of customer service that are influenced by the structure of the
2. Explain how the design of a distribution network affects the cost of the four supply
chain drivers.
3. Discuss the four phases in the framework for network design decisions.
4. Discuss the role of safety inventory in the supply chain and the trade-offs involved.
[20 marks]
QUESTION 3
A company is considering opening a store in Singapore. Three potential sites are being
evaluated for the new store.
Each factor used in the evaluation has been assigned a weight to indicate its relative
importance. The three sites have been evaluated and assigned points on a scale of 0 to 100
(best).
The data are shown below:
Factor Weight Site A Site B Site C
Construction cost 0.1 60 70 80

Operating cost 0.1 60 70 80
Traffic count 0.3 90 80 70
Convenient access 0.2 75 80 70
Parking area 0.2 60 75 90
Surrounding population 0.1 70 60 75
Rank the 3 sites and advise the company of the preferred site.
[15 marks]
QUESTION 4
The historical data on the quarterly demand for a product are shown below for the last 2
years (Year 1 and Year 2):

1 218 257
2 119 110
3 138 156
4 199 201
1. De-seasonalize the data with four-quarters moving average (for centre of data from
2.5 to 6.5), and compute a regression equation for the trend in demand.
2. Compute the average seasonal index for each of the four quarters of a year.
3. Using the trend and seasonal indices you have developed, compute a forecast for
the demand in each of the quarters of the following year (Year 3).
[15 marks]
QUESTION 5
A manufacturing company has a seasonal demand pattern with the forecast demand for
each month next year equal to 1,300, 1,000, 800, 700, 700, 700, 800, 900, 1,000, 1,200,
1,400, and 1,500 units, respectively.

The company plans to end the current year with about 800 units in inventory. The company
requires a minimum of 500 units in inventory for safety stock and work in process. It costs
$1.10 per month to hold a unit in inventory.
The company will end the current year with 40 employees, and it costs $400 to hire and
$600 to lay off an employee.
It takes an employee 5 hours to make a product, and the company operates 160 hours per
month.
1. Compute the cost of a chase strategy, in which the number of employees is changed
so the monthly production rate is made equal to the monthly demand rate.
2. Compute the cost of a pure inventory strategy, with the work force and production
rate held constant at the average demand rate and the variation in demand rate
accounted for by accumulating and depleting inventory.
[15marks]
QUESTION 6
A company sells 750 units of a certain product per year. The holding cost is 22 percent of
the unit cost per year, and the amplifiers cost $180 each. The cost to process a purchase
order is $15.
1. What is the EOQ?
2. How much will the company spend each year to order and hold the inventory, i.e. the
inventory cost?
Suppose that the company opens a second outlet but continues to use one central
purchasing location. The holding cost, order cost, and item cost remain the same, but the
annual demand doubles to 1,500 units per year.
3. What will be the new EOQ?
4. How much will the company spend each year to order and hold the inventory for
this higher level of demand?
5. Do economics of scale apply to inventory under some conditions? Explain.
[15 marks]
*****END OF EXAMINATION PAPER*****

Appendix 4 Online Peer Assessment Form
UNIVERSITY OF SOUTH AUSTRALIA

SCHOOL OF ADVANCED MANUFACTURING AND MECHANICAL ENGINEERING
PEER ASSESSMENT FORM
COURSE & ASSIGNMENT NAME
.....................................................................................................................................
NAME OF PERSON MAKING ASSESSMENT: .........................................................
GROUP NAME: ..........................................
In the table below, list the members of your Group (including yourself as the first name).
For each member, assess the contribution that the member made to the submitted work.
The areas assessed are:
Presence and participation in online Group discussions (Participation)

Willingness to work and share with the Group (Teamwork)
Contribution made to the assessment component (Contribution)
Please give a score out of ten in each category in the table below.
Name of other team Participation Teamwork Contribution Average

members
Comment on the performance of Group members to justify the scores given above:
.....................................................................................................................................
.....................................................................................................................................
.....................................................................................................................................
.....................................................................................................................................
.....................................................................................................................................

