DESC372: Supply Chain Planning and Control
Fall 2009 Midterm Review Sheet (by Sil)
The following Chapter summaries are put in the order of the professor’s lecture.
CH1 Introduction to Supply Chain Management
1.1 What is Supply Chain Management
Typical Supply Chain:
Raw materials are procured items are produced at one or more factories  shipped to warehouses for
intermediate storage  shipped to retailers for customers.
To reduce cost and improve service levels:
Effective supply chain strategies must take into account  interactions at the various levels in the supply
chain.
Supply Chain (also referred as: Logistics Network) Consists of:
Suppliers, manufacturing centers, warehouses, distribution centers, and retail outlets
Also, raw materials, work-in-process inventory, and finished products that flow between the facilities
Supply Chain Management (SCM):
Set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so
that merchandise is produced and distributed at the right quantities, to the right locations, and at the
right time, in order to minimize systemwide costs while satisfying service level requirements.
What make’s SCM difficult?
The Development Chain
Global Optimization
Managing Uncertainty and Risk
1.2 The Evolution of Supply Chain Management
1.3 The Complexity
1.4 Key Issues in Supply Chain Management
CH7 Distribution Strategies
Effective supply chain requires the efficient integration of the front end (customer demand), with the back
end (production and manufacturing processes).
Two Possible distribution strategies:
1) Directly shipped

From Supplier/manufacturer  to retail stores/end customers
2) Use intermediate inventory storage points (warehouses/distribution centers)

