Chapter 1 Basics of Supply Chain and Operations Management

Chapter 1
Basics of
Supply Chain
and
Operations
Management
Free companion web site:
http://global-supply-chain-management.de
Learning objectives
Learning objectives for this Chapter:

• What is transformation process and value creation?
• What is operations and operations management?
• What is supply chain and supply chain management?
• Which decisions are in the scope of supply chain and
operations management?
• Which objectives are used to measure performance of
supply chain and operations management?
• Which qualifications should obtain a future supply chain
and operations manager?
• Which career paths are possible for supply chain and
operations managers? 2
Ivanov D., Tsipoulanidis A., Schönberger J. (2017). Global Supply Chain and Operations Management,
Springer, 1st. Edition
Introductory case-study
The best supply

chain and
operations manager
in the world
 SCOM is everywhere! – production, logistics, healthcare,

airlines, entertainment parks, passenger transport, hotels,
building and construction,…. 3
Operations and transformation process
Transformation process
Input Value adding Output

• Labour
• Products
• Machines Transformation
• Services
• Materials process • Emissions
• Information
Control
Feedback
Operations is a function or system that transforms inputs

(e.g., materials and labour) into outputs of greater value (e.g.,
products or services); in other words, the operations function
is responsible to match demand and supply
4
Operations and enterprise structure
Organization
Marketing Operations Finance
The operations function along with marketing and finance

is a part of any organization.
Operations management is involved with managing the

resources to produce and deliver products and services
efficiently and effectively. It deals with the design and
management of products, processes, and services, and
comprises the stages of sourcing, production, distribution and
after sales. 5
Operations performance measurement
Objective triangle
COSTS
QUALITY TIME
How to achieve maximum of the desirable goal with

limited resources?
6
Supply Chain
Supply chain is a network of organizations and

processes wherein a number of various
enterprises (suppliers, manufacturers, distributors
and retailers) collaborate (cooperate and
coordinate) along the entire value chain to acquire
raw materials, to convert these raw materials into
specified final products, and to deliver these final
products to customers.
Supply Chain Design
Supply Chain Management (SCM)
The first use of the term “SCM” is commonly related to the article “SCM:
Logistics Catches up with Strategy” by Oliver and Weber (1982). They set out
to examine material flows from raw material suppliers through supply chain to
end consumers within an integrated framework that has been named SCM.
Supply Chain Management is a cross-department and

cross-enterprise integration and coordination of material,
information and financial flows to transform and use the
supply chain resources in the most rational way along the
entire value chain, from raw material suppliers to
customers.
SCM is a collaborative philosophy and a set of methods and tools to
integrate and coordinate local logistics processes and their links with the
production processes from the perspective of the entire value chain and
its total performance 9
Supply Chain as an Integration Function
SCM integrated production and logistics processes
10
Why SCM?
Customer orientation Market globalization Information society
Changes in competitive strategies
Individual Reaction Emerging Outsourcing Internet IT systems

products speed markets
Flexibility Transportation New business

increase concepts
Intra-organizational integration and inter-organizational coordination along the entire

value-adding chain have a profound influence on profitability and competitiveness,
rather than the local optimization of intra-organizational functions
Supply Chain Management
“Supply chaining is one of the main drivers that would make the world
more competitive on a global scale in 21st century” (T. Friedman) 11
SCOM: Supply Chain and Operations Management
Business
Administration
Management
Quantitative
Methods SCOM Information
Systems
Engineering
12
Basic decisions in SCOM
Case study „Chocolate Supply Chain“
13
Basic decisions in SCOM
Sourcing Production Distribution IT

Strategy
STRATEGIC COLLABORATION
Collaboration Strategy; Risk Pooling; Supply Chain Organization; Contracting
- Supplier Selection - Production Strategy - Distribution Strategy - Communication

- Sourcing Strategy - Facility Location - Transportation Design (e.g., SupplyOn)
Planning
PROCESS INTEGRATION
Demand Forecasting / Inventory Management / APS / JIT-JIS
- MRP /EOQ - Aggregate Planning -Distribution planning - ERP

- ABC analysis - MPS / Lot-Sizing - Transport. planning - MES / WMS
Execution
EXECUTION COORDINATION
Vendor-Managed Inventory / Supply Chain Event Management
- Ordering
d i - Scheduling - Vehicle routing -RFID
- Inventory Control - Sequencing - Tour planning - Barcodes/Odetta
14
SCOM responsibilities
The responsibilities of decision-makers in SCOM are really

multi-faceted. The decision-making area in SCOM ranges
from strategic to tactical and operative levels.
Strategic issues include, for example, determination of the
size and location of manufacturing plants or distribution
centres, decisions on the structure of service networks,
factory planning, and designing the SC.
Tactical issues include such decisions as production or
transportation planning as well as inventory planning.
Operative issues involves with production scheduling and
control, inventory control, quality control and inspection,
vehicle routing, traffic and materials handling, and
equipment maintenance policies.
15
SCOM House and Book Philosophy
16
Trends and Challenges
• Risk Management and Resilience

• Business Analytics
• Information Technology (Big Data, Cloud computing,
Industry 4.0, data mining, etc.)
• Networking
• Sustainability
• Flexibility / Standardization
• Simplification
• Acceleration of Product Life-Cycles
• Additive Manufacturing (3D Printing)
17
Chapter 3
Processes,
Systems, and
Models

Learning objectives
• Interrelations between business processes, quantitative

models, and information systems
• Role of business process management in operations and
supply chains
• Role of managements information systems in SCOM
• Management information technology, e.g., ERP, APS,
WMS, RFID
• Planning, problem, and decision
• Role of models and modelling in decision-making
• Quantitative methods of decision-making
19
AirSupply
20
Process management
Process is a content and logic sequence of functions or steps

that are needed to create an object in a specified state.
Business process is a network of activities for accomplishing
a business function. Processes have input and output
parameters and may be tied to functional area or be cross-
functional.
Today companies are organized on the process basis. As said by W. Edwards

Deming (Professor at Columbia University; 1900-1993), “if you can‘t describe
what are you doing as a process, you don‘t know what are you doing.“ 21
Business process management
The basic concept for managing processes in an organization

is called business process management (BPM). BPM
contains a variety of tools, methodologies to analyze, design,
and optimize processes. BPM comprises the following steps
(Hammer and Champy, 1993):
• Identify processes for change

• Analyse existing processes
• Design the new process
• Implement the new process
• Continuous measurement
22
Process performance analysis
Process Production Costs

Costs
performance
Service Level
Time
Wastage
Quality
Utilization
Capacity
Product Variety
Flexibility
CO2 Emission
Sustainability
Resilience
Risk
23
Key performance indicators (KPI)
Total customer orders –

Dropped cutomer orders
Service Level %
Total customer orders
Capacity Actually used capacity

%
Utilization Maximum capacity
Lead Time
Flow Time
Customer order Production Production Customer order

arrival start finish delivered
24
Business process modeling
Process models describe the SCOM activities from an

information processing perspective. Process modelling can be
referred to as descriptive modelling and serves as an interface
to information systems development. Process models can also
be used to describe the workflow of decision–making
processes.
• SCOR (Supply Chain Operations Reference),
• ARIS (Architecture of Information Systems),
• UML (Unified Modelling Language) and
• IDEF (Integration Definition for Function Modelling)

25
SCOR
source: www.supply-chain.org
The main value of SCOR is the standardized business

process models. Besides, a coherent system of performance
indicators is correlated with the process models. Finally, the
data origins to calculate the performance indicators are
explicitly provided. 26
Role of Information Technology
SCOM managers say:

Where information is missing, material is also missing.
A universal property of the management processes,
irrespective of the problem domain, is that it has a notably
informational nature, i.e. is connected, first of all, with the
• collection,
• processing,
• analysis and
• usage of data, information, and knowledge.
27
Role of Information Technology
Management Information Systems (MIS) collect,

process, store, and distribute information in order to
support decision making, coordination, and control.
MIS use data, i.e. are streams of raw facts. Information is
data shaped into meaningful form.
For companies, MIS is instrument for creating value.
Investments in right information technology (IT) can
result in superior returns regarding productivity increases,
revenue increases, and long-term strategic positioning.
• MIS automate steps that were done manually previously.
• MIS enable entirely new processes by changing flow of
information, replace sequential steps with parallel steps,
and support new business models. 28
IT for SCOM
Planning at the enterprise level

