Understanding the
Supply Chain
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
What is a Supply Chain?
• All stages involved, directly or indirectly, in fulfilling a
customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)
Chopra and Meindl, Supply Chain Management, 6th Edition
What is a Supply Chain?
• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to
manufacturers to distributors and information,
funds, and products in both directions
• May be more accurate to use the term “supply
network” or “supply web”
• Typical supply chain stages: customers, retailers,
wholesalers/distributors, manufacturers,
component/raw material suppliers
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
Chopra and Meindl, Supply Chain Management, 6th Edition
What is a Supply Chain?
FIGURE 1-1
Chopra and Meindl, Supply Chain Management, 6th Edition
The Objective of a Supply Chain
• Customer the only source of revenue
• Sources of cost include flows of information,
products, or funds between stages of the
supply chain
• Effective supply chain management is the
management of supply chain assets and
product, information, and fund flows to grow
the total supply chain surplus
© Chopra and Meindl, Supply Chain Management, 6th Edition
Decision Phases in a Supply Chain
1. Supply chain strategy or design
How to structure the supply chain over the next
several years
2. Supply chain planning
Decisions over the next quarter or year
3. Supply chain operation
Daily or weekly operational decisions
Chopra and Meindl, Supply Chain Management, 6th Edition
Supply Chain Strategy or Design
• Decisions about the configuration of the supply chain,
allocation of resources, and what processes each
stage will perform
• Strategic supply chain decisions
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Outsource supply chain functions
Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must consider market
uncertainty
Chopra and Meindl, Supply Chain Management, 6th Edition
Supply Chain Planning
• Definition of a set of policies that govern
short-term operations
• Fixed by the supply configuration from
strategic phase
• Goal is to maximize supply chain surplus given
established constraints
• Starts with a forecast of demand in the
coming year
Chopra and Meindl, Supply Chain Management, 6th Edition
Supply Chain Planning
• Planning decisions:
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Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting
Inventory policies
Timing and size of market promotions
• Must consider demand uncertainty, exchange rates,
competition over the time horizon in planning
decisions
Chopra and Meindl, Supply Chain Management, 6th Edition
Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and planning
policies are defined
• Goal is to handle incoming customer orders as
effectively as possible
• Allocate orders to inventory or production, set order
due dates, generate pick lists at a warehouse, allocate
an order to a particular shipment, set delivery
schedules, place replenishment orders
• Much less uncertainty (short time horizon)
Chopra and Meindl, Supply Chain Management, 6th Edition
Process Views of a Supply Chain
1. Cycle View: The processes in a supply chain are
divided into a series of cycles, each performed at
the interface between two successive stages of the
supply chain.
2. Push/Pull View: The processes in a supply chain are
divided into two categories, depending on whether
they are executed in response to a customer order
or in anticipation of customer orders. Pull processes
are initiated by a customer order, whereas push
processes are initiated and performed in
anticipation of customer orders.
Chopra and Meindl, Supply Chain Management, 6th Edition
Cycle View of Supply Chain Processes
Chopra and Meindl, Supply Chain Management, 6th Edition
Push/Pull View of Supply Chains
FIGURE 1-5
Chopra and Meindl, Supply Chain Management, 6th Edition
Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two categories
depending on the timing of their execution relative
to customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes from
pull processes
Chopra and Meindl, Supply Chain Management, 6th Edition
Push/Pull View – L.L. Bean
Chopra and Meindl, Supply Chain Management, 6th Edition
Supply Chain Drivers
and Metrics
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
Drivers of Supply Chain Performance
1. Facilities
– The physical locations in the supply chain
network where product is stored, assembled,
or fabricated
2. Inventory
– All raw materials, work in process, and finished
goods within a supply chain
3. Transportation
– Moving inventory from point to point in the
supply chain
Chopra and Meindl, Supply Chain Management, 6th Edition
Drivers of Supply Chain Performance
4. Information
– Data and analysis concerning facilities,
inventory, transportation, costs, prices, and
customers throughout the supply chain
5. Sourcing
– Who will perform a particular supply chain
activity
6. Pricing
– How much a firm will charge for the goods and
services that it makes available in the supply
chain
Chopra and Meindl, Supply Chain Management, 6th Edition
Facilities
• Role in the supply chain
– Increase responsiveness by increasing the number of
facilities, making them more flexible, or increasing
capacity
– Tradeoffs between facility, inventory, and
transportation costs
• Increasing number of facilities increases facility and
inventory costs, decreases transportation costs and reduces
response time
• Increasing the flexibility or capacity of a facility increases
facility costs but decreases inventory costs and response
time
Chopra and Meindl, Supply Chain Management, 6th Edition
Facilities
• Components of facilities decisions
– Role
• Flexible, dedicated, or a combination of the two
• Product focus or a functional focus
– Location
• Where a company will locate its facilities
• Centralize for economies of scale, decentralize for
responsiveness
• Consider macroeconomic factors, quality of workers,
cost of workers and facility, availability of
infrastructure, proximity to customers, location of
other facilities, tax effects
Chopra and Meindl, Supply Chain Management, 6th Edition
Facilities
- Capacity
• A facility’s capacity to perform its intended function or functions
• Excess capacity – responsive, costly
• Little excess capacity – more efficient, less responsive
- Facility-related metrics
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•
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•
•
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•
•
•
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Capacity
Utilization
Processing/setup/down/idle time
Production cost per unit
Quality losses
Theoretical flow/cycle time of production
Actual average flow/cycle time
Flow time efficiency
Product variety
Volume contribution of top 20 percent SKU's and customers
Average production batch size
Production service level
Chopra and Meindl, Supply Chain Management, 6th Edition
Inventory
• Role in the Supply Chain
– Mismatch between supply and
demand
– Reduce costs
– Improve product availability
– Affects assets, costs,
responsiveness, material flow
time
Chopra and Meindl, Supply Chain Management, 6th Edition
Inventory
• Overall trade-off
– Increasing inventory generally makes the
supply chain more responsive
– A higher level of inventory facilitates a
reduction in production and transportation
costs because of improved economies of
scale
– Inventory holding costs increase
Chopra and Meindl, Supply Chain Management, 6th Edition
Inventory
– Material flow time: the time that elapses
between the point at which material enters the
supply chain to the point at which it exits
– Throughput: the rate at which sales occur
– Little’s law
I = DT
where
I = Inventory, D = throughput, T = Flow time
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy
demand between supplier shipments
– Function of lot size decisions
• Safety inventory
– Inventory held in case demand exceeds
expectations
– Costs of carrying too much inventory versus cost
of losing sales
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Inventory Decisions
• Seasonal inventory
– Inventory built up to counter predictable
variability in demand
– Cost of carrying additional inventory versus cost of
flexible production
• Level of product availability
– The fraction of demand that is served on time
from product held in inventory
– Trade off between customer service and cost
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Inventory Decisions
• Inventory-related metrics
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C2C cycle time
Average inventory
Inventory turns
Products with more than a specified number of
days of inventory
Average replenishment batch size
Average safety inventory
Seasonal inventory
Fill rate
Fraction of time out of stock
Obsolete inventory
Chopra and Meindl, Supply Chain Management, 6th Edition
Transportation
• Role in the Supply Chain
– Moves the product between stages in the supply
chain
– Affects responsiveness and efficiency
– Faster transportation allows greater
responsiveness but lower efficiency
– Also affects inventory and facilities
– Allows a firm to adjust the location of its facilities
and inventory to find the right balance between
responsiveness and efficiency
Chopra and Meindl, Supply Chain Management, 6th Edition
Transportation
• Components of Transportation Decisions
– Design of transportation network
• Modes, locations, and routes
• Direct or with intermediate consolidation points
• One or multiple supply or demand points in a single
run
Chopra and Meindl, Supply Chain Management, 6th Edition
Transportation
• Components of Transportation Decisions
– Choice of transportation mode
• Air, truck, rail, sea, and pipeline
• Information goods via the Internet
• Different speed, size of shipments, cost of shipping,
and flexibility
Chopra and Meindl, Supply Chain Management, 6th Edition
Transportation
– Transportation-related metrics
•
•
•
•
•
•
•
Average inbound transportation cost
Average income shipment size
Average inbound transportation cost per shipment
Average outbound transportation cost
Average outbound shipment size
Average outbound transportation cost per shipment
Fraction transported by mode
Chopra and Meindl, Supply Chain Management, 6th Edition
Transportation
• Overall trade-off: Responsiveness versus
efficiency
– The cost of transporting a given product
(efficiency) and the speed with which that product
is transported (responsiveness)
– Using fast modes of transport raises
responsiveness and transportation cost but lowers
the inventory holding cost
Chopra and Meindl, Supply Chain Management, 6th Edition
Information
• Role in the Supply Chain
– Improve the utilization of supply chain assets
and the coordination of supply chain flows to
increase responsiveness and reduce cost
– Information is a key driver that can be used to
provide higher responsiveness while
simultaneously improving efficiency
Chopra and Meindl, Supply Chain Management, 6th Edition
Information
• Role in the Competitive Strategy
– Improves visibility of transactions and
coordination of decisions across the supply chain
– Right information can help a supply chain better
meet customer needs at lower cost
– Share the minimum amount of information
required to achieve coordination
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Information Decisions
• Information-related metrics
– Forecast horizon
– Frequency of update
– Forecast error
– Seasonal factors
– Variance from plan
– Ratio of demand variability to order variability
Chopra and Meindl, Supply Chain Management, 6th Edition
Sourcing
• Role in the Supply Chain
– Set of business processes required to purchase
goods and services
– Will tasks be performed by a source internal to the
company or a third party
Chopra and Meindl, Supply Chain Management, 6th Edition
Sourcing
• Role in the Competitive Strategy
– Sourcing decisions are crucial because they
affect the level of efficiency and
responsiveness in a supply chain
– Outsource to responsive third parties if it is
too expensive to develop their own
– Keep responsive process in-house to maintain
control
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Sourcing Decisions
• Supplier selection
– Number of suppliers, criteria for evaluation
and selection
• Procurement
– Obtain goods and service within a supply
chain
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Sourcing Decisions
• Sourcing-related metrics
– Days payable outstanding
– Average purchase price
– Range of purchase price
– Average purchase quantity
– Supply quality
– Supply lead time
– Fraction of on-time deliveries
– Supplier reliability
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing
• Role in the Supply Chain
– Pricing determines the amount to charge
customers for goods and services
– Affects the supply chain level of responsiveness
required and the demand profile the supply
chain attempts to serve
– Pricing strategies can be used to match demand
and supply
– Objective should be to increase firm profit
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Pricing Decisions
• Pricing and economies of scale
– The provider of the activity must decide how to
price it appropriately to reflect economies of
scale
• Everyday low pricing versus high-low
pricing
– Different pricing strategies lead to different
demand profiles that the supply chain must
serve
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Pricing Decisions
• Fixed price versus menu pricing
– If marginal supply chain costs or the value to
the customer vary significantly along some
attribute, it is often effective to have a pricing
menu
– Can lead to customer behavior that has a
negative impact on profits
Chopra and Meindl, Supply Chain Management, 6th Edition
Components of Pricing Decisions
• Pricing-related metrics
– Profit margin
– Days sales outstanding
– Incremental fixed cost per order
– Incremental variable cost per unit
– Average sale price
– Average order size
– Range of sale price
– Range of periodic sales
Chopra and Meindl, Supply Chain Management, 6th Edition
Designing Distribution Networks
and Applications to Online Sales
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
Factors Influencing
Distribution Network Design
• Elements of customer service
influenced by network structure:
– Response time
– Product variety
– Product availability
– Customer experience
– Time to market
– Order visibility
– Returnability
Chopra and Meindl, Supply Chain Management, 6th Edition
Factors Influencing
Distribution Network Design
• Supply chain costs affected by network
structure:
– Inventories
– Transportation
– Facilities and handling
– Information
Chopra and Meindl, Supply Chain Management, 6th Edition
Design Options for a
Distribution Network
• Distribution network choices from the
manufacturer to the end consumer
• Two key decisions
1. Will product be delivered to the customer
location or picked up from a prearranged site?
