FRANK DANTE as a managing director of DanteCorp (UK) Ltd. participate in strategic planning of company. DanteCorp (UK) Ltd. is a full-service international import/export agency servicing wholesalers, buyers, entrepreneurs, and privately held companies. Our foremost expertise is in sourcing products and services in China for exportation to Europe, USA , Australia, Canada and other countries.

1. Frank Dante
Supply Chain
Management (SCM)

2. ∗ Defining the issues of SCM
∗ Major Players
∗ How we can work in this new model
∗ Vender relationships
∗ Data Management
∗ Major Issues:
∗ Bullwhip effect
∗ Transportation problems
∗ Location issues
Topics For Discussion:

3. ∗ “Supply Chain management deals with the control of
materials, information, and financial flows in a network
consisting of suppliers, manufacturers, distributors, and
customers” (Stanford Supply Chain Forum Website)
∗ “Call it distribution or logistics or supply chain management...
In industry after industry . . . executives have plucked this
once dismal discipline off the loading dock and placed it near
the top of the corporate agenda. Hard-pressed to knock out
competitors on quality or price, companies are trying to gain
an edge through their ability to deliver the right stuff in the
right amount of time” (Fortune Magazine, 1994)
What is SCM?

4. ∗ As manufacturing becomes more efficient (or is
outsourced), companies look for ways to reduce
costs
∗ Several significant success stories:
∗ Efficient SCM at Walmart, HP, Dell Computer
∗ SCM considers the broad, integrated, view of
materials management from purchasing through
distribution
∗ The huge growth of interest in the web has
spawned web-based models for supply chains:
from “dot com” retailers to B-2-B business
models
Growing Interest in SCM – Why?

5. ∗ Several companies have been able to cut costs
and improve service by postponing the final
configuration of the product until the latest
possible point in the supply chain. Examples:
∗ Hewlett Packard printer configuration
∗ Postponement of final programming of
semiconductor devices – all routines loaded, only
certain ones activated
∗ Assemble to order rather than assemble to stock (Dell
Computer)
Mass Customization:
Designing Final Choices into Supply Chains

6. ∗ Many firms now consider SCM issues in the
design phase of product development
∗ One example is IKEA whose furniture comes
in simple to assemble kits that allows them to
store the furniture in the same warehouse-like
locations where they are displayed and sold
∗ Shipping container designs for FedEx and UPS
– airfreight
∗ Dunnage control in Big Auto
Design For Logistics:

7. ∗ Part of streamlining the supply chain is reducing the
number and variety of suppliers
∗ The Japanese have been very successful in this
arena (they’re an Island – so getting materials there
has always been a problem)
∗ In the mid 1980’s Xerox trimmed its number of
suppliers from 5,000 to 400.
∗ Overseas suppliers were chosen based on cost
∗ Local suppliers were chosen based on delivery speed
∗ In 1996, Ford Motor reduced their supplier count by
more than 60%
Efficient Design of the Supplier Base

8. ∗ Dell Computer has been one of the most
successful PC retailers. Why? To solve the
problem of inventory becoming obsolete,
Dell’s solution:
∗ Don’t keep any inventory! - All PC’s are made to
order and parts shipped directly from
manufacturers when possible.
∗ Compare to the experience of Compaq Corporation
– initial success selling through low cost retail
warehouses but they did not garner web-based
sales
Dell Designs the Ultimate Supply Chain!

9. ∗ EDI: Electronic Data Interchange
∗ Involves the Transmission of documents electronically
in a predetermined format from company to
company. (Not web based.)
∗ The formats are complex and expensive. It appears to
be on the decline as web-based systems grow.
Data Exchange – A Critical Idea

10. ∗ E-tailing: Direct to customer sales on the web –
the so-called Click & Mortor retail model
∗ Perhaps best known e-tailer is Amazon.com, originally
a web-based discount book seller
∗ Today, Amazon.com sells a wide range of products
(we can think of many, many similar organizations)
∗ Amazon and others spawned so called “dot
com” stock explosion in the NASDAQ (1997 to
April, 2000)
∗ Today, many traditional “bricks and mortar”
retailers also offer sales over the web, often at
lower prices
Data and Products – E-Tailing