Appendix 5 Simulation of SC using SIMPROCESS
Note: using Simprocess software is not part of the assessment criteria, and it is not
mandatory that you use it in your work for this course. However applying this powerful
software as a tool in SCM will aid you to refine your design. For example, you can pick
any stress point, identify any bottleneck and examine the “as is” and “to be” state of your
design.
Session One: Theoretical Background
Outline
 Simulation: definition, examples, reasons, types, advantages and disadvantages
 Simulation Model construction and
 Main elements of simulation model.
What is the simulation?

Simulation is the process of designing a mathematical or logical model of a real-system
and then conducting computer-based experiments with the model to describe, explain, and
predict the behavior of the real system.
Model
Simulated
Patte Compare
rn of Natural
Syste
Overview of Simulation Development
Examples of Simulation Applications

Simulation is used in many applications, such as simulation of technology for performance
optimisation, safety engineering, testing, training, education, and video games.

Applications for Simulation Modeling
Reasons for Simulation
 Simulation is used to better understand the expected performance of the real system
and to test the effectiveness of the system design
 Without building them
 experimental system
 new concepts
 Without disturbing them
 costly experimentation
 unsafe experimentation
 Without destroying them
 Determine limits of stress
Types of Simulation
 Discrete Event Simulation: state of system changes only at discrete points in time
(events) i.e. machine repair problem
 Continuous Event Simulation: state of system changes continuously over time i.e.
level of fluid in tank
Advantages of Simulation
 Can be used to study existing systems without disrupting the ongoing operations
 Proposed systems can be “tested” before committing resources
 Allows us to control time
 Allows us to identify bottlenecks
 Allows us to gain insight into which variables are most important to system performance

Disadvantages of Simulation
 Model building is an art as well as a science. The quality of the analysis depends on
the quality of the model and the skill of the modeler
 Simulation results are sometimes hard to interpret
 Simulation analysis can be time consuming and expensive
 Should not be used when an analytical method would provide for quicker results
Simulation Model construction
There are four main elements in the construction of a system model: the inputs, the
outputs, the process model, and the model parameters. These are arranged as shown in
the figure below.
Model construction hierarchy
Model Inputs
 The inputs to system modelling are entities that arrive at the model for processing
 These entities could arrive at a fixed average rate, but usually there is some random variation
in arrival times
 Entity arrival times are usually described in terms of a standard statistical distribution

Model Parameters
 The model is intended to act in a certain fashion. Its behaviour is controlled by the values of
certain parameters, which are stored in tables
 The model process references these tables when computing the simulation response to
inputs
 Typical of these parameters in a business process might be the statistical distribution to be
used to represent service time or the parameters governing the service time in the selected
service model
Model Process
 The process is the heart of the model, and it applies the parameters to control the response to
model inputs, producing the outputs
 A process may be as simple as supplying a service to an arriving entity for an amount of time
defined in the model parameters, and releasing the entity as an output to exit the system
Model Outputs
 Entities exiting the model are termed outputs

 They may carry attributes contributed or modified by the process, or retain attributes acquired
earlier
 They may also acquire a time stamp or time of departure
 As an example of an attribute acquired during processing, consider the security status of an
airline passenger, “checked” or “unchecked.” Such attributes may influence downstream
processing by later parts of the simulation model.
Main Elements of Simulation Model

 Activities – Blocks that represent the operational characteristics of a system
 Perform some kind of action on an entity
 Delay, branch, assemble, generate, etc.
 Entities – The “items” that flow through the model
 Type (e.g., cars, trucks, etc.)
 Instance of a type (e.g., car-1, car-2, etc.)
 Resources – Service providers
 People, machines, supplies, etc
 Each can contain a capacity (number), downtime schedule, and cost
 Events – instantaneous occurrence that may change the state of the system
 Example: Car-1 arrives for service, Car-1 receives service, Car-1 leaves
system. Each of these events will change the state of the system.
 Attributes – Characteristics of modeling constructs can be defined for entity types,
entity instances, resources, activities, processes, and the entire model, example:
 Characteristics of types of entities (e.g., “number of cylinders for cars”).
 Characteristics of instances of entity types (e.g., “car-1 has 4 cylinders, car-2
has 6 cylinders, etc.”).
 Characteristics of the model (e.g., # of cars/week, # of mechanics, etc.).

