Introduction To Logistics & Supply Chain Management:: Key Concepts

CTL.
SC1x -Supply Chain & Logistics Fundamentals
Introduction to Logistics & Supply

Chain Management:
Key Concepts
MIT Center for

Transportation & Logistics
Agenda
Push vs. Pull Systems
Segmentation Strategies
n Products
n Supply Chains
Handling Uncertainty
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 2

Push vs. Pull Processes

You can learn almost everything about
logistics from a sandwich shop
How many different

sandwiches can be made?
Sandwich = Bread + Protein + Spread +Topping

18 6 10 20
21,600 Unique
Sandwiches!
Make to Order
Make to Stock
Engineer to Order
By Jimmy John's Franchise, LLC http://upload.wikimedia.org/wikipedia/commons/e/e3/Jimmy_John_employees_having_fun_making_sandwiches.jpg
By U.S. Department of Agriculture (20111012-FNCS-LSC-0242) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons
http://upload.wikimedia.org/wikipedia/commons/0/06/20111012-FNCS-LSC-0242_-_Flickr_-_USDAgov.jpg

Pull vs Push Processes
Push
n Execution is performed in anticipation of an order
n Demand is forecasted
n Proactive process based on projected need/demand
Pull
n Execution is performed in response to an order
n Demand is actual and known with certainty
n Reactive process based on actual need/demand
Push / Pull Boundary

n Point where push processes are separated from pull processes

Story of Three Sandwiches
Buy Raw Prepare Final Sell
Materials Components Assembly Product
PUSH PUSH PUSH PULL
Ready Made Turkey Wrap
PUSH PUSH PULL PULL

Signature Ham Sandwich
PUSH PULL PULL PULL
One-of-a-Kind Dagwood
By U.S. Department of Agriculture (20111012-FNCS-LSC-0195) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikim
http://commons.wikimedia.org/wiki/File%3A20111012-FNCS-LSC-0195_-_Flickr_-_USDAgov.jpg
By pdphoto.org (pdphoto.org) [Public domain], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3ASandwich.jpg
"Dagwood" by EncycloPetey - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons
http://commons.wikimedia.org/wiki/File:Dagwood.JPG#mediaviewer/File:Dagwood.JPG
Push vs Pull Processes
What about pure systems?
n Pure push leads to higher inventory levels and potential spoilage /
imbalance but faster cycle time
n Pure pull very rare
Mixed systems are common Where is the Push-Pull Point?
n Push undifferentiated, raw product or components
n Pull finished product
Benefits of mixed systems
n Allows for efficient mass customization (Postponement)
n Allows for pooling of products aggregating demand
Key Principles
n Maximize external variety with minimal internal variety
n Keep in-process inventory as Raw as Possible (RAP)

Segmentation

Supply Chain Segmentation
In reality . . .
n Firms operate multiple supply chains
n There is no such thing as a one-size-fits-all supply chain
n Firms segment in order to match the right method to the right
product/customer/supplier combination
n Firms can segment products, customers, suppliers, etc.
Segmentation only makes sense if you do something

different in how you buy, make, move, store or sell!
Purchasing / Procurement Warehousing / Materials Handling
Forecasting / Demand Planning Order Management
Inventory Planning Transportation Management
Inventory Control Customer Service

How should I treat these products differently?
c
c
Summer
c
Fulfillment
c
Center
Distribution
Center
Winter Fulfillment c
c
Center
c
c c
By Tage Olsin (Cropped from Image:Baseball.jpg by Tage Olsin) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-

sa/2.0)], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3ABaseball_(crop).jpg Fulfillment c
By Matt Boulton derivative work: MrPanyGoff [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via c
Wikimedia Commons http://commons.wikimedia.org/wiki/File%3AIce_hockey_puck_-_2.jpg Center
Ball, Braden (2012) Simulation as a Method for Determining Inventory Classifications for Allocation, MIT Masters Thesis
c
c c
Supply Chain Segmentation
How many segments? (Rules of thumb)
n Homogenous- within the segment should be similar
n Heterogeneous- across segments should be very different
n Critical Mass - should be big enough to make it worthwhile
n Pragmatic - dimensions should be useful and communicable
How can I segment my customers or suppliers?

