Pepsi Supply Chain

Supply Chain Management Adel Abou Heneidy Learning objectives To develop understanding of the following key areas and their interrelationships: * Basic concepts of logistics and supply chain management * The strategic role of a supply chain * The key strategic drivers of supply chain performance * Analytic methodologies for supply chain analysis 2 Supply Chain Management Adel Abou Heneidy Highlights: • • • • • • • Understanding the Supply Chain Supply Chain performance: achieving strategic fit and scope Supply Chain Drivers and obstacles Designing the distribution network in a Supply Chain Network Design in the Supply Chain Network design in uncertainty environment Total cost of SCM Aggregate planning in Supply Chain References: References: th Introduction to materials management: J. R Tony Arnold ; ;Stephen N. Chapman ––55thedition edition Introduction to materials management: J. R Tony Arnold Stephen N.

Chapman Supply Chain-Logistics management: Donald J. Bowersox; David J. Closs; M. Bixby Cooper Supply Chain-Logistics management: Donald J. Bowersox; David J. Closs; M. Bixby Cooper Strategic logistics management: Lambert & Stock Strategic logistics management: Lambert & Stock Operations management: Stevenson Operations management: Stevenson Supply Chain Management: Sunil Chopra & Peter Meindl Supply Chain Management: Sunil Chopra & Peter Meindl Supply Chain Management 3 Chapter 1 Understanding the Supply Chain 4 Supply Chain Management Adel Abou Heneidy

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Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together • What is Supply Chain (Value) Management? “ SCM is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize systemwide costs while satisfying service level requirements”. Supply Chain Management Adel Abou Heneidy 5 Another definition of SCM design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally. “ As per APICS Dictionary Supply Chain Management Adel Abou Heneidy 6 The Chain from Original Supply to Final Consumption INFORMATION FLOW Transfer Transfer Transfer Transfer Transfer Transfer Transfer Transfer Supplier Manufacturing Distribution Retail Outlet Consumer CASH FLOW Supply Chain Optimization

Highest level of customer responsiveness at lowest cost Forward Supply Chain –Supply by customer ends Chain Management ? SAP AG 1998 CPSAP_e February ‘98 /13 7 Adel Abou Heneidy What’s the Supply Chain IT Logistics Supply Chain Management Supply Chain Management Adel Abou Heneidy 8 Main Functions and Activities in SC • • • • • • • • Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service Supply Chain Management Adel Abou Heneidy 9 Difference between SCM & Logistics In definition, Logistics usually refers to interface activities that occur in a single organization and typically include processes such as procurement, inventory, storage and distribution. • 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 inventory, and finished goods from point-of-origin to point-of-consumption • I would say logistics is just a part of supply chain Supply Chain Management Adel Abou Heneidy 10

The Logistics/SCM Mission • Getting the right goods or services to the right place, at the right time, and in the desired condition at the lowest cost and highest return on investment. Supply Chain Management Adel Abou Heneidy 11 The concept of Logistics • The concept of logistics covers all activities relating to procurement, transport, and storage of goods to, from, and between members of a supply chain. It includes: – Order processing – Pick & pack – Shipping & Transport – Customs clearance (and documentation) – Distribution – Warehousing & inventory management – Reverse logistics (Returns anagement) Supply Chain Management Adel Abou Heneidy 12 Reverse Logistics • Reverse logistics – the backward flow of goods returned to the supply chain • Reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. • Processing returned goods – Sorting, examining/testing, restocking, repairing – Reconditioning, recycling, disposing • Gate keeping – screening goods to prevent incorrect acceptance of goods • Avoidance – finding ways to minimize the number of items that are returned Supply Chain Management Adel Abou Heneidy 13

Closed-Loop Supply Chain • Closed-loop SC includes traditional forward supply chain activities, and the additional activities of reverse SC. • These activities include: 1) Product acquisition to obtain products from the end-users. 2) Reverse logistics to move the product from points of use to points of disposition. 3) Refurbishing 4) Recycling Supply Chain Management Adel Abou Heneidy 14 Traditional Scope of the Supply Chain Business logistics

Physical supply (Materials management) Sources of supply Plants/ operations • Transportation • Inventory management • Order processing • Acquisition • Protective packaging • Warehousing • Materials handling • Information management Physical distribution Customers • Transportation • Inventory management • Order processing • Product scheduling • Protective packaging • Warehousing • Materials handling • Information management Internal supply chain 15 Supply Chain Management Problems

Supply chain management must address the following problems: • Distribution Network Configuration • Distribution Strategy • Information • Inventory Management • Trade-Offs in Logistical Activities • Cash-Flow Supply Chain Management Adel Abou Heneidy 16 The Importance of SCM • • • • • • • • • • Millions of dollars at stake! Excess Inventory costs Excess freight charges Lost sales / Stock outages Wasted time and energy Extra staff Listings / Delistings Customer dissatisfaction Capital costs Real Estate Costs Supply Chain Management Adel Abou Heneidy 17 Benefits of Supply Chain Management • • • • • • Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Integrates separate organizations into a cohesive operating system Supply Chain Management Adel Abou Heneidy 18 SCM Decision Variables • • • • • • • Number and location of facilities Number and location of suppliers Number and location of warehouses Product stocking locations Modes of transportation Communications network configuration Information system configuration Supply Chain Management Adel Abou Heneidy 19 Key SCM Issues • Distribution network design Determine plant and warehouse locations, capacities, and production/storage levels • Inventory Control – The purpose of inventory is to avoid interrupting a supply process, be it production or end customer demand – How can we avoid such disruptions at the minimum total cost? – Must rely on forecasts Supply Chain Management Adel Abou Heneidy 20 Key SCM Issues • Distribution strategy – Where to hold inventory and how to efficiently transport it to customers? • Ship directly from plant to customers in full truckloads? • Maintain stocks in regional warehouses and distribute locally? Integration and strategic partnerships – How involved should a firm be with suppliers of both materials and services? – What level of information sharing is appropriate? Supply Chain Management Adel Abou Heneidy 21 Key SCM Issues • Product design issues – Tradeoffs between design changes and logistics savings? – Can design strategies buffer against demand uncertainties? • Information technology – What significant data is critical for sharing with partners? – What is the role of the Internet/e-Commerce in all of this? • Customer value – How does SCM contribute to customer value?

