MBA 311:SUPPLY CHAIN MANAGEMENT (SCM) Unit 1.

Introduction:
Supply Chain encompasses all activities associated with the flow and transformation of goods from the raw material stage (extraction), through to the end user, as well as the associated information flows. Material and information flow both up and down the supply chain.

Some Definitions of Supply Chain:

A supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system. Lee and Billington A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Ganeshan and Harrison

A supply chain, logistics network, or supply network is a coordinated system of organizations, people, activities, information and resources involved in moving a product or service in physical or virtual manner from supplier to customer. Supply chain activities (value chains or life cycle processes) transform raw materials and components into a finished product that is delivered to the end customer.

Today, the ever increasing technical complexity of standard consumer goods, combined with the ever increasing size and depth of the global market has meant that the link between consumer and vendor is usually only the final link in a long and complex chain or network of exchanges. This supply chain begins with the extraction of raw material and includes several production links, for instance; component construction, assembly and merging before moving onto several layers of storage facilities of ever decreasing size and ever more remote geographical locations, and finally reaching the consumer. Although many companies and corporations today are of importance not just on national or regional but also on global scale, none are of a size that enables them to control the entire supply chain, since no existing company controls every link from raw material extraction to consumer. Many of the exchanges encountered in the supply chain will therefore be between different companies who will all generally seek to maximize company revenue within their sphere of interest but will have little or no basic knowledge or interest in the remaining players in the supply chain except those to which it is directly linked. There are a variety of supply chain models, which address both the upstream and downstream sides.Figure 1 shows an example of a supply chain. Materials flow downstream, from raw material sources through a manufacturing level transforming the raw materials to intermediate products (also referred to as components or parts). These are assembled on the next level to form products. The products are shipped to distribution centers and from there on to retailers and customers.

Figure 1: An Example of a Supply Chain. The supply chain is made up of all the activities required to deliver products to the customer, from designing product to receiving orders, procuring materials, marketing, manufacturing, logistics, customer service, receiving payment and so on. Anyone, anything, anywhere that influences a products time-to-market, price, quality, information exchange or delivery, among other activities, is part of the supply chain. The old way of delivering product was to develop relatively inaccurate projections of demand, then manufacture the product and fill up warehouses with finished goods. The old ways are fading fast as management across all industries has come to accept that collaboration with customers and suppliers in the planning and replenishment process can and must be made to work very effectively. As customers and suppliers band together in mutually beneficial partnerships, the need for better supply chain management processes

and systems is more evident and becomes a very high business priority. For many companies, it has become clear that a supply chain that flows information and material best can be a significant differentiator, the competitive winner. All the way to the boardroom, improving supply chain management is getting lots of attention because forward-thinking management knows it is the best strategy to increase and maintain market share, reduce costs, minimize inventories and, of course, improve profits. In many industries, market share will be won and lost based on supply chain performance. With the stakes so high, there is a frenzy of activity along the supply chain front. Executive managers are assessing how their companies do business, especially in supply chain activities. They often find dysfunctional sets of policies, processes, systems and measurements. And these exist at all points in the supply chain, including business partners. The former vague image of a company of silos is very apparent and, most importantly, a new clarity of needs and goals emerges for supply chain management. There is a need to transform from dysfunctional and unsynchronized decision making which results in disintegrated and very costly supply activitiesto a supply chain that performs in such a way that it is one of the companys competitive advantages. Prerequisites of success Effectively integrating the information and material flows within the demand and supply process is what supply chain management is all about. In most companies, however, two major and very interdependent issues must be simultaneously addressed. The first deals with delivering products with customer-acceptable quality, with very short lead times, at a customer-acceptable costwhile keeping inventories throughout the supply chain at a minimum. The second issue, which tends to be less understood and accepted, is the need for high-quality, relevant and timely information that is provided when it needs to be known. For many customers and manufacturers, business processes and support systems will not measure up to the task of quickly providing planning and execution information from the marketplace to production and on to vendors so that the customers objectives are consistently met. The fact is, most information supplied is excessive, often late and frequently inaccurate.

