You are on page 1of 249

Day-1

Definition, Nature and Principles of Supply Chain Management (SCM)

Session Speaker K.M. Sharath Kumar


M.S Ramaiah School of Advanced Studies - Bangalore

Session Objectives
To understand the role of Supply Chain Management in Manufacturing and Service Organisations To critique the impact of Supply Chain in gaining competitive advantage To assimilate the legal framework and negotiation tactics in cross cross-border border transactions

M.S Ramaiah School of Advanced Studies - Bangalore

Session Outline

History Hi t of f logistics l i ti and d Supply S l Chain Ch i Management M t (SCM) Objectives of SCM Ch ll Challenges and d opportunities i i in i Machine M hi Tool T l industry i d supply chain Kraljics matri matrix Cross-border negotiation L lf Legal framework ki in cross b border d negotiation ti ti

M.S Ramaiah School of Advanced Studies - Bangalore

Rationale for SCM


Adding Value in Every Thing We Do

M.S Ramaiah School of Advanced Studies - Bangalore

M.S Ramaiah School of Advanced Studies - Bangalore

Rationale for Logistics and Supply Chain g ( (SCM) ) Management


Defeat of the British in the American war of Independence: At the height of war, 12000 troops had to be equipped and fed from the far away Britain.

Gulf war in 1991: Half a million people and half a million tones o es o of equ equipment p e had ad to o be a airlifted ed 12,000 ,000 km w with a further u e 2.3 million tones of equipment moved by sea- all in impossible time frames.

M.S Ramaiah School of Advanced Studies - Bangalore

Supply Chain Management (SCM)(SCM) Definition


Here are two definitions: The h design and management of f seamless, value-added process across organisational boundaries to meet the real needs of the end customer

- Institute for Supply Management

M.S Ramaiah School of Advanced Studies - Bangalore

Supply Chain Management (SCM)(SCM) Definition


Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer. -The Supply Chain Council

M.S Ramaiah School of Advanced Studies - Bangalore

SCM : Schematic

M.S Ramaiah School of Advanced Studies - Bangalore

Evolutionary Timeline of SCM

M.S Ramaiah School of Advanced Studies - Bangalore

10

A business process
Cost Timeliness Performance Product Interface

Customer S Service S ii I Service Interface I Interface tt ff T h l Technology I Interface t f

O Organisation i i Individual Society Processes

P d Products Automation 11

M.S Ramaiah School of Advanced Studies - Bangalore

Value created and added by outside firm providing MIS

Value created and delivered by supplier

Value created and delivered by purchasing and materials management

Value created and delivered by production/ operations management

Value created and delivered by Finance, HR and Marketing

Total value created and delivered for customer

Value created and added by outside firm providing Logistics M.S Ramaiah School of Advanced Studies - Bangalore

12

SUPPLY CHAIN
Customer

Enterprise Processes

Supplier

Enquiries Quotations Orders Supplies Invoices Money


M.S Ramaiah School of Advanced Studies - Bangalore

13

One Variant 6,200 Distinct Parts Imported from 17 Countries From 240 Suppliers Assembled in 1 Plant Within few minutes Exported to 34 Countries Same day Without becoming inventory!

Suzuki Grand Vitara

14

Competition is no longer between Companies: It is between supply chains

M.S Ramaiah School of Advanced Studies - Bangalore

15

Value Chain

M.S Ramaiah School of Advanced Studies - Bangalore

16

Cost

Quality
4

P l People

Technology

Delivery & Service

M.S Ramaiah School of Advanced Studies - Bangalore

17

Succeed in Technology by Connecting with People

M.S Ramaiah School of Advanced Studies - Bangalore

18

M.S Ramaiah School of Advanced Studies - Bangalore

19

2010 Onwards

Achieve Competitive p Advantage g by: y

Focusing on both Core and NonCore Competencies


Ford Company Scenario
M.S Ramaiah School of Advanced Studies - Bangalore

20

Aston Martin

M.S Ramaiah School of Advanced Studies - Bangalore

21

Ford India introduces its Roadside Assistance (RSA) service in Agra


- 21 July 2010, Business Line

M.S Ramaiah School of Advanced Studies - Bangalore

22

Riding Solo, Honda Shifts to Top Gear on 22 wheelers Company p y to focus f on new models, , expand p dealer network

Mr S Shinji j Aoyama oy
Source: Business Line, 5 January 2011
M.S Ramaiah School of Advanced Studies - Bangalore

23

We have combined the leading edge technology of Nissan with ith A Ashok h kL Leyland l d Li Limited's it d' d delivery li capability bilit to t complete l t the th project j t in i a cost t effective ff ti manner". "

Nissan Motor senior vice President and the JV chairman Dr. Andy y Palmer
M.S Ramaiah School of Advanced Studies - Bangalore

24

Alto in India is Rs. Rs 1 lakh cheaper p than in China


- Shinzo Nakanishi, MD and CEO of MSIL
(09 Aug A 2010, 2010 Economic E i Times) Ti )
M.S Ramaiah School of Advanced Studies - Bangalore

25

Customers get Ambushed

M.S Ramaiah School of Advanced Studies - Bangalore

26

Ambushed Every Where

M.S Ramaiah School of Advanced Studies - Bangalore

27

What SCM is not ? SCM is not :


Buying Developing suppliers Logistics Warehousing Inventory Control Kanban M k B d Make-Buy decision ii Manufacturing Distribution

o Blind man touching elephant o All these together g ?

M.S Ramaiah School of Advanced Studies - Bangalore

28

Bottom line Situation Bottom-line


SCM looks l k at t the th process from f b i i beginning t end to d holistically in a seamless way instead of glorifying unduly/underplaying y p y g an in-between event as stand alone The customer does not see, does not have to see, the glorification of any event. He just wants the product/service early and cheap. He is not impressed if you just improve the situation by working on logistics, logistics or shorten the manufacturing lead time or you do all and even more, but still do not deliver results.

M.S Ramaiah School of Advanced Studies - Bangalore

29

Some Examples
You ou ge get Dell e laptop p op in 10 0d days ys after e o ordering. de g. They ey in turn u order all parts to their vendors only after you order. Incidentally the beautiful consignment reaches your doorsteps. Seven KMs above ground level, on a London bound flight from Bangalore at 7 am, when Thames is almost in sight, you get Vada Sambar, Sambar very tasty, tasty more or less so at least. least Sitting in Bangalore, Bangalore through internet you book a 2nd class ticket from Varanasi to Pratabgarh ten days before. The ticket is delivered to your e-mail ID.
M.S Ramaiah School of Advanced Studies - Bangalore

30

SCM is at play behind all this amazing transformation in Value Chain

M.S Ramaiah School of Advanced Studies - Bangalore

31

Fit Between Corporate p and Functional Strategies (Chopra & Meindl)


Corporate Competitive Strategy

Product Development Strategy

Supply pp y Chain or Operations Strategy

Marketing and Sales Strategy

Information Technology Strategy Finance Strategy Human Resources Strategy


M.S Ramaiah School of Advanced Studies - Bangalore

32

The primary drivers drivers for achieving strategic fit in Supply Chain Strategy (adapted from Chopra & Meindl)

Corporate Strategy

Supply pp y Chain Strategy gy Efficiency Responsiveness

Facilities

Inventory y

Transportation p

Information

Market S Segmentation t ti 33

M.S Ramaiah School of Advanced Studies - Bangalore

M.S Ramaiah School of Advanced Studies - Bangalore

34

M.S Ramaiah School of Advanced Studies - Bangalore

35

Importance of Supply Chain Management? Cont.


