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Operations and Supply Chain Management (OSCM) The design, operation, and
improvement of the systems that create and deliver the firm’s primary products and

A Supply Chain encompasses all activities associated with the flow and transformation
of goods and services from the raw materials stage through to the end-user, as well as
the associated information flows. The management of supply chain requires effort to
integrate the processes in the supply chain. To obtain a valuable chain with satisfied
customers it is necessary to have an effective coordination and integration of materials
through out the supply chain. Simultaneously, attention can be paid to reduction of costs.

The main task of a supplier is the supply of raw materials, semi-finished products and
finished products to downstream customers. Thereby, one can apply different strategies:

 Supplying demand at lowest possible costs

 Responding quickly to changing requirements and demand to minimise stock outs.

 Sharing market research for jointly development of products and services

Manufacturers assemble products and services and concerns with made-or buy
decisions regarding components and semi-finished products. They purchase acquisition of
goods and services. Their objectives of purchasing are to identify products and services
that can be obtained externally and to develop, evaluate and determine the best
supplier, price and delivery for those products and services.

Manufacturers that decide to buy instead of making products can follow three-stage

 Vendor evaluation: finding potential vendors and determining likelihood of their

becoming good suppliers

 Vendor development: assuming that a firm wants to proceed with supplier, how to
integrate activities into its own system?

 Negotiations: several strategies exist to determine price(s)

Distributors distribute products from manufacturers to retailers and customers. They

are responsible for the temporarily storage of products in warehouses and the balance of
fluctuations in production. In addition, distributors handle the transportation of products
(e.g. trucks, trains, airplanes, ships or pipelines)

Customers can buy directly products and services at supermarkets or service

organisations or get direct delivery of products after ordering on the Internet or phone.

Activities associated from supplier to customer can be described as downstream flows,

which is contrary to upstream flows (customer to supplier).The reasons for the
occurrence of upstream flows are:

 recycling of products
 money back guarantee for unsatisfied customers

 repairs

 empty packaging materials

 waste

 returned new products

Product-service bundling When a firm builds service activities into its product offerings
to create additional value for the customer

Efficiency Doing something at the lowest possible cost

Effectiveness Doing the things that will create most value for the customer

Value The attractiveness of a product relative to its cost

Operations and supply chain processes can be categorized as follows:

 Planning: processes needed to operate an existing supply chain strategically

 Sourcing: selection of suppliers that will deliver the goods and services needed to
create the firm’s product

 Making: where product is produced or the service is provided

 Delivering: referred to logistic processes

 Returning: involves the processes for receiving worn-out, defective, and excess
products back from customers and support for customers who have problems with
delivered product

The five characteristics of services:

 Intangible process

 Requires the degree of interaction with the customer to be a service

 Heterogeneous (varying day to day between the customer and the servers)

 Perishable and time dependent

 Specification of a services can be defined as a package of features (supporting

facility, facilitating goods, explicit service, implicit service)

The Goods-Services Continuum

Outsourcing means that a third party logistics executes activities of a company. To gain
success the third logistics provider actively needs to help solving problems, if there is
perfect information exchange and trust between parties.

There are three types of production processes:

 Postponement: delaying any modifications or customisation to the product as long as
possible in production process (e.g. Hewlett-Packard adds power system the moment
the destination country of the printer is known)

 Channel assembly: postponement of final assembly until distribution (e.g. Dell

makes a computer in its warehouse from standardised components after the order of
a customer)

 Standardisation: Reduction of the number of variations in materials and components

as an aid to reduce costs

Mass customization The ability to produce a unique product exactly to a

particular customer’s requirements

Business analytics The use of current business data to solve business

problems using mathematical analysis.

As operations and supply management is a dynamic field, a global enterprise challenges

nowadays different issues:

1. Coordination between mutually supportive but separate organizations (existence of

contract manufacturers that are specialized in performing focused manufacturing

2. Optimization of global supplier, production, and distribution networks

3. Management of customer touch points (recognition that making resource utilization

decisions must capture the implicit costs of lost customers as well as the direct costs
of staffing)

4. Raising senior management awareness of operations as a significant

competitive weapon

5. Sustainability and the triple bottom line (economic, employee and environmental

Sustainability The ability to meet current resource needs without compromising

the ability of future generations to meet their needs.

