13TH NOVEMBER 2019

SUPPLY CHAIN
MANAGEMENT
The Impact of Globalization on
Supply Chain Networks
 Globalization offers companies opportunities to
simultaneously grow revenues and decrease costs.
 The opportunities from globalization are often
accompanied by significant additional risk.
 There will be a good deal of uncertainty in demand,
prices, exchange rates, and the competitive market over
the lifetime of a supply chain network.
 Therefore, building flexibility into supply chain
operations allows the supply chain to deal with
uncertainty in a manner that will maximize profits
THE OFFSHORING DECISION
Companies have failed to gain from offshoring
for two main reasons:

1. Focusing exclusively on unit cost rather than

total cost when making the offshoring
decision.

2. Ignoring critical risk factors.

KEY ELEMENTS OF TOTAL COST TO BE
CONSIDERED WHEN GOING GLOBAL
1. SUPPLIER PRICE
2. TERMS: Costs are affected by net payment terms
and any volume discounts
3. DELIVERY COST: Transportation costs and freight
costs.
4. INVENTORY AND WAREHOUSING
5. COST OF QUALITY
6. CUSTOMER DUTIES
7. EXCHANGE RATE TRENDS
NOTE

A global supply chain with

offshoring increases the length
and duration of information,
product and fund flows.
Uncertainties that are relevant when
designing global supply chain
1. DEMAND
2. PRICE
3. EXCHANGE RATES
4. ECONOMIC ENVIRONMENT

Note: These uncertainties and any flexibility in the supply

chain network must be taken into account when
evaluating alternative designs of a supply chain.
 SUPPLY CHAIN RISKS TO BE CONSIDERED WHEN GOING
GLOBAL
CATEGORY RISK DRIVERS
DISRUPTIONS NATURAL DISASTERS
WAR AND TERRORISM
LABOUR DISPUTES
SUPPLIER BANKRUPTCY

DELAYS HIGH CAPACITY UTILIZATION AT SUPPLY SOURCE

INFLEXIBILITY OF A SUPPLY SOURCE
POOR QUALITY AT SUPPLY SOURCE

SYSTEMS RISK INFORMATION INFRASTRUCTURE BREAKDOWN

FORECAST RISK INACCURATE FORECASTS DUE TO:

LONG LEAD TIMES
PRODUCT VARIETY
SHORT LIFE CYCLES
SMALL CUSTOMER BASE
SEASONALITY

INTELLECTUAL PROPERTY RISK GLOBAL OUTSOURCING AND MARKETS

PROCUREMENT RISK EXCHANGE RATE RISK

PRICE OF INPUTS

INVENTORY RISK RATE OF PRODUCT OBSOLESCENCE

DEMAND AND SUPPLY UNCERTAINTY
STRATEGIES TO MITIGATE RISK IN
GLOBAL SUPPLY CHAINS

OPERATIONAL STRATEGIES
1. Carrying excess capacity and inventory
2. Flexible capacity
3. Redundant suppliers
4. Improved responsiveness
5. Aggregation of demand
FINANCIAL STRATEGIES
1. Hedging fuel costs
2. Hedging currencies
NOTE: No risk mitigation strategy will
always pay off.
EXAMPLES
Flexibility built into Honda plants proved effective only when
demand for vehicles shifted in an unpredictable manner in
2008. Otherwise the flexibility would have gone unutilized.
IBAS (Intelligent body assembly system), flexibility built in 1990s,
got Nissan almost bankrupted because the demand in
automotive industry did not fluctuate.
Fuel Hedges cost Southwest Airlines huge amount of money
when crude oil prices dropped significantly in 2008. Initially,
these derivatives made billions for the company .
 ROLE OF FORECASTING FOR BOTH AN
ENTERPRISE AND A SUPPLY CHAIN

 The basis for all strategic and planning decisions in a

supply chain
 Used for both push and pull processes
 Examples:
 Production: scheduling, inventory, aggregate planning
 Marketing: sales force allocation, promotions, new
production introduction
 Finance: plant/equipment investment, budgetary planning
 Personnel: workforce planning, hiring, layoffs

 All of these decisions are interrelated.