2. Will product flow through an intermediary (or
intermediate location)?
Chopra and Meindl, Supply Chain Management, 6th Edition
Design Options for a
Distribution Network
• One of six designs may be used
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and
in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer
pickup
6. Retail storage with customer pickup
Chopra and Meindl, Supply Chain Management, 6th Edition
Manufacturer Storage with
Direct Shipping
Chopra and Meindl, Supply Chain Management, 6th Edition
Manufacturer Storage with Direct
Shipping Network
Cost Factor
Performance
Inventory
Lower costs because of aggregation. Benefits of
aggregation are highest for low-demand, high-value
items. Benefits are large if product customization can be
postponed at the manufacturer.
Transportation
Higher transportation costs because of increased
distance and disaggregate shipping.
Facilities and handling
Lower facility costs because of aggregation. Some saving
on handling costs if manufacturer can manage small
shipments or ship from production line.
Information
Significant investment in information infrastructure to
integrate manufacturer and retailer.
Chopra and Meindl, Supply Chain Management, 6th Edition
Manufacturer Storage with Direct
Shipping Network
Service Factor
Performance
Response time
Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time
may vary by product, thus complicating receiving.
Product variety
Easy to provide a high level of variety.
Product availability
Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer experience
Good in terms of home delivery but can suffer if order from several
manufacturers is sent as partial shipments.
Time to market
Fast, with the product available as soon as the first unit is produced.
Order visibility
More difficult but also more important from a customer service
perspective.
Returnability
Expensive and difficult to implement.
TABLE 4-1 continued
Chopra and Meindl, Supply Chain Management, 6th Edition
In-Transit Merge Network
FIGURE 4-7
Chopra and Meindl, Supply Chain Management, 6th Edition
In-Transit Merge
Cost Factor
Performance
Inventory
Similar to drop-shipping.
Transportation
Somewhat lower transportation costs than dropshipping.
Facilities and handling
Handling costs higher than drop-shipping at
carrier; receiving costs lower at customer.
Information
Investment is somewhat higher than for dropshipping.
Chopra and Meindl, Supply Chain Management, 6th Edition
In-Transit Merge
Service Factor
Performance
Response time
Similar to drop-shipping; may be marginally higher.
Product variety
Similar to drop-shipping.
Product availability
Similar to drop-shipping.
Customer experience
Better than drop-shipping because only a single delivery
is received.
Time to market
Similar to drop-shipping.
Order visibility
Similar to drop-shipping.
Returnability
Similar to drop-shipping.
TABLE 4-2 continued
Chopra and Meindl, Supply Chain Management, 6th Edition
Distributor Storage with
Carrier Delivery
FIGURE 4-8
Chopra and Meindl, Supply Chain Management, 6th Edition
Distributor Storage with
Carrier Delivery
Cost Factor
Performance
Inventory
Higher than manufacturer storage. Difference is
not large for faster moving items but can be large
for very slow-moving items.
Transportation
Lower than manufacturer storage. Reduction is
highest for faster moving items.
Facilities and handling
Somewhat higher than manufacturer storage. The
difference can be large for very slow-moving
items.
Information
Simpler infrastructure compared to manufacturer
storage.
Chopra and Meindl, Supply Chain Management, 6th Edition
Distributor Storage with
Carrier Delivery
Service Factor
Performance
Response time
Faster than manufacturer storage.
Product variety
Lower than manufacturer storage.
Product availability
Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience
Better than manufacturer storage with drop-shipping.
Time to market
Higher than manufacturer storage.
Order visibility
Easier than manufacturer storage.
Returnability
Easier than manufacturer storage.
Chopra and Meindl, Supply Chain Management, 6th Edition
Distributor Storage with
Last Mile Delivery
Chopra and Meindl, Supply Chain Management, 6th Edition
Distributor Storage with
Last Mile Delivery
Cost Factor
Performance
Inventory
Higher than distributor storage with package
carrier delivery.
Transportation
Very high cost given minimal scale economies.
Higher than any other distribution option.
Facilities and handling
Facility costs higher than manufacturer storage or
distributor storage with package carrier delivery,
but lower than a chain of retail stores.
Information
Similar to distributor storage with package carrier
delivery.
Chopra and Meindl, Supply Chain Management, 6th Edition
Distributor Storage with
Last Mile Delivery
Service Factor
Performance
Response time
Very quick. Same day to next-day delivery.
Product variety
Somewhat less than distributor storage with package
carrier delivery but larger than retail stores.
Product availability
More expensive to provide availability than any other
option except retail stores.
Customer experience
Very good, particularly for bulky items.
Time to market
Slightly higher than distributor storage with package
carrier delivery.
Order visibility
Less of an issue and easier to implement than
manufacturer storage or distributor storage with package
carrier delivery.
Returnability
Easier to implement than other previous options. Harder
and more expensive than a retail network.
Chopra and Meindl, Supply Chain Management, 6th Edition
Manufacturer or Distributor Storage
with Customer Pickup
Chopra and Meindl, Supply Chain Management, 6th Edition
Manufacturer or Distributor Storage
with Customer Pickup
Cost Factor
Performance
Inventory
Can match any other option, depending on the location
of inventory.
Transportation
Lower than the use of package carriers, especially if
using an existing delivery network.
Facilities and
handling
Facility costs can be high if new facilities have to be built.
Costs are lower if existing facilities are used. The
increase in handling cost at the pickup site can be
significant.
Information
Significant investment in infrastructure required.
Chopra and Meindl, Supply Chain Management, 6th Edition
Manufacturer or Distributor Storage
with Customer Pickup
Service Factor
Performance
Response time
Similar to package carrier delivery with manufacturer or
distributor storage. Same-day delivery possible for items
stored locally at pickup site.
Product variety
Similar to other manufacturer or distributor storage
options.
Product availability
Similar to other manufacturer or distributor storage
options.
Customer experience
Lower than other options because of the lack of home
delivery. Experience is sensitive to capability of pickup
location.
Time to market
Similar to manufacturer storage options.
Order visibility
Difficult but essential.
Returnability
Somewhat easier, given that pickup location can handle
returns.
Chopra and Meindl, Supply Chain Management, 6th Edition
TABLE 4-5 continued
Retail Storage with Customer Pickup
Cost Factor
Performance
Inventory
Higher than all other options.
Transportation
Lower than all other options.
Facilities and handling
Higher than other options. The increase in
handling cost at the pickup site can be significant
for online and phone orders.
Information
Some investment in infrastructure required for
online and phone orders.
Chopra and Meindl, Supply Chain Management, 6th Edition
Retail Storage with Customer Pickup
Service Factor
Performance
Response time
Same-day (immediate) pickup possible for items stored
locally at pickup site.
Product variety
Lower than all other options.
Product availability
More expensive to provide than all other options.
Customer experience
Related to whether shopping is viewed as a positive or
negative experience by customer.
Time to market
Highest among distribution options.
Order visibility
Trivial for in-store orders. Difficult, but essential, for
online and phone orders.
Returnability
Easier than other options because retail store can provide
a substitute.
Chopra and Meindl, Supply Chain Management, 6th Edition
Supply Chain Logistic
Networks
Chapter 13
What is a Facility Location?
Facility Location: The process of determining geographic
sites for a firm’s operations.
Distribution center (DC): A warehouse or stocking
point where goods are stored for subsequent distribution
to manufacturers, wholesalers, retailers, and customers.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Factors Affecting Location Decisions
1. The Factor Must Be Sensitive to Location
2. The Factor Must Have a High impact on the
Company’s Ability to Meet Its Goals
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Factors Affecting Location Decisions
• Dominant Factors in Manufacturing
– Favorable Labor Climate
– Proximity to Markets
– Impact on Environment
– Quality of Life
– Proximity to Suppliers and Resources
– Proximity to the Parent Company’s Facilities
– Utilities, Taxes, and Real Estate Costs
– Other Factors
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Factors Affecting Location Decisions
• Dominant Factors in Services
– Proximity to Customers
– Transportation Costs and Proximity to Markets
– Location of Competitors
– Site-Specific Factors
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Load-Distance Method
• Load-Distance Method
– A mathematical model used to evaluate
locations based on proximity factors
• Euclidean distance
– The straight-line distance, or shortest possible path,
between two points
• Rectilinear distance
– The distance between two points with a series of 90degree turns, as along city blocks
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 13.1
What is the distance between (20, 10) and (80, 60)?
Euclidean distance:
dAB =
(xA – xB)2 + (yA – yB)2 = (20 – 80)2 + (10 – 60)2 = 78.1
Rectilinear distance:
dAB = |xA – xB| + |yA – yB| = |20 – 80| + |10 – 60| = 110
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Load-Distance Method
• Calculating a load-distance score
–
–
–
–
Varies by industry
Use the actual distance to calculate ld score
Use rectangular or Euclidean distances
Find one acceptable facility location that
minimizes the ld score
• Formula for the ld score
ld =  lidi
i
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 13.2
Management is investigating which location would be best to position
its new plant relative to two suppliers (located in Cleveland and
Toledo) and three market areas (represented by Cincinnati, Dayton,
and Lima). Management has limited the search for this plant to those
five locations. The following information has been collected. Which is
best, assuming rectilinear distance?
Location
x,y coordinates
Trips/year
Cincinnati
(11,6)
15
Dayton
(6,10)
20
Cleveland
(14,12)
30
Toledo
(9,12)
25
Lima
(13,8)
40
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 13.2
Location
x,y
coordinates
Trips/year
Cincinnati
(11,6)
15
Dayton
(6,10)
20
Cleveland
(14,12)
30
Toledo
(9,12)
25
Lima
(13,8)
40
Cincinnati = 15(0) + 20(9) + 30(9) + 25(8) + 40(4)
Dayton = 15(9) + 20(0) + 30(10) + 25(5) + 40(9)
Cleveland = 15(9) + 20(10) + 30(0) + 25(5) + 40(5)
Toledo = 15(8) + 20(5) + 30(5) + 25(0) + 40(8)
Lima = 15(4) + 20(9) + 30(5) + 25(8) + 40(0)
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
= 810
= 920
= 660
= 690
= 590
Center of Gravity
• Center of Gravity
– A good starting point to evaluate locations in
the target area using the load-distance model.
– Find x coordinate, x*, by multiplying each point’s x
coordinate by its load (lt), summing these products
li xi, and dividing by li
– The center of gravity’s y coordinate y* found the
same way
 l i xi
x* =
i
 li
 l i yi
y* =
i
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
i
 li
i
Example 13.1
A supplier to the electric utility industry produces power generators;
the transportation costs are high. One market area includes the
lower part of the Great Lakes region and the upper portion of the
southeastern region. More than 600,000 tons are to be shipped to
eight major customer locations as shown below:
Customer Location
Three Rivers, MI
Fort Wayne, IN
Columbus, OH
Ashland, KY
Kingsport, TN
Akron, OH
Wheeling, WV
Roanoke, VA
Tons Shipped
5,000
92,000
70,000
35,000
9,000
227,000
16,000
153,000
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
x, y Coordinates
(7, 13)
(8, 12)
(11, 10)
(11, 7)
(12, 4)
(13, 11)
(14, 10)
(15, 5)
Example 13.1
What is the center of gravity
for the electric utilities'
supplier?
Customer
Location3
Tons Shipped
Three Rivers, MI
5,000
(7, 13)
Fort Wayne, IN
92,000
(8, 12)
Columbus, OH
70,000
(11, 10)
Ashland, KY
35,000
(11, 7)
9,000
(12, 4)
227,000
(13, 11)
16,000
(14, 10)
153,000
(15, 5)
Kingsport, TN
Akron, OH
Wheeling, WV
Roanoke, VA
The center of gravity is calculated as shown below:
li = 5 + 92 + 70 + 35 + 9 + 227 + 16 + 153 = 607
i
li xi = 5(7) + 92(8) + 70(11) + 35(11) + 9(12) + 227(13)
i
+ 16(14) + 153(15) = 7,504
 li x i
x* =
i
 li =
i
x, y Coordinates
7,504
= 12.4
607
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 13.1
What is the center of gravity
for the electric utilities'
supplier?