Supply chain management (SCM) is the term used to describe the management of the flow of materials, information, and funds across the entire supply chain, from suppliers to component producers to final assemblers to distribution (warehouses and retailers), and ultimately to the consumer.1 In fact, it often includes after-sales service and returns or recycling. Figure 1 is a schematic of a supply chain. In contrast to multiechelon inventory management, which coordinates inventories at multiple locations, SCM typically involves coordination of information and materials among multiple firms. Supply chain management has generated much interest in recent years for a number of reasons. Many managers now realize that actions taken by one member of the chain can influence the profitability of all others in the chain.2 Firms are increasingly thinking in terms of competing as part of a supply chain against other supply chains, rather than as a single firm against other individual firms. Also, as firms successfully streamline their own operations, the next opportunity for improvement is through better coordination with their suppliers and customers. The costs of poor coordination can be extremely high. In the Italian pasta industry, consumer demand is quite steady throughout the year. However, because of trade promotions, volume discounts, long lead times, full-truckload discounts, and end-of-quarter sales incentives the orders seen at the manufacturers are highly variable (Hammond (1994)). In fact, the variability increases in moving up the supply chain from consumer to grocery store to distribution center to central warehouse to factory, a phenomenon that is often called the bullwhip effect (see Figure 2 as an example). The bullwhip effect has been experienced by many students playing the Beer Distribution Game. (Sterman (1989); Sterman (1992); Chen & Samroengraja (2000); Jacobs (2000)) The costs of this variability are high -- inefficient use of production and warehouse resources, high transportation costs, and high inventory costs, to name a few. Acer America, Inc. sacrificed $20 million in profits by paying $10 million for air freight to keep up with surging demand, and then paying $10 million more later when that inventory became obsolete. It seems that integration, long the dream of management gurus, has finally been sinking into the minds of western managers. Some would argue

that managers have long been interested in integration, but the lack of information technology made it impossible to implement a more systems-oriented approach. Clearly industrial dynamics researchers dating back to the 1950s (Forrester (1958); Forrester (1961)) have maintained that supply chains should be viewed as an integrated system. With the recent explosion of inexpensive information technology, it seems only natural that business would become more supply chain focused. However, while technology is clearly an enabler of integration, it alone can not explain the radical organizational changes in both individual firms and whole industries. Changes in both technology and management theory set the stage for integrated supply chain management. One reason for the change in management theory is the power shift from manufacturers to retailers. Wal-Mart, for instance, has forced many manufacturers to improve their management of inventories, and even to manage inventories of their products at Wal-Mart. While integration, information technology and retail power may be key catalysts in the surge of interest surrounding supply chains, e-Business is fueling even stronger excitement. E-Business facilitates the virtual supply chain, and as companies manages these virtual networks, the importance of integration is magnified. Firms like Amazon.com are superb at managing the flow of information and funds, via the Internet and electronic funds transfer. Now, the challenge is to efficiently manage the flow of products. Some would argue that the language and metaphors are wrong. Chains evoke images of linear, unchanging, and powerless. Supply feels pushy and reeks of mass production rather than mass customization. Better names, like demand networks or customer driven webs have been proposed by many a potential book author hoping to invent a new trend. Yet, for now, the name supply chain seems to have stuck. And under any name, the future of supply chain management appears bright.

Key Components of SCM / Key Issues in SCM Supply chain management is an enormous topic covering multiple disciplines and employing many quantitative and qualitative tools. Within the last few years, several textbooks on supply chain have arrived on the market providing both managerial overviews and detailed technical treatments. For examples of managerial introductions to supply chain see Copacino (1997), Fine (1998) and Handfield & Nichols (1998), and for logistics texts see Lambert, Stock, Ellram, & Stockdale (1997) and Ballou (1998). For more technical, model-based treatments see Silver et al. (1998) and Simchi-Levi, Kaminsky, & Simchi-Levi (1998). Tayur, Magazine, & Ganeshan (1999) is an extensive collection of research papers while Johnson & Pyke (2000b) is a collection papers on teaching supply chain management. Also, there are several casebooks that give emphasis to global management issues including Taylor (1997), Flaherty (1996), and Dornier,