Warehouses used in different ways depending on:
1. Manufacturing strategy (make-to-stock vs make-to-order)
2. # of warehouses
3. Inventory policy
4. Inventory turnover ratio
5. Internal warehouses owned by firm or by outside distributors
6. Supply chain owned by one firm or multiple firms
7. Length of time that inventory is stored in warehouse*
*One of the most fundamental
1. Direct Shipment Distribution Strategies
Pros:
- Operating distribution center expenses avoided by retailers
- Lower Lead Times
Cons:
- Risk-pooling effect (CH2)
- Transportation cost increase  smaller trucks to more locations
Consequently Direct Shipment is commonly used:
 When retailers requires fully loaded trucks
 When mandated by powerful retailers
 When lead time is critical
 In grocery industry (perishable goods)
Example of company using the direct shipment strategy: JC Penney
2. Intermediate Inventory Storage Point Strategies
1) Traditional Warehousing
DC/WH hold stock inventory and distribute them as needed to downstream customers
2) Cross-Docking
DC/WH does not hold inventory. DC/WH serves as transfer points for inventory
(Wal-Mart made this strategy famous)
Pros:
.Limits inventory Cost
.Decreased lead times by decreasing storage time (often less than 12 hours)
Cons:
.Needs significant start-up investment
.Very difficult to manage
-Must be linked with advance info system
-Needs a fast and responsive transportation system
-Forecasts are critical, necessitating the sharing of info
-Effective ONLY for large distribution centers
3) Centralized Pooling and Transshipment
Useful when there is a large variety of different products, demand for specific product is small and
difficult to predict
Centralized Inventory Pooling System
Transshipment system
7.5 Selecting an Appropriate Strategy
<From the Class notes>
Distribution Network/System Design (DESC361 textbook: Intro to Management Sciences pg 330-334)
Using Integer Linear Programming
1) Decisions to Make
a. Open/use a facility (plant, WH, DC) at a given location or not
b. Flow of product from Distribution Center (DC)/Warehouse(WH) to a customer
2) Data needed
a. Potential location specified/facility (i)
b. Whether a facility is used/opened (Xi): Xi=1 if open, otherwise Xi=0
c. Customer zone (j)
d. Flow of product from Facility (i) to customer zone(j): (Yij)
e. Annual facility Cost (Ci)
f. Transportation Cost from facility to customer zone (Bij)
g. Demand of customers at each zone (dj)
3) Formulation:
Objective Function:
Min TC= SUM of (facility cost Ci)*(open facility Xi) + SUM of (Transp cost Bij)*(Flow of product Yij)
Constraints:
 SUM of Yij should be >= dj
 SUM of Yij should be <= MXi
CH3 Network Planning
Network Planning: The process by which the firm structures and manages the supply chain in order to:
1. (Network design) Find the right balance between inventory, transportation, and manufacturing cost
2. (Inventory positioning) Match supply and demand under uncertainty by positioning and managing
inventory effectively
3. (Resource allocation) Utilize resources effectively by sourcing products from the most appropriate
manufacturing facility
Network planning process is divided into three steps:
1) Network design
Includes decisions on:
#, location, size of manufacturing plants and WH
- Assignment of retail outlets to WH (distribution)
- Sourcing and typical planning horizon is a few years
2) Inventory Positioning
(Related to CH2 inventory management strategies)
Includes:
- Identifying stocking points
- Selecting facilities that will:
o produce to stock, thus keep inventory
o produce to order, hence keep no inventory
3) Resource Allocation
Determine whether production and packaging of different products is done at the right facility
- What should be the plans’ sourcing strategies?
- How much capacity should each plant have to meet seasonal demand?
1. Network Design
It’s a strategic decision. It determines the physical configuration and infrastructure of the SC. Decisions involve
locations (WH/plant), distribution, and sourcing.
1. Data Collection
2. Data Aggregation
3. Transportation Rates
4. Mileage Estimation
5. Warehouse Costs
6. Warehouse Capacities
7. Potential Warehouse Locations
8. Service Level Requirements
9. Future Demand
10. Model and Data Validation
11. Solution Techniques
12. Key Features of a Network Configuration SCP
2. Inventory Positioning and Logistics Coordination
1. Strategic Safety Stock
2. Integration Inventory Positioning and Network Design
3. Resource Allocation
CH2 Inventory Management and Risk Pooling
Inventory one of the dominant costs in many industries and supply chain
Goal of effective inventory management:
To have the correct inventory at the right place at the right time to minimize system costs while satisfying
customer service requirements
Inventory can appear in many in many places in the supply chain and in several forms:
 Raw material inventory
 Work-in-process (WIP) inventory
 Finished product inventory
Each of these needs its own inventory control mechanism or approach.
Inventory is expensive and difficult to manage. So why hold it at all?
Inventory mechanism need to take the reason why inventory is held into account:
1. Unexpected changes in customer demand
a. Due to short life cycle
b. Due to the presence of many competing products in the market
2. Presence of significant uncertainty in many situations in:
a. Quantity and quality of supply
b. Supplier costs
c. Delivery time
3. Lead Times
4. Economies of scale offered by transportation companies
2.2 Single Stage Inventory Control
1. The Economic Lot Size Model
Trade-offs between setup costs (K) and inventory holding costs (h)
2. The Effect of Demand Uncertainty
Demand uncertainty and forecasting
Principles of all forecasting:
o Forecast is always wrong (Difficult to match supply & demand)
o The longer the forecast horizon, the worse the forecast (e.g. 12 to 18 months)
o Aggregate forecast are more accurate (difficult to predict demand for individual SKU,
easier to predict demand across all SKUs within one product family)*
*it’s an example of Risk Pooling concept
3.
Single Period Models
Situation in which the firm has only a single ordering/production opportunity to meet demand
during a short selling season
Order the quantity that maximizes the average profit
4. Initial Inventory
Similar situation as single period model, but one in which the firm already has some inventory of
the product on hand
When initial inventory is available, the trade-offs is between
- Having a limited amount of inventory by avoiding paying the fixed cost versus
- Having a higher inventory level and paying the fixed cost
5.
Multiple Order Opportunity
To manage inventory effectively, distributor must decide when and how much to order.
Two types of policies:
o Continuous review policy
 Order is placed when inventory reaches the reorder point
 Appropriate when computerized inventory system is used
o Periodic review policy
 Inventory level is reviewed at regular intervals and appropriate quantity is
ordered after each review

6.
Continuous Review Policy
7.
Variable Lead Times
8.
Periodic Review Policy
9. Service Level Optimization
2.3 Risk Pooling
Risk Pooling suggests that demand variability is reduced if one aggregates demand across locations.
2.4 Centralized Versus Decentralized Systems
2.5 Managing Inventory in the Supply Chain
2.6 Practical Issues
2.7 Forecasting
2.7.1 Judgment Methods
2.7.2 Market Research Methods
2.7.3 Time-Series Methods
2.7.4 Causal Methods
2.7.5 Selecting the Appropriate Forecasting Technique