Example
Let us consider a simple simulation model. Suppose a factory produces a product and the
main departments in this factory are:
 Manufacturing department
 Assembly department
 Purchasing department
 Shipping department
In this system:
 Entities: departments, orders, parts, and products.
 Activities: manufacturing process, assembling process, raw material purchasing
process, final product packing process, and shipping process.
 Attributes: order quantity, type of part or work piece, number of machines in each
department
 Resources: machines, workers, and supervisors.
The table below gives examples of some systems and their components.
The System Entities Attributes Activities Resources

Traffic Cars Speed, Driving The Driver
distance
Bank Customers Acc. No., Withdraw Tellers
Creditor cash, loan
application
Call centre Calls Call time, the Call Call services

contact contacting, Rep.
sending...
Shopping Customers Bill of shopping Payment of bill Cashiers
centre

The following figures depict the relations between the model components
(i.e. Entities, Activities, Attributes, and Resources).
Process = Events + Activities

Review Questions
(1) Name a number of continuous systems.
(2) Name a number of discrete systems.
(3) For the business processes listed below, identify the Entities, Attributes, Activities and
Resources for modelling.
 A car wash
 A bank branch office
 A fast food restaurant
 A subway or commuter train station
 An airline terminal
 System for manufacturing and packaging cookies.

Session Two: Simulation Software- SIMPROCESS
Outline
 Simulation software structure and programming, criteria selection

 Main elements of SIMPROCESS: starting, toolbar and activities and
 Process Simulation with SIMPROCESS.
Simulation Software
 Simulation packages are general purpose simulation tools that contain all of the programming
needed for simulating discrete systems
 There is no programming necessary to build a model
 With simulation packages, a collection of general process objects are pre-programmed and
available on a palette
 Some packages allow additional programming in a general purpose language such as Visual
Basic
 Others permit the use of constructs from a simulation language with a predefined set of objects,
methods, and variables one can use to modify the behaviour of the system
Criteria Selection for Selecting a Simulation Package

When selecting a simulation package, the following features should be considered:
 Degree of modelling flexibility

 Ease of model development
 Speed of model execution
 Animation, reporting, other output features
 Maximum size of a model allowed to be built
 Compatibility with other systems and
 Enhancement of model via user programming.

Starting SIMPROCESS
!! 1. Ensure that you have a special folder on your desktop or in your USB to save the
simulation models which you have built and the Standard Report and also save any changes
made on these models.
To start SIMPROCESS:
 From Start menu ,double-click the icon The basic window of

software appears
SIMPROCESS Toolbar
 This section details the modeling constructs available on the SIMPROCESS toolbar and
“Create” menu.

Legend SIMPROCES Activities
Symbol Description Usage Comments
Generate A GENERATE activity produces entities according to a selected format, typically

according to a selected statistical distribution, but uses no resources
Dispose A DISPOSE activity disposes of an entity, using no resources and requiring no

simulation time
Delay The DELAY activity block represents any activity during which an entity is delayed
for a specified time in its progress through the model (system)
Assemble ASSEMBLE activity involves the combining of listed entities into a new output
entity. For example, the development of a business proposal may contain three
documents that are merged using an assembly activity
Branch BRANCH activity allows for defining alternative routings for flow objects.
Branching may be based on a probability or a condition. For example, the
outcome of an inspection process may be modeled using probabilistic branching.
Merge MERGE activity provides a mechanism for merging a number of connectors into a
single connector
Batch A BATCH activity combines a given quantity of entities into a single batch. An
example of a batching activity is the accumulation of mail for delivery
Unbatch An UNBATCH activity splits a previously batched entity into individual entities. For
example, unloading of a truck that results in multiple loads may be modelled with
an unbatch activity
Split A SPLIT activity takes an incoming entity and creates clones of that entity as well
as providing an output of the original entity. For example, clones of a purchase
order may be created with a SPLIT activity and sent to accounts payable and
shipping
Join A JOIN activity takes the clones and original entity that were split up, and matches
them to produce the original one. For example, a JOIN activity may be used for
matching the paperwork with the shipment
Transform A TRANSFORM activity converts an incoming entity into another entity. For
example, a prospective buyer is transformed into a customer when an order is
placed. This activity can be modelled using the transform construct
Transfer A TRANSFER activity routes entities from one portion of a model to another
without using a connector, or routes entities to another model.