Ernst, Fender, & Kouvelis (1998). Introductory articles include Cooper, Lambert, & Pagh (1997b), Davis (1993), Johnson (1998a), and Lee & Billington (1992). To help order our discussion, we have divided supply chain management into twelve areas. We identified these twelve areas from our own experience teaching and researching supply chain management, from analysis of syllabi and research papers on supply chain, and from our discussions with managers. Each area represents a supply chain issue facing the firm. For any particular problem or issue, managers may apply analysis or decision support tools. For each of the twelve areas, we provide a brief description of the basic content and refer the reader to a few research papers that apply. We also mention likely Operations Research based tools that may aid analysis and decision support. We do not provide an exhaustive review of the research literature, but rather provide a few references to help the reader get started in an area. For a more detailed review of recent research and teaching in supply chain management see Ganeshan, Jack, & Magazine (1999) and Johnson & Pyke (2000a) respectively. The twelve categories we define are ocation l transportation and logistics inventory and forecasting marketing and channel restructuring sourcing and supplier management information and electronic mediated environments product design and new product introduction service and after sales support reverse logistics and green issues outsourcing and strategic alliances metrics and incentives global issues. Location pertains to both qualitative and quantitative aspects of facility location decisions. This includes models of facility location, geographic information systems

(GIS), country differences, taxes and duties, transportation costs associated with certain locations, and government incentives (Hammond & Kelly (1990)). Exchange rate issues fall in this category, as do economies and diseconomies of scale and scope. Decisions at this level set the physical structure of the supply chain and therefore establish constraints for more tactical decisions. Binary integer programming models play a role here, as do simple spreadsheet models and qualitative analyses. There are many advanced texts specially dedicated to the modeling aspects of location (Drezner (1996)) and most books on logistics also cover the subject. Simchi-Levi et al. (1998) present a substantial treatment of GIS while Dornier et al. (1998) dedicate a chapter to issues of taxes, duties, exchange rates, and other global location issues (Brush, Maritan, & Karnani (1999)). Ballou & Masters (1999) examine several software products that provide optimization tools for solving industrial location problems. The transportation and logistics category encompasses all issues related to the flow of goods through the supply chain, including transportation, warehousing, and material handling. This category includes many of the current trends in transportation management including vehicle routing (Bodin (1990), Gendreau, Laport, & Seguin (1996), and Anily & Bramel (1999)), dynamic fleet management with global positioning systems, and merge-in-transit. Also included are topics in warehousing and distribution such as cross docking (Kopczak, Lee, & Whang (1995)) and materials handling technologies for sorting, storing, and retrieving products (Johnson & Brandeau (1999) and Johnson (1998b)). Because of globalization and the spread of outsourced logistics, this category has received much attention in recent years. However, we will define a separate category to examine issues specifically related to outsourcing and logistics alliances. Both deterministic (such as linear programming and the traveling salesman problem) and stochastic optimization models (stochastic routing and transportation models with queueing) often are used here, as are spreadsheet models and qualitative analysis. Recent management literature has examined the changes within the logistics functions of many firms as the result of functional integration (Greis & Kasarda (1997)) and the role of logistics in gaining competitive advantage (Fuller, O'Conor, & Rawlinson (1993)).

Inventory and forecasting includes traditional inventory and forecasting models. Inventory costs are some of the easiest to identify and reduce when attacking supply chain problems. Simple stochastic inventory models can identify the potential cost savings from, for example, sharing information with supply chain partners (Lee & Nahmias (1993)), but more complex models are required to coordinate multiple locations. A few years ago, multiechelon inventory theory captured most of the research in this area that would apply to supply chains. However, in nearly every case, multiechelon inventory models assume a single decision-maker. Supply chains, unfortunately, confront the problem of multiple firms, each with its own decision maker and objectives. Of course there are many full texts on the subject such as Silver et al. (1998) and Graves, Rinnooy Kan, & Zipkin (1993)). Useful managerial articles focusing on inventory and forecasting include Davis (1993) and Fisher, Hammond, Obermeyer, & Raman (1994). Clark & Scarf (1960) perform one of the earliest studies in serial systems with probabilistic demand. They introduce the concept of an imputed penalty cost, wherein a shortage at a higher echelon generates an additional cost. This cost enables us to decompose the multiechelon system into a series of stages so that, assuming centralized control and the availability of global information, the ordering policies can be optimized. Lee & Whang (1999a) and Chen (1996) both propose performance measurement schemes for individual managers that allow for decentralized control (so that each manager makes decisions independently), and in certain instances, local information only. The result is a solution that achieves the same optimal solution as if we assumed centralized control and global information. Marketing and channel restructuring includes fundamental thinking on supply chain structure (Fisher (1997)) and covers the interface with marketing that emerges from having to deal with downstream customers (Narus & Anderson (1996)). While the inventory category addresses the quantitative side of these relationships, this category covers relationship management, negotiations, and even the legal dimension. Most importantly, it examines the role of channel management (Anderson, Day, & Rangan (1997)) and supply chain structure in light of the well-studied phenomena of the bullwhip