Triple bottom line A business strategy that includes social, economic, and
environmental criteria.

Shareholders Own one or more shares of stock in the company
Stakeholders Indirectly or directly influenced by the activities of the firm.

The Triple Bottom Line captures an expanded spectrum of values by evaluating a firm
against the following criteria:

 Social: pertains to fair and beneficial business practices toward labor, the
community, and the region in which a firm conducts is business
 Economic: the firm’s obligation to compensate shareholders who provide capital via
competitive returns on investment

 Environmental: the firm’s impact on the environment and society at large

Operations and supply The setting of broad policies and plans for using the firm’s
chain strategy resources optimally and must be integrated with corporate
Operations effectiveness Performing activities in a manner that best implements
strategic priorities at minimum cost.

A planning strategy involves a set of repeating activities, which are performed in

different time intervals and in a closed-loop process:

 Develop/Refine the Strategy (yearly)

o Define vision, mission and objectives

o Conduct strategic analysis

o Define strategy competitive priorities

 Translate the Strategy (quarterly)

o Product design/revision initiatives

o Sourcing/location of facilities initialization

 Major Focus Points and Projects

o Major operations initiatives

o Major logistics/distribution initiatives

There are seven major competitive dimensions forming the competitive position of a

1. Cost or price: The choice to either make the product or deliver the service cheap

2. Quality: The firm’s definition of how the product or service is to be made

3. Delivery speed: The firm’s ability to make the product or deliver the service quickly

4. Delivery reliability: The firm’s ability to deliver the product when promised

5. Coping with changes in demand: The firm’s ability to respond to the change in

6. Flexibility and New-Product introduction speed: The firm’s ability to be flexible in

order to offer a wide variety of production to its customers in a given time.

7. Other product-specific criteria relate to specific products or situations. Special

services can increase sales of manufactured products such as:

 Technical liaison and support

 Meeting a launch date

 Supplier after-sale support

 Environmental impact

 Other dimensions (e.g. color, size, weight)

Trade-offs Occur when activities are incompatible so that more of one thing necessitates
less of another (e.g high quality is viewed as a trade-off to low cost).

Straddling Occurs when a company seeks to match the benefits of a successful position
while maintaining its existing position

Order winner A specific marketing-orientated dimension that clearly differentiates a

product from competing products

Order qualifier A dimension used to screen a product or service as a candidate for


Activity-system Diagrams that show how a company’s strategy is

delivered maps through a set of supporting activities

Supply chain risk The likelihood of a disruption that would impact the ability of
a company to continuously supply products or services

Productivity a measure of how well resources are used.

Partial measure

Input factors: labor, capital, materials, energy

Multifactor measure includes some, but not all inputs:

Total measure includes all outputs and inputs.

Capacity Management in Operations is the ability to hold, receive, store or accommodate

a number of customers in a system. Capacity is the amount of resource inputs available
relative to output requirements over a particular period of time. However, it does not
imply the duration of its sustainability. When looking at capacity, operations managers
look at inputs and outputs. Operations management focus also the time dimension of
capacity. Capacity planning is views in the following three time durations:

 Long range greater than one year

 Intermediate range monthly or quarterly plans for the next 6 to 18 month

 Short range less than one month

Strategic capacity planning

Finding the overall capacity level of capacity-intensive resources to best support the
firm’s long-term strategy.

Capacity The output that a system is capable of achieving over a period of time.

The Best Operating Level is a level of capacity for which the process was designed and
thus is the volume of output at which average unit cost is minimized. The determination
of the minimum is difficult as it includes a complex trade-off between the allocation of
fixed overhead costs and other costs. A measure to reveal how close a firm is to its best
operation level is by calculating the capacity utilization rate.

Capacity utilization rate Capacity used / Best operating level

Economies of scale A cost advantage for companies as the volume increases, the
average cost per unit of output drops.

Focused factory When a production facility works best when it focuses on a fairly
limited set of production objectives. This concept is focused on the capacity by
operationalizing the mechanism by plant within a plant (PWP).