Firms with Supply Chain Management: 1 Start with key suppliers and move on to 1. other suppliers. 2 Similar protocol for customers and 2. shippers as well. 3. Integrate second tier suppliers and customers. (second tier refers to the customers ( customers and the suppliers suppliers)
M.S Ramaiah School of Advanced Studies - Bangalore

36

Objectives of SCM

M.S Ramaiah School of Advanced Studies - Bangalore

37

Objectives of a Supply Chain


Maximise overall value created pp y chain value: difference between what the final Supply product is worth to the customer and the effort the supply chain expends in filling the customers request V l i Value is correlated l t dt to supply l chain h i profitability fit bilit (difference between revenue generated from the customer and the overall cost across the supply pp y chain) ) Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) Increase Supply chain profitability (total profit to be shared across all stages of the s supply ppl chain) Balance Supply and Demand
M.S Ramaiah School of Advanced Studies - Bangalore

38

Components of Supply Chain Management

M.S Ramaiah School of Advanced Studies - Bangalore

39

Supply Chain
Organisations must embrace technologies that can effectively ff i l manage and d oversee their h i supply l chains h i

Distribution or disposal
M.S Ramaiah School of Advanced Studies - Bangalore

40

Benefits of SCM

Inventory I t reduction d ti Productivity Improvement P Personnel l reduction d ti Cost reduction High customer satisfaction Increased profit On time delivery fulfillment On-time Revenue/profit increase Better cash management Better order management
M.S Ramaiah School of Advanced Studies - Bangalore

41

Past and Future


G GLOBALISATION O S ON Whether for buying or selling, no one confines to his own y these days. y country
50% under garments in the world are from Tiruppur, India In Indian Super markets, imported potato wafers compete with l l brands. local b d Roses are exported from India daily. Many international brands of Gadgets to day do not put place of manufacture any more because they cannot assign any one country for adding maximum value in the supply chain. E.q.,
Philips Black and Decker

M.S Ramaiah School of Advanced Studies - Bangalore

42

Supply Chain Competitiveness

Competitor C i Competition Competitiveness

M.S Ramaiah School of Advanced Studies - Bangalore

43

M.S Ramaiah School of Advanced Studies - Bangalore

44

Source: Presentation from K.C. Manjunath, GE-Triveni


M.S Ramaiah School of Advanced Studies - Bangalore

45

Supply Chain Competitiveness : Toyota Way


When Toyota developed Prius hybrid car, a core part of computer system, Insulated Gate Bipolar Transistor had to be developed. Toyota was not good at semiconductors. But they decided to develop and put up a new plant for Manufacture. Why? Toyota wanted Self-reliance as this Technology would lead to f t future & will ill give i th them competitive titi advantage d t

M.S Ramaiah School of Advanced Studies - Bangalore

46

SCM : Activities

M.S Ramaiah School of Advanced Studies - Bangalore

47

Effects of Supply Chain Problems


Problems with the Supply Chain have caused armies to lose wars & companies p to g go out of business, ,f for example p
I WWII In WWII, G Germany encountered problems supplying troops in Russia, which contributed to their collapse. collapse

In 1999 ToysRUS had problems supplying to holiday shoppers & lost business.

M.S Ramaiah School of Advanced Studies - Bangalore

48

Sources of Supply Chain Problems


UNCERTAINTY
In demand forecast In delivery times & production delays

POOR COORDINATION
With Internal units and business partners Ineffective customer service High inventory costs, loss of revenue & extra cost for expediting services. i

M.S Ramaiah School of Advanced Studies - Bangalore

49

B ll whip Bull hi or D Dragon H Head d

M.S Ramaiah School of Advanced Studies - Bangalore

50

B ll hip Effect Bullwhip


Occurs when slight demand variability is magnified as information moves back upstream

M.S Ramaiah School of Advanced Studies - Bangalore

51

Equilibrium q & Bull whipped pp


Information
Products & Services
10 Units 10 Units 10 Units

Suppliers

Producers

Products & Products & Services Distributors Services


10 Units 10 Units 10 Units

Retailers

Cash Information Flow


Suppliers Products & Services
80 Units 160 Units 80 Units

Producers Products & Distributors Products & Services Services


40 Units 40 Units 20 Units

Retailers

Cash Flow
M.S Ramaiah School of Advanced Studies - Bangalore

52

Shrinking Uncertainty in SC

Source:

M.S Ramaiah School of Advanced Studies - Bangalore

53

Buyer-Supplier Relationship
Exit Exit Voice Loyalty Loyalty

M.S Ramaiah School of Advanced Studies - Bangalore

54

Sustainability is the Way Forward


Mulling g new supplier pp system y to minimise natural disaster: Boeing
Source: 4 July 2011, Reuters

M.S Ramaiah School of Advanced Studies - Bangalore

55

Evolution of the Indian Machine Tool Industry


Phase Ph 1: 1 The Th E Early l Y Years (th (three clusters) l t ) Phase Ph 2 : End E d of f the th Golden G ld Y Years Ph Phase 3 1968 to 1983 1983: A Access to I International i l Technology T h l via Collaborations becomes Difficult Phase 4 : The 1980s Open General License (OGL) Phase 5 The 1990s: The Liberalisation Years
M.S Ramaiah School of Advanced Studies - Bangalore

56

Introduction to Machine Tool Industry y


Indian Machine tool industry grew 13% annually over 2008-11 (TAGMA) Indian Machine tool makers target 67% domestic market share by 2020 (IMTMA) As per available statistics (4th Census of MSME Sector), this sector employs p y an estimated 59.7 million p persons spread p over 26.1 million enterprises It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country
M.S Ramaiah School of Advanced Studies - Bangalore

57

International Comparison of Machine Tool Industries


Japan: - Massive and low cost production with higher reliability and flexibility y CNC machine tools - Collaborative development of components with oversea suppliers li has h been b considered id d important i business b i Germany: - Associations play an important role in promoting collaborations - Industrial policies have been effective in strengthening upstream, downstream supply chains and collaborations
M.S Ramaiah School of Advanced Studies - Bangalore

58

International Comparison of Machine Tool Industries Contd.


Italy: - Innovation networks have been in the form of clusters USA: - Composed of SMEs - Grappling because of lack of coordination in technology standardisation d di i - Short term transaction relationship between manufacturer supplier and clients manufacturer, China: - Picked up from 1995 in the form of scattered SMEs - Further diversified into metal cutting and metal forming i d t industry
M.S Ramaiah School of Advanced Studies - Bangalore

59

Auto sector to drive Die and Machine Tool Industry y in India


constitutes 50% of Die & Machine Tool market - TAGMA and d IMTMA
M.S Ramaiah School of Advanced Studies - Bangalore

60

An Estimate of Potential about Machine Tool Industry


The two-wheeler industry adding a capacity of 700,000 vehicles every year, calls for an overall investment of close to Rs 1,000 crore (Rs 10 billion) per annum, of which at least 60 per cent would be in the form of machine tools.
Sou ce: Source:

M.S Ramaiah School of Advanced Studies - Bangalore

61

Machine Tool Industry SC Challenges


D Due to t capacity it constraints t i t in i Indian I di machine hi tool t l industries, i d ti European, Taiwanese and Korean machine tool makers are harvesting the Indian orders With the need to frequently introduce new models as a competitive measure, design and supply of such machine tools needs to be intact with high flexibility Vendors rarely y stick to delivery y commitments in comparison p with international counterparts

M.S Ramaiah School of Advanced Studies - Bangalore

62

Machine Tool Industry SC Challenges Contd.


N Need d to t invest i t substantially b t ti ll more in i IT on the th business b i side, id such as SCM and CRM in order to handle complaints before they become a source of friction Change relationships with parts vendors to become partners in development rather than not being just customers Many critical components of a modern CNC machine tool are not made in the country y

M.S Ramaiah School of Advanced Studies - Bangalore

63

Machine Tool Industry SC Challenges Contd.


S Sophisticated hi ti t d machinery, hi short h t product d t life-cycles, lif l and d demanding user requirements have increased competition in the machine tool market Small and medium enterprises (SMEs) face problems in coordinating their supply chain due to lack of resources and improper directions

M.S Ramaiah School of Advanced Studies - Bangalore

64

A Case

Bharat Fritz Werner Ltd. was able to develop p and deliver, a complex nine-axis CNC multitasking machine for machining rear axle housings of commercial vehicles in a single set t up

M.S Ramaiah School of Advanced Studies - Bangalore

65

Machine Tool Industry SC Opportunities


T Two-wheeler h l sector t is i today t d importing i ti nearly l two-thirds t thi d of f its requirements of machine tools Improve delivery capability through better internal practices by maximising in in-built built capacity Scope for exporting machine tools from here to countries such as Poland, Czechoslovakia and Turkey, which are emerging g g as major j auto component p suppliers pp to western Europe and west Asia, despite competition from Taiwan and Korea
M.S Ramaiah School of Advanced Studies - Bangalore

66

Machine Tool Industry SC Opportunities Contd.