Legend SIMPROCES Activities (continued)
Symbol Description Usage Comments
Gate A GATE activity holds entities in a queue, until a signal is received. For
example, a GATE activity would be used to model orders held in inventory
until a signal is received from the distributor to fulfil the demand
Assign AN ASSIGN activity provides a mechanism for defining or changing attributes

values
Synchronize A SYNCHRONIZE activity takes inputs that arrive at different times and
outputs them in a synchronized fashion. For example, passengers and their
baggage must be synchronized at a terminal
Replenish REPLENISH RESOURCE activity allows for replenishment of consumable

Resource resources
Get Resource GET RESOURCE activity provides a mechanism for capturing resources that
may be used for a number of downstream activities
Free Resource FREE RESOURCE activity provides a mechanism for releasing resources
that were captured by a GET RESOURCE activity
Process Simulation with SIMPROCESS
The basic steps in process simulation through SIMPROCESS:

 Building the simulation model
 Running the simulation
 Analyzing performance measures and
 Evaluation of alternative scenarios.

Building the Simulation Model
Running the Simulation

Analyzing Performance Measures
Evaluation of Alternative Scenarios

Building your first model with SIMPROCESS
See PDF file or refer to Chapter 3

Review Questions
(1) What are the functions of the simulation clock?
(2) What are the advantages of using a simulation language?
(3) What are the advantages of using a simulation package?
(4) Try making a SIMPROCESS model for the following example;
A single machine problem:

Consider a workshop is comprised of one machine for manufacturing two types of
products. The overall operation flow appears as shown in the table below:
Product name Arriving rate Processing time at the machine

Product A 6/Hour 4 Minutes
Product B 10/Hour 3 Minutes
 Run the development simulation model of problem,

 From the simulation report, collect the number of produced pieces from each type.
Change the arriving rate and process time for the work pieces as following:
 Type 1, arriving rate is EXP (10) min., processing time Uni (2, 6).
 Type 2, arriving rate is EXP (6) min., processing time Uni (1.5, 4.5).
 From the simulation report, collect the following:

 Machine utilization,
 Number of work pieces in waiting, and
 Total processing time.

Session Three: Evaluating Alternatives with SIMPROCESS
Outline
 Create and evaluate alternatives with SIMPROCESS,
 Running some models and studying the techniques used in building them for better
appreciation of activity modelling and advanced modelling constructs of SIMPROCESS.
!! Ensure that you have a special folder on your desktop or in your USB to save the simulation
models which you have built and the Standard Report and also save any changes made on
these models.
Create and evaluate alternatives with SIMPROCESS

 Open SIMPROCESS software package.
 Click the Help icon at the top then Simprocess Manuals and select Getting started.
on the left-hand side (on the pane bookmarks in GetStart.pdf) select chapter 4 (Evaluating
Alternatives With SIMPROCESS),
 Go to page 58 – read the introduction of that chapter,
 Open the model which you are constructed in last session (building your first model.);
the model should be saved before you make any changes in a folder at the
desktop or in a folder in your USB.
 Make the suggested development as described in chapter 4,
 Run the model on the SIMPROCESS by select the Simulate  Run from toolbar
menu,
 Display and save the standard report generated by the software package
 Compare the results of (as is) state to (to be) state.
Running Reference Models