Plant within a plant An area in a larger facility that is dedicated to a specific production
objective. This can be used to operationalize the focused factory concept.

Capacity Flexibility The ability to rapidly increase or decrease production levels, or to

shift production capacity quickly from one to another.

 Flexible plants The ultimate in plant flexibility is the zero-changeover-time plant.

Such a plant can adapt to change by the use of
movable equipment, knockdown walls, and easily accessible.

 Flexible processes Flexible manufacturing processes permit low-cost switching from

one product to another and enable economies of scope.

 Flexible workers Flexible workers have multiple skills and the ability to switch easily
from one kind of task to another. They require broader training than specialized
workers and need managers and staff support to facilitate quick changes in their
work assignments.

Economies of scope When multiple products can be produced at lower cost

in combination than they can be separately.

Changing the capacity it is important to maintain system balance, frequency of capacity

additions or reductions, and the use of external capacity. The objectives of strategic
capacity planning are to provide an approach for determining the overall capacity level of
capital-intensive resources that best supports the company’s long-range competitive
strategy. It has an impact on:

 Firm’s response rate

 Cost structure

 Inventory policies

 Management and staff support requirements

Capacity cushion Refers to the amount of capacity in excess of expected demand. It is

the reserve capacity that handles sudden increases in demand or temporary losses of
production capacity.

Deterministic Performance Estimation

Design capacity is the theoretical maximum output of a system or process in a given


Effective capacity The capacity that can be expected given the product mix, methods of
scheduling, maintenance and standards of quality.

Interarrival time The time between two subsequent arrivals of products at

their entrance in the process.
Throughput time The time that passes between the moment at which
the customer/product enters the system and the moment at which
the customer/product is ready

Arrival rate The number of products that arrive per time unit
Departure rate The number of products that leave the system per time unit. It
is determined by the speed of the bottleneck. Only if the arrival process is the bottleneck,
then the departure rate equals the arrival rate.

Bottleneck An operation that limits output in the system and are constraints that limit
output of production. If none of the machines, workers, etc. in the system is a
bottleneck, then we say that the arrival process is the bottleneck.

Determining a bottleneck requires the following:

1. Calculate the design capacity of each process.

2. Calculate the expected number of products arriving at the system

3. If design capacity of all processes is sufficient, arrival process is bottleneck; else,

process with smallest design capacity is bottleneck

The utilisation rate rho for a workstation consisting of n identical, parallel servers can
be computed from rho = λ(n x µ)
λ: arrival rate
µ: production rate

Productive utilisation rate is calculated similar to normal utilisation but exludes set-up

The Work-in Progress (WIP): L = λW

-L is the average WIP,

-W the average throughput time,

- λ is the average number of produced units per time-unit,

There are three methods to calculate the capacity:

Deterministic Analytical
performance modelling (such as Simulation (approximation of reality)
estimation waiting lines)

 Applicability is

 Widely
 Complex
applicable  You cannot determine all characteristics or not all characteristics can be modelled.

 Easy and fast  You cannot incorporate all external influences.

 Limited

 Gives a rough number of  Incorporated external influences will be approximated.

estimate only performance


 Exact results

In deterministic performance estimation we assume there is no uncertainty but overly

optimism. Therefore, the deterministic estimate will be

 too low for throughput times

 too low for Work-In-Progress

 quite good for the departure rate

 quite good for the utilisation rate

Lead time The time needed to respond to a customer order

Customer order decoupling point (CODP)

Determines where inventory is positioned to allow process or entities in the supply chain
to operate independently. It separates order-driven activities from forecast-driven
activities. As closer the decoupling point is to the customer, the quicker the customer can
be served.

Make-to-stock Firms that serve customers from finished goods inventory. Essential
issue in satisfying customers is to balance the level of inventory against the level of
customer service.

 Easy with unlimited inventory but inventory costs money

 Trade-off between the costs of inventory and level of customer service must be

 Forecasting is very important task

Firms applying make-to-stock use lean manufacturing to achieve higher service levels for
a given inventory investment

Assemble-to-order Used by those firms that combine a number of preassembled

modules to meet a customer’s specification.