Customer
Location
Tons
Shipped
Three Rivers, MI
5,000
(7, 13)
Fort Wayne, IN
92,000
(8, 12)
Columbus, OH
70,000
(11, 10)
Ashland, KY
35,000
(11, 7)
9,000
(12, 4)
227,000
(13, 11)
16,000
(14, 10)
153,000
(15, 5)
Kingsport, TN
Akron, OH
Wheeling, WV
Roanoke, VA
li yi = 5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11)
i
+ 16(10) + 153(5) = 5,572
 li y i
x* =
i
 li
i
x, y
Coordinates
5,572
= 9.2
=
607
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 13.1
Using rectilinear distance,
what is the resulting load–
distance score for this
location?
Customer
Location
Tons
Shipped
x, y
Coordinates
Three Rivers, MI
5,000
(7, 13)
Fort Wayne, IN
92,000
(8, 12)
Columbus, OH
70,000
(11, 10)
Ashland, KY
35,000
(11, 7)
9,000
(12, 4)
227,000
(13, 11)
16,000
(14, 10)
153,000
(15, 5)
Kingsport, TN
Akron, OH
Wheeling, WV
Roanoke, VA
The resulting load-distance score is
ld =  lidi = 5(5.4 + 3.8) + 92(4.4 + 2.8) + 70(1.4 + 0.8) + 35(1.4
i
+ 2.2) + 90(0.4 + 5.2) + 227(0.6 + 1.8) + 16(1.6 +
0.8) + 153(2.6 + 4.2)
= 2,662.4
where
di = |xi – x*| + |yi – y*|
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 13.3
A firm wishes to find a central location for its service. Business forecasts
indicate travel from the central location to New York City on 20
occasions per year. Similarly, there will be 15 trips to Boston, and 30
trips to New Orleans. The x, y-coordinates are (11.0, 8.5) for New York,
(12.0, 9.5) for Boston, and (4.0, 1.5) for New Orleans. What is the
center of gravity of the three demand points?
x* =
 li x i
i
 li
i
y* =
 li y i
i
 li
i
=
[(20  11) + (15  12) + (30  4)]
(20 + 15 + 30)
[(20  8.5) + (15  9.5) + (30  1.5)]
=
(20 + 15 + 30)
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
= 8.0
= 5.5
Break-Even Analysis
• Compare location alternatives based on
quantitative factors expressed in total costs
1. Determine the variable costs and fixed costs for
each site
2. Plot total cost lines
3. Identify the approximate ranges for which each
location has lowest cost
4. Solve algebraically for break-even points over
the relevant ranges
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 13.2
An operations manager narrowed the search for a new facility
location to four communities. The annual fixed costs (land,
property taxes, insurance, equipment, and buildings) and the
variable costs (labor, materials, transportation, and variable
overhead) are as follows:
Community
Fixed Costs per Year
Variable Costs per Unit
A
$150,000
$62
B
$300,000
$38
C
$500,000
$24
D
$600,000
$30
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 13.2
To plot a community’s total cost line, let us first compute the
total cost for two output levels: Q = 0 and Q = 20,000 units
per year. For the Q = 0 level, the total cost is simply the fixed
costs. For the Q = 20,000 level, the total cost (fixed plus
variable costs) is as follows:
Variable Costs
(Cost per Unit)(No. of Units)
Total Cost
(Fixed + Variable)
Community
Fixed Costs
A
$150,000
$62(20,000) = $1,240,000
$1,390,000
B
$300,000
$38(20,000) = $760,000
$1,060,000
C
$500,000
$24(20,000) = $480,000
$980,000
D
$600,000
$30(20,000) = $600,000
$1,200,000
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 13.2
• A is best for low volumes
• B for intermediate volumes
• C for high volumes.
• We should no longer
consider community D,
because both its fixed and
its variable costs are higher
than community C’s.
A
1,600 –
Annual cost (thousands of dollars)
The figure shows the
graph of the total cost
lines.
(20, 1,390)
1,400 –
D
(20, 1,200)
1,200 –
B
(20, 1,060)
C
1,000 –
(20, 980)
800 –
Break-even
point
600 –
400 –
200 –
|–
0
Break-even
point
C best
B best
A best
|
|
|
|
2
4
6
8 10 12 14 16 18 20 22
6.25
|
|
|
|
|
|
14.3
Q (thousands of units)
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
|
Example 13.2
The break-even quantity between A and B lies at the end of
the first range, where A is best, and the beginning of the
second range, where B is best.
(A)
(B)
$150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units
The break-even quantity between B and C lies at the end of
the range over which B is best and the beginning of the final
range where C is best.
(B)
(C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 13.4
By chance, the Atlantic City Community Chest has to close
temporarily for general repairs. They are considering four
temporary office locations:
Property Address
Move-in Costs
Monthly Rent
Boardwalk
$400
$50
Marvin Gardens
$280
$24
St. Charles Place
$360
$10
$60
$60
Baltic Avenue
Use the graph on the next slide to determine for what length of
lease each location would be favored?
Hint: In this problem, lease length is analogous to volume.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 13.4
500 –
Fs + csQ = FB + cBQ
FB – Fs
cs – cB
$60 – $360
=
$10 – $60
– 300
=
= 6 months
– 50
The short answer: Baltic
Avenue if 6 months or less,
St. Charles Place if longer
St Charles Place
400 –
–
Total Cost →
Q=
Boardwalk
–
Marvin
Gardens
300 –
–
Baltic Avenue
200 –
–
100 –
–
|
–
0
|
|
|
1
2
3
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
|
|
|
|
|
4
5
6
7
8
Months →
Transportation Method
• Transportation method for location problems
– A quantitative approach that can help solve multiple-facility
location problems
• Setting Up the Initial Tableau
1.
Create a row for each plant (existing or new) and a column for
each warehouse
2.
Add a column for plant capacities and a row for warehouse
demands and insert their specific numerical values
3.
Each cell not in the requirements row or capacity column
represents a shipping route from a plant to a warehouse. Insert
the unit costs in the upper right-hand corner of each of these cells.
• The sum of the shipments in a row must equal the corresponding
plant’s capacity and the sum of shipments in a column must equal
the corresponding warehouse’s demand.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Transportation Method
Warehouse
Plant
San Antonio, TX
(1)
Hot Spring, AR
(2)
5.00
Sioux Falls, SD
(3)
6.00
Capacity
5.40
Phoenix
400
7.00
4.60
6.60
Atlanta
500
900
Requirements
200
400
•Finding a solution
300
900
–The goal is to find the least-cost allocation pattern that satisfies all
demands and exhausts all capacities.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 13.3
The optimal solution for the Sunbelt Pool Company, found
with POM for Windows, is shown below and displays the data
inputs, with the cells showing the unit costs, the bottom row
showing the demands, and the last column showing the
supply capacities.
Figure 13.5a
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 13.3
Below shows how the existing network of plants supplies the three warehouses to
minimize costs for a total of $4,580.
All warehouse demand is satisfied:
• Warehouse 1 in San Antonio is fully supplied by Phoenix
•
Warehouse 2 in Hot Springs is fully supplied by Atlanta.
•
Warehouse 3 in Sioux Falls receives 200 units from Phoenix and 100 units from Atlanta, satisfying
its 300-unit demand.
The total optimal cost reported in the upper-left corner of the previous table is
$4,580, or 200($5.00) + 200($5.40) + 400($4.60) + 100($6.60) = $4,580.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
A Systematic Location
Selection Process
Step 1: Identify the important location factors and
categorize them as dominant or secondary
Step 2: Consider alternative regions; then narrow to
alternative communities and finally specific sites
Step 3: Collect data on the alternatives
Step 4: Analyze the data collected, beginning with the
quantitative factors
Step 5: Bring the qualitative factors pertaining to each site
into the evaluation
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 13.5
Management is considering three potential locations for a new
cookie factory. They have assigned scores shown below to the
relevant factors on a 0 to 10 basis (10 is best). Using the preference
matrix, which location would be preferred?
Location
Factor
Weight
The
Neighborhood
Material Supply
0.1
5
0.5
9
0.9
8
0.8
Quality of Life
0.2
9
1.8
8
1.6
4
0.8
Mild Climate
0.3
10
3.0
6
1.8
8
2.4
Labor Skills
0.4
3
1.2
4
1.6
7
2.8
6.5
Sesame
Street
Ronald’s
Playhouse
5.9
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
6.8
Solved Problem 1
The new Health-Watch facility is targeted to serve seven census tracts
in Erie, Pennsylvania, whose latitudes and longitudes are shown
below. Customers will travel from the seven census-tract centers to
the new facility when they need health care. What is the target area’s
center of gravity for the Health-Watch medical facility?
LOCATION DATA AND CALCULATIONS FOR HEALTH WATCH
Census Tract
Population
Latitude
Longitude
Population 
Latitude
Population 
Longitude
15
2,711
42.134
–80.041
114,225.27
–216,991.15
16
4,161
42.129
–80.023
175,298.77
–332,975.70
17
2,988
42.122
–80.055
125,860.54
–239,204.34
25
2,512
42.112
–80.066
105,785.34
–201,125.79
26
4,342
42.117
–80.052
182,872.01
–347,585.78
27
6,687
42.116
–80.023
281,629.69
–535,113.80
28
6,789
42.107
–80.051
285,864.42
–543,466.24
Total
30,190
1,271,536.04
–2,416.462.80
Table 13.1
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 1
Next, we solve for the center of gravity x* and y*. Because the
coordinates are given as longitude and latitude, x* is the longitude
and y* is the latitude for the center of gravity.
1,271,536.05
x* =
30,190
= 42.1178
– 2,416,462.81
y* =
30,190
= – 80.0418
The center of gravity is (42.12 North, 80.04 West), and is
shown on the map to be fairly central to the target area.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 2
The operations manager for Mile-High Lemonade narrowed the
search for a new facility location to seven communities. Annual
fixed costs (land, property taxes, insurance, equipment, and
buildings) and variable costs (labor, materials, transportation, and
variable overhead) are shown in the following table.
a. Which of the communities can be eliminated from further
consideration because they are dominated (both variable and
fixed costs are higher) by another community?
b. Plot the total cost curves for all remaining communities on a
single graph. Identify on the graph the approximate range over
which each community provides the lowest cost.
c. Using break-even analysis, calculate the break-even quantities
to determine the range over which each community provides
the lowest cost.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 2
FIXED AND VARIABLE COSTS FOR MILE-HIGH LEMONADE
Community
Fixed Costs per Year
Variable Costs per Barrel
Aurora
$1,600,000
$17.00
Boulder
$2,000,000
$12.00
Colorado Springs
$1,500,000
$16.00
Denver
$3,000,000
$10.00
Englewood
$1,800,000
$15.00
Fort Collins
$1,200,000
$15.00
Golden
$1,700,000
$14.00
Table 13.2
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Location costs (in millions of dollars)
Solved Problem 2
10 –
8–
6–
Break-even
point
Golden
Break-even
point
4–
2–
|–
0
Fort Collins
Denver
Boulder
|
|
1
2
2.67
|
|
|
|
3
4
5
6
Barrels of lemonade per year (in hundred thousands)
Figure 13.10
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 2
a. Aurora and Colorado Springs are dominated by Fort
Collins, because both fixed and variable costs are higher
for those communities than for Fort Collins. Englewood is
dominated by Golden.
b. Fort Collins is best for low volumes, Boulder for
intermediate volumes, and Denver for high volumes.
Although Golden is not dominated by any community, it is
the second or third choice over the entire range. Golden
does not become the lowest-cost choice at any volume.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 2
c. The break-even point between Fort Collins and Boulder is
$1,200,000 + $15Q = $2,000,000 + $12Q
Q = 266,667 barrels per year
The break-even point between Denver and Boulder is
$3,000,000 + $10Q = $2,000,000 + $12Q
Q = 500,000 barrels per year
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 3
• The Arid Company makes canoe paddles to serve distribution centers in
Worchester, Rochester, and Dorchester from existing plants in Battle
Creek and Cherry Creek.
• Arid is considering locating a plant near the headwaters of Dee Creek.