D Due t to shortening h t i of f a product's d t' lif life cycle, l companies i are t to focus on their service offers in order to ensure an advantage in competition Scope for collaborative design of tools, tools digital manufacturing systems, and integrated production management systems, to augment new products to market Strategic g collaborations by y integrating g g the upstream, p midstream, and downstream parts of their supply chains

M.S Ramaiah School of Advanced Studies - Bangalore

67

Machine Tool Industry SC Opportunities Contd.


Specialisation and coordination mechanism for technological innovation have been dynamically evolving Export opportunity exists to step up share of exports in the world market due to price competitiveness

M.S Ramaiah School of Advanced Studies - Bangalore

68

UK Manufacturers Take on the Supply Chain Challenge


Present Scenario (12 January 2012)
Source: MTD Website

M.S Ramaiah School of Advanced Studies - Bangalore

69

Rationale for the Study

SMEs should focus on information flow and mutual t l understanding d t di among the th members b of supply chain
Source: Rajesh K. K Singh Indian Institute of Foreign Trade (IIFT), New Delhi, Business Process Management g Journal, , Vol. 17 No. 4, , 2011,pp. ,pp 619-638
M.S Ramaiah School of Advanced Studies - Bangalore

70

Efficient Consumer Response (ECR)

Consumer: An orientation toward the needs of the consumer Efficient Response: A process optimisation of the supply chain oriented

M.S Ramaiah School of Advanced Studies - Bangalore

71

Efficient Consumer Response (ECR)


V Vertical ti l collaboration ll b ti i in manufacturing f t i and d retailing with the objective of an efficient satisfaction ti f ti of f consumer needs d All efforts should stand towards improved customer satisfaction
Source: Dr. Dr Dirk Seifert Harvard Business School
M.S Ramaiah School of Advanced Studies - Bangalore

72

Concept of ECR in SCM

Efficient replenishment Efficient administration Efficient operating standards

M.S Ramaiah School of Advanced Studies - Bangalore

73

Collaborative Planning Forecasting Replenishment (CPFR)


Definition: f Sharing of forecast and related business information among trading partners in the supply chain to enable automatic product replenishment. replenishment American Production and Inventory Control Society (APICS). Objective of CPFR- optimize supply chain through improved demand forecasts, with the right product delivered at right time to the right location, with reduced inventories, avoidance of stock stockouts, & improved customer service. Value of CPFR- broad and open exchange of forecasting information to improve forecasting accuracy where both the buyer and seller collaborate through joint knowledge of base sales, promotions, store openings or closings, & new product introductions introductions.
M.S Ramaiah School of Advanced Studies - Bangalore

74

Wal-Mart, , Warner-Lambert SAP H Hyundai d i VAATZ C Concept Open Standards,Broad Requirements & S t Systematic ti Integration I t ti
M.S Ramaiah School of Advanced Studies - Bangalore

75

What Collaboration Should Be?


Do D Things Thi Differently Diff tl B2B Extranet Planning Systems Advantage-Strategic Strategic Competitive Advantage Competitive Duration-Medium to Long Drivers-Cost D i C t Eli Elimination i ti through th h synchronization Barriers-Medium Technology;Large People
M.S Ramaiah School of Advanced Studies - Bangalore

76

THE CPFR 9 STEPS


Develop p Collaborative Arrangement g What info are we going to Share? Create Joint Business Plan How are we going to do business? Create Sales Forecast What does the future look like? Identify Exceptions for Sales Forecast What we know that the supplier doesnt What the supplier knows that we dont
M.S Ramaiah School of Advanced Studies - Bangalore

77

THE CPFR 9 STEPS..contd


Resolve/Collaborate on Exception Items How are we going to overcome the exceptions?

Create C O Order Forecast


What can we live with and move forward with?

Identify Exceptions for Order Forecast R Resolve/Collaborate l /C ll b t on Exception E ti Items


Generate the Orders
M.S Ramaiah School of Advanced Studies - Bangalore

78

BEFORE CPFR LIMITED COLLABORATION


Od Order

1. 2

Government

Vendor

Characteristics:
Limited visibility of future demand requirements Both partners forecast independently Outages cause adversarial relationships
Inventories to buffer against unexpected demand

M.S Ramaiah School of Advanced Studies - Bangalore

79

POST CPFR
Government

Collaborative Arrangement
Retailer Sales Forecast 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,559 2,993 3,656 9,208 3,848 3,400 3,724 3,016 13,988

Joint Business Plan


Supplier Sales Forecast Joint Sal;es Needed OnForecast Display Units Hand 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 61 989 1,855 3,492 7,166 0 7,308 10,273 15,735 14,719 15,146 14,840 22,124 21,803 -7,838 -4,567 -6,389 -7,084 0 0 2,773 10,845 61 989 1,855 719 -3,679 0 0 0 0 0 0 0 0 On-Hand Receipt Need 0 0 0 0 0

Sales Forecast Firm Order Collaboration Past Fzn Zone


Order

Order Forecasts with tolerances

Order

Order

Order

361 361 0

Characteristics:
Dual insights provide a better forecast demand Long term view of demand requirements partners j jointly y forecast Both p Earlier visibility of issues through the exceptions Monitor POS data via the private exchange/web portal; p ; compare p to forecast Focus of relationship becomes win-win M.S Ramaiah School of Advanced Studies - Bangalore

Vendor

80

Summary y
In order to smoothen the supply pp y chain bull whip, p , we need accurate visibility of demands: CPFR is an industry standard guideline for collaboration Collaboration requires q trust Collaboration is a transformational strategy Roles and responsibilities can change Collaboration facilitates long-term B2B relationships Collaborative C ll b ti partnerships t hi must tb be win i / win i Collaborative benefits can be huge!
M.S Ramaiah School of Advanced Studies - Bangalore

81

Global Supply Chains


Some of the issues involved in global supply chains; legal issues, customs fees and taxes language and cultural differences fast changes in currency exchange rates political instabilities.

Global Supply Chains = Supply chains that involve suppliers and/or customers in other countries.

M.S Ramaiah School of Advanced Studies - Bangalore

82

Principles and Standards for Ethical Supply pp y Management g Conduct


LOYALTY TO YOUR ORGANISATION JUSTICE TO THOSE WITH WHOM YOU DEAL FAITH IN YOUR PROFESSION

M.S Ramaiah School of Advanced Studies - Bangalore

83

Business Culture
Western Perfectionist Engineer Planning g Facts matter p Mauls for non-compliance Single task at a time Indian Functionalist Businessman Improvisation p People matter Bonus for success Multi-task at a time

M.S Ramaiah School of Advanced Studies - Bangalore

84

Supplier Negotiation and Sourcing Challenges

M.S Ramaiah School of Advanced Studies - Bangalore

85

Evaluating & Selecting Key Suppliers


When evaluating Wh l ti suppliers li f for a strategic t t i partnering, purchase cost becomes relatively less important. -Tata Nano V/S A-Segment Cars Key Supplier Selection is conducted by a cross functional team selection approach pp wherein purchasing staff, primary users, product designers, and manufacturing personnel participate. - Buyer Audit
M.S Ramaiah School of Advanced Studies - Bangalore

86

M.S Ramaiah School of Advanced Studies - Bangalore

87

Kraljics Matrix

M.S Ramaiah School of Advanced Studies - Bangalore

88

Kraljics Matrix

M.S Ramaiah School of Advanced Studies - Bangalore

89

STRATEGIC SOURCING FOR SUCCESFUL SUPPLY CHAIN MANAGEMENT

Why Strategic Sourcing?