• ERP (Enterprise Resource Planning)
• MES (Manufacturing Execution Systems)
• WMS (Warehouse Management Systems)
Planning and control for supply chain coordination
• APS (Advanced Planning Systems)
• TMS (Transportation Management Systems)
• SCEM (Supply Chain Event Management)
Real-time control
• RFID (Radio Frequency Identification)
• T&T (Trace and Tracking)
• ASN (Automated Shipping Notification)
29
IT for SCOM
Business intelligence
OLAP (On Line Analytical Processing)
DSS (Decision Support Systems)
Data miming and Big Date
Cloud computing
Supply chain communication and data interchange
EDI (Electronic Data Interchange)
E-Commerce
XML (Extensible Markup Language)
Mobile technologies, Android
Electronic payment systems with security services
30
IT for SCOM
31
Implementation of Information Technology
1. Issues of investments in IT infrastructure:

• amount to spend on IT
• IT can be bought, but also rented or used via cloud
computing
• IT can also be available via outsourcing.
2. Whatever option is selected, total cost of ownership
(TCO) model for costs analysis should be used. It analyzes
direct and indirect costs. Note that hardware and software
costs account for only about 20% of TCO. Other costs include
installation, training, support, maintenance, infrastructure,
downtime, space, and energy.
3. IT project management. Activities in an IT project include
planning work, assessing risk, estimating resources required,
organizing the work, assigning tasks, controlling project
execution, reporting progress, and analyzing results. 32
ERP
33
ERP
 Enterprise resource planning (ERP) systems

 Suite of integrated software modules and a common
central database
 Collects data from many divisions of firm for use in nearly
all of firm’s internal business activities
 Information entered in one process is immediately
available for other processes
34
ERP
Source: Heizer/Render:
Operations Management, 2013.
35
ERP
36
APS systems
Further reading: Stadler H., Kilger C. Supply Chain Management and

Advanced Planning.
37
APS
Source: Stadler H., Kilger C. (2008) Supply Chain Management and Advanced Planning, Springer
38
APS and Erp: how it works
Input data from ERP Reports
Decision on manufacturing
Master production schedule start
Module "Production Schedule
planning"
Regustration of start/end of
Bill-of-materials manufacturing operations Orders
Processing technology
Module "Technology"
Order fullfullment card
Order completion; working

time registration
Human ressource Gantt-diagramm
requirements
Module "Human
ressources" Automatic calculations in APS Plan execution analysis;
system bottle-neck identification
Inventory on hand and work- Schedule calculation

in-process (WIP)
Module "Inventory"
Plan deviation analysis and

schedule adjustment
Manufacturing workers Production and
Module "Plant" manufacturing reports
Statistics update
Planned cost calculation Reporting

Module "Controlling"
39
APS
40
APS Systems and Real-Time Control
Planning
Order Shop floor

Adaptation
Execution release control
(real-time Vehicle
decisions) Monitoring
dispatch
Supply Chain Event Management

41
RFID
42
RFID in practice
• International Supply Chains

• Trade: movements of goods
• Warehousing
• Traceability (food!)
+ -
Up-to-date data Costs
Contact-free Technical issues
„Bulk“-reading Privacy issues
Protection / Security
43
Future IT for SCOM
44
Future IT for SCOM: Industry 4.0
45
IT: Communication
Example: SupplyOn
46
Basic quantitative optimization methods in SCOM
Execution Planning Strategy Sourcing Production Distribution SCM
- MILP
-Simulation (e.g., - Linear Programming - Linear Programming - Game theory
system dynamics - Queuing theory - Geometrical methods -System dynamics
- Statisitical methods - Statisitics

- Linear Programming -Linear Program.
- Probability theory - Probability th.
- Goal Programming
- Simulation - System dynamics
-Integer programming - Integer programm.

-Simulation (e.g., -Genetic algorithms/ACO -System dynamics
-Genetic algorithms
system dynamics -Control theory - Control theory
-ACO
Project management
Graph theory
Fuzzy / Robust / Stochastic optimization

47
Decision-making principles
Decision
Analytical component Behavioral component
Each management decision has two components. The first one is an

analytical component and the second one is the behavioral component. The
analytical part of the decisions is supported by the quantitative analysis
business analytics methods. The behavioral part of the decisions is based on
the intuition and leadership qualities of the decision-maker as well as on the
external environment behavior prediction and reaction in regard to the
decisions of suppliers, retailers, and customers.
48
Model-based decision making principle
How to achieve a desirable goal with limited resources?
49
What is a problem?
For a problem to exist there must be an individual (or a group of individuals),

referred to as the problem owner (decision maker):
 is dissatisfied with the current state of affairs within a real-life context, or
has some unsatisfied present or future needs, i.e. has some goals to be
achieved or targets to be met;
 is capable of judging when these goals, objectives, or targets have been
met to a satisfactory degree; and
 has control over some aspects of the problem situation that affect the
extent to which goals, objectives, or targets can be achieved.
The elements of a problem: (1) the decision maker, (2) the decision maker's
objectives and (3) the associated decision criterion, (4) the performance
measure, (5) the control inputs or alternative courses of action, and (6) the
context in which the problem occurs.
A problem is not an objective unit a priori – it has objective components and

subjective treatment  objective problem and its model to make decision.
Note! – problems exist in systems: different interests, different criteria, etc. 50
What is a decision?
Decision is a selection of an activity (or a set of activities) to handle from

several alternatives.
Decisions are subject to constraints which limit decision choices and

objectives making some decisions preferred to others.
Objective and criterion:

Objective – the end towards which effort is directed, a goal or end of
action.
Criterion – principle on which a judgement is based  how well the
objective has been achieved
The first step in the analysis of organizational systems and decision-

making is to define the interests and how they are interrelated!
51
Decision-making
A selection of a managerial decision leads the system goal-oriented to

the output performance. The decisions shape the system behaviour with
regard to a certain goal (or multiple goals).
Basic problems in decision-making
• optimality,
• multiple objectives (most preferred solutions),
• risk and uncertainty, and
• system and model complexity.
The leading role in decision-making assurance in SCM belongs to the

decision-support information systems and to their core, special
software and mathematical tools for decision support.
Supply chains and operations are organizational systems  decisions

are taken by managers (not by automatics)  Subjectivism, individual risk
perceptions, delays in decisions 52
Multiple objectives
Security
Robustness COSTS Resilience
Stability Flexibility
QUALITY TIME
Agility Adaptability
Sustainability 53
Risk and uncertainty
Risk
Risk Uncertainty
Uncertainty
initiates from exists in any system

uncertainty; can be with a sensible extent
identified, analyzed, of complexity; can be
controlled and reduced or amplified
regulated; can cause a
disturbance
Disturbance
Disturbance Deviation
Disruption
results from risk; can results from a

be prevented and disturbance; can
eliminated by means damage a supply
of reliability and chain; can be
flexibility reserves; can eliminated by means
cause a deviation of adaptation
54
Risk and uncertainty
Risk
Risk Uncertainty
Uncertainty
initiates from exists in any system

uncertainty; can be with a sensible extent
identified, analyzed, of complexity; can be
controlled and reduced or amplified
regulated; can cause a
disturbance
Disturbance
Disturbance Deviation
Disruption
results from risk; can results from a

be prevented and disturbance; can
eliminated by means damage a supply
of reliability and chain; can be
flexibility reserves; can eliminated by means
cause a deviation of adaptation
55
Risk and types of uncertainty
 random uncertainty (demand fluctuations)

 hazard uncertainty (unusual events with high impact)
 deep uncertainty (severe disruptions)
(Knight 1921) classified under ‘risk’ the ‘measurable’ uncertainty.