• Annual capacity for each plant is shown in the right-hand column of the
tableau.
• Transportation costs per paddle are shown in the tableau in the small
boxes.
• For example, the cost to ship one paddle from Battle Creak to
Worchester is $4.37.
• The optimal allocations are also shown. For example, Battle Creek ships
12,000 units to Rochester.
• What are the estimated transportation costs associated with this
allocation pattern?
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 3
Source
Battle Creek
Cherry Creek
Dee Creek
Demand
Destination
Worchester
$4.37
Rochester
$4.25
Dorchester
$4.89
12,000
$4.00
6,000
$4.13
6,000
$5.00
$5.27
4,000
$4.50
$3.75
6,000
12,000
22,000
12,000
Figure 13.11
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Capacity
12,000
10,000
18,000
40,000
Solved Problem 3
The total cost is $167,000
Ship 12,000 units from Battle Creek
to Rochester @ $4.25
Cost =
$51,000
Ship 6,000 units from Cherry Creek
to Worchester @ $4.00
Cost =
$24,000
Ship 4,000 units from Cherry Creek
to Rochester @ $5.00
Cost =
$20,000
Ship 6,000 units from Dee Creek
to Rochester @ $4.50
Cost =
$27,000
Ship 12,000 units from Dee Creek
to Dorchester @ $3.75
Cost =
$45,000
Total = $167,000
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Network Design in the
Supply Chain
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
The Role of Network Design
• Facility role
– What role, what processes?
• Facility location
– Where should facilities be located?
• Capacity allocation
– How much capacity at each facility?
• Market and supply allocation
– What markets? Which supply sources?
Chopra and Meindl, Supply Chain Management, 6th Edition
Models for Facility Location and
Capacity Allocation
• Maximize the overall profitability of the supply
chain network while providing customers with
the appropriate responsiveness
• Many trade-offs during network design
• Network design models used
– to decide on locations and capacities
– to assign current demand to facilities and identify
transportation lanes
Chopra and Meindl, Supply Chain Management, 6th Edition
Models for Facility Location and
Capacity Allocation
• Important information
–
–
–
–
–
–
–
–
–
Location of supply sources and markets
Location of potential facility sites
Demand forecast by market
Facility, labor, and material costs by site
Transportation costs between each pair of sites
Inventory costs by site and as a function of quantity
Sale price of product in different regions
Taxes and tariffs
Desired response time and other service factors
Chopra and Meindl, Supply Chain Management, 6th Edition
Network Optimization Models
FIGURE 5-3
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
n =
m =
Dj =
number of potential plant locations/capacity
number of markets or demand points
annual demand from market j
Ki =
potential capacity of plant i
fi =
cij =
annualized fixed cost of keeping plant i open
yi =
xij =
1 if plant i is open, 0 otherwise
quantity shipped from
plant i to market j
cost of producing and shipping one unit from plant i to market j (cost
includes production, inventory, transportation, and tariffs)
n
n
i=1
i=1
Minå f i yi + å
m
åc x
ij ij
j=1
subject to
n
åx
ij
= D j for j = 1,...,m
i=1
m
åx
ij
= K i yi for i = 1,...,n
j=1
yi Î {0,1} for i = 1,...,n, x ij ³ 0
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
• Constraints
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Phase III: Gravity Location Models
xn, yn: coordinate location of either a market or supply source n
Fn: cost of shipping one unit for one mile between the facility and
either market or supply source n
Dn: quantity to be shipped between facility and market or supply
source n
(x, y) is the location selected for the facility, the distance dn between the
facility at location (x, y) and the supply source or market n is given by
dn =
Chopra and Meindl, Supply Chain Management, 6th Edition
(x – x ) + ( y – y )
2
n
n
2
Gravity Location Model
Coordinates
Transportation
Cost $/Ton Mile (Fn)
Quantity in
Tons (Dn)
Buffalo
0.90
500
700
1,200
Memphis
0.95
300
250
600
St. Louis
0.85
700
225
825
Atlanta
1.50
225
600
500
Boston
1.50
150
1,050
1,200
Jacksonville
1.50
250
800
300
Philadelphia
1.50
175
925
975
New York
1.50
300
1,000
1,080
Sources/Markets
xn
yn
Supply sources
Markets
k
Total transportation cost
TC = å d n Dn Fn
n=1
Chopra and Meindl, Supply Chain Management, 6th Edition
Gravity Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
• Merge the companies
• Solve using location-specific costs
yi = 1 if factory i is open, 0 otherwise
xij = quantity shipped from factory i to market j
n
n
Minå f i yi + å
i=1
Chopra and Meindl, Supply Chain Management, 6th Edition
i=1
m
åc x
ij ij
j=1
Capacitated Plant Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Plant Location Model
FIGURE 5-12
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Model With
Single Sourcing
• Market supplied by only one factory
• Modify decision variables
yi = 1 if factory i is open, 0 otherwise
xij = 1 if market j is supplied by factory i, 0 otherwise
n
n
m
Minå f i yi + å å D j cij xij
subject to
i=1
i=1 j=1
n
åx
ij
= 1 for j = 1,..., m
i=1
m
åD x
j ij
£ Ki yi for i = 1,..., n
j=1
xij , yi Î { 0,1}
Chopra and Meindl, Supply Chain Management, 6th Edition
Capacitated Model With
Single Sourcing
• Optimal network configuration with single
sourcing
Open/
Closed
Atlanta
Boston
Chicago
Denver
Omaha
Portland
Baltimore
Closed
0
0
0
0
0
0
Cheyenne
Closed
0
0
0
0
0
0
Salt Lake
Open
0
0
0
6
0
11
Memphis
Open
10
8
0
0
0
0
Wichita
Open
0
0
14
0
7
0
TABLE 5-4
Chopra and Meindl, Supply Chain Management, 6th Edition
Locating Plants and Warehouses
Simultaneously
FIGURE 5-13
Chopra and Meindl, Supply Chain Management, 6th Edition
Locating Plants and Warehouses
Simultaneously
• Model inputs
m
n
l
t
Dj
Ki
Sh
We
Fi
fe
chi
cie
cej
=
=
=
=
=
=
=
=
=
=
=
=
=
number of markets or demand points
number of potential factory locations
number of suppliers
number of potential warehouse locations
annual demand from customer j
potential capacity of factory at site i
supply capacity at supplier h
potential warehouse capacity at site e
fixed cost of locating a plant at site i
fixed cost of locating a warehouse at site e
cost of shipping one unit from supply source h to factory i
cost of producing and shipping one unit from factory i to warehouse e
cost of shipping one unit from warehouse e to customer j
Chopra and Meindl, Supply Chain Management, 6th Edition
Locating Plants and Warehouses
Simultaneously
• Goal is to identify plant and warehouse locations and
quantities shipped that minimize the total fixed and
variable costs
yi
ye
xej
xie
xhi
=
=
=
=
=
1 if factory is located at site i, 0 otherwise
1 if warehouse is located at site e, 0 otherwise
quantity shipped from warehouse e to market j
quantity shipped from factory at site i to warehouse e
quantity shipped from supplier h to factory at site i
n
t
i=1
e=1
l
n
n
t
t
m
Minå Fi yi + å fe ye + åå chi xhi + åå cie xie +åå cej xej
Chopra and Meindl, Supply Chain Management, 6th Edition
h=1 i=1
i=1 e=1
e=1 j=1
Locating Plants and Warehouses
Simultaneously
subject to
n
åx
hi
£ Sh for h = 1,...,l
i=1
åx
ej
£ We ye for e = 1,...,t
j=1
l
åx
t
hi
h=1
– å xie ³ 0 for i = 1,...,n
e=1
t
åx
ie
n
£ Ki yi for i = 1,...,n
m
åx – åx
ie
t
åx
ej
= D j for j = 1,...,m
e=1
e=1
i=1
m
ej
³ 0 for e = 1,...,t
j=1
Chopra and Meindl, Supply Chain Management, 6th Edition
yi , ye Î {0,1} , xej , xie , xhi ³ 0
Accounting for Taxes, Tariffs, and
Customer Requirements
• A supply chain network should maximize profits after
tariffs and taxes while meeting customer service
requirements
• Modified objective and constraint
m
n
n
j=1
i=1
i=1
n
m
Maxå rj å xij – å Fi yi – å å cij xij
n
åx
ij
i=1 j=1
£ D j for j = 1,...,m
i=1
Chopra and Meindl, Supply Chain Management, 6th Edition
Supply Chain
Integration
Chapter 14
Supply Chain Integration
Supply Chain Integration: The effective coordination of
supply chain processes though the seamless flow of information
up and down the supply chain.
Upstream
Tier 3
Tomato
suppliers
Downstream
Tier 2
Tier 1
Tomato
grading
stations
Tomato
paste
factories
Ketchup
factory
Information flows
Cash flows
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Retail
sales
Consumers
Supply Chain Disruptions
• External Causes
– Environmental Disruptions
– Supply Chain Complexity
• Internal Causes
– Internally Generated
Shortages
– Loss of Major Accounts
– Quality Failures
– Loss of Supply
– Poor Supply Chain Visibility
– Customer-Induced Volume
– Engineering Changes
Changes
– Service and Product Mix
Changes
– Late Deliveries
– Underfilled Shipments
– Order Batching
– New Service or Production
Introductions
– Service or Product
Promotions
– Information Errors
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Supply Chain Dynamics
Bullwhip Effect: The phenomenon in supply chains whereby ordering
patterns experience increasing variance as you proceed upstream in the
chain.
Consumers’
daily
demands
Order quantity
9,000
Retailers’
daily orders
to
manufacturer
Manufacturer’s
weekly orders
to package
supplier
Package
supplier’s weekly
orders to
cardboard
supplier
7,000
5,000
3,000
0
Day 1
Day 30 Day 1
Day 30 Day 1
Day 30 Day 1
Month of April
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Day 30
Integrated Supply Chains
First-Tier Supplier
Service/Product Provider
Support Processes
Support Processes
Businessto-business
(B2B)
customer
relationship
process
New service/
product
development
process
Supplier
relationship
process
Order
fulfillment
process
Business-toBusinessconsumer
to-business
(B2C)
(B2B)
customer
customer
relationship
relationship
process
process
New service/
product
development
process
Supplier
relationship
process
Figure 14.3
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Order
fulfillment
process
External Consumers
External Suppliers
• External Supply Chain Linkages
Supplier Relationship Process
• Supplier selection
– Material costs
• Annual material costs = pD
– Freight costs
– Inventory costs
• Cycle inventory = Q/2
• Pipeline inventory = L
• Annual inventory costs = (Q/2 + L) H
– Administrative costs
– Total Annual Cost =
pD + Freight costs + (Q/2 + L) H + administrative costs.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.1
Compton Electronics manufactures laptops for major
computer manufacturers. A key element of the laptop is
the keyboard. Compton has identified three potential
suppliers for the keyboard, each located in a different part
of the world. Important cost considerations are the price
per keyboard, freight costs, inventory costs, and contract
administrative costs. The annual requirements for the
keyboard are 300,000 units. Assume Compton has 250
business days a year. Managers have acquired the following
data for each supplier.
Which supplier provides the lowest annual total cost to
Compton?
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.1
Supplier
Belfast
Hong Kong
Shreveport
Annual Freight Costs
Shipping Quantity (units/shipment)
10,000
20,000
30,000
$380,000
$260,000
$237,000
$615,000
$547,000
$470,000
$285,000
$240,000
$200,000
Keyboard Costs and Shipping Lead Times
$100
Annual Inventory
Carrying Cost/Unit
$20.00
Hong Kong
$96
$19.20
25
$300,000
Shreveport
$99
$19.80
5
$150,000
Supplier
Belfast
Price/Unit
Shipping Lead
Time (days)
15
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Administrative
Costs
$180,000
Example 14.1
The average requirements per day are:
d=
300,000/250 = 1,200 keyboards
Total Annual Cost =
pD + Freight costs + (Q/2 + dL)H +
Administrative costs
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.1
BELFAST: Q = 10,000 units.