Supply Chain Management Adel Abou Heneidy 22 Supply Chain Uncertainty • • • • • • • Poor forecasts Production problems Late deliveries Poor quality Canceled orders Erroneous information Political uncertainty Supply Chain Management Adel Abou Heneidy 23 Conflicting SCM Objectives • Manufacturing and Transportation – Desire economies of scale – Long production runs – Full truckload shipments • Marketing and Sales – Desire flexibility and product variety – Increased inventory for better service • Trade-off s – Service levels – Inventory levels

Supply Chain Management Adel Abou Heneidy 24 SCM Features • Multiple entities – Geographically diverse – Different ownership • Conflicting objectives • Random demands • Distributed inventory • Lead times – Manufacturing – Distribution • Different information Supply Chain Management Adel Abou Heneidy 25 The value the SC generates • The objective of SC is to maximize the overall value generated. • The value a supply chain generates is the difference between what the final product is worth to the customer and the effort the SC expends in filling the customer’s request. SC profitability is the total profit to be shared across all SC stages. • SC success should be measured in terms of SC profitability and not in terms of the profit at an individual stage Supply Chain Management Adel Abou Heneidy 26 Elements of Supply Chain Management Element Customers Forecasting Design Processing Inventory Purchasing Suppliers Location Logistics Typical Issues Determining what customers want Predicting quantity and timing of demand Incorporating customer wants, mfg. and time Controlling quality, scheduling work Meeting demand while managing inventory costs Evaluating suppliers and supporting operations Monitoring supplier quality, delivery, and relations Determining location of facilities Deciding how to best move and store materials Supply Chain Management Adel Abou Heneidy 27 Effective Supply Chain • Requires linking the market, distribution channels processes, and suppliers • Supply chain should enable members to: – Share forecasts – Determine the status of orders in real time – Access inventory data of partners Supply Chain Management Adel Abou Heneidy 28 Successful Supply Chain Trust among trading partners • Effective communications • Supply chain visibility • Event-management capability – The ability to detect and respond to unplanned events • Performance metrics (KPIs) Supply Chain Management Adel Abou Heneidy 29 Decision phases in a Supply Chain • Supply Chain decision phases may be categorized as: 1) SC strategy or design – structure of SC over the next several years – How resources will be allocated – locations / capacities – Modes of transportation will be used 2) SC planning – Forecasting for the coming periods – Which markets will be supplied from which locations ? Inventory policies,… 3) SC operation – How the day to day business will be handled ? Supply Chain Management Adel Abou Heneidy 30 Process view of a Supply Chain • A Supply Chain is a sequence of processes and flows that takes place within and between different stages and combine to fill a customer need for a product. There are two different ways to view the processes performed in SC: • 1) Cycle view: – Customer order cycle – Replenishment cycle – Manufacturing cycle – Procurement cycle Supply Chain Management Adel Abou Heneidy 31 Process view of a Supply Chain

Customer order cycle: It occurs at the customer / retailer interface Customer arrival Customer order receiving Customer order entry Customer order fulfillment Supply Chain Management Adel Abou Heneidy 32 Process view of a Supply Chain Replenishment cycle: It occurs at the retailer / distributor interface Retail order trigger Retail order receiving Retail order entry Retail order fulfillment Supply Chain Management Adel Abou Heneidy 33 Process view of a Supply Chain Manufacturing cycle: It occurs at the distributor / manufacturer interface Order arrival Receiving Production scheduling

Manufacturing & shipping Supply Chain Management Adel Abou Heneidy 34 Process view of a Supply Chain Procurement cycle: It occurs at the manufacturer / supplier interface Order based on manufacturer’s Production schedule or supplier stocking needs Receiving at manufacturer Supplier production scheduling Component manufacturing and shipping Supply Chain Management Adel Abou Heneidy 35 Process view of a Supply Chain 2) Push / Pull view: – Pull processes are initiated by a customer order. – Push processes are initiated and performed in anticipation of customer orders (forecasted).

Customer order cycle Customer order & manufacturing cycle PULL Customer order arrives Procurement cycle Procurement, manufacturing, replenishment cycles Supply Chain Management Adel Abou Heneidy PUSH L. L Beans SC Dell SC 36 Supply Chain macro processes in a firm SRM Supplier relationship management Source Negotiate Buy Design collaboration Supply collaboration ISCM Internal supply chain management Strategic planning Demand planning Supply planning Fulfillment Field service CRM Customer relationship management Market Sell Call center Order management Supply Chain Management Adel Abou Heneidy 37

Key points: • A cycle view of the SC clearly defines the processes involved and the owners of each process. It specifies the roles and responsibilities of each member of SC and the desired outcomes for each process. • A push / pull view of the SC categorizes processes based on whether they are initiated in response to a customer order (Pull), or in anticipation of a customer order (Push). This view is very useful when considering strategic decisions relating to SC. • Within a firm, all SC activities belong to one of three macro processes: CRM ISCM SRM Integration between the three macro processes is crucial for successful SC.