 From the financial perspective of Markowitz (1952), risk is the variance
of return.
 From the project management perspective, risk is a measure of the
probability and consequence of not achieving a defined project goal.
 According to March and Shapira (1987), risk is a product of the
probability of occurrence of a negative event and the resulting amount of
damage.
56
Uncertainty and complexity
Reliability/ Reliability/
Costs Flexibility Flexibility Costs
System
Risk space System Risk
space
Uncertainty space Uncertainty space
a) b)
57
Uncertainty and complexity
Reliability/ Reliability/
Costs Flexibility Flexibility Costs
System
Risk space System Risk
space
Uncertainty space Uncertainty space
a) b)
Plan robustness is not sufficient Improbable event
Deviations may occur subject to events which have not been

considered in the plan 58
Risk management and SCOM
Quantity / Availability /
Demand Supply
Risks
Global / Volatility /
Structure Process
59
Trade-offs
COSTS
Flexibility Resilience
60
Trade-off example
Capacity Utilization vs Lead Tiime
Utilization
Lead Time
61
Supply chain flexibility
System: System:
redundancy in capacity and coordination / intergation
inventory, multiple sourcing outsourcing
Flexibility
Process:
Product:
Flexible and real time-based
modularization / standardization,
production/warehousing
postponement
systems
62
Supply chain resilience
Preparadeness: Stabilization:
risk monitoring, operation preservation,
risk control contingency plan execution
pre-disruption Resilience post-disruption
Mitigation Recovery:
create structural and parametric adaptation,
robustness long-term impact minimization
63
Models and Real World
Source: Grigoryev I. (2015). AnyLogic In Three Days 64
Models
A model is:
 an image of reality:
 a system whose investigation
is a tool for obtaining information
about another system;
Object
Объект
 a method of knowledge Subject
existence; and
 a multiple system map of the
original object that, together with
absolutely true content, contains
conditionally true and false
content, which reveals itself in the Model Environment
process of its creation and (М)
practical use.
65
Modelling
Modelling is one of the stages of cognitive activity of a subject, involving

the development (choice) of a model, conducting investigations with its
help, obtaining and analysing the results, the production of
recommendations on the further activity of the subject and the estimation of
the quality of the model itself as applied to the solved problem and taking
into account specific conditions.
66
Practical implementation
Conflicting viewpoints and impacts of other

departments;
„Good“ solution to the right problem is better
than optimal solution to the wrong problems
Complexity-understand; textbook-reality
„Garbage in – garbage out“
Understanding mathematics; not just one
answer but a range of options
Validity of results, assumptions review
Identification of necessary changes; impact
of changes; sensitivity analysis
Management fear - the use of formal analysis
processes will reduce their decision-making
power.
Source: Render et al. (2012). Quantitative Analysis
for Management, Pearson. Action-oriented managers may want “quick and
dirty” techniques.
Analysts should be involved with the problem and
careSupply
Ivanov D., Tsipoulanidis A., Schönberger J. (2017). Global about Chain
the solution.
and Operations Management, 67
Modelling framework
68
Source: ORMS Today, December 2015, p.23.
Modelling options
Models
Optimization Heuristics
•Optimal solutions
• Special problems
•Time-consuming • Short calculation time
calculations
• Quality of soultion is unknown
 Application in practice!
Simulation
Expert knowledge and Visualisation

69
Methods
min f T  x
Linear Programm
Solving subjectto,
Stochastic Prog.
Optimization Robust Optimiz.
equations
A x  b
Goal Programm. Aeq  x  beq,
Optimal Control
lb  x  ub,
Simulation System Dynamics What

Agent Systems happens, if..?
Genetic algorithm
ACO algorithm
Algorithm
SNO heuristic
Heuristics Adaptive control
70
Problem, model, and decision
The transfer of a problem into Causes:

a model is rarely possible  Boundaring
without a loss of reality  Input-output interrelating
connection
 Variables, Goals, Constraints
 Results interpretation
Real
 Conflicts of interests
problem
 Solution procedure
Problem relevant Mathematical Formal

reality cut-out model problem
Solution of a Solution of the

(real) problem formal problem
71
Simulation as a method for SCOM decision support
Source: Popkov T. (2015). Presentation on AnyLogistix, INFORMS, Nov. 4. 205, Philadelphia, PA. 72
Modelling method selection
73
Source: anyLogistix
Modelling method selection: example supply chain design
74
Source: anyLogistix
Modelling method selection: example omnichannel supply chain
75
Source: anyLogistix
Optimization
Optimization is the finding the best decision through representing

problem choice as decision variables and seeking values that extremized
objective functions of the decision variables subject to constraints on
variable values expressing the limits on possible decision choice.
This is a technical treatment  Supply chains are organizational systems

 decisions are taken by managers (not by automatics)  Subjectivism,
individual risk perceptions, delays in decisions, decentralization.
The drawback of using optimization is difficulty in developing a model

that is sufficient detailed and accurate in representing problem complexity
and uncertainty, while keeping the model simple enough to be solved.
Furthermore, most of the optimization models are deterministic and static.
Unless mitigating circumstances exist, optimization is the preferred
approach. However, in reality, mostly the problems of strategic nature may
be correctly addressed by optimization.
Examples:  Oracle SNO; SAP APO; ILOG, Excel Solver 76
Linear programming
 A mathematical technique to help plan and make decisions relative to

the trade-offs necessary to allocate resources
 Will find the minimum or maximum value of the objective
 Guarantees the optimal solution to the model formulated
1. LP problems seek to maximize or minimize some quantity (usually profit

or cost) expressed as an objective function
2. The presence of restrictions, or constraints, limits the degree to which we

can pursue our objective
3. There must be alternative courses of action to choose from
4. The objective and constraints in linear programming problems must be

expressed in terms of linear equations or inequalities
 Solution algorithm: Simplex-Method
 Implemented in industrial solvers 77
Spreadsheet Modelling
Book recommendation: Baker K.R. (2015). Optimization Modeling with Spreadsheets,. Wiley, 3rd Edition 78
Spreadsheet Modelling
The technology behind spreadsheet-based modeling is simple: you enter the

data inputs in some cells and you view the data outputs in others. Formulas –
and in more complex models, scripts – link the input and output values.
Various add-ons allow you to perform parameter variation, Monte Carlo, or
optimization experiments.
However, there's also a large class of problems where the analytic (formula-
based) solution is either hard to find or simply doesn’t exist. This class
includes dynamic systems features
Consider a problem that requires you to optimize a rail or truck fleet. It’s
difficult to use an Excel spreadsheet to manage factors such as travel
schedules, loading and unloading times, delivery time restrictions, and
terminal point capacities. A vehicle’s availability at a given location, date, and
time depends on a sequence of preceding events, and determining where to
send the vehicle when it’s idle requires us to analyze future event sequences.
Book recommendation: Baker K.R. (2015). Optimization Modeling with Spreadsheets,. Wiley, 3rd Edition 79
Heuristics
Heuristics are intelligent rules that often lead to good, but not necessarily
the best, solutions. Heuristic approaches typically are easier to implement
and require fewer data. However, the quality of the solution is usually
unknown. Unless there is a reason not to use the optimization, heuristics is
an inferior approach.
Trends: nature-based heuristics such as genetic algorithms and ACO (Ant
Colony Optimization).
Example: in supply chains, the concurrent open shop problems are
encountered most frequently. It is well known that most scheduling
problems of this class are hard to solve with optimization due to high
dimensionality. That is why heuristics (e.g. genetic algorithms) are usually
applied instead of optimization. They do not guarantee the optimal solution
but allow a permissible result to be found within an acceptable period of
time. The quality of this solution with regard to the potential optimum,
however, remains unknown. Second, the multiple objective problems are
still a “bottleneck” of the heuristics. 80
Simulation
Formulas that are good at expressing static dependencies between

variables typically don't do well in describing systems with dynamic
behavior. It’s why we use another modeling technology - simulation
modeling - to analyze dynamic systems.
Simulation is imitating the behaviour of one system with another. By
making changes to the simulated SC, one expects to gain understanding of
the dynamics of the physical SC.
Rather than deriving a mathematical analytical solution to the problem,
experimentation with the model is done by changing the parameters of the
system in the computer, and study the differences in the outcome of the
experiments.
Simulation is an ideal tool for further analysing the performance of a
proposed design derived from an optimization model.
One promising area is the study of combining simulation methods with
optimization methods in an iterative way  Optimization-based
simulation. 81
Simulation
Approaches:
 discrete-event simulation
 system dynamics
 agent-based simulation
Each method serves a specific range of abstraction levels.