Material costs = pD = ($100/unit)(300,000 units)
= $30,000,000
Freight costs = $380,000
Inventory costs = (cycle inventory + pipeline inventory)H
= (Q/2 + L)H
= (10,000 units/2
+ 1200 units/day(15 days))$20/unit/year
= $460,000
Administrative costs = $180,000
Total Annual Cost = $30,000,000 + $380,000
+ $460,000 + $180,000 = $31,020,000
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.1
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier
10,000
20,000
30,000
Belfast
Hong Kong
Shreveport
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.1
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier
10,000
20,000
30,000
$31,020,000 $31,000,000 $31,077,000
Belfast
$30,387,000 $30,415,000 $30,434,000
Hong Kong
Shreveport $30,352,800 $30,406,800 $30,465,800
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Green Purchasing
• Green purchasing – The process of identifying,
assessing, and managing the flow of
environmental waste and finding ways to
reduce it and minimize its impact on the
environment.
– Choose environmentally conscious suppliers.
– Use and substantiate claims such as green,
biodegradable, natural, and recycled.
– Use sustainability as criteria for certification.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.2
The management of Compton Electronics has done a total cost
analysis for three international suppliers of keyboards (see Example
14.1). Compton also considers on-time delivery, consistent quality, and
environmental stewardship in its selection process. Each criterion is
given a weight (total of 100 points), and each supplier is given a score
(1 = poor, 10 = excellent) on each criterion. The data are shown in the
following table.
Score
Criterion
Total Cost
On-Time
Delivery
Consistent
Quality
Environment
Weight
25
Belfast
5
Hong Kong Shreveport
8
9
30
9
6
7
30
8
9
6
15
9
6
8
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.2
The weighted score for each supplier is calculated by
multiplying the weight by the score for each criterion
and arriving at a total.
For example, the Belfast weighted score is:
Belfast =
(25  5) + (30  9) + (30  8) + (15  9) = 770 Preferred
Hong Kong = (25  8) + (30  6) + (30  9) + (15  6) = 740
Shreveport = (25  9) + (30  7) + (30  6) + (15  8) = 735
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Supplier Relationship Process
Design collaboration
• Early supplier involvement
• Presourcing
• Value analysis
Negotiation
• Competitive orientation
• Cooperative orientation
Buying
•
Electronic Data Interchange
•
Catalog Hubs
•
Exchanges
•
Auctions
•
Locus of Control
Information Exchange
• Radio Frequency Identification (RFID)
• Vendor-Managed Inventories (VMI)
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Order Fulfillment Process
• Customer Demand Planning
• Supply Planning
• Production
• Logistics
–
–
–
–
–
Ownership
Facility location
Mode selection
Capacity level
Cross-docking
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.3
Tower Distributors provides logistical services to local
manufacturers. Tower picks up products from the manufacturers,
takes them to its distribution center, and then assembles
shipments to retailers in the region. Tower needs to build a new
distribution center; consequently, it needs to make a decision on
how many trucks to have. The monthly amortized capital cost of
ownership is $2,100 per truck. Operating variable costs are $1 per
mile for each truck owned by Tower. If capacity is exceeded in any
month, Tower can rent trucks at $2 per mile. Each truck Tower
owns can be used 10,000 miles per month. The requirements for
the trucks, however, are uncertain. Managers have estimated the
following probabilities for several possible demand levels and
corresponding fleet sizes.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.3
Requirements
(miles/month)
100,000 150,000 200,000 250,000
Fleet Size (trucks)
10
15
20
25
Probability
0.2
0.3
0.4
0.1
If Tower Distributors wants to minimize the expected
cost of operations, how many trucks should it have?
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 4.3
C = monthly capital cost of ownership
+ variable operating cost per month + rental costs if needed
C(100,000 miles/month) = ($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles) = $121,000
($2,100/truck)(10 trucks)
C(150,000 miles/month) =
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(150,000 miles – 100,000 miles)
= $221,000
C(200,000 miles/month) =
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(200,000 miles – 100,000 miles)
= $321,000
C(250,000 miles/month) =
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(250,000 miles – 100,000 miles)
= $421,000
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 14.3
Next, calculate the expected value for the 10 truck fleet size
alternative as follows:
Expected Value (10 trucks) =
0.2($121,000) + 0.3($221,000)
+ 0.4($321,000) + 0.1($421,000) = $261,000
Using similar logic, we can calculate the expected costs for each of the
other fleet-size options:
Expected Value (15 trucks) =
0.2($131,500) + 0.3($181,500)
+ 0.4($281,500) + 0.1($381,000) = $231,500
Expected Value (20 trucks) =
0.2($142,000) + 0.3($192,000)
+ 0.4($242,000) + 0.1($342,000) = $217,000
Expected Value (25 trucks) =
0.2($152,500) + 0.3($202,500)
+ 0.4($252,500) + 0.1($302,500) = $222,500
The preferred option is 20 trucks.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
The Customer Relationship Process
• Marketing
– Business-to-Consumer Systems
– Business-to-Business Systems
• Order Placement
–
–
–
–
Cost Reduction
Revenue Flow Increase
Global Access
Pricing Flexibility
• Customer Service
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Supply Chain Risk Management
• Supply Chain Risk Management
– The practice of managing the risk of any factor or
event that can materially disrupt a supply chain,
whether within a single firm or across multiple
firms.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Supply Chain Risk Management
•
Operational Risks – Threats to the effective flow of
materials, services, and products in a supply chain
–
–
–
–
–
–
–
–
–
Strategic Alignment
Upstream/Downstream Supply Chain Integration
Visibility
Flexibility and Redundancy
Short Replenishment Lead Times
Small Order Lot Sizes
Rationing Short Supplies
Everyday low pricing (EDLP)
Cooperation and Trustworthiness
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Supply Chain Risk Management
•
Financial Risks – Threats to the financial flows in
a supply chain, such as prices, costs, and profits.
– Low Cost Hopping
– Hedging
•
•
Production Shifting
Futures Contract
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Supply Chain Risk Management
•
Security Risks - Threats to a supply chain that could
potentially damage stakeholders, facilities, or
operations.
–
–
–
–
–
Access Control
Physical Security
Shipping and Receiving
Transportation Service Provider
ISO 28000
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Performance Measures
Customer Relationship
Order Fulfillment
Supplier Relationship
 Percent of orders taken
accurately
 Percent of incomplete
orders shipped
 Percent of suppliers’
deliveries on-time
 Time to complete the
order placement process
 Percent of orders shipped
on-time
 Suppliers’ lead times
 Customer satisfaction
with the order
placement process
 Time to fulfill the order
 Percent defects in services
and purchased materials
 Customer’s evaluation of
firm’s environmental
stewardship
 Percent of botched services
or returned items
 Cost of services and
purchased materials
 Cost to produce the service
or item
 Inventory levels of
supplies and purchased
components
 Percent of business lost
because of supply chain
disruptions
 Customer satisfaction with
the order fulfillment process  Evaluation of suppliers’
collaboration on
 Inventory levels of work-instreamlining and waste
process and finished goods
conversion
 Amount of greenhouse
 Amount of transfer of
gasses emitted into the air
environmental
 Number of security
technologies to suppliers
breaches
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 1
Eagle Electric Repair is a repair facility for several major electronic
appliance manufactures. Eagle wants to find a low-cost supplier for
an electric relay switch used in many appliances. The annual
requirements for the relay switch (D) are 100,000 units. Eagle
operates 250 days a year. The following data are available for two
suppliers. Kramer and Sunrise, for the part:
Freight Costs
Shipping Quantity (Q)
Supplier
2,000
10,000
Price/Unit
(p)
Carrying
Cost/Unit
(H)
Lead
Time
(L)(days)
Administrative
Costs
Kramer
$30,000 $20,000
$5.00
$1.00
5
$10,000
Sunrise
$28,000 $18,000
$4.90
$0.98
9
$11,000
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 1
The daily requirements for the relay switch are:
d = 100,000/250 = 400 units
We must calculate the total annual costs
for each alternative:
Total annual cost = Material costs + Freight costs
+ Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL) H +
Administrative costs
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 1
Kramer
Q = 2,000:
($5.00)(100,000) + $30,000 + (2,000/2 + 400(5))($1) + $10,000
= $543,000
($5.00)(100,000) + $20,000 + (10,000/2 + 400(5))($1) + $10,000
Q = 10,000:
= $537,000
Sunrise
Q = 2,000:
($4.90)(100,000) + $28,000 + (2,000/2 + 400(9))($0.98) + $11,000
= $533,508
Q = 10,000:
(4.90)(100,000) + $18,000 + (10,000/2 + 400(9))($0.98) + $11,000
= $527,428
The analysis reveals that using Sunrise and a shipping quantity
of 10,000 units will yield the lowest annual total costs.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 2
Schneider Logistics Company has built a new warehouse in Columbus,
Ohio, to facilitate the consolidation of freight shipments to customers
in the region. How many teams of dock workers should he hire to
handle the cross docking operations and the other warehouse
activities? Each team costs $5,000 a week in wages and overhead.
Extra capacity can be subcontracted at a cost of $8,000 a team per
week. Each team can satisfy 200 labor hours of work a week.
Management has estimated the following probabilities for the
requirements:
Requirements (hours/wk)
Number of teams
Probability
200
400
600
1
2
3
0.20
0.50
0.30
How many teams should Schneider hire?
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 2
We use the expected value decision rule by first computing the
cost for each option for each possible level of requirements and
then using the probabilities to determine the expected value for
each option. The option with the lowest expected cost is the
one Schneider will implement. We demonstrate the approach
using the “one team” in-house option.
One Team In-House
C(200) = $5,000
C(400) = $5,000 + $8,000 = $13,000
C(600) = $5,000 + $8,000 + $8,000 = $21,000
Expected Value =
0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Solved Problem 2
A table of the complete results is below.
Weekly Labor Requirements
In-House
200 hrs
400 hrs
600 hrs
Expected Value
One team
$5,000
$13,000
$21,000
$13,800
Two teams
$10,000
$10,000
$18,000
$12,400
Three teams
$15,000
$15,000
$15,000
$15,000
Based on the expected value decision rule,
Schneider should employ two teams at the warehouse.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Coordination in a
Supply Chain
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
Obstacles to Coordination
in a Supply Chain
•
•
•
•
•
Incentive Obstacles
Information Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles
Chopra and Meindl, Supply Chain Management, 6th Edition
Incentive Obstacles
• Occur when incentives offered to different
stages or participants in a supply chain lead
to actions that increase variability and
reduce total supply chain profits
– Local optimization within functions or stages of
a supply chain
– Sales force incentives
Chopra and Meindl, Supply Chain Management, 6th Edition
Information Processing Obstacles
• When demand information is distorted as it
moves between different stages of the supply
chain, leading to increased variability in orders
within the supply chain
–Forecasting based on orders and not customer demand
–Lack of information sharing
Chopra and Meindl, Supply Chain Management, 6th Edition
Operational Obstacles
• Occur when placing and filling orders lead
to an increase in variability
– Ordering in large lots
– Large replenishment lead times
– Rationing and shortage gaming
Chopra and Meindl, Supply Chain Management, 6th Edition
Operational Obstacles
FIGURE 10-2
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing Obstacles
• When pricing policies for a product lead to
an increase in variability of orders placed
– Lot-size based quantity decisions
– Price fluctuations
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing Obstacles
FIGURE 10-3
Chopra and Meindl, Supply Chain Management, 6th Edition
Behavioral Obstacles
• Problems in learning within organizations that
contribute to information distortion
1. Each stage of the supply chain views its actions locally and
is unable to see the impact of its actions on other stages
2. Different stages of the supply chain react to the current
local situation rather than trying to identify the root
causes
3. Different stages of the supply chain blame one another
for the fluctuations
4. No stage of the supply chain learns from its actions over
time
5. A lack of trust among supply chain partners causes them
to be opportunistic at the expense of overall supply chain
Chopra and Meindl, Supply Chain Management, 6 Edition
performance
th
Supply Chain
Sustainability
Chapter 15
What is Sustainability?
Sustainability: A characteristic of processes that
are meeting humanity’s needs without harming
future generations.