Forecasting Methods
 Qualitative: Primarily subjective; rely on judgment and
opinion
 Time Series: use historical demand only
 Static
 Adaptive
 Causal: use the relationship between demand and some
other factor to develop forecast. Find correlation between
demand and environmental factors and estimates of what
environmental factors will be to forecast future demand.
Example: Companies
 Simulation
 Imitate consumer choices that give rise to demand
 Can combine time series and causal methods
 Components of an Observed Demand

Observed demand (O) =

Systematic component (S) + Random component (R)
Level ( measures current deseasonalized demand)

Trend (measures rate of growth or decline in demand)

Seasonality (indicates predictable seasonal fluctuations in

demand)
• Systematic component: Measures the expected value of demand
• Random component: The part of the forecast that deviates
from the systematic component. It measures fluctuations in demand
from the expected value.
• Forecast error: difference between forecast and7-12
actual demand
Time Series Forecasting

50,000
40,000
30,000
20,000
10,000
0
,2

,3

,4

,1

,2

,3

,4

,1

,2

,3

,4

,1
97

97

97

98

98

98

98

99

99

99

99

00
7-13
 Role of Aggregate Planning
in a Supply Chain
 Capacity has a cost, lead times are greater than zero
 Aggregate planning:
 process by which a company determines levels of
capacity, production, subcontracting, inventory, stockouts,
and pricing over a specified time horizon
 goal is to maximize profit
 decisions made at a product family (not SKU) level
 time frame of 3 to 18 months
 how can a firm best use the facilities it has?

8-14
 Role of Aggregate Planning
in a Supply Chain
 Specify operational parameters over the time horizon:
 production rate
 workforce
 overtime
 machine capacity level
 subcontracting
 backlog
 inventory on hand
 All supply chain stages should work together on an
aggregate plan that will optimize supply chain
performance

8-15
 The Aggregate Planning Problem
 Given the demand forecast for each period in the
planning horizon, determine the production level,
inventory level, and the capacity level for each
period that maximizes the firm’s (supply chain’s)
profit over the planning horizon
 Specify the planning horizon (typically 3-18 months)
 Specify the duration of each period
 Specify key information required to develop an
aggregate plan

8-16
 Information Needed for
an Aggregate Plan
 Demand forecast in each period
 Production costs
 labor costs, regular time ($/hr) and overtime ($/hr)
 subcontracting costs ($/hr or $/unit)
 cost of changing capacity: hiring or layoff ($/worker) and cost of
adding or reducing machine capacity ($/machine)
 Labor/machine hours required per unit
 Inventory holding cost ($/unit/period)
 Stockout or backlog cost ($/unit/period)
 Constraints: limits on overtime, layoffs, capital available,
stockouts and backlogs

8-17
 Outputs of Aggregate Plan
 Production quantity from regular time, overtime, and
subcontracted time: used to determine number of workers
and supplier purchase levels
 Inventory held: used to determine how much warehouse
space and working capital is needed
 Backlog/stockout quantity: used to determine what
customer service levels will be
 Machine capacity increase/decrease: used to determine if
new production equipment needs to be purchased
 A poor aggregate plan can result in lost sales, lost profits,
excess inventory, or excess capacity

8-18
Aggregate Planning Strategies

 Trade-off between capacity, inventory,

backlog/lost sales
 Chase strategy – using capacity as the lever
 Time flexibility from workforce or capacity
strategy – using utilization as the lever
 Level strategy – using inventory as the lever
 Mixed strategy – a combination of one or more
of the first three strategies

8-19
Chase Strategy
 Production rate is synchronized with demand by varying
machine capacity or hiring and laying off workers as the
demand rate varies
 However, in practice, it is often difficult to vary capacity
and workforce on short notice
 Expensive if cost of varying capacity is high
 Negative effect on workforce morale
 Results in low levels of inventory
 Should be used when inventory holding costs are high
and costs of changing capacity are low

8-20
Time Flexibility Strategy
 Can be used if there is excess machine capacity
 Workforce is kept stable, but the number of hours
worked is varied over time to synchronize production
and demand
 Can use overtime or a flexible work schedule
 Requires flexible workforce, but avoids morale problems
of the chase strategy
 Low levels of inventory, lower utilization
 Should be used when inventory holding costs are high
and capacity is relatively inexpensive

8-21
Level Strategy
 Maintain stable machine capacity and workforce levels with
a constant output rate
 Shortages and surpluses result in fluctuations in inventory
levels over time
 Inventories that are built up in anticipation of future demand
or backlogs are carried over from high to low demand
periods
 Better for worker morale
 Large inventories and backlogs may accumulate
 Should be used when inventory holding and backlog costs are
relatively low

8-22
Fundamental Tradeoffs in Aggregate
Planning
 Capacity (regular time, overtime, subcontract)
 Inventory
 Backlog / lost sales
Basic Strategies
 Chase strategy
 Time flexibility from workforce or capacity
 Level strategy

8-23