 Select chapter 5 (demonstrations and reference models) on the pane bookmarks in
GetStart.pdf
 Go to page 64 – read the model description
 Read the SIMPROCESS help file explanation for each of the following models:
 Call centre model,
 Cashier process model,
 Credit issuance process model, and
 Purchasing process model.
!! Note: to run the models mentioned above and modify them, please
Select open  Demos  Click (Control + C) on the mentioned models  Paste them
(control + V) in your special folder on the desktop or in your USB.
 Run each model on the SIMPROCESS simulator by selecting the Simulate  Run
from toolbar menu
Review Questions
(1) Make suggestions for development of these models.
(2) Discuss the effect of these suggestions on the outcomes of these models.

Session Four: Supply Chain Modelling Using Simulation
Part A
Out line
 Supply chain management definition, benefits, data requirements for modelling and
examples,
 Run and evaluate the (as is) state for the supply chain model,
 Make some changes in model construction to answer what-if analyses.
Supply chain management: The concept

Supply chain management (SCM) has been defined as "a process-oriented approach to procuring,
producing, and delivering products and services to customers. SCM has a broad scope that
includes; sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end
users. It covers the management of material, information, and funds flows."
The table below shows general areas of supply chain management.
Functionalities/Areas of supply chain management

Areas Of Supply Description
Chain
Demand planning Demand planning aims to reduce forecast error
and to suggest buffers considering demand
variability.
In order to improve accuracy of forecasting,
collaborative forecasting is essential.
Master planning Provides multi-site planning. Master planning
based on the material, capacity, transportation and
other constraints, simultaneously.
Procurement Constraints such as vendor capacities, costs and
lead
times can be modelled as part of supply chain
resulting in superior plans.
Transportation Consider dynamic transportation requirement and
generate optimizing transportation plan.
Manufacturing Plan considering material, capacity and other
constraints which impact on manufacturing.
Benefits of Supply Chain Management Simulation

Benefits of supply chain simulation are as follows:
 It helps understanding the overall supply chain processes and characteristics by
graphics/animation
 Able to capture system dynamics: using probability distribution, user can model unexpected
events in certain areas and understand the impact of these events on the supply chain and
 It could dramatically minimize the risk of changes in planning process: By what-if simulation,
the user can test various alternatives before changing plan.

Data Requirements for Supply Chain Management Modelling
The table below shows examples of data requirements for supply chain modelling.
Examples of Data Requirements for Supply Chain Modelling

Area Data Required
Manufacturing Process and time information Manufacturing process data (process time, queue
time, setup time, number of machine in each
process, alternate route)
Calendar data (shift information, holiday
information, preventive maintenance information)
Machine data (number of machine, mean time to
failure, mean time to repair, alternate resources data,
preventive maintenance time)
Bill of material structure
Inventory control policies information Safety stock level, Reorder point, Inventory level of
finished products, Raw material, Intermediate parts,
Stock location in shop floor
Procurement and logistics information Supplier lead-time, Supply lot size, Supplier capacity
Procurement horizon, Procurement time
Demand information Due date, Priority, Start and End data, Demand pattern
Policies/Strategies information Order control policies, Dispatch policies
Diagram of an example supply chain simulation model

Supply Chain Model
Starting with Supply Chain Model:

 From the main window of SIMPROCESS, from the menu toolbar, select the File 
Open Demos  click Copy on Supply Chain Model.spm.  Paste it in your special
folder on desktop or in your USB, and then open it from that folder
 For help to understanding the model, read the model description by selecting
Computer  C:\Program Files\SIMPROCESS\SPSYSTEM\GetStart.pdf
 Click on chapter 5 (demonstrations and reference models) in the pane bookmarks in