 Requires a design that enables as much flexibility as possible in combining


 Significant advantages from moving the customer order decoupling point from
finished goods to components

 Manufacturing results in customer specific products, assembled in a similar way

Make-to-order Used by firms that make the customer’s product from raw materials,
parts and components. Essential issue is to deliver on time, while keeping costs low
through high capacity utilization

 Catalogue products with small demand and specific customer details/specification

 Limited inventory of raw materials, extensive planning and scheduling efforts

Engineer-to-order Used by firms working with the customer to design the product, and
then make it from purchased materials, parts and components.

 Company translates the customer’s requirements into a design and a product

 Often the design of the products requires novel solutions and a lot of engineering
knowledge, manufacturing might be relatively easier, but still complex (many
suppliers, materials, and subcontractors)

Lean manufacturing

To achieve high customer service with minimum levels of inventory investment.

There are forces which influences the position of the decoupling point:

 Process constraints (long lead time, bad process control)

 Delivery service requirements (short delivery time, high delivery reliability)

 Product-market constraints (irregular market demand, specificity products)

 Inventory cost consideration (low stocks, reduce risk of obsolescence)

Total average value of inventory

The total investment in inventory at the firm, which includes raw material, work-in-
progress, and finished goods.
Inventory turn An efficiency measure where the cost of goods sold is divided by
the total average value of the inventory.

Days-of-supply A measure of the number of days of supply of an item.

Little’s law Mathematically relates inventory, throughput, and flow time

Throughput The average rate that items flow through a process

Flow time The time it takes one unit to completely flow through a process.

Inventory = Throughput rate * Flow time

Process selection refers to which kind of production process to use to produce a product
or provide a service. There are different formats by which a facility can be arranged. The
five basic structures are

1. Project layout: product remains in a fixed location

2. Workcenter: similar equipment or functions are grouped together, such as all

drilling machines in one area and all stamping machines in another

3. Manufacturing: dedicated area where products that are similar in a processing

requirements are produced

4. Assembly line: work processes are arranged according to the progressive steps by
which the product is made.

5. Continuous process: production follows a predetermined sequence of steps in a

continuous flow

The relation between layout structures is often illustrated on a product- process matrix.

Workstation cycle time

The time between successive units coming off the end of an assembly line.
Assembly-line balancing
The problem of assigning tasks to a series of workstations so that the required cycle time
is met and idle time is minimized

Precedence relationship

The required order in which tasks must be performed in an assembly process.

If there are problems in lines/balancing, possibilities to accommodate tasks are:

 To split the task

 To share the task

 To use parallel workstations

 To use a more skilled worker

 To work overtime

 To redesign
Extent of contact The percentage of time the customer must be in the system relative
to the total time it takes to perform the customer service.

High and low degree of customer contact

A concept that relates to the physical presence of the customer in the system.

There are different degrees of customer/server contact:

 Buffered core: physically separated from the customer

 Permeable system: penetrable by the customer (telephone, face-to-face contact)

 Reactive system: both penetrable and reactive to the customer’s requirements

The greater the amount of contact, the greater the sales opportunity

Service-System Design Matrix

Pure virtual customer contact

Enable customers to interact with on another in an open environment.

Mixed virtual and actual customer contact

The customer’s interaction with one another in a server-moderated environment such as
product discussion groups and YouTube.

Service Blueprint A standard tool for service process design is the flowchart. It
emphases what is visible and what is not visible to the customer.

Poka-yokes Procedures that prevent mistakes from becoming defects.

A main problem in service setting is the management of waiting lines. The manager has
to measure out the cost of waiting against the added cost of providing more service.
Managing queues, the following suggestions are made:
1. Segment the customers

2. Train your servers to be friendly

3. Inform your customers of what to expect

4. Try to divert the customer’s attention when waiting

5. Encourage customers to come during slack periods

Queuing System
Consists of three major components:

1. Customer arrivals

 Finite population limited-size customer pool that will use the service and at times
from a line

 Infinite population large enough in relation to the service system so that the
population size caused by subtractions or additions to the population does not
significantly affect the system probabilities

2. Distribution of arrivals

 Arrival rate The expected number of customers that arrive each period.