Supply Chain Management Adel Abou Heneidy 38 Chapter 2 Supply Chain Performance: Achieving strategic fit and scope Supply Chain Management Adel Abou Heneidy 39 Competitive and Supply Chain Strategies • Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services • Product development strategy: specifies the portfolio of new products that the company will try to develop • Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted Supply Chain Management Adel Abou Heneidy 40

Competitive and Supply Chain Strategies • Supply chain strategy: – determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product – In other words, it addresses your warehouse or distribution center network, inventory stocking strategy, facility layout and processes, staffing, technology, systems and related costs is critical to maintaining a competitive advantage. – Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important Supply Chain Management Adel Abou Heneidy 41

The Value Chain: Linking Supply Chain and Business Strategy Business Strategy New Product Marketing Strategy Strategy Supply Chain Strategy New Product Development Marketing and Operations Distribution Sales Service Supply Chain Management Adel Abou Heneidy 42 Framework for Supply Chain Strategy Business Objectives Supply Chain Objectives Business Strategy Supply Chain Strategy Management Processes Supply Chain Processes Importance to Top Management Focus of Top Management Supply Chain Management Adel Abou Heneidy 43 Aligning Supply Chain Strategy with Business Strategy Business Objectives Supply Chain Objectives

Business Strategy Supply Chain Strategy Supply Chain Processes Management Processes Importance to Top Management Focus of Top Management Supply Chain Management Adel Abou Heneidy 44 Value Chain Analysis • • • Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Primary Activities – those that are directly concerned with creating and delivering a product (e. g. component assembly). Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e. g. uman resource management). It is rare for a business to undertake all primary and support activities. Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others (“out sourced”). • Supply Chain Management Adel Abou Heneidy 45 Competitive Strategies Competitive Strategies Competitive Advantage Lower Cost Differentiation Broad Target Competitive Scope Narrow Target Cost Leadership Differentiation Cost Focus Focused Differentiation Supply Chain Management Adel Abou Heneidy 46 Strategies, Forces, and Tactics in Competitive Markets Cost leadership • based on efficient operations • based on effective operations • economies of scale – become a low cost producer – market segmentation (niche) – Focused differentiation • Market niche – Cost focus • narrow market & low cost Supply Chain Management Adel Abou Heneidy 47 Value Chain with Typical Strategic IS Value Chain with Typical Strategic IS Mapped onto it Mapped onto it EDI-Based Purchasing System Inbound Logistics ComputerIntegrated Mftg. Operations Automated Ordering System Outbound Logistics Expert Systems for Salespeople Marketing and Sales Telemaintenance Expert Systems Service

Upstream Chains of Suppliers Downstream Chains of Customers Supply Chain Management Adel Abou Heneidy 48 Steps in Value Chain Analysis • Value chain analysis can be broken down into a three sequential steps: (1) Break down a market/organization into its key activities under each of the major headings in the model; (2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage; (3) Determine strategies built around focusing on activities where competitive advantage can be

Supply Chain Management Adel Abou Heneidy 49 Achieving Strategic Fit • Strategic fit: – Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy – Competitive and supply chain strategies have the same goals • A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy Supply Chain Management Adel Abou Heneidy 50

Steps in achieving strategic fit • Step 1: Understanding the customer’s needs and supply chain uncertainty • Step 2: Understanding the supply chain • Step 3: Achieving strategic fit Supply Chain Management Adel Abou Heneidy 51 Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier Responsiveness High A The SC of “A” has high responsiveness, but with high cost, which means with low efficiency. The SC of “B” has low B responsiveness, but with low cost, which means with high efficiency Low

Cost High Supply Chain Management Adel Abou Heneidy Low 52 Step 1: Understanding the Customer and Supply Chain Uncertainty • • • • • • • Identify the needs (attributes of demand) of the customer segment being served Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product Supply Chain Management Adel Abou Heneidy 53

Step 1: Understanding the Customer and Supply Chain Uncertainty • • • Overall attribute of customer demand Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: reflects uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires Understand customers by mapping their demand on the implied uncertainty spectrum • Supply Chain Management Adel Abou Heneidy 54

Achieving Strategic Fit • Understanding the Customer – – – – – – Lot size Response time/ Lead time Service level Product variety Price (sensitivity to) Innovation Supply Chain Management Adel Abou Heneidy Implied Demand Uncertainty 55 Impact of Customer Needs on Implied Demand Uncertainty Customer Need Range of quantity increases Lead time decreases Variety of products required increases Number of channels increases Rate of innovation increases Required service level increases

Causes implied demand uncertainty to increase because … Wider range of quantity implies greater variance in demand Less time to react to orders Demand per product becomes more disaggregated Total customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand Supply Chain Management Adel Abou Heneidy 56 Step 2: Understanding the Supply Chain • How does the firm best meet demand? Dimension describing the supply chain is supply chain responsiveness • Supply chain responsiveness — ability to: – respond to wide ranges of quantities demanded – meet short lead times – handle a large variety of products – build highly innovative products – meet a very high service level Supply Chain Management Adel Abou Heneidy 57 Step 2: Understanding the Supply Chain • There is a cost to achieving responsiveness • Supply chain efficiency: cost of making and delivering the product to the customer • Increasing responsiveness results in higher costs that lower efficiency

Supply Chain Management Adel Abou Heneidy 58 Step 3: Achieving Strategic Fit • All functions in the value chain must support the competitive strategy to achieve strategic fit • Two extremes: Efficient supply chains and responsive supply chains Supply Chain Management Adel Abou Heneidy 59 Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map Responsive supply chain Responsiveness spectrum of it e on gic F Z e t ra St Efficient supply chain Certain demand 60 Implied uncertainty spectrum Uncertain demand Comparison of Efficient and Responsive SC Efficient

Primary goal Product design strategy Pricing strategy Mfg strategy Inventory strategy Lead time strategy Supplier selection strategy Transportation strategy Lowest cost Min product cost Lower margins High utilization Minimize inventory Reduce but not at expense of greater cost Cost and low quality Greater reliance on low cost modes Supply Chain Management Adel Abou Heneidy Responsive Quick response Modularity to allow postponement Higher margins Capacity flexibility Buffer inventory Aggressively reduce even if costs are significant Speed, flexibility, quality Greater reliance on responsive (fast) modes 61