GetStart.pdf
 Run the model on the SIMPROCESS by selecting the Simulate  Run from toolbar
menu
 Click Run in the window of model parameters when it is open
 Display results of simulation by selecting the Report  Display Standard Report
from toolbar menu
 Click Display Report in the window of Standard Report
 Look for the results in the report especially (Entity : Total Count - Observation Based :
Replication 1)
 Please save the report in a folder (you can make a new one on the desktop). The
results can be saved in text editor, spreadsheet and report viewer. Please rename the
results file by the name (As is results)
Review Question:
Now, answer following questions through the simulation of SIMPROCESS model for a “Supply
Chain Mode.spm”:
 What if the demand for certain products from the east coast supplier doubles?
(It means the demand of the customer 4 in Boston in the model is changed from 1 /
hour to 2/hour – for more details double click on customer 4 Boston in top level of
model  click on Generate Order, then click the right mouse and select
properties, under Schedule Edit, and then change the value of Quantity in
(Periodic Schedule for Generate Order) from 1 to 2.
 What if the Phoenix supplier is having manufacturing problems with a product line? (If
Phoenix supplier is having manufacturing problems with a product line- the four factories, in
this case there is no supply to theses factories. Repeat the previous step with Phoenix supplier
by changing the value of generates supplies-1, 2, 3, and 4, from one to zero.)
 What if we use alternative transportation carriers to deliver products to customers? To
do that, try to reduce the travel time between factories and customers by changing the
value of that time as follows:
 From toolbar menu, select the Define  Global Attribute Definitions

 The following window will appear:
 When the Global Attribute Definitions window is open, click on

Model tab in that window
 Changes the value of ((AvgMilesPerHour)) by clicking on value of it in that
window
 Change the value of ((AvgMilesPerHour)) from 45 to 60,
 Close the window of Global Attribute Definitions
 Save the change in toolbar menu
 What if we outsource the assembly process? If the assembly process is outsourced in the
model, then the time of delay activity in assembly process will equal to zero.

Session Five: Supply Chain Modelling Using Simulation
Part B
Outline
 Example of optimisation of model parameters,
 A brief introduction about inventory control concepts
 Run and evaluate the (as is) state for the Inventory Model,
 Try out various schemes of order quantities and reorder point to minimise total
inventory cost.
Optimisation of model parameters

 The purpose of this session is to give a brief idea about the effect of model parameters values
and the effects of these parameters on performance measures and consequently the need for
parameters values optimisation.
In the call centre model (page 65 in GetStart-please read it for more understanding) to maintain the
high level of service that consumers demand the management always needs to balance staffing
levels of the centre. In this context let us see the effect of the current status (three technicians: X,
Y, and Z). The technicians are answering the questions of the incoming calls to the centre as
follows:
 Question Type A can be answered by any of the three technicians,
 Question Type B can be answered by a Y or Z Technician, and
 Question Type C can be answered only by a Z Technician.
 The model parameters (please refer back to the last session for how you can find the model
parameters in SIMPROCESS) by default are as in the table below:
Model parameters value

Max.Num.on Hold 10
X 1
Y 1
Z 1
 With these model parameters, the outcomes of simulation for three days (in a model of 28
days) is as follows:
Number Answered Balked Reneged

of calls
609 201 33 375
 Now, let us employ 2 technician (x) workers in the call centre to reduce the waiting time of
customers, the model parameters becomes:
Model Parameters Value

Max. Num. On 10
Hold
X 2
Y 1
Z 1
 And the performance results due to the increasing number of technician (x) are:
Number Answered Balked Reneged

of calls
609 253 30 326
 According to this simple example, the optimal values of the model parameters can be obtained
by more changes in these values so as to reach the best solution for the model construction
elements. The best solution guarantees (as we stated above) to maintain the high level of
service that consumers demand and lowest cost for management.
Definition and explanation of Reorder Point (reorderpt) and Reorder

Quantity (reorderqty)
Reorder point is a minimum level of the on-hand inventory stock; when the on-hand stock reaches
this point, an automatic requisition is generated.
Reorder quantity is how much quantity is to be ordered when stock reaches below the reorder
point.
Calculating Reorder Point (R):
The following two formulas are used for the calculation of Reorder Point.
𝑅 = 𝑑𝐿
Where
d = demand rate per period (e.g., daily or weekly or monthly)
L = lead time
Example: ABC paint store open 311 days per year. If annual demand is 10,000 gallons of
Ironcoat paint and the lead time to receive an order is 10 days, determine the reorder point
for paint.
Solution:
𝑅 = 𝑑𝐿 = (10,000/311)(10) = 321.54 gallons. When inventory level falls to approximately

321 gallons of paint, a new order is placed. Notice that the reorder point is not related to
the optimal order quantity or any of the inventory costs.