• Sustainability Challenges:
– Environmental protection
– Productivity improvement
– Risk minimization
– Innovation
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
The Three Elements of
Supply Chain Sustainability
• Financial Responsibility
• Environmental Responsibility
- Reverse Logistics
- Efficiency
• Social Responsibility
- Disaster Relief Supply Chains
- Ethics
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Humanitarian Logistics
Humanitarian Logistics: The process of planning, implementing and
controlling the efficient, cost-effective flow and storage of goods and
materials, as well as related information, from the point of origin to the
point of consumption for the purpose of alleviating the suffering of
vulnerable people.
Reverse Logistics: The process of planning, implementing and
controlling the efficient, cost-effective flow of products, materials, and
information from the point of consumption back to the point of origin for
returns, repair, remanufacture, or recycling.
Closed-Loop Supply Chain: A supply chain that integrates forward
logistics with reverse logistics, thereby focusing on the complete chain
of operations from the birth to the death of a product.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Reverse Logistics
• Financial Implications
– Fee
– Deposit fee
– Take back
– Trade-in
– Community programs
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Transportation Distance
• Route Planning
– Shortest route problem
• Find the shortest distance between two
cities in a network or map.
– Traveling salesman problem
• Find the shortest possible route that visits
each city exactly once and returns to the
starting city.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Nearest Neighbor Heuristic
• Steps
1. Start with the city that is designated as the central
location. Call this city the start city. Place all other cites
in an unvisited set.
2. Choose the city in the unvisited set that is closest to
the start city. Remove that city from the unvisited set.
3. Repeat the procedure with the latest visited city as the
start city.
4. Conclude when all cities have been visited, and return
back to the central location.
5. Compute the total distance traveled along the selected
route.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Four-City Traveling Salesman Problem
A
90
100
85
130
Central
Hub
80
B
120
Figure 15.3
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
C
Example 15.1
Hillary and Adams, Inc. is a privately-owned firm located in
Atlanta that serves as the regional distributor of natural food
products for Georgia, Kentucky, North Carolina, South Carolina,
and Tennessee. Every week, a truck leaves the large distribution
center in Atlanta to stock local warehouses located in Charlotte,
NC, Charleston, SC, Columbia, SC, Knoxville, TN, Lexington KY,
and Raleigh, NC. The truck visits each local warehouse only once,
and returns to Atlanta after all the deliveries have been
completed. John Jensen is worried about the rising fuel costs and
is interested in finding a route that would minimize the distance
traveled by truck. Use the Nearest Neighbor heuristic to identify
a route for the truck and compute the total distance traveled.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.1
The distance between any two cities in miles is given below:
From/To
Atlanta
Charleston
Charlotte
Columbia
Knoxville
Lexington
Atlanta
0
319
244
225
214
375
435
Charleston
319
0
209
116
373
540
279
Charlotte
244
209
0
93
231
398
169
Columbia
225
116
93
0
264
430
225
Knoxville
214
373
231
264
0
170
351
Lexington
375
540
398
430
170
0
498
Raleigh
435
279
169
225
351
498
0
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Raleigh
Example 15.1
• Step 1
– Start with Atlanta and place all other cities in the
unvisited set.
• Charleston, Charlotte, Columbia, Knoxville, Lexington,
Raleigh
• Step 2
– Select the closest city to Atlanta in the unvisited set,
which is Knoxville.
– Remove Knoxville from the unvisited set.
– The partial route is now Atlanta-Knoxville which is:
• 214 miles
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.1
• Step 3
– Scan the unvisited set for the city closest to Knoxville,
which is Lexington.
– Remove Lexington from the unvisited set.
– The partial route is now Atlanta-Knoxville-Lexington
which is:
• 214 + 170 = 384 miles
• Step 4
– Repeat this procedure until all cities have been
removed from the unvisited set.
– Connect the last city to Atlanta to finish the route.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.1
• Step 5 - Compute the total
distance traveled along the
selected route
• Using Nearest Neighbor
– Atlanta
– Knoxville
– Lexington
– Charlotte
– Columbia
– Charleston
– Raleigh
– Atlanta
Total distance
starting with
Atlanta
214 + 170+ 398 +
93 + 116 + 279 +
435 = 1,705 miles
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.1
• Use the Nearest Neighbor heuristic again to
see if a better solution exists:
Charleston – Columbia – Charlotte – Raleigh –
Knoxville – Lexington – Atlanta – Charleston
116 + 93 + 169 + 351 + 170 + 375 + 319 =
1,593 miles
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.1
Charlotte – Columbia – Charleston – Raleigh –
Knoxville – Lexington – Atlanta – Charlotte
93 + 116 + 279 + 351 + 170 + 375 + 244 =
1628 miles
Columbia – Charlotte – Raleigh – Charleston –
Atlanta – Knoxville – Lexington – Columbia
93 + 169 + 279 + 319 + 214 + 170 + 430 =
1674 miles
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.1
Knoxville – Lexington – Atlanta – Columbia –
Charlotte – Raleigh – Charleston – Knoxville
170 + 375 + 225 + 93 + 169 + 279 + 373 =
1684 miles
Lexington – Knoxville – Atlanta – Columbia –
Charlotte – Raleigh – Charleston – Lexington
170 + 214 + 225 + 93 + 169 + 279 + 540 =
1690 miles
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.1
Raleigh – Charlotte – Columbia – Charleston –
Atlanta – Knoxville – Lexington – Raleigh
169 + 93 + 116 + 319 + 214 + 170 + 498 =
1579 miles
Of the 7 routes , the best one starts with Raleigh
for a travel distance of 1579 miles.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Freight Density
• Freight rates are based on the following
factors:
1.
2.
3.
4.
5.
6.
The freight density
The shipment’s weight
The distance the shipment is moving
The commodity’s susceptibility to damage
The value of the commodity
The commodity’s loadability and handling
characteristics.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Calculating Break-Even weight
• To determine the break-even weight between two
adjacent weight breaks we define the following
variables:
x = break-even weight
A = lower weight bracket
B = next highest weight bracket
C = freight rate relative to A
D = freight rate relative to B
Break-even weight: x = (BD)/C
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Weight Breaks and Freight Class
($/cwt)
Class
10,000
< 500 (lbs) 500 (lbs) 1,000 (lbs) 2,000 (lbs) 5,000 (lbs) (lbs)
> 20,000
(lbs)
50.00
34.40
28.32
24.25
23.04
17.58
15.74
10.47
55.00
36.94
30.50
26.12
24.82
18.93
17.41
11.58
60.00
39.59
32.69
27.99
26.60
20.29
19.08
12.69
65.00
41.94
34.64
29.66
28.18
21.49
20.27
13.48
70.00
44.64
36.86
31.56
29.99
22.88
21.94
14.59
77.50
48.10
39.72
34.01
32.32
24.65
23.85
15.86
85.00
51.90
42.86
36.70
34.87
26.60
26.24
17.45
92.50
55.89
46.15
39.52
37.56
28.64
28.38
18.87
100.00
60.27
49.77
42.61
40.50
30.89
30.77
20.46
Table 15.2
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.2
One of the products produced by Kitchen Tidy is Squeaky Kleen,
a tile cleaner used by restaurants and hospitals. Squeaky Kleen
comes in 5-gallon containers, each weighing 48 lbs. Currently
Kitchen Tidy ships four pallets of 25 units each week to a
distribution center. The freight classification for this commodity
is 100. In an effort to be environmental responsible, Kitchen Tidy
asked their product engineers to evaluate a plan to convert
Squeaky Kleen into a concentrated liquid by removing some
water from the product which would allow the engineers to
design a smaller container so 50 units can be loaded on each
pallet. Each container would weigh only 42 pounds. This would
reduce the freight density and the freight class to 92.5. What
would the savings in freight costs be with the new product
design?
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.2
• Current Product Design:
– Weekly shipment =
(Number of pallets)(units per pallet)(pounds per unit)
(4) * (25) * (48) = 4,800 pounds
– Break-even weight (Freight Class = 100)
(50) * (30.89) / (40.50) = 38.14 or 3,814 pounds
**The shipment qualifies for the lower freight rate**
– Total weekly shipping cost
(48) * (30.89) = $1,482.72
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.2
• New Product Design:
– Weekly shipment =
(Number of pallets)(units per pallet)(pounds per
unit)
(2) * (50) * (42) = 4,200 pounds
– Break-even weight (Freight Class = 92.5)
(50) * (28.64) / (37.56) = 38.126 or 3,813 pounds
**The shipment qualifies for the lower freight rate**
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Example 15.2
• New Product Design:
– Total weekly shipping cost
(42) * (28.64) = $1,202.88
– Savings =
$1,482 - $1,202.88 = $279.84 per week
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 15.2
• Kayco Stamping in Ft. Worth, Texas ships sheet metal
components to a switch box assembly plant in
Waterford, Virginia. Each component weights
approximately 25 lbs and 50 components fit on a
standard pallet. A complete pallet ships as freight
class 92.5. Calculate the shipment cost for 3 and 13
pallets.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 15.2
• At 3 pallets or 150 pieces
– Shipping Weight
(150) * (25) = 3,750 pounds
– Break-even weight (Freight Class = 92.5)
(50) * (28.64) / (37.56) = 38.13 or 3,813 pounds
**The shipment does NOT qualify for the lower
freight rate**
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 15.2
• At 3 pallets or 150 pieces
– Total shipping cost
(37.5) * (37.56) = $1,408.50
– The per-unit shipping charge
$1408.50/150 = $9.39
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 15.2
• At 13 pallets or 650 pieces
– Shipping Weight
(650) * (25) = 16,250 pounds
– Break-even weight (Freight Class = 92.5)
(200) * (18.87) / (28.38) = 132.98 or
13,298 pounds
**The shipment qualifies for the lower freight
rate**
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Application 15.2
• At 13 pallets or 650 pieces
– Total shipping cost
(162.5) * (18.87) = $3,066.38
– The per-unit shipping charge
$3,066.38/650 = $4.72
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Transportation Mode
• Major Modes of Transportation
1.
2.
3.
4.
Air freight
Trucking
Shipping by Water
Rail
• Intermodal shipments
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Transportation Mode
• Transportation Technology
– Relative drag
– Payload ratio
– Propulsion systems
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Humanitarian Supply Chain Operations
Disaster – A serious disruption
of the functioning of society
causing widespread human,
material, or environmental
losses which exceed the ability
of the affected people to cope
using only its own resources.
Forecasts and Early Warnings
Prepare
Disaster
– Human-related
– Natural
Response
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Recovery
Managing Disaster Relief Operations
• Life Cycle of Disaster Relief
1. Brief needs assessment
2. Development of initial supply chains for
flexibility
3. Speedy distribution of supplies to the affected
regions based on forecasted needs
4. Increased structuring of the supply chain as time
progresses: receive supplies by fixed schedule or
on request
5. Dismantling/turning over of the supply chain to
local agencies.