 Exponential A probability distribution associated with the time

between distribution arrivals.

 Poisson Probability distribution for the number of arrivals during distribution each
time period.

 Size of Arrival units:

o Single arrival One unit (the smallest number handled)

o Batch arrival Some multiple of the unit

 Degree of patience:

o Patient arrival Waits as long as necessary

o Impatient arrival Customer decides to leave after seeing the length of line
(balking) or joins the line but departs after a while (reneging)

3. The Queuing System: Factors

 Length

o Infinite potential length: customers form a line around the block as they wait to
purchase tickets at a theater

o Limited line capacity: gas stations, loading docks, parking lots

 Number of lines
o Single line: one line

o Multiple lines: single lines that form in front or two or more servers

 Queue discipline Rules for determining the order of service to customers in a

waiting line (First come, first served (FCFS))

 Service rate Capacity of the server in number of units per time period

 Line structure:

o Single channel, single phase one-person barbershop

o Single channel, multiphase series of services; e.g. carwash

o Multichannel, single phase teller’s window in a bank

o Multichannel, multiphase admission of patients in a hospital

o Mixed multi-to-single channel and alternative path structures

4. Exiting the Queuing System

a. The customer returns to the source population and immediately become a

competing candidate for service again

b. Low probability of reservice

Practical: How to solve exam questions

1. Identify the appropriate waiting line model.

2. Determine  and m

3. Identify the appropriate performance measure.

4. Find the correct formula.

5. Fill out the formula.

To Identify the appropriate waiting line model, there are two options
given: M/M/1 (refers the arrival process) and M/D/1(refers to the service process).

M/M/1: The first letter M means “Poisson distributed” arrivals and the second letter
„negative exponential“ (random) service times.

M/D/1: The first letter M means “Poisson distributed” arrivals and D means
“deterministic” (constant) service times.

The third letter refers to the number of service channels.

Determine λ and m

λ = Mean number of arrivals per time period.

m = Mean number of people (or items) served per time period.

Identify the appropriate performance measure

Average queue time, Wq

Average queue length, Lq

Average time in system, Ws

Average number in system, Ls

Probability of idle service facility, P0

Utilization, r

Probability of more than k customers in system, Pn > k

Find the correct formula:

Total Quality Management (TQM) may be defined as ‘managing the entire

organization so that it excels on all dimensions of products and services that are
important to the customer’. It has two fundamental operational goals:

1. Careful design of the product or service

2. Ensuring that the organization’s systems can consistently produce the design

Malcolm Baldrige National Quality Award

An award established by the U.S. Department of Commerce given annually to companies
that excel in quality.
Design quality refers to the inherent value of the product in the marketplace in thus a
strategic decision for the firm. The dimensions of design quality are:

 Performance Primary product or service characteristics

 Features Added touches, bells and whistles, second characteristics

 Reliability/Durability Consistency of performance over time

 Serviceability Ease of repair

 Aesthetics Sensory characteristics (sounds, feel, look..)

 Perceived quality Past performance and reputation

Conformance quality refers to the degree to which the product or service design
specifications are met. It involves activities essential in achieving conformance.

Quality at the source is concerned with a person’s work responsibility for making sure
that the output corresponds the specification.

Cost of Quality (COQ) analysis is one of the primary functions of thee QC departments.
The COQ can be classified into four types:

 Appraisal costs Inspection, testing

 Prevention costs Finding quality problems, training

 Internal failure costs Scrap, rework, repair in a company

 External failure costs Repair, loss of goodwill, warranty replacement

ISO 9000 and ISO 14000 involve a series of standards agreed upon by the
International Organization for Standardization (ISO). This approach was adopted in 1987
in more than 160 countries.

ISO 9000 is based on eight quality management principles focusing on business

processes related to different areas in the firm.

1. Customer focus

2. Leadership

3. Involvement of people

4. Process approach

5. System approach to management

6. Continual improvement

7. Factual approach to decision making

8. Mutually beneficial supplier relationships

ISO 1400 adresses the need to be environmentally responsible. The standards define a
three-ponged approach for dealing with environmental challenges.