- Lehman Brothers Case

M.S Ramaiah School of Advanced Studies - Bangalore

90

M.S Ramaiah School of Advanced Studies - Bangalore

91

M.S Ramaiah School of Advanced Studies - Bangalore

92

M.S Ramaiah School of Advanced Studies - Bangalore

93

TYPES OF SUPPLIERS
TECHNOLOGY MACHINERY/CAPITAL EQUIPMENT RAW MATERIAL COMPONENTS FINISHED PRODUCTS

M.S Ramaiah School of Advanced Studies - Bangalore

94

NEED FOR GLOBAL SUPPLIERS

QUALITY TECHNOLOGY COST SERVICE

M.S Ramaiah School of Advanced Studies - Bangalore

95

GENERALLY NON NON-NEGOTIABLE NEGOTIABLE ITEMS

SPECIFICATIONS PAYMENT TERMS

M.S Ramaiah School of Advanced Studies - Bangalore

96

ISSUES IN NEGOTIATION

CULTURE EXCHANGE RATE DEGREE OF TRANSPARENCY REQUIRED OUR MINDSET/ OUR MANAGEMENTS MINDSET

M.S Ramaiah School of Advanced Studies - Bangalore

97

Supplier Strategies
Pl Plans to t h help l achieve hi company mission i i Affect long-term competitive position Strategic options
Many y suppliers pp Few suppliers Keiretsu network Vertical integration Virtual V tua company co pa y

Pl Plan

1995 Corel Corp.

M.S Ramaiah School of Advanced Studies - Bangalore

98

Daimler Chryslers Supplier Cost Reduction Effort


Supplier
Rockwell Rockwell

Suggestion
Use passenger car door locks on trucks Simplify design/substitute materials on manual window system Change tooling for woodgrain panels to allow three from one die Change wiper-blade formulation Exterior lighting suggestions

Model
Dodge trucks Various

Savings
$280,000 $300,000

3M

Caravan, Voyager Various

$1,500,000

Trico

$140,000

Leslie Metal Arts

Various

$1,500,000

M.S Ramaiah School of Advanced Studies - Bangalore

99

Many Suppliers Strategy


Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic POs High prices Infrequent, large lots Delivery to receiving dock

1995 Corel Corp.

M.S Ramaiah School of Advanced Studies - Bangalore

100

Few Suppliers Strategy


1 or few sources per item Partnership (JIT) Long-term, stable On-site audits & visits Exclusive contracts Low prices (large orders) Frequent, small lots Delivery to point of use

1995 995 Corel Corp.

101

Tactics for Close Supplier Relationships


Tactic
Red Reduce ce total n number mber of suppliers Certify suppliers
Results Average 20% reduction in 5 years

Ask for JIT delivery from key y suppliers pp Involve key suppliers in new product design Develop software linkages to suppliers li
M.S Ramaiah School of Advanced Studies - Bangalore

102

Vertical Integration Strategy


Ability to produce goods previously purchased
Setup operations Buy supplier Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)
103

Make-buy issue Major financial commitment Hard to do all things well


M.S Ramaiah School of Advanced Studies - Bangalore

Forms of Vertical Integration


Iron Ore Silicon Farming Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)

Steel

Flour Milling

Automobiles

Integrated Circuits

Distribution System

Circuit Boards Computers Watches Calculators

Dealers

Baked Goods

M.S Ramaiah School of Advanced Studies - Bangalore

104

Keiretsu Network Strategy


Japanese word for affiliated affiliated chain chain System of mutual alliances and cross-ownership hi
Company stock is held by allied firms

Lowers need for short-term profits pp distributors, & Links manufacturers, suppliers, lenders
Partnerships p extend across entire supply pp y chain

M.S Ramaiah School of Advanced Studies - Bangalore

105

Virtual Company Strategy


Network of independent companies
Linked by technology
PCs, faxes, Internet etc.

Each contributes core competencies Typically provide services


Payroll, editing, designing

May be long or short-term


Usually, only until opportunity is met
1995 Corel Corp.

M.S Ramaiah School of Advanced Studies - Bangalore

106

Overview of Global Procurement:


Cross Border Negotiations
Interpretation, Enforcement and Dispute Resolution

M.S Ramaiah School of Advanced Studies - Bangalore

107

Precedence's Precedence s are Referred but not Followed


Sales Act High Court Verdict on S/W CDs C Common Law L (P (Prone to Ch Changes) )

M.S Ramaiah School of Advanced Studies - Bangalore

108

Legal System Framework


Category 1
Supreme Court, Federal Apex Judiciary

Category 2
II round Takes 10-12 months Court of last resort I round Takes 6 months

Category 3

High Court

District/Province/Civil Court

50-60% disputes p sorted Takes 24 30 months

M.S Ramaiah School of Advanced Studies - Bangalore

109

Legal System Framework


Category 1 Category 2
Arbitration Alternative to litigation

Category 3

Special Jurisdiction

Place of evidence is very vital

Headed by professionals not t judges j d Three member committee Two Industry Veterans and one retired j judge g
M.S Ramaiah School of Advanced Studies - Bangalore

110

Points to Remember
C Contract t t dispute di t b between t any t two companies i cannot t violate i l t the Country law Law to be referred has to be mentioned in the contract Ex: Bombay court may look into Hongkong/Singapore laws to deal with broadcasting rights Choice of Forum Depending on the issue Choice of Law Decided by Parties

M.S Ramaiah School of Advanced Studies - Bangalore

111

Legal System Framework


Category 1 Category 2 Category 3

Regulators

Example:
TRAI SEBI AAI etc.
M.S Ramaiah School of Advanced Studies - Bangalore

112

Cross Border Negotiations

M.S Ramaiah School of Advanced Studies - Bangalore

113

What is Negotiation? g It is the art of creating agreement on a specific issue between two (or more) parties with 4 differing views (Win/Loose, Win/Win, Loose/Loose, Loose/Win) imparting or conveying ideas, views or information from the mind of one person to the mind of the other. What is Purchasing? The activity of acquiring goods or services to accomplish the goals of an organisation. What is Purchasing Negotiation? A process in a finite number of steps consisting mainly of alternate proposals and counter-proposals or a form of cooperation with both common and opposed interests with two or more parties.
M.S Ramaiah School of Advanced Studies - Bangalore

114

Golden Rules of Negotiation


1 FORM 1. 2 People Buy People First 2. 3 Buyers 3. Buyers are liars and Non Non-Buyers Buyers are bigger liars 4 Emotion Sells and Logic solidifies the sale 4. 5 Never 5. N Gi Give U Up 6 PMA and 6. dK Keep S Smiling ili
M.S Ramaiah School of Advanced Studies - Bangalore

115

Role Play

M.S Ramaiah School of Advanced Studies - Bangalore

116

Session Summary
Meaning and definition of Supply Chain Management has been explained. Special cases with respect to advantages of SCM has been discussed. Current trends of Supply Chain and its impact have b been elucidated. l id d

M.S Ramaiah School of Advanced Studies - Bangalore

117

Day-2

Manufacturing Logistics and Make or Buy Decisions


Session Speaker K.M. Sharath Kumar
M.S Ramaiah School of Advanced Studies - Bangalore

Session Objectives

To ascertain the key factors to optimise logistics process To assimilate the factors to be considered for Make or Buy decisions To match supply chain strategies with products

M.S Ramaiah School of Advanced Studies - Bangalore

Session Outline

Logistics strategies Make or Buy Factors to be considered Span of Process Push vs. Pull Scheduling Hybrid approach for supply chain

M.S Ramaiah School of Advanced Studies - Bangalore

Manufacturing Logistics

M.S Ramaiah School of Advanced Studies - Bangalore

CLM DEFINITION OF LOGISTICS


.is that part of the supply chain process that plans, implements, and controls the efficient, effective
flow and storage of goods, services, and related information from the point-of-origin to the point-ofconsumption in order to meet customers' requirements.
Council of Logistics Management, 1998; www.CLM1.org

M.S Ramaiah School of Advanced Studies - Bangalore

Logistics - Science of managing (controlling) the movement and storage of goods (or people) from acquisition to consumption. Goods: Raw Materials Final products, and everything in between.

Movement Storage

= Transportation (between locations). = Inventory, Warehousing (at locations).

Difference between acquisition and consumption is a matter of space and time.