Multiple Products and Customer Segments • Firms sell different products to different customer segments (with different implied demand uncertainty) • The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments • Two approaches: – Different supply chains – Tailor supply chain to best meet the needs of each product’s demand Supply Chain Management Adel Abou Heneidy 62 Product Life Cycle The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle • Supply chain strategy must evolve throughout the life cycle • Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary • Late: predictable demand, lower margins, price is important Supply Chain Management Adel Abou Heneidy 63 Product Life Cycle • As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

Supply Chain Management Adel Abou Heneidy 64 Competitive Changes Over Time • Competitive pressures can change over time • More competitors may result in an increased emphasis on variety at a reasonable price • Changes in technology can make it easier to offer a wide variety of products • The supply chain must change to meet these changing competitive conditions Supply Chain Management Adel Abou Heneidy 65 Key points: • To achieve a strategic fit, a company must: 1) Understand customers needs, the uncertainty of the SC, and to identify the implied uncertainty. ) Understand the SC’s capabilities in terms of “Efficiency” & “Responsiveness” The key to strategic fit is ensuring the SC responsiveness is consistent with customer needs, supply capabilities, and the resulting implied uncertainty. When the scope of strategic fit is narrow, individual functions try to optimize their performance based on their own goals, which leads to: 1) Conflicting actions 2) Reducing SC surplus As the scope of strategic fit is enlarged to include the entire SC, actions are evaluated based on their impact on overall SC performance, which helps increase SC surplus. Supply Chain Management Adel Abou Heneidy 66 Chapter 3 Supply Chain Drivers and obstacles Supply Chain Management Adel Abou Heneidy 67 Drivers of Supply Chain Performance Drivers determine supply chain performance. For each driver, managers must make tradeoffs between efficiency (cost) and responsiveness. • • • • Inventory Transportation Facilities Information Drivers (4 enablers) of SC Price People Discuss ! Supply Chain Management Adel Abou Heneidy 68 Inventory All of the raw materials, work in process (WIP), and finished goods within the supply chain.

Inventory policies can dramatically alter a supply chain’s efficiency and responsiveness. Why hold inventory? Unexpected changes in customer demand (always hard to predict, and uncertainty is growing) * Short product life cycles * Product proliferation (spreading) Supply Chain Management Adel Abou Heneidy 69 Why hold inventory? Unexpected changes in customer demand (always hard to predict, and uncertainty is growing) * Short product life cycles * Product proliferation (spreading) * Uncertain supply: Quantity / Quality / Costs / Delivery time

What if there was no uncertainty in supply or demand—would it still be necessary to hold inventory? Supply Chain Management Adel Abou Heneidy 70 Inventory’s Impact Inventory can increase amount of demand that can be met by increasing product availability. Inventory can reduce costs by exploiting economies of scale in production, transportation, and purchasing. Inventory can be used to support a firm’s competitive strategy. More inventory increases responsiveness, less inventory increases efficiency (reduces cost). Inventory can significantly affect material flow/cycle/ throughput time.

In other words: If you move your inventory faster, you don’t need as much inventory (inventory velocity) 71 Types of Inventory Needed • Cycle Inventory – The average amount of inventory used to meet demand between replenishments. • Seasonal Inventory – Inventory that is built up to meet predictable variation in demand. – Amount of seasonal inventory depends on how quickly and inexpensively a firm can change its rate of production. Supply Chain Management Adel Abou Heneidy 72 Types of Inventory • Safety Inventory – Random, unpredictable, unexpected Inventory held to counter uncertainty in demand or supply (“just-in-case” inventory). • Pipeline Inventory – Work-in process of transit • Inventory held to do business. Supply Chain Management Adel Abou Heneidy 73 Transportation • Modes and routes for moving inventory throughout the supply chain. Transportation’s Impact Transportation’s Impact Faster transportation allows a supply chain to be more responsive but generally less efficient. Less than full truckloads allows a supply chain to be more responsive but generally less efficient. Transportation can be used to support a firm’s competitive strategy.

Customers may demand and be willing to pay for a high level of responsiveness. Supply Chain Management Adel Abou Heneidy 74 Transportation Decisions Mode of transportation is the manner in which a product is moved (air, truck, rail, ship, pipeline, electronic). Each mode differs with respect to speed, size of shipments, cost, and flexibility. Routes are paths along which a product can be shipped. In house or outsource the transportation function. Many companies use third-party logistics providers (3PL) to perform some or all of their transportation activities

Supply Chain Management Adel Abou Heneidy 75 Facilities • Places within the supply chain where inventory is stored, assembled, or fabricated. • Decisions on location, capacity, and flexibility of facilities have a significant impact on performance. • • • • • • Warehouses Factories Processing centers Distribution centers Retail outlets Offices Supply Chain Management Adel Abou Heneidy 76 Facilities Impact Facilities either store inventory between supply chain stages (warehouses, distribution centers, retailers) or transform inventory into another state (fabrication or assembly plants).

Centralization of facilities uses economies of scale to increase supply chain efficiency (fewer locations and less inventory) usually at the expense of responsiveness (distance from customer). Supply Chain Management Adel Abou Heneidy 77 Facility Decisions Location. Centralize to gain economies of scale or decentralize to be more responsive. Other issues include quality and cost of workers, cost of facility, infrastructure, taxes (duties), quality of life, etc. Capacity. Excess capacity allows a company to be more responsive to changes in the level of demand, but at the expensive of efficiency.