System dynamics assumes very high abstraction, and it’s typically used
for strategic modeling.
Agent based models can vary from very detailed models where agents
represent physical objects to the highly abstract models where agents
represent competing companies or governments.
Discrete event modeling supports medium and medium-low abstraction.
82
Simulation: example AnyLogic
83
Optimization vs Simulation ?
Optimization
Advantages Possible limitations
Optimal solution Dimensionality and complexity of real problems
Methodical basics Dynamics and uncertainty of system and model evolution
Easy accessibility Poor flexibility
Linearity and discreteness
Simulation
Advantages:
1. to analyze systems and find solutions where methods such as analytic calculations
and linear programming fail.
2. you can measure values and track entities within the level of abstraction, and you
can add measurements and statistical analysis at any time.
3. The ability to play and animate the system behavior in time is one of simulation’s
great advantages.
84
Simulation + Optimization: Example Supply Chain Risk
Optimization
Simulation • Supply chain structure with back-
• Randomness in disruption ups
and recovery policies • Discrete number of periods
• Real-time analysis • Demand (distribution) in periods
• Real problem complexity • Production capacities in periods
• Inventory control policies • Beginning and ending inventory
• Dynamic recovery policies in periods
• Gradual capacity degradation and • Production quantities in periods
recovery • Sourcing quantities in periods
• Impact of changes in operational • Shipment quantities in periods
policies on the ripple effect and • Backorder quantities in periods
operational parameter dynamics in • Operational costs
time • Disruption duration, in periods
• Multiple performance impact • Recovery duration, in periods
dimensions including financial, • Individual impact on service level,
service level, and operational costs, and lost sales at the end of
performance in time planning horizon
85
Example: Modelling with anyLogistix
86
Chapter 4
Operations
and Supply
Chain
Strategy
Learning objectives
• Operations strategies and “strategic fit”

• Efficient and effective supply chain strategies
• Bullwhip-effect
• Vendor-managed Inventory (VMI)
• Collaborative Planning, Forecasting, and Replenishment
(CPFR)
• Ripple-effect
• Supply chain resilience and sustainability
88
“Quick and affordable”:

Zara, UNIQLO & Primark
89
Supply Chain Strategies
Supply Chain
Strategy Application Competion basis
Contribution
Unique Fast new product

Innovation Innovative products
technology development
Cost-efficient
Costs The lowest prices Efficient supply chain
organisation
Flexibility, Customer is central

Service / Customer
customer point of the supply
Response satisfaction
service chain
High-quality Highest quality Quality control stages

Quality
products standards in the supply chain
90
Performance improvement
Service Level Costs
Inventory Supply Cycle

Optimization Time
Uncertainty of Demand and

Supply
91
„Strategic fit“: The Logistics/Marketing Interface
Strategic fit presumes alignment of objectives in different

departments with the overall SC objectives. For example,
typical decisions in marketing relate to product mix and pricing.
This should be brought into correspondence with logistics
decisions such as transportation, packaging, and
transshipment.
92
Value and cost adding
Reducing non-value-adding time improves

service level and reduces cost
93
„Strategic fit“ and SCOM Strategy
Efficient Supply Chains Responsive Supply Chains
Primary Goal Supply demand at the lowest Respond quickly to demand

cost
Product design Maximize performance at Create modularity to allow
strategy minimum product cost postponement of product
differentiation
Pricing Strategy Lower margins because price Higher margins because price is
is a prime customer driver not a prime customer driver
Manufacturing Lower costs through high Maintain capacity flexibility to buffer

Strategy utilization against demand/supply uncertainty
Inventory Strategy Minimize inventory to lower Maintain buffer inventory to deal
cost with demand/supply uncertainty
Lead time strategy Reduce, but not at the Reduce aggressively, even if the
expense of costs costs are significant
Supplier Strategy Select based on cost and Select based on speed, flexibility,
quality reliability and quality
Reference: Fisher ML (1997) What is the right supply chain for your product? Harv Bus Rev march–april: 83–93
94
Risks in SCOM
Operational risks : Bullwhip Effect

High
Frequency
Disruption
Low
Low High
Performance Impact
Disruption risks : Ripple Effect
95
Bullwhip effect
The magnification of variability in orders in the supply

chain: little variability in retail orders….can lead to greater variability
for a fewer number of wholesalers, and……can lead to even greater
variability for a single manufacturer.
96
Bullwhip effect
Behavioural causes
 misuse of base-stock policies
 misperceptions of feedback and time delays
 panic ordering reactions after unmet demand
 perceived risk of other players' bounded rationality.
Operational causes
 dependent demand processing (demand is non-
transparent and causes distortions in information)
 lead time variability
 lot-sizing/order synchronization
 quantity discount
 trade promotion and forward buying
 anticipation of shortages. 97
Bullwhip effect
60 – Suppliers believe sales
▶The tendency are huge and respond
accordingly
Wholesalers order even more
to be sure retailers can be
adequately supplied
for larger 50 –
Suppliers
order size 40 –
Retailers respond Wholesalers
fluctuations
Order Quantity
by ordering more
Retailers
30 –
as orders are Consumers
relayed 20 –
through the 10 –
supply chain 0–
A short-term increase in consumer demand
| | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11
Day
▶ Creates unstable production schedules, expensive

capacity change costs, longer lead times, obsolescence
▶ Damage can be minimized with supplier coordination
and planning 98
Bullwhip effect analysis
Variance of orders  orders 2

BWE   2
Variance of demand  demand
If BWE measure is:
> 1 – Variance amplification is present

= 1 – No amplification is present
< 1 – Smoothing or dampening is occurring 99
Bullwhip effect: Task 1
100
Imagine we have four different retailers for new iPhone 7

cases. They are all ordering the cases from a production
company in Atlanta. We assume that weekly demand is nearly
constant. Consider the following data for order quantity,
frequency and customer demand
Retailer Order Order Customer

quantity frequency demand/week
W 570 every 2 weeks 285
X 120 every week 120
Y 525 every 3 weeks 175
Z 600 every 3 weeks 200
∑ 780
101
Week 1 2 3 4 5 6 7 8 9 10 11 12
Retailer
- 570 - 570 - 570 - 570 - 570 - 570
W
Retailer
120 120 120 120 120 120 120 120 120 120 120 120
X
Retailer
- 525 - - 525 - - 525 - - 525 -
Y
Retailer
- - 600 - - 600 - - 600 - - 600
Z
Demand
120 1215 720 690 645 1290 120 1215 720 690 645 1290
Atlanta
Demand
custom 780 780 780 780 780 780 780 780 780 780 780 780
er/week
102
103
Bullwhip effect
Reason for bullwhip effect Countermeasures

Demand non-transparency Information coordination
Neglecting to order in an Automated ordering and
attempt to reduce inventory monitoring of inventory in order
to avoid overstock or shortage
Order batching Coordinated and accurate lot
size definition
Promotions Use of everyday low prices
(EDLP) instead of promotions
Shortage gaming Validation of customer demand
through historical data of
customer ordering
Product returns Policies to control returns or
canceled orders.
104
Vendor-Managed Inventory (VMI)
 Vendor control inventory at the buyer side

 Buyer provides information on inventory and sales
Responsibility
with
VMI
Responsibility
no
VMI
105
106
VMI (Vendor-Managed Inventory)

the buyer provides certain information to a supplier of that
product ,
 the supplier takes full responsibility for maintaining an

agreed inventory level of the material, usually at the buyer's
consumption location (usually a store).
 a third party logistics provider (3PL) can also be involved to
control that the buyer has the required level of inventory by
adjusting the demand and supply gaps.
107
108
VMI Example
109
VMI Example
110
VMI Technology: SupplyOn
1. agree on min. and max. stock limits

2. demand and inventory is transmitted from ERP to SupplyOn
3. demand and inventory is shown in the Inventory Monitor, thus the supplier can plan
deliveries based on the agreed limits
4. ASN is entered by the supplier and transmitted to the ERP system
5. Inventor Monitor shows in-transit quantities
6. goods are booked into the system upon delivery and are visible in the Monitor
111
7. invoice or credit note is generated as soon as the goods have been booked
Vendor-Managed Inventory (VMI): Advantages
For vendor:
 Early recognition of fluctuation in demand
 Optimization of production planning; increased volume
 Forces disciplines: measurements and communication
 Better planning and resource use via visibility
 Improved market analysis and elimination of “waste“ activities
 Closer customer ties and preferred status
For buyer:
 Increase of inventory availability
 Reduction of procurement activities
 Fewer stock-out with higher inventory turnover
 Lower operating, purchasing and administrative costs
 SC relationship strategic strength
 Greater customer satisfaction and increased sales 112
Vendor-Managed Inventory (VMI): Advantages
For overall SC:

 Optimization of inventory management and cost reduction
 Decrease of fixed capital (stocks)
 Improvement of financial planning
 Supports long-term collaboration
For end-user:
 Increased service level and reduced stock outs
113
Vendor-Managed Inventory (VMI): Limitations
Limitations of VMI
 Trust in the supply chain should be high
 High costs of implementation and investments in IT
 Customer loss risk
 Non-foreseeable risks: employee strikes
 VMI mostly benefits end user and seller while vendor does
most of the work
 Additional processing activities for vendor (costs)
 Supplier dependent buyer
Application
 Items with high a consumption amount
 Items with a high consumption value (A- and B-items)
 Traditional procurement activities should be changed 114
SCOM: Collaboration Strategy
Planning CPFR (Collaborative