Reorder point with variable demand
R  d L  Z d L
d = average daily demand

L = lead time
 d = the standard deviation of daily demand
Z = number of standard deviations corresponding to the service level probability
Z d L = safety stock
Example: for the ABC Paint store example above, we will assume that daily demand for
Ironcoat paint is normally distributed with an average daily demand of 30 gallons and a
standard deviation of 5 gallons of paint per day. The lead time for receiving a new order of
paint is 10 days. Determine the reorder point and safety stock if the store wants a service
level of 95% - that is the probability of a stock out is 5%.
Solution:
d = 30 gallons per day L = 10 days  d =5 gallons per day
For a 95% service level, the value of z from the normal distribution table is 1.65. The safety
stock is:
Safety stock = Z d L = (1.65)(5)( 10 ) = 26.1 gallons
Reorder point = R  d L  Z d L = 30(10) + (1.56)(5)( 10 ) = 300+26.1 = 326.1 gallons

Order quantity models:
Economic Order Quantity (EOQ) model:
2CO D
Qopt 
CC
Where
Qopt = optimal order CO = order cost D = annual demand CC = carrying cost
Order quantity with variable demand:
Q  d (tb  L)  Z d tb  L  I
d = average demand rate t b = the fixed time between orders
L = lead time  d = standard deviation of demand
Z d tb  L = safety stock I = inventory in stock

(As is) state of Inventory model
Starting with Inventory model:
 From the main window of SIMPROCESS, from the menu toolbar, select the File 
Open Demos  click Copy on Inventory.spm. Paste it in your special folder on
desktop or in your USB, and then open it from that folder
 For help in understanding the model, read the model description by selecting
Computer C:\Program Files\SIMPROCESS\SPSYSTEM\GetStart.pdf
 Click on chapter 5 (demonstrations and reference models) on the pane bookmarks in
GetStart.pdf
menu
 Click Run in the window of model parameters when it is open
 Display results of simulation by selecting the Report  Display Standard Report
from toolbar menu
 Click Display Report in the window of Standard Report when it is open
 Look for the results in the report especially (Entity : Total Count - Observation Based :
Replication 1)
 Save the report in a folder (you can make a new one on the desktop). The results can
be saved in text editor, spreadsheet and report viewer. Please rename the results file
by the name (As is results)
(To be) state of Inventory model

Now, try making a development in SIMPROCESS model for an “Inventory” by changing
the values of model parameters (Reorder Points and Quantities)):
 From toolbar menu, select the Define  Global Attribute Definitions

 When the Global Attribute Definitions window is open, click on Model tab in that
window
 Try to make some changes in values of ((comp1reorderpt, comp1reorderqty,
comp2reorderpt, and comp2reorderqty)) by clicking on value of each one in that
window
 Change the value of comp1reorderpt from 200 to 150, comp1reorderqty from 100
to 75, comp2reorderpt from 400 to 300, comp2reorderqty from 200 to 150.
 Close the window of Global Attribute Definitions
 Click on in toolbar menu to save the changes in the model parameters
menu
 Repeat the previous steps to minimise the amount of inventory for each node in the
supply chain
 Save the results of the run by the name (To be results )
 Compare the results of (As is results) and (To be results), analyse and discuss how
you would use simulation to improve process operations.