NOTE: Logistics does not deal with Technology of Production, such as the design of machines, vehicles and the design of finished products.
M.S Ramaiah School of Advanced Studies - Bangalore

Source: Presentation by Mr. K.C. Manjunath, Triveni Engineering Ltd.


M.S Ramaiah School of Advanced Studies - Bangalore

Five Business Systems - Tightly Interconnected within the Organization


Management Strategic Systems
Decisions Measurement Decisions Reward Decisions Price Decisions Place (How, where, how much) Product Decisions Product Design Decisions Process Design Decisions

}
Promotion Decisions Production Capacity Decisions Production Scheduling Decisions Shop Floor Decisions

Engineering Systems

Logistics Systems

Marketing Systems

Inventory Decisions

Transportation Decisions

Sourcing Decisions

Manufacturing Systems

M.S Ramaiah School of Advanced Studies - Bangalore

Logistics Mission [A Bill of Rights]


Logistics embodies the effort to deliver: the right product in the right quantity in the right condition to the right place at the right time for the right customer at the right cost

M.S Ramaiah School of Advanced Studies - Bangalore

Activities and Logistics Decisions


Transportation
rate and contract negotiation mode and service selection routing and scheduling

Customer Service
determining customer wants determining customer response to service changes

Inventories
finished goods policies supply scheduling short term forecasting

Materials Handling
equipment selection equipment replacement order picking procedures

Warehousing
private vs. public space determination warehouse configuration Stock layout and dock design stock placement Cross-docking

Packaging design Order Processing


order procedure determination

Facility Location
determining location, number and size of facilities allocating demand t o facilities

Coordinating Production Schedule


aggregate production quantities sequencing and timing of production runs 10

M.S Ramaiah School of Advanced Studies - Bangalore

Manufacturing Logistics
Physical Distribution
Recycling/ Returns/ Waste Disposal Location Communication

M.S Ramaiah School of Advanced Studies - Bangalore

11

Inbound & Outbound Logistics


SUPPLIER CUSTOMER

MANUFACTURING PROCESSES

INBOUND LOGISTICS

OUTBOUND LOGISTICS
12

M.S Ramaiah School of Advanced Studies - Bangalore

Reverse Logistics
To manage the flow & Storage of products and services, moving backwards through the supply chain Supply chains create waste due to packing New development in SCM includes the recycling of products and packing materials, disassembly of products for reuse, product returns for warranty claims
M.S Ramaiah School of Advanced Studies - Bangalore

13

TVS Logistics Case

M.S Ramaiah School of Advanced Studies - Bangalore

14

Air Asia Case

M.S Ramaiah School of Advanced Studies - Bangalore

15

Freight management goes online in Thiruvananthapuram Railway division


(August 24, 2010)

Freight Operating Information system will enable traders to monitor arrival of the freight train, plan out the receipt and dispatch of consignments to the intended locations, besides providing adequate time to arrange for labour.
M.S Ramaiah School of Advanced Studies - Bangalore

16

Importance of Logistics
Essential & Expensive - ( GDP ) 10 to 13% in India 8% in USA Bigger than the profit margin on goods Affects Financial Performance

M.S Ramaiah School of Advanced Studies - Bangalore

17

Logistics for life sciences still out in the cold


A goods carrier crossing a State border in India may have to wait anywhere between two to 24 hours to get the necessary clearances before it can enter the next State. Compare this to transit across borders in China, which takes between 15 minutes to two hours. Or in the EU, where the carrier usually does not have to wait for more than a few minutes. According to World Bank's Logistics Performance Index ranked India 47 with a score of 3.1 (world average 2.5) in 2010, dropping from 39 in 2007. The index evaluates the logistics performance of countries on the basis of following key dimensions such as Customs clearances, infrastructure, ease of shipment and tracking.

Source: Joint Study by DHL and Organisation of Pharmaceutical Producers of India , October 2011
M.S Ramaiah School of Advanced Studies - Bangalore

18

M.S Ramaiah School of Advanced Studies - Bangalore

19

Role of logistics managers in strategic decision


DISCUSSIONS & AGREEMENTS LOGISTICS MANAGER OTHER MANAGERS

BUSINESS STRATEGY

LOGISTICS STRATEGY

ROUTINE LOGISTICS DECISIONS

M.S Ramaiah School of Advanced Studies - Bangalore

20

M.S Ramaiah School of Advanced Studies - Bangalore

21

M.S Ramaiah School of Advanced Studies - Bangalore

22

Volvo-Case
Multi Axle Transport Solution

M.S Ramaiah School of Advanced Studies - Bangalore

23

Benefits
Equivalent to 5 : 2-Axle trucks Higher Average speed Less Breakdowns Transportation cost saving of 20-40% to Fleet owners Takes 16 m road space but the latter take 90 m Cut in fuel consumption by 50% Environmental safety

M.S Ramaiah School of Advanced Studies - Bangalore

24

Consolidation
Smaller Operators are shrinking Large players are outsourcing Shift towards bagging quality orders Warehousing etc.

M.S Ramaiah School of Advanced Studies - Bangalore

25

Volvos Fuel Cost


Typical Trucks Fuel Consumption Cost/Tonne KM Load Carried Fuel cost/Tonne KM 3.5 kmpl Rs. 4.60 10 Tonnes Re 0.46 Volvo Trucks 2.5 kmpl Rs. 6.40 30 Tonnes Re 0.21

M.S Ramaiah School of Advanced Studies - Bangalore

26

Conclusion

Big is Better

M.S Ramaiah School of Advanced Studies - Bangalore

27

Indian Government Initiatives


Allowing 100% FDI Eliminating CST and IT exemptions on Port development Projects Improving Multi Modal Transport and PPP

M.S Ramaiah School of Advanced Studies - Bangalore

28

Plan for multi-modal venture by 3 logistics PSUs


SCI, Concor, Central Warehousing Corporation would be equity partners

Source: BL, 5 January 2011


M.S Ramaiah School of Advanced Studies - Bangalore

29

Delhi may soon levy congestion fee on vehicles


08 April 2010 Source: ET

M.S Ramaiah School of Advanced Studies - Bangalore

30

Railways sees scope for greater logistics play


Source: ET, September 2011

M.S Ramaiah School of Advanced Studies - Bangalore

31

Make or Buy Decisions

M.S Ramaiah School of Advanced Studies - Bangalore

32

Make or Buy Choice


One of the key strategic issue in manufacturing is the decision regarding what to make and what to buy. Companies rarely make their own products/services from start to end. Mostly these decisions have been taken on an ad-hoc manner and lack adequate scientific consideration.

M.S Ramaiah School of Advanced Studies - Bangalore

33

Make or Buy Choice


Inability to make in-house (Technical capability High-Investment Low Utilisation) Retaining Core Technology

L & T Komatsu-Welding Robot


M.S Ramaiah School of Advanced Studies - Bangalore

34

Make or Buy Choice


BREAK EVEN ANALYSIS

TOTAL COST -BUY

COST TOTAL COST MAKE MAKE-FIXED COST MAKE-VARIABLE COST BREAK -EVEN VOLUME

M.S Ramaiah School of Advanced Studies - Bangalore

35

Span of Process

M.S Ramaiah School of Advanced Studies - Bangalore

36

Make-or-Buy Decisions
Reasons for Making
1. 2. 3. 4. 5. 6. 7. 8. Maintain core competence Lower production cost Unsuitable suppliers Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities Obtain desired quality Remove supplier collusion Obtain unique item that would entail a prohibitive commitment for a supplier 9. Protect personnel from a layoff 10. Protect proprietary design or quality 11. Increase or maintain size of company
M.S Ramaiah School of Advanced Studies - Bangalore

37

Make-or-Buy Decisions
Reasons for Buying
Frees management to deal with its core competence 2. Lower acquisition cost 3. Preserve supplier commitment 4. Obtain technical or management ability 5. Inadequate capacity 6. Reduce inventory costs 7. Ensure alternative sources 8. Inadequate managerial or technical resources 9. Reciprocity 10. Item is protected by a patent or trade secret
M.S Ramaiah School of Advanced Studies - Bangalore

1.