The first is the definition of more than 350 international standards for monitoring the
quality of air, water and soil. The second part is a strategic approach by defining the
requirements of an environmental management system that can be implemented using
the monitoring tools. Finally, the environmental standard encourages the inclusion of
environment aspects in product design an encourages the development of profitable
environment-friendly products and services.

Six Sigma refers to the method companies use to eliminate defects in their products and
processes. It seeks to reduce variation in the processes that lead to product defects. The
Six-Sigma thinking allows managers to describe performance of a process in terms of its
variability and to compare it using the defects per millions opportunity (DPMO) metric.

Defects per million opportunities (DPMO) requires three pieces of data:

1. Unit The item produced or being serviced

2. Defect Any item/event that does not meet the customers’ requirements

3. Opportunity A chance for a defect to occur

DPMO = Number of defects * 1,000,000

Number of opportunities for error per unit * Number of units

The methodology side of Six-Sigma are project-oriented through the Define, Measure,
Analyse, Improve, and Control (DMAIC) cycle. It is used to set the focus on the
understanding and achieving what the customer wants.

By the integration of analytical tools for Six-sigma, DMAIC categories can be illustrated.
In exhibit 10.5 on page 316-317 the analytical Tools for Six Sigma and Continuous
Improvement are depicted.

Statistical process control (SPC) involves testing a random sample of output from a
process to determine whether the process in producing items within a preselected range.

Assignable variation Deviation in the output of a process that can be clearly identified
and managed

Common variation Deviation in the output of a process that is random and inherent in
the process itself

Upper and lower specification limits

The range of values in a measure associated with a process that is allowable given the
intended use of the product or service.

Process capability is the ability of a process to produce output within specification

limits. This concept only holds meaning for processes that are in state of statistical
control. Improving process capability involves (a) changing the mean in the short run,
and (b) reducing normal variability in the long run, requiring investment. Process limits
are based on based on normal variation in the process. Specification limits are variation
as designed, which is acceptable for customers.

Lean production Integrated activities designed to achieve high-volume, high-quality

production using minimal inventories of raw materials, work-in-process, and finished

Customer value In the context of lean production, something for which the customer is
willing to pay.

Waste Anything that doesn’t add value from the customer’s perspective.

There are seven types of waste:

1. Production of defect products

2. Waste of overproduction

3. Inventory waste

4. Waste of waiting time

5. Unnecessary processing (repairs)

6. Waste of motion

7. Transportation waste

Value stream These are the value-adding and non-value-adding activities required
design, order, and provide a product from concept to launch, order to delivery, and raw
materials to customers.

Waste reduction The optimization of value-adding activities and elimination of non-

value-adding activities that are part of the value stream.

Value stream mapping A graphical way to analyze where value is or not being added
as material flows through a process.

To eliminate waste, a firm can do the following:

 Sort/segregate Keep what is needed and remove everything else from

the work area

 Simplify/straighten Label and display for easy use only what is needed in
the immediate work area

 Shine/sweep Keep work area clean and well maintained

 Standardize Remove variations from the process by developing standard operating

procedures; standardize equipment + tools
 Sustain/self-discipline Review periodically to recognize efforts and to motivate
to sustain progress

Kaizen is the Japanese philosophy that focuses on continuous improvement. The Kaizen
bursts identify specific short-term projects that teams work on to implement changes in
the process.

Preventive maintenance is emphasized to ensure that flows are not interrupted by

downtime or malfunctioning equipment. This involves periodic inspection and repair
designed to keep equipment reliable.

Lean concepts:

 Group Technology (GT) is a philosophy in which similar parts are grouped into
families, and the processes required to make the parts are arranged in a
manufacturing cell.

 Quality at the Source means do it right the first time and, when something goes
wrong, stop the procces or assembly line immediately.

 Just-in-time (JIT) is a philosophy of continuous and forced problem solving that

drives out waste (storage, inspection, waiting etc.). It is typically applied to
repetitive manufacturing. JIT exposes problems that are otherwise hidden by

Level schedule A schedule that pulls material into final assembly at a constant rate.

Freeze window The period of time during which the schedule is fixed and no further
changes are possible.