Front-end agreement Planning, Forecasting,
Joint-business plan
and Replenishment)
Forecasting
Sales-forecast
collaboration
Order-forecast
collaboration
Replenishment
VMI (Vendor-managed
Order generation
Inventory) 115
Risks in SCOM
116
Operational and disruption risks
Feature Ripple-Effect Bullwhip-Effect

Risks Disruptions (e.g., a plant Operational (e.g., demand
explosion) fluctuation)
Affected Structures and critical Operational parameters

parameters (such as such as lead-time and
areas supplier unavailability or lost inventory
sales)
Recovery Middle- and long-term; Short-term coordination to
coordination efforts and balance demand and supply
investments
Affected Output performance such as Current performance such

Performance annual revenues or profits as daily or weekly stock-
out/overage costs
117
Disruptions in the Supply Chain
- Tsunami and Earthquake in Japan in 2011 - Explosion at BASF plant in Ludwigshafen

- One of the most severe natural disasters with in 2016
the highest economic damages Impact on the Supply Chain Performance:
Impact on the Supply Chain Performance: • 15% of raw materials for global supply chain
• Toyota’s global sales reduced by 4%  market are missing
leadership lost in 2011 • Some production facilities are out of operation
• Honda’s global sales reduced by 9% for many weeks
Image Sources:
http://www.zeit.de/gesellschaft/zeitgeschehen/2016-10/ludwigshafen-basf-chemiekonzern-explosion
http://www.motortrend.com/news/japan-earthquake-tsunami-hit-parts-supplies/
http://wheels.blogs.nytimes.com/2011/03/24/toyota-to-resume-production-of-prius-and-two-lexus-hybrids/ 118
http://www.reuters.com/article/us-japan-quake-supplychain-idUSTRE72D1FQ20110314
Disruptions in the Supply Chain
Disruption: An event which is not planned or anticipated and may affect the structure
or dynamics of systems.
Economic and political shocks or changes, Terrorist attacks, Natural disasters,
Epidemics, Labor strike, Legal disputes
Disruptions cause supply chain structural dynamics.

They may affect the supply chain structure locally or
spread out through the supply chain network 119
Examples of disruptive risks
Factor Example Impacts
Terrorism September 11 Five Ford plants have been closed for a
Piracy Somali, 2008 long time
Breaks in many supply chains
Natural Earthquake in Apple computers’ production in Asia has
disasters Thailand, 1999 been paralysed
Flood in Saxony, Significant production decrease at VW,
2002 Dresden
Earthquake in Production breakdown in Toyota’s supply
Japan, 2007 chains amounted to 55.000 cars
Hurricane Katrina, This storm halted 10%–15% of total US
2006 gasoline production, raising both domestic
and overseas oil prices
Earthquake and Massive collapses in global automotive and
tsunami in Japan, electronics supply chains; Toyota lost its
2011 market leadership position
Floods in Chennai, Production of academic literature has been
India in 2015 stopped at many international publishing
120
houses
Examples of disruptive risks
Man-made Explosion at BASF plant 15% of raw materials were missing for the
disasters in Ludwigshafen in 2016 entire supply chain
Production of some products at BASF has
been stopped for many weeks
Fire at distribution center Delivery stop for a month
of e-commerce retail
company ASOS in 2005
A fire in the Phillips Phillips’s major customer, Ericsson, lost
Semiconductor plant in $400 million in potential revenue
Albuquerque, New
Mexico in 2000
Political “Gas” crisis 2009 Breaks in gas supply from Russia to
crises Europe, billions of losses to GAZPROM
and customers
Strikes Strikes at Hyundai plants Production of 130,000 cars has been
in 2016 affected
Legal Volkswagen and Prevent Six German factories face production halt
contract Group contract dispute in on parts shortage; 27,700 workers are
disputes summer 2016 affected, with some sent home and others
121
moved to short-time working
Performance and Resilience
122
Supply chain resilience
Resilience is the ability to maintain, execute and recover

(adapt) the planned execution along with achievement of the
planned (or adapted, but yet still acceptable) performance.
Building the resilient supply chain is based on mitigating risks,
preparedness to disruptions, stabilization and recovery,
123
Resilience and robustness
Robustness is based on redundancy to guarantee some performance
over a wide range of uncertainty. Resilience is based on redundancy
and flexibility. In this setting, flexibility is a system ability to situational
process and structural changes as an adjustment reaction to internal
and external disturbances.
124
Ripple Effect in the Supply Chain
Ripple effect: propagation of disruptions in the supply chain
125
Ripple Effect in the Supply Chain
Ripple effect describes the impact of a disruption on SC performance,

disruption propagation, and disruption-based scope of changes in the SC
structures and parameters.
supply chain structure dynamics control and adaptation
operations execution and stability control
xmax
xreal
Impact
xplan
xmin Disruption Stabilization

supply chain performance control
Recovery
Jmin
Ivanov D., Dolgui, A., Sokolov, B. (2014) The Ripple-Effect in Supply Chains: Trade-off “efficiency-flexibility-resilience” 126
in supply chain disruption management. International Journal of Production Research, 52:7, 2154-2172.
External reasons for disruptive risks
Demand Supply
External Natural and man-made
Financial and political
crises reasons disasters, strikes, piracy
Supply chain
Demand structure
Production facility
Demand disruption
disruption
Supplier and Transportation

logistics service disruption
provider bankruptcy
Supply disruptions
Currency exchange
rates fluctuations
Information system
disruptions
127
Internal reasons for disruptive risks
Sourcing Strategy Production Planning
Single 100% capacity

Sourcing utilization
Low-level Internal
safety Batching
reasons
technologies
Low safety No contingency

stocks plans
Inventory Management Control
12
8
How to protect the supply chain?
129
Supply chain capabilities
System: System:
redundancy in capacity and coordination / intergation
inventory, multiple sourcing outsourcing
Flexibility
Process:
Product:
Flexible and real time-based
modularization / standardization,
production/warehousing
postponement
systems
130
Improving performance through resilience
Adopted with changes from Pettit et al. (2010)
131
Resilience framework
Service Level
Redundancy Robustness/Flexibility Responsiveness
Pre-disruption Post-disruption
Preparedness Stabilization
Mitigation Recovery
Costs
132
Three decision levels
Proactive planning Reactive control

Structural Supply Chain Resilient Supply Chain Resilient Supply Chain
Design Stage Structural Design Control
Supply chain design in regard to Robustness and flexibility Supply chain recovery in the
efficiency and effectiveness analysis of the supply chain case of disruptions
Supplier FactoryDC Market
design Supplier Factory
Supplier Factory DC Market DC Market
Efficient supply chain Creating supply chain Supply chain recovery by

design flexibility by redundancy using flexibility
- efficient production - back-up facilities and links - system flexibility
- efficient logistics - risk mitigation inventory - structural flexibility
- efficient inventory - capacity flexibility - process flexibility
133
Role of proactive strategies
Order of 100 units per day
Risk Mitigation
Factory Inventory 700 units Retailer
Capacity 100 Daily Warehouse Daily shipments
units per day shipments
Factory is disrupted for 7 days

Service
Level, %
100
7 14 21 28 35 42 Time, days 134
Risk Mitigation
Inventory 700 units Retailer
Factory

Service
Level, %
100
0
7 14 21 28 35 42 Time, days 135
Risk Mitigation
Inventory 700 units Retailer
Factory

Service
Level, %
100
0
7 14 21 28 35 42 Time, days 136
Factory Warehouse Retailer

Capacity 100
units per day Back-Up
Factory

Service
Level, %
100
BUT: both higher safety stock and

back-up factory increase costs!
0
7 14 21 28 35 42 Time, days 137
Role of Recovery Policies
Time-to-Survive vs Time-To-Recover
Recovery Costs vs Recovery Time
Adapted from: Sheffi Y., Rice J.B. (2005). A Supply Chain View of the Resilient Enterprise. MIT Sloan
Management Review 138
Reactive control
Performance Disruption
recovered
performance
time for recovery
0
Time
Proactive and reactive resilience actions increase costs!
Total costs = operational supply chain costs