38

Framework for Make/Buy Decisions


Which component to Manufacture and what to Outsource? Identify Core Competencies and it should be made internally. Fine & Whitney Framework for Outsourcing Dependency on Capacity Dependency on Knowledge Toyotas outsourcing strategies
M.S Ramaiah School of Advanced Studies - Bangalore

39

Make/Buy Decisions
Product Dependent on Independent Independent knowledge of knowledge, of knowledge and capacity Dependent on and capacity capacity Outsourcing is Outsourcing is Opportunity to risky an opportunity reduce cost through outsourcing Outsourcing is Outsourcing is Keep very risky an option production internal
M.S Ramaiah School of Advanced Studies - Bangalore

Modular

Integral

40

Push and Pull Scheduling

M.S Ramaiah School of Advanced Studies - Bangalore

41

Effective SCM Pre-requisites


Efficient integration warehouses, and stores. of suppliers, manufacturers,

Coordinating activities across the supply chain Improve performance through cost reduction, increasing service level, reducing the bullwhip effect, better utilising resources, and effectively responding to changes

M.S Ramaiah School of Advanced Studies - Bangalore

42

Challenges can be met by Integration


Linking front-end customer demand and back-end production and manufacturing portion of the supply chain.

Various supply chain integration strategies:


Push, pull, pushpull strategy. Matching products and industries with supply chain strategies. Demand-driven supply chain strategies. The impact of the Internet on supply chain integration.

M.S Ramaiah School of Advanced Studies - Bangalore

43

What is Push and Pull?


MRP is the classic push system. The MRP system computes production schedule for all levels based on forecasts of end items sale. Once produced, subassemblies are pushed to next level whether needed or not. Typical PC Manufacturing JIT is the classic pull system. The basic mechanism is that production at one level only happens when initiated by a request at the higher level. That is, units are pulled through the system by request. Dells PC Manufacturing
M.S Ramaiah School of Advanced Studies - Bangalore

44

Comparison
These methods offer two completely different approaches to basic production planning Each has advantages over the ot her, but neither seems to be sufficient on its own. Both have advantages and disadvantages, suggesting that both methods could be useful in the same organisation.

M.S Ramaiah School of Advanced Studies - Bangalore

45

Push Vs. Pull Scheduling in SCM


Push Scheduling - Traditional Approach
- Move the Job when finished - Creates Excessive Inventory

Pull Scheduling
- Coordinated Production - Driven by Demand( Pulled thru system ) - Extensive use of visual triggers
M.S Ramaiah School of Advanced Studies - Bangalore

46

M.S Ramaiah School of Advanced Studies - Bangalore

47

Demand Pull

Customer D1 D2 D3 D4

Finished products, Demand forecast level

RDC1 Factory Warehouse

RDC2

Finished products

Finished products

Factory Warehouse

WIP

Sub Assemblies

Product Push

Vendors/Suppliers
M.S Ramaiah School of Advanced Studies - Bangalore

Components

48

Push-Pull Scheduling in Supply Chain


A Hybrid Approach in Todays Scenario

M.S Ramaiah School of Advanced Studies - Bangalore

49

Toyotas Manufacturing Strategy Dells PC Manufacturing Strategy

M.S Ramaiah School of Advanced Studies - Bangalore

50

Push-Pull Supply Chain


Initial Stages are operated in a push based manner whereas the remaining stage are operated in a pull based manner. Interface between the push based stage and pull based stage is known as the push-pull boundary Supply Chain Time Line

M.S Ramaiah School of Advanced Studies - Bangalore

51

Supply Chain Timeline

Push-pull supply chains

M.S Ramaiah School of Advanced Studies - Bangalore

52

General Framework for Time Line

Make a part of the product to stock generic product The point where differentiation has to be introduced is the push-pull boundary Based on extent of customisation, the position of boundary on the timeline is decided

M.S Ramaiah School of Advanced Studies - Bangalore

53

Matching Supply Chain Strategies with Products

Push-pull supply chains


M.S Ramaiah School of Advanced Studies - Bangalore

54

GMs Case
Failure of Make to Order Strategy

M.S Ramaiah School of Advanced Studies - Bangalore

55

Characteristics of Push & Pull in Supply Chain


Push Objective Complexity Focus Lead Time Processes
Minimize Cost High Resource Allocation Long Supply chain Planning

Pull
Maximize Service Level Low Responsiveness Short Order Fulfillment
56

M.S Ramaiah School of Advanced Studies - Bangalore

Implementing a PushPull Strategy


Achieving the appropriate design depends on many factors:
product complexity manufacturing lead times suppliermanufacturer relationships.

Many ways to implement a pushpull strategy


location of the pushpull boundary. Dell locates boundary at the assembly point Furniture manufacturers locate the boundary at the production point
M.S Ramaiah School of Advanced Studies - Bangalore

57

The Impact of Lead Time

Longer the lead time, more important it is to implement a push based strategy. Typically difficult to implement a pull strategy when lead times are so long that it is hard to react to demand information.

M.S Ramaiah School of Advanced Studies - Bangalore

58

Cases

M.S Ramaiah School of Advanced Studies - Bangalore

59

Grocery Industry
Typical supermarket employs a push-based strategy Peapod was built on pure pull strategy with no inventory and no facilities.
Significant service problems with high stock-out rates Changed to a pushpull strategy by setting up a number of warehouses Warehouse covers a large geographical area
Aggregated demand

Other challenges:
Reducing transportation costs Short response time Low customer density

Products having low demand uncertainty were treated with


high economies of scale in transportation cost push-based strategy more appropriately.
M.S Ramaiah School of Advanced Studies - Bangalore

60

Book Industry
Initial model of Amazon.com a pure pull system with no warehouses and no stock.
Ingram Book Group supplied most of Amazons customer demand.

As volume and demand increased:


Amazon.coms service level was affected by Ingram Books distribution capacity Using Ingram Book in the first few years allowed Amazon.com to avoid inventory costs but significantly reduced profit margins.
As demand increased distributor no longer required.

Current Amazon.com:
Several warehouses around the country where most of the titles are stocked. Inventory at the warehouses is managed using a push strategy Demand satisfied based on individual requests, a pull strategy.

Slow moving low volume books and CDs are not stocked at Amazon distribution centers
Amazon orders those when demand arrives.
M.S Ramaiah School of Advanced Studies - Bangalore

61

Session Summary
Meaning of Logistics, components of Logistics management have been explained. Factors influencing the make or buy decision has been elucidated. Cases with respect to Push-Pull supply chain have been discussed.

M.S Ramaiah School of Advanced Studies - Bangalore

62

Day-2

Supply Chain (SC) Design

Session Speaker K.M. Sharath Kumar


M.S Ramaiah School of Advanced Studies - Bangalore

Session Objectives
To identify the role of aggregate planning in supply chain to manage supply and demand To examine the key factors to be considered when designing a distribution network To apply optimisation techniques to evaluate trading partners

M.S Ramaiah School of Advanced Studies - Bangalore

Session Outline

Introduction to SC modelling Managing supply through Aggregate planning Gravity Model Supply Chain Benchmarking Data Envelopment Analysis

M.S Ramaiah School of Advanced Studies - Bangalore

Supply chain Networks

M.S Ramaiah School of Advanced Studies - Bangalore

Integrated Supply Chain


Functional Integration - Purchasing, M anufacturing, Transportation, Warehousing Spatial Integration - Geographically dispersed vendors, - Facilities & Markets Inter-temporal Integration - Strategic, Tactical & Operational Integration of SC & Demand Management
M.S Ramaiah School of Advanced Studies - Bangalore

Overview of SC Models and Modelling System


Need to augment Transactional IT with Analytical IT - Metrics is very important Analytical IT involves - Descriptive Method - Normative Method or Optimisation method or Mathematical Programming method

M.S Ramaiah School of Advanced Studies - Bangalore

Descriptive Method
Forecasting Models - predict demand for companys finished products, cost of raw materials etc. Cost Relationship -describes how direct and indirect costs vary Resource Utilisation -how manufacturing activities consume scarce resources Simulation Models -describes parts or all the companys supply chain that will operate over time as function of parameters and policies
M.S Ramaiah School of Advanced Studies - Bangalore

Normative or Optimisation Method


- Helps

managers to make better decisions

- Requires descriptive data & models as inputs

M.S Ramaiah School of Advanced Studies - Bangalore

The primary drivers for achieving strategic fit in Supply Chain Strategy (adapted from Chopra & Meindl)
Corporate Strategy

Supply Chain Strategy Efficiency Responsiveness

Facilities

Inventory

Transportation

Information

Market Segmentation 9

M.S Ramaiah School of Advanced Studies - Bangalore

Introduction to Linear Programming Problem (LPP)


The most important function of management is effective decision making.