Backflush Calculating how many of each part were used in production and using these
calculations to adjust actual on-hand inventory balances. This eliminates the need to
actually track each part used in production.

Uniform plant Smoothing the production flow to dampen schedule variation.


Kaban production control systems

Kaban is the Japanese translation for sign or instruction card. In those production control
systems, only cards or containers are used to make up the Kaban pull system and
regulate JIT flows. Level scheduling requires material to be pulled into final assembly in a
pattern, which is uniform enough to allow the various elements production to respond to
pull signals.

Kaban significantly reduces the setup costs and changeover times achieving a smooth

Strategic sourcing is the development and management of supplier relationships to
acquire goods and services in a way that aids in achieving the immediate need of the

Depending on the contract duration, transaction costs and specificity of the product, a
firm’s purchasing can be classified into types of processes:

 Strategic alliance close relationship

 Spot purchase no relationship, market based

 Request for proposal (RFP) requirements are formulated and potential

vendors prepare a detailed proposal how they intend to meet requirements,
including a price

 Reverse auction sellers compete to obtain business, and prices typically decrease
over time, buyer specifies the item

 Request for bid specification of item is given and price is the main or only factor in

 Vendor managed inventory the supplier manages an item or group of items for a

 Electronic catalog online purchasing

The Bullwhip Effect describes the phenomenon of variability magnification as we move

from the customer to the producer in the supply chain. It indicates a lack of
synchronization among supply chain members.

The causes of the bullwhip effect are:

 Order synchronization Customers order on the same order cycle

 Order batching Retailers may be

 Shortage gaming If supplier

 High transportation costs

 Poor customer service due to stock outs

Functional products Staples that people buy in a wide range of retail outlets, such as
grocery stores and gas stations.

Innovative products Products such as fashionable clothes and personal computers that
typically have a life cycle of just a few months.

Hau Lee’s Uncertainty Framework

The concept of Hau Lee aligns the supply chains (sc) with the uncertainties revolving
around the supply process side of supply chains. His framework is illustrated in a two by
two matrix resulting from low/high uncertainty and low/high demand uncertainty.
For visualization refer to page 229, exhibit 8.4.

There are four types of supply chain strategies:

 Efficient supply chains utilize strategies aimed at creating the highest cost efficiency

 Risk-hedging supply utilize strategies aimed at pooling and sharing

resources chains in a supply chain to share risk

 Responsive supply utilize strategies aimed at being responsive and flexible chains to
the changing and diverse needs of the customers)

 Agile supply chains utilize strategies aimed at being responsive and flexible
to customer needs, while the risks of supply shortages or
disruptions are hedged by pooling inventory and other capacity resources

Outsourcing is the act of moving a firm’s internal activities and decision responsibility to
outside providers. This allows a company to create a competitive advantage while
reducing cost. Applying to this capability, an entire function (e.g. distribution,
manufacturing) or some elements of an activity (e.g. producing parts) may be
outsourced. Reasons to move firm’s activities outside the firm can be motivated by
organizational and financial factors as well as the factor of improvement.

Factors evaluating whether to outsource or not are the following:

 Coordination how difficult it is to ensure that the activity will integrate well with the
overall process

 Strategic control degree of loss that would be incurred if the relationship with the
partner were severed

 Intellectual property

Green sourcing refers to the finding of new environmentally friendly technologies and
the increasing the use of recyclable materials. It helps to reduce drive cost in a variety of
ways: product content substitution, waste reduction, and lower usage. To transform a
traditional process to a green sourcing one, the Six-step process can be applied:
1. Assess the opportunity

2. Engage internal supply chain sourcing agents

3. Assess the supply base

4. Develop the sourcing strategy

5. Implement the sourcing strategy

6. Institutionalize the sourcing strategy

Total Cost of Ownership (TCO) is a financial estimate of the cost of an item, which
determines direct and indirect costs of a product or system. It includes all the costs
related to the procurements and use of items, including any related costs in disposing of
the item after it is no longer useful. It can be applied to internal costs or more broadly to
costs throughout the supply chain. The costs can be categorized into three broad areas:

 Acquisition costs

o Purchase planing costs

o Quality costs

o Taxes

o Purchase price

o Financing costs

 Ownership costs

o Energy costs

o Maintenance and repair

o Financing

o Supply chain/supply network costs

 Post-ownership costs

o Disposal

o Environmental costs

o Warranty costs

o Product liability costs

o Customer dissatisfaction costs

To evaluate supply chain efficiency, two common measures are used: inventory
turnover and weeks-of-supply. The Inventory turnoverare the costs of goods sold divided
by the average inventory value, whereas the Days-of-Supply are the inverse of inventory
turn scaled to days.