+ proactive costs of redundancy
+ reactive costs of recovery
139
Research Framework
We are interested to investigate the supply chain performance impact of

different combinations of disruptions, proactive mitigation strategies and
reactive recovery policies.
Example:
Two disruption scenarios I and II Four combinations of proactive

and reactive policies A, B, C, and D
Service Service
Scenario I Scenario II
Level Level
D B D
C
A
B
A C
140
Costs Costs
Ivanov D., Tsipoulanidis A., Schönberger J. (2017). Global Supply
1 Chain and Operations
Introduction 2 Management,
3 4 5
Supply chain resilience and ripple effect control
Stability
Ripple
Robustness effect Resilience
control
Risk mitigation Parametric recovery

inventory; (inventory);
Flexibility
Capacity flexibility; Process recovery
(capacity flexibility);
Backup facilities
and channels Structural recovery
(backup facility)
Proactive
Reactive
141
Supply chain sustainability
• Supply chain sustainability is based on triple-bottom-

line “economy-ecology-society”.
• Joint consideration of all these elements is crucial for
SCOM in long-term perspective.
• In SCOM such concepts like “Closed-Loop Supply
Chain” and “Reverse Logistics” have been developed.
• They are based on the idea that supply chain does not
end at the point of sale but can be seen as a cycle
including the after-sale area.
142
Chapter 5
Sourcing
Strategy

Learning objectives

• Role of purchasing, procurement, and sourcing in SCOM
• Basic elements of sourcing process
• Make-or buy vs outsourcing
• Organization issues in sourcing
• Sourcing strategies according to number of suppliers,
geographical supplier distribution, and sourcing principles
• Methods of spend analysis and supplier selection
• Elements of supplier relationship management (SRM)
144
New logistics concept (NLK)

at Volkswagen
145
Basic definitions
Supplier
Supplier Selection
Scoring Collaboration Replenishment
And Purchasing
And Design planning
Contract
Assessment Negotiation
Sourcing Procurement Purchasing
Purchasing is the process of procuring the proper requirement, at

the time needed, for the lowest possible costs from a reliable source.
Purchasing deals mostly with commercial activities and is related to
transactional, ordering processes.
Procurement covers a broader scope than purchasing and covers
both acquisitions from third parties and from in-house providers. It
also involves options appraisal and the critical “make or buy”
decision. 146
Sourcing
Sourcing needs to be understood to be the entire set of

business processes required to purchase goods and services.
Sourcing activities range e. g., from the selection of suppliers,
to drawing up contracts, product design and collaboration, to
evaluation of supplier performance. Broadly speaking, sourcing
is the process of establishing and managing the supplier
relationships in the SC. In the narrow sense, sourcing is related
to the activities and processes to provide the enterprise with
materials, services, capital equipment, means of production,
tools and supplies for work, etc. from external suppliers or
partners.
Sourcing is a very important activity in the SC. The purchased
parts and materials can account for over 60% of the cost of
finished goods; for retail companies within the SC this can be as
high as 90%. 147
Sourcing process
Based on: Kummer S, Jammernegg W, Grün O (2013) Grundzüge der Beschaffung, Produktion und Logistik. 2nd
edn. Pearson, Harlow 148
Sourcing process
 Determination of material requirements:
i.e., the type, composition, configuration, quality, volume, location and timing
for the delivery of the sourcing objects;
 Order management:
i.e., determination of order volumes, frequencies, times and specification of
logistical conditions. Also the supervision of accurate deliveries, goods
reception, invoice control and approval;
 Supplier base research, observation and analysis:
i.e., analysis and evaluation of the supplier base, assessment of potential
new partnerships and elaboration of (strategic sourcing) recommendations,
preparation of negotiations, contracts, etc.
 Make or buy decisions:
Identification of internal/external value adding scope depending on the core
competencies, but also comparison of capacities, lead times, costs, etc.
 Supplier management:
i.e., auditing suppliers, running performance management assessments e.g.,
regarding on-time deliveries, quality , reliability, flexibility, etc. This is also
related to supplier development or can initiate a substitution of suppliers. 149
Make-or-Buy vs Outsourcing
“Make or buy” is a strategic decision that determines if the

sourcing objects are internally made or externally sourced.
Such strategic decisions are related to the question of core

competencies.
If the relevant value adding processes have historically been

performed by an organizational unit’s own people and the
decision has been made to externalize certain processes (i.
e., to buy), the so-called “outsourcing” takes place. That
means that outsourcing is a result of a make or buy
decision.
150
Outsourcing analysis
 lower production cost

 better use of available resources
 focusing on core competencies
 cost restructuring
 reduction of time-to-market
 risk sharing
 know-how sharing
 quality issues
 flexibility
 tax benefits.
151
Make or Buy analysis
 Core competence/strategic fit

What are the unique capabilities that are very difficult to
imitate?
What are the strategic objectives the company needs to
meet?
Does the focus on lean production require an adaptation
of the production depth?
Is it necessary to buy more in new markets because of
local content requirements?
 Variety and/or stability on the demand side
What is the stable level of demand we can fulfil with our
existing capacity and when is it recommended to increase
peak capacity needs by temporary supplementary
external sourcing?
152
• Production capacity on the sourcing side

Are there existing contracts (e. g. purchasing agreements or
sales orders) that need to be fulfilled and which will impact the
make or buy decision?
• Autonomy
Do we jeopardize our competitive position by providing external
parties with confidential drawings, intellectual property rights,
new research results, etc.? Is there a risk that we might even
create a future competitor by going for a buy decision that will
lead to a know-how transfer?
• Dependency on suppliers
With the increasing level of external purchases, dependency on
suppliers, their quality, reliability and also punctuality can
significantly influence the organization’s own reputation.
Do we have a strong or weak market position and how does it
look in the case of suppliers? 153
• Evaluation of the cost structure

In the case of “make” decisions, the corresponding costs are
linked to e. g., material and labour costs, salaries or the
depreciation cost of the equipment in use. In the case of “buy”,
the decision will be related to the purchasing, transportation,
handling, storage or transportation costs.
• Financial shortage or need for capital
Especially at times of financial shortages, the decision to
externally source parts, modules or services is an important
factor, as it relieves the cost pressure.
154
Sourcing strategy classifications
Number of suppliers Geographical aspects

• single sourcing • local sourcing
• dual sourcing • national sourcing
• multiple sourcing • international sourcing
• global sourcing
Sourcing principles
• sourcing on-stock
• Just-in-time (JIT) sourcing
• supply chain coordination (e.g., VMI)
• particular sourcing
155
Sourcing strategy classifications
Number of suppliers Geographical aspects

• single sourcing • local sourcing
• dual sourcing • national sourcing
• multiple sourcing • international sourcing
• global sourcing
Sourcing principles
• sourcing on-stock
• Just-in-time (JIT) sourcing
• supply chain coordination (e.g., VMI)
• particular sourcing
156
Single vs Multiple Sourcing
• volume
• product variety
• demand uncertainty
• lead time importance
• disruption and other risks
• transportation costs
• manufacturing complexity
• coordination complexity
• post-sales issues
157
Single Sourcing
• long-term agreements • inefficient price policy

• price stability • lead time, quality and
service issues
• suppliers included in the
product development • lack of collaboration with
process at a very early many suppliers
stage
• low transactional costs
• scale effects
158
Local vs Global Sourcing
Costs
labour, taxes, transportation, insurance, transshipment, duties,
and transactions
Quality
bill-of-materials, quality control, after-sales service,
certifications
Service
on-time delivery, responsiveness, flexibility, technical
equipment, image, reliability
Sustainability
political, economic, social issues
159
Local vs Global Sourcing
Local Sourcing Global Sourcing
Advantages  Same norms / standards  Broadest variety of available
 Easy to reach / short vendors
distances  Largest portfolio of products
 Same culture, same currency, or services
same political climate  Best opportunities to compare
 Good basis for JIT deliveries and negotiate with suppliers
due to broadest supplier base
 Lower disruption risks for
overall supply chain
Disadvantages  (Very) limited supplier base or  Longer travel and
there could be even no transportation time
supplier base  Longer response time in case
 Possibly limited bargaining of changes
power of buyer because of  Possibly larger lot sizes
limitations on supplier side
 Potentially different norms /
standards
 Different cultures, currencies
and political uncertainty
 Higher disruption risks for
160
overall supply chain
Global sourcing: impact analysis
Costs
Quality Service
Politics / Society / Nature 161
Examples
 Make-to-Order  Make-to-Stock  Make-to-Stock