Lead time Service Level
Purchase History Order Size/Volume
Geography Demographic
Sales Trends Channel Segmentation
Strategic Importance
How can I segment my products?

n Physical characteristics (value, size, density, etc.)
n Demand characteristics (sales volume, volatility, sales duration, etc.)
n Supply characteristics (availability, location, reliability, etc.)
Adapted from Prashant Yadav (2005) Course Notes, Zaragoza Logistics Center.

Distribution of SKUs

Product Segmentation
Local Grocery Store
n~20,000 SKUs
n Categories: Dry, Frozen, & Perishables
Analysis of Dry Goods (~8,000 SKUs)

n 1.156 M SKUs sold in 1 year
n Number of units sold per SKU

w Mean 144
w Median 72 Top Sellers
w Mode 0 1. EVAPORATED MILK 12 OZ
w Std Dev 355 2. BATHROOM TISSUE
3. BOTTLED WATER 1 GALLON
Biggest Sellers? 4. MACN CHEESE
5. CANNED WHITE TUNA
Biggest Sales Day?
How are products distributed in terms of sales volume?

Uniform? Normal? Other?
Kerslake, Christopher (2005) A Method for Analyzing the Delivery Frequency From a Distribution Center to a Retail Grocery Store, MIT Masters Thesis
"Faced products on a supermarket shelf" by Amnesiac86 - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - http://commons.wikimedia.org/
wiki/File:Faced_products_on_a_supermarket_shelf.JPG#mediaviewer/File:Faced_products_on_a_supermarket_shelf.JPG.

Potential Product Distributions
100%
90%
80%
70%
Percent of Sales Volume
60%
50%
40%
144
30%
20%
10%
144 144
144
0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percent of SKUs
Uniform Normal Power LogNormal

Frequency of SKU Sales
100%
90%
80%
70%
Percent of Items Sold
60%
y = 1.1245x0.3784
50% 2
R = 0.9717
40%
30%
20%
10%
0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percent of Products
This is an example of the Power Law, y=axk

Why is this important?
Is this distribution unique?
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts
Example: Distribution of Traffic on Lanes
Full Truckload movements between Postal Codes in US
5 million shipments on ~400k lanes
100%#
90%#
3% of volume is handled
80%#
by 43% of the lanes!
70%#
Percent'of'Total'Volume'(Shipments)'
60%#
50%#
Very few traffic lanes account
40%# 50% of volume is handled for the vast majority of
by 3% of the lanes! truckload movements.
30%#
20%#
10%#
0%#
0%# 10%# 20%# 30%# 40%# 50%# 60%# 70%# 80%# 90%# 100%#
Percent'of'Total'Lanes'(5'digit'postal'code'to'5'digit'postal'code)'

Power Law (y=axk)
Exceptionally common in physical and social systems
n Severity of hurricanes and earthquakes
n Income within a population (Paretos Law)
n Visits to websites (Nielsens Law) & blogs
n Frequency of words in any language (Zipfs Law)
n Frequency of digits within tables (Benfords Law)
n Frequency of authors citations in literature (Lotkas Law)
n Animals metabolic rates with respect to mass (Kleibers Law)
n Profitability of customers & products
n Distribution of volume on traffic lanes
n Questions from students in a class
The important few versus the trivial many
Fundamental Insight
Distribution of many phenomena across a
population follow a Power Law relationship
ABC Analysis