effect that was noted in the introduction. The bullwhip effect has received enormous attention in the research literature. Many authors have noted that central warehouses are designed to buffer the factory from variability in retail orders. The inventory held in these warehouses should allow factories to smooth production while meeting variable customer demand. However, empirical data suggests that exactly the opposite happens. (See for example Blinder (1981), and Baganha & Cohen (1998).) Orders seen at the higher levels of the supply chain exhibit more variability than those at levels closer to the customer. In other words, the bullwhip effect is real. Typically causes include those noted in the introduction, as well as the fact that retailers and distributors often over-react to shortages by ordering more than they need. Lee, Padmanabhan, & Whang (1997) show how four rational factors help to create the bullwhip effect: demand signal processing (if demand increases, firms order more in anticipation of further increases, thereby communicating an artificially high level of demand); the rationing game (there is, or might be, a shortage so a firm orders more than the actual forecast in the hope of receiving a larger share of the items in short supply); order batching (fixed costs at one location lead to batching of orders); and manufacturer price variations (which encourage bulk orders). The latter two factors generate large orders that are followed by small orders, which implies increased variability at upstream locations. Some recent innovations, such as increased communication about consumer demand, via electronic data interchange (EDI) and the Internet, and everyday low pricing5 (EDLP) (to eliminate forward buying of bulk orders), can mitigate the bullwhip effect.6 In fact, the number of firms ordering, and receiving orders, via EDI and the Internet is exploding. The information available to supply chain partners, and the speed with which it is available, has the potential to radically reduce inventories and increase customer service.7 Other initiatives can also mitigate the bullwhip effect. For example, changes in pricing and trade promotions (Buzzell, Quelch, & Salmon (1990)) and channel initiatives, such as vendor managed inventory (VMI), coordinated forecasting and replenishment (CFAR), and continuous replenishment (Fites (1996), Verity (1996), Waller, Johnson, & Davis (1999)), can significantly reduce demand variance. Vendor Managed Inventory is one of the most widely discussed partnering initiatives for improving multi-firm supply chain efficiency. Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in

the grocery industrys pursuit of efficient consumer response and the garment industrys quick response. Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer). In a VMI partnership, the supplierusually the manufacturer but sometimes a reseller or distributormakes the main inventory replenishment decisions for the consuming organization. This means the supplier monitors the buyers inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing. Transactions customarily initiated by the buyer (like purchase orders) are initiated by the supplier instead. Indeed, the purchase order acknowledgment from the supplier may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in transit. Thus the manufacturer is responsible for both its own inventory and the inventory stored at is customers distribution centers (Figure 3).

These innovations require interfirm, and often intrafirm, cooperation and coordination that can be difficult to achieve. While marketing focuses downstream in the supply chain,

sourcing and supplier management looks upstream to suppliers. Make/buy decisions (Venkatesan (1992), Carroll (1993), Christensen (1994), Quinn & Hilmer (1994), Kelley (1995), and Robertson & Langlois (1995)) fall into this category, as does global sourcing (Little (1995) and Pyke (1994)). The location category addresses the location of a firms own facilities, while this category pertains to the location of the firms suppliers. Supplier relationship management falls into this category as well (McMillan (1990) and Womack, Jones, & Roos (1991)). Some firms are putting part specifications on the web so that dozens of suppliers can bid on jobs. GE, for instance, has developed a trading process network that allows many more suppliers to bid than was possible before. The automotive assemblers have developed a similar capability; and independent Internet firms, such as Digital Market, are providing services focused on certain product categories. Other firms are moving in the opposite direction by reducing the number of suppliers, in some cases to a sole source (Helper & Sako (1995) and Cusumano & Takeishi (1991)). Determining the number of suppliers and the best way to structure supplier relationships is becoming an important topic in supply chains (Cohen & Agrawal (1996), Dyer (1996), Magretta (1998), and Pyke (1998)). Much of the research in this area makes use of game theory to understand supplier relationships, contracts, and performance metrics. See, for instance, Cachon & Lariviere (1996);Cachon (1997); and Tsay, Hahmias, & Agrawal (1999). The information and electronic mediated environments category addresses longstanding applications of information technology to reduce inventory (Woolley (1997)) and the rapidly expanding area of electronic commerce (Benjamin & Wigand (1997) and Schonfeld (1998)). Often this subject may take a more systems orientation, examining the role of systems science and information within a supply chain (Senge (1990)). Such a discussion naturally focuses attention on integrative ERP software such as SAP (Whang, Gilland, & Lee (1995)), Baan and Oracle, as well as supply chain offerings such as i2s Rhythm and Peoplesofts Red Pepper. The many supply chain changes wrought by electronic commerce are particularly interesting to examine, including both the highly publicized retail channel changes (like Amazon.com) and the more substantial business to business innovations (like the GE trading process network). It is here that we interface