 Production flexibility  Production efficiency  Ban on supply IKEA
by the Swedish
 Global organisational  Global organisational
furniture trade
structure: structure:
organisation
• Production facility • Product development
• International purchase
(Assembly)
• Production facilities showed the opportunity
• Supplier network for local development
• Assembly
• Distribution Hubs  Global organisational
• Dispatch
• Call Centres structure:
• Sales & service • IKEA acted as a

dominant entity over its
• IT and Data centres suppliers
162
Future of Global Sourcing?
163
JIT: just-in-time
“JIT is a philosophy of manufacturing based on planned

elimination of all waste and continuous improvement of
productivity.
The primary elements include having only the required inventory
when needed; to improve quality to zero defects; to reduce lead
time by reducing set-up times, queue length and lot sizes; to
incrementally revise the operations themselves; and to
accomplish these things at minimum cost”.
Based on: American Production and Inventory Control Society
JIT allows reducing inventory at the production site, cutting

lead times, increasing productivity and responsiveness.
High-value materials with good demand predictability and quite
steady demand especially can be recommended for JIT.
164
Just-in-Time / Just-in-Sequence Example Volkswagen Saxony
Cockpit fitting: 200 min after the material order
In‐house
R Manufacturing time Delivery transportation R
20 95 40 35 10 Time
Passat B6 A5 / B6 (min)
Golf A5
Material order
JIT SAS
In‐house
SAS Manufacturing start
transportation
Delivery to Mosel
Truck loading (24 Cockpits)
JIT SAS
Manufacturing Cockpit
165
SRM: Supplier Relationship Management
166
Supplier assesment methods
Spend analysis
• What categories of products or services significantly influence the
company spending?
• How much are we spending with various suppliers?
• What are our spending patterns at different locations?
Supplier industry analysis
Cost and performance analysis
Supplier role analysis
Business process analysis
Business benefit analysis
Commodity plan implementation and execution
167
Supplier selection: factor ranking method
Popular because a wide variety of factors can be included in

the analysis
Six steps in the method
1. Develop a list of relevant factors called key success
factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for each
location
6. Recommend the location with the highest point
score
168
Supplier selection
Scores for Supplier A Scores for Supplier B
Criteria Weight [%] supplier A rating supplier B * rating
Cost of purchased items 20 6 1,20 7 1,40

Quality of purchased
items 20 4 0,80 6 1,20
On time delivery (OTD)
performance 15 7 1,05 4 0,60
Sustainability standards
compliance 25 6 1,50 8 2,00
Reputation of supplier in
the market 10 3 0,30 4 0,40
References from other
customers 5 8 0,40 4 0,20
Global footprint of
supplier 5 9 0,45 6 0,30
Total 100 5,70 6,10
* The scale ranges from 0 points (very poor) up to 10 points (excellent).
Sensitivity analysis should be performed in the case of any quite similar

evaluations of some suppliers. Such an analysis will help to identify the
impact of changes in weights and scores on the overall supplier evaluation. 169
Supplier integration and development
1. identify the critical products

2. identify the critical suppliers
(assess their current and future capabilities)
3. appraise the performance of the suppliers
(usage of a standardized KPI framework)
4. determine the gap between current and desired supplier
performance
5. form a cross-functional supplier development team
6. meet with supplier’s top management team
7. agree how the identified gaps can be bridged;
8. set deadlines for the achievement of the improvements
9. monitor improvements
170
Key Points from This Chapter
What to source?  Make or Buy and outsourcing decisions.

How to source?  What is the sourcing tool or process that needs to
be applied (e. g. do we consider manual sourcing or do we use IT
tools such as portals, EDI? How well are business processes aligned
between the supplying and the buying parties?) What is the
appropriate sourcing organization, to purchase individually or to
establish an alliance and thus follow the idea of collaborative
sourcing?
From whom to source?  With how many suppliers or partners do
we cooperate? Which supplier demonstrates good performance or has
further potential –who should be developed and who should be
substituted?
From where to source?  local vs global sourcing?
When to source?  how to schedule the sourcing (e.g. JIT)
Alternatively the strategy of sourcing on-stock might be applied. 171
Identify the problems with this process and suggest solutions!
172
Chapter 6
Production
Strategy

Learning objectives

• Push and pull views of the supply chain
• Mass customization and modularization
• Order penetration point and postponement
• Basic production strategies in the supply chain
• Analysis of order penetration point location
174
DELL vs Lenovo
175
Production Strategy
With pull processes, execution is initiated in response to a customer order.

With push processes, execution is initiated in anticipation of customer orders.
Therefore, at the time of execution of a pull process, customer demand is
known with certainty, whereas at the time of execution of a push process,
demand is not known and must be forecast.
176
The push/pull view
The push/pull view of the supply chain divides supply chain processes into
two categories based on whether they are executed in response to a
customer order (downstream part) or in anticipation of customer orders
(make-to-stock, upstream part).
Pull processes are initiated in response to a customer order. The
advantages of the downstream part are responsiveness, and high degree of
customer-oriented product individualization.
Push processes are initiated and performed in anticipation of customer
orders. The advantages of the upstream part are the economy of scale (low
manufacturing and transportation costs), flexibility (high level of inventory),and
the short supply times.
This view is very useful when considering strategic decisions relating to
supply chain design, because it forces a more global consideration of supply
chain processes as they relate to the customer.
177
Order penetration point (OPP) and postponement (1)
The push/pull boundary is called OPP that separates push

processes from pull processes.
A product is kept as long as possible in a generic state. Differentiation of

the generic product into a specific end-product is shifted closer to the
consumer by postponing identity changes, such as assembly or packaging,
to the last possible supply chain location. 178
Order penetration point and postponement (1)
Van Hoek (2001) defines postponement as “an

organizational concept whereby some of the activities in the
SC are not performed until customer orders are received”.
The postponement concept was first time introduced in the
literature by Alderson (1950), where it was observed that
products tend to become differentiated as they approach the
point of purchase.
Especially useful for:
 Significant number of variants of an end product with an
uncertain split of demand on variants.
 Delivery time requested by customers must allow value-
adding steps after receipt of customer orders (or reliable
demand forecast). 179
Order penetration point and postponement (2)
Differentiation of the generic product into a specific end-

product is shifted closer to the consumer by postponing
identity changes, such as assembly or packaging, to the last
possible supply chain location.
This allows keeping safety stock of one generic product
instead of multiple specific end-products. Especially in
cases where the split of demand into specific end-products
is uncertain, postponement with its risk pooling effect leads
to less safety stock required and to a lower risk of
obsolescence of end-products.
Furthermore, as less value has been added to the generic
product than to the specific end-product, less capital is
bound in each stocked unit.
180
Case-study and company video
AirSupply
181
AirSupply
182
AirSupply
183
Task
This task investigates the issue of how to determine right

production strategy and OPP location in the supply chain.
Consider two strategies:
 MTS and delivering from a general inventory holding unit
and
 introducing the MTO agile part downstream the general
inventory holding unit.
We assume that the introduction of the agile supply chain part
downstream the OPP leads to an increase in both flexibility
and costs. We propose the “lost-sales”-based treatment of
the OPP location determination: OPP location can be
determined through a comparison of financial results of the
two strategies (with and without OPP).
184
Task
Ra  k a  (Cua  Cda  P a  La )
D  maxt 0 ;T 
R  (C  k  P  k  L)
185
Example
186
Chapter 7
Facility
Location
Planning and
Network
Design
Learning objectives

• Understand the importance of selecting the right facility
locations
• Describe the main phases of location-related decision-
making processes
• Apply quantitative analysis techniques to solve supply
chain design problems
• Compute solutions to different settings of the warehouse
location problem
• Use centre-of-gravity methods and the Miehle algorithm
• Apply factor-ranking method to facility location decisions
188
Power Pong Sports, China
189
Importance of location decision
• One of the most important decisions a firm makes

• Increasingly global in nature
• Significant impact on fixed and variable costs
• Decisions made relatively infrequently
• Costs is not the only factor to be considered
• Innovations, supplier market, infrastructure, qualified
people, political issues, currency exchange risks,…
• Once in place, location-related costs are fixed in place
and difficult to reduce
• Capacity expansion aspects should be considered
• Determining optimal facility location is a good investment
• The objective is to maximize the benefit of location to the
company 190
Supply Network Design Framework
191
Global Supply Chain Design: Warehouse location problem (WLP)
Given (parameters): Find (variables):

- Set S of potential facility Facility locations: if a facility is opened in
locations region sS, then ys=1 and the annual
- Set M of markets fixed costs rise by the amount fs;
- Set T := S · M of all otherwise ys=0
possible transportation links Transportation links: if a transportation
- Link transportation costs link (s,m)T is used, then xsm=1
csm and the annual costs increases by
- Fixed costs fs amount csm ; otherwise xsm=0
Satisfy (constraints): xsm  ys , s  S, m  M

- Single sourcing constraints
x sm  1, m  M
ys 0;1s  S, xsm 0;1(s, m) T
- Binary constraints sS
Extremize (objective function):