Review Question:
 Compare the results of report (as is) state and (to be) state,
 Summarise possible process improvements based upon the simulation results of
states (As is results) and (To be results).
Reports Preparation:
For every session, the student should present a report. The contents of that report are as
follows:
 Title of your report-same as title of session
 Introduction about the purposes and importance of the session(200 words)
 Theoretical background about the main themes of the session (500 words)
 Answers of Review Question(s) of session (250-1000 words)
 Conclusions-summarise the results of session practice (200 words)
Further Reading
1. The Getting Started With SIMPROCESS manual, chapter (1-5), http://lrss.fri.uni-

lj.si/sl/teaching/OMIS/simprocess/GetStart.pdf
2. Raymond P. Jefferis, “Simulation of Business Processes”,
http://muse.widener.edu/~rpj0001/courses/Engr670/Book/BookFile.pdf

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Study Guide – Internal – SP5 - 2016

MFET 5043 (ID: 101161)

SUPPLY CHAIN MANAGEMENT G

MLK/P2-04 Mondays 12:10am – 03:00pm

Course Coordinator: Dr Yousef Amer

Location: Mawson Lakes Campus, J2-20

Information regarding this course is available through myUniSA:

Dr Yousef Amer - School of Engineering 2 of 123 University of South Australia

Prerequisite(s)/ Assumed knowledge

Course Objectives Graduate Qualities being developed though the course

2. is prepared for lifelong learning in pursuit of personal development and excellence in

4. can work both autonomously and collaboratively as a professional

5. is committed to ethical action and social responsibility as a professional and citizen

6. communicates effectively in professional practice and as a member of the community

7. demonstrates international perspectives as a professional and as a citizen.

Dr Yousef Amer - School of Engineering 3 of 123 University of South Australia

Lectures (online) 7 wks x 2 hours

Tutorials 4 wks x 2 hour

Practical session 3 hour session

Online quizzes 1 hour per week

Self-directed study and group work 13 wk x 8 hours

Unit value of course: 4.5 units

Materials to be accessed online

Extra course information

 UniSA Library: http://www.library.unisa.edu.au/

1. Continuous formative assessment

2. Major Group Assignment 25% By end week 11 1, 3

Dr Yousef Amer - School of Engineering 5 of 123 University of South Australia

Problem Solving Questions

Refer also to Extra course information at:

Assessment 2—Major Group Assignment

Dr Yousef Amer - School of Engineering 6 of 123 University of South Australia

Variations to assessment tasks

Submission and return of Assessment tasks

Refer also to Extra course information at:

Evaluation of the course

Dr Yousef Amer - School of Engineering 7 of 123 University of South Australia

KEY COMPONENTS OF THIS ASSIGNMENT COMMENT BY MARKER

RELEVANCE OF WORK TO QUESTIONS/PROBELMS

QUALITY OF STRUCTURE AND PRESENTATION

THE GRADUATE QUALITIES BEING ASSESSED BY THIS ASSIGNMENT ARE INDICATED BY AN X:

GQ2: ARE PREPARED FOR LIFELONG LEARNING GQ6: COMMUNICATE EFFECTIVELY

GQ3: ARE EFFECTIVE PROBLEM SOLVERS GQ7: DEMONSTRATE AN INTERNATIONAL

GQ4:CAN WORK BOTH AUTONOMOUSLY AND

Dr Yousef Amer - School of Engineering 8 of 123 University of South Australia

Study Period 5 Topic Assessment – Due by

Topic 1 01/08/16 – Session 1 Practical @ J2-17 (12:10-

Online Topic 1 quiz - (12-13/08/16)

Online Topic 2 quiz - (19-20/08/16)

Online Topic 3 quiz - (26-27/08/16)

Online Topic 4 quiz - (02-03/09/16)

Online Topic 5 quiz - (09-10/09/16)

12 Sept Online Topic 6 quiz - (16-17/9/16)

week 9 03 Oct Topic 7

10 Oct Online Topic 7 quiz - (14-15/10/16)

17/10/16 - Session 3 Practical @ J2-17 (12:10-

Major assignment (also submit your Peer

Exam weeks Examination

How to use this study guide

Topic 1: Analysing Supply Chain Frameworks and Metrics

Topic 2: Supply Chains Strategy and Performance

Topic 3: Designing the Supply Chain: Distribution Network Configurations

Topic 4: Designing the Supply Chain: Network Design