Segmentation: ABC Analysis
Class A Items - the important few
nVery few high impact items are included
n Require the most managerial attention and review
n Expect many exceptions to be made
Class B Items the middleshare

n Many moderate impact items (sometimes most)
n Automated control w/ management by exception
n Rules can be used for A (but usually too many exceptions)
Class C Items - the trivial many

n Many if not most of the items that make up minor impact
n Control systems should be as simple as possible
n Reduce wasted management time and attention
n Group into common regions, suppliers, end users
Remember these are arbitrary classifications

ci Di ciDi
Annual Annual $
Part ID Price Demand Value
5497J $ 2.25 260 $ 585.00
3K62 $ 2.85 43 $ 122.55
88450 $ 1.50 21 $ 31.50
P001 $ 0.77 388 $ 298.76
1. Identify the SKUs that management
2M993 $ 4.45 612 $ 2,723.40
3HHT8 $ 6.10 220 $ 1,342.00
should spend time on
56M4 $ 3.10 110 $ 341.00 2. Prioritize SKUs by their value to firm
89KE $ 1.32 786 $ 1,037.52 3. Create logical groupings
45O3 $ 12.80 14 $ 179.20 4. Adjust as needed
55K2 $ 24.99 334 $ 8,346.66
978SD3 $ 7.75 24 $ 186.00
78HJQ2 $ 0.68 77 $ 52.36 Example:
23LK $ 0.25 56 $ 14.00 Sample of 20 SKUs
990RT $ 3.89 89 $ 346.21 Total of 4,677 units
58JH4 $ 7.70 675 $ 5,197.50 Total ~$22k
2340P $ 6.22 66 $ 410.52
3784 $ 0.85 148 $ 125.80
38JQ2 $ 0.77 690 $ 531.30
56TT7 $ 1.23 52 $ 63.96
7UJS2 $ 4.05 12 $ 48.60
4,677 $ 21,983.84
ci Di ciDi ciDi
Annual Annual $ Cum $ Pct Ann
Part ID Price Demand Value Value $ Value
55K2 $ 24.99 334 $ 8,347 $ 8,347 38% A Items:
58JH4 $ 7.70 675 $ 5,198 $ 13,544 62%
2M993 $ 4.45 612 $ 2,723 $ 16,268 74% 80% of Value
3HHT8 $ 6.10 220 $ 1,342 $ 17,610 80% 20% of SKUs
89KE $ 1.32 786 $ 1,038 $ 18,647 85%
5497J $ 2.25 260 $ 585 $ 19,232 87%
38JQ2 $ 0.77 690 $ 531 $ 19,763 90% B Items:
2340P $ 6.22 66 $ 411 $ 20,174 92% 15% of Value
990RT $ 3.89 89 $ 346 $ 20,520 93% 30% of SKUs
56M4 $ 3.10 110 $ 341 $ 20,861 95%
P001 $ 0.77 388 $ 299 $ 21,160 96%
978SD3 $ 7.75 24 $ 186 $ 21,346 97%
45O3 $ 12.80 14 $ 179 $ 21,525 98%
3784 $ 0.85 148 $ 126 $ 21,651 98% C Items:
3K62 $ 2.85 43 $ 123 $ 21,773 99% 5% of Value
56TT7 $ 1.23 52 $ 64 $ 21,837 99%
78HJQ2 $ 0.68 77 $ 52 $ 21,890 100% 50% of SKUs
7UJS2 $ 4.05 12 $ 49 $ 21,938 100%
88450 $ 1.50 21 $ 32 $ 21,970 100%
23LK $ 0.25 56 $ 14 $ 21,984 100%
4,677 $ 21,984
Distribution By Value
100%
90%
Percent of Annual Value
80%
70% C
60% Items
50% B
40% Items
30%
A
20%
Items
10%
0%
%
%
5%
15
25
35
45
55
65
75
85
95
Percent of SKUs

Segmentation: Other Methods
H
Demand variability
C B A
Economic value
Volatile: Sophisticated techniques; frequent reviews
Stable: Less sophisticated techniques; less frequent reviews
Unimportant: Unsophisticated techniques; infrequent reviews

Adapted from Prashant Yadav (2005) Course Notes, Zaragoza Logistics Center.
Segmenting Supply Chains