most directly with colleagues in information technology and strategy, which again creates opportunities for cross-functional integration (Lee & Whang (1999b)). Product design and new product introduction deals with design issues for mass customization, delayed differentiation, modularity and other issues for new product introduction. With the increasing supply chain demands of product variety (Gilmore & Pine (1997)) and customization (McCutcheon, Raturi, & Meredith (1994)), there is an increasing body of research available. One of the most exciting applications of "supply chain thinking" is the increased use of postponed product differentiation (Feitzinger & Lee (1997)). Traditionally, products destined for world markets would be customized at the factory to suit local market tastes. While a customized product is desirable, managing worldwide inventory is often a nightmare. Using postponement the product is redesigned so that it can be customized for local tastes in the distribution channel. The same generic product is produced at the factory and held throughout the world (Figure 4). Thus if the French version selling well, but the German version is not, German product can be quickly shipped to France and customized for the French market.

For these problems, we find an interface with engineering and development, with clear implications for product cost and inventory savings. Stochastic inventory models are often used to identify some of the benefits of these initiatives (Lee, Billington, & Carter

(1993)). Also important are issues related to product design (Ulrich & Ellison (1999) and Robertson & Ulrich (1998)), managing product variety (Fisher, Ramdas, & Ulrich (1999)) and managing new product introduction and product rollover (Billington, Lee, & Tang (1998)). The service and after sales support category addresses the critical, but often overlooked, problem of providing service and service parts (Cohen & Lee (1990)). Some leading firms, such as Saturn and Caterpillar, build their reputations on their ability in this area, and this capability generates significant sales (Cohen, Zheng, & Agrawal (1997)). Stochastic inventory models for slow-moving items fall into this category, and there are many papers on this topic related to inventory management (Williams (1984); Cohen, Kleindorfer, & Lee (1986)) and forecasting (Johnston & Boylan (1996)). While industry practice still shows much room for improvement (Cohen et al. (1997)), several well-known firms have shown how spare parts can be managed more effectively (Cohen, Kamesam, Kleindorfer, Lee, & Tekerian (1990); Cohen, Kleindorfer, & Lee (1992); and Cohen, Zheng, & Wang (1999)). Reverse logistics and green issues are emerging dimensions of supply chain management (Marien (1998)). This area examines both environmental issues (Herzlinger (1994) and the reverse logistics issues of product returns (Padmanabhan & Png (1995), Clendenin (1997), and Rudi & Pyke (1998)). Because of legislation and consumer pressure, the growing importance of these issues is evident to most managers. Managers are being compelled to consider the most efficient and environmentally friendly way to deal with product recovery, and researchers have begun significant effort in modeling these systems. The term product recovery encompasses the handling of all used and discarded products, components and materials. Thierry, Salomon, Van Nunen, & Van Wassenhove (1995) note that product recovery management attempts to recover as much economic value as possible, while reducing the total amount of waste. They also provide a framework and a set of definitions that can help managers think about the issues in an organized way (see Figure 5). These authors examine the differences among various product recovery options including repair, refurbishing, remanufacturing, cannibalization, and recycling. The whole process of manufacturing begins, of course, with product design. Today, firms are beginning to consider design for the environment (DFE) and

design for disassembly (DFD) in their product development processes. Unfortunately, AT&T discovered that designing products for reuse can result in more materials and complexity, thereby violating other environmental goals. (See Frankel (1996), who also reports on product take back and recycling initiatives in numerous countries.)