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Managing Disaster Relief Operations
• Supply Chain Management Challenges
– Design implications
– Command and control
– Cargo security
– Donor independence
– Change in work flow
– Local infrastructure
– High employee turnover
– Poor communication
Krajewski, Malhotra, Ritzman, Operations Management: Processes and Supply Chains, 11th Edition
Transportation in a
Supply Chain
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
The Role of Transportation
in a Supply Chain
• Movement of product from one location to
another
• Products rarely produced and consumed in the
same location
• Significant cost component
• Shipper requires the movement of the product
• Carrier moves or transports the product
Chopra and Meindl, Supply Chain Management, 6th Edition
Modes of Transportation and Their
Performance Characteristics
•
•
•
•
•
•
•
Air
Package carriers
Truck
Rail
Water
Pipeline
Intermodal
Chopra and Meindl, Supply Chain Management, 6th Edition
Air
• Cost components
1. Fixed infrastructure and equipment
2. Labor and fuel
3. Variable depending on passenger/cargo
• Key issues
–
–
–
–
–
Location/number of hubs
Fleet assignment
Maintenance schedules
Crew scheduling
Prices and availability
Chopra and Meindl, Supply Chain Management, 6th Edition
Package Carriers
•
•
•
•
•
•
Small packages up to about 150 pounds
Expensive
Rapid and reliable delivery
Small and time-sensitive shipments
Provide other value-added services
Consolidation of shipments a key factor
Chopra and Meindl, Supply Chain Management, 6th Edition
Truck
• Significant fraction of the goods moved
• Truckload (TL)
– Low fixed cost
– Imbalance between flows
• Less than truckload (LTL)
– Small lots
– Hub and spoke system
– May take longer than TL
Chopra and Meindl, Supply Chain Management, 6th Edition
Rail
•
•
•
•
Move commodities over large distances
High fixed costs in equipment and facilities
Scheduled to maximize utilization
Transportation time can be long
Chopra and Meindl, Supply Chain Management, 6th Edition
Water
• Limited to certain geographic areas
• Ocean, inland waterway system, coastal
waters
• Very large loads at very low cost
• Slowest
• Dominant in global trade
• Containers
Chopra and Meindl, Supply Chain Management, 6th Edition
Pipeline
• High fixed cost
• Primarily for crude petroleum, refined
petroleum products, natural gas
• Best for large and stable flows
• Pricing structure encourages use for
predicable component of demand
Chopra and Meindl, Supply Chain Management, 6th Edition
Intermodal
• Use of more than one mode of
transportation to move a shipment
• Grown considerably with increased use of
containers
• Key issue – exchange of information to
facilitate transfer between different modes
Chopra and Meindl, Supply Chain Management, 6th Edition
Selecting a Transportation Network
•
•
•
•
Eight stores, four supply sources
Truck capacity = 40,000 units
Cost $1,000 per load, $100 per delivery
Holding cost = $0.20/year
Chopra and Meindl, Supply Chain Management, 6th Edition
Selecting a Transportation Network
Annual sales = 960,000/store
Batch size shipped from each
supplier to each store
Number of shipments/yr from
each supplier to each store
Annual trucking cost
for direct network
Average inventory at each
store for each product
Annual inventory cost
for direct network
Total annual cost of
direct network
Chopra and Meindl, Supply Chain Management, 6th Edition
Direct shipping
= 40,000 units
= 960,000/40,000 = 24
= 24 x 1,100 x 4 x 8 = $844,800
= 40,000/2 = 20,000 units
= 20,000 x 0.2 x 4 x 8 = $128,000
= $844,800 + $128,000 = $972,800
Selecting a Transportation Network
Annual sales = 960,000/store
Batch size shipped from each
supplier to each store
Number of shipments/yr from
each supplier to each store
Transportation cost per shipment
per store (two stores/truck)
Annual trucking cost
for direct network
Average inventory at each
store for each product
Annual inventory cost
for direct network
Total annual cost of
direct network
Chopra and Meindl, Supply Chain Management, 6th Edition
Milk runs
= 40,000/2 = 20,000 units
= 960,000/20,000 = 48
= 1,000/2 + 100 = $600
= 48 x 600 x 4 x 8 = $921,600
= 20,000/2 = 10,000 units
= 10,000 x 0.2 x 4 x 8 = $64,000
= $921,600 + $64,000 = $985,600
Selecting a Transportation Network
Annual sales = 120,000/store
Batch size shipped from each
supplier to each store
Number of shipments/yr from
each supplier to each store
Annual trucking cost
for direct network
Average inventory at each
store for each product
Annual inventory cost
for direct network
Total annual cost of
direct network
Chopra and Meindl, Supply Chain Management, 6th Edition
Direct shipping
= 40,000 units
= 120,000/40,000 = 3
= 3 x 1,100 x 4 x 8 = $105,600
= 40,000/2 = 20,000 units
= 20,000 x 0.2 x 4 x 8 = $128,000
= $105,600 + $128,000 = $233,600
Selecting a Transportation Network
Annual sales = 120,000/store
Batch size shipped from each
supplier to each store
Number of shipments/yr from
each supplier to each store
Transportation cost per shipment
per store (two stores/truck)
Annual trucking cost
for direct network
Average inventory at each
store for each product
Annual inventory cost
for direct network
Total annual cost of
direct network
Chopra and Meindl, Supply Chain Management, 6th Edition
Milk runs
= 40,000/4 = 10,000 units
= 120,000/10,000 = 12
= 1,000/4 + 100 = $350
= 12 x 350 x 4 x 8 = $134,400
= 10,000/2 = 5,000 units
= 5,000 x 0.2 x 4 x 8 = $32,000
= $134,400 + $32,000 = $166,400
Trade-offs When Selecting
Transportation Mode
Chopra and Meindl, Supply Chain Management, 6th Edition
Trade-offs When Selecting
Transportation Mode
Demand = 120,000 motors, Cost = $120/motor,
Weight = 10 lbs/motor, Lot size = 3,000,
Safety stock = 50% ddlt
Carrier
Range of Quantity
Shipped (cwt)
Shipping Cost ($/cwt)
AM Railroad
200+
6.50
Northeast Trucking
100+
7.50
Golden Freightways
50–150
8.00
Golden Freightways
150–250
6.00
Golden Freightways
250+
4.00
TABLE 14-4
Chopra and Meindl, Supply Chain Management, 6th Edition
Trade-offs When Selecting
Transportation Mode
Cycle inventory = Q/2 = 2,000/2 = 1,000 motors
Safety inventory = L/2 days of demand
= (6/2)(120,000/365) = 986 motors
In-transit inventory = 120,000(5/365) = 1,644 motors
Total average inventory = 1,000 + 986 + 1,644
= 3,630 motors
Annual holding cost
using AM Rail = 3,630 x $30 = $108,900
Annual transportation
cost using AM Rail = 120,000 x 0.65 = $78,000
The total annual cost for
inventory and transportation
using AM Rail = $186,900
Chopra and Meindl, Supply Chain Management, 6th Edition
Trade-offs When Selecting
Transportation Mode
Lot Size
(Motors)
Transportation
Cost
Cycle
Inventory
Safety
Inventory
In-Transit
Inventory
AM Rail
2,000
$78,000
1,000
986
1,644
$108,900
$186,900
Northeast
1,000
$90,000
500
658
986
$64,320
$154,320
Golden
500
$96,000
250
658
986
$56,820
$152,820
Golden
1,500
$96,000
750
658
986
$71,820
$167,820
Golden
2,500
$86,400
1,250
658
986
$86,820
$173,220
Golden
3,000
$80,000
1,500
658
986
$94,320
$174,320
Golden (old
proposal)
4,000
$72,000
2,000
658
986
$109,320
$181,320
Golden (new
proposal)
4,000
$67,000
2,000
658
986
$109,320
$176,820
Alternative
Inventory
Cost
Total Cost
TABLE 14-5
Chopra and Meindl, Supply Chain Management, 6th Edition
Inventory Aggregation
• Can significantly reduce safety inventories
• Transportation costs generally increase
• Use
– When inventory and facility costs form a large fraction
of a supply chain’s total costs
– For products with a large value-to-weight ratio
– For products with high demand uncertainty
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
HighVal – weekly demand µH = 2, σH = 5, weight = 0.1 lbs, cost = $200
LowVal – weekly demand µL = 20, σ L = 5, weight = 0.04 lbs, cost = $30
CSL = 0.997, holding cost = 25%, L = 1 week, T = 4 weeks
UPS lead time = 1 week, $0.66 + 0.26x
FedEx lead time = overnight, $5.53 + 0.53x
• Option A. Keep the current structure but replenish inventory
once a week rather than once every four weeks
• Option B. Eliminate inventories in the territories, aggregate all
inventories in a finished-goods warehouse at Madison, and
replenish the warehouse once a week
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
1. HighMed inventory costs (current scenario, HighVal)
Average lot size, QH = expected demand during T weeks
= T H = 4  2 = 8 units
Safety inventory, ss H = F –1 (CSL) * T + L = F –1 (CSL) * T + L * H
= F –1 (0.997) * 4 + 1 * 5 = 30.7 units
Total HighVal inventory = QH / 2 + ss H = (8 / 2) + 30.7 = 34.7 units
All 24 territories, HighVal inventory = 24 x 34.7 = 832.8 units
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
1. HighMed inventory costs (current scenario, LowVal)
Average lot size, QL = expected demand during T weeks
= T H = 4 * 20 = 80 units
Safety inventory, ssL = F –1 (CSL) *  T + L = F –1 (CSL) * T + L *  L
= F –1 (0.997) * 4 + 1 * 5 = 30.7 units
Total LowVal inventory = QL / 2 + ss L = (80 / 2) + 30.7 = 70.7 units
All 24 territories, LowVal inventory = 24 x 70.7 = 1696.8 units
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
Annual inventory
holding cost
for HighMed = (average HighVal inventory x $200
+ average LowVal inventory x $30) x 0.25
= (832.8 x $200 + 169.8 x $30) x 0.25
= $54,366 ($54,395 without rounding)
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
2. HighMed transportation cost (current scenario)
Average weight of each replenishment order
= 0.1QH + 0.04QL = 0.1 x 8 + 0.04 x 80 = 4 pounds
Shipping cost per replenishment order
= $0.66 + 0.26 x 4 = $1.70
Annual transportation cost = $1.70 x 13 x 24 = $530
3. HighMed total cost (current scenario)
Annual inventory and transportation cost at HighMed
= inventory cost + transportation cost
= $54,366 + $530 = $54,896
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
Current Scenario
Option A
Option B
Number of stocking locations
24
24
1
Reorder interval
4 weeks
1 week
1 week
HighVal cycle inventory
96 units
24 units
24 units
HighVal safety inventory
737.3 units
466.3 units
95.2 units
HighVal inventory
833.3 units
490.3 units
119.2 units
LowVal cycle inventory
960 units
240 units
240 units
LowVal safety inventory
737.3 units
466.3 units
95.2 units
LowVal inventory
1,697.3 units
706.3 units
335.2 units
Annual inventory cost
$54,395
$29,813
$8,473
Shipment type
Replenishment
Replenishment
Customer order
Shipment size
8 HighVal + 80 LowVal
2 HighVal + 20 LowVal
1 HighVal + 10 LowVal
Shipment weight
4 lbs.
1 lb.
0.5 lb.
Annual transport cost
$530
$1,148
$14,464
Total annual cost
$54,926
$30,961
$22,938
TABLE 14-6
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
Average weight of
each customer order = 0.1 x 0.5 + 0.04 x 5 = 0.25 pounds
Shipping cost per
customer order = $5.53 + 0.53 x 0.25 = $5.66
Number of customer orders
per territory per week = 4
Total customer orders
per year = 4 x 24 x 52 = 4,992
Annual transportation cost = 4,992 x $5.66 = $28,255
Total annual cost = inventory cost
+ transportation cost
= $8,474 + $28,255 = $36,729
Chopra and Meindl, Supply Chain Management, 6th Edition
Tradeoffs When
Aggregating Inventory
Aggregate
Disaggregate
Transport cost
Low
High
Demand uncertainty
High
Low
Holding cost
High
Low
Customer order size
Large
Small
TABLE 14-7
Chopra and Meindl, Supply Chain Management, 6th Edition
Trade-off Between Transportation Cost
and Customer Responsiveness
• Closely linked to degree of responsiveness
– High responsiveness, high transportation costs
– Decreased responsiveness, lower
transportation costs
• Temporal aggregation – combining orders
across time
Chopra and Meindl, Supply Chain Management, 6th Edition
Trade-off Between Transportation Cost
and Responsiveness
Steel shipments LTL = $100 + 0.01x
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Week 1
19,970
17,470
11,316
26,192
20,263
8,381
25,377
Week 2
39,171
2,158
20,633
23,370
24,100
19,603
18,442
TABLE 14-8
Chopra and Meindl, Supply Chain Management, 6th Edition
Trade-off Between Transportation Cost
and Responsiveness
TABLE 14-9
Two-Day Response
Three-Day Response
Day
Demand
Quantity
Shipped
1
19,970
19,970
299.70
0
2
17,470
17,470
274.70
37,440
3
11,316
11,316
213.16
0
4
26,192
26,192
361.92
37,508
5
20,263
20,263
302.63
0
6
8,381
8,381
183.81
28,644
7
25,377
25,377
353.77
0
8
39,171
39,171
491.71
64,548
9
2,158
2,158
121.58
0
10
20,633
20,633
306.33
22,791
11
23,370
23,370
333.70
0
12
24,100
24,100
341.00
47,70
13
19,603
19,603
296.03
0
14
18,442
18,442
284.42
38,045
Cost ($)
$4,164.46
Chopra and Meindl, Supply Chain Management, 6th Edition
Quantity
Shipped
Cost ($)
Four-Day Response
Quantity
Shipped
Cost ($)
0
474.40
0
48,756
475.08
586.56
0
0
386.44
54,836
648.36
0
745.48
0
66,706
327.91
767.06
0
0
574.70
68,103
781.03
0
480.45
$3,464.46
38,045
480.45
$3,264.46
Tailored Transportation
• The use of different transportation networks
and modes based on customer and product
characteristics
• Factors affecting tailoring
– Customer density and distance
– Customer size
• Transportation cost based on total route distance
• Delivery cost based on number of deliveries
– Product demand and value
Chopra and Meindl, Supply Chain Management, 6th Edition
Tailored Transportation
Short Distance
Medium Distance
Long Distance
High density
Private fleet with
milk runs
Cross-dock with
milk runs
Cross-dock with
milk runs
Medium density
Third-party milk runs
LTL carrier
LTL or package
carrier
Low density
Third-party milk runs
or LTL carrier
LTL or package
carrier
Package carrier
TABLE 14-10
Chopra and Meindl, Supply Chain Management, 6th Edition
Tailored Transportation
Product Type
High Value
Low Value
High demand
Disaggregate cycle inventory.