M.S Ramaiah School of Advanced Studies - Bangalore

10

Definition of LPP
Linear Programming (LP) is a versatile technique for assigning a fixed amount of resources among competing factors. A mathematical technique used to obtain an optimal solution in resource allocation problems, such as production planning, scheduling, advertising, cost analysis etc. It is basically used for efficient and effective utilisation of limited resources to achieve organization objectives (Maximise profits or Minimise cost).

M.S Ramaiah School of Advanced Studies - Bangalore

11

The General LP Formulation


There are n variables in m constraints to be solved Max / Min Z = C1x1 + C2x2 + .Cnxn Max/Min Z =cx11 +c x22 +. +c xnn Subject to a11 x1 + a12x2S.t + . + a1nxn < /> = b1 + 1 xa nn // = b1 . + a2nxn < /> = b2 1 xa 1 + 12xa 2 +.+ a21 x1 + a22x2 21xa 1 + 2 xa 2 +. + 2 xa nn // = b2 am1 x1 + am2x.2 . . . . .+ . . . . . . . + amnxn < /> = bm
m 11 m 22 mn n m

xa + xa +. + xa // = b

where xi >= 0, i = 1,2,.n


xi 0, i=1,2. ,n

M.S Ramaiah School of Advanced Studies - Bangalore

12

Formulation of LPP (Production allocation problem)


Case: 1 A manufacturer produces two models M1 and M2 . Each unit of model M1 requires 4 hours grinding and 2 hours polishing. Each unit of model M2 requires 2 hours grinding and 5 hours of polishing. The manufacturer has 2 grinding wheels wherein each is available for 40 hours per week only. Similarly there are 3 polishing machines wherein each is available for 60 hours per week only. Profit on model M1 is Rs. 300 per unit and profit on model M2 is 400 per unit. The manufacturer has to allocate his production capacity so as to maximize his profit. Formulate the LPP.
M.S Ramaiah School of Advanced Studies - Bangalore

13

Formulation of LPP (Production allocation problem)


Solution: Let X: Number of units of model M1 to be produced. Y: Number of units of model M2 to be produced. Model
M1

Model
M2

Requirement Maximize < 80 < 180

Number of units Grinding time(hrs.) Polishing time(hrs.) Profit (Rs)

X 4X 2X 300 X

Y 2Y 5Y 400 Y

M.S Ramaiah School of Advanced Studies - Bangalore

14

Conversion to LPP (Production allocation problem)


Maximum Z = 300X + 400Y Subject to (S.t) 4 X + 2Y < 80 2X + 5Y < 180 and X > 0, Y > 0

(cont..d)

Objective Function

Constraints

Decision variable (non negative)

M.S Ramaiah School of Advanced Studies - Bangalore

15

Formulation of LPP
Case: 2 A firm produces two home products viz. model A
and model B. The production involves three operationsassembly, painting and testing. The relevant data are as follows: Hours required for each unit Unit selling price Model A Rs.40 Model B Rs.60 Assembly 10 18 Painting 2 5 Testing 1 2

M.S Ramaiah School of Advanced Studies - Bangalore

16

Case-2

Formulation of LPP

(Contd)

Total number of hours available each week are as follows: Assembly 400 Painting 100 Testing 60 The firm wishes to determine its weekly product mix so as to maximize profit. Formulate the problem as a linear programming problem(LPP).
M.S Ramaiah School of Advanced Studies - Bangalore

17

Case-2

Formulation of LPP

(Contd)

Solution: Let X: Number of units of model A to be produced. Y: Number of units of model B to be produced. Model A Number of units Assembly time(hrs.) Painting time(hrs.) Testing time (hrs.) Profit (Rs) X 10 X 2X 1X 40 X Model B Y 18 Y 5Y 2Y 60 Y Requirement

< 400 < 100 < 60

M.S Ramaiah School of Advanced Studies - Bangalore

18

Case- 2

Conversion to LPP

(cont..d)

Maximize Z = 40X + 60Y Subject to (S.t) 10X +18Y < 400 2 X + 5Y < 100 1X + 2 Y < 60 and X > 0, Y > 0

Objective Function

Constraints

Decision variable (non negative)

M.S Ramaiah School of Advanced Studies - Bangalore

19

Methods for Solving Linear Programming Problems (LPP)


Important method of solving LPPs

Simplex method using Solver

M.S Ramaiah School of Advanced Studies - Bangalore

20

Managing Supply in a Supply Chain

M.S Ramaiah School of Advanced Studies - Bangalore

21

Aggregate Planning in Supply Chain


Aggregate planning is a process by which a company determines ideal levels of capacity, production, subcontracting, inventory stock outs and pricing over a specified time horizon Goal is to satisfy demand while maximising profit. Premium Paper Mill Case Spring Annual Reports Fall - Car Brochure
M.S Ramaiah School of Advanced Studies - Bangalore

22

Aggregate Planning Strategies


The planner should make trade-offs among capacity, inventory and backlog costs/ lost sales. If one increases the other two decreases. Trade off Strategies (tailored strategies) - Chase strategy - using capacity as lever - Time flexibility from workforce or capacity strategy using utilisation as a lever - Level strategy using inventory as the lever

M.S Ramaiah School of Advanced Studies - Bangalore

23

Red Tomato Gardening Tool Case


Demand for Red Tomatos gardening tools is highly seasonal in spring. The first step towards aggregate planning is to arrive at effective demand forecasting.
Month Jan Feb Mar Apr May Demand forecast Tomato tools for Red Jun 2200
24

Demand Forecast 1600 3000 3200 3800 2200

M.S Ramaiah School of Advanced Studies - Bangalore

Red Tomato Tools Case Contd


Red Tomato sells each tool at $40. The company has a starting inventory of 1000 tools in January. At the beginning of January, company has a workforce of 80 employees. Plant works 20 days in each month with 8 hrs per day. Each employee earns $4 per hour on regular time.

Capacity of the plant is determined by total labour hours worked. As per labour rules, no employee works more than 10 hrs overtime per month. SC manager goal is to have 500 units at the end of june as inventory. Minimising cost over the planning horizon is equal to maximising profit as all demand has to be met.
M.S Ramaiah School of Advanced Studies - Bangalore

25

Various Costs for Red Tomato Case


Item
Material Cost Inventory holding cost Marginal cost of stock-out/backlog Hiring and training costs Layoff cost Labor hours required Regular time cost Overtime cost Cost of subcontracting

Cost
$10/unit $2/unit/month $5/unit/month $300/worker $500/worker 4/unit $4/hour $6/hour $30/unit

M.S Ramaiah School of Advanced Studies - Bangalore

26

Decision Variables
Wt = Workforce size for month t Ht = number of employees hired at the beginning of month t Lt = number of employees laid off at the beginning of month t Pt = number of units produced in month t It = Inventory at the end of month t St = number of units stocked out/backlogged at the end of month t Ct = number of units sub-contracted at the end of month t Ot = number of overtime hours worked in month t where t = 1, 2, ........ , 6
M.S Ramaiah School of Advanced Studies - Bangalore

27

Table Containing Decision Variable

M.S Ramaiah School of Advanced Studies - Bangalore

28

Table containing Constraints

M.S Ramaiah School of Advanced Studies - Bangalore

29

Formulae
Cell M5
(Wt Constraints)

Cell Formula = D5-D4-B5+C5

Equation W t = W t-1 + Ht -Lt Pt 40 W t + Ot /4

N5
(Capacity
Constraints)

= 40*D5+E5/4-I5

O5
(Inventory Constraints)

= F4-G4+I5+H5-J5F5+G5 = -E5 + 10 * D5

It-1 + Pt + Ct = Dt +St-1 +It - St

P5
(Over-time Constraints)