The analysis of the recovery situation is considerably more complicated than that of consumables. Normally, in a recovery situation some items cannot be recovered, so the number of units demanded is not balanced completely by the return of reusable units. Thus, in addition to recovered units, a firm must also purchase some new units from time to time. Consequently, even at a single location, there are five decision variables: (1) how often to review the stock status, (2) when to recover returned units, (3) how many to recover at a time, (4) when to order new units, and (5) how many to order. When there are multiple locations, the firm must decide how many good units to deploy to a central warehouse, and how many to deploy to each retailer or field stocking location. With consumable items the lead time to the retailers is a transportation time from the warehouse plus a random component, depending on whether the warehouse has stock. With recoverable items, the lead time is the transportation time plus the time to recovery, if the warehouse does not have stock. So in some cases the two systems can be treated in almost the same way. However, if the recovery facility has limited capacity, or if the

number of items in the system is small, the systems will differ significantly. For example, if many items have failed and are now in recovery, they cannot be in the field generating failures. Therefore, the demand rate at the warehouse will decline. In a consumable system, it is usually assumed that the demand rate does not depend on how many items have been consumed. Most of the research in this area relevant to this article concerns products and packaging after manufacturing has been completed. For example, a large U. S. chemical company gained significant market share in water treatment chemicals by delivering its products in reusable containers. The customers (hospitals and other large institutions, for example) need never touch the chemicals or deal with the disposal of used containers. This problem has been addressed by Goh & Varaprasad (1986); Kelle & Silver (1989); and Castillo & Cochran (1996), among others. Some products that are not reused as is can be disassembled so that some of the parts can be used in remanufactured products. Muckstadt & Isaac (1981) report on a model developed in connection with a manufacturer of reprographic equipment. There is a single location with two types of inventory: serviceable and repairable. Demands for serviceable units and returns of repairable units occur probabilistically, specifically, according to independent Poisson processes with rates D and fD, respectively (where f is a fraction). In addition, repairs are done on a continuous, first come-first served basis (for example, at a local machine shop). Any demands for serviceable units, when none is available, are backordered at a cost per unit short per unit time. Purchases of new stock from outside involve a known lead time. With respect to purchase decisions, a continuous review (s,Q) system is used;specifically, when the inventory position drops to s or lower, a quantity Q is purchased. Outsourcing and strategic alliances examines the supply chain impact of outsourcing logistics services. With the rapid growth in third party logistics providers, there is a large and expanding group of technologies and services to be examined. These include fascinating initiatives such as supplier hubs managed by third parties. The rush to create strategic relationships with logistics providers and the many well-published failures have raised questions about the future of such relationships. (See Bowersox (1990), (1998).) In any case, outsourcing continues to raise many interesting issues (Cooper, Ellram, Gardner, & Hanks (1997a)).

Metrics and incentives examines measurement and other organizational and economic issues. This category includes both measurement within the supply chain (Meyer (1997)) and industry benchmarking ((1994), (1997)). Because metrics are fundamental to business management, there are many reading materials outside of the supply chain literature, including accounting texts for instance. Several recent articles concentrate on the link between performance measurement and supply chain improvement (O'Laughlin (1997), Johnson & Davis (1998)). Finally, global issues examines how all of the above categories are affected when companies operate in multiple countries. This category goes beyond country specific issues, to encompass issues related to cross boarder distribution and sourcing (Kouvelis (1999)). For example, currency exchange rates, duties & taxes, freight forwarding, customs issues, government regulation, and country comparisons are all included. Note that the location category, when applied in a global context, also addresses some of these issues. (Cohen & Huchzermeier (1999)and Huchzermeier & Cohen (1996); Arntzen, Brown, Harrison, & Trafton (1995).) As we mentioned earlier, there are several texts devoted to global management. Many recent articles also examine challenges in specific regions of the world (for example, Asia Lee & Kopczak (1997) or Europe -- Sharman (1997)).

Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain as efficiently as possible. Supply Chain Management spans all movement and storage of raw materials, work-inprocess inv entory, and finished goods from point-of-origin to point-ofconsumption. Supply chain management is a cross-functional approach to managing the movement of raw materials into an organization and the movement of finished goods out of the organization toward the end- collaboration among supply chain partners, thus improving inventory visibility and improving inventory velocity. A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm. Below is an example of a very simple supply chain for a single product, where raw material is procured from vendors, transformed into finished goods in a single step, and then transported to distribution centers, and ultimately, customers. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arborescent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large. Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution

capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization---there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such an integration can be achieved. Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm, and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram [1993] compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race. The Benefits of Supply Chain Management Effective supply chain management can impact virtually all business processes, leading to continuous improvements in areas such as data accuracy, reductions in operational complexity, supplier selection, purchasing, warehousing, and distribution. Other benefits include:

Improved delivery performancequicker customer response and fulfillment rates Greater productivity and lower costs Reduced inventory throughout the chain Improved forecasting precision Fewer suppliers and shorter planning cycles Improved quality and products that are more technologically advanced Enhanced inter-operational communications and cooperation Shortened repair times and enhanced equipment readiness More reliable financial information.

Supply Chain Decisions We classify the decisions for supply chain management into two broad categories -strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy (they sometimes {\it are} the corporate strategy), and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain. There are four major decision areas in supply chain management: 1) location, 2) production, 3) inventory, and 4) transportation (distribution), and there are both strategic and operational elements in each of these decision areas.

Location Decisions
The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. (See Arntzen, Brown, Harrison and Trafton [1995] for a thorough discussion of these aspects.) Although location decisions are primarily strategic, they also have implications on an operational level.

Production Decisions
The strategic decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets.

As before, these decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path(s) through which a product flows to and from these facilities. Another critical issue is the capacity of the manufacturing facilities--and this largely depends the degree of vertical integration within the firm. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility.

Inventory Decisions
These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw materials, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. However, most researchers have approached the management of inventory from an operational perspective. These include deployment strategies (push versus pull), control policies --- the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels.

Transportation Decisions
The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by tradingoff the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer

against the inherent uncertainty associated with them. Therefore customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy.

UNIT 2- INVENTORY MANAGEMENT

Inventories: Manufacturing entities have inventories for raw products (RPI), products in the production process (WIP), and finished products (FGI). In addition there are often warehouses or distribution centers between the different levels of the supply chain. Inventories are costly. Binding capital in inventories prevents the company from investing this capital in projects of higher return. The holing cost inventories are therefore often set as high as 30 - 40% of the inventory value! In addition it is desirable to avoid so-called dead inventory, i.e. inventory that is left when a product is no longer on the market (often referred to as end of life (EOL) writeoff). As we see it is in every company's interest to keep inventory levels at a minimum. Much effort has been put into this, for example an entire manufacturing paradigm has come out of it. A main objective of the Just in Time (JIT) paradigm is to virtually abolish inventories. The efforts made have been more or less successful .

Flexibility can be defined as the ability to respond to changes in the environment. In the case of a manufacturer, flexibility is the ability to change the output in response to changes in the demand. In a supply chain the flexibility of one entity is highly dependent on the flexibility of upstream entities (see Fig. entities in a supply chain, and their interrelations. ). The overall

flexibility of a supply chain will therefore depend on the flexibility of all the

Figure: Illustrating how flexibility, inventories, and customer service are interrelated.

Figure discussed.

shows (very simply) how the three issues described above are

interdependent. To put it bluntly; all depend on all. In the following this will be

Inventory is a ``Flexibility Buffer''

A manufacturers flexibility is its ability to respond to changes in demand. Imagine a company that can receive customer orders, order and receive components, assemble these, fill the orders, and ship them to customers in one single day. This company would have a total flexibility. It would be able to respond to any unforeseen events on a daily

basis, and could easily attain a hundred percent customer satisfaction without any inventory. But this is of course rarely the case. A supply chain may consist of many levels of production, transportation, and warehousing, each level adding to the lead time. The time from the first materials are ordered at the beginning of the supply chain till the finished products reach the customer may be long. In the US apparel industry this time is typically 58.5 weeks. It is evident that customers will not wait this long from order to delivery. The manufacturer needs to plan ahead, and therefore also to estimate future demand by making demand forecasts. If planning of production and inventories was perfect we would be able to implement a pure Just in Time strategy, with components arriving as they are needed, and finished goods being shipped as they leave the assembly line. But in a supply chain there are many events that can not be foreseen and uncertainties that need to be accounted for. These may be: late shipments from suppliers, defect incoming material, imperfect production yield, production process breakdown, or highly uncertain product demands. The longer the planning horizon, the less accurate the plans will be. A typical US apparel manufacturer must see more than a year into the future ! For it to maintain a high level of customer service, all uncertainty of the year must be accounted for (see Pitfall 5 below). The long lead times make the manufacturer inflexible, and vulnerable to unforeseen changes and inaccurate demand forecasts. A manufacturer will account for the uncertainties and unforeseen events by keeping safety stocks. The safety stocks assure the necessary flexibility, or rather they act as buffers for the lack of flexibility in the supply chain. As we decrease lead times in the supply chain, we decrease the planning horizon, and thereby increase the flexibility. The need for a buffer in the form of inventory will also diminish. In other words; higher flexibility allows less inventory to maintain the same level of customer service.