Inventory turnover: Cost of goods sold

Average aggregate inventory value

Cost of goods sold: cost for a company to produce goods or services provided to

Average aggregate inventory value: total value of all items held in inventory for the firm
valued at cost

Weeks-of-Supply: Average aggregate inventory value * 52 weeks

Cost of goods sold

Logistics is a part of the supply chain process that plans, implements, and controls the
efficient, effective flow and storage of goods/service.

International logistics is concerned with managing logistics internationally. Global and

local supply chains can differ in distances and time differences, forecasting, exchange
rates, infrastructure, variety of products and foreign rules.

Third-party logistics companies are companies that manages all or part of another
company’s product delivery operations.

Parts of the logistics process can be classified into three components:

 Materials Management all activities to move materials, components and information

efficiently to and within the production process
and all activities to use the production process efficiently.

 Physical distribution: refers to the movement of goods and information outward from
the end of the assembly line to the customer.

 Reverse logistics: logistics management skills to manage reverse flows.

The objectives of logistic processes can be as follows:

 maximise quantity to be produced

 maximise profit

 maximise service

 minimise costs

 minimise cycle times

Transportation modes

 Highway

 Water

 Rail

 Pipelines

 Hand Delivery

shipments are broken down

into small shipments for local delivery in an area.

Free trade zone A closed facility into which foreign goods can be brought without being
subject to the payment of normal input duties.

Trading blocs A group of countries that agree on a set of special

arrangements governing the trading of goods between member countries.
Companies may locate in places affected by the agreement to take advantage of new
market opportunities.

The functions of warehouses are:

 to facilitate the coordination between production and customer demand by buffering

(storing) products for a certain period of time

 to accumulate and consolidate products from various producers for combined

shipment to common customers

 to tranship products from one mode of transportation to another

 to split large quantities

 to provide same-day delivery to important customers

 to support product customization activities (value added logistics)

There are three methods to evaluate the best locations for a warehouse:

1. Factor-rating systems

2. Cost volume analysis

3. Center-of-Gravity Method

Factor-rating systems uses weights to assign importance of qualitative and

quantitative factors. There are no exact results dues to subjectivity of weights.

 List relevant factors

 Assign importance weight to each factor (0 - 1)

 Develop scale for each factor (1 - 100)

 Score each location using factor scale

 Multiply scores by weights for each factor and total

 Select location with maximum total score

Cost volume analysis is used to make an economic comparison of known locations.

 Determine fixed and variable costs for each location mathematically or graphically

 Select location with lowest costs for expected production volume

Center-of-Gravity Method is a mathematical technique for finding best location for a

single warehouse with the objective to minimise costs. This method requires data from
location of markets (retailers), volume of goods to be shipped to those markets and the
shipping costs. The ideal location is the minimized weighted distance between warehouse
and retailer.

Transportation management is concerned with planning, implementation and control

of external transportation services such that objectives and constraints are met. This
includes the mode(s) of transportation, the selection of carriers in each mode, costs
analysis, routing and the relation with materials handling. In addition, transport
management decides on whether to outsource transportation or not.

Transportation in a supply chain is influenced by multiple factors:

 Location of plants, warehouses, vendors and customers (direct impact on

transportation costs)

 Inventory requirements (impact on the mode of transportation)

 Required packaging depending on the transport mode

 Customer service goals (impact on type and quality of carrier)

Cost analysis

A product with low value is characterized as a cheap and relatively slow mode of
transportation. Costs form an important part of logistics costs.

A product with high value is characterized as a fast and more expensive mode of
transportation. Costs for transport are less relevant than moving inventory costs.