Ot 10 W t

Here, M5 = 0; N5 0; O5 = 0; P5 0
M.S Ramaiah School of Advanced Studies - Bangalore

30

Table containing Objective function

[640W
6 i =1

+ 6 ot + 300 H t + 500 Lt + 2 I t + 5 S t + 10 Pt + 30 C t
We need to arrive at minimised solution
M.S Ramaiah School of Advanced Studies - Bangalore

31

Invoking Solver Tool and following Constraints

M.S Ramaiah School of Advanced Studies - Bangalore

32

Solver Steps
Set Target Cell: C22, Equal to : Select Min By Changing Cells : B5 : I10 Subject to Constraints B5 : I10 0 (All decision variables are non -negative) F10 500 ( Inventory at end of period 6 is at least 500) G10 = 0 (Stock-out at the end of 6 months equals 0) M5 : M10 = 0 (workforce constraints) N5 : N10 0 (capacity constraints) O5 : O10 = 0 (inventory constraints) P5 : P10 0 (over-time constraints)

Assume linear model in options and press solve


M.S Ramaiah School of Advanced Studies - Bangalore

33

Final Solution

M.S Ramaiah School of Advanced Studies - Bangalore

34

Gravity Models in Supply Chain

M.S Ramaiah School of Advanced Studies - Bangalore

35

Steel Appliances (SA)


Gravity location models are used to find locations that minimises the transportation cost. SA manufactures high quality refrigerators and cooking ranges - currently one plant in Denver which supplies entire US - Three parts plant located at Buffalo, Memphis and St. Louis will supply parts for new factory which will serve Atlanta, Boston, Jacksonville, Philadelphia and Newyork. - The coordinates, demand, required supply and shipping cost has been collected.
M.S Ramaiah School of Advanced Studies - Bangalore

36

Supply sources and Markets for SA

M.S Ramaiah School of Advanced Studies - Bangalore

37

M.S Ramaiah School of Advanced Studies - Bangalore

38

Gravity Model
This model assumes that both markets and supply sources can be located as grid points on plane. All distances are calculated as the geometric distance between two points on the plane. Assumes transportation cost linearly grows with quantity shipped.

M.S Ramaiah School of Advanced Studies - Bangalore

39

Input Parameters
xn, yn : coordinate location of either a market or supply source n Fn: Cost of shipping one unit for one mile between facility and either market or supply source n Dn: Quantity to be shipped between facility and market or supply source n If (x,y) is the location selected for the facility, the distance dn between the facility at location (x,y) and the supply source or market n is given by:

M.S Ramaiah School of Advanced Studies - Bangalore

40

Formulae

(x

x)
n
k

+ y

) y
2 n

Total Cost (TC) is given by:

TC = d n D n F n
n =1

The optimal location is one that minimises the total TC


M.S Ramaiah School of Advanced Studies - Bangalore

41

M.S Ramaiah School of Advanced Studies - Bangalore

42

Equations
Cell Cell formula Equation Copied to
G5:G12

G5

=SQRT($B$16-E5)^2+($B$17-F5)^2

B19

=SUMPRODUCT(G5:G12,D5:D12, C5:C12)

After entering these formulae, invoke solver to solve the problem


M.S Ramaiah School of Advanced Studies - Bangalore

43

M.S Ramaiah School of Advanced Studies - Bangalore

44

Results
The coordinates (x, y) = ( 681, 882) has been identified as the location of the new factory which minimises the total transportation cost. From the map, these coordinates are close to the border of North Carolina and Virginia. The manager should look for desirable sites close to optimal coordinates that have the required infrastructure and appropriate worker skills.

M.S Ramaiah School of Advanced Studies - Bangalore

45

M.S Ramaiah School of Advanced Studies - Bangalore

46

SC Trading Partners Benchmarking


using Data Envelopment Analysis (DEA)

M.S Ramaiah School of Advanced Studies - Bangalore

47

Non-Parametric Analysis Tool


- Data Envelopment Analysis (DEA)
Analyses multiple outputs and inputs simultaneously to arrive at single overall performance index Uses Linear Programming technique to objectively derive individual weights under MCDM Organisation under study is called as DMU
X $ 1,00,000

Limitations Dependent on data


48

M.S Ramaiah School of Advanced Studies - Bangalore

Contd.

M.S Ramaiah School of Advanced Studies - Bangalore

49

50

Motivations to use DEA


Simplicity and ease-of-use No need to specify relationships or trade-offs among performance measures prior to computation The frontier principle suits benchmarking goal Evaluate multiple outputs and multiple inputs simultaneously Addresses quantitative and qualitative data together Weights obtained by solving LPP from the data objectively

M.S Ramaiah School of Advanced Studies - Bangalore

51

Inferences after using DEA


Measures operational performance relative to peer groups Identify performance gaps in inefficient DMUs Evaluate improvement opportunities Assess operational progress over time

M.S Ramaiah School of Advanced Studies - Bangalore

52

Methodology
- Identification of input (X) and output (Y) variables of DMUs for performance evaluation through DEA. - In general, radial efficiency () measure takes the form of ratio

=
-

Output Input

Considering all m inputs and s outputs portraying total factor productivity measure of a DMU, the unknown variable weights will be represented as vi and ur

Virtual Input = v1x1o + ............... + vmxmo Virtual Output = u1y1o + ............... + usyso - Finally the linear programming technique will be used to maximise the ratio and to determine weights individually
M.S Ramaiah School of Advanced Studies - Bangalore

53

Input and Output Consideration Consideration


Principle to be adapted for selecting inputs/outputs: lower the better for input value higher the better for output value n = max { (m*s), (3*(m+s)) } condition has to be satisfied

M.S Ramaiah School of Advanced Studies - Bangalore

54

Basic Charnes Cooper and Rhodes (CCR) Model

FPo = Fractional Programme


M.S Ramaiah School of Advanced Studies - Bangalore

55

Converting FP into LPP

LPo = Linear Programme


M.S Ramaiah School of Advanced Studies - Bangalore

56

Inference after Solving LPP

M.S Ramaiah School of Advanced Studies - Bangalore

57

Taking Dual* of the LPP (DLP)

Where, is the non-negative Column Vector of Variables is radial efficiency X is Input vector and Y is Output vector xo, yo is DMU under study
M.S Ramaiah School of Advanced Studies - Bangalore

58

Example

M.S Ramaiah School of Advanced Studies - Bangalore

59

Mathematical Formulation

M.S Ramaiah School of Advanced Studies - Bangalore

60

Optimal Solution

M.S Ramaiah School of Advanced Studies - Bangalore

61

Reference Set

M.S Ramaiah School of Advanced Studies - Bangalore

62

Consolidated Results

M.S Ramaiah School of Advanced Studies - Bangalore

63

Output Oriented Model

M.S Ramaiah School of Advanced Studies - Bangalore

64

Example-Case (1 Input and 1 Output Case)

M.S Ramaiah School of Advanced Studies - Bangalore

65

Graphical Representation

X $ 1,00,000

M.S Ramaiah School of Advanced Studies - Bangalore

66

Demo Session

M.S Ramaiah School of Advanced Studies - Bangalore

67

References
1. Chien-Ming Chen, Evaluation and Design of Supply Chain Operations using DEA, Ph.D. Thesis, Erasmus University Rotterdam, 2009. 2. William W. Cooper, Lawrence M. Seiford, Kaoru Tone, Introduction to Data Envelopment Analysis and Its Uses, Springer, 2006. 3. William W. Cooper, Lawrence M. Seiford, Kaoru Tone, Data Envelopment Analysis, 2nd edition, Springer, 2007.

M.S Ramaiah School of Advanced Studies - Bangalore

68

Session Summary
Strategies adapted in aggregate planning with trade-offs has been elucidated. Facility location model in the form of gravity model has been applied. DEA models to evaluate the trading partners has been demonstrated.

M.S Ramaiah School of Advanced Studies - Bangalore

69

sharath@msrsas.or g M: 0 99005 14038


M.S Ramaiah School of Advanced Studies - Bangalore

70

You might also like