Inventory vs. Customer Service: A Trade-Off

If we assume lead times to be constant, the ability to fill orders is directly dependent on the inventory levels in a supply chain. As long as there are products in the finished goods inventory (FGI), from which products are taken, orders can be satisfied. Other inventories, such as raw product inventories will have a more indirect effect on customer satisfaction. Stock-outs in any of these will obstruct production and may eventually lead to stock-out in the FGI. For this reason, it is common in supply chain management to keep exaggerated inventory levels. But as mentioned above inventory holding costs are often calculated as high as 30-40% of inventory values. While an oversized inventory is a costly inventory management strategy, low fill rates are also costly. Business may be lost through cancelled orders, and the company's reputation may be severely damaged. It is therefore in a company's interest to balance inventory holding cost and the cost of imperfect customer satisfaction. The trade-off inventory vs. customer satisfaction is one of the classic issues of logistics and supply chain management. Pitfalls in Inventory Management

Based on knowledge and experience from supply chain management in electronics, computer, and automobile companies, Lee and Billington identify 8 pitfalls in inventory management. Eight of which are found relevant to this project: Pitfall 1. No Supply Chain Metrics: In a supply chain with multiple sites, each site will often have its fairly autonomous management team. The objectives of the various teams may differ, and even be conflicting. Inventory may for example be reduced at a Site A of a supply chain, and thereby, seen from a local perspective, the performance is

enhanced. But the inventory decrease may also decrease Site A's flexibility. Because Site A now responds more slowly to changes, Site B, which is Site A's customer will have to increase its inventory (of Site A parts) in order to maintain its flexibility and level of customer service. The lack of supply chain metrics has prevented managers at Site A to see that their local improvements has not lead to improved overall performance of the supply chain. The objective of supply chain metrics is to give the basis for evaluations of the performance of the whole supply chain as one system. Pitfall 2. Inadequate Definition of Customer Service: Too few and in-concise metrics for customer service. The evaluation of performance becomes difficult, and certain aspects of customer service may be overlooked. Pitfall 3. Inaccurate Delivery Status Data: Customers are not correctly informed of delivery dates of orders and of late deliveries. Companies can often not readily retrieve the information needed to do so. Pitfall 4. Inefficient Information Systems: Databases at different operation sites that describe system environment, inventories, backlog, future production plans, and so on are often not linked. Information must be retrieved manually, and this can be a long process. Planning cycles may therefore be long, using highly uncertain demand forecasts. The wrong products are made, and inventories and backlogs grow. Pitfall 5. Ignoring the Impact of Uncertainties: Too often supply chains do not track uncertainties such as suppliers' delivery times, the quality of incoming materials, manufacturing process time, transit times, and so on. This leads to non-optimal stocking levels. In some cases uncertainties are properly tracked, but there is no follow-up. Pitfall 6. Simplistic Inventory Stocking Policies: Stocking policies are often not linked to knowledge of the uncertainties mentioned above. Stocking policies are often based on the quantity usage of the items stocked. This says nothing about the uncertainty associated with the usage.

Analysis show that stocking levels could be greatly reduced by transferring stocking policies from being quantity based to being uncertainty based. Pitfall 7. Organizational Barriers: Entities in a supply chain may belong to different organizations within the same company. The organizations will independently measure the performance of the entities. While each entity is occupied with achieving local goals (much like in pitfall 1), important synergies may be lost. Pitfall 8. Incomplete Supply Chain: Supply chain managers are often focussed only on the internal supply chain. Going beyond the internal supply chain by including external suppliers and customers often exposes new opportunities for improving internal operations. Section gives some thoughts on how many of these pitfalls can be avoided through

increased integration and coordination. The section suggests that this can be done using agent-based management and information systems.