Manufacturing Methodology. Decisions between a product or functional focus, between flexible or dedicated capacity. Warehousing Methodology. Chose between SKU storage (stores all of one type of product together), Job lot storage (stores different products together to satisfy a particular customer or job), or cross-docking. Supply Chain Management Adel Abou Heneidy 78 • How Toyota & Honda use facilities decisions to be more responsive to their customers? 1) By opening manufacturing facilities in every major market that they enter to be near of the customers. ) Also, by opening local facilities they protect themselves from currency fluctuation and trade barriers. Supply Chain Management Adel Abou Heneidy 79 Information Data and analysis regarding inventory, transportation, facilities, and customers throughout the supply chain. It is potentially the biggest driver since it affects all the other drivers. Information’s Role • • • • Information connects various supply chain stages and allows them to coordinate activities. Information is crucial to the daily operations of each stage of the supply chain.

An information system can enable a firm to get a high variety of customized products to customers rapidly. An information system can enable a firm to understand changing consumer needs more quickly Supply Chain Management Adel Abou Heneidy 80 Information Decision Components Push versus Pull. Push systems (like MRP) need information on anticipated demand to create production and purchasing schedules. Pull system (like JIT) need accurate and quick information on actual demand to move inventory and schedule production in the chain. Coordination and Information Sharing.

How will the goal of maximizing supply chain profitability be achieved through the coordination of activities and sharing of appropriate information? Forecasting and Aggregate Planning. How will future demand and market conditions be forecast, and to what extent will collaborative forecasting be used? How will aggregate planning be used to meet forecasted demand and to what extent will it be shared throughout the supply chain? Enabling Technologies. Which information technologies will be used and integrated throughout the supply chain? lectronic data interchange (EDI), the Internet, enterprise resource planning (ERP) systems, supply chain management (SCM) software. 81 Major Obstacles to Achieving Fit • SCM is big: – Variety of products and services – Spoiled/ demanding customers – Multiple owners (procurement, production, inventory, marketing) / multiple objectives – Globalization Local optimization and lack of global fit Supply Chain Management Adel Abou Heneidy 82 Major Obstacles to Achieving Fit • Instability and Randomness: – Increasing product variety – Shrinking life cycle – Customer fragmentation

Increasing implied uncertainty Supply Chain Management Adel Abou Heneidy 83 Major Obstacle / Challenge • Impact of the internet on supply chain strategies • What shifts in supply chain strategy are occurring because of the internet? Supply Chain Management Adel Abou Heneidy 84 Traditional Fulfillment vs E-Fulfillment Traditional Fulfillment Supply chain strategy Shipment size Reverse logistics Delivery destination Lead times Push Bulk Small part of business Small # of stores Relatively long E-Fulfillment Push-pull Parcel Important and highly complex Large #, geographically dispersed Relatively short

Supply Chain Management Adel Abou Heneidy 85 Common Problems • • • • • • • Lack of SCM metrics :How do we measure responsiveness? Poor IT design Poor delivery status information Ignoring uncertainties Internal customer discrimination Poor integration More inventory costs Supply Chain Management Adel Abou Heneidy 86 Key points: • Many obstacles, such as growing product variety and shorter life cycles, have made it increasingly difficult for supply chains to achieve Strategic Fit. Overcoming these obstacles offers a tremendous opportunity for firms to use SCM to gain competitive advantage. Responsiveness is defined as the ability of a supply chain to respond rapidly to changes in demand, both in terms of volume and mix of products. • The major drivers in supply chain performance are: Facilities / inventory / transportation / information • To create a strategic fit between SC & competitive strategies, a company has to find the right balance between responsiveness & efficiency. Each driver affects this balance as follows: 1) More facilities: improves the responsiveness, but decreases the efficiency. 2) Higher levels of inventory: improves the responsiveness, but decreases the efficiency. ) Faster modes of transportation: improves the responsiveness, but decreases the efficiency. 4) Investing in information : improves both the responsiveness and the efficiency {DELL} Supply Chain Management Adel Abou Heneidy 87 Key points: • The major obstacles that must be overcome to successfully manage a SC are: Increasing product variety Decreasing product life cycles Demanding customers Global competition Fragmentation of supply chain ownership Supply Chain Management Adel Abou Heneidy 88 Chapter 4 Designing the Distribution Network in a Supply Chain 89 Supply Chain Management Adel Abou Heneidy Goal

Given: • Product Characteristics • Markets Served What is the appropriate distribution network? Supply Chain Management Adel Abou Heneidy 90 The Role of Distribution in the S C • Distribution: the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain • Distribution directly affects cost and the customer experience and therefore drives profitability • Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness • Examples: Wal-Mart, Dell, HP, Proctor & Gamble Supply Chain Management Adel Abou Heneidy 91 Factors Influencing Distribution Network Design Distribution network performance evaluated along two dimensions at the highest level: – Customer needs that are met – Cost of meeting customer needs • Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service Supply Chain Management Adel Abou Heneidy 92 Factors Influencing Distribution Network Design • Elements of customer service influenced by network structure: – Response time – Product variety – Product availability – Customer experience – Order visibility: access to up-to-the-minute information about the orders. Return ability Supply chain costs affected by network structure: – Inventories – Transportation – Facilities and handling – Information Supply Chain Management Adel Abou Heneidy 93 • Service and Number of Facilities Response Time Supply Chain Management Adel Abou Heneidy Number of Facilities 94 The Cost-Response Time Frontier High Cost Low Low Response Time Supply Chain Management Adel Abou Heneidy High 95 Inventory Costs and Number of Facilities Inventory Costs Number of facilities Supply Chain Management Adel Abou Heneidy 96 Transportation costs

Inbound transportation costs: cost of bringing the material into a facility Outbound transportation costs: cost of sending material out of a facility ? Since lot size is larger in the inbound, usually Outbound transportation cost/unit > Inbound transportation cost/unit ? As # distribution centers increases, average outbound distance decreases, thus the fraction of outbound transportation cost decreases. Supply Chain Management Adel Abou Heneidy 97 Transportation Costs and Number of Facilities Transportation Costs Number of facilities Supply Chain Management Adel Abou Heneidy 98

Facility Costs and Number of Facilities Facility Costs Number of facilities Supply Chain Management Adel Abou Heneidy 99 Total Costs Related to Number of Facilities Total Costs Total Costs Facilities Inventory Transportation Number of Facilities 100 Supply Chain Management Adel Abou Heneidy • Determine the number of facilities, cost, and the response time which maximize the efficiency of the supply chain (refer to below graphs). What will be the number of facilities & response time if the logistics budget is of USD 150,000, in case of perishable, and home appliance products.