Aggregate safety inventory.
Inexpensive mode of
transportation for replenishing
cycle inventory and fast mode
when using safety inventory.
Disaggregate all inventories and
use inexpensive mode of
transportation for replenishment.
Low demand
Aggregate all inventories. If
needed, use fast mode of
transportation for filling
customer orders.
Aggregate only safety inventory.
Use inexpensive mode of
transportation for replenishing
cycle inventory.
TABLE 14-11
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing and Revenue
Management in a Supply Chain
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management, 6e
The Role of Pricing and Revenue
Management in the Supply Chain
• Revenue management is the use of pricing to
increase the profit generated from a limited supply
of supply chain assets
• Supply assets exist in two forms – capacity and
inventory
• Revenue management may also be defined as the
use of differential pricing based on customer
segment, time of use, and product or capacity
availability to increase supply chain profits
Chopra and Meindl, Supply Chain Management, 6th Edition
The Role of Pricing and Revenue
Management in the Supply Chain
• Revenue management has a significant impact on
supply chain profitability when one or more of the
following four conditions exist
1. The value of the product varies in different market
segments
2. The product is highly perishable or product wastage
occurs
3. Demand has seasonal and other peaks
4. The product is sold both in bulk and on the spot
market
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing and Revenue Management for
Multiple Customer Segments
• Differential pricing increases total profits for a firm
• Two fundamental issues must be handled in practice
– How can the firm differentiate between the two segments
and structure its pricing to make one segment pay more
than the other?
– How can the firm control demand such that the lowerpaying segment does not utilize the entire availability of
the asset?
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing and Revenue Management for
Multiple Customer Segments
d = 10,000 – 2,000p
FIGURE 16-2
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing to Multiple Segments
Demand curve for segment i = d i = Ai – Bi pi
Supplier maximizes ( pi – c )( Ai – Bi pi )
Optimal price = pi =
For capacity constrained by Q
k
Max å ( pi – c )( Ai – Bi pi )
Subject to
i =1
k
å (A – B p ) £ Q
i =1
i
i
i
Ai – Bi pi ³ 0 for i = 1,..., k
Chopra and Meindl, Supply Chain Management, 6th Edition
Ai c
+
2 Bi 2
Pricing to Multiple Segments
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing to Multiple Segments
Customers unwilling to commit d1 = 5,000 – 20 p1
Customer willing to commit d2 = 5,000 – 40 p1
c = $10
5,000 10
p1 =
+ = 125+5 = $130
220 2
5,000 10
p2 =
+ = 62.5+5 = $67.50
2 40 2
d1 = 5,000 – (20130) = 2,400 and d2 = 5,000 – (40 67.5) = 2,300
Total profit = (1302,400)+(67.52,300) – (10  4,700) = $420,250
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing to Multiple Segments
Same price to both segments
( p – 10) (5,000 – 20 p) + ( p – 10) (5,000 – 40 p)
= ( p – 10) (10,000 – 60 p )
10,000 10
Optimal price p =
+
= $88.33
2  60 2
d1 = 5,000 – 20  88.33 = 3,233.40
d2 = 5,000 – 40  88.33 = 1,466.80
(
) (
)
Total profit = 88.33-10  3,233.40 +1,466.80 = $368,166.67
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing to Multiple Segments
Total production capacity is limited to 4,000 units
(
)(
) (
)(
Max p1 – 10 5,000 – 20 p1 + p2 – 10 5,000 – 40 p2
Subject to
(5,000 – 20 p ) + (5,000 – 40 p ) £ 4,000
(5,000 – 20 p ) ,(5,000 – 40 p ) ³ 0
1
2
1
Chopra and Meindl, Supply Chain Management, 6th Edition
2
)
Pricing to Multiple Segments
FIGURE 16-3
Chopra and Meindl, Supply Chain Management, 6th Edition
Allocating Capacity to a Segment
Under Uncertainty
• Basic trade-off is between committing to an order
from a lower-price buyer or waiting for a higher-price
buyer to arrive
– Spoilage
– Spill
( )
RH C H = Prob(demand from higher-price segment > C H )  pH
Prob(demand from higher-price segment > C H ) = pL / pH
(
)
(
C H = F –1 1– pL / pH , DH , H = NORMINV 1– pL / pH , DH , H
Chopra and Meindl, Supply Chain Management, 6th Edition
)
Allocating Capacity to a Segment
Under Uncertainty
• Effective use of revenue management increases firm
profits and improves service for the more valuable
customer segment
• Create different versions of a product targeted at
different segments
• Tactics for multiple customer segments
– Price based on the value assigned by each segment
– Use different prices for each segment
– Forecast at the segment level
Chopra and Meindl, Supply Chain Management, 6th Edition
Allocating Capacity to
Multiple Segments
Chopra and Meindl, Supply Chain Management, 6th Edition
Allocating Capacity to
Multiple Segments
Revenue from segment A, pA = $3.50 per cubic foot
Revenue from segment B, pB = $2.00 per cubic foot
Mean demand for segment A, DA = 3,000 cubic feet
Standard deviation of demand for A, A = 1,000 cubic feet
(
)
= NORMINV (1– 2.00 / 3.50,3,000,1,000)
C A = NORMINV 1– pB / pA , DA , A
= 2,820 cubic feet
(
C A = NORMINV 1– 2.00 / 5.00,3,000,1,000
= 3,253 cubic feet
Chopra and Meindl, Supply Chain Management, 6th Edition
)
Pricing and Revenue Management
for Perishable Assets
• Any asset that loses value over time is
perishable
• Two basic approaches
1. Vary price dynamically over time to maximize
expected revenue, dynamic pricing
2. Overbook sales of the asset to account for
cancellations
Chopra and Meindl, Supply Chain Management, 6th Edition
Dynamic Pricing
• Effective differential pricing generally increases the
level of product availability for the consumer willing to
pay full price and total profits for the retailer
Demand for period i = di = Ai – Bi pi
k
(
Maxå pi Ai – Bi pi
Subject to
i=1
)
k
å( A – B p ) £ Q
i
i
i
i=1
Ai – Bi pi ³ 0 for i = 1,...,k
Chopra and Meindl, Supply Chain Management, 6th Edition
Dynamic Pricing
Chopra and Meindl, Supply Chain Management, 6th Edition
Dynamic Pricing
• Effective differential pricing generally increases the level
of product availability for the consumer willing to pay
full price and total profits for the retailer
d1 = 300 – p1, d2 = 300 – 1.3p2, and d3 = 300 – 1.8p3
(
)
(
)
(
Maxp1 300 – p1 + p2 300 – 1.3 p2 + p3 300 – 1.8 p3
Subject to
(300 – p ) + (300 – 1.3 p ) + (300 – 1.8 p ) £ 400
1
2
3
300 – p1,300 – 1.3 p2 ,300 – 1.8 p3 ³ 0
Chopra and Meindl, Supply Chain Management, 6th Edition
)
Dynamic Pricing
FIGURE 16-4
Chopra and Meindl, Supply Chain Management, 6th Edition
Dynamic Pricing
FIGURE 16-5
Chopra and Meindl, Supply Chain Management, 6th Edition
Evaluating Quantity with
Dynamic Pricing
d1 = 300 – p1, d2 = 300 – 1.3p2, and d3 = 300 – 1.8p3
(
)
(
)
(
)
Maxp1 300 – p1 + p2 300 – 1.3 p2 + p3 300 – 1.8 p3 – 100Q
Subject to
(300 – p ) + (300 – 1.3 p ) + (300 – 1.8 p ) £ Q
1
2
3
300 – p1,300 – 1.3 p2 ,300 – 1.8 p3 ,Q ³ 0
Chopra and Meindl, Supply Chain Management, 6th Edition
Evaluating Quantity with
Dynamic Pricing
FIGURE 16-6
Chopra and Meindl, Supply Chain Management, 6th Edition
Overbooking
• Basic trade-off is between having wasted capacity
because of excessive cancellations or having a
shortage of capacity because of few cancellations
requiring expensive backup
Cw
s* = Prob cancellations £ O * =
Cw + Cs
(
(
)
)
(
O* = F –1 s*, c , c = NORMINV s*, c , c
(
) (
)
(
)
) (
)
O = F –1 éë s*,  L +O , L +O ùû = NORMINV éë s*,  L +O , L +O ùû
Chopra and Meindl, Supply Chain Management, 6th Edition
Overbooking
Chopra and Meindl, Supply Chain Management, 6th Edition
Overbooking
Cost of wasted capacity, Cw = $10 per dress
Cost of capacity shortage, Cs = $5 per dress
Cw
10
s* =
=
= 0.667
Cw + C s 10 + 5
(
)
(
)
O = NORMINV éë0.667,0.15,(5000 +O ) ,0.075 (5000 +O )ùû
O* = NORMINV s*,  c , c = NORMINV 0.667,800,400 = 973
O* = 1,115
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing and Revenue Management
for Seasonal Demand
• Seasonal peaks of demand common in many supply
chains
• Off-peak discounting can shift demand from peak to
non-peak periods
• Charge higher price during peak periods and a lower
price during off-peak periods
• Increases profits for the owner of assets, decreases
the price paid by a fraction of customers, and brings in
new customers during the off-peak discount period
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing and Revenue Management for
Bulk and Spot Contracts
• Problems constructing a portfolio of long-term bulk
contracts and short-term spot market contracts
• Decide what fraction of the asset to sell in bulk and
what fraction of the asset to save for the spot market
• The amount reserved for the spot market should be
such that the expected marginal revenue from the
spot market equals the current revenue from a bulk
sale
Chopra and Meindl, Supply Chain Management, 6th Edition
Pricing and Revenue Management for
Bulk and Spot Contracts
cS – c B
Optimal value p* =
cS
(
)
(
Q* = F –1 p*, , = NORMINV p*, ,
Chopra and Meindl, Supply Chain Management, 6th Edition
)
Long-Term Bulk Contracts versus the
Spot Market
Chopra and Meindl, Supply Chain Management, 6th Edition
Long-Term Bulk Contracts versus the
Spot Market
Bulk contract cost, cB = $10,000 per million units
Spot market cost, cS = $12,500 per million units
cS – cB 12,500 – 10,000
p* =
=
= 0.2
cS
12,500
(
)
(
)
Q* = NORMINV p*, , = NORMINV 0.2,10,4 = 6.63
Chopra and Meindl, Supply Chain Management, 6th Edition