Segmentation: Innovative vs. Functional
Functional Innovative
Demand Predictable Unpredictable
Life Cycle Long > 2 yrs Short <1 yr
Margin 5% to 20% 20% to 60%
Variety Low (10-20) High
Error at Production ~10% ~40-100%
Avg Stockout Rates 1% to 2% 10% to 40%
Forced Mark down 0% 10% - 25%
Lead time for MTO 6 mon to 1 yr 1 day to 2 wks
Supply Chain Objective Efficiency Match Supply & Demand
Source: Fisher, M. (1997) What Is the Right Supply Chain for Your Product?, Harvard Business Review. Adapted from Sheffi (2010) ESD.260 Course Notes
By Balougador (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], http://commons.wikimedia.org/wiki/File%3ACampbellsModi
By (Own work) [GPL (http://www.gnu.org/licenses/gpl.html), GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/3.0)],
CTL.SC1x - Supply Chain and Logistics Fundamentals
http://commons.wikimedia.org/wiki/File%3ASmart_phone.jpg Lesson: Key concepts 25
Supply Chain Portfolio
Decision variables for SC Design :
(One option is chosen from each column)
Fast / High Intermediate Slow/Low Cost

Cost Design
Manufacturing On shore Near shore Off shore
Location (e.g., US/Europe) (e.g., Mexico/ Romania) (e.g., China, Vietnam)
International Air Freight Rail/Truck Ocean

Shipping
Final Assembly On Shore Near Shore Off Shore
Location
Order Fulfillment On Shore Near Shore Off Shore
Location (Factory/DC) (Factory/DC) (Factory/DC)
Inventory Stocking Build to Stock Configure to Order Build to Order
Model
Source: Olavsun, Lee, & DeNyse (2010) A Portfolio Approach to Supply Chain Design, Supply Chain Management Review. Adapted from Sheffi (2010) ESD.260 Course Notes

Original Inkjet SC:

Cost Design
Manufacturing On shore (e.g.,
Location US/Europe)
International Rail/Truck
Shipping
Final Assembly On Shore
Location
Order Fulfillment On Shore (Factory/
Location DC)
Inventory Stocking Build to Stock
Model
Hp500-1" by Oguenther - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Hp500-1.png#mediaviewer/File

Postponement Inkjet SC:

Cost Design
Manufacturing Off shore (e.g.,
Location China, Vietnam)
International Ocean
Shipping
Final Assembly On Shore
Location
Location DC)
Inventory Stocking Configure to Order
Model
"Hp-deskjet-895cxi". Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:Hp-deskjet-895cxi.jpg#mediaviewer/File:Hp-des
"MFHP1600" by LupisSM - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0-2.5-2.0-1.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:MFHP1600.JPG#me
File:MFHP1600.JPG
Cost Competition Inkjet:

Cost Design
Manufacturing Off shore (e.g.,
Location China, Vietnam)
International Ocean
Shipping
Final Assembly Off Shore
Location
Location DC)
Inventory Stocking Build to Stock
Model
"MFHP1600" by LupisSM - Own work. Licensed under Creative Commons Attribution-Share Alike 3.0-2.5-2.0-1.0 - http://commons.wikimedia.org/wiki/File:MFHP1600.JPG#mediaviewer/File:MFHP1600


Variability & Uncertainty
Occurs in all aspects of supply chains
Managing to the mean or average is rarely sufficient
Handled by assuming a probability distribution
n Normal Distribution ~N(, )
w Continuous (-<x<+) and Symmetric
w Most commonly used for good or worse
n Log-normal Distribution ~(*, *)

w Continuous (0<x<+) and Skewed left
w Less common but good for supply chains
n Poisson Distribution ~P()

w Discrete (integers 0)
w Commonly used for low valued distributions

( x0 )2
Normal Distribution ( )
f x x0 =
e
2 x2
x 2
Normal ~N(, )
fx(x0)
Spreadsheets
NORMINV(probability,,) =+kx Area = Area =
P[x<+kx] P[x+kx]
NORMDIST(x,,,1) =P[x<+kx]
=1-P[x<+kx]
Unit Normal ~N(0,1)
Transformation: k = (x-)/x
Spreadsheets
x0
NORMSINV(probability) =k +kx
NORMSDIST(k) =P[u<k] x02
Standard Unit Normal Tables fu(u0)