Cost (USD) Time (Hours) 30 400,000 25 Response Time 300,000 20 15 Total Logistics Costs 200,000 10 100,000 5 Minimum cost 0 3 6 9 12 15 18 Number of Facilities 101 Supply Chain Management Adel Abou Heneidy Main distribution concepts • • • • • Direct shipping Direct shipping with milk runs Direct shipping via Distribution Center (DC) Pool distribution (Groupage) Cross-docking Supply Chain Management Adel Abou Heneidy 102 Main distribution concepts 1) Direct shipping S1 R1 S2 R2 R3 R4 Supplier/Plant Supply Chain Management Adel Abou Heneidy Retailer/Base 103

Direct Shipping • Eliminates need for intermediate facilities (e. g. , warehouses and distribution centers) – Dell computer – orders for desktop computers will have the monitors picked up directly from Sony, and delivered to the customer. • Warehouse club stores, grocery stores, and mass merchandisers are adopting the DSD (Direct Store Delivery) strategy where manufacturer delivers goods directly to the retail outlet or the customer. • Perishable items, high volume goods, high bulk items, and specialty products are primary candidates for direct shipping.

Supply Chain Management Adel Abou Heneidy 104 Benefits of Direct Shipping • • • • • Less inventory in the supply chain Less handling and opportunity for product damage Faster production to store shelf time Higher productivity, sales, service, satisfaction Improved accuracy – invoices match receiving records, correct products enter the store Supply Chain Management Adel Abou Heneidy 105 Direct Shipping Challenge • Greater hassle for store personnel – More deliveries, paperwork, activity •

No safety stock in the event of a supplier problem • Transportation costs can be higher • Manufacturers may incur extra handling costs by picking/shipping to individual stores • Not well suited to high variation events like holidays and promotion Supply Chain Management Adel Abou Heneidy 106 2) Direct shipping with milk runs • Single supplier to a number of retailers – • Single retailer to a multiple suppliersdeliver like a milkman S1 R1 R2 R3 deliver like a milkman S3 S2 S1 R1 Supplier/Plant Retailer/Base Retailer/Base Direct shipping with milk runs Drivers pick up goods from suppliers along a route and delivering the entire load to a single facility. • This allows reduction in cost by eliminating the need for direct small shipments using LTL shipments • Benefits: Supports JIT systems, eliminates distribution centers. • Requires: – Consistent schedule, high volume – Dedicated carrier or private fleet. Toyota uses milk runs both in Japan and in the USA to support its JIT manufacturing Supply Chain Management Adel Abou Heneidy 108 3) Direct shipping via DC S1 R1 S2 R2 S3 DC R3 S4 Supplier/Plant Supply Chain Management Adel Abou Heneidy R4

Retailer/Base 109 Before a company invests capital in a new distribution center, someone should ask the following questions: • • • • • How many distribution centers should we have? Are there opportunities to consolidate distribution centers? What is the role of each distribution center? Have we properly sized the distribution centers? Which products should we inventory in each distribution center? • Which customers should each distribution center service? • Do we have enough flexibility to accommodate future customer demands? Supply Chain Management Adel Abou Heneidy 110 4) Pool Distribution (Groupage)

Consolidating merchandise shipments at the origin into loads destined for defined regions; transporting the load to a central point in the region and making local deliveries from the central point. LCL shpts to New York, AMS, and Milan LCL shpts to New York, Milan, and Paris LCL shpts to New York, London, and Paris Break-bulk & Groupage New York Milan Paris London Rotterdam 5) Cross-Docking • Direct flow of merchandise through a facility from receiving to shipping, eliminating the need for storage. “goods arriving at a warehouse from a supplier are unloaded from the supplier’s truck and loaded onto outbound trucks, thereby warehouse storage. • Supply Chain Management Adel Abou Heneidy 112 • Cross docking shift the focus from “supply chain” to “demand chain” by receiving goods at one door and shipping out through the other door almost immediately without putting them in storage. • For example stock coming into cross docking center has already been pre-allocated against a replenishment order generated by a retailer in the supply chain. Supply Chain Management Adel Abou Heneidy 113 Cross-Docking Example Freight is received, checked for accuracy ; prepared for release to stores (bar coded labels are applied to cartons).

Cartons travel thru facility on conveyor system to reduce labor and speed transfer of goods. Bar code reader identifies products and diverts cartons down appropriate loading line. Supply Chain Management Adel Abou Heneidy Cartons are loaded in trailer and shipped when trailer is full 114 The driving idea behind Cross Docking • Cross docking seeks to eliminate the expensive functions of inventory holding and order picking from modern distribution centers by taking advantage of the information system infrastructure in modern supply chains.

Hence, at a cross dock, incoming material is already assigned to a destination, and therefore, the only required functions are consolidation and shipping. In this way, material is staged at the facility for less than 24 hours. =;gt; Just-In-Time for distribution • • • Supply Chain Management Adel Abou Heneidy 115 • Cross docking reduces cost – Increases inventory turns by speeding the flow of products from the supplier to the store. – Cross docking, coupled with consolidating warehousing, avoids LTL deliveries. Most notably, it eliminates the two most expensive distribution operations: cost of handling and storing inventory. Supply Chain Management Adel Abou Heneidy 116 Crossdock Operations Strip doors: doors where full trailers are parked and unloaded. Any incoming trailer can be unloaded to any strip door. Stack doors: doors where empty trailers are put to collect freight for specific destinations. Each stack door is permanently assigned to a distinct destination. Supply Chain Management Adel Abou Heneidy 117 Optimizing the cross dock performance • • The major operational cost for cross dock is the labor cost.