11. ∗ B2B (business to business) supply chain
management:
∗ While not as visible and “sexy” as E-tailing, it appears
that B2B supply chain management is the true growth
industry!
∗ Web searches yield over 80 matches for supply chain
software providers. Some of the major players in this
market segment include:
∗ Agile Software based in Silicon Valley.
∗ i2 Technologies based in Dallas.
∗ Ariba based in Silicon Valley
Dealing with Data – the modern way

12. ∗ Walmart and P & G
∗ Target and Pepsi/Coke
∗ But … Barilla SpA. An Italian pasta producer
pioneered the use of VMI (Vendor Managed
Inventory)
∗ They obtained sales data directly from distributors
and decide on delivery sizes based on that
information
∗ This is in opposition to allowing distributors (or even
retailers) to independently decide on order sizes!
Data Transfer in Supply Chains: Vendor
Managed Inventory (the real solution?)

13. Order Growth – The Bullwhip Effect – An
Important issue

14. ∗ First noticed by P&G executives examining the
order patterns for Pampers disposable diapers.
∗ They noticed that order variation increased
dramatically as one moved from retailers to
distributors to the factory.
∗ The causes are not completely understood but
have to do with batching of orders and building in
safety stock at each level
∗ Problem: increases the difficulty of planning at
the factory level
Information Transfer in Supply Chains:
cause of ‘The Bullwhip Effect’

15. ∗ Inventory management and demand forecasting
models such as those discussed in this course
∗ The transportation problem and more general
network formulations for describing flow of
goods in a complex system
∗ Analytical methods for determining delivery
routes for product distribution – optimal location
of new resources
There has been a Revitalization in the
Analytical Tools needed to Support SCM

16. ∗ The Goal is to reduce total transportation costs
throughout the supply chain
∗ Usually solved with some approach to the
“Transportation Problem”
∗ Our approach will be the Balanced Matrix model
Focusing on the Distribution Problem:

17. ∗ We must have a Supply/Demand balance to solve
∗ In this problem that requirement is met
∗ If it is not met, we must create “Dummy” sources (at
$0 move costs) or Dummy Sinks (also at $0 move
costs) to achieve the require S/D balance
In the Transportation Problem:

18. ∗ Goal is to minimize the total cost of shipping
∗ We will allocate products to cells – any allocation
means the row resource will ship product to the
column demand
∗ The process is an iterative one that requires a
feasible starting point
∗ Can start by using NW Corner approach
∗ Can start using a more structured VAM (Vogel
Approximation method)
The Transportation problem:

19. ∗ Determine Row Penalty number (PNi) –the difference
between lowest and 2nd
lowest cost in row
∗ Here: R1 is 1; R2 is 1: R3 is 2
∗ Determine Column Penalty Number (PNj) – the difference
between the lowest and 2nd
lowest col. Cost
∗ Here: C1: 3; C2: 0; C3: 0
∗ Choose R or C with greatest penalty cost – here is C1
∗ If there is a tie, break tie by choosing C or R with smallest costs
∗ Max out the allocation in chosen C or R at lowest cost cell then x-
out the C or R
∗ And so on after allocation (after we recompute PN’s!)
Starting with a VAM Solution
technique:

20. ∗ We must allocate a very small amount of material movement
(call it ε) to any independent cell
∗ An independent cell is any one where we can not complete a
“stepping motion” of only horizontal and vertical movements
through filled cells to return to the originating cell
∗ We call this the θ-path. (this would be done by alternating adding or subtracting
assignments of material to any filled cell we step on)
∗ Note any cell were a path can be build is a dependent cell
∗ We would add sufficient ε’s to reach allocated cells count of m
+ n – 1 number (make the solution non-degenerate)
∗ Here since R1C1 is independent – check for yourself – we will
fill it with ε units – this makes our solution non-degenerate – 5
cells are allocated!
Dealing with Degeneracy (when it is found)

21. ∗ We will explore the MODI (modified
distribution) algorithm
∗ After finding a non-degenerate initial solution,
add a row of Kj’s and a column of Ri’s to the
Matrix
∗ To begin, Assign a zero value to any R or K
position
∗ For each allocated cell, the following
expression must be satisfied:
∗ Ri + Kj + ci,j = 0
Entering Phase II: Determining
Optimality