- Minimize total costs 192
Spreadsheet Modelling: data and objective function
193
Excel Solver setup
194
Spreadsheet Solution
195
How Excel-Solver works: Branch & Bound method
For small instances, b&b is a suitable method. However, the solution

of real-life problems involves a higher complexity. This makes it
necessary to apply solving the WLP by different heuristic methods
rather than exact algorithms. The reason for that is the high number of 196
integer variables.
Capacitated warehouse location problem (CWLP)
Differencies to WLP problem
• we know the quantities qs (s S) that can be handled by

each reseller per year (i.e., supply capacity is restricted)
• in order to assign a sufficient quantity to each reseller we
need to have the demand dm of each market mM
• we use the family of non-negative decision variables zsm ≥ 0
in order to represent decisions about the installation and
usage of transportation links. If zsm = 0 then there is no link
installed to connected supplier s with market m. If zsm > 0
then the value of zsm is interpreted as the shipment
quantity along the transportation link originating from
supplier s and terminating in market mM.
197
CWLP model
Given (parameters): Find (variables):

- Set S of potential facility locations Facility locations: if a facility is
- Set M of markets opened in region sS, then ys=1 and
- Market demand dm the annual fixed costs rise by the
amount fs; otherwise ys=0
- Market sale quantitiy qs
- Set T := S · M of all possible Transportation links: usage of the
transportation links transportation link (s,m)T increases
the annual costs by amount csm· zsm
- Unit transportation costs c‘sm
Shipment quantities zsm
- Fixed costs fs
Satisfy (constraints): Logical constraint:
Demand constraint Capacity constraint Binary and non-negativity cons.

z
sS
sm  d m ,m  M z
sS
sm  qs ,s  S ys  0;1s  S , zsm  0(s, m) T
Extremize (objective function):

- Minimize total costs 198
CWLP Model: analysis
1. Formulate the CWLP model!

2. What can you say about sensitivity of the goal function to
changes in (a) fixed costs and (b) variable transportation costs?
3. How could you use the CWLP to explain to your CEO:
(a) why would the total supply chain costs increase or decrease if
change our locational decision?
(b) how can you use the optimization results and the costs of
optimal solution to negotiate with logistics companies and
suppliers?
(c) what would it make more sense to reduce the new costs: to
negotiate with (i) freight careers to reduce transportation costs or
(ii) with engineering company that builds your new facilities?
199
Stage II: Regional facility location
• The CWLP-based approach helped us with identification

of regions that should be considered for setting up a
supply chain. These regions might be continents,
countries, states or even farms or growing areas or
plantations supplying or consuming products.
• The outcome of phase I (the regions to be considered in
the prospective supply chain) are now forwarded into
phase II where one or several locations have to be
identified and compared for each region as network
node.
200
Center-of-gravity method: principle
Center-of-gravity method (also known as greenfield analysis

(GFA)) helps to find location of a distribution center or a
warehouse that minimizes total transportation costs
It considers:
• Location of markets expressed by two coordinates
• Volume of goods shipped to those markets, i.e., market
demand
• Shipping cost (or distance)
It assumes that cost is directly proportional to distance and volume

shipped
Placing the existing locations on a coordinate grid, we

calculate X and Y coordinates for ‘center of gravity’ which
implies finding the optimal location
201
Center-of-gravity method: formalization
Objective function:
Notation Meaning
Z Total transportation costs
px X-coordinate of optimal location
py Y-coordinate of optimal location
xi X-coordinate of i-market
yi Y-coordinate of i-market
D Demand in the i-market
i Running index of market numbers
202
Center-of-gravity method: computation
How to compute distance and coordinates?

direct line method: corner method:
d ( px ; p y );( xi ; yi )  ( xi  px ) 2  ( yi  p y ) 2 d ( p x ; p y ); ( xi ; yi )  xi  p x  yi  p y
203
Center-of-gravity method: computation
How to compute distance and coordinates?

direct line method: corner method:
If costs is different for

different transportation
links, then:
· costs
· · costs 204
Center-of-gravity method: example
German customers of TT Profi
i Name Coordinates Annual demand

xi yi Di
1 Sport 1-2-3 KG 10 -80 3t
2 TT direct -45 -30 1t
3 Sports and Fun 60 50 1.5t
4 Leisure Outlet 45 -75 3.5t
5 Raquets & More -75 80 2t
205
Center-of-gravity method: solution using corner method
30  45  90  157,5  150  240  30  75  262,5  160

px   8,25 py   29,75
10 10
I Name Coordinates Distances Demand

xi yi d(px;py) Di
1 Sport 1-2-3 KG 10 -80 52 3t
2 TT direct -45 -30 37 1t
3 Sports and Fun 60 50 72 1.5t
4 Leisure Outlet 45 -75 82 3.5t
5 Racquets & More -75 80 117 2t
Note: here we assume that cost factor per km and weight

unit is 1 euro. If not, we need to multiply (distance by
206
volume by cost factor)
Improvement by Miehle algorithm
Replace: px=a and py=b
207
Improvement by Miehle algorithm: procedure
208
Improvement by Miehle algorithm: procedure
… if Rackets
& More
demands 8
tons:
209
Stage III: Location selection and factor-rating method
• A wide variety of factors can be included in the analysis

• Seven steps in the method
1. Identify location options.
2. Determine decision criteria (location factors) and their
measurement.
3. Determine weighting totaling 100% for the different criteria.
4. Evaluate every location option on a normalized scale to
achieve “partial utility values”, e.g., usage of a scale from 1-
10 points (in which 10 = best).
5. Calculate the “total utility value” of a location option by
multiplying “partial utility values” with weights and adding
these values.
6. Compute weighted average if many experts are involved
7. Choose the option with the highest “total utility value”. 210
Qualitative and quantitative factors
Quantitative criteria Qualitative criteria

Transportation costs Infrastructure
Building and construction costs Quality of labour
Rental costs Transportation development
Labour costs Purchasing power
Material costs Options for financing (free trade zones, etc.)
Taxes Suppliers
Financial support from local Political risks
governments Natural disaster risks
Proximity to customers and suppliers
Business climate
Environmental regulations
Competitive advantage
Government and trading barriers
211
Example
The option with the highest score is the one that is suggested If the
scores of different options are very close to each other, sensitivity
analysis is mandatory.
Shortcomings of the factor-rating method include the fact that the
212
weighting percentages assigned per factor are not clearly visible.
Software Example: anyLogistix
213

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Chapter 1

Learning objectives for this Chapter:

The best supply

 SCOM is everywhere! – production, logistics, healthcare,

Input Value adding Output

Operations is a function or system that transforms inputs

Marketing Operations Finance

The operations function along with marketing and finance

Operations management is involved with managing the

How to achieve maximum of the desirable goal with

Supply chain is a network of organizations and

Supply Chain Management is a cross-department and

SCM integrated production and logistics processes

Customer orientation Market globalization Information society

Changes in competitive strategies

Individual Reaction Emerging Outsourcing Internet IT systems

Flexibility Transportation New business

Intra-organizational integration and inter-organizational coordination along the entire

Supply Chain Management

Case study „Chocolate Supply Chain“

Sourcing Production Distribution IT

- Supplier Selection - Production Strategy - Distribution Strategy - Communication

- MRP /EOQ - Aggregate Planning -Distribution planning - ERP

The responsibilities of decision-makers in SCOM are really

• Risk Management and Resilience

Free companion web site:

Learning objectives for this Chapter:

• Interrelations between business processes, quantitative

Process is a content and logic sequence of functions or steps

Today companies are organized on the process basis. As said by W. Edwards

The basic concept for managing processes in an organization

• Identify processes for change

Process Production Costs

Total customer orders –

Capacity Actually used capacity

Customer order Production Production Customer order

Process models describe the SCOM activities from an

• SCOR (Supply Chain Operations Reference),

• ARIS (Architecture of Information Systems),

• UML (Unified Modelling Language) and

• IDEF (Integration Definition for Function Modelling)

The main value of SCOR is the standardized business

SCOM managers say:

Management Information Systems (MIS) collect,

Planning at the enterprise level

1. Issues of investments in IT infrastructure:

 Enterprise resource planning (ERP) systems

Further reading: Stadler H., Kilger C. Supply Chain Management and

Order completion; working

Inventory on hand and work- Schedule calculation

Plan deviation analysis and

Planned cost calculation Reporting

Order Shop floor

Supply Chain Event Management

• International Supply Chains

Up-to-date data Costs

Contact-free Technical issues

„Bulk“-reading Privacy issues

Execution Planning Strategy Sourcing Production Distribution SCM

- Statisitical methods - Statisitics

-Integer programming - Integer programm.

Fuzzy / Robust / Stochastic optimization

Analytical component Behavioral component

Each management decision has two components. The first one is an