Hence, the system performance is optimized by seeking to maximize the throughput of the crossdock operations by establishing an efficient freight flow. Factors affecting the freight flow: – Long term decisions: • Number of doors and shape of the building • Employed material handling systems • parking facilities – Medium term decisions: • Crossdock layout, i. e. , the characterization of the various doors as strip or stack doors, and the assignment of specific destinations to the stack doors – Short term decisions • Inbound Trailer Scheduling Supply Chain Management Adel Abou Heneidy 118 • The number of doors and the parking lot size Number of stack doors: determined by the volume of freight moved to each customer, and any potential delivery schedules Number of strip doors: since trailer unloading is a faster job than trailer loading, a common rule of thumb is to have twice as many stack doors as strip doors, so that you balance the incoming with the outgoing flow. In general the larger the number of doors in the cross dock, the larger the distances that must be traveled. The parking lot should provide parking space for two trailers per door, so any flow surges can be accommodated without considerable problems. • • • Supply Chain Management Adel Abou Heneidy 19 Trailer Scheduling How should we pick the next inbound trailer to be processed at a free strip door? • If the freight mix tends to be uniform across all inbound trailers, then a simple rule like FIFO will perform well.

• Otherwise, the selected trailer should be the one that will have the smallest processing time w. r. t. the considered strip door, among those currently waiting in the parking lot. Supply Chain Management Adel Abou Heneidy 120 Cross-Docking Challenges • Cross-docking requires supply chain synchronization. – Supply chain synchronization relies on strong IT capabilities (ASN via EDI, Bar codes on cartons, etc. and real-time information sharing. – Works best if trading partners engage in collaborative planning, forecasting, and replenishment. • Cross-docking may necessitate – New facility layout, – bar code scanning equipment, and – WMS (~$500,000 investment) to maintaining product visibility as it moves through the system. • To support JIT, product availability, accuracy, and quality are critical since goods are shipped directly from supplier to the shop floor. Supply Chain Management Adel Abou Heneidy 121 Design Options for a Distribution Network (applying the main distribution concepts) Manufacturer Storage with Direct Shipping • Manufacturer Storage with Direct Shipping and InTransit Merge • Distributor Storage with Carrier Delivery • Distributor Storage with Last Mile Delivery • Manufacturer or Distributor Storage with Consumer Pickup • Retail Storage with Consumer Pickup Supply Chain Management Adel Abou Heneidy 122 Manufacturer Storage with Direct (Drop) Shipping Manufacturer Retailer Customers Product Flow Information Flow 123 Drop Shipping ? Centralization is beneficial if there is high variety, high value items with low and unpredictable demand. Centralized inventories leading to high product availability, low inventory levels (higher inventory turnovers), better forecasts. ? Manufacturer can postpone customization until order arrival. ? Partial shipments introduce complexity, hard to implement if there are more than 20-30 sourcing locations Supply Chain Management Adel Abou Heneidy 124 Performance Characteristics: Drop Shipping Inventory Cost Factor Transportation Facilities and handling Information Response time Product variety Product availability Service factor Customer experience Order visibility Returnability Lower due to aggregation.

Benefit is larger if low demand, high value items, if there is postponement Higher due to increased distances and partial shipping Lower fixed costs. Better handling costs if direct shipment from production line. Higher, since info flow is essential b/w manuf. and retailer. High response time, worse if there is partial shipment Easy to provide high level of variety Higher due to aggregation Good since there is home delivery but partial shipments may increase complexity. Very important for customer but more difficult since an integration of retailer and manuf. info systems is needed Expensive and difficult.

Return to manuf. vs. return to seperate facility. Supply Chain Management Adel Abou Heneidy 125 In-Transit Merge Network Factories Retailer In-Transit Merge by Carrier Customers Product Flow Information Flow 126 In-Transit Merge Network • In-transit merge combines pieces of order coming from different locations, so the customer receives the order by single delivery. Ex: Order a Dell pc with a Sony Monitor. • Beneficial for high value items with low to medium demand, 4-5 sources. • Main advantage over drop shipping: Lower transportation cost and improved customer experience! Supply Chain Management Adel Abou Heneidy 27 Performance Characteristics: In-Transit Merge Network Inventory Cost Factor Transportation Facilities and handling Information Response time Product variety Service factor Product availability Customer experience Order visibility Returnability Similar to drop shipping Somewhat lower than drop shipping Higher handling costs than drop shipping; lower receiving costs at customer Higher than drop shipping Similar to or higher than drop shipping Similar to drop shipping Similar to drop shipping Better due to single delivery Similar to drop shipping (or somewhat more difficult) Similar to drop shipping

Supply Chain Management Adel Abou Heneidy 128 Distributor Storage with Carrier Delivery Factories Warehouse Storage by Distributor/Retailer Customers Product Flow Information Flow 129 Distributor Storage with Carrier Delivery • • • • • Inventory is not held by the manufacturers, but is held by distributor/retailer in intermediate warehouses. Package carriers are used to transport items from the retailer to the customer. Ex: Amazon Higher inventory capacity is needed than the manufacturer, since demand uncertainty is aggregated at a lower level! Better for medium to fast moving items.

Better response time, lower transportation costs when compared to manufacturer storage. Distributor storage can handle somewhat lower variety than manufacturer storage but it is better than a chain of retailers. Supply Chain Management Adel Abou Heneidy 130 Performance Characteristics: Distributor Storage with carrier Delivery Inventory Cost Factor Transportation Facilities and handling Information Response time Product variety Product availability Service factor Customer experience Order visibility Returnability Higher than manufacturer storage. Difference is not large for fast moving items. Lower than manufacturer storage.