22. ∗ Examine all indicator values for empty cells – if all are
non-negative the solution is optimal
∗ If some are negative then develop a θ-path beginning at
most negative cell (here is R3C3)
∗ Complete the θ-path by stepping only to filled cells (and
pivoting) while alternatively subtracting then adding θ
allocation
∗ After completing the path, determine the “-θ” cell with
the smallest quantity and choose its value for “θ” –
substitute it along the whole path
∗ Note here: all indicators are positive thus we have the
optimal solution!
MODI continued:

23. ∗ All indicators are now positive – this indicates
an optimal solution!
∗ Note this agrees with optimal solution found
earlier!!!
∗ Relax ε value to zero – makes cell 1,1 allocation
100 units
∗ Optimal transportation cost is:
∗ 5*100 + 4*200 + 3*100 + 9*200 + 5*100 = 3900
Looking at this Matrix

24. ∗ Optimal Value = $3900 (as we found ‘by hand’!)
∗ Ship: 100 DM-A; 200 FL-A; 200 E-B; 100 E-C; 100 FL-C
∗ All as we found using the VAM Heuristic
∗ Much Faster and easier using LP!
Examining Results:

25. ∗ When a system is allowed to use intermediate
‘warehousing’ sites – they are Source sites or
even Sink sites in regular transportation problem
– for reducing the total cost of transportation we
call the problem the transshipment network
problem
∗ We require more costs to be obtained but
typically, in most complex S. Chains, companies
find savings of from 7 to 15% (or more) in
implementations that allow transshipment
Expansion to Transshipment Problem

26. ∗ This problem is usually one of very large scale
(classically called the Traveling Salesman Problem)
∗ Because of this, we typically can not find an
absolutely optimal solution but rather only near
optimal solution – as seen in our textbook
∗ Here, the knowns are the costs of travel from point to point
throughout the network and we try to save costs by “ganging
up” trips
∗ Solution typically follows along a line of attack based
on the “Assignment Problem”
∗ See Handout, focus on the Shortest Route Problem
Another Level of Transport – the delivery
route problem

27. ∗ Realistically, a delivery vehicle can only
carry so much – so this may reduce
effectiveness of solutions
∗ Delivery’s take Real Time – again this
must be considered during scheduling
and routing
∗ Loading of vehicles is very critical to
control step 2 time – load in reverse
delivery order!
Delivery Optimization:

28. ∗ Considerations:
∗ Labor Climate
∗ Transportation issues:
∗ Proximity to markets
∗ Proximity to suppliers & resources
∗ Proximity to parent company (sharing expertise,
purchasing, drop routing) – could be plus or minus!
∗ Quality of transportation system
Looking at the Locating of New Facilities:

29. ∗ Consideration, cont.
∗ Costs to operate (utilities, taxes, real estate costs,
construction)
∗ Expansion considerations
∗ Room available for growth?
∗ Construction to modify structure?
∗ Any local incentives to re-locate?
∗ Quality of Life (schools, recreational possibilities, health
care – cost, availability)
Looking at the Locating of New Facilities:

30. ∗ Most organization compare several alternatives
∗ They identify weighting factors for the characteristics then
narrow choices
∗ 1st
consider regions
∗ 2nd
narrow search to communities
∗ 3rd
consider specific sites
∗ Done by collecting data addressing the various factors under
study
∗ After data is collected and weighted, make selection
(typically by starting with quantitative decision follow with
qualitative analysis)
Looking at the Locating of New Facilities:

31. ∗ In the final analysis the decision typically comes down
to a “Center of Gravity Solution” that minimizes the
total travel distance between the Facility and all
possible Contact facilities
∗ Contact facilities may be sources of Raw Materials or
other Suppliers or they may be destinations for Product
stored in or made at the new facility under design
Location Decisions in SCM:

32. Lets Consider an Example:
(where should we put our
new Distribution Center?)

33. ∗ Outsourcing of the logistics function (example: Saturn
outsourced their logistics to Ryder Trucks. Outsourcing of
manufacturing is a major trend these days)
∗ Moving towards more web based transactions systems
∗ Improving the information flows along the entire chain
Trends in Supply Chain Management

34. ∗ Moving manufacturing offshore to save direct costs
complicates and adds expense to supply chain
operations, due to:
∗ increased inventory in the pipeline
∗ Infrastructure problems
∗ Political problems
∗ Dealing with fluctuating exchange rates
∗ Obtaining skilled labor
Global Concerns in SCM