( )
f u u0 =
e 2
Look up k or P[u<k] Area = 2

P[u<k]
Area =
Confidence Intervals P[uk]=
=1-P[u<k]
n 68.3%
n 2 95.5%
n 3 99.7%
0 k u0

Poisson Distribution
Poisson ~P()
n Probability of x events occurring w/in a time period
n Mean = Variance = x0
e
p[x0 ] = Prob !" x = x0 #$ = for x0 = 0,1,2,...
In Spreadsheets: x0 !
n p(x0) = POISSON(x0,,0) x0 x
e
n F(x0) = POISSON(x0,,1) F[x0 ] = Prob !" x x0 #$ =
x=0 x!
30%
2.2 4 8
Poisson Tables (partial)
25%
Columns:
20%
Rows: F(x0)
Probability
15%
10%
5%
0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Random Variable

Key Points from Lesson

Key Points from Lesson
Push vs. Pull Systems
n Push proactive based on forecast demand
n Pull reactive based on actual demand
Benefits of Mixed Systems
n Maximize external variety with minimal internal variety
n Keep in-process inventory as Raw as Possible (RAP)
n Postponement & Aggregated Demand
Segmentation Strategies
n Segment for a purpose (functional vs. innovative)
n Product segmentation (ABC) good starting point
n Normal Distribution
n Poisson Distribution

CTL.SC1x -Supply Chain & Logistics Fundamentals
Questions, Comments, Suggestions?

Use the Discussion!
"Jack Russell tilting her head" by Writ Keeper - Own work. Licensed under Creative Commons Attribution-Share Alike
3.0 http://commons.wikimedia.org/wiki/File:Jack_Russell_tilting_her_head.jpg
MIT Center for

Transportation & Logistics caplice@mit.edu

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CTL.

SC1x -Supply Chain & Logistics Fundamentals

Introduction to Logistics & Supply

MIT Center for

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 2

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 3

How many different

Sandwich = Bread + Protein + Spread +Topping

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 4

Push / Pull Boundary

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 5

PUSH PUSH PUSH PULL

Ready Made Turkey Wrap

PUSH PUSH PULL PULL

PUSH PULL PULL PULL

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 7

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 8

Segmentation only makes sense if you do something

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 9

By Tage Olsin (Cropped from Image:Baseball.jpg by Tage Olsin) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-

How can I segment my customers or suppliers?

How can I segment my products?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 11

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 12

Analysis of Dry Goods (~8,000 SKUs)

n Number of units sold per SKU

How are products distributed in terms of sales volume?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 13

Uniform Normal Power LogNormal

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 14

This is an example of the Power Law, y=axk

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 16

The important few versus the trivial many

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 18

n Expect many exceptions to be made

Class B Items the middleshare

n Rules can be used for A (but usually too many exceptions)

Class C Items - the trivial many

n Control systems should be as simple as possible

n Reduce wasted management time and attention

n Group into common regions, suppliers, end users

Remember these are arbitrary classifications

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 19

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 22

Stable: Less sophisticated techniques; less frequent reviews

Unimportant: Unsophisticated techniques; infrequent reviews

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 24

Fast / High Intermediate Slow/Low Cost

International Air Freight Rail/Truck Ocean

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 26

Fast / High Intermediate Slow/Low Cost

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 27

Fast / High Intermediate Slow/Low Cost

Fast / High Intermediate Slow/Low Cost

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 29

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 30

n Log-normal Distribution ~(*, *)

n Poisson Distribution ~P()

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 31

Standard Unit Normal Tables fu(u0)

Look up k or P[u<k] Area = 2

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Key concepts 32

n Log-normal Distribution ~(, )