Reduction is highest for fast moving items. Somewhat higher than manufacturer storage Simpler structure compared to manufacturer storage. Faster than manufacturer storage. Lower than manufacturer storage. Lower than manufacturer storage. Extra investment is needed forlarger availability Better than manufacturer storage with drop shipping. Easier than manufacturer storage. Easier than manufacturer storage. Supply Chain Management Adel Abou Heneidy 131 Distributor Storage with Last Mile Delivery Factories Distributor/Retailer Warehouse Customers Product Flow 132 Information Flow Distributor Storage with Last Mile Delivery • • • • Disributor/retailer delivers the product to the customer’s home instead of using a package carrier. Requires distributor warehouse to be very close to the customer, so more warehouses are needed when compared to package delivery. Suitable for fast moving items where disaggregation does not lead to significant increase of inventory. Hard to justify this option when labor cost is high. Can only be justified when there is large customer demand at this higher price. Very short response time, better customer experience and returnability. Last mile delivery should be integrated with the existing distribution network. Supply Chain Management Adel Abou Heneidy 133 Performance Characteristics: Distributor Storage with Last Mile Delivery Inventory Higher than distributer storage with package delivery, since uncertainty is aggregated in lower level with larger # of distributers Higher than any other distribution option. Maybe somewhat cheaper in large and dense cities Higher than all options but lower than chain of retail stores. Similar to distributor storage with package carrier delivery. Very quick, in 1 day. Somewhat less than distributor storage but larger than retail. Lower than other options except retail stores.

Extra investment is needed for larger availability Very good Easier than manufacturer storage or distributor with carrier delivery. Easier than other options, more expensive and difficult than retail network. Cost Factor Transportation Facilities and handling Information Response time Product variety Product availability Service factor Customer experience Order visibility Returnability Manufacturer or Distributor Storage with Customer Pickup Factories Retailer Cross Dock DC Pickup Sites Customers 135 Customer Flow Product Flow Information Flow Manufacturer or Distributor Storage with Customer Pickup Inventory is stored at the manufacturer or distributor warehouse (cross dock), customer place orders on line or via call center and come to designated pickup points to collect their orders. • Inventory and transportation costs are low due to appropriate aggregation Supply Chain Management Adel Abou Heneidy 136 Performance Characteristics: Manufacturer or Distributor Storage with Customer Pickup Inventory Cost Factor Transportation Facilities and handling Information Response time Can be as low as possible by appropriate aggregation Lower than the use of package carriers Can be very high if new facilities have to be built.

The increase in the handling cost at the pickup site can be large. High investment is required Similar to packae carrier delivery with manufacturer or distributor storage. Same day delivery is possible for items stored at pickup site Similar to other manufacturer or distributor storage options. Similar to other manufacturer or distributor storage options. Lower than other options due to absence of home delivery. Discrepency is less if pickup points are dense. Essentially required but difficult Easy if pickup points can handle returns. Supply Chain Management Adel Abou Heneidy 137

Product variety Service factor Product availability Customer experience Order visibility Returnability Retail Storage with Customer Pickup u u u u Inventory is stored locally at retail stores. Customers walk into the retail store or place an order online or by phone and pick it up at the retail store. Best for fast moving items Very short response time due to local storage, lower transportation cost Increased inventory and facility costs Supply Chain Management Adel Abou Heneidy 138 Performance Characteristics: Retailer Storage with Customer Pickup Inventory

Cost Factor Transportation Facilities and handling Information Response time Product variety Product availability Service factor Customer experience Order visibility Returnability Higher than all options Lower than all other options Higher than other options. The increase in the handling cost at the pickup site can be large. High investment is required for online and phone orders Same day, very quick Lower than all other options. Very expensive to provide high levels Assesed according to customer request Trivial for in-store orders.

Essentially required for online and phone orders. Easy if pickup points can handle returns. Supply Chain Management Adel Abou Heneidy 139 Distribution Networks in Practice • The ownership structure of the distribution network can have as big as an impact as the type of distribution network • The choice of a distribution network has very long-term consequences • Consider whether an exclusive distribution strategy is advantageous • Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers

Supply Chain Management Adel Abou Heneidy 140 • Key point: The key factors to be considered when designing the distribution network? 1) The customer needs to be met. 2) Costs of meeting these needs. 3) Costs of inventories, transportation, facilities, handling and information. • Discuss the strengths and weaknesses of various distribution options. (Please refer to the text) Supply Chain Management Adel Abou Heneidy 141 Chapter 5 Network design in the Supply Chain

Supply Chain Management Adel Abou Heneidy 142 Supply Chain Management Adel Abou Heneidy 143 Symbols in logistics network Supply Chain Management Adel Abou Heneidy 144 Network Design Tools: Major Components • Mapping – Mapping allows you to visualize your supply chain and solutions – Mapping the solutions allows you to better understand different scenarios – Color coding, sizing, and utilization indicators allow for further analysis • Data Data specifies the costs of your supply chain – The baseline cost data should match your accounting data – The output data allows you to quantify changes to the supply chain • Engine – Optimization Techniques Supply Chain Management Adel Abou Heneidy 145 Mapping Allows You to Visualize Your Supply Chain Supply Chain Management Adel Abou Heneidy 146 Displaying the Solutions Allows you To Compare Scenarios Supply Chain Management Adel Abou Heneidy 147 Logistics Network Configuration 1) Data collection:

A typical network configuration problem involves large amounts of data, including information on: 1- Location of customers, retailers, existing warehouses an distribution centers, manufacturers facilities, and suppliers. 2- All products, including volumes, and special transport mode. 3- Annual demand for each product by customer location. 4- Transportation rates by mode. 5- Warehousing costs (fixed ; operating). 6- Shipment size and frequencies for customer delivery. 7- Order pattern / order process cost. 8- Customer service requirements and goals.

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